With ‘big brother’ lift, Aston Martin sues Ferrari

GAYDON, England, April 26 (Reuters) – After decades of ups and downs, British carmaker Aston Martin Lagonda (AML.L) is charting a more efficient and profitable course, building on technology from the shareholder Mercedes-Benz (MBGn.DE) to make the expensive leap to electric vehicles (EVs).

Less than two years after billionaire Lawrence Stroll came to the rescue of James Bond’s car marque of choice, Aston Martin has undergone a facelift to boost its margins and help it look more like rival Ferrari (RACE. MID).

Stroll, the biggest shareholder and executive chairman of Aston Martin, who is also an avid Ferrari fan, says that after vehicle sales jumped 82% in 2021, the automaker’s transformation towards long-term profitability term is well underway, with new cars to come and financing secured through 2025.

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But analysts say Aston Martin, which has gone bankrupt seven times since its founding in 1913 and has flirted with death as often as Agent 007, continues to burn piles of cash. Some question its ability to generate Ferrari-like sales to fund the huge cost of electrification.

“It’s precarious and it’s possible this company could go bankrupt,” said Redburn equity research analyst Charles Coldicott. “I don’t think that’s a controversial thing to say although Aston wouldn’t like to hear it.”

Asked to comment on perceptions of a shaky future, an Aston Martin spokesman reiterated Stroll’s view that the automaker is on the right path to long-term profitability and has adequate access to cash.

During a tour of the automaker’s Gaydon factory, Tobias Moers, former head of Mercedes’ high-performance AMG brand and chief executive of Aston Martin since August 2020, lists moves including the removal of the one of two assembly lines and the supply of bespoke items such as in-house seating.

Perhaps the most significant shift has been to focus on higher-value, customer-focused custom orders – a big part of Ferrari’s success – rather than over-producing and bulk-producing sports cars, which then had to be updated.

“When I joined, the company was dominated by manufacturing rather than engineering, which is insane for a luxury automotive company,” Moers said. “In a company of this size, you need maximum flexibility and agility.”

Moers has reduced Aston Martin’s inventory to 600 sports cars from 2,000 – his cars average around 150,000 pounds ($195,750) – and custom orders now account for 50% of sales from 6% when he joined the company.

At that time, the automaker was struggling after a disastrous IPO in 2018.

Stroll says that with its new vehicles, the company is aiming for a gross profit margin per vehicle of at least 40% and, in some cases, 50%. Analysts put Ferrari’s figure at over 55%.

By 2025, Aston Martin aims to sell 10,000 cars a year – almost 40% more than in 2021 – close to Ferrari’s production.

Stroll says Aston Martin will benefit from a deal struck with Mercedes-Benz in October 2020 where it will have access to the German automaker’s latest engines and EV technology.

Under the deal, Mercedes now owns nearly 12% of Aston Martin, which will grow to 20% in 2023. The German luxury carmaker has been relatively tight-lipped about its plans for a stake in Aston Martin.

“It was really important for a company of this size, especially with electrification coming … to have a big brother,” Stroll said. “So I made a really transformational deal with Mercedes-Benz to get their electric architecture.”

Aston Martin plans to launch its first all-electric car in 2025.

Automakers have focused on outsourcing for decades, but increased customization has enabled Aston Martin to reverse that trend, CEO Moers said.

Allowing customers to choose their leather, stitching and other interior adornments resulted in a 20% increase in options, driving up the selling price.

But offering 30 different qualities and colors of leather means 900 variations. As each car is individual, it’s cheaper to do more in-house – for example, Aston Martin plans to manufacture its own steering wheels again.

“The variation at Mercedes-Benz was a nightmare, we wanted to reduce it and reduce it,” Moers said. “But here, that’s our goal.”

“Our sample size is one.”

Aston Martin has closed its paint shop in Gaydon and painted most cars at its sport utility vehicle factory in Wales – saving £1,000 per car by cutting the immense costs of two paint shops.

But Aston Martin will hand paint any unique color customers want, at an additional cost.

Aston Martin has also started delivering the limited edition Valkyrie, a road-legal version of a Formula 1 car heralded by the company’s former management that starts at £2million.

But the Valkyrie was extremely expensive to develop, so it won’t happen again as Aston Martin focuses on cost-effective sports cars instead.

“There’s no business case for this,” Moers said.

Before going electric, Aston Martin is launching several combustion engine models, including its powerful V12 Vantage sports car and a new SUV.

In 2023, the automaker is planning its first mid-engine sports car – where the engine sits behind the driver providing better weight distribution for performance – joining Ferrari, McLaren Automotive and Lamborghini.

For Aston Martin and its peers, going electric is particularly tricky because the appeal of luxury sports cars relies on the feel of a powerful internal combustion engine.

“More people who are our customers today, who are more gasoline enthusiasts, want to see, smell, hear and smell a combustion engine for a long time,” Stroll said.

But to go electric, “Mercedes will be the foundation of everything we do,” he said.

Redbush’s Coldicott said Aston Martin lacks the wider appeal of Ferrari and is unlikely to sustain the annual production of 10,000 units needed for long-term investment in new vehicles. While the company expects to burn nearly £125million this year, Coldicott said Aston Martin has a limited time.

“If you put a gun to my head, I would say my base case is that Mercedes is going to acquire the company,” he said. “I don’t know at what price, but I imagine it will be significantly lower than today’s price.”

Mercedes spokesman Tobias Just said in an email that the German automaker was “very satisfied with our current cooperation with Aston Martin”.

He declined to comment on the German automaker’s future plans for its stake in Aston Martin if the British automaker’s turnaround comes to a halt.

Jefferies analyst Philippe Houchois said that while Aston Martin has aspired for many years to be more Ferrari-like, its current management has always done the right thing, upselling its brand “by under-producing and moving towards more content and more personalization”.

“They are now following chops at Aston Martin,” Houchois said. “But it’s a question of how long it will take and if they have the funding to support it.”

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Reporting by Nick Carey in Gaydon, England; Additional reporting by Victoria Waldersee in Berlin and Giulio Piovaccari in Milan Editing by Matthew Lewis

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