Wednesday, 25 February 2009

Company Focus - LDV Vans - From Here to 'E'-ternity?

Given LDV's low-profile and comparatively small operations, industry insiders will be more than familiar with the ever-resurgent ability to re-invent itself. Many argue that it has had to as each and every self re-invention stutters in the face of ever increasingly harsh European and global competition in the LCV (light commercial vehicle) market.

As the big-boys (Ford, Renault, PSA, Fiat, Daimler, VW etc) continue to create powerful JVs amongst eachother and broaden commercial product portfolios by maintaining and developing car derived vans (& vice-versa) that merge utility & private sectors, so LDV has found the going ever-tougher.

To paraphrase Alice in Wonderland as a pertinent illustration "you have to run faster just to stay where you are". Thus, the LDV Board, and the company's parental owners, have had to utilise lateral thinking and unorthodoxy to continue.

But of course a company is a very dynamic entity, to be shaped in prevailing macro-circumstances and re-shaped as appropriate to release potential at operational (revenue) and strategic (M&A) levels. And that was the intent of Sun Capital Partners who bought LDV out of administration in 2005, by inserting a senior management team consisting of ex-Ford Martin Leach and ex-AT Kearney Steve Young to re-create the business as an attractive saleable and ongoing proposition. SunCap and LDV combined appeared to have devised a 3-pronged strategy:
A) Ensure manufacture of a contemporary, competitive van. Done so by completing the acquisition of the design and production rights to their Korean JV with Daewoo (when Daewoo failed).
B) Strengthen the firm's capabilities to create an attractive vendor sale proposition. So LDV bought 80.1% of Stadco Birmingham Pressings and looked Eastwards to cash-rich 'oligarch' Russia for prospective M&A buyers (following the TVR - Smolenski route).
C) Seek out new niches converting market challenges into market opportunities.
Looking at these 'intents'...

The introduction of the Maxus did indeed at long last provided a credible successor to "Sherpa+". SunCap we suspect turned a useful profit for the PE firm when it re-organized and sold LDV Ltd to Oleg Deripaska's GAZ Group (as part of its own, Russian Machines and Basic Element's growth plans) for a reported £50m on 31.07.06. And lastly, since then the van-maker continues to seek out those all important new niche plays such as School Mini-buses.

However, for the most part LDV has been and continues to be effectually a pseudo-nationalised domestic van-maker. Its largest constituent customers comprising of government bodies and agencies such as Local Authorities, TV Licensing, the Royal Mail, the Emergency Services, National Utility companies and similar that have a formal or implicit remit to 'Buy British' when possible.

[Perhaps the irony of ironies was the creation of council schemes titled LDVs (Local Delivery Vehicles) created to develop regional campaigns & amenities...the title-creators perhaps didn't have to far to look for inspiration and in turn LDV Vans must have been hoping the synergy was ultimately more commercial than solely etymological !]

Indeed for much of the entity's history as chronologically Leyland, Freight-Rover, Leyland-DAF and LDV Ltd throughout the 1990s and 2000s it was effectively 'national-fleet' sponsorship that has provided the majority of the firm's revenue.

And whilst it has reportedly been running an accounts deficit since 2004, for much of the 90s LDV will have theoretically been generating sizable profits as the product offering consisted of the ever re-engineered Sherpa Van (under Convoy & Pilot) so utilising cost-reduced 'old-generation' parts, largely amortised tooling and a flexible labour force. But that was obviously a strategy of diminishing returns as the ever reducing low cost-low benefit equation became an unsustainable business model.

So much changed for the business model when Maxus was wholly absorbed, even if at a discounted price from Daewoo administrators, possibly biting of more than LDV could chew given the productivity/competitiveness chasm between a small LDV and its far larger foreign rivals.

Of course Maxus is a well-applauded effort, a desperately needed modern successor that appears on par with its competitor-set. But of course the prime disadvantage is that of small volume vs its far higher volume peer group which either benefits from iconic status (Ford Transit) or JV alliances (Renault-Nissan-Vauxhall, PSA-FIAT) or earned reputation (VW, Toyota). As FT diagrams highlight using SMMT figures (see yesterday's 24.02.09), LDV averaged sales of 6,050 units per month through-out 2008 within a market-place TIV of >300,000 units, equaling approximately a 2% market share. That's a very small number indeed for viability when the brand is effectively sponsored by national interests and to a great extent the tax-payer.

For GAZ and the LDV Board the intention was the effective short-term duplication of LDV van production at GAZ's Nizhny Novgorod site; initially assembling vans from CKD (complete knock-down) kits freighted from the UK then building-up capability to build from locally produced replica specification parts. The target was 50,000 vehicles in 2009. Had that plan to essentially migrate and rename LDV as GAZ been achieved, then the marginalisation of the UK operation could have been 'carried' in the short-term, until the scale and efficiencies had been built-up enough overseas to in turn provide a low-cost production source for LDV in the UK, which in time could have re-built its credibility and latterly perhaps be unified as GAZ-LDV or simply badged GAZ in the UK.

But of course the consequences of the global financial crisis dealt a major blow to Deripraska's finances, presently seeking to re-structure much of the primary entities within his Basic Element empire. Importantly he divested of his Magna International holding which perhaps says much about his changed automotive agenda. And so critically that appears not to include LDV for the moment, GAZ's grand plans at best look to be put on hold. Hence the aired idea of a yet another MBO for the van company, very probably as an inherent aspect of the recent £30m government funding aid request.

[GAZ appears stretched itself now with perhaps with very little liquidity given the cost of re-design and production of the Volga Siber, an adapted Chrysler Sebring. That vehicle itself could now hurt GAZ as a cash-burner given the retraction of middle-class Russian spending the car was aimed at].

The £30m plea was rightly refused and would have been hypocritical of government to assist a Russian owned entity when it equally rebuffed Jaguar Land Rover's parent TATA for direct state aid.

Instead assistance, in due course, appears to be on the horizon as part of the general industry's £2.3bn Green-Tech package that seeks to assist UK companies over the expensive R&D cost hurdles in trying to re-orientate the sector towards clean-technology propulsion solutions. Auto-industry execs bemoan the tardiness of fund provision, complaining of ever weakening markets and commercial enterprises, but they may have to wait a while longer until such funds can be put through a repaired banking system with confidence. The fragility of the financial intermediaries will be the governments reason or excuse for perhaps not feeding the clean-tech funds as quickly as desired.

In the meantime LDV will be another firm that must follow trend and seek to eventually operate at a skeletal level, 'right-sizing' as necessary until the 'green-shoots' re-appear.

And those green-shoots could be sizable and plentiful indeed, given the climate challenge remit by way of carbon-footprint targets that all national bodies and agencies must work towards. A major element of administrative CO2 pollution beyond the HVAC exhaust of civil service buildings and end-of-life re-cycling sites s of course the automotive fleet. Whilst low CO2 hybrid cars have been and will be procured from the likes of Toyota and Honda (and others to come), the question posed regards commercial vehicles is slightly more problematic given the lack of mainstream hybrid and all electric product.

There is product available, as eco-conscious supermarkets have been trialling for home delivery, from the likes of Smiths Vehicles and Modus Vehicles, but the number operating compared to actual fleet size is small indeed; cited as “test” and “experimental”. Thus it is unsurprising that Erik Ebardson (Chairman of GAZ) states that “the [LDV] base case is a viable diesel van company with a future in electric vehicles”. Hence LDV's public statement that it is looking for a business partner to extend into full production apparently successful EVV1 model product trialling. (A strangely short product trial of only 3 months given the Nov 08 start of trial announcement). This in effect that means partnering with either a known EV vehicle maker or powertrain producer. So who may be in the running?

Smith Electric Vehicles is effectively out, tied to Ford given the Transit Connect and Transit-based Ampere and Edison. Modec supplies its own small vans (that could theoretically accompany Maxus) and works to develop 3rd party interests such as that with Manganese Bronze's LTI TX4e Ev Taxi. (Moreover it's production facility was officially opened by David Cameron, presently destined as the next Prime Minister as so a possible clean-tech funding favourite). And lastly there are Zytec and Azure Dynamics as powertrain designers/providers.
So of this UK crop, Modec appears, on paper, as a favoured potential partner given core-competencies, track record and political association.

But even if the Modec partnership prevails, LDV is set against a competitor set that was not only quicker to market, but offers a greater vehicle range. Ford-Smith's provides 2 mid and small vans, whilst FIAT Professional offer no less than 4 vans: Ducato (vs Maxus) with smaller Scudo, Doblo & Fiorino underlings.

Viewed solely as a private enterprise, presently on very fragile ground LDV's present ambitions of a partial EV ambition would generate skepticism for any typical analyst given the lack of internal resources the firm holds.

But if viewed as a private entity operating within the psuedo-monopoly of preferred government & 'national' supplier, the future could take on a very different light....there is a light at the end of the tunnel, but it still looks somewhat distant from the present gloom; perhaps another 8 months of contraction and consolidation to reduce fixed and variable costs as much as possible which will mean workforce retrenchment, the use of multi-skilling and perhaps a temporary closure of the labour intensive Special Vehicle Operations function depending on the present Order Book. Today that Book looks slim, but the future Book should fill in due course, as it historically has done with the advent of government spending.

2010 onwards will see the positive ramifications of the massive budget deficits being dug today, LDV should be thankful for the current adoption Keynsian economic policy even if the wait is indeed painful.

Sunday, 22 February 2009

Business Opportunity – Sweden's Krone Joules – Re-invigorating National Assets

The news of SAAB's bankruptcy filing was altogether not unexpected. Further to a reported loss-making run stretching from 2001 until now, set against the extremely fragile state of GM accounts and the pressure to show Congress recovery steps, as the weakest brand portfolio member SAAB was ever destined.

Given (GM's) standard practice not to reveal individual company results under the parent umbrella, there could be an argument set-forward that it was GM internal accounting that has consistantly over-loaded Trollhatten operations with group-wide costs year on year. Done so under the auspices to 'trickle-down' Swedish systems and component quality into mainstream operations, but also providing the benefit of pulling-out cost from North American & European operations. But SAAB knows that given the long-time cash hemorrhaging of NA and recent troubles of Germany & UK, that 'transferable cost' argument which has undoubtedly been delivered time and time again in Detroit, is now purely academic.

Corporate submissions to the Swedish authorities show that on paper SAAB lost Skr2.19m in '07 compared to Skr2.90 in '06, which whilst showing a slight upturn over that year, was effectively torpedoed by an atrocious 2008.

The truth is that back in the late 90s when GM management belatedly concluded the need to match Ford with its own Euro-premium marque acquisition, the only remaining 'wall-flower' that hadn't been asked to dance was SAAB. Unfortunately, the pair were mismatched from the start. GM a hulking none-to-sensitive Quarter-Back type, with a modus operandi apparently formed from limited knowledge, and so unsubtle steps applied with overt gusto. This, versus a small overtly sensitive, intelligent and demure type of girl who took time and patience to coax-out the best. After some years of trodden toes and knocked knees, she was eventually hoisted upon his feet to dance his way, and so there formed a critical disconnected with only a veneer of her former self outwardly shown.

That forced relationship now appears greatly diminished, and destined to be over by 2010.
The insolvency action heard on 20.02.09 at the Vanersborg court included the appointment of an Official Administrator who could ultimately act as a welcome White Knight. One that provides the fair maiden with her highly valued independence.

That Knight is reportedly Stockholm-based law firm Lofalk Advokatbyra AB. Able to provide an initial 3 month alleviation from creditor pressures, time for CEO Jan Aake Johnsson to plan a restructure and importantly seek new financial stakes from 3rd parties under the Swedish government's Skr25bn / $3.1bn loan guarantee scheme. [ Provided to SAAB & Volvo after ruling-out a complete nationalisation].

Those stakes could possibly come from: the incumbent share-holder Investor AB (the Wallenberg's family wealth firm), a Swedish led domestic or international cartel, or the aired possibility of GM sourced liquidity to ease the transition; but offered only with a conditional state guarantee. And of course there is the prickly idea of converting creditor debt into reduced debt or debt for equity convertibles.

To gain that investment Johnsson will have to ensure the turn-around plan looks clearly viable. This obviously means negotiations with suppliers on parts costs (eg Autoliv, Continental, BASF)... talks with unions regards labour rates and social benefits... discussions with dealers about ex-factory re-pricing of cars, accessories & parts... and of course debt re-scheduling with SEB Bank and other lender and equity holders. So much to be done, but the CEO appears upbeat regards core financing, giving the impression he has been tentatively addressing this looming issue over the last 6 months.

Unlike the US's Chapter 11, the Swedish system demands visible and meaningful progress within 3 months if the Administrator is not to fully wind-down the company – it cannot crawl along protected but in a zombie state as we see happen in the US (as could be the possibility for GMNA).

That plan includes 3 new models replacing an aged 2 (9-3 & 9-5) and an additional small (9-1) stemming from the Aero-X concept. But such a plan put to action asap would demand the continued use of GM or other VM platforms, probably the Astra platform, hence GM's previous intention to have an undecided car built alongside its DNA-sibling in Russelsheim. Of course that whilst the theoretical business case may look sound on paper with, as ever, optimistic volumes and cost savings the truth of the matter is that once the development programme gets underway the 'cost reality' bites and accountancy-led compromises are made. The North American initiative between SAAB & Subaru that re-skinned Impreza and Tribeca demonstrated the 'ugly-ducking' consequences.

And SAAB's have been ugly ducklings for some time, caught between the limitations of shared engineering (especially engineering hardpoints and surface form parametres), probably limited budgets and a push for intrinsic SAAB individuality. The present set of cars have perhaps been the worst ever, aesthetically caught in the transition stage between 2 evolutionary design themes. That's not unusual, infact a norm for the industry as facelifted cars take on the elements of the next new models. But the fact is that 9-3 and 9-5 metamorphosis toward tomorrow's aircraft aesthetic looks very cheaply done for maximum effect, the headlight and grille surrounds that indicate tomorrow's face look little more than tacky, gaudy 'stick-on' trim – a world away from the modernist aero-design ideals of Sixten Sason & Gunner Ljungstrom.

In today's highly competent premium segment under GM governance the mainstream saloons have become little more a pastiche of their former selves. Thankfully restraint has been applied to the iconic convertible which could perhaps serve as the ideological centre-point looking forward - SAAB's equivalent to BMW's 3 series coupe or Mini's Cooper S – the Centre of Gravity for the brand.

But that is tomorrow, and given the major headwinds facing the company as a very very marginal player on the global stage, it has much to contend with. With 0.4% of the European market, it produced only 93,300 cars in '08. With a workforce of just over 4,100 that gave an average of less than 25 cars per employee. SAAB obviously isn't a Rolls Royce or Maybach to support such a poor productivity ratio, and the auto-analysts more than know it; many stating the firm will simply whither away in due course given the heavy cost-disadvantage.

Its national peer Volvo finds itself in a similar. if not quite so precarious position, producing 366,249 vehicles in 2008; so in capacity terms is 4 times the size of its national rival. And similarly, it too is looking to create its own future once released from the Ford fold
Although ostensibly to date rivals operating on the outer fringes of the premium segment, their similar positions as relative small-fry players 'versus the world' (ie Germans & Japanese) and palpable shared cultural values highlights their match as ideal candidates for a 'co-opetition' agreement.

Both were adopted by powerful parents only to be arguably diluted and discarded, so why not band together under the umbrella of national interest to formulate a strategic framework that seeks technical step-change and provide scale efficiencies in architecture and major sub-systems that enable a mutuality yet provide enlarged scope for critical brand differentiation?

To, in time, discharge themselves from complete dependence upon a 'major benefactor', they need to eventually create their own proprietary mid-high volume flexible platform systems that offer a broad design/packaging envelope to enable a potentially broad portfolio of vehicle types.

In the short-medium term this avenue could be pursued using borrowed solutions from the worlds best flexi-architecture producers. Perhaps aligning its methods to the operational ethos of PSA which leverages best-practice multi-alliances and Toyota's own highly evolved flexible production lines. Overtones of the previous NedCar effort with Mitsubishi may be unavoidable but the essential aim is to create as close as possible reach to the mass-customisation production-line. That short-medium term strategy would eventually morph into the medium-long term ultimate goal of home-grown proprietary advanced structures which offer a step forward in materials engineering & package configurability.

This would provide Swedish industrial independence. An independence born from eco-tech that not only acts as a salient global market USP but provides a technology basis that can be made internationally salable to old guard & new-comer automakers via platforms, sub-systems & IPR. Such independence would provide a dual (B2C & B2B) revenue stream for Sweden and undeniably attract latter-day inward foreign investment.

Such a policy develops the present-day local advantage. As a consequence of national policy, innate culture, and Ford & GM's global R&D orientation, Sweden has developed as a centre for safety, clean-tech propulsion, telematics and efficiency-seeking of ICE propulsion. Thus instead of selling the nation's crown jewels to the Americans (or others) Sweden could sweat its assets for wholly its own gain. Converting Crown Jewels into “Krone Joules”.

As investment-auto-motives suggested previously, such a nationally orientated policy could well be set within an international eco-industrial policy for the Scandinavian & German auto-sectors. In effect utilisng each country's innate core-competencies through-out the value-chain and across differing production scales. As such if planned properly SAAB & Volvo could be re-energised as the centre-piece players of tomorrow's GreenWorld, a remotely conjoined relationship that marries developmental and production efficiencies with marque uniqueness.

It is a road that the likes of VW-Porsche have trodden with veritable success, a road similarly trodden by Jaguar-Land Rover that has provided much needed access to lightweight, hi-content aluminium structures that were desperately needed.

Automotive history highlights that alliances only tend to work, paying dividends, when both parties are nationalistically and culturally aligned. (When they are not there is little point as each party tends to pull in its own direction so fracturing the tie). As of today, there can be perhaps none closer, none ideologically better suited than a Swedish government inspired 'Green-Car' SAAB – Volvo scenario.

Tuesday, 17 February 2009

Macro Level Trends – US Autos Inc – Automotive Committee Displaces Autocratic Superman

After the substantial rhetoric regards the nomination of a theoretically all knowing, all powerful Saviour figure in the form of a 'Car Czar', it appears that the the new Administration has concluded that a panel-type structure would be better suited to the task of steering a U-turn for US Autos. Having sought-out candidates that ideally imbued the dual capabilities of Lee Iaccoca & Jack Welch the annals of the Automakers, Wall Street and Government could not deliver.

Theoretically, natural candidates would have been the ex-Auto executives who migrated to PE. The likes of Jacques Nasser at (JP Morgan's) One Equity Partners, Tom Stallkamp at Ripplewood Holdings and Cerberus' David Thursfield and Wolfgang Bernhard (now recently returned to Daimler). But of course of those a number will have obviously aligned interests. Perhaps the best nominee would have been Nasser given his 7 year remoteness from operating as a direct (ex Ford) CEO and his (additionally) more visionary strategic competence. But this seems an academic possibility now.

Though there is a wealth of discipline-centric talent, the very fact that such people move to PE firms as advisors after climbing the automotive corporate ladder, suggests that this convention (at such a rarefied altitude) infact creates the chasm of cross-disciplinary ability that should exist between/across these macro-economic worlds.

And at a time such as now that convention appears to be a major draw-back.
As for the PE-sourced names, the re-structuring experts who might have taken such a post reportedly directly under Paul Volcker are conspicuous by there absence. That is not surprising, the arenas of financial engineering and auto-engineering are, as stated, unfortunately worlds apart. And from an intrinsic professional PE perspective, given this 're-birth' period of historical proportions, why would they wish to place themselves as the constrained central architect of the hurricane, when being external means potential access to the valuable flying debris? [However, there is still speculation that Steven Rattner of Quandrangle Group could advise without such a high-public profile].

Thus, without such apparent 'super-men' with requisite breadth and depth of understanding of Autos and Finance, the necessary broad spectrum of knowledge required can only be drawn from a panel. And, seemingly after the apparent political-positioning between Geithner and Volcker, that panel will now propose to (Treasury Secretary) Tim Geithner and (White House National Economic Council Head) Larry Summers.

As a key component of the Presidential Task Force, ex-Lazard's Ron Bloom will be helping to lead the way with Stephen Girsky as his No.2; and pertinently not donning the 'Car Czar' title. That title is unfortunately seen by many more as a Crown of Thorns, given present abysmal industry conditions reflected by the diametrically opposed ideologies of stake-holder parties, which need to be converged and aligned by the lead negotiator. US Autos appears to remain a very 'hot-potato' that few if any are willing to wholly risk their professional reputation upon.

Today of course is an intermediate deadline date for progress reporting on the Big Three's turnaround plans, prior to the full recommendations at March-end. Given their relative independence, seeking only fall-back financing and comparatively good corporate housing-keeping, Ford's details should notionally be waved through. It is of course GM and Chrysler that remain the real headaches for Congress, with sitting closely in the background the Supplier-sector's recent remonstration for $25bn in subsidies, soft-loans and loan guarantees.
As for GM and Chrysler a credible road-map forward which is amenable, or made prescriptive, to stake-holders must be formulated as both burn through the substantial cash drip-feed previously alloted in a 1st round and recently requested as a 2nd call. [GM: $18bn + $13.4bn = $21.4bn / Chrysler : $4bn + $3bn = $7bn].

That roadmap will need to co-align the interests of all incumbents. Presently that indicates that the central 'creditor' parties may need to recede and take a major 'hair-cut' on their positions if they are to maintain their interests in ongoing concerns. But of course Corporate Bondholders and UAW members have very different ultimate aims.

The former (generally institutionals) depending upon their expectations of the 'liquidity freeze' time-line may well wish to seize assets to in turn liquidate for much needed balance sheet cash; but that could back-fire as a PR disaster – short term gain for long-term pain. As a tabled compromise they seek senior/preferred equity for holding the risk, in leu of coupon and goodwill for assisting in heavy reduction of public debt levels needed by government.
The latter, the UAW, should be far more predisposed the need to maintain GM and Chrysler status quo if the VEBA arrangement previously agreed that swaps 'legacy' debt-for-equity is to be of ultimate worth.

At present it looks as if the Geithner-Summers partnership will be the prime evaluators and negotiators, advised in turn by the Auto-Committee. But much of course depends upon the full and final recommendation plans delivered as to whether GM and Chrysler can indeed create viable futures leaning upon government and foreign auto-sector partners as crutches for the near & medium term.

At present the obvious question is who is properly qualified assess those plans? The Committee is apparently still being formed yet the March-end deadline, and the possibility for Chapter 11 proceedings, looms ominously.

The yesteryear formulation of the American Motor Corporation (AMC) out of failed firms will be a case study from the past lodged in the back of observer's and player's minds. AMC's marginalised product line and unsustainable business plans led to its eventual demise and put the firm, and the legendary Jeep brand, into the hands of Renault (and the French Government) for a time.

At present the likelihood of an amalgamated GM-Chrylser looks very remote given the distinct lack of direct benefits and numerous disadvantages. (That is unless Obama et al seek to create an enlarged Tier 0.5 manufacturing model that would migrate the VM's assets and liabilities to Visteon and Delphi backed with government guarantee? However, that could smack of protectionism go against US investor interests given the accordant covenant conditions (& de-rail Wilbur Ross' holdings strategy) and so could be the US's industrial undoing.

So for the present, that Autocratic Superman looks to be not American but instead FIAT's Marchionne. Thus Chrysler looks to have a light at the end of the tunnel, even if a painful one for Cerberus and Daimler seeing their equity stakes dramatically de-valued. The real question still pertains to GMNA. The General in North America has already been demoted in the eyes of the consumer, but will government decide to ultimately disseminate his ranks? Better a slimmed, re-allocated and able force than over-populated sedantary starvation.

If GM's plans don't convince Geithner, Summers et all, they will need to balance politically 'off-set auto-initiatives'. Off-set in as much as that they will need to both create a new US industrial format that convinces present stakeholders and critically create confidence for foreign VMs and non-domestic investors.

The ideology of an American Motors needs to be born again, but perhaps in a very different guise.

Thursday, 12 February 2009

Parallel Learning – Investment Vehicles – The Cognitive Interlink between Classic Cars and Financial Instruments.

In the current gloom, with Mervyn King's comments delaying the BoE's timeline for re-bound growth expectation, the odd moment of blue sky provides anticipation of Spring. Whilst the industry holds its breath during the liquidity stall, rapidly pares back overhead & hoards cash if possible, the recent £2.3bn UK Auto-Aid announcement gives some hope in the longer term.

In the meantime, by way of a welcomed momentary distraction, today (12.02.09) heralds the Preview Evening of this Summer's Salon Prive. Held in Fulham, London, the event highlights a veritable cornucopia of rare and classic automotive masterpieces, from the carrozzeria and specialist car-makers of what presently seem a glamorous bygone age.

Given the social mix of the event spanning many facets of the financial and automotive sectors, there'll be 2 prime topics for conversation that centre around the term “SIV”:

a) the present efforts to 'find bottom' in the financial markets by actually identifying a market value for the toxic asset SIVs (Structured Investment Vehicles) brought back onto banks' balance sheets.

b) the New-Year 'barn-find' discovery of a very rare SIV (Special Interest Vehicle) in the form of a 1937 Bugatti Type 57S Atalante (perhaps only second in provenance to the iconic Royale) and valued at £3m.

Observers might think that the two happen to simply share an acronym, but if we explore further, there is very useful parallel learning to be gained - re-directing the regenerative norms of the classic car field to the problematic financial instruments which have become the bain of Big-Bank CEO's, Auditors, Regulators and critically Governments world-wide.

It centres on the notion and perspective of value...the core of economics and trading; and how they alter given differing sets of conditions.

Economic philosophising - the Vienna School particularly - may well be in vogue at present, from the re-delivery of George Soros' Theory of Reflexivity to Richard Bronk's call for the use of greater imagination in economic modelling. But instead of seeking to co-align 'homo-economus' with 'homo-sociologicus' and 'homo-romanticus', investment-auto-motives simply provides a very pertinent and useful analogy, from the world of classic-cars and auto-engineering to the world of high-finance and financial-engineering; with Joseph Schumpeter and the ideology of 'creative-destruction' the philosophical bridge:

Firstly, it must be stated that the analogy looks at the broad classic car market as opposed to the very very niche concours d'elegance of level as proffered by Salon Prive or its American & worldwide counterparts such as Pebble Beach et al. (Many of these vehicles could be considered beyond a AAA rating given their rarity and condition, which as with distinguished art, arguably sets their investment value beyond even the grade of certain once solid national sovereign debt (eg Spain, Greece).

Thus we turn to the general classic car market comprising of numerous and variable quality vehicles that succinctly align to that hot corner of the financial derivatives market populated by broad spectrum of variable quality asset-backed securities and bond types. Items 'chopped and shopped' to create the now eponymous range of 'exotic financials' now regarded 'toxic'. Most visibly the CDS (Credit Default Swap) and its variants CDS (squared), CDS (tripled) etc.

The Structured Investment Vehicle was essentially a process of ever-stretching (and so ever-diluting) the strong fundamentals of certain low-exposure. low-risk ABS products by mixing them with weaker and weaker ABS products. Though at the time it would have been argued otherwise, and its heart it was effectively creating the perception of soundness and value, largely exploiting the then buoyant market confidence; done so through the heavily tranched modelling process that used thin quality veneers and the accordant kudos from association.

In essence an object lesson of the manipulation of aesthetics and object lesson in the manipulation of perception..

And of course aesthetics and provenance are the central elements of the classic car world. Whether for a scant & demure 1959 Mini or or a grandiose 1928 Springfield Rolls-Royce Phantom 1 Brewster Coupe; a fine gloss of paint, gleaming bright-work and the respective implied previous ownership of Alec Issigonis and Warren Buffett and the cars take-on an extra-ordinary significance and so value too.

But of course the majority of classic cars do not hold such standing, instead having an innate value generated by the interplay of fundamental utilitarian worth (whether 'prestine', 'solid', a 'runner', 'donor' for components or 'scrap') and the level of collectivist or individual's enthusiasm for the said car and of course the sale environment (whether a breakers yard or Bonhams). At its core the value relationship comes down to an array of complex value judgements – and they of course change given prevailing circumstances which themselves change and can be created by accordant agents some wholly independent others with concomitant interests...the make-up of any market.

So as is the norm, SIV products whether classic cars or financial instruments will accord to prevailing market perception, they can be the 'belle de jour' or 'passe'.

Of course complex markets often include 'market-makers' that act as intermediaries and instigators, and such agents seek to maximise market dynamicism and return potential and by subtly orientating the market through 'perceptional massage'. And that means optimising current conditions and creating new conditions.

In the investment banking arena that is the very remit of the creative cerebrally manufacture new value-creation products that accord to regulatory principles/boundaries and can generate significant return. That was the brief behind the presently extinct financial exotica...or are they actually simply dormant?

Good capitalism depends on new value, and now that these mixed-bag value items are being parked into nationally/ privately held 'bad-banks' or similar 'toxic-dumps' the question must be asked whether these instruments can be disassembled? Once in that (national, PE or PIPE backed) 'breakers-yard' the requirement is to sift through the component parts of the 'SIV mountain' to identify the good/usable/valuable from the (at least in the near-mid term) completely valueless.

That is the issue that both Governmental Chancellors and Private Equity firms are grappling with at present. Yes the exotic instruments constitutes a complex array of entangled risk-levels but many will quietly whisper that 'where there's muck there's brass”.

Just as the vehicle-breaker became the vehicle-dismantler and now is titled 'vehicle-recycler', seperating re-useable from scrap components, so there must be a case for the creation of such an entity within the financial world to investigate and identify the component parts of Structured Investment Vehicles that hold presently invisible yet hidden value.

Yes, the ABS's & CDS's of the recent past may have with time become less and less visibly worthy, but just as a newly refprmed and ultimately valuable car can be built from the sum of the parts of many other scrap vehicles, it will be 'creative-destruction' and 'perceptional norms' that once again give rise to a new phoenix - just as it did 20 years ago for the original sound set of Gen1 SIVs?

This evening at Salon Prive people will look over just a few examples of automotive beauty and value; a few examples that underlie many more. The point is that those rolling sculptures owe their existence to the recycling of donor-parts and the creativity of responsible craftsmen.

Because barn-find Bugattis are very much the exception to the rule...a notion that will not be lost on Governments, Private Equity and Investment Banking Luminaries.

Monday, 9 February 2009

Macro-Level Trends – France SA – 'Poli-ticking' the National Box

The French auto-sector has had a long history of governmental intervention, decade upon decade of industry steering and propulsion as regional economic trends have required. Up until only recently, the modern world and its international industry players have espoused the criticality of free-market trading and free-market sourced capital, but times have changed and France may well, for the moment, laud its auto-political inter-relationship as the ideal match even if that model.

Although once the anathema to the norm, as the US props-up its sector with numerous billions of Dollars, the UK sourced 2.3 billion Pounds for its 'industrial transition', Germany & Italy essentially underwrite their sectors and the EU becomes a possible 'integrative lender' via EIB monies; it is all too apparent that the much of the global car industry has become a weighty short-term burden (tho' arguably long-term asset) to nations' own sets of domestic accounts.
Thus its comes as no surprise that President Sarkozy has unveiled a much awaited 'rescue package' for the domestic entities of Renault and PSA. Each will receive 3 billion Euros at a favourable interest rate of 6-7%, well above the ECB's recently announced (and probably long-lasting) 2% so theoretically providing national coffers with positive cash-flow over the next 5 years.

(There is an argument that the application of collaborative 'quantitative easing' could momentarily but rapidly surge the EU economy and so demand a major rate hike response that exceeds 6% but that looks to have been discounted).

The assistance is undoubtedly useful to Ghosn and Streiff, indeed possibly a 'super-charged' boost given that both French firms are already far better placed than European counterparts; with either a luxury-bent or far more diverse stable of auto-brands and/or conglomerate industrial divisions. But that Sarkozy & top-table assistance comes at a high price given the demands that : no domestic jobs be lost with all national plants kept open and so the avoidance of R&D and assembly migration to lower cost regions.

Both CEO's recognise that the large proportion of future growth lies in emerging nations, even if those regions have been heavier hit by the down-turn their socio-economic & market fundamentals position them well for quicker rebound and continued long-term growth. So both Heads will want to use that additional liquidity to fund future non-EU expansion but also maintain respective technology leads in their fields – Renault Diesels & EVs and PSA Diesels and Platform Modularity – so as to try and hold a firm grip on the essentially slow-growth, transitional yet still very valuable EU region.

And beyond, Ghosn, Streiff and their counterparts recognise that consequential to this period of major change is their position in the latter-day global automotive order. Recognising the importance of the outcome to the EU auto-sector may have been the impetus behind the recent rumour of a possible PSA-BMW alliance. (investment-auto-motives questioned Luxembourg's EU Minister recently at an EU seminar on the origins of this rumour, whether the corporations were endeavouring to at least look to be 'ahead of the political ball' or if alliance exploration was subtly suggested by Brussels? Typically the answer was non-committal).

Back to the Renault-PSA situation, and investors very mildly welcomed the aid-package news, the FT reporting that respectively shares were up 1.4% and 3.7% in early trading and maintaining a steady rate climb to 17.35 and 15.25 Euros by mid afternoon today. The post announcement steady trading seems to be related to what could be a long period of situational assessment, as analysts weight the pros and cons of the package conditions or await corporate decisions as to if and how they will allot the governmental monies. Critical of course is the issue of limited or possibly altogether abandoned intermediate dividends. That could give rise to all but domestic and 'EU pliant' institutionals deciding to exit their holdings if there's no other commercially driven story that increases its MarketCap growth potential.

And we suspect although the headline conditions have been reported, that there may well be numerous other less visible aspects of the deal that further unite the interests and capabilities of French industry.

Previously mentioned in other posts, internally, Ghosn may well be progressing the co-coalescence of Renault-Nissan's EV ambitions with France's own nuclear capabilities currently internationally extolled via EDF; including understandably Japan. At present Renault appears to be in a hiatus of sorts, having received much of the pay-off of its investment in the Dacia brand & model variants during the Eastern European economic boom, awaiting the revenue from its $1bn 25% stake in Russian Avtovaz's new car family and relying on heavy marketing push (ie incentives and ad spend) for its mainstream European models, which have suffered in non-domestic EU countries without the sustained level of design differentiation.

At PSA, its long maintained policy of technology and model alliances with other manufacturers should see a reduction in both its core and tertiary model development programme costs. Of particular interest is the continued Mitsubishi alliance which could fast-track the Japanese company's own EV knowledge into PSA, perhaps best exemplified by the Mi-EV Kei car that would be a real-world 'real-car' alternative to many of the EV models originating from France, Sweden, India and China today. (As an aside, we could well see TATA copy the Mi-EV with an battery powered variant of the similarly packaged Nano in due course).

In summary, the news of the French aid finance is undoubtedly welcomed by: the recipient companies and their suppliers (eg Valeo presently solely and JV developing battery packs and hybrid-drive units as it seeks to climb the value-chain); undoubtedly so the still over populated national dealer-base (like the US), and of course the automotive labour force.

The question that obviously emerges is “to what degree has Sarkozy bought his popularity at the expense of a truly rationalised and efficient French auto-sector”?

He will probably argue that greater EU & Japanese industrial co-operation will off-set what appears to be yet another raft of French protectionism, but ultimately it will be Ghosn and Streiff who will apply the light or heavy hand when 'poli-ticking the national box' as they seek to best balance their firm's global interests.

[Post Script - And to that end, Ghosn's recent announcement demonstrates that Nissan will become leaner and leaner, increasingly more reliant upon Renault. It will 'right-size': global capacity, its CapEx commitments, now over-populated workforce (retrenching 9.5%/20,000 of its global workforce) to combat the weak market, fragile liquidity access and the strong Yen. The big 'cost-saving' numbers being banded by him puts him back in the mould of 'le cost cutter' that gave him his reputation some years ago; now more than ever focused delivering a mix of high global small car volumes and the 'leapfrog' tech of Electric Vehicles via a new Nissan corporate structure].

Tuesday, 3 February 2009

Micro-Level Trends – Powertrain Engineering – Battery Technology's Opposite Poles.

Batteries typically operate via the conductivity 'charge flow' between +ve and -ve poles, thus the technology requires the existence of polar opposites to create power. But whilst necessary within technology itself, it is debatable as whether such polar opposite stances hold true for the development of the battery industry itself, and so the development of (Series & Parallel) Hybrids, PHEVs and full EVs.

And that has been the case for many years as different R&D houses, battery-manufacturers and automakers battle to distinguish which 'technology-play' would be most advantageous. The array of options have been spawned by the spectrum of vehicle types that exist and by the alternative battery (chemistry & structure) possibilities that exist, created from 150 years of research and from a plethora of applications. Of course the consumer electronics industry has been the prime client in recent decades requiring hi-performance, compact powerpacks that evolved the battery's own R&D efforts down a particular path that leading to the broad adoption of Lithium-Ion (L-ion) technology.

Historically different 'powerpack' solutions have been born from different requirements, even in the auto-industry, ranging from the tried and tested Lead-Acid re-fillable type to the sealed L-A type to latter-day lightweight but limited - life compact Gel-Pack types used for motor racing.
As we've seen over the last 5 years or so, the 'holy grail' is the viable use of L-ion in vehicles, and its spin-off derivative Lithium Polymer (Li-poly). Thus Labs have been trying to both extend the innate advantages of the tech and reduce the endemic disadvantages. To summarise the +ves and -ves of L-ion are:

Positives: a) the ability to configure battery layouts as necessary within given package b) lightweight c) high open-circuit voltage possibilities d) no 'memory-effect' e) low self-discharge rate

Negatives: i) very poor 'shelf-life' – quick loss of potency if not immediately used ii) irreversible capacity loss at median-high temperatures (such as under-bonnet environs) iii) high-internal resistance limits 'high-drain' loads such as power-tools and full EVs iv) safety features required adding cost, utility & warranty issues.

The indisputable 'real-world', high-production tech leaders of the automotive arena are Toyota and Honda with the respective Prius (Gen 3) and Insight (Gen 2). They have opted for the known 'tried and tested' Nickel Metal Hydride (Ni-MH) battery option to actually put series-hybrid cars on the road. That option may not be as sexy as L-ion, or offer the theoretical panacea of possibilities, but viability won-over as a preferred route back in 1998 to: actually create the new 'eco' segment, produce cars that would meet the high reliability standards that are core to brand values and allow incremental performance, weight-reduction and cost-down improvement to the chosen battery technology.

In contrast western auto-producers have chosen to endeavour to work on a fast-track route towards the L-ion solution, whilst proffering 'inter-mediate' (relatively low-volume) Ni-MH hybrid vehicles. GM in particular has vaulted the L-ion Volt concept for some time and recently announced it had chosen LG Chem as its preferred development/production partner (over Canada's A123 Systems) relying on the creation of a 'Manganese Spinal Cathode' to help overcome some of the major L-ion disadvantages. Daimler are pseudo-testing the battery via the niche produced S-class Bluetec [NEC and Samsung doing likewise]. Advances in Nano-technology such as those at MIT and Stanford are progressing the cause, but barriers are still yet to be overcome.

Thus the auto-industry has and continues to remain split regards the routes for adoption of battery technology. And that is because the matter is complex indeed, the number of technology, business and user considerations and variables means there is no simple answer, and that we suspect was much of the reason as to why these Japanese auto-makers effectively went down the evolutionary route for Prius and Insight, playing safe to further differentiate themselves – into possibly an unsalable position - within the mainstream sedan segments they had fought hard to own. (After all, 'Disruptive Tech' has created little disruption in 100 years of ICE-based cars, even the small-step of the Wankel-Rotor engine only ultimately used as a periodic product story for Mazda). However, that doesn't mean Toyota and Honda are not exploring non-Ni-MH alternatives.

But of course Nissan, with Renault parentage, is co-opted to align itself with French industrial policy that propagates nuclear-sourced electricity, and so the raison d'etre for pushing all the way to full EVs. Thus Nissan, largely via Renault and its efforts with the Israeli government and Project Better Place, is Ghosn's 'Disruptive' bete noir for his No 1 & 2 ranked counterparts in Japan; the newly re-appointed Toyoda and Fukui at Toyota and Honda respectively.
Of course that commitment toward truly clean-energy supply chains has been ongoing since Japan held the Kyoto Summit, itself taking on the mantle to live-up to the high ideals of the accord. Although the accord was legally non-binding, participant countries including the US were castigated for not doing more sooner.

In comparison Japan and a commercially 'shadowing' S.Korea elected to re-strengthened their own industrial prowess to lead the world in eco-tech. For Japan, much of that drive was undertaken as a dual initiative between government and industry, utilising a mix of tax-gathered monies and buoyant corporate balance sheets; themselves created as hostile take-over defense mechanisms during an era of Japanese economic stagnation. (investment-auto-motives has long believed since 2005 that the the lessons learned from the Japanese 'precursor-model' would be instructive for the west – as has come to pass). In contrast, S.Korea was able to predominantly ride the previous global growth and utilise to good effect its own capital markets (including PIPE allocations), FDI and a portion of public funds to climb the manufacturing value-chain and equal & better Japan in certain tech arenas – as LG Chem's apparent progress in L-ion has shown.

However, although the technical complexities and ultimate ROI levels of the 'L-ion Battery Race' are still to be truly ascertained, the event of the global financial melt-down and subsequent global provision of national stimulus packages (with aligned private funding initiatives) have prompted Electronics Corporations and Battery R&D Companies to demonstrate their conviction in growth plans with the recent spate of M&A and new plant announcements. No matter whether a relatively new L-ion tech-leader – scaling-up consumer electronics capabilities – or a traditional low-tech Lead Acid or Ni-MH commodity-battery producer, none wish to not be seen at least in the running; so important is the rhetoric around L-ion.

Hence GS Yuasa's alliance with Honda, NEC's joint venture with Nissan, Toshiba's tie with VW, Panasonic’s Y807bn takeover bid for Sanyo and even Toshiba's re-entry into the L-ion's denizen with its proprietary SCiB variant.

The race is of course based upon demand forecasts that premium battery tech will be required to power continued and voracious new demand across:

1. consumer electronics (phones, laptops, net-books, mp3s, e-books etc)
2. integration into vehicle powertrain systems
3. use as storage devices for clean tech energy systems (solar, wind, wave etc)

Forecasts (as ever) are the impetus behind the systems, and whilst exact volumes are debatable, the apparent future demand does indeed look conducive to at the very least be seen to be proactive in the arena to satiate investor confidence and maintain perceptions of brand progress.

Research agencies (with arguably vested interests) state that “We are on the cusp of mass production now – that is why there is a sense of urgency,” but it seems that the core issues 'ghosts' of technical and production scale-up issues have yet to be fully exorcised. Instead there is a sense that companies are prepared to deal with arising problems as they emerge, a consequence for many feeling compelled that they have to run before they are truly comfortable walking. And importantly, the industry's tech-speak with raft of scientific formulae and algorithmic control jargon can be used to bamboozle and convince the majority of non-techies in government and investment circles who hold the developmental purse strings. Rather like the web-based tech-boom of the late 1990s, much apparent promise may lay in intendedly heavily science-laden business plans.

For today, within an environment of stalled and limited liquidity, commercial enterprises that are currently enjoying sector limelight appreciate the intense level of intra-sector competition to access monies from the national public purse and from aggressive private financing sources; themselves under pressure to sweat dormant funds.

Never in recent history will those business plans be so important. Let us hope that the recent era of creative accounting in the ethereal financial sector is not replaced by overtly creative business planning in what is supposedly a conservative sector.

And lastly, perhaps instead of a possible irrational dash for cash that could fragment the sector and its efforts, the critical importance of the power storage industry 's products to society may call for a more holistic approach between government(s) and the investment community. One that ascertains a possibly more plausible, viable R&D and productionisation framework for L-ion+ and other next generation technologies.

If the Green Call is to be answered powerfully and rationally, it makes sense that the apparent polar opposite concerns of Lord Stern and Lord Lawson for unhindered technical exploration versus rational investment thinking be ultimately combined in a dual-aspect approach. And that the apparent polar opposite +ves and -ves of Ni-MH vs L-ion be fully appreciated and appropriated.