Companies Focus – Global 11 VMs – Q2 2012 Results

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


Contradictory Signs -

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

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

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

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

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

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


Comparative Q2 2012 Results -

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

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

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


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

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


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

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


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

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


Operating Cash Flow -

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

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


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

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


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

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


Automakers' Positioning -

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

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

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

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


Automaker's Context -

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

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

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

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

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

Outlook -

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

Micro Level Trends – UK Trade & Investment – From the Middle East, to Infiniti & Beyond.

It is during the more testing of economic periods – such as now – that the importance of long-established royal relationships between countries comes to the fore; in re-strengthening the intra-national basis for mutually beneficial trade, industry and commerce.

As seen from the S.Korea meeting, whilst G20+ politicians discuss exactly what the architecture of international agreements, and diplomats are tasked with shaping the building blocks that form cross-border business relationship building; very often the cement which forms necessary strong bonds is mixed and spread at the social level between royals.

This week the the Queen, heading the House of Windsor, has hosted the visit of the Emir of Qatar, heading the House of Al-Thani. The important implicit pretext of maintaining mutual interests between the UK and Qatar and ideally strengthening the level of commercial interaction.

Such initiatives are welcomed at a time when the very notion of national sovereignty – and its financial and diplomatic power - has re-emerged via the important deployment of SWF monies as a major contribution in stemming and rebuilding the previous loss of confidence in capital markets and the economy at large. Whether that was the Middle-Easts re-capitalisation of CitiGroup, or indeed the re-capitalisation of General Motors (North America) with Canadian governmental finance made available, presumably under the ultimate auspices of the UK's Queen's Council.

Thus, we see the very real relevance of 'global back-stop' sovereign governance.

The desire to grow and protect historic trade routes between the 2 regions (as part of the East-West network) and the early 20th century discovery of oil in the Peninsula, has meant that typically the UK's relationship with the Middle-East has been low-key but strong. The tribulations such as concerns about yesteryear UK imperialism, the Suez Crisis and the early 21st concerns regards international terrorism, in the bigger historical context, problems that were (and will be) overcome.

In recent years, Qatar has taken a leading role within the Middle-East in building ties with the UK, its efforts building upon those by Bahrain and Kuwait in the arenas of real estate & automotive (Aston Martin Lagonda). Qatar, through the QIA SWF monies and other vehicles, has (as the FT well illustrated) in 2007 invested a 25.9% stake in Sainsbury's, bought 15.1% of the London Stock Exchange and took a lead share in the (now 'Mutually Royally Re-Worked' and aesthetically far improved) Chelsea Barracks redevelopment scheme that same year. In 2008 helped to underpin Barclays with a 6.8% stake. And in 2010 bought Harrods (from Egyptian Mohammed Al-Fayed) aswell as the Park House site in Oxford Street. These purchases therefor nearing £7 billion.

Of course, such deals are part of a larger, mutually beneficial, reciprocal arrangement which sees portions of trade monies effectively recycled between the UK and Qatar to buoy their respective balance of trade figures: the UK importing CNG and LPG from Qatar via its South Wales storage and distribution centre, as part of its desire to nurture trade and to burn cleaner fossils fuels for its own energy needs.

Nothing mentioned thus far is a revelation, but beneath the surface of such highly visible UK and Mid-East relationships is an ever growing level of smaller scale trade, something noted some time ago by investment-auto-motives via observation of central London retail, and recently highlighted by the FT's Video section which 'snap-shots' Egypt's now outward-bound stance; with examples such as Azza Fahmy (jewellery), Sewedy Cables (industrial electrical) and Citidel Capital (PE firm) based in Cairo. Thus, Egypt and its Arabic neighbours are becoming more export orientated with the confidence to use both local private equity funds and buoyant company balance sheets to make their mark on the international scene. Perhaps in particular London and the UK scene given good historical links and Britain's reputation for speedy economic recuperation during times of economic malaise.

But perhaps the most high profile case in point sits within the automotive retail arena.

Nissan's Infiniti brand launched in the UK in August, making a high-profile appearance on Piccadilly, located opposite The Ritz hotel and next-door to Audi, all as a firm positional statement. This showroom acts as the prestige flagship store, and accompanies a more operationally centric sites in Reading and Birmingham, with plans to open further showrooms in Bristol, Cambridge, Nottingham, Stockport, Leeds, Newcastle, Glasgow & Belfast – so targeted points country-wide.

As part of its marketing initiative to demonstrate Infiniti's soul, the spirit of Japan's 'Adeyaka' has been espoused, the term indigenously used within old Japanese to reflect the essence of 'Japanese artistry', and different interpretations of which are used to convey the persona: from use of Japanese calligraphy to mimic the feature lines of its cars, to the idea of a 'boutique hotel' as part of its showroom image, to an in-house magazine titled Adeyaka that is intrinsically art orientated.

Of note is what appears a collaboration of Japanese & Arabic cultures, with website and magazine graphics displaying 21st century computer-created renditions of traditional Islamic geometric patterns, and the Adeyaka soundtrack seemingly a mixed overlay of calming Japanese and Arabic melody. The use of a cross-marketing exercise with Cirque du Soleil, also conveys the central brand notion of 'a modern twist on a classical theme': raison d'etre of the French acrobatic troupe

The brand arrives as part of Renault-Nissan's strategy to grow Infiniti beyond its previous US boundaries, where the brand was ostensibly devised as effectively a re-badge exercise to utilise Nissan's large car platforms and take on Toyota's Lexus and Honda's Acura. Initially launched with one overtly conventional car the range broadened via the addition of smaller 'badge-engineered' products. The lack of sales success in Japan and the US augured more radical design thinking resulting in the idiosyncratic 'curvy' J30: offering a very different premium car aesthetic as a way to try and stand out from Japanese rivals. However, this strategy the effort failed to truly excite prospective US customers, and the brand whilst holding a steady in sales terms never reached Acura figures, and so very wide of Lexus numbers.

Yet, Nissan recognised it would be a long slog, with the Renault tie up in 1999 adding renewed impetus regards financing, resources much if which is strategically driven by Renault's own failed 'on-off' efforts thus far to create an up-market French brand, having tried to offer avantegarde premium Avantime and Vel Satis models, with Laguna as the supposed 'bridge'.

Hence, the strategic and very necessary role of Infiniti as the R-N group's premium brand has come ever greater to the fore over recent years as mainstream car sales took a heavy hit and additional/complimentary unit margin profitability has been perhaps the prime assessment criteria in the midst of the E3bn of French government support and investor calls for factory closures. Moreover, the recent technical cooperative agreement between Renault-Nissan and Daimler, not only aims to provide both parties with reduced cost quality components, but should critically allow Infiniti to access 'non-obvious' Daimler technology, just as the Germans look to utilise added-advantage from Infiniti's Japanese sourced technologies. But critically, R-N & Daimler talks will have discussed how Infiniti can be used to target BMW & Audi (hence its Piccadilly 'confrontational' positioning). So as to draw-fire in the long-term from Daimler.

This is undoubtedly a welcomed move by GCC fund managers given that Daimler itself is 9.1% owned by Abu Dhabi's Aabar Investment (Aabar itself interestingly taking 40% of Daimler's Tesla stake) and Kuwait's Investment Authority holds 6.9%; with Renault-Nissan holding 3.1% (as at 31.08.2010).

This may appear to undermine Qatar's own stakeholder interests in VW Group, owners of Audi, but in reality the sales volume differential between Audi and Infiniti is presently huge, with Audi due to grow further yet driven by the Chinese market, other EM regions, new entrant vehicles like the sub-compact A1 and new conventional A2 and further economies of scale from the VW group at large. So whilst Infiniti appears to 'sit on the doorstep' of Audi, there is little threat to the Audi (thus VW Group) income stream - and so the size of Qatar's SWF dividends from VW AG - given the bigger picture dynamic.

In contrast to the US experience, Infiniti did however enjoy greater success in the Arab world, largely due to the credibility and respect that Nissan had build-up over the preceding 20 years with the hardy 4x4 Patrol and conservative but ever-reliable sedans. That engineering edge gave Infiniti a gateway into the region which it took, and although still behind Lexus, ahead of Acura. In tandem with this for global publicity purposes it used product placement in the film 'Three Kings', which set in the first Gulf War, set Infiniti convertibles amongst Rolls-Royces et al amongst the disposed despot's luxury car stable amongst.

This then sets the Arabic context to the Infiniti division's global sales aspirations, setting itself out as the alternative brand to the obvious German and Japanese, with efforts towards additional markets primarily in Western Europe, Russia and the higher net worth regions of Asia.

Thus, whilst the RymCo UK proprietorship nameplate is somewhat unknown to the casual showroom visitor in Piccadilly, it should come as little surprise to the worldly observer that the UK market reach for Infiniti is financially backed by the UK arm of a locally publicly listed Lebanese company: the Rasamny-Younis Motor Company. RymCo UK seemingly employing a mix of auto-retail experienced senior management, the average fixed cost-base reduced with the use of enthusiastic younger sales staff. The sales onus is on the level of personal service offered (with valet car pick-up & delivery) along with the Infiniti (entry-strategy) staple of offering a highly specified car for comparable cost to its lesser equipped claimed competitors.

RymCo is Infiniti's partner in its home territory, and the most important vehicle distributor/dealer in the Lebanon. The company was set-up in 1934 and distributed Fords, GM (Holden), Chrysler, aswell as consumer durables such as Colgate toothpaste and Palmolive soaps. Honda and Datsun/Nissan was added in the 1960s, whilst afterward truck distribution and sales for GMC, Nissan Diesel and China's FAW became important contributor to turnover. It has been present in the UK for some years, and today operates across the Middle-East, the US, Japan, Europe and China.

[NB The FAW interaction begs the question that does RymCo see itself as a foreign-region importer of Chinese cars and trucks in due course].

No doubt RymCo also prides itself on the fact that whilst the financial crisis caused untold contraction to western enterprises, seeing car sales collapse, it was able to boast of Lebanese-market unit sales growth in cars of 74% for 2007 (vs 2006) & 84% for 2008 (vs 2007). (Thereby gaining public recognition from Carlos Ghosn, CEO of Renault-Nissan, and himself of Lebanese parental extraction, though born in Brazil)

Though many Middle-Eastern countries and firms have displayed a renewed confidence and improved ability, it can not be denied that (as the FT reports) there are industrial structural and cultural challenges to be overcome.

The executive director of Egypt's government assistance agency highlights the restriction of middle and large capital funding at the local level for foreign investment. An additional challenge is that of the typical foreign-held viewpoints regards the operational commitment by Arab businesses to FDI projects, especially regards their desire for a use of their local labour force so as to stimulate local county-scale economies.

The answers to these and other questions should be addressed firmly and clearly by Arabic businesses and rationally absorbed by foreign representatives seeking FDI, so as to ascertain the true and feasible synergies between the interacting parties, and importantly not to create an unintentional stalemate and so loss of faith between what are typically more urgently motivated westerners (seeking to tick the boxes of development plans) and the more philosophically orientated middle-easterners who seek a level of security and stability to be delivered by outside of their direct cultural influence and so comfort zone. Thus, in the question of expectational manufacturing FDI into Europe or indeed Asia, Arabic companies may need to demonstrate their own manufacturing cost base and national development ambitions time and time again to show their rational for domestic production if it appears a sticky issue.

It is no surprise that to date Arabic investment fields in foreign lands have been typically real-estate (eg Chelsea Barracks), reputation trusted retail (eg Harrods), large corp banking (Citi & Barclays) aswell as reputational global manufacturing (eg Daimler & VW).

These are undoubtedly lower-risk options in what Arabs probably see – for good reason - as a world of higher-risk possibilities. Understandably investors are forced to trust either the asset-base's innate value, the integrity of the management team, and ideally a combination of both. Add a cultural difference into the equation and what appears of medium risk to a western investor possibly borders exotic to a more cautious (wo)man from the Middle-East.

To this end, international success stories such as RymCo - and similar scale peers from around the Arab-world - should serve as models for the small yet ambitious enterprises; ones that see themselves with a place within the regional, continental and world-wide business and investment arena.

This should ultimately be a win-win for Anglo-Arabic relations as British companies identify low-cost sourcing and/or manufacturing opportunities generated by an increasingly skilled Arabic workforce using modern methods, with the possibility of a counter-point skills transfer sees the previously lost-skills of specialist crafts fields either brought back to the UK or indeed possibly newly introduced.

Today Arabic SWFs and cash-laden companies cautiously seek new investment opportunities in foreign climates, both within their usual asset-classes and beyond; this exploration undoubtedly governed by the need for mutual synergy relationships that importantly allow for what they see as appropriate levels of shared return at financial, corporate development and structural development levels.

Thus it does not seem too far a point of conjecture to suggest that as the Qatari Emir rested in Windsor Castle, that his thoughts turned to the efforts and experiences of Lebanese RymCo, its UK HQ situated only a short distance westward down the M4 corridor in Reading.

For the brighter future of the UK, Qatar and Anglo-Arabic relations investment-auto-motives does indeed hope so.

Companies Focus – 2009 Auto Sector Performance – Will FY09 Earnings Reflect 2010 Pulling Power?

Macro-economic forces across the globe presently seem to almost conspire against an easy pull-out of these dour times. China's altered monetary stance to cool asset class bubbles, Europe sovereign debt problems, a US caught between Democrat's calls for fulsome regulatory reform vs Republican's concerns about consequentially impeded investment & growth, to now major shudders through SE Asian capital markets caused by the first aforementioned issue.

As markets hold their breath, so do western automakers, recognising the revenue off-set that the Eastern consumer brought, stepping into the shoes of reduced, yet stimulus supported, western consumption. As Asia pauses for thought and EU & US budget attention lessens the likelihood of a second year of scrappage incentives (even if FIAT's Marchionne should like to see one), both CEOs and investors weigh-up what Q1 2010 will bring.

Unsurprisingly, the publicity noise and glare of the banking sector's massively buoyed FY09 earnings (and related bonus pots) undoubtedly over-shadows investor and public reaction to industrial sector earnings.

Financials were dramatically lifted over the last 3 quarters thanks to: a rapacious equities rebound (possibly overdone) earning brokerage fees and proprietary fund returns, mandate earnings from client companies seeking lower-cost funding via bond and convertibles markets and scouring for prime M&A deals offering advisory fees and credit-line products.

In comparison the story for much of the rest of the matured western commercial base has been one of caution in the face of continued lack-lustre supply-side and demand-side economic indicators, and more importantly, very tight management budgeting schedules. The majority of CEOs & CFOs continue to expel non-core operational activities, finesse cash-flows and under-take the typical end of decade strategic reviews with greater vigour - so as to be in the right shape for the “new normality” (to quote PIMCO's Mohammed El- Erian).

This continuous cost-cutting march has become almost business as usual within the Auto sector. Perhaps less highly visible but more acute amongst the western supplier-base as it re-organises both internally and sector-structurally to meet this “new normality” pertaining to a heavily flattened consumer demand for new vehicles, within which the down-sizing product trend reads as inherently reduced per unit profitability. Hence, in quiet but large measure the supplier operations continue to shift toward Mexico, the CEE region and of course BRIC areas; either as transplant ventures or JVs with local companies depending upon national legislation and/or cultural climate. The perfect storm that engenders the move continues as EM vehicle demand continues apace – even if slightly slowed – and the ongoing pressures to reduce costs intensify across the board, from: plant & office fixed costs, to raw material, component, sub-assembly, labour & GA.

2008-9 saw the automotive centre stage move undeniably and irrevocably eastwards.

That dynamic is of course also mirrored by the volume car-makers with primary exposure to the Triad regions, facing similar macro-challenges but in reality positioned subtly differently relative to their own product and structural 'SWOT's & 'TOWS' – even if the typical group-think of stock market reaction rarely differentiates. As a consequence of both that generalised herd instinct versus the varying analytical comparator penchants of auto-sector analysts, CEO and CFOs must of course manage investor and analyst expectations.

The recent years of flux have meant dedication to hard cost-cutting QoQ, with an attendant optimistic broadcast of a brighter, eco-green tinted tomorrow with long awaited reflated revenues. Naturally the law of diminishing (marginal) returns meant that the initial 'top-line' benefits gained inevitably decreased as COGS caught-up with turnover. As such the force of commercial headwinds intrinsically increased; the counterpoint deflationary force on input costs of little real effect given suppliers' own determination to maintain their own margins, via maintained pricing where possible and 're-scheduled' credit and debit payments.

Invariably the old mantra that 'cash is king' came to demonstrate its truism, as has the importance of structural integrity provided by strategic 'shape & direction' . Those corporations that had either accumulated liquidity (eg VW, FIAT, Honda, Hyundai) or were able to ably raise it (eg Ford) and importantly were attuned to the new C of G in global purchasing demand for smaller cars were better set to face the incoming, and still ongoing, storm. Consequentially, those corporations that were more naturally aligned to A,B,C segments due to originating domestic market & prime market characteristics were able to ride the wave. And furthermore, the firms that had been through relatively recent restructuring (best exemplified by externally-imposed Hyundai & self-imposed Ford) were structurally light enough to gain a greater boost from that surge in small car sales.

However, in contrast to these examplars of near singular global products, the power and future potential of regional leaders with multi-brand, intra-platform marque-engineering mastery cannot be ignored – especially if credible. Perhaps best demonstrated by VW's grasp on Europe-China (re-run with the new A3 platform after old A4), perhaps the benchmark for FIAT-Chrysler's ambitions of Euro-Americas synergies (initially a 'badge engineered' for N.America). With of course the onward march of Chinese manufacturers seeking domestic domination via consolidation and accordant economies of scale and brand/product positioning – effectively mirroring Alfred Sloane's philosophy when creating GM through the 1920s.

This then sets the scene to date, so what of investors' expectations from the major western manufacturers for Q409, FY09 and 2010?

To answer this, as a pre-cursor to the Q409 /Q1 2010 report, over the next 8 web-log posts investment-auto-motives provides broad-level snapshots derived from its Q3/Q409 forecast report, adding latter-day intelligence from recent events, official public statements (earnings guidence and otherwise) & generally inferred corporate direction for the constituent 8 major western producers.

Macro-Level Trends – Combating CO2 – Waking Up to a Downsized Electric Vehicle Dream?

Electric Vehicles are seen as a major part of the panacea to 'detox' the planet of its CO2 ills. And of course, theoretically within the whole-system argument of the negative (oil) 'well-to-wheel' versus better (power) 'plant to (battery) pack', the argument stands if the energy is created in a zero emissions manner.

This of course highlights the questionable feasibility of carbon sequestration, wind-generation, solar-power and other new-age clean-tech solutions relative to their proven older counterpart nuclear (fission); which whilst generating clean energy poses the drawback of waste disposal.

And so, like the green recycling logo itself, the never-ending discussion goes round and round and round. Doing so primarily between oppositional extremes: that of the scatter-logical alarmist approach “try anything at any cost to save the planet as quickly as possible!” in contrast to the overtly-cautious approach that posits “need for a balanced cost-risk-reward”.

The climate change campaign origins of meteorological academia obviously provided the (arguably simplistic) graph-based 'shock & awe' effect, as presented by Al Gore on his global lecture tour. That information awoke western society along with the weighty support document compiled by Sir Nicholas Stern.

Thus today, through a process of slow absorption, the western world has largely accepted CO2 cause, even if the argument's dissemination has not been seen to go through the process of 'hypothesis + antithesis = synthesis' that would have added gravitas. Of course, such a process appears 'only academic' relative to the limited time-frame to save the planet. Something all the more ironic given the campaign's origins.

Even so a growing profile of climate change skepticism is appearing, the counter-argument raising its head recently in the financial press. The doubts aired by the fringe deployed by those guarded, economically squeezed, nations which are all too aware of the financial consequences of signing-up to the successor of the Kyoto Protocol, at what will be a water-shed Copenhagen Summit.

Thus, whilst largely 'on-side' with the anti-C02 camp, the public looks on in bemusement, unable to understand the level of eco-hype versus eco-reality. And as a consequence, so the ideal level eco-action versus the attainable level of eco-action, Copenhagen then, becomes yet another milestone of confusion and ideological fragmentation.

As partial arbiters and history-makers themselves, industry sector CEOs and Boards stand in a similar position, being seen to be 'on-side' through green initiatives and good CSR, but also appreciating that they individually cannot be eco-extremists – especially so during such financially constrained times – given their obligation to corporate stability and shareholders. Overt eco-martyrdom has the flip-side concern of share-price suicide....something perhaps best illustrated in the energy sector itself.

So it is within this ethereal, juxtaposed milieu that automotive manufacturers must develop their corporate stance – both implicitly and explicitly.

They must tread a careful path that demonstrates that they are well-attuned to the CO2 agenda – especially in the public arena, are able to leverage their own R&D development, as well as directing such R&D to incorporate available government assisted funding, to create a multiplier effect. Yet still acknowledge that economic rationality must prevail in maintaining the technical conventionality and financial guardianship that underpins the viability of the commercial enterprise to its ultimate owners.

Executives must showcase their long-term corporate vision, yet also demonstrate a viable path to that far-off point. Different companies from different countries undertake this remit relative to their innate cultures, national sensibilities and interests, and executable R&D capabilities.

Thus Japan's historically conservative Toyota has in the last 20 years set out its 100 year plans, done so in virtual secrecy, with the edict that “eco-actions speaking louder than words”. Hence its low-key introduction of original Prius in the mid 1990s, sound technical development and proof of case in the real-world as a precursor to (self-congratulating) marketing campaigns. Choosing the Hybrid route (and so influencing Honda) via proven Ni-MH battery technology, Toyota has sold over 2 million vehicles (primarily in Prius1,2,3 forms) in the last 15 years.

That is an annual average take-up rate of 133,333 per year, excluding the exponential effect of manufacturing ramp-up and broadened geographical reach. This must be regarded as the industry benchmark given its first to market attempt and achievement using proven technology fed into today's (historically little altered) road infrastructure. At its core Toyota objectively appreciated that the Hybrid Ni-MH solution requires nothing outside of the automaker's control, thus was and is the 'de facto' solution.

The company recognised early-on that reliance upon external 'macro-level enablers' dictated by the political & financial circumstances & whims of disperse global governments was not a basis to progress its future. Its own domestic experience with the relatively stable, progressive Japanese government operating a relatively controlled society demonstrated the realistic headwinds. And let us not forget that Japan has been the technical tour de force for much of the late 20th century, which along with its lack of oil independence, is why it was glad to originally host the Kyoto Summit and review alternative auto-industry paths.

In contrast to Toyota's cautious achievement we have other international auto companies that laud the wonders of other technology solutions.

Some high-up the tech-curve are little more than Lab-bench proven. Whilst others (like the Lithium-Ion battery) sit effectively mid-stream and offer technology transfer exercises into the auto-sector in Hybrid guise (eg Daimler) and EV guise (Tesla). But given their respective experiences and volumes, these are hardly proven achievements that encourage mainstream adoption, since these integration cases do not reflect the heavy duty-cycle requirements that an EV version of a conventional mainstream sedan or 5-door hatchback would demand. Such vehicle uses demand far more than Li-on's originally envisaged requirement relative to its adoption in low power uses in consumer electronics.

Thus as with the case of GM's Volt 'range extender' car (offering massaged 200mpg+ figures) the promises of near-term mainstream future-tech seems all the less plausible given a heavily subsidised $35,000 sticker price (vs Prius' $22,000 & Insight's $19,000). Instead it seems a recycled re-run of GM's infamous Motoramas of the 1930s & 1950s - technological 'Tomorrow's Worlds' that never emerge.

But as perhaps the greatest proclaimer of the present day is Renault-Nissan.

Carlos Ghosn's achievements and ambitions at Renault-Nissan are well recognised. Changing times and corporate fortunes means that he has had to evolve from the renowned 'Le Cost-Cutter' a decade ago into the nouvelle 'L' Homme Electrique ' of recent years. Given Renault's part-national ownership (now perhaps under greater grip given the recent financial aid) and France's international push of EDF as a nuclear energy provider, it should be no surprise that there is an alignment of national industrial policy interests and so impetus to parallel EDF's and Renault-Nissan's future fortunes.

Overt EV-mania that has gripped the press in the last 5 years, assisted by automaker proclamations (of which Renault is the loudest), has generated accordant expectancy. Yet that expectancy which still has a long road to travel to be realised en mass, and if/when doing so will provisionally take a different form in terms of vehicle perception to that hyped and expected.

Even for the French, its experience of EVs - whether adapted standard vehicles (such as the PSA 106 EV & Partner EV) or indeed concept EVs (such as the PSA Tulip with associated rental scheme business model tested in La Rochelle) – have been comparatively small and isolated 'baby steps' relative to the size of the task. And let us not forget that these French-centric efforts with amenable government fleets and regional administrations were undertaken within far more conducive economic climates.

Today – even for French bureaucrats - whilst the technology may have improved the situational context has undoubtedly deteriorated. Furthermore, the innate business model(s) required at both ends of the value chain are still being developed.

At one end (upstream/micro-level) :
- the question of whole vehicle packaging
- the massive reduction of vehicle mass
- technology real-world prove-out of Li-on
- battery and EV manufacturing scale-up.

At the other end (downstream/macro-level):
- slack international governmental progress to develop a credible EV routemap
(especially in co-aligning regulatory reform of the road-space to accommodate radically different advanced battery-centric architectures).
- the budgetary pressure on governments not to fulfill their national and state pledges to subsidies the EV agenda.
- the lack of developmental progress regards 'holistic' powergrid development, including vehicle e-feed infrastructure.
- OPEC's apparent determination to maintain 'affordable oil' through additional capacity investment
- the question of merging historically separate oil & electric energy providers at the retail level to sell petroleum/diesel & electricity fuels side by side at the pump.

Already large chunks of public funds have been directed at volume manufacturers, vehicle start-ups and other participant players within energy & transport that appear 'big on talk but little on delivery'. As mentioned in previous posts, part of the reason for such slow progress is that often the era of 'technology disruption' (real or perceived) is that a great number of variables must be aligned to bring in a new norm, and that broad promise of fundamental change can be exploited by less than honourable interlopers that seek to gain from the overt investment enthusiasm of government and privateers. But beyond the opportunity for unethical practices, the very process of the multi-various economic agents working perfectly in orchestra is indeed problematic. [NB that is why historically greater technical progress is made in wartime conditions; when greater use of central planning is enforced, at the literal cost of public finances].

So such a land of promise, like an oasis, often appears closer than the foibles of everyday reality permits.

This oxymoronic state of affairs is highlighted in a recent WSJ interview with Carlos Ghosn, with his counter-point statements that: "our forecast is that sales of EVs will be 10% of the total market...by 2020"... versus... "EVs will move up slowly, not taking the market by storm"

Let us conject upon the credibility of the former statement...”10%..by 2020”. We can project forward (using VW's 2018 figures) that the global market will be 30% higher than today's (55m units) at 73m, and a few years thereafter reach 75m units, that means that Renault forecasts that approximately 7.5m EVs will be sold. This means that over the next 10 years an average of 750,000 EVs must be sold each year, discounting the ramp-up effect. This figure compares to the 133,333 units sold by Toyota using a far more mainstream technology & vehicle type over the 15 year period to date

It is thus no wonder Mr Ghosn must play both roles of optimistic 'preacher' and conservative 'prudent'.

For the present time, with Copenhagen upon us, it seems that the PESTEL context of conflicting issues and agendas that can be encapsulated as “eco-idealism versus economic handicaps” means that neither conventional car-makers, unconventional 'start-ups', the financial community nor governments are truly able to initiate the required change into a true EV world within the foreseeable future. Ultimately, each party looks to the other and rhetoric continues to overshadow tangible progress.

So, the word of warning is that investors must see conditions for true EV traction before the possibly hollow perception is priced into corporate MarketCap valuations. For whilst the auto-industry certainly needs buoyancy aids, they need to be credible and not the stuff of possibly damaging technology story bubbles.

investment-auto-motives objectivity means that it has no axe to grind, except that of that of private investors (the core of capitalism) being fully informed, by competent boards and management, and not led along possible garden paths, no matter how well intentioned.

However, to end on a more positive note that demonstrates a realistic step toward an EV participantt future, at the beginning of the year investment-auto-motives made an informal recommendation that Daimler exploit its use as a licensor/contract builder of its >smart ForTwo vehicle architecture. (It is perhaps the most 'package perfect' product that encapsulates the generic form & lightweight mass of a small 2-seater city car. Perhaps the best proven mainstream vehicle - along with the previous generation 'sandwich floor' A-class - for EV tailorisation. Thus at the recommendation's heart proposing that Daimler become a strategic enabler and benefactor from global JV agreements using ICE and EV powertrains.

That identified and recommended opportunity is now being reportedly taken-up by Daimler & Renault, with mention that the Twizy EV concept will be born from ForTwo, after a conventionally powered 2 seater is created.

The EV dream has been downsized for the near and mid-term, but is all the more 'real-world' practicable for doing so by being familiar and off-setting high-cost EV powertrain and e-control costs with a recently 'break-even' amortised platform.

So whilst there is a long road to still undertake, “Bravo” to Monsieur Ghosn and “Biefall” to Doktor Zetsche for taking the first plausible step.

As the struggle goes on to maintain the world with less than 550ppm (parts per million), the take-up of electric cars will seem indeterminably slow given the reality of government rhetoric over action and relatively tiny funding for such a major societal transition.

In truth, they may continue to grow stature as the 'good taste' preserve of a 'local elite' within the wealthier inner-suburbs of major metropolises within Europe's London, Paris, Berlin, Amsterdam, and the outer reach enclaves elsewhere, such as US's Silicon Valley, New York State Hamptons, Newport Beach, Santa Barbara, Carmel etc.

But whilst such EV popularity grows and has an affect, it will do so only at a comparatively tiny relative to the major CO2 reduction enablers of clean-tech ICE and Hybrid vehicles. Since, given its omnipotence, it will be evolved technology that takes centre stage in the CO2 battle as the economy regains a slow positive momentum between 2011-2013, and so perversely could, along with feeble budget-constrained government infrastructure efforts, suffocate the progress of tentative 'real-world' city-centric EV.