Thursday, 25 June 2015

Industry Practice – Volume Manufacturing – Call for a Paradigm Shift...Usual Rhetoric or Prescient Timing? (Part 2)

Throughout much of the auto-industry's history there have been calls for rationalisation, obviously so, especially through periods of substantial economic contraction, awaiting the upturn: just a few examples given previously in the 'take-away' of Part 1.

Such rationalisation inevitably undertake via inter-firm consolidation.

However, there have been calls for yet greater re-modelling of the auto-industry, so although arguably somewhat (or very) remote from the ultra-competitive realities of a VM's operational demands, the intention of this portion of the weblog is to very basically highlight the broad 'paradigm shift' efforts within the sector – see accompanying graphic.

And to highlight how at a time when Marchionne's call for consolidation has been viewed by some as overtly idealistic, over the last two decades there have been other 'shadow debates' and efforts which have sought alternative technical solutions, along with part and wholesale re-creation of the sector's innate (historically embedded) operating structure.

The internet powered information-age has in turn promoted such perspectives, especially amongst those with vested interests in disrupting the norm. Cyber-space deployed along with the combined use of traditional academic 'heavyweight' publishing, the trade press and ever greater exposure to 'industry insider' issues within car consumer magazines.

The Traditional “Play Book” -

The ideological conflict between a global growth ambition, a desire to sweat its vertically integrated industrial assets and need for improved ROI, appears to have set FCA Group on a rational path toward further 'Eastern Consolidation'; even if subtly presented.

[NB although the words spoken and put-out in the press release highlighted the challenge of 'tomorrow's world' mobility and its enabling technology, little if any of this detail was actually apparent in the presentation].

The 'set play' by corporations and (very often) their capital markets backers the is merger and acquisition of 'synergistic' firms, so as to gain broader overall market footprint, greater penetration of its segments, operational economies of scale, improved margins and cash-flow and thereafter greater efforts and rewards from research and development. As seen then, merger and acquisition is “par for the course” and with the success of globalisation a repeatable formula ad infinitum.

Such calls then are expected and critiqued relative to the zeitgeist, and could be viewed as ostensibly evolutionary for the sector.

Versus “Alternative Revolutions” -

However, as will be seen, there are periodically other - far more revolutionary – calls made, along with rare efforts toward 'sector-disruption'. These (though previously failed, now gaining greater publicity) then are:

1. Sector Technological
2. Sector Structural

These may be viewed as the two primary avenues of change, and are inevitably entwined, any progress within one sphere opening up debate and opportunity in the other.

The spectrum itself ranges from the marginally evolutionary of either sphere (eg improvement of the internal combustion engine vs cross corporate consolidation) through to the radically revolutionary (ie broad adoption alternative propulsion units vs wholly new manufacturing or retailing methods). As such each may represented as opposing 'x' and ''y' axis on a basic Cartesian graph.

So it is seen that in both realms – Technological and Sector Structural – that a seeming plethora of alternative routes may be undertaken; by both sector incumbents (typically more modest and plausible) and sector disruptors (typically more ambitious and problematic).

Mainstream “Business as Usual” -

Firstly that which is viewed as the convention with low-risk/lower-reward “baby steps” by most VM firms, whether mainstream or premium. (seen in 1.)

Mainstream 'Eco-Mobility' -

Then onto what may be termed 'Semi-Intermediate' technical initiatives, which very rationally combines (or better described 'integrates') unfamiliar new technologies within the conventional. The best known and most successful example to date being Toyota's massive early investment into Hybrid powertrains, from Prius onward. These power-sets intentionally installed into otherwise conventionally manufactured and styled products for operational integration and increased market acceptance. Over time continued research in the 'miniturisation' - or at least scaling-down - and improvements upon the original Prius mk1 power-set has allowed for broad vehicle range applications. (seen in 2.)

Taken yet further, a similar balanced rationality, has lead to the diametrically opposed position taken-up by Tesla, whereby its market revolutionary EV system is now installed into a sporting sedan based upon advanced aluminium construction but produced via evolutionary pressed-metal stampings in Fremont, CA, USA in order to quickly scale-up volume of its EV products.

However, the greatest progress has been made by BMW, with its i3 model: in either full EV and (more practical) 'range-extended' variants. Unlike other major manufacturers, under the new 'i' sub-brand and its 'MCV' (MegaCity Vehicle) ideals, BMW undertook essentially a clean-sheet design to maximise the optimisation of the overall package; whilst ensuring it could be built in volume numbers via its conventional (pressed steel and aluminium) production system (thus far in Leipzig, Germany). Most impressive though is the company's investment in carbon-fibre composite processing to create the strong yet light structure. (Further future weight-saving likely to be achieved with poly-carbonate windows). Thus BMW's leap of faith with 'i3' demonstrates its commitment to 'visioneering'.  

Niche “Business as Usual” -

As is well understood, even by the early 1930s the trend toward mass demand of the motorcar witnessed an industry morphing from what had for decades been a crafted item, toward one effectively re-moulded by the volume and speed efficiencies of Fordism, and thereafter the Budd-based and semi-monocoque and full-monocoque.

However, whilst there was indeed consolidation amongst the old-style upmarket (chassis-on) coach-builder body-makers, with some names absorbed into conglomerate structures of major manufacturers, the basic skills deployed in crafted, low volume, bodies and whole vehicles were re-utilised after WW2; with now the added advantage of new materials and thinking prompted by WW2.

Together with the post-war economic boom, this provided fertile ground for development of the unadulterated sports-car to satiate the demands of aspirant and more adventurous members of western society.

However, unlike mainstream production's usually sustainable variability through the economic cycle, the very nature of sports-car and luxury-car niche is dependent upon prosperity. Hence the innate business model had to be 'back to basics': dependent upon low CapEx tooling and fabrication solutions, far greater use of a flexible labour force and as low as possible overhead. (see item 3 on the graphic).

Even so, this has not been a perfect formula for success, since so much depends upon the appeal of the product itself, and the very real difficulty and onerous cost of scaling up production beyond certain niche limits if ultimately very successful.

The boundaries of what was once possible however has been somewhat expanded by those major VMs who have acquired specialist marques, and with relatively large R-D budgets, have been able to undertake the learning curve to instigate the ever greater numbers of advanced 'trickle-down' materials and methods; specifically the application of aluminium, carbon fibre, other composite types, usually combined as a 'mixed matrix', depending on performance requirements. Those parent car-makers well recognised the need to improve production and quality levels to raise the prestige of specific marques, and have been very successful in doing so.

The only others, as plausible independents, seen to have invested in advanced engineering - using internal and external fund-raising - have been Pagani (Italy), Koenigsegg (Sweden) and McLaren (UK). These companies viewed as patriotic torch-bearers in their respective national ambitions toward advanced engineering, and the export earnings and technology transfer hopes.

However, very frankly and a world away from the cosseting of VM guardianship, and national interests, it must equally be recognised that this glamorous business arena has a darker side.

Historically used as the stalking ground for disingenuous entrepreneurial “Producers” who – who as with the namesake film – have sought to instead absorb and channel as much excitable investor cash as possible, before going (intentionally) “belly-up”.

Nevertheless, some companies have been long-lived - typically if managed well with avoidance of debt - as was the case for so long with family run Morgan Motors; cutting its operational cloth to suit good and bad times. Likewise (the defunct but seemingly returning) TVR when under Peter Wheeler ownership. And (from a distance) today the seeming example of Ginetta with Lawrence Tomlinson.

But it must be stated that as an ongoing long lived enterprise, Morgan is a rarity, the historical experience of premium orientated niche vehicle businesses run independently that of at best “feast and famine” and at worst substantial investor losses. Only few names such as Aston Martin are typically able to ride the such waves - taking shelter under VM influence as required, thanks to enormous cache.

This said, the following arena, based toward commodity-type, city-mobility should not automatically be viewed in the same manner, though investor caution should always apply.

Micro-Factory Retailing -

The centre ground of the chart may be loosely termed 'Definitively Intermediate', centred around what is essentially niche type (ie low volume) production methods which have been utilised since the 1930s in Grand Prix cars and the 1950s in sports cars: typically a structural skeleton supporting major systems, covered with composite, aluminium or mixed panels.

This was re-named Micro-Factory Retailing by academia in the mid 1990s to befit a far more localised approach to vehicle construction. It was initially imagined as the best way to create locally-fabricated vehicles for developing markets (ie 1980s Africar to 2010s Mobius). (see item 4 on the graphic)

A commercial model latterly seen as eventually applicable to advanced nations as well (as in relative terms the Triad sees an economic 'structural shift' with lower growth and increased eco-awareness). Hence the ability to offer new vehicle architectures and powertrains that are concisely designed around the ideal of much expanded eco-mobility; made operable at a local level to support sub-national regional economies. (seen in 3.)

With this 'eco-local' perspective in vogue amongst Triad regions governments at the height of mid 2000s consciousness and eco-budget spending, a number of previous conceptual and prototypical vehicles and business models were created to date befitting the LEV and NEV remit. Such eco-concepts as the continuance of THINK!, and new Mindset, Loremo, Bollere-Pininfarina, Tesla and GMD's T-series were generated during the period. The latter examples gained greater financial backing and so exposure. Most recent arrived in this conceptual space is 'Divergent Micro-Factories', showcasing its 'Nodal' construction arrangement as rolling chassis for its Blade concept'. The basic structure a partial materials update of the conventional niche production space-frame / bird-cage method (as applied to early aircraft, race cars and typically niche-car specialists).

[NB The massive funding difference between America's Tesla and France's Bollere vs Britain's GMD says much about the power and speed of wealthy entrepreneurs, versus the modern equivalent of the drip-fed funded 'garagista' awaiting roll-out through licensing].

One aspect of that automotive “eco rush” was the emergence of often overtly idealistic 'open-source' designed cars such as Oscar, Local Motors and OSvehicle; each progressing in stops and starts. These invariably appear to have insecure funding streams, possibly used by others to extract IPR ideas, and may have arising issues regards any eventually monetisation of the value provided by external contributors.

Sector “Unbundling” -

Perhaps most profoundly is the call for 'Sector Unbundling' by the likes of Maxton and Wormald. (see item 5. on the graphic)

[NB as can be imagined, it is the very opposite of the 'bundling' trend seen in developed market telecoms and info-tainment over the last decade].

The hypothesis (seen in 2004) is that the the Triad regions (USA, Europe and Japan) have matured to effectively stagnation point, and the true ultimate market opportunity for major triad car-makers in EM nations will not be as great nor as lengthy as appears the 'promised land' case. The expectation that BRIC and EM nations will likewise seek to follow China's own automotive manifesto; to conjoin with JV partners from the triad nations so as to capture modern technology assets and know-how, but to critically deploy that knowledge to serve its own economic growth, thus slowly squeezing-out today's major / global auto-industry players.

With such a bleak horizon, the only way to further extract investment reward from the largely triad-based auto-industry will be to undertake a wholesale restructuring to align to 'core competencies' and so 'key competitive advantages'. The outcome being any remaining vertical integration of the major players is divested and likely bought-over by Tier 1/2 suppliers; and likewise, 'core activities' remaining in-house to a VM, but peripheral activities given over to current or newly created corporate entities wholly focused upon a specific realm. This would eventually naturally lead to the creation of Tier 0.5 companies and 'Integrators' who effectively act as vehicle architects and suppliers to many of the brand names of today, and a new emergent set of newcomer brands from outside the industry.

[NB Very small scale, indeed thus far negligible, efforts by auto-sector outsiders to initiate such thinking has been seen by the 'open-source' (OS) vehicle design community, as shown in the accompanying graphic].

This then a major over-haul of what historically has been a very entrenched industry; one which when faced with forms of external disruption has sought to quell the threat.

[NB One example is the previous selected assets acquisition of some of Europe's various niche production design-contract houses (eg Karmann, Heuliez), before being possibly resuscitated as 'Integrators'.Another example is Daimler's stakeholding in Tesla Motors. As investment-auto-motives has mentioned time and again, that some 'entrepreneurial disruptors' may in reality simply be seeking to gain a very handsome reward by exiting their ventures with sales to the industry's incumbent major players. Thus, in some instances – autos most obviously – there may well be a commercial imperative, masked by apparent humanitarianism, behind such sector disruption].

Thus, 'Sector Unbundling' does indeed promote the scaling back of VM's (often dynastic) centralist power-base, seeking to create what is viewed as a far more rational (horizontally integrated) industry structure; one which now includes far greater provision of electronics and cyber-based 'info-tainment' hardware and software. Under the 'Unbundled' scenario, today's auto-companies would effectively shrink to become automotive 'brand houses', able to concentrate on their specific USP internally and procure what would be far more complete 'vehicle modules' and 'sub-systems' from external parties, with the 'ultimate ideal' of farming-out much of the whole vehicle manufacturing process to a new crop Tier 0.5 firms (the apparent ambition of Magna International).

The Take Away -

Quite obviously, such calls for change are presented by those who essentially convey themselves as deliberate antagonists so as to push the boundaries of two important arenas:

A. Eco-Consciousness and Revolutionary Eco-Mobility.
B. Potential for Improved Return on Investment via Sector Re-Alignment.

Both sets of sector activists seek to create a major shift in current, historically engrained, perceptions by consumers, industry insiders and investors. Variously, such voices come with and without auto-industry experience, each background with positive and negative attributes. Others have practical experience of different product and service fields. Others still with very little or no experience, with bravado and a PR driven publicity machine, simply seeking to re-deploy the basis of other sectors' commercial models into eco-mobility.

These pointers for change ostensibly arise from an overtly intellectual and philosophical standpoint, either in auto-associated management consulting or auto-orientated academia. And those actions for disruption made by a plethora of initiators, from over idealistic, commercially naïve eco-activists to those with seemingly high ideals, very deep pockets, political connections; and very possibly high-return exit strategies.

However, these 2 calls for change, from very different perspective and goals, should not be immediately viewed as inter-linked or inter-dependent; though of course the latter may ultimately assist the former.

With this understanding, given the level of great publicity generated by the Californian 'Mamas and Papas' of eco-mobility, little more need be added.

Instead, Part 3 of this weblog instead looks to the investor critical ROI hypothesis, as purported by Maxton-Wormald, and provides a summary of the recommendations made over a decade ago, back in 2004; with recognition of the fact that even Marchionne's calls for evolutionary consolidation fell to a large extent on the 'deaf ears' of necessarily cynical investment analysts.

Friday, 12 June 2015

Industry Practice – Volume Manufacturing – Call for a Paradigm Change...Usual Rhetoric or Prescient Timing? (Part 1)

Over recent months the investment community has watched as a number of major auto-manufacturers have undergone various internal ructions and publicly aired sector concerns. The latest of which has been GM's apparent rebuff of FCA Group's intent to further consolidate the auto-sector, itself as a primary actor.

A Snapshot of Current Affairs -

The formal departure of Ferdinand Piëch from the official top perch at Volkswagen came with little warning, although he (as effective patriarch of the Piëch-Porsche clan) obviously retains massive shareholding influence. At Renault there may be possible future frustrations for Carlos Ghosn after the French government's raised near 20% share-hold, which with regulation imposed increased voting rights, raises the issue of 'politicising' the efficiency rates of domestic plants. (Previously, investment-auto-motives highlighted the case that promised plant efficiencies at Renault and Peugeot would simply be delivered on the back of improved sales on a per unit basis).

More apparently pro-active is the ongoing push by Sergio Marchionne of FCA Group for yet greater broad-based efficiency seeking within the sector.

An Ever Ongoing Contextual Debate -

Under the title 'Confessions of a Capital Junkie: An Insider Perspective on the Cure for the Industry's Value Destroying Addiction to Capital'' (dated 29.05.15), he recounted to analysts the sector's need for consolidation. Whilst also explicitly refuting that the timing of the speech reflected: FCA's present investment position (“in the food chain”), the possibility of an FCA sale, a revision of the 5 year plan, any presumption about him seeking a last 'big deal'.

His prime plea is for mergers, acquisitions or partnerships as the costs of developing and selling vehicles invariably rises, with specific focus upon the costs of research and development, stating that the auto-industry creates less value for customers and shareholders than most other industries. In short it “has not earned its cost of capital over a cycle”. It was presented as a dispassionate, objective view of the sector, from the outside, using insider understanding, and “choosing between mediocrity and fundamentally changing the paradigm”

Presentation Summary -
[with investment-auto-motive's comment]

The first slide demonstrated the rise in capital expenditure and research and development for the major mainstream and premium manufacturers, from €76bn to €122bn, with a compound annual growth rate of about 12% for mainstream and 10% for premium makers.

[However, this in itself infers little. Reflecting simply a relatively stable and strong return of general business confidence from the extreme post-crisis lows of 2009/10. Those lows then were historically off-trend and an anomaly. The success of US economic QE re-inflation (much assisting GM and Chrysler), with similar central bank actions followed by Japan and Europe, plus ongoing faith in various EM markets, has then expectantly seen what appears a substantial rise in CapEx and Research-Development].

The second slide was more telling...with the sur-title “and going forward, new technical challenges will continue to raise the bar on capital requirements”.

[This critique of the investment costs relating to [regulatory] a) emissions, b) safety and [customer] c) car-connectivity, were all obviously wholly valid].

Slide three offered a the perspective that...”product development costs are consuming value at a much faster rate than other industries”. A comparative calculation spanning different auto-cos and other sectors was provided, showing what appears a valid viewpoint: the number of years taken in which Enterprise Value is swallowed by CapEx and R-D. EV is typically used an alternative 'full sum' and fulsome perspective to simply MarketCap. It is conventionally calculated as: [MarketCap + Debt + (minority interest and preferred shares)] – [Total Cash + Cash Equivalents].

[As ever though direct comparisons may be unintentionally misleading. Because of their inherently different histories, business dynamics and point in their own business cycle, different sectors are viewed very differently. Some with overt over-speculation or expectation, so artificially boosting MarketCap, whilst others (ie providers: food, utilities, building materials and construction) often take on far greater leverage given 'staples' nature, that debt essentially based upon assured business income, so raising their EV value. (Remember that the banks' business is to lend, and since EV includes debt, the value of a business or sector is simplistically seen as greater). Also, as known, newer high potential firms with much publicity tend to be speculatively “equity heavy” so boosting MktCap, whilst socially engrained firms tend to be “debt heavy”. Critically, as seen new autos are seen as highly consumer cycle dependent, so whilst notionally 'socially engrained' are also absolutely foregoable as a discretionary purchase. Thus the sector doesn't enjoy either the speculation boost on its EV, nor the debt boost. (Through investment-auto-motive's own 'Coupled Ratios' analysis, autos tend to have lower level of leverage vs their cash positions). As a maturer industry, the typically well attuned analyst and institutional investor tends to be rational about their valuations approach to autos and so conservatively value its participants. Thus whilst the slide's 'take-away was that “the average across (combined) other industries is about 20 years for CapEx and R-D to reach EV levels compared to Autos' approximate 4.1 years”, that conclusion, whilst a probable truism, is very much overly generalised].

Slide four highlighted that... ”high operational leverage amplifies profitability swings across the cycle”, this inferred by a cross-comparison of mainstream vs premium auto firms and other sectors' EBIT Margins once again. Here mainstream VM producers are seen to have a lower EBIT Margin obviously compared to premium makers, but critically also lower than a number of other sectors.
The sectors illustrated are (in ranked order) Pharmaceuticals, Consumer Products, Aero and Defence, Chemicals, Packaging, Telecoms, Building Materials. It is shown that it was only Autos which experienced negative margins during the post-Crisis lows of 2009, whilst Premium Autos is on par with Chemicals and Telecoms since 2010, whilst Mainstream Autos under-performs against all.

[Once again, it must be recognised that such a comparison is distinctly not 'apples vs apples', but this is not Marchionne's absolute point, simply the relative EBIT. Again, it must be recognised that the autos environment is very different to those illustrated. Unlike cars, the Pharma sector has a distinct three tier structure across commodity drugs (retailed), conventional drugs (prescribed) and break-through drugs (high margin), each of which has various yet comparatively high levels of margin. Consumer Products are a broad range, but the effective commoditisation of the invisible electronic hardware thanks to its massive volume, easily adaptable, low-cost nature, plus ability to re-locate to international sites offering low cost workers has driven down the per unit cost of production: from smart-phones to flat-screen TVs to toasters. Thus brand, general design, interface and software availability have maintained price ceilings with a plethora of goods have allowed older (well amortised) specification products with low brand awareness products to lower price floors yet still gain appreciable per unit margins. Aero and Defence, viewed as 'specialist' is relatively protected by a somewhat secure pipeline of contract orders which even in the event of cancelled orders will invariably find alternative buyers at a slight discount in the global marketplace; furthermore whilst apparently “research rich” and so costly at the front-end of specific projects requires far less heavy plant and tooling than its Autos counterpart. The others, similarly have sector-specific traits, with perhaps most simplest Building Materials typically extracted from the earth and often only 'part-processed' at a relatively low cost per tonne before offered to the retailer and end user. Moreover, many of these sectors are typically not reliant upon B2C influenced consumer credit, but have are B2B facing, hence their ability to maintain earnings through the post-crisis downturn in which 'big ticket' consumer items were worst hit. Nonetheless, when compared to a broad array of other disparate sectors, Marchionne does indeed have point about the “high operational leverage” impact because of the cost of CapEx and R-D].

Onto the fifth slide and the mention of the previous impact...”resulting in structurally low and volatile returns”. This illustrates how – against the same comparative sectors – both mainstream and premium auto-makers suffered far greater volatility in the Return Of Invested Capital (ROIC) through the post 2008 down-cycle. It states that the Weighted Average Cost of Capital (WACC) across all combined sectors has been approximately 9% over the last decade, as as such mainstream makers have over-whelmingly failed to meet that base-line with the exemption of immediate post crisis period – unstated but when artificial sales incentives were created by governments - with premium makers previously just under the base-line, while over the last five years comfortably surpassing it. The conclusion then is that given the raft of higher return investment opportunities elsewhere, mainstream auto-makers current inefficient business models are destined to fail to continue attracting investors.

[Once again close attention needs to be paid to the reality of the WACC per sector, and specifically the details of each sector's typical corporate capital structure (critically the cost of equity and cost of debt). As stated, various of the sectors used are indeed of the “defensive” variety which invariably attract high investor demand and so lesser costs of equity and debt. As a “cyclical” entity, mainstream auto-makers will suffer by comparison, especially soon after a calamitous period. However, given the fact that auto-makers must endure the disadvantages of heavy fixed costs and demand cycles, compared to distinctly simpler, less exposed business formats, Marchionne maintains a valid point].

Slide six asks...”Why did this happen?”...and answers...[because] “OEMs spend vast amounts of capital to develop proprietary components, many not discernible to the customer”. Here we see two diagrams with % breakdowns:
1. Typical Vehicle Development Costs:
a) vehicle R-D = approx 40% [spanning wide specifications spectrum and high IT content]
b) vehicle tooling = approx 35% [presumably mix of VM + OEM supplier funded]
c) power-train R-D = approx 15% [utilising std mid and low-cost casting/machining processes]
d) powertrain tooling = approx 5% [typically marginally altered std components]
e) other = approx 5%
2. New Vehicle Programme – Developments Costs Split
x) differentiating products / technologies = 50% - 55%
y) 'beneath the skin' components = 45% - 50% [“indiscernible to customer”].

[As a basic % cost guide, little actual 'systems detail' can be gained, beyond the obvious intimation regards the component complexity of the modern vehicle, the heavy financial burden of the conventional pressed steel “Budd system” and the increasing toll of R-D in electronic hardware/software. Likewise belief must be placed in the calculated development and provision of customer 'visible' items vs 'invisible' parts development costs. This template conforms to the general historical norm. However ultimately both the visible and invisible aspects of customer perceived “component contribution” are obviously heavily dependent upon the associated variant or sub-brand: vital in premium markets but also in portions of mainstream, seeking to use knowledge about their 'invisible engineering' to persuade the customer of differentiation and thus purchase initiative. However, even though specifically informed or knowledgeable target customer are swayed (by sway-bar thickness and such), it appears very likely that the majority of modern mainstream car users are not concerned about being informed about engineering details].

Slide six expounds that... “one industry solution focuses on reducing the number of active platforms and increasing scale”. We are shown in one diagram how since 2004 the number of platforms for the global top 10 auto-firms has reduced from 22 to 18 in 2014 (though disingenuously including the few platforms for vehicles produced at 2k units pa). Accompanying another diagram showing how the number of 'top hats' [car style variants (ie upper body internals, mono-sides, closures, etc)] has risen from 2.5 in 2004 to 3.3 in 2014. This then the conventional 'in-house' strategy for reducing complexity and overall core platform multi-model development costs.

[The usual opposing argument is that such standardisation runs the risk of reducing the differentiation (ie relative performance capability) per variant and model type, especially for the high margin, lower volume spin-off variants].

Slide seven highlights that...”some OEMs are trying larger scale commonization across diverse brands”. The corporate strategy examples of VW Group and Toyota Group are illustrated with respectively the MQB and MC-M architectures.

[Of course, as already seen, the reduction of core platforms and associated costs has been partially undermine by automakers expansion of vehicle types - apparently responding to apparent market-demand - so increased costs of providing more body-styles per model and all new model name-plates. So careful assessments regard the realistic contribution of new variants and models must be undertaken by the VM. And whilst comment regards "model/variant proliferation" undoubtedly has relevance, it must also be noted that the best producers will invariably be "cost-intelligent"].

In slide eight we see the alternative strategic ploy...”[while] others [gain] through one-off co-operations, JVs and other equity tie-ups”. Here proper distinction is made between these various methods with also that of 'full integration', each category populated with projects deems successful or unsuccessful, depending upon “level of expected impact” vs “level of integration”. The stated results indicate that the category of “one-off industrial co-operations” provides the greatest success rate (of 4 successful projects vs 2 failed).

[Without details of the studies examples, it seems likely to investment-auto-motives that the basis for success of the “one-off co-operation” category may well be upon the historical strategic deployment of both:
a) “badge engineered” vehicles, wherein one firm acts as contract supplier and another as client seeking to supply a specific market segment or niche quickly and cheaply (at the possible expense of devaluing own brand reputation). (eg Dodge's use of FIAT vans).
b) a combined dual vehicle development project, whereby both VM partners are either fiscally induced to create a 'dual aspect' single vehicle package, or believe they are so well mutually aligned to share the basic vehicle package and majority of components. (eg Daimler's new Smart 'For4' and Renault's new 'Twingo': both using unconventional rear-engine, rear-wheel drive)].

Slide nine, however, states that...”but all this has produced poor results so far, as OEM returns and valuations are still depressed. Here the ROIC and EV/EBITDA for mainstream auto-cos are depicted against the previously listed industrial sectors. Whereas Mainstream Autos are shown as providing a ROIC of 7.8% (against an averaged WACC of approx 9%), Oil And Gas offered 10%, Telecoms 11%, Building Materials 12%, Chemicals 13%, Packaging Materials 14%, Aero and Defence 16%, Pharma 19%, Consumer and Retail 22%. Likewise EV/EBITDA is shown as Mainstream Autos: 4x, Oil and Gas: 6.2x, Telecoms: 6.8x, Aero and Defence: 9x, Packaging Materials: 9.1x, Chemicals 10.7x, Building Materials: 11x, Consumer Retail: 11.1%, Pharma: 13x.

[Whilst FCA's (or very possibly its corporate banker's) own calculations generate this conclusion, it should be recognised that given the present generally depressed global market demand conditions (aside from re-buoyed N.America and improving Europe), that Mainstream Autos today sits at a relatively low point of the global economic cycle - with demands of ongoing EM and partial AM CapEx cash-burn - so currently undermining their increasingly global foot-print business models].

Slide ten asks...”why haven't these approaches provided a significant lift to returns?”...and highlights 2 headwinds. Firstly, the 'large scale organic reduction in platforms' the challenges are:
1. prolong the life-cycle of older platforms given inherent cost savings gained [esp new CapEx]
2. this option only suited to those firms with existing scale, desire to grow body variant numbers and have wide regional presence
3. temptation to over-engineer (incurring additional cost) so as to 'package protect' the platform.
4. attraction of low risk, improved margin short term gains at expense of much improved long term advantages.
Secondly, the topic of 'OEM co-operations', its prevalence typically non-core to operations:
a. most effective on single ventures, but with limited scope
b. usually involve non-core elements of portfolio
c. not a pervasive , substantive solution for any OEM

[Herein, Marchionne conveys the reasons why the aforementioned efforts of platform reduction, internal cross-brand common engineering and inter-company relationships have, in FCA's view, failed to raise the sector's (averaged) bottom-line. These are indeed salient points, but as critically as CEO's and CFO's and attuned investors well recognise, the near and mid-term advantages of a redeployed of a previous generation platform can be acutely compelling. Whether used as the ongoing underpinnings for 'new' model replacement, or as a reduced cost method for entering (or creating) a new segment with a new product line (as seen previously with original Ford Mustang, that template copied ever since including the mid 1990s radically styled FIAT Coupe, and very importantly by Renault to create the Dacia Logan and the early variants of its off-spring family). As per 'OEM co-operations and their typical 'non-core' use of shared development projects, unfortunately Marchionne may have overlooked the vitally important contribution of the previous project alliance for Ford and FIAT on their small car platform, for series 2 Ford Ka, and FIAT's series 2 and 3 Panda and retro 500. As such this all too close to home case study has proven that such efforts – when well executed – may indeed be substantive].

As for slide eleven, the question...”why does industry consolidation matter”...the conclusion is that 'the potential savings are too large to ignore'. But also recognises that previous attempts have failed because of various pertinent problems, including: cultural divide, inequality of integrating parties, very different operating methods, lack of sensitivity for brand differences, lack of mutual respect / trust. Hence the barriers and complexity viewed as overtly problematic. But 'it enables': fast execution, enabling rapid scale gain, fosters step-change to best practice development approach toward engineering commonality and modularity.

[This then once again truism, seeking to convince that the problems potentially incurred are worth the outcome. However, objectively this can only be assessed on a case by case basis].

Slide twelve presents...“the facts; breaking down product development costs”, illustrating the current proportionate costs of frame/body related systems (excluding power-train) and the potential for common-parts cost-savings whilst importantly maintaining differentiation. FCA shows the following (Current Cost as % of overall vehicle / Potential for Commonality):
Under-body (11% / 70%)
Upper-body exterior (38% / 10% [minimal])
P-T installation systems (7% / 75%)
Brakes (1% / 90%)
Suspension/Wheels (4% / 80%)
Steering (1% / 80%)
HVAC (2% / 80%)
Electrical (5% / 70%)
Interiors (17% / 30%)
Gen. Assembly / Paint (14% / 100%)
FCA Group calculates potential gains of “up to €2bn on vehicle investments”.

[These respective percentages for these important calculations appear generally convincing to investment-auto-motives. However, it should be recognised that there is probable potential for slightly greater Upper-Body Commonality amongst participating firms, whilst given the desire for model specific wheel-sets, slightly less potential for commonality within the wheels portion of Suspension/Wheels (although there may be scope for low cost adaptation of core wheel designs, so re-raising the commonality quotient). This need to find low-cost adaptation solutions to core designs would also applies to HVAC systems, Electrical systems and possibly Interior items (from trim panels to carpet-sets to seats)].

Slides thirteen and fourteen highlight that...”Powertrain portfolios show even higher dupications across OEMs, both for engines...and for power-trains”. These two successive diagrams demonstrate to what degree the current engine and transmission portfolios of 8 other OEMs match/overlap that of FCA Group.

[Though without the names of its competitors identified, it is apparent that those companies with a full ladder of brand and product types will invariably have a broad span of small to large capacity engines/transmissions, with increasing hybridisation capability. Likewise, for those corporations created from mergers with the rational of spanning smaller and larger engine regions and product types (as was the case for indeed FCA Group). And distinction of those firms with historical roots in small capacity regions and so 'small engine' regimes. Also interesting is the manner in which diesel and petrol/gas descriptions have been differently assigned, the former reflected by capacity of engine, the latter by engine configuration. This may be to extenuate the central point of overlap, or to simply aid clarification. Marchionne's point is indeed valid, but already well understood. However, the fact remains that most VMs tend to maintain power-train capabilities and manufacturing as a core competence. in order to allow the VM to massage performance levels for not only a seemingly 'all new' vehicle, but critically for mid life-cycle 'face-lift'. And today and well into the future.major focused upon the issue of 'eco' power-train performance (initially as 'down-sized' and also allied with full hybrid systems), (FCA's own two-cylinder 'twin-air' and BMW's twin-turbo three cylinder engines high profile). Ultimately it is suspected that Marchionne has publicised this chart in order to attract OEM attention towards FCA's own proven 'Multi-Air' system for either contract production or licence-out].

Slide fifteen highlights...“the facts: sharing platform, vehicle and powertrain development can yield significant savings”. Herein, nominal indications are given as to what level of savings 'consolidated investment' may bring to what would have been separate 'stand-alone' projects. The first example for a (whole vehicle project) A/B class car is viewed as saving 20-40% overall. Whilst the second example is for a notional 4-pot engine with similar comparison, the amalgamated effort saving approximately 25-30%.

[The notations regards the calculation provides interesting food for thought, since the former car example is shown as essentially a 'spin-off' product (a la Ford Mustang from Falcon), and the latter engine example states that this is without “tooling synergies”, which typically comprise a substantial portion of a power-train development project. More detail was necessary to be convincing, and even if provided, would simply be a notional exercise given that through the time of a JV development project, all too typically, one party usually seeks to alter the original specification parameters to the frustration and chagrin of the other party].

Slide sixteen states...”we believe large scale integrations are required to unleash full potential”. Herein, a broad-based theoretical two axis graphic is provided to demonstrate the levels of “potential capital rationalisation' available for different types (ie depths) of co-operation across various facets of VM operations. Hence co-operation is split into: a) one-off technical co-op, b) JV, c) cross share-holding enabled co-op, d) full integration, whilst the operational facets are: 1) shared R-D costs and tech development, 2) optimised tooling investment, 3) maximise plant utilisation, 4) capture cross-selling opportunities, 5) capture other op-ex opportunities and 6) (total) potential for capital rationalisation.

[Obviously and unsurprisingly, as shown, “full integration” provides the highest levels of per activity efficiency and overall combined activities capital rationalisation. Of specific note are the remarks made about “key enablers” relating to tooling investments and plant utilisation regards “integrated industrial footprint strategy”, and the ideal of R-D efforts and cross-selling opportunities providing for “integrated product strategy”].

Thereafter is slide seventeen, with...”potential synergies from consolidation of auto OEMs would be approximately 70% driven by industrial rationale”. The four major obvious gains identified are: 1. shared platform development expense, 2. top-hat development costs, 3) avoiding budget duplication for power-trains, 4) optimisation of manufacturing investments and production allocation. The gains to be had are seen as: approx. 70% in technology and products, approx. 15% in op-ex opportunities (ie procurement, SG-A etc) and likewise approx 15% in cross-selling opportunities. It is propagated by FCA that combinations with another large OEM could provide advantage to the tune of between €2.5bn - €4.5bn annually.

[Once again the ideology of 'two acting as one' is hard to refute in principle. Yet such gains have always been known by industry executives and analysts, this type of common leverage the very cornerstone of the industry, applied since the 1920s onward. What is of primary importance to industry leaders and the large shareholder families and institutions, is real-world vs theoretical potential. Because of the many issues and vagaries (inc. core competencies, advanced IPR, secret commercial ambitions and direction), the question of ultimate leadership, of outcome voting rights and influence and overall control matters relating to such a monumental venture, as well as critically, the ability to ride regional and global economic timing. Reality then, is far more complex than idealism].

Slide eighteen highlights how... “consolidation can support significant ROIC and valuation improvement”. This interesting 'X and Y axis' graphic plots the relative (2014) ROIC vs (2014) EV/EBITDA for FCA Group amongst its previously mentioned competitor VMs and the calculated average values for the set of various comparative industrial sectors. By its own admission it demonstrates how FCA is presently positioned as the second weakest VM and similarly a lowly player amongst the other sectors' firms with an ROIC of approximately 5% and 3x EV/EBITDA. In contrast the average for the auto sector is about 8% and 4x. As seen FCA and its auto peers are seen to critically sit under the 9% WACC level, whilst all other sectors sit above. By 2018 the stated consensus is that FCA will be at 9% vs 5.5x. (The average for the sector is unstated). Crucially, Marchionne believes that if consolidated with another, FCA would reach 13% and 7.5x. Such a move would propel the group into the bottom third of the better performing comparator sectors.

[Whilst valid to assume improved corporate performance, the outcome as presented is highly speculative, much depending upon the true costs and efficiency advantages of any one agreed consolidation].

Slide nineteen provides...”some conclusions” and provides the sign-off statement.
These are:
1. Top OEMs spent over €100bn for product development in 2014 alone, about €2bn per week and likely to continue
2. Historical volumes have been broadly below the cost of capital, even after the restructuring of the US auto industry and NAFTA volumes at peak.
3. Single purpose projects, JV (et al) will assist, but not enough
4. Capital consumption rate by OEMs is unnacceptable – it is duplicative, does not deliver real value to customers and is a pure economic waste.
5. Consolidation carries executional risks, but gains too large to ignore
6. It is ultimately a matter of leadership style and capability.

The Take-Away -

Industry professionals and auto-sector analysts will undoubtedly agree with everything said, wholly valid in theory. As long as the conjoined assets and capabilities of any merger ensured, through a myriad of distinct function by function efforts, that the essential positive attributes of both companies previously enjoyed are retained, with critically the individual brands within a broad new stable remaining (for all intense purposes) undiluted.

This is far easier said than don, especially when the temptation is to recycle the centrally planned synergistic savings (from purchasing, development, production and retail) months or years later to once again grow brand and product differentiation in the bid to remain market competitive.

Of course when there is a very strong region, product and brand rationale to do so, the result can be truly transformative for both parties, securing a long term stability and prosperity (ie Renault-Nissan). But when whet even appears a good fit is undermined by a culture of post-merger internal politics, a 'not invented here' silo mentality (bad enough across parallel functions, let alone 'diaganal ones), and so initial target cost savings targets and project budgets become fatuous, then severe value destruction inevitably follows to the detriment of not only immediate share-holders but to the industry in general (ie Daimler-Chrysler).

History of merger and acquisition consolidation appears to demonstrate that much depends upon the exact fit and timing relative to broad regional economics. The history of the auto-sector is littered with such examples, especially in the early, mid and late periods of the 20th century. Here are just a few:

Conglomeration in period of market expansion:
1909 General Motors – healthy firms entwined in strong (national/global)market: success
1925/8 Chrysler Motors – healthy firms amalgamated in good (national) market: success
1922 Ford-Lincoln – poor management of luxury firm allows for takeover: success

Conglomeration in period market of market contraction:
1929 Rolls-Royce- Bentley – high debt exacerbated by 'crash' and RR buys to rationalise: success
1954/70 American Motors - weaker companies merged in successive (national) downturns : failure
1968 Citroën-Maserati – original business ideals undermined by oil crisis and inflation: failure

History then has its uses, the indepth analysis of case studies can indeed assist, but what of Sergio Marchionne's present-day ideals? Here, investement-auto-motives very simplistically outlines the
probable intentions behind his presentation

1. To convince investors of the innate pro-investor mentality of FCA Group.

2. To subtly highlight FCA's willingness to conjoin with another VM (in one form or another)
a. Any attracted VM unlikely to be American or European, most likely Japanese or Chinese
b. This would give FCA a true 'three continents' global footprint.

3. To actually generate yet more project and platform based JV exercises
a. Prompting others to this as a “lesser evil” versus full consolidation.
b. This a ploy to expand FCA's own global presence,
c. Using already 'localised' JV partners as essentially contract manufacturers
d. So reducing the heavy CapEx demands of foreign production plants.

4. To help generate better secure JV contracts for FPT (FIAT Power Train), Teksid, Magneti Marelli and Comau, the legacy divisions of FIAT now viewed as “global enablers” given their contribution within the vertical integration model (metal castings, components and production processes).
a. The prospecting position by FPT to help others 'plug the gap' of their own product down-sizing and up-sizing expansion strategies.
b. An expanded order book for FPT power-train systems no doubt a prime ambition for FCA.

Lastly, it might be worth considering that Marchionne may have subtly timed the presentation for two tactical and strategic outcomes.

A. To instigate a possibly welcome reprieve to the potential stock price overheat of FCAU.

B. To spark actual eventual consolidation interest amongst either one of China's (SOE) or India's larger auto-makers (to create a "globally embedded" 3-continents auto-maker). So providing FCA's improved entry into China, India and as consequentially SE Asia. The obvious reciprocity being China's or India's ultimate entry into NAFTA and Europe).

Monday, 1 June 2015

Industry Practice – Personalities of the Past – Lee Iacocca: Autobiographical Reflection... 3 Decades On.

It is hardly advisable to steer a course forward by looking in the rear-view mirror, yet it is inevitable that yesteryear's words of wisdom, or at least descriptions of historical experiences, should rightly or wrongly have a level of influence for auto-sector leaders, whether from their formative youth, or in latter years.

Looking Back -

In recognition, this web-log offers a synopsis of Lee Iacocca's autobiography; viewed in the late 1970s and early 1980s as “saving Chrysler”. Though it should also be recognised that America has always had a tendency to deify its industrial leaders as all-conquering heroes, with little objective countenance.

So at this juncture, although in real terms belated for the US – and of little true use to current Chrysler head Sergio Marchionne (who is more than aware given his near identical Italian-Canadian background), and should be well known by auto-sector sell-side and buy-side analysts, the autobiographical recount of a previous era's 'Detroit Doyen' may offer a degree of insight for a new generation of BRIC and broad EM auto-sector participants, whether managing or investing.

Far more pertinent for China's auto sector leaders, especially relative to SOEs, who themselves whilst presently gaining from their lower pricing strategies – vis a vis foreign brands - now face a new era of quality improvement, process rationalisation, marketing improvement and ultimately improved domestic and export competitiveness as the PRC government inevitably slowly loosens indirect control and the firms are formed eventually into autonomous free-market entities.

Today, Iacocca has become engrained in American automotive heritage, itself a major strand of its national culture; a culture now very much media-driven, expanded, and very well 'curated' by the likes of Jay Leno.

(An interesting youtube link: Jay Leno's Garage...“50 years of Mustang: Lee Iacocca).

Auto sector investors would do well to immerse themselves in that which industry executives should already know 'by heart': the story of the Ford Mustang's development and the turnaround of Chrysler after the 'Japanese Invasion', industry watersheds born from 'boom' and 'bust' contrasts in national fortune.

Lee Iacocca -

Now very much a member of America's 20th century's “hall of fame”, Iacocca, sits alongside names such as: Henry Ford, Walter P. Chrysler, Alfred Sloane, Harley Earl, the “Whiz-Kids” of McNamara and Thornton, Virgil Exner, Bill Mitchell and John De Lorean.

To deploy Warren Buffet's saying: these men “were fortunate enough to win the life lottery”, being born into the heartland of America's 20th century industrial and cultural hegonomy, its reach across the world. But sat mid-point of that century, Iacocca also viewed the initial stumbling of domestic automotive might in the face geo-political shifts, questions about energy security and a reduction of US import tariffs which mustered better consumer competition. Unlike his 'hall of fame' forebears, he watched as the innate national 'feel-good factor' declined, and what seemed an unassailable nation, for a while, much blighted.

The time-line of Iacocca's career was fortuitous, he rode the good times as a younger man, making an taking opportunities, and was informed and mature enough to not only endure, but help re-orientate the later bad times.

Published in 1984 'Iacocca, An Autobiography' arrived within the context of a sociologically battered but re-emerging USA. During the Reagan era it became a type of invigorating touchstone for all kinds of readers; from industrialists to students. Thirty years on from its publication it may still serve.

The PR 'Blurb' -

The Amazon book sales website pronounces the following:

...He’s an American legend, a straight-shooting businessman who brought Chrysler back from the brink and in the process became a media celebrity, news-maker, and a man many had urged to run for president.

The son of Italian immigrants, Lee Iacocca rose spectacularly through the ranks of Ford Motor Company to become its president, only to be toppled eight years later in a power play that should have shattered him. But Lee Iacocca didn’t get mad, he got even. He led a battle for Chrysler’s survival that made his name a symbol of integrity, know-how, and guts for millions of Americans.

In his classic hard-hitting style, he tells us how he changed the automobile industry in the 1960s by creating the phenomenal Mustang. He goes behind the scenes for a look at Henry Ford’s reign of intimidation and manipulation. He recounts the miraculous rebirth of Chrysler from near bankruptcy to repayment of its $1.2 billion government loan so early that Washington didn’t know how to cash the check.

Synopsis -

This is offered by the publishers Compact Classics within volume one of its humorously titled compendium 'Passing Time in the Loo':

[NB For counter-point balance independent comment from investment-auto-motives is provided as deemed necessary].

….Lee Iacocca, the tough businessman who brought Chrysler back from the brink of collapse, offers his own story here – along with his opinions on safety belts, Japanese self-interest, mandatory retirement, worker entitlements, and how to make America great again.

Nicola Iacocca sailed into New York harbour in 1902, a poor solitary 12 year old. For him America was a land where you were free to become anything you wanted to be. This philosophy he later infused into his daughter, Delma, and his son, Lido (Lee). The children were made to feel important and loved. “My father may have been busy with a dozen other things but he always had time for us”.

Nicola became the owner and promoter of several movie houses and advertised special offers for Saturday matinees: “people still talk about the day he announced that the ten kids with the dirtiest faces would get in for free”. Then the Depression hit. Lee was only six or seven at the time but he still remembers the anxiety he felt about the future. The backbone of the family was his mother, Antoinette. She ensured they had enough to eat by sewing shirts for hire. His father's favourite theme during those years was that life has its ups and downs: “you'll never know what happiness is unless you have something to compare it to”.

Even in a restaurant, Lee's father demanded top performance. If the waitress was rude, he'd call her over to give her a real tip: “why are you unhappy in this job? Is anyone forcing you to be a waitress? If you really want to be one then be the best damn waitress in the world. Otherwise do something else”.

[NB Although this was hardly an option for many during the harsh economic times of post-Great Depression America, especially for those with little formal education]

In predominantly Dutch Allentown, Pennsylvania, being Italian was something you tried to hide. Bigotry left its mark.

[NB It must be noted that this difference is not only nationalistic but stems from the historically engrained cultures of conservative Protestant northern European perspective (work ethic, frugality etc necessary in a cold climate) vs the historical Catholic southern European orientation (greater lethargy because of the heat, the innate power-base of the Church, and (ironically) a less strict moral code. Critically, the Protestant Dutch were historically typically distrustful of Jews, and thus the American emigree Dutch were wary of the close relationship Jews created and other migrants such as new American-Italians].

In school Lee discovered what was to become his most important lesson – how to communicate.

After engineering degrees from Lehigh University and Princeton he began working for Ford Motor Company as a student engineer. On the assembly line he learnt about every stage of manufacturing. However, he was eager to be where the action was in marketing or sales. Though awkward and bashful Lee was a willing learner and liked working with people.

“Learning the skills of a salesman takes time and effort. Not all young people understand that. They see a successful businessman and they don't stop to look at all the mistakes he might have made along the way. Mistakes are part of life, you can't avoid them. All you can hope is that they won't be too expensive and that you don't make the same mistake twice”.

[NB This then a seemingly overtly relaxed very 'American' and 'salesman-like' perspective (reflective in the book's cover photo of Iacocca) Very different to highly analytical, risk-averse, and typically very responsible attitudes of Northern Europeans and most corporate EM mindsets].

At Ford, he met Charlie Beacham, “a southerner, a warm and brilliant man and the closest thing I ever got to a mentor”. Charlie taught Lee to face up to his own failings and mistakes. He also advised in matters of communication and public relations, and so before Lee's first trip to the southern states Beacham highlighted that he spoke to fast, and that should swap around his Christian name and Surname. ('Lee' was the revered name of General Lee, the Confederate leader, whilst Iacocca audibly sounds much like 'Coca-Cola', the nation's favourite soft drink).

[NB It is perhaps no surprise then that latterly in the late 1970s Iacocca sought to rejuvenated Chrysler's fortunes with the help of a television series which starred a Dodge Charger named the 'General Lee'. This fictional car's licence plate was “CNH 320”, perhaps an early indication of FIAT's concurrent ownership of both Chrysler-Dodge and the CNH Industrial division (with renewed focus upon US agriculture)].

With sales slumping at Ford, Iacocca suggested a new sales campaign: offering a new 1956 car for a modest down-payment, followed by three years of payments at $56 per month. The “56 for '56” took off like a rocket, “after 10 years of preparation I became an overnight success”.

He was promoted to become the Washington DC district manager. Thereafter, twice more he was promoted. First in Ford's domestic Trucks marketing section. Then onto lead marketing for Cars.

Robert McNamara was his new boss, a good businessman who believed in producing a utilitarian car, and so came out with the extremely popular and inexpensive Ford Falcon. But its profit margin was limited.

[NB As one of Henry Ford II's original 'Whiz-Kids', brought into save Ford after WW2, it was McNamara background in military planning, his use of statistical sciences, dogmatic efficiency seeking and reporting that saved Ford. As cold rationalist who viewed the 'snake-oil' ways of salesmen as beneath contempt, he and Iacocca were not kinsmen, but Iacocca was respected by his boss for his ability to comprehend the process science, engineering and talk to those at the coal-face.

Despite the book's description, Falcon was not an overtly utilitarian car, simply the corporate answer to a natural market development for a lighter, smaller, fuel-efficient, affordable 'compact' entry-level vehicle, which did come with, if not an array, buyer relevant trims and options. Importantly, right product, right time after the 1957 recession and painful loss of mid-size sales, and failure of directly targeted Edsel. It vied against the likes of VW Beetle and Nash Rambler and later Chrysler Valiant and Chevy Corvair, and grabbed and grew segment share.

Interestingly, it was born not from an engineering ideal or “back of a napkin”, but from a set of MacNamara's target statistics (volume, weight, cost). Per unit margins were indeed limited because of the very nature of the car, as the cheapest of the range and use of a new expensively developed platform. However, to McNamara's credit, this was well recognised in the original business model and ROI was intentionally based upon the high volume sales of the North America, South America, Australia and elsewhere. In McNamara's view the car would sell itself...and it did...even if it did not reach the ambitiously set 600k plan].

So [in reaction to “utlitarian” Falcon and planned later 'Cardinal' model (which became the European Taunus P4)] Iacocca set out first to 'dress-up' Falcon to gain margins in variants and trim decoration]...then to develop his own car [based on “power, price and style”]. “One that would be popular and also make us a lot of money. He brought together a team of “creative young guys” with a goal of creating a car that would appeal to a million post-war baby-boomers who Iacocca knew would be screaming for the right product. One with with great styling, strong performance and low price” With time running out and 18 clay models, none of which was quite right, the company staged a competition. An engineer named Dave Ash submitted a model that to Iacocca looked like it was moving. From the names: Bronco, Puma, Cheetah, Colt, Cougar and Mustang the latter was chosen.

[NB The fact is that Mustang was only achievable as a pertinent affordable offering because it relied heavily on the already much amortised Falcon platform; hence its low production cost. In technical reality it was largely slightly altered in engineering hard-points, a total re-skin, expanded engine choice and new interior. That was however more than enough to market it as a wholly new vehicle. The prime carry-over parts philosophy then provided an immediate ex-factory profit base, which was boosted yet again by the high buyer uptake of a wide choice of options and accessories, so as to better personalise the car].

At this time Iacocca had his first confrontation with Henry Ford II, about the topic of rear seat passenger legroom, Ford demanding an extra inch in the wheelbase so impacting the project's engineering and styling development, time and costs and adding additional material costs. Even so at launch in March 1964 dealerships were mobbed to view and drive the new Mustang.

[NB Management must recognise that there may be confidential and highly strategic/tactical reasons' for what seem odd (seemingly personal) demands from company leaders. Thus specific timing and cost targets set-out in the planning phase become subservient to, and reactionary to, higher 'big picture' corporate aims. These may span from the immediacy of 'bad news' negatively impacting short-term share-price dynamics if it is felt the share-price has over-heated, through to ongoing alliance discussions with a prospect of future platform sharing, requiring aligned product dimensions].

Iacocca was in line to become the next President, however Henry Ford II instead chose the highly regards product man Bunkie Knudsen from cross-town rival General Motors. Knudsen immediately required that the next generation of Mustangs and Thunderbirds be bigger, which took convincing (given the macro-trend for smaller) but it was the habit of Knudsen walking into Ford's office unannounced and without knocking that set his fete at FMC. “He tried to get palsy-walsy with Henry and that was a big mistake”...”Give Henry a wide berth” as Beacham frequently advised, “Remember, he has 'blue blood', your's is only red”.

In 1970 Iacocca finally became President, located next to Ford in the 'Glass House' and given 'royal class' service and accommodation. The new boss inaugurated a programme to cut operating costs by $50 million in four areas: timing foul-ups (to limit machinery and worker down-time), product complexity, design costs and outmoded business practices. He revised Ford's shipping procedures and rid the corporation of dozens of operations that either lost money or made minimal profits. Now without the stamina of the Mustang years and increased responsibilities he took on a driver and protected his weekends from work and so his sanity.

But even as the business prospered Iacocca worried about the future of the business under Henry Ford II. “He held the power of life or death over all of us, he could suddenly say 'off with his head' and often did. Without a fair hearing one more promising career at Ford would bite the dust. It was superficial things that counted for Henry, he was a sucker for appearances, if a guy wore the right clothes and said the right buzz words Henry was impressed, 'keep your people anxious and off-balance' was Ford's management philosophy. What made him so insecure? Maybe because Ford the younger never had to work for anything in his life...but worried that he might screw things up?”

Once when Iacocca forged a masterful bargain to use a Honda engine in the Ford Fiesta Henry promptly vetoed it. “no car with may name on the hood is going to have a Jap engine!”

[NB the probable reality behind this was that Henry Ford II recognised the need to maintain core competence in small car engine design, rather that simply transplanting a very good externally sourced engine in what would become a best selling small hatchback model in Europe.

Also, the fact is that the Ford family – rightly – have always been very concerned about the firm being intentionally weakened by insiders who might have external ties to those who would like to see Ford's demise.

This harsh reality was learned the hard way by the firm's founder Henry (I), when ousted from the original car company he set-up. That experience, and other observations, led Henry to have personal concerns about the 'international jew' and “conspiratorial ways”. Iacocca, through his father and elsewhere, had cordial business connections to American jews of the period. Thus Henry Ford II would inevitably always have concerns about Iacocca's true loyalty, even if it was from Iacocca's viewpoint wholly unquestionable. Ford's beliefs where no doubt seen to verified when Iacocca ran Chrysler and gave Gerald Greenwald the Vice-Chairmanship of Chrysler].

With Henry Ford II's health failing “he began to realise his mortality” and to worry about “the Italian interloper” taking over the family business. “Ford conducted a full scale investigation of both my business and personal life, interrogating executives and suppliers. When the witch-hunt failed to produce results Ford ordered some of Iacocca's close company circle fired. Lee finally found out he had been fired. Henry would give no reason (see above). “I wanted him to know exactly what he was throwing away...'we've made a billion-eight for the second year now, you may never see a billion-eight again....because you never knew how we made it in the first place!”.

“As you go through life there are thousands of little forks in the road, and there are a few really big forks – moments of reckoning, moments of truth. This was mine. I was financially secure and could play golf for the rest of my life, but it just didn't feel right, I knew I had to pick-up the pieces and continue. As it turned out I went from the frying pan into the fire”, Iacocca offered the presidency of troubled Chrysler Corporation. “Even its top management didn't have a very good idea of what was going on. They knew Chrysler was bleeding, but didn't realise it was actually haemorrhaging”

He was hired and his wife, Mary, though having suffered a heart attack said “Let's give Henry a shot he'll always remember. The same day Chrysler announced its worst deficit in history.

“In the end, all business operations can be reduced to three words: people, products and profits. People come first, unless you've got a good team you can't do much with the other two.

“Like Italy of the 1860s, the company consisted of a cluster of little duchies, each run by a prima donna. There were 31 vice presidents, each with his own turf. No real committee set-up, no system of meetings. The guy running engineering was not in constant contact with his counterpart in manufacturing; these people almost have to be sleeping together; these guys weren't even flirting”.

Iacocca realised that cohesion must be created, incompetence abolished and install sound financial systems. He fired some workers and sought out others who possessed inner strength, who enjoyed adventure and risk and who stuck with a task even when it was not fun. “Hal Sperlich was already at Chrysler when I arrived, having been been fired by Henry in 1977. Having Hal was like finding a tall, cold beer in the middle of the desert...thankyou Henry!”

To create new images for Chrysler's Dodge-Plymouth division, he hired the same PR firm who came up with the 'Ford has a Better Idea' campaign: Kenyon and Eckhardt. The first action was to bring back Dodge's ram symbol. Slowly public perception of Dodge changed to that of durable, dependable and no-nonsense, able to match Ford and GM. Secondly a thirty-day, no-quibble, return policy was initiated.

Customer service was improved, prompted by disgruntled customer letters, with dedicated dealership seminars held to underscore the need for courteous customer service. If sales people couldn't at least provide that they should (in Nicola Iacocca's words) “look for another line”.

And at last, quality control was highlighted, adopting the Japanese mindset of 'right first time' and aspects of lean manufacturing.

However, whilst micro-level issues were being improved, the macro environment worsened as 1979 saw the world economy stumble. “The Shah was forced out of Iran, gas prices almost doubled, and the plentiful, gas-sipping Japanese imports were very much sought after by the public. All whilst Chrysler's own full-size car plants were working over-time”

[NB This occurrence then highlights that Iacocca's turnaround efforts were not wholly attuned and successful, and whilst he did indeed create a number of firsts, he also followed the crowd by mimicking the production schedules of cross-town peers. Even though the smallest of 'the Big 3', and so more nimble, and offering the small Euro-sourced Omni since 1977, the failure to react quickly compounded operational problems].

“Detroit got caught with its pants down. Sure enough as the weakest link Chrysler got hit first”. Within six months GM and Ford also experienced losses. There was only one course to take: Iacocca did his homework and then went and asked the US government for a loan. He was criticized for asking:

“Predictably the biggest cry came from the business community, the old cliches got dusted off. Ours is a profit and loss system....liquidations and close-downs are healthy...a loan guarantee violates the spirit of free enterprise. But they were wrong, free enterprise is about competition, and that loan ensured greater competition since it would allow the third of Detroit's Big Three to remain. Saving Chrysler also preserved jobs, 600,000 of them. So Chrysler's closing would only mean exporting more jobs to Japan!”

But Iacocca's biggest argument dealt with economics.

“The Treasury Department estimated that if Chrysler collapsed, it would cost the country $2.75 billion during the first year alone. It was time for tough, straight talk: “you guys have no choice. Do you want to pay the $2.75 billion now... or do you want to provide guarantee loans for half that amount and have a good chance of getting it all back?”

“Many members of Congress were ideologically against the loans, but when they recognised that their states risked job losses and lost revenues it was farewell ideology”.

In his fight for survival Iacocca cut his own salary to a dollar a year, and cut pay at all but the lowest levels...”we left the secretaries alone, since they deserved every cent they made”. He caught the attention of the unions...”hey boys I've got a shotgun at your head, I've got thousands of jobs available at $17 per hour, I've got none at $20!”. “I discovered that people accept a lot of pain if everyone's going through the chute together...equality of was hundreds of millions of dollars given-up by everybody involved”.

Chrysler cut back the layers of management and found that running a large company became easier...”that's a lesson our competitors have yet to learn, I hope they never do”. An all-American red,white and blue campaign was initiated to promote the new smaller packaged front-wheel drive K-car...”yet still roomy enough to hold six Americans”. Sales improved and by 1982 the company showed a modest profit, by 1983 it made its largest operating profit ever. Chrysler modernized its plants, moved to FWD technology across the all car platforms, led in fuel economy and had a half million strong labour force.

[NB in the technology realm Chrysler was infact essentially on par with Ford, which had redeployed its European FWD capabilities – first with (1976) Fiesta, then (1981) Escort and (1982) Sierra – into the US, culminating with mid-size (1985) Taurus. Protecting this competence highlights the true understanding Henry Ford II actually had, even if disregarded by Iacocca given the proposed Honda deal, FMC latterly taking a shareholding in Mazda for JV development and production. GM obviously followed in badge engineering and adopting light FWD architectures as with the Geo Metro].

“After paying off one-third of the government loan we made the momentous decision to repay the entire sum right away, seven years before agreed”....”it makes the last three miserable years all seem worthwhile”.

“Now we were out of danger it was time to think of fun again”, and so he had a custom LeBaron convertible created as a potential 'daily-driver'. The press and public attention it drew was strong, and so by-passing the usual routine of preliminary marketing research he ordered the cars into production. Soon after GM and Ford followed suite and created personal convertibles of their own.

Though the Minivan was actually conceived at Ford, it was first produced at Chrysler, where it became a hit, its low step assisting women in skirts, low roof-line to fit into a garage and front mounted engine to provide partial crash space.

[NB the Minivan concept had been seen originally with the 1955 GM 'window-van-sedan' concept, then appeared as a working prototype by the Willys-Jeep FC, and later in the mid to late 1960s with International Harvester's passenger van concept and Ford's 'CommutaVan' concept. But all these were of a 'forward-control' layout. It was ultimately the pioneering efforts of Matra in France during the late 1970s (connected to a separate yet commercially entwined Simca/Chrysler/Rootes Europe) that truly evolved the Minivan, and influenced Chrysler's Voyager and Renault's Espace alike].

Iacocca's wife Mary unfortunately died at the young age of 53, after second and third heart incidents, demonstrating the emotional and physical load she carried to support her husband and undertake volunteer work in the local hospital.

“Mary never got wrapped-up in the corporate life. For both of us family was supreme. Yes I've had a wonderful successful career, but next to family, it really has not mattered at all”.

At one time Iacocca was aired as a possible candidate for the White House...which he laughed away...though adding “I do think that our national leadership consists of too many people that don't have business backgrounds...I'd like to see a system where we brought in the twenty top managers to run the business side of the country”

When asked how he reached his level of achievement, he said:
“I go back to what my parents taught me. Apply yourself. Get all the education you can, but then do something. Don't just stand there, make something happen. It is not easy, but if you keep your nose to the grind-stone and work at it, it's amazing how you can become as great as you want to be. And of course be grateful for whatever blessings are bestowed upon you”.

Upon Reflection -

The story-telling manner behind of historical content is a central aspect of the commercialisation and so sales of autobiographies. Such books within the realms of the business-world, will inevitably typically raise the importance of the author's industrial and so societal contribution.

The corporate helmsman battling the mire of hostile real world circumstances and a fairy-tale ending is what enthuses readers, maintains the fascination with corporate career ladders, and in many cases – given origins - simultaneously maintains America's global hegemony.

To this end, Iacocca's account of his career to 1984 did not simply sell himself, and reward the publishers, but also operated as a marketing tool for Chrysler, Dodge and Plymouth sales of the period, under-pinning and demonstrating the Auto-American rebound.

Yet it must also be seen that as a prolific salesman Iacocca undertook the dream role of convincing the public of the very worth of himself.

Even so, reading between the lines of even this very abridged autobiography, it is clear that beneath the surface of the ego-driven, publicity seeking “industrial hero”, he openly recognises, to a degree, that he was neither perfect nor infallible.

His initial entry into the auto-industry via Ford was seemingly effectively assured after attending the Ivy League Princeton University. Unlike the necessarily bigger, rigid and bureaucratic GM, and the less structured more chaotically managed Chrysler of the 1950s, thanks to Ford Motor Company's rock-steady familial roots and the 'turnaround' processes initiated by the “Whiz-Kid'” senior managers, FMC in the period proved that it was intimate enough to provide individual familiarity for a career rises through meritocracy, yet also operationally efficient enough to ensure that such individual's efforts translated directly into speedy bottom-line results.

Iacocca then was arguably in the perfect environment, by far the best of Detroit's 'Big 3'.

However, his refutation about the low per unit profitability of Falcon, and so its worthlessness, was wholly incorrect. That car essentially saved Ford given the massive recession period losses on its big cars and the simultaneous introduction of the poorly timed new 'near-luxury' Edsel (sat below Lincoln, but above respectively ranked Ford and Mercury). Conventionally engineered and cleanly styled it was the the perfect formula for a down-shifting North America in 1960, mid recession and wholly aligned to the 'thrifty' driven consumer; at least until things improved some time later in 1963-4. Had Ford II and MacNamara allowed Iacocca to expand the variant offerings of Falcon into sporty and personal realms much earlier as he wanted, it would have only served as a loss-making exercise on the car, as proven by the poor sales of the later Mk2 'Sprint' and Convertible variants in 1963 – one year before Mustang. That 'late' introduction of 'personal' variants then both reduced losses but critically simultaneously built a perceptual pathway in customers' minds for the introduction of Mustang in 1964.

Thus, with the advantage of distant hindsight and objectivity, the reality of the Falcon experience situation does not directly accord with Iacocca's re-telling.

With early 1960s economic improvement, new consumer optimism grew, and as ever the case people sought to reward themselves for the years of previous constraint.

Mustang then was an obvious and expected product, given the market and model environment of the early and mid 1960's.

Whilst the America's original “sportscar”, the Chevrolet Corvette, had remained essentially the same as a 2-seater, Ford's own direct competitor the Thunderbird had by the Mk2 iteration grown in size and weight to accommodate 4 people, thereafter available with a hardtop variant also, hence marketed alternatively as an up-scale lifestyle car. By differentiating the Ford, and placing it into a separate higher volume territory, the instigated difference protected each notional 'competitors' respective market space(s) during the TIV suppressed years between 1958 and 1963.

With the inclusion of compact cars, the theoretical market space for compact-based spin-off models grew as a new product type in itself. The engineering base of a standard model series could spawn something different with greater style and panache: an affordable smaller 2+2 sporty car, produced in higher volumes with coupe and convertible variants, as a semi-mainstream offering. Essentially the little brother to the bigger Thunderbird; and so the 'Pony Car' was born. This was hardly revolutionary thinking, as Iacocca might convey, simply commercial logic that had been deployed for much of the previous sixty years.

Of influence was also the rumour that Chrysler and possibly GM were contemplating putting performance power-trains into their smaller cars, so as to create the first offerings of ex-factory, dealer offered 'hot-rod' trend inspired variants, latterly known as 'muscle cars'. The post WW2 'hot-rodders' and specifically the corporate men wannabees had generally good incomes as recognised by the likes of De Lorean and the Pontiac (Tempest) GTO.

It was only logical than that Mustang should offer a wide range of appeal, spanning from faux sportiness through mere appearance, through to true high performance capability (via Shelby) performance. The true achievement was less Iacocca's product planning and more Gale Halderman's inspired styling work and proportions, which managed to merge the need for relatively slab-sides to allow for as large a cabin space as possible using the “euro-moderne” style partially seen in Falcon and more so in the Lincoln Continental; (this cleaner look with styling accents even used to create a far less known 4-door clay model variant). This appearance then gave a taught, very different 'muscularity' at a time when sporting cars were traditionally curvaceous (eg Italian, German and British sports-cars).

Ultimately, applause must be given to all three major participants. Ford II for approving the project in a timely manner in line with the economic cycle. Iacocca for recognising the potency of Mustang as a new concept for broad spectrum customer-base, with vitally its opportunity for strong profitability, using amortised platform and prompting customer-led mass-customisation with high margin add-ons. Halderman for perfecting the body-style, after what had been a problematic process.

As the savvy self-promoter, on the back of the Mustang launch, Iacocca started to appear as a national treasure, on the front-cover of Time Magazine and other publications. Now with very much raised industrial and public persona.

This must have concerned Henry Ford II. Whilst undoubtedly recognising that whilst such publicity about the capabilities of the company's management was advantageous in an era when FMC was still a relatively young publicly listed company on the NYSE, it also posed a possible threat to future family's interests. No matter how seemingly remote, board members and senior management could feasibly secretly collude with those with financial means outside of the company and create through intentional mismanagement a long and protracted coup: by damaging share price, deliberately devaluing the market capitalisation of the firm - damaging to the family's paper-based wealth – deliberately destabilise the balance sheet, and with resultant low credit rating effectively demand issuance of new stock, and so dilute the family's holding. All of which could end with the family's loss of sizeable control.

That possible threat, no matter how remote, meant that inevitably the useful but self-promoting Iacocca would be eventually released. The small 'Siberian' office that Henry Ford gave him, from which to use as a base to seek-out his next post, undoubtedly a ploy to further irritate him further...possibly ordained from on-high – the Whitehouse or elsewhere - to anger, steel and ready him for his eventual next deployment across town.

[NB At this point Iacocca should have remoulded himself as an independent consultant, with wide remit and greater overall influence, but it seems his anger and desire for revenge got the better of him].

His desire to beat Henry Ford generated the move to the much struggling Chrysler, was then, an obvious one.

As stated previously - after the loss of Walter P. Chrysler as authoritarian leader (1925 - 1940) - the company, whilst enjoying the post WW2 boom-time, experienced greater problems that GM and Ford during the 1958-63 recession, with the failure of De Soto as an increasingly meaningless marque, poor styling choices (such as the Valiant) and thus fewer economies of scale by which to ensure its health and was most likely through the 1960's and 70's to experience a loss of potential sales to the even weaker American Motors Corporation, especially in compact cars.

Hence a loss of general corporate strategy, momentum and profitability. Plymouth too slowly faded in the popular consciouness as a notionally mid-market badge engineered version of higher volume Dodges. However, whilst the functionally respected Dodge nameplate retained favour in the pick-up truck sector and its cars often sold as essentially functional, thus demanding greater incentives and so less profit, and to 'shift metal' were often heavily discounted to police forces, business fleets and taxi firms. This business decline was only partially saved by own-brand rebadging of Mitsubishi's Colt/Lancer as a stop-gap, and the design 'importation' of the small Omni hatchback in 1977 from Chrysler Europe. The lack of foresight and need to rely upon fuel-efficient 'imports' demonstrated the poor habits and mismanagement of Chrysler up until 1977, when Iacocca joined.

Given the threat of Japan's grown prowess, (in small cars and trucks), the circumstances he faced regards functional “silo-creation” and internal “empire building” are astounding to see. Such problems allowed the spiral of decline and should have been overcome by the early 1970s in recognition of the increasingly prolific Japanese industrial mindset, its achievements and the potential threat from Europe's low-cost car-makers after the success of VW's Beetle.

Yet the highly combative nature of automotive sector corporate politics of the time in the USA, UK, though less so Europe, – was somewhat akin to the 'swinging dicks' mentality of Wall Street. That “not invented here” attitude ostensibly undermined the efficiency and efficacy of western manufacturers throughout the late 1960s, 1970s and even partially into the early 1980s. Whilst an intransigent attitude was very necessary to combat militant trade unionism, ultimately it weakened internal capability.

As the 'father of Mustang', it was Iacocca's reputation that Washington sought to revitalise the #3 car-maker, recognising that whilst AMC was weak enough to be lost (dissected and sold), the idea of a remaining GM vs Ford duopoly riled against the notional American spirit of open competition.

With the loss of AMC, itself a blow to employment in plants and through the tier 1 and 2 supply-chain, Chrysler was destined to be saved, inevitably through the offering of government funds. And so Iacocca's role was to enthuse management, staff unions, suppliers, dealers and customers.

In this regard, although the “die was set” by circumstance, the fact is that Iacocca did indeed use the critical thinking he'd learned from McNamara and importantly combined it with the ability to convincing 'sell' the set of solutions required to all internal and external stakeholders, from Washington down to the local dealer and to hearts and minds of past, current and potential Dodge, Plymouth and Chrysler customers.

Although perhaps viewed as a little smarmy by some, it was his public self-assurance of the plan ahead for the company, and its operational and profitability renaissance, that did indeed allow for all the different bits of the business model puzzle to come together relatively smoothly. Others could have achieved the same thing, but it was his ability to orientate intrinsically important conversations as a subtle and not so subtle negotiator that quickened the process of corporate recouperation.

Between the mid 1980s to late 1990s Chrysler had re-established itself as the most progressive of Detroit's Big 3 auto-makers, with introduction of the modern American minivan/MPV in the Caravan/Voyager, conceptually funky concepts toned down market such like compact Neon, futuristic 'cab-forward' packaging and organic styling in the full size LHS, greater 'less is more' taste to personal cars such as the Sebring, and the hugely popular retro-styling of the PT Cruiser and Ram pick-up, and importantly the revitalisation of the Jeep brand, all providing enough cashflow and confidence to create 'homages' to home-grown auto-culture with Viper and Prowler.

After Daimler's overtly heady high-priced purchase, the 2000s once again witnessed a new confidence, with sales of high margin Durango and 300C, creation of blended cars such as the Crossfire, and highly efficient multi-marque platform sharing, even if perhaps dilutive to historic brand personas. Yet once again intense competition by the mid  2000s saw incentives rise, unit margins for most models decline rapidly and ultimately credit fuelled sales lead to production over-capacity as ever greater economies were sought...right up until the financial crisis of 2008.

Thereafter, all is well known, Washington (once again) to the financial rescue, and the phased-in control of FIAT group, leading to today's FCA Group.

Lee Iacocca, whilst an undeniable self-proclaimer, then perhaps contributed less toward the Ford Mustang than history would have us believe. But, whilst perhaps overly applauded, he re-conjoined the multiple facets of American industry and commerce to re-boot Chrysler in the early 1980s. And all too tragically soon after experienced the loss of his very cherished wife, very possibly as a consequence of the shared stresses endured.

Today, auto-sector's own dimming memory exists largely through culturally attuned media, dedicated collections and honorific products such as the Shelby Fords and the skunk-works inspired 2009 'Iacocca Mustang'. Automotive heritage has never been so well curated given its cultural and commercial importance, especially so, and obviously so, in the USA.

Yet critically, looking forward, Iacocca's story (and those of his counterparts) must act as newly discovered chapters for the current and future EM-born automotive executives. And ideally as critically, the ever expanding band of EM institutional, hedge fund, private equity and even possibly auto-enamoured retail investors.

All involved should know of the historical contexts, watershed case studies and personalities that together underpinned the evolution of today's global auto-sector.