Sunday, 29 August 2010

Micro-Level Trends - Russian Auto Sector - MARUSSIA: Short-Cut Business Modeling in Constrained Times.

During the St Petersburg International Economic Forum in mid June, President Medvedev espoused the stance for continued diversification and modernization of the Russian economy. Its ambition to become "a cornerstone of the new world economic order". Amongst the high profile intentions are Moscow as a powerful financial hub, and the creation of a 'Silicon Valley'. Such initiatives assisted by FDI incentives.

The financial press however reports that the transition from broad national ambition to distinct, actionable policy-setting to create a delivery mechanism has proved less than successful. Those with an ideological or political counterpoint view highlighting the failure of the state to properly address everyday door-step issues, let alone grande plans. The recent fire-fighting debacle seen during the recent heat-wave provides the tinder for such allegations regards state incompetence. However, the homeland priority of a heavily diminished 2010 wheat crop could be said to counter this picture, publicly reflecting strong leadership to the people - even if an 'invisible outcome' would be to latterly release the commodity into the global market for a higher price.

Of course the apparatus of industrial modernization – visible and invisible - is distinctly separate from the newspaper headlines and regional politicking. Instead largely crafted by both the slow evolution of a massive but dinosaur-like ex-state infrastructure, and the faster joint venture collaborations with international corporations. Acting as catalysts within and alongside this mix are the role of domestic entrepreneurs, with as a not so small aside, the issue of their funding bases.

Undeniably, as with all countries, partiality of multiple interests obviously exists, but perhaps in Russia a little more obvious given the high profile of oligarchs and associates, than might be the case in other countries. To many since the collapse of communism the famed Churchillian quote that “Russia is a riddle, wrapped in a mystery, inside an enigma” stands more prophetic than ever. The fractious BP-TNK relationship in the oil sector perhaps the archetype case in point for today's and tomorrow's international business students.

However, as part of its metamorphoses from 'emerging' to 'advanced' status, the country has obviously been keen to re-generate its sizable automotive industry. And over the last decade has been successful in attracting FDI from global manufacturers, themselves keen to participate in a previous boom, with still high potential once the region gets back on track.

[NB Putin well recognises this reality, and so seems happy to slow WTO accession so as to create an 'FDI window of opportunity' (reflected in a reversal of normative import tariff reductions) which provides a more immediate route to industrial impetus.

Bodies such as OAR (Association of Russian Automakers) and AEB (Association of European Business' Auto Manufacturers' committee) act as umbrella and co-ordination agents to assist the ambition; especially so in providing the reliable domestic sales reporting and product regulation harmonization so required to assist the business fundamentals of credible market data and access.

To this end, factories were built by GM, Ford, BMW, Daimler, Renault, PSA, Hyundai-Kia, Mitsubishi etc, with the new comers from China in the guise of Chery, Great Wall etc chosing to use Russia as a stepping stone for their European entry strategies. As politically determined, simultaneously this foreign interest has enabled growth of its home capability via an improving supplier-base to periodically re-engineer long-in-the-tooth domestic vehicles, whilst also leveraging JV accessed foreign technology.

Whilst some legendary USSR names such as ZIL and Moskvitch effectively changed their operational shape through their own efforts to try and re-acclimatise, including purveying 'retro-chic' in old and new guises, others have been, and are in the process of being, reborn.

AvtoVaz initially joined with GM to largely produce Chevrolet badged Opel Astras until 2008, which whilst commercially unsuccessful was far more useful for knowledge and capabilities absorption. This JV model set the necessary template, and was more recently superseded when AvtoVaz joined with Renault-Nissan to update Lada. GAZ (owned by Basic Element – Russian Machines') bought Chrysler's mid-size car tooling with limited market success badged as Volga, and has toyed with the idea of re-generating the old Volga brand as 'retro-esque'. It also critically bought the UK's LDV van company to bolster the commercial vehicles section, yet the UK assets where eventually sold to private equity group China Venture. Elsewhere ex-Ford senior management took seats on the Board of Kamaz Truck, indicating likely co-operation.

[NB Thus the Russian auto industry is effectively seen to come full circle from the days when Moskvitch licenced Opel designs and Lada (like other eastern bloc companies) replicated FIAT].

Moreover, this approach to leverage 'piggy-backed' technology now seems to sit central to new premium positioned niche vehicle ambitions.

The Russian interest in niche vehicles has always been prevalent, from specialist military devices to home-grown adaptations of cars grey-imported from Poland and Germany, but perhaps first came properly into view during Russia's commodity exporting and industrial boom years when Russian businessmen had cash and incentive to do so.

Nikolai Smolensky bought the UK's TVR in 2004 (from ex oil man Peter Wheeler), split the company into 3 divisions* and shipped much of the tooling to Russia, choosing the near-namesake Tver as the supposed new home. [NB the company had been rationally split into 3 areas as presumed to be exploited or re-sold to other investment groups as ongoing concerns: they are: 1. Motors (IPR & Brand), 2. Power (Parts & Spares), 3. Blackpool Automotive (Factory and Manufacturing Assets). Although understandably disliked by the TVR faithful, that action helped jump-start Russia's own considerations of its own upmarket niche vehicle industry.

That perception was assisted by the creation and (15 unit) sale of the impressive Russo-Baltique Impression in 2006, which aped and enlarged the legendary carrozerria styles of the 1920s/30s, bodies seen on cars such as the Bugatti 57CS Atalante Coupe, Lago, Hispano-Suiza, Delahaye et al. The car was presented as what would have naturally evolved had the operation continued beyond 1919. [NB Russo-Baltique existed between 1909-1919 in St Petersburg & Moscow]

Yet to date little had emerged as properly engineered, broadly certified and market successful. The TVR tooling was rumoured to have been sent to Turin in Italy, and then onto the near name-sake town of Tver in Russia; but this appears more of a PR motivated story than solidly proven as a basis for new manufacture.

The blow of the 2007/8 financial melt-down created a major Russian recession with over-leveraged conglomerates such as Basic Element having to restructure under external debt and internal efficiency pressures. As a consequence of the country's rapid industrial re-structuring – essentially from bottom-up and demanding massive cash injections (as seen by Avtovaz vying Renault on its 25% stake) – the remote fringe ideals and focus of creating a Russian niche sportscar / luxury car market, appeared periodically halted.

However, moving into this picture at that time, apparently spotting the future opportunity, was Nikolai Fomenko - a domestically renowned musician, actor, motor-sports driver and presenter of Russia's Top Gear TV programme..

[NB investment-auto-motives suspects a low-profile yet well-connected 'backer' has identified the present opportunity to create something anew, exploiting the low point of the financial crisis 'after-shock' within the economic cycle. Given his background and public familiarity, Fomenko has seemingly been positioned as the high profile front-man].

'His' idea for “all new Russian supercar” and luxury brand titled MARUSSIA (aired in 2006).

However, given the lack of quality domestic niche manufacturing capability - which in recent history has seen variable levels of niche sporting car sophistication - the MARUSSIA business model would have to look further afield to access both (ostensibly) ready-made platforms and access higher levels of engineering and fit & finish.

From investment-auto-motives' external view, the fundamental business plan appears to 'simply' overlay new body/bodies, accompanying cabin re-engineering and the additional of multi-media services, to position the MARUSSIA marque in 'luxury sporting' territory. This essentially combines the typically distinct arenas set out by front-engined luxury coupes and mid-engined sporting/track cars. The closest parallel is perhaps the limited series Maserati MC12 – itself derived from Ferrari Enzo, the synthesis of both cars developing other limited editions.

Thus MARUSSIA's self-proclaimed ethos is the age-old automotive scheme of adding greater comfort and practicality features to 'bear-bones' credible/proven sporting origins; Bentley, Bugatti and Alfa Romeo good yesteryear illustrations. The difference here is that these British, French and Italian companies both fully designed and modified such vehicles as the 4.5 Litre, the Atalante and the 8C. MARUSSIA must short-cut such conventions given its limited capabilities.

However, an additional twist to the business model is that MARUSSIA offers a 're-body' service, which at first impression seems to mirror the yesteryear exercise of re-bodying a vehicle to suit different seasons or fashions – very much in the old carrozeria mode. However, Fomenko says without giving detail that this is not quite the case. [NB A latter-day re-body initiative was to be part of Daimler's >smart brand business vision, its ForTwo car designed to enable the swapping of different coloured skin panels]. However, Fomenko apparently states that his offering neither parallels that 'pick & mix' exercise. Exactly what he means by the “re-body service” is thus not yer clear.

Fomenko has been promoting the venture with an overtly philosophical stance, driven by what he describes as his own 'ideological' perspective; something that no doubt chimes well with the Russian mentality. Reasonable enough as part of the marketing ploy, yet the real operational trick – especially given Russian economic and capability constraints – is to pull together the business package by effectively outsourcing the prime and 'added-value' elements of the proposition.

This process, balancing resources vs cost vs product capability - is the archetypal 'triangular heart' of the niche vehicle business model; seen decade after decade across the globe.

He claims to have developed a new mid-engined supercar from what he would have the world believed as 'from scratch', intended to compete against, and sit squarely between the likes of Ferrari/Lamborghini and Bentley. This as a consequence of Russia's wealthy turning to the more comfortable, practicle and liveable Bentley on Russia's poor roads, after enjoying Ferrari/Lamborghini but frustrated by the infrastructure limitations that prohibit use and damage vehicles. Moreover, B1 is set to compete against Koenigsegg, Spyker, McLaren, Venturi et al, aswell as – one would think – Pagani's Zonda.

Furthermore, the original B1 model has also been developed into an additional B2 variant to give the brand and products greater breadth and so wider customer appeal/

[NB By no coincidence the MARUSSIA badge/logo mimics the iconic badge used by MARCHAL, the maker of headlamps for the finest marques in the pre-WW2 years – the metaphor of 'leading light' not lost on classic car connoisseurs].

At first rudimentary glance, given the fact that Fomenko drives an Audi Q7 SUV (from VW Group) and mentions Italian design assistance on B1, it was conceivable that he would ideally use the solid supply source of VW's last-generation - well proven and much amortised – platforms. Thus VW AG would also strengthen its business and political ties with Russia, something very much needed given the level of mass market competition, and Fomenko could use Q7 as the base for his F2 SUV.

Thus investment-auto-motives' original hypothesis was that the B1 was derived from the 2002-2011 Lamborghini Murciellago. But closer inspection of the cars front-end 'hardpoints' such as screen shape and wheel-centre to screen A-post relationship proved otherwise. Instead, its proportions and general form and detailing (such as exhaust outlet positioning) tentatively appears closer to the Pagani Zonda. This would make sense given Fomenko's mention of Italian design/engineering, and Pagani's need to generate an income to service the R&D and production requirements of its next advanced generation of supercars.

However, its seems that for various reasons (including Zonda's IPR protection, exploitation of Russia's own metals resources & processing development, aswell as ease of Russian build), Zonda's has not divulged its core-competence expertise in carbon-fibre race structures. Instead the MARUSSIA B1 uses an aluminium semi-monocoque which accords to early Zonda models and reflects the more conventional construction method used by the 2002-2010 Lamborghini Murciellago. This older construction method better befits new supercar business models which require greater business case elasticity given their unproven nature. (Zonda itself is developing its new generation cars from its R CS model). However, the B1 does incorporate a level of carbon fibre application but largely includes use of a supposedly advanced polyurethane material, which whilst not proving leading-edge theoretically provides nominal weight saving at reasonable costs.

MARUSSIA was shown in 2008 in Moscow, 2009 at Frankfurt, and April 2010 in Monaco, comes in the aforementioned 2 guises: the original B1 incorporates various 'generic' and specific supercar cues from competitor and past cars, aswell as the Zonda-esque small 'bubble' cabin and broad flanks – derived from FIA GT1 and LMP racing.

The B1was showcased alongside Virgin Racing's F1 team given Marussia's partner status, no doubt to provide Virgin with Russian exposure, aswell as the obvious halo/credibility rub-off from F1 - and shared engine use - for Marussia (ie using two versions of a V6 'Marussia-Cosworth' engines, a 3.0L naturally aspirated and 2.8L turbo-charged).

[NB A possible sponsorship link could also feasibly be agreed with MARUSSIA to run at Le Mans and similar Series races such as Sebring and Daytona so as to help raise its and Virgin's international profile alongside F1].

The B2 (2+2) takes-on a more geometric front & side look with a different vertical A-post style windscreen that aids entry/egress, 2-window side DLO graphic and an archetype aerodynamic tear-drop roof profile (with usual Kamm tail) so as to accommodate 4 people. It has an unusual appearance given the coupe cabin volume and treatment, which in part reflects a supposed functionalism which stylistically echoes the intendedly differentiated Avions Voisin cars from the 1920s/30s.

However, oddly the dimensional specifications for the car as listed on the official website are the same as the B1. Of course as much similarity as possible reduced cost but given its differing remit seems strange, especially regards height given head room requirements and an apparent visual difference. It is suspected that the B2 specs are little more than copy+ of B1 for simple website publishing.

In addition to the cars is the intention to develop a performance SUV vehicle, as showcased by the F2 concept in Moscow in May 2010. This is logical given wealthy Russian's demand for large SUVs, however the treatment as shown does leave much to be desired

The eventual vehicle portfolio then will essentially mimic Porsche's & Aston Martin Lagonda's use of sportscars and performance 4x4. (Porsche also of course offers coupes and coupe saloon, the latter also offered by AML. Aston Martin Lagonda also offers its 'novel' city car sourced from Toyota).

Thus in product positioning and model portfolio, MARUSSIA follows in the path of 2 legendary companies. However, given the need to markedly differentiate its products from their origins means that their vehicles' innate cosmetic and functional DNA is somewhat 'different' or 'interesting'.

The B1 two-seat mid-engined supercar appears the most conventional, whilst the 2+2 packaging of the B2 version suffers typical 2+2 M-E packaging faults, whilst its use as a 'product bridge' to the cosmetically 'alternative' F2 SUV, means that it is compromised on the aesthetic front aswell as the packaging front.

Ironically given its mid-engined layout, the B1 names itself a 'Grand Turismo Sport Coupe', something nominally associated with front engined road cars which allows for adequate rear storage. However the B1's reference is to the FIA's GT racing class. This then has obvious connetation to Maserati's GranTurismo Coupe & Convertible.

[NB It also correlates to TVR's 1960s Grantura model name, so possibly leaves the door open for latter-day operational synergies with a resurrected TVR]

As for the B2, things from this admitted distance look unclear, especially the subject of a shared wheelbase with B1 which would compromise either one or the other.

[NB the idea of 'long cabin' 2+2 or 4 seater laid-out within a mid-engined car package has long been seen as 'the worst of both worlds' since it leads to a heavily compromised product basis on dynamic performance grounds given the loss of true mid-engined positioning and on passenger occupancy grounds given rear leg & head-room squeeze. Though it 'works' as a theoretical USP on paper, historical precedents demonstrate the limited appeal: the less than successful 1980s Ferrari GT4 & Mondial, and more recent 2006 Lotus Europa. Typically 2+2 M-E based cars are created either to build-up the volume basis for a project's business case, or to extend the life-cycle of a platform seeking either required additional volume to realise original business case ambitions, or to try and maximise margins from a previously amortised base].

Given the apparent use of an adapted Pagani Zonda frame, investment-auto-motives believes margin maximisation is MARUSSIA's intention, whilst the Pagani desire is to licence old technology for an additional income stream.

As is to be expected, and all to typical within the start-up arena, a certain amount of press chasing and public story-telling is being told by Fomenko to support the project and business.

To this end the B1 and B2 have supposedly designed wholly on computer via advanced CAD systems, aiding the speed of development and enabling a quicker market launch, since this supposedly negates the need for typical running prototypes, the full prove-out process supposedly achieved via computer hardware programmes and rig-testing of a single vehicle.

This again is somewhat questionable, since throughout the history of CAD use such assertions have been made, the reality being that initial customers end-up as the trialling process that irons out problems that a mass manufacturer would solve during in-house trialling. The prototype trialling process is of course a costly one, and so for small start-up businesses with limited liquidity it makes sense to create a business model which modifies a proven platform, enables niggle-fixing from customer feedback and critically shortens the period between set-up and supply costs and customer revenue receipts.

Getting the Overhead and CapEx budget balanced by the Income Receipts is the most important element of any new business, especially so in the auto-motive sector. The failure to do so has been the downfall of many ventures over the last century, and is the reason why (rightly) the investment community generally prefers the pragmatic attitude of the businessman to the perfectionist attitude of the inventor-engineer.

With no doubt help from other more low-profile colleagues, Nikolai Fomenko, ever the showman will need to balance marque enthusiasm, commercial practicality, product delivery and ongoing support to be taken seriously by customers. That is the real challenge given that MARUSSIA is still in its infancy, with the possibility that its eyes are bigger than its belly.

However, Fomenko indicates that a production volume of 100-150 units would be “ a good result”, though it is not clear whether that 100 figure equals the project's financial break-even, and the additional units profit. Or whether it requires 150 vehicles to reach break-even. It is an important point to make that such a 50% variation is highly unusual when assessing the viability of a niche manufacture vehicle project. Whilst exacting figures are understandably in-credible, a reduction in the volume's effective 'spread' would be deemed very necessary to pin down the business case.

To this end MARUSSIA must present itself well and convincingly to an international crowd.

Fomenko's ultimate ideal, as presented to latter-day investors, could well be piggy-back Pagani to build reputation and credibility in the near term – ie over the next decade - then to piggy-back a bigger sourcing partner such as Lamborghini (ie VW Group) to gain production efficiencies.

This would appear to be a notionally stable long-term plan if viable.

Yet, even with greater levels of FDI pumped into Russian capital markets, seeking higher-value returns than available in the West or Japan, given the past foreign investment concerns in Russia, there will be a need by any foreign investor to see tangible returns and/or growth evidence. An immediate ROI 'bang for the buck' directing capital to the likes of commodities, metals, telecoms and state-support initiatives. Whilst for VC orientated entities, the need to have far greater transparency throughout the infancy stages of any start-up company; critically to ensure allotted funding is fully accountable and provides visible early-stage business traction.

That future FDI that President Medvedev seeks will have investor procedural demands of its own, but especially, and necessarily, so in the relatively complex, costly and politicised world of national supercars.

Ironically, even with the current pro-Russia stance of global capital markets, in such non-conventional capital plays, it will be the Russian who will act the bulls and the FDI outsiders the legendary Russian bear.

Friday, 20 August 2010

Company Focus – GM – Investor Road-Show Prospecting with a Necessarily Low Key “Yippee IPO”

The North American operations of the new General Motors Company has experienced a remarkable ride over the last 12 months or so. Its $60bn+ financial life-line and a politically generated 'fast-track' Chapter 11 restructuring designed to provide it with a lease of new life; so as to play its part in the economic regeneration of the US, and end the domestic value-destruction drag within the company's global empire.

Undoubtedly a radically re-shaped entity. It saw 8 brands slashed to 4: banishing non-performing divisional marques and those out of kilter with prevailing social trends. It saw an essentially cannibalistic dealer-base much contracted*: re-setting showroom catchment areas and enabling pricing power. It saw product specification rationalisation: the resurgent days of “more combinations than stars in the universe” gone. It saw the number of preferred supplier numbers shrunken: to offer contract security in return for discounts driven by economies of scale. It saw product engineering rationalisation: as new vehicle programmes were determined 'global' instead of 'local'. It saw the UAW recognise the scale of the challenge, necessarily altering its historic left-ward stance to rightwards: the reality of the enormous GMNA challenge and government persuasion showing its need to be part of the solution, not the problem. It saw major national support: from the large Energy Department loans from the out-going Bush administration, to the unprecedented Quantitative Easing measures from President Obama, which not only provided the 'bail-out' monies but doubly support the company (and the sector) with”Cash for Clunkers”

[*NB allegations flying back and forth within public web forums that the dealer rationalisation programme was supposedly heavily influenced by the Dem vs Rep campaign donation choices of GM auto-dealers].

Never in the US auto-sector's history has so much change been seen. As a result of that drastic surgeory which spanned major liposuction, cardio-vascular re-routing and skeletal support, the organic element of the company is indisputably different.

However, akin to any over-weight, artery clogged, arthritic patient, the surgeory can only normalise the organic. As important, if not more so, is mental (ie cultural) re-orientation For three reasons: to avoid re-lapse into destructive old habits, to recognise the reality (ie 'new norm') of the surrounding environment (of the global automotive arena, and GMNA's objective place within it) and to set-out a health improvement regime which re-builds understanding, character and innate strength.

This was always was set to be the substantial post-apocalyptic challenge – and it has now arrived.

Yet after so much positive yet painful traction, enabled by 'text-book' actions and oiled by Washington, as the company nears the eve of its IPO – for an expected 20% disposal of the government stake – two events of a macro and micro nature, point to a behind the scenes reality at GM which is marring the bright future previously painted.

1.At the macro-level, the candid description of the all to real re-emerging macro-economic headwinds availing themselves, depicted in the Risks (ie caveat) section of the S-1 document submitted to the SEC yesterday as part of the IPO procedure.
2.At the micro-level, the very surprising departure of Chairman Ed Whitacre, having seen successful emergence from Chapter 11 and offered two quarters of seemingly successful financial results.

Although not privvy to an inside view of the restructuring, investment-auto-motives has long been cautious about the reality behind the all too typical necessary but potentially over-played corporate bravado. In short questioning “what the store really looks like behind the Wall Street directed window-dressing”?

The question that always beset New GM was “in what manner would it approach re-listing onto public capital markets”? Of course much was dependent upon the positive or negative dynamics of those markets themselves, setting the scene for relative economic confidence throughout the economy and especially so the institutional and mom & pop investor. That said, once the market sharply rebounded from its March 2009 low-point, the rapidity of that rise – holding steady after 6 months and sustained for 14 months - essentially set the scene for an early presentation of New GM.

Market dynamics fitted well with the government's need to claw back its 'investment' in the company and so, given the record breaking valuation and size of the eventual full listing, commissioned the full gamut of Wall Street's big name investment banks to both act as book-runners and under-writers.

But since the recent topping-out of western capital markets, thanks to corporate earnings driven by a mixture of tail-end cost-savings and inventory re-building, unsurprisingly the age of what seemed continued, unfettered, but foundationally unproven jubilation has been somewhat scuppered.

This has engendered a 'reality check' amongst both touting corporate executives and their agent bankers. It is a very necessary reaction which in the larger context should help prevent the bursting of a mini-bubble. And crucially at the corporate level instills a conservative atmosphere of reasoned valuation.

Thus GM's change of tack. From a 'full steam ahead' stance to something more cautious. The initial reported intention of an all-out offering of Washington's & Ontario's complete stake, so riding buoyant market sentiment as a switch play from what seemed a bond bubble, has altered dramatically in the cold light of recent market jitters. Equity buys have slowed for even proven 'risk-off' buys such as infrastructure, pharma and sections of consumer retail, so the market acceptance of a large scale GM offering – even a stretch in itself – would have consequently diminished.

This is the reality which GM wisely conveyed in its S-1 filing, that 'risk-off' sentiment detailed by the still lack-lustre recovery in the US, Europe's economic drag and perhaps most importantly the contraction of vehicle demand in China as the PRC seeks to re-align its own economy; given the slowed demand-pull from export regions which by default helps keep the Renminbi tracking slightly lower.

Thus GM's S-1 recognition of a concerning slowed phase in the global economy must be seen to be seen, with GM no doubt an understanding that with slowed Chinese domestic demand hitting commodity imports along with increasing world-wide food-stuff prices, that even rebuoyed South American car demand may suffer as well; so seeing demand deflation across the globe.

But what of Ed Whitacre's untimely departure?

It is unexpected given his stand-by-thee reputation build at AT&T. Of course it was well recognised that he was parachuted into GM specifically to lend gravitas to and managerially underpin the floatation process, that is seemingly his craft. Yet as insightful financial press editorials have stated: the job is far from done, even if the environmental market conditions have changed. As has been reported. the CEO's role has been handed from the charismatic long-serving Wagoner, to the accounts clinical Henderson, to the re-orchestrational Whitacre and now to the more entrepreneurially renowned Dan Akerson.

Most interestingly, Akerson holds an MD position as Buy-Out Head at the private equity firm Carlyle Group.

Ideally Whitacre would have kept to his word of (to paraphrase) “not going anywhere for sometime”, since this would have given a much needed stability to GM mid and senior tier management, who quite frankly must be continually bemuddled even as corporate confidence builds. But the appointment of Akerson highlights perhaps not only greater care to pitch GM properly to the market, but also allow it to fairly value and dispose of its remaining interests in the essentially defunct Motors Liquidation Corporation.

The 'old GM' company - still with creditors in toe - has the remit of off-loading what are essentially reams of 'rust-belt' properties and plant Such asset disposal is typically not the remit or capability of typical auto-executives, their focus better directed in running the active side of the business. So instead, who better than a knowledgeable, value-driven, and deal savvy private equity player to undertake the role?

Brown-field industrial plots here and now seem to be the last asset class on people's minds, but of course it will be Chinese, Indian and SE Asian firms, who whilst cash-rich and enjoying steady income streams will be on the look-out for western acquisition deals throughout North America and Europe. As a way-in to serve the still sizable GM across the range of different vehicles systems: from possibly the likes of TATA in body construction, Bharat Forge in powertrain and suspension castings, Geely affiliated companies in trim and interiors and other Chinese companies in electrical and electronic harnesses and 'black-box'.

Identifying 'fair-value' asset disposal prices will be key, as will a 'simple and clean' no-nonsense agreements to enable quick legal conveyance of the properties and plant. If not as successful as planned in selling to overseas buyers, GM may need to look at the possibility of passing on such redundant land to the government as a part of an equity return deal. This would assist both GM and the government in terms of re-apportioning soft and hard assets to their natural places, GM holding more of its own equity and the state holding more of its own terra firma, but for better mid-term confidence and an improved outcome for long-term national prosperity, the attraction of Eastern FDI cannot be understated.

On paper the production active side of GM's business model has been reset to reach breakeven at an annual market volume (TIV) of 10.5m, given a maintained and projected market-share of approximately 20%.

[NB. Maintaining that 20% will be key, as recent marketing campaigns such as the 5-year/100,000 mile vehicle warranty highlights. Yet the level of competition is still severe, as seen by Hyundai's 7-year warranty, the need for Toyota to reclaim its dominance, Honda, Nissan & Suzuki incursion, aswell as critically the North American growth ambition of VW, Ford's retained hold and the obvious return of Chrysler (and latterly FIAT) as market forces].

GM cannot simply rest on its laurels of a transformation job well done under Whitacre, nor can it expect the capital markets to accept that miraculously all is now well, nor can it expect a windfall from its MLC asset-disposals, nor can it expect the future helping hand of Washington.

As the year-end IPO deadline approaches GM must be seen to be more far more than it has been. It has by Chapter 11 default escaped its image of endemic irresponsibility and mis-management.

But now New GM must present itself to be far more than a possible case of 'fur coat and no knickers'. This viewpoint generated by recent issues such as: partnership with a sub-prime lender to support sales volumes (vis a vis Washington's expectations), concerns regards the proliferation of creditor-warranty and convertible bonds related 'class-B' shares, and the surprisingly large reported pensions drag carried-over: which could not be culled under Chapter 11 given the scale of GM's social legacy.

Yes, GM enters a new phase, one in which it will be undoubtedly tested, but as with any buyer of a car, let alone a car company, it will need to have been 'tried and tested', before fully convincing the capital markets.

Theoretically, having ridden the support wave over the last year,its present $32bn cash pile would allow it to prove itself without the need for immediate new capital injections. If all is truly stable, that would surely be the expectation from investors, and the acid test for GM. Thus avoiding the IPO as effectively an avenue to 'Lemon Aid'. Exactly how it conducts itself throughout this new period of 'stretch' of retracted consumer demand will be testament to its current and future capability.

Whilst Akerson is promoting divestment potential the fundamentals of the IPO's confidence relies upon operational acumen, and drafting a tenable payment schedule from its investment funds to meet its still weighty pensions obligations without having to 'bet the farm' on high risk choices.

These irredoubtable and crucial facts are recognised by the financial press, sector analysts on both side of the buy-sell deal and critically Washington itself. And no doubt by Akersen himself.

Having come so far, no matter how 'lady-like' its appearance, GM cannot afford to 'pull a fast one' on the markets, expecting a latter case of a rising tide lifting all boats. This IPO registration process is vitally important for the corporation and the country. Certain quarters of the press have already hinted that "Dan Akerson's number should be up", but we can only allow investor 'registration numbers' to tell the ultimate tale. Black versus Red labels are all to easy to affix before the event. Yes it may be a strenuous hill-climb yet, but that all important S-1 document at least highlights the bumps in the road ahead, even if the possibility of black-ice is not overtly mentioned.

So, from the basic operational and balance sheet out-look, investment-auto-motives is yet to be convinced of GM's fully-recovered return. But that declaration of horizon risk indicates an renewed atmosphere of prudence at GM which should be welcomed, even if investor breath must still be cautiously held whilst fully assessing the floatation worthiness of the GM vehicle itself.

Sunday, 15 August 2010

Macro Level Trends – UK plc – “R&D&R” : Adding the Element of "Realisation” to the R&D Agenda

This third and last commentary regards the UK's current industrial state of play unashamedly uses an excerpt of classic literature to once again (poignantly) echo Lord Brown's all important point: that the nation's R&D agenda – between 'Pure' and 'Applied' must be better managed.

To re-emphasis, the correlation of 'value-added' technological solutions versus 'time' to exploitation, has rarely ever been so critical.

[NB investment-auto-motives titles this new era 'RADAR' : derived from the extension of the term R&D into R&D&R – the latter 'R' suffix highlighting 'Realisation'. RADAR is intentionally used as a metaphor given its role as an examplar of technological development and application which quite literally altered Britain's future at a critical juncture of its own history].

As Business Secretary Vince Cable seeks to address the innate problems of the country's productivity mechanism - and the 'value-added' nature of its output - a pertinent section from Jonathan Swift's “Gulliver's Travels” (circa 1726) is undoubtedly timely.

It is taken from Gulliver's 3rd adventurous trip, reaching Lagado, where he reveiws the role and manner of the indigenous sciences. Whilst Swift was overtly light-hearted in its case-studies, he importantly raises questions regards the less than wise deployment of resources.

[NB An innate irony presents itself given that Swift questions the role and delivery of Lagado's 'Acadamies' whilst his central sentiments are being presented by Lord Brown, who some 284 years later the President of the Royal Acadamy of Engineering. It is a small irony I'm sure both would enjoy].


Gulliver's Travels / Chapter 5

“The academy is not an entire single building, but a continuation of several houses on either side of the street, which growing waste, was purchased and put to that use.
I was received today by a very kindly warden, and went for many days to the academy. Every room hath in it one or more projectors [NB scientific developers]; and I believe, I could not be in fewer than five hundred rooms.
The first man I saw was of meagre aspect, with sooty hands and face, his hair and beard long, ragged, and singed in several places. His clothes, shirt and skin were all the same colour. He had been eighty years upon a project for extracting sunbeams out of cucumbers, which were to be put into vials hermetically sealed, and let out to warm the air in raw, inclement summers. He told me he did not doubt, in eight years more, he should be able to supply the governor's gardens with sunshine at a reasonable rate; but he complained that his stock was low, and entreated me to give him something as an encouragement to ingenuity, especially since this had been a very dear season for cucumbers. I made him a small present, for my Lord had furnished me with money on purpose, because he knew their practice of begging from all who go to see them.
I saw another at work to calcine ice into gun-powder, who likewise showed me a treatise he had written concerning the malleability of fire, which he intended to publish.
There was a most ingenious architect, who had contrived a new method for building houses, by beginning at the roof, and working downwards to the foundation, which he justified to me, by the like practice of those two prudent insects, the bee and the spider.
There was a man born blind, who had several apprentices in his own condition: their employment was to mix colours for painters, which their master taught them to distinguish by feeling and smelling. It was, indeed, my misfortune to find them, at that time, not very perfect in lessons, and the professor himself happened to be generally mistaken: this artist is much encouraged and esteemed by the whole fraternity”.

Today, as perhaps never before, the nation's own 'RADAR' capability must be commissioned to qualify and quantify the output from the UK's public and private investment R&D agenda.

Friday, 6 August 2010

Address to The House of Lords

The previous post applauds the informed reaction of Lord Brown and Mr Dennis in appreciating the macro and micro-level challenges the UK faces in generating a new era of industrial & economic value creation.

The following re-presents a letter from investment-auto-motives addressed to pertinant independent Cross-bench Peers of the House of Lords, with the aim of highlighting the level of challenge and providing a contextual background, the combine of which calls for a new 'UK Auto Industry Manifesto'.

The letter is provided here for the interests of my web-blog readers from investment, governmental and industry spheres.


The House of Lords
Palace of Westminster

14th April 2010

Re: Fiscal Consolidation & the Need for a 'UK Automotive Industry Manifesto'

My Lords & Lady,

Perhaps as never before in Britain's modern history has the need for truly independent judgment been greater to set the country back on course, domestically and internationally.

This letter and its enclosures are intended for yourselves and ideally copied to other wholly independent Cross-Bench Peers as well as members of the Science & Technology Committee; thus those who have non-partisan associative interest and baring – formal or otherwise - on the future of '21st century Industrial Britain'.

The list of published reports from the House indicates that scant legal & associative policy regard has been given to the indigenous automotive sector over the last two decades. This is unsurprising, a consequence of the decline of British owned mass-manufacture in a notional post-industrial age; with instead primary attention directed at the Kyoto ambition of curbing vehicle emissions as part of the bigger global CO2 reduction ambition.

Yet the two – industry & the eco-challenge - are undoubtedly concomitant.

Presently attention is drawn to the future by way of Bills attendant to: digital communications, genomic medicine, nano-tech, the electronic micro-chip etc; such disciplines now set against the very real regard of “Setting Priorities for Publicly Funded Research” given the sizable retraction of near-mid term public expenditure.

For the UK, and indeed much of the West, a concerning 'activity chasm' has emerged as a consequence of prolific macro-economic headwinds and the level of ecological challenge. That chasm will only be bridged by the effective and efficient use of the country's public and private resources - from availability of capital, to the promotion of the enterprise base, to the nourishment of the inherent human intellect.

The bursting of the credit-bubble demonstrates just how fragile the UK economy has become, portions of our population now economically disconnected; the 'credit-pull' for (often nefarious) personal consumption has exhausted, and instead, today, there is a new requirement for 'productivity-push'.

Just as the 19th century gave rise to mass industry and the 20th to mass consumption, so the 21st demands a re-formation of both sides of the equation, to meet this new era's demands.

As such, the full cross-section of UK industry, services & commerce requires re-examination and where necessary re-orientation to become: aligned, harmonious, productive and create meaningful value in the economic sense, the rational utility sense and even the emotional reward sense at both national and personal levels.

To this end, the full value chain of the British automotive sector, along with its incumbent foreign-owned manufacturers, and potential inter-regional co-operation, must be considered in-depth as an 'economic re-generator' given the ever present need for personal & public mobility, which in itself is historically proven as a cornerstone in promoting increasing economic activity.

All too often 'automotive' is seen as yesteryear because the conventional 20th century mass-manufacture 'Budd-system' business model is now typically better served by the socio-economic dynamics of the developing world. That perception whilst valid is not the whole story, discounting the reality and increasing relevance of alternative business models that focus upon advanced technologies and niche manufacture. Yet the UK's historical, formative, connection to these 'old' and 'new' sectors means that it operates higher-up the value-curve, with concomitant IPR leadership and effective operational know-how.

Whilst the recent rehabilitation of coal-mining is applauded as in the national interest, the automotive industry - although mis-perceived as 'old' - can be viewed in a similar vain, since the sector is so diverse and multi-faceted as to be more comparable to a reformable Rubik's cube - ie with the ability to re-shape itself both throughout the value-chain: from component supplier to assembler to retailer to maintenance & thru' life services provider; and indeed in time as a whole.

Thus it is my sincere belief that through insightful guidance at government, investor and enterprise level, that the UK automotive industry has a compelling role to play in both the wealth generation and well-being of the nation.

The enclosed items present the sole originally intended 3-page web-log item titled 'Fiscal Consolidation & the Need for a UK Auto Manifesto'. (The accompanying diagram illustrating the global 'trickle-down' achievable).

Yet to give this 'call to action' improved context, a compendium of selected web-log essays has been compiled providing various inputs for 'big-picture' food for thought. Hence a cross-section of items seeks to paint a portrait of the prime issues and trends facing the sector, including:

- The required 'economy drive' to dig the UK out of national indebtedness
- The danger of over-ideological personal transport initiatives such as TfL's bicycle scheme.
- The need to generate tangible added-value across the UK, US & Europe (Parts 1,2 & 3)The investor prompted need for continued western auto-industry restructuring.
- The importance of R&D: direct applications and technology transfer, with Dyson example
- The increasing importance of the small car, with Aston-Martin-Lagonda City-Car example
- The recognition that pure EVs have a near-term limited role, with Daimler-Renault example
- The need to consider vehicle manufacture & usage patterns relative to metro-mobility and metro-rehabilitation needs, using Las Vegas as hypothetical model.
- The 'dis-joint' of near-mid term currency markets as prompter for auto-sector value-seeking.

From a truly independent voice, this call to consider the role and shape of 'UK Auto plc' has no political bias or stance and prohibits its use as such. Instead it simply promotes the idea of improved industrial thinking & policy-setting that must be addressed from 'top-down', seeking to increase the momentum of the recent UK Motor Industry Inquiry, and critically poses the question as to how the country can best utilise its high & mid-value capabilities on global & national stages: the latter with overt reliance on auto-retail.

Napoleon's disparaging adage that 'Britain is a country of shop-keepers' may be all too true today given the realities of manufacturing efficiencies elsewhere and the necessary need for free-trade to lift all nations. Yet the high national cost of the Automotive Assistance Plan that generated the sale of foreign made and owned vehicles only serves to highlight that the UK should recapture that lost wealth. Extolling its world-leading development capabilities via the production of its own (exported) low-CO2, high-value vehicles. In short part of a re-aligned national business model which delivers economic consistency – an automotive whole far beyond the sum of its parts

Yours sincerely

Mr Turan Ahmed MA

Monday, 2 August 2010

Macro Level Trends - UK Autos plc - "Future-Scoping" from a Convincing Double Act.

In a very timely manner, Julia Banner's current exhibition at Tate Britain highlights the danger of UK's engineering sector plunging to earth; in an age of hyper competition from supposedly 'advanced' and nominally 'emerging' nations.
In a prosaic metaphor she hangs a de-commissioned Harrier Jump Jet from the ceiling, its nose centimetres from the floor, whilst in an adjoining space, a paint-stripped and mirror polished Jaguar Fighter lays belly-up on the floor, as if downed fowl - resting on canopy, wing-tip and tail.

The best of art has always been a pertinent comment of the era, and whilst an overly obvious metaphor for the eyes of more profound minds, it is undoubtedly a powerful juxtaposition, citing the UK's industrial fragility within the backdrop of a building literally built from Tate & Lyle's proceeds of trade and industrial might of the Victorian era.

The innate message is clear to the masses

In sync comes (ex-BP) Lord Brown's call - as President of the Royal Society of Engineers - to the Department for Business, Innovation & Skills.

A call for a National Science Review that looks at the necessary measures required to re-balance the £4 billion per annum public expenditure, his assertion that the current funding ratio between far horizon 'Applied' versus near-horizon 'Pure' must be altered.

This call has been lambasted as short-sighted and reactionary by certain quarters of the financial press, and rebuked by Lord Rees - President of the Royal Society: known for its 'blue-sky' thinking; (where Lord Brown is also a Fellow). * Please see Post Script.

But Lord Brown is absolutely correct in this assertion....realistically "there is no alternative"...and realism must at this time prevail over esoteric ambitions.
Given not only the state of the nation's fiscal woes, but that of its relatively declined knowledge and advanced capabilities base in the face of fast-track BRIC+ nations.

PM Cameron's (ostensibly trade) visit to India highlighted that such nations can now licence and build UK designed aero-structures, as seen with Hindustan Aero's deal to construct India's own Hawks to BAE specifications. The (admittedly high-value) avionics and engine packages have still been sold direct from the UK by BAE Systems and Rolls-Royce, providing £500m & £200m programmes respectively. Whilst in the private aircraft realm we see only this month the launch of Brazil's Embraer small jet plane, and of course in China ambitions to match Boeing and Airbus in the mid and large commercial plane segment.

So the progress made by what were once seen as automatic – indeed desperate - recipients of UK aero-tech, highlights the changed world the west must now address in its own industrial policy-making.

Under greater pressure still is the UK Auto-sector, given its lower order technological demands. In a similar call to Parliament's Automotive Industry Reception, Ron Dennis (Chairman of McLaren) requested additional government assistance, his solution comprising of:
1. Education: additional effort to attract would be students to STEM subjects (Science, Technology, Engineering & Maths)
(plus extra curricula activities such as the Formula Student 600cc race car competition)
2. New Tax breaks for R&D efforts
3. The idea of 'collective achievement'
4. Cultural change in schools toward 'courageous experimentation', not 'fear'

Now this 4-point plan may be simplistic, arguably far too lightweight (in its current presented guise) to be taken seriously as a 'Vision for Britain' but it highlights some of the basic elements that are undoubtedly required. In his own words, it is not "rocket science".

[NB With all due respect, although Dennis partially decries the student shift to the 'social sciences' (media etc etc), the reality is that ultimately a marriage of STEM subjects and the Arts is required, with moreover an injection of a 3rd disciplinary mentality: namely Business & Finance methods and processes.

At the educational level investment-auto-motives whole-heartedly believes that "Renaissance (wo)Man" needs to be re-born in the UK to propel the capability of its knowledge-base. This has always the central philosophy of Turan Ahmed's and a central USP of investment-auto-motives].

However, ultimately the discussion of exactly how the UK progresses to generate future industrial value-creation is at long last being tabled.
It may be seen by some purveyors of the more esoteric sciences that it all smacks of picking winners and losers. Such a blinkered approach undoubtedly will not prevail, whilst positively a better and stronger value chain can be created between (public & private) investment, academia and industry.

To sum-up, in a reversal use of the overtly coarse phrase "its all about the economy, stupid!"

At present such truisms presented so harshly are desperately required.

Post Script*
One presentation at the London School of Economics last year was given by a New York University lecturer, the supposed contributing originator and part-backer of (to quote) a "Chug Chug" machine - that had supposedly gained Royal Society interests.
Supposedly designed to extract CO2 directly from the atmosphere (presumably in a tree-like manner, as opposed to Carbon Capture & Storage of power-stations**), no explanation of the machine's mechanicals were presented even at theoretical level. The young yet 'savvy' student audience saw the proposition as advanced as ludicrous.
It did the Royal Society no favours either, potentially seen by the LSE audience as a 'crack-pot' body, which is far from the truth given its illustrious origins and members. However such presentations only serve to assist the cultural chasm between science and economics – the very last thing needed.

The issue of CCS is presently being discussed by the House of Lords