Pirelli S.P.A. Business Information, Profile, and History

History of Pirelli S.P.A.

Pirelli S.p.A. is among the world's leaders in both tire and cable manufacturing, and is one of the largest companies in Italy. Its founder, Giovanni Battista Pirelli, a 24-year-old engineering graduate from the Milano Politecnico, formed the company Pirelli & C. with an initial share capital of L215,000. Annual sales neared L20 trillion by the mid-1990s, with core operations producing and distributing tires for cars, motorcycles, and farm and industrial vehicles, and cables for power transmission and telecommunications.

Pirelli had astutely realized that rubber was to become one of the most important commodities in the rapidly industrializing Italy. Less than a year after its inception in 1872, Pirelli's company built its first factory in Milan. There were 45 people employed in the small, 1,000-square-meter building as demand for the company's rubber sheets, belts, slabs, and vulcanized products increased. The rapid growth in the popularity of the motor car, which was now seen as more than a fashionable plaything for the rich, led to contracts to supply pneumatic tubes and transmission belts.

From its earliest years Pirelli demonstrated a willingness to diversify its product range and to produce overseas in order to satisfy its desire for ambitious, yet controlled, expansion. The company began the manufacture of insulated telegraph cables in 1879 and within seven years had developed the technology to produce underwater telegraph cables. In 1890 pneumatic bicycle tires rolled off the production line and were followed in 1900 by the company's first car tires.

Pirelli established a trend that many Italian companies were to follow 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 by a similar venture in Britain in 1914, and by 1920 factories had also been set up in Brazil, Greece, Argentina, Turkey, and Germany. Product diversification at home was encouraged by the firm's long-term commitment to investing in research and development. Giovanni brought his two sons into the business and they helped to run the new motorcycle tire production plant built at Bicocca in 1908. Forever at the forefront of new technology, the company began to produce rubberized fabrics as early as 1909.

Two major factors were to account for Pirelli's growth in the years immediately 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 derived much of its demand from newly established ventures, was well placed to benefit from these changes by producing fluid control devices, transmission belts, and fuel distribution machinery. Second, the invention of the internal combustion engine in 1910 made the mass production of cars economically viable. The so-called "rubber boom" of 1911 marked the acceptance of the material as a worldwide commodity and ensured the continued success of the company.

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. Pirelli & C., the original company founded by Giovanni Pirelli, changed its status and became an investment rather than a production company. 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 Internationale Pirelli S.A., incorporated in Brussels, was set up to manage the group's rapidly increasing overseas operations.

In 1924 Luigi Emanueli, an employee of the company, developed the first commercially viable oil-filled cable. The world's first crossply tire--the Superflex Stella Bianca--was successfully launched in 1927 and 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. Initiatives 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 in international Grand Prix racing. Nevertheless, the rise of Mussolini's fascists and Italy's increasingly disastrous foreign policy in the mid-1930s led to a further period of economic and political turbulence. To counteract the impending threat of international boycotts, Compagnie Internationale Pirelli S.A. was transferred into Pirelli Holdings S.A., a holding company incorporated in neutral Switzerland.

World War II left Italy politically and economically crippled. A weak leadership was unable to cope with the severe poverty, rampant inflation, and high unemployment that affected the whole country. But Alcide de Gasperi, the Christian Democrat leader, was able to bring both inflation and the budget deficit under some degree of control 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 because of the availability of both capital and raw materials--steel for machinery and railways, coal for power--and again Pirelli, which derived 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 Cintuarto CF67, which revolutionized the tire industry.

In the 1950s and 1960s Italy enjoyed the same kind of economic miracle experienced by many European countries as postwar depression gave way 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 further cable factory in Canada in 1953, a latex foam plant in France in 1957, and new tire plants in Greece and Turkey in 1960. The company reinforced its position in both South America and Australasia when it opened further cable manufacturing operations in Peru in 1968 and Australia in 1975. Pirelli was also involved in establishing several turnkey plants during the 1960s to provide tires for Eastern European companies.

Throughout this period of expansion Pirelli followed the strategy, common to most of the Italian multinationals, of eschewing joint ventures and the purchase of minority and majority shares in established companies. Instead, product ranges that had already proved successful in the Italian domestic market were transferred for production and sale overseas. In this way the company has been able to retain complete control over its operations abroad while being able to overcome barriers preventing Italian exports.

In the late 1960s Pirelli's reputation for being at the forefront of innovation was usurped by Michelin when the latter introduced steel-belted radial tires. Michelin also entered the U.S. cable market seven years before Pirelli. Some commentators suggested that Pirelli's management was more concerned with producing glossy calendars than tires. The company responded by embarking on a long-term research and development agreement with the British Dunlop group. This surprising move did not lead to a full merger and neither party seemed to be too disappointed when the agreement was terminated in 1981. Despite successes in the development of low-profile tires and in revolutionary fiber optics, the joint venture now appears, with the benefit of hindsight, to have been too much of a defensive measure designed to counter the perceived threat of Michelin.

A personal tragedy hit the firm in the early 1970s when Giovanni Pirelli, a direct descendant of the original founder, was killed in a car crash. This natural leader of the firm was replaced by his younger brother, Leopoldo, who was also severely injured in the accident. Leopoldo led the company through a period of protracted change.

The oil crises of the 1970s brought about a change in attitude towards the role of the motor car. Sales of new cars slumped as the price of gasoline soared, and as a consequence the worldwide demand for tires fell dramatically. Italy, far more dependent on imported sources of energy than most of its European partners, was particularly badly hit 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 compromise" 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 damaged the morale of the country.

After the ending of the agreement with Dunlop, Pirelli benefited from the upturn in the European economy of the early 1980s. The Italian and Swiss parent companies were responsible for an extensive reorganization of the group in 1982, which saw an equalization of the shares each company held in the group's many and varied subsidiary companies. A new management company, Pirelli Société Générale S.A., was created in Basel to ensure that unified policies and centralized objectives were put in place in Pirelli companies throughout the world.

In 1985 Pirelli acquired the share capital of Metzeler Kautschuk, a German company with many interests in the rubber industry. The acquisition of Metzeler led to a 13 percent increase in consolidated turnover and reinforced Pirelli's position in the market for motorcycle tires and automobile components. Just as important, the move provided 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 growth--was also demonstrated in 1988 when the group acquired Armstrong Tire Co., 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 development appeared to be slowing down and no further radically different tires were introduced, the company did benefit from the increased margins offered by a shift in demand in favor of low-profile and premium radial tires.

A further share restructuring was undertaken in 1988 when Pirelli S.p.A. acquired Société Internationale Pirelli S.A.'s holding in Pirelli Société Générale S.A., thereby accepting direct responsibility for the day-to-day management of the operating companies. In turn, these operating companies were restructured into self-contained divisions in order to facilitate faster responses to financial, production, and employment problems. The three divisions--Pirelli Tire, Pirelli Cavi, and Pirelli Prodotti Diversificati--were each given separate holding companies.

The worldwide tire industry was badly hit by the recession of the late 1980s and early 1990s as any other manufacturing sector. Worldwide sales of tires stagnated, and producers were unable to pass on increases in the cost of raw materials--especially oil&mdashø the final consumer. Car makers, suffering from reduced demand, cut their costs by forcing tire manufacturers to accept lower prices. A spate of ill-conceived takeovers in the early 1980s and an increasing market dominance by a decreasing number of companies led to pressure on margins in the struggle to gain market share. Excess capacity and oversupply exacerbated 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 to take control of the U.S. company Firestone in 1988 and 1989. With the benefit of hindsight, Pirelli should be content to have lost the battle and thereby have avoided what has proved to be a costly and largely unsuccessful acquisition for Bridgestone.

Pirelli's second attempt to increase its market share by entering the world of mergers and acquisitions led to a long series of merger discussions with the German company Continental AG and ultimately, near-disaster. The plan to merge the fourth- and fifth-largest tire producers in the world was designed to produce a force powerful enough to achieve critical mass in a fairly stagnant market. Damaging price competition would be avoided and overcapacity would be reduced. This deal seemed a far more attractive proposition than the opportunity to acquire Firestone two years earlier. The proposed merger, however, proved to be problematic from the very first time the two parties met. The board of Continental, led by chief executive Horst Urban, angered the Pirelli leadership by publicly revealing details of secret meetings. Pirelli believed 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 stages of the deal. Continental's belligerent defensive strategy, inspired by the aggressive tactics employed by the City of London and Wall Street in the mid-1980s, led Pirelli to hire an investor group to buy up Continental stock. While talks between the two firms dragged on into 1991, Pirelli's financial condition weakened under the strain of the stagnant economy to the point where Continental pulled out of the merger discussions.

It was subsequently revealed that Pirelli lost almost $300 million 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¢ per share in 1990, the company posted a loss of 48¢ per share in 1991). In 1992 Leopoldo Pirelli was pushed aside of day-to-day management (he remained chairman of the board) in favor of his son-in-law Marco Tronchetti Provera, who had 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--tires and cables--out of the nine it had operated at its peak of diversification. In addition to the sale of such operations as conveyor belt and apparel manufacturing, much of Pirelli's downtown Milan real estate was sold, bringing in $563 million which contributed to cutting the firm's $2.5 billion debt load in half. The company's workforce was cut from 53,500 in 1990 to 38,500 in 1994, or about 25 percent, and the number of factories Pirelli operated was reduced from 103 in 1990 to 74 in 1994.

After its near-disastrous loss of L657 billion in 1991, Pirelli's newfound concentration on its core tire and cable businesses slowly turned the company around. After smaller losses of L69 billion in 1992 and L41 billion in 1993, Pirelli returned to profitability in 1994 with a gain of L72 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 percent of the European tire market, behind only Michelin. The North American market lagged behind, however, because of the poor performance of Armstrong. Pirelli replaced Armstrong's management team in early 1995, giving the new team until 1997 to break even.

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 for power. Pirelli had expressed interest in broadening its telecommunications business by purchasing a stake in the state-owned Telecom Italia, which the Italian government had considered privatizing. But threats to block any such Pirelli move to further enhance its position in the Italian telecommunications sector were immediately raised by Italian legislators.

As it neared the end of the 20th century, Pirelli appeared stronger and more stable than it had in the early 1990s. As it consolidated its positions in the tire and cable industries and pushed into new markets through such moves as expanding its tire business into East Asia, observers wondered what was next for a company that had undergone such remarkable changes over the previous 30 years. Some speculated that a further divestment was to come, with Pirelli choosing to concentrate solely on telecommunications, an industry predicted for more growth than that of tires. Ironically, then, a company that had aggressively sought to expand its tire business through two failed acquisitions and one successful one was rumored to be considering selling off that same core business.

Principal Subsidiaries: F.O.S. Fibre Ottiche Sud S.p.A.; Holdim S.p.A.; Innex--Fili Isolati Speciali S.p.A.; Pirelli Cavi S.p.A.; Pirelli Coordinamento Pneumatici S.p.A.; Pirelli Pneumatici Holding Italia S.r.l.; Pirelli Prodotti Diversificati S.p.A.; Pirelli Servizi Finanziari S.p.A.; Pirelli Servocavi S.p.A.; Società Pneumatici Pirelli S.p.A.; Pirelli Gesellschaft mbH (Austria); Pirelli Tyres Benelux S.A. (Belgium); Cables Pirelli S.A. (France); Pneus Pirelli S.A. (France); Deutsche Pirelli Reifen Holding GmbH (Germany); Pirelli Deutschland A.G. (Germany); Elastika Pirelli S.A. (Greece); Pirelli Cable Holding N.V. (Netherlands); Pirelli Finance (Holding) N.V. (Netherlands); Pirelli Tyre Holding N.V. (Netherlands); Sipir Finance N.V. (Netherlands); Pirelli Polska Sp.zo.o. (Poland); Desco Fabrica Portuguesa de Material Electrico e Electronico Ltda (Portugal; 70.91%); Pirelli Neumaticos S.A. (Spain); Productos Pirelli S.A. (Spain); Pirelli Scandanavia AB (Sweden); Lunares S.A. (Switzerland); Pirelli Société Générale S.A. (Switzerland); Çelikord A.S. (Turkey; 50.98%); Türk-Pirelli Lastikleri A.S. (Turkey; 62.21%); Pirelli General plc (U.K.); Pirelli UK plc; Pirelli UK Tyres Ltd.; Pirelli Canada Inc. (Canada); Pirelli Armstrong Tire Corporation (U.S.A.); Pirelli Cable Corporation (U.S.A.); Pirelli Argentina de Mandatos S.A.; Muriaè S.A. (Brazil); Pirelli Cabos S.A. (Brazil; 85.17%); Pirelli Pneus S.A. (Brazil; 86.35%); Pirelli Instalaciones Chile S.A.; Neumaticos de Venezuela C.A. (75%); Pirelli Cables Australia Ltd (51%); Pirelli Tyres Australia Pty Ltd; Pirelli K.K. (Japan); Materials Purchasing Private Ltd (Singapore); Pirelli Cable Systems Pte Ltd.