A Q&A with KTM executives – September 25, 2006

EDITOR’S NOTE — Cross Industries’ Stefan Pierer and Rudolf Knuenz purchased KTM out of bankruptcy in late 1991 for approximately $4.5 million. On Aug. 31, the motorcycle manufacturer ended its fiscal year with sales of about 85,000 motorcycles and revenues of approximately $635 million.
Pierer, joined by Winfried Kerschhaggl, international strategic marketing director, Harold Ploeckinger, managing director R&D/Production, and Jon-Erick Burleson, president of KTM North America, discussed a number of topics with Powersports Business during the manufacturer’s recent business meeting in Portland.
The following is an excerpt of the conversation, edited for brevity and clarity.
PSB: KTM has experienced some amazing growth since you purchased it in late 1991 for what now computes to about Euro 3.5 million.
PIERER: That was a lot of money at the time. The company was bankrupt so it was just a brand and some remaining inventory. We didn’t get any credits or allowances from the bank, so it was 100 percent equity. It was everything we had saved up at that time, so it was a huge risk.
Now, after 15 years, the motorcycle has a good reputation and is well accepted in all the different classes. But at that time it was really tough. In Europe, environmentalists fought to close off riding areas and the market was down.
POLARIS
PSB: Why did you decide to keep KTM Sportmotorcycle AG under control of Cross Industries, rather than sell a larger share of the company to Polaris Industries?
PIERER: A very, very important part of this deal was based on dealer reaction, around the globe but especially in the States.
Throughout the year we noted people — dealers, employees and even suppliers — telling us that, in a merger, the bigger company often dominates the smaller company and then ultimately becomes responsible for the success of both companies. And that wasn’t our intention. This is our life work, and we want to keep control of KTM’s direction. So the reaction I received gave me the safety or security to make that decision.
KERSCHHAGGL: It’s important to note that the dealers didn’t make bad comments about Polaris. They just said, ‘You are so different that it would not work.’ Those statements made us see that we really are two very individual companies that couldn’t be joined. It’s a disappointment, that’s clear. Many of the projects we’re working on together have progressed quite nice.
BURLESON: When Mr. Pierer announced his decision during the business meeting, you heard the reaction. The dealers just seem to really realize how important our brand is and how important our company is on its own.
PSB: Do you want to buy back all of the shares currently held by Polaris? Previous statements suggest Polaris keeping 5 percent to 10 percent.
PIERER: It depends. We want to start the negotiations by the end of September. The formula of how to buy back the share is already agreed to. It’s just a matter of timing and which portion they want to keep that’s under discussion.
PSB: Going forward, will you continue to serve as a distributor for Polaris in Germany?
PIERER: We made a three-year contract and KTM sticks to contracts. The experience has been very helpful to us because, in Europe, the ATV distribution business is very different than the motorcycle distribution business. There’s very little overlap because ATVs often come out of agricultural and utility dealers and some smaller automotive dealerships.
Based on our North American experience, we thought it could work a similar way in Europe. But it didn’t. The motorcycle dealer really is out of that business and refuses the ATV product more than you would expect looking from a North American perspective.
KTM AUTOMOBILE
PSB: How did the idea come about for the automotive project?
PIERER: The motorcycle industry, including ATVs, is in my opinion under extreme pressure in Europe. First, we’re very restricted to riding off-road, and we’re facing every year more and more requirements and restrictions on homolugation, noise, emissions, everything. Second, we’ve found that in Europe only 25 percent of license exams are for motorcycles – a motorcycle license costs twice as much as a regular driver’s license, and safety concerns are forcing many younger, first-time buyers to opt for automobiles. Third, we realized that, while the standard ATV is good for off-road, it’s very dangerous for on-road settings, accidents are increasing in Europe, and we’re unsure of the direction that portion of the market will take.
KERSCHHAGGL: So we started thinking about modifying the standard ATV to be lower and wider and came up with what could be considered a supermoto ATV that could be ridden on-road. Then we recognized that the product itself was too dangerous and would face pretty stiff governmental restrictions. This developed the idea further and, sticking to KTM brand concept, we continued to look at other vehicle possibilities with low weight and high performance.
PIERER: We then noticed niche segments in the automotive industry. The kit car market in Europe is a big market, like all the Lotus, Caterham, Ariel, Radicals. Each manufacturer sells on average 300 per year. Not that bad.
And so that brought us to the idea of a ‘supersport of sportscars’ idea. And that was the starting point.
KERSCHHAGGL: It’s an interpretation of the brand concept on four wheels.
PSB: How was the partnership with Audi formed?
PIERER: We sought an experienced partner, and have a very close relationship with Audi, that is part of the Volkswagen group. They had already been thinking of such a product, but really didn’t have the allowances to do it. So we agreed to do it together.
And it really gives us the opportunity to get components at a good price. The chassis, design, suspension, everything is coming from KTM. But we get a gearbox and transmission and turbo-charged two-liter four-cylinder engine from Audi, which in the standard version puts out about 220hp and in a tuned version about 260hp, and we have Dallara, the famous sportscar producer, as another partner.
Now what we have is a two-seat cabriolet with a carbon-fiber polycoque chassis. We want to stay around 1,465 lbs., so related to 240 hp it has incredible acceleration. We’re looking at 0-60 mph in 3.4 seconds.
We plan to unveil the car in March at the Geneva Auto Show.
PSB: Any hint of a price? And where do you plan to market the vehicle?
PIERER: We want to sell 1,000-1,500 per year starting in Europe and maybe in the Far East. In Europe, we’d like to stay below Euro 40,000.
PLOECKINGER: To enter North America, we would have to make sure we fulfill U.S. standards. We’re focusing only on European homolugation at the moment.
PANKEL RACING
PSB: Cross Industries recently purchased 26 percent of German automotive supplier Pankel Racing. What interested you in that company?
PIERER: It was a decision that simply came about when a shareholder wanted to exit. We had a relationship and so we did it. On the other hand, the company has good potential, and we understand the racing business.
The main business of Pankel is in crankshafts, transaxles and driveshafts for basically Formula One. They do about Euro 40 million in business per year, mainly dealing with clients like Ferrari’s Formula One team and Audi’s sportscars. But they also are a small supplier for KTM racing activities – crankshafts and pistons and things like that.