About this report
This report was written in August 2018 as a paper for a Strategy course during an MBA at the Bologna Business School. It got great reviews from colleagues, professors, and industry leaders. It is clean from outside funding or relation to one company or another. Special thanks to Professor Roberto Nogueira for sharing his insights with me.
Prologue: Supercars Business Arena and Me
Supercars take a very small niche market compared to the mass vehicle market. In 2018 around 30,000 new supercars were sold worldwide by all companies together, while 93.6 million new cars were sold on the mass market. And yet, these are highly profitable companies, with strong brands and huge influential power over the industry and customers.
Nicola Boari, Ferrari Product Director
“It is a privilege to purchase and own this product.”
As one who comes from a startup culture, where everything is at a price war, even if you have the most wonderful product, I have always been intrigued by this luxury culture. Why would someone pay so much money for something that would take them from A to B, even if it is eye-catching and beautiful? How amazed I was to see the Ferrari marketing director so brave to confidently claim that “it is more than a sale; It is a gift to our best clients”, when he refers to the opportunity to purchase their newest model (note that since then I met with Mr. Boari and I learned a lot from him).
My industries for the past 20 years were gaming, emergent technologies, autonomous machines, and innovation. But studying the luxurious supercars industry for the past few months revealed a whole new world for me, and I take this chance to summarize what I have learned about it.
“ Supercars are not just vehicles, they are art and history. Its business is not just about sales.
Luxury customers think differently from mass-market customers, and are driven by different purchasing forces & motivations. Often customers are collectors and return to buy a second and a third time. Supercars are art, history, culture, technology, effort, and accuracy, carved into a flawlessly-designed machine.
Ralph Lauren
“ Each car I have has a story. I don’t see myself selling them.“
Ralph Lauren, a fashion designer and the owner of a 350 million dollar car collection, says that he can’t see himself selling any of them, since each means something to him. That’s why the main competition comes not specifically from other luxury car manufacturers, but from other luxury brands of fashion and art. Customers aren’t necessarily buying them to drive.
Research question
So what are the forces that will shape the supercar industry in the next decade? How is this market influenced by the changes in the overall car industry? What are the challenges and opportunities this market faces? Will supercars still be here 20 years from now?
The Ecosystem of Supercars vs Personal Car
The personal car industry and the supercars are two very different businesses in almost any area: design, R&D, marketing, branding, sales, distribution, and business strategy. Since the supercar industry is a niche industry of the car industry, I had to learn both ecosystems.
Deloitte’s research team has concluded that the electric revolution is coming for car engines, and also marked the technological advancements of AI and autonomous vehicles as an uncertainty of the industry. As a person who had the chance to work quite a bit on the future of autonomous vehicles (Intel Israel Strategic Think Tank, Patent about ride-sharing, and prototypes), I feel quite comfortable defining this as a trend.
The Deloitte team also believes that regulations or OEM lobbies might prevent that potential technological progress. Therefore the second powerful uncertainty lies in the balance of power between the OEMs and the suppliers of services (such as ride-sharing).
Different Supply Chains
Drawing out the supply chain of both industries, one can see the huge difference in the core drivers. The average personal car OEM is fed by one main channel of sales, compared to the supercar OEM which also feeds from the racing channel. Another key difference is the tight relationship the supercar OEM maintains with its clients using private clubs and unique dealerships.
Figure 3 highlights the several industries in which the supercar company operates. While companies like Ferrari work towards a locked-in system, addressing customers’ motivation from several angles (Hax & Wilde, 1999; Oz, 2018), mass market car OEMs are focused on a best-product strategy while being price competitive. That is why they are incomparable.
Different Value Chains
Figures 4 and 5 present the two main value chains of supercar producers: car sales and racing tracks. The latter is strongly fed from advertising (BBC, 2007; Striler, 2016), which is powered by brand power, racing performance, and gossip — much like in other sports. Average car manufacturer doesn’t have that type of income source.
Figure 4 shows that even the production line sequence is not aligned with standard car manufacturers. The vehicle design process is significantly longer since there is a great deal of personalization in the cars. Therefore sales often happen much before production starts.
An additional income route is coming from side-deals or events, which feed from brand power. Ducati offers a weekend of wine tours in traditional Tuscany castles, while taking driving lessons on their mountain bike. Dallara built an amusement park in the USA, with real race car experience (with 2 seats), simulators, and other video games. The governor of Indiana marked this park as one of the main reasons for the growth in tourism in his country (Indianapolis Market 2019). The Ferrari Corse Clienti program offers their clients to participate a few weekends during 1–2 years, where participants will be invited to private events around the world where they could experience the real emotions of racing cars that aren’t allowed on public roads, either Formula1 cars or other. In simpler words, these are high-quality car renting services that offer a luxurious experience for top clients. This can only happen with high brand power.
In simpler words, these are high-quality car renting services that offer a luxurious experience for top clients. This can only happen with high brand power.
Ecosystem Drivers, Trends, and Uncertainties
Figure 6 maps key Trends and Uncertainties in those ecosystems. I believe the main drivers for the car industry are regulations and technological developments regarding electric engines and autonomous vehicles; also the progress of urbanization and transformation into megacities, thus creating pressure on public transport infrastructure. Deloitte described the latter as a “battle” between car OEMs and service providers (such as Uber or other ride-sharing), and its influences on the future business model of these OEMs.
Reasons to buy
But things are very different for the supercars companies. The purchasing decision arises from different forces. First of all, this niche market targets people that can pay that amount of money, and usually these companies also make sure that the customer has enough financial means to support car maintenance.
So the existence of this market depends on the fact that billionaires will continue to thrive. Well, apparently 85% of the world’s wealth is held in the hands of 10% of its population. The number of billionaires is rising steadily and stands today at around 40 million people. And that is a great potential client base for the supercar industry, which today sells 30,000 cars a year altogether.
From the consumer side, the decision to buy is not coming specifically from the functional need for transportation, as in the mass car market. Owners usually have one or more of the following reasons: a fun toy to experience; a collectible jewel, even if it is rarely used; a future investment that will be designed or customized and sold later; daily use car.
Whatever the reason would be today, there is always a risk that wealthy people would change their priorities in funds allocation. Assume that they would decide to donate more to charity or research; or perhaps investment opportunities will transition to other products.
Purchasing a supercar is more like purchasing an art piece. Buying a Ferrari, Lamborghini, or Maserati, is usually made with an appreciation for its great history and heritage.
Michele Ciavarella, Style Magazine
“New fashion brands cannot just become luxury. They are growing to be as such”
Michele Ciavarella, the vice editor of Style magazine, told me once that Luxury brands need to have a history. Brand power grows stronger as time goes by, like great wine or cheese. Although it is not true for all supercars out there, buying a brand with a history is much preferable, and sales prove so, with Bentley and Ferrari taking over 60% of the market.
Some of the supercar companies have a link with racing tracks. In fact, some are actually centered on racing tracks. McLaren and Ferrari are two known brands that use funding from selling commercial cars in order to invest in R&D for racing cars (BBC, 2007). This means that buyers contribute to racing efforts.
“Luxury product takes its value from the brand’s power”
Luxury brands express stability even when the reality is changing for other products. Therefore, as long as supercar brands can keep themselves stable and true to their principles, they will be able to maintain their brand strength. If this stability shatters, the company will face a risk.
From the last two points, we also understand that competition to one Supercar Company does not come specifically from other supercar companies. The same purchasing decision can lead to buying other luxury goods, such as: wine, art, fashion, or jewels (Thompson, 2017; Koenig, 2017). From a financial point of view, these products behave differently compared to mass-production products, as they usually maintain high value and often even increase their value according to their rarity.
“If you don’t have roads to drive in, would you keep a car?”
Another important factor that can influence the survivability of the supercar business is the existence of roads and infrastructure that is suitable for driving these cars. There is no point in keeping a car like this, if you can’t drive it. If efforts in infrastructure focus on megacities and public transport, this might eventually bring a devastating blow to leisure driving.
Figure 8 maps the identified drivers according to the level of impact and uncertainty. Note how different the supercar ecosystem is from the mass car market described by Deloitte.
Scenario Mapping
The following scenario mapping jumps 10 to 20 years forward, and investigates three of the most decisive parameters described earlier:
- Maintenance of intercity roads
- Regulations on speed and pollution
- Acceptance of autonomous vehicles
Seeing that the process of urbanization and gathering into mega-cities has already started, it is a strong future prediction. The designed scenarios are built with megacities as a ground assumption.
Figure 9 explains how I built the 8 possible scenarios between these 3 factors.
Scenario 1
1- Due to the population concentration in megacities, intercity roads become more open.
2- Due to strong regulations to limit speed, autonomous vehicles manage to drive much more efficiently. Following a successful trial with few independent lanes for autonomous vehicles, the government is considering creating fully autonomous public transportation.
3- People use more public transportation, but it is not enough to reduce pollution in cities. The government has to regulate the use of gas and electricity. The public debates also on banning the use of private cars in the city.
How to Deal with Scenario 1?
- Manufacturing facilities should be prepared to transform into an efficient mode of energy use, like industry 5.0, in case pollution will be further regulated.
- The existence of intercity roads means that supercar owners still have room to experience their car’s power.
- More and more mass-market manufacturers will transition to autonomous technology. Supercars will become even more rare, and therefore could increase in value.
- Due to the limited use of gasoline, the engine has to be made fully electric. Tesla’s Roadster-like supercar models will arise. Supercar OEMs could make all-electric supercars that simulate the feeling of a fuel-based one: such as a roaring sound, car shake, gearbox, etc.
- Speed regulations might not affect the niche small supercar market.If it would, supercar OEMs could make cars that are more stylish, and offer burst of power, but low maximum speed.
Scenario 2
1- Due to the population concentration in megacities, intercity roads become more open.
2- People use more public transportation, but it is not enough to reduce pollution in cities. The government has to regulate the use of gas and electricity. The public debates also on banning the use of private cars in the city.
3- A number of accidents with autonomous vehicles have led to a lack of trust in the technology. The current debate is on moral issues and regulation around it.
How to Deal with Scenario 2?
- The existence of intercity roads means that supercar owners still have room to experience their car’s power.
- People still use private cars, especially after society stopped trusting autonomous technology.
- Gasoline usage is regulated, and electric cars become widely used. Public transport becomes electric. Supercar OEM would need to use electric power or non-pollutant energy.
- Manufacturing facilities should be prepared to transform into an efficient mode of energy use.
Scenario 3
1- Due to the population concentration in megacities, intercity roads become more open. After a redesign of the train, intercity trains become a much faster way of commute, and are the main way of transfer. The government declared it will stop maintenance on roads outside the cities.
2- People use more public transportation, but it is not enough to reduce pollution in cities. The government has to regulate the use of gas and electricity. The public debates also on banning the use of private cars in the city.
3- Due to strong regulations to limit speed, autonomous vehicles manage to drive much more efficiently. Following a successful trial with few independent lanes for autonomous vehicles, the government is considering creating fully autonomous public transportation.
How to Deal with Scenario 3?
- More and more mass-market manufacturers will transition to autonomous technology. Supercars will become even more rare, and therefore could increase in value.
- The over-polluted mega-cities forced new regulations on the use of energy consumption.
- Supercar OEMs should consider switching the product focus to a super-electric city car. Supercars should become smaller. Creating faster and more luxurious autonomous vehicles will probably have a bigger market than sports cars.
Scenario 4
1- Due to the population concentration in megacities, intercity roads become more open.
2- People use more public transportation, but it is not enough to reduce pollution in cities. The government has to regulate the use of gas and electricity. The public debates also on banning the use of private cars in the city.
3- A number of accidents with autonomous vehicles have led to a lack of trust in the technology. The current debate is on moral issues and regulation around it.
4- After a redesign of the train, intercity trains become a much faster way of commute, and are the main way of transfer. The government declared it will stop maintenance on roads outside the cities.
How to Deal with Scenario 4?
- People still drive private cars, especially after society stopped trusting autonomous technology.
- Gasoline usage is regulated, and electric cars become widely used. Public transport becomes electric. Supercar OEMs would need to use electric power or non-pollutant energy.
- Manufacturing facilities should be prepared to transform into an efficient mode of energy use.
- Supercar OEMs could create dedicated parks suitable for their electric supercars. With the help of the drivers’ clubs and dealers, this might be done. These parks can be located on the outskirts of the mega-cities and offer also parking for the supercars. There is an extended business that can be done with such a solution.
Scenario 5
1- The gathering of the population into megacities turns out to be highly successful. Compliance with environmental issues keeps pollution levels steady.
2- People use more public transport, and the government doesn’t see reasons to add new regulations. People embrace more environmental care behaviors, and society stabilizes pollution levels.
3- Due to strong regulations to limit speed, autonomous vehicles manage to drive much more efficiently. Following a successful trial with few independent lanes for autonomous vehicles, the government is considering creating fully autonomous public transportation.
How to Deal with Scenario 5?
- Autonomous vehicles dominate the mega-city, but supercars still have a market.
- The maintenance of intercity roads allows owners to keep their hobby. The niche market of supercars does not influence pollution levels and regulators do not bother about it.
- Current strategies still apply.
Scenario 6
1- The gathering of the population into megacities turns out to be highly successful. Compliance with environmental issues keeps pollution levels steady.
2- People use more public transport, and the government doesn’t see reasons to add new regulations. People embrace more environmental care behaviors and maintain pollution levels.
3- A number of accidents with autonomous vehicles have led to a lack of trust in the technology. The current debate is on moral issues and regulation around it.
How to Deal with Scenario 6?
- The maintenance of intercity roads allows drivers to keep their hobby. The niche market of supercars does not influence pollution levels and regulators do not bother about it.
- Current strategies still apply.
Scenario 7
1- The gathering of the population into megacities turns out to be highly successful. Compliance with environmental issues keeps pollution levels steady.
2- People use more public transport, and the government doesn’t see reasons to add new regulations. People embrace more environmental care behaviors and maintain pollution levels.
3- Due to strong regulations to limit speed, autonomous vehicles manage to drive much more efficiently. Following a successful trial with few independent lanes for autonomous vehicles, the government is considering creating fully autonomous public transportation.
4- After a redesign of the train, intercity trains become a much faster way of commute, and are the main way of transfer. The government declared it will stop maintenance on roads outside the cities.
How to Deal with Scenario 7?
- The niche market of supercars does not influence pollution levels and regulators do not bother about it.
- Supercar OEMs could create dedicated parks suitable for supercars. With the help of the drivers’ clubs and dealers, this might be done. In this scenario the parks could be based on gasoline experience, perhaps some sort of a traditional experience of the “historic” roots of the automotive vehicles.These parks can be located on the outskirts of the mega-cities and offer also parking for the supercars. There is an extended business that can be done with such a solution.
Scenario 8
1- The gathering of the population into megacities turns out to be highly successful. Compliance with environmental issues keeps pollution levels steady.
2- People use public transport inside cities, and private cars are used as a service (the service providers and government worked together to buy cars from the public).
3- After a redesign of the train, intercity trains become a much faster way of commute, and are the main way of transfer. The government declared it will stop maintenance on roads outside the cities.
4- A number of accidents with autonomous vehicles have led to a lack of trust in the technology. The current debate is on moral issues and regulation around it.
How to Deal with Scenario 8?
- The niche market of supercars does not influence pollution levels and regulators do not bother about it.
- Supercar OEMs could create dedicated parks suitable for supercars. With the help of the drivers’ clubs and dealers, this might be done. In this scenario the parks could be based on gasoline experience, perhaps some sort of a traditional experience of the “historic” roots of the automotive vehicles.
Recommendations
1- Creating a Locked System
Luxury car OEMs have to maintain the stability of their brand power. They have values and tradition that has to be at the base of the business. When these can no longer be maintained, the brand will shatter and will be in danger. This ecosystem has the potential to be maintained financially, since the population of rich people is much greater than the existing client base. The players in this ecosystem can create a locked system if they maintain a gamification-inspired strategy they might provide to the customer. Linking one sale to another, supporting private fan clubs, organizing close luxurious events, and maintaining a strong supplier chain — all contribute to creating a locked system.
2- Cross Brand Collaborations and Partnerships
Luxury companies should collaborate and link luxury brands to one another. As said, luxury products compete with one another rather than with other items from their own industry. Linking sales between industries, like fashion, cars, jewelry, and food — has a high promise.
3- Common Recommendations Across Scenarios
- Manufacturing facilities should be prepared to transform into an efficient mode of energy use.
- Prepare a backup plan for hybrid and/or full-electric technology. Find a strategy that would allow you to sell these vehicles when the time requires. Consider simulating the feeling of a fuel-based car: such as a roaring sound, car shake, gearbox, etc.
- Prepare a strategy for all-electric cars with a low top speed. Although this scenario has a low probability, it also has a higher business risk.
- Consider running hands-on activities for both new and existing customers, working toward a strong community and relationship directly with your audience. This will strengthen brand identity and power, as well as its chance to withstand the future.
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