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 centres located within the United
States to handle the distribution needs had to be considered. Of particular concern was the cost of
labour in the production of tires, which led senior management to direct Scott Barnette, Central
Controller of the Americas-Finance, to analyse two potential locations with perceived low labour 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 favoured by the company.
The fourth core value, “for one another,1’ 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
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 US 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.
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.”

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 labour costs may be the wrong
approach.