DuBuyCar – The Birth of Ferrari 2020
On May 4th, 2020 something wild happens to automotive stocks.The market value of Italian supercar maker Ferrari soared to 30 billion dollars above those of all three major U.S.automakers, General Motors, Ford and Fiat Chrysler, which was once Ferrari’s parent company compared with those three giants.Ferrari is a tiny carmaker.It has long been known for limiting production and makes just about 10000 units per year. Compare that with General Motors, which sold nearly eight million cars, trucks and SUV cars in twenty nineteen.While Ferrari is a small company.It is a huge name.One of the most famous and admired in the automotive world.In late May, a 2003 Ferrari Enzo fetched two point six million dollars onan online auction, making it the most valuable car sold in a dedicated online only. Collector car auction to date.We live in a world that’s only more and more noisy all the time.I like to say there are more and more things going on there.More and more items competing for your attention.And in a world like that, if you’ve got a brand that can stand out, a brand that is universally recognized and can kind of step through and rise above that noise, you’ve got a very valuable brand.And Ferrari in the automotive world would be a perfect example of one of those brands. Perhaps aside from competitor Lamborghini, Ferrari is the name that has given Italy its reputation for producing some of the fastest, sleekest and most eye-catching cars on the planet.That reputation is so strong.Ferrari bets it can carry its world class name far beyond automotive production and sell other goods to the legions of admirers unable to afford a six or seven figure sports car.This gamble, however, is by no means a safe one.Stamping the Ferrari name on fashion, merchandise and even theme parksrisks diluting the brand, especially if the famous pony emblem ends up on some less than premium products.The company has acknowledged this.Ferrari has also stumbled in Formula One, the global racing class where elite carmakers battle each other for worldwide recognition.Ferrari did not respond to a request in time for the story over the long term. The car market, really the idea of transportation itself, stands toundergo tremendous changes that could even affect demand for exotic sportscars. As we move into a world where we’re getting increasingly electrified and potentially shifting away from vehicle ownership towards shared mobility. Is there still a place for a brand like Ferrari in the twenty 40s and the twenty 50s?Ferrari takes its name from founder Enzo Ferrari, an Italian race car driver who had been racing Alfa Romeo cars since 1924.In 1929, Ferrari founded his own racing team, Scuderia Ferrari, which exists to this day based in Modena, Italy.Scuderi, a Ferrari, was at first a team centred on racing Alfa Romeos.But about a decade later, Enzo set up a manufacturer called out toOrville, construed Cioni and moved his headquarters from Modena to thecity of Maranello, which would become Ferrari’s legendary home.Thereafter, Ferrari was a car company that wanted to race, and Enzo Ferrarirealized he had to sell a few cars to regular consumers so he could fundhis racing program. That was literally the mantra and the vibe thatstarted Ferrari.That was what the owner wanted to achieve.Ferrari commissioned the engineer Dwar Keno Colombo, to build him a totallynew car in 1945.Ferrari’s first racing car was the one twenty five s made in nineteenforty seven. It came with a 12 cylinder engine, something frequently seenon Ferrari’s. Later, a street vehicle called the 166 Integra came.A year later, Ferrari started competing in Formula One, the elite globalracing series in 1950 and won its first world title two years later.Racing has always been at the heart of the Ferrari brand Scuderia.Ferrari is the oldest Formula One team and has also participated in famousraces such as the endurance races at Le Monde, France and Daytona,Florida, continuously.It’s the only brand that has been continuously part of Formula One racingfrom 1950 onwards when a world championship was established.And they’ve also been involved in a lot of other motor sports.Unlike other brands, they’ve always tried to keep it relatively pure heelsports and grand touring cars.Being a small manufacturer of highly specialized cars is never an easy pathto travel. Many such automakers have either formed partnerships withlarger companies or been acquired entirely.Ferrari was no different.The Italian automaker Fiat took a 50 percent stake in the company in 1969and increased its stake to 90 percent in 1988.Enzo Ferrari son Pietro owned the other 10 percent.And in 2016, Fiat, which had since become Fiat Chrysler, spun Ferrari outinto a separate, publicly traded company, trading under the ticker symbolrace. Ferrari is obviously best known for its cars.But the company has expanded the reach of the Ferrari brand beyond thesesmall, rarefied world of racing fans and lovers of supercars.The late Sergio Marchione, the larger than life CEO of Fiat Chrysler, whoalso served as Ferrari’s chairman and CEO until his death in 2018, hadsaid in 2014 that he thought Ferrari had a future that went far beyonddriving. I actually think cars are almost incidental to Ferrari, Marchionesaid prior to the company’s initial public offering.It sounds sacrilegious, but it is truly a luxury brand up to its IPO.Marchione maintained Ferrari was worth at least 10 billion euros, around11 billion dollars, according to May 2020 exchange rates.Some analysts thought that number sounded a bit high, with at least onevaluing the company at roughly half that.But if market capitalization is any indicator, the company is worth aboutthree times that just a few years later.Its revenues have not tripled in that time.Rather, the company and investors have been betting that brand recognitionis an underexploited asset.At Ferrari, the Ferrari name and the famous yellow and black prancing horselogo are recognized the world over brand finance, a firm that measures theimpact of various brands, considers Ferrari to be the most powerful brandin the world. Its fame either rivals or exceeds that of not only otherglobal luxury symbols such as Rolex and Air May, but also the brand powerof massive information technology and entertainment names such as Disneyand Google and even purveyors of seemingly ubiquitous products such asCoca-Cola. This is especially striking when one considers Ferrari sellsabout 10000 cars per year.When Coca-Cola says it hands out one point nine billion servings of one ofits drinks every day.They’ve been quite cautious about what they’re doing, but the kind ofprimary. Primary thing that they’ve been really focused on is making surethat their models are really strong and they maintain their reputationfor just for excellence in motor cars while not devaluing orreducing the strength of that brand.So Ferrari is looking for new ways to leverage that brand power.The company said it plans for branded goods to contribute 10 percent ofearnings before interest and tax within the next decade.This includes merchandise such as clothing, coffee mugs and watches.The company operates its own stores and sells goods online through theyears. Ferrari has stamped its logo on an array of products, includingsome very offbeat ones like Acer, laptop computers and mahjong sets.There is also a Ferrari world theme park in Abu Dhabi, complete withroller coasters. But there is definitely an opportunity to make a lot ofmoney from their brand. I mean, if if it’s closely connected to theirbrand and their experience, like in the case of the theme park, thenthat’s probably good, because you can you can maintain the connection andthe maintain sort of how the brand is perceived and seen to customers.And you have quite a lot of control over that.Of course, there are risks to this.The company acknowledged in filings that its attempts to reach morecustomers through merchandising could lead to some missteps.Branding is a tricky business.Part of what gives Ferrari its brand identity is exclusivity.The ten thousand one hundred thirty one cars it sold in twenty nineteencame after the company decided to lift its once strict production limit of7000 cars per year.Waiting lists for Ferrari cars can be long.Buyers can wait four to five years for delivery of most customizedFerraris. The company is also known for being very picky about who it willeven sell some of its limited edition vehicles to.Late racing legend and devoted Ferrari collector Preston Henn, who passedaway in 2017.Had sued Ferrari, alleging that the company refused to sell him a Ferrari.Appeared to Hend had gone to great lengths to get the car.Even Mei-Ling million dollar check to Sergio Marchione.The check was returned.Hend slapped Ferrari with a defamation suit, which he later dropped.Then he bought an accurate NSX, a supercar from Honda’s premium brand,which he said was better than a Ferrari.Anyway, the company has at times seemed even aggressive in controllingwhat its cars are associated with.In twenty nineteen, German fashion designer Philip Plein reportedlyreceived a letter from lawyers representing the automaker complainingabout pictures on his Instagram account.The lawyers considered persay distasteful, including pictures of shoes onthe car and other photos.The letter said, tarnished the brand’s image.The letter demanded Plein remove the pictures within 48 hours.The pictures and the image of the letter, which Flynn also posted, werelater removed. It remains to be seen whether the company will be able topolice the use of Ferrari baseball caps and key chains.But these efforts can fit Ferrari’s Lux brand image in twenty nineteen.It formed a partnership with high end Italian clothier Giorgio Armani.For example. The company has cut back on its number of licensingpartnerships and reduced the number of licensed products.When you start merchandising into lots of different product categoriesabout which you don’t really know the details about how you don’t know howto maintain quality, it starts to get more difficult.Which is why I think they they have reduced the number of agreements thatthey’ve they’ve got in terms of licensing by 50 percent and they’vereduced the number of categories by 30 percent.Apart from preserving its exclusive brand image, the automaker takesseriously the need to prove its engineering prowess and capability on theracetrack. Scuderia Ferrari has a remarkably successful overall record inFormula One. But Ferrari noted in its 20 19 annual report that the teamhad struggled that year.Sponsorship brings in about 14 percent of Ferrari’s net revenue, but itsreputation as a winner on the track is difficult to put a price on speed,as at the very heart of Ferrari’s identity.One of its most famous vehicles is referred to as the super fast.Racing is also very important for Ferrari research and development.Many of the innovations that begin life on the track eventually make theirway into Ferrari’s street vehicles.And unlike a lot of other brands that have had that, you know, that race onSunday, sell on Monday kind of philosophy, you know, with Ferrari, there’sactually been a lot of technology that has filtered down from the racecars into the production cars, you know, when they first went from manualtransmissions to semi automatic transmissions.That was technology that they took directly from their Formula One racecars. Ferrari has said it intends to take steps to win on the track again,and despite its branding and merchandising efforts, it remains focused onbuilding cars. Ferrari unveiled a record five models in 2019.Among these. The company introduced its first production plug in hybrid.You know, the Ferrari history is still what’s most fascinating to me andthe history that that that brand stands for and the things thataccomplished. And, you know, you can’t live in the past forever.So Ferrari, of course, has to look forward to can’t just always look back.Electrification is a trend.Many in the automotive industry are at least ambivalent about an oftendivided among themselves over on the one hand.Many see it as an inevitable and welcome development that reducespollution while delivering in many ways comparable or even superiorperformance. But part of owning a supercar, say some, is the experience ofdriving one. And the distinctive engine note produced by high end enginesis part of that experience.Some also argue that cars stand to lose some of their distinctiveperformance characteristics.There are tremendous differences in performance among various types ofengines. But some argue electric motors are vulnerable to commodification.Well, I mean, one of their most distinctive things is that the kind ofruler of the engine, the engine is what’s driving that brand.At the time. But really, when you’re really producing 10000 cores and it’spretty likely that some people are going to be able to drive petrol coresprobably forever, you know, maybe you don’t need to move into thosedifferent areas. However, going after high end customers was precisely howTesla built its reputation.Whereas previous attempts at electric and hybrid vehicles stressed theireco friendliness, Tesla’s roadster and later Model S and X modelsemphasized luxury and lightning fast acceleration.When Tesla debuted its Model S performance sedan in 2016, CEO Elon Muskboasted there were only a few other cars that could beat the Model S S’szero to 60 time of 2.5 seconds.One was the Porsche 918 Spyder and the other was, well, the Ferrari leFerrari. Ferrari is also working on a sport utility vehicle codenamed thePuto Gay literally pureblood or thoroughbred.The coronavirus pandemic’s stands to severely threaten the automotivemarket around the world. But the high end market is, for better or worse,just not the same as the rest of the market.Investors appear to be betting that companies like Ferrari, which caterexclusively to the wealthy, might be a bit better protected from aneconomic downturn, always produce at least one fewer vehicle than there isdemand. Making sure that they’re not overproducing matching production todemand so that they can keep their prices up so they don’t have to cuttheir prices. They don’t have to put incentives on their vehicles andmanaging that so that they and managing their costs at the same time tomaintain their margins.Ferrari’s margins don’t hurt either.Some analysts indicate Ferrari makes an average of about 80 thousanddollars of profit on each car it sells based on the prices of the cars andits annual production volume.That is enough cash to buy a high end Mercedes, BMW or Porsche.Its margins are healthy around 24 percent, compared with about fivepercent for most other automakers.In 2020, the company raised its dividend 10 percent over the previousyear. However, it is not bulletproof.Ferrari said in its May earnings announcement that it was loweringguidance on net revenue to between three point seven billion and threepoint nine billion, down from 4.5 billion previously.It cut its forecast for adjusted earnings before interest, taxes,depreciation and amortization to a top range of one point three onebillion dollars from a top range of one point five six billion dollars.CEO Lewis Camilleri told investors on a call that the company had seenorders canceled in the USA and Australia.But so far, there were no red flags.Still, Ferrari’s performance beat expectations and encouraged investorsfaced with an unprecedented economic situation.What Ferrari makes is not essential.It isn’t toilet paper, soap or food.But Ferrari does have a world class brand built over generations.It also has a product.Devoted fans will wait for four years, pay millions and even file lawsuitsto own. That might be, in its way, a very safe bet.