Follow up on Enzo

I just came across an article that was written by Joseph White in the Wall Street Journal this week called "Yes, People buy Ferraris in a Recession".

Just wanted to take a few excerpts from it that relate nicely to my first post "Enzo Doesn't Need Supply and Demand."

...

At Ferrari SpA, North American chief Maurizio Parlato says the company is taking a "conservative approach" to the current year, and emphasizing Ferrari's value as an investment-grade product. "Our cars keep their value," he says. "You put money in the market, and you have no money."

Ferrari is launching a new model, the California, in June. A limited-edition model called the Scuderia Spider 16M is already sold out, Mr. Parlato says. Ferrari plans to build only 499 of the 510hp Scuderia convertibles. If you Google the car, you'll see it has attracted more than one million searches. Mr. Parlato says Ferrari is flying some of the cars to eager buyers.

The super-luxury car market doesn't operate by the same rules as the mass market, of course. All together, brands such as Maserati, Ferrari, Lamborghini and Bentley sell in a year what Ford Motor Co. or Toyota Motor Corp. dealers sell during one or two bad days. Mass-market brands talk about building relationships with customers. The senior executives of ultra-luxury brands know the names of many customers.

Ms. Eulberg looks at the paperwork for Maserati deals so she can get a detailed understanding of who her customers are and how they are paying for their cars. At Maserati's sales volumes, she can do that.

Worried or not, makers of ultra-expensive cars are starting to pay more attention to bread-and-butter issues, such as marketing pre-owned vehicles that need to be resold.

For Ferrari, one benefit of the downturn has been to shrink the waiting lists that Mr. Parlato and his staff once had to manage. "Now we have people who want to own a Ferrari," he says, not people who want to snag one and flip it for profit to someone behind them on the list.

Mr. Parlato says he's not too worried about the attacks on Wall Street bonuses and the troubles in the financial industry. "Our customer base is not mainly those people," he says. "Those people are quick buyers" who favor other brands that don't require a waiting list.

"Our people," Mr. Parlato says, "have serious money."

...

It seems as though Ferrari isn't too worried about the recession affecting their business, even though their sales were down 30% so far this year from what they were at this point last year.

I'm sure Mr. Parlato is putting up a strong image, and is a bit more concerned than he is letting on, but overall, Ferrari will make it through the recession in decent shape because of thier unique ability to influence price by controlling supply.  (i.e. when Parlato says "we are taking a conservative approach" he means "we are scaling back production".)

Bad News

Last summer I was fortunate enough to work at an exotic car dealership in Toronto.  I lived my dream of having access to some of the nicest cars on the planet everyday.  I was able to drive a 997 cab as a go getter, for things like picking up documents for the selling/purchasing of vehicles for the dealership.  I also had the opportunity to drive an '05 Lambo Gallardo for an emissions test at Canadian Tire of all places, but thats a story for another day.  All I can say right now is that there is no feeling in the world like sitting in a Lamborghini for the first time, firing up the engine, and engaging the six speed into gear.  I'll be sure to post this story in the near future.

Unfortunately, it doesn't look like I'll be able to return to work there this summer.  I called my boss the other day to ask about summer work and he informed me that they already have enough help. I'll be missing being able to drive those fantastic machines, but on the bright side I'll be getting more experience in marketing, which is the field I'm majoring in anyway.  You know what they say, behind every let down, there is opportunity.

Since I won't be working there, I'll just have to go visit more often to see them (the cars and the people).  

On another note, a high school friend of mine has a car blog that is updated much more regularly with some very interesting articles and a great writing style.  Check it out.

http://derekkreindler.blogspot.com/

911 cabriolet = travesty of design

One of my favourite car designs is the 911.  I've always held an affinity for Porsches in general, which probably stems from riding in my dad's old 944 back in the day.  My love for Porsches runs deep, but I have one personal vexation with the 911 cabriolet.  Undoubtedly, the 911's curvy, frog like body shape doesn't lend itself well to a drop top version.  The convertible's look has always annoyed me, especially when it the top is down.  

Don't get me wrong, the 997 cab is a fantastic car to drive, but how can a car that looks so perfect with a fixed roof, look so wrong when the roof is removed?

The rear third of the car, behind the seats where the engine is, just doesn't flow properly to the front of the car with the gap where the roof should be.  Because the roof on the coupe is so curved, which gives flow to the design, it harmoniously bridges the gap between the front third of the car (from the windsheild forward) and the rear third.  When that bridge is removed, it destroys the whole design.  Next time you see one on the street, (pictures don't quite do it justice) look at the way the body of the car from behind the seats lines up with the windsheild and tell me you don't see what I'm talking about.  The lines just don't match up.

I went home to Toronto this weekend, and decided to head up to the dealership I worked at last summer to see if they had any new cars.  Heading westbound on the 401, I slowed down for a second as I was trying to send a text while driving (oh get off your high horse, I know you've done it).  So out of the corner of my eye a grey flash goes by me on the right, and then cuts into my lane right in front of me.  I look up to see a 993 turbo coupe, the last of the air cooled 911s and one of my all time favourite Porsches.  So I'm trying to chase the guy down to honk and give him the thumbs up, but unfortunately the traffic was too heavy and it was pouring rain.  After 5 mins of weaving in and out of cars and not gaining any ground, I gave up.

I reached my exit and turned up onto the 400, on up to Steeles and then West past Weston rd. and into the dealership.  Inside there's quite a collection, but they just happened to have a beautiful dark blue 993 cabriolet, which caught my eye from across the showroom.  It wasn't a turbo, but it had the signature "whale tail" and a sweet set of rims.

Yes, I just said it, the convertible 911 looked good.

It did have the top up at the time, but I stood next to it picturing how it would look with the top down, and the flow was there.  I could see how the lines would connect even with the gap where the roof would be missing.

I still don't know exactly what gives it that flow, mabye that big wing on the back, but it just looked way more natural than any of the newer 911s.

For future designs Porsche should take a page out of their own history book, and get back that flowing look of the 993 body style.

Enzo doesn't need Supply and Demand

Having learned about economics and business models from the courses I've taken over the past 3 years, combined with a passion for the auto industry and cars in general, I've been thinking about an interesting and relatively unique business model.  Of course, if you are familiar with the company you can tell from the title of this post that I am talking about none other than the one and only Ferrari.

Any first year business student will tell you that the rules of supply and demand state that in order to reach equilibrium, or maximum efficiency, supply must be equal to demand.  Apparently the executives at Ferrari skipped that lecture.  Instead of following this proven model, they have gone off the proverbial beaten path, and used a model that directly contradicts logic...at least at first glance.

There are literally lineups of customers waiting to pay the exorbitant fee to get into a new Ferrari every year.  In order to reach equilibrium, Ferrari should clearly increase their annual production to meet this excess in demand.  If a third year university student like myself is qualified to explain this obvious flaw in their business model, why have they not done anything about it?

The answer is that this shortage of supply is not a flaw, but a rather ingenious technique used to control the market for their product.

To explain this I'll start by asking a question.

How come we get excited when we see a pristine 348 blasting past us on the street with the throttle wide open and that 3.4L V8 emitting a symphony that puts Beethoven to shame?

Is it because of the beautiful body lines?  Of course.

Is it because of the aforementioned symphony? No doubt.

More importantly; however, it is because we do not often see a beautiful prancing horse galloping down the street, but rather a rust bucket Civic with a crappy four-banger and a tin can for a muffler (see: POS).

The fact that Ferraris are relatively rare gives them an aura of exclusivity, and here-in lies key to the Ferrari business model.  By limiting production to a level that falls short of demand they are able to control two important factors; price and rarity.  These two factors work as compliments to each other, giving Ferrari unprecedented control over the market.

Without getting too far into the details behind economic theory, it basically works like this.  The first thing you learn in economics is the rule of scarcity; which states, people have unlimited wants, but limited resources to satisfy those wants.  Thus, we cannot satisfy all of our desires and must make decisions as to which ones we wish to, or are able to attain, and which we do not wish to, or cannot attain.  Building on this rule, we have the supply and demand graph, which can be manipulated to show how the price of a good, and the quantity sold of said good, will be affected by changes in supply or demand.  Using this graph, we can tell that by reducing the supply of resources (in this case Ferrari vehicles) and leaving demand (in this case the number of people who want to buy a Ferrari) as is, the price of the good, or resource (Ferrari vehicle) will go up.

Applying what we have just learned (congratulations, you have just passed first year microeconomics) to the business model that Ferrari uses, we can start to shed light on why it works.  Essentially, by producing fewer cars than they are able to sell, they have more control over the price of their product, rather than letting the natural forces of the market (fluctuations in demand due to factors that the company cannot control, such as the current recession) decide the price for them, as is the case for most products.  This is important because when you know what the selling price will be, and you know how many cars you will sell, ie. all of them (there is a lineup waiting to buy these cars, remember?  Each one is spoken for before it is made!) you therefore know exactly how much revenue you will have at the end of the year.  

All Ferrari has to do is figure out how much it costs them to make one car, multiply that by the total number they plan to make that year, add the overhead costs and bingo...they know their costs and their revenue.  Revenue - Costs = Profit.  So essentially, Ferrari is able to determine how much profit they will make at any specific price they choose.  For most companies, even a small increase in price will have a negative effect on how many units they sell, but since there is a lineup of people waiting to buy Ferraris, an increase in price (within reason) will have absolutely no effect on how many cars they will sell.  Thus, Ferrari can maximize their revenues by setting the price at the maximum cost people are willing to pay, without increasing it so much that too many customers take their names off the waiting list.  The other factor that comes into play is the fact that the fewer cars they make, they more they are able to charge for each one.  Thus, the trick is to find the best combination of production volume and price to maximize proft.

As I said earlier, by limiting supply, not only to does Ferrari control price, but also rarity.  By operating on a limited production run each year, they ensure that the market doesn't become flooded with Ferrari's (remember how we get excited when we see that 348 because they aren't very common).  This rarity is essential to protecting the status and exclusivity of the brand, which is essentially what makes a Ferrari so desirable, and thereby allows them to have such incredible control over setting the selling price.  Ferrari is not only adept at controlling the market for their new cars, but used ones also.  By running a limited production volume year after year, they ensure that the used market doesn't become too big, thus retaining the exclusivity that gives new and old Ferraris alike their high status level.

This plan virtually guarantees that the company will have stability over the long term, as long as they don't sell out for a short term gain.  Of course, if they ever wanted to, Ferrari could produce enough cars each year to meet demand.  They would make much more money if they did this; however, over time the cars would lose their aura of exclusivity, and all of a sudden Ferrari just wouldn't be in that top teir anymore, but rather competing with the likes of Porshce, which sells a much higher volume of cars.  By losing that exclusivity, Ferrari would lose a significant amount of control they have over the market and they would no longer be able to charge such obscene prices for their product.  Simply put, they would make more money in the short term but it would cost them in the long run.

So now we have seen how Ferrari controls both price and exclusivity by limiting their production.  They don't sell out in the short term, but rather play for the long term gain...always thinking about the future.  At Ferrari, the planning for the future of the business is matched only by the planning of future technologies to put in their cars, many of which are developed by their Formula 1 team.  This type of forward thinking will help Ferrari make it through this recession with a lot less trouble than most automakers are experiencing.

What's that you say...the economy is going to be even worse this year?  Not to worry, if demand goes down, just produce fewer cars.  They will be saving on variable costs (materials and labour), while keeping demand and exclusivity, their bread and butter so to speak, as high as always.  Plus, people who buy Ferraris, especially new ones, have, for the most part, enough money that the state of the economy wouldn't affect their decision to buy a Ferrari.

Never wavering from their plan, that horse can keep standing on its hind legs for the foreseeable future.  If only the same could be said for GM...