Bridgestone faces hefty cost in tire spat
TOKYO, Japan (CNN) -- Bridgestone Corp. says it will lose around 2 percent of its worldwide sales by severing ties with Ford Motor Co.
Tokyo-based Bridgestone Corp.'s U.S. subsidiary, Bridgestone/Firestone Inc., announced Tuesday it has axed its almost century-old relationship with Ford.
But analysts say the real impact of the break may be much more severe and will not be clear for years.
An 'excruciating' decision
Firestone will see out existing contracts, which run through 2003, but refuses to do any more business with its longtime partner.
Bridgestone Corp. shares took a beating in Tokyo on Tuesday. They were the fourth-biggest loser on the market, surrendering 9.4 percent to finish at 1,268 yen, as investors bet the company would lose market share.
The Ford-Firestone business tie is one of the most storied in U.S. industry. It dates to the companies' founders, Harvey Firestone and Henry Ford, and to the popularization of the car.
Bridgestone President Shigeo Watanabe called the decision to end ties with Ford "excruciating." He said his company only took the drastic step because Ford left it with no other option.
A $372 million hit
Bridgestone's drastic step comes after months of Ford faulting its tires for a rash of accidents when they were driven at high temperatures. Bridgestone now says the design of the Ford Explorer sport utility vehicle shares some of the blame.
Bridgestone says it will take a sales hit of $372 million a year, or 2 percent of its worldwide revenues of $18.6 billion (2.0 trillion yen).
Assuming a 5 percent margin, Bridgestone will be giving up profits of roughly $16.3 million a year (2.0 billion yen).
Two-thirds of the shortfall will come from tire sales in North and South America, where Nashville, Tenn.-based Firestone sells the majority of its tires.
But the breakdown has longer-running implications. Tire companies fight hard for the privilege of supplying original equipment on new vehicles like the Explorer.
Though profits are much higher on replacement tires than originals, customers often buy the brand they already have.
Bridgestone takes the offensive
Steve Usher, Japan auto analyst with J.P. Morgan, noted that the business bust-up has little relevance outside of America.
"It's very unfortunate for both companies," Usher said. "But the bottom line impact on Bridgestone is going to be certainly very manageable."
Bridgestone says it will bolster ties with other major manufacturing customers, including DaimlerChrysler, Toyota and Honda. That's something Usher believes it can do.
He also credits Bridgestone for finally taking a proactive role in its debacle over recalled tires.
"They didn't feel it was as serious a problem as it was in the United States. They also took a more Japanese approach, which is not to flay your opponents," he said.
"The decision to sever the ties with Ford and take a more aggressive stance with regard to the allocation of blame is a very positive one," he added.
Still, the company did its utmost to avoid breaking ties with Ford. Deals to serve as an original-equipment maker are hard to win and lead to lucrative replacement sales, he noted.
A wider Ford recall expected
The Ford-Bridgestone relationship has been rocky since last summer. A problem with tread separation on Firestone tires supplied as original equipment on Ford Explorers led to blowouts.
Bridgestone recalled 6.5 million tires starting last August as a result. The estimated $750 million cost of the recall caused Bridgestone to post its worst results in a decade for 2000, with profits down 80 percent.
Ford is expected to announce in Washington on Tuesday it is replacing another 10 million to 13 million Firestone tires.
The problem first surfaced in hot-climate nations such as Saudi Arabia and Venezuela. But the massive U.S. market, which accounts for 30 percent of Bridgestone revenues, has been hardest hit.
U.S. sources expect the tally of 174 deaths blamed on the Ford-Firestone combination to increase.
Ford took the offensive in dealing with the problem. It reacted with a massive public-relations campaign. It is trying to deflect blame away from its highly profitable Explorer, which has traditionally been the top-selling U.S. sport utility.
The Detroit-based car-maker is gearing up the rollout of its 2002 Explorer, wider and lower than the old model. It will carry Goodyear and Michelin tires.
The company insists the design of its vehicles is sound and the blowouts have been caused by problems with Firestone tires, some of which were made during a work stoppage.
Litigation, much of it settled out of court by Ford, has been fierce and promises to get worse. The breakdown of the Ford-Firestone front suggests there is a hefty dose of finger-pointing to come.
Firestone recently launched a U.S. publicity campaign called "Making It Right" in an effort to save its brand. But many observers feel the damage is irreparable.
Firestone was in fact forced to sell out to Bridgestone in 1990 after it contested a 1978 tire recall. It was ultimately made to recall 14.5 million tires. The move brought it near bankruptcy.
On Monday, Ford said it is recalling about 50,000 of its 2002 Explorers and Mercury Mountaineers because of tires damaged during assembly.
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