Michael Sheehan's Article

Ferrari enters the Marchionne-era

A case study in Automotive evolution and corporate governance:

As appeared in:

Online Exclusive—July 2015 issue


by Michael Sheehan

Hitting the 10,000 car limit:

Ferrari has long been one of the world’s most successful and most opaque auto companies. Thanks to a recent analysis by Max Warburton we now know that Ferrari made a profit of approximately $428m on total sales of $3b with Formula One bringing in 15% of the cash flow. The F-1 team has an income of approximately $400m with $220m from sponsors and $180m from its share of F-1’s income. Operation costs result in a “net” loss of $40m after expenses, cheap in the world of global advertising. The net result is that approximately 80% of income and 90% of profit comes from building road cars. The California only brings in 20%, the F12 and FF V-12s bring in another 20% (combined) and the 458 brings in the remaining revenue.

Ferrari's 458
Ferrari's 458

Ferrari has been able to raise prices with every new model thanks to clever branding, long lists of profitable options and the latest-greatest “specials” such as the La Ferrari (which brought in half a billion in revenue) plus limited run bespoken “specials” such as the Sergio (only 6 built) or F60 America (10 built). While Ferrari officially built 7,255 cars for the global market, that level is based on maintaining market exclusivity. Marchionne has made it clear that his goal is to increase production to 10,000 cars a year, and no more, simply because the EPA and DOT limit fuel-economy and emission exemptions to companies that produce less than 10,000 cars per year! The question, of course, is how to get to 10,000 cars while maintaining Ferrari’s exclusivity?

The selling of Ferrari:

As a study in Italian corporate politics, even after FIAT-Chrysler spins off Ferrari, the Agnelli family will maintain majority control. According to Bloomberg, the Agnellis are setting up a “loyalty share plan” that would let the family’s holding company, Exor, and Piero Ferrari keep at least 51 percent of shareholder voting rights. Ferrari may also register its Fiscal headquarters with the rest of FCA in the Netherlands, as the Dutch are more flexible on IPOs than the U.S. Marchionne had planned to sell 10% of Ferrari by the third quarter and transfer $2.8 billion worth of cash and other assets over to FIAT-Chrysler before the IPO but under British tax law the IPO can only take place 12 months after the 12 Oct., 2014 establishment of the FIAT-Chrysler merger. After the IPO 80% of the shares will be sold to FIAT-Chrysler shareholders, with the last 10 percent going to Piero Ferrari. Maintaining a scarcity premium is critical to Ferrari’s 90%-owner FIAT Chrysler. The business has been valued by analysts at €4 billion to €8 billion, a very wide range that reflects a debate over whether it should be considered a premium car brand like Porsche or, as Mr. Marchionne believes, a high-margin luxury-goods company commanding top valuation. Max Warburton’s analysis shows that merchandising and related activities are hugely profitable but at 5% are only a small fraction of total income and do not seem to be growing quickly, an argument against Ferrari being in the luxury-goods market.

The uphill battle at Alfa Romeo:

Not all battle plans succeed. Alfa Romeo was Marchionne’s biggest headache when he took over as FIAT CEO in June 2004—and it remains so eleven years later, he said. In 2006 Marchionne said he wanted to double Alfa sales to 300,000 units by 2010 but 2010 global sales were just 115,000 units and the 2015 goal was a mere 155,000 units. Transforming Alfa-Romeo Automobiles SpA, which sold exactly zero cars in the United States in the last decade, into a brand as popular as Audi AG will be a Herculean task. To remedy that, he has committed $5b over the next five years to make Alfa Romeo the legendary sports car manufacturer it once was, and the limited edition 4C is clearly a great start. Last year 83 FIAT dealerships and 3 Maserati dealerships began to sell the 4C in the US and Canada, the first new Alfa to be offered since 1996. The ultimate goal is 300 Alfa Romeo franchises in North America. Just ten days ago, on 24 June, Alfa’s 105th anniversary, Marchionne unveiled the new Guilia at Arese, Alfa’s headquarters. An upscale 500 plus hp turbocharged V-6 sedan destined to take on Audi and BMW, the Guilia’s marketing will be emphasizing Alfa’s racing heritage. Backed by a €5 billion investment, the financial resources, technical capability and global distribution of Fiat Chrysler and a new design and engineering team in Modena, the goal is to use over-staffed and un-profitable Italian factories while returning Alfa to profitability. Marchionne plans eight new models to increase sales to 400,000 Alfas a year by 2018. Having turned FIAT, then Chrysler, then Maserati into money-makers, Marchionne may yet save Alfa Romeo. As for reviving the multiple World-Championship Rally winning Lancia in any market, Lancia was sadly euthanized last year.

It’s good to be King:

Marchionne is on track to get $72 million in total pay for 2014—mostly from bonuses and a stock award tied to FIAT’s takeover of Chrysler that led to a 61% jump in its share price, by far the highest pay package of any auto executive. In addition he will receive a 2014 bonus of €12 million plus 1.62 million FCA shares (worth roughly €23 million at today’s share price) when he steps down as CEO.

On being outside the box:

At a conference call in April of this year with equity analysts, Marchionne shared a PowerPoint entitled “Confessions of a Capital Junkie,” explaining that by cooperating on projects, the various automakers could return 2.5 billion to 4.5 billion euros to stockholders instead of wasting that money on duplicated investment and development costs.

The price tag to develop a new vehicle starts around $1b and can be as much as $6 billion if it’s an all-new car on an all-new platform with an all-new engine and an all-new transmission and new factory with nothing carrying over from the old model. Sharing common units, such as 75% of a simple 4-cylinder engine could save each company as much as $1b in development costs!

Marchionne understands that FCA must reach beyond mere stability, the next industry downturn could be fatal to a company laden with €11.4b in debt. FCA needs partners, more sales and profit; and the automaker must pay down debt—or someday find itself where Chrysler was in 2008, on the doorstep of bankruptcy.

Marchionne’s calls for consolidation have received no takers so far amongst other automakers, CEO Mary Bara at GM is one of a number of top auto industry executives who have rejected his call for integration. The lack of response has led him to possibly discuss a deal with Silicon Valley giants such as Google or Apple as they move into the next frontier of autonomous cars. If he finds any takers he will not be hard to reach as he carries five different cell phones with him in his knapsack.

To Infinity and beyond, 10,000 cars:

As part of Ferrari’s IPO Marchionne made it very clear he wants to go to 10,000 sales a year as the increased sales column will bring Ferrari’s market value up substantially. How he plans to do so may have been revealed on June 5th. Speaking to British magazine Autocar, Marchionne said it was “not a question of if but when” a new Dino will join the Ferrari fleet. The Dino will have a mid-mounted V6, like the original, but with twin turbochargers developing something over 500bhp.

Marchionne had often said that it costs $1b plus to take a car from designer’s sketch pad to a dealer’s showroom while adapting a platform from an existing model can be done for less than $300 million. Both the Maserati Ghiblis and Quattroportes use a 3.0 twin turbo V6 which will also find its way into some of the forthcoming Alfa range, thus gaining more scale for the engine. It can be assumed that the new Dino will possibly share multiple components and perhaps even the platform from the upcoming Maserati Alfieri due out in 2017. In the $200k price range the new Dino will slot in perfectly filling the gap between the top range Maserati and the California.

The new engine will probably have a displacement of just under 3.0 liters in order to evade the heavy taxes that come with engines of 3.0 or more liters in various markets. As a turbo it will help the entire FCA group meet mandatory industry-wide CO2 targets and since F1 has adopted V-6 engines Ferrari can market the link to its F1 efforts.

The Factory in Maranello can build up to 10k cars per year and Maserati has a plant in Modena with a capacity of approximately 12k units so the facilities are already in place. The Maserati plant currently builds approximately 3,000 Alfa 4Cs and the Alfieri (coupe and Spyder) will undoubtedly be built there. The Alfieri has a target price to be competitive with the 911 and F Type which may leave the market price point and capacity to build 3,000 Dinos a year, taking Ferrari to the ultimate goal of 10,000 cars a year! As an interesting academic aside, Ferrari has the rights to two different 17 digit VIN sequences, one now used starting with “ZFF” and the second 17 digit VIN starting with “ZDF” which was coincidently used on the last of the 308 GT/4 “Dino” series. Looking much further down the road, the “new Dino” could potentially become a 10,000 car “stand alone” marque!

A Dino VIN, maybe a portent of the future?
A Dino VIN, maybe a portent of the future?

Marchionne has said he intends to stay at FIAT Chrysler through the completion of a five-year operating plan that ends in 2018. Although he is nebulous when asked of his future plans, after his hyper-kinetic career and meteoric rise in the automotive world, there is little chance he will merely fade away. Given Marchionne’s string of successes there is little doubt that the days of 10,000 Ferraris per year will happen sooner rather than later.