When he took over as chairman and CEO of Pirelli Tire North America, Mauro Pessi was certainly no stranger to the tiremaker or its parent, Pirelli Tyre. Since his return, Pirelli has undergone some major changes. First, the parent company formed a number of business units and is now wholly invested in the tire industry. Second, Pirelli signed a three-year deal to be the sole tire supplier to Formula One, the most important racing series in the world. Finally, Pessi moved PTNA’s sales and marketing operations out of its Rome, Ga., headquarters to offices in New York City. Tire Review interviewed Pessi at PTNA’s new offices near Grand Central Terminal in midtown Manhattan.
After a year as CEO of Italian brake component maker Brembo, Pessi, 43, returned to his roots when he became head of Pirelli’s North American operations. Pessi had been with PTNA from 1991 to 2006, serving as vice president of marketing from 1998 to 2000 and as sales and marketing director worldwide from 2001 until 2006. He also held a number of posts with Pirelli’s Latin America operations.
Since his return, Pirelli has undergone some major changes. First, the parent company formed a number of business units and is now wholly invested in the tire industry. Second, Pirelli signed a three-year deal to be the sole tire supplier to Formula One, the most important racing series in the world. Finally, Pessi moved PTNA’s sales and marketing operations out of its Rome, Ga., headquarters to offices in New York City.
Tire Review interviewed Pessi at PTNA’s new offices near Grand Central Terminal in midtown Manhattan.
You have been in place as CEO now for about a year. Where do you see Pirelli in the North American market?
“PTNA did a lot of things, if you look at our history. We bought Armstrong, then we closed all of the Armstrong plants, then we tried the joint venture with Cooper when the ‘multi-brand approach’ was the rule of the game. And then we split from Cooper because the results what either of us expected. Then we set up the MIRS plant in Rome, Ga., and went our own way.
“Now where do I see Pirelli? The game for Pirelli in the U.S. is not to play against the big guys. We are not here to make a run for big volumes or market share. So we will not compete at that level. That is not what we defined as our strategy. We have no intention to go to 10 percent, 15 percent or 20 percent market share to compete against the big companies. Why? It would be tremendously costly and it would defocus the Pirelli brand away from its target. Our key strategy is to double our market share, so move from our 1.8 percent-2.0 percent share to 4 percent or 4.5 percent. This is our goal. Relatively, we would be a very small market share company, and we would still be able to joke with our customers that we are the only major brand with no market share. If you look at one side of the coin, one could say we are negligible, we are nothing.
“The clever customers see that the strategy we are developing is to flip the coin and look at the positive of this: That we are the only major brand that will not be overexposed in the market. That means dealers can drive their margins in a more stable way than what they can do with the other brands. Our strategy is to be very highly focused on the independent tire dealer channel, meaning that we are not in clubs, we are not in mass merchants, we have no equities and we have no intention to open company-owned stores. We do not participate in the associate or private brand markets. Inside the independent dealer channel, we want to pick the customers that better understand us and can better deliver value for us and themselves with the Pirelli brand. It is a highly-tailored distribution approach that delivers that kind of proprietary brand concept to our customers. That means they will never be exclusive, of course, but there would be a sense of relevance if they keep Pirelli in their business. We never intend to go to a retailer or distributor and say ‘You need to displace a brand to get us.’ We never ask that. But we want dealers to see the fact that we are so selective and so unique in our distribution approach that this delivers you additional profit margins vs. any other major brand in the market. So if they understand that and measure that, they can push our brand any time against any other major brand. They will not be under pressure or be embarrassed to sell Pirelli because there is high competition down the road. It is not a marginal approach because the more this keeps going, the more the dealers appreciate working with our brand and the more, we’re pretty sure, they will promote it and be active with our brand in a sustainable way. Not withstanding the fact that we have very solid OE pull through from all the premium applications domestic or imported from Europe which naturally helps deliver value, growth, margins and mix. In that way our growth will be steady and continuous. That is the way we want to go in the U.S.”
What do you see as PTNA’s strengths and what are its weaknesses?
“Strengths? I think definitely the brand image that we have, the product lineup and quality. Every time we talk to dealers and consumers, I am impressed by the way they perceive the brand. That tells you a lot. Americans perceive the brand to be in a high position, and that our distribution policy and pricing that we put in the market are key assets. The weakest part of our game? Today, it could be the marketing budgets that we have. The market is asking to support our position with communication and advertising and so on. That’s why with the F1 agreement that we just signed, we think we will be able to expose the brand in a more effective way than we have been able to do in the past. And probably to do something that is unique and not available to the other tire companies. And to me that is most relevant thing, to be able to do something that no one else can do.”
Last year was a tough one for everyone in the market. How did PTNA finish up 2009 in terms of sales and profits? What are your projections for 2010?
“Our policy is that we don’t disclose numbers by region but only by product sector. We just published the results for the first half of the year; we did pretty well. Revenues up by 19.8 percent and we definitely were very solid. Last year overall, independent of all of the turmoil in the market, the numbers in the second semester were starting to improve, but it was still not a happy year. We were not satisfied, but we were able to limit a lot of damage because as a corporation we did rationalize our cost base the year before the crisis started to jump into the market. So through cost management and mix, we have been able to defend our overall situation without any huge impact. If you look at our overall corporate results, our numbers were by far among the best in the industry.
“This year, so far, is going much, much better. In the U.S. we have been able to grow sales by 20 percent, by far double the rate of the market and we could do even better. This is pretty easy because everyone is short of tires, so there are opportunities. So we’re happy because in terms of sales and profits in the U.S., we are growing in a really good way. For the year-end, we do not expect the trend to change. Replacement demand is strong everywhere: in North America, Europe, China, Asia, South America. In the U.S., there was pent up demand and the China tariff put pressure on the market to meet demand on the lower end.
“Will next year will be at the same level? No. Probably next year the market will range between 2 percent-3 percent. The expectation is for average growth in the market. OE, in my opinion, is the big question mark. If the economy doesn’t recover at a more sensible speed I don’t think the OE market will be in a position to maintain sales, let alone grow. It will be difficult with the unemployment rate so high. The other factor is wages are flat. People are not earning much more money and their savings has been destroyed by Wall Street or by the real estate market. You may be able to keep your job, but if your savings has been cut by 30 percent-40 percent, are you going to buy a new car? You’re going to be careful about your leftover money and keep it in your pocket. That’s why I have some concerns how the OE situation will shape up.”
Pirelli recently moved its sales and marketing operations and your office to NYC, but its headquarters remains in Rome, Ga. Can you explain exactly why Pirelli made this move and how it will benefit dealers?
“To be clear, our headquarters is still in Rome Ga., and it will not move. It will stay there and we are not abandoning Rome. Opening offices here is not because we have problems in Georgia. It’s not that at all. We are happy to be there. There were several reasons we decided to move the sales and marketing offices to New York City. And, by the way, this is not an exercise that we have done only in the U.S.; we did it in Germany a number of years ago and in China and Brazil, where we moved the front line of the local company out of the plant and to a larger city. For our brand, which is a very unique, particular brand, in our opinion you have two places in the U.S. where you can really broadcast the brand in a different way. One is New York City and the other is Los Angeles. L.A. is a nine-hour time zone difference with Europe, and while L.A. is a unique place, there it is all aesthetics. Here in New York you have everything you need. It is more grounded. There is the culture, there the financial world, the fashion industry; there are all of the agencies and suppliers that you need. Most importantly, there is a powerful area of young, talented people here. At the end of the day, here we have better access to the resources the company needs and greater visibility for the brand. We use this location to invite investors and analysts from all over the world. Next year, we will introduce our brand in the fashion business as we have done in Europe. The Northeastern U.S. also has the highest populated areas and the greatest concentration of good retailers and dealers that we want to do business with. If you combine all of that, all in all, this location would give us a lot of benefit and efficiencies for the front line of the company. The factory and R&D and the behind-the-scenes parts of the company are staying in Rome, and there will be a strong link between our offices here and Rome. I will be going back and forth to the plant quite a bit.”
The opportunity to come to New York has existed for years. Why now?
“In reality, we were already thinking of moving the sales and marketing part of the company, and maybe the company took the occasion that I was coming back to go ahead and make the move. ‘Let’s do something different, let’s position ourselves in a different way, invest totally different in this market, let’s gain some exposure and visibility.’ The U.S. has been a Cinderella market for us, with a lot of promise but relatively small results. So we decided to try to make it happen. We have all of the right ingredients, so now it is time to make it happen. Now we have all of the good expectations and we also have the confidence that we are on the right track.”
Recently, Pirelli was chosen to be the sole supplier for Formula One beginning next year. Obviously, the company will be spending quite a bit of money worldwide to support and leverage this deal. What kinds of things are you looking at doing in the U.S. and Canada to leverage F1?
“F1 is really an amazing communication tool. It’s not for all brands. Some brands fit F1 better than others. I don’t want to speak badly of others, but Bridgestone, in my opinion, did not collect all of the results that were expected. After seven to eight years in F1, more European consumers thought Pirelli was in F1 than Bridgestone. That’s the perception people have there. Some people say F1 is not a factor in the U.S. because there is NASCAR and Indy. Yes, of course on TV that is what you see. But if you look at the perception of the American consumer, when you ask them what is the most technologically elevated race series, they think of F1, not NASCAR or Indy. So for the Pirelli brand there is a good fit with F1. Both of us represent the highest expression of speed and performance, and the combination of the two will work very well together. That commonality of the F1 image and Pirelli image, in my opinion, will have a very strong marriage. And our intention is to dedicate a major part of our marketing and communication effort in exploiting the synergy, with promotions to the trade and to consumers. This could be through trade advertising or to consumers with ads or through Internet advertising. Montreal is next year and in two years we will have an F1 race in Austin, Texas, and those races will help us a great deal in leveraging the effort in North America. Montreal and Austin will give us a domestic footprint.”
How long had Pirelli been thinking about throwing its hat into the F1 ring?
“We had been contacted and analyzed coming back to F1 for the last two to three years. The reason we never looked seriously at committing to it was because F1 was a money-losing operation, and the millions of dollars that Bridgestone and Michelin spent on F1 was not well-justified. It was an enormous investment for a return that was really marginal. So we looked at it, but it was unprofitable and not justified. Six months ago Bridgestone said they were done, and by that point the racing world changed a bit. The series and promoters learned that in this economy, they couldn’t keep squeezing everyone because there were no more free meals for everyone. Since that became clear to them, Pirelli was interested in coming back. It is not that we want to make money, but we do not want to lose our shirt. It was the right conditions to come back and talk. We made our offer and Michelin also made their offer they were competing with us big time but they lost, and we have been flexible enough to meet F1’s needs. At the end of the day, the only relevant brands with the heritage and the tradition and technology to cope with F1 were Pirelli and Michelin.”
It’s been 20 years since Pirelli was last in F1 what does this return to F1 racing mean to Pirelli?
“It’s a kind of a return to our origins. If you look to our tradition, it is still in the eyes of the consumer what we did 100 years ago when we started with the Paris to Beijing Race in 1907, for example. In our Cultural Foundation in Italy, you have all of the history of the company and there are official documents of the first telegraphs from the different stages of the race and the drivers’ comments on Pirelli tires and how good they were. That’s the Pirelli DNA innovation and challenge. So going back to F1 is our heritage. It’s not that we were doing nothing for the last 20 years. We were involved in rallying and sports car racing and super bike in motorcycle. We didn’t stop developing racing technology, but at the end of the day it’s going back to our tradition and competing in the most competitive racing. It’s part of the tradition of our brand and company.”
What is the current status of that plant, and are there specific plans now to expand production or add production lines there?
“Last year we added a line, and we put in the fifth line last year. It’s the most modern line that we have there; it is much bigger and more productive. It has been going full steam since January. We have other plans, as well. The plant was originally set up for 20 lines and we have plenty of space. But the market has changed. The 24-inch tires that a few years ago were selling for $450-$460 are now sold for $200 if you’re lucky and the 22s that were sold for $250-280 now are being sold for $120-$140 max. So the market changed dramatically and what we have done is optimize the mix of the MIRS lines on the really premium tires that we need to sell in the U.S. and on the new size applications. So we are making investments to gain a better return.”
At SEMA last year, Pirelli introduced its first “green” tire for the North American market the Scorpion Verde A/S. How has that product been received thus far, and what are Pirelli’s plans for eco-friendly, fuel-efficient tires in the future?
“The line was launched at SEMA and we are now delivering the first sizes. The size range was limited to CUVs and imported SUVs, so they were very specific applications. We thought that was the best position for that tire. Those kinds of drivers tend to be more sensitive to longer lasting tires and lower rolling resistance. The line has been well-received. There is a lot of expectation for us to expand the size range and that is what we intend to do. Later this year and early next year, we will expand the line to be more complete and updated in terms of sizes. And there will be a full introduction of the line into the dealer channel. Major customers like the concept and positioning of the product, the way it has been communicated, and also the way it looks and how it performs. Yes, there will be additions of eco-compatible products. The intention of Pirelli is to be greener and greener we call it ‘Green Performance’ because we don’t want to lose the heritage of performance but we don’t want to have a trade-off of performance and eco-compatibility. We developed new technologies in order to deliver the traditional Pirelli way of driving, but without compromising the new ways of driving that are more friendly to the environment.”
Pirelli SpA has shed its real estate operations and telecom business, and is now 100 percent a tire company. How do you see this realignment impacting the company, and what will it mean for Pirelli’s operations on this continent?
“Even when we were engaged in several other businesses, the tire sector was always a good performer. Over the last 10 years, Pirelli Tire has delivered good results and cash flow to the company. Of course, when we had those other businesses, the company was bigger and there was more of a fight for money for investments because you cannot support all wishes of the business units at the same time. At the end of the day, the tire sector was able to prove internally that it was profitable and could be a good cash generator. Now we are dedicated to the tire industry. But that doesn’t mean there is free money. Our investment rules will not change. If the investment is not profitable, if there is no payback, then the investment will not be done. That holds true in North America. For us, we have greater focus on tires but it doesn’t change the priorities the company has always had: being profitable, being financially solid and being able to deliver value to our customers. If we follow those rules, we will be successful. If we are not successful with those parameters, that doesn’t changes the rules.”
We have heard much about Pirelli’s Cyber Tire product. When can we expect to see that tire launched in North America? And will it be a broad release, or limited to certain dealers or retailers?
“The way I see the Cyber Tire is when it’s launched it will be launched first at OE. That is the natural fit for the kind of revolution that we are targeting with the Cyber Tire. It’s not something that you can start on the replacement side because of the premium price we would need to ask and because drivers may not understand the value properly. Most of the innovation in the car industry comes from OE, not the replacement side. But this kind of revolutionary product which implies lots of electronics will be justified only with an OE option. Once drivers understand the benefits of this new product, then they will ask for it in the replacement market. The kind of technologies that we intend to put in the Cyber Tire are not easy to introduce into the replacement market because they deserve the high technical explanation, and drivers deserve to test it in their vehicles before deciding to buy it. It has to be part of a full package when you buy a car. And the collaboration that is happening right now with certain OEMs is because of the onboard computers and so on. There is testing going on. Electronics in a tire is an interesting engineering program, and it is not easy at all. So it will take collaboration.”
Any thought to making that technology available to other tiremakers, licensing that technology?
Generally, no. But any time a manufacturer tries to have a single innovation and keep it for themselves, it never works. OEMs don’t want to be tied up with one single supplier. What I’m expecting is that Pirelli and another major will develop some solutions that will be competitive with each other, but more or less with the same philosophy and technology; in that way, it will become sort of the standard. The technologies would be different, but the products would be more or less comparable. This is what I think will happen here compatible and competitive products.
Tire pricing is and will remain a major issue for tire dealers and consumers. Obviously raw material costs are the big issue for manufacturers, particularly NR. How do you see the raw material situation shaping up through next year, and what can dealers expect from the industry in terms of pricing?
“From my point of view, raw materials will remain high; that trend will not change. There are two reasons: one, demand from tiremakers is there, so we will not see any relaxation in the market that would cause costs to go down. Both OE and replacement markets globally are going like freight trains. Actually, right now there is a shortage of natural rubber availability because plantations cannot keep up with demand. So I don’t see a strong short-term possibly of there being reductions unless the market slows down. The second thing that influences the prices of raw materials is financial speculation. There are no places where you can put your money these days and make good returns. Unfortunately, all of the hedge fund investors see raw materials and raw material futures as good places to make money. Even if you have stable growth in demand, that does not justify the level of where prices are today. To me, that is related to financial speculation. This is what has been creating the situation. For example, and I’m just using numbers here, if raw material prices go up 80 percent year-on-year, what part of that is from speculation? Probably 20 percent, but that 20 percent has a tremendous impact on the financial P&L side for tiremakers. You cannot prevent that; it is free trade. As a general industry view, if prices of raw materials keep up where they are, then we need to make a drive for higher prices to reduce again the impact of those raw materials on the P&Ls. Recent price increases do not cover the full costs of the raw material increases we see. We’re far away from recovering that. I’m expecting there will be other adjustments in prices. Perhaps not this year, but at the beginning of next year, probably. But we also probably won’t see three to four price adjustments in a year, as long as raw materials stay level.”
Pirelli once tried to enter the North American commercial market. Are medium truck tires for N.A. being considered by Pirelli?
“Not short-term. Long-term will be very long because our strategy with truck is to focus on emerging markets in South America, Asia, Middle East and Africa. All of those markets are booming, and the cost of truck tire operation is much lower. Fleet servicing and technical assistance are not as high as in the U.S. or Europe. That is where we are focusing our attention, and we’re doing well in those markets. It is not the case that the U.S. is not worth it, but the cost of selling truck tires here is really high. The cost to enter is huge. On top of this, we are sold out on product and we plan to be sold out for the next two to three years. So there is no serious possibility to bring truck tires to the U.S. anytime soon. Never say never, because the market could change. But we have no plans to make that happen.”
Editor’s Note: This interview originally appeared in AMN’s sister publication, Tire Review.