Sunday, 26 June 2016

Industry Practice – 'Value Stream' Exploitation – Conclusion

The tour of those functional areas recognised as the functional automotive corporate innards has been completed; that journey having 'come full circle' upon Sales and Services, the end-point to which the whole corporate enterprise is ultimately dedicated. Thereafter the process invisibly morphs into the early research aspect of Marketing, the essential start-point for any organisation.

A lengthy journey undertaken to give broad explanation of, and find new insight into, the vital question posed at the very beginning of this multi-part, extensive weblog topic...

….The critical need to better exploit the complete automotive 'value stream' to avoid the possibilities of either investment capital stagnancy or indeed possible destruction; very real possibilities the apparent 'new norm' of delayed and anaemic growth.

Since the financial crisis eight years ago we have witness what could be termed 'yoyo' economics affecting broad national and continental economies, capital markets and so corporate confidence swaying back and forth as the initial massive prime pumping of liquidity through economies and its partial success has given way to 'on-off' governmental fiscal policy and stimuli during the transition period away from 'melt-down' toward a new normality.

Growth has indeed emanated within the USA, the UK and latterly Europe – as seen by the surge in auto-sales from their 2009/10 lows (the US now effectively fully re-inflated at 17.5m units pa).

Yet as seen by US employment rate volatility, whilst wholesale money markets operate and the consumer credit taps have been re-opened (unfortunately far too quickly back to sub-prime regards car financing) the national economies of the western world are still not what might be described as healthy, indeed still fragile.

The intended trickle-down effect into the general economy has been delayed because of the interwoven complexity of the 'global macro' and the effective re-structuring complexity of a broad range of sectors and companies (ie examples in the UK ranging from the remnants of 'old industry' as with TATA steel Mill in Port Talbot, to the vicissitudes of the service sector as with Serco Group).

Thus the US and UK have enjoyed long continual regrowth in vehicle sales, but despite what the auto-sector sales numbers illustrate as a seemingly re-attained norm, it is unclear whether returned and returning vehicle demand is fully sustainable at previous levels going forward.

It has been recognised that every trick in the generic economics text book has been thrown at the problem to try and kick-start growth, the catalytic fiscal-monetary impetus prompting the re-emergence of previously lost or delayed consumer demand; especially seen in auto sales given the delay of the previous replacement cycle.

But such present glee might provide a partially misleading picture, noted by industry chiefs with near saturation of the USA car market. Having gained strong traction there over the past five years traction they and the investment community now look to a continued upturn in sales across Europe to off-set slowed North American sales, with thereafter Latin America and Asia.

Thus it is presumed that a over-lapping series of demand sine-waves will booth even-out and steadily grow global demand and so capacity into the future. With also an expectation that any endemically structural demand loss in Triad countries will obviously superseded by stronger new demand in EM regions (Jaguar - Land Rover's recent mention of its new Brazilian factory for 'Mercosaur' just one example).

Yet as experienced, the immense socio-economic impact of the Financial Crisis, the European Sovereign Debt Crisis and the scale of post-boom EM contraction has had an undoubted impact upon the consumer consciousness of the older and newer global middle-classes.

It is very possible that an altered and more cautious mind-set might have become engrained in individuals, families and communities globally. Not just from Birmingham, Midlands UK to Birmingham Alabama, USA, or more obviously from Athens, Greece to Athens, Georgia USA, or Paris France to Paris Texas, but also importantly from to Sao Paulo in Brazil to Sao Paulo Portugal. Those persons  now viewing  themselves as metaphorically burned by the turmoil of global economic events hitting hard locally,. And so more hesitant to return to the past spendthrift behaviour of the 'good old days'.

Any definitive return to any form of 'normal' would be illustrated by strengthening and sustainable industrial and services productivity providing the trickle-down value creation for their employees who in turn can draw upon credit sources for vehicle loans and agreements.

However, consumers themselves have also been caught in the deflationary spiral of recent years with wages/salaries necessarily kept on hold and the rise of short-term contracts to help stabilise many companies themselves.

Thus unlike the post-WW2 productivity boom which itself was stronger than the simultaneous expansion of lagging consumer credit, and unlike the 1990 – 2008 growth period based upon all oo easily available governmental and corporate credit, today's general environment is that of constrained governments, cautious corporations and inevitably altered consumer behaviour.

It looks likely that the under 35's have re-prioritised their far more limited discretionary budget spending toward basic necessities (rent, food, commuting) these painful costs off-set by more immediate gratification (home delivered food, restaurants, clothes, health and fitness, and IT hardware and software) coupled with 'scheduled escapes' (weekend trips, holidays and extended global travel). The relatively high-cost of a even a new average car simply seen as irrational, when other options exist, from 3 and 5 year old used cars to rental vehicles to local and app-based private-hire taxi cars to scooters, bicycles and public transport.

Instead new car sales supported by its original (post-WW2) demographic in the 35+ range, with family responsibilities toward not just children but also now longer lived parents and diverse activities, from taking off-spring to better but further afield schools to trips to a new eco-genre of garden centres.

Conversely, even with present EM contraction and retrenched consumerism, with vast 'under-served' populations, global capitalism and accordant car sales will rebound and indeed thrive in those already much developed EM countries and the so called 'Pioneer' nations. The emergent and newly emerging nations ready to enjoy in a very similar suburban manner the fruits of sustained economic expansion. (This more than ever thanks to the intra-nationalist trade and economic bloc pacts made between EM nations to obtain greater independence).

Though many are presently somewhat burdened by the US Dollar denominated national debt made stark during the contractionary period, it is beholden to for the success of global capitalism that those countries evolve their own national capabilities and so develop a sustainable trickle-down effect for general EM and indeed AM prosperity.

So yes global car-makers will expect changed homeland and international dynamics in overall sales splits and vehicle types, as the patterns of western and emergent countries' automotive use and ownership changes.

Those in the west that do purchase requiring 'value purchases' (as seen with popularity of Renault's Dacia Duster) and more 'affordable fashion' (as with PSA's DS brand). Whilst rising middling EM consumers span the full spectrum of purchase preferances, from 'value purchases' (akin to that which underpinned the old VW Gol) through to 'mainstream' (in the old Ford Focus/Modeo/Taurus manner) through to increased displays of status (the usual German badges having to fend-off both Japanese near luxury brands – Lexus, Acura, Infiniti – but also now Hyundai's official launch of the Genisis brand), as well as high performance niche sports cars.

And of course along with this fundamental re-orientation of sales TIV per brand type and vehicle type is the impact of those that best utilise increasingly cyber-moulded and cyber-accessed consumerism; ranging from the already entrenched new vehicle info-tainment reports by media outlets to possibilities such as a new-car discount programmes via a points accrual system through the likes of MPESA mobile payments.

As has become obvious, car-makers' business models marginally but obviously under attack from both sides of the sales and usage equation: with the likes of driving scale-based price discounting from dealers and manufacturers, and the likes of Uber, Lyft et al re-creating user's perceptions about the cost and availability of on-demand private-hire cars. Why buy a car when you have one notionally a finger-click away? Or if set on purchase, why go to a showroom at all?

Furthermore – as predicted by investment-auto-motives – we can see just how the Californian titans of IT and 'New-Tech' have created a new wave of Merger and Acquisition. Aided by massive liquidity 'war chests', closely aligned to local 'FinTech' - itself close to cyber-based business disruptors - aswell as Wall Street's enduring connections with established consumer durable companies, we see the effective re-building of manufacturing and services sectors. With new multi-dimensional (vertical, horizontal and diagonal) conglomerate entities being formed.

[NB the recent announcement by Elon Musk that he seeks to merge Tesla Motors with Tesla GigaFactory and SolarCity to create a closely integrated clean energy and mobility enterprise was itself 'scenario expected'. Though the $2.7bn new share offering in the Motors company to absorb the $3bn of SolarCity's debt is indeed grievous to in-situ Tesla investors. Furthermore converse to Musk's rhetoric about eco-tech government funding – as used to assist Motors – it looks likely that this too will be reined-in. Yet, though as questionable as the process is, this example of corporate integration is itself a prompt for similar re-calibration across cash-rich and progressive corporate America. The Microsoft – LinkedIn merger also illustrating the American desire for continued IT dominance and influence, with yet greater fusion of the perceptual and physical realms toward a new era of soft-power global market dominance in the technologies and solutions of tomorrow].

Thus inevitably into the mid and long-terms, the shape of the auto-producer's business model looks to be unlike the relative conformity and stability of the past century.

Thus, given the continued fragility of western and global economies and the changing usage patterns of cars and their ownership, and the 'effect of the net', those auto-makers that fail to undertake a surgical and exacting approach to value creation will inevitably lose control of their destinies to better attuned counterparts and new entities.

However, critically, as previously explored, that investigative approach to value creation must however not be simply biased toward the threat of the new in the external world, but as critically, be directed inward to better appreciate what true value may be extracted from within the organisation.

The descriptive functional tour sought to demonstrate why car-makers must learn to become their own internalised 'self-disruptors', by questioning every aspect of the internal value-stream within the both the individual company and in a unified manner across the established sector as a whole.

This requires objective reasoning to underpin rational 'visioneering'.

Whether this be about about:
1. Possible technology transfers (as seen with QR codes)
2. 'Deconstruction and reconstruction' of corporate methods and processes to better reach organisational goals.
3. The possibilities for new business incubation and spin-offs from such discoveries.
4. The co-creation of new entities with external agents of change.
[NB as regards the last point, not simply the obvious IT giants and up-coming highly publicised disruptive minnows – many of which are in reality simply seeking highly profitable exit strategies - but a deeper and better structured collaboration with domestic and international academia.
A critique of the UK's Automotive Catapult initiative useful herein as an guiding template]

Moreover, as engines of worldwide economies, it is arguably beholden that auto-makers – with suitable governmental assistance by way of tax breaks, development zones etc - become a fundamental part of the solution toward overcoming possible spectre of continued under-par growth.

This very necessary to combat and the now very engrained ongoing general malaise amongst many in a disaffected global populace.

As things stand, exempting the likes of India, China, Indonesia and Vietnam, the remainder of the world sits in what could be described as a 'yoyo' economic circumstances, whereby much governmental intervention is required to prompt powerful but short-lived capital statistical growth, this affect over-whelmed by constrictive deflationary forces. The ripple effect is that the real economy has not yet advanced beyond 'bottom-gear'.

Although previously corporate returns were much improved at the EPS level thanks to the reduction of inventories, reduced staffing levels, hard negotiating and critically the use of profits for share buy-backs (so again boosting the profit available to stock-holders), the reduced earnings power of corporate America since Q4 2015 demonstrates the need to obtain healthy macro-economic growth so as to not rely upon short-spell micro-economic ploys.

This never more required than today, with the tremors of Britain's referendum exit of the EU shaking the market fundamentals around the world of both the prime inhabitants of capital markets (insurance companies, pensions companies, asset managers) by virtue of the heavy selling of both banks and cyclical stocks experienced on 'Black Friday' (24.06.16).

Without such a 'path to growth'; companies and their stakeholders - from shareholders to employees to consumers - will continue to experience the present unsettling 'yoyo' effect of choppy growth.

The actual consequences of 'Brexit' are yet to be felt, but they will be invariably be negative to a lesser or greater extent for international relations and the Eurozone project; even if paradoxically because of the dramatically dropped value of Sterling, Britain could looks more attractive as trade partner to EU and worldwide businesses.

That helps UK based auto-makers – Jaguar Land Rover, Nissan, Toyota, Honda, Ford, GM-Vauxhall, Bentley and Rolls-Royce – who will gain from the immediate highly positive FX-effect, but only if we see sustainable growth across Europe (and elsewhere) which is now affected by the concern of EU-wide disintegration.

And it must be recognised that for most of those players (except JLR) the UK is but a single manufacturing location within their still shaken global empires.

Thus to counter any lost potential auto-makers must continue to reduce costs by driving conventional efficiency gains from functionally within their value-streams and should undertake 360 degree cost and productivity regimes from the ground-up – critically staff multi-tasking (from office cleaning to cross-learning of roles).

Just as standard practices should be reconsidered to maximise manpower utility for the corporate common good, so in such a new and open (almost 'campus') climate, exploration must be made as to how the corporate machine can better operate cross-functionally and externally to revolutionise the visible and invisible vagaries of engrained practice.

The impact of external disruptors has “set a cat amongst the pigeons” for auto-makers, and as the threat became ever more tangible, the pigeons have indeed set themselves on a path of new world reformation.

The institutional investors in GM, Ford, VW, BMW, Daimler, FCA, PSA, Renault-Nissan, Toyota, Honda and Hyundai should hereafter act a greater inquisitors – indeed in an pseudo activist manner – as to exactly what manifesto each has laid-out for continued semi-revolutionary change.

Those necessarily confidential manifestos will inevitably be only rough commercial maps given the reality of ever-changing circumstances, but more than typical corporate presentations of the specifically financial or specifically technical, should allow investors to better gauge whether corporate strategy goes beyond the usual automotive sector orthodoxies.

“Value Stream Exploitation” remains the prime goal, recognising that into tomorrow the river delta of the prime value stream will indeed be fed by a myriad of internal and external inter-connected tributaries.

Just as “the network-effect” has impacted upon the changing trends of consumerism (street food to clothes to automotive), so there will eventually be more proximity of cluster and real-time feed-back prompts into Marketing, Design, Engineering, Production, Distribution and Sales and Services.

The Intelligent Investor will seek out the Intelligent Automakers; those who deploy a marriage of ever more Artificial Intelligence allied with ever more Insightful Creative Intelligence.