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In the face of luxury push-back from China’s government and hyper competition for luxury car consumers, how is Ferrari tuning its China message?

2013 was not luxury’s finest year in China. The government shamed any and all ostentatious displays of wealth and decadence, and Chinese con­sumers are now backing off the luxury buying frenzy that shaped the decade following the country’s ascension to the World Trade Organization, proving to be increasingly selective as time passes.

So how does an iconic luxury car brand navigate such a climate?

Named the world’s most powerful brand in the 2014 Brand Finance Global 500 report on brand valuation, Ferrari brings Chinese consumers into “the fam­ily”, favoring scarcity and exclusivity over chasing easily available sales, deliberately dropping the number of cars delivered to their global network by 5.4% to 6,922 cars in 2013. The tactic has paid off hand­somely. Revenues rose by 5%, reaching €2.3 billion ($3.2 billion) in 2013 and net profits rose 5.4%, exceeding €246 million ($341 million).

Edwin Fenech, Ferrari’s Greater China President and CEO
Edwin Fenech, Ferrari’s Greater China President and CEO

Overseeing Ferrari’s current China od­yssey is Edwin Fenech, Ferrari’s Greater China President and CEO since 2010. Within three years, the French-Italian Fenech tripled Ferrari’s dealer network in China, introduced the Ferrari Pirelli Cup Challenge to Asia—running races in Zhu­hai and Shanghai—and launched a drag­on-striped limited edition vehicle just for the China market.

Fenech shares with CKGSB Knowledge the thinking behind Ferrari’s branding strategy in China, the logistical challenges of delivering autos from factories in Italy to buyers in the world’s second-largest econo­my, the major international brand’s surviv­al guide to negative press, and how they go about establishing and strengthening racing culture in a country that has traditionally shrugged at international events like For­mula One. Along the way, he recounts take aways from his time overseeing the Euro­pean, Middle Eastern and African (EMEA) region and dismisses the notion that China is anything less than the most important growth market for luxury cars.

Q. In January 2011, Ferrari CEO Amedeo Felisa said: “For Ferrari, China repre­sents the present and the future.” And then this year Marco Mattiacci, the Ferrari North America CEO, said that “Mexico is the new China.” How has Ferrari’s China game plan evolved since 2011? How would you describe the importance of China currently to Ferrari?

A.China now is the second-biggest econ­omy in the world. China is the number one market for automotive in the world. And I think now we are just scratching the surface, especially when we are talking luxury.

In terms of the market, I think we dou­bled [our] market’s [size] in the last three to four years. This is something you’re not seeing anywhere else in the world. This is the market that has all the potential to re­ally grow. What we’re going to see in automo­tive, especially in luxury automotive, is there are a lot of Chinese travelling abroad, also moving abroad. We are monitoring a clear trend that Chinese are buying Fer­raris abroad.

But this does not mean we will stop investing here in the country. This is the opposite [of] everything the other luxury manufacturers are doing. We are in the country where we absolutely need to dis­close our DNA, our brand values, to edu­cate people [on] the market, who we are, and why we are so peculiar.

Q. Ferrari Chairman Luca di Monteze­molo said this year: “A Ferrari is not a luxury product. To buy Ferrari is to obtain a piece of art, a piece of technology.” In light of the official reprimand of opulence here, how is Ferrari in China integrating that into its identity and strategy?

A.Really the anti-corruption didn’t have any effect on us. In fact, since they bring this anti-corruption [crack down], we’ve grown. I can easily state it. I think no peo­ple under the government will ever try to be seen with a Ferrari, it’s just too visible. For the rest, we have to acknowledge one thing, it’s the young people who are buy­ing. Here it’s a chauffeur-driven market. People who are a certain age and wealthy they will go for [a] chauffeur, like [with] a sedan. You just have to look at the re­sults of Rolls-Royce [Motor Cars] here in China. They are amazing. They are selling more than us. But when you come to the sports segments, it’s dedicated to a smaller number of people which are generally the young guys. The average age of our cus­tomers is the lowest in the world, by far. But this is normal because in the mature countries, you’ve had the time to establish your brand, and also to be part of history. People now who are 60 years old [in ma­ture markets], they’ve known Ferrari since they were born, they grew up in this cul­ture of racing.

Here, the first car we sold was rough­ly 20 years ago, but the real implication of Ferrari in the country [came] more or less 10 years ago. In these 10 years, every single competitor came at the same time. It has created a little bit of, I wouldn’t say confusion, but imagine a customer that 10 years ago never approached the sports segments, now all of the sudden, he has a huge shopping list with everybody trying to pull him aside, saying, ‘I’ll give you the best,’. This is one of the reasons we are doing a lot of branding. This branding serves in two ways: one, to educate the customers, but the other side is to create loyalty. What we are seeing is that now, these young guys [have] evolved, they are evolving very fast. What’s interesting is that the more they age, the more they [are] loyal to the brand. From this point here we can be very proud. We are a company that’s also very able to make people loyal.

Q. How is that loyalty achieved?

A.It’s like Ferraristi; you’re part of a fam­ily. That’s what’s interesting. We have no ‘customers’. We have people who live their dream which is to buy a Ferrari and they’re part of the family. In China we are selling 500 cars. We have 500 new cus­tomers or repeat customers that come to us every year. We should know everybody by name.

When they start to become loyal, it’s true loyalty, because they really partici­pate in every single event. They start on racing, they buy every single model, it’s amazing.

This market is in constant evolution. It’s normal in this country [that] we have more first time buyers than in any other country in the world.

What is interesting to us is that the sec­ond and third tier cities are the ones that are growing faster than the rest of China, and we are taking advantage of that. When I came here in 2010, we had 10 dealers. From 2011-2013 we grew to 30 dealers. Then we tripled the distribution in only two years. Obviously, by entering new cit­ies, [this] brought us new customers. Now I can tell you that we are approaching first time customers. But we [also] have a very big chunk of our customers that are repeat, loyal customers. Come more than one time to our events and you will see many famil­iar faces. We are like a family, we are to­gether, we drink together, we go to watch Formula One together and things like this. It’s very important.

Q. How would you describe the impact of Formula One in Shanghai on the Ferrari brand in China?

A.First of all, racing is not that popular in China. Obviously for us from a commer­cial point of view, from a media point of view, it’s something that’s very important. But we have to face the fact that racing is not a big interest. We cannot compare with basketball, with Yao Ming and that’s really the point because there are really no Chinese drivers in racing. And that’s maybe one of the reasons for the lack of interest, but this does not mean we are not doing anything.

From our side we have the duty to pro­mote racing, and I think we are the best ones to do it because it’s really part of our DNA. We started by introducing the [Pirelli] Challenge four years ago. The Challenge means huge investment. Why? Because normally how the challenge is structured is you create teams which are generally managed by our dealers, which is what’s happening in Europe and US. Here, no, because you don’t really have any racing culture. Racing is a serious thing. You cannot mess around with rac­ing because it can be very dangerous. To organize the best service with the highest level of quality and safety, we decided to manage everything by ourselves, the lo­gistics, the cars and rental of the circuit, [the] technicians, we fly 50 people from Italy for every single race all over Asia. This has a huge cost.

We are working on scouting the next Chinese pilot, and we really would like to be the first one to be really involved, to be the first to have a Chinese pilot represent­ing [us] in different series and one day at Formula One.

Q. Is this the first time you’ve had to really develop the racing culture to this extent in a new market, or have you been through this before?

A.No, because even in the Middle East F1 is very popular. You can see there are al­ready races in Abu Dhabi, in Bahrain and this is very highly followed locally. Here, we start from scratch. But through media, we are promoting what F1 is, what our racing is.

Q. How would you describe your media strategy and general marketing ecosys­tem?

A.First of all just to understand when we say media, we never pay for advertising, this is all about creating news. We are tar­geting the national [media] but also work­ing with the most important local media.

For instance, I travel a lot and most of the time we have interviews with local media. I think there is a strange apprecia­tion of Ferrari, love of Ferrari and passion for Ferrari. There are some journalists who are crazy about Ferrari. It’s funny, every time when they come to see me, they dressing only Ferrari gear.

But above all is the new media. New media is the one that really gives you the highest coverage by far. I don’t know how it is in the other countries but for us, for Ferrari, the management of new media is very important, we have a dedicated team because it’s so important.

Q. Along with other international brands, Ferrari had some unfortunate press expo­sure earlier in 2013. Could you outline a quick survival guide for large brands on how to deal with negative press in China?

A.First of all, clearly understand the context. Second you also have to be very quick in reacting, otherwise things can re­ally take a dimension that can be very dif­ficult to manage. Be very quick in releas­ing your statement, there can be different kinds of statements, but absolutely show your voice, tell your point of view. In China it’s very important because Chinese pay attention to what the brand is saying. Afterward, you can be rejected, but at least you have your statement, and from your statement you can work on it. But it’s very important, the context and being quick. I think the “wait and see” [approach], it doesn’t work here, it goes [from] worse to worst, you have to raise your point. [Also], have only one voice, not a bunch of differ­ent people talking.

Q. Distribution is a challenge for any manufacturer in China. How does Ferrari cope with post-sale services and the lo­gistics of shipment and delivery given the cars are manufactured in Italy?

A.Since we are [in] a growing market, we are growing in terms of network, ob­viously finding the people—the mechan­ics—it’s always a challenge. There’s very fierce competition on that front. But for us and this is one of my strong requests to our network and to those who are managing our network, I want stability. When I was in Paris I was also managing one of the biggest dealerships we have in the world. And there we were seeing the customer come in by themselves. Before, even if you owned a Ferrari, generally it was the chauffeur who brought the car for repairs. Now people come in because it’s part of the experience of understanding, speak­ing, creating the relationship. This is very important.

Q. And in terms of logistics?

A.We used to have a lot of logistical problems.

The problem with Ferrari is that the cars are sports cars, they are not normal cars. They cannot go on normal trucks es­pecially when you load it. The most common issues we had [were] scratches on the front bumpers or also another one that is really annoying is when you scratch the rims, which are very costly. We overcame in two ways: in the beginning when we had to face it, but could not solve it, we had to order a lot of bumpers and a lot of rims. But we could not sustain this for long. Then my sales team started to scout [for] best practices, talking with people in the same field, with other manufactures, and we came to identify one [local] group, but even with this group, obviously no one had the real tools to manage Ferrari, be­cause we need very specific trucks. So we made a deal with the company, according to the volume of cars per year, they will make the investment up front to have ded­icated trucks [just] for us. Obviously it’s costly, but it’s less costly than to change the bumper [every] time.

The difference between then and now is night to day. Now we have much [few­er] problems. We have really improved the transportation issues.

Q. Do you envision a time when you will manufacture the cars here in China?

A.First of all, in order to build an addi­tional plant you need significant additional volume and this is not our strategy. Our strategy is completely the opposite, be­cause we’re a very exclusive brand we want to limit our volume, even if we have huge potential to sell more, we really want to maintain the scarcity and the exclusiv­ity. If you flood the market with too many new cars, the value drops. If you have scar­city, people want to buy a Ferrari. [If] they don’t want to wait, they can easily have very good cars on the market, which are used cars. Like this, you maintain a very healthy circle of people buying first used cars, then selling back, which is a huge benefit for the customer that’s driving one of the best cars in the world without losing too much money. And this has been one of the successes of Ferrari.

For us it’s absolutely key to be the owner of our pre-owned car market. We are working to create a process that in­volves our dealers buying back the cars [from] our customers to have a pool of pre-owned cars, to [then] be offered to the market from our dealers. This has ad­ditional benefits. First of all you maintain the price of the car as you want. If you control the market then you decide how much this car is worth. Second, you pro­pose additional business to your dealers, and when it’s well done it can bring a lot of money. The only issue we have here in China is the stocking price of the car. Pric­es are very expensive. We have an average price of RMB 4 million. At this price level people want to buy a new car. If you want to reach the price for people that want a used car, you have to drop quite a lot.

Q. Your partner, Poly Group Corp, is not exactly an auto maker, what does each side bring to the table that benefits the other? How do you negotiate that relationship?

A. First of all we started to work together when this market was not that big. When you enter for the first time into such an unknown market, it was like stepping on the moon. When you step on the moon, you want to be very well prepared and to be sure that you will be successful. In this part of the discovery we prefer to be covered by a very important group, which is a group that’s a state-owned company, very influential, and that can give us the right direction. Because in China it’s not a normal market, because you’re in a coun­try that’s governed by different rules than what you can understand, from the culture [and] from the political side [and] from the expectation of the customers. We want to build in the proper way, assuring the right direction. And definitely this is what Poly gets.

And we also have inside [knowledge of] exactly where the government goes, the influence of the government can have a huge impact on every single business.

Q. You’ve also supervised the Middle East and Africa branch of Ferrari, meaning you’ve covered a significant part of the globe for the company. Would you say there is a formula for integrating the Fer­rari brand and products into a local mar­ket? Or does each place demand its own special process?

A. With emerging countries you are enter­ing a market where people are discover­ing. To discover you have to make them understand who you are, be present where you need to be present, which means dis­tribution with the right service. And face the competition, which means you need to do branding activities. You have to understand where you have to be present and with whom, because partners are very important. Especially when you are talk­ing about Ferrari, we are [of a] different mindset than others. You have to explain to someone who’s investing in your brand, if the guy can sell 100 cars I’m going to give [him] 50, that’s a mindset that can frustrate some people. You have to find the right one that understands what luxury business is.

Then above all I think that you have to refrain from being too aggressive. We are a brand that has to be the same everywhere in the world. It’s non-negotiable. We’ll re­frain from entering in this race of dis­counts. Here [in China] we never sold out. Here we have a long-term vision. The ob­jective in the long term is to be the best brand in the country.

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