Thursday, 30 October 2008

Company Focus – Porsche Automobil SE – Trimming the Hedgies

This week's Dax 30 phenomena will be the talking point of hedge-funds and regulators alike. A market contortion created by the after-shock once it dawned on the investment community that Porsche SE had silently but contractually scooped up a second majority stake in VW AG through a massive batch of cash-settled options set against VW common shares. This represented 31.5% of the share-issue in addition to the previous 42.6%, equaling 74.1%.

With approximately 13% of the free-float on loan to hedge-funds for shorting purposes the Porsche announcement set fund managers scuttling back to buy back into VW stock. The problem was stock availability and elasticity, turning what is usually a very liquid instrument and asset into something decidedly frozen. It rapidly turned the remaining few stock sellers into price-fixers who recognised the level of buy-back panic and temporarily effected a lucrative auction.

Previous weeks has seen 2 similar events of contorted peaks, but prior to this 3rd enormous peak the markets thought the concerns had been contained and were over. Piech and Porsche knew better.

Much originates from the investment community's mistake to assume Porsche's stake build into VW would consist of Preference stock, but given its more limited availability and higher profile (esp to watchful VW management) why would such an assumption have been made? And the very fact that Piech's long-time plainly lauded ambition has been to envelope VW, has been acutely reflected by Porsche's actions as a self-perpetuating hedge fund in order to build its capital position. Yes, there were previous mutings that Porsche wanted only a limited stake to ensure opportunity for operational synergies but, given Piech's voracious business appetite and Porsche's limited organic growth capabilities, such a corporate position should have been seen as part of a bigger Porsche plan.

That plan, we believe, looks three-fold:

Firstly, to access VW envious at-hand and other liquid assets in the short term able to thus use VW as banker for Porsche Cars operations given the endemic credit freeze.
Secondly, to benefit from the expected major margin improvement and expected major sales growth of VW Golf series VI. Essentially the global, mainstream car that is well recognised as premium in its segment. (Strong management focus has been appointed to this critical project, spanning savings across materials, purchasing, productivity and enhancement in volume and FX currency off-setting)
Thirdly, to piggy-back VW/Audi technologies, platforms, dealer network and associated credit division to enable Porsche to broaden its product portfolio far more speedily than it could otherwise – we believe to possibly become the new BMW, mimicking BMW's impressive rise from the 1970s.

To undertake the latter and remain credible as truly Porsche, requires Porsche in the business and operational driving seat, and that is what Piech has ensured. He recognised that whilst the rest of the world looks to alliances that his company's experiences as an engineering and production partner on projects like Cayenne / Toureg / Q7 were less than satisfactory regards preserving brand quality. And that this would always be the case given the low volume take Porsche represented in such projects. Instead, leading with Porsche means that future Porsche-VW model programmes can have a far greater Porsche input, and with swelling global platform volumes, allow the higher Porsche related on-cost (of specific components etc) be absorbed into the expansive products programme.

That way Porsche stays Porsche. And as importantly, from the public's perspective, the VW line-up from Audi and down benefit from DNA origins and association.

At a time when German industry has been consolidating through an ever implicit 'semi-protectionist' political tone enabled with industrial family money, those in the Reichstag and the Deutsche Borse who are critical of Piech's methods may do well to recognise the bigger picture of the resultant effect. Yes there has been temporary, probably inadvertent market surprise and reaction, but Porsche's actions may well have greatly consolidated and strengthened a major pillar of Germany's economic value-creation machine.

Piech and the dual intelligences of his executive team and company solicitors and brokers have performed a near faultless 'fait accompli'.

As for that supposedly conservative arbitrage play undertaken by the now famished hedge-funds - shorting VW expecting it to return to sector norm and Dax 30 norm valuations - the truth is that they should have looked harder at the underlying realities of the situation that was indeed driving up the VW stock.

Fund managers of whatever persuasion, 'Beta' index-orientated or supposedly 'Alpha' smart, tend to be herd creatures, and generally right to be so given the safety of numbers and the market power of numbers. But that doesn't preclude them from their own proactive research, analysis and determination on each and every investment decision.

Unfortunately for the sprawling many who had simply rode the previous economic growth wave, it was the apparent absence of a broader comprehension of the situation - the importance of the qualitative became clear, beyond the easy-spot quantitative fundamentals that promised so much.

As for this historic Porsche-VW tie-up, it sits as an early player and beneficiary within what investment-auto-motives believes to be an increasingly probable eventuality of European automotive consolidation. Consolidation that will continue via both cash-rich enterprises picking over fallen peers openly or secretively for synergies and enhancement with divisional 'bolt-ons'; and governmentally sanctioned M&A to strengthen singular nation's and Europe's auto-sector standings.

The united voices of France's Nicolas Sarkozy and Italy's Silvio Berlusconi are essentially calling for the ECB to provide aid packages to Automotive similar to Washington's efforts, and that will generate an official enquiry that will consequently re-organise the industry to consolidate and climb the industrial value curve.

The real politik that surged through Germany's highly integrated communicational grapevine shows them ahead of the curve, even if it has had to try and be seen as balancing public national interest vs private empire building.

But even if Porsche has been crticised as “part hedge-fund, part automaker”, the formula has been astoundingly successful. The question is, now that it controls VW with its highly cash generative base, will it eventually re-play the same fiscal engineering strategy and tactics over the coming years to perhaps absorb yet another player in either the US, Europe, Japan, China or SE Asia?

The most obvious candidates are the Chinese alliances of FAW-VW and SAIC-VW but Chinese authorities would probably wish to IPO them first to gain maximum value extraction and so full take over would theoretically be at least a decade away. Conversely, VW has over the last year or so periodically mentioned wanting to be the European Toyota, but why mimic Toyota when Porsche-VW could latterly feasibly try similar takeover actions with part by part stake-builds.

As the US government looks hard at the SEC which in turn looks hard at the NYSE's regulatory framework the likelihood of buying slowly into Toyota secretively may be harder and harder, but the TSE's Nekkei , given Japan's never-ending economic anemia, may embue relaxed regulation to encourage transactional activity...and if so, who knows, even Toyota could be on Piech's, or at least Porsche-VW's, far horizon.

Tuesday, 28 October 2008

Macro-Level Trends – Raw Materials Supply - Ships in a Bottle(neck)

The massive inflation hikes in raw materials and energy costs that so concerned the auto-industry has largely diminished - for the moment at least. This is possibly the only positive outcome from the global economic contraction caused by the financial markets turmoil and its real-world contagion.

Rocketing commodity costs through-out 2007 to Q208 were more than evident, headline news almost every other day. Automakers were effectively sandwiched between such escalating input prices that fed into unit costs and a franticly competitive vehicle market driven only by phase after phase of incentive waves.

Today, observers from sensitive central banks to literate consumers, recognise that what were painful inflationary pressures have been eased, but at the reletive cost of healthy regional economies - the West moving into near 0% and negative GDP growth. As a result of global contraction input prices, from oil to steel, have returned to what many see as sustainable from their record highs. The oil price best exemplifies this trend, now down to approximately $60 pb from its near $150 pb peak not so long ago; prompting leading political figures like Gordon Brown - seen as the architect of the globally adopted economic reaction plan - to urge petrol pump prices to follow suite.

Knowledgeable investors would have been aware that the previous high commodity prices in turn encouraged the ramping-up of drilling, mining and affiliated processing which post-peak would ultimately result in commodity over-capacity. Hence the speed of the rapidly squeezed global economic climate, along with the credit freeze took many by surprise and so shrunk commodity producers' order-books massively at a time of unparalleled product output. And obviously that massive and quickly emerging over supply- under demand gap. So far an unfortunate exercise in Economics 101.

The contrast between today and 6 months ago is palpable, a boom-time scenario when steel makers like ArcelorMittal, TATA, Nippon, POSCO, US Steel, Baosteel et al were in the driving seat and used that power to demand spot-pricing as opposed to contract pricing on steel orders.

As ever, timing the demand peak & subsequent downturn is the vital trick, and only those investors and steel-makers with attuned macro-economic foresight at the scale of the financial fall-out would have correctly anticipated the timing and acted accordingly. Steelmakers guiding their clients onto long-term stable contract pricing, and investors siding with the more intelligent steel corporations or perhaps temporarily exiting the sector altogether. The capital exit now apparent is retracting plant and operational expenditure, and so reducing capacity, but it will perhaps be the more nimble smaller operators that can react quicker.

But generally, operating a steel mill has the obvious "stopping a super-tanker" analogy given the long-lead time required by upstream participants in the value chain that supply the iron ore and coking coal. Thus many steel-makers will still have comparatively high cost structures and over-capacity for some months which set against the final products very sensitive donward pricing elasticity puts many steel-makers in less than optimum positions - as highlighted in a Goldman Sachs note earlier this month prompting 'sell' guidance on many.

Given their position as the foundations of the modern industrial world, it is not surprising to see the steel sector being hit as hard as it has been on international bourses; the 'whipping boy' of rightly or wrongly paranoid markets. To illustrate the point, steel prices have plummeted from $1099 and $1039 per tonne highs for hot rolled coil and plate respectively in late July '08, a consequence of not just rational estimation of over-capacity but also compounded the markets flight from risk. Ironically, steel has been seen as a true defensive stock, but as with the VW-stcok contortion due to short selling, all standard and reasonable expectations seem to have be thrown well out of kilter.

Of course, steel is not one homogenius commodity, it actually spans 3 different types depending on use.

The worst affected, leading the decline, were those that specialise in, or whose primary mix is, rod & section steel - the core products used in infrastructure and house-building. The rolling bursts of international housing bubbles saw construction falter and so accordant demand. But that housing crash, via sophisticated financial instruments, went on to infected the credit markets which as we've seen has taken a major toll on vehicle demand & production, which obviously dramatically affected the demand for hot/cold rolled sheet. Lastly, and luckiest are those who are those mills least exposed due to their sector dynamics, and these are those who deal in steel plate, primarily used in ship-building and repair.

So from a steel-makers perspective a more stable segment to play within, though with accordant lesser growth prospects given more prevelent barriers to entry for newcomers. This is best seen by POSCO's sheltered market position in the storm compared to others who previously gained more, but now seeing greater losses.

However, though it maintains a lower-profile in steel production output, it is the role of shipping that is today playing a major part in the price equilibrium of steel - specifically regards raw material input in the form of scrapped ships and re-cycled steel.

Yesterday the FT reported that (to quote) “a key safety valve for regulating the world's supply of ships has stopped working...after credit and other problems brought the sale of ships for scrap to a near halt”. In summary, recent sale transactions have been undermined by the plummeting price of scrap steel.

In India specifically, buyer's banks are unwilling to provide letters of credit to vendors typically secured by said vessel as prime secured asset. As with other world-wide asset de-leveraging, the innate worth of the asset is decreasing, yet another victim of accounting's 'mark to market' requirement. (In early September this scrap steel was fetching $740 per tonne, but now only about $300). This loss of transactional confidence has created a systemic bottleneck, where ship-owners prefer to maintain and operate old ships (increasing the likelihood of infringement of recent environmental regulation) or will 'mothball' them for an indeterminate period awaiting better scrap rates.

This disrupts the shipping sector's renewal rate and disturbs ship-operators nominal CapEx renewal plans - a useful interruption given the slowly thawing credit markets many will say. But it also means that the recycled steel input rate has been artificially reduced. That co-incidentally helps to reprieve over-supply capacity pressures in the market and thus stabalise what were spiralling downward price pressures.

Specifically this is good news for the likes of ArcelorMittal and TATA on whose home ground the 'problem' and effects are most widely felt. But the news of constrained recycled scrap will not be good news to the Purchasing Directors of the world's automakers who eagerly relish depressed steel prices and do not have TATA's benefit of close inter-conglomerate relationships between steel and cars. Unlike India and China, the West is not able to play the internal transfer-pricing game.

The US and Europe will be glad to hear that some of China's more labour intensive ship-breaking yards will re-open, after previous poor-productivity closures; essentially re-routing end of life vessels to China. Such an outcome would partially alleviate China's strategic urgency to capture foreign mining resources, but only for a finite period, and indeed the CCP could view the mining and steel sector downturns as a perfect time to increase its alliance and independent interests.
The final outcome depends on whether a recycling battle between India and China emerges, and given present conditions such a scenario looks unlikely in the short-medium term given market rates and ship-owner reticence.

Although automakers worldwide will have been heartened by the retraction of steel prices in recent weeks, they may well be disheartened to see India playing what could be construed as a self-serving game. Especially at a time when agencies like the IMF and World Bank state that international trade co-operation is vital as perhaps the most important mechanism to avert the world from possible economic collapse.

That means US, European and Asian trade commissioners may well be lobbying India on automakers behalf, urging the Bank of India (via BoI guarantees or some-such) to inject the much needed commercial confidence. That may ultimately mean guaranteeing steel scrap values. A notion not a million miles away from Sir Nicholas Stern's words at a recent London School of Economics lecture where he talked of stabalised commodity prices as part of a 'Global Deal'

However, as for the here and now, at a time when global trade is perhaps the greatest concern and quandary facing international government the East is understandably keen to protect its own economic momentum. It does not want to be pulled back down by the West beneath the newly forecast 7-9% ASEAN growth rate - which itself is well off previous growth forecasts.

India and China, aswell as Russia and Brazil, well recognise the very central role steel output has to play, both in terms of the very material that underpins new rounds of infrastructure build and the foreign currency income it brings national reserves. And at a time when their own stock-markets have taken a worse battering than the US or Europe, they may well be implicitly using the very basic tenants of capitalism to their own advantage.

And that could mean a serious additional fracture to the already fragile western automotive picture.

Washington and Brussels will perhaps need to do more than simply pump cash into their respective auto-empires, they'll need to take the fight to the new-world industrial emperors. For it could feasibly be the case that India, so reliant on steel, is trying create a 'steel-price market bottom'.

Ships may well have man-made steel hulls and bottoms, but the prescient question may well be, "should markets"?

Thursday, 23 October 2008

Company Focus – Ford Motor Company – Tracinda's Double Play?

With previously secured funding in late 2006 described as “America's biggest home loan” to buoy the balance sheet, assistive UAW / VEBA agreements, successful divestments of Aston Martin & Jaguar-Land Rover, a successful rationalisation and integration of global operations under the banner of ONE FORD and a promising attractive high margin world-wide small in the pipeline; Ford promises to be the best bet of Detroit's Big 3.

So why having accumulated 140.8m shares in FMC would Tracinda Corp (namely Kirk Kerkorian & his trusted lieutenant Jerome B York) be so public about its partial sell-off of 7.3m shares? Especially since their sale price of $2.43 is well under the Bloomberg reported $7.07 average price paid for the complete stake?

To what degree this move is prompted by or interconnected with the timely departure of FMC Board members Sir John Bond (the ex HSBC Chairman) and Jorma Ollila is unclear. But what isn't is the behind the scenes pressure Tracinda has been putting on FMC to be braver in its turnaround efforts. Jerry York previously apparently aired his desire to see Volvo sold-off and Mercury disbanded as soon as possible to gain income, cut costs and further assist the balance sheet to both strengthen the cash-at-hand position and possibly/probably start paying improved dividends.

It may have been to counter such pressures that prompted FMC to install Odell from successful Mazda into suffering Volvo to steel Board and investor confidences. And more recently rumours are abound that FMC has been touting a partial sale of its 33% stake in Mazda to Mazda business partners ranging from suppliers to bankers. That move may well have been a precursor effort to maintain Tracinda's interest and avoid a slow sell-off, or even its potential, that can be so damaging. If that was indeed the ploy it was unsuccessful, Kerkorian choosing to sell-down his holding.

He and FMC recognise his buy & sell influence on the capital markets, and through the general grapevine and that (along with the general stock slide over recent weeks) has been demonstrated by the stock price fall from Sept 30th a$5.20 to the $1.99 low, followed by a psychologically driven rebound to the £2.40-2.20 range, resulting in a new recent low of $2.10 as of today (at GMT time).

Exactly why he did it when the longer-term prospects for FMC look good will only be known to him, but one or both of the following reasons are obvious:

1. Board Influence
Given Tracinda's lack of voting rights (40% held with the Ford family) and long-stay Board directors who's independence could have wavered, he probably feels Tracinda's voice is not being heard at Board level, and so what he regards as reasonable corporate strategy actions remaining unexplored. Having had that experience with GM (over the Renault-Nissan alliance debate) he may now this time feel that such 'pro-activity' through fiscally influential moves may he feel be his only recourse.

2. Drive-Down / Buy-Back-In
The other aspect is that he could have cannily attempted, and succeeded, to undertake a loss-leader play, taking a substantial hit on that small stake % to drive the market lower and buy back in with greater interest at a later date. Having seen FMC stock bounce back at the previous $1.99 pyschological floor, he may well be trying to break that floor to substantially buy back in at that record low level. To achieve this he may have to run the risk of selling further small-slot stakes to maintain market discomfort.

Thus Tracinda's statement that said that it saw “unique value in the gaming and hospitality and oil and gas industries and has, therefore, decided to reallocate its resources and to focus on those industries” are undoubtedly rationale; all 3 sectors are valued lowly given their position and immediate headwinds – and of course Tracinda's MGM holding has been reported as requiring shoring up. So there may well be sound reasoning, but there must also be an element of generated ruse to reactively raise FMC Board concern

Undoubtedly Ford believe, and have reason to believe, that new F-150 and global Fiesta will substantively assist revenues.

New F-150 looks and performance are far better than the current truck, and outshine its GM, Dodge and Toyota peers. So although the truck market has shrunk rapidly over the last year and looks in the doldrums for the foreseeable future, it could be Ford that wins the biggest slice of the pie. Even if it has to ply further incentives on-top of the new model to equal GM & Chrysler promotions, its cash-at-hand pool and direct control of Ford Credit should enable such a fight to 'bring-in' the dithering buyer. And the mooted GM-Chrysler merger, although irrational and realistically untenable, would add more fuel to the fire for Ford's dealers to seize upon.

And new global Fiesta looks to attract much consumer attention as the flight to smaller cars continues and a dimensionally enlarged segment car effectively equalises the size of the super-mini small-car segment internationally. Ford and Gm have done much to harmonise their international offerings, and whilst GM has benefited across Europe and RoW, it looks to be Ford with Fiesta that will win hearts & minds & pockets in North America.

Above and beyond the product angle, and the likable Don Leclair has been replaced by the tough Lewis Booth as Chief Financial Officer. This was done to both give recognition to Booth for his European efforts, but also to provide a clear signal to the markets that (along with the Odell appointment at Volvo) that Ford is strengthening its critical eye over the P&L, Balance Sheet and Cash Book. The rightly undertaken staff cut-backs within Volvo a major signifier of its commitment.

So in summary, it seems that Tracinda still appreciates the longer-term promise for its 6% holding in Ford, but understandably wants a greater say in operational decision-making. Having failed to gain operational influence at GM with his previous 10% stake he's seeking to jivvy-up what he may see as an overtly conservative FMC attitude. That attitude has undoubtedly been the calm hand on the tiller through what have been, and still are, choppy sector waters. Steering a safe course in troubled times has always been Ford's strength given its family interests, but equally it should look to tomorrow to build-upon the comparative domestic strength it has today.

As ever, that 'win-win' for both parties will be key. So Tracinda should demonstrate its long-term vision for FMC (possibly synergistically with its other holdings) aswell as continuing to use its muscle-power to have that voice heard. And in turn FMC could correspondingly employ Tracinda's presence as the informal confidence builder for other PE and institutionals. The family and the big institutions well recognise the ever present friction generated between Tracinda & FMC, the trick is to make it creative and positive friction.

Friday, 17 October 2008

Company Focus - MAN AG – Samuelsson's Challenge

Hakan Samuelsson, CEO of MAN (and ex-exec at Scania) recognised the size of the challenge when he moved across to the German conglomerate that operates the primary 3 main divisions of: MAN Nutzfahrzeuge AG (Truck, Bus & Military Vehicles), MAN Diesel SE [Engines] and MAN Turbo AG [Systems].

Although it has an illustrious past, involvement from the very beginning with Rudolf Diesel's, the engineering concern is best known for its Truck division; seen plying freight across the European road network. Unfortunately, the MAN brand is predominantly German-centric, and although Europe-wide has been the historical 'poor cousin' to the likes of Daimler, Scania, Volvo, Renault even within its own territory, and takes only a sliver of international sales given regional predominance of other European, American, Japanese and emerging Asian marques. Marques like: Freightliner, Mack, International, Hino, Isuzu, Nissan and Daewoo Heavy Industry.

As well reported, Samuelsson's initial ploy was to endeavour and buy market-share and gain synergistic efficiencies and economies via a buy-into Scania, taking 15.6%. But a canny and stronger VW / Ferdinand Piech, then took a 51% ownership of Scania, in turn took a 20% stake in MAN. The cross-shareholdings seem to place VW in perhaps the strongest position, with the agenda of integrating MAN-Scania and its own Brazilian truck operations. But that hasn't happened (as of yet) possibly because of Piech's own influence, and so Samuelsson's own perceived Scania buy hasn't generated results as expected. Thus it begs the question “did Samuelson infact realistically act as a proxy for Piech so he could latterly piece together the jigsaw?”

MAN and VW do appear to share similar ambitions in terms of focus on diesel engines and turbo systems, both recognise the rationale to assemble whole vehicles in Germany & even E. Europe is diminishing, that it makes sense to orientate commercial activities around those high-value powertrain and ancillary systems and the associated services that surround them. This could possibly even lead to Piech and Samuelsson respectively re-creating VW & MAN in the mould of Porsche - as both vehicle manufacturers and specialist engineering consultants to their respective global sectors.

[Note that MAN Diesel SE is an SE appointed enterprise related to European corporate legislation, as is Porsche Holdings SE. This dual status simplifies merger possibility]

With that ideology in mind, MAN would be looking to create relationships with major Asian players that need the technological and know-how leap that MAN can provide. The obvious candidate is TATA given its massive Indian domestic sprawl and international growth ambitions. Of course Ratan Tata has FIAT Board seat, so a close connection to the Italian conglomerate that is effectively TATA's European equal. But that does not preclude relationships with others that can fill TATA's competencies gaps where FIAT cannot. And whilst there is an obvious car, LCV and agri-vehicles alignment, FIAT cannot assist in updating TATA's reliable yet aged truck range. That truck range is largely derived (licensed and tooling supplied) from Mercedes 1970s truck range; which although the sin qe non of Indian Trucks is in global terms archaic, and in domestic terms, leaves the company open to virulent attack from the powerful global truck-makers.

MAN could be a possible ally to both provide advanced diesel-emissions knowledge and possibly powertrains to assist TATA's ecological efforts, and step by step create a JV that allows MAN (as a proprietary brand or OEM for TATA) to enter the growing Indian economy - matching its Chinese & Russian habitation within the critical BRIC 4 [VW already present in Brazil]. Such an alliance could ensure that the yesteryear alliance between TATA and Daimler was not re-forged and extend its own Indian sales reach spanning the full spectrum of MHV to HGV segments, 4.5T to 44T aswell as mid and large bus products. TATA would be unlikely to immediately re-badge MAN vehicles as its own, but could encourage the JV to initially cover the generally unsupported Class-7 sector. A sector which has the capability, because of its container-carrying orientation, to transform the logistics capabilities of Indian haulage, especially regards import and export trade. And of course the opportunity for TATA to build labour intensive MAN products (both Vehicles & Engines) as a cost-reduction, out-sourced, production partner is obvious.

(This effective freight rationalisation would of course partially diminish the very high labour content of Indian logistics course brings about the issue of employment. But Indian authorities recognise that their own age-old labour policies keep them in a psuedo 19th century economic trap, so they must continue to reform).

Thus, these are, very briefly, the prime internal and external situations facing Samuelsson. & MAN AG. It does have the potential to transformation and could be part of an ongoing German attempt to consolodate Deutsche AG; as witnessed by Schaeffler-Continental. But as the downturns in Trucks & Marine Vessels (key to MAN Diesel's order book) start to bite, now looks to be a good time to start to execute a possible grand plan that secures MAN's position and provides renewed strong revenue streams and operating profit into the next decade.

Wednesday, 15 October 2008

Company Focus – TATA Group – Enhancing its New Energy Credentials

In this era of clean-energy focus the newswires have recently been buzzing about TATA Motors' major stake acquisition in a little known Norwegian EV manufacturer. The Indian conglomerate's European Technical Division, based in Warwickshire (near the Gaydon based Jaguar-Land Rover engineering site) has taken a 50.3% controlling slice of Miljo Grenland to gain access to EV engineering integration knowledge. Knowledge set to install the polymer L-ion battery technology sourced from Canada's Electrovaya into the TATA Indica V2 small passenger car.

That car though 10 years old now continues to be one of India's mainstay vehicles set for possibly pleasing sales over 2008/9 as the Indian economy slows in the global economic downturn. As with China's love affair with VW's older models, there may be newer, 'sexier' vehicles available but they cost more and are mechanically effectively unproven in a consumer environment that likes what it knows, and knows what it likes.

However, we don't suspect there'll be thousands of 'EV2s' swarming TATA's hometown of Mumbai anytime soon. TATA's board is renowned for its technical R&D (including compressed-air propelled municipal fleet vehicles), and this newly announced technical initiative with Norwegien-Canadian business partners should we believe be regarded as TATA needing to effectively 'stay in the game' amongst its global VM peer group that have signed battery development agreements with Electronics manufacturers across both ambitious L-ion and the more presently tenable Ni-MH.

Thus whilst there may be a limited number of EV2s running around Gaydon and Mumbai for evaluation, demonstration and publicity purposes, these cars will in effect be technology test-beds to gain a better understanding of the technical limitations and solutions to overcome those boundaries. And critically, the absorption of Electrovaya's knowledge into the heart of TATA, including TATA Power.

Given the Green political agenda of the 'developed' regions, led by proponents like Sir Nicholas Stern and Al Gore, Ratan Tata recognises the level of importance between the techno-political interplay, and understands the influence the eco ideology has on the innate nature, and multi-dimensional aspects of the TATA conglomerate. As such seniors such as JJ Irani, Director at TATA Sons, takes a lead role as Chairman of the Climate Change Steering committee, dedicated at cross-company initiatives, typified by efforts throughout the value-chain from TATA Power providing the conglomerate's and nation's power to the highly energy intensive manufacture of complex products such as cars, trucks and buses, which in turn utilise, en mass, massive amounts of hydro-carbon and so CO2 & variant particulate release.

Thus there is a natural feedback-loop from power generation to storage to usage to reclamation.
Thus given its broad span of effectively intertwined industrial and consumer activities, and its obvious regional economic and environmental importance, TATA is remarkably positioned as a major instigator and catalyst for ASEAN industrial advancement philosophy.

Of course, that political 'will' / 'pressure' comes from primarily the US and W. Europe and the G8 countries, though Russia as a major fossil-fuels provider and now with de-stabalised economy, is less vocal. But even with the odd logically reticent member, the G8 has since 2003 endeavoured to invite the quickly advancing, massively growing [and hence CO2 profligate] 'O5' (Outreach Five) nations to join the them at the table for Climate Change talks amongst other issues. [NB. The 'O5' being: India, China, Brazil, Mexico, South Africa]. In June this year the 'G8+5' members plus S.Korea and the EU en bloc met in Japan and established via the International Energy Agency (IEA) the 'International Partnership for Energy Efficiency Co-operation'.

That aligns to the “G8 Action Plan for Climate Change to Enhance the Engagement of Public & Private Financial Institutions” which importantly launched the “Climate Investment Funds” (CIFs) by the World Bank. CIFs are a conjoined effort by Multilateral Development Banks to create two financing streams:

a) Clean Technology Fund – CTF
Focused on making renewable energy as cost competitive as coal-fired energy as quickly as possible.

b) Strategic Climate Fund -
Focused on piloting new approaches for scaling up technology.

So, although by global-player standards, TATA has come late to the EV playing field, it has unsurprisingly come at a poignant time given the macro-context.

Thus, Ratan Tata, Ravi Kant and JJ Irani are effectively centre-stage and leading the way in translating the BRIC regions eco-rhetoric into real execution. A weighty task given global jitters at present. The considerable slow-down of these economies in recent months combined with the global frozen liquidity problem of recent weeks has spotlighted the role of Central Banks core importance and influence. And indeed their required alignment with World Bank and IMF policy now appears to indicate that the new low-cost liquidity made available from central banks, to the banking system itself and direct lending to corporations, is made available with implicit Climate Change understanding regards sector and company industrial policy initiatives.

And as TATA seniors well know, in a risk-averse period where large scale investors such as Institutionals, Private Equity and Hedge Funds have massively retracted their capital awaiting stabilised markets, it will be the large corporations that will have to, and be seen to, convey their Green ambitions to access short & mid-term national, regional & unified-world government liquidity.

In that light, Miljo Grenland's Kr12m costs were a small price to pay to add EVs to the conglomerate's impressively growing, inter-divisional R&D portfolio.

Monday, 13 October 2008

Industry Structure – USA Auto Inc – Re-Structuring for the Road Ahead

Although Capitol Hill approved the $25bn worth of low cost loans to the US auto-industry, Detroit will be lobbying for second and possibly third rounds of equivalent contribution. But as with the $700-950bn TARP initiative, Washington will seek to be convinced that public funds will be best served with new thinking in Michigan and beyond, new thinking that sets out a far more stable and eventually prosperous road-map for the domestic auto-sector.

Much of this decade, especially he latter half, has witnessed a continuous and increasingly alarming sales decline for the Big 3 - first the once popular gas-guzzling SUV & its pick-up origins fell out of favour on the back of escalating oil, now the TIV severely undermined by the real economy's battering from the fall-out of the financial crisis. Stock prices depict the damage better than any number of now defunct adjectives – Ford recently at $1.99 and GM at $4.89 - pessimistically factoring-in market sentiment of dual enterprise bankruptcy, noting the cash-burn of all the Big 3.

To avoid that the lobbying will continue, but the necessity for a dramatic re-structure of the industry looks ever more likely. A call investment-auto-motives has made long before now, and one abetted by formal recommendation that Cerberus gradually start to dispose of the 3 divisions within Chrysler LLC to a well-matched (but for this post's purposes un-named) Asian buyer.

The situation faced today by the industry's senior executives and Washington politicos has been a long time brewing, its traces spanning back to the decade after decade of 'right-sizing' the Big 3 (& previously 4) have undertaken as their domestic market-share shrank. Periodic JV's & M&As such as AMC & Renault, Chrysler & Rootes-Matra, Chrysler & Mitsubishi & GM and Toyota have all played roles in stabilising the domestics and assisting profitable come-backs riding economic expansions, but those yesteryear situations were never as today.

On the back of the low-cost loans, it seems that the financial press have now started to appreciate the enormity of the situation, questioning the analysts community as to how GM, Ford & Chrysler might move forward, including major asset disposals of brands, plants and finance arms. The previous level of invisible concern perhaps now made visible by rumours of Ford's potential relinquishment of its 33% stake in Mazda, aswell as Volvo...sold as a volume-platform and technology affiliated compatible pair perhaps?

Beyond immediate revenue-earning, cost-reduction disposals apart for one company, the far bigger issue for Washington and Detroit must be that which questions the overall shape of the US automotive sector in the medium and long term.

The 5 options below provide a broad yet concise summary of possibilities:

1. Consolidation –
Demanding major upfront amalgamation costs to glean far-off returns, including UAW resistance given recent new contract signings and most importantly the lack of financing available in frozen credit markets, which even if thawed would presently require very high interest rate demands given 'junk' status of the auto-companies.

2. Sale –
Probably impermissible for GM & Ford given level of platform and global divisional integration, but Cerberus/Chrysler would be well positioned to divest of more easily disentangled brand-bases (indeed it would regain & strengthen individual brand character). [A timely full recommendation was made to Cerberus in August 2007, recognising the fall-out to come].

3. Industrial Reform Diktat from Washington -
Instigating cross-company JV's to create efficient operational workings from raw material & parts sourcing to platform engineering to production to dealer network agreements. Obvious problems with anti-competitiveness ideology & policy, especially from foreign automakers (transplants & imports) but that could be circumnavigated with off-setting subsidy, low-taxation and tax-credit agreements

4. Nationalisation / Part Nationalisation –
Viewing the auto-sector as a critical economic pillar that needs close monitoring and continued state aid. If seen as an adjunct to the TARP philosophy, the argument could be made that USA-Auto Inc is actually a long-term valuable asset that would actually be a Return on Investment for the American tax payer. Taking major equity stakes in what is perhaps the 20th century's epitomous icon of American Capitalism however could be seen as a step too far, and a failure of capital markets appreciation for US industry's acute value.

5. “Deconstruction for Reconstruction” -
Essentially the impartial, objective philosophical 'pull-apart' of the complete sector by not Washington, but Wall Street. This would create a new operationally efficient template that goes further than perhaps short-sighted governmentally imposed reform (see 3) by gaining GM, Ford and Chrysler's willingness to spin-out synergistic assets in the form of new Tier 0.5 enterprises; spiritual successors to Delphi & Visteon that could possibly include these Tier 1 corps to create a fundamentally strong Tier 0.5 industrial base that lifts the operational weight from the Big 3 to themselves move forward their own business models as eventually fully fledged 21st century Brand Enterprises avoid of heavy Capex demands and able to create high free cash-flow models that the new business order most definitely requires.

Wednesday, 8 October 2008

Macro-Level Trends – Financial Markets Contortion – VW (momentarily) at #1

As the over used euphemism 'contagion' spreads across the globe, this week undermining Europe's banking sector and more sharply spreading concerns throughout Asia, so regional regulator's have sought to pull more and more economic levers to calm the raging storm. The Fed's landmark TARP initiative comes in the wake of previously failed Treasury & Federal Bank ad hoc efforts, the ad hoc approach used to avert the risk of encouraging further 'moral hazard'. Now TARP has been followed up with a major US rate cut - timed with a similar global-wide central banks strategy - which together try and both provide 'lubricating' liquidity and improve business investment confidence as Large Cap Cos and SMEs face their toughest operating challenges yet.

Since the ripple-effect (or rather tsunami-wave) washed across to Europe, national governments have had to look selfishly to their own level of exposure and associated economic risk. Euro-skeptics like the UK's re-emerged, experienced and vocal Norman Lamont (ex Conservative Chancellor of the Exchequer) commentating on the noticeable fractures appearing within the Euro-Project, as individual national governments seek their best nationally-biased defensive economic plays at this critical point of the storm.

Germany has perhaps come under the heaviest criticism for its policy and regulatory reaction, not at all surprising given its role as as the central promoter of the EU ideology from the earliest days. Encouraged by the success of its own re-unification in 1989 it touted the economic advantage of strength in numbers via cross-continent unification. That has for the most part been proven true, EU expansion and value creation apparent for a decade, but conversely and controversially, just prior to the brink of the sub-prime credit-crunch in August 2007 Germany appeared to gain 20/20 foresight. It started to build its own economic defense barriers across national-industry via M&As (eg Schaeffler-Continental) and seemed to rouse quiet but powerful political pressure. Done so to maintain and strengthen an implicit corollary that holds-together intra-national business confidence; that political will obviously focused on the formally separate, yet endemically close-coupled, multi-tiered banking sector.

That sentiment of comradeship in the national interest to manage risk has been most apparent with recent banking sector consolidation including Deutsche's buy-into Postbank, Commerzbank's takeover of Dresdner and Commerzbank in turn assisted by Allianz. This latter kinship derived from the insurance company's free-cashflow dominant business model that underpins its own and associates' Balance Sheets. However, comradeship does not include illogical self-sacrifice, as seen with peer-group aversion to Hypo-Real Estate. Those with most complex and opaque Balanced Sheets (even with apparently 'solid' underlying assets) are rightly recognised as a step too far, at any price, given the possibility of internalised domino-affect decline that would only de-stablise the sector and nation's economic base furthermore. Thus Merkel's Government and the Bundesbank have had to, like its US and UK peers, step into the breach to ease capital market, industrial and national tensions.

Given German historical 'sozial-democratish' leanings the possibility, indeed probability, of proactive governmental intervention, whether invisible or explicit, has always been recognised by its capital markets. Even with Merkel reigning over a grand co-coalition of CDU-SPD encouraging progressive 'lassaiz-faire' economic attitudes the onset of previously potential, and now realised, hard times effectively re-set the German psyche; especially so at the main Frankfurt DAX Bourse.

And since the intervention policy templates to stem market losses & possible collapse were being effectively set by the US and UK market participants were aware enough to recognise Berlin's probable moves. And having seen the SEC and FSA essentially ban short-selling to avoid the driving-down of the market, although regarded not such an issue in Germany with less Hedge-Fund and Speculator action (given the 'Vulture-esque' repute), it was always a realistic early option to execute as was aired a couple of weeks ago

Thus, the sharp momentary 55% intra-day spike in VW common stock, following the 27% leap on 18th Sept, could be viewed as surprise, both in terms of time-lag and ferocity.
(As widely reported, the spikes are the result of off-setting contra-buy strategies from those who'd previously shorted the stock, but had to cover their positions when the expected decline didn't actually eventuate).

But given the 'awareness' of the general market to the probability of a short-sell ban it's interesting to note trader's mass behavior. Although there was a generally controlled contra-buy wind-up, each trader will have been trying to double guess the timing of eachother's buy movements and relative positions in such a sensitive market. Yet ironically, as seen in the US Great Depression's short-sell ban, a mass of traders trying to cautiously avoid over-paying can paradoxically post-pone many buys resulting in market rush which unsurprisingly spirals price.
Of course although market theory posits informational transparency for all, the reality (even with nano-second quick price information services) cannot illustrate the psychological 'moods and modes' of all VW shorting participants. Thus the wrong double guessing other trader's actions by the majority of trading mass may have generated the ferocity.

Additionally, given that Porsche Holdings SE holds (presently) 35% of the company's stock and the State of Lower Saxony holds 20%, there is only 45% or so available as free-float. It is estimated that a third of this available equity (15%) was previously being shorted, given the poor outlook for the auto-sector; the remainder held by passive ETFs (Exchange-Traded Funds).
What's interesting is that the bourse itself didn't step-in to halt VW stock trading when it was so obvious that market reaction and rapid stock rise was wholly due to extraneous factors, not the core earnings outlook fundamentals or other incoming information game-changers. Given this weeks hellish market drops, and the very contrast to mass-index behavior, one might well suppose that the bourse operators momentarily turned a blind-eye given the corporation's powerful influence on the dour DAX and Eurostoxx indices.

The previous expectancy of a significantly lowered VW stock price that short-sellers were banking on would have played favourably into the hands of Ferdinand Piech and Porsche Holdings SE given their stated intention to buy 51% or so of the company by month-end. So the shorting ban must have infuriated Piech who is keen to extol the potential synergies between VW (specifically Audi) and Porsche, aswell as recognising that the markets would have boosted Porsche's own stock-price for having obtained such a sizable additional stake in VW AG for such relatively little expenditure.

Thus the remarkable rise of VW's Market Cap value, widely reported as now the world's #1 automaker beating Toyota, will be recognised as essentially fatuous and a result of very contorted market dynamics. Yes VW has been the automotive darling of capital markets maintaining a very valuable upward traction of over 50% valuation YoY to date, but given the very specific, short-lived driving-factors that saw the stocks spiking, it is fundamentally irrational to expect VW to maintain such a climb in the long-run, even if as is probable many of the short-sellers who took-on the contra buys keep buying to defend the own considerable present exposure.

Indeed general 'long-play' investors beyond the ETFs will seek to see a valuation-drop to get back in the game and benefit from a soundly based re-growth period as VW introduces the all-important 6th generation Golf, a core revenue contributor given its #1 standing in Europe and its high potential as the catalyst for capturing the new CO2 literate 'diesel progressives' segment of US mass-market.

As for Piech and Porsche Holding's ambitions for VW ownership, could he be brewing an alternative ploy that involves the Hedge Fund owners of that all important 'over-paid' 15%?

Sunday, 5 October 2008

Micro-Level Trends - Paris Auto Show 2008 - The Green, Amber & Red issues of the Euro-Players.

Given the context of a severely YoY contracted European market, calls that the EU should follow the American lead in providing EC and National funding for the continent's automakers and the encroachment of Asian makers (old and new), investment-auto-motives thought it prudent to give a brief critique relative to the majority of manufacturers keen to demonstrate their Eco-credentials and product & company outlooks.

Brilliance Jinbei Auto -
The Sino vanguard into Europe aided by sunstantial state backing, BMW JV quality benchmarks and as located in Shenyang near N.Korean border could possibly utilise regionally low labour costs if today's initial Sino-N.Korean relations flourish. As some Chinese VMs look to Vietnam for a new realm of low cost l-v parts and assemblies, so N.Korea will probably open up further. Brilliance is obviously endeavouring to be a premium Chinese automaker, putting it eventually in middle ground against the likes of Ford & Opel - the everyman's Asian BMW.

X1, Mini 'Traveller' and 7-Hybrid demonstrate its dedication to unit margin maximisation in globally popular segments, aided by more simple yet highly intelligent design surfacing. Given BMW's recent poor earnings performance, now hit by the withdrawl of state-side auto-loans severely diminishing volume (BMW US now looking at margins not volume / down 10% for 08), BMW Munich will be focued on ensuring these Paris products are brought to market on schedule to maintain market momentum (esp BRIC) and demonstrate BMW's return to 8-9% operating margin.

FIAT Group -
The 'GreenLabel' eco-sub-brand is launched, following in the footsteps of a plethora of names from the Germans; from Ford's 'ECOnetic' to Skoda's 'GreenLine' to VW's 'Bluemotion' to Mercedes' 'Bluetech'. Applied to 500, Brava and Croma the basket of usual technical modifications are made, including lowered body, under-body aerodynamics control, longer gear ratios, low resistance tyres and 'start-stop'. Respective CO2 reductions of 4g/km (to 115g/km), 4g/km (to 115g/km) & 17g/km (to 140g/km)are apparently achieved giving an impressive >10% on the large car, but approx 3.5% on the small and compact cars. Although undoubtedly a directed effort the eventual sales mix for GreenLabel is yet to be seen; essentially created to keep FIAT perceptivelly on-par with others

Ford Motor Company -
Tellingly vis a vis FIAT's petrol-based achievements in the CO2 reduction race, Ford's new global Fiesta ECOnetic variant obtains 98g/km from a 1.6L diesel engine, demonstrating the industry's bias to hi-tech diesel for CO2 ambitions, and part of the global push for diesel (esp by VW)

New Ka, supports ONE FORD global small/compact car push and saliently created wisely as joint platform with FIAT. But Ka could have been a much needed (almost standalone) sub-brand given cult-like impact grown over 13 years, obviously a bone of contention in JV product planning meetings with FIAT obvioulsy in a stronger 'walk-away' position. Thus New Ka, could have been Ford's global 'Scion', the car the philosophical underpinnings of something exciting, innately linked with youth and counter-culture. Now FIAT's PR makes Topolino look like spiritual successor - a lost brand strategy opportunity, but much required pragmatic answer to creating a new city-car.

General Motors -
The Chevrolet Volt premiers in Europe. Given the technology hype, the real commercial and profitability story lies within the bounds of cost of production vs retail pricing. Ex-factory presently mooted at $35k. With Prius at $22K and new Honda Insight 2 below that (both Ni-MH not L-ion), $35K looks decidedly hefty and when including the possibility of diminishing oil prices given a global slow-down (stablising at $85 p/b?). The question is exactly how much of Capital Hill's $25bn will go towards subsidising Volt to make it a more realistic buy proposition? Especially when GM needs funding to re-orientate its 'tanker-like' operating structure.

The compact Cruze sedan is an understandable & credible attempt to compete in such important value-orientated sectors given these dour market times. As a counterpart, Orlando looks to be a good 'clean'' mini-SUV' offering, marketed as an underling to the not so well received Captiva.

Honda Motor -
Insight 2 moves the hybrid game on immeasurably as lower proced counterpart to Prius 2. Although later to mass-market, Honda PR states a strong Hybrid product pipeline to follow in the form of New Civic Sedan (variant?), Jazz city car (a real coup if a plausable proper hybrid - battery pack replacing mid-mounted fuel tank + relocated small tank - and not just mild 'stop-start') and CRZ sportscar.

These together with global F1 'Earth Dreams' campaign, much TV coverage and the previously signed JV with could springboard Honda beyond Toyota as 'the' eco-automaker.

Hyundai Kia Group -
New is the i20 (replacing Getz), the i55 SUV, and 'Genesis' large car & coupe that we believe could be eventually extended into a premium flagship brand in its own right to compete with Infiniti, Acura etc latterly destined for the USA and Asia, though not Europe.
Kia is pushing the youth dimension of the compact and boxy 'Soul' that made a splash in its 3 variant guises at Geneva. This car is an important stepping stone in the development of Kia as a credible automaker, establishing its own identity and confidence as a worldclass producer and no-longer over-shadowed by Big Brother Hyundai.

At last both brands are developing characters beyond the previous 'entry-level' segments into mainstream and young / 'young at hearts'. A much needed ploy given the strategies of mainstream producers to introduce their own 'entry' brands (from Chevrolet to Dacia to Lada in due course). As such Hyundai Kia looks to maintain its global momentum, spread its offerings, and mature as a well positioned 21st century corporation. However, it must move beyond the old globalisation model set by the likes of Toyota and Honda, and should lean on S. Korea's advanced IT industries to provide competitive advantage over the old guard players whose IT value-chain is more disparate and fragmented.

Jaguar - Land Rover (TATA Group) -
Situated next to the Volvo & opposite Ford stands illustrates a prescient metaphor regards the operational inter-relationship between TATA and Ford.

Besides the 'stop-start' facility integrated into all diesel manual Freelanders, as part of the brand's vital CO2 reduction efforts, nothing of real import from Land Rover, with memories of the LRX concept still an imagined bridge to future profitability.

Jaguar equally has little to show at the moment, the press highlighting the supposed 'skunk-works' XK-RR to add additional performance kudos and endeavour to stretch Jaguar's price ladder up to, eventually, the £100,000 mark. Critical to that is the next generation XK in various guises; including the role of Daimler - if it has much brand potency left in reality. How viable that ambition is given the present contraction of premium markets and the rebound brand power of the Germans (inc more affordable Rolls-Royce, Maybach and possibly a 3rd Bentley line) remains to be seen. Ratan Tata's seat on FIAT's board (illustrating the kinship of both industrial royal families) obviously points to a Maserati & Jaguar JV as the base for contending the Germans in the future using advanced structural engineering and the leverage of the TATA conglomerate throughout the product's associated design and production process value chain.

At a time of deplorable European & US sales, the results of operational rightsizing are apparent with the lack of XF's in London and UK regional showrooms. And equally the XF's presence on central and suburban London roads isn't very noticable, when it should be. Dealer staff state there is no supply-demand problem but one element of that equation, from our perspective, looks out of kilter right now which could well be negatively affecting revenues and cashflow.

Amongst the glitter of the Hypnos and RC, Citroen's C3 Picasso & latter-day Peugeot 3008 fight in prime territories, adding MPV and X-over dimensions to the small and mid-size segments. The C3 will aiding company's C02 fleet balance whilst the 3008 would be dimensionally/package plausible for clean-energy technologies - obviously critical at home given eco-taxation structure and corporate domestic sales bias.

PSA will obviously continue to focus its Pan-European marketing on its worthiness as a low CO2 producer, much to its credit and Christian Streiff's demands as he continues to balance operational cost-cutting without undermining the potency of his company's positive market position.

Renault-Nissan -
The re-reveal of Logan, although already in market, demonstrates Dacia's core role in Renault's very important 1.4 & 1.6 'practical motoring' fight, especially on home turf. The Sandero's new 1.5 diesel engine will give the brand slightly more style and improved emissions, so endeavouring to halt the march of PSA's small cars. In effect larger car offerings for small car money. Not serious cannabalisation threat to Renault brand, which has, we think, has near & mid term sales headwinds of its own.

Megane is launched but we harbour concerns that the Pelata vs Le Quement friction endemic in 2005/6 has over-dulled the new car, and like Laguna, the 'flight from design risk' has unfortunately also undermined Renault's central consumer demand theme, its style USP, and so will affect projected volumes. Hence Megane will be the 3rd dissapointing new product after Twingo 2 and Laguna. Ghosn should have backed Le Quement to maintain the style flair that Renault had so wisely build-up as part of its, now lost, DNA.

Infiniti's long awaited European launch will test the elasticity of premium market, under-cutting peer Lexus models, as it previously did vs the German dominants. The service dimension, already worked upon as standalone with previous dedicated Japanese and Russian pilot sites aims to seperate the brand from architype dealer experiences, more boutique hotel than showroom, and this will indeed be a theoretical key element to the Infiniti offering, where service levels and commtiment in the sector are crucial.

Toyota - Lexus -
Toyota leads with 3 new products: the landmark iQ city car, Urban Cruiser and new Avensis.
The first endeavours to demonstrate that city cars can be intelligent and upscale, package & functionality being the prime marketing elements. Urban Cruiser, derived from Yaris, points to a X-over & Scion-esque product that we believe is paving the way to orientate European mindsets to the latterday introduction of Scion as a global brand. And new Avensis has morphed into a sharp-suited product that mimicks the Lexus IS range, so adding prestige to the model-line that previously lost its way.

Lexus unveils the IS250C, a quietly introduced vehicle that could be a major landmark. Competing in the 'personal car' US segment it has the timely potential to steal from the German pack, suffering so badly stateside.And within Europe and RoW, its a perfect stablemate to shore-up and enhance the IS small car range. Only the 2nd convertable, after the much lauded SC430, it will undoubtedly prove truly popular and a real revenue earner around the world for Toyota.

Volkswagen AG -
Beyond the Eco push VW's core message is the introduction of Golf VI, and will want to maintain its stranglehold has Europe's best selling car aswell as dramatically raise unit volumes in the USA and other prime RoW regions. Replacing the old Rabbit, which still has psuedo-cult status in the US, with a market attuned Golf VI & VII, would dramatically improve the automaker's margins thanks to volume and productivity gains and recapture it's somewhat lost Golf gold-standard reputation. It will be the core aspect of VW's charge on Toyota. As such the car is conservative and visually clean and price-wise starts with an entry level car on par with the C segment middle-ground, the strategy to enhance low-priced models' margins with sizable features list, aswell as creating a raft of variants that provide a price ladder from 16K Euros to 26.4K Euros.

As part and parcel of VW's product spread strategy SEAT introduces the Exeo as a value-orientated competitor in the C/D segment vs Mondeo, Insignia, 407/8 etc. This car tries to copy Skoda's fortune with the Superb by walking up a segment and giving more gravitas to the brand aswell as allowing greater VW parts commonality and linked volume efficiencies. Loss of what has been the debatable SEAT Scalop in the front and door flanks of the rest of the range is a plus making it visually sit better within the upmarket associative VW family.

However, Spain's current severe economic contraction will probably undermine the domestic volume forecasts, and the more value orientated VWs, the renewed sense of ability from Ford and Opel in the D segment aswell as Skoda's inroads with Superb's many guises including sporty & 4x4 will demand that SEAT presents itself as the cut-price Alfa Romeo alternative, as it was initially supposed to, but failed.

This car has similar Alfa surfacing elements - unsurprising since Walter de Silva - ex Alfa Design Chief leads VW & SEAT Design - so much will depend upon performance, pricing and importantly a coherent marketing platform that evolves 'auto-emocion'. Presently, if the UK is reflective, regional national sales companies are creating their own advertising, as the UK did with the new Leon, in a bid to raise profile or impact. As SEAT's family of cars visually fragment (see Leon vs Exeo) an even stronger Pan-European core brand message is needed, not yet another layer of brand fragmentation leading to consumer dis-orientation.

Volvo Cars -
Introduction of the 'DRIVe' eco sub-brand, using familiar CO2 reduction techniques that propel the C30, S40 & V50 to emit less than 120g/km, very good achievements given the size of the vehicles and demonstrate Volvo's commitment to be seen as a Green automaker. Ironically, we believe Volvo shouldn't have introduced a parallel sub-brand to all its peers, instead simply allow Volvo to capture the halo-effect, rather than deflect it to a specialist moniker.

Wednesday, 1 October 2008

Industry Structure – BYD & China Autos - Warren Buffett's Auto-Futurism.

With only two days before the unveiling of a host of Electric Cars at the Paris Auto Show, exactly one week since the watershed EDF take-over of British Energy, 3 weeks after the revised US Energy Bill, and on the eve of Congress' agreement to fund Detroit with $25bn in low-cost loans, the deity of the investment arena - Warren Buffett - buys into the Chinese conglomerate BYD. A 'future-forward', vertically integrated Auto-maker with core competencies in the high-value arenas of Electronic Equipment and critically Battery Packs. Timely indeed Mr Buffett!

His recent $5bn stake in Goldman Sachs (with accordant warrants and secured high yield dividends) could well be seen as providing the future funding access, indeed at this point "vital liquidity" for many of his recent & new acquisition ventures. Those ventures span sectors from rail-roads to nuclear energy to now finance (Goldman's investment arm able to effectively fund itself from the retail deposits pool and PE funds) and now the promise of eco-cars.

With the US caught between the jaws of economic recession and eco-ideals, and a time of temporary mass-migration from private to public transport, clean energy diktats and interbank & business lending interest-rate hikes, his latter-day spending spree is looking very very considered...even more so at today's undervalued mark-to-market enterprise prices.

Relative to BYD, Chinese stocks have been heavily depressed for some time, down typically 56% YoY, but Berkshire Hathaway's share-buys in BYD sent the stock rocketing 40% almost instantaneously - so is the confidence factor injected. Of course that is not reflective of most Chinese stock focus, ex-state utilities like Chinese Railways and other 'defensives' attracting what cautious domestic and, now foreign, money there has been of late.

The investment community has been relatively cautious of the 'promise' set out by Green Tech to date, and whilst there has been a growing band of brave PE funds directed at the Green sector they have had to digest and discern between the commercial realities of a plethora of scientifically plausible yet unproven options at varying states of development - from Algae Farms producing Bio-fuels to 'Home-brewed' hydrogen stacks to Nano-technology promising to radically alter the functionality and so investment feasibility of advanced automotive battery packs.

Of course Berkshire Hathaway's general remit is very different to the philosophies of FFF-incubators, VC start-ups and stage-2 PE developers. Buffett and his trust-worthy close cohorts seek risk-aversion as a fundamental pillar of BH's massive, highly followed and very influential funds base that serve the Average Joe & Joanne 'Buffetteers' that span the USA, from Nebraska to New Mexico to New York to Newport Beach..... the latter of these obviously being the home-towns of the sexy end of funds management. Buffetteers don't go for sexy, they go for solid...especially so now.

So why a little known, veritable minnow, Automaker over in China?

Because whilst the majority of automakers are recoiling from the mix of very depressed markets and necessary heavy capital expenditure to stay conventionally positioned in the traditional game, BYD - although tiny compared to the likes of its peers SAIC, FAW, Geely etc has from the beginning set-out to operate within the auto-arena from a better placed position.
Unlike traditional auto-companies that have grown in the Ford-esque mould embroiled in standard operating models that include a massive 'dead-weight' of crucial but low-value engineering and production activity, BYD Auto was essentially created to 'run-light' operating against the grain.

Instead, a sister division to a large Electronics and Battery concern, a conglomerate that sweats high-value industrial and consumable assets, which have synergistic transfer rationale into essentially bought-in automotive platforms and assemblies. BYD execs and their backers hope that the bringing together of bought-in 0.5 Tier access ability, bought-in styling from leading design houses and in-house competencies can create a new business-model. One that achieves greatly improved unit margins and cash-flow (a sin que non of today's large investor) via reduced fixed costs and controlled variable costs and a philosophy that seeks to merge best practice from Auto and IT sectors...almost the ideology of the Italian Carrozzeria meets Dell meets Apple!

As a high value-adding commercial structure, BYD appears to demonstrate much needed advanced thinking for the auto-sector. Whilst the West is trying to transform its near century-old industry into something that can leapfrog into the 21st century (as Carlos Ghosn would like), the Chinese have had the opportunity to start from effectively a clean slate. The 'authoritarian capitalism' of the CCP able to - since 2004 and its auto-industry review looking at 2010 - create a new multi-tiered sector that meshes with the needs and aspirations of other industrial sectors; in BYD's case IT, Electronics & Power-Packs.

Ironically for all the West's derision of 'copy-cat' cars and poor product quality, those in the know aren't focused on the product - that will improve in due course with world-class project process adoptions. Those in the know are far more focused upon today's 'technology web' and orchestration of resources to create valuable commercial enterprises. At a time when mainstream auto-producers in the US are loosing per unit, the mainstream Europeans make 3%, premium Europeans reach 6.5-8% all senior sector, banking and investment eyes look to the new industrial platforms being nurtured in China, for latter-day adoption.

That's why Warren Buffett bought into BYD. China today, the world tomorrow?!