Friday, 27 April 2012

Industry Practice - Global VMs (Part 2) – Down-Shift Products to Scale-Up Volume & Profitability.

Previously, Part 1 introduced and expanded upon the auto-industry's more recent, necessary obsession with new product cost consciousness. Such singular strategic focus very necessary so as to try and industrially re-couple previously very separate cross-regional product offerings.

This effort to unify NPD operations ironically comes about as the result of the de-coupling of the advanced-industrial nations of the Triad 'olde worlde', and those speedily advancing-industrial nations that constitute an ever enlarging EM base; with 'established emergent' and 'newly emerging' status.

Such Triad vs EM developmental economic flux is most effectively illustrated by the ever apparent reduction of what was once a massive chasm in living standards chasm. Whilst still of course wholly evident between the top and bottom rungs of the social-ladder rungs, the fact remains that late 20th and early 21st century globalisation has elevated the living standards and aspirations of countless people across Asia, South America, the Middle East & Africa.

EM industrialisation largely replays the Western and Japanese models of yesteryear, and that of S.Korea more recently. In doing so, it has furnished lower cost goods and services to Triad markets thanks to the philosophy of intra-national competence, and has installed within EM regions self-perpetuating economic engines; comprised of: materials extraction, processing, goods production, multi-media marketing and an ever more sophisticated consumer. The foundations of the "economic miracle".

Global Product Convergence -

That convergence of national wealth and consumer expectation has in turn generated the general idiom of globalised product convergence. This most obviously seen in basic household items, fashion clothing and white and brown goods, but also increasingly evident with motor vehicle choices. The prime difference being that in such a capital intensive sector, the trend provides a basis upon which automotive VMs are able to re-utilise what were previously sunk costs in R&D and CapEx previously directed at Triad zones. That recycling of 'old' Triad technology and tooling thus able to provide seemingly new fashionable, safe and better performing vehicles to those buoyant EM zones.

In very simplistic economic graph terms; the matured Triad market demand curve has become increasing shallow, but now - at its near 'flat' end-point - been conjoined with a second EM market demand curve, which given high growth rate, shows a strong and steep gradient. This has been well understood for over a decade, and so the old-guard western and Japanese automotive companies have sought to combat the increasingly hostile Triad investment environment through global expansion, seeking to attract receptive new EM consumers by effectively 're-playing' – and critically technically re-utilising - those products and services which previously served Triad audiences.

Since 2008, it has become ever more apparent that the global macro-environment sees constrained consumption in western countries and fast paced consumer growth in the BRICS, CIVETS and remaining 'Next 11'. This trend has thus consequentially re-orientated the destination of corporate investment. But of course such decision making is not wholly binary nor wholly instantaneous. Thus we presently sit in an economic and commercial transition period, where the respective dynamics of consumer expectation and corporate capability relative to Traid and EM regions effectively overlap.

In reaction to this environment, VMs have sought to worked more intelligently, with rationalisation across the value-chain, but best illustrated by the undertaking of aver more joint ventures to provide geographic reach and the invention of sophisticated 'module-set engineering' to gain increased cost-benefits from creating a greater number of mechanical combinations. In turn, such engineering intelligence allows auto-makers to both extend the life-cycles of their newer automotive products and also recycle, with minimal changes, older cost-absorbed products. So greatly amortising the VM's overall costs, yet also able to maintain apparent product renewal and model variant choice for western consumers; seeking to maintain competitive advantage.

Such heavily cost reduced products are then able to be offered to government, fleet & private buyers in EM countries, with the additional volume gained also providing for additional cost reduction, and so product pricing flexibility.

Here then western auto-makers have sought to continue the 'recycling' of previous generation products & platforms, just as they has done previously with the many examples highlighted in Part 1.

But instead of being generally 'hands-off' as was the case, changed global conditions and opportunity require a VM to be far more 'hands-on'. Indeed to integrate 'product recycling' centrally into its strategic thinking.

They must then be able to recognise and satisfy both the similarities and differences between regions in a converging yet still disparate world; through construction of an ever more multi-faceted and intelligent corporate mindset.

Such complicated research and development requirements are masked by the apparent simplicity of the generic term 'Low Cost Car'.

Re-Cap of the 'Low Cost Car' -

More detailed description was presented in the previous web-log (Part 1)and is perhaps best recognised by Renault's impressive efforts with Dacia's base car Logan, and its spin-off variants and models which grew and ever wider Dacia range.

Yet there have also been powerful examples before and after Logan, set by Detroit and other European VMs.

GM was able to re-conquer Brazil in the early 1990s with the introduction of a more durable yet cost-down engineered Corsa small car, also expanding that base model into other Latin only models.

Later Ford re-engineered its previous 'run-out' European Fiesta hatchback to gain market-share in India, regenerating model as the Ikon small sedan. And more recently enlarged its project budget to re-design the next generation European Fiesta to become India's Figo. Overlaying the Fiesta's mechanical package with (bigger brother) Fusion like styling so as to create a more mature premium-like product.

The long established and successful operations of FIAT Brazil meant that it could effectively create its new Novo Uno 'in-market', as a ground-up 'low cost' product. It sought to design a car “for Brazil by Brazil” (and Latin America), exploiting regionally lower R&D & CapEx costs, with the project's business case expected to gain from the boosted amortisation rate derived from high volumes thanks to FIAT's sizable Brazilian market grasp. (That car is very probably due to be both exported and productionised in Italy, with its formula of affordable no-frills functionality expected to be an Italian and Southern European hit if/when released).

However, it is the Ford Figo example which demonstrates the far greater cultural market sensitivity required by VMs when adapting new product for EM ragions and devising a 'low cost' car strategy.

The rate of competition and broad exposure to western consumer trends means that the expectations of those 'deeper pocketed' middle-class EM buyers has far surpassed that of a cheap, native, homogeneous, durable, 4-wheeled box. Being well down the track of their “economic miracle” relates to ever greater product and service demands - arguably more so than the western consumer. This because such regions are effectively "buyer's markets' where achieving complete consumer satisfaction is critical for business credibility and success. Obviously then, the idea of what could be called a 'commodity car' seeking to serve the expanding and demanding EM middle-classes is almost laughable; a fact known by most, except the least informed and so most blinkered of western eyes.

Mobilising a Nation -

Of course each EM nation is unique, each sits at differing points of the 'received' economic growth path and has differing social structures – statistically and culturally: the shape of the population pyramid, levels of wealth (wealthy, middling & poor) and levels of social (and commercial) interaction between different ethnic groups. All of which comprise a socio-economic matrix. Yet, even though many EM countries tend to have greater internal 'social mosaics', the historic precedence set by the economic growth models of 20th century America and Europe means that it is well recognised that any nation's GDP growth and parallel GINI rating depends a great deal upon the advancement of its citizens' personal and private mobility.

This is being achieved by virtue of an increasing size in the middle-class, yet these are largely 1st and 2nd tier city dwellers, and make up only a fraction of any EM nation's populace. The real challenge is to mobilise the remaining millions in other lesser cities, towns and villages so as to create far greater social links, commerce and enterprise across a country.

Vehicle affordability is of course key.

It has previously been sought by creation of 'national champions' with the invite / tender of foreign manufacturers, Malaysia's Proton & Perodua, and India's Maruti prime examples, via Mitsubushi, Daihatsu and Suzuki respectively. Such created entities have proven highly effective, their successes achieved via a combination of low cost assembly, protectionist vehicle market policies from government (often for lengthy periods) and secondary assistance through state-based vehicle purchase programmes to speed financial break-even. In this way indigenous commercial success of the 'national champion' is ensured, which in turn provides for 'organic' and 'bolt-on' growth of a nation's internal automotive value chain.

This model seen in India, China, Brazil and elsewhere essentially reflects the 'low cost' car template: licensed and re-utilised technology achieving a substantially lower ex-factory unit cost and offered to the still relatively thin sliver that is the new bourgeoisie. Whilst undoubtedly important for nation and fortunate individual, the such a template cannot reach and mobilise the less fortunate 'very shallow-pocketed' remaining millions that sit within the 'bottom-tier'.

The 'Ultra Low Cost' Car -

To do so theoretically requires something akin to a 'commodity car'; very low cost, simple construction and mechanics, good durability, easy repair and minimal running costs.

Such qualities are the prime aims within the design brief of what is now known as the 'ultra low cost' car.

As its name implies, recognition that a large economic gulf exists between the newly emergent middle class of a certain financial standing and those uthers who live and work (when available) within the 'bottom tier' of society.

[NB. Whilst the very ideology of such a 'commodity car' appears exemplified by the old Eastern-Bloc Trabants, and FIAT sourced LADA's, FSO's & Polski's, given their near omnipresence, it is evident that these instead befit the 'low cost' car business model].

The massively challenging goal facing optimistic 'visionary' industrial pioneers is to create a widely accepted, popularised, bought and so successful 'ultra low cost' car.

However, such an ambition appears to obviously 'fly in the face' of convention.

Convention dictates that the automotive sector's 'natural order' is one where the ongoing manufacture of ever better new vehicle replaces a previous generation vehicle. Replacement purchase of ever newer vehicles then releases older vehicles for sale on the used car market, thus creating the typical descending staircase of market prices; each 'price point' step – latterly aided by independent pricing guides - reflects a vehicles age, condition, specification level etc. The model notionally stands true even if actual prices are highly dependent upon each nation's unique market characteristics.

So, logically, the 'commodity car' exists at the far end of this staircase, where price and pure functionality meet. Such as in the UK, where a cheaply bought old vehicle can be used as everyday commuter transport to the local train station.

However, given the importance of vehicles in EM countries, they tend to retain good residual values with merit given to brand reputation, condition and new and used parts availability - as opposed to the bias of age as is the more the case in the west.

The Mass-Mobility Exclusion Effect -

Circumstances then create a pricing sandwich where by new cars are far far too expensive for those on society's 'bottom tier' to afford even if there own manufacturing cost-floors have been reduced by way of the 'low cost' car basis. Yet also, there presently exists a nigh on static price-floor for even the majority of old used cars which still remains far beyond the means of most.

Whilst this remains the case presently, the fact that global TIV growth is heavily biased to EM regions suggests that eventually that price-floor will lessen when the availability-demand equation alters.

However, to the far-sighted EM industrial moguls, these prevailing, presently deeply embedded conditions which have thus far excluded the majority, are viewed as a central challenge to the national economic good.

To date healthcare for the masses, whilst not yet wholly adequate, has improved immeasurably thanks to government and foreign NGO efforts. Likewise, educational reform has ensured that far more of those children living below, at, or just above the poverty line do receive a basic education, so that they may be better prepared for adulthood; even if again much is still yet to be done. Public transport improvements in rail and bus have been ongoing for decades so as to mobilise the workforce. Housing has slowly improved, though of course man urban slums remain prevalent as people seek to maximise their income levels from higher paying city jobs whilst seeking low cost living areas. Yet even the slums are morphing into conventional neighbourhoods as corrugated steel is swapped for concrete, and sanitation and roadway programmes are started to better the locale. And in rural regions ongoing - though slow industrialisation in some areas - promises better paid, more stable incomes from the core of agriculture, aswell as mining, processing and assembly factory work.

Yet economic progress and so the development of a sophisticated bottom-tier consumer culture the is still largely distant, and highly correlated to population size, its educational capability, the speed of national and regional economic advancement and the bias of cultural issues such as caste, ethnicity and class.

Yet given the size of populations and the inherent inertia therein, the pace of progress seems snail-like.

Plying the Bottom-Tier of the EM Social Pyramid -

In many spheres beyond the auto-sector, and well before the financial crisis, consumer goods companies (and the supporting suppliers of materials and capital goods) have long sought additional income streams by building models which could adequately satisfy the global 'bottom-tier' customer – if he/she can be so generalised

[NB Generalisation must be viewed as overtly simplistic and very probably misleading, so may be a highly deceptive concept, given the 'real world mosaic' which exists within such a stereotype].

Nevertheless, an apparent automotive market opportunity has been identified by local and global auto-makers, the core proposition of an 'ultra low cost' car formed from observation of commercial success in the household consumables sector and social transformation ideals of the IT sector. The case studies themselves could be viewed as a marriage of 'management science fact' & 'management science fiction' given their respective real-world and theoretical origins. However nonetheless, for some years now an emerging school of corporate thought regards 'bottom-tier' opportunities has arisen. Three of the most influential influential examples have been:

1. 'Micro-Pack' Retailing
2. '$20' Laptop
3. 'Micro-Financing' Initiatives

'Micro-Pack' Retailing -

Claimed corporate successes have been achieved by staple consumer goods companies which have expanded 'product-line reach' via the offering to poorer customers the purchase of re-packaged goods into smaller quantities or sizes. Known nominally as 'Micro-Packs' they are also termed “one-hit” or “bite-size”, and span such basic consumables as washing powder, coffee, cigarettes, imported foodstuffs (chocolate/candy) etc. Typically sold through alternative informal distribution channels using local sales peoples who themselves are already respected, or command soft-power, within the community.

Such corporate initiative mimics the dynamics of local market trends that have been in-situ for decades; where local “entrepreneurs” recognising the limited spending power of people have split often (legally & illegally) imported standard sized boxes of goods and split them into far smaller pack sizes for re-sale. This multiplication then offering greater profit margins on each item sold.

There have been apparent corporate successes, but realistically most corporations still face a very tough task in circumnavigating those indigenous self-styled “goods broker” entrepreneurs. They have for decades bought goods through a well established commercial network which when 'multiplied' are sold via a network of street hawkers; often door to door. Those apparently enterprising connections also often linked to less desirable parties such as loan sharks and protection rackets.

Across the more squalid quarters of Mumbai, Maputo & Mexico City the reality of local conditions is that of an invisible but prolific 'power-centric' economic ordering; often corrupt and with powerful links to local authorities.

Hence, many large western corporations who had little previous EM 'bottom-tier' experience gained from in-market production, have woken-up to the fact that reaching-out to directly service cities, towns and communities with their own official micro-pack goods (such as cigarettes sold in packs of five, or sachets of washing powder) is far harder to accomplish given the vested interests already in place.

Thus whilst the central rules of 'simplification' and 'multiplication' could be seen to simplistically apply to automotive, as 'de-contenting', 'de-costing' & production capacity expansion, the intimacy, intricacy and 'persuasive' element of the everyday sales connection is absent.

The '$20' Laptop -

Further inspiration for auto-makers conjecture and exploration – though far more ethereal than 'micro-packs' - comes from deliberations within the electronics industry.

Specifically the 2009 announcement about the Indian “$20 laptop”. To purportedly aid the education of even the poorest and most disadvantaged of Indian school-children.

As is often the case the PR buzz masked the reality of a much smaller concept-based untested hand-held device that offered little of the original promise.

However, whilst there is at least some feasibility in building a $50 laptop by simply using low grade motherboard, processor and screen technology, there seems little direct automotive equivalent.

Simply because the rate of 'standardised' technological change and improvement is so vastly different between the electronics industry and vehicle industry. The former gains from a comparatively far greater 'linear' R&D advancement in product (largely processing) performance – as invoked by the now legendary Moore's Law. Whilst there is no similar seemingly endless exponential advancement curve for automotive, whose own industrial fundamentals were initiated a century earlier. It is to compare what is ostensibly a 1970s industry with an 1870s industry

Drawing direct parallels between the still empty dream of education boosting cheap laptops and the ideal of the cheap mass mobility car is then either inadvertently na├»ve or highly disingenuous. Contrary to the possibilities of personal electronics, it is not only product but indeed whole process that requires full re-invention. Not to do so only leads back to the pricing limitations – the inherent business model 'floor' that is already 'low cost' car.

'Micro-Finance' Initiatives -

These have developed over the last 15 years or so, and as the name suggests, have been created to assist those small scale typical sole traders who were caught effectively in a poverty loop whereby a sizeable portions of their daily profit was paid to their wholesale goods provider and to the owner of the vending cart or retail plot, thus unable to secure the savings required to grow their business. Their unfortunate position meant that access to formal bank loans which offered lower borrowing rates was prohibited given a bank's typical need for an asset-backed security, whilst the borrowing available from informal (loan shark) lenders is ridiculously high.

The book 'Poor Economics' notes that on average formal bank lending – as opposed to family, shop or 'loan shark'- represents under 7% of loans for the rural poor and about 10% for urban poor. State-backed lending exercises at reduced rates are often skewed to political bias or were operationally inefficient, running at YoY financial loss.

Thus, often because of local social network or intimidation pressures, usury money-lenders are by far the default port of call when the poor need external financing. However, more often than not the terms are onerous.

These circumstances then left room for the start-up of funds providers with a social consciousness and so less demanding rates of return and this different business models.

Micro-Financing Initiatives (MFI's) originated by way of middle-class individuals and groups seeking better ways to more effectively back the 'bottom-tier' populace, with the intent that such availability of small-sum capital would create a catalyst for the creation of small businesses in local communities.

Fifteen or so years on and this new financial sector, offering alternative financial instruments that rely heavily on local social inter-responsibility, has spawned many operators. Yet it has encountered problems, and is unable to grow the size of its loan book - or more likely unwilling to risk the higher exposure - as small company borrowers seek greater sums to become larger entities. The model is then successful in taking small margins from a broad worldwide customer base, but cannot provide the bridge for people to move out of their 'bottom-tier' lives.

Furthermore, its very ethos of social consciousness can be both intentionally abused or exposed to the far higher life risks that poorer people generally face. Such risks the very reason why formal banks and co-operatives do not lend to the poor and why informal lenders are able to charge such high rents.

Lending to the poor then is known to be a demanding, time consuming and often loss-making enterprise, where the cost of initial client due-diligence, monitoring and repayment administration eats into the low loan margins gained if seen to be a socially conscious lender.

Thus, even for VMs with in-house 'captive' finance divisions which appear to be set-up to expand into the 'bottom-tier', the risk exposure to lend is high, and the vehicle re-possession efforts costly.

The Visionary Challenge -

Hnece the aforementioned issues and no doubt many more indicate that the headwinds for such apparently good-willed and high-minded visionary industrialists are still immense, and appear very hard to ultimately overcome.

'Bottom-Tier' Business Learning -

Tapping into the consumer habits and aspirations of the many millions that reside in the lowest social strata may appear a tempting 'text-book' solution to achieve that magical thread of long-term profitability. And yes, there obviously exists massive numbers of poor, so necessarily thrifty customers who en mass appear to provide large-scale & small-margin commercial reasoning.

But as seen in the commercial history of household consumables, such an approach typically takes great financial muscle to achieve, even then only when a company is or has become culturally enshrined in the region, which can take decades for foreign entities. The item or service must work with the market's popular consciousness and provide a truly meaningful functional advantage, and so create a powerful emotional affect.

Even then, the instigator is open to attack either horizontally by a similar domestic or foreign enterprise, and especially from those with greater cultural or political connection or financial might.

Within this, it must be recognised that bottom-tier EM market consumers have an in-built bias toward their respective indigenous manufacturers, a natural consequence of local history, engrained by cultural roots and the protectionist or pseudo-protectionist measures that are put in place as national economies morph through different phases of a mixed economy from a communist or heavily socialist past toward a free-market economy. Yet realistically apparent 'free-market' steps are only taken when new knowledge can be obtained from external foreign parties to the advantage of a specific primary, secondary or tertiary industrial sector.

This sense of nationalism and the 'national good' tends to reside most prevalently in poorer countries where melded national, group and personal identities are far more closely coupled to a generational historicism. This exacerbated by a sense of being the global underdog and an ambition to recapture lost regional or worldwide status from a bygone age.

Beyond the cultural connection, the domestic commercial advantage is often retained by pro-domestic governance, an historical ruling elite (though under a pro-people banner) with family or keiretsu / chaobol-type holding structures across much if not all of major industries.

[NB As seen in Japan to this day, this method used to ensure that sections of corporations cannot be wholly bought or majority controlled by foreign interests – the lessons of history].

However, this industrial holding structure is criticised – typically by western bankers - as being archaic since it prohibits the wider transformative influences of entrepreneurialism and access to more broadly available capital. In contrast, those poweful business leaders and politicians across sections of Japan, S. Korea, India, China, Russia, Brazil and elsewhere view the importance of self-determination as vital, with the endemic conglomerate heirachy not as a barrier to ideas sharing and internal entrepreneurialism but as a pathway.

[NB Both philosophical corners have merit, and should ideally be combined to provide EM countries with an ethos of “Dynamic CSR” (for want of a better phrase) so that some EM countries do not take similar retrograde steps to those seen by Argentina recently with Repsol YPF].

This then gives a massive home advantage to domestic goods and service providers within that seemingly all important 'bottom-tier' consumer population.

Chasing the Ultra Low Cost “People's Car” Dream -

Nevertheless, the attraction of satisfying the 'marginalised masses' for some indigenous CEOs and executives still appeals; stepping in the footsteps of historically important others who have initiated 'people's cars'. Especially so, when such individuals lead a domestic industrial power-house, one with an engrained popular social connection and wields political influence.

That 'People's Car' path has obviously already been trod by Henry Ford with the Model T in 1908, the Austin 7 & Citroen Type C in 1922, the FIAT Topolino of 1936, the VW Beetle in 1938, the 2CV of 1948, the FIAT 600 of 1955 (also SEAT & Zastava badged), and the1959 Austin Mini.

Yet lesser known is the long distant 'ultra low cost' car path traversed by many early pioneers and established companies in the late 19th & early 20th century. Much as is being discussed today within EM spheres, they offering small light and critically affordable 'voiturettes'; also known as cycle-cars given their technical re-appropriations of bicycle and motorcycle technologies . Many names appeared, the majority Anglo-Franco initiatives, and ranged from Amilcar in France to Mascot in Sweden to Pluto in Germany to Xtra in Britain.

There is an obvious primary difference between the creators of those now legendary successful 'People's Cars' and the forgotten 'Cycle-Cars'. The former were firms led by individuals with strong financial muscle or backing, had political influence (private or as part of the national agenda), often had engrained social connectedness from established operations, played a role (subtle or less so)in social-engineering and created a self-perpetuating momentum by having its staff earn enough to buy the very cars they were building.

In contrast many, though not all, Cycle-Car companies were set-up in a manner far more like today's Venture Capital operators. Recognising the mass-market opportunity, they combining the singular attributes of different business entities from different sectors (eg bicycle makers, generator firms, hardware companies and failed aeroplane makers) to create the theoretical fundamentals of a small car manufacturing business, aided by high budget spend in newspapers and exhibitions. All had the same profiteering dream of shrinking the dimensions, specifications and so price of what were ostensibly luxury car products, to suit the motoring desires of the masses.

Needless to say given the voracious level of competition few survived their initial start-up periods, and many were consolidated to try and create volume efficiencies and grow market share. But even the most successful in Europe were themselves vanquished by the break-up of the Austro-Hungarian Empire, Europe's ensuing economic volatility and the beginnings of WW1.

The few that survived such as Britain's Morgan Motor Company relied upon the originator's own independent wealth and had the wherewithall to reposition themselves away from the previous 'commodity car' offering toward a sporting car offering afforded by the virtue of its lightweight design.

That small car space was entered by the mainstream manufacturers after WW1 who were able to ride the new economic boom that lasted between 1918 & 1929 selling to the spreading lower-middle class, and gained again when those small cars proved popular amongst all motoring types during the financially tight but optimistic 1930s.

These years saw the reappearance of 3-wheelers but this time primarily for commercial use, with Germany leading the way providing much of that engineering capability to then allied Italy and made highly evident in the post WW2 austerity and regeneration years via Piaggio and Lambretta. These companies in turn licensing their products for manufacture by India's Bajaj Auto and Force Motors which made famous for their 3-wheeled 'tuk-tuks'.

Even though cycle-cars had perished, Reliant Motors sought to revive and modernise a similar 'commodity car' genre from 1935 onward, but in 3-wheel form, offering commercial van and private car models which saw moderate success with low income buyers who has previously ridden motorcycles and were limited by the conditions regards vehicle class of their driving licences which restricted them to 2 & 3 wheelers. Whilst 3-wheel models continued to the 1980s sales declined from the 1950s onward, the company creating 4-wheeled variants from the late 1970s onward but in very low numbers, finally trying to compete in conventional niche sportscars; closing in 2001.

Thus we see that the fortune's of yesteryears 'light car' – engineered as the 'ultra low cost' car – were very much dependent upon very specific time periods of economic squeeze; with reduced cash liquidity and minimal credit availability. Their popularity boosted in such times when governments (such as French and British) saw fit to alter road-tax regimes to benefit small capacity engined cars as part of national economic renewal efforts.

Critically 3-wheeler models survived in the UK for a lengthy period because of personal transport needs of a very specific (generally older) driver type. Similarly France had a larger similar demographic who maintained the fortunes of the re-invented 4-wheeled light-car category from the 1970s to this day.

The cycle-car, light-car or 'ultra low cost' car's market popularity then heavily depends upon a mixture of low personal income and the limitations of a restricted driving licence

Modern Re-Invention of the 'Ultra Low Cost' Car -

The idea of the 'ultra low cost' car was re-born in 2003 when Ratan Tata, Chairman of the TATA Group of companies, saw fit to start a new vehicle development programme that would mobilise India's 'bottom-tier'. The project known as the “1 lakh Car” (approx $2,000) ran for 6 years, the vehicle presented in 2009 as the now famous Nano and available to the public in 2011.

With such great expectation the car created a media and public fire-storm.

Unsurprisingly the high-mindedness and ensuing massive publicity of the TATA project then saw some of its prime Indian small vehicle rivals: Maruti, Bajaj Auto and Force Motor claim that they too were developing similar 'people's car' programmes, either independently or impressively with the aid of renowned western volume manufacturers.

[NB investment-auto-motives retrospectively believes the some of these Indian companies exploited the 'Nano-mania' effect to simply attract foreign VMs with the true intent of seeking other more fundamental industrial synergies]

Thus far the only competitor to showcase a Nano-like vehicle has been Bajaj Auto with its BE60 model shown at the 2012 Delhi Auto Show. Like Force Motor, Bajaj specialises in motorcycles and 3-wheelers, so BE60 is the company's first attempt at a 4-wheeled car. Although Bajaj did indeed instigated 'ultra low cost' car talks with Renault-Nissan in 2010, the BE60 visually appears independently produced, its basic mechanical packaging and cosmetics reflecting utilitarian origins. It is then befitting that Bajaj seeks not to compete directly with Nano, but instead seeks to attract its rickshaw taxi customers into the vehicle, proffering greater comfort and safety.

Thus India now arguably has 2 'heirs apparent' to the 'ultra low cost' car throne, but neither yet can claim that distinction if the 1 Lakh price point determines the winner. Nano retails at a base car price of $2,400 whilst the BE60 is offered at $2,500.

Nano has undeniably suffered marketing, sales and so production capacity problems since launch, beginning with the under-stocking of TATA's dealer inventories' when released, cases of instantaneous combustion, and a failure to reach the predicted 25k per month unit sales figures which fills full production capacity at the Gujarat factory. The contraction in Indian consumer credit availability mid to late last year is blamed for an 85% fall in YoY sales figures in November 2011.

The vehicle is in the process of being technically upgraded so as to boost popularity, with inclusion of a broader colour palette, additional features and importantly the inclusion of a more powerful 800cc engine by which to directly match the old but iconic Maruti 800 ('low cost' car). These specification changes will obviously add cost, which together with rising general manufacturing input costs will ultimately create a far broader pricing structure for Nano, relative to chosen engine capacity (624cc vs 800cc) and chosen trim level (Std, CX & LX), thus providing for 6 variants within India, and reaching above the present price ladder of between INR 140,880 rupees ($2,800) and 196,959 rupees ($3,914).

Nano has also been touted in a European guise named 'Europa' which includes additional feature to compete more credibly against entry level cars across the continent, with a base EU price of E6,000, whilst the Pixel concept shown at Geneva recently is presumed to be a halo-effect precursor to Nano's eventual EU arrival.

Thus, even with consideration of much risen input costs which invariably at such a low level cannot be 'swallowed', it appears that TATA's real strategic aim was to create a long-run popular buzz about Nano being something very different prior to and at launch. Although much admired for its engineering simplicity and lightweight ethos, the true point of the vehicle programme was realistically to drive down development and capex costs, so that the car could be latterly adapted to become far more conventional in both Indian, other EM and Triad markets in order to eventually boost per unit profitability and so corporate margins.

Though perhaps very misleading to the press and public at large, with the recent turnabout in the product proposition, if sales figures can critically meet and beat those of the programme's core business case early in the product's intended lifespan, investors will be impressed with TATA's commercial prowess.

To try and overcome any consumer ill-feeling about the broken initial 2003 1 Lakh pricing pledge, TATA is offering a doubling of product warranty to 4 years, a cheap monthly service contract, fast-track 48 hour loan approvals and a low deposit value of just INR14,000 ($300).

Nano then proves itself less than a truly new class of car, but instead – if successful – highlights that the small car business template may prove profitable yet.

This done by initially setting a very low cost target for the product, achieved via very shrewd engineering solutions and hard-nosed supplier negotiations to drive down up-front capex and piece costs. Then launching the car in its original no-frills guise whilst intentionally 'starving' the marketplace, with the true intention of simultaneously pumping up consumer demand. Re-setting base level pricing yet higher, and undertaking what would be considered premature product re-engineering to boost performance and feature specification early-on in the car's lifetime so broaden the pricing ladder, attack head-on the prime competition and ready the much upgraded car for international exposure.

Conclusion -

From the much debated TATA example, and the recent Bajaj example, it appears that the hoped for dream of a mass mobility car provided at an astonishingly low price remains an anathema. Although that specific dream appears dashed for obvious commercial reasons, the fact is that Nano (and presumably BE60) both progress the raison d'etre of ever lower build-costs for small but ostensibly mainstream vehicles.

When developing the Nano TATA managed to combine its conglomerate industrial muscle with a sense of true innovation by questioning the conventional and the possible in both product, process and promotion. Thus TATA managed to impressively coalesce the very distinct and separate attitude and capabilities of those industrial giants and innovative VC-like cycle-car entities from a century ago.

Although still criticised by press and public, TATA's long-view pragmatic perspective with Nano should deliver impressive results over the coming decade, but only if it can maintain its USP relative to more sophisticated similar cost used cars that will unavoidably continue to threaten.

It is not surprising that the fruits of an ultra low cost car build should be orientated in the manufacturer's favour. The positive outcome being that it assists overall company profitability at a time when EM manufacturers must build their financial resources and reserves. Creating such financial fire-power if they are to credibly enter the world stage with plausible business ambitions and attractive product propositions. Both of which will necessarily require in-built operational cost and unit pricing flexibility given the political and pricing power of American, European, Japanese, S Korean and now Chinese players.

Failure of the 'ultra low cost' car to eventually appear and change the lives of millions is of course somewhat sad, but the effort to propagate what can only be regarded as a powerful business template if and when proven - from that original high ideal should be applauded by investors.

India's progress thus far with what should ultimately conclude as a very much altered automotive business equation – in its design, build and marketing methodologies - will very probably be of major influence to other smaller EM nations across the CIVETS and elsewhere who seek to speed their own economic development agendas.

Thursday, 19 April 2012

Industry Practice - Global VMs (Part 1) – Down-Shift Products to Scale-Up Volume & Profitability.

Investors and commerce maintain a fingers crossed stance regards the global economic slow-down. So far, although stock markets have sold-off recently, it appears somewhat tempered by periodic, tentative good news labour reports from the US, the sigh of relief that is China's 8.1% growth rate, the deep re-structuring of Japanese industry and an optimistic expectation that the recent productivity loss seen in the BRIC nations can be substituted by the new CIVETS constituents; themselves part of the “Next 11”.

Europe of course remains heavily subdued, still suffering from the entwined relationship between national sovereign debt and the balance-sheets of the EU's banking sector. The ECB acting as drug-prescribing doctor via the LTRO, itself surely with a long-term agenda of slowly weakening the Euro to eventually eradicate the European disadvantage. By way of ongoing phased QE and similar methods which will circulate EU liquidity; the German reluctance a manner by which to manage an orderly devaluation whilst Germany itself re-orders so as not to be highly exposed to the increase in materials import and input costs.

Car-makers perhaps most exposed and so presumably heeded by Brussels and each country's government.

VMs Seek 'Rational Product' Growth -

Upon this highly fractured world-wide playing field, global vehicle producers are having to sensitively balance investment markets expectations against a now much more heavily price competitive international vehicle market.

[NB Investors seeking the equity and bond 'safe-havens' by way of cash & asset-backed corporations on favourably historically low p/e's yet unfavourably muted dividends].

The now firmly entrenched 'new norm' contrasts markedly to the credit-fuelled boom seen in Western and top-tier BRIC consumerism, experienced prior to 2008. The economic contraction, which most affects the behavioral patterns of the squeezed western mass middle class, has re-molded and re-aligned the trends of consumer demand. From what was previously largely desire-driven consumption - arguably focused on increasing frippery - toward a greater needs-driven trend which values innate functionality and quality.

This in turn has closed the chasm which once existed between the distinctly separate psychological perspectives of consumers and corporations in 'post-industrial' and 'advancing industrial' regions.

In short, there has been an increasing meeting of minds over recent years, which re-emphisisies the importance of price and innate utility over the frivolity of fashion. So, behind the seemingly constant reports about mega-wealthy and newly wealthy spending habits amongst the top-tier of BRIC and Middle-Eastern populace, the true reflection of mass global consumption is that intra-national values have necessarily coalesced.

This is of course 'old news' to the DAVOS crowd.

The Dual-Approach Reaction -

For most companies, such intelligence purports that either or both of 2 strategies may be undertaken.

1. To target the 'shallow-pocketed' western middle-class, and simultaneously, the growing, increasingly 'deep-pocketed' EM middle-class.

2. To target the millions – indeed billions – of 'no-pocketed' who exist within the bottom tier, but which en mass, constitute large portions of any EM economy.

Targeting the Thrifty Western Consumer -

Understandably, companies will make strategic investment decisions that align to the squeezed environment, making best use of this understanding and extracting as much environmental and competitive knowledge as possible.

Yet the naturally concluded management recommendations applied internally and externally do not provide guaranteed results.

Companies are having to apply ever greater efforts in reviewing unit-price and overhead cost levels and so 'de-content' to 'de-cost' their products, constantly re-appraise administrative leanness, refine input costs via supplier rosters / price bargaining / delayed creditor payments, re-structure distribution and retail channels.

Yet of course by far the best way to ameliorate costs is to extend the life-span of current vehicle platforms and now with a strategic imperative to re-generate what were defunct 'last generation' technologies. As the profit margins of truck, bus and car-makers in yesteryear's “developing countries” through the 1960s-80s demonstrated, the re-utilisation of 'old' technology platforms – then bought from western firms – provides for healthy profitability when macro and micro market circumstances allow.

That 'recycling' of previous platforms, modules and components has been rediscovered by western VMs in the mid 2000s, to proffer a new type of affordable passenger car. The archetype that pioneered the way has of course been Renault's highly impressive fundamental re-invention of Dacia. Using re-deployed lower-cost parts to create a low-cost vehicle amenable to what were initially CEE growth economies, from homeland Romania up to Poland, then latterly in the MENA region with prime assembly hubs in Iran & Morocco, in Russia, India, Brazil & Colombia.

However, renewed sizable market demand for low-end affordable new cars in Western Europe, within the 'new norm' economic age, provided yet further sales expansion opportunity; a market gap which the Logan and its siblings have filled admirably.

Ironically, even though western consumers are forced to accept the 'new norm' on a rational level, because the private car buying process is such an emotive one, the VM must seek to massage the ego to demonstrate that the affordable product is not necessarily “second-best”. The consumer perception aspects that are customer pre-awareness and sales process persuasion are the all important.

Hence, any car company seeking to fulfil this market gap must have deeply assessed its own corporate position both prior to and after the 'new-norm' watershed, so that it may determine those strategic paths available which are vitally credible in the eyes of the squeezed consumer, with recognition of the ramifications – both +ve & -ve - such new product and probably brand actions may also create.

Re-Taught Lessons From EM Divisions -

The very concept of the 'low-cost' car is becoming increasingly engrained within the heart of all global VM's internal industrial systems. Core learning about low-cost design and manufacture has been seeming back into corporate headquarters from EM located plants, national sales companies and where evident regional engineering centres. This learning spanning all aspects of factory and tooling capex, R&D capital, base vehicle programme development capital, and variant project capital.

Whilst industry and press circles chatter about the 'low-cost' car as if a new phenomena, the fact is that this category was created long ago, when the tooling of superseded western vehicles was 'lifted and shifted' into 'colonial' and foreign markets where new low-cost business models could be created to feed local economic expansion and national agenda ambitions.

Long defunct BLMC produced localised. 'cheaper' original Land Rovers and Minis in Australia and South Africa as distant sub-economies of the UK. Volkswagen aided massively in the industrialisation of Mexico and Brazil with original Beetle, Van, Variant, Karmann Ghia and other domestic-only models like the Puma sports-car (not to be confused with Ford's much later Puma) aswell as the eponymous (Euro & South African linked) Gol. Likewise, FIAT sold its 1950s sedan models to India's Premier Motors (as did Britain's Morris to Hindustan) before developing Argentinian and Brazilian interests, starting with the 600 and small van imports and CKD, locally manufactured 147 variants in the 1970s-80s, leading up to Uno variants in the 1980s-90s, the latter Tipo and Palio variants & and recently the Brazilian developed Novo Uno. And Renault produced its own vehicles in Mexico and Brazil during the 1960s before its fateful amalgamation with America's AMC as part of a failed bid to corporately conjoin South, Mid and North America; its retrenchment back into Europe overcome in 2004 with Logan.

Of course it was the Detroit 3 during the 20th century, riding on the back of the American boom fed by materials from abroad, that were able to best demonstrate themselves as producers of localised vehicles, the fervency of Detroit's pathological obsession with new model years thus stylistically ageing cars quickly and – though usually based upon same mechanicals – GM, Ford and Chrysler were able to 'localise' visually older products elsewhere around the globe, able to wield both heavily amortised tooling and its strong (world reserve) US$.

Conversely, when applicable in regions with different cultural backgrounds and domestic national economic agenda ambitions, auto-makers have traditionally sought to provide either whole re-badged vehicles, sent complete vehicles in component parts as CKD kits, provided major sub-assembly components or set-up complete plants as part of a JV agreement.

The past saw Rootes Group undertake the technical feasibility and early development work for Turkey's Anadol national car in the 1960s, soon after also nurturing Iran's nascient car industry with Iran Khodro's Paykan. In the early 1980s Mitsubishi sold its Colt model rights to the newly born Proton Motor of Malaysia to create another national car. During the same period PSA allowed Egypt, Kenya and Argentina to produce the 504 and itself served as the linch-pin for the effective overhaul of Iran's auto-sector replacing the old Paykan with the far newer 406 based Samand.

As seen, 'platform recycling' has long been part and parcel of the international modus operandi of large multi-nationals for over half a century. It was simply a forgotten art over the last 30 years or so as the West lost its previous economic grip over 'developing' nations and so western VMs lost their secondary markets.

After the 1980s, that once integral practice grew ever less required as a consequence of Japan's transformative influence. It had manufactured vehicles that were of such comparative high quality, had such broad international sales reach, were consequentially given grey-import 'second-lives' in a host of then burgeoning EM countries. Toyota, Nissan, Mitsubishi and Honda had inadvertently but effectively banished the local market need for 're-cycled' western models.

Whilst those used, old but reliable Japanese vehicles had sufficed a previous need in many EM countries, rapid economic growth supporting a concordant rise in commercially linked fleet vehicles and private consumerism has meant that second-hand, no matter how durable, does not suffice.
Hence the desire for what at least appears modern and contemporary cars as seen in Berlin, Paris, London, Los Angeles and Tokyo, though with an expectation that they can traverse what are often still problematic roads in such EM regions.

Global Product Convergence -

EM consumer desire, and so the auto-industry requirement, to visually coalescence 'post-industrial' market cars with 'advancing industrial' market cars has come to the fore in recent years.

The trend allows corporations to seize a thus far denied yet massive engineering opportunity to merge NPD philosophies and so marry simplicity and volume growth by producing a close-knit set of structural sub-assemblies, mechanical components, electronic architectures, trim-based styling components etc.

That product alignment is of course good news for VMs if they can create compelling technical strategies to deliver investment and re-investment value.

Yet even though a now squeezed western middle-class, the car buyers across Europe, North America and Japan do not wish to feel as if they've been forced to accept a down-grading of their previous motoring expectations.

So it is imperative that VMs are able to create convincing and compelling product, brand and marketing messages to this somewhat schizophrenic western audience. An audience who still hold much of the prime purchasing power, even if more reluctant to spend as they build-up their own savings levels.

[NB Which in turn provides banking sector capital liquidity which when loaned as investment capital acts to provide the much needed 'productivity push' to boost their own purchasing patterns].

Every major VM seeks to explore and deliver by following in the same footsteps of Renault / Dacia. Especially so given the recent announcement by Renault-Nissan that the Datsun name will be re-introduced as Asia's interpretation of Dacia. (Very possibly badge-engineered Dacia's). The 'anti' raised again by Volkswagen Group's ruminations regards adding an new entry-level brand to compete against Dacia head-on; below Skoda.

The Economic 'Floor' of the 'Low Cost' Car -

The economic advantage gained by 'recycling' a last generation technology set (eg basic structural platform, powertrain, electronic architecture, sub-structure fittings etc) with whole vehicle assembly taking inside a lower tier CEE EU country, is proven by Renault's reported 6% margin to be very impressive.

[NB Those magic investment friendly ROI figures being 3% - 5% margin on mainstream cars (typically presently though <0% - 2%), 5% - 8% on commercial vehicles, a similar level on 21st century 'low-cost' cars, 10% - 12% on premium cars and 15% - 17% on super-cars]

Yet there is of course still the matter of the all important ultimate 'floor' pricing level.

Within the EU, this is estimated by investment-auto-motives to be approximately E4,500 for an A-segment sized car, E5,200 for a B-segment sized vehicle and E5,800 for a C-segment sized car; all consisting of very basic feature and specification.

Thus, as can be evidently recognised, even this much reduced ex-factory base price, such costs, even as break-even market-share chasing prices, would be far beyond the reach of the bottom-tier masses in the likes of India, China, Brazil and Russia.

Renault's previous JV with India's Mahindra and Mahindra managed to save 15% off of the ex-factory price via the use of local parts supply deals and cheaper Indian assembly labour. This then lowers a typical B-C segment car (as is the footprint of Logan) from an estimated E5,500 to E4,675 or INR 3,17,900 (Indian Rupees).

EM nations such as India have such large quantities of poor folk because of economic fundamentals, critically a surplus labour relative to the national productivity requirements. To such an extent that for those earning a basic and average living amongst the 'bottom-tier' mass – typified by the unskilled agricultural worker - even the ex-factory price of that M&M (Logan) sedan at INR 3,17,900 represents 30 years worth of earned income (supposing an above average rate of INR 70 per day and 150 days of work each year). This means that ownership of the archetype 'low-cost' car is nothing more than an unobtainable distant dream for most.

The Ideal of the 'Ultra Low Coat' Car -

This dilemma has prompted political and corporate leaders in EM countries to seek two alternative routes. To try and enable an extension of the 'low cost' car, aswell as (seemingly more prescient) the feasible invention of the 'ultra low cost' car. Solutions required to transform the lives of 'bottom-tier' people so enabling them to achieve mass private mobility in 4-wheeled comfort..

Those two alternative routes to social, commercial and economic change, range from the conventional & conservative to the radical & innovative.

Conservatively, the purchase of old technology from those advanced – and not so advanced - foreign VMs (for a cross-border 'lift & shift'), with of course the least advanced technologies providing the most affordable option.

Radically, to nurture domestic industrial creativity, providing for original, innovative 'homeland' NPD possibilities. Where hopefully the usually opposing forces of management science theory and application can be combined with the re-ordering of the traditional industrial process: as seen with TATA's ideal for the “1 Lakh” Nano

These opposing philosophical road-signs thus present a very contrasting paths for VMs own individual, and possibly multiple shared, technical strategies.

Whether 'thesis' and 'anti-thesis' can meet in the form of a ground-breaking new 'hypothesis' remains to be seen. Business models often can, like cars, with practical creativity be dissected and reconstructed to suit. Presently however, that possibility appears a distant possibility given the widespread reliance on a 'low cost' route, and the great intellectual flux of the 'ultra low cost' route.

To Follow – (Parts 2 & 3) -

Part 2 of this web-log will provide a general outline of those alternative routes.

As the most progressive yet most challenging of those alternatives, it will consider where the inspiration originated for the 'ultra low cost' car.

A potted history of those successful and less successful pioneers should serve as lessons learned but possibly forgotten, ranging from Ford's Model T through to Morgan & Reliant 3-wheelers through to TATA's Nano

It will include 'snapshot' views of today's players in EM regions who have sought through history and today to provide mass mobility private transport and consequentially sought to turn the auto-industry on its head, and the success achieved thus far.

Part 3 of this web-log will contrast and compare the notions of the 'ultra low cost' car as exemplified by Nano, with the 'low cost' car (as depicted by Logan). With the important recognition that these two ambitions, though seemingly on a linear cost savings scale actually represent very different viewpoints and very different commercial hurdles, pitting an adaption of business as usual against a radical re-think of the auto-business.

Given the 'low cost' car's greater affect and potential affect upon the global auto-industry, the piece returns to provide deeper contextual insight regards Renault's impressive achievement with Dacia, by both learning from VW's previous efforts in reviving Skoda, and confidently seeking even greater advantage from the rising economic tide that was EU expansion.

It poses the question as to whether any other western VMs can indeed copy the 'Renault EM Playbook', or whether it was the last example of the West's ability to do so?

Lastly, the natural final question is to ask which vehicle manufactures across 'advanced' and 'advancing' regions might be best placed to follow these wholly separate routes of 'low cost' car vs 'ultra low cost' car? And whether any of those global, regional and national players might possibly be strategically equipped and ambitious enough to explore both paths?

Wednesday, 11 April 2012

Macro Level Trends – UK Investment (Part 3) – New Perspectives on Toll Roads - Future Models

The previous two web-logs highlighted the national paradox Britain faces, its desperate need for transport infrastructure renewal yet without the public monies to fund such a renaissance. As has been the case with other infrastructure works – namely airports and water – the funding made available over recent years and of today is of invariably in foreign hands, by way of SWF bodies and PE companies.

Western infrastructure projects thus increasingly rely upon the demands of others.

There are two prime aspects to the investment agenda behind much of that liquidity: the desire for risk averse, long-horizon propositions and the ability to re-play the scheme again elsewhere geographically. (This done within the funder's own homeland as part of its own national economic agenda, and if possible in other similar infrastructure evolved countries).

Thus it could be said that the foreign SWF or PE fund of the 21st century views its investment decisions upon much the same philosophical lines as those 20th century American companies which created the iconic US shopping mall, then multiplied what became well understood, almost standardised models across the world.

As mentioned in Part 1, Britain's powerful past and its ability to combine mercantilism with industry meant that it played perhaps a pivotal role in the idea of transport and transport network infrastructure in formative modern times – from the creation of tarmac to invention of 'cat's eyes' – physically and metaphorically laying the foundations. Yet whilst the UK saw increased standards of living thus providing for mass vehicle ownership and seeming unending logistical demand of goods hauliers to feed consumerism, the country has also increasingly suffered road network congestion and resultant affects of loss of productivity, driver & social stress and area specific grid-lock pollution.

[NB However, the advances in modern internal combustion engine efficiency by the major VMs (including 'add-on' start-stop function) must be recognised and praised as the prime enablers of impressive pollution reduction. London's 'pea-soupers' are very much a past phenomenon].

Nevertheless, governments, green campaigners, institutional-type investors and indeed auto-manufacturers, all alike well understand the massive advantage that a truly intelligent 21st century road network – and indeed holistic transport network – would provide for Britain. Yet since its own pioneering advancement all those years ago, the country has arguably not even 'kept pace' with the advancements made elsewhere: from the relatively rudimentary payage system seen on France's motorways to the phased advancements seen in Singapore since the 1970s.

Britain's examples, described previously with the QE2 Dartford Bridge, the London Congestion Zone, the M6 Toll Expressway, the (failed) Manchester Congestion Zone, and the Greater London Emissions Zone, have all highlighted the manner in which semi-state and non-state funding seek commercial methods (obvious or invisible) to improve Britain's age-old transport network.

Different schemes in varying locales have been designed to suit local conditions, the socio-economics and indeed regional psycho-graphics.

Schemes such as Milan's original 'Eco-Zone' format have used the level of a vehicle's CO2 emissions (g/km) to either effectively prohibit, allow at no cost or allow with fee, various vehicles of age and size into the city's central area. This contrasts with other schemes but highlights the development of segmented usage.

Segmentation is hardly a new concept, simply a pseudo-modernist word for old world categorisation, the kind of categorisation which on British toll roads centuries ago charged different rates for different types of conveyance; from pedestrian through to heavy draft horse and wagon.

Today's we see renewed interpretations, but the very action of segmenting what had previously been regarded 'utility goods' has been a marked trend for the last few decades.

Utility Service Segmentation -

The most commercially visible case-study has perhaps been the market for drinking water. This very essence of life has evolved from merely its basic tap-water form (still the envy of millions) through to variously offered varieties in variously offered containers: from glass bottled premium branded 'spring' waters, to basic 'bottom-rung' non-tap waters in 5 litre sizes, to scientifically vitamin enriched health waters, to sports-science developed energy water and beyond. Thus, market-enabled adaption of a basic commodity to suit ever more nuanced, and critically different, customers' needs, wants and desires.

[NB investment-auto-motives conjects that in years to come segmentation may appear regards industry and household (domestic-use) consumption. Critically where varying levels of water purity can command a graduated pricing structure – from filtrated pure drinking water to (today's) standard drinking water to personal washing/bathing & white goods water to garden 'grey-water'. Thus mimicking the segmentation of household waste into: recyclable, green-matter & refuse].

However, a more meaningful parallels to road-pricing possibilities come from the general 'utility' service sector, in the provision of electricity, gas and telecoms.

In the UK these markets have long since been segmented, yet whilst consumer complaints have been made about the confusing tariff structures of electricity and gas – especially when combined - the most prescient example of well received segmentation is that of the telecoms sector.

Here the proliferation of services across land-line phone, mobile phone, internet and cable television has meant that consumers can buy ever more discretely separate offerings, or indeed the opposite of ever more 'bundled' offerings, to suit their lifestyle and functional needs. The telecoms experience then appears to offer good guidance as to how any seeming 'commoditized' utility may be creatively developed and differentiated for improved price modelling and ultimately latter-day re-investment. Though it must be recognised that – unlike the electricity or gas cases – it has been innovation has played a major role in enabling such segmentation.

Models To Date -

The traffic management toll-enforced initiatives to date - started at different times in different cities and with subtly different agendas - in effect create a matrix of usage and so pricing possibilities.

The 'pricing dimensions' seen thus far which allow such a flexible structure are:

1. Time of Travel (ie hour of day & accordant traffic level)
2. Environmental (CO2 Pollution) Affect (ie vehicle rating).

The relatively new access schemes seen thus far were introduced using a singular dimension, for ease of public acceptance, ease of administration and the ability to evolve ever more segmented future pricing structures. So these two seemingly separate elements will undoubtedly corss-fertilise in years to come, and thereafter various new additional 'price dimensions' could be applied – such as vehicle footprint size and passenger / load capacity-usage of vehicle (ie efficiency). To create an ever more 3-dimension or even 4-dimensional structures, so ever more pricing flexibility and thus 'intelligent pricing'.

[NB Though it is recognised that such additional initiatives could be seen as ever incremental stealth taxes upon road users where vehicles are not used at optimum levels].

This then reflects the thesis that has been well under-way in certain quarters of government and investment houses, which views the future of road travel as 'segmentable'. What was once a utility service, with accordant low public expectations, may offer a plethora of combinations and so pricing options.

This then a 'dicing and slicing' of the basic element in much the same way that many other previous 'commodity markets' were developed.

Planning 'C21' Britain: Four Basic Models -

Below are listed 4 basic but distinct road-pricing models. Each pertains to what may be regarded as the 4 basic locational and usage road types, and seeks to reflect logical reasoning as to how each may be segmented to provide fair graduated system.

The accompanying graphic provides visual depiction of what investment-auto-motives views as 'naturally evolved' road pricing models across the 4 discrete categories, with rates related to the predominance of either geographic locale and / or a specific user types.

The 4 types encompassed are:

1. Urban Roads
2. A & B Roads
3. Motorway Roads
4. Rural Roads

Urban Roads :

Historically, urbanisation trends are typically accompanied by raised living standards and so general raised levels of motorisation. The UK an obvious example in the latter half of the 20th century. Though suburbs and new towns grew to cater for that requirement, given its relatively small land mass, its long history of established habitation, and so a necessarily ad-hoc and constrained approach to infrastructure development, the UK is almost endemically 'network constrained'.

Unlike say the USA with greater land availability, so suburban stretch and indeed development of 'auto-cities' such as Los Angles - which fundamentally differ in plan from traditionally historically evolved European cities and towns - the UK has always had to try and efficiently operate the available space of its cities and towns, whether in the majority of old cities or the far fewer 'new towns' latterly built.

Any city-based toll scheme must reflective the real-world transport challenges faced within that specific city. Yet of course whilst cities differ geographically and regards specific problems and 'problem areas' and must function under various political and administrative leanings, the fact that urban roads may be viewed as 'network systems' - with levels of usage and flow predictability, even with supposedly autonomous users – means that variously developed models have come into being since Singapore's pioneering effort.

As such London's planners were able to take on board lessons learned from elsewhere when originally conceiving the London Congestion Charge, which itself will be used as the template for latter day roll-out of other UK city schemes. This meant exploring various 'simple to complex' pricing structures which had to be assessed for level of popular acceptance and implementation ability.

Though new tolls are inevitably unpopular, to lessen resistance, aid popular comprehension and so make introduction workable, the London scheme was brought into being using a simple flat-fee pricing structure.

However, its original guise saw a more complex scheme, like Milan, deploying CO2 emissions pricing bands within a maturing Vehicle Road Fund Licence (ie Road Tax) system. Thus proposing to align zone entry charges relative to vehicle type. This is partially employed with exemption of zero-emissions vehicles and the pricing difference between cars and trucks, yet the flat-fee system was used to “sugar the pill” Londoners and provincial commuters.

However, the Congestion Zone's future will inevitably be one where segmentation plays a greater role to good effect for the benefit of all road users and indeed public space users. Moreover, given the scale of the UK's national financial deficit, and the city's own (post-Olympic) economic growth ambitions, it seems that London's 'CC' scheme must be developed to provide the metropolitan and nation-wide income so desperately required to help the UK back into the black.

The accompanying graphic shows a chart titled 'Urban Centre' which displays exactly how the London scheme must be developed. It shows both Non Peak Hour and Peak Hour scenarios (as is the case today) with an additional price relative “Vehicle CO2-band” staircase within each scenario.

The fee structure shows exactly the same 'rate of climb' relative to the recognised CO2 bands, but rationally the base level for Peak Hour driving (ie the entry point price of “Y”) is higher than that of its Off Peak counterpart of “X”.

Unlike today, this then introduces a 'payage' across a full day's 24 hour period to enter the city centre.

A & B Roads :

This roadway classification has been the official and popularly recognised prefix naming convention for what may be termed 'senior' and 'junior' route-ways carrying differing weights of traffic. With the expansion of general network capacities over the years some lesser used old 'A' roads were demoted to 'B' road status. Whilst many view the archetype A road as a dual carriageway and the archetype B road as single lane, the fact is that both can consist of either single or double lanes, often combining both relative to local traffic needs.

Since A and B roads comprise the majority of prime suburban and inter-regional connections, and can be characterised by their respective 'directness' to whichever destination, it is envisioned that both types convey different levels of usage fee. Obviously the more senior reflecting a higher toll and the junior a lower toll. Unlike the city-centre scheme there would not initially be Peak Hour and Non Peak Hour rates, although such a system could be latterly introduced.

This is depicted in the relevant chart as a simple 2 tier pricing structure.

For such road rating purposes, investment-auto-motives believes that a new national road survey may be required to fundamentally assure that any levied toll would be commensurate with the level of roadway provision given.

Motorways :

These would mirror what the British see as the 'continental' motorway set-up, seen with the M6 Expressway and the similar examples in Toronto, Canada and elsewhere. Thus the typical introduction of 'toll plazas' providing the e-Tag system, automated coin collection and manned coin collection, and in course more sophisticated electronic vehicle identification and tracking methods.

The prime difference being that the roadway itself is philosophically and physically evolved to proffer 3 distinct products. Via greater application of electronic intelligence, the conventional 3 lanes of 'slow-lane', 'middle-lane' and 'fast-lane' are differentiated and re-established. Leveraging the public's basic perceptions of each type, the routeways are metaphysically divided into respectively: the 'eco-lane', the 'mass-lane' and the 'fast-track'.

The eco-lane would operate at speeds up to 60mph, the,mass-lane range between 60-80mph and the fast-track to offer drivers the ability to legally drive 'at speed' between 80-100mph, mimicking the model of the German Autobahn.

This then allows differing driver types and their relative vehicle types better “allocation”.

HGVs, motorhomes, towed caravans and typically smaller cars using the eco-lane, the slower speeds thus maximisng fuel efficiency and maintaining the natural 'safety zone' for different vehicle types seen today. The toll levied here would be minimal (see the relative chart's “X”) given the reduced impact on the environment, and the nature of the vehicles using this lane.

The mass-lane would consist of cars and lighter commercial vehicles (LCVs) whose drivers wish to drive in the conventional manner, but now with an enhanced speed limit of 80mph to aid traffic flow and assist in creating better vehicle separation so as to allow greater breaking distances, so aiding safety. The toll levied would be at “Y” at the medium point of the 3 level range, reflecting the mid-point utility of the road and possibly the greatest road-surface 'wear & tear' given the mass density of traffic.

The fast-track would critically offer a graduated toll relative to the speed travelled, as recognised by speed cameras or similar advanced technology. Thus the faster driven the greater the toll to be paid. This would then create a useful unhindered 'expressway' to be used by those who are “cash-rich & time-poor” under the greatest pressure to travel quickly; so including company executives, managers and travelling commercial staff, aswell offering a more efficient roadway to (car & LCV) based delivery companies – which are expected to grow in number as a result of continued postal deregulation and a re-emergent UK economy.

Of course vehicles would not be prohibited from lane-changing as necessary, and as is the norm today, but it might be envisaged that a specific (chargeable) lane is specified at entry to the toll plaza, with an allotment of say 5% travel time to be allowed for the required lane changing for natural over-taking of a vehicle in front.

Rural Roads :

City dwellers no doubt view these roads as costly on a per mile travelled basis, their sparse use highlighting them as under-utilised, whilst there necessary surface maintanance regime (because of exposure to wide ranging climatic conditions) means that the relative cost for each actual user is high. Thus on a purely measured and calculated basis, rural roads have about as much reason for 'not being' as those closed rural rail-lines under Dr Beeching in the 1960s.

However, this is to over-simplify the matter, since roads provide a far greater case as a social and economic life-line than the railway ever could, especially under the then weight of a rising UK car-parc. Rural roads, though possibly 'cut-off' in extreme conditions in certain regions, provide the transport back-bine for small towns and villages by way of private car, often shared car journey and of course public transport.

Furthermore, they are the literal routeway into what is often considered 'Real Britain', that countryside idyll, and an idyll which is today being re-awoken as the UK seeks to grow its domestic tourism sector.

To this end, the very distinct uses of country roads by distinct user types means than this category of road ought to be rated not simply upon a usage basis – as is the case elsewhere – but on a user basis.

Thus user differentiation provides for the Rural-Dweller, the Suburban Dweller and the Urban Dweller. These three types then typically have different uses of rural roads. Looking at the relative chart, the former Rural Dweller, being 'in-situ' and bound to rural roads would pay the lowest toll “X” so that he she can go about his/her daily lives. The Suburban Dweller with perhaps greater call or necessity to travel to and across what is classed as countryside - given geographic proximity – would pay “Y”. Whilst the Urban Dweller would pay the highest rate of “Z” given the more likely reason to use country roads as that of a tourist. Moreover, this high rate toll would be paid by those wealthier city-based people who are fortunate to also have a country home or weekend retreat, thus in effect utilised by government as a progressive tax.

[NB This then depicts four models relative to to four distinct roadways. Whilst the reasoning offered is considered sound, of course far greater exploration and analysis would be required before these specific models were to be recommended for eventual adoption].

It is then shows the complexity in theorising and installing a nationwide road-tolling scheme, whether in a peace-meal manner via private funding on a per project basis, or 'in extremis', if government were to fundamentally alter the structure of state-induced road pricing, away from the current vehicle road fund license and fuel duty toward something far more proactive.

As mentioned throughout the 3 web-log parts, it appears that private finance and new era PFI initiatives would take such a lead on a project by project basis, utilising advanced traffic management technologies to assist in monitoring road usage and pricing models to balance overall costs versus the income stream.

Traffic Recognition Technology Advancement -

As previously highlighted, to date traffic management technology has developed to become increasingly sophisticated over the decades. Its prime purpose to identify specific vehicles and their owners in order to levy any access fee. It consists primarily of 2 technologies, depending upon whether 'area-bound' relative to a congestion zone or 'pass-point' relative to bridge or motorway.

The technologies developed generally :

1. Camera based for visual recognition of vehicle number plate.
2. Micro-chip based “master and slave” electronic sensors.

However, ever more sophisticated sensing technology has emerged in recent years, one which originated inside the automotive industry with its need for efficient logistical planning and been latterly rolled-out amongst many kinds of B2B and B2C groups.

It is of course the QR (Quick Response) graphic coding system, now deeply embedded within the public's own consciousness given the 'Aztec' style black and white blocks that have appeared across many spheres, and endemically linked to the smart-phone arena, in which the term 'flashgram' is often used.

Its origins lay within DENSO, the auto-parts manufacturing and supply sub-division of Toyota, yet interestingly Toyota preferred to let the technology become public domain as opposed to trying to commercialise itself. (Possibly given the fact that similar 'matrix code' exercises were being researched by others).

The graphic coding system has been adopted by the railway and airline sectors as part of their ticketing methods – both in printed and screen formats, and recognised by an official code-reader.

But appears not to have yet been adopted by any country's official vehicle registration bodies for full scale implementation; although the Polish Vehicle Registration Authority has apparently applied the graphic to its own registration documents so that auto insurance companies can avoid fraud by obtaining precise official records 'first hand', instead of relying upon what might be adulterated paperwork.

The UK vehicle registration system came into being in 1903, and has seen crucial modification as a result of increasing number of road vehicles in 1932, requiring greater alpha-numeric combinations, and since 2001 has had to address the influence of EU standardisation. To date standard UK mainland plates have been alpha-numeric, yet like EU counterparts may also carry a blue band on the left-hand edge which to date has been used for displaying a national flag and – at least in the UK – other symbols such as the logo of a favourite football team etc.

It looks to be the case that this blue-band margin then may be used to in future house other graphic signifiers which may be of use to either official governmental bodies or private toll-road operators, or indeed both.

Thus, it may well be the case that the QR matrix coding graphic could in time become a 'quick read' option for electronic eyes, and far beyond the limited capabilities of the established alpha-numeric system, could hold a broader raft of vehicle information within its matrix that would be of use to police and emergency services, such as owners name, vehicle crash history, etc, and perhaps allows for an immediate 'read' of the vehicle's recent whereabouts and last inspection condition by police, insurers, highways agency etc.

Thus, the inclusion of QR coding technology in combination with the creation of a truly intelligent road and transport network would propel the UK into the future.

Conclusion -

The very issue of road tolls and road pricing is understandably a contentious one; especially so in the UK where unlike other nations road travel has been notionally 'free'. Yet of course it is not free, it is a public and industry funded 'public good'.

Roadways (like canals and railways) have been the very foundations of national economic growth in the UK since Roman times, and have historically been seen as a core governmental responsibility to assist economic mobility and so the national wealth.

But as seen with even the Roman Empire, aswell as 17th century land and road and bridge owner-operators, toll collection became a requisite part of road creation and improvement funding. The development of smoother, safer and faster roads - along with concomitant improvements in horse-drawn carriage design and size – sped-up general mobility and saw a massive productivity boost. To such an extent that Victorian England's postal service had more daily collections as part of its general service than today.

Of course ethereal e-travel of information across internet has in many quarters superseded the capabilities for informational relay that can be done physically by road, rail or air. But much of the economic activity with the UK is vitally dependent upon the transport of people, goods and services.

And so still (thankfully) a long time away from the wholly e-connected distopia described in Graham Greene's 'The Machine Stops'...which ironically highlights a return to the natural and physical.

So whilst undoubtedly e-connection has brought many commercial and social advantages, the fact remains that old fashioned physical infrastructure remains vitally important for the good of the economy and individual and so national well being.

However, after over a century of notionally 'free' infrastructure use – paid for by the largely invisible public purse as opposed to the sensitive private purse – the ultimate true cost of vehicle travel is yet to be wholly recognised by the general public and enterprise alike.

This must change in due course.

As the topic of financing becomes more prescient for all at personal and state levels, the opaqueness – indeed invisibility - of the current system administered by the state and constantly criticised by the private motorist and haulage contractor alike, will need to evolve.

That evolution will require formulae that provides account of the cost-benefit equation, so that users can be better informed and so make more economically rational choices from sets of broader choices about their vehicle travel requirements.

And to so will require innovation, with a far greater proportion of R&D put into the hands of industry and enterprise, so that a new vitality can over-ride years of institutional state conformity by divesting R&D operations as spin-off in the Qinetiq mould. Such spin-off companies then given the freedom to interact with private construction companies and their SWF and PE infrastrcuture fund backers. And to in time set new worldwide roadway standards, eminating from the UK.

As regards toll roads thus far, there have undoubtedly been teething problems – as with the (not unexpected) under-capacity of the M6 Toll Motorway. But such experiences will obviously occur as the toll road system slowly develops from that of a very static, realistically uninformed and slow reacting, pricing system toward something far more trend and user sensitive.

It is an approach that has served well in other 'utility service' spheres, with the obvious example of the internet, telephone and tv channel providers providing highly segmented pricing structures to suit the varying needs of different parties. What the yesteryear GPO or 'old BT' could not possibly have achieved as state-run concerns, in terms of customer service and technological development, has been achieved by the many 'visioneering' private and public companies. The ownership de-regulation of the communications industry changed the face of society and assisted the development of the national economy immeasurably.

However, transforming the engrained public perception of roadways is a very hard task, especially when there appears little or no cohesive grand vision as to what that future may look like.

To this end, such possibilities should be explored, conceived and explained.

[ NB. In parallel there may be changes required made regards the executive responsibilities of roadways, at present seemingly a web of bodies which span-out from the 2 prime 'chairs' of the The Highways Agency and Local Authorities. investment-auto-motives is admittedly wholly unfamiliar with the bureaucratic format].

A singularity of purpose and responsibility appears key.

The difference between the implementation success of London's Congestion Charge toll system and the inability of local government to create a parallel initiative in Manchester seems in large part to result from the presence – and lack of - of a singular City Mayor.

The wide-reaching leadership, PR and legal powers held by such high office then appears to ensure that public and commercial reaction (and opposition) can be distinctly heard via the normal consultative process, but also ensures that what is inevitably an initially unpopular income raising scheme can be realised.

As Britain economically chugs forward very very slowly, symbolic initiatives such as the High Speed Rail 2 (HS2) and the creation of what may be considered a 4th London airport to the east in Southend promise themselves as precursors to a far more dynamic 'Great Britain'.

Yet the UK's road system today demonstrates itself on a daily basis to be both the thorn in the heel of commercial and social mobility, and hence the slowed circulation of national productivity.

As former Prime Minister, Lady Thatcher once remarked that...”you and I come by road or rail...but economists travel on infrastructure”.

The austerity era has induced the British population to start thinking like pragmatic economists on a personal and household level. Now it must do so on a national level. Part of that starts at the end of their individual driveways.. between 80-100mph, mimicking the model of the German Autobahn.

This then allows differing driver types and their relative vehicle types better between 80-100mph, mimicking the model of the German Autobahn.

This then allows differing driver types and their relative vehicle types better between 80-100mph, mimicking the model of the German Autobahn.

This then allows differing driver types and their relative vehicle types better between 80-100mph, mimicking the model of the German Autobahn.

This then allows differing driver types and their relative vehicle types better

Wednesday, 4 April 2012

Macro Level Trends – UK Investment (Part 2) – New Perspectives on Toll Roads...Examples to Date.

The previous web-log provided a very basic overview of why the UK should continue to review the broad topic of 'road pricing'. Given the present (and indeed long-term) dire state of public finances it is a subject that must be addressed with both clear investment rational yet public sensitivity.

New infrastructure spending programmes will need to span and weave many multi-party stakeholder requirements and ideals, demonstrating much improved national road-network productivity and general satisfaction of multiple user types, Central to such infrastructure re-invention the topic of R&D enabling highly visible 'cost-benefit' advances, which in turn may underpin a convincing business investment template. This now required by a more demanding clique of infrastructure backers, exemplified by the increasing number of global and regional infrastructure funds seeking out new 'value extraction' template formulae, and either behind them or independently alongside, those cash-rich, non-UK foreign investment houses in both SWF and PE forms.

Background -

The pattern of Britain's 21st century physical transport demands will undoubtedly alter when compared to the pattern seen last century, as a natural consequence of an e-connected world, social trend changes and what may be argued as a 'post-peak' slowing of economic growth activity as part of the 'new norm'.

However, national and regional infrastructure - in all its guises: from internet connection 'richness' to the 're-commandeering' of the canal network - will still obviously remain as the primary social and commercial enabling support device by which individuals, commercial enterprises and the state will undertake their respective functions.

However, in what is today a seen as a highly integrated - notionally singular – global economy, the now ageing general infrastructure of the west, largely created in the post WW2 boom years, is undoubtedly loosing its previous capability lead versus the more recent advances made in newer emergent economies such as S.Korea, China and elsewhere, with those country-specific advances expected to be replicated across the remainder of Asia, S.America, India, the CIS and Africa in time.

Where once the UK was perhaps the “sine qua non” of modern infrastructure development, conjoining the best of American and European planning methods and technology, Britain well recognises the heavy public cost burden now apparent in simply maintaining what is ostensibly 'yesteryear infrastructure'.

Entrenched long-term national debt together with meagre near and mid-term economic growth conditions inevitably prohibit any further sizable public expenditure; as both debt-GDP measures and PSBR levels require taming. This leaves little alternative but for the UK to rely upon private and foreign funding relative to infrastructure re-furbishment and renewal.

This in turn necessitates greater appreciation and focus upon commercial 'value-creation' and so creates an arena where the social good and commercialism must entwine, perhaps the very philosophical essence of CSR, and possibly eventually a return to Britain's Victorian past when the masses recognised that “the corporation” stood as a privately held but publicly orientated hybrid entity.
Consequentially, it is inevitable that a greater commercial bearing will be placed upon publicly used infrastructure, with roadways being perhaps the prime topic for business and physical development, and so increasing deployment of the toll road, albeit in electronic pay format compared to the hal'-penny and penny coinage format of centuries ago.

The UK Picture -

There have been five primary British examples to date, which have thus far resulted in three of the four schemes becoming generally accepted. Those road-toll schemes, in order of appearance, are:

1. The Queen Elizabeth II Bridge (over the River Thames).
2. The Central London Congestion Charge
3. The Greater Manchester Congestion Charge
4. The M6 Motorway “Toll Road”.
5. The Greater London Low Emission Zone

As is evident today, these initiatives span both 'proactive' privately funded and privately collected tolls regards new infrastructure build (QE2 Bridge and M6 Toll) and 'retrospective' pricing of state infrastructure assets (London & Manchester “CC” schemes & London Low Emission Zone).

The QEII Bridge came into being as part of a government Private Finance Inititive (PFI) in 1988 and completed in 1991, to enable greater traffic flow efficiency across the Dartford-Thurrock river crossing; a capacity expansion programme to support the over-burdened Blackwall Tunnels.

[NB Critically, the river crossing of both northbound (tunnel) & southbound (bridge) routes utilises instant recognition/instant payment technology to enable a pre-paid usage facility for regular crossing users; known as “DART-tag”].

A generally successful toll implemention took place within Central London via the 'Congestion Charge' scheme, introduced as part of the then new London Mayoral city transport reform agenda; effectively managed by TfL. It came into being in 2003 pertaining to central and inner London and was extended westward in 2007 – the extension retracted in 2011. As part of expected revenue raising efforts, its simple initial flat-fee and exemption pricing structure appears to be progressing toward a more nuanced methodology relative to vehicle and user types.

A similar 2008 initiative became a flailed effort in Manchester when government sought to create 2 'inner' and 'outer' ringed areas across the city under the wide-span programme previously known as the Greater Manchester Transport Innovation Fund. Questionnaire polling conducted amongst the public at the time found typical initial “Yes but No but” public reaction, appreciating the positive infrastructure improvements of the proposed scheme but preferring not have to incur the costs. The issue went to the voting polls amongst Manchester's 10 constituent boroughs and was voted against by a massive majority, so terminating the scheme in the near and mid-term.

[NB The GMTIF a local sub-element of the broader national Transport Innovation Fund which delineated local/regional (Congestion TIF) and national (Productivity TIF) infrastructure monies and planning. The TIF has now been superseded by the Urban Challenge Fund].

The M6 Motorway Toll Road (otherwise known as the Birmingham North Relief Road) was conceived in 1980 with one of the five proposed routes settles upon in 1989, created to alleviate M6 slow / start-stop / grid-lock of the M6.

It was an early example of a contemporary Public-Private Partnership project in which the tender winner (Midland Expressway Ltd) was given a 53 year tenure to construct the highway within 3 years, operate it using 'toll plazas' and the like for 50 years, at the end of which the road would be passed onto the state. Opened in 2003, unusually, toll rates are left flexible and set by the operator (reviewed every 6 months) with no upper limit pre-ordained by government. Thus it operates as a wholly insular highway. There are four modes of payment collection: automatic coin bins, cash booths with attendants, automated credit/debit card method or by the pre-paid electronic 'M6 tag' (as with the Dartford Crossing). The proposed extension route known as the M6 Expressway was abandoned in 2007 due to cost and construction difficulties.

[NB Midland Expressway Limited (MEL) is owned by Macquarie Infrastructure Group; see previous post].

Very basic research indicates that capacity levels on the M6 Toll have been less than anticipated, the early years showing “disappointing” usage levels, 2005 showing about a 66% capacity rate (50,000 vehicles versus an expected 74,000) and declined in 2008 to about 50% capacity, that rate still the case as of December 2011.

This demonstrates the obvious tendency for drivers to avoid what is considered an overtly high fee, when alternative route(s) are available. However, what is interesting is the manner in which the toll roads owners, Midland Expressway & Macquarie have chosen to run their business model, offering the road effectively as the premium-priced alternative, as opposed to dropping toll prices to attract greater custom. This the inevitable result of a dual choice 'M6 offering' as is the present case, and would not presumably be the case – given its monopolistic bias – if there were no alternative.

The Greater London Emissions Zone may be viewed as a toll zone by virtue of the fact that it imposes a hefty fee upon what are classified as high-carbon emitting vehicles. However, it of course operates essentially as a deterrent and so catalyst for behavioural change to heavily prompt those truck and fleet operators who wish to transport through greater and inner London to use newer, cleaner vehicles.

The International Picture -

Having shown various UK examples, the following provides a very basic view of the other prime international cases:

The small but wealthy island recognised in the early 1970s the mismatch between the city-state's economic boom with the inevitable rise in materialistic consumption patterns including passenger vehicles. It pioneered the use of a toll fee to enter down-town (CBD) Singapore in 1975 called the Singaporean Area Licensing Scheme, which has operated in conjunction with other 'deterrent' policies which make car ownership costly. This scheme was replaced by an Electronic Road Pricing Scheme in 1998, operating via overhead detection gantries which collect vehicle identification information from licenced and unlicenced vehicles. An electronic chip held within a windscreen mounted 'pass' is linked to a pre-paid credit account and the vehicle's annual (re)registration process. Unsurprisingly this sophisticated level of vehicle tracking with an ability to effectively monitor and so price individual journeys – becoming increasingly 'real time' - demonstrates Singapore as the most advanced 'intelligent' road pricing case-study. Advantageously, as with 'top-up' mobile phones etc, the scheme provides for substantial amounts of credit-based income accrued ahead of client usage, thus assisting the state's own public finances – which includes its prime SWF: 'GIC' (Government of Singapore Investment Corporation).

Toronto, Canada:
Like Singapore this uses 'open road' automatic road-price billing and has been implemented on the 407 Express Toll Route (ETR), in a system which is able to either photograph a vehicle license plate for non-registered users or identify the I.D. of an in-car transponder and so bill the owner. The system has been criticised for a number of technical failings which have incurred erroneous costs and so unjustified debt-collection demands from drivers.

Stockholm, Sweden:
After trialling the Stockholm Congestion Charge was permanently introduced in 2007., with income collected dedicated to Stockholm's road improvement programmes and general regional environmental concerns. The system identifies a vehicle's entry and exit from the controlled zone which itself is price regulated based upon time of day and traffic flow demand. Sweden's intrinsic eco-concerns have ensured that electric vehicles are amongst the officially vehicle exempt list (inc: diplomatic cars, military vehicles etc). As with other systems the technology consists of number plate recognition and ID transponder.

Milan, Italy:
Started in 2008 as a trial, the scheme was titled 'eco-pass' and affects the central Cerchia dei Bastioni area of Milan. An extension in 2009 ran through to 2011. In early 2012 the initiative was re-titled 'Area C' and recognised as a conventional congestion charge exercise. Importantly, this initiative differed from others by actually utilising from the very beginning – as central to its ideology - defined (vehicle emitting) CO2 categories.

[NB This in contrast to the flat-fee structure in London, Toronto and to the daytime-rates which are applied to Singapore and Stockholm].

San Francisco, USA:
Proposals were forwarded to the San Francisco Board of Supervisors in 2008 and 2010, seeking a trial programme to be instigated by 2015.

New York, USA
As part of Mayor Bloomberg's 'PlaNYC2030' a proposal was submitted in 2008 to instigate a 3 year trial programme. After a protracted city-wide debate and an effectively 'strung' outcome, the federal monies intended for the New York trial were transferred to Chicago for public transport needs.

Building Future Pricing Formats -

These cases highlight the manner in which the character and capabilities of 'congestion charging' has evolved over the years, each demonstrating a specific locally-tailored mix of policy-ideology, budget availability and technical solution.

Yet the most important aspect to developing a successful, long-term road-pricing model is the ability to introduce the scheme in an attractive manner, possibly having to 'sugar the pill' for the public. Thereafter continually manage the prevailing income stream to deliver the near, mid and far-horizon ROI expectations relative to initial capex costs and through-life maintenance costs.

As noted, to date there have been 3 pricing dimensions applied:

1. Flat-Fee
2. Graduated Daytime-Rate
3. Graduated CO2 Emissions Band Rate

Thus, the applied pricing structure will very much depending upon specific local conditions, especially regards scheme introduction.

But it looks very much the case that the most progressive of schemes will seek to merge various criteria so as to make any future scheme more sensitive to social and economic needs and allow for a rational and acceptable road-pricing framework.

Part 3 -

In the next web-log investment-auto-motives seeks to provide brief (and very incomplete) analysis as to how the future of Britain's road infrastructure could evolve relative to 'market segmentation' theory so as to generate alternative income streams and thus attract new 'deep-pocket' rounds of investment monies from foreign sources.

That income to be necessarily utilised to provide for the much needed 'leap-frog' of infrastructure productivity capabilities and of course to similarly improve by a marked degree the 'public good'.