DUCATI - HEC

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 1996; EBITDA
had grown from 33 million Euros in 1997 to 60 million in 2000; Ducati’s market share had gone from 5%
in the sport bike segment in 1997 to 6.7% in 2000. 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
1.6 million motorcycles were sold around the world in 2001. 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 1998. 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 46, 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 2000. 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.
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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
60% 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 600 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).
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Harley-Davidson – Harley was the major US manufacturer and dominated the US heavyweight (> 650
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 1999. Since going public in
1986, 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 1999. 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 $6,000 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 1984. 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 1936 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 1996, 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
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- 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 1996, 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 1996, 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 76 bikes per workers in 1996 to 87 in
2000. 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 165 to 65 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 2000. This helped to reduce the time to market for new product launches. Ducati’s latest models
were developed in 15 months versus 36 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 26 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.
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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 996 and the 748, each produced
in three different versions. The 996S 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 1998.
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 1996 (with prices ranging from
$6,000 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
1997.
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 6% for Ducati).
Exhibit 2 – The world market for motorcycles: New registrations 1996-2000
1996 1997 1998 1999 2000
New registrations 935,000 1,111,000 1,261,000 1,463,000 1,566,000
Ducati’s core
Market (as a % of the total
market)
29.7% 30.3% 32% 32.7% 33.2%
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
1996 1997 1998 1999 2000 1996 1997 1998 1999 2000
3.9 5.1 6.2 6 6.7
4.3 5.2 6.5 6.4 7
23.3 24.7 23.5 21.4 21.5
23.8 25.8 24.2 21.5 22.7
16.3 15 15.7 15.8 13.4
15 15 15.3 15.8 12.3
23.8 24.4 22.1 22.1 23.8
24.5 24.1 21.3 21.9 23.5
18.5 17 19 21.2 20.6
21.3 18.7 18.4 21.8 22
5.1 4.8 4.7 4.6 3.5
5.8 5.4 4.8 4.8 3.6
5.8 4.8 3.8 3.3 3.3
1.5 1.2 1.2 1 1
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Exhibit 4 – A map of the market
Knee down
riders
Fast riders
Performance
Urban riders
Function
Weekend
cruisers
Easy riders
Lifecycle
Highway
lovers
Exhibit 5 – Presence in different segments
Ducati
BMW
Harley D.
Honda
Kawasaki
Suzuki
Yamaha
Exhibit 6 – Customer profile
Sex
Age range
Comfort
Off road Cruiser Touring SPORT
Hyper sport Super sport Sport touring Naked
Ducati hyper Ducati super Ducati sport
sport
sport
touring
98% male 99% male 98% male
62%: 18-35 64%: 18-35 73%: 31-43
Ducati naked Harley
Davidson
96% male 91% male
66%: 18-35 45.6 (median)
Exhibit 7 – Ducati price premium vs. comparable products (average % premium per family)
1997
2001
Hyper sport Super sport Sport touring Naked
31.2%
31.4%
8.03%
7.2%
29.97%
20.4%
13.27%
13.03%
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Exhibit 8 – Cost structure (% total revenues)
Motorcycle materials a
Related products
Direct personnel b
Indirect personnel
Total
R&D c
Variable sales costs d
Fixed sales costs e
Administration
Ducati 2000 Ducati 1996 Harley-Davidson
43.4
6.9
5
3.7
59
1.1
5.9
14.5
4.7
55.8
2.2
6
4.2
68.2
0.1
5.1
10.4
5.3
Total
26.2
20.9
a
Includes parts, accessories and apparel (16.6% 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
D&A
EBIT
Net income
Market share
45
8
6.4
4.5
65.9
1997 1998 1999 2000 2001
(estimates)
195.63 240
294.5 379.5 422.1
74.57 91.71 118
150.5 165.9
0.53 1.18
4.1
4.9
7
41.7 52.4
71.3
95.4
103
33.4 46.49 50.8
60.03 69.9
16.7
16.37
2.7
5.1
19.17
27.32
(1.24)
6.2
24.4
26.4
8.9
6
29.6
30.4
10.5
6.7
2
6
5
3
16
32.8
37
13.4
7
7