Pirelli – 20% More Capacity by end of 2011

During the company’s 2009 full financial year conference call on March 10, Pirelli Tyre CEO Dr. Francesco Gori discussed a number of plans for this and the coming year. “Our strategic guidelines for 2010 confirm our strategic positioning in line with our business plan,” he stated. “And the distinctive strategic features are focused on the strong and truly global brand that made us improve once more our position in the top consumer segments. It selected exposure in emerging markets with a focus on Latin America, where we are clearly number one, the Middle East, Africa and Asia. Our expectation for 2010 is to further improve our revenues in the industrial business by fully exploiting the potentials in those geographies.”

Part of this focus on emerging markets involves the increase of tyre production in what Gori calls low cost countries. “By the end of 2011 we believe we can reach our 2011 target of over 90 per cent of industrial and over 70 per cent of consumer production in low cost factories. Consistent with our growth strategy, our investments will be accelerated in 2010,” he noted. In 2008, 87 and 61 per cent of industrial and consumer tyre production was located in low cost countries respectively.

The Italian manufacturer intends to increase global truck and car tyre capacity 20 per cent by the end of 2011, Dr. Gori reported. “To fuel our growth, we will invest over 300 million euros in 2010 in a number of projects, with the purpose of increasing production capacity, mostly in low-cost countries. Projects in Europe will range from a new fully automated green plant in Italy, replacing an old plant that has actually been out of production since December, with the exception of the mixing department (the Settimo factory), to a 60 per cent increase in car tyre production in Romania. A greenfield startup project in Russia is being finalised and awaiting the approval of a new special economic zone.

“In China we plan to increase our truck and car capacity by 20 per cent and 100 per cent respectively,” the Pirelli Tyre CEO continued. “In Egypt we plan a 20 per cent increase in truck tyre capacity, and finally, in Latin America we will boost a 20 per cent truck and 25 per cent car tyre increase.”

When Dr. Gori refers to a new ‘green’ factory in Italy, he is of course referring to Pirelli’s Green Performance concept. This was first introduced to us in the form of the Cinturato. Further explaining the idea behind Green Performance, Gori said “we are showing the ability of Pirelli to match the more and more stringent requirements from legislation and carmakers in terms of low rolling resistance, with a performance and safety that has always characterised Pirelli products worldwide. We are also going to introduce in the next few weeks another green performance product specifically in the SUV segment, named Scorpion Verde.”

Consumer market growth of five to six per cent is expected in emergent OE and replacement markets this year, Gori said. A recovery in the North American OE business is also anticipated, however Europe will most likely remain flat. “Nevertheless, as far as we are concerned it should be positive because our mix is more on the side of the premium manufacturers, which did suffer more last year,” he commented. The replacement tyre business in the mature European and North American markets are expected to be characterised by single digit growth in 2010.

“As far as our action and growth strategy is concerned, our strategic focus in North America is increasing market share, the keyword in Europe is ‘green performance’, in Latin America we shall consolidate our leadership position in both OE and replacement markets. Finally, in China we shall enter the OE market this year, with a focus on European premium transplants,” Gori commented.

Double digit growth in the industrial tyre OE business and five to seven per cent growth in the replacement business is anticipated for 2010. Dr. Gori remarked that this growth would be stronger during the first part of the year and progressively flattening in the second half. “Our goal is to consolidate our position in all areas, taking advantage of the market recovery,” he summarised.

Following last year’s lows, raw material prices are again on the rise and Pirelli, like all tyre manufacturers, must respond accordingly. “The cost of natural rubber recently peaked at over $3,000 per tonne, back to the top rate of 2008,” Gori noted. “And given the current scenario, we estimate a raw material cost headwind of approximately 200 million euros. Therefore we are exercising a stricter control by rising prices and implementing cost efficiencies.” The Pirelli Tyre CEO reviewed the latest price increases, which include a 10 per cent increase in the Middle East and a four per cent rise in North America and Europe, applicable to all products.

“For 2010 our target is to achieve an additional 60 million euros in gross savings, in line with our three-year plan or slightly better,” Gori added. “We promised actually 50 million, but given the headwind on raw materials we have to try and work to compensate for that raw material cost.”