Monday, 4 February 2008

Parallel Learning – Corporate Financing Models – The Case for ‘Stock Cars’?

For the average Joe & Joanna, their purchase of a new vehicle has virtually no extended economic relationship to the chosen auto-manufacturer beyond the price paid and credit terms agreed.

A vital question must surely be: "can a VM extend the basis of the economic relationship further still?" Academics and Executives alike have long looked at the extended up-stream value chain activities to provide additional revenue streams; exploring insurance, servicing, fuelling etc. This is recognised as the conventional ‘beyond’ upon which the fundamentals of a brand-enterprise is based.

However, investment-auto-motives believes that brand preference and through-life loyalty could provide an alternative, simpler option for directly raising capital from buyers. The clue is in the title and it’s called ‘Stock Cars’.

The simple, but potentially powerful, concept would be to directly link the product purchase to availability of a new (secondary) company stock. A subordinate class that infers no voting rights and probably without the liquidity of Ordinary shares, but provides other compensatory advantages.

The theory connects the totems of brand loyalty to commercial success, providing a bridge between a consumer’s emotional attachment of the product to the continued success of the company that created that brand magic in the first instance.

As Marketing 101 states: good products, designed for purpose and user satisfaction, engenders brand attachment and in turn develops a respect for the automotive company. Good companies produce good products & services which in turn drive the successful growth of the company. Ferrari and Toyota demonstrate the polar extremes of the basic model.

Perhaps the most prevalent examples today are the likes of Apple, Google, YouTube and SecondLife. In short there’s a philosophical melding of company and buyer, best exemplified by the shareware communities that invest their time and financial donations to a commercial cause.

These examples aren’t meant as direct comparables to vehicle buyers, but they do show the level of inter-connectivity that is evolving.

Our thesis is that repeat car buyers, who’ve taken the brand to heart and have become ambassadors, are able to literally buy into, and help fund, the continued success of the company. It can be described as an emotionally created, rationally developed, literal value (adding) chain.

From the consumer perspective, the opportunity to buy-into the brand (beyond the car) instils the very essence of a co-operative relationship, and obviously from the corporate perspective, it allows for additional, stable and known-cost, fund raising that is used to once again serve the customer via improved product R&D, Quality etc.

Ordinarily the inter-connection between the Balance Sheet and Product is the firm’s Finance arm that provides credit (eg GMAC, Ford Credit etc). So given that the infrastructure is broadly in place, could it not additionally arrange (via an in-house or associate broker) such new corporate financial instruments.

(Take the theory to a natural conclusion and the company could source much of its short and long term debt directly from its customer-base at reduced interest rates given the ‘mutuality’ of 2 parties)

Although the basic ‘Stock-Car’ idea invites obvious questioning regards the actual cost of raising capital through stock creation, and the detriment to present shareholders, the idea could have important merits in as much as the new group of stock buyers would not be purely motivated by stock performance and dividends received - unlike a traditional institutional or private buyer.

Perhaps the best example of an emotionally attached, extremely supportive, shareholder groups are those related to football clubs like Manchester United Supporter’s Trust (MUST), or indeed the financial interest Arsenal, Tottenham, etc supporters have in their publicly floated club companies.

The idea would be to use such examples as best practice case studies, reviewing how it could be achieved for the auto-industry. The first obvious step is the inclusion of brand specific classic & contemporary car clubs with enthusiastic participants, eventually broadening the scheme out.

Of course different brands have different levels of following, and critically, different types of customer (brand loyalist) types each with different appreciation for such a scheme – a Bentley customer perhaps rather more adroit with the idea of share-ownership than a Skoda owner, but their enthusiasm ironically possibly similar?

But although the premium brands (R-R, Bentley, Merc, BMW etc) look to be the obvious start point for such a scheme, their present-day relatively high ROI levels and general credit-worthiness wouldn’t perhaps necessitate the scheme (for the time being).
Perhaps other more pertinent companies are the likes of the (now global) Chevrolet, or Skoda, or even more relative TATA or Chinese auto-companies. The indigenous loyalty of ‘Chindia’ is extremely high - national pride, cultural connections and being seen to do the right thing well renowned. To this end, could the ‘Stock-Car’ scheme be developed in these regions, especially in the area of mass-motoring as we’ve recently witnessed with the TATA Nano.

From this perspective, it could actively involve the lower levels of the burgeoning new middle-class in additionally contributing (beyond the cost of the car) to the growth or their nation’s industrial base and economic success, aswell as introduce them into the idea of stock-markets, the workings of the broader financial world. And for the companies themselves, their customers become more than simple users, they become psychologically intrinsically linked to ‘their’ brand.