Ferrari Counts on Brand Pull to Thrive in Niche

By Christoph Rauwald, Tommaso Ebhardt and Mark Clothier

For Ferrari SpA, proving it can thrive as an independent sports-car maker may be a tougher challenge than a Formula One victory.

Following its spin-off next year from parent Fiat Chrysler Automobiles NV (FCA), the global cachet of the Ferrari name will be key to master hurdles such as the costs of developing cars that meet the standards of its elite customers and ever demanding regulators.

Ferrari’s self-imposed production cap at about 7,000 cars a year, aimed at preserving the exclusive appeal, will limit growth potential in an industry where scale can be paramount to survival.

“The global industry trend is that such brands seek shelter” by becoming part of a large automaker, said Arndt Ellinghorst, a London-based analyst with ISI Group. “Fiat does the opposite to repay debt from the mass-market business. It’s the beginning of the end.”

The threat of being squeezed out of a market has driven Bentley, Lamborghini and Porsche into the arms of Volkswagen AG, and Rolls-Royce is now part of BMW. Aston Martin, which has struggled since being cut loose by Ford in 2007, is cozying up to Daimler AG to access technology, while British sports-car maker Group Lotus Plc is cutting its workforce by as much as 27 percent to survive.

“It’s getting increasingly difficult to operate in a market niche like sports cars as a stand-alone company,” said Stefan Bratzel, director of the Center of Automotive Management at the University of Applied Sciences in Bergisch Gladbach, Germany.

What might set the Maranello, Italy-based company apart from other sports-car makers is what Brand Finance lauded as the world’s “most powerful” brand, beating even Apple. The consultancy, which values the marque at $4 billion, cited the loyalty of Ferrari’s customers and its high margins.

Ferrari has perfected the balance between a luxury product that only the very wealthy can call their own and a brand recognition that’s universal. It’s supported by quasi-religious loyalty of devout fans ranging from young boys plastering their bedrooms with Ferrari posters to Formula One fanatics to rich serial buyers who will spend any sum on the latest model.

Ferrari’s independence was the result of mounting debt at Fiat Chrysler, which is seeking to finance a five-year, €48 billion ($61 billion) investment program. With the focus on expanding the Jeep and Alfa Romeo brands globally and Maserati already part of the portfolio, the opportunity to cash in on Ferrari’s allure was hard to pass up.

Under the plan, Fiat Chrysler will list 10 percent of Ferrari in the U.S. and possibly Europe and the remainder will be distributed to its investors. That serves as an enticement to buy a mandatory convertible bond and as many as 100 million shares. Mediobanca estimates Ferrari’s stand-alone value at about €9 billion. The remaining 10 percent of the sports-car maker is owner by a descendant of founder Enzo Ferrari.

In the third quarter, Ferrari posted earnings before interest and taxes of €89 million on revenue of €662 million, giving it a profit margin of 13.4 percent, which is among the highest in the auto industry.

The maker of the $319,000 F12berlinetta also won’t totally be cut loose from Fiat Chrysler. Chief Executive Officer Sergio Marchionne plans to remain on as Ferrari chairman. He took on that role earlier this month after orchestrating the departure of Luca Cordero di Montezemolo, the long-time boss of the super-car brand. The Agnelli family, which founded Fiat, will also be the biggest shareholder in both carmakers.

Ferrari has proven its broad appeal, licensing its name to the Ferrari World indoor theme park in Abu Dhabi, the world’s biggest. Opportunities to extend beyond exotic sports cars could be more aggressively pursued when the company becomes independent.

“Ferrari is a lifestyle,” said Joe Phillippi, president of AutoTrends Consulting. “It’s Vogue and Town & Country and Architectural Digest all wrapped around a Ferrari prancing horse. That makes it more than just a car company.”