Continental Tire: Pursuing a Winning Plant Decision

VIDEO CASE Continental Tire: Pursuing a Winning Plant Decision

As the world’s largest automotive company and fourth-largest tire manufacturer, Continental’s global business operations cover a diverse set of enterprises. Perhaps best known for its passenger and light truck tires, this sector of the Hanover, Germany-based company’s total tire activities only comprise about 30% of total revenues, which topped 33 billion euro ($44.5 billion USD) in 2013. The rest comes from chassis and safety equipment, powertrain, interior systems such as infotainment and navigation, and its ContiTech division that produces marine hoses, conveyer belts, vehicle springs, and other automotive hoses and trim components. With over 300 manufacturing sites in 49 countries, the company recently undertook an ambitious $500 million project to build a new passenger and light truck (PLT) tire plant near its customers in the United States and Canada.

While the decision at hand focused on locating a single facility, it is a decision that was impacted by Continental’s existing U.S.-based manufacturing plants in Mount Vernon, Illinois, and other plants in Mexico, Europe and Latin America. Plants in the network operate independently of one another, yet may share raw materials sources and customers such as Walmart or Ford Motor Company. The existing network of warehouses and distribution centers located within the United States to handle the distribution needs had to be considered. Of particular concern was the cost of labor in the production of tires, which led senior management to direct Scott Barnette, Central Controller of the Americas–Finance, to analyze two potential locations with perceived low labor costs: Mexico and Costa Rica.

Scott was well-aware that three of Continental’s four core values—trust, passion to win, and freedom to act—empowered him to explore beyond the locations initially favored by the company. The fourth core value, “for one another,” that encompasses teamwork also played a role. So, when he suggested adding a potential location in the United States to the list that might meet or exceed established internal rate of return hurdles, he was instructed to go ahead, but to continue with a primary focus on Mexico and Costa Rica.

In 2011, Scott began gathering all the necessary data to incorporate into his linear programming optimization software program. This program was designed to analyze all costs, called “landed costs” at Continental, which covered the entire stream from raw materials through to the customer, not just production costs at the plant. Approaches used in the past focused more on production costs rather than landed costs. Raw materials include natural rubber from Asia, synthetic rubber from Germany and Japan, textiles from Georgia and Asia, steel from Asia and domestic sources, chemicals from numerous global sources, and carbon black – the powdered petroleum processing by-product that makes tires black and helps enhance durability. Continental is not a vertically integrated enterprise so all materials must be procured from these global sources.

The seven groups of factors that dominate manufacturing plant location decisions, as noted in this text, were all present for Continental. Prior to construction of the new plant, Continental had been importing tires for the U.S. and Canadian markets from Europe and Asia. The initial production output from the new plant would be 4 million tires annually to meet this demand. Company estimates for growth in domestic demand placed the need for an additional 4 million units per year from this plant, so Scott made sure the company’s location choice had adequate room for expansion. Additional acreage at the plant site with ample energy access was critical. The remaining global demand of 22 million units would be handled by plants in Illinois, Brazil, Europe, India and China, near to those markets.

Using state-of-the-art technology, Continental Tire makes four million tires annually at its new Sumpter, South Carolina manufacturing facility. The $500 million investment created nearly 1,600 new jobs and greatly enhanced the economy of South Carolina.

In a typical location decision, most organizations create five-year models to fully understand the impact of their choices. After all, locating a physical plant is a huge investment intended to span decades of operations. For Scott and Continental, a 20-year model was created. With a plan to invest up to $500 million dollars and create close to 1,600 jobs, Scott wanted to be sure the effect of any mid-term, location-specific community incentives such as real estate, tax, and other breaks wouldn’t cloud the long-term cash and profitability picture.

After considering both the Mexican and Costa Rican sites, twelve U.S. locations were scoped, and eventually narrowed down to South Carolina. The state had a history of stable business, manufacturing experience, low manufacturing costs, an international influence, a proactive business approach, and a solid logistics infrastructure with both the Port of Charleston and major highways nearby. The chosen site near Sumter, South Carolina also had a small but experienced manufacturing population of approximately 60,000 people who could immediately benefit from the new plant’s investment.

After considering Scott’s analysis, Continental awarded Sumter the plant and broke ground in March of 2012. It took an average of 300 people over 626,000 hours to complete the construction. Operations started in late October 2013, and full ramp up and expansion are expected to run through 2021. It’s now the largest land site for manufacturing of any kind in the world for the company. When company officials were asked what the intended use was for the sizeable plot of land they purchased, they simply smiled and responded, “We have big plans, and we are not constructing a golf course.”

QUESTIONS

 

  1. Consider the dominant factors for manufacturing as described in the text. Briefly describe how each one may have influenced Continental’s decision to locate its new plant in Sumter, South Carolina instead of Mexico or Costa Rica.
  2. South Carolina is also home to manufacturing plants for major tire competitors Michelin and Bridgestone. How might these two plants factor into the company’s location decision?
  3. Explain why locating a plant solely on the basis of low labor costs may be the wrong approach.
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