What struck you most when you first started at Ferrari?

First of all, I would say it was the fact that all the people were in the same location. When you are a consultant, you study the theory of how you can really build a network. Also, I was probably spending half of my time on the phone with remote people to optimize my time when I was consulting, with teams, with clients, et cetera. So, I lost the importance and the value of personal contact with people. The fact that all the people, literally all the company is in the same location, reachable by a maximum of 5 minutes on foot, is of enormous value. People meet each other very frequently, they have lunch together, those who live far away and only go back home at the weekends also have dinner together in the same canteen, that creates an enormous sense of community and shared values. Shared values are really quite present in every single meeting. The fact that people meet each other so frequently means the feeling of shared values is really strong. As a consultant, I have also never met a company with such strong and aligned values, so the sense of passing Ferrari to the next generation to make it stronger, the atmosphere surrounding the company that you need to preserve and nurture, and that aligns people in a way that I have never seen in any other company. So that's the magic. I was struck by that. I came from a company where the magic was already there, but Ferrari is possibly even more intense from that point of view.

I think the culture is the culture of the winner. People are there to win. So there is no compromise. The strength of the winner is the strength of delivering no compromises and being able to shape the industry.  Altogether forgetting what competitors are doing, because you know that you shape the pace, the behavior and the trends of the customer and the market, and that all the others will need to follow you. It's not arrogance, it's the sense of really shaping the industry.

So you never looked at competitors’ strategy or performance?

No, ‘you never look at competitors’ is the wrong statement. It's that you don't care whether competitors are doing different things. If you have a clear idea in mind, you don't really care whether the others are following you or not, whether the others have a different point of view or not. Of course, you do care about what they do and the ideas that they have, but you are not afraid to have a contrarian view because you have the consciousness, you have the self-confidence and you can shape the market around that. You know the others will follow inevitably, because you are so much bigger and you are so much stronger than all the others. You can afford to be the leader. That means that you need to deliver above and beyond your competitors every single time. That's the challenge and that creates a sense of ownership. You collectively know that you can only serve if you stay ahead of all the others. There’s a clear sense of that.

How does management encourage that pressure on delivery but also the pressure to innovate and be at the front of design and shaping the market?

It's clear. In order to be a winner, you need to have the most beautiful, the best performing, the most fun to drive car in its segment. Otherwise the car does not pass the test and you don't develop it. You can only be the number one, if you are not worse than any competitor, on any of those dimensions. It's an easy bar. You need to be better than all the others on those three key dimensions: style, performance and pleasure to drive. So if one of the three does not fit or you feel that others are better, then you need to improve. That's very clear. So there's no compromise. There are also very clear rules to avoid compromise. For example, you can’t cheat on materials, you can’t cheat on noise, on sound, like the others are doing. If you tell your customers that everything is in aluminum, then you can’t have the surface in aluminum and the structure in plastics, because you told the customer it's aluminum, even if they don't see it. So, if the sound is the sound, you can’t do what Porsche or others do: you can't have an amplifier. The sound should come naturally from the car. Nobody's questioning that. So it's a pretty obsessive rule but everybody agrees on it. Nobody questions that these are the values that make you stand out from the crowd. It's pretty unique.

How would you compare this culture at Ferrari versus other more premium OEMs that you may have come across in your consulting days?

I think that there is no comparison whatsoever. All the others that I have seen are competing against others and they don't try to stand out from the crowd. The only one who has exactly the same thought might be Rolls Royce. Rolls-Royce is in the luxury non-sport segment, it has the same story, although much smaller of course. They have the same attitude of shaping what comfort means, what style means, what ultimate luxury means for cars that are not sporty. So, they are in a completely different type of segment but have the same attitude. All the others are one or two notches below. They can’t really compete.

Of course, every single motor can compete, but the culture of the company can’t compete.

What is it that makes OEMs like, say, Bentley or Aston Martin, one or two notches below Ferrari?

Bentley in some segments is competitive to Ferrari, in others it’s not. For example, the Continental GT and also the Bentayga are somehow competitive. Other models are not. Aston Martin is definitely not a competitor of Ferrari, because Aston Martin is definitely priced one notch down. I don't think there is any Ferrari customer, or very few, who would hesitate between Aston Martin and Ferrari. It's also a completely different positioning.

How would you compare the culture of Bentley or Aston Martin to Ferrari?

I'm not familiar enough with the culture of these two companies to be able to comment on that. Frankly, I don't know. I can only comment on their market positioning. I think the most important challenge for Bentley - and I don't know how well they have been able to manage it - is how to be part of a group, as Ferrari has been for 4 years, without being blurred into the much bigger group. I don't know how independent Bentley manages to be, frankly speaking.

Now, Ferrari is a completely different entity, but when it was part of Fiat group, I think the secret to success was to preserve it as completely separate from the rest of the group. Not in terms of management, I moved from one to the other, for example, because the top management was considered part of the same cluster. But, in terms of all the operational functions, all the processes were completely separate, and that was key to preserve Ferrari.

How does the organizational design of the company drive the culture of Ferrari? You mentioned how everyone is in the same place, are there any other material differences in how certain functions are set up compared to other OEMs?

The car makers organizations are typically pretty conservative, more or less. First of all, organization is more than boxology, so you need to look at different aspects of the organization in a broader sense. But, if you look at the structure of the organization, I think there are two major differences between Ferrari and its competitors. One is the strong integration of supply management and product development, because, for example, purchasing reports to the CTO, the chief technical officer, which is quite unusual in the car business where purchasing typically functions and reports directly to the CEO, and is primarily in charge of cost reduction and cost efficiency. In Ferrari, on top of these targets, which are still very important, the other major driver is to support the development of new cars. The contribution of suppliers is so critical to the development of new cars, because in many instances you go to the limit, or you go into performances that are unknown to you and to your suppliers, that you need purchasing to be very closely integrated with the product development teams. So, that's the major difference. The other difference is that the technology department is looking not only at the make technologies, so the processes that Ferrari manufacturers in-house, but is also very heavily supervising and cooperating with the suppliers’ processes.

If you look at the skills that are in Ferrari, they have people who know about plastic injection molding, about carbon fiber production, so they are people who are capable of going to suppliers and supporting them in their development process, not only in Ferrari’s own processes, which is quite unusual for a car maker, again, because in many instances you have to deal with suppliers who have never done that process before. If you go to the limit, you can’t manage the process at arm's length. You need to manage it as if it were your own process. So that's the major difference vis-à-vis other manufacturers.

What's the structure from the top down in Ferrari?

The structure is pretty traditional. You have the CTO, chief technical officer; you have manufacturing and technology, so a chief manufacturing officer; then you have a chief marketing and sales officer, who holds the subsidiaries and sales and pricing and marketing; then of course you have a CFO; then you have a chief design guy, who is obviously a very important person in your organization; and you have the head of the Formula 1 team, so the managing director of Formula 1. That's the top management team. Of course, you have other functions that are important to the operation like legal, et cetera. But these are the guys who make up the group executive council.

So it's unusual for the purchasing guy to report to the chief technical officer?

It's completely unusual. It's instrumental in delivering the product development of new cars in the context where the contribution of suppliers is so critical. Typically, you split the two functions quite clearly, so that there’s no overlap.

And that drives accountability in terms of integrating with the supply chain and driving the technical performance of the car.

The most important issue is that when you develop new cars, which, by definition is doing something that is unheard of or unproven or up to the limit of performance, you need to have your suppliers on board to deliver that performance, because otherwise you won't deliver the car. So, it’s so important to have purchasing as a product development leader, which is why purchasing reports to the chief technical officer.

What are the big challenges with this model?

Every model has its pros and cons. The challenge is obviously the pressure. How do you make sure that you also have a focus on efficiency and on product cost reduction? That is precisely the reason why my function was created, to create product competitiveness. I was exactly in between the two of them to run cost transparency and to make sure that the products were developed with the right fixed costs, so capex and R&D on one side, but also with the right variable costs. So it's driving purchasing and manufacturing efficiency, that was my primary objective. At the end, people tend to underestimate it, but the cost of the car is very critical. It's a clear component of profitability. Ferrari is making money not only because of price but also because the cost is good, otherwise you don't make money at the end. It's not only because of price power. Yes, price power is a clear factor, but the cars are cost-effective as well.

In terms of organizational structure, do you think part of the magic of Ferrari is due to this unique method of the purchasing team reporting directly to the technical officer, or is there anything else that enables it?

I don't think that is part of the magic. I think that that is a pragmatic choice. There have been many discussions on whether it was better to separate it and make them report to the CEO. So that was a matter of choice.

The magic is about the brand, about the product. It's about the customers coming to Maranello and being happy to pay a cheque of $300,000 and shake your hand and say, “thank you”, which is not exactly easy for any manufacturing company. So that's the magic, it's not rooted in the organizational structure.

When you look at the luxury market, how do you view the major drivers?

First of all, we are talking about luxury sport, so that's fundamentally different from luxury itself. Ferrari is luxury sport, otherwise you include other strange or very expensive cars that have nothing to do with sport. I think that's a very important distinction. At the end, it's the combination of consistently being able to deliver superior performance over the three dimensions that I mentioned before. The three dimensions are not written on the walls, but they are written in the heads of all the people every single time. So that’s superior performance in terms of whatever defines acceleration, handling capability, et cetera for a specific segment; style, so no compromise on style, that's another very important driver; and the third one is emotion and pleasure to drive, which is different from performance, because you can have pleasure in driving even if you are not driving at the limit. Actually, very few people drive a Ferrari to the limit. I, myself, have a Ferrari. I'm not able to drive it to the limit, not even close to the limit, but I have a lot of fun. Sometimes, on the autobahn, I’m overtaken by people who look at a Ferrari, and go faster than me but I'm sure they are not having as much fun. They are simply going fast. Who cares? The emotion is a different thing, it's the feeling you have, the sense of continuous acceleration, sound - obviously you need to be able to go fast - it's a different dimension to performance.

Once these three things are constantly and consistently delivered then you create a clear brand perception, but rooted on specific products. And people are willing to pay for it. People who have enough money to afford a Ferrari and want a luxury product. They want it to look good, and they want the pleasure to use it. So, the secret is the blend between the three. Of course, the mix, the recipe varies according to the different segments. But, basically, all these three elements are clearly present. There are cars which are probably more extreme in terms of super acceleration, but they are obviously impossible to drive or the sound is completely fake or the interiors are not luxurious. It’s the challenge of having all these three things together that makes it unique. It’s a clear position to me. Obviously, it’s a consistent position over time. So you also have the history. You have the Scuderia, the fascination of the racing legacy, the most successful racing team in the history of motorsport. You have a lot of things that support that. You cannot create it from scratch, but you need to consistently deliver against that backdrop.

What management principles are encouraged to drive those three pillars of Ferrari?

It’s very simple, these three things must be delivered at any given point in time. I don’t think anyone is willing to compromise on that. You know it from the very first day that you enter Maranello that these three things are clearly fundamental. It’s in the DNA of everyone working on any new development, on any process, of anyone looking at whatever. It’s not even a question, it’s so clear that you’re doing those three things that you will never find a Ferrari with a spoiler for example, with fake aerodynamic devices, because you know that every single shape and micro-shape on the body of a Ferrari should have functionality, should not be something attached to it for the sake of aesthetics. At the same time, you can’t have anything ugly because of performance. It’s simply a question you would never ask because you know that when you enter a church, you have to take your hat off. You don’t ask, “should I keep it on or should I take it off?” You simply take it off. That’s it. You don’t ask yourself why. That’s the rule. Ferrari is not governed by processes or rules, it’s governed by values.

How is that implemented in practice? Is it a case of human capital and the people they employ?

People quickly understand that this is a winning recipe. So why would you destroy the toy? People immediately understand that that’s the way, it’s a successful story, you’re in a successful company. You listen to those you are working with because they are successful, because they built the company as they built it. Why would you screw it up? You might challenge some decisions I’m sure but not the values. The values are there. The values of beauty, the values of performance, the values of customer excitement while driving are values that you of course you understand you need to fulfil. Why should you question them? What would that do? Why should you make it different?

Of course, this is true because the company is successful. Now, if the company were not so successful, people might say, “we’re in a crisis so we should do things differently.” But if you’re not, why should you? You’re growing, profitability is growing, margins are growing, sales are growing, reputation is growing. Why would you change the recipe?

So there’s no procedures or structure in place to drive those values, it’s more inherent in the people and the culture.

Yeah, absolutely. This is facilitated by the fact that people are all together in the same place. That’s very important. For example, if you have Ferrari 2.0 in the US, with some people developing their own cars, that would be a disaster because that would be impossible to manage. Not because the Americans would be less smart than the Europeans, but because you would not be able to keep the culture in the same way, exactly harmonious and homogenous. I think the colocation is one of the key factors. I’m absolutely sure about that. This is why Ferrari has never delocalized anything. Ferrari will be in Maranello forever, for sure. It would be so stupid to move it.

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 indicate. 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 optimizing 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 focusing 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 optimize 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 optimize all the techniques to reduce capex, to optimize 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 minimize 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 optimize 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-optimizing 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-optimizations.

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.

Which is unbelievable when you think about the price they sell for - that the fixed cost of a Ferrari is lower than a mass market car.

It has to be. If it weren’t that way then Ferrari wouldn’t make money. So you need to compromise between fixed costs and variable costs obviously. By having tools that are less costly, you increase the variable costs because you have more manual work along the chain and less investment. In the end the tradeoff will be that you make fewer units.

In terms of ratio between the fixed and variable costs, you mentioned 40 to 1?

So if you do the math and you take a normal car, a high-volume D segment or C segment car, you spend €1 billion to €1.5 billion, more or less, to make it, that car costs €30,000 variable cost. If you do more than 1 million over the life cycle - maybe 250,000 over 5 years - that’s €30 billion, €40 billion. So, over the life cycle, the fixed to variable is 40 to 1. So you can imagine that people are focusing on the 40 and not on the 1.

If a Ferrari costs €50,000, variable cost, and you make 10,000 or 8,000, it’s €400 million and capex of €100 million, then it’s 4 to 1, not 40 to 1. So you need to pay attention to the 1. The ratio is 10 times higher for capex. The percentage of capex over the life cycle of the car is 10 times higher than for the mass market, and that’s why people are putting an emphasis on it.

Are there any major advantages in the actual manufacturing processes, i.e. the variable costs?

The variable costs must be kept under control. Fixed costs are important, but variable is 4 to 1 so it’s still very important. If a car costs €50,000, it depends on the car obviously but if you do 3,000 to 8,000, that’s still €150 - 400 million over the whole life cycle, so it’s still a very important portion of the total cost. You need to work on cost optimization exactly as a mass market OEM does, with different techniques, but the focus on variable cost is critical. Design to cost, design to value stuff - those efficiencies are absolutely key. Manufacturing is less important because, at the end, vertical integration is not very high, so the factory is relatively small and that’s less important. Also because the manufacturing plant is also a marketing tool.

It’s a showcase for the company, so you need to trade off the quality and the cleanliness. The Ferrari foundry has air conditioning - I’ve never seen an aluminum foundry with air conditioning in my life. Typically, it’s a very heavy environment to work in, it’s very hot and challenging. Ferrari has said that all the people working for them deserve the same environment, the same treatment, so the foundry should be as clean and as air conditioned as any other department. Of course, that comes with a cost. But then, when you invite your customers, or your dealers, or the head of government to your plant and you go to the foundry and say “Hey, this is a foundry,” everybody is shocked because they think it’s a laboratory. That’s part of the overall experience, the overall magic sold to customers. And, frankly, it’s more important to build over capacity in the system, and to make sure that lines are flexible enough to accommodate different products, than sheer cost efficiency. Of course, there is a clear culture to make it efficient, but frankly it’s not the focus.

They can afford that as they can get that back in pricing?

There’s not a direct relation between how clean the plant is and pricing obviously, but you need to show that you have a plant which is at the level of the products you produce, and the promise you embed in those products.

Just on the variable cost point, is it more in the design and that part of the variable cost? You mentioned that manufacturing is obviously standard and not so efficient.

I’m not saying the manufacturing process is not cost efficient. I’m not saying there’s not the relentless focus that you have in other areas, because it’s small and because it’s visible.

In terms of the design, where does the accountability lie?

It’s all linked. It can’t be separated. In the end, the number of hours you need to assemble the car or to manufacture the engine are a result of the design choices. It’s all linked. They all share the same objectives, of course. You can’t split the manufacturing objectives with the product costs from the design ones.

There must be clear accountabilities by function or by division?

Yes, it's a joint target. They share exactly the same target, obviously. If you design something more complicated, then people still have to manufacture it, they have to share the same target obviously.

What do you think is the biggest risk for Ferrari?

If you look at the plan that was presented in September at the capital market day, I think the most important risk is the demand they are going to place on the R&D people to develop so many products simultaneously. At the end of the day, it's a very lean company. The number of people they have in R&D is much lower, per unit, than many competitors. So it's a very efficient company.

In the plan, there's an increase in the number of products to be developed simultaneously, so the demand on the R&D organization will be very high. So that's going to be challenging. I don't think they are going to make mistakes, because, at the end, the values are such that they will not have any slippage. But I think the risk is that they will be late on some products, because it's too many things to do simultaneously. That's the risk I see.

Is there a sense that the shareholder base or the market driving too much demand on management that's causing them to overextend?

The management team has been the same for almost 10 years now, with very few changes. I think it's a reliable and strong team. So I don't think there’s a risk in the management team. I think there's a risk in overstretching the organization and not finding the right leverage to hire new people capable of supporting today's leaders to run the new programs. That's the major challenge. I'm not aware of the details, how many people they have hired, how successful they were et cetera. It's tough.

Ferrari: Values and Culture of a Prestigious Automaker

Former Chief Product Officer and SVP Production Processes at Ferrari

inpractise.com/articles/ferrari-values-culture-full

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Executive Bio

Ervino Riccobon

Former Chief Product Officer and SVP Production Processes at Ferrari

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Ferrari: Values and Culture of a Prestigious Automaker(November 18, 2019)

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