Recent news stories quoting expert consultant opinion, has highlighted the invisible force Chinese truck manufacturers yield in their home territories and neighbouring Asia. An Undoubted fact. But that opinion has also indicated that Chinese truck producers will invariably expand into the US and Europe – sooner rather than later.
This 'line' has become almost prevalent thinking since the automotive under estimation of the Japanese in the 1970s and latterly S.Koreans in the 1990s. But the car and truck worlds imbue very different political, economic, purchaser and user characteristics; and so easy parallels cannot be drawn, especially so today when the growth and export potential no longer lies in the west, which itself already domestically has over-ripe and presently under-utilised demand and capacity, to say nothing of the endemic regulatory and associated technical barriers.
However, whilst it is not envisaged that Chinese branded trucks will enter western markets any time soon, Africa, Russia, CIS states, the Middle East and parts of South America are the undoubted preferred destinations given broader national economic interests of China and its similar levels of lower technological need with RoW markets: allowing DIY servicing and running repair. Thus as seen with much of its broad apparent strategy – at the managerial cost of some European companies in previous flailed JV talks - the ideal has been to fit modern looking bodies to last generation mechanicals at affordable pricing thus offering what on paper appears a compelling proposition to target markets.
However, the fact that European truck manufactures have a comparably large labour content (versus the car) indicates that western manufacturers will be using their Chinese JVs to reduce the cost of their own purchase and assembly costs, possibly use these centres as structural and 'first-fix' assemblers – before shipping chassis units to their homelands – and using such performance benchmarks as indicators for their own domestic assembly targets.
Thus, whilst the Chinese branded truck export attack is hardly imminent, it is worth while viewing a basic 'outline' picture of the Chinese truck sector, and its accordant strategic future, as would be viewed by both domestic and international investors.
The truck and logistics industries are of course viewed as secondary investment indicators – beyond the metric norms - reflecting enthusiastic, flat or dour demand levels of an economy en mass, both at national and global levels. To this extent, the Chinese truck sector depicts the dynamics of the day, and by virtue, presents itself as a prime component of a much broader global macro picture.
Of course, the Chinese truck manufacturers have over the last 20 years experienced an ever upward growth trend as homeland consumers, services and industry underwent radical change under the auspices of quasi-communism, quasi-capitalism; a very 'alternative' mixed market economy sat on the world stage, which in turn required greater macro-policy comprehension and manouvre, and where the micro-policy of industrial manufacture was given increasing free market reign.
This is well understood by all, yet today China's economic world position has grown to that of a disputably 2nd or 3rd economic pillar, behind the US (and Europe), now nudging ahead of Japan. Yet more presciently, as the wealth gap narrowed under the dynamic of the 'Chinese miracle' its competitive advantage narrowed also, more so since the fiscal and economic stalling in the West under necessary fiscal deleveraging. Rising general inflation, the increased cost of capital (in the 'open' capital markets) and the spiraling wage component of input costs created the need for business model modification.
In reaction, following the basics of regional economic theory, mass manufacturers in lower-value businesses found it necessary to either move eastwards into the Chinese interior, aided by local and national government grants, or over the border to low-cost neighbours; with which bi-lateral trade has been of increasing importance.
Along with aspects of divisional re-locational has been parallel structural re-orientation of those industries which demanded ongoing cost-savings at fixed and variable levels, thus demanding improved logistics and haulage methods, containerisation growing in popularity, this partly enabled by the expansive railway network, but more so driven by the rapid rise of the domestic truck industry which offers ever better tailor-made and fuel-efficient products; itself a prime example participant of the aforementioned 'industrial shift'.
As a result of explosive demand over the last 15 years and the resulting reduced margins of hyper-competition, the face of the truck industry has changed immensely, primarily in terms of output and product offering. But it has also had a major ripple effect on national infrastructure along with popularization of the private car. A ripple which was always destined to created a literal traffic wave and ultimately a grid-lock 'flood'. This illustrated by Beijing's infamous 9-day August traffic jam on the Beijing-Tibet Expressway between Beijing and Jining. This near seizure created by a spike in HGV traffic compounded by on-going road-repair.
Ironically this rapid transit slow-down also reflects the policy-thinking of PRC party seniors and acts as a metaphor for the country at large, including ramifications for the truck sector. Having recognised the all too real changed conditions of the global economy, macro policy focus was re-aligned to inwardly charge the domestic economy with re-circulated wealth, instead of relying upon fading export demand.
That state of play has in effect been in motion since Q308, exemplified by the massive $586bn liquidity injection in 2008/9, orchestrated by the National Development and Reform Commission, and largely apportioned between public infrastructure build on road, rail, airport and irrigation, with the rebuild of Sichuan since the devastating earthquake, consisting primarily of official low-cost housing replacing slum quarters.
Read between the lines of snippets from previous policy speeches, recent central bank remarks and initiatives to cool a possible housing bubble, and it is clear that the PRC is itself undergoing a slowing of sorts to both combat internal cost-base rises and their effect on what officials see as the super-charging of the Renminbi valuation vis a vis foreign currency baskets.
Thus it seems a subtly played-out yet 'across the board' re-orientation is taking place, one in which the implicit party line is that only China can be counted upon to maintain its own growth path. And that will require the discomfort of change, both visible on the ground, and invisibly behind the scenes of industrial restructuring. Thus without the foreign-trade impetus as was so readily seen on its Balance of Trade account, China is seemingly set to become a more inward looking, or at least regionally aligned, country. This the case for all the 'soft pressure' that the US and Europe seeks to apply toward unilateral, bi-lateral and global interests.
A large consideration of the 'Chinese miracle' has of course been due to the ability of indigenous industry to scale-up capacity and so lower costs for a consumer hungry population. But perhaps of equal importance has been the expectational boost delivered to consumers through the catalysts of joint-ventures with western firms. Most notable are VW and GM, joined by a host of other manufacturers seeking their Chinese foothold, but less high-profile has been the JV arrangement in the truck sector. Here the largest – typically ex-state -producers have enjoyed foreign relationships that have helped transform their product ranges and operational methods.
A summary of truck sector players follows:
Top 8 heavy truck makers
- Sinotruck, - FAW, - Shaanxi Auto , - Foton , - Beiben, - SAIC Iveco Hongyan (SIH) , - JAC Auto, - Dongfeng,
Top 10 Medium Truck makers
- Dongfeng, - Chengdu Wangpai, - FAW, - Shaanx Auto, - Sichuan Nanjun Auto Co, - Foton, - Qingling Motors , - Hubei Tri-ing SPV Co, - Chengdu Xindadi Auto Co, - JAC Auto
Top 9 Light Truck makers
- Foton, - Dongfeng, - JAC Auto, - Shandong Kama Auto, - FAW, - Great Wall , - Tangjun Ouling Auto, - Shaanxi Auto , - Sichuan Nanjin Auto.
The span of company types, their geographies and product line-ups is intentionally broad, choosing a 3 examples to illustrate the innate strategic diversity between entities that have been born from political orchestration, set within the competitive arena, yet the fortunes of which are still largely directed PRC policy wishes that must balance free-marketeering and the Chinese social good.
Represented are:
1.Politically Driven - The complexity of what is essentially a devolved but still pseudo state-like operation such as CNHTC operating purely in heavy-truck from 'national-asset' origins.
2.Technically Driven - The seeming 'technical synergy & competence' operation of JMC Auto spanning technically inter-related SUV / light-van / medium truck segments, also exploiting foreign best practice via close-coupled foreign partner (not mentioned above but still a listed entity).
3.Marketing Driven - The broad aspirations of JAC Auto offering a full spectrum of vehicles from cars to small, medium and large trucks, seemingly emulating the Mercedes Benz idiom and business model; played-out across diverse international boundaries.
China National Heavy-Duty Truck Group Co Ltd –
Based in the 'truck producing cradle' of Jinan City, Shandong Province, formed from JAW (1935) and offered the first true heavy truck (8 tonne) via HUANGHE brand in 1963. CNHTC presently holds a plethora of sub-company and brands representing parts suppliers, full-assemblers / retailers and special vehicle developers and re-fitters; these split between the primary Jinan and Shandong areas. Moreover, its R&D centre still sits in government hands, whilst its investment interests also include other asset areas such as real estate, property management, import – export, finance, 'vouching'. It holds a Hong Kong registered company since 2004 (titled CNHTC-HKC) to ease foreign trade transactions (via CNHTC-SDIEC : the import - export company) )and capital markets access; and holds an A-stock listed representation entity titled SINOTRUK.
It essentially operates in a matrix-type structure with all sub-holding companies simultaneously 'operationally fed' by a suite of 'back-office' divisions spanning: Strategy, Enterprise, Finance, Budget Planning, Marketing, Technical Development, Quality, HR. Beyond this 2D structure, the 3rd pillar relates to a separate Sales, Import-Export, Finance, Real Estate and the government owned R&D section. This operational structure undoubtedly reflects its historic government roots, but undoubtedly also raises questions of transparency for foreign investors regards the flow of funds between not only different 'front-office' sister divisions, but also directly and indirectly between 'front-office' and 'back-office'.
On the issue of JVs, CNHTC has previously enacted an agreement with Steyr Truck of Austria which appears successful by observation of shared aesthetic and specific systems, but the deal with Volvo Truck of Sweden flailed in 2007, the Volvo aesthetic seemingly appropriated for the HOWO range In early 2009 Germany's MAN bought 25% of SINOTRUK shares listed in HK, this viewed by investment-auto-motives as both a pure remote investment play with the additional positive of greater negotiational leverage relative to additional synergy seeking between SINOTRUK and MAN after the recent Electrical Systems Harness project.
Today CNHTC brands & products presently span HOWO, STEYR-KING, STEYR, HUANGHE Prince, HUNAGHE Commander.
Jiangling Motors Co – (aka JMC Auto).
Based in Jiangxi Province, as with other similar inter-regional peers, it was essentially created in the mid 1980s thanks to the commercial exploitation agreements formed at the time between Japan and China. JMC has maintained a simple business model that sought to fully exploit 'off-the-shelf' Isuzu platforms via long-life use, profitability attained from resultant early capital investment amortisation, aswell as crucially exploiting its ability as a maximiser of technological synergies between close-coupled product lines..
However, as with peers, all 3 product lines - the Boadian pick-up, the BaoWei SUV and Qingka medium truck – to this day show their historic origins given their 'as-set' engineering hardpoints. Even if, as in the case of the Qingka medium truck, the offshoot variant(s) have been developed to visually replicate respected truck lines from the likes of Toyota's Hino and Mitsubishi's Fuso.
The original re-badged vehicles have been given periodic latter-day minimal investment, providing for updated re-bodies and greater levels of lower-cost locally procured parts, whilst balance sheet reserves were used to create a vertically integrated in-house supply/value-chain for high-value completely dressed engine sets, front axles and primary castings (ie engine blocks, cylinder heads, connecting-rods, manifolds, pump housings and other castings). Produced and sold under JMC Parts Ltd, presumably also service the broad Chinese client-base with similar Isuzu beginnings, aswell as servicing after-market needs across primarily China and Africa (which has absorbed much of the Japanese 4x4 and truck grey market).
Hence the strategy has been to a) drive relative differentiation intended to maintain pricing levels, b) simultaneously reduce the input-cost base, and c) create a further income stream / cost-centre.
By 1993 demonstrable profitability led the company to list A-class stock on the Shenzhen Exchange, followed by the offering of B-class stock via ADRs, available to foreign investors; something taken-up by America's Ford Motor Co.
That relationship allowed the establishment of JMC-Ford, in which the Chinese company produces two generations of Ford's Transit van: the '2006' created from older Mk4 & 5 series models and new generation '2010' van based on the European (2006) Mk7 series van. This essentially provides a much needed additional income stream, aswell as providing JMC's own brands with potential to access Ford's 'past-generation' technology base.
This is crucial if JMC is to maintain itself as a credible player in the eyes of both consumers and investors, the choice of Ford obvious given its parallel product lines and breadth of product range from large pick-ups to city-cars, which JMC could 'piggy-back' to broaden its own range.
Jianghuia Automobile Co - (aka JAC Auto)
Established in 1964 with its singular medium size truck plant – heavily dependent on manual labour, updated in the 1970s with semi-automation with the 131 model, and latterly in the 1980s with Japanese influenced 1061 using Korean sourced automated welding jigs. The product line grew in 2000s to include a new heavy truck demanding Japanese sourced heavy press tooling, a new van-derived MPV and new 'SRV' (SUV), both effectively sourced externally even if touted as developed 'in-house', though now touting R&D centres in Japan and Italy aswell as China. {NB though exactly how well equipped with staff, hardware and software is less well known].
Today JMC offers 7 passenger car models (inc MPV & SRV) but mainly centred around small and compact cars [the first completely cChinese producer to win a JD Power quality award in 2009]. It also offers 1 four-door pick-up (styled after GM's Silverado), 1 light truck, 2 medium sized trucks (various bodies), 1 heavy-duty tractor unit (ie Semi-unit), 5 bus chassis (varying dimensions), an SVO section that tailors MPV / SRV / Sedan for emergency services use, and provides contract manufacture of its European developed 2.0L, 2.4L & 2.7L engines.
The exponential broadening of its product range from into various passenger vehicle segments from 2000 onwards demonstrates the opportunism of the firm, targeting high growth trends at home and with the ambition of simultaneously building its truck and car 'empire' in targeted fringe cost-conscious export countries. Thus, with apparent worldwide ambitions JAC has grown a low-key but broad foot-print, entering fringe areas, offering presence in Central America, the lesser territories of South America, Russia and Ukraine, strategic nations of Africa, the Near Middle East, Afghanistan, Bangladesh, Sri Lanka, Vietnam, Malaysia and the Philippines.
What may be contentious is the brand moniker of a 5 pointed star, which together with styling cues on various cars and a similarly named car range heavily reference Mercedes-Benz. In this manner JAC's modus operandi is similar to other 'copy-cat' companies that wish to exploit the power of consumer cognitive association, expecting a positive rub-off effect. China's increasing political/diplomatic ties with such a coterie of such countries, also intimate that Daimler's ability to legally protect the apparent infringement may be questionable.
This trio of separate examples demonstrates just 3 of the many business platforms that China (ie the PRC Communist Party) have created within the Truck Sector. Each represented a core pillar of capability:
1. The might of the state and its ability to marry little changed organisational structures to the exploitation of Hong Kong as a commercial hub
2. The ability to exploit early phase, foreign derived, homogeneous mechanical platforms to, in turn, create a revenue stream which allows for supply-chain integration and supplementary income streams.
3. The ability to rapidly re-orientate a single product-line domestic business into an enterprise modeled on (arguably) 'the best vehicle company in the world', serving to blossom the vehicle range into new segments and new worldwide territories; ostensibly based upon Chinese economic promise.
However, beyond the detail and grand ambitions of the various enterprises themselves, PRC seniors have well recognised the fact that in the short and medium terms, that the west is not the holy grail it was once considered. With Navistar, Daimler, Renault, Volvo, Scania, MAN, VW, Iveco and others fighting for the much constrained capacity demand in the US, Canada, Western Europe and CEE, although the 'corporate cash-constrained' circumstances might seem like a good entry-point, the real world barriers of comprising of everything between cosy fleet-supplier relationships to buoyant manufacturer cash positions to effectively 'value-fight' the Chinese in the short-term to maintain market-share indicates that any Triad region market ambitions will have to wait.
But the Chinese undoubtedly recognise this, and also well recognise the bounty on the domestic and Asian door-step to be harvested, itself acting as the value-generator throughout the region.
Thus whilst CNHTC, JMC, JAC and the many others may well be technologically inferior to the West, may well have only a spattering of truly capable executives, may well be inefficiently organised and may well be operationally hamstrung by PRC diktat, the real-world environment of their business reality – as depicted by their balance sheets and P&L - looks strong indeed.
Since its earliest days in advisory, investment-auto-motives has been stating that Western truck-makers should equally look to the East for developing relatively low-tech, high style model lines suited to RoW markets, aligned to price-sensitive purchase and running-cost expectations and the ability to endure rough-ride road conditions.
[NB the MAN – Sinotruk JV adopted this rational for a RoW HGV as of last month, promising a new sub-brand marque].
Today the likes of MAN's Lion, Daimler's Star and Renault's Diamond finds themselves in a tough global business. They don't roar so loud, or shine so bright. Instead the rational pull for the professional investor looks to be exemplified by the likes of JMC*, as Ford well recognises with its 30% holding and the various domestic and international fund names on the shareholder register.
[NB JAC may well present its H1,2010 results in an amateurish form, simply as a poorly aligned word document, but the numbers of the unaudited accounts appear to tell a happy tale].
In today's re-orientated global business context, the West offers the stability-base of the renowned heavyweight truck corporates which although battered and bruised have undergone necessary re-structuring. From the nominal retail perspective in the triad regions they still own the share of mind, but increasingly it is China which offers investment traction, and the pillar of a compelling investment growth story.
Though investment-auto-motives states advisedly: that pillar must be made increasingly of transparent, (regulatory) strengthened glass, instead of the historic (politically) impermeable stone.
During this week's World Economic Forum in Tianjin, the PRC Premier Wen Jiabao has promised that progress will be made regards the internal consideration of foreign investment - both at capital inflow and corporate activity levels. Whilst no doubt well intentioned, in reality this statement sits at odds to the Chinese impetus for self regard - as also seen in the rumblings of the US Congress regards the Chinese trade relationship.
Ultimately both nations must demonstrate their support for truly free trade to re-balance the global economy, probably via a few high-profile deals and bills, even if the reality of the everyday minutia that makes-up much of trade flow is encumbered by subtle levels of self-interest. In this regard, the truck sector deserves on-going attention.
Tuesday, 14 September 2010
Monday, 6 September 2010
Companies Focus – Exor, IFIL & Agnelli e C.Sapaz – The 'Flaming Ferrari' effect on Dynastic investment planning and FIAT Auto's intended IPO.
As investment-auto-motives constantly voices: it is the ability to 'connect the dots' that represent short, medium and long-term issues that makes for deep intelligence and relative competitive advantage in both the identification of investment potential, and the formation of company strategy itself.
As such recent events could not have been more prosaic in weaving two stories together to provide an almost allegorical ethical tale.
Just at the time the time that Wall Street remonstrated that the endemic 'bonus culture' will no longer be as be deployed to lure employees (recognising the basic economics of staffing and managerial supply-demand dis-equilibrium), so the end of that era of excess is prophetically and demonstrably marked by the case of 5 Ferrari 458 Italia models suffering from vehicle fires in various worldwide cities.
The cause of the combustion was tracked down as a type of glue used to attach the wheel-arch liner to the body underside, which when exposed to “extreme temperatures” in use dripped onto the hot exhaust and created flame. [NB this chemical fixing was used as a substitute for the more normal mechanical fix].
The press were always bound to strike upon the headline 'Flaming Ferraris', which beyond a literal description of events, overtly alludes to the self-styled, self-named band of young stock brokers led by James Archer (son of novelist Jeffrey) in the late 90s who consumed the rum-cocktail. The juxtaposition of events could not have been prosaic even if written as a subplot into the current suite of popular financial-based books explaining the recent past. An allusion that could even lend a Daniel Steel air to the modest Vince Cable...though improbably leading to DaVince plot threads the size of steel cables! More likely is the obvious possibility that 'Archer the Younger' seize on the fortunate coincidence - it could not have been better scripted to evolve an infamous literary genealogical line.
However, beyond the literary conjecture, of rather more important nature is the impact of the 'Flaming Ferrari' events on the closely knit Italian dynastic clans of the Elkanns and Agnellis.
They of course have primary interests in FIAT SpA, the broad-spread conglomerate which has a plethora of interests from the FIAT-centric of: cars, trucks, agricultural and construction machinery, component parts, factory automation machinery, to aeronautical and popular Italian press. Both families' investment vehicles are 'Giovanni Agnelli e C. Sapaz' and 'IFIL', which control major shares in FIAT SpA (>30%) aswell as other national and international industrial, service and financial interests. As such John Elkann acts as Vice-Chair to both investment companies, as well as Chair at FIAT itself; after Luca Cordero di Montezemolo's recent resignation.
'Agnelli-Sapaz' essentially acts as the umbrella company, with a number of sub-holding companies working under its wing. Importantly, the previously 'once removed' Exor – under IFIL and in which John Elkann was closely involved – has now been directly 100% acquired by the parent company.
Thus as is the case for all investment holding companies, the role of Agnelli-Sapaz is to maximise the interests and synergies of its holdings; for directly both the families themselves and indirectly toward the 'Italian good'.
[NB. Critically, although obviously privately own, they are viewed as guiding investment lights – almost national champions. A factor which may increasingly gain attention as national economic pathfinders, as Italy's own Finance Minister Giulio Tremonti (at the Ambrosetti Forum) presently highlights the need for the country to re-structure, diversify its own industrial base and extend outside interests].
The 'Flaming Ferrari's' episode - and the necessary recall of all 1,250 458 Italia models - spotlights the probably need for improved quality measures at Ferrari and probably at Maserati, given their historical organisational, supplier-chain and assembly interdependence; even if Maserati notionally sits under Alfa Romeo division today.
Thus in effect a re-consideration of quality assessment across the board at Ferrari's home in Maranello, in Modena/Bologna for Maserati and given the extended Alfa connection and Alfa's own export drive intentions, into the design, build and inspection centres for that marque aswell.
[NB this would be seen as a necessary action by the FIAT board given the rumour of VW's interest in acquiring the brand so as to add vital engineering integrity to its “coure-sportif”].
Thus from the 'cause' of 5 or so separate events in the USA, France, Switzerland and China, the ultimate 'effect' may be a top-down re-evaluation of methods and participants for quality assessment. The methods being more stringent to ensure full process quality and the participants being necessarily independent to ensure time and cost pressures do not interfere with the core initiative of re-building FIAT's quality perceptions.
As such the Elkann's and Agnelli's are well ahead of the game given their diverse sector interests, specifically with interests in SGS Group – the Swiss based 'inspection, verification, testing and certification company'. Founded in 1878, SGS is recognized as a (perhaps 'the') benchmark assessor in quality and integrity, with 46,000 employees, and 1,000 offices and laboratories world-wide.
investment-auto-motives has undertaken basic desk research in reviewing the 'Agnelli-Sapaz' portfolio and noted that at the end of 2006 the sub-company of IFIL Investissements SA (based in Geneva) extended its 10% ownership, that portion presumably rolled-into Exor's current 15% stake-holding in SGS. (This stake only paralleled by the German Von Finck family holding).
Thus for some time the Elkanns and Agnellis have noted the growing importance of SGS Group as a credibility tool and ultimately international enabler for FIAT Auto.
However, the fact is - as seen by GM's increasingly demure IPO expectancy – that FIAT Auto may have trouble reaching its book-run MarketCap target, given the short time-line for its split from the newly created FIAT Industrials division. The well reported large number of postponed 2010 IPOs, plus the under-performance of those that have appeared and thereafter traded at typically 10-20% below launch price, has troubled corporations, book-running banks and of course investors seeking partial exits – such as 'Agnelli-Sapaz' and its affiliated investment companies.
Ferrari was always to be separated from the FIAT offering, maintained by Elkann as a separate family-esque entity; an action that makes total sense given this low point of the economic cycle and the continued commercial potential of the brand. But the interesting point here, is that potentially Ferrari could be the gate-keeper for SGS Group's trickle-down through FIAT, after first being proven via Ferrari application to create a workable quality control system: perhaps a hybrid of SGS methods and FIAT practice; attuned to different bias depending upon the application time-frame.
Thus Maranello – and by default 'Agnelli-Sapaz' could take a notional managerial fee to oversee SGS service application throughout Maserati and Alfa Romeo, thereafter possibly Abarth and FIAT cars.
At the end of the day, the high profile embarrassment of 5 'Flaming Ferraris' could conceivably help FIAT improve its consumer credentials at home and in time across the world; and in the meantime add a much needed addition to the liquidity feed of the family fund.
Such an arrangement should bring financial and practical reward to both FIAT and the Elkann & Agnelli tribes. But future FIAT Auto investors placed in institutionals and private funds should demand to know exactly what internal price in terms of Euros and managerial time absorption such a quality improvement regime will cost.
Moreover, given their undoubted interest in the Industrials side of the business, raise the idea that FIAT-SGS could viably create a new Industrials sub-division alongside Magnetti, Teksid and perhaps twinned to Comau, that adds a 'high-value' international income stream string to its bow.
Beyond the immediate fire-fighting at Ferrari PR, that is the real task Elkann and his team must attend.
As such recent events could not have been more prosaic in weaving two stories together to provide an almost allegorical ethical tale.
Just at the time the time that Wall Street remonstrated that the endemic 'bonus culture' will no longer be as be deployed to lure employees (recognising the basic economics of staffing and managerial supply-demand dis-equilibrium), so the end of that era of excess is prophetically and demonstrably marked by the case of 5 Ferrari 458 Italia models suffering from vehicle fires in various worldwide cities.
The cause of the combustion was tracked down as a type of glue used to attach the wheel-arch liner to the body underside, which when exposed to “extreme temperatures” in use dripped onto the hot exhaust and created flame. [NB this chemical fixing was used as a substitute for the more normal mechanical fix].
The press were always bound to strike upon the headline 'Flaming Ferraris', which beyond a literal description of events, overtly alludes to the self-styled, self-named band of young stock brokers led by James Archer (son of novelist Jeffrey) in the late 90s who consumed the rum-cocktail. The juxtaposition of events could not have been prosaic even if written as a subplot into the current suite of popular financial-based books explaining the recent past. An allusion that could even lend a Daniel Steel air to the modest Vince Cable...though improbably leading to DaVince plot threads the size of steel cables! More likely is the obvious possibility that 'Archer the Younger' seize on the fortunate coincidence - it could not have been better scripted to evolve an infamous literary genealogical line.
However, beyond the literary conjecture, of rather more important nature is the impact of the 'Flaming Ferrari' events on the closely knit Italian dynastic clans of the Elkanns and Agnellis.
They of course have primary interests in FIAT SpA, the broad-spread conglomerate which has a plethora of interests from the FIAT-centric of: cars, trucks, agricultural and construction machinery, component parts, factory automation machinery, to aeronautical and popular Italian press. Both families' investment vehicles are 'Giovanni Agnelli e C. Sapaz' and 'IFIL', which control major shares in FIAT SpA (>30%) aswell as other national and international industrial, service and financial interests. As such John Elkann acts as Vice-Chair to both investment companies, as well as Chair at FIAT itself; after Luca Cordero di Montezemolo's recent resignation.
'Agnelli-Sapaz' essentially acts as the umbrella company, with a number of sub-holding companies working under its wing. Importantly, the previously 'once removed' Exor – under IFIL and in which John Elkann was closely involved – has now been directly 100% acquired by the parent company.
Thus as is the case for all investment holding companies, the role of Agnelli-Sapaz is to maximise the interests and synergies of its holdings; for directly both the families themselves and indirectly toward the 'Italian good'.
[NB. Critically, although obviously privately own, they are viewed as guiding investment lights – almost national champions. A factor which may increasingly gain attention as national economic pathfinders, as Italy's own Finance Minister Giulio Tremonti (at the Ambrosetti Forum) presently highlights the need for the country to re-structure, diversify its own industrial base and extend outside interests].
The 'Flaming Ferrari's' episode - and the necessary recall of all 1,250 458 Italia models - spotlights the probably need for improved quality measures at Ferrari and probably at Maserati, given their historical organisational, supplier-chain and assembly interdependence; even if Maserati notionally sits under Alfa Romeo division today.
Thus in effect a re-consideration of quality assessment across the board at Ferrari's home in Maranello, in Modena/Bologna for Maserati and given the extended Alfa connection and Alfa's own export drive intentions, into the design, build and inspection centres for that marque aswell.
[NB this would be seen as a necessary action by the FIAT board given the rumour of VW's interest in acquiring the brand so as to add vital engineering integrity to its “coure-sportif”].
Thus from the 'cause' of 5 or so separate events in the USA, France, Switzerland and China, the ultimate 'effect' may be a top-down re-evaluation of methods and participants for quality assessment. The methods being more stringent to ensure full process quality and the participants being necessarily independent to ensure time and cost pressures do not interfere with the core initiative of re-building FIAT's quality perceptions.
As such the Elkann's and Agnelli's are well ahead of the game given their diverse sector interests, specifically with interests in SGS Group – the Swiss based 'inspection, verification, testing and certification company'. Founded in 1878, SGS is recognized as a (perhaps 'the') benchmark assessor in quality and integrity, with 46,000 employees, and 1,000 offices and laboratories world-wide.
investment-auto-motives has undertaken basic desk research in reviewing the 'Agnelli-Sapaz' portfolio and noted that at the end of 2006 the sub-company of IFIL Investissements SA (based in Geneva) extended its 10% ownership, that portion presumably rolled-into Exor's current 15% stake-holding in SGS. (This stake only paralleled by the German Von Finck family holding).
Thus for some time the Elkanns and Agnellis have noted the growing importance of SGS Group as a credibility tool and ultimately international enabler for FIAT Auto.
However, the fact is - as seen by GM's increasingly demure IPO expectancy – that FIAT Auto may have trouble reaching its book-run MarketCap target, given the short time-line for its split from the newly created FIAT Industrials division. The well reported large number of postponed 2010 IPOs, plus the under-performance of those that have appeared and thereafter traded at typically 10-20% below launch price, has troubled corporations, book-running banks and of course investors seeking partial exits – such as 'Agnelli-Sapaz' and its affiliated investment companies.
Ferrari was always to be separated from the FIAT offering, maintained by Elkann as a separate family-esque entity; an action that makes total sense given this low point of the economic cycle and the continued commercial potential of the brand. But the interesting point here, is that potentially Ferrari could be the gate-keeper for SGS Group's trickle-down through FIAT, after first being proven via Ferrari application to create a workable quality control system: perhaps a hybrid of SGS methods and FIAT practice; attuned to different bias depending upon the application time-frame.
Thus Maranello – and by default 'Agnelli-Sapaz' could take a notional managerial fee to oversee SGS service application throughout Maserati and Alfa Romeo, thereafter possibly Abarth and FIAT cars.
At the end of the day, the high profile embarrassment of 5 'Flaming Ferraris' could conceivably help FIAT improve its consumer credentials at home and in time across the world; and in the meantime add a much needed addition to the liquidity feed of the family fund.
Such an arrangement should bring financial and practical reward to both FIAT and the Elkann & Agnelli tribes. But future FIAT Auto investors placed in institutionals and private funds should demand to know exactly what internal price in terms of Euros and managerial time absorption such a quality improvement regime will cost.
Moreover, given their undoubted interest in the Industrials side of the business, raise the idea that FIAT-SGS could viably create a new Industrials sub-division alongside Magnetti, Teksid and perhaps twinned to Comau, that adds a 'high-value' international income stream string to its bow.
Beyond the immediate fire-fighting at Ferrari PR, that is the real task Elkann and his team must attend.
Sunday, 29 August 2010
Micro-Level Trends - Russian Auto Sector - MARUSSIA: Short-Cut Business Modeling in Constrained Times.
During the St Petersburg International Economic Forum in mid June, President Medvedev espoused the stance for continued diversification and modernization of the Russian economy. Its ambition to become "a cornerstone of the new world economic order". Amongst the high profile intentions are Moscow as a powerful financial hub, and the creation of a 'Silicon Valley'. Such initiatives assisted by FDI incentives.
The financial press however reports that the transition from broad national ambition to distinct, actionable policy-setting to create a delivery mechanism has proved less than successful. Those with an ideological or political counterpoint view highlighting the failure of the state to properly address everyday door-step issues, let alone grande plans. The recent fire-fighting debacle seen during the recent heat-wave provides the tinder for such allegations regards state incompetence. However, the homeland priority of a heavily diminished 2010 wheat crop could be said to counter this picture, publicly reflecting strong leadership to the people - even if an 'invisible outcome' would be to latterly release the commodity into the global market for a higher price.
Of course the apparatus of industrial modernization – visible and invisible - is distinctly separate from the newspaper headlines and regional politicking. Instead largely crafted by both the slow evolution of a massive but dinosaur-like ex-state infrastructure, and the faster joint venture collaborations with international corporations. Acting as catalysts within and alongside this mix are the role of domestic entrepreneurs, with as a not so small aside, the issue of their funding bases.
Undeniably, as with all countries, partiality of multiple interests obviously exists, but perhaps in Russia a little more obvious given the high profile of oligarchs and associates, than might be the case in other countries. To many since the collapse of communism the famed Churchillian quote that “Russia is a riddle, wrapped in a mystery, inside an enigma” stands more prophetic than ever. The fractious BP-TNK relationship in the oil sector perhaps the archetype case in point for today's and tomorrow's international business students.
However, as part of its metamorphoses from 'emerging' to 'advanced' status, the country has obviously been keen to re-generate its sizable automotive industry. And over the last decade has been successful in attracting FDI from global manufacturers, themselves keen to participate in a previous boom, with still high potential once the region gets back on track.
[NB Putin well recognises this reality, and so seems happy to slow WTO accession so as to create an 'FDI window of opportunity' (reflected in a reversal of normative import tariff reductions) which provides a more immediate route to industrial impetus.
Bodies such as OAR (Association of Russian Automakers) and AEB (Association of European Business' Auto Manufacturers' committee) act as umbrella and co-ordination agents to assist the ambition; especially so in providing the reliable domestic sales reporting and product regulation harmonization so required to assist the business fundamentals of credible market data and access.
To this end, factories were built by GM, Ford, BMW, Daimler, Renault, PSA, Hyundai-Kia, Mitsubishi etc, with the new comers from China in the guise of Chery, Great Wall etc chosing to use Russia as a stepping stone for their European entry strategies. As politically determined, simultaneously this foreign interest has enabled growth of its home capability via an improving supplier-base to periodically re-engineer long-in-the-tooth domestic vehicles, whilst also leveraging JV accessed foreign technology.
Whilst some legendary USSR names such as ZIL and Moskvitch effectively changed their operational shape through their own efforts to try and re-acclimatise, including purveying 'retro-chic' in old and new guises, others have been, and are in the process of being, reborn.
AvtoVaz initially joined with GM to largely produce Chevrolet badged Opel Astras until 2008, which whilst commercially unsuccessful was far more useful for knowledge and capabilities absorption. This JV model set the necessary template, and was more recently superseded when AvtoVaz joined with Renault-Nissan to update Lada. GAZ (owned by Basic Element – Russian Machines') bought Chrysler's mid-size car tooling with limited market success badged as Volga, and has toyed with the idea of re-generating the old Volga brand as 'retro-esque'. It also critically bought the UK's LDV van company to bolster the commercial vehicles section, yet the UK assets where eventually sold to private equity group China Venture. Elsewhere ex-Ford senior management took seats on the Board of Kamaz Truck, indicating likely co-operation.
[NB Thus the Russian auto industry is effectively seen to come full circle from the days when Moskvitch licenced Opel designs and Lada (like other eastern bloc companies) replicated FIAT].
Moreover, this approach to leverage 'piggy-backed' technology now seems to sit central to new premium positioned niche vehicle ambitions.
The Russian interest in niche vehicles has always been prevalent, from specialist military devices to home-grown adaptations of cars grey-imported from Poland and Germany, but perhaps first came properly into view during Russia's commodity exporting and industrial boom years when Russian businessmen had cash and incentive to do so.
Nikolai Smolensky bought the UK's TVR in 2004 (from ex oil man Peter Wheeler), split the company into 3 divisions* and shipped much of the tooling to Russia, choosing the near-namesake Tver as the supposed new home. [NB the company had been rationally split into 3 areas as presumed to be exploited or re-sold to other investment groups as ongoing concerns: they are: 1. Motors (IPR & Brand), 2. Power (Parts & Spares), 3. Blackpool Automotive (Factory and Manufacturing Assets). Although understandably disliked by the TVR faithful, that action helped jump-start Russia's own considerations of its own upmarket niche vehicle industry.
That perception was assisted by the creation and (15 unit) sale of the impressive Russo-Baltique Impression in 2006, which aped and enlarged the legendary carrozerria styles of the 1920s/30s, bodies seen on cars such as the Bugatti 57CS Atalante Coupe, Lago, Hispano-Suiza, Delahaye et al. The car was presented as what would have naturally evolved had the operation continued beyond 1919. [NB Russo-Baltique existed between 1909-1919 in St Petersburg & Moscow]
Yet to date little had emerged as properly engineered, broadly certified and market successful. The TVR tooling was rumoured to have been sent to Turin in Italy, and then onto the near name-sake town of Tver in Russia; but this appears more of a PR motivated story than solidly proven as a basis for new manufacture.
The blow of the 2007/8 financial melt-down created a major Russian recession with over-leveraged conglomerates such as Basic Element having to restructure under external debt and internal efficiency pressures. As a consequence of the country's rapid industrial re-structuring – essentially from bottom-up and demanding massive cash injections (as seen by Avtovaz vying Renault on its 25% stake) – the remote fringe ideals and focus of creating a Russian niche sportscar / luxury car market, appeared periodically halted.
However, moving into this picture at that time, apparently spotting the future opportunity, was Nikolai Fomenko - a domestically renowned musician, actor, motor-sports driver and presenter of Russia's Top Gear TV programme..
[NB investment-auto-motives suspects a low-profile yet well-connected 'backer' has identified the present opportunity to create something anew, exploiting the low point of the financial crisis 'after-shock' within the economic cycle. Given his background and public familiarity, Fomenko has seemingly been positioned as the high profile front-man].
'His' idea for “all new Russian supercar” and luxury brand titled MARUSSIA (aired in 2006).
However, given the lack of quality domestic niche manufacturing capability - which in recent history has seen variable levels of niche sporting car sophistication - the MARUSSIA business model would have to look further afield to access both (ostensibly) ready-made platforms and access higher levels of engineering and fit & finish.
From investment-auto-motives' external view, the fundamental business plan appears to 'simply' overlay new body/bodies, accompanying cabin re-engineering and the additional of multi-media services, to position the MARUSSIA marque in 'luxury sporting' territory. This essentially combines the typically distinct arenas set out by front-engined luxury coupes and mid-engined sporting/track cars. The closest parallel is perhaps the limited series Maserati MC12 – itself derived from Ferrari Enzo, the synthesis of both cars developing other limited editions.
Thus MARUSSIA's self-proclaimed ethos is the age-old automotive scheme of adding greater comfort and practicality features to 'bear-bones' credible/proven sporting origins; Bentley, Bugatti and Alfa Romeo good yesteryear illustrations. The difference here is that these British, French and Italian companies both fully designed and modified such vehicles as the 4.5 Litre, the Atalante and the 8C. MARUSSIA must short-cut such conventions given its limited capabilities.
However, an additional twist to the business model is that MARUSSIA offers a 're-body' service, which at first impression seems to mirror the yesteryear exercise of re-bodying a vehicle to suit different seasons or fashions – very much in the old carrozeria mode. However, Fomenko says without giving detail that this is not quite the case. [NB A latter-day re-body initiative was to be part of Daimler's >smart brand business vision, its ForTwo car designed to enable the swapping of different coloured skin panels]. However, Fomenko apparently states that his offering neither parallels that 'pick & mix' exercise. Exactly what he means by the “re-body service” is thus not yer clear.
Fomenko has been promoting the venture with an overtly philosophical stance, driven by what he describes as his own 'ideological' perspective; something that no doubt chimes well with the Russian mentality. Reasonable enough as part of the marketing ploy, yet the real operational trick – especially given Russian economic and capability constraints – is to pull together the business package by effectively outsourcing the prime and 'added-value' elements of the proposition.
This process, balancing resources vs cost vs product capability - is the archetypal 'triangular heart' of the niche vehicle business model; seen decade after decade across the globe.
He claims to have developed a new mid-engined supercar from what he would have the world believed as 'from scratch', intended to compete against, and sit squarely between the likes of Ferrari/Lamborghini and Bentley. This as a consequence of Russia's wealthy turning to the more comfortable, practicle and liveable Bentley on Russia's poor roads, after enjoying Ferrari/Lamborghini but frustrated by the infrastructure limitations that prohibit use and damage vehicles. Moreover, B1 is set to compete against Koenigsegg, Spyker, McLaren, Venturi et al, aswell as – one would think – Pagani's Zonda.
Furthermore, the original B1 model has also been developed into an additional B2 variant to give the brand and products greater breadth and so wider customer appeal/
[NB By no coincidence the MARUSSIA badge/logo mimics the iconic badge used by MARCHAL, the maker of headlamps for the finest marques in the pre-WW2 years – the metaphor of 'leading light' not lost on classic car connoisseurs].
At first rudimentary glance, given the fact that Fomenko drives an Audi Q7 SUV (from VW Group) and mentions Italian design assistance on B1, it was conceivable that he would ideally use the solid supply source of VW's last-generation - well proven and much amortised – platforms. Thus VW AG would also strengthen its business and political ties with Russia, something very much needed given the level of mass market competition, and Fomenko could use Q7 as the base for his F2 SUV.
Thus investment-auto-motives' original hypothesis was that the B1 was derived from the 2002-2011 Lamborghini Murciellago. But closer inspection of the cars front-end 'hardpoints' such as screen shape and wheel-centre to screen A-post relationship proved otherwise. Instead, its proportions and general form and detailing (such as exhaust outlet positioning) tentatively appears closer to the Pagani Zonda. This would make sense given Fomenko's mention of Italian design/engineering, and Pagani's need to generate an income to service the R&D and production requirements of its next advanced generation of supercars.
However, its seems that for various reasons (including Zonda's IPR protection, exploitation of Russia's own metals resources & processing development, aswell as ease of Russian build), Zonda's has not divulged its core-competence expertise in carbon-fibre race structures. Instead the MARUSSIA B1 uses an aluminium semi-monocoque which accords to early Zonda models and reflects the more conventional construction method used by the 2002-2010 Lamborghini Murciellago. This older construction method better befits new supercar business models which require greater business case elasticity given their unproven nature. (Zonda itself is developing its new generation cars from its R CS model). However, the B1 does incorporate a level of carbon fibre application but largely includes use of a supposedly advanced polyurethane material, which whilst not proving leading-edge theoretically provides nominal weight saving at reasonable costs.
MARUSSIA was shown in 2008 in Moscow, 2009 at Frankfurt, and April 2010 in Monaco, comes in the aforementioned 2 guises: the original B1 incorporates various 'generic' and specific supercar cues from competitor and past cars, aswell as the Zonda-esque small 'bubble' cabin and broad flanks – derived from FIA GT1 and LMP racing.
The B1was showcased alongside Virgin Racing's F1 team given Marussia's partner status, no doubt to provide Virgin with Russian exposure, aswell as the obvious halo/credibility rub-off from F1 - and shared engine use - for Marussia (ie using two versions of a V6 'Marussia-Cosworth' engines, a 3.0L naturally aspirated and 2.8L turbo-charged).
[NB A possible sponsorship link could also feasibly be agreed with MARUSSIA to run at Le Mans and similar Series races such as Sebring and Daytona so as to help raise its and Virgin's international profile alongside F1].
The B2 (2+2) takes-on a more geometric front & side look with a different vertical A-post style windscreen that aids entry/egress, 2-window side DLO graphic and an archetype aerodynamic tear-drop roof profile (with usual Kamm tail) so as to accommodate 4 people. It has an unusual appearance given the coupe cabin volume and treatment, which in part reflects a supposed functionalism which stylistically echoes the intendedly differentiated Avions Voisin cars from the 1920s/30s.
However, oddly the dimensional specifications for the car as listed on the official website are the same as the B1. Of course as much similarity as possible reduced cost but given its differing remit seems strange, especially regards height given head room requirements and an apparent visual difference. It is suspected that the B2 specs are little more than copy+ of B1 for simple website publishing.
In addition to the cars is the intention to develop a performance SUV vehicle, as showcased by the F2 concept in Moscow in May 2010. This is logical given wealthy Russian's demand for large SUVs, however the treatment as shown does leave much to be desired
The eventual vehicle portfolio then will essentially mimic Porsche's & Aston Martin Lagonda's use of sportscars and performance 4x4. (Porsche also of course offers coupes and coupe saloon, the latter also offered by AML. Aston Martin Lagonda also offers its 'novel' city car sourced from Toyota).
Thus in product positioning and model portfolio, MARUSSIA follows in the path of 2 legendary companies. However, given the need to markedly differentiate its products from their origins means that their vehicles' innate cosmetic and functional DNA is somewhat 'different' or 'interesting'.
The B1 two-seat mid-engined supercar appears the most conventional, whilst the 2+2 packaging of the B2 version suffers typical 2+2 M-E packaging faults, whilst its use as a 'product bridge' to the cosmetically 'alternative' F2 SUV, means that it is compromised on the aesthetic front aswell as the packaging front.
Ironically given its mid-engined layout, the B1 names itself a 'Grand Turismo Sport Coupe', something nominally associated with front engined road cars which allows for adequate rear storage. However the B1's reference is to the FIA's GT racing class. This then has obvious connetation to Maserati's GranTurismo Coupe & Convertible.
[NB It also correlates to TVR's 1960s Grantura model name, so possibly leaves the door open for latter-day operational synergies with a resurrected TVR]
As for the B2, things from this admitted distance look unclear, especially the subject of a shared wheelbase with B1 which would compromise either one or the other.
[NB the idea of 'long cabin' 2+2 or 4 seater laid-out within a mid-engined car package has long been seen as 'the worst of both worlds' since it leads to a heavily compromised product basis on dynamic performance grounds given the loss of true mid-engined positioning and on passenger occupancy grounds given rear leg & head-room squeeze. Though it 'works' as a theoretical USP on paper, historical precedents demonstrate the limited appeal: the less than successful 1980s Ferrari GT4 & Mondial, and more recent 2006 Lotus Europa. Typically 2+2 M-E based cars are created either to build-up the volume basis for a project's business case, or to extend the life-cycle of a platform seeking either required additional volume to realise original business case ambitions, or to try and maximise margins from a previously amortised base].
Given the apparent use of an adapted Pagani Zonda frame, investment-auto-motives believes margin maximisation is MARUSSIA's intention, whilst the Pagani desire is to licence old technology for an additional income stream.
As is to be expected, and all to typical within the start-up arena, a certain amount of press chasing and public story-telling is being told by Fomenko to support the project and business.
To this end the B1 and B2 have supposedly designed wholly on computer via advanced CAD systems, aiding the speed of development and enabling a quicker market launch, since this supposedly negates the need for typical running prototypes, the full prove-out process supposedly achieved via computer hardware programmes and rig-testing of a single vehicle.
This again is somewhat questionable, since throughout the history of CAD use such assertions have been made, the reality being that initial customers end-up as the trialling process that irons out problems that a mass manufacturer would solve during in-house trialling. The prototype trialling process is of course a costly one, and so for small start-up businesses with limited liquidity it makes sense to create a business model which modifies a proven platform, enables niggle-fixing from customer feedback and critically shortens the period between set-up and supply costs and customer revenue receipts.
Getting the Overhead and CapEx budget balanced by the Income Receipts is the most important element of any new business, especially so in the auto-motive sector. The failure to do so has been the downfall of many ventures over the last century, and is the reason why (rightly) the investment community generally prefers the pragmatic attitude of the businessman to the perfectionist attitude of the inventor-engineer.
With no doubt help from other more low-profile colleagues, Nikolai Fomenko, ever the showman will need to balance marque enthusiasm, commercial practicality, product delivery and ongoing support to be taken seriously by customers. That is the real challenge given that MARUSSIA is still in its infancy, with the possibility that its eyes are bigger than its belly.
However, Fomenko indicates that a production volume of 100-150 units would be “ a good result”, though it is not clear whether that 100 figure equals the project's financial break-even, and the additional units profit. Or whether it requires 150 vehicles to reach break-even. It is an important point to make that such a 50% variation is highly unusual when assessing the viability of a niche manufacture vehicle project. Whilst exacting figures are understandably in-credible, a reduction in the volume's effective 'spread' would be deemed very necessary to pin down the business case.
To this end MARUSSIA must present itself well and convincingly to an international crowd.
Fomenko's ultimate ideal, as presented to latter-day investors, could well be piggy-back Pagani to build reputation and credibility in the near term – ie over the next decade - then to piggy-back a bigger sourcing partner such as Lamborghini (ie VW Group) to gain production efficiencies.
This would appear to be a notionally stable long-term plan if viable.
Yet, even with greater levels of FDI pumped into Russian capital markets, seeking higher-value returns than available in the West or Japan, given the past foreign investment concerns in Russia, there will be a need by any foreign investor to see tangible returns and/or growth evidence. An immediate ROI 'bang for the buck' directing capital to the likes of commodities, metals, telecoms and state-support initiatives. Whilst for VC orientated entities, the need to have far greater transparency throughout the infancy stages of any start-up company; critically to ensure allotted funding is fully accountable and provides visible early-stage business traction.
That future FDI that President Medvedev seeks will have investor procedural demands of its own, but especially, and necessarily, so in the relatively complex, costly and politicised world of national supercars.
Ironically, even with the current pro-Russia stance of global capital markets, in such non-conventional capital plays, it will be the Russian who will act the bulls and the FDI outsiders the legendary Russian bear.
The financial press however reports that the transition from broad national ambition to distinct, actionable policy-setting to create a delivery mechanism has proved less than successful. Those with an ideological or political counterpoint view highlighting the failure of the state to properly address everyday door-step issues, let alone grande plans. The recent fire-fighting debacle seen during the recent heat-wave provides the tinder for such allegations regards state incompetence. However, the homeland priority of a heavily diminished 2010 wheat crop could be said to counter this picture, publicly reflecting strong leadership to the people - even if an 'invisible outcome' would be to latterly release the commodity into the global market for a higher price.
Of course the apparatus of industrial modernization – visible and invisible - is distinctly separate from the newspaper headlines and regional politicking. Instead largely crafted by both the slow evolution of a massive but dinosaur-like ex-state infrastructure, and the faster joint venture collaborations with international corporations. Acting as catalysts within and alongside this mix are the role of domestic entrepreneurs, with as a not so small aside, the issue of their funding bases.
Undeniably, as with all countries, partiality of multiple interests obviously exists, but perhaps in Russia a little more obvious given the high profile of oligarchs and associates, than might be the case in other countries. To many since the collapse of communism the famed Churchillian quote that “Russia is a riddle, wrapped in a mystery, inside an enigma” stands more prophetic than ever. The fractious BP-TNK relationship in the oil sector perhaps the archetype case in point for today's and tomorrow's international business students.
However, as part of its metamorphoses from 'emerging' to 'advanced' status, the country has obviously been keen to re-generate its sizable automotive industry. And over the last decade has been successful in attracting FDI from global manufacturers, themselves keen to participate in a previous boom, with still high potential once the region gets back on track.
[NB Putin well recognises this reality, and so seems happy to slow WTO accession so as to create an 'FDI window of opportunity' (reflected in a reversal of normative import tariff reductions) which provides a more immediate route to industrial impetus.
Bodies such as OAR (Association of Russian Automakers) and AEB (Association of European Business' Auto Manufacturers' committee) act as umbrella and co-ordination agents to assist the ambition; especially so in providing the reliable domestic sales reporting and product regulation harmonization so required to assist the business fundamentals of credible market data and access.
To this end, factories were built by GM, Ford, BMW, Daimler, Renault, PSA, Hyundai-Kia, Mitsubishi etc, with the new comers from China in the guise of Chery, Great Wall etc chosing to use Russia as a stepping stone for their European entry strategies. As politically determined, simultaneously this foreign interest has enabled growth of its home capability via an improving supplier-base to periodically re-engineer long-in-the-tooth domestic vehicles, whilst also leveraging JV accessed foreign technology.
Whilst some legendary USSR names such as ZIL and Moskvitch effectively changed their operational shape through their own efforts to try and re-acclimatise, including purveying 'retro-chic' in old and new guises, others have been, and are in the process of being, reborn.
AvtoVaz initially joined with GM to largely produce Chevrolet badged Opel Astras until 2008, which whilst commercially unsuccessful was far more useful for knowledge and capabilities absorption. This JV model set the necessary template, and was more recently superseded when AvtoVaz joined with Renault-Nissan to update Lada. GAZ (owned by Basic Element – Russian Machines') bought Chrysler's mid-size car tooling with limited market success badged as Volga, and has toyed with the idea of re-generating the old Volga brand as 'retro-esque'. It also critically bought the UK's LDV van company to bolster the commercial vehicles section, yet the UK assets where eventually sold to private equity group China Venture. Elsewhere ex-Ford senior management took seats on the Board of Kamaz Truck, indicating likely co-operation.
[NB Thus the Russian auto industry is effectively seen to come full circle from the days when Moskvitch licenced Opel designs and Lada (like other eastern bloc companies) replicated FIAT].
Moreover, this approach to leverage 'piggy-backed' technology now seems to sit central to new premium positioned niche vehicle ambitions.
The Russian interest in niche vehicles has always been prevalent, from specialist military devices to home-grown adaptations of cars grey-imported from Poland and Germany, but perhaps first came properly into view during Russia's commodity exporting and industrial boom years when Russian businessmen had cash and incentive to do so.
Nikolai Smolensky bought the UK's TVR in 2004 (from ex oil man Peter Wheeler), split the company into 3 divisions* and shipped much of the tooling to Russia, choosing the near-namesake Tver as the supposed new home. [NB the company had been rationally split into 3 areas as presumed to be exploited or re-sold to other investment groups as ongoing concerns: they are: 1. Motors (IPR & Brand), 2. Power (Parts & Spares), 3. Blackpool Automotive (Factory and Manufacturing Assets). Although understandably disliked by the TVR faithful, that action helped jump-start Russia's own considerations of its own upmarket niche vehicle industry.
That perception was assisted by the creation and (15 unit) sale of the impressive Russo-Baltique Impression in 2006, which aped and enlarged the legendary carrozerria styles of the 1920s/30s, bodies seen on cars such as the Bugatti 57CS Atalante Coupe, Lago, Hispano-Suiza, Delahaye et al. The car was presented as what would have naturally evolved had the operation continued beyond 1919. [NB Russo-Baltique existed between 1909-1919 in St Petersburg & Moscow]
Yet to date little had emerged as properly engineered, broadly certified and market successful. The TVR tooling was rumoured to have been sent to Turin in Italy, and then onto the near name-sake town of Tver in Russia; but this appears more of a PR motivated story than solidly proven as a basis for new manufacture.
The blow of the 2007/8 financial melt-down created a major Russian recession with over-leveraged conglomerates such as Basic Element having to restructure under external debt and internal efficiency pressures. As a consequence of the country's rapid industrial re-structuring – essentially from bottom-up and demanding massive cash injections (as seen by Avtovaz vying Renault on its 25% stake) – the remote fringe ideals and focus of creating a Russian niche sportscar / luxury car market, appeared periodically halted.
However, moving into this picture at that time, apparently spotting the future opportunity, was Nikolai Fomenko - a domestically renowned musician, actor, motor-sports driver and presenter of Russia's Top Gear TV programme..
[NB investment-auto-motives suspects a low-profile yet well-connected 'backer' has identified the present opportunity to create something anew, exploiting the low point of the financial crisis 'after-shock' within the economic cycle. Given his background and public familiarity, Fomenko has seemingly been positioned as the high profile front-man].
'His' idea for “all new Russian supercar” and luxury brand titled MARUSSIA (aired in 2006).
However, given the lack of quality domestic niche manufacturing capability - which in recent history has seen variable levels of niche sporting car sophistication - the MARUSSIA business model would have to look further afield to access both (ostensibly) ready-made platforms and access higher levels of engineering and fit & finish.
From investment-auto-motives' external view, the fundamental business plan appears to 'simply' overlay new body/bodies, accompanying cabin re-engineering and the additional of multi-media services, to position the MARUSSIA marque in 'luxury sporting' territory. This essentially combines the typically distinct arenas set out by front-engined luxury coupes and mid-engined sporting/track cars. The closest parallel is perhaps the limited series Maserati MC12 – itself derived from Ferrari Enzo, the synthesis of both cars developing other limited editions.
Thus MARUSSIA's self-proclaimed ethos is the age-old automotive scheme of adding greater comfort and practicality features to 'bear-bones' credible/proven sporting origins; Bentley, Bugatti and Alfa Romeo good yesteryear illustrations. The difference here is that these British, French and Italian companies both fully designed and modified such vehicles as the 4.5 Litre, the Atalante and the 8C. MARUSSIA must short-cut such conventions given its limited capabilities.
However, an additional twist to the business model is that MARUSSIA offers a 're-body' service, which at first impression seems to mirror the yesteryear exercise of re-bodying a vehicle to suit different seasons or fashions – very much in the old carrozeria mode. However, Fomenko says without giving detail that this is not quite the case. [NB A latter-day re-body initiative was to be part of Daimler's >smart brand business vision, its ForTwo car designed to enable the swapping of different coloured skin panels]. However, Fomenko apparently states that his offering neither parallels that 'pick & mix' exercise. Exactly what he means by the “re-body service” is thus not yer clear.
Fomenko has been promoting the venture with an overtly philosophical stance, driven by what he describes as his own 'ideological' perspective; something that no doubt chimes well with the Russian mentality. Reasonable enough as part of the marketing ploy, yet the real operational trick – especially given Russian economic and capability constraints – is to pull together the business package by effectively outsourcing the prime and 'added-value' elements of the proposition.
This process, balancing resources vs cost vs product capability - is the archetypal 'triangular heart' of the niche vehicle business model; seen decade after decade across the globe.
He claims to have developed a new mid-engined supercar from what he would have the world believed as 'from scratch', intended to compete against, and sit squarely between the likes of Ferrari/Lamborghini and Bentley. This as a consequence of Russia's wealthy turning to the more comfortable, practicle and liveable Bentley on Russia's poor roads, after enjoying Ferrari/Lamborghini but frustrated by the infrastructure limitations that prohibit use and damage vehicles. Moreover, B1 is set to compete against Koenigsegg, Spyker, McLaren, Venturi et al, aswell as – one would think – Pagani's Zonda.
Furthermore, the original B1 model has also been developed into an additional B2 variant to give the brand and products greater breadth and so wider customer appeal/
[NB By no coincidence the MARUSSIA badge/logo mimics the iconic badge used by MARCHAL, the maker of headlamps for the finest marques in the pre-WW2 years – the metaphor of 'leading light' not lost on classic car connoisseurs].
At first rudimentary glance, given the fact that Fomenko drives an Audi Q7 SUV (from VW Group) and mentions Italian design assistance on B1, it was conceivable that he would ideally use the solid supply source of VW's last-generation - well proven and much amortised – platforms. Thus VW AG would also strengthen its business and political ties with Russia, something very much needed given the level of mass market competition, and Fomenko could use Q7 as the base for his F2 SUV.
Thus investment-auto-motives' original hypothesis was that the B1 was derived from the 2002-2011 Lamborghini Murciellago. But closer inspection of the cars front-end 'hardpoints' such as screen shape and wheel-centre to screen A-post relationship proved otherwise. Instead, its proportions and general form and detailing (such as exhaust outlet positioning) tentatively appears closer to the Pagani Zonda. This would make sense given Fomenko's mention of Italian design/engineering, and Pagani's need to generate an income to service the R&D and production requirements of its next advanced generation of supercars.
However, its seems that for various reasons (including Zonda's IPR protection, exploitation of Russia's own metals resources & processing development, aswell as ease of Russian build), Zonda's has not divulged its core-competence expertise in carbon-fibre race structures. Instead the MARUSSIA B1 uses an aluminium semi-monocoque which accords to early Zonda models and reflects the more conventional construction method used by the 2002-2010 Lamborghini Murciellago. This older construction method better befits new supercar business models which require greater business case elasticity given their unproven nature. (Zonda itself is developing its new generation cars from its R CS model). However, the B1 does incorporate a level of carbon fibre application but largely includes use of a supposedly advanced polyurethane material, which whilst not proving leading-edge theoretically provides nominal weight saving at reasonable costs.
MARUSSIA was shown in 2008 in Moscow, 2009 at Frankfurt, and April 2010 in Monaco, comes in the aforementioned 2 guises: the original B1 incorporates various 'generic' and specific supercar cues from competitor and past cars, aswell as the Zonda-esque small 'bubble' cabin and broad flanks – derived from FIA GT1 and LMP racing.
The B1was showcased alongside Virgin Racing's F1 team given Marussia's partner status, no doubt to provide Virgin with Russian exposure, aswell as the obvious halo/credibility rub-off from F1 - and shared engine use - for Marussia (ie using two versions of a V6 'Marussia-Cosworth' engines, a 3.0L naturally aspirated and 2.8L turbo-charged).
[NB A possible sponsorship link could also feasibly be agreed with MARUSSIA to run at Le Mans and similar Series races such as Sebring and Daytona so as to help raise its and Virgin's international profile alongside F1].
The B2 (2+2) takes-on a more geometric front & side look with a different vertical A-post style windscreen that aids entry/egress, 2-window side DLO graphic and an archetype aerodynamic tear-drop roof profile (with usual Kamm tail) so as to accommodate 4 people. It has an unusual appearance given the coupe cabin volume and treatment, which in part reflects a supposed functionalism which stylistically echoes the intendedly differentiated Avions Voisin cars from the 1920s/30s.
However, oddly the dimensional specifications for the car as listed on the official website are the same as the B1. Of course as much similarity as possible reduced cost but given its differing remit seems strange, especially regards height given head room requirements and an apparent visual difference. It is suspected that the B2 specs are little more than copy+ of B1 for simple website publishing.
In addition to the cars is the intention to develop a performance SUV vehicle, as showcased by the F2 concept in Moscow in May 2010. This is logical given wealthy Russian's demand for large SUVs, however the treatment as shown does leave much to be desired
The eventual vehicle portfolio then will essentially mimic Porsche's & Aston Martin Lagonda's use of sportscars and performance 4x4. (Porsche also of course offers coupes and coupe saloon, the latter also offered by AML. Aston Martin Lagonda also offers its 'novel' city car sourced from Toyota).
Thus in product positioning and model portfolio, MARUSSIA follows in the path of 2 legendary companies. However, given the need to markedly differentiate its products from their origins means that their vehicles' innate cosmetic and functional DNA is somewhat 'different' or 'interesting'.
The B1 two-seat mid-engined supercar appears the most conventional, whilst the 2+2 packaging of the B2 version suffers typical 2+2 M-E packaging faults, whilst its use as a 'product bridge' to the cosmetically 'alternative' F2 SUV, means that it is compromised on the aesthetic front aswell as the packaging front.
Ironically given its mid-engined layout, the B1 names itself a 'Grand Turismo Sport Coupe', something nominally associated with front engined road cars which allows for adequate rear storage. However the B1's reference is to the FIA's GT racing class. This then has obvious connetation to Maserati's GranTurismo Coupe & Convertible.
[NB It also correlates to TVR's 1960s Grantura model name, so possibly leaves the door open for latter-day operational synergies with a resurrected TVR]
As for the B2, things from this admitted distance look unclear, especially the subject of a shared wheelbase with B1 which would compromise either one or the other.
[NB the idea of 'long cabin' 2+2 or 4 seater laid-out within a mid-engined car package has long been seen as 'the worst of both worlds' since it leads to a heavily compromised product basis on dynamic performance grounds given the loss of true mid-engined positioning and on passenger occupancy grounds given rear leg & head-room squeeze. Though it 'works' as a theoretical USP on paper, historical precedents demonstrate the limited appeal: the less than successful 1980s Ferrari GT4 & Mondial, and more recent 2006 Lotus Europa. Typically 2+2 M-E based cars are created either to build-up the volume basis for a project's business case, or to extend the life-cycle of a platform seeking either required additional volume to realise original business case ambitions, or to try and maximise margins from a previously amortised base].
Given the apparent use of an adapted Pagani Zonda frame, investment-auto-motives believes margin maximisation is MARUSSIA's intention, whilst the Pagani desire is to licence old technology for an additional income stream.
As is to be expected, and all to typical within the start-up arena, a certain amount of press chasing and public story-telling is being told by Fomenko to support the project and business.
To this end the B1 and B2 have supposedly designed wholly on computer via advanced CAD systems, aiding the speed of development and enabling a quicker market launch, since this supposedly negates the need for typical running prototypes, the full prove-out process supposedly achieved via computer hardware programmes and rig-testing of a single vehicle.
This again is somewhat questionable, since throughout the history of CAD use such assertions have been made, the reality being that initial customers end-up as the trialling process that irons out problems that a mass manufacturer would solve during in-house trialling. The prototype trialling process is of course a costly one, and so for small start-up businesses with limited liquidity it makes sense to create a business model which modifies a proven platform, enables niggle-fixing from customer feedback and critically shortens the period between set-up and supply costs and customer revenue receipts.
Getting the Overhead and CapEx budget balanced by the Income Receipts is the most important element of any new business, especially so in the auto-motive sector. The failure to do so has been the downfall of many ventures over the last century, and is the reason why (rightly) the investment community generally prefers the pragmatic attitude of the businessman to the perfectionist attitude of the inventor-engineer.
With no doubt help from other more low-profile colleagues, Nikolai Fomenko, ever the showman will need to balance marque enthusiasm, commercial practicality, product delivery and ongoing support to be taken seriously by customers. That is the real challenge given that MARUSSIA is still in its infancy, with the possibility that its eyes are bigger than its belly.
However, Fomenko indicates that a production volume of 100-150 units would be “ a good result”, though it is not clear whether that 100 figure equals the project's financial break-even, and the additional units profit. Or whether it requires 150 vehicles to reach break-even. It is an important point to make that such a 50% variation is highly unusual when assessing the viability of a niche manufacture vehicle project. Whilst exacting figures are understandably in-credible, a reduction in the volume's effective 'spread' would be deemed very necessary to pin down the business case.
To this end MARUSSIA must present itself well and convincingly to an international crowd.
Fomenko's ultimate ideal, as presented to latter-day investors, could well be piggy-back Pagani to build reputation and credibility in the near term – ie over the next decade - then to piggy-back a bigger sourcing partner such as Lamborghini (ie VW Group) to gain production efficiencies.
This would appear to be a notionally stable long-term plan if viable.
Yet, even with greater levels of FDI pumped into Russian capital markets, seeking higher-value returns than available in the West or Japan, given the past foreign investment concerns in Russia, there will be a need by any foreign investor to see tangible returns and/or growth evidence. An immediate ROI 'bang for the buck' directing capital to the likes of commodities, metals, telecoms and state-support initiatives. Whilst for VC orientated entities, the need to have far greater transparency throughout the infancy stages of any start-up company; critically to ensure allotted funding is fully accountable and provides visible early-stage business traction.
That future FDI that President Medvedev seeks will have investor procedural demands of its own, but especially, and necessarily, so in the relatively complex, costly and politicised world of national supercars.
Ironically, even with the current pro-Russia stance of global capital markets, in such non-conventional capital plays, it will be the Russian who will act the bulls and the FDI outsiders the legendary Russian bear.
Friday, 20 August 2010
Company Focus – GM – Investor Road-Show Prospecting with a Necessarily Low Key “Yippee IPO”
The North American operations of the new General Motors Company has experienced a remarkable ride over the last 12 months or so. Its $60bn+ financial life-line and a politically generated 'fast-track' Chapter 11 restructuring designed to provide it with a lease of new life; so as to play its part in the economic regeneration of the US, and end the domestic value-destruction drag within the company's global empire.
Undoubtedly a radically re-shaped entity. It saw 8 brands slashed to 4: banishing non-performing divisional marques and those out of kilter with prevailing social trends. It saw an essentially cannibalistic dealer-base much contracted*: re-setting showroom catchment areas and enabling pricing power. It saw product specification rationalisation: the resurgent days of “more combinations than stars in the universe” gone. It saw the number of preferred supplier numbers shrunken: to offer contract security in return for discounts driven by economies of scale. It saw product engineering rationalisation: as new vehicle programmes were determined 'global' instead of 'local'. It saw the UAW recognise the scale of the challenge, necessarily altering its historic left-ward stance to rightwards: the reality of the enormous GMNA challenge and government persuasion showing its need to be part of the solution, not the problem. It saw major national support: from the large Energy Department loans from the out-going Bush administration, to the unprecedented Quantitative Easing measures from President Obama, which not only provided the 'bail-out' monies but doubly support the company (and the sector) with”Cash for Clunkers”
[*NB allegations flying back and forth within public web forums that the dealer rationalisation programme was supposedly heavily influenced by the Dem vs Rep campaign donation choices of GM auto-dealers].
Never in the US auto-sector's history has so much change been seen. As a result of that drastic surgeory which spanned major liposuction, cardio-vascular re-routing and skeletal support, the organic element of the company is indisputably different.
However, akin to any over-weight, artery clogged, arthritic patient, the surgeory can only normalise the organic. As important, if not more so, is mental (ie cultural) re-orientation For three reasons: to avoid re-lapse into destructive old habits, to recognise the reality (ie 'new norm') of the surrounding environment (of the global automotive arena, and GMNA's objective place within it) and to set-out a health improvement regime which re-builds understanding, character and innate strength.
This was always was set to be the substantial post-apocalyptic challenge – and it has now arrived.
Yet after so much positive yet painful traction, enabled by 'text-book' actions and oiled by Washington, as the company nears the eve of its IPO – for an expected 20% disposal of the government stake – two events of a macro and micro nature, point to a behind the scenes reality at GM which is marring the bright future previously painted.
1.At the macro-level, the candid description of the all to real re-emerging macro-economic headwinds availing themselves, depicted in the Risks (ie caveat) section of the S-1 document submitted to the SEC yesterday as part of the IPO procedure.
2.At the micro-level, the very surprising departure of Chairman Ed Whitacre, having seen successful emergence from Chapter 11 and offered two quarters of seemingly successful financial results.
Although not privvy to an inside view of the restructuring, investment-auto-motives has long been cautious about the reality behind the all too typical necessary but potentially over-played corporate bravado. In short questioning “what the store really looks like behind the Wall Street directed window-dressing”?
The question that always beset New GM was “in what manner would it approach re-listing onto public capital markets”? Of course much was dependent upon the positive or negative dynamics of those markets themselves, setting the scene for relative economic confidence throughout the economy and especially so the institutional and mom & pop investor. That said, once the market sharply rebounded from its March 2009 low-point, the rapidity of that rise – holding steady after 6 months and sustained for 14 months - essentially set the scene for an early presentation of New GM.
Market dynamics fitted well with the government's need to claw back its 'investment' in the company and so, given the record breaking valuation and size of the eventual full listing, commissioned the full gamut of Wall Street's big name investment banks to both act as book-runners and under-writers.
But since the recent topping-out of western capital markets, thanks to corporate earnings driven by a mixture of tail-end cost-savings and inventory re-building, unsurprisingly the age of what seemed continued, unfettered, but foundationally unproven jubilation has been somewhat scuppered.
This has engendered a 'reality check' amongst both touting corporate executives and their agent bankers. It is a very necessary reaction which in the larger context should help prevent the bursting of a mini-bubble. And crucially at the corporate level instills a conservative atmosphere of reasoned valuation.
Thus GM's change of tack. From a 'full steam ahead' stance to something more cautious. The initial reported intention of an all-out offering of Washington's & Ontario's complete stake, so riding buoyant market sentiment as a switch play from what seemed a bond bubble, has altered dramatically in the cold light of recent market jitters. Equity buys have slowed for even proven 'risk-off' buys such as infrastructure, pharma and sections of consumer retail, so the market acceptance of a large scale GM offering – even a stretch in itself – would have consequently diminished.
This is the reality which GM wisely conveyed in its S-1 filing, that 'risk-off' sentiment detailed by the still lack-lustre recovery in the US, Europe's economic drag and perhaps most importantly the contraction of vehicle demand in China as the PRC seeks to re-align its own economy; given the slowed demand-pull from export regions which by default helps keep the Renminbi tracking slightly lower.
Thus GM's S-1 recognition of a concerning slowed phase in the global economy must be seen to be seen, with GM no doubt an understanding that with slowed Chinese domestic demand hitting commodity imports along with increasing world-wide food-stuff prices, that even rebuoyed South American car demand may suffer as well; so seeing demand deflation across the globe.
But what of Ed Whitacre's untimely departure?
It is unexpected given his stand-by-thee reputation build at AT&T. Of course it was well recognised that he was parachuted into GM specifically to lend gravitas to and managerially underpin the floatation process, that is seemingly his craft. Yet as insightful financial press editorials have stated: the job is far from done, even if the environmental market conditions have changed. As has been reported. the CEO's role has been handed from the charismatic long-serving Wagoner, to the accounts clinical Henderson, to the re-orchestrational Whitacre and now to the more entrepreneurially renowned Dan Akerson.
Most interestingly, Akerson holds an MD position as Buy-Out Head at the private equity firm Carlyle Group.
Ideally Whitacre would have kept to his word of (to paraphrase) “not going anywhere for sometime”, since this would have given a much needed stability to GM mid and senior tier management, who quite frankly must be continually bemuddled even as corporate confidence builds. But the appointment of Akerson highlights perhaps not only greater care to pitch GM properly to the market, but also allow it to fairly value and dispose of its remaining interests in the essentially defunct Motors Liquidation Corporation.
The 'old GM' company - still with creditors in toe - has the remit of off-loading what are essentially reams of 'rust-belt' properties and plant Such asset disposal is typically not the remit or capability of typical auto-executives, their focus better directed in running the active side of the business. So instead, who better than a knowledgeable, value-driven, and deal savvy private equity player to undertake the role?
Brown-field industrial plots here and now seem to be the last asset class on people's minds, but of course it will be Chinese, Indian and SE Asian firms, who whilst cash-rich and enjoying steady income streams will be on the look-out for western acquisition deals throughout North America and Europe. As a way-in to serve the still sizable GM across the range of different vehicles systems: from possibly the likes of TATA in body construction, Bharat Forge in powertrain and suspension castings, Geely affiliated companies in trim and interiors and other Chinese companies in electrical and electronic harnesses and 'black-box'.
Identifying 'fair-value' asset disposal prices will be key, as will a 'simple and clean' no-nonsense agreements to enable quick legal conveyance of the properties and plant. If not as successful as planned in selling to overseas buyers, GM may need to look at the possibility of passing on such redundant land to the government as a part of an equity return deal. This would assist both GM and the government in terms of re-apportioning soft and hard assets to their natural places, GM holding more of its own equity and the state holding more of its own terra firma, but for better mid-term confidence and an improved outcome for long-term national prosperity, the attraction of Eastern FDI cannot be understated.
On paper the production active side of GM's business model has been reset to reach breakeven at an annual market volume (TIV) of 10.5m, given a maintained and projected market-share of approximately 20%.
[NB. Maintaining that 20% will be key, as recent marketing campaigns such as the 5-year/100,000 mile vehicle warranty highlights. Yet the level of competition is still severe, as seen by Hyundai's 7-year warranty, the need for Toyota to reclaim its dominance, Honda, Nissan & Suzuki incursion, aswell as critically the North American growth ambition of VW, Ford's retained hold and the obvious return of Chrysler (and latterly FIAT) as market forces].
GM cannot simply rest on its laurels of a transformation job well done under Whitacre, nor can it expect the capital markets to accept that miraculously all is now well, nor can it expect a windfall from its MLC asset-disposals, nor can it expect the future helping hand of Washington.
As the year-end IPO deadline approaches GM must be seen to be more far more than it has been. It has by Chapter 11 default escaped its image of endemic irresponsibility and mis-management.
But now New GM must present itself to be far more than a possible case of 'fur coat and no knickers'. This viewpoint generated by recent issues such as: partnership with a sub-prime lender to support sales volumes (vis a vis Washington's expectations), concerns regards the proliferation of creditor-warranty and convertible bonds related 'class-B' shares, and the surprisingly large reported pensions drag carried-over: which could not be culled under Chapter 11 given the scale of GM's social legacy.
Yes, GM enters a new phase, one in which it will be undoubtedly tested, but as with any buyer of a car, let alone a car company, it will need to have been 'tried and tested', before fully convincing the capital markets.
Theoretically, having ridden the support wave over the last year,its present $32bn cash pile would allow it to prove itself without the need for immediate new capital injections. If all is truly stable, that would surely be the expectation from investors, and the acid test for GM. Thus avoiding the IPO as effectively an avenue to 'Lemon Aid'. Exactly how it conducts itself throughout this new period of 'stretch' of retracted consumer demand will be testament to its current and future capability.
Whilst Akerson is promoting divestment potential the fundamentals of the IPO's confidence relies upon operational acumen, and drafting a tenable payment schedule from its investment funds to meet its still weighty pensions obligations without having to 'bet the farm' on high risk choices.
These irredoubtable and crucial facts are recognised by the financial press, sector analysts on both side of the buy-sell deal and critically Washington itself. And no doubt by Akersen himself.
Having come so far, no matter how 'lady-like' its appearance, GM cannot afford to 'pull a fast one' on the markets, expecting a latter case of a rising tide lifting all boats. This IPO registration process is vitally important for the corporation and the country. Certain quarters of the press have already hinted that "Dan Akerson's number should be up", but we can only allow investor 'registration numbers' to tell the ultimate tale. Black versus Red labels are all to easy to affix before the event. Yes it may be a strenuous hill-climb yet, but that all important S-1 document at least highlights the bumps in the road ahead, even if the possibility of black-ice is not overtly mentioned.
So, from the basic operational and balance sheet out-look, investment-auto-motives is yet to be convinced of GM's fully-recovered return. But that declaration of horizon risk indicates an renewed atmosphere of prudence at GM which should be welcomed, even if investor breath must still be cautiously held whilst fully assessing the floatation worthiness of the GM vehicle itself.
Undoubtedly a radically re-shaped entity. It saw 8 brands slashed to 4: banishing non-performing divisional marques and those out of kilter with prevailing social trends. It saw an essentially cannibalistic dealer-base much contracted*: re-setting showroom catchment areas and enabling pricing power. It saw product specification rationalisation: the resurgent days of “more combinations than stars in the universe” gone. It saw the number of preferred supplier numbers shrunken: to offer contract security in return for discounts driven by economies of scale. It saw product engineering rationalisation: as new vehicle programmes were determined 'global' instead of 'local'. It saw the UAW recognise the scale of the challenge, necessarily altering its historic left-ward stance to rightwards: the reality of the enormous GMNA challenge and government persuasion showing its need to be part of the solution, not the problem. It saw major national support: from the large Energy Department loans from the out-going Bush administration, to the unprecedented Quantitative Easing measures from President Obama, which not only provided the 'bail-out' monies but doubly support the company (and the sector) with”Cash for Clunkers”
[*NB allegations flying back and forth within public web forums that the dealer rationalisation programme was supposedly heavily influenced by the Dem vs Rep campaign donation choices of GM auto-dealers].
Never in the US auto-sector's history has so much change been seen. As a result of that drastic surgeory which spanned major liposuction, cardio-vascular re-routing and skeletal support, the organic element of the company is indisputably different.
However, akin to any over-weight, artery clogged, arthritic patient, the surgeory can only normalise the organic. As important, if not more so, is mental (ie cultural) re-orientation For three reasons: to avoid re-lapse into destructive old habits, to recognise the reality (ie 'new norm') of the surrounding environment (of the global automotive arena, and GMNA's objective place within it) and to set-out a health improvement regime which re-builds understanding, character and innate strength.
This was always was set to be the substantial post-apocalyptic challenge – and it has now arrived.
Yet after so much positive yet painful traction, enabled by 'text-book' actions and oiled by Washington, as the company nears the eve of its IPO – for an expected 20% disposal of the government stake – two events of a macro and micro nature, point to a behind the scenes reality at GM which is marring the bright future previously painted.
1.At the macro-level, the candid description of the all to real re-emerging macro-economic headwinds availing themselves, depicted in the Risks (ie caveat) section of the S-1 document submitted to the SEC yesterday as part of the IPO procedure.
2.At the micro-level, the very surprising departure of Chairman Ed Whitacre, having seen successful emergence from Chapter 11 and offered two quarters of seemingly successful financial results.
Although not privvy to an inside view of the restructuring, investment-auto-motives has long been cautious about the reality behind the all too typical necessary but potentially over-played corporate bravado. In short questioning “what the store really looks like behind the Wall Street directed window-dressing”?
The question that always beset New GM was “in what manner would it approach re-listing onto public capital markets”? Of course much was dependent upon the positive or negative dynamics of those markets themselves, setting the scene for relative economic confidence throughout the economy and especially so the institutional and mom & pop investor. That said, once the market sharply rebounded from its March 2009 low-point, the rapidity of that rise – holding steady after 6 months and sustained for 14 months - essentially set the scene for an early presentation of New GM.
Market dynamics fitted well with the government's need to claw back its 'investment' in the company and so, given the record breaking valuation and size of the eventual full listing, commissioned the full gamut of Wall Street's big name investment banks to both act as book-runners and under-writers.
But since the recent topping-out of western capital markets, thanks to corporate earnings driven by a mixture of tail-end cost-savings and inventory re-building, unsurprisingly the age of what seemed continued, unfettered, but foundationally unproven jubilation has been somewhat scuppered.
This has engendered a 'reality check' amongst both touting corporate executives and their agent bankers. It is a very necessary reaction which in the larger context should help prevent the bursting of a mini-bubble. And crucially at the corporate level instills a conservative atmosphere of reasoned valuation.
Thus GM's change of tack. From a 'full steam ahead' stance to something more cautious. The initial reported intention of an all-out offering of Washington's & Ontario's complete stake, so riding buoyant market sentiment as a switch play from what seemed a bond bubble, has altered dramatically in the cold light of recent market jitters. Equity buys have slowed for even proven 'risk-off' buys such as infrastructure, pharma and sections of consumer retail, so the market acceptance of a large scale GM offering – even a stretch in itself – would have consequently diminished.
This is the reality which GM wisely conveyed in its S-1 filing, that 'risk-off' sentiment detailed by the still lack-lustre recovery in the US, Europe's economic drag and perhaps most importantly the contraction of vehicle demand in China as the PRC seeks to re-align its own economy; given the slowed demand-pull from export regions which by default helps keep the Renminbi tracking slightly lower.
Thus GM's S-1 recognition of a concerning slowed phase in the global economy must be seen to be seen, with GM no doubt an understanding that with slowed Chinese domestic demand hitting commodity imports along with increasing world-wide food-stuff prices, that even rebuoyed South American car demand may suffer as well; so seeing demand deflation across the globe.
But what of Ed Whitacre's untimely departure?
It is unexpected given his stand-by-thee reputation build at AT&T. Of course it was well recognised that he was parachuted into GM specifically to lend gravitas to and managerially underpin the floatation process, that is seemingly his craft. Yet as insightful financial press editorials have stated: the job is far from done, even if the environmental market conditions have changed. As has been reported. the CEO's role has been handed from the charismatic long-serving Wagoner, to the accounts clinical Henderson, to the re-orchestrational Whitacre and now to the more entrepreneurially renowned Dan Akerson.
Most interestingly, Akerson holds an MD position as Buy-Out Head at the private equity firm Carlyle Group.
Ideally Whitacre would have kept to his word of (to paraphrase) “not going anywhere for sometime”, since this would have given a much needed stability to GM mid and senior tier management, who quite frankly must be continually bemuddled even as corporate confidence builds. But the appointment of Akerson highlights perhaps not only greater care to pitch GM properly to the market, but also allow it to fairly value and dispose of its remaining interests in the essentially defunct Motors Liquidation Corporation.
The 'old GM' company - still with creditors in toe - has the remit of off-loading what are essentially reams of 'rust-belt' properties and plant Such asset disposal is typically not the remit or capability of typical auto-executives, their focus better directed in running the active side of the business. So instead, who better than a knowledgeable, value-driven, and deal savvy private equity player to undertake the role?
Brown-field industrial plots here and now seem to be the last asset class on people's minds, but of course it will be Chinese, Indian and SE Asian firms, who whilst cash-rich and enjoying steady income streams will be on the look-out for western acquisition deals throughout North America and Europe. As a way-in to serve the still sizable GM across the range of different vehicles systems: from possibly the likes of TATA in body construction, Bharat Forge in powertrain and suspension castings, Geely affiliated companies in trim and interiors and other Chinese companies in electrical and electronic harnesses and 'black-box'.
Identifying 'fair-value' asset disposal prices will be key, as will a 'simple and clean' no-nonsense agreements to enable quick legal conveyance of the properties and plant. If not as successful as planned in selling to overseas buyers, GM may need to look at the possibility of passing on such redundant land to the government as a part of an equity return deal. This would assist both GM and the government in terms of re-apportioning soft and hard assets to their natural places, GM holding more of its own equity and the state holding more of its own terra firma, but for better mid-term confidence and an improved outcome for long-term national prosperity, the attraction of Eastern FDI cannot be understated.
On paper the production active side of GM's business model has been reset to reach breakeven at an annual market volume (TIV) of 10.5m, given a maintained and projected market-share of approximately 20%.
[NB. Maintaining that 20% will be key, as recent marketing campaigns such as the 5-year/100,000 mile vehicle warranty highlights. Yet the level of competition is still severe, as seen by Hyundai's 7-year warranty, the need for Toyota to reclaim its dominance, Honda, Nissan & Suzuki incursion, aswell as critically the North American growth ambition of VW, Ford's retained hold and the obvious return of Chrysler (and latterly FIAT) as market forces].
GM cannot simply rest on its laurels of a transformation job well done under Whitacre, nor can it expect the capital markets to accept that miraculously all is now well, nor can it expect a windfall from its MLC asset-disposals, nor can it expect the future helping hand of Washington.
As the year-end IPO deadline approaches GM must be seen to be more far more than it has been. It has by Chapter 11 default escaped its image of endemic irresponsibility and mis-management.
But now New GM must present itself to be far more than a possible case of 'fur coat and no knickers'. This viewpoint generated by recent issues such as: partnership with a sub-prime lender to support sales volumes (vis a vis Washington's expectations), concerns regards the proliferation of creditor-warranty and convertible bonds related 'class-B' shares, and the surprisingly large reported pensions drag carried-over: which could not be culled under Chapter 11 given the scale of GM's social legacy.
Yes, GM enters a new phase, one in which it will be undoubtedly tested, but as with any buyer of a car, let alone a car company, it will need to have been 'tried and tested', before fully convincing the capital markets.
Theoretically, having ridden the support wave over the last year,its present $32bn cash pile would allow it to prove itself without the need for immediate new capital injections. If all is truly stable, that would surely be the expectation from investors, and the acid test for GM. Thus avoiding the IPO as effectively an avenue to 'Lemon Aid'. Exactly how it conducts itself throughout this new period of 'stretch' of retracted consumer demand will be testament to its current and future capability.
Whilst Akerson is promoting divestment potential the fundamentals of the IPO's confidence relies upon operational acumen, and drafting a tenable payment schedule from its investment funds to meet its still weighty pensions obligations without having to 'bet the farm' on high risk choices.
These irredoubtable and crucial facts are recognised by the financial press, sector analysts on both side of the buy-sell deal and critically Washington itself. And no doubt by Akersen himself.
Having come so far, no matter how 'lady-like' its appearance, GM cannot afford to 'pull a fast one' on the markets, expecting a latter case of a rising tide lifting all boats. This IPO registration process is vitally important for the corporation and the country. Certain quarters of the press have already hinted that "Dan Akerson's number should be up", but we can only allow investor 'registration numbers' to tell the ultimate tale. Black versus Red labels are all to easy to affix before the event. Yes it may be a strenuous hill-climb yet, but that all important S-1 document at least highlights the bumps in the road ahead, even if the possibility of black-ice is not overtly mentioned.
So, from the basic operational and balance sheet out-look, investment-auto-motives is yet to be convinced of GM's fully-recovered return. But that declaration of horizon risk indicates an renewed atmosphere of prudence at GM which should be welcomed, even if investor breath must still be cautiously held whilst fully assessing the floatation worthiness of the GM vehicle itself.
Sunday, 15 August 2010
Macro Level Trends – UK plc – “R&D&R” : Adding the Element of "Realisation” to the R&D Agenda
This third and last commentary regards the UK's current industrial state of play unashamedly uses an excerpt of classic literature to once again (poignantly) echo Lord Brown's all important point: that the nation's R&D agenda – between 'Pure' and 'Applied' must be better managed.
To re-emphasis, the correlation of 'value-added' technological solutions versus 'time' to exploitation, has rarely ever been so critical.
[NB investment-auto-motives titles this new era 'RADAR' : derived from the extension of the term R&D into R&D&R – the latter 'R' suffix highlighting 'Realisation'. RADAR is intentionally used as a metaphor given its role as an examplar of technological development and application which quite literally altered Britain's future at a critical juncture of its own history].
As Business Secretary Vince Cable seeks to address the innate problems of the country's productivity mechanism - and the 'value-added' nature of its output - a pertinent section from Jonathan Swift's “Gulliver's Travels” (circa 1726) is undoubtedly timely.
It is taken from Gulliver's 3rd adventurous trip, reaching Lagado, where he reveiws the role and manner of the indigenous sciences. Whilst Swift was overtly light-hearted in its case-studies, he importantly raises questions regards the less than wise deployment of resources.
[NB An innate irony presents itself given that Swift questions the role and delivery of Lagado's 'Acadamies' whilst his central sentiments are being presented by Lord Brown, who some 284 years later the President of the Royal Acadamy of Engineering. It is a small irony I'm sure both would enjoy].
…....................................................................................
Gulliver's Travels / Chapter 5
“The academy is not an entire single building, but a continuation of several houses on either side of the street, which growing waste, was purchased and put to that use.
I was received today by a very kindly warden, and went for many days to the academy. Every room hath in it one or more projectors [NB scientific developers]; and I believe, I could not be in fewer than five hundred rooms.
The first man I saw was of meagre aspect, with sooty hands and face, his hair and beard long, ragged, and singed in several places. His clothes, shirt and skin were all the same colour. He had been eighty years upon a project for extracting sunbeams out of cucumbers, which were to be put into vials hermetically sealed, and let out to warm the air in raw, inclement summers. He told me he did not doubt, in eight years more, he should be able to supply the governor's gardens with sunshine at a reasonable rate; but he complained that his stock was low, and entreated me to give him something as an encouragement to ingenuity, especially since this had been a very dear season for cucumbers. I made him a small present, for my Lord had furnished me with money on purpose, because he knew their practice of begging from all who go to see them.
I saw another at work to calcine ice into gun-powder, who likewise showed me a treatise he had written concerning the malleability of fire, which he intended to publish.
There was a most ingenious architect, who had contrived a new method for building houses, by beginning at the roof, and working downwards to the foundation, which he justified to me, by the like practice of those two prudent insects, the bee and the spider.
There was a man born blind, who had several apprentices in his own condition: their employment was to mix colours for painters, which their master taught them to distinguish by feeling and smelling. It was, indeed, my misfortune to find them, at that time, not very perfect in lessons, and the professor himself happened to be generally mistaken: this artist is much encouraged and esteemed by the whole fraternity”.
....................................................................................
Today, as perhaps never before, the nation's own 'RADAR' capability must be commissioned to qualify and quantify the output from the UK's public and private investment R&D agenda.
To re-emphasis, the correlation of 'value-added' technological solutions versus 'time' to exploitation, has rarely ever been so critical.
[NB investment-auto-motives titles this new era 'RADAR' : derived from the extension of the term R&D into R&D&R – the latter 'R' suffix highlighting 'Realisation'. RADAR is intentionally used as a metaphor given its role as an examplar of technological development and application which quite literally altered Britain's future at a critical juncture of its own history].
As Business Secretary Vince Cable seeks to address the innate problems of the country's productivity mechanism - and the 'value-added' nature of its output - a pertinent section from Jonathan Swift's “Gulliver's Travels” (circa 1726) is undoubtedly timely.
It is taken from Gulliver's 3rd adventurous trip, reaching Lagado, where he reveiws the role and manner of the indigenous sciences. Whilst Swift was overtly light-hearted in its case-studies, he importantly raises questions regards the less than wise deployment of resources.
[NB An innate irony presents itself given that Swift questions the role and delivery of Lagado's 'Acadamies' whilst his central sentiments are being presented by Lord Brown, who some 284 years later the President of the Royal Acadamy of Engineering. It is a small irony I'm sure both would enjoy].
…....................................................................................
Gulliver's Travels / Chapter 5
“The academy is not an entire single building, but a continuation of several houses on either side of the street, which growing waste, was purchased and put to that use.
I was received today by a very kindly warden, and went for many days to the academy. Every room hath in it one or more projectors [NB scientific developers]; and I believe, I could not be in fewer than five hundred rooms.
The first man I saw was of meagre aspect, with sooty hands and face, his hair and beard long, ragged, and singed in several places. His clothes, shirt and skin were all the same colour. He had been eighty years upon a project for extracting sunbeams out of cucumbers, which were to be put into vials hermetically sealed, and let out to warm the air in raw, inclement summers. He told me he did not doubt, in eight years more, he should be able to supply the governor's gardens with sunshine at a reasonable rate; but he complained that his stock was low, and entreated me to give him something as an encouragement to ingenuity, especially since this had been a very dear season for cucumbers. I made him a small present, for my Lord had furnished me with money on purpose, because he knew their practice of begging from all who go to see them.
I saw another at work to calcine ice into gun-powder, who likewise showed me a treatise he had written concerning the malleability of fire, which he intended to publish.
There was a most ingenious architect, who had contrived a new method for building houses, by beginning at the roof, and working downwards to the foundation, which he justified to me, by the like practice of those two prudent insects, the bee and the spider.
There was a man born blind, who had several apprentices in his own condition: their employment was to mix colours for painters, which their master taught them to distinguish by feeling and smelling. It was, indeed, my misfortune to find them, at that time, not very perfect in lessons, and the professor himself happened to be generally mistaken: this artist is much encouraged and esteemed by the whole fraternity”.
....................................................................................
Today, as perhaps never before, the nation's own 'RADAR' capability must be commissioned to qualify and quantify the output from the UK's public and private investment R&D agenda.
Friday, 6 August 2010
Address to The House of Lords
The previous post applauds the informed reaction of Lord Brown and Mr Dennis in appreciating the macro and micro-level challenges the UK faces in generating a new era of industrial & economic value creation.
The following re-presents a letter from investment-auto-motives addressed to pertinant independent Cross-bench Peers of the House of Lords, with the aim of highlighting the level of challenge and providing a contextual background, the combine of which calls for a new 'UK Auto Industry Manifesto'.
The letter is provided here for the interests of my web-blog readers from investment, governmental and industry spheres.
.......................................................................................
The House of Lords
Palace of Westminster
London
SW1A OPW
14th April 2010
Re: Fiscal Consolidation & the Need for a 'UK Automotive Industry Manifesto'
My Lords & Lady,
Perhaps as never before in Britain's modern history has the need for truly independent judgment been greater to set the country back on course, domestically and internationally.
This letter and its enclosures are intended for yourselves and ideally copied to other wholly independent Cross-Bench Peers as well as members of the Science & Technology Committee; thus those who have non-partisan associative interest and baring – formal or otherwise - on the future of '21st century Industrial Britain'.
The list of published reports from the House indicates that scant legal & associative policy regard has been given to the indigenous automotive sector over the last two decades. This is unsurprising, a consequence of the decline of British owned mass-manufacture in a notional post-industrial age; with instead primary attention directed at the Kyoto ambition of curbing vehicle emissions as part of the bigger global CO2 reduction ambition.
Yet the two – industry & the eco-challenge - are undoubtedly concomitant.
Presently attention is drawn to the future by way of Bills attendant to: digital communications, genomic medicine, nano-tech, the electronic micro-chip etc; such disciplines now set against the very real regard of “Setting Priorities for Publicly Funded Research” given the sizable retraction of near-mid term public expenditure.
For the UK, and indeed much of the West, a concerning 'activity chasm' has emerged as a consequence of prolific macro-economic headwinds and the level of ecological challenge. That chasm will only be bridged by the effective and efficient use of the country's public and private resources - from availability of capital, to the promotion of the enterprise base, to the nourishment of the inherent human intellect.
The bursting of the credit-bubble demonstrates just how fragile the UK economy has become, portions of our population now economically disconnected; the 'credit-pull' for (often nefarious) personal consumption has exhausted, and instead, today, there is a new requirement for 'productivity-push'.
Just as the 19th century gave rise to mass industry and the 20th to mass consumption, so the 21st demands a re-formation of both sides of the equation, to meet this new era's demands.
As such, the full cross-section of UK industry, services & commerce requires re-examination and where necessary re-orientation to become: aligned, harmonious, productive and create meaningful value in the economic sense, the rational utility sense and even the emotional reward sense at both national and personal levels.
To this end, the full value chain of the British automotive sector, along with its incumbent foreign-owned manufacturers, and potential inter-regional co-operation, must be considered in-depth as an 'economic re-generator' given the ever present need for personal & public mobility, which in itself is historically proven as a cornerstone in promoting increasing economic activity.
All too often 'automotive' is seen as yesteryear because the conventional 20th century mass-manufacture 'Budd-system' business model is now typically better served by the socio-economic dynamics of the developing world. That perception whilst valid is not the whole story, discounting the reality and increasing relevance of alternative business models that focus upon advanced technologies and niche manufacture. Yet the UK's historical, formative, connection to these 'old' and 'new' sectors means that it operates higher-up the value-curve, with concomitant IPR leadership and effective operational know-how.
Whilst the recent rehabilitation of coal-mining is applauded as in the national interest, the automotive industry - although mis-perceived as 'old' - can be viewed in a similar vain, since the sector is so diverse and multi-faceted as to be more comparable to a reformable Rubik's cube - ie with the ability to re-shape itself both throughout the value-chain: from component supplier to assembler to retailer to maintenance & thru' life services provider; and indeed in time as a whole.
Thus it is my sincere belief that through insightful guidance at government, investor and enterprise level, that the UK automotive industry has a compelling role to play in both the wealth generation and well-being of the nation.
The enclosed items present the sole originally intended 3-page web-log item titled 'Fiscal Consolidation & the Need for a UK Auto Manifesto'. (The accompanying diagram illustrating the global 'trickle-down' achievable).
Yet to give this 'call to action' improved context, a compendium of selected web-log essays has been compiled providing various inputs for 'big-picture' food for thought. Hence a cross-section of items seeks to paint a portrait of the prime issues and trends facing the sector, including:
- The required 'economy drive' to dig the UK out of national indebtedness
- The danger of over-ideological personal transport initiatives such as TfL's bicycle scheme.
- The need to generate tangible added-value across the UK, US & Europe (Parts 1,2 & 3)The investor prompted need for continued western auto-industry restructuring.
- The importance of R&D: direct applications and technology transfer, with Dyson example
- The increasing importance of the small car, with Aston-Martin-Lagonda City-Car example
- The recognition that pure EVs have a near-term limited role, with Daimler-Renault example
- The need to consider vehicle manufacture & usage patterns relative to metro-mobility and metro-rehabilitation needs, using Las Vegas as hypothetical model.
- The 'dis-joint' of near-mid term currency markets as prompter for auto-sector value-seeking.
From a truly independent voice, this call to consider the role and shape of 'UK Auto plc' has no political bias or stance and prohibits its use as such. Instead it simply promotes the idea of improved industrial thinking & policy-setting that must be addressed from 'top-down', seeking to increase the momentum of the recent UK Motor Industry Inquiry, and critically poses the question as to how the country can best utilise its high & mid-value capabilities on global & national stages: the latter with overt reliance on auto-retail.
Napoleon's disparaging adage that 'Britain is a country of shop-keepers' may be all too true today given the realities of manufacturing efficiencies elsewhere and the necessary need for free-trade to lift all nations. Yet the high national cost of the Automotive Assistance Plan that generated the sale of foreign made and owned vehicles only serves to highlight that the UK should recapture that lost wealth. Extolling its world-leading development capabilities via the production of its own (exported) low-CO2, high-value vehicles. In short part of a re-aligned national business model which delivers economic consistency – an automotive whole far beyond the sum of its parts
Yours sincerely
Mr Turan Ahmed MA
investment-auto-motives
London.
The following re-presents a letter from investment-auto-motives addressed to pertinant independent Cross-bench Peers of the House of Lords, with the aim of highlighting the level of challenge and providing a contextual background, the combine of which calls for a new 'UK Auto Industry Manifesto'.
The letter is provided here for the interests of my web-blog readers from investment, governmental and industry spheres.
.......................................................................................
The House of Lords
Palace of Westminster
London
SW1A OPW
14th April 2010
Re: Fiscal Consolidation & the Need for a 'UK Automotive Industry Manifesto'
My Lords & Lady,
Perhaps as never before in Britain's modern history has the need for truly independent judgment been greater to set the country back on course, domestically and internationally.
This letter and its enclosures are intended for yourselves and ideally copied to other wholly independent Cross-Bench Peers as well as members of the Science & Technology Committee; thus those who have non-partisan associative interest and baring – formal or otherwise - on the future of '21st century Industrial Britain'.
The list of published reports from the House indicates that scant legal & associative policy regard has been given to the indigenous automotive sector over the last two decades. This is unsurprising, a consequence of the decline of British owned mass-manufacture in a notional post-industrial age; with instead primary attention directed at the Kyoto ambition of curbing vehicle emissions as part of the bigger global CO2 reduction ambition.
Yet the two – industry & the eco-challenge - are undoubtedly concomitant.
Presently attention is drawn to the future by way of Bills attendant to: digital communications, genomic medicine, nano-tech, the electronic micro-chip etc; such disciplines now set against the very real regard of “Setting Priorities for Publicly Funded Research” given the sizable retraction of near-mid term public expenditure.
For the UK, and indeed much of the West, a concerning 'activity chasm' has emerged as a consequence of prolific macro-economic headwinds and the level of ecological challenge. That chasm will only be bridged by the effective and efficient use of the country's public and private resources - from availability of capital, to the promotion of the enterprise base, to the nourishment of the inherent human intellect.
The bursting of the credit-bubble demonstrates just how fragile the UK economy has become, portions of our population now economically disconnected; the 'credit-pull' for (often nefarious) personal consumption has exhausted, and instead, today, there is a new requirement for 'productivity-push'.
Just as the 19th century gave rise to mass industry and the 20th to mass consumption, so the 21st demands a re-formation of both sides of the equation, to meet this new era's demands.
As such, the full cross-section of UK industry, services & commerce requires re-examination and where necessary re-orientation to become: aligned, harmonious, productive and create meaningful value in the economic sense, the rational utility sense and even the emotional reward sense at both national and personal levels.
To this end, the full value chain of the British automotive sector, along with its incumbent foreign-owned manufacturers, and potential inter-regional co-operation, must be considered in-depth as an 'economic re-generator' given the ever present need for personal & public mobility, which in itself is historically proven as a cornerstone in promoting increasing economic activity.
All too often 'automotive' is seen as yesteryear because the conventional 20th century mass-manufacture 'Budd-system' business model is now typically better served by the socio-economic dynamics of the developing world. That perception whilst valid is not the whole story, discounting the reality and increasing relevance of alternative business models that focus upon advanced technologies and niche manufacture. Yet the UK's historical, formative, connection to these 'old' and 'new' sectors means that it operates higher-up the value-curve, with concomitant IPR leadership and effective operational know-how.
Whilst the recent rehabilitation of coal-mining is applauded as in the national interest, the automotive industry - although mis-perceived as 'old' - can be viewed in a similar vain, since the sector is so diverse and multi-faceted as to be more comparable to a reformable Rubik's cube - ie with the ability to re-shape itself both throughout the value-chain: from component supplier to assembler to retailer to maintenance & thru' life services provider; and indeed in time as a whole.
Thus it is my sincere belief that through insightful guidance at government, investor and enterprise level, that the UK automotive industry has a compelling role to play in both the wealth generation and well-being of the nation.
The enclosed items present the sole originally intended 3-page web-log item titled 'Fiscal Consolidation & the Need for a UK Auto Manifesto'. (The accompanying diagram illustrating the global 'trickle-down' achievable).
Yet to give this 'call to action' improved context, a compendium of selected web-log essays has been compiled providing various inputs for 'big-picture' food for thought. Hence a cross-section of items seeks to paint a portrait of the prime issues and trends facing the sector, including:
- The required 'economy drive' to dig the UK out of national indebtedness
- The danger of over-ideological personal transport initiatives such as TfL's bicycle scheme.
- The need to generate tangible added-value across the UK, US & Europe (Parts 1,2 & 3)The investor prompted need for continued western auto-industry restructuring.
- The importance of R&D: direct applications and technology transfer, with Dyson example
- The increasing importance of the small car, with Aston-Martin-Lagonda City-Car example
- The recognition that pure EVs have a near-term limited role, with Daimler-Renault example
- The need to consider vehicle manufacture & usage patterns relative to metro-mobility and metro-rehabilitation needs, using Las Vegas as hypothetical model.
- The 'dis-joint' of near-mid term currency markets as prompter for auto-sector value-seeking.
From a truly independent voice, this call to consider the role and shape of 'UK Auto plc' has no political bias or stance and prohibits its use as such. Instead it simply promotes the idea of improved industrial thinking & policy-setting that must be addressed from 'top-down', seeking to increase the momentum of the recent UK Motor Industry Inquiry, and critically poses the question as to how the country can best utilise its high & mid-value capabilities on global & national stages: the latter with overt reliance on auto-retail.
Napoleon's disparaging adage that 'Britain is a country of shop-keepers' may be all too true today given the realities of manufacturing efficiencies elsewhere and the necessary need for free-trade to lift all nations. Yet the high national cost of the Automotive Assistance Plan that generated the sale of foreign made and owned vehicles only serves to highlight that the UK should recapture that lost wealth. Extolling its world-leading development capabilities via the production of its own (exported) low-CO2, high-value vehicles. In short part of a re-aligned national business model which delivers economic consistency – an automotive whole far beyond the sum of its parts
Yours sincerely
Mr Turan Ahmed MA
investment-auto-motives
London.
Monday, 2 August 2010
Macro Level Trends - UK Autos plc - "Future-Scoping" from a Convincing Double Act.
In a very timely manner, Julia Banner's current exhibition at Tate Britain highlights the danger of UK's engineering sector plunging to earth; in an age of hyper competition from supposedly 'advanced' and nominally 'emerging' nations.
In a prosaic metaphor she hangs a de-commissioned Harrier Jump Jet from the ceiling, its nose centimetres from the floor, whilst in an adjoining space, a paint-stripped and mirror polished Jaguar Fighter lays belly-up on the floor, as if downed fowl - resting on canopy, wing-tip and tail.
The best of art has always been a pertinent comment of the era, and whilst an overly obvious metaphor for the eyes of more profound minds, it is undoubtedly a powerful juxtaposition, citing the UK's industrial fragility within the backdrop of a building literally built from Tate & Lyle's proceeds of trade and industrial might of the Victorian era.
The innate message is clear to the masses
In sync comes (ex-BP) Lord Brown's call - as President of the Royal Society of Engineers - to the Department for Business, Innovation & Skills.
A call for a National Science Review that looks at the necessary measures required to re-balance the £4 billion per annum public expenditure, his assertion that the current funding ratio between far horizon 'Applied' versus near-horizon 'Pure' must be altered.
This call has been lambasted as short-sighted and reactionary by certain quarters of the financial press, and rebuked by Lord Rees - President of the Royal Society: known for its 'blue-sky' thinking; (where Lord Brown is also a Fellow). * Please see Post Script.
But Lord Brown is absolutely correct in this assertion....realistically "there is no alternative"...and realism must at this time prevail over esoteric ambitions.
Given not only the state of the nation's fiscal woes, but that of its relatively declined knowledge and advanced capabilities base in the face of fast-track BRIC+ nations.
PM Cameron's (ostensibly trade) visit to India highlighted that such nations can now licence and build UK designed aero-structures, as seen with Hindustan Aero's deal to construct India's own Hawks to BAE specifications. The (admittedly high-value) avionics and engine packages have still been sold direct from the UK by BAE Systems and Rolls-Royce, providing £500m & £200m programmes respectively. Whilst in the private aircraft realm we see only this month the launch of Brazil's Embraer small jet plane, and of course in China ambitions to match Boeing and Airbus in the mid and large commercial plane segment.
So the progress made by what were once seen as automatic – indeed desperate - recipients of UK aero-tech, highlights the changed world the west must now address in its own industrial policy-making.
Under greater pressure still is the UK Auto-sector, given its lower order technological demands. In a similar call to Parliament's Automotive Industry Reception, Ron Dennis (Chairman of McLaren) requested additional government assistance, his solution comprising of:
1. Education: additional effort to attract would be students to STEM subjects (Science, Technology, Engineering & Maths)
(plus extra curricula activities such as the Formula Student 600cc race car competition)
2. New Tax breaks for R&D efforts
3. The idea of 'collective achievement'
4. Cultural change in schools toward 'courageous experimentation', not 'fear'
Now this 4-point plan may be simplistic, arguably far too lightweight (in its current presented guise) to be taken seriously as a 'Vision for Britain' but it highlights some of the basic elements that are undoubtedly required. In his own words, it is not "rocket science".
[NB With all due respect, although Dennis partially decries the student shift to the 'social sciences' (media etc etc), the reality is that ultimately a marriage of STEM subjects and the Arts is required, with moreover an injection of a 3rd disciplinary mentality: namely Business & Finance methods and processes.
At the educational level investment-auto-motives whole-heartedly believes that "Renaissance (wo)Man" needs to be re-born in the UK to propel the capability of its knowledge-base. This has always the central philosophy of Turan Ahmed's and a central USP of investment-auto-motives].
However, ultimately the discussion of exactly how the UK progresses to generate future industrial value-creation is at long last being tabled.
It may be seen by some purveyors of the more esoteric sciences that it all smacks of picking winners and losers. Such a blinkered approach undoubtedly will not prevail, whilst positively a better and stronger value chain can be created between (public & private) investment, academia and industry.
To sum-up, in a reversal use of the overtly coarse phrase "its all about the economy, stupid!"
At present such truisms presented so harshly are desperately required.
Post Script*
One presentation at the London School of Economics last year was given by a New York University lecturer, the supposed contributing originator and part-backer of (to quote) a "Chug Chug" machine - that had supposedly gained Royal Society interests.
Supposedly designed to extract CO2 directly from the atmosphere (presumably in a tree-like manner, as opposed to Carbon Capture & Storage of power-stations**), no explanation of the machine's mechanicals were presented even at theoretical level. The young yet 'savvy' student audience saw the proposition as advanced as ludicrous.
It did the Royal Society no favours either, potentially seen by the LSE audience as a 'crack-pot' body, which is far from the truth given its illustrious origins and members. However such presentations only serve to assist the cultural chasm between science and economics – the very last thing needed.
PPS**
The issue of CCS is presently being discussed by the House of Lords
In a prosaic metaphor she hangs a de-commissioned Harrier Jump Jet from the ceiling, its nose centimetres from the floor, whilst in an adjoining space, a paint-stripped and mirror polished Jaguar Fighter lays belly-up on the floor, as if downed fowl - resting on canopy, wing-tip and tail.
The best of art has always been a pertinent comment of the era, and whilst an overly obvious metaphor for the eyes of more profound minds, it is undoubtedly a powerful juxtaposition, citing the UK's industrial fragility within the backdrop of a building literally built from Tate & Lyle's proceeds of trade and industrial might of the Victorian era.
The innate message is clear to the masses
In sync comes (ex-BP) Lord Brown's call - as President of the Royal Society of Engineers - to the Department for Business, Innovation & Skills.
A call for a National Science Review that looks at the necessary measures required to re-balance the £4 billion per annum public expenditure, his assertion that the current funding ratio between far horizon 'Applied' versus near-horizon 'Pure' must be altered.
This call has been lambasted as short-sighted and reactionary by certain quarters of the financial press, and rebuked by Lord Rees - President of the Royal Society: known for its 'blue-sky' thinking; (where Lord Brown is also a Fellow). * Please see Post Script.
But Lord Brown is absolutely correct in this assertion....realistically "there is no alternative"...and realism must at this time prevail over esoteric ambitions.
Given not only the state of the nation's fiscal woes, but that of its relatively declined knowledge and advanced capabilities base in the face of fast-track BRIC+ nations.
PM Cameron's (ostensibly trade) visit to India highlighted that such nations can now licence and build UK designed aero-structures, as seen with Hindustan Aero's deal to construct India's own Hawks to BAE specifications. The (admittedly high-value) avionics and engine packages have still been sold direct from the UK by BAE Systems and Rolls-Royce, providing £500m & £200m programmes respectively. Whilst in the private aircraft realm we see only this month the launch of Brazil's Embraer small jet plane, and of course in China ambitions to match Boeing and Airbus in the mid and large commercial plane segment.
So the progress made by what were once seen as automatic – indeed desperate - recipients of UK aero-tech, highlights the changed world the west must now address in its own industrial policy-making.
Under greater pressure still is the UK Auto-sector, given its lower order technological demands. In a similar call to Parliament's Automotive Industry Reception, Ron Dennis (Chairman of McLaren) requested additional government assistance, his solution comprising of:
1. Education: additional effort to attract would be students to STEM subjects (Science, Technology, Engineering & Maths)
(plus extra curricula activities such as the Formula Student 600cc race car competition)
2. New Tax breaks for R&D efforts
3. The idea of 'collective achievement'
4. Cultural change in schools toward 'courageous experimentation', not 'fear'
Now this 4-point plan may be simplistic, arguably far too lightweight (in its current presented guise) to be taken seriously as a 'Vision for Britain' but it highlights some of the basic elements that are undoubtedly required. In his own words, it is not "rocket science".
[NB With all due respect, although Dennis partially decries the student shift to the 'social sciences' (media etc etc), the reality is that ultimately a marriage of STEM subjects and the Arts is required, with moreover an injection of a 3rd disciplinary mentality: namely Business & Finance methods and processes.
At the educational level investment-auto-motives whole-heartedly believes that "Renaissance (wo)Man" needs to be re-born in the UK to propel the capability of its knowledge-base. This has always the central philosophy of Turan Ahmed's and a central USP of investment-auto-motives].
However, ultimately the discussion of exactly how the UK progresses to generate future industrial value-creation is at long last being tabled.
It may be seen by some purveyors of the more esoteric sciences that it all smacks of picking winners and losers. Such a blinkered approach undoubtedly will not prevail, whilst positively a better and stronger value chain can be created between (public & private) investment, academia and industry.
To sum-up, in a reversal use of the overtly coarse phrase "its all about the economy, stupid!"
At present such truisms presented so harshly are desperately required.
Post Script*
One presentation at the London School of Economics last year was given by a New York University lecturer, the supposed contributing originator and part-backer of (to quote) a "Chug Chug" machine - that had supposedly gained Royal Society interests.
Supposedly designed to extract CO2 directly from the atmosphere (presumably in a tree-like manner, as opposed to Carbon Capture & Storage of power-stations**), no explanation of the machine's mechanicals were presented even at theoretical level. The young yet 'savvy' student audience saw the proposition as advanced as ludicrous.
It did the Royal Society no favours either, potentially seen by the LSE audience as a 'crack-pot' body, which is far from the truth given its illustrious origins and members. However such presentations only serve to assist the cultural chasm between science and economics – the very last thing needed.
PPS**
The issue of CCS is presently being discussed by the House of Lords
Wednesday, 28 July 2010
Micro Level Trends – The UK e-Car Incentive – Plugging-In to Hot Air which will Condense in the Long Run
It has been announced that the UK government's much vaulted £5,000 subsidy towards the purchase of alternative energy cars (worth £43m in all by OLEV) will stay in place. This is an unexpected outcome given the size and speed of national and regional budget cuts that Chancellor Osborne rightly states must be implemented in the short and mid term.
But should it be unexpected given the political and budgetary realities of the situation?
Could the announcement, no matter how well intentioned, infact represent a reality where the monies apparently made available are hard to access in practice due to (in)inadvertently constrained terms and conditions of the scheme and the realities of the EV and ULEV marketplace?
Could its true purpose instead be a much needed 'rally-cry' to foreign manufacturers of advanced powertrain systems that to quote Transport Secretary Richard Hammond, “the UK is open for business”. This in itself should be applauded, yet the consumer realities and so immediate carbon-footprint reduction impact, of the scheme may be less so.
Given the unpopularity generated by the deep budget cuts needed to reduce the nation's debt levels, investment-auto-motives (itself a naysayer of current EV capabilities and business models) believes that the exercise to 'greenify' London and the country, no matter how well intentioned today, may contribute little.
As read in financial and trade press, the retained grant offers £5,000 toward 25% of the cost of a new vehicle which has either Fuel-Cell, Full Electric or Plug-In Hybrid powertrains, which comply with safety, reliability, performance and warranty standards set by the Office for Low Emission Vehicles.
That may appear poignant and indeed generous, but look to see exactly what cars are available and the offer starts to lose traction.
To start – in reverse order - there are no Fuel-Cell vehicles currently in production besides limited series buses and trucks, with only prototype fuel-cell cars being evaluated by the R&D departments of global manufacturers such as most notably Honda, and in addition small often VC backed start-ups. [NB. the latter demonstrating mis-allocation of private capital for anything but military vehicles].
The EV has of course made an impact in London to a smaller extent other UK metropolises. Most visiblee in the ground-breaking yet oft mocked 'Noddy-esque' Reva G-Wiz purchased by high-profile (typically 'City' & Media) execs seeking green credentials; yet the car's sales havewanedd as its product life-cycle peaked and recession appeared.
A new model has been created and Reva apparently seeks factory/assembly space outside of its homeland India. [NB this topic may be on PM Cameron's agenda during his current international-trade agenda - beyond the prominent nuclear talks]. Yet immediate promise for Reva looks doubtful given that it has only reportedly sold 3,000 cars over the years (up to Jan) 2010, and its updated re-style whilst looking better, is largely a re-skin of a very basic, less than truly crash-worthy structure.
Effectively replacing the G-Wiz has been France's Axiam-Mega EV, derived from the Country's popular quadricycle sector which typically uses small capacity ICE. More conventional in stature and looks, the car is more 'grown-up' and has the backing of a large industrial corporate, having acquired the assets of the flailed NICE (No Internal Combustion Engine) Co based in West London.
Other 'commute' and 'city-delivery' vehicles are available from Chinese sourced MyCar, Ze-O.
Adapted conventional cars include Daimler's >smart. BMW's Mini, FIAT's e500, PSA's C1 & 107 and Mitsubishi's i-MiEV (also badged by PSA), but these are available only as limited series 'test-bed' fleet, much of which has been deployed.
[NB. investment-auto-motives believes that beyond the ground gained by Daimler's local use >smart EV, the only truly convincing EV (& ULEV) project to potentially satisfy all of the required economic, technical, legal and consumer demand parameters is the BMW MegaCity programme. This seats 3 or 4 instead of 2 and scale-up & cost-down robust lightweight carbon-fibre structures which can be 'dressed' on standard production lines, so heavily reducing the need for costly EU labour and maintaining product quality].
So regards pure EVs, presently little beyond the Axiam Mega which effectively replaced Reva, is presently even approaching convincing, though highly priced for its capabilities, whilst the adapted mainstream models if even available are extremely expensive (eg i-MiEV at £25k).
[NB Axiam Mega has entered the UK to essentially grow its ICE business as a new era parallel to Reliant Motors (4 wheeled Kitten) of old]. But the numbers of EVs sold will in actuality remain intrinsically limited and low.
The big EV story (literally) is of course the much publicised Nissan Leaf sedan, which packages all necessary electrical systems into a compact saloon format, and critically for the UK includes Sunderland assembly.[NB investment-auto-motives expects this in reality to be a 'halo' variant model with ICE also]. But that is not expected for launch until 2013, when in the midst of an expectantly improved UK economy, the present subsidy (or its size) will probably be long gone, depending on the results of the first review due in Jan 2012, short months ahead of the Olympics.
Plug-In Hybrid is now available as a development of 'standard' hybrid technology, notably from Toyota and the 'ever-green' Prius (in its ZVW30 guise).
At the end of the day of course, to access the grant funds depends on actually fulfilling the prescribed remit of product capability and importantly meeting the criteria that on the surface states “25% of the vehicle price, up to £5,000”. This appears to be key, and as ever, much is in the exact wording of the offer – especially so the inter-dependence of X% and £X - and its relativity to real-world circumstances.
This would suggest that such an eligible car would cost £20,000, but the smaller cars from India, France and China do not appear to meet the prescribed benchmark product standards, whilst the larger EV cars from global manufacturers made available have either been already acquired (on a monitoring basis) and cost well above the £20,000 apparent set limit. [NB the Nissan Leaf is expected at £28,350 before incentive subsidy and so £23,350 if applied].
Of the Plug-In hybrids, Honda is not set to launch a PHEV until mid 2012 and then only in Japan & US, thus practically irrelevant given geographic availability and chronologically beset given the Jan 2012 grant review point.
General Motors still highlights the benefits of Chevrolet Volt/Opel Ampera given its 'range-extender' (ie ICE back-up) package which supposedly offers 350 miles of travel. Yet it is being touted at $41,000, well out of the ball-park for the majority of compact sedan buyers, and probably the majority of which will go to car rental companies; to acclimatise the public and generate production efficiencies - as seen with Nissan's Leaf.
This then leaves Toyota's Plug-In Prius as the only real beneficiary of the £43m grant scheme, given its expected launch soon. The car uses L-ion battery technology instead of the more convention Ni-MH in the standard (non-plug) car, and will represent an important volume scale-up of the L-ion application which should reduced what are presently wide cost differentials between the lower cost Ni-MH and more expensive L-ion. However, given that only the less popular base variant of the Prius (the T3) costs beats the theoretically nominal £20,000 limit (by only £145) versus £21,510 T4 variant and £22,960 Sprint variant, the expected take up would be less than immediately imagined for all Prius sales.
Thus, it seems that the “eco-car grant” has been viewed through the 'political telescope', and the resultant perspective demonstrates that the relatively low cost of the big PR exercise would, if extinguished, would contribute little to the nation's budget deficit reduction efforts.
Instead, from first impressions, it seems to offer a greater 'bang for the buck' for governmental PR, than for eco-conscious consumers given the possible 'invisible devil in the detail'.
If the UK's new car buyers wish to 'save the world' they could well end up having to pay a higher price than initially expected to do so.
However, even if not of immediate 'greening' impact given their small scale, positively, the very existence of alternative energy vehicles means a continued pressure on ICE, conventional hybrid, power systems and body structure technology advancement...to deliver better carbon-footprints and so lower oil consumption at more realistically amenable market pricing.
The 'eco-grant' may prove hollow when properly examined, and indeed could be viewed as international trade & FDI prompters with Japanese and French trade partners, but they at least highlight the UK's desire to improve the sustainable mobility model and both welcome-in and push-out across the board technological advances that act as economic generators in their own right.
And of course, if that £43m cannot be practically spent, it will add a small chunk to the deficit reduction process.
Congestion charges may have been added to Parking Meter charges, and the 'Lovely Rita Meter Maid' may be not so well loved today, but both in Park Lane or Penny Lane, the Conservative-Lib Dem coalition will be watching the proverbial pennies so that the pounds can look after themselves – much to the pleasure of City and IMF international bankers.
The song 'Penny Lane' mentions the “banker with his motor car”, and the fact that “he never wears a mac in the pouring rain...very strange'. Well “the banker waited for his trim” and will receive it judging by the slimmed Q2 2010 bonus pot.
That will be the reality for public spending too, even if presently over-dressed in 'electric blue'.
But should it be unexpected given the political and budgetary realities of the situation?
Could the announcement, no matter how well intentioned, infact represent a reality where the monies apparently made available are hard to access in practice due to (in)inadvertently constrained terms and conditions of the scheme and the realities of the EV and ULEV marketplace?
Could its true purpose instead be a much needed 'rally-cry' to foreign manufacturers of advanced powertrain systems that to quote Transport Secretary Richard Hammond, “the UK is open for business”. This in itself should be applauded, yet the consumer realities and so immediate carbon-footprint reduction impact, of the scheme may be less so.
Given the unpopularity generated by the deep budget cuts needed to reduce the nation's debt levels, investment-auto-motives (itself a naysayer of current EV capabilities and business models) believes that the exercise to 'greenify' London and the country, no matter how well intentioned today, may contribute little.
As read in financial and trade press, the retained grant offers £5,000 toward 25% of the cost of a new vehicle which has either Fuel-Cell, Full Electric or Plug-In Hybrid powertrains, which comply with safety, reliability, performance and warranty standards set by the Office for Low Emission Vehicles.
That may appear poignant and indeed generous, but look to see exactly what cars are available and the offer starts to lose traction.
To start – in reverse order - there are no Fuel-Cell vehicles currently in production besides limited series buses and trucks, with only prototype fuel-cell cars being evaluated by the R&D departments of global manufacturers such as most notably Honda, and in addition small often VC backed start-ups. [NB. the latter demonstrating mis-allocation of private capital for anything but military vehicles].
The EV has of course made an impact in London to a smaller extent other UK metropolises. Most visiblee in the ground-breaking yet oft mocked 'Noddy-esque' Reva G-Wiz purchased by high-profile (typically 'City' & Media) execs seeking green credentials; yet the car's sales havewanedd as its product life-cycle peaked and recession appeared.
A new model has been created and Reva apparently seeks factory/assembly space outside of its homeland India. [NB this topic may be on PM Cameron's agenda during his current international-trade agenda - beyond the prominent nuclear talks]. Yet immediate promise for Reva looks doubtful given that it has only reportedly sold 3,000 cars over the years (up to Jan) 2010, and its updated re-style whilst looking better, is largely a re-skin of a very basic, less than truly crash-worthy structure.
Effectively replacing the G-Wiz has been France's Axiam-Mega EV, derived from the Country's popular quadricycle sector which typically uses small capacity ICE. More conventional in stature and looks, the car is more 'grown-up' and has the backing of a large industrial corporate, having acquired the assets of the flailed NICE (No Internal Combustion Engine) Co based in West London.
Other 'commute' and 'city-delivery' vehicles are available from Chinese sourced MyCar, Ze-O.
Adapted conventional cars include Daimler's >smart. BMW's Mini, FIAT's e500, PSA's C1 & 107 and Mitsubishi's i-MiEV (also badged by PSA), but these are available only as limited series 'test-bed' fleet, much of which has been deployed.
[NB. investment-auto-motives believes that beyond the ground gained by Daimler's local use >smart EV, the only truly convincing EV (& ULEV) project to potentially satisfy all of the required economic, technical, legal and consumer demand parameters is the BMW MegaCity programme. This seats 3 or 4 instead of 2 and scale-up & cost-down robust lightweight carbon-fibre structures which can be 'dressed' on standard production lines, so heavily reducing the need for costly EU labour and maintaining product quality].
So regards pure EVs, presently little beyond the Axiam Mega which effectively replaced Reva, is presently even approaching convincing, though highly priced for its capabilities, whilst the adapted mainstream models if even available are extremely expensive (eg i-MiEV at £25k).
[NB Axiam Mega has entered the UK to essentially grow its ICE business as a new era parallel to Reliant Motors (4 wheeled Kitten) of old]. But the numbers of EVs sold will in actuality remain intrinsically limited and low.
The big EV story (literally) is of course the much publicised Nissan Leaf sedan, which packages all necessary electrical systems into a compact saloon format, and critically for the UK includes Sunderland assembly.[NB investment-auto-motives expects this in reality to be a 'halo' variant model with ICE also]. But that is not expected for launch until 2013, when in the midst of an expectantly improved UK economy, the present subsidy (or its size) will probably be long gone, depending on the results of the first review due in Jan 2012, short months ahead of the Olympics.
Plug-In Hybrid is now available as a development of 'standard' hybrid technology, notably from Toyota and the 'ever-green' Prius (in its ZVW30 guise).
At the end of the day of course, to access the grant funds depends on actually fulfilling the prescribed remit of product capability and importantly meeting the criteria that on the surface states “25% of the vehicle price, up to £5,000”. This appears to be key, and as ever, much is in the exact wording of the offer – especially so the inter-dependence of X% and £X - and its relativity to real-world circumstances.
This would suggest that such an eligible car would cost £20,000, but the smaller cars from India, France and China do not appear to meet the prescribed benchmark product standards, whilst the larger EV cars from global manufacturers made available have either been already acquired (on a monitoring basis) and cost well above the £20,000 apparent set limit. [NB the Nissan Leaf is expected at £28,350 before incentive subsidy and so £23,350 if applied].
Of the Plug-In hybrids, Honda is not set to launch a PHEV until mid 2012 and then only in Japan & US, thus practically irrelevant given geographic availability and chronologically beset given the Jan 2012 grant review point.
General Motors still highlights the benefits of Chevrolet Volt/Opel Ampera given its 'range-extender' (ie ICE back-up) package which supposedly offers 350 miles of travel. Yet it is being touted at $41,000, well out of the ball-park for the majority of compact sedan buyers, and probably the majority of which will go to car rental companies; to acclimatise the public and generate production efficiencies - as seen with Nissan's Leaf.
This then leaves Toyota's Plug-In Prius as the only real beneficiary of the £43m grant scheme, given its expected launch soon. The car uses L-ion battery technology instead of the more convention Ni-MH in the standard (non-plug) car, and will represent an important volume scale-up of the L-ion application which should reduced what are presently wide cost differentials between the lower cost Ni-MH and more expensive L-ion. However, given that only the less popular base variant of the Prius (the T3) costs beats the theoretically nominal £20,000 limit (by only £145) versus £21,510 T4 variant and £22,960 Sprint variant, the expected take up would be less than immediately imagined for all Prius sales.
Thus, it seems that the “eco-car grant” has been viewed through the 'political telescope', and the resultant perspective demonstrates that the relatively low cost of the big PR exercise would, if extinguished, would contribute little to the nation's budget deficit reduction efforts.
Instead, from first impressions, it seems to offer a greater 'bang for the buck' for governmental PR, than for eco-conscious consumers given the possible 'invisible devil in the detail'.
If the UK's new car buyers wish to 'save the world' they could well end up having to pay a higher price than initially expected to do so.
However, even if not of immediate 'greening' impact given their small scale, positively, the very existence of alternative energy vehicles means a continued pressure on ICE, conventional hybrid, power systems and body structure technology advancement...to deliver better carbon-footprints and so lower oil consumption at more realistically amenable market pricing.
The 'eco-grant' may prove hollow when properly examined, and indeed could be viewed as international trade & FDI prompters with Japanese and French trade partners, but they at least highlight the UK's desire to improve the sustainable mobility model and both welcome-in and push-out across the board technological advances that act as economic generators in their own right.
And of course, if that £43m cannot be practically spent, it will add a small chunk to the deficit reduction process.
Congestion charges may have been added to Parking Meter charges, and the 'Lovely Rita Meter Maid' may be not so well loved today, but both in Park Lane or Penny Lane, the Conservative-Lib Dem coalition will be watching the proverbial pennies so that the pounds can look after themselves – much to the pleasure of City and IMF international bankers.
The song 'Penny Lane' mentions the “banker with his motor car”, and the fact that “he never wears a mac in the pouring rain...very strange'. Well “the banker waited for his trim” and will receive it judging by the slimmed Q2 2010 bonus pot.
That will be the reality for public spending too, even if presently over-dressed in 'electric blue'.
Saturday, 24 July 2010
Micro Level Trends - New GM & AmeriCredit – Scuppering Hard Won Investor Credibility.
Having given GM the benefit of the doubt, by ranking it higher than FIAT in the Western 8 company commentaries, investment-auto-motives revisits the New GM story given recent events.
Since its emergence from fast-track Chapter 11, the intention was that General Motors could demonstrate itself as a very different beast. Value-creation versus previous value destruction.
Yet a year on having enjoyed the clunkers stimulus mini-boom that saw it post first time promised profits, the enterprise's purchase of AmeriCredit – the finance company – for $3.5bn shows a return to its old ways of boosting sales volume via the attraction of sub-prime credit rated buyers.
Yes the cost is only one-tenth of its buoyant cash reserves, and it is the norm for an auto-player to exercise captive finance capabilities, and the ability to access ever wider-opening B2B and B2C credit windows would be typically expected of a large VM. But given New GM's position as the 'prodigal son' in what are still far from normal – indeed 'new norm' conditions – is it not scuppering its own supposed success story, even if the deal does provide avenues to Canadian and Lease markets?
There has been recent mention that only 4% of current US vehicle sales are to sub-prime buyers, no doubt reflecting the reality of 2008/9 when credit availability to all but the best rated was very limited. Yet there has also been industry rumour that even well positioned, nominally reputable Honda sells 21% of its vehicles in N.A to poorly rated customers. That press quoted figure may well have been relative prior to the credit-crunch.
Yet the mid-point of these two capital market condition extremes suggests that - as today - with easier flowing credit up to 15% of the vehicle market consists of less reputable customers.
[NB the recent up-tick in Harley Davidson sales will have been influenced by such amenable credit availability].
That said, just over an eighth of the TIV is a large slice, and something which would undoubtedly provide additional boost to The New General, but given that GM seeks to float by year-end it's P&L and Balance Sheet should be proving itself to investors. This done so without cash-flows and bottom lines being partially propped up by fringe sales which in the not so distant past have proven to be the thin end of a problematic wedge generated by negative feedback loops regards vehicle residual values. The production and inventory levels are seismically shifted downward, but the inadvertent process of 'pulling the rug from under itself' still stands up to scrutiny.
As the much publicised IPO deadline date approaches New GM will be trying every trick in the book to boost sales – including Ed Whitacre's efforts to have its NomAds and Book-Runners agree to purchase GM vehicles as part of their business terms. This is understandable as a demonstration of inter-company unity between client and service provider, and obviously provides higher profile ownership demographics for GM. But metaphorically scrapping the 'bottom of the barrel' so soon after 're-birth' might be judged by many an investor (institutional and individuals) as something to query if indeed that 15% is needed to provide demonstrable margin above the operating overhead.
The view might be that Washington is recouping part of its bail-out expenditure by in effect passing the still largely unproven auto-parcel to not only investors, but GM customers themselves who are literally buying back into the company with good faith under the belief that the old ways are gone and GM is part of the new American economic era.
Of course the counter-point argument to such tabled negativity is that given the recent poor H1 reporting fortunes of much of the financial sector, the ability to acquire a fully fledged, legally enabled captive finance house here and now is a good move. And in so much investment-auto-motives would not disagree. Presuming the avoidance of any double-dip recession, given the historical precedent and believing in slow but stable economic traction, then building-up renewed captive finance capabilities that extend customer reach and can be exploited to cross-sell vis a vis Alley (with its Bank status) undoubtedly makes complete sense.
But what must be clearly highlighted to the world at large, especially so in the IPO count-down, is the Q3 & Q4 sales mix by customer credit rating. At the very least to demonstrate that AmeriCredit truly 'only' truly represents that reported fringe 4%. Only by doing so and convincingly demonstrating that sub-prime accounts for a very small percentage of financing deals will New GM maintain any form of very necessary credibility.
But in the desire to exploit the new captive finance ability the temptation to super-charge sales through massaged deals may prove very tempting. Especially so if it can prompt poor rated buyers to use Ally (itself under pressure to lend) for access to smaller sized upfront deposit sums for AmeriCredit. In effect on the books of the 2 companies themselves, cross-balancing the vehicle purchase deal; akin to an accumulator.
But, at the broader level, investment-auto-motives poses the question that begs “ to what extent has the AmeriCredit purchase been politically generated?” - given that it only provides a supposed 4% sales boost.
This period of renewed US economic unease would undoubtedly be exacerbated if the folks on Main Street were to retract even the limited current spend behavior which is keeping the economy ticking over; albeit at a much reduced rate. The feel good factor is all important, and it is well known that during times of economic strain it is the far more positively elastic consumptive patterns of society's lower ranks that maintains the consumptive flow. Where the middle-classes pull in their horns, others with less of a responsible stake-holder mentality seize the moment: as demonstrated by a portion of 'cash for clunkers' beneficiaries.
Thus could the AmeriCredit purchase by GM – which the name in itself smacks of the country's (delusional) liquidity well-being – have been fully condoned by Washington? Or even prompted by it, given its (and Canada's) desire to monetise and partially exit their combined 72% equity hold in New GM?
It all my look good in the short-term for GM, AmeriCredit, (Ally) and Washington D.C., but is there not a danger that instead it will be consumers and business that are left 'holding a possibly crying baby' in the short to medium term?
In which case, the desperate desire to re-inflate the economy on sound principles, stays little more than circular rhetoric. Investors – that bedrock of the economy – need convincing, and so in this case there must be a reversal of the old GM adage.
Today, what is good for the American economy must set the precedent for the ongoing transformation of New GM (as seen with www.gmreinvention.com). Not to recognise this truism and the measures required that underpin it would be a disservice to investors, the company and public alike.
Since its emergence from fast-track Chapter 11, the intention was that General Motors could demonstrate itself as a very different beast. Value-creation versus previous value destruction.
Yet a year on having enjoyed the clunkers stimulus mini-boom that saw it post first time promised profits, the enterprise's purchase of AmeriCredit – the finance company – for $3.5bn shows a return to its old ways of boosting sales volume via the attraction of sub-prime credit rated buyers.
Yes the cost is only one-tenth of its buoyant cash reserves, and it is the norm for an auto-player to exercise captive finance capabilities, and the ability to access ever wider-opening B2B and B2C credit windows would be typically expected of a large VM. But given New GM's position as the 'prodigal son' in what are still far from normal – indeed 'new norm' conditions – is it not scuppering its own supposed success story, even if the deal does provide avenues to Canadian and Lease markets?
There has been recent mention that only 4% of current US vehicle sales are to sub-prime buyers, no doubt reflecting the reality of 2008/9 when credit availability to all but the best rated was very limited. Yet there has also been industry rumour that even well positioned, nominally reputable Honda sells 21% of its vehicles in N.A to poorly rated customers. That press quoted figure may well have been relative prior to the credit-crunch.
Yet the mid-point of these two capital market condition extremes suggests that - as today - with easier flowing credit up to 15% of the vehicle market consists of less reputable customers.
[NB the recent up-tick in Harley Davidson sales will have been influenced by such amenable credit availability].
That said, just over an eighth of the TIV is a large slice, and something which would undoubtedly provide additional boost to The New General, but given that GM seeks to float by year-end it's P&L and Balance Sheet should be proving itself to investors. This done so without cash-flows and bottom lines being partially propped up by fringe sales which in the not so distant past have proven to be the thin end of a problematic wedge generated by negative feedback loops regards vehicle residual values. The production and inventory levels are seismically shifted downward, but the inadvertent process of 'pulling the rug from under itself' still stands up to scrutiny.
As the much publicised IPO deadline date approaches New GM will be trying every trick in the book to boost sales – including Ed Whitacre's efforts to have its NomAds and Book-Runners agree to purchase GM vehicles as part of their business terms. This is understandable as a demonstration of inter-company unity between client and service provider, and obviously provides higher profile ownership demographics for GM. But metaphorically scrapping the 'bottom of the barrel' so soon after 're-birth' might be judged by many an investor (institutional and individuals) as something to query if indeed that 15% is needed to provide demonstrable margin above the operating overhead.
The view might be that Washington is recouping part of its bail-out expenditure by in effect passing the still largely unproven auto-parcel to not only investors, but GM customers themselves who are literally buying back into the company with good faith under the belief that the old ways are gone and GM is part of the new American economic era.
Of course the counter-point argument to such tabled negativity is that given the recent poor H1 reporting fortunes of much of the financial sector, the ability to acquire a fully fledged, legally enabled captive finance house here and now is a good move. And in so much investment-auto-motives would not disagree. Presuming the avoidance of any double-dip recession, given the historical precedent and believing in slow but stable economic traction, then building-up renewed captive finance capabilities that extend customer reach and can be exploited to cross-sell vis a vis Alley (with its Bank status) undoubtedly makes complete sense.
But what must be clearly highlighted to the world at large, especially so in the IPO count-down, is the Q3 & Q4 sales mix by customer credit rating. At the very least to demonstrate that AmeriCredit truly 'only' truly represents that reported fringe 4%. Only by doing so and convincingly demonstrating that sub-prime accounts for a very small percentage of financing deals will New GM maintain any form of very necessary credibility.
But in the desire to exploit the new captive finance ability the temptation to super-charge sales through massaged deals may prove very tempting. Especially so if it can prompt poor rated buyers to use Ally (itself under pressure to lend) for access to smaller sized upfront deposit sums for AmeriCredit. In effect on the books of the 2 companies themselves, cross-balancing the vehicle purchase deal; akin to an accumulator.
But, at the broader level, investment-auto-motives poses the question that begs “ to what extent has the AmeriCredit purchase been politically generated?” - given that it only provides a supposed 4% sales boost.
This period of renewed US economic unease would undoubtedly be exacerbated if the folks on Main Street were to retract even the limited current spend behavior which is keeping the economy ticking over; albeit at a much reduced rate. The feel good factor is all important, and it is well known that during times of economic strain it is the far more positively elastic consumptive patterns of society's lower ranks that maintains the consumptive flow. Where the middle-classes pull in their horns, others with less of a responsible stake-holder mentality seize the moment: as demonstrated by a portion of 'cash for clunkers' beneficiaries.
Thus could the AmeriCredit purchase by GM – which the name in itself smacks of the country's (delusional) liquidity well-being – have been fully condoned by Washington? Or even prompted by it, given its (and Canada's) desire to monetise and partially exit their combined 72% equity hold in New GM?
It all my look good in the short-term for GM, AmeriCredit, (Ally) and Washington D.C., but is there not a danger that instead it will be consumers and business that are left 'holding a possibly crying baby' in the short to medium term?
In which case, the desperate desire to re-inflate the economy on sound principles, stays little more than circular rhetoric. Investors – that bedrock of the economy – need convincing, and so in this case there must be a reversal of the old GM adage.
Today, what is good for the American economy must set the precedent for the ongoing transformation of New GM (as seen with www.gmreinvention.com). Not to recognise this truism and the measures required that underpin it would be a disservice to investors, the company and public alike.
Saturday, 17 July 2010
Parallel Learning – M&A Case Study – Finding a PlayBoy Friend.
The ever ongoing demand for structural and organisational change in the auto-sector sees senior management changes at Ford and Volvo. Stephen Odell steps across from Sweden to Germany tasked as FMC's new European Head, and Volvo takes on its new Geely related Chairman in the guise of Li Shufu, with Olov Olsson as new Vice Chairman.
Quite obviously, during all periods of renewal the status quo is questioned.
Especially so after the pain experienced by the auto-sector over the last 3 years, eased only in part by near morphine like applications from the state to the largest VMs which dulled the pain yet left the need for deep and near constant surgeory. Board-level capability at steering their ship through what has been a prolonged period of treacherous waters has never been so apparent, dividing the wheat from the chaff in identifying those that were prepared, those who quickly reacted and those who flailed.
At this time, as the waters quell, no matter what condition that ship, the Board must endeavour to understand the broad scope of the future, beyond the all too typical “Narrow-Scoping” of “good / middling / bad” business development scenarios which illustrate only more of the same strategic and operational approaches leading to varying levels of success.
What may be deemed (Futurological) “Broad-Scoping” has normally been undertaken only in the best of times, riding high on market returns and as a darling of the capital markets; when immediate pressures are absent and the scale of internal 'fire-fighting' small.
That is the time for blue-sky thinking is it not?
Perhaps not always so.
Beyond his/her independent viewpoints and contribution on other general company matters, it is the special remit of the Non-Executive to think more broadly about the future of his/her commercial 'ward'. The very nature of the role means distance from immediate internal 'busyness', and so theoretically mentally open to a far wider range of inspirational influence - this especially the case if holding similar positions across 2 or more industrial sectors, or multiple positions throughout a single sector's value-chain.
Beyond an M&A ideas generator, such an individual must be the voice of external objective reason during the corporate 'broad-scoping' exercise. Prompted by management trends or capital market dynamics, overtly nave or ambitious middle and senior management may be unduly swayed and enthused by well intentioned outside third parties such as high-profile consultants or financiers seeking copy+ book-running deals. These sorts of quasi-independent contributors can of course be very useful for introducing alternative perspectives, yet it is both management's and the Board's remit to counter-balance the world of the possible with the world of the feasible.
Typically within M&A realms (and indeed IPO realms) 'Big Tomorrow' stories are underpinned by high impact presentations crammed with well set-out argument in which a small enterprise which rides today's & tomorrow's 'dynamic trends' requires the resources and scale-up abilities afforded by a new corporate guardian. The theoretical synergies of the 'May to December' relationship is laid-out with of course the full intent to excite the larger, more secure 'broad-scoping' enterprise. The ideal of stability meets dynamism is for all to see. What is often less clear is the ability for the 'broad-scoping' entity to critically and honestly assess what such patronage brings.
[NB Of course the same 'mating game' is played with the capital markets.
Presently here in the UK it is truly in-credible that the much publicised Ocado floatation seeks a valuation x50 p/e, at a time when solid, asset laden businesses hold x9 to x12 p/e, and long after China's own x30 p/e push has been deflated. On this basis, the Ocado 'Big Tomorrow' story which in reality is little more than a delivery service for Waitrose, in time others, and possibly itself, should not be viewed on par with a successful 'sector disruptor'. It plainly is not, no matter what how much PR spin is created around it. It will instead simply be positioned to take-over individual supermarket's own delivery fleet. This is indeed worthy, but the present business model - well critiqued in The Economist - is out of kilter with the smaller, local scale requirement which works around local customer dynamics].
Thus there will be many many occasions in all sectors when a 'light presented in the dark' will be highly misleading and indeed possibly graven – especially if it is in actuality seeks a parasitic stance. An entity at which first appears friendly but inadvertently shows itself to hold an alternative self-regard agenda, is of course to be avoided at all cost.
Thus the substance of the case presented here, is that any 'broad-scoping' enterprise must lay out its own firm criteria by which it judges an M&A match to offer the foundations of success – at strategic, operational and bottom-line levels.
Part and parcel of this procedure for the auto-sector is the need to learn from the external world, both from within a firm's own sphere, and from further afield in other industrial and commercial realms.
Such a case study that may be of merit is the (still very early) M&A possibility between FriendFinder Networks' $210m offer for Playboy Enerprises Inc.
At first appearance it seems like an odd mis-match between the new and old worlds of a contemporary dating website and a renowned Men's magazine publisher. However beyond a diverse range of websites (including men orientated building materials), the former also operates AdultFriendFinder and own Penthouse Magazine.
Its brand coverage across magazine publishing, television and of course the web reflects Playboy's own coverage and so on the surface highlights synergies. So in the typical M&A value-creation models that espouse 'horizontal', vertical' or 'diagonal' integration, there is seen to be overlap.
Obviously there is scope to build a pricing-based ladder model, placing a higher-brow Playboy over a more overtly sensationalist, pornographically driven Penthouse. But the wish to build the adult-entertainment side of the FriendFinder Network business also reflects the desire and need to cross-feed consumer traffic.
The relationship between the Carris.com reel packaging business and FriendFinder may not be immediately apparent, but the inter-link between construction sites and the 'show-reel' aspect of adult films is none the less their and subconsciously strong. Moreover, the relationship site FriendFinder links across to AdultFriendFinder for those relationship website visitors that may not have found the prospect of love, yet instead seek prospects for near term physical gratification, and of course inter-linked again is Penthouse (and would be Playboy) for immediate visual gratification.
Thus, as is the ambition of most portfolio holding companies, FriendFinder Networks seeks to build an effective and efficient consumer feed-through and circulation model which both maximises capture and spend.
In regard to the automotive sector, it has a history of 'vertically' leveraging its supply-side value chain, and 'horizontally' leveraging the R&D, development and production processes, as seen through-out historical M&A's, from GM's origination to pass-the-parcel of Chrysler (eg Rootes, Daimler & FIAT)
Most illustrative are Henry Ford's early days with agrarian supplies from lumber, to rubber to soy plants (for body frames, tyres, seals and pipes to plastic mouldings) to GM's creation of the multi-systems Delphi supply base to Ford's more recent acquisition and disposal of Hertz Rent-a-Car. (This exploitation of vertical integration replayed by the Japanese, Koreans and Chinese).
In latter days, looking forever up to the top of the value-curve - re-positioning western auto-companies as brand enterprises (reflecting Jacques Nasser's ideal) - many alternative mobility models have been dreamt-up; and either largely left on the drawing board: as with INDEGO, or tentatively introduced: as with PSA's Mu
[NB see the review of PSA in investment-auto-motives' previous post].
However, whilst this reflects a more visionary CRM stance, is there more?
Whilst the worldwideweb has undoubtedly been exploited by auto-companies expanding beyond the normative channel advertising vein – from 30 seconds TV slots to viral Marketing to Corporate Messaging to Consumer Feedback – the previously described 'network feed' pattern enabled by the web – and as being exploited by FriendFinder Networks – may offer an alternative philosophical viewpoint by which auto-execs can survey the access points and transfer channels of their terrain.
Of course even though evolving heavy industry manufacturing companies tied to the realities of balancing stretched B2B relationships to today's more fragile B2C patterns, They must attend to required but not over-played expenditures in capital equipment, supporting the supply & distribution chains, and maintaining as much captive control of dealer and customer credit finance as possible.
But looking elsewhere into the very different worlds of other industries which themselves focus on CRM and the systemic captive through-put of customer attention and spend is an increasingly critical feature of a modern - and capital markets attractive - automotive company.
But in that search for identifying, creating and leveraging the potential of the future, Execs and Non-Execs alike must temper the 'fast charge' business model idealism with an objective outlook that underpins a slower yet stronger built reality that firmly demonstrates the firm's measurable and true innate value.
Quite obviously, during all periods of renewal the status quo is questioned.
Especially so after the pain experienced by the auto-sector over the last 3 years, eased only in part by near morphine like applications from the state to the largest VMs which dulled the pain yet left the need for deep and near constant surgeory. Board-level capability at steering their ship through what has been a prolonged period of treacherous waters has never been so apparent, dividing the wheat from the chaff in identifying those that were prepared, those who quickly reacted and those who flailed.
At this time, as the waters quell, no matter what condition that ship, the Board must endeavour to understand the broad scope of the future, beyond the all too typical “Narrow-Scoping” of “good / middling / bad” business development scenarios which illustrate only more of the same strategic and operational approaches leading to varying levels of success.
What may be deemed (Futurological) “Broad-Scoping” has normally been undertaken only in the best of times, riding high on market returns and as a darling of the capital markets; when immediate pressures are absent and the scale of internal 'fire-fighting' small.
That is the time for blue-sky thinking is it not?
Perhaps not always so.
Beyond his/her independent viewpoints and contribution on other general company matters, it is the special remit of the Non-Executive to think more broadly about the future of his/her commercial 'ward'. The very nature of the role means distance from immediate internal 'busyness', and so theoretically mentally open to a far wider range of inspirational influence - this especially the case if holding similar positions across 2 or more industrial sectors, or multiple positions throughout a single sector's value-chain.
Beyond an M&A ideas generator, such an individual must be the voice of external objective reason during the corporate 'broad-scoping' exercise. Prompted by management trends or capital market dynamics, overtly nave or ambitious middle and senior management may be unduly swayed and enthused by well intentioned outside third parties such as high-profile consultants or financiers seeking copy+ book-running deals. These sorts of quasi-independent contributors can of course be very useful for introducing alternative perspectives, yet it is both management's and the Board's remit to counter-balance the world of the possible with the world of the feasible.
Typically within M&A realms (and indeed IPO realms) 'Big Tomorrow' stories are underpinned by high impact presentations crammed with well set-out argument in which a small enterprise which rides today's & tomorrow's 'dynamic trends' requires the resources and scale-up abilities afforded by a new corporate guardian. The theoretical synergies of the 'May to December' relationship is laid-out with of course the full intent to excite the larger, more secure 'broad-scoping' enterprise. The ideal of stability meets dynamism is for all to see. What is often less clear is the ability for the 'broad-scoping' entity to critically and honestly assess what such patronage brings.
[NB Of course the same 'mating game' is played with the capital markets.
Presently here in the UK it is truly in-credible that the much publicised Ocado floatation seeks a valuation x50 p/e, at a time when solid, asset laden businesses hold x9 to x12 p/e, and long after China's own x30 p/e push has been deflated. On this basis, the Ocado 'Big Tomorrow' story which in reality is little more than a delivery service for Waitrose, in time others, and possibly itself, should not be viewed on par with a successful 'sector disruptor'. It plainly is not, no matter what how much PR spin is created around it. It will instead simply be positioned to take-over individual supermarket's own delivery fleet. This is indeed worthy, but the present business model - well critiqued in The Economist - is out of kilter with the smaller, local scale requirement which works around local customer dynamics].
Thus there will be many many occasions in all sectors when a 'light presented in the dark' will be highly misleading and indeed possibly graven – especially if it is in actuality seeks a parasitic stance. An entity at which first appears friendly but inadvertently shows itself to hold an alternative self-regard agenda, is of course to be avoided at all cost.
Thus the substance of the case presented here, is that any 'broad-scoping' enterprise must lay out its own firm criteria by which it judges an M&A match to offer the foundations of success – at strategic, operational and bottom-line levels.
Part and parcel of this procedure for the auto-sector is the need to learn from the external world, both from within a firm's own sphere, and from further afield in other industrial and commercial realms.
Such a case study that may be of merit is the (still very early) M&A possibility between FriendFinder Networks' $210m offer for Playboy Enerprises Inc.
At first appearance it seems like an odd mis-match between the new and old worlds of a contemporary dating website and a renowned Men's magazine publisher. However beyond a diverse range of websites (including men orientated building materials), the former also operates AdultFriendFinder and own Penthouse Magazine.
Its brand coverage across magazine publishing, television and of course the web reflects Playboy's own coverage and so on the surface highlights synergies. So in the typical M&A value-creation models that espouse 'horizontal', vertical' or 'diagonal' integration, there is seen to be overlap.
Obviously there is scope to build a pricing-based ladder model, placing a higher-brow Playboy over a more overtly sensationalist, pornographically driven Penthouse. But the wish to build the adult-entertainment side of the FriendFinder Network business also reflects the desire and need to cross-feed consumer traffic.
The relationship between the Carris.com reel packaging business and FriendFinder may not be immediately apparent, but the inter-link between construction sites and the 'show-reel' aspect of adult films is none the less their and subconsciously strong. Moreover, the relationship site FriendFinder links across to AdultFriendFinder for those relationship website visitors that may not have found the prospect of love, yet instead seek prospects for near term physical gratification, and of course inter-linked again is Penthouse (and would be Playboy) for immediate visual gratification.
Thus, as is the ambition of most portfolio holding companies, FriendFinder Networks seeks to build an effective and efficient consumer feed-through and circulation model which both maximises capture and spend.
In regard to the automotive sector, it has a history of 'vertically' leveraging its supply-side value chain, and 'horizontally' leveraging the R&D, development and production processes, as seen through-out historical M&A's, from GM's origination to pass-the-parcel of Chrysler (eg Rootes, Daimler & FIAT)
Most illustrative are Henry Ford's early days with agrarian supplies from lumber, to rubber to soy plants (for body frames, tyres, seals and pipes to plastic mouldings) to GM's creation of the multi-systems Delphi supply base to Ford's more recent acquisition and disposal of Hertz Rent-a-Car. (This exploitation of vertical integration replayed by the Japanese, Koreans and Chinese).
In latter days, looking forever up to the top of the value-curve - re-positioning western auto-companies as brand enterprises (reflecting Jacques Nasser's ideal) - many alternative mobility models have been dreamt-up; and either largely left on the drawing board: as with INDEGO, or tentatively introduced: as with PSA's Mu
[NB see the review of PSA in investment-auto-motives' previous post].
However, whilst this reflects a more visionary CRM stance, is there more?
Whilst the worldwideweb has undoubtedly been exploited by auto-companies expanding beyond the normative channel advertising vein – from 30 seconds TV slots to viral Marketing to Corporate Messaging to Consumer Feedback – the previously described 'network feed' pattern enabled by the web – and as being exploited by FriendFinder Networks – may offer an alternative philosophical viewpoint by which auto-execs can survey the access points and transfer channels of their terrain.
Of course even though evolving heavy industry manufacturing companies tied to the realities of balancing stretched B2B relationships to today's more fragile B2C patterns, They must attend to required but not over-played expenditures in capital equipment, supporting the supply & distribution chains, and maintaining as much captive control of dealer and customer credit finance as possible.
But looking elsewhere into the very different worlds of other industries which themselves focus on CRM and the systemic captive through-put of customer attention and spend is an increasingly critical feature of a modern - and capital markets attractive - automotive company.
But in that search for identifying, creating and leveraging the potential of the future, Execs and Non-Execs alike must temper the 'fast charge' business model idealism with an objective outlook that underpins a slower yet stronger built reality that firmly demonstrates the firm's measurable and true innate value.
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