Italian Buying Orgy

Who's buying?  Who's selling?

So what’s being owned by Piaggio mean to Guzzi and Aprilia? My first reaction is cautious optimism. My second thought is what I call the ‘new baseball manager’ syndrome, in which we believe the new guy will be great, even though we don’t know anything about him!

In my most pessimistic moment, I remember what I thought when Aprilia’s Ivano Beggio purchased Moto Guzzi in May of 2000: We’ll there’s another deep pocket to drain! But seriously, I thought Aprilia would be the best thing to happen to Guzzi since it was privately owned by its founders. Since Carlo Guzzi’s death in 1964, I think of Moto Guzzi as having been owned by a succession of monopoly players, more interested in propping the company up to profitably sell to the next guy than making motorcycles. Aprilia seemed to be a dream come true: a highly successful privately-held motorcycle manufacturer with money! Ivano Beggio conveys a passion for Moto Guzzi, understandable as a motorcycle nut who grew up in Italy. I wonder if he wasn’t a bit bored, as Aprilia was making lots of money and probably kind of ran itself. Moto Guzzi was an intelligent addition to Aprilia, as Guzzi had tremendous unrealized potential in the large cruiser market, which is too far removed from Aprilia’s high-tech, high-performance brand image for them to attempt to build their own. So the acquisition was sensible from a business standpoint, as a pet project for Mr. Beggio, and maybe as a way to give back to the Italian motorcycle industry by resurrecting an icon. It has also been said that emotions and the need to outbid Ducati lead to Aprilia paying too much for Guzzi.

So what went wrong? I’m not going to pretend that Aprilia was completely blameless for their downfall but they do seem to be a victim of circumstances beyond their control. Two significant law changes came about in Italy, possibly related to the move towards European unification. One deregulated insurance, raising the rate for the average teenage scooter rider from $500 to $1500 a year. The other made helmets mandatory, which I thought also affected young riders the most but it turned out to be especially adverse to young office workers - helmet head is simply not fashionable!

Aprilia saw their total sales drop from a peak of 330,000 to 170,000. Worse, this drop happened right at the time when scooter profits were to be directed to refurbishing Guzzi. Still, huge improvements were made at Moto Guzzi’s facilities, plus Guzzi benefited from Aprilia’s greater buying power and huge engineering staff.

Looking back now, I can see the signs of them trying too hard to make up for a lack of money. Really, we’ve had little in the way of truly new models from either company since Aprilia bought Guzzi. There has been a huge improvement in quality and some nice updates to existing models, but the truly new stuff from Guzzi is really next year and beyond.

The first public sign of trouble was news of the Guzzi assembly line closing in about March. It turns out that the news was taken more ominously than it really was, as apparently it’s common practice for large Italian manufacturers to impose temporary layoffs that are supported by the government.

Things got worse when news came of impending bankruptcy for Aprilia if they failed to meet an early May deadline for paying several million Euros, meaning that Aprilia’s creditors could take control of the company. I didn’t fail to notice that the date pretty well coincided with Aprilia’s purchase of Guzzi four years earlier. This made me realize for the first time that Aprilia probably didn’t so much ‘buy’ Guzzi as they ‘financed’ it. It also possibly explains the curious coincidence of Aprilia buying Guzzi and Laverda at the same time. Perhaps one of the banks arranging the financing was holding paper on Laverda and made it a required part of the deal.

So the bankers refused to extend Aprilia’s credit any further, obviously seeing their legal opportunity to seize control of the company. The Italian government apparently didn’t like the situation and provided a bridge loan to get Aprilia out of the jam. With their pressure removed, the banks suddenly found it in their hearts to extend Aprilia’s credit some 30 million Euros. Nice guys.

At this point I was afraid Aprilia might think they could struggle on. Thankfully they publicly stated their intention to seek a financial partner, envisioned as being something about a third share in the overall company. To make a strong gesture to potential investors of their potential influence, Ivano Beggio stepped down. I thought Aprilia suffered from wishful thinking, as any investor would likely want controlling interest.

We heard that as many as fifteen potential investors investigated the possibility, from BMW to Suzuki to an unnamed auto manufacturer. The bad part at this phase was that we didn’t know how many were serious or when a deal might happen, a painfully indefinite interlude.

The best comment on the situation came to me from an Aprilia marketing guy, who said that the Guzzi dealers were taking it well and having fun with it, as they had just gone through this same thing four years prior. Conversely, the Aprilia dealers, who have never seen anything like this, were freaked out!

So with that theme of ‘having fun with it,’ I sent out the following on April 1^st, and few ‘got it’:

Madras, India and Noale, Italy

In an historic move Wednesday, Aprilia S.p.A. chief Ivano Beggio announced a new partnership between his Moto Guzzi and The Eicher Group, manufacturers of Royal Enfield motorcycles in India.

"Today begins a new partnership that solves our immediate needs and provides opportunities for both brands in the future, both in terms of expanded markets and manufacturing opportunities," Beggio said through an interpreter.

Reports portray Beggio as a man in need of financial partners, both for Moto Guzzi and his flagship Aprilia brands. Recently Moto Guzzi has furloughed its production staff, a common strategy for large Italian manufacturers to reduce inventory. Scooter giant Piaggio has been named a potential Aprilia investor.

Royal Enfield of India is the remains of a once great, now defunct British manufacturer of motorcycles. The Indian division continues to produce a largely unchanged design from the 1950s, selling with great success to the somewhat captive, billion-strong Indian market.

Moto Guzzi will benefit from Eicher Group's financial resources immediately (annual sales of US $315 million). In the future the new connection will also provide Moto Guzzi with cheaper manufacturing, a more diverse product line, and greater access to southeast Asian markets. Eicher Group will gain greater prestige for its Royal Enfield motorcycles and better access to European markets.

This is not Beggio's first foray into India. Last fall he partnered his Aprilia brand with Hero in similar ways to this Guzzi/Enfield tie-up, but in this previous instance without a financial buy-in by the Indian firm.

I guess when something sounds believable it’s easier to get fooled!

Finally in late July we heard that Ducati had made known their intention to make an offer. A little checking with friends with contacts inside Guzzi brought the news that a deadline had been set for entities to announce their intention to bid. Bids were to be placed by the end of July with hopes of announcing the likely winner in early August. Ducati’s announcement was followed a week later by Piaggio’s (parent company of Vespa scooters). Others announcing their intention to bid were Kymco of Taiwan and Canada’s Bombardier. Now this was very welcome news, as we finally had a definition of who and when. But at the same time, who are the who’s and what are the prospects for each of them?

Bombarider has assets of $29 billion (CDN) and dabbles in things such as airplanes and mass transit monorails. They recently spun off their recreational products division into a separate company, Bombardier Recreational Products (BRP), taking with them their famous snowmobiles and personal watercraft. Bombardier owns Rotax, the Austrian engine manufacturer that powers some Aprilia scooters, their 650 single, and all of their various 1000-cc V-twins. This seemed like a good match in that Bombardier has a lot of money but few products while Aprilia/Guzzi has lots of products but little money. I was a little worried as I read that the family members that bought off the recreational products division barely raised enough capital to do it, so maybe the parent company had a lot of assets and/or money but possibly BRP didn’t.

Ducati wanted Guzzi for all the same reasons Aprilia did: Guzzi’s bikes potentially appeal to the largest segment of the market, cruisers, while the brand identities of Aprilia and Ducati could never allow such bikes of tradition to be built under the same name as their leading-edge sport bikes. Ducati could help Aprilia/Guzzi with much-needed expertise in brand marketing. What I feared was that Ducati was too small to take on so much and that, what with the great overlap between Aprilia and Ducati motorcycles, maybe their intentions were to sell off Aprilia scooters and do away with their motorcycles.

Kymco makes mostly scooters but also small motorcycles and was said to be the high bidder. I liked this pairing as Kymco needs recognizable brands, they seem very successful, and down the road all these European manufacturers are going to need to move some or all production to Asia to remain viable. I also heard that Kymco was looking to move more into motorcycles than they had been.

Piaggio makes modern scooters but is better known in the US for Vespa, which I consider the Harley-Davidson of scooters, in that they have the iconic name and are known for tradition and classic styling. Piaggio fell on hard times a couple of years ago for the same EU-related reasons as Aprilia did this year. Roberto Colaninno of Telcom Italia fame bought and refinanced Piaggio. Their motorcycle/scooter holdings also include Gilera (which competes in 125-cc GP road racing), Puch of Austria, and Derbi of Spain. I figured that Piaggio would love to add Guzzi and Aprilia motorcycles, but I wasn’t sure what would happen to Aprilia’s scooters.

The Italian government announced that they wanted to see Aprilia remain in Italian hands, so I figured that meant tax incentives that would disadvantage Kymco and Bombardier. I also wondered what it meant to Ducati, as a large portion of their ownership was an American company, Texas Pacific Group, but apparently they remained in the running.

I was surprised to learn the relative size of the companies involved. Aprilia did about half a billion dollars in business in 2003 but lost $40 million (Guzzi made a small profit.) while building about 170,000 vehicles. Guzzi built under 10,000 motorcycles and of Aprilia’s tally, about 20,000 were motorcycles. Ducati built some 39,000 motorcycles, Piaggio/Vespa 430,000 scooters, and Kymco 460,000 scooters/motorcycles. It wasn’t too surprising that Kymco’s offer was said to be the highest.

In late August came a Ducati press release announcing that they had obtained an exclusive right to negotiate with Aprilia. That seemed crazy to me (but what do I know about big business acquisitions?) in that one of Aprilia’s greatest strength would be the competition between bidders. During this time there were lots of press releases from Ducati, leading many to believe the deal was pretty much done.

For August, Cycle World Magazine had a nice editorial describing the situation quite even-handedly, at least, that is, until they got to the end where Michael Lock of Ducati USA said ‘Let’s be frank. Guzzi’s become an oddity.’ That to me was too much like kicking us when we were down. My reply wasn’t published but here it is for you:

So Ducati’s Michael Lock thinks Guzzi’s an oddity? Well Michael -"let’s be frank”- what the heck do you think desmodromics do for you? A degree of oddity is necessary for non-Asian motorcycle manufacturers. Guzzi’s got this figured out very well and that’s why Aprilia outbid Ducati to buy Guzzi and why Ducati’s stuck with lingering Guzzi envy. It would be cheaper for Ducati to build their own than buy another company, but they know they can’t reinvent what Guzzi has. Sadly for Mr. Lock, I think the closest he’ll come to Guzzi ownership will be visiting his local dealer!

In the end, Ducati apparently made a low bid for a controlling interest in Aprilia/Guzzi/Laverda, announcing in yet another press release "Take it or leave it!” Aprilia left it (saving me from having to face up to Mr. Lock!). So that was the end of Ducati’s exclusive negotiation period, after which it immediately became known that Piaggio was still in the hunt and an offer would be forthcoming by August 14^th. Since that was a Saturday, the agreement between Piaggio and Aprilia was made on Friday the Thirteenth – nice beginning, guys. 

So as of this writing, we have an offer made by Piaggio and accepted by Aprilia, but still waiting for approval by banks and vendors, and eventual finalization sometime in the future. As a comparative example, Aprilia’s purchase of Guzzi was announced in May of 2000 but not finalized until August of that year. But even after the deal is done, there’s no telling if other deals may happen. I’ve heard rumors of everything from Ducati buying Guzzi from Piaggio (Sorry about that, Mr. Lock!) to Piaggio buying Ducati! It’s sort of like the ‘player to be named later’ in baseball transactions. So for now at least, it’s amazing enough that they have Aprilia, Derbi, Gilera, Laverda, Moto Guzzi, Piaggio, Puch, and Vespa – eight brands!

So how does all this affect you and me? Certainly parts availability will improve, but it surprisingly didn’t get appreciably worse over the summer, which I expected, as scarce resources were more likely to be funneled into production. Also, the ETA for new models should finally be firmed up. None of this will happen quickly – your MGS/01 won’t show up next week and your 1984 Guzzi T5 side cover isn’t in the mail just yet. And problems remain, biggest to us is that the US dollar has become relatively worthless in the past two years, taking all the incentive out for developing products especially for our potentially huge market. More than one European motorcycle manufacturer has diverted production of high-demand relatively-scarce models to other markets where they can actually make money selling them. A year and a half ago the US dollar was up 13¢ on the Euro but now it’s down 23¢. We haven’t seen bikes prices go up 30% in that time so you know all the companies are eating the difference – for now.

The most common question I hear concerns dealer franchises: will Guzzi dealers now be selling Vespas or will Guzzi dealers loose their franchise to the local Vespa shop? I think both scenarios are extremely unlikely. When Aprilia bought Guzzi, we didn’t see imposed dual franchises. Taking a franchise away from a dealership is actually quite difficult and laws and dealer agreements restrict close proximity. More so, the companies spend a lot to have representatives in the field determining the best outlet for their brands, so they wouldn’t throw all that away and subject themselves to scores of lawsuits. Besides, what does it matter to them who represents them if all the profits from wholesale sales to dealers filter up to the same parent company?

So what do we know? For now not much more than the company is saved. Potentially, we have successful business-like ownership with financial resources from Piaggio, engineering expertise and continuity from Aprilia (This time without the pressure of impending doom!), new models already developed, refurbished manufacturing and assembly facilities at Moto Guzzi, more competitive prices from larger group purchasing, and reduced overhead and distribution costs per vehicle from greater total volume. How fast will any of this happen? When Aprilia bought Guzzi it was over a year before we as dealers saw anything significant. Luckily there’s plenty already in the pipeline: the biggest one-year new model introduction in modern history for Guzzi: Nevada 750, Griso, MGS/01, and Griso, and from Aprilia a whole line of new models based on their new 450-550 V-twin.

The next couple of months will be extremely busy for the ‘new’ Piaggio group. Aprilia and Guzzi have left-over inventory from slow sales during uncertain times. The Intermot motorcycle/scooter show looms in mid-September, where the world comes to see what’s new from the European manufacturers for 2005. Fall dealer meetings must be arranged and programs devised for 2005. Show space and booth displays must be purchased for winter motorcycle shows. The world is watching and wants the instant gratification of visible progress. That’s a normal feeling but remember: Rome wasn’t built in a day. Patience!

Dave Richardson/Summer 04

Dave Richardson is the proprietor of Moto International and author of the best selling Guzziology.