Tuesday 24 June 2008

Macro-Trends – Stock Market Dynamics – Subtly Building Bullishness?

In skittish equity markets, where volatility has been rife and bankers, analysts, CFOs and public alike seek the new bottom from which to build. It seems that with that in mind, with its own brokerage income as a beneficiary, that Merrill Lynch looks to have taken tangible and psychological steps to try and inject some confidence into investors' outlooks.

Whilst some banking analysts talk of the sector's need to create new business models – including obvious alliances & consolidations - many of the the bulge bracket banks will be reviewing how to stablise deal-flow and put some semblance of sense back into a tumultuous market that have undermined consistent company Market Capitalisation valuations and so, in turn, undermined the very basis of fundamental value assessment.

Until that is done, and a current stormy sea gives way to calmer waters, the very confidence of conventional volume dealings driven by institutional and private investors won't prevail; and that stability is required to create stable MktCap valuations that facilitate acquisitions and divestments, the very core of M&A activity and of course associated Wall St commissions
Thus we believe that by now re-categorising its stock recommendation titles Merrill Lynch is subtly seeking to help create the more buoyant market conditions which underpin its famous logo. In automotive speak, attempting to 'jump-start' the value creation engine and remove its inconsistent 'flat-spot' drops and baseless 'surging'.

Candice Browning, under the banner of “improved investment research”, has created “an absolute system with a relative twist”. In practice this means that ML is apparently demonstrating & communicating analysts' calculation transparency and putting further detail into the recommendation titles.

Critically, this now turns:

- A “Sell” ranking to an “Under-Perform” - which reflects the lowest 20% of expected performers (though this doesn't necessarily mean it will drop, it could rise)
- A “Buy” ranking stock is expected to go up at =/> 10% in price
- A “Neutral” stock is expected to hold or go up (inferred 0-9.9%)

Of course the most critical feature is that absolute 'line in the sand' drawn that will create a new fever of inter-sector competition, irrespective of the specific sector's general performance. The CEOs and CFOs of listed companies will be presumably be seeking to stay out of that bottom band to retain a good reputation.

This in itself is a catalyst for managerial focus on stock-price performance, when at a time for many industries, especially the auto-industry, is facing severe headwinds and is keen to avoid the Market's glare so as to build secure foundations for their long-term corporate futures.
investment-auto-motives believes that Merrill Lynch's new ratings system will set a new format that many of its peer research departments and brokerages will follow.

Nardelli will be glad of the reprieve that PE ownership brings, but Wagoner and Mulally will surely be scratching their heads as to how best to play-out this fundamental shift in investor perception, especially relative to their European counterparts such as Daimler, VW and FIAT.
As for the NA supplier-base, especially those corporations already in Chapter 11, this could put the cat amongst the pigeons, sharply dividing those who appear to have positive futures vs those that don't; indeed any Chapter 11 supplier will do their damnedest to reach above that bottom 20%.

What will this mean in practice?

We suggest that this ML initiative may well be the spark to set-off the new rounds (of much conjectured) alliance building and mergers & acquisitions. All players will be seeking the safe ground and looking to see how their business structures and relationships can be re-orientated to provide the best picture possible. Of course, at best it hones corporate strategy and long-term focus, but at worse it theoretically could lead to informal and formal amalgamations of those companies that present the best price/earnings picture – M&As undertaken for Wall Street's pacification.

Such an unabated hunt for paper-based valuations could result in a re-run of the conglomerate bubble of the 1960s, in which parent companies built up broad portfolios of often un-synergistic sub-holdings that invariably led to ultimate demise as the p/e based acquisition model ran out of steam.

Automotive CEOs and CFOs must resist the temptation to follow the 'paper trail' to temporary success under these new assessment conditions, instead demonstrate to analysts that their operations can be run lean and effective, with only directly synergistic couplings considered for M&A.

Wall Street may be plying on the pressure to both 'clean out' the market systemics and create a new market bottom, but VMs and Suppliers must not be tempted to short-terminism. Instead we may be on the verge of an opportunity to put into practice the new automotive business models that have for so long been diagrams and charts in industry and analysts note pads and strategy presentations.

Monday 23 June 2008

Company Focus – Ford Motor Company – Mercury : Base Metal or Precious Commodity?

Depending upon mindset, the word 'Mercury' will conjure up images of either: Olympic God, planet, fluid metal or for many American's Ford's upper mainstream automotive brand. Look into Roget's Thesaurus at the associative derived term 'Mercurial' and we see the following

“changeful, unstable, moving, speedy, light-minded, irresolute, capricious, excitable”

Most definitely from from the 1930s to the 1950s (and even as far as the early 1970s, these adjectives reflected the excitement of a middle-class brand which, riding the wave of American consumerism. An aspirant marque for millions who – Ford loyal – sought one day to reach the dizzying heights of Lincoln as so beloved of the country's 20th century Presidents

But since the mid 1970s these adjectives have slowly eroded, the fiscal pressures of the 70s and 80s remoulding Mercury as less of a true mid-line independent, and more of a poor dependent relation, alternately passed between Ford and Lincoln divisions. Although by this time the policy of platform-economies had been utilised, the obviousness of the exploitation had worn even long-time buyers' loyalties thin. When - as most evident in the 80s – badge engineering reigns, product and marque differentiation obviously wains and so creates opportunities for others.

In Mercury's case (as with Buick, Oldsmobile & Plymouth) the influx of Japanese near-luxury brands of Lexus, Acura and Infiniti. But the real blow came when these new near-luxury brands were able to climb up the price ladder and their mainstream counterparts became the 2nd wave of competition for the US nameplates with Camry, Accord and Q series

The truth was that the fiscal calamities of the 70s eroded the core strength of Ford, and so by best protecting its jewels of Blue Oval and Lincoln, essentially forfeited the ability to compete in the mid-stream aspirant sector. However, although a calamity for vehicle enthusiasts, by continuing Mercury in the portfolio as essentially an off-shoot sibling from Ford and Lincoln platforms gave FMC the ability to essentially create a copy+ business model which provided a line-up of vehicles against which, in in-house accounting terms, the investment base was comparatively low; much absorbed by either the core Ford programme, a Lincoln programme or by playing the European card as it did with the Merkur sub-brand for Euro markets, or by importing Ford Europe cars and re-branding them as it did with Capri and (7th Gen) Cougar.

And that essentially has been the Mercury ploy by FMC for nigh-on 30 (some say 60) years – the ability to play the investment cost numbers game, and that's why we've witnessed the 'dependent' division ply between Ford-Mercury vs Mercury-Lincoln re-organisation after re-organisation.

Of course FMC has endeavoured to maintain character through 'upscale' cosmetic treatments, higher specification feature/technology and a re-drawn logo/badge, but the “inconsistancy of consistency” with Ford brethren cars are plain to see with Milan, Sable, Mariner and Mountaineer vehicles. The true present irony is that the only non-shared vehicle being the Grand Marquis, now that Crown Victoria is not publicly sold (only to Government & Fleet). As a throwback of yesteryear, it is a symbol of an ongoing, but soon to be extinct, reflection of the brand itself.

But of course Mercury management are keen to demonstrate the viability of the brand. (Indeed within FMC the ability to keep the brand active in the marketplace is seen as a 'baptism of fire' amongst the senior auto-execs, and can make or break a career! Insiders don't want it, but once alloted fight like hell to maintain the Mercury momentum and of course operating and per unit margins). That's why the brand was marginally the first to enjoy the introduction of Hybrid technology as seen in Mariner (gained from the Escape base), but unfortunately little more has been heard of regards the roll-out of Hybrid technology as a key enabler for the division ever since.

FMC is keen to point out that it is undeniably backing Mercury, but with unit sales at approximately 200,000 per annum, the concern is that at this North American sales level that the business case wears thin indeed. (Infact the last year sales figures for both Oldsmobile and Plymouth were higher than 200K just before discontinuation). And of course at a time when GM is pushing Chevrolet as an affordable global brand and trying to recreate interest in Cadillac beyond US shores Ford will have considered the same strategy with Mercury, but it well knows that it just doesn't have the same recognition or power as GM's 'All American' marques.
We hear the usual rhetoric from Dearborne that FMC is “right behind” Mercury, and some think that the buoying of the line-up to 5 cars from 2/3 not so long ago is a sign. But to play Devil's Advocate, each of the models is a Ford variant, nothing more, and a sign of true conviction is yet to be seen.

Rumours about that Mercury suppliers have indicated that they haven't been asked to quote for Mercury supply beyond 2012, the run out time of an extended life-cycle of today's cars.
Given the example of Lincoln, where the creation of powerful and emotive concept cars earlier this decade have yet to be fully realised – with only partial appropriation of styling elements – things do not presently look good for Mercury. Showcars like the 2003 Messenger Coupe and 2005 Meta One (an adapted Freestyle) demonstrate the mixed messages being sent out to the industry and public at large (Forgive the Messenger put but it was entirely intended!). There quite simply isn't any action behind the words that point to a renaissance of the marque.
And in truth, why should there be? To employ the hackneyed Boston Consulting Matrix description, Mercury is little more than the archetypical 'Fading Star' of its sector, and has been for some time.

Thus FMC has 3 options:

A - “Put to Bed”
B - “Divest”
C - “Re-Invent”

Option A looks the obvious choice, going the way of its 'peers', but we suspect that overhead costs of running the division are (or could be) in line with revenue, so keeping it going whilst assessing B & C routes should make sense; even if that means juggling this review with the all important F-series delayed launch, ensuring small and compact global car programmes are on schedule, and of course keeping Tracinda and Jerry York's intentions to rid divisional dead-weight (inc Volvo) at bay.

Option B would be the best long-term choice, why eradicate the marque if it can be sold-off to a highly liquid Asian player who in an attempt to gain competitive local advantage would pay good money for an established marque. From fiscal FX and regulatory perspectives, the weak US$ vs increasingly strong Chinese Rem nimbi plus the relaxation of foreign FDI rules and creation of PE and investment bank partnership agreements would assist the likelihood of such a transaction.
Fading Stars can be re-born in other locations, just as Buick has been in China via the SAIC partnership, though it should be stated this wasn't achieved overnight. Consumer ravenous China is keen on foreign brands and hyper-real, re-invented ' authenticity' , as witnessed by SAIC's use of Rover – Roewe, eulogizing the (highly re-worked) quintessential “Bwitish Car”. Thus, there may be potential for Mercury to be 'translocated' to Beijing, Shanghai and beyond. This would be done via both recent Ford import agreements to soak-up possible NA over-capacity (though there are design rules issues) and via Changan Ford's assembly base in Chongqing [Fiesta & Mondeo] and the FAW-Mazda plant [Mazda 6].

Option C could be achieved as and when Option B was secured. investment-auto-motives believes Mercury may be re-energised both at home as a specialist, consistent 200K volume, higher priced alternative midstream offering of dedicated 'personal' coupes that have been so favoured in the past. But using platforms from a lower-cost production region that permit the oncost of engineering upgrade and select technological features instead of 'all singing all dancing' feature-packs that erode margin and reliability. In short remove the befuddling complexity and cost and create succinct real Mercurys. That region is of course China enabling the re-creation of full-line, multi-model production of coupes to SUVs for the emergent 'middle-class' buyer base that is today keen to buy mid-size segment cars from brands that evoke history and authenticity.

Mercury does indeed have an illustrious past of icon vehicle that embraces the aspirant sporting mould with vehicles such as:

1949-51 Mercury Coupe (the pinnacle of latter-day 'Leadsled' Kustom Kulture)
1963 ½ Mercury Marauder Coupe
1968 Mercury Cougar XR-7G
1970 Mercury Cougar Boss 302 “Eliminator”

Thus there is a base for re-popularisation of the brand as the true sporting (if not very high performance) upscale coupes. Mercury Coupes were generally the best sellers of the range as affordable 'personal cars' and this could provide a new niche if re-invented to the stylistic heights of say the Messenger concept car and offer 'peppy' and more performance to take on Pontiac and others. Fading Stars can enjoy resurgences, just look at Harley Davidson & Triumph motor-cycles, but they need to be in-tune with the zeitgeist and play to their strengths.

FMC undoubtedly faces a real challenge, but if managed well, it's essential core attributes of 'change' and 'speed' have never been more prosaic. Fortunately for FMC, Mercury (otherwise known as Hermes – a true luxury brand) is also the god of Commerce, Luck and Magic!

Wednesday 18 June 2008

Industry Practice – Marketing – The Need for Retailing “Options & Accessories”

It has been a long time aspiration, but step by step (even if inch by inch) the old guard of triad region automakers in Europe, USA and Japan, are moving up the value curve. As the East continues to swell, capitalising on what seem to an increasingly post-industrial 'West' yesteryear industrial models, the heavy fiscal and operational burden of manufacture is being replaced by the idealism of cashflow based marketing models stemmed from a mix of black art and consumer science.

Since Jacques Nasser heralded Ford 2000 back in the mid/late 1990s, effectively setting out a premis that an auto-company should convert from pure producer & financier to retail & 'through life' service providers [Brand Enterprises] exploiting higher margin, broader scope revenue streams, many companies have sought to develop their interaction with the public and consumer, and of course better orchestrate their inherent relationships with franchised and independent dealers – the crucial arbiters of the brand experience.

And where commercial attention leads, so consulting services follow. Thus over the last decade 2 spotlights have shone brighter than ever upon the marketing arena and:

a) industry norm marketing practices.
b) 'new era' marketing possibilities.

For respectively honing via assessment and measurement of marketing budget spend, and better connecting product, brand, service and company with ever refined definitions of consumer categories. As a result, the full spectrum of the sales and marketing process, from Research to After-Care, has been diligently de-constructed.

An economically restrained post tech bubble and post 9-11 era, in which profitability reigned to rebuild corporate credibility and support stock and capital markets, meant that companies have (and still do) effectively run operationally 'lean', boards demanding accountability and creativity from sales and marketing activities to make every penny & cent count whilst creating new consumer interactions.

Marketing consulting services tend to balk at the age old comedic quip about “knowing that 50% of marketing spend works and 50% fails, but unable to identify which is which”, and so in such lean times there has been a B2B market for injecting discipline and science into the black art; some of it credible, some not. In this vein we've witnessed the like of Milward Brown create 'Brandz' – a multi-criteria based ranking (including financials) of global brands and their inherent multi-dimensional characteristics; a methodology that's become almost evangelical in certain echelons. From the opposite earnest approach, Ernst & Young have incorporated today's commercial focus on instability into their consulting offering, with the conservative (with a small 'c') 'Marketing & Advertising Risk Services'.

Thus we appear to live in paradoxical marketing times, a dualistic age, that is keen to avoid excess and budgetary waste, yet also recognise the necessity to move beyond the boundaries of 'safe' or 'blame reduction' conventional practices to alternative 'new era' approaches that embrace the modern fast changing zeitgeist.

That zeitgeist has been unquestionably altered by the web and now 'web 2.0', cyberspace now creating a spectrum of S&M offerings, spanning subtle psychological engaging promotional mini-movies that build-up brand associations without explicit strap-lining or 'tagging', to very obvious basic raw pricing and specifications data – each of these and other offerings directly linked to each aspect of the “attract - engage – convert – sell – re-capture” sales chain.

The increasingly important virtual world is creating ambiance and leading expectation more than ever before, the personal computer screen being far more 'personal' than the radio, TV or cinema-screen. [In hyper-reality speak “merging object (brand) and subject (consumer) into a unified universe”].

However, whilst such powerful corporate-worlds are being created in cyber-space there is undeniably a growing chasm between the picture-perfect virtual world and its alignment with the human fallibility of the physical world. Perhaps none more evident than in the automotive sector, where the real world face of the created corporate idyll is an often independent automotive dealer-base. And here is the obvious rub of expectation and reality. Whilst the company spends millions on building its brand and endeavouring to create consumer nirvana, the dealer-base - consisting of far more financially fragile entities – focuses its eye on the bottom-line, using typically less than sophisticated client negotiation methods to shift the metal.
Thus the created dream can be dashed in the cut and thrust of commercialism.

VMs obviously recognise the 'chasm' problem, and know that with the advent of cyber-space and raising of consumer desires that the chasm has invariably grown, presenting a sizable challenge for Dealer Managers in balancing the stakeholder expectations of both the public and the franchise dealer. Of course the traditional typical solution to 'closing the chasm' is: evaluation and re-organisation of the dealer-chain for 'cultural re-alignment' (through contractual dissolvement and renewel), infrastructure up-grades across signage/showroom/building exterior/ landscaping (& possibly re-location) and operational re-training for dealer management and staff.

But of course in such lean times the costs of raising the infrastructure & service quality bar does not come cheap. And although the automaker will cite that the costs can be off-set through accounting depreciation, the onus is obviously on the dealer to absorb the expenditure, and that can only be done through a direct conversion into turnover and gross profitability. If not immediately successful in increasing foot-fall and unit sales, the increasing worry is that such high investment costs has the potential to make or break the dealer; perceived as more likely the latter in these stated lean times.

More than ever both parties VM & dealer-base must debate how to look beyond the traditional approaches and create cost-effective, mutually complimentary advertising and retailing strategies. Strategies that work within the critical intersect of virtual and physical worlds. More than the temporary marketing drives that is the industry's default position (and in reality have little long-reach affirmable impact) the onus is the 'strategic' not the 'tactical'.

They must be born from consistent, aligned creative endeavours that need to be woven into business-as-usual practice, expanding the marketeering mindset beyond usual advertising “above, below & across the line” and go beyond the use of even more cyber-facet media buying such as the now conventional web-based viral marketing. (The novelty of a drumming gorilla sells chocolate bars, but more intelligence and respect is required to sell a vehicle). And such screen based media fragmentation only serves to perpetuate the “50%” adage. Thus VMs and dealers must look beyond the sales blurb of conventional advertising and media-buying service circles and attend to the 'virtual-physical chasm', creating strong links to mesh these two distinct worlds – to create physically based cyber bridges.

In this regard, we believe Daimler's >smart brand has been an inspiration in looking to see how to connect with potential consumers in alternative ways. To match its original product offering, from the very beginning >smart created its own distinct S&M ethos and messages centred around fun and toy-like yet also intelligent and sophisticated – balancing the apparent paradox. A sense of hyper-reality (so key to the post- modern consumerism of the late 90s & 2000s) was woven into its being - far more so than the obvious product and service creations from VW, BMW and Ford for their post-modern re-interpretations of Beetle, Mini, Thunderbird/Mustang/GT40. From the stacking of smartcars in glass towers (a la children's toy car carry-cases) to early adoption of web-channels.

The toy-like alignment, although obviously more associative to a small, novel vehicle, was key in stirring the emotional dimension of the public at large, re-connecting with the automobile in a way that hadn't been done since childhood. Yes, VW, BMW & Ford have played the same card buy Daimler did it with far greater understanding.

Part of that has been the simple but powerful use of the 'model-car' showcase box, the insertion of the vehicle into this glass-walled box cognitively removed it from the world of normal cars, and whilst on the surface just a gimmick played a far greater role in placing the vehicle in that all important intersect of the virtual and the real. These boxes have been, and still are, placed in non-car related environs, such as malls and so have doubly removed smart from the auto-norm. Some boxes were created as akin to art gallery glass-cases mimicking those holding modern art installations, such as a Damien Hirst, so elevating the very perception of the vehicle to that of a piece of object d'art – like a showcased classic Ferrari or museum held Model T. As mentioned, other boxes were designed to mimic the 'model car' box and instead placed directly on the street in parking bays or within a line of parked cars to highlight the juxtaposition and demonstrate the difference between the >smart and the conventional.

SEAT tried to copy the car-in-a-box initiative with their recent models exhibited under glass on the back of flat-bed trucks traversing European cities. Not as successful and obviously derivative, but combine the 2 initiatives of juxtaposition and logistics and another, potentially high impact – possibility comes to mind.

investment-auto-motives believes that this combine used as part of the vehicle delivery process to develop the buyer's brand experience could be powerful tools in enhancing enjoyment, satisfaction and product & brand connection.

Just as new cars have become nigh-on ubiquitous in advanced markets, easily replaceable and near commodity-like due to production overcapacity and easy purchase terms; so the thrill of ordering, anticipating and receiving a new car has been lost. Automakers obviously evaluate how to build-up the front-end of the purchase process, adopting customer service approaches from the sector's best-in-class operators and embracing learning from hotel and fashion sectors. But they need more to stay ahead and engage the buyer, making the car purchase experience unlike any other retail experience a consumer goes through.

Delivering a new car to a customer's residence (where possible) in a 'show-box' makes an obvious 'new car' statement to the neighbours and provides a literal just-out-of-the-box glee and satisfaction to the excited buyer.

[These 'show-boxes' could be in turn be re-cycled through new uses from >smart sponsored public transport shelters to garden glass houses to short-stay summer cabins in rural areas etc etc, ultimately dismantled and materially re-cycled]

The showcase box is just one idea of creating within the intersect of the virtual and the real. More needs to imagined and deployed.

So just as vehicles themselves have a myriad of options and accessories as part of a myriad of features, so why shouldn't the same approach be used for the 'engagement' process? Of course the luxury marques such as Rolls-Royce, Bentley, Porsche, BMW etc already have expansive customer relationship management initiatives, from holidays to track days; aspects that can be absorbed in the operational overhead by high margins and indeed 'bolted-on' as additional revenue streams.

But such options are not available to the cost-conscious, mainstream VM. Instead the mainstream must - to re-appropriate the much hackneyed phrase - “think out of the box”...and just possibly how to use the box itself.

Friday 13 June 2008

Company Focus - Daimler AG – Thinking Smart about >smart

As the input costs of energy and raw materials surge the pressure on producing a profitable City Car or Small Car programme increases. The historical business convention for small (and now low cost cars) is a marriage of:

a) volume
b) cost-down by VMs and OEMS
c) margin 'claw-back' from options & accessories
d) deal financing.

Now a case-study of business re-modelling, back in 1993 Daimler took over the faltering SwatchCar initiative created by Swatch and VW, renaming it Smart and putting it under the control of MCC (Micro Car Company). Turning convention on its head, through the exploration and set-up an avante garde approach to supply-chain, logistics, design, engineering, production and retail. Keen to avoid the heavy fiscal demands of conventional factory set-ups, and change the very nature of manufacturing responsibility, Hambach was chosen by MCC as the heart of a business-partner network of Tier 1s and Logistic firms that fed a lean assembly line with a unit production rate of 4.5 hours per unit. That delegation of responsibility was core to the project, more than simply a new car, it was an attempt to literally break the Budd-derived mould of auto-manufacture.

The undertaking, whilst remarkable, has come at a price, and for the investment community the tie-up of capital in something with such a long gestation period, exacerbated by the initial slow market take-up (20K units sold in 1998 as opposed to a predicted 200K), has proven painful when the typical ROI period for the sector is 5-6 years on a new car and 10 on plant. But at last after previous break-even false-dawns, the project at last became cash-generative in 2007. But, although beyond the usual pay-back period, Wall Street, The City, Stuttgart and now Kuwait's KIA will recognise that with Hambach came not just a new vehicle model but a complete new operational model.

The auto-industry might state that the 15 year wait was simply the result of adding the 2 conventional ROI lead-times and the investment community will state that the project did not deliver to the original schedule and was a heavy drag on the previous Daimler-Chrysler results. However, whilst factually correct, both parties will recognise that MCC & '>smart' eventually (and very timely to the Green agenda) delivered a revolutionary product and revolutionary industrial framework; both of which are now ready to pay large dividends – literally and metaphorically.

The Germans (Daimler and its forebear VW) always recognised the enormity and impact of the game-changing smart-car, its ripples to be felt throughout a large part of the 21st century's first half, setting a new template by popularizing the acceptability of the 'radical' in the embracing of intelligent and green metro-based personal transport.

>smart's official entry into the US (migrating popularity from Canada and Mexico) as gas hits $4 a gallon will be the true test of >smart's marketing capabilities, but Daimler has been intelligent enough to create a sociological lead by allowing grey-imports in more the more high-minded progressive states with eco-populism such as Nevada & Arizona, before launching the car to the higher-minded eco-mobile masses of New York, Boston, Seattle, San Diego etc.

[And beyond the ICE norm, a micro-hybrid version on the cards bridges conventional ICE toward the 100 electric smartcars test-vehicles 'percolating' in congestion-charged London demonstrate. [NB. the 'micro-hybrid' is in reality infact simply a 'stop-start' engined variant, accusations of PR 'green-washing' perhaps don't go amiss.” ]

But the US market is an important element to this Phase 2 of >smart. The project's original investment costs recouped and project learning done, we are now entering the growth and rewards phase, the generation 2 car demonstrating concept and product's maturity and itself as the very archetype of the global City Car.

And that's the critical advantage point to Daimler. Although facing partial competition from Toyota's new iQ concept, Daimler has set the very template of the lightweight urban vehicle, the unique idiosyncratic tall 2 seater package and modular design - which can be stretched to 2+2 & 4 seater to mimic Mitsubishi's iCar & VW Up variants – provides the perfect base and 'palette' (ie interchangeable skin panels) for a rapidly changing, urban centric world.

It is a formula that should well serve >smart, but very importantly it has the major potential to also serve other automakers and critically forms an operational and platform basis for new automaker entrants such as Project Better Place. And Micheal Dell's recent announcement of MSD Automotive Partners could be an ideal upscale US outlet for >smart derived premium city & (retirement) village cars. After all he has mentioned much about looking at the whole value chain, and use of up-stream Hambach might compliment MSD activities downstream.

Thus Daimler and Hambach - and copy+ models thereof - could potentially 'own' the market for the purist of City Cars in the triad regions of Europe, US, Japan and beyond into the premium sub-segments of Asia (obviously not competing head-on with Asia's indigenous low cost-structures and mainstream local brand loyalty.

In this mould Daimler becomes what investment-auto-motives calls an 'Originator-Deployer', able to utilise centrally built-up core competencies for itself and chosen others who seek ready-made advanced emissions and crash compliant platforms. [Daimler also has this opportunity in its high-end luxury vehicle activities}. Thus it may act as a veritable 'City Car Broker' allowing Daimler to subtly control portions of the marketplace and potential competitors.
Itself and others (especially 'new automakers') recognise that the creation of the car and manufacturing system was a hard fought, now won, battle by Daimler. That 1994 seed of change has now grown into a tree that can bear fruit.

In terms of engineering and public acceptance, although there were aberrations in the form of the For Four model and once planned ForMore X-over, Daimler has managed to grab the intellectual high-ground of City Car design. Other alternatively packaged City Cars are engineering-wise viable and as we see by the activities of BMW and VW there is a real sense of urgency to cross-pollinate motor cars and motor cycles to come-up with lightweight merged products (akin to TATA Nano's engineering philosophy) and could (re)produce anything from a Tandem Quad (re-inventing the Messerschmit) to the renewed bubble car (per a new 'Front Door' Heinkel & BMW Isetta). But no other configuration would have the public acceptability of >smart, and all know that.

So why re-invent the wheel when it could be licensed, leased or indeed bought by another automaker or Tier 0.5. Wouldn't the likes of Magna International or Wilbur Ross' International Automotive Components group look to obtain a decisive and lucrative slice of such a promising business operation?

So as we look forward to forecasts of Daimler's future, the progress made since the unshackling of Chrysler may only be a taste of things to come if the German giant can truly squeeze the innate value held within Hambach. In an industry where large premium cars equal sector leading returns, a new era for an alternative profitability model at the other end of the product spectrum, may be under way by the very same protagonist. A new paradigm. As mentioned, it's been a long time coming but now here once Daimler has milked the cash-cow for itself it may be passed onto Green pasture anew.

In Daimler's recent Investor & Analysts' Technology Day Dieter Zetsche, his management team and analysts all quietly realised that for MBC that the new C-Class, GLK and next year's E-Class were the prime income drivers, promoting Mercedes' product mix sweet spot over the next few years. Given MBC's contribution - most evidently seen in FY07 and Q108 - the question posed by Morgan Stanley' s Adam Jonas was poignient. Although framed as [the possible mis-alignment] of “Wall Street's Timeline expectations vs Daimler's Timeline expectations“, the real question was “how will Daimler support its 10% RoS in the longer term” given passing of the product sweet-spot?

The answer may not lie wholly in the technically imbued and updated products themselves, but if played properly, substantial long-term real value extraction will come from Stuttgart and Alabama, but also from Hambach.

Tuesday 10 June 2008

Company Focus – GM – Humm(er)ing the Wrong Tune

At this critical juncture for GM, we decide to spend a moment considering conjecture of the industry rumour-mill.

The ongoing macro-headwinds highlighted at the recent GM investor's meeting raised the spectre amongst executives and observers that GM may need to take more drastic action than simply awaiting (the present far of promise of) a North American economic uplift. Worse than expected unemployment figures (5.5%) [although theoretically conducive to reduced interest rates] and the $140 p/b record oil price created by the 3 dimensions of continued Asian demand, OPEC's restricted supply and accusations of market speculation, plus the 1 in 10 home re-possessions have dramatically de-stabalised the consumer-base; as witnessed in painful 2008 US TIV figures.

Investors obviously see GM, operating over-exposed to the dismal climate, with a poor product mix and and what seem far-off promises of new technology managing to save the day. Although Wagoner et al have stipulated that much of the new product portfolio addresses consumer concerns and will act as the agents of change, investors are understandably jittery and are looking for greater corporate structural change possibilities to ensure the turnaround happens.

As we recommend in our last post, beyond the schedules closures of under-utilised high cost plants, GM needs to seriously assess how to deal with its remaining tangible and non-tangible asset-base. And critically seriously consider division disposal options. As suspected this call simultaneously came from the investor floor. But Wagoner, Henderson, Lutz and all GMNA management must resist reactionary investor demands for what at first appear as obvious and 'easy pickings' for division disposals.

We are of course talking of HUMMER.

Newspaper articles such as the FT's Weekend are already proffering headlines such as “RIP HUMMER”, and of course, given the brand's military roots, the truck platform bases, appalling fuel efficiency and latter-day accusations of it being a near automotive anti-christ, the apparent raison d'etre to seems all to sensible; especially given the interests of TATA and Mahindra, who both appear to be in a battle to become India's seminal 4x4 producer.
However.

investment-auto-motives firmly believes that time should be taken to ensure that the “baby is not thrown out with the bathwater”. Notwithstanding reactionary investor calls and gleeful opportunistic buyers and present-day 'out of kilter' positioning, GMNA should first take the time to properly assess the potential for massive brand expansion across all vehicle (size) segments, ranging from the H3 down to even City Vehicles.

It makes sense to translocate manufacture to India, obviously for the H1 & H2 assembly lines, but we feel the brand itself should be retained and licensed to interested parties.

Why?

Because no automotive brand has come to the fore in such a short time as HUMMER, and it is more than simply a out of step fashion brand from very recent yesteryears. Importantly, in an automotive consumer world (set within an ever more fearful social climate) the fundamental aspects of inferred - and engineered – personal security and assertiveness are marketing jewels. These elements are part of what's allowed Land-Rover and Jeep to spread into the mainstream with 'capable' small SUVs and X-overs, and all 3 brands could if managed properly go far further. Critically, as we've seen with City Luxury cars, small size does not detract from the central brand value. Remember everything is relative and even with its off-colour military Gulf 1 & 2 and Iraq connotations the US consumer sees HUMMER as a quintessential American brand in the Chevy, Ford or Harley Davidson mould.

The past and present isn't the future. If it were Land-Rover & Jeep would have become extinct decades ago. Ironically, HUMMER possibly has more sales potential than many of the 'lost' GM stable if the product 'stretch' is executed well.

And beyond psychological linkage to 'personal security' and 'assertiveness', HUMMER exudes 2 more critical cognitive enablers for today's multi-mode, high demand buyers; whether rural, suburban or urban: 'character' and 'functionality'.

The hard-edged, verticality and box-like styling with shallow glass apertures would dramatically differentiate within the mainstream offering and it would dramatically improves internal packaging, (a much needed element as vehicles decrease in size). But perhaps most favourable is that such boxyness has been seen as cutting edge by Generation Yers since its inception in radical vehicles such as the Scion xB, Honda Element and Nissan Cube (to be brought to the US in electric form). And of course Chrysler's upcoming Hornet.

Exploiting this avenue, and re-interpreting it America's own, would be a major coup de gras for 'The General', and the showcasing of the HX concept (to be seen in the Film Transformers 2) demonstrates that the brand is looking to be the ironically post-modern, 21st century (authentic) Jeep [CJ/Wrangler].

[NB. Post-Modernism heralds re-invention of the original...creating a constructued more visually authentic version than the original. See 'Simulacra' work by the philosopher Umberto Eco].

Thus 'The General' has effectively started the helicopter drop of HUMMER into premium mid-size activity vehicle territory to take on the likes of Toyota's re-invented FJ. We believe the path is clear to effectively head-off the Japanese invasion in 'cult' mainstream vehicles, and so we implore GM investors, from Kirk Kerkorian to the institutionals to ensure that HUMMER is used to pay effectively 2 dividends – in India and the US.

So, sell the HUMMER H1 & H2 production lines, allowing the US Defence Department dramatic savings in future procurement, but:

- Retain advanced HUMMER Military IPR
- License the brand to TATA, Mahindra or other
- Explore brand stretch into all mainstream segments
- Use the intrinsic assets of: 'Character', 'FUNctionality', 'Security' & 'Assertiveness'

HUMMER took the desert (by) storm, it can also take the freeway, boulevard and car-park.

Friday 6 June 2008

Business Opportunity – GM – Time to Break-Up the Demoted General?

Since Adam Smith wrote the economic bible 'The Wealth of Nations' (published in the same year as the USA declared its independence) the fundamental theories of modern investment have been engrained into the popular consciousness. Whilst not rocket science in principle, the prompting and exploitation of value creation can be in reality much harder, when much must be orchestrated at the appropriate time, as any Activist Investor or Board Member well knows.

Since “ timing is everything”, all important is the convergance of a firm and/or sector's discarded baggage and the ability to see untapped potential, obviously set against the macro-economic picture. Reading that moment and creating that routemap are the fundamental aspects of value creation.

So at a time when the American Auto-Sector, has shrug-off much of its fiscal drag with the transference of legacy commitments to union backed VEBA's even through there are certain undeniable headwinds, it could be argued that, with the shake-out and consolidation of the supplier base that the industry is getting back into shape to properly plan for the future.
Amongst Detroit's Big 3, beyond a privately held Chrysler and a resurgent Ford (on stock price and p/e basis) it is GM that comes under the spotlight for greatest attention given that:

- its US market share has hit an all time low of 20.5%,
- its stock hovers at a very low $17 (from a high of over $40 only seven and a half months ago & a massive decline to the late 1990s $80 price),
- the obvious correlation to general US economic well-being.

An ever increasing globalised world both offers domestic challenges in the way of competition (as we see), but also increased opportunity to ride the wave of international emerging market expansion. Now that's taken for granted as is the same case for many VM's, the problem for GM is sorting-out its home-life back in North America and fundamental questions regards future strategy must be asked.

Now at its centennial years it's easy to see how the corporation grew in the early years of America's automotive emancipation through Durant's raft after raft acquisitions of peer automobile makers, taken under the wing of his holding company GMC. Under Sloane's leadership the complexities and production costs of “a car for every pocket” were rationalised, and the 'span-all' corporation was to become eponymous as an object lesson in economy of scale, and unsurprisingly that set the tone for the next 75 years, the volume of generic parts the central pillar to operations.

As we know, the sector's historic process of rationalisation and consolidation saw the emergence of the Big 3, the common parts philosophy intrinsic to the corporate success of all, but for GM with the widest brand portfolio and an ethos of being risk averse (unlike Ford & Chrysler) common platforms was an entrenched idiom that the corporation was built from and it stayed. And as both a social satiator and fiscal generator – indeed becoming the national economic machine - “what was good for General Motors was good for America”.

However, even 50 years ago by 1958 the power of the companies central planning clearly positioning each brand as different customer propositions was, because of internal and external competitive forces, started to unravel, a stretching of brand ranges/pricing ladders creating overlap. Those forces endured through the 60s with the rise of compact cars and into the break-point of 1973 with the oil crisis and the surge of VW, Toyota & Datsun and Detroit's tardy retorts. But GM's product lows came in the mid '70s to 80s when the push for profitability (using not only common platforms but common skin panels across the various brands – differentiated through nose/tail, exterior trim and interior treatments) succinctly demonstrated that a Chevy and a Cadillac shared not just a bloodline, but an engineering father and styling mother. This allied with reliability/quality problems saw the migration of more discerning customers to Japanese mainstream and European upmarket vehicles. Cars that were designed as pure to the brand's core values and intentions and, critically, designed with commitment to be 'fit for purpose', whether a Toyota Corolla or BMW 3 series.

Through the mid to late 80s GM senior management recognised the foreign threat and witnessed Detroit Brethren raise the bar in reaction, and also so thanks to a 1990s rising economy, was able to set about 'de-commonising' and through SUVs stretching its vehicle range. But the post-9-11 down-turn, massive oil price rally, greatly hiked input costs and 3 quarters of deepening 'credit crunch' have left the work of all the Big 3's efforts unrewarded as bigger picture macro forces take hold.

Given its size GM has been perhaps hit hardest and must find a way to maintain traction that may have to go beyond the paradoxical, even ironic, campaigns such as the honorific “Mark of Excellence” chrome badging vs “Employee Discounts to All”. These were deeply troubling initiatives that clearly send out hollow mixed messages, and though they worked for a period in shifting stock, as the industry saying goes its “sold out tomorrow's order book” as buyers traded in early; helping the revenue base of the last 2-3 years but now facing the double whammy of a dried-up regular customer base, and because of the loss of sub-prime credit buyers, a loss of the 'extension' buyers – with the market looking its weakest in decades.

Thus GMNA faces a truly onerous task of putting its house in order. It is of course in a transition phase, endeavouring to wean itself off of SUVs whilst still purveying trucks and new (probably diesel-centric) technologies for the most-part playing a critical role - even if 'plug-in' hybrids are vaulted more highly. [GM is far behind even Ford and woefully behind Toyota in the hybrid sales race as of Q108]. But with a shrunken, lightened vehicle-line plying better MPG and CAFE measures, there is a natural re-bound to be had...but will going through the same ol' same process as before be enough? Previously execs wore 29% badges indicating that would be their defended market-share base; that dropped to 24% in H1'06 and now we see 20.5% in Q208 (vs Toyota's 17.4%).

From an stake-holders perspective (whether institutional investor or finance house) investment-auto-motives believes that GMNA may have too little left in the tank for such rebound , especially given the intensity of homeland competition and the large, inter-rival and often spurious, brand stable that soaks up heavy overheads. The extinction of Oldsmobile highlighted its market-disconnection, its own loyal band of older customers naturally expiring, not replaced by other 'grey-market' customers – in truth the brand had had its day, and new 'greys' had already been driving Camrys , Accords, Sebrings and Japanese X-overs like RAV4 for years.

So, in reality, what have GMNA's divisions become? The homeland market squeeze and search for new global frontiers in international waters demonstrates that the central propositions of many of the brands and vehicles have in effect become little more than alternatively badged commodity cars within their respective sectors, value-deal led and carrying too much intrinsic feature-based cost as opposed to clear design-led, cost-conscious proposition. Of course common platforms impose a level of engineering envelope constraint, but as VW demonstrated with its A4 platform in the 1990s spawning everything from a Seat hatchback to an Audi TT, and as GM-Holden demonstrates with its flexible (now VE) Commodore large car platforms, much can be done to extract different wines from the same grape.

However, even with a renaissance of engineering intelligence, the real problem may be the need to manage so many vying brands, because even a highly modular platforms base will ultimately inadvertantly create overlap products as each division chases eachother's sales. On the production side, scheduled closures of what have become over-capacity, loss-making truck and SUV plants in Ohio, Wisconsin & Oklahoma, car plants in Tennessee and Michigan and parts factories elsewhere , will certainly ease redundant heavy fixed overhead and variable parts costs.

But even with these actions, that long promised rebound could take far longer than desired. And that is why alternative divestment schemes should be fully assessed to create a broader scope of re-couperation, break-even and postive profitability – much sought after the Q108 loss announcement – the heaviest in America's corporate history.

So, just as we see with Jerry York's & Tracinda's call for Ford to divest of Volvo due to its mis-alignment to Blue Oval and intrinsic open market value, so shouldn't GMNA be assessing the commercial value of each of its divisions? The commissioning of a boutique consultancy allied to the M&A division of an investment bank would be able research and recommend upon a range of commercial options, from the open-market worth (to intrinsically gauge the elasticity Goodwill) to the licensing off design-rights and tooling.

So of the present NA stable (Saturn, Chevrolet, Pontiac, Buick, Cadillac, GMC & Hummer) which have room for improved re-bound if not operationally dragged back by lack-lustre performers, and which of those lack-lustre brands could be better served through alternative sale or licensing arrangements?

The domestic slow-down of Buick (down over 45% since 2002), countered by its high-flying Chinese success, would seem the obvious candidate for a re-structure of business operations. As its stands it looks like its headed for an Oldsmobile-like extinction path with discontinued product not buoyed by new cars, so something must be done to both help it serve itself and unburden the operational focus of GMNA. To date, heavily intrinsic, but informal operational links span the US, China and Australia, fair enough in developing the Chinese offering, but now is the time to start to shift responsibility away from the US and operate an quasi-independent management, design and production framework, putting the Centre of Gravity firmly in Asiana.

This scenario opens up the dialogue about which brands should find natural new owners and possibly regional homes. We believe this would streamline GMNA operations and re-balance the natural powerbase of GM worldwide. When that finds its balance, why not then actually look at each of GM's international divisions (GMNA, GME, GMAP & GMLAAM) to assess the viability for individual independence, with GM itself as a hub-like entity maintaining a powerful share in each newly separated and value-creative spin-off regional divisions.

The point is that GM and its investors should look to see how GMNA could start a process of operational re-configuration to set out a new path, one beyond the historic boom and bust created by the thrust and drag of North America.

Durant pulled together those separate brands to create a new whole, but under today's and tomorrow's much changed, eastern emergent world, now at 100 years old, it may be time to
seek value through de-construction and re-construction.

Monday 2 June 2008

New Business Opportunity – Electric Cars – Beyond CO2 to Merged Industry Sectors

In this last review of EVs, investment-auto-motives looks beyond today and the near-term to posit a long-term convergence scenario generated from the logical conclusion drawn from the increasing 'electrification' of vehicles. One that highlights the potential for major industrial cross-pollination that could bring about major changes to business case possibilities and the owners of IPR & associated tangible assets.

Whilst the CO2 challenge is the central driver behind the promotion of Hybrids and Pure EVs could there be yet another additional 'invisible' propagator behind electric vehicles?

The massive rise in electronic integration into the common car, let alone specialist vehicles, demonstrates the emerging centrality of electronic hardware and software. Such energy hungry items put ever increasing demands on the electrical load of the standard combustion engined car running a mass of 'parasitic' ancilleries such as ever higher ampage alternators. So it makes sense to alter and develop the basic principles (including powertrain) of the car to allow for an evolutionary 'electric platform'.

The massively expanded scope of electronics is already impressive, and is only set to grow as it spans:
- vehicle control (ie X-by-wire & CANBUS)
- vehicle diagnostics (for optimum running & service count-downs)
- sophisticated instrumentation displays (derived from or akin to Microsoft, Apple etc)
- multi-media formats
- personal communications
- greatly expanding telematics

Momentarily focusing on the subject of telematics, the role of telematic boxes/systems is expected to become central to the design and use of vehicles, industry expectation that legal requirement will demand the factory installation and possible retro-fit of the technology, as seen in Saudi Arabia today and expected in Brazil in 2009 and Europe by 2011. This has the potential for:
- e-call (emergency services notification)
- e-anti-theft (as in Brazil)
- e-pay (tolls)
- e-mileage rates (insurance and road taxes)
- e-infrastructure (traffic-flow management & 'Green Dynamics')

[Not surprisingly given the potential the investment community has had a close eye upon those growth ambitious and restructured Tier 1 & 2 Suppliers (like Magneti Marelli & Continental) that are in a position to exploit this burgeoning OE market].

Information Technology's rapid (some say exponential) rate of growth has greatly altered the world we live in and the way we interact with it. And in the automotive case, the ability to create ever broadening and specific realms of electro-mechanical and electro-chemical, functionality control.

For years electrical engineers have bemoaned the limitations of of the conventional 12 volt, heavily multi-wired, multi-fused, multi-relayed, electrical system – itself a development of the previous 6V version – now nearly 100 years in its application. But as stated, the rapid integration of electronic equipment and supposed needs/wants/desires is turning the car into effectively a mobile electronics platform. And given that this technology content is, by innate Dollar, Yen & Euro value, an increasing cost and value creation 'hook' when compared with the mechanical systems content, it is not surprising that fundamental systems – especially the core aspect of propulsion technology – have meta-morphosised to support what is in reality already an e-car.

Thus Hybrids and especially pure EVs offer a far more synergistic basis....especially so if Lithium-Ion based, even if the issues of reliability, durability, scaled production, and disposal remain to be conquered. This we suspect the real importance of the L-ion vs NiMHyd tussle isn't simply the functional performance of one versus the other, but the desire to reach a battery standard that can be applied across the board from MP4s to vehicles to gain massive economies of scale production and so profitability.

(This would be a major achievement for especially Japanese industry eager to help pull the country out of the economic dearth it has been suffering for over a decade).

Such powerpack standardisation – L-ion & beyond - would greatly assist a plethora of electronics stake-holders including not only battery producers but electronic & IT hardware producers, software developers, and even web-based service providers such as Google and Yahoo - the latter of which are keen to put their massive Market Capitalisation values to greatly expanded use in synergistic virtual to physical world 'lifestyle solutions' businesses - mobility being perhaps as important as communication as intrinsic to the human existance.

The merging of Autos, IT and Service Provision means that the business-model permutations offered by technology and brands could be immense. So the Hybridisation and Electricfication of vehicles could very well lead to the 'Hybridisation' and 'Electricification' of the intrinsic bases of industry; generating a new industry and service revolution within this, the information age.

As its stands, we are some way away from that horizon, but look to the leading-edge combined demand requirements for mobility and information 'platforms' (vehicles) within military applications and such examples may provide the latter-day technology base to help create tomorrow's consumer world that merges cars, communications and of course the opportunity for entrepreneurialism to bring the 2 together.