Automobili Lamborghini: Growth after Bankruptcy

This case was written by Brinda Gothandapani under the direction of Bharathi S. Gopal, IBSCDC. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. This case was compiled from published sources. 2007, IBSCDC

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Automobili Lamborghini: Growth after Bankruptcy

Automobili Lamborghini is one of the worlds most prominent manufacturers of highperformance sports cars in 2007. Lamborghini made its debut in the sports car market in 1964. Ever since its inception, Lamborghini has had a troubled performance, as it faced bankruptcy and was changed hands quite frequently. In the later part of 1998 Audi AG a German based company1which was itself owned by Volkswagen AG2, bought the Italian brand Lamborghini for $110 million3. Under Audi AG, the company showed signs of improvement with increase in sales. But it continued to lag behind its rival Ferrari. In 2007, it initiated several efforts to meet the competitive threat posed by Ferrari. However, Lamborghini had to ensure a balance between higher sales and brand exclusivity since it was known for limited production irrespective of demand.

Lamborghini: The Company Profile

In 1964, Lamborghini launched its first model, 350 GT, an aerodynamic sports car with a fourcam V12, five-speed transmission, four-wheel disk brakes, and four-wheel independent suspension. This model created an uproar in the market by threatening the customer base of the well established brands like Porsche and Jaguar. Moreover, the brand also amassed appreciation from the automobile critics including Enzo Ferrari. The overwhelming response and the accolades made Lamborghini an even bigger name during the period from 1966 to 1972. During this phase, Lamborghini gained competitive strength over its counterparts by consistently producing numerous models with optimum quality. Some of the models it introduced during this period were 400 GT, Miura P400, Islero 400 GT, and the Espada, which became the popular models of Lamborghini. With Lamborghini showing positive signs of growth, analysts felt that Lamborghini was all set to cast a shadow over its counterparts including the industry leaders like Ferrari.
Audi AG is a German automobile manufacturer, was originally founded in 1910. It has been operating as a subsidiary of the Volkswagen group since 1964. 2 Volkswagen AG is a Germany based automobile manufacturer and is the worlds fourth largest car producer after Toyota, GM and Ford Volkswagen AG operates as the core of the Volkswagen Group. 3 Automobili Lamborghini Holding S.p.A, http://www.fundinguniverse.com/company-histories/Automobili-Lamborghini-HoldingSpA-Company-History.html 4 Ferruccio was born in 1916, in a small Italian village near Bologna. As a young businessman, Ferruccio focused on tractor business which brought his business high financial stability. 5 Ferrucio noticed a faulty part in Ferrari car, during one of his drives. Wanting to get the fault repaired, Ferrucio took the car to Ferrari Headquarters at Modena. There he was left unattended for long hours. Finally getting annoyed with the response at the headquarters, Ferrucio demanded to meet Ferraris founder, Enzo Ferrari. Ferrari, a reputed man in the international race car circuit also could not attend to Ferrucio immediately. Becoming angry and frustrated with the way he was treated at Ferrari headquarters, Ferrucio decided to establish his own company to produce contemporary sports cars 6 Enzo Ferrari was the founder of the Ferrari cars and was a car racer too. In late 1940s, Ferrari decided to make cars bearing his name.
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Automobili Lamborghini S.p.A (Lamborghini) was incorporated in 1963, at Sant Agata near Bologna. Founder Ferruccio Lamborghini (Ferruccio)4held a collection of different cars as he was fascinated by the mechanics of revolutionary engines and automobiles. Ferrari, which was one of the most prestigious and high-performance sports cars of his time, was also one among his collections. Ferruccio decided to establish a company of his own that produced sports cars, as he experienced dissatisfaction5 with Ferrari and its founder, Enzo Ferrari6. With an intention to roll out a sports car with better performance than the contemporary sports car brands, in 1963, Ferrucio recruited Paolo Stanzani, an automotive engineer and entrusted him with the extraordinary task of building a state-of-the-art and up-to-the-minute car making facility.

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For the first time in the early 1970s, almost after ten years, Lamborghini was making money and attracting the markets.7 But Ferruccio sold the controlling interest and 51% stake in Lamborghini to Georges-Henri Rossetti (Rossetti), a Swiss industrialist8 as a result of a severe setback received by his tractor business which led to a major loss.

Lamborghini Under Multiple Drivers

The year 1973 witnessed an event which affected the industry and the company as well. The oilcrisis9 that erupted due to a worldwide recession hit several players in the automobile industry including Lamborghini. And the market for high-speed gas-guzzling vehicles suddenly dried up, there by, arresting Lamborghinis sales rapidly. With the decline in sales of Lamborghini, Ferruccio sold out the remaining 49% of the companys stake to Rene Leimer (Leimer), a Swiss business tycoon.10 Rossetti and Leimer, the new owners of Lamborghini launched new models like- Countach. Though Countach was well-accepted in the market, Lamborghini was unable to infuse the capital required for manufacturing Countach. The companys financial crises further deepened when Lamborghinis contract with BMW was cancelled in 1977.11 Rossetti and Leimer finally decided to sell the factory. But nothing worked out during the period between 1977 and 1978. Finally, Lamborghini was declared bankrupt.12 Later on, the company was under the government control for a short time before going into unavoidable liquidation. In 1980, the Bologna court handed over the management of the company to Mimran Brothers13 and in 1984, sold the firm to Patrick Mimran the younger of the two brothers for around $3 million (3,850,000,000 Lire, exchange rates as of 1984).14 Under the Mimran Brothers, the company recovered from bankruptcy. They invested large amounts of capital to breathe new life into the manufacturing facilities at Sant Agata, and then initiated a worldwide search for brilliant automotive engineers and designers. Under their leadership, Lamborghinis name was changed to Nouva Automobili Ferruccio Lamborghini SPA. In 1982, Lamborghini redesigned and introduced the Countach LP500S with a new 5liter, 375-horsepower engine. A brand new model, Jalpa was also introduced in the same year. In 1985, the Countach LP500S was redesigned and was renamed as LP500S QV. Under Patrick Mimran, Lamborghini managed to gain back its leading position in the market for highperformance exotic cars. 15 For the next couple of years Lamborghini continued to develop and earn revenues. 16 But the companys income level was not able to match with the capital expenditure that rose with the rapid pace of production. And Mimran Brothers realised that fetching the required capital expenditure for Lamborghini was much beyond the capabilities of
The History of Automobili Lamborghini S.p.A, http://www.lambocars.com/history.htm Automobili Lamborghini Holding S.p.A, op.cit 9 In 1973, the Organisation of Arab Petroleum Exporting Countries announced that they would not ship petroleum to nations (US, Western European Countries, Japan) that supported Israel in its conflict with Syria and Egypt. This led to an oil crisis 10 The History of Automobili Lamborghini S.p.A, op.cit 11 BMW made a contract with Lamborghini for building the new BMW M1 racing cars. But, Lamborghini used up BMWs finances to design and build its new model Cheetah, which could not live up to Rossettis expectations. This worsened Lamborghinis financial crises 12 The History of Automobili Lamborghini S.p.A, op.cit 13 The Bologna court handed over Lamborghinis management to the Swiss based Mimran Brothers, who were food industry tycoons with unlimited financial value 14 The History of Automobili Lamborghini S.p.A, op.cit 15 Ibid. 16 Ibid.
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individual investors like themselves. The Mimram Brothers were thus looking out for a financially stable partner. In 1987, the Chrysler Corporation17 (Chrysler) stepped in, promising to rejuvenate the future of Lamborghini. Chrysler bought Lamborghini for approximately $25 million.18 Soon after the takeover, Chrysler changed the name back to Automobili Lamborghini and invested $50 million with a bid to hike its production and widen its reach19. Under the guidance of Chrysler, Lamborghinis most successful model: the Countach series celebrated 25th anniversary. Since the market for Countach LP500S was good, Chrysler decided to produce till its successor Diablo was ready for the market. During the 1990s, Diablo became the fastest car in the world, cruising at a speed of 202m.p.h20. With Lamborghini producing 673 cars for 1991, the sales for the year were very brisk with a profit of $1.32 million. 21 During the same time, Chrysler launched Lamborghinis new models in the US market and reorganised the existing Lamborghinis network in US into a highly efficient franchise with support services.22 Chrysler also opened a new factory in Italy to produce Formula One racing cars; Lamborghini also began the manufacture of Marine Engines.

Kimberly believed that the company needed more than just one or two models to sell, and developed Lamborghini cars for a price within the reach of the American customers who adored contemporary high-performance cars. Simultaneously, he made efforts to make Lamborghini Sports cars more attractive to the customers. These initiatives undertaken by Kimberly resulted in the sales moving upwards by 14% in US, and 34% worldwide in 1995.27 Despite Lamborghinis better performance, its Indonesian owner was hard stung by the economical crises28 of the mid1990s, and was unable to provide sufficient funds for research and manufacturing. This triggered a change in the management, which saw the arrival of Di Capua, a veteran of the car industry, with a staggering 40 plus years of experience at Fiat S.p.A. He thought of slandering the size of
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Chrysler Corporation founded by Danil Young, is now in 2007 known as Daimler Chrysler Motors Company LLC. It is an American Automobile manufacturing company and has been in the field since 1925. Automobili Lamborghini Holding S.p.A, op.cit 19 Ibid. 20 Ibid. 21 Ibid. 22 Ibid. 23 Ibid. 24 Lamborghini, http://www.speedace.info/lamborghini.htm 25 MegaTech was a holding company registered in Bermuda and wholly owned by SEDTCO Pty.,( Setiawan Djody and Tommy Suharto,) the sons of the premier of Indonesia and had extensive worldwide holdings in mining, manufacturing, and shipping. MegaTech Ltd.was a large Indonesian conglomerate 26 Automobili Lamborghini Holding S.p.A, op.cit 27 Ibid. 28 The financial crisis that erupted in Asia in mid-1997 led to sharp declines in the currencies, stock markets, and other asset prices of a number of Asian countries and contributed to a robust volatility in international financial markets
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But the success of Lamborghini was very brief in 1992 and 1993, as it produced only 166 and 215 cars respectively, against 673 cars in 1991.23 Given the unpleasant drop in the production, Chrysler reviewed the low production volumes and profitability. Soon, Chrysler realised that the management of a luxury car manufacturing company which aims for exclusivity was in no way comparable to the management of company like Chrysler which was involved in mass production.24 Eventually, in late 1993, Chrysler sold Lamborghini to MegaTech Ltd25., a consortium of Indonesian investors, for about $40 million26. MegaTech was quick in its endeavor of turning around Lamborghinis fortunes. Its first step was to sign up Michael Kimberly (Kimberly), who was associated with Jaguar and General Motors, as the president and managing director of Lamborghini.

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the company by bidding adieu to numerous executives and consultants, thus moving on a raging cost-cutting spree. Di Capua also realised the growing need to milk the brand by taking more belligerent measures through merchandising and licensing deals. He also came up with $100 million budget for development of the Diablo, nicknamed the Super Diablo, and a smaller version dubbed the Baby Diablo. 29 However, the aggressive initiatives of Di Capua were confronted by an uncontrollable phenomenon the Asian meltdown30of 1997, creating a capital-flight-induced financial furore, that adversely affected the global economy. The Asian financial crisis led to yet another change in the ownership of Lamborghini when, Volkswagen bought Lamborghini for $110 million31 in 1998. During the late 1990s, Volkswagen AG was determined to take its company upmarket through a rampant acquisition spree. Thus After the takeover, Lamborghini became the subsidiary of Volkswagen luxury car subsidiary, Audi AG. For Audi AG, Lamborghini was an important cog in its wheel, as Audi believed that, both were armed with complementary skills for mutual progression and development. An Audi spokesperson Juergen de Graeve mentioned, Lamborghini could strengthen Audi's sporty profile, and on the other hand Lamborghini could benefit from our technical expertise32.

Audi Takes over Lamborghini

According to the industry observers, there seemed to be an air of stability in Lamborghinis ownership ever since Audi AG took over Lamborghini. Further, Lamborghini has started achieving consistent profits under Audi AG. Since 2001, Lamborghini had witnessed an encouraging upswing in its sales (Exhibit I). Commenting on the increase in sales, Stephen Winkelmann (Winkelmann) the president and chief executive officer of Lamborghini said, In 2006, Lamborghini's gross profit more than quadrupled to 18.1 million ($23.84 million); while revenues grew 43 % to 346.3 million ($454.87 million) with record sales 2,087 cars. 33 It was reported that sale of 2087 cars is the highest recorded figure in the companys sales history.34 It is also predicted that in 2007, Lamborghinis pre-tax profit could rise to $14 million, and revenues could increase by 30% to $400 million. 35 However, this figure was lesser than the expected $1.9 billion revenue from the sale of 5400 Ferrari cars for the year 2006. Addressing this difference, Winkelmann clarifies that, You cant increase volume at the snap of a finger. 36 Further he continued to express that he had plans to boost Lamborghinis earnings with limited-edition models packed with pricey options, as he has done with limited edition of Murcielago LP640 cars, which were sold for $500,000.37

Automobili Lamborghini Holding SpA, op.cit Ibid 31 Ibid. 32 Ibid. 33 Lamborghini considers retail stores, http://www.cnn.com/2007/AUTOS/03/08/bc.autoshow.lamborghini.reut/index.html, March 8th 2007 34 Ibid. 35 Edmondson Gail and Chhatwal Rishi.P, A Burst of Speed At Lamborghini, http://web.ebscohost.com/bsi/detail?id=24&bk1&hid=101&sid=2f1c3d1a-b518-440a-91a3-259737c29b7e%40sessionmgr108, 2007 36 Ibid. 37 Ibid.
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Exhibit I Lamborghinis Sales: 2001-2006

Year 2001 2002 2003 2004 2005 2006 Total units sold 297 442 1305 1592 1493 2095 Models sold Diablo, and Murcielago All Murcielago 890 units Gallardo, and 415 units of Murcielago 1215 units of Gallardo, and 377 units of Murcielago 972 Gallardo, and 464 units of Murcielago 1651 Gallardo, and 444 units of Murcielago

Source: Italian Car Makers, http://www.autozine.org/Manufacturer/Italy.htm,

Further, It is also felt that the rapid rise in the economies and the standard of living of the Asian countries like China, and India, along with Russia in the Eastern Europe have made Lamborghini to pay an undivided attention to these growing markets. In China, Lamborghini has opened three dealerships and have sold 20 cars since 2005. Where as, in Russia they commenced operation in 2006 with the target of selling 25 cars.41 India has also attracted the attention of the Italian sports car brand. Lamborghini has launched three of its latest international models the Gallardo, the convertible Gallardo Spyder and the Murcielago. Lamborghini has adopted importer-distributor model in India. In July 2006, Lamborghini made its debut in the capital city of India, Delhi and planned to enter its commercial capital, Mumbai by the end of 2006. It expected to sell 50-60 cars in the country on an annual basis.42 Referring to the plans for 2007, Winkelmann added that, 10 more partnerships for selling Lamborghinis would be added, with dealers in India and Kiev, Ukraine.43 Winkelmann however seemed unenthusiastic to make any hike in the production, due to his faith in the credo that says produce always less than the demand. Further, to maintain Lamborghinis exclusivity, Winkelmann decided to continue to keep the waiting period of 12 months. Winkelmann said,
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Moore Matt, Emissions concern won't hurt Lamborghini, http://www.boston.com/news/world/europe/articles/2007/03/07/hybrid_lamborghini_nope/, March 7th 2007 Lamborghinis Stephan Winkelmann speaks out, http://www.pistonheads.com/doc.asp?c=52&i=15855, February 9th 2007 40 Krolicki Kevin, Lamborghini Unveils Sports Car It Vows Not to Make, http://en.epochtimes.com/news/6-1-6/36617.html, January 6th 2006 41 Lamborghini Getting Ready For Indian Roads, http://www.autoindia.com/News/auto-news-india686.html, July 15th 2006 42 Ibid 43 Moore Matt, Lamborghini motors on in green era, http://www.boston.com/cars/news/articles/2007/06/03/lamborghini_motors_on_in_green_era/, June 3rd 2007
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Under Audi AG, the US remained Lamborghinis major market. It accounted for 876 cars sold in 2006, up 37% from the 640 sold in 2005. Europe is second with 746 cars sold in 2006, up 50 % from 2005, with a noticeable increase in demand in Switzerland38. Moreover, a single US dealer, Lamborghini Houston, sold more number of cars in 2006 than Russia, China and India combined. Throwing some more light on the importance of the Californian market, Winkelmann said, if California were a separate nation, it would be the companys biggest market39. Company sources also feel that, Southern California, in the US, which is the hotbed of Hollywood celebrities, is indisputably the most profitable market for the brand. The point became crystal clear when Winkelmann said, If you don't make it in Southern California, then there is no need to go anywhere else. Its our most important market40.

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Whats easy to overlook, is that for decades we have been building 250 cars a year. Now we are a different company, but in order to protect the brand we still need the same philosophy of producing always less than demand. Once you oversupply, that leads to a vicious circle of discounting at dealers and then the brand is done. Completely over44. It remains to be seen whether Lamborghini would strike that exceedingly difficult balance between higher sales and exclusivity.

The Brace-Up for the Future Growth: The Road Ahead

Lamborghinis initiative to further strengthen its brand had led to its incursion into retailing. According to the company executives, the high performance sports car maker Lamborghini is considering options to boost public awareness of its brand, by including a chain of merchandise stores. Retailing is not new for Lamborghini, since it had formed a communion with Versace45 to endorse its brand. Under the agreement, Versace boosted the Lamborghini brand - Murcielago LP640 by providing exclusive interiors, hand worked accessories46. To further enhance the product offering, Lamborghinis premium accessories division offered an elite range of watches47 as a gift package accompanying the purchase. Analysts also opine that, Lamborghini followed the Ferrari modus operandi to introduce a wide range of branded merchandising.48 Lamborghini forged partnerships with Nokia and Asus49 to produce a limited series of mobile phones and laptops. With Nokia, it launched 8800 Sirocco Phone50 that contained Lamborghini themes, ring tones and a laser etched logo. Its association with Asus resulted in the launch of automotive-inspired laptops called Asus VX1 Lamborghini. Lamborghini was also making efforts to capitalize on its prestigious name by opening a chain of retail stores, selling T-shirts sporting the charging-bull logo. The raging bull merchandise is already sold in authorized dealerships and online, at few retail locations in Italy. The company has been working towards going retail around the world. In reference to this, Winkelmann said, We are thinking about different scenarios, he further continued saying, Opening stores is one of them, but not necessarily the one we will follow. We are trying to find partners that act globally51. Furthermore, to increase its brand awareness, Lamborghini intends to expand its program for personifying itself to customised needs, which it calls Ad Personam (Exhibit II). Lamborghini has also teamed up with Asustek Computers, a leading Taiwanese producer of finished PCs and computer peripherals, to develop a line of notebook computers, which would have the Lamborghini emblem on it.

Enright Andy, Italian style, German quality, http://www.edmunds.com/insideline/do/Features/articleId=119574, February 27th 2007 45 Versace helped design the interior of two special edition cars. 46 The accessories include exclusive suit cases with Versace motif that is sized to fit the Murcilago trunk, Pair of driving shoes, gloves. All made of blue calfskin 47 The Lamborghini offers Chrono Matt Soft Touch watch, available in lustrous black or white ceramic versions, and ladies watch in shiny white set with diamonds 48 Lamborghini attempts to rival the branded cell phones and laptops made for Ferrari by Motorola and Acer. 49 Asus is a Taiwan based company that is into making of laptops, notebook computers, computer components/accessories- mother boards, optical drives, PDAs, computer cases and the like 50 The 8800 Sirocco phone is the Nokia and Lamborghini created limited edition phone 51 Lamborghini considers retail stores, op.cit

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Exhibit II Ad Personam
The highest level of individuality and exclusivity are the hallmark of Ad personam. This programme gives all Lamborghini clients the possibility of creating their own unique sports car, personifying their own style down to the last detail. With Ad personam, every Lamborghini becomes a unique car. Ad personam offers a multitude of options via which to give both a cars interior and exterior its own unique style. For this purpose, the fabric and color designers from Sant Agata have created particularly prestigious equipment packages for the entire Lamborghini range. For example, the leather packages offered use only the highest quality leather and offer further scope of personalization via the vanish and stitching. A hint of the race track is felt with the carbon packages, which include a carbon finish for the control panel of the air conditioning, gear change console and handbrake amongst other areas. This high tech material is also available for various mounted parts of the car body. For the car exterior, personalization options include an extended choice of rims, brake calipers in yellow and silver, plus smoked rear windows and tail lamps. Ad personam is available for Automobili Lamborghinis entire model range: The Murcielago LP640, Murcielago Roadster, Gallardo and Gallardo Spyder.
Source:http://www.fourtitude.com/news/publish/Lamborghini_News/article_2582.shtm

Apart from the retailing strategies and customizing itself to the needs of individual customer, Lamborghini recently (2006) tried to showcase itself to attract car enthusiasts, celebrities, by unveiling a concept car that revives its Miura car52 design from 1966. However, Winkelmann clarified with Reuters about Lamborghini having no plans to produce a revived Miura, who said, Never say never, but we will not go into production. We have a little company. We have a model line which is going to a fourth model, and we have to put our priorities in a row.53However, it remains to be seen whether the restructuring efforts of Lamborghini would enable it to cruise ahead of Ferrari, whose sales seem to be beyond the reach of Lamborghini.

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Miura is one of the few early models of Lamborghini cars. It was introduced in 1966 and its sales stopped in 1971, as its successor Countach was introduced 53 Krolicki Kevin, Lamborghini Unveils Sports Car It Vows Not to Make, http://en.epochtimes.com/news/6-1-6/36617.html, January 6th 2006

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