In focus: Building Michelin’s competitive advantage in China - China Essay Example

In focus:

Building michelin’s competitive advantage in china

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Abstract (200-300 words)

Introduction

Michelin Group prides itself as the Global Leader in Tire Innovation, providing the forward-looking solutions to help the road transportation industry in its bid for competitive edge and to meet society’s ever pressing needs for safety, fuel efficiency, and respect for environment. Michelin had been the first to patent radial tires, which had been widely used and famous in automotive industry and the company boasts of a century of progress and innovation in tire design and many product firsts.

 

At the end of December 2005, Michelin posted 36 percent growth in its net income at EUR 889 million (USD 1.049 billion) with over EUR 15.59 billion (USD 18.40 billion) in net sales, up 3.6% from the previous year[1]. While the tire industry continues to consolidate in the short term, Michelin has continued to expand its product line and operations into new regional markets. Currently, the company has a global sales network in 170 countries, 71 manufacturing plants in 19 countries, 6 rubber tree plantations in Brazil and Nigeria, and an extensive Brand Portfolio, which includes Michelin and BF Goodrich as the flagship brands of the company as well as 2 distribution networks namely Eurometer and TCI[2].

 

Michelin continues to grow with a firm mission to “contribute to the progress of mobility”. In 1988, Michelin started to selling tires to China. By 1996, Michelin established the first joint venture (JV) in Shenyang in 1996 to seize the growing opportunities in China market. A bigger opportunity emerged in 2001 when Michelin was offered to buy Shanghai Tire and Rubber Co. Ltd. (STRC).  Michelin signed a $200 million deal to buy 70% stake in the company and the right to use Warrior brand, which had been popular in China since 1947[3].

 

The move provided Michelin with an annual tire manufacturing capacity of 5 million passenger car and light truck tires and immediately capture 5% market share in the China tire market. Shanghai Tire and Rubber Co. had been the largest tire manufacturing company in China employing 2,700 people and had sales at around $80 million in 2000.

 

For Michelin China CEO and Chairman Eric Jugier, “Michelin is here to stay and grow the market. Our strategy from the start has been to manufacture the same quality tires in China as we did around the world”. While it is clear the growth and opportunities presented in the China market is too good to pass up, the challenge had been managing the cultural differences and integrating Michelin China into the Michelin Global Group.

 

In this paper, we will look into the human resources strategy of Michelin in integrating Michelin China with the Michelin Group’s values as well as aligning their the local company to Michelin’s mission and commitment to continuous product innovation and best quality practices. We shall benchmark the human resources integration strategy with Samsung Electronic’s strategic entry to China market. More importantly, we will look into Michelin’s human resources strategy in light of Samsung’s success in integrating its China operation to its Global operation.

 

Methodologies and Limitations (300-400 words)
The main methods for researching and gathering information about the tire industry, Michelin, and doing business in China had been done via the internet and online data sources. Materials on Michelin’s financial performance, mission and vision as well as strategies were readily available in the company’s website. News and press releases on new product introduction, recent partnership and alliances as well as company acquisitions were also available in the archives of general news sources such as the Wall Street Journal and CNN. Moreover, industry trade publications and website also provided good information on the industry size, growth, news, statistical trends, and future outlook.

 

Published materials such as financial reports and case studies were further analyzed to provide a clearer picture on the business environment in the tire industry and to create and recommend strategies for the company. Financial analysis and the application of theories in strategic management such as SWOT analysis were also employed to give a clearer picture of the overall outlook and strategy of management.

 

A major limitation of the methodology is that the researcher was unable to obtain industry experts’ or insider insights of the future outlook or trends in the tire industry as well as the operations of doing business in China. The researcher believes that an interview with an industry expert would have provided deeper understanding on the industry dynamics in the tire business.

 

Environment Analysis – Use porter’s 5 forces model (1000 words)
Macro-environment Analysis

 

The global tire market size is approximately USD 92 billion in 2004, growing by 26.72% from USD 71 billion in 2002. The market consists of 75% Replacement Tires (RE) and 25% Original Equipment (OE)[4]. The market is mainly segmented by major regional markets and by tire category.

 

 

Major tire categories include passenger cars and light trucks, heavy trucks, and other specialty tires. Passenger cars are still the largest market segment (63.30%) in tire market in terms of tire category. On the other hand, major regional markets are the European and North America in the tire market industry. These two regional markets were considered as developed markets, while China which currently accounts for 11.30%, is eyed as growing markets due to the increasing affluence of Chinese consumers. Michelin reports[5]:

 

The Chinese market accounts for 29% of the global market and is just 23% radialized, thus representing a formidable growth opportunity for the Group. In replacement, however, there are major differences as between passenger cars – an emerging market where the Group was able to quickly gain a lead – and trucks. This market, which is over half a century old, comprises a majority of old, not to say obsolete vehicles. This makes the Chinese truck market very difficult to penetrate owing to slow renewal and radialization. In Original Equipment, the Group’s bus tire supply contract with the City of Beijing boosted its market share.

 

Michelin, for example, reports significant increase in world tire market particularly in Replacement Tires in China where it accounts for 35 – 40 millions of truck tires.

 

Michelin’s decision to enter the China market had been driven by its vision to achieve Global Leadership. When Michelin was offered to Shanghai Tire and Rubber Co. Ltd (STRC) in 2001, Michelin immediately took advantage of the opportunity because foreign investment in China’s tire industry was highly restricted at the time. The only way Michelin could enter the China market was to work with a Chinese partner. Michelin hoped to leverage on both parties’ strengths – i.e. Michelin superior technology and STRC’s number 1 tire brand, Warrior.

 

Upon completion of the deal, Michelin first move was to send out expatriates to work with the new company in communication and in operations. A technical team was tasked to refurbish and to replace equipments, to train and to institutionalize new processes and workflow, and to deploy new technologies following Michelin’s strict standard of product quality. Other teams were also sent to improve on the overall value chain of new company working to improve distribution networks, to improve merchandising and product knowledge among retailers, to boost Warrior brand customer service, and to increase collection efficiency.

 

However, the merger had met organizational resistance from STRC and soon Michelin management would see that management of human resources would prove the biggest challenge in the acquisition[6].

 

To start with, there were several cultural and managerial differences between the new company and Michelin Group. First, the prevalent management style in a Chinese organization is one of power distance and humility and people have great respect for fixed hierarchical relationships. This is reflected in its business structure where top leaders have the natural power and authority while subordinates are trained to be less proactive and to simply follow orders. On the other hand, Michelin promotes the value of trust, initiative and action among its employees. There was no established and predetermined job path, no road straight to the top, and no lists of jobs to fill in. Michelin promotes career management where people always had the opportunity to let their talents and interests guide their careers.

 

Second, promotions were also based on tenure rather than performance or abilities. This created the “iron rice bowl” mentality, which symbolized guaranteed lifetime employment more commonly seen in state-owned enterprises. On the other hand, Michelin promotes a performance-based approach in managing personnel and career development program for its employees. Michelin’s appraisal process would determine the career direction and the recognition received by an employee.

 

Third, the Chinese place much significance to the concept of face. That is, Chinese often prefer to avoid conflicts or confrontations. Good relationship is maintained in helping each other to save face in front of other people and keeping the value of face. This ensures harmony and social order within the group. This is in conflictwith the management style of an expatriate who at one point provides direct and instantaneous feedback to engineers, causing them to lose face in front of the team.

 

Moreover, Chinese always nurture mutually beneficial relationship between each other. This means that one person would do a favor for another, with the expectation that the person being helped would provide some type of unspecified future assistance in return. Such relationships more commonly exist between neighbors, with the clerk in a local store, with government officials or with business associates. This is also contrast with the Western management style which tends to spend less time cultivating personal relationships.

 

Fourth, because of close family ties and close inter-relationships that exists within the Chinese household, the Chinese have a different communicative style. The Chinese have a high-context and non-verbal communication style of communication. It is high context in the sense that certain knowledge was already assumed, as opposed to a low-context culture, where more information is exchanged during each communication. Non-verbal communication included implied meanings, non-verbal cues, indirect statements and symbolic language. It assumes a shared understanding among communicants. In addition, Chinese businesspeople would rarely say “no” directly in response to a suggestion. Instead they would often propose that the matter be studied further. Similarly, open-ended questions were common, avoiding the possibility of forcing someone into a corner by requiring a “yes” or “no” answer. Rather than valuing directness, the Chinese are more likely to be polite but vague.

 

Lastly, Chinese value technical skills than leadership skills in the workplace. Being technically solid is a prerequisite in order to become a manager. Without sound technical knowledge and skills, it is difficult to earn respect from staff in the workplace. This also highly contrasts with Michelin’s management philosophy of delegating tasks, where leadership is emphasized and valued.

 

Key Driving Forces

 

The key macro-economic trend has been the globalization phenomenon. This trend has led many multinational companies to take advantage of the market opportunities presented in the China market as well as the risks associated with it.

 

While foreign multi-national companies continue to invest in facilities in the China market, we believe that two key driving forces would affect the human resource strategy on direct investments in China market. One would be the growing affluence and changing lifestyle of China’s middle class, and second improvements in technology and emphasis of China’s education.

 

With the significant increase in foreign direct investment in China market, a burgeoning Chinese middle class had developed. Chinese embassy reports that “China’s middle class covered 19 percent of the 1.3 billion population in 2003… with assets ranging 150,000 to 300,000 yuan (18,072 to 36,144 USD)… [government]  further expects the segment to grow 40 percent by 2020.”[7]

 

The rise of the middle class in the China market is one of the important developing trends in the region. The emerging middle class segment carries a special meaning for multinational companies in the China market[8]. On one hand, multinational companies not only expect to produce their products at low cost, but at the same time take advantage of growing their business with the increasing affluence and spending of the middle class. On the other hand, the multinational also believes that this segment would prove to be the key in identifying and recruiting local talent with right managerial skills to operate the local business.

 

Local talent is one of the scarce resources in the China’s labor market. Moreover, with the increasing foreign direct investment in China, multi-national companies had been competing with the limited talent. Keeping good people and training and development were also major issues. The scarcity of managerial talent was often referred to as “famine in the midst of abundance.” The short supply of experienced people with excellent management skills led to salary escalation, high staff turnover and less commitment from the company to invest in training and development. [9]

 

The “labor shortage” has raised concern on China’s losing its low-cost labor advantage. Yu Nanping, a researcher at East China Normal University, notes in a published article that “Labor advantage is not just about the quantity, but about quality as well.” [10] Yu argues that “China’s labor advantage lies with low intellectual cost over competitor.” He points to the lower salary range for highly skilled labor force (i.e. with PhD degree), which earns only one twelfth of what same qualified worker in Europe or North America. Yu suggests the further improvement on the training and development of workers to improve on further technology and quality of labor force. More importantly, he argues that China’s economy needs to shift its labor force from over-reliance on low-cost labor to a skilled workforce.

 

These next wave of social development will be the key driving force for companies operating in the China market. Particularly, the ability to understand and to adapt strategies conforming to the cultural norms and management styles is one key success factor in entering the China and establishing a foothold.

 

Strategic Capability Analysis – Use SWOT model (4000 words)
Having enumerated the difference in cultural and managerial issues confronting Michelin China, two key strategic questions had to be raised. First, should the company overlay its Western management principles and best practices into the deeply ingrained Chinese management style into new company? And, how can the team facilitate knowledge transfer into the new company and integrate the best practices in product quality and innovation in line with Michelin Group’s core strategy?

 

Eric Jugier, Michelin China CEO and Chairman, had a clear strategy in mind. That is, integrate the organizational culture and values of the Michelin Group to the new company.[11] However, Eric is also cautious of the risk which he acknowledges in the following account:

 

The fact that Chinese values and beliefs were different from their own could result in costly misunderstandings. If successfully managed, however, the differences in culture could complement each other and lead to better and faster knowledge transfer within the company. In order to facilitate the integration process, Michelin kept the original management team. To minimize cultural conflict, Michelin emphasized the importance of nourishing local management talent. [12]

 

In analyzing the strategic capabilities of Michelin China, we have undertaken a SWOT analysis on the Strengths, Weaknesses, Opportunities, and Threats for the Company:

 

Strengths:
Have the capability to diffuse technical know-how from product development to manufacturing across countries
Have a history of product innovation and strong commitment to product quality
Have established global problem solving processes and procedures and managerial philosophy
Have a strong company brand recognition as well as brand and product portfolio
Have a global footprint of 71 manufacturing/production plants across 19 countries
Financially capable and have the investor’s support
Weaknesses:
Have limited market knowledge and understanding (social, cultural, and political influences)
Limited pool of local management talent adopting a Western management style
Learning curve and experience effect of cultural attitudes in a business setting
Cultural insensitivity of expatriates may cause costly misunderstanding, cultural conflict, and hinder integration process
Opportunities:
Entering a once highly-regulated and closed China market
Very competitive cost structure and opportunities to increase scale production of tires in plants
Growing population size and increasing disposable income of local market
Expanding Michelin brand portfolio to include Warrior and developing new market segments for the Michelin’s core brands as well
Threats:
Inability to voice and participate in regulatory policies that may affect overall business operations
Local attitudes, managerial styles, and concerns that affect the decision making and overall performance.
Michelin’s Core Competence

 

By definition, core competence is “the capability of a company to perform a certain task relative to other competitors.”[13] It gives the company a competitive capability and thus qualifies as a genuine company strength and resource.

 

Michelin’s core competence had been its proficiency in developing market-driven products that is more durable and technologically advanced in safety and fuel efficiency. With its global manufacturing footprint and strong company brand recognition for product innovation and quality, it only suggests that the company has the capability to diffuse and disseminate technical know-how from product development to production across many countries. Moreover, Michelin’s expertise in developing innovative product and strong brands for different regional markets and tire category places the company in a distinct competitive advantage.

 

More importantly, Michelin’s strong brand and product quality gives the company the pricing power to consumers and automotive manufacturers. The company can demand a premium price for its products with the benefits/features it offers to automotive manufacturers, which had been more price sensitive compared to consumers. Its pricing power over buyers gives it a competitive advantage while rising prices of natural rubber and oil continue to put significant pressure to the company’s operations. With a history of product innovations, the brand recognition on Michelin tires has created a sense of trust on product quality and sense of superiority for its customers.

 

Product innovation and strong brand have been the key success factor for Michelin’s strategy. Innovation resides in its people and in its intellectual capital. It is grounded on the knowledge transfer between departments and functional combinations of skills, resources, and technologies. Knowledge and intellectual capital, more than physical assets and tangible organizational resources, are the key ingredients of an organization’s core competence and its competitive capability.

 

Market Opportunity and Threats

 

Market opportunity is a big factor in shaping a company’s strategy. Strategically, the market opportunities most relevant to a company are those that offer important avenues for profitable growth, those where a company has the most potential for competitive advantage, and those that match up well with the company’s financial and organizational resource capabilities. Furthermore, it is important to note that not all opportunities are worth pursuing. It is often advised to pass on a particular market opportunity unless it has or can build the resource capabilities to capture it.

 

The China market proves to be one of key growth markets outside the European and North American tire market. It is considered to be as frontier and one of emerging new markets, which attracted significant attention from all companies from different industries. Clearly, Michelin was ready to exploit the new market at the early stages when it struck a deal with Shanghai Tire and Rubber Co. Michelin’s joint venture places it in a unique position over its rivals Goodyear and Bridgestone. Michelin is now the no. 1 tire business in China and they expect to increase demand by 108 million radial tires in 2010.

 

On the other hand, certain factors in China’s operations are still uncertain and can pose threats to its profitability and competitive well-being. According to a published report in Wharton, Xavier Mosquet, a senior Vice President and head of Boston Consulting Group (BCG) European Operations, notes on the role that China can play in the global operations for many multi-national companies. “For many CEOs, however, it is still an abstraction. They don’t necessarily have a full-blown plan of what it means in terms of the scale – the role of manufacturing or the role of China in terms of technology – and how and to what extent they can and cannot rely on that country to provide shared services for their operations in the rest of the world,” he explains.[14]

 

 

China Expansion and Michelin’s strategy

 

Michelin had one of the first global companies to establish their presence in the China market. The China expansion has been one of current key landmarks in Michelin’s goal for global sustainable profitable growth. To put it more succinctly, the company would report in its financial statements:

 

“The Group’s strategy of profitable growth, which is global, sustainable and targeted is based on technology and innovation. It involves valorizing its powerful brands and quality products and services through universal customer recognition.”

 

Michelin had recognized the potential in the China market as early as 1996 when it invested a Production facility in Shenyang and later on gaining a controlling stake at Shanghai Tire and Rubber Co. Ltd.

 

Clearly, the strategy at the time for Michelin was to take advantage of the Shanghai Tire and Rubber Co.’s market share of 5% in the passenger cars segment, its established brand Warrior, and a distribution channel to build on its capacity and reputation. Its long term goal was to be the first to take position to become the number 1 tire maker in the fast growing China market.

 

Both companies have its strengths. On one hand, Michelin has the advantage of technology, management expertise, brand portfolio, and financial strength, while Shanghai Tire and Rubber Co. has the local knowledge of the distribution channel, market (i.e. existing customers), engineers and production capability in the region.

 

For Michelin, the success of the joint venture is largely dependent on the transfer of its organizational capability. The technology advantage is dynamic, so the real source comes from R&D and innovation. From this perspective, the critical challenge facing Michelin is to pump its “blood” to the body of the employees from Shanghai Tire and Rubber Co., Ltd.

 

Aligning the People at Michelin China

 

Every company has its unique organizational culture. Each has its own business philosophy and principles, its own ways of approaching problems and making decisions, its own work climate, its own embedded patterns of “how things are done around here,” its own lore, its own taboos, and political don’ts – in other words, its own ingrained beliefs, behavior and thought patterns, business practices, and personality that define its corporate culture.

 

The beliefs, vision, objectives, and business approaches and practices underpinning a company strategy may be compatible with its culture or they may not. When they are, the culture becomes a valuable ally in strategy implementation and execution. When the culture is in conflict with some aspect of the company’s direction, performance targets, or strategy, the culture become the stumbling block that impedes successful implementation and execution.

 

The culture at Michelin was based on five fundamental values: (1) respect for customers; (2) respect for people; (3) respect for shareholders; (4) respect for facts; and (5) respect for the environment. All the group decisions were taken in light of these values (see Exhibit 1).

 

Exhibit 1.

The 5 values of the Michelin Group[15]
Respect for Customers
The very core of the company’s mission is to serve its customers; our long-term existence and growth depend on the long-term satisfaction of our customers. Our primary responsibility is to provide our customers with safe products, suitable for their intended use, of high manufacturing quality. Likewise, the services we provide aim for the highest levels of quality in terms of reliability, customer expectations and compliance with deadlines and costs.
Respect for People
We intend to continue the Michelin Group’s global expansion through the development of good relations which are mutually beneficial for all our stakeholders be they our employees, our industrial and commercial partners, public authorities, non-governmental organizations, the media or local communities where we are implanted.
Respect for Shareholders
Respecting shareholders therefore means fully recognizing their role and the risks they take, involving them in the life of the Company and striving to meet their long-term expectations.

 

We are convinced that focusing on our economic performance, as well as caring for the environment, for people and for society as a whole, are not only compatible but, indeed, inseparable.

 

Realizing a sufficient level of profit enables us to meet the expectations of our shareholders, to meet our investment needs, to grant our employees pay rises, to enhance our environmental performance and participate in the development of the countries where we operate.
Respect for the Environment
It is our responsibility to provide our customers with ever more environmentally-friendly products and services. Accordingly, our

permanent innovation policy focuses on enhancing the environmental performance of mobility.
Respect for Facts
Respecting facts demands objectivity and intellectual honesty, above and beyond opinions and preconceived ideas.

 

When we develop our tires we put them to the test in real world conditions. This is testing the facts. This pragmatic attitude is applied in all our activities: from the manufacturing workshops on a daily basis and over the long term with all our interlocutors, be they members of our teams, customers, partners, public authorities, journalists, etc.
It means adopting an approach based on curiosity, attentiveness and modesty as we apprehend reality. It is a necessary component of our progress.
Its people are the key factor for Michelin’s success and innovation ability. Respect for people value represents Michelin’s commitment for the personal development of its people, encouraging managers to delegate in a spirit of trust, providing employees with freedom to initiate and act. No established hierarchical and pre-determined job path, no road straight to the top, and no lists of jobs to be filled in had been created in its organizational structure.

 

On the other hand, the major challenges facing Michelin China have been the cultural differences of the French and Chinese, the differences in the attitudes, beliefs and style of local management team of Shanghai Tire and Rubber Co. and Michelin, the gap between the organizational needs of Michelin and STRC, and the local employee’s mental models and expectations. The key task, therefore, for its operation in China is to implant the same innovative gene that runs in the Michelin Group to its China operation. And, to ensure everyone is aligned to the company’s mission and global strategy, the first thing for Michelin China to undertake is to introduce, to educate, and to enroll the local employees on its corporate culture and values.

 

While Michelin China CEO Eric Jugier’s clear strategy was to superimpose the values and corporate culture embodied by the French Global company at the start, it had been clear that expatriates had encountered resistance from local employees at Michelin China particularly because of the cultural differences and the mental models exhibited by the formerly State-owned Enterprise.

 

Existing Strategy Analysis

 

 

While the merger of Shanghai Tire and Rubber Company Ltd and Michelin had been widely opposed by local management, the key strategic goal of the latter had still been to integrate the and to facilitate the knowledge transfer to the new company.

 

The management resistance can be attributed to the insensitivity to cultural differences. It is important to note that the joint venture was built on Shanghai Tire and Rubber Co., Ltd., and 90% of the employees come from the old company. This implies that the new company will largely inherit the interpersonal relations, mindset and practices of Shanghai Tire and Rubber Co., Ltd. Moreover, the interpersonal relations, mindset and practices of the old company have largely been ingrained and had formed into a habit and the superimposition of the new management systems should take time to be perfected. The amount of the time would depend on the degree of resistance exerted by the local company. Nevertheless, Eric Jugier should focus on overcoming this inertia in order to focus more on the opportunities in the China market.

 

Differentiating Michelin’s Personnel Management System

 

In line with Michelin’s strategy to differentiate itself in terms of quality, technology, and innovation, Eric Jugier sets out to implement the same strategy to the employees of the new company. It had been clear that employees in Shanghai Tire and Rubber Co. was accustomed to the traditional Chinese management style.

 

The broad differentiation strategy of Michelin’s offering to the employees seeks to differentiate the company’s offering from the traditional management with expectation that it will appeal to local management team, regular employees, and attract external local talents as well.

 

Michelin’s personnel department, which employs 1,400 people worldwide, is independent of the other management structures, and the chain of command is not as straightforward as in many other multinational companies, not to mention Chinese companies.

 

The department’s main mission was to: “Build individual professional advancement in line with personal aspirations and proven skills and performance. Satisfy the personnel requirements of the Group’s entities, in both the short and long term.”

 

To achieve this mission, the personnel function focused on five activities: (1) individual career management; (2) training and development; (3) management of current and future staffing levels and competency development; (4) management of labor relations; and (5) development of tools to assist in personnel management.

 

Individual career plans and personal progression were an integral part of Michelin philosophy. Every professional employee mapped out long-term career directions and interests, received ongoing feedback and evaluation and was engaged in discussions about career interests.

 

Career development was a shared responsibility between an employee, his/her manager and a career manager. A career manager “followed” all employees, regardless of level, throughout their career with Michelin, meeting with them every two years to assess their needs and opinions.

 

The career offering at Michelin with its features and benefits seems enticing enough to enroll STRC’s employees into the integration program of Michelin. The essence of this strategy is to offer unique and customized career paths that can be valuable to local Chinese talents as well as reduce resistance to the change in management.

 

 

Pitfalls in Personnel Management in Michelin China

 

While a team of expats work to introduce and to enroll its new colleagues to the Michelin culture, it is important to note that joint ventures and alliances, nevertheless, have their pitfalls. Achieving effective collaboration between Michelin and Shanghai Tire and Rubber Co., each with different motives and perhaps conflicting objectives, is not easy[16]. It requires many meetings of many people working in good faith over a period of time to iron out what is to be shared, what is to remain proprietary, and how the cooperative arrangement will work. The team in Michelin China also has to overcome language and cultural barriers and communication, trust-building, and coordination consumes a lot of management’s time. Often, if the interaction is not managed properly, partners discover that they have deep differences of opinion about how to proceed and conflicting objectives and strategies. Tensions build up, working relationships cool, and the hoped-for benefits never materialize.

 

Being sensitive to cultural differences would be a key factor in personnel management for Michelin China. Unless expatriates take time to understand and build relationship with key local management personnel, it would be difficult in creating a productive relationship in the new company. More importantly, an outsider must always exhibit respect for the local culture and local business practices. Ensuring that employees and key local management personnel recognize the vision, value, and benefits on both sides would eventually lead to trust-building and collaboration.

 

Benchmarks of Best Approaches

 

In order to pursue Michelin’s commitment to “contribute to the progress of mobility”, it is important to facilitate knowledge creation and knowledge transfer across borders. Knowledge transfer across borders is one of the core strengths of Michelin in operating manufacturing plants in over 19 countries. The overall success of the project is hinged on the success of transferring competencies, capabilities, and resource strengths. This requires collaboration and knowledge sharing among global Michelin experts and local employees. Moreover, Michelin needs to approach its strategy in China market with cultural sensitivity and clear commitment.

 

It is important to note that while Michelin was one of the first in establishing itself in the China market, many multinational companies have followed suit as well. In a published report Changing Face of Management in China in Wharton, they reported that in 2003 Boston Consulting Group (BCG) did a survey to benchmark on the best corporate approaches to establishing and managing their overall presence in China. The consultancy studied 14 multi-national companies looking at a broad corporate perspective, how they maintain global visibility in its China operations, and how different functions are carried out.[17]

 

BCG reports the following as 10 unique ways on how multi-national companies approach China market[18]:

 

The China operation has a very senior, accountable sponsor at the global level; at Samsung, for example, the China CEO is one of three top group executives.
Clear, bold targets are set internally, and sometimes externally; GE has goals of $5 billion in sales and $5 billion in sourcing by 2005.
A continual, top-down management push is reinforced with management processes; Michael Dell of Dell Computer and other CEOs visit China at least once a year.
The MNC is willing to change its rules regarding global priorities and norms to favor China; Kodak moved its Asia headquarters to China.
China-specific products are pursued; virtually all major MNCs have China-specific products. The MNC works aggressively to bring the industry value chain, including R&D, into China; Samsung set up a 300-person handset R&D laboratory in Beijing.
Managers are nurtured for the long term; Motorola University runs management development programs in China.
Government relations and public relations are strongly emphasized; Pepsi has stepped up its government-relations focus on the central government and less on provincial governments.
The China operation is given a truly “value-added” role; Kodak’s China organization prepares an integrated strategy across six businesses.
China is made a global or regional center — or both — for key responsibilities; Nike says its China operation will become increasingly important in the build-up to the 2008 Olympics
(Source: BCG in “The Changing Face of Management, 2005).

 

Samsung’s Success

 

Samsung’s China strategy had not been different with other multi-national corporations operating in China. The strategy had been mainly to establish a manufacturing capacity in 1990 to take advantage of China’s cheap labor. However, as China economy has grown significantly, Samsung has adjusted its strategy to reflect its commitment in developing its overseas business.

 

Not only did Samsung invest a significant amount of money into building R&D and marketing support facilities, and upgrading the production equipments in China, but it also pursued a localization strategy[19]. Samsung has invested to becoming a local company in China and played an active role in trying to take root in China and developing China’s economy. Moreover, it has taken steps in involving Chinese employees in key senior management position responsible for some of its core business. In fact, China’s CEO is one of the top three executives in the group and Samsung has established its second headquarters in China as well. This has led to the increased collaboration, greater accountability of Chinese managers and advancement in Samsung’s technology and deeper understanding on the needs of the local China market. As a result, at the end of 2005, Samsung has posted USD 79.5 billion in sales and USD 7.5 billion in net income with the China market share continuously growing[20].

 

Similarly, Michelin’s investment in the China market is mark of its initiative to create long-term growth market for its tire business. However, comparing its China strategy, it is important to note of Samsung’s initiative to get out of its way to stress the importance of the China market in its global operations. On the other hand, Michelin continue to be cautious and conservative in its expansion in the market noting its difficulty in the enrolling the local management to Michelin’s global strategy. Moreover, unlike Samsung’s strong market presence in the electronics segment, Michelin had had difficulties in penetrating the local market particularly the truck tire market.

 

To illustrate, Michelin reports that World truck tire market accounts for 1/4 of world sales or more than 150 million tires, 84% of which are sold on the replacement market. China’s truck tire market, which alone accounts for close to 30% of the world market, representing a formidable growth opportunity for the Group (Exhibit 2).

 

 

 

 

 

 

 

 

 

Exhibit 2

 

Truck tires are capital goods. They account for 3% of a truck fleet’s operating costs on average and can induce substantial fuel savings. This is significant since fuel accounts for 20% of a heavy hauling firm’s operating costs. There are major differences though in the China truck tire market. This market, which is over half a century old, comprises a majority of old, not to say obsolete vehicles. This makes the Chinese truck market very difficult to penetrate owing to slow renewal and radialization. In Original Equipment, the Group’s bus tire supply contract with the City of Beijing boosted its market share.

 

On the positive note, Michelin has made significant improvements in the quality of tires sold and educate the market as well on the advantages of such improvements. Nevertheless, Michelin continues to study and be cautious on investment and the level of activity in the local market.

 

Generate Strategic Options

 

Going back, two key questions were raised: First, should the company overlay its Western management principles and best practices into the deeply ingrained Chinese management style into new company? And, how can the team facilitate knowledge transfer into the new company and integrate the best practices in product quality and innovation in line with Michelin Group’s core strategy?

 

We would still recommend for Michelin to continue to educate and to enroll its local Chinese employees into its mission and values. While the entry of Michelin will result to initial resistance from the Chinese employees, the values and principles adhered to by the company can be considered to be universal. In time, local employees will understand these principles and embody these Michelin values in their behaviors.

 

Knowledge transfer had been one of the key tasks in the acquisition of Shanghai Tire and Rubber Co. It is therefore important for Michelin to invest in training and development of local engineers as part of Michelin’s best practices in product quality. Moreover, it is important to continuously consult and exchange ideas across borders in order to facilitate knowledge sharing and knowledge creation towards product innovation.

 

After analyzing the strategic capabilities of Michelin China, we have then generated several strategies on addressing these questions in line Michelin’s Global strategy. We have used the TOWS analysis on how to exploit the opportunities and defend against the possible threats to the company’s overall profitability and growth.

 
Strengths
Weaknesses
– Technical know-how from product development to manufacturing

– Commitment product innovation and quality

– Established global problem solving processes and procedures and managerial philosophy

– Strong brand recognition and product brand portfolio

– Global footprint

– Financially sound, stable,  and capable
– Limited market knowledge and understanding (social, cultural, and political influences)

– Limited pool of local management talent adopting a Western management style

– Learning curve and experience effect of cultural attitudes in a business setting
Opportunities
–       Increase tire volume demand on Warrior tires and Michelin and BF Goodrich tires

–       Produce and export low cost tires from China

–       Tap on technical expertise and high quality and low cost talent to develop new products and improve processes

 

–    Train and educate local talent for key management position

–    Tap on the technical skills, knowledge, and exposure on the Chinese tire market by recruiting top local talent

–    Localize marketing strategy to increase penetration in the China tire market
– Entry a once highly-regulated and closed China market

– Very competitive cost structure and opportunities to increase scale production of tires in plants

– Growing population size and increasing disposable income of local market

– Expanding Michelin brand portfolio to include Warrior and developing new market segments for the Michelin’s core brands as well
Threats
–       Communicate, educate, and train local employees on the Michelin’s Mission and Values

–       Acknowledge and celebrate diversity in workplace. Recognize and offer incentives for performers
–    Consult, collaborate and develop productive working relationship on new product developments and market strategies

–    Key management people in Michelin China should be also work in the planning and decision making of launching in the new products.
– Inability to voice and participate in regulatory policies that may affect overall business operations

– Local attitudes, managerial styles, and concerns that affect the decision making and overall performance.
Recommended Strategies (500-1000 words)
1. Taking advantage low-cost labor and Warrior brand in China

 

In line with the present strengths of the Michelin Group and the opportunities of the present for the company, we would suggest to continue to take advantage of the low-cost labor in China to produce and to export tires for the Global Tire Market. In addition, it is important to also take advantage of the established brand of Shanghai Tire and Rubber Co.’s Warrior in understanding the local China market.

 

Michelin management should also work on continuously improving on the processes, technology, and equipment of the acquired company to improve on efficiency and increase productivity. Moreover, technical training with the local engineers with the Global office to assist in improving work process as well as facilitating the knowledge transfer of best practices.

Organizing the production facility according to the global quality standards of Michelin would be one of the initial key tasks that need to be accomplished.

 

In addition, while the production line will continue to produce the Warrior brand tires, it is important to set goals for other Michelin brands such as BF Goodrich, and for Michelin to penetrate the market as well. With the inclusion of an established distribution channel in the acquisition deal, it is important to see the opportunity of offering additional brands in local tire market. Moreover, it gives Michelin the ability to educate the market on the improvement of the tire technology and quality, and benefits of such improvement as well.

 

2. Invest in training and development of local talent for key management position

 

It is important to recruit, train and develop top local talent for key management positions in the company. Recruitment and training would be the key processes in human resources department. The growing segment of Chinese middle class will undoubtedly increase the pool with competent local employees. Their personal investment in education and development of skills will add attractiveness to quality of workforce.

 

Recruitment process the right local talent with the right attitude will be key in the solving the Michelin China’s dilemma. Recruitment must not only assess the competencies, skills, educational background, but give priority to the person’s character fit within the company. Early on, the local talent needs to understand the mission and values of Michelin and be integrated in the company culture.

 

Moreover, investing in the development of local talent will provide the company with the local knowledge and expertise in serving the China market. Their close affinity to the local culture will serve as the differentiator in effectively serving the needs of the local market.

 
Appendix A: Michelin’s 2005 Key Figures[21]

 

Key Financial Figures

 

 

 

 

 
Appendix B: World Tire Market[22]

 

 

 

 

 
References and Bibliography

 

BBC News (Oct 11, 2004). China middle class revolution [Online] Available: http://news.bbc.co.uk/2/hi/asia-pacific/3732914.stm

 

China Embassy in the US. [Online] Available:

http://www.china-embassy.org/eng/xw/t80880.htm

 

Economist (Jan 17, 2002). To get rich is glorious [Online] Available: http://www.economist.com/world/asia/displayStory.cfm?Story_ID=940833

 

[email protected] (2005). The Changing Face of Management (Pennsylvania: Wharton Business School) [Online] Available: http://knowledge.wharton.upenn.edu/article.cfm?articleid=1164 [Accessed: September 7, 2006]

 

[email protected] (2006). Does a Growing Worker Shortage Threaten China’s Low-Cost Advantage? (Pennsylvania: Wharton Business School) [Online] Available: http://knowledge.wharton.upenn.edu/article.cfm?articleid=1473 [Accessed: September 7, 2006]

 

Michelin corporate website: http://www.michelin.com/

 

Michelin (2006). Michelin Annual 2005 Report. (France: Michelin Group) [Online] Available: www.michelin.com/corporate/front/templates/affich.jsp?codeRubrique=20060414090253&lang=EN [Accessed: September 7, 2006]

 

Shengjun, L. (2004). Michelin China: A Case Study (China Europe International Business School) [Online] Available: www.ceibs.edu/link/latest/images/20051012/1736.pdf

 

Sun, J Sun, X and Xu, T. Competitive Advantage Based on Innovation. A Case Study on Samsung (Beijing Conference 2004) [Online] Available: http://faculty.washington.edu/karyiu/confer/beijing03/papers/sun&sun&xu.pdf

 

Thompson, A and AJ Strickland (2003). Strategic Management: Concepts and Cases. 13th ed. (New York: McGraw-Hill).

 

Yu, S. and Jian Yang (2005). “Enemy at the Gate” (CFO Asia). [Online] Available: http://www.cfoasia.com/archives/200505-02.htm

 

 

[1] Michelin 2005 Annual Report. See Appendix A.
[2] Michelin corporate website: http://www.michelin.com/
[3] Michelin China. The case study tackles on the management problems and the cultural differences of the French company and its acquisition of a Chinese tire company in 2001. The case was prepared by Dr. Liu Shengjun at CEIBS and Research Associate Inna Francis.
[4] See Apendix B. Source: Michelin 2005 Annual Report
[5] Michelin Annual Report 2005.
[6] Based on the case study of Michelin China
[7] China Embassy in the US. Online available: http://www.china-embassy.org/eng/xw/t80880.htm
[8] BBC news report “China’s middle class revolution” Oct 11, 2004 (online: http://news.bbc.co.uk/2/hi/asia-pacific/3732914.stm); Economist “To get rich is glorious” Jan 17, 2002 (online: http://www.economist.com/world/asia/displayStory.cfm?Story_ID=940833)
[9] “Does a Growing Worker Shortage Threaten China’s Low Cost Advantage?” May 10, 2006 ([email protected])
[10] “Does a Growing Worker Shortage Threaten China’s Low Cost Advantage?” May 10, 2006 ([email protected])
[11] Michelin China. A Case Study
[12] “Does a Growing Worker Shortage Threaten China’s Low Cost Advantage?” May 10, 2006 ([email protected])
[13] Thompson, A and AJ Strickland. Strategic Management: Concepts and Cases. 13th ed. McGraw-Hill, US.
[14] “The Changing Face of Management” June 1, 2005 ([email protected]).
[15] Source: Michelin Corporate Website
[16] Sylvia Yu and Yang Jian. “Enemy at the Gate” CFO Asia. May 2005. Online: http://www.cfoasia.com/archives/200505-02.htm
[17] “The Changing Face of Management” June 1, 2005 ([email protected]).
[18] “The Changing Face of Management” June 1, 2005 ([email protected]).
[19] Sun, J Sun, X and Xu, T. Competitive Advantage Based on Innovation. A Case Study on Samsung”
[20] Samsung 2005 Annual Report
[21] 2005 Annual Report
[22] Michelin 2005 Annual Report.

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