Evaluation of the Issues Determining a Potential Large Michelin Investment at Waterville

The information below is almost exclusively sourced from published articles in the tire industry press.

Background – Michelin North America

• Michelin has significant holdings in North America including its North American Head Office in Greenville South Carolina. There are currently NINE plants in “upstate” South Carolina, 3 in Nova Scotia, although one is essentially closing and single plants in a number of states and Mexico. Michelin’s main focus for investment is South Carolina with $5 billion invested to date.
• Two new factories with a cost of approximately $1 billion have been built in SC since 2006, one has just opened and the other, Lexington has expanded 5 times since opening. The supporting raw materials production facility has recently experienced a $200 million expansion.
• The Starr SC Plant – Just opened, is based on a modern, very successful, modular, designed-for-expansion, plant in Lexington SC.

The Waterville Plant

• Opened 32 years ago.
• Makes the same line of Off The Road (OTR) tires as Starr & Lexington and 2 other plants and the same X-One truck tire as Spartanburg SC. X-One tires represent about 0.5% of truck tires sold and that production line is already the subject of a small, 5 year expansion to the west of the Waterville plant, not toward the airport.
• At the encouragement of the (former) NDP government Michelin requested they spend $100,000 on a feasibility study to move the airport but continue to say they have no plans for expansion. “Michelin acknowledged it requested that the province study the situation, but a spokesman stressed “at this point it is just that (a study).”
• Shipment in and out of the plant is hampered by lack of rail service.

Michelin Capital Investment Strategy

• Michelin has made very large capital expenditures in tire manufacturing infrastructure since their initial investment in North America 1971. Michelin has stated that they have invested $5 billion dollars in South Carolina since 1973, building nine factories to date. Two new easily expanded “modular” plants have been built recently and a number of expansions have occurred in these, supporting plants or other plants in SC in recent years. A significant amount of this added capacity is for the same product line as built in Waterville.
• When speaking of the new Starr plant, “Mr. Selleck declined to say how quickly the tire maker might expand it, saying it would depend on demand.”
• The $500 million expansion promised by the Warden would be the same size as the new Starr plant and would add a large (un-needed) production capacity considering that the same tires are built elsewhere in more modern or even new facilities closer to more efficient shipping infrastructure.

Business Climate and Effect on Regional Economy

• South Carolina appears to have made a concerted effort to create the conditions or take advantage of the market conditions in the state to give incentive for Michelin to invest there. It is stated that they have a low tax base, low wages, few unions and backing from politicians at all levels. The work ethic is said to be very good. These conditions have prompted Michelin to build 9 factories in the state and within months of the announcement of Michelin’s Starr factory Bridgestone Tire & Continental Tire announced they would invest a total of $1.7 billion (2550 jobs) in the state for new or upgraded facilities. Car maker BMW has built a factory in SC as well.
• “Michelin likes the state because of its low tax base, fairly low wages, small percent of unions and backing from politicians from the local level through the governor’s office and into Congress, company officials said.”
• “Our attitude is simply that they have now discovered what we have known for 40 years, South Carolina is a great place to position a manufacturing environment,” Chairman and President of Michelin North America Inc. Pete Selleck said.
• “South Carolina put up $9.1 million in funding toward the project, Michelin said in 2011, Michelin will benefit from provisions from Anderson and Lexington counties allowing the firm to pay fees in lieu of taxes.”
• Pete Selleck essentially has said SC is their default location when he opened the new $750 million Starr SC facility in December, he said they “could have built the plant anywhere in the world” but chose again to invest in SC. That speaks much louder in the business world than the ambitions of the Warden of a small municipal unit.

State & Local Support for Production Facilities

• Michelin has received financial incentives from State and local governments to locate in South Carolina. South Carolina has provided multi-million dollar incentives for facility improvements and negotiated fees in lieu of taxes.
• “Mr. Selleck cited South Carolina’s infrastructure — including the port of Charleston — its government’s willingness to work with industry and availability of skilled labor as well as the success of the Lexington plant as reasons the company chose to build this plant in Starr.”
• “South Carolina put up $9.1 million in funding toward the project, Michelin said in 2011, Michelin will benefit from provisions from Anderson and Lexington counties allowing the firm to pay fees in lieu of taxes.”

Plant Closures

• Michelin has recently announced that tire production at the Granton Nova Scotia plant will be all but terminated with no prospect for new production since the plant/equipment is too old to upgrade economically, 500 jobs will be lost. Another car tire plant in Kitchener-Waterloo, making Michelins’ BF Goodrich brand was closed in 2006, with job losses of 1100 and production transferred to more cost efficient USA locations.

Probability Assessment of Michelin Expansion at Waterville

• Based on the information available in the public domain, developing justification for a business case to proceed with a major expansion at the Waterville plant would seem to be difficult.
• Modern, new, efficient and modularly expandable facilities exist in the core Michelin production zone of South Carolina.
• The current Waterville plant does not conform to the new Michelin philosophy of ensuring the ability to expand is inherent in their facilities. Even if the airport land was taken, there is little more further land to be had other than what they are sitting on at present without expropriating residential properties.
• Michelin are closing Canadian production capacity while investing in new, modularly expandable facilities in their core production zone in SC. Two Canadian plants have been closed, 1600 people out of work. The first was closed in 2006 (Kitchener-Waterloo), the second is phasing out all but minimal niche market car tire production currently (Granton).
• The Kitchener-Waterloo plant was shut down in 2006 and the equipment moved to the USA where production is more efficient.
• The facilities at Waterville are 32 years old and would require age related upgrades to be competitive with the new facilities.
• The Granton closure is an example that new facilities are favored over old for capital investment.
• The Municipal Council “has no money” for incentives.
• The recently elected provincial Liberal government has turned away from subsidizing big companies to “buy” jobs.
• State and county legislators in South Carolina have a track record of providing financial incentives including gifting land, granting money and providing supporting infrastructure to provide Michelin incentive to build in the state.
• Compared to SC, Nova Scotia’s taxes are higher, electricity costs are very high, transportation costs more, wages are higher and recent first contract legislation has, according to Michelin, made Nova a higher risk investment.
• The capital expenditure quoted by the Warden, $500 million but never backed up with a business plan, would be close to the value of the just commissioned Starr SC plant, it is unlikely Michelin would make that kind of investment outside their core SC area and if they did consider it SC politicians would most likely increase their incentives to overturn the decision. Further, an investment of that magnitude of new modular, designed for expansion architecture would not be made on a tract of land which would not permit further expansion.