Thursday, 30 September 2010

Company Focus – General Motors – How the NOMAD MEN will be Targeting Additional Buyers for the IPO Roadshow

Recent press releases at long last demonstrate that fact that the US Treasury must temper its ambitions regards the innate sale value of GM's first IPO tranch. Intended to raise between $10-20bn, recent murmurings highlight that the figure could be lower.

The standard below-par offer sits at between -5% to -8% the nominal face-value of a released stock, so as to try and ensure the 'early-bird' investors see a positive short-term gain. At extremes, there are reported views that GM's stock may have to be presented at up to -30% face-value.

Such an event would make a mockery of the floatation, and has set-off alarm bells for the UAW trustees and Canadian government, who would rather release their respective portions when improved market conditions assure recoup of original respective 'debt-swap' and 'bail-out' expenditures.

Thus the US Treasury would be the only seller, and itself caught between a rock and a hard place, between being seen to recapture a portion of the tax-payer funded $61bn GM package and the possibility of seeing proportionate value-destruction.

That $61bn sum of course does not include the additional costs actually incurred by the process of Chapter 11 administrative filing and expected fees in marketing and finalising the IPO. Some say that figure, added to the original $61bn, reaches near $70bn all told. The natural method for pricing is to compare with domestic sector competitors, with Ford really as the only comparable benchmark.

The debt-laden but operationally profitable Ford is worth approximately $40bn market capitalisation, hoping to combat recent and ongoing input cost and consumer demand headwinds by actually reducing its range (as seen with the retraction of the 'thinner margin' Ranger pick-up from the NA market).

[NB Chrysler is not referenced given its operational integration/protection by FIAT, and the inability to clearly assess a standalone enterprise, even if early official reports state it as being profitable].

Thus, this essentially direct comparison of two US multi-national automakers, set against the global sea of Eastern players - is the current bug-bear of the markets in identifying a fair value for GM.

GM's nominated advisors (its NomAds) will have scoured the global investment community to identity the most likely candidates for near assured sale: the FT reporting of 10 book-runners and under-writers. Although the usual suspects of large institutionals are the first port of call, other non-traditional may well have been approached given the limited level of risk-exposure all large investment bodies presently seek; with the underwriters themselves possibly re-insuring themselves against a possible 'hit' of unsold stock..

A general view indicates that with so many fund managers seeking a mix of western risk-free buys (typically in bonds and revolved defensive stocks) married to still buoyant EM stocks, in-house pressures to maintain stability and growth of their portfolios indicates that longer-shot buys will largely remain on the shelf. And presently, GM could be seen by some as such a long-shot.

In recognising the 'perspective dependent' volatility of GM's value, the interest of the shrunken but hard-fighting hedge-fund sector may take, could also be problematic. With the macro-global outlook stance increasingly tepid on the expectation of China's 'soft-landing' and still fragile US consumer confidence, undermined by underpar jobs data , the hedge-fund attitude may well be negative. Those bigger players with market-fire-power could well seeking to short the stock, so positioning themselves for a latter 'buy-in' after what could be a number of rolled-over shorts, and so marked stock price decline.

Hence, with the risk-averse major institutionals weary (perhaps only taking the smallest floatation slice for political reasons) and hedge-funds possibly predatory, the NomAds will probably be targeting other buyer types:

1. Global Sovereign Wealth Funds
2. 'Bailed-Out' US Institutionals
3. US Governmental Pension Scheme Agency Funds
4. US Municipal Investment Funds
5. Foreign Auto Companies (ie Chinese & S.Korean)
6. Private Equity

Given their intrinsically long-time horizons and roles as facilitators of international diplomacy, sovereign wealth funds have a major part to play as IPO facilitators. The US could feasibly use its separate Treasury interests in GM to 'borrow from Peter to pay Paul' but such a ploy – even if indeed tenable - would obvious only serve to send the message out to the broader market that the GM entity was essentially a dubious running concern, and create a 'field-day' for political and financial journalists. Instead the far more buoyant pots of Asian, Middle Eastern and South American SWFs are undoubtedly seen as the prime candidates for taking long positions on GM, with the ability to stand any minor early period stock shocks that could come about. Equally, although well entrenched operationally within EM regions, GM is still seen as a local industrial and economic facilitator, part of the 'driving mechanism' to advance infrastructure and standards of living. Hence, these are seen by investment-auto-motives as the prime candidates from the NomAd viewpoint.

Whilst the more secure, risk-averse private and publicly held institutionals in pensions and insurance realms may baulk at the GM offering, certain enterprises – namely those themselves bailed-out by the US government during the financial crisis – may be expected to participate as buyers, even if not 'corner-stone buyers'. The most obvious is AIG, into which the US Treasury pumped a reported $182bn to stem its losses and restructure the company. The US Treasury is about to transfer its holding of preferred stock worth $49.1bn to 1.66bn common stock shares to itself recoup its 'public good investment'. But whilst AIG is naturally seeking to divest of non-core assets – including an auto-insurance company, there could well be quiet whispers from Washington that seek it to take-up a stake in GM; especially so since it is the only insurer not to have repaid its TARP monies (Hartford and Lincoln having done so). Not quite a case of borrowing from Peter to pay Paul, but in reality not too far off.

The third candidate is the varied group of Pension Funds run at Federal and State levels that seek to secure the retirement futures of government employees. Separated from Municipal bodies to avoid conflicts of interest regards a state's balance sheet, they have acted much as mini-SWFs, with a vested interest in 'hard'/'soft' national infrastructure aswell as down-the-line earnings to satiate the increasing demand-level from retirees. These economically aligned funds are obvious participants in the GM offering. Under the 1932 inaugurated State Employees Retirement System ('SERS' latterly 'PERS'). 'CALPERS' is perhaps the best known, today representing the retirement interests of California's public workers, and seen to be the most activist. Whilst the one of the largest funds there may take some convincing of the patriotic good in backing GM, since beyond its own activism toward GM in 1992 regard corporate governance, California has historically been the home of various auto-companies design, R&D and divisional HQs, but much of GM's activity (besides retail) takes place outside of CA: in Michigan, the mid-west, and now southern states. Also California's recent 'sponsorship' of alternative energy vehicles including companies such as Tesla Motor could lead to Board-level conflict when pursuing the national and state agendas. (Any vested interests by board members or influential state persons should be identified). However, given the importance of the GM IPO to the US, such frictions would be expected to be overcome, ideally without word from Washington, and as part of the balanced stock-price identification mechanism.

Municipal Investment Funds and State Investment Funds have obviously been set-up for the good of the region, state and so in turn the nation*. Wisely separated from Governor access, like PERS, these regional funds have the similar remit to act as mini-SWFs, with dual goals of providing both additional short-term operating cashflow (thereby assisting beyond immediate tax revenues and budget spend) aswell as longer-term capital cushion buoyancy. Given the poor state of many State finances, these investment funds have gained greater visibility in recent years, both in terms of risk exposure – given the CDO debacle – and general governance.
[*This remit stands in stark contrast to the massive over-leveraging of the PSBR many US states have undertaken. Whilst historically conservative states like Nebraska, Texas and Virginia have constrained spending and so debt, other like California and Michigan weigh-down the nation. leaving their own credit standing - and possibly that of the whole US nation's - as near perilous, with ramifications for the dollar – something China undoubtedly sees with resistance to its own Rm rise; an issue GM itself must address given the repatriation effect of Rm:$].
However, Municipal and State-level investment funds have a major role to play determining the success of the GM floatation, yet whilst acting as floatation catalysts will also recognise the onus on themselves as foundations of regional balance sheet wealth creation, thus have an impetus not to overpay, so again actors in the stock-price determination mechanism. Interesting to watch will be the actions of intermediaries such as the New Jersey State Investment Council, the likes of which may have to pursue (simplistically) split investment attitudes between homeland offerings such as GM and more international opportunities via PE firms such as TPG on its roster.

Foreign automotive companies are also an obvious possibility, seeing the opportunity to gain a new or greater foot-hold in North America via (symbolic or otherwise) ownership of GM stock. Such a move would also provide a basis for technical co-operation and expansion between GM and other interested VMs. To this end, two Asian countries hold the greatest appeal: China and S.Korea.
Along with Chrysler, GM was one of the first 'foreign enablers' for China in the early 1980s, its initial arms-length co-operation evolving into the biggest JV entity via GM-SAIC (Shanghai-GM offering Cadillac, Buick & Chevrolet), with more recent stake in Wuling mini-vans to broaden its own product coverage and critically ingratiate itself with an important economy-driving segment. Thus continues to play a major role in US-Sino relations; even if the HUMMER deal was canceled.
After 3 decades of such focus, given the changing economic/financial world order, it seems only natural that the PRC itself seek to put a portion of its massive foreign reserve dollar holdings to work, thereby gaining greater corporate, technical and political co-operative standing with the US, and simultaneously reducing the dollar's strength via FX flows which in turn provides a short term buying opportunity in US$ based assets (and equally $ pegged assets) aswell as the impetus to reduce its own internal cost base for later resumption of higher-value exported goods and services.
Thus just as the US has bought into China, so we seem to have come to the point where China buys into the US.
A second possibility is one, two or even three S.Korea auto-companies: namely Hyundai-Kia, Samsung and Ssangyong. Hyundai is of course well known in the US with its own manufacturing plants, but its CEO's public ambition is to grow massively to become ultimately the No3 maker. Assisting this effort, Hyundai procured a brokerage house some time ago to (although not explicitly stated) serve its own periodic buy-back ambitions, assist its own equity financing methods, and provide less conspicuous buy into other domestic and foreign companies through-out the automotive value chain. Thus with such ambitions, the piggy-backing of GM – through its IPO - could be a strategic option.
Samsung is the lesser known player outside of S.Korea, and sits as a sub-division of Renault-Nissan. Carlos Ghosn recognises the need to expand R-N's coverage of the USA and Canada, given that Nissan is the sole representative and could do with an underling to fend-off Hyundai-Kia et al. Given Samsung's export entry into South America has proceeded seemingly slowly but well, the notion could well be to position Samsung as the American Dacia, serving both South, Central and North America with affordable vehicles. This would counter its homeland position as near-premium, but allows for R-N's global expansion. Thus Samsung could through a third party take a small slice of the IPO offering to secure its place, in time growing its holding to become a latter-day operational associate with GM.
Ssangyong, the previous purveyor of exported SUVs with Daimler engines, has had injections of Chinese funds via SAIC's partial ownership, and access to low-cost components so as to maintain an element of modernity about the products and the company. Although notionally S.Korean,it could feasibly serve as China's entry vehicle into world markets as SAIC grows its ownership of the firm which at least has brand recognition in RoW markets, even if perhaps not an illustrious image.

Private Equity is the last candidate, though perhaps for less than obvious reasons. With the slowed economic era, the returns that shareholder activism was generating have also diminished. However, this era is witnessing PE taking on less of a 'conflict role' and more of a 'assistive role'. The replacement of Ed Whitacre with the appointment of Daniel Akerson as CEO, demonstrates Washington's, Whitacre's and the GM's Board's sensitivity to the requirements of the private equity sector. (Akerson well established in that field as a Director of Carlyle Group was appointed to the GM Board by the Autos Task Force in 2009). As mentioned in a previous web-log post at the time of the Akerson appointment, GM still has much to do to divest of its sizable asset-base, from the tangible defunct property and plant, the core of standalone divisional operations, to the less tangible goodwill value of dormant brands. Akerson will know how the PE sector operates, and it will be his remit to enthuse PE companies to take up the GM stock offering as part of their own long-horizon plays, so as to to gain favour in purchasing any of the divested assets GM must shed. Here, his task is to seek-out PE relationships which provide a good balance between long-term mutual wealth generation through GM operations probably working with a PE company's own portfolio, and the more immediate arbitrage opportunity the PE sector can earn from purchasing and latterly selling tangible and goodwill assets.

Thus all said and done, the GM IPO will not be an easy marketing exercise for the NomAds themselves, having to pitch to a myriad of investor types, many of which are not the usual candidates, and with recognition that Washington has a close eye on the process so as to try and ensure it recaptures a proportionate value of its bail-out spend.

Even with hard-ball negotiations between the book-runners and buy-siders, that looks increasingly unlikely given the present global macro climate, and the fact that any buyer – patriotic or not – must be seen to be operating an up-trend portfolio.

Those buyers will use prime evidence such as GM's September's NA market share slippage (to 18%) in their negotiations, and whilst not a perfect outcome, the more realistic the IPO pricing, the better for all to conclude in a successful take-up. Infact, this is an instance where all parties - the buyers, the book-runners and the under-writers – have a real role to play as economic actors that underpin the fragile US economy.

Wednesday, 22 September 2010

Macro Level Trends – The Global Taxi Service – Balancing Commercial & Economic Impetus Against the Public Good in Rapidly Changing AM and EM Regions

The public service, private hire, taxi has become in indispensable part of city, suburban and rural life. As the intermediate transport mode between costly 'go anywhere' private vehicle ownership and affordable ' limited route' bus and train transport; the taxi cab provides a service that is governed by the economic market.

Where the private car sits idle for much of its life, and the bus / train runs typically well-under or well-over capacity (relative demand flow governed by non-peak and peak times), at a median utility price the cab efficiently ensures the goals of travel freedom to client and the vehicle (asset) maximisation to operator.

Beyond the pure functional and economic perspective, over the last 100 years – especially last 40 years - the city-bound (or region-bound) taxi cab has come to form an integral part of the street-scape and so local cultural character. When derived from a sensitiveness to both functional public good, the commercial needs of homeland vehicle builders and the relative surrounding city-scape, its very origins, form and aesthetic demonstrate a natural corollary and uniqueness which provide an additional socio-cultural layer. So has been the case for London's eponymous Austin & LTI Black Cab, New York's previous Marathon Yellow Cab, Mexico's Green & White Beetle Cab and Tokyo's Toyota Crown Comfort cab in Yellow & Red, Berlin's Beige E-class Mercedes, Shanghai's Silver VW Santana, Kuala Lumpur's Red & White Proton Iswara, Soeul's Hyundai's & Samsung's and Delhi's White Hindustan Ambassador.

Thus as would be expected, where a country operates an indigenous or semi-indigenous automotive manufacturing sector, the taxi trade accords to use such vehicles for nationalistic and cost reasons. And for governments and regional administrations that natural relationship between makers and operators creates a city-scape homogeneity akin to moving architecture : “carchitecture”. When governed well – balancing the public, private and entrepreneurial good - it adds both civic dynamic vibrancy and an essential form of public familiarity, faith and trust.

'Ply-for-hire services' have been part and parcel of life since before Roman times on both road and river, but the modern model grew from Victorian London's multiple needs for safe, convenient and affordable private hire – the onus as much on the 'private' as the other factors in the taxi equation.

That led to development of the 'Hackney Carriage' regulations which had been installed as part of a parliamentary decree in 1654, adding and enforcing greater regulation to improve the service, which introduced a full separation of driver and passenger(s) on the 1834 Hansom Cab – the driver sat outside, to the rear and above. The basic layout of the Motor Taxi demanded that the driver sit in-front once again, but the prominent use of semi-closed phaeton bodies meant that only the passenger enjoyed weather-protection and so accordant hierarchical symbolism – that 'in service' element not lost on the fore-lock tugging yet entrepreneurial cabbie.

Gradually the open-front sections was enclosed with the partition remaining. However, whilst operator comfort improved, Public Carriage Office regulations were critically stiffened regards both vehicle and operator. The performance demands and condition of the vehicle were set high so as to function with ease in London's tight and crowded streets, and also greater demands were placed upon incoming operators to demonstrate themselves as geographically knowledgeable and courteous gentlemen of the road. As is legendary, 'The Knowledge' has become central to the licence approval process, though the courtesy and helpfulness element has been largely set to individual's discretion, with the general view that Black Cab drivers see it in their best interests to maintain personal standards.

Thus the Hackney Carriage ideal, regulated by the PCO, become the world-wide 'gold-standard', exemplified by the retinue of cabs stationed besides the Bank of England for over a century. Thus the template was set to both colonial and ex-colonial cities, and from Boston reaching across the USA; and thereafter globally.

However, from the 1960s onwards the intersect of an increasingly services-driven UK economy, increasing private income, diverse commercial & leisure transport demands, and the trend toward increased UK auto-industry competition – including fleet sales – saw the birth and rise of the mini-cab through taxi service de-regulation; especially so in smaller towns and cities.

This era of UK change not only witnessed the expansion of personal retail services but also saw the effect of indigenous over-capacity in the indigenous auto-industry, a plethora of operationally inefficient players squeezed by Ford and GM multi-nationals, themselves under pressure from state-backed entities such as FIAT, VW, Renault, others in Europe and the threat from Japan. Driving down cost to both meet that challenge and maintain investor interest via stock markets was key, and in turn produced internal efficiencies and new products which would serve the private car owner, emerging corporate fleets and the mini-cab trade.

Exemplified by Ford of Britain's new American-influenced Cortina, the car itself set the tone of change for people – illustrated then and now by its starring role in two British comedies filmed almost 50 years apart: 'Carry On Cabbie' and 'Made in Dagenham'. The former tells the tale of an antiquated all male-driver taxi firm using old Austin FX3s upstaged by a new firm offering all female-drivers and new Ford Cortinas; showing the winds of consumer change. Whilst the latter recounts the strike action of Ford's female seat-stitching workers in southern Essex, showing the winds of social change.

Yet the message communicated by the central plot of 'Carry On Cabbie' remains pertinent to this day in the UK and elsewhere. In the capital, TfL inserted of its own taxi-service (of black Ford Galaxy MPVs) between the Black Cab and Mini Cab, much to the chagrin of both “Real London Cab” drivers and their less illustrious counterparts. Thus a 3 tier system* emerged, the then new template of the TfL idea to create a dual-aspect service which offered a mid-point in service standards and price to the customer using TfL licensed drivers & taxi-companies with standardised (or near standardised) vehicles.

[NB the TfL service also offers a taxi-sharing service for separate clients seeking the same destination, similar to the system used in Japan and less wealthy EM regions, in the TfL case undertaken to offer slight price reduction and CO2 footprint reduction].

The TfL case is but one example of renewed social good being installed by a government agency in a mature market. But driven by cultural, social and personal needs/wants, on the back of growing global wealth - especially so in near advanced and EM countries - there has been an ongoing evolution (indeed possibly revolution) of city taxi-services in recent times. Various cases of which which, although seemingly set apart, serendipitously marry the central plots of 'Made in Dagenham' [women's rights] and 'Carry On Cabby' [female operated cabs]. These in Pueblo Mexico and the Middle East (eg Tehran, Beirut, Hebron, Cairo, Kuwait, Bangladesh).

Unlike the humorous Carry On plot which had 'dolly bird' female drivers as the prime attraction for male customers, the female-only pink-coloured taxi serves a serious end. It has grown in popularity to solve the harassment concerns of female passengers (and indeed female drivers). As state sanctioned enterprises the Mexican vs Mid-East initiatives serve an apparent social demand.

[NB. Whether that demand is purely social or religiously ascribed is a matter of very separate debate].

The Pueblo, Mexico example came into folk-lore in 2007. Though initially the effort stumbled commercially it appears to have renewed social backing and so funding. Given that the city offers separate woman-only sections on trains and buses to avoid the problem of sexual harassment, so it seems only natural that a publicly available private-hire service offer a similar public good.

Comparatively, the Mid-East examples whilst no doubt satisfying the desire for female security, also (rightly or wrongly) satisfies the social norm that a wife traveling alone not be left alone with another male. Thus seemingly meeting both individual and social preferences.

Nevertheless, whilst the profit motive behind serving an identified market segment accords to the very core of Adam Smith's philosophy, it also seems a great shame that such separatist (sub-segment) initiatives are seen as necessary, since they fly in the face of the original ideals set by the Hackney Carriage system and London's Public Carriage Office, which orchestrated a method by which to both separate driver and passenger and to have the driver hold himself-up as to the standards of 'a gentleman of the road'. Indeed the same thing said of female Black Cab drivers .

[NB let it be noted that sexual harassment is not a one-way-street of men over women, and that much of it is typically not about sex but power, and that such behavior also exists between similar sexes].

However, given the fact that 99% of the global taxi trade is undertaken in standard saloon cars, which to a large extent have an FDI economic connection to the specific country (eg the Iranian Samand derived from France's Peugeot) the idea of creating country or city dedicated new taxi vehicles – which allow for innately safely separated client transportation - may presently seem an anathema.

But will this always be the case?

In an era when the associated yields and spreads of Sovereign Debt Bond markets clearly demonstrate that the pejorative title of 'Emerging Market' is a misnomer compared to the supposedly 'Advanced Markets', the time has surely come for such regions and their prime cities to demonstrate their own identity. Effort that moves beyond the normative self-proclaiming 'iconic' infrastructure projects as seen in the past from Brasilia to Shanghai, with projects that tie the geographic with the social and the economic. Projects such as dedicated and differentiated taxi-services that form part of the city-scape, street-scape and national identity – as London is, Tokyo is and New York was.

This is no doubt the message that the UK's Manganese Bronze has been touting, now with Chinese affiliation to Geely, manufacturing in China via the Shanghai LTI Auto Co. As investment-auto-motives stated before the set-up of this initiative, the LTI London Black Cab is perhaps the only modern and truly unique and idiosyncratic taxi vehicle available to an international market; and Chinese manufacture will have taken brought the base manufacturing cost down massively.

But if any notionally progressive city/region is to consider its own dedicated, national championing taxi fleet - beyond the immediate idea of buying-in the “Chinese London Cab” presented by any logical investment banking adviser - would it not also consider the notion of self-manufacture tied to self-regulation? So effectively creating a barrier to entry. Though against the grain of open-trade interests and heavily discouraged, unfortunately the answer may well be a "yes". This is something that Manganese Bronze & Geely should prepare for and so tailor their own specific entry strategy: whether full vehicle import, CKD import for local assembly or indeed project assistance with portions of technology transfer and accordant licensing.

Much of course depends upon the country in question's level of industrial self-sufficiency,issues relating to import policy and FDI perspectives.

But such a stance would in effect follow the original London model step by step. This is of course an option perhaps especially attractive to low-order EM countries that wish to build the very foundations of an indigenous auto-industry and aspects of its retail sector.

This grander option sought instead of the norm of buying-in the modern product which normally involves partner reliance (as with say Iran & Rootes/PSA or Malaysia & Mitsubishi) which typically leads to latter-day operational isolation when the relationship has run its course. The alternative is to effectively develop a singular taxi based entity using foreign involvement in design and/or manufacture and/or sales.

Thus today, as we see within the shifting sands of the global economic order, and the re-orientation of the social milieu, the taxi fleet continues to play a central role; both regards the upstream aspect of national economic and industrial ambition and from downstream pressures regards questions regards such a service being fit-for-use, and if not, its reactive re-alignment via sub-segmentation.

However, at the end of the day, the commercial profit-driven enterprises that obtain the rights to private hire mobility must hold themselves to the highest standards of social conduct, and the associated regulatory bodies that must be seen to act when required.

Such highly visible issued licence plates adorning taxis from Shanghai to London must act as badges of decency, resting upon well constructed, socially sensitive, regulatory powers. When their lamps shine they must be seen to be the essence of the honourable 'coupe de ville'.

Monday, 20 September 2010

General Comment - Barclays' Bike Hire Grafitti

As regular readers will know, investment-auto-motives was never an advocate of the London bike hire scheme - initiated by Mayor Johnson and latterly sponsored by Barclays. Concerns about the ultimate cost relative to actual use - ie project pounds spent relative to cycled hours - were depicted in a previous web-log item last year.

Whilst the scheme itself could not be condoned, the recent spate of cynical, aggitational grafitti that has appeared on the rear wheel spats of many bikes must surely be rejected by any 'right thinking citizen' - private aswell as corporate.

The intendedly subtle yet high impact campaign involves the use of the swear word 'f**k', placed above the Barclays logo in a near corporate script style.

This may be viewed as 'direct action' activism or some such, seeing the bank as both (retail bank) 'bail-out' recipient and (investment bank) profiteer, but the reality is that in present circumstances the investment bank section will have to perform as
the starter-motor for the entire organisation and indeed whole British (and elsewhere) economy.

No doubt a distasteful truism for many over-idealistic individuals and groups, but the reality that all banks - not just Barclays - must now consider how best to responsibly act as the central components in re-generating the national and international wealth model that mixed economies depend upon.

The perpetrators of such acts should perhaps think far more broadly about how to realistically resolve economic and financial matters. To paraphrase President Lincoln "He only has the right to criticise, if he also has the heart to help".

Wittily ascribed grafitti does indeed have a role to play in society; perhaps best epitomised by Banksy and others regards the evidently negative aspects of modern society. But such 'art' is not only far more imaginative but by being so carries far deeper reflections and sends pertinant messages into the viewers psyche and across society.

In itself then, this act has done not only the nation a dis-service, but a dis-service to the UK tradition of socially important grafitti. Thus whilst the more juvenile-minded may find it funny, it certainly isn't clever, and if anything for Barclays simply underpins the adage that there is no such thing as bad PR.

Tuesday, 14 September 2010

Micro Level Trends – Chinese Truck Sector – Continued Domestic, Asian & RoW Concentration, with little Export Will to the West

Recent news stories quoting expert consultant opinion, has highlighted the invisible force Chinese truck manufacturers yield in their home territories and neighbouring Asia. An Undoubted fact. But that opinion has also indicated that Chinese truck producers will invariably expand into the US and Europe – sooner rather than later.

This 'line' has become almost prevalent thinking since the automotive under estimation of the Japanese in the 1970s and latterly S.Koreans in the 1990s. But the car and truck worlds imbue very different political, economic, purchaser and user characteristics; and so easy parallels cannot be drawn, especially so today when the growth and export potential no longer lies in the west, which itself already domestically has over-ripe and presently under-utilised demand and capacity, to say nothing of the endemic regulatory and associated technical barriers.

However, whilst it is not envisaged that Chinese branded trucks will enter western markets any time soon, Africa, Russia, CIS states, the Middle East and parts of South America are the undoubted preferred destinations given broader national economic interests of China and its similar levels of lower technological need with RoW markets: allowing DIY servicing and running repair. Thus as seen with much of its broad apparent strategy – at the managerial cost of some European companies in previous flailed JV talks - the ideal has been to fit modern looking bodies to last generation mechanicals at affordable pricing thus offering what on paper appears a compelling proposition to target markets.

However, the fact that European truck manufactures have a comparably large labour content (versus the car) indicates that western manufacturers will be using their Chinese JVs to reduce the cost of their own purchase and assembly costs, possibly use these centres as structural and 'first-fix' assemblers – before shipping chassis units to their homelands – and using such performance benchmarks as indicators for their own domestic assembly targets.

Thus, whilst the Chinese branded truck export attack is hardly imminent, it is worth while viewing a basic 'outline' picture of the Chinese truck sector, and its accordant strategic future, as would be viewed by both domestic and international investors.

The truck and logistics industries are of course viewed as secondary investment indicators – beyond the metric norms - reflecting enthusiastic, flat or dour demand levels of an economy en mass, both at national and global levels. To this extent, the Chinese truck sector depicts the dynamics of the day, and by virtue, presents itself as a prime component of a much broader global macro picture.

Of course, the Chinese truck manufacturers have over the last 20 years experienced an ever upward growth trend as homeland consumers, services and industry underwent radical change under the auspices of quasi-communism, quasi-capitalism; a very 'alternative' mixed market economy sat on the world stage, which in turn required greater macro-policy comprehension and manouvre, and where the micro-policy of industrial manufacture was given increasing free market reign.

This is well understood by all, yet today China's economic world position has grown to that of a disputably 2nd or 3rd economic pillar, behind the US (and Europe), now nudging ahead of Japan. Yet more presciently, as the wealth gap narrowed under the dynamic of the 'Chinese miracle' its competitive advantage narrowed also, more so since the fiscal and economic stalling in the West under necessary fiscal deleveraging. Rising general inflation, the increased cost of capital (in the 'open' capital markets) and the spiraling wage component of input costs created the need for business model modification.

In reaction, following the basics of regional economic theory, mass manufacturers in lower-value businesses found it necessary to either move eastwards into the Chinese interior, aided by local and national government grants, or over the border to low-cost neighbours; with which bi-lateral trade has been of increasing importance.

Along with aspects of divisional re-locational has been parallel structural re-orientation of those industries which demanded ongoing cost-savings at fixed and variable levels, thus demanding improved logistics and haulage methods, containerisation growing in popularity, this partly enabled by the expansive railway network, but more so driven by the rapid rise of the domestic truck industry which offers ever better tailor-made and fuel-efficient products; itself a prime example participant of the aforementioned 'industrial shift'.

As a result of explosive demand over the last 15 years and the resulting reduced margins of hyper-competition, the face of the truck industry has changed immensely, primarily in terms of output and product offering. But it has also had a major ripple effect on national infrastructure along with popularization of the private car. A ripple which was always destined to created a literal traffic wave and ultimately a grid-lock 'flood'. This illustrated by Beijing's infamous 9-day August traffic jam on the Beijing-Tibet Expressway between Beijing and Jining. This near seizure created by a spike in HGV traffic compounded by on-going road-repair.

Ironically this rapid transit slow-down also reflects the policy-thinking of PRC party seniors and acts as a metaphor for the country at large, including ramifications for the truck sector. Having recognised the all too real changed conditions of the global economy, macro policy focus was re-aligned to inwardly charge the domestic economy with re-circulated wealth, instead of relying upon fading export demand.

That state of play has in effect been in motion since Q308, exemplified by the massive $586bn liquidity injection in 2008/9, orchestrated by the National Development and Reform Commission, and largely apportioned between public infrastructure build on road, rail, airport and irrigation, with the rebuild of Sichuan since the devastating earthquake, consisting primarily of official low-cost housing replacing slum quarters.

Read between the lines of snippets from previous policy speeches, recent central bank remarks and initiatives to cool a possible housing bubble, and it is clear that the PRC is itself undergoing a slowing of sorts to both combat internal cost-base rises and their effect on what officials see as the super-charging of the Renminbi valuation vis a vis foreign currency baskets.

Thus it seems a subtly played-out yet 'across the board' re-orientation is taking place, one in which the implicit party line is that only China can be counted upon to maintain its own growth path. And that will require the discomfort of change, both visible on the ground, and invisibly behind the scenes of industrial restructuring. Thus without the foreign-trade impetus as was so readily seen on its Balance of Trade account, China is seemingly set to become a more inward looking, or at least regionally aligned, country. This the case for all the 'soft pressure' that the US and Europe seeks to apply toward unilateral, bi-lateral and global interests.

A large consideration of the 'Chinese miracle' has of course been due to the ability of indigenous industry to scale-up capacity and so lower costs for a consumer hungry population. But perhaps of equal importance has been the expectational boost delivered to consumers through the catalysts of joint-ventures with western firms. Most notable are VW and GM, joined by a host of other manufacturers seeking their Chinese foothold, but less high-profile has been the JV arrangement in the truck sector. Here the largest – typically ex-state -producers have enjoyed foreign relationships that have helped transform their product ranges and operational methods.

A summary of truck sector players follows:

Top 8 heavy truck makers
- Sinotruck, - FAW, - Shaanxi Auto , - Foton , - Beiben, - SAIC Iveco Hongyan (SIH) , - JAC Auto, - Dongfeng,
Top 10 Medium Truck makers
- Dongfeng, - Chengdu Wangpai, - FAW, - Shaanx Auto, - Sichuan Nanjun Auto Co, - Foton, - Qingling Motors , - Hubei Tri-ing SPV Co, - Chengdu Xindadi Auto Co, - JAC Auto

Top 9 Light Truck makers
- Foton, - Dongfeng, - JAC Auto, - Shandong Kama Auto, - FAW, - Great Wall , - Tangjun Ouling Auto, - Shaanxi Auto , - Sichuan Nanjin Auto.

The span of company types, their geographies and product line-ups is intentionally broad, choosing a 3 examples to illustrate the innate strategic diversity between entities that have been born from political orchestration, set within the competitive arena, yet the fortunes of which are still largely directed PRC policy wishes that must balance free-marketeering and the Chinese social good.
Represented are:

1.Politically Driven - The complexity of what is essentially a devolved but still pseudo state-like operation such as CNHTC operating purely in heavy-truck from 'national-asset' origins.
2.Technically Driven - The seeming 'technical synergy & competence' operation of JMC Auto spanning technically inter-related SUV / light-van / medium truck segments, also exploiting foreign best practice via close-coupled foreign partner (not mentioned above but still a listed entity).
3.Marketing Driven - The broad aspirations of JAC Auto offering a full spectrum of vehicles from cars to small, medium and large trucks, seemingly emulating the Mercedes Benz idiom and business model; played-out across diverse international boundaries.

China National Heavy-Duty Truck Group Co Ltd –
Based in the 'truck producing cradle' of Jinan City, Shandong Province, formed from JAW (1935) and offered the first true heavy truck (8 tonne) via HUANGHE brand in 1963. CNHTC presently holds a plethora of sub-company and brands representing parts suppliers, full-assemblers / retailers and special vehicle developers and re-fitters; these split between the primary Jinan and Shandong areas. Moreover, its R&D centre still sits in government hands, whilst its investment interests also include other asset areas such as real estate, property management, import – export, finance, 'vouching'. It holds a Hong Kong registered company since 2004 (titled CNHTC-HKC) to ease foreign trade transactions (via CNHTC-SDIEC : the import - export company) )and capital markets access; and holds an A-stock listed representation entity titled SINOTRUK.
It essentially operates in a matrix-type structure with all sub-holding companies simultaneously 'operationally fed' by a suite of 'back-office' divisions spanning: Strategy, Enterprise, Finance, Budget Planning, Marketing, Technical Development, Quality, HR. Beyond this 2D structure, the 3rd pillar relates to a separate Sales, Import-Export, Finance, Real Estate and the government owned R&D section. This operational structure undoubtedly reflects its historic government roots, but undoubtedly also raises questions of transparency for foreign investors regards the flow of funds between not only different 'front-office' sister divisions, but also directly and indirectly between 'front-office' and 'back-office'.
On the issue of JVs, CNHTC has previously enacted an agreement with Steyr Truck of Austria which appears successful by observation of shared aesthetic and specific systems, but the deal with Volvo Truck of Sweden flailed in 2007, the Volvo aesthetic seemingly appropriated for the HOWO range In early 2009 Germany's MAN bought 25% of SINOTRUK shares listed in HK, this viewed by investment-auto-motives as both a pure remote investment play with the additional positive of greater negotiational leverage relative to additional synergy seeking between SINOTRUK and MAN after the recent Electrical Systems Harness project.
Today CNHTC brands & products presently span HOWO, STEYR-KING, STEYR, HUANGHE Prince, HUNAGHE Commander.

Jiangling Motors Co – (aka JMC Auto).
Based in Jiangxi Province, as with other similar inter-regional peers, it was essentially created in the mid 1980s thanks to the commercial exploitation agreements formed at the time between Japan and China. JMC has maintained a simple business model that sought to fully exploit 'off-the-shelf' Isuzu platforms via long-life use, profitability attained from resultant early capital investment amortisation, aswell as crucially exploiting its ability as a maximiser of technological synergies between close-coupled product lines..
However, as with peers, all 3 product lines - the Boadian pick-up, the BaoWei SUV and Qingka medium truck – to this day show their historic origins given their 'as-set' engineering hardpoints. Even if, as in the case of the Qingka medium truck, the offshoot variant(s) have been developed to visually replicate respected truck lines from the likes of Toyota's Hino and Mitsubishi's Fuso.
The original re-badged vehicles have been given periodic latter-day minimal investment, providing for updated re-bodies and greater levels of lower-cost locally procured parts, whilst balance sheet reserves were used to create a vertically integrated in-house supply/value-chain for high-value completely dressed engine sets, front axles and primary castings (ie engine blocks, cylinder heads, connecting-rods, manifolds, pump housings and other castings). Produced and sold under JMC Parts Ltd, presumably also service the broad Chinese client-base with similar Isuzu beginnings, aswell as servicing after-market needs across primarily China and Africa (which has absorbed much of the Japanese 4x4 and truck grey market).
Hence the strategy has been to a) drive relative differentiation intended to maintain pricing levels, b) simultaneously reduce the input-cost base, and c) create a further income stream / cost-centre.
By 1993 demonstrable profitability led the company to list A-class stock on the Shenzhen Exchange, followed by the offering of B-class stock via ADRs, available to foreign investors; something taken-up by America's Ford Motor Co.
That relationship allowed the establishment of JMC-Ford, in which the Chinese company produces two generations of Ford's Transit van: the '2006' created from older Mk4 & 5 series models and new generation '2010' van based on the European (2006) Mk7 series van. This essentially provides a much needed additional income stream, aswell as providing JMC's own brands with potential to access Ford's 'past-generation' technology base.
This is crucial if JMC is to maintain itself as a credible player in the eyes of both consumers and investors, the choice of Ford obvious given its parallel product lines and breadth of product range from large pick-ups to city-cars, which JMC could 'piggy-back' to broaden its own range.

Jianghuia Automobile Co - (aka JAC Auto)
Established in 1964 with its singular medium size truck plant – heavily dependent on manual labour, updated in the 1970s with semi-automation with the 131 model, and latterly in the 1980s with Japanese influenced 1061 using Korean sourced automated welding jigs. The product line grew in 2000s to include a new heavy truck demanding Japanese sourced heavy press tooling, a new van-derived MPV and new 'SRV' (SUV), both effectively sourced externally even if touted as developed 'in-house', though now touting R&D centres in Japan and Italy aswell as China. {NB though exactly how well equipped with staff, hardware and software is less well known].
Today JMC offers 7 passenger car models (inc MPV & SRV) but mainly centred around small and compact cars [the first completely cChinese producer to win a JD Power quality award in 2009]. It also offers 1 four-door pick-up (styled after GM's Silverado), 1 light truck, 2 medium sized trucks (various bodies), 1 heavy-duty tractor unit (ie Semi-unit), 5 bus chassis (varying dimensions), an SVO section that tailors MPV / SRV / Sedan for emergency services use, and provides contract manufacture of its European developed 2.0L, 2.4L & 2.7L engines.
The exponential broadening of its product range from into various passenger vehicle segments from 2000 onwards demonstrates the opportunism of the firm, targeting high growth trends at home and with the ambition of simultaneously building its truck and car 'empire' in targeted fringe cost-conscious export countries. Thus, with apparent worldwide ambitions JAC has grown a low-key but broad foot-print, entering fringe areas, offering presence in Central America, the lesser territories of South America, Russia and Ukraine, strategic nations of Africa, the Near Middle East, Afghanistan, Bangladesh, Sri Lanka, Vietnam, Malaysia and the Philippines.
What may be contentious is the brand moniker of a 5 pointed star, which together with styling cues on various cars and a similarly named car range heavily reference Mercedes-Benz. In this manner JAC's modus operandi is similar to other 'copy-cat' companies that wish to exploit the power of consumer cognitive association, expecting a positive rub-off effect. China's increasing political/diplomatic ties with such a coterie of such countries, also intimate that Daimler's ability to legally protect the apparent infringement may be questionable.

This trio of separate examples demonstrates just 3 of the many business platforms that China (ie the PRC Communist Party) have created within the Truck Sector. Each represented a core pillar of capability:

1. The might of the state and its ability to marry little changed organisational structures to the exploitation of Hong Kong as a commercial hub
2. The ability to exploit early phase, foreign derived, homogeneous mechanical platforms to, in turn, create a revenue stream which allows for supply-chain integration and supplementary income streams.
3. The ability to rapidly re-orientate a single product-line domestic business into an enterprise modeled on (arguably) 'the best vehicle company in the world', serving to blossom the vehicle range into new segments and new worldwide territories; ostensibly based upon Chinese economic promise.

However, beyond the detail and grand ambitions of the various enterprises themselves, PRC seniors have well recognised the fact that in the short and medium terms, that the west is not the holy grail it was once considered. With Navistar, Daimler, Renault, Volvo, Scania, MAN, VW, Iveco and others fighting for the much constrained capacity demand in the US, Canada, Western Europe and CEE, although the 'corporate cash-constrained' circumstances might seem like a good entry-point, the real world barriers of comprising of everything between cosy fleet-supplier relationships to buoyant manufacturer cash positions to effectively 'value-fight' the Chinese in the short-term to maintain market-share indicates that any Triad region market ambitions will have to wait.

But the Chinese undoubtedly recognise this, and also well recognise the bounty on the domestic and Asian door-step to be harvested, itself acting as the value-generator throughout the region.

Thus whilst CNHTC, JMC, JAC and the many others may well be technologically inferior to the West, may well have only a spattering of truly capable executives, may well be inefficiently organised and may well be operationally hamstrung by PRC diktat, the real-world environment of their business reality – as depicted by their balance sheets and P&L - looks strong indeed.

Since its earliest days in advisory, investment-auto-motives has been stating that Western truck-makers should equally look to the East for developing relatively low-tech, high style model lines suited to RoW markets, aligned to price-sensitive purchase and running-cost expectations and the ability to endure rough-ride road conditions.

[NB the MAN – Sinotruk JV adopted this rational for a RoW HGV as of last month, promising a new sub-brand marque].

Today the likes of MAN's Lion, Daimler's Star and Renault's Diamond finds themselves in a tough global business. They don't roar so loud, or shine so bright. Instead the rational pull for the professional investor looks to be exemplified by the likes of JMC*, as Ford well recognises with its 30% holding and the various domestic and international fund names on the shareholder register.

[NB JAC may well present its H1,2010 results in an amateurish form, simply as a poorly aligned word document, but the numbers of the unaudited accounts appear to tell a happy tale].

In today's re-orientated global business context, the West offers the stability-base of the renowned heavyweight truck corporates which although battered and bruised have undergone necessary re-structuring. From the nominal retail perspective in the triad regions they still own the share of mind, but increasingly it is China which offers investment traction, and the pillar of a compelling investment growth story.

Though investment-auto-motives states advisedly: that pillar must be made increasingly of transparent, (regulatory) strengthened glass, instead of the historic (politically) impermeable stone.

During this week's World Economic Forum in Tianjin, the PRC Premier Wen Jiabao has promised that progress will be made regards the internal consideration of foreign investment - both at capital inflow and corporate activity levels. Whilst no doubt well intentioned, in reality this statement sits at odds to the Chinese impetus for self regard - as also seen in the rumblings of the US Congress regards the Chinese trade relationship.

Ultimately both nations must demonstrate their support for truly free trade to re-balance the global economy, probably via a few high-profile deals and bills, even if the reality of the everyday minutia that makes-up much of trade flow is encumbered by subtle levels of self-interest. In this regard, the truck sector deserves on-going attention.

Monday, 6 September 2010

Companies Focus – Exor, IFIL & Agnelli e C.Sapaz – The 'Flaming Ferrari' effect on Dynastic investment planning and FIAT Auto's intended IPO.

As investment-auto-motives constantly voices: it is the ability to 'connect the dots' that represent short, medium and long-term issues that makes for deep intelligence and relative competitive advantage in both the identification of investment potential, and the formation of company strategy itself.

As such recent events could not have been more prosaic in weaving two stories together to provide an almost allegorical ethical tale.

Just at the time the time that Wall Street remonstrated that the endemic 'bonus culture' will no longer be as be deployed to lure employees (recognising the basic economics of staffing and managerial supply-demand dis-equilibrium), so the end of that era of excess is prophetically and demonstrably marked by the case of 5 Ferrari 458 Italia models suffering from vehicle fires in various worldwide cities.

The cause of the combustion was tracked down as a type of glue used to attach the wheel-arch liner to the body underside, which when exposed to “extreme temperatures” in use dripped onto the hot exhaust and created flame. [NB this chemical fixing was used as a substitute for the more normal mechanical fix].

The press were always bound to strike upon the headline 'Flaming Ferraris', which beyond a literal description of events, overtly alludes to the self-styled, self-named band of young stock brokers led by James Archer (son of novelist Jeffrey) in the late 90s who consumed the rum-cocktail. The juxtaposition of events could not have been prosaic even if written as a subplot into the current suite of popular financial-based books explaining the recent past. An allusion that could even lend a Daniel Steel air to the modest Vince Cable...though improbably leading to DaVince plot threads the size of steel cables! More likely is the obvious possibility that 'Archer the Younger' seize on the fortunate coincidence - it could not have been better scripted to evolve an infamous literary genealogical line.

However, beyond the literary conjecture, of rather more important nature is the impact of the 'Flaming Ferrari' events on the closely knit Italian dynastic clans of the Elkanns and Agnellis.

They of course have primary interests in FIAT SpA, the broad-spread conglomerate which has a plethora of interests from the FIAT-centric of: cars, trucks, agricultural and construction machinery, component parts, factory automation machinery, to aeronautical and popular Italian press. Both families' investment vehicles are 'Giovanni Agnelli e C. Sapaz' and 'IFIL', which control major shares in FIAT SpA (>30%) aswell as other national and international industrial, service and financial interests. As such John Elkann acts as Vice-Chair to both investment companies, as well as Chair at FIAT itself; after Luca Cordero di Montezemolo's recent resignation.

'Agnelli-Sapaz' essentially acts as the umbrella company, with a number of sub-holding companies working under its wing. Importantly, the previously 'once removed' Exor – under IFIL and in which John Elkann was closely involved – has now been directly 100% acquired by the parent company.

Thus as is the case for all investment holding companies, the role of Agnelli-Sapaz is to maximise the interests and synergies of its holdings; for directly both the families themselves and indirectly toward the 'Italian good'.

[NB. Critically, although obviously privately own, they are viewed as guiding investment lights – almost national champions. A factor which may increasingly gain attention as national economic pathfinders, as Italy's own Finance Minister Giulio Tremonti (at the Ambrosetti Forum) presently highlights the need for the country to re-structure, diversify its own industrial base and extend outside interests].

The 'Flaming Ferrari's' episode - and the necessary recall of all 1,250 458 Italia models - spotlights the probably need for improved quality measures at Ferrari and probably at Maserati, given their historical organisational, supplier-chain and assembly interdependence; even if Maserati notionally sits under Alfa Romeo division today.

Thus in effect a re-consideration of quality assessment across the board at Ferrari's home in Maranello, in Modena/Bologna for Maserati and given the extended Alfa connection and Alfa's own export drive intentions, into the design, build and inspection centres for that marque aswell.

[NB this would be seen as a necessary action by the FIAT board given the rumour of VW's interest in acquiring the brand so as to add vital engineering integrity to its “coure-sportif”].

Thus from the 'cause' of 5 or so separate events in the USA, France, Switzerland and China, the ultimate 'effect' may be a top-down re-evaluation of methods and participants for quality assessment. The methods being more stringent to ensure full process quality and the participants being necessarily independent to ensure time and cost pressures do not interfere with the core initiative of re-building FIAT's quality perceptions.

As such the Elkann's and Agnelli's are well ahead of the game given their diverse sector interests, specifically with interests in SGS Group – the Swiss based 'inspection, verification, testing and certification company'. Founded in 1878, SGS is recognized as a (perhaps 'the') benchmark assessor in quality and integrity, with 46,000 employees, and 1,000 offices and laboratories world-wide.

investment-auto-motives has undertaken basic desk research in reviewing the 'Agnelli-Sapaz' portfolio and noted that at the end of 2006 the sub-company of IFIL Investissements SA (based in Geneva) extended its 10% ownership, that portion presumably rolled-into Exor's current 15% stake-holding in SGS. (This stake only paralleled by the German Von Finck family holding).

Thus for some time the Elkanns and Agnellis have noted the growing importance of SGS Group as a credibility tool and ultimately international enabler for FIAT Auto.

However, the fact is - as seen by GM's increasingly demure IPO expectancy – that FIAT Auto may have trouble reaching its book-run MarketCap target, given the short time-line for its split from the newly created FIAT Industrials division. The well reported large number of postponed 2010 IPOs, plus the under-performance of those that have appeared and thereafter traded at typically 10-20% below launch price, has troubled corporations, book-running banks and of course investors seeking partial exits – such as 'Agnelli-Sapaz' and its affiliated investment companies.

Ferrari was always to be separated from the FIAT offering, maintained by Elkann as a separate family-esque entity; an action that makes total sense given this low point of the economic cycle and the continued commercial potential of the brand. But the interesting point here, is that potentially Ferrari could be the gate-keeper for SGS Group's trickle-down through FIAT, after first being proven via Ferrari application to create a workable quality control system: perhaps a hybrid of SGS methods and FIAT practice; attuned to different bias depending upon the application time-frame.

Thus Maranello – and by default 'Agnelli-Sapaz' could take a notional managerial fee to oversee SGS service application throughout Maserati and Alfa Romeo, thereafter possibly Abarth and FIAT cars.

At the end of the day, the high profile embarrassment of 5 'Flaming Ferraris' could conceivably help FIAT improve its consumer credentials at home and in time across the world; and in the meantime add a much needed addition to the liquidity feed of the family fund.

Such an arrangement should bring financial and practical reward to both FIAT and the Elkann & Agnelli tribes. But future FIAT Auto investors placed in institutionals and private funds should demand to know exactly what internal price in terms of Euros and managerial time absorption such a quality improvement regime will cost.

Moreover, given their undoubted interest in the Industrials side of the business, raise the idea that FIAT-SGS could viably create a new Industrials sub-division alongside Magnetti, Teksid and perhaps twinned to Comau, that adds a 'high-value' international income stream string to its bow.

Beyond the immediate fire-fighting at Ferrari PR, that is the real task Elkann and his team must attend.