Introduction
Michelin is a global tire producer, distributor, and seller headquartered in Clermont-Ferrand, France. The company provides products and services, including tires, mobility services, lifestyle items, Michelin solutions, and Michelin engineering and services. Its main business segments are passenger car and truck tires, related distributors, and specialist businesses. The Michelin Group, founded in 1889 by the Michelin brothers, manufactures tires tailored to specific client needs and road conditions in a variety of countries.
In addition to manufacturing tires, the company has expanded its offerings to include travel guides and road maps that provide information to improve the overall travel experience. Furthermore, the company has grown into a prominent mobility corporation, dedicated to designing and manufacturing cutting-edge tires, services, and solutions, as well as developing high-tech materials for a wide range of industries. This paper examines Michelin’s supply and demand trends before, during, and after the COVID-19 pandemic.
Demand and Supply
Demand and Supply Pre-COVID-19
The real effect of COVID-19 was most evident in 2020 and 2021, when things began to return to normal. Therefore, the pre-pandemic analysis highlights the demand and supply dynamics in 2019 and prior years. According to the law of demand, demand for a product changes inversely with its price, with all other factors remaining constant.
In other words, demand decreases as price rises. Figure 1 shows that the supply of Michelin tires increased from Q1 to Q3 in 2018. As a result of the rise in supply, the prices decreased as shown in the graph below. In response to the declining supplies from Q1 to Q4 in 2019, the prices increased significantly throughout the year. Equilibrium is achieved in 2018 at Q4, where price and demand intersect. A free market should, in theory, strive for an equilibrium quantity and price at the point where supply and demand converge.
At that time, supply and demand are perfectly balanced, with suppliers producing just enough of an item or service at the appropriate cost to meet demand from all parties, as shown in Figure 1. The demand data is only available for 2019, and it shows that demand for Michelin tires fluctuated throughout the year. Demand decreased by 2% from the previous year, prompting a drop in supply (see Figure 1).
Nevertheless, prices increased due to declining demand and supply, indicating that supply and demand do not necessarily respond to price changes in proportion. A spike in demand during Q3 in 2019, however, triggered a price increase in line with demand and supply laws. For instance, if supplies remain low while demand is rising, prices will shoot up, as illustrated in the graph.
Demand and Supply During COVID-19
The demand for Michelin tires from 2020 to 2021 was abnormally skewed. Figure 2 shows that supplies slope negative 32% during the first and second quarters, while demand remained relatively constant. However, there was a steady rise in supply from Q3 2020 through to Q2 2021. Despite the steady demand, there was no significant price shift (see Figure 2). Similarly, prices did not change slightly while supplies increased sharply in Q2 in 2021.
Demand and Supply Post-COVID-19
The law of demand states that a product’s demand fluctuates inversely with its price. During the first quarter of 2022, demand for tires increased, peaking in the third quarter (Figure 3). Nevertheless, supplies remained significantly low throughout 2022 and 2023, whereas prices increased slightly. In 2023, prices fell when supply increased, and demand remained constant. A surplus often results from increased supply without a corresponding increase in demand. Numerous factors, including productivity spikes, may cause this shift.
Elasticity of Demand and Supply
The kind of goods being sold determines how much price influences demand. It is also contingent on market competition. There is demand elasticity for some non-essential goods or products with plenty of substitutes, meaning price changes will have a significant impact on their demand (Smith, 2020).
Conversely, the demand for necessities such as health care and gasoline is comparatively inelastic. Therefore, if someone needs gas to travel to work, they are likely to pay for it regardless of the cost, particularly if they have no other options, such as taking public transportation. Vehicle tires are elastic, as one can easily forego the cost of acquiring a new one and take public transport until one has the money to purchase a new one.
Furthermore, the products are relatively expensive and are affected by government regulations, raw material costs, productivity-boosting technologies, transportation, and other supply chain issues. The industry is competitive, with alternative products readily available, implying that customers have many options. Price wars, costly marketing campaigns, and competition for marginal improvements can result in a competitive advantage and consumer power. Stronger customers can pressure companies to offer better goods or services at lower prices. This force intensifies under certain conditions, such as price sensitivity, informed buyers, and easy switching costs.
Demand and supply before the coronavirus pandemic were mostly influenced by natural market forces. A growing supply from Michelin met the market’s rising demand for tires and better equipped it to absorb the increasing vehicle usage. The oversupply also helped depress the prices, as shown in Figure 1. Therefore, it indicates the market was shifting normally, with supply decreasing to match demand.
Prices also shifted slightly due to market forces. Since consumers may spend only a certain amount on any particular good or service, higher costs lower the quantity demanded. On the other hand, when a product gets cheaper, demand increases (del Rio-Chanona et al., 2020). When product prices fall below production costs, supply tends to shrink toward zero in businesses like tire production, where suppliers are not prepared to lose money.
The number of sellers, their combined production capacity, the ease with which prices can be raised or lowered, and the market’s competitive dynamics will all affect price elasticity. It is therefore normal for tire prices to remain constant despite declining demand and supply, as shown in Figure 1. Generally, supply and demand before the COVID-19 pandemic aligned with market dynamics.
The epidemic disrupted the economy’s supply and demand, making it more difficult for businesses to produce and for customers to purchase. Therefore, consumption of goods and services during the crisis differed from the previous year (see Figure 2). Government-imposed labor mobility restrictions, combined with individual workers’ choices, led to a sharp decline in production volume on the supply side.
On the demand side, early in the pandemic, there was a significant drop in total real consumption due to public health restrictions and high levels of anxiety surrounding both the economy and health(Anitha et al., 2021). The graph in Figure 2 shows that the company experienced negative supply growth, with most operations altered due to COVID-19 restrictions.
Since the restrictions affected transportation, the supply of vehicle parts became surplus to requirements as most people stayed indoors. Typically, the epidemic affected potential output through several pathways that are challenging to simulate with conventional methods. Therefore, most companies, uncertain about the market availability of their product, limited production in response to a temporary halt in the supply chain. The scenario is depicted in Figure 2, where Michelin minimized production and supply amid declining demand and product prices.
The supply and demand were lowest in 2020 but slowly picked up at the beginning of 2021 (see Figure 2). Most countries had begun to remove COVID-19 restrictions by mid-2021, allowing the supply chain to resume (Anitha et al., 2021). For instance, the peak rise in supply during the second quarter illustrates the resumption of trading.
The sharp increase in supply while demand remained low could be attributed to companies fulfilling pending customer orders. During the coronavirus pandemic, most companies were caught unaware of the travel and transportation restrictions, leading to many orders never being delivered, including those placed during the pandemic. After the spike in Q2 2021, most companies were not actively manufacturing to clear their backlogs; thus, supply declined after the second quarter.
Elastic supply and demand curves show that the quantity provided or demanded reacts to changes in price more than proportionately. When a given percentage change in price results in a lesser percentage change in the quantity desired or supplied, the demand or supply curve is said to be inelastic (Li et al., 2023). The post-COVID-19 period occurred in the third quarter of 2022, and the rest of 2023 was characterized by low supply amid high demand and high prices (See Figure 3).
Although vehicle tires are considered elastic due to the availability of substitutes or strong competitors, prices remained relatively inelastic before, during, and after the COVID-19 crisis. As a result, Michelin Tire can be considered to have inelastic supply or demand, indicating that a change in price by a certain percentage leads to a smaller change in the quantity supplied or demanded. The prices fell significantly in Q4 2023, suggesting that the economic impact of COVID-19 is slowly subsiding and that the market is resuming its natural flow.
Conclusion
The types of commodities sold and market competitiveness affect demand for goods and services. While necessities like healthcare and gasoline are inelastic, non-essential products have considerable demand elasticity. Vehicle tires are stretchy because strong competitors or alternatives are readily available. There are many options in this competitive market, and consumer power can be gained through price wars, costly marketing efforts, and other forms of competition.
Before the COVID-19 pandemic, the tire manufacturing business was primarily affected by natural market dynamics, particularly supply and demand. The market’s increasing demand for tires was met by Michelin’s expanding supply, which contributed to price reductions. However, the pandemic changed the supply and demand in the economy, making it harder for consumers to buy products and for firms to generate new products.
Supply and demand peaked in 2020 and began to decline in 2021, as most nations lifted COVID-19 restrictions by the middle of the year. Due to order backlogs, the market had low supply relative to high demand, leading to higher prices following COVID-19. Michelin tires fall under the category of inelastic supply or demand, which occurs when a price change results in a minimal change in the goods supplied.
References
Anitha, P., Patil, M., & Venkatapur, R. (2021). COVID-19 effect on supply and demand of essential commodities using unsupervised learning method. Journal of the Institution of Engineers (India): Series B, 102(6), 1311–1317.
del Rio-Chanona, R., Mealy, P., Pichler, A., Lafond, F., & Farmer, J. (2020). Supply and demand shocks in the COVID-19 pandemic: an industry and occupation perspective. Oxford Review of Economic Policy, 36(Supplement_1), S94–S137.
Li, Y., Shao, M., Sun, L., Wang, X., & Song, S. (2023). Research on demand price elasticity based on expressway ETC data: A case study of Shanghai, China. Sustainability, 15(5), 4379.
Smith, V., Inoua, M. S. (2020). The classical theory of supply and demand. In Digital Commons.
The Michelin Group. (2020). 2019 annual results guide (p. The Michelin Group).