Stock Price (Paris @ 23.02.2010, 16.50 GMT)
Ordinary : Euro 30.43
In conclusion to the overview of the 'Western 8' automakers, Renault is put under the spotlight, having announced its FY09 results on 12.02.2010.
Renault-Nissan was instigated by Carlos Ghosn in 1999, to effectively create a 21st century auto-manufacturing model which had both global breadth across markets and segmentational depth within these markets. An entity that had mutual synergies & compliments, an entity which operating with “twin-pillars” could maximise the advantages of cross-shared ownership and so dual determination without the political and operational problems of fully fledged integration.
Mutual platform & systems rationality was of course the primary driver, which along with the integration of Samsung Motor, assisted in the initial years a dramatic cut in development costs and economies of scale which enabled greater production flexibility and critically cost-leverage over a broad basket of EU, Japanese, Asian and South American suppliers, all intent on 'coat-tail growth'.
The productivity improvement of platform sharing (Renault-derived on B & C segment, Nissan-derived on D, E & 4x4, Samsung-derived on niche) undoubtedly assisted on cost-savings, a level of intra-corporate competition intentionally created by Ghosn in the search for efficiency, but also pragmatically sharing best practice and learning across the empire. All though was not initially rosy, as Nissan was forced to adopt Renault sourced systems on small cars, the quality gap between the 2 marques became evident, Nissan's reputation suffering at the customer level with more 'things gone wrong' whilst under warranty, which cost national sales companies and Nissan HQ new parts costs, dealer-fit charges and internal demands that its parent Renault design to a quality standard not a cost standard.
The difference was wholly evident in earlier generation product comparisons too. Though Nissan had had good quality, its general cosmetic appeal had been lost through successive spirals of conservatism – itself driven largely by the contracting and so conservative Japanese domestic market in the 1990s and a loss of direction in the US. In direct contrast though, Renault had been able to overcome its almost endemic sub-par general quality standards by focusing upon the 3 critical customer deal-winners of the time: aesthetics, safety and credit. That focus on differential styling, NCAP test star ratings (tending to BIC) and easy access credit, firstly turned around the UK and German consumer's perceptions of Renault (even if only relatively superficial) and secondly attracted more people (of varying credit status it must be said) to drive away.
But of course Renault's claim to fame throughout the 2000s was its re-generation of Romania's Dacia as perhaps the core CEE brand, with commercial reach into selected western Europe countries and into the 'Near East'. The Logan in its variant forms and Sandero now account for nearly 257,000+ units pa in 2008.
[NB. though the dramatic CEE downturn will have significantly cut that number. Unfortunately although an inexpensive option for W.Euro buyers, the cars' mass, size and use of less advanced technology means that the loss of CEE Dacia sales have in all probability only been slightly off-set by western buyers given that it is not a 'scrappage scheme' contender. However Renault was well placed with its own cars in A & B segments].
That was the 1999-2007 success story, but of course as with its mass-market peers, Renault has been heavily hit by the consumer fall-out effect of the economic crisis, so reliant upon the French government's Euro3bn soft loan, and the demand-driver effect of EU nation-state scrappage schemes through 2009 and variously into 2010.
A paper based critique of annual and monthly YoY figures gives theoretical hope, market TIVs - thanks to incentives - showing a weak upward trend. However, the fact that so much government liquidity has been pumped into the EU and US car markets to seemingly stabalise consumption does engender the argument that once removed the downward effect may well continue, and data highlighting that approximately 50% recent sales have simply been pull-forward or indeed the opportunity jumped upon by opportunist (less scrupulous) buyers.
As highlighted in the FY09 presentation, Renault has been a visible beneficiary, its sales for the most 'flat' (hovering at a median average of 0.5%) across most of its international markets. However, the UK, Brazil, Turkey and Iran do show full-year slight losses, though for the UL and Turkey turning positive with H2 YoY comparisons. Thus as the year ended it was only Brazil and Iran in the red, and respectively only by 0.1% and 2.0% (Renault Iran consisting of just Tondar [Dacia] sedan & 'old' Megane). On a sales basis the company out-performed its peers as a beneficiary of the EU scrappage boost. The A-segment TIV increased 29%, whilst Renault gained 34%, whilst the B-segment rose 8% and Renault gained 12%. In the C-segment, whilst the TIV dropped -6%, its new Megane gained 15%. As a small-impact comparison that other segments (D/E) dropped -14%, whilst it lost -34%. However, as the EU's #1 LCV manufacturer it managed to beat heavy YoY segment losses of -30%, with a -24% loss.
As with all enterprises in the current climate, the company has been keen to demonstrate its recognised importance of liquidity and working capital.
Thus highlighted its H109 & H209 efforts respectively focused on initially securing delayed transactions to creditors (accounts payables) [giving +E486m] and latterly securing timetabled transactions from debtors (accounts receivables) [giving +E640m] (The use of any 'factoring' used, if any, was not given). Added to this was 'liquidation' of inventory stock [giving +E1,372m], plus further savings +E425m, thus proving a “WCR” contribution of E2,923m (approximately E3bn).
[NB it will not go unnoticed by many that this is of the same magnitude as France's 'soft-loan' to Renault].
Alongside the liquidity issue, is that of driven cost-savings given the loss of revenues. Carlos Ghosn having gained his nick-name as 'Le Cost Cutter' back in the late 90s, has a decade later, been required to once again lead that task with COO Patrick Pelata, and together they have had to be seen beating the income slide at fixed and variable levels. At a fixed level, 2009 was compared with 2007 and 2008 datum points, highlighting that the majority of fixed cost reduction for G&A and Manufacturing was extracted in 2008, whilst 2009 saw more punitive extractions across R&D, Net CapEx and Marketing.
Given the typical massive guzzle of the auto-industry's capital expenditure, such hard times are calling for a modified approach relating to core products and plant. With this approach Renault sizeably cut Net CapEx and the capitalised and expensed portions of R&D, leaving it -33% down compared to peak 2007 figures ('09: E3,108m vs '08: E4,342m vs '07: E4,631m). In contrast, G&A is down -20% over these 3 years.
Given the alternative annual focus on fixed-cost plant (hardware [2009]) versus people (software [2008]), it appears that a new cost-initiative may need to be made in G&A & Marketing in 2010, with moreover more efforts regards variable costs in these arenas as well as of course across production sites. Exact detail about how Ghosn/Pelata 'play' these initiatives to show YoY cost-savings (ie hardware vs software, and fixed vs variables) would be of great interest to the analyst community, though may of course be showing Renault's 'hand', beyond the cost-reduction determinant presented for variable costs.
YoY revenues were down approximately 11% (E33,712m) compared to 2008 restated figures (E37,791m). The critical operating margin fell from 0.9% (E326m) to -1.2% (E-396m) so down YoY by -2.1%. 'Other' operating income and expenses fell from E-443m to E-559m.
Net financial income and expenses down from E441 to a negative E-404m, so dropping E-845m.
'Associated Companies' fell from E437m to a negative E-1,561, so dropping E-1,998m (ie nearly E2bn). (This included Nissan E-902m – though pulling back well in Q3/Q4, Volvo Truck E-301m, Avtovaz E-370m, Other E12m).
Including current and deferred taxes (these staying relatively flat) and the Net Income for 2009 dropped from E599m previously to a negative E-3,068m, so down E-3,667m. Looking at Debt, FCF and Liquidity Reserves, debt levels have reduced YoY from E7,944m to E5,921m, cashflow now sits at 2,088m, and Liquidity (cash & commercial credit lines) has improved from E4.8bn to E9.5bn. Of the Debt, E1.1bn is payable in 2010, decelerating until 2013 when E1.4bn matures, but the real hit comes in 2014, when E4.1bn matures, the Government's E3bn, plus E1.1bn.
Renault's global market TIV outlook expects 2010 to show a -10% decline in Europe, -10% in EuroMed (Balkans, Turkey, NW Africa), “Stability” in S.America & Asia/Africa, and +10% increase in EuroAsia (Russia & ex-CIS states).
Renault states that even though 2010 will be tough it will show +FCF through 2010 due to:
1. “A gain of EU market share in declining TIV”
2. “Extraction of alliance synergies”
3. “Taking cost savings further”
4. “Sustaining a high level of WCR efficiency”
Of these investment-auto-motives believes:
1. “A gain of EU market share in declining TIV”
Renault will probably follow the typical French norm of within the matured EU of “buying market-share” (akin to PSA behavior) via maintained (or even expanded) capacity of plants - given nominal inventory depletion. The group's captured-finance house RCI able to play a key role in doing so given its stated good performance in 2009 and implicit backing from the French wholesale finance sector.
However, the strong product momentum Ghosn mentions, whilst on paper looks 'interesting' with cabrios like Megane and new Wind, will very probably suffer when put up to hard scrutiny...unless Ghosn has immediate suprises in store; which looks doubtful.
Twingo & Clio experienced sales boosts thanks to the scrappage scheme, but their innate conservative look, does little to separate them from the field, with new generation face-lifts adding little product appeal, hence the aforementioned Renault pricing power plays expected. Megane has performed and will sustain sales due to its point in its lifecycle, though without detail of internal forecasts business model expectation are hard to judge. The large cars will struggle as they have historically done. Critically, Renault has arguably over-filled the A-C segment with variants, many of which appear heavily overlapping in practical terms, even if not on paper, the plethora of MPV & 'Grand' (extended wheelbase) variants now either encroached by taller standard cars, or encroaching upon larger siblings. Thus, as with other makers desperate to fill niches, a level of product redundancy appears apparent as seen with the customer reaction to Modus, possibly repeated on a mooted Clio-Scenic (unless it proves the natural dimensional successor to Megane Scenic Mk1).
Planners have been desperate to create volume off of singular platforms to drive theoretical economies of scale, yet if production volumes do not actually meet market demand for forecast volumes, and product must must discounted on the dealer-floor then the validity of the planning exercise has been futile and ultimately for the investor, value destroying.
[NB the case of the “tail wagging the dog” has been proven all too real throughout auto-industry history, as the economic requirement for volume becomes the determinant corporate driver, not the attuned understanding of the marketplace true demand type and levels. Instead, as we see with French industry and previously US industry, volumes simply increase a manufacturer's in-market pricing power].
On the LCV front Renault tends to lead EU sales given its broad-span product portfolio from B-segment CDVs (car derived vans) right up to its class 7 HGVs and sizable dealer network. But the core products are the Traffic and Master, this latter van seeing model replacement this year. Renault has also maintained its manufacturing JV with Opel, assembled in GM's Luton, UK plant, and also rebadges product for Nissan Europe. Presumably Ghosn will be expecting the LCV and Truck markets to rebound from their heavy lows prior to proper traction in passenger cars in line with the economic upturn; when it eventually arrives, and will be directing RCI to prime business & fleet buyers with attractive finance terms.
Given present EU market constraint, Renault is undeniably looking for additional volume from the EM regions.
Brazil is presently 'flat' due to its own economic constraint caused by depleted commodities exports so whilst awaiting return, which is largely related to Chinese materials demand. As such, Renault like others is required to 'cherry-pick' its regional investment bets with the BRIC region during this global lull.
Russia, previously a rapid growth country has witnessed a heavy economic and consumer demand slump, 2009 car sales 50% down YoY. Although Ghosn was put under pressure by Russian production partner AvtoVAZ, he rightly did not cave-in to demands for additional liquidity, even at the threat of Renault equity dilution.
India saw Renault's relatively arrival late compared to the Japanese and Germans, but since 2007 Renault formed its 1st Indian JV with TATA in assembly of old generation Trafic vans. A 2nd JV with Mahindra & Mahindra to produce the (Dacia) Logan in Nashik, Maharashtra (at 50,000 units pa) and has invested in Chennai (to produce 400,000 units pa). A 3rd JV with Bajaj regards the concept development of a low cost “1-Lakh” car to compete with TATA's Nano. Thus it has set a synergies based template for car, van and truck JV's, aiding both the technical development of its Indian domestic partners and provides market access for its own indigenously manufactured and imported vehicles. Critically, the Parisian Board will be closely watching India to maintain its growth path as the other BRIC nations falter or slow.
China, and the Dongfeng-Renault relationship ran into trouble in mid 2009 after supposed Renault product defect problems. The original planned production plant in Huadu, Guangzhou City has been handed to Dongfeng-Nissan, probably to enable Nissan to maintain its sales lead. Although Renault cars will also be built there in realistically relatively limited numbers. Although Renault has been present in China for some time - though not as long as PSA - the ongoing capacity constraint regards domestic production leaves the company at a severe disadvantage compared to other, far better market-engrained western competitors, and so has in effect to catch-up with EU peers like the almost iconic VW (and sub-brands) and GM and late arriving but quickly established Japanese.
Thus for the present, although Renault may gain a larger share of the shrunken EU cake in the short term, it seems that Renault's primary BRIC focus is set upon India.
2. “Extraction of alliance synergies”
A decade since formation of the Nissan alliance and synergies have undoubtedly been captured, these opportunities creating challenges of their own both in-house and externally in the markeplace – everything from the previously mentioned operational problems of Nissan product quality defects through to at a strategic level the avoidance of product clash in regions and segments. But overall the alliance template created has worked inside the corporation's twin organisations, culture clashes largely avoided and efficiencies created.
Such lessons learnt though on a smaller scale, and the organisation of management inter-faces somewhat different, should serve the Avtovaz, TATA, Mahindra, Baja alliances and in time develop influence at corporate and perhaps political levels at Dongfeng & the regional PRC Administration.
In short Renault is having to create an evolved corporate template that is perhaps best described as a halfway house between its Nissan experience and that of smaller-scale regional partnerships such as Oyak-Renault in Turkey, or IDRO-Renault in Iran.
These developments are of course promising and already bearing fruit, such as Logan's reach into Asia. But the type of synergy-seeking will be very different to the technically based, new platform programme work achieved with Nissan – work that is well-structure and attains obvious cost-savings results. The synergies sought with its new partners will be far more market driven, and less 'controllable', with Renault having to diplomatically balance its 'ownership' of product and process with the political and cultural demands of its partners and the typically more volatile consumer demand of EM regions.
3. “Taking cost savings further”
This is perhaps the most visible sign of Renault's dedication to its future, competitive shape.
Though Renault shows a declining R&D and CapEx ratio relative to revenues, it seems increasingly hard to see exactly how it will attain the levels of cost savings without jeopardising future competitiveness. That is unless it possibly demands that Nissan become the major R&D extoller, and simply buys-in at cost the evolved technology with the hope of a maintained, and indeed increased, Yen vs Euro&Dollar differential - so assisting Nissan EU & US exports.
It seems inevitable that Renault is hard-pushed to create a more cost-drive value chain using BRIC located suppliers that are able to supply locally assembled cars (ostensibly the standard B-low cost Logan platform) with production capability for technically superior yet similar parts for EU-specified unit sales. This then provides R-N with a BRIC supplier base that is already effectively a generation ahead in terms of the ability to supplying for next generation local cars. And so Renault appears to have continued its philosophy of 'step-ahead, lowered cost' components sourcing, this created by the technical & procurement strategy template put in place originally for Logan and its CEE markets.
Thus the theory has been proven by CEE Logan and to an extent in Brazil, and so is shown to be viable. But the internal trends of these very different BRIC regions are very different to the CEE where Dacia was first and dominant. Renault cannot ensure such market and industrial dominance over the BRIC regions, especially so given its presently low capacity/volume levels. Instead of replaying the CEE model on an isolated basis in per region, it may need to consider creating a BRIC network of suppliers as a short-medium term solution, depending upon local BoM costs. Sub-assembly costs, FX relations, global shipping and local storage costs.
In short it will be harder to replay the Nissan or Logan cost-efficiency models given less control of a softer, more volatile macro-context.
4. “Sustaining a high level of WCR efficiency”
The creation and protection of Working Capital is of course a key determinant of long-term survival and success in such fragile economic times. For car-makers operating with global reach and so open to a broader palette of macro-economic influence it is vital. Thus no surprise that Renault highlights WC as a prime corporate lever, Ghosn knows that's investors wish to see that prime indicator of operational health.
But in these extra-ordinary times, given that Renault infact reached-out for the much needed $3bn aid-package, the present level of WCR seems far less credible, since it was not wholly the result of managerial acumen or astute capital management. Instead the capital markets could effectively assume that Renault (and PSA) knew that the socially-biased government as a large shareholder would ultimately come to its rescue and so as a consequence were previously more lax regards the honing of a truly efficient WC attitude. Had it been, it would perhaps not have required the E3bn, or if so, not as much.
Instead it is seen to be on par with PSA when the 2 companies are intrinsically very different, and demonstrating an awareness of “WCR” importance now seems almost a case of “closing the stable door after the horse has bolted”, if not verging on the hypocritical.
Instead it should perhaps highlight its ambitions via a more pertinent investor indicator Whilst BMW typically focuses upon RoCE and PSA now highlights its focus on Operating Margin, Renault will need to find an equally convincing 'financial hook', beyond still important but diminishingly so liquidity levels.
Vying against PSA on the Operating Margin measure, which itself is set against the “top-5 benchmark” could be that hook to regain credibility and a guide of relative future performance.
Renault will have to fight hard in Europe and Brazil whilst awaiting its 'Indian Summer', so should be seen to avoid simply buying market share via reduced margins; for that is a tactic that more investor-friendly companies (eg VW, Daimler, BMW, Honda) learned to avoid long ago.
In that respect relative to these 'capital-cautious' times, Renault must not be seen to be a quasi-nationalistic enterprise, but instead the truly globally capable, globally integrated, fiscally prudent blue-chip Ghosn envisaged.
The partial sale of Renault F1, and intended real-estate divestments help to illustrate the required mentality, but it must be seen not just in the Board's tactics or intentions, but created throughout the organisation down to a change in the innate reliance upon Renault's volume muscle and accordant pricing power.
Showing posts with label French Scrappage Scheme. Show all posts
Showing posts with label French Scrappage Scheme. Show all posts
Tuesday, 23 February 2010
Thursday, 18 February 2010
Company Focus – PSA Group – Poor Hunting In the Lion's Den
PSA Group Stock Price (Paris @ 18.02.2010, 23.00 GMT)
Ordinary: Euro 20.41
PSA was formally created on the verge of 1974 by the sheltering of the then flailing Citroen brand under the Peugeot umbrella. A few years later, with sound finances and corporate optimism Chrysler Europe was integrated into the group, yet overburdened by complexities and cash drain the previous memory of essentially an independently run and successful Peugeot, the company was to see 5 years of blight between 1980-85.
This episode taught the Peugeot family much about the importance of independence, created by the ability to 'run lean', the core enabler to do so the philosophy of a 'pick & mix' technical and product strategy with external parties. That formula re-built the company through the 1990s, and by the late 90s was seen as the grandmaster of reduced level, high impact CapEx capability, common platform & components between Peugeot & Citroen enabling at the time impressive margins for such a marginal player.
Having expanded its sales of affordable, youthful cars to a plethora of new customers throughout the age range, broadened national markets (Germany & the UK being prime volume regions), and created joint ventures with Iran and China to enter new markets using amortised platforms (405 & ZX respectively) cracks started to appear in 2006. Folz's 11 year reign came to a close in 2007 when the ex-Airbus Streiff was appointed, but reportedly his style created personality clashes with the family and management led to his dismissal quickly after the loss-making FY08 results were announced.(To present a counterpoint, Streiff's unpopularity could have also been a case of 'hard truths' not wanting to be heard and intransigent management). Into the breach stepped ex-Corus man Varin, presumably the Peugeot family and others believing his more consensual style and deeper knowledge of the upstream value-chain given his steel industry acumen would be of more immediate and consequential assistance.
[NB investment-auto-motives believes that the Peugeot family's possible intent is to create a far greater inter-connected, conglomerate model Chinese PSA division. Able to drive down raw material costs through a PSA owned value chain and critically better orchestrate flexible transfer costs between sections of the vertical chain to suit the Chinese & regional economic cycle].
The recent report of perhaps PSA's worst ever financial year - after previous year on year losses – demonstrates the urgency of re-organising the company as a viable entity. In a recent Financial Times 'View From the Top' interview, Varin appeared 'upbeat' to the camera about the Euro3bn loan (at 6% interest) given by the French government (as with Renault) to effectively bail them out of the woes generated by the collapse of credit and consumer markets. Varin was keen to focus on the recent rise in capacity utilisation, something he knows is a key metric to financial analysts, stating that by H209 it was running at 92%, yet also oxymoronically stated that capacity will be cut by 25% between 2008-2012. This we suspect is simply the consequence of only slightly reduced production set against a modelled forecast of 2012 global TIV demand, thus the 25% figure appears somewhat concocted.
Given that to date the EU region is well over-capacity producing 14.5m units versus 12.5m sales, and that only one (Belgian GM) plant has been shuttered, surface impression is that the Euro3bn aid is indeed being used to maintain PSA status quo, presumably in the hope that when the economic uplift returns and so car-demand returns, PSA will be in a strong competitive position But future EU TIV looks 'flat' to 2020 and probably beyond; thus no case of 'a rising tide lifting all boats'. Until that slight uplift to the perpetual 'flat-line', as the EU's #2 largest auto-maker strengthened with state aid it will seemingly fight its way forward to that point – possibly via a price war. By similarly producing an almost a flat YoY volume of cars in the short-term will increase levels of product and plant amortisation, which in turn provides a per unit cost reduction, and so enable price reductions on the dealer floor. Thus a case of pricing-power to buy market-share also assisted via generous credit if feasible via PSA Banque and additional 'goodies' incentives. Thus PSA re-enacts its downturn play-book, as we saw with the extended run-out strategy of 206 to claw-in sales.
Given PSA's stature as now a pseudo-nationalised entity, Varin may well see this European market scenario as the only one available given the envelope of conflicting forces he must operate within -ie government paid job-creation vs structural cost cutting.
That is the present-day's pragmatic look behind the still well stocked dealer inventories and PSA's own 'shop window' consisting of an attention grabbing, almost intendly distracting, sizable concept car family stretching across is 2 core brands and newer DS sub-brand. The reality behind the glitz looks far less glamorous, and demonstrates that the company must continue to properly address its cost-structure, product direction, product mix /cadence and overall brand & product(s) appeal.
As regards its cost-structure, little looks achievable in Europe given the implicit promise to keep buoying French economy, only perhaps feasible in the CEE and in tandem with its Toyota JV on its A-segment cars (107/ C1 / Aygo). Indeed we suspect that PSA will be heavily reliant upon Toyota's present position and ability to re-negotiate broad parts cost savings given a combination of its woes due to its massive volume recalls, and the presumed intent to only slightly change the basic specification of the platform and variant cars. Better PSA cost-savings look probable elsewhere in the EM regions, as scale efficiencies are built-up and once again amortisation plays a critical role in BoM (Bill of Material) reduction.
Product Direction will be key as it tries to balance the continued phase-by-phase roll-out of aging product over various regions, against now very immediate, well gleaned consumer perceptions.
The Corporate Forward Plan as presented three months ago on 12.11.09, sets out the broad PSA strategy template, which derived from PESTEL trends highlights the need for:
1. Global Reach given growth & demographics in EM regions (esp Asia)
2. Urbanisation demanding cleaner vehicles
3. Convergent Worldwide CO2 Regulations
4. New Products & Services to cater for changed global demand.
Whilst PSA is undertaking typical CO2 reduction initiatives regards next generation vehicles (mass, aero, powertrain efficiency, etc) on ICE cars, it also states that it wants to attain 20% market-share for Hybrids and EVs by 2020, its effort promoted by demonstrators such as its diesel-hybrid and its rear axle e-motor as integrated into the front ICE engined 'PROLOGUE Hymotion4' SUV. It presents a catalogue of eco-solutions ranging from engine capacity downsizing (industry norm) to 'start-stop' to L-ion EVs. And like Daimler et al, divides car usage types into 3 categories: “Urban, Peri-Urban & Polyvalent”.
As part of what it lauds as an alternative approach - “new services for new customers” - it offers 2 types of EVs, one homegrown in the form of an electric CV per brand (Partner & Berlingo) and what is essentially a badge engineered Mitsubishi MiEV, (iOn & C-ZERO). History and circumstances indicate however that such efforts may well be more of a PR exercise to keep PSA in the competitive fray. Since PSA has offered electric CVs in the past, such projects being short-lived to the high-cost of such niche volume vehicles being largely restricted to temporarily cash-rich, pro-green municipality customers. And the Mitsubishi e-car offered in its 2 variant forms has had only moderate success in homeland Japan and is yet to undergo market-trials in Oregan, USA. Thus the 2 PSA cars will be in reality market-trial cars, and so any production forecasts presently given must be treated with caution - ie 100,000 units over next 5 years.
[NB that 20,000 pa figure represents only 0.61% of the 3,260,400 annual sales (2008 figure) and critically also includes the E-vavacity e-scooter, which investment-auto-motives' suspects makes up a large percentage of the 100,000 unit estimate. Thus the direct car contribution appears minimal].
Also of note is the exploration of creating an in-house (variable) vehicle rental-based business model, that follows in the footsteps of other French transport initiatives such as the bike-based 'Velo'. Under the name of 'Mu' it offers a Pay-Per-Use model via a pre-paid client card, and offers various 'fringe' vehicles relative to use; suggesting use of a 3008 for weekends, e-scooter for immediate use, (e)bike for half day ride and baby seats or a van for occasional need. This type of complimentary business model has been a constant byline in the industry, ranging from Ford's previous ownership of Hertz to its similar 'Indigo' exploration.
As a multi-vehicle manufacturer and with changing EU mobility habits, the management team has struck a chord with the modern green psyche. Its prime aim of course to generate up-front liquidity via the pre-paid cards. However, as a purely commercial enterprise it runs up against fairly entrenched competition, and would need to be willingly backed at scale and done so at a probably loss-making level for some years until it gained public recognition. Also the business fundamentals of appropriate cyber-physical retail channels, inventory logistics management etc are complex, with what may seem parallel case studies (such as Velo) generally simpler and critically typically commercially fudged given sunk-cost government funding for social good. Indeed such an initiative may well have been required for the French Euro3bn soft-loan. Hence the 2010 roll-out in Paris, Berlin and elsewhere (not yet announced) will be closely watched, and analyst/investor quizzing of the business's very basics should be justifiably expected.
Hence, whilst useful PSA 'feel-good' stories, the EV and Mu initiatives must be considered as icing on the cake. What matters is the business ingredients, mix and quality of the fundamental PSA cake across the primary Autos division and as an adjunct the health of its other smaller divisions: Faurecia, Gefco, Banque PSA Finance, Motorcycles, P-C Moteurs and Process Conception Ingenierie.
Unsurprisingly, the recent 10th February FY09 presentation was one of optimism, highlighting the ongoing turnaround in fortunes especially given the H2 sales lift. EU passenger car market-share was up by 14.3% in Q4, and 13.7% for full year, EU commercial vehicle sales was up to 22.2% market-share and global market-share was up to 5.1%. But in total, units sales were down 2.2% YoY to 3,188,000 (assembled & CKD) units. As a CO2 count, of these approximately 1m emitted 130g/km or less, and of those, 750,000 emitted 120g/km or less.
But importantly, over 2008/9, PSA's previously broadly considered unique sales proposition by the capital markets as a low CO2 car company stalled in comparison with fast-approaching competitors.
In short PSA due to whatever restrictions – technical, managerial etc - did not best utilise the previous lead it had, largely we suspect because of the necessary 'extended amortisation basis' the business presently runs upon (eg 206+).
[NB investment-auto-motives made note of this in 2008 and due to degraded PSA product appeal – ie 'guppy mouth' fronted and pick & mix styled Peugeots, style over substance Citroens and a cobbled DS proposition - did not share the general enthusiasm for the group's YoY prospects, and notes that in part new sales have been a result of poor quality vehicle returns, displeased lease-plan buyers tempted into new Citroen sales via price and credit incentives by dealers to 'shift metal' Thus, the seeds of PSA misfortune were being sewn in 2007].
However, as of today, all recognise the role that the Euro3bn soft-loan played, apportioned to reduce net debt from E2.9bn to E2bn, assist working capital and probably allow unhindered transfer of large stock inventory sales to be booked more or less directly into positive FCF (of E300m).
However, such financial engineering could not stem the major loss of E1.161bn.
In the face of such losses the age-old, auto-industry reaction to creeping value-destruction is typically the search for scale-efficiency. A route well understood and exploited by Renault given its decade-long relationship with Nissan. Understandably given its failed past attempts to build volume in this manner (ie 1977 with Chrysler Europe) PSA looks to build such scale and savings via technical alliances as it has generally successfully done (though less rewardingly in recent years) and we suspect the idea of building greater self-styled industrial verticality in EM regions to access both growing markets and so volume scale, and simultaneously self-direct the value chain.
This is a longer term ambition, and whilst being slowly built PSA should look to the probable advantages of creating yet further alliance relationships: with as present possibilities: BMW, Mitsubishi and Toyota.
The BMW idea, long mentioned on the grapevine, would theoretically provide BMW with cross the board savings on Mini and/or a tentative 0-series, something it would well appreciate, and provide via joint engineering PSA with improved product quality...possibly leading to improved in-house NPD acumen if it could adopt BMW's rigorous methodology. As Eurozone members there would be no fluctuating currency problem to better budget by, and such an alliance would politically assist the ideology of a united Europe, a hot topic at the moment. Indeed the venture could possibly enable low-cost EIB funding if it could be seen to have effect on the global stage.
A second option is to create a parallel model to Renault-Nissan, very probably with present ally Mitsubishi, given its small car capability (inc e-vehicles), the Japanese company's need for medium car leverage vs Japanese peers and its 4x4 competence (as seen with the 3008 project). Moreover such a R-N parallel (PSA-M) could indeed be cross-linked into Renault-Nissan on a project / regional basis, providing a bigger strategic possibility envelope for all companies involved with either direct lateral, indirect vertical or indirect diagonal strategy options. This would presumable also assist with all the individual party's needs to create a sustainable base to credibly compete in the upscale premium sector. (ie PSA to piggy-back Nissan's Infiniti).
As an alternative is the possibility to create a stronger alliance with Toyota, building upon the present A-segment JV, thus able to 'piggy back' Toyota's own massive cost-down achievements. Here PSA's Varin could feasibly lead steel procurement talks with global steel mills, and Toyota could lead component talks to achieve dual gains.
Varin's presentation highlights his desire to mimic the median financial achievements of the top-5 best performing industry players in hitting a 6% operating margin of E3.3bn on E50bn annual turnover, which when questioned by the FT was indicated as between 3-5 years.
Today, PSA sits in a somewhat precarious position running at 1% “recurring operating income” (E550m on E54.3bn turnover), so to fill that aforementioned profitability gap by 5% appears a huge task within 4 years. Of the E3.3bn required, he states 30% will come from Sales & Marketing (as we read typical incentives tied with vehicle replacement/upgrade offers), 15% from high growth markets (ie China, India, Brazil, Russia & RoW) and 55% from Production, Development and SG&A.
This latter section representing 55% suggests there is much fat-reduction to be had, and it is here that investors will want to see vital transparency. To achieve that level of uptick suggests that Mr Varin already has PSA's primary steel procurement contracts already signed and future technical alliance's secured, possibly with French political help, even if he is not letting on about any procurement coups today. This though is but inference, much more needs to be seen to give the capital markets true assurance.
Ordinary: Euro 20.41
PSA was formally created on the verge of 1974 by the sheltering of the then flailing Citroen brand under the Peugeot umbrella. A few years later, with sound finances and corporate optimism Chrysler Europe was integrated into the group, yet overburdened by complexities and cash drain the previous memory of essentially an independently run and successful Peugeot, the company was to see 5 years of blight between 1980-85.
This episode taught the Peugeot family much about the importance of independence, created by the ability to 'run lean', the core enabler to do so the philosophy of a 'pick & mix' technical and product strategy with external parties. That formula re-built the company through the 1990s, and by the late 90s was seen as the grandmaster of reduced level, high impact CapEx capability, common platform & components between Peugeot & Citroen enabling at the time impressive margins for such a marginal player.
Having expanded its sales of affordable, youthful cars to a plethora of new customers throughout the age range, broadened national markets (Germany & the UK being prime volume regions), and created joint ventures with Iran and China to enter new markets using amortised platforms (405 & ZX respectively) cracks started to appear in 2006. Folz's 11 year reign came to a close in 2007 when the ex-Airbus Streiff was appointed, but reportedly his style created personality clashes with the family and management led to his dismissal quickly after the loss-making FY08 results were announced.(To present a counterpoint, Streiff's unpopularity could have also been a case of 'hard truths' not wanting to be heard and intransigent management). Into the breach stepped ex-Corus man Varin, presumably the Peugeot family and others believing his more consensual style and deeper knowledge of the upstream value-chain given his steel industry acumen would be of more immediate and consequential assistance.
[NB investment-auto-motives believes that the Peugeot family's possible intent is to create a far greater inter-connected, conglomerate model Chinese PSA division. Able to drive down raw material costs through a PSA owned value chain and critically better orchestrate flexible transfer costs between sections of the vertical chain to suit the Chinese & regional economic cycle].
The recent report of perhaps PSA's worst ever financial year - after previous year on year losses – demonstrates the urgency of re-organising the company as a viable entity. In a recent Financial Times 'View From the Top' interview, Varin appeared 'upbeat' to the camera about the Euro3bn loan (at 6% interest) given by the French government (as with Renault) to effectively bail them out of the woes generated by the collapse of credit and consumer markets. Varin was keen to focus on the recent rise in capacity utilisation, something he knows is a key metric to financial analysts, stating that by H209 it was running at 92%, yet also oxymoronically stated that capacity will be cut by 25% between 2008-2012. This we suspect is simply the consequence of only slightly reduced production set against a modelled forecast of 2012 global TIV demand, thus the 25% figure appears somewhat concocted.
Given that to date the EU region is well over-capacity producing 14.5m units versus 12.5m sales, and that only one (Belgian GM) plant has been shuttered, surface impression is that the Euro3bn aid is indeed being used to maintain PSA status quo, presumably in the hope that when the economic uplift returns and so car-demand returns, PSA will be in a strong competitive position But future EU TIV looks 'flat' to 2020 and probably beyond; thus no case of 'a rising tide lifting all boats'. Until that slight uplift to the perpetual 'flat-line', as the EU's #2 largest auto-maker strengthened with state aid it will seemingly fight its way forward to that point – possibly via a price war. By similarly producing an almost a flat YoY volume of cars in the short-term will increase levels of product and plant amortisation, which in turn provides a per unit cost reduction, and so enable price reductions on the dealer floor. Thus a case of pricing-power to buy market-share also assisted via generous credit if feasible via PSA Banque and additional 'goodies' incentives. Thus PSA re-enacts its downturn play-book, as we saw with the extended run-out strategy of 206 to claw-in sales.
Given PSA's stature as now a pseudo-nationalised entity, Varin may well see this European market scenario as the only one available given the envelope of conflicting forces he must operate within -ie government paid job-creation vs structural cost cutting.
That is the present-day's pragmatic look behind the still well stocked dealer inventories and PSA's own 'shop window' consisting of an attention grabbing, almost intendly distracting, sizable concept car family stretching across is 2 core brands and newer DS sub-brand. The reality behind the glitz looks far less glamorous, and demonstrates that the company must continue to properly address its cost-structure, product direction, product mix /cadence and overall brand & product(s) appeal.
As regards its cost-structure, little looks achievable in Europe given the implicit promise to keep buoying French economy, only perhaps feasible in the CEE and in tandem with its Toyota JV on its A-segment cars (107/ C1 / Aygo). Indeed we suspect that PSA will be heavily reliant upon Toyota's present position and ability to re-negotiate broad parts cost savings given a combination of its woes due to its massive volume recalls, and the presumed intent to only slightly change the basic specification of the platform and variant cars. Better PSA cost-savings look probable elsewhere in the EM regions, as scale efficiencies are built-up and once again amortisation plays a critical role in BoM (Bill of Material) reduction.
Product Direction will be key as it tries to balance the continued phase-by-phase roll-out of aging product over various regions, against now very immediate, well gleaned consumer perceptions.
The Corporate Forward Plan as presented three months ago on 12.11.09, sets out the broad PSA strategy template, which derived from PESTEL trends highlights the need for:
1. Global Reach given growth & demographics in EM regions (esp Asia)
2. Urbanisation demanding cleaner vehicles
3. Convergent Worldwide CO2 Regulations
4. New Products & Services to cater for changed global demand.
Whilst PSA is undertaking typical CO2 reduction initiatives regards next generation vehicles (mass, aero, powertrain efficiency, etc) on ICE cars, it also states that it wants to attain 20% market-share for Hybrids and EVs by 2020, its effort promoted by demonstrators such as its diesel-hybrid and its rear axle e-motor as integrated into the front ICE engined 'PROLOGUE Hymotion4' SUV. It presents a catalogue of eco-solutions ranging from engine capacity downsizing (industry norm) to 'start-stop' to L-ion EVs. And like Daimler et al, divides car usage types into 3 categories: “Urban, Peri-Urban & Polyvalent”.
As part of what it lauds as an alternative approach - “new services for new customers” - it offers 2 types of EVs, one homegrown in the form of an electric CV per brand (Partner & Berlingo) and what is essentially a badge engineered Mitsubishi MiEV, (iOn & C-ZERO). History and circumstances indicate however that such efforts may well be more of a PR exercise to keep PSA in the competitive fray. Since PSA has offered electric CVs in the past, such projects being short-lived to the high-cost of such niche volume vehicles being largely restricted to temporarily cash-rich, pro-green municipality customers. And the Mitsubishi e-car offered in its 2 variant forms has had only moderate success in homeland Japan and is yet to undergo market-trials in Oregan, USA. Thus the 2 PSA cars will be in reality market-trial cars, and so any production forecasts presently given must be treated with caution - ie 100,000 units over next 5 years.
[NB that 20,000 pa figure represents only 0.61% of the 3,260,400 annual sales (2008 figure) and critically also includes the E-vavacity e-scooter, which investment-auto-motives' suspects makes up a large percentage of the 100,000 unit estimate. Thus the direct car contribution appears minimal].
Also of note is the exploration of creating an in-house (variable) vehicle rental-based business model, that follows in the footsteps of other French transport initiatives such as the bike-based 'Velo'. Under the name of 'Mu' it offers a Pay-Per-Use model via a pre-paid client card, and offers various 'fringe' vehicles relative to use; suggesting use of a 3008 for weekends, e-scooter for immediate use, (e)bike for half day ride and baby seats or a van for occasional need. This type of complimentary business model has been a constant byline in the industry, ranging from Ford's previous ownership of Hertz to its similar 'Indigo' exploration.
As a multi-vehicle manufacturer and with changing EU mobility habits, the management team has struck a chord with the modern green psyche. Its prime aim of course to generate up-front liquidity via the pre-paid cards. However, as a purely commercial enterprise it runs up against fairly entrenched competition, and would need to be willingly backed at scale and done so at a probably loss-making level for some years until it gained public recognition. Also the business fundamentals of appropriate cyber-physical retail channels, inventory logistics management etc are complex, with what may seem parallel case studies (such as Velo) generally simpler and critically typically commercially fudged given sunk-cost government funding for social good. Indeed such an initiative may well have been required for the French Euro3bn soft-loan. Hence the 2010 roll-out in Paris, Berlin and elsewhere (not yet announced) will be closely watched, and analyst/investor quizzing of the business's very basics should be justifiably expected.
Hence, whilst useful PSA 'feel-good' stories, the EV and Mu initiatives must be considered as icing on the cake. What matters is the business ingredients, mix and quality of the fundamental PSA cake across the primary Autos division and as an adjunct the health of its other smaller divisions: Faurecia, Gefco, Banque PSA Finance, Motorcycles, P-C Moteurs and Process Conception Ingenierie.
Unsurprisingly, the recent 10th February FY09 presentation was one of optimism, highlighting the ongoing turnaround in fortunes especially given the H2 sales lift. EU passenger car market-share was up by 14.3% in Q4, and 13.7% for full year, EU commercial vehicle sales was up to 22.2% market-share and global market-share was up to 5.1%. But in total, units sales were down 2.2% YoY to 3,188,000 (assembled & CKD) units. As a CO2 count, of these approximately 1m emitted 130g/km or less, and of those, 750,000 emitted 120g/km or less.
But importantly, over 2008/9, PSA's previously broadly considered unique sales proposition by the capital markets as a low CO2 car company stalled in comparison with fast-approaching competitors.
In short PSA due to whatever restrictions – technical, managerial etc - did not best utilise the previous lead it had, largely we suspect because of the necessary 'extended amortisation basis' the business presently runs upon (eg 206+).
[NB investment-auto-motives made note of this in 2008 and due to degraded PSA product appeal – ie 'guppy mouth' fronted and pick & mix styled Peugeots, style over substance Citroens and a cobbled DS proposition - did not share the general enthusiasm for the group's YoY prospects, and notes that in part new sales have been a result of poor quality vehicle returns, displeased lease-plan buyers tempted into new Citroen sales via price and credit incentives by dealers to 'shift metal' Thus, the seeds of PSA misfortune were being sewn in 2007].
However, as of today, all recognise the role that the Euro3bn soft-loan played, apportioned to reduce net debt from E2.9bn to E2bn, assist working capital and probably allow unhindered transfer of large stock inventory sales to be booked more or less directly into positive FCF (of E300m).
However, such financial engineering could not stem the major loss of E1.161bn.
In the face of such losses the age-old, auto-industry reaction to creeping value-destruction is typically the search for scale-efficiency. A route well understood and exploited by Renault given its decade-long relationship with Nissan. Understandably given its failed past attempts to build volume in this manner (ie 1977 with Chrysler Europe) PSA looks to build such scale and savings via technical alliances as it has generally successfully done (though less rewardingly in recent years) and we suspect the idea of building greater self-styled industrial verticality in EM regions to access both growing markets and so volume scale, and simultaneously self-direct the value chain.
This is a longer term ambition, and whilst being slowly built PSA should look to the probable advantages of creating yet further alliance relationships: with as present possibilities: BMW, Mitsubishi and Toyota.
The BMW idea, long mentioned on the grapevine, would theoretically provide BMW with cross the board savings on Mini and/or a tentative 0-series, something it would well appreciate, and provide via joint engineering PSA with improved product quality...possibly leading to improved in-house NPD acumen if it could adopt BMW's rigorous methodology. As Eurozone members there would be no fluctuating currency problem to better budget by, and such an alliance would politically assist the ideology of a united Europe, a hot topic at the moment. Indeed the venture could possibly enable low-cost EIB funding if it could be seen to have effect on the global stage.
A second option is to create a parallel model to Renault-Nissan, very probably with present ally Mitsubishi, given its small car capability (inc e-vehicles), the Japanese company's need for medium car leverage vs Japanese peers and its 4x4 competence (as seen with the 3008 project). Moreover such a R-N parallel (PSA-M) could indeed be cross-linked into Renault-Nissan on a project / regional basis, providing a bigger strategic possibility envelope for all companies involved with either direct lateral, indirect vertical or indirect diagonal strategy options. This would presumable also assist with all the individual party's needs to create a sustainable base to credibly compete in the upscale premium sector. (ie PSA to piggy-back Nissan's Infiniti).
As an alternative is the possibility to create a stronger alliance with Toyota, building upon the present A-segment JV, thus able to 'piggy back' Toyota's own massive cost-down achievements. Here PSA's Varin could feasibly lead steel procurement talks with global steel mills, and Toyota could lead component talks to achieve dual gains.
Varin's presentation highlights his desire to mimic the median financial achievements of the top-5 best performing industry players in hitting a 6% operating margin of E3.3bn on E50bn annual turnover, which when questioned by the FT was indicated as between 3-5 years.
Today, PSA sits in a somewhat precarious position running at 1% “recurring operating income” (E550m on E54.3bn turnover), so to fill that aforementioned profitability gap by 5% appears a huge task within 4 years. Of the E3.3bn required, he states 30% will come from Sales & Marketing (as we read typical incentives tied with vehicle replacement/upgrade offers), 15% from high growth markets (ie China, India, Brazil, Russia & RoW) and 55% from Production, Development and SG&A.
This latter section representing 55% suggests there is much fat-reduction to be had, and it is here that investors will want to see vital transparency. To achieve that level of uptick suggests that Mr Varin already has PSA's primary steel procurement contracts already signed and future technical alliance's secured, possibly with French political help, even if he is not letting on about any procurement coups today. This though is but inference, much more needs to be seen to give the capital markets true assurance.
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