Monday, 14 April 2008

Industry Structure – Low Cost Cars – But what is Low Cost?

Idealist sagas tend to run deep and run long in the auto-industry, idealised solutions that never seem to emerge given the complexity and, some might say, stakeholder interest.

Most basic is the corporate efficiency idealism offered by the generic ‘world car’- technologically conventional and ‘stamped-out’ in its tens of millions.

Starkly contrasting that theme of operational mass-conventionality is the high ideal of the long-mentioned HyperCar, a radically architecturally (BIW & P/T) altered vehicle and production process that makes today’s vehicles look very…well…early 20th century. The ‘World-HyperCar’ is perhaps the ultimate ideal, and theoretically not inconceivable, but given the required down-to-earth attitude by execs of “profit over prophecy” that dualistic nirvana is still some time away.

However, far closer to home, applicable idealism has been centred on the thesis of the ‘low cost car’ by old world and new world auto-makers alike, to serve the rapidly rising consumer-bases of BRIC+ regions. And powerful solutions have been proffered. The extremes possibly reflected by Renault’s (Dacia) B/C-segment Logan & TATA’s A-segment Nano. The first demonstrates the laudable 6% margin available from an amortised ‘old’ platform & supplier value-extraction. [Renault rightly sought good Euro NCAP ratings early-on to provide long platform lifecycles to enable extended application as a low cost car – 2 birds, 1 stone]. Whilst secondly, TATA’s Nano demonstrates what’s achievable with product champion will, a very broad corporate capabilities base and the promise of a massive volume business case.

The web-site just-auto has recently been questioning what essentially makes a ‘low-cost car’, and rightfully concludes that there are many variations of the theme, market relativity, segment type and auto-maker type important. Thus there is no singular correct definition; the world and the industry are simply too complicated for that.

The secret to developing a low cost car is about understanding and managing as many elements as realistically possible within the (‘cost-down’) value chain. But theory doesn’t necessarily deliver results given a firm’s real-world situation. So it must play to its own strengths, and possibly align its core abilities with the complimentary core competencies of others, so as to create its own low-cost car routemap. Of course the usual contributors of: volume [for CapEx amortisation and purchasing scale], part-count-reduction engineering, low-margin feature/options/accessories elimination, etc are a given.

So although definitely worthwhile, infact critical, to understand the operational and project-based routes to achieving a low-cost car we must also appreciate that the bigger picture that corporate context plays a vital role in enabling its creation. And the fable to the low-cost story will be familiar to any industry luminary. As initially played-out by Ford and GM in the 1920s/30s, then Japanese in the 1960s/70/80s, then the Koreans in the 1990s and today the Indians and Chinese, long and malleable industrial value-chains are key.

Powerful vertical and horizontal cross-industry structures enable cross-divisional (‘elasticised’) transfer-pricing and the opportunity for general financial engineering – especially under beneficial accounting rules. [A wonderful example of this is massive 21% stock-price rise of Hyundai Motor over the last month, even with tough ‘headwinds such as steel costs, thanks to legal omissions of subsidiary losses]

So, for financiers and investors, there’s much much more to be investigated behind the apparent panacea of the low-cost car. How exactly do you define low-cost? Is the Nano’s amazing price all of TATA Motors’ doing, or a result of heavy internal project and production subsidisation? Thus as the industry chases the pot of gold at the end of the BRIC+ rainbow – and it is undoubtedly there - how do the less keretsu/chaebol integrated companies even-out the playing field? Renewed VM shareholder interest in the re-structuring supplier sector? GM’s recent move for convertible loan-stock interest in an indebted Delphi might be the first clue? And the second clue? Pardus Capital’s insistence on 2 Board seats at Valeo for “full and proper representation” as it possibly seeks to consolidate the French parts-maker with its stake in Visteon.

Look at the timing of the re-structuring of the western supplier-base in regards to the timing and the broadening and sub-segmentation of the BRIC+ middle classes and we see that lower-cost (possibly ‘world’) cars could be in western VM’s portfolios by 2010 and beyond. If these VMs, with major Tier 1 supplier stake-holdings (Bought from the exit strategies of private equity sellers), use the best of the Renault ‘long-life’ platform stratagems and the best of Asian value-chain extraction practice, today’s primarily institutional investors (and reduced stock-holding PE) will be content indeed by 2012.