Tyres and digital transformation

Tyres and digital transformation

By David Shaw*:

The challenge is going to be how companies adapt to the new type of job roles that are emerging: data architect; App developer; user experience guru

David Shaw

I’ve been thinking a lot about how the tyre industry is responding to the forthcoming revolution in business models. The challenge is going to be how companies adapt to the new type of job roles that are emerging: data architect; App developer; user experience guru.
These are completely new roles for tyre companies. The people who hold those job titles have grown up in an environment that is completely different from tyre development offices. They have different expectations; different cultures and different ways of working.
The challenge for conventional tyre companies is how to manage these people and retain them, so that there is not a huge staff turnover on critical software projects.

Increasingly commoditised

First, the main issue is that tyres are becoming commoditised. A new wave of tyre makers in South Asia as well as East Asia is emerging. They make good tyres.
These new tyre makers are turning out perfectly adequate tyres at good prices. Furthermore, in order to break into the established order, those newer tyre makers are forced to be a bit creative and change the rules a little bit. Furthermore, few people get passionate about tyres, so it’s relatively easy for the dealer to convince customers to buy a less-well-known brand name, if it’s significantly cheaper than the big-name brands we have all heard of.
The result is that consumers, wholesalers and truck fleets have a wider range of perfectly decent tyres than ever before, across the whole price spectrum. This is removing the excessive price premiums that the top tyre makers used to enjoy.
I have data on tyre prices and the biggest driver of average tyre prices over a 5-year period is raw materials costs. Within that, however, the difference between cheapest tyre in any given size category and the most expensive depends largely on the number of different brands available in that size. The more brands, the lower the difference between the top-price and the cheapest.
Again, this points to commoditisation. The top brands can no longer command super-premium prices if there is a lot of competition.

Finding a way out

In a commodity market, the low-cost producer wins. I don’t say the tyre business is fully commoditised – that would mean minimal R&D spend and minimal brand strength.
Premium brand tyre makers have high overheads in advertising, marketing, and tend to pay their workers more than the cheaper mid-range brands.
Nevertheless, the trend in the business is towards more low-cost manufacturers making perfectly decent tyres. Furthermore the tyre retailers know this and they have incentives to sell the cheaper tyres (more margin per sale than they get for a premium brand).
All this means that the premium brands have to find a way to de-commoditise their business models.

Online retail

One way is to by-pass the tyre retail stores entyrely and sell tyres online. This is good, but it does not guarantee success. While online retail sales have now crept into double-digit market share, and continue to grow, this is either a very expensive investment in a dedicated sales portal, or it is simply a matter of partnering with the right sales portal. That’s a technique that can be copied by the new tyre makers, who will probably move faster and offer better terms to the e-tailer.

Digital transformation

So we get to the point of this column. A very few companies in the tyre industry have spotted a way out of this challenge. Pirelli and Michelin are furthest down the road in seeking to change the whole organisation to adapt to the needs of the data architects and user experience gurus.
Pirelli is most robust about this. As a relatively small company and one which has already gone through a restructuring in the wake of its sale to ChemChina and subsequent re-launch on the Milan stock exchange, it is more open to change than most.
At Michelin, the ‘Responsibilisation’ programme is being rolled out across the organisation this year and it is, according to my contacts, creating a certain amount of chaos, as middle manager no longer know how they are supposed to do their jobs.

Pirelli’s cyber products

Within Pirelli, the programme is a year into its roll-out, and already showing results. These include projects such as the Connesso, Cybertyre, CyberCar and CyberFleet. Each of these is based around a near-identical tyre-mounted sensor, but Pirelli has developed specific software for each of the different markets.
The key to this is that Pirelli has seen that it can acquire data that might be of use to various different audiences, such as consumers; fleet managers or car control systems.
Different project teams worked closely with the respective customer groups to develop software, apps and data acquisition protocols suited specifically to the different market groups.
While the hardware is essentially identical in each case, the value in the product revolves around the software and how it combines different aspects of the data and presents it to the user.
This is why the people with those exotic job titles are important. They are the ones who can enable a legacy tyre maker to transform itself into a company that provides specialised data and services to different audiences based on existing technologies, existing databases and existing expertise.
The challenge is for the senior leadership teams to manage the transition from producing physical products competing in a commoditising industry into a data and services organisation that is both agile and delivers products faster than its rivals.
Pirelli already is ahead of other tyre makers. Who is going to start the race and try to catch them?

* David Shaw is Founder and CEO of UK-based Tire Industry Research

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