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).