Bridgestone U.S. Strategy - Smooth Road Ahead

August 23, 2002

TOKYO - Daniel Hauck writhing for Reuteurs reported today that, soaring profits, expanding output and a share price that has doubled, is not an outcome many would have bet on a year ago for tyremaker Bridgestone Corp as recall scandals looked set to wreck its U.S. Firestone brand.

Now, analysts say, a strong performance by the U.S. operation in the coming months is likely to confirm a turnaround in the company's fortunes and keep its shares pumped up.

Bridgestone, battered for two years by the legal fallout from deadly accidents involving its U.S. unit's tyres, made a case for its rebirth last week, reporting a net profit of 24.48 billion yen ($209 million) after a loss of 30.57 billion a year earlier.

The results beat even the company's own forecast of a profit of 18 billion yen, thanks to a stronger than expected recovery in its U.S. operations.

It also announced its first major production expansion since the Firestone recalls began in August 2000, taking aim at the number one spot among the world's "big three" tyremakers -- a group Bridgestone shares with Michelin of France and U.S.-based Goodyear Tire and Rubber

The results would have been difficult to imagine last year, when Bridgestone and its U.S. unit were battling a flood of lawsuits after U.S. federal regulators linked Firestone tyres to 271 deaths and more than 800 injuries from rollover accidents.

Millions of tyres, most installed on Ford Explorer sports utility vehicles, were recalled, and Firestone's near century-long relationship with Ford was severed as the companies traded allegations about who should be held responsible.

As the two slugged it out, Firestone racked up losses of $1.68 billion, mostly linked to lawsuits and restructuring.

Now with more than 700 lawsuits settled, and Bridgestone's cash reserves seen ample enough to handle any that are left, the main worries for Japan's biggest tyremaker are more mundane matters such as rising rubber prices and a strong yen.

Not only shrewd decision-making, but unique circumstances and a fair amount of luck played a role in the bounceback, so other scandal-tainted firms struggling to survive probably shouldn't take too much heart from Bridgestone's revival, analysts said.

FOCUS SHIFTED

Key to the company's success was a decision to shift focus in North America to the relatively untainted Bridgestone brand while working to rebuild, rather than abandon, the Firestone name that had retained loyalty among many customers despite its troubles.

The initially questioned decision to take on Ford in public over blame for the accidents also looks shrewd in hindsight.

"(Firestone CEO John) Lampe took a really strong stand, and he seemed to come off as convincing and solid with an air of honesty, while Ford might have handled the situation less than ideally," said William Nestuk, auto analyst at West LB Panmure.

Many believe Lampe's performance helped shift U.S. public opinion away from the view that the tyres were solely at fault.

Firestone was also fortunate that it had the backing of the the considerable financial resources of its parent to fund its restructuring, and that the relatively unscathed Bridgestone brand was available to stem steep declines in sales.

Bridgestone injected $1.3 billion into Firestone under a new holding company structure, and also close its most outdated and inefficient plant, Decatur, Illinois.

The moves helped to cut fixed costs, depreciation and interest expenses and boosted profits at the U.S. unit by $125 million in the first half, according to analysts' estimates.

Bridgestone raised reserves for lawsuits to $1.05 billion in 2001, ensuring no special charges were taken for legal settlements in the first half of 2002.

So far, about $660 million has been paid out on suits.

Analysts said the remaining $400 million was likely to be more than enough to cover any remaining legal settlements.

The Japanese tyre giant also used its acquisition last year of Morgan Tire and Auto Inc and a blizzard of advertising, for example at the Winter Olympics in Salt Lake City, to help build up name recognition and push the Bridgestone brand.

Analysts said the strategy helped to push up sales in the Americas by more than 12 percent in the first half of 2002 as sales of higher-margin Bridgestone brand passenger care tyres soared by more than 30 percent.

With a big jump in exports from Japan to the U.S. market accounting for much of the increase in supply of Bridgestone brand tyres, the company got an added bonus from the weakness of the yen versus the dollar during the period.

STRATEGY A SUCCESS

The decision to retain Firestone as a mass-market brand also worked as sales of Firestone tyres performed better than anyone had expected, falling only five percent from a year earlier.

Analysts said Bridgestone was wise to not totally abandon a 102-year old brand that had managed to retain a core of dedicated enthusiasts despite its setbacks.

"It still has one of the more exciting brand images if you look at tyres - I don't think Michelin does it for America," said West LB's Nestuk.

Ford's recent willingness to agree to talks about a resumption of business between Firestone and Ford has also helped rebuild the image of the Firestone brand in the U.S. public eye, while Japanese carmakers have stuck by the brand.

Having achieved an half-year net profit of 24.48 billion yen, Bridgestone is forecasting 70 billion yen for the full year.

Analysts said the company should have little difficulty hitting its targets, but worries about high rubber prices, falling tyre prices in Japan, a stronger yen and the chance of further legal problems may limit the upside for the shares.

Bridgestone shares were trading at 1,605 yen at midday on Thursday, up 3.22 percent on the day.

They were trading at just 825 yen last October.

"Our outlook has been bolstered, simply because (of) the stellar performance in the U.S.," said Chris Redl of UBS Warburg.

"I'm more concerned about what's going on in the Japanese market plus raw materials prices," Redl said.

A weaker U.S. economy may also cause problems.

Bridgestone's shares fell 5.7 percent on Wednesday as the yen spurted higher and after a California lawyer filed a lawsuit demanding that Firestone recall 27.5 million Steeltex tyres he alleged were affected by a tread separation problem.

A Firestone spokeswoman said the tyres were perfectly safe and had been tested by the U.S. National Highway Traffic Safety Administration, which found no defects.