The automotive sector in Sweden has over the last few years endured what is - even by its tumultuous historical standards – an agonising period.
The decision by Ford to eradicate its Premier Automotive Group (PAG) back in the mid 2000s eventually saw Volvo Car Corp. sold in 2010 to the Chinese group Zhejiang Geely, as the tail-end exercise; after divestment the British brands: Aston Martin Lagonda, Land Rover & Jaguar.
SAAB AB -
GM under even greater strain to re-structure – ultimately via Chapter 11 – sought similar disposal having underpinned the SAAB Automobile brand with its platforms, yet having seen little financial return; arguably the result of enforced group R&D cost-absorption into the Swedish entity, itself paradoxically 'hands-tied' regards in-house technical & product development, marketing impetus and corporate budgetary spend. The heavy spiral of demise is seen SAAB's annual sales figures: 125.5k units in 2007, 89k units in 2008 and 21k in 2009. However, 2010 did produce an up-tick giving 32k units, though against an in-house target of 50K units.
During GM's disposal period, SAAB's former MD, Jan-Ake Jonsson effectively said that de-merger from GM was a blessing in disguise, enabling the company to start afresh with new investment and freer hand.
Notionally, this appeared the case, but the aftermath of the 2008 financial crisis combined with the complexity of the investment community, consisting of multi-party value-seeking from both PE and trade buyers - each trying to devise their own high-priced exit-strategies and conversely low-cost entry points – has made the secure future of SAAB a somewhat drawn-out affair. Seemingly at its heart are the two prime factors of a) the ability to set a valuation on a presently poorly performing company with illustrious brand history; thus the elasticity of accounting goodwill, and b) the tactical machinations that have arisen between seller and potential buyers, each trying to demonstrate their respective attitudes of a 'seller's market' vs a 'buyer's market'.
Emergence of Spyker NV / Swedish Automobile -
Recent history initially saw GM offer SAAB to Koenigsegg Group (backed by China's BAIC), the deal faltering, but with BAIC taking the vehicle platform IPR for previous generation 9-3 & 9-5 cars. Alternate SAAB company interest came from GENII Capital and Spyker NV, with a sale was finalised to the latter on 23.02.2010 for $400m, a seemingly ambitious task given the manufacturing size and methods chasm between the niche supercar maker that is Spyker Cars and SAAB AB. However, the Dutch based NV entity was/is a holding company controlled by Victor Muller which sits above the far more apparent manufacturing activity 'below', and was obviously tempted by the opportunity to continue SAAB operations, seeking new era possibilities, whilst supported by GM's platform and technologies contract-service agreement.
[NB For further background details and commentary, please view the investment-auto-motives web-logs dated June 2009, January 2010 and April 2011].
On 25.02.2011, it was announced that the supercar production arm Spyker Cars would be sold to Vladimir Antonov for E15m, with a further E18m consideration to be paid over successive stages; thereby valuing the Spyker Cars business at E33m That notional deal looked to have been tied into Mr Antonov's relinquishment of his previous interests in the company, necessarily sold-off as a condition bt GM for the sale of SAAB to the holding company Spyker Cars NV.
In mid 2011 Mr Muller announced that the corporate name Spyker NV would be replaced by Swedish Automotive NV, and continue in its public listing on NYSE Euronext Amsterdam using the ticker 'SWAN'. The new name obviously intendedly chosen to give far greater weight to the SAAB ownership, but also put an onus on the Swedish government and the European Commission to continue assisting the struggling SAAB during an 'intermediate' period. The almost poetic intonation was to proffer the idea that the 'ugly duckling transforms into the swan'.
Surviving this 'Intermediary Period' -
Thus far that intermediate period has lasted well over 20 months, and prior to the purchase consisted of 'soft bankruptcy' proceedings through the Stockholm courts for corporate restructuring and a E400m loan from the European Investment Bank in February 2010, this backed by Sweden's National Debt Office to allow ongoing operations and thus try to save jobs in Trollhatten and maintain a core competency of volume vehicle manufacture inside Sweden after the 'loss' of Volvo AB. By March 2011 E260m of that credit facility had been drawn. Exactly how long that intermediate period was to last was and seems still is indeterminate.
On 08.09.2011 Swedish Automobile NV filed for bankruptcy protection against its list of creditors, many from SAAB's supply-base who have themselves had to cope with income volatility as SAAB's financing taps have been turned off, on, reduced, stopped etc, thus affecting production and supply chain demand and payments.
Chinese Investment Hopes -
New investment finance for SAAB has apparently been discussed with a number of external parties, the most hopeful 'solution' originating from a Chinese share sale. Initial interest came in May 2011 from 'Pang Da Automobile Trade Co' from Tangshan, one of China's largest vehicle dealership groups, with 1,200 multi-brand franchise stores and retail sales of 470,000 units, thus offering a powerful and geographically broad point-of-sale outlet for SAAB in China. But the necessary intent to manufacture in market so as to reduce production costs meant that Pang Da required a manufacturing alliance. This appeared in the form of a joint partnership approach between 'Pang Da' and 'China Youngman Group' of Zhejiang. Youngman itself a manufacturer primarily of coach/bus and truck with increasingly passenger car content, using in each respective sector the licencing vehicle basis of Neoplan coach, MAN truck and assembly of Proton compact cars and Proton-Lotus sporstcars.
Global Contraction Woes -
But given the mixture of typical power struggle negotiations and heavily deflated stock markets across Europe and now China, the still relevant magic formulae of Swedish Auto & Pang Da & Youngman Group of Zhejiang, is looking increasingly fragile.
This is illustrated by respective stock prices.
Most notably Pang Da's price plummeted on Wed 10th October from 28 Yuan to 10 Yuan in a space of minutes, presently (midday Friday 14th October) hovering around 11 Yuan.
Swedish Auto (SWAN) presently sits at E1.03, thus giving a MarketCap of E25.6m (having seen 52-week highs and lows of E6.12 and E0.35).
Exacerbating Stock Volatility -
It appears that the release of contrastingly 'dour' and 'upbeat' comments from Pang Qinghua – Chairman of 'Pang Da' – sharply affected SWAN's share-price. His comments perhaps intentionally used to demonstrate Pang Da's influence and 'muscle' over SWAN, given his position as presently the only tenable strategic investor sat at the negotiating table. Moreover those contrasting statements may have been used as a (remote-control) 'depress and buy' tactic to gain greater (in)direct influence over SWAN – though it must be stated that this hypothesis is wholly unsubstantiated.
SWAN's Counter -
Recognising Swedish Automobile's ever more marginalised position - sat between headwinds from consumer & capital markets and the apparent machinations of its 'saviour' – Mssrs Muller (CEO) & Huganholtz (Chairman) have apparently sought to intentionally extend SAAB's period of 'animated suspension' by both:
- Seeking bankruptcy protection
- Divesting of the Spyker Cars business.
Bankruptcy Protection -
As previously mentioned, a filing was submitted on 08.09.2011, its intention to yet again clear the largely creditor-set hurdles facing SWAN, but with the undoubted intention of encouraging Swedish and European stakeholders to once again financially backstop SAAB with enforced creditor haircuts, and very probably further liquidity provision from the European Investment Bank (to protect original monies) and probably a second guarantee from Sweden's National Debt Office.
However, as is all too obvious, that government finances across Europe are being put under prolific strain, the cost of capital markets derived finance acting s a deterrent to additional sovereign borrowing, and that that which is probably majority directed at national banking systems; even if denied in principle. This in turn now profoundly effects the EIB's ability to raise finance and sharpens both the type of projects funded and the criteria therein; typically infrastructure based initiatives in fast-growing regions. Thus additional reliance upon the EIB may not be forthcoming. A possible secondary approach to the European Investment Fund – an operationally independent sub-division of the EIB – could be made. But its prime remit is the SME realm 'future-forward' companies and projects. Whilst SAAB could well highlight its R&D work as pertinent, its very scale could well disqualify any application, and even if accepted the funds provided only small relative to the magnitude required.
Thus, a second European 'bail-out' of SAAB looks increasingly unlikely. Instead, the less economically constrained homeland Sweden could provide a financial backstop...but at a price. Sweden has of course been a very light casualty of the EU debt crisis, having worked its own way through national busget 'fiscal contraction' over preceding years – indeed as an exapmlar to the UK. It could offer assistance via its own banking system with a lender such as the government owned SBAB Bank AB. However its own business headwinds (even excluding the impact of European economic contraction) has affected the banks's credit rating by Moody's – set as of 05.09.2011 on a “negative outlook”, thus increasing the cost of its wholesale funding and so lending rates.
[NB investment-auto-motives believes this “outlook” rating to be overly harsh given the comparatively strong economy, GDP growth rates of 5.5% in 2010 and 4% in 2011, and a respected 'Geni co-efficient' showing social cohesion / stability].
Thus the only provider of non-commercial assistance at this time is the Swedish government].
Sale of Spyker Cars -
The sale of the sportscar business has been muted over the last year, the CEO himself stating in the H1 2011 report that managing both SAAB & Spyker businesses only adds complexity and that more importantly innate share-holder value could be lost given the cash burn and future funding requirement demanded by Spyker Cars.
Muller and Huganholtz also well recognised that SWAN had to be seen to be proactive in financially supporting SAAB (as it could) if it was to garner external respect and so a greater likelihood of assistance.
The fact that no sale had been made to Vladimir Antonov through the year – as previously proclaimed – highlighted a changed mentality at SWAN, one in which investment-auto-motives believes Muller & Huganholtz recognised the 'foreign aid' power of America's QE programmes and the US$'s ability to meet the firm's immediate and possibly long-term financing needs.
Thus, the reported sale of Spyker Cars to North Street Capital (of Connecticut, Massechussettes, USA) for between $42m & $44m, looks to be at face value a semi-forced action, one which provides a the finances for a partial funding stream for SAAB, which it is hoped to be matched and bettered by external (state) lenders, as was the case previously; but moreover importantly creates the potential for a US funding bridge.
[NB North Street Capital LP is a dual aspect 'macro-play' and 'venture capital' investment house, based in Greenwich, Connecticut, USA]
Critically, the full cash-sale funds are able to be booked directly and immediately to the balance sheet, which would have not been the case with a sale to Antonov.
Advantageously, Swan has benefited from a rise of approximately E10m in Spyker Cars' valuation over the last 9 months. This then generates questions about the valuation methods North Street used, but probably in part answered by North Street's expectation that the US$ will continue its path of decline, thus allowing to 'over-pay' now, so as to 'over-book' later; with what is imagined as a healthier Spyker Cars business in the coming years boosted by the enlarged differential effect of the US$ vs Euro FX spread.
It seems only natural for a VC firm with PE money goes bargain hunting in the industrial margins, especially so in luxury goods arenas which have high (USA) potential and appear notionally under-valued at this point of the (unnaturally distended) economic cycle.
The problem Spyker Cars however does face is momentum and development headwinds. Sales have slackened over preceding years since its 2006 sales high, and it undoubtly requires substantial technical investment with probable 'piggy-backing' of a VM's support to grow its model portfolio . Namely the D8 and E8 models showcased thus far, and the ongoing development needs of current C8 and C12. (investment-auto-motives believes that the C12 body will in reality be the true next generation C8).
With SAAB's future presently unsecured - for all the PR rhetoric - the previously 'assured' Sedan & SUV platforms provision has been heavily undermined. In this light North Street Capital must surely have an industrial partner at hand with an MoU or greater in place, or a knowing demand from other PE firms in the US' 'secondaries market' who themselves have such holding interests.
Furthermore, besides the turnaround and FX-related potential, one can only assume that North Street investors will been placated of natural concerns about the acquisition of Spyker Cars with details regards (amongst other factors) the size of its wholly owned asset-base and size of deposit-paid order book. Only such 'backstops' would offer immediate purchase rational, but even then the substance of even these price-supports should be seen to be highly convincing.
However, investment-auto-motives believes that in the current climate that the hedge fund industry and associated PE houses are being forced to appear active, and as such may well be pinning deals on the eventual USA rebound, the rise in demand for niche luxury cars and the FX supercharger effect.
SWAN Forcing China's Hand -
Any funding bridge to date has been in the hands of Pang Da who had previously promised some weeks ago, but not yet delivered a goodwill payment of approximately Skr670m / $95.8m / E70m.
It had previously placed an order for 2000 SAAB cars in June and provided a deposit of Skr45m, but financing and production problems meant that those cars were not delivered by the September deadline and are still awaited.
SWAN's American deal – with its portence of an increasingly closer US relationship – appears to have ruffelled Pang Qinghua, who stated on 12.10.2011 that SAAB's bankruptcy appeal effectively distinguished the agreement between SWAN and Pang Da Auto Co. That set-off alarm bells in Holland and Sweden and a joint statement from SWAN and Pang Da was later made to re-enforce both parties commitment to the venture.
Though it is clear that Pang Da will have understandably become very frustrated at the absence of its vehicle deliveries, all the while China's car market demand waining in the midst of the country's heavy economic contraction; thus as and when the cars do arrive they may sit on dealer forecourts for some time and require discounting themselves, which only goes to undermine the premium character and pricing that both SAAB and Pang Da seek to grow both businesses.
The SAAB AB Sale -
Since the disposal of SAAB by GM the future of the company, whilst extolled as 'bright' by associated executives and enthusiastic brand fans, was also recognised as precarious by auto-industry knowledgables and the number crunchers of the investment community.
To buoy sentiment and maintain customer and brand loyalty a number of websites / web-logs were created by both Spyker NV / Swedish Automobile NV and supportive loyalists, These are the official 'insider' website named insidesaab.com, and the 'unofficial' support website saabsunited.com. Though each appears to exist independently, investment-auto-motives assumes that there is a high level of information feed from the former to the latter to as best possible allay customer and investor fears and create interest stories during this 'intermediate period'.
That period of uncertainty appeared to start to draw to a close with the arrival of Pang Da and Youngman, the duo offering Skr2.2bn / E230m for a 24% stake in SAAB; thus valuing the firm at Skr9.16bn / E958m.
With the 2000 vehicle order presenting what appears a new 'promised land' for much boosted SAAB product distribution, immensely lower-cost manufacturing (even with China's inflationart climate) and the associative economies of scale available.
But will the offer, even if well intended as seems the case, be able to transform SAAB's fortunes? In short, can Pang Da and Youngman themselves deliver the goods? .
Credibility of the Chinese Approach -
The SAAB ambition undoubtedly bolsters the Chinese entrepreneurs' domestic ambitions, adding further premium European brands to Pang Da's dealerships, so raising its own brand equity, and providing a new industrial platform from which to operate effectively afresh.
All that Pang Da 'brings to the table' seems obvious enough, its broad dealer coverage able to penetrate the main metro centres of China and tier 1 & 2 cities. The only question for SAAB is to what degree those dealers are able to positively reflect SAAB's products, brand values and desired customer service levels. Unless a company is able to be hands-on to both proffer itself and by virtue protect itself, the stark price-led realities of the Chinese car market mean that there is a danger of even 'quality' products being heavily discounted as local dealers feel is necessary to 'shift metal'.
It has been muted that any new 'Chinese SAAB' would be dedicated to the home market, with little interest in global markets, thereby increasing the likelihood that any 'unprotected' foreign brand would become victim to the cost-down, scale-up business mentality that drives any 'commoditised' sector.
Thus to truly ensure SAAB's good fortunes in China, Swedish Automobile would need to create an agreement with Pang Da that their brand is not commoditised, to do so ensuring that SAAB is sold in an aligned or even bespoke retail environment. Given the level of hyper-competition inside China and the dealer expensed CapEx to create such showrooms, this appears very unlikely. And whilst SAAB could be mutually buoyed if sold with parallel brands such as Volvo or say Alfa Romeo or Nissan's Infiniti, the reality is that multi-franchise dealers (across the price ladder) tend to provide greater incentives to sell their better branded inventory, the innate sales mentality necessary in mainstream brands contaminating slow moving upper brand models.
So whilst the sales opportunity over the short, mid and long terms looks huge, pitching the brand as necessary is all important: a reason why European luxury fashion goods makers have been so hands-on with their retailing strategies.
The picture is further complicated by the 'manufacturing promise' offered.
Investment-auto-motives suspects that in its ambitions to become a major player in passenger car production,Youngman itself may well be trying to digest an opportunity / challenge that proves bigger than itself. And that stems from its present and intended manufacturing methods, what appears a leap-frog of (possibly misplaced) faith.
Whilst the manufacturing process is little different between coach/truck and niche sportscars, in its ciurrent domain, this is a world away from mainstream car production. The former is based upon low CapEx levels set against a high labour content for 'slow assembly'; with an ability to easily purchase and utilise low-tech tooling such as fabrication frames, roll-through carrier-dollys and the like, in effect very yesteryear operations. The process for volume car-making is wholly different, requiring high CapEx costs for 'fast assembly' via body-panel steel press tools, robotic welding stations, dip baths, paint shop, (hanging) car-body travelators, powertrain 'stuff-up' stations, etc etc.
This of course is philosophically well understod by Youngman, but the ability to 'leap-frog' in the desired manner is highly complex. It has some experience, but realistically very little, gained from exploring a partnership deal with Malaysia Proton, at a time when Proton had built its Proton City manufacturing plant, and latterly sought Chinese partners to access cheap componentry and ideally sell-on ownership of the new plant infrastructure.
However, Youngman's actual previous business arrangement (and experience) with Proton extended to little more than factory tours and ultimately resulted in simply the desired importation of fully built Gen2 model cars, re-badging as 'Eurostar' by Youngman for domestic sale.. An agreement was signed in 2007 with 'intention' for 30,000 cars yet it is understood that only a few thousand cars were actually delivered and re-badged. The highly hoped 'saving' of Proton from the Chinese did not emerge, and talks of selling Proton to Youngman, or indeed licensing the Gen2 model for Chinese manufacture, did not progress. So whilst Youngman managers no doubt learned more about high volume production systems its unwillingness or prohibited inability to proceed meant transferable and deployable learning was halted.
Proton itself may have felt misled, so 'giving-up' its production 'secrets' (overhead costs, input costs per vehicle, factory-gate pricing, organisational methods etc etc) whilst Youngman paid a small price by way of re-badged cars for the experience.
All at SAAB will of course be weary of a similar repeat by Youngman, especially given its lack of experience with quality-led vehicle mass-manufacture.
However, one of the greatest stumbling block and so barriers to credibility is that it that Pang Da – Youngman have openly stated that they yet to apply to the PRC leadership for approval of the SAAB deal, the former citing that it is for its smaller partner to do given that it would be necessarily judged by the PRC leadership as a merger of vehicle producers.
This 'handing-over' of deal progress responsibility appears to be part of the 'modus operandi' in stalling and negitiating, though ironically such a production-centric issue (as seemingly deemed by PRC M&A regulations) did not stop Pang Da's CEO from announcing the deal void when SAAB sought bankruptcy proceedings.
This seemingly intentional greying of responsibilities between the two Chinese partners then only serves to discredit what are presented (and periodically shown to be with cash deposits) as honourable intentions.
As things presently stand SWAN very possibly internally views the ultimate outcome of any deal as less than ideally desired.
A E70m bridging loan from Youngman agreed on 12th September, has now reportedly been received by SAAB which will be welcomed, with further monies expected on 22nd October. This then starts to cement the deal, though of course opt-out clauses and re-imbursement payments will have no doubt been agreed should the deal be terminated.
Youngman as Chinese Auto-Sector 'Intermediary Agent' -
Having described the core capabilities and general industrial shape of Youngman, which prescribes an 'unnatural fit' (unlike say BAIC,SAIC, FAW and similar large operational others) there may be reason to believe that Youngman may be operating as an 'Intermediary Agent' for want of a better title.
China's current Five Year Plan calls for rationalisation of domestic industry players, thus the biggest companies cannot be seen to be scouting for additional foreign brands to incorporate into their portfolios, whether JV or indeed wholly owned. Thus there is a real chance that Youngman is either being deployed or presented itself as a legitimate co-buyer for SAAB, its advantage being in that as a fringe player it has limited funding levels and so can legitimately pursue relatively 'low ball' bids. It would enlarg its stock-hold over time at a steady affordable rate, with its own strategic exit of selling what is ostensibly the SAAB brand and any other late stage advantageous IPR to another major Chinese producer, very possibly BAIC (which already acquired the previous generation platform design rights) or Geely (the buyer of Volvo).
This would then follow a similar play to the 'dissection and re-amalgamation' of MG and Rover (Roewe).
Moreover, with such a coupling the PRC leadership may wish to creates a 'pseudo-Trollhatten' metropolitan area, something that matches its 'pseudo-Wolfsburg' (relative to VW) as part of its own New Towns urbanisation programme. Each of which has specific globally-related architectural and cultural 'reflections' mated to specific 'industrial / service' local economies. These in turn intended to draw in FDI and immigrant (from home nations) advanced skills workers, so that a progression of (brand specific) technical advancement can be made where it was otherwise 'left-off' whence China bought the corporation.
SWAN & SAAB's Current Position -
Undoubtedly, Muller and all executives are seeking a way forward, away from what have been tortuous times; seemingly all avenues explored whilst obvioulsy still seeking the right avenue for SAAB's value maximisation and so SWAN's profitability and shareholder attraction.
Given the challenge, it represents a commercial situation that few would want to face, the size of the challenge well recognised by those PE firms that took an initial interest in SAAB yet walked-away.
Although the 'Chinese solution' is being progressed – albeit painfully for all – more advantageous alternative courses may become available if and when the global and so western economies start to gain positive traction. There is no doubt that Corporate America and portions of Corporate Europe sit on mountains of liquidty which their own investors are calling to be either used in logical, truly value adding acquisitions, or to be dispensed in the form of dividends. Thus American and European Chairmen and CEOs are now expected to plot wise courses for tomorrow's earnings levels.
This then broadens the picture for SAAB as to who else may be willing to 'adopt' SAAB. Given the present funding constraints inside SAAB, which very possibly could be maintained even with Chinese capture, Muller et al would be wise to re-think the notion of stitching together a harmonious JV or indeed JVs which allow SAAB to 'piggy-back' another's ready-made platforms and systems sets.
Ideal Strategic Options -
In reality SAAB must seek out a capable partner that can provide off-the-shelf and easily adaptable platforms spanning all major segments so that SAAB can create quickly and to budget a compelling family of properly develop, yet intrinsically differentiated vehicles for both global and Chinese clients.
The following provides a very basic overview of possibilities:
- Ford Motor Co: using well amortised but capable platforms and systems sets and providing development and procurement synergies with the up-scale Lincoln marque.
- Renault-Nissan: giving corollaries with Infiniti and assisting the Renault marques need to climb the price ladder, as being forged by competitor PSA.
[NB this being the 'preferred' route for SAAB proposed by investment-auto-motives when SAAB was put up for sale by GM, then being negotiated with GENII Capital, Bernie Ecclestone and the Renault F1 team, allowing for horizontal and vertical integration].
- Hyundai-Kia: able to use low-cost S.Korean produced sub-structures and devise a convergence and divergence technology strategy with Hyundai's Genesis marque
- Daimler AG: to lodge SAAB as a 'sandwich filler' brand, a feasible 'underling' to Mercedes whilst 'overling' to Smart, and so better defend against renewed competition from Alfa Romeo and other lower-premium sporty marques.
- New GM: leveraging the European arm, Opel, offering as contract manufacturers its new generation powertrain and platforms to SAAB, thus absorbing cost for both, and both co-creating mutually deployable technology strategies for the mid-premium (SAAB) and lower premium (Opel's new target position) segments. However, doing so might re-create operational constraint problems of old, especially if GM is unable to grow its profitability as first thought at its IPO – a very real possibility given global economic and consumer preference headwinds presently faced.
Any alliance idea would very probably exclude the majority of Japanese corporates since they tend to prefer 'sole control' of their own destinies; with perhaps Suzuki-Maruti in India a rare exception to the historically set rule.
However, the previous arrangement with Subaru – previously deployed via GM – could offer JV potential as Eastern and Western faces of the same technology sets, both maybe able to re-foster mutual histories in rallying (though very separate eras) thus deploying selectively applied USPs in AWD systems and low-centre of gravity boxer engines.
It almost very definitely excludes a tie-up with TATA's Jaguar Land Rover, since TATA would wish to retain aluminium-led advanced body-structures and new powertrain systems for itself as much needed differentiators, and look to be considering possible technology share with FIAT's Maserati (as both fight their way against the Germans & Japanese) through Ratan TATA's Italian relationship.
A multi-VM 'amalgum' approach might be optimal if seeking to secure as much design freedom as possible, utlising various sources for under-body body structures, power-train families and electronics systems,. But such a 'freedom path' would induce not only highly sets of JV agreements to be create and maintained by executives, but also a heavy management burden for procurement and engineering teams. The technical complexity of sourcing from different geneological DNA pools inly adds to the multi-product brand-coalescence challenge.
Conclusion -
Presently, the 'Chinese solution' appears theoretically ideal for the long-term security of SAAB, and for the profit maximisation SWAN. Indeed it is the only viable route forward available to Victor Muller and Swedish Automobile NV, and for investors with SWAN it seems to offer a 'big prize' reward for the troublesome and volatile ride.
But look more closely at the innate structure of the parties involved and that ideal starts to demonstrate some fundamental flaws. This is why investment-auto-motives suspects that the Youngman element of the JV arrangement may ultimately serve as an 'intermediary agent'.
This is not to say that SAAB and SWAN cannot access and capture the Chinese market, simply that the route into China, and so leveraging the Chinese market, may well be even more disconcerting than has been the case thus far.
Pang Da and Youngman may not be corporate assimilations of Lewis Carol's “Walrus & Carpentor” but SAAB is ostensibly at the behest of both when walking quite literally into a foreign territory.
Thus, it is imperative that SWAN start to re-assess the potential for working with a western VM that has presence, credibility and political leverage in China.
Whilst that had not been an option previously, due to 2008-9 'fire-fighting' and subsequent organisational restructuring, the subsequent financial cushioning inside many American and European corporates have put them in prime predatory positions. For Boards of Directors there is a stark choice emerging that either targets be sought or investor demands for increased dividends be satiated.
Unlike previous periods of exacerbated p/e levels, such value and growth hunting is becoming actively encouraged by progressive investors keen to see their own investments put to work.
This then is a very positive backdrop for SAAB and SWAN.
Since both has little choice but to traverse what seems a grey and winding commercial rouite into China, it could do far worse than encourage the accompaniment of a major western VM, preferably one already well established in China to provide financial and political support.
The ideal outcome would be for Swedish Automobile to create a commercial structure for SAAB that gives a 24% hold to Pang Da & Youngman, a 24% hold to another and 52% hold to SWAN.
The 'slow boat' analogy regards China entry is both over-used and unimaginative, but at least with a better balanced control of tiller and throttle, the comparatively little swan's own onward journey may be far less frenetic.
Friday, 14 October 2011
Friday, 7 October 2011
Micro Level Trends - Electric Vehicles – 'Range Extending' the Business Distance Rhetoric
The electric car has over the last 20 years been proclaimed as a magical panacea for the ecological worries set about by the 'Climate Challenge' agenda which emerged in the popular consciousness during the mid 1990s.
That apparent 'panacea' was once again showcased recently with the heralding of Rolls-Royce's Phantom EV and the Parisienne 'Autolib' EV rental scheme: which seeks to replicate the much vaunted Velib bicycle scheme. The former is most definitely in the singular, whilst the latter seeks the numerous, starting with 66 cars now, 250 by year-end and citing 3000 by 2012-end.
This news arrives on the back of Robert Bosch GmbH stating during the Frankfurt Motor Show that it seeks its future in the EV, a very bold move given its general dependency on the ICE powered vehicles manufactured by its clients. Investment-auto-motives' believes the statement was made to keep in step with German government policy announcements, to return procurement-pricing pressure tactics upon its current VM clients who've gained much input price reduction over the last 18 months, and to keep in step with the ideology of the seemingly permanent EV ideology from both strategic and CSR perspectives. But ultimately, given Bosche's electrical heritage such a grand statement of intent was always to be expected.
Yet the real-world EV picture is far less 'cut and dried' than as portrayed by the press or PR centric company statements.
With a touch of irony, the EV is seen by constituent players from two groups that ordinarily sit at logger-heads; or more accurately commodities 'logging-heads'. However, with regard to this issue environmentalists view this mode of automotive propulsion as their preferable 'dark-green' option which can 'save the planet', whilst portions of the investment banking world believe that such a “disruptive technology” can offer a completely new automotive economic platform (within the green economy).
The 'Rainbow Warrior' mindset sees a healthy world of zero-emission, quiet 'paradise-like' urban life. The 'Progressive Wall Street' mindset foretells of new, alternative business streams. Streams gained from dramatically reduce product production costs (electric motors [excluding battery chemistries & costs] technically simpler than ICE), and the creation of through-life rental-use models. So providing for theoretically both enlarged margin at point-of-sale, and an on-going steady-rate margin from (ideally life-time) 'service contract' deployment.
The originating business model was of course that of the mobile phone, and the ideology was born at a time when the mobile phone's provision and popularisation were in the ascendency. But it as witnessed, the mobile phone model has been over the course of the last decade heavily diminished. The relatively low barriers to sector entry encouraged high rates of incoming new competition, thus squeezing margins, whilst traditional phone communications providers created 'bundled' multi-service packages adding greater pressure. Within an historically short time-frame market saturation at the functional level appeared, with profitability declines forcing both M&A and geographic expansions to scale-up the surviving businesses. To attract customers the pace of technological development has surged to metaphorically that of 'light-speed', whilst ever bigger alliances have been formed to try and leverage a mix of market penetration and technological edge.
Thus the very business model that the EV dream was based upon has shown itself to be less than sustainable over the long term; necessitating capture of scale and so leading to market domination by the relatively few. Whilst the low technical barriers foster the excitement of numerous new participants, many of those would & will ultimately fall by the wayside. This is what of course typically happens as a new market develops and the mix of consumer preference and scale economies are under-pinned by allocated capital from discerning investors.
Yet perception is everything, and some of those more 'business savvy' and fiscally astute business people – arguably with little true 'green aspiration' - saw the large opportunities to ride the EV wave and attract government funding through importing typically low-quality (often questionably unsafe) vehicles from China, as part of what was supposed to be meteoric rise into the future. This ilk best exemplified by Californian companies that leveraged the impetus of federal state CO2 policy directives, available funding packages and direct shipping lines from China.
There were those however who genuinely believed & believe in the product concept prospects and accordant business prospects of the pure EV.
Many of these new recruits emerged across a 15 year timespan from the early 1990s to late 2000s, but have (as of yet) failed to create tenable EV businesses, with only a few emergent brand-known names still effectively upon life-support from investors.
The majority were typically reliant initially upon VC monies, superseded by national and local government funding incentives, then upon private and/or public share sales.
The start-up process is known to be tentative and exceedingly fragile, funding often scant when considering the true establishment costs (facilities, overhead, personnel costs) and monies often short-lived when maintaining the cash-burn of a lengthy gestation period (ie R&D, prototyping, production set-up, marketing, possibly political lobbying, enhanced personnel costs etc). Thus, the business models of typical of start-ups are based upon the founder's willingness to work for basic subsistence living expenses (in expectation of reaping the potentially massive rewards tomorrow), the ability to attract replacement re-financing arrangements and the need to ensure successful product and business gateways so as to try and attract next-round support. Given the multi-party interests involved - possibly conflicting interests – this becomes a very fine business development balancing act.
This crop of recent (and indeed not so new) companies is chronologically exemplified by the following (non-exhaustive list) much of this surface observation derived from wikipedia and company websites, the former typically with 'pro' (self or 'agent' written bias) or possibly by those with counter interests:
1991 - 'TH!NK Global' (Norway), initially PIVCO later TH!NK, bankruptcy in 1999, bought by Ford with short run production until 2002 for US/UK, sold to KamKorp of Switzerland with focus on EV mini-bus sector but 2006 bankruptcy, sold to Norway's InSpire Investment Group and led by original founder and given present name, in 2008 GE & A123 Systems enter partnership for 'globalisation' and 'battery supply', late 2008 financing distress, early 2009 bridging loan supplied by EnerDel. 2009 recapitalisation from Ener1 (US)/ Rockport Capital (US)/ Element Partners (US) / Kleiner Perkins (US) / Valmet Automotive (Denmark). Early 2010, Production starts in Denmark & Indiana USA but halts in March 2011, bankruptcy in June 2011. Sold to EMS AS, new production cited for early 2012. (Four bankruptcies in 20 years).
2000 - 'Loremo' [with EV & ICE options] (Germany), presently run by Thomas Zollhoefer, originally conceptually powered by small cc ICE, replaced by EV powertrain in 2009 within unorthodox vehicle package (neither fish nor foul). Company reported closed in mid 2010, yet re-established in late 2010, presently seeking investors.
2003 - 'Tesla' (USA), backed by Elon Musk (re-instated as present CEO), Vantage Point, Draper Fisher, Bay Area Equity, Valor Equity, Compass Venture. Wikipedia article (seemingly written by Tesla) shows a total of eight private funding rounds to date: series-A: $7.5m by Musk, series-B $13m, series-C $40m, series-D $45m, series-E $40m, series-F $465m by US Dept of Energy as low interest bearing loan, series-G $85m, series-H via IPO of $226m. Thus in total raising $921m. In May 2009 Daimler took a 10% stake for $50m so valuing the company at $500m. The article shows that by Jan 2011, 1500 units of the (modified Lotus Elise) Roadster had been delivered, with the 'S' variant now produced. The 'Model S' sedan is being developed. The apparent business model also includes strategic e-powertrain deals with Mercedes-Benz and Toyota and the sale of accrued zero-carbon credits to VMs such as Honda.
2007 - 'Mindset' (Switzerland), backed by Spirit Avert AG and led by ex-Daimler & VW designer Murat Gunak. It originally sought $152m, latterly ran into funding problems, sought financing from the Turkish government which was later denied, and recently acquired by MIA Electric (see below). The vehicle itself was packaged as a EV & PHEV and mixed aesthetics of a Karmann Ghia coupe, dune buggy and shooting-brake.
2007 - Gordon Murray Design (UK), backed by Davidnow Ventures, Capero Group, the renowned vehicle designer created an alternatively packaged 3-seat micro-car which houses EV & ICE powertrains (T25 & T27) and has been constantly tracked by the UK auto-press. The product was created in tandem with a re-deployed 'yesteryear coachbuilt' build system (ie platform[variant] + body[variant]) named iStream®. The T27 EV will be produced by a partnership of GMD & Zytec, an EV integrator. However, this now appears to have been paralleled by development of a mid-engined EV sportscar for Toray Industries Inc, seemingly seeking to replicate / better the Tesla Roadster.
2007 – Bollore-Pininfarina (France & Italy), an obvious JV between Bollore conglomerate led by Vincent Bollore and the design and production house Pininfarina. This has produced the shared basic vehicle of the Bollore Blue and Pinifarina B0, with individual styling alterations to suit seperate market requirements. The Bollore Blue aimed at the EV rental sector, the B0 to be sold privately.
[NB see Autolib Paris Scheme mentioned below].
2010 - MIA Electric (France & Germany), backed by Prof Edwin Kohl (of Kohl Pharma) and acquired from the niche car builders Hueliez. MIA combines Hueliez work in the form of the primary vehicle the mini 'micro-bus' EV (available in SWB 3-seat, MWB 5-seat and MWB van configurations) and the aforementioned 'Mindset'
Additionally, mating EV and ICE technology with plug-in charging capability is the PHEV, this perhaps best seen by Toyota's own PHEV Prius, but additionally the favoured route for previous start-ups; Fisker the most high profile:
2007 – 'Fisker Automotive' (USA), co-founded by Henrik Fisker (present CEO) (ex BMW & AML designer) and Bernhard Koehler (COO) co-running Fisker Coachworks which heavily modifies BMW 6-series vehicles on a BTO basis. Fisker Automotive is co-owned by Fisker Coachworks and Quantum Technologies - a fuel metering and energy storage company. It was initially additionally backed by Kleiner Partners and Caufield Partners. Presented the PHEV Fisker Karma sports-luxury sedan in 2008, presently being engineered for stated production at Valmet in Finland. Originally intended for customer receipts in 2009, funding problems delayed to reported late 2011. Karma S convertible hardtop showcased in 2009, due for release in 2012, with Fisker Surf (shooting brake) showcased in 2011. Reports cite that Fisker aimed for 200 dealership across N.America and Europe by YE2011. The website shows 37 intended US dealers, 3 in Canada, and 8 in Germany, 6 in France, 3 in Italy, 1 in Belgium, and similar singles elsewhere. .
General Business Model Observations -
If the TH!NK experience is examined for practical investment guidance, then the city-car EV business model appears to attract interest on a 'chronological & geo-political' basis. Attractive to PE especially when government or state policy decisions create an external climate for the funding of zero-CO2 vehicle initiatives, with the ambition to kick-start new sustainable green business ventures for the nation or region. The process allows for a build-up of an EV-honed asset-base and development progression of new or existing vehicle(s). However, typically when support funding diminishes as a result of government spending cuts, the financial lifeline to the company is severed, and without a self-sustaining business model bankruptcy administrators dispose of the accumulated assets and inventory to typically a PE company located elsewhere with new assisted eco-funding on the horizon.
There is of course nothing immoral nor illegal about such activities, and indeed are wholly market-led, but simply highlight the schism between what is usually short-termist reliance upon achieved or expected public funding to provide a new lease of life for both old assets and newly established company. It has been this 'swings and roundabouts' experience that has given “arrested development” to both specific EV programmes and the EV genre in general.
The erratic TH!NK story is seemingly countered by the high profile stories of the apparently 'successful' few such as Tesla and Fisker, companies which maintain a high PR quotient to carve a place in the popular consciousness.
As a Palo Alto company the ownership and administrative centre of Tesla Motor was intentionally born into a very different funding environment; Silicon Valley's co-existence of IT orientated thinking, large scale VC backing and wealthy company owners then the seeming perfect 'hot-house' for the apparent technology-disruption intent of other sectors. Yet Tesla Motor is not the conventional niche car manufacturer, infact it does not manufacture, and could be argued as not even outsourcing 'its' vehicles. Thus far the business model has been to integrate a battery and control system into another company's vehicle; its Roadster born from this philosophy with cosmetic adaption of the Lotus Elise. Thus unlike its aforementioned counterparts (TH!NK, GMD, et al) it exists effectively as a brand-led virtual car company, with additional business income streams such as sale of zero-carbon credits to other car companies.
This then allows it to avoid sinking sizeable monies into a typically capital intensive production site, plant buildings, tooling, production line equipment and 'end of line' test equipment. It did infact purchase, at a 'drastic firesale' price of only $42m, an ex-NUMMI plant(GM-Toyota) in California to reportedly build the future Model S with Toyota support. It also avoids the growing trend toward manufacturers sharing supplier development and tooling costs. As such it is easy to note how it was born from the Silicon Valley attitude of outsourcing the lower order aspects of the value-chain, growing mass-exposure for the brand and focusing upon funding issues and the end customer.
Thus Tesla looks to be very much a brand-led 'Funding Vehicle' accessing advanced technology solutions by leveraging other companies' products and manufacturing processes). The company was not designed as a car company in the traditional sense – as seen elsewhere – but moulded effectually around building a company that could meet high-expectation, new business model demands of the investment community and latterly stock market.
Thus whereas conventional valuation measures can be placed upon other 'normal' car-makers, the fact that Tesla has positioned itself in an unconventional operating space / position makes direct valuation all the harder. The old market measurement perspective creates the view of absolute abhorrence that a company with little direct asset-base, absolute reliance on outsourced whole-car providers and their supply chain, having delivered less than 2000 can infact command a valuation of $2.8bn (its share-price rising from $24 to $27 over the last 2 days whilst this web-blog was being compiled). But then again, the company is not a standard car company its works as an apparent technology provider to VMs and offers synergistic by-products in zero-carbon credit to off-set others, this no doubt ironic given that it does not physically make its cars. But stock markets even in today's dour times, have ostensibly become gauges of sentiment and expectation, not Victorian value 'fundamentals'. Silicon Valley could be said to have been born from Wall Street, and thus has been Tesla Motor.
[NB The eventual delivery of the promised 6,000 Model S cars will undoubtedly help crystallise perceptions to the benefit of Tesla, though it appears that technical integration, manufacturing processes and plant support will be the responsibility of Toyota. Exactly how this arrangement will evolve remains unclear.
The reported production rate of 20,000 vehicles in 2013, and even up to 450,000 vehicles thereafter should be presently inferred as pure ambition].
Fisker Automotive was formed from Fisker Coachwork, a company cited the major potential for a market in 'coachbuilt' products. It used using heavily modified base cars platforms from the Mercedes SL and BME 6-series, thus able to pragmatically immediately access premium chassis, powertrain and systems technologies whilst offering unique exterior & interior finishes, However reports suggest that only 14 SL based Tramontos were delivered, whilst the newer 6-series based Latigo CS is limited to150 units (possibly as a result of the BMW sourcing agreement if directly procured), delivery numbers and so turnover etc unknown. Fisker Coachbuilt also designed a mid-engined vehicle with for Germany's Artega, itself seeking to compete against Tesla. Thus it also performs as a outsourced design and engineering house for worldwide vehicle start-ups.
What is of interest but cannot be viewed is exactly how the 2 companies are entwined, investment-auto-motives presumes the initial Coachbuilt division (established in 2005) was effectively rolled into the newer Automotive division (est 2007) as part of a partial asset-backed funding agreement, though not known, or with the alternative possibility that Kleiner Partners and Caufield Partners took separate interests with the general intention that the Coachbuilt arm contractually services the Automotive arm. Trying to read 'between the lines' with limited information is hard, but the ambition seems to have been to initially develop exterior and interior engineering and production skills using the base car structures, then once assured for A-surface quality, closure gaps, lighting units etc, develop the understructure capability with advanced lightweight materials. Thus in effect designing the car 'outside-inside' using the VM cars as the benchmark quality base – this then an effective method to create an all new vehicle seeking to try and mimic premium VM quality standards. Adding to theoretical profitability margins, the application of naturally occuring 'non-perfect' leather skins for interior trimming means that it can procure far cheaper animal hides – compared to quality perfect quality hides as is the norm – and sell that as an eco-luxury USP; thereby boosting margins at procurement and retail levels. The company stated in January 2011 that deliveries would commence “within weeks”, little is known as to how many cars have been delivered.
Thus, Fisker looks to be very much an 'Operational Vehicle' for internal and external client niche model development
Expectation -
It is proposed by investment-auto-motives that the 'Funding Vehicle' Tesla Motor will, in the medium term if not before, strike an accord with the 'Operational Vehicle' that is Fisker Automotive.
This done to 'piggy-back' its technology platform for future Tesla models, with the Karma offering the Karma's 'carcuss' for the Model S sedan, and its Surf 'carcuss' for the Model X cross-over, and the SunSet 'carcuss' for a retractable hard-top variant There is of course a close technical coupling between Tesla's Model S and the Fisker Karma as Fisker Automotive was contracted to design the Model S but was accused of 'taking the best' of that design for its own Karma creation. A law-suit entailed and Tesla was required to pay Fisker over $1m. Such a re-formed business relationship as client and contract manufacturer would then provide Tesla with an almost immediate 3 variants of its Model S: sedan, x-over and convertible
Overview -
The EV and PHEV worlds are new, and they apparently offer the panacea of 'eco guilt-free motoring' if the concern of the traditional 'well to wheel' equation is subsumed by the not so 'free lunch' of nuclear/gas/coal/oil 'generator to e-motor'.
The emergent business space has thus developed new (or renewed) thinking both technological and business model realms, perhaps even multiplying the potential for financial reward if the two can be combined.
The accompanying graphic depicts very generalised views of the business models that have been formed to explore and ideally conquer the sector. The graphic (top right) consists of a 3x3 matrix conveying funding levels (low, medium, high) against chosen approach (traditional Product Self-Build, Flexible Product & Process Case-Specific Application, Virtual Car Company – Outsouring of all with Financing & Brand focus)
Headwinds -
But what of the real-world customer reaction to the EV? That will be very much on a product by product and brand by brand basis, but for the moment the following cars and schemes face respective challenges.
Tesla Roadster & Model S :
The Roadster looks like a sports-car and has the driving dynamics of a sports-car, but does not have the visceral sensuality of sports-car. There are no gear-changes in the traditional manner (or even 'flappy-paddle' manner), nor the marque-characteristic exhaust notes which are intrinsic to PorschePorsche, Ferrari, Lamborghini, Bentley, Aston Martin, and the 'lower-order' makers such as Ginetta. Thus there is far less physical engagement with the vehicle compared to conventional sportscars.
The car was / is priced in super-car territory yet could not offer either the real-world driving range nor high-speed upper limits, limited at 125 mph, presumably because of battery energy exhaustion rates. The battery pack is expected to last 7 years with a replacement cost of $33,000 (but$12,000 if order with the car), and is expected to hold 70% charge after 5 years. This then exhibits a more apparent powertrain performance decline than with ICE systems.
The new Model S sedan looks to have typically 'amazing' 0-60 mph EV performance but when produced is destined to be an urban runabout given lack of infrastructure. As with Roadster the top speed will require restricting. Thus 'off the line performance' will no doubt win many (inappropriate) quarter-mile drag runs between traffic lights in the US or Middle East, but in far more congested UK, European, Japanese streets even that thrill may be often negated.
Rolls Royce 102EX :
Rolls-Royce is presently exhibiting its own EV concept, the 102EX, via a world-dealership and events tour. It displays a beautiful illuminated “Spirit of Ecstasy” upon the Palladian nose (very much in the 1920s Rene Lalique radiator mascot style) and offers a seemingly retro-moderne alternative merging the 1920s & 2020s.
On paper the silence of e-propulsion is perfect for the Rolls-Royce brand, a virtue that has been engrained since its earliest days of the first Ghost. Indeed, some years ago investment-auto-motives provided a blog comment on just-auto.com that e-propulsion would be perfect for Rolls-Royce.
[NB Turan Ahmed initiated the idea of the car's floating R-R wheel-hubs as part of a personally created skunk-works proposal for R-R's re-birth when at BMW-Rover during the mid 1990s. The floating hub to primarily provide for a 3rd long-lived marque USP accompanying proprietary palladian grille & 'flying lady', but also for the functional and visual delight possibility of utilising hybrid and e-drive axle for 2WD and 4WD modes, the hubs illuminated with the R-R logo when powered].
Yet upon later consideration, that original quietness that was and is a hallmark of Rolls-Royce is a consequence of its crafted engineering of an ostensibly noisy power unit. That USP of 'near silence' from the 1907 Silver Ghost onward has a direct corollary with the usual rumble of ICE. The Ghost was the very opposite of 'Chitty Chitty Bang Bang'.
But that achieved silence becomes a lost USP within the EV world, since all other EVs of whatever ilk and price – including golf carts - can claim similar levels of powertrain refinement. Thus the EV solution for Roll-Royce, when sat amongst the broad EV crop, could be argued as a liability.
It has been argued that e-propulsion would be an natural solution since it is assumed that most Phantoms are used for city centre and short-hop travel for luxury shopping and evening leisure pursuits such as the theatre or opera. And this may well indeed be the case, especially of course for hotel tenders such as the Phantom at The Ritz or Hyde Park Hotel here in London.
Yet those cars are also driven, albeit infrequently, out of the city centre to social events such as Royal Ascot, Cheltenham, Henley Regatta, Glyndebourne et al. Thus the 125 mile range of the e-power-pack of the 102EX does not suffice and may only serve to aggravate the (near) assured arrival time, the courtesy of providing another with a 'lift', wishing to explore the country-side or the often required flexibility of short-notice travel.
It may also be argued that the actual CO2 output from such typically small annual mileage may in fact be less than that of the standard mid-size 'company car' saloon which trundles the commuter run and across the nation's motorway network.
The 102EX looks a wonderful machine, but will very probably lead to the emergence of Hybrid powertrain variants of Phantom & (new) Ghost which allows R-R to directly access BMW's R&D activities and more directly reduce its overall CAFE rating.
Paris Autolib :
On Sunday (02.10.11) Paris saw the launch of an automotive equivalent to the Velolib bicycle rental scheme. Whilst the bike scheme is run across many cities and towns, Autolib will for the near and mid term be concentrated upon Paris.
The scheme looks to be in the French grand tradition of technology inspired 'socialist experiments', exemplified by the Eiffel Tower, TGV rail system and Millau 'skyway' road bridge, and is the apparent shared brain-child between the Parisienne Mayor Bertrande Delanoe and industrialist Vincent Bollare (of Bollore Group & Bollore Investissements SA), so a Public-Private Partnership deal.
As stated previously, Bollore formed a JV with Pininfarina SpA. The agreement that the French company supplies the solid-state lithium polymer battery-pack for the shared new vehicle project, whilst the Italian company develops a singular vehicle base providing for 2 car variants.. Bollore to receive a basic no-frills product designed for rental 'hard-knock' use, whilst Pininfarina would obtain a more up-scale car for private sale.
The Paris scheme has the cost city-centre administrators and surrounding 'arrondisement' councils approximately Euro 200m to erect the complimentary infrastructure equipment needed to service the cars. Initially 66 vehicles have been released from 66 parking/docking spaces, with an expected 250 cars by December, ramping up to 2000 - 3000 cars by YE2012 – highly ambitious. Criticism has come from some public and commercial quarters stating that the eventual 12.5km of allotted Autolib spaces critically undermines already tight parking availability for private drivers.
This then is a progressive effort to cut the city's congestion levels, CO2 levels and create a more socialist 'caring & sharing' environment, based upon an almost utilitarianist economic theology.
Yet it will undoubtedly also be a prime target for crime, just as the French Velib scheme and other bike-hire schemes have proven; London loosing over 14,000 bikes since inception to theft, vandalism or irreparable damage. As neither respected privately owned items, nor 'nailed down' publicly owned items, the vehicles will undoubtedly be stolen for their parts content: wheels, tyres, lights, wipers, seating, dashboard instruments and metal content scrap values (under the plastic skin). Thus a constant monitoring of the fleet with emergency response teams looks necessary, but if the scheme has priced in loss and vandalism coverage, any losses will simply be recovered or possibly sought from the city's coffers itself if contractually obliged.
An admirable scheme to change the personal transport face of Paris, especially during this period of economic contraction so providing an alternative cost-effective method for city drivers. But previous precedents indicate that the car-share scheme will not be the long-term antidote Bollore publicly hopes, the opportunity for abuse may only serve to add new income streams for the criminally minded, and the eventual economic upswing will diminish participation in public vehicle hire.
In the meantime though Bollore's industrial interests will have scaled-up its battery production base and presumably helped prove and develop the technology. Providing a new opportunity to service Renault & PSA within France and possibly serve FIAT in Italy.
The public's partial financing of Autolib then could well act as the public springboard for one of France's largest private industrial concerns, from which it will seek to serve other niche manufacturers and 'electrified' VMs.
London, we recently saw the 'Ecovelocity Show' held in literally within the shadow of Battersea Power Station – the underlying sub-text obvious! It was a display of the recent crop of EV, ULEV and LEV vehicles, ranging from multi-billion dollar though scantily seen range-extender GM Volt to the wholly frugally developed efforts such as the Westfield EV. Yet it must be noted that such cars were mirrored by a raft of more conventional Hybrid and low CO2 ICE cars.
Thus we clearly see that the fact remains that over the last 100 years and still today modern transit is dominated by the massive 'energy enablement' that oil provides. We undeniably live within a powerful auto-centric world, in which the triumvirate sectors of automobiles, petroleum and insurance act as massive interdependent economic generators. It is a seemingly irresistible force that now has grip over the EM world, the scale economies generated therein perhaps only serving to add an even greater impetus to the conventional technology model, as even higher volume platforms and engine families are devised to satiate the now truly coupled global economy. That in turn adds greater weight to the aforementioned economic triumvirate, spreading ever broader and deeper tentacles throughout horizontal, vertical and diagonal value-chains. From the oil well to refinery to retailer's tank to pump-nozzle and within the global insurance sector where the modernisation of EM road networks to match that of western infrastructure effectively allows for 'mimic-modelling' of risks and premiums seen in the western past and applied to the EM future.
Yet perhaps, if western nations are truly serious about trying to deliver lower emissions immediately, the UK and Europe and indeed North American should look to the USA example of in the 1970s.
[NB another age in which the EV was said to be a soon dominant force].
It was during that era, after the 1973-4 oil crisis scare that Washington passed legislation to reduce the national speed limit to 55mph (and later re-rate gasoline octane chemistry). That singular initiative undoubtedly improved real-world fuel efficiency rates and saved the national atmosphere from the exponential CO2 emission typically experienced at increasingly higher speeds.
The investment community must continue to seek out new solutions in answer to the CO2 challenge, and the business world must identify opportunities therein. Opportunities that range from overtly pragmatic 'in the box' thinking (such as ICE cylinder de-activation) to seemingly remote 'out of the box' thinking (such as community shared vehicle schemes).
But the real challenge as ever will be to identify the winners from losers amongst the plethora of technological solutions and allied synergistic business models. And critically to remember, that given the historically imposed macro-level PESTEL boundaries present, even the radically micro-level 'change the world' youngster typically matures to meld into the slowly evolutionary conservative centre ground.
In the meantime a host of concepts, prototypes, and limited edition models will keep emerging from start-ups, M&A-driven PE and VMs. This all then sets to repeat the “survival of the fittest” - or rather read that as: “survival of the richest” since that is the true determinant - and continues to makes for a generally bumpy but interesting low emissions ride into the future.
That apparent 'panacea' was once again showcased recently with the heralding of Rolls-Royce's Phantom EV and the Parisienne 'Autolib' EV rental scheme: which seeks to replicate the much vaunted Velib bicycle scheme. The former is most definitely in the singular, whilst the latter seeks the numerous, starting with 66 cars now, 250 by year-end and citing 3000 by 2012-end.
This news arrives on the back of Robert Bosch GmbH stating during the Frankfurt Motor Show that it seeks its future in the EV, a very bold move given its general dependency on the ICE powered vehicles manufactured by its clients. Investment-auto-motives' believes the statement was made to keep in step with German government policy announcements, to return procurement-pricing pressure tactics upon its current VM clients who've gained much input price reduction over the last 18 months, and to keep in step with the ideology of the seemingly permanent EV ideology from both strategic and CSR perspectives. But ultimately, given Bosche's electrical heritage such a grand statement of intent was always to be expected.
Yet the real-world EV picture is far less 'cut and dried' than as portrayed by the press or PR centric company statements.
With a touch of irony, the EV is seen by constituent players from two groups that ordinarily sit at logger-heads; or more accurately commodities 'logging-heads'. However, with regard to this issue environmentalists view this mode of automotive propulsion as their preferable 'dark-green' option which can 'save the planet', whilst portions of the investment banking world believe that such a “disruptive technology” can offer a completely new automotive economic platform (within the green economy).
The 'Rainbow Warrior' mindset sees a healthy world of zero-emission, quiet 'paradise-like' urban life. The 'Progressive Wall Street' mindset foretells of new, alternative business streams. Streams gained from dramatically reduce product production costs (electric motors [excluding battery chemistries & costs] technically simpler than ICE), and the creation of through-life rental-use models. So providing for theoretically both enlarged margin at point-of-sale, and an on-going steady-rate margin from (ideally life-time) 'service contract' deployment.
The originating business model was of course that of the mobile phone, and the ideology was born at a time when the mobile phone's provision and popularisation were in the ascendency. But it as witnessed, the mobile phone model has been over the course of the last decade heavily diminished. The relatively low barriers to sector entry encouraged high rates of incoming new competition, thus squeezing margins, whilst traditional phone communications providers created 'bundled' multi-service packages adding greater pressure. Within an historically short time-frame market saturation at the functional level appeared, with profitability declines forcing both M&A and geographic expansions to scale-up the surviving businesses. To attract customers the pace of technological development has surged to metaphorically that of 'light-speed', whilst ever bigger alliances have been formed to try and leverage a mix of market penetration and technological edge.
Thus the very business model that the EV dream was based upon has shown itself to be less than sustainable over the long term; necessitating capture of scale and so leading to market domination by the relatively few. Whilst the low technical barriers foster the excitement of numerous new participants, many of those would & will ultimately fall by the wayside. This is what of course typically happens as a new market develops and the mix of consumer preference and scale economies are under-pinned by allocated capital from discerning investors.
Yet perception is everything, and some of those more 'business savvy' and fiscally astute business people – arguably with little true 'green aspiration' - saw the large opportunities to ride the EV wave and attract government funding through importing typically low-quality (often questionably unsafe) vehicles from China, as part of what was supposed to be meteoric rise into the future. This ilk best exemplified by Californian companies that leveraged the impetus of federal state CO2 policy directives, available funding packages and direct shipping lines from China.
There were those however who genuinely believed & believe in the product concept prospects and accordant business prospects of the pure EV.
Many of these new recruits emerged across a 15 year timespan from the early 1990s to late 2000s, but have (as of yet) failed to create tenable EV businesses, with only a few emergent brand-known names still effectively upon life-support from investors.
The majority were typically reliant initially upon VC monies, superseded by national and local government funding incentives, then upon private and/or public share sales.
The start-up process is known to be tentative and exceedingly fragile, funding often scant when considering the true establishment costs (facilities, overhead, personnel costs) and monies often short-lived when maintaining the cash-burn of a lengthy gestation period (ie R&D, prototyping, production set-up, marketing, possibly political lobbying, enhanced personnel costs etc). Thus, the business models of typical of start-ups are based upon the founder's willingness to work for basic subsistence living expenses (in expectation of reaping the potentially massive rewards tomorrow), the ability to attract replacement re-financing arrangements and the need to ensure successful product and business gateways so as to try and attract next-round support. Given the multi-party interests involved - possibly conflicting interests – this becomes a very fine business development balancing act.
This crop of recent (and indeed not so new) companies is chronologically exemplified by the following (non-exhaustive list) much of this surface observation derived from wikipedia and company websites, the former typically with 'pro' (self or 'agent' written bias) or possibly by those with counter interests:
1991 - 'TH!NK Global' (Norway), initially PIVCO later TH!NK, bankruptcy in 1999, bought by Ford with short run production until 2002 for US/UK, sold to KamKorp of Switzerland with focus on EV mini-bus sector but 2006 bankruptcy, sold to Norway's InSpire Investment Group and led by original founder and given present name, in 2008 GE & A123 Systems enter partnership for 'globalisation' and 'battery supply', late 2008 financing distress, early 2009 bridging loan supplied by EnerDel. 2009 recapitalisation from Ener1 (US)/ Rockport Capital (US)/ Element Partners (US) / Kleiner Perkins (US) / Valmet Automotive (Denmark). Early 2010, Production starts in Denmark & Indiana USA but halts in March 2011, bankruptcy in June 2011. Sold to EMS AS, new production cited for early 2012. (Four bankruptcies in 20 years).
2000 - 'Loremo' [with EV & ICE options] (Germany), presently run by Thomas Zollhoefer, originally conceptually powered by small cc ICE, replaced by EV powertrain in 2009 within unorthodox vehicle package (neither fish nor foul). Company reported closed in mid 2010, yet re-established in late 2010, presently seeking investors.
2003 - 'Tesla' (USA), backed by Elon Musk (re-instated as present CEO), Vantage Point, Draper Fisher, Bay Area Equity, Valor Equity, Compass Venture. Wikipedia article (seemingly written by Tesla) shows a total of eight private funding rounds to date: series-A: $7.5m by Musk, series-B $13m, series-C $40m, series-D $45m, series-E $40m, series-F $465m by US Dept of Energy as low interest bearing loan, series-G $85m, series-H via IPO of $226m. Thus in total raising $921m. In May 2009 Daimler took a 10% stake for $50m so valuing the company at $500m. The article shows that by Jan 2011, 1500 units of the (modified Lotus Elise) Roadster had been delivered, with the 'S' variant now produced. The 'Model S' sedan is being developed. The apparent business model also includes strategic e-powertrain deals with Mercedes-Benz and Toyota and the sale of accrued zero-carbon credits to VMs such as Honda.
2007 - 'Mindset' (Switzerland), backed by Spirit Avert AG and led by ex-Daimler & VW designer Murat Gunak. It originally sought $152m, latterly ran into funding problems, sought financing from the Turkish government which was later denied, and recently acquired by MIA Electric (see below). The vehicle itself was packaged as a EV & PHEV and mixed aesthetics of a Karmann Ghia coupe, dune buggy and shooting-brake.
2007 - Gordon Murray Design (UK), backed by Davidnow Ventures, Capero Group, the renowned vehicle designer created an alternatively packaged 3-seat micro-car which houses EV & ICE powertrains (T25 & T27) and has been constantly tracked by the UK auto-press. The product was created in tandem with a re-deployed 'yesteryear coachbuilt' build system (ie platform[variant] + body[variant]) named iStream®. The T27 EV will be produced by a partnership of GMD & Zytec, an EV integrator. However, this now appears to have been paralleled by development of a mid-engined EV sportscar for Toray Industries Inc, seemingly seeking to replicate / better the Tesla Roadster.
2007 – Bollore-Pininfarina (France & Italy), an obvious JV between Bollore conglomerate led by Vincent Bollore and the design and production house Pininfarina. This has produced the shared basic vehicle of the Bollore Blue and Pinifarina B0, with individual styling alterations to suit seperate market requirements. The Bollore Blue aimed at the EV rental sector, the B0 to be sold privately.
[NB see Autolib Paris Scheme mentioned below].
2010 - MIA Electric (France & Germany), backed by Prof Edwin Kohl (of Kohl Pharma) and acquired from the niche car builders Hueliez. MIA combines Hueliez work in the form of the primary vehicle the mini 'micro-bus' EV (available in SWB 3-seat, MWB 5-seat and MWB van configurations) and the aforementioned 'Mindset'
Additionally, mating EV and ICE technology with plug-in charging capability is the PHEV, this perhaps best seen by Toyota's own PHEV Prius, but additionally the favoured route for previous start-ups; Fisker the most high profile:
2007 – 'Fisker Automotive' (USA), co-founded by Henrik Fisker (present CEO) (ex BMW & AML designer) and Bernhard Koehler (COO) co-running Fisker Coachworks which heavily modifies BMW 6-series vehicles on a BTO basis. Fisker Automotive is co-owned by Fisker Coachworks and Quantum Technologies - a fuel metering and energy storage company. It was initially additionally backed by Kleiner Partners and Caufield Partners. Presented the PHEV Fisker Karma sports-luxury sedan in 2008, presently being engineered for stated production at Valmet in Finland. Originally intended for customer receipts in 2009, funding problems delayed to reported late 2011. Karma S convertible hardtop showcased in 2009, due for release in 2012, with Fisker Surf (shooting brake) showcased in 2011. Reports cite that Fisker aimed for 200 dealership across N.America and Europe by YE2011. The website shows 37 intended US dealers, 3 in Canada, and 8 in Germany, 6 in France, 3 in Italy, 1 in Belgium, and similar singles elsewhere. .
General Business Model Observations -
If the TH!NK experience is examined for practical investment guidance, then the city-car EV business model appears to attract interest on a 'chronological & geo-political' basis. Attractive to PE especially when government or state policy decisions create an external climate for the funding of zero-CO2 vehicle initiatives, with the ambition to kick-start new sustainable green business ventures for the nation or region. The process allows for a build-up of an EV-honed asset-base and development progression of new or existing vehicle(s). However, typically when support funding diminishes as a result of government spending cuts, the financial lifeline to the company is severed, and without a self-sustaining business model bankruptcy administrators dispose of the accumulated assets and inventory to typically a PE company located elsewhere with new assisted eco-funding on the horizon.
There is of course nothing immoral nor illegal about such activities, and indeed are wholly market-led, but simply highlight the schism between what is usually short-termist reliance upon achieved or expected public funding to provide a new lease of life for both old assets and newly established company. It has been this 'swings and roundabouts' experience that has given “arrested development” to both specific EV programmes and the EV genre in general.
The erratic TH!NK story is seemingly countered by the high profile stories of the apparently 'successful' few such as Tesla and Fisker, companies which maintain a high PR quotient to carve a place in the popular consciousness.
As a Palo Alto company the ownership and administrative centre of Tesla Motor was intentionally born into a very different funding environment; Silicon Valley's co-existence of IT orientated thinking, large scale VC backing and wealthy company owners then the seeming perfect 'hot-house' for the apparent technology-disruption intent of other sectors. Yet Tesla Motor is not the conventional niche car manufacturer, infact it does not manufacture, and could be argued as not even outsourcing 'its' vehicles. Thus far the business model has been to integrate a battery and control system into another company's vehicle; its Roadster born from this philosophy with cosmetic adaption of the Lotus Elise. Thus unlike its aforementioned counterparts (TH!NK, GMD, et al) it exists effectively as a brand-led virtual car company, with additional business income streams such as sale of zero-carbon credits to other car companies.
This then allows it to avoid sinking sizeable monies into a typically capital intensive production site, plant buildings, tooling, production line equipment and 'end of line' test equipment. It did infact purchase, at a 'drastic firesale' price of only $42m, an ex-NUMMI plant(GM-Toyota) in California to reportedly build the future Model S with Toyota support. It also avoids the growing trend toward manufacturers sharing supplier development and tooling costs. As such it is easy to note how it was born from the Silicon Valley attitude of outsourcing the lower order aspects of the value-chain, growing mass-exposure for the brand and focusing upon funding issues and the end customer.
Thus Tesla looks to be very much a brand-led 'Funding Vehicle' accessing advanced technology solutions by leveraging other companies' products and manufacturing processes). The company was not designed as a car company in the traditional sense – as seen elsewhere – but moulded effectually around building a company that could meet high-expectation, new business model demands of the investment community and latterly stock market.
Thus whereas conventional valuation measures can be placed upon other 'normal' car-makers, the fact that Tesla has positioned itself in an unconventional operating space / position makes direct valuation all the harder. The old market measurement perspective creates the view of absolute abhorrence that a company with little direct asset-base, absolute reliance on outsourced whole-car providers and their supply chain, having delivered less than 2000 can infact command a valuation of $2.8bn (its share-price rising from $24 to $27 over the last 2 days whilst this web-blog was being compiled). But then again, the company is not a standard car company its works as an apparent technology provider to VMs and offers synergistic by-products in zero-carbon credit to off-set others, this no doubt ironic given that it does not physically make its cars. But stock markets even in today's dour times, have ostensibly become gauges of sentiment and expectation, not Victorian value 'fundamentals'. Silicon Valley could be said to have been born from Wall Street, and thus has been Tesla Motor.
[NB The eventual delivery of the promised 6,000 Model S cars will undoubtedly help crystallise perceptions to the benefit of Tesla, though it appears that technical integration, manufacturing processes and plant support will be the responsibility of Toyota. Exactly how this arrangement will evolve remains unclear.
The reported production rate of 20,000 vehicles in 2013, and even up to 450,000 vehicles thereafter should be presently inferred as pure ambition].
Fisker Automotive was formed from Fisker Coachwork, a company cited the major potential for a market in 'coachbuilt' products. It used using heavily modified base cars platforms from the Mercedes SL and BME 6-series, thus able to pragmatically immediately access premium chassis, powertrain and systems technologies whilst offering unique exterior & interior finishes, However reports suggest that only 14 SL based Tramontos were delivered, whilst the newer 6-series based Latigo CS is limited to150 units (possibly as a result of the BMW sourcing agreement if directly procured), delivery numbers and so turnover etc unknown. Fisker Coachbuilt also designed a mid-engined vehicle with for Germany's Artega, itself seeking to compete against Tesla. Thus it also performs as a outsourced design and engineering house for worldwide vehicle start-ups.
What is of interest but cannot be viewed is exactly how the 2 companies are entwined, investment-auto-motives presumes the initial Coachbuilt division (established in 2005) was effectively rolled into the newer Automotive division (est 2007) as part of a partial asset-backed funding agreement, though not known, or with the alternative possibility that Kleiner Partners and Caufield Partners took separate interests with the general intention that the Coachbuilt arm contractually services the Automotive arm. Trying to read 'between the lines' with limited information is hard, but the ambition seems to have been to initially develop exterior and interior engineering and production skills using the base car structures, then once assured for A-surface quality, closure gaps, lighting units etc, develop the understructure capability with advanced lightweight materials. Thus in effect designing the car 'outside-inside' using the VM cars as the benchmark quality base – this then an effective method to create an all new vehicle seeking to try and mimic premium VM quality standards. Adding to theoretical profitability margins, the application of naturally occuring 'non-perfect' leather skins for interior trimming means that it can procure far cheaper animal hides – compared to quality perfect quality hides as is the norm – and sell that as an eco-luxury USP; thereby boosting margins at procurement and retail levels. The company stated in January 2011 that deliveries would commence “within weeks”, little is known as to how many cars have been delivered.
Thus, Fisker looks to be very much an 'Operational Vehicle' for internal and external client niche model development
Expectation -
It is proposed by investment-auto-motives that the 'Funding Vehicle' Tesla Motor will, in the medium term if not before, strike an accord with the 'Operational Vehicle' that is Fisker Automotive.
This done to 'piggy-back' its technology platform for future Tesla models, with the Karma offering the Karma's 'carcuss' for the Model S sedan, and its Surf 'carcuss' for the Model X cross-over, and the SunSet 'carcuss' for a retractable hard-top variant There is of course a close technical coupling between Tesla's Model S and the Fisker Karma as Fisker Automotive was contracted to design the Model S but was accused of 'taking the best' of that design for its own Karma creation. A law-suit entailed and Tesla was required to pay Fisker over $1m. Such a re-formed business relationship as client and contract manufacturer would then provide Tesla with an almost immediate 3 variants of its Model S: sedan, x-over and convertible
Overview -
The EV and PHEV worlds are new, and they apparently offer the panacea of 'eco guilt-free motoring' if the concern of the traditional 'well to wheel' equation is subsumed by the not so 'free lunch' of nuclear/gas/coal/oil 'generator to e-motor'.
The emergent business space has thus developed new (or renewed) thinking both technological and business model realms, perhaps even multiplying the potential for financial reward if the two can be combined.
The accompanying graphic depicts very generalised views of the business models that have been formed to explore and ideally conquer the sector. The graphic (top right) consists of a 3x3 matrix conveying funding levels (low, medium, high) against chosen approach (traditional Product Self-Build, Flexible Product & Process Case-Specific Application, Virtual Car Company – Outsouring of all with Financing & Brand focus)
Headwinds -
But what of the real-world customer reaction to the EV? That will be very much on a product by product and brand by brand basis, but for the moment the following cars and schemes face respective challenges.
Tesla Roadster & Model S :
The Roadster looks like a sports-car and has the driving dynamics of a sports-car, but does not have the visceral sensuality of sports-car. There are no gear-changes in the traditional manner (or even 'flappy-paddle' manner), nor the marque-characteristic exhaust notes which are intrinsic to PorschePorsche, Ferrari, Lamborghini, Bentley, Aston Martin, and the 'lower-order' makers such as Ginetta. Thus there is far less physical engagement with the vehicle compared to conventional sportscars.
The car was / is priced in super-car territory yet could not offer either the real-world driving range nor high-speed upper limits, limited at 125 mph, presumably because of battery energy exhaustion rates. The battery pack is expected to last 7 years with a replacement cost of $33,000 (but$12,000 if order with the car), and is expected to hold 70% charge after 5 years. This then exhibits a more apparent powertrain performance decline than with ICE systems.
The new Model S sedan looks to have typically 'amazing' 0-60 mph EV performance but when produced is destined to be an urban runabout given lack of infrastructure. As with Roadster the top speed will require restricting. Thus 'off the line performance' will no doubt win many (inappropriate) quarter-mile drag runs between traffic lights in the US or Middle East, but in far more congested UK, European, Japanese streets even that thrill may be often negated.
Rolls Royce 102EX :
Rolls-Royce is presently exhibiting its own EV concept, the 102EX, via a world-dealership and events tour. It displays a beautiful illuminated “Spirit of Ecstasy” upon the Palladian nose (very much in the 1920s Rene Lalique radiator mascot style) and offers a seemingly retro-moderne alternative merging the 1920s & 2020s.
On paper the silence of e-propulsion is perfect for the Rolls-Royce brand, a virtue that has been engrained since its earliest days of the first Ghost. Indeed, some years ago investment-auto-motives provided a blog comment on just-auto.com that e-propulsion would be perfect for Rolls-Royce.
[NB Turan Ahmed initiated the idea of the car's floating R-R wheel-hubs as part of a personally created skunk-works proposal for R-R's re-birth when at BMW-Rover during the mid 1990s. The floating hub to primarily provide for a 3rd long-lived marque USP accompanying proprietary palladian grille & 'flying lady', but also for the functional and visual delight possibility of utilising hybrid and e-drive axle for 2WD and 4WD modes, the hubs illuminated with the R-R logo when powered].
Yet upon later consideration, that original quietness that was and is a hallmark of Rolls-Royce is a consequence of its crafted engineering of an ostensibly noisy power unit. That USP of 'near silence' from the 1907 Silver Ghost onward has a direct corollary with the usual rumble of ICE. The Ghost was the very opposite of 'Chitty Chitty Bang Bang'.
But that achieved silence becomes a lost USP within the EV world, since all other EVs of whatever ilk and price – including golf carts - can claim similar levels of powertrain refinement. Thus the EV solution for Roll-Royce, when sat amongst the broad EV crop, could be argued as a liability.
It has been argued that e-propulsion would be an natural solution since it is assumed that most Phantoms are used for city centre and short-hop travel for luxury shopping and evening leisure pursuits such as the theatre or opera. And this may well indeed be the case, especially of course for hotel tenders such as the Phantom at The Ritz or Hyde Park Hotel here in London.
Yet those cars are also driven, albeit infrequently, out of the city centre to social events such as Royal Ascot, Cheltenham, Henley Regatta, Glyndebourne et al. Thus the 125 mile range of the e-power-pack of the 102EX does not suffice and may only serve to aggravate the (near) assured arrival time, the courtesy of providing another with a 'lift', wishing to explore the country-side or the often required flexibility of short-notice travel.
It may also be argued that the actual CO2 output from such typically small annual mileage may in fact be less than that of the standard mid-size 'company car' saloon which trundles the commuter run and across the nation's motorway network.
The 102EX looks a wonderful machine, but will very probably lead to the emergence of Hybrid powertrain variants of Phantom & (new) Ghost which allows R-R to directly access BMW's R&D activities and more directly reduce its overall CAFE rating.
Paris Autolib :
On Sunday (02.10.11) Paris saw the launch of an automotive equivalent to the Velolib bicycle rental scheme. Whilst the bike scheme is run across many cities and towns, Autolib will for the near and mid term be concentrated upon Paris.
The scheme looks to be in the French grand tradition of technology inspired 'socialist experiments', exemplified by the Eiffel Tower, TGV rail system and Millau 'skyway' road bridge, and is the apparent shared brain-child between the Parisienne Mayor Bertrande Delanoe and industrialist Vincent Bollare (of Bollore Group & Bollore Investissements SA), so a Public-Private Partnership deal.
As stated previously, Bollore formed a JV with Pininfarina SpA. The agreement that the French company supplies the solid-state lithium polymer battery-pack for the shared new vehicle project, whilst the Italian company develops a singular vehicle base providing for 2 car variants.. Bollore to receive a basic no-frills product designed for rental 'hard-knock' use, whilst Pininfarina would obtain a more up-scale car for private sale.
The Paris scheme has the cost city-centre administrators and surrounding 'arrondisement' councils approximately Euro 200m to erect the complimentary infrastructure equipment needed to service the cars. Initially 66 vehicles have been released from 66 parking/docking spaces, with an expected 250 cars by December, ramping up to 2000 - 3000 cars by YE2012 – highly ambitious. Criticism has come from some public and commercial quarters stating that the eventual 12.5km of allotted Autolib spaces critically undermines already tight parking availability for private drivers.
This then is a progressive effort to cut the city's congestion levels, CO2 levels and create a more socialist 'caring & sharing' environment, based upon an almost utilitarianist economic theology.
Yet it will undoubtedly also be a prime target for crime, just as the French Velib scheme and other bike-hire schemes have proven; London loosing over 14,000 bikes since inception to theft, vandalism or irreparable damage. As neither respected privately owned items, nor 'nailed down' publicly owned items, the vehicles will undoubtedly be stolen for their parts content: wheels, tyres, lights, wipers, seating, dashboard instruments and metal content scrap values (under the plastic skin). Thus a constant monitoring of the fleet with emergency response teams looks necessary, but if the scheme has priced in loss and vandalism coverage, any losses will simply be recovered or possibly sought from the city's coffers itself if contractually obliged.
An admirable scheme to change the personal transport face of Paris, especially during this period of economic contraction so providing an alternative cost-effective method for city drivers. But previous precedents indicate that the car-share scheme will not be the long-term antidote Bollore publicly hopes, the opportunity for abuse may only serve to add new income streams for the criminally minded, and the eventual economic upswing will diminish participation in public vehicle hire.
In the meantime though Bollore's industrial interests will have scaled-up its battery production base and presumably helped prove and develop the technology. Providing a new opportunity to service Renault & PSA within France and possibly serve FIAT in Italy.
The public's partial financing of Autolib then could well act as the public springboard for one of France's largest private industrial concerns, from which it will seek to serve other niche manufacturers and 'electrified' VMs.
London, we recently saw the 'Ecovelocity Show' held in literally within the shadow of Battersea Power Station – the underlying sub-text obvious! It was a display of the recent crop of EV, ULEV and LEV vehicles, ranging from multi-billion dollar though scantily seen range-extender GM Volt to the wholly frugally developed efforts such as the Westfield EV. Yet it must be noted that such cars were mirrored by a raft of more conventional Hybrid and low CO2 ICE cars.
Thus we clearly see that the fact remains that over the last 100 years and still today modern transit is dominated by the massive 'energy enablement' that oil provides. We undeniably live within a powerful auto-centric world, in which the triumvirate sectors of automobiles, petroleum and insurance act as massive interdependent economic generators. It is a seemingly irresistible force that now has grip over the EM world, the scale economies generated therein perhaps only serving to add an even greater impetus to the conventional technology model, as even higher volume platforms and engine families are devised to satiate the now truly coupled global economy. That in turn adds greater weight to the aforementioned economic triumvirate, spreading ever broader and deeper tentacles throughout horizontal, vertical and diagonal value-chains. From the oil well to refinery to retailer's tank to pump-nozzle and within the global insurance sector where the modernisation of EM road networks to match that of western infrastructure effectively allows for 'mimic-modelling' of risks and premiums seen in the western past and applied to the EM future.
Yet perhaps, if western nations are truly serious about trying to deliver lower emissions immediately, the UK and Europe and indeed North American should look to the USA example of in the 1970s.
[NB another age in which the EV was said to be a soon dominant force].
It was during that era, after the 1973-4 oil crisis scare that Washington passed legislation to reduce the national speed limit to 55mph (and later re-rate gasoline octane chemistry). That singular initiative undoubtedly improved real-world fuel efficiency rates and saved the national atmosphere from the exponential CO2 emission typically experienced at increasingly higher speeds.
The investment community must continue to seek out new solutions in answer to the CO2 challenge, and the business world must identify opportunities therein. Opportunities that range from overtly pragmatic 'in the box' thinking (such as ICE cylinder de-activation) to seemingly remote 'out of the box' thinking (such as community shared vehicle schemes).
But the real challenge as ever will be to identify the winners from losers amongst the plethora of technological solutions and allied synergistic business models. And critically to remember, that given the historically imposed macro-level PESTEL boundaries present, even the radically micro-level 'change the world' youngster typically matures to meld into the slowly evolutionary conservative centre ground.
In the meantime a host of concepts, prototypes, and limited edition models will keep emerging from start-ups, M&A-driven PE and VMs. This all then sets to repeat the “survival of the fittest” - or rather read that as: “survival of the richest” since that is the true determinant - and continues to makes for a generally bumpy but interesting low emissions ride into the future.
Saturday, 1 October 2011
Companies Focus – Pendragon plc vs Lookers plc – Battle of the UK Dealer Giants
It is generally argued that Europe has been the most competitive new vehicle sales region; a fact repeatedly engrained by the earnings results of American VM's. It results from a mix of various factors: condensed populace in urban areas, openness to free-trade / import competition, the previous flow of credit availability and a large, dynamic used vehicle market. The was historically somewhat tempered by the previous domination of numerous local dealers of national champion VMs effectively protecting national and local economies, but since EU economic integration, the Euro generated cross-border competition, making European industry and markets more dynamic, consumer orientated and efficient.
The vehicle sales environment of the UK could be said to have preceded the European transition, its longer held laissez-faire governmental policy approach 'open to competition and free trade'. That exposed the indigenous VM motor industry as inefficient in the 1960s, encouraged the influx of imports since the mid 1970s, helped establish Japanese transplant factories in the 1980s, and assisted the takeover of portions of the domestic auto-industry by Germany in the 1990s and India in the 2000s. Simultaneously as the production-base was 'sold-off' – though often effectively still UK owned at arms length by UK financial institutions – so the automotive retail environment soared. It was under-pinned for decades by an increased differential between real earnings and product pricing cheaper cars. That in turn grew the national car-parc, which generated a greater number of ever younger used vehicles which spread amongst and to the benefit of 3rd and 4th owners, and so raised the living standards for many. This trend boosted again – to arguably too far a degree - by the previous availability of credit, in its turn created the conditions for an arrival of the US style 'used-car warehouse', an arrival which set tremors through long established dealers at national and local levels.
Unsurprisingly such a dynamic market environment set changes apace far earlier than in Europe, old and decade after decade established vehicle retailing names were merged and acquired by those that recognised the need and operating power of the consolidation process; whether in the trade themselves or others creating holding companies for portfolio acquisition.
Thus old names like Charles Hurst, Dutton Foreshaw, Platts Harris and Taggart(s) were gradually 'rolled into' the Lookers Group. Whilst Reg Vardy Ltd (whose very name recounts a yesteryear age, established in 1923) was sold to Evans Halshaw, itself an old name, along with Stratstone & Chatfields, swallowed by Pendragon plc.
[NB The Vardy family, now led by the founder's son Sir Peter Vardy, chose to create Vardy Group, comprising of Vardy Venture Capital and Vardy Property Group, both seemingly supporting the evolution of Peter Vardy Ltd for vehicle sales, itself acquiring Perth Vauxhall of Inverness, and using British Car Auctions as business aid. investment-auto-motives believes that move was to simultaneously avoid cash being tied up in portions of non-moving inventory and to send older cross country so as not to undermine local pricing levels, so protecting the Vardy local market].
Hence, whilst there are still a great number of dealer groups typically on a regional format, recent years has witnessed the UK vehicle retail market dominated by a small number of major players.
These include: Inchcape plc (£5.9bn 2010 revenue), Pendragon plc (£3.6bn), Arnold Clarke Group (£2.2bn), Sytner Group (£n/a) and Lookers plc (£1.9bn). Each has had to plot a differing path given the historical natural limits of the UK market.
As seen, Inchcape is by far the biggest today and truly multinational, operating in 24 countries, Arnold Clarke has sought expansion from horizontal integration by creating dealer training centres, and Sytner Group was de-listed to become part of the US giant Penske Auto Group (listed on the NYSE).
But investment-auto-motives seeks to look at a Pendragon plc and Lookers plc in particular, relative to their public-listing status providing easy access to investors, and critically the fact that even though large per se they represent 'animals' within the auto-retail 'jungle' of different size: Pendragon with over 300 franchise dealerships and its £3.6bn turnover vs Lookers with 119 dealers and £1.9bn. So whilst notionally in the same market space of UK retail, each must view its surroundings, the challenges and opportunities in different ways.
Given market dynamics with new changes and constraints, such acumen will be sorely needed to maintain and convey investor interest in an arena that has historically poor margins and periodically tendency for value destruction.
The first signs of peer competition between the two companies was the 2006 battle over Reg Vardy, which as stated went to Pendragon. However, this spotlighted the larger firm's concerns regards the underling when in turn it sought a (failed) hostile take-over bid for Lookers.
Nigh on six years later, these two companies should be back in the spotlight for assessment by institutional stock (and corporate bond) holders, for various reasons:
- A renewed UK focus relative to the present and near-term European economic blight,
- The ability for large scale auto-retailers to demand (and receive) discounted wholesale prices from mainstream VMs
- The buoyancy of the 'affordable' used vehicle market
- The need for 'evolutional' multi-aspect business models in this sector
The following then provides a very brief, scantily researched, overview of how these 2 companies will competitively face each other in the small island that is the UK, and critically which of the two looks to offer best potential to investors.
The following (accompanied by the 'overlap' & 'divergence' graphic) provides a basic comparison of the 2 businesses, across:
- the size and shape of the business
- the vehicle brand offered
- the recent financials
Business Size & Shape -
Pendragon:
>300 UK Dealers
New & Used Cars:
- Stratson (Luxury)
inc: BMW, Ferrari, Aston Martin, Maserati, Porsche, Mercedes Benz, Jaguar, Land Rover, Lotus, Mini, Smart, Honda
- Evans Halshaw (Volume)
inc: Vauxhall / Chevrolet, Ford, Hyundai-Kia, Nissan, PSA Citroen Peugeot, Renault.
- Chatfields (Commercials Vehicles)
inc: DAF, LDV, Renault, Nissan
- California Division (9 Luxury Dealers)
inc: Aston Martin, Jaguar, Land Rover
Support Businesses:
Leasing Division: Pendragon / Bramell / Vardy. ..Contracts
Parts Division: Quickco
Software Division: Pinewood (dealer back-office)
Recent Financials:
H1 2011 vs H1 2010
Turnover - £1,773.2m vs £1.833.4m
CoGS - £1,531m vs £1,578m
Gross Profit - £242.2m vs £255.1m
EBIT - £42.5m vs £40.1m
PbT - £18.2m vs 13.3m
Net Profit - £13.3m vs £8.4m
Op. Margin - 2.4% vs 2.2%
Basic EPS - 2.0p vs 1.3p
Dividend - none vs none
Net Debt - £294.9m vs £325.5m
Goodwill % - 24.7% vs 25.6%
(of asset base)
Market Capitilisation £135.58m
Pendragon's H1 2011 Operational Highlights:
Turnover for the period reached £1,773.2m from £1,817.4m a year earlier, showing a £-44.2m decline. YoY an underlying operating profit of £42.5m from £40.1m, much of that £2.4m addition directly added to the PbT figure, showing a growth of £2m from £15.2m to £17.2m, up 12.7%. Underlying profit margin grew to 2.4% (from 2.2% a year earlier).
Unfortunately the operating profit contribution from the luxury car division Stratstone shrank by 9% from £17.1m to £15.5m, losing £1.6m, but counter-acted by 19% growth in the volume division Evans Halshaw showing a YoY rise form £12.1m to £14.4m, and 15% growth in the additional divisions from £10.9m to £12.6m.
Cashflow from operating activities markedly increased in H1 2011 from the prior period, to £73.5m from £5.2m. This drove FCF to £35.3m from £-28.3m. Debt was reduced to £-294.9m from £-346.7m.
The company was re-capitalised via a £75.2m share rights issue, a tentative market taking 67.7% of the stock offered, the remainder of the 'rump' absorbed by company under-writers. And it was agreed that the present pensions deficit would be eliminated from a “property-backed transaction that reduced cash outflow by an estimated £46m p.a. By 2014”
Lookers:
>119 UK Dealers
New & Used Cars:
Ford, GM's Vauxhall & Chevrolet, VW's SEAT & Skoda, FIAT & Alfa Romeo, FIAT-Chrysler's Jeep & Chrysler, PSA's Citroen & Peugeot, Renault & Nissan, Hyundai, Toyota, Honda, SAAB,
Range-Rover, Jaguar, Daimler's Mercedes-Benz & Smart, Volvo, Mazda
(Charles Hurst N. Ireland includes) Bentley, Aston Martin, Maserati, Lexus
Motorcycles: BMW & Yamaha
Used Cars:
Lookers Used Car Supermarket: Lookers Trade Centre(s) in Bristol & Burton
Support Businesses:
Lookers Leasing Division
Lookers Parts Division: Ferraris Piston Services (not related to FIAT-Ferrari).
Lookers Agricultural Division
Recent Financials
H1 2011 vs H1 2010Turnover
Turnover - £1,002m vs £988.3m
CoGS - £-868.9m (86.7%) vs £-850.7m (85.25%)
Gross Profit - £133.3m (14%) vs 137.6m (14%)
EBIT - £28.5m vs 29.1m
PbT - £21.3m vs £21.4m
Net Profit - £15.5m (1.54%) vs £15.1m (1.51%)
Op. Margin - 2.85% vs 2.14%
Basic EPS - 4.04p vs 3.5p
Dividend - 0.8p vs 0.6p
Net Debt - £-49.7m vs £-60.7m
Goodwill - 8% vs 7.9%
Market Capitalisation £201.35m
Lookers H1 2011 Operational Highlights:
Turnover for the period reached £1002.2m, from £998.3m last year, showing a £3.9m improvement.
YoY an operating profit of £28.5m from £29.1m, thus a £0.6m decline. A similar difference reported in the YoY Adjusted Operating Profit showing £29.2m vs 29.8m previously. That gap was closed at the PbT level, showing £21.3m from £21.4m previously.
Commenting on the results, Lookers Chief Executive Peter Jones said:
“We are pleased to announce that we have delivered a strong trading performance in the first six months of 2011. Our motor division produced a creditable result notwithstanding the weak new car market and the parts division produced another record trading performance. Operational cashflow for the period was particularly positive resulting in a strengthened balance sheet which gives us confidence that we can continue to grow the business, deliver satisfactory results for the full year, significantly increase our dividend payments and be in a position to pursue strategic growth opportunities as and when they arise.”
Overview:
Thus we see the broad similarity of core operational activity across new and used cars in all segments, with accompanying after-sales businesses for servicing, repair and maintenance. Both companies support their After-Sales businesses with Parts divisions, thus creating a natural 3-level order
The primary difference then is the focus upon Motorcycles at Pendragon, seen as complimentary in the consumer realm at showroom retail level, whilst Lookers targets the business realm of agriculture as an adjunct to its commercial vehicles and parts delivery activities. This difference no doubt a direct result of regional footholds, Pendragon in more urbanised regions such as S.England vs Lookers (esp Taggarts) in more rural areas (esp Scotland).
Pendragon Performance & Outlook:
The Stratstone luxury division's 9% loss in operating profit showed the changed conditions for business owners and wealthier individuals & families through H1 2011, a level of insecurity that has only grown into H2 as the reality of the UK's immediate economic outlook was (at long last) made clear by the Treasury. The company's confidence in the new product arrivals of facelifted Jaguar XF and new small luxury SUV the Range Rover Evoque looks justified given the 'face-fixed' Jaguar (now with contemporary headlight shape & new diesel 4 cylinder) and the expansion of the RR brand into a lower price bracket so expanding customer catchment.
However, the unfortunate near-term UK economic horizon will reduce both VM and dealer sales expectations given what would have been positively re-worked figures; possibly even through the H1 sales downturn reality. Thus the cars will prove popular and attract showroom visitors, but given their own constrained wallets, customer's will expect a continuation of the discounts seen by JLR in recent years, obviously more so on XF than Evoque. Unfortunately, what may be necessary discounting combined with absorption of part-exchanged series-1 XF's and large (increasingly unwanted) LR/RR products will take a toll on expected margins and critically the mix on used vehicle inventories will themselves need heavy discounting even in a positive used car market. Thus immediate sales should boost Stratstone's top-line and feed through to paper-based profitability, but there could well be an invisible drag on its general vehicle inventory asset value which may sit under the immediate radar for investors.
The Evans Halshaw division dealing in mainstream vehicle will face headwinds as purse strings re-tighten into H2 2011, traction still maintained given the static UK environment but Q3 & Q4 growth dropping to an expected 8-12% from the H1's YoY 19%. Thus new car ordering systems may require re-evaluation, and greater consideration may be required as to how to gain advantage in the used vehicle sector (akin to Lookers' 'supermarkets' and Peter Vardy's use of its auction house affiliations).
The recent upbeat trend in the sales of lifestyle motorcycles (from 2008-9 collapse) which Pendragon accesses via BMW and Yamaha will falter again, so major efforts will need to be made to off-set the loss with new and renewed by corporate and government agency fleet sales & leasing as their motorcycle fleets require renewal. If not already the case, Pendragon could seek to create a new business unit from an intake of part-exchanged large capacity part-exchanged, dedicated to those ex car drivers who wish to use affordable commuter transport, and a bike replacing one car of a two car household.
Given the correctly recognised ageing of the UK car-parc, Pendragon was right to see the additional potential in service and repair. However, the re-appearance of the small independent garage as a consequence of the recession and sector recognition of the ageing car trend, means that competition for the additional business will be rife. Pendragon reacted well by introducing 'Quicks' as a servicing sub-brand to offer old(er) car owners an alternative yet credible format given their historical dissuasion from using a typically more costly main dealer covering high overhead.
Thus the 'Quicks' alternative 'service and repair' marketing format should capture an appreciable level of the used car servicing segment at a local level. But the model will require fine-tuning itself to maximise returns. This includes an obvious greater bias toward 'servicing' given the increasing likelihood that older vehicles are judged by insurance companies as beyond “economic repair”. It also necessitates far greater cost-alignment compared to the standard operating model in which costs can be passed on to the customer. That means focus on the baseline costs and operating flexibility of 'Quicks' vehicle technicians – contract periods, hourly rates, garage allocation etc – so as to compete with lower cost independent garages, and also off-set the additional costs incurred from advertising overhead etc. If not already investigated successfully, one such supporting action could be the deployment of dedicated night & early-hours shifts for technicians in geographically permissible non-residential or mixed-use areas. Thus sweating the infrastructure assets, reducing overall fixed costs whilst absorbing a proportionately small rise in variable costs, so possibly able to meet the 'Quicks' business break-even point earlier than planned – seemingly 24 months from the March 2010 set-up.
The new business obviously extends the intra-company synergies as a 3rd customer for the Quickco (parts) business, adding additional volume parts sales to the Evans Halshaw demand, aswell as additionally gaining what are typically higher margin units sales contribution for similar 'under-skin' parts from Stratstone. The outcome of Ford's previous prolific platform / systems / components sharing across Ford, Jaguar, Land Rover and Volvo vehicles, now in the aged car-parc should provide continued 3-fold boost to Quickco via its 3 sister companies.
The buoyant rebound of the UK's Van and Truck markets since Feb 2010 and Sept 2010, moving up by 34% and 27% respectively, will have been a long awaited boon to the CV division Chatfields.
As for the 2011 Outlook at mid-year, the CEO Peter Jones and fellow directors presented a generally positive picture across the areas of: Aftersales, Used Cars, New Cars & Financials.
In After-sales, the contraction of the new car market was being countered by actions toward expanding used car aftersales work – as seen with 'Quicks'. In the Used Car market Pendragon did indeed outshine the general market, and saw little change in the remainder of 2011. In New Cars, it recognises the headwinds of a flat TIV (as per SMMT forecasts) but sees new product launches as assisting. As said, investment-auto-motives suspects that a boost will be visible but will also add other pressures to the inventory mix and depreciation values, so onto the non-current element of the balance sheet. As for Financing, the over-indebted capital structure is being re-structured (at the maintained rate of LIBOR plus 3.5% but now with reduced fees and covenant of a share warrant; but that came at the cost of unpaid dividends previously, due for re-instigation – albeit at probably a low level – a some point in FY2012.
Lookers' Performance & Outlook:
In the first half of the 2011 the company added 2 more franchises to existing locations, thus adding the prospect of additional turnover at minimal cost to overhead, a positive move. The acquisition of 'The Audi Centre' of South Dublin in Ireland however, may have been ideally mistimed and in the short-term value destructive, given the still fragile Eire/Irish economic outlook.
However, Lookers obviously sees the site as a long-term opportunity with the intention to develop the site as a flagship store for Lookers' multi-brand portfolio. That is creditable and the inclusion of what is expected as entry level and mid level VW and other mainstream brands will no doubt create a site that allows a brand-ladder 'walk-up', much in the manner that VAG (VW-Audi Group) dealerships did in the 1970s & 80s. However, there will be lacklustre income for a period that must be managed with constrained overhead whilst franchise development planning proceeds.
The closure of 5 under-performing stores demonstrates in the H1 period demonstrates a necessary hard-headed approach to avoiding profitability drag for the company at large. Such actions whilst unfortunate serve not only to re-direct traffic to other Lookers dealers in the region, but also should provide impetus to dealer principles elsewhere that profitability targets are to be taken seriously in this slow sales environment. Such a message though must be conveyed with recognition that dealer principles have the autonomy to re-shape as viewed fit – and within practice guidelines - their local showroom.
The acquisition of Get Motoring / VRS appears a positive strategic move given the previous pick-up in the fleet market. This then adds scale to enable grater client catchment and critically 'feed-into' other areas of the Lookers business. Moreover, beyond the tactical and into the far-horizon strategic, it appears to serve long-term trends in UK demographics, economics and vehicle use patterns. It adds scale to the present leasing business and may have been undertaken to eventually give vertical value-chain access to the private client marketplace which has grown albeit slowly through private car hire schemes such as ZipCar (of the USA) & StreetCar (of the UK). The former acquired the latter in late 2010 to obtain greater UK access and market coverage, this action itself possibly seen by Lookers as validity for seeking to offer a similar service as adjunct to in-situ operational strengths.
Less positive were the new car sales levels of H1 2011, with a general market contraction of 7.1%, the retail side (as opposed to business and fleet) reducing by 18.1%. Lookers sales however remained above trend, with 'only' a -12.7% reduction YoY. This then allowed Lookers to 'beat the market' by 5.4%, buoying its market share to 4.04% from 3.8% in 2010. Gross profit per unit on new retail cars was stated as remaining in line YoY. Through focus on higher quality fleet business.
Back in May-June, Lookers' “order take” for the important month of September was “on plan”, but recent heavy UK economic headwinds has probably dented that previous expectant forecast which set a similar level to H2 & FY2010.
Used cars sales increased by 5% YoY on a like for like basis, with gross margins decreased slightly by 3.4%, but offset by the increased volume. Rightly recognised by Lookers (indeed expectedly so) “The used car market, which has annual sales of circa 6.7 million vehicles, remains a huge area of opportunity for the group. Through improved sourcing and a broader stock mix, together with rigidly applied stock control policies, we expect to take advantage of the stable market conditions in the used car sector to improve volumes and margins”.
This then demonstrates the company's recognition of its 'bread and butter' business, theoretically able to deploy its know-how and resources in what has become over recent years the more profitable arena of vehicle sales.
This corporate attitude then builds upon then the previous initiative which created the 'Lookers Car Supermarket', presently operating out of 2 large-capacity premises.
[NB Some years ago, large UK dealers were faced with to the challenge of the emergence of a new American-esque "stack 'em high" business model for used cars. Initiated by the likes of AutoNation and CarMax, there were soon UK variants such as CarCraft, Cargiant, AutoPlanet, The Motorhouse etc. Each seeking to replicate the success of those US first-movers. That forced traditional dealers to 'morph', but they have done so in different ways.
Bristol Street Motors with its nationwide network simply appears to have used a veneer re-brand primarily over the internet, directing interested customers to its standard (if graphically altered) showrooms. Though of course cost-effective, it does not reflect the true 'CarSupermarket' spirit, or indeed client expectation. Lookers chose to mimic the trend, thus combining brand power with inventory throughput leverage]
From general observation this appears the right path for developing the business, reflecting the old adage of turning a challenge into an opportunity. So, the 2 current sites will need to be added to depending upon the market dynamics and competitor fortunes.
[NB the obvious 'down the road outcome' is that a consolidation of the Supermarket genre is necessary].
Nonetheless, over the next decade or so, this initiative appears a primary strategic imperative.
This plan to roll out more Looker CarSupermarket sites is implied by the former mention of used car market opportunity. Such a distinct move to apparently increasingly split the business between 'new' and 'used' has consequences for the present all encompassing dealer network, especially so its property base. Thus, reading between the lines and forecasting the effects of such a structural change, means that a 'split-markets initiative' would determine that:
a) less inventory space would be required at the typical high-street dealership, now dealing only in new vehicles; so allowing alternative lease or sale of the redundant land.
b) the removal of used cars allows dealers to improve their new vehicle offering, the additional scale gained giving greater wholesale buying power from VMs and so re-buoying unit margins.
c) the probability that Lookers decides a 'mixed bag' of these 2 options depending upon site.
The After-Sales portion of the Motor Division expectantly continued to grow through H1, although the management pointed-out a decline in the 1-3 year old car-parc. That was seemingly off-set by servicing needs of the expanding older car market, with higher average ages than seen for some decades. Similar YoY margins were maintained. Importantly Lookers has broadly mentioned its Customer Relationship approach and implementation, recognising that during economic lulls that maintaining customer loyalty, so increasing per visit spend must be done via cost-effective CR routes. This achieved with focus upon longer term 'care contracts' and diagnostic equipment which identifies the general trend for increasing 'vehicle problems'; thus creating a kind of virtuous income circle.
[NB this will be the same at Pendragon and other major dealer-networks and dedicated service, tyre & MOT companies].
The Lookers Parts Division primarily feeds independent motor factors which in turn supply independent repairers; with 2010 as a record year in 2010. Turnover for the division increased by 7%, operating profit increased by 3%. This stable upward trajectory should be set to increase as the independent repair sector sees a greater volume of cars needing repair. As such, Lookers says it views its Parts division as the major differentiator compared to its competitors – and hopes investors will see similar - since it “provides a high quality earnings stream that is subject to fewer fluctuations in the demand for new and used cars”.
As would be expected, primary operational focus has been on working capital management and cashflow, assisted by sale of surplus assets, which realised £12 million in the first half of the year. Net debt continues to be well managed and is at a lower level than both budget and the start of the year. The “significant headroom” in bank facilities, should allow Lookers to take advantage of strategic acquisition opportunities across both Motor and Parts divisions
A recent Strategic Review was undertaken to assess strategic options for the business and critically deliver shareholder value. The BoD looked at what value could be obtained by splitting and divesting either of the divisions, but concluded that the optimum path forward maintained current organisational structure of Motor & Parts, seeking organic growth and selective acquisition,
Conclusion -
The automotive retail trade is a portion of the automotive-sector value chain which, because of its innately heavily-weighted labour force has a 'per unit' effect, has for decades has been viewed by VMs as a 'necessary drag' on their own profitability, whether dealerships held 'in-house' or on a franchised basis.
Those franchised dealer network groups that survived the bouts of value destruction in economic downturns did so with growth obtained via sector consolidation, necessary route since the near saturation of the UK market by the mid 1980s. Thus the only model by which a company could survive with attractive profitability margins was the classic tale of scale efficiencies: increased volumes to improve turnover whilst simultaneously undertaking a centralisation of administration and back-office activities, so reducing group-level overhead.
Thus today’s UK giants – here represented by Pendragon & Lookers - are the evolutionary outcome.
However, BoDs recognised that even this answer to market saturation could not be ever re-played within a free-market policy climate which discourages cartels, duopolies and monopolies, so necessitating previous efforts to diversify into complimentary adjoining sectors; both through vertical and horizontal integration. Thus both Pendragon's and Looker's capture of Parts & Leasing on the vertical plain, and respectively Motorcycles and Agricultural on the horizontal plain.
This then assisted UK-centric earnings streams, but a continuation of the 'scaled efficiencies' argument is a hard one to resist given its foundational basis for most if not all advanced market auto-retail models; and one so adroitly accomplished by the biggest player Inchcape plc. This perhaps especially so in an ever more widely inter-connected IT driven world. Thus, ongoing expansion into international markets looks compelling, the eventually rebounding US and new growth EM regions prime targets. Yet past experience of internationalisation can leave bitter after-taste, as has been found by the likes of Marks & Spencers in general retailing with its Brookes Brothers acquisition. A similar comment is made on wikipedia stating that Pendragon overpaid for its Californian assets and undermined local performance by 'parachuting in' UK managers.
However, those dealers now appear to offer a slightly better contribution to the bottom line than the UK dealer-base, but exactly when that cost centre broke-even – if it indeed has – is unclear given the limited research herein. Nonetheless, internationalisation is a medium and long-term ambition which will always sit on the executive radar, more so today under the economic 'new world order', and that classic orthodoxy for driving scaled and synergistic efficiencies will be a hard one to resist for Pendragon given that arguably 'oversized' in the UK market it may well follow in the footsteps of Inchcape, possibly forced to do so given Penske's possible backing of Sytner multi-national expansion relative to fluid US capital markets.
Pendragon's international expansion may be seen as the viable option given the state of play in the UK. Maintaining its UK presence with good-performing outlets to await the upturn, yet disposing of poor performers to eliminate financial drag.
Moreover it has well recognised the manner in which the new and used vehicle markets have structurally changed, and reacted in a meaningful structural manner with the introduction of the lower priced 'Quicks' after-market servicing brand (vs Halfords-Nationwide Autocentre, Kwik-Fit et al). The value of the after-sales sector is perhaps best demonstrated by Pendragon's YoY average gross profit margins, growing from 57.3% in H1 2010 to 59.9% in H1 2011 on a like for like basis.
Pendragon could well have instigated its own 'CarSupermarket' business model but chose not to, probably seeking an alternative route away from what it saw as an increasingly over-crowded space. But beyond deploying 'Quicks' – a natural strategic reaction – investors may view the company as either possibly accidentally dithering or possibly intentionally stalling, if indeed it has additional bigger and better strategic plans.
As of today though even tell-tale signs of any re-orientation, re-structuring plans have not been made public, and so such 'dithering' when matched with the lower margin performance compared to Lookers (and probably others), plus the fact that dividends were stopped in H1 2011 unfortunately leaves Pendragon looking like the 'clueless poor cousin' amongst its foes.
This may not be the actual case, and the BoD may be playing a cunning game of value reconstruction yet to arrives, but here and now that looks remote, and the UK market challenges look not to have as yet been fully combated or conquered.
Conversely the far smaller Lookers, since its daring 2006 attempt for Reg Vardy, has played a comparatively thoughtful long-game of constant cost-reduction focus and ploughing time, finances and effort into revitalising its dealer-base aswell as underpinning its 'CarSupermarket' new venture, which combines brand and operational leverage, so as to meet the UK used car challenge head-on.
This is implicitly described by the CEO “The total vehicle car parc in the UK market is over 30 million vehicles, with just over 6.5 million of these being in the conventionally, dealership dominated 1 to 3 year vehicle parc. In contrast to the younger vehicle parc, the 4 year plus vehicle parc in the UK has benefited from growth in recent years” .
Thus, whether through gentlemen's agreement or not, and very probably from their investment bankers advice, Pendragon and Lookers have taken alternative UK strategic paths within the used car realm, the former targeting Used Car After-Sales, the latter targeting Used Car Sales.
However, beyond the recent forays into synergistic new business streams which will underpin long-term earnings, both companies will need to seriously look at both continued organic growth and open their minds to incorporating alternative business models.
The prime difference, investment-auto-motives suspects, being that:
A. Pendragon seeks international expansion enabled by the present low cost wholesale capital markets which can also be exploited to provide EM customer credit lines
vs
B. Lookers seeks UK expansion (possibly buying specific Pendragon sites) and seeking to dominate the 'CarSupermarket' business arena by acquiring the sites of its private company competitors.
Apart from such rationale-based forecasting in the normal operational realm, efforts must be made to observe and prompt alternative business models which potentially pre-empt far-horizaon trends in both declining western markets and rising EM markets.
To this end, Lookers may be philosophically ahead. Its recent drive to expanding its leasing business with the acquisition of Get Motoring / VRS look to be signs seeking a path by which to ultimately transfer the present (typically) B2B mentality of leased vehicle agreements into the B2C sphere. This is something seen with PSA's own adventurous 'mu' rental model. And indeed the Lookers-VRS business could even possibly be an acquisition target for PSA in years to come.
Exactly how successful this may be is hard to judge, since much depends upon the strength of the UK's eventual economic rebound.
But a permanently weak 'New Norm' (as investment-auto-motives & PIMCO's El-Erian have both mentioned and re-mentioned) would point to a trend of longer lived used car re-use, and an long-term 'thinning trend' of car ownership (especially in cities) so diminishing the need for either a sizeable dedicated car sales network, or more likely, the metamorphosis of that network becoming a mixed-bag of car sales, leasing and rental.
The very basic insights unearthed then point to a classic tale of a bigger, more lumbering beast, versus the smaller, hungrier and more agile smaller animal.
Pendragon which whilst certainly not resting on its laurels, may be viewed by the investment community as needing to be seen as more dynamic. Lookers in contrast investigating and jumping upon short-term, medium-term and long-term initiatives.
Yet by virtue of historic precedence and its innate grasp, the traditional UK retail trade - even in this watershed period - is not about to see drastic business model disruptions, nor to be eclipsed by alternative sales methods and channels. Instead new developments physical and virtual will continue to be deployed so as to broaden customer catchment, and used to access additional sales avenues from partnering with independent 'on-line on-sellers' that crawl dealer inventories for its own clients, through to greater potential for co-opetition with cross-brand/cross-group vehicle sourcing and sales.
But even with e-commerce as an entry place, the car-buying customer still wants to see the potential in the flesh first, hence the physical need for the old fashioned car dealer will stay, indeed develop as it incorporates 'experiential' aspects which converge commerce and leisure; akin then to the shopping mall experience.
Thus Pendragon and Lookers will need to combine the 'olde worlde' with the 'new world', yet do so without the over-blown 'dotcom' type rhetoric so often used in trying to attract investors toward what appear as over-ripe, capital market under-performing sectors and businesses.
[NB one 'fundamentals' measurement that investment-auto-motives views as critical is the ratio of 'goodwill & intangibles' relative to the overall reported asset-base. Pendragon appears to hold a mighty 25% of such goodwill, whilst Lookers holds 8%. The former figure may be tenable for a company's bankers happy with their own rolling credit facilities, but for the value or growth seeking investor such a comparatively high goodwill figure in such a mature business sector appears concerning].
As of today the facts and figures show Lookers to hold that investor interest, just as its name was devised to attract showroom footfall. The seemingly mighty but staid Pendragon – whose name intimates 'head dragon' from Arthurian legend – may need to either drip-feed information on future strategy, or possibly step outside its Den, and once again closely survey the national and international terrain.
The vehicle sales environment of the UK could be said to have preceded the European transition, its longer held laissez-faire governmental policy approach 'open to competition and free trade'. That exposed the indigenous VM motor industry as inefficient in the 1960s, encouraged the influx of imports since the mid 1970s, helped establish Japanese transplant factories in the 1980s, and assisted the takeover of portions of the domestic auto-industry by Germany in the 1990s and India in the 2000s. Simultaneously as the production-base was 'sold-off' – though often effectively still UK owned at arms length by UK financial institutions – so the automotive retail environment soared. It was under-pinned for decades by an increased differential between real earnings and product pricing cheaper cars. That in turn grew the national car-parc, which generated a greater number of ever younger used vehicles which spread amongst and to the benefit of 3rd and 4th owners, and so raised the living standards for many. This trend boosted again – to arguably too far a degree - by the previous availability of credit, in its turn created the conditions for an arrival of the US style 'used-car warehouse', an arrival which set tremors through long established dealers at national and local levels.
Unsurprisingly such a dynamic market environment set changes apace far earlier than in Europe, old and decade after decade established vehicle retailing names were merged and acquired by those that recognised the need and operating power of the consolidation process; whether in the trade themselves or others creating holding companies for portfolio acquisition.
Thus old names like Charles Hurst, Dutton Foreshaw, Platts Harris and Taggart(s) were gradually 'rolled into' the Lookers Group. Whilst Reg Vardy Ltd (whose very name recounts a yesteryear age, established in 1923) was sold to Evans Halshaw, itself an old name, along with Stratstone & Chatfields, swallowed by Pendragon plc.
[NB The Vardy family, now led by the founder's son Sir Peter Vardy, chose to create Vardy Group, comprising of Vardy Venture Capital and Vardy Property Group, both seemingly supporting the evolution of Peter Vardy Ltd for vehicle sales, itself acquiring Perth Vauxhall of Inverness, and using British Car Auctions as business aid. investment-auto-motives believes that move was to simultaneously avoid cash being tied up in portions of non-moving inventory and to send older cross country so as not to undermine local pricing levels, so protecting the Vardy local market].
Hence, whilst there are still a great number of dealer groups typically on a regional format, recent years has witnessed the UK vehicle retail market dominated by a small number of major players.
These include: Inchcape plc (£5.9bn 2010 revenue), Pendragon plc (£3.6bn), Arnold Clarke Group (£2.2bn), Sytner Group (£n/a) and Lookers plc (£1.9bn). Each has had to plot a differing path given the historical natural limits of the UK market.
As seen, Inchcape is by far the biggest today and truly multinational, operating in 24 countries, Arnold Clarke has sought expansion from horizontal integration by creating dealer training centres, and Sytner Group was de-listed to become part of the US giant Penske Auto Group (listed on the NYSE).
But investment-auto-motives seeks to look at a Pendragon plc and Lookers plc in particular, relative to their public-listing status providing easy access to investors, and critically the fact that even though large per se they represent 'animals' within the auto-retail 'jungle' of different size: Pendragon with over 300 franchise dealerships and its £3.6bn turnover vs Lookers with 119 dealers and £1.9bn. So whilst notionally in the same market space of UK retail, each must view its surroundings, the challenges and opportunities in different ways.
Given market dynamics with new changes and constraints, such acumen will be sorely needed to maintain and convey investor interest in an arena that has historically poor margins and periodically tendency for value destruction.
The first signs of peer competition between the two companies was the 2006 battle over Reg Vardy, which as stated went to Pendragon. However, this spotlighted the larger firm's concerns regards the underling when in turn it sought a (failed) hostile take-over bid for Lookers.
Nigh on six years later, these two companies should be back in the spotlight for assessment by institutional stock (and corporate bond) holders, for various reasons:
- A renewed UK focus relative to the present and near-term European economic blight,
- The ability for large scale auto-retailers to demand (and receive) discounted wholesale prices from mainstream VMs
- The buoyancy of the 'affordable' used vehicle market
- The need for 'evolutional' multi-aspect business models in this sector
The following then provides a very brief, scantily researched, overview of how these 2 companies will competitively face each other in the small island that is the UK, and critically which of the two looks to offer best potential to investors.
The following (accompanied by the 'overlap' & 'divergence' graphic) provides a basic comparison of the 2 businesses, across:
- the size and shape of the business
- the vehicle brand offered
- the recent financials
Business Size & Shape -
Pendragon:
>300 UK Dealers
New & Used Cars:
- Stratson (Luxury)
inc: BMW, Ferrari, Aston Martin, Maserati, Porsche, Mercedes Benz, Jaguar, Land Rover, Lotus, Mini, Smart, Honda
- Evans Halshaw (Volume)
inc: Vauxhall / Chevrolet, Ford, Hyundai-Kia, Nissan, PSA Citroen Peugeot, Renault.
- Chatfields (Commercials Vehicles)
inc: DAF, LDV, Renault, Nissan
- California Division (9 Luxury Dealers)
inc: Aston Martin, Jaguar, Land Rover
Support Businesses:
Leasing Division: Pendragon / Bramell / Vardy. ..Contracts
Parts Division: Quickco
Software Division: Pinewood (dealer back-office)
Recent Financials:
H1 2011 vs H1 2010
Turnover - £1,773.2m vs £1.833.4m
CoGS - £1,531m vs £1,578m
Gross Profit - £242.2m vs £255.1m
EBIT - £42.5m vs £40.1m
PbT - £18.2m vs 13.3m
Net Profit - £13.3m vs £8.4m
Op. Margin - 2.4% vs 2.2%
Basic EPS - 2.0p vs 1.3p
Dividend - none vs none
Net Debt - £294.9m vs £325.5m
Goodwill % - 24.7% vs 25.6%
(of asset base)
Market Capitilisation £135.58m
Pendragon's H1 2011 Operational Highlights:
Turnover for the period reached £1,773.2m from £1,817.4m a year earlier, showing a £-44.2m decline. YoY an underlying operating profit of £42.5m from £40.1m, much of that £2.4m addition directly added to the PbT figure, showing a growth of £2m from £15.2m to £17.2m, up 12.7%. Underlying profit margin grew to 2.4% (from 2.2% a year earlier).
Unfortunately the operating profit contribution from the luxury car division Stratstone shrank by 9% from £17.1m to £15.5m, losing £1.6m, but counter-acted by 19% growth in the volume division Evans Halshaw showing a YoY rise form £12.1m to £14.4m, and 15% growth in the additional divisions from £10.9m to £12.6m.
Cashflow from operating activities markedly increased in H1 2011 from the prior period, to £73.5m from £5.2m. This drove FCF to £35.3m from £-28.3m. Debt was reduced to £-294.9m from £-346.7m.
The company was re-capitalised via a £75.2m share rights issue, a tentative market taking 67.7% of the stock offered, the remainder of the 'rump' absorbed by company under-writers. And it was agreed that the present pensions deficit would be eliminated from a “property-backed transaction that reduced cash outflow by an estimated £46m p.a. By 2014”
Lookers:
>119 UK Dealers
New & Used Cars:
Ford, GM's Vauxhall & Chevrolet, VW's SEAT & Skoda, FIAT & Alfa Romeo, FIAT-Chrysler's Jeep & Chrysler, PSA's Citroen & Peugeot, Renault & Nissan, Hyundai, Toyota, Honda, SAAB,
Range-Rover, Jaguar, Daimler's Mercedes-Benz & Smart, Volvo, Mazda
(Charles Hurst N. Ireland includes) Bentley, Aston Martin, Maserati, Lexus
Motorcycles: BMW & Yamaha
Used Cars:
Lookers Used Car Supermarket: Lookers Trade Centre(s) in Bristol & Burton
Support Businesses:
Lookers Leasing Division
Lookers Parts Division: Ferraris Piston Services (not related to FIAT-Ferrari).
Lookers Agricultural Division
Recent Financials
H1 2011 vs H1 2010Turnover
Turnover - £1,002m vs £988.3m
CoGS - £-868.9m (86.7%) vs £-850.7m (85.25%)
Gross Profit - £133.3m (14%) vs 137.6m (14%)
EBIT - £28.5m vs 29.1m
PbT - £21.3m vs £21.4m
Net Profit - £15.5m (1.54%) vs £15.1m (1.51%)
Op. Margin - 2.85% vs 2.14%
Basic EPS - 4.04p vs 3.5p
Dividend - 0.8p vs 0.6p
Net Debt - £-49.7m vs £-60.7m
Goodwill - 8% vs 7.9%
Market Capitalisation £201.35m
Lookers H1 2011 Operational Highlights:
Turnover for the period reached £1002.2m, from £998.3m last year, showing a £3.9m improvement.
YoY an operating profit of £28.5m from £29.1m, thus a £0.6m decline. A similar difference reported in the YoY Adjusted Operating Profit showing £29.2m vs 29.8m previously. That gap was closed at the PbT level, showing £21.3m from £21.4m previously.
Commenting on the results, Lookers Chief Executive Peter Jones said:
“We are pleased to announce that we have delivered a strong trading performance in the first six months of 2011. Our motor division produced a creditable result notwithstanding the weak new car market and the parts division produced another record trading performance. Operational cashflow for the period was particularly positive resulting in a strengthened balance sheet which gives us confidence that we can continue to grow the business, deliver satisfactory results for the full year, significantly increase our dividend payments and be in a position to pursue strategic growth opportunities as and when they arise.”
Overview:
Thus we see the broad similarity of core operational activity across new and used cars in all segments, with accompanying after-sales businesses for servicing, repair and maintenance. Both companies support their After-Sales businesses with Parts divisions, thus creating a natural 3-level order
The primary difference then is the focus upon Motorcycles at Pendragon, seen as complimentary in the consumer realm at showroom retail level, whilst Lookers targets the business realm of agriculture as an adjunct to its commercial vehicles and parts delivery activities. This difference no doubt a direct result of regional footholds, Pendragon in more urbanised regions such as S.England vs Lookers (esp Taggarts) in more rural areas (esp Scotland).
Pendragon Performance & Outlook:
The Stratstone luxury division's 9% loss in operating profit showed the changed conditions for business owners and wealthier individuals & families through H1 2011, a level of insecurity that has only grown into H2 as the reality of the UK's immediate economic outlook was (at long last) made clear by the Treasury. The company's confidence in the new product arrivals of facelifted Jaguar XF and new small luxury SUV the Range Rover Evoque looks justified given the 'face-fixed' Jaguar (now with contemporary headlight shape & new diesel 4 cylinder) and the expansion of the RR brand into a lower price bracket so expanding customer catchment.
However, the unfortunate near-term UK economic horizon will reduce both VM and dealer sales expectations given what would have been positively re-worked figures; possibly even through the H1 sales downturn reality. Thus the cars will prove popular and attract showroom visitors, but given their own constrained wallets, customer's will expect a continuation of the discounts seen by JLR in recent years, obviously more so on XF than Evoque. Unfortunately, what may be necessary discounting combined with absorption of part-exchanged series-1 XF's and large (increasingly unwanted) LR/RR products will take a toll on expected margins and critically the mix on used vehicle inventories will themselves need heavy discounting even in a positive used car market. Thus immediate sales should boost Stratstone's top-line and feed through to paper-based profitability, but there could well be an invisible drag on its general vehicle inventory asset value which may sit under the immediate radar for investors.
The Evans Halshaw division dealing in mainstream vehicle will face headwinds as purse strings re-tighten into H2 2011, traction still maintained given the static UK environment but Q3 & Q4 growth dropping to an expected 8-12% from the H1's YoY 19%. Thus new car ordering systems may require re-evaluation, and greater consideration may be required as to how to gain advantage in the used vehicle sector (akin to Lookers' 'supermarkets' and Peter Vardy's use of its auction house affiliations).
The recent upbeat trend in the sales of lifestyle motorcycles (from 2008-9 collapse) which Pendragon accesses via BMW and Yamaha will falter again, so major efforts will need to be made to off-set the loss with new and renewed by corporate and government agency fleet sales & leasing as their motorcycle fleets require renewal. If not already the case, Pendragon could seek to create a new business unit from an intake of part-exchanged large capacity part-exchanged, dedicated to those ex car drivers who wish to use affordable commuter transport, and a bike replacing one car of a two car household.
Given the correctly recognised ageing of the UK car-parc, Pendragon was right to see the additional potential in service and repair. However, the re-appearance of the small independent garage as a consequence of the recession and sector recognition of the ageing car trend, means that competition for the additional business will be rife. Pendragon reacted well by introducing 'Quicks' as a servicing sub-brand to offer old(er) car owners an alternative yet credible format given their historical dissuasion from using a typically more costly main dealer covering high overhead.
Thus the 'Quicks' alternative 'service and repair' marketing format should capture an appreciable level of the used car servicing segment at a local level. But the model will require fine-tuning itself to maximise returns. This includes an obvious greater bias toward 'servicing' given the increasing likelihood that older vehicles are judged by insurance companies as beyond “economic repair”. It also necessitates far greater cost-alignment compared to the standard operating model in which costs can be passed on to the customer. That means focus on the baseline costs and operating flexibility of 'Quicks' vehicle technicians – contract periods, hourly rates, garage allocation etc – so as to compete with lower cost independent garages, and also off-set the additional costs incurred from advertising overhead etc. If not already investigated successfully, one such supporting action could be the deployment of dedicated night & early-hours shifts for technicians in geographically permissible non-residential or mixed-use areas. Thus sweating the infrastructure assets, reducing overall fixed costs whilst absorbing a proportionately small rise in variable costs, so possibly able to meet the 'Quicks' business break-even point earlier than planned – seemingly 24 months from the March 2010 set-up.
The new business obviously extends the intra-company synergies as a 3rd customer for the Quickco (parts) business, adding additional volume parts sales to the Evans Halshaw demand, aswell as additionally gaining what are typically higher margin units sales contribution for similar 'under-skin' parts from Stratstone. The outcome of Ford's previous prolific platform / systems / components sharing across Ford, Jaguar, Land Rover and Volvo vehicles, now in the aged car-parc should provide continued 3-fold boost to Quickco via its 3 sister companies.
The buoyant rebound of the UK's Van and Truck markets since Feb 2010 and Sept 2010, moving up by 34% and 27% respectively, will have been a long awaited boon to the CV division Chatfields.
As for the 2011 Outlook at mid-year, the CEO Peter Jones and fellow directors presented a generally positive picture across the areas of: Aftersales, Used Cars, New Cars & Financials.
In After-sales, the contraction of the new car market was being countered by actions toward expanding used car aftersales work – as seen with 'Quicks'. In the Used Car market Pendragon did indeed outshine the general market, and saw little change in the remainder of 2011. In New Cars, it recognises the headwinds of a flat TIV (as per SMMT forecasts) but sees new product launches as assisting. As said, investment-auto-motives suspects that a boost will be visible but will also add other pressures to the inventory mix and depreciation values, so onto the non-current element of the balance sheet. As for Financing, the over-indebted capital structure is being re-structured (at the maintained rate of LIBOR plus 3.5% but now with reduced fees and covenant of a share warrant; but that came at the cost of unpaid dividends previously, due for re-instigation – albeit at probably a low level – a some point in FY2012.
Lookers' Performance & Outlook:
In the first half of the 2011 the company added 2 more franchises to existing locations, thus adding the prospect of additional turnover at minimal cost to overhead, a positive move. The acquisition of 'The Audi Centre' of South Dublin in Ireland however, may have been ideally mistimed and in the short-term value destructive, given the still fragile Eire/Irish economic outlook.
However, Lookers obviously sees the site as a long-term opportunity with the intention to develop the site as a flagship store for Lookers' multi-brand portfolio. That is creditable and the inclusion of what is expected as entry level and mid level VW and other mainstream brands will no doubt create a site that allows a brand-ladder 'walk-up', much in the manner that VAG (VW-Audi Group) dealerships did in the 1970s & 80s. However, there will be lacklustre income for a period that must be managed with constrained overhead whilst franchise development planning proceeds.
The closure of 5 under-performing stores demonstrates in the H1 period demonstrates a necessary hard-headed approach to avoiding profitability drag for the company at large. Such actions whilst unfortunate serve not only to re-direct traffic to other Lookers dealers in the region, but also should provide impetus to dealer principles elsewhere that profitability targets are to be taken seriously in this slow sales environment. Such a message though must be conveyed with recognition that dealer principles have the autonomy to re-shape as viewed fit – and within practice guidelines - their local showroom.
The acquisition of Get Motoring / VRS appears a positive strategic move given the previous pick-up in the fleet market. This then adds scale to enable grater client catchment and critically 'feed-into' other areas of the Lookers business. Moreover, beyond the tactical and into the far-horizon strategic, it appears to serve long-term trends in UK demographics, economics and vehicle use patterns. It adds scale to the present leasing business and may have been undertaken to eventually give vertical value-chain access to the private client marketplace which has grown albeit slowly through private car hire schemes such as ZipCar (of the USA) & StreetCar (of the UK). The former acquired the latter in late 2010 to obtain greater UK access and market coverage, this action itself possibly seen by Lookers as validity for seeking to offer a similar service as adjunct to in-situ operational strengths.
Less positive were the new car sales levels of H1 2011, with a general market contraction of 7.1%, the retail side (as opposed to business and fleet) reducing by 18.1%. Lookers sales however remained above trend, with 'only' a -12.7% reduction YoY. This then allowed Lookers to 'beat the market' by 5.4%, buoying its market share to 4.04% from 3.8% in 2010. Gross profit per unit on new retail cars was stated as remaining in line YoY. Through focus on higher quality fleet business.
Back in May-June, Lookers' “order take” for the important month of September was “on plan”, but recent heavy UK economic headwinds has probably dented that previous expectant forecast which set a similar level to H2 & FY2010.
Used cars sales increased by 5% YoY on a like for like basis, with gross margins decreased slightly by 3.4%, but offset by the increased volume. Rightly recognised by Lookers (indeed expectedly so) “The used car market, which has annual sales of circa 6.7 million vehicles, remains a huge area of opportunity for the group. Through improved sourcing and a broader stock mix, together with rigidly applied stock control policies, we expect to take advantage of the stable market conditions in the used car sector to improve volumes and margins”.
This then demonstrates the company's recognition of its 'bread and butter' business, theoretically able to deploy its know-how and resources in what has become over recent years the more profitable arena of vehicle sales.
This corporate attitude then builds upon then the previous initiative which created the 'Lookers Car Supermarket', presently operating out of 2 large-capacity premises.
[NB Some years ago, large UK dealers were faced with to the challenge of the emergence of a new American-esque "stack 'em high" business model for used cars. Initiated by the likes of AutoNation and CarMax, there were soon UK variants such as CarCraft, Cargiant, AutoPlanet, The Motorhouse etc. Each seeking to replicate the success of those US first-movers. That forced traditional dealers to 'morph', but they have done so in different ways.
Bristol Street Motors with its nationwide network simply appears to have used a veneer re-brand primarily over the internet, directing interested customers to its standard (if graphically altered) showrooms. Though of course cost-effective, it does not reflect the true 'CarSupermarket' spirit, or indeed client expectation. Lookers chose to mimic the trend, thus combining brand power with inventory throughput leverage]
From general observation this appears the right path for developing the business, reflecting the old adage of turning a challenge into an opportunity. So, the 2 current sites will need to be added to depending upon the market dynamics and competitor fortunes.
[NB the obvious 'down the road outcome' is that a consolidation of the Supermarket genre is necessary].
Nonetheless, over the next decade or so, this initiative appears a primary strategic imperative.
This plan to roll out more Looker CarSupermarket sites is implied by the former mention of used car market opportunity. Such a distinct move to apparently increasingly split the business between 'new' and 'used' has consequences for the present all encompassing dealer network, especially so its property base. Thus, reading between the lines and forecasting the effects of such a structural change, means that a 'split-markets initiative' would determine that:
a) less inventory space would be required at the typical high-street dealership, now dealing only in new vehicles; so allowing alternative lease or sale of the redundant land.
b) the removal of used cars allows dealers to improve their new vehicle offering, the additional scale gained giving greater wholesale buying power from VMs and so re-buoying unit margins.
c) the probability that Lookers decides a 'mixed bag' of these 2 options depending upon site.
The After-Sales portion of the Motor Division expectantly continued to grow through H1, although the management pointed-out a decline in the 1-3 year old car-parc. That was seemingly off-set by servicing needs of the expanding older car market, with higher average ages than seen for some decades. Similar YoY margins were maintained. Importantly Lookers has broadly mentioned its Customer Relationship approach and implementation, recognising that during economic lulls that maintaining customer loyalty, so increasing per visit spend must be done via cost-effective CR routes. This achieved with focus upon longer term 'care contracts' and diagnostic equipment which identifies the general trend for increasing 'vehicle problems'; thus creating a kind of virtuous income circle.
[NB this will be the same at Pendragon and other major dealer-networks and dedicated service, tyre & MOT companies].
The Lookers Parts Division primarily feeds independent motor factors which in turn supply independent repairers; with 2010 as a record year in 2010. Turnover for the division increased by 7%, operating profit increased by 3%. This stable upward trajectory should be set to increase as the independent repair sector sees a greater volume of cars needing repair. As such, Lookers says it views its Parts division as the major differentiator compared to its competitors – and hopes investors will see similar - since it “provides a high quality earnings stream that is subject to fewer fluctuations in the demand for new and used cars”.
As would be expected, primary operational focus has been on working capital management and cashflow, assisted by sale of surplus assets, which realised £12 million in the first half of the year. Net debt continues to be well managed and is at a lower level than both budget and the start of the year. The “significant headroom” in bank facilities, should allow Lookers to take advantage of strategic acquisition opportunities across both Motor and Parts divisions
A recent Strategic Review was undertaken to assess strategic options for the business and critically deliver shareholder value. The BoD looked at what value could be obtained by splitting and divesting either of the divisions, but concluded that the optimum path forward maintained current organisational structure of Motor & Parts, seeking organic growth and selective acquisition,
Conclusion -
The automotive retail trade is a portion of the automotive-sector value chain which, because of its innately heavily-weighted labour force has a 'per unit' effect, has for decades has been viewed by VMs as a 'necessary drag' on their own profitability, whether dealerships held 'in-house' or on a franchised basis.
Those franchised dealer network groups that survived the bouts of value destruction in economic downturns did so with growth obtained via sector consolidation, necessary route since the near saturation of the UK market by the mid 1980s. Thus the only model by which a company could survive with attractive profitability margins was the classic tale of scale efficiencies: increased volumes to improve turnover whilst simultaneously undertaking a centralisation of administration and back-office activities, so reducing group-level overhead.
Thus today’s UK giants – here represented by Pendragon & Lookers - are the evolutionary outcome.
However, BoDs recognised that even this answer to market saturation could not be ever re-played within a free-market policy climate which discourages cartels, duopolies and monopolies, so necessitating previous efforts to diversify into complimentary adjoining sectors; both through vertical and horizontal integration. Thus both Pendragon's and Looker's capture of Parts & Leasing on the vertical plain, and respectively Motorcycles and Agricultural on the horizontal plain.
This then assisted UK-centric earnings streams, but a continuation of the 'scaled efficiencies' argument is a hard one to resist given its foundational basis for most if not all advanced market auto-retail models; and one so adroitly accomplished by the biggest player Inchcape plc. This perhaps especially so in an ever more widely inter-connected IT driven world. Thus, ongoing expansion into international markets looks compelling, the eventually rebounding US and new growth EM regions prime targets. Yet past experience of internationalisation can leave bitter after-taste, as has been found by the likes of Marks & Spencers in general retailing with its Brookes Brothers acquisition. A similar comment is made on wikipedia stating that Pendragon overpaid for its Californian assets and undermined local performance by 'parachuting in' UK managers.
However, those dealers now appear to offer a slightly better contribution to the bottom line than the UK dealer-base, but exactly when that cost centre broke-even – if it indeed has – is unclear given the limited research herein. Nonetheless, internationalisation is a medium and long-term ambition which will always sit on the executive radar, more so today under the economic 'new world order', and that classic orthodoxy for driving scaled and synergistic efficiencies will be a hard one to resist for Pendragon given that arguably 'oversized' in the UK market it may well follow in the footsteps of Inchcape, possibly forced to do so given Penske's possible backing of Sytner multi-national expansion relative to fluid US capital markets.
Pendragon's international expansion may be seen as the viable option given the state of play in the UK. Maintaining its UK presence with good-performing outlets to await the upturn, yet disposing of poor performers to eliminate financial drag.
Moreover it has well recognised the manner in which the new and used vehicle markets have structurally changed, and reacted in a meaningful structural manner with the introduction of the lower priced 'Quicks' after-market servicing brand (vs Halfords-Nationwide Autocentre, Kwik-Fit et al). The value of the after-sales sector is perhaps best demonstrated by Pendragon's YoY average gross profit margins, growing from 57.3% in H1 2010 to 59.9% in H1 2011 on a like for like basis.
Pendragon could well have instigated its own 'CarSupermarket' business model but chose not to, probably seeking an alternative route away from what it saw as an increasingly over-crowded space. But beyond deploying 'Quicks' – a natural strategic reaction – investors may view the company as either possibly accidentally dithering or possibly intentionally stalling, if indeed it has additional bigger and better strategic plans.
As of today though even tell-tale signs of any re-orientation, re-structuring plans have not been made public, and so such 'dithering' when matched with the lower margin performance compared to Lookers (and probably others), plus the fact that dividends were stopped in H1 2011 unfortunately leaves Pendragon looking like the 'clueless poor cousin' amongst its foes.
This may not be the actual case, and the BoD may be playing a cunning game of value reconstruction yet to arrives, but here and now that looks remote, and the UK market challenges look not to have as yet been fully combated or conquered.
Conversely the far smaller Lookers, since its daring 2006 attempt for Reg Vardy, has played a comparatively thoughtful long-game of constant cost-reduction focus and ploughing time, finances and effort into revitalising its dealer-base aswell as underpinning its 'CarSupermarket' new venture, which combines brand and operational leverage, so as to meet the UK used car challenge head-on.
This is implicitly described by the CEO “The total vehicle car parc in the UK market is over 30 million vehicles, with just over 6.5 million of these being in the conventionally, dealership dominated 1 to 3 year vehicle parc. In contrast to the younger vehicle parc, the 4 year plus vehicle parc in the UK has benefited from growth in recent years” .
Thus, whether through gentlemen's agreement or not, and very probably from their investment bankers advice, Pendragon and Lookers have taken alternative UK strategic paths within the used car realm, the former targeting Used Car After-Sales, the latter targeting Used Car Sales.
However, beyond the recent forays into synergistic new business streams which will underpin long-term earnings, both companies will need to seriously look at both continued organic growth and open their minds to incorporating alternative business models.
The prime difference, investment-auto-motives suspects, being that:
A. Pendragon seeks international expansion enabled by the present low cost wholesale capital markets which can also be exploited to provide EM customer credit lines
vs
B. Lookers seeks UK expansion (possibly buying specific Pendragon sites) and seeking to dominate the 'CarSupermarket' business arena by acquiring the sites of its private company competitors.
Apart from such rationale-based forecasting in the normal operational realm, efforts must be made to observe and prompt alternative business models which potentially pre-empt far-horizaon trends in both declining western markets and rising EM markets.
To this end, Lookers may be philosophically ahead. Its recent drive to expanding its leasing business with the acquisition of Get Motoring / VRS look to be signs seeking a path by which to ultimately transfer the present (typically) B2B mentality of leased vehicle agreements into the B2C sphere. This is something seen with PSA's own adventurous 'mu' rental model. And indeed the Lookers-VRS business could even possibly be an acquisition target for PSA in years to come.
Exactly how successful this may be is hard to judge, since much depends upon the strength of the UK's eventual economic rebound.
But a permanently weak 'New Norm' (as investment-auto-motives & PIMCO's El-Erian have both mentioned and re-mentioned) would point to a trend of longer lived used car re-use, and an long-term 'thinning trend' of car ownership (especially in cities) so diminishing the need for either a sizeable dedicated car sales network, or more likely, the metamorphosis of that network becoming a mixed-bag of car sales, leasing and rental.
The very basic insights unearthed then point to a classic tale of a bigger, more lumbering beast, versus the smaller, hungrier and more agile smaller animal.
Pendragon which whilst certainly not resting on its laurels, may be viewed by the investment community as needing to be seen as more dynamic. Lookers in contrast investigating and jumping upon short-term, medium-term and long-term initiatives.
Yet by virtue of historic precedence and its innate grasp, the traditional UK retail trade - even in this watershed period - is not about to see drastic business model disruptions, nor to be eclipsed by alternative sales methods and channels. Instead new developments physical and virtual will continue to be deployed so as to broaden customer catchment, and used to access additional sales avenues from partnering with independent 'on-line on-sellers' that crawl dealer inventories for its own clients, through to greater potential for co-opetition with cross-brand/cross-group vehicle sourcing and sales.
But even with e-commerce as an entry place, the car-buying customer still wants to see the potential in the flesh first, hence the physical need for the old fashioned car dealer will stay, indeed develop as it incorporates 'experiential' aspects which converge commerce and leisure; akin then to the shopping mall experience.
Thus Pendragon and Lookers will need to combine the 'olde worlde' with the 'new world', yet do so without the over-blown 'dotcom' type rhetoric so often used in trying to attract investors toward what appear as over-ripe, capital market under-performing sectors and businesses.
[NB one 'fundamentals' measurement that investment-auto-motives views as critical is the ratio of 'goodwill & intangibles' relative to the overall reported asset-base. Pendragon appears to hold a mighty 25% of such goodwill, whilst Lookers holds 8%. The former figure may be tenable for a company's bankers happy with their own rolling credit facilities, but for the value or growth seeking investor such a comparatively high goodwill figure in such a mature business sector appears concerning].
As of today the facts and figures show Lookers to hold that investor interest, just as its name was devised to attract showroom footfall. The seemingly mighty but staid Pendragon – whose name intimates 'head dragon' from Arthurian legend – may need to either drip-feed information on future strategy, or possibly step outside its Den, and once again closely survey the national and international terrain.
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