Q&A: Pirelli sees growth in high-value segment

Responding to a questionnaire sent by Tire Business, Andrea Casaluci, general manager of operations for Pirelli & C. SpA, said the company will continue to focus on high-value tires as the prestige and premium markets continue to grow.

A: The growth in profitability recorded in the first quarter was proof of the validity of our strategy, and as a result we were able to confirm the targets for the full year despite the slowdown in some markets and the high volatility of exchange rates and raw material costs. So we are on track with the guidelines set out in our Industrial Plan for 2017-2020.

In particular, Pirelli is getting stronger in the high-value segment, which includes prestige and premium, as well as specialty tires, and we are progressively reducing our exposure to the standard segment. This is our high-value strategy, which also involves the further strengthening of partnerships with prestige and premium car makers and increasing our high-value production capacity and extending the distribution network coverage, which now stands at around 14,500 points of sale worldwide.

And we are more and more focused on developing new products that meet the emerging needs of the end-customer, such as the Velo range for bicycles and cyber smart tires. Cyber technologies are the most recent chapter in Pirelli's Perfect Fit strategy, focused on the development of made-to-measure products and services that meet the personal requirements of drivers as well as the specialisations of car manufacturers.

Perfect Fit solutions also include the P Zero colour edition and the development of specific tires for individual cars — denoted by special markings on the sidewalls (with different markings for each manufacturer) — and our specialties like Seal Inside, Pirelli noise cancelling system and so on.

Q: What are some of the pleasant surprises you are seeing in the market? What has surprised you most?

A: Pirelli was able to identify certain emerging market trends at an early stage, and these are now consolidated. I am referring to the constant increase in variety of product offerings driven by the demands of consumers who themselves are always more diversified.

They are concerned with, among other things, safety, extended mobility, environmental impact and noise reduction. To these we need to also add demands of car makers who want to contain CO2 emissions, optimise aerodynamics and reduce noise.

Pirelli has shown that it can deliver solutions for all these demands, which guarantees the creation of value for clients and, as a consequence, for us.

Q: Where do you see industry markets headed in the second half of 2018?

A: Our analysis looks beyond the year and is the basis for the 2017-2020 business plan. Over the three-year period — and we are already seeing the trend in 2018 — we expect 9% market volume growth in the high-value segment, which is already outperforming the standard market by a factor of 8, in line with growing demand for premium and prestige cars and the growth of new forms of mobility, such as the electric and hybrid vehicles.

Thanks to our "consumer centric" approach, we are also developing products that are more and more "tailor made," such as "Connesso" and "Cyber Car," our latest smart tire products for replacement and original equipment channels.

Q: What trends are you seeing in the marketplace? How are you reacting to them?

A: The markets are moving toward higher rim sizes and high-value tires in sync with new car technologies. We are following these trends with new products and processes and, as a result, have increased our homologation portfolio to more than 2,150 prestige and premium homologations, as well as launching tires with an embedded sensor, such as Pirelli Connesso, which enables the communication of data, via a cellphone app, regarding tire wear, pressure and temperature. It also includes the offer of personalised services, such as car valet and remote assistance.

This is being tested by car makers and will be available for the first time for both electric and traditional vehicles by the end of the year. In our plants, we are implementing a plan of transformation and renewal that aims at the digitalisation of planning, production, distribution and consumer profiling processes.

This plan includes four inter-functional programs: the integrated forecasting program, which applies data science to offer greater demand predictability; the smart manufacturing program and flexible factory, to respond in an ever quicker and more flexible manner to the requests of consumers, car makers and distribution networks; the supply chain program, which aims to bring consumers closer to personalised services; and the prestige program, focused on the prestige end-consumer.

A: In general, the high-value segments are growing well and at a faster rate than the rest of the market. This trend will consolidate in the future because the high-value segment is more resilient in the face of economic cycles, and it is common to all the areas of the world.

Q: What sectors are struggling? Do you expect them to rebound? If so how soon, and if not, why not?

A: Commodity markets remain volatile with increases in oil and metal prices due to trade actions and sanctions and geopolitical factors, such as the ongoing Syrian conflict, the re-imposition of U.S. sanctions on Iran, and further production shortfalls in Venezuela. These have tightened global oil supply. The recent rise in oil prices will soon be reflected in headline inflation across many parts of the world. That said, outside the U.S. economy, it is hard to see any systemic rise in inflationary pressures.

Q: How, if at all, is the threat of tariffs affecting you?

A: Part of Pirelli's approach is what we call local-for-local production, which means we try to have production facilities within or close to keys markets. In NAFTA we have two plants that produce predominantly for the U.S. market; in addition we are upgrading our capacity to high-value in Brazil to serve the U.S. market. In China, too, we mainly produce for the APAC markets. All this should limit risks related to trade disputes.

Q: Are you anticipating any price hikes in the second half of 2018?

A: Adjustments to prices dictated by the high volatility of exchange rates and fluctuations in raw materials have already been made. We are constantly vigilant on this front and we will intervene if necessary.

Q: What are the challenges the industry is facing? How have the tax cuts affected you? In particular, are customers buying more tires because of it?

A: In the US, for example, we are facing some important market changes where the independent tire dealers are the strongest usual distribution channel, and car dealers are gaining market share, while mass merchandisers decline. In addition to this, all players started to sell tires online and investing in digital marketing targeting the millennials.

I don't foresee that tax cuts in our sector will lead to an increase in sales in the short term.

Q: How are Pirelli's plans going to expand high-end tire production in general, and in Brazil in particular? Are there any expansion plans for the Rome, Georgia, plant, or for any other Pirelli facility besides Brazil? If so, what?

A: We have recently announced investments of more than 250 million euro in the next three years in Latin America — already included in the 2017-2020 industrial plan — in the context of our global strategy as a company focused on consumer tires in the high-value segment. These investments will be used for the ongoing modernisation of local production facilities and the development of high-value tires and also the partial reconversion of standard capacity into high-value. The investments will allow us to satisfy the demand for high-end tires both in local markets and, in particular, in the NAFTA area for which Brazil is one of the integrated sources of supply.

In our plant in Rome, Georgia, we produce high-value tires with our best robot technology: the MIRS. The actual volume of production is in line with the needs and mix of products of the US market.

We do not break down our investment plan by country, but in 2020 we aim to have 63% of total revenues deriving from high-value, and all our factories around the world, therefore, are affected by a process of optimisation of the production mix in favour of the high-value component.