Analysis: Ferrari parent company FCA embroiled in US emissions challenge

Today's news that the US Environmental Protection Agency has decided to go after FIAT Chrysler Automobile for violating emissions laws will cause some concerns in the corridors at Ferrari.

Although Ferrari is not directly affected - the case revolves around the Jeep and RAM brands in the USA - nevertheless the size of the multi billion dollar fines paid out by VW recently to settle its case and the impact that has had on the VW and Audi motorsport programmes, will be front of mind.

The EPA has issued FCA with a 'notice of violation', relating to the sale of 104,000 recent diesel model Jeep and RAM vehicles that it said violated legal limits on toxic substances, the accusation being that there is software designed to trick the EPA's emissions tests.

"Once again a major automaker made the business decision to skirt the rules and got caught," said California Air Resource chair Mary Nichols.

FCA boss Sergio Marchionne, who is also chairman of Ferrari, has come out with a robust defence, saying "We have done nothing illegal" and calling the EPA's move "grandstanding" shortly before the inauguration of the new US President Donald Trump.

Trump had earlier in the week Tweeted his thanks to Marchionne and FCA for announcing a new plant in the US, creating thousands of jobs. Whether the announcement was a pre-emptive move, knowing that the EPA was on the warpath, is not known at this time.

VW has had a torrid time since the EPA went after them, with executives being charged with criminal offences and an admission of guilt and $4.3 billion coming only yesterday.

The VW example shows that what happens in the automotive sector can have a devastating effect on the company's ability to compete in the motorsport space. Having paid already close to $20 billion, VW has cancelled the Audi WEC programme and all its rally activities in WRC.

Ferrari is in a slightly different position in that it's F1 team is very well funded from outside. It earns around $170 million a year from F1 Management, $100m of which is an annual bonus payment for being the 'Longest Standing Team'. That deal is locked in until the end of 2020 under the bilateral agreement with F1 Management struck by former Chairman Luca di Montezemolo and Bernie Ecclestone.

On top of that it has big money sponsorship deals with Philip Morris, Shell, Santander and others which mean that the amount of money Ferrari itself contributes to the F1 programme is quite small. It also earns money from the sale of engines to Haas and Sauber and of technology and support services to Haas.

So if the US EPA does manage to prove that FCA utilised software on its diesel cars that cheated their emissions tests and FCA is liable to the fines of around $4 billion that are being talked about, the impact on Ferrari's F1 operation will not necessarily be as painful as it was for Audi and VW Motorsport.

However, the new owners of F1 Liberty Media, will be renegotiating the deals with the F1 teams for the period after 2020 and it is hard to see the $100m bonus continuing at that level. Additionally it is not clear how much longer the Philip Morris deal with Ferrari will continue.

Another concern is the large debt on FCA, which partly motivated the flotation of Ferrari last year. FCA has net debt of $4.7 billion at the end of 2016 and Marchionne's target is to clear that by the end of 2018 at which point he is due to step down and hand the FCA reins onto a new manager. Marchionne has told Italian media that FCA will survive even if it is hit with the kind of fines being talked about.

There has been talk in F1 circles recently of selling off electronics and automotive components business Magnetti Marelli to help reduce debt.

The EPA news from America would also appear to put paid to Marchionne's oft stated dream of returning Alfa Romeo to Formula 1.

For Ferrari, F1 is vital as it is the company's principal marketing effort, along with a limited GT programme in WEC and Le Mans as well as US sportscar racing. For Liberty Media, whose shareholders meet on the 17th to vote on the final part of the F1 takeover, the presence of Ferrari in the F1 field is fundamental.

It has been a year of shocks and there seems to be no sign of that ending.

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