Pirelli CEO Marco Tronchetti Provera on company strategy

Thank you.

The recession affected largely Southern Europe and even Central Europe is not growing at an acceptable shape. Europe is the core of the recession. Latin America is doing quite well. In the US we grew thanks to our new products and technologies. In Russia it's a startup for us, and China and the Far East is doing well, and also the Middle East is doing quite well.

We see growth in Asia will continue. Russia is an opportunity because we just started our operations a few months ago. Europe will remain even in 2013 not an easy market. We can compensate a bit because we are focused on premium and the premium segment is doing better than the standard segment. So where there is more technology there is still some growth. And then in the US we continue thanks to the actions we are taking inside with a new factory that is starting production.

Romania is good as a location and is good cost wise. It's in Europe, so to supply the rest of Europe from Romania and the Eastern markets from Romania is good logistically and good in cost wise. We will have in few years the largest factory in Europe, in Romania.

We launched many new products in the last few years and we have a project to double the innovation speed within the next five years. We will launch 18 new platforms within 2011-2015. In five years we will do double what we did in the decade before.

Recession is something we have to face. I think it's the only way to overcome the recession through innovation. Only technology, innovation, new markets. We have to profit of the global market knowing the weaknesses and strengths, but with products that are very much technologically advanced. I think we have room to improve.

Innovation is mostly related to the structure and to the materials. In the last decade there has been an amazing improvement in raw materials. We use carbon fibers, the structure is more and more complex. The new compounds, mostly the synthetic rubber compounds, are evolving fast. The grip is changing dramatically. An easy example is winter tires. A decade ago in Europe it was a must to have chains on board around the Alps during the winter season. Today it is a must to have winter tires. New legislation in Germany, Switzerland, Austria, North Italy starting in 2005 and 2006 introduced winter tires as mandatory because of the grip. You can go any place even on a ski slope with winter tires. So you need several sets of tires. The tire is the only part of a car that touches the ground. If you don't have the right tires, you can have serious problems. With the right tires, you can have the right grip.

There is part of the business that is core for the company because one of the main aspects of our activity is to improve the sustainability of our products, our factories, our suppliers. We are in all international indexes in the top ranking on sustainability. Part of this is inside as I mentioned, and part of the business is a business unit that takes care of environment where we produce filters for car engines and truck engines to reduce pollution, to reduce the PM10 small particles. We believe we have to grow together with the growth of sustainability of our products. To stay within the environmental business makes us confident to continue the same way.

I think it's the best way to advertise our products because of the mix between technology, the pioneer, and some glamour. Formula One is something special with hundreds of millions of viewers going around the world, mostly in the areas of the world that are growing. Formula 1 has five races in the Far East and we are the main supplier, the only supplier for. So this is good also for technology because we test new compounds in the worst possible conditions, under stress, and this is also very much motivating our people. People feel part of an adventure where our technology is at the center of this world. And it does trickle down to the kinds of tires we sell to the public. Yes, of course, because the compounds we develop for Formula One can be partly used also for traditional tires.

We have to combine our products and the customers that use our products. We are focused on premium tires where there is more technology and where there are the beauty of new cars coming to the market, like top cars where we have 50% of the market. In top cars like Ferrari, Maserati, Porsche, Bentley, McLaren, Pirelli is the main supplier. So the link with Formula 1, the link with the Pirelli calendar, the fashion, is something that is in line with the products we supply.

The adventure started 40 years ago in the UK. The management team decided to make a calendar for dealers for truck drivers. They did a good job. After a few years even the headquarters understood that could have been a good way to advertise the brand. Then the adventure started. I'm taking care of the calendar since 1992, so the last 20 years with the calendar have been very exciting.

The calendar has to change with the changes of the behavior of people around the world. It is a mirror that shows the evolution of the society. So we have to find through the eye of good photographers something that is attractive but also represents the society in which we live.

I think that to be the CEO of a company that is global means also to see the evolution of the world together with your company. You cannot watch the company without looking to the society. Only an harmonious growth can guarantee the growth of a company for decades and decades. Our company is 140 years old. I love to be part of the story that we last a number of centuries. The only way to imagine that our company can survive in the next decades is to have good products, good people, and to take care of the society and of the environment. So if we understand what is happening around us, we can make mistakes but we cannot make errors that could destroy our company.

I think there are two main points. One is to have a management team young and with the opportunity to show their professionalism and results. I have 10 people partly in Italy partly around the world that are very good. They are succeeding in their missions. These guys will run the company for the next decades. Out of them there will be one in the next year that will be able to be the one that will have more drive and more vision. At least that community that I'm part of, we decide who is the one that could succeed me.

Yes, I have a son. He's too young, he's not interested. He is doing a number of things. He has to choose his life. I don't see that succession in family is a must or something that has to be a burden for a son. I do prefer that the one that has the responsibility to run a company like this is chosen by people that have the responsibility to choose them within the board of directors. And I can be with them the one that will choose the next CEO.

No, I think it's important that the next leader will stand on its own legs and will run the company without the need of someone behind him.

We bought it because there's a chain that covers 14% of the market in Sweden. It's a very well-run chain. We had a very small stake in a market that is an interesting market where winter tires are the most important product, covering more than 40% of the market. To enter this market the best way for us was to buy a network already well placed. We are satisfied with what we did. We don't have anything else, if not something in Latin America distribution network. We are more and more focused on distribution, which is key for a company focused on premium because premium means new products, high tech, and good service. Good service is achievable through a good distribution network.

I think that we have a shareholder structure that is very good. We enlarged our shareholder structure to a number of institutional investors that are global, coming from the US, from China. They are confident in our company, so they support the management, they support the company. I think it would be very costly for another player to buy in.

I think that doing business means to take risk. Taking risk, you have never to take a risk that can be so high to put in danger the future of the company. So we have to be creative, we have to be innovative, we have to look forward to be visionary, but we have to test ourselves in any possible challenge, but always remembering that a CEO has the responsibility of the future of the company and has not to put at risk the future of the company.

I did it, I did it, and I was able to come out of it. When I was running Telecom Italia, the company did perform very well but was a next state-owned company, very difficult to be part of an entrepreneurial private company. So luckily I left and I was back in Pirelli.

The end of the euro crisis is an integration of Europe. There is no way out of the crisis if not to be closer with the same rules, having an harmonization of the budget, having a central bank that will be a real central bank like in any other region of the world. So we have to leave something in order to get more. We talk a lot about sovereignty, but we already gave away sovereignty. The euro is already part of the life of the Europeans. The Commission is largely part of any new law that is passed to the European Parliament. So we cannot be half integrated. We need a better integration, keeping the identities of the different countries, the culture of the different countries, but we have to grow together. We cannot grow alone. No one country can grow alone, not even Germany.

I think that the first part of what you say is right. The second part is a simplification of a reality that is more complex. The first part is right, and Basel 3 is providing limits to the banks that in a time of recession could really affect dramatically the balance sheet of the banks. I think that something will be revised. We cannot have a different financial system compared to other regions of the world. The restrictions have to guarantee the transparency and to protect the investors and clients, but has not to compromise the future of the banks.

I think that Europe as a mission in this global world is to combine the speed of the new world we live in with the deep culture that Europe has inside. So a university that is creating the managers of tomorrow has to let them be more conscious of the advantages that we have and of the challenges the global world is providing us. So it is an interesting challenge for a school like INSEAD, and you are doing very well this job.

Thank you.