Tire Recall Will Cost Bridgestone $350 Million

With its shares having fallen to levels not seen since 1996, the Bridgestone said today it would post a $350 million special loss this year after its U.S. unit, Firestone, announced a recall of 6.5 million tires.

The recall comes as the U.S. National Highway Traffic Safety Administration (NHTSA) investigates three brands of Firestone tires that may have led to dozens of fatal crashes.

At least 46 deaths have been recorded in crashes where the tires blew out or the tread peeled away. The incidents involve one size of the company’s ATX, ATX II and Wilderness tires.

20/20 Hindsight Linking the accidents with hot weather, a higher speed limit on U.S. highways and consumers not maintaining the tires properly, Bridgestone vice president Tadakazu Harada said he wished the company had been able to prevent the accidents.

“With the benefit of hindsight, it would have been better if we had made consumers more aware of keeping their tires properly inflated,” he told a news conference.

He said Bridgestone had found no manufacturing flaw in the tires and that many of the 193 accidents reported to the NHTSA involved tires damaged after they had left the factory.

Jumping off the Stock Investors fretting about consumers deserting the Firestone brand and costs rising from a potential ballooning of lawsuits, dumped shares of Bridgestone, sending them down 11 percent to its lowest point since early September 1996.

The stock has slid some 24 percent this week, initially sparked by U.S. retailer Sears saying it had stopped selling the tires under review.

Harada said the $350 million extraordinary loss covered only the cost of the recall and not potential lawsuits or loss of revenue, adding that the company did expect some impact on sales.

“We are prepared for a considerable impact in the United States although we do want to minimize that,” he said.

He said 50 related lawsuits had been taken out against the company.

Ford Stands by Firestone On the plus side for Bridgestone, Ford Motor, which had at one stage said it might consider discontinuing some Firestone brand tires, has so far made no move in that direction.

The automaker said on Wednesday that Firestone would continue to be a “valued supplier.”

Around three quarters to 80 percent of the accidents reported to the NHTSA have involved Ford’s Explorer — the top-selling sports utility vehicle in the United States. Harada said that around 70 percent of the tires involved in the reported accidents were fitted at the time of manufacture while 30 percent were replacement tires. He declined to speculate on whether Ford had also contributed to the problem.

Long term Implications Bridgestone, which bought Firestone in 1988, also cut its group net profit forecast for the year ending December 31 to $620.7 million from an earlier estimate.

Managing director Hiroshi Kanai said the Firestone division could fall into the red this year, with current recall costs putting the loss at $10 million to $20 million, although he said the loss could be even greater.

But analysts were most worried about the long-term impact on consumer sentiment because most of the tire manufacturer’s profits are made in the aftermarket.

“It’s inevitable that there will be some downturn in share for the company in the U.S. tire replacement market. With treads coming off tires, some consumers are bound to turn away,” said Tsunemi Tachibana, analyst at Nikko Salomon Smith Barney who kept a neutral rating on the stock.

Further Downgrades Credit rating agency Standard & Poor’s said it may cut the rating of Bridgestone and its Firestone unit, while Societe General Securities lowered its rating “underperform” from “hold.”

That downgrade follows two others this week — a cut to “reduce” from “hold” by Dresder Kleinwort Benson and a cut to to “3” or neutral from “2” or outperform by Nomura Securities after the announcement by Sears.

Bridgestone’s troubles have been a boon to stocks of other tire makers, including France’s Michelin and Goodyear Tire and Rubber.