The Big Q: How long will it take Ferrari to get back on Top in F1?
The Big A: Not an easy one to answer, given that the problems run deep, it could take some time.
Ferrari’s (NYSE:RACE) drop from race-winning team with frustrated title-challenging aspirations over the prior 3 seasons to midfield struggler this year is rooted in the series of engine technical directives that have been issued in recent times.
These were partly the result of a collaboration between Ferrari and the FIA through a secret engine settlement struck because of suspicions, unproven but clearly serious, that it was not running its power unit package legally. Ferrari is now well down on power, by around 50bhp, and has on average the 5th-fastest package of Y 2020.
Ferrari has had to roll back the techniques it was using to run savage engine modes in qualifying that gave it a significant power advantage last year.
This is not just about finding the power, but doing so in a way that does not damage the engine, given the huge heat generated if you advance the ignition timing.
This season, it did not have a special engine mode, something that became moot once the rule banning the changing of engine modes from qualifying to the race was introduced at the Italian Grand Prix in mid-September.
So Ferrari is already in a hole in terms of the engine, something that has also held back customer squads Haas and Alfa Romeo.
While both Haas and Alfa Romeo have a higher aero-efficiency philosophy that serves them well, the Ferrari is simply too draggy for its power level.
This explains why Alfa Romeo driver Kimi Raikkonen has been able to finish ahead of the leading Ferrari in the last 2 races at Monza and Mugello.
Ferrari’s aero concept was already limited and the team had simply decided against a major overhaul for Y 2020 given the need to focus on the brand new aerodynamic regulations scheduled for Y 2021.
These have been deferred to Y 2022 as part of the emergency measures in response to the impact of the China virus chaos that cancelled the 1st 4 months of the season. On top of that, there are heavy restrictions on car changes for Y 2021.
“We somehow try to address whatever we can for next season in terms of car development, trying to understand what are the weaknesses of this season,” said Ferrari team boss Mattia Binotto earlier this season. “It is obvious the system is overall a compromise of the current situation post-COVID. We cannot be fully happy because, if you look where we are as Ferrari, our intention would have been to fully develop, but we understand the point and that’s part of the season compromises that have been taken”
There are also restrictions in place on the engine side.
This is the biggest area of concern for Ferrari, given it is at the heart of its problems. It needs a big step forward in terms of power and has not only lost the gains it made previously, but has had to set a new course of development to achieve extra power by means compatible with the technical directives. We wait, we see…
F1 is working towards a total freeze of the power units that will start with the introduction of the final permitted homologation changes in Y 2023. This means that up to and including Y 2023 the V6, turbocharger, MGU-H and fuel/engine oil can only have 1 change in spec per year.
The MGU-H, MGU-K and energy store aka battery are only allowed 1 change across each of Ys 2020/21 and 2022/2023. Given the lead times for such designs and the restrictions on dyno testing, Ferrari is really up against it.
These restrictions are the biggest concern for Ferrari. It is 1 thing to be behind, but there are constraints that might limit the speed of catching up. Ferrari CEO Louis Camilleri showed how worried Ferrari is about this in an interview ahead of the Italian GP.
“I am hoping with a bit more flexibility in the regs next year, we can at least step it up from where we are,” said CEO Camilleri; behind the scenes, there is no lack of lobbying going on to allow Ferrari more chance to catch up.
We also need to take a further step back and look at the widest context for Ferrari.
Its Y 2020 troubles are 1 thing, but this is a team that, despite having the resources and the expertise to dominate, has not won a championship since Y 2008 or the drivers’ title since Kimi Raikkonen’s success a year earlier. While it has been a regular winner, a tally of 29 victories since the start of Y 2009 represents a win rate of 13%, not good enough.
Under Boss Binotto, who became team principal ahead of the Y 2019 season things initially looked promising. But the struggles of this season have led to restructuring to confront some of the long-term weaknesses, as well as the gap created by Mr. Binotto switching from his previous role as technical director.
A new ‘performance development’ department was created in July under aerodynamics lead Enrico Cardile that the legendary Rory Byrne, who retains an office at Maranello but is semi-retired, also apparently contributes to. The highly-rated aerodynamicist David Sanchez is also a Key player in this new division
“As we said in July, we are restructuring the technical department,” said Mr. Binotto, “Now it’s only a very little time since it happened, and I think normally to see the results of a reorganization, it takes some more time. I’m pretty happy, the way I can feel that the people feel responsible, understand the matter of urgency of our situation and are working hard, are committed, united in the way to progress the car and somehow progress our competitiveness.”
Also, there is another challenge Ferrari must face, which is created by the $145-M per season cost cap that kicks in next year. Originally set at $175-M, this was lowered after the COVID-19 chaos hit and will drop to $140- in Y 2022 and $135-M in Y 2023. This means Ferrari has both the general challenge of maximizing its efficiency after being used to spending in excess of $400-M per season, and the specific struggle to reallocate staff and possibly even make redundancies.
That reduction sounds crippling, but the number of exemptions to the cost cap means its real spending will be far more than $145-M per season next year given that drivers, the 3 highest-paid personnel and myriad other expenditure streams are not included. But it will have a significant impact, and drain further resources from Ferrari as it adapts.
And ranged against this, Ferrari knows that MercedesAMG will march on with a well-organized team that can adapt to such challenges from a position of strength.
The same applies, albeit to a slightly reduced extent, to Red Bull Racing
Meanwhile, midfield rivals such as McLaren and Renault are already a more appropriate size for the cost cap era.
So, back to the Big Q: So how long before Ferrari is back to winning ways?
The Big A: We can write off Y 2021 immediately in terms of winning on merit, both because of the restrictions on changes for next year, and the fact that Ferrari itself has bigger things to do even though work on the Y 2022 car is not permitted to restart until next year, having been suspended by rule changes after the COVID-19 chaos struck.
The Y 2022 technical regulations represent a dramatic change and therefore a big opportunity, and this is what Ferrari itself is targeting, as Chairman John Elkann explained earlier this year.
“Today we are laying the foundations to be competitive and return to winning when the rules change in 2022,” said Chairman Elkann. “I am convinced of it.
“Mattia Binotto, who has taken the helm of The Scuderia for a year, has all the skills and characteristics to start a new winning cycle. He was in Ferrari with Todt and Schumacher. He knows how to win, and from next year he will work with 2 drivers who are young and ambitious like us.”
Ferrari has set its course and, despite suggestions that he could be replaced, backed Boss Binotto to oversee this recovery. And while Y 2022 is the 1st chance to make a big step forward and rejoin the front of the pack, it seems a bit optimistic to believe Ferrari can fix all of its long-term problems to be capable of beating MercedesAMG over a season by then.
More realistic is to target being able to fight for a few wins then, and to be in position to challenge for the title in the years that follow.
Ferrari will get there, but given the depth of the hole it is in through its own actions, it is going to take more than just a rule change to get it back to the front. Unless, of course, it gets a little help to accelerate the process in terms of loosening some of the regulations that restrict development.
I hope it gets there quickly.
After all, F1 needs Ferrari up at the front to take the fight to MercedesAMG, and the team has let down fans of Grand Prix racing for too long. Again, We wait, we see…
Ferrari is The Aristocrat of the automotive sector.
Our overall technical outlook is still Bullish with a Very Bullish bias in here, my Key indicator is Very Bullish, the stock is extremely oversold.
Ferrari finished Monday at 184.10, -3.82 in NY it’s all time high was marked at 199.97 marked intraday Wednesday, 26 August.
The Maranello Outfit’s shares were raised to Buy from Hold at HSBC.
Ferrari will continue to create value the long term as it becomes the world’s 1st Super Luxury brand.
Ferrari is a quality 1st long term luxury products investment, and I called it at it at 200+/share ATV (after the virus) and sided with BAML to 230 long term, then…
Thursday, 13 August I raised my long term target to 300, a Strong Bull call.
Ferrari has an average rating of “Buy” and an average target price at 194.33.
The Maranello Outfit’s shares were raised to Buy from Hold at HSBC.
Ferrari will continue to create value in the long term. Ferrari is a quality 1st long term luxury products investment, and I have called it at it at 200+/share long term, adjusting it to 200/share short term ATV and siding with BAML to 230 long term for now.
The stock is now considered defensive in the sector.
The Russian GP is this weekend, tune in,
Have a healthy day, Keep the Faith!