Via Gaetano Negri 10
Company Perspectives:
The Pirelli Group has a long industrial tradition and is ranked among the world's leaders in every sector in which it operates. For more t han a century, we have been developing into a fully-fledged multinati onal, firmly rooted in various national markets. Our competitive stre ngth lies in technological capabilities and research, and in the qual ity and the professional expertise of our human resources.
One of the largest companies in Italy, Pirelli & C. S.p.A. is amo ng the world's leading tire manufacturers, producing and distributing tires for cars, motorcycles, and farm and industrial vehicles. The w orld leader in tires for high-performance cars, Pirelli produces tire s in 22 factories located in Argentina, Brazil, Egypt, Germany, Italy , Spain, Turkey, the United States, the United Kingdom, and Venezuela . Its marketing network covers 120 countries around the world, with a bout 14 percent of tire sales stemming from the home market, 45 perce nt from the rest of Europe, 7 percent from North America, 20 percent from South America, and the remaining 14 percent from Africa and the Asia-Pacific region. Among other operations, Pirelli is involved in r eal estate management, optical research relating to photonics-based t elecommunications, and the development of alternative fuels from wast e products, and it also holds a 57.7 percent stake in Olimpia S.p.A., which in turn is the leading shareholder of Telecom Italia S.p.A., o ne of Europe's largest telecommunications companies.
Late 19th-Century Origins
The company's founder, Giovanni Battista Pirelli, a 24-year-old engin eering graduate from the Milano Politecnico, formed the company Pirel li & C. with an initial share capital of ITL 215,000. Pirelli had astutely realized that rubber was to become one of the most importan t commodities in the rapidly industrializing Italy. Less than a year after its inception in 1872, Pirelli's company built its first factor y in Milan. There were 45 people employed in the small, 1,000-square- meter building as demand for the company's rubber sheets, belts, slab s, and vulcanized products increased. The rapid growth in the popular ity of the motor car, which was now seen as more than a fashionable p laything for the rich, led to contracts to supply pneumatic tubes and transmission belts.
From its earliest years Pirelli demonstrated a willingness to diversi fy its product range and to produce overseas in order to satisfy its desire for ambitious, yet controlled, expansion. The company began th e manufacture of insulated telegraph cables in 1879 and within seven years had developed the technology to produce underwater telegraph ca bles. In 1890 pneumatic bicycle tires rolled off the production line and were followed in 1901 by the company's first car tires.
Pirelli established a trend that many Italian companies were to follo w when it began to expand abroad as early as 1902. The new cable and electrical lead factory set up near Barcelona in Spain was followed b y a similar venture in Britain in 1914, and by 1920 factories had als o been set up in Brazil, Greece, Argentina, Turkey, and Germany. Prod uct diversification at home was encouraged by the firm's long-term co mmitment to investing in research and development. Giovanni brought h is two sons into the business and they helped to run the new motorcyc le tire production plant built at Bicocca in 1908. Forever at the for efront of new technology, the company began to produce rubberized fab rics as early as 1909.
Two major factors were to account for Pirelli's growth in the years i mmediately preceding World War I. First, between 1900 and 1914, Italy saw increased social reforms and political stability, which created more favorable conditions for trade and industry. Pirelli, which deri ved much of its demand from newly established ventures, was well plac ed to benefit from these changes by producing fluid control devices, transmission belts, and fuel distribution machinery. Second, the inve ntion of the internal combustion engine in 1910 made the mass product ion of cars economically viable. The so-called rubber boom of 1911 ma rked the acceptance of the material as a worldwide commodity and ensu red the continued success of the company.
Interwar and World War II Era
New factories were opened in Spain in 1917 and Argentina in 1919, but the first major event to affect the company after the end of the war was a change in its organizational structure, implemented in 1920. P irelli & C., the original company founded by Giovanni Pirelli, ch anged its status and became an investment rather than a production co mpany. Società Italiana Pirelli, later to become Pirelli S.p.A ., was incorporated to act as a holding company to control the group' s varied industrial operations based in Italy. Compagnie Internationa le Pirelli S.A., incorporated in Brussels, was set up to manage the g roup's rapidly increasing overseas operations. Pirelli & C. S.a.p .A. was taken public in 1922; Pirelli S.p.A. was listed four years la ter.
In 1924 Luigi Emanueli, an employee of the company, developed the fir st commercially viable oil-filled cable. The world's first crossply t ire, the Superflex Stella Bianca, was successfully launched in 1927 a nd within two years a new cable production unit was opened in Brazil and a new tire factory was opened at Burton-on-Trent in England. Init iatives were also made in India and Malaysia to guarantee the supply of natural rubber to Milan and Pirelli's overseas subsidiaries.
This was a period when Pirelli's products, fitted to the Ferraris and Alfa Romeos of Nuvolari and Ascari, became synonymous with success i n international Grand Prix racing. Nevertheless, the rise of Mussolin i's fascists and Italy's increasingly disastrous foreign policy in th e mid-1930s led to a further period of economic and political turbule nce. To counteract the impending threat of international boycotts, Co mpagnie Internationale Pirelli S.A. was transferred into Pirelli Hold ings S.A., a holding company incorporated in neutral Switzerland, in 1937.
Postwar Rebuilding and Expansion
World War II left Italy politically and economically crippled. A weak leadership was unable to cope with the severe poverty, rampant infla tion, and high unemployment that affected the whole country. Nonethel ess, Alcide de Gasperi, the Christian Democrat leader, was able to br ing both inflation and the budget deficit under some degree of contro l, and by 1948 a large-scale public investment program was instigated .
Italian industry had been situated in the north of the country for a number of reasons. Milan, Turin, and Genoa became business centers be cause of the availability of both capital and raw materials--steel fo r machinery and railways, coal for power--and again Pirelli, which de rived much of its success from the success of others, was well placed to take advantage of the new boom in the north. Pirelli responded to this opportunity by producing the first fabric-belted tire, the Cint urato CF67, introduced in 1948, which revolutionized the tire industr y.
In the 1950s and 1960s Italy enjoyed the same kind of economic miracl e experienced by many European countries as postwar depression gave w ay to years of growth and prosperity. An influx of new talent, often from comparatively humble backgrounds, suffused the established upper crust of Italian society and led to an improvement in the quality of management. Pirelli set new records for expansion overseas, opening a cable factory in Canada in 1953, a latex foam plant in France in 19 57, and new tire plants in Greece and Turkey in 1960. The company pur chased the German tire company Veith in 1963 and reinforced its posit ion in both South America and Australasia when it opened cable manufa cturing operations in Peru in 1968 and Australia in 1975. Pirelli was also involved in establishing several turnkey plants during the 1960 s to provide tires for Eastern European companies.
Throughout this period of expansion Pirelli followed the strategy, co mmon to most of the Italian multinationals, of eschewing joint ventur es and the purchase of minority and majority shares in established co mpanies. Instead, product ranges that had already proved successful i n the Italian domestic market were transferred for production and sal e overseas. In this way the company was able to retain complete contr ol over its operations abroad while being able to overcome barriers p reventing Italian exports.
Surviving Heightened Competition from Michelin and the 1970s Oil S hocks
In the late 1960s Pirelli's reputation for being at the forefront of innovation was usurped by Michelin when the latter introduced steel-b elted radial tires. Michelin also entered the U.S. cable market seven years before Pirelli. Some commentators suggested that Pirelli's man agement was more concerned with producing glossy calendars than tires (the first Pirelli calendar having been produced in 1964). The compa ny responded by embarking on a long-term research and development agr eement with the British Dunlop group. This surprising move did not le ad to a full merger, and neither party seemed to be too disappointed when the agreement was terminated in 1981.
A personal tragedy hit the firm in the early 1970s when Giovanni Pire lli, a direct descendant of the original founder, was killed in a car crash. This natural leader of the firm was replaced by his younger b rother, Leopoldo, who was also severely injured in the accident. Leop oldo led the company through a period of protracted change.
The oil crises of the 1970s brought about a change in attitude toward s the role of the motor car. Sales of new cars slumped as the price o f gasoline soared, and as a consequence the worldwide demand for tire s fell dramatically. Italy, far more dependent on imported sources of energy than most of its European partners, was particularly badly hi t by the 1974 crisis, which saw the return of rampant inflation and a massive drop in the value of the lire. The second oil crisis of 1979 followed the withdrawal of the Communists from the "historic comprom ise" coalition government that had done so much to stabilize Italian political life. The Naples earthquake of November 1980 and the public exposure of P2, the secret Masonic lodge, six months later further d amaged the morale of the country.
Reorganizing and a Program of Acquisitions in the 1980s
After the ending of the agreement with Dunlop, Pirelli benefited from the upturn in the European economy of the early 1980s. The Italian a nd Swiss parent companies were responsible for an extensive reorganiz ation of the group in 1982, which saw an equalization of the shares e ach company held in the group's many and varied subsidiary companies. A new management company, Pirelli Société Gén&e acute;rale S.A., was created in Basel to ensure that unified policies and centralized objectives were put in place in Pirelli companies th roughout the world.
In 1986 Pirelli acquired the share capital of Metzeler Kautschuk GmbH , a German company with many interests in the rubber industry. The ac quisition of Metzeler led to a 13 percent increase in consolidated tu rnover and reinforced Pirelli's position in the market for motorcycle tires and automobile components. Just as important, the move provide d Pirelli with a well established distribution chain that dealt with manufacturing activities. This apparent change in strategy, favoring growth through acquisition at the expense of traditional organic grow th, was also demonstrated in 1988 when the group acquired Armstrong T ire and Rubber Company, the sixth largest U.S. tire manufacturer. In the same year Pirelli bought Filergie S.A., a cable manufacturer with 13 plants in France and Portugal. Although the pace of technical dev elopment appeared to be slowing down and no further radically differe nt tires were introduced, the company did benefit from the increased margins offered by a shift in demand in favor of low-profile and prem ium radial tires.
A further share restructuring was undertaken in 1988 when Pirelli S.p .A. acquired Société Internationale Pirelli S.A.'s hold ing in Pirelli Société Générale S.A., the reby accepting direct responsibility for the day-to-day management of the operating companies. In turn, these operating companies were res tructured into self-contained divisions in order to facilitate faster responses to financial, production, and employment problems. The thr ee divisions, Pirelli Tire, Pirelli Cavi, and Pirelli Prodotti Divers ificati, were each given separate holding companies.
The worldwide tire industry was as badly hit by the recession of the late 1980s and early 1990s as any other manufacturing sector. Worldwi de sales of tires stagnated, and producers were unable to pass on inc reases in the cost of raw materials, especially oil, to the final con sumer. Car makers, suffering from reduced demand, cut their costs by forcing tire manufacturers to accept lower prices. A spate of ill-con ceived takeovers in the early 1980s and an increasing market dominanc e by a decreasing number of companies led to pressure on margins in t he struggle to gain market share. Excess capacity and oversupply exac erbated the situation.
Pirelli's reaction to these market forces was to engage in two major merger and acquisition exercises. First, the company became involved in an acrimonious battle with Bridgestone Corporation to take control of the U.S. company Firestone Tire & Rubber Company in 1988 and 1989. With the benefit of hindsight, Pirelli should be content to hav e lost the battle and thereby have avoided what proved to be a costly and largely unsuccessful acquisition for Bridgestone.
Early 1990s: Near Disastrous Attempt to Merge with Continental and a Massive Restructuring
Pirelli's second attempt to increase its market share by entering the world of mergers and acquisitions led to a long series of merger dis cussions with the German company Continental AG and ultimately, near disaster. The plan to merge the fourth- and fifth-largest tire produc ers in the world was designed to produce a force powerful enough to a chieve critical mass in a fairly stagnant market. Damaging price comp etition would be avoided and overcapacity would be reduced. This deal seemed a far more attractive proposition than the opportunity to acq uire Firestone two years earlier. The proposed merger, however, prove d to be problematic from the very first time the two parties met. The board of Continental, led by CEO Horst Urban, angered the Pirelli le adership by publicly revealing details of secret meetings. Pirelli be lieved that its attempts to follow traditional German merger practice , in which friendly approaches are made to willing partners in order to achieve mutual benefit, was the best way to act in the early stage s of the deal. Continental's belligerent defensive strategy, inspired by the aggressive tactics employed by the City of London and Wall St reet in the mid-1980s, led Pirelli to hire an investor group to buy u p Continental stock. While talks between the two firms dragged on int o 1991, Pirelli's financial condition weakened under the strain of th e stagnant economy to the point where Continental pulled out of the m erger discussions.
It was subsequently revealed that Pirelli lost almost $300 millio n on the Continental stock its investor group had purchased, further damaging the company's fortunes and instigating a shareholder revolt (after an earnings gain of 11 cents per share in 1990, the company po sted a loss of 48 cents per share in 1991). In 1992 Leopoldo Pirelli was pushed aside from day-to-day management (he remained chairman of the board) in favor of his son-in-law Marco Tronchetti Provera, who h ad opposed the Continental takeover attempt. Tronchetti instigated a massive restructuring effort to forestall threatened bankruptcy. Many of the businesses his predecessors had acquired in preceding decades were sold off, eventually reducing Pirelli to two core divisions, ti res and cables, out of the nine it had operated at its peak of divers ification. In addition to the sale of such operations as conveyor bel t and apparel manufacturing, much of Pirelli's downtown Milan real es tate was sold, bringing in $563 million which contributed to cutt ing the firm's $2.5 billion debt load in half. The company's work force was cut from 53,500 in 1990 to 38,500 in 1994, or about 25 perc ent, and the number of factories Pirelli operated was reduced from 10 3 in 1990 to 74 in 1994.
After its loss of ITL 657 billion in 1991, Pirelli's newfound concent ration on its core tire and cable businesses slowly turned the compan y around. After smaller losses of ITL 69 billion in 1992 and ITL 41 b illion in 1993, Pirelli returned to profitability in 1994 with a gain of ITL 72 billion. Its tire operation was boosted by a resurgence in European sales based primarily on Pirelli's emphasis on increasingly popular high-performance tires. By 1995, Pirelli had captured 12 per cent of the European tire market, second only to Michelin. The North American market lagged behind, however, because of the poor performan ce of Armstrong. Pirelli replaced Armstrong's management team in earl y 1995, giving the new team until 1997 to break even. At the same tim e, Pirelli began to expand its tire business into East Asia.
On the cable side of its business, Pirelli had built itself into one of the world's top two manufacturers of fiber-optic cables. It aimed to increasingly emphasize telecommunications cables over those used f or power. The company was also doing pioneering work in the area of p hotonics: the use of optical fiber and other components for high-spee d transmission of information as pulses of laser light. Pirelli had e xpressed interest in broadening its telecommunications business by pu rchasing a stake in the state-owned Telecom Italia, which the Italian government had considered privatizing. However, threats to block any such Pirelli move to further enhance its position in the Italian tel ecommunications sector were immediately raised by Italian legislators .
Late 1990s: Solidifying the Turnaround
By 1996 net income had jumped to ITL 436 billion on revenues of ITL 1 0.24 trillion ($6.2 billion), while Pirelli's debt load had been cut to just ITL 1.02 trillion ($617 million). In a further signal of the company's turnaround, Pirelli made its first dividend payment in five years. In June 1996 Tronchetti succeeded the retiring Leopol do Pirelli as chairman of Pirelli, becoming the first non-Pirelli to chair the group. Early the following year, Tronchetti unwound his pre decessor's disappointing acquisition of Armstrong. Pirelli closed the last of the factories inherited from Armstrong, consolidated its Nor th American production at its plant in Hanford, California, and ended its use of the Armstrong brand. The new strategy in North America wa s to sell high-performance tires under the Pirelli brand and use its Formula brand in the broad-line replacement passenger tire market. Pi relli's main U.S. tire subsidiary, Pirelli Armstrong Tire Corporation , was renamed Pirelli North America Inc.
At the beginning of 1999 Pirelli completed a further simplification a nd modernization of its ownership structure. Pirelli & C., the pr incipal holding company of the Pirelli family, maintained control of Pirelli S.p.A. through three intermediary holding companies. In a com plex series of transactions, these intermediary companies were elimin ated, after which Pirelli & C. directly held a controlling 30 per cent stake in Pirelli S.p.A. Meanwhile, Pirelli was in the midst of b olstering its position in power cables through several acquisitions. In 1998 the company purchased the power cables operations of Siemens AG for $277 million, gaining businesses in Germany, Hungary, Roma nia, Turkey, Italy, Spain, Austria, Slovakia, and China and making Pi relli the world's largest producer of energy cables. This deal was fo llowed in 1999 by the purchase of the power and construction cables d ivision of Metal Manufacturers Limited of Australia and in 2000 by th e acquisitions of part of the power cable operations of the electrici ty companies of NKF, a Dutch cable company, and of the energy cable o perations of BICCGeneral, a unit of General Cable Corporation. The la tter deal included 11 factories, five of which were in the United Kin gdom and one in Italy along with additional facilities in Africa and Asia and joint ventures in Malaysia and China. A restructuring announ ced by Pirelli in late 1999 involving the elimination of 2,800 jobs a nd the closure of five plants was mainly aimed at streamlining its ac quisition-bolstered cable operations.
On the tire side, meanwhile, Pirelli formed alliances with Cooper Tir e & Rubber Company in North and South America in 1999. Cooper agr eed to distribute and sell Pirelli passenger-car and light-truck tire s for the North American replacement-tire markets, while Pirelli agre ed to distribute and market Cooper tires in South America. For Pirell i, this alliance was mainly intended to shore up its position in its weakest market, North America. In June 1999 Pirelli acquired majority control of Alexandria Tire Co. S.A.E., the largest tire manufacturer in Egypt. As part of a drive to cut costs, Pirelli also developed a new production process it dubbed the Modular Integrated Robotized Sys tem (MIRS). A highly flexible, robot-run mini-factory integrated with the entire supply chain, MIRS made its debut in 2000 at the firm's M ilan factory.
Early 2000s: Enter Telecom Italia, Exit Cables
In 2000 Pirelli completed two large divestments that left it with a h orde of cash. In February Pirelli sold its terrestrial fiber-optic eq uipment business to Cisco Systems, Inc. for about $2.2 billion. A s part of the deal Cisco invested $100 million for 10 percent sta kes in Pirelli's fiber-optic components and submarine-cable businesse s. Part of the fiber-optics components business, however, was sold in December 2000 to Corning Inc. for approximately $3.6 billion. In the wake of these deals, which left Pirelli with about $5 billio n in cash--Pirelli having sold the assets at the peak of the market-- the company split its cables and systems division in two, effective a t the end of 2001, creating two new units, one focused on telecommuni cations cables and systems and the other on energy cables and systems .
In September 2001 Tronchetti stunned the European financial community when he used Pirelli's pile of cash to gain control of Telecom Itali a, at the time the fourth largest telecommunications firm in Europe, with interests in the telephone, Internet, and television sectors, an d a debt-laden company struggling to shake off its past as a bloated state-owned monopoly. Telecom Italia had been privatized in 1997 and then taken over by Olivetti S.p.A. in 1999 in a highly leveraged host ile takeover engineered by Roberto Colaninno. Tronchetti joined with the Benetton family, Italy's three largest banks, and the investment fund Hopa in a EUR 7 billion ($6.1 billion) deal to take a contro lling 27 percent stake in Olivetti, which in turn controlled 55 perce nt of Telecom Italia. Pirelli set up a new holding company called Oli mpia S.p.A. as the vehicle to hold the stake in Olivetti. Pirelli ini tially held a 60 percent stake in the new company.
This deal was treated quite coolly by investors, and Pirelli's stock was pummeled. Tronchetti's plan was to refocus Pirelli on telecommuni cations, including the Telecom Italia assets and Pirelli's own fiber- optic cables, components, and networking gear. Toward this end a plan was announced to divest the firm's tire and energy cable operations by the end of 2002. Luckily for Pirelli, this plan was never put into full effect, sparing it the prospect of being fully exposed to a wor ldwide telecommunications industry gone bust. Instead, Pirelli restru ctured into four businesses in 2003: tires, energy cables and systems , telecommunications cables and systems, and real estate. Seeking to further simplify its convoluted ownership structure, Pirelli S.p.A. w as acquired by and merged into Pirelli & C. S.p.A. in 2003, the l atter becoming the main holding company for the Pirelli group. At the same time, Olivetti was merged into Telecom Italia, further reducing the number of companies linking Pirelli to the latter.
While Pirelli's telecommunications and cables businesses suffered fro m deep slumps, its tire business was doing quite well thanks to an em phasis on high-performance products and the spread of its automated f actories. In 2003 a new MIRS plant in Rome, Georgia, began churning o ut tires, including a new model called the Scorpion that was intended to reintroduce the Pirelli brand to the U.S. market. During 2004 Pir elli's tire operations enjoyed their best performance in ten years as Pirelli's emphasis on high-end tires continued to pay dividends. The tires unit posted profits of EUR 169 million on revenues of EUR 3.26 billion. Overall net income amounted to EUR 274 million on revenues of EUR 7.11 billion.
By this time, Pirelli had placed both of its cables units up for sale , and in June 2005 it announced their sale to the private equity arm of Goldman Sachs for EUR 1.3 billion ($1.6 billion). This left th e group focused primarily on tires, telecommunications, and real esta te. With Telecom Italia beginning to perform better and the tires uni t riding high, Pirelli's future seemed bright. Not resting on its lau rels, the company was actively pursuing new markets for its tires bus iness and by late in 2005 had set up new joint ventures for tire manu facturing in Romania and China.
Principal Subsidiaries: Olimpia S.p.A. (57.7%); Pirelli La bs S.p.A.; Pirelli & C. Real Estate S.p.A. (53.9%); Pirelli B roadband Solutions S.p.A.; Pirelli Ambiente Holding S.p.A. (51%); Pirelli Pneumatici S.p.A.; Pirelli Gesellschaft mbH (Austria); Pirel li Tyres Belux S.A. (Belgium); Pneus Pirelli S.A.S. (France); Pirelli Deutschland GmbH (Germany); Elastika Pirelli S.A. (Greece); Pirelli Hungary Tyre Trading and Services Ltd.; Pirelli Tyre Holding N.V. (Ne therlands); Pirelli Tyres Nederland B.V. (Netherlands); Pirelli Polsk a Sp. Zo.o. (Poland); S.C. Cord Romania SRL (80%); S.C. Pirelli T yres Romania S.R.L.; Pirelli Slovakia S.R.O.; Pirelli Neumaticos S.A. (Spain); Pirelli Tyre Nordic AB (Sweden); Agom S.A. (Switzerland; 80 %); Pirelli Tyre (Europe) S.A. (Switzerland); Çelikord A.S . (Turkey; 50.76%); Türk-Pirelli Lastikleri A.S. (Turkey; 63 .05%); Pirelli UK plc; Pirelli UK Tyres Ltd.; Pirelli Tire Inc. ( Canada); Pirelli North America Inc. (U.S.A.); Pirelli Neumaticos S.A. I.C. (Argentina); Pirelli Pneus S.A. (Brazil; 99.73%); Pirelli Ne umaticos Chile Limitada; Pirelli de Colombia S.A.Pirelli Neumaticos d e Mexico S.A. de C.V.; Pirelli Venezuela C.A. (96.22%); Alexandri a Tire Company S.A.E. (Egypt; 86.82%); Pirelli Tyre (Pty) Ltd. (S outh Africa); Pirelli Tyres Australia Pty Ltd.; Pirelli Tyres (NZ) Lt d. (New Zealand); Pirelli Japan K.K.; Pirelli Asia Pte. Ltd. (Singapo re).
Principal Competitors: Bridgestone Corporation; Compagnie G&ea cute;nérale des Établissements Michelin; The Goodyear T ire & Rubber Company; Continental AG.
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