Thursday, 26 May 2011

Macro Level Trends - Seeking UK Growth - "Hop on the Bus Gus...Get a New Plan Sam"

Recent UK economic indicators highlight the short-term problems the UK faces, a reality the coalition government and Whitehall well recognise, trying avidly to assuage media scrutiny.

Joblessness sits at a 30 year high, large corporates are in necessary 're-balancing' mode (as seen by the TATA Steel) so adding unemployment weight, input costs have risen thanks to commodity inflation, SME firms running 'lean' are concerned about additional borrowing before the green shoots appear even if Vince Cable threatens to admonish the City if it does not meet set lending targets, and (as investment-auto-motives predicted) the Asian contraction has started together with a loss of momentum in northern Europe, so undermining the wished for 'export effect' of a weakened Pound.

These items and more offer a gloomy picture to the likes of George Osborne and Gus O'Donnell facing respectively outward and inward of Whitehall, yet Nick Clegg hopes to brighten that picture with talk of the eco-investment push necessary providing technical and commercial solutions that David Cameron can in turn subtly promote as a 'proof positive' to his former trade tour of EM nations.

As an important adjunct, the newly formed Green Investment Bank will play a vital role in providing the funds for this new eco-driven era, news that Clegg is pushing for a rapid escalation of wholesale funding access and loan provision: ramping up from the Treasury's initial provision of £3bn in 2012 to a capital market assisted £15bn by 2015. A heated argument is already underway about just how 'self-strapped' Britain could be by its law-enshrined eco-policy . Philosophically, investment-auto-motives takes a techno-conventionalist stance, to ensure technical feasibility and thus smoother economic integration – yet no doubt the adage of our eco-challenge being the 21st century's equivalent to the 'moon rocket' challenge will be heard again and again into the future.

However, Kennedy's presidential words were spoken at a time of economic boom, early television adoption, mass enthrallment and broad western confidence. The similar rhetoric today, given the socio-economic reality, unfortunately does not have the same effect, any naïve optimism best balanced by a high degree of pragmatism – a trait with which the British have been historically imbued; its part of the nation's DNA.

The prescience of President Obama's visit to Ireland recounting his “Moneygall” roots was undoubtedly not lost on the Irish, many seeing their economic plight rooted in Wall St. Yet as Washington knows all too well, its self-generated 'blarney' is intended to maintain strong connections to the UK and Europe. But in reality those links have been under heavy tensile pressure, given the strain that the financial collapse put on the global economy and manner in which the US helped itself by creating an enormous level of $ liquidity. That supercharged commodities speculation to the woe of EM consumers and global corporations, aswell as rapidly boosting US equity markets, prognosis of a new tech bubble in the air after staggering IPO launches. Thus whilst the US rebounds EM nations face major FX headwinds which must in turn be countered by reactionary economic contraction; to the dismay of their peoples.

Britain's once 'Special Relationship' with the US is being rephrased as an ' Essential Relationship'. Whilst one cannot deny the essential links between both countries' financial centres of London and New York, the UK now finds itself less West-facing, the real-politik demands created by the re- balanced global power base – so evident in IMF Chairmanship talks – highlights that the UK must be as open to other 'Olde Worlde' powers and 'Next World' powers as to that with the once 'New World' power of the USA.

Britain is officially seeking to put the 'Great' back into its title, and so seeks a type of self re-invention, one that is both 'inward looking' as a value-creation mechanism appreciated by its own people, and an 'outward looking' persona as an exporting nation, recapturing its Georgian and Victorian heyday.

In this new growth orientated eco-age, the creation of new commercial platforms which in turn act as bridges to a new mixed 'intelligent industrialised' age, is the goal, both within the UK 'by itself for itself' yet also as a necessary parallel, in conjunction with a broader range of re-emergent and emergent international partners. Thus a more self-reliant yet globally networked attitude is key, one that shifts (uncomfortably or not) from the case over the last century, whence the dominance of the USA commerce and industry has led the world.

For all the rhetoric, the US is in undeniable flux, exemplified by the fact that the country's own deeply loyal public remains highly concerned about the future, the Tea Party reflecting an underlying consciousness that looking backwards to move forwards might have its own merit. One school of thought looks to greater state-levied powers, de-centralised from Washington. A re-working of the popular Paul Simon song “50 Ways to Leave Your Lover” leads to “50 states to leave their mother” reflects the fringe but growing attitude, even if seemingly highly unlikely in outcome.

The more typical ms-interpretation of the song's lyrics includes: “Get on the Bus Gus...Get a New Plan Sam”.

Whilst any such quarrelsome sentiment toward 'Uncle Sam' by Downing Street or Parliament is incomprehensible – especially after the speeches and BBQ - the very essence of the initial words may have some value, especially to Whitehall's #1. Sir Gus O'Donnell. A 'down to earth' man who although playfully signing himself as 'G.O.D' on internal memos, is reflected as a man of the people given his own modest up-bringing, and as such apparently does not think it demeaning to take public transport and 'the bus'.

His prime remit is to assist the slimming of the civil service to enable public expenditure cost savings, but the idea gleaned from TV coverage is that he also appears to hold sway regards general policy formation and execution; thus the year-old Coalition Cabinet apparently far closer to the civil service than previously under New Labour. This must surely be a good thing, the whole of the intra-governmental framework thus deployed to help re-build Britain.

And the lyrics “Hop on the Bus Gus” have more than a note of serendipity about them when we consider the economic role that the new London Bus is expected to play, both in the capital and across the land. Notionally titled the NB4L (New Bus For London), it is expected to provide a renewed identity to the city streets with an intentional resemblance to the classic Routemaster.

[NB. The few remaining Routemasters in service trundle the short 'Heritage Routes' across town].

The project - first aired in 2006 - was announced in 2008 and was set as a professional design competition, attracting entries from a raft of contributors spanning product designers, architects, vehicle designers, bus companies and even Aston Martin's own design department. The eventual winner, understandably given its capabilities in the sector, was WrightBus, a division of Wright Group based in Galgorm, Ballymena, Northern Ireland.

However, interestingly, Wrightbus is essentially a coach-builder, fitting steel / aluminium / composite body, the interior and the electrical and auxiliary systems onto a rolling chassis.

The Mayor's office publicised the fact that the new bus would be “the return of a great icon for London, and the cleanest, greenest red bus that goes around our city”.

But unfortunately investment-auto-motives believes that whilst TfL have opted for a safe easily 'project deliverable' option ready for showcasing at the 2012 Olympics, the new bus is a missed opportunity to wholly re-invigourate the UK's capabilities in R&D, conceptual thinking, engineering process development, advanced prototype testing, advanced tooling applications and large scale production and after-care monitoring.

Unfortunately the new London Bus was not ordained as a fully fledged new design, something that mimics the rationale and revolutionary bearing that original Routemaster brought.

This is a great shame, more attuned to a 2012 'Olympic deliverable' (as showcased at the Beijing Games) than a new economic pillar for London and the country at large.

It can thus be argued that this transport project, like the Barclays sponsored rent-a-bike scheme, was originated with good intent but limited vision, more of a Mayoral 'publicity machine' than long-term city or national asset, even though a TfL (Transport for London) venture.

However, though notionally called the New Routemaster its marketing-based origins are the very antithesis of that for the original 1959 bus that became a national treasure to this day.

That bus was 'visioneered' from scratch by and every aspect was considered. From the hard-wearing 'moquette' seat fabric to the introduction of cabin heating to the under-stair 'sentry box' for the conductor, to independent suspension to the direct influence of integral construction method and materials in mainframe and sub-frames that borrowed heavily from both WW2 aeroplanes and advanced small car design, to the dedicated overhaul facilities at Aldenham & Chiswick which proritised labour-force efficiencies. Modularity ruled from basic design to time and motion studies on the factory floor and so efficiency and thus investment rationale ruled.

Like that other London icon Tower Bridge, whilst it had a conventional 'look' for public acceptance, it was the engineering magic of its innards that made it so revolutionary. The New Routemaster in direct contrast intentionally looks like a 21st century update, visually fit for a futuristic movies, but actually uses a construction method which ironically predates its forebear.

However, to offer credit to TfL's 'Surface Transport' department who well recognised the achievements of their London Transport forebears (such as Durrant, Curtis & Scott) the package / layout has been designed from scratch “for London” utilising an innovative 3 door & 2 staircase approach, the stairs given 'flow windows' of their own to aid light, airiness and detract from stair-well vandalism. However the concept's rear open 'hop-on' platform – indicating the return of the conductor's role – will invariably be lost in favour of automatic doors and much needed reduced crew operating costs. The 'long-body' design appears to be dimensionally mid-way between the standard double decker and the extended 'bendy-bus', so offering a capacity of 87 passengers. The hybrid powertrain is acclaimed as offering 40% reduction in CO2 and 40% increase in fuel efficiency.

In an age of personal carbon footprints, as seen, the 'NB4L' offers a capacity of 87 passengers, which compares with 149 for a Daimler Citaro 'Bendy-Bus', 90 for a standard double-decker and original Routemaster's (comfortable)60 or so.

However, it would be disingenuous to compare the contextual origins of the Routemaster with that of 'NB4L', since the former was created under the whole-hearted stewardship of a powerful and centrally controlled London Transport body, with responsibility beyond strategy incorporating everything from product R&D (on buses, trams and tube-trains) to the everyday service needs such as conductor ticketing. Since the LT privatisation programme of 1986 the role of London Transport altered and 'diminished' to become far more strategic and as policy-formers, the operational aspect of the LT system run by private enterprise.

Hence, the previously impressive bus engineering and design section – at its peak in the early 1950s and envy of the world - was diminished and subsequently lost. Privateer companies understandably purchasing off the shelf buses from manufacturers and thus able to eradicate the R&D expense and focus on the in-service operational aspect of running a small localised bus fleet.

That necessary shift for LT (now TfL) born from big-budget contraction through the 1970s instigated the idea of commerce and competition, albeit bounded by LT regulations regards the level of service deemed minimal and the general specification of public-serving buses etc.

So whereas Routemaster was 'bred' from a lineage with strong nuclear family stock of core values and strong finance, today's NB4L arrives from a typically modern amalgamated family which must cater for 3 aspects: a) the public good – as directed by TfL, b) the commercial running of the service with profitability top of mind, and c) as a cultural identifier for London.

Given these constraints, the New Bus competition the 'pragmatic' outcome was hardly surprising.

Whilst investment-auto-motives was critical of the blank-sheet 'Boris Bike' project - concerned that the real per bicycle, or per journey costs would be far higher than publicised (the FT in accordance with its calculation of approximately £5) – the NB4L is a different matter entirely given its systemic infrastructure importance and as a wealth generator for the UK.

The web-log called 'Boris Watch' has been highly critical of the project, expected given its bias . Indeed it may have justification regards the manner in which the cost of the project was 'sold' to the public, highlighting low-value sums publicised that reflected the smaller 'front-end' design & development costs of the project compared to the final procurement costs for hundreds of buses.

It rightly states from official TfL documentation that the original 'Boris quote' of £3m was unbelievable given the project costs involved, and so highlights how the 'authorised monies' rose from £1m in 2009/10, to £1.1m in 2010/11 and grew to £10.9m in 2011/12.

Whilst investment-auto-motives is not privy to the project's exacting costings or accounts, the ramp-up in costs is typical of the nature of vehicle development work as manpower, activities, materials and overhead costs rise rapidly from conceptualisation stage to product launch. Furthermore it may be the case, as is typical with niche vehicle manufacturers, that their own budgetary planning means that they recoup initial phase losses – pitching for the project – from later stage income.

BorisWatch also states that the 5 deliverable buses in 2012 thus costing £2.27m per bus, versus the £350k or so for an off-the-shelf hybrid bus from Daimler or similar.

This is plainly ridiculous.

Those high upfront costs are of course intended to be amortised over far more than the first 5 buses, and if replacing the whole 'Bendy-Bus fleet' expecting to see another 395 or so units. Of these orders will probably come in batches of 50 or so, each batch expectedly seeing cost reductions as suppliers and assembler are able to provide contractual discounts on volume basis, which should have been woven into the NB4L agreement with Wrightbus.

Hence, BorisWatch is wrong to say that the project serves as little more than a Boris vanity project and is a 'money-pit' that serves Wrightbus.

Thus from basic project information available in the public domain, investment-auto-motives is far less scathing about the NB4L business case than that of the 'Boris-bike'.

However unfortunately the product aesthetic whilst seemingly born from the modernist idiom of 'form follows function' (ie staircase windows) that underpinned original Routemaster, and looks 'modern' to the untrained eye should have been far better resolved cosmetically.

It looks far too 'styled' all for the sake of visual impact (as many buses & coaches are) as opposed to 'designed' in a balanced manner for settled longevity. There were of course many entrants to the competition, their various backgrounds bring something different but useful to the party by way of their own concepts. The first was from Capoco Design run in collaboration with Autocar magazine, latter professional entries from the likes of Foster Architects and Aston Martin. Foster's effort picks up on the 'clean-modernism' of the Routemaster – a simple unfussy form peppered with engineering details such as rivets and roof ribs - which in turn gave it architectural gravitas. Whilst Aston Martin's submission included the visual sophistication born from a car-design studio and highlighted the friendliness of the original bus .

These 2 submissions were amalgamated into a JV concept that would have provided a 21st century re-interpretation. This and the first Capoco concept shared the competition win and the notional £25,000, which when split 3 ways would have hardly covered respective internal costs, thus £25k given to each party.

Unfortunately that 'perfect' JV concept suffered a 'still-birth' due to the commercial pressures that route operators face.

The route and fleet operators are of course shareholder directed, ROI & ROE maximised by cost reduction and scale maximisation, the bus sector's commercial dynamics invariably driven by consolidation. Thus such enterprises are naturally reticent at investing in such an idiosyncratic product created 'for London by London' when they seek to operationally rationalise region-wide, nation-wide and often international bus fleets.

This is the reason why 'Routemaster II' in its 'half-way-house' guise – born from disparate DNA - could never realistically meet the benchmark set by its notional predecessor.

But nonetheless, even with this caveat, given the UK's need for economic regeneration, it is a disappointment (and ongoing concern) that 'Routemaster II' was innately limited in its project scope from the very beginning. It is viewed by investment-auto-motives as a lost opportunity to have achieved something truly remarkable for the UK, something that could have better replicated the economic impact that the original bus made.

With greater 'national-interest' thinking the 'commercial challenges' that constrained a perfect outcome could have been been morphed into 'commercial opportunities' had their been greater vision and participant collaboration. To be frank, it seems faintly ridiculous that the fate of 'Routemaster II' was dictated by an Olympic bid instead of sound city-planning principles. Even so the case, far more could have been done far earlier, a full 3 years were lost since the initiation of the project relied on Boris' mayoral win in mid 2008, 3 years after the Olympic bid win. That true 7 year time-frame was thus shrunk to 4 years and so the integrity of the process ('decision-plan-build-delivery') at schedule and content levels was thus heavily compromised.

It was only 2 years ago this month that the 'Offer for Tender' were received by the bus manufacturers short-list, consisting of: Alexander Dennis, EvoBus (inc Mercedes-Benz Bus), Hispano Carrocera, Optare, Scania & Wrightbus. Volvo declined the invitation, and soon after EvoBus and Scania pulled-out recognising the near impossibility of undertaking such a task.

The retracted bidders may have thought the short timescale provided for a 'fait-accompli' to ensure a British winner, but the reality of the project teams' ability to form itself, create a design brief and identify suitable tender candidates, means that the overtly short timescale made available to manufacturers was a consequence of overall compressed project timing, not necessarily a pro-UK bias.

However, the short programme schedule begs the question as to how well designed and fabricated the eventual 5 showpieces will actually be? Critically, if those first 5 are perfectly assembled to very high quality (presumably at cost) as expected, will subsequent builds suffer a product quality shortfall, an important issue given the manufacture hundreds of buses.

Hence investment-auto-motives believes that the failing of 'Boris' Bus' is not a commercial one, like 'Boris' Bike', but instead a philosophical one that does not live up to the hype and could fail to deliver a true 'London Legacy'.

Yes, five supposed new 'Routemaster IIs' will be displayed for amusement of the Olympic visitors and will gain press coverage that bolsters the look and feel of the games, but when the athletes, trainers, officials and visitors have packed-up and gone home 2 weeks later, London won't have its new icon, and the 'Bendy-Bus' will eventually be replaced by little more than a 'Trendy-Bus'.

And fashion unlike classic design simply ages quicker and fades sooner.

The New London Bus (NB4L) project then appears to be a short-termist support pillar for the Olympics and medium-term social pillar for London. It could have been a long-term support pillar for the UK economy.

[NB infact investment-auto-motives believes that instead of a singular bus being designed, instead a family of modular based vehicles for nation-wide should have been conceptualised.

The 'family' consisting of 6 variants, double-deck and single-deck models available in MWB and LWB guises, each with the ability to fit a type of 'bendy-bus' rear trailer.

This then would have initiated a new revolution, new structural & powertrain concepts offering fleet operators the opportunity to 'pick and mix' standardised yet configurable vehicles attuned to variable scale needs and ambitions; aswell as regenerating UK Bus R&D, providing for a better integrated UK components supply chain and off-setting investment costs to UK manufacturers given a 'design for life' investment rational.

Such an initiative must still be considered if the UK is to be seen to lead 'intelligent eco-industry'].

Come this Saturday late afternoon a good number of London's famous red buses will be be even more colourful, their windows incandescent with a colour spectrum created by flowers, plants and general flora snapped-up by gardeners at the end of the RHS Chelsea show. That multiplicity of inspiration from the natural world spans the realms of perfect creation; including efficient bio-engineering, golden proportion, modular structures, functional efficiency and ultimately philosophically offering much more than the sum of parts.

Whilst certain garden BBQ's serve a political purpose by demonstrating the soft-side of hard-power, the UK's economic growth path and impetus must be perceptively targeted at projects of nation-wide importance. These in turn must be given the time-frame to provide for project integrity and thus meet ultimate objectives, not simply woven into the time-scales and agendas of political schema. Only this will create the economic roots critical to the appearance of mid-term green shoots and long-term flourish.

So, respectfully...

“Hop on the bus, Gus
You don't need to discuss much
Just turn the driver's key, Lee
And get yourself free”

Post Script

As an additional element to the NB4L programme, buses are of course mobile advertising hoardings.

At this time of infrastructure re-furbishment, TfL appears to face daunting cuts to its budget, the first obviously from central government funding, with a second stream from the expected upturn in infrastructure-linked advertising (via CBS Outdoor) looking poor. Today, out-of-date events are poster advertised to TfL customers, these items left in-situ to fill the advertising void.

One saving grace to this disenchantment with the poster advertising medium has been the advent of flat-screen technology, allowing for more impactful moving image adverts on tube-platforms and escalators, the 19th century and 21st century medium juxtapositions astounding

Yet this nascent application of the technology is not automatically suited to the side, front and rear elevations of London bus. Well recognising this TfL has commissioned a competition called the 'BigBusChallenge' aimed at eliciting ideas about the future of bus advertising.

The future of the London bus then as city icon, public service vehicle and communications device can be summed up in 'watch this space'.


London radio news reports that NB4L is about to undergo testing at the Millbrook Proving Ground in Bedfordshire. investment-auto-motives hopes that the prototype vehicles 'pass muster' without major problems emerging. Good Luck to the engineering team and TfL. Though critical of specific aspects of the NB4L project, a smooth, swift delivery is now essential to make London 'bloom' in 2012.

Thursday, 19 May 2011

Micro Level Trends - Auto Insurance – The Inadvertent Marketing of Criminal Activity

Recessionary times typically witness a rise in crime, activities across the board from harassment begging to organised on-street personal theft to white-collar massaging of company account books.

As the hard times start to bite so social morals appear diminished,and society itself becomes less cohesive.

In the world of personal motoring certain sections of society see the apparent high cost of auto-insurance as of limited cost-benefit, especially if driving an old, low value vehicle. With little more than a slap on the wrist from the authorities, the threat of even a driving ban of little dissuasion, recent years have seen an upward trend in the recession-riddled western nations.

The situation of course creates a virtuous circle of problems, the unscrupulous uninsured drivers of what have become almost 'throw-away' vehicles then have far less incentive to drive courteously and safely and so increasingly likely to be liable for an accident. If so, the outcome is that he/she will very probably walk away 'Scot-free' incurring the damage to or loss of his/her car, whilst the accident victim if not a 'mirror image' must bare the brunt of vehicle repair costs on his/her own auto-insurance policy.

Thus the recession has brought on a type of social moral hazard for insured drivers and their insurance companies.

But that moral hazard has more recently become even greater, this time to insurance companies themselves.

To combat the uninsured driver problem more and more UK insurers have started to offer policies that provide the policy-holder with no loss of the annually built-up 'no-claims bonus' that off-sets the premium. This if of course a marketing initiative to demonstrate corporate empathy for its current and potential clients. Part of the insurance companies' rationale for doing so will included the internal intelligence input from the synthetic modeling of trend-analysts and actuaries, demonstrating the theorised boost to the premiums income-stream from new clients and retained clients versus the 'down the road' pay-out costs. In an era when insurance company CEO's and CFO's are pressured to generate earnings - given the intent of large insurance conglomerates to re-build the balance sheet since the 2008 crisis - even if modeled outcome do not reflect a wholly persuasive argument to do so, the competitive pressures in the sector mean that the decision to offer the new client package becomes almost a default position. Then having to gauge the level of premium cost-absorption different client types will withstand.

However, unfortunately the new offer is undoubtedly seen to be 'manna from heaven' for those less-than-honest sections of the community, who see the policy-coverage as a tempting way to 'earn easy money' by playing the personal injury game; investment-auto-motives witnessed the aftermath of what seems such an incident only last week, in the local area.

An apparent accident between 2 cars dislocated nothing more than a corner small iron fence, both were cars undamaged, but the female driver of the 'staged' car across a pavement and still nudging the fence, periodically massaged her shoulder and neck as she gave her statement to the called police officers. The drivers were all young, the cars about 10 years old. In normal circumstances the drivers would exchange contact details and insurance company details, inform the fence owner of the occurrence, then drive away in their undamaged cars.

But such a staging needs external independent affirmation to ensure an ultimate high-price 'pay-out', and the ironically the police serve such a purpose. Police officers were called to the 'accident' scene, and even if to them it had looked completely staged, limited to the procedural responsibilities of police officers they could only undertake their own duties in reporting the accident and taking statements. The 'accident' is thus reported to the insurance companies or company, ratified with the corresponding police report, and thus the insurance company has little if any proof that the accident was staged, and so must pay.

Now with the marketing of 'uninsured driver cover' the ability to stage a dishonest incident is even greater, 2 co-conspirators in separate cars staging a 'swerve and run', where the covered driver swerves into something that will not overtly damage the car, and the (supposedly) uninsured driver 'runs' away. Staged in more populous middle-class areas the accident has typically good-natured witnesses and so apparent authenticity. The 'victim' driver in turn claims for personal injury costs from his (but more typically) her company, her innate gender also adding plausibility to the case.

Obviously, insurance companies are trying to differentiate themselves as offering improved service over the competitors, but even if such policy-offers do seem on a modeled basis to buoy the corporate income stream, the innate moral hazard generated which such organised criminals leverage, must be questioned, and insurance companies themselves must take greater care in assessing the validity of claims.

Of course insurers are typically observant, UK assessors considered diligent, as was the case recently when one criminal gang with multiple accomplices was jailed for major insurance fraud.

Yet even such well publicised examples of supposed deterrent seemingly do little to truly deter, especially amongst those are younger, are used to higher-disposable personal expenditure, as see this blatant act as a form of low-level, victimless, almost white-collar crime.

But of course there are clear victims: they appear in 3 forms.

Firstly, those other individual drivers that must ultimately pay the price of year on year increased insurance premiums, a cost which is becoming ever harder to bare for the average driver, couple or family. For many having to make an uncomfortable choice between the bills that are or are not immediately paid, or indeed the small luxuries that will have to be denied.

Secondly, the theft from the insurance companies themselves means that the re-capitalisation of their own balance sheets suffer.

Thirdly, given that a portion of those incoming premiums are typically directed toward a 'float' for general investment purposes, it means that the economy itself is proportionately dis-served as investment opportunities, or investment levels in specific opportunities, are negated or under-fed. Thus in a national, regional and global sense, the wealth creation mechanism could be said to under-perform, again arguably necessitating additional 'socialised costs'.

At a time when the necessary reduction of government expenditure in areas such as public policing and public prosecution, the onus to try and eliminate such white-collar crime seems to lay in ever greater ways with the insurance sector itself. No doubt it has what it regards as good crime detection and aversion principles, from policy-making to accident research, IT systems creating ever better inter-body links that aid intelligence gathering.

But more than ever, now is the time to decline suspicious claims, if presently non-existent combining efforts and financial input to resource stand-alone investigative bodies as appear the case with high-price fraud in other insurance-related spheres such as the art world. If such an entity already exists, all the better, simply a probable need to boost its capabilities.

This unwelcome trend for staged accidents has apparently been surrupticiously imported from the USA. There, Florida, New York & California have all suffered the greatest rates of these 'non-Kosher' accidents, there often staged with groups of passengers as pretend victims of personal injury and share-out the 'winnings'. So the UK and European insurance sector, now feeling the full impact, must interact with the US insurance giants (eg GEICO) as much as possible to gain both in-depth knowledge of the criminals' methods and how best to counter.

As shown, the ultimate cost of such insurance scams is far higher than perhaps immediately apparent, it impacts the price of insurance for the individual, the ability to re-bound by insurance companies and the investment push of the economy at large.

Friday, 13 May 2011

Macro Level Trends - Re-Building Japan - Reading New Age Consumer Complexity

The earthquake, its resultant tsunami and consequential nuclear disaster shocked not only Japan but the world at large. TV pictures beamed around the world displayed a disorientated north-eastern region of the main island, yet unlike probable outcomes in other supposedly developed countries, chaos did not reign for even seemingly a moment, the idea of social anarchy and the notion of looting an anathema to the civic pride of Japan.

What we saw instead was devastation met by heroic levels of humanitarian concern and stoic spirit - a lesson to many of the world.

The flattening of villages and towns also economically flattened certain prefectures, and those close-by areas not so obviously physically effected had to mentally deflect the concern of nuclear fall-out 'cloud'. As recently reported, the outcome of that event ultimately changed Japan's government policy toward the use of nuclear energy for decades to come.

Whilst it was somewhat insensitive of economists to discuss the positive re-generative effects created by the re-building challenge, at this point in time these few months on, it is perhaps a useful exercise to try and gauge just how the Japanese consumer has been shaped by events with the arguable existence of a new national psychology that may either stall or propel the economic re-bound.

To us foreign outsiders, Japan seems an almost mystical place. Its culture so unique that a mystery prevails perhaps even more so if one has visited for a short while. Such uniqueness was of course created from a policy of isolation across much of the 2nd millennium AD from China after wars, and later international isolation through the 18th & first half of the 19th century. Then aware of the internal problems that had blighted China after trade and political dealings with the Dutch, French and British.

The often foreign-serviced opium dens of Shanghai and other coastal towns which had undermined the morality and productivity of the masses had managed to wriggled through the statute-book prohibitions. This and other concerns had been noted by Japan, such observation and experiences then affecting late 19th century relations with America and other 'new colonials'.

Hence, up until the turn of the 20th century Japan had stayed resolutely Japanese, unchanged in method of rule under the Emperor and his Ministers, in the method of social structure pertaining to familial and individuals roles and of course resolute in the traditional teachings, crafts and ceremonies, in the daily, monthly and annual time-frame, that maintained the 'Japanese Way'.

However, the 20th and 21st centuries have seen massive societal change, arriving more as revolutionary shifts (than perhaps the typical evolution the West understands) each generated by foreign influence. Most notably of course that of the USA through its economic might via 'hard' and 'soft' power, which spans everything from the MacArthur Plan to McDonalds. Critically Japan incurred greater social shifts than perhaps the likes of S.Korea or China in recent decades, given their faster yet intrinsically less socially complex re-shapings.

Very simplistically, investment-auto-motives believes those Japanese socio-economic shifts can be described as containing 7 distinct phases

until 1868: rural-based feudal system of tribal peoples led by Shogun leaders.
1855-8: Western influx through treaty signings with US, UK, Russia & France
1869 – 1912: revived imperialistic & expansionist policy using western technology to win wars against China and Russia
1912 – 1936: continuation of industrial modernisation era, licensing and adapting western-sourced technologies to create an indigenous heavy engineering spanning machine tools, plant, auto & aero.
1945 – 1980: post-WW2 economic ascent, combination of low cost base with increasingly sophisticated engineering & electronics hi-value capabilities for export & domestic consumption, so living standards raised, creation of conglomerate empires give 'job for life' stability.
1980 – 1992: economic peak, able to export to re-buoyed western nations, able to create high-priced lifestyle orientated products for domestic market, and heyday of advanced electronics.
1992 – 2011 early period seeks to satiate fantasy-driven consumption reflective of social ease, but global recession of 1990-1993 and Asian Tiger crash in 1998 hits hard, highlighting the major cost-base differential disadvantages Japan suffers. In answer, the national tech-advantage seen as its foundation-stone relative to the 1992 Kyoto Protocol. Domestic consumption initially targeted to retain Yen strength, this used for international (typically USA) M&A. The national R&D toward the 'bio-mechanics' & 'technology interfaces'. But Japan 'stuck' between the high costs of its domestic 'social obligation' and so a necessary international deflationary stance for over a decade. These disjoints still proving highly problematic to today.
2011: The Fukushima disaster in March appears to 're-set' the nation's psychological outlook, instigating an economic re-build “on 1945 scale” (though in reality not so), such social messages to relay the task in hand and the requisite 'social perspective and attitude re-alignment' necessary.

Whilst now the 3rd largest global economy, when in the previous 2nd place unlike the US it remained a manufacturing power-house having built its international reputation for vehicles, white goods and brown goods since the 1960s. But it has been far later than its international peers to 'off-shore' manufacturing activity that had been undertaken domestically. In the automotive arena, whilst Toyota created alliance JVs and later green-field trans-plant factories to gain ever greater market-share in the US in the 1980s & 90s – a model latterly replicated across the world - domestic manufacturing and its large chunks of the vertical and horizontal value-chains were seen as sacrosanct, and so effectively untouched.

This arguably value-destructive attitude resulted from the domestic industry's highly inter-connected conglomerate structure, which whilst providing a highly stable foundation for growth, self-reliance and workforce CSR over preceding decades, meant that since the late 1980s until mid 2000s it lacked the ability to effectively re-structure low and mid-value sections. The increasing costs at the lower end of the value-ladder borne by the higher tier divisions. The structure undoubtedly allowed for trusting working relationships to evolve which bore fruit in the manner of benchmark R&D planning and execution, aswell as most visibly world-class product quality levels which in turn drove demand; all to the good.

But it also created internal commercial conditions where investor capital was not being deployed in a wholly efficient manner, executives caught in an ever more pressured position between the demands of global capital markets wishing to see good ROI & ROE figures, and the sense of good corporate responsibility to its workers and the nation at large, a sentiment bred into the psyche of senior executives commanding Japan's largest companies.

In autos, perhaps the first to suffer in this manner was Nissan, its late 1990s demise necessitating the buy-in and guidance of Renault SA since 1999. That take-over was whilst in reality a welcome relief for Nissan shareholders and workforce, was also somewhat distasteful embarrassment for Japan, however it did provide a much needed 'wake-up' call for the likes of Toyota / Daihatsu, Honda, Suzuki and Subaru; Mazda already partially under the wing of Ford.

The holy-grail of the 'in-house' secure control of corporate R&D has been relaxed, at least regards the post concept engineering development project stage (ie post product approval by the BoD). So Japanese corporations have recognised the need to become less rigid in orchestrational manner, utilising the best available from outside. This seen by Toyota's relationship with Subaru in developing a new performance coupe.

The competitive pressures of global industry across many sectors has also seen Japan latterly 'off-shore' what had been the national obsession of domestic production for domestic consumption, an integral part of its hard-learned attitude of self-reliance. And whilst done to suit prevailing conditions, it cannot be assumed that this more flexible attitude toward Japan's 'industrial social security' will remain, the internal reaction to events such a Fukushima could see Japan once again 'pull-up the drawbridge'.

Thus whilst the 'Keiretsu' system has indeed been slowly dismantled, the philosophy that created it is still very much integral to the Japanese psyche, for it set within the context of the international playing field, under-pinned the creation of modern Japan. After all, it was that unity which prevailed even after the Post-WW2 MacArthur Plan sought to see the the old 'Zaibatsu' system – under the control of aristocratic old families – demolished. Those families seemingly well understood that sizable portions of Japan's industry would have otherwise been sold-off in favour of the interests of the Alliance powers that won the war.

It can be argued that Japan today may well once again look inward to sustain its future., presently feeling marginalised between the undermining economic might and coersive political expectations of the USA and China relative to foreign policy, aswell as the internal challenges of the Fukushima aftermath set within its long-term economic stagnancy (reporting -3.7% in Q1 2011 and continuation of 0% inflation and interest rates).

Having been so 'Trans-Pacific' over the last 50 years with powerful new discourse with EM regions – beyond China – and with Kyoto credence and advanced eco-technologies, Japan could possibly see itself in a new role, one of its own making, as opposed to playing as a co-partner to the geo-political and technology imperatives deigned by the US and China. Beyond keeping cordial relations with the super-powers, Japan may try to define itself as a more independent advanced technology provider to not only the West & China, but critically to EM nations, thus becoming a kind of eco-tech & human-tech provider to the world.

Having seen virtual 'ownership' of the capital markets by the US, and weary of a similar re-run by China, it may wish to leveraging its own IPR and industrial capabilities for itself, as opposed to having its scientific and technical advances quickly assimilated by others and commercially exploited.

The Toyota Prius and Honda Insight are examples of such a policy of 'soft-power' application, both VMs rightly pursuing the more tenable 'real-world' Hybrid solution, so as to be attractive to private, commercial and state consumers all over the globe, from Los Angeles to Chile's Los Alamos.

However for the most part, beyond the obvious car-makers' nameplates and the logos of eponymous IT hardware manufacturers, Japanese companies' identities are for the most part visibly nation-bound – unlike GM, American Express or Starbucks. The bank Nomura gained greater European visibility – temporarily in the news at least - when it acquired Lehman Bros' regional business, as did Mitsubishi UFJ (MUFG) with 20.1% purchase of Morgan Stanley. A consequence of Japan's export success with high-tech products, but misadventures with department-stores, fashion clothing, and indeed foodstuffs – the foreign trend for sushi over the last decade mostly created and served by US and European companies.

Indeed, it was surprising that Japan did not make more cultural headway when Sony bought the Hollywood film studio Columbia-Tristar in 1989 to form Sony Pictures Entertainment, and bought Columbia-CBS to form Sony Music; the all-American management and attitude left in place so as to not upset the 'golden geese'.

More recently, as a 'halfway house' as a part of its own identity stamping, Nissan's expansion of its up-scale Infiniti brand tries to coalesce Japanese product personality and culture, its marketing material in on-line and hard-copy formats centred upon the influence of historic Japanese artforms.

However, as seen, to date although there have been periodic 'cultural expansions', the marriage of Japanese commerce and cultural consumption has been unsurprisingly predominately with the Japanese consumer.

For B2C companies 'reading the consumer' and 'prompting the consumer' sits at the heart of success.

Hence from the late 1950s onward, the realm of marketing grew to include a myriad of new elements that better understood the market-base. Deconstructions to identify specific consumer groups expanding from the initial idiom of age and ABC class demographics, toward the personal psychologies of current & potential users. Research now spans demographic, product/service usage and psychographic areas, and the use of 'customer clinics' watched behind one-way glass and 'vox-pop' user diaries common-place.

But the GenX, GenY and 'New Millenials' have grown-up in the marketing age and are typically very tuned-in to the methods and manners used by corporations, especially regards advertising and marketing, so have grown increasingly disenchanted, disenfranchised and disagreeable. In answer we see the evolution of TV advertising in the UK which both goes 'back to basics' providing either a parody of 'sexy' adverts to then give a simple message (Tesco), uses simple humour (VW) or provides 'knowing humour' to highlight their understanding of their clients' dissatisfaction with manipulative tactics (DirectLine).

Whilst the UK, US and Europe obviously have their own marketing cultures, perhaps nowhere has been as commercially bombarded as Japan, itself the foremost information-driven society (with S.Korea close behind). It has been formed by a virtual 'informational pressure-pot' within a competitive environment, first experienced when young, at school, through educational career and later the corporate career. Until recently the Japanese 'salary-man' (& woman) in major cities read 3 daily newspapers – morning, afternoon and evening – a sign of the relentless pace of daily change. That informational pace seen clearly in 'above-the-line'' but especially in 'below-the -line' advertising, newspaper and magazine pages crammed with colourful (supposedly) eye-catching words and phrases.

In reaction to this oversell, especially Japan's ongoing stagnant era, the younger generation has become increasingly dis-illusioned with 'being sold to', and instead have in ever greater numbers sought their own less commercially sourced identities, creating individualistically created counter-cultures which themselves become the basis of a new trend and so commercially served. The apotheosis of this almost a decade ago was the creation of those no-name shops that would 'pop-up' and then just as quickly disappear.

Having watched youth fascination with western culture, girls reconstructing the Audrey Hepburn look, and boys reconstructing the Elvis Presley look, in the late 1990s Toyota and its multi-sector strategic partners tried to engage the Japanese youth with its WiLL brand.

Created as a singular lifestyle identifier targeted at the 15-35 year old age-range, so spanning differing disposable incomes. All WiLL products could be accessed immediately by the 30-something with high disposable income, or built-up year after year by the 15 year old. That 15 year old could immediately purchase a WiLL deodorant and other small items, but later when moving through life-stages could purchase the WiLL refrigerator (akin to the iconic SMEG) and as a couple purchases the WiLL car (itself supposedly inspired by Cinderella's carriage reflecting the couple's romance),

The exercise, whilst not wholly unsuccessful, and improved units sales for all participants, did not create the unitary tribal identity sought, nor the new 'commercial hold' over next generation consumers ultimately wanted.

The mind of the Japanese youth (or at least the 'fashionista intelligentsia' that leads youth trends), for all its impression of child-like naivety with a penchant for Disney characters, anime, manga picture novels, virtual pets and fluorescent rag-doll dresses, was not going to be so easily and overtly 'sold'.

[NB In direct contrast, compare WiLL to the later seemingly comparable cross-sector branding exercise undertaken in China. Here, the social messaging website QQ and automaker Chery created a co-lensing deal, 'QQ' used as a model name for its small car, itself a copy of the Daewoo Matiz. (This a good example of what investment-auto-motives calls “Matrix Manufactoring”©). Importantly, this wholly fabricated exercise was knowingly directed at a far less sophisticated youth consumer market, one 'pent-up' with aspiration in an economically strong environment, unlike the Japanese effort directed at a satiated and arguably near exasperated sophisticated target market].

The Japanese 'problem' then for some years has been the bad marriage of economic stagnancy so undermining consumer confidence, a psychologically mature consumer-base across the age range, and products which having surpassed basic quality expectations some years ago must be increasingly sold relative to the less tangible aspects of their personality and social association. Creating that critical human connection has been the focus of corporations from over a decade, instilling products with ever greater 'Shinto' (soul), the realms of IT and emotionally derived human interface designs examples of this seen annually at the Tokyo Motor Show.

The Japanese consumer, especially the savvy young, then appears somewhat oxymoronic, a veneer of the 'kidult' yet insightful of sophisticated marketing ploys.

That “Matrix Manufactoring” has been played out time after time, so no surprise then that younger members of Japanese society both at home and whilst abroad have become jaded by obvious commercialism, and though still cling to designer European brands if they have the means, many have sought instead to re-invent their personal worlds of dress, language, general consumption patterns and 'being', often closer in appearance to an on-screen game-play character or personal avatar than the standard 'clone-like' human.

That modern raconteur and globe-trotter Tyler Brûlé (who himself evokes an almost cartoon-esque image of the man-about-town) conveyed a good snapshot of Japanese tribal dress in his FT Weekend column. His May holiday observations were that domestic fashions were becoming more utilitarian, the stylistic 'uniforms' being displayed as he described them seemed to draw greater inspirational bias from the outfits worn by predecessors from the agricultural fields and early industries of a century ago.

Whilst this could be a mimicking of the UK's recent youth interest in 1940's Austerity Fashion reflecting the recession (itself generating a reaction of far more upmarket Lawn Tennis. Boating & Golfing Edwardian dress) the sharp difference between West and East was that the British re-interpretation was more of an affectation, whilst the Japanese take (as described) is a more modest, less-affected simplicity. As such possibly far closer to Japan's social history, with thus with greater meaning as a mirror for the current zeitgeist.

As Brûlé highlights, there are commercial concerns from analysts and socio-economic observers about what direction the Japanese consumer takes next, given the additional social 'weight' the Fukushima disaster place upon the social consciousness.

After the 50 year rule of the more conservative Liberal Democratic Party, the (ironically more socially liberal) Democratic Party of Japan took office in 2009, led initially by Yukio Hatoyama and since 2010 by Naoto Kan, the men as youthful leaders seen to be more in step with modern times and global outlook than previous older generation. The cabinet then have the task of re-vitalising Japan on the home-front, an achievement that has been a long time coming, though Fukushima adds a very powerful new dimension.

So as foreign observers wait & watch to view the fortunes of the imported luxury goods market (ie German cars, Italian clothing, French accessories & grooming) so Kan and colleagues must try and orchestrate a lift in the domestic economy. As is obvious, these two actions have corollaries, given that Ministers would rather see local consumption of luxury goods directed at Japanese made items rather than foreign goods which negatively effects the Balance of Payments, something which has become increasingly sensitive because Japan historically ran a soundly surplus BoP account.

The Bank of Japan presently reports that as of Q4 2010-end, the country ran a gross national debt position of ¥211,555bn, this the highest since Q1 2008 in the aftermath of the Triad financial crisis when ¥211,015bn. Critically at that time Inter-company Investment Lending sat at ¥3,417bn whilst in Q4 2010 it sat lower at ¥3,085bn. Also to be noted is the near parallel lending levels in these two periods to Public Sector and General Government in a ¥68,020bn to ¥68,099bn range, showing the desire to maintain a constant, effectively deflationary, control of public spending.

Thus whilst the BoJ obviously acts in the capacity of a notional Central Bank – as seen by its maintaining 0% rates - and clearly not in the role of a national investment bank, the large difference between public sector expenditure and inter-company investment lending is noticeable.

[NB That illustrated 11 quarter time-line, also shows that Japan has sought to maximise its use of the low interest levels available on spot-rate international markets, and so has extended it short-term exposure whilst contracting its long-term].

Yet the question that still stands like the proverbial elephant in the room is how to get the economy moving again, beyond the reconstruction projects in and around the North East.

It has been a long-time public ambition by the state to regenerate domestic private spending, even if privately the BoJ hopes it not too great given the deflationary trend-line Japan still needs to maintain.

Of greatest hope are the large sums of savings that the older generation have secured as what they see as a necessary cash-cushion during these insecure times. The old theme is that these Japanese housewives by virtue of their number and level of savings were central to the foundations of the Yen carry-trade by foreign investors using borrowed no/low interest Yen to invest in other currencies and EM markets. The National Treasury believed that this money which had been either locked into nil-interest bearing savings accounts or 'stuffed under the mattress' by a concerned public, could be put to better use by spending on high-value goods made by Japanese factories.

This impetus was part of Toyota's decision to introduce its Lexus brand into Japan in 2005, some 16 years after its birth and international success story. Interestingly, America's firm import favourite - the Lexus LS400 and siblings - had never been badged as Lexus on home ground, the upscale models used to defend the standing of Toyota's own label on home turf. But the action was taken to both stop defection by Toyota loyalists to Mercedes, BMW, Audi & Range-Rover aswell as to try and attract those domestic consumers that had to date been loyal to the German car-makers. It is believed that the move did indeed stop defection and attracted others, but to what exact degree is not known, more a case of general sector discussion and hearsay. But it is unquestionable that the introduction of the smaller Lexus vehicles, its lead in Hybrid propulsion, and the marriage of these two elements in cars such as the Prius based CT200h has played a role in maintaining Toyota's standing domestically.

In the bigger context, this then could be viewed as part of Japan's own effort to highlight its credibility as a luxury brand and goods provider to its own people.

But the greatest dilemma Japan faces is how it can exploit the obvious creative and increasingly individualistic talents its young people demonstrate whilst simultaneously convincing the economically astute 50 & 60-somethings to part with their savings. However, the older generation infact looks upon today's youth as the spoilt generation living in what seems an ongoing childhood supported by family and state typically into their 30s; so a world-away from their own hard-working, self-denying past that helped build Japan.

The Fukushima aftermath will undoubtedly close the generation gap in the North East where old and young can be part of the re-build in one form or another. Yet the generational chasm that exists throughout the rest of the country and especially so in major cities is the one that attention must be drawn to.

The Japanese government must ironically educate the grey generation as to how its underlings are both very different to themselves yet simultaneously far more fluent in the realities of consume culture and re-inventing it for their own use, aswell as that of their peers and even foreign consumers via a new generation of Japanese luxury brands that have global meaning.

Whilst new bridges are physically build in the Fukushima region, new sociological bridges must be created between old and young across the country, from Hokkaido island in the North to the reaches of Kagoshima on the south island.

That is perhaps the central pillar of Japan's additional economic re-build task.

Post Script

A very brief part PESTEL view provides additional insight of Japan:

It was only in the post-WW2 era that constitutional change devolved power from Emperor and his Advisors to the newly created Diet government. Though infact old 'fuedal' Japan was far more collaborative than generally understood, given that the Emperor's lofty standing as a diety (human god) meant that he typically ratified policy decisions already concluded by his court.

Having moved from a rural-based economy to that of a hi-tech one, the country (in western terms) morphed from an 18th century condition to that of a 21st century persona within a period of 70 years. Such change and growth primarily created by ever higher value manufactured goods and electronics leadership. But this stalled in the early/mid 1990s as a consequence of national 'over-inflation', becoming essentially economically and competitively dislocated from new Asian challengers such as S.Korea, Malaysia, Taiwan etc. The innate over-inflation of the cost-base and value-base created by wage-rate spiralling, parallel cost of living increases, the weakening of foreign currencies whilst the Yen comparatively sored, and perhaps most visible the bubble in Tokyo property prices. These and the whole nation have since the late 1990s been in a process of de-leveraging; trying to continually re-balance the innate cost gap between itself and the world, initially the West, then ASEAN, now China and up-coming N11 (Next 11) EMs.

Social – the once prevelant wholly 'community' directed mentality which stemmed from village life and then transferred into conglomerate corporate life has increasingly wained as family, social and corporate fractures grew, thus instilling a more individualistic attitude amongst the more 'dislocated' young. This also undermined the previously innate deference between young and old. Additionally the necessary deflationary environment and increase in IT-based jobs encouraged greater participation of the female workforce, so changing the systemic roles of both sexes and thus the framework of society.

The following provide a list of recognised Japanese company names to non-Japanese eyes, though these reflect a large proportion of the national GDP output, they only reflect about 20% of the nation's large but effectively unknown corporate names:

Automotive -
Toyota, Toyota Boshuko, Toyota Industry, Honda, Mazda, MazdaSpeed, Nissan, Nagisa Auto, Isuzu, Ralliart, Suzuki, Subaru, Yamaha, Yamaha Motor, Denso, Bridgestone, Autobacs, NGK, Kabuta, Yanmar,

Consumer & Industrial Electronics -
Sony, Matsushita-Panasonic, Brother, Canon, Casio, Hitachi, JVC Kenwood, Konoca Minolta, Makita, Mitsubishi Electric, Mitsui, NEC, Nikon, Nintendo, Olympus, Pentax, Pentel, Pioneer, Sanyo, Sega, Sharp, Sony / Sony Music, Toshiba,

Large Scale Engineering -
Fuji Heavy Industry, Fujitsu, Kawasaki Heavy Industry, Mitsubishi Heavy Industry, Nippon Steel, NSK, Sumitomo Group

Retail -

Food & Beverage -
Sapporo Beer, Asahi Beer, Kirin Beer.

Finance -
Bank of Tokyo Mitsubishi UFJ, Daiwa Securities, Nomura Holdings,

The large Japanese conglomerates which still hold influential control are:

Keiretsu -
(Mitsubishi [Motor, HI, Electric], Kirin Brewery, Nippon Yusen Shipping, etc)
(Sony Corp, Toshiba, Japan Steel, Fuji Photo, Nippon Flour Mills, etc)
(Mazda, NEC, Asahi Breweries, Hanshin & other Railways, etc)
(Nissan, Yamaha, Canon, Ricoh, Asahi Kasei Chemical, Tobu Railway, Matsua Retail)
Dai-Ichi Kangyo:
(Isuzu, Kawasaki, Fujitsu, Hitachi, TEPco, Showa Shell, Japan Metals)
(Suntory Foods, Hankyu & Keisei Railways, Kobe Steel, Cosmo Oil, Hitachi, Ube Ind)
(Toyota, Suzuki, Daido Steel, Ricoh Machinary, IK Petroleum etc)
(Fuji HI [Subaru Cars], Riken Machinery, Nippon Soda Chemicals etc)

Saturday, 7 May 2011

Micro Level Trends - US Autos - The Need to Generate Profitability from the New Social Glee

The US surgical assault in Pakistan to annul Osama bin Laden could not have been better timed for the US economy. Acting as it does as uplift for the social psyche.

It obviously also a boost to President Obama's previously flagging popularity, almost as if it were timed to reflect his words pertaining to the importance of the national agenda versus the far right's intentions for rumour-mongering.

It also coincides with the posting of Q1 2011 corporate financial results, in which old fashioned heavy industry has demonstrated itself as fundamental to America's renewel prospects. The likes of Caterpillar and Cummins Diesel (as highlighted by the FT's Tony Jackson) demonstrating the intrinsic worth of 'smokestack' industry both as an export earner and as homeland economic pillar. The momentum seen thus far has been impressive - as Jackson points out seen in valuation multiples - yet maintaining earnings and growth traction is of course vital if the re-balance of the economy from Wall St to Main St is to progress.

So whilst much noise about the killing of America's '#1 Most Wanted' fills the popular media and blogsphere, ranging from conspiracy theory to citations of disrepectful burial methods, the real focus is still on the US economy, and the question of “what next?”

History demonstrates the link between US national security (ie threats v confidence) and national output. Washington Administrations over the decades seeking to re-balance the economy when it sees capital markets contract in reaction to a threat. Done so by raising foreign & domestic
defence spending and expenditure on public goods & services. Latterly as the upturn begins then once again re-balancing with state-level spending reductions. This part and parcel of policy-making for all notionally free-market and mixed-market nations.

However, the unprecedented US (and global) concern today is regard the level of US indebtedness, critically the capital market's sensitivity to perceived ability/inability to re-pay that debt. Whilst some see America as still unrivalled as the super-power, others see its national balance sheet and basic accounting as akin to that of Greece, Ireland or Portugal; simply on a far greater scale. The main difference however relates to military might on the global stage, something the European fringe nations do not have. It has been its 'hard' and 'soft' power that has sustained the US to date throughout economic downturns.

This clearly demonstrated by the bin Laden attack. However, the presumption is that whilst the head of the snake has been removed, a general threat still exists, yet perhaps more opaque without the same organisational framework, thus presumably making terrorism intelligence gathering harder.

Nonetheless, in the President's own back-yard the bin Laden's apparent demise is a welcome milestone as a 'psychological closure' for the US. It gives reason for national celebration aswell as rememberance. The effect on the capital markets have been largely negligable, more of a Main St event than a Wall St one. Thus even if though there are many questions surrounding the validity of the event, the long-awaited vanquish for 9/11 has come, for Americans it heralds that "we got him!".

The desired effect is that the 'victory' becomes the conversation piece in offices, factories, bars and dining tables across the land, and that it builds innate patriotic confidence. A much needed confidence whilst in the present drudge and malais of high unemployment, inflationary input costs to industry and food & energy. A confidence set to boost the country's mood and in tandem, ideally, its consumptive attitude.

The good news story will have seen celebratory consumption boosted across food, alcohol and no doubt a raft of tacky bin Laden-directed merchandise. Yet the real hope is that translates into bigger ticket spending, none more so than Autos as a form of personal reward and view of a brighter future.

For Washington, growing domestic consumption levels at this critical point in time is vital, and the Obama Administration knows it only too well. The government-driven revival, whilst effective in the short & mid-term, must be superceded by real wealth generation created by industry and the public at large.

Thus far, even whilst still in an economic 'low-gear', the uptake in US Auto sales from commercial and private purchases has been has been keen, seeing vehicle market TIVs climb from the low of 9.5m in 2007 to an expected 12.5m in 2011.

Of course, this was largely due to the availability of Treasury supplied, and latterly Wall St injected, liquidity pumped directly and indirectly into car-makers via part-nationalisation, cash-for-clunker schemes (which at one high-point in early 2009 boosted cars sales alone exc trucks to an ASA rate of 8m) and consumer-credit pumping in support of GM & Chrysler after respective re-structuring. Indeed, GM's IPO perhaps more about generating economic confidence than the (seemingly so far lost) effort to recoup the Federal prop-up costs.

Thus, on paper, given the level of assistance provided by Washington, the new incarnations of GM & Chrylser have made progress

From this perspective, the Q1 financial results of Detroit's Big 3 automakers give cause for general satisfaction within Washington. On Wall St though the sell-side and buy-side analysts believe that a greater portion of the profitability the 'middle-line' reporting shows should have been paid to institutional and retail investors. This done to retain faith in Detroit's Big 3', and done to reduce the investor 'value-gap' between GM, Ford and (notionally) Chrysler versus the rest of the world's automakers, especially so the 'hi-performance' Germans.

For Q1 2011, BMW, Daimler & VW. BMW proving yet again that its profitability margin at 11.9% outstrips all western VMs, VW Group's Audi division reaching a still impressive 10.9% and Daimler hitting 9.3%. Thus, for investors the decades long value-chasm between US & Germany automakers (Opel within GM) appears as real as ever.

However, a brief look at Detroit's Q1 results would be instructive to gain closer view :

General Motors :

GM saw its fifth consecutive profitable quarter with Q1 profit triple to $3.2bn from a revenue of $36.2bn (from $31.5bn in Q1 2010). EBIT improved to $3.5bn (vs $1.8bn), but had a hard reduction hit from special items of $-1.5bn (vs $-0.1bn), leaving an Adjusted EBIT of $2.0bn (vs $1.7bn), the impact of special items on EPS dilution being $0.82 (vs $0.08). Thus the notional top-line $1.77 dividend figure (vs $0.55) was effectively halved. Automotive net cash flow from operating activities weakened to $-0.6bn (vs $1.9bn), whilst Automotive FCF dropped to $-1.9bn (vs $1.0 a year earlier), both cash-flow lines hit by the $-2.5bn termination cost of previously agreed wholesale financing packages.

North America (GMNA) reported EBIT of $2.9bn (vs $1.2 bn), on an EBIT-adjusted basis, GMNA increased earnings to $1.3bn (vs $1.2bn), the remainder of 2011 expected to see EBIT-adjusted results improve due to better pricing and fixed cost reductions offsetting commodity cost increases and unfavorable mix. Europe (GME) EBIT of $-0.4bn (vs $-1bn) showed improvement but still a loss, targeting to achieve EBIT-adjusted break-even basis before restructuring for FY2011.
International Operations (GMIO) EBIT of $0.5 billion (vs $0.9bn), with EBIT-adjusted $0.6bn (vs $0.9bn). South America (GMSA) EBIT of $0.1 billion (vs $0.3bn) with no adjustments in either period.

The American re-bound then continues, GM a beneficiary with its NA market share climbing slightly from 2010's Q1 of 18.7% to 2011's Q1 of 19.6%, April seeing 20.1%. Yet that market-share was effectively bought with greater purchase incentives than its two cross-town rivals, GM offering an average of $3,313 in discount/'throw-ins' as an avarage throughout the 2010/11 period, the greatest 'value-destruction' per unit amongst the rivals. For a company supposedly offering a strong vehicle portfolio and changed ways, this does not look good; even if it states that from April onward incentives have dropped by 8% it still leads the pack in terms of vehicle give-aways to fill production capacity.

GM expects that full-year 2011 EBIT-adjusted results will show solid improvement over 2010. GM continues to expect no material impact on full-year results from the Japan crisis. For the quarter, automotive cash flow from operating activities was $(0.6) billion and automotive free cash flow was $(1.9) billion. Both figures include the $2.5 billion cash impact of GM’s decision, announced in October 2010, to end a wholesale advance agreement with Ally Financial.

GM ended the quarter with very strong total liquidity of $36.5 billion. Automotive cash and marketable securities, including Canadian Health Care Trust restricted cash, was $30.6 billion compared with $27.6 billion at the end of the fourth quarter of 2010.

However, much of that $ 3.2bn profitability figure was gained from sales of stakes in former affiliates, an important point at a time when the lion's share of bookable profitability should be derived from vehicle sales and margins there-on.

investment-auto-motives was critical of GM at the time, since its actions to 'window-dress' prior to the IPO appeared drastic, using 'old-culture GM' short term tactics to boost company growth and so valuation. Its pre-IPO 'turnaround' went beyond conservative operational measures, the prime example being the leverage of sub-prime lending to 'top-up' income, easily bookable 2-stream profitability derived from the additional unit sales of cars / trucks and the loan-book effect of higher APR rates derived from higher-risk lending.

Like the US administration's massive QE programmes that propped up the country's economy at such cost, the executives at GM & Chrysler no doubt view “the past (as) another country”, the 'ends' of a more stable country and its 'domestic' corporations justified by the 'means'; looking forward the critical action, not dissecting the recent past.

But, it was one of the danger signs which under-pinned investment-auto-motive's suspicion that the post IPO share-price in the near term would 'flat-line' at thereabouts its $33 launch price. This has proven the case 5 months after the November re-listing, the price wavering seen in the interim between $29 & $39 due to market over-reaction.

Ford Motor Co :

Q1 2011 net income was $2.6 billion from a total revenue of $33.1bn (vs $28.1bn in Q1 2010) so up $5bn. Thus gave an EPS of $0.61, a $466m YoY increase. Pre-tax operating profit was $2.8bn or $0.62 cents per share, an increase of $827m YoY. The company showing a pre-tax operating profit over the last seven consecutive quarters.
Of this, the Automotive division pre-tax operating profit was $2.1bn , an increase of $936m YoY; whilst the Finance division saw a pre-tax operating profit of $713m, a decrease of $-115m YOY.

Automotive operating-related cash flow reached $2.2bn, a YoY improvement of $2.3 bn, with Automotive gross cash of $21.3bn, up $800 m compared to FY2010-end. Automotive gross cash exceeded debt by $4.7bn, up by $3.3bn from FY2010-end. By Q1 2011 end $30.7 bn was held in total Automotive liquidity, an increase of $2.8bn over the preceding quarter. Automotive debt was reduced by $2.5 bn of net reductions, this resulting from redemption of all outstanding Trust Preferred Securities.
For full year results, Ford plans to deliver continued improvement in pre-tax operating profit and Automotive operating-related cash flow compared to 2010.
FoMoCo's average NA discounting expenditure was $2,878 in 2010/11, the lowest of the Big 3., highlighting its standing in the public's eye as America's most credible of US auto-manufacturers.

It also reflects good model mix management, and the leverage to competitively price vehicles thanks to scale efficiencies created by its sector lead in global platform/module engineering Moreover, its maintained focus on general internal cost-control and fixed and variable levels.

But ultimately demonstrates the most harmoniuos alignment of brand personality, product quality, RRP levels & 3-year vehicle residual value.

That figure set to decline by 20% in Q2 2011 onward, to $2,399, which whilst still unwelcome - representing as it does approximately 15% of a typical vehicle's 'sticker' value - demonstrates Ford's willingness to resist very-heavy discounting, its F-series pick-up as ever leading its class and retains #1 rank in overall sales, and its small & compact cars, far lower down the sales ranks defended from the very damaging margin erosion typical in small cars sales.. Thus the blue oval demonstrates both good internal practices and maintains consumer credibility, extremely useful when re-building its product-line to in turn grow unit and business margins.

The only concern is that with Focus sales down 6% in April, reflecting the models run-out and renewal, that self-discipline, amongst dealers at least, may be severely tested, and retaining RRP pricing on new 2012 (Q2 2011) Focus will be a Ford 'must do'.

Chrysler Group LLC:

Chrysler reported its first positive income statement in Q1 since its restructuring in June 2009. Net Revenues $13.1 billion (vs $9.7 billion in Q1 2010), a Modified EBITDA of $1.171bn equal to 8.9% (vs $787m), a Modified Operating Profit of $477m equal to 3.6% of Net Revenues (vs $143m), Net Income of $116m in Q1 2011 ( vs $-197m in Q1 2010), with Cash at Q1-end at $9.9 billion, (vs $7.4bn at FY2010-end), FCF at $2.5bn (vs $1.6bn) improved accordingly. Gross Industrial Debt was $13.3 bn (vs $13.1bn at FY2010-end), Net Industrial Debt of $3.4 billion showed a decrease (vs $5.8bn billion at FY2010-end), primarily due to the increase in cash.

Yet each reporting line had a notation caveat, and critically the Gross Revenue line was not included

Its US market share increased slightly to 9.2% vs 9.1% a year earlier; with Canada gaining 1% to 15.7%. Worldwide sales in grew 18% YoY to 394k units. In contrast, worldwide vehicle shipments grew by 28% to 485k in Q1 (vs 380k in Q1 2010). This difference in sales versus shipments growth figures highlights the possibility that Chrysler has intentionally over-stocked its international dealers to both realise early shipped income (via full or part-payments) and to demonstrate to foreign consumers that Chrysler & Jeep are once again 'fully-fledged' operators.

Chrysler also discounted its vehicles averaging $3,451 in give-aways during 2010/11, less than GM but still appreciably more than Ford, its intention to reduce that figure by 23% to $2,806 after Q1

As a precursor to its intended IPO, Chrysler submitted Form 10 disclosure to the SEC highlighting its performance as an LLC status company bound under Federal agreements to pass specific financial, operating and product milestones. The milestones enabling the uptake of increased shareholding call-options, the second of these milestones now passed, so able to increase share from initial 25% to 30% (after phase 1) to 46% (presently) and onward to a final 51% at milestone 3, expected in Q4 2011.

As the smallest US automaker Chrysler has also perhaps both the greatest challenge and also opportunity for growth. Its best selling vehicle is the Dodge Ram pick-up, but it only sits at #15 in the April sales rankings, whilst its direct rivals the F-series and Silverado sit in #1 and #3 spots respectively. Irrefutable then, that new product pipe-line must be wholly compelling across all 3 group brands, and throughout each's pricing ladder.

The company's reporting of being 'back in the black' was expected by the markets, but its parent FIAT Auto SpA (now seperated from FIAT Industrial SpA) is experiencing problems. Despite Fiat Auto SpA has reporting Q1 revenue of €9,210m (up 7.1% from the Q1 2010), disproportionate out-performance contribution by its components division, earnings in Fiat's Automobiles business declined by €4m YoY with Fiat Group Automobiles (FGA) seeing trading profit dip by 15.0% and the margin easing to 1.9% from 2.2%. Leaving a FIAT SpA margin of 2.7%, the same as Q1 2010.

Thus the FIAT parent has its owns woes to combat, an aged product-mix in passenger cars – still awaiting New Uno – and internal cost rises depleting what should have been a 3.0+% margin. The FIAT board then is has the task of dual (yet merged) companies resuscitation and brands and product stories which have yet to convince US consumers.


Detroit's 3 have had a fortuitous Q1 and April in its homeland market.

GM sold 25% more vehicles by April 2011 than a year earlier, reaching 825,100 units YTD in 2011. Ford sold 16% more vehicles YoY, reaching 684,800 units. Chrysler sold 22.5% more vehicles YoY, reaching 404,175 units.

This primarily down to 5 factors.

Firstly, The Federal Reserve's Keynsian derived QE2 programme replaced QE1 to 'keeping America moving' and so general confidence in the immediate financial framework and its synergistic effect on a 'Restructured Detroit' was prevelant.

Secondly, domestic demand stayed relatively buoyant even after repeal of the financial aid packages Washington presented to smaller car buyers, the success of Wall St and general corporate earnings through 2010 inferring that economic normality was on its way, and so the consumer (without house-purchase expectations in a dour housing market) was able to spend on personal items, just as fleets were able to replace cars at welcome discount rates.

Thirdly, the still deflated dollar on a global stage allowed GM, Ford & Chrysler to ship large numbers of vehicles to foreign shores, the shipments a mix of leisure-orientated status product destined for buoyant EM countries, such as Jeeps for Russia, and commercial vehicles in the form of pick-up trucks to industrial customers in CIS, Middle East, Latin America etc, alongside the sales prospects the likes of Caterpillar achieved serving national infrastructure and primary industry projects..

Fourthly, the $ vs Won FX 'chasm' meant that the recently hugely US successful Hyundai Motor had less leeway to price-compete on US shores, itself under pressure in Asian capital markets to maintain margins relative to the pressure from its industrial conglomerate peers in S.Korea and elsewhere. Thus the tables in its competitive US fortunes were turned, though it still managed to

Fifthly, Detroit enjoyed a great macro-propelled competitive-advantage created by Japan's national disaster, massively undermining Japanese VM & supplier production centres, seeing Japanese domestic demand hit hard, aswell as the inability to service other Asian & American assembly plants; deliveries not expected to return to normal until June-August.

Thus Q1 was a kind of 'perfect storm' of advantage for GM, Ford and Chrysler, yet given the tailwinds prevalent analysts are asking what happened to investor returns?

It points to a general attitudinal relaxation by US VMs on their own internal cost-bases – perhaps especially so in procurement and marketing – aswell as general overhead cost-absorption such as executive travel and IT expenditures.

Beyond long-term debt being paid down to reduce future cash-flow drag - encountered by higher inflation rates and so payable interest - it appears that income is being hived away in reserve pots for latter day deployment.

In veru generalistic terms, excluding immediate and long-term liabilities, GM holds a $36.5bn liquidity pot, Ford a $30.7bn pot and FIAT a $20.18bn* (E14.1bn*)pot partly accessible to Chrysler)[NB *inc recent bond sale income].

Given this early stage of the economic cycle the first substantive impression is that the funds are to be used for strategically aligned 'bolt-on' acquisitions. Unlike the 1990s when auto-makers sought to build their brand and product portfolios, today the imperitaive is to re-build presence across the value-chain in specific areas of technology supply and retail / distribution.

Thus VMs will be seeking Tier 1s and 2s with specific ability to bolster in-house brands ideally with target region presence. Thus providing a formula which can leverage both regional market growth for enhanced volumes and margins, the automaker as parent shareholder thus enjoying additional synergistic income streams at both a cash level from dividends and at long-term asset level on its own balance sheet. But as importantly able to effectively dictate business terms with higher rate pricing discounts than would otherwise be the case, having to then balance the profitability levels of parent and child.

However, beyond this pertinent consideration, those reserve pots will also very probably be deployed to meet the future renewed challenge from Japanese, Korean and European producers, as their own headwinds decline. Japanese production normalisation, and a reduced FX spread between the $ and Won & Euro will certainly create a tougher environment for Detroit.

Inevitably, the new influx of foreign competition will come, at which point Detroit looks prepared to return to its old game of massive advertising programmes, heavy discounting and feature & accessory give-aways.

On its home-ground, beyond M&A activities, there is a good chance that the supposed 'New Detroit' may well end-up acting suspiciously like the 'Old Detroit'; simply throwing cash at the problem by effectively buying market share, and so reducing its unit margins and ROI.

With a likelihood that the recent decline of vehicle purchase incentivisation programmes will indeed reverse in the face of the expected foreign challenge, the stewards of both long-term investment funds and long-horizon hedge funds should maintain a beady eye upon the US auto-maker's margins, and its net payable dividends.
For its is only this that will properly support Detroit's innate value and market capitalisation levels.

Far from being confrontational, a new generation of more activist stewards would simply be new era governors, replacing the 'save and support' mindset of Washington's governorship with one better attuned to commercial and investment reality on the global stage.

In the meantime, GM, Ford & Chrysler must do all they can to leverage the improvement in public sentiment given the good news which recently eminated from the White House. That means honourable, not crass, message campaigns, since Detroit's US and global renewal also carries the responsibility of reflecting America's outward persona.

Those bumper-stickers offering bin Laden jokes are best left at the dollar-shop.