Thursday, 20 January 2011

Micro-Level Trends – Auto Business Models – 'Open Your Eyes' to Additional 'Plate Spinning'

As many will remember, James Bond's Aston Martin DB5 featured revolving number plates, from British to French regulation nomenclature. External to the car's store of other gadgetry, this 'plate spinning' capability allowed for re-invention to suit the changed environment.

It is a useful metaphor in this day and age, since whilst the title of 'Automaker' reflects a prime function of a firm – its origins and most visible offering – companies have over the last century and into the 21st century become far broader in their operational remit.

Value capture for the greatest value creation has been the historical imperative, and unsurprisingly that has meant the conglomeration of those previously separate links of the value chain that offered best reward. From raw materials acquisition all the way through to the after-sales 'experience'.

The fables of Henry Ford's expansion of his employee customer-base - via the $5 per day wages model – went hand in hand with FMC's expansion of autonomy for its materials supply – via the South American siting of 'Fordlandia and 'Belterra'' to access forestry for wood and rubber. Beyond reducing the cost of FMC's input prices, it was seen as a grand schema to essentially colonize S. America (or $.America as some commentators then proclaimed it) to help unify the continent.

Thus in the early part of the 20th century, the automobile was seen as an economic force for global change and good, woven into foreign policy hopes. Yet the latter half of the century such failed attempts in what was a 'de-colonizing' era auto-saw companies re-orientate and re-focus upon the up-stream elements of retail and associated consumer (and thus inter-connected wholesale) financing.

Such actions were of course reflective of the specific economic growth period (ie the stage of capitalism per se), and so as the national context changed so too did economic interaction. Compare Ford to FIAT, the latter of which existed in a very different, pro-socialist environment which held far longer onto the associated downstream activities which fed its factories. (Arguably, right up until this year, and arguably still not fully de-tangled).

By the 1990s the new business mould was set, by which time finance played as greater a part in income capture as vehicle production, with disposals of what were integrated supply-chain vendors such as Delphi and Visteon by GM and Ford, though of course they rightly took full advantage of purchasing supplier shares when times proved prudent, so as to gain greater hold on ensuring supply feed and pricing.

Yet in the main, once through the recessionary early 90s, buoyant capital markets and economies allowed for ever greater vehicle sales to new customers and an ever cheapening cost of capital through which the sales could be obtained. This symbiotic relationship strengthened by the purchase of external finance houses (to gain immediate scale and create cross-tie selling opportunities) and the creation of internal finance companies so as to grow internal capabilities and keep a sharper eye upon the vehicle vs financing inter-relationship: especially important for managing the fine balance between fleet-sales and the managing of used cars' residual values.

In essence car-makers - thanks to Wall Street's own advisory opportunism and stock listing demands - become bankers.

Whilst such actions may fly in the face of the idea of core-competencies, automakers expanded their capabilities to prove that they were as adept in this field as in manufacturing cars and trucks, indeed the activity helped them maintain credit ratings and thus investor interest.
Thus history demonstrates that the larger automakers had become (critically) systemic components of a nation's or region's economy, and in the US's case, the argument for 'bail-outs' was hard to combat, even if the execution created grounds for criticism.

[NB As seen by the Congressional Oversight Report dated 13th January which all too lightly slaps the hand of the Obama administration for the irreparable loss of public funds, by selling the first GM stock tranche at $33 instead of the calculated $45 required to fulfill the public purse. This investment-auto-motives believes was done so as to leave 'much meat on the GM bone' by which the stock market itself could benefit – the 15% rise since IPO listing demonstrating that assumption.

[Interestingly, compare GM to the upcoming Facebook IPO, in which US buyers cannot participate – is the latter seen as too much of a bubble risk to the US index? An interesting academic case study].

Whilst the corporate interaction between vehicle sales and financing is of course nothing new, by 2007 the scale and management task in maintaining this symbiosis, with its tentacle-like extensions – grew to massive proportions.

Here history itself provides a lesson, exemplified by Pierre Alexandre Darraq in 1890s France. His interest in the automobile was purely financial. The income promise generated by (the short-lived achievement of) mass-manufacture, tied to associated 3rd party financing a polar opposite to his contemporaries' engineering focus to create a legacy.

Playing one side of the financing coin, Darraq company share issuances took place in Germany (to Opel), in Britain (with the Darraq Co), in Italy (to the pre-curser of Alfa Romeo) and in Spain; all as part of pan-European strategy devised seemingly by certain French bank. Playing the other side of the coin, consumer finance was offered via those companies and/or the French bank at lower than market rates. (Though sold to the obviously wealthy who did not need credit, the financing was viewed as part of a quid pro quo relationship).

Thus the dualistic interplay is age old, especially where a holding company is formed, an understandable part of its own business model, such 'plate spinning' very much part of the necessary work for successful commercial 'take-off'.

As the early pioneering decades gave way to those which saw efficiently honed production, the very nature of an expanding global automotive market also demanded geographical expansion of company abilities. Later, the effective commoditization of the car - generated by the wash of financing - meant that corporations had construct themselves as scale-driven competitors, and so effectively become 'lead-share market-makers', a pattern seen since the 1930s in the USA everytime an economic downturn consequentially expelled the smaller firms.

However, cars and trucks of course became central to the national economic model in all mid-stage industrialised countries. And as GDP slowly increased so did the public's comfort and level of expectation, hence old automakers joined by new. All having to create empires which could handle a myriad of requirements; across procurement, logistics, manufacturing, marketing, design, development, retailing etc etc.

Such 'plate-spinning' became ever more complex, and the ability to manage a specific portion and/or portions of the internal value-chain became the lever(s) of competitive advantage. From lean manufacture to life-cycle planning to R&D strategy to brand development to product personality and feature content to retail spaces to today's reach of 'concierge service' (this trikling-down from luxury and into the premium sector).

As a natural consequence, the number of plates that must be spun by an individual company - or indeed competitor peer set - depends greatly upon the expectation of the customer, competitor action, and of course a corporate desire to engage into and exceed both client and foe mindsets. All in order to raise its ability to massage the client perception, attitude, reaction and of course ultimately, the company's top line. The ultimate goal to create price inelasticity as a central tenent of the business model.

Obviously, this most prevalent for those within the luxury product realm, themselves now increasingly the 'centre of gravity' for western-world production and export.

Unlike their 'commoditized' opposites in price-sensitive sectors, premium and luxury brands are to a great extent the 'lifestyle purveyors and intermediaries' which form part of a wealthy client's 'reality'.

As part of such a 'reality manipulation' remit, they must offer 'Life Extensions' (to co-opt the parlance of the film Vanilla Sky). To offer something previously never experienced, or to do so with greater aplomb.

Yet, what can you give the man or woman with everything?

Vanilla Sky's main character David Aames is the man with everything: a publishing empire, a Park Avenue apartment, a classic Ford Mustang (though he literally dreams of a Ferrari 25OGTO), and an 'FB' girlfriend with model looks. No man could seemingly want more. But what David really wants is love and reliability, attachment and security.

In today's socially-frenetic hyper-consumerist culture where constant change rules as the norm, those central humanistic desires appear to be spiralling-away in ever decreasing circles within the human experience. The humanistic desire replaced by brand-connections in the retail and virtual realms.

This is only a part of the PESTEL environment in which any B2C company (automotive especially) must participate and offer, with varying levels of the psychological and esoteric.

Once upon a time something like an 4th hand used Toyota provided these innate satisfiers to a newly licensed 16/17 year-old teenager. Yet that, and far beyond, is something that even the likes of Bentley, Rolls-Royce & Maybach must proffer to the ever so world-weary forty-something adults that are 'cash-rich and time-poor'.

Such ability to engineer delight often depends on the size of the vehicle programme budget, its boundaries dictating the level of innovative freedom allowed; with ideally such innovation derived from pre-phase R&D efforts.

When not part of a bigger corporation with funds to throw at innovation, it may be harder still. Thus for the likes of Aston Martin and its smaller peers to orchestrate such innovation, there is greater reliance upon internal imagination. A need for dedicated and innovative personnel who can add product/brand psychological value, both during concept gestation, and through wholly idiosyncratic 'created experiences' once the car is in the client's hands with the brand melding into their hearts.

AML an others of course already recognise the theory of this , with the efforts to create a world of 'Aston Martin' that goes beyond the sector norm of track-days and VIP events, via the brand pillar of amateur race-team support and up-scale merchandise. To do so, it has embraced the realms of 'art' to both create lifestyle links and brand-associations. However, presently it seems directed at the 'petit-bourgeois' yet monied provincial buyers - that no doubt represent much of the client-base - who likes to see an 'arty' picture of his/her car on their lounge or dining room wall. But in such a world, customers must be psychologically led, if anything, to balance the obvious (and income necessary) typical mind-set chasing. AML and others need more than replicating the metal assuage of the 1980s Testarossa on the boy's bedroom wall.

Compare this with FIAT's seeming arms-length efforts to strike at the heart of the London art establishment, with a Tate Britain gallery showing an 'old-new built 126' showing the 1970s vs 2000s vehicle time-warp (with inference of panel match build quality), and an original 1960s 500 held by a seeming giant child's hand with inference of the new 500 being a life-toy for the fully grown adult today.

And in turn, see FIAT's work with Ferrari via Ferrari Heritage (car reconstruction), Ferrari's client 'Race Stable' (for special edition models, and Ferrari World for the tourists of the Middle-East.

Today, more than ever, from London's Berkeley Square to Beijing's Regent area, luxury product companies are faced with a slow but strong rebound in the West within which loyalist and new clients will want to see new marque dimensions and personifications – both as distinct to the company and as a personal 'rub-off''.

In the Near and Far East, the seeming continuous stream of new GCC and Asian clients, once past the novelty of acquisition and 'arrived' ownership may also expect a level of marque (and to them by default associative cultural) immersion.

This luxury realm learning of course should trickle-down in time to lower sectors, brands and products.

Recently the global component supply chains were fractured and are re-set via ongoing M&A, internal company efficiencies are being strictly maintained for FCF & working capital purposes, necessarily buoyant balance sheets are kept for investor interest, and within that 're-set' context board members and their non-execs must be prepared to reach ever further-out. Into new exploratory and uncomfortable areas, to spin yet more additional plates set-up within the value chain and across the retail realm.

This new era has only just begun, and the doors of consumer and corporate perception are being expanded.

Lastly, Dr Piech and Porsche AG (as was) was derided for becoming “a Hedge Fund with a car company attached”. It was only its commitment to both itself and customers that allowed it to become so. Though much to the chagrin and envy of its competitors who were given a clear lesson in how a high margin auto-business evolved over decades could give high FCF from which to create a synergistic financial powerhouse. Businesses that could be both autonomous yet mutual rewarding, and all furthermore, all to the German national good. (Ferdinand Piech may well privately think “I'm a legend”, and considered arrogant for doing so, but ultimately he is right.

Moreover, today and situated to the east, South Korea's Hyundai Motor marches forward, with conglomerate interests in its own brokerage house to trade its way into the future via close contact with the capital markets; a model Chinese exporters will no doubt mimic with even greater strength in times to come.

Thus, just as James Bond kept his plates spinning relative to the environment, so must the auto-industry.

As 'Vanilla Sky' asserts in its opening* and closing sequences...“Open Your Eyes”.

*Post Script:
the opening sequence also depicts the TV showing Audrey Hepburn's 'Sabrina', like most of her films demonstrating character self-development, a Directorial short-hand for Vanilla Sky's plot-line.

Though perhaps such a viewpoint is relevant to the US auto-industry today, it might gain greater impetus from 'Billion Dollar Brain', since all investors, companies and governments must think extremely deeply as the sector is re-moulded.