Tuesday, 25 November 2008

Company Focus – GM – Banking Against Bankruptcy

The pro and con argument regards the 'bail-out' of the Big 3, and particularly GM, continues unabated. Around Capital Hill, the Washington politicos of Obama's camp, Detroit and the public at large that rely on the automotive sector north and south of the re-enlivened Mason-Dixie line that separates what many recognise as the over-bloated UAW responsible northern states and the economically efficient southern states that are the success story of 21st century US auto-sector capitalism – even if ironically for the most part foreign owned.

As the Big 3 re-consider their respective and collective position(s) after the reportedly poor performances of Detroit's 3 CEO's at the recent Congressional hearing, there is the notion that the industry will prick the Congressional consciousness by driving a caravan of 200 or so eco-tech vehicles to DC.

Such a parade could well be viewed by the likes of Pelosi and Reid as little more than a cynical PR stunt generated to gain the public's goodwill to effectively 'lean' on Congress, and create the retort that the initial $25bn green-tech monies have already been signed off by Bush awaiting accessibility. Instead the additional $25bn 'bridging loan' will be heavily dependent upon Nancy Pelosi call to submit medium to long-term strategic viability plans that philosophically and numerically demonstrate a tenable and profitable road-map forward.

These funds, predominantly in GM's favour given its size and need - of a reported $13-14bn – are viewed as either 'lifelines' through the recessionary period, or wasted feeding a veritable 'money-pit' that will falter soon after burning through the appropriated cash - the parallel to the distressed banking sector all to painful.

But if the argument be fought on fiscal accountability grounds, Wagoner could well have a strong card, if not an ace, up his sleeve. For unlike the risk-laden, overtly laissez-faire attitude of the likes of Chuck Prince previously at Citi and Dick Fuld previously at Lehman Bros, Wagoner can point to the financial prudence GM has demonstrated with its own employee pension fund obligation. Although full year 2008 figures are not available yet, a recent story from the New York Times highlights that GM has been topping-up its fund obligation since its under-par position earlier this decade, illustrating acute use of accounting rules and no tax advantages, and keen to publicise its social responsibility.

That rebuilt its fund from sizable budget deficits in 2001/2002 (of $20bn) to break-even in 2003/2004 to growing impressive surpluses between 2005-2007. Importantly it learned from the tech stock bubble of 2000, and cautiously switched from the typical corporate portfolio holding of 25% equities to a far reduced level of 15%, preferring the safety of coupon payments from US Treasury Bonds and US Blue-chip Bonds – the dividends able to fulfill the present-day requirement of $7bn per annum. That conservative approach was contra to the general fund manager sentiment of the 2003-07 period where stocks boomed, but has now been seen as a wise precautionary against the credit-crunch created stock-market collapse of the last year, ranging from 45%-90% depending on sector, and demonstrating that even what were regarded as defensive stocks have not performed to expectation.

That fiscal foresight in protecting its ability to pay its pension obligations could well be the critically advantageous 'silver bullet' issue for GM and Congress' view of its self-governance.
Of course the 15% asset allocation to stocks will have been heavily knocked, and we are yet to find out how that write-down affects 2008 pension budget figures – importantly whether it remains in surplus. Very basic maths assumes that even a full loss of that 15% allocation would still leave the budget balanced, so the level of surplus depends on exactly which stocks the GM Pension Fund holds – and for that it is a case of “watch this space” for FY2008 results in the new year.

The crux is that Wagoner et al are endeavouring to avoid the possibility of bankruptcy that would be so so damaging to not only the Big 3, but the sector as a whole and the American economy – both sides of the all to academically re-emerged Mason-Dixie. And the pensions issue may well be GM's tour de force.

For even if GM were to enter into even a supposedly quick pre-packaged Chapter 11 – something investment-auto-motives believes would be very tricky, indeed onerous, to create – it would leave Washington with that $7bn per annum pensions bill. Would it want to add to its already massive liabilities by that annual amount, and even if so for a temporary period, a Chapter 11 re-structure would very probably result in the that liability not being put back onto a restructured GM's books and left instead with government and the over-laden tax-payer.

However, GM's success in running its pension fund, with the additional irony that it has done so by effectively buying US Government debt to feed its own coffers, could make all the difference to its future outlook, and access to that $25bn 'bridge-loan'. Perhaps especially pertinent now that the Federal Reserve has stated it will undertake a 2-step $800bn initiative to unfreeze credit markets to consumers aswell as home-buyers and SMEs.

And as for that implied 200 car green-tech caravan, its route into Washington will be all to serendipitous, expect Detroit and the Japanese to band together, but GM will want to come via the northern DC suburb of Chevy Chase rather than (Toyota's) Tacoma. Still, organising the caravan route is the least of all US car-maker's problems; the real road-map to create is a strategic and operational one.

One that we believe should over the next decade change the innate structure and profitability of the US auto-industry - the government acting in the role of fiscal supporter and process invigilator.

Friday, 21 November 2008

Micro-Level Trends – US Autos – Huffing and Puffing over Detroit

The Huffington Post, and the views of a primary contributor / journalist Diane Tucker, has become a regular read for many Americans over the last few years who initially sought out a distinctive liberal-leaning voice some years back in the face of an ever publicly 'removed' Bush administration.

Reading and riding the the obvious zeitgeist of a politically frustrated middle-class angst, Softbank Capital and Greycroft Partners financially backed the venture to grow into a what's fast becoming an apparent de facto 'independent' news source and 'speakers corner'.

The pro and anti stances of Democrats and Republicans regards the tax-payer support of Detroit's Big 3 has taken up much of the news-sheet over the last few weeks, with an interview structured repost from the respected journalist and author Peter de Lorenzo endeavouring to demonstrate that, to alter a hackneyed quote: “not all is rotten in the Kingdom of Detroit”.

Peter de Lorenzo is fighting Detroit's corner and puts forward strong argument that the automakers have been on their way to turnaround for some time before the credit crisis broke. And whilst it is undeniable that GM, Ford and Chrysler have indeed been successful in trimming over-head and piece costs, primarily through plant and labour retrenchment and trying to re-balance the supply-demand see-saw by manipulating auto demand elasticity through extended credit periods, the profitability goal posts have sharply moved due to a previously rapidly changing, volatile global economy; essentially undoing the good work done to date.

Two main elements demonstrate the innate schism: The brokered UAW VEBA deal was rightfully applauded but the previous policy implementation of extended & sub-prime credit was ultimately value-destructive; delaying the per unit break-even period and so reducing the unit, division and corporate IRR.

However, even foregoing such back-firing short-termism, the truth of the matter is that US Automakers are endemically structured from a sector template devised over half a century ago and long past its peak. Recent events demonstrate the acute level of global automotive sector competitiveness and highlight the predominance of credit-dependency over and above product-purchase objectiveness. It has been evident that for years the often better paid white collar 'rationalists' on East and West coasts have bought into the Japanese & Germans, whilst the less financially able blue-collar 'emotionalists' were loyal to the US 3 who via their own credit arms were able to create fiscally attractive deals. (The Koreans sat squarely between the 2).

But ultimately the operational model has, quickly and painfully, been seen wanting. Ongoing headwinds encompassing everything from hyper-oil-price to mis-matched product mix to over-lapping (and untapped) brands to an unstable supplier-base to unfortunately still uncompetitive labour cost 'legacy' responsibilities to still under-capacity, therefor over-cost, poor production efficiencies.

Like US products vs Japanese peers, Peter de Lorenzo believes that Detroit is really victim to an image problem, its reputation (as viewed by Congress) suffering now due to past deficiencies. But the truth is that like its products it is forever in 'catch-up' mode, and as with the cars no amount of PR spin about domestic product or sector improvement changes the evident reality.
Yes fuel efficient cars are evident and in the pipe-line, but where were GM-Chevrolet's real competitors against Yaris and Corolla that should already be part of its global small and compact car portfolio?

The solution earlier this decade was to demploy a strong small car competance from the new GMDAT, risen pheonix-like from the ashes of Daewoo? Instead the asset base was commercially exploited, attaching Chevy badges to Daewoo cars and undertaking low-cost re-skins and part re-designs as part of a plan to maximise profit but forestall on tomorrow's investment. That tomorrow has arrived and what should be an sparkling asset, whilst undoubtedly commercially viable, could be accused of suffering from an arrested development consequential of lack of parental supervision. As rightly reported, vehicle rankings in "U.S. News" demonstrate that 7 of the 34 affordable small cars are produced by the Big 3, but the best performing is the Chevrolet Cobalt, managing a paltry #20, while #1-3 are all Hondas.

Honda's small and compact car ability, in fact innate knowledge. also highlights the possible foible of GM looking to advanced yet unproven and industrially expensive battery technology as the green-tech panacea. The Chevy Volt, using L-ion batteries, goes against the conservative philosophical and real-world proven grain of Honda's & Toyota's use of far more proven Ni-MH technology. These companies have become the effective Hybrid & EV mainstream and are the demonstrable knowledge creators and, along with their suppliers, the de facto knowledge brokers. Whilst the use of L-ion is growing its applications are currently limited, best viewed in the 2009 Mercedes Bluetec S-class which will be sold in limited numbers, closely followed in operation by Daimler R&D specialists and given class-leading customer support. The paradox of a mainstream Chevy and rarefied Daimler limousine sharing technology which is still 'cutting its teeth' is all too apparent - especially as the real impetus for GM to shift into future-tech dwindles as the oil price hovers at $50 as a consequence of the global economic slow-down.

Yes Toyota (down 23% YoY) and Honda have taken a hit with plunging TIV sales due to broken consumer confidence, but they are in better condition to weather the storm. Their innate operational flexibility and product strength demonstrated by speedy cut-backs of worldwide production capacity, and critically, their ongoing ability to continually improve all-important Chinese market-share. (GM will suffer locally caught between the dually deserved fine build reputations from the modern Japanese & older German models that are viewed as risk-averse and maintain depreciation values).

Historically, Detroit's Big 3 have played-out 3 types of differing modus operandi. Their differing fortunes relative to their reaction to the sector's periodic shifting sands driven by economic cycles. Their strategic & operational roles and methods are almost endemic to the corporations, best understood by each's general and reactive styling and engineering strategies.
GM has been the conservatively-led mainstay of the domestic sector, a heavily laden and almost sector-responsible super-tanker (or rather 'mother-ship') orchestrated by the ideology of economies of scale over all else, and as such been the centre-ground mainstream that, for the most part, proffers a diluted array of once meaningful brands which have been so 'inter-morphed' in the search to generate profit that resultantly they have long-lost their innate individual magic. As such it has been the marathon runner, long on stamina but experienced ever-ongoing depletion (slow shrinkage) of reputation and profitability up until this 'rupture point'.

Ford has been the middle-man, seen as middle-ground and conservative but in fact often the stylistic and so expectational game-changer for the industry. (From the Model T to the '30s Zephyr to the '61 Lincoln Continental to '80s Sierra & Taurus to New Classics like Thunderbird & Mustang and beyond possibly re-inventing itself through Model U and affiliate US transport brands like Airstream and Super Chief). As such it has played a domestic role as paradigm shifter whether through Aerodynamics, Euro-Modernism, Retro-Design and perhaps now Diesel instigator along with VW). It has endeavoured to re-invent itself to fit the zeitgeist (as with creation and dilution of PAG) and maintain credibility and importantly profitability. As such it has been the periodic pace-setter, thrusting forward to alter the pace, then settling back into the mileau.

And in contrast Chrysler has been the periodic performance 'spurter', with a profile and profitability that 'yoyos' between lacklustre, plodding at the back of the pack, to rapid energisation that propels momentarily to the front for short periods before slipping backward. As the smallest and weakest of the Big 3 the propellants have been external capital (Government, PE and Trade), alliance formations (eg Simca-Roots, Mitsubishi & Daimler) and product 'injections' (eg '80s Minivan, 90s cab-forward LH cars, '00s PT Cruiser & 300H); the combination of which markedly improved performance for short periods.

So yet again Detroit sits at yet another “historical juncture”, the obvious answer touted being another round of marque extinction and sector consolidation with GM's absorption of Chrysler and latter-day re-organisation. But that would only extend the financial and social angst and pain as cultural clashes, internal politics and massive budgetary requirements emerge to forceably shrink the 2 headed monster. After the turmoil and experiences of the Daimler-Chrysler relationship, Chrysler knows only too well that it would suffer under such powerful 'guardianship'; re-align leading to inevitable expiration as GM leverages its muscle to obtain the best of Chrysler's assets and run-down competing products, brands, dealerships etc for its own advantage

The North American solutions of the past have demonstrated themselves to provide only ever more marginalised breathing space for the survivors as round after round of domestic consolidation momentarily alleviates domestic pressure only to be re-pressurised by foreign newcomers from both ends of the price spectrum. Thus, such understandable yet reactionary behavioral dynamics of the past, in reality amounted to re-runs of familiar tactical fire-fighting providing at best mid-term reprieve.

But today is very different for North America. The credit-melt-down demonstrates the vulnerability of a business model whose heavily capital intensive operations were reliant on the absolute stretch of patriotic good will and floods of liquidity to shift what has effectively become a commodity product, the best item bought at the least serviceable cost to the buyer.

That squeeze between product design & production costs and incentivised sales programmes to shift millions of units was always a disaster waiting to happen. So as that all too critical tide of easy credit rapidly withdrew, even with the deflation of input costs, the Big 3's economic structural inefficiencies are all too apparent. Soros' much bounded euphemism about “now seeing who's been swimming with their pants down” has never been so true.

Ironically, the world outside of the US, that ever-present threat that has evolved for decades, is not such a foreign land. The Big 3 have been operating there, beyond the US borders for much of their own existence and know it well; indeed planted the seeds of growth with their own brands and JV ventures. They know only too well that growth and commensurate auto-demand (particularly in Asia) is only achievable with sound national macro and micro economic principles, fiscal and monetary policy guided by ambitions of national growth to climb ever higher up the economic value curve. But that value curve is dependent upon innate industrial structures that rely on domestic and foreign trade demand. The very tenants of Anglo-American capitalism, that of domestic wealth creation reliant upon educational aspiration and the subsequent self-momentum effect which was once the preserve of the US is now that of Asia and beyond.

And this is the dilemma that Wagoner, Mulally & Nardelli now face. The economic miracle and the complex, capital intensive industrial structure that the Big 3 represented in the 20th century is now well under way to being successfully replayed in BRIC regions, even with the unease of their current temporary slow-downs.

America now has the challenge of re-inventing its own PESTEL order to create a new economic platform from which it can map a new value curve to climb and so regenerate national growth and accordant well-being.

And that is why Detroit must be helped, but also put under the auspices of a qualified invigilation to ensure that the assistive funds provided are indeed used to remould the companies as new era entities in new industrial territories, and not simply left fight over the crumbs left on the table in what is now, for the west, essentially for the most part a value-destructive sector. After much academic and consultancy forewarning (from notably the likes of John Wormald and Graham Maxton) the credit-melt-down is perhaps the final wake-up call, and Detroit must heed the tolling of the bell, just as Warren Buffet did.

There has been, and will be, much more 'huffing and puffing' over Detroit, and whilst Peter de Lorenzo makes his points well, he and others must appreciate the industry in global and economic context and recognise the size of the over-riding challenge.

Monday, 17 November 2008

Macro-Level Trends – The US of GM – The United States of General Malais

As the seniors of national central banks and governments of the world 'look-on', they recognise that much of their own economic tinkering is of second-order importance, magnitude and consequence to the economic restorative actions of the US and China.

As the effective powerhouses of global-effect policy and growth, that much needed restorative confidence will take longer to emerge than politicians, business and the public should like.

America's 'Troubled Asset Relief Programme' (TARP) is presently worth somewhere between $700-950bn, was originally intended to buy-up the veritable ocean of toxic assets that created the now international financial fall-out. But the investigation into identifying and locating the problematic instruments has demonstrated that their immense spread and opacity (of SIVs et al) inhibits the realistic possibility of isolating a virulent viral spread that infected even high-grade instruments.

Hence, given such a scenario, the Federal Reserve wisely recognises that even the near trillion dollar fund could well be but a drop in the monetary ocean, with limited direct effect on global finance, let alone broaching the question of the US's cross-border liability.
TARP was born not from a prescriptive, exacting solution, but from general philosophy and ideology, the execution dependent upon realistic outcomes.

In assessing the big-picture the Fed and Congress recognised that an action to 'chase-down the problem' was in reality a 'guestimate solution', an effort which given the problem's scale would be effectively be fool-hardy and irresponsible. Better to resolve domestic financial dynamics in markets and commerce with a mix of traditional free-market economics and periodic light and heavy interventionism to avoid the encouragement of 'moral hazard' and avoid major societal affliction.

Thus TARP's raison d'etre altered from the 'target strike' of what were hard to identify targets to the damage limitation of the country's central players. From the danger of an idealised yet impotent offensive action, to a well-reasoned domestically welcomed defensive play.
Although criticised from some quarters, it has to date largely been used to re-buoy the heavily 'written-down' balance sheets of those damaged entities that are judged inherently critical to avoid market-melt-down (eg Fannie May, Freddie Mac, AIG) or judged inherently strong (eg Goldman Sachs and Morgan Stanley). That criticism should have been largely quelled by the fact that these institutions have as part of that liquidity injection agreed to undertake diktats and accordant measures that redress their own inherent risk exposure. Actions that conform to Bank Company Holding status regulation such as raised capital to leverage cover ratios (typically its Tier 1 level) which in turn has attracted additional equity from respectable domestic and foreign external sources such as Warren Buffet's Berkshire Hathaway and Mitsubishi UFJ.

As a consequence in the flight for safety under TARP, other exposed financial entities have started to court the US government for funding, and as such the latest (if not surprising) community is in the consumer credit-finance arena. The now permitted action of American Express to convert to Bank Holding Company status will give the credit divisions of major American corporations the precedent to seek similar operational protection given their bank-like characters. Indeed the very size of Detroit car-maker's loan & lease exposures weigh heavily on the parent companies' already strained balance sheets and credit ratings. Today the Big 3 are in an unparalleled danger of bankruptcy caused by unprecedented and untenable circumstantial macro and micro headwinds. Headwinds and multiple counternancies which combined evidently highlight a lack of confidence resulting in GM stock plummeting to a 1943 low. [That market counternance consisting of the escalating cost of corporate default insurance for bond-holders and the retraction of insurance for the the Big 3's suppliers, leading to ever declining falls into new realms of 'junk-grade' territory].

The efforts of GM, Ford and Chrysler to highlight their plight and request Capitol Hill's assistance has been a long-time coming, the necessity now here. But although detractors might state that the 2007 New Energy Bill makes proviso for the Big 3, that split $25bn was and is intended for green technologies, not general operations. That promised money needs to be accessed now and protected for only eco-tech projects to ensure US Auto Inc does indeed have a future on the global stage and can play a role as part of the new eco-economy, a new paradigm being created by Californian players in Silicon Valley and the LA mayor's office and LA Port Authority.

However there is now an undeniable need for the government's assistance to ultimately reach that new future, to as Wilbur Ross states “provide a bridging loan” to 2010. Something much needed given the rapid domestic sales crash (from 17m to 11.5m), an unaligned product mix, proportionately heavy overhead costs, ongoing rounds of redundancy costs and an ever increasing squeeze from competitors for the remaining market share. Competitors, ranging from the Japanese, Koreans and now German's (by way of VW) that have realistically better products and deeper pockets to fight price and incentives wars if such a value-destruction continuum is unfortunately maintained. These factors have, and will, continue to create pain via record monthly cash-burns which quickly deplete cash-at-hand and force the sale of its more liquid short-term assets which themselves are endemically seen as undervalued at present unrepresentative 'forced' levels.

Thus the Big 3 are individually and collectively the proverbial “3 Men in a Boat” to re-appropriate Jerome K Jerome's classic literary piece. Unfortunately, the very term banded about - “bail-out” - indicates remedial action regards a sinking vessel, and although the water-level is well past the plimsoll line and very choppy economic waters have washed onto the deck the US industry's situation should perhaps be best described as being an overburdened, essentially antique age old design, struggling to cross hostile waters with heavy currents at many times its payload and so making no headway. Comparable to the all too traumatic Vietnamese fishing boat exodus story of the 1990s which saw too many people and too much baggage on a boat well past its sea-going range limits. In euphemistic essence today the Captains of GM, Ford and Chrysler are requesting the assistance of the US Coastguard.

Unsurprisingly as the first $350bn of the $700bn TARP monies is alloted to the finance industry recipients, Detroit tries to access these funds directly via the prompted appeals of corporate executives, industry related state governors, dealer groups and employees; aswell as indirectly via application to have their credit divisions taken into the Bank Holding Company model.

However, the reality is that in previous years when US automakers had to undertake operational turnarounds, the economic environment was relatively benign compared to today – the recessionary cycle more 'V' and 'U' shaped (as depicted on a graph) demonstrating quick and short-term pull-up. Today economists worry about a possible 'W' and at worst 'L' shaped eventuality which compares respectively to Japan's recent experiences and the earlier 1920/30s US drag then created by the 'dust-bowl' leading to the 'Great Depression'.

And that is the real concern that Congress and the new incoming President and his aids and advisors must deal with.

Listen to the all too evident and available media commentary from 'talking heads' or 'economic experts on a stick' and one will hear multi-various expectations of the depth and length of the downturn the US, UK and Europe are now well within. The Bull's have been present throughout, simplistically seeing an upturn as input costs reduced and inflation stemmed, however all others things aren't equal and although oil is below $60 per barrel the consumer reality has shifted measurably given the fragility of income and jobs, so whilst $4 gas has disappeared (if no further geo-political problems occur) today's new reality to feel comfortable in automotive consumer psychological is a national drop to under $2 gas – which given oil corporation's margins squeeze, a pull-back in western accessed reserves & refining and OPEC's capacity cuts, is plainly never going to happen. Add the absence of easy consumer credit and the automotive feel-good factor – at least, as known before through conspicuous consumption – has gone for many years to come.

The Bull's will also point to a much reduced interest rate cut, now globally co-ordinated, that encourages investment and consumer spending and a strong US dollar that attracts the repatriation of foreign currency reserves giving liquidity to domestic markets. But those rate cuts were provided as stimulus measures that ultimately proved impotent and meaningless given the major contraction of interbank and commercial lending, and now that the US rate is so so low the Fed has little room for further similar action to revive the economy. Moreover, the lack of commercial credit being restrained due to lack of real liquidity and ever decreasing commercial credit ratings particularly hitting SMEs means that the ordinary, historical levels of investment will very probably not emerge soon, especially since big players like GM and its peers in other sectors are deferring their own capital expenditure and new product programmes as part of their needed efforts to shrink. Hence the results of an ongoing credit squeeze and lack of pull-demand from the biggest commercial entities means effective hiatus if not complete stagnation.

And importantly, that paradoxically strong US dollar constricts the demand for US exports at such high costs to foreign buyers (esp UK and Eurozone) and equally suppresses domestic profits from exports to the US, especially so for Japan, Korea and China.

So as things stand there is a long haul to trek for a very very strangled private enterprise which is the bedrock of the capital economy. Thus leaving the onus to governmental Keynesian pro-activity to provide impetus. But that impetus will not emerge for some time, we are still in the wind-down period that ultimately necessitates a complete restructure of much of Western industry – a restructure that puts industry and commerce onto a new solid footing set by new long-term strategic directions - as typified and led by the energy companies - and often provide for new, higher margin and critically cash-flow orientated, business models.

Undoubtedly, there is a United State of General Malais, but the American public must realise that the world of commerce, and America's position within it, is today a very different place to the 1950s which essentially created the ever marginalised industrial template evidently prevalent today.

However, it is at such times of change that the call of, and for, entrepreneurialism is loudest, and the US - from Senator to 'Joe the Plumber' - need to demonstrate that strength and conviction as new economic foundations are re-built. The US effectively exported capitalism and now must be seen to, along with other national stakeholders (esp China, India, Russian and Brazil) be seen to act in unison to bolster that motivational ideology.

To falter with a retraction to short-termist protectionist policy-making (reminiscent of the now proven damaging Smoot-Hawley tariffs) would highlight the hypocracy of previous empty rhetoric and in the long-term embed a United State of General Malais for far longer than the period presently faced. So President (Elect) Obama will need to sugar-coat the bitter pill to be swallowed,which in turn requires entreprenerialism at its best.

So whilst investment-auto-motives encourages the use of Federal monies to assist GM et al over the short-term, such funds cannot be used simply to extend the life of the 'obese' industry we witness today. Such funds must be used, with formalised agreements to transform the very structure of the industry just as the previous $25bn is directly solely at green R&D and production programmes.

At a time when Daimler's Dieter Zetsche rightly calls for a complete change to automotive vehicle design, so a concurrent call must be made for industry structure and business model design, reaching as far as a disposal of Chrysler to a foreign buyer, a break-up of GMNA divisions, increased domestic & foreign collaboration to obtain efficiencies and access sector propelling technologies that fit within a new era inter-connected US industry framework

Wednesday, 12 November 2008

Macro-Level Trends – Globalisation – The Armistice as Poignant Remembrance.

Yesterday Remembrance Services that marked the 90th anniversary of the end of WW1 were held in many nations across the face of the globe. Services from the humble village church to the gravitas of the Cenotaph in Whitehall conveyed the memory of, and gratitude to, all those who have fallen in war.

The end of WW1 was not “the great war to end all wars”, indeed the very meaning of 'armistice' indicates 'truce' not finale, a sad fact highlighted only a generation later by WW2. It was that conflict that in turn led to the major super-powers of the day to create the Bretton Woods agreement that would stabilise the fundamentals of global trade. A major landmark, given that it was the perception of unfair inter-regional trade practices that has been the perennial problem behind a long history of international conflict.

90 years on from that philosophical and literal spark in the Balkans that set the first of a billion bullets flying, the leaders of the G20 nations are due to confer at the forthcoming summit to try and stem the global fiscal melt-down and optimistically look to set out a new roadmap – a Bretton Woods II as some have claimed.

As some leading commentators have stated, creating such a far reaching and transformative accord of BW ilk may at this juncture be 'over egging the mix'. Since although there has been a massive global financial fracture different regions have suffered at different rates and therefore will be more vs less inclined to a radical re-alignment of trade policy-making.

So whilst there has been a growing agreement for international fiscal co-ordination of stimulus packages so that each nation or region can assist themselves - ranging from the US's $700bn TARP to talk of an EU Fund to Japan's $51bn effort to China's $589bn by the CCP – the idea of an all-pervasive, completely global agreement has unsurprisingly set economists and politicians chattering. But it cannot be denied that today's world is fiscally inter-connected, both as we've seen with financial markets that operate a myriad of instruments that support the 'enterprise economy' and the myriad of products shipped across oceans and services proffered via a global e-based hyperspace that underpins the 'real economy'

But there is no singularly similar action plan that each individual national economy can or should undertake, each effort although globally co-ordinated must be appropriate to domestic and foreign trade needs and growth plans. This basic premis is obvious given the 'differing states of differing states'. But exactly how this is achieved quickly and efficiently will be the major headache.

Given the size of the global financial fall-out there have been calls for increased regional and international regulation, and the push to align US accounting standards from GAAP to IFRS will undoubtedly be used as an argument co-coalesce the 21 or so central bank models currently in existence. [That #21 derived from a recent lecture by Sir Howard Davies at the London School of Economics].

However, utilising the GAAP to IFRS vehicle to successfully promote global fiscal policy alignment might be a problem, since the US acceptance of the new accounts principles may yet be resisted by the Obama government given negative outcome that running the model has had on blue-chip example accounts results. It will take a brave US president indeed to accept that this is the US's responsibility to see a better international outcome further down the road. That would create yet more short to medium -term pain for the US economy but ultimately could strengthen its foothold against the ever more internationally accepted Euro (and possible petro-Euro), especially regards an extended period of attracting foreign direct investment (FDI).

At this poignant and prescient time, the G20 summit will hopefully remember the lessons drawn from the first half of the 20th century, and act responsibly. As the spectre of terrorism (born from a perception of a split world) hopefully wanes, and the topic of climate change becomes the ethereal yet powerful new enemy for all, we will hopefully witness a new age of alliance in fiscal framework agreements and subsequent domestic government policy that provides a global mutuality without the constraint of independence that the powerful essentially 'emerged' BRIC+ nations demand. As the FT's Martin Wolf and the LSE's Davies correctly concur, there must be a new era and realm of international diplomacy and relationship building.

To not achieve this will dangerously put the world back 90 years or more, to revisit a time of sullied, aneamic economies that creates insularity and trade protectionism and engenders nationalism, xenophobia and possibly fascist international moves motivated by a sense of economic loss that was previously and 'rightfully' theirs.

To conclude, whilst we remember the past and those who suffered, we should not and cannot sleep-walk back 94 years if the peoples of the world are to win as a whole. We must see the individual and national Chinaman, American, Arab, European, African and Asian as trading partners, not economic threats.

Monday, 3 November 2008

investment-auto-motives' 100th Web-Blog Communique

The intention of this post is to proudly and unabashedly celebrate the 100th posting of the investment-auto-motives web-blog.

As familiar readers well recognise, the remit of the web-blog has been to reflect the spirit of Auto-Antenna, our initial informational vehicle (previously in electronic & hard-copy) that imbued the heart of investment-auto-motives' consulting remit:

- Company Focus : strategic, operational, projects evaluation
- New Business Opportunities : identification of specific value arenas
- Industry Practice : structure, models, mentalities & approaches
- Macro-Level Trends : PESTEL external influences & drivers
- Micro-Level Trends : full internal operational value-chain (from R&D to EoL)
- Cross-Industry Learning: case studies translation & application

That remit delivers prescient research, analysis and recommendation for seniors within the investment community, automotive industry and government – an often triangular inter-relationship that individually and combined seeks to maximise return on investment; both fiscally and philosophically.

To this end, I wish to thank the following at this reflective & motivationally highly encouraging juncture:

Senator Kim Carr and Rt. Hon. Steve Brack, over-seeing the Australian government's Automotive Review.

Richard Parry Jones, Chairman of the UK government Automotive Enquiry,

George Kennedy, Club Secretary at The Royal Automobile Club for the club's kind liaison.

John Lawson at Citi, Adam Jonas at Morgan Stanley & Keith Hayes at Goldman Sachs and many other perhaps less high profile City & Wall Street analysts. Also importantly, Henry Frantzen head of external commissioning at Goldman's.

Jerome B York at Tracinda and Nicholas Clarry of CVC and others in the private equity field.

The Partners and Autos team at Freshfields Bruckhaus Deringer legal practice.

David Leggett at just-auto, Keith Crain & Edward Lapham at Automotive News, Joe White & Neal Boudette at the Wall Street Journal and John Gapper & Martin Wolf and all on the autos section at the Financial Times. In addition the myriad of Bloomberg & Reuters new hounds too numerous to mention.

To one and all, my sincerest thanks

As of today, we witness the very nature and landscape of the global automotive industry irrefutably changing, not simply in its notional progress of international coverage & social coverage, but an advancement in an unparalleled age that will (possibly radically) alter the very structures that have been inherent for so long; both in the West and East.

In the West, from a new wave of M&A and consolidation, to the criticality of accessing capital & liquidity that will more heavily prompt business model thinking, to the possible stake-holdings of domestic governments to ensure industry stability and an aligned strategic direction with national aims. But ultimately through well prescribed and dispensed private and public finances that creates an evolved platform upon which to prove that it is the very will and entrepreneurship inherent in the human spirit that will evolve and strengthen capitalism as we know it.

In the East, that model has even with its market jitters become the post 1989 norm, and although presently dragging as a consequence of Western sentiment and fundamentals over-spill, will given its strong standing and partial de-coupling continue to prove itself as the vehicle for growth and regional transformation. China has been the undoubted success story that others from Vietnam to a tentative North Korea seek to follow.

The fiscal and climate challenges and themes of the 21st century are clear, and although there is undoubted political friction in orientation and coalescence of what can be disparate national agendas, the automotive industry's developmental journey will along with the structural shift in global banking policy and energy policy be the core change agents to create an aligned world of values-driven prosperity and convenience.

Hence this 100th communique from investment-auto-motives comes at a crucial time, and we look forward to playing our role. In the Western automotive industry's new shifted regime through continued diagnosis, prescription, cure & maintained health, and in the Eastern sector to promote the progress of commercial, cultural and social advancement.

Yours most sincerely