Thursday, 27 August 2009

Macro-Level Trends – Global Economic Outlook – The Need to Heed Roubini's 'Fundamentalism'.

The 6 month stock-market rally that began in March has been so warmly welcomed by investors that it could be said to have mirrored the rise in climate temperature graphs in the northern hemisphere. Better than expected Q1 and H1 earnings news (ie “less bad”) combined with the desire to jump upon any positive economic indicator news (no matter how simplistic) combined with the good weather saw stock graphs the world-over climb, climb, climb.

On January 4th investment-auto-motives presented the case for concern regards the timing and speed of any substantial recovery, stating that even a mid-year pick-up – as we've expectantly witnessed - appeared too soon given the weight of negative forces apparent across the board – from the innately weak structure of the majority of the banking sector to the 'consumer fall-out' to come.

The nature of this unprecedented, de-stabalised, era means that the reactive and ongoing opposing forces of basic economics, corporate retraction, government demand interventionism and capital market's sentiment (driven by trader frustration) has set the scene for constant re-shifting of focus and so changing expectation. The fundamentals for a return to global confidence were not in place back in January and, whilst the storm has waned and liquidity has started to pump very slowly through the system, those fundamentals are still not truly in place these 8 months later.

March to date's upswing – from stock prices to consumer confidence - looks to be misplaced probably largely driven by irrational behavior driven by 'recession fatigue' and 'blind faith'. And for capital markets, the drive to move stagnant liquidity across various asset classes.

Unsurprisingly, the near 6 month rapid stock rally has divided opinion between the 'fundamentalists' best extolled by academia and the 'sentimentalists' best typified by fund management firms. Opposing viewpoints perhaps best showcased by the recent (23.08.09) FT article by Nuriel Roubini “vs” Lazlo Birinyi's (26.08.09) WSJ rebuttal. In summary “dead-cat bounce” vs “1st phase of bull market”.

As professional market-watchers understand, the reality is that the stock graph path (whether singular company, sector or cross-sector index) is created by the ongoing tussle between macro- micro fundamentals ('assisted' by theoretical valuation metrics) and sentiment. However, at present, the 2 are diametrically heavily opposed. And since fundamentals are the effectively the 'centre of gravity' for markets – the rationality – we can only assume that there will be an inflection and a trending downward at some point when present stock-holders recognise the 'hot air' of the market and sell through the 'greater fool theory' to lock-in amazing gains.

Obviously, much of the buying has been in the belief that company stock is undervalued, but was there really that much previous undervaluing for the market to jump so high so quickly? (ie S&P500 YTD from bottom of 666 to present high of 1,028). Or is it really ultimately a case of the 'old dogs' of the market, who've seen it all before, recognising and riding the (rare but typical) post-melt-down re-active rally?

It is indeed a moment of sunshine amongst the storm clouds, but the distant horizon still looks very murky, as described by Roubini in that FT article.

Unfortunately, but realistically, “on the same page” as the NYU professor, investment-auto-motives
now takes a look at his comments and provides additional (often auto-sector centric) comment.

Nuriel Roubini – Market Outlook 23.08.09

“3 prime questions”:
1.When Bottom-Out?
2.Shape of Recovery?
3.Possibility of Re-lapse?

To paraphrase ...

1. When Bottom-Out?
Roubini - “Q408 & Q109 mirrored contraction seen in early stages of the Great Depression”... “it appears that market will bottom-out in Q409”...”Asia, Latin America, France, Germany, Japan & Australia re-growing now”...”but: US, UK, Spain, Italy other Eurozone members (mostly CEE) will not see positive growth until 2010”.

Asia's sustainable self-propelling growth capability and ability to 'weather the storm' has proven it's level of de-coupling from the west, and though present regional GDP growth, consumption and capital investment is lower than the previous headiness, the acute-nature of the massive Asian populace to spend and save rationally – this dictated by circumstance and aversion to credit - provides the strength for balanced continued growth through consumption and investment. In contrast, the US and Europe will continue to be undermined by 'real-world' ongoing credit retraction and 'virtual' consumer incentive packages as seen in autos and now consumer durables. The latter “positive manipulation” ultimately disruptive to market and production planning and so capital investment planning, with the potential of creating a false-bottom that quickly dissipates.

The key for the West is still the structure and true fragility of the banking system, something which has been subtly masked by the support of systemic big-name players (socialised losses), recent 'stellar' & 'better than expected' results. Banks have been forced into 'liquidity retention' through preservation of government 'bail-out' cash, calling-in debt and formulating onerous lending policies.
This perfect-storm combination allowed for recent 'good-news' earnings, but it is short lived. Thus the financial system is still largely effectually 'seized' until it can draw in further sector investment (ie PE and elsewhere) that allows the brakes to be released.

Such additional monies will largely come from investors who will want to see their bank's loan book' consisting of sound customers (possibly government guaranteed) and possibly assured lending to associated interests – either to broad sector relative industrial holding companies or to the more promising (perhaps dominant) sector players.

Thus the complexity is in re-organising both the west's banking system and the core of its industrial structure. And that can only be done properly and efficiently when a period of rational 'fundamentalism' prevails over 'sentimentalism'. The sentimentalism drives stock volatility but unfortunately also undermines focus on the much needed banking and industrial re-structuring.

2. Shape of Recovery?
Roubini - “we'll see a more U-shaped recovery than V-shaped”.
investment-auto-motives believes it will verge on “slanted J” with very slow recovery due to the aforementioned inter-woven structural complexities and their widespread relative issues:

A. Unemployment Drag
“<10% > affecting consumer demand and bank losses”...” and loss of 'skills capability' amongst the workforce in turn affecting productivity growth”.

That figures could rise higher than the 10%, and well above the 9% or so in general international official statistics. As with the UK's 3-day week in the 1970s, there will probably be a re-calibration of working hours for the individual and a division of labour across the typical working week. Unemployment will rise and stay high until the industrial re-structuring occurs and new working templates are drawn-up which allow for labour flexibility (via part-time work) and suppress / contain overhead costs.

B. Case of Solvency not just Liquidity
Roubini - “de-leveraging has not yet fully 'worked through the system”...and so...“confines the ability of banks to lend, consumers to buy and companies to invest”.

The western stimulus packages have acted as a temporary fix, socialising seeming swathes but in reality only a portion of lost value. Continued uncertainty and sporadic use of 'marked-to-market' valuations on corporate balance sheets mean that there has not been a clean process of 'downward re-ratcheting'; aswell as the concern regards still properly unidentifiable 'toxic asset' types. And the inherent necessary act of moving portions of these losses from private sector to public sector in turn
limits both transparency and the basic financial transmission mechanism.

C. National Budget Deficits
Roubini - “countries with current account deficits badly positioned as populace needs to save more set against context of falling asset prices, shrinking incomes and unemployment threat”.

The US and UK are obviously prime instances here, the former running a (conservative) $1.58 trillion deficit, with expected (conservative) $9 trillion over the next 10 years. Having reached the limits of public spending and precious little private investment incentive, such countries appear to face a period of economic stagnation; Keynesian 'prime-pumping' a used and now unavailable alternative.

D. The Financial System
Roubini - “despite support, still heavily damaged”...”the shadow banking system largely disappeared, traditional (retail) banks still have $ trillions of bad debts & securities to swallow whilst still being under-capitalised”.

An issue highlighted previously, but a worst case scenario – not out of the question – is partial banking seizure as more bad news surfaces and investors big & small decide to hold off supporting the banks. Bloomberg reports that the FDIC has identified 146 'problem banks' which could deplete already shrunken FDIC reserves. More bank failures result in yet further sector contraction and more M&A consolidation as geographically useful 'bolt-ons' are acquired by often including foreign firms (BRIC+) seeking targeted US & western market coverage – see Brazilian ambitions. Furthermore, the examples of previous privately funded US, UK and German bank re-capitalisation that burned the fingers of GCC and other investors, mean that yet stricter financing demands will need to be met; including amongst other requisites, the continuation of more 'covenant-rich' agreements behind convertible bond deals which offer swaps to not common but preferential shares.
(Those supporting the banks will want the 'Buffett-esque' agreement Berkshire Hathaway gained from Goldman Sachs).

E. Weak Profitability
Roubini - “caused by poor earnings from incurred low growth caused by debt repayment”

Earnings also effected by reduced credit ratings and so in-coming investment which was possibly partially re-cycled into dividend payment for Q209's good results. Therefore the generally increasing cost of capital (ie risk premium) when available, and other deflationary headwinds could act as disincentives so lowering productivity through skeleton staffing and the likelihood of minimal &/or deferred investment.

F. Public-Private Sector “Re-Leveraging”
Roubini - “the public sector creates large fiscal deficits and risks 'crowd-out' of private expenditure”
The stimulus effect will fizzle-out by early 2010 thence requiring replacement by greater private investment contribution to continue any prevailing growth. This may well not be in place.

G. Global Imbalance
Roubini - “there is expectation of a continued narrowing of the global deficit-savings imbalance”...[ie western deficit excluding Japan & German vs the general EM surplus)....
“But if demand does not grow in surplus countries, then counterpoint growth will not occur in deficit countries, so delaying global upturn”.

The concern is that Asia and EM regions do not maintain the 'demand-pull' previously seen for western goods and services. This is a real concern, not because the consumer demand or investment demand is not there, but because western products and knowledge can be replicated either domestically or by other regionally close-by nations. EM regions may well have reached a self-reliant 'tipping-point' in everything from car production to electronics R&D to beyond, the Japanese and South Koreans acting as the new 'Pseudo West' in growing areas of technology and skills transfer.

He states there are also 2 further reasons (X & Y) giving rise to a 'drop-back' and so W-shaped recovery:

3. Possibility of Re-Lapse?

X Quantitative Easing
Roubini – “the inherent risks associated with exit strategies from massive fiscal and monetary easing mean administrations are between a rock and a hard place”

If policy-makers raise taxes / cut spending / re-absorb QE liquidity... to fight the budget deficit and PSBR over-spend they will strangle consumer confidence, so raising the spectre of stag-deflation.
But if they maintain large deficits and over-spend then bond-markets will naturally expect a rise in long-term inflation, and so charge higher bond yield rates as a risk premium to off-set the probability of monetary devaluation. Increased bond yields will produce a domino-effect on capital borrowing interest rates and so stifle recovery, possibly leading to stagflation.

However QE - a blunt but useful monetary policy instrument for demand management– is an inexact science, given its typical use as a last resort. And whilst certain elements of the QE mix can be theoretically managed, the reality is that much of the economic boost is largely unguidable in the complexities of a mixed-economy and once in place hard to track. Thus it has a history of either little identifiable downstream effect or creates the overt-boost that economists fear leads to rapid inflation. Just as the UK and Gordon Brown lead the G20 in its answer to the crisis – including the prominent use of QE - the BoE's Monetary Policy Committee maintains on-going belief in the tool by injecting a further £175bn, with possibly more to come in November.

The QE moves are viewed as successful thus far in quelling the financial fall-out, but it is hard to truly gauge its real affect. One thing is clear, that QE statements tend to weaken the homeland currency in the FX war which is so prevalent at the moment, so helping the argument for much needed export led growth. That puts pressure on maintaining free and open bi-lateral and multi-lateral trade agreements, which are in turn presently under subtle but intense protectionist pressures - let alone the general global fight for currency devaluation - and so create additional concerns regards national QE exit strategies.

Y – Commodity Inflation
Roubini - “concerns that Oil, Energy & Food prices are now rising faster than fundamentals warrant, and could be driven higher by excess liquidity”.
Unworked capital is a concern for all money managers, especially those in SWFs and the downsized hedge fund sector. Thus there is an argument to say such dormant capital is being 'over-allocated' to defensive plays such as Commodities (both in material purchase and hold and futures contracts) that are directly linked to relatively buoyant EM consumer demand. .So inadvertently prices are driven higher and higher with the potential to reach a shock-point before collapsing, as we saw previously with $145 p/b oil.

The argument set forward is that the new shock level is a more sensitive $100, would damage confidence if a similar re-bound contraction occurred. For the moment larger than expected US oil reserves have knocked the Texas Intermediate spot price back to $71.43, indicating a $75 ceiling at present. However, if stocks keep unfathomably rallying it would send signals to traders to keep piling into oil and other base commodities, and as we saw previously the greater it climbs the harder it will fall – to the detriment of market confidence and the case for rationality that so badly needed.

Roubini summarises that “the recovery is likely to be aneamic and below trend in advanced economies, and there is a big risk of double-dip 'W' recession”.

investment-auto-motives believes that economists will have to add the term “slanted J” to truly reflect the scenario being played out between 2007-2012. But in all actuality the semantics pale into insignificance relative to the need for the market to act with true objectivism. And that may be harder than ever given the pressure that hedge funds are under to provide investor returns, even with their lesser fee models - for they may relish a period of “range-volatility” and the 'double plays' and 'high-spreads' such a financial climate offers.

To summize, excluding hedge-fund market antagonism, investors will need to understand the very foundations of their business interests, to ascertain the very 'nuts and bolts' of typical enterprise construct to gauge its present, near-term and long-term worth. Rather than the grandiose (generally y opaque) investment plans of old, this new era demands old style 'bread and butter' business evaluation that in turn demands company transparency. That means seeing the acute detail of the big picture.

As many will know, investment-auto-motive's own marketing strap-line from its 2006 beginning has been to implore clients to “think small” - referring not only to its boutique size and level of 'focus' - but as an important guiding philosophy when analysing the myriad of critical criteria of a company and/or sector.

Uber-conservatism is the order of the day, required when reviewing trading businesses of any age or indeed the hypothetical business models that this historical juncture will see emerge. Let's hope most market constituents (primarily institutionals & PE) are on the same page as investment-auto-motives.

Since stability must be put back into the market, and that can only come from sensibly formed MarketCap and p/e ratios, with such valuations based upon a firm's true operating revenues and true 'marked to market' asset-backed worth. Stability will not come from the 'sentimentalism' of promiscuous sector-jumping speculators or over-nervy desperate traders that have created the recent, effectively baseless, over-confidence.

All must return to the premis of economic and financial 'fundamentalism', if we are to create real traction, a smaller but healthier economy and the prospect of well supported long-term growth.

Friday, 21 August 2009

Industry Structure – EU Supplier Sector – Re-Forming the Sector

Although August & September are typically a quieter period for capital and money markets, they are also the time of the summer & fall conventions; a European notable being the Frankfurt Motorshow with adjunct conferences.

For global auto-industry investors, the associated heavy focus on US Autos and its supplier base has momentarily switched to Europe. North America has seen much its sector M&As and acquisitions given the activity highs between 2004-07, with the latter 07-09 financial fall-out pulling more suppliers into bankruptcy which has allowed PE to cherry-pick below-value enterprises that should benefit from GM and Chrysler's quick-routed Chapter 11 emergence, and the first to benefit FMC..

Thus, now US investment eyes have crossed the water to Europe.

Recognising that the EU supplier sector has lagged the US in its downturn due to latter-day credit-crunch shock-effect , more disparately placed car manufacturers and the now waning support of government to offer yet further 'bail-out' funds to individual companies beyond those already publicised.

So increasingly, EU member governments are looking to Brussels to take on the burden of 'supportive reform', thus the EIB (European Investment Bank) has stepped into the fray to offer bridge financing to the systemically important vehicle manufacturing and parts supply players as an interim step to the re-building of Europe's car and light commercial vehicle industry. And as such takes on the role of partial arbiter for the sector's future.

[NB. the EIB will be acting as a self-interested agent of change given that it must itself be seen to invest in companies with sound long-term fundamentals that underpin EU prosperity and thus so its own 'Loan Book' & Capital Ratio can support its own triple-A credit rating. (It's 'mission' as “The Bank Promoting European Objectives”)

Unfortunately, automotive/personal mobility per se does not seem to appear as an RDI (Research, Development & Innovation) focus for the EIB. investment-auto-motives prompts the EIB to encapsulate this highly economically important arena ].

Thus at present industry observers and the investment community alike now watch over Europe.

Just as it did with the North America and its regional sector collapse. That NA process is still of course ongoing, its own decline starting as early as 2004 with listed and privately held companies bitten by the contractual – and for some sole supplier - leverage that Detroit's Big 3 had over them; those 3 themselves in turn caught in a spiral of value-destruction created by legacy costs and an unforgiving marketplace.

For Europe, although EU members are often thought to act in concert, the 'Brussels reality' is unsurprisingly somewhat different; especially so during such decisive, watershed times as these. The 'beggar thy neighbour' reaction of individual members to the banking crisis, and more recent 'back-door' subtle protectionism enaction, shows that Europe still has broad economic policy frailties stemming from member states of diverse economic foundations, sizes, specific industrial sector 'GDP generators' and resultant attitudes.

This complex context is the terrain that today both supplier company board chairmen & directors and private equity industrial portfolio & fund managers must appreciate in detail if they are to respectively compile their futures. And given that today's only partially thawed liquidity that is preferably done as collaborating agents, given PE's effective ownership of allocatable financing capital and what should be in-depth board-level knowledge of their own company.

Presently PE – much US based - is looking at the European supplier base to both obtain synergistic 'bolt-on' capability to currently held enterprises in North American and as eco-tech enablers with migrational prospects into the US, Canada and 'down the road' Mexico – as part of NAFTA pact trading conditions. Thus PE is looking typically for the near age-old idioms of manufacturing & geographic market scalability and technical competitive advantage – 2 basic tenants of enterprise. (The recent Obama espoused Modec-Navistar/International JV offers an examplar of the latter trend.)

Thus the Aug-Sept conference season sees the SupplierBusiness conference in Frankfurt on Sept 17th. Executives from Tier0.5, Tier 1 and Tier 2 supply companies along with banking representatives and big hitters from the PE world – Wilbur Ross of WL Ross & Co a key-note speaker, as is Philip Wylie, now with boutique investment bank Houlihan Lokey.

The conference will typically be 'abuzz' with conjecture as to potential sector consolidation deals and where exactly the EU supply-sector sits today in a tri-sected arena of ICE, Hybrids and EVs, vs a very forward looking Japan, re-surgent S.Korea, the giants of India and China, the capital flows into Taiwan etc etc.

The Modec-Navistar venture will set a tone regards the tech-transfer of EU capability, but the segment as a whole must maintain its view and momentum forward; even if major “value-curve M&As” such as the Schaeffler-Continental amalgam are suffering heavily at present.

investment-auto-motives highlights the EU potential, possibly via the EIB, to follow Berkshire Hathaway's lead with BYO – an enterprise created from 'conjoined twins': an electronics producer and automotive manufacturer. An example that highlights the present and future need for cross-sector pollination.

Thus at this time Brussels (with the assistance of CLEPA) should be creating a broad EU Supplier Sector Roadmap, a guidance template of sorts that states to the world the aspirations of the EU for its multiple Tier levels, incumbents and possible & probable new entrants.

Private equity has had its fingers burned to a degree in the US because of the combination of a less than rounded and detailed industrial policy, now greatly exacerbated by the previous seizure and now cautious dynamic of capital markets. The EU must take heed and learn, perhaps indeed sensitively using the US experience to its own advantage in seeking locally appropriated funds and FDI for a new era.

In the meantime, expect the investment community at the SupplierBusiness conference - titled “A New Direction for Suppliers – A Radical Industry Reconfiguration?” - to be wandering the hall with compiled lists of the key financial ratios of each company at hand, balance sheet numerics of core assets (ie without intangibles) vs liabilities, privately critiqued corporate strategies and importantly SWOT analysis of incumbent management

Futhermore, regards hot-topic 'bar talk', the recent WSJ press report that hedge-funds may be short-selling VW given its Porsche related dealings, which if ultimately occurs puts yet more pressure on VW and its EU suppliers. In such a move the hedge funds would be acting as 'cats' amongst EU supply-base 'pigeons'; which could in due course net useful 'pigeon pie' for PE.

Given Frankfurt's role as a major European financial hub, financial analysts should already be running “what if” scenarios that will be priced into the FSE listings – even going so far as to question of VW's sustainability in the DAX.

Definitely a case of “watch this (sector) space” until the industry chatter resumes on September 17th.

Tuesday, 18 August 2009

Industry Structure – Re-Shaping the Sector - Investor Prompted Structural Change Seeking the 'Holy Trinity' of Business Models

Industry luminaries, observers, CEOs & CFOs have for many years sought to alter the dwindling fundamentals of the matured western industry. A maturity hallmarked by intense competition, the nature of which is laid bare in recessionary times as demands retracts and the stronger absorb the weak; or the latter fall by the way-side.

Thus typically and historically the normal modus operandi has been the striving toward (economies of) scale-building in production and resource management. “Reduce unit costs”...” improve margins”... “exert market leverage”... and critically “re-build stronger”... have all been part of the mantra in order to better compete against new-entry players often better competitively positioned from RoW regions that have fundamental macro-economics. The opposition enjoys everything from everything from low-cost labour to deep pools of governmental financial backing. Thus the western auto-industry has been the 'sine qua non' of that innate industrial (almost military-eque) mentality to scale-up efficiency, incur ever increasing capital & resource intensive expenditure, all defrayed by ever-growing market-share of ever-growing regional automotive markets.

That indeed was the very business model origin of General Motors between 1908 and 2002's acquisition of Daewoo – the original 'buy & hold' strategy of William Durant almost endemic in the corporation and serving to partially off-set eroding NA market share with broader global sales up until 2009. Thus it achieved its centenary but historically savvy investors will rightly say its ROI heyday was many decades ago. However, until its recent heavy divestment undertakings – an action previously recommended by investment-auto-motives – GM had been the effective 'playbook' for all growing automakers.

Obtaining volume scale, new market reach and new segment reach via competitor acquisition at below-par historic values is still as valid today as it ever was for those companies well positioned to do so. The TATA-Jaguar-Land Rover deal, the FIAT-Chrysler deal, the Penske-Saturn deal and Koningsegg-SAAB deal the M&A's of the recent past.

This then is the normative behavior of the western auto-industry, today being relayed across S.Korea, India, China and other areas of SE Asia, the recent bankruptcy of Ssangyong yet another example of Shumpeter's 'creative destruction' as Ssangyong plant and assets are put up for offers and duly taken by either its parent's (SAIC) subsidiaries or competitor companies.

Thus Asia is 'enjoying' the early period of its 'hey-days' - the equivalent of the US industry's 1920s.

But there have been seen to be natural limits to the big is better model, the process itself incurring baggage and costs as a corporation inevitably takes on 'social baggage' (eg pensions, healthcare, etc) and by doing so increasingly must carry a hefty financial drag which in turn inadvertently generates a loss of its commercial & industrial momentum.

We have witnessed this in what was the heavily over-burdened 'Old GM' as it slowly approached its centenary year, requiring a shedding of its wholly 'legacy costs', the divestment of lesser performing divisions with re-focus on North America, China, Asia & Latin America.

This re-orientation marks a visible watershed period of western & Triad region industry, the mature sector understanding its relative position and seeking alternative ways forward with new structures, business models and products. ”New ways for new days” so as to meet the (inter)-national PESTEL challenges of tomorrow.

Unsurprisingly, they primarily include: energy reliance and security and energy cost, with the result - as some political commentators believe - to improve Triad commercial leverage with OPEC, Russia and other oil exporting regions by demonstrating oil's lesser hold on Triad economies.

Beyond the politics, it theoretically allows them to lead the world in eco-tech and latterly sell-on such physical product or licensed IPR advancement to the rest of the world.

So new automotive industrial structures are being formed in the midst of the present sector reformation, some obvious – typically new product types or marketing hype being on the everyday radar-screen of the popular and business press - others less so, effectively below the radar but far more powerful, such as the slow build theoretical formation of new era hypothetical business-models and so value-creation.

To do so enterprise innovators have and are looking to 'best practice' models, cases and benchmarks from external sectors so as to re-shape the very perception of what constitutes 'automotive' per se, and moreover, what constitutes the basis (and accordant perceptions) of personal & family mobility 'reality'. By shifting understanding and perception of the innate 'value' of mobility it so shifts the 'reality of mobility'. By doing so there can be an according re-appropriation of mobility methods, models and pricing structures.

Thus a fundamental shift from the historical/normative viewpoint of “cost-driven pricing” (ie. production cost + retail margin = price), toward “value-driven pricing” (ie mobility value = price). In essence, a deconstruction and reconstruction of mobility from both business profitability and consumer usage dimensions.

That implies re-evaluation - indeed recreation - of the mobility value-chain to ideally gain multiple value-streams and so potential revenue-streams. The process has been termed as “unbundling”; a cutesy phrase less threatening than 'reformation', 'reconstitution' or 'reconstruction'.

The closest example to date in telecommunications - that of the communications device (the mobile phone), the usage methods (ie service package options) and the transmission network itself. In short – the device (basic to complex), the usage (level & type) and the infrastructure.

[NB investment-auto-motive's previously published item “iPODs, Barbie Dolls & Airfix Kits” to demonstrate through analogy and example 3 of the prominent consumer and production trends forging the ability for lowered cost mass customisation, which will in time directly effect the re-strengthening of value-creation, affecting industry structure and so the evolution of public and sector and private sector vehicles]

The basics of an overtly (overly?) broad vision is slowly, step by step being sought, involving new product technology, service options and the implementation of telematics. Hybrids and EVs, new leasing arrangements and the inter-connectivity of 'intelligent transport systems' (ITS) and electrical charge points/grids.

Thus it is around this 3-Dimensional 'Mobility Order' (Product – Service – Network) that investment, commerce and industry is trying to orientate. Developing a plethora of commercial initiatives from mature, developing and embryonic enterprises and sectors.

But although each arena has developed independently since there appears to be no publicised over-riding master-plan or route-map. Whilst academic hypothesis may have been developed behind closed doors, the massive clean-tech and infrastructure spending from inter-national stimulus packages must be adequately planned and governed if the present global economic hiatus is to be used to change the face of mobility.

However, even without the issue of a formally publicised plan, commercial enterprises of all shapes and sizes are driving the agenda, both independently, via official industry bodies and via cross-sector formal and informal forums 'from DAVOS down'.

The investment community and commerce is talking, but is it at the level of detail required? Given this apparent fact, (yet recognising that outline plans will be periodically hypothesised), investment-auto-motives proposes highlights the importance of 'scenario plotting' to trace-out the 3-link business partnerships that best re-shape sector for a latter-day / additional 21st century auto-industry.

Ultimately amongst the plethora of clean-tech vehicle Researchers, Producers, Retailers, Service & Applications Providers, Charging Providers and Energy Companies – and the multiple combinations thereof - the investment community will need to improve its ability to identify the potential winners from the probable losers.

Auto industry history is littered with the lost finances of both professional and optimistic, enthused, naïve amateur investors, seeking to get in on the ground floor of 'future-tech' cars. Where there is chatter, there is interest, and where's there's interest there is the real possibility for the age old 'confidence-trickster'; same scam of 'creaming' over-enthused and irrational investors. The fabled story-line of 'The Producers' or the many historical examples of off-plan real estate projects well illustrate the process from hyped marketing to basic business set-up, business stalling, re-capitalised and re-stalling with the pile of investor funds 'lost' in the process.

And today, such funds carry with them the very heart and weight of investor confidence – at a level perhaps not seen for over 150 years given the micro-macro complexity and depth of today's unprecedented experience.

investment-auto-motives believes that the current optimism in capital markets is misplaced given the overt exuberance toward the “less than very bad” economic indicator news and the better than expected H1 results. [NB See previous post “False Prophets of a False Dawn”]. 'Toxic assets' still haunt the western banking sector - looking something like a case of 'pass the parcel' – and so they still have not been properly identified, re-packaged and confidently sold-off. That means that bank balance sheets are still precarious even if many for the moment appears far stronger than previously. In short, the fundamental concerns that created the financial debacle have not disappeared, even if it appears like normality is re-emerging.

Thus today we see the ongoing, and possibly increasing, pressure on the availability and cost of capital.

Thus the major issue for the investment community keen to re-orientate the overtly matured Western/Triad auto-sector is the manner in which that can be achieved.

Thus presently, the rewards of tomorrow's '3-part Mobility Model' seems a very compelling, but the road to that scenario still appears hazy and the question of how exactly to appropriate the scarce 'propulsion fuel' - the capital markets' liquidity relative to different approaches and enterprises – is being ever more critically debated.

Friday, 7 August 2009

Macro-Level Trends – Energising US Autos – Clean Tech Stimulii Toward Broader Horizons.

There have been sharp critics of the 'Cash for Clunkers' initiative in the US, investment-auto-motives one of them. That plan, like those in the UK, Germany, France and Italy, simply re-directs monies from the responsible masses and puts them in the pockets of the relatively few who seek a new cheap new rides.

Those trade-in car buyers effectively event driven arbitragers who will only momentarily buoy a percentage of US production - as much of that money is spent on small foreign imports – the annualised July sales figure of approx 11.7m reflecting little of the realistic 10m new norm that the national industry (GM & Chrysler in particular) must prove it can successfully trade upon.

As $1.0-2.5bn tax dollars are directed toward the mass market (another clunker initiative still being discussed), so President Obama is keen to demonstrate the administration' s commitment to automotive clean tech in EVs and hybrids. Ford, GM, Chrysler, Nissan and the likes of Tesla have already been publicly allotted their government grants from an amalgam of the 2007 Energy Bill and the $787bn stimulus package of approximately $435m.

After the obvious names in the sector, now the focus is on the battery supply-base and US medium-heavy truck-makerss like Navistar International; hosting the Presidential announcement at its Wakarusa plant in Indiana. An area much like Michigan hard hit by the economic crash and eager for stimulus monies to be converted into local jobs.

Having developed the International DuraStar diesel-electric hybrid truck, Navistar has now been given $39m to produce 400 EV trucks, averaging $97,500 per truck, but intending to develop the EV competence base within the company. The new product(s) come from the creation of a JV with Modec, a well known e-truck producer; and from first impressions of the showcased truck, implicitly appears to effectively license current Modec technology, with perhaps ongoing R&D work. It is as yet unclear how this initiative and its monies fits with the USDoE PHEV School Bus programme that is expected to cost $10m. Either way, although the School-Bus and Generic EV Truck programmes differ in their propulsion system solutions there should be a basis for cross-project co-learning.

But much will expected given the Modec, other manufacturer and governmental 'piggy-backing'. [NB investment-auto-motives' previous recommendation that the US must seek RoW clean-tech assistance, Modec an implied capability provider].

The truck sector across the globe has been obviously hard-hit, with only Indian and Chinese truck-makers seeing a rise in orders, so it is hoped that Navistar's usual customers presently devoid of liquidity and strategic intent to buy at present can buy-into the green vehicles in 2-3 years when the US economy has hopefully re-awoken and Navistar's own captive finance house can re-lend to a greater extent.
All in all, 20 states will benefit from the state expenditure in clean tech, the Tier 1 supplier Johnson Controls gains $299m so it can climb up the value-curve, having already formed a French JV from which it can now migrate knowledge into the US.

A123 Battery Systems gains $249m from a large $1.5bn programme dedicated to battery technology development and production, an effort so catch-up with and ideally beat Japanese, Korean and Taiwanese abilities. Though it must be noted that Japan is in reality about a decade ahead of the US in the field of mass market application, in-service monitoring and next generation cost & weight improvement. Thus it is assumed that a portion of this fund will be dedicated at today's US-Asian JVs and attracting additional Asian FDI to transplant its power-knowledge, mirroring the experiences of transplant vehicle factories. However, the irony has been noted that US monies are being given to the US divisions of foreign nation corporations; eg $151.4m to Compact Power, a division of S.Korea's LG Chem Ltd.

Beyond this, $500m goes to others designing electric motors and drivetrain components, perhaps the benchmark in the latter arena set by PSA recently with its low-cost 4WD adaption technology that links an electric motor to the rear axle for part-time 4WD. Other countries', other VM's and other OEM's efforts will be evaluated through what are known as whole-vehicle, vehicle-system and charging-systems 'tear-down' exercises to appreciate what today's 'world-class' engineering looks like. So $400m has been set aside to do just that. Ultimately to “copy +” the best of today and fund R&D to move the science and the eco-tech genre onward.

Joe Biden, Vice-President, is reported as saying “We’ve got to get ahead of this curve,” [otherwise] “We’re going to get left behind.”

The US has made progress in the past, but the science long been in gestation, at best past EV efforts like GM's EV1 and Toyota's US RAV4-EV either at best miss-timed to market or at worst claimed to be cynically calculated PR stunts to prove EVs shortcomings in the mid-90s. US made Hybrids in everything from Silverado pick-ups to Taurus sedans have not been big sellers compared to mainstream hybrids like the Japanese Prius, Civic, Camry and now Insight.

Part of this $2.4bn is to propel US capability forward and start declining the worrisome unemployment figures, but ironically Japan has its own unemployment concerns, now at a 6 year high. It has set the bar for auto-clean-tech, and now may be wishing to focus its own national agenda upon clean energy creation – with next generation solutions spanning everything from nuclear to solar – and of course domestic housing and commercial premises technologies. To do so it will undoubtedly be looking for the cross-fertilization from its auto-industry to do so, with the intention of licensing the IPR and products to the world.

In this recent US initiative, there are 48 identified auto-related projects that will share $2.4bn. In order to avoid playing cross-sector catch-up some of that ought to be set toward setting a road-map for a “technology-ripple” that can affect other equally high – if not higher - CO2 emitting sectors.

At a time when the US is so obviously relatively low on that all important value-curve, it must better plan its way forward to climb and latterly regain control of the curve itself.

Fund recipients such as Navistar with its RV chassis arm may do well by working with its RV build customers to track and model motor-home energy usage & CO2, taking learning from low-energy RV installed products and adapting them to the broader market, either individually as products in their own right or in league with commercial home developers providing a suite of domestic solutions.

History recounts that such ideologies and business models have worked in the past, indeed so for Navistar's former entity International Harvestor. Between the 1930s and the late 1950s the US auto industry created Home Appliances divisions such as Ford's 'Philco', GM's 'Frigidaire', Chrysler's 'Airtemp', Nash's 'Kelvinator' and Studebaker's 'Franklin Appliance Co'. International Harvester maintained its own branded electric appliances marketed to farmers wives benefiting from an expanding electricity grid to rural regions. Today that grid nationwide and worldwide (ie GCC countries) is becoming 'Smart-Grid'.

US industrial policy-making would do worse than reflecting that cross-functional interactive philosophy, and perhaps should demand more of its industry players, to truly see the long-term results of government investment, and the exercise to not simply end as a feasibly the biggest 'sunk-cost'* for possible little return of US history.

[NB. See Auto Task Force's major concerns about the GM Volt business case*].

Monday, 3 August 2009

Industry Practice – Platform Sharing – Mas-Cat-Raiding or Masquerading?

Evident difficulties exist when creating a viable business model for what is effectively a low volume performance marque. By its very virtue, it must rely upon the sporting cornerstones of advanced chassis dynamics, the immediacy of power and a unique aesthetic in order to maintain its differentiation and so provide its brand USP.

Automotive history is littered with well intended, highly ambitious but ultimately flawed, commercial thinking by company owners and overtly biased management. People that thought advanced product design alone, without the usual tenants of business management, would create success - from the post-war Tucker Torpedo to NSU's Ro80, and many more names besides.

Indeed, such experiences are not only limited to names of the past, but also appear in the histories of today's players.

Two names that have had a fair share of fruitless, over-ambitious and ultimately value-destructive efforts have been Jaguar and Maserati.

The former with the XJ13 and XJ220 and the latter – under De Tomaso - with the Deauville and the Bi-Turbo range. Of course no 2 examples are ever the same since no 2 set of circumstances are the same, but these items do reflect Jaguar's failed efforts of 'supercardom' in the prosperous 1960s & lean 1980s, whilst Maserati's historical instances result from attempts to battle previous commercial decline, trying to recapture former glory during the PESTEL headwinds of the 1970s a& 1980s.

Jaguar's commercial is in the history books: from William Lyons' 1922 establishemnt of the Swallow Side-Car Company and onward to empire building with milestones such as the XK120, E-Type and series 1 XJ as its arguable peak. And onto the marque's unfortunate tarnishing under the BLMC/BMH umbrella in the 1970s onto 1980s Privatisation under Sir John Egan, onto the 1989 Ford take-over and more recently TATA's relatively recent purchase. Unfortunately for many of those years Jaguar has been a commercial under-performer, this condition created by a mixture of customer migration to markedly better competitors and the downward spiral of lesser revenues inducing reduced core-competances and the influence of parentally enforced higher agendas from BLMC to the process of privatisation to FMC's PAG to now arguably TATA's broader issue conglomerate requirements.

The Maserati brothers established themselves in 1914 as contract-builders for others' GP aspirations. Their own Trident logo appeared in 1926, bought-out by the Orsi family, wisely and effectively switching from race to road car production with increasing success until its commercial heyday in the 1960s. Purchased by Citroen in 1968 ostensibly to raise its own profile and share technology (eg SM), it fell into receivership as part of Citroen's 1974 bankruptcy, only saved by the Italian state GEPI fund as a lifeline bridge before being bought by De Tomaso. Chrysler took a stock slice with the all-important 1993 FIAT full purchase providing stability and expertise; especially so with Ferrari's 50% stake so providing technical resource.

To add more detail of its past problematic experiences, Maserati was effectively 'lost' for 40 years due to poor direction in the mid-1960s, the 1970s downturn, raging 1980s competition and a 'climb-back' in the 1990s - even Lancia aruably better positioned. From 1968 onward various efforts were made, the most interesting perhaps the 4-door Deauville concept mimicking a futuristic Jaguar XJ. That was followed with efforts like the 2-door Longchamp mimicking the Mercedes 2+2 SLC, and the Bigua/Bi-Turbo (latterly Qvale Mangusta and MG X-Power SV, that last tag desperately trying to evoke Lamborghini). Thus a period of brand disorientation, lacklustre products, lost credibility and for De Tomaso and for FIAT until only very recently a cash-burning money-pit. MAserati exemplified the hard task of turning around and reviving a past glory name.

However, the Deauville case-study is prescient today since it attempted a 'modernised' Jaguar XJ (and was an interesting Italianate precursor to Jaguar XJ Kensington concept by Giugiario which heavily latterly influenced Lexus (GS) design identity.

The crux of the matter is that the Deauville concept was not simply an attempt to find a renewed identity but clearly an effort to court the imagination of Jaguar's then quite unsure, uncomfortable management given the massive whole left by Lyon's departure. Appearing in 1970 it came 18 months after the 1968 launch of the series 1 XJ, and effectively a clear statement that Maserati – itself at a major juncture with then Citroen's new ownership – wanted to build alliance with another low volume prestige marque. The pretext was not only for the Italian sub-division but Citroen itself as a manner of walking up the price ladder with a 4-door SM to replace DS.

Thus the Italians and the French well understood the opportunity to gain economies of scale and the opportunity to re-appropriate parts from diverse parts-bins enabling lower cost additional vehicle development.

Remember that this was at a time when the UK Pound had been decimalised and the UK was on the verge of Common Market / EEC entry. So Maserati (& Citroen) would have undoubtedly thought that their implicit proposal to the UK producer had fortune on its side. It was not to be.

That alliance could have offset the flailing fortunes of the luxury collaborators given the oil crisis impact on production volumes and so commercial viability. But Jaguar's focus was UK & BMC-centric given the dire-straits of the period and the level of government (Stokes/Ryder)intervention including funds. For all the pro-EU chatter, any migration would have been politically and socially hapless.

Ultimately, if Maserati and Jaguar hadn't been such national icons with innate marketable potential to Trade-Buyers, Private Equity and Public Markets, both would have diminished in the 1970s. Thier names and supposed future potential saved them.

Today, some 40 years later, those same micro-level and macro-level drivers have converged. Global financial contraction, retracted luxury car sales, tumbling revenues, slashed operating budgets and onerous clean-tech requirement highlight the importance of inter-regional volume efficiencies made possible broader open-market, globalised B2B and B2C trade.

[NB investment-auto-motives' recomendation for a Northern European Eco-Tech 'Regional Rainbow'].

The tenants for regional alliance-building between low-volume producers has oome into being since the BRICs surged and now hold economic stability, whilst the West peaked in 2007, stalling heavily since and now running effectively on empty. Italy and India recognised this trend and informally commercially re-coupled, as they did previously in the 1950s onwards with the Premier-FIAT 500 & 1100 and the myriad of Piaggio & Lambretta JV scooters and 3-wheelers.

But 40 years on it was TATA's turn, and from a very different position.

Given their conglomerate natures and divisional mirroring FIAT & TATA have formed what externally appears a warm relationship; primarily between Ratan Tata and Sergio Marchionne. Tata invited to sit on FIAT's Board as part of their synergy seeking aspirations. The Board will have tasked senior management to seek-out cost-savings, product improvement initiatives, overall core-competence building, inter-company divisional procurement and divestment opportunities.

TATA's purchase of Jaguar-Land Rover was seen as a momentous opportunity for the ambitious company thriving on Indian and (at the time) global growth (thru' TATA Steel & IT Consulting Services). Given the informal FIAT tie there has been natural conjecture that Jaguar and Maserati should form a JV given their similar market positions, similarly sized and specified large saloon/sedan, coupe and convertible vehicles and their limited internal resources vs the German & Japanese competition. Such an accord primarily allows for the cross-application of aluminium structures, platforms and knowledge. So bringing down capital investment, general overhead, per unit costs and enabling their respective R&D budgets to focus upon more customer tangable brand-specific systems focus.

Moreover, and very importantly, FIAT's Chairman Luca Cordero di Montezemolo recognises the commercial pressures facing Ferrari from both reduced F1 Sponsorship revenues and contraction of orders for the Maranello factory. He will not want Maserati to weigh upon Ferrari once again given the financial and technical assistance it has previously provided. So no doubt ordered Maserati to find alternative paths to sustain itself. Let us not forget that Cordero di Montezemolo will have his eyes on the massive Indian potential for Ferrari F1 followers that will draw-back corporate sponsorship to Ferrari aswell as the large potential for car sales to the ever growing entrepreneurial and upper middle classes; aswell of course the ocean of merchandising potential India offers. Ratan Tata obviously has major influence in the region, a fact well known by Coredero di Montezemolo for many years.

2009, and the ideology of that 1970 Deauville toward a cross-fertilisation appears to have come into being with the New Jaguar XJ and Quattroporte. [NB Although no official statement has been released from either party since it would not be in their interests to do so]. However, investment-auto-motives conjects that the TATA-FIAT relationship has now borne the off-spring of the soft-coalition toward new product development.

Very crude basic research (consisting of the visual overlay of vehicle side-views) suggests that the New Jaguar XJ appears to share very similar dimensions with the Quattroporte Bellagio Touring concept (seen as a possible variant or replacement). Apparent in the engineering hard-points for : front-bulk-head / windscreen cowl, A-post lower, front lamp positions and nose/grille section height. Regards the latter, the Jaguar appears to take a similar front lamp dimensions to current Quattroporte, whilst the facelifted 2009 Quattroporte take a new lamp shape closer to the Gran Turismo Coupe. Furthermore, the New XJ's rear approximates the Quattroporte in boot/trunk shut-lines (although placed higher), to accommodate the inward diagonal what look to be shared rear lamp cluster armatures - both cars offering brake lights formed from 2 lines of diagonal LEDs. Lastly and very interestingly, the Jaguar's rear lamps are very evocative of Lancia's treatment created from previous generation Thesis forward and even seen on the Ypsilon city-car. [NB. Similar styling treatment also appears on Nissan's large cars and Infiniti line-up]. This suggests that the XJ vehicle platform would also be used for future large Lancias, and exploited further given the Maserati-Alfa Romeo connection (seen in the sub-structure of the retro-esque 8C) with FIAT's desire to create truly sporting (RWD) Alfas. I.E. the sub-structure would also be utilised as broadly as possible to revitalise FIAT's premium marques as part of its own global growth strategy. Add Jaguar's Daimler marque to the frey and FIAT-TATA hopes to set battle against the large sections of the high margin business BMW, Mercedes, VW and Lexus hold.

Higher level industrial policy-making between Tata and Marchionne & Cordero di Montezemolo, will of course ensure that future large cars meet and better regulatory emissions standards via clean-tech applications. With the Maserati aluminium base dating from late 2003 (designed in 2001/02) that left the newer aluminium Jaguar platform (from Alcan-Novelis) to take the lead for the alliance – especially so given the trickel-down available from the UK government's sponsoring of Jaguar and R&D partners to create the 'Limo-Green' PHEV system. [NB another fuel cell based system is being explored but realistically it will no or very little commercial success].

What is interesting is the subtle balance of power apparently being demonstrated by the New XJ taking on such a close form to its FIAT owned sibling. It is not beyond the realms of logical speculation to purport that either FIAT demanded direct influence over the XJ vehicle 'packaging' and so resultantly 'styling envelope'. More likely, given the long-play industrial game, Ratan Tata probably indicated that the XJ should be closely aligned to the Quattroporte so as to demonstrate to Jaguar management the future NPD-policy regards shared engineering DNA. In effect a reversal of the 1970 Maserati overture to Jaguar, given the benefit it bears with promised FIAT derived volumes for the XJ platform – spread over Maserati, Lancia, Alfa-Romeo and possibly even Arbath.

In short Jaguar becomes to Maserati that which TATA Cars is to FIAT Auto in India - the enabling industrial mechanism which in turn is fed by FIAT global reach.

So the XJ appears to be being utilised as more than simply a car, and more than simply a platform for shared use. The company effectively utilised as a 'commercial vehicle' in its own right espousing greater operational integration of FIAT-TATA and their respective coverage of the automotive markets, sectors, the value-chain and relative core-competencies.

Such aims are of course laudable in terms of the theories of value creation for both parties – TATA recognising FIAT's new reach into North America via Chrysler and FIAT well understanding the influence TATA conglomerate has (from steel manufacture to IT) on the Asian sub-continent. But how has this inter-company bridge-building affected Jaguar – more specifically the chimera-like XJ?

To be candid, at this point in time it does not appear overly positive regards western market expectations in the short-medium term given segment conditions and the consumer flight to (German/Japanese) brand safety, but may be greatly buoyed by the the aspirant desires of the upper-middle class Indian buyer.

The XJ follows the XF which was the real retro mould-breaker for the company. However, ideally that mould should have been broken far far earlier in the early 2000s or well before – the S-Type a mistake in itself. [NB, no a case of 20/20 hindsight, an arguement stated at the time].

[NB. Latterly in 2002 investment-auto-motives provided recommendation for a quick yet robust 'transformation' response – see website: ]

By 2008, when the XF appeared, Lexus and the Germans had, with their market gravitas, moved the game forward substantially both in terms of popularly received aesthetic and product credibility. Jaguar has been forced to play catch-up, leaping (forgive the pun) forward vehicle generations but caught-out by the acceptable level of brand-product stretch. The limited numbers of XF in and around major UK and other European cities indicates that the car has unfortunately not lived up to initial expectation.And PR efforts like the XFR Bonneville record-speed car – whilst good for the morale of few in the engineering community – are in reality costly, low impact, no-£-return exercises.

Thus XF has not blazed the trail required to clear an easy path for XJ, due to a mixture of headwinds such as:

a) oxymoronic 'aggressive-defensive' styling leading to a muted public reaction,
b) later than ideal diesel engine availability
c) the economic downturn which hit the 'mid-exec' (D/E) segment hard
d) the pricing power of major competitors

The last point very poignient, competitors often with in-house or affiliated 'captive finance' houses and so better able to weather the credit-crisis fall-out where credit availability contributed historically disproportionately to new car sales.

New XJ whilst a natural successive 'big-brother' to XF - from the front & side views – is a radical departure from 'Old' XJ as has been the intention. But the level of success is highly debatable, especially regards the Audi-esque glass-house and overtly alien rear-view. (There could be an argument made by officiandos that the rear light lenses mimic the Series 3 XJ by Giugiario but that would be a poor effort of persuasion given the little recognition of that fact by the public at large).

In the west, during these fragile economic times that have retracted consumer mentality there is a 'flight to safety' – to the known and importantly socially acceptable - as we see with Ford's re-popularisation in mainstream segments and BMW, Daimler and Lexus 'softening' so as not to repel current or potential customers.

Whilst a bold step forward was needed, there is a real danger that Jaguar has stepped forward but also not quite as straight and true as necessary. Such bold moves can prove useful regards brand direction but often that takes time to execute with the public playing acceptance catch-up and the auto-producer having to absorb the lack of popularity, sales and so income revenue in the short-medium term. The likes of Ford were able to do it with 'Aero' Sierra and BMW latterly with 'Flame Surface' 5 series et al, but both those companies were well financially cushioned when they took the leap, able to swallow the initial fall-off of revenue.

TATA's previous revealed Jaguar-Land Rover's Q1 financial losses, now combined with recent press reports of FY08 losses for the UK business unit (of £641.5m / $1.2bn inc actuarial pension losses). Undoubtedly aired to highlight to the UK government the company's need for short-term aid financing. The State BIS (nee BERR) Office, run by Lord Mandleson, reportedly offering $175m over 6 months versus TATA's £500m amount from the UK over 12 months and an EIB loan worth £340m. [NB excluding exceptional items such as Jaguar's sale of AML shares in 2007, entity's PbT/L was £-38.3m in '07 and £-34.1m in 08].

The majority of financing appears to come from J-LR banking relationships to the tune of £100m and $486m for the Jan-May 09 period, a mixture of regular external banking and TATA internal banking agreements with a stated LoI from TATA to provide further roll-over facilities. Given the Q1 problems TATA had in securing its own funding during the liquidity freeze, it had to understandably resort to appealing to the Indian public; something very sombre and reminiscent of previous struggling periods. More recently impressive Q2 results were attained by TATA Motors (excluding J-LR drag) thanks to improved commodities/materials and FX cost shifts. Even so a portion of those J-LR monies to prop-up a luxury car maker will have ironically come from the pockets of the Indian working class, themselves socially eager (some say pressured) to be seen to believe in the TATA Group.

Similarly, it may well be that social cohesiveness in India that comes to Jaguar's eventual rescue.

Although separatist by old caste notions and differences in creed, there is a growing notion of 'Indian-ess' created by economic growth and success. The betterment of the nation proudly exemplified on the global stage via achievement in sports (ie cricket previously and today F1 involvement) and world-class industry as seen with TATA's purchase of Corus & J-LR and Mittal's previous acquisition of Arcelor. This slowly emerging unity of social cohesiveness obviously emerged after 1948 Independence, subtly witnessed across private, social and commercial spheres, driven by the paradox of wanting to both assimilate 'the Best of British' from its colonial past but also be seen to beat the British - and other nations - at their own game.

Thus the upper middle classes and exec-set of India recognise at an ephemeral level that what is good for Jaguar is good for India, and so can appease themselves in the feeling that such luxurious consumption is not as socially crass as was viewed in the past. Indeed the purchase of Jaguar (& Land Rover) products actually promotes Indian industrial income, this expected to rise in the future as greater managerial, engineering, IT, administrative and production jobs are passed to Indians and the products themselves co-manufactured in local plants effectively boasting that the apparent 'best in the world' is “made in India”.

Thus it could well be Indian-ness rather than innate British-ness that buoys Jaguar's hopes in the short, medium and long-term.

To sum-up the central theme of this essay: "a current test-case of the platform-sharing ideology" – the past and present aligned forces highlight the potential for the TATA-FIAT initiative; but also highlight the importance of execution.

The use of shared platforms and components is of course as old as the auto-industry itself, with much devoted to the edict that what is out of sight is out of mind. PSA has been traditionally seen as the leader in this field given the 66% level of share by parts count, and 79% by parts value, in the mid 1990s. But as seen with Ford's Premier Automotive Group the push for economies can dilute the marque experience.

Jaguar has effectively been co-dependent since 1989 under Ford, now seemingly with FIAT. From an output high of 130,000 units (over 4 platforms) in 2002, production/sales dropped to a low of 60,485 units in 2007, rebounding to 65,350 units in 2008. Critically these were split between 2 steel structures (X-Type & S-Type/XF) and 2 aluminium structures (XK & XJ), an intolerable situation.

Although X-Type is now discontinued, Jaguar unlike its peers does not have the immediate ability to leverage the momentum of self-sustained volume nor standardised platform bases. It will probably need to migrate next generation XF to full or (at least) semi-aluminium structure to align its R&D & Manufacturing strategies, unhinge itself from the heavy burden of traditional pressed-steel vehicle production and critically to reach/better the 120g/km fleet average eco-target across its fleet. Thus it must both continue to develop its own structural core-competencies derived from Alcan-Novelis (ideally also sold externally as IPR license or contract manufacturer) and continue to effectively borrow conventional mid and small car platform technology from other OEMs or Tier0.5s; most probably FIAT given today's ties or possibly 'New Opel' (from either Magna or RHJI) to access COTS 'pre-packaged' clean-diesel technology.

To reach such a far off growth goal – which must be implicit with Ratan Tata - Jaguar must first underpin its current ethos as a re-vitalised, self-styled “niche player”. Today's task to improve unit margin profitability developed from mid-scale, 'advanced architecture' manufacturing methods. Production ties between the large sedans (XJ/Quattroporte/Lancia 'Limo')and latterly large coupes (XK/Gran Turismo/8C replacement/ Lancia 'Gamma') would help reach the optimal 100,000 unit production run for the architecture. Doing so is especially important given the recent rises in aluminium purchasing costs that are only headed higher given the industrial demand squeeze on the material.

Moreover, Sergio Marchionne's own endeavour to limit FIAT CapEx spending across operations where possible, thus utilising the best current platforms and technology at hand and from alliance partners to update aging product (such as Quattroporte) and stretch-out product life-cycles on the newer available platforms and modules. The CapEx issue especially prevalent given Maserati's YoY Q2 drop in unit sales by 48.3%, equal to a hefty 45.9% revenue reduction, only balanced by severe operational cost containment. [NB Q2 revenue of E111m vs E205m last year, and Q2 of E2m vs E12m last year].

FIAT appears to have timed their Maserati efforts well, exploiting the 2003-2007 period of high growth which was especially fortunate for its buyer set; many of whom either work/worked in high-finance or were commercially closely related to it. Now that such revenue has declined it appears to have leveraged the TATA connection to probably share a next generation platform and so avoid much of the development and productionisation pain and overhead.

Thus, investment-auto-motives believes this describes the 'behind the scenes' reality of the dynamic between TATA and FIAT, a context of relationship building requiring 'given ground' in this instance by Jaguar at a TATA group operational level so impacting product development freedoms.

The New XJ seems to visually demonstrate the inherent compromises that must be made from such a position given the assumed heavy influence of FIAT Auto and its own platform strategy needs. That is not to say that New Jaguar is doomed, simply that it must face a new and very different future largely dependent on the social dynamic and economic engine of India and SE Asia. And much of that depends on whether Jaguar itself can persuade that XF and XJ truly are Jaguars, which given their obvious overtures to to Lexus and Audi by design, and Maserati by default, could be argued as failing to stand on its own “4 feet”.

So, “Mas-Cat-Raiding” or 'Masquarading'? The semantics and tautology are clear, but it will be the Indian buyer that decides whether to call (in cricketing parlance) “In” or “Out”. And TATA-FIAT must learn from the exercise.

Whatever the outcome, the Jaguar-Maserati connection demonstrates the industry critical issue of the need to form alliances yet maintain marque integrity. History demonstrates that this is a very hard objective to achieve, especially so for the partner with lesser leverage. And it is here, with the likes of an academic and in-depth Jaguar-Maserati case-study, that the auto-sector must continue to learn and appreciate the political nuances, corporate subtleties and product consequences of such alliances – the good, the bad and the remote possibility of the unintended ugly.

It is a lesson that the crop of newly 'independent' car-makers that have spun-off from 'Old GM' will need to learn – from SAAB to Hummer to Saturn to Pontiac, as well as very probably the Ford divestment of Volvo when capital markets are re-inflated. For investors will want to see that merged economies of scale can be obtained whilst maintaining marque uniqueness.

Otherwise their investment strategy will simply be to ride the sector upturn and exit before consumer confidence diminishes in a brand. Such resultant – arguably circumstantially enforced - investor behavior will only return the sector to its former poor NPV modelling, low IRR and so low RoI experience; something all involved are keen to avoid.