Thursday, 29 April 2010

PESTEL Trends – Chinese Car Market – The Danger of Overtly Simplistic Generalisation

As is plainly evident, investment-auto-motives' ethos is that all investment decisions are serious. For share-holders (private & public), industrial futures and society at large.

Given the innate value of finance swirling within still volatile capital markets and its RoI relationship with fragile consumer markets, there has perhaps never been as great a need by investors of all species to critically assess the various options typically available. The investor-base's task is to create positive inter-connectivity within the economic engine - between the multitude of industrial & service sector players so as to best serve the individual within the grande societal context.

Thus today, when reviewing investment possibilities, it is a critical requirement to see beyond the generalised norms that inhabit the human psyche.

Of course the whole of human existence is essentially one of expectational modeling; that is how mankind functions. But as PIMCO has remarked regards the ongoing economic concerns, overt generalisations about situations (ie markets) create stereo-types; which in turn typically creates in actuality an unfounded 'comfortableness'; which can lead to dangerous misapprehension of the situation.

Unfortunately 'expectational modeling' is often at the very heart of investment, perhaps none more so than the car industry given its need to devour capital to raise structural efficiencies. However, the role of the strategic advisor is to look far beyond the 'given norm' of previous experience. Man tends to gravitate toward ingrained perceptions, especially when a situation appears on the surface as a typical re-run of a previous situation, yet the detail of the structure itself may in fact be very different.

Thus, he/she must fully understand the spectrum of variables specific to the case at hand.

investment-auto-motives sees this as a twin diagnostic process, which together seeks to identify and comprehend all pertinent knowledge-bases:

Initially taking the normal (scientific) approach of thesis ('norm') + anti-thesis = synthesis. And latterly, taking an all new view to build a picture from the ground-up so as to intentionally avoid the generalisation trap. This combination of 'real-world' and 'theoretical-world' scenarios, when aligned provides a more detailed, insightful view of an idealised outcome.

Even within supposedly set strictures a planned economy, it is such an approach that should be utilised to answer the question regards the future and growth-power of the component parts of the Chinese auto-sector. Perhaps most critically from both:

1. the international export expansion ambition into the Triad regions.
2. the domestic growth ambition relative to pan-national road infrastructure growth.

Both answers obviously ultimately lie in the hands of the PRC party, the economic machine closely tied to state control, but increasingly - as exemplified by reduced regulation and constraint about Sino-foreign brokerage houses – the demands of the market are becoming an increasing force, against which state-planning must be optimised.

It is a dual-aspect question partially alluded to within a recent edition of The Economist: the article highlighting the rise of younger people's motor-based social clubs, visiting certain places, the popularity of drive-in movie theatres, and the slow adoption of the 'road-house' to service motorists' break needs. Hence this 'toe in the water' of Chinese auto-culture precursed these 2 primary questions posed by a press reporter to an American consultant at the Beijing Auto Show.

His answers - although admittedly obviously constrained given the informal interview format - essentially stated that China would respectively be informed by, and follow, the US experience: both in terms of 'import brand/model ingress' into the US and the spread of an intrinsic auto-orientated culture (and so unit volume demand) throughout China.

When questioned about the timescale in which the Chinese automakers would become a sizable force in the US, the reply was “5-10 years” – the logic being that it took the Japanese 20 years and S.Koreans 10 years. But that stock answer and perception has been on people's lips for at at least the last decade. Of course, the ,ore time passes the greater the likelihood of eventually being proved right, but it is an example of archetypical generalisation that should be avoided.

Being pedantic - as one ultimately must - the truth is that the Japanese with a Post WW-2 US backed industrial plan took only 15 years, even with a 3 year initial false-start, to become a powerful force in US sales, from the release of the 1957 Toyota Toyopet, through to the popularity of the E20 Corolla from 1972 (and similar Nissan/Datsun models). The S.Koreans took between 1983 (with Canadian entry) and 2000 for Hyundai to gain credible North American entry, so 17 years and so 2 years longer than the Japanese.

The organic growth pattern of slow and steady market acceptance of improving quality standards is not a business model the Chinese wish to replicate given their enormous potential for export capacity, hence their purchase and technology adoption of the likes of MG-Rover, Volvo, possibly Hummer, SAAB interest etc. Understandably China wishes to attain world class quality standards as soon as possible to become credible. But as competitor's quality standards move ever onward – especially in the wake of Toyota's problems - and the problems of merging western and Chinese management cultures intensify when seeking both quality and quantity, so the problem of perfect export timing becomes elusive.

As we see from both examples, of critical importance is the transition between what is essentially a state-funded, state-mentality driven enterprise into a privately run corporation with developed internal capability across the board and critically, knowledge of foreign market demands. Unsurprisingly the normal route has been that of low-cost/price offering to differentiation to ultimately niche supply – the ideal being a span of all, each strategy directed at different regions positioned at various points of the regional economic growth curve. Hence for Toyota: Toyota, Lexus, Scion and now a return to roots for low-cost capability relative to India et al.

The point is that China has already undergone a 30 year systematic auto-sector development model, from the earliest days of Beijing Jeep with Chrysler Corp, to the productionisation growth years with VW & GM to the more recent mixed marriage JVs of its domestic players with the remainder of existing foreign multi-nationals. And by way of nefarious but useful self-learning for production cost-quality balances were the copy-cat efforts such as mimicked Smart ForTwo, FIAT Panda, Mercedes CLK or Renault Megane CC.

As to the real time-frame for major market foreign export, much depends upon other variables such as satiating local demand and the higher level concerns of Renminbi FX rates, what with calls for a floating currency. Hence there is no normal model to follow, and unlike the previous Japanese and S.Korean examples, the US has far less political leverage regards national export policy formation, though interestingly perhaps the likes of Warren Buffet with BYD interests could be inadvertently playing that very role.

Pundits will as ever regurgitate conventional thinking, but the devil will be in the detail, and as with all things Sino-American or Sino-European, there is a mountain of detail to sift, understand and prioritise so as to obtain an informed opinion.

Moving on to the second question...

When the consultant was questioned about the relativity of China's expanding inter-city/inter-province road network and a resultant growth in private vehicle sales the answer was a definite “yes”...”re-running the 1950s American model” (or words to that effect).

The fundamental premis for ongoing high-rate private vehicle TIV growth of 10-14% CAGR is undeniable. Increasing wealth, generated by the convergence of: increasing urbanisation, better education, aligned human capital, highly liquid captive capital markets with increasing FDI and ongoing agricultural efficiency reform, when all combined create a positive economic spiral to improved living standards and induce wealth generation.

Thus the inter-connect between transport networks, human movement, urbanization and is historically well recognised; and was well conveyed.

However, relative to recent vehicle sales spikes, the consultant disagreed with the assertion that recent tax incentives played a role in rapidly re-energising vehicle sales. Of course they did.

The Chinese are value-conscious, deal savvy “jump-in/jump-out” consumers, and when the opportunity came to enjoy a new car at lower cost it was seized with open arms; as it was in Europe and the US by certain buyer-set mentalities.

The recent vigorous market dynamics that drove a +74% quarter-based YoY surge came after a period of economic cooling and concerns that the national economy might over-contract; as seen by the hoards of rural returning labour from cities. This momentary blip in the urbanisation model could have turned into a longer-term trend had such incentives – along with the massive stimulus package – not been enacted.

NB investment-auto-motives believes that the level of stimulus spend in China had greater reasoning and necessity than the over-extended 'prime-pumping' seen in the US & Europe due to necessary orderly 'expansionism' versus 'orderly 'contractionism'].

As such, the small car purchase tax breaks were part and parcel of a fundamental trend to increase car sales via the dispersal of wealth into the pockets of the expanding middle class. Indeed much of the incentive was taken up by first time buyers looking for their initial affordable car, an offering largely made by indigenous manufacturers, the PRC administration recognising that the spent cash would be retained and effectively re-cycled within the country.

There was also an observation from the Auto Show that domestic manufacturers were walking up the pricing ladder by offering larger, more luxurious vehicles, whilst the typically more premium foreign manufacturers had started to offer affordable small cars.

This again is a dangerous generalisation, since the dynamics of still vibrant maturing auto-markets are very different from the archetype western model. Given their comparative lesser 'consumer brand equity' the indigenous manufacturers will have to still play the lowest cost (in small cars) or greater value (in larger cars) game. This innate quality disparity between Chinese and Japanese/European/American offerings means that cars of similar sizes effectively sit within different pricing sub-segments; much as BMW's Mini Cooper does not compete with say Hyundai's i10 in the west, and indeed in China.

As per larger cars, yes the Chinese are understandably seeking to walk up the quality ladder, but for some time to come their new larger cars will have to compete on foot-print size and specification at a cost. For the Chinese buyer it will mean making a same price choice between a say medium-sized foreign badged car with associated kudos, or a larger, better appointed (but probably lower build quality) indigenous car.

Thus an innate customer perceived quality heir achy exists, and that is something that foreign firm executives will endeavour to maintain; allowing them to maintain a pricing and profitability position, whilst awaiting the Chinese public to 'come to them' as their annual incomes rise. and expectations increase. When evaluating the potential of 2nd and 3rd tier cities, the intention is not to chase the hoards of price-conscious buyers there but to place themselves ahead of time and create a local demand buzz.

Thus the idea that a key challenge is managing the “hyper-competition” between indigenous and foreign firms was an over-statement, probably touted by foreign factory managers and dealer managers on the Beijing Show floor; they rightly see the short-term power of pricing in the deal conscious market, yet are under-pressure to grow capacity/sales whilst maintaining the foreign-local credibility gap.

Thus any idea that Chinese firms are an immediate threat to more premium foreign manufacturers, or indeed that those foreign firms are chasing entry level consumers is a typical 'attention grabbing' misnomer.

As with Japan's Lexus and Korea's Genesis brands, the time will eventually come to pass that sees a company like Geely or SAIC eventually compete with the best, but that process is still in its infancy given the political (esp IPR related), technical and management core-competence chasms between China and the Triad nations – even with long-established JVs and more recent buy-outs of flailing western firms.

Having seen MG-Rover swallowed by Nanjing Auto & SAIC, only for the former to be swallowed by the latter as part of the national sector consolidation policy, today's eyes are obviously on Geely's purchase of Volvo. The commentator once again espoused the fact that it would be a challenge given the past failures of M&A marriages such as Daimler-Chrysler, with different governance systems creating friction, and an entrepreneurial vs conservative attitude creating conflict. But there have equally been successful marriages such as Renault-Nissan, and ever more alliances.

But as mentioned, key will be the ability to reduce Volvo's innate cost-structure via Chinese supply sources (at sheet metal, component levels and sub-assembly levels), localised production giving Volvo access to the Chinese consumer, whilst driving down BoM (Bill of Material) costs for Swedish assembled cars, thus ideally leveraging cost-reduction with distinct Euro identity.

[NB it must be noted that investment-auto-motives suspects that to the Chinese consumer, this Swedish marque has far less relevance than German, Japanese, British or Italian car marques. Thus Geely's prime ambition was to obtain Volvo's technology base to upgrade their own locally branded cars, export vehicles and, only as a distant second mode, re-energise Volvo in western markets.

The MG-Rover case study highlights the ever-ongoing latent promise of 're-birthing' MG in the UK and Europe – no doubt much depending upon heavy government subsidy – something the Swedish government was keen to avoid, but will ultimately face once again from Volvo's new owners].

From the question of the Chinese Industry itself, we move onto the question of infrastructure imbued auto-sector growth.

When asked whether the expansion of road infrastructure would have a bearing on new car sales the obvious reply is that it undoubtedly will. Of course there is a synergy, but to what degree, and is it not indeed national specific relative to other macro-trend variables which have a bearing on private car usage?

The historical perspective offers the background to today's overtly generalised perceptions.

Perhaps the first country to create a networked highway system was Germany, under the auspices of “for the people” but also reciprocal to military use. However, the very sight of autobahns being built scurried the 'deutsche volk' to buy into the 'Volks Wagen' (People's Car) ideology via a coupon based system. With a proficient but route and capacity lacking railway system alternative – due to former separate sovereign states - this 1930s initiative then set the highway precedent of ”build it and they will come!”. History shows that those incoming funds were diverted to military use, yet the synergistic relationship between the 'Auto und Bahn' system when offered to a people seeking mobility freedom was undeniably powerful.

The second, and most prolific, case study of course comes from the US.

Cross-country road-building had started in earnest in the 1920s, serving primarily road haulage and also the Model T's successors, and continued apace in the 1930s, at a slower pace throughout WW2, and regained in the late 1940s & 50s. Thus the map had been laid over 30 years, roadways periodically enhanced to cater for modern traffic. Remember too that WW2 had been an economic boom for the USA, so 1945 onward, full employment was recycled into greater wealth generation, the 1950s/60s became the heyday of the family station wagon and cross-country jaunts, aswell as 'escape routes' for mobile youngsters: Route 66 and all that. Critically though, the US rail system was, under privatisation, re-orientated to bias more profitable and stable freight income. Seeing the potential of the auto-industry as a wealth generator, and vital element of expanding suburbia, the US government's transport focus had long moved away from rail toward the car. And from the 1980s onwards, affordable domestic flights became ever more popular, given the time saving offered in a 'cash-rich/time poor' nation, so seeing the demise of the legendary road-trip.

Given its past, overtly socialist political agenda and the sheer scale of population challenge, whilst previous highway network development models can be overlaid, China's background (politically and critically socially), its task and apparent solution is very different.

The highway network is being developed (as is the norm) to serve commercial and economic growth, both linking major cities and pushing ever further into the hinterland to promote the transportation of people eastwards, foodstuffs eastwards and agricultural & industrial machinery and services westwards. As stated a prime raison d'etre is the populational re-distribution of rural workers both towards regional towns and to the major coastal cities. Thus, the highway development programme, urbanization programme and provincial & agricultural development programmes run with intrinsic inter-connectedness.

But the dynamics of private car owner's use of these highways may ultimately be very different to that seen in the US in the 1950s and 60s, even if some elements like China's popular drive-in movies screens depict a simplistic similarity. Remember, drive ins were typically sighted at the edge of medium sized rural towns, not cities or villages in the US. So visitors were simply town and district-bound kids and families. Drive-Ins were a local solution to cheap entertainment, not an integral element to a cross-nation infrastructure.

Such simple reference-points generate the idea of intercity and holiday car travel will shift to mimic 1950/60s America. But will it play out as expected, with as McKinsey & Co have been reported to state that China will see a tenfold increase in car demand between 2005-2030?

[NB In 2005 China manufactured 5.71m units, though it would be naive to think this figure can be multiplied by 10 given the growth and natural absorption of the used car market].

China is unlike the yesteryear US since it combines very attractive substitutions to car travel by way of an expanding, modern rail system and rapidly commercialised airport & airline network; something not available to Americans or indeed their Asiatic Australian cousins in days gone by as they had little choice but to take the car for long distance, inter-state journeys.

The following illustrates the major distances between 1st tier cities and so question travel options?

Beijing - Shanghai 908 miles or 1,461 kms
Beijing - Shenzhen 1196 miles or 1925 kms
Beijing - Nanjing 718 miles or 1,139 kms
Shanghai - Shenzhen 740 miles or 1191 kms

Thus initial highway developments look to continue inter-linking neighbouring regional cities, not the creation of a veritable spiders-web of nation-crossing super-highways. Good recent examples are the Beijing - Tianjin superhighway (86 miles in length), and the 4 lane toll-road between Hangzou and the port of Ningbo in Zheijing province.

Moreover, unlike the big-car culture that nurtured the US and Australian car user, China uses typically Euro sized and smaller cars, far from the US mom & pop, lazy cruise, 6-cyl or V8 station wagon, and with a typically Chinese 'go go...busy busy' attitude, drive them in a manner more reminiscent of manically active Europeans, a far cry from the lazy methods of the US. This is seemingly true even of younger female drivers who though often preferring an automatic gearbox option, still drive aggressively as required. Though automatics have become the norm for many chauffeur driven cars and taxi drivers, imbuing a sense of less urgency, even many older men brought-up on manual drive cars, see them as reflecting a machismo image.

If this looks at the everyday, commuter behavior, which differs heavily to the US, so there may be major differences regarding the use of cars on holiday trips. The yesteryear US holiday maker was stuck on an isolated continent which with prohibitive air-travel costs denied travel to anywhere but within the US or Canada and later the Caribbean and Mexico. Whereas, Chinese holiday maker are more likely to mimic Japanese tourist trend in the 1980s/90s, looking elsewhere around SE Asia and Australasia to see new, more exotic sights. The trend has already begun via partially subsidised Chinese airlines.

And once again innate national mentality is critical; whilst the Chinese will undergo almost 24/7 exertion for commerce/money he/she is far more passive regards the use of leisure-time, in need of the relaxation, less willing to consistently drive hundreds of miles once the original novelty has worn off.

Moreover the car is a conspicuous consumption status symbol, so driven locally where it can be seen and recognised as belonging to Mr X or Miss Y or Family Z

Another US vs China difference regards cross-country leisure travel is that by the time the car was mainstream in the US the country had developed over the prevailing 150 years - and so 'time-space' illustratively - both from East coast westwards and from West Coast eastwards so meeting in the middle. The US had substantial region-based cultural variation to act as attractions, from the up-market sailing locale of Maine, to the Catskill Mountains, to the historic centres of Boston, Pennsylvania etc, Atlantic City aswell as newer build attractions like Disneyland & KnotsBerry Farm, in car-centric California and Miami beach and DisneyWorld in Florida, etc etc.

China appears – to an outsider - culturally more homogenous given its effectively stagnant economic development under communist rule, and though ethnically diverse and with the dynastic past of Tang, Song & Ming influence, seems not to have the obvious regional 'time-space' illustrations of say the US or Europe which in turn generated motor tourism.

China of course has legendary sites such as the Great Wall and Beijing's Forbidden City (Palace Museum) and Tienanmen, the Temple of Heaven, the Summer Palace, Terracotta Army and in the provinces places like Suzhou (China's Venice). However, these are typically reached by tour-bus, municiple bus or rail, with limited visitor parking given their proximity to the city centre and relative land value; thus largely excluding parking for anyone but PRC officials. Even so provision will need to be made for the motorist, and so 'Park & Ride' schemes will be very necessary to both cater for the increasing amount of vehicles heading to attractions and to ecologically protect the buildings, remnants and relics.

Though roadside cafes/restaurants etc are being built, there is reportedly a lack of general amenities given lack of private investor interest reletive to typically low or even negative RoI, and the very vastness of the country. But, beyond driver/passenger needs, perhaps most important of all is the lack of a suitable vehicle-reletive infrastructure. Little or no breakdown services often just beyond city-limits, let alone in far-away stretches. Any available mechanic more adept with 1950s/60s based trucks from FAW, Nanjing, SAIC and BAIC and older Russian sourced trucks than any modern passenger car, which is less amenable to DIY tinkering and on-the-spot fabrication.

[NB the '4S shop' – consisting of Sales / Sparepart / Service / Survey - is the main interface for car-related issues, these ostensibly dealer-service sites largely located in Tier 1 and 2 cities].

So it may be the case that China more closely resembles the pattern set out in 1970s UK when people increasingly afforded both cars and foreign travel by plane, for the Chinese using Air China, China Southern and China Eastern and newer budget carriers. (Since late 2009 it has been possible to travel to Taiwan from 21 cities on the Chinese mainland, with flights typically over-booked thus demonstrating the level of air-travel demand. The same story in India).

The truth is that beyond the natural beauty that satisfies a small portion of travelers, for the typical tourist there is little attraction in China's interior which is worth the lengthy drive, when the glamour of urbanization and historic and modern leisure is typically coastal based?

Rail continues to serve the modern transport requirement, with major infrastructure projects seeing renewal in Beijing (now with 3 major rail hubs) and similarly designed new stations across coastal cities and the nation. Given the eco-credentials of rail on a per passenger carbon footprint basis, and the associatively large commercial activity it brings, it seems that rail is set as the preferred 21st century cross country transport solution. The present lengthy travel times shortened with much improved track, signalling and telematics systems, consequent improved service schedules and the ongoing introduction of rapid 'Bullet' trains.

A prime travel motive for any workforce - Chinese or American - is to see distant family – the Thanksgiving holidays being the archetype example. This will be a similar, innately human catalyst for China's new motorists, expecting to travel far on holidays. But as mentioned the options for the modern mobile Chinese citizen seem broader, alternatives undermining reliance on the car.

This highlights the major difference between the China's transportational development approach and that of the US to date.

China's is a 'simultaneous' transport development philosophy exploiting multiple public and private vehicle types, in direct constrast to the US's historic experience of 'chronologically successive' transport solutions, largely dependent on national economic stage and technical prowess.

This then is perhaps the most visible difference between each's economic ideologies: the power of enormous yet partially wasteful socialist national planning, versus a system of capital efficiencies with probable social inadequacies.

Each nation's roads then lay out the mentality map of their respective ideologies, even if, as we witness today, the US moves ideologically 'left', and China moves ideologically 'right'.

Hence, in the late 1950s onwards where rail (and public transport in General) was comparatively under-capitalized as a consequence of promoting the automobile, the US Auto industry and ultimately the US enterprise-based economic model. Thus US road-building ran as a parallel to the car-building, both pro-actively encouraged, (The historic political allegiances to GM are well documented)

China, although increasingly enterprise driven, seems not to share this industrially biased development model. Instead developing its transport solutions in parallel. Part of the raison d'etre to focus on public transport (inc underground metro systems) beyond the mass transit efficiency of its citizens is inevitably to enable inward bound foreign tourism. And so continue to buoy Yen, Euro and Dollar foreign currency reserves.

[NB investment-auto-motives believes that China will maintain a deflated Renminbi FX policy, even if 'encouraging signs' are being transmitted through capital markets' commentators as a pressure-repreaving answer to US criticism].

Foreign eyes however should not be overawed by China's outward-facing progressive facade, the present World Expo the big symbol: the electric vehicle story a good case in point.

Given China's aligned and ever improving capabilities to build ICE powered vehicles - with critically ICE's complex, multi-part value-chain which helps drive the economy – the conventional car, not the electric car, represents by far the real-world picture of Chinese car availability and demand.

Though the Beijing Auto Show presents a plethora of EVs from BYD, Geely, Chery, Lifan, FAW, Changan and BAIC, these are for the most-part PR vehicles to demonstrate each company's supposed progressive ethos and capabilities. (Yang Jian, editor of Automotive News China provides similar comment).

Moreover, the very notion of a new wave of travel-constrained EVs set within a massive super-highway network is pragmatically untenable - the technology and the system at odds given today's still prevalent long-distance usability barriers. Thus high-way build programmes must be suited to oil-fueled vehicles - as is the case today and historic norm – given oil's role as an economic pillar.

Given China's own petroleum production capability with companies such as PetroChina, Sinopec, CNOOC and mass of smaller companies, its drilling interests in Iraq, its trade links with state-based foreign oil companies, the car-demand linked synergistic growth in downstream petrol/diesel retail potential, and Beijing/Shanghai financial districts' links to crude-oil trading and oil company share-trading; it is plainly oil that will drive China in all senses, not the showcased EVs that represent an eco-illusion in the global CO2 challenge.

[NB investment-auto-motives believes Hybrids will continue to provide the real-world broad-use solution, whilst radical alteration is needed in product type and business modelling for what would be only local use – endemically lower utility-value and so lower pricing-value EVs].

As such it will be perfecting 'the (ICE) car' as is, and its 'role' to suit both future users' demands at home and abroad within the infrastructure context, that will occupy the minds of indigenous company executives and largely province-based highway planners.

Any ideas of an massively intricate 'spider-web' super-highway that 'criss-crosses' the whole nation in a USA v2.0 model seems presently illogical.

Instead, the continuance of major cities spawning satellite towns/cities linked by relatively short distance 8-lane 'super-highways' to transport the mass of commuters and freight. Done so in a far more technology-controlled manner than the coast to coast 'open-roads' of 1950s America. The world has moved on rapidly since those days, and modern China, exploiting all it can to maintain its GDP growth and world influence, needs to maximise functional and commercial output from its metropolitan and provincial infrastructure planning.

That is not to say that the state investment model of today will not eventually morph into a privately funded, capital-driven nation of tomorrow. Society's liberalisation and capital's free-marketeering will enable that transition. By which time of course the results of today's massive infrastructure programmes – including the highway system – will need refurbishment.

At such a time, the relative traffic-flow capacities of all routes and their respective economic contribution measures will be fed into the RoI forecasting models of wholly privately owned civil engineering companies, construction companies and utilities companies. Hence, the publicly funded infrastructure build of today helps to hone the eventual full privatisation model of tomorrow.

Yet to realise that outcome means viewing the car's relativity to grand-infrastructure picture at as detailed a level as possible.

Ultimately China hopes to maintain its position as a global economic engine through both increased domestic consumption and foreign export of increasingly higher-value goods – as mentioned, the Chinese electric car plays its role a the symbol in that ambition.

To do so however requires detailed thinking by a cross-section of experts as to how far China mimics the vehicle and infrastructure growth stories of the past. China must build appropriate cars for both export and domestic use, or possibly turning that argument on its head, create its own culture and auto-format which it then uses to influence the US, Europe, Asia, Latin America and even possibly a rapidly evolving Africa.

As such, it will need to critically assess Japan's and S.Korea's past to view their respective balancing of domestic vs export vehicle use. Japan had to recognise a level of 'Americanisation' and 'Europeanisation' which influenced the very fabric of its road-network and the DNA of its cars. For the S.Koreans it was a question of adding 'Japanisation' learning too. Thus China has much history to draw from in constructing its future.

China, has already effectively become the 21st century global hub of car-making, and as such will need to absorb best practice and identify and rebuff poor outcomes. It must continue do so quickly to align proficiency with growth ambitions. Moreover, it will need to defend the best of its own culture to create an innate national auto-culture, one in which the very infrastructure promotes the sociological which in turn feeds the developmental DNA of the car.

To achieve all of this, as part of the step by step move-away from a command-economy, requires far more than well intentioned yet short-sighted generalisations.

Saturday, 24 April 2010

Company Focus – FIAT SpA – Family Planning

From the long-view perspective FIAT Auto has ridden tumultuous, good and troublesome times over the last decade. The potential energy for its previous turnaround was actually created by the effectual cash injection brought into play when GM decided not to take its 'call-option' on the then flailing Italian firm, and instead had to pay its way out of contractual obligations. Those monies were used to buoy FIAT, its brands and credit division which with the help of asset and balance-sheet leverage enabled FIAT to create a virtuous circle of product development and credit availability.

Of course late 2008/9 saw the credit bubble burst which impacted FIAT's (and many others) business models – including the US auto sector. With a contrarian mindset, Marchionne took the challenge as an opportunity to court Washington to create a performance related 'equity walk-up' deal for Chrysler, and although a hard task master, at least the apparent savior of the smallest Detroit player.

FIAT is undeniably battered, as are most, but having weathered the storm of the last 2.5 years and noting the recent term stability of risen capital markets, the FIAT Board see the time as right to present its future to the investment community. As a signal of refreshed mid-term optimism is the appointment of Agnelli family heir John Elkann – who heads the family's Luxembourg based investment fund Exor - from V-C to Chairman; so replacing Cordero di Montezemolo.

[NB Exor sits within the master investment holding company Gianni Agnelli & C. Sapaz].

Importantly, Elkann's dual role as both head of family investments and the cars division indicates progression toward the unbundling of FIAT Group divisions – Auto, Iveco, CNH Global, Magnetti, etc. This strategy means that FIAT Group retains Autos as its central pillar, but evaluates divestment of the remaining.

As witnessed, first off the block is release of Iveco, CNH, FPT Industrial and Marine merged to form an 'Industrial Vehicles' business. That leaves Auto with: FGA, the Chrysler stake, Ferrari, Maserati, Magnetti Marelli, Teksid, Comau and FPT Passenger & Commercial Vehicles

This news boosted the company's shares on Milan stock exchange by 8% almost immediately, demonstrating the air of expectation that something big is in the works – very typical of historic major Milan market moves where nuance over-powers fundamental metrics.

The Q1 2010 results were set out as a game of 2 halves, the nominal last quarter sales, revenue and profitability report, aswell as the presentation of what seems essentially Marchionne's 5 year plan.

Q1 Results:
investment-auto-motives expected less than many in Milan, the City or Wall St; and it proved so. Given the structural market headwinds and the retraction of EU scrappage schemes – in which FIAT was not a prime beneficiary outside of Italy – and indeed its poor alignment to such scrappage schemes without a true B-segment car, the inability to claw in greatly expanded revenue was always to be the case. In effect, having seen much of the incurred cost to generate latter efficiency gains from previous structural downsizing, and the sizable loan repayment to maintain a plausible credit rating, Q1 was always set as a period of the Auto unit ostensibly 'treading water' (although at a quicker pace awaiting full swim) as far as external observers were concerned, and so a continuation – though at far lower level of net losses. (Q409's E-283m / $380m). To expect more was perhaps na├»ve, but nonetheless the improvement on 'paper-based' reasoning is momentarily encouraging., even if overshadowed by the 'family planning' announcement that added upward and concomitant downward price volatility.

Using LSE/ThomsonReuters data, Q1 offered revenues of E12,926m (vs Q109 of E11,268m), EBITDA was not stated, but EBIT offered E352m (vs Q109 E-129m). [This E352m faces an estimated average of E345m from FIAT listed external investment analysts, as reported by Bloomberg; and as one analyst correctly states “results broadly in line with forecasts are not market prompters”]. Pre-Tax Profit was E157m (vs Q109 E-360m), Net Income was E-25m (vs Q109 E-410).

Within this given FIAT's 20% Chrysler stake – intended to raise to 35% in 2 years – the US company's tax-payer funded turnaround seems underway, with Q1 showing a loss of $197m, markedly smaller in comparative terms than the June 10th to Dec 31st 2009 loss of $3.78bn – though this comparison has obviously been chosen to flatter given the odd June 10th date elected. ($2.1bn of this was a charge to the UAW healthcare fund). Marchionne however was proud to state that Chrysler gave an operating profit of $143m demonstrating its improved break-even level at 1.1m units in the US. In an improving US market TIV, it was stated that revenue is expected at $40-45bn, with EBITDA of $2.5-2.7bn. Cash at hand (presumably of all liquid instruments) increased to $7.4bn from $5.8 at year-end, with an additional $2.4bn available from US & Canadian government sources. Q1 market share was up in the US, Canada and world-wide to respectively: 9.1% (from 8.1%), 13.7% (from 11.6%) and in vehicle terms global sales reaching 334,000 from 318,000.

[NB investment-auto-motives believes that given the strength of competition, and Chrysler's lack of small cars, this was probably largely achieved via incentives on passenger cars and the revenue input of ever faithful Dodge Ram truck buyers].

The 5 Year Plan:
Marchionne states that it has been recognised that for some time the transparency of FIAT Group has been lacking, thus creating a harder detailed forecast picture to be painted by both sell-side & buy-side analysts. That inter-dependent structure has however played a vital role in leveling out the cyclical nature of FIAT Group's separate divisions, especially Autos. However that was through historically normative economic cycles. Yet (apparently similarly to FIAT thoughts) investment-auto-motives believing that the 2008 western crisis changed the 'normative', each sector effectively individually starting from scratch from 2010 onwards, hence the logic to largely unbundle. This unbundling a very necessary feature if the western auto-industry is to be re-aligned along more lateral lines instead of its historic vertical value-chain to improve investment rationale and RoI.

Automotive News' post report identified its 'primary takeaways' of the announced plan as: Autos saving $4bn by 2014 in combined purchasing, Chrysler worker retraining and $126bn in revenue earned by 2014, that very year supposedly offering E64bn in turnover of which giving E3.8bn in trading profit. (FIAT's definition of trading profit being the subtraction of top-level costs and additional extra-ordinary costs – typically restructuring costs – thus a measure providing far greater flexibility to achieve).

[NB by its very nature FIAT has re-orientated the adage to set a E64bn question!].

The 2014 financial goals for the new Industrials division are a turnover of E29bn giving a trading profit of approximately E3.3bn.

Interestingly the Group's debt present debt structure will be evenly split between Autos & Industrial, that debt rising from E4.4bn year-end to E4.7bn by end Q1; hence its seems that much of the debt incurred to date for Autos is disproportionately being given to Industrial, adding to the chance of financial performance improvement for Autos in the mid-term.

And it may well need it, if new product cadence does not live-up to ambition.

Looking forward...

Marchionne of course recognises that FIAT has not marketed an archetype B-class car in Europe for some years, instead hoping that the introduction of a (new) 2011 'Novo Uno', fills the void between Panda and Grande/Evo Punto. Hopes are that it can replicate the success of original Mk1 & Mk2 Uno between 1983-1995 (though maintained in EM regions under different names with evolved body-styles), and the idea to both drive economies of scale from a shortened Grande-Punto platform and simultaneously obtain conquest sales from largely French (Renault & PSA) and Korean (Hyundai & Kia) competitors, aswell as of course GM Corsa and Ford Fiesta, yet using Japan's Mazda 2 as the BIC benchmark. Interestingly, initial pictures suggest it takes on a more functional aesthetic than its more svelte peer-group, mimicking with softer lines the clean boxy, partial asymmetrical detailed, appearance of 1970s o/Strada and 80s Uno.

If this is indeed the case the styling ethos appears to visually merge the historically separate offerings to EU and EM markets, no bout heavily influenced by Chinese acceptance of visually simple body-styles. Thus FIAT hopes to expand its RoW design philosophy into Europe. How ultimately successful this will be in practice is in Europe open to debate, but in an age of 'classy super-minis' from most manufacturers, including increasingly the Koreans, the concern is that Novo Uno is perceptually lumped together with more utilitarian cars like Dacia's Sandero.

FIAT obviously wishes to differentiate itself, and needs a suitably clean body-style onto which it can graft Dodge and even Jeep identities, but will need to better explore how a 'functional aesthetic' should be conveyed so as to be aspirational. Not doing so will only create a pricing pull-down effect as EU potential customers re-classify FIAT's small cars as increasingly 'cheap & cheerful', and discordant with the more up-market image of 500, and Abarth performance variants. The 21st century EU is far more complex than 1960s Italy or 1980s Europe.

Marchionne is aiming at 35% of Chrysler in 2 years time. That will depend upon a success FIAT rebound, itself dependent of a managed mix of both, a) new vehicle offerings which the markets will embrace (harder in Europe & the US) and b) the manner in which FIAT Group (inc ultimately Auto – though not stated) is divested and re-equitised, so as to give FIAT Auto and Exor (via Elkann himself) as large a return as possible to re-pump back into Autos thus able to acquire a latter-day increased stake in Chrysler.

The new added transparency provided by a split conglomerate will of course help external valuation and, as the WSJ states, the 'conglomerate discount' presently seen should wain. It recounts Credit Suisse's estimation that at E10 per share FIAT trades nearly 30% below its nominal E13.90 for the sum of its parts. (investment-auto-motives has not undertaken a similar proportionate evaluation and so cannot ratify that figure. Typically conglomerate discounts run at 15-20%).

Moreover, investment-auto-motives believes it would be only natural to suspect that over the last each of the individual companies have been reformed so that respective balance-sheet accords 'light-values', especially regards heavily written-down asset values, boosted cash reserves and other accounting tactics – the natural schema for what could well be a stream of spin-offs from each of the 2 new divisions, with probable doubt latter-day re-ties on an independent basis between Auto & Industrial sub-units

[NB investment-auto-motives believes that one such examplar could well be that the Industrial Vehicles business may in due course absorb FIAT's small van business 'FIAT Professional' to better separate the car-derived vans from the van-derived cars in FIAT Autos range. This separated relationship for Iveco thus increases its commercial vehicle range, provides for greater leverage of unfettered fixed transfer pricing of goods sold by Autos to Industrials, but interestingly also allows the new Industrials division to overlap the technologies and systems of vans/trucks and tractors/diggers etc.

This not only generates synergistic savings but also provides promise for vehicle overlap, such as that seen by the successful JCB Fastrac, which measurably changed the AgCon vehicle playing field. To do something similar would be of great advantage to FIAT given its EM exposure]

As for the tactical timing of the FIAT presentation itself, very probably to over-shadow the relative financial quarter under-performance that could alone have damaged share-price, with the market promise of “jam tomorrow” - and it seems to have worked.

This presumably intended to put a new perceptional share-price 'floor' for the Group at the E10 – 11 mark, which in time will improve due to the income effect of Autos enjoying slow but stable market-tide growth, and in turn raises the very generalised apportioned valuations for each division when separation occurs; the current investors expected to receive 2 shares of the Industrial Division for every 1 Group share owned.

Thus FIAT is using a 2-stage ploy by which to increase the value of each division when they eventually individually come to market.

So whilst the Torino FC readies itself in its fight back to Seria A after its relegation, across town in the industrial and financial realm FIAT Group is readying itself for a continuation of its fight on the national and world stage. Given that Marchionne's expects domestic car demand will fall 30% and EU demand 15% in 2010 FIAT must face yet another trialling period; in the belief that challenges bring eventual opportunities.

[NB the FIAT TIV forecasts are believed by investment-auto-motives to be over-exaggerated, so as to assist Autos beating self-set and externally set earnings guidance).

However, as Marchionne well knows, presently the over-capacity of European autos will keep generating long-term value-destruction until the (long-awaited) shake-out to his quoted 6 players emerges.

The scrappage scheme has assisted FIAT enormously, especially domestically, eve though the strength of its BIC low CO2 emissions ratings (possibly inadvertently boosted by lack of a B-segment car) was ultimately hindered by the reduced appeal of its aging product.

But, the question for most investors regards the auto-industry – especially after GM & Chrysler bankruptcies and EU bail-outs, is the innate value of an enterprise if stripped essentially bare. This is presently an academic exercise given FIAT's capital market credibility generated to date, but if seen from PE eyes - beyond the dynamic of hazier public capital markets - the harsher, real test is that of 'on-paper' value vs 'bare asset' value. As of Q1 2010 FIAT reports its value as E68,027m: the Equity & Liabilities value = Current & Non-Current Assets value). Remove the Asset-Backed Finance Payable of E7,482m and a sub-total of E60,545m appears (as FIAT displays). Remove the Unsecured Financial Payable of E20,818m and the new sub-total of E39,727m appears. Remove the Equity level of E11,457m and the new sub-total of E28,270m appears. Remove General Provisions, Employee Benefit, Trade Payables, Taxes and Other Liabilities of combined E36,746m and the new subtotal reads E-8,476m. Remove Intangibles/Goodwill of E7,446m and the final total reads: E-15,922m. FIAT Group when stripped bare in its consolidated conglomerate form, fundamentally operates as a value-destructive enterprise to the tune of E-16bn.

This is admittedly purely a paper-based, academic exercise but it underpins the Agnelli family's raison d'etre that Marchionne perceptively release and separate FIAT's internal value-creation mechanisms so that they gain market-reflective values and can have the autonomous futures to best ride the separate sector-relative economic upturns when they arrive.

FIAT is a long way from being out of the woods, with the mainstream FGA element still facing market headwinds, but the basic industrial plan of separating into 2 distinct enterprises has shown to win market favour. But much remains in the execution, the debt burden playing a critical role in the short term, as will generated synergies and the ability for any full transfer-pricing between the 2 divisions and within a division as each company is tasked further to seek a greater portion of external non-FIAT business.

But ultimately, investors will be asking themselves not only about the new Industrial division's PaT, but if it will be used as a FIAT Autos 'Patsy'. The question being: will it be laboured by Iveco's having to buy Auto's car-based small & medium vans and FPT engines, gearboxes & other components at full market rates, to ultimately help bolster Auto's revenues and margins? If that is part of the invisible big-picture – and reasonable to think so given Marchionne's “New FIAT” ambitions – pressure will be put on the new Industrial division to both grow at a pace for each company beyond their respective sector TIVs, but also seek-out mutual programme development, technical systems and production-build synergies across the Iveco – CNH – Marine group.

Ultimately, in the quest to become a truly viable 'sexy' global car company, the FIAT board will need to try and avoid Industrial (FI) becoming the inadvertent 'whipping-boy'. As Elkann, Marchionne et al develop their IPO plans – as part of the new transparency edict - that is perhaps the central investor issue that requires elucidation.

Tuesday, 20 April 2010

Company Focus – Automobili Lamborghini SpA – Stretched between Sant'Agata and the 21st Century.

Lamborghini's rise from its tractor origins to supercar is part of automotive legend. Founder Ferruccio's ambition was to improve upon Enzo Ferrari's creations, to produce useable, 'liveable' supercars that created a formula for sales success on the street, whilst on the track a mantra of only privateer team racing, so as not to undermine the purely commercial raison d'etre of the operation.

The disruption of the 1973 oil crisis to sales and consequential commercial 'de-railing' means that Ferrucio's ambition still being chased some 47 years later – though at last with increasing success.

Sportscar and (bull-badged) tractor operations were completely separated in 1972 entities, the latter sold to SAME [latterly Same Deutz-Fahr] to retain Italian ownership. The car company, in a very different sector to tractors, experienced the extremities of the economic cycle: the typical norm for what are capital intensive, yet high reward entities, only as long as company stewards can judge the economy and its correlated marketplace vagueries.

However, today in a manner 2010 revisits 1962 in as much as there is the requirement to 'stretch' the company's internal activities and capabilities, but this time instead of jumping sectors very much centred on expanding the automotive success story this decade.

[NB Lamborghini Holding SpA is the holding company of Automobili Lamborghini, and holds as seperate sister sub-divisions the previously linked elements of Lamborghini Merchandisng and Lamborghini (V12) Marine engines and portions of VW Italian retail interests.

VW Group parent and Sant'Agata executives are hoping to radically extend the capabilities of the Bolognese enterprise; essentially forced to do so in light of an increasingly competitive, able and high-profile peer set. This the case relative to both the traditional external foes such as Ferrari & Aston-Martin, 'resurgents' such as Maserati, McLaren & Lotus and relative newcomers such as Koenigsegg (now holding SAAB) and others, and indeed the ever increasing internal threat from internal brands within the VW empire such as Porsche, Bentley & Bugatti.

Lamborghini Cars, having seen success over the last decade with a renewed 2-tier product portfolio – Murcielago & Gallardo – is now considering its instrinsic future strategy beyond replacement and range extending vehicles – such as the 4 door Estoque. It is having to look beyond normative marketing practice that build-up its fan and client base via efforts such as typical merchandising (ie Collezione), a factory-linked museum, track-days (ie Lamborghini Academy) and brand convoy drive events (ie GiroLamborghini) which incorporates charity fund-raising, so adding a 'do-good' CSR dimension to such conspicuous consumption.

Now beyond the outward-looking Marketing platform which has created the success to date, is a renewed inward-looking stance, reviewing at a much deeper level the manner in which it must evolve within its own being to take charge of its own destiny. In doing so to progress onward from overt reliance on inward capital & technical flows from its VW-Audi parent to create the basis of self-sustainability.

Thus, assessing its own in-house, and probably globally networked 'capabilities-base'- something very necessary amidst (and in line with) similar ever-strengthening actions of its peers.

Set within the big picture of combative global sales, perhaps at the core is the battle between VW Group and FIAT Group, their respective sportscar divisions their corporate halos and so cultural leverage across the prime battlegrounds of Europe, the US and China. And thus for Lamborghini the eponymous 'creative friction' versus Ferrari.

Yet even with its 21st century success story, headwinds are amassing for Santa'Agata, its cars effectively aging versus a broader, more market-reactive and quickly refreshed Ferrari model portfolio. Ferrari's commercial balance comes from offering both mid-engined sportscars (F458) and front-engined GT cars (California, 599 GTB/GTO, 612 Scaglietti) in V12 and V8 guises. Importantly Ferrari has been able to gauge the market dynamic very well, the introduction of the cheaper, more versatile California reflecting the relative downsizing and economising of recent times for established and conquest clients.

The question of Lamborghini's future came back into focus recently, pricking investment minds when the FT's European View - hosted by Paul Betts – re-highlighted it relatively new research activities within Washington University. Since October 2009 its remit to develop general research knowledge across processes and applications that span and inter-feed automotive and aeronautical engineering realms which is envisaged to underpin the development of composite-centric future generation parts to supersede steel, aluminium and low-grade plastics in structural and surface applications.

[NB the Reventon concept car, with 20 production units, reflects this auto-aero ideology given its reportedly F-22A Raptor fighter jet inspiration].

This is a good indicator that the company seeks to unhook itself from overt reliance on VW Group R&D, so as to build an independent stock of technical weaponry which provides brand distinction in the marketplace and ideally cannot be replicated by external or internal competitors.

[NB see note* below as post-script]

However, although such mid-long term goals remain valid, it cannot be ignored that the prosaic context for the 'Lambo Lab' news, is one in which VW Group/Lamborghini gains access to Seattle-centric aero-derived knowledge, and as such enables UW-Lamborghini to access green-tech funding from the Obama administration; made available from the Energy Bill and other similar prompters. The cognitive inter-connectedness of Washington state and Washington DC is not lost in either Wolfsburg or Sant'Agata, and is very probably a Wolfsburg directive, possibly from Dr Piech himself recognising the ground gained by Marchionne at FIAT within the corridors of US power.

Moreover, even with the understandable lack of detail regards the R&D context and content – for confidentiality reasons – the 'Lambo Lab' will serve a secondary, if more 'surface' PR, goal. That is to provide the company with a greater level of gravitas within the US, something very necessary if it is to be seen as a credible, stable competitor, and thus sales alternative, versus the almighty Ferrari in North America.

Its own financial woes and the poor US performance of all the Italian brands (except Ferrari) during 1970s & 80s set Lamborghini back, for a time overtaken by the Japanese with cars such as Honda NSX, aswell as other British and US homegrown offerings, such as TVR and Calloway.

As stated, in Europe, Japan and Asia, the eventual comeback and sales success was thanks to Audi division's assisted development of Murciellego and Gallardo, the original remit to enhance product capability, reliability and improve procurement efficiencies via the use of Audi division's R&D, development methods including latest version release CAD platforms and the required German pedantry regards programme progression only when criteria 'gateways' have been properly satisfied.

In the same vein, the 4-dr Evoque concept is very probably well matured 'on paper' given a type of 'lend-lease' arrangement regards the Audi A8 platform and the improved mutual understanding between parallel German and Italian development teams. But it will obviously require resource which Piech et al may feel is better utilised elsewhere within VW Group.

Press reports and informal 'read between the lines' conversation with a Bentley representative indicates that the A8 platform will help spawn not only the debuted Mulsanne, but also a possible Bugatti saloon. The fourth natural derivative being the Lamborghini as Evoque, allowing VW Group to fight against AML's Rapide in a pincer movement with both Porsche Panamera and Lambo Evoque; the Lamborghini very probably sculpturally similar to the rear-heavy, mid-engined concept car, but ultimately packaged as front-engined as per Audi A8. However, much depends upon capital & labour resource spread between Sant'Agata - exploring the next generation mid-engine cars - and Ingolstadt

Whilst revenues and profitability over the last 8 years grew apace, in 2009 sales took a severe hit, down 50% YoY, a poorer result than the general market sector decline of 35%. Critically, Ferrari sales declined by only 5% thanks to a mix of new product introduction and improved Asian demand 'off-setting'. Hence Sant'Agata took a heavy comparative toll, though presumably expected given the point in both cars' lifecycles (8 & 6 years respectively), fewer Asian dealers, and so high elasticity of demand. As a result, commercially Ferrari has put greater space between itself and its notional rival.

Yet there would have been wranglings inside Audi-Lamborghini given that it appears that Lamborghini was prohibited from marketing a V8 Gallardo, so as not to inadvertently compete with Audi's own Gallardo derived V8 R8 car. Adding insult to injury, the R8 was latterly made available in V10 guise thus directly vied against Gallardo. So whilst Ingolstadt did indeed assist Sant'Agata, it has been seen to have done so with its own interests at heart.

The bigger question is whilst undoubtedly there are proven and potential synergies to be leveraged by VW Group's stablemate brands, just how they are managed to maintain relative distance is important. In this instance, Audi's growth strategy to chase BMW & Mercedes was rightly put before Lamborghini's requirement, yet the execution (especially regards V10) may have been rather
more sensitive, given the relatively little additional exposure and revenue R8 V10 would have brought.

Ultimately, internal and external expectation is that Lamborghini's cars have proven themselves enough to set firm foundations under the marque, the requirement now for deep appreciation of what needs to be done across the board both strategically and operationally to buoy as much as possible the former sales momentum. However, the natural sales and revenue decline of both cars indicates that the company should have since 2008 been seeking full spectrum cost efficiencies and leveraging any low cost external funding. The UW 'Lambo Lab' points to the latter, presumably something similar being mirrored in Italy also. But the issue of Sant'Agata's operational streamlining at fixed and variable cost levels will have been key over 2009/10.

Typically from an organisation undergoing such pressures little has been formerly announced, Lamborghini management being 'challenged' by the Audi division (with VW Board acquiescence) to show its in-house ingenuity relative to reduced formal assistance and in the face of declining revenues and margins until the Murcielago replacement (nominally code-named Jota) arrives in 2011.

The evolution of Lamborghini technical development for sub-structures can be seen between the 'body-on-steel frame' Murcielago and the (Audi derived) aluminium space-frame of Gallardo. The nomenclature 'Superleggara' has been applied to one Gallardo limited edition car which - whilst not conforming to the true original build method as invented by Carrozzeria Touring of Turin in 1937- does reflect Lamborghini's focus on improving the basic construction method using advanced metals and composites to enable cross the board vehicle performance improvements.

Today then is a time that combines both the need for step change yet partially constrained in execution by financial frustration. However the change is necessary given the increasingly out-dated legacy methods of Sant'Agata which effect not only the build-method and so efficacy of the vehicle dynamic, but also commercially critical, the innate efficiency of production and thus capacity and per unit cost.

The following impression of the in-house build process for the 2009 Murciellago LP670/4-SV is taken from a National Geographic documentary film, and as such cannot be considered truly meaningful appreciation, yet perhaps broad enough to provide useful observations regards the 'legacy' factory methods which Sant'Agata is endevouring to improve. Recognising the importance of the construction method relative to farming-out cost via larger bought-in sub-systems, the level of assembly difficulty, thus level of labour input and so degree of factory efficiency and indeed efficiency variability. Here Gallardo and presumably NG 'Jota' demonstrate the required step change from the old world Italian carrozzeria mentality to that of VW's more systematic approach.

The Murcielago assembly process consists of 14 stages, and delivers only 2.7 cars per day, so inadvertantly limiting Murcielago availability, yet ideally the process should be flexible enough to work with seasonal & annual demand fluctuation, as opposed to imposing a client wait time. This may be acceptable for the likes of Morgan Cars given its history and materials, and indeed almost a delight to highly status orientated Chinese clients that delight in the expectation (and associated extended pre-delivery bragging time, but whilst the ideology of under-supplying demand is by its very nature commercially sub-optimisation of capital and resources – the question is just by how much? Firms must always seek to balance the supply-demand flow marginally under par, so that both client expectation is raised yet not at the overt expense of commercial (and thus financing) optimisation.

The following conveys the broad impression:

Starting with the construction of a steel frame with secondary structural and non structural panels as its central body on frame' BIW (body-in-white) solution. This then creates a shell which for build-up purposes appears like a normative monocoque. Similarly the engine, gearbox and trim builds are done on site.

Without a paint-shop that factory built shell is transported 35 kms to Auto Carrozzeria Imperiale to undergo outsourced painting - a typical characteristoc of the old Piedmont and other regional local works network. Esentially a multi-phase surface treatment from initial bare-metal inspection to build-up of undercoat to new surface inspection and rub-down to undercoat rebuild to multi-phase repeat painting which dictates that only one man undertake the task to ensure quality. ( Apparently no 2 sprayers work in the same manner, and so the use of 2 or more painters supposedly results in a less even and lustrous finish). Lastly comes the polish routine, viewed as the 'silver bullet' finale. If understood properly, this process takes a total of 250 hours (31.25 days / 6.25 weeks) per shell. Obviously not are all 'man-hours' given that a portion of that time is for primer & paint curing, but compared to mass-manufacture, commercial auto-body sprayers and even other niche manufacturers, the time required appears extra-ordinary. Of course there is the 'quality' aspect, and the idea that the firm wants to highlight the time taken by the 'craftsman', but the lengthy process may in itself be causing additional inefficiencies as sprayers alter between work on differing shells of differing colours at different paint phase points, so possibly increasing the level of 'switch-over' downtime. (This could be seen in a similar vein to the press factory re-tooling which in the 1950s took a whole day, yet by the 1990s was reduced to 45 minutes thanks to Japanese lean production / sigma six methods). Simply to state that an innately lengthy process can generate additional inefficiencies. The adoption of certain advanced structure parts such as the carbon fibre floor and transmission tunnel on SV of course obviate paint coverage as lessen process time, but the innate process is one that is ripe for re-evaluation – assisted by Gallardo's latter day learning – given the future volume ambitions sought and relative improvement in throughput numbers.

This highly valuable shell (in terms of labour cost and fragility) is then rolled-out of the paint-shop for sub-assembly fitment in what is realistically an exposed condition, to be protected as necessary by work-over covers at each build station. Essentially the car is built in a 'outside-in' manner, instead of the ideal of 'inside-out' which logically layers the process and avoids the constant danger of damaging the exposed painted bodywork. Thus from the beginning this approach theoretically requires proportionately greater use of costly man-power given the need to thenceforth fit the multitude of cabin items (from dashboard to seats to carpets etc) through a small body-contorting aperture even with doors off (typically requiring a smaller framed person, thus female), the insertion of bulky powertrain mass into the rear aperture via a moveable (unstable) hoist/winch, and lastly inside what are termed the 'closures' the fixing of under-bonnet ancillaries, etc etc. Fitment of under-body components such as prop-shafts and front trans-axle is enabled with use of a 90 degree swing frame to roll the body over to provide the under-floor vertically to the fitter. This obviously improved ergonomic access, but the very task of securely fitting the car to the frame in the first place, rolling it over to vertical position, thereby exposing the body to the costly consequences of frame or fitment failure, fitting the components, rolling it back laterally and de-coupling the body is a time consuming process with ultimately inherent risk, no matter how well designed the process itself to mitigate that risk.

One, singular build-action appears to be telling of Lamborghini's quandary between appearing 'crafted' and delivering a repeatable faultless build process.

The fixing of the revered company badge on front closure (front bonnet) appears by typical industry quality standards as somewhat haphazard, open to process failure for even the relative 'craftsman' let alone any stand-in, less skilled substitute. In short, the process consists of the fitter drilling by eye a hole into the badge recess of the painted finished aluminium front cover (on the finished body) so as to provide a location point for the bolt/spur on the reverse of the Lamborghini badge, before gluing and bolting. The badges are locked away given their value, yet potentially the drill action is once again open to process failure if the hole is misaligned or drill-bit slips so scratching the painted recess or surrounding panel, thus incurring damage that would require costly repair/refurbishment, add to build time and possibly clog the through-put system. A better alternative practice would see the hole drilled whilst the cover was in an unprimed, unpainted condition so that the inner ring of the newly exposed raw-metal hole is primed and painted fully. This done using a template to ensure that any fitter - not necessarily the supposed 'craftsman' - could perform the task/ At the very least a template should be used 'as is'.

At the other end of the build process, as part of the quality validation procedure, the cars are taken on a 60 km road-test over local roads given the fact that the factory lacks its own test-track. Things are appreciably different at Ferrari SpA, and a world apart at group stablemate Porsche AG.

[NB investment-auto-motives believes that FIAT-Ferrari executives have intended the 'infiltration' of ex Ferrari management into Lotus to probably deny
VW-Lamborghini possible acquisition of, or alliance with Lotus, and so access to its more comprehensive R&D facilties, including a test-track].

Thus, seemingly today, Lamborghini executives allow a freedom for processes to be done in a lassaiz-faire (some would say “very Italian”) manner, which necessitates a level of fitter knowledge (as we see with the drilled badge point) which supposedly conveys a hand-built, craftsman ethos. This may be the case for some areas, but others as described clearly demonstrate that the crafted ability only derives from making the process harder and concomitantly 'mystifying' it. Ultimately the build method should be a combination of best practice from both mass-manufacture and crafted build to improve risk-avoidance and build-in quality. This mantra would have been a constant call from Audi and VW Group, with undoubtedly fitters begrudging the commoditisation of their stock-in-trade, but Lamborghini management must continue to rationalise the build process both through designed-in assembly ease at the engineering concept development stage and by questioning the factory's legacy methods.

2010 onwards appears to be a period of strategic and operational change at Lamborghini, a time when the core capabilities of the enterprise have to be reconsidered across the board from R&D to final assembly so as to strengthen the company both vertically throughout its in-house value-chain and laterally relative to its functionally relative business partners, such as the initiative in Washington state. All the old methods reviewed and improved so as to maintain philosophical and commercial 'track-pace' with its counterparts in Maranello, Stuttgart, Woking and elsewhere that are simultaneously strengthening their own strategic & operational selves.

This of course includes the brand's expansion plan across the ever growing, BRIC+ countries, part of this the issue over regaining licensing rights of the brand – for vehicle build and merchandising -
in Mexico, sold-off in 1995 to a third party with his own sportscar knowledge network, and probably implicitly agreeing the use of the already in-place production centre – with required upgrades - to assemble Sant'Agata specified cars so as to leverage the lower local cost base and NAFTA regulations for US market access with improved unit margins.

Another important element of the growth path will be the centralised control of used vehicles, given that credible sources estimate that 25% or so of all Ferrari's built to date are sold 'turned-over' annually, so making for a very profitable downstream official-dealer activity.

As Alitalia and Air France planes ready themselves for take-off through European skies after the chaos of the Icelandic volcano, utilising aero-influence – real or indeed otherwise perceived - Lamborghini seeks an increasingly independent and prosperous future. It may not be immediate given economic sluggishness and unspoken VW Group internal friction, but relative to the bigger VW vs FIAT battle, it still has seeming cause to be optimistic.

In time, with ongoing balanced self-determination, the world may be conquered , but as many in Sant'Agata recognise, the raging bull spirit dictates that “there is no place like home”. And as part of that innate culture, that is where the bull will stay, close to its roots. Yet it will also need to evolve and grow on all fronts, incorporating driven emotionality with pragmatic rationality to serve the founder's single-mindedness of purpose.

To regain its successful run over the last decade Lamborghini will need to be cognitively aware yet consciously oblivious to others people's (ie Ferrari's) 'red rag-top' cars who's accomplices and fans repeatedly shrill their horns. The race continues, 2010 and ever onward.

Post Script

[NB*. as a relevant aside, in 2006 investment-auto-motives in its 'Auto-Antenna' report previously called that Ford would be ideally suited to nurture such a cross-industrial and inter-academic R&D base. Given CEO Mulally's previous connections to Boeing, it was suggested that seat engineering be explored to provide single seating system solutions applied to both surface vehicle and air vehicles.

The basic hypothesis (to be remoulded as necessary), was that car and private light aircraft could share a similar structural solutions, whilst private passenger coaches and commercial airliners could share an alternative solution. As 'functionally intermediate', Bus and Train public seating could be simultaneously used as technology demand stimulator – giving additional scale economies -, with possible latter-day refurnishing incorporating any relative higher-cost electronic-systems integration once proven-out in car and plane use – thus viewing a 20 year plus time-horizon to harmonize the eco-tech solutions for private and public transportational seating. It is understood that part of Aston Martin's remit regards the cabin refurbishment of British Airway's fleet includes the far horizon, costly topic of seating.]

Wednesday, 14 April 2010

Macro Level Trends – Input Prices – Auto Players Dropping Hints to no 'a-Vale' while the Price Keeps Rising

The European and US auto-sectors enjoyed the temporary reprieve given by the various national scrappage schemes, but now reality hits and possibly much harder than previously expected. The profitability crunch now heightened by the fact that the mining industry has re-tabled the notion of sector consolidation – long on the cards – to improve its own performance; especially now that China has been identified as a net importer of coal, this demonstrating its economic hunger and continued demand for base commodities.

As expected, the Rio Tinto - BHP Billiton concept of up-stream production integration is obviously growing increasingly real, the companies managing expectations over the last few months, with today, a letter in the FT from the legal and external affairs executive indicatively not only defending the position, but highlighting the fight it is willing to take on to achieve the ambition.

Understandably, the global industrial base is holding its breath given the possible consequential outcome, and so presents its case to relative sector bodies - in the automotive case, the voice of Europe's ACEA now being heard vying against this “duopolistic” intend. However, even it must know that to state that such a move was unexpected would be disingenuous.

The growing gap between iron ore's long-term contract price and its near-term spot price has been growing over the last year, ever since the equities rebound and miner's angst that they had ultimately locked-in their contract prices too early, but had little choice given the fragility of sentiment at the time. The 2009 commodities surge led to a historic watershed in the negotiational stance between iron ore miners and steelmakers when on 30th March the usual benchmark setting, first-round Japanese talks effectively changed the game for all. The previous annually set price agreements (based on average mid-term trend pricing) were abandoned, instead becoming a quarterly event with direct relevance to spot prices.

Having been a victim of the price/inflation turnaround the miners were keen to make-up ground, and it seems to ensure supply for its rapidly re-aligning industrial base Japan was happy to oblige as was a similarly keen China, itself experiencing a lesser re-alignment. That sets a new price of between US$110-120 per tonne for the Q2 2010, hence up 100% over the 2009 contract settlement price. 'Wet finger in the air' predictions from sector analysts indicate that the biggest 3 miners: Rio-Tinto, BHP-Billiton & Vale would enjoy a $5bn boost to bottom-line performance.

In what appears a tactic to essentially get ahead of the future demand curve, attract investment capital and so increase capacity, efficiencies and further improve profits, Rio & BHP are fighting hard to demonstrate the advantages of its proposition. It says Chinese Walls will create split between the combined upstream and still separate downstream components of their operations, so gaining the best of both worlds: creating scale-efficiency at source (primarily W. Australian mines) and encouraging sales and marketing competitiveness at the retail level to its customers.

For the large capacity steelmakers primarily operating in hungry markets, the price increase can be ammortised over the capacity and steel type, with of course probable scale-ordering discounts made quietly available. This silent but expected reality would best serve India's ArcelorMittal; No1 by a tonnage processing factor of x3. And so in effect ArcelorMittal can afford to let Japan's Nippon and China's Boasteel and their 'brethren' set a global price that it very probably won't have to pay. Equally S.Korea's POSCO with similar processing tonnage to the Japanese and a lesser structural cost to endure should theoretically have the ability to swallow the revised prices; indeed this action possibly expected by the relevant national governments as part of their ongoing export drives and cross-sector, cross-economy profitability hopes to maintain economic balance; assisted by the Won's recent international deflation as a consequence of the Renminbi's maintained FX stance.

But it will be the comparatively smaller others like TATA, US Steel, NucorCorp, Severstal, Corus etc with less of a bargaining stance that will be forced to pass-on the 12 month price increase (of $380 to $550 to $725 by Q2 end for high-quality hot-rolled) to try maintain their own margins.

[NB investment-auto-motives expects that the steel-sector's smaller players will in due course need to consolidate further, primarily via allegiances with a few M&As to maintain negotiating strength, whether the Rio-BHP consolidation is enacted or not].

Thus, for the vehicle industry, whilst China and Japan very probably intends to swallow the iron-ore price via absorption at the steel-processing level and as part of operations overhead at the manufacturing level (possibly with relative in-place tax relief), others vehicle producers elsewhere will be forced to pass-on much if not all of the input price hike.

That is bad news for the US, Europe & Russia. In India TATA may have the ability to re-jig its transfer-cost arrangements so as to reduce the on-shock to its burgeoning customer base (especially obviously on Nano). Whilst in Brazil, the local big 4 – VW, GM, FIAT & Ford – will probably be able to gain government assistance in compelling the local supply-chain to partially suppress local consumption pricing – probably adding any lost component 'invisibly' into iron-ore and steel export pricing.

So, at first glance, the big losers appear to be GM, Ford, FIAT-Chrysler, VW, PSA, Renault, BMW , and Daimler. Thus yet again, for the nth time, the western region structural cost bases of these manufacturers will come under pressure, especially so now that the expected volume decline appears now the green consumer incentives have disappeared and governments cannot afford to replay them.

Obviously investors will be keen to see just how prepared these companies are to react to the input price hike, the advantage of scale, platform / systems / parts commonality being key, whilst also recognising the importance of CEO's and CFO's proven performance in previously locking-in long-term contracts with steel-suppliers. In relation to the last issue, any that did will be sure to convey that to the investment community.

The ramifications present the all too familiar juxtaposition of 'winners & losers'. For the near-mid term.

The former camp consisting of VW Group leveraging purchasing scale and commonality, Ford on the same basis and Renault-Nissan absorbing into previously cost-amortised 'old' platforms. Although both BMW & Daimler are a long way from leveraging the production scale increases from next generation small cars, basic business-model economics indicates that they can better absorb the on-cost given their premium position, internal ability to create a pricing elasticity, and the ability to adopt alternative materials (aluminium or composites) where brand/model relative.

[NB the aluminium price slowly falling as large national inventories are being run-down].

In the latter camp, PSA may well have leveraged Varin's steel-supply know-how but it still faces ongoing structural and model portfolio headwinds,, whilst FIAT-Chrysler – even though working rapidly towards - have yet to realise the volume efficiencies Marchionne envisaged, which in itself it is suspected will take longer than envisaged unless Chrysler effectively buys its US market share.
Critically this will be a harsh test for GM-Opel having been assisted through its restructuring, and it will need to re-demonstrate its EU production sites' commercial viability.

Thus, for the European view, the bet is that the relative positions of EU 8 are little changed – the sun will still shine for some, cloud for others. What is of consequence is the level of 'hit' each takes given individually maintained vs individually weakened sales volumes the endemic relative structural costs by unit, platform and marginal productivity site measures, and critically the methods announced by executive teams to combat this newly emerged massive headwind.

Pressure then once again builds, this time though with little apparent reprieve, and so the western industrial base for all steel-linked consumer goods – from cars to fridges - is put under the micro-scope to see if cracks appear, so in turn presenting re-structuring and/or alliance opportunities.

Some will crack....but the best of the crop – strategically attuned & operationally fit – have far from any intention in doing so. As the impinging price war rages at the input level, so no doubt the default position for the wavering mass manufacturers will be to create a price war at the dealer level, so as to try and create a virtuous cycle of spiraling volume and reduced per unit costs. That internally generated sales-focus pressure may be their all too typical undoing.

Yet more rounds of the same to come no doubt, whilst the intelligent producers look to balance-sheet strength and diminished-cost asset acquisitions across both the US & Euro regions. The ramifications of the commodities pricing wave throughout the sector are yet to be seen. A case of 'watch this space' as the automotive intelligensia leverage the resultant circumstances.

Tuesday, 6 April 2010

Macro Level Trends – US Metro Rehabilitation – Navigating Las Vegas through the Economic Desert

Recently reported upbeat US technical data has prompted Presidential Senior Advisor Larry Summers to state that the country approaches “escape velocity” in its bid for attained self-sustaining growth. For millions of citizens that technical data and the overtly positive rhetoric may presently appear as yet another examplar within the realms of that all too familiar quote regards statistics.

Yet, unquestionably the US administration must move beyond its stance on China's foreign reserve surplus in re-balancing global liquidity, and regenerate its economic base, building its way out of Main Street's tough recession. The topic of infrastructure, and its endemic relationship with the prime tenants of ecological responsibility and the individual, of course will play perhaps the primary role in the re-building of the US. But today - unlike J Edgar Hoover's relatively basic 'New Deal' that saw a geographically diverse population 're-centred' for infrastructure building projects from the agricultural dust-bowls of the Mid-West to unprofitable mining towns in Virginia – a new more expansive and forward thinking philosophy is required to regenerate America.

In a bitter twist of fate, one of the most desperate cities that requires the boost of such initiative is Las Vegas itself, once the 'escapist' older satellite town to Boulder City - created to house the construction workers of the New Deal's iconic Hoover Dam.

Given its relative youth and very murky origins, the 20th century story of Las Vegas is a well known addition to the US's history books. However having expanded rapidly over the last 15 years or so, it is the 21st century's near-term that must provide new solutions to meet the challenges that emerged when the economy rapidly contracted; effectively leaving economic devastation as the reality behind the glitzy facade of the city.

Of course recessions are typically a time of new build, the advantages of reduced labour & materials costs leveraged to bolster project costs, business models and of course add to the good of the local economy. Though not quite on the legendary scale of the Hoover Dam, Vegas has been espousing the regenerational agenda of 'City-Center', a reportedly different entertainment venue for regional residents and tourists alike in contrast to the character and remit of its Casino-related surrounds. Instead, it endeavor to bring 'culture' per se to Las Vegas via what is in reality a re-baked version of regurgitated 'Euro-Modernism': as seen before in Miami's 1930s originally 'clean' 'Ocean Drive Deco', this momentarily re-diverted by Lapidus hotels & Lincoln Drive's “Too Much is Never Enough” re-creation in the 1950s (that simply overlayed vibrant tones over simple geometric structures), and perhaps last seen back in the 'Euro' guise of Ford's 1961-69 Lincoln Continental.

Of course for Las Vegas after such pseudo-architectural landmarks like the kitsch original Flamingo and The Sands, the 1960s onwards brought on the idiom of the commercially successful but characterless 'decorated sheds' and 'neon boxes'; perhaps best illustrated by The Mint.

However, whilst an architectural atrocity that added no cultural value to the roadscape The Mint inadvertently assisted in growing the soul of city auto-culture in the guise of the The Mint 400 off-road race between 1968 and 1977– latterly put into legend As the Great American Desert Race - as a counterpoint to the better known and older Baja 1000.

The Mint 400 has been revived and runs annually from its Fremont Street start-point, but critically it nourished the small core of Vegas auto-culture. Today beyond that renowned desert race of Hunter S Thompson lore, it takes the form of NHRA Drag-Racing derived from its illegal start-point of counter-culture youth origins across America but perhaps most emblematic on the old Vegas Strip – very apt – to the running of NASCAR at the Vegas Speedbowl.

The business park grounds surrounding the Speedbowl also happens to be home of the US auto-legend Shelby - which today goes by the holding company name of Carroll Shelby International Inc since 2003, previously in the guise of Shelby American, that name now reborn as the manufacturing subsidiary of CSI (ticker CSBI:OTC for 'over the counter' stock trades).

[NB CSBI is today 06.04.2010 trading at $0.26, a quarter of the value it reached on 25.02.08, demonstrating the decimation to the national and local economy].

For today's media-connected, TV referential popular society that 'CSI' nomenclature has obvious overtones to the TV series CSI: Las Vegas. Whilst that may have been an obvious cognitive tool happily the only connection Shelby has to the judicial system has been the use of the prison system's low cost labour in the formation of 'hand-lay-up' composite body-shell surfaces (hoods, fenders, doors etc) for its niche Cobra and Series One cars.

In the dour economic climate of this Nevada state desert town, this picture of knocked automotive niche manufacturing confidence sits in apparent contrast to the overtly upbeat tones of the local Mayor et al regards the expensive 'City-Centre' initiative – something touted as an economic savior. It's true role as a commercially profitable cultural centre remains to be seen, though as with the case of any newly announced maximum capacity passenger aircraft that proffers space and new experiences like on-board gyms the reality ultimately reverts back to normal business practices and maximum capacity utilisation. This may be ultimately the case with City-Center, where good social intentions that seek to change the character of the city fall to the way-side as the demand-cycle for cheap accommodation picks-up as part of the recessionary-busting effort.

City-Center is perhaps the expected reaction to the recession, an evolution of the 1930s build initiative, this time using largely private funds (even if tussled over) of MGM Mirage and Dubai World. It at least demonstrates the much needed fluid and symbiotic interaction of private capital and an assistive town administration, and highlights an effort to think beyond the (neon) box for the social and commercial good.

And whilst it may be far more typical Vegas style 'Show than Substance' it highlights the need for the city to become self-sustaining in a re-balance of its commercial, productive and wealth creating base. Moreover, just as it became a leading examplar of the credit-bubble, the metropolitan area growing at historic record rates with the explosion of housing construction, so perhaps now the challenge is to re-mould the city as a model of future-thinking.

That means strategically reviewing its geographic and philosophical position, understanding its innate industrial capabilities that lay beyond the gaming tables, show stages, service hospitality to the self-sustaining practical nature of its businesses and inhabitants that once built a city in the desert. That spirit may have heavily depleted as Vegas's character changed with the boom times, but that character needs to be regained.

Look behind the surface and today the outskirts of Vegas into Paradise, Winchester and Enterprise counties are experiencing the same type of retraction as inner-city Detroit experienced over decades as the indigenous car industry slowly shriveled to new global conditions. This of course, it is hoped, is an exaggerationn of the troubles facing Las Vegas, but the wake-up call is clear that alternative growth models beyond City-Centre and ever lasting discounted hotel-room pricing.
As part of this exercise the automotive soul of Vegas should be re-examined to see what else can be built to serve a new era, vehicles beyond the generic limousine Lincoln Towncars, stretched Hummers, yellow cabs, Detroit-sourced white rental cars, police black & whites, and periodic appearances of Elvis' pink Cadillac that run up to 'drive-through' churches furnishing marriage services.

2011 sees a new electorial mayor, after 3 terms of Goodman, and s/he should pose that question to the City and get answers that go far further than simply the usual 'taking heads'.

It may be an over-used example that now has become about as kitsch as Vegas itself, but that original winning attitude of Carroll Shelby that originally took the seemingly unconvincing shell of an AC Ace and fitting it with the massive energy of the 427 power-plant, does serve as a lesson for the municipal ambitions of the city. Ambitions that could seek to create a self-sustaining ethos in everything from water-resources to personal mobility. With unemployment running high and the local prison system likely to see influx, the innate costs of the value-chain are probably at an all time (price parity) low.

Perhaps there is no-where better that could merge a can-do attitude with the American fascination for the automobile, recognising than whilst old fashioned mass-manufactured 'Detroit Iron' resides in the heart, the future calls for a vehicle type and manufacturing system that should be radically different, something far more in-tune with the needs of the earth, local-economies and local individuals. Look at the desert racers (and indeed the swamp racers of the Deep South) and it is obvious the ingenuity for auto-re-creation is there; prompted by a 'Strip' ethos that could see lightweight as key for the goal of fuel economy and US energy security.

Buggies parade the desert sands, why not an on-road philosophical equivalents of very different shapes and sizes, If 1960s European sportscars were revered as 'rolling sculpture' why not the case for 'rolling architecture' in Vegas, where the 'neon boxes' are made to move?

Carroll Shelby held an Ace up his sleeve forty years ago that changed the face of US autos. Time now that the Obama & Las Vegas' administrations back Private Equity resources, possible PPI schemes & Main Street America's capabilities, to fabricate an Ace of their own.

Evolutionary development in nature show how desert beetles are able to navigate their way around a parched Nevada landscape; and a similar 'fit for purpose' philosophy should be part of the US Auto sector's localised re-invention where plausible and amenable.

The sooner Las Vegas starts its re-invention, not glamourising its seedy past, yet merging excitement and its new (City-Center) higher ideals in way that creates something truly avante-garde, the better for it and the whole of the US.