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 4^th 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 11^th 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 3^rd 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 21^st 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 4^th 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

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.