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].