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17/04/2015
PIRELLI UNDER THE DRAGON'S BANNER

International Agreements


A new Chinese majority shareholder, the chemical giant ChemChina, and a development scenario, both multifaceted and full of opportunities: let's see what will change as of now and in the future


Francesco Lojola

The industry’s news of the year, no doubt intended to change the balance and dynamics of the current competitive scenario. Pirelli falls into Chinese hands, those of the state-owned chemistry giant China National Chemical Corporation (ChemChina), through its subsidiary China National Tire & Rubber, a whole new chapter in Pirelli’s history, which began in Milan 143 years ago.

Thanks to the new majority shareholder, ready to pay about 7.1 billion euro for the purchase of the Milan based group (1.8 of which to purchase the 26.2% of shares held by Camfin, a holding company) the new corporate structure multiplies the size of the market, and, with it, penetration power on Asian markets, where, now more than ever before, competitors such as Continental and Michelin are pushing to increase their presence and business share. By September, after a series of complex steps that will culminate with the takeover bid of the entire capital, with the goal of delisting Pirelli from the stock exchange, the reorganization should be finalized. Producing a Chinese/Italian industrial group with renewed ambitions, complementary in the contributions that both can offer in the field of production.

In the first press conference following the agreements Ren Jianxin, president of ChemChina, underscored how Pirelli needed "an Asian partner in order to grow", acknowledging its premium position in the high-end car tire segment, but at the same time, how "in the industrial and agricultural tire segment its potential appears limited".

 

Headquarters, R&D and technology to remain in Italy

An important fact to remember is that China is now the largest global car market, with 23 million vehicles sold in 2014 alone, and a ratio of 107 cars per thousand inhabitants, expected to increase to 252 within a decade. And if it is true that Chinese buyers are showing a growing appetite for brand-name products, this is true also for tires, therefore, with development and growth prospects guaranteed, the future looks bright indeed. The elongated P is a brand mark that Ren, like a fashion enthusiast, called the Prada of the tire industry, the crown jewel of a chemical giant, ChemChina, which boasts 140 thousand employees, a 45 billion Euro turnover and a direct presence in 140 countries, following an investment that ranks fifth among the major state-owned Chinese companies.

The entry of ChemChina, according to Pirelli’s CEO Marco Tronchetti Provera in his message to the employees, "will provide greater force to the company’s growth strategy. These agreements guarantee full managerial autonomy, ensure the continuity of the current management and will keep our corporate headquarters and our technologies in Italy". Tronchetti Provera is guaranteed to remain at the helm of the group for the next five years, as well as to choose a successor. And, moreover, "a partner like ChemChina will guarantee the company’s future growth, and both our production plants and more generally the job market can only benefit from it".

 

 

4th among truck tire producers

Furthermore, ChemChina "has no intention of interfering in the operational management of the group," and above all, "both the headquarters and R&D will remain in Italy. Moreover, technologies will not be sold to third parties". To change these rules, as stated in the terms, the approval of 90% of the shareholders is required, making such an event highly unlikely.

Among the many effects of the agreement with ChemChina, the announced spin-off of the industrial activities of Pirelli to be merged with those controlled by the Beijing multinational, under the banner of Aeolus Tyre and China National Tire & Rubber. The consequence will be a doubling of business volumes, soaring to nearly 12 million tires per year, creating the world's fourth largest truck tire manufacturer. A decisive leap forward for Pirelli, which, according to preliminary data on the budget, in 2014, showed a decrease in truck tire sales volumes of 6.5% (revenues fell from 1.552 to 1.397 million euro), mainly due to difficulties on the South American market on which Pirelli strongly depends, particularly on original equipment sales.

Since 2005, Pirelli had already started investing in China, a country that accounts for 40% of the global market for industrial tires, opening in Yangzhou, Shandong Province, a factory for radial truck tires. A production plant (in addition to the three already active in Brazil, as well as their counterparts in Egypt and Turkey) created with a local partner, Roadone Tyre, after having signed a letter of intent with Aeolus itself.

 

Technological Upgrading for ChemChina                            

Today the industrial segment makes up 23% of Pirelli’s total sales volume, 20% of which comes from road transport and a further 3% from the farming segment. The Asia-Pacific market accounts for just under 9% of Pirelli’s turnover. It is still early to determine who will draw the greatest benefit from this take-over operation. Certainly, ChemChina, on the one hand will see an opening to the European market, with strong sales potential in the international arena, as well as taking advantage of significant technology upgrades, aimed at developing its own range of premium tires.

On the other hand, Pirelli gains the upper hand over competitors focusing on the Far East and can look with greater confidence to meeting the planned targets, going beyond the partnership with Russian Rosneft (who will remain as shareholders with a reduced share), affected by a complex geopolitical situation, shifting its interests from an area of the market that still accounts for no more than 4% of the total turnover. Objectives can be summarized in bringing consolidated sales from 6 to 6.4 billion exploiting opportunities for growth in developing countries, with an increase in premium tire volumes sales of at least 10%, and an overall increase of sales in excess of 3%. In the end, as to the operating profit of the group, Pirelli expects to grow this year to 930 million, from the 838 million recorded last year.

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