Wednesday, 12 May 2010

Companies Focus – The Western 8 – Dealing with a Triple Speed Triad and Balancing the Asian Volume vs Profit Mix

The investment community welcomed the multi-agent $1 trillion bail-out of what seemed probable contagion default of Greece, Portugal, Spain and perhaps even Ireland. Yet, certain commentators still question the fundamental long-term growth capability of southern Europe and Ireland; and rightly so given their intrinsically weak economic structures after the credit bubble burst.

Furthermore, the more far-sighted re-raise concerns about this measure effectively morphing directly or indirectly into additional QE injection; effectively pumping extra liquidity into a presently over-valued region. The IMF, ECB & Fed monies will be used to purchase 'PIGS' debt, and the effect was immediately strongly felt as bond-spreads eased greatly, but there is a prevailing dilemma that the liquidity may be circulated through the capital markets and possibly re-boosted equities after the recent sell-off. Dangerously, especially so in the smaller and more reactive capital markets of the affected nations.

At a macro level this will only eventually generate even greater instability as eventually these 'assisted' stock values falter when the reality of little productivity and a value-dwindled asset-base comes to the fore, even with a propped-up Euro.

So whilst Northern Europe's governments, companies and consumers are being economically ratcheted-down in the face of fiscal consolidation, it seems that Southern Europe could be in danger of thinking that a delusional happy ending has come to solve their nightmare, but that may not be the case and from respective political and public viewpoints the North vs South divide has turned into a chasm. Germany, the main determinants will no doubt continue its bi-polar rhetoric, Kohl's words for the unity project re-echoed whilst Merkel subtly derides the Med nations, but also quietly appreciates the competitiveness that Euro denominated German exports have gained across the globe. Thus partially good news for VW, BMW and Daimler.

Relative to a possibly stagnant EU, Japan stays in its endemic low growth pattern; one which tries to continually re-cycle its large savings glut, yet balance its cost-base against ever reduced on-shore manufacturing productivity and meet its increasing social costs. If we take Toyota's Q1 results as a n indication, the strengthened Yen has been successfully combated by cross the board cost reductions at overhead and variable levels. Given the speed and size of Toyota's turnaround, that bodes well for others such as Honda, Nissan and even Mitsubishi – though the results will be respectively diminishing given each's respectively smaller leverage over their cost structures

In the face of this the optimistic, re-buoyed US looks to try and maintain its growth path; the best in Triad economic region over the last year or so. Part of that paper-based success story has been the 'saving' of GM and Chrysler, the invisible reality of the nation's sunk cost in GM especially noted in the blogosphere, even if Whitacre & Ratner hail the supposedly “re-payed” loan and comfortable position. In the lead-up to any IPO the capital markets will take greater convincing, and that will need to be done well, to avoid speculators turning over the New GM stock almost immediately and so creating a roll-a-coaster rise, free-fall dip and lengthy flat-lining.

As a general result the Boards and CEO's of European & US-Euro auto-makers are under renewed pressures, and their efforts will very probably be more of the recent same – talking-up the West helped by credit-driven incentives and fleet sales, but searching the East desperately for conquest and renewed custom to counter-balance and underpin global sales.

Thus today automakers face an all-round squeeze of macro and micro-level pressures:

1.massively raised input (sheet-steel) costs after the recent Miner-Processor talks (+20-25%)
2.having to increase supplier volume orders to combat supplier input costs investment implementing ever greater cross-segment 'flexi-platform' solutions
4.thus improving capacity efficiently of under-utilised plants
5.yet with the challenge of selling in post-scrappage constrained EU & US markets

For investors an apt quote comes from the US Rock group's Blondie's 'Europa' album from 30 years ago, EU makers face being “thoughtlessly locked into phase 2 grid-lock...keyed-up...on its rims”. This may be an over-terse description, but no question that “The Tide was High” but it is retracting.

Having faced a previous economic 'grid-lock' in 2008/9 which should have slain the weak, saved by major government interventionism, the EU players now once again undertake their never-ending march for volume capture. That dichotomy is part and parcel for autos & parts investors, both long and short-term. Either way at such times the funds or fiscal-breaks seemingly keep flowing, either in the national interest by fearful politicos, or by relatively risk-averse institutionals and SWFs which sway toward safe-heaven slow-growth but asset-backed entities such as utilities and industrials.

Yet this dualistic, mutually related, investment theorem which underpinned 2008/9 that arguably generated investment sector 'themes' over sector 'picks' is now coming to a close as the ability of governments and central banks becomes increasingly untenable given the over-stretch to effectively underpin the common EU ideal.

Instead, as mentioned by investment-auto-motives' Spring “post-card'”campaign, the West's auto-sector is once again being re-fractured, something seemingly recognised by the likes of Elkann & Marchionne at FIAT given their recent courting of investors with FIAT's massively re-orientated business model of separated Cars & Industrials.

Thus move away from mutually inter-dependent and inter-supportive divisions is designed to create investor transparency and divisional autonomy, and has set the investor grapevine a flutter with some parties pushing other conglomerates such as Daimler to follow suit with its Truck section. But of course everything must be judged on an individual basis, and to this end FIAT Group was never a true comparable to its western peers, more akin to its commercial partner TATA; though far slimmer and with differing sales ratios for its cars vs capital goods and services.

This then sets the basic picture for the remainder of Q2 and into Q3. One of newly changed EU consumer circumstances, which will typically demand either cash burn by those with government provided low-cost liquidity pots, or the settling of new (ie secondary) equities offerings such as VW, and for those that bridge these 2 'banks' of the river such as Renault-Nissan a dualistic approach.

All 3 of the US players that also operate in Europe saw their futures buoyed in 2009, achieved via either independent credibility in Ford's case – the markets only darling -, by massive cash injection in GM's case, and via pseudo 'partnership' in Chrysler's case.

The following posts re-run the previous over-view that considered the positions and investment potential of all Western 8, and so will analyse:

VW Group
BMW Group
Daimler Group
Ford Motor Co
New GM
FIAT-Chrysler Group
PSA Group

Comparatively depressed mainstream consumption means ongoing re-alignment for the mass manufacturers, with ever greater pressure to gain market share in BRIC and (notionally called) EM regions.

[NB though as many have correctly stated investors need another coda other than EM].

Eyes are upon the executive and luxury manufacturing set, such products enjoying a renewed upswing as the plethora of global SME businesses and corporations took-on new models with relative aplomb as rationally: “low depreciation company assets” and emotionally as: “post-crisis self-rewards”

The EU's TIV in 2010 is expectantly going to be down by -9% to 15%, the former figure much dependent on the strength of the private sector to re-infuse consumer optimism via jobs and output data. That outcome could ironically be the case as ongoing fear over sovereign debt problems that puts liquidity primarily to work in EU and UK large-cap and mid-cap companies.

As the private consumer baulks, so Sales and Marketing Directors at the biggest VMs will be looking to fleet and rentals to maintain factory output and so any kind of leverage over their whole value-chain. Furthermore, a key element for them will be the decision rational between chasing Asian volume to increase their foothold and critical per unit profitability which sets not only the basis for future expectations but also the perceptional standard in market. The Western 8 must all stand firm and make an innate quality statement in their pricing structure of new models. This of course is less so for some of the yesteryear models that are used as new cars entry points, but in this case the value-gap between old and new must be perpetuated – and of course all will be following VW's Chinese lead in this arena.

Once again those best placed with brand credibility, moderately aspirant vehicle portfolio spread, good product cadence, BIC capacity utilisation credible strategies , cash-cushions and access to low cost of capital will pull away and create a decisive story in the 2010 race. The fundamentals will tell all now that market frothiness is thankfully falling away.

Ultimately, as with Blondie's former recessionary era album titles, “AutoAmerican” & “Europa”, there will be a level of “Rapture” and “Follow Me” for those companies that used the shock period of the last few years to re-strengthen themselves to cater to today's investor's demands. Their present remit is to curry future investment favour by playing Blondie's “Picture This”.

As ever, investment-auto-motives remains on hand to review just how well those pictures have been painted. To re-iterate the Spring/Summer campaign: undertaking its own Art of Work in probing beneath the surface and conjoining the investment opportunities.