Wednesday, 1 April 2009

Industry Structure - US Autos Inc - GM's Need for its own G20 inspired 'A-Team'

As the press has re-iterated time after time, President Obama has a long list of domestic and international issues to address. As he and the other G20 leaders meet today, at London's Excel Centre on the River Thames, discussion will obviously centre upon the fractious issues of:

1. Additional Stimulus Packages - their size, speed & alignment; to feed additional liquidity into the seemingly ever absorbent sponge of the global financial system.
[As a pre-cursor to that debate, George Soros spoke yesterday (31.03.09) at the LSE Business School, extolling the need for governments to recognise the role of SDRs (Special Drawing Rights) as a powerful unitary & unifying currency instrument].

2. Regulatory Reform - at national & international levels; Gordon Brown probably using Lord Turner's recent report as a template offering; noting the absence of a Glass-Steagall-like measure which suggests that a level of 'inter-play' between Retail & Investment is desired to rally international economies (esp given the massive Chinese/Asian savings-base).

3. Anti-Protectionism - the willingness to brave domestic wrath; as poignantly demonstrated by Obama's hard-line with Detroit only a few days before. [NB France, Italy, Russia, et al]

That last point has of course has been a primary bone of contention in the mid-west US, especially given the close yet policy-sensitive Obama-Granholm relationship; and the President's own ability to lead his Michigan-based Democrat voters through hard policy terrain. The fiscal backing of Detroit via Auto-Aid packaged was awarded contingent demands that it transform, but subsequent 'term-reports' stating "can do better" has of course led to the loss of Wagoner as perhaps the symbolic gesture of change. Better extremely late than never, and an initiative which must lead to a natural critique of the whole of GM's Board for future effectiveness.

As part of that change-mechanism Obama has of course installed change-agents like Steven Rattner, Ron Bloom, Diana Farrell & Brian Deese. Critics state that the innate auto-industry knowledge of this important team leaves much to be desired. None having actually worked within the innards of the sector highlights the concern that they cannot truly discern the depths of the 'truisms' set forward by all stake-holding parties: GM & Chrysler, the UAW, the corporate bond-holders et al - excluding the internal demands of the public budget setters within the Treasury Dept itself. Even a team of 30+ advisors cannot provide the type of 'second-nature' understanding and judgements required.

Even so, the onus to create viable, indeed prosperous, industrial policy framework for US Autos, rests on the shoulders of Rattner & Bloom because with their previous incarnations as Lazard Freres & Co investment bankers they will should know how to ultimately create a viable investment framework. Previous Wall St and present White House posts require them to maximise company and intra-sector value-creation; done so by deconstructing all the prime elements of the US automotive industry (with its international links) and setting out a formula for its re-construction.

This re-orientation of such a large contingent of the US economy will provide short, medium and long-term impetus into the banking sector and financial markets. Book Runners, Underwriters and Investors should gain confidence in the very process sector re-structuring aswell of course the ROI potential of a re-aligned - more efficient / customer-centric / more profitable - industry.

Howver, at present even the creation of such a necessary template seems far off, given Washington's 'bounce-back' of the auto-maker's strategic plans laid-out this week, and the presently entrenched positions of Bond-holders and the UAW - each of the 3 main constituents looking to eachother for 'next-move' compromise. The FT equates the situation to a 3-D chess board and the WSJ re-quotes Rattner's analogy regards the "complexity of a Rubik's Cube".

Reports state that Washington sees Chrysler as the immediate problem child given its smaller scale comparative to big fiscal demands. So with a 1 month dead-line, eyes are perhaps presently more narrowly focused upon the Chrysler-FIAT alliance talks. This in turn has set the context that Chrysler could seek other additional new alliance partners to steady its fate; which would engender a return to its normative, historical rescue stratagems. However the alliance model appears a favoured route for many players given the operating concerns of other withering VMs (such as Opel, PSA & TATA). Such a large consortium could lead to a new US-Euro-Asia 'tri-continental' alliance template that theoretically out-guns Renault-Nissan's bi-continental structure that has been so powerful in synergy seeking and capacity strengthening.

[Marchionne has very probably been reviewing this schema for FIAT's long-term survival].
(NB commendation to Paul Betts of the FT for also recognising and espousing this possibility).

With G20 and internationalism as the contextual backdrop, Washington would undoubtedly welcome such an outline plan, if the basic tenants of inter-party notional agreement can be set within the new 30-day return deadline.

Ironically looking toward GM, it could be argued that the company has been the very spirit and ethos of the G20 ethos given its global reach and influence over the last 80 years.

As Wagoner departs and COO/CFO Henderson becomes new CEO, we will hopefully see a new focus regards a deep and meaningful calculation of the innate $ value of the global business empire. As accounting and auditing methods & regulations seek greater global alignment, it is indeed timely that an internal-audit that de-constructs and values every aspect of the GM empire be undertaken; a truly indepth exercise that seeks to identify intrinsic value throughout the build-process inventory and far beyond. From the combined value of millions of 5mm washers sitting in production-line feed boxes to the field-stacked and dealer-stacked inventory of unsold and unpaid vehicles - from homeland Alabama to Zhong County in China.

GM veteran Henderson reputedly understands every operational dimension of the empire. As such will be privvy to the nooks and crannies of the company's international financial architecture - perhaps particularly where 'fair-value' or 'mark-to-market' estimations may have been overly pessimistic, or where land values haven't been formally updated for a good number of years. This knowledge, along with the raft of continued changes in plant closures, lay-offs and dealer consolidation should - obviated by symbolic CEO change - demonstrate the rapid need for change.

investment-auto-motives previously backed the notion of the auto-aid package for North America, given level of integration the sector has with the economy and its connections to European, Asian and EM regions. [NB investment-auto-motives did not back comparatively substantive 'crutch-support' for the UK or European sectors given their relatively advanced state]. But to our dismay, since that initial Bush announcement progress has been painfully slow. Detroit will undoubtedly point a finger at Washington given the governmental transition and tardiness in setting up a capable Autos-Governance Team, whilst Washington will point its finger at Detroit for being so demonstrably inept to react to visible sector trends, and the recent inability to charter a viable course forward, hardly out of the harbour with a still over-laiden boat and over-optimistic 'weather-outlook' today.

Although eyes are on Chrysler given its shorter dead-line date, its intrinsic 'boom & bust' experiences that have seen it create alliance-relationships time after time, aswell as its private ownership status, suggests that such operational flexibility & a 'simple' stake-holder model that it is more able to react as necessary to evolve and survive into a new state of being with buoyant business model.

GM is a very different beast, far larger and far less flexible in nature. A once dominant breed of automaker who's business model is 50 years past its prime and as such continues to diminish. Domestically re-sized with each recession but still having to bare an overtly heavy 'legacy' load, with now even the previously 'off-set' divisions in Europe & China under attack from the dual pincer squeeze of prestigious and affordable competitor brands squeezing the mainstream.

The evident fiscal and structural inefficiencies of GM come to light, and though there are probably the previously mentioned 'accounting rabbits to be pulled from regional hats' such tactics are at best medium-term salvos.

The world had changed immensely for GM even before the consequences of the global financial fiasco. GMAC was undoubtedly a prime player within that fiasco, but also acted as a major support pillar to GM before the markets and it crumbled. Thankfully the 51% sell-off to Cerberus helped diminish GM's own CDO-linked balance-sheet liabilities, a very necessary and timely exercise whos immediate benefit out-weighed the long-term rebound advantages of GMAC as a Bank Holding Co and a TARP recipient.

That means that GM's ability to lean on financial engineering as much as vehicle engineering has largely diminished. And that is undoubtedly a good thing. Like similar manufacturers shawn of their finance houses, the real picture of vehicle manufacturing efficiency, productivity and profitability will come into vivid focus. And that is a very necessary paradigm-shift for government and investors alike.

As such GM and US Autos will be looking to Rattner & Bloom to separate the 'wheat from the chaff'. They will need to undertake full and frank 'top-down', 'bottom-up' and truly 'holistic' analysis of GM and the whole sector to better understand how The General and sector participants would best re-structure and evolve.

Never before has GM, the US Auto-Sector, the US Administration and the international community needed an 'A-Team' to prevail as much as today - generating and executing an accomplished action plan.

Inadvertently or not, GM may be 'the' real-world, sector-giant, 'live' case-study for the G20. Highlighted as a real-time example affected by the forces of global flux - its possible regional or divisional break-up a definitive 'tour de force' of US anti-protectionist sentiment.

Perhaps the G20 summit will mobilize a very different set of auto-sector-centric heroes that promote the philosophy of international trade - at financial and physical levels -to assist in the re-alignment of a US industry that for far too long has exhibited a general trend for diminishing marginal returns. To do so would boost investor confidence and oil the cogs of seized financial markets.

Thus, as an epilogue, it must be the pinnicle of irony that it was GM itself that manufactured the now serendipitously titled GMC G20 Van that transported those TV-based 'A-Team' heroes!