What VW means for Ducati

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After weeks of rumor, Bloomberg and Reuters are both independently reporting that VW has agreed to purchase Ducati for something in the neighborhood of $1.12 billion. But why does a gigantic auto conglomerate want a tiny bike manufacturer? What will VW do with Ducati? And, what does the deal mean for that most evocative of bike brands? Let’s examine the background, business and speak to experts that may be able to share some insight.

Photo: Grant Ray

Ducati, a brief history
It’s easy to fall into the trap of thinking of Ducati in terms of what it currently is — the maker of some of the most technically advanced, fastest, most desirable motorcycles in the world. But, that version of Ducati has only been around for a relatively short time. Prior to 1985, the marque changed hands seven times, always flirting with greatness rather than really achieving it. Fits of genuine mechanical innovation were tempered with a frequent lack of funds and the limitations that come from being a tiny, passion-driven, Italian vehicle company.

Then, in 1985, Ducati was purchased by Claudio Castiglioni’s Cagiva group and shortly thereafter began making world class performance bikes. 851, 888, 916. With that final model, the brand’s existence in the motorcycling pantheon was forever secured. That, plus racing success, opened the door for acquisition by Texas Pacific Group. Ducati was then sold to InvestIndustrial SpA in 2005 and Performance Motorcycles SpA in 2008. Bizarrely, the Hospitals of Ontario Pension Plan is one of the company’s largest current shareholders.

“Ducati is good motorcycles, not a good business,” explains industry analyst Michael Uhlarik. “It has just not made money for most of its life. Suppliers consistently go unpaid/late paid, debt goes up but sales refuse to go much beyond 50,000 units.”

One Billion Dollars
Boy, does $1.12 billion dollars sound like a lot of money. And, to you or me, it would be. But, in the world of gargantuan corporations, it’s simply not that significant an amount.

“Instagram was just acquired by Facebook for $1 billion,” highlights Jon Alain Guzik, a veteran of the technology and automotive industries. “What’s worth more, 35 million users or making 40,000 bikes a year? Instagram’s assets and brand pale in comparison to those of Ducati, but the two companies achieved the same valuation.”

$1 billion is also a trivial sum to a company as large as Volkswagen. Last year, the Group’s 11 brands (Ducati makes 12), sold 8.4 million vehicles for a revenue of $209.1 billion. “Consider for a moment that Volkswagen’s business generates something close to 8 billion euros in free cash every year,” Barclays Capital analyst Michael Tyndall told Reuters. “The company either has to find investments to enhance its return on capital or it needs to return the extra cash to shareholders.”

What VW can hope to gain
You’re going to be reading a lot of VW wanting to enable Audi to better compete with BMW by adding Ducati to its stable. That’s just total horse shit. BMW motorcycles is as irrelevant to BMW as 40,000 bikes a year will be to VW. In 2011, BMW Group had a total revenue of about $90 billion, $1.8 billion of which was contributed by Motorrad. Reuters uses the term “a drop in the bucket.”

You’ll also be hearing speculation of VW gaining technology from Ducati. Specifically stuff about small engine technology. That is a tempting rabbit hole to speculate down. Ducati makes 1199cc engines that make 195bhp. VW makes 1.6 liter engines that make 100bhp. Plug Duc technology into that Polo and every wins, right? Right? Guys? Again, a company at Ducati’s level — 40,000 bikes as opposed to over 8 million cars and trucks — simply does not have technology that the bigger company doesn’t. They don’t have more talent or any secret alien technology. Motorcycle engines play a very different game to car engines. Sure they have higher specific power outputs, but they do so at a higher price (the engine is a higher percentage of total vehicle cost on a motorcycle), with much higher emissions, much lower service intervals and exponentially lower outright lifetimes. If VW started selling Golfs that went 175mph, but cost $75,000, got 8mpg, required $5,000 services every 4,000 miles and blew up after 20,000 miles, VW would be in a lot of trouble, right? That’s before you even factor in emissions standards, which are far more lenient for motorcycles than they are for cars.

What else? Some marketing tie ins or race team sponsorships or presence at corporate events are multi-brand dealers? Again, to quote Reuters, “a drop in the bucket.” All these benefits are marginal in the context of one of the world’s largest businesses acquiring a company with the same valuation as an iPhone app.

Ducati’s latest product, this Streetfighter 848, is the perfect representation of the brand’s values — performance, design, character. Photo: Brian J. Nelson.

Lamborghini, a case study?
This isn’t the first time VW has purchased an exotic Italian company that’s far, far, far smaller than the parent brand. In 1998, VW purchased Lamborghini for $110 million. In 14 years, it’s transformed that brand from the ridiculed maker of temperamental exercises in wealth flaunting, to a maker of genuinely good exercises in wealth flaunting, expanding Lamborghini’s product’s into new segments and bringing in a new demographic of owner. In 1997, Lamborghini sold 209 Diablos. In 2007, before the world financial crisis, they sold 2,580 Murcielagos and the new, smaller, cheaper Gallardo. Perhaps the best indicator of Ducati’s fate under VW ownership is that neither the Lamborghini brand nor its products are now viewed in any way as watered down or diluted. Under VW ownership, Lamborghini is healthier and produces more appealing products than Ferruccio could ever have dreamed for.

So what can we expect for Ducati? “This is TPG Ducati redux,” says Uhlarik. “Wild talk of ‘IPO on the horizon’ and expanding the line. The economies of scale are there, but only if they can successfully leverage brand against low cost manufacturing without negative consequences. No one has done this in the bike biz so far.”

In short, Ducati is in safe hands. It will continue to innovate and produce exciting new superbikes and other luxury goods. The 1199 already promises to be the mostest superbike out there and its heirs will likely continue to similarly innovate and push the performance envelope. That’s great news for fans of fast motorcycles like you and me, but it’s unlikely that VW ownership will translate into higher volumes or more affordable products. Honda doesn’t have much to worry about.

“VW took over Lambo, which similarly made no money for over 20 years and 5 owners and turned it around,” continues Uhlarik. “If there is one company that can fully understand the Italian manufacturing proposition and make it work, it is VW.”

The real reason?
Back in 1985, now VW Group chariman Ferdinand Piech passed on a chance to purchase Ducati for a price he called “peanuts.” Since that time, it’s been well publicized that he retains an interest in owning a motorcycle maker.

“The Ducati purchase is driven by VW’s passion for nameplates rather than industrial or financial logic,” states Credit Suisse analyst Arndt Ellinghorst to Reuters. “It’s an unnecessary sideshow to VW’s main challenges.”

“The purchase does have a trophy feel to it, in the sense of something you might mount up on the wall next to the stag you shot last year,” an anonymous analyst told the outlet.

“Strategically it’s insignificant for Volkswagen,” Christoph Stuermer told Business Week. “Its revenue is more than Lamborghini’s and Bugatti’s combined, but to the automotive operations, it’s a mere accessory.”

“Piech is having another Bugatti/Phaeton moment,” concludes Uhlarik.

Sources: Business Week, Dealer News, Reuters, VW, BMW, original reporting

  • Adam

    I ride a Volkswagen… Hmmph.

    • http://www.anotherdamndj.com evilbahumut

      Do you have an Apple sticker on your back window?

      • Adam

        And a roof rack with a little padded thing for my kayak.

        • Joe

          With no ground clearance?

  • Brad

    They’ll find a way to make the window regulators fail regularly on the Panigale.

    • dux [87 CBR600, 95 XR600R]

      Haha! Maybe the climate control will freak out randomly as well.

    • BigRooster

      ..and shit engine coils.

  • Ceolwulf

    2WD turbodiesel Ducatis in 2014. You read it here first.

    • Holden and Annette

      But I thought of it second!

  • http://rider49er.blogspot.com Mark D [EX500]

    First person to shoehorn two Monster 1100 engines into a bug wins.

    • Ceolwulf

      ooh. I like this plan.

      • http://www.anotherdamndj.com evilbahumut

        +2

      • Mike

        Hey, I knew a guy with a Guzzi engine in an OG fiat 500, so why not..

        • http://twitter.com/metabomber Jesse

          That’s way more style than the Hayabusa powered Smart cars.

  • The other Joe

    Maybe now Ducati can become competetive in MotoGP!

  • 10/10ths

    Big egos. It’s all about VW group wanting to beat BMW in WSB.

  • DoctorNine

    Uhlarik’s reasoning is compelling.
    I agree.

  • PenguinScotty

    Wait, wasn’t it VW that bought a large amount of shares in Suzuki?

    I mean, not really comparable to Ducati and such, since it’s another automotive manufacturer, whereas Ducati is strictly Mopeds.

    For one, i think it’s hilarious to see VW/Audi to buy Ducati, since the demographic absolutely fits perfectly. I’m already seeing big-watch wearing VW Golf GTi drivers with Ducati and, like evilbahumut said, Apple stickers.

    We’ll see what happens, honestly. The article definitely explains the reasoning behind the purchase, just because Piech wanted mopeds.

    Should be interesting to see.

    • Joe

      Suzuki has parted ways with VW. Suzuki didn’t want to be controlled, and the CEO aired out his grievances in a very public manner.

      It was a divorce that would make Kim K blush.

      • DoctorNine

        Also, VW’s interest in Suzuki, was related to small car production, not cycles.

      • BigRooster

        And now Suzuki (cars) is on life support in North America – good call on not wanting to be controlled.

        • aristurtle

          Suzuki cars have never done well in North America, and that market has never really been a priority for them in the first place. They’re doing quite well in India, which is where VW wanted to get a foot in the door.

          • muckluck

            I’d buy a Samurai if they brought them back to the US, I believe they’re called Jimny in the UK.

  • Gene

    One thing VW is smart about is letting the exotic sub-brands stay exotic brands. You don’t see a VW circlet on a Veyron or a Murcielago.

    When Cagiva bought Ducati, they plastered that “elefant” logo all over, like AMF did to Harley. I know they pissed off a lot of die-hard Ducatisti that never went back.

    VW’s smart enough not to do that.

    • nick2ny

      I like my little elefants. I like them more than Porsche and Bentley sharing VW platforms, Audi sharing platforms with Skoda, and Lamborghini sharing engines with Audi.

    • Gary Inman

      The hardcore Ducatisti could be counted on the fingers of one hand before Cagiva took over. What followed was the 851, 888 and 916. A fair swap for a little elephant logo.

      Great article, by the way. I love the way you do industry news.

  • DavidMG

    Good for Ducati, but couldn’t VW have bought SAAB too? :-(

    • BigRooster

      Sadly, I think Ducati sold more bikes in 2010 than SAAB sold cars. Would have been nice to replace my 9-5 with a VW backed replacement one day.

  • OC

    Like mentioned in the article, looking at this purely emotionally it just doesn’t seem right.

    Things that are worth One Billion Dollars:

    Instagram: 1.5 years old, 13 employees, sepia photo filter which can be done by an infinite number of other applications.

    Ducati: 84 years old, 1,172 employees, world class motorcycles unmatched by any competitor.

    Oh well, I’m 23, have owned two bikes and refuse to use Intagram, I guess I’m not the average gen y’er

    • jp182

      No you’re not; the sooner that you accept it the less annoyed you’ll be.

      • AHA

        Don’t worry yourselves about these mindless valuations of web businesses. I realised this 10 years ago when Freeserve, at the time one of the IP access co’s in the UK with the most subscribers, was valued several 100 times higher than it’s parent company that had a 20 year trading history and owned prime retail real estate in every town in the country. The parent company made £££S and their subsidiary never made a profit. The stock market geniuses lost their shirts but the same error gets repeated in every web commerce generation. Ask Rupert Murdoch about MySpace. :)

        • http://www.twitter.com/wessilerfanclub Sean (the other one)

          You couldnt be farther off. 10 years ago we didnt have google in our pocket and people didn’t even know what a twitter feed was, let alone see the news on it first.

          10 years ago the internet was for porn now the internet is for porn and motorcycles and storing all of your personal data and connecting with pretty much everything. There is a reason instagram was valued at 1 billion and a reason why Facebook had the billion to spend. You’re a fool if you think these companies are all just some worthless fad or gimmick.

          • austin_2ride

            Fad and gimmick!

          • kidchampion

            I agree with Sean. Apple and Facebook have very few employees relative to their worth and their reach but that doesn’t make them less relevant. It makes jobs less relevant. These companies are reshaping modern life and a crazy pace. I heard automotive write Dan Neil interviewed the other day and he said the car will become extinct as the world becomes more urban. VW might be getting into the small vehicle business as a hedge.

          • AHA

            Whoops. Bit of misunderstanding methinks. The self-evident potential of the Internet was why all those investors put their cash into the Freeserve South Sea Bubble in the first place. They got it wrong, picked a crap business and lost it all . The Internet is fantastic , no argument, but there are quite a few crap businesses out there that are way over-valued often because the Internet makes them look way better than they are.

    • robotribe

      I see your point, but there are some basic tenets of economics we see at play here.

      Even as a borderline-crotchety Gen X-er who treats Facebook like it’s an STD, I can see why an Instagram w/35 million users, little overheard, a high-margin product with little barrier to entry ($200 smartphone w/contract) in a growth industry has a higher a market value than an 84 y.o. motorcycle company with likely smaller margins, a higher barrier to entry ($9,000+ bike, insurance, personal risk etc.) and in a shrinking market.

      I like Ducati, but looking at it through the lens of a motorcycle outsider and investor, the valuation makes sense.

      • austin_2ride

        Facebook is a STD!

  • CG

    Given the new Honda NC700 uses half of a car engine, who knows what is possible? But, more importantly there is a good reason for Ducati to be bought. The new EU motorcycle regulations being threatened would literally end the high performance motorcycle. Perhaps with VW in the mix, those regs might be rethought. In addition Italian bond yields just doubled in the last month putting more pressure on an economy (and the Euro). If I owned Ducati I would take the money and run. As for VW? Maybe America will finally build a sportsbike. They’ll just be called Ducati’s and be built in S.Carolina….

  • ike6116

    This article is called “What VW means for Ducati”. The the whole article talks about what Ducati means to VW and the answer ends up being vanity.

  • Sam

    In the long run I think this will be good for Ducati. I feel weird as being unable to find a Futura or a V11 kinda shoehorned me into buying another Duc and now I’m starting look like a fan girl what with my street bikes owned list being a metal tanked monster and an air cooled MTS.

    If it means Ducati gets the funding to keep making products like the 1199 and MTS 1200 great! I don’t see VAG screwing with them that much. The money for Ducati to keep doing lots of awesome things is peanuts to VAG’s CEO and if he wants to keep them in business because he loves their products more power to him.

  • http://respectthetrade.tumblr.com/ KR Tong

    (Insert joke about Europe unifying under German rule…)

    Last time I read about this, Audi was only interested in buying part of Ducati and didn’t want to pay for all of Ducati’s debt. I dunno if that $1.1 is all they paid, or how much of the company they got for that. And lets not forget the italian company’s right in the center of the EU economic meltdown and its hard for ANY european company (especially italian or greek) to get any kind of loan/liquidity at all.

    Meanwhile Instagram was sold for top-dollar because of the ridiculously inflated patent war going on in silicon valley. Its not like Facebook could make an instagram-style app or feature on their website (like google+ has) without risking lawsuit by some petty patent holder who thinks they invented filters.

    • http://www.ninja250blog.com R.Sallee (Ninja 250)

      Instagram’s value is in their 40-million-people user base. You’re right, it wouldn’t be tough for Facebook to make a photo app with filters. But I don’t think Instagram is a known holder of strategic patents.

  • http://www.ninja250blog.com R.Sallee (Ninja 250)

    I’m not so sure Lamborghini and Ducati are that comparable. “Italian exotics” sounds nice, but Ducati sell the Monster and the majority if their lineup isn’t exponentially more expensive than bikes people wouldn’t call exotic. You even point out that Ducati revenue is greater than Lamborghini + Bugatti revenue, which suggests to me Ducati isn’t that niche.

    40,000 bikes a year is probably insignificant to VW. But remember, Honda sold 17 million bikes in 2010. There’s a lot of market out there that Ducati’s not playing for, and IMO it’s not beyond reason that they might go after the small capacity Asian market. $1 billion could look like a steal.

    • Sean Smith

      The world could certainly use a modern 350 scrambler…

      • Mr.Paynter

        +1

      • http://twitter.com/metabomber Jesse

        I’ll take one. Today. High pipes, 35ish HP, some semblance of rutty fire road capability, 2 up seat with a rack on the back.

        • Sean Smith

          I’ll take mine with 50hp. That’s what modern means ;)

    • http://www.cdavisdesigns.com Chris Davis

      Buying Ducati to produce low-cost, low-margin, low-maintenance motorcycles in Asia doesn’t seem like a sound business decision.

      • http://www.ninja250blog.com R.Sallee (Ninja 250)

        KTM is getting into it, I wouldn’t put it past Ducati.

  • http://www.damiengaudet.blogspot.com damien

    Nice, through my vw stock I think I will own 0.0000000000000000000000001% of Ducati! Sweet. I’ll walk into my local dealership with a new swagger. Ha.

    • BigRooster

      Like a boss.

      • BMW11GS

        hahah, I bought some harley stock as a joke (its actually done quite well…shhhh don’t tell anyone) and I always imagine showing up to a harley dealership, eyeing my capital investments and issuing directive. Now I can do this with Ducati.

  • AHA

    Sober article based on real numbers. Good to see the idle thinkers’ bubbles being burst.

    Ferdy Piech basically wants to have the world’s biggest mid-life crisis. “Never mind the Italian virility symbol, honey I bought the company…”

    I know I posted this a few weeks ago before VW’s interest was announced, but if I was KTM, I’d be pissed. Who knows, they might be next. Asian buyer probably and hopefully not Russian. (Thinking of TVR, the British Sport car co.)

    • robotribe

      About KTM being pissed, I don’t know why they would be. There’s absolutely no way they could make themselves more attractive an acquisition than Ducati based on caché alone. KTM being left out in the cold is evidence of they’re failure to hit the mainstream street bike market they’ve been gunning hard for the past 5-6 years.

      • AHA

        I think you’re pretty much right- which is exactly why they might be feeling pissed off. It’s external evidence that their strategy maybe hasn’t worked .

        • robotribe

          Anecdotal evidence is the number of ’09 and later RC8 and Super Duke models I see on sale at big box moto dealers (Bert’s in Azusa, CA being one).

  • markbvt

    Come on, we all know the REAL reason VW’s buying Ducati… because it rhymes with Bugatti.

    • http://www.facebook.com/beastincarnate Ben W

      Bravo!

    • The Other Will

      Dugatti Veyavel – 650 hp W8.

  • nbeato

    Maybe a VR engine in the works… Desmosedici performance /VW reliability

    • Ceolwulf

      A VR5 … make it so …

  • The Other Will

    As someone said above, I really enjoy the industry reporting. Wouldn’t at all mind having even more of it when possible.

    That being said, the Instagram comparison is apples to oranges. Insane over-valuation of tech companies is a tradition as old as silicon valley, and doesn’t really analogue to the real world. VW may have gotten a steal here though. It will be really interesting to see what they do.

    • http://hellforleathermagazine.com Grant Ray

      You entirely missed the point for the Instagram deal. The valuation is in the access and data mining of 35 million users’ personal information that can be sold at a profit to other companies. Nobody gives a shit about that little mobile program with the cutesy photo filters.

      • The Other Will

        I don’t think I missed the point. I understand that what’s being sold is user data. That’s why it’s apples to oranges. Ducati has physical materials and hard sales figures. Instagram has projected ad revenue. It’s a minor quip on my part. It’s just like comparing the industrial age to the information age, it doesn’t analogue.

        • http://hellforleathermagazine.com Wes Siler

          Ones an exponentially expanding market with limitless opportunities, the other is a great brand operating in a shrinking space increasingly populated exclusively by geriatrics.

          • The Other Will

            No arguments from me on that one.

  • http://www.muthalovin.com the_doctor

    This is by far the best read regarding VW-Ducati out there.

    So, when can I buy a Streetfighter at my local VW dealer?

  • pj134

    So… how long until all Ducatis have a dual clutch? Maybe VW will build the GX3 as a Ducati to try and take down their biggest and most fearsome rival, Morgan.

  • Peter88

    This was an emotional purchase and will provide a halo effect for Audi (VW). Aesthetics goes a long way in any area of selling. And thanks for the insight on Instagram.

  • aristurtle

    Guys, Instagram was purchased with “one beeeeeeellion dollars” worth of pre-IPO Facebook stock, not cash money. It’s worth $1B if you think that Facebook is worth $100 billion.

    • austin_2ride

      The only way it could be worth that much is if you factor in all the possible income from identity theft.