Russia represents a rapidly expanding market with strong growth in the Premium segment, particularly Winter tyres, and a high level of replacement. In the period 2012-2015 new car registrations are expected to grow at an average rate of 6% per annum leading the car park to reach 50 million of vehicles by 2015.
Many competitors have limited production capacity in the area, with the consequence of high tariffs on imports. The agreement with a strong partner like Russian Technologies, which also entails the sharing of country risk and financial commitment, allows Pirelli to acquire an already operational industrial base with a high quality workforce which will enable anticipating the production of Pirelli brand tyres rather than the construction of the new factory ex novo.
The production capacity will be located in two plants, Kirov and Voronezh. The latter, in particular, specializes in high end tyres, with an output of two million pieces in 2012 to reach four million in 2014. In 2015 it will produce solely Pirelli brand tyres.
The investment in this plant is expected to be 100 million Euros in the period 2012-2014. A further 100 million Euros will be destined to the Kirov plant over the same period, the capacity of which will be approximately 6.5 million pieces already in 2012 and will be progressively converted to the Pirelli brand (over 60% by 2015). Of Pirelli’s sales in Russia, 80% will be locally produced by the end of 2015.
Part of these investments will be dedicated to reinforce Pirelli position on the Premium segment by reinforcing brand perception and developing distribution. Pirelli’s goal by 2012 is to reach 800 point of sales (more than 40% of total Russian POS). With 322 stores, we have already laid down a soft affiliation programme, where some of the incentives are linked to shelf space and Pirelli branding. These stores are located in Moscow, St. Petersburg and in the other ten major Russian cities with over 1 million citizens.
Pirelli has already been acknowledged by the most authoritative Russian trade magazines as the best Tyre Company for both the Winter studded and Summer Tyres, with the P7 Cinturato.
Pirelli’s product portfolio is now 57% bigger and focus has been placed on Premium following the introduction of 19 Top-of-Range sizes and 8 SUV sizes. This is one of the most interesting business segments in terms of growth potential: +49% the 2011 SUV market, against the market average of 36%.
In 2012 the expected revenues from the Russia project will be around 200 million Euros, reaching over 500 million Euros in 2014, with profitability at the end of the period expected to rise between 14% and 15% from low single digit in 2012. Cash generation is expected to be positive in 2014, less than two years from the moment of acquisition.