Why Ferrari is under financial pressure

Where previous Formula 1 power battles have been all about egos and controls, the latest skirmish between leading teams, the FIA and Formula One Management revolves around nothing other than unadulterated financial power.

He who controls F1 benefits commercially, as FOM CEO Bernie Ecclestone's billionaire status proves. And Sergio Marchionne's Ferrari could do with just such an income.

That need for cashflow helps explain much about Ferrari's recent modus operandi - both within and without F1, such as the spin-off of the brand from majority parent company Fiat Chrysler Automobiles (FCA) on January 3 2016.

The US Securities and Exchange Commission defines a 'spin-off' as: when a parent company distributes shares of a subsidiary to the parent company's shareholders so that the subsidiary becomes a separate, independent company.

This definition is absolutely crucial to understanding Ferrari's corporate situation and the plays of Marchionne - nicknamed 'The Jumpered Assassin' by some, on account of his rather unconventional sartorial sense, which seemingly combines a navy zipped sweater with whatever else happens to be about his wardrobe.

The aforementioned spin-off followed Ferrari's listing on the New York Stock Exchange on October 21 last year, the day F1 decamped in Austin for the United States Grand Prix.

In human terms this sequence is akin to reaching the age of consent, of assuming full responsibility for one's actions, and living for and on one's own account.

Marchionne's recent comments in Detroit shed new light on Ferrari's challenges © XPB

Previously Ferrari had been 90 per cent owned by the Fiat group and 10 per cent by Piero Lardi Ferrari, Enzo's only surviving son - following buy-backs from various minority investors, including Abu Dhabi sovereign wealth fund Mubadala, towards the close of the last decade. But the IPO diluted Fiat's holdings as around nine per cent was traded on the NYSE, peaking at $58 after listing at $52 on opening day.

As things currently stand, Fiat shareholders own 80 per cent of Ferrari stock, and Piero Ferrari his 10 per cent, with nine per cent traded and one per cent sitting in the vaults of advisers. A pact between FCA and Ferrari Jr ensures the consortium retains control going forward, provided holdings are not decimated.

The IPO valued the company at $9.8billion (£6.8bn), very much line in with Marchionne's projections. However the Italian-born Canadian son-of-a-policeman based his valuation on Ferrari being a luxury goods brand: "a unique expression of art and technology", rather than solely a purveyor of ultra-high-end motor cars.

This concept befuddled the markets, which soon gathered that not all products can be stallion-branded, because exclusivity would be devalued.

Marchionne now seems to have grasped that, recently saying: "The most important thing is not to do anything big and stupid.

"If you put Ferrari on a toaster, it doesn't go faster... You cannot stick [Ferrari's Cavalino Rampante logo] everywhere, otherwise it loses its value."

Already, though, Marchionne intends upping annual production volumes from 7000 units per annum to 9000 (eventually rising to 10,000), allegedly to cater for demand in emerging markets such as Asia and Middle East. Yet demand for luxury cars in China is well down (54 per cent in the case of Rolls-Royce and 40 for Bentley), with projected sub-$25 per barrel oil prices expected to cause havoc in OPEC territories.

The net effect is that Ferrari's share value has plunged a quarter since October (ranging around $43 this week), seriously affecting FCA's chances of off-loading further shares to reduce its considerable debt pile of $8bn (and rising).

Things have been going better for Ferrari on track recently © LAT

Worse, FCA holds around three months' stock in the US, with its best seller being the Chrysler 300C, based on a 2002 Mercedes-Benz E-Class platform. Second is a RAM truck.

To place these numbers in perspective, consider that US market peers General Motors and Ford hold half the stock on rubber and have cash-on-hand of $8bn and $16bn respectively, which they are investing in electric and autonomous cars - currently way off FCA's radar due to cash constraints. It is clear, then, that Marchionne faces a massive task on that side of the Atlantic, even before factoring various recalls affecting a total of 11 million vehicles into the equation.

Things aren't much better on the eastern seaboard. Apart from countering time-consuming EU Commission allegations that FCA had improperly evaded tax via its restructure, plans to position Alfa Romeo as a direct market competitor to the BMW 3 Series, Audi A4 and Mercedes C-Class models have already been downgraded and variants delayed, even before the first new rear-drive Alfa in decades goes on public sale.

Demand for Maseratis has plummeted - operating profit for the brand dropped 80 per cent, from $90m to $12m - with interest in the Trident's luxury Jeep-based SUV, aimed primarily at Asian/Arabian markets and due to be launched in Geneva in March, said to be tepid. Recent plans to rebadge Chrysler models as 'Lancia' failed to hoodwink buyers, while immediately post-spin-off, Fiat Chrysler NV shares fell one third.

Equally, the spin-off means Marchionne cannot simply rebadge Ferrari F1 engines as 'Alfa Romeo' as had been his grand plan, for technically Ferrari and FCA are separate companies with individual shareholder obligations. Where once it was akin to a parent taking an item from one child (Ferrari) and presenting it to another (Alfa Romeo), they are now distant relatives bound only by an absent parent.

Therefore, in real terms, any Alfa Romeo badging on Ferrari F1 cars - as seen in 2015 - should be accounted for at market rates, despite a portion of Ferrari's share value having found its way into Alfa's coffers via FCA.

Now, though, the real bombshell: Iin reviewing FCA's 2014-18 five-year plan - originally dubbed 'fantasyland' by a respected industry analyst - during this week's Detroit Motor Show opening, Marchionne indicated he would retire in 2018, adding he was committed "to achieving the 2018 plan" but "come '19 and later, [industry consolidations] will have to be handled by my successor." Three years to go, then...

Talk of the Alfa name returning to F1 has swirled around the paddock but not come to fruition © LAT

Various in-house successors are being punted, including former VW man Harald Wester, Alfa Romeo/Maserati CEO and FCA's chief technical officer, with but one Italian among them: Alfredo Altavilla, head of business development and COO for Europe. The rest are American...

Marchionne may not, of course, stand down from Ferrari at that time, but retirement would certainly affect his influence were he to remain in Ferrari's chair while relinquishing his FCA responsibilities given that - spin-off or not - Ferrari and Gruppo Fiat are inextricably linked.

Marchionne is a board member of Phillip Morris - spun-off from parent Altria in 2008 -- sitting on its finance, product innovation and regulatory affairs committees. Clearly he will have advanced whiffs of the direction the smoke blows in future. Should the £70million-per-year deal end, it will be a massive blow to Ferrari's F1 budgets during that crucial 2018-20 period. Somehow that will need to be recovered.

Let us pull these strands together:

1) FCA is under enormous pressure, and may need to off-load Ferrari shares to balance books, finance inventory and keep investors sweet.

The Marlboro name has long since vanished from F1 Ferraris, but the funding remains © LAT

2) Ferrari's revenues (both product and F1) are likely to dip, with share prices following suit just when FCA needs to off-load.

3) The SEC may take active interests in proceedings, obliging Ferrari to ensure all dealings are squeaky clean.

4) Ferrari may be seeking a new president by 2018.

The foregoing is intended simply to illustrate the enormous pressures Marchionne, who patently needs to optimise every revenue stream, is under.

Thus it was no surprise when Marchionne in October invoked Ferrari's F1 regulatory veto, for he was blatantly protecting the Scuderia's commercial interests - a 50 per cent reduction in powertrain prices as targeted by the FIA would cost Ferrari up to $30m per annum through to 2020. That adds up to $150m, which shareholders and FCA would require answers about.

It seemed outrageous in November when this column suggested that Ferrari's F1 future beyond 2020 was in doubt, but the suggestion was subsequently confirmed by Marchionne during Ferrari's traditional media Christmas lunch, while he also indicated that an Alfa-themed F1 campaign using rebadged Ferrari engines could see the light of day - so long as another team pays for it.

When the 63-year-old told Autosport "nobody would be interested in Formula 1 without Ferrari" that was both a statement driven by ego and a threat to F1's commercial controllers. Equally, it is no coincidence that Marchionne suggested FOM should pay for F1's mooted alternate engine formula. Yes, Ferrari could be involved, he said, but only if FOM picked up the bills.


Where once virtually every comment made by a Ferrari spokesperson could be seen against a background of political spin, from January 3 this year Marchionne's (or his minions') comments should now be seen against a background of the commercial spin-off. And it has only just begun.