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.

Companies Focus – VM Basic Assessment (Part 1) - Reviewing the Fundamentals

The intention of this next two part weblog is to review the investment / investor standing of the world's best known auto-manufacturers.

Part 1 (herein) provides a “basic view” by using the standardised 'fundamentals' measure of the price-earnings calculation.

Part 2 (to follow) provides an “advanced view” by examining each companies' 'fundamentals' in greater detail. Through the construction of four graphs which depict the investment-auto-motives' perspective of 'coupled ratios'. This marrying two standard 'ratio' measures to better assess: a) Market Valuation, b) Profitability, c) Liquidity d) Debt.


The Global 'Macro' Picture -

By measure of international bourses, the global economy continues to 'shudder and shake' as a mix of very cautious macro sentiment mingles with what seem rapid 'risk-on, risk-off' equities vs bonds actions creating volatility.

In the USA, a much altered QE policy structure took the wind from the stock-market's sails, the presidential campaigning highlighting President Obama's desire to avert economic focus, whilst Romney obviously seeks to. The USA's previously strong bullishness has wained, America's prime indices the Dow Jones and NASDAQ illustrated that much turned mood. The DJ gave-away a sizeable 1000 points plus drop between its recent peak of 1st May and trough-bottom on 4th June, though has regained approximately half that lost value since. The NASDAQ peaked 26th March and bottomed on 4th June, showing a 366 point loss, and has regained a fifth or so of that loss since. So whilst the encouraging 'bottom-bounce' provides more confidence, the full extend of its strength is yet to be seen.

Europe of course continues to be blamed as the instigator of ongoing global economic drag. (Most notably as the prime disruptor of US prosperity, a bad citation by Obama given the EU's relatively small intake of US exports). However, the sovereign debt crisis continues to fester, the liquidity demands of the PIIGS debt-laden banking now exacerbated by Spain's calls for EcB monies and with the 'shorting' of Italy's 2-year government bonds; a flattening of the yield curve the same trend as seen prior to Greece's woes. Central of course is the fact that no general agreement has yet been obtained regards exactly how the E 1 trillion ESM (and old EFSF) could be made to operate, Germany's rightful viewpoint that there must be a type of securitization offered by recipient nations – ranging from gold to public assets – so as to avoid the 'moral hazard' problem that has already been witnessed by the empty promises of Greek and Spanish politicians, seeking to both gain liquidity yet also carry favour with voters by not implementing further austerity. Corporate stocks have undoubtedly suffered, with prices at record low, in turn delaying CapEx projects until greater stability appears. That has been indicated by the French, with the idea that yet another policy stimulus could primarily assist domestic producers. But that undoubtedly relies upon the release of ESM funding, so presently appears a PR tactic by President Hollande et al.

South America's desire to reduce its own cost-base and negate its exposure to 'cheap' Chinese imports has meant a quite severe policy response. This primarily via a hike in import duties, especially so upon non-Mercosaur-made vehicles, and efforts to try and re-foster a lean domestic industrial attitude, improving indigenous value-chain capabilities and prompting consumer spending on self-made goods – the previous weblog's mention of Brasil-Movimento motorcycles a good example. The national BOVESPA index hit a high of 68,394 on 13th March and hit a recent low of 52,481 as of 5th June, thus loosing 23% of its value, before rebounding to 55,651 recently.

At first glance, China's economic contraction appears even softer than expected given a growth slowdown to 6.5%, approximately half of its modern era double-digit rate. Yet the 22% YoY rise in vehicle sales in May illustrates what seems a dichotomy, when autos sales rates are supposed to typically reflect general GDP measures. The answer very probably lies with a possible over-statement of growth drop by the PRC government to stimulate 'incentivisation' by producers to maintain and grow consumption; none more so than the hyper-competitive automotive sector, reflected in the provision of a sales initiatives inland. Thus there seems a slowing of coastal generated growth off-set by new growth in 3rd and 4th tier cities and towns in more rural areas, thus a balancing of the national economy as coastal regions themselves seek to reduce cost-bases and so maintain a competitive differential in world markets in light of the deflationary forces in the Triad regions.

Here in the UK new deflationary concerns have resurfaced. The broad manufacturing sector (exempting autos) - previously a start performer throughout 2010 & 2011 - now showing signs of a marked slowdown given lacklustre domestic demand and now decreased EM export demand. That has generated political calls for sector-specific task-forces similar to that of the now politically much applauded Automotive Council, yet it must also be noted that whilst of definite value to the UK economy, the ramp-up in UK factory production of whole vehicles has been because of foreign VM (ie Nissan, Honda, Toyota) domestic capacity constraints previously caused by the Japanese tsunami. Previously the national economy had partially relied upon that important 'visible-trade' export buoyancy, both indigenously owned and foreign owned, but the weakened order book for UK companies and a possible contraction of UK vehicle exports as Japan returns to strength indicates declined value-creation. The BoE's £80bn 'funding for lending' scheme appears a moderate response given the need to both urge lending and contain a growing 3% RPI rate, yet given the caution of SME borrowing – described as the “UK's mittelstand-off by the FT – it is probable that the liquidity is instead directed at the UK stock market, across the FTSE100, 250 and possibly AIM, seeking new growth enterprises.


The World 'As Is' For Automakers -

The fragility of both consumer retail markets and the world's stock markets has for some time now created a delicate balancing act for automaker's CEO's, COO's and CFO's. With much of the Triad region's banking sector and consumers in respective 'deleveraging' mode, and wholesale finance erratic and expensive and dwindled deposit provision by car buyers, the need to protect corporate 'cash cushions' – build-up from CapEx minimisation and deferral - to provide self-financing has been the order of the day. Such internal funds used as no-cost “incentivisation levers” toward car buyers in regions where such prompting initiatives prove useful.

However, the mere existence of those cash cushions on balance sheets have not underpinned the stock-price positions of all, only those that are strategically best positioned. Others heavily exposed to retracted markets, notably Southern and 'fringe' Europe, aswell as 'core' France, have seen their stock values decline in relation to their EU exposure. This in turn, via a cross-sector dynamic, has dragged down the better positioned German companies' MarketCap valuations, though the strongest of those 3 tends to rebound soon after any bad news is absorbed, a sign of institutional investors' constant 'flight to quality', and profiteering reaction of day-traders.


Assessing the Auto-Makers -

Thus, given the erratic state of market dynamics, it would prove useful to gain greater insight into each company's “fundamentals”, so as to stave-off over-reaction to sentiment driven 'buy' or 'sell' actions in the broader marketplace.


Basic Comparison -

The following conveys the basic yet prime stock information per company:
(Prices as of market-close 15.06.2012).

Price P/E EPS Dividend

GM $21.74 6.54 3.32 none
Ford $10.35 2.23 4.71 1.93%
VW E116.80 3.25 36.50 2.47%
BMW E55.96 7.21 7.77 4.11%
Daimler E34.04 6.11 5.57 6.73%
FIAT SpA E3.66 3.23 1.13 none
Renault SA E31.10 4.05 7.68 3.73%
PSA E7.51 2.39 2.56 none
Toyota $76.50 33.67 2.27 1.65%
Honda $32.36 21.89 1.48 2.35%
Hyundai (EDR) E22.60 0.69 32.82 0.73%


Here we see a wide span of current valuations, much of course dependent upon the enterprise value of the firm and the amount of shares (of different classes) made available. Even so, the affect of recent history is readable within present valuations.

'New' GM's Chapter 11 financial restructuring via seen in its price, even though down 30% from its IPO price, it still holds credible price-earnings ratio when compared to its smaller Detroit counterpart, and relatively close to the sector average.

Ford's price essentially limited by the critical inhibitors of weighty debt servicing (by far the most amongst its peers) and the extra-ordinary gains of tax exemption which has boosted profitability, but not directly from the top-line. Though its much improved dividend has been welcomed by institutionals, its 'bottom of the class' price-earnings highlight future regional and PaT concerns.

VW Group's valuation the result of its inherent global reach, B2C & B2B product portfolio reach, and the controlling families' historical desire to be very hands-on by seeking to limit the number of shares in circulation. BMW has come under much pressure recently given the concerns about the impact of global economic contraction upon 'mass-premium' vehicles, yet also reflects the trait of 'family influence' and German institutional holding so as to seek to avoid the long-lasting damage of “vulture-like” short-selling. Its low price-earnings value seemingly a result of heavily constrained liquidity within Europe, which takes a heavy toll on such a large company - as opposed to the firm's innate operational efficiency.

Daimler's price-earnings figure shows strong resilience to both the general squeezed liquidity conditions, and investor concerns about the possible severe impact of a continued global down-turn upon. This probably because Daimler's broad exposure to various private-spend, commercial-spend and public-spend vehicle segments, means that it is also equally well placed for any new European economic revival when it arrives, especially regards early phase spending on HGVs and publicly funded Bus & Coach.

FIAT SpA (FIAT-Chrysler) share price reflects the double impact of high exposure to heavily retracted EU and Brazilian sales. Critically though, ongoing concerns about Italy's core market ability to balance austerity, introduce labour reform and rebound growth; even under the new 'technocratic' administration. This critical to FIAT so as to mimic USA traction by Chrysler.

Renault similarly suffers from an anaemic homeland, but has been assisted by the very supportive earnings gained from Nissan, so better supporting its share-price and price-earnings. Moreover, since partly government owned, there is a markets expectation that Renault stands as natural primary recipient of any supportive direct or indirect government assistance.

PSA's share-price has suffered more so, as Europe's #2 auto-maker and with greater EU market exposure and apparent lack of a 'government backstop' taking a greater toll and adding uncertainty. Though GM's announced intended 7% acquisition ironically induces short-term price reduction until the purchase is actually made – GM enjoying the fact – it also argues for long term value via disposal of PSA assets to GM and possibly others; though. the “platform-share” story still does not convince.

Toyota's price highlights its dichotomy: as a cornerstone of the Japanese economy, yet endured the earnings ravages of the 'tsunami effect' which assisted continued industrial restructuring using off-shore production. Its share price seen as the 'entry cost' by Japanese pension and insurance houses for ongoing stable dividend and for governmental recognition of national patriotism. However, as its earnings increase with a US and China sales rebound, and a possibly improved dividend yield, the result may be reduction the hefty price-earnings ratio that slowly attract foreign interest.

Honda's price and price-earnings ration reflects its less domestically entrenched position, its better dividend arguably showing its greater organisational flexibility and faith in its renewed interest to North American buyers; much needed given its 1.6% car-market share slip since 2010 to current 9%.

Hyundai shows itself to still arguably be an anathema as traded on European bourses; whilst a respective pillar of the Korean economy (with the biggest production plant in the world) it is not yet listed as an ordinary or preferred standard stock, but instead as a form of GDR (Global Deposit Receipt) seeking Euro capitalisation (a EDR); thus not commonly traded, but its underlying value characteristics suggest that Hyundai Motor may seek an ordinary listing in time.

Displaying the table again, investors could seek to simplistically plot the crop of global auto-makers, purely from the prime measure of price-earnings.

Price P/E EPS Dividend

GM $21.74 6.54 3.32 none
Ford $10.35 2.23 4.71 1.93%
VW E116.80 3.25 36.50 2.47%
BMW E55.96 7.21 7.77 4.11%
Daimler E34.04 6.11 5.57 6.73%
FIAT SpA E3.66 3.23 1.13 none
Renault SA E31.10 4.05 7.68 3.73%
PSA E7.51 2.39 2.56 none
Toyota $76.50 33.67 2.27 1.65%
Honda $32.36 21.89 1.48 2.35%
Hyundai (EDR) E22.60 0.69 32.82 0.73%

To plot as such, promotes the usual modelling of depicting the archetypes of 'growth stocks' and 'value stocks'. Given the maturity of the sector, its barriers to entry etc, a true 'growth stock' is rarely ever truly seen. Perhaps only in China between 1999-2008 when certain emergent indigenous auto-companies such as BYD Auto intentionally mustered high profile international PR brand campaigns around the apparent adoption of eco-tech/high-tech, supported by renowned names such as Warren Buffet. Instead, because of the inescapable cyclical impact of macro-conditions on the auto-sector, seasoned long-term investors tend to seek-out unloved auto-stocks during a dour economic climate such as today.

To this end, whilst during normal times (in the West) many asset classes are valued at 10x annual earnings, today the demarkation level of 5x has far more resonance given the market headwinds of cautious sentiment and tight liquidity.

Using this as a very simplistic guide, we see a ranked order of theoretical attraction: Hyundai (EDR*) @ 0.69, Ford @ 2.23, PSA @ 2.39, FIAT @ 3.23, VW @ 3.25 and Renault @ 4.05.

Beyond the 5x level, are: Daimler @ 6.11, GM @6.54, BMW @ 7.21, and far beyond the 10x level are Honda @ 21.89 and Toyota @ 33.67.

However, whilst figures give a good desk-top comparison, all must be seen in context, thus it is critical to view the bigger macro picture by reading between the lines of corporate actions vis a vis regional markets and economies.

The following provides a short picture of recent issues per VM.


Corporate “Headlines” -

GM
- Presently evaluating internal successor to Akerson.
- Akerson recognises 'profitability chasm' relative to best mainstream companies
- Reducing pension burden via group annuity contract with Pru Insurance (20% 1st tranche)
- Facing increasingly tough battle in all important China
- Bochum plant 'life extension' to 2016 for frozen union costs
- Seeking to once again re-animate Cadillac vs dominant German & Japanese premium models
- Notions of any new Republican administration 'dumping' its 26% holding unlikely, expected staged sales at predetermined price-points to ensure corporate price stability.

Ford
- Mulally expected to remain
- Expected to follow the 'annuity contract' route
- Already de-risked pension liabilities by re-weighting to fixed-income
- Critically recent entrant to China so holds consumer appeal
(its May YOY sales marginally above the surprising 22% market climb)
- Seeking to once again re-animate Lincoln (like GM's strategic need)
- Studying indigenous brand for China with JV partners
- Ford Credit regains 'investment grade' status (Moodys) raising $1.5bn recently
- Announced re-alignment of EU market plan appears slow reaction

VW
- Governance issues regards Mrs Peich's Boardroom election seem to diminish
- Successor to Winterkorn expected from restructured divisional management.
- EU May sales slide less than industry average (5.7% vs 8.7%)
- China's Jan-May sales boosted by 9.3% YoY (44% for Audi)
- Continued major China expansion via plant openings (4m unit target for 2018)
- Rational acquisition of Ducati followed by exploration of Navistar Truck holding.
- Remaining stake of Porsche AG to cost E4.5bn (E0.6bn increase).

BMW
- Reithofer maintains conservative stability
- Senior R&D and Purchasing execs swap roles to strengthen internal capabilities.
- New sales records for Q1: Asian growth of 9.1% Jan-May 2012
- China sales for May up 31.5% YoY
- Concept store opens in Paris on “George Cinq”
- i8 hybrid 'supercoupe' expected at E100,000 price level
- JV agreement with Toyota on Lithium battery R&D ratified

Daimler
- Zetsche maintains strategic leadership
- Bernhard retained on board as head of Mercedes Cars until 2018
- New car sales record in May, up 4% YoY
- Truck sales up 20% in Q1
- Long awaited introduction of 'conventional' A-class range
- New Citan small van allows entry against VW & PSA-FIAT Eurovans
- Smart brand to include scooters as of 2014
- Car2go / Europcar rental scheme spans 12 cities / 4000 vehicles

FIAT SpA (Chrysler)
- Marchionne continues as corporate lynch-pin & figurehead
- Cut in CapEx by E0.5bn to E7bn given European market compression
- Introduction of Serbian Kragujevac plant adds lower cost capacity
- Italian sales incentives include new petrol discount scheme
- EU sales down 17% Jan-May 2012
- Chrysler board expanded
- US sales for Chrylser up 30% from very low base in 13.4% market rise
- European R&D slows as US R&D maintained
- Annuity contract pension changes seen as uneccessary

Renault
- Carlos Ghosn cites “3-4 years stagnation” in Europe
- This negativity viewed as pressuring ministers to evoke state aid.
- Able to service Nissan with components during tsunami aftermath
- Star performer division Dacia cuts production to re-balance slower sales
- Renault badged (Dacia) Duster performs well in slowed Brazil
- EU sales down 19% Jan-May 2012

PSA
- Varin continues strategic efforts for major cost reduction and asset divestment
- Downsizing of 6000 posts by YE2012, Sevelnord plant & elsewhere
- Expected to dispose of 50% of GEFCO logistics subsiduary to PE consortium
(8 candidates emerged, 2-3 probably sharing the deal to preserve cash)
- China sales up approx 20% Ytd in May
- EU sales down 15% Jan-May 2012

Toyota
- $2.5bn bond issue announced to run between 2012-14
- Massive 87% YoY rise in US sales in May 2012
- NAFTA plants increase production by 64% Jan-May 2012
- Japan sales boosted by 125% (exc kei cars)

Honda
- President & CEO Takanobu Ito highlights share-holder value: to be seen
- NAFTA plants increase production by 67% Jan-May 2012
- Japan sales boosted by 48% (exc kei cars)
- Recall of Civic and other regulatory safety investigation in US

Hyundai
- Chairman Mong Koo Chung (holding 25% share-base) maintains solid control
- Worldwide sales up 8.1% in May YoY
- All new Sante Fe and Sonata models released helping model mix
- Doubling of production with Kibar Holding in Turkey
- Small car product recall in China, possibly used to cross-sell products / services
- S.Korean union calls to reduce flexible labour content (and so 'competence advantage').

[NB. European auto-execs meet this week under European Union supervision to discuss the possibility of a “factory-closure blueprint”; so as to discourage member states from offering incentives to protect local jobs at the cost of the broader efficiency of the Eurozone.

However, even as Marchionne (the idea's originator) cites, such an agreed outcome given the present conditions, looks unlikely.

Although it will be an opportunity for 'suffering' VMs (FIAT, PSA, Renault) to discuss JV projects. Additionally Brussels is also examining whether to introduce yet higher standards of CO2 emissions targets for new cars, a topic no doubt welcomed by FIAT & PSA]


Plotting VM Positions -

The accompanying chart provides a simplistic perspective of the respective positions of the global VMs vis a vis each other. The respective axis used are: the 'micro' of a company's price-earnings (P/E), and 'macro' which assimilates the general picture of that company's prime challenges / opportunities ('headwinds' vs 'tailwinds' with mid “transition zone” seperating the two). Though the P/E is a well recognised as an objective pseudo-scientific metric (and the 5x vs 10x demarkation has been mentioned), conversely, the assessment of exactly where a company sits in the macro picture depends upon a generalistic subjective summary, weighted by exposure to contracting, stable or expanding regional economies; and its competitive advantage / disadvantage therein.


Results -

Expectantly, the lower down the vertical P/E axis a firm sits the more enticing the value proposition appears for the investor, but this must be viewed against the 'real world' context.

Today that low price-earnings figures could be said to be either the outcome of innate pessimism regards a corporate turnaround, or the sign of cautious slow moving “viscous” market liquidity, or indeed a combine of both. Thus anything under 5x deserves close evaluation of operational health and prospects.

Those firms with higher P/E numbers between 5x & 10x presently tend to:

1. Have an intrinsic governmental 'safety-net' (ie too big to fail)
2. Comprise of anti-cyclical divisional-based business model
3. Historically demonstrated consistent value-creation

Contrastingly, the Japanese firms with (to western eyes) extreme P/E ratios above 20x or so are located in an ostensibly deflationary 'low-growth' homeland, which has experienced decades long 'pumped liquidity' programmes.

[NB This in turn has appeared to 'normalise' a Japanese firms valuation relative to the seemingly 'frothy' valuations of far newer high growth companies in China and across SE Asia. These notionally comparable valuations in turn assisting the book-building process behind ever ongoing M&A, cross-holding and JV process which has built modern industrial Asia].

Ironically, it may well be the massive differential between the 'poor' West and 'valuable' East that kick-starts the European revival in the mid-term future.

The chart and each respective corporate position speaks for itself.

Companies Focus – The Western 8 : PSA Peugeot-Citroen – Losing the EU Reactivity in its Hub & Spoke Business Model

PSA, although larger than its Gallic peer Renault, beyond its French homeland has always given the impression of a somewhat smaller entity. A persona in no part due to its cleaving of production & sales figures between its dual Peugeot & Citroen brands, its smaller penetration within its semi-global footprint with tied to ex-colonial regions, and the fact that throughout the 20th century the Peugeot family owners – now holding 30.3% - and senior management have seemingly purposefully chosen to stand back from the limelight, with an innate mantra of “products not personalities”, best shown by Pierre Peugeot's role model behavior.

Given the 15th century roots and impressive but low key multi-sector growth throughout the industrialisation era, the Peugeot family have understandably long held almost baronial ownership, influence and autonomy as most precious; the redrawing of the familial lion passant in January 2010 emphasising the point.

Thus it is perhaps no surprise why the PSA board made up of, and led by, family members have typically appointed CEOs with deep industrial understanding but typically from non-Auto companies – Folz from aluminium & electronics, Streiff from aerospace and latterly Philippe Varin from steel. Such appointments seemingly intend for leverage of a CEO's innate knowledge and access of complimentary industrial sectors (ie 'input' or 'development'); whilst not exposing the family to possibility that a CEO will 'company hop' across the auto-sector, and so possibly engendering (corporate secrecy) betrayal.

As is well established, in almost ironic reflection of the separate Peugeot bicycle company, PSA Peugeot Citroen (still integrally holding the scooter division) operates a 'Hub & Spoke' business formula. One in which a theoretically cost-conscious, omnipotent central HQ deploys its evolved and strategically aligned small car core-competence whilst also: buying-in required fringe products/technologies, selling-on proprietary technology to 3rd parties and forming strategic R&D / manufacturing / retail alliances.

That philosophy has been officially transposed into the PSA production System, an approach that maximises scale efficiencies within, and externally to other parties with over-lapping strategic goals. In physical terms it means 3 internal PSA platforms, one of which is to be extended as a core enabler in 2012 and beyond; aswell as 2 platforms deals with FIAT on LCVs & MPVs, 1 platform deal with Toyota for the A city car segment, 1 platform deal with Mitsubishi for SUV and 1 with FIAT & TOFAS for LCVs. And in Q1 it renewed its agreement to develop and manufactured a shared 4 cylinder engine with BMW AG.

In an age of unforeseen 'Black Swans' creating consequential global economic and political turbulence, the family no doubt see themselves as proven right to protect PSA's innately flexible business model, yet given its comparative smaller industrial weight it must perhaps also act more quickly and nimbly than its larger peers to identify and secure areas of advantage with other (typically EM located) parties beyond its primary sphere and influence.

In doing so given that PSA is a very different beast to its archetype multi-national peers, Varin and his lieutenants must proffer different raison d'etres to compose alternative alliance virtues, the diesel technology lead the attraction for the industry at large and ability to sell modern or near-modern product to the national car companies of EM nations as part of their own economic development plans. These then have been to the 2 external alliance hooks to date, whilst internal alliance hooks have provided for the 'plugging' of PSA product portfolio gaps (eg Mitsubishi Outlander), model specific alliance manufacturing to defray plant investment risk (eg Toyota Aygo) and 'PSA brand advancement' initiatives (eg enabled by Mitusibishi iMEV electric vehicle).


Q1 2010 Performance -
Group Revenue increased by 27.5% from E10.97bn to E14bn compared to Q109; so reflecting the general upward trend of a rising tide of the time. Group worldwide sales for the YoY period increased to 914,000 units.

The Autos section individually posted a 22.4% increase YoY to E10.619bn, up from E8.678bn in the preceding year. As is evident, Q1 still enjoyed the tailwinds of various national scrappage schemes. Being well positioned PSA gained share in that period, cars & LCVs up from 13.5% and ending at 14.6%. Greatest gain were was in Italy, up 1.8% to take 11.6% of the local market.

Having experienced an early boost, executives previously forecast that the EU market will shrink YoY by 9% given the reduction in broadscale Keynesian economic policy and adoption of a far more Monetarist fiscal tightening approach.

Faurecia:
This subsidiary which manufactures various vehicle module systems sets enjoyed a vaulting 59.5% rise in Q1 Revenues, reaching E3.2bn from E2.0bn in the preceding year.

Gefco:
The subsidiary logistics company saw a 27% rise in Revenues as its Q1 figures reached E842m, up from E664m.

PSA Banque:
The captive financial arm of the group saw marginal decline in Q1, Revenues down by -1.1%

However, the company did not release any profit or loss figures in Q1, a fact which investment-auto-motives' believes was sanctioned by the Board so that investors and the French government would not witness a 'see-sawing' of corporate income fortunes as the tailwind of the EU scrappage schemes came to an abrupt halt. Thus done in order to manage expectations and present a smoother income distribution picture over H1, H2 and FY2010.


H1 2010 Performance -
Global auto markets sales increased by 13%, led by China at 27% and Latin America at 11%, whilst European sales was very variable, France up 6%, UK up 19%, Spain up 38%, Germany down -27%, CEEC down -13%.

H1 sales figures reached a new high of 1,856,000 units, so up 16.9% if CKD figures are incorporated. Of this fully assembled vehicles represent 1,618,000 so 16.8%, and CKD kits represent 237,000 (a rise of 18% YoY, mostly from Peugeot). European sales rose 1% to 14.6% market share when including for EU, EFTA & Croatian figures. PSA's reliance on Europe declined slightly, with non-European regions accounting for 36% versus 34% a year previously. PSA maintained its lead in small & compact LCVs, yet in a sector that grew 9.4% YoY only gained 0.4% market share to 22.4%.

Yet, at a time when PSA should have been 'mopping-up' towards the latter-end of the European 'perfect storm', the 1% increase is (as expected) disappointing. The levels of artificially generated consumer demand growth for low CO2, affordable cars (PSA's hallmark) may not be seen again, even if a double dip recession does take hold. Similarly, the rising-tide in LCV growth has only seen a near equivalence maintained, when PSA should have been in the LCV driving seat.

Thus investment-auto-motives believes that the opportunity that arose was under-played, and partially mismanaged, probably as a result of overt constriction on NPD budgets as part of group-wide cost-saving efforts which kept the company effectively treading water, and relying on consumer purchase discounts and incentives necessary to shift factory and dealer inventory, keeping cars sales buoyant, which enabled it to reach its 'record' sales figures. Figures achieved probably at the cost of per unit profitability margins.

For Citroen, the unfortunate late introduction of new C3 in Q409 meant that the division was bereft of product, it will have been 'pushing old product' such as C1 and old C3, but critically had (and has) no C2 model. C3 Picasso mini-MPV was perhaps its only tenable model to befit the scrappage scheme incentives, but the lack of attractive siblings demonstrated Citroen's effectual absence from the dynamic market.

For Peugeot, the aged 107 offers little attraction even if an apt vehicle, whilst a mid-2009 face-lifted on the 3 year old 207 was too subtle to be of commercial effectiveness, thus simply kept it in the running in the middle of the pack, as opposed to its 'rightful' position of 'front & centre'.


Strategic -

Outside of homeland France PSA's dual identities, both hinder and help the group at large. Unlike other OEM's typical single marque dealerships, its history of dual brand dealerships has muddled the market offering. The innate PSA experience at the critical purchase decision point has been mixed; one of almost paradox given each brand's 'dueling for buyer attention' created by the price-point and target market differentiation. [NB Citroen pitched as affordable to a family market, whilst Peugeot pitched higher, to more sporty singletons and couples]. That mixed message of single sire dealerships made even more opaque with the introduction of Citroen's DS models, which reach into Peugeot territory.

Of course the efficiency and market(s) reach rational of running dual-brand dealerships for the corporation and dealers alike is of course beyond the historical picture still compelling, especially so in these financially constrained times that require the sweating of a locational asset. Recognising this corporate schizophrenia as an integral issue driving the need for a brands identity update – relative to brand perception & experience - PSA had Citroen and Peugeot logos redrawn. (Moreover, new corporate messages were generated: Citroen as “Creative Technologie” & Peugeot as “Motion & Emotion). Both now depicted in the polished metal badge that has become the auto-sector's homogenous requirement. This then negates the old colour clash between Peugeot Blue and Citroen Red on all corporate identity items ranging from stationary to advertising to dealership facades and provides a level of unity between the brands and throughout each's marketing communications palette.

However, whilst undoubtedly good for the corporation and dealers in the mid-term , the change forces a sizable overhead cost to dealers, since good corporate identity change programmes span a raft of areas well beyond the door-top signage of a forecourt, including full exterior, full interior and the use of corporate prescribed desks, chairs, picture frames, etc etc to ensure all dealer convey the same corporate persona. Usually prescribed to its 3rd party agents in the early phase of an economic recession, those agents not in booming EM regions will be resisting change, especially as they see their monthly sales figures reduce as the scrappage effect fades.

The consequences of this will probably for a period further muddle the Peugeot-Citroen identity on the high street and in retail parks across the UK, Germany, Italy and perhaps most so in France, as a renewed corporate identity roll-out creates a patchwork of dealership facades: the new 'chrome' vs old 'blue & red', sites which further erodes the perceptional integrity of the business. To avoid this highly probable outcome PSA will need to be both firm in its implementation, yet be flexible enough to maintain good dealer relations – so necessary during this time of economic flux. A partial subsidy of the roll-out programme is the typical answer (with latter-day claw back of the sum from dealer margins), yet whilst such a solution does ensure quick adoption, it does create a drag on near term quarterly profits.

The corporate R&D strategy of course spans the 5 prime systems areas of: a) structure, b) powertrain, c) chassis, d) electrical & electronics and e) trim & hardware. And in recognition of its own strength and competitor strengths PSA maintains a focus on Powertrain, its future-view of which includes high-efficiency diesels, dual-role hybrid technology which sees the electric motor fitted as a complementary item added in almost a 'bolt-on' manner to the the secondary axle, and the seeming perennial slow maturation of EVs.

PSA's diesel capability has long been recognised by the public since the 404 model with Peugeot trying to maintain that reality and impression via motorsport such as Le Mans (with Audi diesels literally close-by), the WRC and other privateer team links with various endurance racing..

Importantly, Q1 saw the announcement of a 3 cylinder turbo engine being developed. With a 175m budget this looks like an adaption of a 4 cylinder architecture as opposed to what would be a more expensive new engine family.

With regard to hybrid tech strategy, PSA is following both conventional and unconventional routes, the latter as seen with the introduction of the 3008HYbrid4, the intention is to use exploit low-cost applications methods which instead of being intrinsically built-into the prime powertrain of the car (as with Prius or latter diesel 308Hy) or indeed optionally mated to the gearbox (as with FIAT), is instead a very separate entity which requires as least engineering interference with the prime mover unit as possible, and instead develops a structural package protection policy affecting small sections of the platform rear to house a rear axle electric motor and battery space.

[NB This was has been the conventional approach for hybrids throughout their 20th century development - eradicating the problems experienced from the hub-driven Lohner-Porsche yet maintaining its dual systems simplicity – and most prominent in military applications to provide both short-term silent running and optional 4WD].

Thus through Bosche co-developed systems, PSA though later to market with hybrids is theoretically well placed to in time 'steal the march' over less frugal petro-electric hybrid systems offered by others.

At the geographic level the BRIC regions and other 'secured' EM nations are of course a major focus for PSA, as for all western VMs seeking future growth.

China:
China has obviously offered growth in recent years as its economy flourished, and even with the slight slowdown seen in recent months, will continue to do so given PSA's long established market presence. H1 2010 saw a 49% sales increase YoY.

Its operational presence has been buoyed by the fact that a new JV agreement is to be signed with Changan Motor which provides a second manufacturing avenue given the long established JV with Dong Feng (DPCA) now running with available capacity of 450k pa via 2 plants and another Powertrain plant with 640k pa engine capacity and 375k pa gearboxes. This production 'homeland' formed a base from which PSA was able to build Chinese presence for Faurecia, GEFCO, PSA Banque (market entry via Bank of China), and latterly R&D capabilities (titled the China Tech Centre) in Caohejing, Shanghai, which both encourages local supply-chain strength and modifies vehicles to meet national consumer expectations. This capability works reciprocally with the Tongji University's Institute of Automotive Studies, the recent fruition of which was the April debut of the Metropolis concept – the first notionally Chinese concept car developed. And recently an exhibition partner for the French stand at the Shanghai World Expo.

[NB. Present press reported regards the evolving 'remoteness' of PRC attitudes to foreign company presence may or may not be being over-stated. Yet it seems that given long recognised Auto Policy which necessitates the consolidation of the domestic auto-industry that PRC officials will implicitly “balance” the interest levels of foreign interest companies. To this end, investment-auto-motives believes that given its effective role as an early entrenched sector development 'agent', PSA will have the innate advantage over its peer Renault which may increasingly need to rely upon its Nissan standing in the country. Hence although sector shrinkage will continue to proceed, PSA is not in danger of being marginalised given its deep involvement to date along with of course VW & GM].

Presently China accounts for 14% of PSA Autos sales, up from 10% in 2009, which highlights the disjuncture between the 2 markets over the period.

However, historically ranked as the 3rd foreign brand, it can be argued that Citroen is more susceptible to the intrusion of other non-Chinese marques from Japan and S.Korea aswell as China's own championing brands such as Geely, BYD, Great Wall etc. Hence the introduction of Peugeot 5 yeas ago. In obvious contrast to the near static product management of ZX in its former years, PSA must demonstrate a near constant model evolution policy that sees low cost but truly noticeable aesthetic modification every 18 months or so; very much aligned to the USA's 1950s new model year ethos of 'planned obsolescence' creating an ever-changing surface impression to avidly promiscuous consumers for what are in effect long serving, highly amortised platforms and architectures.

[NB investment-auto-motives proffers that in doing so, an additional income stream could be obtained from a newly created separate after-sales unit, with the remit of offering to (same shape) older model buyers, cosmetic update packs which imitate the features on previous model years, and negates the oft seen poor efforts of used car personalisation that can damage brand perception. This thereby maintains a constant design lead yet allows for a sizable after-sales opportunity in parts and service to perpetuate demand for new and near new vehicles in what is possibly the world's harshest auto-retail environment].

Riding on the back of Citroen standing and offering something akin to Euro-sportiness, the Chinese sales of Peugeot cars have climbed ever upward, reaching 410k units in 2009

Russia:
In Russia, Moscow, St Petersberg and regional surrounds experienced a -7.6 % YoY sales decrease for H1 2010.

Assembled vehicles from the (Mitsubishi JV) Kaluga facility (110 miles south of Moscow) came on stream in April, though the initial plan of 75k units pa may be reduced. The E470m plant was designed with an annual capacity of 150k units which was intended to serve a 100k 2010 Russian sales ambition generated in late 2007, but a massively declined car market has of course undermined that target.

[NB the original 150k capacity has been officially reduced to 125k, very probably to demonstrate better plant utilisation rates when the factory ramps up production].

Moreover it reportedly caused a massive over-stock of vehicle inventory, which has sat as a virtually unattended glut on the runways of a fringe airport near St Petersberg for a year. Conjecture presents that given the inability to properly secure these sites that the criminal fraternity will have been tempted to steal whole vehicles and parts for black-market export to the Balkans, Greece, Turkey & CIS.

Mercosaur:
Whilst Latin America generally saw sales plummet in 2009, Brazil and surrounds saw an 11% YoY increase for H1 2010, so theoretically aiding the goal of reaching 500k units pa in the mid-term.
Q1 saw both Brazil and Argentina lift 17% or so, PSA beating the market trend with a 20% rise.

PSA currently holds 5.3% Mercosaur market share, something it intends to buoy with the capacity exapansion of its Porto Real plant in Brazil and Palomar facility in Argentina, the cost bases of which to be assisted by the establishment of a regional Procurement School.

The ambition is to become a top 4 producer in Brazil, so displacing either FIAT, VW, GM or Ford,: all of which have appreciably higher regional share. The PSA Board views a #1 position in the Argentinian market as the prime stepping stone. However, having seen Argentinian gains of 26% in 2007, 2% in 2008 and -22% in 2009, even in a market up 20% so far this year (peaking at 37% in March) the performance of PSA is uncertain given its lower ranked position, unless its new Hoggar car derived pick-up manages to steal hearts and minds.

India:
The Asian sub-continent has been a frustrating arena for PSA, with previous attempt(s) flailing. However in the last year PSA re-affirms its intent not to miss out on such present day lost sales, and the obvious large future potential. Chennai – the small car manufacturing & export hub of the country – has once again been notionally nominated as an ideal location, but for the production of mid-sized cars: presumably in the Logan mould, so following Renault's entry strategy (beyond its own Bajaj JV small car intent).

This is one where western OEMs avoid head-on small car competition with the likes of Maruti-Suzuki or TATA, and instead push the sale of affordable compact saloons and hatch-backs, thus following the path of Ford and others.

Yet it also follows a similar effort over a decade ago with the 309 in partnership with local producers Premier Motor. This stumbled due to an overlap of various issues, including immature market, low sales and worker demands raising per unit labour costs, and claimed low support of the service network by TVS (Chennai) and others. Moreover Premier Motor also undertook a renewed agreement with FIAT to assemble the cheaper Uno which undercut the 309. The outcome for PSA was to see the Peugeot name spotlighted in consumer issues press, somewhat staining its reputation, having pulled out in 2001 has waited a decade for a re-entry attempt.

[NB Given the present heavily declined position of Hindustan Motor – losing R-3326.37 Lahk in
Q1 2010 – the company aswell as rationalising operations and expanding Mitsubishi licensed vehicles may well be seeking additional JV projects or full alliances. This will not have been unnoticed by PSA executives – as indeed that of other western VMs – and investment-auto-motives expects that the basis of a mutual agreement between PSA and Hindustan Motor will have been explored, possibly engaging latter-day 3-way talks between the parties given the PSA-Mitsubishi alliance link already in place, in a near copy+ of the Russian Kaluga agreement].

Having previously conducted feasibility studies PSA believes it must operate at above the 5 Lahk mark to both separate itself from the centre of the mass market, presenting a price differential on the local value ladder, between a lower set Peugeot and higher set Citroen. R-introduction set for mid 2011.


Viewing PSA concept cars, last year's Peugeot BB1 city-car with unorthodox 'twin scooter seating' arrangement was really an exercise to publicly demonstrate the company's attention regards small car products such as Smart ForTwo, BMW's upcoming MegaCity and France's own established Axiam Mega (which acquired the UK's NICE Car Co). The recent SR1 simply sets-out the future styling tone, which see Peugeot a much needed return to handsome conservatism after what as been a period of deliberately provocative unbalanced proportions (esp front vs rear), general form and oversized trim and hardware such as grill and lamps, The SR1 heralds back to the much lauded Pininfarina designed 'clean' 'thin-lamp' 406 coupe, and in doing so should convey improved product qualities and quality that will help maintain pricing levels.

For Citroen, following the 2CV inspired Revolte from last year, the GQbyCitroen concept which allied the division with GQ magazine appears little more than a March/April 2010 marketing initiative, exploiting a computer rendered concept car as an 'Advertorial' truing to reach a higher disposable income target market audience which would not ordinarily consider Citroen. Physically real – even if really another PR exercise is the Survolt race EV, premiered at Le Mans presently.
And as previously stated PSA China illustrated the Metropolis concept, still bound to a computer screen and reflecting SR1 cues, but essentially declaring the maturation of its local self and in a broader sense China's own improving R&D skills.

As for the future of the DS line, the 'High-Rider' offers a second DS model derived from the 3008 Hybrid4 platform, offering instead a 3dr coupe package

Given the creation of a more upscale DS line, industry observers have been questioning about the creation of a low-level line to compete against Renault's Dacia in specific EM regions. Jean-Marc Gales (Head of Peugeot-Citroen brands) has not outwardly refuted the idea and given the in-roads Dacia has made in both EM and latterly 'advanced' areas, it must be top of mind even if not explicitly sat on the Board agenda. Gale adds fuel to the conjectural fire by stating that such an initiative would be (obviously) not centred on the EU, presumably instead driving demand from near-east stronghold countries and India.

Mu by Peugeot:
Mu was previously launched to demonstrate PSA's commitment to the 21st century ideology of 'a la carte' personal mobility, offering a one-stop-shop service for the individual, couples and families to order and experience a selection of 'mood & mode' appropriate, low carbon footprint travel solutions. The service ranges from bicycles to scooters to cars, MPVs and vans to in due course EVs.

Introduced in Paris, it is now available from Peugeot owned dealers in Berlin, London, Madrid, Brussels and Milan, due for extension into other 2nd tier cities in these countries aswell as the Netherlands and Portugal.

It has won Automotive News' LEADER award in the distribution category, and with over 200,000 website hits has spawned public interest from press stories, yet exactly how many take up the service remains to be seen. At the very least even if ultimately unsuccessful as a transport rental model operated by PSA dealers the initiative does allow PSA to claim corporate social responsibility bragging rights aswell as increasing footfall into corporate owned dealerships, a percentage of which will be converted to conventional vehicle sales.

However, ultimately the roll-out of Mu should be applauded given the sweating of the PSA asset-base in terms of dealer locations and broad product portfolio, as long as undertaken as a constrained, high impact initiative that is not expected to perform overnight, but instead gains ground across Europe's metro-centres year after year. It must then have a 5-10 year commitment with ideally separate and detailed cost-centre financial reporting.

Given the auto-sectors long-held desire to re-orientate aspects of its business model to reach over into the typically warmer investment waters of 'hi-tech consumerism', PSA with investment banker assistance, will probably be moulding Mu as necessary to attract PE 'eco-scheme' interests prior to an ideally envisaged long-term IPO; the process of which allows PSA to enter untapped global metropolitan areas as a precursor to growing PSA in low exposure and uncharted regions.

Thus the role of the allied 'Peugeot City' sites (seen first at Rue de Chateudun, Paris in March) is to set a new alternative retailing tone. It is set out with 4 distinct zones: 'Lab' (visual vehicle personal spec facility via touch-screen), 'Novelty' (for brand news updates), 'Urbanilty' (for communicating Peugeot's mobility philosophy ie prompting bicycle and scooter use) and 'Advice' which acts as a conventional purchase and finance agreement desk). Latter locations include Warsaw & Riyadh.

[NB investment-auto-motives conjects that PSA will indeed introduce a second sub-brand (akin to DS) which will compete against Dacia, Skoda and others in the entry-level section of segments. And given the manner in which DS sits above, so “CV” appears to be a powerful nomenclature to sit below the 2 primary Citroen and Peugeot brands].


Operational -
Cars:
The beginning of the year started with a tinge of dismay as PSA announced the recall of 100,000 107 & C1 cars that were deemed to have inherent problems given their twin manufacture with the Toyota Aygo in the Czech republic.

Of the recent & soon to be introduced new models: 5008, DS3 Racing and RCZ, although they do fill the product cadence pipeline, they do not in themselves significantly lift vehicle mix and so income contribution as typically new conventional mainstream product would. RCZ is a halo product to lift the image of Peugeot and although seemingly well conceived from a 'parts-bin' view, so limiting project investment and time to market, and per unit margin, its limited numbers offer a small financial contribution. DS3 Racing, though in greater numbers is derived from the same raison d'etre, indeed it seems the ethos of the sub-brand itself. Whilst sales will be greater than RCZ as a cheaper more practical car, its volume and reduced margins still adds relatively little contribution at this critical time.

The 5008 is a slightly different beast, as a compact 'high-ride' CUV, serving as the 7 seat variant to its 3008 sibling introduced last year; that earlier core variant due to take much of the PSA Lion's share in this segment. Given its 308 platform roots and the development of the vehicle type from MPV-SUV-hatchback roots, the 3008/5008 can be regarded as 'fringe mainstream' given that monospaces account for 19.4% of sales in France, 14.3% in Germany, 13.5% in Span, 13.1% in Italy and 11.7% in the UK. Thus whilst the physically longer 5008 may add additional sales and possibly good unit margins (depending on accounting methods), it will be the 3008 which serves well throughout the remainder of 2010.

[As described in previously posted PSA comment, the DS sub-brand – intended as a Mini competitor – is only really a compelling proposition to French buyers given the sub-brand's relevance to the French popular consciousness (and even then only really to older people such as the 'grey set)' who seek something petite, Francaise et avec 'la difference'; thus not a product platform (in its current guise) for Pan- European or worldwide product success].

The new 408 sedan and variants is launched worldwide in H2. In a change from the historical norm of a separate model line, in a bid to harmonise and scale-up platform efficiencies, the new car is effectively an (rear overhang) extended 308 given a boot/trunk and saloon profile. This marked change, from a poor-performing low level pseudo-exec EU-centric car, better suits the compact sedan demands of EM regions.

Citroen C5 is also additionally launched in China, whilst Latin America gains the 408, C3 Aircross and Hoggar (208 pick-up)

To maintain public profile PSA ran two new RCZ coupes at the Nurburgring 24 Hour race in May, taking first & second its class (sub 2.0L diesel); one of the cars driven by Jean-Phillipe Peugeot – Vice Chairman of the Supervisory Board. It was of course both a pre-cursor to the LMP event at Le Mans and a celebration of Peugeot's 200 years since official formation in 1810, together an effort to raise Peugeot credibility amongst the dominant 'sporting class' Germans.

And lastly, to demonstrate its self-styled leadership role in CO2 friendly cars, PSA states that it will:
by 2010-end introduce 3 models that reach 99g/km or less (207*, C3*, DS3* – Airdream etc spec. engineered) [NB* the substantially higher list prices of these type of eco cars from all manufacturers, to cover project engineering costs and set an eco-premium precedent)
at 2010-end introduce an EV
in 2011 introduce diesel hybrid variants of 3008 and DS5
in 2012 introduce a plug-in 3008 (rated at 50g/km)

Faurecia:
Though Q1 was relatively quite, company ambitions regards Chinese expansion were realised in June and July, having seen its sales double over the last year thanks to continued business relations and a prior rebound in the domestic market (before the recent slip).

June saw it take an 18.75% stake in Xuyang Group of Changchun, Jilin Province.. This company owned by the local municipality supplies to FAW (including FAW-VW). In detail, the various systems divisions are to be split as:
Seating : 60% Faurecia vs 40% Xuyang
Interiors: as above
Accoustics & Interior Trim: 40% Faurecia vs 60% Xuyang

And on 2nd July it finalised a cooperation agreement with Geely and Limin for exterior and interior systems for all of Geely's brands manufactured out of 5 new plants currently under construction. These include 'Emgrand', 'Englon' (the London Taxi JV) & 'Gleagle'

GEFCO:
Little operational news has been announced from GEFCO HQ regards performance to date, however beyond winning an industry award, the downside has been a notice from the (soon defunct) FSA to its UK division.

Dated 26th April 2010 it states that GEFCO – amongst others - had not supplied details of their Retail Mediation Activities Returns (RMAR's) within the required time period.

Whilst the revocation of FSA approval may be seen as simply the regulatory body trying to show its teeth before its disbandment, it still highlights the poor business practices and possibly business culture of GEFCO UK Ltd, something GEFCO HQ and PSA HQ should take seriously if it is to demonstrate itself as a truly untinged entity when seeking credit market related activities in various regions.

PSA Banque:
Q1 saw the division access a E1.8bn from capital markets as like many CFOs it sought to exercise beneficial conditions given possible credit contraction possibilities on the horizon.

As with all auto-producers, deployment and exploitation of captive finance houses have been recognised as key to retaining access to wholesale credit markets. As a result of previous reliance on a few key western locations – as has been the historical norm – the credit crunch and EU sovereign debt problems have forced producers to set-up far more market localised in-house financing operations, acting as the intermediary between less problematic local wholesale credit markets and the pent-up potential demand of dealers and consumers. Thus reaching further into BRIC+ territories has been a primary management focus over the last year.

In this vein in January PSA has announced its regional licence completion for PSA Banque RUS in Russia, taking over AIG's previous operations and taking a 98% stake, a necessary move given PSA's small but evolving market share and availability of PSA product from the local assembly facility in Kaluga.


Financials -
Unfortunately PSA transparency in this field has become ever more opaque, which unfortunately gives the impression of budget allocation struggles having absorbed the 'life-saving' E3bn soft-loan last year/

The FY2009 report tried to balance an overall dark picture of (reduced) debt (to E1,993m from E2,906m) and operating losses (of E689m) with the upbeat highlight of a positive FCF (at E809m).

Such a bias to demonstrating healthy liquidity has of course been normal modus operandi for most VMs, well recognising that organisational and balance sheet re-dress to demonstrate the availability of working capital was viewed as key – even if the other accounting fundamentals flailed. Unfortunately for PSA the balance sheet – from an officially interpreted distance - appears more stretched than its peers, which whilst also suffering aren't quite as much, and typically have greater strategic and operational strength behind them.

To add further liquidity a E500m 5 year corporate bond issuance was offered, with as a counter-measure against debt over-exposure and so credit-rating mark-down, a partial bond buy-back initiated to the value of E244,950,000 for previous 10 year bonds issued in 2001. Theoretically given the end of life timing, with few if any coupon payments remaining, they would have been bought-back at near par value, and seems a case of recycling funds to sustain fixed income markets standing.


Conclusion -
Just as the hub & spoke design of a bicycle wheel is able to absorb and reflect external shocks, with simple change of spokes as necessary, so the Peugeot family have exploited such a flexible organisational format to maintain control and quickly access areas of competitive advantage & competitive equalisation.

However, the creation the organisational structure and the ability to exploit the advantages it affords very much depends upon fully understanding the dynamics of external forces. PSA's ability over the last 20 years to receive pertinent market intelligence, formulate required action and and execute has been part of its innate being that allows it to maintain its level of independence and supposed flexibility.

But the inability to react harmoniously to recent 'perfect storm' events highlights what could be evolving invisible stresses from within, and the very real need to make speedy progress in the Group Performance Plan that seeks to re-balance the apparent massive inefficiencies that have crept in over the last 5-7 years.

Investment-auto-motives external observation presents a case where PSA has partially suffocated its prime European offering so as to strengthen RoW operational capabilities and offerings in its 'holy grail' EM regions. A pertinent internal geo-political case of being sat between 'a rock and a hard place', and possibly fearful reaction having 'not watching the farm'.

Hence, real-world absence from the all important EU small car watch, whilst over-focusing executive, management and staff resource upon the extension reach of: non-EU areas, new entry into CUV segment, introduction of high-line DS. In addition expended effort to proactively manage public and investor perceptions - via concept cars, halo cars, PR & marketing initiatives such as Mu & Peugeot City - rather than fundamental realities of the business.

Such observations cannot be simply brushed aside, especially so if indicative of an inherent inability to evenly spread attention as necessary and implement all important required product actions to retain a once highly competitive position.

Of course EM attention, NPD attention and Retail Channel attention are all critically necessary. Especially so when a company is trying to escape its near overt 2/3 sales dependence upon a singular regional market, within which it relies upon tight segment(s) concentration. In this mould it is similar to say FIAT but is under greater pressure to be seen to be doing something relatively radical as it does not enjoy the similar foreign footprint or market standing of FIAT or other peers.

Yet giving away the home advantage in such a core arena as small cars only ultimately precipitates a far harder fight both at home and abroad. After all it is the commercial reality of net income and working capital levels that underpins the transition of ' PSA Futurology' into successful commercial extension achievements.

At a time when the corporation offers “Jam Tomorrow” - and adding seeming sizable sums to its fixed cost-base to do so - it must be seen to be capable of baking its bread and spreading its butter as convincingly at home as in the almost self-perpetuating EM regions.

Far more exacting detailed transparency about the exact ingredients (costs), recipe (targets) and baking fortunes (results) would be welcomed by near-term large scale institutional shareholders, mid-term governmental debt-holders and longer-term (Mu linked) expectation from possible private equity.

For PSA the development of Mu was undoubtedly undertaken to formulate a powerful yeast in the ostensibly cloying dough of the western auto-sector. However, although brilliantly dreamt-up as a brand name given its overtones of electrically-charged particle mobility, it also more recognisably represents the value of a friction co-efficient between 2 forces.

Thus PSA's real task is to better secure near-term value-creation as solid stepping stones to its more esoteric long-term goals. Doing so will regenerate its own credibility and reduce any level of investor frustration and friction.

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.