Do you think Bridgestone should have manufacturing facilities in US? Why? Why not?
Bridgestone is currently world’s 3rd largest tyre manufacturer with a market share of 10.2%. Its revenues are skewed in favour of Asia and Oceania market where its competitors Goodyear and Michelin are trying hard to make a dent to its business. Moreover Bridgestone’s market share in US (US accounts for 45%of the world tyre market) is just ~2%. 1980s is seeing a lot of consolidation in the tyre industry and three players have emerged as bellwethers of the market. They are Goodyear, Michelin and Bridgestone. Company | Capacity | Main Geographical area of business | Aims to enter | Goodyear | 40 plants in 26 countries. 4500 dealers, 2000 company operated stores | US (market leader). In the replacement market, it had a full line of tyres | Asia market | Michelin | 43 plants in 16 countries | Europe - 40%US - 11% | Asia market | Bridgestone | 15 plants in 6 countries. 2500 dealers in US | Japan – 46% | US and Europe markets |
Bridgestone should have manufacturing facilities in US. We base our decision on the following analysis:
1. Bridgestone has a market share of 46% in Japan. It has acquired 4 manufacturing plants in the Asia Oceania region. It is the market leader in this geographic market. It has been able to set up strong OE relationships with automobile manufacturers as well. Almost half of the tyre shops in Japan sold Bridgestone tyres. Therefore it is well positioned to protect its market leadership.
2. As Yen becomes stronger against the USD, exports of tyres to US become barely profitable and the firm has to opt for local manufacturing in US to prevent declining earnings from exports. This will make its tyres cheaper and will make them more price competitive.
3. 1980s is seeing market consolidation in the tyre industry. Goodyear and Michelin have started focussing on Asiatic markets. In order to compete with these two effectively, Bridgestone has to fully commit to manufacturing both in the US and European markets.
4. In order to meet the demand of Japanese automakers, who have started local assembly in the US, Bridgestone has to expand its US facilities.
5. Bridgestone has a relatively small number of dealers – 2500 and low public brand recognition. Its market share of the US replacement market for passenger cars was less than 2%. It needs to have manufacturing facilities in order to increase its presence in the world’s largest tyre market.
6. The firm has no manufacturing presence in Europe and only one medium-sized plant in North America - a truck tire factory in Tennessee. US is the world’s largest tyre market (45%). Bridgestone has to improve its presence here in order to increase its revenues.
7. The OE and Replacement markets are increasing in the US. Bridgestone should have manufacturing facilities in US.
8. Bridgestone currently sells its tires in the United States through independent dealers and had no automobile service centers in US. Setting up manufacturing facilities will be the first step in vertical integration of setting up its own automobile centres which its compatitors thrive on.
9. Even though Bridgestone is world’s 3rd largest tyre maker (10.2%), it is far less than the market shares of Goodyear (18.8%) and Michelin (18.2%). Bridgestone needs to shrug off the image of just another second tier manufacturer in the global tire industry and become a competitor to Goodyear and Michelin. The first step will be to establish a manufacturing base in the US.
10. Bridgestone has found it difficult to crack the code of US market. It needs to have a deeper presence in US in order to understand the market better.
11. Bridgestone is technologically strong. It has established excellent OE relationships in Japan. It is strong in the replacement market in Japan. It can use the experience in order to gain a foothold in the US OE and Replacement markets.
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Should Bridgestone increase its offer to $63? DCF valuation is required to justify your stand?
As per DCF valuation (Excel Sheet), the fair value of share price comes out to be $38.27. However, there are various strategic reasons for Bridgestone to acquire Firestone. Also, the synergies coming out of the merger needs to be accounted for if a fair share value is to be determined for the merger. 