Driven By Design

Pininfarina's legendary craftsmanship helped put ailing Maserati on the road to recovery. But for the $1 billion Italian studio, design is only the most visible arm of a far bigger machine.

Cloaked in a silver canvas, the machine sat on the roof of a glass-and-steel box in the industrialized outskirts of Turin, Italy; at its side stood three senior designers from Pininfarina, the storied automotive-styling house. Jason Castriota, best known for his Ferrari exteriors, lifted a corner of the canvas and began a kind of vehicular striptease, casually revealing first the wheels, flanks, and hood, then ripping away the shroud to expose the entire body of a full-sized, hyperrealistic replica of Maserati's new GranTurismo coupe. The model, which functions as a prototype during the styling process, is literally a sculpture, crafted by hand from a milled resin called epoxy wood. As the three men took in the taut skin and graceful lines, Castriota recalled an insight from a former Pininfarina design director: "The difference between beautiful and ugly often comes down to one millimeter."

Castriota and his colleagues apparently nailed that last millimeter. In March, the world got its first full-frontal display of Maserati's new $125,000 GT coupe at the International Geneva Motor Show--and it was promptly hailed as "a sculpture on wheels" and "one of the year's most beautiful cars." That was music to the ears of both Maserati and Pininfarina--but for very different reasons.

Maserati saw it as a sign that its long nightmare might finally be over. The company, after all, hadn't turned a profit since the Fiat Group acquired it in 1993. But after a half-century hiatus, the Modena carmaker and the Turin styling studio reunited; Maserati has since sold about 10,000 of its 2004 Quattroporte sedans, and the first batch of 2008 GTs (400 cars will be hitting North America this fall) sold out almost instantly. For managing director Roberto Ronchi, the fate of those two models represents that of Maserati itself. As he conceded in an interview, his is a three-model company, "and there's no way to survive if these two models don't do well."

For Pininfarina, by contrast, the adulation that greeted the GT was something else entirely: a brand-building coup. Pininfarina may be fabled for its 77-year history of iconic silhouettes for the likes of Alfa Romeo, Ferrari, Jaguar, Lancia, and other first-in-class marques, but it has come to see that sort of high-end work as a powerful marketing tool for its real business--engineering and assembling far more modest vehicles for giants such as Ford and Mitsubishi. Many big automakers, looking to cut costs, goose development time, and feed the insistence on customizable components among even entry-level buyers, have begun farming out the development and production of specialty models that sell in small quantities (roughly 20,000 to 30,000 a year) to contract manufacturers in Europe, which assemble the cars in their plants.

It's a rapidly accelerating trend in auto manufacturing: outsourcing production. Pininfarina now offers a complete suite of services that can take an automaker's project from a blank sheet of paper to final delivery. And it has gambled a great deal to get there. The cost of ramping up for this sort of microbatch production ran to the hundreds of millions of dollars, pushing Pininfarina to a net loss of $29.5 million for 2006 (despite a 53.7% jump in revenues). This year, however, the company expects nearly 90% of its $1 billion--plus in revenues to come not from design, but from product-and-process engineering and the production of nearly 70,000 vehicles for Alfa Romeo, Ford, Mitsubishi, and Volvo. It also expects to be back in the black. "For us, design is just the tip of the iceberg," says Andrea Pininfarina, the mirthless third-generation chief of the company, a mechanical engineer by training. "Design gets most of the attention, but engineering and manufacturing is the massive part of the iceberg that sits underwater, invisible to everyone outside of our business."

Pininfarina wasn't the only company to see this trend emerging. Last year, the production of some 400,000 cars was outsourced to companies such as Canadian-owned Magna Steyr, which is based in Austria, and Germany's Karmann; the six largest European coach builders together generated revenues of roughly $11 billion. Indeed, the Boston Consulting Group estimates that the contract-manufacturing business will double in eight years. "We expect that this market will also develop in the U.S., as some of the factories that are being closed or sold will offer niche manufacturers low-cost opportunities to step in," says Xavier Mosquet, who heads BCG's automotive practice for the Americas.

But Pininfarina, which leaped into the engineering and low-run production of cars as far back as 1954, when it turned out 27,000 Giulietta Spiders for Alfa Romeo, is by far the largest design house to have pivoted to the contract-manufacturing business. And it may have had little choice. Beginning in the late 1980s and early 1990s, major U.S., Japanese, and European automakers invested massively in developing their own in-house design facilities. As a result, the big manufacturers were far less inclined to turn to outside consultants like Pininfarina for design proposals. At the same time, say automotive consultants such as Geoff Wardle, director of advance mobility research at California's Art Center College of Design, Pininfarina was "very privately" facing up to a knotty truth: Even when major car-makers did decide to outsource a niche model's design, they "no longer automatically assumed that they would get the best design by going to Pininfarina."

Around 2000, with the global economy deteriorating and the competition heating up, Pininfarina's fancy bloodlines were starting to look a little thin. The imperative was clear: diversify and grow--fast. Andrea Pininfarina remade his design studio by boosting its head count to more than 3,000 employees; launching a sleek, 129,000-square-foot engineering center on its Turin campus; and expanding its engineering and manufacturing operations to Germany, Sweden, and Morocco. (The company also ramped up Extra, its industrial-design subsidiary, which has churned out more than 300 projects since its 1986 launch.) "No European design studio moved to niche car building on a scale like Pininfarina," says Ken Okuyama, who was the company's design director until last year. "Many in the business thought it was moving too fast, too soon. But Pininfarina saw before most that outsourcing production was the future."

If Andrea and his team found this new work to be less glamorous than penning all of those Ferrari and Maserati bodies, there were compensations: Developing an entire vehicle pays a lot more than simply styling it--by about a 10-to-one margin.

But the risks are equally nasty. Pininfarina declined to comment on its deals with Ford and Mitsubishi. Analysts say, however, that contract manufacturers typically bear a significant portion--and sometimes the entire cost--of the up-front financing to produce their niche models, and Pininfarina has reportedly invested more than $900 million since 2003 to build its current lineup: Alfa Romeo's Brera and Spider, the Ford Focus Coupe-Cabriolet, the Mitsubishi Colt CZC, and the Volvo C70. Meanwhile, the ultimate fate of a contract-produced model remains in the carmaker's hands, which means the contractor can find itself stuck with a slowing assembly line--or worse--if the model doesn't sell well. To take one grim example, Michigan-based ASC, the only prominent specialty-vehicle producer in the United States, reportedly ponied up $250 million to produce General Motors ' retro-styled Chevrolet SSR, only to be left holding the bag when orders stalled. GM eventually dumped the model entirely, and this past May, ASC filed for bankruptcy.

Pininfarina's deep relationships with its customers and current crop of big contracts leave it in relatively good shape in the near term, but BCG's Mosquet predicts that at least three competitors are headed for "serious difficulty."

"Companies like Pininfarina reflect the obstinacy and ego that you find in unparalleled quantities in this industry," says consultant Wardle. "Only a car company would be proud enough--and stupid enough--to think that it could do everything." And while analysts predict that the demand for contract automotive manufacturing will grow considerably during the next decade, the industry is grappling with a bout of overcapacity as ailing carmakers like Ford and GM have been reluctant to outsource production. The result is that carmakers, short term, can squeeze niche manufacturers even harder.

"It's a tough business," says automotive consultant Ron Harbour, president of Harbour Consulting in Troy, Michigan. "The bigger the potential profits, the bigger the potential losses." For Pininfarina, that's where the burnish of its brand helps the most: as a catalyst for keeping its assembly lines running at capacity. Design may account for only a mouse-size share of the company's revenues, but its true value to the organization is almost incalculable, since the cachet of the Pininfarina look remains a powerful lure for the likes of Ford, Mitsubishi, and Volvo. "You use the halo of Pininfarina's design mystique to sell the car," says David O'Connell, chief designer for Mitsubishi Research and Design America. "To be able to say the car is developed in conjunction with Pininfarina adds a lot of status to the vehicle."

Similarly, Pininfarina benefits from its association with Maserati, which may explain why Andrea beamed as he stood next to Maserati's Ronchi at the Geneva auto show, witnessing the GranTurismo's rapturous reception. He knew that one next-generation Maserati would, more likely than not, pull in a far bigger pot of gold--a contract to crank out 20,000 or 30,000 humble-but-profitable cars for Detroit or maybe even Beijing. It's a cold, brutal bit of business logic, all dressed up in fine Italian style.

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