Tuesday, 9 March 2010

PESTEL Trends – The Western Economic Model – Regenerating Tangible Added Value...Part 3

The aforementioned 'call to action' for the creation of a new industrial template – with auto playing an important role - of course presents major challenges to any successive governments seeking to re-balance the UK's wealth generation model (ie Industry vs Service vs Finance sectors)

Undeniably there has been a gradual change in the structure of British economy over the last 40 years, as heavy industry has migrated to more suitable regions, the service sector has flourished and perhaps most apparent to government the massive growth of the Financial Services sector due to national and international growth.

That is an inevitable consequence of general wealth generation domestically and the fact that London defends its predominant position as a destination of choice amongst global capital markets - often the exchange of choice for new and secondary IPOs.

With the personal rewards on offer in the City versus comparatively poor rewards in other realms, unsurprisingly the sector has also attracted the best and brightest from graduate level to later year 'career shifters' and been a major influence regards dedicated new entrepreneurial activity – indeed it was this fact that set the context for the bridging the 'intelligence chasm' between industry, investors and government that drove the creation of investment-auto-motives.

Even with progressive competition from New York, Hong Kong and Beijing, London today still sits at the commercial epicentre of global commercial affairs, as depicted by the FTSE 100 / 250. Its age-old, proven track-record, plethora of multi-sector prime operators and support players, aswell as a balance of self-control relative to 'light-touch' regulation elevates the City as perhaps the most responsible yet progressive of financial hubs.

To that end, unsurprisingly the Top (FTSE) 20 highlight the importance of financial intermediaries along with other mature sector household names:

Financials - Banking, Insurance, Pensions (HSBC, Barclays, Standard Chartered, RBS, Lloyds),
Energy - Oil (BP, Shell) Gas (BG Group),
Telco - (Vodafone),
Pharma - (GSK, AstraZenica),
Mining - (BHP Billitonn, Rio Tinto, Xstrata, Anglo-American),
Tobacco - (BAT),
Consumer - (Tesco, Diagio, SABMiller, Unilever)

Given the need to essentially transform the UK's (and in due course Western Europe's) economic model, of these corporations, only Vodafone can be regarded as a late 20th century commercially transformative 'disrupter'. A new entrant 'sector transformer' in the typical sense whose characteristics are seen to be akin to any successful eco-tech venture in the near to mid-term. Hence the Telco business model via Vodaphone and peers is as close a pseudo-industrial equivalent to the successful dotcom companies that are taken as a benchmark for high-potential 'eco-tech'.

But it must be noted that Vodafone was always in reality heavily biased to its service content, the reality of its true industrial base always intended to be light – the erection of a 'simple' low cost mast network, the use of (bought-in) proprietary handsets, as an on-seller of reputed branded handsets, with focus on service package provision (B2B & B2C). Moreover, the firm's true growth came not organically, but from national and international 'bolt-on' acquisitions, M&A and partnerships.

Thus, to use Vodafone as a directly applicable model for 'eco-tech' (especially regards the auto-industry) maybe somewhat naïve, even if well intended. There are undoubtedly 'lessons to be learnt as has been the case in the push for a modelled auto-industry (from INDEGO to Better Place to GM's appointment of ex-AT&T Whitacre), yet as a the UK's prime reference, case-study enterprise, its 'reflection' may ultimately be less useful than than often espoused by the sector-transformative rhetoric heard. When seeking to re-create an entrenched industry, it is finite, applicable detail that is required, not broad, hypothetical generalities.

Thus it may be 'only' within the 'FTSE 30 & 40' that we start to see the placings of other auto-relevant sectors, in the guise of traditional Engineering & Energy companies which through phases of consolidation and scientific improvement, have climbed the 'value-ladder' in respectively specialist application fields, or by re-packaging their commodity offerings.

#23 Energy (National Grid)
#25 Energy (Centrica)
#27 Aerospace & Defence (BAE Systems)
#29 Energy (Scottish & Southern)
#34 Aerospace (Rolls Royce Aero)

[NB the UK's eponymous GKN fell out of the FTSE100 in 2004].

Given that the eco-tech realm must be (hardware and software) engineered, some may see it as a concern to see that the only few big UK Engineering companies sit in the 'late 20s', compared with say Germany's crop in the DAX30 (inc VW, Daimler, BMW, MAN, Continental, Siemens, Thyssen-Krupp), or the ranking of France's CAC40 constituents (inc PSA, Renault, Michelin).

Of course, given that London is such a large financial global hub the FTSE intrinsically holds a greater number of international companies with larger rated MarketCaps, so the rankings of the UK's finest would be expectantly lower. Yet still a counter-viewpoint will argue that the EU inter-national difference between the UK and the Continent (ie national 'deference') to the automotive sector is plain to see. And it is that productivity difference that will have a very large impact in this 'post-apocalyptic' economic world in creating economic growth. In effect, the UK presently has all to play for.

The argument runs that given the importance & poignancy of personal mobility - and the entrenched 'added value' therein - since the fall-away of GKN from the FTSE100 in 2004, the remaining core of the UK's automotive industry is now ever more distant from investor attention; especially 'deep-capital' institutional attention.

Today in the UK it is the more visible Trade section of the auto-industry that automatically draws investor attention; ranging from Inchcape, Lookers and Pendragon to Halfords. Their upstream counterparts in supplier and development realms - such as Smiths Group (having acquired TI Group) and Tomkins - perhaps loosing profile since peers (such as Lucas, TRW etc) were absorbed into foreign ownership and their ostensibly 'low-mid-tech' products are seen as lacking competitive edge; hence investor interest..

Beyond the obvious FTSE listings, there are many more that have a theoretical influence and bearing upon the future of UK Autos and 'eco-tech; in general. The FTSE-techMARK100 is directed at high-tech' and innovative companies, whilst latterly the creation of various 'Responsible Investment Indices' track the performance of those that meet CSR-based criteria, but invariably drags as a consequence of failed Kyoto & Copenhagen. Indeed, the ability to demonstrate a truly tenable 'eco-index'; and may not appear until the ideals and realities of carbon-credit trading market becomes a stable, credible entity; this still looks some time away.

Instead as a proxy, the FTSE-techMARK100 is typically used as the viewing-pool when assessing eco-relative progress: technical breakthroughs, feasible R&D spin-offs (incubators & VC backing) with possible emergence of B2B & B2C products. Presently, commercial entities in the techMARK100 with material relevance to automotive include: Cobham (inc Frazer-Nash Research), QinetiQ, Aveva and Ultra Electronics.

This focus on publicly listed companies obviously overlooks privately owned entities. Taken from The Times' 'Top Track 100', such influencers include:

R&D and Assembly Base - Caparo Group (inc Caparo Vehicle Technologies), JCB
Development - Arup Engineering.
Supply Base - TI Automotive, Unipart Group, Marshall Group, Doncasters Group,
Retail/Trade Base - Arnold Clarke, Greenhous Group, JCT600 Group, Listers Group
Aftermarket Base – Kwik-Fit

In addition beyond these relatively 'large Cap' companies, the UK possibly has the world's most extensive network of Niche Producer / Assemblers; from the renowned few (eg McLaren, Noble (Fenix), Marcos, Ginetta, Westfield and of course Morgan) to the myriad of little known plentiful Kit Car firms, often family owned, or part of a small synergistic conglomerate.

[NB Aston Martin Lagonda & Lotus are not shown given their comparitive sizable 'mid-scale' volumes. Also note that AML operates what is notionally known as a craft-shop for limited edition and personalised models - using non-standard leathers, veneers, paints etc; but in reality essential skills-base is semi-skilled as is necessary
to add the required dimension of cosmetic difference. (The definition of craft-talent here is in the William Morris vein of the singular constructor/adapter, yet with a pro-free-market individualist stance, instead of Morris' more socialist view)].

Unfortunately there often exists a level of distrust and friction between the small operators and the investment community. The past has witnessed internal strategic power struggles as investors naturally seek to maximise their returns via financial leverage, asset divestment or alternative exit strategies, going against the grain of originator's intent. Equally history shows how niche car companies have been created or re-directed as little more than emotion-led capital attraction schemes, little business development and brand building resulting after dissappearance of the original 'club' set-up capital.

Thus, note that for many small companies the Morgan Motor Co. business model seen as a template of self-sustainability. And whilst the UK's aim is obviously to progress a high-value, intelligence intensive R&D auto-realm, the re-creation a modern-day crafts-based labour force at the 'micro' level – as Morgan does – plays a role in manufacturing high-value tailor-made products].

And of course, pertaining to certain sections the core product's value chain, or circumnavigating the whole, is the world of auto-industry strategic and operational consulting.

Unlike the previous John Harvey-Jones' recommendation for Morgan to modernise its production methods – though acute in parts – investment-auto-motives has longed believed that 'Morgan Way' has facets of merit that can influence the future of specialist UK auto-manufacture.

But to re-quote Sir John on one perceptive matter... “if we imagine the UK can get by with a bunch of people in smocks showing tourists around medieval castles, we are quite frankly out of our tiny minds”.

Thus though the UK is notionally 'post-industrial' with only 14% of GDP generated by manufacturing, it undeniably has a broad span of capabilities, each link of that value-chain varying in 'strength & connectedness' given historical events.

But of course labels abound, and just as we are 'post-industrial', so there is a sense that we are 'post-advertising' given its declining influence, and even 'post-marketing' given the growing trend to avoid consumer tracking. Ultimately semantics are of little use, what matters is an understanding of how the UK must be strategically positioned relative to other countries, and how its core competencies must be evolved and re-shaped.

As demonstrated by the FTSE100, in recent decades the UK's value-creation base has been largely led by financial, energy, media, telco and retail sectors. As with other M&As, the sale of Cadbury to Kraft only serves to show how the basic mass-consumer industries that formerly build the UK's economy are today better served from other countries or by foreign owners in the search for scale efficiencies and global marketing reach - it's the natural evolution of the globalised capital markets which the UK itself benefited by.

Yet the UK chocolate industry, like its brewing cousin, is far from dead, with a new crop of higher value 'chocolatiers' and micro-brewers reinvigorating their respective sectors...a poignient philosophical lessons for UK Autos plc.

Ultimately, it will require a synthesis of the following issues and more within a coherent policy format to achieve the required transformation of the indigenous UK sector.

- Recognition of the full span/reach of the auto-sector across the broad value-chain
- Parallel learning, case-study lessons (eg Vodaphone plus others) for each sub-sector of that chain.
- Development of pathways for improved scientific & technical cross-fertilisation
- Creation of 'white space' for cross-sector product experimentation
- Far greater government oversight of publicly funded 'eco-tech' ventures

Commercial IPR Leverage
- Applied 'in the bag' R&D from other non-auto indirect sectors & vanguards (eg BAE to Dyson)
- Applied product development methodologies (philosophical & operational) from BIC within the auto-sector and from elsewhere
- Applied process and materials 'technology-transfer'

Industry Structure
- Greater interaction between domestic industry and foreign 'transplant' tech & IPR capabilities.
- Greater interaction between domestic industry and other sectors
(eg motorcycles, light aircraft, private marine)
- Creation of a central 'knowledge-bank' re: companies' competence, resource & IPR
- Connectivity enabled by use of centralised IT database and progressive intel-mgmt
- Connectivity aim to enhance robustness of sector
(ie stretching from NPD exploration via more Joint Ventures to 'dormant' asset/plant lease-lend)

Legislative Regulation
- Regulatory change in roadway definition & use
- Regulatory change in vehicle definition & use

Consumer Orientation
- Consumer attitudinal change towards 'eco' from “worthy” to “aspirational”
- Consumer attitudinal change regards the very idea of 'the car' and its DNA

- Re-examination of Education's remit in creating the creative commercial minds of tomorrow.
- Greater connectivity of education and commerce with vitally necessary cross-disciplinary learning
(eg the sciences mixed with the arts mixed with business)
- Far greater focus on automotive industry history, practice and methods:
(Cardiff Business School – Brunel Univ. - Imperial Univ. - Coventry Univ - RCA cross-pollination)

[NB plus much more].

This to be achieved via utilisation of the home-grown, indigenous high-value Automotive Consulting base, constituents of which ably demonstrate themselves as world-class - an enabler for our own island, and that island's influence over the globe.