DUCATI

Background and Context:

● Federico Minoli, CEO of Ducati, reflected on the company's history and its
upcoming milestones in January 2006.
● Ducati was established 80 years ago for producing electronic radio equipment
and had been producing motorcycles for 60 years.
● Minoli had led Ducati's turnaround over a decade, emphasizing engineering,
Italian heritage, design, and attracting racing enthusiasts.

Financial Performance:

● From 1996 to 2000, under Minoli's leadership, Ducati's revenues increased from
€95 million to €380 million, and EBITDA improved from loss to €60 million.
● However, from 2000 to 2005, revenues fell by 2.3% CAGR, and EBITDA was
-€273,000 by the end of 2005.

Ownership Change and Capital Increase:

● In late 2005, shareholder Texas Pacific Group sold its 30% stake to
InvestIndustrial Holdings and other investors.
● A capital increase of €80 million was planned to address financial concerns and
future strategy.
● Minoli anticipated changes in cost-cutting and growth strategies due to the new
shareholders.

Challenges and Strategy:

● Minoli acknowledged a successful turnaround until 2001, but challenges arose

afterward.
● Product issues and external factors, including the decline of the U.S. dollar,
affected Ducati's performance.
● Minoli emphasized the need to consider actual capabilities in planning rather
than ideal desires.

Global Motorcycle Industry:

 ● The global motorcycle market was valued at $48.3 billion in 2004, with 2.5%
CAGR in revenues and 3.3% CAGR in units over five years.
● High displacement motorcycles (over 400cc) constituted a small portion of the
market (1.2 million units).
● Ducati's relevant market was estimated at 642,000 units in sports, sport touring,
and related categories.

Geographic Consumption:

● Asia-Pacific led with 56.1% of the market's value, driven by motorcycles as

primary transportation due to cost efficiency.
● The U.S. surpassed Europe as the second-largest region (17.3% vs. 16.4%).
● North America and Western Europe favored higher-priced and more powerful
motorcycles for recreational purposes.

BRIC Countries and Luxury Goods:

● "BRIC" countries (Brazil, Russia, India, China) showcased emerging "new rich"
consumers interested in North American and European luxury goods.
● Challenges in China included motorcycle restrictions in many cities for safety,
congestion, and pollution concerns.
● Companies like Harley-Davidson and BMW faced government policies that
impacted motorcycle sales in China.

Motorcycle Categories:

● Motorcycles were categorized as touring, cruisers, sport bikes, and off-road

based on use and design.
● Ducati's relevant market was sport bikes over 400cc, including Superbike, Naked,
Dual, and Sport Touring segments.

Rider Diversity:

● Riders had various reasons for choosing motorcycles, including affordability,

style, freedom, and rebellion.
● Different rider groups, from casual riders to hardcore enthusiasts, formed clubs
and participated in events and competitions.
● Ancillary products like clothing, magazines, and music supported the motorcycle
culture.
 ● The motorcycle community saw an increasing presence of women riders, with an
estimated 10% by 2005, up from 2% in 1990.

Early Beginnings and "il Cucciolo":

● In 1926, Antonio Cavalieri Ducati and his sons founded Società Radio Brevetti
Ducati in Bologna, Italy, producing electrical components for radios.
● During World War II, Ducati's factories were occupied and bombed, but the family
focused on engineering new products after the war.
● In 1946, Ducati launched "il Cucciolo," a small motor that could attach to bicycles
for increased speed. It became popular, leading to the development of 175cc and
98cc motorcycles.

Fabio Taglioni and Racing Success:

● Engineer Fabio Taglioni joined Ducati in 1954, introducing innovative designs and
the Desmodromic valve distribution system for increased power.
● Taglioni's designs set records, including speeds over 162 km/h, and the
Desmodromic system continued to be used in subsequent models.
● The 750 Supersport in the early 1970s marked Ducati's racing dominance, with
wins in Isle of Man and Imola.

Challenges and Revival:

● In the early 1980s, Ducati faced financial challenges and shifted focus away from
motorcycles to other mechanical products.
● The Castiglioni brothers acquired Ducati in 1983 under Cagiva Group, refocusing
on motorcycle racing and introducing new models.
● The Monster, designed by Miguel Galluzzi in 1993, aimed to create a
stripped-down street bike with a racing feel.
● The 916, launched in 1994, became a high-performance sports bike, earning
acclaim and recognition as "Motorcycle of the Century."

Financial Struggles and Revival:

● Despite successes, the Cagiva Group faced working capital issues, leading to late
deliveries and production delays by the mid-1990s.
 ● By 1996, Ducati was near bankruptcy, and Texas Pacific Group, a U.S.-based
private equity firm, acquired a controlling interest to capitalize on the company's
niche position in the motorcycle industry.

Federico Minoli's Leadership:

● Federico Minoli became Ducati's CEO in 1996, bringing a diverse background

from companies like Procter & Gamble, McKinsey, and Benetton.
● Minoli focused on leveraging Ducati's unique attributes: a differentiated product,
skilled engineers, and strong brand loyalty.

Unconventional Approach:

● Minoli avoided strict organizational structures and encouraged creativity and

teamwork within Ducati's largely unstructured environment.
● Engineers were known for their fanaticism towards speed, performance, and
innovation.

Goals and Investments:

● Minoli's goals were double-digit revenue growth and an EBITDA ratio comparable
to Harley-Davidson's 20%.
● Instead of upgrading manufacturing capabilities, the first major investment was a
Ducati museum to symbolize an ideological change.
● The "World of Ducati" strategy aimed at enhancing the overall Ducati experience
and reinforcing loyalty among "Ducatisti."

Expanding Brand Influence:

● Ducati acquired a controlling interest in Gio.Ca.Moto and formed a joint venture

with Dainese for apparel and accessories development.
● Research and development investment increased significantly to build new
products and the racing division.

Product Innovation and Diversification:

 ● From 1997 to 2000, Ducati introduced new models under each family, reducing
time to market from 36 to 15 months.
● Ducati expanded its offerings within each product family, targeting both
entry-level and high-end models simultaneously.
● A Sport Touring line aimed at older customers was introduced, a departure from
Ducati's traditional sport-oriented customer base.

Production and Outsourcing:

● Ducati continued to outsource the majority of its production to third parties, with
the Emilia region known for automotive racing tradition.
● Outsourcing increased from 80% of production in 1996 to nearly 90% in 2001.

Positive Results and IPO:

● The turnaround strategy yielded positive results: revenues increased from €195.6
million in 1997 to €379.5 million in 2000.
● EBITDA grew from €33.4 million in 1997 to €60.0 million in 2000.
● Texas Pacific Group reduced its holdings through an initial public offering on the
Milan and New York Stock exchanges, bringing the turnaround phase to a
successful close.

Stagnant Financial Performance:

● From 2001 to 2005, Ducati's revenues remained relatively flat: €362.4 million in

2001, €320.8 million in 2005.

● EBITDA declined from €78.5 million in 2001 to -€273,000 in 2005.

● In 2005, the company posted an after-tax loss of €41.5 million compared to a

loss of €3.5 million in 2004.

● A drop in motorcycle volumes, unfavorable mix, and the weakening U.S. dollar

contributed to the poor performance.

Challenges and Internal Issues:

 ● Minoli acknowledged mistakes made during the growth phase, which impacted

results from 2002 to 2005.

● Three major internal issues identified were product discontinuity, customer

acquisition model issues, and mismanagement in the U.S.

Product Discontinuity - The 999 Superbike:

● Ducati replaced the popular 998 with the 999 in 2004, resulting in a tepid

response from customers.

● The 999 was considered too radical in terms of design and aesthetics compared

to the successful 998.

● The discontinuity in style affected the bike's reception despite its improved

performance and technology.

Success with the Multistrada:

● Despite Superbike challenges, the 2003 release of the Multistrada experienced

strong sales response.

● Initial hesitation was observed due to the Multistrada's departure from Ducati's

traditional design language.

● The Multistrada was not considered a move towards building a cruiser, but rather

a different experience.

MotoGuzzi and Aprilia Acquisition Attempts:

● Ducati explored purchasing MotoGuzzi, a heritage cruiser brand, but faced

challenges due to its financial state.

 ● In 2004, Ducati and Piaggio engaged in a public bid for Aprilia, with Ducati initially

offering €40 million for MotoGuzzi and Aprilia off-road assets.

● Piaggio ultimately acquired Aprilia's entire business in 2005, including

MotoGuzzi.

Changes in Customer Acquisition Model:

● Ducati's entry strategy was to capture customers through affordable models and

upgrade them to more expensive bikes in a few years.

● The introduction of new entry-level bikes, the SS651 and the 620, faced

competition from Japanese manufacturers who offered higher technology at

lower prices.

● Ducati struggled to compete on both price and cost fronts, leading to the

discontinuation of the SS651 project and reevaluation of the 620 model.

Decline in U.S. Business:

● Ducati North America experienced a 39% decline in sales from 2000 to 2003.

● Disruption due to a change in the head office location, along with IT system

changes, led to significant operational challenges.

● A new CEO, Michael Lock, was hired in 2001, and efforts were made to recover

the lost volume and stabilize operations in the U.S.

Minoli predicted that with time, the U.S. market would rebound to become the

company's largest market.

Ducati's Product Portfolio and Characteristics:

● Ducati produced motorcycles in the Sport segment, organized into six families:
Superbike, Super Sport, Sport Naked, Sport Touring, Multistrada, and
Sportclassic.
● All Ducati bikes shared five core characteristics: Desmodromic valve control
system, L-twin engine design, signature engine sound, Formula One-inspired
tubular trestle frames, and Italian styling.
● The Desmodromic system allowed high-speed engine performance, providing
consistency comparable to four-cylinder engines.
● The L-twin engine design offered improved aerodynamics, lighter weight, and
distinctive sound.
● Ducati frames were built around tubular trestle, offering rigidity, handling power,
speed, and compact design.
● Italian styling and distinct design gave Ducati bikes a recognizable identity.

New Product Development:

● Developing a new motorcycle, including the engine, took about three years and
cost €20 million on average.
● Ducati invested in R&D, spending 8.3% of revenues in 2005 (€26.5 million) to
drive innovation.
● Domenicali took over product development, emphasizing the importance of
balancing innovation with Ducati's brand identity.

Market Expansion and Cruiser Segment:

● While some speculated about Ducati entering the Cruiser segment, the company
remained committed to its sports bike focus.
● Minoli stressed that Ducati's brand was associated with racing and speed,
making the Cruiser segment unsuitable.
● Domenicali suggested that if Ducati ventured into cruisers, it would likely be in a
"sports side of the niche" while maintaining essential Ducati features.

Design and Development Strategies:

 ● Ducati used both internal and external designers for new models; external
designers brought fresh ideas while internal teams handled engineering.
● Ducati started using online surveys and blogs to gather feedback for new
designs, embracing community involvement in the design process.
● Minoli emphasized the need for design "magic" akin to successful Italian fashion
brands, guiding the creation of appealing and relevant motorcycles.

Ducati Corse Racing:

● Ducati considered participation in professional motorcycle racing crucial for

brand promotion and product development.
● Racing improved product visibility, demonstrated high-performance
characteristics, and influenced R&D.
● Ducati Corse SRL managed racing teams and specific motorcycles in
competitions, maintaining a strong presence in racing championships.

Accessories, Apparel, and Marketing:

● Ducati earned significant revenue from accessories and spare parts (€29 million
in 2005) that supported the existing motorcycle fleet.
● Owners spent on average €1,600 to €3,000 on accessories in the first six months
after purchasing a new Ducati.
● Collaborations with other brands and licensing expanded Ducati's presence in
apparel, gear, and other merchandise.
● Marketing initiatives centered on building a strong Ducati community, focusing
on events, racing, clubs, and the Ducati museum experience.
● Ducati employed a tribal advertising approach, relying on media coverage, events,
and word-of-mouth to promote the brand rather than traditional advertising.

Online Presence and Sales Distribution:

● Ducati.com and country-specific websites provided comprehensive information

and virtual tours, fostering a connection with the Ducati community.
● Ducati utilized its database of 200,000 riders for surveys and feedback on new
products and user satisfaction.
● Sales distribution involved multi-franchise and mono-franchise stores globally,
with a focus on enhancing the brand experience in dealerships.
 ● The company pursued a restructuring of the dealer network in different countries,
aiming to optimize performance and brand support.

Production and Supplier Strategy:

● Ducati's manufacturing facility followed lean manufacturing principles inspired by

the Toyota Production System.
● On average, a motorcycle comprised 1,400 parts, with many outsourced to
third-party suppliers.
● Italian suppliers provided 80% of outsourced parts, and the top ten suppliers
accounted for 45% of all outsourced materials.
● Ducati aimed to maintain two suppliers for each component and explored
sourcing components from low-cost areas.
● The company sought to strike a balance between quality and cost-effectiveness
in its global sourcing efforts.

Future Growth and Strategies:

● As Ducati prepared for new investors, various growth options were considered,
including potential takeover targets from sectors beyond motorcycles.
● Minoli's immediate goal was to reposition the company for sustainable growth
while maintaining its niche identity.
● Ducati's strategy focused on remaining a niche producer with loyalty to the sports
enthusiast, rejecting mass production.
● Minoli envisioned continued growth within the sports segment and the expansion
of the Ducati community.