Friday, 29 January 2010

Company Focus – VW AG – St James's and the Giant Piech

VW Share Price (@ 12.36pm 29.01.2010)
- Ordinary : Euro 64.96
- Preference: Euro 57.54

From the Upper East Side and St James's comes news that members of the hedge fund industry have been considering how best to buoy their own coffers, heavily sunk in part by what they consider misrepresentation by Porsche management at the time of the intended VW buy-out.

As history has shown, that intention was given a swift about-turn as over-extended by debt, Porsche was swallowed by VW AG. A second critique comes from institutional investors, concerned at the price VW is paying for Porsche Holdings AG, with the conjecture that the Piech and Porsche families will be the major beneficiaries at the cost of large shareholders.

In Germany, where the machinations of industrial engineering meets financial engineering, Prof. Ferdinand Piech sits centre-stage seemingly unperturbed.

Unquestionably the strongest of the Europeans presently, VW's 2009 turnover has been greatly assisted by still relatively strong sales in its Chinese & Brazilian strong-holds, add to which the benefit provided as a substantial recipient of EU scrappage schemes. The VW Group, its core and satellite brands and a now well entrenched with eco-sub-brands assisting (eg Bluemotion, GreenLine etc) could be argued as having to date largely won the eco-perception battle amongst the public. This volume & profile mix ensured VW had a record number of deliveries in 2009 at 6.29m units (+1.1% YoY). As such VW presently 'sits pretty'.

Beyond the market sqawk, VW has auto-sector strength, in terms of market share, model mix, pricing power with consumers, the introduction of the low-cost A3 platform, industry leading flexible manufacture across sites, and on the back of these the ability to drive economies of scale with international component suppliers relative to local and Euro FX conditions.

Moreover the stated cross-sharing alliance with Suzuki is a positive sector-shifting move. It obviously chosen as a pragmatic alternative to the heavy investment required, and long-pay-back period of a new, advanced tech, small car programme (ie Up! In contrast to 2nd world Fox). We suspect it's manifest agenda was two-fold: To protect still highly prized liquidity on the balance sheet and hasten the launch of a market leading small car under Polo.

At the strategic level, beyond a reduced cost option versus domestic development, the alliance also creates geographic, further fiscal and strategic options and opportunities: Piech has witnessed Machionne and Ghosn develop direct and indirect Indian ties with respectively TATA and Bajaj, and shrewdly sees a possible greater value-adding multi-play via Suzuki with:

1. Europe – possibly replaying the PSA-Toyota manufacturing alliance in a CEE location
2. India – piggy-backing Suzuki-Maruti presence in manufacturing and distribution.
3. Japan – dual forces with enhanced VW presence to take advantage of Toyota woes.
4. S. America – dual forces to squeeze VW competitors (esp Ford & FIAT)
5. Financing – Ability to tap liquid Japanese banks at 0.1% base-rate thru' probable weakening Yen
6. Strategy – Ability to tap into Suzuki's broad and deep 'cars to quads to motor-cycles' capability.

In short, as Europe starts to enter its own 'Kei' car' era, VW wishes to leverage learning and synergies from perhaps the world's best small car maker with expansive personal mobility reach.

Within its core of Western Europe it identifies the A & B segments as its prime targets, given what it sees (or perhaps likes to purvey) as a lack of variant model presence across: notchback, estate, MPV, van , coupe, cabrio & roadster variants.

Q309 reported data shows that VW Group holds #1 in Germany( with 21% market share) , China & Brazil and holds 11.7% of global TIV (up from 10% YoY), but warns of caution for 2010 even if well placed in EM markets such as India and Russia.

The VW brand shows success with Jan-Sept 09 deliveries up 1.5%, September of major benefit seeing a 22.8% (extra-ordinary) single month rise (mainly due to local & global scrappage incentive schemes for lower CO2 emissions smaller cars . Internationally Gol maintains its performance in Mercosaur region whilst in China Jetta, (Newish) Lavida and Passat benefit from the both return 'loyalty' purchases and 'flight to safety' migration from other newer (less proven) Chinese domestic automakers.

In recent presentations (ie Hans Dieter Potsche) VW tries to demonstrate how it created firm foundations through the boom period. This then provides room to proactively manage through the economic trough and maintain focus upon the typical efficiency levers:

a) “Working Capital optimisation” via efficacious inventory management,
b) “Constant CapEx review”,
c) “Maximise Liquidity”,
d) “Cost Discipline”,
e) “Flexible Labour Contracts”,
f) “Managing Production Capacity”.

The Q309 report stated an increased CapEx to Sales Revenue quotient of 5.7% (from 4.9%), now quoted as industry standard, is largely the result of the ratio-effect due to declined sales revenues

VW states that E25.8bn is to be invested over next 3 years (2010-1012), of which E19.9bn CapEx directed at property, pant and equipment. Approximately E10bn of that will be spend directly in Germany, presumably to demonstrate its commitment to the German people and importantly grow favour with Lower Saxony (its 20% 'supervisory' shareholder).

VW Group's product strategy foundations will continue as normal with a "multi-brand modular matrix" strategy previously seen with the A4 platform since the mid 1990s, now extended in technical sophistication and model reach with the slightly smaller FWD A3 platform set (known as MQB) [with the larger RWD set known as MLB]. This includes greater integration of automatic gearboxes which highlights the ambition toward greater US and non-EU mix.

New plant and equipment acquisition and investment are noted relative to construction of a new USA plant due for 'SoP' in 2011, and Porsche (platform & capability) integration with its purchase of the Karmann Osnabruck (niche vehicle) site.

However, amongst the positive SEAT continues to struggle and is the Achilles heal of the group, its offering of married practicality & sportiness effectively unrecognised due to lack of brand resonance amongst consumers. However, after decades of various motorsport campaigning, SEAT has had 2009 WTCC success, the most high profile of which were #1,#2,#3,#4 positions at the Brazilian round. This theoretically creates a launch-pad for the brand in Brazil, with the possibility to leverage SEAT's cultural connections to the 'old world'.

With few other automakers as well placed we conject that Ferdinand Piech will be using his strong corporate performance, with liquidity, to combat institutional investor concerns regards over-payment for the Porsche division. However, it is that corporate liquidity that has also drawn the eyes of the aggrieved US hedge funds and the reported considered $1bn filing.

It is conceivable that this action has been stirred so as to both gain much sought after cash - given the level of recent fund withdrawls - from VW, and to possibly dampen the present Porsche share price so that hedge-funds could purchase Porsche stock at a discount prior to the beginning of the VW's own Porsche stock buy-back. Thus ironically possibly using VW sourced cash to purchase a hiked Porsche stock to help compensate for the original massive losses.

However, recent news highlights that it is the UK's St James's players that prefer a less confrontational approach. There is still much value left in the giant VW 'peach', it appears both St James's and Prof. Peich well recognise that fact.

Wednesday, 27 January 2010

Companies Focus – 2009 Auto Sector Performance – Will FY09 Earnings Reflect 2010 Pulling Power?

Macro-economic forces across the globe presently seem to almost conspire against an easy pull-out of these dour times. China's altered monetary stance to cool asset class bubbles, Europe sovereign debt problems, a US caught between Democrat's calls for fulsome regulatory reform vs Republican's concerns about consequentially impeded investment & growth, to now major shudders through SE Asian capital markets caused by the first aforementioned issue.

As markets hold their breath, so do western automakers, recognising the revenue off-set that the Eastern consumer brought, stepping into the shoes of reduced, yet stimulus supported, western consumption. As Asia pauses for thought and EU & US budget attention lessens the likelihood of a second year of scrappage incentives (even if FIAT's Marchionne should like to see one), both CEOs and investors weigh-up what Q1 2010 will bring.

Unsurprisingly, the publicity noise and glare of the banking sector's massively buoyed FY09 earnings (and related bonus pots) undoubtedly over-shadows investor and public reaction to industrial sector earnings.

Financials were dramatically lifted over the last 3 quarters thanks to: a rapacious equities rebound (possibly overdone) earning brokerage fees and proprietary fund returns, mandate earnings from client companies seeking lower-cost funding via bond and convertibles markets and scouring for prime M&A deals offering advisory fees and credit-line products.

In comparison the story for much of the rest of the matured western commercial base has been one of caution in the face of continued lack-lustre supply-side and demand-side economic indicators, and more importantly, very tight management budgeting schedules. The majority of CEOs & CFOs continue to expel non-core operational activities, finesse cash-flows and under-take the typical end of decade strategic reviews with greater vigour - so as to be in the right shape for the “new normality” (to quote PIMCO's Mohammed El- Erian).

This continuous cost-cutting march has become almost business as usual within the Auto sector. Perhaps less highly visible but more acute amongst the western supplier-base as it re-organises both internally and sector-structurally to meet this “new normality” pertaining to a heavily flattened consumer demand for new vehicles, within which the down-sizing product trend reads as inherently reduced per unit profitability. Hence, in quiet but large measure the supplier operations continue to shift toward Mexico, the CEE region and of course BRIC areas; either as transplant ventures or JVs with local companies depending upon national legislation and/or cultural climate. The perfect storm that engenders the move continues as EM vehicle demand continues apace – even if slightly slowed – and the ongoing pressures to reduce costs intensify across the board, from: plant & office fixed costs, to raw material, component, sub-assembly, labour & GA.

2008-9 saw the automotive centre stage move undeniably and irrevocably eastwards.

That dynamic is of course also mirrored by the volume car-makers with primary exposure to the Triad regions, facing similar macro-challenges but in reality positioned subtly differently relative to their own product and structural 'SWOT's & 'TOWS' – even if the typical group-think of stock market reaction rarely differentiates. As a consequence of both that generalised herd instinct versus the varying analytical comparator penchants of auto-sector analysts, CEO and CFOs must of course manage investor and analyst expectations.

The recent years of flux have meant dedication to hard cost-cutting QoQ, with an attendant optimistic broadcast of a brighter, eco-green tinted tomorrow with long awaited reflated revenues. Naturally the law of diminishing (marginal) returns meant that the initial 'top-line' benefits gained inevitably decreased as COGS caught-up with turnover. As such the force of commercial headwinds intrinsically increased; the counterpoint deflationary force on input costs of little real effect given suppliers' own determination to maintain their own margins, via maintained pricing where possible and 're-scheduled' credit and debit payments.

Invariably the old mantra that 'cash is king' came to demonstrate its truism, as has the importance of structural integrity provided by strategic 'shape & direction' . Those corporations that had either accumulated liquidity (eg VW, FIAT, Honda, Hyundai) or were able to ably raise it (eg Ford) and importantly were attuned to the new C of G in global purchasing demand for smaller cars were better set to face the incoming, and still ongoing, storm. Consequentially, those corporations that were more naturally aligned to A,B,C segments due to originating domestic market & prime market characteristics were able to ride the wave. And furthermore, the firms that had been through relatively recent restructuring (best exemplified by externally-imposed Hyundai & self-imposed Ford) were structurally light enough to gain a greater boost from that surge in small car sales.

However, in contrast to these examplars of near singular global products, the power and future potential of regional leaders with multi-brand, intra-platform marque-engineering mastery cannot be ignored – especially if credible. Perhaps best demonstrated by VW's grasp on Europe-China (re-run with the new A3 platform after old A4), perhaps the benchmark for FIAT-Chrysler's ambitions of Euro-Americas synergies (initially a 'badge engineered' for N.America). With of course the onward march of Chinese manufacturers seeking domestic domination via consolidation and accordant economies of scale and brand/product positioning – effectively mirroring Alfred Sloane's philosophy when creating GM through the 1920s.

This then sets the scene to date, so what of investors' expectations from the major western manufacturers for Q409, FY09 and 2010?

To answer this, as a pre-cursor to the Q409 /Q1 2010 report, over the next 8 web-log posts investment-auto-motives provides broad-level snapshots derived from its Q3/Q409 forecast report, adding latter-day intelligence from recent events, official public statements (earnings guidence and otherwise) & generally inferred corporate direction for the constituent 8 major western producers.

Wednesday, 20 January 2010

Industry Structure – UK Autos – 'Fiscal Consolidation' vs Need for a 'UK Auto Manifesto'.

The 2007/8 financial crisis expectantly led to sizable government stimulus spending. The UK's costly vehicle scrappage scheme perhaps the most visible in answering the distress calls by industry bodies such as the SMMT.

Consequentially car sales were indeed buoyed, with perhaps the major beneficiary being the retail motor trade itself, for the most part assisting the sales of affordable B-segment import vehicles made by Ford, PSA, FIAT, VW Group brands & Hyundai-Kia. GM's own Vauxhall Astra (though a C segment car) should have been a prime sales candidate were it not for the model's production run-out in Ellesmere Port, whilst Nissan's Sunderland-made Micra, also an aging product, gained relatively little uplift. As for the likes of JLR (Jaguar Land-Rover), Bentley or Rolls Royce, they of course were never really part of the mass-market scrappage scheme equation that sought not only sales but positive political impact.

As a consequence the direct financial 'multiplier-effect' through the retail-base, into home manufacturers and thence into home Tier 1 & 2 companies was realistically limited. The dealers were given cold comfort and redundancies post-poned (to the present-day). But importantly, the core of the UK auto-industry per se appears not to have been fundamentally assisted.

In short the political reaction, as part of its QE exercise, appeares well-intended, though perhaps naive of economic reality and level of direct domestic influence.

Fundamental, targeted assistance is what is required if the UK industry is to prosper. Such assistance not necessarily in financial terms or hand-outs - though such calls always come – but more so relative to proper understanding and creation of a relevant and strong industrial-commercial framework that allows UK Autos plc to successfully compete both at home, and critically throughout the world.

Today, as a somewhat stabalised nation, the UK now faces the resultant massive fiscal deficit outcomes and must both address the repayment of the gaping deficit and simultaneously review the future for its industrial base and national commercial competences.

With the former of these issues presently under the spotlight as a general election draws ever closer, the Conservative PR machine wishes to demonstrate its governance capability and policy direction by utilising the 'lessons leaned' from the parallel case study of Sweden's economic turnaround of the early 1990s. To this end Anders Borg (Sweden's current Finance Minister) was invited to give a lecture summary of the Swedish recovery model, prior to reflective words by George Osborne, the Shadow Chancellor of the Exchequer.

[NB. Understandably the centre-right keen to practice the very essence of prudent micro-economics set within reformist macro-economic policy, which looks in greater part, to the true utility and leverage of private investment as an objective national driver. This thankfully instead of the public (pseudo) 'investment' we've witnessed over the last decade by the centre-left which basically espoused a policy of publicly-funded 'bought' 'wooden-dollar' public-sector job expansion, the beneficiaries of which in turn arguably fueled the credit bubble].

To summarise the Swedish recovery formulae, it was a return to archetypical neo-classical econometrics for balancing a budget:

1.All options available for application should be reviewed and used.
2.Taxation should be biased away from prime motivators (ie personal income & corporate) and set toward a broader-base plethora of tertiary sources.
3.Expenditure decrease to be achieved via cost-restructuring whilst safe-guarding essential human (future labour capital) development criteria (ie education & welfare)
4.Improve the 'base-line' scenario through productivity expansion via R&D & reform.
5.Creation of a credible budget 'base-line' so as not to alienate capital markets (re: Government Guilts , Bonds, Note issuance prices & spreads) or households (ie gross vs net disposable spending).
6.'Front-load' the consolidation, demonstrating “pain equals gain” improvement thus providing “openness to build credibility”
7.Calculate the political cost vis a vis SIGs (Special Interest Groups) and public perspectives.
8.Safeguard labour force participation to create value-adding society
9.Strengthen fiscal institutions via greater independent target-data advisory & examination
10.Maintain social cohesion so as not to experience a destructive splintering pattern

Given the dire circumstances of EU members, ranging from a false appearance of stability in France (re: cost-structures vs RoW) to the real concerns over Greece's economic credibility, such actions will be required across the EU and even Triad region; thus intra and inter-nationally. This will bring substantial ramifications for the European auto-industry in terms of continued need for re-structuring, something which is seemingly being led by London's capital market demands (ie seeking restructuring, value-creation opportunities) and Italy's recognition of the need for change (ie FIAT's vanguard as EU cost-harmoniser with RoW regions as part of its own growth strategy). Thus we view the apparent paradox of a once heavily socialist state leading the race for regional cost-down in a global context that with revive both the European auto-industry and member state economies.

Set against this context the UK sector itself stands distinctly separate to its EU neighbours at micro & macro levels, in as much that:

A. the sector is of different 'shape' -
(ie no national mass manufacture 'champions', instead a broad scattering of 'upstream' enterprises)

B. the UK holds relative administrative independence -
(eg relative autonomy providing flexible monetary and labour policy-setting)


In contrast to EU peers, the UK's auto-sector has progressed beyond 'domestically owned' low-value mass manufacturing, by refocusing core productivity towards spheres of activity, which albeit far smaller in size & turnover figures, sit higher-up the commercial value-chain and so enable improved margins and profitability. These include:

1.Strategic Consulting
2.Systems & Whole Vehicle R&D (partially in association with academia)
3.Project Engineering
4.Test & Development
5.Associated Software & Hardware Development
6.Professional & Amateur Motorsport(s)
7.Premium (Luxury & Sports) Niche Vehicle Production

[NB. Such 'up-stream' activities are partially mirrored within the normative schema of matured mass-manufacturer operations, but under such in-house circumstances are arguably constrained by conflicting political & financial/capital allocation company demands. The process of 'unbundling' appears to be a prime strategic aim of Toyota Motors (sic Japanese industry) as it faces stiffer global competition].

[NB. The UK must also review how it can evolve the auto-sector's 'downstream' activities -
the retail base & process, through-life ownership interaction, and vehicle disposal network].

[NB. With the structural re-formation of Volvo & SAAB under Chinese &/or other interest – which will alter the very core of Sweden's auto-sector - it appears that Sweden may wish to learn from the UK auto-sector's industrial evolution model, just as the UK seeks to utilise the Swedish Fiscal consolidation model. Thus there may be an opportunity to strengthen Scandinavian ties, as part of what investment-auto-motives conjects as a Northern European Auto-Sector 'Rainbow'].

Moving on to item B in lesser detail...

Although presently in a deeper economic hole than its EU counterparts, yet has the (hard-defended) fortune of relative independence and so greater flexibility regards monetary/fiscal and labour-force policy-setting. Such flexibility is critical to meet the challenges of a present-day heavily mired government budget, and the ability to re-set & re-orientate the nation's industrial and commercial template.

It is with regard to creating a 21st century template that the highly visible UK auto-industry could possibly play a leading role, but before such ambitions, it is indubitably important that the 'Fiscal Consolidation' process itself does not to 'de-rail' its constituent parts whether 'on-shore', nor 'off-shore' in its role as a 'quiet voice' global leader. Examples such as assisting China to create its own NPD capabilities or answering the US call for electric vehicle alliances demonstrate the UK sector's importance as a commensurate foreign-trade , income generator.

To this end the UK sector should be viewed as de-coupled from the typical perception that all EU auto-activity is automatically 'value-destructive', even if the over-capacity problem does pose a profitability threat to incumbent large manufacturers – delineated as 'winners' & 'losers' and much of the cross-border retail trade (inc UK).

The business of 'UK-Auto' is to serve domestic personal mobility needs, and by setting that bar high via consumer acceptable regulation so demanding new technical solutions, able to in turn serve the R&D and development needs of 'follower' nations and global-reach foreign auto-companies. This then accompanies Britain's already proven ability to guide Emerging Market auto-players relative to today's established vehicle systems solutions and relative modifications, within the fields of conventional ICE (internal combustion engine) technology, the traditional 'Budd Manufacturing' pressed steel vehicle body production, the development of intelligent electro-mechanical architectures etc etc.

investment-auto-motives simplistically depicts the UK picture using a created (copyrighted) graphic (see above) that overlays the endemic value-curve over a 4x4 matrix, the axis of which demonstrate theoretical marginal profitability versus relative geographic requirements. The model titled “4x4 Policy Traction” introduces the aforementioned Northern European 'Rainbow' industrial model as part of a 4 tier 'trickle-down' system which affords the UK to seize the opportunity to act as a global auto-industry policy originator and consulting destination and technology service provider.

The finite detail of this broad overview regards what is effectively a 'UK Automotive Manifesto' must be understood and act as agenda reference criteria relative to the execution of the aforementioned governmental 10 point plan for fiscal consolidation, so as to not only negate possible negative implications and outcomes of both models' inter-operative meshing, but in actuality properly guide and promote the UK sector at national and international levels.

Thus, to conclude, whilst the UK can undoubtedly learn much from Sweden relative to fiscal turnaround, so in turn may Sweden learn from the UK in developing its own and a UK-Sweden synergistic automotive industrial planning thesis. This in turn engenders the UK potential ambition as an even greater influence and player on the global industrial stage.

Friday, 15 January 2010

Macro-Level Trends – Auto Equities 2010 – Navigating a Turbulent Sea: Demanding Convincing Strategy & Low Cost Funding

The new year and decade is underway, Detroit, Delhi & Brussels show their vehicle wares and the investment community starts to once again critically assess the current state of play for the auto-sector prior to Q4 & FY2009 earnings season - the
SAA enclave a hub of activity.

As is the annual cree, the intercept of financial bottom-lines is set against big picture trends.

From a macro-trend perspective, its eyes are on Chinese economic policy given its role as perhaps the global economic engine and the concomitant decisions of the PRC, itself caught domestically in a similar position to the west between 'bubbling' capital markets and worrisome consumer citizens.

From a micro perspective, its eye on corporate balance sheet top lines, hoping that fundamental sales growth can start to power earnings further to quarter after quarter of cost-savings. It desperately wants to see liquidity generated from B2B and B2C transactions as apposed to liquidity gained from relatively high cost bond, hybrid & stock sales.

In short it wants to see the fundamentals underpin the sentiment at a time when p/e values are once again ahead of themselves across many sectors. That may be a result of Asian liquidity being re-directed westwards as it seeks lower p/e targets and regionally comparative theoretical better buys.

So having seen 9 months of western stock market rally, the very mixed bag of macro-economic signs continues to add haze, even if not witnessed by the stable Vix index – that sign in itself demonstrating the paradox of what seems a relatively calm surface with turbulent under-currents.

Yet compared to recent history, the subsided storm has created navigable channels across asset classes, even if much of it be thus far sentiment driven. The music re-appeared and market players quickly rose to dance.

2010, looks to be a tough year as stimulus spending is retracted and the reality of the global economy becomes more transparent, and the growth schism between Triad and BRIC regions is viewed and tested once more to see if the QE exercises undertaken has indeed kick-started western economies.

The veteran investors with experience and gravitas, the likes of Buffett, Soros, Rogers etc, seem to be re-running, or possibly intending to re-run, their investment plays of yesteryear.

Warren Buffett jumps back onto the railroad in true Benjamin Graham style. George Soros (or a proxy) is surely sizing-up the fundamental strength of the UK Pound given the Euro-skeptic Tories who must surely seek to maintain a differential between the Pound & Euro counterpart / competitor. And Jim Rogers appears to be picking over the (to re-quote him a year on) “finished” UK economy to seize any under-valued UK companies or assets within globally buoyant sectors.

Given the level of commercial contraction the west has experienced, the accordant Schumpertarian spirit of 'creative destruction' (for re-construction) is surely underway by the most progressive of investment banks, private equity players and trade-buyers. First witnessed within banking itself, now across B2B and B2C enterprise.

investment-auto-motives believes that the west is, even if not immediately apparent, undertaking its first tentative steps into a new economic epoch which can be rationally followed by investors across a logical, intrinsically cyclically structured, growth path.

[NB Buffet's buy into initially banks via Goldman Sachs, latterly into Burlington Northern Sante Fe and now evaluating GMAC Mortgage Services appears to echo investment-auto-motives' own hypothesis].

Though ideally that growth path will be properly moulded via aligned intra-national governmental policy and private enterprise, that leads to a new eco-led 'belle epoch'. This is still a medium to long term destination, but it is the sound industrial decision-making and responsible capital allocation of today that will lead us there.

Arguably the players at the vanguard, and so most visible, of this march are those within the Auto sector, and within them, those that act as ideology leaders.

At either ends of the commercial spectrum – product vs strategy - Toyota did it with Prius and today VW does it with Suzuki.

[NB Obviously VW's win-win intention is to develop its eco-credentials with small cars whilst simultaneously entering the massive EM demand for 'people's cars'. In this vein the new 'Up!' (now probably front engined given the Suzuki alliance) will act very much as the original Beetle did].

[NB*. The alignment of EM & Triad consumer demand, to enable massive economies of scale, is perhaps the driving force of the first half of the 21st century, and so demands the creation a mid-point, global-reach 'prototype' and genre. ('Proto-type' in its original Latin sense of 'original', 'start of new series') This is the case in all consumer fields, from TVs to washing machines as EM peoples 'move up' the consumption ladder & Triad people's 'down-scale'. The TATA Nano seen perhaps as the most visible example, even if the real market weight' sits in the B segment which India has orientated itself toward ].

As for global Auto sector investment interests specific to corporate equities, the powerful market movers and so industry-enablers in the form of pensions fund and insurance fund 'institutionals ' are having to critically assess the leadership & management competences, and tangible & intangible asset-bases, in the harsh-weather short haul and fairer weather long-haul.

Already, we've witnessed a decade of credit driven, 'value-false' autos growth from 1997-2007, but in reality it was also a period of value-destruction for the auto-sector, given the level of car buyer 'incentivisation' that went on up until late 2007 often enabled itself by the level of corporate leverage car-makers themselves were undertaking. This only to be substituted (thankfully at a lower level) by pan-government car-buying schemes, and in GM's case partial nationalisation, which assists an unwinding of leverage, even if not as speedily or broadly as investment value hunters would have preferred from 'natural collapse'.

As of 2010, QE with have at least been seen (within the halls of power) to serve its purpose of allaying public fears from economic collapse. With only a portion of the big-number figures reported actually spent – reportedly one-third in most cases - thus limiting the real case for latter-day inflationary pressures, and allowing new entry administrations to re-balance what seem abysmal western PSBR levels, trade accounts, national balance sheets and national budgets.

That minimal / anti-inflationary scenario is of course good news, as are presently vibrant bond markets, from investment-grade to high-yield 'junk'. Thus creating a welcome environment for investment, even if awaiting the drag of consumer pick-up. The question on all debt and stock analysts lips is: “which auto-sector companies are best positioned to obtain/use liquidity and strategically on-course to deliver a 'deep investment utility-boost'”. The answer derives from:

X. the ability to access either 'zero-cost' working capital, cash-book liquidity or low WACC capital from amenable external sources.
Y. a company's own strategic and operational position(s).

In reality all auto-companies are of course positioned differently given the innate complexities involved. Yet analysts obviously seek to model their probable futures, simplistically metaphorically plotting companies on these aforementioned X & Y co-ordinates.

Though that may be conjectural good news at a macro-economic level, the western Auto sector itself still remains under tremendous pressure given the level of over-capacity that exists today and in the face of ever-optimistic CEO forecasts 'beemed' to Wall St, the City, Paris, Milan & Frankfurt. Forecasts and good news presentations that place themselves as prime little change there.

Perhaps most 'at risk' is the European auto-sector, still bloated even with nominal capacity cuts and sold-off divisions. Having over the last decade witnessed the rationalisation of S.Korean Autos, the rise of Chinese Autos, the forced restructuring of US Autos and the new self-reorganising of Japanese Autos (led by Toyota), the Europeans will spend 2010+ fighting-it-out amongst themselves in a bid for regional & global scale to achieve economies of procurement, manufacture and retail.

This is a scenario which, by economic rationale, should have been set underway some time ago, at the economic fracture of late 2007. Instead regional governments became the irrational vote-seeking white knights and so only delayed the inevitable. However, it did assist analysts to sort-out the corporate 'wheat from the chaff', in terms of assessing those who were intrinsically strong enough to ride the deep recession and come out best placed leaner, stronger and more competitive. That exercise will be repeated once more in 2010 as the massaged boost of 2009 15m unit TIV is once again deflated to what seems a consensually agreed 13-13.5m amongst CEO's.

But if we forward the argument that there has been much 'pull-forward' of 2010/11 sales into 2009, and that western consumers once again retract personal spending on big-ticket items, and the once enthusiastic CEE private buyers have realistically vanished, there is a real possibility that 2010 TIV could be as pitiful as 11-12m. That is not a forecast per se, simply that all manufacturers – the EU contingent most notably - must base their EU business plans (and so additional regional cost cuts) on such thin numbers.

investment-auto-motives beleives that that 12m TIV is also a real possibility for North America, well under Detroit's expectation of 13.5m, yet aligned within Wilbur Ross's similarly conservative expectations. We highglighted the possibility of a CARS2 programme emerging from Washington, something Mr Ross also sees as a possibility, but critically we do not support such an initiative, the natural economic course must be allowed to evolve via market led deflation & re-inflation.

Thus, only by doing so, and manufacturers re-organising to below estimated par, will profits be maintained faced with the realistic possibility that European & US sales are hit harder than expected.

So, 2010 looks to continue the theme of separating 'winners' and 'losers'. This undoubtedly the much discussed topic during the now calendar aligned Delhi, Detroit and Brussels Auto Shows, whose alignment reflect the increasing global alignment of manufacturers' products and brand identities.

For the moment at least, it is that ideology and critically the ability to execute with cash and capability, that will enable value-creation, that will continue to separate the winners from losers in the near and medium term.

The consequences of 2008/9 mean that in 2010 onward the global economy effectively enters a new epoch; one created by a complex myriad and interplay of macro & micro factors.

Automakers stand in the middle of this dynamic: affected by the expected re-balancing of global liquidity that has started to affect corporate bond markets and possibly stock support, to the emergence of internationally aligned consumer tastes from media influence within McLuhan's much fabled (only recently arrived) global village.

For it is today's circumstances and challenges which will test all spheres of the auto-sector, and result in individual future success or not. As new-car market demand falls, input costs slowly rise and the large 'spread' in the cost of capital continues given the variability of corporate exposure, the story will be seen to unfold.

However, for the most part those corporate moulds already appear set.

Monday, 11 January 2010

Company Focus – SAAB Automobile AB – Genii : Creating (Chitty Chitty Bang) “Bang for the Buck”

Since GM put SAAB up for sale various enquiries and collated tenders have been submitted to its advisors Deutsche Bank. With realistically, little interest in the whole – given the depth of pockets and size of capability required – sale of the whole burdonsome enterprise was/is wishful thinking. Instead more successful results regards hived-off sections for successive partial sales of the full asset-base.

Hence GM has understandably undertaken a dual track path of offering the division, or parts thereof, as ongoing business(es), and pursuing a course of administrative liquidation. The latter obviously intended to create a greater 'break-up' value, by doing so thereby raise the value of 'in-trading' offers.

First out of the block on 16.06.09 was the niche sportscar maker Koenigsegg, which even with high ideals, substantive regional backers and the loan guarantee of the EIB, was seen to be 'chancing its arm'. It had the major headwinds of still partially frozen capital markets, what seemed a specific 'window', and in truth operational & synergistic limitations, which presumably that 'window' (ie alliance capability agreements) was intended to overcome.

Next in line, as of 19.12.09, and more successful, was that Chinese leviathan BAIC. Cutting a $197m (SEK 1.4bn) deal to buy the IPR and tooling of the 9-3 & 9-5 vehicle platforms and associated drivetrain. BAIC states that it bought 3 platforms but we infer that as the possibility for a 3rd product and/or generated vehicle variants. Although focused primarily on technologies and plant BAIC says it has continued interest in possibly buying the full brand & identity rights.

These 2 approaches pertinently demonstrate the past and potential attitudes that are driving solicited and unsolicited offers:

a) the value of SAAB's market potential into the future.
b) the value of SAAB's present physical assets as built up in the past

As with the Volvo counterpoint example, Eastern trade buyers seek modern technology and know-how at knock-down prices, whilst Western private equity seeks the regenerative potential of the marque within a closely aligned socio-economic context.

In almost a replay of the Koenigsegg pitch - given its business model - Spyker entered the fray with parental backing from Convers (its holding co) and in turn superior interests from a few big players within the Russian banking system. GM has stated that it was concerned about the lack of information available regards one of the individual backers, and so retracted negotiations just before Christmas 09. Whether that was a stalling tactic to illicit a second offer (as has been the case), or indeed an edict straight from Washington remains unclear.

Throughout the process the Swedish government has made it clear it will not take on the burden of SAAB (or indeed Volvo) through formal nationalisation. It is however willing to offer loans to maintain the company's survival if the new owner provides clear commitment that sizable SAAB manufacturing will be retained in Sweden. Today SAAB holds a staff of 3,400, and realistically that governmental offer should stay firm with an understanding that 10-15% of that workforce will need to be retrenched to assist the company's survival and future growth.

Thus, the very obvious aim by any interested party is to be able create a new enterprise whole that looks and feels like an unaltered – indeed improved - SAAB in culture and product identity. But critically one that provides potential for turbo-charging of the organisation and its financial returns. Done so via the use of a much reduced cost-base, with new (and ideally seem-lessly integrated) procurement routes for: raw materials processing, component sourcing, sub-assembly procurement, logistics, whole car assembly. Moreover, a new owner that can bring to the table a credible forward-facing technology plan within its power to execute.

Given fragile business confidence, unsurprisingly, pulling together such a matrix of 'competence enablers' will be tough going, and only really open to those who are pulling the strings behind the scenes of the likes of Koenigsegg or Spyker, and see such companies as relevant 'proposition fronts' for far greater structural reform needed at Trollhatten (now SAAB's only manufacturing site of core vehicles).

It is in this vein, that as of 07.01.09, another entry has been muted: one seeking to align what appear more visible interests and capabilities.

The Swiss Investment firm Genii Capital, accompanied by Bernie Ecclestone, stated its interest in buying a majority stake in SAAB, so leaving GM as a minority co-owner. This is of course a similar proposal to Koenigsegg & Spyker given the criticality of shared, but to be paired down, technological links. Those links that underpin the brand's technology strategy can only really be shed, and superseded with other (reduced cost) parties, in a timely and phased manner. Thus any new owner must have the technology and manufacturing 'reach' to realistically re-energise the SAAB business model.

With this regard it seems Genii Capital has been hard at work to build that framework.

As of mid December Genii Capital has taken a large ownership interest in the Renault F1 team. And what timing in doing so relatively inexpensively, given that the team itself is in a contextual trough, presently 're-grouping' to overcome its strategic embarrassments caused by the Nelson Piquet crash fiasco, and to re-organise in order to face the much changed 2010+ F1 era.

[NB Renault F1 was previously run by Flavio Briatore, who as Ecclestone's confident and following in his career footsteps was and still is considered possible successor to lead Ecclestone's F1 media-owner FOM enterprise. The point is that Briatore still wields considerable power behind the scenes at Renault F1 and so it is an imperative that ego clashes or power struggles are avoided if all parties involved are to mutually steer a clear path through what is still a relatively poor visibility F1 'business circuit' with much track debris still remaining].

To his credit, Genii's CEO Eric Lux was very open in his public statement regards the role he wishes Genii to play essentially as an 'co-architect' of F1 into the future, leveraging the technologies and services of Genii's own portfolio interests to (implicitly) move the technology platforms of the sport forward and in doing so that of tech-trickle-down possibilities.

Given the oft cited argument regards technology trickle-down from motorsport into premium car sectors and latterly into mainstream sectors, it seems obvious that Genii's ambition is to create a powerful automotive business model 'eco-system' for its own ecologically orientated powertrain and braking technologies (ie MCE-5 engine & MOV'IT braking system).

[investment-auto-motives notes that for over a decade SAAB has had R&D interests in 'variable compression' engines, the prime tenent of MCE-5].

Thus for Genii, its seeks the ambition to create and sit upon the breadth and depth of the eco-tech value-chain. The R&D feeds into the requirements of the new era F1 formula – in turn creating a competitive tech spiral - which gains both public visibility/acceptance and reliability 'prove-out'. This in turn entertains the conjecture of an affiliate SAAB branded twin to the Renault F1 team both using the best of Genii-SAAB & Renault systems and componentry. Successful performance and longevity on the track with concomitant bench-testing leads to niche and latterly series production technology licensing to SAAB and 'sister' Renault-Nissan's premium Infiniti brand with possible eventual inclusion into Renault's mainstream cars.

Thus Genii is developing a long-term value creation pathway, looking to every step of the way, from the small scale high-margin R&D work demanded by F1 to eventually the large-scale reduced margin sales of components themselves.

Of course an alternative path that highlights the real remit of an investment company, is to see it create the value-creation 'plan and pathway' and selecting to dispose of its commercially inter-connected portfolio either as a whole system in phased stages, or as discrete slices to other investment firms or indeed trade-buyers – such as Tier 1s or fast growth new Auto-players themselves.

Thus the exit strategy for the Swiss company could well be to re-build SAAB as an independent, progressive entity, but with loose & tight technical alliances with Renault, which in due course provide the base synergies that encourage Renault to take a minor stake-hold, replacing GM, and latterly add SAAB to its corporate stable.

The term “Genii” is the Latin plural of Genius, and it is perhaps not uncoincidental that the Directors of the firm may well have created the name in reference to GEN II, the numberplate of the automotive movie-star 'Chitty Chitty Bang Bang'. For the magical Chitty was created in a pheonix like manner (by inventor Caracticus Potts) from the remnants of an old and disheveled post WW1 Grand Prix car.

It seems the Genii title is indeed apt. The Chitty metaphor pertinant as the Luxembourg firm creates business strategies, new investments, and strengthens its own investment vehicle, partially generated from the 'ashes' of Renault F1 and 'ashes' of SAAB. To now embrace the repute, scale and eco-premium potential of SAAB Automobile AB.

As one of the songs in that famous 1968 musical cites...”up from the ashes, up from the ashes, grow the roses of success!”

GENII Capital seems to have created a formula that should theoretically fly as high as SAAB Viggen jets and a certain alternative 'fly-drive' hybrid fairy-tale car. The Swiss Alps are re-knowned as the origins for the happy endings of children's fairy-tales...perhaps it can provide one for the Swedish auto-industry.

Friday, 8 January 2010

Macro-Level Trends – Peddling Public Pounds – “Bye Bye” Bicycles

The admonishment of private car use within western metropols has been an ongoing and evolving trend for some years. The idea to replace private domain car travel with public and private hire systems is perhaps best exemplified by the London schema.

As part of the ongoing reformation of London's transport network and cityscape, beyond the infamous congestion zone, the Mayor Boris Johnson has more recently promoted the idea of a public utility bicycle system; having witnessed similar applications elsewhere.

The idea is almost as old as the modern 'Rover Safety' bicycle itself, but perhaps was most visibly prevalent in Amsterdam during the 1960s under the Provo' Movement's White Bicycle project. That uber-liberal scheme of free bicycle use for all ultimately faltered, those 'pick-up / put-down' intentionally unsecured bikes for civilised citizens were typically ushered away by those with lesser morals repainted and privately used, sold to unsuspecting buyers, or stripped for spare parts.

Intriguingly, the scheme's originator today says that the scheme faltered because only a very small number of bikes were made available, of which many were confiscated by the police. Utter nonsense. Speak to any older Amsterdam resident and they'll tell you that the over-idealised 'hippy' scheme folded due to miscreants, not the authorities.

In 1974 the French town of Rochelle started a similar scheme called Yellow Bicycle, and though claimed as successful, in reality it rapidly diminished. In the 1990s community activists in the US took on the task, with projects running in Portland, Oregan and Madison, Wisconsin. In Canada, Toronto operated 'Bikeshare' by non-profit CBN between 2001-2006, essentially the learning-curve precursor to the present-day operations of Montreal's Bixi and Washington DC's 'Smartbikes'.

However, the failure of Bikeshare with its high administrative cost to revenue streams, even with adjusted business modelling, should serve as a vital warning to other socially ambitious towns, cities and administrations.

There have been supposed successes, such as Velo'v in Lyon, who's formulae was essentially copied by Velib elsewhere in France; but once again we suspect that in socialist France the programme has been subtly politically & financially assisted so as not to be seen to fail.

Unsurprisingly in today's eco-generational political push for reduced CO2 and healthier, more sociable mass mobility the idealistic public bicycle model has returned. Lessons of the past have been learned, and ongoing learning supposedly continues regards the development of a practical and functional bike-system and an accordant balanced business model.

Best known is France's Velib system in Paris and other selected French towns like Montpellier which have a mixed culture of tourists & academics. The Copenhagen Summit also gave a chance for world leaders to witness the city's Bycyklen system that runs between mid April and early November each year and offers 2000 bikes, 110 bike stations, 1 repair shop & 4 mobile repairers. Aarhus also runs a smaller scale operation. And Barcelona has adopted a similar city-bike model

Over time a number of start-ups and new entrants have promoted the cause, ranging from Velib to OYBike, but today it is the Canadian firm Bixi that is seemingly growing quickest with the business coup of a contract with the UK's TfL (Transport for London). This achieved having established the scheme in a phase 1 & 2 manner recently in Montreal (May & Aug 2009) and Ottowa (Sept 2009). Montreal sees 8000 bikes, 700 docking stations and undisclosed number of other docking points, whilst Ottowa sees (provisionally?) only a pawltry 50 bikes and 4 docking stations.

Beyond the Transport for London contract, Bixi has won over the city of Boston with an expected 2,500 bikes, 290 docking stations and an associated 3,750 docking points. But it will be London that provides the additional real scale, with 6,000 bikes, 400 docking stations and 10,000 docking stations.

The business model is based on the use of both an on-line period-based subscription bases and the use of credit-card only payment stations on site. The technical infrastructure appears impressive, the hardware making it as convenient as possible for operator and public alike; with quick set-up methods for the docking stations themselves and a self powering and monitoring system via the application of solar sourced energy, and touch screen credit-card tech for one-off or limited use customers. [NB. The Montreal scheme subscription rates are C$5 per day, C$28 per month and C$78 per annum. Surcharge rates are: C$0 first 30 mins, C$1.50 second 30 mins, C$3 third 30 mins & C$6 forth 30 mins and all half-hour periods thereafter].

The practical foibles of a system that is, even with supposed 'monitoring', exposed to theft and vandalism has supposedly been ironed-out as the learning curves of operational challenges have been overcome by requisite solutions – primarily an improved security lock and the use of customers paying deposits.

However, problems are obviously abound.

It is investment-auto-motives' concern that not only is there a possibility that the true cost of such programmes is undisclosed or intentionally blurred under the auspice of social good, but that any latter-day attempts by city authorities (eg Stationnement de Montreal, TfL etc) to transfer the scheme into a PPI investment base, or indeed from PPI towards a fully privatised investment base, could ultimately lead to value-destruction; even with each bicycle acting as a mobile advertising bill-board for sponsors as an additional revenue stream..

It is reported that in Montreal significant infrastructure damage, accidental and inflicted, was experiences, with one fifth of the bikes damaged and inoperable and the docking stations themselves damaged at the hands of determined (not opportunistic) bicycle thieves. Supposedly, the bike designer Michel Dallaire said that it had not occurred to him that people would break the docking stations to steal the bikes. Truly incredulous, truly unbelievable!

The truth is that thieves view this public service initiative as “manna from heaven”. And whilst lower levels of crime may be the case in smaller more civic-minded French & French-Canadian cities, the impersonal urban jungle of inner-London is a place where even the most savvy bike-users are weary. Even today bike-commuters, bicycle-messengers and leisure bikers try and avoid actually securing their own personal bikes to official bike stands given their understanding that bike thieves regularly tour them.

The knowledge that thousands of hi-tech aluminium bikes owned by no-one in particular will be parked over London will be joy to immoral minds. Even if the official bike stations are made increasingly more tamper-proof, criminal minds become ever more ingenious and daring. Moreover, if the bike stations themselves do pose serious deterrent, that could well make the user him/herself a target for 'bike-jacking'. This done either through threat and force, or from orchestrated 'accidents' by pillion-carrying motorcycles or even gangs in cars & vans.

The Economist quotes that the London scheme itself will cost £140m over 6 years, with the idea that the project will have been self-funding having reached break-even by the end of that period.
Business analysts at Bixi and at TfL will have been 'running the numbers' to gauge different scenarios regards the number and mix of user types to arrive at subscription fees and period rental charges.

That £140m for the set-up and running costs over 6000 bikes and associated hardware, infrastructure and staff equates to an average (non DCF) of £23,333 per bike over the 6 years, so equating to £3,888 per bike per year.

This means each bike will need to earn £10.65 per day, simplistically assuming that no bikes are stolen, are taken out of service or need additional repair. Of course, one would hope the business model will have provided a 15% to 20% cost contingency for the realities of the down-time of stolen bikes, requiring new manufacture orders, bike 'down-time' and spare parts for damaged cycles.

Add that 20% figure (as born out by Montreal's experience of 1/5 losses) and the number rises to £12.78 per bike per day for full 365 day use over the full 6 years.

But even this common-sense ready-reckoning will ultimately prove a fallacy.

Even that breakeven-point will seem optimistic if we include lost rental time from cold winter days, snow & ice (as presently witnessed), nominal holiday periods that heavily fluctuate demand and the fact that much of the realistic usage will be weekend orientated given that most users will be at work 5 days per week for the majority of the day.

investment-auto-motives suspects the real income figure required is more akin to a consistent £18-20 per day per unit. But the truth is that this £140m - and very probably plus - will be an administrative sunk cost, with the scheme having little chance to develop into becoming in time a privately funded, revenue earning “method of intermodal transport” presently being pronounced.

Given that the UK's and London's public finances are under such pressure to deliver bang for buck, this overtly honourable but practically unrealistic public utility bicycle scheme could well prove the nail in the London Mayoral coffin as the next (probably Tory) government seeks to drastically cut costs via cross UK and probably abolish Mayoral controlled city-budgets.

But in the meantime, the scheme will go into affect as part of the 'good-vibe' feeling that the present government and contra-political London Mayor wish to generate prior to the 2012 Olympics. Boris Johnson, Gordon brown et al will want to showcase London as the bicycling capital of the western world come 2012.

Unfortunately it is suspected that many of the London schemes' users will ultimately be disillusioned with the limitations of the service itself (ie bicycle availability, limited use periods, surcharges, journey restrictions between 'stations' etc) and simply abandon the scheme in favour of walking, public transport or purchasing their own bikes.

Leading citizens into their own private bike use is pronounced as an aim of the scheme, but we suggest the majority cycling converts will simply have done so and will do so anyway, effectually by-passing the assistance of the scheme.

Of the Bixi bikes themselves, many hundreds will be stolen and stripped, and put into shipping containers for transport out of the UK destined for the CEE region, Russia and elsewhere.

Thus, beyond the poor utility-cost financial burden to society, there may even be a sizable human cost if the scheme itself generates a increased trend for organised 'bike-jacking'.

investment-auto-motives dislikes being the harbinger of doom for what is on the surface a well intended initiative. And we do indeed applaud the commercial initiative of Bixi, it will undoutedly do well for itself presuming it has fiscal exclusions for unexpected vaguaries and events.

However, a devils' advocate is required.

We suspect, the real issue is very probably about the operational modelling that truly reflect the realities of the city, indeed London, per se.

In the business realities of the world at large, where private enterprise supplies to private enterprise to the tune of £140m, the rigour of financial modelling and cost management is typically as water-tight as possible. The same should be the case for private to public service contracts. And in this case, Whitehall itself should encourage an independent entity to look over the possibly over-optimistic business model created between TfL and Bixi, to serve as warning flag waiver and project advisor.

At its heart the effort is indeed commendable, and should be given as great a chance as possible to actually work to make that all important difference to the planet and its people. Otherwise it will simply be a case of “bye bye bicycles” and “bye bye public confidence”.

Friday, 1 January 2010

Macro Level Trends – Economic Structures – the Need for 2010 New Belief thru' Eco-Capitalism

The beginning of a new decade begs the question of how we are to build and progress the very core of the global, and specifically western, economic construct.

The failure of the Copenhagen Summit to deliver a political solution to “the greatest challenge to face humankind in its history” (to re-quote the engrained mantra) has left industry and commerce in the mire of enormous doubt.

That reality, married to ongoing pressure regards the availability and cost of capital together with shell-shocked B2B & B2C relations, in turn generates a climate of conservatism, angst and possibly fear at BoD level and in the strategic planning, marketing and production departments of companies – large caps and SMEs.

The economic system of the West beyond the severe trauma of the recent past years, the news from US, UK, now France and CEE nations highlight the possibility that the multiple challenges posed by cross-arena 'seizure' (available government policy instruments, 'baton the hatches' business mentalities and sensitive consumers) could theoretically set the scene for a version of multi-cause systemic 'anaphylactic shock' – something akin to Japan's 'lost era'.

This last decade of ever-increasing CO2 appreciation ['awakening' vs 'mania'] created the a new political ideology and stage, with grand plans to combat the threat assisted by ever more diverse and eclectic eco-solutions, most notable in new energy generation. But across the board in each sector (energy, industry, housing, transport etc) similar supposed panaceas were seized upon and over-hyped by journalists seeking to create content for the eco-interested audience across a wide spectrum from New Scientist magazine to the Sunday Telegraph.

The CO2 challenge is still very much apparent, even if the topic has been 'sensationalised' as far as realistically available solutions are concerned. However, without that all important political global agreement put into place the expectation of what was an actionable 'trickle-down' from global standards down to directly-linked nation-based policy-making has been lost. The task is muddied by present economic waters given the disparity between 'old-world' and 'EM' regards present economic strength and near, medium & far term growth expectations.

Instead it is down to individual nations and at best regions (ie EU, NAFTA, MERCOSUR, ASEAN)
to set eco-policy. Given that the west is further along the notional development curve regards income levels and standards of living, yet arguably – depending upon technology type - to an extent lower-down on the eco-tech curve compared to Japanese, S. Korean & Chinese peers, this puts the west in a somewhat precarious position. Very basic analysis, interpretation and conjecture highlights the strain on western economies created by the gap between economic muscle and the 'heaving lifting' ambitions regards the carbon-challenge.

Public funds – largely borrowed – have been set aside to assist in the task, portions of which have been allocated and spent, but the as the severity of the dismal economic picture is slowly but increasingly appreciated, so the necessary reaction to avoid future national economic meltdown has been more speedily understood as the question of actual sovereign wealth – the innate financial standing of nations – poses new unnerving realities; a scene not seen in the west for 250 years. Hence the actions Iceland, Ireland, Spain and Greece, with now the UK (and sterling) under increasing scrutiny.

The capital markets will undoubtedly both dampen and exacerbate the national credit-worthiness issue on a case by case nature. By quickly viewing the west, it can be seen that Europe will come under greater strain given its increasing internal strains acutely testing the integration model (thereby putting pact leaders Germany & France under greater pressure to finance and devalue the Euro), whilst the UK faces the compromise of possible further devaluation of sterling to maintain a competitiveness gap whilst also having to content with the possibility of latter-day inflation as a result of massive previous (and possibly slimmer ongoing) QE measures.

But what will drive the western economies looking forward relative to the eco-challenge?

In short, mass application of conventional evolutionary solutions supplied at a lower cost base. Japan and been, and presently is, the examplar; especially so now with Toyota's call that it reduce its input costs (Tier1/2 parts, overhead inc energy) by 30%.

Instead, the Japanese / Toyota model will set the standard for the west.

The idea of those supposed 'savior' new technologies and sectors such as neural-IT, bio-tech and nano-tech - which demand presently unavailable major financing and 'armies' of suitably educated management and staff – will be inevitably surpassed by the realistic answer to resurrecting economies. Incremental conventionality with reduced cost-base, the importation of foreign solutions and the creative application of inter-sector technology transfer.

[NB. For the UK and elsewhere, the case study of Dyson (though perhaps over-used) is still applicable for the engineering and manufacturing sectors. Dyson transferred industrial air-filtration solutions into the domestic home, and latterly has re-branded Mitsubishi owned technology for its 21st century public-use hand-dryers).

This then sets-out the outline of viable, progressive road forward, but what of the issue of capitalisation?

The west is, for the first time in 60 years, undergoing a period of mass fiscal saving given the fears that people now have regards their own financial fragility. Whilst it may be argued that saving is thus not spending and so not growing the western economies, a less populist but more coherent argument is that this period of personal saving, whilst temporarily undermining M4 itself, has the effect of building a solid, and importantly liquid, capital base.

Advantageous to both nations themselves given the debt & credit-worthiness issue, and as the innate fertiliser for new-age attuned industry and services. However, in time as individual savers and the masses feel greater comfort from their cushion savings, the issue of pitiful returns will raise its head (eg UKs 0.5% MPC base-rate). Whilst other savings tools are available (eg ISAs), they too have innate disadvantages, increasingly so as government retracts the previously generous terms that attracted so many entrants as it seek to reduce the budget deficit & PSBR/PBR.

Thus in time savers with partially morph into value hunters, seeking new higher-return prospects for their hard-earned cash, especially in the face of possible wage-deflation (or indeed its opposite under the scenario of overt-played QE and endemic wage-push inflation that proves effectively worthless).

New avenues for capital allocation will be sought and such drivers raise the banner for 'Eco-Capitalism' – a new evolutional, developmental and robust phase in the history of capitalism itself.

Today, our economic system must be attuned to the needs, wants and desires of all stake-holders.

From the popularist mentality of society en mass, to individual consumers themselves. From the companies that act as primary economic agents, to bond / stock & hybrid investors that set the course of action. From the banking sector itself that acts as the central economic intermediary, to the increased role and expectations of partially integrated government.

In the face of our new decade in this still relatively new century, this suggests a re-orientation of the perception and focus of capitalism. Importantly not a major re-organization of the economic model 'in toto' a so many would have us believe, but perhaps a re-consideration of the ideals and worth of capitalism as a global force for good and its positive outcomes.

The key is an evolutional development which allows for greater control (though not necessarily via heavy handed regulation), and the task of attracting people to appreciate the benefits of merging a stakeholder society with that of a stock-holder society. By historical example (inc present day China) the radical about-face structural revolution some far left-leaning commentators seek only ultimately leads to a deeply floored economic model and accordant social dismay.

Instead the future should be moulded through good-minded eco-activism being directed through a periodically imperfect but proven and progressively attuned model of new era 'eco-capitalism'.

As the needs, wants and desires of various economic and social actors are being voiced, so the task of nations, finance and industry is to tune relative policy-making and action past the 'crackle' of well-intended but mis-appropriated 'interference', and onto the right frequency for economic and social improvement.