Italian company forges Chinese partnership at the right time to conquer emerging tire sector

Just over a decade after expanding into China, Italian tire giant Pirelli Tyre S.P.A has already become a leading player in the premium tire market. This year, the company has embarked on an ambitious strategy to accelerate its growth.

Pirelli will join forces with China National Chemical Corp, or ChemChina, to make strides in the country's industrial tire market with its advanced core technology, such as re-treading and cyberfleet functions.

Pirelli Tyre S.P.A says it already has a share of the premium car tire replacement market in China. The company also has more than 3,000 points of sale in China. Photos provided to China Daily

Marco Tronchetti Provera, chairman and CEO of Pirelli, says the timing is right because the Chinese market is looking for environmentally friendly solutions, and improving efficiency and reducing costs, while better Chinese roads has led to a demand for better tires.

Tire retreading, for example, is a core technology that replaces the tread on worn tires, which reduces the need to replace tires, significantly reducing costs. Yet now it accounts for only 2 percent of China's market, compared to 30 percent globally, showing the potential to expand market share through early entry.

Cyberfleet technology allows companies to track the tire pressure and other information of entire fleets, so managers can better control costs and take strategic decisions based on the data.

Together with Aeolus Tyre Co Ltd, a subsidiary of ChemChina specializing in industrial tires, Pirelli says it aims to develop more advanced technology and increase the scale of production.

"We want to develop technology with Aeolus that will create great savings for industrial fleets and have a better environmental impact," Tronchetti Provera says. "Thanks to China's infrastructure development, the highways are better, and market demand for technologically advanced tires is growing."

He says Pirelli is already the 10th largest industrial tire producer globally. With new capacity from Aeolus, combined production will become the fifth-largest in the world.

Last year, Pirelli recorded revenues of more than 6 million euros, with about 30 percent from industrial tire production, making Pirelli the fifth-largest tire producer globally. However, the company says it is more interested in profitability than scale as it positions itself as a premium tire producer.

Tronchetti Provera says it was previously difficult for the more expensive premium industrial tire technology to break into China because the country still had a big capacity of old, cheap technology. However, new standards for efficiency and carbon emissions reduction are encouraging the market to grow.

The partnership between Pirelli and Aeolus is part of a larger operation, which will see ChemChina initially acquires a 26 percent stake in Pirelli from its main shareholder, Camfin. ChemChina, through a consortium controlled by ChemChina and partly owned by Camfin investors, will then launch a bid to buy the rest of Pirelli's shares, which is expected this year.

After the acquisition, Tronchetti Provera says the core technology for industrial tires will remain with Pirelli, and his team will help Aeolus upgrade its technology to match the same standards. He says Pirelli has a production capacity globally of more than 6 million industrial tires, and ChemChina has 10 million in China.

The Italian chairman first met Ren Jianxin, ChemChina's CEO, three years ago to discuss the possibility of setting up a partnership.

"We started talking, we shared the same vision, and we analyzed our businesses," he recalls. "But the timing was not right, because of other developments taking place in the shareholder structure of Pirelli. We met again six or seven months ago, and the time was good."

Tronchetti Provera says he and Ren liked each other as business partners. "He is a man of vision, a man who is committed to his job, and has passion for his business. He is a forward-looking person. So I think we share one thing, we are passionate about what we do, and we both want to build the future. I want to build the future of Pirelli and make it stronger, and he wants the same for ChemChina."

Based on a joint vision to tackle the emerging market, the partners decided to combine the industrial tire business of Pirelli and Aeolus. Pirelli's consumer business will not be affected by the deal, and its existing factory in Yanzhou, Shandong province, will also continue business as normal, Tronchetti Provera says.

Meanwhile, the team at Pirelli will control the business strategy, with the deal creating bylaws reflecting the vision to have Pirelli as a company with continuing strong management, an Italian headquarters, the protection of Italian proprietary technology, and the ability to motivate its workers, he says.

Pirelli expanded into China in 2005 by establishing a joint venture with the Chinese conveyor belt manufacturer, Yanhe Group. In 2011, Pirelli extended it into a modern industrial hub, significantly increasing its capacity.

Today, the China plant has become a significant part of Pirelli's business. The company employs about 4,000 workers in Asia, with most in China.

Pirelli is considered a latecomer to the consumer car business in China, as industry giants such as Michelin and Bridgestone expanded into China in the 1980s when the country's automotive market emerged. However, Tronchetti Provera argues that Pirelli's entry was timed to coincide with the growth of the premium automotive sector.

Over the years, Pirelli's position in China has significantly strengthened, thanks to its partnerships with premium car brands such as BMW Mini, Mercedes, Volvo, Audi, Jaguar and Land Rover. These partnerships have a very high pull-through effect on replacement, which means people who buy cars already fitted with Pirelli tend to buy the same brand when replacing the first set.

According to Pirelli, its tires in China already have a share of the premium car tire replacement market in the "high teens", and the market share is even higher in the super-premium market, defined as tires 18 inches and above. The company also has more than 3,000 points of sale in China.

After seeing great growth in China's industrial tires, which supply heavy duty vehicles such as trucks, as well as agriculture and industrial equipment, Tronchetti Provera says he hopes the new partnership with ChemChina will help Pirelli broaden its customer base.

"China is the largest tire market in the world, and the technology is lagging behind," he says. "There is a large opportunity to provide a winning business model for us and our customers."

After a decade doing business in China, Tronchetti Provera says he has been amazed by the speed of change, which he says he had expected. It has also made him feel confident about Pirelli's future, as going forward he expects even faster growth for his company in China.

"What we have done in the last four to five years in the consumer business shows we can grow in China faster than we can grow in any other region," he says, adding that the dedication and work ethic of his Chinese workers greatly contributed to this growth. "The Chinese employees are really committed, they are straightforward. They believe in their projects and provide good results."

He explains he is greatly attracted by the power of the new world represented by China. "I come from an old part of the world, and I see China competing in a proper way," he says. "I can learn a lot from my trusted Chinese friends, but I see my Chinese friends are eager to learn themselves, so we have good relationships based on a common vision and cultural exchanges."

cecily.liu@chinadaily.com.cn

(China Daily European Weekly 05/15/2015 page19)