TC Debica SA: Labor threat, investor interest
Investors were invited to make bids for at least 10% of the equity.
A spokesman for the Privatization Ministry said the outcome of the bids would not be known for at least another two months.
Investment interest in Debica has been very high, despite the recent threat of strikes, says Andreas Wasserman, analyst at London brokerage Barings Securities. The company's unions had demanded 10% of the remaining stock free of charge to reflect recent changes in the Law on Privatization.
When Debica was privatized last year, the law in force at the time entitled workers to 20% of the stock at half price. The revised law now grants 15% free of charge.
The Privatization Ministry has so far refused to bow to their claims. Zdzislaw Chabowski, managing director of Debica, believes that the majority of workers understands the situation at the company and is not prepared to strike. A solution to the problem exists, he says, although he refuses to give details.
Strong fundamentals
Debica is very favorably viewed by the investment community. "A dominant supplier in a growing market" is how Steve Reilly of Creditanstalt Securities in Warsaw sums it up. The company holds a 67% share of the domestic car tire replacement market and is a major supplier to original equipment manufacturers (OEM) such as FSO, Fiat Poland and Peugeot Lublin. Car ownership, the main driver of tire demand, is expected to grow rapidly in Poland over the next few years.
The product also stands out strongly against the competition. In an independent rating conducted last year by the german magazine "Auto Zeitung," Debica's products were classified as medium- to high-quality at medium price. The price advantage stems from cheaper labor costs.
Labor accounts for only 20% of Debica's total costs, compared with 30%-38% at typical Western plants, according to Chabowski. The quality of Debica's products is testified by the recent award of an ISO 9001 quality assurance certificate.
That Debica is so sought after by foreign investors, however, is also a tribute to its management. At the beginning of the 1990s, the company went through a crisis period as clients started switching to Western products. The company responded with a restructuring program aimed at introducing higher value-added products, reducing costs and improving the company image.
The results of the restructuring program are clearly bearing fruit. Net profits for the first half of this year are at the same level as for entire 1994. Productivity has gone up from 18,000 tires per worker in 1991 to 40,000 today. Debica's new products, including winter tires and high-speed tires, have been well-received. And an aggressive advertising campaign has reassured customers and consolidated the company brand.
On the domestic tire replacement market, Debica has successfully developed a network of tire service stations through its subsidiary DECART (standing for Debica Car Tires). Tire service stations make good sense as they represent an opportunity to raise margins through higher value-added quality and develop consumer brand loyalty. The company distributes through 160 stations, and this number is expected to rise to 200 by the end of the year.
Interestingly, unlike many Polish manufacturers, the company has not chosen to develop the network itself, but rather offer franchises to independent companies. This saves the company the trouble of direct management of small distribution outlets and the cost of carrying the inventory. The outlets, explains Chabowski, receive a manual and assistance to establish themselves, but otherwise, are independent.
Growing exports
Debica has also had significant success in building Western export markets. Exports for the first half of this year grew by 86% year-on-year, compared with 34% for domestic sales. Exports now account for just under half of total sales.
The main export markets are in Western Europe, particularly the United Kingdom, where the company has a 7% market share. The market position in the United Kingdom is largely thanks to Debica's relationship with the dominant supplier, Kwik Fit. In addition to Western Europe, the company is also targeting Hungary and the United States.
At the beginning of the year, Debica signed its first Western OEM contract with Fiat of Turin. The contract foresees the supply of 200,000 tires this year, with the option of increasing supplies in the future. Chabowski describes the signing of the OEM contract as a "major marketing success." The company had been planning to enter the Western OEM market only by 1997.
The value of OEM contracts is in the replacement market they create and the brand promotion. The contracts themselves are low margin and should, therefore, be kept within the range of 20%-25% of overall sales, explains Chabowski. Debica is currently negotiating similar contracts with GM, Ford and Daewoo.
Western investor still desirable
With or without a foreign investor, Chabowski believes Debica can survive in the short term as an independent company. In the longer term, however, the company is too small to make the investments in new product development, promotion and distribution, he says.
The tire industry is an industry dominated by giants. Three companies, Michelin, Goodyear and Firestone/Bridgestone, control 57% of the global market. Goodyear had been seriously considering taking a stake in Debica, but talks with the government broke down in June, according to Barings' Wasserman. It will be interesting to see who takes up the offer now.
A spokesman for the Privatization Ministry said the outcome of the bids would not be known for at least another two months.
Investment interest in Debica has been very high, despite the recent threat of strikes, says Andreas Wasserman, analyst at London brokerage Barings Securities. The company's unions had demanded 10% of the remaining stock free of charge to reflect recent changes in the Law on Privatization.
When Debica was privatized last year, the law in force at the time entitled workers to 20% of the stock at half price. The revised law now grants 15% free of charge.
The Privatization Ministry has so far refused to bow to their claims. Zdzislaw Chabowski, managing director of Debica, believes that the majority of workers understands the situation at the company and is not prepared to strike. A solution to the problem exists, he says, although he refuses to give details.
Strong fundamentals
Debica is very favorably viewed by the investment community. "A dominant supplier in a growing market" is how Steve Reilly of Creditanstalt Securities in Warsaw sums it up. The company holds a 67% share of the domestic car tire replacement market and is a major supplier to original equipment manufacturers (OEM) such as FSO, Fiat Poland and Peugeot Lublin. Car ownership, the main driver of tire demand, is expected to grow rapidly in Poland over the next few years.
The product also stands out strongly against the competition. In an independent rating conducted last year by the german magazine "Auto Zeitung," Debica's products were classified as medium- to high-quality at medium price. The price advantage stems from cheaper labor costs.
Labor accounts for only 20% of Debica's total costs, compared with 30%-38% at typical Western plants, according to Chabowski. The quality of Debica's products is testified by the recent award of an ISO 9001 quality assurance certificate.
That Debica is so sought after by foreign investors, however, is also a tribute to its management. At the beginning of the 1990s, the company went through a crisis period as clients started switching to Western products. The company responded with a restructuring program aimed at introducing higher value-added products, reducing costs and improving the company image.
The results of the restructuring program are clearly bearing fruit. Net profits for the first half of this year are at the same level as for entire 1994. Productivity has gone up from 18,000 tires per worker in 1991 to 40,000 today. Debica's new products, including winter tires and high-speed tires, have been well-received. And an aggressive advertising campaign has reassured customers and consolidated the company brand.
On the domestic tire replacement market, Debica has successfully developed a network of tire service stations through its subsidiary DECART (standing for Debica Car Tires). Tire service stations make good sense as they represent an opportunity to raise margins through higher value-added quality and develop consumer brand loyalty. The company distributes through 160 stations, and this number is expected to rise to 200 by the end of the year.
Interestingly, unlike many Polish manufacturers, the company has not chosen to develop the network itself, but rather offer franchises to independent companies. This saves the company the trouble of direct management of small distribution outlets and the cost of carrying the inventory. The outlets, explains Chabowski, receive a manual and assistance to establish themselves, but otherwise, are independent.
Growing exports
Debica has also had significant success in building Western export markets. Exports for the first half of this year grew by 86% year-on-year, compared with 34% for domestic sales. Exports now account for just under half of total sales.
The main export markets are in Western Europe, particularly the United Kingdom, where the company has a 7% market share. The market position in the United Kingdom is largely thanks to Debica's relationship with the dominant supplier, Kwik Fit. In addition to Western Europe, the company is also targeting Hungary and the United States.
At the beginning of the year, Debica signed its first Western OEM contract with Fiat of Turin. The contract foresees the supply of 200,000 tires this year, with the option of increasing supplies in the future. Chabowski describes the signing of the OEM contract as a "major marketing success." The company had been planning to enter the Western OEM market only by 1997.
The value of OEM contracts is in the replacement market they create and the brand promotion. The contracts themselves are low margin and should, therefore, be kept within the range of 20%-25% of overall sales, explains Chabowski. Debica is currently negotiating similar contracts with GM, Ford and Daewoo.
Western investor still desirable
With or without a foreign investor, Chabowski believes Debica can survive in the short term as an independent company. In the longer term, however, the company is too small to make the investments in new product development, promotion and distribution, he says.
The tire industry is an industry dominated by giants. Three companies, Michelin, Goodyear and Firestone/Bridgestone, control 57% of the global market. Goodyear had been seriously considering taking a stake in Debica, but talks with the government broke down in June, according to Barings' Wasserman. It will be interesting to see who takes up the offer now.
