Ferrari: Capital Efficiency

Ervino, it's pretty clear that on a capex and R&D basis, Ferrari spend far less than its competitors. In terms of capital investments per car Ferrari is roughly €57,000 - €58,000 per car versus €56,000 - €57,000 for Aston Martin and a bit higher for Bentley, yet they also price at a premium. What actually drives the capital efficiency of the business?

The capital efficiency is one of the most important success factors and it's also one of the most difficult to imitate. It's almost impossible to reverse engineer because you can't reverse engineer a car. You can understand how components are built, how technology is developed but you can hardly copy the way the car has been developed. So that's a combination of a multi-year effort of, rather than just focusing on optimising each of the capex items, because Ferrari puts an emphasis on capex that normal OEMs put on variable cost. Typically, capex is a very small portion of the total cost of a car. That's very important but people are typically not focussing on the cost of capex. They take it for granted in comparison to how much money you spend on variable costs. Take a Jeep, for example, it might cost $1 billion to develop and then about $40,000 of variable cost per car to produce a million cars over the life cycle of that car. So it's 40 to 1 in terms of cost over the life cycle. So people focus on the 40 billion and not on the 1 billion, in terms of energy and also the skills that you put there, so the brain power employed to optimise that. For Ferrari, the ratio is not 1 to 1 but it's close to it. No car with a high fixed cost would pay off, no matter what the price power would be. So, since the very beginning of the industrial era of Ferrari, twenty years ago, the efforts have been to optimise all the techniques to reduce capex, to optimise the number of prototypes, to reduce the number of cars you need to test all the elements, to do a very well designed experiments, to make sure that you don't do a test or don't build a tool that is not strictly necessary. You use prototype technologies to minimise the fixed costs, and you develop your suppliers in order to squeeze it. So, it's continuous improvement and research for new techniques, new ideas and new methodologies to reduce that number. The others might do that too, but for them it would mean to squeeze the cost by 0.0% and for Ferrari it's clearly instrumental. So it's a matter of focus.

If you spoke to all the other luxury players wouldn't they say the same thing? They look to optimise all items of capex but it doesn't show in the numbers.

No, that's not true. I know at least two of them very well. Maserati, was part of FCA, so I knew them very well. And Ferrari has hired at least 2 or 3 people from Porsche, with whom we had extensive discussions about that. Although they could not tell us the details, obviously, because of confidentiality reasons. But the Porsche guys were shocked when they saw the fixed costs of Ferrari. They said it's one third of what they would typically spend to develop a similar car. Maserati has been with Ferrari for 10-12 years. So, theoretically, you should find similar techniques there but that's not the case. Only a few years of connection with a mass producer like FCA was enough to lose all the knowledge. So I can tell you, it's a matter of focus, it's a matter of looking at different suppliers, at different technologies, of hyper-optimising the experiments, of how to test an engine, how to test the electronic stuff, how to make sure that with one prototype you test three things instead of building three prototypes and so on. So it's very detailed know-how, it's not one secret, one silver bullet that is the killer argument. It's a number of small micro-optimisations.

Iterations as well.

Yes, of course. The fixed cost is treated by the product manager with exactly the same emphasis as the variable costs. So, once it's in the mass market, people tend to say that it's a variable cost issue because again that's 40 to 1, so obviously you focus on the variable cost issue. When it comes to Ferrari, in any presentation of a new development, any product manager has two sections: variable cost and fixed cost. There's no doubt about it. The target is clearly equally important, equally discussed and the share of minds of the top management is equally split between the two and that's critical.

So, in terms of a Ferrari then, what is roughly the percentage of fixed cost of a unit versus variable?

You can do it quite easily. It depends first of all on the type of model, and also on the cycle. So you typically have two 5-year cycles. For each segment you develop a car every 4-5 years. One of them is a major renewal and the other one is a slightly less invasive renewal with more carry-over parts. You typically change most of the aesthetics but you might not change all the interiors, you might not change all the transmission, etc. So it's impossible to give a number because it's completely variable according to which cycle, GT, sport, which can change a lot, but it's in the realm of 100 million or something like that; between 50 and 150 million. That's the overall number which is an order of magnitude less than a mass market car, as you may imagine.