Sunday, 24 February 2013

Micro Level Trends – Global 11 VM Outlook – (Part 3) Corporate Insights

Having previously set the general scene for the 'auto-majors' in Part 1, and provided commentary for GM, Ford, FIAT-Chrysler, VW, BMW and Daimler in Part 2, this third portion of the current weblog gives insight into the present strategic position of the remaining players; namely: Renault-Nissan, Peugeot, Toyota, Honda and Hyundai.

A similar content layout is used to maintain conformity, and so reflect the present importance of the North American vehicle market – at the global level - to investor sentiment.

Informed observers will recognise that the Renault brand and Peugeot brand had little interaction with those “big hitter” American events: the Detroit Motor Show and SuperBowl. (Though of course the former gains an indirect boost via its major shareholding in Nissan).

Of course all of the 'Global 11' are exposed to a far more lacklustre European marketplace, news from press agencies reporting the fact that certain auto-companies have endured poor sales performance in the first month of 2013, but only one drastically out of line with the general 2012 decline trend, others matching that trend of -8.5% drop in sales.

But expectations are indeed better, with between a 5-3% drop expected in FY2013 within Europe by forecasting agencies and auto executives (seen in their outlooks). So seemingly showing a new market bottom, before macro-economic traction appears in H2 2013 and 2014.

Add the prime momentum of the North American market to what investment-auto-motives believes will be a notably improved H2 2013 (thanks to Germany and the UK) giving secondary momentum,


Renault-Nissan -

The Detroit Show obviously housed Nissan with, as ever, no in-market imperative for Renault. The Japanese company showcased the Resonance concept (a mid-size cross-over) alongside its new model year production vehicles such as the 370Z, Pathfinder, Rogue, Sentra, new Versa Note (compact MPV). The Infiniti vehicles highlighted the updated Q50, which has ever greater electrical content replacing mechanical and electro-mechanical tasks. A one-off GT-R named 'Mr Bolt' (referring to Usain Bolt) was made available as an auction special (raising over $200,000 for charity).

Resonance hints to the replacement for present Murano, but more importantly from the corporate product strategy perspective, it infers to important 'internal' and 'external' corporate influences.

The general body-side shape and its 'DLO' (glazing) appear very similar to the smaller new Renault Megane, though altered beyond the C-pillar. This infers that across their respective vehicle segment ranges that Nissan and Renault seek ever-greater design, engineering, development and production commonality in a bid to meet corporate cost-down targets. Under-the-skin systems sharing was a prime technical goal over the last decade, so it may now be the case that more obvious, (though treatment and detail disguised), sharing will take place regards the BIW (body-in-white) as a core 'internal' driver.

Of external influence appears to be Nissan's desire to partially mimic Toyota, not only with its crypto-declaration that Hybrid powertrains are ultimately more pragmatic and 'usable' (versus the EV path it had previously trodden) but by adopting very similar front lamp design for Resonance from current Prius (also applied to the rear); with a 'comet tail' that runs along the hood/bonnet and tailgate shut-lines.

These two observations indicate that beyond a few exceptional examples such as Juke, Nissan may to date be said to have been lagging Honda and Toyota in the product stakes.

[NB Japan's 'Big 3' have historically played out different product strategies to span domestic and international markets; Honda historically offering fashion-leading products which in turn trickle-through].

However, whilst Nissan is in styling catch-up mode, its ability to leverage internal corporate capabilities with Renault means that it could overtake its Japanese peers regards the ability to reduce costs across its full model range and across international operations.

This has been extrapolated with its now well established Russian interests, thus increasing ongoing efficiency via deployment of industrial alliances. Obviously initially seen with Nissan. Thereafter with AvtoVaz (of Russia) and latterly with Daimler AG.

Although the Daimler alliance offers opportunity regards small vehicle architectures, powertrain, contract manufacture of Mercedes Citan (light commercial vehicle), and seemingly more limited EV programme. However, beyond van production the ultimate ability to best match Renault-Nissan and Daimler needs so as to capture optimum savings and technical advancement may be limited given possible proprietary differences.

In direct contrast to marrying the needs of two 'advanced' auto-makers, there has been and will continue to be greater opportunity for industrial cohesion between the Franco-Japanese and Russians, since the industrial template created is one of technical cross-fertilisation between 'advanced' and 'laggard' companies, with an onus upon re-use of amortised technology to boost profitability and lowered cost vehicle development and production from the LADA Togliatti plant. So effectively re-running the Dacia model created and employed by Renault in Romania, yet with far greater volume potential across Russia, the Caucuses and an 'Expanded Europe'.

[NB now named Alliance Rostec Auto BV the prime remit to re-develop Avtovaz production capabilities and critically the LADA nameplate (which presently has 33% Russian market share). The intent that Renault and Nissan gain greater (67%) control in 2014 whilst providing new foundations for the broader Russian owned auto-sector.

To access the Russian market, itself seen as a prime growth region in a lower growth world, very recently Renault-Nissan has sought to create a 60:40 JV with Italy's Unicredit to offer finance to private consumers, company buyers and fleet operators. Expected to be established and operation by end 2013. The move will further support R-N's 12% market share and allow it to ride the 5% YoY TIV growth of a region presently worth 2.9m units annually.

Within Europe, of particular importance is the release of the 4th generation Clio, in the high volume B-segment. Whilst France saw its 2012 TIV fall by -13% a contrasting picture emerged in the UK, up 4%. Like PSA, investment-auto-motives believes that Renault will be seeking to use the UK as its European 'beach-head', both with its new core model, and the introduction of the entry-level Dacia brand (Sandero, Sandero Stepway and Duster). Improved corporate liquidity enabling competitive consumer finance.

Of near equal investor interest is the eventual launch of Renault's Capture vehicle, itself seemingly largely derived from the Nissan's Juke. This vehicle would be able to present itself as all new to the Renault range yet also leverage much of the CapEx absorption from the Juke architecture, so with the potential to offer sizeable per unit margins, that would theoretically better that high 7% water-mark achieved by Dacia given the car's price far higher point versus its (Juke based) Bill of Materials and 'ready tooled' production costs; possibly sharing the same UK and Indonesian production lines as Juke for western and eastern export markets.

The oft overlooked matter however is the relative importance of Renault's LCV activities, on behalf of itself, Nissan and contract production on behalf of others, notably GM Opel-Vauxhall regards mid-size vans, with agreement renewal ongoing from 2013, and now Daimler with small vans. Since company and fleet van sales typically appear earlier than private car sales, those auto-makers present in this sector should start to see a much needed, high margin and increasingly strong income stream in H1 2013.

The official 2013 outlook illustrated muted EU confidence, with a -3% TIV drop expected at best. Reliance upon renewed growth in Russia and Brazil is evident, both target markets for all other auto-makers so likely to deflate previous unit margins for all. A revival plan for S.Korea and its Samsung Cars division may be problematic given that the far stronger Hyundai-Kia will be re-focusing upon its home market in reaction to Yen devaluation and possible capacity reductions for export markets. The turnaround in India is still awaited given the JV manufacturing and distribution problems previously seen with Indian partners, plus of course the slowdown in the national economy which will strengthen local Maruti-Suzuki's position after its previous operational problems. Rightly, China is called the 'new frontier' yet R-N sits in an odd position, given that Nissan gained previous favour with the PRC administrators, and Renault effectively rebuffed. The recent Sino-Japanese disagreement over the out-crop islands appears to have softened, so it may be the case that party leaders seek to ironically play Renault against Nissan regards effective new entry versus in-situ capacity re-expansion.

Renaults FY2012 report bolstered investor confidence, given that overall revenues were down by only 3.2% and operating margin as a percentage of revenues by minus 0.8%, showing the group's favourably dis-location from yesteryear European reliance; with its financing arm up by 8.5%. Critically Avtovaz demonstrated a near quadrupling of 'associated company' contribution, so highlighting the importance of the 'Russian Effect' as an income off-set. The details and financial implications of which will be reviewed at a later time, when all auto-players have reported.

Renault's stock price ended the week at E47.37, having previously climbed 20% or so in 2013 to a high of E49.24, now sold-off to a more stable price, though the base resistance band sits slightly lower still before volume buying might resume.


Peugeot -

Obviously, without US presence, PSA did not appear at the Detroit Show, thus given the US market tailwind to most of the Global 11 players, could be said to have been conspicuous by its absence, invariably adding to the weight of investor concern about the company.

That concern obviously lingers, FY2012 sales figures food for corporate doom-mongers; though France's emphatic backing of the company appears to have deterred signs of PSA stock short-sellers.

Unsurprisingly, it has been China, Russia and RoW nations which have only very partially off-set the heavy sales losses across Europe and (more worryingly) Latin America. The current geographic sales mix shows Europe absorbing approximately 1.76m units (-14.8% YoY), China 442k units (up 9.2% YoY), Latin America 283k units (-13.2% YoY), RoW 259k units (up 16% YoY) and Russia 78k units (up 4.9% YoY). Thus of the 2.822m vehicles sold in 2012, 62% were inside burdened EU; the company with broad exposure to the economically constrained 'periphery' nations.

However, during what have been unprecedented times, PSA has sought to both concentrate upon its core vehicle ranges in cars and LCVs aswell as retain a sense of imagination and a brighter tomorrow using various concept cars over the last recent years, its notional ambitions spanning everything from the urban-centric, originally formulated BB1 to the more prosaic SR1 sports coupe-cabrio, to the more fanciful, yet road-ready Citroen GT concept which entertained crowds in London and Paris fashion streets, and latterly the Onyx, a carbon-fibre and copper 'skinned' supercar with diesel-hybrid powertrain.

Seemingly perversely through the economic downturn PSA sought to maintain its Le Mans race programme, winning in 2009 so as to maintain press and public interest in the company as it was experiencing a harsh sales environment. Seeking to maintain it an exciting persona via the Peugeot RCZ (able to do so using a heavily amortised 308 platform) and the Citroen DS range, which itself has pragmatically utilised a mix-and-match philosophy of Citroen and Peugeot parts and systems to create a higher value offering to both differentiate PSA and to eak-out unit margins in specific markets.

Thus whilst its share price and MarketCap has fallen substantially given the company's size as Europe's number 2 auto-maker, and its historic large exposure to that 'single market', the Peugeot family, CEO Varin and his lieutenants have sought to propel the 2 core brands and now a third sub-brand to the fore of target buyer consciousness.

More over, of particular note is the fact that the 'big picture' strategic efforts have not been put on hold whilst sales figures fire-fighting takes notional precedence, indeed quite the opposite, PSA deciding to:

a) position itself as a leading multi-solution hybrid power-train provider (first to offer a hybrid cross-over/MPV with lower cost bolt-on rear electric axle, in the mass European market).

b) creation of the 'Mu' mobility service (fitting car-type option to situational need), so matching the behaviour patterns of an increasingly less vehicle dependent, city-bound young population.

c) [Varin's] work 'behind the scenes' to drive down PSA's large steel procurement bill, (itself aided by the “commodity slump”).

d) the historical move to seek close quarter synergies with GM through its 7% sharehold.

e) recognition of Toyota as an important alliance partner for city cars

f) a willingness to divest of non-core assets and commercial interests.

g) direct action in shuttering unproductive plant(s).

h) the ability to overcome Brussels' concerns about its E2bn loan from the French government.

i) the willingness to absorb a massive 28%, E4.7bn write-down (part of its FY2012 E5.1bn loss)

j) demonstrating 'over-delivery' on cost savings (by 20%)

k) the French government's dismissal of a national stake-hold for the E2bn loan.

Thus, perhaps more than any other auto-maker PSA appears to have been viewing the horizon far beyond the here and now, and whilst recognising the immediate and mid-term units sales concerns, battling that exposure well given its level of exposure; below TIV decline trend during the former 'big hit', and on-trend with FY and Jan 2013 figures.

Ironically, it may even be the case that PSA may actually have a strategic advantage over Renault given its apparent dedication to mid and long-term Chinese capital investment. Given recent premium-seeking efforts and exercises, indicate a desire toward premium standing in China. Whilst unable to achieve such in the west (having seen Renault's failed efforts), it may be able to partially re-invent itself as a French luxury goods company, offering special personal vehicles to China and Asia. So whilst the RCZ may be its “graceful coupe”, the real strategic 'coup de gras' would be PSA's much extended reach into China; leveraging its present joint ventures with Changan and Dongfeng to evolve the DS brand into a kind of “Prada PSA”.

Furthermore the PSA has no doubt contemplated the re-creation its own rally-motorsport heritage in the Chinese manner,both individually on a region by region basis in the mid term, and later as part of the inevitable global expansion of the World Rally Championship, with only Asia and China remaining as virgin WRC territory, though part of the Asia-Pacific championship. Its dominance of WRC at constructor and driver levels over the last decade, as others faltered, and during the Group B 1980s heyday, means that its rally-sport pedigree could feasibly underpin a dedicated Chinese following worth tens of millions of TV viewers and hundred of thousands of route spectators.

[NB as of today, the sport is relatively 'narrow' with only (Indian sponsored) VW-Skoda, (privateer) Subaru and 2012 winners (Malaysian factory team) Proton - a company that has consistently sought Chinese commercial interaction. China was a WRC destination in 1999 but has not hosted since, presumably due to WRC negotiational differences with the FIA, but does host the APRC, and probably a desire to create a 'home-grown' championship for its indigenous auto-makers].

However the PRC administration will not simply open its doors to PSA so as to access the ever growing relatively high spending upper middle classes. As such China will seek ever greater industrial co-operation, with specific interest in hybrid technology for adoption by its own players, (having seen very limited efforts with BYD Auto), and very probably seek to deploy the 'Mu' business template inside Chinese MegaCities in its own domestic image.

But as of 2013, there are 7 reasons for PSA investors to become gradually more optimistic:

1) the “national back-stop” attitude of Hollande's government, having offered a E7bn bond guarantee, itself availed to low cost state bond issuance and ECB OMT liquidity.

2) the devotion to both immediate remedial action and far-horizon strategy formulation by Varin et al under the corporate restructuring plan.

3) [as per Renault] the ability to use the UK and Germany as powerful EU car market 'beach-heads'

4) leadership of the European LCV sector (21%), set for early-cycle sales return

5) the well styled new B-segment 208 (versus Clio, Polo, Astra etc) with #1 sales leadership

6) the #2 Euro market Hybrid provider (behind Toyota/Lexus)

7) the Varin publicised 'clean slate' after swallowing massive balance sheet write-downs, able to buoy from future mark-to-market asset re-pricing and serve additional (non-EU) CapEx ambitions

Though it is painfully clear that unlike its peers PSA cannot enjoy the North American advantage, it has undoubtedly repositioned itself ahead of the eventual European rebound. (Itself seemingly foretold in Europe's re-bounding stock markets, now showing traction in periphery countries). IR presentations more than allude to the fact that it will re-balance its Euro-centric standing with much increased presence within China, even daring to raise itself as a mid-market and premium-orientated French flagship.

And whilst the GM agreement has yet to show true cost-saving and synergistic fruits, Faurecia suffers likewise as a parts supplier to Europe, the Gefco logistics divison undergoes operational footprint restructuring, it is the finance arm Banque PSA (like others) which points to a structurally improved future, assisted by useful if small 6.3% net debt reduction within the group, as its adds to its cash cushion.

Banque PSA shows itself to have a Tier 1 'core banking ratio' of 13%, so able to offer consumer and company client finance that will 'move metal' and indeed could be applied to other non-automotive personal and commercial loan uses, adding further 'receivables' weight to the corporate balance sheet, aswell as the matching an newly emerging industry-wide effort to offer retail banking like deposit accounts.

So whilst web-TV broadcasts the present woes of the “arthritic lion”, just remember that a re-invigorated entity could may well enjoy the immense symbolic power of the 'Chinese Lion' – a subtle fact not lost on the Peugeot family, Board executives and indeed possibly the new Chinese premier Xi Jinping.

Whilst it is easy to bemoan and over-darken PSA's present competitive position, as investment-auto-motives has stated previously, the micro and macro fused winds of change will markedly shift the present storm-clouds.

The Peugeot share price ended the week at E5.72, down from recent highs of E6.40 after an expected market correction given previous over-buying, yet well up from the E4.50 lows seen toward the end of last year.


Toyota -

Toyota seeks to reclaim its past glories in the US and Canada, and ongoing expansion in Mexico, its sales and stock price rebound (since Fukushima disasters and product recall problems) seemingly demonstrate the American public's and investors maintained confidence in Toyota. It has once again overtaken GM in sales volume to return to its previously momentarily held #1, now producing 8.7m vehicles under Toyota and Lexus marques and nearly 10m units including associate nameplates.

During this more economically restrained 'new-norm' era, the company is unsurprisingly focusing upon 'sweating' its present assets, hence no new plant builds for three years, concentration upon globally relevant compact vehicle income streams, assisted by life-cycle extended editions, lower-cost model development initiatives and onus upon full capacity utilisation worldwide.

The Detroit show saw the company showcase various vehicles, with special editions of standard range product, Corolla, Camry, RAV4, special FJ Cruiser etc. Including the sportier Corolla S ((itself essentially a carry-over from 2012), which seeks to compete against the sporty Honda Civic, and draws from Central America's inclusion of a Corolla XRS edition.

Highlighting the compact sedan as both a central product offering and future sales generator was the Corolla Furia concept.

[NB the Corolla nameplate has represent 38% of sales since its American introduction in 1968, is on a world-wide level the most produced car/nameplate in history, and currently holds 13.5% of American compact car market share. Hence the company's desire to trade on that goodwill and defend its position in a very competitive field].

It accentuates the present styling cues derived from Honda, and also draws detailing from its upscale sibling Lexus. Thus seeking to regenerate compact saloon/hatch sales as both more sporting and mature; Toyota USA adding performance elements in wheels and trim so as to heighten its cache to those in the Gen-Y / i-Gen crowd who seek affordable yet customisable vehicle which importantly maintains residual value.

This corporate approach then merges the previous separate intents of the Toyota brand and the 'underling' Scion brand, itself created to attract a new generation, yet from a sales perspective unable thus far., and become less radical to do so. (Offering more conventional cars in limited colour-run series). As to whether the productionised performance Corolla gains a Toyota or Scion badge, remains to be seen. Very possibly both given Toyota's willingness to 'badge-engineer', seen with elements of the present Scion range, and specifically the GT86 / F-RS/ (Subaru) BRZ coupe; so as to minimise manufacturing costs, distribution costs and maximise brand aligned consumer reach.

Lexus showed the new IS200, with evolutionary styling and offering both petrol and Hybrid power units, no diesel available, which appears the right choice for N.America given that diesel is even now seen as 'dirty' given its truck and CV associations, 'clean diesel' adding little consumer pull. Toyota appears then to have reason to believe that those drivers who drive petrol will remain or move to Hybrid and those relatively few US drivers that moved to diesel for fuel efficiency reasons will move on to Hybrid.

During the Corolla Furia unveil Toyota USA stated that it “anticipates improvement in consumer confidence, unemployment, the housing market, interest rates and an avalanche of pent-up demand...we see the market expanding this year” [over the 14.5m units in 2012]. “Camry remained America's #1 selling car, for the 11th straight year and 15 of the last 16 years...Corolla second best seller...Prius third”. And “by the end of the year all Corollas sold here will be built in N.America”.

As for SuperBowl advertising, the 'RAV4 Genie' effort sought to demonstrate the car as the answer to each of a suburban family's individual wishes, as ever using celebrity association and humour to do so. With the prime message that the RAV4's exterior mounted spare wheel has been changed, so that the vehicle appears less 4x4-esque, instead more of a semi-premium cross-over. That advert supported by a similar 'web-spot' where the 'RAV4 Genie' (Kaley Cuoco) makes dreams come true for some city folk to the soundtrack of “I wish” by Skee-Lo, which itself speaks of the desire for a new car. In all it appears little more than a feel-good campaign that boost a positive psychological connection to the Toyota, but with the prompt for people to replay the Skee-Lo track on youtube or i-pod a subtle form and of subliminal coercion.

Wisely, Toyota seeks to maintain its ever more engrained American identity, having set up its NUMMI facility in 1984 with GM, others transplant factories since, entered NASCAR years ago and offered the Tundra full-size pick-up truck to vie against Detroit's Big 3. The fact that old Toyota mid-size pick-ups (like Nissans) have become enthusiast 'classic' and 'retro' items demonstrates its well earned success thus far.

Critically, Toyota research indicates that it is younger buyers who are returning to the market in greater numbers since the financial crash; though that exact demographic of 'younger' has a broad span given that the median age of a Toyota buyer is 54 years old.

Japan's financial calender runs from March to March, so the company's 3rd quarter reporting reflects the October to December period and the nines months previously from March 2012.

Whilst more analytical investigation of sales, turnover, EBIT, net profit and re-expansionary cost-containment efforts will be reviewed at another time, the reported numbers do highlight Toyota's robust turnaround. YoY worldwide consolidated sales for those 9 months grew from just under 4.99m units to 6.63m units, up 33%, whilst net revenues grew by 26% and operating income boomed six-fold, the net income up three-fold.

The earnings rebound of Japanese auto-makers was pre-empted by the markets and Toyota's stock has seen a 35% rise from its most recent low in October 2012.

However, the more sombre but still impressive Q3 (ie Oct-Dec) figures will steady such heady price climbs, with a 9% YoY increase in net revenues, a -16.7% drop in operating income and a still handsome net income at plus 26%.

Those 9 months saw a massive domestic sales drive, assisted by government incentives, which lifted operating income well out of the red, and as that boost-effect waned, so newly emergent demand from N.America has been able to re-balance the income tide and so Toyota's corporate boat; with gains even Europe over those 9 months unlike many of its counterparts; only central and south America seeing a small income decline, again unlike many of its competitors.

Toyota's broad equity interests with Japan's industrial and services base (eg Daihatsu and Hino amongst many others) assisted greatly as the broad national economy re-emerged from previous economic ravage, caused by Fukushima and latterly the Sino-Japanese political spat.

That re-growth confidence is retained in Toyota's upward re-stated full FY2013 forecast figures (ending March 2013).

Japan's willingness to devalue the Yen in a bid to promote exports activity and effectively create inflationary growth at home of course benefits Toyota two-fold, abroad and at home as foreign customers recognise a new price competitiveness in Japanese vehicles – given greater FX pricing flexibility – and domestic consumers seeing personal wage inflation become more confident in spending on 'big ticket' items such as cars. With indeed a propensity for personal income to stay within Japan as the weakened Yen discourages foreign travel and the foreign auto-makers on Japanese soil loose any pricing flexibility they may have previously enjoyed.

Notably Toyota is under-going a new period of CapEx investment, partially paid for (like others) the extended product life-cycles of its current models, and as mentioned, the wide-net marketing of specific vehicle models. YoY CapEx up 21% or so, and R&D up 4%.

However, even though Toyota is enjoying a resurgence in fortunes, one which as an economic pillar of the country will trickle throughout the Japan, it seems likely that Toyota Group may come under pressure from foreign fund holders to divest at least a small part of its plethora of associated companies; to re-evaluate itself as a possibly slimmed 'Vertical Keiretsu'.

For good reason, and indeed seemingly by ancient Japanese law, Keiretsu were formed to maintain Japanese economic and social stability, this re-enforced during Japan's isolationist era when it saw its cultures and values counter to those held by 'western influences'. This could be said to hold true today even if in a diluted form, and could indeed re-emerge if a stronger Sino-Japan relationship forms in decades to come.

But the fact is that from a western and 'modern Japanese' viewpoint there may be much untapped value existing within the component parts of any singular Keiretsu division. Value which could be unearthed and maximised by greater autonomy and possibly listings on national and international bourses.

The paradox is however, that the Keiretsu model may could be re-inforced, as China's own state companies are notionally privatised but actually formed into the Keiretsu / Chaebol model themselves.

Nonetheless, given Japan's continued need for new economic traction, Toyota should seek to understand how it might conservatively divest so as to act as a catalyst for the national economy, providing the ability to direct its large savings base toward more visible high-value R&D orientated activities, which in turn would attract FDI and so commercial dispersement opportunities..

Whilst the new GT86 model seeks to re-capture the buzzing corporate energy of Toyota's 1980s past and Prius dominates practical eco-tech, now back under Toyoda family influence, it may perhaps once again review the innate structure of Toyota Group, so that it grows ever stronger in the 21st century.

Toyota's stock price ended the week at $102.34, down from a February climb from $96 to near $106, a recent bounce off of $101 still yet to be directionally determined.


Honda -

Like other Japanese auto-makers, the troubles of 2011/12 have massively altered Honda's previous comfortable existence, forced to re-structure its operational cost base through-out the supply-chain and across the value-chain, within Japan and SE Asia and re-emphasise the importance of maintaining lean operations in the West (seen by reduced shifts in UK plants).

However, with signs of light toward the end of that previous tunnel, with 2013 seeing 4m units produced globally and ambitions of 6m by 2017, more than 1.5m of those from the new 'compact series', the Fit, the City and all new small SUV, the architecture highlighted in the official presentation at the Detroit Show.

Just as Toyota inferred the American and global importance of compact Corolla (B-C) segment, so Honda does the same for Fit/Jazz in the lower (A-B) segment

[NB the unconventional 'centre-tank' packaging of the Fit/Jazz was recognised by investment-auto-motives some years ago as Honda's prime platform enabler, providing platform and module-set engineering flexibility and industrial competitive advantage for packaging Hybrid component sets; an advantage unfortunately delayed because of the financial effects of 2008 and 2011].

The Show itself displayed Honda's dealership models aswell as, in the now usual manner, forthcoming models coyly termed 'concepts'.

Having seen the Accord Coupe of 2012, an almost production ready item, this year saw a less production ready small cross-over, presently notionally called 'Urban'. Derived from Fit/Jazz packaging, it will be manufactured in Japan and Mexico, necessarily so in the latter to maintain unit margins, off-set Japan's production costs, and provide cross-continental N and S. American distribution reach.

[NB the model on stage at Detroit appeared well beyond a 'clay' with fully representational exterior parts, yet the glazing seemed to be that of 'dynoc' so indicating that interior fitments are still being engineered].

The (Acura) NSX supercar concept was re-shown with slight alterations, promising Hybrid powertrain and AWD system, via a mid-mounted V6 ICE and electric motors propelling front wheels, it highlights Honda's desire to be provide a spiritual successor to the original early 1990s car, so as to try gain a badge status equal to Nissan's GT-R, Audi R-series and other performance and luxury cars. Also within Acura is the new MDX cross-over, stated as a 'prototype'; a description that other manufacturers should also employ for obviously near production vehicles; even if not the true definition of a prototype (given roots in engineering development). But most urgent for Acura income is the release of 2014 RLX large sedan to buttress the smaller ILX, with an RLX AWD Hybrid reputedly offering 30mpg city /30 mpg freeway /30 mpg combined fuel use; its drive-train related to that of the NSX.

Honda's official Detroit presentation included rhetoric which highlighted the fact that 90% of Honda's vehicles sold in America are manufactured in America, and presaged the fact that Accord has been the benchmark mid-size sedan since the mid 1990s, it and its siblings giving Honda the best sales in 2012 since 2008, and the company;s 4th best year in it American market history

To buoy Accord's stature, the 2014MY Accord will feature a Plug-In Hybrid model, developed from 'EarthDreams' philosophy, whilst slightly earlier the Accord Hybrid launched in the Fall/Autumn.

An interesting initiative has been Honda's Motor's US division partner with Solar City, in a pilot project to enable a relatively small number of dealerships (10-20) and client households (2500-3000) install solar panels on a monthly contract basis, instead of paying a single high fixed price transaction. This obviously better suited to western and southern states that experience greater strong sunlight hours per year. Suited to the emergence of Plug-In Hybrid Vehicles (PHEVs) versus more range limited EVs, though EVs can still pragmatically operate in such mild climates as city-cars.

When read between the lines, a general interpretation of the official dialogue indicates that Honda will seek to avoid too much head-on competition with Toyota in the compact (Corolla vs Civic) class, instead dedicating its efforts towards small cars (Fit and variants) and a large range of SUVs and Cross-Overs (inc new 'Urban'.

The SuperBowl advertising campaign was various, it showcased the 'Urban' vehicle in fast moving night-time imagery to muster pre-launch interest, it showed a slightly humorous advert for Civic with Indycar 'legend' Mario Andretti, and in simple manner a value message regards specification and purchase details for the Accord.

As for its recent performance, it obviously too has enjoyed the Japanese economic rebound, its Q3 FY2013 earnings report (Oct-Dec 2012) indicating returned signs of improved health. Post-poning a more detailed deconstruction of its numbers for another time, the 9 months between March 2012 and December 2012 shows net sales revenue up 28.7% YoY, operating income up by 242.2%, EBIT up 137.8%, net income up by 108.3%. The EPS for the 9 month period rose about 200% YoY.

As with Toyota, the standalone Q3 period saw a reduction steadying of the previous explosive growth patter, with net sales revenue up 24.9% YoY, operating income up by 197.8%, EBIT up 53.5%, net income up by 62.5%. The EPS for the 3 month period rose by about 60% YoY.

[NB Some web-TV reports indicate that Q3 growth for Japanese industry, was flat overall, but even when slowed from its previous frantic growth pace, its auto-makers have enjoyed still highly buoyant re-growth].

As for its EoY forecasts (ending March 2013), Honda believes it will deliver approximately a 23% YoY improvement in net revenue, a 125% improvement in operating income, a 100% improvement in EBIT, a 75% improvement in net income and 88% improvement in EPS. All on a slightly downward sales revision of car, motorcycle and power-product sales.

However, it should be noted that seems likely to deliver these figures, even though it has seen a dramatic decline in European profitability as a result of intent to 'buy market share', which it is doing to enable its global platform ambitions.

Unlike divisional problems at BMW Motorcycles – seeing the sale of the Husqvana brand – Honda's broad mix of utility and performance motorcycles has faired well in N.America and Asia in (Japanese) Q3, showing a 256k unit improvement across those markets, the majority of which was utility Asian based, this off-setting a 48k unit loss in Brazil; so showing a Q3 YoY total up by approximately 6%. However operating margins in the division have slipped from 10.6% six months earlier to 7.4% in Q3, highlighting the greater Asian mix.

And the tide appears to be turning favourably in the Power products division, with the loss-making period of FY2012 now delivering break-even operating income and operating margin in Q3.

And the Financial Services business, whilst fallen from its Q1 2012 highs of 38% operating margin, most recently delivered a still respectable 27.6%.

Of interest is the fact that Honda has sought to de-list its Y50 common stock offering from the London Stock Exchange. This comes as little surprise to investment-auto-motives, given the small size of the Autos section on the LSE, its odd mix of few 'giants and dwarves', contrasting the far greater trading volumes seen on the Tokyo exchange, the NYSE and across Europe.

As of today, given the increasing ecological pressures on automakers to 'down-size' their vehicle offerings in the west, and the need to compel the EM masses into small cars, a major theme of global vehicles will be the ability to integrate traditional car technologies with that of smaller engine capacities typically seen in motorcycles and the ability to integrate alternative power sources. With at the extreme of integrational picture, the ideal that one day a vehicle can not only draw energy from elsewhere as a 'plug-in hybrid' may, but also possibly, in a reversed condition, actually feed un-used energy back into a national or international power grid.

Honda Group's own industrial structure, and its future-forward initiatives such as robotic Asimo, theoretically puts its at the forefront of being able to deliver such a future.

Honda Motor's stock price ended the week at $37.56, down a dollar from recent highs, yet still with a seemingly strong rebound from its $36.85 recent floor.



Hyundai-Kia has enjoyed over the last 5 years or so entered the early phases of its maturation period, both in terms of global footprint, and regards product aesthetic and quality. These three critical elements, having taken 30 years to evolve, together with what has been a weak Won (so enabling export income) have been the foundational aids to the company's sales success.

However, today with its own ambitions to move up the price ladder to mid and upper mid price points – so as to support S.Korea's own increased cost base and its social aspirations -- means that it faces the challenges of moving from perceived as an entry level vehicle option to a fully fledged mainstream offering, having matured itself first within its domestic market to try a match US and (higher) European quality benchmarks. The creation of the Genesis and Equus nameplates demonstrates its desire to match premium segment expectations, naturally doing so with lower pricing and higher vehicle content.

These ambitions made evident at the 2013 Detroit Show, where it showcased the company's dealer available range, and new introduction and possibility. The new Kia Cadenza large sedan (a re-badge of the Korean market Hyundai Azera/Grandeur) was shown as the new US flagship for Kia. And the Genesis HCD-14 large premium sedan concept designed to high-light its continued attempt on the 'near luxury' and 'premium' sector (ie versus Buick, Cadillac, Lincoln, Acura, Infiniti) (BMW, Mercedes, Audi, Lexus).

Hyundai's US leaders understandably sought to re-emphasise its meeting of last years sales target of 700k units. It highlighted its low incentive spend vs competitors, though itself a function of the lower sticker price, and its low fleet mix, again a partial function of volume.

[NB A point about Hyundai's US market presence is that it more closely reflects the true market price elasticity of N.America, and reflects the contortion of major brand historical pricing].

Hyundai is obviously seeking to micro-manage the residual values of its premium-seeking Genesis and Equus vehicles, seemingly able to support used vehicle values via a returned vehicle trade-in policy that also apparently generates customer loyalty; this feasible at present given its low sales volumes. This part of the strategy to “evolve public perceptions from a 'value brand' to a 'valuable brand'. Given the relatively low cost in satisfying these early adopters Hyundai has rightly offered a valet type service which reduces the usual dealership run-around for its high-end clients, its 'home call' service a critical element.

By lowering the barriers to entry and slightly altering the playbook (price, residual value and service) the company seeks to create the right formula to overpower the near luxury and premium segments. Each competitor brand of course will be calculating its capability to match or nearly match that purchase mix.

A note of caution though is the self-congratulation regards customer feedback on product and service quality ratings. It has always been the norm that early adopter customers of non-conventional brands have sought to defend their purchase decision, both internally to themselves and externally to others. Such leading scores were also noted for the likes of Skoda at the opposite end of the spectrum twenty years ago; during its modern-era early conquest days.

It appears the case that the real strategic function of Detroit 2013 was to try and underpin the credibility and gravitas of the Hyundai and Kia brands, using the recent success of Genesis, and the theatre of HCD-14 (little more in actuality) to cast a halo over its semi-premium and mass-market underlings

Soon after Detroit, the SuperBowl campaign provided a series of humorous but differently themed adverts relative to each vehicle type shown. The Sante Fe mid-size cross-over came in two versions. The first demonstrating itself in a 'guardian role' as it collects the friends of one nice child who'd previously been intimidated, challenged and had his football taken. The physically smaller but determined new group of friends arrive, voicing their preference for a 'tackle' (not 'touch') football game. The obvious overtone is that of Hyundai, as the relatively new kid on the block, seeks to take on the older, 'bigger' incumbents. In the second, it serves as one family's adventure vehicle, as they enjoy various activities with cinematic overtones; intentionally including Star Wars to associate with the popularity gained by VW's own previous 'Darth Vader' advert.

But by far the best effort was Hyundai Canada's airing of 'Gaspocalypse', in which a middle-class Sonata Hybrid driver is chased by a threatening gang of V8 driving MadMax lunatics. The the first twist being that they run out of fuel first so denying their 'capture', the second punchline being when the Hyundai driver speaks to the gang them at the gas station, berating their fantasist 'weekend warrior' ways.

The brand then seeks to evoke a very middle-class sentiment...the ability to have fun, operate within the realms of social respectability and responsibility, and strength subtly challenge those that don't.

2012 proved another good year for the company, its global sales up over 7%, within which American sales were up by over 8%, European sales up by over 10%, Chinese sales up by nearly 12%, RoW up by nearly 7.5%, with Korea down by just over -2%, but growing domestic market share. The model sales mix increased notably in small cars, highlighting the importance to European and Chinese sales. Group revenue was up 8.6%, with operating profit up 5.1%, net profit up by 11.7% and profit margin increased to 10.7%. Its cash cushion boosted by about 8% YoY.

The official 2013 outlook sees overall sales increasing by 5.7%, the majority originating from international manufacturing and sales as Korea sees a -3% production and sales contraction. The US and China unsurprisingly expected as the main profit creators, the mid-size Sonata and compact Elantra being the respective prime income contributors, which bodes well for unit margins.

The future for Hyunda-Kia looks “balanced”, with both obvious headwinds and tailwinds.

Having enjoyed western and EM growth over the last decade, boosted by EM economic emergence, by value-seeking buyers in western markets, and by the stumbling of Japan. Sizeable new 'headwinds' have appeared; primarily by way of the Won's global basket FX appreciation and Japan's recent return to power.

Hyundai may be required to endure a tougher era for its 'exports' given the end of what has been long-lasted period of Won depreciation in light of the Triad region (N.America, Japan and probably Europe) probable willingness to maintain ongoing 'currency wars'. Yen devaluation especially critical for Korea given its impact on the Korean-Japanese vehicle export race. This illustrated in even domestic market competitiveness, whereby Hyundai has seen its large car sales down -20%, reducing their list price by 3% or so to maintain Korean buyer loyalty; in the face of Toyota's Camry winning Korea's COTY.

More positively, N.American re-expansion is a 'rising tide' for all auto-makers, and the fact that a surprisingly buoyant UK market should lead the way for Europe's return over the coming and next year. But for both markets it is still early days, with improved but still risk-averse consumer credit flows, so the importance of maintaining value offerings remains; a natural position for Hyundai-Kia.

Hyundai's stock price (on the European market) ended the week at E24.59, up from a recent E23.20 low, accelerating hard within its usual 'slow climbing trending range' with its 'on-off' trading manner.


Conclusion -

With present ongoing European market fragility and a settling of lower growth across EM regions (though in grater volumes), this still fractious period may very well prove to have ultimately been over-looked as a prime investment period for autos.

At a time when Berkshire Hathaway pays a 20% premium on Heinz for a “safe” company at a p/e of x23, and at a time when powerful hedge funds seek to short questionable business models or corporate operations - as seen by Herbalife and Apple Inc - the very structure and transparency of the auto-sector provides investment “safety”.

Physical assets (capital goods and inventory), improved cash-flow, global brand power, the massive global aspiration for personal transportation, the simple 'abacus' calculation of units sold plus contribution of any captive finance division (many with psuedo-banking aspirations), and the car company of today continues to be a slowly re-strengthening pillar of the world's macro economy into tomorrow.

That perspective understood by Berkshire Hathaway with its purchase of 10m more shares in one certain auto-maker last year, to add to the 15m already held.

Yes, recent market bullishness has and will fade over the short term, but that eradication of sentiment driven 'froth' only serves to draw the investment eye ever closer to company fundamentals, regional production/sales TIV dynamics, broader inter-continental economic relationships, and the greater inference of rooted 'glocal' advantage for an auto-manufacturer.     


Post Script -

Japan's Eco-Tech Industrial 'Renaissance'

investment-auto-motives believes that any Japanese economic rebound, obviously massively assisted by the now (G8/G20) uncontested Yen devaluation, will come through a smaller scale but similar national automotive industrial strategy template to that seen in the 1960s/70s.

Then, as a natural evolution of the Kei car era, the main manufacturers not only used a great deal of common component parts across their own respective vehicle ranges, but utilised a great deal of same and similar items (across all 5 system types) 'under the skin'. It was such industrial cooperation which enabled Japan's low cost base plus (as now) a weak Yen, that made it an export earning (so balance of trade) powerhouse.

Of course, given today's relatively high general cost base of Japanese and Triad production, any present boost effect from industrial alignment will not parallel that of 40-50 years ago; but will nonetheless add support to Japan's economic rebalancing efforts. The major continued focus being the production scale efficiencies of Nickel-Cadmium battery packs and associated electronic hardware for Hybrid vehicles across Japan's main auto-players.

Moreover,the Detroit Show inferred that the Japanese seek to slice-up their share of the N/American market in the following manner:

Toyota seeking to primarily offer mainstream compact and mid-size coupes/sedans/hatches/wagons and affordable sportscars in petrol and Hybrid forms, Honda primarily offering small cars, a mid-size range and lower functionality cross-overs, in petrol and Hybrid form (plus diesel elsewhere), and Nissan offering compact sedans, various MPVs and higher-functionality SUVs with Hybrid introductions later than its peers.

Friday, 8 February 2013

Micro Level Trends – Global 11 VM Outlook – (Part 2) Corporate Insights

Global VM Outlook -

In parallel with the Q4 2012 and FY 2012 reporting season, the following provides a general 2013 outlook view of each of the primary auto-makers within the “Global 11”. Using intelligence gleaned from those auto-makers, other sources and interpretation by investment-auto-motives.

[NB When all auto-makers' FY2012 results are reported, investment-auto-motives will provide relevant comment including ongoing 'Coupled Ratios' analysis].

The following commentary from investment-auto-motives, in this Part 2, seeks to paint but a general impression picture upon what is a broad canvas, pertaining to various auto-manufacturer's strategic position and that consequence regards corporate earnings potential, and thus investor interest.

At a time of still fragile but seemingly fundamental positive attitudinal change toward a still much deflated 'cult of equities', all investors types should view the automotive sector with a mid and long-term perspective. Economic vitality and ultimately people's lives depend upon seeing the sector's growth settled at a strong but steady pace, with the recent reactionary 'drag-strip' stock dynamics over the short-term 'quarter (mile)' melded into a sustainable long-haul pace over the years to come.

So as not to overwhelm, six of the eleven auto-makers will be discussed herein; the remaining five to be seen in Part 3 to follow this web-log.

Given present attention drawn by the North America, and the level of broad interest regards the recent Detroit Show - demonstrating US autos as once again a re-strengthened, fundamental pillar of the economy, views on those western manufacturers most able to directly gain – and so pass on investor gains - are provided.

Hence: General Motors, Ford, FIAT-Chrysler, VW Group, BMW and Daimler.

[NB The resurgence of the US and Canadian economies will obviously assist the remaining: Renault-Nissan, the Peugeot [brand] via its scooter only sales, and of course undoubtedly Toyota, Honda and Hyundai-Kia; the likely impact on their corporate stock 'up-side' appears less so, given the level of valuation rises seen in Japanese auto stocks over the last quarter – as part of their foreseen rebound – and the lesser immediate effect on others].

The Primary Six Western Beneficiaries -

General Motors –

GM displayed at Detroit with a renewed swagger given a positive 2012 and climb in stock values and so MarketCap, so assisting corporate credibility from showroom to credit agency.

A new intentionally conservatively styled Silverado/Sierra full size pick-up is intendedly targeted at conservative federal, municipal, corporate and mainstream private buyers, its 'double stack' signature front lamps needed to transfer its stature on the freeway or in the 'shop. Compared to its competitors, the edgy F-150 and aggressive Ram it may appear relatively dour but being 'middle of the road' will assist sales success within 'everyman' Chevy and GMC empires. An all new but heavily competitor style-derived Corvette Stingray expected to have a large enthusiast impact with dealer footfall attraction, a re-freshed Chevrolet Impala with obvious Japanese and Korean styling influence, a new Cadillac ELR Coupe (using Chevy Volt range extending technology) destined to be a small volume ‘halo’ model for the brand with an aged decade long styling theme.

[NB GM was conspicuous by its relative absence regards 2013 SuperBowl advertising, perhaps deciding that the sizeable campaign budget would be better served added to either the per unit dealer-floor incentives pot or given to CapEx budgets or added to a future share dividends. The two ads, highlighting GMC Sierra's warranty provision and a 'director's cut' teaser promo for new Stingray Corvette obviously fulfilled the respective purchase drivers: rationality vs emotionality, thus maintaining a profile, even if relative low].

The company's share price pleasantly presently sits at $28.50, well above its not so distant $19 low and not so far away from its $33 IPO listing price, the rebound thanks to the averted fiscal cliff budget compromise and good news for original new GM investors. However a $2 fall from its Jan 14th high of $30.50 (with recent 50 cents rise) indicates that investors are tentative about GM and its possible need to now buy market share given its lacklustre advertising showing.

Two corporate publications for investors and analysts were dated 3rd and 15th January, the former simply a 'good news' item highlighting December's 5% increase in sales; the latter of greater interest with a diagnosis of forthcoming 2013 performance. To summarise the latter (57 page) report, the company has publicises that it has sought to create what it terms a 'fortress balance sheet', so as to generate further broad confidence in markets, stating that 2012 saw returned competitiveness.

Specifically: profitability again in S.America, a mid-decade break-even plan for GME in Europe, fixed costs assisted by a pension risk reduction of $29bn and CAW agreement, its financial credibility regained with an investment grade revolving credit line worth $11bn, maintained strong liquidity of $37.5bn as of Q3 2012, extended CapEx to $8bn in 2012, US Treasury debt 're-paid', GM Finance division expanded with acquisition of Ally international so providing 'captive financing' for 80% of international sales presence, a JV with WellS Fargo to provide US-centric consumer financing, new model launches, dealer facility upgrades and inventory and pricing discipline.

Derived from a similar Deutsche Bank Conference slide-set, GM seeks to raise its EBIT from 8% to 10% “in the mid-term”, with a bottom line of “mid single digit margins” indicating 5%. Yet the question of pricing discipline, for all the rhetoric remains the most pertinent issue.

Model launches were biased to an affordable Chevrolet at a time when mid and near sub-prime consumer finance has returned and been part of the aforementioned volume sales boost, but that has come at the cost of generous incentive programmes. Undoubtedly new Silverado will provide much improved per unit and so average margins, so rebalancing the cost of GM's effectively 'buying' passenger car market-share, but the true test is whether Chevy can truly stand upon its own two feet, and furthermore now is the time when Buick and Cadillac should be seen to be entering their new renaissance phases, so as to better compete with up-scale Germans, Japanese, (now) Korean and of course Lincoln (itself with a good cultural tailwind - see below).

As for GM's own FY13 forecast, it presently indicates that the US TIV will increase by approximately 5%, GM to take a 'modest' share uptake of that volume increase, small cars volumes and lower margins to be off-set by its up-scale marques, truck production – any US company's best margins stream – to be flat, and improved pricing on new models and unimproved on older previous model-year inventory, general Sales and Marketing costs up, whilst its EBIT higher than 2012 whilst seeing a flat overall YoY margin.

Its 'modest' market share increase then appears to be below the expected 5% climb, which is why such an effort was made to promote the idea of its 'fortress balance sheet'. The only interpretation to be assumed is that the GM share price will not be adversely affected by failure to reach notional sales / profitability expectations.

GMSA, the S.American division, was temporarily hurt by EM contraction, but the corporate forecast shows improved operating conditions, with input price rises (industrial and FX) absorbed by a slowly re-growing market (esp Brazil) in which to disperse costs, with a 'richer' product mix adding income. PESTEL and sector risks exist, such as the possibility of Argentinian government intervention. However, it seems highly improbable to investment-auto-motives that broad swathes of foreign owned heavy industry would be nationalised when (unlike the oil case) the auto-sector consists of a mobile tooling and other capital goods.

However, GM rightly points out its need to “manage sovereign risk” given the need to protect its market leadership in various high potential EM regions, a message directed as much to the re-newed Washington administration as to investors; seeking US economic foreign policy interventionism to bolster GM's own foreign advances.

The primary headwind is of course the European division GME (Opel-Vauxhall) since it still weighs heavily as a corporate drag. Though the ex-Wall Street, ‘parachuted-in’ new chief Stephen Girsky espouses rhetoric about an Opel revival, the fact is that such a picture has been seen time and time again since the mid-1980s, with only low-value returns seen at a late-stage within the mid-point of the overall economic cycle; as general fiscal buoyancy and an ability for GM to cheaply finance customers comes into being; little expected change in this new era regards Opel, therefore a maintained drag on profits in the near and mid-term.

Though impressive work has been undertaken regards capacity reduction and inventory reduction, the official picture provides mixed messages regards cost containment. [One presentation slide shows a downward facing green arrow which should either be a negative red or stable yellow], This especially critical given reliance upon a very price pressured A, B and C segments with accordantly small margins (if not negative for some 'looser' producers). The promise of substantial savings from the 2012 PSA JV will not arrive for some years, with only initially thin savings captured from shared road and rail distribution logistics adding immediate but low order value.

However, positively, investment-auto-motives suspects that by stating that full-size pick-up sales will remain 'flat' for 2013, GM is deliberately under-playing the sizeable income stream it should receive from the expected growth of the pick-up segment as America's private and public infrastructure re-building finally gets under-way. Thus the benefit of gaining a substantial number of “high mark-up” Silverado and Sierra sales. This good news story topped-up by re-slowly bounding S.American operations deriving income from what appears the well cost-contained platform shared Chevy Onix / Opel Mokka; which itself appears an export earner for GMSA delivered to GME.

Hence, GM appears to be deliberately under-playing two of its best cards, so as to presumably surprise Wall Street by H1 / Q3 2013.

Ford –

Blue Oval showcased its entire US range or “showroom” to promote itself. Beyond the standard and updated product was the Ford F150 Atlas – a future technology USP story to maintain F-series interest, the Euro-related Transit Van range replaces Econoline (also complementary to compact Transit / Tourneo Connect), Mustang GT500 Super-Snake (with a wide-body option by Shelby American), and Lincoln MKC compact SAV (to complement the up-coming MKZ)

Indication of the strong efforts toward production cost saving seen in the willingness to share of Transit body-side panels where the side-door slide recess is left visible on the non-door side, also leaving option for dual side door variants. This vehicle destined to be a high-profit model for sizeable corporate fleet renewal.

[NB the 2013 SuperBowl advert for Lincoln MKZ sought to offer a different perception of the brand to that of the previously entrenched large car guise: 'TownCar' (and Navigator); toward smaller and more luxurious. The use of the end-copy Lincoln Motor Company mimics the old manner phrase use by esteemed other luxury marques, the excerpt of President Lincoln supporting the old establishment reputation. A generally rounded advert that achieves its goals].

Presently, the appearances of Blue Oval products such as the US Fusion mid size sedan, and S.American EcoSport compact SAV, indicates that FMC has one of the 'cleanest' and stylistically consistent product-lines, very akin to (VW) the German tuetonic, so philosophically re-iterating the ONEFORD idea within the public perception, a powerful unifying device to demonstrate the power of the brand, and could be likened to Apple Inc's clean uniform aesthetic.

[NB Use of an Aston Martin-esque radiator grille also adds to the perception of associative luxury, so seeking to diminish the blue-collar association of the Blue Oval badge].

The Lincoln brand will undoubtedly gain a popularity boost from the film 'Lincoln' about the legendary US president, with 'living history' actors portraying Henry Ford to stand visitors given his birth 150 years ago. 'Living History' an ongoing theme as FMC offers the classic 1940 Ford Coupe body shell, to take partial corporate ownership of small-town 'American Graffiti', 'Grease Lightening' auto-culture, as constantly relived on 'Woodward Avenue' by enthusiasts.

[This at first appears oxymoronic given that such auto-culture primarily stems from often anti-corporate, anti “the man” creative individuals, but FMC is obviously seeking to capture that yesteryear zeitgeist in the same manner that Henry Ford created Greenfield Village: for perpetuity. It may be a loss-making enterprise but it gains much goodwill from the American public]

Of critical sales interest has been FMC's growth in China and Russia. 2012 showing annual gains of 21% at Ford China, its JV Changan-Ford up 31% and JMC commercial products JV up 3%, with December sales typically showing a doubling of those figures. Russia saw an 11% annual gain in 2012. The company arrived later in China and Russia than its Detroit peer GM, but is able to leverage slightly different market positioning, seen as more avante garde and technological, and sat between Chevy and Buick, thus with arguably greater flexibility for new middle-class aspirational consumer growth.

Turnaround efforts within Ford Europe have been underway with more flexibility and so efficacy than other in-situ VMs given its smaller production footprint and historical cultural willingness by management and unionised staff to undertake necessary near term structural change. (Again the idea of ONEFORD being central). A 13% fall in Ford registrations within a market that shrunk 7.8% in 2012 highlights the need for rapid turnaround, and so the closing of 3 plants and release of 6,200 staff.

But whilst cost containment is crucial so is an attractive product range, and whilst Ford's general styling is appropriate, there appears room for improvement regards the car range, with only the new B-Max demonstrating the type of useful consumer-type directed novel functionality with its “open wide” pillarless doors that should be seen across the full range to compliment the technology story. (Here the Atlas truck serves a purpose, as have other Euro cars of the past such as GM Zafira's Flex-7 seating).

Interestingly in the past it was Euro-design that filtered into the N.America to add stylistic zing, but today Euro product awaits the American style infusion. When married with the created info-tech package and a new product functionality message across the full range Ford Europe should see substantial in market gains. Ford Europe must seek to win back its once leading position within FMC, and could do so by effectively adding hi-value 'content' to the global model story, seemingly the case over the next 18 months as product renewals come to pass. Whilst the EU introduction of Mustang will add little beyond a notional brand halo, the launch of S.American derived EcoSport under Kuga will support public interest and compete against GM's Mokka.

The company has now chosen to double the dividend payable to common stock and B-class stock holders to 10 cents per share.

A recent report filed with the SEC states that as of 12.05.2013 FMC seeks to raise $2bn via a thirty year fixed income notes issuance paying a 4.75% coupon, typically under-written by a broad consortium of banks.

[NB Interestingly FMC has chosen to publicly* open its investment doors to its broad professional investor base by publicising not only the purchase of conventional stocks but two other asset classes: Ford Interest Advantage via Ford Credit and Asset-Backed Securitization of Ford Credit's various 'payables'. Of interest is that by virtue of the items being viewable on-line is the possibility that FMC seeks to reach out to the private investor via Ford Interest Advantage, itself essentially a retail biased savings product].

As for 2012, the company has been keen to highlight its advances, namely: demonstrating that Focus and Fiesta were world-beating products by sales, successful in-roads in Asia and China, revitalisation of Lincoln also introduced to China, production capacity expansion in N.America and Asia, profit sharing with hourly paid workers (in the Henry Ford idiom), re-attained investment grade rating, resumed shareholder dividends, a European turnaround plan, de-risking of pension obligations, new CAW agreements.

To re-quote the FMC Financials Release for Q4 and FY2012, “Ford expects another strong year, with Total Company operating profit to be about equal to 2012, Automotive operating margin to be about equal or lower than 2012, and Automotive relative operating cash-flow to be higher than 2012”.

As for its own 2013 outlook, it appears expectedly conservative, seeing global growth at 2-3%, a global industry TIV of 80-85m units, N.American GDP at 2.5% growth (highlighting its 'global pull' effect), US and Canadian sales buoyed by replacement of the old car parc, Brazil sees economic rebound, Europe remains weak awaiting further policy steps / enactment, recovery in China and 'bottoming-out' in India, so giving growth traction.

Presently, FMC share price sits at $13.20 or so, down from its mid January $14.20 high, yet up from the $12.88 seen on 4th February. As with GM, investment-auto-motives suspects that after the performance deflation of FY 2012 (seen perhaps over-markedly in EPS), FMC seeks to not only not disappoint, but possibly delight Wall Street by H1 / Q3 2013. Doing so equally by creating 'so so' expectations today, relying upon ever better N.American income to do so, this foreseen in improving Q4 YoY sales and income.

FIAT-Chrysler –

Detroit's Cobo Hall saw the Dodge Dart GT, an updated Durango, Caravan and Journey, Jeep Compass and Cherokee with new high-line variant, the FIAT 500 Cattiva and Abarth Tenebra variants, and an updated Maserati Quattroporte. The overall impression was one of basic model range improvement, but offering no US dedicated model surprises, having previously seen new Dart and 200. Given Chrysler's need to maintain a strong PR profile a lack of a show-stopper item perhaps demonstrates that the company is directing budget at local advertising and dealer orientated activities.

This infers that Chrysler will need to rely ever more on incentives and consumer financing. Just as GM re-adjusted with Ally regards its financing division, so FIAT-Chrysler seeks to do the same, but instead of absorbing a financing house, it seeks to create a mutual alliance with an external finance provider in the shape of a US division of Spain's Banco Santander. With low and medium credit risk buyers utilising mainstream American financing, Santander (itself with a need to boost performance) has offered to provide for higher risk customer loans, in the lower-medium risk and near/at sub-prime level. (Though it should be noted that the 'sub-prime' bar/criteria has been raised since 2007/8 as part of bank sector de-risking).

[NB the 2013 Superbowl advert for Dodge Ram was poetic and nigh on perfect; highlighting old fashioned values that reverberate across society and buyer types, country to suburb; demonstrating an affinity with heartland America and the compassionate yet determined spirit of its farming folk. Itself a re-appropriation of a famous convention quote. (A youtube favourite with over 10m views so far). Less impactful but still good was the ad for Dodge Challenger, contravening obvious muscle car overtones to focused on heartfelt family relationships, perhaps a way of rationalising it as a family purchase for shared experiences.

Though only one of the two adverts for the enlarged FIAT 500L titled “wedding” actually 'worked', though the car itself is rather an aberration for US buyers. However, the ad for the 500 Abarth Cabrio captured the vehicle's spirit very well, merging the idea of Mediterranean physical freedom with a frisson of danger/excitement conveyed by the scorpion – itself with etymological parallels to a previously acclaimed campaign for VW Beetle].

FIAT Group's 2012 overview highlighted that: its available liquidity was 3x that of industrial debt, worldwide mass brand shipments rose 6%, various bond issuances thru' the year raised $2.5bn, special share classes were converted into common stock and the desire to purchase approx 3.3% sharehold from VEBA.

Time and time again over the last decade there has been talk of an Alfa Romeo SAV to compete against the myriad of other premium, near luxury and mainstream urban SUVs. Marchionne re-stating the desire to generate excitement. But it had no proficient 4WD platform from which to base a new car, using rebadged Suzuki products for its own FIAT 4WD efforts (beyond home grown Panda 4x4), with even now the Jeep cross-over platforms of Compass/Patriot arguably too unsophisticated to evolve into an Alfa Romeo so as to equal the German and Japanese competition. A re-working of present Dodge Dart platform (known as “Compact Wide”) has occurred resulting in the new Jeep Liberty to be launched in March – Chrysler's 'growth engine' international brand. This then appears to be the foundations of any new Alfa SAV, but will require ever more engineering cost and content to differentiate.

The real problem with Alfa has been the business's 'start-stop' past, lack of dedicated ongoing brand strategy and investment. The informed premium car buyer/enthusiast well recognises this. So whilst the 4C special edition sportscar offers a glimpse of the 1950s and 1960s experience – and may well be completely sold out to 1960's 'Graduates', themselves now successful business people – Alfa needs to gain the same broad span of dedicated dealership coverage which German marques enjoy.

Today, relative to the USA, whilst it has Euro cache, Alfa Romeo effectively re-enters and stands where Porsche stood in the early 1960s with the (pre-911) 356 & 550. So whilst Alfa has far greater industrial might under FIAT and the ability to co-opt Chrysler dealers, a truly meaningful Alfa bloodline will only be built when perceived as 'independently' (even if conglomerate supported), thus relatively slowly and with race-circuit competition success; just as Porsche did over 50 half a century. FIAT SpA will obviously wield far greater resources than a tiny yesteryear Porsche, and can obviously associate with successful 'super-sports' and 'GT' Ferrari and Maserati stablemates, but can it effectively create a new dimension to the Euro sports-sedan market?

The vital question for 'Alfa America' is whether those 'petrol-head' days have actually disappeared in what is now a very much altered western world? One where not only has general car interest depleted, especially amongst the young i-Generation, but the halcyon days of the original Mille Miglia, and 'La Dolce Vita' (upon which Alfa's spirit still partially rests), have effectively become eroded memories for the upper echelon, and were not truly absorbed by the mainstream upper middle-class Americans who today buy the high volume of German and Japanese cars.

[NB investment-auto-motives believes that FIAT's strategy is to take Infiniti and Acura market share so as to gain a foothold in the sector].

Alfa Romeo could rely upon a mainstay of the 'grey dollar' and a low volume US business, but that is not the mid volume plan. The 4C is effectively an automotive brand re-launch toy, but Alfa Romeo cannot afford to be seen in such an obscure manner. The planned front-engined Mazda (MX-5) based vehicle is a natural and important cult-orientated yet mainstream market step. That will be the car that makes Alfa's name in the US, but the leap from such success with a low volume 'barchetta' to that of high-volume full-range line-up is an onerous one, and much of that down to the willingness of Mazda to MX-5 sales cannibalisation, even if theoretically the Alfa is pitched at a higher (BMW) Z4 price.

Any N. American re-entry will obviously require unabashed long-term financing and be perfectly executed effort to succeed. Yet even so any talk of Alfa Romeo's high US profitability contributing to the Group is possibly still a decade away.

Given all that is said about the promise of a profitability boost from Alfa's US return, the fact remains that FIAT SpA will be effectively wholly reliant upon Chrysler, a return of the Brazilian market for FIAT, aswell as of course a necessarily jingoistic consumption return in Italy, and broader Europe. With Italian labour unit productivity costs amongst the highest in Europe, the wage re-alignment trend indicates that Italians will be effectively forced to purchase small and lower spec' medium sized cars over coming years.

Though this has the advantage of matching the product trends necessary for FIAT to once again reach into the growing expanse that is an Eastern expansive EU, with probably the resurrection of the Zastava brand, so re-playing the (original) Skoda and Dacia play-book. S.American market leadership, expanded European in-roads and possible re-reach into select EM nations is the 'bread and butter' business model in the mid term. With only as as a long-term goal the growth of Alfa in the US and proper return of FIAT brand (beyond trendy 500) thereafter; so creating a conjoined full continental reach across the Americas.

As of today, the true driving force behind FIAT SpA's revitalisation has been the American and European QE programmes by the Fed and ECB, these have been the life-forces re-enabling new commerce. The necessary platform re-engineering of Alfa Guiletta into Dodge Dart allows for yet further platform amortisation (given its already distant roots in FIAT Stilo) and obviously adds platform volume.

Yet the very fact that Dodge and Alfa are technically very connected means that the it will be a hard task to convince a new generation of ex Ivy Leaguers and Silicon Valley types to adopt the brand, unless it can distinctly differentiate the two marques through ongoing dedicated Alfa investment. BMW succeeded in the late 1970s and early 1980s by offering a wholly different car with 2002 and 320, something obverse to the US norm, but still took 20 years to see volume success as the consumer trickle-down took effect with improved disposable incomes.

FIAT will have a hard task trying to capture ongoing cost savings through technical cross-fertilisation whilst also recognising that each brand serves very different target buyer sets. If a aspirational company V-P knows his potential Alfa Romeo is mechanically related to his secretary's Dodge Dart, will he still make the purchase?

As stated, it will be FIAT's 'bread and butter' global car business, assisted by a FIAT linked supply chain, that will be its prime future economic engine.

In recent weeks there has been further talk of an IPO for Chrysler that would see the staff VEBA monetise (probably in a phased manner) its 41.5% ownership in the company, much depending upon the Wall St and private investor reaction. FIAT SpA says its seeks to further consolidate the subsidiary via a call-option, and as seen with previous ‘coupled ratio’ analysis is not in immediate need of liquidity; thus pointing to the possibility of a high priced offering in buoyant market conditions, if even at all.

FIAT SpA's slow path of recovery started as of 20.11.2012 when the stock price hit its low, and though an overly strong January rebound came, an inevitably correction followed given its 9.5x FY2013 p/e valuation. The stock now returned to its trending norm; good for the long term sector investor.

Volkswagen –

Detroit witnessed VW group show the CrossBlue SUV concept (positioned between Tiguan and Toureg and vs high-line Ford Explorer variants), the Audi RS5 cabriolet, the RS7, the SQ5 performance cross-over and an updated Porsche Cayenne Turbo S.

From an earnings potential the CrossBlue offers the greatest interest given segment volumes, whilst the RS and S variant cars sold in comparatively low numbers would see their sizeable unit margins eroded if their earnings were repatriated. Hence VW's necessary desire to grow its US presence so as to create a virtuous, ideally self supporting, US business.

However, whilst VW continues to win public plaudits with most of its US advertising campaigns, along with with a quality product reputation, maintained 'managed' residual values and favourable buyer financing packages enabled by global profits, perhaps the most important news is the launch of Golf 7, using the now established MQB platform (shared across the VW empire).

[NB the 2013 Superbowl advert from Audi, whereby boy goes alone to Prom night, kisses the Prom Queen, is punched by her Prom King boyfriend, and returns home smiling, encapsulates the football event's immersion of action heroes ('geek' and 'jock' shown) and supports the brand upscale association.

The VW advert for Beetle, pre-cursed by a Jimmy Cliff teaser ad, (referential to the Fiscal Cliff concern), offered the usual SuperBowl 'content twist'; showing a typical white male inverting office and social convention by speaking with a Caribbean accent to brighten his co-workers' day. Though cited by some as politically incorrect, it comically played upon overly-simplistic black and white stereotypes].

The importance of Golf as VW's mainstay western product continues, with special relevance to income earnings in a consumer down-sizing USA and partial up-sizing Latin America. Beyond being an economic pillar of German manufacture it is to be built in Pueblo, Mexico so as to access relatively low production costs, grow intra-continental sales and critically negate the present FX discord between the Euro and far weaker US dollar. VW Group strategy seeks that 75% of vehicles sold in NAFTA are produced within the economic bloc, its $5bn NAFTA CapEx plan underway.

And of course its will see continued dominance in Europe. Golf 7 was presented in March at the Paris Motor Show, and now uses turbo-charged 1.2L and 1.4L engines, aswell as conventional 1.6L and 2.0L diesel. So as to both broaden market appeal by 'blurring the historic boundaries', a theoretical USP to offer the notional small B-segment engine efficiency in a larger C-segment body. (This an industry trend). However, it appears likely that US sold vehicles will retain their larger engine characteristic to befit regional customer expectations, using a Mexican produced turbocharged 1.8L and 2.0L engines.

China's soft-landing has supported long-held massive VW growth ambitions, now its biggest market. To maintain its leading position it states that planned CapEx spending across the 3 years of 2013, 2014, 2015 alone will be two-thirds of that spent between 1985 and 2012. Illustrating both the phenomenal expansion of the marketplace, the depth of commercial interests amongst FAW and SAIC joint ventures (17 subsidiaries in all) and the company's goal to keep its revered position amongst PRC leaders, local party administrators, the public and consumers.

Thus to effectively remain a core component of China's rolling 5-year plan; now well publicised as shifting to an “internal, qualitative” focus. It sees an 8.2% CAGR for 2013, up from 7.7% in 2012, and averaging over 7% until 2020, this satiated by 94 Group products by 2015; and will be directing much of the CapEx toward “Go West” and “Go South” strategies to re-direct toward inland and southern coastal regional economies, income from slowed growth new car production and sales assisted by an expanded business model dedicated to pre-owned car sales and consumer and corporate financing; thus able to re-play western markets practice.

But it is N.America that presently offers the respective greatest interest, given that VW Group has far out-stripped market dynamics, seeing an astounding 26.2% rise in sales during the first 9 months of 2012 (YoY) relative to the vehicle markets' own impressive 12.4% rise. Infact, in every regional market (split into six commercial zones) VW Group showed remarkable sales results, typically twice or thrice the local TIV growth.

VW Group has proven itself as the par examplar of an automotive business, utilising world-class engineering capabilities to create an unmatched stable of marques which span the full pricing spectrum whilst driving cost efficiencies. The substantial revenue and profit rewards have been deployed to maximise shareholder value through Volkswagen AG and Porsche Holding, structuring the near conglomerate to suit the era – fragmenting and consolidating as required – with those profits used to deploying trickle-down R&D. Formula that aids individual brand prowess and group strength. It has in the past been called “a hedge fund fronted by a car company” given its deep interest in global investment possibilities and dynamics, but that only serves to strengthen the entity; investing in synergistic and non-synergistic interests that both assist internal operations or assists external socio-political advantage. The familial voting control model, though lambasted by governance experts, has provided the necessary freedom to both create and extract value for the Piech and Porsche families, a myriad of shareholder types and Germany as a national state with growing global influence.

In short VW Group demonstrates a decades-long considered, well honed, synergistic and highly complimentary operating model which has dimensionally expanded beyond the norm of any vertical or horizontal conglomerate. It deserves to be the envy of the automotive sector and far beyond. A case study for all enterprises which seek long-term investor favour, and for the elites of China and all EM countries a template for true long-term growth and wealth creation.

“das auto” indeed.

Today VW stock sits at about E166.50, down from its February 1st high of E174.00, but returning to trending lows that formed since September 2012.


The company showcased the new model year 1-series, the 3-series update, an all new model 4-series coupe, the M6 GranCoupe and Mini Cooper JCW Paceman.

Of these the 4-series represents a milestone change, as what were 3-series coupe/cabrio variants gain their own moniker and standing, and whilst much internally and externally remains similar to 3-series a wheelbase change and improved packaging means that the 4-series grows compared to its forebears. This car has been expected for some time, given the precedent of Z4, with the raising of its stature within the range equating to a not so subtle move up the price ladder. Combine the price gain and a project business plan that presumably initially equates then raises old 3-series coupe production and sales volumes within the uS and globally, and the new '4' provides a meaningful developed income stream for BMW Cars that also defends its premium standing vis a vis German and other competition.

BMW reports its 2012 FY earnings relatively late in March, and has not (as yet) provided a round-up of its 2012 achievements. However, it has released a broad span but very general January 2013 investor presentation, which provided a welcome snap-shot across the company, so as to bolster investor confidence.

The YtD “9-month” report in Q3 2012 demonstrated that it managed to generate sales traction through-out what was a fragile year, with revenues increased by 11.6%, with an EBIT up 0.8%, a virtually flat PbT and Net Profit down by -2.8%, with a similar drop in EPS. But this downward trend conflicts with far more positive reported data for Q3 2012, showing all unit sales up by 8.3%, of which BMW badged cars saw an 8.6% rise and the Mini range gain 7.2%, Rolls-Royce experiencing a -4.7% fall, and Motorcycles seeing a -1.1% decline. Whilst the 3 and 5 series remain the prime volume contributors, 1-series and X3 sales grew at about 30% YoY for the period.

Even in an economically depressed Europe BMW saw sales rise by 2.6% (Germany and Britain) and up 2.1% in N.America, whilst Asia / China saw a marked increase of 30%.

The presentation highlights BMW's desire to return as the 'poster child' of auto-sector growth and profitability, that determined by an ability to 'shape the future' (ie consumer expectations) via 'access to technologies and customers' (ie advanced powertrain/drivetrains and material types) and (Triad re-expansion and EM expansion). The firm illustrates the reality of its depletion of R&D and CapEx budgets over recent years – a very necessary sector-wide phenomenon. R&D falling from highs of 6.7% in 2005 to 4.6% in 2010, and CapEx dropping from 10.2% in 2003 to 5.4% in 2010. So being open about the renewed deep level of re-investment.

Procurement and production cost-down efforts are over-simplistically communicated, with possibly an under-play of present shared common parts both within engine type families (ie number of cylinders) and across fuel types (ie petrol vs diesel). This would be better complimented by a monetary interpretation of common parts value, but the former provides room for more easily perceived improvement.

[NB When automakers proffer their common parts achievements/ambitions, investors would be better served if all 5 vehicle systems were presented (BIW, P/T, Chassis, Electrical, Trim/Hardware) to gain a far more usefully detailed picture; that possibly simplified via a Bill of Common Materials].

From the global ambition footprint, it is pleasing to see BMW apparently separate China from other EM regions, and has therefore re-termed the BRIC countries as BRIKT countries to denominate (S)Korea and Turkey. However the distinction falls short when describing the “millionaire demographic” expected by 2020 given its inclusion of mainland China. Re-calculated the BRIKT regions give a “millionaire's CAGR” of +12.4%, versus China's +7.4%. Its China success story is adeptly recounted, showing a thirteen-fold increase in sales between 2005 and 2012; 24k units to 326.4K units: of which the sales mix is 33% from 5-series and 13% from 3-series, the prime centres of gravity for per unit margins given volume scale, even if with muted elasticity in options pricing, as is the Chinese norm.

As with all premium producers the size of the ever expanding population, urbanization and personal wealth pies in China underpinning future success. The premium sector's CAGR until 2020 viewed to be 11% (previously as 43% given the almost exponential growth pattern). A good description of the present China dealer footprint is given, indicating that BMW seeks gain a lead over others with its present West and South regional 'habitation', ready for the next growth period in these critical regions.

However, given that China represents 18% of the global sales mix and N.America accounts for 21% and is regarded as the next growth phase, greater detail regards BMW's competitive actions within the USA specifically would have been very useful. As would a European overview given its high 47% of sales.

Unsurprisingly, rather than a rear-view mirror glimpse of past model life-cycles, a detailed account of post 2012 model and variant introductions (“product cadence”) would have served far better, rather than the vague pipeline replacement diagram, indicating that 75% of vehicles will have been renewed by 2016 – an expected outcome.

However, the introduction of the Active-Hybrid range spanning 7, 5 and 3-series at last competes against Toyota's Lexus, depending upon actual volume released.

Whilst the PR spin of BMW I (i3 and i8) has generated much attention grabbing, so demonstrating BMW as very forward, the reality of delivering a volume scale e-car range (in the tens and hundreds of thousands, rather than 600 test models) is still remote, instead the i-cars technology used to both develop a new sub-brand (of suspected hybrid cars) and the technology cross-fertilisation of lightweight materials (esp high productionised carbon fibre) into mainstream BMW and Mini vehicles and applied to specialist R-R cars as required.

[To support Rolls-Royce a new coupe named Wraith will be shown at the 2013 Geneva Show. Derived from Ghost it offers a fast-back rear akin to the Bentley Continental GT to intentional contrasts against the Phantom Gentleman's Coupe. Whilst itself a low volume model, and with Ghost using much cost-amortised 7-series technology, a presumably 6-series related Wraith will provide impressive per unit margins given the margins on the base car plus expectation of inevitable buyer personalisation adding to options income. Wraith itself may provide a useful 'productionised' carbon-fibre strategy stepping stone given the smaller singular skin panel efforts seen on M3 et al to date].

This also a prime technology story within the BMW-Toyota agreement of mid 2012, along with RWD sportscars, diesel engine contract supply (BMW to Toyota) and FWD vehicle platforms.

Of greater immediate market importance is the continued success of the Efficient Dynamics story and the associated 'tailor-made' energy saving devices/packages, which provide a true real-world eco-advantage by reducing parasitic losses, adding 'vehicle intelligence' and promoting better driving behaviour. Given its 120g/km claim on its range across Mini / 1-series / 3-series, BMW balances its performance reputation with true eco-capability, a necessary exercise so as to remain credible by offering the best of both worlds, especially so with Europe.

The advantages of vehicle leasing vs cash purchase or loan purchase have become critical to the intersection of the finance and manufacturing divisions, since leasing provides for longer ownership lifecycles, a higher 'options spend' and appreciable levels of improved customer loyalty, BMW rightly keen to highlight this very influential and so income important consumer offering and trend.

Relative to this focus continues on the importance of capturing vertically driven 'upstream' services, BMW Bank continues to expand, partially via absorption of the leasing business section.

As the most popular premium marque the BMW business model continues to propel upward, with important new N.American sales growth balancing the onward march in China and Asia.

Like the other German premium companies, BMW group now is the inflection point when western sales over coming years can be merged with the impressive sales foundations sown in Asia and EM regions over the last 5-10 years. Even as Asia slows in GDP terms, the volume effect remains, and so provides a partial spring-board effect for improved corporate earnings gained from the rebound west.

In an attempt to gain income in what is a generally low-interest bearing environment, BMW has demonstrated its capability in building a financial cushion from expanding its cash base, expanding its marketable securities and effectively lend-to and earn-from its trading partners by substantially growing its 'receivables' (ie debtor base)

As part of that funding re-calibration, BMW rightly seeks to retain/grow its funding independence, accessing funding markets and types worldwide whilst seemingly adding greater CFO accountability to achieve optimal rates and terms. It no doubt sought to demonstrate that fact to the banking/investment community by presenting its 'funding options' slides so as to try and gain “buyer advantage”.

BMW well recognises the higher CapEx and R&D funding needs at this present time, endemic to all automakers, and so has with its impressively detailed January 2013 investor presentation effectively opened its doors wide to avail (given its forecast numerics) a compelling case for confidence and mid and long term value creation.

As seems the case with GM and Ford, BMW AG appears to be intentionally under-playing its expectations of 2013, by re-presenting what was basically flat and slight decline sales picture for Jan-Sept 2012, knowing the western markets boost effect seen since both in showrooms and on Wall St, London, Frankfurt, Paris and Milan bourses.

BMW stock presently sits at about E73.15, down from its near E76 highs in early and late January, trending nigh-on sideways over the last week.

Daimler –

The Detroit Show saw the CLA250 (high-line variant of) new compact sedan & hatchback, an updated E-class sedan/ wagon/estate/coupe/cabrio, and the E63AMG variant.

Obviously of greatest interest will be the public's reception of CLA, shown in sedan guise for the US but advertised in hatch guise for Europe and other regions. Some fund managers berated Daimler for not having a compact car before CLA – presumably those being US based funds relative to their home market – since infact this new model marks the second philosophical 'softening' of the A-class what was the radically engineered original.

Whereas that car sought-out a smaller number of affluent Europeans, and the second generation spawned larger MPV type cars (in A and B class) this new range expanding product seeks to effectively be a global premium small car so as to create a worldwide popularity of Mercedes small cars by attracting BMW 1-series and Audi A1 owners, aswell as those migrating 'up' and 'down' from other brands. To do so Daimler has chosen to introduce the CL body-shape which mimics styling of the high-end CLS 4-door coupe, so as to draw attention to the baby range and cross-fertilise the quality perception into higher volume vehicle.

[NB the two prime 2013 Superbowl commercials for CLA appeared respectively directed at males and females. The former a very good visual recital of the age old (and happily rejected) Faustian pact, by a young man who at the end catches a glimpse of the (notionally affordable) sticker price and rejects the devil. The latter advert not quite as compelling, with role reversal of a 'pin-up' girl instructing a football team to wash the car; an obvious contextual ploy].

Daimler has yet to report Q4 and FY2012, yet it noted caution back in Q3 2012 when it recognised its own slower sales growth rate, with the Group as whole up only 1%, Mercedes Cars up 2% and Trucks up 3%by Q3 last year. Seeing slow passenger car growth within Europe, 'postponed' growth in its US linked truck division, and 'postponed' growth in Brazilian commercial vehicles, it sought to enthuse Indian bankers and analysts given its successful JV with Bharat-Benz mid-size Trucks in India and the Auman large Trucks JV in China. Both nations experiencing a slowed economy but obviously still with powerful momentum relative to west weakness at the time, and critically with far greater national growth reliance upon trucking fleets as the enablers of state economies.

Although the company has mentioned its market by market balanced sales structure, it has undeniably been affected by the fact that (as of Q3 last) 43% of car sales originated in Europe, leaving it well exposed to a domestic downturn, (though less so than BMW's 47%). Germany is undoubtedly the EU's economic engine and German buyers notably loyal to their homeland brands, however the fact is that without the expected US truck market growth at the time, Daimler did suffer proportionately more than its German peers; who faired better with car sales in Asia; seen in its share price struggle at the time.

However, even through this elongated hiatus, Dieter Zetsche et al have not wavered from re-cycling income back into international Capital Expenditure programmes, these partially assisted by the willingness to previously discontinue shareholder dividends in the aftermath of the financial crisis; a long term attitudinal leadership that was cheered by investment-auto-motives at the time, and proved to be correct given the delay in recessional rebound over that period.

The latter half of 2012 saw unit sales buoyed by the 'Euro-rational' B-class mini-MPV and the 'China-exuberant' M-class SUV, assisting the mainstay sales of C-class and E-class. Interesting to note the sales approximation in (last reported) Q3 of M-class and E-class.

As a group Daimler stated that it sought a return to 10% RoS. That profitability level forthcoming in H2 2013 when the series of vehicle replacements and additions come into being across cars and trucks, newer Chinese interests being recouped, and seeing overall cost savings of E2bn delivered by year end 2014 through a series of variable cost, fixed cost savings centred around per unit build productivity measures, and importantly for investor returns an ability to 'step off the gas' regards CapEx spending for the mid decade period.

Given the industrial base Daimler has across cars, vans, trucks, bus/coach and finance, the company chose a

wise discretionary path forward, whilst maintaining a CapEx determination through what were complicated, indeed unnerving, times. Times when the normative multi-sector sales dynamic of the usual business cycle, which have historically assisted such a conglomerate, failed to emerge.

Given this cautious yet 'pin-point' mentality, the finally arrived flow of American QE trickling through banking intermediaries and the extended debt ceiling indicates that Daimler is positioned advantageously well in the multi-faceted (private, public, corporate) rebound. This notion seemingly recognised within share price climb of recent months.

With its historical national and European roots, its span across cars, vans, trucks, buses (and of course finance company interests) with oddities such as the EADS shareholding, Daimler is a far more complex animal to orchestrate, and so has invariably suffered more so than simpler structured peers since 2008, now seeking to shed its legacy non-core activities. But equally is arguably better positioned to benefit from amalgamated of global economic traction (Triad and EM) when the returns from such a macro-investment 'sweet-spot' arrives mid decade.

Daimler stock presently sits at E45.15, up from E42 two days ago, thanks to positve reaction to the FY2012 results just presented.

To Follow -

Part 3 of this web-log will view the strategic positions and investor appeal of the remaining five 'Global 11' volume manufacturers:

- Renault-Nissan
- Peugeot SA.
- Toyota Motor Corp.
- Honda Motor Corp.
- Hyundai – Kia Group.