DUCATI. The market for motorcycles in Products

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1 DUCATI By the end of 2000, Ducati had transformed from a company on the verge of bankruptcy into one of the most profitable motorcycle manufacturers in the world. Revenues had quadrupled since 199; EBITDA had grown from 33 million Euros in 1997 to 0 million in 2000; Ducati s market share had gone from 5% in the sport bike segment in 1997 to.7% in Analysts generally considered that a goal of 10% market shares within the next few years was reachable. Within the company, however, a question kept coming back: What should the company do next? Was doing nothing an alternative for Ducati? If not, should they attack Harley Davidson s niche? The market for motorcycles in 2001 Products 1. million motorcycles were sold around the world in The market was divided into four segments: off-road, cruisers, touring and sport bikes. Off-road were designed for both on-road and off-road use and were characterized by a specific ergonomics to accommodate this dual use. The largest players within the off-road segment were the Japanese manufacturers. Cruisers were big motorcycles with an upright riding position. Their design emphasized styling over comfort and speed, and was preferred by many American riders. Harley-Davidson dominated this segment, while Japanese companies such as Honda, Yamaha, Suzuki, and Kawasaki imitated the traditional Harley style. In 1997, BMW introduced its own interpretation of a cruiser, which enjoyed a stunning commercial success. Touring bikes were larger motorcycles equipped for longer rides and greater comfort. BMW, Harley-Davidson and Honda controlled this segment. Sport bikes had lighter frames, a more forward seated position, and emphasized speed, acceleration, and minimal comfort. This niche could be further disaggregated into four subsegments: hyper sport (extreme performance, close to real racing machines), super sport (high performance, good handling and low weight), naked (good performance and urban riding) and sport touring (speed and handling, married with comfort for longer rides). Japanese companies dominated this niche, while European firms such as Ducati, BMW, and Triumph also vied for market share. Harley- Davidson entered the sport bike market by acquiring Buell Motorcycles in This segment was Ducati s reference market. Customers A wide variety of inviduals, with very different tastes (and also differed by age, income, education, gender), bought motorcycles, from racing fans to week-end riders (who associated motorcycles with a certain life style). A large portion of undecided bikers preferred more balanced and versatile bikes. The median age for a Harley-Davidson customer in 2000 was 4, while most Ducati buyers, ranged between 25 and 35 years old (and was constantly decreasing over the years, while it was increasing for Harley). Women had become an attractive new customer base for motorcycle manufacturers, and were particularly important to some manufacturers like Harley and Ducati. Harley s proportion of female buyers had increased from 2% in 1987 to 9% in Ducati claimed that women were attracted by the low seat height and weight of its motorcycles and accounted for 8% of sales of its most popular bikes, the Monster. 1

2 Advertising happened essentially through specialized press. Motorcycle firms also gained media coverage by participating in racing events. In addition, movies brought cachet to motorcycles (especially Hollywood movies such as Easy Rider with Jack Nicholson and Peter Fonda). Technology and R&D Since its introduction at the end of the 19 th century, motorcycles comfort, performance, reliability and ease of maintenance had improved vastly. In the more recent periods, both engine innovations and improvements in pain, chrome and exhaust pipe shaping were introduced by manufacturers to appeal customers. Starting in the 1970s, the most important trend had been the progressive introduction of electronic components. More recently, advances in materials science led companies to introduce composites, titanium and magnesium to make their bikes lighter and more reliable. In-house R&D expenditures ranged between 2% and 5% of sales. Since the early 80s, companies such as Honda, Kawasaki, Yamaha and Ducati had also used racing competitions to develop technical solutions and test materials, and eventually transferred effective solutions to their production series. The racing circuit encompassed many competitions, the most important being the Grand Prix (125cc, 250cc and 500cc categories) and the Superbike Championship (with bikes ranging from 750cc to 1000cc). Manufacturing Most motorcycle companies invested heavily to automate production lines and worked with parts suppliers to improve quality and delivery. Only a few firms such as Triumph in 2000 outsourced around 0% of its production. Many outsourced a considerable portion of their inputs, and therefore had very flexible production structures. Outsourcing minimized fixed asset investment, but the quest for quality, reduced costs and responsiveness to market fluctuations forced final assemblers to create strong commitment at the level of suppliers (Harley-Davidson was one of the leaders of this). The production had thus essentially become an assembly line where motorcycle components were assembled. Distribution All companies had some presence in the three major markets: United States, Europe and Japan. Their typical distribution systems comprised two types of agents: wholesale distributors and retailers. Depending on the strategic importance of the area, they used independent, partly, or totally owned wholesale distributors (subsidiaries). The size of the network, and therefore the degree of penetration into the market, were largely a function of the company s strategy. Large Japanese mass-producers such as Honda and Yamaha, tended to maximize penetration, while companies such as Harley, BMW or Ducati emphasized the quality of the dealer and, where possible, used single-franchise agreements. This allowed them to control prices and brand positioning by allowing direct communication with customers. The most extreme case was Harley- Davidson, which had single-franchise agreements with the majority of its dealers (about 00 dealers in the US) and was really working on developing dealership loyalty. Competitors Over the 20 th century, the number of motorcycle manufacturers had decrease dramatically. In 2001, there was one major American manufacturer, four Japanese manufacturers and a handful of European firms (see Exhibit). 2

3 Harley-Davidson Harley was the major US manufacturer and dominated the US heavyweight (> 50 cc) market. In 2000, it achieved its fifteenth consecutive year of record revenues and net income, increasing the former by 18.5% to $2.2 billion and the latter by 30% from Since going public in 198, its stockholders had realized a compound annual growth rate of over 40%, and Harley Davidson was the most profitable motorcycle manufacturer in the world. It produced 205,000 motorcycles, a 15% increase over 1999 (in addition, Buell sold 10,200 motorcycles a year). Its parts and accessories businesses made strong gains in 2000, with increases in revenues of 24% and 14% respectively over Relative to other manufacturers, Harley had a smaller global presence and kept a strong focus on the US market. Its presence in Europe was, however, increasing. Harley was considered as the typical example of a lifestyle company. In the US, particularly, it was a social and cultural phenomenon embodying values such as freedom and rebelliousness, and representing the history of motorcycle. The Harley brand was the strongest in the country. Harley sold 23 models, with prices ranging between $,000 to $20,000 (with an average price of $14,000). Honda - With 5.4 million bikes produced (including scooters and small bikes), Honda was the world largest manufacturer of motorcycles. The company shared technology, engineering capabilities, marketing, distribution and know-how with its automobile division. It competed in all segments of the industry, and had a strong reputation for reliability and technical excellence. With its capabilities in fourstroke technology, Honda also led the industry in producing motorcycles and scooters utilizing low emission, fuel-efficient engines. Honda entered the US market in 1959, and had prices ranging from $5,000 to $19,000 (with an average price of $9,300). BMW One of the top European automakers, BMW had been in the motorcycle business since It was the strongest European competitor in the US market, where it was growing. Its bikes had introduced several technical innovations such as advanced suspension systems, fuel injection, and anti-lock brakes, giving the brand a reputation for exceptional quality, reliability and comfort. The US average price of BMW motorcycles was $14,500, ranging from $8,000 to $20,000. Other Japanese manufacturers In 2001, the other three Japanese manufacturers held a market share of 57% of Ducati key market. Yamaha, Suzuki and Kawasaki entered the US motorcycle market in the 1970s by selling small motorcycles. They then moved to the heavyweight segment. In Europe, Suzuki had a larger market share than Honda. In Asia, Kawasaki trailed only Harley and Honda. These companies competed on technological innovation and price. Ducati Ducati was founded in 193 and its first bike, il Cucciolo became a blockbuster after the second world war. Followed several highly sophisticated and powerful models, all based on innovative engine systems. Thanks to this technical superiority, Ducati motorcycles rapidly achieved success in international racing, which fueled the company s growth among sport-oriented customers and built a strong reputation for high performance. In spite of this, Ducati declined in the 1980s, was sold to Cagiva, regained momentum for a while, but faced important financing problems in the 1990s. In 199, the company was one step from going bankrupt and was acquired by a private equity firm. The main partner had a passion for high-end businesses and was driven by the firm belief that Ducati had an enormous unexploited potential. To realize this potential, he hired a high profile new management team. The new management found three things at Ducati when it arrived: - good products: unique and beautiful bikes, even though regarded as less efficient and reliable than the Japanese - top-notch engineers: both in R&D and for the racing division 3

4 - a brand with a strong potential. In most European markets, Ducati s brand recognition was the highest in the motorcycle industry. With these aspects in mind, the new team worked at Ducati s turnaround. The first thing that the new team designed was an ambitious plan, called the World of Ducati, to support and develop the brand. This started with the decision to build a museum, in order to show that Ducati was more than a motorcycle company: a dream and a passion. Investments in the racing team were also implemented. This generated an important change: in 199, the racing division spent approximately 3.9 million Euros with almost no revenue; in 2000, it spent around 10 million Euros, but revenues increased to 7.9 million Euros. The racing team was also a sophisticated R&D laboratory, where new features were continuously created and tested, and then introduced (for some of them) in series road bikes. Ducati also organized many events which were great public successes, attracting thousands of motorcycles lovers. Other aspects of Ducati s turnaround strategy included the organization of production, and more precisely the role of outsourcing. In 199, about 80% of Ducati s production activities were outsourced. In 2001, that number had climbed up to 90%, a number which was significantly higher than other motorcycle producers. This allowed Ducati to increase its productivity from 7 bikes per workers in 199 to 87 in The majority of Ducati s suppliers were concentrated in a district in Italy (known as the Engine Technology District ), in which about over 2,000 small and medium companies had created clusters and served many other companies including Ferrari, Maserati, etc.). This allowed for joint activities in R&D, purchasing, suppliers quality control, etc. Regarding distribution, Ducati originally distributed its motorcycles through multi-franchise and independent dealers. The decision was made in 1997 to take more control of the distribution, especially in strategic markets. Subsidiaries were established in France, Germany, Japan, the UK and Holland, and a chain of mono-franchise dealers was created. Distinctive characteristics of Ducati were displayed in these dealer stores. Investments were also made to increase the average quality of the dealers (competent sales force, good technical assistance, etc.) everywhere in the world. This came with a decrease in the number of dealers (for instance, from 15 to 5 in Italy). Annual registrations per dealers therefore increased significantly (from 14 to 150 per dealers). Finally, the company also invested heavily in R&D, especially in new design technologies, product development and human capital. R&D investments went from 3.2 million Euros in 1997 to 12.9 million Euros in This helped to reduce the time to market for new product launches. Ducati s latest models were developed in 15 months versus 3 months in earlier periods. In 2001, Ducati s team of engineers was reputed as one of the most expert and skilled in the industry. The R&D department operated in close collaboration with the racing division but also the marketing department. The turnaround strategy didn t involve major changes in the firm s pricing strategy (see Exhibit). The current situation Now that the company s turnover seemed practically over, Ducati s executives were considering other alternatives for growth. The one that was receiving the most attention was entering Harley s niche: the cruiser market. With about 400,000 units sold in 2000, this was a very large segment in the industry. To develop a cruiser model, however, Ducati would need to make additional investments (evaluated to 17 million Euros) and would incur additional costs (evaluated to 2 million Euros). Using Ducati s L-twin engine, Ducati had in mind a line of vehicles that could directly attack Harley s line, and which would be priced between $10,000 and $20,000. 4

5 Exhibit 1 Ducati s products EXHIBITS Ducati products were present in several market segments: Hyper Sport, Super Sport, Naked, Sport Touring. In addition, Ducati was selling spare parts, accessories and apparel. Hyper Sport: The company offered two basic models there in 2001: the 99 and the 748, each produced in three different versions. The 99S was Ducati s flagship motorcycle and sold for $21,895 and contributed for 43% to the total revenues generated by motorcycles. Super Sport: The first Ducati Super Sport bike was launched in 1973 and remained for a long time Ducati s most popular product. A new version, with a very futuristic design, was launched in Naked: Ducati s naked motorcycle was called The Monster. It quickly became a very popular bike and the number of models in this family had been continually increasing since 199 (with prices ranging from $,000 to $13,000). Sport Touring: These motorcycles offered a more comfortable riding position than most other Ducatis. Different from other Ducati s products, the number of Sport Touring models had not increased since Sparte parts, accessories and apparel: All of this production was outsourced to two Italian companies. Many more spare parts were made available and distribution was improved, resulting in a considerable increase in the contribution of these spare parts to total revenues. Accessories and apparel businesses had become particularly important. In 2001, only Harley Davidson had a higher incidence on revenues (12% of revenues for HD, against % for Ducati). Exhibit 2 The world market for motorcycles: New registrations New registrations 935,000 1,111,000 1,21,000 1,43,000 1,5,000 Ducati s core 29.7% 30.3% 32% 32.7% 33.2% Market (as a % of the total market) Touring market (as a % of total market) 33% 33.9% 33.8% 33.8% 32.7% Exhibit 3 Market shares of competitors in Ducati s core market (the sport niche) Ducati Honda Kawa Suzuki Yamaha BMW Harley World Europe

6 Exhibit 4 A map of the market Knee down riders Performance Fast riders Urban riders Function Weekend cruisers Easy riders Lifecycle Highway lovers Comfort Exhibit 5 Presence in different segments Ducati BMW Harley D. Honda Kawasaki Suzuki Yamaha Off road Cruiser Touring SPORT Hyper sport Super sport Sport touring Naked Exhibit Customer profile Sex Age range Ducati hyper sport 98% male 2%: Ducati super sport 99% male 4%: Ducati sport touring 98% male 73%: Ducati naked 9% male %: Harley Davidson 91% male 45. (median) Exhibit 7 Ducati price premium vs. comparable products (average % premium per family) Hyper sport Super sport Sport touring Naked 31.2% 8.03% 29.97% 13.27% 31.4% 7.2% 20.4% 13.03%

7 Exhibit 8 Cost structure (% total revenues) Motorcycle materials a Related products Direct personnel b Indirect personnel Ducati 2000 Ducati 199 Harley-Davidson Total R&D c Variable sales costs d Fixed sales costs e Administration Total 2.2 a Includes parts, accessories and apparel (1.% of total revenues in 2000) b Inbound logistics, quality management and operations c Part of Ducati s R&D costs are capitalized (2.7% revenues) d Distribution, dealer bonus and warranties costs e Sales, marketing and after sales department costs, advertising, events, racing costs, subsidiaries costs Exhibit 9 Ducati: Selected financials Total revenues Gross profit Other operating income SG&A EBITDA (estimates) D&A EBIT Net income (1.24) Market share