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.