Monday, 26 October 2009

Industry Structure – The F1 World Tour – The Shared Traits of Donington Park & Dr Parnassus

The globalisation model has always relied on the seemless interaction of the 'new world' merging successfully with the 'old world'. That interaction became increasingly frictionless with Marshall McLuhan famously stated that since the 1960s we have lived in the 'global village', such is the technological inter-connectedness of the modern-world.

Beyond the more ethereal realm of telecommunications and into the physical, that marriage of a 'global village' and of advanced technology is perhaps best exemplified by Formula One. A now high exposure, highly commercialised 'sports-entertainment complex' which has created its own hyper-reality-world. An alternative reality in which the human psyche sits mid-distance between physical tangibility and the more remote yet powerfully immersive regions of cyber-space and the human imagination. For motor-sport enthusiasts and the public alike it is hyper-reality (see Baudrillard & Eco), engendered by its history, myth and expectation; a background presence that regionally comes alive only once a year with a weekend bonanza, and where dreams become reality.

Without doubt, F1 is the spiritual successor of the traveling circus. With that showmanship in mind, the show much be ever 'bigger and brighter', drawing inspiration from all quarters to for 48 hours present the biggest show on earth.

Presently the century old silver-screen serves-up 'The Imaginarium of Dr Parnassus' at cinemas. On-screen the central character, the good Doctor leader of a famtasy show for the mind, finds himself peddling via horse and cart a show from a bye-gone age that has become evermore ineffectual and irrelevant to the expectations of the modern ausience – even though the esoteric offering is in itself a wonderful delight.

Dr Parnassus is lost between old and new worlds, that is until the new arrival of a 'johnny-cum-lately' with better commercial instincts and new ideas to update the show.

The film's plot serves as an analogy to the 'old-world' vs 'new-world' situation facing the owners of British motor racing circuits – none more so than Donington Park, the poor cousin to Brands Hatch, Silverstone and Goodwood.

In the world of Formula One, the iconic names of Monaco, Spa-Francorchamps, Nurburgring, Silverstone and Suzuka trade on a combination of their international repute and inter-continental accessibility. Whilst the newer global tracks such as Sepang (Malaysia), Shanghai (China), Sakhir (Bahrain), Istanbul (Turkey) and Yas Marina (Abu Dhabi), are able to offer a 21st century experience thanks largely to hefty government funding seeking a recognition and status on the global stage.

Within the UK, the fight for the modern home of motor-sport has been an ongoing process since Brooklands lost its monopolistic lead in the late 1920s with in I933 Donington Park heralding the first sealed-track. As the best of its type at the time it hosted the British round of the World Grand Prix through the 1930s until its WW2 closure and Silverstone's effective over-taking of Donington Park in 1948 and its secured F1 title since 1987.

For decades Donington Park found itself in the same constrained circumstances as Dr Parnassus, an offering – centered on its asset-base - that was initially slowly but now quickly becoming outdated compared to the modern ilk, enjoying only periodic small infrastructure adjustments limited to the those only strictly necessary to maintain basic BRDC club standards.

The motorcycle, car and truck race loyalist crowd maintain a core audience, and so revenue from gate-receipts, restaurant covers and commercial leasee rents provides an income; but it seems this is a low level of revenue compared to its international peers. In truth, given the history and nature of the circuit-loyal crowd, the basic provision service has worked, since those who typically attend for “the machines and the action”, not the odd spectacle and social schmoozing. They generally have lesser disposable incomes and so lower levels of personal expenditure. In retail parlance, Donington is more of a provincial Morrisons than a city-centre Waitrose. Indeed, those who have historically attended Donington Park prefer the fact that 'the Park' is anything but 'slick' and retains an innate 'pantina' of a yesteryear heyday. To them Donington feels to be 'theirs'.

Yet beyond the sentiment, economic and corporate ambitions effectively demand a 'sweating of assets' and so the idea of business re-modeling has been a constant part – if less than a reality - of Donington's past. The interactive circle of event-type affects crowd demographic and crowd-capacity, a formulae in which hiked consumer expenditure on a per capita basis is reasoned to against multiple revenue streams to provide a new business rationale.

This process has been as much part of Donington history as the wheels that circumnavigate the track. But the reality has been somewhat different, and so the incumbent circuit operator has instead been forced to exploit the differing crowd type's cultural affinities. Thus since the 1980s, “Donington Park” itself became as recognise for hosting 'The Monsters of Rock' concerts, and the latter-dau spin-off 'Ozzfest'; aswell as ad-hoc events for other musical genres. Efforts to host other event types, nominally fairs and conventions, have been less successful relative to the powerful offerings of conventional event halls which have increased in number, ground space, inter-rivallry and so reduced the per metre squared hosting costs to exhibitors (ie Manchester Arena, Birmingham Exhibition Centre, London O2 Arena, Docklands Arena etc).

So although additional service provision to attract other types of customer has been tentatively tried, the improvement in income in recent times was as a default consequence to a social / consumer trend. That of the rise in sports-bike popularity and ownership between 1997 and 2007 amongst the deep-pocket 'mid-life crisis' male from the suburbs. Unfortunately with the economic downturn and re-shifting of social perceptions that crowd has been diminishing of late as disposable expenditure becomes constrained and 'Boys Toys' became unaffordable luxuries.

So for all past hopes and temporary gains, Donington is typically viewed as the 'working (wo)man's' circuit, its populist association perhaps more so with 2-wheels than 4-wheels (even with BTCC & other events). 'The Park' is home to World Championship Superbikes, the British Motorcycle GP and 'Revivalist' Classic machine races. So, in bike terms a combination of both Silverstone & Goodwood's as per cars.

However, that seemingly ever-present ambition to regain the 1930s Grand Prix glory-days – echoing names such as Nuvolari, Rosemeyer and Shuttleworth - has been a long-held draw. Especially so since the circuit, estate & house's 'Laird' Tom Wheatcroft, moved his large collection of GP cars into a specially build exhibition space in 1973.

However it took 34 years, when in 2006 the newly formed company Donington Ventures Leisure Ltd (DVLL), led by Simon Gillett and advised by the Wheatcroft brothers, took up the 'dormant opportunity'. A 150 year lease on the circuit was agreed and an agreement with Bernie Ecclestone's FOM (Formula One Management) to host the British F1 event for 2010 and the following 10 years.
Critically this was subject to the facility's major upgrading.

This as many observers have noted gave Ecclestone - as the effective F1 operations puppet-master - the ability to play Silverstone against Donington (& vice versa) relative to the world-class infrastructure standards required to ensure to maintain and raise the glamourous reputation of F1.

However, progress in developing the Donington circuit by DVLL proved slow and painful; a cost to the company's credibility. The Q109 DVLL debenture flailed, months after it was cited by the Wheatcroft estate as having fallen into rent arrears; thus seeking re-payment or repatriation of the circuit. Though an out of court settlement was reached this negative episode undoubtedly made any additional 3rd party investors sensitive to questioning the innate shape and health of the company. This realised when the company, facing breach of contract with FOM, set out on 14.10.09 to secure a further funding via issue of £135m corporate bonds with Citi acting as the book-runner.

Even though the offer was promising to pay a 15% coupon over 7 years and was presented at a 10% discount investors shied away. Beyond the sizable immediate problems, there is surely a belief within the investment community that

a) the circuit development could not be completed within the given timescale to host the 2010 British GP
b) even if miraculously built would have incurred diminished scope & scale of required facilities,
c) 'skimped' build-quality
d) high potential of full project completion cost over-runs.

All of which blight the investment equation.

Furthermore, to the external observer, it is rational to expect Mr Ecclestone's contunation as a 'utility maximiser', thus to better service FOM's own interests by possibly switching between his effective suppliers (Donington vs Silverstone). FOM could have re-negotiated that claus at an future time with DVLL, both knowing that Silverstone was FOM's fall-back position. Ecclestone would have presented it as only reasonable, to maximise circuit rivalry and so raise the bar of British F1's competence and international standing.

Thus it seems that DVLL, if financially sound, may be forced to simply run Donington 'as is', dispensing of the ambitious future CEO Simon Gillett sought. There is of course the option of selling the 148 year lease it holds – or a portion thereof - to another 3rd party; if indeed one is at all interested. For its marketable value must incur heavy discounting given the present low valuations of commercial property (esp within the leisure industry), the strain put on the FOM relationship and the realistic level of yield and capital growth available from the circuit.

In all probability, the circuit will return to the Wheatcroft estate, either sold-back for a nominal sum or returned by contractual default. Thus, to be managed by a small events team of in-house staff until at future point in time, possibly beyond a decade away, a new business-buzz can be attached to the circuit's future potential, so attracting new lease-holders and their campaigning for infrastructure investment.

In lieu of a new F1 Donington era, the Wheatcroft Estate, may simply have to book the circuit to its long-term assets section of the balance sheet, probably doing so as 'development class land' which though heavily discounted in the present market, should bounce-back in due course proving useful addition in due course to the Wheatcroft capital-base.

The Donington loyalists will be happy at the unchanged state of their home circuit, much of the patina remaining, and the F1 circus will carry on at Silverstone.

In the 'Imaginarium of the F1 Business', the innate complexity, politics and alliances of the machine means that perhaps not everything is as its seems. But, unlike the Dr Parnassus analogy, at least Donington's soul remains intact.

Tuesday, 20 October 2009

Micro Level Trends – Corporate Financing 2009 – Convertible Bonds Show Their Worth to Investors

The beginning of 2009 was undeniably very dour. Essentially frozen credit markets, a free-falling stock market, sizable risk premium spreads between anything but AAA rated bonds versus government instruments, and the repatriation of FDI monies to US$ & JapÒ° homelands demonstrated a 'flight to safety' by investors not seen in modern history.

A combination of corporate need to access liquidity for working capital and investor expectations of a better tomorrow down the road created the perfect storm for the return of the convertible bond – a hybrid type of issue itself born from preceding tumultuous eras and so perfectly suited to the start of 2009. From a low base-level of C-B sales, the innate risk-reward structure of this asset-class matched general sentiment; that sentiment in turn assisted by the forced sell-off of 'in-play' notes by hedge-funds seeking to re-build their own cash levels. This over-discounting presented a powerful buy opportunity given their mirroring of the near-mid market picture, the above base-rate yield and above comparable normal bond coupon.

As others have remarked “2008 was the year for banking re-capitalization, whilst 2009 was the year for corporate re-capitalization”. Whilst that process was relatively stable for the banking sector with a separation of obvious winners and losers via allocated government and investor funds, has been a testing time for other sector CFOs and indeed true long-term investors themselves. This so because it has been traders - a relatively small number of market participants with powerful leverage - that has as over-excited the market since its 3rd March bottom.

As previously stated, investment-auto-motives was at the beginning of the year concerned about the occurrence of a market rally sustained by the the sentiment reaction of “less than bad news” mixed with the illusionary effects of 'cost-cut achieved earnings'. History implies that such an event was almost always going to happen, but the verocity and timespan (as more value is priced into ever positive next quarter earnings) has been surprising. When the DJIA crossed 10,000 at the end of play on October 14th the jubilation at the NYSE was monumental. And more to the point, having dropped and returned, climbing to 10,110 as of 1.30pm on 19th October, the emerging attitude is that it is sustainable.

But of course speedy effectively arbitrage-led trading floors are last place to look for the bigger-picture perspective; that's the remit of sector analysts and behind them economists.

Given the sense of caution at the start of the year created by real-world tensions which prompted in favour of 'coupon & upside' convertible bonds, it seems that the market has indeed been heavily distorted given the 'supercharging' of the FTSE, S&P, DAX. That supercharging based on a mixture of emotionally driven sentiment and very probably almost heroic achievements regards the financial engineering of the corporate balance sheet. This enabled via ongoing cost-cutting and the re-cycling of the capital 'float' obtained from both enhanced MarketCap thanks to the markets and accessed liquidity, whether from in-place roll-over credit agreements or indeed any higher-cost credit made available. And of course there is always the ability to 'manage expectations' with overly conservative pre-reporting announcements, only to 'surprisingly' surpass them come reporting day

Every tool in the tool-box will have been used over and over again.

As the FT recently illustrated, for mega-cap and large-cap global enterprises with sizable EM exposure and income (50-60%) there is an 'off-set' of inter-regional fortunes, foreign earnings assisted by conversion through the weak US$. For other small-cap (and private SMEs) with typically far greater homeland exposure or sector-specific vagaries the picture appears less positive.

So for the present, the S&P100 and FTSE 100 players are carrying the whole market, and by virtue providing possible false hope for their smaller and less flexible/capable peers simply because they are similar sector inhabitants.

Q309 earnings season, has been well underway with first Alcoa's better than expected results and the financial sector continuing its expected buoyant run thanks to greater private savings and released government liquidity serving commercial and private lending, with brokers doing well from the 6-month rally witnessed. And more recently Apple Inc has 'beat the Street' with its results.

But in the broader picture both B2B and B2C arenas have ongoing fragility as we see from heavy industry Caterpillar and in consumer high-street retail. This is set against what most market observers believe to be a frothy market. And that mixture of realism vs over-optimism points to future stock declines, whether rapid or orderly.

Back to corporate financing and the previous trend toward convertible bonds

{NB. itself promoted by investment-auto-motives – see spring marketing campaign picture in the web-log picture space].

Of late some CEOs have been bleating about their 'hit' from C-Bs.

Their concern that at the time their issuing new releases of convertible bonds – though happy at the thought of potentially paying coupon at under par – that the ensuing stock-market rise would be slow and steady. So theoretically providing at some mid-term point a normative conversion rate when the instrument matured and morphed into equity. But of course the monumental rally has delivered 'fat' present valuations which given the stepped timescales of the call-options on convertible bonds (typically at 3-6 month intervals) have seen investors happily convert at well over the expected conversion level. That some CEOs say has afflicted their enterprises with rapid and large-scale capital retraction and for a time over-weight equity commitments.

Though convertibles were a relatively small slice of the market it was a powerful force in recreating a sense of confidence which helped to start the rally. Now that those early-birds seek to lock-in their gains, like other rally risers, those same market predictors may well be seeking to sell-on their newly acquired equity, thus maintaining the share-holder obligation by the firm, but with newly added pressures.

This process in itself could add weight to the speed of any market decline via the snowball effect, as holders recognise the bubble nature of the ride, convert and get-out. For the US, UK and Europe that in turn could create downward-pressure conditions which corrects and normalizes the market. The positive outcome being that economic and corporate fundamentals taking centre-stage (as is so necessary) in the valuation process.

With the market froth disappearing and less consequential room for corporate financial engineering, the ongoing need for working and investment capital will be required given the scale of intra-sector and inter-sector structural change still necessary.

Thus we saw the return of the convertible bond popularity between February and June 2009. And we could see a similar, though at smaller volume, replay in 2010.

For whilst the banking sector has seen a good 3 quarter run, many are questioning its strength given the level of 'toxic-asset write-downs' and still to be absorbed (considered only 50-65% complete) and the requirement to repay tax-payer 'bail-out' monies. If the banking sector begins to falter itself it will react with (sensibly) over-riding caution thus effectively retracting current 'liquidity-transfer' levels toward industry and consumers.

This inescapable reality, along with the previously mentioned 'top of market' equity selling, plus possible additional pressure created by reduced foreign earnings for big-cap companies negatively affected by 'stimulus-retraction' in China / Japan / India, could create the perfect storm for taking the wind out of present-day economic and equity-driven sails.

Though painful, this process would help to normalize the contorted present conditions, both on Wall Street and Main Street, and spread risk back across proportionately to broader asset genres – also slowing the present gold-run and any possible near future commodity speculation.

If this process does indeed happen, governments and regulators must endeavour to stop the pendulum swinging too far negatively. It must stabalise what have been highly pendulous conditions. More than ever, the market en mass must not charge back in and repeat the process. Such a scenario would only be economically self-defeating and put off the real long-term traction at micro and macro levels so desperately required.

Thus in the meantime mid-term to long-term investors must seek to philosophically 'strip-down' all corporations to ascertain their real values via true transparency – both offered from Board-level and through in-depth research. This a necessity before looking to once again take up any, though far more scant (and thus potentially more attractive, relative to company characteristics) future convertible bond issuance.

[NB. investment-auto-motives' autumn/fall marketing campaign pictorially depicts this call to transparency and objectivity].

Friday, 16 October 2009

PESTEL Trends – Technology Transfer – The Dyson Bladeless Fan

The 'Multiplier Effect' is a phrase generally much loved by economists, and today much hyped by politicians relative to the expected positive results from recent massive stimulus spend. But of course its root lays in the laws of physics (from particulate to quantum). And as of today, that important difference is critically highlighted by the announcement of the Bladeless Fan from (James) Dyson. A physical examplar and useful allegory.


Because in essence it demonstrates the philosophical and policy-led 'about turn' required to regenerate the global economy. To re-direct it through 180 degrees from the now exhausted and disqualified 'credit-pull' variety of economic growth to one of 'productivity push'. In short, for the horse to be put back in-front of the cart by means of meaningful inventive progress that generates meaningful B2B and B2C demand. True progressive conceptual innovation over false static repackaging.

Just as there needs to be a new 'fundamentalism' in the manner that objective investors view the capital markets – rationality over emotionality - so society and its consumption en mass is returning to a new age of reason. The Copenhagen talks approach the Kyoto Protocol ideals will be tested, the outcome seen to either kick-start a new eco-participatory era or very possibly flail under the political reality of EM region economy-building demands. If this is the case, it will ironically be the politicians looking at both industry and the populace to make the difference.

Given the fragility of the politics, the onus is increasingly looking to be upon the consumer expectations which in turn must be met by industry. And importantly that puts an upstream onus on every corporate participant within every sector of industry. That by default puts the onus onto the R&D departments of all industrial players which by virtue (and investment reality) demands that the very commercial nature of R&D and the resultant IPR can be applied as broadly as possible as improved solutions for new age challenges.

That calls for inter-disciplinary interaction, whether via an investment group's holding-company portfolio, a conglomerate structure, joint-ventures, corporate spin-offs into new arenas or M&A to acquire and broadly-deploy new solutions.

In short the eco-demands of today and tomorrow create greater commercial pressures, yet greater concomitant rewards.

Whilst investment-auto-motives intentionally has both broad and deep investment related remits spanning the macro and the micro, it understandably tends to spotlight directly related auto-industry issues and current affairs topics. Thus, at the micro-level steers toward the corporate components of the industry's value chain – from raw materials procurement and processing to Tier 3, 2 & 1 suppliers (single sector or multi-sector), to VMs themselves, to the dealer-base (corporate, affiliated or independent), to consumer credit furnishers, to auto-insurance providers and lastly the general aftermarket suppliers and distributors.

Given the maturity of the industry and typical barriers to entry ( ie high CapEx, brand lineage & credibility, historical distribution agreements etc etc) the company names mentioned are all to well known ranging from say Basic Element Group to say Arcelor-Mittal to say GKN to say FIAT Auto to say Pendragon or CarMax to GMAC to GEIKO to say MoPar to say Halfords. For the most part the names are indelibly linked and recognised.

And whilst the industry itself, in its conventional form, runs through yet another typical phase of regional consolidation and re-shaping to align itself with the global economic and business cycles, the shifting sands at the edge of the sector created by PESTEL trends highlights the potentiality of non-typical companies and solutions.

By this investment-auto-motives does not necessarily infer the theoretical industry disruptive effect of pure EVs – there are still sizable barriers of regulatory, technical and commercial natures to overcome related to these vehicles. Instead the more feasible and commercially tractable routeway to 'improved autos' is the re-engineering of the conventional systems and methods we have in place today and which make-up the the reality of our economy. This instead of the largely hot-air rhetoric of introducing a 'tomorrow's world' ideology that practically appears light years away.

The reality is that western governments do not have the funds to transpose us into a new world, and the east which is far more liquid has already invested in conventional technology to date. Thus whilst it is right to applaud efforts to increase renewable energy technology and the EV ideology and set proportionate funds aside to develop such technologies (along with concise project monitoring to ensure “bang for buck”, the industrial reality of the auto-sector must dictate a logic of evolution over revolution.

In this regard Sir James Dyson's bladeless fan is a useful tool – both as possibly a directly applicable engineering solution to vehicle engineering and as an inspirational case-study.

[NB. Of course with the Dyson brand so closely related to advanced electrical consumer goods there is an argument regards its applicability as an EV manufacturer in its own right].

Like Dyson's previous ball-barrow, cyclone vacuum cleaner and ball-upright vacuum cleaner, the fundamentals of a conventional design have been re-assessed and improved upon. Of course advancement means improved functionality and so differentiation and thus pricing power, and that has been the Dyson matra to date. But just as the cyclone vacuum was a self-confessed technology transfer from industrial filtration systems to a domestic application, we must ask ourselves whether the principles of the bladeless fan can be adapted to other fields – such as automotive design?

Conventional ICE powertrains are water/liquid-cooled, but the present-day trend for them to shrink in relative cubic capacity and in cases the actual number of cylinders so associated heat build-up and dissipation declines, prompting the possibility of utilising an air-cooled system. This provides the benefit of a) simplified engine block design and manufacture b) sizable weight reduction from a waterless system c) avoidance of conventional radiator weight, cost and engine-bay packaging complexity (assisting front-end crash performance) d) avoidance of weight, cost and parasitic energy depletion from mechanically or electrically driven ancillaries – such as the radiator fan itself.

“Water cooled versus air-cooled” is a question that arises when any new small vehicle project given 'clean-sheet' status by the Board; it is one of the fundamentals of the early stage decision tree. But historically given the level 'sunk-cost' (financially and culturally) in multi-platform common systems and the normative order-capacity agreements put in place to secure discounts with suppliers, much of the engineering component packaging is effectively 'a given' when a new project is embarked upon. Hence the self-fulfilling systemic circle.

However, there have of course been evolutional advancements at a systems level generation after generation and through technical trickle-down – typically orientated toward powertrain and chassis systems as the additional cost of a new solution is first absorbed by high-margin/low volume products and latterly reached low-margin/high-volume products. 'e-systems' solutions ranging from e-steering to the e-accelerator to now e-regenerative brakes are reflective of the influence and integration of of e-systems. Thus new solutions are introduced.

So whilst chassis and powertrain have ostensibly seen the main focus, what of the engine cooling and and the physically linked HVAC ? Ostensibly little has altered, except the typical attuning of radiator & fan size and materials along with CAD enabled dynamic thermal management. As for HVAC, there have been efforts regards miniaturization and simplicity.

But taking things back to first principles – such an an air-cooled ICE engine – allows for new thinking and solutions. Thus with technology transfer in mind, it is almost natural that the Dyson bladeless fan solution be conceptually incorporated into both CAD-based and physical powertrain prototypes relative to next generation lightweight small vehicle packages

As an integrated element of the HVAC system – inter-feeding feeding air instead of conventional liquid – the fan-ring could sit in frontt of, or directly over, a normal small engine block or possiblyseparatedd and physically 'finned' cylinders – as with old-style exposed motorcycle boxer (eg BMW) or V-twin (eg Harley-Davidson) engines.

And latterly as the commercialisation and consumer demand of pure EV cars grow, such simple integrated solutions can critically act as 'technical transition enablers' allowing the creation of dual powertain (ICE or EV) platforms - and so act as stepping stones toward the EV dream.

This Dyson inspired example is of course derived simply from the recent press release, as opposed to the fully exhaustive research and assessment required – a task investment-auto-motives believes lays at the feet of national and international government.

And beyond the responsibility of government it is surely in the investment community's interest to bolster such activity. By far of the majority of 'Green Funds' created have looked at – and largely been cautious of – radical renewable-energy technologies – with accordant (self-interested) scientific over-hype and usually complex deployment scenarios.

So it is no surprise that the investment sector has learned from recent lessons, made all the more prosaic from still cautious credit and capital markets, and are increasingly looking to the the eco-directed R&D from within the bowels of each sector (materials processing to building construction) and also the opportunities for technology transfer.

In this regard Dyson's bladeless fan appears to cut both ways, and all funds from VC's to last-phase to indeed the institutionals should be assessing and creating that commercial 'white-space'.

Tuesday, 13 October 2009

Macro Level Trends – China & HUMMER – Transporting Global Military Might.

In China the first day of October celebrates 'National Day', marking the establishment of the PRC, under the Communist Party. This year saw an extra-ordinary effort of 'show-boating' by the country to mark its 60th anniversary – a mark of symbolism as much to the rest of the world as to its own people.

To western eyes that celebration may have seemed somewhat surreal, starting at 2.00am GMT, the President Hu Jintao wearing the eponymous Mao tunic took centre stage, standing upright through the roof-hatch of China's own near simulacrum of a Rolls-Royce Phantom. But with a Chinese twist on the world-class benchmark limousine manufactured by Hongqi, the adapted HQD model – even larger than the phantom - had a re-worked face that reflected the 'glorious past' of Chinese auto marques. That past which ironically were themselves reworks of Eastern European styles derived from US influence which served the Soviet-Sino Communist Bloc for decades.

(As a side bar note also the Geely GE model which mimics the Rolls).

This is not to deride China to any degree, simply that its auto-sector, having arrived so comparatively late, has been a historical story of adaption – firstly from those Czech cars to the American influence of Beijing Jeep in the early 1980s to the almost Baudrillard-like hyper-realism of the Hongqi and Geely GE.

China today finds itself both having to be attuned to our globalised culture where semiotics / symbolism plays such an important role, yet also maintain its own symbolic lineage. This was perhaps the core reason why the Presidential procession appeared so contrived. It may have seemed amateurish to some, but every element serves a purpose.

Perhaps the greatest example of that contrivance were the exteriors of the tanks, missile carriers and other military transport vehicles. For they demonstrated the very paradoxical nature of China's present-day identity, merging both a show-casing of the (to us) distant past and a promising future. This was done via juxtaposed use of 'pixalation-camouflage' paintwork derived straight from a computer video game imagery and white-wall tyres that cognitively demonstrate cleanliness, order, discipline. Thus for western eyes a twisted mix of automotive cultures eras from well before 1949 to well beyond 2009.

Yes, the pixilated liveries combined with white-wall tyres may seem daft, but the aesthetic was unarguably powerful. Almost straight from the Director's mind's-eye, storyboards and edit-suit of 1960s distopian future-scope films like A Clockwork Orange or Fahrenheit 451. Something - unlike the slick latter-day retro-futurist efforts of Brazil, Blade-Runner or The Fifth Element – that was very psychologically jarring. Although all processions are directed, this one appeared almost cinematographically so.

Whist the direction of the 60th anniversary procession was undoubtedly minute perfect, the direction of the country's automotive sector – under the present 5 year plan – has been more questionable to foreign observers.

The past success of speedy and massive economic growth encouraged a plethora of state-derived, joint-venture and all new domestic producers; some as extensions of other industrial works,others as new start-up companies. At one point in mid 2007 there were over 220 enterprises vying for success. Unsurprisingly over-capacity resulted. Recognising this, the current plan called for a consolidation and contraction of the sector, so as to overcome the overt value-destroying nature of sector and to enter a new maturer and value-creating phase. We witness that today as those domestic firms either struggle and close, are merged into bigger fish, or grow as those big-fish. But more so there has been Chinese international ambition as auto-makers try to follow the state plan for globalised Chinese enterprise.

Thus western eyes have been on the likes of BAIC and Geely in their pronouncements regards US divestments in the form SAAB and Volvo...and critically HUMMER.

Unlike GM's other generally questionable off-loaded brands, HUMMER was divested, candidate contested and sold relatively easily and quickly; the successful joint-buyers being Sichuan Tengzhong Heavy Industrial Machine Company (to hold 80%) and entrepreneur Suolang Duoji (to hold 20% via his company Lumena resources Ltd, a sodium sulphate processing company also based in Sichuan). They take the brand, trademark, further trade-names as well as importantly the IPR of the company. A deal struck at a remarkably low $150 million, which includes GM's agreement to manufacture the vehicles until 2012.

Thus, investment-auto-motives sees the deal as much an 'entente-cordial' between the US and Chinese administrations which usurps what would have been far more contracted negotiations on a purely commercial basis had there not been such a desire for as much 'lassez-faire' bi-lateral trade as possible.

Importantly, set against the bigger context the HUMMER deal is not as simple as the “shameful loss of an American icon” as some US blog-commentators quote, but a major step for China in becoming the world's supplier of military transport might.

China has already mimicked the original HUMVEE/H1 with various copy-cat cars (as per Rolls-Royce), but whilst arguably the highest form of flattery, ownership of the original brand has been viewed as vital by Beijing both in terms of innate symbolism as a world player (as seen with IBM laptop – Lenovo) and on pure commercial grounds – militaristic and civilian.

The original HUMVEE has been in service with numerous sovereign & national armies, navies and air-forces across the globe, manufactured between 1992 and 2006 (the Mishawaka, Indiana factory built in 1984) with of course its H1 civilian twin and smaller 'conspicuous consumption' H2 and H3 siblings offered to the 'suburban cowboy' set phased-in over the following 14 years. Today HUMMER is assembled in the original Indiana plant (H1, H2), Shreveporte, Louisiana (H3), Port Elizabeth, South Africa (H3) and licensed build in Kalingrad, Russia (H2). Under Sichuan Tengzhong Heavy Industry it appears that it will be business as usual in the US with a new Detroit HQ created, but whilst many expect yet another 'lift and shift' operation of the US tooling, frames etc investment-auto-motives suspects that whilst so for H2 and H3, H1 will remain in situ with a replicant set of tooling, set-frames et al created for a new production site in Sichuan or thereabouts.

Though the allocation data for the international fleet size/car parc for military HUMVEEs is not immediately available, it is a fact that the vehicles are incontestably aging. If we assert that the peak of production & delivery was during the late 1990s, then much of the fleet is already 10 years old, with oldest US vehicles about 20 years old. Thus Sichuan Tzenghong will have 3 main goals:

1.Production of new HUMVEE vehicles for China's own massive appetite
2.Repair & Reconditioning of the large international HUMVEE fleet
3.Introduction of HUMMER as a new domestic consumer brand

Thus critically, Sichuan Tengzhong now has both global reach given its worldwide plants and critically both military and civilian operations. This provides the ability to directly replace GM by servicing the world's forces with a full portfolio for medium-size, medium (off-road) ability vehicles across “Dark Green” (front-line theatre of war), “Light Green” (intermediate range) and “White” (non-combat/logistics) operations.
The standardisation of vehicle fleets achieved via expanded 'modularisation' and package-protected technically-specific variants has been an ongoing ambition of international MoDs given the cost efficiencies attained from homogeneity and of the growing trend toward combined mult-force operations under NATO and UN banners requiring inter- interoperability. (This in turn applicable to Red-Cross, Red-Crescent & now Red-Star emergency aid and Peace Corps operations)

Broadening the view, whilst the Chinese have now taken the 'Medium' weight category with HUMVEE, India has already seized the opportunity to 'sew-up' the Light' weight category with both its own 'old' 4x4 products and the newer Land Rover vehicles, specifically “White Discovery” and “Light & Dark Green” Defender – themselves seeking learning from previous mid 1990s 'Wolf' (attack vehicle) and 'Pulse' (ambulance) projects which have themselves begot ongoing fleet repair & maintainance contracts).

Looking back to China, and the plethora of heavy military transport machinery on show at the 60th anniversary celebration intentionally demonstrated the front-line power of China. And whilst undeniably it has a sizable intermediary and logistics fleet derived from ex-Soviet and homegrown products, the PRC high command recognised that to be integrated as a world-player that 'back-office' capability had to be both updated and (globally) co-ordinated.

So instead of simply buying the relevant apples, given its massive US$ reserves and the current positive FX benefit of the Yuan vs US$, it instead bought the whole apple stall. Moreover, very importantly by buying HUMMER China has now effectively become a co-optive international partner amongst the leading G20 nations.

And for its own benefit HUMMER will bring a long-horizon of demand from its newly purchased global vehicle parc centred around the key values of:

1.Affordability (for stretched western defence budgets)
2.Durability (from innate design)
3.Inter-changeability (important for rapid response and in the field repair)
4.Flex-tech (providing mission specific 'strip & re-build' 4x4 platforms)

In an age when arguably much of the use of military might on the international stage relates to the social unrest induced from national fracturing – primarily in Africa, CIS states, S. America - peacekeeping and nation-building is the remit of the day.

And as we've historically seen with Jeep, Land-Rover and UAZ, such HUMMER 'birth-origins' make for a powerful brand that stretches with credibility into the realms of commercial utility vehicles ranging from the 'low plains' of agriculture to industry to infrastructure work, right across to the 'high-plains' adventure and expedition.

Jeep conquered Europe and Asia in the 1940s, Land Rover conquered Africa in the 1950s & 1960s, UAZ conquered Siberia in the 1970s and Toyota conquered EM regions in the 1980s and the Arctic in the 2000s.

HUMMER will now conquer China and commercially harness the world beyond.

So although front of stage the discordant sight of a mock Rolls-Royce set amongst an ocean of people and war equipment creates that image of a distopian future-scope to western eyes, let us not be blinded by first impressions. The purchase of HUMMER perhaps says more about China's global integration to an international business & political audience than the choreography played-out by the PRC for its own citizens and the general global audience.

Friday, 9 October 2009

Macro Level Trends – Scandinavia – Closing Ranks to Secure its Future?

Sweden and Norway have historically been periodic enemies and allies; mid 19th century political pressures even generating the idea of a Scandinavian united kingdom with the addition of Denmark to compete against rising German influence. Though that proposal by Charles XV of Sweden didn't arise, the relative late-coming of the industrial revolution and globalisation undoubtedly galvanised their symbiotic relationship. A dualism that sought ever greater regional industrial and financial strength versus an initially an increasingly competitive Europe, and more recently, Rest of World.

Since its birth effectively for 1915 with SKF/Volvo trucks and 1924 for Volvo cars, and the 1947 for SAAB, Swedish Automotive has benefited from Norwegian oil reserves and dual-country petroleum refining. Although Norway is the world's 7th largest oil exporter, gaining 25% of its GDP from its black-gold', and Sweden has claimed it seeks to have a 100% non-fossil-fuel car parc by 2025, the realistic inter-dependency between cars and oil to date - and crucially into the mid-term – cannot be refuted.

Having to juggle the Scandinavian set of economic & ecological ideals against the constraints of today's regional economic concerns and its related effects upon intra-regional, self-protecting, industrial policy-making, is becoming increasingly fraught.

Prime examples of the fragile situation have come to light recently with:

1. The “repatriated” PE investment of a near confirmed SAAB (with EIB-Norwegian-Russian backing) and now possibly Volvo Cars (via US led Crown Consortium with respective US-Swedish backing)

2. The objection to the VW-Porsche amalgamation by Norges Bank Investment Management – Norway's State Pension Fund, a division of the nation's Central Bank.($325bn asset-base Q408)

Scandinavia's industrial luminaries well recognise the massive global-wide potential for the 'eco-premium' brand foundations of its 2 well-regarded 'homeland' marques. However, whilst the future looks good, the present-day financing for both companies is still not fully secured; respectively drawn from confirmed and proposed Scandinavian PE sources – the latter requited if the Chinese Geely bid fails. Even with big-name and big-family investors behind the deals - such as Bard Eker & Augie Fabela and possibly the Wallenbergs – both firms have needed interim EIB (national-government-backed) bridging finance given the eased but still tentative access to held & borrowed capital.

(Understandably, the Swedish government is not keen to work itself into a political corner, the way arguably the US government has with GM, so is reliant on the EIB as partial funding intermediary with heavy-weight domestic investment groups refining future business-models and long-term funding).

Thus Volvo & SAAB require a level of subtle protectionism of their own until they are past their re-formation phase.

Furthermore, Valmet Automotive, the Finnish contract vehicle manufacturer is also threatened by the VW-Porsche plan given its reliance on the Porsche Boxster contract (as of 1997) and Porsche Cayman contract (as of 2005), these high-margin contracts due to end in 2012. Having watched the resultant Merkel-Magna that so benefits German workers, it will be concerned that all future Porsche assembly will be undertaken in Stuttgart and potentially Wolfsburg. Valmet is undoubtedly concerned about loss of income, its order book replaced now with only low volume Fisker PHEV sports-saloon and low-margin TH!NK City car and Garia Golf Car assembly. {NB Valmet and Investinor – the Norwegian government backed fund - have interests in the recently re-capitalised TH!NK Global).

However, investment-auto-motives expects Valmet will also be used by SAAB and Volvo as a continued Special Vehicle Operations base for their own Hybrid, PHEV & niche series variants. This should help balance the order book, and it is believed that this initiative will be used as a showcase to re-attract Porsche's patronage.

To the crux of the matter...

...investment-auto-motives conjects that given the level of official and unofficial inter-play between Sweden, Norway and Finland, that Sweden with its powerful investor-base and Finland with its own Norwegian interests, could have added additional weight to Norges Bank Investment Management's Norwegian objection of the merging of VW and Porsche.

This does not of course preclude Norge's own primary concerns regards the alleged dis-proportionate benefit gained by the Porsche and Piech families from the M&A relative to smaller stock holders – Norges Bank reported being VW's 7th largest stock-holder – but simply that there may be important related strategic side-issues that effect the maintainance of Scandinavia's own investment / economic harmony.

The objection itself sent to the VW supervisory board cited that the deal..“fails to assure that the plans will benefit VW shareholders equitably....neither does the information available assure us that the conflicts of interest have been handled satisfactorily. In total, therefore the deal appears unacceptable” [especially since] “Porsche is in more need of the transaction than VW”.

Such investor interloping could well intendedly slow the legal process of VW-Porsche integration, this in turn slowing the project-specific platform/technology sharing that VW seeks to integrate from Porsche into Audi and vice-versa. For as we've seen with BMW's Efficient Dynamics vehicles there is real potential for the German's to undermine, or at least mimic, the intrinsic “eco-premium DNA” of SAAB and Volvo and so their USP in the regional and global automotive marketplaces.

Eco-Premium hatch-backs, saloons, coupes and convertibles are the play-book for the revitalisation of “Scandinavian Autos AB”, and Sweden – as it should - will be greatly concerned about Germany's momentum in this arena; particularly Audi relative to the B, C, C/D & E segments and Porsche relative to dedicated & shared-tech coupe & convertible variants. Moreover, Opel's new owner Magna International seeks to re-structure and re-establish Opel, very probably as both continued in-market presence and use of Opel assets for 3rd party contract manufacturing.

Thus whilst certain sections of Scandinavia will not wish to antagonise German clientele, there is a far bigger picture 'industrial interest story' that emerges from the very inter-connectedness of the region and the emerging threat from a structurally radically altered German auto-sector.

This means that the vitally important abilities of situational analysis and interpretation will have to be concise, as will the accordant sensitive activism that follows. So far Scandinavia and Norges Bank Investment Management seems to have handled the situation well and passive-aggressively, a rare example of activism on behalf of publicly-held monies.

Others from similarly placed peers, from Californian CALPERS to Singaporean GIC funds, would do well to watch how Norges conducts itself from here on, a case-study of our times regards the guardianship of public monies set within a complex political context.

International Economics and International Diplomacy, as ever, consequential bed-fellows.

But for one and all, a case no doubt of: “watch this space”...or...”ur denne mellomrum” (Norwegian)...”se den har utrymme” (Swedish)...”katsella nyt kuluva asettaa” (Finnish).

Monday, 5 October 2009

Company Focus – Penske Corp & Saturn Cars – Running Rings Around GM?

GM's over-due decision to undertake massive structural reform, including its divestment of non-core businesses, ultimately came later than it ideally should have. As a forced consequence of the bail-out package from the US administration, the shedding of the corporate load has been necessarily quick and in the most dire of commercial environments.

However, such times and events often make for the capture of undervalued commercial opportunities for visionary investors, but only if they can create a truly viable business plan or if such an acquisition strategically fits an investors portfolio.

GM has been keen to showcase the potential of its orphaned brands to international trade and PE buyers, and so almost 'natural' homes seem to have been found for Hummer and SAAB, with respectively China's Tengzhong Heavy Industry (assisting its truck and defense segment ambitions) and Koeniggseg-BAIC (seeking to combine & 'cost-off-set' high-cost advanced technology with low-cost mass production efficiencies). Pontiac, for the moment appears 'lame & stabled', GM unsure of its future – whether to re-invent it, sell it or simply close it - but promoting its available inventory via the on-line venture with e-bay in the meantime.

That leaves the Saturn brand, the relative baby of the brand family, being only 24 years old from its inception as the affordable yet innovative choice; targeted at the growing band of consumers heading to Japanese vehicles. Formed in effectively a different era, and created outside the 'family-pressures' of the GM empire, it was touted as “a different kind of car company” that should have ideally created learning and possibly set a template for the whole of GM. Unfortunately, yet typically, the financial pressures of the early 1990s and under-achieved over-ambitious sales expectations – always a danger of any new project, let alone a new company - dictated that Saturn's operations be brought closer to the empire itself.

The zenith of sales was in 1994 at 286,000 units as an 'event-driven' consequence of the US consumer pulling out of the recession, buying as a young adult 1st new car, 2nd GM family car or in many instances as a safe option for parent bought college kids. But even so, the ever present GM 'production efficiencies snowball' meant that even by 1996 over 290,000 units were being manufactured with fewer consumers interested, and even by 1999 over 275,000 units built; all adding to inventory and margin pressures. Note that Toyota picked-up on the GenY trend with its Scion marque and Hyundai-Kia squeezed price-wise from 'bottom-up' so further depleting Saturn's market relevance, USP and pricing power.

Part of that ever optimistic build schedule was created by the rationality dictated that within GM both the product-line and the managerial and administrative operations be ever more greatly integrated to Detroit HQ's direct needs. Part of that endemic 'rationality' was the internal need to satisfy the production appetite of GM's many US plants – all part of the vicious circle. And so as a consequence Saturn's variously successful/unsuccessful distinct aesthetic was watered-down until from the turn of the century onward the cars were little more than badge engineered cars with origins from GM's international divisions.

Given the brands relative lack of sales success post-1995 vs its Japanese competitors, Saturn's product strategy and new-model year management became ever more reactive, dis-located and compromised, this itself eroding product and brand credibility. That effect, plus the unofficial abandonment of price ceiling and floor between it and its 'step-up' Chevrolet sibling division, meant that the onus was put on Saturn dealers to deliver volume. Done so via reduced pricing and incentives, which obviously eroded margin and helped the value destruction spiral for all GM divisions and its dealer-base. The 2007 eco-orientated 'Green-Line' variant type was added to the performance-orientated 2004 'Red-Line' variant, appearing to be easily digested differentiators offering advanced technologies such as the BAS Mild-Hybrid, but there have been criticisms of its availability

So that is the tale of history, so similar to other previous flailing, now extinct, US marques over the decades that tried to re-invent themselves at the bottom of the price-rung.

Thus, as part of New GM's more globally relevant re-invention of itself with Chevy, Buick, Cadillac & GMC, the Saturn division with its financial drag on the corporation created by logistically complex and costly assembly procedures and declining sales simply had to be hived-off.

With that news some months back, interested parties started to review the business hoping to find new “what if” scenarios based on alternative business templates and criterion; so undertaking differing levels of due-diligence and moulding different types business plans.

A core function of any new business plan had to be the attainment of market-relevant products (smaller cars and X-overs) at drastically reduced cost; through via either:

a) 'Transfer' procurement from GM using current/future platforms for Aura (Epsilon2), Theta (Vue) & Lambda (Outlook) and ideally Astra (Delta)
b) Contract procurement of a foreign manufactured product(s) not available in the US, but with minimal alteration, able to meet US crash and emissions regulations.
c) Self-manufacture with greatly lowered BoM (Bill of Material) costs, labour assembly costs and overhead cost.

[NB. So as not to undermine its own small and compact car sales with Chevy & Buick, New GM has expressly announced that it will not offer contracted manufacture of Astra].

Thus for interested parties this GM divestment set out both undoubted challenges and possible opportunities, with the ideally perfect scenarios played-out as an orderly step-by-step fusion of a), b) and c).

Expectantly, with such a plan in mind, one individual came to the fore.

Virtually as soon as the news was announced, on June 5th Penske Corp, run by Roger Penske, the renowned industry veteran and veritable hero of the stereotypical blue-collar man. His auto-conglomerate's reach across various activities have been built-up over the last 2 decades since his successful motor racing days and now include:

1.Retail (inter/national) with Penske Automotive Group (NYSE ticker: PAG). The 2nd largest sales network in the world with 40 brands and 310 sites new & used) across US, Puerto Rico, UK & other with consumer-credit, insurance, after-parts and 25 crash-repair centres. (Previously UnitedAuto). Also distributes Daimler Smart's “for-two” A-segment car in US.
2.Retail (California) with Penske Motor Group
3.Truck Leasing – a JV with GE Leasing – inc Penske Logistics for supply chain deliveries
4.VM Motori SpA (51%) – with strong GM Powertrain manufacture licence deals & additional Truck-lite/Davco distribution activities
5.Racing – the old heart of Penske, historically inc NASCAR, CART, Indy, ALMS & F1

Thus given Penske Corporations business portfolio, with industrial habitation either side (upstream & downstream) of the typical car company, enabling even greater synergies via a car assembly operation has surely been in Roger Penske's mind for years. But undoubtedly always done so with the edict of pure operational rationality as opposed to the (often mis-placed) kudos of owning a car company.

With that objectivity front of mind Penske would have tried to construct minimum-risk/high-reward strategies – for entry, ongoing operation and ultimate exit of Saturn Motors.

Entry :
investment-auto-motives believes that Penske would have had critical discussions with the intentional start-up V-Vehicle Company – the CA & GA based potential builder of eco-orientated cross-over vehicle in receipt of substantial Energy Bill funding. V-Vehicle's business model was based around the development of GM Vue (actual or type) car to be produced in a southern non-union ex-GM plant. Given the 2 companies' mutual focus on the Vue, the potential to create - via JV or latter M&A - the “Saturn-V” cross-brand nameplate was presumably seen as highly relevant. Since it re-calls the NASA rocket ('67-'73) and fortuitously echoes the Cadillac “V-series” sub-brand. Also note that Penske would have been prompted by New GM & Cadillac's possible incursion on the race-scene, via GM's Performance Division's relationship with Pratt& Miller creating Le Mans success with Corvette C5-R. New GM may surely try to boost Cadillac in the same way so mimicking the likes of other premium mainstream marques, eg Audi.

Continued Operations :
Though the initial deal with GM was for the contract manufacture of mid-size cross-overs – thus a non-compete clause regards sedans & hatchbacks – Penske would need to develop the Saturn brand in the medium-long term with an expanded range of vehicles which importantly included cars given their increasing return penetration of the NA and global market.

Thus Penske broached talks with S. Korea's Samsung Motors - 70% owned by Renault and officially title abbreviation to RSM – to create a JV. An unsurprising move given the obvious advantages and adherence to the aforementioned “a-b-c” plan. It seems that whilst the RSM management were amiable to the proposal – and were being seen by their immediate seniors to be busy exploring - unsurprisingly the RSM Board (consisting of Renault and Nissan senior representatives) were not. For Penske it was the perfect 'future-proofing' exercise, but in truth, given the core proposal of Renault-Nissan product/platform sharing in the US, it was always a tetchy proposal. On paper Penske tried to fulfillllll Ghosn's wish for an NA partner with low contractual demands, but Nissan obviously recognised that if it wants to expand its volume in the US via an “underling brand” (the mirror opposite of Infiniti) it could do so directly using Renault Dacia leverage, or alternatively, create an affordable non-cannabalistic business model on its own, much as Toyota has done with Scion.

Hence, an expectantly failed approach to a major auto-maker with substantial US market stake. But surely Penske will have been looking at other possible options and substitute partners.

He will be viewing the outcome of the GM Opel / Magna-Sberbank-GAZ talks, and the 'policing role' the EU will be playing regards the German government's possibly illegal 'as is deal' struck with Magna International. Beyond the jobs and unions issue, Penske will pay special regard to the IPR allocation of Opel technologies. This includes the “re-appropriation” of the important Delta2 platform (ie Astra), which under Magna hands could become a core contract-manufacture base for non-compete clients vs Opel...such as US based Penske; and possibly closer to home even possibly SAAB.

[NB the SAAB influenced aesthetic of the original Saturn L-series sedan, raising the spectre of future shared platform engineering from Magna].

Furthermore, for Magna the very possibility of other non-compete clients in other regions or segments opens the door for contract manufacture on behalf of Chinese VM's seeking global expansion.

Exit :
With such a Magna offered solution to expand the required Penske product range and more. Since with possible latter-day, platform attuned, Magna-Sino co-relationships, Penske could be perfectly positioned. Sino auto-maker's themselves ideally seeking to play-out a combination of Euro-proven technology on a relatively small scale basis before 'scaling-up' for the US. Thus such techno-regional synergies via Magna and Penske would prove highly beneficial.

Unsurprisingly, a potential Penske-Sino alliance or full disposal would be a dream exit scenario for Roger Penske.

Yet, for the moment, so so much depends on the fractioustate of play in Germany and the EU for such a scenario to evolve. investment-auto-motives believes that Roger Penske and RHJ International / Ripplewood Capital, should be in discussion right about now regards the possible political machinations that effect the ultimate re-structuring of Opel/Vauxhall. The frictional heat caused between Brussels/London and Berlin could yet fall to Penske's advantage.