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ChemChina move into the fast lane with Pirelli tires purchase
The announcement of the proposed acquisition of Italian tire maker Pirelli by China National Chemical Corp (ChemChina), a state owned chemical company, on March 23rd marks a significant move in the global tires industry.
While Pirelli is an attractive business in itself, recording net profits of $414m in 2014 and boasting a strong balance sheet, there are a three key reasons motivating ChemChina’s takeover.
Firstly, Pirelli’s focus on high performance car and motorcycle tire segments means the business has a wealth of technological knowledge and research and development (R&D) capability ChemChina can acquire instantly; which ordinarily would take a considerable period of time to develop internally. Processes and technologies may also be shared and applied among ChemChina’s existing businesses, offering a further boost to the purchaser.
The acquisition of a premium tire brand such as Pirelli also provides ChemChina with strong growth prospects in China and surrounding markets. Marketline analysis valued the Asia-Pacific tire market to be worth $118bn in 2014, and is estimated to grow at a steady 3.5% compound annual growth rate (CAGR). While Pirelli has an existing presence in China, with two factories producing over 10 million tires per year, the scope of ChemChina’s operations leave it well placed to increase Pirelli’s market share in China and capitalize on the country’s burgeoning demand for premium cars and consequentially premium tires.
Lastly, the deal brings the added value of providing access to the top table of motorsport through Pirelli’s exclusive tire supply arrangement with Formula One. The intangible value of the heritage and prestige of the Italian manufacturer is particularly notable here, as ChemChina and Chinese manufacturers more generally lack the global reputation and stature to enter such agreements. Therefore Pirelli acts a useful vehicle for accelerating ChemChina’s expansion plans, allowing entry into markets in which it would have previously struggled to penetrate.
Overall, the acquisition looks set to shake up the Asia-Pacific and global tire markets and leaves competitors Michelin, Goodyear and Bridgestone with plenty to ponder.
For further information on tires and rubber check our Global Industry Profile here.