Tuesday, 18 December 2012

A Time for Celebration & Reflection

As 2012 draws to an end, many of the world's 7 billion peoples have celebrated, or await to partake, in age-old events which have spawned from the annuls of Eastern history.

These are as aesthetically and phonetically diverse as the intended seperational leaps in theosophic tribal evolution, from Egyptian-Babylonian-Zoroastrian to Indo-Aryian to Shang-Confucianism. Today filtered into various belief systems, notably Eid for Muslims, Diwali for Hindus, Bodhi for Buddhists, Yuletide for Pagans and Christmas for Christians and multi-strains of Asiatic Humanism.

Theological disbelievers may recognise it all as a man-made construction, for power and order, an aspect of 'Selfish Gene' theory. But the period at least offers a little relaxation for such aetheists.

Culturally - even if for a short time - it is about tribal re-affirmation, a halting of the typically seperatist social structures that exist within the everyday, born from Adam Smith's 'division of labour' to Jeremy Bentham's 'individualistic utilitarianism'.

For this period, each theological environ displays singularly familiar 'auto-icons' to propogate the tribal instinct and re-create social cohesion : such innately created tribalism today re-played by and within the materialism consumer and lifestyle brands.

As a primary signifier of materialistic age merged with social binding, the motor car itself has even been inducted into olde-worlde traditions. For a small fee, a 'newly arrived' family's purchase of a new small minivan, sedan or hatchback is splayed with garlands, sprinkled with water and receives holy proclaimation so as to ward-off evil and ensure a lifetime of successful motoring.

investment-auto-motives revels in the delight and wonderment vehicles and the vehicle industry increasingly brings to millions of peoples across the emerging world, and the western recognition toward the need of 'globally balanced' automotive consumption for eco-harmony.

As the multitude of candles and fireworks are lit across the world, so the car, van and truck transports millions to their celebratory destinations and so help alleviate for a time their personal yet universal challenges.

The religion that is the motor car is plain to see, millions investing their time, efforts and monies toward a better, comfortable and more spiritually uplifting motorised journey through life.  

The day may yet come when Karl Benz, Henry Ford, Ferdinand Porsche, Kiichiro Toyoda and Soichiro Honda are deified by future generations.

Friday, 7 December 2012

Company Focus - Aston Martin - New Port of Call for the BoD

It is now old news that the world renowned British manufacturer of sporting luxury vehicles, Aston Martin Lagonda Ltd., sought a new financial suitor, so as to secure the mid and long-term future of the company.
That suitor is now known to be Investindustrial, a private equity firm which with a portfolio imbalance biased toward other sectors, is now seen to set it sights upon available good quality industrial and brand assets. Bloomberg reports its purchase of 37.5% stake in AML at a price of E190m / $246m, seeking to re-vitalise AML in the manner it did for Ducati, before exiting with a divestment of the motorcycle company to VW Group.

The following web-log commentary, written before today's announcement, provides investment-auto-motives' overview of the prime issues which sat behind the two 'white knight' negotiations, and is glad to see that the deal has been amended in order to satisfy the demands of the current and new owners, and to underpin the financing of a much publicly admired company.
“Lean-Burn” Times -

A recent assessment by Moodys concluded that a credit rating of “B3” (non-investment) grade should be ascribed; the present clouded circumstance. Obviously resulting from much diminished car, services and merchandise sales, a much reduced income stream and consequential cash-burn, starkly seen by its Q3 2012 figures: an operational loss of £-3.6m, negative FCF of £-27m and a reduced 'cash pile' to £28.4m

Unit sales fell by 20% to 2,520 vehicles for the first nine months of 2012, all deliveries weakened, unsurprisingly and unfortunately so regards the 12-cylinder engine models which obviously provide very good unit margins when actually sold.
Reports state that adjusted EBITDA in 2011 fell 18% to £76.2m, delivering approximately 4,200 units. A continuation of the 2012 sales trend suggest that about 3,360 units would be delivered in 2012.

Barclays reports that RandD and SandM costs alone absorb approximately 25% turnover at AML, compared with 12-14% at rivals such as BMW, Jaguar Land Rover and Daimler.

The Search for Fresh Funding -
Unavoidably, the firm has been reported as undertaking “advanced” talks in order to sell new shares to investors, thus underpin its financial foundations and ensure it may then pursue growth plans.

Much of course depends upon the financial standing of AML's backers, press reports stating that the two prime Kuwaiti investors - Investment Dar and Adeem Investment (under the Efad umbrella) – seek to partially liquidate their holdings (originally paying £503m for a 64% stake) to reduce their own debt levels incurred as a result of over-leverage during the GCC asset-bubble years; having already undertaken a $1bn debt restructuring some years ago, and $4.9bn restructuring in February 2012.

Bloomberg reports that the stake being offered is a 40% equity stake of the company, leaving Dar/Adeem (Efad) with a remaining 24%, and offers 50% of the voting rights, which suggests that Kuwait's original participants: Mssrs Al-Mussallam, Al-Qadhi, Al-Humaidhi, Al-Saleh and Al-Roumi are willing to hand over their combined executive powers to any new-comer.

However, seeking to monetise the present and growing future 'goodwill' factor and value inherent within the AML brands, the Kuwaiti owners are reportedly seeking to recoup the full £503m* through the announced 40% sale. Thus valuing AML at £1,257,500m (£1.2bn).

[NB * Investment Dar's website states that it paid “around £500m”, whilst other reports highlight a figure of £479m – this 'information gap' possibly a result of misinformation or possibly intentional 'information wars' to assist either side's position].
Kuwaiti Valuation -

Whilst this may immediately appear an over-confident stance given presently reduced consumer demand for AML's cars and services, this position may well be taken for one of two reasons. Initially as a typical formative negotiation tactic, or alternatively, a possibility that Dar/Adeem is able to walk-away from any lesser deal.
Unlike the general public or capital markets, it recognises that AML's 'lightweight' technical knowledge and IPR proffers the potential as a valuable eco-tech vehicle engineering base, able to apply its abilities to other various vehicle segments and potential clients.

The Kuwaiti SWF monies that appear to partially bankroll Dar/Adeem are appropriated as part of the 'national-agenda' drive to expand Kuwaiti industrial activity into oil related but also globally relevant activities – eco-tech a prime consideration in the GCC (see state projects such as Masdar City). Thus AML itself an enabler of that goal.
[“Extra Extra” Late Insert: it now appears that the Kuwaiti's were essentially bluffing about their valuation expectation, the price knocked-down from £503bn for 40% (= £471.5m for 37.5%) to a lowly £150m – less than one-third the original price. (As described by the BBC and Bloomberg), If the case, and seemingly so, this unfortunately heavily undermines the credibility of future Kuwaiti negotiational stances and may affect future BoD influence].

Tipping the Balance -
The current March 2013 forecast of a $73 oil barrel 'low' – this itself possibly prompting the tentative AML stake sale - may ultimately prove innocuous if the North American and Chinese economies rebound more strongly than anticipated in Q1 2013; so improving Kuwaiti petro-dollar income and the present notion of a AML stake sale.

However, presently, if the Kuwaiti perception is that a global economic drag is set to continue - as appears the underlying assumption behind the British Chancellor's recent Autumn Statement - then Kuwaiti concern of an ongoing depressed oil price and so reduced Kuwaiti oil revenues may hasten the desire to avoid 'propping-up' a cash-burning AML.
Potential Buyers -

Press reports state that Investment Dar has received competing bids from Italy's Investindustrial (a private equity firm with a previous raft of sector interests) and India's Mahindra & Mahindra (the manufacturer of utility 4x4s, SUVs and tractors, and a subsidiary of the conglomerate Mahindra Group).

There is also speculation that Toyota had also asked an external agency to undertake a non-committal general review of AML.
For the moment it seems that Investindustrial has offered only £250m, whilst M&M has tabled a better figure. But a critical difference in the tenders is that Investindustrial appears to have co-opted the application of Germany's AMG company, now a division of Mercedes Cars, obviously part of Daimler AG.

NB If truly the case, this investment-auto-motives believes could be a major advantage regards the future technical 'story-telling' for AML, since both AML and AMG operate in similar spheres, with of course the powerful 'patronage' of Daimler and its deep connections into the German and worldwide supplier-base.
An independent desk-research review of AML by investment-auto-motives, arrived at a very similar conclusion regards Daimler.

But what stops AML itself from directly approaching Daimler?
And indeed the German wholesale capital markets? A video sequence on FT.com with Lombard Odier discussing US vs European corporate bond demand highlights under-supply of good asset-backed notes within N. European markets.

This achieved via the issuance of fixed income notes to the still highly liquid markets that offer modest coupon return during these low interest rate conditions. Tapping the German markets without going so far as the example of Williams GP Engineering, which now trades as Williams F1 in Frankfurt.
McLaren – Mercedes set new benchmarks on the F1 track and commercially with the SLR road car, why should AML not form a similarly strong relationship for itself now that the McLaren niche production relationship has diminished, even though Daimler maintains an 11% stake?

But for the moment, rather than speculate, the intention of this web-blog is to assess the potential of both InvestIndustrial and MandM as suitors.
Prior to doing so, it is worthwhile re-capping AML's distant and recent history, aswell as viewing a 'snapshot' of the entity today

Background -
Officially founded in 1913 in Kensington, London, the firm went through consecutive iterations as the cyclical need for innovation and ever new funding sources saw commercial surging and stalling across the decades. It moved to Feltham (SW London) for its first cost saving measure, then after yet another resurrection in 1947 by tractor magnate David Brown, onto Newport Pagnell with the acquisition of Tickford coachbuilders. For decades this site was – and for many classic vehicle enthusiasts still is - its long time spiritual home; where the DB series cars (of James Bond fame) were manufactured, thereafter replaced by the 1970s/80s 'V' series cars.

Recessionary sales contractions, a string of different commercial owners and efforts to regenerate the Lagonda marque led to the Victor Gauntlett era; which via oil-industry association provided for new sales routes beyond the similarly cyclical UK, Europe and North America into the Middle and Far East. By the mid 1980s however additional funds were required and Ford Motor Company took a stake-hold in 1987 under Walter Hayes, and allowed for creation of the 'new era' DB7, forming the nascent core of an expanding PAG stable (alongside Jaguar, Land Rover, Volvo and Lincoln) under the auspices of ex-BMW senior Dr Wolfgang Reitzle. At the time a prolific ambitious exercise that saw a new port of call for AML within PAG and access to Ford's then broad, strategically brand inter-connected, technology fiefdom.
[NB The gradual divestment of most PAG marques came as Ford re-structured its operations to concentrate on mainstream high volume operations, with also the challenge of re-popularising Lincoln in the premium car segment. However, it is understood that Ford retained a minority stake worth £40m in 2007 ].

During the period of PAG formation, Aston Martin Lagonda moved headquarters to the Gaydon technical grounds in Warwickshire, the site purchased by Ford from BMW (Rover Group) passing into the hands of TATA Motors with the JLR acquisition; AML's HQ and 'DB' build-centre understood to be a leased, highly private portion of that overall site.
The Present Context -

Since the 2008 western financial crisis, which itself arguably created the domino effect of the global economic slowdown, unsurprisingly AML has suffered a substantial fall in vehicle demand, something which its business model sought to avoid with a globally balanced geographic footprint.
However, it also appears the case that AML's 'thinner' operational funding stream has left the company at a serious disadvantage to its prime German and Italian competitors; indeed Germano-Italian in the case of Audi-Lamborghini , and Germano-British regards VW-Bentley Motors.

A widening of the competitive gap seen to be ever more evident given the opposing fortunes of Ferrari compared Aston, within what has been a challenging macro environment. Ferrari has maintained business traction thanks to a mixture of glamour association and well orchestrated product pipeline.
Volume manufacturers' greater access to various funding sources and in-house R&D strengths have provided not only resurrection for what were once fading marques, but a truly tenable commercial path. Volkswagen (Lamborghini, Bentley, Bugatti and now Ducati motorcycles), Daimler (AMG), BMW (self-evolved M-Sport) and FIAT (nation-centric Ferrari & Maserati), all demonstrate the idiom. Yet the competitive playing field is set to become even harsher as resurgent Japanese manufacturers now seek to re-invent their past glories in order to 'move up the pricing and margins ladder'; with Honda (NSX) and possibly Toyota (2000GT) [itself a 1960s Bond movie star], and engineering-led Subaru seeking new sporting product segments via a Toyota JV small coupe project, having already interwoven WRC success into its brand.

Auto industry observers will rightly point to FIAT SpA's fiscal ability to provide critical protection of Ferrari and its willingness to continually fund road and private track car projects, new retailing projects like 'Atelier Ferrari' alongside its legendary Formula One programme; at the activist behest of Exor and Agnelli & C. Sapaz holding interets (via John Elkann et al).
Since the divorce from Ford, AML has no such deep-pocketed – and importantly technically assistive – patron, which can both inject liquidity and offer discounted engineering resource as required.

Yet, when the current AML led by Dr Ulrich Bez, was sold by Ford in 2007 to its present consortium owners – David Richards, John Sinders and Kuwait's Investment Dar and Adeem Investments (these sharing a similar BoD profile) – the company had been created to be effectively self-sustaining under the healthy economic conditions of the time.
The basic competitive needs being to evolve its 'modular' VH platform, to externally 'price' or internally 'splice' the electrical architecture from a VM or Tier 1 supplier, and the ability to rely upon (minority shareholder Ford's) Cologne engine plant for all important power-train supply continuity. All to ensure that unlike volatile supply experiences of the past, that the production stream of 21st century 'DB' and 'V' range of coupe and cabriolet cars, the (outsourced*) Rapide 4-door coupe , variant specials and the One-77 supercar, would be effectively self-determined.

[NB to overcome Gaydon capacity limitations and to better explore the manufacture of higher quantity aluminium structures, Rapide production was allocated to Magna Steyr in Graz, Austria; also contractors for the Mercedes-Benz SLS AMG].
To add more business model stability, the traditional sporting range was extended to include a new twist: the Cygnet city car – a radical departure for AML . The model itself an adaption of Toyota's iQ vehicle and intended to provide a critical “CAFE off-set” regards Corporate Average Fuel Efficiency of the AML product range, given ever more pressing western emissions regulations; aswell as a method by which to gain 'extensional sales' to both current and conquest clients, and importantly seeking to counter the expected loss of the larger and far more expensive car sales during recessionary times.

[NB investment-auto-motives previously stated that Cygnet should have ideally been released under the Lagonda marque. Though obviously £25-31k appears a notionally low-end price point for what is a re-born luxury brand, it reflects the product reality of comfort over performance, and so would have reflected a very different product and brand character 'chunky, comfortable and protective' which matches the luxury SUV dimension upon which Lagonda is set to operate, so providing better matched city and country cars for N.American, Middle Eastern, Asian and S.American buyers. However the decision to badge Cygnet as an Aston Martin was understandable in order to seemingly reduce public perceptional complexity during a critical period of expected cashflow reduction ].
Thus, from a manufacturing perspective at least, AML sets out a strong business template as the hard business lessons of history have been interwoven with operational aforethought. Giving a strong fundamental technical strategy base from which to develop later generation vehicles, and theoretically extolling the technical learning of the Aston Martin Racing (AMR) division to enable a vehicle systems technology trickle-down, so notionally aiding product performance and efficiency; with much marketing spin to bolster the brand.

But it is the competitive pace of product change by sector leaders which has created the greatest challenge for AML.
Whereas historically a niche volume sporting luxury vehicle maker such as Lamborghini or Porsche would have had a model life-cycle lasting near ten years before a wholly re-engineered replacement (and necessarily longer for true independent, such as the UK's AC Cars, Bristol Cars, Ginetta Cars, TVR Cars and of course Morgan Cars etc), the then small size of the marketplace meant that what is now regarded as aged model's innate status was able to quench the demands of a then very small market.

But the advent of an ever expanding global marketplace changed the playing-field dramatically, and whereas model longevity once had cache (eg Plus 4 or Blenheim) the 'new money' of a consumer-driven global market appeared to demand ever shorter and more prolific model replacement programmes, more akin to the 'planned obsolescence' of VM production. This was enabled by those “corporate-propped” major players such as Porsche and Ferrari that sought to leverage conglomerate abilities to underpin brand standing and income stream growth. Porsche sought to maintain platform longevity where possible, obviously with iterations of 911, but has adapted to the market where necessary to remain dominant, primarily via new model introductions and constant variant releases. Ferrari however, has used a near standardised 5/6/7 year replacement cycle for its major models since the early 1990s so as to lead the super-car pack.
Furthermore, AML product differentiation appears to have become as highlighted conundrum, well noted by a certain TV journalist about the DB9 and DBS models, but evoking general public perception. Though either series is marketed differently “sporting vs tourer” both sit inescapably within the GT mold with very similar body-forms, given DBS' creation from DB9. Invariably some consumers view as AML as seeking to squeeze “ever more blood from of a (DB) stone” in the search for per unit margin and company profitability. Value extraction from precious CapEx is very necessary, but the method of doing so is vital so as to retain client and public brand faith.

The different routes followed are seen in a quick comparison exercise: In 2011 Ferrari alone (excluding Maserati) sold 7,195 units compared to AML's reported 4,200 units. Critically, Ferrari-Maserati's Net Revenue in Q3 2012 alone was €89m (£72m), versus AML's £76.2 EBITDA for the whole of 2011; simplistically suggesting F-M to be approximately four times commercially stronger than AML.
The question is, “why such disparity between the two companies given their notional innate similarity”. The corporate patronage aspect has been mentioned, and is of major influence, but another aspect may well be regards the operational imbalance regards: company dividends.

Whilst unsupported by evidential fact, given limited access to company figures and the shallowness of this web-log piece, it may be likely the case that greater levels of shareholder dividend have been extracted from AML annually, thus reducing CapEx availability and operational reserves. The reason seemingly being that prime shareholders might support respective other automotive and non-automotive interests. If indeed the case, this of course is their prerogative, and presumably directs capital toward other 'value creation' enterprises inside and beyond the auto-sector; good for new start-ups and new employment. But if the case, may have an effect upon AML's year on year fiscal stability.
This is not to say that Ferrari-Maserati may not undergo a similar experience, it may simply be the fact that any extracted dividends proportionately above basic earnings are essentially replaced by FIAT Group's own divisional re-funding. A similar structural ownership and possible dividends pattern might also now be appearing within VW Group, as Porsche manufacturing is integrated and Porsche Holding is able to access and deploy its portion of overall VW group earnings to create a renewed investment-house ethos able to orchestrate tomorrow's technology-orientated enterprises.

[NB In the next web-log, investment-auto-motives will take a closer look at various VM shareholder structures with influential family and investor members, to ascertain probable and possible European and global industrial regeneration paths into the 21st century]
Assessing the “White Knight” Options for AML -

The following provides a scant review of the two prime contenders at this stage.
InvestIndustrial :

In its own words “with more than €3.0 billion of combined assets under management, Investindustrial is one of Europe's leading investment groups focused on taking control positions in Southern European medium size companies that are leaders in their fields. Our aim is to create long-term value by helping portfolio companies to accelerate international expansion and improve operational efficiency”.
This holding company's name is intentionally devoted to what are now seen as undervalued industrial assets; especially so the case given ongoing Mediterranean woes, the firm's targeted focus. However to date its portfolio reach has (and still) spans three arenas: a) Manufacturing, b) Services & Concessions, c) Consumer Retail & Leisure.

However, as the economic tide has turned from demand-led, credit-fuelled consumerism toward a new era of supply-led 're-industrialisation' it has exited (or “realised”) many of its former holdings, and appears to be 'next phase fundraising' with greater industrial bias, seen by the current scarcity of industrial holdings. The following lists shows retained vs sold interests as shown on its website (though may have not been updated):
Industrial Manufacturing....

Present: AEB Group (beverage & food services), Polynt (plastics)

Realised: Contenur (waste & containers), Italmatch Chemicals (chemicals), Johnson Radley (glass-making tools), Permasteelisa (steel sector), RTS (robotic technologies).

Services and Concessions....
Present: Banco Popolare di Milano regional banking), Applus (Engineering Testing & Construction), Cogetech (gaming sector), SNAI (gaming sector), Inaer (emergency helicopter services), TSC (ambulance services), Panda Security (IT software),
Realised: Eutelsat (satellite broadcasting), Logic Control (business software), Sirti (telecom & railway networks),
Consumer Retail and Leisure....

Present: Port Adventura (holiday), GruppoCoin (fashion apparel), Stroili Oro (retail outlets), Morris Perfume Holding (perfumary consolidation), Svenson (medical),
Realised: Ducati Motorcycles (sold to VW Group via Audi-Lamborghini division), Karrimor (adventure equipment), Mountain Warehouse (adventure equip retailer), GardaLand (theme-park), Care (Spanish nursing homes), Castaldi Illuminazione (architectural lighting), Recoletos (publishing), Ruffino (wine-making), Zero9 (branded various).

This then highlights Investindustrial's desire to re-balance its portfolio towards high-value manufacturing that broadens its geographic footprint. Interestingly the interest in AML runs counter to its usual / previous Mediterranean focus, unless it has an intent to relocate any possible low-value content to S.Europe. And the fact that it has representation in Switzerland, Luxembourg, Spain, UK, USA and China suggests that whilst S.Europe may provide possible 'cigarette butt' opportunities, its intent is far broader.
A proclamation has been made that it can leverage powerful synergies with Daimler's AMG division on behalf of AML, a compelling attraction for AML given its need to ideally amortise CapEx, RandD and production costs and so gain greater margins over the cost of capital.

A more likely possibility could is that Investindustrial would seek to effectively 'store and flip' AML, either to Daimler AG, or perhaps even to FIAT SpA, to conjoin with Ferrari-Maserati, and so substantially bolster the business case for Maserati, create shared volume with Ferrari GT cars, aswell as enabling mid-engined Aston Martin products, an ambition previously cancelled by the British firm.
Thus Investindustrial would have two apparent exit possibilities, as VMs themselves eventually regain strength and seek new acquisitions to bolster their own brand stables and competitive positions.

This seems the prime case, given that presently Investindustrial has no directly synergistic connections with AML (or indeed AMG) within its portfolio of companies.
[NB the very existence of the V12 Vantage 'Carbon Black' edition has intentional or not referential overtones with Mercedes Benz AMG Black series vehicles, whether to directly compete, or attract Daimler's attention, or probably both].

[NB In 2009 investment-auto-motives undertook an independent, proprietary study which concluded that the optimal route for securing AML's future was a JV with Daimler, other VMs at the time less suited to acquisition or merger given the paucity of funding and/or additional operational complexity].
Mahindra andMahindra:

MandM is a renowned name in India and across Asia, one of the world's biggest tractor producers, a manufacturer of utility 4x4s, micro and medium flat-bed trucks and hard-body trucks, and over the last decade a natural expansion into mainstream SUVs. Efforts to enter the mainstream Indian compact sedan car segment (vs TATA and others) more problematic as an attempted JV with Renault resulted in a short production run of CKD assembled Logan vehicles, many of which were directed toward the taxi market. And ambition to enter the highly competitive and high expectation US pick-up truck market, using a CKD entrance model, has rightly been indefinitely delayed given the likelihood of failure, aswell as arising legal complications cited by some N.American dealers. It also has a controlling stake in S.Korea's Ssangyong Motor (4x4s && SUVs) and the Indian EV producer REVA.
As quoted commentators have rightly stated over this week, there appears little innate overlap or mutuality between MandM Motors and AML, concerns that given rival TATA Motor's now successful ownership of Jaguar Land Rover, that an MandM bid may simply be to capture a 'trophy asset' to try and seemingly equal TATA. Such a move lacks any comparative accounting rationality, given the massive production capacity difference between the two firms, and presents little in the way of an immediately applicable technology transfer in either direction. MandM may see itself in a PR positive 'white knight' role, providing the necessary funding until Aston Martin (and Lagonda) obtains a better sales footing, and perhaps vitally by doing so earn favour with the UK government by which to ease the international ambitions of other Mahindra Group companies. These broader activities range across: vehicle components, (entry-level) motorcycles, energy generation, aero sector, defence sector, agricultural equipment, education, hospitality, IT, logistics, luxury boats, retail, sports, “lifespace” real estate and consulting.

Mahindra Group cites its worth at $15.9bn, operates in over 100 countries and employs more than 155,000 people.
So although no direct industrial synergies seem to exist between AML and MandM Motors, besides the radical and remote possibility of engineering an all-new hi-tech Mahindra sports car, or using AML as an exploratory R&D laboratory, any decision to try and purchase AML might be seemingly theoretically justified by assumptions that AML technology and know-how could be drip-fed into across the Motors division and into other hi-tech or potential hi-tech divisions such as aerospace, motorcycles, defence and boats; with perhaps an idea of marketing its luxury boats alongside Aston Martin cars.

However, another thought from investment-auto-motives is that MandM instead seeks to serve the Indian national good by ironically corroborating with its auto-sector peer. Thus – like Investindustrial – the rationale could be to 'store & flip' the company for latter-day sale to TATA Motor, so that it may eventually merge of AML with Jaguar Cars' operations (within JLR), an easy action given operational proximities at Gaydon and a very efficient method to both boost platform volumes on what are today dimensionally closely related low-mid volume sportscars.
This would increasingly de-couple AML from the original lower volume engineering methods utilised for the technically flexible (regards track and wheelbase) but costly 'VH modular' component set; itself a proportionate mix of aluminium and affordable composite. And allow manufacturing strategy to evolve along a path which allows it to encompasses (by niche model standards) a mid-volume output, developing the lessons learnt in the Rapide project. Aspects of the old 'VH' technologies perhaps only retained for the largest, halo-type products, which may or may not include the dedicated engineering solutions of the One-77 aluminium & carbon-fibre structure.

So for core vehicles, utilise a more conventional all aluminium monocoque type structure (with composite parts as required high price variants) for fabrication and assembly ease of higher output, developed in Rapide and adopted by Jaguar (and Land Rover / Range Rover). The British then, seeking to match the now well established business model of Porsche. Any eventual merger of AML and JLR would undoubtedly provide for a more robust rational for each brand to offer an efficiently produced 3-tier range using common platforms and technologies: (small) 'F'-Type and Vantage / (mid) 'XK-Type' and DB-series / (large) 'XX-Type' and Vanquish. It would allow for greater choice regards systems applications and provide for improved variant business modeling sensitivity.

This, investment-auto-motives believes, is the only rationally feasible raison d'etre for MandM. To appropriate knowledge-transfer and tech-transfer where possible during its ownership, and to when optimal, sell AML onto TATA – JLR. This a very powerful exit strategy given the assumed re-growth of the luxury sportscar market and rationalisation of AML's company and financial structure, thus presenting TATA's new incoming chairman Cyrus Mistry to seize a 'bolt-on' opportunity that directly advances Ratan Tata's efforts to date.
Conclusion -

Aston Martin Lagonda Ltd has undergone a massive transformation over the last two decades, taken as the 'English Patient' under Ford's wing, revitalised and put into new ownership under the highly regarded direction of Bez and phase-financed by Richards, Sinders and the financial muscle of Kuwaiti SWF companies.
The mid-point of the 2000s were by far AML's glory years, able to metaphorically and financially 'bank' the efforts that had been injected previously. The new consortium's purchase in 2007 was understood by investment-auto-motives at the time understood to be at valuation peak given the subtle creaking of the financial system a year before its eventual implosion.

That massive economic contraction obviously took a great toll on AML, but it sought to strive-on – whilst not regardless of the times, perhaps in an over-confident manner - with a seeming belief that the recession would resolve itself within the normal historical timeframe. That was never to be the case, far more a right-leaning 'W' or ''J' given the 'new norm' that had set in but not be wholly appreciated.

This then arguably meant that AML did not realise the level of fundamental change that had occurred, but recognised the ongoing need for business template development, so necessarily and imaginatively undertaking new efforts in customer service and merchandising, aswell a being daring enough to introduce the radical Cygnet. These were very good efforts by Dr Bez to diversify income streams so as to better balance the business model.
But they were as of then unproven and there was little way of understanding whether such efforts could effectively finance, or at least heavily contribute towards, ongoing expansionary plans such as the ambition of the world-class One-77 supercar. AML thought it could drive through the 'economic black ice' as long as the steering and 'foot-down' propulsion remained unaltered.

By 2009, investment-auto-motives had concerns about the cost impact and financial return of the One-77 project, given the then dire economic climate it appeared a vanity project, a late-comer to a fading party with Bugatti Veyron, McLaren-Mercedes SLR, et al, and drew an observational parallel to the likes of the loss-making Jaguar XJ220 created in the late 1980s. Unarguably a fantastic engineering achievement which blends F1-tech with craftsmanship, and so a wonderful collectors piece, with the realised ambition to match the brand and product benchmarks of Veyron, SLR and MP4-12C.

But at what true cost to the health of AML cashflow and its near-term balance sheet? The cash call now being seen undoubtedly has been hastened by that astounding but costly supercar exercise.

Aston Martin Lagonda now faces a very very different era, whilst it awaits an upturn in core vehicle demand and seeks to gain full RRP for its special editions, it seems that the very foundational structure of the company will need to be deeply assessed.

It appears that Investindustrial believes it can replay its Ducati success, pumping monies into product range expansion and distributor/dealer expansion, awaiting the eventual upturn.

Expectantly, investment-auto-motives believes that like a classic Aston Martin vehicle returned to Newport Pagnell for detailed inspection, sensitive repair and maintenance overhaul, that the very business structure of AML must fundamentally re-assessed – a review akin to the x-ray of an aluminium component. Altered as needed, if it is to commercially mimic the power of its legendary cars.

Investindustrial will hopefully seek to undertake such an exercise, for the long-term benefit of all: shareholders, management and staff, valued clients and the public alike.

Monday, 26 November 2012

Companies Focus – Global 11 VM Positioning – Q3 Coupled Ratios Analysis.

The previous weblog sought to highlight the use of ‘Coupled Ratios’ analysis.

A detailed yet still simplistic assessment methodology created by investment-auto-motives, which seeks to bridge the gap between the necessarily procedural and complex intelligence gathering of sell-side and buy-side analysts within the professional realm, and the oft limited appreciation of fundamentals analysis by the all too often indiscriminate private investor, who typically relies to a great extent upon belated news-stream information and/or (accumulated sub-conscious) instinct.

Application -

Having initially demonstrated the approach in June this year, with the prominent use of four distinct graphs - spanning a) Market Valuation Ratios, b) Profitability Ratios, c) Liquidity Ratios, and d) Debt Ratios – the intent of the last web-log was to illustrate how those VMs identified as theoretically ‘best positioned’ from that quantitative data, did indeed out-perform their auto-sector peers.

As seen, those were prominently: VW Group and Hyundai Motor, with relatively impressive share price rises over a very dour 6 month period for the sector, whilst an identified Renault saw limited share price damage compared to its international contemporaries.

Noted in the last web-log was FIAT SpA’s impressive valuation retention, thanks to both rebounding Chrysler sales within its N.A. home market and capital market sentiment buoyed by the ECB’s “backstop” QE announcement; so benefiting from dual tailwinds. FIAT-Chrysler's 'off-set' business model, and the assistance of US and European intervention, largely contrasting the fortunes of the 'recovering Japanese' and still 'domestic-centric French'.

March to September -             

General sector share price loss over this period was represented by an influx of negative readings within the bar chart, and manifestly described a dearth of market confidence in most auto-makers: all except for the few with a balanced global sales presence, the strongest of fundamentals and a fortunate mid-Atlantic centre of gravity.

For much of those six months most of the Global 11 automakers were still experiencing the aftermath of heavy physical and metaphorical storms, and whilst seeking to ready themselves for an eventual return to notional normality, were still highly cautious about over-promising to investors given the on-going ‘choppiness’ of the global economy.

Looking Forward -

This web-log seeks to revisit and re-deploy the ‘Coupled Ratios’ assessment method, by way of an updating of the four prime indicator graphs, and their respective ‘investment windows’, which provide an easy-read comparison between each VM.

The four established graphs displays both the previous Q1 position of each 'Global 11 VM' and each VM's present position using data obtained from various sources.

[NB. These are Capital IQ, Bloomberg, auto-makers' own IR reports, and where wholly unavailable modelled from previous H1 2012 data. It must be recognised that for obvious reasons the executives of various auto-makers have intentionally chosen to provide reduced levels of Q3 financial data where viewed as damaging, to even-out presented EoY performance over a cautious Q4, and for those best positioned to possibly provide for a positive FY2012 perceptional boost].

Findings -

These are presented in the established VM order of American, European, Japanese and Korean.

For the duration of this web-log, the accompanying respective chart (see top right) indicates both the previous Q1 position (company name) and the new Q3 based position (coloured roundel). Arrows of varying length show interim movement that has occurred. Where there has been no discernible movement the company name is shown with static symbols to either side.

Market Valuation Ratios:

GM (light blue) now sits at a P/E of 9.4 and P/B of 1.2, showing a substantial rise in its P/E rating from six months ago, as both the N.A. Economy and regional unit sales saw renewed confidence and traction mid year, boosted by trickle-down of QE liquidity into swelled credit availability for businesses and consumers.

Ford (dark blue) sits at a P/E of 8.6 and P/B of 2.1, its P/E raised substantially by much improved N.A. Earnings, though still marred by investor concerns regards the re-structuring of its European division, which Ford has since sought to quell with plant closures.

Volkswagen (grey) sits very stable with a P/E of 3.2 and P/B of 0.9, its solid positive performance provided from global footprint and broad vehicle range providing a balance-effect and immediately translated into an on-trend general share price rise, yet itself muted by the limited buying behaviour consequential from the restructuring of many European banks.

BMW (light green) sits at P/E 0f 9.0 and P/B of 1.4, the former indicator rising slightly as a probable result of pre-empting improved SME business conditions in the USA which provides a major sales base, the economic 'soft-landing' in China so maintaining sales traction with ongoing local factory CapEx and very probably assisted by domestic German equity buyers (institutional, commercial and private) buying 'safe' asset-backed, global-reach, and profit-stable German choices

Daimler (purple) sits at a P/E of 7.0 and P/B of 0.9, showing a valuation improvement in both measures as it becomes increasingly recognised that its broad vehicle range - spanning premium cars, light commercial vehicles, bus and coach and heavy goods vehicles – provides for a multi-aspect income boost as western economies slowly emerge from previous stagnation. Institutionals specifically recognising the deep levels of apparent CapEx Daimler has undertaken during the elongated downturn, and its efforts to better serve target sizeable small car and small van markets.

PSA (dark red) now sits at a P/E of effectively 0 and P/B of 0.1, highlighting its precarious finances, now seemingly underpinned by a E7bn loan to its finance division, which should feed liquidity through to both the core business and the consumer base, presumably to be alternately directed to create a virtuous demand circle. However, institutional investors seem yet to be convinced by the massive promised liquidity injection nor the 2015/16 rebound plan, including the GM alliance, seemingly awaiting a firm improvement in sales and income results.

Renault-Nissan (orange) sits at a P/E of 6.4 and P/B of 0.4, showing a slight strengthening of both indicators, very probably as a 'safer bet' consequence of PSA's woes. A previous valuation strengthening was seen during the period of ECB announcement optimism mid year, but dashed through Q3, now assisted by Nissan's expected sales improvement in the USA (given the North East's states' replacement effect from Hurricane Sandy) so buoying income.

FIAT-Chrysler (brown) sits at a P/E of 23.0 and P/B of 0.45. The former figure ostensibly highlights expectation of a much improved long-term tomorrow, having seen initially supportive US sales figures from Chrysler, the strong P/E presently pre-empting a long-term view of necessary European capacity restructuring and a strong sales flow ultimately derived from an increasingly synergised North America, South America and Europe, with the potential of an eventually expanded Eurozone market via western re-strengthening and new sales from commodities economies to the east of the Balkans.

Toyota (green) sits at a P/E of 14.8 and a P/B of 1.0, reflecting both a major improvement in earnings over the last few quarters, so reducing its relative P/E (having been at near 30) and the typically higher valuation metrics generated by an institutionally-heavy Japanese stock-market. But also the turnaround and 'new future' potential of Toyota (inc Lexus, Daihatsu and Hino) given its perceived massive technology lead with 'real-word' hybrid powertrain eco-tech, plus the expectation towards eco-intelligent transport and housing, core competences that Toyota has increasingly sought to weave together in Japan, seeking to export this capability across the world over the decades to come. So its seemingly high P/E valuation a result of a still optimistic Japan, domestically orientated local fund managers and the increasing interests of Asian funds (SWFs etc).

Honda (light red) sits at a P/E of 14.0 and a P/B of 1.0, with a similar story to Toyota (having been at a P/E of low 20s). Honda's dominance in motorcycles and domestic power generators is seen as a natural beneficiary from pan Asian growth, as bottom-tier consumers aspire to Honda 2-wheelers and new mid-tier consumers seek to aspire to 4-wheeled Honda vehicles, and power-packs becoming a household staple given the infrastructure-lag evident in fast growing communities. Thus ever since the legendary Honda Cub moped, the brand has retained close connection to Asia, but now must re-position itself vis a vis Toyota and other VMs in the west to maintain a clear product and eco-tech USP.

Hyundai (mid blue) sits at a P/E of 1.9 and a P/B of 0.3, and has effectively stayed static on both measures, a consequence of a positive climb in its GDR's in Europe and parallel confidence decline in the S.Korean KOSPI index over the same period; in which it is of course a major constituent. The emergence of the company's over-statement of fuel-efficiency figures had a momentary effect on sentiment but hardly displaces the perception that Hyundai, KIA and Genesis brands have increasingly strong credibility across the 3 all important regions of N.America, China and Europe, and will continue to build upon good standing within EM regions. As stated before, it is the general illiquidity of Hyundai Motor stock beyond the confines of Soeul and European bank GDR's which surpress broad market valuation.


As seen previously the 'investment window' seeks to deploy standardised demarkation lines where possible and elected demarkation to suit. However, the increasing availability of central bank enabled wholesale credit through a strengthening western banking systems prompts a widening of the investment window for Valuation Ratios. To this end the P/E indicator has been raised to 7.5, whilst the P/B indicator remains at 1.0; thereby reflecting funding conditions whilst also seeking to maintain a focus on theoretical 'under-price'.

As seen, the only remaining previous inhabitants of this window are Volkswagen, Hyundai and Renault (its P/E rise accompanied by the enlarged window). The markedly risen P/E of FIAT SpA has catapulted it out of the frame, whilst PSA's marked P/E decline positions it in the 'bottom-left' corner of near investor obscurity. (The converse argument being that as an increasingly eco-centric mass-market brand its strategic core competences and market valuation are diametrically opposed, so providing a good 'value-buy' story). Whilst previously on the border of the 'investment window' Daimler now sits fundamentally within the frame.

Thus on a valuation basis the auto-makers identified as most promising are: Volkwagen and Hyundai, followed by Daimler and Renault.

Profitability Ratios -

GM saw a profitability decline in Q3, from 5% profit margin and near 20% ROE to 3.8% and 13.2% respectively; thus falling away from investment window inclusion.

Ford likewise saw its performance fall even more dramatically from a 17% margin to 5%, with a lesser proportionate reduction in ROE to 140%, a consequence of the heavy asset-backed financing previously undertaken and being paid-down. Thus unlike its cross-town Detroit peer it just about stays within the required metrics.

Volkswagen appears to have enjoyed a remarkable 23% profit margin for Q3, yet it is a figure that was not explicitly stated in reporting, possibly arising from a negotiated 'profits taxation holiday' to support German industry. It will therefore possibly to provide an EoY surprise for investors, or allow a cushioning of any Q4 under-performance, and critically provides ongoing investment impetus for the institutional investment community (Germany especially so). Its ROE remained stable at 32%. This provides a clear boost to its leadership position at this point in time, though unexpected to be repeated in the near future.

BMW retained its 7% profit margin whilst seeing a decline in its ROE to 10.8% from near 20%. Thus

Daimler saw its profit margin reduced to 4.2% from 6% previously, and its ROE fall from 16% to 14.3%, so re-positioned just outside of the “investment window”.

PSA experienced a profit margin drop to -1.8% from 1%, and ROE drop to -5.8% from 6%, plainly highlighting its commercial and industrial concerns.

Renault-Nissan saw a profit margin fall to 3.8% from 5%, and an ROE fall to 6.9% from 8.5%, its greater non-EU market exposure via Nissan, Renault and Dacia brands providing the ability to sit close to but still beyond the investment frame.

FIAT SpA saw a notable decline in its performance in Q3, with a 1.4% profit margin from a previous 3% and 10.4% ROE from previous 20%. So propelled yet further from optimal investment ground; lower than all except the tortured PSA.

Toyota saw its placing improve, profit margin pulling strongly to 4.8% from approximately 2% and ROE raised to 8% from about 4%, assisted by the post-Fukushima replacement business and consumer purchasing, an FX declined Yen and upturn in NA sales.

Honda saw its profit margin grow but at a far slower pace than Toyota, up by 1% to 4.4%, and its ROE similarly rise to 7.9% from 6.5%.

Hyundai remained relatively static but strong with a 9.1% profit margin, down from its 'normative' 10% or so, and a ROE of 23.75%; spot-lighting its continued investment rational.


From the all important profitability perspective, there were clear sets of winners and losers. Volkswagen, Hyundai, BMW and Ford remained within the investment arena, whilst Daimler dropped just beyond the fringes.

The Japanese demonstrated an expected profitability rebound, heading back towards the 'window' whilst the remaining set, with FIAT stumbling in Q3 and PSA showing obvious heavy faltering.

Liquidity Ratios -

GM saw its liquidity substantially contract from a Operating Cash Flow measure of near 0.8 to 0.01, whilst its Current Ratio shrank slightly to 1.25, highlighting

Ford experienced a heavy liquidity loss, with Op C-F diminishing from 0.1 to 0.026, whilst driving down its liabilities to give a Current Ratio of 1.9, theoretically inefficient but providing a sound re-financing safety net for itself if at all necessary.

Volkswagen shrank its Op C-F to 0.06 from 0.1, whilst also seeing a reduced Current Ratio from 1.2 to 1.1.; a portion of the cash-flow possibility directed to bottom-line profit.

BMW saw its Op C-F reduced to 0.025 from 1.0, and its Current Ratio fall from 1.3 to 1.0.

Daimler stayed effectively static, with a bare minimum Op C-F of 0.003 and Current Ratio of 1.27.

PSA maintained a Current Ratio of 1.0 but saw Op C-F distorted to a lowly -0.006.

Renault-Nissan saw its Op C-F reduced to 0.043, whilst it retained a Current Ratio of 1.0.

FIAT-Chrysler experienced an Op C-F of 0.05, down from 0.2, and a Current Ratio of 1.4 from 1.6.

Toyota saw its Op C-F decrease to 0.065 from 0.15, and Current Ratio of 1.0 from a previous 1.2.

Honda had its Op C- fall to 0.024 from 0.18 and its Current Ratio of fall to 1.3 from 1.5

Hyundai Op C-F reduced to 0.046 from 0.13, and Current Ratio swell to 1.6 from 0.8.


Most auto-makers saw a heavy cash burn through the Q3 period as vehicle demand tailed-off from previous period highs, though for the lucky few, some of that Op C-F loss may have been appropriated toward either inward investment (seemingly so with Daimler) or toward boosted profits (as appears the case with Volkswagen)

However, no VM appears in the “investment window”. The closest players being Volkswagen and Toyota, who are closely jointly placed with 'best-in-class Op C-F of 0.06 and optimal Current Ratio of 1.0.

Debt Ratios -

GM has a much improved cash cushion of $37.5 and overall debt position of $113bn (although its highlights a lower mid-term debt obligation of $43.1bn). This now gives a general overall measure of 1 : 3 cash to deb, much removed from its previous apparent 1 : 1 position as then calculated.

Ford has cash of $24.1bn and debt of $26.4 (although states a mid-term obligation of $14.2). An impressive measure then of 1 : 1.1. This then equates to an apparent major debt reduction programme and increase in cash reserves.

Volkswagen remains largely static, showing gross cash of E25.7bn and debt E82.5bn, giving 1 : 3.2

BMW has cash of E13bn and overall debt of E102bn, thus 1 : 7.8. It saw both cash and debt levels rise by approximately 30% and 25% respectively

Daimler shows gross cash of E16.3bn and gross debt of 121.2bn, thus 1 : 7.4

PSA has liquidity of of E11.5 (largely government funded) and debt of E33.76, so 1 : 2.9

Renault-Nissan shows E7.5 cash and E51.3 debt, thus 1 : 6.84

FIAT-Chrysler stays generally 'in-situ', it has cash of E17.1bn and debt of E26.8bn, thus 1 : 1.56, a surprisingly good relative position.

Toyota with $39bn cash and $149 debt shows a major cash influx and slightly reduced debt level; its measure now 1 : 3.82

Honda remains generally stable with $12.5bn cash and $51bn debt; thus 1 : 4.

Hyundai stays relatively static with E13.42 cash and E31.8 debt

Results :

The order of cash to debt strength within the “investment window” is as follows: Ford best placed, a surprising FIAT second, Hyundai third, VW fourth, a “bailed-out” PSA fifth, Toyota sixth and lastly Honda seventh on the fringe.

Conclusion -

Category leaders are seen to be:

Valuation Ratios : Volkswagen, Hyundai, Renault

Profitability Ratios: Volkswagen, Hyundai, BMW & Ford / Daimler close to fringe.

Liquidity Ratios: No absolute leaders / VW and Toyota best placed.

Debt Ratios: Ford, FIAT, Hyundai, VW, PSA, Toyota & Honda

Consistent Appearance: Volkswagen (four times) & Hyundai (three times)

The onward positive strides of Volkswagen Group (now incorporating Porsche) and Hyundai (with conglomerate leverage and restructuring Korean industrial base) looks set to remain. Still set apart from other manufacturers regards the all important – and ironically obviously contrasting – indicators of valuation vs profit.

These 2 players then still stand head and shoulders above others; but the remainder of the VM pack is slowly improving.

The overall picture of the short and mid-term future then is not quite as clear-cut as it has been in recent times. The remaining German companies BMW and Daimler seek to defending profits and so may close the emerged gap between VW and themselves. The French firms of Renault and PSA are able to respectively pry 'value seeking' and 'brave turnaround' investor interest based upon deflated and 'market hammered' valuations and new liquidity availability. A Japanese resurgence by Toyota and Honda, assisted by a much weakened Yen provides confidence in their ability to repatriate the rewards of re-conquered US sales. But they will vie against a newly invigorated Detroit 'Big 3' with reduced immediate debts and public favour on-side within what seems a newly confident USA.

All auto-makers perceive what may be described as cautious optimism for the mid-term global economy and reduced concerns about an ever-lasting Eurozone drag stalling other regional economies.

Yet ironically, “outside the box” of the theorectical “investment window”, it could be FIAT SpA which once again provides a share price upturn, as possible speculators seek to beat the crowd so creating a possible self fulfilling pull, the same even possible of PSA.

But for now the risk averse will stick to the proven pack leaders and the improving middle pack; with the brave alpha seeking speculator looking to apparent stragglers with turnaround promise.

Post Script -

Whilst TATA Motors is indeed listed on Indian bourses and the NYSE, and has in recent times provided ever greater transparency regards sales, income and bottom-line performance of its Jaguar Land Rover division – itself with global reach – the fact that TATA badged vehicles do not as of yet enjoy global recognition by the public outside of India provides the rationale for omitting TATA Motors from the “Global VM” listing.

As and when TATA seeks to relinquish a partial sale of JLR via an IPO (on world exchange(s) outside of India), it will expand the current 11 VMs into a “Global 12”. The recent Credit Suisse event of 07.11.2012 highlighting the ongoing IR effort, further having seen an over-subscribed £1bn raised privately in May 2011 via 2018 & 2021 notes targeted at Indian and Asian buyers. However, it must also be stated that TATA Motors may wish to understandably raise the required JLR expansion capital by offering fixed income instruments to institutional investors, thereby avoiding a stock dilution, though those same institutionals may positively seek a JLR equity holding, given lowered risk-adversity anxiety amongst their own pension fund trustee clients. Though, the much improved liquidity available in Western bond markets, still available at low coupon rates, raises the prospect that a JLR IPO could be some time away, depending upon the growing appearance of recent “institutional activism”.

Friday, 9 November 2012

Companies Focus – Global 11 VM Positioning – Revisiting Coupled Ratio Assessment

Investment analysis can range from the most simplistic 'rule of thumb' measures to the most complex of analytical methodologies. The spectrum of course spans top-down interpretation of the 'macro' that so heavily guides 'Event-driven' funds to the bottom-up 'micro' in which the financial fundamentals of company accounts play such an important role.

The macro tends to speak for itself, the obviousness of news reports from the outbreak of wars to environmental disasters (ie Hurricane Sandy) directing the general investment sentiment of many investor types into commercial sectors which will very probably directly and indirectly benefit from such happenings.

Interpretation of the 'fundamentals', whilst undoubtedly understood by individual private investors in its shallower waters who have spent years examining capital markets, understandably tends to be the remit of specialists when it comes to delving into its deeper waters; a numbers based science or artform which itself can become ultimately inadvertently problematic taken to extremes when seeking 'holy grail' methods.

Thus, whilst economic theory once upon a time posited capital markets as 'efficient systems' (EMH etc) the fact that such a disparate range of analysis methods are applied by a multitude of investment actors with varying informational access and behaviours, means that the market itself is never truly an efficient mechanism; hence the very idea of arbitrage.

Yet undoubtedly, thanks to a mixture of personal web access, ever improving (obviously commercially driven) informational availability and an immense lost public trust in 'faceless' pension/asset management schemes, those people fortunate enough to have a middling to good income are becoming more self-involved regards how to best invest what is today very precious personal finance.

Slowly, but progressively, the chasm between 'public' and 'professional' worlds is shrinking, and as the individual takes greater interest and responsibility in moulding his/her financial future, so far greater two-way mutuality evolves between individuals and institutions.

To better enable individuals and institutions alike, simple yet powerful investment methods must be created. With this ambition in mind, in mid 2012 investment-auto-motives (ie Turan Ahmed) sought to combine some of the prime individual, standard valuation metrics so as to create the tool of 'Coupled Ratios'.

In Addition To Given Practice -

This method may be viewed as a natural evolutionary development of normative practice, whereby a greater level of investment criteria may be mapped, and thus an expansion of what is typically reductive calculations - such as P/E, PEG the EV/EBITDA measure – and critically seeks to visually map the plotted results to provide better analytical comparison.

The Use of Coupled Ratios -

This is little more than a common sense manner by which to picture the 'investment standing' of publicly listed companies, using basic intelligence to plot the performance and financial fundamentals of a corporation vis a vis sector competitors – in this instance for the automotive industry – presented graphically for far easier interpretation and investment guidance.

The four (x,y) graphs previously shown presented :

1. Market Valuation Ratios :
Price / Earnings vs Price / Book

2. Profitability Ratios :
Profit Margin % vs Return on Equity %

3. Liquidity Ratios :
Current Ratio vs Operational Cash-Flow Ratio

4 Debt Ratios :
Total Cash vs Total Debt

[NB Though various metrics are available, only the most basic/popular used].

Each of these graphs contains what may be described as an optimal theoretical 'investment window' which provides basic guidance regards those best positioned companies.

Previous Global 11 VM Standing Q1 2012 -

Before viewing the present-day positions of the 'Global 11' volume vehicle manufacturers, relative to their Q3 2012 results - as will be conveyed in the following web-log - it is well worth re-visiting the results of the previous exercise from Q1 2012, so that the general picture may be formed as to how each company has faired / performed.

Results -

It was clear from the previous weblog that of the 11 VMs, only Volkswagen and Hyundai were able to present a sound investment case based on the 'basic' (yet simplistically sound) view that married the micro-perspective of P/E with the macro-perspective of global PESTEL conditions.

To recap that commentary:

"As regards Market Valuation, Daimler, GM show themselves as reflecting fully “priced in” market valuations by virtue of their P/E and P/B standing. their share-price being at or marginally over respective book-value. BMW sits higher still whilst Honda and Toyota sat in the metaphoric stratosphere. All these then essentially rely upon future earnings growth to maintain and grow share-price. Conversely VW, FIAT, Renault, PSA and Hyundai were increasingly under their book values, reflecting what a mixture of constrained investment liquidity for all – taking a specific toll on VW - and the severe concern about the time it will take to see French and Italian manufacturers rebound, whilst the S.Korean producer is seen to sit at a lowly price because it has been overlooked on the Xetra exchange because it is only accessible by GDR / EDR. Hence the two that stand out as probable opportunities are VW and Hyundai.

As regards Profitability, VW and Hyundai were clear winners offering 10% EBITDA and 20%+ RoE. BMW and Daimler maintained the mid-ground with 6-7% EBITDA and 15-20% RoE. GM offered 5% EBITDA with approximately 20% RoE, whilst Renault gave 5% EBITDA with approximately 10% RoE. The remaining companies fell well below the 5% demarkation. Level.

As regards Liquidity, it was Toyota that sat in an optimum position (well inside the investment window, whilst Renault, VW, BMW, Ford and Honda sat on the fringe in descending order of attractiveness. GM and FIAT showed extremely good cashflow rates, but these are viewed as a temporarily anomaly created by cash boosts incurred from GM's re-birth 'sweet-spot' and FIAT's deferred CapEx demands. Though diversely positioned both Daimler and Hyundai appear less attractive on a liquidity basis because of CapEx investments, Daimler especially so making use of the global downturn to heavily return cashflow into the business. Whilst PSA's standing is a direct result of local sales contraction.

As regards Debt, GM stood positively apart from its peers, well within the assigned 1:1 area. FIAT was the only firm to sit within the 1:2 area. Hyundai and VW sat within the 1:3 area. Honda and Renault sat within the 1:4 area. Ford sat just outside but effectively on the fringe of 1:4. Toyota, Daimler, BMW and PSA all sat well outside this specific determinant area".

Criteria Winners -

Market Valuation : Hyundai and VW
Profitability : VW and Hyundai
Liquidity : Toyota
Debt : GM
'Window' Consistency: VW and Renault

Performance -

By virtue of the exercise, these four companies were deemed best in class amongst the Global 11.

A review of share price performance in the 6 month period between 31st March and 31st September, so encompassing Q1 – Q3 (prior to latter's reporting), allows us to gauge the efficacy of the exercise.

GM -
$25.65 to $23.09
Loss of 10% across the period
(low of $18.80 on 25th July)

Ford -
$12.48 to $9.86
Loss of 21% across the period
(low of $8.92 on 2nd August)

VW Group –
E120.90 to E130.50
Gain of 8% across the period
(low of E109.65 on 23rd April)

BMW Group -
E67.43 to E56.91
Loss of 15% across the period
(low of E53.70 on 26th June)

Daimler -
E45.21 to E37.67
Loss of 16% across the period
(low of E33.40 on 26th June)

E4.35 to E4.16
Loss of 4% across the period
(low of E3.29 on 9th May)

Renault -
E39.53 to E36.52
Loss of 7% across the period
(low of 29.54 on 26th June)

E12.08 to $6.15
Loss of 50% across the period
(low of E5.74 on 5th September)

Toyota -
$86.82 to $76.51
Loss of 12% across the period
(low of $72.51 on 25th July)

Honda -
$38.43 to E30.90
Loss of 19% across the period
(low of $30.21 1st August)

Hyundai -
E22.95 to E24.98
Gain of 9% across the period
(low of E22.10 on 5th November)

An accompanying graphic to this web-log displays a simple bar graph highlighting company share performance.

Conclusion -

As can now be clearly seen, the 'coupled ratio' exercise highlighted VW and Hyundai as the dominant names relative to two of the four criteria: Market Valuation and Profitability, and their respective 8% and 9% share price improvement between Q1 and Q3 highlights the market's highly positive attitude toward these dominant investment players.

The other two criteria placed named respectively for Liquidity and Debt were Toyota and GM, and whilst these two companies saw share price declines they were at a lesser level than many peers at -12% and -10% respectively. However, it must be noted that these two identified players were in fact beaten by FIAT with -4% and Renault with -7%.

It should be seen that Renault (along with VW) appeared most consistently within the 'investment windows' shown in the exercise, so its relative 'low loss' performance, amongst the 9 fallers should be expected.

Of particular note is the better than analytically gauged performance of FIAT during the period, showing the smallest loss. This because of generally upbeat market macro sentiment relative to its positive North American exposure via Chrysler, the technocratic budget management of the Italian economy and the expectancy of the OMT liquidity boost across the EU.

To conclude, whilst the 'coupled ratios' exercise proved most useful in spotting powerful share price performers and least loss performers, it must be recognised that ultimately the right balance must be struck between 'bottom-up', 'fundamentals', 'micro' analysis and 'top-down', 'macro' analysis.

Whilst they must be viewed in unison, each will at various points in the broad economic cycle, ultimately take greater precedence over the other relative to the general investor mindset. Obviously, the 'macro-mindset' more dominant during socio-politically sensitive times such as the last 5 years, and the 'micro-mindset' more so as economic stabilisation improves and the competitive capabilities of the single firm becomes more prescient.

To Follow -

Having mapped out each of the Global 11 VM positions for Q1 2012, the next investment-auto-motive web-log will undertake the exercise once again based upon Q3 financial data to see how each stands today.

Friday, 26 October 2012

Micro Level Trends – The London Black Cab – Britain 0, Germany 1.

During a week that saw the British legend James Bond brought back to the world's cinema screens, it was sad to see the apparent imminent demise of a very real British icon: the London Black Cab.

The vehicle has been virtual time-capsule which interlinks the economic psycho-geographies of Bond Street and Threadneedle Street, it crosses numerous decades, and played a prominent role during the closing ceremony of this year's Olympics.

However, in direct contrast to that celebration, recent news has come that the vehicle's principle manufacturer and manufacturing licensor, Manganese Bronze Holdings plc, with a workforce of 288 people, has been forced to call in PricewaterhouseCoopers, to act as the administrators; having failed to elicit necessary re-structuring finance from China's Geely, a JV partner.

Presently it seems that unless PwC can find an optimal direct restructuring and recapitalisation route (best for all concerned, including remaining shareholders), a likely outcome would be the more advantageous 'packaged liquidation' (for any buyer and employees) versus at worst, a fire-sale of remaining company assets.

[NB Physical assets have dwindled over the years as MBH sought to gain liquidity and run lean, with sale and lease-back of its HQ property the prime example. Today it seems that 'goodwill' elements such as trading name and vehicle design & tooling are prime valuation determinants, along with usual inventory, (a costly £3.9m and accounting erred) IT system and miscellaneous].

The suspended share price today, near the end of 2012, now languishes at 10p.

(MarketCap context: end '08 = 600p, end '09 = 90p, end '10 = 100p, end '11 = 75p)

Background -

Manganese Bronze built a business that spans the prime areas of vehicle manufacturer, vehicle retail and vehicle maintenance. Most activities are undertaken under the trading name of the London Taxi Company.

LTC itself consists of 3 divisions:

1. Vehicle Sales - including design, development, assembly and retail [new and part exchanged]
2. Vehicle Services – primarily provision of finance
3. Shanghai LTI – manufacturing and sales JV with China's Geely Auto
(of which Lloyds Banking Group holds 48%)

Whilst 1. and 2. have been essentially continuance of 'business as usual' in the UK, it was company investors that initially pushed for creation of the 3. viewing the international high regard for the classic London cab as both an exportable item (from 'commodity' to 'idiosyncratic' relative to region) as well as recognising the obvious need to reduce the impact of invariably high UK assembly costs, for what is a high labour content vehicle.

The Recent Past -

The 2008 financial crisis had an immediate and to date long-lasting effect upon the fortunes of MBH, given the massive deflation of what to then had been strong demand buoyancy from its customers – large and medium sized fleet operators and single owner-operators – who themselves heavily relied upon corporate and personal fares from those within London's financial and support sectors.

Recognising the fragility of the company at the time, and so as to strengthen the strategic mutual interests of the Anglo-Sino relationship, October 2008 saw previous talks with Geely Auto culminate in the sale of near 20% in MBH to the Shanghai based vehicle manufacturer, at a stock price in the region of 600p

This was in effect done to underpin the financing structure of the company, to try and ensure greater stability and reduced pressure on what was likely as a downward trend of free-float trading.

Increasingly Dire Straits -

That assisted for a short time, but as earnings results faltered year on year the ever present 'eyes of the market' narrowed to a contemplative and increasingly cynical squint, thus ongoing pressure seeing the general share price drop from

A view of corporate fundamentals illustrates the condition of very poor health. The share price of the 30 million registered share float was suspended from market trading when the announcement was made, done so at a price of 10p. This obviously gives a Market Capitalisation of approximately £3 million, a pitiful sum.

Expected Stumble...of Sorts -

For some years those drivers and operators 'at the coal face' recognised an increasing failure of LTC product quality, with increasing levels of “things gone wrong”. With an ever present eye upon UK auto manufacture, conversations between investment-auto-motives and rank-parked cab drivers highlighted an ever-present, yet critically increasing, dissatisfaction with LTC; as serious and less serious vehicle problems spanning engine, gearbox and ancillaries, prior to the latest issue of the steering box which required a product recall of 400 cabs.

[NB it is understood by investment-auto-motives that the steering box issue is not immediately dangerous, the box is understood as a conventional hydraulically assisted mechanical link, with simply loss of hydraulic power assistance; able to operate unassisted].

Whilst a good portion of that driver dissatisfaction is directly due to MBH/LTC''s component and service failures, it must be recognised that driver disaffection was heightened by an inability to earn during a more economically troublesome 2012.

Nevertheless, it was felt - real or perceived - that the later TX models had become less reliable, drivers 'off the road' for longer periods, which they felt was attributable to diminishing product quality between TX2 and TX4, a less enjoyable ownership experience and critically their business costs. Thus some 'cabbies' viewed the competitive position of MBH/LTC as increasingly tenuous, from a ground floor perspective.

The Economic Squeeze -

It seems a viscous circle once again emerged between LTC and operator owners, whereby problem vehicles required more replaced parts, necessitated longer time by service technicians and so saw a hike in both parts replacement costs and associated labour costs, both of which incurred VAT.

Of course it is almost an expected truism – though morally wrong – that during lean economic times both distributor associated dealers and independent garages will seek to stretch-out repair and servicing jobs for their own financial benefit. But by far the greatest impact has been the stalling economy which since 2008 has meant the unfortunate appearance of a vicious downward economic spiral affecting all levels of the inter-linked service and industry value chain.

The cracks first appeared in 2008 when recognising the very fragile near term picture, and likelihood of mid term depleted new vehicle sales, MBH sought to operationally redress the downturn. That obvious forecast was realised, with the annual new vehicle sales rate diminished as follows:

2008 = 1,900 units approx.
2009 = 1,700 units approx.
2010 = 1,650 units approx.
2011 = 1,500 units approx.

Positive Company Reaction -

In order to try and achieve the prime necessity of reducing per unit losses, ensure Coventry's manufacturing activities and ultimately 'balancing the books', it was necessary that new component sourcing efforts were undertaken, seeking to obtain lower value items (typically pressed and casting produced mechanicals) from those China located companies that had been involved in the ramp-up of TX4 production in Shanghai, many of whom themselves had been awarded ISO 9000 quality awards, or recognised Chinese equivalents.

Thus the MBH Board and managers invariably leveraged the immediate opportunities available to them, so as to reduce manufacturing costs and so try maintain stable though low level margins in the face of ever growing product competition in the UK Hackney Carriage segment.

So as seen, strategically and operationally the company under increasing commercial pressure manoeuvred as necessary, seeking to continue to serve its customers and temper the grievances of increasingly fraught shareholders that had seen the value of their holdings effectively plummet.

That battle to overcome macro and micro headwinds, had up until recently been well fought, though “far from out of the woods”.

2010 vs 2011 Results -

MBH appears to have necessarily frozen the IR portion of its website – responding to regulatory needs - thus there is an inability to access and read the quarterly / bi-annual / annual earnings releases over the years.

However basic figures available via other sources show the following business pick-up between 2010 and 2011 as manufacturing cost savings and a 'sweated' Service division were off-setting the loss new vehicle sales:

FY2010 vs FY 2011

Group Revenue: £75m vs £69,6m (+7.8%)
Operating Loss: £1.3m vs £1.9m (+31%) [exc special items]
Finance Costs: £0.8m vs £0.9m (+8%)
EBIT: £-2.6m vs £-6.3m (+58%)
EPS: -9.95p vs -18.19p
Net Debt: £8.9m vs £14.4m (+38.2%)

[NB an exceptional restructuring cost of £-3.5m was incurred for 2010]

Hence indications of new momentum.

Q1 2012 Corporate Update -

The beginning of the year showed renewed strength within the enterprise, with the Q1 results and investor presentation depicting:

- Record export sales in 2011 of 705 units vs 2010 of 226 units
(500 units shipped to Azerbaijan in February)
- Sales of new vehicles in London rose 4% YoY (1,074 vs 1,034)
- Sales of new vehicles across UK declined -31% (428 vs 619)
- UK Group operating loss much reduced (£-377k vs £-2m) (exc JV income)
- Cash generation of £7.1m (£7.7m used in 2010)


- Continued JV development of TX4
- Continue TXn 'global taxi' development
- Identify further JV opportunities
(ie international order book)


- Stabalised financial position
- (Critical) extended credit terms by Geely Auto.
- Sluggish London sales expect boost from new TfL regulations
- Launch of new Euro V compliant vehicle
- Interim agreement signed regards LTC support of Geely Cars UK introduction
- 'After tough years, company well positioned with Geely' (paraphrased)

Miscreant Accounting -

However, for all the good work seen on renewed foundations, it has been the reported issue of accounting 'oversight', an oversight estimated at £3.9m incurred on IT systems procurement and maintenance, that has now heavily undermined the balance sheet and cash-flow position of MBH.

Whilst CEO John Russell tries to best manage this newly arrived blow, press reports indicate that the ultimate blame is being accorded to the finance function and invariably CFO Peter Johansen, perhaps along with the external auditors Grant Thornton UK, if reported as audited accounts.

From this week onwards there will no doubt be a near forensic focus on previous reporting and management accounts between PwC and GT.

The prime concern for MBH and its shareholders and creditors, financiers and suppliers, yet more so for a potential company buyer, is exactly what effect the outcome of an investigation might have.

Critically, whether the £3.9m sunk into IT systems can actually be viewed as providing substantial competitive advantage, so truly value generative, in better connecting those core aspects of the internal value chain and associated supporting activities.

If viewed as such, it would add to a much improved valuation of 'intangibles' which could be effectively re-booked to the long-term assets portion of the balance sheet.

(The art of interpretation always a moot topic in the compilation of accounts!)

Intensified Stricken Position -

As important, the company's executives, external stakeholders and any new buyer( will be very much aware of the intensified competition which has come to pass within the black cab sector over the last decade.

With the ability to offer high general functionality and improved running costs, small, midi and large passenger vans have over the last 10 years taken an ever increasingly large slice of the general mini-cab market across London and the UK, increasingly replacing saloon cars, estate cars and older suburban run FX series and TX series black cabs during the early 2000s.

But for those higher-value 24 hour city-centre applications, typically overseen by the Public Carriage Office, the fact that the iconic black cab had been designed to fulfil the demanding criteria of 'Hackney Carriage' regulations had for a seeming eon given it effective protection against the less agile standard production vehicle.

That was the case up until the last 5 years or so.

In a bid to create greater competition, add what was viewed as greater fairness, and dismantle what was by many seen as a closed-shop approach to gaining and running a black-cab licence, the unified operating agency that is Transport for London (TfL) sought to slowly deregulate the sector.

This was first seen with a more lassez-faire attitude toward mini-cabs, itself leveraged through the creation of TfL regulated and approved taxis which themselves were typically black coloured mid-sized people carriers; so a hybrid of mini-cab and classic black-cab.

Thus, TfL and the PCO started to dismantle what had been historically fervent protectionist walls against other vehicle types ostensibly produced by foreign manufacturers which tended to utilise associated vehicle converters located within the UK.

[NB European harmonisation of taxi type vehicle regulations provides an incentive for major vehicle manufacturers to create central in-house modification centres,as opposed to deploying country by country specialist adaption companies to befit local needs].

So for years those others had well recognised the their inability to access the profitable black cab trade, and had feared the waste of investment costs necessary to modify a standard vehicle to meet PCO regulations – the greatest issue being that of the required turning circle radius – to 'U' turn in what are narrow olde London streets.

But the opportunity to grasp a slice of the official 'Ply for Hire' sector, operated by “The Knowledge” qualified “Green Badge” holders proved very tempting. And so gradually headway has been made by others.

Most notably Daimler with its Vito M8 model.

The Black Cab Market -

Very basic web research indicates that London's black cab 'car parc' (by far the biggest in the UK) is approximately 23,000 vehicles, out of approximately 25,000 nationwide. (Of these 23,000, about 12,000 are in use midweek afternoons).

It is understood that the TX series holds 93% of the 'orange lamp' taxi population and the Vito 6% (remaining being older MetroCabs). The standard TX4 black cab presently costs about £31,000 (actually £29,150 or 32,15), versus approximately £34,000 for the modified Vito.

[NB The distributors of Vito (via H1 2012 reporting) cite TfL data that indicates that the vito has taken 38% of all new taxi sales, presumably spanning all taxi types not simply 'pure' black cab].

Two approaches may be used to gauge the market value: producer intelligence and car parc intelligence.

Regards the former, MBH has traditionally produced about 2,500 vehicles per annum, as mentioned, the downturn seeing that fall to 1,900 units in 2009 and 1,500 in 2011. Thus in the present mid term 'new norm' it could be assumed that average annual demand of TX vehicle is about 1,700. This rate alone is worth £52,700,000 . At the old norm rate of 2,500 worth £77,500,000.

However, looking at broader 'car parc' renewal, it is assumed that a vehicle is replaced on average every 5 years (though actually between 4 and 6 years depending on reliability, mileage, financing structure and operator type). These used vehicles sold-off to other UK regions, whilst a small portion of far older FX series vehicles remain run by enthusiast drivers as 'originals'. The Euro 5 emissions regulations thus hasten and assist that renewal rate.

With a car parc of 21,000, a 5 year renewal rate starting as of 2013, it indicates a theorectical annual demand rate of about 4,200 units. Using present TX pricing alone, that indicates a theoretical annual market value is £130,200,000.

[NB However, the Mercedes Vito retails at approximately £34,000 and could be viewed as the new benchmark for a next generation vehicle which offers improved running costs, and arguably better residual values].

Furthermore, the Mayor of London's office set-down requirements that no vehicle over 15 years old would be allowed to remain, given that a reported 20% of PM10 classified air pollution derived from taxi tail-pipes.

Little wonder then that Mercedes and others such as Nissan, with far better eco credentials, wish to make headway into the London and UK Hackney Carriage arena, at the trough of a new economic cycle, and start of a new green era, and critically, especially so during a period when private and fleet car sales in Europe have slowed.

The New Entrants -

As seen, over the last decade growing recognition that TfL was practically changing and 'opening-up' that previous 'closed shop' culture gave far greater confidence to those on the 'outside', as long as they could meet the necessary vehicle functionality demands set in place for very good reason to aid the public and drivers alike.

As noted, the greatest response has undoubtedly come from Daimler via adaptation of the the Mercedes-Benz Vito passenger van, itself a 6 passenger seater, thus providing greater seating capacity than the 5 seater TX4 series. It is produced in the Basque area of Spain and in special London taxi guise uses a rear axle unit licensed from the specialist engineering company One80.

It gained PCO accreditation in 2008,and has since been sold via a subsidiary of Eco City Vehicles plc (an AIM listed company) called KPM-UK.

To enable accordance to PCO turning circle standards, the Vito has been fitted with 'rear steer' modification thus making what were normal uni-directional fixed rear wheels multi-directional, the rear steer only activated when manoeuvring at low speeds. That was

But now the TX and so MBH/LTC is under even more direct attacked from Japan and even the US.

The Nissan NV200 small van was showcased in August 2012 as a black cab variant, and touted as ready for 2014, whilst also publicised as a possible new New York yellow cab – so effectively seeking to be seen as the global taxi standard.

It is smaller than the Mercedes Vito but package efficient given its 'tall-boy' body (this shape very common in Japan), and provides the conventional 3+1+1 seating layout of the London Taxi. It offers a standard diesel engine (the whole vehicle reported by Nissan as 50% more efficient than the TX4) and has the apparent option an EV variant, supposedly with affordable battery and maintenance costs.

[NB investment-auto-motives in not convinced by the ever depleting argument for EVs (given present and mid-term battery cost, battery replacement and specialist servicing needs, and so believes that the EV variant is being touted by Nissan UK as a PR exercise and to tempt TfLTfL the PCO and others toward the NV200. It will however and rightly should be judged on its own merits].

Critically, unlike Vito and its more corporate account and group travel directed clientèle, the NV200 seeks to compete head-to-head against TX4.

But what gives Nissan (ie Renault-Nissan) the confidence to do so?

The fact is that Nissan is the UK's largest vehicle producer, having manufactured in Sunderland since the mid 1980s, itself along with Toyota and Honda the mainstay of British vehicle manufacture by volume, in contrast to the premium set of JLR, Rolls-Royce, Bentley (all foreign owned) which provide useful but less turnover.

Nissan's good standing has been attained as both being seen to be committed to the UK, as an export earner and job provider for the local North East and inter-regional Midlands. That powerful economic concoction means that it rightfully garners governmental respect.

[NB Even more so now, after the news of Ford's 1,400 job losses across Dagenham and Southampton (transit van plant), in addition to it Belgium plant].

Unlike the TX4, the NV200 is a mass platform derived vehicle, thus dramatically lowering the ex-factory price of the standard, intentionally 'commoditised' vehicle, before modification to PCO standards (ie turning circle, wheelchair access etc). Furthermore even these adaptions may be unnecessary or cheaper to undertake than on 'comparable' Vito, since the van was created for tight Japanese prefecture streets, that its turning circle may already meet the PCO requirement.

Furthermore, in mid 2010 Ford showcased versions of the small Transit Connect dressed in a Yellow Cab livery, highlighting CNG and LPG powertrain options, so obviously demonstrating its suitability as a new global taxi provider to large eco orientated cities.

Returning to The Classic -

It should be recognised that the 1997 TX1 was not simply a re-engineered, re-bodied FX/Fairway – as has been mentioned in the press – but a completely new vehicle. There were very few minor carry-over items (excluding engine types), and as such was purely a spiritual successor to the previous Fairway, itself the last iteration of the 1959 Austin FX4 Taxi.

The new cab was immediately welcomed by the British public and UK motor industry with open arms, and demonstrated that Britain's engineering capabilities could create a utility vehicle to match the reputation of niche British luxury cars and sports cars.

Whilst other attempts had been made to update the black cab – the square-bodied MetroCab the most 'infamous' – none were previously successful given lack of the the 'classic' shape of the FX4, hence the retro-body of the TX series.

Given the historically high price of Black Taxis, high valuations seemingly aligned to the high value of the necessary 'green badge' license, TX volume production numbers pertained roughly to the demand levels of a then deeply regulated trade.

The initial business model for TX vehicle was to seek the customer mix between owner-operators and fleet-operators would provide for a mix of high margin unit sales for the former (seeking more luxury) and lower margin but higher volume sales for the latter (seeking to better 'sweat' the company assets via multi-driver, round the clock use). So a three tier trim moniker was used – Bronze, Silver and Gold – reflecting ever better features. However, in the midst of growing competition from Mercedes, the most recent variants are named 'Style' and 'Elegance': the latter a well known trim variant for Mercedes-Benz products.

When the variant naming change occurred it demonstrated that MBH itself felt that it was loosing its historic near monopolistic grasp of the sector.

A Time for TX Re-Incarnation -

Quite obviously, and inevitably after 15 years, the TX series has aged. Not simply in its own right, but critically relative to the influx of newer rivals from far larger and typically much financially stronger volume manufacturers.

Thus beyond the efforts seen to date, primarily 'running lean' and the Geely Auto JV, in order to try and secure its own future MBH executives (prompted by Grant Thornton) must seek to create a new vision for the future of the TX series.

This must be centred around the Mayoral (so TfL administered) 'Clean Air Strategy' set out in 2010 :

“The aim is to produce a taxi with a 60 per cent improvement in fuel economy by 2015 (based on current levels) and capable of zero tail pipe emission operation by 2020. The introduction of such vehicles will deliver significant air quality benefits. There are a variety of promising propulsion and power technologies which could see hybrid, plug-in electric, full-electric and fuel cell taxis on London’s roads in the future. The Mayor will establish a financial incentive scheme that will offer a reduction on the purchase prices of qualifying vehicles to London’s taxi drivers.

[NB Whilst the ambition is to be applauded, investment-auto-motives believes that achievement of low and zero emissions is a 'whole vehicle' issue, thus affecting the weight/mass and efficiency of all systems, thus providing an open door for conventional ICE technology which is more affordable].

In reply to the 'Clean Air Strategy' MBH previously highlighted the adaption of prototype TX bodyshell(s) to house a completely electric drivetrain; the EV project partnered with Tanfield Vehicles, best known for modification of panel van and chassis-cab vans to EV. Little has been heard since, given Tanfield Group's own commercial restructuring with America's Smiths Electric Vehicles, but it is assumed that the TX EV project has been shelved with Smiths for the present.

[NB an alternative car-based operator Green Tomato Cars has now stated that it will bring EV versions of the Chinese made (Berkshire Hathaway backed) BYD e6 to London; whether this is just a publicity grabbing exercise in the light of MBH struggles, or true 'live' initiative remains to be seen].

Whilst the full EV route appears the magic potion for what is obviously a heavy vehicle, such technology cannot conceivably be applied as a mass-market application. Beyond probable production constraints and high installation and so ex-factory product costs, cab drivers have heard many EV horror stories over the decades, and by and large would prefer an all ICE or Hybrid (even PHEV) solution...whichever wholly reliable system provides themselves with maximum earning power.

Thus investment-auto-motives views the only correct avenue for life extension of the TX4, after Euro 5 and 6 to be the triple aspect adoption of:

1. 'Light-weighting'
1a. Select or all external body panels
1b. Select internal structural items
1c. Select ancillary items (eg radiator etc)
(these to be aluminium and basic composites)

2. Powertrain Sourcing
2a Optimal 'long-life' VM sourced engine (bias to Volvo unit)
2b. Advanced lower cost 'bolt-on' eco-tech

3. Parts Sourcing
3a. Major focus on improving quality of Chinese made components

This intentionally evolutionary route is typical of any cash-constrained vehicle development programme, retaining as much previously amortised engineering as possible, whilst providing a 'staircase' type technology strategy over the next 15 years. But critically retaining the classic TX body shape which, for all the vehicle's woes to drivers, is by far its primary USP.

Any other route would seem foolhardy given the economic advantages to MBH.

Chinese Whispers -

Geely Auto's near 20% stake of course gave its far greater strategic interest in the fortunes of MBH, of course viewing it as a useful component of its own vehicle empire. This spans Volvo Cars at the premium level to the Emgrande brand sold as 'domestic premium' to the Englon brand (into which the TX4 is uncomfortably slotted) to the Gleagle at entry level.

The TX4/Englon business model developed thus far sees envisages an annual production rate of 40,000 units, with the core vehicle – and critically development off-shoots - being spread across new segments, including not only the conventional city centre taxi market, but also a limousine taxi variant and two premium sedan variants for other commercial and private buyers.

[NB it appears that – typically for a production orientated, supply-led economy such as China – that the TX4 is being made to fit into a company strategy that is intentionally 'capacity-centric' so as to underpin the domestic growth aspirations, and export ambitions, of Geely Auto; and of course China itself].

Geely's ownership of Volvo Cars is an undeniable massive advantage, both as a respected marque across the world, but perhaps as powerfully the ability to draw from Volvo eco-orientated vehicle systems technologies that can be deployed elsewhere across the group's other divisions, MBH/LTC a prime potential beneficiary.

Conclusion -

The unfortunate fact is that the UK is ultimately not the best location for what is still, in automotive terms, a relatively low priced niche product - versus 'big ticket' sportscar and specialist vehicle peers.

The primary internal and external headwinds are that: it demands large levels of low-skilled and semi-skilled labour, which typically demands wage levels inconsistent with the global norm for such work. It is also set within the industrial context of greatly increased competition from heavily automated VMs using low-cost in-house or farmed-out modifiers dedicated to the adaption of mainstream passenger vans to black cab and other dedicated task variants.

In short, the volume producers have intentionally created business models to out-flank the likes of MBH/LTC, utilisng the best of both worlds: much amortised basic platforms and vehicles (especially so for vans) and highly cost effective SVO (Special Vehicle Operations) cost centres.

There may be a case for maintaining an assembly section in Coventry, thus re-appointing the status qou in which CKD units are exported from China into the UK for full assembly and finish. But it would need to operate with truly competitive fixed and variable cost rates, meaning a highly flexible workforce operating as autonomously as possible meaning a heavy bias toward 'rounded apprenticeships' including multi-tasking and job-sharing, with a very lean group of highly influential and respected affordable managers to deploy a younger, more affordable and more flexible workforce.

Since 2008 Manganese Bronze / LTC has come under immense business pressure, firstly from obvious macro-level trends, and secondly from an ever growing competitive environment in which what was once a heavily tilted (virtually monopolistic) playing field has been made more and more level.

MBH and Geely must together learn as much as possible from the 'new champions' of the taxi market and their routes to market via the likes of Eco City, and equally leverage as much knowledge as feasible from internally across the increasingly powerful Geely Group.

Though presently it appears that Geely Auto has stepped back from its ties with MBH/LTC, it seems highly likely that a growth orientated Geely Auto seeking to make its global name with iconic foreign marques and nameplates will ultimately seek to buy the assets of Manganese Bronze, and so take up a majority or full share.

The question remains exactly what route will be used to do so? Use of a proxy company to 'invisibly' access a packaged liquidation, use of a co-opted private equity company to pick and choose from the whole 'carcass', or multi-party proxies via a fire sale, so as to individually pick-up different elements of the whole to be latterly re-assembled?

With a £3 million MarketCap, many involved in investment banking, private equity and the auto industry will see it as a highly compelling proposition. But as ever its the full Enterprise Value, via its component parts, that must be fully calculated before thoughts of other future EVs can be entertained.

Post Script -

To update the web-log: The Telegraph's Business pages (29.10.2012) published a letter from the Mayor regards latest developments of  possible MetroCab based EV taxi.

[NB MetroCab 'as was' had been the maker of previous generation taxis, was owned by KamKorp (which presently also owns Bristol Cars) and appears to have been passed onto Ecotive Limited.  This company seemingly continuing the Fraser-Nash associated development of an EV black cab. Exactly how much credibility actually sits within this proposal - given the need for a major technical update of the whole vehicle - remains to be seen].