Ferrari IPO Makes China Crucial for Courting Growth-Obsessed Wall Street

Ferrari's F12berlinetta. (Courtesy Photo)

Ferrari’s F12berlinetta. (Courtesy Photo)

While most ultra-luxury auto brands rely heavily on China for a large portion of their overall global sales, Ferrari has been seeing handsome profits despite a comparatively limited number of China deliveries. Now that the company is gearing up for its IPO, China is likely to become a bigger part of the equation to impress investors intent on seeing quick growth.

Last Thursday, the Italian luxury sports car maker filed a prospectus with U.S. regulators for an IPO on the U.S. stock exchange after its parent company Fiat Chrysler announced plans to do so last October. Around 10 percent of the company will be sold in the IPO, with Fiat Chrysler predicting a valuation of at least €10 billion. Planned for the fourth quarter of this year, the IPO will be followed by a sale of Chrysler’s remaining stake in Ferrari on the first business day of the next year.

As an ultra-luxury car maker, the company’s sale of a very limited number of models each year may contrast with Wall Street’s obsession with rapid growth. The brand currently makes around 7,000 units per year, and only plans to increase to 9,000 units by 2019 to preserve exclusivity. Its healthy profit margin of €265 million in 2014 on revenue of €2.76 shows that this has been a successful strategy as a non-publicly listed company.

But experts are saying Wall Street will want more, and that’s where China comes in. According to a recent Bloomberg article, one of the four things the company needs to do to impress investors is perform well in emerging markets, which are a key source of growth outside saturated developed countries. China, of course, is the most important of these emerging markets for all luxury automakers, taking up 27 percent of the world’s ultra-luxury auto sales.

But Ferrari still lags behind its competitors in the race to reach China’s rich. Last year, the company shipped only 9 percent of its cars to China, while Fiat’s other Italian luxury marque Maserati sees more business in China than in Europe. This is true for other luxury auto brands as well, such as Rolls-Royce.

As the company gears up for its IPO, it faces several obstacles in the China luxury auto market. Many ultra-luxury brands have taken a hit from China’s anti-corruption campaign, which has caused the government to introduce several new measures restricting officials’ use of luxury cars and caused a fear of driving around a flashy vehicle that would attract speculation. A Ferrari was directly involved in the downfall of Ling Jihua, a former top aide to Hu Jintao, who was arrested on corruption charges this month. The corruption investigation was opened three years ago when his son was killed in a Ferrari crash in which two other female passengers were injured. China has seen multiple high-profile instances of Ferrari crashes in recent due to the car’s popularity for illegal street-racing, which has contributed to an association on Chinese social media with the country’s spoiled fuerdai.

In addition, China’s stock market woes have caused a new dent in the country’s luxury auto market as investors lose massive fortunes, with even brands in the more stable midrange luxury segment like Audi and BMW seeing China sales drops in June. Fiat recently attributed Maserati’s first-quarter profit drop of 39 percent to China’s slowdown.

Ferrari has been no stranger to slower China growth, which it says is part of its global strategy to limit production while keeping prices high. For the first half of the 2014 fiscal year, Ferrari saw a year-on-year reduction in deliveries to Greater China, delivering only 285 cars compared to 344 in the first half of the previous year. While the company saw 784 deliveries to Greater China in 2012, the year the anti-corruption campaign began, the number dropped to 700 for 2013.

For Ferrari to see China growth that will please investors while sticking to its focus on exclusivity, it will need to make China’s rich fall in love with its super-high-end bespoke and special-edition models. As China’s wealthy become more focused on individuality, their willingness to pay a premium for a limited-edition car or expensive bespoke additions such as special colors or cashmere armrests could allow the company to maintain its high-end status while bringing in the revenue its investors demand.

 

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