Company Focus – 'New' General Motors Company – All Change at the RenCen and Around the Globe.

General Motors has emerged from bankruptcy proceedings in a record time of 39 days -thanks to the 363 procedure - astounding investors, industry executives and indeed re-structuring lawyers given the minimum of 90 days expected. Justifiably the 'old' bond-holders will continue to feel marginalised given the 60.8% stake now owned by Washington – costing approximately $1bn for each 1.22% - the 17.5% by the UAW, 11.7% by the Canadian Government and remaining 10% left to 'old GM' MLC (Motors Liquidation Company) and by virtue its equity and debt-holders.

[NB. The 'old' GM free-float rallied on the 'exit' news from a fluctuating range of $0.35 to a close of $1.15 on Friday (10.07.09) giving it a MktCap of $702.25m].  

In another potentially conspired twist of fate, that will cause more old bond-holder consternation, GM has along with Chrysler & Nissan North America agreed to loan Ford monies that will be passed-on to the quasi-dependent but bankrupt Visteon (itself filing 28.05.09). That occurrence obviously entwines the US auto-industry and we suspect was done so at the behest of Steven Rattner's Auto Task Force Team, so as to ensure Detroit helps itself by creating a collaborative culture rather than the historically normal competitive one – a case of value creation rather than value destruction. This of course stabilizes Visteon and allows for the precedent that a greater emphasis on 'common systems engineering' will prevail which will reduce development costs, inventory count, manufacturing overheads & variables, and logistics costs.

Thus at last Detroit is creating a very loose kind of chaebol system, that being the crucial basis of previous Japanese and S. Korean operating methods that both reduced costs and allowed for quicker new model development programmes. This probably an outcome of the efforts by Senator Bob Corker that created the covenant-like 'bail conditions' for GM.

GM comes out of bankruptcy with what Frederick Henderson espouses as a new culture; one that purports to do away with the endemic inefficiencies of the old dinosaur corporation. Swathes of white-collar management, admin staff and production-line workers have been retrenched (27,000 compared to 2008) in a bid to create an entity that is “smaller, leaner, tougher” - one which can from Henderson's words return the US government's injected funding well before 2015. The new mantra being “customer focus” including an e-bay related initiative, and product management with “cost-revenue focus”. 

Beneath the rebirth spin, the question must be what does GM realistically have that can transpose the PR into successful achievement? Viewing from afar, it has a crop of 30-something/40-something managers who have been essentially elevated by this historic occurrence. No doubt Henderson et al will be pep-talking those people: paralleling their 'opportunity' to that of John DeLorean's rapid rise. So the chance to re-make GM, now focused upon a slimmer brand portfolio of Chevrolet, Buick, Cadillac and GMC, with much needed debt-reduction boosting the balance sheet massively

[NB. Debt down from $176bn to $48bn according to the WSJ vs the FT's report of $54.4bn to $17.3bn. GM itself states it as $11bn excluding $9bn of preferred stock and could - ie probably will - alter under new accounting terms].

Given the new heavy marketing stance, Bob Lutz is now saying how he is really a marketing man at heart, having 'illegally' spent the majority of his career in product strategy and development. All part of the usual staged corporate rally cry that Detroit has mustered at such times to bolster belief both internally and critically externally.

So assuming that the operational management has been appropriately cut-to-shape and does have the experience and competence, what of the new Board? An entity which must combine the balancing act of creating strategic futures will the task of cherry-picking the recommended operational initiatives? The WSJ yesterday reported what much of the new board will look like, those members who are departing and those to take their new seats. 

Under new Chairman Ed Whitacre, Henderson carries on his good work as CEO including the direct responsibility for GMNA, [Nick Reilly now with International Ops (GMIO)] whilst Bob Lutz takes a Vice-Chair post probably charged with running the smaller Auto-Strategy Board & Auto-Product Board, and critically building the confidence of the remaining US dealer-base and pepping-up critical BRIC+ regional business divisions. Other names come and go.

As mentioned in the previous post, Stephen Girsky plays a pivotal role given his ability to see both side of the management-ownership equation. Although former Kodak CEO George Fisher departs, six current Board Execs remain including: former Coca-Cola Chairman Neville Isdell, ex Northrup Grumman CEO Kent Kresa ex E&Y Chairman Phil Laskawy. The appointment by the Obama administration of former investment banker Robert Kidder to GM aswell as Chrysler demonstrates the ideal of sector inter-connectedness that Washington seeks.  

Thus the Board's remit is to both create a vision for tomorrow and simultaneously effectively dismantle and divest 'Liquidation Motors' of yesteryear. Whilst Whitacre, Henderson and Lutz perform much of the former - including a new e-bay based venture, the latter will probably be left to Whitacre, Isdell, Kresa, Laskawy & Kidder working with the investment banking community. The search to find suitable domestic and foreign trade and PE customers continues for the divested brands, product inventories, plants, tooling and land assets. Their job to create compelling 'Blue-Books' possibly for complete divisions but more probably on a part-by-part basis, the latter with the potential to release greater capital value generated by a wider audience.

Thus today even the New GM appears a world away from the long-term vision of 'General Mobility' – with concomitant new vehicle modes and business models - that it seeks under Whitacre. Many, including ourselves, will question the efficacy of the lightening-quick bankruptcy exit, but it must be assumed that although not formally 'pre-packaged' per se, the resultant animal is close in shape to the desired outcome by both Washington and GM itself. 

But whilst Henderson et al maintain the GM publicity machine of 'customer focus' and 'star products' that buoys consumer – indeed American – confidence, others from Wall St, the City, Moscow's Presnensky, HK's Choong Wan, Seoul's Cheonggyecheon, Shanghai's Lujiazui & Beijing's own financial district will all have representatives clammering over GM's remaining 'toxic assets'. Assets which if utilised by others with low cost structures should have surprising inherent value. Penske's bid for Saturn and BAIC's bid for Opel should start a stampede. 

Thus although the Washington – Beijing relationship has been tetchy in the recent past, this opportunity for bi-lateral and global trade which also aids the fragile US$-Renmimbi balance should be welcomed, as indeed will Washington glad to see immediate returns. 

Thus it should not be such a wonder that Motors Liquidation Company has attracted so much attention, much of it speculative in the short-term but arguably with such international interest providing longer-term sustainability. Especially so if seperated-off as a strategic holding company for unhurried investors. Thus MLC may have firmer grounds for market confidence than perhaps many presently think.

Sometimes it pays better to be rationally contrarian...to 'think small'.  

Macro-Level Trends – 'New' General Motor Co – Stars & Stripes Industrial Policy-Making Knotted by Orion's Bow-Tie

A CEO's remit is to harness the economic conditions of the day to maximise the investment, growth and returns potential of his/her organisation. Even if that organisation be in a rather unconventional state of play (ie Chapter 11) and under alternative effective ownership (ie Government & UAW) in what is supposed to be a capitalist society that CEO must make coherent rational choices, especially so if s/he seeks to create long-term stability from what have been fragile foundations. 

Thus few industry observers will fault Frederick Henderson for siting 'New' GM's proposed small car-plant in Orion Township – Michigan, given the state's contribution of $779m in tax-credits over the next 20 years, other local incentives totaling $102m and a federal pot of £130m for local worker training. But the present realpolitik, which obviously includes Washington's $50bn+ of bail-out financing, wasn't lost on Orion's peer bid-competitors in Spring Hill, Tennessee and Janesville, Wisconsin. The Republican representatives of those locales reportedly concerned by what they see as a misrepresentation of a winning criteria based on CSR attributes instead of pure business-case fundamentals. [NB. The reported criteria spans a diverse range of issues both CSR and purely commercial, thus it is suggested that it was infact the 'spun' PR reporting regards 'eco' & 'community' that provided the fuel for the fire].

However, investment-auto-motives believes that in the interest of pure economic theorum, that it must be stated that the Michigan siting of the small-car plant, although in the short-term an attractive package, is still highly questionable. That is unless 'New' GM can somehow radically change the economics of the traditional US car-manufacturing business which is inherently tied to incompatible global cost-competitiveness throughout the US-centric value-chained. 

But with new Board under new Chairman (ex AT&T) Edward E Whitacre Jnr, consisting of primarily government overseers & UAW figures there is a heavy reliance on the know-how of 'old-guard' GM management that (with all due respect) are not known for radical auto engineering and production approaches. Thus the Board with all the best intentions appears caught between a business case that must parallel car-market reality (at 9.9m-10.1m SAAR) that necessitates lowest-cost approaches, and the inherent external & internal pressures of what is now effectively a state-run enterprise. Whilst Whitacre will have the strategic perspective of transforming New GM into something with 'Telco' form (ie product service contracts and bolt-on packages) the only real informed Board-member is Stephen Girsky (now a UAW representive) from the Rattner Task Force; given that he sat alongside Wagoner in years gone by, and best understands the shape and form of the global company. Given his dual-role experiences, he is the real power-player in the broad schema.

As stated the realpolitik cannot be under-estimated, but the fact that New GM proposes to manufacture sub-compact (B-class) segment vehicles in Michigan still seems concerning. Even given the new lower Tier 2 UAW wage-rates ($14-16.23 per hour) that arguably compete with Southern states' labour rates they do not compete with Asian rates. Nor is there the flexibility to compete in the future as the US Administration seeks to raise the minimum wage from $6.55 to $7.25; that 70c raise will in turn indubitably push 'semi-skilled' rates up by $1 or more, so widening the cost-gap between Michigan, its southern counterparts, and particularly Mexico and BRIC regions which are 'enjoying' deflationary pressures to improve their auto-industry cost structures. 

[NB. It was for very good reasons that Chrysler decided to manufacture its proposed Hornet sub-compact in China with its JV partner Chery – now possibly TATA-Chery given FIAT's acquisition].

New GM's small car should look something akin to the 'BEAT' concept which won an on-line potential-buyers poll in 2007 is a segment-adjusted interpretation of the new-age Chevrolet aesthetic (as also seen with Volt) due for production release in 2010. That B-class platform named 'Gamma2' has been developed by GMDAT in Inchen, S. Korea so much of the development costs will have been born by the relatively buoyant Asian subsidiary. Thus we suspect that the programme cost has been divorced from the (heavily subsidised) production cost, and much of the high-value systems (esp electronics) will be sourced from S. Korea, so therefore producing a 'feasible' business-case for Orion's small-car on paper.

In essence, Orion is acting in the same manner as the notional transplant production facility, ironically its new owner (the US Government) able to leverage both the reduced cost of overseas engineering development and exploit the deflationary pricing resultant from the re-structuring of weak chaebols ongoing in S. Korea and the FX rate fall of the Won vs Dollar.

(The irony of a present centre-left US administration benefiting from global capitalism is not lost! But of course the tenants of Adam Smith's 1776 ideology is about the exploitation of regional core competences...so all to the good).

However, the fact remains that even with such 'priced-in' costs that make the small-car programme apparently workable, it is the very basics of the US Administration's fiscal and monetary policies (ie heavy stimulus spending plans combined with M3's “Quantitative Easing” that threaten the mid-long-term viability of the BEAT/AVEO to New GM vs foreign manufacturer's such as Toyota, Hyundai within the US. 

For, investment-auto-motives is bearish on the mid-term, believing that any apparent new growth will infact be little more than an illusionary mixture of a (possibly heavily) devalued Dollar combined with spiralling price inflation initially created by artificial wage-price adjustment. That perception of growth (primarily in observed data sets) will neither be true 'demand pull' nor 'productivity push', but a consequence of today's pump-priming actions, that in turn could well choke the US economy, and so set it for a dreaded invisible 'L-shaped' future.  

If and when such a scenario plays out, New GM may endeavour to add margin to the small car programme by resorting to Buick, Cadillac and even possibly GMC branded variants that will try an d piggy-back the luxo-small car trend that appeared after the Merc A-Class, Brabus Smart and continues with the Aston Martin (Lagonda) Cygnet based on the Toyota iQ [see last posting]. (The Buick version would sit under or replace the Buick Sail in China, that car possibly brought to the US so expanding today's limited 3 car vehicle range; with also a mooted 'Wildcat Gran Sport' inspired coupe as a halo vehicle). 

Thus we are back to a replay of the economic circumstances of the 1970s which in turn prompted the invention of mid-size Buicks and Cadillacs that assisted group revenue at the time, but helped to diminish the brand equity of both once illustrious marques. Of course GM must now pay as much, and realistically more, attention to China's marketplace, so the US will increasingly become second fiddle with S. America on the other side of the regional product strategy sandwich.

At that point, GM will once again need to re-create itself again as a 'Brand Broker' and that is when we'll see the legacy of Edward Whitacre Jnr via new business modelling 

That work will need to happen asap for in the meantime, if our economic conjecture* proves correct, the New GM is yet another phase of what is a long journey of transformation.

Post Script

* Our fundamental yet academically undetailed economic conjecture parallels Prof Niall Ferguson's edict. In essence, that today's economic reality is best understood as a re-modeled hybrid construction of various past depression/heavy recession experiences. Thus is not a direct replay but involves different elements of various US (1930s/70s), European (1930s/70s), Japanese (1990s/2000s) and Asian (1990s) experiences and so requires a 'weighted basket' of countering policy reactions to suit. 

Company Focus – Aston Martin Lagonda – Cygnet Signifies an Alternative Business Stream

The WSJ today reports that Aston Martin Lagonda and Toyota have agreed a platform/vehicle sharing arrangement with the iQ city car. 

To be known as the Cygnet under an AML marque, the strategic aim appears to enable both regulatory adherence regards CO2 emissionsf its V12 and V8 the DBS, DB9 and V8 Vantage & Volante supercars and provide reach into affluent yet congested and increasingly restricted global city-centres.

Of course initial reaction to the idea of a Aston badge adorning the front and rear of an iQ is “shock-horror”, but of course there will be far more rational and detail behind the initiative. As the economic slow-down bites into conventional business at Gaydon and capacity & revenue sharply, Ulrich Bez et al will deploy a plan of action designed to battle the historic norm of AML's generational demise as the supercar business-cycle sweeps into a trough.  

It is generally recognised that unlike the Aston brand, the revived Lagonda marque is not “set in stone” by the public's perception. (Indeed its periodic re-emergence has been a both svelte AM saloon body variants in the '80s and previously the then shocking 1970s Townsend designed angular vehicle. It's original 1920s and 30s guise is lost to most except marque connoisseurs). Hence it's re-invention can be made theoretically from a blank canvas, and that it exactly what AML did with the Lagonda concept X-over vehicle at Geneva 09.

That car was used to demonstrate a new forward looking era for the revived marque, one which rode the X-over trend by marrying the DNA of a Porsche Cayenne, Range Rover and Bentley, The remit to produce something alternative for the uber-luxury set of target clienteleee that span the globe and have outer-city homes; from contemporary weekend beach-side houses in The Hamptons to luxury weekend Khaymas (tents) in thdesert-landsds of the Arabic Gulf - in indeed both! This select latter group could well apply to the part-owners of AML: the Adeem investment consortium.

So whilst the Geneva car presented something of the alternative new Lagonda, the story appears not to end there. There was mention of a sedan vehicle, which given that the X-over is based on a Mercedes GL platform would suggest that a sedan would be evolved from an S-Class or E-Class base, cementing a Daimler inter-relationship which also offers new 'eco-tech' solutions (such as L-ion hybrids) and critically would also strengthen the inter-relationship of GCC SWF and PE funds given Adeem's AML interests and Abu Dhabi's $2.7bn Aabar Investment Fund buy-in to Daimler in March along with (and slightly diluting) the the Kuwait Investment Authority holding. 

As we see today, the reports of the AML-Toyota city car alliance alters partially 'given' perceptions that the other AML cars would be born from Daimler given Stuttgart's willingness to seek alliances. (ie suggested Daimler-BMW small car). However it seems that the the A-B class platform and Smart Car base were either not put on the table for debate - perhaps Daimler demanding retained sole usage - or the limited ability to alter the A-class and Smart's aesthetic to suit another brand's design cues with in the latter's case the added disadvantage of sub-optimal NVH (noise, vibration, harshness) driving characteristics.

So AML it seems needed another borrowed platform to provide credibility to inhabit the premium city-car segment. So providing an urban-focused radically different counterpoint product to the previously displayed X-over. One that not only fitted the luxury city-car genre, but also by establishing a second stake in the ground so far away from the original indicated the potential stretch & span (ie market segment coverage) of the Lagonda brand. 

Now the Lagonda Wings are truly stretched!

But investment-auto-motives suspects that AML has also taken on this 2nd strategic partner to enable dual access possibilities to eco-tech powertrains from Daimler & Lexus for fitment to next generation supercars such as the successor to the soon to arrive Aston Rapide and a probable sister Lagonda variant. And increasingly beyond the 30mph/50kph + speed limits of suburban roads and motorways / freeways / autobahns, Lagondas will have to operate inside city-centre LEV and ZEV environs (from London to Singapore) that will demand alternative propulsion solutions.

Lagonda has the task of creating an identity from scratch his purports that the Lagonda marque will offer an alternative driving and passenger experience. To do this it appears to be rightly looking across the spectrum and history of personal travel. Remember the word sedan in auto-terms originates from the sedan chair, of which there was even a Lagonda names version. 

However, crucially the marque's name is actually a transmogrification, derived from 17th century wealthy Venetian's calling for “La Gondolier” for canal-way carriage .

Furthermore, Lagonda was once synonymous with the forerunners of today's powerboats, the V12 car engines used for propulsion and that water-land connection promoted numerous wooden-body and boat-tailed vehicle creations. 

And the so choice of the Cygnet moniker conjures up the quiet British riverside, the near silent wafting of rowed and sailed leisure craft and connection to the brand's 'waterland' origins - a happy picture to 'paint' to influential - yet given these tough times - jittery investors.

So it seems AML, Dr Bez & Adeem are indeed, through the Cygnet initiative, following that change in social & business tidal flow - using high-quality, visionary external business partners exemplifed by Daimler and now Toyota. This exercise demonstrates their "(signet) ring of confidence", and will (intendendly) be the talk of the Henley Royal Regatta this weekend.

Industry Practice – Formula One – Competing for Pole Position in the F1 Business Model.

It was a very long time ago that motorsports were the amateur sport of choice for European gentlemen. Today, homage runs such as the Mille-Miglia is where the leisured money is directed , even if behind the scenes passionate classic car owners also consider the importance of Mille-Miglia vehicle valuations, keeping P&L and balance sheet accounts as an important “aside”.

As a raw commercial counterpoint to VSCC, RAC and other leisure-class racing, Grand Prix's post WW2 popularisation has grown exponentially, with it snowballed commercial rewards. Firstly from day & weekend gate receipts, from track advertising, then from vehicle/team sponsorship and of course in the last 30 years from global TV transmittance. As F1 popularity expanded so increasing multi-stream revenues were devised and implemented, the monies enabled the sport's participants to hone every dimension of their competitiveness, from R&D facilities that led to the paradigm-shift of carbon fibre to the use of telematics to the offered sizable salaries that drew top driver talent.

Unsurprisingly, as that ever expanding liquidity pot attracted business acumen, deals and contracts followed leading to what has essentially become the agenda- driven forces of power-broking parties.

The FIA regulates the sport - presided by Max Mosley - and prescribes the specification 'formula' to which the race-cars must accord. Whilst it was Bernie Ecclestone that created the modern template, as a past team owner of Brabham he saw the value of the sport's commercial rights potential back in the late 70s, In doing so set-up FOCA (Formula One Constructors Association) with Mosley, then as legal council, to fight the cause for commercial change which he/they won.

A finance vehicle was created called FOPA (Formula One Promotions & Administration) which split the income as: 47% to the Teams, 30% FIA and 23% to FOPA (ie Ecclestone). FOPA latterly morphed into FOM (Formula One Management) and FOA (Formula One Administration) under the Alpha Prema investment umbrella with latter-day CVC Capital Partner's; interest thereby taking on much of the operational responsibility and financial rewards of the sport.

Thus for nigh on 3 decades these 2 prime arbiters of F1 have orchestrated, with understandable periodic tensions; the Teams obliged to take their cut as prescripted. But Grand Prix's exponential popularisation based on national patriotism and auto-brand affiliation has both encouraged and demanded a ballooning of financial injection – F1 has been the veritable financial snowball. YoY F1 grew as the dynamic global advertising medium, Team inter-rivalry pushing R&D limits that required, and were met by, increasing corporate sponsorship spend; as was regional race-track infrastructure spend.

This means that where once the FIA garnered much of the income from motorsport, latterly split that growing pot from event operators and TV broadcasters to Ecclestone's FOM/FOA , the rise of 'Team Turnover' means that billions of US$ the sport has encouraged is being handled by the Teams. Unsurprisingly, they have argued for some years that the former 47% agreement - and the associated 5 Concorde Agreements – do not represent a fair/true representation of level of their contribution or share of the sport's profitability. As to the size of that 'contribution' to the sport, FormulaMoney's calculations and research estimates the top 8 Teams 2008 budgets to total $2.906bn, of which only $771 represents sponsorship contract fees, the remainder (>$2bn) made up of manufacturer's and constructor's monies.

[NB. Whilst the manufacturers undoubtedly have a case to set forward, those sponsorship numbers do appear low and may be a result of dramatically cut-back 2008 corporate marketing budgets, whilst the incurred Team costs presented could be taken from the more buoyant 2006/7 seasons, so generating such a wide 'manufacturer contribution' gap. Such figures as always must be drilled into to understand the underlying accounting sources and exceptions. Such self-regarding evidence will of course be expected from all 3 parties].

Today ironically, the cyclical wheel of progress becomes apparent once again.

Just as Ecclestone as an ex-team owner leveraged combined Team's muscle in the 70s, so now 35 years on, Flavio Briatore - ex Benetton owner and now Renault Team MD – is undertaking a similar move with FOTA (Formula One Team Association) with the acumen and influence of FOTA's founder Ferrari/FIAT's President, Luca Cordero di Montezemolo. [NB Cordero di Montezemolo's previous condemnation of FIA regulations regards the 2005 US GP's single tyre per race controversy].

So, today there are 3 in a bed within the GP kingdom, the latest of which FOTA – a body born from the frustration - continues to recoil against the FIA prescribed 2010 season team budget capping at $40m. This represents a fraction of modern team budgets and is what FOTA calls “resource restriction”. (Given the fact that today's pit-stop crew consists of 26 members each undertaking a specific task, and the size of other team HR 'service demands' such as trailer staff and complementary guest overhead the FIA will try to present a case for Team fiscal over-indulgence).

However, in the face of such growing criticism, FOTA threatens that to operate normally, at near today's cost levels, it will form a breakaway championship; thus carrying-away with it the big auto-names such as Ferrari, Renault, McLaren, BMW Sauber, Toyota, Brawn GP, Red Bull and Torro Rosso, threatening to leave F1 with only the commercially low-yielding Williams and Force India.

Thus today we witness a re-run of the historic schisms that have been part and parcel of any sport as differing power-players endeavour to maximise their 'take' relative to media spend – seen in UK football over the last 5-10 years and seen with Kerry Packer in Australian cricket back in the 1970s.

Thus, eventual outcome will be decided by the influence of the global TV audience, and critically their waking hours. For it is the ability to reach that expanding audience that forms the very foundations of a 21st century GP business model. Just as the sport expanded into EM regions from Istanbul to Shanghai, and so was forced to schedule night races – re-formated as a new dimension in F1 – to access western hemisphere audiences, so the 21st century business demands will also shape the GP business model.

Such a format - created by Briatore and Ecclestone - is already being laid-out under the GP2 Series banner; the feeder series for F1 which replaced F3000. The GP2 Series operates as GP2 and GP2 Asia, the remit of which is to create an Asian-based mirror to its western counterpart; incorporating an intended bias to Middle-Eastern and Asian drivers to whom EM audiences feel a greater connection. Ecclestone's FOM owns the TV rights and since the GP2 races are held a support events to F1 races, there appears strong evidence that it is being used as a template for an improved business model format for F1 itself.

However, the FIA although an income beneficiary well understands the FOM GP2 strategy to wrestle control, and so a year ago announced a countermeasure – a competing interest - via the return of F2 in 2009. Stock vehicle chassis and engines are supplied by MotorSportVision (MSV) with the vehicle designwork done by Williams – hence William's loyalty to F1's and the FIA's status quo. But MSV also acts as promoter of the race-series so with no doubt ambitions to emulate Ecclestone's FOM success.

Given GP2's “lead”, this of course begs the question, can F2 truly compete or will it be required to buy-out Ecclestone GP2 interests to gain commercial traction?

investment-auto-motives suspects it will, and in the process create F2 and F2 Asia: more formalised templates for a longer-term traditional F1 and a new F1 Asia.

FOTA, whose members are perhaps the prime players, well understands the global potential of the sport as both a massive income generator in its own right as well as the 'magic halo' for their own brands and road-vehicles – none more so than Ferrari, understandably the greatest protagonist.

Details as to whether FOTA has managed to persuade financial backers remains unclear, as would the championship's name/title, though the existence of A1GP – based on 'National Teams' does raise questions as to how that could be leveraged, by FOTA or indeed the FIA and FOM in F1.

[NB RAB Capital as 80% A1GP shareholder will be keen to 'turbocharge' its investment bought from A1GP founder His Highness Sheikh Maktoum Hasher Al Maktoum – probably partly by using GCC SWF monies to create a competing set of GCC Teams].

As the FIA endeavours to rationalise the engineering difference between F1 vehicles, laying out what FOTA detractors state as “generic basic skateboard chassis that reduces Team innovation”, could the real end-game be to effectively swap-over F1 participants? In essence promoting the possibilities for:

1. Shifting automakers into their own alternative field of conventional ICE technology.
2. Introducing Nation-based Teams using greater eco-tech powertrains :
This echoes the 1930s Auto-Union/Merc Silver Arrows era where national budgets were directed at GP – this time however it is the US Government who as owners of much of the US auto industry could display US.
3. Thereby creating a roadmap for latter-year 'demand-pull' for the automakers to buy back into F1 as representing National Champions :
It is suspected that the Briatore-Sarkozy and Cordero di Montezemolo – Berlesconi links are strong enough to complete this outcome in the years ahead.

For the moment the Mosley, Ecclestone, Briatore & Cordero di Montezemolo self-interested 'scripts' continue.

Notes...
[NB As an aside MSV has its testing facilities in Bedfordshire UK, a county also houses Nissan's UK/European development centre known as NTEC and houses various motorsport R&D and production centres. Interestingly, the recent government review of the UK auto-industry calls for a new ideology called 'Test-Bed UK' which appears to focus on extolling the virtues of the region, with nearby Northamptonshire, and possibly make it an auto-sector clean-tech hub with trickle-down tech from F1, F2 etc into mainstream production cars].

Company Focus – VVC: the V Vehicle Co – Sweating the US Tax Dollar to Geographically & Structurally Re-Configure US Autos Inc.

At a time when the US Government's “Cash for Guzzlers” initiative is being criticised as yet more "good money thrown after bad" at the auto-sector, the supplier base is outwardly frustrated at its declined application for funds. Having seen GM and Chrysler given massive bridge-financing, now the retail-base is seemingly favoured to whittle away the hundreds of thousands of cars and trucks held by bloated dealer inventories.

Of course from an industry structure perspective, that decision to deny supplier-base financing will be seen to be the correct one in due course. At present the Obama Administration must content with:

1. the ongoing stresses in the banking sector (that could demand additional funds even after stress-testing given the write-down levels still to come and need for sector re-structuring).
2, the problems of state-level funding which at present sees a plethora of states already well into the red.
3. the momentus budget deficit that must be addressed.

But critically, the US supplier-base must be re-drafted as a new power-house that operates far further up the value curve, not for the most part the myriad of uncompetitive small to medium size enterprises born from Detroit's glory days and little changed in that time. Visteon and Delphi - the supposed advanced guard - have been destroying value for years, so what chance the less capable? The supplier base acts as the sector's corner-stone and must be transformed to meet the operational and market challenges of today and tomorrow.

As we know, there are various new enterprise start-ups looking to take advantage of the large scale macro-economic forces presently re-shaping industry. Such efforts range from Asian imported electric 3-wheelers, to nascient radical concept companies pushing the limits of consumer acceptance, to the likes of Fisker trying to re-create from farmed-out 3rd party systems, to the Buffet backed BYO that appears to have the remit of productionising in mass quantities automotive clean-tech.

Today, although working quietly behind the scenes for 3 years, comes San Diego's V-Vehicle Company (VVC), with an announcement that it seeks to re-open a former GM-Delphi production facility in Monroe, NE Louisiana with the intention of building “environmentally friendly vehicles”. Welcomed by Governor Bobby Jindall, the firm has secured $67m in direct state funding and a further $12m in workforce training given the employment opportunities for approximately 1,400 people. So at a time when questions are being asked about the ROI the taxpayer expects to see from GM and Chrysler, what is on offer from the V-Vehicle Co, given that the phrase “environmentally friendly vehicles” is very nebulous?

Perhaps the headline player is financier T Boone Pickens of Texas oil and now wind farm fame, as part of a consortium of investors. They include the Silicon Valley venture capitalists Ray Lane Managing Partner at PE Buy-Out firm Kleiner Perkins Caufield & Buyers (who as COO helped orchestrate stellar results at Oracle Corp between 1996-2000), John Doerr an IT 'deity' also of KPCB and Louisiana businessman James Davison, who owns the Monroe plant itself
2008 SEC filings (19.03.08) report the head of management team as Frank Varasano, Founder & CEO (also ex Oracle Corp and ex Booz Allen Hamilton Eng & Man'g division) whilst other Directorships include the names of: Druskin (Chairman) Deason, Blodgett, Krauss, Miller & Sullivan.

In a bid to add industry expertise and product development credibility, the newly appointed Head of Design is Tom Matano, formerly head of Mazda Design USA (renowned as the father of Miata/MX-5), ex Gm , ex BMW and latterly an academic stint as course head at the S.F. School of Industrial Design.

Reaction in the blogosphere (jalopnik.com etc) has ranged from the positive to the down-right cynical, but is clear is that if it wishes to succeed V-Vehicle Company must appear with a greater public credibility than it currently has. “Google” the firm's name and no company website appears, simply short press reports that highlight the calibre of investors and management and the Louisiana 'good news' story. 3 years on from founding and one would have hoped that V-Vehicle would have been running a story-board marketing campaign that highlights, from the beginning the phases of development the enterprise has gone through, so building good PR and credibility.

As it presently stands the firm is being seen by some as just another tax-money swallower with little real promise. Basic research suggests is seen as either:

a) promoting little toward technical innovation [ie e-cars or hybrids] in the 'clean car' game
or
b) lacks economies of to reduce product costs and so nurture manufacturing success.

The V-Vehicle Co must combat this negativity with its own communications strategy that moves beyond the inability to mention corporate or product range detail due to the competitive nature of the automotive start-up sector. Paranoia is typical in auto and investment circles but it must be balanced by a public discourse.

As for that level of technical progress on offer, perhaps the name “VVC” intrinsically portends to the technical reality to be ultimately served; since this acronym was officially born for lean-burn ICE engines bearing VVC-Variable Valve Control. The concept vehicle shown under wraps appears to be a mid-size SUV, displayed at a crucial point in time when the Gas Guzzler Scrappage comes into being, thereby hinting that V-Vehicle Co can allow the consumer to “have his [SUV] cake”.

As such this is a poignant example of policy-setting instigating idealised public good in environmental and economic realms through the encouragement of private enterprise in untapped / dormant geographical regions.

As investment-auto-motives noted through the previous 'Auto-Antenna' reports in 2006, the sub-text of the film 'CARS' was to highlight to the American public the shift in the C of G of the American auto-sector manufacturing from the north to the south.
Initially through foreign transplants by the likes of BMW in Spartanberg South Carolina, Daimler in Tuscaloosa County Alabama and Hyundai-Kia in Montgomery County Alabama; and more recently via new enterprises under the 'clean-tech' banner. Louisiana is obviously fighting back for its competitive position in the state vs state war for tomorrow's lean and profitable US auto-industry given its role in propagating regional economic growth.

Thus V-Vehicle Company may not be the most auto-sector's most technically transformative initiative, but it may well be that apparent core of creative conservatism that provides the firm foundations for commercial success. Past quotes from Ray Lane indicate that the exercise is more about the reconstruction of the structure of a typical car company to enhance profitability than radical product focus. As a successful exercise is doing so would add much value regards the future restructuring of the sector itself, both downstream and upstream of the value-chain.

Of course, that is still a long way off, much depending on the product and service to be proposed, the manufacturing quality at launch and beyond and of course the ability to run what is a niche vehicle company in what will still be very testing times as cautious consumers sway toward better known, established brands.

However, investment-auto-motives suspects that the real exit strategy of the “New American Motors” could well be to sell-on the concern - primarily its low cost production asset-base – to other US market focused players, thereby providing a good consulting revenue for KPCB and ROI for the investor consortium.

The enterprise's smaller size and scale perhaps best suited to a new entry Asian player, or a current southern state operator seeking additional niche vehicle manufacturing capacity or an ambitious global expander such as FIAT-Chrysler, seeking the ideal of new markets, new segments and much improved structural profitability within those geographic and product-place locations.

In this industrial matching of Silicon Valley's finance, San Diego's entrepreneurialism and Monroe's regional support, there is undoubtedly a sense that rationality pervades, and that with liquidity still so so precious "none like it hot"*

* referencing the (Marilyn) Monroe movie set in Coronado, San Diego County.

Micro-Level Trends - Swedish Swag-ger - Koenigsegg Automotive & SAAB AB

investment-auto-motives continues to be encouraged by GM's divestment and structural reform process. The divestment of regional divisions and lacklustre brands a much overdue necessity, though of course there emerges a broader sector-related philosophical tension regards the handling of the $42m outstanding debt to 3 Illinois pension funds. That set a dangerous precedent that undermines the confidence of high-tier bond-holders across 'smoke-stack' America.

As recommended some time ago by ourselves, this unprecedented massive unbundling of America Inc means that GME's (effectively national-based) fragmentation has at last come to light - a very neccessary step on the path forward.

And as such, the opportunity arises for an effective springboard toward re-newed regional automotive policy-setting given the greatly shifting macro-context that sees the very notion of personal and mass mobility altering; from car usage patterns to the concept of the car itself, through to the very make-up of a global industry at large. In short societal change is requiring industry to undergoing a slow but powerful alteration in the search of new era economics and profitability.

However, as press commentary conveys - most prevalent being the FT's Paul Betts - a snap-shot of sector's present phase of re-structuring could be said to indicate a sense of 'de-consolidation' as the likes of Hummer, GMC, Pontiac, Saturn and arguably Jaguar & Land-Rover set adrift from their previous parents temporarily undermine the conventional "economies of scale" understanding; toward effectual "dis-economies" in the short-term. But instead, what we are rather perhaps witnessing is only a very necessary momentary fracturing before full and proper re-calibration on a global scale takes place. Such occurrences were perhaps not so evident previously given the trend for regional-centric consolidation, but now a critical juncture given Indian, Chinese & SWF involvement (ie their much needed liquidity) and of course the effectual re-structuring of the capital and money markets.

Thus we are in very very different days of far greater complexity, with more 'players' with different pressures and obligations having to reference much changed consumer, economic and funding terrain [NB the corporate bond issuance trend in lieu of normal credit-lines along with the consolidation of PE such as BlackRock-Barclays GI].
Thus it must be noted that Wall St & City investment banks, regional state funders such as the EIB and globally-linked lenders such as the IMF along with national governments are seeking to maximise the world-wide asset allocation of the sector to underpin long-term growth and enable global trade at sector and capital market levels.

So, the political communities and M&A book-runners within investment banks and advisory are seeking to best align under-performing assets with alternative new owners. That means seeing past the normative 'Horizontal Value-Chain Integration' (though still valid as with FIAT-Chrysler) to seek greater long-term sector stability and of course value creation potential to be had from "Vertical Integration" & "Diagonal Integration". Whether that be at industry level through either typical conglomerate leverage of major EM corporations (eg TATA), or at fund level via the synergy-seeking of investment holding companies within a portfolio (eg RHJ International).

Interestingly the case of Koenigsegg's interest in SAAB appears to play-out a mixture of both.
Although at first glance reminiscent of the 'David & Goliath' actions of Shaeffler on Continental and Porsche on Volkswagen, this latest minnow-swallows-giant deal could potentially offer a more cohesive rationale. The prime elements of the 'deal menu' being: capability integration (at management and technical levels) and a more stable, conventional financing framework given the mix of Swedish Government/European Investment Bank backing to the value of a reported $1bn, together with what appears reputable, industrial savvy privateer funding.

investment-auto-motives highlighted the potential for the Nordic marques of SAAB & Volvo some time ago. Given their prime positions as globally recognised 'national champions' set within a low-key but prevalent 'eco' and 'progressive' industrial economic agenda.

Thus, today we see Sweden taking-up the 'national cause' - no doubt with political persuasion from Stockholm - via Koenigsegg's interest in SAAB; the deal reportedly taking an "unconventional" shape. Though a world away in terms of present business size, production capacity & turnover, the potential for ideological and operational alignment seems apparent.

Even so, much depends upon:

a) SAAB being properly operationally re-structured via present court supervision.
b) The Riksdag being brave enough to weather the 'social storm' of further redundancy
c) Koenigsegg being able to quickly organically expand its operations so as to strategically service and philosophically lead its larger business twin.

This will be the entry strategy for the consortium of PE parties that include: Christian Koenigsegg, Baard Eker (an industrialist who owns Eker Group Holdings which in turn owns 49% of SAAB & is backer of the new Koenigsegg stake), possibly Dag Alexander Hoeili (an original part-backer of Koenigsegg Automotive) and the Swedish nation itself - a nation that embraces the idea of independence and self-determination both industrially and economically.

And to do so obviously means nurturing value creation by suppressing all dimensions of the cost base, building a strong 2-way 'parent-daughter' relationship, re-casting SAAB as a true premium marque and broadening the horizons for Koenigsegg Cars (as seen with the 2009 Quant concept).

Identifying the 'value gap' appears to have been the forte of Christian Erland Harald von Koenigsegg - the founder of the Sportscar Company. The progenee of an aristocratic Germanic-Swedish family, he used the capital gained from Alpraaz AB - the successful fish wholeseller & trading company - to initially fund Koenigsegg Automotive AB. (The company's logo and car's badge is derivative of the family's coat-of-arms).

The company's factory is based at Angelholm Airport within 2 aircraft hangers that previously housed fighter jets, so the spiritual link to SAAB given its links with the aero industry (ie SAAB Viggen aircraft) is very apparant. The factory move to the airport can be seen as either serendipitous or a very well orchestrated credibility building exercise.

Sweden's politicians have a strong voice in promoting industrial capability and growth, and appear to act as catalysts for inter-corporate co-operation for the good of the country. Thus Volvo previously assisted Koenigsegg in the mid-90s with wind tunnel testing, crash testing and powertrain sourcing from its parent Ford. Thus it is seen that the Riksdag well-recognises the need to develop a niche 'high-value' advanced auto-sector that can act as both deliverer and beneficiary of inter-sector technical transfer. Thus Koenigsegg is nurtured as the crown of Sweden's niche car sector; a vital component part of national industrial agenda to serve technology, components and sportcar trade across B2B and B2C markets domestically and globally.

investment-auto-motives therefore believes Stockholm is seizing the present opportunity to re-mould the country's core asset-base. (Just as so many other nations are, perhaps the most high-profile being China's Chinalco endeavour with the Australian assets of Rio Tinto).
The SAAB deal was announced on June 11th by Koenigsegg, is set to close by early July, demonstrating the urgency to get deals settled before competitors and general market sentiment can alter the deal-landscape.

So whilst the above provides the context, what is the core M&A rationale?

Observed as the unloved cousin in the GM stable, SAAB has supposedly been loss-making since its purchase from the Wallenburgs in the late 90s (as a reaction to Ford's creation of the previous PAG). But there is a distinct possibility that GM loaded SAAB with GME and GMNA development and purchasing costs to lighten their own financial burden, that in turn possibly exerted greater pressure on SAAB management which in turn annually set forth ever greater volume forecasts/goals to absorb overhead. Furthermore being a low-volume, low priority element of Detroit's globally dictated product/platform development schedule, meant that their was little autonomy regards product management (specification, variants and development & launch timing). Such restrictions lead to the current 9-5 (SAAB's core product) becoming 12 years old in a very competitive segment, thus detracting from consumer appeal. Additionally forced JV projects seeking synergies - such as Subaru SW & Cadillac X-over - whilst providing a nominal contract design & production income vitally constrained what would have otherwise been independent management decisions and accordantly improved income planning.

It was this inadvertent vicious circle of encumbered Detroit top-down decision-making that led to year on year under-performing growth (vis a vis its Volvo peer) and eventual sales demise. The years of GM antipathy meant that SAAB was swimming naked as the (credit) tide retracted.

However SAAB Bidders (including Ira Leon Rennert's Renco Group PE firm, Merbanco group of Wyoming investors and a previously rumoured FIAT) see the brand and company as the unpolished diamond, with potential to re-obtain its former glory typified historically by the original Sasson concept, the 60s & 70s rally wins, the 99 Turbo, the iconic Cabrio and vitally as the "understated thinking (wo)man's" brand.

Undoubtedly for Sweden it is the ability to bring back SAAB into the national fold, hence the willingness to back the enterprise. That back-stop financing provides a sizable level of risk-aversion for Eker and Koenigsegg on which they can build their own risk-reward business modelling. And given the current favourable political and consumer climate toward 'eco-engineering' and clean-tech the SAAB (& Volvo) brands given their Scandanavian roots perhaps hold a special place in the 'consumer psycho-space' and the zeitgeist - Premium Eco. These 2 marques are arguably set apart and positively positioned as the Sporty (SAAB) and Functional (Volvo) dimensions of that high-value product arena.

The deal allows Koenigsegg to capture what GM reckons to be $500m worth of plant and liquidity in addition to the $150m cash and cash convertibles on the present balance sheet. As to whether GM will retain a strategic sharehold (of 105 or under) is yet to be understood but it would make for a far better operational relationship in the short-medium term given that there will be platform licensing and general service agreements in place to ensure technical support for the re-born company.

So what of the SAAB & Koenigsegg similarities? And how has SAAB CEO Jan-Ake Jonsson been presenting the company's natural alignment and untapped potential?

SAAB originated from Sasson's original concept as being Aero and Weight focused regards its engineering ethos; progressive & sporty in direct contrast to Volvo's conventional boxy functionalism. Koenigsegg is obviously Aero & Materials focused given its supercar remit. Thus their theoretically exists a white-space for SAAB to return to its purist design roots, the new advanced engineering parent acting as the enabler. R&D work to date by both parties demonstrates interests in bio-fuel & flex-fuel powertrain solutions, the CCXR mooted as the 1st 'green' supercar in 2007. [NB whilst E85 orientated, realistically high-grade bio-ethanol production is still limited especially since the retraction in bio-fuel investment; and though many point to Brazil/Mexico's infrastructure as 'the possibility' they tend to use lower quality grade fuel compared to NA or Euro). As stated, a new concept called Quant was recently shown at Geneve 2009, conceptually a solar-electric 4dr supercar; supposedly created for an unspecified customer, but in reality probably to try and create a market demand 'pull' and critically gain credibility for the SAAB bid.

Importantly it is expected that Koenigsegg will seek to leverage use of its in-house eco-tech IPR for application in SAAB's niche and follow-up mainstream powertrains. This to provide welcome cross-company income streams from engineering development, perhaps sale of full IPR to SAAB or on a per unit royalties basis regards eventual mass production. Furthermore such internal sales allow for more flexible transfer pricing as and when necessary to boost or reduce either party's turnover or cost-base.

Business Strategy
This approach appears to indicate that Koenigsegg apparently wishes to raise profile by:
1. Becoming 'the' prominent player of advanced engineering applied to volume production.
2. Use its core competencies as the catalyst of metamorphosis at SAAB
3. Use SAAB to access off-the-shelf, lower cost front-engined architectures (Epsilon 2 to broaden own product range - (vs Merc CLS, Maserati Quattroporte, Porsche Panamera, Aston Martin Rapide, Tesla Bluestar/Whitestar, Fisker[Quantum] Karma) -and use Delta platform for smaller footprint vehicles.
4. The creation of a fully fledged Engineering Consulting division for external client work
5. Providing opportunity for Koenigsegg to access Opel-Magna given technical origins
6. The opportunity for Koenigsegg's eco-developed GM-SAAB platforms to be offered for contract manufacturing purposes to 3rd party '21C' car companies that focus on brand and outsource all manufacturing and build. (see below)

Importantly, NB the link between the Koenigsegg Quant name and the Fisker-Quantum JV. This could be coincidence, but also possibly suggests that Koenigsegg wishes to associate with Quantum for access to its PHEV technology. This could in turn lead to SAAB platforms being used for smaller future Fisker cars so providing contract manufacturing income.

Product Strategy -
To critically take-control of product planning and implementation using adapted Epsilon2 platform (9-5), adapted Delta platform (9-3), thus able to focus on high-value systems improvement (eg powertrain, drivetrain, chassis, electrical) since low-value capital intensive BIW (Body) system already in place.
The marriage of small and large operations that are respectively advanced and conventional offers a new spectrum of possibilities:
1. The opportunity to leverage a supercar name for SAAB via cross-over branding ties.
2. Thus create a new premium/performance division for SAAB similar to Mercedes AMG, BMW M-Sport, FIAT Abarth et al
3. Possible 3 tier product orientations of: Base > Viggen (sport) / Griffen (lux) > Koenigsegg
4. This would theoretically enable stretch beyond the current credibility constrained price ladder so reaching into BMW, Audi and Merc buyer territory.

Engineering Strategy -
The deal suggests the possibility of the formation of a 'technology bridge' between niche & mass.
1 As stated focus on systems differentiation to build the brand(s)
2. To migrate advanced materials from niche to mainstream use.
2. So growing volumes and gaining efficiencies of scale.
3. Thereby providing innate product performance (speed and mpg) differentiation.
4. Being seen to apply Koenigsegg's engineering ethos & build quality principles into SAAB.

Design Strategy -
1. To gain greater cross-range aesthetic cohesion which has been lost.
2. Presently the SAAB styling cue palette is overlayed onto less than optimal body dimensions, proportions and forms).
3. Maximise the opportunity to regain the conceptual purity of Sixten Sason's design language sympathetic to aero and modernist functionality.
4. (As re-layed by the reference-point created by the 'Aero X' concept).
5. 'this will be a prime element of SAAB's rebound and so the upcoming vehicles (9-5, 9-3, 9-4X etc) together espouse a 'clean cohesiveness'.

[NB 'stretched' & 'lost' product identities have arisen given merging of segment distinctions, constant aesthetic meddling and constraints of multi-marque platforms].

Manufacturing Strategy -
Need to wholly rationalise plant operations:
1. Maximise capacity utilisation in Trollhatten to improve unit margins (ideally >100%=120K +)
2. End contract manufacture agreements (eg Magna build of Cabrio)
3. Reduce parts count and logistics costs using high % common parts (undoubtedly an objective of Aero-X.
4. Possibly set-up SVO (Special Vehicle Operations division) for niche series projects prospecting and delivery (though ideally using main-line build process for manufacture).

Brand / Marketing Strategy -
1. Major opportunity to create the 1st credible eco-performance orientated premium car brand
2. Need to re-invent SAAB in consumer's eyes and mid-space
3. Need for new approach to avoid being lost in marketing comms 'white noise'
3. The possibility to open up the world of global Motorsport to SAAB via itself & Koenigsegg
3. To recapture Rally heritage and run at Le Mans (LMP1, GT1)
4. Ultimately create a new market space SAAB and Koenigsegg can 'own'.

Thus SAAB enters a new era with a possible new parent, but what of the long-term distant business view, that of investment collection. The ideal exit strategy may well be already formulated or could be a more distant, fluid expectation.

Business Exit Strategy -
A. To possibly sell SAAB to either an Asian Trade buyer with global ambitions, maintaining a strategic stake for continued dividend and capital earnings and business links.
B. To possibly sell to a PE firm, latter-day Hedge Fund (as that sector pulls-back) or SWF. Indeed would the Wallenberg's be interested in re-purchasing their former stake to GM?
C. If / when SAAB has excess sizable liquidity after paying-off state debts, the possibility to sell Koenigsegg to SAAB in a reverse take-over, thereby providing what should be impressive ROI for Eker & Koenigsegg.

Whilst far from a completed deal, with what seems an intricate level of mass detail regards the deal structure itself and confirmation of funding sources, the marriage of 2 such entities could create conditions for a successful re-birth of SAAB and the mutual reciprocation of far greater credibility for the rapidly expanding supercar manufacturer with what seem - by reading between the lines - ambitious plans for itself and Sweden.

investment-auto-motives highlighted the opportunity to be had from GM and GME fracturing / divestment, and proposed and prompted the idea of a Northern European 'eco-tech rainbow' centred on the Scandinavian, Germanic and UK automotive value-chain.

As with our participation in Australia's auto-industry re-orientation, we are proud to have played the subtle role of debate catalyst for Northern Europe; recommending with broad-brush direction how the industrial asset-base(s) of the region should be re-comprised to create value through a new eco-roadmap.

Interlude

NB: - There will be a web-blog interlude between 27th May - 12 June.
Many thanks to all clients & regular readers
Turan

Industry Structure - GM - Playing Value Chain 'Connect 4' with GME

GM's European division (GME) has understandably come under a lot of scrutiny over the last few months since Detroit's announcement that it would divest a major (60+%) portion of the entity. [investment-auto-motives welcomed this move given its previous impartial recommendation via this portal to do so].

Since then Sergio Marchionne was obviously the first to enter into negotiations, whilst later enquiries of interest directed to GME's lead "NomAd" (Commerzbank Dresdner Kleinwort) came from Magna International (with Plan B of GAZ alliance partner) and various 'fall-away' PE companies with only the most seriously positioned PE firm neing RHJ International. (RHJI a portfolio investment company understood to be one of Ripplewood's funds, with Timothy C Collins & the Rothschild family as key members). Post the deadline date was reported contact from a potential Chinese bidder, noted as Beijing Auto, whilst recent broad-brush employment/union concerns led FIAT SpA to mildly revise its offer in an attempt to alleviate German government concerns regards post-merger staff cuts.

Frederick Henderson et al at GM's HQ will be seeking the best buyer proposal which offers both short-term incentive (ie a cash offer to assist its woeful balance sheet) and longer-term attraction. This would be by way of a synergistic business relationship, that strategically aids GMNA operationally and regards cashflow, thus across: R&D, advanced components, outsourced production etc and secondly provide a demonstrably useful future share-capital increase & dividend yield. In short a welcome income stream from GM's retained shareholding in the new company.

For GM and the investment community at large, the inferance is that the rationality of value creation in whatever guise must prevail over any political pressures arising from preferences or bias from either Washington or Berlin quarters.... or indeed any short-termist attitudes regards size of the 'cases of immediate cash on the table' from more liquid bidders, no matter how enticing.

Thus given the number of apparent interested buyers, Henderson and his executive team will be busily evaluating/'playing' an industrial version of that children's logic-game 'Connect 4'; each of the bidders representing a play on the automotive value chain.

Case by case they reflect the 3 fundamental integration routes of the M&A game:

1. Horizontal Integration - FIAT Auto / [Beijing Auto]
2. Vertical Integration - Magna (Tier 0.5 "Short Vertical" ), RHJI (Tier 2+ "Long Vertical")
3. Diagonal Integration - Magna-GAZ ("Short Vertical" + "Horizontal")

With regard to FIAT Auto, Marchionne obviously sees the massive economies of scale (and future profits) to be had as he attempts to intertwine 3 companies hamstrung by individual overcapacity in presently saturated regional marketplaces. The appeal to create a leaner, more competitive 'super-group' industrial entity is undoubted. One that offers improved product pricing flexibility (due to reduced competition) and so unit margin improvement leverage plus inter-divisional distribution opportunities possibly boosted by the rebound of, primary EM markets if GMLA is also secured.
His marriage of efficiency and volume is of course CEO strategy 101, but GM's concern about passing on what are prime assets to a powerful foe - domestically & internationally - was always a prime issue regards FIAT Auto, all the more so if the divested package was forced by Washington to included GMLA.
Moreover, whilst Henderson recognises the US as GM's prime defensive home territory he also well understands the critical role GME has to play to assist the NA market rebound given its core competencies in compact and mid-size Delta, Gamma and Epsilon 2 platforms; the smallest of those ideally re-directed in future for comprehensive or heavily shared low-cost engineering in South America.

The second "Horizontal" play comes very tentatively from Beijing Auto Industry Corp (BAIC). Already a successful proponent of JVs with the likes of Hyundai, Mercedes and Chrysler it has become the No 5 Chinese automaker critically from alliance learning and technology transfer.
As to how real the enquiry is, is open to debate, since although Chinese automakers have indeed been successful at home, the domestic sector is undergoing a period of restructuring and consolidation so the big fish (like BAIC) chasing the smaller fish to grow market share, improve efficiencies and broaden product lines.
With so much important M&A action on its doorstep would BAIC really endeavour to stretch itself so so far with Opel? Probably not, even with what domestically appear large cash hoards. GME is of a very different scale and complexity and since that cash was hard earned it is unlikely that BAIC management would risk it in such a venture, even with nominal German Aid backing.
And more so than with the FIAT bid, German union voices would be aghast at (even the remote) possibility of a 'lift and shift' to China. Beyond that Chinese financial analysts have stated that BAIC is simply not in the position to seriously bid as it should recognise its own budgetary and management limitations.

Magna International represents the first case of possible "Vertical Integration". It above all others has become the modern-day examplar of a burgeoning new automaker; starting from its parts-maker roots to create a Contract-Builder business for some of the most hallowed names in the industry - Mercedes, BMW, Jeep, Chrysler etc. Buying up the assets of flailing operators like Steyr-Puch to provide outsourced assembly capacity for high margin niche products and simultaneously enlarging its 4WD engineering and production capabilities.
Thus its interest in GME is to effectively create a fully fledged Tier 0.5 business. The full exploitation of this business model has been on the minds of industry execs for 20 years, the ideal to allow today's typical car company to instead become effectively a Brand Broker between outsourced manufacturer and distributors/dealers.
Magna has been the major proponent to fit the jigsaw pieces of such an ideology together, recognising the size of the opportunity to become the No1 large scale contract assembler.
Thus if successful, the company's end-game could be to collate the best physical assets (plants, tooling, human resource etc), divest of the lesser productive items - possibly to China - and sell off the Opel Brand to a trade or PE buyer as part of a long-term supply agreement.
Its own ability to essentially re-invent the rules of automotive assembly, without the headwind of intrinsic legacy costs and the tailwind of more flexible labour, would regenerate the profitability of auto-manufacturing when given such freedom.
[NB Latest reports indicate that Stronach et al at Magna have convinced Russian Sberbank Rossi of its business model to finance a Magna-Sberbank JV for 55% of GME].

RHJ International represents a deeper level of "Vertical Integration" stretching to Tier 1 & 2, and so reflecting typical long-reach value-chain consolidation. RHJI is a holding company with interests stretching across Auto Parts, Electronics, Audio-Visual & Leisure Resorts.
Its Auto Parts companies include Asahi Tec Corp (60.18%), Honsel Int Tech (51%) and Niles Co [electrical switches] (77.3%). Beyond immediate auto-related companies the collection of audio/visual company & brands held could be said to offer indirect synergies given the level that media and entertainment has infiltrated the driving & passenger experience over the last decade of so.
But its prime capabilities are Asahi & Honsel which produce 'higher-end' lightweight core components such as aluminium, magnesium (and iron) extrusions, castings, machined and fabricated items for chassis (esp wheels), driveline & NVH (Noise, Vibration, Harshness) applications.
Moreover they have expertise in electrical and environmental engineering which has snowballed from Japanese government contracts. Thus RHJI seems to be promising the ability to re-engineer the typical car (and perhaps new vehicles) for a new era. (VW the proclaimer of 'das Auto' will be watching avidly). Reports indicate that it has been courting influential German Economics and Industrial Ministers to demonstrate the value-added it can bring to Deutsche Auto GmbH.

Lastly there is the "Diagonal Integration" of Magna-GAZ, which seems to offer the combined strengths of Magna's advantageous manufacturing position with opportunity for operational symbiosis with GAZ. This undoubtedly incentivised for Magna and the German government given the Russian government's agreement to fund strategically important stricken enterprises - aligning Berlin and Moscovite empathies.
Furthermore Oleg Deripaska's mighty influence is still apparent given his retained empire's financial restructuring, and so the leverage advantages of his Russian Machines enterprise and the massive commodity orientated conglomerate Basic Element which specialises in aluminium production via UC Rusal. Add together the sum of the parts of the empire and it could provide cost-effective (chaebol-like) internal purchasing agreements, to assist Magna-GAZ profitability. Basic intelligence suggests that (like FIAT) it is a 'no cash' offer instead offering the industrial leverage of Russian materials, labour, logistics, parts, production and distribution.

Ultimately beyond the bidders, GM, the German government and possible latterday large-scale institutional and private individual investors will question the philosophical focus of such restructuring. Crucially, whether the new GME should, from a value-chain perspective, be restructured 'laterally' (FIAT-GME-Chrysler) or 'vertically' (Magna or RHJI) or 'diagonally' (Magna-GAZ).

FIAT, Magna, RHJI & GAZ will have weighed up as best they can the innate detail and broad ROI of these 3 options. Done so to gain both the vendor's perspective and German governmental perspective; to get into the heads of these 2 co-dependent divestment arbiters, so as to create their own strategic arguments that places them in the best possible light.

Day by day press reports discuss the pros and cons of each bidder and the leading contender for the moment. Thus it was said that RHJI was increasingly in favour by Klaus Franz of Opel's works council, catching the leading Magna bid; thereby prompting Marchionne to revise his FIAT offer.

In the meantime the ever increasing likelihood of GM's soon entering Chapter 11 means that Opel will require governmental bridging financing which itself could induce the creation of an intermediate Trustee body as advised by the Economics Minister Karl-Theodor zu Guttenberg. To do so would provide much needed breathing space that would enable far better consideration of GME's future, and allow each bidder to round-out their own due diligence intelligence and strategy presentations.

This array of disperate bidders will either be seen to create a plethora complex issues, or judged against key criteria - ideally explicit, but in all probably more so implicit. If the former it suggests that the ongoing talks will stretch into June and possibly beyond given the added dimension of GMHQ's own Chapter 11 administration dealings. It will seek as large a slice of the new entity as possible as part of a contributive effort toward its own re-birth. If the latter, as seems to have been the case given the 28th deadline date, the present murky picture for the future of GME will clear.

Historically. the auto-industry has of course witnessed national industry re-alignment as regional economics have contracteda and what were once buoyant companies whither. GM's own US birth was from such a case of amalgamation, as was Germany's own 'pre-modern' Audi (born from the Auto Union conglomeration of Wanderer, Horsche, DKW and Audi) which itself was merged into VW.

And for GME/Opel, depending upon outcome, after 80 years of GM 'stewardship', it may now be given the kind of operational independence not seen since its automotive inception in 1899. That was 36 years after the company's own founding which produced sewing machines and bicycles, obtaining the license for French Darracq chassis technology on which it bolted Opel custom bodies.

It's logo is of course the electrical 'lightening bolt' and in our new age of burgeoning hybrid and electric vehicles, might the new stewards of Opel re-assess the viability of new licensing arrangement in order to add a strategic 'leap-frog' to its product line and business model? Inspired by Darracq, could a new Opel once again turn to France and Renault-Nissan to assist in the supply EV technology and architectures?

investment-auto-motives has pointedly highlighted Europe's less than favourable FX and trade positions compared to its global competitors, and so the need for impetus regards EU industrial policy. Germany is seen as a technical tour de force with revered 'eco' engineering. So the opportunity to showcase much needed EU vision and renewed integration through GME/Opel's re-orientation could be very compelling - politically and financially.

[NB. See previous investment-auto-motives' conjecture regards the EU to potentially plan an geographically prescient 'Eco-Rainbow' for automotive technology: an arc spanning (right to left)Germany, Scandinavia & the UK - using the notion of scaled-size and value-chain driven eco-tech collaboration].

Today, we hope that a 'lightening bolt' of directed creative reasoning has struck within the Ivory Towers of Berlin, Detroit and Washington, so that a grand-plan context can be set for Opel/GME in its own right and to act as the catalyst of change in EU autos.

In which case, if so, today's deductive 'game' of "Connect 4' rationality may act as a precurser to a far more powerful, holistic international EU exercise of 'Join the Dots' to form that persuasive collaborative Rainbow.

Macro-Level Trends - US Emissions Regulation - One Size Fits All.

As an echo of the the 1973-5 Oil Crisis, the "milestone" announcement that has been years in the making arrived. After years of debate and multi-various federal and state standards set, the coming of a single nationwide plan for US emission and mileage standards seems to have arrived.

Although not yet ratified by an Act of Congress, Obama's vision that the US should improve its energy security and advance its role regards emitted pollutants has been made clear. A country-wide CAFE (Corp Avg Fuel Efficiency) standard has now been aired for passenger cars and light trucks to be attained by 2016 - 4 years earlier than previous proposals.

Passenger cars must deliver 39mpg up from 27.5 today, and light trucks must reach 30mpg from 23mpg; giving a fleet average of 35,5mpg [NB these are of course average figures, and do not relate to specific models, simply the cross-fleet median, so as to allow for 'performance' and 'frugal' models and variants that sit above and below the benchmark].

The announced outcome of these measures is to save the equivalent of importing 1.8bn barrels of oil per annum (approximate the import capacity from Saudi Arabia) and saves 900m metric tonnes of greenhouse gases being emitted into the atmosphere which is paralleled to 177m cars being taken off the road. By current Washington estimates car-makers will need to average a betterment of 5% each year between 2012-2016 given todays capabilities.

For Detroit this of course sets provides a single template by which to engineer CO2 & NOx emissions for the country. It was previously claimed that the different regional standards made the Big 3's job hard, even though their foreign peer set such as the Japanese and Germans were able to engineer to an in-house standard by 'simply' bettering the most demanding state's requirements. But at least for Detroit it banishes the regulation chasm between 'progressive' California and the other states, even if the new standards are more aggressive than Californian demands.

All constituents from Congress to Detroit appear supportive of the plan, though given Detroit's current woes the "per vehicle on-cost" generated by additional R&D/Engineering spend, powertrain systems spend and dealer service/maintenance spend will be a much discussed item of the corporate agenda behind closed doors. Reports of that additional cost wildly differ from $600 by Automotive News and $1,300 by the WSJ.

But of course it will be a case of different technological solutions suiting differing applications (ie vehicle duty cycles); whether that be smaller capacity turbo-charged & lean-burn engines for lower cost compact & mid-size cars, hybrids and clean diesels for mid-size and large cars and clean diesels for SUVs and tradition diesels with tail-pipe tech for trucks. And of course the continued 'slow-burn' possibilities regards what are in reality specialist-case EVs. A case of "horses for courses" relative to consumer expectations and R&D/project budgets. But we suspect that given the markedly reduced 'contract' and 'spot' price of steel Detroit will only utilise aluminium and composit structures and sub-structures where the additional cost can either be absorbed in high sticker price luxury/niche cars or can be amortised by high volume cross-car standard part production.)

investment-auto-motives agrees with other commentary (eg Wachovia) that for the short and medium term this plan could in the short-term put Detroit and its traditional 'slow-progress' supplier-base at a distinct disadvantage given that its general product line and systems technology is "behind the curve" and so will require possibly billions of dollars of funding. However, there is of course Congress' Green Tech Fund that was announced by Bush prior to the later GM & Chrysler aid packages, which offered $25bn as a credit line as part of the 2008 Energy Bill.

Suppliers and external engineering consultancies have been eager to play their respective parts in forming the intelligence behind and conclusions to this debate; jossling as beneficiaries of the outcome.

One typical example is Ricardo Engineering has wisely endeavoured to best position itself - given its diesel combustion knowledge and competence build-up in electronic control systems for various hybrid system types and full EVs. As a savvy player it has endeavoured to mould the general dialogue as both a NHTSA contributor (helping to form government appreciation) and worked with the investment bank sector to mould technical and business case understanding.
From the supplier angle, it has been aired that the likes of American Axle, Lear, Magna could suffer due to their previous dependency on truck parts production, whilst the likes of BorgWarner could gain a metaphorical boost from its Turbo division.

Amongst Detroit it has been Ford that historically has tended to be the early advocate of efficiency-seeking design and engineering, today leading in the form of the Eco-Boost range of engines available as IL-4 & V-6, so GM's Ecotec and Chrysler will be seeking to chase Blue Oval's lead in advancing conventional ICE powertrain. This required impetus this raises the GM-Opel divestment issue, since GMNA will be keeping a strategic stake in the company and be seeking a synergistic relationship from GME's new owners given that Russelsheim has been the development home of small (B) compact(C) and medium(C/D) platforms - Gamma, Delta, Epsilon respectively.

However, beyond the reported cash-sale demand (vs FIAT's non cash offer) it must be assumed that GM's HQ will be seeking a technical advantage/routemap from the likes of Magna or RHJI International that can provide technical-transfer to GMNA for the renewed competitive positioning of both products and the 'new' North American company.

Prescient also that on the day of the Presidential announcement that Daimler should announce that it has taken nearly 10% of Tesla for an undisclosed sum "of a double digit millions sum". This cements the business relationship born from the battery supply arrangement for the Smart EV and provokes conjecture that Daimler will supply the C-E class architecture to enable a ready made production solution for the Model S. Yet much still remains unclear about the specifics of synergies Tesla offers Daimler, and about the eventual battery-tech functionality and business case given Daimler's own 49.1% interest in a JV named Deutsche Accumotive. In the end, it could simply be a blocking maneuver by Daimler to stop any of its competitors 'marrying' Tesla.

Interesting indeed given the recent increase in Daimler stakeholding from certain GCC investment companies. Much of their funding obviously originates from the region's pumped petro-dollars, and although the GCC is investing in clean-tech, it raises the possible prospect of Daimler at best setting forth internally competitive technology streams, and at worst conflicting big-picture ideologies.

On which note, now that oil has reached $55pb and its extraction & refining overhead has finally come down thanks to deflationary pressures, margins for oil-producers are set to grow and if sustainable for long enough attract further oil industry investment. So whilst there has been justified criticism regards Obama's apparent avoidance of a gas-tax - to reduce auto-use and assist the Treasury coffers - that could be ratched-up beyond the nominal 18c per gallon as Exxon et al improve their earnings and the economy slowly recovers over the next 4 years.

Whilst the US seeks global alignment in economic reform and the banking sector, so it should do so in due course for the auto-industry to generate harmonisation and improved value-creation. Achieved via both FDI alliances such as FIAT and a possible latter-day 'new GME' relationship, and also by re-aligning consumer desires. VW did it with Beetle & Golf in the 60s & 70s, Toyota did it with Corolla in the 70s & 80s, BMW did it with 3-series in the 80s & 90s and Toyota did it with Prius in the 2000s. VMs have been seeking the panacea of truly global vehicles for eons, today the US government can continue its 'time for change' efforts and assist that goal and in turn regain the heavily depressed investor sentiment in the sector.

However, as oil rounds out at $55pb, could it be an omen for the return of the 1970s style nation-wide 55mph limit? As an intermediate CO2 reduction-step which simultaneously maintains national oil inventory, might Obama use it as part of a new speed-limit delineation policy for various road systems?

The announcement may be the first step of a very different US autos roadmap – philosophically and literally.

Macro-Level Trends - Timing the US Upturn - Reading a New Market of Increased Complexity

As the events of the last 2 years have palpably demonstrated, the global economy is now critically inter-dependent thanks to the a congruence for capital driven enterprise, the information enablement of IT, and of course the median of massive intermediary financial markets. It is inter-woven to a degree of depth and speed unlike any other period in history, one which has surprised even the most insightful of supposed luminaries.

2 years into the global contraction and, as ever, the financial newswires and video talking-heads typically consist of Bull vs Bear sentiments, perhaps a consequence toward the endemic reality that in such times bulls tend to over-emphasize the impact of any immediate good-news reports whilst bears tend to view the longer-term macro-fundamentals of the system Thus we typically see a general underlying downward trend in most asset classes (but most prevalently stocks) with overlying volatility created by 'better than expected' released company results, released economic indicator figures or governmental announcements that produces short-run up-tick rallies.

Thus as ever, given that the market consists of a great number of participants each wielding very different levels of actionable power, the market is an intrinsic 'living oxymoron', the amalgam of contrasting viewpoints and sentiment.

For the Bulls it is a case of the Bears being masters of their own doom, confidence being everything; and for the Bears the experiential acumen that statistics and rhetoric (whether company-specific, agency-specific or government-specific) must be treated with caution, recognising the possible bias of origination. It may be over-zealous to quote Disreali's "lies, damned lies and statistics", but such distrust of apparent exactitude has proven historically accurate in times of economic uncertainty and change.

In 'normal' times the market (analysts, traders & investors) must contend with looking at the 'surface' of the global economic framework, since when the economic machinery is purring, all that needs to be viewed and judged are the everyday trades of the market, whether Bonds or Stocks or FX or T-Bills/Gilts, or the more obscure Derivative Placements, or the more sophisticated calculations for Arbitrage. Thus in 'normal' times there is only a need to appreciate the 'Lateral' inter-connectivity.

But today the ongoing need is to better understand the 'Vertical' inter-connectivity, that is an understanding for the inner-workings of the global trading machine itself, given the nature of the systemic breakdown and the accordant diagnosis and prognosis from multi-constituent experts.

Simplistically, the Bears recognise the size and complexity of the problem, whilst the (speculating?) Bulls see the moments for opportunity in specific sectors or regions.
But if we look at the picture simplistically yet holistically there is still a large discontinuity between theory and optimism. The mention of 'green shoots' and up-beat growth sentiment still seems very premature given that the creation of solid economic foundations is still fundamentally lacking.

There's much talk of the growth momentum coming from 'Main St' and not Wall St given the more positive earnings reports of late, but that 'positivity' is undoubtedly a reflection of well-managed individual companies conserving cash and buoying balance sheets. These companies have had to maintain their momentum given either their inability to rely on banking credit and unwillingness to draw on any available credit-lines. Thus they individually may be seen to be weathering the storm, but that is a consequence of their own 'weather-protection' ability, and that should not be mistaken as reflective of the broader picture.

The fact is that the very heart of the global economic machine - the international banking system - is still very fragile due to the lack of confidence regards levels of individual and collective write-downs, and indeed the size of losses that need to be recognized and attributed. Until this faulty economic foundation-stone is properly unearthed and dealt with there can be no return to normality.

That of course is what governments the world over have been trying to do, both individually and acting together under the G20 umbrella. As ever policy fractures have emerged, the likes of the Obama administration using TARP and TALP to immediately re-capitalise the primary banks via directly injected public funding, versus the likes of Merkel's administration seeking a longer-term 20 year write-down of the present-day toxic assets - seeking a latter-day asset price rebound - so as not to burden public taxation.

As of today, though primary pricing indicators highlight a slight upturn in inflation (and so apparently growth) this anathema is really a result of general re-alignment of previous over-capacity across most sectors, from energy (eg oil price) to retail. But that is in reality a misleading phenomena as sectors re-adjusted inventory and trading levels.

Ultimately today, instead of the normative 2-D play between (consumptive & productive) society and the financial markets, there is a 5-D play between:

1. Society,
2. the Financial Markets
3. International Central Banks
4. International Government Agencies (ie G20)
5. Global Funding Agencies (esp IMF, World Bank);

This of course increases the complexity enormously, with macro-economic issues taking precedence, and importantly during this crisis, the latter of these groups - the new-world orchestrators - trying to re-mould themselves or create spin-off entities to undertake their remit to solve the global problem.

It has oft been mentioned that the over-credit driven, over-stretched, and some say effectively bankrupt West must look to the enormous savings levels of the East for effectively FDI and re-capitalisation at both retail & investment banking levels and importantly regards investment in Western industries. Although the West (US and UK particularly) have instigated large stimulus packages to boost domestic consumption, hoping to use the debatable 'accumulator' theorem, part of such a re-starter motor's expectancies would be to inspire confidence for FDI from the Middle East, Asia, and of course specifically China. [NB Jon Huntsman's nomination as Sino-US Ambassador].

But whilst commodity and industrial-based SWFs from the likes of the GCC, N. Korea and Singapore will look fervently for Western opportunities, the real issue of accessing Asia's massive savings base - tor re-set the global funds imbalance - presently looks quite remote.

For many Asian countries with agrarian roots still in the public psyche, combined with a lack of social safety-nets and the recent history of the 1997 'Tiger Crash', the desire to build and preserve savings is still very much apparent. Even for the Generation X's and Yer's, though they have spent throughout the good times, their parent's and grandparent's advice has still been heard. Thus with rising unemployment and a re-patriation for many back to their home towns, they will seek to utilise their funds personally and locally. This perhaps especially evident in China where a 'feast and famine' past has created a self-dependent, entrepreneurial spirit.

To this long-time socio-graphic principle we can now add the possible results of a recent important financial occurrence - Bank of America seeking to divest 30% of its current share-holding in China Construction Bank Corp (moving from 16.7% to 11% ownership). As a consequence of seeking the monies for its own re-capitalisation (as part of its recent government stress-test) could the Chinese authorities view the move as a retrograde, almost defensive step, inspired by Washington? Especially acute after the 'mutual collectivity' seen in London for the G20. Or indeed, is the divestment welcomed by Beijing to help de-couple a well positioned CCBC from a less than healthy BoA? But given CCBC's recent stock rally on the back of more upbeat China economy sentiment relative to its own stimulus package, it seems almost ironic that BoA must sell at what could be below-par to swap a strong long-term asset for short-term liquidity - but "USA Inc" needs it to do so.

As for "USA Inc" reports suggest that its banking sector has written down about two-thirds of the outstanding toxic assets that weigh on balance sheets, which compares against Europe's one-third to half; as we see with Germany's reticence. Both approaches obviously have arguable pros and cons, with the US wanting to clear out the garbage on Wall St to place it in a better position sooner.

Clearing the decks will obviously assist in due course, allowing the banking sector to both inspire and exploit the re-bound, but at present that re-bound still looks some way off; especially so without the level of Asian FDI assistance previously hoped for.

Domestically the WSJ reports that 52 economists expect the recession to officially end by Q309, but taking years for the economy to recover fully. As we see it, the prime economic catalysts of Main St, Wall St and the National Budget/PSBR are still very weak:

Main St -
- unemployment to reach 10.5% by year-end (not 9.7% of averaged forecasts)
- Q209 GDP contraction of 2.2% (not 1.6% of avg'd f'casts)
- large cross-sector industrial re-structuring leading to 'leaning' of ops and delayed job creation
- improved personal savings levels deferring esp big-ticket purchases
- the 'kinetic energy' of stimulus will take time to be felt given local budget planning time-frames.
- consumer reticence, especially given housing stock wind-down

Wall St -
- 2/3 toxic write-down needs broader confirmation
- bank stress-tests seen as not credible by academic quarters (esp Rubini)
- this creates greater latter-day discomfort - false foundations
- personal savings improve capitalisation ratios
- but still evidence of apparent 'good' (standalone) banks vs 'bad (gov't loan) banks

National Budget/PSBR -
- record budget deficit
- inability to pull levers now at 0% and QE measures
- TARP & TALP need to be seen to work
- stimulus plans must be managed to create the 'accumulator effect'.
- a general expectation that Congress will not be asked for funds again
- major changes to normal budget allocation (eg Defense spending criteria)
- could leave administration open to criticism if further homeland terrorism
- which would in turn demand unfortunately maintained heavy PSBR.

Thus the economic fundamentals demonstrate that there is a 'new norm' for the US almost starting afresh regards value creation, and it will be one that is set to unfurl slowly at first then moving more quickly for quite possibly much of the decade to come. investment-auto-motives doesn't enjoy being so bearish but has to agree with the likes of Gary Shilling, that we are entering a new period.

[That sentiment seemingly paralleled by Berkshire Hathaway's long-term plays on 251 "underpriced" monoline insurance company derivative instruments, suggesting/expecting a far improved default environment 15-20 years down the road].

It is one which, as we've said before, must be build from scratch and from a re-casting of the country's industrial base in order to create new productivity and innate value. The economy must re-inflate itself based on sound fundamentals and solid business principles, not from the historic credit-pull that created the consumer and financial markets misplaced euphoria that ultimately ended in a bubble and so gave rise to today's unwelcome diaspora.

Times of fundamental transition by their very nature demand structural change across all sectors, and that of course means M&A opportunities for Advisory, Underwriting and event-driven equity trading. So whilst the markets themselves may be smaller in the number of participants given the disfavour of the general public (and so reduce what have often been over-indulged CapEx values), it does mean that a smaller number of professional participants (as active 'protagonists' and passive 'riders') be able to pick-over the bones and lean-meat of global companies.

But before even that step of the economic re-build story can happen, the very working of Wall St need to be re-cast, tested as sound and utilised as the M&A orchestrator and multi-sector business model arbiter. We are still some way from that point, as the structure of banking itself undergoes its gradual but hopefully powerful transformation.

That process includes, as a first step, the re-moulding of 'Core Role National Agencies' that overlook banking standards and regulation; including the structure of: National Treasury Departments, National Central Banks (esp The Fed & BoE), regulatory bodies (eg the SEC and FSA) and at a higher plane the IMF and World Bank.

All are presently prescribing new-era financial framework templates and guaging their own executive roles. Although simultaneous to Wall Street's re-invention, this must lead slightly ahead to provide cohesive, globally inter-related direction. So it is in itself a lengthy process that may take time, time which will affect US and global industries and society. But it must be done soundly to effect robust, long-term change.

Now more than ever the criticality of economic inter-relationships is key, and whilst 'tormented' investors presently feel frustration from the lack of market traction, better to overhaul the global financial transmission system than experience unwieldy self-destructive 'kangaroo-hops' from fundamentally broken financial machinery.

And by that score, the serendipity of General Motors plays-out as a useful metaphor.