Tires tread

Economy vehicles dominate China's auto market as families buying their first car usually pick models that are affordable to buy, operate and maintain.

Yet Marco Provera, chairman of Italian tire giant Pirelli, believes local customers are showing a growing preference for high-end and luxury sedans, which will eventually put the upscale market on a roll.

"We have seen double-digit growth in China's high-end car market and we aim to grow with it," Provera said during his recent visit to China.

Pirelli has long been the tire used on expensive high-performance and luxury cars, including Ferrari, Porsche, BMW, Mercedes-Benz and Audi.

The economy and mid-sized auto segments are continuing to grow rapidly at the moment, but Provera says they will soon level out, while the market for higher-end cars will boom in the years to come.

Confident of the potential, the Italian firm recently invested $100 million in a domestic factory to produce high-performance car tires.

Located in Yanzhou of Shandong Province, the same city as its first investment in China, a truck tire factory, the new 70,000 sq m plant has an annual output of 3 million tires and employs 1,000 workers. Its planned capacity at full operation is 10 million units.

"The move begins Pirelli's second phase of expansion in China, one of the most compelling markets in the world for tire manufacturers," Provera notes.

The chairman adds that growth in the local tire market will be driven by a significant increases in demand for new cars in the next four years due to China's robust growth, ever-improving road infrastructure and lower prices brought by competition and technological innovation.

According a survey by Pirelli, 1.4 percent of the Chinese population now own a car, but the figure will hit 2.8 percent two years.

"That includes both economy and medium-priced, as well as very expensive cars," Provera says. "Take Ferrari for example - they sell cars in China one week before they even make them."

"Individual customers here are becoming more sophisticated and they want the best," he says.

While acknowledging that many consumers are price-sensitive, Provera notes there are also more customers every year who give priorities to quality, safety, comfort, quietness and glamour.

Its international competitors such as Michelin, Goodyear and Bridgestone have been in China for decades, but Pirelli believes its entry to the China is at the right moment in the right way.

"For the China market, it is never too late," Provera says.

Back in 2005, when Pirelli sought partners in China it had one major criterion - the partner must be able to build a brand-new factory so the Italian tire maker could more easily transfer its technology.

It joined Shandong-based Yinhe Group, forming a joint venture, with Pirelli holding a 60 percent stake in a truck tire factory in Yanzhou that enabled Pirelli to begin its industrial presence in the nation. Pirelli recently increased its stake in the joint venture to 75 percent.

"The target now is to conquer the growing Chinese automobile market, in particular in the mid-high range segments where a double-digit cumulative annual growth rate is expected over the next four years," Provera tells China Business Weekly.

Pirelli's car tire output will rise to 10 million units in two years, while its truck division is projected to expand to produce 1.3 million tires in that time.

"We expect 10 percent of global production in China," Provera says. Latin America is currently Pirelli's largest market, followed by Europe, where the firm has a 16 percent market share.

Worldwide its market share is 5 percent overall and 15 percent in the global high-priced market.

"Our ambition is to achieve the same market share in China as our global market share," Provera says.

Its China operations are not only serving the domestic market but also the entire Asia-Pacific region.

"Initially 50 percent of car tires will be sold in the domestic market and 50 percent exported," Provera says. "For trucks, 70 percent is for the local market and 30 percent for export - but the ratios will change."

The strategy also includes strengthening the company's distribution network, which will grow to over 1,000 points of sale by the end of next year. At least two-thirds of outlets will sell only Pirelli tires - underlining its ambitions in the replacement market, which the company says will account for 70 percent of its business in the next three years.

(China Daily 12/29/2007 page4)