Friday, 29 October 2010

Micro Level Trends – UK Trade & Investment – From the Middle East, to Infiniti & Beyond.

It is during the more testing of economic periods – such as now – that the importance of long-established royal relationships between countries comes to the fore; in re-strengthening the intra-national basis for mutually beneficial trade, industry and commerce.

As seen from the S.Korea meeting, whilst G20+ politicians discuss exactly what the architecture of international agreements, and diplomats are tasked with shaping the building blocks that form cross-border business relationship building; very often the cement which forms necessary strong bonds is mixed and spread at the social level between royals.

This week the the Queen, heading the House of Windsor, has hosted the visit of the Emir of Qatar, heading the House of Al-Thani. The important implicit pretext of maintaining mutual interests between the UK and Qatar and ideally strengthening the level of commercial interaction.

Such initiatives are welcomed at a time when the very notion of national sovereignty – and its financial and diplomatic power - has re-emerged via the important deployment of SWF monies as a major contribution in stemming and rebuilding the previous loss of confidence in capital markets and the economy at large. Whether that was the Middle-Easts re-capitalisation of CitiGroup, or indeed the re-capitalisation of General Motors (North America) with Canadian governmental finance made available, presumably under the ultimate auspices of the UK's Queen's Council.

Thus, we see the very real relevance of 'global back-stop' sovereign governance.

The desire to grow and protect historic trade routes between the 2 regions (as part of the East-West network) and the early 20th century discovery of oil in the Peninsula, has meant that typically the UK's relationship with the Middle-East has been low-key but strong. The tribulations such as concerns about yesteryear UK imperialism, the Suez Crisis and the early 21st concerns regards international terrorism, in the bigger historical context, problems that were (and will be) overcome.

In recent years, Qatar has taken a leading role within the Middle-East in building ties with the UK, its efforts building upon those by Bahrain and Kuwait in the arenas of real estate & automotive (Aston Martin Lagonda). Qatar, through the QIA SWF monies and other vehicles, has (as the FT well illustrated) in 2007 invested a 25.9% stake in Sainsbury's, bought 15.1% of the London Stock Exchange and took a lead share in the (now 'Mutually Royally Re-Worked' and aesthetically far improved) Chelsea Barracks redevelopment scheme that same year. In 2008 helped to underpin Barclays with a 6.8% stake. And in 2010 bought Harrods (from Egyptian Mohammed Al-Fayed) aswell as the Park House site in Oxford Street. These purchases therefor nearing £7 billion.

Of course, such deals are part of a larger, mutually beneficial, reciprocal arrangement which sees portions of trade monies effectively recycled between the UK and Qatar to buoy their respective balance of trade figures: the UK importing CNG and LPG from Qatar via its South Wales storage and distribution centre, as part of its desire to nurture trade and to burn cleaner fossils fuels for its own energy needs.

Nothing mentioned thus far is a revelation, but beneath the surface of such highly visible UK and Mid-East relationships is an ever growing level of smaller scale trade, something noted some time ago by investment-auto-motives via observation of central London retail, and recently highlighted by the FT's Video section which 'snap-shots' Egypt's now outward-bound stance; with examples such as Azza Fahmy (jewellery), Sewedy Cables (industrial electrical) and Citidel Capital (PE firm) based in Cairo. Thus, Egypt and its Arabic neighbours are becoming more export orientated with the confidence to use both local private equity funds and buoyant company balance sheets to make their mark on the international scene. Perhaps in particular London and the UK scene given good historical links and Britain's reputation for speedy economic recuperation during times of economic malaise.

But perhaps the most high profile case in point sits within the automotive retail arena.

Nissan's Infiniti brand launched in the UK in August, making a high-profile appearance on Piccadilly, located opposite The Ritz hotel and next-door to Audi, all as a firm positional statement. This showroom acts as the prestige flagship store, and accompanies a more operationally centric sites in Reading and Birmingham, with plans to open further showrooms in Bristol, Cambridge, Nottingham, Stockport, Leeds, Newcastle, Glasgow & Belfast – so targeted points country-wide.

As part of its marketing initiative to demonstrate Infiniti's soul, the spirit of Japan's 'Adeyaka' has been espoused, the term indigenously used within old Japanese to reflect the essence of 'Japanese artistry', and different interpretations of which are used to convey the persona: from use of Japanese calligraphy to mimic the feature lines of its cars, to the idea of a 'boutique hotel' as part of its showroom image, to an in-house magazine titled Adeyaka that is intrinsically art orientated.

Of note is what appears a collaboration of Japanese & Arabic cultures, with website and magazine graphics displaying 21st century computer-created renditions of traditional Islamic geometric patterns, and the Adeyaka soundtrack seemingly a mixed overlay of calming Japanese and Arabic melody. The use of a cross-marketing exercise with Cirque du Soleil, also conveys the central brand notion of 'a modern twist on a classical theme': raison d'etre of the French acrobatic troupe

The brand arrives as part of Renault-Nissan's strategy to grow Infiniti beyond its previous US boundaries, where the brand was ostensibly devised as effectively a re-badge exercise to utilise Nissan's large car platforms and take on Toyota's Lexus and Honda's Acura. Initially launched with one overtly conventional car the range broadened via the addition of smaller 'badge-engineered' products. The lack of sales success in Japan and the US augured more radical design thinking resulting in the idiosyncratic 'curvy' J30: offering a very different premium car aesthetic as a way to try and stand out from Japanese rivals. However, this strategy the effort failed to truly excite prospective US customers, and the brand whilst holding a steady in sales terms never reached Acura figures, and so very wide of Lexus numbers.

Yet, Nissan recognised it would be a long slog, with the Renault tie up in 1999 adding renewed impetus regards financing, resources much if which is strategically driven by Renault's own failed 'on-off' efforts thus far to create an up-market French brand, having tried to offer avantegarde premium Avantime and Vel Satis models, with Laguna as the supposed 'bridge'.

Hence, the strategic and very necessary role of Infiniti as the R-N group's premium brand has come ever greater to the fore over recent years as mainstream car sales took a heavy hit and additional/complimentary unit margin profitability has been perhaps the prime assessment criteria in the midst of the E3bn of French government support and investor calls for factory closures. Moreover, the recent technical cooperative agreement between Renault-Nissan and Daimler, not only aims to provide both parties with reduced cost quality components, but should critically allow Infiniti to access 'non-obvious' Daimler technology, just as the Germans look to utilise added-advantage from Infiniti's Japanese sourced technologies. But critically, R-N & Daimler talks will have discussed how Infiniti can be used to target BMW & Audi (hence its Piccadilly 'confrontational' positioning). So as to draw-fire in the long-term from Daimler.

This is undoubtedly a welcomed move by GCC fund managers given that Daimler itself is 9.1% owned by Abu Dhabi's Aabar Investment (Aabar itself interestingly taking 40% of Daimler's Tesla stake) and Kuwait's Investment Authority holds 6.9%; with Renault-Nissan holding 3.1% (as at 31.08.2010).

This may appear to undermine Qatar's own stakeholder interests in VW Group, owners of Audi, but in reality the sales volume differential between Audi and Infiniti is presently huge, with Audi due to grow further yet driven by the Chinese market, other EM regions, new entrant vehicles like the sub-compact A1 and new conventional A2 and further economies of scale from the VW group at large. So whilst Infiniti appears to 'sit on the doorstep' of Audi, there is little threat to the Audi (thus VW Group) income stream - and so the size of Qatar's SWF dividends from VW AG - given the bigger picture dynamic.

In contrast to the US experience, Infiniti did however enjoy greater success in the Arab world, largely due to the credibility and respect that Nissan had build-up over the preceding 20 years with the hardy 4x4 Patrol and conservative but ever-reliable sedans. That engineering edge gave Infiniti a gateway into the region which it took, and although still behind Lexus, ahead of Acura. In tandem with this for global publicity purposes it used product placement in the film 'Three Kings', which set in the first Gulf War, set Infiniti convertibles amongst Rolls-Royces et al amongst the disposed despot's luxury car stable amongst.

This then sets the Arabic context to the Infiniti division's global sales aspirations, setting itself out as the alternative brand to the obvious German and Japanese, with efforts towards additional markets primarily in Western Europe, Russia and the higher net worth regions of Asia.

Thus, whilst the RymCo UK proprietorship nameplate is somewhat unknown to the casual showroom visitor in Piccadilly, it should come as little surprise to the worldly observer that the UK market reach for Infiniti is financially backed by the UK arm of a locally publicly listed Lebanese company: the Rasamny-Younis Motor Company. RymCo UK seemingly employing a mix of auto-retail experienced senior management, the average fixed cost-base reduced with the use of enthusiastic younger sales staff. The sales onus is on the level of personal service offered (with valet car pick-up & delivery) along with the Infiniti (entry-strategy) staple of offering a highly specified car for comparable cost to its lesser equipped claimed competitors.

RymCo is Infiniti's partner in its home territory, and the most important vehicle distributor/dealer in the Lebanon. The company was set-up in 1934 and distributed Fords, GM (Holden), Chrysler, aswell as consumer durables such as Colgate toothpaste and Palmolive soaps. Honda and Datsun/Nissan was added in the 1960s, whilst afterward truck distribution and sales for GMC, Nissan Diesel and China's FAW became important contributor to turnover. It has been present in the UK for some years, and today operates across the Middle-East, the US, Japan, Europe and China.

[NB The FAW interaction begs the question that does RymCo see itself as a foreign-region importer of Chinese cars and trucks in due course].

No doubt RymCo also prides itself on the fact that whilst the financial crisis caused untold contraction to western enterprises, seeing car sales collapse, it was able to boast of Lebanese-market unit sales growth in cars of 74% for 2007 (vs 2006) & 84% for 2008 (vs 2007). (Thereby gaining public recognition from Carlos Ghosn, CEO of Renault-Nissan, and himself of Lebanese parental extraction, though born in Brazil)

Though many Middle-Eastern countries and firms have displayed a renewed confidence and improved ability, it can not be denied that (as the FT reports) there are industrial structural and cultural challenges to be overcome.

The executive director of Egypt's government assistance agency highlights the restriction of middle and large capital funding at the local level for foreign investment. An additional challenge is that of the typical foreign-held viewpoints regards the operational commitment by Arab businesses to FDI projects, especially regards their desire for a use of their local labour force so as to stimulate local county-scale economies.

The answers to these and other questions should be addressed firmly and clearly by Arabic businesses and rationally absorbed by foreign representatives seeking FDI, so as to ascertain the true and feasible synergies between the interacting parties, and importantly not to create an unintentional stalemate and so loss of faith between what are typically more urgently motivated westerners (seeking to tick the boxes of development plans) and the more philosophically orientated middle-easterners who seek a level of security and stability to be delivered by outside of their direct cultural influence and so comfort zone. Thus, in the question of expectational manufacturing FDI into Europe or indeed Asia, Arabic companies may need to demonstrate their own manufacturing cost base and national development ambitions time and time again to show their rational for domestic production if it appears a sticky issue.

It is no surprise that to date Arabic investment fields in foreign lands have been typically real-estate (eg Chelsea Barracks), reputation trusted retail (eg Harrods), large corp banking (Citi & Barclays) aswell as reputational global manufacturing (eg Daimler & VW).

These are undoubtedly lower-risk options in what Arabs probably see – for good reason - as a world of higher-risk possibilities. Understandably investors are forced to trust either the asset-base's innate value, the integrity of the management team, and ideally a combination of both. Add a cultural difference into the equation and what appears of medium risk to a western investor possibly borders exotic to a more cautious (wo)man from the Middle-East.

To this end, international success stories such as RymCo - and similar scale peers from around the Arab-world - should serve as models for the small yet ambitious enterprises; ones that see themselves with a place within the regional, continental and world-wide business and investment arena.

This should ultimately be a win-win for Anglo-Arabic relations as British companies identify low-cost sourcing and/or manufacturing opportunities generated by an increasingly skilled Arabic workforce using modern methods, with the possibility of a counter-point skills transfer sees the previously lost-skills of specialist crafts fields either brought back to the UK or indeed possibly newly introduced.

Today Arabic SWFs and cash-laden companies cautiously seek new investment opportunities in foreign climates, both within their usual asset-classes and beyond; this exploration undoubtedly governed by the need for mutual synergy relationships that importantly allow for what they see as appropriate levels of shared return at financial, corporate development and structural development levels.

Thus it does not seem too far a point of conjecture to suggest that as the Qatari Emir rested in Windsor Castle, that his thoughts turned to the efforts and experiences of Lebanese RymCo, its UK HQ situated only a short distance westward down the M4 corridor in Reading.

For the brighter future of the UK, Qatar and Anglo-Arabic relations investment-auto-motives does indeed hope so.