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.