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Pirelli's Pace: 'Product differences should not be driven by regional regulations'

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Pirelli Tire North America Inc. Chairman and CEO Hugh Pace delivered the keynote address at the American Chemical Society (ACS) Rubber Expo in Louisville, Ky., earlier today.

The exposition is being held at the Kentucky International Convention Center from Oct. 14–16. There are 168 exhibitors on hand and approximately 2,000 attendees.

Pace is no stranger to the ACS. His father, Dr. Henry Pace, was a member of the ACS during his 39 years as a research scientist at Goodyear Tire & Rubber Co.

Pace's speech, "The Tire Industry: Globalization and Regulatory Harmonization," opened the 31st Rubber Expo, which was held in conjunction with the ACS's 174th Technical Meeting. The speech focused on two main topics:

1. how new technologies and the expansion of commerce have led to global markets, and

2. how regulatory standards have impacted those markets.

Excerpts from Pace's presentation follow.

"Shakespeare said, 'It is a wise father that knows his own child.' My father was a very wise man. He watched me struggle through a high school chemistry course, and then counseled me that both the world and I would be better off if I would abandon any aspirations of following in his scientific footsteps.

"He understood that my mind was not oriented to the scientific mold, to think in abstract forms in complex patterns. The study and practice of economics and marketing have served me much better during my 31 years in the global tire industry.

"And it is precisely my business background and experiences that motivated me to address you about the subjects of globalization and the need for regulatory harmonization in the tire industry."

Globalization and tires

"In 1983, I read with great interest business guru and Harvard marketing professor Ted Levitt's article, 'The Globalization of Markets,' said Pace. "This 10-page work turned out to be perhaps the greatest business essay ever written. His theme centered on how the force of technology was driving the world toward, what he called a 'converging commonality.'

"Levitt argued that everyone, everywhere on the globe, who is exposed to new technologies would want products that incorporate those new technologies.

"First, they were transistor radios, then color TVs and then Walkmans. Now they are high definition flat screen TVs, cell phones, iPods, and, of course, Pirelli P Zero tires. He defined this new reality as the emergence of global demand creating global markets for common high-tech consumer products. And in doing so, he coined the concept and the word globalization.

"Of course, Levitt's thesis has stood the test of time. And to show just how forward thinking his 1983 article was, he even had a segment titled, 'The Earth is Flat.'

"Sound familiar? That was the title of Thomas Friedman's best selling and enlightening book of just three years ago. Friedman's book validated Levitt's thoughts that the spread of information enhances modernity and stimulates demand for standard, high-tech consumer products.

"The core of Levitt's essay was that new technologies and the expansion of commerce would lead to global markets for standardized products. He argued consumers around the world would generally reject regionally differentiated products, or last year's model, or lesser versions of advanced products.

"Levitt said, 'While there are cases where markets require product customization, the successful global corporation accepts and adjusts to these differences only reluctantly and only after efforts to reshape them.' In effect, Levitt's mantra was that the world's needs and desires were and are becoming irrevocably homogenized.

"A subsequent premise of Levitt's was that this world-wide consumer demand for world-standard, high-tech consumer products would drive corporations to operate uniformly and globally. They would benefit from low relative costs due to economies of reduced scope and large scale, and sell the same things in the same way, everywhere.

"And this is pretty much what has evolved over the past 25 years -- to a point.

"The path has not been smooth. There have been and still are bouts of

economic nationalism, including protective trade practices. But these barriers to pure globalization are declining, and even disappearing.

"Regional trade blocks and international trade commissions are key drivers in liberating market forces' march toward Levitt's 'converging commonality.'

"So how does Ted Levitt's article, 'The Globalization of Markets,' relate to my presentation today, and to the tire industry? How has the tire industry faired in its quest toward pure globalization? ...

"... Consistent with Levitt's thesis, tires are certainly a high-tech consumer product, whose popularity and demand are aligned to the global modernization of the automotive industry. So, does the tire industry meet Levitt's definition of an industry benefiting from constancy and large economies of scale, through sale of 'the same things everywhere'?

"Well, I would say 'sort of,' but due to significant differences in national and regional regulatory standards, the industry still has a way to go before realizing the real benefits of pure globalization."

'Regional' regulations

"The harmonization of these varied national and regional standards is the single greatest challenge to tire industry globalization," said Pace.

"In the case of the United States and the European Community, many of their regulations have been in place for years. However, in several developing areas, new regulations are often country or region specific, with varying objectives and technical requirements. These county or region-specific regulations are a force against standardization and the development of global products."

The objective of selling the "same thing everywhere" does not come easy to the tire industry from the standpoint of regulations, he said.

"Let's look at some specific regulations in effect today, and some that will come into effect during the next few years.

"The U.S. has had the Federal Motor Vehicle Safety Standards since 1966. This comprehensive standard is designed to regulate all aspects of a vehicle, including the tires.

"The light vehicle tire-specific portion of the standard was updated in a very significant way as a result of the TREAD (Transportation Recall Enhancement, Accountability and Documentation) Act of 2000 legislation. One of the objectives of the legislation was to require a more severe tire testing methodology compared to the existing standard, and to add a new test at low inflation pressure. ...

"... In some cases, the new test and the more severe methodologies required tire companies to redevelop existing tires to comply with the new standards.

"This is a good example of where a country specific regulation, in this case the USA, required some companies to develop a 'New Global Product' in order to stay in compliance with multiple world-wide regulations.

"The Rubber Manufacturers Association estimated the costs to its members to comply with the TREAD Act... to be as high as $1 billion."

Here are some of the regional regulations that either soon will go into effect or are being proposed, according to Pace. "Again, the challenge to standardize global products remains formidable."

1. Aromatic Oil Free PAH's. "The European Union has issued a directive which restricts the use of certain extender oils, rich in polycyclic aromatic hydrocarbons (PAH). The directive cites the adverse health effects of PAHs. These aromatic extender oils have a long history of use in most tire compounds.

"This EU directive now requires these compounds to be redeveloped using different formulations, so that they are Aromatic Oil Free (AOF). As a result, every tire sold in the EU after Jan. 1, 2010, will have to be redeveloped to be in compliance.

"This redevelopment work has been in progress for some time at most tire companies, driven initially by original equipment tire development projects. However, both OE and replacement market tires must comply if they are to be sold in the EU...."

Pace then gave an example of how this type of regional regulation can impact the market globally.

"Consider a company that makes a size 235/45R17 tire in the U.S., and sells that same tire in all markets around the world. And suppose all of the certification requirements have been met to make this a

truly global product.

"Now, a new EU regulation goes into effect, requiring AOF compounds in all tires sold in Europe. What happens? ... We now have a new tire specifically developed for Europe, along with our former but no longer 'global' tire.

"In order to establish a new 'global tire,' it must now become Aromatic Oil Free for all markets worldwide. And after incurring significant development costs, we end up with a new global product."

2. Noise. The European Community has in place today a noise regulation for car, light truck and heavy truck tires, said Pace. The maximum permitted noise levels allowed are a function of the width of the tire. However, new regulations are being drafted that will further reduce these limits in 2010.

"In order to meet these new limits in 2012, and maintain a stable of global products, tread design modifications and compound redevelopment will be required to create a new global product. Certainly, this will add cost and complexity to our business."

3. Wet braking traction. In the United States, wet braking traction is regulated by the Uniform Tire Quality Grading (UTQG) system, which is controlled and administered by the National Highway Traffic Safety Administration, he said.

"Most car tires sold in the U.S., with some minor exceptions defined in the regulation, require sidewall markings with the UTQG ratings for tread wear, temperature and wet traction. ... There is a specific test methodology defined to obtain the ratings for the three categories. And now the European Community has developed its own wet braking regulation that will go into effect in 2012."

There are significant differences between the U.S. and EC wet braking test methods and ratings. "Again, the tire companies will need to do the compliance testing to understand if there will be a need to redevelop current global products to create new global products to meet the requirements of this new EC regulation," said Pace.

"It is likely cost and complexity will again be added to our business."

4. Rolling resistance. "In the area of rolling resistance, there is an emerging proposal that presents an opportunity for global harmonization, right from the get go," said Pace. "The specific requirements of each region are still being defined however, so the final story is yet to unfold.

"The goals of this rolling resistance regulation are to improve energy savings and reduce CO2 emissions. North America and the EU are developing the regulation in parallel. And the tire industry associations are fully supporting harmonizing test methodology; the

test methodology must be well defined, easily repeatable and affordable to all players.

"This approach is very encouraging for the future of establishing more

global tire performance standards."

Conclusion

"How do we globally harmonize all these current and future proposed, well-intended regulations for the benefit of consumers and manufacturers?" asked Pace.

"In 1998, the United Nations Economic Commission for Europe held a World Forum for Harmonization of Vehicle Regulations to develop a global process by which contracting parties -- such as manufacturers, manufacturing associations and governments -- can jointly develop Global Technical Regulations (GTRs).

"A GTR, and I quote, 'should promote high levels of safety, environmental protection, energy efficiency, and reduce technical barriers to international trade through harmonizing existing technical regulations of contracting parties.'

"The 'justification' statement for forming a GTR for passenger tires reads:

'The global tire industry is frequently confronted with difficulties in demonstrating the conformity of its products in different regions of the world. This is due to increasingly varied requirements brought about by implementation of local or regional regulations… .'

"An excellent illustration of this predicament... are the six

international methods for determining the physical dimensions of a tire. In this case, one tire may need to be made in several different versions, where, in fact, only the regulatory markings on the sidewall differ in order to satisfy a country or a region's standards.

"Certainly, this impedes the benefits of globalization, creates logistics management issues, and increases costs and complexity in the

manufacturing and certification processes.

"The recognition of these obstacles to globalization at the international industry and government level is a great step in the remedy to impediments to tire industry globalization."

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