VW ran afoul of the Environmental Protection Agency when they were fined billions for their software “defeat” system that altered the emissions on some of their cars. The lingering effect of this kind of impact to the balance sheet was the removal of Audi’s racing programs in WEC and VW’s WRC programs.
This week, the EPA has served a Notice of Violation (NOV) to Fiat Chrysler Automobile (FCA) concerning 104.000 Jeep and Ram vehicles it says are producing emission levels that are illegal and this could cost FCA and estimated $4.63 billion in fines.
The immediate concern is what impact the fines may have on Ferrari’s racing program. As part of the FCA portfolio, Ferrari spend hundreds of millions on their Formula 1 racing program. To be fair, a large portion of that expense is offset but prize money from Formula One Management (FOM) as well as a premium payment of $100m for their position as the longest standing team in F1 that expires in 2020.
Ferrari also have strong sponsorship deals with UPS, Philip Morris, Shell, and Santander as well as a revenue stream via the sale of hybrid power units to Haas F1 and Sauber. With a large portion of their expenses offset by these partnerships and payments, any EPA fines against FCA may not impact Ferrari in the same way it has VW/Audi.
Ferrari’s participation in F1 is crucial to the series as well as the new majority owners, Liberty Media, and it would be devastating should Ferrari be forced to remove itself from GT racing in WEC or F1 as they represent the two largest marketing programs for the Italian auto maker.
The EPA’s fines have cost many jobs in VW/Audi’s racing programs, marketing departments and third-party marketing contracts as well as impact on hospitality, travel, hoteliers, freight, transportation and eateries. The impact it will have on attendance at some of the WRC and WEC races has yet to be seen.
For Ferrari, the EPA’s NOV to FCA will be a crucial element to 2017 and beyond. Looming in 2020 is the end of their Historic Team contract and it remains to be seen if the new owners, Liberty Media, will be keen to sweeten the pot for Ferrari only. Sponsorship deals will also be ending and renewal will be critical. FCA CEO Sergio Marchionne has insinuated that he’d like to see Alfa Romeo back in racing too but if the EPA fines FCA billions, that could be a desire lost.
“We have done nothing, in our view, that is illegal,” CEO Sergio Marchionne said on a conference call. The characteristically blunt executive accused regulators of “grandstanding” and trying to “lynch companies” over differences of opinion.
The project fines of $44k per vehicle would place a serious burden on FCA and erase several years of profits as well as make it difficult o meet its debt obligations which are at €4.7 billion at the end of 2016.
Hat Tip: WSJ