Pirelli Negotiated the Crisis Year Well

During the global recession and financial crisis of 2009, tyre manufacturer Pirelli negotiated the challenges thrown at it better than expected and in doing so proved it is what many companies only claim to be: a storm-proof edifice. With its world-renowned Pirelli premium brand, the Italian tyre business retains its pattern of growth.

In the 90s everything seemed to focus solely upon the big three – Bridgestone, Goodyear and Michelin – while the second group of three – Continental, Sumitomo and Pirelli – struggled to keep up. However by the end of the new century’s first decade limitations upon the big three’s market dominance had appeared. New suppliers from the so-called emerging markets have entered the competitive battle and have established themselves not just in their own regions; exports to established markets such as Europe and North America are already robust. The strength of these inroads can indeed be seen in the US decision to impose duties upon tyres imported from China. In the meantime, the combined sales of the six largest tyre makers, which once divided three-quarters of the world tyre market between themselves, is today significantly less then two-thirds and it appears their slice of the pie will continue to shrink. From this group, Pirelli is the sole manufacturer that has been able to gain additional market share.

Pivotal to the company’s success is its very solid manufacturing network. In Europe the production capacity at factories in Italy and other West European sites are supplemented by deliveries from Romania and Turkey. North and Latin America are largely supplied with products from Brazil, and in China Pirelli erected a truck tyre plant and subsequently established a passenger car tyre facility at the same site. The aim has been to get a foot in the door early in China in regards to establishing a market presence, and on top of this export large quantities of tyres to Asia and Oceania.

In Europe the market continues to be more concentrated than the global market. The big three (counting Goodyear Dunlop as one) plus Continental and Pirelli account for well over 80 per cent of market turnover here, a state of affairs that can be attributed to the fact that the majority of Eastern European suppliers proved themselves uncompetitive and sought shelter under the large tyre manufacturers’ roofs.

Following Continental’s aborted takeover attempt in the early 90s, the Italian firm has embarked on a radical new beginning. It is relying upon organic growth and confidence in the market penetration of its globally recognised Pirelli brand, a name not only counted as a “major brand” –  those with consumer insight identify it with absolute certainty as a premium brand that consumers worldwide are prepared to pay a truly fair price for. And here lies a key difference between Pirelli and all its main competitors: They promote themselves through multi-brand product ranges, such as Bridgestone/Firestone, Goodyear/Dunlop, Michelin/Uniroyal/BFGoodrich/Kleber and, last but not least, Continental with its well-known brand portfolio. It was this diversity of brands under the one roof that led to the development of a variety of multi brand strategies based on the theory a portfolio of several brands would provide tyre dealers with the means of attaining the highest possible share of the new tyre business. That this in practice worked very poorly can be easily seen in the fact that during this time previously unknown and new suppliers from around the world, particularly from Asia, were able to succeed.

Under the leadership of Dr. Francesco Gori, CEO of the Pirelli Group’s tyre subsidiary, the company acted very differently. The aim was not to become recognised as a global player at any cost –  and at any rate such a label is nothing more than a catchphrase. Instead the company set itself the goal of marketing high quality products, including some niche market items. Doing so would simply have been impossible with “second brand” or “third brand” tyres.

Yet Pirelli’s truck tyre business has also been able to withdraw itself from the recent economic melee. Admittedly, setbacks could not be avoided, however these were markedly more moderate than those experienced by several respected competitors. An often overlooked fact is that Pirelli globally, although not in Europe, achieves a higher turnover through truck tyres than, for example, Continental, and the products it markets are qualitatively on par with the best available. And the Pirelli principle of qualitative marketing is also applied to its truck tyres: Pirelli must not offer every bread and butter tyre in the market and certainly not at fire sale prices.

The recent assertion made during a presentation held by Korean manufacturer Hankook that its truck tyre business in Europe was on an equal footing with that of Pirelli was noted and refuted. The point is, tyres cannot simply be counted and a sweeping statement made regarding market strength if you are, so to speak, comparing apples and pears. In terms of turnover and value of goods Pirelli is three times stronger in Europe than Hankook, who is still clearly positioned below Nokian. Indeed, the counting procedure can sometimes be completely senseless: If in order to make a 100,000 euro turnover a manufacturer produces 300 commercial vehicle tyres and achieves a decent margin with these, is he then smaller or weaker than a manufacturer that needs to deliver 400 identical tyres in order to achieve the same turnover and earns no money in the process?  This is exactly the substantial dilemma facing many suppliers who – as we now see in hindsight – the product quantities were right, but unfortunately they chose to produce the wrong tyres. At the end of the day everything depends upon how much profit can be achieved from a particular type of tyre and not how many units can be manufactured in a year.

In an interview with Tyres & Accessories in late January, Pirelli CEO Dr. Francesco Gori explained that during the ‘crisis year’ of 2009 to the start of the year the target EBIT margin of 6.5 per cent could be exceeded and most likely go beyond the seven per cent mark. In 2008 the company recorded restructuring costs of some 100 million euros, with such costs continuing the following year to the tune of 30 million. The Pirelli Group’s total debt decreased during 2009 from one billion euros to 700 million euros. In the meantime Pirelli’s tyre division accounted for more than 80 per cent of the entire Group’s total corporate value. The proposed sale of the Pirelli RE real estate subsidiary, according to the latest press releases, is taking a few months longer than anticipated but the process is continuing.

Dr. Gori expresses confidence regarding what 2010 holds in store; admittedly modest price increases could not be avoided and, more importantly, the anticipated market recovery in the passenger car tyre and particularly in the truck tyre segments should take place. Such a recovery, it must be noted, will most likely involve sales at levels still a fair way below those achieved before the crisis. The manufacturer desires to grow step-by-step in the USA, however the real stimulus will, as previously, come from China. The replacement market there has continued to grow in double digits and Pirelli is in the thick of this activity. Ranked immediately below in terms of importance is Brazil. It remains to be seen whether Dr. Gori is making a broad hint or just fomenting competitive uncertainty when he lets it slip (referring to expiry of Trelleborg’s use of the Pirelli trademark on agricultural tyres at the end of 2010) that an evaluation is currently being conducted to determine whether a return to the agricultural tyre market would be worthwhile. The South American agri market is continuing to advance and its radialisation is currently underway, and this could only serve to strengthen Pirelli’s interests. Gori sees, incidentally, a similar development in Russia and the Ukraine. As is well known, Pirelli will shortly begin producing tyres in Russia under a joint venture arrangement.

In conclusion, China, Southeast Asia and Russia hold the highest priority for Pirelli in the upcoming years. The company will, should it prove feasible, place an even stronger emphasis upon its premium product lines than previously, as Gori is convinced that a premium brand’s reduced sales can never be made good through gains accrued via a cheaper brand. The larger manufacturers’ loss of market share has its clear roots in that new suppliers of cheap tyres acted as direct competition for the budget brands from the large manufacturers and could snatch their market share away. In this respect Pirelli is, at least according to the view represented here, unique. The manufacturer has acquired no turnover for itself through large buyouts, rather it has built up its market influence and position over the years and made these relatively secure. The company has not taken over any “inherited waste” and was capable of spreading its Italian influenced culture throughout the world. With this culture, the brand’s uniqueness and the company’s optimised global production network, Pirelli has of all the major manufacturers the best chance to utilise its growth potential and to edge ahead more quickly than others. In its recent history the Pirelli Group took on much through its “Diversified Products”, “Cable” and “Real Estate” divisions, yet none of these has proven as constant and successful as its tyres.