What changed Michelin’s mind on F1 return?

As a few F1 journalists have mentioned, Michelin may be interested in returning to F1. James Allen and Joe Saward effectively (as usual) describe the situation—you’ll recall the consternation between the FIA and Michelin which lead to their departure from the sport in 2006. According to most reports, namely the Bloomberg article, the prospects of a return to F1 and an amicable relationship with the FIA actually look redemptive in nature.

The quote, from Bloomberg, regarding their talks with the FIA is:

“We might consider returning but there are some very clear conditions,” Senard said today in an interview in Paris. Rules on tire use would have to change to “show the performance they can bring, notably in terms of fuel saving and CO2 reductions.”

Ideally Michelin would like more emphasis placed on tire performance and to highlight their “Green X” program and line of tires which reduce rolling resistance and increase mileage. F1 would need to commit to a better promotion of the tire component involved in its racing series.

Bridgestone, the sole-supplier of tires for F1 since 2006, is leaving the sport in 2011. At some level the sole-supplier model (Mosley derived) is a difficult proposition and one in which Michelin stated very firmly they are not interested in. The comment in 2005 was:

“Michelin has continually made its belief known that Formula One should, as motorsport’s cutting-edge discipline, be an arena where the most advanced technologies can do battle in the interest of motoring. In this respect, the changes in the Formula One rules to bring in a single-tyre supplier go completely against these principles. It is one more step towards standardizing a sport which should be practiced at the highest level of competition”

Bridgestone is rarely discussed by name in F1 and while the advertising hoardings are ubiquitous at every grand prix, the only time the company’s name is mentioned is when the tire is bad for a particular track. Not a branding message you want on the tip of viewers tongues. Here we are, however, with Michelin stating they may be interested in a return as sole-supplier IF the FIA focus on the tire technology and brand message as well as allow the maker to promote their line of “Green X” product which account for more than 2/3’s of their global volume in sales for 2009.

Where I am going to depart from the elder statesmen of F1 journalism is in my attempt to find the emotional prime mover for Michelin’s desire to return to a sole-supplier series in which they clearly are not interested in. To do that, we need to look at recent financial data released by Michelin. Bear with me on this folks, it’s business talk:

Michelin’s net profit fell last year—further than expected—due to declining tire sales and high restructuring costs. How much you ask? Net profit dropped 71% to €104 million ($142.3 million) in 2009 from €357 million a year earlier, below analysts’ estimate of €125 million. Revenue fell 9.8% in 2009 to €14.81 billion from €16.41 billion, reflecting a 15% drop in tire sales.

“The market visibility prevailing in early 2010 and the rising cost of raw materials [particularly natural rubber] are prompting us to exercise extreme vigilance,” said Managing partner Michel Rollier.

Sales of car and light-truck tires declined 4.5% to €8.28 billion representing the reduced customer base from slower car and truck manufacturing. On Friday, Michelin said that replacement truck tire prices will go up 4% on April 1 in Europe and replacement car and light truck tires will rise between 3% and 4% during the second quarter. “It’s imperative that we increase prices. If we don’t, we jeopardize our margins, and there’s no question of doing that,” Co-managing partner Jean-Dominique Senard said.

Time to circle the wagons? No, but it may give some insight in to what could have changed Michelin’s mind on the sole-supplier position in F1. Sales is king in an economy where cash is emperor. Capitalizing on Jean Todt’s call for “green” F1 and highlighting their Green X products as well as getting the FIA to commit to more, positive brand positioning may be something worthwhile in a lagging market. In fact, it may make a lot of sense as Bridgestone is bowing out.

Michelin’s net debt, meanwhile, fell to €3.05 billion from €4.27 billion, improving the company’s gearing ratio to 55%—a record low for the company—from 84%.

We could spend time discussing total debt/total equity, EBIT/total interest, equity/assets but the simplest answer to the gearing ration is that a company with high gearing (high leverage) is more vulnerable to downturns in the business cycle because it must continue to service its debt regardless of how bad sales are. A larger proportion of equity provides a cushion and is seen as a measure of financial strength.

With that in mind, Michelin looks better from an equity stand point and needs to return to pre-GFC sales and profit volumes. In order to do that, capitalizing on their hottest selling product, the Green X line, and getting a better, agreed upon Return On Message commitment from the FIA might just be the catalyst for returning to F1 and I couldn’t be happier about it.

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