Tuesday, 15 January 2008

Industry Practice - Detroit Auto Show 07-08 – Reading Between the [Model] Lines

The 2008 NAIAS is underway this week for press and industry participants. This show obviously demonstrates the US Big 3’s intentions, domestically and globally, and should be assessed to better appreciate the effects their immediate and longer-term strategic directions will yield. Detroit sets a tone and provides clues as to which vehicular arenas these VMs will be seeking to gain competitive, sales and margin advantage. 2008 looks to offer a lowly 15-15.5m US volume, so we hope the Big 3 look to product advantage messages and not another round of value destroying sales incentives at home, whilst offering new hope in the global battle.

As today's FT depicts, GM & Ford have seen a halving of their share-price over the last decade compared to a doubling of Toyota's. So will this year see the start of re-surgence after the year end large stock sell-off at the news of an expected US recession hitting autos and housing hardest? Only time will tell, but with such dark clouds hovering all will have to search harder to identify those auto-related areas (from R&D companies to core-parts suppliers to diesel and bio fuel distributors) that promise worthwhile returns. But let us not immediately discount Detroit's Big 3, instead viewing them as indicators of value arenas most obviously seen by the GM-Coskata new-ethanol-energy partnership announced.

Beyond the obvious clutch of new concepts and NA model releases, that illustrate immediate product availability, we would hope to see informational updates from the US Big 3 on those ‘marker’ vehicles from 2007 to demonstrate that they were indeed under development, enabling critical business and projects assessment, and not just used as old-fashioned show-stoppers.

GM [3.82m units in 2007]
Talk of Detroit ’07 (indeed much of the year) was the much lauded Chevrolet Volt and the ideal of the viable ‘electric car’ via the E-Flex propulsion system – in reality a hybrid electric motor & recharge/drive flex-fuel engine. Central to the industry talk was of course cost and GM ‘deliverability’ given the reliance on advanced L-Ion battery pack. A formal update on R&D/project progress would be in order to maintain investor and public belief in the proposal – especially regards L-Ion - since history lessons suggest that the radical concepts shown during lean & fuel crisis years don’t come to fruition as oil prices eventually subsume to historic norms. However, even if not fully delivered, we see Volt intrinsically pushing the development and cost-down of hybrid technology (for mid-size eg Malibu) through the GM hybrid alliance with other automakers.

For ’08 unsurprisingly we would hope to see a continued focus on small & compact cars given the impetus of 3-way concepts competition of last year (ie Beat, Groove, Trax), The successor being seen as a desperately needed successor to Aveo (sedan & 5) and GMDAT small cars. We believe/hope that development work was already well under way with the trio’s winner simply a public ‘car-clinic’ ratification of chosen style). Investment and industry circles would be keen to view any updates on platform and BIW adaptability to cost-consciously modify such a high volume platform over its lifetime and across brand/global variants. Interesting would be the ‘package protection’ potential for efficient 3-cylinder rear-engine, low spec –low cost variants (specifically powertrain) replacing the highly popular Matiz formula across India/Asia (less so China now).

Cadillac is highlighted with the CTS Coupe again, CTS-V, Escalade Hybrid and Provoq concept after Lincoln’s good show in 07. But in truth, the angular ‘Stealth’ Cadillac style is long-in-the-tooth. A much needed radical change in 2001 it was destined to age quickly, especially against the European set, and so newcomers such as the Coupe and Provoq/BRX, although ‘different’ relative to competitors, aren’t as aesthetically sophisticated. In truth Cadillac desperately needs a new design direction with importantly a better considered, more broadly applicable, palette philosophy if it is to maintain momentum and compete against what look to be handsome ‘clean’ future Lincolns.

SAAB’s re-re-release of the 9-4X as a premium cross-over against the Germans, Infiniti, Lexus, Lincoln etc promises to make waves in the segment, sell well and produce good revenues. Originally touted on a Cadillac base, then the Subaru Tribeca base, the vehicle is now apparently derived from within the GM stable again. If the case, the margins will obviously better the transfer price agreed with Subaru, but to be honest we would have rather seen the vehicle developed from Tribeca, launched earlier to gain a foothold in the segment, and grow SAAB credientials & revenue. However, at least from the perspective of product integrity and appeal, we have greater hopes for this model than sister sedans/hatches. In this sector SAAB has greater brand relevance in balancing 4x4 ownership against the eco social zeitgeist – the acceptable face of 4x4s if you will. Although the concept looks good, the ‘finish’ of final product will be key, and we suspect that SAAB's design & engineering development team will have a freer hand if based on perhaps the global AWD Theta platform.

SAAB design has been through a transition period of late, many of the 9-2, 9-3 & 9-5 cars obvious unsuccessful aesthetic ‘grafts’ from sister company models, but the 9-4X should be more successful. Given BMW X3’s lack of market favour, and yet to be released Audi Q5 and Merc baby GL, the 9-4X looks like a very promising proposal indeed for those seeking a ‘high-minded’ premium European alternative.

2007 saw SAAB sell a lowly 133,000 units globally (vs Volvos 600,000) so the contribution the new car makes should very conservatively hit the 175,000 target SAAB HQ seeks. We believe this car and successors, as a more integrated part of the GM multi-brand platform design process, may well have the credentials to lift SAAB substantially, and if successor product is as appealing, to reach 320,000 over the next 5-7 years, given perceived Eco credentials and migrants wishing to find alternatives to ‘aggressive’ German marques.

Critically, to maintain its uniqueness SAAB must return to its purist (Sixten Sason) design roots to do so. However, the theoretical sizeable per unit margins available to recoup should provide the SAAB division with technical flexibility to lead in specific USP technology (esp weight, aero & safety) so as to avoid GM platform ‘dilution’; the type of which we’ve seen in recent years. Given SAAB’s small voice in the GM empire, maintaining a heavyweight divisional champion is still very necessary.

Trucks, although suffering a downturn (GM down 4% for 2007), still provide massive revenues that need to be protected in the face of Toyota, Nissan & of course Ford F-series. Cylinder De-activation technology has been adopted for highway conditions. However, given legislative CAFÉ/CO2 pressures, beyond the Yukon Hybrid announcement, we would like to see the technology brought to the Silverado truck line, enhanced volumes reducing hybrid system costs and providing buyer reason to stay with profitable full-size trucks.

Ford [2.57m units in 2007]
We expect Ford to provide something interesting and possibly provocative this year given GM’s Volt success in the limelight last year. Marry GM’s perceptional advantage with the release of real-world Malibu and add Ford’s 24% drop in ’07 car sales (due to ageing Mustang and Insipid Taurus) and Blue Oval should be coming out fighting at Detroit ’08 to maintain external confidence. 2007 was the year it lost its 75 year #2 spot to Toyota so we want to see the signs of a comeback.

Last year saw J Mays unveil the Airstream concept, which along with Peter Horbury’s SuperChief truck concept (named after the classic train) demonstrate that Ford is trying to continue and capture the essence of American-Icons, a natural onward direction given re-works of Thunderbird, GT40, Mustang etc. Under the continued ‘Bold Moves’ campaign we expect Ford to expand ‘characterisation’ as a blue-oval theme which (like Retro-Futurist Beetle, New Mini, New 500 etc) demonstrate Design’s role in moulding perception to deliver higher margin products.

‘Airstream’ looks to re-invent the Mini-Van formulae, injecting interest into the much declined segment. The truth is that mono-volume vehicles continue offer fundamentally right attributes in our multi-role lives, so variations on theme Like airstream) much needed.

[To maximise profitability, ideally the industry would offer only modifiable monoboxes as mainstream high volume vehicles, today’s ostensibly very different and costly variants reduced to variants of. Think the MPV business model (Zafira, Scenic etc) further stretched to include a spectrum of cost efficient, appealing variants from limousines to camper-vans utilising a broad spectrum of exterior & interior fittings].

‘Interceptor’ was also shown in ’07 depicting a brutalist, performance interpretation of mid-large sedans. Born from the 4-door Mustang ideal married with public’s love of muscular F-series for those who want a 'big-bad' sedan (a la 300C) or with the need to economically ‘trade-down’. Investment-auto-motives believes that Interceptor could beyond sedans, pave the way for a car-derived pick-up come back in the US (and answer the criticisms of Dodge’s larger Rampage concept in ’06). Such ‘Utes’ have always been popular in Australia and Ford’s Falcon Ute a legend. Create an Interceptor inspired Ute for the US and Australia from a semi-monocoque base (new E8 Falcon) and we could see a re-popularisation of the genre (utilisng V6 twin turbos instead of the 'dirty' V8) in the face of Green Consciousness. Could Ford steal the legend from GM and its El Camino (and rumour of a Holden based Pontiac GS8) without cannibalising existing truck sales? The Brutalist Ute = “Brute”. Very probably under review at present.

Again like GM, Ford will need to be seen doing something on the F-series to maintain waning fleet and public interest given that trucks = 62% of sales and 12% drop YOY. Invisible cost-down, gas mileage and imaginative features are key, maintaining close sales relationships with the corporate and private building trade.

In ’08 Ford will undoubtedly be touting the new Jaguar XF and Land Rover LRX concepts at Detroit as it moves into the final few months of negotiation with TATA, so window-dressing and talking-up potential US volumes will be order of the day behind the scenes.

Chrysler [2.1m units in 2007]
Under Cerberus, we expect to see Chrysler, Jeep and Dodge produce future offerings that demonstrate the march of progress under the PE firm. The small Hornet concept being developed with Chery was well received both in product and business case form, so we expect to see more of the same acumen at Detroit, even if over-played with the exploitation of their ENVI Propulsion R&D programme.

Chrysler Cars has done well within Minivan segment decline, capturing increased market share, as would have been hoped given its Minivan reputation born from its 1980s origination of the formula. So we expect to see new re-inventions of the type, in size and feature, as seen with the L-ion powered parallel hybrid Eco-Voyager, concept to assist Chrysler’s prime position in this vital segment. In reality expect a mid-size MPV for global markets that utilises Bluetec diesel technology originated from Daimler.

The Nassau of ’07 was well received demonstrating a willingness to break into compact segment territory with what seems a pertinent upscale offering, recognising that its mid-large cars, minivans &SUVs are under threat in the US and to create something far more appropriate for ROW markets, especially Europe and China.

The Firepower concept, utilising the Dodge Viper base, looks to be little more than a publicity attempt at trying to maintain Chrysler as a mid-point near luxury contender.
Given the lacklustre sales performance of the far cheaper, higher volume Cross-Fire, this may be an attempt to simply provide a Maserati-esque niche volume halo car. As such the on-paper business case could be created to offer a high margin project, but relative contribution from maybe 1-2000 vehicles will be miniscule for accounting purposes.

Jeep has little to show this year since the large relatively recent product roll-out Patriot and Compass. Given worries about its 4x4 image it uses the show to showcase the intended incorporation of Green technologies via the application of alternative fuel and hybrid systems (inc L-Ion) packs and light construction materials, aluminium frames and composite skin panels as seen in the Renegade small ‘City Jeep’ concept.
But once again, this is corporate show-boating. The current Jeep vehicle portfolio will have to work hard to maintain momentum for some time and given less than wonderful domestic and global market reaction to Compass and Patriot that will be hard to do.

Dodge has expanded its brand over the last few years with car based products to counter-balance overtly heavy truck reliance, the Challenger muscle-car most visible.
But in truth the newish cars brought to market have been unremarkable. The vehicle portfolio is somewhat of a misnomer, trying to elicit Challenger personality in all but woefully failing to do so. Relative to IRR, we imagine probably the worst (ie cost inefficient) line-up for years even though they are theoretically low-cost created variants.

The Dodge Zeo is the last of the Chrysler ENVI-based concept trio, another ‘remote’ car based on a the popular Coupe 2+2 package a la RX-8. And the performance R/T Caravan notionally stretches the popular Minivan’s appeal.

Cerberus and Chrysler are offerng promises of the future as opposed to concrete products of today that would markedly raise income levels for Cerberus in the near term. For Cerberus focus is really on operational efficiencies and the leverage of JVs. Detroit ’08 is really being used to demonstrate the internal pace of change for the #3 US car-maker, to allay public fears regards its US based plants and enthuse the investment community about it’s bright ‘turnaround’ future.

“Jam Tomorrow” is the unsurprising story from Detroit’s Big 3, re-echoing the message of recent years that financiers are well aware of and having to wear in the expectation of the promised 09 and beyond bounce-back. This contrasts against the strides of progress made by the Japanese, Koreans and the continued credibility demonstrations coming from the Chinese 5, including EV claims using current (ie non L-ion) technology.

At this point we see implicitly that a number of new vehicle programmes underway for US producers, bearing little fruit in the short-medium term and weighed down by economic gloom and fulsome inventories. Instead, value-seekers within auto may well best identify those parts-producers who are well placed from these NPD programmes, both at home and abroad. Obviously the idealised adoption of L-ion technology makes the headlines, bouying R&D and supplier valuations, as does the national focus on bio-fuel R&D, development, refining and distribution.

But reading between the (model) lines we see a presently small, but concerted effort, of a multi-VM mandate backing a US diesel push. Showcased in domestic both pick-ups and German supercars, the looks to be pinzer attack on the public's consciousness to slowly accept the MPG & CO2 'inevitability' of clean, high performance diesels, forcasted to grow from 3% of US vehicle sales today to 15% by 2015.