Monday, 11 August 2014

Companies Focus – The Global 11 Automakers - Q2 2014 Results...Part 3

The last portion of VM Q2 reports and assessment. Further to the previous highlighting of respective Q1 positioning, below are the continued summaries and associated analysis which will allow for the plotting of Q2 based 'Coupled Ratios' analysis.

Provided relative to the respective release schedule below:

Previously -
Daimler: 23.07.2014
GM: 24.07.2014
Ford: 24.07.2014
Hyundai 24.07.2014

Herein -
Honda 29.07.2014
Renault 29.07.2014
Peugeot 30.07.2014
FIAT-Chrysler 30.07.2014

To Come -
Volkswagen 31.07.2014
BMW 05.08.2014
Toyota 05.08.2014

Details of the remaining three follow.

Volkswagen Group-

Unit Sales:
Q2 2,645,000 (vs 2,498,000 Q2 '13) +5.9%
H1 5,207,000 (vs 4,873,000) +6.8%
Q2 €50.977bn (vs €52.122bn) -2.2%
H1 €98.808bn (vs €98.687) +0.1%
Q2 €3.33bn (vs €3.437bn) -3.1%
H1 €6.186bn (vs €5.78bn) +7% [exc €2.6bn China JV equity income]
% of Rev:
Q2 6.5% (vs 6.6%)
H1 6.3% (vs 5.9%)
Q2 €4.42bn (vs €3.93bn) +12.4%
H1 €7.777bn (vs €6.62bn) +17.5%
H1 7.9% (vs 6.7%)
Net Income:
Q2 €3.249bn (vs €2.847bn) +14.1%
H1 €5.716bn (€4.793bn) +19.3%
EPS (ord):
Q2 €
H1 €11.33 (vs €10.04)
Net Liquidity
H1 €13.979bn (vs €11.313bn) [vs €16.9bn YE2013]
Operating C-F
Q2 €6.167bn (vs €4.904bn) +25.2%
H1 €8.388bn (vs €8.431bn) –0.5%
Free Cash Flow
Q2 €2.97bn (vs €1.645bn) +80%
H1 €2.92bn (vs €1.23bn) + 238%

- flat H1 YoY sales revenue because of negative € FX effects
- Chinese JV income and 'other' assisted PbT and Net Profit
- Scania share-hold acquisition..budget balanced by...
- issuance of Pref Shares and Hybrid Note
- worldwide deliveries surpass global TIV growth
- face-lifted Jetta / Toureg / Golf 40th
- S7 variant of A7 / Leon CUPRA / Cayman GTS, Boxster GTS
- previews of new TT cross-over variant
- preview of possible Bentley Mulsanne 'plug-in hybrid'
- anti-trust probes (VW, BMW, Daimler, FCA)

By Division:


VW Group H1 Deliveries vs TIV growth / unit sales by region -
North America...-3.2% vs 4% / 422k (vs 450k previously)
South America... -20.2% vs -11.2% / 368k (vs 485k)
Western Europe...7.1% vs 5.5% / 1,695 (vs 1,586k)
Mid and Eastern Europe...6.3% vs -3.3% / 344k (vs 326k)
Asia-Pacific...15.9% vs 9.2% / 2,138k (vs 1,810)
Rest of World...-5.5% vs -0.9% / 213k (vs 224k)

H1 Unit Sales / Revenue / EBIT by brand (vs H1 2013) -
VW...2,302k (vs 2,376k) / €49.26bn (€50.36bn) / €1.01bn (vs €1.494bn)
Audi...750k (vs 692k) / €26.69bn (vs €25.234bn) / €2.67bn (vs €2.644bn)
Skoda...426k (vs 362k) / €5.974bn (vs €4.966bn) / €0.425bn (vs €0.243bn)
SEAT...258k (vs 244k) / €3.95bn (vs €3.63bn) / €-0.037bn (vs €-0.040bn)
Porsche...89k (vs 78k) / €8.162bn (vs €7.025bn) / €1.398bn (vs €1.294bn)
Bentley...6k (vs 4k) / €0.887bn (vs €0.69bn) / €0.095bn (vs €0.058bn)

Commercial Vehicles:
H1 Unit Sales / Revenue / EBIT by brand (vs H1 2013)-
VW...221k (vs 220k) / €4.724bn (vs €4.777bn) / €0.280bn (vs €0.246bn)
Scania...38k (vs 38k) / €5.067bn (vs €5.095bn) / €0.476bn (vs €0.464bn)
MAN...58k (65k) / €6.7bn (vs €7.63bn) / €0.222bn (vs €-0.124bn)

VW China
(not included in Group figures but calculated as equity method contribution)
FAW + SAIC...1,847k (vs 1,517k) / revenues n/a / €2.622bn (vs €2.370bn)

Financial Services:
H1 Revenue / EBIT
VW FS...€10.423bn (vs €9.688bn) / €0.776bn (vs €0.696bn)

Group Total
H1 Unit Sales / Revenue / EBIT (vs H1 2013) -
5,207k (vs 4,873k) / €98.808bn (vs €98.687bn) / €6.186bn (vs €5.780bn)


Deliveries expected +4.9% to 9.731m units
Revenues expected +2.2% to €197bn
Operating RoS expected -0.1% to 5.9%

we expect..
- to moderately increase deliveries yoy in 2014 in a still challenging market environment
- 2014 sales move within a range of 3% around previous year, depending on conditions
- Op RoS between 5.5 - 6.5% (Cars division similar)
- Op RoS for Commercial Vehicles + Power Engineering to moderately exceed 2013
- Op RoS for Financial Services between 8 - 9%


As seen, the ideal for any global VM is to gain both from the rising tide of growing regions so as to counter-act the negative headwinds of any other contracting regions. This should but, does not always, promise favourable revenue earnings in growth markets, especially so if a firm's own competitive position 'on the ground' is not at or near its own 'sweet spot'.

H1 for VW Group may be regarded as only semi-successful, given that the 4% market uplift in N. America did not directly feed into overall VW Group sales. Instead VW N.A. seeing overall sales reduction, due to much declined Golf / Beetle / CC, marginally reduced Jetta / Passat, slippage of Tiguan / Toureg and end of life for the (Chrysler JV assembled) Routan. Declines were also seen across the model board at Audi in the USA for A4 / A5 / A6, though fortunately the introduction of A3 provided much uplift as did the flat yoy trend for Q5 and 9% rise in Q7 sales.

Nonetheless, the perfect storm of: a) the buoyant but pressurised sales environment (including sooner incoming new models from BMW and Mercedes-Benz), b) VW's desire to maintain unit pricing on current models so as not to undermine later new model launch and c) reduced demand for 'personal' cars such as Beetle and Eos, took a toll on overall sales performance.

Positive market out-performance across the whole of Europe and Asia (China specifically) did help counter-act US market headwinds, supporting the overall +5.9% rise in Q2 world sales and the +6.8% for H1.

[NB of the BRIC nations, Brazil 301k units (vs 370k) -18.7% , Russia 143k (vs 156k) -8.4% , India 34k (vs 50k) -33%, China 1,814k (vs 1,544k) + 17.5%].

Unfortunately, these increased unit sales, primarily in a still price-bound Europe and price-sensitive Asia, did not translate directly into equivalent revenue rises, as seen by the -2.2% yoy revenue intake in Q2 and the virtually flat-lined +0.1% in H1. Nonetheless, the balancing of additional CapExR+D against operational savings provided H1 operating cash-flow of €8.4bn; primarily boosted in the Q2 period (worth €6.16bn). CapEx as a % of Revenues for H1 was 4.1%.

As the above figures demonstrate, the H1 top-line and EBIT income was undermined by VW passenger car sales to the tune of €-1.1bn vs previous year, this counteracted by the increased Asian popularity of Audi drawing in an additional €1.46bn yoy.

Like the Porsche 918 hybrid hypercar concept, the preview of the 'eco' orientated plug-in Bentley Mulsanne hybrid concept highlights VW's dedication to becoming recognised as a leading light in eco-luxury. The subtle use of copper detailing as an aesthetic metaphor for the conduit of electrical energy, a suitably understated differentiator.

Acquisition of Scania truck shares expended €-6.5bn of liquidity, this temporary loss of liquidity regained from: issuance of additional preferred shares + issuance of Hybrid bond + equity capital increase at VW Financial Services + transfer of MAN AG Financial Services equity into the Group.

By way of a subtle demonstration of slightly improved Q3 and H2 economic and sales expectations, it was noted that Q1 and Q2 saw a small rise in production numbers over sales numbers, so providing small surplus added to dealer inventories of 9k units in Q1 and 4k units in Q2. This of particular note compared to Q2 2013's overtly lean “one out, one in” inventory replacement policy. Thus we see the tentative yet erratic beginnings of a 'loading-up' process of dealer inventory in anticipation of increasing demand for 'in-stock' vehicles for quick delivery. The small surplus also presumably highlighting Volkswagen's desire to tightly manage and maintain a 'price-floor' of per unit margins. This also seen through media advertising on Golf, with the humorous “you get what you pay for” campaign.

Creating demand and supply inelasticity so as to support new model pricing and used car residuals and thus a virtuous circle of valuations is obvious positive for the medium and long terms. Yet, this deliberate control of price policy has short-term drawbacks if the model mix is not strong, as viewed in N. America, where VW seeks to not follow the pack with sales incentives, as it has in the past to its detriment. This denting sales and so impacted overall unit contributions. But, positively, the major lift in Chinese demand (25%) provided the anti-cyclical basis by which US and (later) European 'pricing floors' can be implemented, so boosted tomorrow's unit margins and overall RoS.

Thus it appears VW has been willing to experience near-term pain (where others have undoubted gained market-share) in order to gain longer term value.

BMW Group-

Unit Sales
Q2 €19.905bn (vs €19.552bn) +1.8% yoy
H1 €38.140bn (vs €37.098bn) +2.8% yoy
Q2 €2.603bn (vs €2.066bn) +26%
H1 €4.693bn (vs €4.104bn) +14.4%
Q2 €2.660bn (vs €2.032bn) +30.9% yoy
H1 €4.826bn (vs €4.035bn) +19.6%
Net Income
Q2 €1.771bn (vs €1.392bn) +27.2% yoy
H1 €3.233bn (vs €2.704bn) +19.6% yoy
EPS (ord)
Q2 €2.69 (vs €2.11) +27.5%
H1 €4.91 (vs €4.10) +19.8%
Q2 n/a
H1 €10.62bn (vs €8.072bn)
Operating C-F
Q2 n/a
H1 €1.896bn (vs €2.253bn)
Free Cash Flow
Q2 n/a
H1 €1.3bn (vs €1.673bn)

- H1 record for BMW and Rolss-Royce vehicle sales
- significant rise in Group PbT
- non-FX influenced revenue +5.2% (vs stated +1.8%)
- Q2 Europe & US launch of advanced i3
- H2 China launch of advanced i3 (after Euro,US, Japan)
- Q1 launch of 2-series Active Tourer / 4 series convertible
- Q2 launch of facelift X3, X4 and Mini
- Q3 launch of M4 and Ghost II
- plans to rebalance production and research...
- per geographic sales (China, S.Korea, USA)
- new in-car tech ventures (eg JustPark)
- China anti-trust probes (VW, BMW, Daimler, FCA)

By Division:

Deliveries Q2 / H1 by brand
458k (+8.3%) / 886.3k (+10.2%)
74k (-10.4%) / 131.9k (-11.4%)
Rolls Royce...
1.071k (+28.6%) / 1.968k (+33.4%)
533.18k (+5.3%) / 1,020k (+6.9%)

Deliveries Q2 / H1 by region
Europe 232k (vs 229.5k) +1.1% / 446.19k (vs 436,71k) +2.2%
Americas 121.4k (vs 117.4k) +3.5% / 221.28k (vs 213.86k) +3.5%
Asia 164.36k (vs 142.72k) +15.2% / 322.94k (vs 272,94k) +18.3%
RoW 15.4K (vs 16.75k) -8% / 29.8k (vs 31k) -3.9%
Total 533.19k (vs 506.32k) +5.3% / 1,020.21k (vs 954.25k) +6.9%

Revenues Q2 / H1
18.504bn (vs €18.201bn) +1.7% / €35.063bn (vs €34.108bn) +2.8%
EBIT Q2 / H1
2.161bn (€1.755bn) +23.1% / €3.741bn (€3.335bn) +12.2%
Op C-F Q2 / H1
1.370bn (vs €2.378bn*) -42.4% [first use *IFRS adjusted]
3.502bn (vs €4.349bn*) -19.5% [first use *IFRS adjusted]
FCF Q2 / H1
n/a / €1.032bn
CapEx H1
2.58bn (German plants) +8% rise yoy and a CapEx to Revenue 6.8%
EBIT Margin Q2 / H1
11.7% (vs 9.6%) / 10.7 (vs 9.8%)
RoS Q2 / H1
12.2% (vs 9.1%) / 11.1 (vs 9.3%)

Deliveries Q2 / H1
42.26k (+5.1%) / 70.98k (+9.3%)
Revenues Q2 / H1
0.528bn (vs €0.475bn) 11.2% / €1.0bn (vs €0.911bn) 9.8%
EBIT Q2 / H1
0.055bn (€0.046bn) 19.6% / €0.119bn (€0.097bn) +22.7%
Op C-F Q2 / H1
n/a / €1.896bn
Free Cash Flow Q2 / H1
EBIT Margin Q2 / H1
10.4% (vs 9.7%) / 11.9% (vs 10.6%)
RoS Q2 / H1
10.2% (vs 9.5%) / 11.7% (vs 10.4%)

Financial Services
Contracts Q2 / H1
380,842 (vs 388,290) /
Revenue Q2 / H1
5.155bn (vs €5.058bn) / €10.045bn (vs €9.888bn)
EBIT Q2 / H1
0.459bn (vs €0.468) / €0.924bn (vs €0.918bn)
Op C-F Q2 / H1
n/a / €-0.941bn (vs €-1.527bn)

Global expectations of FY2014 are that the global economy grows at approximately 2.9%. Of this:
China 7.4%, India 5.3%, USA 2.2% (higher probable), Japan 1.5%. Brazil 1.2%, Europe 1.1%.
Within Europe the UK highest at 3.0%, Germany 2.0%, Spain 1.1%, France 0.9%, Italy 0.4%. Russia falters at 0.4% given current affairs impact.

Automotive markets' TIV expected as: Global 3.2% (+12.7m units). Of which USA 3.9% (reaching 16.2m), China 12% (18.3m), In Europe: Germany +1.6% (reaching 3m), France 3.5% (reaching 1.8m), Italy 4.1% (1.4m), UK 6.1% (2.4m), Spain 15.4% (0.83m). Japan -8.9% (4.8m), Russian -4.7% (2.5m), Brazil -10.3% (3.2m).

Motorcycle markets simply described as showing revival in 500cc+ segments after years of decline and stagnation.

Autos CapEx for FY2014 expected to exceed previous >7% guidence, but below 8.8% of FY2013

We expect that the high levels of expenditure on future technologies, intense competition and higher personnel expenses will again have an adverse impact....Nonetheless BMW Group forecasts another successful year with PbT signifacntly up on previous year's €7.913bn


Whilst top-line income grew very moderately as expected, it has been the major jump in in Q2 EBIT of 26%, boosting the yoy H1 revenue rise to 14%, that will have surprised many. That translated to PbT increase of near 31% for Q2 and near 20% for the half year, and into respective 27% and 20% rises for Net Proft.

These figures demonstrate how BMW has gained momentum on two fronts. Firstly, as a relative late entrant into Asia / China compared to Audi and Mercedes-Benz, it could be argued to hold a slightly greater degree of comparable attraction to these important markets (though sales growths remain comparible). Secondly, throughout the western down-turn BMW set itself the task of “coming out of the stalls” strongly. This gained not only from the strong open taps of new US demand, but exploited well with perceptively different new vehicle portfolio, with both new series identification system, which highlights the separateness of coupes and convertibles so providing pricing elasticity, and thus allows for a wider range of variant possibilities within more mainstream model series.

This act has essentially re-cast BMW for future opportunity.

From an historical perspective, unlike the more disparate vehicle divisions of Daimler and VW, BMW has been adroitly positioned since the beginning of the modern global economic boom; starting in early1980s America, spreading to Europe by the late 1980s, into Eastern Europe by the mid 1990s and onto BRIC and other EM regions since.

Though a partial cliché in the west (so assisting Audi and Mercedes sales), its performance engineering prowess and now entrenched legacy means that it remains a powerful staple symbol of the aspirational lifestyle, upper level models such X6 and 'halo' M-series variants as acting as the BMW brand's ambassadors regards the mass-premium of 3-series and below.

Thus as a (perhaps 'the') reference-point symbol of an ever growing, ever wealthier world – though temporarily impacted by the 2008 financial crisis and its global repercussions – the core BMW division continues to thrive.

The acquisition and deployment of both Mini and Rolls-Royce provided for broad client demographic coverage, the seemingly ever expanding model ranges of all three marques providing for captive and migratory buyer choices within the group. The creation of eco-centric iBMW with small i3 citycar and large i8 GT coupe does likewise.

Hence BMW group continues to evolve its business base simply but very effectively.

Though its innate 'brand equity' is primarily drawn from the ethos of “the ultimate driving machine” - as applied to rear-wheel drive cars with unadulterated front steering - the social cache of the badge has become so powerful in its own right it is now viewed as able to ( and at last, to necessarily) deploy front-wheel technology; for more recent consumer interest in more spacious smaller cars.

Hence new 2-series Active Tourer (a full 20 years after BMW first started exploring the idea via FWD Rover Cars, and given adoptive credence via Mini stable-mate and Mini platform technology).

Though unstated, this fringe re-formatting of the still instrinsically dedicated BMW technical package was required to :

a) enter the monospace sub-segment with 2-series Active Tourer
b) compete with Mercedes A and B class at premium end
c) beat Audi's expectantly matured bigger A2 / gain conquest sales from high-trim VWs
d) allow BMW to possibly partner in future with other manufacturers in this sub-segment
e) expectantly gain from worldwide (esp EM) demand for roomier small cars
Thus, though presently possibly viewed as an oddity by BMW purists, now that the badge has become far more than the literal sum of its technical parts, the departure into 2-series is as market relevant as the previous 1999 departure into X5.

And the fact that 2-series Active Tourer appears within the same time-frame as more radical i3 and i8 is no doubt wholly strategic so as to highlight its relative conventionality compared to the truly different /advanced.

Toyota -
(Q1 2015 – Apr to June 2014)

Unit Sales
2.241m units (vs 2.232m previous year) +9k units
¥ 6,390.6bn (vs ¥ 6,255.3bn) +2.2%
¥ 692.7bn (vs ¥ 663.3bn) +4.4%
Net Income
¥ 587.7bn (vs ¥ 562.1bn) +4.6%
EPS (ord)
¥ 185.43 (vs ¥ 177.32) + ¥8.02
Net Liquidity
Operating C-F
¥ 692.7bn (vs ¥ 663.3bn) + ¥ 29.3bn
Free Cash Flow
Margin on Net Income
9.2% (vs 9.0%)

- After effects of 'Abenomics' still evident but much weakened
- especially so upon home turf, still +ve elsewhere
- positive FX effects of weaker Yen vs $ and €
- FX + cost-savings + finance instruments off-set...
-...poorer volume / model mix and higher labour and research costs

By Division:

Cars -
by region

Unit Sales / Op Inc Margin %
Revenue /EBIT

506k (vs 526k) -20k / 11.1% (vs 13.2%)
¥ 3,296.5bn (vs ¥ 3,456.1bn) / ¥ 365.9bn (vs ¥ 456bn)
North America
710k (vs 689k) +21k / 6.6% (vs 4.9%)
¥ 2,259.1bn (vs ¥ 2,105,2bn) / ¥149.7bn (vs ¥ 103.5bn)
207k (vs 193k) +14k / 1.7% (vs 0.9%)
¥ 650.6bn (vs ¥ 596bn) / ¥ 10.8bn (vs ¥ 5.3bn)
385k (vs 394k) -9k / 9.2% (vs 8.6%)
¥ 1,197.4bn (vs 1,218bn) / ¥ 110.3bn (vs ¥ 104.1bn) +¥ 6.2bn /
(Central + S. America, Oceana, Africa and Mid East)
433k (vs 430k) +3k / 5.8% (vs 7%)
¥ 591.9bn (vs ¥ 608.9bn / ¥34bn (vs ¥42.5bn) -¥ 8.5bn /

¥ 5,914.6bn (vs ¥ 5,817bn) +1.7%
¥ 586.7bn (vs ¥ 608.4bn) – 3.6%

Financial Services -
¥ 377.4bn (vs ¥ 339.9) +11%
¥ 98.2bn (vs ¥ 51.3bn) +91.6%

Affiliated Companies -

¥ 105.3bn (vs ¥89.9bn) + ¥15.4bn
of which
Japan ¥ 68.7bn (vs ¥65.2bn) + ¥3.5bn
China ¥ 27.9bn (vs ¥16.4bn) + ¥11.5bn [sales of 228k vs 185k]
Other ¥ 8.6bn (vs ¥8.1bn) + ¥0.5bn


Toyota's updated FY2015 global forecast expects to see a total of 9.1m units sold; similar to previous stated expectations. Of these the company expects to experience stagnant demand in flat-line Japan (2.21m), a +90k unit improvement in N. America (to 2.71m), a +10k unit growth in Europe (0.860m), Asia to see a loss 0f -50k units (to 1.58m) and RoW similar -50k loss (to 1.74m)

Correspondingly, line item forecast remain constant. Net Revenues at ¥ 25,700bn (flat) , Operating Income (EBIT) at ¥ 2,300bn (+0.3%), Net Income of ¥ 1,780bn (-2.8%), Net Margin at 6.9%. These figure very close to the FY2014 results. Likewise R+D and CapEx both remain constant, respectively at ¥ 960bn and ¥ 1,020bn, illustrating an upward rebound rise since 2011.


Compared to the initial massive boost effect of a very much weakened Yen and last year's +14% revenue boost and +88% EbIT boost, the present Q1 2015 growth of 2.2% and 4.4% respectively appears very pedestrian.

However, the situation may be read as the remit of Abenomics being to put Japanese firms simply 'back on course' having been previously hit by an unsurpassed multiplicity of challenges, from the 2008 western collapse to the natural disasters which shut-down both domestic and prime Asian operations aswell as the China Sea island tensions. Given the scale of headwinds Abenomics was seen by Japanese executives as simply “re-levelling the global playing field”.

Hence, with such “Q1 2015” results (as per Q2 2014), Toyota could be viewed as having returned to an approximate of normality, with 1.7% increase in turnover, even if EBIT reduced by -3.6% because of overhead increases.

Given the generally improving but still fragile mainstream auto markets, as for all auto-makers, that return to a much desired 'normality' is an unusually lengthy and volatile a process.

Japan sales decline with buyers seeking lower value models hurt local EBIT. N. American sales growth coupled with cost-saving exercises boosted local EBIT. European proporitionately small sales growth together with cost-savings more than doubled local EBIT. Asia sales decline more than off-set by combination of Yen positive FX effects and cost savings. RoW saw flat-line sales yoy, yet EBIT contracted notably, the result of reduced local production and weakened local currencies; (Toyota seemingly seeking to post-pone local demand until negative FX effects shift).

Regards Financial Services, it was actually the 'fair value' recorded valuation gains of interest rate swaps amongst Toyota's sales financing subsidiaries that gave the large EBIT boost. So although revenues increased 11%, profitability buoyancy did not derive directly from increased lending balance (“loan book”) or simply the translational effects of generally stronger foreign currencies. Thus whilst 'fair' so as to mark-to-market, also an accounting ploy to revitalise the division and counter loss of consumer and business finance momentum in Japan.

As for products, the company obviously still deploys its reputation for styling conventionality alongside its eco-credentials as the biggest hybrid vehicle producer; the landmark series of Prius models, which enabled volume scaling of batteries and energy management systems, now wholly cross-pollinated with most of the mainstream models as standard or option depending on market: Camry, (not Avensis), (not Verso), Civic, Auris and Yaris, with the smaller, lighter Aygo and iQ deemed presently in no need of hybrid drive given standard higher fuel efficiency and obvious package constrained system installation issues, instead suited to pure EV.

So as to avoid the Toyota brand becoming perceived as overtly 'eco' (with inherent dangers of hybrid vehicle commoditisation) the company has been in recent years seeking to recapture its previous RWD performance spirit of the 1980s (TA22 Celica GT, AE86 Corolla, MR2 and Supra). Hence the previous release of the affordable RWD GT86 and the latter FT-1 concept as larger coupe; possibility envisaged in possible production as a curvaceous competitor to the more brutal Nissan GT-R.

As per new 'youth orientated' 'X-face' Aygo, investment-auto-motives suspects that given a similar 'X-face' PR “teaser” images from Volkswagen's SEAT division, that either:
a) SEAT seeking to gain conquest sales from the Toyota, or more possibly...
b) VW and Toyota possibly in secret talks to create a youth orientated JV business model.

This is pure conjecture, but such a scheme might be a cost-effective, shared risk approach to gaining the custom of what is a harder to reach and convince, reduced driving generation. The precedence for Toyota is that of the previous and present PSA JV for Aygo / C1 / 108, an alliance which has fulfilled its strategic intent as has the Suburu JV on GT86 / Scion FRS / BRZ. Thus search for a new or additional European partner to offer a 'Euro-Scion' type of car or range appears within the bounds of possibility.

For VW, doing so would bolster the improving but problematic SEAT. Resulting in both companies attracting the 17-30 aged 'cyber-youth' (17-30) with X-face, whilst and separately attracting the older 'young at heart' groups with a dynamic value for money offering with evolved 'razor' styling. Combining dual personas across both brands to reduce individual cormpany's CapeX and boost sales volumes.

A mutually arranged sharing of 'X-face' would need to be explored properly, not only regards production, but also possibly singular or complementary on-line marketing channels, and indeed possibly as shared sub-brand and with dedicated secular JV commercial entity. (Having first learned the lessons of GM's Saturn and Scion USA itself).

This is presently pure conjecture from investment-auto-motives, and requires major research, but appears a plausible strategic avenue for mutual exploration by both companies.

Post Script –

As press reports intimate, China's recent announcement of anti-trust investigations into foreign multi-national companies – with car-makers' alleged price-fixing of parts – does indeed appear to be yet another episode of less than subtle industrial policy.

Initial reaction is to see the move as a providing advantage to China's home-grown brands, as part of a wider rebalancing of cross-sector market-shares, so as to aid domestic firms as part of a 'great rejuvenation'.

However, in real terms closing the pricing-gap (between typically better quality foreign badged cars vs lesser quality domestic badged products) only serves to increase pressure on Geely, BYD, Great Wall et al, since the rational to buy domestic diminishes.

investment-auto-motives believes that the intended impact is not in fact simply to scold the foreign interests of Sino-foreign enterprises, but to drive a one or two-fold gain.

1. price deflation
2. option of expanded consumer tax

Firstly, forced price reductions obviously creates internal price deflation across the auto-sector, affecting initially those foreign brands, but latterly domestic brands as they seek to maintain the price gap which for them beholds a value offering. So price-cuts pushed down to Tier 2 suppliers, all to advantage of the end consumer.

Secondly, to aid national or state-wide budgeting, the resultant price reductions in each sector could be partially or wholly absorbed by additional consumption taxation. Thus, the public gains with either a slightly price reduction, or at worst a “price-stabilised” product, whilst the government gains income and public favour.

So, under the banner of Chinese nationalism, either singularly or combined, points 1 and 2 “rejuvenate” domestic momentum.

The anti-trust moves seen thus far have been set against the likes of BMW, Daimler and Jaguar Land-Rover, marques that essentially operate in a luxury class of their own, so any price reductions would ironically be to the gain of China's wealthy, who themselves have seen their own apparent progress slow as the economy cooled. Cheaper luxury cars would off-set any possible loss of motivation.

Lowering the cost of component input prices (Daimler posits -15%) obviously lowers the BOM (bill of materials) and thus provides for greater ex-factory pricing elasticity. This in turn enables pricing flexibility down-stream, amongst distributors / dealers, their own intermediate-level purchase costs determined by scale economy reductions. Those per unit savings either wholly or proportionately passed onto the end buyer.

Previous press reports highlighted China's continued over-production and so over-supply of input materials - especially so in steel. It was envisaged by investment-auto-motives, and mentioned in this web-log at the time, that this had been sanctioned so as to create a lower-cost materials input base, by which Sino industry could flex its own intermediate and consumer prices to expectantly generate additional household demand as income and savings were re-directed away from the property bubble and to high and mid-price consumer durables.

With the PRC's approval, even with current general over-capacity, the Sino-foreign joint ventures continue their capacity expansion projects largely located in Western and Southern China. And so obviously require pseudo-massaged distributor, dealer and consumer demand. Official demands for orchestrating reduced input prices allows for this; and so promotes aspirational consumerism to the gain of both JV partners.

[NB It should be remembered that foreign car-makers receive their quarterly income not as cash earnings, but either as dividends or as equity revaluation, both typically determined by the Chinese partner].

The country's leadership well recognises that it must delicately manage the present ' economic tight-rope' period given contraction in Asian and EM directed exports, and restrictions in state administration spending given the municipal credit bubble.

Ultimately, such state imbued 'invisible' transfer-pricing directly into the marketplace is simply part of the overall economic rebalancing. This, as well recognised by all, toward greater internal private demand vs previous overt reliance on now slowed infrastructure expenditure and previous dependence upon low low-value / low margin exported goods (the export rebound seeking to create higher value)