Near Moscow, in the village of Davydovo, the leader on the world tire market Michelin has become the first foreign tire manufacturer to set up shop in Russia.

“The road from Moscow to Davydovo reminded me of Canada: woods, woods, and more woods…,” recalls one top executive at the French corporation Michelin, one of the top-three tire companies in the world. Many at Michelin remember that employees who had come to build the factory in Davydovo and especially their wives were shocked to discover that the nearest European-style supermarket was 100 kilometers from their housing development. The potential of the Russian tire market had brought these French specialists to this seemingly remote corner of the world. At the factory’s official opening, executive partner Edouard Michelin stated that while developed economies were expanding at 2%, Russia was growing “unprecedented rates.” And economic growth means growth on the tire market.
Michelin is the first, but not the last, tire transnational on the Russian market to earn the status of local producer. Finnish Nokia, Michelin’s direct competitor in snow tires, which will make up the bulk of the Davydovo factory’s products, announced that it will build a factory in Vsevolozhsk near St. Petersburg and start production next year.

The greenfield principle

When referring to high growth rates, managers at Michelin have two things in mind. First, the number of passenger automobiles per thousand inhabitants in Russia is still three to five times lower than in developed countries. In its business plan for the Davydovo plant, which will produce tires for this type of vehicle, the company is projecting that the market will double over the next ten years to around 50 million tires a year. Moreover, the company believes that foreign car makers will join them in Russia. By adding up all the announced plans to open up facilities in Russia, Michelin estimated that 300,000 cars will soon be produced in Russia (56,000 foreign brand vehicles were produced in 2003).
Secondly, an economy that is growing by 7% a year will need a similar expansion in freight transportation. Christian Tschann, Director of Michelin’s European Division, announced that sooner or later Michelin will also start producing truck tires in Russia. The company believes that it will fare well in a market segment Russian producers have yet to conquer. According to Michelin’s estimates, only 5% of all tires for large trucks in use in Russia are produced using solid steel belts. The Russian economy’s emphasis on natural resources is also playing into the French company’s hands, as tires for quarry and mining vehicles make up a significant portion of their product. Apparently, Michelin tires are already rolling through the diamond mines of Yakutia.
The company decided to build the new factory from scratch, without any Russian companies as partners. According to Tschann, Michelin representatives visited almost every tire factory in Russia and saw that their obsolete equipment would never produce tires that met current world standards. For this reason they decided to build factory equipped with the latest technology from the very start.
The greenfield approach will also benefit Michelin in several ways. The company will not only be able to create its production line from scratch, but also its workforce. According to a Michelin human resource manager, it is crucial for the company to find people who want to work and who will work at the pace common in today’s factories. For this reason, young people predominate at the Davydovo plant. Middle-aged inhabitants of Davydovo, as many people familiar with the local labor market have noted, are used to traveling to Moscow to work a couple times a week.
Michelin invested $70 million in the construction of the factory and plans to spend $160 million in total. By 2005, the factory will begin to operate at full capacity for the project’s first stage, 2.1 million tires a year or 8% of the total Russian automotive tire market. Managers at Michelin are not ruling out the possibility that in the future the plant will eventually reach the same production levels as the company’s other factories, from 5 to 10 million tires a year.
The Davydovo plant will manufacture quality, mass-market Class A automotive tires under the Energy (summer) and Alpin (snow tires) brand names. Products with special characteristics will carry the Michelin name such as racing tires or the company’s most recent development, PAX. Even if punctured, these tires can make it to the next service station without any disturbing consequences. The Russian mass market is not ready for these high-class tires according to Michelin, and won’t be ready anytime soon. All parts and components—rubber, metal belts, textile tire cord—will be imported. Michelin is in the process of negotiating with Russian input producers, but to become a Michelin supplier, companies first have to meet all of the French company’s standards.

Money and technology

The arrival of Michelin and other foreign tire producers will naturally have a major effect on the Russian market. Domestic producers will be forced to bring their products up to international standards. This is a capital-intensive process, especially with the long-term neglect of R&D and equipment at Russian factories. However, big Russian companies believe that they can manage.
For example, as part of the business program approved this April, Sibur plans to invest up to $300 million over the next four years in its factories. The Amtel Holding announced in July that construction of a premium-class tire factory was underway in Voronezh that will produce 3 million tires a year and cost the holding 60 million euros.
Russian producers are also ready to meet foreign competitors head on in the area of marketing. Amtel will make its Voronezh tires under a brand name. Sibur also plans to launch new brands on the market, one overarching brand for all makes of tires and another independent one for automotive tires.
Large Russian companies are confident that foreign producers’ new Russian factories will not affect their positions much. For instance, Sibur, which currently controls 30% of the market for automotive tires, believes Michelin could squeeze out Russian manufacturers in this area. However, the French company will have a harder time breaking into the market for agricultural equipment and truck tires, where Sibur is particularly strong. Sibur plans to increase its share of these markets to 70% and 60% respectively by 2008. The company already dominates the market for steel-belted truck tires (70%), one of the very markets Michelin is targeting.
Russian tire manufacturers are also noting that Michelin tires will only be competitive on the Russian market if they can keep French quality but sell at Russian prices. Michelin’s managers believe there is no reason for prices to be any lower on the Russian market than anywhere else. The price of even the most basic tires stems from the cost of inputs, materials, and the technology ensuring a certain level of quality and safety below which Michelin refuses to fall. Demand for tires is shifting toward higher-priced segments. Tire imports prove this, and according to data from Irbis, import patterns have undergone a qualitative change. While in 2001, the lion’s share of imports came from Ukraine and Belarus, by 2002 these countries’ shares had already fallen to 35%. Michelin’s share of imports rose over the last three years from 6.4% to 14%, and its total share of the Russian market increased from 1.4% to 2.5%.
Dmitri Kabalinsky at Expert RA thinks that one should not be overly optimistic about even large Russian tire manufacturers’ chances, especially in the long term. The fact of the matter is that their current investment will only at best lead to production modernization and targeted innovation. In the future, they will need a technological breakthrough, which means large-scale investment in R&D. Russian companies simply don’t have the resources. The most natural way for them to stay competitive is to join up with leading world manufacturers. However, this is not as easy as it sounds. At one point Amtel was making snow tires for Nokia, and the companies were in the process of setting up a joint venture when something went wrong. Now the Finns are also thinking greenfield.

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