The global economic system is entering a period of radical change. For multinationals with cross-border supply chains, this is a problem. However, Michelin’s CEO Florent Menegaux argues that the flexibility his company has developed during the last decade will help it prevail through turbulent times.
“The world was different before COVID and before President Trump was elected in 2016,” says Menegaux. “This triggered changes around the world. We are present in 175 countries globally, but the world is evolving, especially in relationships between countries. The geopolitical risk that has always existed is now top of our agenda. We've also seen war arriving suddenly in Europe, which has completely changed our supply chains. We heavily depended on Russia for raw materials, and overnight we had to change all our supply chains for these and for some components of our composites.”
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COVID changed the way companies manage their staff, too. “We thought that movement was natural, and suddenly more than half of the world was locked down,” continues Menegaux. “Then we had huge inflation that quickly changed the way we were envisaging supply chains as well because of sharp rising costs. All that has created a new world inside Michelin. We are thinking that maybe we were wrong in defining chaos and order. Previously, we had a view of order, but now maybe chaos is the new order.”
“The question was whether our strategy was adequate in this new world,” says Menegaux. “Michelin has developed better agility.”
One way that Michelin has been improving its resilience to a chaotic environment is by diversifying business into composites, where different materials are bonded together to form a single substance. Tires have been composites for decades, so this business pivot leverages the company’s existing expertise. Michelin now makes flexible tubing, timing belts, huge conveyor belts for use in mining facilities, and rubberized fabric for inflatable boats.
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The company even manufactures tiny composite components designed to be surgically introduced into human bodies to repair damage. Composites currently only make up 5% of Michelin’s business, but the aim is for the proportion to reach 20% by 2030. The flagship composite project is Michelin’s bid to provide airless tires for NASA’s Artemis mission Lunar Terrain Vehicle. “Developing this technology will also have a lot of benefits for our day-to-day tires that will be used on Earth,” says Menegaux.
Global competition has been building for years and there’s no sign of it abating in the tire business even with new tariff regimes. China is the most obvious competitor now, but the threat is nothing new. “For the past 15 years, we have been competing heavily with China, and this is strengthening us, provided they obey the acceptable rules of the game,” says Menegaux. “We have made a lot of real advancements in our technologies because of the pressure from China. When I joined Michelin, the pressure was coming from Japan. After that, we had Korea. Because of the size of China, it's very likely that one or two global, worldwide players will emerge, and after that, you will have one from India, and probably then you may see something coming from Africa. That's okay, because we think the world vehicle number is going to double, so there is space for everybody. We have seen more than 100 tire manufacturers from China emerge in 20 years. So that will have to change. There is too much capacity, not enough technology.”
“The question was whether our strategy was adequate in this new world. Michelin has developed better agility.”
Michelin has been reconfiguring its manufacturing footprint for years to deal with these shifting market conditions. “We had a lot of plants for historic reasons,” says Menegaux. “We used to sustain our scattered footprint in Europe, because we were able to export out of Europe. Now the competitive environment is not adequate for us to export out of Europe, so we must envisage our footprint in Europe being for Europe.”
“We have revised how the global supply chain should be done,” says Menegaux. “For a while now, we have had a local-to-local vision. Sourcing something critical to your production from the opposite part of the world may not be a wise thing unless you're forced to do that. For example, natural rubber trees don't grow in Italy. They grow only in a band of 200 kilometers north or south of the equator. But do you need to manufacture things in China because it’s cheaper?”
The current tariff wars are meant to combat the imbalances between manufacturing costs in different countries, but Menegaux reckons this won’t prevent the inertia of globalization, which has been a net benefit to the world. “We are already globalized now,” he says.
“However, the way this globalization is done may evolve. How do you make sure that wealth is evenly split amongst countries, but also amongst populations? If you are smarter, you can reduce costs. But if your cost structure is different because of tax or social conditions, it's wrong. The preceding globalization has been done on the premise of finding something cheaper elsewhere, or with fewer rules on environmental conditions. But overall, globalization has been very good for the world, because hundreds of millions of people have been lifted out of poverty.”
Michelin’s strategies of localization and diversification could make it less vulnerable to the U.S. tariff wars than some global companies. “Around 70% of what we sell in the U.S. is produced in the U.S.,” says Menegaux. “The tariffs will have an impact, but less than one might think. North America has been built on the NAFTA agreement, which promised free flow between Canada, Mexico and the U.S.” This became the USMCA under Trump’s previous presidency. “Suddenly changing those rules will be ineffective for those three countries. The economy will suffer because of the tariffs, and citizens will suffer because it will mean inflation. It’s impossible for us to change supply chains overnight. If tariffs stay for a few years, we will have to revisit our investment plans, and it will take a decade before it is effective.” In the short term, Michelin will have to increase its prices. “What will happen is our customers will have to pay more, or they will switch to cheaper offers from other brands. But we are better placed than most of our competitors.”
Nevertheless, globalization is changing even if it isn’t over. “It's not chaos anymore, it's the new order,” says Menegaux. “We don't qualify this as chaos. We'll adapt to that now. Europe should play a central role in the world, like China, like India tomorrow, like America. What we lack in Europe right now is a vision. The vision when we built the EU was to make peace in Europe. We needed to stop fighting each other, because we share a land. We have succeeded, because for 70 years, we didn't have war created by the founders of the EU. But then we lost sight of why we are continuing to build Europe. We need a new vision. We think it’s just a giant supermarket. It's not sufficient.”
Europe should play a central role in the world, like China, like India tomorrow, like America. What we lack in Europe right now is a vision...
The composites business is perhaps Michelin’s most radical shift towards greater agility and a longer-term plan. “With composites, we are defining a new business category that didn't exist before,” says Menegaux. But it’s just one part of a shift towards greater flexibility. “It's like good cooking,” concludes Menegaux—he is French, after all. “Sometimes you need more salt, sometimes you need a bit more sugar. It's never the same. You adapt based on certain conditions. It's more a question of adapting to the instant priority of the moment, rather than changing the long-term strategy. We are clear on where we want to go. We don't know exactly the journey to get there.”
This story was originally featured on Fortune.com
