Saturday, 26 December 2009

Season's Greetings - Never the Same Old Line

To One and All.

investment-auto-motives prides itself on its hard fought independence to provide objective advisory.

It is an independence which allows it sit centrally, and be triple-facing, toward the arenas of:
- the investment community
- government
- the auto-industry

The investment decision-making process toward either a singular project, an enterprise, a conglomerate or the breadth and depth of the auto-sector itself, requires that investment banks, private equity, trade-buyers and official authorities consider a broad spectrum of issues, levels, conflicting forces and alternative approaches.

The macro-economic investment waters have calmed greatly, the battering storms of 2007/8 subsiding whilst 2009 created a welcome, yet perhaps over-enthusiastic, rebound. 2009 was largely a sentiment driven market: cost-savings, retained liquidity and inferred 'good news' data ruled.

Governments provided QE reprieve. Auto-demand was much massaged. Sector winners & losers availed. Now all investors require insight, to see through the emerging mist created by enthusiastic over-reaction. The speedy turnaround from 'famine to feast' and starvation to over-indulgence can create systemic sickness if the process is not managed with restraint and objectivity by all 3 structural players.

2010 will prove tougher. Quantitative Easing diminished, consumer incentives withdrawn, the need for the banking sector's continued re-capitalisation for health and now the question of sovereign debt stability will continue to create squeezed credit conditions, engender risk-premiums and so marginally raise the cost of capital.

Yet, positively, large swells of liquidity seek safe-haven homes in these still-water times.

The economic mechanism is being largely re-set via the re-balancing of bonds & stocks, assisted by the assistive intermediate hybrid instruments (old and new), to give new growth platforms which in turn will encourage 'early cycle' M&A activity.

In short, the optimism of a still tentative, very slow yet welcome new beginning.

Upon this sentiment, as corporate balance sheets themselves, in time, start to re-gain content over style, far more than 'Good Will' to one and all.

investment-auto-motives... 2010 and onward.

Best Regards


Monday, 21 December 2009

Macro Level Trends – Copenhagen Climate Summit – The Futility of Short Orders

After many months of rhetoric and hype that Copenhagen would lead to a cementing of international eco ambitions in turn leading to a global policy agreement, the stark economic realities that have beset many members of the G20 & G77 ultimately created the politics of disporia.

As supposedly the successor to Kyoto, the US and UK essentially took charge of matters, though perhaps idealising the application of the international cohesion created by generally united reaction to the financial crisis. Instead, seemingly for many it became a 'trap and pony show', both in terms of downsized ambitions and indeed as a euphemism the political subtleties emerging.

The core script, already previously beset by the recognition that no legally-binding agreements would be made, was written and re-written time and time again until it became almost an academic exercise of oxymoronic word-smithery – grandiose in appearance yet increasingly lacking any substance.

The most progressive proponents early on in talks were some of the fast growing EM nations such as Brazil, India and South Africa, presumably to have greater influence in proceeding and not alienate the US or UK, but early enthusiasm took a back-seat to the big picture economic - and regional social cohesion - interests of the EU and China.

The high ideals of CO2 reduction target of an 80% reduction by 2050, and global warming target of 1.5 degree (as opposed to 2 degree) limit became early casualties. As the high ideals crumbled so the innate, increasingly empty, politicking grew; coming to a head as President Obama & Premier Wen met. Their talks reportedly becoming (not surprisingly) ever increasingly fractious as China resented the US for its accusations of secret coal mines and its self appointment as policy policeman, and in turn the US seeks Chinese transparency given its concerns about China's growing geo-political influence in Asia through its regional exports of minerals and energy.

By the end the US, India, China, Brazil and South Africa agreed upon the disputed areas to be latterly considered, but with even an agreement to post-pone full ratification by a year, the hollowness of Copenhagen shines through, shorn of its central ideals; much as the hair on the heads of the environmental protestors outside were shorn in protest.

Perhaps the greatest symbolic illustration of the failure was the inability to even multi-laterally support the UN sponsored 'REDD' programme. It seeks to protect flora and fauna from the de-forestation effects of the logging industry in EM nations. [NB. it is reputed that the present rate of deforestation actually surpasses the CO2 levels of combined harms of the entire global transport sector, being the 2nd biggest 'emitter' at 20% of global output, only behind energy production].

By the end the only agreement made was that the world's poorer nations would be given $30bn (£19bn) of climate aid over the next 3 years, with that aid to increase to $100bn (£62bn) annually from 2020 – though this was sceptically met regards its power to do good.

Copenhagen reporters state that by the end there was a growing recognition by many that previous high expectations of massive carbon reduction in the near and medium term were unrealistic given the state of play for many national economies, supposedly rich and poor alike, and their political needs wants and desires.

The growing consensus implicitly projects that instead a new routemap should be considered, something beyond the realms of the conventional UN model that some would argue has run its historical course given the very changed geo-political landscape the 'global village' now sits within.

The irony is that this sad end was set in motion some time ago. The highly charged emotional rhetoric of 'green-speak' has set expectations both political and public. But demonstrated itself to be little more than a useful ideological vehicle for politicos and the possibility to align and direct massive public expenditure to big-budget yet ill-conceived schemes and projects across the industrial spectrum.

This emotional irrationality flies in the face of good investment governance and procedure, the sort practiced by the financially driven, results orientated private equity sector; and a mirror mentality of good stewardship of public funds by respected senior ranking officials.

[NB Relative to recent press comment, investment-auto-motives conjects that the reason that the £2.5bn of state aid for the UK auto-industry has not been immediately forthcoming is because Whitehall has yet to be convinced of its direct application towards long-term value creation. And instead seeks greater structural re-form and robustness for the UK auto-sector before providing sizeable monies].

So, looking forward...

We face a period where having convinced the majority of the public of the need for eco-behavior, the very modus operandi of international central governments, and its negative effect on presently unaligned unconvinced private investment, must alter.

Government must become far more concise in its industrial planning and thus provide a stable framework by which commercial enterprise can be guided.

Instead of political grand-standing and the questionable force-fitting of big-number yet shallowly devised economic modelling, far clearer multi-stage roadmaps must be drawn. Roadmaps which combine the virtues of financial conservatism and commercial creativity.

For the auto-industry itself, that means a far broader vision that the over-utopianised, panacea-like ideal swallowed by politicians and the public alike. We will not all be driving electric cars by the end of the decade given the complexity of PESTEL 'headwinds' that must be overcome. The EV does indeed have a role to play and should not at all be discounted, but its role as a solution provider for mass personal transit is specific and requires much social, commercial and product re-engineering. Eco-enthusiam should not overlook the technical frailties of purely electrically powered vehicles.

In relatively stable, circuit-type environments they have a definite role, as we see in factories or commercial premisis, and on golf courses and retirement villages - especially so in mid latitude regions. Environmental cleanliness, minimal temperature variance and other factors seemingly must be created and controlled to give the perfect world for relatively low-tech, low-cost EV solutions. Real world, weather dominant, applications in cities, suburbia and the country present very different challenges.

A graphic example of this surfaced coincidentally and serendipitously with the virtual collapse of Copenhagen.

The Eurostar rail service came to a grinding halt over the weekend because the electric motors of its locomotives could not operate with snow and chill-wind condition interference to the drive and control systems. Cold and moisture, though scientifically conductive for electricity, are not condusive to real world EV drive and control systems - let alone the repletion of stored battery energy.

The Eurostar fiasco serves as a reminder that political hyperbole must work in orchestration with technical achievement and a deliverable reality.

Thus as Christmas fast approaches the festive period offer a good reflective period for politicians and policy-makers around the world, to re-plot a truly tenable course forward. After all. Every element of the P+E+S+T+E+L formula must be balanced to create a progressive result.

Thursday, 10 December 2009

Macro Level Trends – UK – The Economy Drive of All Time.

Once the white knights of the global financial fiasco, the western-world national account budgets have suffered a heavy toll over the last 12 months. Capital markets watched as the US further plundered its national deficit to support its stimulus and the UK did the same, leading the G20 with the over-ideological internationally co-ordinated financial response.

But of course different countries face different complex problems, and those star performers of the early part of the decade – the likes of the CEE region, Spain, Greece and Ireland that leveraged their low cost-bases & hyped-up asset values – are now suffering. Their 'thin' economic models have surfaced as the financial tide of private FDI and locally generated funding has withdrawn. Productivity has shrunk, GDP contracted, credit ratings slipped and credibility stymied, so creating a negative multiplier effect.

But the smaller brother nations, whilst more precarious, do not find themselves alone. Anything but. The US is publicly perceived as 'in hoc' to China given the respective $800bn trade deficit and the > $2 trillion Sino reserves. Germany & France find themselves caught in socially biased mixed economies which are popularly moving further to the left, but unlike the past where social-democracy could survive unfettered given the European competitive lead, such EU countries find themselves a very different global context – less post-colonial, more intrinsically post-modernist (ie post 20th-century).

But it is perhaps the UK that without the US political clout and noted as the EU laggard – the last to technically emerge from recession – that finds itself with perhaps the greatest future-forward transitional challenge to face. Today, the economy is at its lowest ebb in living memory.

As the UK government's National Statistics Office has reported: present GDP levels are at an average -5.2% over 2009, that average presented via a bottoming-out in Q209 and slight 'upturn' in Q309. The attached graphic highlights the UK's plight, with real GDP falling over 7% since Q108.

Of Q309, the greatest downturn was seen in the “distribution, hotel & catering” sector, this segment taking what could be regarded as a normative / expected hit as a cyclical consequence to previous period hits of primary industries (mining, agriculture), secondary industries (processing and production) and construction. Thus theoretically, the recession is working its way through, supported by the now ramped-down but still loose Quantitative Easing stimulus spending (1.2% of national GDP).

But that massive fiscal injection by the government into primarily the banking sector along with consumer incentivisation (ie the UK car scrappage scheme) has left public finances in a dire situation. At its heart the current or new-come government must steer the UK economy between the extremes of a Japan-like long-term minimal growth scenario and that of an over-extended QE policy generating M4 liquidity to give a false impression of substantial growth which invites hard to handle inflationary pressures. Keen to avoid both, Mervyn King et al on the BoE's Monetary Policy Committee must now work in conjunction with broader industrial policy-makers to regenerate the economy, especially so since many of the fiscal levers have already been effectively exhausted.

In summary, the concerning environment is as follows: a budget deficit of £175bn approx (of a £800bn PSBR), a trade deficit of £8.3 as of November (down from a previously better 7.8% 'helped' by car exports) and unemployment standing at (an 'official' though suspectedly unrepresentative) 8%.

And so it is in this already concerning context that the UK Treasury Minister yesterday highlighted his government's need to take the nation's accounts yet further into the red to eventually alleviate the pain, the aim to half the national debt by 2014. The measures of reduced public sector expenditure nominally by -12 to -15% and the efforts to increase income via steeper taxation are of course expected, though sensitively deployed. A theoretically pertinent element here is the application of the Low Carbon Transport initiative, which alleviates company car tax on electric cars and vans. And though good news for the likes of Smiths Electric and Modec that convert and manufacture e-vans, the real effect in increasing zero emissions e-vehicles on UK roads will be realistically negligible given the chicken-and-egg dichotomy of of e-charging infrastructure that has to date seen little real investment; especially so outside of inner-London.

So Alistair Darling's announcement was par for the course, yet still elicited little corporate or public belief as to how his (or any) government would or could engage a plan of national economic growth. For it is the question of long-term industrial planning, beyond the rhetoric of the “Green Economy”, that UK & foreign corporations and the public at large ponder.

The disparity gap between the rhetoric and reality has perhaps grown to an all time high. The very function of a supposedly knowledge economy shown to be in schism when theoretically highly qualified graduates work in 'chicken-cell' call-centres, inanimate computer servers as opposed to human brains are the real knowledge hubs, and the street graffiti artist 'Banksy' depicts better social commentary 'advertising' than the famed creative media 'shops' of Soho Square. Disaffection runs rife through all age groups, but perhaps most prevalent in the productive critical 30 & 40-somethings - over and above the comfortably off Baby-Boomers or their cyber-space'd (almost self-consciously removed) teenage grand-children.

[NB. The book 'Fantasy Island', authored by Elliot & Atkinson, although not yet read by investment-auto-motives, appears to give a good rounded account of the UK's present PESTEL position]

Inevitably, planning the country's industrial future is perhaps the most important task for the highest echelons of the UK establishment that sit in Whitehall. One only hopes they have a good appreciation of the size of that task, the complexity of the journey and ultimately the required outcome. But given past performance of only limited advancement and holistically orchestrated demonstration, there are 101 million reasons to think not.

However, to this end we will undoubtedly see the re-emergence of greater central planning – even under probable future Tory governance – which administratively echoes the 'reign' of the National Economic Development Council of 1962 – 92. Though unlike NDEC, the primary 3 way conversation must be between government, industry and finance. The latter replacing seat of the 'old world – old view' unions that ruled and stalled Britain the 1960s and 70s.

As a result, investment-auto-motives imagines new Economic Development Committees (neo-NDC's) will be born relative to each systemically-important industrial sector. And as such the remit of an automotive sector strategy council will take and progress the recent findings of the UK Motor Industry Report.

Presently in the broader forum, the re-balancing of investment in government bonds, corporate bonds, hybrid instruments such as convertible bonds and newly emergent 'CoCo's and renewed belief in fundamentally strong stocks will slowly but surely provide a new platform for growth.

Equally a platform must be built for the future of UK Autos, one which includes investment-auto-motives' previously mentioned need for a synergistic relationship between imported Tier 1 technologies and national NPD and local build competences. That probably means a re-birth of the 1981 British Technology Group, the conjoined forces of the then National Research and Development Council and the Development Corporation. Today the Sept of BIS (nee BERR) seems to be setting the scene for that eventuality to promote industrial efficiency and innovation – through probably today a PPI scheme, given the contextual background of government owned large UK banks and the need for wholesale sector transformation.

And so today is set in the context of historical economic cycles, rises and slumps necessitating the use of alternate associative loose and tight industrial planning.

As the progressive Chinese automaker BYD sets its sights on Los Angeles as its entry-point for its clean-tech cars, the UK must ask itself how it can best serve itself in this arena.

Today's UK auto-industry spans a plethora of scale and capabilities, yet must be essentially re-worked as an intelligent, interactive network to maximise change and productivity.

Today's low production run e-vans are of little impact and realistically commercially unviable. So the structural climb to large scale mass mobility that offers very low & zero emissions CO2 vehicles, perhaps engineered, produced and retailed in a very different manner via a very different business model and set of capabilities is today still practically a long-reach aim; even if on the fringes pieces of the jigsaw are being slowly put into place.

Friday, 4 December 2009

Micro-Level Trends – US Autos Inc – Government Aided Gangland Detroit?

The intended consequence of the CARS programme did indeed assist hard hit domestic manufacturers by buoying sales (though largely foreign) and so helped forestall what was seen as a possible collapse of the US auto-sector, and its national economic repercussions.

Though appreciative of the need to assist the sector to reform as far more socially relative and competitive, investment-auto-motives was not a supporter of the scale and cost of CARS and the level of government intervention that has resulted in GM and Chrysler. Believing instead that these 2 entities should have worked largely within the structure of market forces and normative Chapter 11 processes, with the heavily constrained credit conditions requiring government aid, but done so on a far more pragmatic basis.

Instead today we see the outcome of less than financially & economically sound principles forming a picture that almost defies the principles of capitalism that historically is the cornerstone of the US.

The newly emergent picture of a further de-stabalised auto-sector is summed-up by the recent news that GM and Ford will increase Q1, 2010 production by 25% each. Whilst no criticism can be made of Ford given its independent standing (if we discount clean-tech Federal funding) to leverage its muscle, the Obama administration should recognise that GM vis a vis the underdog Chrysler sits in a very different position.

Taking a look at the massive November sales disparity between Chrysler vs Ford & GM, and their dual announcements to hike production, it seems that the bigger pair are 'ganging-up' against Chrysler to possibly flood the market with new vehicles which will enable them to gain market share through probably the age old value-destruction tactic of discounting and incentives. In short it appears that Ford & GM – recognising the strength of Japanese and Korean peers - seek instead to erode Chrysler's small slice of the pie yet further.

Whilst such hard-ball play presumably does not infringe into anti-competition/anti-trust legal territory given the number of players within & level of fragmentation of the US car market, it does appear that GM is utilising the financial bolster given to it (& Chrysler) intended to “save” US Autos Inc as a weapon against its smaller, weaker counterpart.

If GM was in Ford's position of self-sufficiency there would be no argument, but it is not. It is largely government owned and as such, in the spirit of the nation, should act with accordant perspicacity. GM will of course argue that part of its remit is to return government monies as soon as possible and so must earn its way to do so; thus it finds itself in the age-old paradox.

The US administration must address the issue, and so quickly and fairly. For let us not forget that beyond the direct and indirect aid given to Chrysler, the company's only 'white knight' in the form of FIAT SpA, effectively saved the company from full and final liquidation. FIAT effectively saved jobs and by virtue saved state and federal budgets from yet further deficit strain.

Thus the Administration has a moral and ethical duty to ensure that Chrysler itself – a vehicle of the future economic upturn - is not beaten-up too badly by what seems a new “Gangland Detroit”, and Marchionne and his Chrysler executives should raise the matter with Washington. After all what is the point of saving two industrial 'brothers in arms' only to have one seemingly take an overtly offensive stance against the other after the fact?

As investment-auto-motives stated previously, in truth commerce and government should only really be mixed when devising national economic policy. When forced to converge during times of economic malaise, the interaction - including financial assistance - should be as limited and pragmatic as is feasible. Otherwise, as we witness today, the interplay of massaged commerce becomes a very messy affair that requires further disentangling and attention.

And by default it seems that FIAT SpA becomes ever more marginalised as it seeks to rebuild Chrysler in the near future from what will possibly be yet an even lower sales, revenue and income base.

As Frederick Henderson steps down from a short but well regarded financially-focused role as GM's CEO, and Chairman Ed Whitacre seeks out his replacement, the new incumbent will require a broader and deeper appreciation of the new domestic environs GM must critically credibly operate within. That means a different business mindset, alternative tactical weaponry and changed market-targeted (alliance-based) strategies.

At a time when US Autos Inc needs to overcome its innate systemic problems, it should be working in greater unison, not attacking its own to gain a single percentage here or there. Otherwise the raison d'etre of the massive financial aid packages and incurred budget deficits – as investment-auto-motives speculated – simply becomes counter productive to the US auto-industry, foreign trade investment interests (ie FIAT) and ultimately the US nation itself.

Gangs of any ilk are akin to petty children in playgrounds, or small town adolescent groups that in reality have power over little. Such a mentality should not serve as the hidden or implicit industrial basis of a presently stalled world super-power. The US and international trade & FDI deserves and require better governance.