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