Monday, 1 December 2008

Micro-Level Trends – Portfolio Divestments – SAAB & Volvo : Homeward Bound?

As Wagoner, Mulally and Nardelli re-visit Washington to proffer their re-drafted mid-term plans, a central element for GM and Ford will be the divestment of SAAB and Volvo.

As investment-auto-motives predicted some time ago (see previous items) this event is a natural consequence of efforts to relieve the ever-growing fiscal pains both multi-nationals have been facing.

Ford re-assigned Stephen Odell from Mazda to Volvo a couple of months ago to, as we suspected, provide greater bargaining power with the Swedish government regards government loans and undoubtedly, very diplomatically, air the idea of Sweden itself re-absorbing one of its national car-makers. Concurrent to, and possibly on the back of, that conjecture GM has undoubtedly requested that SAAB's CEO Jan-Ake Jonsson take perhaps a less strong-arm, more 'fellow country-man' tack with Maud Olofsson, the Minister for Industry.

Thus, as national governments across the West become the new realm of direct and indirect international intermediaries, financiers and 'public good' industry policy arbiters, so we imagine there could be a raft of nationally-orientated M&A events that brings back what were once national industries back to the country-fold, driven by a compelling mixture of conglomerate divestment in search of cash and liability depletion and essentially sovereign interests to recapture and control what are critical domestic enterprises and brands.

Under these skies, funded by Chancellors of the Exchequer under homeland political pressures, the time could well be here to begin a new era that combines and intertwines the acumen & doggedness of corporate strategy formulation with the sensitivity & subtlety of international diplomacy.

In short, though under pressure to regain 'national treasures' that are so important to the domestic and regional economy, such Chancellors will want to see a game plan that provides the tax payer and national budget with a mid-term return on investment.

Ford and GM (and their Bankers) may be working competitively or co-operatively on the approach to Olofsson and his Swedish peers, their approach strategies largely depend on their respective views about the size of the national budget notionally allocated to 'saving the auto industry'. If small, an inevitable bun-fight would unfold. If government indicated that it was only interested in saving one auto-maker that could well be SAAB as a smaller and less costly purchase exercise and its present-day integration with European Opel. Volvo, as a far bigger and expectantly more valuable enterprise, even with less European (Ford) integration (given its NA-shared large car & 4WD platform) would on the open market expect to command a greater price...but then, as we recognise, value is very very relative in these turbulent times.

If the Bankers work wisely, they'll demonstrate that the greatest high-value long-term play by the state, would be the dual purchase of SAAB and Volvo. In a world increasingly psychologically attracted, and led, to that which is ecological, sustainable and intelligent, Sweden itself has long represented those values, even if a mix of perception and reality.

Both brands have historically been the ambassadors of such, even the Volvo XC90 seen as a family responsible, and acceptable face of 4x4s, thanks to its marque. Volvo has longevity and dependability (ie sustainability) running through its DNA thanks to a reputation set by the robust 120 “Amazon” series and the boxy 240 series. And as Swedish sibling, SAAB was similarly born from 'responsible roots', its own DNA served by a mixture of aerodynamic efficiency and lightweight construction to lessen fuel consumption and accordant pollution. Of course as both brands gained a reputation as 'aspirant' vehicles - sold to the pseudo-intelligentsia globally – so they were able to raise prices and margins that attracted Ford and GM to roll them into their respective portfolios. An act that for a period provided high unit margins, but as with their other brands, became victim to ultimately zealous economic rational and so lost much of their original magic.

But to summize, Volvo & SAAB, as were and as could be, the very representation of high-morality export consumerism. And at a time when smaller vehicles are en vogue, both companies have the opportunity to re-mould and expand their vehicle portfolios – with meaningful, powerful messages – into the premium mainstream, much as Mercedes did with A-class and Audi are doing so with A1.

Of course, importantly, the industrial-base to conquer these opportunistic ambitions for both brands already exists in the medium term by virtue of Ford and GM's European operations. And that idea of a more cohesive Europe could be key to the nationally sponsored transformation of the Swedish auto-industry even though the country does not share the common currency. Even with the present Merkel - Sarkozy difference of opinion regard the level of European fiscal & industrial integration, the very fact that the Ford & GM small and medium platform production centres reside with Europe, itself the initial target market for Sweden's smaller-eco vehicles, means that the FX disparity between the Krona and Euro should not be problematic. Indeed if the Euro maintains its recent history strength, as a consequence of the US Dollar's expected mid-term decline, Sweden could benefit double-fold including the FX effect.

From the intra-political regional economic perspective, Merkel may well recognise such a Germanic-Swedish agreement as beneficial to her own state and national economies, though she would of course be heavily lobbied by the indigenous 3 (VW, Daimler & BMW) to either reject the Swedish proposal or have themselves as JV beneficiaries as providers of essential hardware. And the engineering services sector, from Porsche Engineering to AVL would by default be preferred suppliers for the necessary integration engineering work.

Such a scenario would naturally build upon the implicit & explicit German industrial consolidation that has taken place over the last 18 months, most evident with Shaeffler-Continental and Porsche-VW. (Infact such actions although seen as self-serving and protectionist amongst EU peers may well have set the die for many nations/regions to subtly review their respective positions and natural techno-political alliances). If Berlin believes it has achieved much of the national consolidation originally sought with the integration of VM and OEM players, it would very probably seek-out like-minded regional partners that share similar policy sentiment – close enough to benefit, but not so close as to be an irritant.

And from Sweden's and Olofsson's perspective, their could be an equally powerful and prosaic possibility in forming Scandinavian-centric automotive policy centred purely on 'eco'.
Large sections of a theoretically near complete value-chain exist today and can be grown into the future : from small-scale but maturing TH!NK, to a re-vitalised Valmet focused on part to full-hybrids and all-electric premium vehicles in low-mid volumes to the possible SAAB-VOLVO alliance to incorporation of Project Better Place's new-energy infrastructure impetus.
Such as Scandinavian coalescence may in turn even require Krona to Krona pegging and even Krona to Euro pegging agreements but we presently imagine, that at this critical world juncture, that many variations of industrial policy scenarios are being presently explored by Sweden's Trade and Industry bodies.

Whilst the world looks on at the hopeful outcome of the next G20 summit, creating new direction al themes for global trade & fiscal policy-making that Obama and his new economic advisory forum can broadly agree, the GM, Ford and the Swedish government will be assessing their respective positions within the new global socio-economic context.

But critically for such an ideally corroborative deal to be struck, all parties will need to take an amiable, mutually respectful view that allows SAAB and Volvo to return home at a 'fair value' price. One that from Sweden's corner reflects and their long-term 5-10 year values, yet also from the VM's corner demonstrates a willingness to alleviate themselves of their present-day divisional write-downs and corporate cost 'drag'.