(FORTUNE Magazine) – Up on a catwalk in a hospital-clean factory in Milan, research director Renato Caretta of Italy's Pirelli waves his hands happily as he points out features of a new robot-based production line. Without human hands and in a fraction of the space of a conventional plant, the factory, known by the letters MIRS, can build a new tire in three minutes. Piccolo--"small" in Italian--is the name that Caretta, a burly engineer, tenderly calls one of the robots silently performing tasks on the floor below.

Hundreds of miles north, in one of the tire industry's old-style plants, the acrid smell of cooking rubber permeates the air. But John Jentgen, manufacturing director of Goodyear's Luxembourg tire complex, beams with pride as he displays the company's new "hot-forming calender." This series of rollers can shape and put together in a continuous strip more than half the pieces of a truck tire, which are usually made separately. The hot former is the centerpiece of Goodyear's Impact advanced manufacturing system, a series of innovative prescriptions for retooling plants like this one. Says Jentgen: "Isn't it beautiful?"

Pirelli, Goodyear, and other tire manufacturers are on a quest to transform the time-consuming and complex way tires are made--a process that hasn't changed significantly in the decades since radial tires came along. "It is a revolution," contends Pirelli's chief executive, Marco Tronchetti Provera. Never again, he vows, will Pirelli build a conventional tire plant. In fact, it is pushing ahead with four more MIRS factories. One will open soon in Germany, and more are planned (one in Rome, Ga., and two outside the U.S.) at a cost of $100 million each.

Tiremaking is overdue for major improvements, says Sam Gibara, Goodyear's CEO. His industry has been "slow at looking at process technology," he says. "You have to think outside the box, or all you'll get is incremental improvements." Big changes are the tiremakers' only choice, analysts say, if they are to survive in an era of massive overcapacity and falling prices. Major players like Goodyear, Michelin, and Bridgestone, the world's three biggest tiremakers, are battling one another as well as smaller rivals like Pirelli and upstarts in developing markets such as Southeast Asia.

"A tire is probably one of the most complicated pieces of material and the least understood," says Ken Taormina, senior vice president with KPMG Consulting in Arlington, Va. Compared with the lean efficiency of a Toyota car plant, conventional tire plants often seem like inventory-clogged throwbacks to the time of Charles Dickens. They routinely boast miles of conveyor belts and curing presses that yield thousands of steaming tires each day--up to seven million a year at the biggest plants.

Unlike auto companies, which assemble vehicles from components, tiremakers build their products essentially from scratch, starting with latex rubber from plantations that the major players run in Southeast Asia and other remote parts of the world. In an era of increased outsourcing, the industry still produces the wire and fabric around which rubber is wound to form a tire, and makes in-house the molds that define each tire's outer contours.

The whole journey starts when rubber is combined with additives in a Banbury mixer. This creates a raw product that looks a little like saltwater taffy, except for its unappetizing color. A machine kneads it to produce the smooth black rubber familiar to motorists. Some of it is then extruded by other machines to form the sidewalls, tread, and other rubber components that make up a tire.

While the rubber is being prepared, fiber and steel elements that strengthen a tire take shape elsewhere in the plant. One operation turns fabric cord into body plies that run crosswise to the tread, as well as into rubber-coated steel belts that run lengthwise. In a separate operation, steel is spun into hoops and coated with rubber to form the beads that hold a tire to a vehicle's wheel rim.

All the components--rubber extrusions, plies, belts, and beads--come together at a tire-building machine, where they are automatically placed on a drum in proper sequence. The whole operation takes about six minutes for a truck tire, much less for a passenger-car tire, and requires some human muscle power. To apply the strip of rubber that will form the tread, for example, a worker at the machine must tug the two ends together until they overlap on the drum to make a clean joint--no easy task, as a visitor learned.

The result is called a green tire, not because of its color but because it is uncured. It is placed in a curing press, essentially a two-piece oven that looks somewhat like a waffle iron. There the tire is molded to its final shape, down to its tread pattern, as heat and pressure bake it, in the case of a passenger tire, for ten to 14 minutes at temperatures of up to 350 degrees Fahrenheit. The same step vulcanizes, or toughens, the rubber. After the tire cools, it travels through machines that check measurements and then moves on for visual inspection and other checks.

While some of these processes have been automated, the tire industry has generally been slow to install robots or adopt methods such as just-in-time inventory. The reason, says consultant and author James Womack, president of the Lean Enterprise Institute in Brookline, Mass., is the manufacturing philosophy on which the tire industry is based. Motor vehicle assemblers like Toyota and Ford, Womack says, focus on making workers more productive. Tiremakers, on the other hand, have always pushed to get the most out of their machines.

Womack says tiremakers have traditionally thought, "We've got these expensive molds and have to keep them busy. The inventory is not valuable." But many analysts contend that the industry can no longer afford this approach. In the past 20 years the major tiremakers have been squeezed in two ways. First, the cost of raw materials has risen, particularly of crude oil, from which the tiremakers get additives such as carbon black and synthetic rubber, which they mix with latex rubber to make it more durable. Second, retailers and automakers--the industry's two primary customers--refuse to pay higher prices even though tire designs have become more complex and difficult to produce.

Despite innovations such as run-flat tires, industry figures show that the typical price consumers pay for a car tire has fallen from $63 in 1980 to $39 today. They don't need to replace tires as often, either. In that same period an average tire's life has lengthened from 28,000 miles to 43,000 miles. Auto companies pay far less than consumers do: Less than $25 for each car tire, a little more for a sport-utility or truck tire. "It's a commodity," says analyst Chiara Tirloni in Milan, who follows the tire industry for UBS Warburg. "You can talk about performance all you want, but it's a piece of rubber."

It's no wonder, then, that tire companies are scrambling to reexamine how they build their products. Along with Pirelli and Goodyear, major players Michelin, Bridgestone, and Continental are each following their own approach to modernization. Michelin, while mum on the details, says it has installed highly mechanized "C3M" production modules in seven of its plants in the past four years. But Pirelli, already known as a daring company (not only because of its annual nude calendar), has stolen the spotlight even though it is one of the industry's smaller producers, with $8.1 billion in revenues in 2000 and operating profits of $469 million. Its solution is MIRS, which stands for modular integrated robotized system. Since it produced its first tire last summer, it has drawn a flock of visitors.

MIRS has been in the works since 1998, when CEO Tronchetti Provera asked veteran engineer Caretta what untried manufacturing technology Pirelli had on the shelf. Recalling the conversation over lunch at a small 14th-century castle that serves as Pirelli's hospitality center, Tronchetti Provera, who boasts a profile as sharply defined as his navy pinstriped suit, says, "I called him and said, 'Enough with traditional process. We have to think of something new.'"

The answer that emerged grew out of Caretta's earlier work. In the mid-1970s he had invented a novel aluminum drum for use in tire production. Typically, tires are built on heavy metal drums that must be changed each time a different size or type is made. The changeover can take hours. Caretta's drum could be adjusted to make different tires. Unlike conventional drums, moreover, it would save a step by continuing to hold the tire while it was in the curing press. Afterward the drum could be taken apart so that the finished tire could be removed. The invention was never put to use because at that time there was no machinery in the rest of the company's plants capable of adapting quickly to changeovers. But now, thanks to robots and computer software, Caretta's idea of flexible production has become a reality, though in a modified way.

On the outskirts of Milan, the MIRS factory--actually the first of four tire-building production modules--takes up a tiny corner of Pirelli's Bicocca complex, a collection of aging brick buildings that somehow survived Allied bombing in World War II. Walking across a gravel driveway in brilliant sunshine, Caretta punches a code and unlocks the security doors. Inside, in a space of about 4,000 square feet, roughly the size of a small store, is a complete production module, a minifactory manned by eight robots. Working silently in sequence, they perform most of the functions that are normally spread out over a half-mile assembly line.

The MIRS module has three main production cells, one each for building, curing, and inspecting a tire. Starting with uncoated fabric and the taffylike material that comes out of the Banbury mixer, machines in the compact, semicircular first cell extrude rubber, slice and coat fabric with it, weave cords, and make tire treads and other parts. Then a series of robots lays down the parts on drums that are passed from robot to robot. Like Caretta's earlier invention, the drum is designed to stay with the tire through the curing step. To free the finished tire, Piccolo, Caretta's favorite robot, removes pieces of the drum like so many pie slices. Then the tire is taken by a robot to go through a series of inspections and measurements before shipping. (The drum is reassembled for another tiremaking cycle.)

The drums used in MIRS cannot be adjusted, like the earlier version, to make different tires. However, changeovers to make a different size are rapid. The machines simply select a new drum of the required size. "You can do a lot size of one," says Caretta. "The robot doesn't know the difference between a real tire and a prototype." To prove MIRS' flexibility, Caretta one night designed a tire on his computer screen, commanded the MIRS machines to make it, installed it on his car, and drove home. This ability to achieve mass customization is central to Tronchetti Provera's quest to maintain Pirelli's strong position in ultra-high-performance tires. While more profitable than conventional tires, they also require more research and development spending, and a tiremaker can't count on big production volumes.

A mere handful of workers, clad in coveralls, stand by at MIRS for repairs and assembly-line adjustments. Otherwise, the robots are on their own to turn out various types of car tires (modules for making motorcycle and truck tires will come later). Pirelli says each MIRS plant, working 24 hours a day, will be able to build one million tires a year. That is only one-seventh of the output of a big Goodyear plant, and half that of Pirelli's conventional plant in nearby Bollate. But MIRS is meant to be smaller, and it is cheaper to run.

According to Pirelli, MIRS achieves a 25% savings, start to finish, over conventional production methods. The total manufacturing time for each tire is 72 minutes, compared with the usual six days. The lengthy cycle in a conventional plant stems from the fact that rubber is generally mixed ahead of time in big batches and stored until needed. Since MIRS requires few people, labor productivity is 80% higher. Energy costs are 33% lower because robots take the place of long lines of machinery.

Though Pirelli has confidence in the new production system, one of its challenges has been to persuade customers and government agencies to certify MIRS-made tires. Bit by bit, it's happening. Mercedes-Benz, BMW, and Italy gave their approval in 2000. Pirelli says it expects certification this year from Germany, Britain, Porsche, Audi, Fiat, Volvo, and Jaguar. The U.S., a smaller market for Pirelli, will come later, presumably by the time its MIRS plant opens in Georgia.

Tronchetti Provera is looking for another kind of acceptance from an auto company: He hopes that eventually one will tap Pirelli to build a MIRS manufacturing line inside a car or truck plant. For generations, auto companies have relied on tiremakers to ship them big batches of tires from huge factories that may be hundreds of miles away. That's not ideal, for two reasons. First, delivery time adds cost to a product already selling at slim profit margins that generally average less than 10%. Second, rubber doesn't keep forever. Fresh tires are safer and more reliable.

There has been a lot of insinuation by Pirelli's rivals that Tronchetti Provera's real purpose in building MIRS factories is to make Pirelli more attractive as a takeover candidate. With so much overcapacity in the tire industry, says UBS Warburg analyst Tirloni, "why else would he spend so much money on this?" Tronchetti Provera acknowledges the whispers. He says he wants Pirelli to look like an innovator--and if a takeover offer comes up, so be it. "My strong belief is that we are never successful enough," he says. "The competition is moving fast, and time is the enemy."

Halfway across the world, in Akron, it's as if Goodyear officials can hear him speak. They are subdued, even nervous, as they ride a freight elevator to the basement of the company's technical center, a former tire plant, where parts of the company's Impact system were developed.

Impact--the letters stand for integrated manufacturing precision assembled cellular technology--is as different from MIRS as Akron is from Milan. It is essentially a collection of efficient manufacturing processes that stop short of full robotization but rely heavily on automation. Goodyear, which has spent $516 million since 1998 installing Impact, does not expect any kind of quick productivity boost that will aid its bottom line. Analysts say Goodyear has told them that Impact's full implementation will take up to 15 years. Only three plants had pieces of it in 2000. By 2004 elements of Impact will be running in seven factories, where they will be involved in a third of the company's truck-tire production and a tenth of its passenger-tire output.

"We're not doing Impact for a short-term benefit," declares CEO Gibara. Neither will the U.S. automotive slowdown, which is hitting the $14.4-billion-a-year company harder than it expected, deter Goodyear. Volume is down, the head count is being cut, and the company posted a loss after a restructuring charge in 2001's first quarter. Says Gibara: "The cycles have their ups and downs. They will not keep us from doing Impact." In fact, he says, they are an impetus.

Impact is a two-pronged approach. One is to build novel machines that combine work processes. The other is to regroup work in cells that, like the MIRS facility, maximize the amount of value-added work done at one location. Novel machines are getting the most emphasis right now. Goodyear's prize exhibit is the hot-forming calender at the Luxembourg plant, the first of its kind.

The hot former is a series of seven rollers that squeeze out and shape 12 of the 23 parts that make up a truck tire. All are strips of rubber, such as those that become sidewalls and curved segments called apexes. Normally they would be made separately in operations scattered around the plant, each accumulating its own inventory. Instead, the hot former lays down the parts as fast as they emerge from the rollers, creating a continuous strip atop the tire's rubber inner liner. What emerges at the far end is a single piece of material ready for the tire-building machine, where other parts such as plies, belts, beads, and tread are added.

Before installing the hot former in Luxembourg, Goodyear used a series of machines that took up 12,560 square feet of floor space, and required 2,104 separate movements along the assembly line, to produce the same 12 pieces. With the hot former, floor space is cut to 7,000 square feet and the operation takes only 424 steps. Material from the hot former, says plant manager Jentgen, is 20% cheaper to produce and uses 42% less labor. It's also of higher quality because the rubber gets less shearing and heating, which tend to degrade it.

The hot former was developed and built in the basement of the Akron technical center, in a laboratory behind locked doors that is Goodyear's learning field for new technology--"our sandbox," says David Reece, a manufacturing engineer who is part of the center's closely knit staff. Jim Benzing, a colleague whose edgy appearance seems more Seattle than Midwest, dreamed up the hot former five years ago.

"It's silly to take all these parts to a tire machine and apply them," Benzing says. "I said, 'Why can't we put it all together?'" Goodyear's advance manufacturing technology director, Rick Vannan, said, "Prove it to me." Benzing did, building in an aisle the mechanism now running in Luxembourg. Near the spot where Benzing invented the hot former sits a smaller version with four rollers, which Goodyear will soon use to make six of the 13 parts that go into passenger-car tires.

To these folks, who work on technology years before it runs in plants, the hot former is old news. One of their latest fascinations is a hulking machine that sits in the back of the room. It is an injection molder that makes a single piece of tread that could be applied to a tire without the usual tugging. Inside a giant cabinet lined with heat-resistant glass, 12 big nozzles inject rubber into a big O-ring mold. After baking for two to eight minutes, the finished loop of tread falls, steaming, onto a conveyor belt. Once it cools, a worker can simply strip off excess rubber and slip it on a tire-building machine.

Over the years Wall Street analysts have wondered when a tiremaker might try to adopt injection-molding techniques. Goodyear won't say how soon this molder will go into operation. But Vannan, escorting a visitor away from the machine, says it could be particularly valuable in producing tread for truck tires. Goodyear would like to pick up business in that market, where tires routinely sell for hundreds of dollars. "A company can own the truck market," Vannan says, if it can come up with a top-quality tire.

Word of injection-molding machines like this one is news to United Steelworkers official Ron Hoover, who's in charge of bargaining with Goodyear. But from what he has heard about Impact, Hoover says, he isn't concerned that these methods are an immediate threat to jobs: "It sounds like they are sharpening up the process."

Even the most potentially significant piece of Impact that Goodyear is willing to reveal hasn't eliminated workers completely. Company officials save it, like dessert at the end of a long meal, for the final few minutes of a four-hour tour of the Goodyear tire plant in Napanee, Ontario. Tucked away in the back of the factory near a loading dock is a U-shaped manufacturing cell that brings together processes that would normally take place in separate locations. Rubber comes down one side of the assembly line to a machine where it is made into various parts. Other pieces, such as tread and beads, are cut out and travel down the other side. The two operations converge at a tire-building machine.

The cell lacks the flash of MIRS. There are no robots in the tire-building area, and there are still workers around to perform various tasks. But where a typical tire in this plant takes ten hours to journey down an assembly line, a cell-made tire requires less than two hours. Eventually, Goodyear could simplify the operation further by adding a hot former to feed in rubber parts already joined together. It's all so simple that it raises a question: Why hasn't Goodyear simply ditched its miles of conveyors and long assembly lines and gone to cells like this one?

Production volume is one reason. One of these manufacturing cells can produce 3,600 tires a day, while a conventional Goodyear plant can build up to 17 times as many. To match the output of such a plant, the company would have to build a whole series of cells, something it hasn't yet attempted. In fact, this is the only such cell it has in operation in North America. Meanwhile, Goodyear has billions of dollars tied up in factories that it is reluctant to abandon because, it says, they are perfectly good and make quality products at competitive prices. Nevertheless, says Bradley Bruggeman, Goodyear's director of facilities planning, work cells will play an important part as the company introduces new tire designs.

Goodyear has its own MIRS-style factory up its sleeve, Bruggeman adds. It is called FMS II--for flexible manufacturing system. He claims it will be 100% automatic, with no workers, and will be able to switch production quickly between different types of passenger tires. Goodyear plans to put FMS II into production in the first quarter of 2002 at its plant in Fulda, Germany.

Even if such a factory is in Goodyear's future, KPMG consultant Ken Taormina is concerned that Goodyear isn't attacking with the same zeal as Pirelli. "Maybe what they are trying to do is a measured risk," he says. There's nothing measured about Pirelli's lunge into the future. If MIRS succeeds, says consultant Womack, Pirelli, despite its small size, could force its competitors to embrace advanced technology faster than they had planned. "Sometimes you need a Toyota in your industry to get your butt in gear," Womack says.

Caretta, hoping Pirelli will play a leadership role in the new millennium, leads the way to a small laboratory near his office. "I'm going to show you something no outsider has ever seen!" he declares. Inside is a set of robots frozen in position over a drum that can be dismantled. This was the first experimental attempt to design MIRS, and Caretta has preserved the layout as evidence of Pirelli's vision. With luck, the company just might change the history of tiremaking.

FEEDBACK: mamayn@aol.com. Stories from FORTUNE's Industrial Management & Technology section can be found at fortune.com/imt. Executives in manufacturing and research and others eligible to receive FORTUNE's Industrial Edition can subscribe by calling 888-394-5472.