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A New Partnership – April 3, 2006

April 3, 2006
Filed under Features

Arctic Cat is a manufacturer of ATVs and snowmobiles sold under the Arctic Cat brand name. Piaggio is a manufacturer of two-wheel motor vehicles sold under the Aprilia, Moto Guzzi, Derbi, Piaggio, Vespa and Gilera brand names.
Initially, Arctic Cat and Piaggio will cooperate on product distribution, with both sharing access to their respective dealers in North America and in Europe. Arctic Cat will be able to sell its ATV products through selected Piaggio Group dealers in Europe, and the Piaggio Group will sell its motorcycles and scooters through selected Arctic Cat North American dealers.
“What this deal does is allow us to get introduced to the more than 9,000 Piaggio Group dealers in Europe, specifically those who might be interested in adding ATV product,” said Christopher Twomey, chairman and chief executive officer of Arctic Cat. “At the same time, when we talk to our dealers about what kind of other products they’d like from us, they talk about dirt bikes. Of course, the Piaggio Group with their Aprilia dirt bikes have a great product, and so this is an opportunity for the Piaggio Group USA to get introduced to some of our best dealers who expressed an interest in getting into the dirt bike business.
“But we’re not going to be out selling their products, and they’re not going to be out selling ours. We will just be trying as much as possible to facilitate relationships between the two companies’ dealers.”
Arctic Cat serves 650 to 700 snowmobile dealers and about 1,000 ATV dealers in the United States. Twomey describes Arctic’s European dealer base as “not too large, since we’re just now building distribution.” Piaggio Group USA, the New York-based subsidiary of the Italian parent company, currently serves approximately 300 dealers, about 100 for Vespa/Piaggio, 120 for Aprilia and 90 for Moto Guzzi.
“Arctic Cat is very established in North America, where we are not. On the other hand, we have a very established business in Europe, where they are just making their first steps,” said Paolo Timoni, president of Piaggio Group USA. “As both companies aspire to expand in their new regions, there will probably be potentials to work together and to do something that’ll be beneficial to both companies.”
Both Twomey and Timoni talked with Powersports Business on March 6 while in Yellowstone, Mont. Arctic Cat dealers were informed of the partnership later that day while in Yellowstone for a product introduction. Piaggio Group dealers in Europe were told of the deal during a meeting held simultaneously in Monte Carlo.

WHY?
Twomey said the partnership came to mind when Arctic Cat purchased its European distributor, ACE Trade AG of Austria, in July and made it a wholly owned subsidiary.
“We distributed ATVs to him, and he then distributed the product throughout Europe, but that economic model doesn’t work anymore in Europe since all of the major manufacturers have gone to a dealer-direct basis,” explained Twomey. “He was taking the machine, doing some remanufacturing of them for the European market, and then selling them to distributors. Economically, that wasn’t working out and so we determined that we needed to establish a dealer-direct relationship.
“We looked around to see who had a large number of dealers who we could partner with in Europe, and who might be interested in getting some sort of access to our relatively large number of North American dealers. That’s when we began talking to Piaggio.”
Twomey said the partnership serves as one of “two or three other strategies about how we’re going to develop that European dealer base.”
“Initially we’ll be selling in the larger market countries, but eventually we’ll have to branch out to cover all 15 and then, going forward, look at the EU 25,” he said. He said key markets include France, Italy, Spain, Portugal, the United Kingdom and Scandinavia.
At Piaggio USA’s first dealer convention, held in Denver in December, Timoni said success in the United States for the Piaggio Group relies on: 1) well-designed product; 2) a dealer network that covers all major markets; and 3) a solid infrastructure with “best in class” service and support. The deal with Arctic Cat is one tool Piaggio USA will use to achieve its goal, he affirmed.
“North America is a huge place and there are many, many markets where we have no presence,” he said. “For us to build that presence by ourselves one dealer at a time would have taken a long time and a lot of effort. Chris Twomey seemed to be receptive to some of our ideas and opening dialogue with us, so we talked and defined possibilities. Now, with the help of our friends at Arctic Cat, maybe getting into some of those markets will become easier.”
Did Piaggio talk with any other firms? “Everybody is talking to everybody,” Timoni said. “This is a very small industry and everybody is constantly looking for new opportunities.”
Officials of both companies said they began conversations in August. They also said both companies have complementary assets and capabilities.
Privately held Piaggio & Co. SpA, which recently decided to apply for listing on the electronic stock market MTA (Mercato Telematico Azionario) segment of Borsa Italiana, closed 2005 with a net profit of Euro 37.9 million ($45.2 million) on sales of Euro 1.451 billion ($1.731 billion). The results are an improvement from a net profit of Euro 4.1 million ($4.9 million) and sales of Euro 1.084 billion ($1.293 billion) for 2004.
Arctic Cat posted its fifth consecutive year of record sales in the 2005 fiscal year, ended March 31, 2005. Net sales totaled $689.1 million, up 6 percent versus $649.6 million for fiscal 2004. Net earnings for 2005 totaled $28.3 million, or $1.36 per diluted share, compared to net earnings of $30.4 million, or $1.40 per diluted share, in 2004. The company anticipated net sales of $740 million to $750 million for its fiscal year ended March 31, 2006.

MULTIPLE FACETS
While Arctic Cat and Piaggio said the partnership could potentially lead to other areas of future collaboration, such as product development and manufacturing, both say they have not yet formally discussed such possibilities.
“We expect that it could develop to more things in the future, but right now it’s just a distribution opportunity for both companies that we intend to focus on,” Twomey said. “Are there some things that they do maybe better than we do, or that we do maybe better than they do? Is there some engine technology they may have? Are there some parts they make we ought to be buying from them? Are there some parts they ought to be buying from us? Those are all things we’ll try to figure out in the next period of time.”
Those thoughts were echoed by Timoni.
“Hopefully this relationship will expand to touch upon a number of areas,” he said, “but today we plan on starting with distribution.”
Asked if the deal with Arctic Cat could serve as springboard for Piaggio’s entry into the ATV market, Timoni responded: “These are some of the things that we’re still evaluating, but this relationship may result in some joint development there. Arctic Cat is very strong in the development of ATVs, and Piaggio has put a lot of effort in developing new engines. But one step at a time, right? This is an alliance that we’ll pursue market by market and opportunity by opportunity.”

OTHER VENTURES
This latest partnership is not the sole pact for either company. Piaggio has a joint venture in China with Zongshen Group to produce parts, engines, scooters and motorbikes based on Piaggio patents and technology. Also, one of its brands, Spain-based Derbi, sells four models of ATVs in Europe built by Sang Yang Motor Co. of Taiwan.
Arctic Cat – 32 percent owned by Japan’s Suzuki Motor Corp. – has enlisted Taiwan’s Kwang Yang Motor Co. (KYMCO) to build the DVX 250 ATV.
Piaggio, Sang Yang and KYMCO all are competitors in the global scooter market.
“KYMCO produces some of our smaller displacement ATVs, and we have a great relationship with KYMCO, and we intend to continue that relationship with KYMCO and probably expand that relationship,” said Twomey. “We also have a great relationship with Suzuki. They’re a shareholder and make a lot of our engines, and we expect that that will continue and grow as well.”
“I don’t see any concerns there,” said Timoni. “If anything, that’s another opportunity that might open in the future.”
“We anticipate that this agreement will enhance the competitive positions of both companies internationally, providing tangible benefits to our customers, dealers and shareholders,” said Twomey. “It’s a real win/win for both of us – a win for us in Europe and for them in North America.”

- Guido Ebert

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