Michelin Offshoring in China

Michelin is a tire company that was created by Edouard and André Michelin in 1888 in Clermond-Ferrand, France. The company created the removable tire; the train tire and the green tire that reduce fuel consumption. Today the company has become the biggest tire manufacturer in the world with 20% market shares and an annual revenue of€17.89 in 2010.

There headquarter are still based in Clermont-Ferrand but the company has become international. Its main factories are based in Europe and in the United States and its products are sold all around the world. The problem is that it’s becoming more and more difficult for the company to keep its place of leader on this constantly growing market.

The Michelin Company is starting to close factories and lay off employees in France because the factories are not enough competitive. Its production activity has always been principally based in France but today with the evolution of the market it is very difficult for the company to continue like that and stay competitive.

A lot of new producers are appearing on the tire market and are basing their production in countries like China or India where labor and production costs are a lot lower than in France. If Michelin wants to stay competitive and keep its position of leader in the tire market it is imperative that it starts exporting its production activity in one of those countries.

It’s been decided that the company should build a factory in China. There are many reasons that influenced our decision to do it in this country. First China has very good infrastructures and a cheap labor. Building a factory in China is also way cheaper and faster than in European countries because there are fewer regulations to take into account. Another good reason for building it in China is because it is the new big market that we have to occupy with many of the other developing Asian countries.

China is developing very fast and is becoming a very wealthy country where the demand for cars is constantly increasing. To be able to enter this huge market we don’t have any other choice than offering tires at a lower price than the one we are actually selling. And the only way to do that is to find a way to significantly lower the production costs. Producing our tires on the territory will also lower the transportation costs. That way it will be easier, faster and cheaper for Chinese companies to order our tires directly from our production site.

To implant this new factory in China we first need to find a place next to a big Chinese city with good infrastructures. We need good transportation facilities and to be situated not too far from a big harbor site to be able to export our products easily all over the world. We also need to have access to qualified and unqualified labor to run our factory. Therefore we decided to build our factory in or near the city of Shanghai, a city that has all those characteristics.

2.The need of Financing

* To invest in implementation, infrastructuresIf offshoring is a need, more than an asset, it has a cost which even if it will soon help you asks a big cost of energy and money.

Consultants are paid with big money to analyze the opportunities of such a big operation. Then you must pay others to set up a new the Enterprise Resource Planning for instance. First you will need to buy a field. If you want to find easily workers with some of them with skills, you may look for a place near a city, which is going to be more expensive. Then you have all the cost bound to the construction, the cost of the buildings themselves all the other expenses. Then you also have to pay taxes to the government.

You must finance the formation of your new workers. It’s a loss of time during which one you have fixed cost but you don’t produce, or slowly. Traveling cost will increase a lot as well.

* To finance everyday operationsWhen buildings and habits will be all set and your new facilities working, you won’t be done with financing needs. Indeed, you will have to find new suppliers. It means being able to pay them even before selling anything from your new factory? In fact, we can now talk about all the operating costs you’ll have to face, what must be done with a strong treasury. 3. How to finance your activities

There are several way to get financed:

– Internal financing (auto financing)Michelin can decide to use its past profit to finance its new branch in China.

Advantages:Good for the autonomy and independence of the companyFree (thanks to previous profits) and is immune to the high cost of credit when rates are high No refunds expectedGives an healthy and prosperous image of the business

Disadvantages:Limited investment by past profitsMay deprive the company of other judicious use of productivity gains. May not be enough to cross a threshold (minimum size) for profitability. May unnecessarily deprive facilities for growth and profits, especially if interest rates are low. – Indirect external financing (banks)

Michelin can use traditional financing from a bank.

Advantages:Flexible funding (adjusted to the needs of corporate finance) and can afford to take advantage of growth opportunities. Is not unhealthy, as it allows to generate more profit than cost of the debt.

Disadvantages:it can be expensiveDependence with the bankThe debt can end up worrying partners …

– Direct external fundingMichelin may have recourse to capital markets. The compagny has two options: issuing shares or issuing bonds. Issuing a share means creating capital for the company, the buyer then has a stake and is paid with dividends. A bond is similar as a debt or a loan. It works the same way. – Issuance of shares

Advantages:No refund or debt, but increase the equityIt is not free because you pay dividends but it depends on the profit. This can boost their reputation.Disadvantages:Risk of spreading the capital (crumbling heritage)Risk of loss of control of the leaders within the company (one share = one vote) Risk of acquisition of the company by another firm (hostile takeover) The continuity of the investment depends on the requirements of immediate profitability of a partner unstable

– Bond IssueAdvantages:Fixed financial charges (interest) that tend to lighten with inflation No loss of power by leaders (no risk of takeover)You can replace a bond that finishes by another one

Disadvantages:it can be expensiveDebt (= debt obligation) can worried some partners (although less than bank debt)