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.