Thursday, 17 April 2008

Company Focus – Manganese Bronze / LTI – Hailing a New Ride Eastward

In niche manufacture supply chain relations and dependency means everything, and such producers rely heavily on the supply and payment flexibility of said suppliers, so whilst there have been forays into low-cost production centres from as far afield as Essex to Tunisia and Tamworth to the CIS, UK specialists have historically stayed nation-bound, unless sold-off to foreign owners; as witnessed with TVR to the Smolensky’s – Blackpool to Russia.

These industry ‘minnows’ are the philosophical and operational polar opposites of their major VM counterparts, often dealing in the high hundreds of units on an annual basis as opposed to the hundreds of thousand or millions. However, aiming for a new position further up the output scale, lifting 3,200 units pa to an ambitious 20,000, is London Taxis International, and its conglomerate parent Manganese Bronze, the renowned makers of the iconic London Taxi Cab.

Whilst the niche auto-sector has had to look closer to home for assembly cost savings, the theoretical ‘match made in heaven’ between the UK’s niche auto-companies and China’s low cost capabilities has long been recognised. But given the often UK localised, small scale supply-chain that feeds such businesses, and long relatively costly, transportation through China and over-seas, the logistical element can prove problematic unless volumes are raised to overcome the hurdle. Not may niche-makers can substantially grow their business-base over-night to take such advantage, and so have been caught between the Sino-promise and Anglo-reality.

Manganese Bronze and LTI are in the process of dispelling that paradigm, the volume-rise key to the business case delivering. LTI was for many years considered a relic of the trade, unchanged for decades with its core, long-running FX2/3/4 vehicles but the business at the time was very profitable thanks to long-amortised tooling and basic engineering that had been incrementally cost-shaved year on year. The high margins were protected by a virtual monopoly on the approved taxi business, as it ‘made hay under the blue skies’ of protectionism by the Public Carriage Office’s licensing specifications; so creating an effective regulatory barrier to new entrants.

Hence LTI was left alone inside its own eco-system, whilst the world of private passenger car design evolved. The FX - although a dinosaur - was practical and profitable for LTI and its cabbie customers.

The modern world started to encroach in the early 1980s when other specialist manufacturers were encouraged to replace the archaic FX, leading to MetroCab Ltd introducing their very geometric vehicle, a then very ‘modern’ package efficient vehicle. Outside of London it sold well, taking LTI market share thanks to price and running cost advantages, but inside the capital where the classic FX’s shape and history was a much loved attribute by tourists and Londoners alike, the MetroCab foundered. London cabbies knew that shape was a part of what earned their fares.

Although LTI was saved by circumstantial fortune the MetroCab affair shook the complacency of the company management who realised that ‘taxi-land’, even London’s ‘taxi-land’, may not be theirs for the keeping after all. That realisation, along with the massive (safety, comfort and emissions) design chasm that had emerged between the FX and cars demonstrated that the FX had reached the end of the road and needed replacing with another FX retro-styled vehicle. The mid 90s TXI was born, but whilst safer and nicer than the old cab has been the bane of cabbie grumbles, caught between the advantages of new MPVs and even the old FX. There major concern, beyond driver ergonomics of the seat and MPG, is the massive fall in residual values of the vehicle since, unlike the old FX that went-on to provincial territories, Manchester, Birmingham, Liverpool, Glasgow etc cabbies have kept with the MetroCab and its successor variants, and 2nd hand TXIs compare against new MetroCabs, let alone 2nd hand prices. So an enlarged used TXI market would be a London cabbies dream, and that might eventually come about for right-hand drive foreign markets such as Australia and South Africa, and remotely possibly Japan, if Manganese Bronze’s and LTI’s long-held international expansion plans materialise.

That 20,000 unit pa ambition is underpinned by a JV with Geely based in Shanghai, which although proffers amongst the costliest labour in China, does still look attractive even with a rising Rinminbi. Especially so as the TXI, although less labour intensive to assemble compared to the FX, still depends on substantial man-hour input – it was actually designed that way to avoid heavy tooling CapEx costs.

The JV provides the basis for a greatly improved niche vehicle business model, massively reducing the overhead, variable and stock-item costs to provide greatly enlarged margins and profitability. And importantly, room to inject a final product pricing elasticity that may be required when endeavouring to secure new international contracts from new clients that have in many instances been ‘locally loyal’ for decades.

But ultimately the product and service offering from LTI will need to be developed to be far more than the (first glance) apparent ‘icon vehicle’ that visually adds to the city-scape. It’s a good start and differentiator, but needs to be worked into the contextual background that’s being created by increasingly high profile City Mayors that have been given their head in more and more cities since Rudy Giuliani & Michael Bloomberg in New York and Ken Livingstone in London highlighted the power to transform. So TXI has to develop to fit within individual (and hopefully ultimately separately convergent) City politics and policies that would back a unique City Cab initiative. Thankfully for TXI there are very few regulatory bodies abroad akin to the UK’s Public Carriage Office that still essentially set such specific design standards.

[Paradoxically one might expect emergent countries to use such legal mechanisms to partially protect their own indigenous auto-sectors; however given that car-based taxi-fleets are such as corner-stone of an emerging market - esp with foreign JVs (eg China’s use of the old VW Passat/Santana) – such barriers have proven pointless].

However, as of today, LTI is under pressure to meet the initial 500 unit order of that ideal 20,000, as industry insiders watch to observe proof of the JVs operational integrity, both in the efficiency of completing the 1st order run and the level of Chinese (vs UK) product quality. But ultimately from a City analysts’ perspective the ‘proof is in the pudding’ and that pudding includes anticipated UK market fortunes. As the share-price drop indicated, unfortunately for Manganese Bronze the sentiment is conservative, since LTI is caught between the reality of a (possibly heavy) reduction in London/UK sales given the economic climate and the promise of its new ‘Chinese 500’ enterprise performing perfectly. [Privately we suspect the customers who’ve ordered the Chinese Cabs may try and find fault in the product, delivery, or contract so as to reduce their payment and LTI’s receivable invoice value].

However, that hopefully unrealised concern aired, this is indeed a new era for MB & LTI, the ambition has for so many years appeared as pure speculation, however as those who’ve been there know, Chinese negotiation and agreement is a frustratingly slow and painstaking process.

But the result is that the foundations have been set, and LTI needs to now shift into an enhanced world-view marketing mindset that engenders the ability to not only offer the classic London Cab design to the world but with a modicum of exterior changes, develop a range of city-specific products for capital cities and their over-shadowed 2nd & 3rd city counterparts who seek higher profiles nationally and internationally. If the firm can reach the upper echelons of influential key decision-makers (such as the re-emergent City Mayor) and integrate their TXI product and service with local public-private transport policy – through possible lobbying for change that MB/LTI can assist and mould to be sympathetic.

So in addition to the much needed ability to raise volume the firm should also take a lead in clean energy propulsion technologies to add a technical functional USP beyond its aesthetic one. And furthering that dimension, look to be part of an intelligent transport infrastructure, installing perhaps with client city assistance, networked telematic technologies from sat-nav and upwards so as to demonstrate itself as the vanguard of global taxi and private hire product & service providers.

If MB and LTI can strategise and implement effectively, the expected growth of private-public transport should be approached logically yet creatively; especially so in mature western consumer markets under where car usage is altering due to socio-economic and environmental reasons. But that is the long term, today is about managing the UK-China relationship, for that’s the first step of what could be a very long and productive journey.