AKRON-When Italy's Pirelli Group purchased Armstrong Tire Co. in 1988, the deal was hailed as good for both parties. The deal aligned Armstrong with a large, global corporation to protect the small, domestic tire maker in the increasingly competitive world tire market.
For Pirelli, it gave the Italian company a much-desired foothold in the U.S., setting the stage for original equipment contracts with U.S. automakers.
Although Pirelli targeted Firestone as its first choice (losing out to Bridgestone Corp.), the firm said it was pleased with the consolation prize.
But six years later, the picture is less than rosy.
Pirelli Armstrong is operating in the red and has seen its sales drop 21.3 percent from 1990 to 1993.
Recently, Pirelli Armstrong Tire Corp. (PATC)-embroiled since July 15 in a strike by United Rubber Workers members-sold what many believed to be Armstrong's most valuable asset: its farm tire unit.
Despite these problems, company officials-headed by newly appointed President and CEO Paul Calvi-are confident the tire maker can turn things around.
In a recent interview, Mr. Calvi pinpointed several factors that have hurt PATC's profitability:
A product portfolio that wasn't modern or tailored to the U.S. market;
Undervalued tires, such that an Armstrong tire made with Pirelli technology was selling at a non-premium ``Armstrong'' price; and
Labor costs 10-25 percent higher than the larger tire companies.
Mr. Calvi's plan to return to profitability includes increased investments in production. Since its purchase of Armstrong, he says Pirelli has poured $200 million into the U.S. company, and another $100 million from Italy is on hold until the strike is over.
Other strategies include boosting research and development, adding new products in both the Pirelli and Armstrong lines and lowering labor costs, primarily by eliminating retiree health care benefits.
Mr. Calvi's goal is to break even by 1995, though he admits that may be ``optimistic.''
Industry analysts, former PATC officials and labor leaders question if the moves are enough for the firm to succeed in the ultra-competitive tire market.
``It's obvious that Armstrong was the second-best solution for Pirelli,'' said Stephen Reitman, an analyst with UBS-Philips & Drew of London, referring to Pirelli's missed bid for Firestone.
With the tire market dominated by Goodyear, Groupe Michelin and Bridgestone Corp., and with the returning health of Bridgestone/Firestone Inc. and the consistent strength of Cooper Tire & Rubber Co., it will be tough for Pirelli Armstrong to survive, he said.
``Maybe the shakeout (in the tire industry) is just taking longer than expected,'' the New York Times quoted Mr. Reitman as saying. ``Maybe it's the smaller manufacturers-the Continentals, the Pirellis, the Dunlops-that are going to go.''
A former PATC official, who asked not to be identified, said the two companies were a mismatch: ``Pirelli and Armstrong were too diverse philosophically, with Pirelli being a high performance tire manufacturer and Armstrong, a farm tire maker.''
No OE contracts
When the deal was made, Pirelli had ambitious goals to obtain OE pacts in North America by the early 1990s. But while Pirelli has many OE deals in Europe, U.S. contracts haven't materialized.
Most of the investment in Pirelli technology has taken place at the firm's Hanford, Calif., plant-the industry's only surviving tire factory on the West Coast.
The Hanford facility's capacity is nearly all OE-ready, Mr. Calvi said, but more must be added to prepare the factory for OE shipments. The opposite is true in Nashville, Tenn., he said, where OE quality must be achieved.
``The goal is still there to get original equipment contracts in the U.S., but we have to get our plants in order to get the contracts,'' he said, and predicted the company's factories could be ready to supply OE pacts in 18 months.
``I doubt they have given up hope in getting into OE,'' said another former company official, who also asked to remain anonymous. ``I also doubt they can be successful in Hanford, Calif.
``Pirelli has put a lot of money into the Hanford plant. It makes excellent products, but it's in Hanford, Calif. It's 2,000 miles away from the automakers.''
Mr. Calvi said Hanford's location is a ``handicap, not a concern.'' Warehouses in Nashville could ease problems supplying carmakers in the East.
Another obstacle is the company's relatively small distribution system, said Harry Millis, securities analyst from Fundamental Research Inc. in Cleveland. Automakers are reluctant to strike deals with companies that have limited dealer coverage because of warranty considerations.
``If you buy a car with Pirelli or Armstrong tires and have a problem, you may not be able to find a dealer handy to service them,'' he said.
But OE business may be on the horizon. The combination of Mercedes-Benz A.G. and BMW A.G. building production plants in the U.S. and Pirelli's existing relationship with those automakers in Europe could result in American business, Mr. Calvi said.
One of the great things Pirelli saw in Armstrong at the time of the purchase was its long-standing relationship with retail giant Sears, Roebuck and Co.
At that time, Sears accounted for 60 percent of Armstrong's tire output, and 75 percent of all tires sold by Sears were Armstrong-made, according to Mr. Millis.
But times were changing and Sears was looking to diversify its tire line, resulting in a reduction in Armstrong tires to make room for new brands.
Sears wasn't unhappy with the Armstrong products, Mr. Millis said. It just wanted to carry a wider variety of tires.
However, Mr. Calvi said the company's relationship with the retailer is ``excellent.''
Exiting farm tires
Pirelli Armstrong's announcement in July that it was selling its Des Moines, Iowa, farm tire unit, ``shocked'' URW members, said Stanley Johnson, president of URW Local 670 in Nashville.
``If you can't make money with a 20-percent stake in the farm tire business, I don't know how you can make money with a 4-, 5- or 6-percent share of the passenger tire business,'' he said.
The company said the sale is part of the final step in its restructuring plan, begun in 1992 to pull the firm out of the red by 1995.
Several sources said selling the Des Moines plant was logical. ``It's not a complete surprise because farm tires wasn't Pirelli's bag,'' said a former executive with Armtek Corp., from which Pirelli bought Armstrong.
``Pirelli is getting back to what it's familiar with-high performance and passenger tires.''
Mr. Calvi agreed that farm tires, especially bias-ply ones, didn't fit with Pirelli, which makes radial farm tires in Europe. Switching the Des Moines plant to radial production would have been too expensive, he said.
But Scott Soffen, an analyst with Lehman Brothers Inc., questioned whether PATC has cut its tire offerings too thin: ``....It seems Pirelli Armstrong will have a hard time getting profitable because they lack critical mass; they're just not big enough.''
Exactly what's in the future for PATC remains unclear, especially with the ongoing strike.
Mr. Calvi has frozen investments, at least until the strike is settled. ``Our people have to deserve the money we put into our plants,'' he said. ``We can get all the money we want from Milan-investment is no problem. But we have to deserve it.''
Mr. Soffen sees three options for the tire maker:
Close the U.S. operation-something he doubts will happen;
Focus on its passenger, light truck and high performance niches; or
Blend Pirelli Armstrong with another player through a joint venture, acquisition or sale.
But analyst Joshua Harari with Standard & Poor's Corp. doubts Pirelli is ready to give up on North America. ``I don't think they'll just walk out of the market.''