1 Executive Summary
This report is written to review why Ferrari’s sales dropped during 2015 to 2017 and the measures company should take to gain back these sales figures.
After research, it has been found that Ferrari’s shipments in Middle East were 16 percent less in 2016 as compared to 2014 (Deloitte, 2018). This was a matter of concern for Ferrari since in the first half of 2013 Ferrari’s sales increased by 39 percent, which was the biggest increase for the company internationally (Duncan, 2013). Further investigation in to the topic reveals that other than environmental legislations and competition from similar brands in the Middle East, there are economic and political factors as well that led to this downward trend in sales. The main economic factor was the low oil prices in the recent years, and due to the fact that Middle Eastern countries are majorly dependent on oil business as their income, it hindered the economic growth in the region. Then another factor is of high interest rates leading to increased cost of borrowing and limiting growth in few of the major Middle Eastern countries like UAE and Oman; since they have adopted ‘dollar peg’. Furthermore, political turmoil in the region and Qatar 2017 crisis are other factors contributing to Middle East’s reducing sales numbers.
Finally, the report discusses few strategies Ferrari should implement to overcome these challenges, such as increasing the number of dealerships in Qatar and Kuwait, designing and manufacturing more tailor-made cars for the Middle Eastern clients, making an active presence at UAE World Expo in 2020 and more.
”Ferrari is among the world’s leading luxury brands focused on the design, engineering, production and sale of the world’s most recognized luxury performance sports cars. Their brand symbolizes exclusivity, innovation, state-of-the-art sporting performance, Italian design and engineering heritage” (Ferrari Annual Report, 2017). Ferrari sells its cars in more than 60 markets globally through a network of 164 authorized dealers operating 185 point of sale, and Middle East is one of the markets. The company has 13 points of sales in 9 Middle East markets (Ferrari’s website, 2018). According to Zauner, General Manager of Ferrari Middle East and Africa (2015) the region takes about 8 percent of the Ferrari production and approximately 10 percent of the worldwide sales of Ferrari. Prevalent thinking is that Middle East is a land of deserts, oil wells and camels, but a more appropriate image nowadays would be traffic jams of Ferraris and other luxury vehicles (Ahmad, 2007). For instance, Ferrari dealers reported 120 percent growth in sales in UAE in 2006.
However, in the recent years Ferrari started facing a decline in its sales; 2015 was the year when the units shipped to Middle East starting falling from 456 cars to 439 in 2016 to 331 in 2017, which was the lowest as compared to the other regions (s. Appendix A). Whereas, between 2013 and 2014 there was a rise of 10 percent, with cars shipped increasing to 521 in 2014 as compared to 472 in 2013 (Ferrari Annual Report, 2015 ; 2017).
This paper will firstly focus on importance of environmental impact, competition and substitutes of Ferrari in the Middle East, moving on to the PESTEL but in the form of overall challenges the company faced, which led to a declining trend in sales in the region and finally change strategies and recommendations for Ferrari to get back on the upward sales trend.
2.1 Industry Overview
Middle East is a big luxury car market where a major portion of motor vehicles are imported; UAE and Saudi Arabia being the biggest buyers (Smith, 2017). According to Alpen Capital (2016) in the Gulf Cooperation Council (GCC) countries number of motor vehicles are expected to rise to 13.2 million by 2020. In 2012 sale of luxury goods, in which cars were number one, outperformed global demands by 15 percent in the Middle East (Jones, 2012). In Middle East region, UAE has always been a popular market of luxury motor vehicle companies.
3 Environmental Impact, Competition, Substitutes and Buyers Power
When formulating a business strategy for any market an organization has to consider competition, substitutes, governmental laws and regulations, economics factors, environment and etc. to successfully operate in that market or region. The upcoming paragraph will focus on few relevant to Ferrari N.V. in Middle East.
As also discussed in the Ferrari group presentation environmental impact of motor vehicles has become a matter of concern globally in the recent years. According to Ferrari’s annual report (2017) stringent environmental laws and regulations have been passed in the US and EU to reduce greenhouse emission from cars. Similarly, some Middle Eastern countries are also creating new policies to control the greenhouse emission. This indicates a change in demand in the Middle East market, leading to consumers demanding more hybrid and electric Ferraris in future as compared to conventional ones with combustion engines.
Furthermore, Ferrari faced high internal rivalry in the region from brands such as Lamborghini, Porsche, Bugatti and Maserati, which also target the same market segment. According to Stefan Brungs, member of the board of management of Bugatti Automobiles, one-third of Bugatti Chiron sports cars were sold in Middle East in 2016 and a quarter of Bugatti Veyron (Arab news, 2016). This shows that Bugatti automobiles are giving tough competition to Ferrari N.V in the Middle East region. Looking from a different point of view, these supercar luxury brands can also act as substitutes for Ferrari’s cars; when deciding on buying a luxury sports car, a consumer would always have these alternative options to choose from. In-addition, power of buyers is medium to high in the Middle East market as buyers have alternative luxury sports car options available with a low switching cost. When it comes to luxury sports cars buyers, price is not the main deciding factor (s. Appendix B).
Other than these known international supercar brands, now there is a Middle Eastern competitor, W Motor from Lebanon who introduced the first Arabian supercar called the Lykan Hypersport at Qatar motor show in 2013. The motor vehicle was priced at 3.4 million Dollars (Anderson, 2015). Albeit, not on a large scale but it can turn out to be a threat to Ferrari in the Middle East since people might want to buy this vehicle in order to support a local manufacturer. In-addition, the Lykan was featured in the Fast ; Furious movie series, which already makes it popular, especially amongst the children of the rich Arabs who are the major users of these super sports cars.
4 Challenges in Middle East
4.1 Shrinking Oil Prices
As mentioned earlier, Ferrari was going through a downward trend in sales in the Middle Eastern region. According to Wachman (2018) Ferrari’s profits rose globally by 34 percent but Middle East was not very bright in terms of profit contribution. Ferrari revealed that their car shipments were 16 percent less in 2016 (439 units) as compared to 2014 (521 units) in the region. In 2017, growth in Middle East was nearly flat due to economic uncertainty (Deloitte, 2018). The reason for such a flat demand in the region would be discussed ahead.
One of the main challenges Ferrari faced in the region was the shrinking oil prices, and the dynamics of the luxury goods in the Middle Eastern region which is highly dependent on oil prices. IMF (2016) stated that in mid-2014 price of oil fell from more than 100 dollars a barrel to approximately 50 dollars a barrel. Oil exporting countries’ governments started cutting on spending, leading to economies slowing down, which resulted in a negative impact on people’s disposable incomes and this led to reduced spending on luxury goods and services. In-addition, when supply is steeper than demand, prices of commodities tend to fall, a similar case happened with oil prices. Majority of the economies in Middle Eastern region depend on oil as a source of income, and due to a falling demand there were loss of jobs, hiring freezes and wage cuts; this indicates an overall descending spending and domestic consumption patterns in the region (IMF, 2016).
According to Dudely (2016) among oil exporters, the GCC countries grew by 1.7 percent in 2016 and 2.3 percent in 2017 as compared to 7 percent between 200-2014, when Ferrari’s sales were also on a rise in Middle East.
4.2 Rising Interest Rates
High interest rates could tend to slow down economic growth in Gulf countries especially Saudi Arabia, UAE and Oman, who have adopted the ‘dollar-peg’ (where a country maintains its value of currency at a fixed exchange rate to US dollar). According to Constable (2018) higher interest rate is inclined to increase the cost for businesses, since borrowing money becomes pricier. Businesses usually run on credit, and increasing interest rates means less borrowing from the financial institutions, which results in lesser spending. Hence, Ferrari’s dealers depend on financing options from third party financial institutions to purchase cars from the company, and higher interest rates would result in less number of cars ordered since the borrowing cost would increase. Then, retail clients also depend on finance and leasing options to acquire Ferrari’s cars, higher cost of borrowing means reduced amount of spending on luxury items such as super sports cars.
4.3 Value Added Tax
Moreover, there has been an introduction of Value Added Tax (VAT) in the GCC countries of 5 percent in early 2018. In Ferrari’s case it would be an import VAT, which would be borne by the dealers of the region. Ferrari would have to make sure that their dealers are VAT registered businesses because if a business is registered they would not have to pay VAT. Whereas, if a dealership is not registered then it will have to pay the 5 percent VAT, resulting in an increase in the retail price of Ferrari’s cars (Deloitte, 2018).
4.4 Abandoned Cars
Countries face problems such as poverty, unemployment, crime and etc. while UAE has a major issue of abandoned luxury cars. Lot of foreigners move to Dubai and Abu Dhabi for high-end and flashy lifestyle; they buy luxury sports cars like Ferraris and Lamborghinis and finance them through bank loans or leasing. But, when these expats are not able to pay back these loan payments to the bank they abandon the cars at the airport and fly back to their home country. They fly back because under sharia law, which is observed in the majority part of Middle East, non-payment of debt is a criminal offense and leads to imprisonment (McElroy, 2016).
According to McElroy (2016) around 2,000 to 3,000 cars are abandoned each year in Dubai and Ferraris are amongst them. A famous case in the recent years has been of a British expat who defaulted on his loan payments and abandoned his 1 million pounds worth Enzo Ferrari at Dubai airport and fled back to his country in order to avoid imprisonment.
The issue of abandoned sports cars is another important factor that can explain Ferrari’s challenge in Middle Eastern UAE; since these expats are now more aware of strict UAE laws against debt payments that they would think twice before getting the Ferraris, whereby leading to reduced car shipments in not the entire region but just UAE, which is one of the wealthiest economies in the Middle Eastern region. In-addition, it was not just the expats even Emirati owners were found to default on debt payments and abandoned their luxury motor vehicles (Harper, 2012).
4.5 Political Issues
A stable political environment in a region or country is necessary for a business to operate successfully there. According to Sliwinski (2015) ”Politics in the Middle East have long been as fluid as the sands which make up much of the region”. The region has been facing quite a few challenges, some of which are:
• Israel – Palestine conflict: where both the nations are fighting over a small strip of land situated in between Egypt to the south, the Mediterranean to the west, Jordan to the east, and Lebanon and Syria to the north.
• Iran nuclear program: where the US wants Iran to shut down its nuclear program, otherwise they might be under the risk of getting attacked by US, Israel and even Saudi Arabia.
• Extremist groups: such as ISIS and Hezbollah continuing threat to the world (Sliwinski, 2015).
Veiga and Aisen (2011) stated that political instability in a region or a country adversely affects its economic growth and even foreign investment. For instance due to political tensions in Iran, its GDP growth fell from 12.5 percent in 2016 to 3.5 percent in 2017 and rising slightly 3.8 to 4.1 percent between 2018 to 2022, while Qatar and Bahrain had a growth of just 2.5 percent in 2017, UAE 1.5 percent in 2017 and Saudi Arabia with only 0.1 percent in the same year (IMF, 2017). Hence, proved that political unrest leads to flatter economic growth; it results in slowing down of businesses and less disposable income. Moreover, consumers are skeptical in spending on luxury goods since they are not sure of the future state of the country’s economy. This is one the major challenges Ferrari has been facing in the Middle Eastern region.
4.6 Qatar 2017 Crisis
In 2017 one of the oil rich Middle Eastern countries, Qatar, was cut-off by its strong gulf neighbors (Saudi Arabia, UAE and Bahrain) for supporting terrorism (BBC, 2017). According to Aljazeera (2018) air, sea and land blockade was imposed by the three Arab neighboring countries; as a result no imported goods were able to enter the country. Among other international companies Ferrari could have also faced a challenge of not getting their cars in the country, resulting in lesser number of cars shipped in the Middle Eastern region in 2017. Also, due to instability in the country people would have been skeptical in spending on luxury items, leading to a reduced demand.
5 SWOT Analysis
Ferrari has an established strong brand image in the Middle Eastern region. Owning a Ferrari is seen as an aura of luxury and a status symbol. Ferrari has also been a big part in major events like Abu Dhabi’s Grand Prix In-addition, Ferrari has a theme park in Abu Dhabi called Ferrari World, which is a significant revenue generator for the company (Ferrari annual report, 2017).
Ferrari takes about 12 to 24 months to deliver their motor vehicles, in due time it can lose customers to its competitors. Also, Ferrari has only 11 dealerships in the Middle East (Ferrari’s website, 2018).
Though 2016 brought about a slump in the Middle Eastern economy but the last quarter of 2018 would see economic growth due to the Expo 2020 in UAE and World Cup FIFA 2022 in Qatar (Alpen Capital, 2016). This would be an opportunity for Ferrari to regain their sales in Middle East. Furthermore, hybrid models are one of the bright opportunities Ferrari has with its recent growing demand.
Environmental laws in the region to control greenhouse emission can be sought as a threat to the company. Secondly, some dealers being not registered with VAT can still cause problems for Ferrari. Thirdly, , low oil prices and political instability in the region; resulting in an unpredictable environment for the businesses can be seen as a threat.
6 Turnaround Strategies
Zauner, General Manager of Ferrari Middle East and Africa said that the company is well aware of slower sales in the Middle East from 2014 to 2017, and they are already thinking about future strategies to overcome that (Workman, 2017). According to Workman (2017) for Ferrari’s 70th anniversary they planned a new product launch in Abu Dhabi and a special event for Dubai motor show in 2017. In-addition, Ferrari plans on celebrating the 25th anniversary of the company is Gulf in 2019 with a surprise for everyone. These are few of the strategies Ferrari has already been developing in the Middle Eastern region to get their sales back on track.
Alpen Capital (2016) stated that though GDP declined in 2016 in Middle East countries it is projected to improve during 2017-2020, with more disposable income, and wealth of affluent people is expected to grow at a CAGR of 6.7 percent during 2015-2025. This shows that it would be a good opportunity for Ferrari to gain back its lost sales figures.
Furthermore, there are certain strategies that the company can use in the future. Reid (2014) stated that Ferrari produced some amazing GT road cars, with bespoke, hand finished bodies for owners in the Middle East. There were five custom made cars each for, Saudi Arabia, UAE, Bahrain, Qatar and Kuwait; every car named after a different gemstone in Italian language. Ferrari invites selected number of clients to its studio in Maranello factory where these customers can get their bespoke Ferrari designed with a personal designer. Since, Arabs are famous for custom made luxury items and especially cars, Ferrari can do this activity of bespoke cars for clients in the Middle Eastern region more often. This would give those customers a sense of personalization and uniqueness for their Ferraris and could help increase brand loyalty.
According to BBC (2018) Saudi Arabian government has recently allowed women to drive and have started issuing them driving licenses. Also, as mentioned in the Ansoff matrix during the group presentation that Ferrari should move towards new market development; therefore, it is an excellent opportunity for Ferrari to target the new segment of female drivers in the Saudi Arabia and this could consequently be a positive impact on the sales in the Middle East (s. Appendix C).
Moreover, Ferrari should work on manufacturing more hybrid and electric models since people are becoming more environment-conscious. As mentioned earlier, Middle East is also implementing environmental laws to control greenhouse emission from cars, so electric and hybrid Ferraris can become quickly popular among the Middle Eastern clients.
Ferrari has 11 dealerships in the Middle East region; but in future it is recommended that they should increase the number of dealers, especially in Qatar, where there is only one dealership although it is the richest country in the world in terms of GDP per capita. The company should also have a second dealership in Kuwait, which is the seventh richest country in the world. In-addition, Qatar and Kuwait have recently amended their Commercial Agencies Law which allows them to have more than one dealer per automobile manufacturer (Alpen Capital, 2016). Increasing the points of sales would aid in reducing shortages and prevent potential clients from going to Ferrari’s competitors due to long waiting time and it could have a positive impact on the sales number in the region. Also, Ferrari should provide competitive financing options to their dealers in the Middle East, since the economy is still recovering from the economic downturn of 2016 due to shrinking oil prices (Ferrari annual report, 2017). The company should incentivize their dealers by increasing their commission which would motivate them to order more cars for region and help increase sales.
Lastly, Ferrari should continue to be present at events like Dubai Motor Show which happens biennially, where the company will be able to interact with wealthy sports cars enthusiasts in person and may even convince them to buy a Ferrari. As mentioned earlier, another such event Ferrari should consider is the world Expo 2020 in UAE.
Few limitations were faced during the research on Ferrari in the Middle East. One of the main was that there were no sales or unit shipments data available on different countries within the Middle Eastern region, which makes it difficult to draw conclusions and propose country specific remedial strategies. Keeping this limitation in mind a future research should be conducted on country specific sales, market share and unit shipments data within the Middle Eastern region.
Moreover, it would have been insightful to discuss and get an insider perspective of one of Ferrari’s employees in Middle East but due to time constraint that was not possible.
To sum up, Ferrari’s sales reduced in the previous years due to shrinking oil prices, political upheaval and more in the Middle East region. Ferrari is now going to see again an upward trend since the region has projected a GDP growth during 2017-2020, which means people would again be spending on luxury goods. Also, wealth of the affluent people is expected to grow at a CAGR of 6.7 percent during 2015-2025.
Lastly, research shows that Ferrari has always been a popular luxury automobile brand amongst Middle Eastern people since it is a symbol of luxury and status. Therefore, the company should implement some strategies like having more dealerships in the region and also custom made Ferraris which could help Ferrari in increasing their market share.
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