Friday, 29 August 2008

Company Focus – Chrysler LLC – Snakes & Lazards: Seeking a New Den for Viper.

When Chrysler was being structurally re-modelled in the late 80s, it took an innovative stance with then new 'cab-forward' vehicles that were decidedly progressive vs GM's traditional, boxy cars and Ford's organically shaped, yet conventionally proportioned offerings.

'Cab-forward' was almost a metaphore for a radically forward-looking company, and as part of that ambition, 1989 witnessed Bob Lutz's re-creation of the spritually lost 'All American Sportscar'. It came in the shape of the Viper, the prototype shown at Detroit's NAAS that year. A new nameplate (with obvious snake derived links to Shelby's Cobra) for an all new low volume production premium priced sportscar. Viper was to have a 'halo-effect' for Dodge, recapturing the past glories of muscle-car names like Charger and Challenger, and adding kudos to the SRT performance division.

16 years on and Chrysler is in a very different position to its upward lift of the 1990s. It has ridden the economic wave of the 90s and early 2000s, having exploited more than any of the Big 3 the trend for and subsequent reliance upon what were high margin trucks and SUVs. But changing times and a flat economy have put Chrysler back at the bottom of the trough of the US industry's historically normative heavy cyclicity

So today, in the $4 per gallon era, as part of Cerberus' Project Genesis, Chrysler's management is undergoing a $1bn revenue raising exercise through “non-core” asset disposals, $500m of which has thus been achieved with sale of the Californian design centre to Daimler and a Brazilian engine plant to FIAT. And at a time where pertinent alliances such as those with Chery for small cars, Nissan for compact car and possibly FIAT for joint US production, Nardelli and La Sorda has rightly recognised that Dodge's dedicated, small-scale sportscar business is a management and fiscal distraction that should be sold. Hence Chrysler seniors are (possibly) euphemistically “listening” to potential suitors for Viper – the cars, the brand and perhaps the Conner Avenue production facility.

It could be said the financial PR machine is underway, Lazard's appointment will have undoubtedly prompted their own PR consultants to spread the word to generate external stimuli in the press and interest, Chrysler's apparent “come hither” stance part and parcel of the inducement process.

But to the crux of the debate and who exactly are the suitors for the Viper business?

The financial press' (Bloomberg etc's) first thoughts were of a trade buyer, an industry expert identifying Shelby, Panoz and Saleen. But whilst we come to these (top of the tree entities) further down, the majority of the US specialist trade posses non too surprising similarities which from vital perspectives of operational realities are not immediately viewed as overtly synergistic:

- Parental Backing/ Ownership -
often family business, small PE group, regional small bank or a division of a larger regional industrial entity that specialises in metal and composite fabrication.
[Viper was born from large VM capabilities and supported as a strategic pet project, thus may have not been ever truly exposed to realities of external funding assessment and independent, self-support. And Viper's current management may endeavour to stay with Chrysler as opposed to running the business on far smaller budgets and with closer owner / director examination}.

- Product Type -
Majority simply not up to Viper (ie large VM) Quality Standards, whether: styling sophistication (often limited due to less sophisticated forming techniques), engineering robustness (due to limited design, testing, re-engineering process) and feature content (due to incurred product build cost and lack of technology supplier relationships given low volumes)
[The internal styling, engineering, feature & quality demands to keep Viper at its current level, let alone improvements required to reach benchmark standards, may well stretch beyond the true competencies of other apparent 'peers']

- Brand Positioning
Most specialist sportscars seen as playboy's toys catering to finite scale sub-segments, seen as credible in that segment given product differentiation or purity, but not credible in mainstream
[Viper sits as a credible car due to its parentage, and as such sits in a rare middle-ground between the plethora of lower quality (often quirky) vehicles and the premium territory occupied by the likes of renowned Italian & British marques. This is a very lightly populated field by 'specialists' given that the predominance of $80-90K sportscars are from mainstream VMs and matured 'fully fledged' luxury sportscar companies].

- Technical Resources / Dependencies
Predominantly production orientated with no or little in-house development engineering capabilities. If a divisional part of a larger industrials holding company reliant upon sister relationships. New developments occur with injections of fresh capital usually via change of ownership.
[Viper was developed at a time of substantial corporate backing – Fed loans etc – and utilised much of Chrysler's large development resources to deliver a standard. Chrysler has kept Viper on par with legal requirements (ie emissions compliance of the all alloy V10 engine etc) but as Chrysler's own 'shape' changes will it actually deliver the levels of technical support present warm comments imply? NB this especially so for the now old V10 engine, the heart of the car].

- Procurement Leverage
Small scale purchase levels mean victims of being 'price takers not price makers'. No or limited relationships with advanced technology suppliers, having to lack feature and if needs be often source expensively through motor factor companies, not directly from disinterested suppliers..
[Viper is essentially a product of the Chrysler machine, its parts bin and a large “understanding”supplier base that assisted on Viper to maintain the customer relationship]

- Labour Costs
Critically must be maintained at low level and flexible compared to UAW or other semi-skilled standards, since the low volume business model relies on sizable labour, thus labour & variable input costs must be constrained to maintain viable profitability.
[Hardline labour negotiations would need to be undertaken with the Viper plant staff – if indeed the facility and same staff were retained - which although now excluded from renewed UAW agreed contracts will be required to swallow hard at reduction of pay and benefits]

- Distribution Networks
Low volume producers of specialist product have very limited,
often regionally based prime network of independent sales sites, which if have a better recognised name, is assisted by a further second tier of independent sales sites in other states / regions. The majority of sales are made from the factory's own showroom, with dealers typically displaying a makers car amongst other, alternative branded vehicles.
[Chrysler obviously has enjoyed the benefits of a massive dealer-base, who themselves have enjoyed the margins on Viper but also, for some less well located sites, somewhat cajoled. That broad national spread of dealers has been a major factor in both accessing the nationwide customer base and instilling confidence given Chrysler's credentials]

- Service Networks
Typically a specialist producer will have sold cars return to its factory for servicing and repair. Although the cars tend to be simple enough for 'mom & pop” garages to service, and could theoretically be done anywhere, the factory relationship is part of the car's ownership experience for the client and a factory stamped logbook for service & repair greatly assists vehicle residual values, keenly sought by pedantic follow-on buyers.
[Given Viper's parts bin basis, it is serviceable at any Chrysler approved, and other, garages; that was part of the car's appeal. But again, the size of the Chrysler service network plays a major role not typically accessible by a specialist producer. Agreements could be put in place but would they be honoured, especially by the independent garages of Chrysler service network?]

Those synergies would have to be primarily product and facility based, and whilst idealistically each of the smaller suitors would love to ride on the back of Viper's Chrysler connections to broaden its own nameplate, first thought impressions are that trying to grow through such an M&A would be very problematic, leaving both of the suitors caught in an operational middle-ground, a no-man's land.

Bloomberg's exploratory calls to Shelby, Panoz and Saleen – Viper's apparent low volume sportcar peers – demonstrate that they may not really, as of today, in the running. And that shouldn't be surprising.

Although perceptionally top of the tree and well positioned, appearances can be deceptive. Whilst are indeed those companies operate in the US niche sportscar sector they are in a very different, much smaller, less capable league in terms of financing and management scale.
investment-auto-motives is not overtly familiar with Panoz and Saleen in-house operations but had the pleasure of plant familiarisation at Shelby (nee Shelby American) in 2003.

As for 'match'?...

There's no need to give a potted history of Shelby, it's self-evident, but its evolutional business model, mow listed on NASDAQ (Caroll Shelby International) has fundamentally been as follows:
a) the in-house production of the limited edition specials of the authentic Cobra and other less successful 'update' ventures such as the Series 1 and 2.
b) the in-house production of enhanced VM product (notably Mustang GT's, GT-R's and KR's) now re-applied on modern Mustangs for the 2006 GT-H and 2007 GT500
c) the licensing of the Shelby name for use on VM produced cars (such as 70's Mustangs and 80's Chrysler product)
Las Vegas based Shelby Automotive has a spiritual link to Viper given that Carol Shelby has had project involvement from the car's inception and it has worn Shelby blue and white colours from early on and again as special edition homage colours in 2006 (GTS Blue). Thus the connection and lineage is apparent and has been used in Viper's marketing from the beginning. Shelby has not (to date) put his name on Viper though it is a possibility. As for buying the Viper business, evidence of past commercial behavior of minimal build involvement and maximum brand exploitation seems to preclude that likelihood. Although the business may have changed since our visit, at the time it was running lean in management and staff using the inmates of a local penitentiary to produce the panels for Cobra – the very essence of a low cost labour policy, and well away from Michigan's labour expectancies. Shelby (man and company) is a wiley ol' bird and would know every nook and cranny of the Viper business. As to whether the company would take on the commercial realities of an aged Viper vehicle and its accordant operational and commercial responsibilities...probably not.

Looking to its latterday spiritual successor and Irvine CA based Saleen operates as both a provider of performance enhanced special editions (of Ford Mustang and F-150) and S7 mid-engined supercar derived from racing. Its Ford links go back to 1983 when race-driver Steve Saleen started producing special edition Fords (much in the mould of Shelby in the 1960s). By 2003 links had grown string enough to use Saleen as a nominated supplier / assembler for the Ford GT supercar programme. To enable that Saleen opened a 200,000 sq ft facility in Troy Michigan which latterly created the Mustang GT-R. Thus would such company with such 25 year old Ford association and its own 'new' Michigan facility that can engineer a Ford based architecture from scratch be interested in buying what is effectively an updated 16 year old car (based on possibly defunct components) aswell as a second site at Conner Avenue? We think not.

South East of Las Vegas and Irvine in Hoschton Georgia we find Panoz Auto Developments, founded in 1989 by the father son duo Don & Dan Panoz. Along with its sister company to Panoz Motorsports Group, which in turn owns single seater constructors Van Dieman and G-Force, aswell as 3 racetracks in Ontario, Georgia and Florida (the renowned Sebring) held under the holding company titled Elan Motorsport Technologies. Panoz has produced 2 road cars: the Roadster, the Esperante in many variants used for road and SCCA racetrack, and most recently developing the Abruzzi. Race cars are LMP series developed for the American Le Mans 24 hour events that Panoz itself promoted. Perhaps most interestingly has been the development of the Hybrid car along with Zytec Engineering of the UK, giving Panoz a lead in designing for Green Racing. Like Saleen, Panoz has been historically linked with Ford for supply of Mustang powertrain and gearboxes, though these base units have been developed in due course. Keen to build truly independent Panoz designed vehicles it seems unlikely that the father & son duo would want to bring the Viper into their fold. Indeed as a competitor on the SCCA track the decline of the Viper would be all too welcome so as to effectively aid GT motorsport and American Sportscar retail ambitions.

Beyond the strategic corporate fit, of which there seems little at Shelby, Saleen and Panoz, there would need to be an ideally natural technical fit, by which we mean that platform dimensions (known as engineering hardpoints) should be similar so as to simply require re-skins and re-fits to produce 2 differently branded cars from one platform. Whilst there is a general construction similarity between Viper and Panoz (ie generic spaceframe & composite panelled exterior) this solution is the basis of many specialist builders – the global norm. Hardpoint dimensions of wheelbase, front/rear track, front bulkhead etc are very different – eg Viper W/B @ 98.8 inches vs Panoz W/B @ 106 inches.

Hennessy Performance Engineering of Houston Texas is perhaps most familiar with Viper as it produces the Hennessy Venom variant which has structural, suspension and powertrain enhancements. However, whilst Hennessy has a dedicated Viper section it also caters for a complete spectrum of manufacturers' vehicles, its raison d'etre being a broad spread to avoid 'all eggs in one basket' syndrome that many 'hot shops' have suffered from in the past. Hence its set-up and management capability wouldn't mirror the demands of running the comparatively massive Viper business.

So as stated, the 3 'top of the tree' suitors and latter 4th possibility are not immediately obvious cohorts unless the their respective finances and business models took a major change of direction.

They are some of the 187 small vehicle makers in the US today, and to put them and the Viper division in perspective investment-auto-motives demonstrates the structure of the industry & market using a 3 tiered model, highlighting Viper to be in the lightly populated middle-ground:

Level 1 – 'The Royals' (2000-4000 vol pa) – Ferrari, Lamborghini, Aston Martin etc
Level 2 – 'The Aspirants' (200-2000 vol pa) – Viper, Lotus, (TVR) etc
Level 3 – 'The Idealists' (20 – 200 vol pa) – the USA's 187 specialist car companies.

This landscape differentiates based upon 3 core criteria, though ultimately inter-connected:

a) Core Competence (Specialisation)
b) Brand Reputation (Price & Position)
c) Operational Leverage (Auto-Industry Relations)

Of the 187 bottom tier 'Idealists' (often backed by dream-fulfilling, legacy seeking business people like the Panoz family) the broad spectrum of builder can be sub-segmented into 18 distinct groups; each described by product genre and entity strengths. Thus investment-auto-motives has created broad-view picture of the A-Z builders, from American Street Rod to Van Genaddi and beyond.

Our exploration highlights the fact that for many businesses seeking to make a name in the sportscar world with reduced costs, reduced complexity and improved quality the obvious answer is to utilise a borrowed platform. The preferred solution is unsurprisingly Corvette, the ongoing king of mainstream US sportscars, and so providing a reliable low cost base, since 1953. Borrowing a platform obviously has its drawbacks in terms of creating a bespoke car, it will not have extreme performance parameters, but for many like Anteros and Dragon having much of the technical development (eg emissions & crash compliance) done is a major advantage, and so the pragmatic route forward.

Ideally Viper could offer a similar 'packaged solution' for present and new builders, but GM's and Corvette's relative stability vs Chrysler's and Viper's relative instability does not bode well, unless a radical step was taken by a lobbying specialist sector for government assistance in developing Viper as a new specialist platform alternative...a very unlikely outcome.

Given present conditions, investment-auto-motives posits the following scenarios based on likelihood & impact rated out of 10:

Scenario A : USA Sportscars Inc
Least Likely (2) – High Impact (8)
Under a newly announced government review of the US Auto-Sector, set-up as part of the far-reaching Energy Bill, the government sets aside funds to develop USA Niche Sportscar industrial competance. Done so utilising the Viper business, Chrysler and its Detroit peers as the cornerstone to developing the abilities of regional small-scale builders nationwide, to aid the growth of names like Shelby, Saleen, Panoz etc as worldclass vehicle constructors in their own right.

Scenario B: USA Trade Sale
Low Likelihood (3) – Mid Impact (5)
New developments that counter the aforementioned rationale for pessimism create a game-changing outcome. A hard-hitting big player backs a small name producer to buy Viper and develop 2 US nameplates in tandem, or an ambitious Supplier company acquires the business in order to demonstrate and create its own Tier 0.5 ambitions.
The present lack of liquidity in the banking sector would negate the investment community backing such as daring move, unless paralleled by Scenario A developments.

Scenario C: Private Equity Sale for Latter-Day Asian Disposal.
Mid Likelihood (6) – Low Impact (4)
A large PE firm, or more likely consortium, buys Viper from Chrysler (Cerberus) and looks to gain maximum value extraction by courting Asian (ie Chinese or Indian) players who seek an iconic brand for their growing international portfolio. The current plant and equipment in Conner Ave would be relocated to a new overseas production site enabling far lower cost achievement in what is a labour-intensive vehicle. The Michigan site would be used to create a US base for said company to fit their US growth strategy, possibly starting with a latter-day sportscar build using Asian sourced components.

As events stand investment-auto-motives believes Scenario C the most probable, given Cerberus' & Chrysler's time pressures and the impetus for Lazard to find a new parent that can maximise the value extraction from Viper Cars.