Ferrari growls less seductively in electric era

The Ferrari GTC4 Lusso T at the Paris Motor Show in September.
The Ferrari GTC4 Lusso T at the Paris Motor Show in September.PHOTO: AGENCE FRANCE-PRESSE

Gloomy prospects for the carmaker as combustion engines come under pressure

Along with a crimson paint-job, a Ferrari's ear-splitting growl is what makes fans weak at the knees - and willing to shell out up to US$2 million (S$2.85 million) to buy one.

But investors should ponder whether Ferrari's full-throated combustion engines are not a potential liability.

For now, it is cruising. The company beat expectations for third- quarter profit and raised its full-year earnings target. That propelled the shares to a more than 5 per cent gain, meaning the stock is back above the US$52 initial public offering (IPO) price.  

But like its cars, Ferrari's shares are not cheap. They trade on 25 times estimated earnings for this year, about treble what BMW fetches and not far off a luxury goods company such as Prada. As Ferrari sells fewer than 10,000 cars a year, it does not have to comply with the same tough emissions rules as bigger carmakers such as BMW.

But that does not mean electrification is not a threat. The planet is warming faster than feared and the effects are becoming apparent even to sceptics. So there is a risk that combustion engines could rapidly start to feel dated. Worse: The roar of a Ferrari tearing through the streets of London or Los Angeles may one day trigger feelings of hostility, not forbearance or jealousy. Remember smoking in restaurants?

Chief executive officer Sergio Marchionne says most or all of Ferrari's cars will be "hybridised" from 2019, meaning they will have both combustion engines and electric motors. But he has said that building a fully electric Ferrari would be "almost obscene" because electric cars are too quiet. He is no fool.

His customers - many of whom own more than one Ferrari - doubtless feel exactly the same way. The trouble is, even the tastes of old, rich folks change. The Blackberry was indispensable until it was not.

The combustion engine has already lost one advantage over electric cars - speed. An upgraded Tesla Model S can accelerate to about 96km an hour in just 2.5 seconds, the same as the Bugatti Veyron and Ferrari's LaFerrari.   

Because battery vehicles all have instant torque, lots of electric cars will presumably be capable of similar. Porsche, Mercedes-Benz and Audi are all bringing out luxury electric models. Speed could become commoditised. 

Of course, Ferrari could probably build an electric car, but that would lift research and development spending, impairing profit growth. At about 20 per cent of sales, Ferrari's R&D spending is already proportionately higher than rivals because its sales volumes are much lower.

A sudden industry shift might also hamper Ferrari's new car sales because customers would worry their combustion-engine vehicles would not retain their high residual values. Ferrari also makes money by selling combustion engines to Maserati, accounting for about 6 per cent of revenue last year.

If this all seems too gloomy, here is what Ferrari's IPO prospectus had to say: "Governmental regulations may increase the costs we incur to design, develop and produce our cars and may affect our product portfolio.

"Regulation may also result in a change in the character or performance characteristics of our cars, which may render them less appealing to our clients.

"We anticipate that the number and extent of these regulations, and their effect on our cost structure and product line-up, will increase significantly in the future."

Daimler and BMW's shares have lagged because investors fear they will incur high costs shifting from gasoline to electric vehicles. The Prancing Horse might get a jolt too.

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A version of this article appeared in the print edition of The Straits Times on December 03, 2016, with the headline 'Ferrari growls less seductively in electric era'. Print Edition | Subscribe