Tuesday, 30 December 2008

Year End Comment - Looking Back, Looking Forward

Stating the obvious, 2008 has undoubtedly been the most precipitous year for generations. Trillions of US$ wiped-off global stock, bond and other asset class markets with the very nervous system of a deeply inter-related financial system ultimately exposed and seen to be nervous indeed.

Across the board a diaspora has emerged as the very structure of the prevalent Anglo-American capitalist system which served the world so well throughout the 20th century cracked due to a lack of oversight, servicing and fine-tuning. From the all too opaque world of private hedge funds to the all too prominent world of fiscally war-torn public companies, questions abound as remedial action is undertaken by world governments, and the terms 'credit-crunch' & 'bail-out' became parallel features of everyone's new economic lexicon.

Remedies continue to be sought to both: stop the spiraling of financial hemorrhaging in the 'write-down' process that has blown a hole through each and every industrial sector, and to help create a new economic platform from which to build a new, improved sustainable – in all senses of the word - capitalist future.

This process of events is perhaps best seen within the automotive industry given its financial might, its social prominence and its central position as catalyst - and possibly arbiter - of change. This socio-economic-centric position shared equally with the housing sector and of course finance sector. All three, so core to economic well-being, are ripe for renewal given their individual experiences of over-extended value-creation into untenable territories that led to eventual value-destruction within each of their business models.

To reach that new sustainable future an interim period – for however long – will prevail.

As markets continue to falter, that period will involve an extension of governmental regulation, possibly into the realms of an unprecidented central planning. Such 'public works' undertaken so as to rebalance market forces old and new to 'assist' equilibrium across the economic spectrum. This may affect consumer choices directly and indirectly via direct and indirect pursuasion. And could, if a latter-day fiscal turmoil emerges, feasibly extend to pricing regulation as seen in previous eras. The 'quantitative easing' exercises of today ultimately leads to over-inflation of national economies and so a return to rapid, uncontrollable, inflation without remaining policy levers to pull. From an industry perspective, a similar story of 'encouraged behavior' could prevail via efforts such as carbon-capping and carbon-credit trading, efforts that must be managed professionally and without bias if the confidence of free-marketeering is to prevail.

What is clear is that international governments are undertaking monumental, aligned and often inter-dependent tasks that should lead to that fiscal and ecological sustainable future. Utilising the need for Eco-change (inherent in technology-led / enabled social behavior) as a platform to simultaneously develop new economic and industrial structures.

As stated, the auto-industry has a massive role to play in this 're-orientation'. To do so it must in itself be structurally 're-orientated' to profitably create and satiate new consumer trends and expectations, so as to in turn create new investor confidence.

Of course the topic of sustainable economic 're-orientation' is a broad and deep one, incorporating many macro-level (PESTEL) and micro-level (sector value-chain) facets. Finance, Politics and Industry being the 3 prime players which individually and inter-dependently contain so much complexity. From the sensitivities of encouraging BRIC & OPEC involvement (beyond political lip-service and gestures) to the major shift required in consumerist (ie social) idealism, to embraceme a different - arguably more utilitarian & modernist ideology -that must create a "less is more" consumer paradox.

Hence there is a veritable gamut of challenges within challenges that must be logically and creatively overcome to build a new era of value creation from re-shaping society itself and accordant industrial and service sectors.

However, the criteria that propels private investment reasoning will alter little, since "it is all about the numbers". As a consequence to the rightfully pragmatic attitude of The City and Wall Street, there will need to be hefty consideration as to how the public and private sectors can mutually aligned. And having been through a period of great value destruction in sectors such as Autos in the West, regulatory and investment specialists will need to create elements of a new "honeycomb structure" the compartmental cells of which attract the busy-bees of public-private inititives and wholly private enterprise. Unlike the typical 'public good' utility sectors of say Energy, Transport or Banking, the Automotive industry has a far far harder task to overcome, and the investment community knows it.

This in turn begs the question about exactly how it does and should assess the enterprises within the automotive arena. Will it differentiate between "old" and "new" business models that have inherently different ROI structures and timeframes? Or will conventional, practical thinking rule, having learnt the burst-bubble lessons from other supposed paradigm-shift examples?

Between 2000 & 2007 the investment community's focus conventionally questioned the operational dimensions of automakers, supplier and dealers. Criteria that have remained constant for nigh on 100 years:

1. Auto-Makers
Focus on the core issues of volume, capacity-alignment, segmentation (creation/hold/entry), new product cadence, platform utilisation, market share and competitive advantage enabling pricing elasticity.

2. Supplier-Base
Focus on core-product lines and an exodus from diversity, centralisation & consolidation of competence(s), exposures to emerging markets and avoidance of single client dependence – all seen as the sin quo non of profitability.

3. Dealer-Base
Focus on inventory turnover / volume and wholesale financing became the necessary evil to off-set to falling unit margins. An emerging 'commodity car' consumer mentality evolved driven by excess capacity and incentivisation. Unit pricing even amongst supposed premium brands became squeezed so the importance of credit-financing, access to wholesale finance and leasing models became ever more encouraged, as did unit volume turnover and overhead cost reduction; seeing the shift to ever larger site ops and the importance of virtual presence on the internet to capture local and inter-regional sales.

Of course many of those fundamental assessment criteria will remain unchanged, they are fundamentals in ascertaining automotive company valuations. But in this new watershed era the predominant shift has been to highlight the positional advantage of the cash-rich strong (with visible income streams) over the liquidity-stretched weak (previously reliant on financial engineering). The credit-crisis has already altered the assessment notions of stock analysts, fund managers and critically private equity companies keen to differentiate the wheat from the chaff. So we expect to see a trend of investment divergence based on pragmatic valuation fundamentals. Pure rationality should now reign, the previous whimsicality of an over-reactive, over-optimistic then over-pessimistic stock-market ended. The long-term investor will once again emerge as a results of meaningful due-diligence become the nadir of investment rationale.

Thus the shifting sands of the economy and the auto and investment sectors has altered immeasurably, irrefutably and irredeemably - radically altered capital markets married with radically altering industrial and consumer markets.

investment-auto-motives is proud to look forward, to play its independent role in the centre-ground of the tri-partite stakeholder function made-up of: Investors, Government & Industry. A role that assesses economic value and devises new value-creation. A role that plays a small but pertinent part in creating tomorrow's auto-economy.

And to that mutual end, investment-auto-motives wishes all a prosperous 2009.

Monday, 22 December 2008

Industry Structure – US Autos – Santa's Clauses

President Bush's agreement to provide the $17.4bn bridge-loan from TARP coffers to GM and Chrysler has answered both company's previous Thanksgiving prayers. $4bn goes to Chrysler and $13.4bn to The General. To slightly confuse matters, the monies are split between December and February payments to both parties in similar amounts - $13.4bn now and $4bn later.

So, Christmas has indeed arrived in Detroit, providing everyone from CEO's to track-workers a reason to breath a temporary sigh of relief, George W. Bush acting as a much needed and awaited Santa Claus, giving provision for both companies to maintain operations whilst devising individual, or possibly inter-dependent, viability plans.

Santa has indeed arrived, but there is now much deliberation regards the level of conditional constraint tied to the low cost loans. There are Clauses to Santa's proposition, but exactly how onerous – indeed 'company & sector trans-formative' – are those clauses?

It has already been aired in the press that the primary intent of the out-going President's actions are to simply 'pass the buck' to the incoming Obama administration, having to deal with multi-stakeholder negotiations, and to provide enjoy the 'final days public glow' of such a action.
Although the deal is theoretically orientated around Congress' previous turn-around action and reporting demands, reported portions of the released wording of the loan agreement, and a summarised White House Fact Sheet, indicate a fair degree of leniency has been written-in to provide flexibility as to how GM and Chrysler report their progress paths to commercially viable entities. That, we suspect, means that deviation from the previously set-down quantitative targets will be permitted if sound reasoning can be proffered.

But, of course the real issue will be for Congress to understand every dimension of the business and its operational and sector inter-dependency. I has previously heard the rhetoric, but now it must investigate the numbers in detail. From the realistic operational limits of capacity reduction that still enable a sustainable supplier feed, to the impact of the still sizable labour & legacy cost content in UAW plants now that the last-in/first-out low-cost $14 UAW newbies are being retrenched, all of which along with general fixed and variable overhead creates the plant-operation break-even that is so important in determining the ex-factory per unit price and margin.

And this must be set against the benchmarks of other foreign automotive operations in the US and globally, both within the GM and Chrysler corporate folds and more importantly the productivity gap between the GMNA and Chrysler NA and the rest of the world.

Thus it will be the remit of Congress to request that Wagoner and Nardelli demonstrate the 'fair and true' 'economic floor' of GM's & Chrysler's innate business models within North America. For it is only be by highlighting the disparity between NA and RoW that rationality regards the sector's next steps can be undertaken.

Whether that inter-mediate wording is called 'Leeway' or 'Loopholes', the matter appears almost academic for now as the sector sits in effective suspended animation over the coming three months.

Wagoner and Nardelli will of course be in deep negotiation with UAW, supplier, creditor and investor stakeholders. Both are undoubtedly respected and determined men that have demonstrated resolve in their achievements to date, especially so with the UAW – which thanks to Gettelfinger's mediation efforts has recognised the problem and provided for steps of much needed change (such as the VEBA and its malleability).

The problem is that those steps are in real (ie globally competitive) terms too small too late – even if they appear drastic to conventional UAW expectation. Had they come earlier, during better times in recognition of the productivity gap that would be exposed during worsened periods, the industry would be in better health and better able to respond to this unfortunate economic turn of events. But of course the UAW are only one dimension of what is a seismic problem.

Creditors and Investors are the other other prime parties to convince that a sustainable turnaround is viable, ideally with their assistance by 'taking a (financial) hair-cut' and becoming more commercially integrated in the process with the issue of debt for equity swaps. This initiative ideally puts all parties in the same boat for the long-term, but in the short-term could be viewed as pitting the interests of present-day investors and creditors against each other as the common-stock bases of GM and Chrysler are diluted.

Ironically such a move could well see the re-integration of parts-makers with VMs as cross-shareholdings such as GM-Delphi initiate closer mutual interests. If that ultimately means a negotiation path to the creation of a new and broad Tier 0.5 supply-base, expanding the responsibilities of present Tier 1s to ultimately provide an independent low-cost vehicle assembly base...all to the good. But if it simply means the creation of expansive 'apparently synergy seeking' dual-control empires which invariably become self-centred, pressure-removed and uncompetitive then...all to the bad. The industry has been here before, and it is not a routemap with which investment-auto-motives can concur.

More than ever the US supply-base needs a transformation to a new lithe and intelligent industry structure, one that is investor transparent and trend-reactive, not a re-visit to the eventually failed mega-structures of the past, whether the Fordonian vertical consolidation of the 1920s or the British Leyland-esque horizontal consolidation of the 1970s.
Thus whilst Wagoner and Nardelli will undoubtedly work hard to align stakeholder interests, and endeavour to head an unofficial task-force for change comprised of sector CEOs, CFO's & COO's, we suspect the size of the challenge and the non-availability of critical turnaround levers to informally achieve such change (ie massive liquidity, UAW & dealer regulation, reformed supply-base structure and concordent investor confidence) means that it would be a Herculian task and miracle to do so by March-end.

It will be Obama's official economic task-force comprising of Volcker et al that will be ultimately handed the responsibility to oversee and question the autonomous re-alignment of Detroit's No.1 & No.3 players. And to importantly lay out an industry policy and plan that can attract domestic investment and critical FDI monies from massive US$ reserves held in the Middle_east and Asia. This would create a latter-day round of $ repatriation, once the currency's FX valuation vs the Euro, Rem nimbi, Yen & Rouble falls back to historic norms. Such an event also encourages greater international technology trade that will be so important to the Greening of Detroit, and encourage the public's conviction to believe in a much transformed US Autos sector and related automotive 'value' and 'growth' stocks.

That is some time away, but the sooner the size of the challenge is understood, and an Auto-Plan created and executed the quicker the sector's upturn can come.

Thursday, 18 December 2008

Industry Structure - EU Autos - National Self-Interest Over Regional Rationality

As Detroit awaits the timing and shape of its $14bn assistance package from Capitol Hill - the Presidential vacuum denying substantive leadership - across the Atlantic in the EU region politicians have been rather more forthcoming.

The trouble is that in doing so for their own national interests, and consequential ruling party favour, the very basis of the EU as a collaborative project to gain global strength, is coming under intense pressure; slowing its progress to a virtual standstill, if not fatally fracturing the uni-border set-up.

Self-interested national mindsets seem to have been born and latterly crystallised by the damage-limitation reactions created by the financial melt-down that has hit Europe over the last quarter. Given the opacity, indeed invisibility, of the CDOs and SIVs that were the undoing of the inter-connected global capital market, and the rapidity of Iceland's fall from grace there has been rapid reaction to 'bolt-down the hatches' where feasible. A case for many Central Bank and Treasury officials of grabbing as safe a seat as possible once the music of free-flowing capital markets revealed itself as instead a game of musical chairs.

Trust in internationalism, for the time being at least, seems depleted; none more so than in the EU. Although there is the usual rhetoric of "mutual solutions' espoused from Ministers, Commisioners and MEPs in Brussels, the individual national reality has been very different. In an attempt to counter an ongoing "tearing up the EU fiscal rule-book" Jean-Claude Trichet (the ECB President) has rebuked the trend to individualism witnessed thus far, and insists that the EU's "stability and growth pact" is still valid given (apparent) flexibility budget/debt rulings for those core members with larger economies and consequent economic leverage.

But the truth is that Germany, with the most cautious fiscal & monetary policies and a consolidated, re-strengthened industrial hub, stands apart from the rest of the membership - importantly Framce, Italy, Spain and Greece. They have been more exposed to the rapid change in the financial fall-out that has affected either commerce or housing sectors. (The 'spread' - or default risk premium - between German government-bonds and those of other member states tells of the capital market's caution and its EU flight to safety under the German umbrella. This in itself strengthens Germany's position and enlarges the 'confidence gap' between it and other states).

And of course as a major pillar of the EU economy, the region's auto-industry is a central component of the EU Project, now perhaps more than ever. But at a time when that belief in inter-dependent harmony should be heavily demonstrated, the self-interest in individual national auto-sectors has availed. Perhaps unsurprisingly after Angela Merkel's independent initiative to defend Germany's banking sector with government guarentees, it was she who first stood to protect Germany's auto-sector with mention of a 1bn Euro guarentee for Adam Opel AG when the woes of its US parent were highlighted.

That action previously stood in sharp contrast to the ambitions of France's Sarkozy and Italy's Burlesconi, who have been leading a call for an EU-wide solution to the region's car-making profitability problems. One that subtely intimated that a multi-member contributed fund could aid the increasingly interdependent sector, allowing it set within a planning framework to meet its combined challenges of over-capacity, product proliferation, CO2 reduction ambitions and the chasm caused by a historical reliance on now essentially defunct consumer-credit.

investment-auto-motives believes both the French and Italian Presidents could well be proposing the beginnings of what could ultimately be radical reform and a new era for the European auto industry and the consumer use of its vehicles. The results of such a possible reform could be years away, but whilst at this critical historical juncture these were perhaps efforts to make a start on that transformation.

Burlesconi will be conveying the wishes of FIAT SpA that seeks greater inter-company alliances and indeed legal partnerships as a solution to its declining fortunes and the need to repeat the JV success of its 500 city-car (with Ford) in the mid-car segment (with another partner) to reach today's 400m+ unit platform ideal. On the other hand, looking past today's immediate challenges, Sarkozy will be conveying the calls of Renault SA's respected CEO, Carlos Ghosn, who is pushing to take the first baby-steps towards a new era with all-electric vehicles and 'pay-as-you-go' business models. Given the French government's major stake-holding in Renault, Ghosn undoubtedly seeks EU or French funding as the 'fiscal starter motor' to encourage consumer momentum toward this new auto- world, one which is orientated toward greater free cash flow and more buoyant balance sheets that allow a company to operate more autonomously; as a dynamic 'brand enterprise' as opposed to heavily baggage laden conventional auto-maker. That in turn theoretically permits Renault to rely less on the French tax-payer in future.

For the moment, given the stalled collaborative EU action on the fiscal front, let alone auto-sector issues, a unified approach toward the challenges of the sector looks less and less likely without Brussel's leadership and German accordance. And that's an accordance which given its efforts to strengthen its domestic auto-sector - putting the likes of VW, Daimler and BMW onto a stronger footing comparative to their peers - looks ever more remote, unless to Germany's advantage.

Given these circumstances it was not surprising that Sarkozy decided to, like Merkel, 'go it alone', as Berlusconi may well have to do; replaying decade after decade of government patronage towards FIAT. Having met with met with car executives from Renault, PSA and Valeo at the Elysee palace, Sarkozy charged minister Luc Chatel to devise a plan by the end of the month to "save" 'Automobile Francais' which reportedly directly or indirectly employs 10 percent of the country's workforce. This appears to be fait accompli given the 26bn Euro aid package his government gave previously, the 100bn Euro package now stated and the promised 1bn Euro loan facility to Renault and PSA.

But although the Review is set to examine the sector's structure (especially supply-chain) and R&D priorities leading to overall investment strategy, the time-frame looks far from plausible to undertake an indepth and thorough job that creates efficiencies instead of simply paying for the wish-lists of domestic VMs and suppliers. So ultimately instead of creating a rational base for a more collaborative European auto-sector, it could well be that politics and national pride conquers the ambitions of the EU Project, its imperitive and rational.

That for Europe would be a mistake, and Brussels needs to demonstrate its industrial policy might by instigating its own EU Auto Review that depicts the operational and profitability advantages of cross-border internationalism over the spiralling tax-payer costs of domestic protectionism.

So at a time when the EU is supposed to be acting as the vanguard of the industrial Eco-cause, creating efficient industrial infrastructures that produce CO2 'tread-lightly' vehicles and conjoin cultures and consumer mindsets under the Green banner; the very mettle of it's leadership is being tested.

At its 10th anniversary, If the EU does not 'walk the walk' why on earth should a more cynical Russia, China or India?

That leaves the door open for Preseident Elect Obama to seize this opportunity to mould US-EU and global foreign policy, using Autos as a 'prime-pumper'. And crucially, enabling the US to access and productionise the best of the EU's presently latent eco-tech. How would that go down in Brussels?

To avoid that outcome, the EU Commission, the ECB, other possible stake-holders (eg the EBRD - European Bank for Reconstruction & Development) and ironically but critically senior investment banking figures, may have to come to the cause of economic rationality and unify the unfortunate present and growing tri-partite.

Wednesday, 10 December 2008

Industry Structure - US Autos - Not Just Renovation, But Foundational Re-Construction.

Wall St has been laying out what they understand to be the central aspects and consequences of Congresses' plans to reform the Big 3 and the US auto-industry at large.

It is a common expectation, as parlayed by the banks bail-out, that shareholders face huge dilution as the government takes up to 20% equity (the details of which, whether 'preferred', 'common', 'convertable' etc yet to be seen). And senior tier debt-holders such as GM bondholders and UAW's VEBA are asked or co-erced to swap debt for equity. And so current investors, largely the institutionals, are concerned that the 'threat' of sizable new stock issuance, above and beyond the inherent rights of present common stockholders, will undermine their own interests.

Such an outcome where the real investors that propped-up GM (whether the likes of CALPERS or Fidelity right down to the individual Chevy loyalists in the public domain) suffer as consequence must be avoided. Any government, UAW and creditor stake-holder conversion must not split and pit one set of new investors against the interests of the incumbent believers who have hung on through the toughest of times and tested their belief in GM, American industry and American capitalism writ large.

And that phrase 'capitalism writ large' is the central message here. The core remit of the legislative and policy-making being written as the terms and conditions of the (possible first round) $15bn funding must create new sustainable belief. To do so it must create fertile foundations that encourage future capital/equity attraction to grow the strength of a new GM(-related) entity in whichever form(s) that may take.

Thus the government and present GM debt holders, must be put on par with the today's stockholders - no more no less. Do do otherwise would simply dis-incentivise the mass trading of the common stock, resulting in the a loss of 'life-blood' to the enterprise from not just US capital markets, but from those around the world.

Remember the massive levels of BRIC (esp Chinese) US$ foreign reserves and the Petro-Dollar based SWFs that seek 'defensive-sector' investment homes typically utilities, infrastructure, civil construction and autos - those core activities of Obama's US Revitalisation Plan.
And, crucially important, it is the growth demand by the common stock-holder that is the powerful driving force behind the dualist marriage so key to enterprise expansion: operational & budgetary efficiency linked with innovative exploratory thinking.

Thus the urge to segregate GM stake-holders into 2 camps must be denied, instead it should be alloted voting rights alone that provide a voice to the government, creditors and UAW.
This should be a top priority for any new incoming Car Czar (Pelosi suggesting Volcker), because by doing so it breaths much needed life into the NYSE, autos acting as a 'liquidity feeder' to other industrial sectors and so in turn boosting confidence; perhaps even as far as effecting the auto IT hardware & software product and service providers listed on NASDAQ. Putting investor confidence in a renewed GM, or seperately stronger divested parts there of, would provide a much needed ripple effect through-out the economy.

As for the future of Chrysler, it is obviously in a very different position since it is privately owned by Cerberus with Daimler's 19.9% remaining stake. Although certain lawmakers have attacked Cerberus for not putting more money into the company, the truth is that throwing money at Chrysler, such a marginalised player, would have not solved its ills and before the financial implosion there was no real need to. Chrysler's problem is primarily its strategic fit in the US & global markets, not its fiscal strength. The liquidity Chrysler already had was already being allocated to small and mid car programmes by the time Cerberus bought-in. However that small car strategy should have been undertaken far earlier to give Chrysler competitive advantage over GM and Ford. And although it chose the right path to undertake foreign JVs with Chery & FIAT, that process creates longer car-project lead-times given political and platform demand complexity. It defrays capital costs but also delays the timing of the resultant income stream that was needed far earlier as part of a self-sustainability mentality.

As investment-auto-motives recommended in mid 2007, Cerberus should have prepared to have fully divested Chrysler to a foreign suitor, via a structured phase by phase divisonal sell-off whilst the markets were liquid and foreign appetite high. That didn't happen, and honourably and rightfully the private-equity group has promised to forgo any benefit resulting from government aid to Chrysler. Though we suspect Daimler may well argue for partial access to the Chrysler monies if it can convince Chrysler and Congress that it intends to maintain its US-focused JV partnership, possibly coming to the technology and platform aid. In short the operational benefits of the previous D-C marriage without the legal and political intractability. Just how Chrysler will react to such a possible action depands much on its own strategic choice.

As of today (10.12.08) reports that Chrysler has ended its small car ambitions with China's Chery suggests that it has been convinced to seek either full Chinese control of that project, possibly taking a role as an end-buyer only of the car, a new JV with a Detroit peer is on the card (given GM-Chrysler alliance conjecture) or that the company (or its assets) as a whole is being reviewed for sale to external parties.

From an investment perspective Cerberus ended up between a rock and a hard place with Chrysler once the US and global car market demand plunged, the retreating tide demonstrating that it was indeed swimming naked strategically. Like much of the private equity world which has lost up to 40% of portfolio value over the last year, Cerberus will either be keen to exit Chrysler for the same price it bought its 80% stake - something looking less and less likely - so more probably look long term to seek mid term efficiencies advantage from US sector integration and far a more lenient UAW advocating recognised neededlow cost labour reforms and deferred/reduced VEBA contributions.

As for the Ford family, it will use this crisis to demonstrate the advantage of its own family-governance structure and 'in-tune' management that has undertaken a seemingly successful One Ford turnaround inititiave. As comparitively the most buoyant, thanks to Mulally's 'large re-mortgaging loan' against Ford assets (at what was an asset high-value watermark) it has stated that will not need the short-term emergency loans but may want access to government funds later. That fiscal position plus ongoing cost-savings, the probable sale of Volvo, a good incoming US product mix with high % of small and compact and critically no government 'interferance' that creates ROI drag for investors perhaps continues to best places FMC in the eys of Wall St and the world.

The tug-of-war between politicians and executives regards the capability of that has emerged over GM’s board & senior management has set the Congressional cat amongst the Detroit pigeons; urging a shake-up as condition of government financing. But whilst Detroit contends that GM is on the right track and its problems stem from economic forces, not poor management the truth is that it should have been acting more like a far more 'in-tune' Ford, when it was in fact acting like Chrysler with such an addiction to the high margins of SUVs created by what were obviously overly massaged credit conditions. Ironically given that GMAC itself was a participant of sub-prime lending offering ridiculous deals with far-off breakeven periods, should have created inter-company dialogue that prepared GM for the inevitable snapping of the over-stretched elastic credit band.

Whilst the pressure for fresh blood is less intense at Ford, Chrysler should not be left off the hook of examination, but who really is to blame? Very probably the Daimler-Chrysler divestment process, since much would have been at standstill as the big picture issue of finding a new Chrysler buyer by typically prettying-up the operation for sale and stemming budgets to hoard cash for the balance sheet took precidence. The executive angst of redundancy was palpable and undermined the desire and ability to properly plan; a great shame when seniors more than ever needed to be operating better than ever.

Today, Job losses will continue carmakers adjust capacity to present demand and the new 'Car Czar' looks a much diminished near-mid term sales demand future. That opportunity to re-structure for a brighter tomorrow muct be recognised by the blue-collar staff who whilst feeling so low must open their eyes to the reality of what has been an over-blown, overtly comfortable and now defunct US automotive business model; a dinosaur model created over 60 years ago in a very different age. Yes the UAW made increasing concessions year on year but the tide of change grew to an unstoppable tsunami.

That means the government will need to set labour rates and conditions at parity pay levels to the 'cheap labour' that has assisted the competitiveness of largely foreign brand automakers' that lie below the Mason-Dixie line. To do so Obama and his economic advisory team will need to convince 'John the Line-worker' just how different, and industrially hungry, the world is beyond the US borders. Whilst John moans of the Mexican story of work translocation, he must be fully educated to the realities of how the Big 3 can and do operate in BRIC regions and beyond into new emerging territories. So even the UAW's agreed two-tier wage structure under which new recruits are be paid $14.20 vs $26.00 per hour will need to be extended.

But whilst the Big 3 will continue in one recognisable form or another, it will be the supply-base that requires greatest consolidation and efficiency creation. It is essentially a nationally complete value chain, created by the likes of Henry Ford and a myriad of family enterprises backed by understandable government ideology and policy of the time. It of course has been remoulded over time, but the plethora of businesses operating at very low profit margins still evident today highlight the systemic inefficiencies of the complete value chain, each party trying to eak-out its slice from a cake of finite value. As we've seen over the last few years, too many parties slicing the a diminishing cake too thinly leaves nothing but crumbs. Not a sustainable diet.

The same is of course true for the massively sprawling, inefficient dealer base, created by the constant previous amalgamation of delaers representing the likes of Fraser, Nash, Willys, latterly American Motor Corp etc etc. All three carmakers have told Congress that they will trim dealer networks, GM axing 1,750 outlets over the next four years, but even then, it would have more than three times the number of Toyota, which is only slightly behind in market share. With fewer brands and a naturally declined attritional market share, that x3 figure will prove too many and so once again encourage price warfare and value destruction amongst the survivors.

That would of course hit GM's profitability and so an eventual return to the problem today. The dealers, well-connected and politically powerful, are protected by state franchise laws, and these require changing. As the FT reports, GM paid out $1bn compensation to dealers after abandoning its Oldsmobile brand in 2001. It could afford it then but not now and definitely not at the taxpayer's or new investor's expense.

Instead, there will need to be a push for regional consolidation where old dealer foes will need to work in unison to merge and re-generate their combined businesses. GM's and Chrysler's delay and cancellation of pipe-line vehicles should allow proprietry and dealer car inventories to whittle down over time and allow for that transition. The quicker they realise that and act to present themselves as part of a renewed, invigourated schema or plausibly elect to leave the US brand fold and take on franchise deals with the likes of Hyundai, Honda, VW etc the better.

The future emphasis smaller cars that will imbue higher cost technologies, from direct injection diesel to plu-in hybrids in the challenge to gain fuel efficiency, meet CAFE regulations and reduce CO2. This in turn means that profitability for supplier-base, VM and dealer will be gained from the leverage of greater volume for single platforms (over 4m becoming the norm) with less model variants and less specification configurations, allied to larger, higher output sales environs, that focus as much on the service and through life experience that both reduced costs and improve pricing abilities with novel new technologiy and usage-method options.

A viable, indeed prosperous tomorrow is attainable, but it needs a massive re-adjustment of sector perceptions and practices to reach it.

Monday, 8 December 2008

Parallel Learning - Formula One - Exploring Strategies for Traction in Changed Conditions.

As an international sport encapturing the pinnacle of competition and glamour Formula One has from the 1970s onward become the "sport of 'new' kings". A highly visible, commercially orientated realm today physically, tele-visually & cyber-spacially spread across the globe to an audience population of 600 million plus that remain crucial to the fortunes of the F1 kingdom, a kingdom which is essentially ruled by a triumverate that faces external and internal challenges - the FIA (the sports official body), the Constructors & latterly Auto-Companies & the commercial rights holder - presently FOH (Formula One Holdings).

Long ago the sport's internal tension was primarily between the FIA and the race car constructors over the set and re-set technical / specificational 'formula' the race vehicles had to abide by. And whilst the sport was essentially visually limited to circuit attenders and the sport's devotees that tension was part and parcel of the evolving face of an intrinsically 'techie' motor-sport; pitting technical innovation against the boundaries and loopholes of the rules - a theme that ran right through to the early 1970s before the advent of media global coverage. From that point onward though the sport, through TV, gained massive popularity and so encouraging corporate sponsorship, initially by cash-rich tobacco firms, and so inevitably the issue of commercial distribution rights

That paradigm shift through the 1970s, which saw the fiscal stakes raised massively, altered the activity's core persona forevermore. Changed from that of a marriage of 'sporting gentlemen' (eg Stirling Moss and Graham Hill) and 'engineering gurus' (eg John Cooper, Jack Brabham & the 'Cosworth' duo) into something far commercially-based, corporately orchestrated and money-charged. So attracting greater interest from the auto-industry's major players who could leverage parts of their large R&D and marketing efforts and budgets to gain competitive technical advantage and promotional visibility amongst the consumers within the mainstream marketplace. The Europeans like Renault, BMW and increasingly FIAT via Ferrari similarly espousing the 1960s US proverb: "Win on Sunday, Sell on Monday"

Integrally stressed engine blocks, ground-effect, suction-fans, turbo-chargers, V10 configurations, layered composites, woven carbon fibre, ABS, active-suspension etc etc all tell the tale of rising innovation and technical budget spend through the 70s, 80s and 90s in bids to increase power, reduce weight and increase controlability; the FIA forever having to catch-up with and re-rule this inventiveness in the name of fair competition and driver safety.

Of course there is the adage that 'racing improves the breed' and race-teams R&D engineers will highlight the 'trickle-down' effect of technology into road-cars, though their is also much counter-weight to the CFO and CEO argument that the technology does not automatically transfer, and very often is developed concurrently by external suppliers adhering to very different 'real-world' performance parameters. Whilst there can be a technical intertwine between F1 and mainstream cars, that relationship is obviously very dependent upon the VM's interdependency with the sport; Ferrari and Renault perhaps being the polar extremes. Even though Renault tries to perceptually reduce that chasm the difference between their respective core products of an F430 and a Megane (& Dacia).

Obviously, the more money available, the more able at massage that connetation. But as is evident today the world at large faces a different interim period over the next 3+ years.
The 5 years of rising fortunes of for strong globalised economy, buoyant corporate earnings in many sector value-chains and the accordant 'feel-good' consumer spend that was seen between 2002-2007 has evaporated before our very eyes as a result of complex and infected financial markets. The viral effect has wiped billions of Dollars, Pounds and Euros from capital and money markets, and wiped millions of off corporate balance sheets as they take the hit of accounting write-downs and plunging asset values. Corporate CFOs, Treasurers and Pension Commitees are doing all they can to mimimise their financial pain, and cost-cutting necessity is perhaps more virulent than ever given the lack of operational liquidity and the need to survive and re-strengthen in future, (let alone for some the potential of hostile take-overs by those with diminished by comparitively stronger positions).

That reality has now finally hit Formula One, with the statement that Honda will be exiting the sport. It is a reality that investment-auto-motives noted some time ago as an obvious consequence and the impact could be potentially huge. It acts as a watershed moment for the sport. The resultant evaporation abundant finance from major sponsorship deals that balooned team R&D and tour caravan size now encourages, indeed necessitates, the need for individual participant frugality and community macro-rational efficiency. The age of simply throwing cash at the problem of finding a micro-second performance advantage has gone.

This is the central message that both the FIA's Max Mosley and FOH's Bernie Ecclestone are vocalising - a rarity to have them singing off the same hymn sheet, and thus indicative of the issue's importance. The FIA acts as the conduit of the new pan-western political will for eco-advacocy and energy-conservation, hence is keen to continue on its path re-set the technical specification 'formula' of F1 to reflect the new eco order.

A time for prescient change.

Change must also be considered on the macro-operational level of the sport. It may now be time to re-assess the present business model and the value-creation it provides for the ruling triumverate (FIA, Race Participants & FOH) and their value-seeking associates. Equally important is the role and say of the high-profile and low-profile Sponsors. High profile are the Corporate Sponsors, best exemplified by Santander or Vodaphone who through FOH's efforts have gained increasing exposure on the race-cars, trackside (often electronic) advertising hoardings and in & around TV camara hotspots and spectator hotspots throughout the circuit itself. Low-profile are the increasing proliferation of State Sponsors - from Istanbul to Beijing - that have invested from their SWF pots in infrastructure and man-power for the good of national pride, profile, tourism, the regional economy and trade relations are increasingly enchanted with F1 as a method of showcasing themselves to the wider world.

Thus, in these changing times investment-auto-motives prompts the sport's major players to not only explore the envelope of the traditional business model and value chain as recognised today, but to also explore the potential for expanding and evolving the very nature of F1 and its international, cross-generational, cross-gender appeal. The 'entertainment' element of the 'sports entertainment' dualism has been growing steadily, but needs to be explored further to further capture that local and global audience's attention and imagination.

This means a philosophical de-construction of what we know the sport to be today, to fully examine each and every component part seeking 'inherent' value release as well the re-construction of the value-chain. Additionally comparison to the plethora of other sports business models that operate across the world, from football to horse-racing, and eventually a overlay of contributive aspects to the mix. And finally a review of the entertainment industry to provide a similar exercise and benefits.

Strategic review of F1 direction for is of course part and parcel of the ever-ongoing triumverate dialogue, and recognise the growing PESTEL and commercial cross-industry 'inter-connectedness' that F1 has displayed in recent years to grow its franchise. This perhaps best seen by the first ever night-race in Singapore taking place this year which aligns to the computer game 'game-play experience' which itself was prompted by the need to tap into a unified global TV audience. Thus the visionaries of F1 has long noted the need for perceptional and inter-actional involvement, and given the evolving the context and backdrop of the sport its evolution on and off the track must be comprehensively considered and well guided.

investment-auto-motives continues to be part of this dialogue to ever stretch and maximise the industrial, entertainment and political value-creation agenda.

Monday, 1 December 2008

Micro-Level Trends – Portfolio Divestments – SAAB & Volvo : Homeward Bound?

As Wagoner, Mulally and Nardelli re-visit Washington to proffer their re-drafted mid-term plans, a central element for GM and Ford will be the divestment of SAAB and Volvo.

As investment-auto-motives predicted some time ago (see previous items) this event is a natural consequence of efforts to relieve the ever-growing fiscal pains both multi-nationals have been facing.

Ford re-assigned Stephen Odell from Mazda to Volvo a couple of months ago to, as we suspected, provide greater bargaining power with the Swedish government regards government loans and undoubtedly, very diplomatically, air the idea of Sweden itself re-absorbing one of its national car-makers. Concurrent to, and possibly on the back of, that conjecture GM has undoubtedly requested that SAAB's CEO Jan-Ake Jonsson take perhaps a less strong-arm, more 'fellow country-man' tack with Maud Olofsson, the Minister for Industry.

Thus, as national governments across the West become the new realm of direct and indirect international intermediaries, financiers and 'public good' industry policy arbiters, so we imagine there could be a raft of nationally-orientated M&A events that brings back what were once national industries back to the country-fold, driven by a compelling mixture of conglomerate divestment in search of cash and liability depletion and essentially sovereign interests to recapture and control what are critical domestic enterprises and brands.

Under these skies, funded by Chancellors of the Exchequer under homeland political pressures, the time could well be here to begin a new era that combines and intertwines the acumen & doggedness of corporate strategy formulation with the sensitivity & subtlety of international diplomacy.

In short, though under pressure to regain 'national treasures' that are so important to the domestic and regional economy, such Chancellors will want to see a game plan that provides the tax payer and national budget with a mid-term return on investment.

Ford and GM (and their Bankers) may be working competitively or co-operatively on the approach to Olofsson and his Swedish peers, their approach strategies largely depend on their respective views about the size of the national budget notionally allocated to 'saving the auto industry'. If small, an inevitable bun-fight would unfold. If government indicated that it was only interested in saving one auto-maker that could well be SAAB as a smaller and less costly purchase exercise and its present-day integration with European Opel. Volvo, as a far bigger and expectantly more valuable enterprise, even with less European (Ford) integration (given its NA-shared large car & 4WD platform) would on the open market expect to command a greater price...but then, as we recognise, value is very very relative in these turbulent times.

If the Bankers work wisely, they'll demonstrate that the greatest high-value long-term play by the state, would be the dual purchase of SAAB and Volvo. In a world increasingly psychologically attracted, and led, to that which is ecological, sustainable and intelligent, Sweden itself has long represented those values, even if a mix of perception and reality.

Both brands have historically been the ambassadors of such, even the Volvo XC90 seen as a family responsible, and acceptable face of 4x4s, thanks to its marque. Volvo has longevity and dependability (ie sustainability) running through its DNA thanks to a reputation set by the robust 120 “Amazon” series and the boxy 240 series. And as Swedish sibling, SAAB was similarly born from 'responsible roots', its own DNA served by a mixture of aerodynamic efficiency and lightweight construction to lessen fuel consumption and accordant pollution. Of course as both brands gained a reputation as 'aspirant' vehicles - sold to the pseudo-intelligentsia globally – so they were able to raise prices and margins that attracted Ford and GM to roll them into their respective portfolios. An act that for a period provided high unit margins, but as with their other brands, became victim to ultimately zealous economic rational and so lost much of their original magic.

But to summize, Volvo & SAAB, as were and as could be, the very representation of high-morality export consumerism. And at a time when smaller vehicles are en vogue, both companies have the opportunity to re-mould and expand their vehicle portfolios – with meaningful, powerful messages – into the premium mainstream, much as Mercedes did with A-class and Audi are doing so with A1.

Of course, importantly, the industrial-base to conquer these opportunistic ambitions for both brands already exists in the medium term by virtue of Ford and GM's European operations. And that idea of a more cohesive Europe could be key to the nationally sponsored transformation of the Swedish auto-industry even though the country does not share the common currency. Even with the present Merkel - Sarkozy difference of opinion regard the level of European fiscal & industrial integration, the very fact that the Ford & GM small and medium platform production centres reside with Europe, itself the initial target market for Sweden's smaller-eco vehicles, means that the FX disparity between the Krona and Euro should not be problematic. Indeed if the Euro maintains its recent history strength, as a consequence of the US Dollar's expected mid-term decline, Sweden could benefit double-fold including the FX effect.

From the intra-political regional economic perspective, Merkel may well recognise such a Germanic-Swedish agreement as beneficial to her own state and national economies, though she would of course be heavily lobbied by the indigenous 3 (VW, Daimler & BMW) to either reject the Swedish proposal or have themselves as JV beneficiaries as providers of essential hardware. And the engineering services sector, from Porsche Engineering to AVL would by default be preferred suppliers for the necessary integration engineering work.

Such a scenario would naturally build upon the implicit & explicit German industrial consolidation that has taken place over the last 18 months, most evident with Shaeffler-Continental and Porsche-VW. (Infact such actions although seen as self-serving and protectionist amongst EU peers may well have set the die for many nations/regions to subtly review their respective positions and natural techno-political alliances). If Berlin believes it has achieved much of the national consolidation originally sought with the integration of VM and OEM players, it would very probably seek-out like-minded regional partners that share similar policy sentiment – close enough to benefit, but not so close as to be an irritant.

And from Sweden's and Olofsson's perspective, their could be an equally powerful and prosaic possibility in forming Scandinavian-centric automotive policy centred purely on 'eco'.
Large sections of a theoretically near complete value-chain exist today and can be grown into the future : from small-scale but maturing TH!NK, to a re-vitalised Valmet focused on part to full-hybrids and all-electric premium vehicles in low-mid volumes to the possible SAAB-VOLVO alliance to incorporation of Project Better Place's new-energy infrastructure impetus.
Such as Scandinavian coalescence may in turn even require Krona to Krona pegging and even Krona to Euro pegging agreements but we presently imagine, that at this critical world juncture, that many variations of industrial policy scenarios are being presently explored by Sweden's Trade and Industry bodies.

Whilst the world looks on at the hopeful outcome of the next G20 summit, creating new direction al themes for global trade & fiscal policy-making that Obama and his new economic advisory forum can broadly agree, the GM, Ford and the Swedish government will be assessing their respective positions within the new global socio-economic context.

But critically for such an ideally corroborative deal to be struck, all parties will need to take an amiable, mutually respectful view that allows SAAB and Volvo to return home at a 'fair value' price. One that from Sweden's corner reflects and their long-term 5-10 year values, yet also from the VM's corner demonstrates a willingness to alleviate themselves of their present-day divisional write-downs and corporate cost 'drag'.

Tuesday, 25 November 2008

Company Focus – GM – Banking Against Bankruptcy

The pro and con argument regards the 'bail-out' of the Big 3, and particularly GM, continues unabated. Around Capital Hill, the Washington politicos of Obama's camp, Detroit and the public at large that rely on the automotive sector north and south of the re-enlivened Mason-Dixie line that separates what many recognise as the over-bloated UAW responsible northern states and the economically efficient southern states that are the success story of 21st century US auto-sector capitalism – even if ironically for the most part foreign owned.

As the Big 3 re-consider their respective and collective position(s) after the reportedly poor performances of Detroit's 3 CEO's at the recent Congressional hearing, there is the notion that the industry will prick the Congressional consciousness by driving a caravan of 200 or so eco-tech vehicles to DC.

Such a parade could well be viewed by the likes of Pelosi and Reid as little more than a cynical PR stunt generated to gain the public's goodwill to effectively 'lean' on Congress, and create the retort that the initial $25bn green-tech monies have already been signed off by Bush awaiting accessibility. Instead the additional $25bn 'bridging loan' will be heavily dependent upon Nancy Pelosi call to submit medium to long-term strategic viability plans that philosophically and numerically demonstrate a tenable and profitable road-map forward.

These funds, predominantly in GM's favour given its size and need - of a reported $13-14bn – are viewed as either 'lifelines' through the recessionary period, or wasted feeding a veritable 'money-pit' that will falter soon after burning through the appropriated cash - the parallel to the distressed banking sector all to painful.

But if the argument be fought on fiscal accountability grounds, Wagoner could well have a strong card, if not an ace, up his sleeve. For unlike the risk-laden, overtly laissez-faire attitude of the likes of Chuck Prince previously at Citi and Dick Fuld previously at Lehman Bros, Wagoner can point to the financial prudence GM has demonstrated with its own employee pension fund obligation. Although full year 2008 figures are not available yet, a recent story from the New York Times highlights that GM has been topping-up its fund obligation since its under-par position earlier this decade, illustrating acute use of accounting rules and no tax advantages, and keen to publicise its social responsibility.

That rebuilt its fund from sizable budget deficits in 2001/2002 (of $20bn) to break-even in 2003/2004 to growing impressive surpluses between 2005-2007. Importantly it learned from the tech stock bubble of 2000, and cautiously switched from the typical corporate portfolio holding of 25% equities to a far reduced level of 15%, preferring the safety of coupon payments from US Treasury Bonds and US Blue-chip Bonds – the dividends able to fulfill the present-day requirement of $7bn per annum. That conservative approach was contra to the general fund manager sentiment of the 2003-07 period where stocks boomed, but has now been seen as a wise precautionary against the credit-crunch created stock-market collapse of the last year, ranging from 45%-90% depending on sector, and demonstrating that even what were regarded as defensive stocks have not performed to expectation.

That fiscal foresight in protecting its ability to pay its pension obligations could well be the critically advantageous 'silver bullet' issue for GM and Congress' view of its self-governance.
Of course the 15% asset allocation to stocks will have been heavily knocked, and we are yet to find out how that write-down affects 2008 pension budget figures – importantly whether it remains in surplus. Very basic maths assumes that even a full loss of that 15% allocation would still leave the budget balanced, so the level of surplus depends on exactly which stocks the GM Pension Fund holds – and for that it is a case of “watch this space” for FY2008 results in the new year.

The crux is that Wagoner et al are endeavouring to avoid the possibility of bankruptcy that would be so so damaging to not only the Big 3, but the sector as a whole and the American economy – both sides of the all to academically re-emerged Mason-Dixie. And the pensions issue may well be GM's tour de force.

For even if GM were to enter into even a supposedly quick pre-packaged Chapter 11 – something investment-auto-motives believes would be very tricky, indeed onerous, to create – it would leave Washington with that $7bn per annum pensions bill. Would it want to add to its already massive liabilities by that annual amount, and even if so for a temporary period, a Chapter 11 re-structure would very probably result in the that liability not being put back onto a restructured GM's books and left instead with government and the over-laden tax-payer.

However, GM's success in running its pension fund, with the additional irony that it has done so by effectively buying US Government debt to feed its own coffers, could make all the difference to its future outlook, and access to that $25bn 'bridge-loan'. Perhaps especially pertinent now that the Federal Reserve has stated it will undertake a 2-step $800bn initiative to unfreeze credit markets to consumers aswell as home-buyers and SMEs.

And as for that implied 200 car green-tech caravan, its route into Washington will be all to serendipitous, expect Detroit and the Japanese to band together, but GM will want to come via the northern DC suburb of Chevy Chase rather than (Toyota's) Tacoma. Still, organising the caravan route is the least of all US car-maker's problems; the real road-map to create is a strategic and operational one.

One that we believe should over the next decade change the innate structure and profitability of the US auto-industry - the government acting in the role of fiscal supporter and process invigilator.

Friday, 21 November 2008

Micro-Level Trends – US Autos – Huffing and Puffing over Detroit

The Huffington Post, and the views of a primary contributor / journalist Diane Tucker, has become a regular read for many Americans over the last few years who initially sought out a distinctive liberal-leaning voice some years back in the face of an ever publicly 'removed' Bush administration.

Reading and riding the the obvious zeitgeist of a politically frustrated middle-class angst, Softbank Capital and Greycroft Partners financially backed the venture to grow into a what's fast becoming an apparent de facto 'independent' news source and 'speakers corner'.

The pro and anti stances of Democrats and Republicans regards the tax-payer support of Detroit's Big 3 has taken up much of the news-sheet over the last few weeks, with an interview structured repost from the respected journalist and author Peter de Lorenzo endeavouring to demonstrate that, to alter a hackneyed quote: “not all is rotten in the Kingdom of Detroit”.

Peter de Lorenzo is fighting Detroit's corner and puts forward strong argument that the automakers have been on their way to turnaround for some time before the credit crisis broke. And whilst it is undeniable that GM, Ford and Chrysler have indeed been successful in trimming over-head and piece costs, primarily through plant and labour retrenchment and trying to re-balance the supply-demand see-saw by manipulating auto demand elasticity through extended credit periods, the profitability goal posts have sharply moved due to a previously rapidly changing, volatile global economy; essentially undoing the good work done to date.

Two main elements demonstrate the innate schism: The brokered UAW VEBA deal was rightfully applauded but the previous policy implementation of extended & sub-prime credit was ultimately value-destructive; delaying the per unit break-even period and so reducing the unit, division and corporate IRR.

However, even foregoing such back-firing short-termism, the truth of the matter is that US Automakers are endemically structured from a sector template devised over half a century ago and long past its peak. Recent events demonstrate the acute level of global automotive sector competitiveness and highlight the predominance of credit-dependency over and above product-purchase objectiveness. It has been evident that for years the often better paid white collar 'rationalists' on East and West coasts have bought into the Japanese & Germans, whilst the less financially able blue-collar 'emotionalists' were loyal to the US 3 who via their own credit arms were able to create fiscally attractive deals. (The Koreans sat squarely between the 2).

But ultimately the operational model has, quickly and painfully, been seen wanting. Ongoing headwinds encompassing everything from hyper-oil-price to mis-matched product mix to over-lapping (and untapped) brands to an unstable supplier-base to unfortunately still uncompetitive labour cost 'legacy' responsibilities to still under-capacity, therefor over-cost, poor production efficiencies.

Like US products vs Japanese peers, Peter de Lorenzo believes that Detroit is really victim to an image problem, its reputation (as viewed by Congress) suffering now due to past deficiencies. But the truth is that like its products it is forever in 'catch-up' mode, and as with the cars no amount of PR spin about domestic product or sector improvement changes the evident reality.
Yes fuel efficient cars are evident and in the pipe-line, but where were GM-Chevrolet's real competitors against Yaris and Corolla that should already be part of its global small and compact car portfolio?

The solution earlier this decade was to demploy a strong small car competance from the new GMDAT, risen pheonix-like from the ashes of Daewoo? Instead the asset base was commercially exploited, attaching Chevy badges to Daewoo cars and undertaking low-cost re-skins and part re-designs as part of a plan to maximise profit but forestall on tomorrow's investment. That tomorrow has arrived and what should be an sparkling asset, whilst undoubtedly commercially viable, could be accused of suffering from an arrested development consequential of lack of parental supervision. As rightly reported, vehicle rankings in "U.S. News" demonstrate that 7 of the 34 affordable small cars are produced by the Big 3, but the best performing is the Chevrolet Cobalt, managing a paltry #20, while #1-3 are all Hondas.

Honda's small and compact car ability, in fact innate knowledge. also highlights the possible foible of GM looking to advanced yet unproven and industrially expensive battery technology as the green-tech panacea. The Chevy Volt, using L-ion batteries, goes against the conservative philosophical and real-world proven grain of Honda's & Toyota's use of far more proven Ni-MH technology. These companies have become the effective Hybrid & EV mainstream and are the demonstrable knowledge creators and, along with their suppliers, the de facto knowledge brokers. Whilst the use of L-ion is growing its applications are currently limited, best viewed in the 2009 Mercedes Bluetec S-class which will be sold in limited numbers, closely followed in operation by Daimler R&D specialists and given class-leading customer support. The paradox of a mainstream Chevy and rarefied Daimler limousine sharing technology which is still 'cutting its teeth' is all too apparent - especially as the real impetus for GM to shift into future-tech dwindles as the oil price hovers at $50 as a consequence of the global economic slow-down.

Yes Toyota (down 23% YoY) and Honda have taken a hit with plunging TIV sales due to broken consumer confidence, but they are in better condition to weather the storm. Their innate operational flexibility and product strength demonstrated by speedy cut-backs of worldwide production capacity, and critically, their ongoing ability to continually improve all-important Chinese market-share. (GM will suffer locally caught between the dually deserved fine build reputations from the modern Japanese & older German models that are viewed as risk-averse and maintain depreciation values).

Historically, Detroit's Big 3 have played-out 3 types of differing modus operandi. Their differing fortunes relative to their reaction to the sector's periodic shifting sands driven by economic cycles. Their strategic & operational roles and methods are almost endemic to the corporations, best understood by each's general and reactive styling and engineering strategies.
GM has been the conservatively-led mainstay of the domestic sector, a heavily laden and almost sector-responsible super-tanker (or rather 'mother-ship') orchestrated by the ideology of economies of scale over all else, and as such been the centre-ground mainstream that, for the most part, proffers a diluted array of once meaningful brands which have been so 'inter-morphed' in the search to generate profit that resultantly they have long-lost their innate individual magic. As such it has been the marathon runner, long on stamina but experienced ever-ongoing depletion (slow shrinkage) of reputation and profitability up until this 'rupture point'.

Ford has been the middle-man, seen as middle-ground and conservative but in fact often the stylistic and so expectational game-changer for the industry. (From the Model T to the '30s Zephyr to the '61 Lincoln Continental to '80s Sierra & Taurus to New Classics like Thunderbird & Mustang and beyond possibly re-inventing itself through Model U and affiliate US transport brands like Airstream and Super Chief). As such it has played a domestic role as paradigm shifter whether through Aerodynamics, Euro-Modernism, Retro-Design and perhaps now Diesel instigator along with VW). It has endeavoured to re-invent itself to fit the zeitgeist (as with creation and dilution of PAG) and maintain credibility and importantly profitability. As such it has been the periodic pace-setter, thrusting forward to alter the pace, then settling back into the mileau.

And in contrast Chrysler has been the periodic performance 'spurter', with a profile and profitability that 'yoyos' between lacklustre, plodding at the back of the pack, to rapid energisation that propels momentarily to the front for short periods before slipping backward. As the smallest and weakest of the Big 3 the propellants have been external capital (Government, PE and Trade), alliance formations (eg Simca-Roots, Mitsubishi & Daimler) and product 'injections' (eg '80s Minivan, 90s cab-forward LH cars, '00s PT Cruiser & 300H); the combination of which markedly improved performance for short periods.

So yet again Detroit sits at yet another “historical juncture”, the obvious answer touted being another round of marque extinction and sector consolidation with GM's absorption of Chrysler and latter-day re-organisation. But that would only extend the financial and social angst and pain as cultural clashes, internal politics and massive budgetary requirements emerge to forceably shrink the 2 headed monster. After the turmoil and experiences of the Daimler-Chrysler relationship, Chrysler knows only too well that it would suffer under such powerful 'guardianship'; re-align leading to inevitable expiration as GM leverages its muscle to obtain the best of Chrysler's assets and run-down competing products, brands, dealerships etc for its own advantage

The North American solutions of the past have demonstrated themselves to provide only ever more marginalised breathing space for the survivors as round after round of domestic consolidation momentarily alleviates domestic pressure only to be re-pressurised by foreign newcomers from both ends of the price spectrum. Thus, such understandable yet reactionary behavioral dynamics of the past, in reality amounted to re-runs of familiar tactical fire-fighting providing at best mid-term reprieve.

But today is very different for North America. The credit-melt-down demonstrates the vulnerability of a business model whose heavily capital intensive operations were reliant on the absolute stretch of patriotic good will and floods of liquidity to shift what has effectively become a commodity product, the best item bought at the least serviceable cost to the buyer.

That squeeze between product design & production costs and incentivised sales programmes to shift millions of units was always a disaster waiting to happen. So as that all too critical tide of easy credit rapidly withdrew, even with the deflation of input costs, the Big 3's economic structural inefficiencies are all too apparent. Soros' much bounded euphemism about “now seeing who's been swimming with their pants down” has never been so true.

Ironically, the world outside of the US, that ever-present threat that has evolved for decades, is not such a foreign land. The Big 3 have been operating there, beyond the US borders for much of their own existence and know it well; indeed planted the seeds of growth with their own brands and JV ventures. They know only too well that growth and commensurate auto-demand (particularly in Asia) is only achievable with sound national macro and micro economic principles, fiscal and monetary policy guided by ambitions of national growth to climb ever higher up the economic value curve. But that value curve is dependent upon innate industrial structures that rely on domestic and foreign trade demand. The very tenants of Anglo-American capitalism, that of domestic wealth creation reliant upon educational aspiration and the subsequent self-momentum effect which was once the preserve of the US is now that of Asia and beyond.

And this is the dilemma that Wagoner, Mulally & Nardelli now face. The economic miracle and the complex, capital intensive industrial structure that the Big 3 represented in the 20th century is now well under way to being successfully replayed in BRIC regions, even with the unease of their current temporary slow-downs.

America now has the challenge of re-inventing its own PESTEL order to create a new economic platform from which it can map a new value curve to climb and so regenerate national growth and accordant well-being.

And that is why Detroit must be helped, but also put under the auspices of a qualified invigilation to ensure that the assistive funds provided are indeed used to remould the companies as new era entities in new industrial territories, and not simply left fight over the crumbs left on the table in what is now, for the west, essentially for the most part a value-destructive sector. After much academic and consultancy forewarning (from notably the likes of John Wormald and Graham Maxton) the credit-melt-down is perhaps the final wake-up call, and Detroit must heed the tolling of the bell, just as Warren Buffet did.

There has been, and will be, much more 'huffing and puffing' over Detroit, and whilst Peter de Lorenzo makes his points well, he and others must appreciate the industry in global and economic context and recognise the size of the over-riding challenge.

Monday, 17 November 2008

Macro-Level Trends – The US of GM – The United States of General Malais

As the seniors of national central banks and governments of the world 'look-on', they recognise that much of their own economic tinkering is of second-order importance, magnitude and consequence to the economic restorative actions of the US and China.

As the effective powerhouses of global-effect policy and growth, that much needed restorative confidence will take longer to emerge than politicians, business and the public should like.

America's 'Troubled Asset Relief Programme' (TARP) is presently worth somewhere between $700-950bn, was originally intended to buy-up the veritable ocean of toxic assets that created the now international financial fall-out. But the investigation into identifying and locating the problematic instruments has demonstrated that their immense spread and opacity (of SIVs et al) inhibits the realistic possibility of isolating a virulent viral spread that infected even high-grade instruments.

Hence, given such a scenario, the Federal Reserve wisely recognises that even the near trillion dollar fund could well be but a drop in the monetary ocean, with limited direct effect on global finance, let alone broaching the question of the US's cross-border liability.
TARP was born not from a prescriptive, exacting solution, but from general philosophy and ideology, the execution dependent upon realistic outcomes.

In assessing the big-picture the Fed and Congress recognised that an action to 'chase-down the problem' was in reality a 'guestimate solution', an effort which given the problem's scale would be effectively be fool-hardy and irresponsible. Better to resolve domestic financial dynamics in markets and commerce with a mix of traditional free-market economics and periodic light and heavy interventionism to avoid the encouragement of 'moral hazard' and avoid major societal affliction.

Thus TARP's raison d'etre altered from the 'target strike' of what were hard to identify targets to the damage limitation of the country's central players. From the danger of an idealised yet impotent offensive action, to a well-reasoned domestically welcomed defensive play.
Although criticised from some quarters, it has to date largely been used to re-buoy the heavily 'written-down' balance sheets of those damaged entities that are judged inherently critical to avoid market-melt-down (eg Fannie May, Freddie Mac, AIG) or judged inherently strong (eg Goldman Sachs and Morgan Stanley). That criticism should have been largely quelled by the fact that these institutions have as part of that liquidity injection agreed to undertake diktats and accordant measures that redress their own inherent risk exposure. Actions that conform to Bank Company Holding status regulation such as raised capital to leverage cover ratios (typically its Tier 1 level) which in turn has attracted additional equity from respectable domestic and foreign external sources such as Warren Buffet's Berkshire Hathaway and Mitsubishi UFJ.

As a consequence in the flight for safety under TARP, other exposed financial entities have started to court the US government for funding, and as such the latest (if not surprising) community is in the consumer credit-finance arena. The now permitted action of American Express to convert to Bank Holding Company status will give the credit divisions of major American corporations the precedent to seek similar operational protection given their bank-like characters. Indeed the very size of Detroit car-maker's loan & lease exposures weigh heavily on the parent companies' already strained balance sheets and credit ratings. Today the Big 3 are in an unparalleled danger of bankruptcy caused by unprecedented and untenable circumstantial macro and micro headwinds. Headwinds and multiple counternancies which combined evidently highlight a lack of confidence resulting in GM stock plummeting to a 1943 low. [That market counternance consisting of the escalating cost of corporate default insurance for bond-holders and the retraction of insurance for the the Big 3's suppliers, leading to ever declining falls into new realms of 'junk-grade' territory].

The efforts of GM, Ford and Chrysler to highlight their plight and request Capitol Hill's assistance has been a long-time coming, the necessity now here. But although detractors might state that the 2007 New Energy Bill makes proviso for the Big 3, that split $25bn was and is intended for green technologies, not general operations. That promised money needs to be accessed now and protected for only eco-tech projects to ensure US Auto Inc does indeed have a future on the global stage and can play a role as part of the new eco-economy, a new paradigm being created by Californian players in Silicon Valley and the LA mayor's office and LA Port Authority.

However there is now an undeniable need for the government's assistance to ultimately reach that new future, to as Wilbur Ross states “provide a bridging loan” to 2010. Something much needed given the rapid domestic sales crash (from 17m to 11.5m), an unaligned product mix, proportionately heavy overhead costs, ongoing rounds of redundancy costs and an ever increasing squeeze from competitors for the remaining market share. Competitors, ranging from the Japanese, Koreans and now German's (by way of VW) that have realistically better products and deeper pockets to fight price and incentives wars if such a value-destruction continuum is unfortunately maintained. These factors have, and will, continue to create pain via record monthly cash-burns which quickly deplete cash-at-hand and force the sale of its more liquid short-term assets which themselves are endemically seen as undervalued at present unrepresentative 'forced' levels.

Thus the Big 3 are individually and collectively the proverbial “3 Men in a Boat” to re-appropriate Jerome K Jerome's classic literary piece. Unfortunately, the very term banded about - “bail-out” - indicates remedial action regards a sinking vessel, and although the water-level is well past the plimsoll line and very choppy economic waters have washed onto the deck the US industry's situation should perhaps be best described as being an overburdened, essentially antique age old design, struggling to cross hostile waters with heavy currents at many times its payload and so making no headway. Comparable to the all too traumatic Vietnamese fishing boat exodus story of the 1990s which saw too many people and too much baggage on a boat well past its sea-going range limits. In euphemistic essence today the Captains of GM, Ford and Chrysler are requesting the assistance of the US Coastguard.

Unsurprisingly as the first $350bn of the $700bn TARP monies is alloted to the finance industry recipients, Detroit tries to access these funds directly via the prompted appeals of corporate executives, industry related state governors, dealer groups and employees; aswell as indirectly via application to have their credit divisions taken into the Bank Holding Company model.

However, the reality is that in previous years when US automakers had to undertake operational turnarounds, the economic environment was relatively benign compared to today – the recessionary cycle more 'V' and 'U' shaped (as depicted on a graph) demonstrating quick and short-term pull-up. Today economists worry about a possible 'W' and at worst 'L' shaped eventuality which compares respectively to Japan's recent experiences and the earlier 1920/30s US drag then created by the 'dust-bowl' leading to the 'Great Depression'.

And that is the real concern that Congress and the new incoming President and his aids and advisors must deal with.

Listen to the all too evident and available media commentary from 'talking heads' or 'economic experts on a stick' and one will hear multi-various expectations of the depth and length of the downturn the US, UK and Europe are now well within. The Bull's have been present throughout, simplistically seeing an upturn as input costs reduced and inflation stemmed, however all others things aren't equal and although oil is below $60 per barrel the consumer reality has shifted measurably given the fragility of income and jobs, so whilst $4 gas has disappeared (if no further geo-political problems occur) today's new reality to feel comfortable in automotive consumer psychological is a national drop to under $2 gas – which given oil corporation's margins squeeze, a pull-back in western accessed reserves & refining and OPEC's capacity cuts, is plainly never going to happen. Add the absence of easy consumer credit and the automotive feel-good factor – at least, as known before through conspicuous consumption – has gone for many years to come.

The Bull's will also point to a much reduced interest rate cut, now globally co-ordinated, that encourages investment and consumer spending and a strong US dollar that attracts the repatriation of foreign currency reserves giving liquidity to domestic markets. But those rate cuts were provided as stimulus measures that ultimately proved impotent and meaningless given the major contraction of interbank and commercial lending, and now that the US rate is so so low the Fed has little room for further similar action to revive the economy. Moreover, the lack of commercial credit being restrained due to lack of real liquidity and ever decreasing commercial credit ratings particularly hitting SMEs means that the ordinary, historical levels of investment will very probably not emerge soon, especially since big players like GM and its peers in other sectors are deferring their own capital expenditure and new product programmes as part of their needed efforts to shrink. Hence the results of an ongoing credit squeeze and lack of pull-demand from the biggest commercial entities means effective hiatus if not complete stagnation.

And importantly, that paradoxically strong US dollar constricts the demand for US exports at such high costs to foreign buyers (esp UK and Eurozone) and equally suppresses domestic profits from exports to the US, especially so for Japan, Korea and China.

So as things stand there is a long haul to trek for a very very strangled private enterprise which is the bedrock of the capital economy. Thus leaving the onus to governmental Keynesian pro-activity to provide impetus. But that impetus will not emerge for some time, we are still in the wind-down period that ultimately necessitates a complete restructure of much of Western industry – a restructure that puts industry and commerce onto a new solid footing set by new long-term strategic directions - as typified and led by the energy companies - and often provide for new, higher margin and critically cash-flow orientated, business models.

Undoubtedly, there is a United State of General Malais, but the American public must realise that the world of commerce, and America's position within it, is today a very different place to the 1950s which essentially created the ever marginalised industrial template evidently prevalent today.

However, it is at such times of change that the call of, and for, entrepreneurialism is loudest, and the US - from Senator to 'Joe the Plumber' - need to demonstrate that strength and conviction as new economic foundations are re-built. The US effectively exported capitalism and now must be seen to, along with other national stakeholders (esp China, India, Russian and Brazil) be seen to act in unison to bolster that motivational ideology.

To falter with a retraction to short-termist protectionist policy-making (reminiscent of the now proven damaging Smoot-Hawley tariffs) would highlight the hypocracy of previous empty rhetoric and in the long-term embed a United State of General Malais for far longer than the period presently faced. So President (Elect) Obama will need to sugar-coat the bitter pill to be swallowed,which in turn requires entreprenerialism at its best.

So whilst investment-auto-motives encourages the use of Federal monies to assist GM et al over the short-term, such funds cannot be used simply to extend the life of the 'obese' industry we witness today. Such funds must be used, with formalised agreements to transform the very structure of the industry just as the previous $25bn is directly solely at green R&D and production programmes.

At a time when Daimler's Dieter Zetsche rightly calls for a complete change to automotive vehicle design, so a concurrent call must be made for industry structure and business model design, reaching as far as a disposal of Chrysler to a foreign buyer, a break-up of GMNA divisions, increased domestic & foreign collaboration to obtain efficiencies and access sector propelling technologies that fit within a new era inter-connected US industry framework

Wednesday, 12 November 2008

Macro-Level Trends – Globalisation – The Armistice as Poignant Remembrance.

Yesterday Remembrance Services that marked the 90th anniversary of the end of WW1 were held in many nations across the face of the globe. Services from the humble village church to the gravitas of the Cenotaph in Whitehall conveyed the memory of, and gratitude to, all those who have fallen in war.

The end of WW1 was not “the great war to end all wars”, indeed the very meaning of 'armistice' indicates 'truce' not finale, a sad fact highlighted only a generation later by WW2. It was that conflict that in turn led to the major super-powers of the day to create the Bretton Woods agreement that would stabilise the fundamentals of global trade. A major landmark, given that it was the perception of unfair inter-regional trade practices that has been the perennial problem behind a long history of international conflict.

90 years on from that philosophical and literal spark in the Balkans that set the first of a billion bullets flying, the leaders of the G20 nations are due to confer at the forthcoming summit to try and stem the global fiscal melt-down and optimistically look to set out a new roadmap – a Bretton Woods II as some have claimed.

As some leading commentators have stated, creating such a far reaching and transformative accord of BW ilk may at this juncture be 'over egging the mix'. Since although there has been a massive global financial fracture different regions have suffered at different rates and therefore will be more vs less inclined to a radical re-alignment of trade policy-making.

So whilst there has been a growing agreement for international fiscal co-ordination of stimulus packages so that each nation or region can assist themselves - ranging from the US's $700bn TARP to talk of an EU Fund to Japan's $51bn effort to China's $589bn by the CCP – the idea of an all-pervasive, completely global agreement has unsurprisingly set economists and politicians chattering. But it cannot be denied that today's world is fiscally inter-connected, both as we've seen with financial markets that operate a myriad of instruments that support the 'enterprise economy' and the myriad of products shipped across oceans and services proffered via a global e-based hyperspace that underpins the 'real economy'

But there is no singularly similar action plan that each individual national economy can or should undertake, each effort although globally co-ordinated must be appropriate to domestic and foreign trade needs and growth plans. This basic premis is obvious given the 'differing states of differing states'. But exactly how this is achieved quickly and efficiently will be the major headache.

Given the size of the global financial fall-out there have been calls for increased regional and international regulation, and the push to align US accounting standards from GAAP to IFRS will undoubtedly be used as an argument co-coalesce the 21 or so central bank models currently in existence. [That #21 derived from a recent lecture by Sir Howard Davies at the London School of Economics].

However, utilising the GAAP to IFRS vehicle to successfully promote global fiscal policy alignment might be a problem, since the US acceptance of the new accounts principles may yet be resisted by the Obama government given negative outcome that running the model has had on blue-chip example accounts results. It will take a brave US president indeed to accept that this is the US's responsibility to see a better international outcome further down the road. That would create yet more short to medium -term pain for the US economy but ultimately could strengthen its foothold against the ever more internationally accepted Euro (and possible petro-Euro), especially regards an extended period of attracting foreign direct investment (FDI).

At this poignant and prescient time, the G20 summit will hopefully remember the lessons drawn from the first half of the 20th century, and act responsibly. As the spectre of terrorism (born from a perception of a split world) hopefully wanes, and the topic of climate change becomes the ethereal yet powerful new enemy for all, we will hopefully witness a new age of alliance in fiscal framework agreements and subsequent domestic government policy that provides a global mutuality without the constraint of independence that the powerful essentially 'emerged' BRIC+ nations demand. As the FT's Martin Wolf and the LSE's Davies correctly concur, there must be a new era and realm of international diplomacy and relationship building.

To not achieve this will dangerously put the world back 90 years or more, to revisit a time of sullied, aneamic economies that creates insularity and trade protectionism and engenders nationalism, xenophobia and possibly fascist international moves motivated by a sense of economic loss that was previously and 'rightfully' theirs.

To conclude, whilst we remember the past and those who suffered, we should not and cannot sleep-walk back 94 years if the peoples of the world are to win as a whole. We must see the individual and national Chinaman, American, Arab, European, African and Asian as trading partners, not economic threats.

Monday, 3 November 2008

investment-auto-motives' 100th Web-Blog Communique

The intention of this post is to proudly and unabashedly celebrate the 100th posting of the investment-auto-motives web-blog.

As familiar readers well recognise, the remit of the web-blog has been to reflect the spirit of Auto-Antenna, our initial informational vehicle (previously in electronic & hard-copy) that imbued the heart of investment-auto-motives' consulting remit:

- Company Focus : strategic, operational, projects evaluation
- New Business Opportunities : identification of specific value arenas
- Industry Practice : structure, models, mentalities & approaches
- Macro-Level Trends : PESTEL external influences & drivers
- Micro-Level Trends : full internal operational value-chain (from R&D to EoL)
- Cross-Industry Learning: case studies translation & application

That remit delivers prescient research, analysis and recommendation for seniors within the investment community, automotive industry and government – an often triangular inter-relationship that individually and combined seeks to maximise return on investment; both fiscally and philosophically.

To this end, I wish to thank the following at this reflective & motivationally highly encouraging juncture:

Senator Kim Carr and Rt. Hon. Steve Brack, over-seeing the Australian government's Automotive Review.

Richard Parry Jones, Chairman of the UK government Automotive Enquiry,

George Kennedy, Club Secretary at The Royal Automobile Club for the club's kind liaison.

John Lawson at Citi, Adam Jonas at Morgan Stanley & Keith Hayes at Goldman Sachs and many other perhaps less high profile City & Wall Street analysts. Also importantly, Henry Frantzen head of external commissioning at Goldman's.

Jerome B York at Tracinda and Nicholas Clarry of CVC and others in the private equity field.

The Partners and Autos team at Freshfields Bruckhaus Deringer legal practice.

David Leggett at just-auto, Keith Crain & Edward Lapham at Automotive News, Joe White & Neal Boudette at the Wall Street Journal and John Gapper & Martin Wolf and all on the autos section at the Financial Times. In addition the myriad of Bloomberg & Reuters new hounds too numerous to mention.

To one and all, my sincerest thanks

As of today, we witness the very nature and landscape of the global automotive industry irrefutably changing, not simply in its notional progress of international coverage & social coverage, but an advancement in an unparalleled age that will (possibly radically) alter the very structures that have been inherent for so long; both in the West and East.

In the West, from a new wave of M&A and consolidation, to the criticality of accessing capital & liquidity that will more heavily prompt business model thinking, to the possible stake-holdings of domestic governments to ensure industry stability and an aligned strategic direction with national aims. But ultimately through well prescribed and dispensed private and public finances that creates an evolved platform upon which to prove that it is the very will and entrepreneurship inherent in the human spirit that will evolve and strengthen capitalism as we know it.

In the East, that model has even with its market jitters become the post 1989 norm, and although presently dragging as a consequence of Western sentiment and fundamentals over-spill, will given its strong standing and partial de-coupling continue to prove itself as the vehicle for growth and regional transformation. China has been the undoubted success story that others from Vietnam to a tentative North Korea seek to follow.

The fiscal and climate challenges and themes of the 21st century are clear, and although there is undoubted political friction in orientation and coalescence of what can be disparate national agendas, the automotive industry's developmental journey will along with the structural shift in global banking policy and energy policy be the core change agents to create an aligned world of values-driven prosperity and convenience.

Hence this 100th communique from investment-auto-motives comes at a crucial time, and we look forward to playing our role. In the Western automotive industry's new shifted regime through continued diagnosis, prescription, cure & maintained health, and in the Eastern sector to promote the progress of commercial, cultural and social advancement.

Yours most sincerely


Thursday, 30 October 2008

Company Focus – Porsche Automobil SE – Trimming the Hedgies

This week's Dax 30 phenomena will be the talking point of hedge-funds and regulators alike. A market contortion created by the after-shock once it dawned on the investment community that Porsche SE had silently but contractually scooped up a second majority stake in VW AG through a massive batch of cash-settled options set against VW common shares. This represented 31.5% of the share-issue in addition to the previous 42.6%, equaling 74.1%.

With approximately 13% of the free-float on loan to hedge-funds for shorting purposes the Porsche announcement set fund managers scuttling back to buy back into VW stock. The problem was stock availability and elasticity, turning what is usually a very liquid instrument and asset into something decidedly frozen. It rapidly turned the remaining few stock sellers into price-fixers who recognised the level of buy-back panic and temporarily effected a lucrative auction.

Previous weeks has seen 2 similar events of contorted peaks, but prior to this 3rd enormous peak the markets thought the concerns had been contained and were over. Piech and Porsche knew better.

Much originates from the investment community's mistake to assume Porsche's stake build into VW would consist of Preference stock, but given its more limited availability and higher profile (esp to watchful VW management) why would such an assumption have been made? And the very fact that Piech's long-time plainly lauded ambition has been to envelope VW, has been acutely reflected by Porsche's actions as a self-perpetuating hedge fund in order to build its capital position. Yes, there were previous mutings that Porsche wanted only a limited stake to ensure opportunity for operational synergies but, given Piech's voracious business appetite and Porsche's limited organic growth capabilities, such a corporate position should have been seen as part of a bigger Porsche plan.

That plan, we believe, looks three-fold:

Firstly, to access VW envious at-hand and other liquid assets in the short term able to thus use VW as banker for Porsche Cars operations given the endemic credit freeze.
Secondly, to benefit from the expected major margin improvement and expected major sales growth of VW Golf series VI. Essentially the global, mainstream car that is well recognised as premium in its segment. (Strong management focus has been appointed to this critical project, spanning savings across materials, purchasing, productivity and enhancement in volume and FX currency off-setting)
Thirdly, to piggy-back VW/Audi technologies, platforms, dealer network and associated credit division to enable Porsche to broaden its product portfolio far more speedily than it could otherwise – we believe to possibly become the new BMW, mimicking BMW's impressive rise from the 1970s.

To undertake the latter and remain credible as truly Porsche, requires Porsche in the business and operational driving seat, and that is what Piech has ensured. He recognised that whilst the rest of the world looks to alliances that his company's experiences as an engineering and production partner on projects like Cayenne / Toureg / Q7 were less than satisfactory regards preserving brand quality. And that this would always be the case given the low volume take Porsche represented in such projects. Instead, leading with Porsche means that future Porsche-VW model programmes can have a far greater Porsche input, and with swelling global platform volumes, allow the higher Porsche related on-cost (of specific components etc) be absorbed into the expansive products programme.

That way Porsche stays Porsche. And as importantly, from the public's perspective, the VW line-up from Audi and down benefit from DNA origins and association.

At a time when German industry has been consolidating through an ever implicit 'semi-protectionist' political tone enabled with industrial family money, those in the Reichstag and the Deutsche Borse who are critical of Piech's methods may do well to recognise the bigger picture of the resultant effect. Yes there has been temporary, probably inadvertent market surprise and reaction, but Porsche's actions may well have greatly consolidated and strengthened a major pillar of Germany's economic value-creation machine.

Piech and the dual intelligences of his executive team and company solicitors and brokers have performed a near faultless 'fait accompli'.

As for that supposedly conservative arbitrage play undertaken by the now famished hedge-funds - shorting VW expecting it to return to sector norm and Dax 30 norm valuations - the truth is that they should have looked harder at the underlying realities of the situation that was indeed driving up the VW stock.

Fund managers of whatever persuasion, 'Beta' index-orientated or supposedly 'Alpha' smart, tend to be herd creatures, and generally right to be so given the safety of numbers and the market power of numbers. But that doesn't preclude them from their own proactive research, analysis and determination on each and every investment decision.

Unfortunately for the sprawling many who had simply rode the previous economic growth wave, it was the apparent absence of a broader comprehension of the situation - the importance of the qualitative became clear, beyond the easy-spot quantitative fundamentals that promised so much.

As for this historic Porsche-VW tie-up, it sits as an early player and beneficiary within what investment-auto-motives believes to be an increasingly probable eventuality of European automotive consolidation. Consolidation that will continue via both cash-rich enterprises picking over fallen peers openly or secretively for synergies and enhancement with divisional 'bolt-ons'; and governmentally sanctioned M&A to strengthen singular nation's and Europe's auto-sector standings.

The united voices of France's Nicolas Sarkozy and Italy's Silvio Berlusconi are essentially calling for the ECB to provide aid packages to Automotive similar to Washington's efforts, and that will generate an official enquiry that will consequently re-organise the industry to consolidate and climb the industrial value curve.

The real politik that surged through Germany's highly integrated communicational grapevine shows them ahead of the curve, even if it has had to try and be seen as balancing public national interest vs private empire building.

But even if Porsche has been crticised as “part hedge-fund, part automaker”, the formula has been astoundingly successful. The question is, now that it controls VW with its highly cash generative base, will it eventually re-play the same fiscal engineering strategy and tactics over the coming years to perhaps absorb yet another player in either the US, Europe, Japan, China or SE Asia?

The most obvious candidates are the Chinese alliances of FAW-VW and SAIC-VW but Chinese authorities would probably wish to IPO them first to gain maximum value extraction and so full take over would theoretically be at least a decade away. Conversely, VW has over the last year or so periodically mentioned wanting to be the European Toyota, but why mimic Toyota when Porsche-VW could latterly feasibly try similar takeover actions with part by part stake-builds.

As the US government looks hard at the SEC which in turn looks hard at the NYSE's regulatory framework the likelihood of buying slowly into Toyota secretively may be harder and harder, but the TSE's Nekkei , given Japan's never-ending economic anemia, may embue relaxed regulation to encourage transactional activity...and if so, who knows, even Toyota could be on Piech's, or at least Porsche-VW's, far horizon.