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    Why Ferrari Succeeds When All Others Would Die

    Why Ferrari Succeeds When All Others Would Die

    http://www.carbuzz.com/news/2016/4/6/Why-Ferrari-Succeeds-When-All-Others-Would-Die-7732901/

     

     

    Can low volume sales cover the astronomical costs of running Ferrari? 

    In terms of raw profits, high-end luxury cars tend to do well. Mercedes makes a killing on each S-Class that is sold and BMW dominates the market with profits on the 3 Series. This is because despite having higher production costs over say, a Toyota Corolla, the designing, engineering, and materials don’t amount to a much larger investment than the Corolla. The part where it all clicks is when you take the premiums on these luxury cars into account.

     

    Luxury car prices are much higher than a Toyota’s MSRP, so Mercedes and BMW get to walk away with a larger cut per car that is sold. Only thing is, even though Mercedes and BMW make fewer cars than Toyota, they are still huge monstrosities of companies that look like Goliath when sitting next to Davids like Ferrari. The Italian supercar maker still does things old school, and this costs a lot. While the two aforementioned Germans have adopted Henry Ford’s assembly line style of production, Ferrari makes its cars by hand, ensuring that it has to pay humans a wage instead of investing in robots. It also means that the time to produce each car goes way up, ensuring that more wages are paid for a smaller amount of work.

     

    After factoring in the cost that it takes to hand build every car, pay top salaries for expert craftsmanship, bestow its racing cars with expensive materials like carbon fiber, and utilize some of the world’s best engineering talent to squeeze a few extra tenths of a second off of lap times, it starts to add up. The fact is, making a Ferrari costs a whole hell of a lot more than a normal car, and even though a Ferrari also costs quite a bit more, its low sales numbers mean that it cannot make up for this gap in production investment by selling a huge amount of cars like Ford or Volkswagen. Another cost to consider is that Ferrari has a racing habit. In the news you see countless stories of wealthy people who lost their money to rampant drug addictions and alcoholism.

    But you’ll never see a more money-sucking habit than racing, and Ferrari has infiltrated many circuits from F1 to Le Mans. This pursuit of cash for racing efforts is part of why Ferrari whored itself out to Fiat after nearly becoming a Ford subsidiary. So how does all of this materialize in the present day? Does the company make enough cash to survive? As it turns out, it is not only making enough cash to get by, but Ferrari is posting some of the largest profits that it’s ever had. And this is despite the fact that the company intentionally caps its production numbers rather than allow V8 and V12 monsters to flow freely out of Maranello. In 2011, it was reported that Ferrari made about $62,000 per car it sold.

     

    This means that given its expenditures for that year, the profit margin on a Ferrari is 15%. Not only is this one of the highest margins in the auto industry, it nears the profit margins seen in the luxury goods sector, which is fitting for Ferrari. To keep profits this high, Ferrari has mastered the art of balancing supply and demand. By keeping its cars exclusive enough that a two year waiting list is required for a new one, customers are always more than happy to fork over high amounts of cash to be “blessed” with a Ferrari. Meanwhile, just enough cars come out of Maranello to keep the black profit ink running for the company’s charts. All of this is quintessential Ferrari, and despite the gamble and slight air of cockiness, it pulls it off wonderfully. Much like its cars.


    Re: Why Ferrari Succeeds When All Others Would Die

    The $62,000 per car is very misleading as is the 15% profit margin.


    --

    Of little, to make much: That is the dream of a human life.


    Re: Why Ferrari Succeeds When All Others Would Die

    nberry:

    The $62,000 per car is very misleading as is the 15% profit margin.

    A least one of those figures has to be plain wrong.  A gross margin of $62,000 / car as 15% of the factory gate price would suggest an average ex-factory price of over $400,000, which is way too high even for Ferrari. Smiley


    --

    fritz


    Re: Why Ferrari Succeeds When All Others Would Die

    fritz:
    nberry:

    The $62,000 per car is very misleading as is the 15% profit margin.

    A least one of those figures has to be plain wrong.  A gross margin of $62,000 / car as 15% of the factory gate price would suggest an average ex-factory price of over $400,000, which is way too high even for Ferrari. Smiley

    Would it still be high if you include all the limited editions and tailor mades?  I think it might be right.

    By the way, their financials were under the highlight at the time of IPO.  The numbers cannot be vastly different only after several months from that.


    Re: Why Ferrari Succeeds When All Others Would Die

    fritz:
    nberry:

    The $62,000 per car is very misleading as is the 15% profit margin.

    A least one of those figures has to be plain wrong.  A gross margin of $62,000 / car as 15% of the factory gate price would suggest an average ex-factory price of over $400,000, which is way too high even for Ferrari. Smiley

    It is probably profits (before taxes) for each car. I posted a similar calc a few months ago since it was on the press... two figures you need: profits for 2015 and cars delivered/sold in 2015.

    I should add, now that Ferrari is a public company all info will be posted and given that it is a simple business it will be easier to calculate the performance. Also, we should remember that these profits are AFTER the costs of the F1 team!


    Re: Why Ferrari Succeeds When All Others Would Die

    The astronomical costs of running are covered by the astronomical price for the same plastic, steel and rubber that is in all cars under 10k... It's all about supply-demand and image through marketing. If one were to truly analyse cars by their performance without any social or cultural or history feelings associated, a 911 would come away the winner everytime. But the Ferrari name is that status symbol of success and wealth. 


    --

    1991 BMW 535i Granitsilber/White Leather

    Ex: '91 BMW 318i, '89 BMW 525i, '74 Mercedes-Benz 280E, '87 BMW 325is, '86 BMW 325e, '05 Ford Focus ZX4 S, '85.5 Porsche 944

    
    

    Re: Why Ferrari Succeeds When All Others Would Die

    Jean:
    fritz:
    nberry:

    The $62,000 per car is very misleading as is the 15% profit margin.

    A least one of those figures has to be plain wrong.  A gross margin of $62,000 / car as 15% of the factory gate price would suggest an average ex-factory price of over $400,000, which is way too high even for Ferrari. Smiley

    Would it still be high if you include all the limited editions and tailor mades?  I think it might be right.

    By the way, their financials were under the highlight at the time of IPO.  The numbers cannot be vastly different only after several months from that.

    The following figures are for 2014:

    Ferrari figs.JPG

    Dividing the company's total turnover by the number of cars shipped might suggest that each car shipped had a value of €380k at the factory gate, which would be a fallacy as Ferrari's annual turnover also includes hundreds of millions for other revenues such as Formula 1 sponsorship, spare parts, sales or licence fees for high-margin fan clothing and articles and other "lifestyle" goods, etc..

    I would suggest that the journalist who wrote that article fell into the trap of making that simplistic calculation and drawing the wrong conclusions.  


    --

    fritz


    Re: Why Ferrari Succeeds When All Others Would Die

    That doesn't really matter because all businesses are based on the car sale business (core business). I doubt that the F1 team is profitable hence its cost is like marketing expense for the car business.


    Re: Why Ferrari Succeeds When All Others Would Die

    wantone:

    That doesn't really matter because all businesses are based on the car sale business (core business). I doubt that the F1 team is profitable hence its cost is like marketing expense for the car business.

    It only matters if someone wants figures to be taken seriously that have been arrived at on the basis of obviously unsound assumptions. 

    McLaren used to survive solely  -  and profitably  -  just from Formula 1. Profitable to the extent that the company could eventually afford to set itself up as a serious manufacturer of very competent road cars. 
    Whilst Ferrari has produced road cars pretty much from the beginning, I understand that Formula 1 is very much a business venture for it which is intended to be profitable in good times, but may well be less so in bad times. When F1 teams are not winning, both their prize money and their sponsorship deals suffer. 


    --

    fritz


    Re: Why Ferrari Succeeds When All Others Would Die

    Again, you need to think how Ferrari stock was sold to investors. Were they buying an F1 team that happens to produce cars on the side? I don't think so. I think marketing was based on the car business and the Ferrari brand.


    Re: Why Ferrari Succeeds When All Others Would Die

    fritz:
    wantone:

    That doesn't really matter because all businesses are based on the car sale business (core business). I doubt that the F1 team is profitable hence its cost is like marketing expense for the car business.

    It only matters if someone wants figures to be taken seriously that have been arrived at on the basis of obviously unsound assumptions. 

    McLaren used to survive solely  -  and profitably  -  just from Formula 1. Profitable to the extent that the company could eventually afford to set itself up as a serious manufacturer of very competent road cars. 
    Whilst Ferrari has produced road cars pretty much from the beginning, I understand that Formula 1 is very much a business venture for it which is intended to be profitable in good times, but may well be less so in bad times. When F1 teams are not winning, both their prize money and their sponsorship deals suffer. 

     

    Williams returns to profit on back of Formula 1 success http://www.motorsport.com/f1/news/williams-returns-to-profit-on-back-of-formula-1-success-686261/


    Re: Why Ferrari Succeeds When All Others Would Die

    wantone:

    Again, you need to think how Ferrari stock was sold to investors. Were they buying an F1 team that happens to produce cars on the side? I don't think so. I think marketing was based on the car business and the Ferrari brand.

    While not wanting to do this subject to death, I would comment that I would expect any serious investors in the Ferrari IPO to have done some research into the company before committing real money to it, and to have tried to establish where income and profits came from so that they could better assess possible future dangers and opportunities.
    They would most certainly not have wanted to rely on incorrect figures in informing their investment decisions, such as those quoted by the journalist who wrote the article quoted above, as they could, for instance, be totally misleading with regard to the effects of car sales figures on the company's bottom line. 


    --

    fritz


    Re: Why Ferrari Succeeds When All Others Would Die

    koko:
    fritz:
    wantone:

    That doesn't really matter because all businesses are based on the car sale business (core business). I doubt that the F1 team is profitable hence its cost is like marketing expense for the car business.

    It only matters if someone wants figures to be taken seriously that have been arrived at on the basis of obviously unsound assumptions. 

    McLaren used to survive solely  -  and profitably  -  just from Formula 1. Profitable to the extent that the company could eventually afford to set itself up as a serious manufacturer of very competent road cars. 
    Whilst Ferrari has produced road cars pretty much from the beginning, I understand that Formula 1 is very much a business venture for it which is intended to be profitable in good times, but may well be less so in bad times. When F1 teams are not winning, both their prize money and their sponsorship deals suffer. 

     

    Williams returns to profit on back of Formula 1 success http://www.motorsport.com/f1/news/williams-returns-to-profit-on-back-of-formula-1-success-686261/

    That report is a timely confirmation of one of the points I made.  


    --

    fritz


    Re: Why Ferrari Succeeds When All Others Would Die

    fritz:

    I would suggest that the journalist who wrote that article fell into the trap of making that simplistic calculation and drawing the wrong conclusions.  

    Smiley


    --

    RC (Germany) - Rennteam Editor Porsche 991 Carrera 4 GTS Cabriolet, Porsche Macan Turbo, Ford Mustang GT500 Shelby SVT (2014), Mini JCW (2015), Jeep Grand Cherokee SRT (2014)


    Re: Why Ferrari Succeeds When All Others Would Die

    fritz:
    wantone:

    Again, you need to think how Ferrari stock was sold to investors. Were they buying an F1 team that happens to produce cars on the side? I don't think so. I think marketing was based on the car business and the Ferrari brand.

    While not wanting to do this subject to death, I would comment that I would expect any serious investors in the Ferrari IPO to have done some research into the company before committing real money to it, and to have tried to establish where income and profits came from so that they could better assess possible future dangers and opportunities.
    They would most certainly not have wanted to rely on incorrect figures in informing their investment decisions, such as those quoted by the journalist who wrote the article quoted above, as they could, for instance, be totally misleading with regard to the effects of car sales figures on the company's bottom line. 

    Of course, as you know serious investors don't buy stocks based on magazine articles.

    If we want to be more specific what it matters is the gross margin for every car sold. Revenue streams from other businesses should be separated...I agree. Although, I doubt if you will find all these details in public docs.

     


    Re: Why Ferrari Succeeds When All Others Would Die

    Net revenue from the sale of cars and parts was $2,080m in 2015 (72.9% of total net revenue). Including sale of engines to Maserati ($219m) you have $2.3B. The rest was through Sponsorship, Mechandising, royalties etc. 

    Cost of Sales was $1,499m and if you contend that there was no real cost of sales for the Sponsorship, Merchandising, royalties etc. that was all against the cars and engines. 

    BTW they amortized $115m of R&D expenses (so mostly against production car issues) and booked $447m in R&D expenses (roughly the running of the F1 team).

     


    --

    Past-President, Porsche Club of America - Upper Canada Region


     
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