Italy and F1 Jewel Pirelli Draw the Blueprint for How to Pivot From China

Italy has become the ultimate test for how a Western economy can roll back its deep dependence on China without making an enemy out of Beijing

(Bloomberg) — Prime Minister Giorgia Meloni’s joust with China over one of Italy’s corporate crown jewels has produced a clear winner: Pirelli & C. SpA Chief Executive Officer Marco Tronchetti Provera, a titan of the country’s business establishment.

Tronchetti’s designated successor, Giorgio Bruno, is leaving the tiremaker after the government moved to limit the influence of its biggest shareholder, China’s Sinochem International Corp., which had backed Bruno.

The surprise move Tuesday clears the way for Tronchetti, who married into the family of the founder decades ago, to consolidate his hold. It culminates the prime minister’s first big push to safeguard the “Italianness” of the country’s most storied firms, a campaign pledge that she followed through on last week with measures to limit Sinochem’s influence.

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Italy has become the ultimate litmus test for how a western economy with deep commercial ties with China can roll back that dependence without making an enemy out of Beijing. It’s also the most extreme example: Italy was the only Group of Seven country to sign up to China’s ambitious Belt and Road Initiative in 2019 and now it wants out. Leaders from Paris to Ottawa will be watching how Italy threads the needle.

After championing Sinochem’s 2015 investment in Pirelli, the 75-year-old Tronchetti recently began raising alarms over the Chinese company’s growing influence. Concerns centered on high-tech patents and data collected by sensors in tires from Pirelli, which is prized in Italy as the exclusive supplier to Formula 1 auto racing. 

Matters came to a head last week when the government exercised so-called golden power, which gives the state oversight on deals involving assets deemed to be of strategic national value. The June 16 ruling grants Pirelli’s biggest Italian shareholder, Camfin SpA, rather than Sinochem, the right to choose the tiremaker’s next CEO. 

Andrea Casaluci was named to that role Tuesday, with Tronchetti remaining executive vice chairman. The government’s invocation of the golden power came after Tronchetti met with Meloni at her Palazzo Chigi residence in Rome, according to a person familiar with the matter.

Investors have signaled concern about Meloni’s intervention, with the shares falling 1.9% early Wednesday after a drop on Tuesday when Bruno’s departure was confirmed following a Bloomberg report.

“Even though the group still looks solid from an operational viewpoint (we are broadly in line with the guidance and consensus), we think it will be difficult for the stock to regain investor favor in the near term, especially as visibility on the tire maker’s governance and ownership structure has not been clarified,” Oddo BHF analysts wrote in a note.

Meloni’s government stopped short of some of the harshest measures it had previously dangled, including a forced sale of Sinochem’s stake in Pirelli. Still, the governance measures it put in place were intended to underline that decisions on Italian companies will be made in Italy and under direct government oversight, according to a person familiar with the matter. 

Rome sees the solution it imposed as less draconian than forcing a selloff, with an outcome that could foster relations with China, the person said, asking not to be named discussing confidential information.

It’s “a double-sided message,” said Giuliano Noci, professor of strategy and marketing and deputy rector for China at Milan’s Politecnico University — balancing Meloni’s “Italy First” message and the US push for western companies to reduce their exposure to China with the need for continued investment and access to Asia’s biggest market.

The decision “says to the Chinese they won’t be forced to sell their Pirelli holding while telling the Americans the remedies are sufficiently severe,” Noci said.

Other European companies have been wrestling with the problem, too, but have stopped short of intervening directly. Germany’s government has been urging companies to scale back dependence on China, though bosses at groups from BASF SE to Mercedes-Benz AG to Siemens AG and Volkswagen AG have been pushing back.

The political pressure has prompted alarm in Beijing, where Premier Li Qiang has called for de-risking decisions to be taken by companies, not governments.

“Enterprises have the most direct and acute sense of risks and they know how to avoid and handle them,” Li told representatives from German companies in Berlin this week, according to the official Xinhua News Agency. “Enterprises should be given back the leadership role.”

Russian President Vladimir Putin’s invasion of Ukraine highlighted the perils of dependence on his country’s gas, but Europe’s business connections and trade with China are much more extensive. If tensions between Beijing and the west escalated over, say, the status of Taiwan, companies like Pirelli, whose ties to China run particularly deep, would be in the crossfire.

Ever since Sinochem took effective control of Pirelli in 2015 via a $7.7 billion investment, its ownership has prompted criticism in Italy. Still, for eight years following the merger, Pirelli appeared to be a big winner from the deal, gaining an inside track into the world’s fastest-growing electric car market.

Tronchetti has been at the helm of the company for three decades. In February 1992, Leopoldo Pirelli, grandchild of founder Giovanni Battista, surprised Italy’s business establishment by handing over his executive powers to Tronchetti, passing over his son Alberto. Tronchetti, formerly married to Pirelli’s daughter Cecilia, then was responsible for finance and administration.

Amid a rise in tensions with China, Tronchetti has shifted his tone from his initial support for Sinochem. Earlier this month, he told state officials his company faces significant business risks, people familiar with the matter said, particularly in the US.

In the public eye, Pirelli may be as well known for its signature pinup calendars and its longtime sponsorship of football’s Inter Milan as it is for its tires. That image as a treasured national asset may have helped Tronchetti build support for the curbs on Pirelli’s top shareholder, particularly as Sinochem set to work to expand its control. 

Sinochem’s push was part of a coordinated effort by Beijing targeting Chinese groups’ foreign holdings, according to people familiar with the matter as well as confidential documents viewed by Bloomberg. 

Citing instructions from Chinese President Xi Jinping, one of the documents says Sinochem is committed to increasing its sway over corporate governance “in order to build boards of directors fully compliant” with state guidelines.

“The Pirelli-Sinochem dispute perfectly illustrates how problematic it can be for a Western company to bring a Chinese investor on board,” said Donatella Depperu, professor of strategic management at Milan’s Catholic University.

Italian companies have been caught off guard, Depperu said, not realizing until too late how aggressive Chinese players might be in seeking access to leading technologies after making big equity investments. 

Ultimately, the June 16 decision, which also stipulates that some strategic decisions at the tiremaker pass with an 80% board majority, may offer broader hints on Rome’s thinking about industrial relations with China overall.

Meloni plans by the end of this year to pull Italy out of the Belt and Road Initiative, a global infrastructure plan bankrolled by Beijing, according to government officials.

Meloni and her predecessor Mario Draghi have both spoken in favor of withdrawing from the program, and the premier outlined that plan with German Chancellor Olaf Scholz earlier this month. It will also be the main topic during her upcoming White House visit, the officials said.

The Pirelli decision is also a warning by Italy’s government to state lender Cassa Depositi e Prestiti SpA, which has a joint venture with State Grid Corp. of China and other investors. While this has not been at the front of the government’s attention, it could be in coming months, according to people familiar with the matter.

In the event of future issues with Chinese shareholders, Italy will again look to regulate governance rather than forcing sales of equity stakes, a person familiar with the matter said, adding that there are no other similar cases under review.

–With assistance from Chiara Remondini.

(Updates with shares in eighth paragraph, analyst comment in ninth paragraph.)

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