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Ducati's New Financial Cycle
by Owen Edwards
January 2008 Issue

It was always the Ferrari of sport bikes, a sexy beast whose muscle and sticker price made onlookers? jaws drop. But after nearly a decade of American mismanagement, the Italian specialty shop still has some catching up to do.

One Sunday last September, on a tricky, rain-slicked racetrack in Japan, a 22-year-old Australian motorcycle racer named Casey Stoner clinched the MotoGP World Championship for Ducati. Stoner?s triumph marked the first grand prix win for a non-Japanese manufacturer in more than 30 years; that Ducati won on the home track of Honda, the world?s top-selling motorcycle brand, made the victory even sweeter for the Italian boutique firm.

In the winners? group photo, Stoner poses beside his bike, No. 27?a number someone had modified with two small white zeroes to read 2007. It was a subtle but highly symbolic customizing job. ?The last few years have been a tough time,? Claudio Domenicali, director of Ducati?s product and racing departments, had said the previous January. ?Our year will be 2007.? He turned out to be right: Ducati rolled out several motorcycles in 2007 that had buyers raving for the first time in years. It replaced its unloved 999 Superbike with the sleek 1098 and introduced two popular models: the Hypermotard and a new version of its venerable Monster. In a final flexing of its stylistic and marketing muscle, the brand began production in November on the Desmosedici, a 16-valve, V-4 version of its grand prix racer, limited to a run of 1,500 bikes. Even with an eye-popping $72,500 sticker price, there?s no shortage of buyers.

This anno spettacoloso marked a reversal of misfortune for a company that aficionados once revered as the builder of the world?s most beautiful bikes. At its height, Ducati represented a blend of panache and performance. In 1998, its kinetic two-wheeled sculptures took pride of place in "The Art of the Motorcycle" exhibition at the Guggenheim Museum in New York. The show broke museum attendance records, even as the Bologna-based manufacturer was losing its top-tier status as the creator of dream machines that everyone wanted but few could afford. Increasingly stylish and technologically advanced bikes from Italy, Japan, and Germany were chipping away at Ducati?s sales and celebrated reputation, and management miscues were sending the company into a long, slow skid.

This wasn?t the first time the firm had run into trouble. One of Italy?s largest motorcycle makers, Cagiva, bought Ducati in 1985 and is said to have siphoned off its resources and profits to shore up Cagiva?s weaker brands, until, a decade later, the factory was producing only about 30 Ducatis a day. Spare parts were scarce, and employees? salaries went unpaid for months at a stretch.

In September 1996, the U.S.-based private equity firm Texas Pacific Group, partnering with an Italian unit of Deutsche Bank, bought 51 percent of Ducati for a price reported to be ­between $285 million and $325 million. T.P.G. has owned companies as diverse as Burger King, Bally, and Neiman Marcus, and although Ducati didn?t fit the profile of other brands in T.P.G.?s portfolio, investors viewed it as a prestigious property that could easily be turned around. But T.P.G. soon discovered it was in over its head.
Customers who buy sport motorcycles care about peak performance, but an equally crucial selling point is a visual appeal that provokes envy. Ducati holds just 4 percent of the U.S. motorcycle market, selling fewer than 11,000 bikes in the States annually. But its upper-echelon, design-obsessed customers wouldn?t dream of being seen on a mass-produced machine, even though Honda, which makes 300 times as many bikes as Ducati, gives plenty of bang for fewer bucks. One Ducati stronghold?despite its flat, curveless, traffic-choked grid?is Miami, where looks mean everything. ?Our bikes are the weapon of choice at the local Starbucks,? says Michael Lock, C.E.O. of Ducati North America.

Ducati?s uniquely Italian sensibility is an enormous asset?and liability. The company was founded in 1926, and the facade of the factory, on Bologna?s Via Cavalieri Ducati, still has its original Art Deco lettering. The geometric regularity of the building?s prewar architecture is echoed in the regimental row of employees? motorcycles parked outside. At first glance, the factory looks like a relic, but inside, it?s a sleek, high-tech facility. With fewer than 1,500 employees, the place exudes efficiency, despite a decidedly unrobotic assembly line.

Like Ferrari, Ducati has kept its growth in check in order to focus on high-end performance and cutting-edge design. While BMW makes cars, Honda makes lawn mowers, and Yamaha makes pianos, Ducati sticks almost exclusively to producing hand-built, premium-priced thoroughbred bikes in microbrew quantities. ?We produce 40,000 motorcycles a year,? says Lock, a youthful exec who works out of a sunny, comfortably cluttered office in Cupertino, California. ?Honda makes millions.?

Of course, a bike?s image depends on technology to back it up. ?Engineers in Italy have the kind of status that doctors and lawyers do in other countries,? says Pierre Terblanche, a Ducati ­designer. In 1993, Miguel Galluzzi designed Ducati?s top seller, il Mostro??the Monster??reputedly built with spare parts Galluzzi had collected from around the factory. Its ?naked? design sparked an industrywide revival of exposed engines, frames, and suspensions. A year after the launch of the Monster, star ­designer Massimo Tamburini won buyers? hearts and wallets with his 916, a bike that dominated the World Superbike race class and, in 1998, earned a prominent perch at the Guggenheim.

Mass-produced models with blistering performance stats are easily affordable. (Kawasaki?s ZX10, which can hit 90 miles per hour in first gear, costs $11,000.) Artisanal production and premium pricing?Ducati?s extravagant new Desmosedici costs nearly seven times as much as the ZX10?work best when the economy is hot, but in the latter half of the 1990s, even as Ducati was attracting such customers as Ralph Lauren and real estate billionaire Sam Zell (who was denied a bid for a 50 percent stake in 1996), the company was trying to ride out a financial slump. T.P.G.?s purchase strengthened Ducati briefly by increasing production, paying bills, and bringing salaries up to date. But the investment firm?s lack of emphasis on Ducati?s exclusivity threatened to prove fatal.

With their majority share of Ducati, the Americans had bragging rights. In hindsight, it?s clear why Cagiva was eager to dump Ducati on T.P.G. In the U.S., Cagiva was an insignificant player with an unknown reputation, and principals Gianfranco and Claudio Castiglioni ?were horrible businessmen,? according to motorcycle historian Charles Falco, a curator of the Guggenheim show. ?They could get components shipped in only if they paid up front in cash. The only way they could regain solvency was to sell Ducati, since no one in the States really knew what Cagiva was.?

Don Brown, a prominent motorcycle-industry analyst, advised T.P.G. during the acquisition. ?The top people at Texas Pacific just thought Ducatis were beautiful and figured that, with good management, any problems could be solved,? he says. (T.P.G. and Cagiva declined to comment for this story.)

Mistakes were made. In 1997, T.P.G. brought in a new C.E.O., the Italian-born Federico Minoli, from the consulting firm Bain & Co. It was a baffling choice. ?Minoli is a very personable guy,? Brown says, ?but he was the wrong man for that job. He knew nothing about the motorcycle industry.?

He knew America, though. A former Procter & Gamble exec, Minoli spoke fluent English and was enthusiastic about marketing Ducati more aggressively. ?The first thing to do is crank out as many [Ducatis] as you can,? he said in 1999. ?I don?t believe in scarcity.? To emulate Harley-Davidson?s model of brand extension, Minoli shifted into overdrive to establish ?a Ducati way of life.? He opened a Manhattan flagship store and pushed for expensive upgrades for Ducati dealerships. Events like World Ducati Week and Ducati Revs America drew thousands of fans to Italy and Las Vegas. A limited-­edition Ducati with a matte-silver finish appeared in the 1998 Neiman Marcus Christmas catalog, and a Ducati even made a flashy cameo in the 1999 film The Matrix.

But Minoli?s strategy was a woeful mismatch with Ducati?s rarefied customer base, whose members didn?t appreciate laying out that kind of cash just to share the road with faux connoisseurs. ?T.P.G. saw a brand that could be marketed to sell significant amounts of fashion apparel and expensive riding gear?like Harley does, but without the rhinestones,? Falco says. ?However, to do that required them to continue selling desirable motorcycles. And that?s where things went wrong.?

T.P.G.?s biggest blunder was in design. It had failed to secure the services of two of Ducati?s leading designers, Tamburini and Galluzzi, in the deal. Had it been buying, say, the New York Yankees, surely T.P.G. wouldn?t have overlooked Alex Rodriguez and Derek Jeter, but it underestimated the absolute importance of retaining Ducati?s stars. The defections cost Ducati its hallmark sex appeal. Despite the short-lived improvements in manufacturing and financial discipline, the loss of those designers made T.P.G.?s high-profile purchase begin to look like high-priced folly.

Partnering with the Italian unit of Deutsche Bank, T.P.G. bought the remaining 49 percent of Ducati in 1998 for a reported $174 million, bringing the total price to between $400 million and $500 million. A year later, T.P.G. took the company public and unloaded 65 percent of its stock to raise about $285 million. Minoli relocated Ducati North America from New Jersey to Northern California, 3,000 miles farther from Bologna?diluting its influence and puzzling industry analysts.

Not only did Ducati no longer have Tamburini or Galluzzi to create a new signature model, but its competitors were catching up in matters of style and engineering. In response, Ducati charged designer Terblanche with replacing the classic, though aging, 916. Terblanche?s marching orders, says Lock, were to build a machine without referencing its predecessor. Terblanche came up with the lean, minimalist 999, a radical departure from anything on the market. It was more powerful than the 916, with quicker handling and better ergonomics, but fans didn?t demonstrate their customary affection. ?Design really is a fickle beast that isn?t tamed by mere business plans,? says Falco. ?It?s not a matter of cutting pennies here and there in manufacturing and shipping, but of appealing in some elusive way to the whims of the customer.?

One successful legacy of the T.P.G. era is a line of bikes harking back to popular racing models from the 1980s. ?I really like the retro bikes,? Terblanche says, ?although the term retro is a misnomer. They?re just really good motorcycles that some customers prefer to the leading-edge machines.?

But Terblanche is well aware of Ducati?s dilemma. Sitting in his disheveled home studio in Bologna, he says, ?In market surveys, the design component is always the No. 1 concern.? Buyers? tepid reaction to the 999 was a huge disappointment for T.P.G. Worse, a rule change in U.S. superbike racing put Ducati at a competitive disadvantage, making the 999 a loser both on the track and at dealerships. ?The sales curve began to level off,? Lock says. ?The 999 was the public face of Ducati?s problems, but they were bigger and deeper than that.?

For T.P.G., ?turning the company around was a lot harder than they?d thought,? Brown says, ?and they had to borrow more than they?d planned.? T.P.G. also had to sell a lot of stock. The crowning insult was Cagiva?s launch of Tamburini?s MV Agusta, a superbike that instantly became a must-have.

Running Ducati wasn?t like running Neiman Marcus. T.P.G.?s fading interest in its new toy was becoming obvious to customers, and the cultural divide was stark. ?The Italians manage from confidence,? Lock says. ?When things are going well, they?re unstoppable. And when things are going badly, they?re also unstoppable.?

After several years of slowing momentum, Ducati made a sharp turn in 2005 back into Italian hands. T.P.G. sold just under 30 percent of the company?most of its remaining shares?for about $50 million, to Investindustrial Holdings, a Milan-based private equity group run by Carlo Bonomi, a popular voice-over actor, and his brother Andrea, a renowned soccer player. (­Investindustrial declined to comment for this story.) The remaining 5 percent went to smaller investors. Minoli, who remained Ducati?s chairman, managed the sale. The Bonomis installed a new C.E.O., Gabriele Del Torchio, formerly with the Ferretti Group, a builder of luxury yachts and sport boats. In 2007, the 1098 superbike delighted critics and got high-end consumers? pulses racing again. ?Our credentials were in some doubt,? Lock says, but the 1098 represented a return to form: Its sales are running five times as high as those of the 999.

Ducati?s problem is now, once again, one it can live with: too much demand. Lock says U.S. sales are up from 4,600 bikes in 2003 to more than 10,000 in 2007. Even with its enormous price, the limited-edition Desmosedici has generated more orders in the U.S. than has the Multistrada, one of the least expensive Ducatis.

Ducati increased its revenue in the first nine months of 2007 to $464 million, 44 percent higher than in the same period in 2006; operating profits soared more than 200 percent, to nearly $40 million.

Of course, a fortuitous 2007 doesn?t guarantee a rosy future. More and more of the company?s customers are first-time Ducati buyers, not obsessives. And the strategy of selling handmade Italian craftsmanship clashes with the ambitions of large dealers who are less interested in promoting a boutique brand than moving significant quantities of motorcycles out of the showroom.

By the end of 2008, 1,500 Desmosedicis will roll off the line; the entire run is expected to sell out within two months. A prince from Dubai is first on the list.


1,002 Posts
That's not the "actual" 72.5k bike right?
the one on the assembly line is the real thing. read it over at ducati.ms that AMS in the DFW area has 30 customers with deposit down on the D16. Now how cool it would be to have such a beast at the track, not that i would really know how to use it to its full potential :hammer: .

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Good read.
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