As the economy teeters along the cusp of the next Great Depression, the luxury automotive segment appears to be enjoying an uptick in consumer spending. Ferrari just reported better than expected earnings earlier this week, on Monday 4th May, causing the Maranello carmaker’s shares to jump almost 7%. The luxury carmaker shut its factory in March as the coronavirus ravaged the brand’s Italian home but total shipments of Ferrari supercars increased 5% to 2,738 during the month-long furlough. Better-than-expected earnings – $1.02 billion, better than the projected $852 million caused Ferrari’s share prices to surge, making the Italian luxury carmaker’s market value worth more than mass market consumer car manufacturers Ford and General Motors.
“The unexpected and sudden nature of the impacts of the pandemic are hitting the autos sector hard, with unprecedented levels of uncertainty around prospects for meaningful global recovery,” said Colin Couchman, executive director, global autos demand forecasting at IHS Markit.
The news comes amidst tempered expectations as factories resume production in China with business data firm IHS Markit forecasting lowered expectations as new COVID-19 safe work requirements makes it impossible to return to previous operational capacity, especially in a market of weaker consumer demand. From January through March, Chinese carmakers endured their weakest quarter as the lockdown shuttered factories, dealerships and kept consumers at home.
According to the China Association of Automobile Manufacturers, demand started to return in March, an improvement from February’s 79% drop but sales were still down 43% compared to the year before. While nearly all dealers across mainland China are back to work, and there are signs of an encouraging uptick in showroom traffic, consumer confidence remains fragile, quarterly sales declined year on year to 3.7 million vehicles with concerns on secondary impacts from the global contagion, which could further disrupt the recovery.
Global light vehicle sales down 22% due to pandemic, luxury cars should be down as well
Over in North America, the US is expected to lead global automotive declines with a 26.6% fall in domestic vehicle sales, the lowest volume since the industry recovered from the 2008 Great Recession. Speaking to CBC news, Dennis DesRosiers of DesRosiers Automotive Consultants said that April sales of Canadian automobiles fell by nearly 75%, the second straight month of double-digit declines after March sales fell by 48% as the epidemic took hold across Canada. DesRosiers added that the auto industry had weathered economic storms such as the energy crisis of the 1970s, and the financial meltdown of 2008, but that there was a fundamental difference between those events and the coronavirus crisis.
“Consumers were still driving. If you’re not driving, your vehicle is just sitting there in the driveway and so you don’t need to replace it. Until we start driving again, it’s going to be very difficult to get people into showrooms.” – Dennis DesRosiers, Automotive Consultants
In fact, DesRosiers believes the coronavirus pandemic will hammer luxury car sales, which has seen high growth for the last decade, explaining that, “One of the reasons that was doing so well is because we had a lot of what I like to call ‘pretend’ luxury buyers, people who aspire to have a luxury vehicle but can’t afford one.” However, the data indicates a different assessment when it comes to luxury cars with Tesla reporting sales of 10,160 vehicles in China for March 2020, its highest ever monthly sales in the world’s largest car market. Like Ferrari and Bugatti, luxury sports cars are having unanticipated recoveries from a bout of high profile revenge spending initiated by bored high net worth individuals.
Speaking to South China Morning Post, China Passenger Car Association secretary general Cui Dongshu, said Tesla sold 30% of the electric vehicles in the Chinese mainland with data showing that Elon Musk’s brand selling 2,620 luxury EVs in January and 3,900 units in February. Tesla, which aims to produce 150,000 Model 3 sedans from its Shanghai factory.
Why Ferrari attracts Investor Confidence: Impressive Margins
Motor1.com studied a 2019 Fiat Group World report which found that Ferrari earned a 23.2% operating margin on each of 10,131 cars it should that year, which works out to be $94,474 per Italian supercar and that “Ferrari achieved its impressive margins through adopting new technologies, adapting to market changes, and marketing its vehicles.” Fiat Group World is a non-official site tracking Fiat Chrysler Automobiles and global car trends.
In an industry where profit margins are around 5-10%, the report also makes a comparative study on how much more profitable Ferrari was compared to other carmakers: BMW would need to sell 30 vehicles to equal the earnings of one sold Ferrari, while Mercedes would have to sell 67 new cars. In the mass market segment, you’d need to sell 908 Fords and 928 Nissans to match. Ferrari’s market capitalisation hovered around $30 billion but end of trading on Monday amidst a backdrop of reduced earnings forecast for 2020 as CEO Louis Camilleri told investors that while there have been “several cancellations” of car orders in the U.S. and Australia, “there are no red lights flashing in any geography”, while warning of continued weakness from its Formula One business and other segments.
IHS Markit Economics and Country Risk team issued a global economic forecast update indicating a 2020 slide into a global recession with real GDP growth down about 3%, and very sharp reduction in near-term demand/supply followed by a slow recovery. Michelle Krebs, senior analyst for Cox Automotive told CNN that “The three things that most determine car sales are credit, employment and consumer confidence. All are working against car sales.” It appears that for the moment, the appetite for luxury consumption is still upbeat with high confidence among the affluent who are not as affected by credit availability and employment.