October 27, 2005

For Tire Makers, An Expensive Battle At the Racetrack

Very Excellent article and quite timely too. Been wondering the cost structure of Bridgestone and Michelin when Goodyear has withdrawn from Formula 1 citing increasing costs.

Michelin, Bridgestone Promote
Products at Formula One;
Benefits Are Hard to Gauge
Money Spent Is 'Staggering'
October 27, 2005; Page A1

For the past five years, French tire maker Michelin SCA and Japan's Bridgestone Corp. have battled one another for the right to brag they produce the world's fastest Formula One racing tires.

At Michelin's research center, one of the largest privately owned chemistry laboratories in Europe, the world's No. 1 tire maker tinkers obsessively with a secret formula for the 150 types of rubbers, oils, resins and other materials that go into its racing tires. At its research center in Tokyo, No. 2 Bridgestone labors to perfect its own recipe.

Both efforts are cloaked in secrecy. The two tire makers send security guards to each Grand Prix racing event to watch over their tires day and night. After each race, the worn tires are shredded. Says Robert Bell, technical director of the Renault racing team: "It's a very black art."

Both companies say Formula One helps them sell more regular tires. But from a marketing standpoint, it is unclear whether either company is winning anything. Michelin spends about $70 million a year on Formula One, Bridgestone more than $100 million, people familiar with the numbers say. Neither company can point to hard evidence of an impact on sales and profits.

Companies have used big-time sporting events to pitch products for decades, and it has always proved difficult to pinpoint the benefits. Equipping a Formula One team clearly raises brand awareness, tire companies say, but it is less clear whether it directly boosts sales. A look inside the unusual duel between Michelin and Bridgestone during the 2005 Grand Prix season underscores that point, and also reveals that such marketing tactics hold serious downside risk.

In June, for example, blowouts of Michelin tires led seven teams to withdraw from the U.S. Grand Prix, infuriating 120,000 fans and Formula One racing authorities alike and striking a blow to the Michelin brand name. One month later, after a particularly poor showing in a race, the top driver using Bridgestone tires, famed German racer Michael Schumacher, delivered what may be the worst-ever plug for a sponsor: "It's obvious we have to get faster, but our main problem is the lack of grip with the tires. It was like trying to fight with a blunted weapon." To cap it off, racing authorities began openly questioning whether the corporate duel is doing the sport more harm than good.

Edouard Michelin, Michelin's chief executive, expresses faith nevertheless in the value of the effort. "Part of the adrenaline driving the company comes from the desire to win" in Formula One, he says.

Some marketing executives agree with the strategy. "Formula One is expensive but it's as close to global sponsorship as you can get," says Stephen Martin, chief executive of M&C Saatchi Sponsorship in London. It offers a way for Michelin and Bridgestone "to make tires exciting" to consumers around the world, he says.

Down on the tire lots, some retailers don't see it that way. Yoshio Midorikawa, a manager at Tire Shop Bear in Yokohama, Japan, says he can't imagine any of his Japanese customers buying a tire because its maker won a Formula One race. "Formula One racing goes on way above the clouds, and doesn't belong to us down here on earth," he says.

Jack Trout, president of marketing strategy firm Trout & Partners Ltd. in Old Greenwich, Conn., says the money spent by Michelin and Bridgestone is "staggering." He compares their competition to an arms race. "I suspect many companies feel deep down they are wasting their money," he says, "but that if they get out their competitors will take over."

Michelin currently has 20.1% of the global tire market, followed closely by Bridgestone, with 18.4%. Goodyear Tire & Rubber Co., based in Akron, Ohio, ranks No. 3 with 16.9%. Goodyear supplies tires to America's most popular racing circuit, Nascar, but withdrew from Formula One in 1998 citing escalating costs and rule changes.

High-performance tires for cars driven by ordinary folk account for a rising share of profits at both Michelin and Bridgestone. Both companies say research and development connected to Formula One leads to breakthroughs on performance and safety of mass-market tires. Bridgestone says it has updated its high-performance Potenza tires repeatedly with R&D secrets developed for the race track. Michelin says its Pilot Exalto and Pilot Sport premium tires also draw heavily on breakthroughs made in Formula One.

Technological Prowess

Formula One racing is the best opportunity to showcase technological prowess, the two companies argue. American racing enthusiasts prefer Nascar stock-car events, which involve more conventional-looking cars roaring around a track. But fans in Europe, Asia and Latin America care only about Formula One. Each season, some 500 million television viewers watch the sleek, winged Formula One racecars whip though curvy circuits from Shanghai to Monte Carlo, sometimes on city streets. It is one of the most widely watched sports in the world.

Hiroshi Yasukawa, Bridgestone's head of motorsport, calls Formula One its most powerful marketing tool. He credits it with boosting European awareness of the Bridgestone brand to 39% of those surveyed in 2004 from 13% in 1996. Bridgestone's European sales have risen 45% between 1999 and 2004.

Michelin, which is already strong in Western Europe and North America, hopes the racing exposure can help it grow in Asia, Eastern Europe and Latin America. In a company survey this year of five European countries and Russia, 46% of respondents said Formula One made them want to buy Michelin tires. In France and Russia, more than 60% said so. Overall, 82% said Michelin's participation improved the performance and reliability of its regular tires. Michelin says Formula One also helps it win other business from the European car makers whose racing teams it equips.

In Formula One racing, tires matter a lot. Over the past five years, advances in tire technology are estimated to have shaved up to six seconds from lap times of between 80 and 90 seconds. Robert Bell, technical director of the Renault team, estimates that tires alone accounted for 50% of the performance difference between the Renault and Ferrari teams this year. That places enormous pressure on Bridgestone and Michelin to keep getting faster.

Bridgestone was founded in 1931 by Shojiro Ishibashi, whose small family business made rubber-soled shoes. When he shifted into tires, Mr. Ishibashi used the English translation of his name, "Stone-Bridge," reversing it to create "Bridgestone." Long dominant in the Japanese market, Bridgestone captured American market share by buying the Firestone brand. But it struggled to make its name known in Europe. In 1998, it decided to use Formula One to try to change that.

Michelin came to racing early on. It started up in 1889 in the small town of Clermont-Ferrand in central France. Two brothers, Edouard and André Michelin, converted a struggling family factory that made farm machinery and rubber balls into a tire manufacturer, producing the first pneumatic tires for cars.

The brothers used one of the world's first motor competitions, the 1895 Paris-Bordeaux-Paris race, to promote the new tires. Although they were last among finishers, the brothers weren't among the race's many dropouts, proving their air-filled tires could run on roads.

Michelin entered Formula One in 1977, introducing belted radial racing tires that improved grip and speed. When the European economy softened in 1984 and Michelin's profits suffered, it pulled out. Edouard Michelin, the great-grandson of one founding brother and a lover of fast cars, took over in 1999. With the company's finances improved, he got back in.

The roughly $100 million that Bridgestone spends annually on Formula One includes trackside advertising and paying an undisclosed portion of the estimated $300 million it costs per year to keep the Ferrari team on the track. Michelin provides free tires to some teams, but doesn't offer other financial support. Three of the seven teams riding on Michelins, in fact, pay between about $3,600 and $6,000 for each set of four race tires. Although the tire deals differ by team, each one gives the tire sponsor a platform to claim some credit if a team wins.

The Right Balance

It can take up to a year to design and produce a new race tire, which is a far different product than any tire seen on the highway. Designers are constantly searching for the right balance between durability and speed. Race tires must withstand tread temperatures in excess of 200 degrees Fahrenheit, but must be soft enough to grip the winding courses, which is essential for speed. They need to last for only one race weekend. To further complicate matters, different tracks warrant different tires.

Until this year, Bridgestone dominated, carrying Mr. Schumacher, who drives for Scuderia Ferrari Marlboro, the Ferrari team, to five championships in a row. But during the past two years, Michelin developed innovative blends of materials that resulted in faster tires in the vital qualifying lap, according to team managers. That enabled the company to poach several of the top teams that used Bridgestones, such as B.A.R-Honda.

But the quest for speedier tires was driving up costs for racers because they necessitated more testing on the track. Keen to check escalating speeds and control team expenses, the Federation Internationale de L'Automobile, the sport's Paris-based regulatory body, instituted new rules this season. Teams could no longer change tires between qualifying laps and race day, or even during races, except to replace damaged ones. Now, tires have to last not 50 miles, but 300.

Michelin adapted well to the change. The Renault and McLaren-Mercedes teams it equipped took turns winning this season's first eight races, while Mr. Schumacher's Bridgestone-equipped Ferrari struggled. Jean Todt, Ferrari's head of motorsport, says the new rules "damaged those who were competitive before."

Bridgestone's engineers struggled to strike a better balance between speed and durability. At first, the tires were durable enough, but too slow in the qualifying lap. The engineers changed the tires to improve the qualifying performance, but that created durability problems.

In June, during a practice run at the U.S. Grand Prix in Indianapolis, Mr. Schumacher's younger brother Ralf, who races with the Toyota team, was rounding the track's final bend when his left rear Michelin abruptly went flat. His car careened into the wall at 180 mph.

Michelin hastily tested the other tires it had brought for the seven teams it equips. It concluded it couldn't vouch for their safety. All seven teams pulled out of the race, leaving the track wide open for the three Bridgestone-equipped teams. Many of the 120,000 fans were furious. Michael Schumacher won his first and only race of the season.

An angry FIA accused Michelin of taking excessive risks to win races. "It's a disastrous performance," said Max Mosley, the FIA's head, at a news conference in Paris shortly after. "Michelin failed to take the most basic precautions."

Mr. Michelin denies sacrificing safety for speed and says that Mr. Mosley was an "aggravating factor" in the Indianapolis crisis instead of "part of the solution." He maintains that his company simply miscalculated the demands of the Indianapolis track's final banked turn. "It was like having basketball shoes for a tennis game," he says. To quell criticism, Michelin agreed to pay fans who attended the race $14.6 million, in the form of cash refunds and future tickets. A spokesman for Bridgestone declined to comment on Michelin's mishap.

Bridgestone hoped to profit from Michelin's blunder by playing up its safety record, according to a person familiar with the matter. But the French company quickly returned to its winning ways.

At Germany's Hockenheim Grand Prix in July, the talk in the pit was all about tires. Mr. Schumacher, who is sometimes described as the best driver of all time, faded late in the race as his Bridgestone tires lost grip. He finished fifth with nearly bald rear tires.

"I don't think I can count myself in this battle anymore," a weary Mr. Schumacher told journalists after the race, blaming his tires.

When the Formula One season ended in mid-October, Mr. Schumacher had lost his driving title. Renault's Fernando Alonso, who drives on Michelins, became Formula One's youngest world champion. Renault also won the team championship, beating out McLaren-Mercedes, which came in second, and Ferrari which finished third.

It appears that for now, Mr. Schumacher's Ferrari team is stuck with its Bridgestones. Although neither Bridgestone nor Michelin disclose the length of their contracts with teams they equip, both companies say they extend for at least a year.

Ferrari's Mr. Todt denies the team wants to switch. Bridgestone's Mr. Yasukawa says the contract binding Ferrari to Bridgestone is "long enough." In mid-September, Bridgestone scored a surprising coup by poaching for next season one of the teams currently supplied by Michelin. Toyota, another team using Michelins, says it's also considering switching.

The FIA's Mr. Mosley and some team managers are now pressing to end the competition between Bridgestone and Michelin by designating a single tire supplier in Formula One. That would stop racing speeds from continuing to rise, thereby improving safety, and cut tire testing costs for all teams, they argue. Peter Sauber, who recently announced the sale of his Sauber-Petronas team to BMW, says having one supplier would reduce his team's costs by $10 million a year.

Michelin says the proposal is contrary to the spirit of racing, and has threatened to leave Formula One if it is adopted. If it cannot compete against another tire manufacturer, Michelin says, it cannot showcase its technology. Bridgestone says it also prefers the competition, but that it would like to remain involved in the sport no matter what.

Renault team manager Flavio Briatore says he is undecided about whether there should be one or two suppliers. But he agrees with other managers who say tires have become too important to the outcome of races. Formula One, he says, has at times "become a tire championship rather than a drivers' championship."


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