Friday, 25 June 2010

Companies Focus – The Western 8 : Renault SA – Fighting Hard on the Western Front & Gaining Ground in the East.

Europe has undoubtedly been the focal point of the investment community in recent months. Emergence of the Greek sovereign debt concerns led to a crisis of confidence across much of Southern Europe, with even Ireland's earlier budget tightening providing little protection from the toxic 'PIGS' enclave. Portions of the CEE – most notably Hungary - have also been exposed, over-stretched public balance sheets resultant from rapid expansion over the last decade.

This ironically creates both a short-term problem, yet a long-term opportunity for the French (and German) carmakers. Having played a large part in the formation of the previous economic climb of peripheral Europe, via Renault-Nissan's Spanish manufacturing and its re-birth of Dacia (aswell as VW's SEAT & Skoda), Renault itself must now balance the realities of short-term contraction with the politically-charged tail-wind that is subtly emerging. Now that France and Germany have essentially under-written (to the value of E750bn) much of the EU debt concern via bond issuance assurance from the newly created IMF-EU backstop mechanism, the implicit presumption must be that as France's national champion Renault will benefit from future public and possibly private expenditure from such 'beneficiary' countries.

Furthermoreee, the structural changes regards national labour-force policy required by the EU-IMF essentially dismantles the overtly rigid, socially entrenched 1960s attitude toward national workforces; and that much needed shift toward far greater labour flexibility will both drive labour costs down as closed shops are opened-up and propagates the need for educational improvement: these 2 forces able to be leverage by Renault-Nissan in due course. This efficiency gain will undoubtedly be used to off-set a level of near endemic French operations protection, but does allow portions of its EU operational base to align to realities prevalent across the rest of the globe..

This far-horizon expectation combined with its alliance global footprint, and future efficiency gains from the announced Daimler alliance with Europe, plus sustained sales performance throughout the western economic upturn in recent quarters puts Renault ahead of the remaining mass European car producing pack, even as a strengthening Yen slightly undermines the Nissan bottom line contribution going forward.

Critically for investors, Renault offers both positive FCF looking across the remainder of 2010, the ability to maintain its market share increases and unlike other manufacturers still has substantial implicit government backing as a last resort – whilst remaining a listed entity - something very very far away but there all the same if ever the need arose.

Q1 2010 Performance -

This quarter saw the corporation's sales figures (in percentage terms) beat the global and regional TIVs. Back in late late April CFO Thierry Moulonguet and Jerome Stoll (EU regional head) veritably beamed as Renault reported industry beating sales gains and minimised sales-losses for its passenger cars and commercial vehicles.

[NB Dominique Thormann appointed as Group CFO from July 1st 2010].

Set against a Q1 Global improvement of 19.3% Renault scored +32%. In Europe versus general improvement of 9.7% it scored +37.7%. In the Euro-Med region versus general a decrease of -11.7% it scored -0.5%. In the Americas (Central & South) versus 10.9% general improvement it reached +27.4%. Eurasia saw a -25% decrease, yet Renault improved by +6.5%. In Asia-Africa versus a regional uptick of 33.8 it scored +40.8%. Gains were made in 13 of its top 15 sales countries, with a massive 76% rebound in S.Korea via its 'homeland' Samsung JV.

Comparing Q109 vs Q1 2010, the model mix was much improved with the introduction of new Megane, its Scenic variant the CoG for both the model range and still (as originator and benchmark setter) the star performer for Europe's highly popular C-segment MPVs. Indeed, Renault has comfortably outperformed the YoY EU market's TIV increase across all segments except large/exec cars – the latter as expected.

The Twingo attraction rate was x12 of its class, the Clio x3.2, the Megane x3.8 (it being the best performer in growth, the new range in its variant guises, up 46,000 units (+61%). LCVs in general reaching x4.

Thus Renault remains the EU's #3 car producer and #1 in LCVs.

This translated into the following income:
[NB the details officially provided were very brief, presumably to highlight the 'good news' figures, yet also providing little information from which analysts could construct detailed pictures]

In Q1 2010 the Autos division proffered a Revenue of E8,642m relative to Q109's E6,631m, (so up +30.3%). Of this significant boost, Europe represented 15.6 percentage points, the combined regions of Euromed + Eurasia + Americas + Asia-Africa gave 11.5 percentage points, the remaining 3.2 percentage points from other operations.

The majority of income was directly related to the major volume increase of 25% YoY, with the weakening Euro providing a 2.5% FX boost, and 3.2% gained from partner company income streams.

Sales Financing via RCI Banque gave a reduced Revenue of E430m versus E436m the previous year, (so down -1.4%). The new customer loan level improved by 27% or so YoY with 227,400 new contracts surpassing 178,700, whilst the outstanding loan book value rose by 1.5% to E20.5bn from E20.2bn a year earlier.

Thus Group Revenues increased overall to E9,072m from E7,068m, (up 28.4%).

Strategic -

Having flailed previously in North America - even with a 1980s Chrysler connection - Renault's global growth ambitions (unlike FIATs) precludes the US and Canada; instead targeted at easier access, less harshly competitive (and arguably value-creating vs value-destructive) EM regions.

As such it appears to wish to strengthen in an 'outward ripple' fashion, from the long-established foothold via colonial French roots in Northern Africa (including a new Moroccan plant due in 2012), across to other typically Muslim states (such as its Iranian JV 'PARS') and throughout Asia Minor. Whilst also obviously recognising the massive potential of the Latin American economic wave and the longer-term picture for Africa; especially so given Nissan's strong regional reputation..

Recent years have seen a global reach strategy which utilises both a JV business model approach where politically necessary with local (under-achieving or strategically placed) auto-companies, and 'go-it-alone' approach where the absence of regulatory limitations or no readily viable domestic 'leap-frog' companies to gain market-share are present.

Having conquered the CEE states and gained ground in W.EU with Dacia, and a slow erratic presence in Iran via the PARS JV (with Khodro & Saipa), Renault wishes to maintain its momentum by exploiting similar opportunities and re-plays elsewhere.

Since 2008, the Russian JV with Avtovaz is used to access the CIS region of Upper Asia. The credit crisis generated temporary friction in the relationship as Russian car sales plummeted, harshly devaluing the company, with demands from Moscow's that Renault contribute more cash to maintain its 25% share. Ghosn rightly stood firm, the troubled waters have been largely eased with a recent show of good faith by Renault In support of the Russian government's Avtovaz's '2020 Plan' Nissan has now become a partner, the tri-alliance designed to expand the members' combined market share from today's 30% to a goal of 40% by 2015. Technical and operational synergies with critical local sourcing and staff training improvements are envisaged that reach across the board from: platform sharing, procurement, production, R&D, sales and marketing, logistics etc.

In the Asian sub-continent, Renault India has been operational, although relatively low key, since 2005, the initial Mahindra distribution relationship giving Renault market access dissolved. Having gained a foothold it grew its own dealerbase and for operational purposes replaced a market-facing Mahindra with a value-chain facing Bajaj, forming a logistics base in Poona and creating an NPD centre in Mumbai. Importantly, moving on from Mahindra production of Logan, its first official Renault-Nissan plant was inaugurated in Chennai in March set to producee 400k units p.a and seeking to provide a full Renault model range in India by 2014 offered from over 35 city-centres.

There is also the promise of an ULC (ultra low cost) car (at $2,500) being formed by Renault-Nissan-Bajaj and to be manufactured in Maharashtra state in a dedicated factory – akin to TATA's Nano. Initial concept renderings suggest the car will be derived from the new Wind model available in Europe, itself derived from the Twingo platform. Thus the ULC business model could be possibly predicated on the fact that much of the capital investment cost has been born by Twingo & (high margin) Wind NPD programmes, this allows the official ULC programme costings to access a largely amortised 'parts-bin' for a locally sourced, piece-part only, low cost BoM and with less 'roboticisation' affords the use of low cost local labour content. Thus the cost – if indeed really $2,500 and not a Nano like publicity stunt – is absorbed in the global platform business case and not created through the ULC's unique NPD process. This highlights the respective TATA vs Renault business positions and demonstrates the kind of industrial economic leverage brought to bare by western players relative to India's domestic firms reliance upon core competence capabilities.

Compared to others Renault arrived relatively late to India, so has had to demonstrate its commitment via a broad-spread of activities reflective of its long-term intention as a 'new domestic' player. Whilst using bridging relationships with local corporations that mirror the likes of Maruti-Suzuki, reading between the lines it seems that Renault will prefer to build as much independent autonomy within the country, so local ties diminishing as it gains strength in the years to come..
[NB. The name Renault-Nissan Private Ltd has been tellingly adopted]. Such advancing steps will be taken in a necessarily slow manner so that Renault can tip-toe through the political terrain, utilising government subsidy/assistance where possible (typically via JV operations) to build its growth base across all upstream & downstream aspects of the full value chain

This EM nation approach was envisaged over a decade ago Renault took the decision to create a dual-aspect platform strategy which reflected the needs (regulatory and consumer) of both advanced and emerging regions, the former recycled into the latter as time passed, so effectively recycling the invested funds of developmental & product testing effort and (amortised) tooling for long-life use and extended revenue generation.

Renault-Nissan China is largely predicated on the back of Nissan's progress in the country, Renault's own manufacturing ambitions set aside to allocate the essentially government allowed increase in manufacturing capacity to go to Nissan. This then set the continued Nissan lead tone, which Ghosn hopes will enable a 10% of the Chinese car market by 2013. Product to date has been imported in relatively low numbers, and adding to its Chinese drag, it has been the victim of copy-cat cloning by Sino players.

As with India, the French firm is relatively late to market with Renault badged cars, but the Renault Board could be using this period to try and re-position itself as a comparatively aspirant offering within the mass-market, given its French origins, its F1 race team and the Chinese predilection for French luxury goods. Essentially as a differentiated alternative to the German and Japanese and of course Chinese domestic players, some with only 'psuedo-British' character.

After a poor Laguna and (last generation) Scenic reception, the release of (Samsung developed) Koleos has attracted attention and sales, its NPD origins presumably adding to unit margins. The Beijing Auto show presented Clio RS, Megane Sport, Laguna Coupe and new Scenic, with the aim that such a high-level shop-window will add a halo effect to the brand's realistically miniscule public persona (at 8,000 units in 2009, 16,000 expected in 2010). However, building recognition amongst a small but socio-demographically important upper-strata city-set, is the undoubted intent. With the upcoming Fluence C-segment sedan (match-manufactured and presumably derived from Samsung) appearing in 2011.

With regard to ecological issues, the company is promoting its 2010 Eco2 Workshop, which showcases the use of various eco-directed powertrain solutions, spanning petrol & diesel ICE, Gas and Electricity, the latter vaulted by the corporate party-line as representing 10% of all new cars by 2020.

[NB. However, investment-auto-motives conjects that projecting the world's annual 2020 TIV as approximately 80 million vehicles – a conservative estimate – some 8 million electric cars would need to be produced. In perspective even after many years of UK government spending promoting and subsidising e-cars, less than 0.1% of the UK's cars are full-electric. To enable such a sea-change major internationally conjoined regulatory change is required to allow for the more tenable NEV type vehicle to emerge en mass. A more realistic prognosis that the 10% will be petrol-electric or diesel-electric hybrid based].

In 'real-world' counter-point to the EV rhetoric, E60m has been invested in expanding and updating the Lardy Powertrain R&D and Test centre outside Paris. This welcome CapEx spend assists in maintaining Renault competitive capability regards the creation of higher-efficiency, emissions leading ICE units and improved efficiency (ie reduced parasitic losses) transmission systems. Although obviously intended primarily for its own use relative to develop new family engines and re-engineer for specific worldwide regional environment demands, its in-house status critically secures any industrial lead Renault may obtain, with reduced reliance on less secure external testing facilities. Furthermore, any spare capacity at the centre will probably be offered to alliance partners Nissan and now Daimler and possibly independent European and global independent engineering companies to gain additional revenue streams from the new asset.

But of course, the headline news of April 7th has been the alliance agreement drawn-up with Daimler, with a cross-share hold of a nominal 3.1% (completed at April end, 1.55% owned by Renault & Nissan respectively). In order to complete the transaction Renault issues 10.78m new shares, simultaneously selling 0.55% of the new share capital base to the French state. The transaction brings E150m in terms of cash supply probably absorbed directly into the working capital budget.

Both Renault & Daimler recognise the detrimental effects of the high cost of capital for CapEX projects, the ever present over-capacity in Europe and their respective operational weaknesses. Thus the announced co-operation on the development of small vehicles in A and B segments (including the Smart & Twizzy joint manufacturing exercise), the development of compact vans and badge engineering & NPD opportunities across the Traffic, Master, Vito, Sprinter and feasibly HGVs, and the cross-selling and contract manufacture of proprietary technologies: a lead example being Nissan's luxury Infiniti division's adoption of Daimler's large engines. Of course, full investigation into the available cost savings made available on a project by project synergistic basis are too many to be examined here, but as previously stated, investment-auto-motives believes that whilst the breadth of inter-connectivity has been presented, the actual depth of resultant value-creation has been intentionally under-played by all 3 parties.

Lastly within the strategic realm, we look at the broader picture of scenario development for a powerful paper-based asset.....

Renault's 21.3% stake in AB Volvo Truck has been a constant source of speculation with Thierry Moulonguet's mention of possible non-core asset sales in 2010 to maintain positive FCF. This in turn prompted capital market conjecture, investors, analysts and traders alike recognising that “non-strategic” means “available for disposal at the right price”. (However, this could also be a ruse to simply lift Renault's share price, with little ultimate intention of disposal).

Sweden's Industrivarden has shown interest as a potential purchaser, stating that nothing has been informally or formally discussed with Renault, yet interestingly chose the press to avail its apparent interest.

[NB investment-auto-motives conjects that Industrivarden would probably be acting as an intermediary agent or self-positioned 'middle-man' on behalf of another investor group, possibly affiliated to Wallenberg and/or Grimaldi industrial holdings with an eye on Swedish & possibly proto-German truck manufacturer consolidation].

But looked at more closely, it seems unlikely that Renault would dispose with no strategic consideration of its own, given the use/exploitation of the Renault Truck brand – even if only remotely owned by Renault SA via AB Volvo (which itself owns Renault Truck).

Given the fact that VW is slowly seeking to consolidate its truck sector via MAN and Scania, Renault's stake sits squarely between any collaboration possibilities between AB Volvo truck and Daimler truck.

In the face of the growing VW truck threat (MAN & Scania) primarily across Europe and Latin America, it seems unlikely that Renault would willingly relinquish its brand existence within this arena, especially with large receipt, inter-purchase, fleet customers who buy across the full range of its commercial vehicles from small city vans to HGVs; and prefer a single branded fleet, even if the 2 Renault divisions are (unwittingly) separately owned.

Critically its sizable voting rights at Volvo Truck keep it both informed of insider information and provide an avenue by which to repulse any hostile take-over threat to Volvo Truck. Ultimately, its influence in Volvo Truck (& by virtue Renault truck) assists sales compatibility for its own LCV division, and critically allows it a conducting role in the orchestration of any truck sector consolidation. This the case relative to any possible 'hostile' 3rd party interest, and especially so relative to possible later-day alliance agreements between Daimler AG and AB Volvo.

(This especially prescient given the political alliance between France and Germany being strengthened to secure the strength of the EU's economic and industrial base)

[NB to that end, investment-auto-motives tables the idea that if an AB Volvo share disposal were to take place, the natural recipient would be Daimler, however Renault of course seeks best pricing so probably wishes to entertain other non-hostile party interests as 'auction dummies' to in turn lift the asset value].

Operational -

Industry observers will recognise that much of Renault's strong Q1 performance was enabled by its E3bn French government soft-loan. Designed to see it through the credit crisis, enable operational efficiency initiatives and generate French-centric production allocation; the liquidity made available has undoubtedly been a prime element in effectively boosting Renault's standing as the the depth of the recession receded and car buyers re-emerged. Such an arrangement obviously flies in the face of the true economic sense of competition theory, but for the French authorities - in historically typical socialist stance - maintaining Renault's size and stature as a French operational hub is seen as a necessary societal contribution during these wavering economic times.

Renault Cars:
The Renault brand entered the beginning of 'EU Main Street' recession in Q308 on 7.8% EU marketshare, to see share fall and re-ramp to 9.6% by Q409 and slow to 9.2% by Q1 2010. To economic purists in the Adam Smith sense, that increased market share was effectively bought by the French tax-payer.

Although filling French factory space and seemingly directing funds to RCI Banque for consumer credit purposes, Renault has also altered operations down-stream at the dealer-level to its own advantage. Inventory levels have reduced from a June 08 high of 510,000 units to a Sept 09 low of 313,000 units before new model introductions gave a ramp-up to 356,000 by Mar 2010. Expectantly, details highlight that Group owned dealers have been given preferential treatment over stock allocation for the new model Megane relative to independent dealers

As with all car-makers the company has increased its used car buy-back facility in an attempt to both boost new sales and influence the pricing (in)elasticity of used Renault vehicles.

[NB. Renault has been historically prone to “auction-house drag-down” (in the UK especially)]

The Gordini performance sub-brand was introduced on Twingo and will be applied to Clio, thereby promotingg a 3 tier performance capability/price ladder of: RS, RenaultSport & Gordini. However, given that Gordini is supposed to compete against the likes of Mini and Abarth the level of marketing effort appears lacklustre, with the once legendary name simply given a single page on Renault's main website (in the UK at least). To truly have an impact, a hyper-link should have been used to direct potential clients to a dedicated website that reflects the supposed premium quality of the marque. Although the domains name and are respectively already taken by a ski sportswear company and Gordini enthusiast club, Renault should be dedicating much more web coverage in one manner or other to generate traffic and interest. This lacklustre effort stands in contrast to the obvious time, effort and expense of the 'VeryGoodTrip' Pan-European campaign for Megane & (new) Wind coupe-cabriolets. The opposite approached
could be intentional, Renault possibly viewing that high-profile Gordini advertising may cannibalism sales of the the larger margin Wind, in which case a better psycho-graphic understanding may have improved the marketing strategy, very simplistically directing Gordini to younger men and Wind to younger women and retired couples.

Dacia Cars:
Alongside the Dacia brand has expectantly gained from the recession, seeing EU market share rise from 0.9% in Q408 to 1.6% by Q409 and Q1 2010. Beyond Logan and Sandero, the new Dacia 'soft-roader' is being introduced to expand the brand's coverage and build credibility. It is the 4th model derived from the Nissan Qashqui, Samsung QM5 and Renault Koleos platform, and should be well received by both private and municipal (typically Police) buyers in the CEE and generate stiff competition against entry level SUVs (eg Chevrolet Captiva) in W.EU markets.

Nissan Motor:
Beyond the obvious Group income contribution to Renault from its share-hold in Nissan, the Japanese partner has previously provided lead platform development for in large car and SUV products. It also provides the technical lead for R-N in the development of hybrids and EVs.

As a precursor to Renault's supposed (but to investment-auto-motives, little believed) e-car revolution, Nissan's new compact car sized Nissan Leaf EV is introduced in relatively small numbers in Japan, the US, UK, Netherlands, Portugal, China & Australia across late 2010 to mid 2012. Thus having gained LoI's with various national and state authorities, Leaf will essentially 'test the waters' of the (innappropriate) steel monocoque packaged EV practicality, durability, cost and ultimately credibility.

Of course much depends upon the continuance of a publicly funded high cost charging infrastructure, which given the perilous condition of western governments' balance sheets, looks increasingly unlikely; unless a form of credible PPI is truly instigated; national Treasury departments noting that many PPI transport projects have a reputation for being overtly biased to protecting and over-rewarding the private funding party.

[NB Given even today's level of macro and micro-levels headwinds spanning consumer resistance, regulatory requirement, rightly cautious private investment attitudes, the high cost of capital, still unproven EV business models versus overtly optimistic tech disruption 'game-changing' rhetoric from instigators (etc etc) the level of endemic value-creation already prevalent in today's auto-sector business model, investment-auto-motives believes that the investment community should not be bowled over by the ongoing mass reporting of supposed 'world saving EVs'.

Ultimately they serve only a tiny fraction of the world's true rationally and emotionally driven transportational needs, and to be sustainable the EV requires a business model by which true typically limited functionality is reflected by (parallel) low pricing to the consumer

At present in the UK the Leaf EV is due to cost £28,350 (before a 2011 £5,000 government rebate which will probably be of limited time-span and deleted as part of necessary budget savings) as compared to £19,500 for the more practical and proven hybrid Toyota Prius].

Thus whilst Nissan provides Renault with a 'good news' story, investment-auto-motives believes (as do Toyota and Honda) that its EV R&D is presently mis-directed, and if integral to its strategy aligned only to Smart ForTwo & Twizzy sized personal city micro-vehicles.

Samsung Motor:
Though Hyundai-Kia and GM dominate the S.Korean small and mid-size car market, Samsung managed to enjoy a level of historic success thanks essentially to its offering of cut-price Japanese technology – cars adapted from durability-proven Nissan's large and medium car products.

New SMC5 and SMC3 have managed to enjoy rapid consumer adoption thanks to the positive economic fortunes of S.Korea resulting from export demand pull for its high-tech products, a weaker Won and ongoing progress regards industrial reform. Strengthening the model range will be 2 new models lightly adapted from Renault Scenic and Clio.

Having proven itself to the S.Korean consumer in the past, and now riding a wave of purchase confidence, Samsung must attend and contain to any emerging problems regards product quality if it is to sustain its market position between its prime bigger domestic rival of Hyundaii-Kia, psuedo-domestic GM-DAT and Japanese imports. This especially so on the new B & C segment cars given GMDAT's recall of 60,000 vehicles for safety-critical steering and fuel storage concerns on Cruze and Captiva. This reputational hiccup for GM could be of near and long-term advantage to Samsung if it attends to quality to maintain a difference between itself and peers.

Countering this opportunity is the challenge that the US Congress is pushing the S.Korean administration to better open its doors to US made cars, so as to close the massive chasm between the 2 countries' mutual automotive export volumes : the US takes 350,000 Hyundai-Kia cars vs S.Korea in-take of 7,000 US vehicles. Given that imported vehicles would typically consist of mid and large cars, this could pose a threat to Samsung's SM5, QM5 & SM7.

However, the company is taking the opportunity to slowly grow its presence felt in Latin America, via Chile, yet will need to somehow demonstrate its consumer resonance there so as not to be swallowed by the Latin market's Big 3 players.

Renault LCVs:
The new Master van and chassis-cab is introduced, maintaining its (competition) declined but still potent offering of product permutations: 4 lengths and 3 heights, and FWD (low flat cargo floor) in 2.8T/3.3T/3.5T GVW guises, RWD in 3.5T & 4.5T guises (and eventually possibly 4WD, as has been the norm. Though the availability of an LSD on RWD vans theoretically reduces 4WD demand, and so the heavy overhead cost typical to SV (special vehicle) operations that re-engineer for 4WD and specialised custom order requirements.

Though not revolutionary as such, and less well engineered than most (besides LDV) it typically achieves enough to sell well to large fleets and SMEs due to lower initial purchase price, flexible lease deals, low 3-year running costs for the user (MPG/KmL, insurance etc). Warranty costs to Renault are typically higher than VW, Daimler and PSA-FIAT, highlighting durability issues. But the slow evolution in van design relative to changed engineering hardpoints requires typically lower investment spread over greater model changes, which in Renault's case is amortised over high capacity production given that it also serves Nissan and Opel/Vauxhall besides itself.

Thus whilst the vehicle models themselves are not 'best in class', the relatively light CapEx demand together with leveraged economies of scale underpin a business model which arguably is BIC, so a core activity that promotes shareholder reward.

Renault Truck:
[NB Owned by AB Volvo since 2001].
See previous Strategy commentary.

RCI Banque:
The division offers funding to the general car-buying public, the R-N retail network (group held and independent) and to corporate fleet buyers, and funds over a third of R-N vehicle sales.

Although Net Revenue reduced YoY for Q1 2010 to E430m from E436m, a closer look at RCI operations shows that 2009 efforts to find cost savings, improve efficiencies and de-risk the loan book led to an improvement in RoE to 16.3% from the previous year's 14.5%. A reduction in loans outstanding by end 2009 and the level of new contracts generated suggests that management were keen to create a steady credible (credit rating) footing for the division. This action no doubt an edict from above given the finance division's importance in assisting the dealer-base and the Group en mass, and seen by Dominique Thormann's promotion from CFO of this division to that of Renault Group. Ghosn wants to demonstrate that the financial discipline shown at RCI will be applied to Group from mid-2010 onwards.

Financials -

The assistance of the French government's E3bn soft-loans to both Renault and PSA is well documented.

However recognising the modern era's capital markets' volatility, in a bid to maintain liquidity in the face of its deteriorating credit rating (Moodys rated Ba1), Renault wisely decide to access the capital markets' 2010 window whilst open.

Hence, has had RCI Banque issue three sets of bond issuance (maturing within 2, 3 & 5 years) providing an income of E1,700m and seen Renault SA itself issue a E500m value bond (maturing in 7 years at a paying a coupon of 5.625%). Revolving credit lines available were at 31.03.2010 to the value of E4.1bn for the Autos division and E6.8bn in available liquidity from internal sources, banking agents and the European Central Bank.

Even though 'back-stopped' by the French government, and timely in its bond issuances, Renault's highly Euro-centric stance still leaves it exposed to possible extended volatility regards access and costs of capital markets' wholesale funding from the region into the future. A critical benefit of the Nissan alliance has been the ability to tap highly liquid, low cost Japanese capital markets, but an eroded Euro and strengthening Yen has constrained both the cost of Japanese capital and the FX arbitrage previously enjoyed.

Thus Renault must continue to seek out additional worldwide financing sources, especially so in Asia, Latin America and Africa through RCI Banque's 39 country foot-print and beyond, to both fund local operations and provide a chain-link between EM sourced funds and the Bolougne-Billancourt Headquarters. This real challenge to the group suggests (at least in part) why Samsung Motor was directed to launch in Chile, so as to in turn bolster RCI Banque presence within the Americas beyond Brazil, Mexico, Argentina & Colombia.

As credit rating agencies such as Moody's have illustrated, Renault previously typically ran with an EBITA Margin of between 6.3% and 7%, but the effect of the credit-crunch from 2007 through to 2009 was to drag that number down dramatically, to 1.2% in 2008 and -6.8% in 2009. Likewise over the 4 year span between 2005 – 09, EBIT/Interest Expense markedly declined from 7.3x to -3.5x. In the same period FCF/Debt rose due to the state's massive 'soft-loan'. That cash cushion also re-orientated the EBIT/Debt relationship.

However the 30% or so rise in Q1 sales YoY demonstrates Renault's relatively strong position in Europe (along with VW & Ford). Portions of the substantial cash reserves will undoubtedly be used to undercut its mainstream peers in major EU markets to buoy market share, so that Renault is better position come the (slow) economic upturn to enjoy improved margins on larger TIV slice.

Conclusion -

Renault is ultimately an entity that has evolved to arguably incorporate some of the worst and best traits of what should be a free-marketeering multi-national; yet this is simply the industrial structural outcome of a previously entrenched French economic stance. Yet both state and company are slowly shifting as global and regional macro-economic pressures demand their change.

Carlos Ghosn has carved a path which because of its national champion status manages to leverage both the goodwill of French government and the technical competence and global reach of a Japanese partner, combining these dual 'backer' and 'reach' strengths with a far-sighted passenger car platform/components strategy which recycles amortised tooling to cost-effectively enter price-sensitive, yet expectational EM markets. The attitudinal overlap between Car and LCV business models is apparent, and has created cost efficiencies that can be re-injected back into tactical product actions aswell as overall investment strategy.

Given its historical socio-economic historical context as the national lead player in smaller vehicles and commercials, it is no surprise that Renault has orientated its business model around the segments it knows well, its long-life platform strategies core, whilst 'bolting-on' the strengths from partner and alliance capabilities as deemed necessary.

The relatively demise of the Euro due to 'PIGS' sovereign debt concerns over the last 7 months or so has given EU exporters an FX lift. Renault, whilst not a major exporter compared to other EU players by value, does gain significant sales from the UK, Turkey and elsewhere, with far-shore operations outside of the EU ramping up volume, the income of which is aided by the inflationary character of such regions and currencies, thus providing an FX counterpoint to deflationary EU, so providing the continued FX tailwind into H2 2010. Furthermore as mentioned in the introduction paragraphs, the ever strengthening Yen – 16% higher now than at the beginning of the year - provides a large, secondary (FX) contribution from stock apportioned income from Nissan.

As with General Motors North America, the provision of 'liquid' government assistance prohibits typical YoY comparisons of the usual profitability ratios, liquidity ratios and activity ratios, and in Renault's case by end 2009 a constrained FCF key metric was over-shadowed by a strong FOCF (Funds from Operating Cash Flow). FOCF levels through Q1 were maintained and although the end of EU state scrappage schemes will have an effect on private car sales (-10% being Renault's the industry's general consensus) investment-auto-motives believes that Renault will hold and possibly gain market share as sales levels decline (by 7% to investment-auto-motives forecast).

Thus a more easily adaptable production and inventory re-orientation and good market (ie consumer share of mind) positioning with a strong product mix and more customer amenable dealer-base – in supporting used car price trade-ins on new sales – indicates that Renault is better positioned than the likes of FIAT-Chrysler and PSA in what will be a reduced but relatively stable European sales environment.

And beyond its Euro-centricism and Nissan worldwide reach, though still of limited penetration from a RoW view, its web-like regional JV strategy and market positioning flexibility gives it an advantage to be exploited in the mid and long term horizon.

H1 2010 results to be announced on 30th July.

Thursday, 17 June 2010

Companies Focus – The Western 8 - General Motors Co LLC : IPO Dressing with 'The General's New Clothes'? Given the Benefit of the Doubt.

Having previously reviewed the 4 western auto companies that are 'in shape' to better face the near and mid terms (ie 'in the light' as depicted by the accompanying graphic) investment-auto-motives continues to survey the remaining 4, arguably less well positioned. In a renewed yet hopefully temporary time of new angst, industrial structure, regional market reliance, political attitudes, credit tightening and a more cautious consumer all add headwinds to the fortunes of large EU centric players.

Thus positioned incrementally 'in the twilight' are typically those that whilst enjoying boosted sales from 2009's governmental stimulus spending, must now face a new round of partial re-structuring to create more efficient, powerful and cost vs income relative: R&D initiatives, product development procedures, supply chain linkages, manufacturing bases, marketing platforms, retail channels, and of course pertinent product.

Relieved of many of its legacy problems after Chapter 11 re-birth, New GM sits in the shadows of an independent Ford, yet theoretically ahead of Chrysler. Whilst all 3 have either directly shown or announce from internal accounting methods a Q1 profitability, given the lack of true transparency regards GM and Chrysler relative to their 'umbrella protection' by Washington and FIAT respectively, the investment community will obviously be trying to assess both's true bottom-line contribution beyond the PR rhetoric.

New GM, now devoid of the 'bad baggage' hived into Motors Liquidation Co, faces the world with optimism citing its renewed product range, renewed North American customer attraction, Chinese market history/penetration and the renewed efforts of global reach and value-car pertinence of its Chevrolet brand.

Thus GM once again seemingly prides itself on what it sees as a largely right-sized, globally relevant, re-invigorated US multi-national, with a business model designed to muster both region-specific relevance and the ability for inter-regional demand off-setting. This was always the historical intent set out by Alfred P Sloane in another age. Chapter 11 bankruptcy and the $65bn state aid package provided the catch-all to initiate contraction of GMNA's operational obesity, protecting NA jobs at more competitive labour rates and re-balancing the worldwide business platform from which it could seize the EM high-growth opportunity and re-orientate itself to new Triad market product demand trends.

' Flight of the Phoenix' is the obvious cinematic metaphor - a semantic sub-text used by the IR team through the inclusion of 'phx' at the beginning of the web address for the Q1 presentation. Thus New GM is a new lightweight corporate structure created from the broken old, but in the film the newly created vehicle performed an impressive but short lives hop skip and jump to the nearest oasis. That cannot be the case for GM, none should see the intended IPO as the final stop oasis, even if it be a destination of choice for Washington and perhaps certain executives.

Instead it must credibly demonstrate that IPO is simply an enabling milestone towards a tenable future, and not a finish line unto its own ends given parental pressures to redress the balance of the the US national debt. The parental governmental protection is ideally given to both act as a safety net and offer enough guidance over the appropriate time-frame to ensure the entities long-term contribution to shareholders, employees and society at large.

[NB the recent UAW convention (miraculously) indicates that union leaders and staff see GM as healthy, a new era of union-building and demand-setting will begin, ahead of the 2011 contract talks. This seeming militancy can only be damaging to NA's operational flexibility and cost-bases, and so employee's futures].

Q1 2010 Performance -

Growing global car demand from Q309 to Q1 2010 saw an increase in GM's global deliveries reaching 1,998,000 units from 1,972,000 units two quarters earlier, but market share if the TIV slipped to 11.2% from 11.8%. (Likewise across the three quarters GMNA deliveries slipped to 563,000 in Q1 2010 from 690,000 in Q309, a 37,000 drop in core brand vehicles of Chevrolet, Buick, Cadillac & GMC, whilst the run-out brands of Saturn, Pontiac, Hummer & SAAB slipped from 102,000 to 12,000 over the period, so helping to decrease over-capacity issues).

Having risen impressively from Q309 to Q409, the Group's Q1 Net Revenue (via GAAP) remained nonetheless strong in Q1 2010 at $31.5bn, which was $800m down on the previous peak quarter. Q1 Operating Income climbed out of the red, reaching $1.2bn, allotting $0.9bn to primarily government stockholders, rated at $1.66 per share.

GMNA market share peaked in Q409 at 19.3%, with at a similar Q4 high of 20.2% for US market share, the 4 core brands representing 18.6%. But Q1 2010 saw a respective slip to 17.8% GMNA share and 18.1 regards the core brand market share. However, incentive sums steadily reduced in Q1 from $3,150 per unit in January to $2,800 by March – before unfortunately climbing above $3,000 in April. Across the year, only in March 2010 did GM managed to fractionally beat the industry average incentivisation package figure, the general monthly figures showing extreme volatility/reactivity which no doubt reflect the end-of-month 'shift deals' undoing the pricing stability achieved previously. And now with the incentives cost creeping back upwards it looks like that March was an historic anomaly. Q1 GMNA Net Revenue increased over the last three quarters thanks seemingly largely to speedy QoQ dealer inventory reduction and re-stocking, reaching $19.3bn from Q4's $18.3bn and Q3's $14.6bn. Through the effects of lesser sales volume with improved unit margins and gained re-structure cost savings this fed through to a GMNA Q1 EBIT of $1.2bn, having seen losses of $-3.4bn and $-1.4bn in the preceding quarters.

GME market share has generally eroded since the slow-down and stoppage of EU government led eco-product credit availability, yet it did picked-up in Q1 thanks to the new compact product launch of Astra, basic EU share latterly at 8.5%. share slides in Germany of 1.2% over 6 months doesn't bode well, probably as a result of GME's begging bowl requests, but a return to nearly 12% in the UK looks promising. The only problem investment-auto-motives envisages is the credit-worthiness (and so future default possibility) of some of its sales base demographic, many purchasers often state employed by a contracting government or equally prone in government affiliated private sector employment. However, Q1 EU deliveries were up 405,000 nearly touching the Q309 high of 409,000 thanks largely to what was an eased retail credit environment. GME Net Revenue fell for the third quarter, reaching $5.5bn, this possibly due to reliance on what could have been limited vehicle availability of the severely contracted previous quarter production. [NB to provide a better picture GM should set Q1 EBIT against Q4 production figures, not Q1 production figures to provide a more relevant cross-comparison of the actual cars produced/sold and accordant revenue].

However, the massive Q2 ramp-up of 90,000 additional units should cure availability issues, and boost Q2 revenues, as long as demand meets supply. Overall Q1 EBIT was negative at $-0.5bn, though improved upon Q409's $-0.8 and apparently heading back toward's Q309's breakeven.

GMIO (International Ops) markedly grew Q1 deliveries in the rest of the world, primarily due to China's rise to 623,000 units from 478,000 units six months previously; whilst remaining Asia-Pacific, Latin America and African sales effectively staid flat at 395k / 403k / 407K units over the preceding 6 months. Market share in China and Brazil staid flat over preceding quarters even if sales were lifted by the 'rising tide', with India showing market share improvement at 4.2% from 3.1% half year earlier, this thanks to its well positioned broad line-up of small, compact and 'high-ride' Chevrolet vehicles. However the additional sales to maintain market share come at the cost of Net Revenue, GMIO down to $8.1bn from Q409's $9.1bn, that quarter's income boosted by China's temporary reduction on small car purchase taxation. However EBIT continued to grow impressively reaching $1.2bn in Q1(of which $0.4bn was equity driven) from $0.7bn and $0.5bn in previous quarters.

Strategic -

Although obviously under the GM conglomerate umbrella, since early 2009 management has tried to perception ally distance its marques from the parent so that they might be divorced from any immediate cross-contamination. Yet in truth, especially for non NA public, the parent and off-spring brands are synonymous.

However, whilst efforts are made to keep North American momentum and China, Asia-Pacific and Latin American regions happily 'bubble', the real operational issue is of course GM Europe. Namely, the manner by which the RenCen can gain additional free/low-cost funding and other corporate benefits from its European host nations, specifically from Germany for Opel, as part of its $3.7bn regional restructure.

[NB investment-auto-motives was always a keen proponent of Opel/Vauxhall's partial or possibly full divestment of its manufacturing base within the GM empire. Then ideally freed from present obligations and hyper-competition, and put under a strict business rational by co-owners or new owners. So as to create a globally cost-competitive, large contract manufacturing base that could serve EU clients such as the remaining commercial shell of New GM Europe, and others including Daimler, FIAT, Renault etc; a model more adept for Europe's new seemingly long-term sales ceiling. This done to create a world class, technology led and well funded B/C-segment industrial base, thereby introducing the much needed horizontal supply model, as opposed to the vertical supply model of the 20th century industrial archetype which still is being run, resuscitated, and run today; as we see with GM].

It is the remit of he GM Board to maximise its cost-benefit of all its divisions, in GME's case by way of externally lenient short-term funding arrangements for what it sees as the precious technical centre of the empire. GM recognises that maintaining its A, B & C-segment technology contacts with Germany's supplier-base is critical to access world class engineering R&D and integration . Hence its attitudinal turnabout regards Opel's release at a time when across the EU injections of sizable state aid were being offered. However, economic and political times move quickly, and Nick Reilly (head of GM Europe) will have known that the receipt of the previous bridging loan guarantee (made largely available to keep the CDU party in power given voter attitudes to Opel), would in all probability not be followed up by any further central funding guarantee of the E1.1bn requested as part of GME's $3.7bn re-structuring plan. Now instead relying on the German provinces to offer 25% of the sum and presumably negotiating the remaining E825m value by way of additional fiscal benefits.

Of course since provision of the bridging loan, another high impact event has come to pass - the European Debt Crisis came into being and keeps rumbling even after the E750m backstop. Its demands spot-light all EU governments' debt levels and constrain future 'savior' expenditure. Now that financial back-stops must be put in place to save the Eurozone from shattering, industry – especially if owned by supposedly 'back on track' companies – has a comparatively empty case.

Reilly and the Board must now be considering what options are left regards the possibility of a self-sustaining GM Europe, something that must take a very different guise if it is not to fall back into the old ways of being internally supported by GM's more profitable NA & EM divisions.

One probable preferential option may be to formulate a deal similar to the NA turnaround model, by way convincing the unions that the conversion of pension debt into equity and so working capital is a good solution for all stakeholders. Alternatively re-visit past suitors as co-owners. Thus to Marchionne's satisfaction re-negotiate the tabled deal with FIAT....or possibly a rekindled deal with Magna International (given the Canadian company's acquisition of certain ex-GM US assets)....or one that sees an extended GM-Avtovaz Russian relationship (in accordance with Merkel's German-Ruso philosophy but a bitter pill for Washington). A PE re-emergence from the likes of RHJ International now seems slim given such tight liquidity access and desire for short-term exit horizons. Singularly, combined or including other new party interests, the ownership and operational shape of a future Opel/Vauxhall remains to be seen – but it must alter to suit the 'new norm' if it is to prosper.

Lastly a topic that sits on the side-lines and is still of curiosity to investors. The devolved 'toxic' side of the old company, Motors Liquidation Co sits quietly in the shadows; its stock being traded over the counter with pink slips that portends reminiscence of the bygone 1920s era which echoes the origins of MLC's asset base of tracts of real estate. Beyond the physical assets which are presently split between mid-valued plant and low-valued ground, interim managers endeavor to seek buyers for the corralled brands of: Pontiac, Saturn & SAAB. As well reported, SAAB has been sold to Spyker Cars and its owners, itself forming SAAB-Spyker Automobiles. Saturn has been destined to to be sold to Roger Penske, but negotiating hurdles emerged regards product supply and dealer contracts. Pontiac, like HUMMER, remains effectively dormant.

[NB HUMMER was not transferred to MLC, retained by GM, and is now 'retired' given the previously failed acquisition agreement by China's Sichuan Tengzhong Heavy Industrial Machinery Co, due to disapproval by the PRC's Ministry of Commerce. Allied and other PE interests emerged from Western China via and the US, but issues of credibility and credit access from the buyer perspective and GM's use of valuable executive resource on increasingly marginal prospects scuppered deal momentum ].

Operational -
GM must be concerned that the the tail-off of CARS (with no CARS 2 forthcoming) may mean a consequential drop-off in sales, especially as the econometric indicators of non-farm payroll and productivity reports, and EU contagion fears, highlight the still fragile state of the US nation.

As Automotive News reports, May sales saw GM's market share drop by 0.4% whilst its per unit sales incentives cost it an additional $61. This contrasts the respective incremental gains by Nissan, Ford, Hyundai-Kia and even Chrysler at 0.3%, 0.4%, 0.5% and 1% respectively, with reduced incentives costs.

In the shadow of reduced sales impetus, renewed focus is being put onto input costs, especially in vehicle systems areas where cost can be more easily abated. With steel contract prices re-set at high levels (+30% or so) after the recent round of iron ore miner vs steel processor talks, it was inevitable that automakers targeted non-engineering critical plastic components as the area to make cost savings. Maintaining showroom activity is of course corrolaristic to pursuing profits. Thus it came of little surprise to investment-auto-motives when - as part of all manufacturer's efforts to maintain consumer credibility via vehicle recalls - GM recently announced a low-safety-critical recall for approximately 1.5 million vehicles dating from 2006 to 2009 to have a “heater washer fluid module” replaced. Originating from 5 instances of low-threat under-hood fires, GM will now replace the possibly faulty unit with an all new item, and offer $100 disruption compensation.

Of course not all owners will return their vehicles, but this event – as with all recalls – promotes the chances of the owners of older vehicles to tour the refreshed 2011 model year showroom, tempting them into replacement deals and so avoiding customer loss to other manufacturers. The typical re-call rate on low-safety items is about 35%, so expecting 500,000 or so people to peruse new product will theoretically cost $50,000,000, but could generate a 50% new buyer conversion rate so securing 250,000 additional new car sales, without the required large incentive packages needed for conquest customers. This follows a previous March recall for steering system faults on Pontiac compact & medium cars that would have pulled otherwise 'promiscuous' customers back into the GM fold.

Chevrolet US sales in May grew by 31% YoY, highlighting eased economic concerns and critically available credit.

GM's intent with Chevrolet has been as the globally rolled-out vanguard that would create a worldwide foundation-stone for the distribution, retail and latterly production of its sibling upmarket brands. After what has been decades of fragmented efforts by the individual divisions to do likewise, and constant emphasis on Buick in China, it seems that albeit painfully GM is growing its foothold in EM & RoW markets thanks to the tenacity of Chevrolet. Gradual success has come in most markets, but problems persist in Europe, where presence and brand positioning has not as successful as originally envisaged given the brands use of below quality GMDAT sourced vehicles and the stiff competition from the likes of Hyundai, Kia, Skoda and Dacia which offer better small product or similarly priced larger vehicles.

This incursion by the Korean and E. European players will only continue to persist on an ever broadening world stage, so Chevrolet must properly define itself globally.

Furthermore, GM fears an image degradation problem (and so profitability) with Chevrolet: specifically use of the term 'Chevy' - given its blue-collar heartland & pick-up truck connotations within the US. Thus – not for the first time – a memo was put out to employees that the supposed image cheapening 'Chevy' nickname should be avoided. Unsurprisingly an internal and public backlash emerged defending the emotionally charged shortened title, given that it is engrained in American popular culture.

[NB This issue is also of importance in international markets, a special case in point is that Indian customers enjoy vocalising and emphasising “Chevy”, since it demonstrates their familiarity with aspirant and 'hip' US culture; and so a reason to maintain and create further cultural currency from “Chevy”.].

The remainder of the 2010 product pipeline includes release of the 2011 model year Cruze compact sedan in GMNA, and the launch of the long-awaited, Volt. In truth the Cruze is of far more importance to GMNA's bottom line than the heavily publicised, but in all probability limited availability Volt, given its high production costs and still broadly untested sophisticated technology in volume real-world customer conditions. Investment-auto-motives expects Volt to be essentially a spiritual successor to the EV1, more practical from package and powertrain stand-points but still far too exotic and expensive a proposition for mass adoption. The Orlando MPV is presented by GME, whilst GMIO continues the roll-out of Spark small hatchback and continues the Sail (rebranded from Buick).

Buick's US sales in May was up 37% YoY, showing that new product and easier financing availability underpinned demand.

As is evident, Buick has been regenerated as a core marque, a consequence of its early availability and popularity in China, with this 'Chinese capacity pull' the rationale for its effective re-invention back in the US. The model range has been seemingly sporadic over previous years as the result of a transition from GMNA's typical badge-engineering policy across many models to instead greater brand-relative product focus.

The ambition is to exploit lower cost Chinese manufacture and the higher margins available from near luxury positioning. However its seems very likely that Buick will continue to introduce smaller vehicles into its range sourced from China and elsewhere in Asia, this GMNA Asian import business model created by the soon to be launched 'baby LaCrosse'

GMIO gains the new 2011 Excelle, which is expected in itself to be superseded by the aforementioned compact.

Buick must of course 'find itself' and its raison d'etre amongst a Pan-Pacific audience. Its offering of near-luxury is in tune with the times and regional demand – as seen 2010MY LaCrosse's reception - yet this may prove harder to secure given that Buick is still offering 'all things to all men', including large sedans, compact sedans, compact hatches, SUVs and 4WD. GM has reviewed the USPs of its separate competitors and apparently tries to fight across all strengths by dipping into the extensive GM tech & parts bin.. This then follows in the footsteps of Cadillac and Lincoln, which have yet to prove that such a catch-all approach is successful against far stronger competitive product and competitor organisations.

Buick's recent product history has been patchy, now it must properly explain its identity and relevance moving beyond the upscale yet unlasting formulas of yesteryear Oldsmobile & LaSalle..

Cadillac's US sales in May was up over 53%, showing renewed near-luxury vigour and the depth of the previous May 2009 low

Since its early glory days Cadillac's re-invention as a serious luxury brand has been GM's ambition so as to gain the advantages of scale cost efficiencies and market pricing leverage. As GM shrunk decade on decade it was able to exploit its SUV products to ensure good margins, but as SUV demand withered and the very size of the manufacturing capacity base necessarily withered, so there has been raised pressure to make Cadillac perform. Present margins come from an aged and presumably tooling amortised product range, with expansion into smaller sedan territory via the ATS model using the Epsilon 2 platform (EU only BLS) in mid 2011. With mid-size CTS presently on the Sigma 2 platform but moving onto new Alpha base, and the platform merging of STS and DTS onto the Super Epsilon 2 base.

However, even with ongoing technical rationalisation, accordant cost savings and the geographic expansion of the smaller car. Cadillac's main concern is its lack of meaningful psychological connectivity to worldwide customers, replacement product after replacement product consistently poorer than German, Japanese and British rivals.

GMC's US sales in May grew by 26%, demonstrating the effect of new SUV product, pertinent to the brand, and slow, specific re-growth in the commercial vehicle arena.

The historical machismo of the GMC brand in commercial trucks, buses, large pick-ups & latterly SUVs echoes meaningfully with the North American spirit. As such it became the #2 GM brand after Chevrolet, and continues as a somewhat uniquely placed division within the GM empire, with perhaps more room for exploration and exploitation that its sibling divisions.

Economic recovery in the US and Canada will bode well for GMC commercials and America's GMC should play into the hands of GMC's value pricing of generally older product compared to Daimler's Freightliner or Navistar Int. Corp.

Note -

Thus having established Chevrolet as its global platform, GM now must 'weave in' Buick, Cadillac and possibly GMC, a task made harder by FIAT's ability to leverage FIAT geographical coverage for Chrysler and Jeep.

As previously stated the machinations over GME's future continue with CEO Nick Reilly now approaching the 4 German states for financial aid assistance, aswell as no doubt continued efforts targeted at the UK and other less fiscally strained nations – ie exempting Spain etc. Given the UK's relative buoyancy for GM versus other EU nations, sales and marketing efforts will undoubtedly be directed here.

Regards new product, new Meriva launches with its 'theatre doors' (also known as clap-hand or suicide doors), that should entertain families given that the only other cars with such apertures are the Rolls-Royce Phantom & Ghost and RX-8. Unlike these 3 cars though Meriva still has an obvious structural B-post which demonstrates style over substance, still nonetheless a USP very much in the innovative Opel tradition after Flex7 seating in Zafira and pull-out bike rack on Corsa. Old Meriva is apparently being 'run-out' but given the large higher price differential compared to new Meriva, investment-auto-motives suspects that in reality it is simply a marketing ploy to demonstrate the suppose value of the replacement car. (A similar pitch for old vs new Astra, but listed at the same presumably to enable dealers in face to face negotiations to heavily discount the old car yet maintaining the price floor on the newer car). Otherwise the line-up remains as is, with discounting envisaged for most models given the level of 'talk-down' available from French and Italian competitors.

This division continues to fight for its place in the GM empire, trying to balance domestic manufacture and consumption with the export of large car (sedans and coupes).

Domestic consumption consists of primarily GM imported small and medium cars, with ever decreasing purchase numbers of its home assembles large cars thanks to a mix of higher oil/petrol prices and product substitution from MPVs and 1-ton pick-up and chassis-cab trucks.

Exports were/are sold under other GM nameplates; primarily in the Middle East (largest market), USA, China, South Korea, Brazil and other smaller markets . That has been the modus operandi since 1998 with its peak between 2003 and 2007, but the demand for large car exports flailed with Pontiac's discontinuance in the US and GM's ability to assemble the Buick Park Avenue in China

Thus the business model has been under severe strain over the last few years and Holden must seek volume growth in regions with low petrol prices and taste for 'affordable eclectic personal cars'. However, this will continue to prove increasingly problematic give n the squeeze between globally extending near luxury players like Nissan's Infiniti and Hyundai's Genesis and the entrenched luxury players such as Mercedes, BMW, Audi etc.

Traditionally the business model has relied upon relatively low cost labour and the higher pricing afforded by differentiated & tailored large car products and fleet sales by nationalised enterprise, but with labour costs rising as a consequence of the general Asian demand wage-spiral and domestic consumption of specialised product falling so Holden finds itself in a business model squeeze; one in which government assistance is unlikely to be forthcoming as it once was.

It seems into the future it will be required to expand its operations as a prime GM Asian engineering centre, with possible continuation of the Zeta and Super Epsilon 2 platforms development and other R&D ambitions, aswell as export continuance of partially and fully dressed engines.

Though not seen as an integral division as such, Delphi has played an increasingly important role in GM, both in terms of component supply and previously creditor for some years. Originally spun-out of GM to diversify its own customer base through the 1990s, GM has recognised that integration of portions of Delphi would be beneficial so as to better control supply chain costs and speed NPD. Thus it took over 4 of Delphi US plants and its global steering business.

GMAC / Ally Finance Inc*:
In 2006, prior to GM's restructuring, it sold GMAC off which latterly coined the name 'Ally' and suffered through its exposure to sub-prime mortgage lending, only to be part nationalised with 56% government ownership. Ally has historically large exposure to the sub-prime lending market, a customer-base that makes up 16-20% of NA sales (so Experian reports). For some months GM has increasingly hinted that it should like to regain a sizable captive finance ability so as to once again tap into sub-prime buyers, which it feels is required to maintain sales levels.

GM recognises the problems of creating from scratch its own finance division, especially given the potential political opposition, so seeks to acquire one. Extending the present arms' length relationship with Ally so as to give it the power of lending arbitration obviously makes most sense,but understandably Ally executives are far from convinced having had its figures burnt previously in mortgages. Though they'll admit that car loan defaults were lower than that of housing at the peak of the toxic asset crisis, they also know that these are different times and default danger still exists given the fragile economy and the willingness of less than wholesome car buyers willing to 'arbitrage' such credit availability for a new car, even if towed away at a later date.

Furthermore, Ally was government appointed as the preferred lender to Chrysler, and obviously Marchionne would attempt to block any effort by GM if it was waived through by Washington.

Ultimately GM having supposedly rid itself of its bad ways, and talking of a new cultural era, must expect a level of concern from investors, if it resorts to such sub-prime targeting practices – even if industry normal - 12 months out of Administration and with a supposed attractive product range at attractive pricing. It must bolster its financial credibility and image credibility, something that cannot be done if vehicle residuals suffer from near new cars rolling through auction houses.

Financials -

As of today, the Q1 figures presented previously look on the surface promising, they reflect the new era attitude of the organisation that has pronounced itself as having paid back the (primary) US & Canadian governments loans of $6.7bn and $1.4bn (@ 7%), prior to the June deadline. The statement with accompanying publicity intimates that all government debt was paid-off. Yet as analysts and Forbes' financial journalists have summised, it seems a distinctly separate $13.4bn 'working capital' loan held in an escrow account was used to pay-off the primary high-profile loan.

It has been suggested that this apparent early pay-back was undertaken to give GM the credibility to access another US dept of Energy loan to the tune of $10bn (@ 5%), so in effect gaining re-financing, easing company debt levels and improving its nominal credit standing.

Without the legal requirement to publicly publish in depth quarterly reports or full accounting of the P&L, Balance Sheet and CashBook, GM has been offering a level of fiscal transparency since the re-emergence from its Chapter 11 filing. Of note was the Sept 09 update which highlighted Q309 actuals vs the Q3 viability plan used for Chapter 11 restructuring. Having reduced last year's $94bn debt pile to only $17bn overnight on June 10th, and dramatically improved net Liquidity and so Managerial Cashflow, GM was set to pounce out of the starting gates and into Q3 & Q4.

Given the massive level of leeway involved – 'pessimistic' pitched plan versus (probably) achieved – it was not surprising to see GM out-perform the Q3 plan. As GM foresaw, Q4 and Q1 2010 experienced greater headwinds with slowing Triad markets set against flattening EM markets with greater cash burn due to increased input materials costs, engineering costs, S&M costs, overall CapEx demands, foreshortened supplier payment terms, debt payments to Delphi etc.

Of greater relevance are the operational achievement figures of recent times and today, now that the easier function of beating overtly dour, self calculated expectations has passed. The business returns to more normal operating assessment. However, relative to this, even it has warned that completing the remaining restructuring steps that impact the heart of the business and not simply the Balance Sheet will be tough.

The seeming increasing lack of deep operational detail being presented appears to be in contrast with the good news Q1 results submitted. At that point investment-auto-motives presumed that Ed Whitacre was underplaying GM's near-term capability, giving little away and letting the numbers speak for themselves. But that approach, if indeed the case, seems to be unravelling with some of the more concerning news leaked, such as GM's desire to access sub-priming lending facilities as the notional deadline date of the intended IPO approaches. But such moves, whilst temporarily boosting revenues, only serve to add risk to the new and improved entity, ironic when GM's de-risking was the prime intent. Better a smaller operation that capacity boosted in such a manner.
And if that means additional rounds of cost-savings prior to the IPO then so be it.

Surely, discussions with the various IPO managers – who themselves are competing for their inclusion in the bookrunner consortium – would have echoed that fact. It may not bring in immediate fees, but adds to their professional credibility, and brings in greater latter-day rewards if the IPO is phased structured.

Today, more than ever, Washington, GM Co LLC and the investment banks must realise that creating the foundations for 'the long game' is what matters to one and all.

Conclusion -

At this end-point juncture, it proves worthwhile to state exactly which entities presently own General Motors Co LLC, agreed via the 363 sale (via Title 11, Chapter 3, Sub-Chapter IV of the US Code).

#1 – The US Government with 60.8% (paid $49.5bn)
#2 - The UAW VEBA with 17.5%
#3 – In Right of Canada & Ontario HRH Queen Elizabeth II with 11.7% (paid $8.1bn)
#4 – Unsecured Creditors with the remaining 10%, primarily 'Old GM' related.

Acting primarily in the role of economic stabalising agents, these entities – largely with their engrained societal responsibilities – stood as the effective patrons of GM's transformation.
As such the US populous, GM employees, Canadian Sovereignty and particularly largely anonymous unsecured creditors, deserve to be rewarded above nominally low base interest rates for their enormous contribution to the industrial welfare of North America.

To ensure this the IPO must be carefully tended so as to achieve a successful launch price and for the stock to maintain an upward momentum well into its open trading period. This in turn relies upon corporate credibility that the GM business model – both in NA and worldwide – has substance. Furthermore, ideally the release of shares onto the market would be done in a phased manner typical of state asset privatisation given its inherent size, the 4 owner groups presenting similar percentage proportions of their holdings for floatation at the different stages. Such a phased full IPO should then better ease the transition into what will largely be domestic and foreign institutional funds ownership.

Much to date has been thrown toward, and undertaken internally by New GM, with the danger that it may appear wholly fixed and self-sustaining in readiness for its renewed capital markets listing. So the real question for investors is exactly what competitive advantages GM holds in the way of: direct customer access/retention, proprietary (and applicable) enabling technologies, manufacturing cost structure, domestic and international shipping rates, dealer-base enthusiasm and reduced customer credit default occurrence?

In the 1920s under Alfred P. Sloane's vision for expansion GM was a leading light in the still nascent auto-sector. But by the 1960s it increasingly became a parody of itself. To re-appropriate Gilbert & Sullivan's words it became with few personnel and product exceptions “the very model of the modern major general”, where once it led the way and taught others, it for nigh on 50 years as the world's No 1 player effectively sat effectively stagnant using its scale as leverage but still loosing market share decade after decade.

Today, even after its 'obesity operation' and its cultural shock, there is still a danger that the innate old GM culture of convention, politicking seniors, staff intrasingency and automatic expectation re-awakens. GM has been through the grinder, it was forced to for its and the US nation's own good. So it must continue to change any in-built old-order habits to in the mid and long-term once again re-capture the role as the true global auto-sector teacher... not the brash, bombastic, self-unaware character that 'sat outside', enthusiastically echoing hand-me-down words and in reality bringing little to the party.

After the massive blow dealt to the stock-holders and bond-holders of the old company – now trying to gain a lowly cent on the dollar via Motors Liquidation Co - to generate credibility and belief prior to any IPO GM must be seen to be advancing on all fronts, strategic an operational, in the critical battle for future US and EU custom.

As of today, simply reciting the good GMNA over Q4 & Q1 together with the rising tide of EM countries set against the lightly put 'problems' of GME is frankly not enough. At a time when the GM Board should be communicating its prime attitudes, viewpoints and actions to the investment community, the lightweight Q1 presentation charts (versus the likes of Ford, Daimler or VW) indicate a case of GM trying to manage expectations rather than conveying very necessary deep insight. Presently unlisted the company can afford to do this, presumably with the intention that more will be forthcoming as the intended IPO launch date approaches.

Yet, what with renewed capital markets' fragility across the world, especially so regards IPO launches (with many recently pulled or post-poned) GM's successful floatation still seems some time away – even though it is presently identifying book-runners and under-writers - probably at this point sometime in early 2011, as opposed to within the next 6 months as intended. The company has well ridden its orchestrated tailwinds as part and parcel of what was to be an early exit from effective nationalisation, but the unfolding reality is that it must demonstrate its mettle in increasingly testing times, and be able to convey sustained multi-region sales performance based on well received products, stable and ideally increasing market share and proven QoQ EBIT numbers

Hence, investment-auto-motives places GM ahead of the Renault-Nissan, FIAT-Chrysler and PSA on the basis that its fresh start, devoid of past responsibilities (and also seen in its accounting procedures) can be exploited. Yet it is a test of the new Board's supposed understanding of a global marketplace and commercial adroitness. This rank (5th of the 8) reflects not so much a case of hope over experience, though from historical evidence it suggests the fact, but more a case that never before in the modern era has GM had such an opportunity to demonstrate its worth as a massively re-calibrated conglomerate with both the scale leverage, global reach and the necessary external pressure/incentive to perform.

Sloane gave GM its 20th century vision, Whitacre et al must provide a credible 21st century vision, that may need to ultimately be truly radical' given the need to convert $46bn worth of Goodwill and Intangible Assets allocated 11 months ago. Even with the sliced debt levels from $46 to $16bn, and the government eased cashflow, the sooner GM shows its intent and methods to maintain the recent artificially inflated buoyancy the better.

In the meanwhile, much of what has been witnessed has been a co-creation of GMNA tailwinds afforded largely by the Obama administration and a fragile uptick in the US economy. Of real significance must surely be the proof of the GMNA pudding, something which should be communicated to investors and the public alike in the form of productivity metrics and a host of benchmark indicators that reflect the ideals set out for the goals of the original re-organisation.

Very much a case of “watch this space”, though no one should be holding their breath until the rising tide of global sales TIV returns. For today, unlike the old adage of “what is good for GM is good for America”, the shrunken company experiences the more converse relationship of “what is good for the global economy is good for GM”.

Post Script:
As of today (17th June) it was announced that GME would no longer be seeking state aid from the German central government, instead seeking to self fund operations.

Friday, 11 June 2010

Companies Focus – Ford Motor Co – Carrying Increasingly Heavy Debt Yet Still Maintaining Impressive Car & Truck Traction.

Unlike its US & European peers, Ford enjoyed its advantageous competitive position as the aftermath of credit crisis played out. Though enduring a historically low credit rating, the fact that Ford had a) slimmed itself considerably via divisional divestment and re-structuring, b) avoided the need for governmental financial assistance, and c) had executed required model shrinkage whilst exploiting a global platforms ideology; altogether highlighted its ability to ably survive tumultuous conditions.

The over-reactive stock-market drop valued FMC at just over $1 at its nadir, the dis-joint soon recognised as investors plunged back, to firstly park their cash against hard inventory-based assets and an untainted brand. Since the March 2009 low, FMC has led the mainstream auto manufacturer's pack by virtue of its own efforts set against the meaningful absence of any other (fiscally healthy) Detroit player on the NYSE, and enjoyed the tailwind of the previous scrappage scheme. FMC now hovering at around $11.10, producing a MktCap of approximately $40bn, dragged down slightly over the week's nervous trading.

Of course the latter-day entity that Ol' Henry left behind is not the globally dominant industrial leviathan it once was, given the growth of foreign competition over the last half century. And now in terms of MktCap sitting behind others: the FT's Global 500 ranks it at 161st place, behind Volkswagen (154th), Daimler (134th place), Honda (87th), Toyota (32nd), yet ahead of Nissan (179th), BMW (263rd) and Hyundai (316th). But of course whilst a prime indicator, MktCap figures alone do not tell the whole investment story.

Having avoided the Washington 'hand-outs', and streamlined its global operations to an increasingly singular corporate organism, the FMC's Board's task now at hand is to demonstrate keenness and ability in paying down the heavy debt burden so that it may both boost its lowly credit rating and direct a greater amount of future income toward improving stock dividends and of course mid-term future investment plans. However, given concerns about wholesale liquidity constraint that has emerged over the last 6 weeks or so, the Board may now be re-focused on maintaining a fluid working capital liquidity position.

Q1 2010 Performance -

The major news was the return to profitability of all FMC's regional divisions, a notable achievement given the differing regional speeds of the global economy.

Q1saw more of the positive Q4 same as YtD sales rose over 30% and YoY monthly sales were up over 20%. As has been well digested by the market, Ford returned to profitability for the Q1 period, beating expectations yet still advising caution regards future expectations given the ending of the US & EU scrappage schemes and the still tenuous state of the real economy. CEO Mulally typically trying to balance optimistic enthusiasm with maintained caution.

The Q1 figures happily illustrated a disappearance of last year's negative parenthesis across many of its reporting lines. Breakthrough came as 1,253,000 sales provided a Revenue of $28.1bn, versus the previous Q109 comparison period of 986,000 sales giving $24.4bn. That $3.4bn additional revenue making all the difference in providing an impressive result. Of that $28.1bn, Autos conferred $1,195m (vs $-1,963m) showing the level of traction gained over the preceding quarters, whilst like-wise, the Financial Services division benefited at $815m (vs $-62m). PaT was $1,761m (vs $-1,793m). Although the allocation of positive contribution Special Items declined by approximately two-thirds to $125m, Net Income reached $2,085m (vs $-1,427), and importantly the Auto units' broad liquidity rose to $25.3bn (from $20.9bn YoY, and up $700m from YE09).

This sits against the increased debt level now at $34.3bn, up $700m since YE09. April saw FMC pay-down $3bn of its (2013) revolving debt facility, directly from income & working capital liquidity, the presumable aim to stabilise and improve its credit-rating ahead of what could possibly prove a second bout of wholesale credit retrenchment, thus providing access that may otherwise be unavailable or achieved at greater cost of capital.

Latter-day results running into June show the continued demand for cars such as Fusion sedan, Edge cross-over etc at that high-water 20%+ rate, but of particular note has been a renewed up-tick in truck sales. The stalwart F-series up 49% and the Super-Duty series up 82%; reflecting the resurgence of confidence by SME's and corporates in the US economy from expectations of trickle-down of governmental stimulus spending and YtD soaring stock market.

On a region by region basis... NA's improved volume, model mix and dealer-floor net pricing capability saw Revenue rise to $14bn (from $10bn in Q109), and Pre-Tax Operating Profit improve to $1.2bn (versus $-665m). S.A. experienced increased input costs, but these were outweighed by a net pricing ability and favourable FX rate, Revenue at $2bn (from $1,4bn), Pre-Tax Operating Profit
at $203m (vs $63m). The EU division experienced higher volume sales, reduced costs and improved parts sales, Revenue reaching $7.7bn (from $5.8bn), Pre-Tax Op Profit at $107m (vs $-585m). Asia-Pacific & Africa saw a raised profit contribution from China JVs, improved volumes elsewhere, better net pricing of vehicles (presumably especially so of commercials) and good FX effect with deflationary west versus inflationary east; Revenue reached $1.6bn (vs $1.2bn), Pre-Tax op Profit was $23m (vs $-97m)

Strategic -
Having suffered decades of market-share decline, with periodic big-hit products over-shadowed by poor product management, Ford badged cars came into their own over the last 18 months. The internal tidying-up programme 'ONEFORD' benefited from a perfect storm of (company positive) external force effects, which effectively left Ford as the only credible mainstream US player, within which domestically loyal car-buyers maintain confidence.

Its shrunken portfolio of well positioned, improved quality, globally relevant vehicles struck the right rational chord with cautious buyers in the US, Canada, the EU and were seen as strong contender mid-market cars for new and replacement upwardly mobile Asian and Latin American owners.

Through judicious product planning and exploitation the original 2000 Focus NA platform (C170 merged into C1), Ford has seemingly enjoyed boosted profitability given the absorbed investment costs, typically reached by year 3. However given the 2002/3 faltering marketplace investment-auto-motives suspects breakeven was reached in 2005. Thus Ford NA has been able to extend the use of the base mechanical platform and prime vehicle systems over an additional 5 years. This cost-absorption and post-postponement of typical heavy NPD CapEx cycle, then enabled concentration on not the mechanical but electronic, thus the integration and up-grading of customer-facing 'in-car' sub-systems to stay competitive in a marketplace that is e-techno savvy and expectational.

Since Ford2000, under Nasser's reign, a prime ambition has been cost control of the lower-value core mechanical systems. This to in turn provide the project & group budget flexibility that can be used add weight in the higher-value realm of in-car electronics. Thus FMC co-developed the critical electronic media inter-face platform – Microsoft Auto - on which various inter-connectivity systems run: ie 'Sync' (comms) [in place], MyFord (vehicle set-up) [2011 model-year Edge, and 2012 Focus], Pandora (music capture) etc.

Importantly, the lessons learned from the evolutionary development of the C1 'international' platform with intended NA application (ie integration), thereby allowed FMC to create the foundations for future 'global platforms' / 'systems sets'. The first of these being 2009/10 B-segment Fiesta, released initially in Europe, N.A, and subsequently Asia-Pacific. This presently in place B-segment offering, presently still at the start of its volume cycle, is to be followed by new 'global' Focus in 2011 across most markets (Asia-Pacific in 2012).

Having ridden the high-margin business of SUVs and Pick-Ups for so long, unlike its more cumbersome US peers tied up with greater legacy and operational problems, Ford was well placed and critically able to quickly react to industry recognition of the prime global small and compact car market that must be satiated with cost-effective near-homogenous product to boost profitability.

A key element to attracting sales across the product-range has been the segment attuned styling strategy. Moving beyond a typical narrow corporate design palette, Ford NA (perhaps with the greatest challenge) has managed to incorporate subtler aspects of its Euro-derived 'Kinetic Design' ethos (typically in the body-side) with alternative vehicle 'faces' that reflect the prime visual attributes accordant to each specific segment. (ie small car 'peppy', compact car 'familiarity' , mid-size car 'techno', large car 'mature' and 2 cross-over personas in 'psuedo-luxury-utility' (akin to Range Rover and previous era station wagons) and 'pseudo-sporty-utility'). Additionally able to inter-weave cross-segment likenesses through proportion and detailing to add visual cohesion to the range. Such accomplished inter-range styling of very different product groups has historically been hard to accomplish successfully, and although intentionally low key and virtually unrecognised, is a far harder task of greater corporate significance than 'hi-style' designwork.

Thus, Blue-Oval has with aplomb managed to subtly balance both cost-pertinent 'engineering extraction' and quality-conveying 'styling signification'. It is this dualism that underpinned brand gravitas as other US players struggled, and so boosted sales.

The ONEFORD initiative is typical of the operational re-centralisation requirement that is undertaken by multi-national producers in economically constrained periods; Ford has been here time and time again, even if Mulally talks as if it is a new achievement. The challenge is similar but the execution has been necessarily improved. However, this time round, with such a debt strain, to the hilt mortgaged assets, heightened global competition, and the existence of an e-connected global client base, the corporate stride forward had to be greater and more meaningful; both internally inside FMC and externally relative to car buyers.

The dedication to achieving truly global B & C-segment products – especially regards EU & NA convergence - appears convincing. But investment-auto-motives had hoped for that the (Mulally quoted) 80-85% commonality achieved on new Focus, had been equally achieved on new Fiesta, quoted at 65%. The 15-20% improvement may demonstrate the ongoing improvement but parts commonality is all the more important on the smaller car with its typically lesser unit margins.

Critically, the subtle product specification variations across different markets (in powertrain, chassis set-up, materials use etc) must be 'restraint managed' to prohibit unnecessary latter-day proliferation of model-spec variability: something typically argued by middle management as a knee-jerk requirement to chase sales relative to competitor product actions.

Ultimately, the Q109 results demonstrated the traction gained by previous NPD, procurement, manufacturing and logistics savings enabled by ONEFORD; the per unit marginal contribution of Fiesta and latterly new Focus set to rise as both products climb higher up their respective sales curves. Add to this the new-found corporate credibility regards F-series and the FMC rebound is set on these two diametrically opposed product pillars targeted respectfully at the world and NA.

However, whilst positioned well in still fragile western markets, FMC perhaps faces a greater uphill challenge in the BRIC+ regions where others such as VW, GM, FIAT and Renault appear to have greater profile and presence. Brazil, now the world's 5th largest national car market, is a good case-study example, with FIAT (joint #2 with 23% share), VW (joint #2 with 23%) and GM (#3 with 18%) historically intrenched as its top 3 players. Ford as its #4 must recognise, as it did in its early days under Henry, that buyers in 'young value-relative economies' tend to stay loyal to the most established and proven brands, or switch to the most value-effective newcomer brands, in S.A's case the likes of Hyundai and Kia; as seen by incursion in other similar EM markets like Turkey, the Baltics and CIS states, with Ford in reality set against the likes of Toyota, Honda and Nissan.

This picture seems to also run true in China and India, although less so in Russia. So although the Ford brand is of course well recognised across the world it needs effective re-polishing in EM regions through insightful product and marketing actions to once again 'get under the skin' of the regions.

Operational -

Ford (Blue Oval):
Focus, Fusion, Taurus and F-150 performed well in the US, providing a 2.7% boost to combined private & fleet market share at 16.6%, whilst private sales market share reached 14.1%. Canadian marketshare grew to 15.5%, showing a 29% YoY increase. Latin America saw 14% increase, with new record sales hit in Brazil. In the EU Ford reached 9.4% market share, showing as top-seller in the prime 19 nations. Asia-Pacific saw sales improve by 39%.

Ironically in the small car era, the US's May sales show an increase in SUV and Pick-Up sales as the low gas price, boosted US economic confidence over the last year and eased credit conditions provided tailwinds for recession-fatigued small business owners and private individuals. As part of this renewed confidence, domestically, $400m has been allotted for future Explorer production in Chicago.

In the EU, it was announced that a $2.3bn injection would be made into the UK as part of its low CO2 product development and manufacturing efforts,

Development of BRIC+ markets interest is of course an important pillar in FMC's global ambition, with an additional $450m budgetary increase in investment in Latin America (Brazil, Argentine), bring the expenditure by 2015 to over $2.5bn. Ford's 2 Mexican plants are being better utilised by adding capacity given the massive labour cost differential between it and US UAW plants – reportedly $4 per hour versus $50 including benefits. India saw the SoP of Figo in Q1, the car effectively a face-lift of old generation EU Fiesta-Fusion, assembled in Chennai. South Africa sees $400m for the Puma diesel engine upgrade and the face-lift of Bantam the compact pick-up (colloquially known as a 'bakkie').

Its no secret that this once venerable, now decayed division will be discontinued, reportedly by Q4. Three decades of 'right-sizing', the increasing stretch (ie cost-benefit) on internal limited resources, and the preferred 'bet' on Lincoln Cars, means the end was always nigh. Invented by Edsel Ford – the founding father's son – in 1939, the brand has served as the aspirant brand for blue-oval owners for decades, and for those with deeper pockets, pitched as a stepping stone to Lincoln. That 70 year old ambition was successful for 40 years but the writing was always on the wall as the baby-boomer generation moved on to typically better-made Japanese vehicles. Thus for 30 years Mercury has perceptively been little more than the Blue-Oval's division upper-level trim-line or at best a lacklustre sub-brand, and treated as the company's “poor-cousin” as seen by its to and fro 'hot-potato' handling between Lincoln and Blue-Oval divisions to being taken into the Blue-Oval fold in 1990, briefly operationally resuscitated with Lincoln again and once again taken back; today with only 4 models, less than 90,000 sales p.a., and only 1% of the N.A market.

Lincoln has seen its sales boosted in recent time, what with FMC's general recent success, aggressive frontal styling and seemingly inescapable incentive packages via generous trade-in offers or new customer ploys. Either way aided funding still plays an invisible role in luring on its mid & large size cars, and SUVs, and for Ford thankfully the demographic of the typically older buyer-set means reduced credit risk when providing lease and loan deals. However, with 6 vehicles in the range a reduction of old-stock inventories has been key, whilst simultaneously efforts to create new realms of customer attraction have emerged, no doubt through new staff training regimes, that try to reflect a 'concierge' type service as seen with Nissan's revitalised Infiniti and similar others.

Of course FMC has been here before, notably back in the early part of the decade when it sought to vie against a regenerated Cadillac. But today the stakes are higher given the amount of government funding GM and so Cadillac receives to resuscitate them, and the supposed 'good news' story GM will tell of its remaining core brands via (in actuality US tax-payer funded) sales success. That means Lincoln has a battle ahead that will ultimately witness a test of Lincoln's perceived product value versus Cadillac's ability to effectively buy its market share. Lincoln of course wishes to replicate the Germanic premium business model, but this has been an age old ambition which has yet to materialise.

Mercury's demise should theoretically benefit Lincoln sales as the Ford Board will expect many ex-owners of large car & SUV Mercury's to naturally cross-over to smaller but price comparative new Lincoln models in three or so years time. (ie 7 new or updated models over the next 4 years).That is the theory. Lincoln will have to work both imaginatively and hard to make it a reality, which will be a test given the probable reduced moral of a reduced 'Lincoln-Mercury' staff. Creating the right internal conditions to enthuse staff and mid management and of course clients will be crucial.

However, extinguishing Mercury undermines the sales-base of many of the Lincoln-Mercury dealers, who have been advised to in large part co-develop Ford-Lincoln showrooms. Whilst this undoubtedly aids Ford's Blue-Oval presence and future sales growth, Lincoln as a supposedly premium brand in actuality requires a Ford-divorced, ideally solus (single-brand) dealerships. So the Ford coupling does not bode well for supposedly building brand differentiation. The big-picture logic appears to be that ultimately the Lincoln business will in reality become a bolt-on to Ford's own. To do so replays previous era recessionary cost-control initiatives that generated Lincoln's demise. It is of course it is an operational 'catch 22', cost control versus premium ambition. But with ever increasing incursion in the 'near luxury sector' ranging from Hyundai's 'Genesis' to Lexus move into small cars the competition simply grows stronger, a bad omen for a possibly under-funded Lincoln, and raises the concern that good NPD efforts are simply undermined at the dealership.

Lastly although the old duchess of the range the TownCar (derived with Grand Marquis & Crown Victoria) ironically has played a vital role in providing a small but steady income stream for the division given the level of tooling amortisation. It is worth watching to see if the tooling for this vehicle is sold and 'lifted and shifted' to Asia given the relatively high labour content involved.

The $1.8bn sale of Volvo Cars to China's Zhejiang Geely Holding Co appears to continue on track after 2 years of talks were finalised in late March. Lewis Booth (FMC CFO) has obviously been keen to divest of the division and allow the extra-ordinary income to be nested on the balance sheet. , presumably as of Q3 2010 when deal completion is due.

Given the $6.5bn paid by FMC for Volvo in 1999 in the heyday of global sales promise, the present sale price appears weak, but is of course the result of what has been limited trade of PE interest in the car unit and in reality Ford's wish to forge stronger business links with China's largest privately run automaker (see comment on Mercury and Lincoln TownCar).

Financial Services:
As with other manufacturer's FS divisions, the corporate remit for Ford Motor Credit Co has been to both help gain cost-effective funding access for portions of the group so as to prop-up general liquidity, and to de-risk the credit-lines on FMCC's own loan books.

FMC also recognised that debt and equity investors would wish to see greater transparency in Ford Motor Credit Co, so furnished greater details about FMCC's own loan book. YoY FMCC's PbT moved from $-36m to $828m, showing a much reduced 'loss to receivables ratio' at 0.58% (vs 1.28%) and reduced level of credit purchasing leverage at 8.7:1 from 12:1, so accordant with typical banking practice. Net income rose to $528m (vs $-13m).

Looking at the FMCC 'walk through', although the size of the loan book was reduced by $130m, off-setting improvements came from improved Financing Margin giving $50m contribution, reduction in Credit Losses providing an additional $440m, Residual values on returned/returnable Lease vehicles improving giving another $440m and 'Other' providing $64m.

Mulally and co were keen to show how the impact of credit default and erosion was abating, showing a timeline of diminishing worldwide 'charge-offs', with high focus on NA improvement, and an inference that the Mercury division – now to be extinguished – had played a role in the earlier high metric for credit loss. This unsurprising given its previous marketplace fight using less strict consumer credit rating criteria to shift metal. Thus the Board made an effort to highlight its deep knowledge of credit generated problems and thus highlights the size of advantage gained by closing Mercury.

As expected, just as credit losses have been stemmed, so with a recently retracted market, so Ford Credit receivables have reduced QoQ, recently stood at $87.9bn, from $92.5bn at YE09, and from $104.2bn in Q109.

The saving grace was a 0.2% reduction in wholesale credit access, by end Q1 available at a generalised 4.8%.

Financials -
As we've seen with GM and FIAT efforts across Europe, Ford likewise has started to apply for national banking licenses so that its Financial Services arm can better access wholesale funding on a region by region basis. Thus a Canadian application has been made and seemingly granted to run Ford Credit Bank in Oakville, Ontario. Given the recently emerging constraints on EU wholesesale liquidity (as seen with VW SEAT's flailed Spanish bond offering) and the new concerns regards sovereign-debt contagion, car-makers including Ford have and will continue to ply efforts in broadening their wholesale funding tentacles; recognising many smaller national sources are better than reliance on a few major capital markets.

Thus Q1 onward proved FMC to be running well on both cylinders – cars & trucks. Ordinarily economists and analysts would have expected to have seen that demand pull in a reverse order – trucks prior to cars - but the special circumstances of recent years effectively threw the sector cyclical rule book out of the window.

In order to paint a rosier hypothetical picture, FMC highlighted the drag-effect of Volvo by stating that without the Swedish company, Automotive Revenue would have delivered not a $3.8bn rebound but a $7bn rebound – over 30% improvement. (Exactly how this figure was arrived at is open to interpretation and debate). Counter-pointing such ethereal comment, the FMC Board recognises investors' desire to see accounting clarity, and so has stated that it will display Volvo's contribution (or otherwise) as special items separate from the core Group's operating figures.

Recognising that investors will want to see Ford's working mind and approach to liquidity, its Q1 description of the general is short but concise, highlighting set portions of liquidity & cash blocs, with substantial reserves attitude, and reminding that it accessed $8bn worth of ABS and unsecured debt in the period; with an additional $3bn in April, thus completing $11bn worth of term funding

Importantly regards debt maturation only $5bn of its outstanding $29bn facility matures by end Q1 2011, and as to be expected there has been a shift in funding sources over the last 3-4 years with the previously large sums gained from private sources diminishing as the increasingly healthy public markets offer more competitive rates and T&Cs.

There is $32.2bn in committed capacity (if relative ABS approved) and $20.7bn in cash & equivalents, so totaling $53.0bn in overall liquidity. Against these backstop numbers, $17.3bn appeared at the time in use, with $21.1bn available, and over and above this $38.4bn was a further $9.0bn from non-direct receivables sources, and $5.6bn in cash (this latter sum to be used only as a ballast device on the Balance Sheet).

What is noticeable however is the diminished Cash Flow from Continuing Operations, at $0.7bn versus $3.1bn a year earlier, when presumably the full effect of international scrappage schemes was being visibly fed directly into the Income Statement. After full consideration of all line items including reduced CapEx against higher Pension and Staff Retrenchment costs, the Operating-Related Cash Flow dropped to $-0.1bn from $3.4bn a year earlier.

This reduced self-funding ability, the mixed fortunes of EU sovereign debt concerns, the fall-off of global stock-markets and inter-related slow-down in corporate bond issuance has undoubtedly put greater strain – though far from unmanageable - on corporation's ability to access previously unsecured liquidity. Thus FMC's attitude of taking full advantage when the taps were open reflects its cautionary approach and has proven efficacious.

Lastly, to the important matters of the US division's 'Debt drag' and Credit Rating

Regards Debt, s mentioned, the mix of secured vs unsecured, and so typically private vs public, portions of debt have increasingly altered over recent quarters. There has been no pay-down of unsecured notes since YE09, yet to presumably show goodwill from the UAW to Ford, a small increase of outstanding unsecured VEBA debt and similar has occurred; so over the Q1 period Total Unsecured Debt rose to $15.4bn from $15.2bn. On a secured basis, VEBA debt was static at $3bn, Term Loan decreased to $5.2bn from $5.3bn, the Revolving Credit Line was static at $7.5bn, US Energy Dept Loan increased to $1.5bn from $1.2bn; leaving Toatal Secured Debt at $17.2bn. Combine the 2 Deb t types together and US Debt reached $32.6bn from $32.2bn.

Add International divisional debt and Overall debt increased to $34.3bn from $33.6bn.

Regards Credit Rating, a mixed bag outlook from the major 4 agencies, with general recognition that Ford must improve as soon as possible. S&P offers 'Stable', Moodys offers 'Review', Fitch offers 'Positive', whilst DBRS (Dun & Bradstreet) offers 'Positive' with a caveat of 'Stable' on short-term loans.

Mulally et al recognise investors desire to see FMC's current levels of indebtedness versus equity ('leverage') reduced, and this is why the Board have generated 'home-baked' ratios that try to demonstrate both transparency and the debt reduction progress: these being 'Financial Statement Leverage' (reduced from 12:1 to 8.7:1 for comparable Q1 quarters) and 'Managed Leverage' (reduced from 10:1 to 6.9:1).

Moreover, the Board wants to ease investor concerns by demonstrating that FMC (broad definition) asset-base (including receivables and leased lands) is valued consistently higher than incurred debt levels over the 2010 – 2013 period.

What of course is not shown is modeled earnings and so liquidity availability to: encourage a stock buy-back, align heavy investment in EM regions when the global economy is back to health, improve dividends (after possible buy back) and critically pay-down debt.

Of course there are various scenarios regards the liquidity's ultimate use that can be played out relative to market and investor conditions, but investment-auto-motives assumes both the Ford family with its power of voting rights, and FMC's investment bank creditors will create a scenario that returns back to Henry's idea of a stable industrial entity with increasing global reach that offers much needed investment returns stability in this new and very different era of value-creation.

Conclusion -

Alan Mulally has maintained his typical upbeat attitude ever since joining from Boeing. Installed by the Board and Ford family for his previous industrial achievement and enthusiastic persona, his previous promises have come to finally bare fruit. Thanks in most part to the efficiency seeking efforts of his executive team that were realistically underway many years ago and part and parcel of the almost normative FMC operational contraction mechanism.

Of course part of his role is as the outward-looking face of the company, their as the FMC ambassador. Yet interestingly, in pertinent debates such as the May 28th Sell-Side conference Call, he tends to speak in re-echoed generalisations. Modus operandi a mix of charm, warmth and anecdotes that offer replies without plainly stating the facts of the matter requested. A well evolved ploy with exacting details left to his financial lieutenants of Lewis Booth and Neil Schlosser. But even they, whilst inwardly wrapped in detail and numbers, appear to have honed the ability for surface explanation; thus leaving answers to be extracted by sell & buy-side analysts from a mixture of presented materials/figures and generalised implications.

Thus the investment community appears to be betwixt between lack of meaningful 'drill-down' detail from the horses mouth, the apparent deep detail of presentations which partially remain unexplained, and the impressive reality of Ford's traction as seen in Q1 figures; and the expectation of Q2-Q4 performance.

The completion timing of the Volvo deal in Q3 2010 should also buoy not only the balance sheet as it feels the post spring/summer sales decline, but also boost FMC stock price as investors return to the archetypical Q3/Q4 buying mode.

Yet looking ahead from the present in June, the economic optimism that reigned in Q409 and Q1 2010 has cooled markedly in the EU, and had an undoubted knock-on effect to Asian and US capital markets which in turn set the tone for B2B and B2C commercial confidence.

The optimistic outlook presented in Q1 for the remaining year is now starting to look somewhat overdone. Market resilience should prevail in the US, China, Brazil and South Africa, but investment-auto-motives expects EU sales levels to stay effectively flat at Q1 levels as long as financing credit conditions are not markedly changed. Whilst impacting the presumed growth hoped Ford et al can once again align EU manufacturing capacity to conservative estimations, and in the process create yet another round of incremental internal cost savings. Furthermore, the BP oil spill in the Mexican Gulf that has enraged US citizens creates an atmosphere of reduced oil supply and increased pricing which thus benefits Ford's small & compact car launches across 2010 & 2011.

Mulally also highlighted his ambitions to see Ford as an industrial 'Integrator' – similar to Daimler's role – with part of its business model gaining income from the sale, licensing of internally developed technology solutions and feasibly contract manufacturer.

First positive signs come from the nature of the Ford – Microsoft relationship, and although exacting detail is confidential, the question that naturally arises is to what degree Ford can leverage its competitive advantage in this field?

Though Mercury is to be discontinued, it is probably a case of 'watch this space' as FMC may be seeking to divest the brand to a Chinese manufacturer, notably Changan Motor given the FMC-Changan JV links in China. Thus providing Changan with a Buick competitor on its home-soil, a recognised small but meaningful future foot-hold in the N.A market, and for FMC, either JV manufacturing income or pure product licensing income, with in the future possibly a cost-effective platform engineering 'bridge' from which to component source for Lincoln.

[NB Furthermore, as investment-auto-motive's has proffered previously, FMC could feasibly 'rest' the brand for some years, before re-introducing it back to N.A and possibly world markets as its 'Youth' brand (in a Toyota Scion vein) given its predominant historical association with affordable (used market, hotted-up) Coupes for the young. This would require a full re-invention of the brand and if undertaken after exhaustive research to support the hypothesis should be done in a low-key, low-cost guerilla/viral manner].

Relative to the macro-headwind and input cost headwinds that are re-fracturing the business models of those less well placed in the western auto-sector (especially GM Opel), FMC itself is undoubtedly a lead western volume manufacturer. It right-sizing and pertinent product re-invention depicts a simple, well positioned business model which will provide the ongoing traction necessary to produce improved per unit margins, so RoS and thus RoI & RoE for creditors and equity-holders alike.

However, newly emerged testing market conditions may see revenue growth slow over Q3 2010 and that in turn may have FMC 'treading water' a while longer regards its current sub investment grade credit-rating, unless the Board decides that the reality of its internal – possibly partially hidden – strength allows it to pay down debt from its liquidity cushion – effectively turning over lending sources to pay Peter from Paul.

More likely is maintained liquidity levels given the seemingly ever ongoing recognition that this is the prime investor indicator of a defensively run yet possibly opportunistic company.

[NB investment-auto-motives sees a possible scenario emerging where Ford and FIAT vie or co-operate to purchase the Microsoft Auto rights; given respective MyFord and Blue&Me in-car systems interests, both presumably keeping close eye on each others level of product integration]

But ultimately FMC is, whilst still a large organism, structurally nimbler and simpler than many of its peers, and can focus management on extracting yet greater value from scale and cost leverage to battle near-term headwind concerns on input costs; a reality even in this supposed era of deflation.

Longer term FMC is headed toward evolving into a different beast that sits higher up the value chain, and it is a combination of present relative simplicity, global reach and long-term technical value generation that maintains investor belief. So though it carries a heavy back-pack it is lean, fit and headed in the right strategic direction – and that is what puts it ahead of the remainder of the mass market pack.