Companies Focus – Global 11 VMs – Q2 2012 Results

The Q2 earnings season saw a raft of mixed results spanning the good, bad and ugly; thus creating a sense of disturbance. Even historically defensive sectors such as banking and oil/gas providing lesser safe-harbours than the case in the past, given high P/Es, low yields and their own PESTEL headwinds. All adding to the 'risk-on, risk-off volatility in the search for value.


Contradictory Signs -

So an an unsure and erratic milieu providing a reduced rational structure for general interpretation. Created by the contrasting “pro and con” results of now globally inter-connected continental macro-level surveys, together with at the micro-level the affect of highly managed earnings guidance from companies (to reflect or boost release sentiment), and critically, the market reliant announcements of influential administrators and politicians. All combine to generate what was predicted and became a sideways moving market with 'snap' sentiment swings of the market – propelled by high-frequency algorithmic auto-trading – and best benefiting short-hold weekly and monthly traders who seek-out the opportunities of 'trough-point' and 'peak-point' stock dynamics, or those long-term participants slowly and cautiously building up holdings when prices (even in low P/E companies) appear attractive.

Being cyclical in nature, auto manufacturers have been forced to ride the heavy weather sentiment of the markets, perhaps more so than most given the demands of heavy capex and working capital requirements.

This now most evidently seen in North America, as the previous short-term financial markets' optimism provided by QE1, QE2 and Operation Twist and the successful lean running of large-caps and SME companies runs into the headwind of revived but still relatively anaemic consumer spending, forcing companies to remain cautious, even in the low-interest (often corporate bond secured) lending environment.

So, whilst America solved its 'capacity obesity' problem with Chapter 11, whilst there may be very real regional structural concerns in Europe, history demonstrates that it is often the case that national economies and auto companies seem to prefer to maintain what could be regarded as 'fallow' capacity (even after the 2 plant closures in Italy and Belgium): for either future job creation or factory disposal (trade-sale or otherwise), whilst awaiting the eventual future economic upswing

Mid and long-term offer a distinct value creation promise in an ever expanding worldwide market, where the BRICS & CIVETS offer so much proven potential. But given Europe's familiarity, still relatively wealthy demographic, cultural links and easily influenced governments – especially now given the economic corporate advantage - an auto-executive's mind still no doubt thinks the company that conquers a now much enlarged Europe (and critically vie against strong Japanese and S.Korean competitors) then has the political and technical lead to conquer the world.

[NB Though FIAT's Marchionne calls for cross-continent European capacity reduction, most other CEOs well recognise the liquidity firing power that GM and FIAT-Chrysler have (intrinsically backed by US foreign policy and a fiscally enabled eased “US$”) to industrially 're-acquire' Europe].


Comparative Q2 2012 Results -

The accompanying graphic (data table) provides an overview of the Q2 results for the prime 'global 11' automakers, GM, Ford, VW, BMW, Daimler, FIAT-Chrysler, Renault-Nissan, Peugeot, Toyota, Honda and Hyundai.

[NB data sourced directly from Q2 / H1 company reports. It appears that for VW, Renault-Nissan, Peugeot and Hyundai, the exact details of a weaker April, May & June sales period have been intentionally absorbed into a general H1 depiction. For the purposes of basic calculation / assumption, the Q2 figures presented are half the H1 numbers presented].

To best provide direct comparison each of the primary accounting lines is examined on a company versus company basis. This across: Revenue / Net Profit / EPS / Liquidity vs Q2 2011 standing.


Revenue -
GM : $37.6bn vs $39.4 (-4.6%)
Ford : $33.3bn vs $35.5bn (-6%)
VW : €47.7bn vs €38.85 (+22%)
BMW : €19.2bn vs €17.9bn (+7%)
Daimler : €28.9bn vs €26.3bn (+10%)
FIAT-Chrysler : €21.5bn vs €13.2bn (+63%)
Renault-Nissan : €10.467bn vs €10.55bn (-0.8%)
Peugeot : €14.77bn vs €15.56bn) (-5%)
Toyota : Y5,501bn vs Y3,438bn (+60%)
Honda : Y2,435.9bn vs Y1,714.5bn (+42%)
Hyundai : KRW21,052bn vs 19,162bn (+9.9%)

Of these, it is apparent that the notional 'winners' regards Revenue improvement are FIAT-Chrysler, Toyota, Honda, and VW & Hyundai. But it must be noted that the Italian-American and Japanese producers come from respectively low bases, so 'easing' their improvement. Whilst the German and Korean producers maintains traction from their record high sales base.


Net Profit -
GM : $1.5bn vs $2.5bn (-40%)
Ford : $1.04bn vs $2.4bn (-56%)
VW : €4.4bn vs €3.25bn (+35%)
BMW : €1.28bn vs €1.77bn (-27.7%)
Daimler : €1.51bn vs €1.7bn (-11.17%)
FIAT-Chrysler : €358m vs €1.2bn (-70%)
Renault–Nissan : €393m vs €626.5m (-37%)
Peugeot : €-409.5m vs €403m (-200%)
Toyota : Y290.3bn vs Y1.1bn (+26,300%)
Honda : Y131.7bn vs Y31.7bn (+415%)
Hyundai : KRW2,550bn vs 2,310bn (+10.4%)

The 'winners' here are Toyota (by a massive degree), Honda, VW and Hyundai. The above remarks pertaining to the Japanese industrial / commercial 'bounce-back' are reflected here at the bottom line. This much contrasted the American duo's foundering as profitability is surpressed to build-up cash reserves and fund capex projects.


EPS -
GM : $0.90 vs $1.54 (-41%)
Ford : $0.26 vs $0.59 (-56%)
VW : €12.05 vs €10.04 (+20%)
BMW : €1.94 vs €2.07 (-6.3%)
Daimler : €1.34 vs €1.51(-11%)
FIAT-Chrysler :not stated
Renault-Nissan : €1.37 vs €2.24 (-39%)
Peugeot : €-1.365 vs €1.77 (-177%)
Toyota : Y91.67 vs Y0.37 (+24,770%)
Honda :Y73.09 vs Y17.64 (+414%)
Hyundai : not stated

Correlated to the outcome of the previous section, the 'winners' here are Toyota (by that massive leap), Honda, VW (and expectantly Hyundai, though not indicated by the company). Once again the reduced profitability of the Detroit 2 is viewed through still positive but much reduced EPS.


Operating Cash Flow -

GM : $3.8bn vs $5.0bn (-24%)
Ford : $0.8bn vs $2.3bn (-65.2%)
VW : €3.35bn vs €4.2bn (-20%)
BMW : €1.84bn vs €3.0bn (-39%)
Daimler : not stated
FIAT-Chrysler :€1.08bn vs €0.52bn (+300%)
Renault-Nissan : €541m vs €767m (-29.5%)
Peugeot : not stated
Toyota : Y702bn vs Y316bn (+222%)
Honda : Y737.43bn vs Y1,070bn (-31%)
Hyundai : not stated

Here FIAT-Chrysler and Toyota win by very wide margins, with Ford seen to suffer most.


Free Cash Flow -
GM : $1.7bn vs $3.8bn (-56%)
Ford : $1.77bn vs $0.46bn (+384%) estimated
VW : €0.995bn vs E1.46bn (-31.5%)
BMW : €853m
Daimler : €1.0bn vs €1.13bn (-11.51%)
FIAT-Chrysler : €0.39bn vs €0.11bn (+354%) estimated
Renault-Nissan : €-100m vs €60.5m (-265%)
Peugeot : €224.5m
Toyota : Y49bn vs 51bn (-3.9%)
Honda : Y64.36bn vs Y339.44bn (-81%)
Hyundai : not stated

The apparent 'winners' here seen to be Ford (in stark contrast to its OCF) and FIAT-Chrysler with more than a tripling of FCF YoY. These figures are only simplistic guestimates, but may have been officially unreleased to build-up greater 'rolled-up' FCF figures for a later Q3/Q4 release, given the power of the indicator to tempt investors. Suffering most is Renault (and presumably Peugeot) given their greatest exposure to Eurozone market troubles.


Liquidity -
GM : $38.5bn
Ford : $33.9bn
VW : €14.9bn vs €17bn (-14%) [$18.47bn]
BMW : €8.01bn vs €7.46bn (+7.5%) [$9.93bn]
Daimler : €12.09bn vs €9.84bn (+23%) [$15bn]
FIAT-Chrysler : €22.7bn vs €21.4bn (+6.5%) [$28.14bn].
Renault-Nissan : E11.1bn [$13.76bn]
Peugeot : €12.08bn [$15bn]
Toyota : Y1,728bn vs Y2,132bn (-19%) [$17.8bn]
Honda : Y1,247.1bn (cash & equiv) [$12.85bn].
Hyundai : KRW17,180bn (cash & equiv) [$15.15bn]

And finally, the importance of 'fiscal fire-power' during this transformative period is seen by the large reserves build-up by GM, Ford and FIAT-Chrysler, with VW and Toyota holding near equal value lower sums and Daimler, Hyundai and Peugeot close behind, with Renault-Nissan, Honda and BMW on lower levels.


Automakers' Positioning -

By the overtly simplistic indications of a) Revenue Increase, b) Net Profit, c) Earnings Per Share, d) Operating Cash Flow, e) Free Cash Flow and f) Liquidity, we see the dominant players per measure:

a) Revenue Increase: FIAT-Chrysler, Toyota, Honda, VW, Hyundai
b) Net Profit: Toyota, Honda, VW, Hyundai
c) EPS : Toyota, Honda, VW, (Hyundai assumed)
d) OCF : FIAT- Chrysler, Toyota
e) FCF: Ford, FIAT-Chrysler (estimated results)
f) Liquidity : GM, Ford, FIAT-Chrysler, VW, Toyota

Consistency goes to Toyota (5 of 6 placings), followed by VW & FIAT-Chrysler (4 of 6 placings), then Honda & Hyundai (3 of 6 placings), Ford (2 of 6 placings), GM (1 of 6 placings).

Unsurprisingly Renault-Nissan and Peugeot lagged heavily, but also too seemingly have BMW and Daimler failed to make a showing. This investment-auto-motives believes because of the BoD's operational consistency which provides slower but ongoing organic value creation, instead of the 'falter and rebound' growth opportunity seen by the aforementioned identified players.


Automaker's Context -

It became apparent some time ago that the dire effects of the credit crunch would most impact western mass market players with heavy exposure to their domestic markets, hence the experiences of previously GM and Chrysler, and now PSA, Renault and FIAT; with the premium/quality type producers with high export market exposure, demonstrated by BMW destined to fair far better, with the 'diversified premium' of Volkswagen and Daimler arguably on even more solid ground spanning B2C and B2C customers. The 'intermediates' of Toyota, Honda and Nissan were destined to sit between the two former groups, but themselves required internal re-structuring to remain competitive; this latterly ironically achieved as a consequence of the 'Great Eastern Japanese' disaster and the Thailand floods.

[NB The recent pan-Indian electrical power failures may induce a far smaller but significant force for auto-producer restructuring as companies seek to relocate to regions of assured power; aswell as obviously providing consulting and installation opportunities for major infrastructure players such as GE, Siemens etc]

As illustrated previously, perhaps the very obvious automotive beneficiary of the global downturn has been the strategically perfectly positioned Hyundai Motor Co with a balanced global sales and production foot-print and ever more attractive and price-compelling vehicle range. Whilst inside western markets for decades, its prime focus over the last decade was in BRIC and EM countries offering small cars and small trucks, then concentrating upon globally credible passenger vehicles as consumer expectations of the 'old-industrial' and 'emerged-industrial' countries began to merge.

However, as seen with the previous focus on Ford, western producers are positioned in course to return to strength if able to set their own paths: either through manifest strategic re-alignment of the intra-national business model (Ford), or through the deployment of large cash reserves via M&A and alliances (GM) or seeking - at smaller level – a combination of both (FIAT-Chrysler). The lessons learned within the US no doubt sought to be deployed by European companies / divisions.

The German corporates have remained strong thanks largely to the success born from the western boom years, their EM exporting models of 'visible' and 'invisible' products and services, the cautious retention of those cash cushions up until recently with now impressive CapEx programmes. These designed to secure industrial dominance domestically...in EM regions...and by virtue of the German 'home improvement plan' re-emphisising its historic role as Europe's industrial hub with powerful spokes now eminating north, west, south and east. .

Outlook -

So beneath the very apparent surface of the 2008-10 financial crisis, the EU sovereign debt and banking crisis, the natural disasters in Asia, the spectre of a technical or real double-dip recession, and so 'in turn' the outcome of heavily afflicted stock prices amongst many 'consumer cyclicals'... the necessary process of business re-invention has been under-way to re-position individual companies and the sector at large into the second decade of the 21st century and beyond.

Micro Level Trends - American Manufacturers – Sizing-Up US Growth in a Vehicle Down-Sizing Age

Perhaps never in the history of US have its two most over-used phrases been so juxtaposed. “Its the economy, stupid” and “ the business of America is business” highlight the present near schizophrenic conditions that exist, a now engrained cautious attitude given the midst of fiscal and social upheaval of the nation, versus the rote conditioning of American business and populace to be optimistic and ambitious.

A recent front-page of Economist newspaper starkly depicts the present picture with the headline “America's Next CEO?”, referring to the results of the Presidential primaries across New Hampshire and South Carolina (poll rating) for the Republicans which show Mitt Romney as current favourite.

On paper, his background of ex-management consultant and ex-Governor looks to bolster the 'assets' side of a euphemistic personal balance sheet. But with the election a year away, the electorate will have noted President Obama's recent Asiatic focus to boost growth, US military presence in the region historically the precursor to strengthened trans-Pacific economic ties; this time however having to power-broke its way vis a vis China and a loss of previous 'reach' from S.Korea.

That combination of current economic fragility sat beside retained global aspiration is no better viewed than at the recent 2012 Detroit Auto Show. Though the state of Michigan has long lost its prowess as auto manufacturing powerhouse relative to the Japanese, Koreans, Chinese and of course the 'trans-plant' states in the “deep south”.

Yet for all the soulful remonstrations of the city's very real decline - by the likes of urban music artist Eminem - Detroit still endeavours to present itself as the vanguard of the global automotive sector as the new year gets under way.

And it is a very much needed show of confidence.

GM's stock price, though improved recently sits at $25, is well below its $33 IPO offering price; the IPO timed to ride previous market peak. Chrysler parent FIAT recognises the need to attract new capital into the US company from the markets, a necessary evolution, but made all the more prescient given FIAT's own concerns about the economic stagnation of Europe and its cash-burning effect upon the overall group balance sheet. And Ford has no doubt most disappointingly seen its stock price fall from its year ago high at near $19 to a present $12.50 due to the retraction of market confidence because of the macro-effects of the EU and global slow-down rather than company fundamentals.

Thus the Detroit trio all face capitalisation challenges.

However, as well recognised, 2011 (on a monthly YtD basis) did bring a glimpse of light for all in the US by way of the improved TIV demand figures, shoppers on Main Street seemingly more upbeat in the short-term than Wall Street traders besieged by the red price boards and 'Occupy Wall Street'.

Whilst 2009 gave 10.4m units sold, and 2010 gave 11.6 units, 2011 is expected to offer approximately 12.5m units. As for 2012, the market pollsters JD Power and sales outlet AutoNation seem agreed on a total of 14m units. That may at first appear a case of wishful thinking and pro-active sentiment boosting. Yet with Detroit's Big 3 sales expected to suffer on a world-wide basis, there may be reason to believe that the GM, Ford and Chrysler will be forced to grow US sales as an off-set to lost foreign demand. That typically means that new and refreshed products which attract dealer footfall are coupled with cross the board yet subtly offered sales incentives to seal deals and reach what may be ambitious state and country-wide sales targets.

With this as Detroit's very real global and national back-drop, the underlying message of NAIAS (North American International Auto Show) at Cobo Hall – just ended - was that although the philosophical broadcast is as 'international' as ever, the pragmatic communiqué is directed toward American buyers and dealers.

In order to excite consumers – and indeed Wall Street analysts – supposed 'concept cars' were rolled-out which intentionally bore more than a passing resemblance to current models so as to try and demonstrate their inherent progressiveness. But in reality – as is so often the case at this point in the economic cycle – are intended as image boosters to current models.

GM offered a compact sports study named the Chevrolet Miray (apparently meaning “future”) from its development centre in Korea, intended to simultaneously highlight the resurgence of the down-sized car – to befit the necessary global fit that enables scale efficiencies - and critical nudging of its sizeable presence in SE Asia's leading economy, with reach across the region. Also under the 'concept' name but seemingly more acutely related to the platform engineering of standard cars were the 2 items shown: the 'Code 130R' in the guise of a downsized Camaro 3-box coupe using Japanese German and Italian surfacing with all-american badging; and the 'Tru 140S', seemingly inspired by the 'organo' wedge-shaped Hondas of recent years. Both cars designed to fight against the 'import' market from Europe and Japan, but made more affordable for the targeted 'Millenium' (youth) consumer, which in reality translates as more affordable 'interpretations' of class leading foreign products for not just the youth but all consumers. An understandable design-policy driven by the strategic aim to build volume by capturing non-GM buyers from other VMs.

In a more candid effort to sell cars Ford offered stylised versions of its standard product range, including special editions of Fiesta, Focus, Taurus and Mustang in respectively, ST, ST-R, SHO and 'Laguna Seca' and 'Shelby GT500' guises. The company then, perhaps without the same pressure as GM to appear concomitantly global and future facing so as to buoy its market capital value, has followed previous US centric stance seen with 'Bold Moves' some years ago by wielding a set of obviously pragmatic 'showroom sellers' which are intended to draw general dealer interest. The new model introductions of course included 2012 versions of the general model range, but most interesting is the mid-size sedan Fusion, which is to be made available in a Plug-In Hybrid format. The investor website Motleyfool.com well recognised its – of course along with its peers - potential as the 'real-world' viable challenger to Tesla's Model S vehicle; this especially so if produced in Lincoln guise as Lincoln itself undergoes another brand overhaul. This aided by the new MKZ shown.

Chrysler showed the 700C concept, its contemporary take on a modern 'one-box' mini-van; a segment it essentially invented and captured in the mid 1980s after initial exploration with Renault (leading to Espace). Just as the Chrysler Town & Country and Dodge Caravan were – along with small sedan Neon – corporate saviours, so FIAT and Chrysler management seem keen to be seen to re-deploy pages from the history books, and target what appears an out of favour segment that lost its popularity given the 'soccer mom' tag and influx of SUVs and Cross-Overs. By way of more mainstream 'concept' efforts there is the Dodge Charger Redline. But of major interest was the Dodge Dart, the first US vehicle to be directly derived from a FIAT platform, the Alfa Romeo Giulietta. The re-engineering of Dodge with Alfa's sporting prowess should re-inject the brand with lost ride & handling characteristics, and with a $16,000 base price will be an attractive market contender. Importantly, FIAT-Chrysler used the show to display its 1.4L Multi-Air engine, which by historical American standards, and popular perception, a small power unit. However, it is being promoted through its use in the FIAT 500 to try and alter that perception so then able to be planned into later US market FIAT and Chrysler products. Furthermore FIAT used NAIAS to introduce the Maserati Kubang premium cross-over seeking to mimic Porsche's success with Cayenne.

From foreign stables, Toyota spotlighted the NS4 concept, a Camry sized Plug-In Hybrid sedan which intentionally spring-boards aesthetically from Honda's Hydrogen FCX Clarity concept of 2009, including its metallic deep red body colour, so subtly massaging public memory to Toyota's advantage. Toyota also debuts the LC-LF, a successor to its previously well received Lexus SC convertible. Honda itself provides a taste of the next generation NSX sportscar, badged in the US as Acura, and with the remit to kick-start what has been lost interest in the pseudo-premium marque that must switch its own centre of gravity from more recent SUV orientated vehicles to sedans, coupes etc. Whilst Daimler gave the idiosyncratic Smart For-US, trying to grow appeal of its micro-car marque.

This provides a basic view of the US market and US product outlook. However, given the bearish worldwide picture -exempting the surprising 8.9% growth in China in Q4 2011 – investors have great expectations that America can pull itself from the mire. To this end the recently experienced positive consumer traction in autos will be (nigh on) expected to continue as the theory of a self-sustaining America allows itself to kick-start its own upturn.

Yet that 'wished confidence' of a brighter era must be supported by evidence of top-line earnings improvement coupled with lean efficiency cost absorption within an organisation thus providing for appealing profitability and so investment incentive.


GM -

The reborn GM has (like Ford) the benefit of true global reach, but perhaps as never before have its 2 prime markets of China and the US been so important. The apparent 'soft landing' in China allowed GM to see its sales increase by 8.3%, ostensibly in line with general country growth.

In its first full year as a resurrected company, its FY 2010 revenue was $135.6bn, EBIT of $7.0bn, net Operating Cashflow of $6.6bn and FCF of $2.4 (having repaid $4.0bn to pension plans) and EPS of $2.89.
In 2011,
Q1 offered (net) revenue of $36.2bn (up $4.7bn YoY), an (adjusted) EBIT of $2.0, an Operating Income of $0.9bn (down from $1.2bn) and an EPS of $1.77 (up from $0.55), FCF dropped to $-0.9bn (from $1.0bn as a result of finance sourcing change that cost $2.5bn) and showed Automotive Liquidity of $36.5bn, with increased use of credit facilities (worth $5.9bn), this $42.2 set against Debt Obligations of $31.7bn.
Production was 2.32m units.
Q2 gave (net) revenue of $39.4bn (from $33.2bn), an (adjusted) EBIT of $3.0bn (from $2.0bn) and an EPS of $1.54 (from $0.85). FCF was up to $3.8bn (from $2.8bn), and Total Automotive Liquidity was $33.8 at hand and a further $$5.9 available via credit facilities. This total of 39.7bn set against Debt Obligations of $31bn.
Production reached 2.4m units
Q3 provided for (net) revenue of $36.7bn (vs $34.1bn a year earlier), an EBIT of $2.2bn (vs 2.3bn), net income for stockholders of $1.7bn (vs 2.0bn) and an EPS of $1.03 (vs $1.20). Operating cashflow reached $1.8bn and FCF from Autos equalled $0.3bn (from $1.4bn). Total Autos Liquidity equalled $33.0bn at hand with $5.9bn retained credit facility. This $38.8bn set against reduced Debt Obligations of $27.9bn, giving Net Liquidity of $10.9bn
Production dropped to 2.22m units.
As stated no Q4 figures presently available, though the BoD states a Q4 similar to that of Q4 2010

The company's earnings chart sets show that GMNA did near all the 'heavy lifting' in Q3, GMIO (Int Ops) showing reduced income, GM Financial assisting, GMSA (S.America) showing virtually no income and GME (Europe) showing a welcome reduction in losses, but still in the red. This the outcome from slow-down in global deliveries from 2.32m units in Q2 to 2.24m units in Q3.

GM has put effort behind its desire to decrease reliance on incentives, but results have been seasonally sporadic, with in the 16 months to Oct 2011, only 3 months of the series actually showing notable positive difference relative to the industry average 'give away' value, its own re-aligned pricing helping to beat internal targets.

This, looks to be part of the reason that Automotive Cash Generation shrank to $1.8bn in Q3 2011 from $2.4bn a year earlier, this broadly affecting Automotive FCF with the hike in YoY CapEx costs for the quarter from $1.2bn to $1.5bn, thus showing FCF heavily declining from $1.4bn to $0.3bn.

To re-quote the official statement “the company does not expect to achieve its target to break even on an EBIT-adjusted basis before restructuring charges in Europe, due to deteriorating economic conditions”. This then of little surprise. The IR department provides a general quote from Dan Ammann (CFO) “GM continues to execute the plan we outlined for investors in 2010...That includes investing in our products, further strengthening our balance sheet, generating cash and profits each quarter, and maintaining our low break-even level. The next level of performance will come as we systematically eliminate complexity and cost throughout the organization.”

Whatever the rhetoric, GM recognises that investors will need to be assured that the drop in stock-price (since IPO) can be off-set by the attraction of dividends. To this end the 2011 cumulative quarterly EPS rates (though not dividend rates)of Q1 $1.77, Q2 $1.52, Q3 $1.03, so far providing $4.32 will need to show a Q4 EPS of $1.44 to maintain an annualised average, and so theoretical attributable earnings to stock holders. If so, the notional “EPS Yield” generated relative to the $33 IPO price would show a 17% EPS return for 2011, and on the recent $24 price a 24% “EPS Yield”.

The prime aspect investors must watch is that whilst North America appears the most fertile and immediate sales ground, with the Q3 2011 numbers showing 96% of revenue came from NA, the exact methods GM uses for extracting additional value from the region must come under scrutiny. Just as the need must be to rebalance the international earnings contribution, so as not to put all the GM eggs in one basket.


Ford -

FY 2010 saw annual revenue of $129bn (vs $116.2bn in 2009), an EBIT of $7.15bn (vs $2.6bn) and a no paid EPS policy (relinquished in Q1 2012). Total Automotive Cash was $20.5bn (vs 24.9bn) with net (post Debt) sum of $1.4bn (vs $-8.7bn in 2009).
In 2011,
Q1 provided for revenue of $33.1bn (vs $5bn a year previous), an EBIT of $2.83bn (vs $0.82bn) and an unpaid EPS of $0.61 (vs $0.11). Total Automotive Cash stood at $21.3bn (vs $20.5bn), which after Debt Obligations stood at $4.7bn (up from $1.4bn) after debt reductions. Total Liquidity (inc marketable securities etc) stood at $30.7bn (from $27.9bn)
Production was 1.4m units (from 1.25m)
Operating Margin stood at 7.7% (vs 6.2% the preceding year) for the total company, though Ford NA offered 10.3% (vs 8.9%)
Q2 gave revenue of $35.5bn (vs $4.2bn), an EBIT of $2.9bn (vs $-0.06bn) and an EPS of $0.65 (vs $0.03).. Gross Automotive Cash stood at $22bn (vs $0.1bn) with net Cash at $8.0bn (vs $13.4bn).
Total Liquidity stood at $32.2bn
Production was 1.52m units (up from 1.42m)
Operating Margin was 7.0% (down from 9.1% preceding year)
Q3 offered revenue of $33.1bn (vs $4.1bn), an EBIT of $1.94bn (vs $0.111bn) and an EPS of $0.41 (vs $0.02). Gross Cash was $20.8bn (vs $-0.3bn) against Debt Obligations of $12.7bn, thus net Cash of $8.1bn (vs $10.7bn), with Total Liquidity inc credit lines at $31.0bn.
Total Liquidity stood at $31bn
Production was 1.34m units (vs 1.25m preceding year)
Operating Margin was 4.8% (from 6.2%)
Q4 along with FY2011 results to be presented on 27.01.2012..

With the same global market dynamic as GM, it was Ford's N.American operations which gave the greatest boost to revenue and profitability. However, whereas GM saw 96% of its revenue stem from NA, Ford sees only 58%, a far more balanced sales base, even if theoretically prone to ongoing international economic turmoil. The fact that Ford was able to enjoy that contribution in what has been a dire year for International Operations highlights what appears a leanly run ship.

Continuing to use the notional “EPS Yield” calculation, Ford saw EPS earnings of Q1 $0.61, Q2 $0.65 and Q3 $0.41, providing an average of $0.55 that investors would expect to see in Q4. However, as known, Ford decided to halt dividends through 2011 so as to buoy its cash cushion and maintain 'deep pockets' that could support CapEx projects, Working Capital needs and other obligations. That decision undoubtedly surpressed Ford's stock value, its current $12 or so seemingly reflective of that reality in tandem with previous bear-market sentiment, but some might argue that basic corporate fundamentals are brighter than recognised. As to how much the re-initiation of dividends at what is a notably cautious rate affects sentiment remains to be seen.


Chrysler

FY 2010 saw revenue of $41.95bn, a modified EBIT of $763m and Net Loss of $-652m, Cash at Hand of $7.34bn with Gross Debt of $13.12bn, giving Net Debt of $5.77bn
In 2011,
Q1 provided for revenue of $13.1bn (vs $9.7bn in the former year), a modified EBIT of $477m (vs $143 previously), [a modified EBITDA of $1.17bn (vs $787m)], a Net Income of $116m (vs $197m, so first reported profit), Cash at Hand of $9.9bn (vs $7.3bn), Gross Debt of $13.2bn (up from $11.2bn) and so Net Debt of $3.3bn (down from $3.8bn). FCF of $2.5bn (vs $1.6bn)
Total Liquidity was not stated.
Sales Total of 394,000 units (vs 334,000 units)
Operating Margin of 3.6% (vs 1.5% a year earlier)
Q2 gave net revenue of $13.7bn (vs $10.5bn), a modified EBIT of $507m (vs $183m), [a modified EBITDA of $1.3bn (vs $855m)], a Net Loss of $-370m (vs $-172m), Cash at Hand of $10.2bn (vs $9.9bn), and Net Debt of $2.1bn (vs $3.4bn). FCF of $174m (vs $491m),
Total Liquidity was not stated, Debt Obligations $12.3bn ($10.7bn of which is payable in 2016+).
Operating Margin of 3.7% (vs 1.7% a year earlier)
Sales Total of 486,000 units (vs 407,000 previously)
Q3 offered net revenue of $13.06bn (vs $11bn), a modified EBIT of $483m (from $244m) [a modified EBITDA of $1.1bn (vs $937m)], a Net Profit of $212m (vs $-84m), Cash at Hand of $9.45bn (vs $8.2bn), Net Debt of $2.9bn (vs $2.1bn). FCF of $-699m (vs $32m)
Total Liquidity was not stated, Debt Obligations $12.3bn (vs $12bn), Net Debt of $-2.86 (vs $-2.1bn).
Sales Total of 496,000 units (vs 401,000)
Operating Margin of 3.7% (from2.2%)
Q4 and FY results due on 1st February 2012, with the Revised Guidance at Q3 giving:
shipments at over 2m, net revenues over $55bn, modified EBIT of $2bn [modified EBITDA of $4.8bn], adjusted Net Income of approx $0.6bn andf FCF over $1.2bn

As an unlisted company – presently awaiting the right timing for a new IPO – Chrysler has little in the way of investor pressures, now that large portions of the tax-payer funded bail-out have been repaid, and the financial and technical gate-ways for FIAT's expansionary ownership of the corporation have been reached. But to generate a successful IPO, FIAT-Chrysler must demonstrate itself as a strategically strong and well positioned car company. Recent events in Europe have to a degree scuppered what had even previously been a tentative merging of empires. Chrysler's compact car future is effectively reliant upon FIAT platforms (which now need a 3rd partner to drive down costs, eliminate EU production overcapacity and generate credible regional earnings). This a sizable but realistically achievable challenge to be seen to be on track ahead of the US corporations own IPO.


Conclusion

The Detroit show's spotlighting of mainstream models in new model year and supposed 'concept' guises demonstrates the 'Big 3' need to generate showroom footfall and public interest converted into sales.

Yet the strategic positioning of the different firms – GM, Ford and Chrysler – largely reflects their 'playbook' positions seen in the past when re-emerging from recessionary times.

GM's play has historically been, and continues to be price-led, its large cash cushion of $10.9bn in Net Liquidity very probably used to maintain its strength at the coalface by continuing to offer the lowest RRP pricing of the Big 3 in each vehicle segment, and probably the biggest discounts and incentives on its vehicles. Thus, although GM seniors talk of a new company with new attitude, the tack it will take to generate market-share and ensure factories run at high capacity rates looks to be conventional.

Ford was the first to undertake corporate shrinkage during the early part of last decade, the sale of Volvo demonstrating the last vestiges of a yesteryear age that included PAG etc. That downsizing and the undertaking of its biggest 'mortgage' borrowing was part of the rationale to create the 'One Ford' of today, keenly focused on global platform/module set leverage and life extension of platforms to ensure what may be the industry's leading rates of CapEx amortisation. However, its strategic position appears 'historically normal', today setting itself out as the 'technologist' car company (eg SYNC etc) where car content and intelligence is decreed as the blue ovals USP in its mainstream markets, both at home and internationally. But once where historically the 'new era USP' was as the vanguard in styling, today with a need to satiate a broad cultural span of global consumers the maturity of middle of the road design is bolstered by efforts toward mainstream segment technology leadership

Chrysler finds itself in a curiously familiar position to that of the late 1970s and early 1980s, having to rise phoenix-like from what has been a very prolonged and concerning time, where its products where becoming very long in the tooth and its multi-brands appeal rapidly diminishing in brand equity. FIAT's parentage is of course seeking to alter that and the efforts thus far appear a mix of hit (ie new Dodge Dart) and miss (ie Chrysler badged Lancia's in Europe, and the FIAT badged Freemont SUV). Yet success is not yet assured, especially as European sales collapse especially so in Italy as it faces enormous economic strains. So the new onus is on Chrysler to help - along with FIAT's slowing but still potent South American operations - to buoy the parent company, by striking hard and fast in the US homeland. It will need to “pull a rabbit out of a hat” and re-create the new buzz it did in the mid and late 1980s. That was achieved back then with a venturesome daring spirit of the new. Today it must exploit the technical and financial advantages of 'pre-packaged' platforms yet recreate that lost spark seen 30 years ago, only periodically seen since, and distinctly lacking in recent years, offering little more than hackneyed 'Detroit Spin'.

To end, the attached table (top right) provides a brief but meaningful overview of the Big 3's current performance and financial positions; as viewed by :

- Worldwide Regional Production
- Revenue
- N. American Revenue as % of Global Whole
- N. American Operating Margin
- Total Liquidity Available vs Total Debt
- Net Liquidity Available

These very basic measures provide a much needed clarity as both global investors and Detroit looks to this emergent period of 'American Expectation'.

Once upon a time the Mako Shark Corvette, the mid-mounted Mustang and hi-tail Superbird reigned supreme in Detroit. Today, necessarily so, it is all about the numbers.

Company Focus – FIAT SpA (Auto) – Divide & Conquer? Or The Emperor's New Clothes?

Unsurprisingly, the new year starts-off with debate about FIAT Group's seemingly long awaited decision to split its conglomerate structure effectively in half; creating a Cars division and an Industrials division. The rationale is to provide greater autonomy for each section, the central element of that being the ability for each to provide greater transparency for external investors, allowing greater focus and understanding about the details of the specific company accounts, its current operational condition and the strategies set in place to grow.

For FIAT SpA (Autos) that means the ability to demonstrate FIAT's need to restructure, especially so in Italy to regain competitiveness, aswell as need for timely amalgamation of stock-ownership and operational corollary with Chrysler LLC. Such re-invention necessary to try and become a greater singular automotive force on the world stage, with the dangerous counterpoint of possible long-term eventual extinction for both the European and American companies if there general health is not markedly improved.

For FIAT Industrials, today's record-high foodstuff prices and global production pressures generate an impetus to better steer the agricultural division of its 'AgCon' business, this perhaps more important than previously thought given the lacklustre construction uptake in the west and the slowing of what was frenzied infrastructure projects in EM and RoW markets. The Truck section also requires close attention, given the fragility of the sector's rebound since 2008. This means the need to rationalise its own structure into well honed core-competencies, and manage the devolution from FIAT cars with an aim of generating new alliances with regional EM players in chosen growth fields; creating similar global reach relationships to the FIAT-TATA arrangements in Cars.

Having been historically financially interwoven – under the premis that FIAT Group could offer its shareholders the confidence of an 'cyclically off-set' empire – the separation of these previous 'Siamese twins' says much about the expectations and ambitious aspirations of senior management, aswell as the seeming desire of the Agnelli descendants to cash-in and probably diversify their own investment interests, these new interests in turn, very probably acting as a bridge for latter-day involvement by the newly listed FIAT companies.

The two FIAT separate companies debuted on the Milan stock exchange on Monday. The original Fiat Auto comprising of a passenger cars operation and vans operation, and the FIAT Industrials section which spans a myriad of sectors from a medium/heavy-weight truck division, spanning the value-chain of vehicle parts and the vehicle build process itself, to its well known involvement in Agricultural and Construction machinery under a portfolio set of acquired brands, aswell as other interests.

Auto ('Cars, Vans and FIAT Powertrain') itself has had greater inter-connectivity in recent years given the strategic impetus to gain efficiencies and the market demand for small van derived cars. Though both cars and vans are largely self-governing given their largely different market focus, the new Board will undoubtedly expect to see greater philosophical alignment so as to hone reporting structures, spread best practice and reduce overhead and piece cost (especially so from FPT) as part of that remit.

Industrial ('Trucks, AgCon, Parts et al) will need to gain a greater global reach and professionalism,the new transparency gained from the split, thus forcing greater responsibility and accountability upon each sub-division.

As highlighted in a post sometime ago, when the conglomerate's split was mentioned, of secondary interest to investors will be how the Elkann's (John & Lapo) and relatives decide to re-invest via the family owned/shared investment vehicles - Exor SpA (previously Giovanni Agnelli's 'IFIL' and Giovanni Agnelli e C. Sapaz, its close collaborating 'parent' vehicle).

As highlighted by investment-auto-motives at the time of the accidental series of Ferrari 458 fires, these holding groups act as a leading light for FIAT (Group), taking stakes in companies that prove of value-added worth to themselves and FIAT, ideally with mutual benefits. At the time investment-auto-motives noted the swapped holding interests in Switzerland's SGS - a the quality methodology and assurance company – which could be leveraged to ensure product and process improvement across the FIAT-Chrysler.

And unsurprisingly, Exor undertook new interests inside India and China through 2010, signing a private equity partnership agreement 6 months ago, and looking for additional – no doubt synergistic – opportunities.

[NB Exor appears to hold a narrowly diversified interest – excluding the breadth of (34.5%) FIAT Group – which pertains to: global property via 2 funds, business services via 2 companies, financial services via 3 companies, and tourism and entertainment via tour companies / a new tv/media 'space' entity / and major holding in Juventus football team. Exor's structure includes Agnelli e C Sapaz's hold of 54.1% Ordinary Stock, and 39.2% Preferred Stock). (This beyond EXOR SpA's self-hold of 2.6% and 13.3% respectively)].

With specific regard to the newly floated FIAT companies, major stock-price fluctuation at their appearance in Milan has been essentially as expected. Though not privy to the exact details given the manner in which the road-shows would have been marketed to an Italian orientated investor base - which itself may have had a level of political expectation hoisted upon it given FIAT's importance to the economy. So the 5% rise by FIAT SpA (Auto) and the 3% rise by FIAT Industrial on the first day of trading (to their E7.00 and E9.00 levels) were essentially foreseeable given the absolute need to best orchestrate the launches to keep all new and old stakeholders satisfied; their combined Market Capitalisation, then slightly higher that the old FIAT Group valuation.

[NB The fact that floatation investors envisaged 25% greater value in the Industrial company relative to the Cars company highlights the over-riding attitude relative to each's present competitive (global) position at this point of the 're-emergence' economic cycle].

The Car company's immediate 5% rise could be said to equates to the handling/experience of GM's re-floatation, though it managed only 3% in early trading. Yet whilst FIAT SpA did manage greater initial impact, much of this must be purely speculative as stocks partially traded across domestic and international institutional hands. Yet, with lesser orchestrated tail-winds that GM, flat-line trading looks probable for near-term trading given the real headwinds facing FIAT.

The present pertinent question of course relates to the future, and the ability for FIAT Spa (Auto) to achieve its ambition and so provide credible stockholder interest and future confidence.

Presently, beyond the very tough European challenge, and much needed boost from FIAT's S. American division, a great portion of that – theoretically at least - lies with Chrysler and its expected 're-bound' position.

As mentioned by investment-auto-motives' recent blogs and the Christmas direct marketing campaign, Washington's ongoing reliance on additional financial stimulus so devaluing the US$ effectively creates a a context for global FX 'stage management'. GM is a prime beneficiary, as is Ford and of course, one imagines, Chrysler - as Detroit's #3. Unsurprisingly this ongoing pseudo-protectionist move by the US administration is the less than popular amongst world leaders, given the economic and social ramifications it causes.

Nevertheless, the desire to deflate the US$ via QE2, provides a dual boost to the US economy, at home and abroad. At home it of course circulates greater domestic money levels (esp credit access – the modern equivalent for many of fiat currency), whilst internationally it allows for 'US pricing-power' vis a vis local competition. This move can only be of massive indirect assistance to Detroit, especially GM and Ford which can enjoy boosted repatriated earnings given the effective FX arbitrage..

[NB Critically, the advantageous FX leverage provides an ability to offer a discounted pricing strategy to its foreign markets, and/or enhanced product-spec provision to attract buyers on product grounds within those regions it wishes to avoid any subsequent 'pricing crush' by better positioned large local competitors].

Equally, the ramification for the world's other (non-US) auto-manufacturers is that the profit boost generated by inflated US sales demand will be only be deflated when the income stream is converted back into homeland currency. Furthermore, there will be at an initial competitive loss outside the US – at home and abroad – until the Europeans, Japanese and S. Korean's can restructure their own domestic and trans-plant's cost-base.

This is the prime drive for the likes of VW and Nissan to locally produce with the US or NAFTA, an action already under way by FIAT itself with Mexican production of the vanguard FIAT 500 for the USA, and its intention to use Chrysler factories to latterly co-produce FIAT and Alfa Romeo branded vehicles.

The rush for Marchionne et al is to create a Chrysler that can benefit from FX stage-management, thereby undermining GM and Ford's own attacks in Europe and S. America on FIAT.

However, unlike GM's or Ford's truly global footprints, Chrysler is at best patchy, with general world-wide coverage but far less in-market presence than its foes – mutual piggy-backing with FIAT (and vice versa) central to the alliance ambition.

Chrysler has had a history of world-wide expansion, over-reach and subsequent contraction; this the case with its Valiant brand in Australia in the 1960s, the failed efforts of loose alliance with the UK's Rootes Group and France's Simca-Matra in the 1970s and the formal marriage with Daimler in the 1990s. The 1960s effort failed due to the inability to fight GM & Ford in the far reaches of the globe. In the 1970s from 'combined doubled troubles' and in the 1990s from an unwillingness to relinquish Detroit control even when under the parental strictures of Daimler. (This last element being due to a mixture of improved profitability through the buoyant era and a politically over-sensitive German owner).

This history will be undoubtedly well understood by Marchionne, hence what seems a firmer grasp upon Chrysler, very necessary given the circumstances.

Chrysler proved its ability to bounce-back in the late 1980s with government assistance and Iaccoca leadership, a dual impetus that gave the freedom to produce truly contemporary products, as seen by its cabin-forward sedans and (Matra inspired) MPVs. But it does not enjoy such a free-hand today, nor does it have the grasp on the US market it had 3 decades ago. Indeed FIAT's very rationale for platform engineering hardpoints, bundled sub-systems and parts-bin efficiencies indicates ultimately a greater alignment of product types between the companies – even if masked as well as possible - so as to generate as large an economy of scale as possible. Its a platform sharing philosophy that worked so well for GM in the distant past, VW in modern times and sets the global standard. But it is also potentially prohibitive for Chrysler in recapturing its independent spirit and being Detroit's 'radical forward thinker', the role it has undertaken to historically rebound.

Moreover, the present Chrysler product line is at best uninspiring, the previous value-destruction and Chapter 11 re-structuring period prohibiting the much needed broad product investment; investment which FIAT now offers, but with its own strings. Indeed, after a dearth of new vehicles, near-term new product launches emerging thus far are the Chrysler 200C, and latterly new 300C (seen at Detroit this week). The former is important as a core product in critical midsize sector, but in itself is only a natural replacement for the mid-size Sebring, and so constrained by overtly conservative project business case pressures, given its critical role in insuring steady 2011 cash-flow. As also expected, the face-lifted 300C looses its uniqueness, now matched to the 200C to provide a fresher unifying corporate face - at least cost - but in the process loosing its original appeal, and expected to become a US rental fleet staple which whilst ensuring income unfortunately also damages the very usedful 'perceptional niche' old 300C had created.

The 200C's gestation period experienced much internal 'politicking' as Chrysler management initially tried to engineer the model from the higher-cost platform of the more expensive 300C, presumably to try retain the lead design rights and so maintain an element of internal power. This, not surprisingly failed. Yet unable to gain timely development access FIAT's own platforms or its prime R&D programmes, the new 200C is essentially a re-skin of Sebring. Thus whilst enjoying a) the definite benefit of amortised tooling costs, b) other 'in-house' efficiencies, and c) product launch scheduling that matches US demand up-tick for mid-size vehicles, the new 200C itself is rather lacklustre versus its competition. This is something FIAT and Chrysler undoubtedly recognise internally, the role of the model to strategically 'tread water' until the new batch of cars arrive 18 months later.

However, this in turn will put pressure on dealers to generate sales, which although aided by a reduction by $875 over old Sebring at launch, may in turn call for incentive programmes to meet (the probably over-estimated) 200C sales projections, and to set against GM and Ford's own larger leverage of customer credit availability. US customers also recognise their own bargaining position and so Chrysler, in its comparatively weaker state, may have to settle with 'less bucks for the bang' per unit. With this the case for 200C and later 300C the remainder of much of the aging product-line may also see likewise.

With this danger coming after the previous poorly received mid-size Dodge Avenger - which itself saw a cost-efficient 2010 facelift - the top-line revenue stream continues to come under pressure. Part of the damage limitation exercise will be to have 200C attract migratory customers as an in-house alternative, with perhaps even bigger Avenger trade-in give-aways to purchase the new 2010 Dodge Journey CUV.

Moreover, until Chrysler-Dodge's compact & small cars appears in early 2012 and 2013 there is nothing to fend-off its Detroit peers with their own more convincing line-up, (Ford in stark contrast able to enjoy the financial fruits of its precursing global platform efforts, latterly followed by GM).

The truth of the matter also is that Dodge's brand/product management has been ever more compromised over the years, given its #3 status versus is siblings, so affecting co-developed vehicles and thus brand integrity. Although re-awakened names like Charger hoped to recapture the glory days, as is 'New Challenger' the mixed milieu of vehicle types and characters only tied-together through the loose connection of stylised radiator grilles and at best style-influenced lamps. Amongst the international competition this now seems almost a parody of itself, increasingly on now a par with the latter-days of Pontiac before being extinguished as a GM nameplate. That action was no doubt welcomed by Dodge seeking Pontiac's pseudo-sporty clientele, but it is also a massive wake-up call for Marchionne. Also, the ability to exploit the Jeep brand will have to wait until 2013 when a new suite of vehicles arrive, thankfully seemingly re-injecting the characterful 'Jeep machismo' lost on Compass and Patriot, albeit done so for the urban enclave and thus smaller cars. The Ram pick-ups, whilst long in the tooth will derive a modicum of sales success from the slow 'American rebuild', however the previous Dodge van section - which used Daimler vans – has been discontinued, FIAT not able to provide a new generation of FIAT derived vans until 2012, and so creating an income vacuum.

In short, Chrysler's real attractiveness as a value-creating vehicle manufacturer does not dramatically increase until at the earliest mid 2012. Thus whilst Marchionne's hope for a 2011 Chrysler floatation is no doubt still on course, investors will have to wait 6-8 months to see the beginnings of real earnings traction generated from sizable input cost reductions, the up-tick in US demand and an ability to offer true 'US market relativity'.

Thus investors in both FIAT SpA and latterly Chrysler may have to 'factor-in' a stock price discount for Chrysler's floatation, waiting time until the all-new products arrive.

Just over a month ago FIAT provided a press release to clarify its position relative to its stake in Chrysler, the core message being that to raise its current 20% ownership level by a further 15% requires the achievement of 3 distinct 'performance events' to be obtained before 2013, each pertaining to additional 5% tranches. These being when:

1. the regulatory approval (and FIAT commitment) to produce the 'FIRE' engine family in the US
2. Chrysler gains $1.5bn+ revenues from outside NAFTA, inc Mercosaur distribution agreements
3. the regulatory approval to produce a US made vehicle using FIAT platform giving 40mpg+.

(These supposed hurdles however do not appear as onerous, part of the expected FIAT strategy to gain US and NAFTA access. However, much depends upon the state of the US market through 2010/2011 at both wholesale credit supply and consumer demand ends. Aswell as of course is the ability of FIAT to expedite these projects– which given its powerful position with the US senate as FDI propagator, and Mercosaur governments as well established corporate cornerstone, is achievable).

Interestingly however, even if not achieved, FIAT has the recourse to use a primary call option to acquire the additional 15% from 2013. Furthermore, FIAT can also access a second call option at the 2013 mark which gives an additional 16%, so giving an effective 51% ownership. (However a provisional part of the agreement with the US & Canadian governments is that not more than 49% may be gained until the outstanding UST loan remains unpaid, thus negating the all important additional 2% that tips ownership rights until so). The 'Considerations' of these call options payable at a rate commensurate with an EBITDA multiple calculation taken from other automakers' 'average reference EBITDAs' though not to exceed the FIAT multiple.

Thus as the FT highlighted, it would be in FIAT's interest to favourably manage its EBITDA and so share-price relationship at a lower-value to latterly pick-up the Chrysler shares. Though this is far easier theorised than actually done, unless Marchionne has a truly prolific and well detailed plan to re-build FIAT's capabilities base - and so set its overall cost base – in close marginal alignment with its global revenue curve. Thereby intentionally under-cutting the Plan's Trading Margin projections for the next few years, perhaps with the implicit backing of Exor / Agnell-Sapaz and other Italian institutional share-holders who support his ambitious long-term 'bigger picture' ideology (this appearing the case given the choice of only trading both the new FIAT stocks only on the Milanese Bourse, although old 'SpA car' stock remains on Paris & Frankfurt exchanges). Part of the incurred cost-base of that ideology, that possibly intentionally tames margin spreads, appears to be the large 30% increase in European retail sites, these probably 'factory owned' to also take advantage of the gradual increase in commercial property values over the next 5 years or so.

As capital markets once again start to become jumpy, the deferring of could be a tempting tactic indeed. Since to do so would negate the need for heavy direct investment in the US prior to the market's TIV being seen to be truly steady, a new low-level but real concern that emerges on the back of recent worries about the contagion of national and regional debt. If these concerns do emerge as increasingly sound, or even appear to be from press reporting, the probable course with Washington consensus would be to focus upon S. America first and foremost, so building US aligned political bridges via FIAT-Chrysler elsewhere in the SA region. US foreign policy could well turn to generating a notion of the 'Americas homeland' much as it did in the 1930s with autos and cinema - especially so given seeming increasing US foreign relations discord with the rest of the world.

Given little opposition by Washington and recognised as a long-term industrial ally, FIAT could feasibly take its additional 15% worth of call options and start to 'walk-up' to a possible hefty 49% before the UST is fully paid-off, then acquire at relative low cost the remaining 2%. As was set-out in its initial negotiation with Washington prior to post Chapter-11 involvement, flexibility and freedom was baked into the arrangement.

Set within this macro-perspective is the central role of FIAT Powertrain (FPT) as a critical enabler to both FIAT SpA (Auto) and of course Chrysler given the obvious 'disadvantageous hole' it presently poses in relation to US and increasingly global CAFE regulations. As such it is an innate component of the new growth engine, for the company itself aswell as the American economy.

Particularly so, because the new FIAT SpA company can now 'play macro and micro tunes' with FPT. Firstly via its macro-promise of weighty FDI potential as itself seeks US growth and the desire to climb the value-ladder (so training the workforce), and secondly, the micro-ability to better manage the transfer pricing of engines and transmissions between FPT and assembly plants. This done through both 'purchase levers' of increased order numbers, greater direct control of FPT's own strategic course within a FIAT SpA strategic context, the ability to hard-bargain with its own now semi-remote FIAT Industrial supplier base, (eg Teksid for castings etc) and the opportunity to use such Italian-centric cost-cutting agreements as a pricing/service template for supplier deals elsewhere. This of course most pertinent to those agreeing to serve any new FIAT-Chrysler engine factory in the US, since FIAT could use its own counter-ploy of creating/expanding its FIAT Industrials production base in the US. It would be rationale to using the (AgCon) Case New Holland Company's tractor engine supply sub-division as a base location for any exploratory project team, given the close links between FPT and CNH engines. Even if though on surface inspection the specifications are technically very different, the engine procurement, build and test regime is essentially the same, so promoting the thesis for same-site or regional located car engine production

Thus whilst Autos and Industrials are publicly listed in Milan separately, to not leverage their inter-relationship in whatever way feasible is hardly creditable. investment-auto-motives suspects that Exor & Giovanni Agnelli e C Sapaz, seeks to maximise near-term exploitation of the AgCon element of FIAT Industrial, especially so for the CNH Company given its advantageous position as a high-value, high-demand US exporter, exploiting the FX differential and the present record-pricing of agricultural commodities and so sector interest in farm machinery. Hence FIAT's rebuttle of competitor AGCO's acquisition interest in CNH.

This then, from a prime FIAT shareholder perspective, would form a follow-on US cyclical play of initially AgCon and latterly Autos, using the shoulders of the former as a strategic enabler for the latter. In essence typical conglomerate behavior, but undertaken by a now 'loose' corollary.

The reality is that the 'singular head' of Exor, Giovanni Agnelli e C Sapaz actioned through Marchionne and his senior generals was always designed to provide the best of both worlds for a partially dismembered FIAT as it fights for its global future; a reality not lost on the market and industry observers.

However, the formal separation of Autos and Industrials – the latter now unprotected by Cars – theoretically gives the ability to negotiate greater BoM (Bill of Materials) flexibility for FIAT-Chrysler, not just from the Powertrain value-chain, but across the full stretch of vehicle systems and vehicle build operations, so drawing better deals from Magneti Marelli and Comau. This applied not just in Italy, Poland, Turkey and other present build centres, but critically serving its US ambitions.

Those foreign ambitions, made clear by the automotive transplants - with the Bursa, Turkey factory now also acting as a contract production centre for Opel AG - set the dour but realistic tone for homeland FIAT workers. Although union rhetoric of resistance continues, staff undoubdtedly increasingly recognise their own squeezed position between a competitive outside world and the decline of political and social support from a previously left-leaning nanny state. Thus it is a given that Marchionne will win the day in achieving Italian reforms that reduce the FIAT cost-base, boost domestic productivity and so aid much needed European production & sales centre profitability.

[FIAT has established new companies to run both Mirafiori (Turin) plant and the Pomigliano d'Arco (Naples) plant, with only the FIOM union to be persuaded. The Mirafiori deal will be put to the vote of workers this month, but FIOM announced that its members will down tools for eight hours on January 28 against the separate agreements; largely seen as an symbolic but essentially empty protest to save face].

Thus in Europe FIAT is making progress, but the question remains as to if this progress will be undermined by the dark near horizon of future EU car sales, FIAT perhaps more prone than any other Euro-manufacturer given its overt reliance on the economic fortunes of Italy and its contracting Mediterranean neighbours (the now infamous 'PIGS'). Thus the Italian efforts, whilst worthy may only serve to keep the company's European operations' 'head above the water' in the short and medium term.

As is well recognised, the new FIAT SpA (Autos) must achieve turnarounds and marked progress in all its global operations, this not did-counting profitable cost-centre of Brazil and other portions of S. America, which have served as the cash injectors for the company over the last few years. As their economies slow due to slightly declined commodities exports to China/Asia, so the unit margins of present production will be proportionately undermined, thus requiring ever tighter production scheduling and reduced overheads to match prevailing demand, this undertaken as the slow-down is used to plan and build a second Brazilian factory in Pernambuco between 2011-14, adding further capacity to the 800,000 units currently available in Minas Gerais state.

The all important 5 Year plan presented by Marchionne in April 2010 was extremely well timed, riding the buoyant sentiment of capital markets that had re-bounded at an amazing rate over the previous year, driven partly by 'disaster-avoidance relief' and partly by pure rally speculation. Thus impeccable timing with the use of the last 8 months to tell the 'FIAT separation story', illustrating the consummate professionalism of himself, his team and more pointedly FIAT's investment banking advisors which were able to 'read' the recent period; and taking the opportunity to exploit that window of opportunity when presenting the new FIAT SpA and FIAT Industrial companies.

[NB Dow Jones reported on 13.12.2010 that both companies had signed a EUR4.2 billion financing package with a group of banks, the Italian stock exchange filing stating that the package includes a three-year Euro1.6 billion revolving credit facility with a syndicate of 23 banks and a Euro2.4 billion term loan with a one-year maturity and a one-year extension option, which is not syndicated. The monies used for 'general corporate purposes' and working capital needs. The operation's lead arrangers and bookrunners were Intesa Sanpaolo SpA's Banca IMI SpA, Barclays Bank PLC's Barclays Capital, BNP Paribas, Citigroup Global Markets Ltd., Credit Agricole, Societe Generale, Royal Bank Of Scotland and Unicredit].

That April 2010 plan set out the challenge and opportunity for FIAT Group, the 2010-2014 period planned to see the Group Balance Sheet is planned to move from holding a Net Debt of Euro>5bn, to provide a Net Cash position of Euro3.4bn by 2014. This driven by Group Revenues planned at a CAGR of 13.1% per annum, giving Euro93bn in 2014, Group Trading Profits rising from 2.2% in 2010 to 7.3% by 2014, and providing a Group Net Income of Breakeven in 2010 and Euro4.9bn in 2014 giving an EPS of Euro3.80 to investors.

For Autos alone, the '6 Pillars' of the Plan are:
1) European TIV rebound to pre-crisis levels by 2014 (16m cars & 2.2m LCVs),
2) Optimal use of FIAT-Chrysler facilities without fiscal drag of new plant CapEx.
3) Full integration of FIAT & Chrysler product portfolios
4) Commitment to develop Alfa Romeo as a Premium 'full line' brand.
5) Strong growth in Latin America
6) Optimal allocation of product development (costs) between FIAT & Chrysler.

Present conditions indicate that:

1) the European TIV will not rebound to pre-crisis levels given the consumer demand ramifications created by the sovereign debt crisis, any new TIV buoyancy to be seen in Germany, France, UK and Scandinavia, which will see their 'national champions' prevail due to renewed nationalistic attitudes and improving wholesale credit conditions available to and homeland and major German, Japanese and Korean producers. Thus creating an environment for a sizable 'FIAT Fight' as VW, BMW, Renault and Ford seek to increasingly quash the squeezed European abilities Opel and FIAT.

2) Production facility optimisation is predominantly aimed at Europe as part of that 'FIAT Fight', utilising restructured FIAT plants to add Chrysler product assembly (eg Lancia-Chrysler) and so improve European capacity utilisation, with added ambition of producing high-margin D-segment cars to boost overall per unit income levels. Thus concentrating D-segment production across 3 brands (including Alfa Romeo). Ideologically, the 3 brands mimica 'near-luxury' perceptional positioning akin to that of Mercedes (Chrysler), Audi (Lancia) and BMW (Alfa Romeo). Though this value-driven era indicates a plausible strategy, its seems inevitable that this effort may only be relatively successful for Alfa, by reducing R&D and production costs, because Lancia still remains ostensibly a niche brand, whilst Chrysler's European successes have been lower volume 'trad-character cars' such as PT Cruiser & 300C, which is now passe, thus providing the new conventional range with little European attraction. Thus the 400K per annum target for D-segment cars – so boosting margins - presently by 2011 standards at least appears untenable.

3) Integration of the FIAT and Chrysler product portfolios is a prime requirement, especially so relative to new model generation in B and C-segments. This will be the crux in deploying new product/brand faces that span broad market segments and geographies with a plethora of well-targeted vehicles. Whilst an obvious goal, the critical aspect will be execution, both in terms of direct product appeal, the overall project and unit costs and critically the need to demonstrate much improved 'quality', these ideals of course often at odds with each other as focus on one or two elements undermine the other. Whilst the FIAT baseline capabilities in all areas have improved over the last decade, the ability to deliver a polished triumvirate for itself and Chrysler remains questionable, though the opportunity has clearly arisen. Best in class global learning from both the Japanese & Germans should have been baked into the co-creational development process to ensure proportionate success-factor criteria is demonstrably integrated into this effort, Though it is appreciated that FIAT cannot easily replicate the sophisticated (decades long) technical strategy path which both its competitor nations have innately build-into their dual aspect - quality improvement & simultaneous cost-amortisation - design and production methodologies..

4) The commitment to develop Alfa Romeo as a Premium 'full line' brand is as Marchionne well knows key to the future success of FIAT-Chrysler. Having enjoyed success previously, the flailed demand for Alfa in recent years a consequence of its direct exposure to the peaks and troughs of the economic cycle in all regions and the need to re-enter B & C segments with credibility. Mito and new Guilia have achieved this, with encouraging initial sales figures. Yet this necessary strategic action to enter more mainstream segments also re-orientates the perceptional centre of gravity of the brand at a lower-level, this a consequence of the necessary reaction to macro-economic headwinds. But also notably a disadvantage avoided by the premium German marques since they introduced their B and C segment cars during more boom times when D and E segment cars maintained demand and so held their centres of gravity. This means that Alfa Romeo must add yet greater impetus in its D, E and coupe, cabrio and sportscar efforts as well as maintaining its mid-car variant expansion (hitting the US in 2012) to be seen as a truly belonging to 'premium'. An unfair result given the effort and success previously engendered but a true reflection of its challenge, especially so for credible US re-entry and impact in China, India and Asian markets.

5) Strong FIAT brands growth in Latin America – seen in the near-term - is perhaps the central element to maintain the investment community's belief in new FIAT SpA. Any lost advantage will be viewed dimly by analysts given the historic stronghold and so the accompanying spring-board effect, especially pertinent as the small yet meaningful economic headwinds facing Mercosaur should be a time of exploitation for the strongest in the region (ie FIAT, VW and Ford). Here lies the importance of the B-segment's New 'Novo Uno', created with Latin American functionality 'squarely in mind'. Though cosmetically intendedly very 'naive', to provide broad appeal, its SUV-esque overtones and higher-ride provide for an effective 'bang for the buck' statement and should engender effective Brazilian feeling equating to almost that of a new national car given its indigenous design remit.

6) Allocation of product development between FIAT & Chrysler to yield optimum cost. This seemingly the strong basis rationalisation of NPD work, pointedly indicating that C-segment being predominantly designed and manufactured in the the USA / NAFTA region, presumably given the generally smaller per unit margins based upon the level of NAFTA domestic sale volumes and the idea that the US$ will resist inflation so as to offer worthwhile export opportunities if deemed fit. This also indicates the 'theoretic reasonableness' (as seen indicated in point 2) that the higher priced lower volume D & E segment models can off-set a higher project and unit cost base relative to FIAT's own Italian competencies with more advanced large cars (eg Maserati, Ferrari) aswell as the opportunity for Pan-European JVs, aswell as an intrinsically more sophisticated European 'premium' supplier base.

Thus the theory of the presented case underpinning the 5 year plan is hard to fault, as it appears the most – possibly only credible way forward for FIAT's growth and survival – hence Marchionne's belief and gusto. A real concern however is just how well placed this necessary demonstration of confidence actually is given the business's strategic contexts at both macro and micro levels?

After a disasterous 2008, FIAT's efforts in 2009 – boosted by massive European green-car stimulus packages – were salvaged, and it went on to enjoy the benefits of a downsized, leaner commercial entity in 2010.
Q1 2010 saw Auto's Revenues up 20% YoY to E7,334m and saw Auto's Trading Profit improve sevenfold to E196m. (NB. when grouped with a sizable CNH contribution and others saw Group Trading Profit returned into the black at E352m, and Group Net Loss reduced to E-21m (from E-411m)).
Q2 2010 saw Auto's Revenues up 6.7% YoY to E7,927m and Autos Trading Profit improve 18.9% to E270m. (NB. when grouped with CNH contribution and others saw Group Trading profit reach E651m, twice the previous Q209 period, and Group Net Profit reach E113m.
Q3 2010 saw Autos Revenues up 1.3% YoY to E7,090m and Autos Trading Profit improve by 1% to E210m. (NB when grouped with CNH contribution and others saw group Trading profit reach E586m, up 90% over Q309, and Group Net Profit reach E190m)

As depicted here and (highlighted by the FT) the Non-Autos portion of the then combined conglomerate offered the greater part of the trading profit boost given its much smaller revenue size, demonstrating itself to be proportionately greater value than Autos, hence its greater MarketCap valuation when floated.

However, what is of greater concern for Autos is the ability to match 2010 sales and income figures given the repeal of government stimulus measures which so helped Q3,Q409 and Q1,Q2 2010 and the dousing effect of hard-hit consumer confidence on as a result of constrained national budgets and its reduced support for primarily state related but also partial private enterprise, employment over 2011. The beginning of that hit may well be seen in the Q4 2010 sales figures reported on 23rd January, which ordinarily would have a contraction effect on FY2010 - precursing dashed expectatencies for a strongly continued Autos rebound in 2011.

Yet countering expectation, FIAT SpA appears to have micro-managed its reaction to events by recently announcing raised guidance for the fiscal year 2010, expecting to report FY 2010, Revenues in excess of E55bn (up from over E50 bn), Trading Profit a minimum of E2bn (up from E1.1bn) and Net Profit of approximately E0.4bn (up from breakeven). The exact details of how this is achieved will no doubt be examined carefully.

On its new floatation day of 3rd January FIAT SpA climbed 5% or so (having corrected to approx E7 on the Paris Bourse) and has traded effectively flat over the following 3 days, now sitting at E7.48 whilst the market takes time to properly re-analise the company's potential.

As a contrast FIAT Industrial opened on 3rd January at E9.03 and closed the same day up 3%, fell to E8.68 two days later and now stands at a rebounded E9.05.

The one question that analysts will be asking themselves is to what end that shared E3b loan will be used between the 2 companies, especially assuming a pattern of Revenue and Net Profit divergence between Autos and Industrials. The use of a near 0% interest loan given by Industrials to Autos at some future point, perhaps mid year, might - if found in both companies' Q3 2011 accounts – be very telling indeed.

But ultimately the need to split Autos and Industrials always made sense as we enter a very new age which presently proffers at first sight such a distinctive and profitable cyclical play for the Agnelli descendents and other follower type investors. The real interest however lies in the organisational depth and schedule timing of the operational and financial inter-plays between the now distant siblings.

The decision to 'divide and conquer' remains powerful and prescient, the only question for FIAT SpA is the ability to manage the perceptions of non-core / latter-day investors that sit outside of Italy. Since Marchionne sits as the notional FIAT Empreror, his personal ease and a wardrobe of trade-mark jumpers will need to appease any hint – warranted or not - of FIAT SpA's possible short-term 'nakedness'.

The holiday season over, the new year dance has begun, but a slow, steady Milanese Waltz - however attired - is undoubtedly more preferable to unsure present European capital markets than any immediate flirtatious Parisienne Burlesque. Yet, the inclusion of any Latin Waltz choreography would also be welcomed if much more than simply a 'Vida-Loca' tease.