Ducati: in Pursuit of Magic (A)
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DG-1507-E Rev. 2/2017 Ducati: In Pursuit of Magic (A) On the first business day of January 2006, Federico Minoli pulled up and parked his Ducati Multistrada motorcycle in front of the Ducati headquarters in Bologna, Italy. As he looked up at the complex, which housed offices, the assembly factory and the Ducati museum, he reflected back on the company’s history. 2006 would mark several anniversaries: 80 years since Ducati was established to produce electronic radio equipment; 60 years since Ducati had been producing motorcycles; and ten years since Minoli had become the company’s CEO. Minoli joined the then near bankrupt Ducati in 1996, and led its turnaround by creating the “World of Ducati,” a world that involved superior engineering, Italian heritage, slick design and an undeniable attraction for racing enthusiasts to “join the tribe” and become “Ducatisti.” See the video: Ducati’s advertising (length: 1’50”) Revenues moved from €195 million to €380 million from 1996 to 2000. EBITDA improved from a loss to €60 million in the same period. However, in the five subsequent years, business results stalled: revenues fell 2.3% on a compound annual growth rate from 2000 to 2005, and EBITDA fell to -€273,000 at the close of 2005. In late 2005, an agreement was signed by shareholder Texas Pacific Group to sell its 30% stake in Ducati to InvestIndustrial Holdings SA and a syndicate of other investors, with the understanding that Ducati would pursue a capital increase of €80 million. Minoli was certain that the new shareholders would demand certain changes to cut costs and get the company’s growth back on track. In selling the concept of the capital increase to the shareholder base, he would need to articulate a plan that would address the immediate financial concerns as well as longer-term strategic considerations. Minoli stated: “We had a very successful turnaround from 1996 to 2001. The issue with the turnaround was the question ‘what’s next?’ Unfortunately for us, the ‘next’ already happened and it wasn’t very pretty. There’s a big chunk of time, which goes from 2002 to 2005 when some bad things This case was prepared by Jordan Mitchel, research assistant, under the supervision of Professor Bruno Cassiman, as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. November 2006. Revised in February 2017. Copyright © 2006 IESE. To order copies contact IESE Publishing via www.iesep.com. Alternatively, write to [email protected] or call +34 932 536 558. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of IESE. Last edited: 2/14/17 1 DG-1507-E Ducati: In Pursuit of Magic (A) happened at Ducati. What happened in between? I’m oversimplifying the issue but we faltered on the product side. Internally, we had some issues with the product, and the product is at the core of any company like ours. There were also some external factors – the primary one being the decline of the U.S. dollar, which hit us very hard. We have to take that into account when planning for the future. Our strategy is very much affected by what we can actually do as opposed to what we’d like to do.” See the video: What to fix? (lenght: 1') The Global Motorcycle Industry The global motorcycle market included motorcycles, scooters, mopeds and three-wheelers, and was worth $48.3 billion as of 2004.1 Over the past five years, worldwide revenues of motorcycles had grown at a compound annual growth rate of 2.5%, while units had grown at 3.3% in the same period. In 2004, 28.2 million two wheel motorized vehicles were sold. High displacement motorcycles (over 400cc) made up only a fraction of the overall worldwide market with annual sales of 1.2 million units. The Ducati relevant market was estimated at 642,000 units and was defined as motorcycles in the sports, sport touring and related categories.2 One industry source predicted that the total number of two wheel motorized vehicles would grow by 4.7% year on year, reaching 35.5 million units by 2009;3 meanwhile the high displacement market and the Ducati relevant market would both grow between two and 3% over the next few years. However, there was no universally accepted method of tracking motorcycle sales, and industry players often disagreed as to the correct statistics. Exhibit 1 shows more information on the global market for motorcycles. Geographic Consumption Asia-Pacific was the leading region, accounting for 56.1% of the global market’s value. The U.S. overtook Europe as second-place region in 2004, holding 17.3% of the market – Europe had 16.4% and the rest of the world made up the remaining 10.1%. Industry observers believed that the rationale for Asia-Pacific’s high consumption of motorcycles relative to other markets was because motorcycles were often the primary source of transportation since they were cheaper to purchase and run than automobiles.4 In contrast, consumers in North America and Western Europe often opted for motorcycles as a secondary recreational vehicle. As a result, it was also more common that North Americans and Western Europeans purchased higher priced and higher powered motorcycles. In recent years, an emerging segment in “BRIC” countries (Brazil, Russia, India and China) referred to as the “new rich” were looking to consume North American and European luxury goods. For example, in China, Harley-Davidson was about to open its first retail outlet, having been absent from the country since World War II. While the company was actively promoting its motorcycles to the Chinese new rich, it was expected that it would face challenges 1 “Global Motorcycle Manufacturers,” Datamonitor, 2005, p. 9. 2 See the section “Motorcycle Categories” for a breakdown and description of the types of motorcycles in the Ducati Relevant Market. 3 “Global Motorcycle Manufacturers,” Datamonitor, 2005, p. 18. 4 Ibid., p. 8. 2 IESE Business School-University of Navarra Ducati: In Pursuit of Magic (A) DG-1507-E with government restrictions. For example, over 170 cities had limits or bans on motorcycle use for reasons of safety, congestion and pollution. BMW had entered China in April 2003. In 2005, it sold only 70 motorcycles due to motorcycle restrictions and the gap between legally and illegally imported motorcycles.5 An official from the China Motorcycle Industry Association stated: “Motorcycle riding fans are still eager to get top machines like Harley- Davidsons, but the government policy seems not motorcycle-friendly at all.”6 See Exhibit 2 for country specific information. See the video: What opportunities do you see in the BRIC countries? (lenght: 4'15") Motorcycle Categories Excluding scooters, mopeds and three-wheelers, motorcycles were often broken down into four main categories based on use: touring, cruisers, sport bikes, and off-road. Touring bikes generally had a comfortable upright seating arrangement and were designed for long distance travel. While the seating of cruisers was similar to touring bikes, cruisers often had larger engine sizes (above 750cc) and emphasized styling and chrome fittings. Sport bikes – also called performance motorcycles – were characterized by forward seating and a lighter frame for higher speeds. Off- road bikes had different tires to facilitate driving through mud and dirt and usually had an upright seating position, thick pads and heavy-duty exposed shocks. While engine configurations and regulations changed by country, engine sizes ranged in four categories from 50cc to over 1,800cc. Ducati considered its relevant market to be the Sport segment over 400cc, which was estimated to have annual volumes of 642,000 units in 2005. This was further divided into: Superbike (256,000 units); Naked (239,000 units), Dual (116,000 units) and Sport Touring (31,000 units). Riders People rode motorcycles for several reasons. A major group of riders chose a motorcycle as an affordable means of transportation and sought fuel efficiency, comfort, ease-of-use and safety. However, motorcycles often transcended their form simply as an engineered method of transit and represented concepts of coolness, freedom, rebellion and desire. Hollywood movies added glamour and pizzazz to motorcycling, ranging from Marlon Brando’s use of a Triumph in the Wild Ones in the 1950s through to Carrie-Anne Moss’s high-speed chase on a Ducati 998 Superbike in Matrix Reloaded. Motorcyclists were characterized from gruff leather-clad groups to athletic high- speed brightly colored sports aficionados. Somewhere in between fell the “weekend riders.” All groups had their corresponding networks of clubs, ranging from the 600,000-member strong H.O.G. (Harley Owners Group) to the D.O.C. (Desmo Owners Club). Many riders belonged to two or more different riding clubs with different bikes for a particular occasion or use. Rider clubs arranged frequent rallies or competitions – notably, the annual pilgrimage to Sturgis, South Dakota attracted over 525,000 motorcycle owners (many of whom were Harley Davidson riders).7 5 Ryan Nakashima, “Harley-Davidson Plans China Dealership,” http://www.cbsnews.com/stories/2006/01/19/world/main1223010.shtml Jan. 19, 2006. 6 Ibid. 7 Sturgis Motorcycle Rally, http://www.sturgismotorcyclerally.com/newsletter.html, Accessed March 13, 2006. IESE Business School-University of Navarra 3 DG-1507-E Ducati: In Pursuit of Magic (A) At the other extreme was the Dakar Rally off-road event, where over 1,400 competitors drove through dramatic desert conditions, commencing in a European city, to Dakar, Senegal.8 In addition to frequent events and competitions, hundreds of ancillary products such as clothing, magazines and music were available to support each branch of motorcycling.