Pirelli Asserts Itself as Latin America’s Number One
Carlos Redondo has been Pirelli’s CEO for Latin America since the beginning of 2003. Before that he was CFO for Pirelli Tyres worldwide. With a turnover of approximately 1 billion euros, about one third of Pirelli’s total worldwide turnover Mr Redondo is successfully piloting his division from its headquarters in Sao Paulo. Tyres & Accessories met Mr Redondo last month in Usuhaia, south Argentina, in conjunction with the launch of its new Sottozero winter tyre.
If Goodyear’s activities in Mexico are excluded due to the technicality that the country belongs to NAFTA, Pirelli is by far the market leader in Latin America. Behind Pirelli and Goodyear the global players Bridgestone Firestone and Michelin (which is focusing on truck tyres in Brazil) are also playing an important role in the Latin American market. Continental, ranked number 4 in the world, is also beginning to take an interest in the market, one that is bound to develop in the not so distant future. The company has expanded its base in Mexico, but more importantly it has begun a $250 million (£136 million) investment programme, which will fund the construction of a tyre plant in the Brazilian central state of Bahia. It is estimated that within three years the facility will reach a capacity of five million passenger car tyres as well as one million truck tyres. Obviously the German manufacturers are following a strategy of absconding with their plants to low cost and low labour countries, while the tyres that are produced there are dedicated predominantly for export to mature markets. So far Continental is the only company to hold any sort of technical agreement with a manufacturer in Latin America. It holds a contract with Argentinean based Fate, a relatively small tyre manufacturer that acquired the redundant machinery and equipment of the truck tyre factory Herstal/Belgium when Continental closed it a few years ago.
Pirelli’s dominance in Latin America is most obvious in Brazil, the biggest and most influential country of Latin America. The company runs two factories producing passenger car tyres, one in Bahia (where production began only in the last few months) and the other in Campinas, as well as truck tyre factories in Bahia and St. Andre near Sao Paulo. And not forgetting a small factory near Porto Alegro where the corporation is producing industrial, agricultural and motorcycle tyres. As far as the quality is concerned all Pirelli factories worldwide are producing to the same standards and are obtaining the same quality, which allows the company to export tyres from any factory to any place in the world if necessary. Up to 80 per cent of passenger car tyres, which are produced in the newly opened factory in Bahia will be exported to the USA; a demonstration of how important the factory’s strategic location is. Pirelli has a MIRS factory in Rome/Alabama, but the bulk of all the tyres sold in the biggest tyre market in the world have to be imported.
The Italian manufacturer’s turnover consists of 35-40 per cent for passenger car tyres and 35-40 per cent for truck tyres; the rest is made up of agricultural, industrial and motorcycle tyres. In other words: Pirelli, which supplies mainly high performance tyres in Europe and the USA, has managed to remain a full range supplier in Latin America. Even its agricultural tyres, which were sold to Trelleborg some years ago, are of importance there. However, it has to be noted, that more than 90 per cent of these agricultural tyres are bias tyres, modern belted tyres do not play a significant role and if needed, Pirelli can buy them from Trelleborg.
The Latin American market offers Pirelli a promising future, as it’s a place where tyre manufacturers are able to earn more money than anywhere else. With the exception of turnover figures, the company has not issued any financial information with particular reference to its performance in Latin America. Whereas Goodyear has published first half results with an operating profit in Latin America of more than 20 per cent and there is no reason to believe that others could not reach, let alone exceed this margin. The problem with Goodyear seems to be that it has restricted its investment in both the plants and the products, which will bring it under increasing pressure in the future.
In comparison, Pirelli’s future looks bright. It has the biggest production base in Brazil, a country with a relatively big automobile industry and with a population in excess of 180 million people it is by far the biggest market. The circumstances under which these big corporations are investing large amounts of money into the country depends on both the political and economic stability of the market. Therefore politicians are protecting companies while at the same time attracting additional companies from many other parts of the world. Not even a poor country like Mexico can compete. Especially considering that industry leaders are claiming that labour costs in Mexico have become too high. It seems an obvious prediction that more tyre manufacturers will shift production from Mexico to Brazil in the near future.
To defend its leading position in the Brazilian market Pirelli is operating a small equity. Pneuac has 30 outlets, which mainly focus on truck tyres. Mr Redondo explains that the company is delivering all the experience a tyre manufacturer needs to remain successful in such a big market. While Pirelli is working with its own equity, rival Michelin has forged a direct contact with fleet companies, which are significant players in Brazil. Michelin has initiated a $100 million (£55 million) investment programme to expand production capacity as fast as possible.
As far as the conditions and circumstances in Brazil are concerned there is no comparison at all with European conditions. 70 per cent of the roads are still gravel roads. That is reason enough for manufacturers to continue to produce and sell bias tyres, especially in reinforced construction. The replacement market for truck tyres is made up of 50 per cent bias tyres and 59 per cent belted tyres. This couldn’t be more different in the OE market, where the quota for bias tyres has decreased to 10 per cent. In such close 50:50 conditions it is not surprising that Pirelli is delivering many more belted truck tyres, as it always veers towards the high end of the market.
Nothing can appear to prevent the future growth of belted tyres, it is only a question of time, and of some years until even Brazil will replace bias truck tyres with belted truck tyres. More significantly is the fact that demand for truck tyres will continue to grow in Brazil, because the whole infrastructure depends on road transportation, railway systems do not play an extensive role.
For the foreseeable future Mr Redondo holds much optimism for Pirelli, this is based on the fact that it is investing the same, if not more than its competitors into the market. Continental’s $250 million (£136 million) investment is noteworthy, but Pirelli’s investment outweighs this. And unlike Continental, Pirelli already has both the right infrastructure in place and the perfect logistic strategy, altogether it holds an ideal dealer base. Therefore the Italian company can invest more or less 100 per cent in its factories. Mr Redondo: “In our business it is all about size. Without that nobody can run a tyre factory efficiently enough. We are going to invest and expand our capacities. A factory for passenger car tyres must produce 20,000 tyres a day and a truck tyre factory must produce 5000 tyres a day. Without this it is extremely difficult to remain successful and to stay competitive. We at Pirelli are doing everything to reach these numbers as fast as we can.”