Tuesday, 30 December 2008

Year End Comment - Looking Back, Looking Forward

Stating the obvious, 2008 has undoubtedly been the most precipitous year for generations. Trillions of US$ wiped-off global stock, bond and other asset class markets with the very nervous system of a deeply inter-related financial system ultimately exposed and seen to be nervous indeed.

Across the board a diaspora has emerged as the very structure of the prevalent Anglo-American capitalist system which served the world so well throughout the 20th century cracked due to a lack of oversight, servicing and fine-tuning. From the all too opaque world of private hedge funds to the all too prominent world of fiscally war-torn public companies, questions abound as remedial action is undertaken by world governments, and the terms 'credit-crunch' & 'bail-out' became parallel features of everyone's new economic lexicon.

Remedies continue to be sought to both: stop the spiraling of financial hemorrhaging in the 'write-down' process that has blown a hole through each and every industrial sector, and to help create a new economic platform from which to build a new, improved sustainable – in all senses of the word - capitalist future.

This process of events is perhaps best seen within the automotive industry given its financial might, its social prominence and its central position as catalyst - and possibly arbiter - of change. This socio-economic-centric position shared equally with the housing sector and of course finance sector. All three, so core to economic well-being, are ripe for renewal given their individual experiences of over-extended value-creation into untenable territories that led to eventual value-destruction within each of their business models.

To reach that new sustainable future an interim period – for however long – will prevail.

As markets continue to falter, that period will involve an extension of governmental regulation, possibly into the realms of an unprecidented central planning. Such 'public works' undertaken so as to rebalance market forces old and new to 'assist' equilibrium across the economic spectrum. This may affect consumer choices directly and indirectly via direct and indirect pursuasion. And could, if a latter-day fiscal turmoil emerges, feasibly extend to pricing regulation as seen in previous eras. The 'quantitative easing' exercises of today ultimately leads to over-inflation of national economies and so a return to rapid, uncontrollable, inflation without remaining policy levers to pull. From an industry perspective, a similar story of 'encouraged behavior' could prevail via efforts such as carbon-capping and carbon-credit trading, efforts that must be managed professionally and without bias if the confidence of free-marketeering is to prevail.

What is clear is that international governments are undertaking monumental, aligned and often inter-dependent tasks that should lead to that fiscal and ecological sustainable future. Utilising the need for Eco-change (inherent in technology-led / enabled social behavior) as a platform to simultaneously develop new economic and industrial structures.

As stated, the auto-industry has a massive role to play in this 're-orientation'. To do so it must in itself be structurally 're-orientated' to profitably create and satiate new consumer trends and expectations, so as to in turn create new investor confidence.

Of course the topic of sustainable economic 're-orientation' is a broad and deep one, incorporating many macro-level (PESTEL) and micro-level (sector value-chain) facets. Finance, Politics and Industry being the 3 prime players which individually and inter-dependently contain so much complexity. From the sensitivities of encouraging BRIC & OPEC involvement (beyond political lip-service and gestures) to the major shift required in consumerist (ie social) idealism, to embraceme a different - arguably more utilitarian & modernist ideology -that must create a "less is more" consumer paradox.

Hence there is a veritable gamut of challenges within challenges that must be logically and creatively overcome to build a new era of value creation from re-shaping society itself and accordant industrial and service sectors.

However, the criteria that propels private investment reasoning will alter little, since "it is all about the numbers". As a consequence to the rightfully pragmatic attitude of The City and Wall Street, there will need to be hefty consideration as to how the public and private sectors can mutually aligned. And having been through a period of great value destruction in sectors such as Autos in the West, regulatory and investment specialists will need to create elements of a new "honeycomb structure" the compartmental cells of which attract the busy-bees of public-private inititives and wholly private enterprise. Unlike the typical 'public good' utility sectors of say Energy, Transport or Banking, the Automotive industry has a far far harder task to overcome, and the investment community knows it.

This in turn begs the question about exactly how it does and should assess the enterprises within the automotive arena. Will it differentiate between "old" and "new" business models that have inherently different ROI structures and timeframes? Or will conventional, practical thinking rule, having learnt the burst-bubble lessons from other supposed paradigm-shift examples?

Between 2000 & 2007 the investment community's focus conventionally questioned the operational dimensions of automakers, supplier and dealers. Criteria that have remained constant for nigh on 100 years:

1. Auto-Makers
Focus on the core issues of volume, capacity-alignment, segmentation (creation/hold/entry), new product cadence, platform utilisation, market share and competitive advantage enabling pricing elasticity.

2. Supplier-Base
Focus on core-product lines and an exodus from diversity, centralisation & consolidation of competence(s), exposures to emerging markets and avoidance of single client dependence – all seen as the sin quo non of profitability.

3. Dealer-Base
Focus on inventory turnover / volume and wholesale financing became the necessary evil to off-set to falling unit margins. An emerging 'commodity car' consumer mentality evolved driven by excess capacity and incentivisation. Unit pricing even amongst supposed premium brands became squeezed so the importance of credit-financing, access to wholesale finance and leasing models became ever more encouraged, as did unit volume turnover and overhead cost reduction; seeing the shift to ever larger site ops and the importance of virtual presence on the internet to capture local and inter-regional sales.

Of course many of those fundamental assessment criteria will remain unchanged, they are fundamentals in ascertaining automotive company valuations. But in this new watershed era the predominant shift has been to highlight the positional advantage of the cash-rich strong (with visible income streams) over the liquidity-stretched weak (previously reliant on financial engineering). The credit-crisis has already altered the assessment notions of stock analysts, fund managers and critically private equity companies keen to differentiate the wheat from the chaff. So we expect to see a trend of investment divergence based on pragmatic valuation fundamentals. Pure rationality should now reign, the previous whimsicality of an over-reactive, over-optimistic then over-pessimistic stock-market ended. The long-term investor will once again emerge as a results of meaningful due-diligence become the nadir of investment rationale.

Thus the shifting sands of the economy and the auto and investment sectors has altered immeasurably, irrefutably and irredeemably - radically altered capital markets married with radically altering industrial and consumer markets.

investment-auto-motives is proud to look forward, to play its independent role in the centre-ground of the tri-partite stakeholder function made-up of: Investors, Government & Industry. A role that assesses economic value and devises new value-creation. A role that plays a small but pertinent part in creating tomorrow's auto-economy.

And to that mutual end, investment-auto-motives wishes all a prosperous 2009.