Despite a reluctance to typecast myself as Omologato’s de facto Woking Bureau Chief, I cannot resist the opportunity to follow my recent, deep-dive review of McLaren’s all-new Artura with a few additional observations and analyses, some of which bolster or confirm my prior arguments and speculation, and some of which … do not.
I was corresponding a fortnight ago about McLaren with my “Deep Throat” industry source, and he offered that my enthusiastic, engaged following of the company’s business model stems from its status as a real-life, real-time Harvard Business School case study. I agreed. As an aside, this fellow possesses both an MBA and considerable OEM work experience; I have neither, just a Classics degree from a liberal arts school and some robust opinions.
Financial Performance (As of 6/30/22):
While McLaren Group - comprised of McLaren Racing and McLaren Automotive - is not publicly traded, it does provide periodic financial updates for the road car portion of the business: An investor presentation “deck” similar to, although far less fulsome than, what a public company would create (here), and a set of interim financial statements with (partially) explanatory notes (here). I will discuss selected highlights.
Nota Bene: McLaren Automotive announced in July a £125.0 million convertible preferred equity raise (£80.0 million already received, remainder committed); these funds are not reflected in the 6/30/22 financials.
McLaren kicks off with a few pages of preamble puffery and highlights “very positive coverage” of the Artura post-Spain launch event, including testimonials from CAR Magazine, Motor Sport Magazine, and Chris Harris; for unknown reasons, none of Sherman’s ~7,600 words re: Artura cut the McLaren mustard. Further, there is a conspicuous lack of reference to the “thermal events” that hampered the launch.
McLaren begins the meat of the presentation by touting its “full” order book for the balance of 2022: 2,510 vehicles on order as of 6/30/22, which has swollen from 1,825 at 12/31/21 and 1,248 at 6/30/21, so the backlog has doubled over the past year. Meanwhile, the marque’s wholesale volume for the first half of 2022 was 850 units - a 24% year-over-year (YoY) decline - which it attributes to “industry-wide” semi-conductor shortages and supply chain constraints…
… leading to 23% lower revenue (“turnover”) versus the same period in the prior year. There was also no revenue from McLaren Applied this year, as McLaren completed the sale of that business in 2021. Be mindful also that wholesaling of the Artura began in August of this year, so that impact is not incorporated in any of these figures.
Comparatively - and despite these “industry-wide” headwinds - the archrivals in Maranello managed to deliver record Q2 2022 results in terms of revenues, EBIT, and EBITDA, subsequently revising investor guidance upward. Quo vadis, McLaren?
The H1 2022 gross margin was 28.7%, which underperformed the 31.7% H1 2021 number, but we don’t know about differences in product “mix” (i.e., deliveries of relatively more or less profitable vehicles) during the respective periods.
General inflation and a strengthening dollar contributed to elevated administrative expenses; McLaren claims that they hedge this foreign exchange risk and work closely with suppliers (Ferrari seems to be much more adept at these tasks). The chasm between H1 2022 and H1 2021 EBIT and EBITDA is misleading, because McLaren saw a £67.7 million gain relating to the sale-leaseback transaction covering the campus in Woking. Nevertheless, pro forma EBITDA swung from £26.9 million to (£24.6) million YoY.
In terms of liquidity, McLaren had £9.9 million of cash on hand and £40.0 million of additional headroom by way of revolving credit / overdraft facilities as of 6/30/22; recall that they have already received the aforementioned £80.0 million capital injection and just begun recognizing Artura revenue. Unsurprisingly, the credit rating is straight up “junk,” although there is a bit of divergence between Fitch and Moody’s / S&P; S&P describes a CCC credit like so (emphasis mine):
An obligation rated 'CCC' is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor [borrower] to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
A final financial item (taken from the explanatory notes in McLaren’s financial statements): McLaren had £853.1 million of intangible assets on the books as of 6/30/22, the majority of which - £822.4 million - were capitalized R&D. As I presented in my Artura write-up, McLaren’s product portfolio is rather aged at this point: The Sports Series (570S, 600LT, 620R, etc.) is dead, the Super Series is over five years old (720S, 765LT), and the most recent Ultimate Series cars (Speedtail, Elva) are also several years old (and fundamentally based on the Super Series and older Ultimate Series - P1, Senna).
As a result, that £822.4 million balance will have to be absorbed by sales of the Artura (and forthcoming variants), the rumored 720S facelift (ibid), future Ultimate Series cars, and - potentially - the recently announced Solus (more on which below). Sherman superfans will remember that “Deep Throat” and I put our heads together and estimated an Artura development budget of ~$800.0 million.
It will take a long time to amortize that capitalized R&D balance; the order book is “full,” recall, although McLaren Automotive only moved 850 cars in the first half of the year. This challenge would be a significant impediment to any near-term IPO.
Another, broader challenge with which McLaren must contend: the faltering home-market economy, characterized by a weakening pound, galloping inflation, cost of living woes, and shocking energy costs (and it’s still, technically, summer).
New Leadership:
The mid-year period also marked the arrival of McLaren Automotive’s new CEO, Michael Leiters.
German-born Leiters is the third Chief Executive Officer in McLaren automotive history; both of his predecessors left office under dark clouds. Antony Sheriff - the first CEO - was placed on “gardening leave” (i.e., being paid by a soon-to-be former employer not to work for someone else for a period of time - I have “enjoyed” such a period myself!) by then-Chairman Ron Dennis and later sued McLaren for wrongful dismissal. Sheriff is currently the CEO of UK-based Princess Yachts, which recently debuted a carbon fiber-hulled day boat, and a board member at Aston Martin Lagonda. Mike Flewitt - the second CEO - was ushered away last October and now works in the “flying taxi” space.
Leiters worked on Porsche’s Cayenne team, eventually rising to become Product Line Director, before moving to Ferrari in 2014, where he served as Chief Technical Officer and oversaw a purple patch of road car development: Ferrari’s first regular production hybrids - the SF90 Stradale and 296 GTB - and the forthcoming Purosangue “FUV” (Ferrari Utility Vehicle, for the avoidance of doubt), which will launch in mid-September. Leiters worked under multiple Ferrari leaders during his Maranello tenure, first for Enzo’s spiritual successor and sprezzatura icon Luca Cordero di Montezemolo, then for long-time company man Amedeo Felisa, then for knitwear collector, industry Cassandra, Elkann-family value unlocker, and ultimately ill-fated Sergio Marchionne, then for bon vivant tobacco man and Naomi Campbell-ex Louis Camilleri, then for interim chief and Fortunate Grandson John Elkann, and then finally - and briefly - for Nintendo Wii-facilitator Benedetto Vigna. After roughly six months on the job, Vigna arranged for several long-time Ferrari execs to wake up next to a severed equine head, one of which was Leiters. Worryingly for the Ferraristi, the German championed the marque’s V-12 selling proposition.
Leiters became an unexpected free agent at the end of 2021, and I suspect he assessed his job options in this fashion:
Volkswagen AG Brands - He already left Porsche; Bugatti and Rimac had just become bizarre bedfellows; cross-town rival Lamborghini had brought Stephan Winkelmann back (from Bugatti) to replace Formula 1-bound Stefano Domenicali
Myriad EV Startups - The bloom was already off the rose given the decline of the SPAC-fueled funding bubble
Aston Martin - Rumors swirled about the clash of personalities between James Bond villain incarnate - and James Bond conveyance sponsor - Lawrence Stroll and ex-AMG hire Tobias Moers; Moers got his pink slip in May of 2022 and was replaced by the aforementioned ex-Ferrari boss Felisa, who is now 76 years old
… all of which left only one credible supercar manufacturer seat for Leiters - McLaren
The ever-excitable automotive press immediately began speculating that Leiters had been hired to develop an SUV for McLaren; I was skeptical, and I appear to have been proven correct.
Autocar, which bills itself as “the world’s oldest car magazine,” is a source to which I have linked liberally throughout this article; the UK buff book recently conducted an exclusive interview with Leiters, which they stretched into multiple articles:
First, there was the opinion piece previewing the tantalizing interview
Second, there was an excerpt from the longer interview
Third, there was the actual interview behind a vertiginous paywall (£66 per month; fortunately, there is a free trial period)
In the interview, Leiters describes McLaren as an “entrepreneurial space” and has found the “positive things … more positive than [he] thought, the negative things … more challenging than [he] thought.” He reflects on his previous point of view at Ferrari and characterizes McLaren as the “benchmark” brand in terms of “weight, driving dynamics[,] and aerodynamics.” He goes on to say that it took Ferrari three years to counter McLaren’s 720S in terms of performance (in the form of the F8 Tributo), and he identifies “driving emotions, sound[,] and the looks” as arenas in which McLaren lags the competition.
He is refreshingly candid regarding quality:
“We aren't good enough in quality. I think [improving] quality has big potential. Quality is perceived badly by our customers. So we created bad customer experiences on the product itself, but also how we manage issues when they appear to the customers. And this definitely has an indirect business impact on residual values.”
In terms of brand positioning, which he describes as “modern luxury … a very exclusive, technology-driven product,” Leiters is cognizant that the efforts to date have been insufficiently differentiated:
“I also think a lot of the line-up isn't clear enough to the customer. We have to follow more the customer and the market segmentation than engineering ideas.”
Ron Dennis must be apoplectic!
Regarding SUVs:
“I developed an SUV at Ferrari. I developed an SUV at Porsche … to be very honest, we haven’t decided to do it or not to do it, and we haven’t had a clear idea.”
But didn’t industry authority Jalopnik say “McLaren's New Boss Wants a McLaren SUV”?
On electrification:
“Hybridization is a big opportunity for us … for supercars, I think the technology for pure BEV is not there. There are many, many examples in the market where somebody announced something, and then you will see hundreds of kilos deviation from that.”
I am inclined to believe that the former CTO of Ferrari has some credibility in that department; as for a concrete example of ballooning weight, consider the Mercedes AMG One, which is far heavier than initially predicted and as a result no quicker than the “Holy Trinity” from a decade ago or - for that matter - a McLaren 720S at a tenth of the price.
Excellent news on the combustion engine front:
“I think it's underestimated how important ICEs will be, especially in our segment, also in the future. And I hope that the regulation framework will allow us to have to continue with having business in this niche. There are two things [to consider]: one is the regulatory framework and the other is the customer.”
On trade-offs between volume and profitability: “Less models, more profit and the right volume, not more or less." He brought this mindset from Ferrari, which prioritizes per unit profit over higher volume (despite the fact that Ferrari output has risen, it hasn’t risen as rapidly as global demand for the company’s products).
One of Autocar’s final questions covers rumors about partnerships and McLaren Automotive potentially being for sale:
“There’s been a lot of talk about McLaren ownership and partnering with another manufacturer, perhaps from Germany. Are you personally open to working with partners?”
Leiters gives a diplomatic answer but ignores questions about a potential “financial” partnership; as far as he knows, McLaren Automotive is not currently for sale, because he obviously wouldn’t have taken the job if he thought that were the case.
Andrew Frankel - who freelances for many publications, including Autocar, and is also a Co-Founder of The Intercooler - recently made the argument that McLaren (and Aston Martin) should sell to a larger automaker with greater resources; Frankel’s line of thinking makes sense, but not to the man who’ll be the first casualty of such a transaction!
Underscoring the posture of independence, Leiters summarizes his ambition succinctly: to transform McLaren into a “futureproofed company.”
Leiters has been active on the PR front during his first few weeks at McLaren; here is another recent interview:
The interviewer, Jason Stein - with whom I was previously unacquainted - resembles a less rambunctious Shooter McGavin and mostly lobs up vague softball questions for Leiters. He has somehow stolen time from industry luminaries including Toto Wolff, Roger Penske, Bruce Meyer, Bill Ford, etc. over the past year.
The most interesting portions of their discussion are when soft-spoken Leiters damns the McLaren he inherited with faint praise by referring to the operation as a “startup,” and when he characterizes the electric vehicle craze as “dogmatic” and “religious.”
Solus GT
As I covered in my Car Week roundup, McLaren launched its track-only Solus GT at The Quail last month.
Leiters delivered the baby, but he didn’t conceive it.
Ferrari pioneered the high-dollar, low production track day car for well-heeled amateurs who aren’t interested in competitive, wheel-to-wheel racing with its XX program, and other manufacturers have followed suit: Porsche offered the 935 redux to 77 lucky customers, Lamborghini has the Essenza SCV12, Aston Martin will sell you a road-going Valkyrie and a Valkyrie AMR Pro, Gordon Murray Automotive is readying its T.50s Niki Lauda, and Red Bull recently announced the RB17. These cars don’t conform to any competition rulebook and are designed to allow wealthy non-pro drivers to access levels of performance hitherto unseen outside of Le Mans prototypes and top-drawer single seaters. You can certainly go as fast for less money (e.g., an LMP2 car), but these cars help establish their buyers as brand whales. For the sellers, they are ultra-high margin products that don’t have to meet road car homologation standards or quality / reliability expectations.
Naturally, McLaren must have such a car, as well. McLaren pre-sold all 25 units at north of £3.0 million apiece (the quoted USD figure was ~$4.0 million), so let’s call it £75.0 - £100.0 million of incremental revenue; this is a meaningful figure for a company that booked £258.0 million of revenue in the first half of 2022. Furthermore, I suspect the Solus GT gross margin will be materially higher than McLaren’s ~30% historical performance, even accounting for the purchase of the Judd-developed V-10.
In my Artura review, I asserted that McLaren’s Ultimate Series was on hiatus until 2025; surely the Solus GT - the fastest Mclaren around a track outside of the brand’s Formula 1 and perhaps IndyCar competitors - qualifies as Ultimate? Not the case according to Woking’s own product matrix (the Solus GT is entirely absent).
On the Solus GT launch day, Top Gear uploaded a video of the car to YouTube only to delete it and then re-upload an edited video. I had assumed that McLaren asked Top Gear to edit out an embarrassing section of footage in which the Solus GT leaves the pits at Anglesey, negotiates several corners and then … grinds to a halt (go to 14:30). But no, the revised footage still includes this gaffe! Top Gear simply interspersed a few renders of the car with its name - previously a secret, they erroneously stated - included. Indeed, McLaren filed trademarks for three model names last year: Solus, Aeron, Aonic:
Solus obviously sounds like “soulless”
Aeron is the name of an iconic Herman Miller office chair
Aonic almost sounds like “ironic,” which would be a great name for McLaren’s SUV, provided they alight on a “clear idea”
Silly Season
One of McLaren Group’s greatest assets is the marketing nous of Zak Brown, the Californian CEO of McLaren Racing; he is not to be confused with Zac Brown, the North Georgia-native country crooner and sometime vintner. Zak Brown made a fortune - and developed an enviable rolodex - in the motorsport sponsorship business before McLaren hired him to run the racing division.
Tacit among his responsibilities was a brief to transform McLaren’s image away from the dour reputation that the Formula 1 team had earned under the stewardship of Ron Dennis and Martin Whitmarsh. Gone were the inscrutable soundbites, the obsessive punctiliousness, the gray scale liveries; enter a shiny happy people vibe, diverse PR officers, papaya orange race cars, and fan favorite / class clown drivers in the likes of Lando Norris and Daniel Ricciardo. Brown also expanded the team into America’s IndyCar Series, and McLaren is set to enter Formula E next season.
After all, would you rather buy a car from the brand represented by the most uptight team in Formula 1 or the (arguably) coolest guys in the sport?
This summer, Zak managed to vaporize plenty of the brand goodwill that he created over the past few years.
In June, IndyCar team Chip Ganassi Racing announced that it had exercised its option on Alex Palou - the reigning series champion - and would be retaining his services through 2023. Moments later, Palou disputed this claim in the digital town square, and announced that he would be joining McLaren - but not specifying which McLaren effort - instead! McLaren later issued its own press release.
Ganassi is suing Palou, and the situation remains unresolved at press time.
Undeterred by his experience winning enemies and (negatively) influencing people in IndyCar, Brown doubled down and did the same thing again in Formula 1! The globe-trotting Piranha Club is more accustomed to this type of skullduggery, but the response was similar.
Alpine - the banner under which French carmaker Renault currently fields its team - had a high-quality problem entering Formula 1’s August break: three drivers vying for two race seats. The team had Frenchman Esteban Ocon under long-term contract, with aging global superstar Fernando Alonso out of contract but keen to stay on for several more years, in my view justified in light of his performance this season. Alpine had also groomed much-fêted Australian junior driver Oscar Piastri for a Formula 1 opportunity and had promised to place him in a race seat - not necessarily at Alpine - for 2023. When Alpine’s leadership balked at giving Alonso a multi-year contract based on his age, the Spaniard defected and signed a deal with Stroll’s Aston Martin team. Alpine then announced Piastri for the remaining seat.
The same day, Piastri made an announcement of his own:
For the following month, intrigue swirled regarding Piastri’s alternative destination - McLaren. Making way for Piastri at McLaren would be his countryman Ricciardo, the final year of whose contract the Woking-based team recently bought out to the tune of $15.0 - $20.0 million. I am sure McLaren Group’s largest shareholder - Bahrain’s Mumtalakat Holding Company - appreciates this judicious deployment of capital. On Friday of the Dutch Grand Prix weekend, the FIA’s Contract Recognition Board completed its assessment of Alpine’s and McLaren’s completing claims to Piastri’s services. McLaren and Brown were the victors, but the manner by which the win was achieved may render it Pyrrhic for the British team, which has coincidentally fallen behind Alpine in the sport’s Constructors Championship standings - bitter, Gallic gall.
Somewhere, Ron Dennis - the gravitational center around which so many Formula 1 controversies orbited - is watching Zak’s machinations and thinking “I wish I’d thought of that!”