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.