NICK GIBBS

Why Aston Martin's CEO expects automaker to be more profitable than Ferrari

The DB11 is part of Aston Martin's 7x7x7 strategy.
Nick Gibbs is a UK correspondent for Automotive News Europe.
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As Aston Martin plan to list shares in London, the automaker's CEO Andy Palmer believes the company will be more profitable than Ferrari.

Ferrari has consistently been the world's most profitable car company in recent years, with an EBIT margin of 24 percent in the first half. Aston Martin meanwhile has only just emerged from a long period of unprofitability.

Berenberg, a bank, described Aston's business model as "flawed" compared to Ferrari's. "Aston Martin lags significantly behind Ferrari on nearly every quality metric, particularly on critical measures like capital intensity [capital investment per car], cash generation and contribution margin," it said in a note.

So how does Palmer believe he can predict consistent EBIT margins of more than 20 percent in the medium term?

Firstly, the company has set a limit on how long models run for. In strategy dubbed 7x7x7, Aston will launch seven models over seven years, each with a seven-year life cycle. Those models are as follows: the already-launched DB11, Vantage and DBS Superleggera sports cars.

Next year comes the DBX SUV, followed by the mid-engine supercar and then the two electric Lagonda models: first an SUV in 2021 and a year later a sedan. At that point, the cycle goes back to the beginning.

In the past, Aston models lived too long. That meant cars needed to be pushed towards the end of their life, which prompted discounting by dealers. "Those are behaviors that mean you lose money," Palmer said.

Palmer: "In our plan, every time we launch a new car the price goes up."

Aston's range is now all-new and the order bank is full, but still the company predicts EBIT margins of 13 percent for the year.

Where's the rest coming from?

Increased prices, is the answer. "In our plan, every time we launch a new car the price goes up," Palmer said. Aston claims the average selling price of its new cars has increased 114 percent between 2007 and 2017 and predicts it will continue to climb. Ferrari's however, could go down if they launch an entry car, the long-speculated Dino.

"If Ferrari do a Dino their average transaction price will come down and that might affect margins," Palmer said.

Aston Martin lacks Ferrari's revenue streams. It does not run a Formula One team, does not sell engines (worth 157 million euros to Ferrari in the first half of the year) and is yet to leverage its brand in the same way. Ferrari's sponsorship, commercial and brand activities accounted for 14 percent of its 1.7 billion revenue in the first half.

Aston Martin however believes it will offer a more complete lineup for the world's growing numbers of ultra rich. "I don't think Ferrari is going to be making three-box saloons any time soon. We have the Lagonda that allows us into that area," Palmer said. Aston is also working to make its brand pay with forays into consultancy work on projects such as apartment blocks, speedboats and even planes.

Aston is ramping up the number of cars it sells. It's half-year wholesale figure of 2,299 (compared to Ferrari's 4,591) will grow to between 6200-6400 by the end of the year. Next year it will pass 7,000, breaking its sales record, on the way to a capped 14,000 in the "medium term," Aston predicts. Despite the high numbers Palmer reckons actual demand will be between 19,000 and 25,000, thus avoiding future discounting problems. "14,000 is exactly where you need it to be," he said.

In Palmer's vision, Aston's history of bankruptcies are a thing of the past, helped by stringent oversight from its board, chairman and shareholders. He said: "Ferrari have overcome the boom-bust cycle. We're trying to mimic Ferrari."

You can reach Nick Gibbs at ngibbs@crain.com.

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