Wednesday, 25 November 2009

Macro-Level Trends – Combating CO2 – Waking Up to a Downsized Electric Vehicle Dream?

Electric Vehicles are seen as a major part of the panacea to 'detox' the planet of its CO2 ills. And of course, theoretically within the whole-system argument of the negative (oil) 'well-to-wheel' versus better (power) 'plant to (battery) pack', the argument stands if the energy is created in a zero emissions manner.

This of course highlights the questionable feasibility of carbon sequestration, wind-generation, solar-power and other new-age clean-tech solutions relative to their proven older counterpart nuclear (fission); which whilst generating clean energy poses the drawback of waste disposal.

And so, like the green recycling logo itself, the never-ending discussion goes round and round and round. Doing so primarily between oppositional extremes: that of the scatter-logical alarmist approach “try anything at any cost to save the planet as quickly as possible!” in contrast to the overtly-cautious approach that posits “need for a balanced cost-risk-reward”.

The climate change campaign origins of meteorological academia obviously provided the (arguably simplistic) graph-based 'shock & awe' effect, as presented by Al Gore on his global lecture tour. That information awoke western society along with the weighty support document compiled by Sir Nicholas Stern.

Thus today, through a process of slow absorption, the western world has largely accepted CO2 cause, even if the argument's dissemination has not been seen to go through the process of 'hypothesis + antithesis = synthesis' that would have added gravitas. Of course, such a process appears 'only academic' relative to the limited time-frame to save the planet. Something all the more ironic given the campaign's origins.

Even so a growing profile of climate change skepticism is appearing, the counter-argument raising its head recently in the financial press. The doubts aired by the fringe deployed by those guarded, economically squeezed, nations which are all too aware of the financial consequences of signing-up to the successor of the Kyoto Protocol, at what will be a water-shed Copenhagen Summit.

Thus, whilst largely 'on-side' with the anti-C02 camp, the public looks on in bemusement, unable to understand the level of eco-hype versus eco-reality. And as a consequence, so the ideal level eco-action versus the attainable level of eco-action, Copenhagen then, becomes yet another milestone of confusion and ideological fragmentation.

As partial arbiters and history-makers themselves, industry sector CEOs and Boards stand in a similar position, being seen to be 'on-side' through green initiatives and good CSR, but also appreciating that they individually cannot be eco-extremists – especially so during such financially constrained times – given their obligation to corporate stability and shareholders. Overt eco-martyrdom has the flip-side concern of share-price suicide....something perhaps best illustrated in the energy sector itself.

So it is within this ethereal, juxtaposed milieu that automotive manufacturers must develop their corporate stance – both implicitly and explicitly.

They must tread a careful path that demonstrates that they are well-attuned to the CO2 agenda – especially in the public arena, are able to leverage their own R&D development, as well as directing such R&D to incorporate available government assisted funding, to create a multiplier effect. Yet still acknowledge that economic rationality must prevail in maintaining the technical conventionality and financial guardianship that underpins the viability of the commercial enterprise to its ultimate owners.

Executives must showcase their long-term corporate vision, yet also demonstrate a viable path to that far-off point. Different companies from different countries undertake this remit relative to their innate cultures, national sensibilities and interests, and executable R&D capabilities.

Thus Japan's historically conservative Toyota has in the last 20 years set out its 100 year plans, done so in virtual secrecy, with the edict that “eco-actions speaking louder than words”. Hence its low-key introduction of original Prius in the mid 1990s, sound technical development and proof of case in the real-world as a precursor to (self-congratulating) marketing campaigns. Choosing the Hybrid route (and so influencing Honda) via proven Ni-MH battery technology, Toyota has sold over 2 million vehicles (primarily in Prius1,2,3 forms) in the last 15 years.

That is an annual average take-up rate of 133,333 per year, excluding the exponential effect of manufacturing ramp-up and broadened geographical reach. This must be regarded as the industry benchmark given its first to market attempt and achievement using proven technology fed into today's (historically little altered) road infrastructure. At its core Toyota objectively appreciated that the Hybrid Ni-MH solution requires nothing outside of the automaker's control, thus was and is the 'de facto' solution.

The company recognised early-on that reliance upon external 'macro-level enablers' dictated by the political & financial circumstances & whims of disperse global governments was not a basis to progress its future. Its own domestic experience with the relatively stable, progressive Japanese government operating a relatively controlled society demonstrated the realistic headwinds. And let us not forget that Japan has been the technical tour de force for much of the late 20th century, which along with its lack of oil independence, is why it was glad to originally host the Kyoto Summit and review alternative auto-industry paths.

In contrast to Toyota's cautious achievement we have other international auto companies that laud the wonders of other technology solutions.

Some high-up the tech-curve are little more than Lab-bench proven. Whilst others (like the Lithium-Ion battery) sit effectively mid-stream and offer technology transfer exercises into the auto-sector in Hybrid guise (eg Daimler) and EV guise (Tesla). But given their respective experiences and volumes, these are hardly proven achievements that encourage mainstream adoption, since these integration cases do not reflect the heavy duty-cycle requirements that an EV version of a conventional mainstream sedan or 5-door hatchback would demand. Such vehicle uses demand far more than Li-on's originally envisaged requirement relative to its adoption in low power uses in consumer electronics.

Thus as with the case of GM's Volt 'range extender' car (offering massaged 200mpg+ figures) the promises of near-term mainstream future-tech seems all the less plausible given a heavily subsidised $35,000 sticker price (vs Prius' $22,000 & Insight's $19,000). Instead it seems a recycled re-run of GM's infamous Motoramas of the 1930s & 1950s - technological 'Tomorrow's Worlds' that never emerge.

But as perhaps the greatest proclaimer of the present day is Renault-Nissan.

Carlos Ghosn's achievements and ambitions at Renault-Nissan are well recognised. Changing times and corporate fortunes means that he has had to evolve from the renowned 'Le Cost-Cutter' a decade ago into the nouvelle 'L' Homme Electrique ' of recent years. Given Renault's part-national ownership (now perhaps under greater grip given the recent financial aid) and France's international push of EDF as a nuclear energy provider, it should be no surprise that there is an alignment of national industrial policy interests and so impetus to parallel EDF's and Renault-Nissan's future fortunes.

Overt EV-mania that has gripped the press in the last 5 years, assisted by automaker proclamations (of which Renault is the loudest), has generated accordant expectancy. Yet that expectancy which still has a long road to travel to be realised en mass, and if/when doing so will provisionally take a different form in terms of vehicle perception to that hyped and expected.

Even for the French, its experience of EVs - whether adapted standard vehicles (such as the PSA 106 EV & Partner EV) or indeed concept EVs (such as the PSA Tulip with associated rental scheme business model tested in La Rochelle) – have been comparatively small and isolated 'baby steps' relative to the size of the task. And let us not forget that these French-centric efforts with amenable government fleets and regional administrations were undertaken within far more conducive economic climates.

Today – even for French bureaucrats - whilst the technology may have improved the situational context has undoubtedly deteriorated. Furthermore, the innate business model(s) required at both ends of the value chain are still being developed.

At one end (upstream/micro-level) :
- the question of whole vehicle packaging
- the massive reduction of vehicle mass
- technology real-world prove-out of Li-on
- battery and EV manufacturing scale-up.

At the other end (downstream/macro-level):
- slack international governmental progress to develop a credible EV routemap
(especially in co-aligning regulatory reform of the road-space to accommodate radically different advanced battery-centric architectures).
- the budgetary pressure on governments not to fulfill their national and state pledges to subsidies the EV agenda.
- the lack of developmental progress regards 'holistic' powergrid development, including vehicle e-feed infrastructure.
- OPEC's apparent determination to maintain 'affordable oil' through additional capacity investment
- the question of merging historically separate oil & electric energy providers at the retail level to sell petroleum/diesel & electricity fuels side by side at the pump.

Already large chunks of public funds have been directed at volume manufacturers, vehicle start-ups and other participant players within energy & transport that appear 'big on talk but little on delivery'. As mentioned in previous posts, part of the reason for such slow progress is that often the era of 'technology disruption' (real or perceived) is that a great number of variables must be aligned to bring in a new norm, and that broad promise of fundamental change can be exploited by less than honourable interlopers that seek to gain from the overt investment enthusiasm of government and privateers. But beyond the opportunity for unethical practices, the very process of the multi-various economic agents working perfectly in orchestra is indeed problematic. [NB that is why historically greater technical progress is made in wartime conditions; when greater use of central planning is enforced, at the literal cost of public finances].

So such a land of promise, like an oasis, often appears closer than the foibles of everyday reality permits.

This oxymoronic state of affairs is highlighted in a recent WSJ interview with Carlos Ghosn, with his counter-point statements that: "our forecast is that sales of EVs will be 10% of the total 2020"... versus... "EVs will move up slowly, not taking the market by storm"

Let us conject upon the credibility of the former statement...” 2020”. We can project forward (using VW's 2018 figures) that the global market will be 30% higher than today's (55m units) at 73m, and a few years thereafter reach 75m units, that means that Renault forecasts that approximately 7.5m EVs will be sold. This means that over the next 10 years an average of 750,000 EVs must be sold each year, discounting the ramp-up effect. This figure compares to the 133,333 units sold by Toyota using a far more mainstream technology & vehicle type over the 15 year period to date

It is thus no wonder Mr Ghosn must play both roles of optimistic 'preacher' and conservative 'prudent'.

For the present time, with Copenhagen upon us, it seems that the PESTEL context of conflicting issues and agendas that can be encapsulated as “eco-idealism versus economic handicaps” means that neither conventional car-makers, unconventional 'start-ups', the financial community nor governments are truly able to initiate the required change into a true EV world within the foreseeable future. Ultimately, each party looks to the other and rhetoric continues to overshadow tangible progress.

So, the word of warning is that investors must see conditions for true EV traction before the possibly hollow perception is priced into corporate MarketCap valuations. For whilst the auto-industry certainly needs buoyancy aids, they need to be credible and not the stuff of possibly damaging technology story bubbles.

investment-auto-motives objectivity means that it has no axe to grind, except that of that of private investors (the core of capitalism) being fully informed, by competent boards and management, and not led along possible garden paths, no matter how well intentioned.

However, to end on a more positive note that demonstrates a realistic step toward an EV participantt future, at the beginning of the year investment-auto-motives made an informal recommendation that Daimler exploit its use as a licensor/contract builder of its >smart ForTwo vehicle architecture. (It is perhaps the most 'package perfect' product that encapsulates the generic form & lightweight mass of a small 2-seater city car. Perhaps the best proven mainstream vehicle - along with the previous generation 'sandwich floor' A-class - for EV tailorisation. Thus at the recommendation's heart proposing that Daimler become a strategic enabler and benefactor from global JV agreements using ICE and EV powertrains.

That identified and recommended opportunity is now being reportedly taken-up by Daimler & Renault, with mention that the Twizy EV concept will be born from ForTwo, after a conventionally powered 2 seater is created.

The EV dream has been downsized for the near and mid-term, but is all the more 'real-world' practicable for doing so by being familiar and off-setting high-cost EV powertrain and e-control costs with a recently 'break-even' amortised platform.

So whilst there is a long road to still undertake, “Bravo” to Monsieur Ghosn and “Biefall” to Doktor Zetsche for taking the first plausible step.

As the struggle goes on to maintain the world with less than 550ppm (parts per million), the take-up of electric cars will seem indeterminably slow given the reality of government rhetoric over action and relatively tiny funding for such a major societal transition.

In truth, they may continue to grow stature as the 'good taste' preserve of a 'local elite' within the wealthier inner-suburbs of major metropolises within Europe's London, Paris, Berlin, Amsterdam, and the outer reach enclaves elsewhere, such as US's Silicon Valley, New York State Hamptons, Newport Beach, Santa Barbara, Carmel etc.

But whilst such EV popularity grows and has an affect, it will do so only at a comparatively tiny relative to the major CO2 reduction enablers of clean-tech ICE and Hybrid vehicles. Since, given its omnipotence, it will be evolved technology that takes centre stage in the CO2 battle as the economy regains a slow positive momentum between 2011-2013, and so perversely could, along with feeble budget-constrained government infrastructure efforts, suffocate the progress of tentative 'real-world' city-centric EV.

Tuesday, 17 November 2009

Industry Structure – GM & Opel – A Temporary Case of Irrational Exuberance?

“Irrational Exuberance” was once the phenomena of stock markets, yet it now seems that such misplaced optimism can be found in the annuls of a still heavily shocked and sedated western auto-sector.

Recent weeks witnessed a U-Turn of attitude in the RenCen at Detroit, after 'New GM' decided to remove the sale of Adam Opel GmbH from the negotiating table. The heady mix of intra & inter-national industrial policy-making, the social strings of financial aid packages and business-centric strategy formulation ultimately clashed, and the triangular relationship of the 3 prime stakeholders - GM, Magna-Sberbank-GAZ and Angela Merkel – pulled and torn.

The protagonist GM has decided that it should, after all, direct the future of its European division, parachuting in Nick Reilly from his successes at GM Asia-Pac to take the reins from Carl Peter-Forster, his role at Opel presumably seen as untenable given his preference for the unit's sale to the the Canadian auto-supplier and Russian bank that would have given GAZ its much needed transformation.

Unable to arrive at a satisfactory conclusion, it has rebuked the Russian backed offer on strategic grounds relating to IPR, R&D, Russian sales territory and longer term global competitiveness implications. Its stance is understandable, given the strategic importance of Opel as GM's medium car creation hub, and the opportunity the relatively new SCCS platform (created as a JV with FIAT) offers a rival automaker such as GAZ which can leverage to its own export advantage Magna components pricing, low cost labour & overhead and its geo-political position between Europe, the CIS states and 'Chindia'.

Unsurprisingly GM does not wish to 'hand on a plate' its relatively knowledge advanced division to an arguably better placed competitor. But it must in due course and at some point acknowledge that something radical must be done to alter the very DNA of Opel as part of an environment reactive evolutionary process if the company is to not simply survive on the largess of state sponsorship in the face of withering consumer attraction.

Critics rightly judge GM by its historical lack of good parenting toward Opel and the 21st century mis-management of its own North American operations, since Detroit has indeed been less than adept in profitably operating such a sprawling monolith - with typical internal & legacy conflictions - caught in a ravenous sea of global sector change.

The 'New GM' with new leadership and a largely new board seeks to redress such criticism, but realistically can it? What exactly will it do to redress the situation and specifically the Opel GmbH challenge?

Recent news indicates it seems to be replaying the 'set-play' recently created in the US by GMNA, which effectively draws in state and union stakeholder for interim term survival. Read between the news-report lines and this appears to be the case; GM using US and EU aid finance aswell as its own rebuoyed balance sheet.

But let us not forget the fact that the political will to keep financially bolstering under-performing companies is withering, and the fact that GM's improved balance-sheet is only – re-iterate 'only' – a function of a macro-enabled external assistance(s).

These being:

1. a fast-track (investor debilitating) Chapter 11 procedure,
2. massive financial injections from Washington ($13.4bn of which still sits in Treasury escrow)
3. the CARS 'cash for clunkers' scrappage scheme which effectively drove an estimated 50% of GM dealership footfall in the period (& with the by-product that it actually benefited Toyota, Honda, Hyundai and Ford far more so than GM).
4. it is effectively US tax-payer cash that repays Opel's E1.5bn bridging loan from the German tax-payer – done so to eradicate the implicitly socialist agenda of the 'custodial' Opel Trust

Given that this is the reality, GM though better placed, is not in a position convey any swagger, or indeed “irrational exuberance”. For its is far from out of the woods in the US, and especially not so relative to Opel's diminished prowess in Europe.

Removing the remit and need for the Opel Trust is indeed a good development, since it partially de-shackles management, but instead of simply re-running the 'GMNA set-play' of state & union equity provision – and thus simply replacing one set of shackles with others - a truly viable plan of action is needed to re-shape Opel. One to suit its diminished place within the EU consumer market yet of possibly more marked importance to a global GM and indeed a global auto-sector.

And it is from the hopeful 'lessons learnt' by way of the Magna-Sberbank-GAZ consortium that GM Europe must re-invent itself.

Such aspiration may or may not be the case, we shall have to wait and see.

In the meantime, instead of an Opel sale, GM has arrived at its own plan, one which reduces the level of German aid reliance and so presumably freeing itself from much of the present plant & labour overhead obligation. Following the FIAT lead with a pan-European approach it seeks to spread the $3bn cost and load of re-structure across various EU nations and labour unions, with $1.48bn of company capital re-directed from Detroit to Russelsheim and beyond.

GM states that Opel has enough liquidity to maintain operations (effectively 'as is') but lacks the resources to undertake the full re-structure required.

So beyond the lower level contribution of EU state and union aid – including 'only' hundreds of millions of Euros from Germany vs the previous E2.2bn relative to the Magna deal – the largest slice of such additional resource presently look to come from the US Treasury.

It will be of little doubt that as GM was negotiating with Magna as to the IPR package made available for sale, it would have also been convincing the Obama Administration of Opel's central strategic role to the company given its R&D exposure to Germany's advanced eco-engineering sector that realistically downplays high-cost EV and hybrid R&D for that of low-cost clean diesel development. Whilst the Japanese may have the petrol-NiMH hybrid lead, GMNA may realistically wish to ultimately pursue a more conventional path for all the rhetoric of presently limited available US-made hybrids or next generation L-ion range-extender vehicles (NB GM Volt est $35,000 vs Toyota prius $22,000!)

Beyond the US's own intrinsic benefit from Opel (ie Germanic) know-how, and we see that with FIAT & RHJ International still probably in the background, GM recognises that Opel's constituent parts of: R&D capabilities, project development assets (HR, IT, studios, test-cells, tracks etc), plants and company dealerships and company land can be very probably further sweated. The company is less than the sum of its parts as a whole, but what if the parts themselves can be informally or formally hived-off?

Investment-auto-motives suspects that even if Opel's full and final sale is not imminent, a new period of corporate asset re-evaluation is so. Led by Reilly he will note: the EU's supplier base ambitions to become Tier0.5 players (not still discounting Magna); FIAT's own growth ambitions (yet cogniscent of historical FIAT-CCCP relationships), and lastly and very importantly his experience of China's auto-industry structural growth path with GM seeking a leading role.

The new Opel plan is ultimately an interim step, and undoubtedly will mean a required metaphysical 'deconstruction' of the entity. Exactly how that comes to play out in the future remains unclear. At one extreme via a 'GMNA set-play' Opel GmbH could be floated to become an AG or more likely an SE via an IPO to reflate its value. At the other extreme it could become a discreet set of self-propelled cost-centres, acting as an eco-engineering house, contract manufacturer, Tier0.5 player and yet more; tasked to compete within the GM empire (esp vs NA & China) to drive down costs and improve quality, and indeed reach out beyond GM to assist at a price in the development of BRIC auto-sectors.

As President Obama talks trade with President Hu Jintoa, that old adage of “what's good for GM is good for America...” is given the additional line “ good for Sino-American relations”

However, for the moment that is a far-horizon possibility.

Any present GM jubilence should be recognise as only a momentary respite in the battle for GM transformation, since reports of Frederic Henderson's self-pronounced reliance on near-term sales which will now slacken after CARS will not provide GMNA with the momentum to turn the corner.

Hence it must look critically at the corporate and sector functions of Adam Opel GmbH.

Tuesday, 10 November 2009

Macro Level Trends – US Transportation – Berkshire Hathaway's “Burlington Berties”

Though investment-auto-motives obviously focuses directly upon the car industry and its players, an overtly narrow and blinkered view must be avoided given the inter-sector connectedness of companies such as Daimler, FIAT, TATA etc, the cross-fertilisation of technology and of course the major macro PESTEL trends and accordant sector schisms that highlight investment opportunities.

Such opportunities come either within a sector as a result of conventional dynamics or, as importantly, promote opportunity within an alternative sector as a consequence or by-product.

Such – investment-auto-motives believes – adds to the weight of Berkshire Hathaway's full purchase of BNSF (nee Burlington Northern Santa Fe), at $100 per share (approx $44bn).BH already had substantial interest in the second largest freight-railroad company in the USA, and appreciates the convention of a slow but stable yield through dividends and MktCap growth; the rational core of a 'utilities' orientated enterprise.

However, Buffet and Munger also recognised that an opportunity was arising as a result of the perfect storm appearing over the horizon for trucking sector.

The harsh US recession has sharply curtailed road-freight shipping, the obvious consequence of now misaligned supply and demand curves generating a substantial slack in the trucking system that has driven down prices as competition became fierce and as a consequence has forced the one-man 'owner-operator' truckers and small-scale 'independent' firms to either exit or consolidate.

Moreover, the combination of essentially frozen credit markets frozen to small business and SME's and the 2010 legal requirement (as of 01.01.2010) for the sale of only new emissions compliant semi-trailer tractor units (as part of the US's efforts to cut CO2), means that large chunks of the trucking sector's capacity will effectively disappear.

Taking Class 7 as a sector median, new truck sales peaked at 131,000 units in 1999, with the 2008 low of 49,000 (see pictorial graph). Daimler highlighted the ongoing situational drag in its Q309 results presentation reletive to its Class 8-10 tractor units which have performed worse than even Class-7 trucks, portending the 'pull-forward' 2010 North American truck sales into 2009, so undermining 2010/11 production and therefor by virtue US and Canadian 2010/11/12 shipping capacity.

This then leaves a short-fall in cross-country shipping capacity when the economic recovery begins proper. And given the scale of the down-turn – economic data-sets urging financial analogies to the Great Depression & WW2 – it is no surprise that the BH duo see today's present circumstances as a re-run of their formative experiences in the 1950s.

Hence, whilst these new “Burlington Berties” like to convey the conventional, conservative 'slow and steady' typical nature of rail-road investment to the outside world and BH's own mom & pop and institutional stock-holders who themselves garner risk-aversity, the sector's own metaphorical 'train' that has had to date grind uphill against the pricing pressures of trucking and other rail sector competitors nears the headwind summit.

The other side a theoretical case of a much improved downhill progress assisted with tailwinds such as declined competition, infrastructure grants from the US and Federal governments, greater pricing power and over the next decade (and possibly beyond) much improved 'sustainable' margins.

Furthermore, BNSF has tried encourage 'railfans' to effectively patrol portions of its track. This appears to be part of psychological shift for the younger demographic toward rail relative to an expected reduction in car reliance – the 17m TIV unit production of 2007 seen as a historical peak – so promoting rail as a form of near-point intra-regional leisure travel with overtones of yesteryear glamour via streamlined stainless-steel Burlington Zephyr locomotives pulling upmarket carriages and observation cars with on-board entertainment.

Such a possible initiative could be related to an important broader contextual agenda.

investment-auto-motives also believes that US industry could well undertake a greatly increased level of commercially-led philosophical & practical integration – something akin to spectrum of interactivity - from 'arms-length' collaboration to direct M&A. That could see Berkshire Hathaway and similar other large PE holding companies act as a powerful 'rationalising forces' that encourage sector cross-fertilisation, innovation, efficiency-seeking and new business models to enhance concomitant ROI.

Moreover, given the increasing level of corporate social responsibility relative to 'under-the-umbrella' workforces, unemployment and housing dilemmas, there could feasibly be a return of 'Guardian Corporations' which through a modern equivalent to yesteryear 'garden-factories' and company-build villages actually house and possibly educate. Such efforts also have the benefit of reducing inherent labour costs and offer holding companies the ability to buy real-estate and acreage and build at below par values, to latterly sell-off the housing stock as the economic shape of the country itself re-evolves over time.

Hence, figures such as Buffett, Munger, those with honourable reputations on Wall Street and Industrialists like BNSF's & GM's Whitacre acting as enabling 'Generals'.

The 'Burlington' name itself was re-appropriated across various areas of the USA in the mid 19th century, and of course originates from the historic links to Britain; specifically the fashionable commercial ('Society') 'Arcade' built beside the Lord of Devonshire's home Burlington House in London's Piccadilly. The house itself became home to the Royal Academy, itself a philosophical cornerstone for the Arts and Science that underpinned Britain's own industrial revolution.

Hopefully Berkshire Hathaway's own paradoxical 'Burlington Berties' – given their modesty, humbleness & bee-like activity - have such similar grand ambitions for a much needed 21st century US industrial revolution.

Post Script...
[NB. Belief in the forthcoming strength and resultant reward of rail-freight container transport on the back of continued strong economic growth has been the raison d'etre for Blackstone GPV Capital Partners to buy 37.5% of Gateway Rail Freight Ltd in India].

Friday, 6 November 2009

Industry Structure – GM & Opel – No Real U-Turns in a EinBahnStrasse.

The recent news that General Motors had altered its decision regards the sale of its Adam Opel division to Magna-Sberbank has created shock-waves through the industry; not least in Ontario, Nizhny Novgorod, Moscow, Berlin and Brussels.

Magna International's Stronach, GAZ's Deripaska and Sberbank's Gref, having thought it was only a matter of crossing the t's & dotting the i's will be fuming at the lost opportunity to re-align their interests in both the massive European Tier 0.5 arena and rapidly enhance a large, update sections of the Russian auto-industry and grow B2B and B2C banking expansion.

In Germany, Angela Merkel has rebuked with distain, having heard the news just as she departed from a Washington trip - but the fortunate paradox for her government is that having been re-elected on the back of a massive Opel aid package, which undoubtedly worried Treasury officials and instigated the concerns of the EU Commission, is that her government's fiscal and regulatory woes have now been greatly diminished.

Whilst in Brussels, the EU Competition Commissioner Neile Kroese can retract the regulator's claws now it seems that any future GM aid requests will be legitimately spread across the region relative to the national industrial and jobs impact. Across town however, the private equity company RHJ International (held by Ripplewood and Rothschild interests) can smile once again as its initial business proposal previously beaten by Magna-Sberbank can be potentially re-tuned and re-submitted to the GM Board.

Whilst GM remarks that the Russian related Magna deal had too many negative strategic implications for both the company and no doubt Washington aswell, GM cannot possibly operate Opel AG in the same form. It may quote the delights of improved revenues over the last 2 quarters for the North American and European divisions, but without government bail-out monies and (pointedly) stimulus generated / subsidised consumer spending GM could not boast such a claim. In real terms there has been improvement in NA with the divestment of portions of its asset portfolio and much talk of a latter-day IPO, but its European arm is still loosing ground in the region, literally through market share and practically via overweight obligations relative to underweight productivity and capacity. As stated in the past, the idea for the profitability of the crammed EU marketplace and so the regional industry would have been to see Opel/Vauxhall disappear completely; its assets sold-off to other PE and trade-buyers with VM and Tier 0.5 & Tier 1 interests.

Thus the Magna deal would have assisted in the positive restructuring of the region, but the manner in which it was undertaken with so much German financial bias showed it to be less than 'democratic' to others such as RHJ International and other interested parties such as FIAT Auto.

The recent deal-retraction news has typically brought the usual government rhetoric and counterpoint union cheer in the UK versus union dismay in Germany, but for Opel/Vauxhall itself as a commercial entity it travels down a One-Way-Street (an EinBahnStrasse) of massive structural re-alignment. That achieved either through far more low-cost parts procurement from outside the EU, labour reduction and flexibility, plant closure(s) and dealer-rationalisation. However, the obvious and correct objection is that vitally previous management did not achieve this requirement throughout its loss-making era, hence its being put up for sale.

Thus the hopefully new path for Opel/Vauxhall is that it instead be put back under the reality of the commercial spotlight by GM's Henderson, Whitacre et al in Detroit, the representatives of the Autos Task Force in Washington, and crucially objective, insightful and independent advisors who understand both micro and macro-level requirements necessary to re-shape the over-bloated and lack-lustre animal that is Adam Opel AG. This of course must be done relative to those micro-macro trends.

Presently for GM, relative to the big-picture EU issues, we have a sharp juxtaposition emerging which must be dually exploited. The somewhat painful ratification of the Lisbon Treaty further integrates policy of mainland national administrations, yet this level of Federal Statism is vehemently countered by the UK's (expected) next government. The Conservative Party recognition is that Lisbon ratification without critical 'get-out-clause' stipulations endangers the competitive trade position of the UK – a country which from the economic perspective is in a far worse off than its EU neighbours given debt-to-GDP levels and other indicators. The UK, with its weakened Sterling currency seeks to benefit from the £ vs Euro differential, both intra-regionally throughout the EU and inter-nationally across the world.

Thus the GM Board must be ready to exploit the political fracture by ensuring that the new political harmonisation of the EU mainland allows it both any nation-based fiscal benefits (aid or taxation dispensations) whilst highlighting its need for operational freedom to restructure through partial or even 'sum-of-parts' whole divestment to PE and trade buyers....which puts RHJ International and FIAT Auto back in the frame, especially so since FIAT's Marchionne and his generals have achieved a similar singular nation-based rationalisation programme for FIAT Auto that could act as a template for GM's progress with Opel.

Objectively, the dead-weight of Opel has been a drag on the European automotive sector's fortunes - ask any CEO of any local car company 'off-the-record' and he'll say similar. Hence, in a globalised world the component entities of the EU, or en block, can not and should not act as a nanny-state. Do to so only undermines regional automakers and the futures of their employees and local economies.

Thus whilst there may now be nation-based aid with arms-length oversight from Brussels, it should be short-termist whilst GM Opel and its bankers seek alternative retained and divested futures for the Opel/Vauxhall's assets – both tangible (plant, R&D centres, admin offices etc) and intangible (brand, IPR, etc).

Capital markets, though over-bought in recent times, are on a historical trend basis slowly strengthening. This together with the pressure to break-up of banking roles & remits means that 'Productivity-Push' will (as investment-auto-motives has long stated) be the real focus for M&A , Fixed Income and Convertibles deal-making across Wall Street, The City, Brussels, Paris, Milan and Frankfurt

So for the future of Adam Opel AG (inc Vauxhall), Round 1 may have ended but the bell will soon ring for Round 2 in the fight for GM profitability.

Monday, 2 November 2009

Parallel Learning – Motor Sports – Business Modeling Over Three Centuries & Beyond.

Maintaining the motor sports theme from the last post, the past weekend witnessed what must the the opposite poles of motor sport. Abu Dhabi hosted the 2009 World F1 championship's last race at brand new Yas Marina track...and in complete contrast almost simultaneously... in London the Apsley House Gate of Hyde Park bore the beginning of the Royal Automobile Club's annual London to Brighton Veteran Car Rally.

Thus, Sunday 1st November showcased not only the opposite ends of the chronological spectrum of the motorcar but also the diametrically opposed human sensibilities that create both spectacles.

Whilst in Saudi the F1 circus demonstrates the necessary 21st century technologies of carbon fibre, micro-second e-systems intelligence and KERs 'energy harvesting', in London the 500 or so largely 19th century technically derived cars quite literally 'paraded' wooden construction, hand operated advance-retard ignition tinkering and the constant kinetic energy concentration to maintain precious momentum. Behind the wheel, it was a case of the consummate hired professional driver contrasted against consummate owner-operator amateur.

Amongst the throng of setting-sun spectators at Marina Yas – implicitly the 'new' Monaco - sipping 'over-the-yard-arm' drinks the corporate influence held sway; Daimler's Dieter Zetsche socialising with his Aabar Investment associates (holding 10% of Daimler) in the McLaren-Mercedes' Pits or indeed the swathes of corporate hospitality and 'ex-pat' oglers. A drizzling London morning in contrast had its 'sun-up' spectators of all ages and backgrounds wear their winter coat, propping up an umbrella in on hand and sipping a flask-dispensed cup of coffee on the other, miraculously clapping as each block of the released vintage cars chugged onto Hyde Park Corner, saving their greatest cheers for the late starters who just about managed to get their car running, the driver as gleeful as if he had indeed 'won' the rally – which from an almost spiritual perspective – s/he had!

The point is that these were two very different events in almost every dimension, but they and every other type of motor-sport event should be intellectually deconstructed to better understand how new business models can be created from the merging of the core components: people, place and products. F1 and the London-Brighton are two types of evolved 'automotive circus' amongst the many today – both commercial and cultural. From the big-bucks budgets of say LMP, GT, NASCAR, DTM or WRC racing to the amateur world largely born from of regional street racing - started by those late 1940s US Hot-Rodders, that 'animal-spirit' echoed in a very different way by the Philippino 'Bone-Bike' racers.

The combination of (wo)men and machines, invariably lead to competition and spectacle at whatever level of the social strata. And as those machines become an ever greater part of people's and nation's culture so new spectacles are born. At one level say the RAC's Brighton run, Goodwood's Revival or as pure showcase Hurlingham's Salon Prive or Pebble Beach. At the other extreme the car's totem as independence provider for the economically-involved young has merged with other aspects of youth culture to create a realm of testerone-fueled spectacles, from 70s urban US Hispanic low-riding to 90s Japan's initiatian of 'Drifting' to the global phenomenon of audio/music 'sound-offs' (demonstrating the power of the owner's, audio-system). All this alongside the conventional desire for speed and spectacle provided by '(engine) chips and (body) kits'. In short 'auto-individuality' set within a context of 'auto-tribalism'.

Thus as we see most evidently purveyed by the newness of Middle Eastern F1 and the antiquarian nature of London-Brighton, global auto-culture is broad and varied, and regionally sits along national, populace GDP, time and cultural dimensions.

As stated previously, the world has indeed become a global village, but that apparent shrinkage has only highlighted the microcosmic detail that investors, the auto-industry, real-estate and entertainment worlds should better understand, build and harvest. “Long live the Car-nival !”