Perhaps the hardest commercial arena to operate within amongst the very diverse auto-parts sector has been Tyres & Rubber. This industry has few barriers to entry given its basic nature, and consequently there’s been a myriad of new, primarily Asian, operators seeking global ambitions over the last 20 years or so. The arrival of initially the Japanese, Korean, Taiwanese etc has slowly eaten-away at the once dominant market-shares of the likes of Europe’s Continental, Pirelli and America’s Goodyear etc.
During this period of increased competition the old-guard have sought to maintain margins by broadening product ranges and, critically re-positioning themselves as premium quality tyre producers for performance coupes/saloons and SUVs. Even so it was only a matter of time before fast-followers were encroaching and by 2005 Continental recognised it had to re-align its strategy by broadening its span of operations. Doing so by appreciating that the field of vehicles dynamics had radically altered over the last 10 years, the role of electronics playing a far greater role in vehicle safety and performance and so on-road behaviour – that was once the domain tyres relative to what were not so long ago antiquated suspension set-ups.
Of course the likes of anti-lock braking, collision warning, auto-brake, anti-roll control, hill-descent control, popularised four wheel drive and the return of four wheel steering (passive and proactive) have demonstrated that tyre-makers, as the previous gurus of vehicle control, have had to re-assess their position in the big scheme of things (ie encroaching basic tyre competitors and ever more prevalent involvement of vehicle electronics).
And needless to say, the rapid growth of BRIC nations (esp China) meant that local producers who have mastered what are basic tyre production technologies for western markets were ideally placed to satisfy local Asian demand for ‘commodity’ (ie cheap) products – leaving the sophisticated Europeans and Americans out in the cold.
To this end we have witnessed Continental seek new, critically important strategic directions, no doubt pushed for initially by its biggest share-holder, the new strategic formulae latterly appealing to recent others:
#1 Capital Group @ 5.10% (as of Oct 2003)
#2 Europacific Growth Fund @ 4.66% (as of Nov 2007)
#3 Barclays Bank @ 4.5% (as of July 2006)
#4 Marsico Capital Management @ 3.03% (as of Dec 2007)
#5 Axa Group @ 2.52% (as of March 2007)
#6 UBS AG @ 2.36% (as of Nov 2007)
One will immediately recognise that 3 of the 6 took their positions in Continental in late 2007, recognising the seismic change taking place and eager to buy at the then offered €101 per share – 14.6m shares offered – to provide €1.48bn capitalisation for continued M&A activities.
This was done on the back of reports that private equity had taken a substantial interest in Continental, but negotiations were mutually, unsuccessfully concluded. That PE catalyst proved to have problematic outcomes for the quick to jump institutional investors, as unfortunately, soon after company share-price dramatically faltered through Q407 on the back of US/European credit-crunch ripples affecting auto-demand and so component supplier order-books. Shares dropped from a €110 July high to a €73 low witnessed during the European auto-stock sell of last week. The recent new low – wiping over 25% off share-value, has come as a very unwelcome shock to the institutional investors – a low not seen since 18 months ago – so they will need confidence building by Continental to see a brighter longer term built upon a rapidly evolving Continental competence.
But for Continental, the end-October share-offer was timely indeed. Given its Q1-Q3 performance, or lack of relative to the DAX (-5.3%) and Dow Jones Euro-Stoxx Autos/Parts (-23.5%), the immediate market hype over the Siemens acquisition played out very well for the company!
It formed part of the financial foundations to action the Board’s (in our opinion late) realisation that it must broaden its philosophical sphere beyond tyres and traditional areas and onto being the Champion of Vehicle Dynamics, Route Positioning & In-Car Info-tainment.
To do so M&A has been the only real option, hence the additional share-offering - Continental purchasing Motorola’s Auto-Electronics Division ($1bn) and Siemens VDO (€11.4bn) – now both absorbed into the Automotive Systems Division; further bolstering a critical profit centre amongst the corporation’s 4 divisions:
1. Vehicle Systems Division (Elec & Hydraulic Brakes, Chassis & PT, Telematics, Elec-Drives, Body & Security, Aftermarket)
2. Passenger Car & Light Truck Tyres
3. Commercial Vehicle Tyres (Heavy Truck, Industrial & OTR Tyres)
4. ContiTech (Fluid, Air, NVH Control, Power Trans, Conveyer Belt, Elastomer Coatings)
[Additionally the Board sees that it must continue its conventional acquisition trail to essentially buy car and truck tyre market-share in Asia]
Of course historically Tyres has been the greatest Group contributor, but recent revenues in the Electronics arm now overtaking Tyres shows the importance of focusing on this sector and integrating Siemens to add down the road value (after post 2009 absorption) cannot be stressed enough. Reflecting that importance and impact, the Vehicle Systems Division will form the basis of 3 new divisions to aid efficiency:
A. Chassis & Safety
B. Powertrain
C. Interior
Although the star of the future, and newly crowned primary contributor, for the first three quarters of 2007 Automotive Systems was well out-performed in terms of earnings improvement by its less glamorous Car Tyre and ContiTech divisions, only losing out in growth stakes to a heavily set-back Truck Tyres. A seemingly lack-lustre growth performance was undoubtedly affected by the need to massively alter its operational shape to absorb Motorola and prepare for Siemens integration, as the fiscal information demonstrates:
Division / Revenue / YoY Improvement
Auto-Systems / €5,011.7m / 3.0%
Car Tyres / €3,646.6m / 62.1%
Truck Tyres / €1,069.9m / -3.9%
ContiTech / €2,810.7m / 12%
The effects of these figures demonstrated (in Q307 Results) a solid but frustratingly slow growth period in terms of sales (+€975.2m), improved earnings (+€165.8m) primarily gained through cost-efficiency initiatives; EPS up from €4.51 to €5.63
Of course although Continental like so many Auto-sector players has been “unfairly punished” by stock-market sentiment recently, the fundamentals of the business appear to be solid, and presently at the early days of what should be much improved revenue and earnings stream, specifically from the recent additions to the Auto-Systems division.
Western Tier1s and 2s have long recognised they must move further up the value-chain to avoid competing and ultimately losing to newer Asian peers in low-value manufacturing. Continental’s ambitions are now being realised and although there will be much re-organisational upheavel going forward, the business is already starting to look better and leaner. The newly obtained, far improved, geographical and technological reach able to provide considerable operational and fiscal improvement.
Once metals, rubbers and hydraulics ruled the auto-manufacture paradigm, but over the last decade, and with an exponential rise into the future, electronics are the new value-added 'fiscal core' of automobile module and parts supply. Continental is proving itself as a continued diversifier from old world rubber and hydraulics based realms to new-age electronic-centric platforms. The next step from there will be customer needs recognition (very much ruled by the parameters brand-attributes) and associative R&D expansion derived from marrying such 'similar-customer-enabling' to the ever demanded economies of scale.
Wednesday, 30 January 2008
Tuesday, 29 January 2008
Company Focus – PSA – Streiff-ing Forward
Christian Streiff has undoubtedly made waves since joining the car-maker from Airbus Industrie in early 2007. As a surprise appointment, coming from outside the auto-sector, and having to follow in the footsteps of much liked Jean-Martin Folz, he had a reputation for tackling the thorny issues involved in business turnaround scenarios and succeeding; even if it meant ruffling management and staff feathers in the process. But then radical action rarely comes without a price.
This week’s Economist critiques his man-management abilities, stating that what was once a compulsive ‘task-orientation’ has, through a period of reflection, expanded to include the softer people skills that are required when dealing with the likes of the Peugeot family (as Chair and V-C) and their substantial stake-holding and, of course, influence.
2006 saw the second-year faltering of PSA compared to what had been nigh-on glorious previous years as it maintained essentially flat revenue as a Group. Thus, FY06 results were painful for management and analysts alike; the non-core divisions providing decent results to support the PSA mass. Sales (like Revenue) stayed virtually flat with a 2.7% drop in W.Europe and 20% drop in ROW CKDs balanced by 15% rise in ROW fully assembled vehicles. Of course beyond primary operating issues such as Fixed (Plant) Costs and Variable (Labour) Costs, 2006 saw PSA’s vehicle average-age rise to 4.5 years and even with discounting to reduce inventory and maintain capacity, car-buyers were reacting, knowing new models (esp 207, C4 Picasso & LCVs) were to follow shortly.
Critical to expanding the product pipeline through 2007 has been JV operations with FIAT in LCVs and Mitsubishi for the C-Crossover/4007 AWD. And noticeable is PSA leverage of Spanish production facilities in Vigo (its biggest plant) and Madrid for MPV and niche products, taking advantage of the recent Spanish economic downturn.
Unsurprisingly, the good news of 2006 was the volume ramp-up in China up 44% over FY05 (141K units to 202.5K). This Dongfeng JV (amongst all of its co-operative agreements: Sevel, TPCA, BMW/Ford PT) is undoubtedly the operation to watch so as to gauge the level of continued local market reaction and subsequent success PSA can expect in China’s very competitive compact and mid-size car segments.
Soon we see the FY07 results and the achievements against targets outlined a year before. Streiff will have been keen to super-charge the pace of change within the Group and its 5 main divisions (Peugeot-Citroen Autos, Banque PSA Finance, Gefco, Faurecia & Others). Promises of a much improved 2007 were made across many fronts, specifically:
A. Plant cost reduction with closure of Ryton (+€90m on fixed costs) and ramp-up of Trnava (+€60m start-up costs) and announced Kaluga, Russian plant (+€300m CapEx)
B. Improving vehicle quality assisting warranty costs
C. Targeting €600m of manufacturing cost reduction.
D. Major improvement of the product pipeline & model mix
The last of which was to provide a massive leap in Auto Division Operating Margin. Since H205 PSA has produced very distressing Op Margin results, major falls ‘bottoming out’ in H206, with promise of a €105m ‘pull-up’ in H107 and a €100m rise in H207, leaving end of year Op Margin at a (long-last) positive €50m.
The 2007 expected negatives were the ever topical rises in raw material costs (esp aluminium & platinum) and a PSA relatively lowly 94% Capacity Utilization (though actually regarded as good in industry terms, especially when seen against the major plant changes taking place).
Undoubtedly the new products that appeared through 2007 (esp delayed 207, the 308, Tepee/Berlingo etc) will have a major effect on earnings. But one cannot help but question to what degree the late arrival of the all important 207 was internally ‘managed’ to create what would theoretically be a blockbuster 2007 with new B and B/C segment cars arriving as a near duo? Not necessarily a bad thing given that an earlier launch would not have had such an impact and presumably the delay assisting in quality engineering and future warranty cost reduction.
Whilst PSA has been ‘streamlining’ the engineering and marketing of its core vehicle portfolio, we like the fact that it has endeavoured to produce and follow-up more innovative products such as the successful compact family vans (Berlingo/Tepee) and the – we think- underrated 1007.
The 1007 may appear at first odd, as a shorted regular car, but we suspect that it is the result of seeking not only new product directions but platform possibilities too. If we are correct, PSA has essentially build a highly modular base car that can be easily stretched to provide either 2+2, 4 or 6 seater variants, the latter essentially a light, small people carrier so familiar to the emerging market demands of hi-capacity seating and flexible, practical interiors. Thus investment professionals should question PSA more deeply about this vehicle and look far closer at the permutations and possibilities this car may give, providing we think, many may consumer and commercial variants, and could be used as a lynch-pin as a highly cost/parts efficient element of future product strategies. We think learning from this car (and further similar R&D) is the basis for what the PSA Board has described as a “highly innovative concept that’s focused on time to market”.
PSA has, through plant re-locations, re-newed domestic labour agreements, maintained capacity (through the extended run-out of older cars), JV exploitation, Asian parts sourcing etc etc, managed to set a new path forward. Exactly what the first FY07 results of that new path look like, we’ll have to wait.
The H107 Interim Report demonstrated slightly reduced worldwide volume sales YoY, but improved revenue by €1,725m. This provided a Net Income of €182m.
CapEx YoY was reduced whilst generated Working Capital from Operations improved.
Relative to investors, Streiff has been somewhat canny is as much as equally focusing on the longer-term with his 2010-2015 Ambition, thereby asking stakeholders to look beyond the under-competitive present to a far brighter tomorrow. In the mean time he has to get there with CAP2010 - reaching a desired 3% margin through a 10% rise in European sales and 100% rise in BRIC+ sales. Altogther reaching a 'magic' 4m volume total (adding 300K to 2006 volumes). Done so with 18 model renewals and 5 additional line-up extensions. And undoubtedly their C02 credentials assisting as the (presently) leading Green VM. But PSA is noticeably late to Russia and India, though an additional Chinese JV currently being negotiated does off-set this apparent disadvantage. However, the question remains "has PSA lost critical early ground in what are lucrative, though feasibly slowing, emerging regions?"
Product appeal, and the efficacy of its development and manufacture, is of course the key in moulding a sustainable, fast-reacting, low-cost high-margin company. PSA demonstrated its abilities when further integrating Peugeot & Citroen during the 1990s – infact it’s lean, dynamic engineering development operations were set as global benchmarks at the time in extracting the most product and brand value from the least component variability. CAP2010 must strenghthen such fundamentals to the once strong PSA of innovative independence so as to deliver a sound business base with technical and market longevity.
This week’s Economist critiques his man-management abilities, stating that what was once a compulsive ‘task-orientation’ has, through a period of reflection, expanded to include the softer people skills that are required when dealing with the likes of the Peugeot family (as Chair and V-C) and their substantial stake-holding and, of course, influence.
2006 saw the second-year faltering of PSA compared to what had been nigh-on glorious previous years as it maintained essentially flat revenue as a Group. Thus, FY06 results were painful for management and analysts alike; the non-core divisions providing decent results to support the PSA mass. Sales (like Revenue) stayed virtually flat with a 2.7% drop in W.Europe and 20% drop in ROW CKDs balanced by 15% rise in ROW fully assembled vehicles. Of course beyond primary operating issues such as Fixed (Plant) Costs and Variable (Labour) Costs, 2006 saw PSA’s vehicle average-age rise to 4.5 years and even with discounting to reduce inventory and maintain capacity, car-buyers were reacting, knowing new models (esp 207, C4 Picasso & LCVs) were to follow shortly.
Critical to expanding the product pipeline through 2007 has been JV operations with FIAT in LCVs and Mitsubishi for the C-Crossover/4007 AWD. And noticeable is PSA leverage of Spanish production facilities in Vigo (its biggest plant) and Madrid for MPV and niche products, taking advantage of the recent Spanish economic downturn.
Unsurprisingly, the good news of 2006 was the volume ramp-up in China up 44% over FY05 (141K units to 202.5K). This Dongfeng JV (amongst all of its co-operative agreements: Sevel, TPCA, BMW/Ford PT) is undoubtedly the operation to watch so as to gauge the level of continued local market reaction and subsequent success PSA can expect in China’s very competitive compact and mid-size car segments.
Soon we see the FY07 results and the achievements against targets outlined a year before. Streiff will have been keen to super-charge the pace of change within the Group and its 5 main divisions (Peugeot-Citroen Autos, Banque PSA Finance, Gefco, Faurecia & Others). Promises of a much improved 2007 were made across many fronts, specifically:
A. Plant cost reduction with closure of Ryton (+€90m on fixed costs) and ramp-up of Trnava (+€60m start-up costs) and announced Kaluga, Russian plant (+€300m CapEx)
B. Improving vehicle quality assisting warranty costs
C. Targeting €600m of manufacturing cost reduction.
D. Major improvement of the product pipeline & model mix
The last of which was to provide a massive leap in Auto Division Operating Margin. Since H205 PSA has produced very distressing Op Margin results, major falls ‘bottoming out’ in H206, with promise of a €105m ‘pull-up’ in H107 and a €100m rise in H207, leaving end of year Op Margin at a (long-last) positive €50m.
The 2007 expected negatives were the ever topical rises in raw material costs (esp aluminium & platinum) and a PSA relatively lowly 94% Capacity Utilization (though actually regarded as good in industry terms, especially when seen against the major plant changes taking place).
Undoubtedly the new products that appeared through 2007 (esp delayed 207, the 308, Tepee/Berlingo etc) will have a major effect on earnings. But one cannot help but question to what degree the late arrival of the all important 207 was internally ‘managed’ to create what would theoretically be a blockbuster 2007 with new B and B/C segment cars arriving as a near duo? Not necessarily a bad thing given that an earlier launch would not have had such an impact and presumably the delay assisting in quality engineering and future warranty cost reduction.
Whilst PSA has been ‘streamlining’ the engineering and marketing of its core vehicle portfolio, we like the fact that it has endeavoured to produce and follow-up more innovative products such as the successful compact family vans (Berlingo/Tepee) and the – we think- underrated 1007.
The 1007 may appear at first odd, as a shorted regular car, but we suspect that it is the result of seeking not only new product directions but platform possibilities too. If we are correct, PSA has essentially build a highly modular base car that can be easily stretched to provide either 2+2, 4 or 6 seater variants, the latter essentially a light, small people carrier so familiar to the emerging market demands of hi-capacity seating and flexible, practical interiors. Thus investment professionals should question PSA more deeply about this vehicle and look far closer at the permutations and possibilities this car may give, providing we think, many may consumer and commercial variants, and could be used as a lynch-pin as a highly cost/parts efficient element of future product strategies. We think learning from this car (and further similar R&D) is the basis for what the PSA Board has described as a “highly innovative concept that’s focused on time to market”.
PSA has, through plant re-locations, re-newed domestic labour agreements, maintained capacity (through the extended run-out of older cars), JV exploitation, Asian parts sourcing etc etc, managed to set a new path forward. Exactly what the first FY07 results of that new path look like, we’ll have to wait.
The H107 Interim Report demonstrated slightly reduced worldwide volume sales YoY, but improved revenue by €1,725m. This provided a Net Income of €182m.
CapEx YoY was reduced whilst generated Working Capital from Operations improved.
Relative to investors, Streiff has been somewhat canny is as much as equally focusing on the longer-term with his 2010-2015 Ambition, thereby asking stakeholders to look beyond the under-competitive present to a far brighter tomorrow. In the mean time he has to get there with CAP2010 - reaching a desired 3% margin through a 10% rise in European sales and 100% rise in BRIC+ sales. Altogther reaching a 'magic' 4m volume total (adding 300K to 2006 volumes). Done so with 18 model renewals and 5 additional line-up extensions. And undoubtedly their C02 credentials assisting as the (presently) leading Green VM. But PSA is noticeably late to Russia and India, though an additional Chinese JV currently being negotiated does off-set this apparent disadvantage. However, the question remains "has PSA lost critical early ground in what are lucrative, though feasibly slowing, emerging regions?"
Product appeal, and the efficacy of its development and manufacture, is of course the key in moulding a sustainable, fast-reacting, low-cost high-margin company. PSA demonstrated its abilities when further integrating Peugeot & Citroen during the 1990s – infact it’s lean, dynamic engineering development operations were set as global benchmarks at the time in extracting the most product and brand value from the least component variability. CAP2010 must strenghthen such fundamentals to the once strong PSA of innovative independence so as to deliver a sound business base with technical and market longevity.
Monday, 28 January 2008
Company Focus – FIAT Group – “Free at Last, We are [Debt] Free at Last!”
Sergio Marchionne is an inveterate imaginative, charming and hard-headed performer during financial reporting calls; and the timeliness of Martin Luther King Day allowed a topical reporting title. The respect from investment bank and equities houses’ analysts is clear given his ability see the very big picture that is FIAT Group aswell as specific divisional details…but then of course that’s his job as has been his tendency to beat earnings guidance. Equally that of analysts is to best deconstruct financial reporting to get to the nub of understanding the shape and future performance of FIAT, especially so given the company’s size and multiple divisions.
And of course the corporation is one to watch, many wondering whether Marchionne can maintain the growth patterns of recent years. From €-9.4bn debt to €400m cash surplus between FY04 and FY07, a massive €7.5bn attained from disposals, providing a 04-07 CAGR of 8.7%. This lightened group entity to maintain continued traction through 2008 and beyond; intended through:
1. Division operational improvement (NCH/Agriculture & Construction & FPT),
2. Product renewel (Mass & Luxury FIAT Auto) & Iveco Trucks
3. US geographical expansion (Alfa-Romeo & Iveco ‘piggy-backing’ NCH)
4. ‘On track’ performance from Components (FPT, Marelli, Teksid, Comau etc)
But what of those reported figures? Of course the spot-lighted issue was the de-shackling of debt and associated costs, but that wasn’t really the surprise given the revenue levels. Especially over 2007 and the big Q4 push across all sectors to get FY figures into impressive double-digit territory. The big question looking forward was just how much was going to be turned over to enriching CapEx spending vs cushioning Cash Reserves, given evident pressure in such competitive sectors, the need to ride the credit-crunch and the desire to regain that all important investment-grade status from the likes of Moodys, S&P etc. (A sore point with the CEO)
So at this time of corporate celebration, the stock-market fall-out over the last week has hit auto-stocks given the reliance on consumer credit and sentiment, but Marchionne firmly believes FIAT’s suffering was underserved. Given turnaround performance and spread of the Group’s business portfolio. We think that he has a major point, but as ever stock-market sentiment doesn’t immediately absorb critical data and rationalise corporate fundamentals, at times of concern it just systemically reacts. Fortunately the FIAT financials re-charged company stock, new confidence stemming from:
- Group revenues up 13% to €59bn (much thanks to Autos)
- Trading Profit up 66% to €3.2bn
- 5.5% FY07 Trading Margin vs 3.8% FY06
- achieved €300m cost-down target in spite of raw material cost increases
- nearly €7bn liquidity (€426m via 07 share buyback)
- a new high of 2.2m units for FIAT Auto (best since 2000 & Euro #5)
- a 33% jump in volumes at Iveco
- 20 new products at CNH Agriculture & Construction
- record volume at FPT with 3.1m engines & 2.2m transmissions.
Given the stresses and strains of the automotive sector these are credible performances, and the level of detail in the reporting presentation (with special focus on 3 year traction) was given to underline the good work achieved thus far. Marchionne knows that analyst and market sentiment has been severely dented by economic prospects and wanting to demonstrate FIAT’s divisional spread across many industrial sectors, not wholly reliant on one or two – unlike some counterparts.
It is evident that FIAT Auto has provided much of the Group impetus and lion’s share of contribution and so has attracted much of the attention. New vehicles (Grande Punto esp) winning European-wide acceptance as will new 500. But there is still heavy reliance on the Italian (60% sales) and Brazilian markets. Analysts are rightly concerned about the product cycle and mixes going forward, worried that FIAT may have peaked with Grande Punto & Bravo in terms of optimum margin-volume mix. New 500 will undoubtedly be a high volume seller (target of 190K units) the shared FIAT-Ford platform required to reduce both party’s CapEx in the project and maintain reasonable margins, but volume and options-pricing will be key for 500.
As for Brazil, optimism reigns with market leadership in cars and LCVs (at 26%) and buoyant local market demand (est 10% increase in 08) so the opportunity to ‘ride the wave’. But given so financiers want to see true value extraction from such bull markets. Adam Jonas at Morgan Stanley wanted to compare FIAT’s Brazilian unit margin to Ford’s at 15% (possibly centred on a re-vamped Ka). Comparison details weren’t forthcoming, we suspect because FIAT knows that Ford’s smaller vehicle portfolio is more ‘cost-containable’ with far less product variation, and on a competitive front appears more contemporary. (In Brazil FIAT looks for market coverage whilst Ford seeks a narrower, slightly more upscale focus). Hence Brazil is a battle-ground FIAT must focus on given Ford, Chevy, Renault, Honda, Toyota and of course VW. Although a heavyweight FIAT is we believed posed to lose ground to intense competition. One must ask exactly how much of the expanded +10% TIV will be secured amongst such credible peer products. FIAT must react quickly here to maintain FGA and the Group’s momentum. Older product and possible pricing incentives do not work in thriving economy with demanding consumers so rapid product replacement is highly desirable as we’ll see with Linea (in BRI regions).
Although not imminent, Alfa-Romeo’s US market re-entry will require perhaps greater detailed orchestration than previously planned. Introduced at what could be the trough of a US recession, consumers will consider new car purchases very carefully indeed, specifically servicing & resale value. So the excitement of new Alfa vs a traditional and prestige Euro provider (BMW 1 series, Audi A1) may be initially squashed by consumer reticence, higher Sales and Marketing overhead needed to achieve planned 1st year targets. FIAT obviously wishes to replicate Mini’s success in the US but the parental credibility of Fiat does not match BMW.
But to give credit where due, the distribution-network plans have been achieved 1 year ahead of schedule. 310 additionally signed up FIAT dealers in 07 (replacing 145 underperforming dealers) should provide ‘on the ground’ visibility and allow for a more meaningful potential consumer dialogue converted into new sales.
And the re-born Abarth name will undoubtedly add credibility to the FIAT brand, supporting a more sporting façade and with the ability to provide much improved margins on mainstream vehicle variants. As the link to Alfa-Romeo, we expect this initiative to pay dividends in a sector that in reality has lost, or diluted, the heritage rich European 1960s sporty marques such as Alpina or RS, modern-day Japanese competition and badges spiritual successors. We reserve judgement on the level of new sub-brand success, but the basic foundations are at least being built.
Ferrari’s performance of 45% improved trading profit drew questions given ‘only’ 11% volume rise and 15% revenue rise. Where exactly this additional income came from was unclear, speculation that Formula 1 TV rights contributed much. Maserati at long last broke into positive trading profit at €24m, the first time since 1993. Maserati has historically had massive upturns and downturns, but given the strength of the brand’s return it is in a good position for expansion, utilising both Alfa-Romeo and Ferrari technologies to gain economies and uniqueness in the luxury sector. (And apparently Ferrari-Maserati margins are fast approaching Porsche’s). Looking forward we would hope to see range extension plans for obviously a Cabrio, probably not so an SUV, and baby-Maser range of saloons and coupes in the same mould at lower price point, based on the A-R 169 platform, allowing Maserati and Alfa to squeeze the Germans from top and bottom
As for CNH (Case New Holland) it is undoubtedly benefiting from global agricultural investments and housing/commercial construction – the latter in most regions except the US. Marchionne recognises the future weakness of US construction so expect a mid-term focus on Agricultural efforts, especially as the question of expanded land use and scaling-up of farming continues driven by record grain prices for food stuffs and bio-fuel ambitions. The High powered large scale Combine Harvesters and Tractions well suited to the Big Farm trends we see in NA, China, Ex-Soviet states, Latin America, Eastern Asia and of course the expectancies of Africa. (Latin America +85% Combine Harvester sales) CNH giving a record dilutive EPS ever.
A similar success story for Iveco trucks, buoyant sectors (especially within Eastern Europe and Latin America) showing major strides in light and heavy trucks if not in medium. Margin targets were achieved at 7.3% within the broad 7.1-7.9% targets, even if at the lower end, so keeping to market expectancies. Trading profits (+50%) were derived from favourable markets and product quality/mix aswell as offering Green Euro-5 compliant engines 2 years ahead of requirement, assisting fleet operators to better stagger their own procurement needs and costs.
All of these contributing divisions and more, demonstrate that by keeping its broad Group portfolio of companies that FIAT has been in a prime position to benefit from global macro-economic and localised micro-market trends such as: the major push in global agricultural development, continued civil construction projects in EE, LA and Asia, Brazil’s economic wave (that is reported to keep going), this driving the demand for light and heavy commercial trucks, the switch by western car buyers to seek smaller, frugal, fashionable cars, the rise of Chinese & Indian automakers seeking expanded deals (as with Chery in PT/cars and TATA in the same).
Some might say the stars aligned for FIAT, other that Marchionne knows his game intimately and has pulled all the right levers to turn the corporation around. Comparitively FY08 sales are projected at about €60bn, which after a gain of 13% to €58.5 in FY07 doesn’t initially look overtly ambitious. However given the expected turbulence of western economies Marchionne’s target (given his track record) has attracted investor confidence as seen by the 8% stock jump soon after FIAT’s reporting. Although there are issues to be dealt with, perhaps more than ever auto-stock and bond investors see the broad, diversified yet synergistic, portfolio and specific regional and segment competitive advantages of FIAT as a safe harbour in very choppy waters.
This business ethos seems to have been forever the heart of the FIAT-Agnelli empire ideal....and for today and the medium term it is working admirably. "More of the same please" investors will undoubtedly be thinking.
And of course the corporation is one to watch, many wondering whether Marchionne can maintain the growth patterns of recent years. From €-9.4bn debt to €400m cash surplus between FY04 and FY07, a massive €7.5bn attained from disposals, providing a 04-07 CAGR of 8.7%. This lightened group entity to maintain continued traction through 2008 and beyond; intended through:
1. Division operational improvement (NCH/Agriculture & Construction & FPT),
2. Product renewel (Mass & Luxury FIAT Auto) & Iveco Trucks
3. US geographical expansion (Alfa-Romeo & Iveco ‘piggy-backing’ NCH)
4. ‘On track’ performance from Components (FPT, Marelli, Teksid, Comau etc)
But what of those reported figures? Of course the spot-lighted issue was the de-shackling of debt and associated costs, but that wasn’t really the surprise given the revenue levels. Especially over 2007 and the big Q4 push across all sectors to get FY figures into impressive double-digit territory. The big question looking forward was just how much was going to be turned over to enriching CapEx spending vs cushioning Cash Reserves, given evident pressure in such competitive sectors, the need to ride the credit-crunch and the desire to regain that all important investment-grade status from the likes of Moodys, S&P etc. (A sore point with the CEO)
So at this time of corporate celebration, the stock-market fall-out over the last week has hit auto-stocks given the reliance on consumer credit and sentiment, but Marchionne firmly believes FIAT’s suffering was underserved. Given turnaround performance and spread of the Group’s business portfolio. We think that he has a major point, but as ever stock-market sentiment doesn’t immediately absorb critical data and rationalise corporate fundamentals, at times of concern it just systemically reacts. Fortunately the FIAT financials re-charged company stock, new confidence stemming from:
- Group revenues up 13% to €59bn (much thanks to Autos)
- Trading Profit up 66% to €3.2bn
- 5.5% FY07 Trading Margin vs 3.8% FY06
- achieved €300m cost-down target in spite of raw material cost increases
- nearly €7bn liquidity (€426m via 07 share buyback)
- a new high of 2.2m units for FIAT Auto (best since 2000 & Euro #5)
- a 33% jump in volumes at Iveco
- 20 new products at CNH Agriculture & Construction
- record volume at FPT with 3.1m engines & 2.2m transmissions.
Given the stresses and strains of the automotive sector these are credible performances, and the level of detail in the reporting presentation (with special focus on 3 year traction) was given to underline the good work achieved thus far. Marchionne knows that analyst and market sentiment has been severely dented by economic prospects and wanting to demonstrate FIAT’s divisional spread across many industrial sectors, not wholly reliant on one or two – unlike some counterparts.
It is evident that FIAT Auto has provided much of the Group impetus and lion’s share of contribution and so has attracted much of the attention. New vehicles (Grande Punto esp) winning European-wide acceptance as will new 500. But there is still heavy reliance on the Italian (60% sales) and Brazilian markets. Analysts are rightly concerned about the product cycle and mixes going forward, worried that FIAT may have peaked with Grande Punto & Bravo in terms of optimum margin-volume mix. New 500 will undoubtedly be a high volume seller (target of 190K units) the shared FIAT-Ford platform required to reduce both party’s CapEx in the project and maintain reasonable margins, but volume and options-pricing will be key for 500.
As for Brazil, optimism reigns with market leadership in cars and LCVs (at 26%) and buoyant local market demand (est 10% increase in 08) so the opportunity to ‘ride the wave’. But given so financiers want to see true value extraction from such bull markets. Adam Jonas at Morgan Stanley wanted to compare FIAT’s Brazilian unit margin to Ford’s at 15% (possibly centred on a re-vamped Ka). Comparison details weren’t forthcoming, we suspect because FIAT knows that Ford’s smaller vehicle portfolio is more ‘cost-containable’ with far less product variation, and on a competitive front appears more contemporary. (In Brazil FIAT looks for market coverage whilst Ford seeks a narrower, slightly more upscale focus). Hence Brazil is a battle-ground FIAT must focus on given Ford, Chevy, Renault, Honda, Toyota and of course VW. Although a heavyweight FIAT is we believed posed to lose ground to intense competition. One must ask exactly how much of the expanded +10% TIV will be secured amongst such credible peer products. FIAT must react quickly here to maintain FGA and the Group’s momentum. Older product and possible pricing incentives do not work in thriving economy with demanding consumers so rapid product replacement is highly desirable as we’ll see with Linea (in BRI regions).
Although not imminent, Alfa-Romeo’s US market re-entry will require perhaps greater detailed orchestration than previously planned. Introduced at what could be the trough of a US recession, consumers will consider new car purchases very carefully indeed, specifically servicing & resale value. So the excitement of new Alfa vs a traditional and prestige Euro provider (BMW 1 series, Audi A1) may be initially squashed by consumer reticence, higher Sales and Marketing overhead needed to achieve planned 1st year targets. FIAT obviously wishes to replicate Mini’s success in the US but the parental credibility of Fiat does not match BMW.
But to give credit where due, the distribution-network plans have been achieved 1 year ahead of schedule. 310 additionally signed up FIAT dealers in 07 (replacing 145 underperforming dealers) should provide ‘on the ground’ visibility and allow for a more meaningful potential consumer dialogue converted into new sales.
And the re-born Abarth name will undoubtedly add credibility to the FIAT brand, supporting a more sporting façade and with the ability to provide much improved margins on mainstream vehicle variants. As the link to Alfa-Romeo, we expect this initiative to pay dividends in a sector that in reality has lost, or diluted, the heritage rich European 1960s sporty marques such as Alpina or RS, modern-day Japanese competition and badges spiritual successors. We reserve judgement on the level of new sub-brand success, but the basic foundations are at least being built.
Ferrari’s performance of 45% improved trading profit drew questions given ‘only’ 11% volume rise and 15% revenue rise. Where exactly this additional income came from was unclear, speculation that Formula 1 TV rights contributed much. Maserati at long last broke into positive trading profit at €24m, the first time since 1993. Maserati has historically had massive upturns and downturns, but given the strength of the brand’s return it is in a good position for expansion, utilising both Alfa-Romeo and Ferrari technologies to gain economies and uniqueness in the luxury sector. (And apparently Ferrari-Maserati margins are fast approaching Porsche’s). Looking forward we would hope to see range extension plans for obviously a Cabrio, probably not so an SUV, and baby-Maser range of saloons and coupes in the same mould at lower price point, based on the A-R 169 platform, allowing Maserati and Alfa to squeeze the Germans from top and bottom
As for CNH (Case New Holland) it is undoubtedly benefiting from global agricultural investments and housing/commercial construction – the latter in most regions except the US. Marchionne recognises the future weakness of US construction so expect a mid-term focus on Agricultural efforts, especially as the question of expanded land use and scaling-up of farming continues driven by record grain prices for food stuffs and bio-fuel ambitions. The High powered large scale Combine Harvesters and Tractions well suited to the Big Farm trends we see in NA, China, Ex-Soviet states, Latin America, Eastern Asia and of course the expectancies of Africa. (Latin America +85% Combine Harvester sales) CNH giving a record dilutive EPS ever.
A similar success story for Iveco trucks, buoyant sectors (especially within Eastern Europe and Latin America) showing major strides in light and heavy trucks if not in medium. Margin targets were achieved at 7.3% within the broad 7.1-7.9% targets, even if at the lower end, so keeping to market expectancies. Trading profits (+50%) were derived from favourable markets and product quality/mix aswell as offering Green Euro-5 compliant engines 2 years ahead of requirement, assisting fleet operators to better stagger their own procurement needs and costs.
All of these contributing divisions and more, demonstrate that by keeping its broad Group portfolio of companies that FIAT has been in a prime position to benefit from global macro-economic and localised micro-market trends such as: the major push in global agricultural development, continued civil construction projects in EE, LA and Asia, Brazil’s economic wave (that is reported to keep going), this driving the demand for light and heavy commercial trucks, the switch by western car buyers to seek smaller, frugal, fashionable cars, the rise of Chinese & Indian automakers seeking expanded deals (as with Chery in PT/cars and TATA in the same).
Some might say the stars aligned for FIAT, other that Marchionne knows his game intimately and has pulled all the right levers to turn the corporation around. Comparitively FY08 sales are projected at about €60bn, which after a gain of 13% to €58.5 in FY07 doesn’t initially look overtly ambitious. However given the expected turbulence of western economies Marchionne’s target (given his track record) has attracted investor confidence as seen by the 8% stock jump soon after FIAT’s reporting. Although there are issues to be dealt with, perhaps more than ever auto-stock and bond investors see the broad, diversified yet synergistic, portfolio and specific regional and segment competitive advantages of FIAT as a safe harbour in very choppy waters.
This business ethos seems to have been forever the heart of the FIAT-Agnelli empire ideal....and for today and the medium term it is working admirably. "More of the same please" investors will undoubtedly be thinking.
Thursday, 24 January 2008
Company Focus – Toyota (Motor) Corp vs General Motors Corp
Given GM’s 77 year hold over the title, the global #1 has encouraged perhaps over-enthusiastic coverage regards the “battle” between American and Japanese counterparts. Given GM’s recent woes, the badge of honour may mean more in corporate credibility terms than the oft touted idea of executive ego. And for Toyota, its release of a rounded 2007 sales figure of a basic 9.37m units; compared to GM’s specifically accurate 9,369,524. It’s a nice talking point, but the reality is about running a profitable, growing business, and the sales volume parallel pales massively when the Market Capitalisation of the 2 are considered - Toyota worth 10.5 times more than GM ( $152.07bn vs $14.5bn)
The financial data and key metrics tell all:
Metric GM($) vs Toyota($)
Sales 185.4bn vs 239.1bn
Income -40.8bn vs 17bn
Gross Profit Margin 13.91% vs 19.30%
Pre-Tax Margin -1.4% vs 10.1%
Net Profit Margin -22.05% vs 6.33%
Earnings/Share -65.48 vs 5.31
ROE -42.9 vs 15.5%
ROA -13.2 vs 5.0%
ROC -17.2 vs 8.1%
Of course these figures are the business and market interpretation of 2 very different entities, originating from 2 very different nations with 2 very different commercial cultures and 2 very different growth vs decline paths. Though it is easy to compare the headline basics the world’s 2 biggest auto-companies, in truth it is a futile exercise for those working within the industry or those looking to invest the companies. As ever, “god and the devil are in the detail”. And it is only at such an operational level that learning can be gained by either counterpart.
In very basic terms GM started from (then typical) big cars and the desire to satisfy the motoring masses of the US, and Toyota started from small cars and the wish to motorise Japan. Where as GM bought its way into new geographical markets through M&A (eg Adam Opel, Vauxhall, Holden), Toyota grew its way globally with suited vehicles (esp. Corolla) – the 2 automakers temporarily uniting in the early 80s US recession to create NUMMI.
Historically obvious contributions to the foundations of todays industry are:
GM’s development of the multi-brand product ladder aimed at alternative buyer types employing core platform engineering [central tenants for GM’s founder William Durant and hence its name].....&
Toyota’s concentration on production and product quality baring Kansai & Six Sigma and the development of Lean Production through Just-In-Time logistics.
Hence these two companies essentially set the 4 operational cornerstones of today’s auto-industry Relative to these firsts, “Quantity vs Quality” was the comparitor byword through the 1980s and ‘90s. However, such once perhaps all too true generalisations have been diminished over the last decade as both counterparts and all automakers adopted eachother’s best practices.
The rest of the story behind Toyota’s rise and GM’s decline hardly needs retelling; summed up in the words “Corolla”,“Camry”, “Lexus”, “Scion” and “70s Oil Crisis”, “80s unreliability”,”90s incurred costs”, “00s near collapse”. OK, these summaries are overtly simplistic, but they do demonstrate the very different management approaches and routeways that each company has trodden.
For Toyota it was successful products = successful business
For GM it was successful business = successful products.
This isn’t surprising given each company’s roots and linked contemporary cultures. The detail focus of Kiichiro Toyoda is today matched by the fervency of Katsuaki Watanabe. In comparison, the big picture appreciation of William Durant & Alfred P Sloane is just as evident in Rick Wagoner. Beyond culture, both are inextricably tied to their respective national politics, especially their country's position in the international scheme of things. From that context they have very different levels of political leverage on the global stage, the US and GM far more able.
Financial analysts pitch for Toyota as the more apparently, very obvious value-creation machine given a near perfect 50 year growth track record generated from product performance, market penetration and customer loyalty; the core Toyota attributes spanning Mainstream, Luxury and Small segments. As stated today’s financial figures are worth a thousand words. And pertinently Toyota has tried to be as self-supporting as possible, maintaining independence and growing its own sub-company and cross-holding network as supporting pillars of that endeavour.
In comparison GM has been the very antithesis, cyclically changing shape often to react to and befit changing US and global business conditions, and a major client of the US bulge bracket (and beyond) banking.
In truth the 2 are very very different beasts, driven by very very different national business cultures that prominently reflect the historic differences between East and West Capitalism.
GM has obviously worked wonders in re-developing global ambitions with efforts such as the Daewoo takeover to form GMDAT, Russian interests with Avtovaz, Chinese interests with Shanghai GM and Wuling GM.. The Japanese were slower in developing JV interests, only having done so on almost a project basis and opposed to business basis, hence later to partner with the likes of PSA on European small cars and legally necessarily with FAW Sichuan Toyota & FAW Tianjin Toyota - preferring to stay as independent as possible.
But what of the future?
Toyota although prodigious hasn’t ever rushed forward to grow, it’s late entry into BRIC+ regions evident and sometimes (wrongly) criticised. Those in the know, including itself, recognise that Toyota’s amazing reputation has preceded before it, as those emerging markets that all are keen to jump-into, have long been the domain of the 3rd/4th hand import Toyota, Nissan and Mitsubushi in the form of pick-ups, vans, mini-buses and cars. It was the durability of these vehicles that made Toyota’s name by the mid 80s in developing regions as far afield as the Baltics to Mozambique. LandCruiser dominating Land-Rover said it all in the extreme climate of Africa. So continued slow but meaningful product push will continue to be the lead business philosophy in the US and as slow but strong followers in BRIC+ regions. (Expect the Toyota low-cost car in development to provide both massive volume and major cost savings)
For GM perhaps a very different story. At this critical point in its history all possibilities must surely be places on the table and assessed. And perhaps the most radical is the reversal of Durrant’s ideology that brought many nameplates and companies together to for ‘The General’. Would it be inconceivable to break-up the giant into smaller, more distinct, regional or divisional parts? Indeed is that part of the ultimate game plan with the newly globalised Chervrolet playing a leading role? Small Cars made in Korea and India, Compact and Mid in China, Medium and X-Overs in the US etc? Creating a newly re-structures General that could be fragmented to create higher value off-spring. Perhaps…but there’s some time to go yet. Perhaps when we see the signs of such a truly ‘horizontal’ (not old vertical) strategy become apparent, and when the value chain behind such a will is streamlined, will we see dramatic turn of fortune in investor confidence and stock-price climb.
But what of the meantime, that intermediary period. What of the migration of Jim Press et al from Toyota America to GM NA? Could that be a sign of the 2 car-makers seeking a possible coalition through what will certainly be testing times for the American market. A NUMMI Part 2? Or less complex, other shared/dual badge-engineering vehicles, spiritual successors to the 1972 Chevy-Isuzu LUV pick-up. (Toyota still has a sharehold of Isuzu). Possibilities across all those vehicles with over-capacity vs segment demand cannot be ruled out.
There'll be much discussion in the Board rooms of Detroit and Nagoya.
The financial data and key metrics tell all:
Metric GM($) vs Toyota($)
Sales 185.4bn vs 239.1bn
Income -40.8bn vs 17bn
Gross Profit Margin 13.91% vs 19.30%
Pre-Tax Margin -1.4% vs 10.1%
Net Profit Margin -22.05% vs 6.33%
Earnings/Share -65.48 vs 5.31
ROE -42.9 vs 15.5%
ROA -13.2 vs 5.0%
ROC -17.2 vs 8.1%
Of course these figures are the business and market interpretation of 2 very different entities, originating from 2 very different nations with 2 very different commercial cultures and 2 very different growth vs decline paths. Though it is easy to compare the headline basics the world’s 2 biggest auto-companies, in truth it is a futile exercise for those working within the industry or those looking to invest the companies. As ever, “god and the devil are in the detail”. And it is only at such an operational level that learning can be gained by either counterpart.
In very basic terms GM started from (then typical) big cars and the desire to satisfy the motoring masses of the US, and Toyota started from small cars and the wish to motorise Japan. Where as GM bought its way into new geographical markets through M&A (eg Adam Opel, Vauxhall, Holden), Toyota grew its way globally with suited vehicles (esp. Corolla) – the 2 automakers temporarily uniting in the early 80s US recession to create NUMMI.
Historically obvious contributions to the foundations of todays industry are:
GM’s development of the multi-brand product ladder aimed at alternative buyer types employing core platform engineering [central tenants for GM’s founder William Durant and hence its name].....&
Toyota’s concentration on production and product quality baring Kansai & Six Sigma and the development of Lean Production through Just-In-Time logistics.
Hence these two companies essentially set the 4 operational cornerstones of today’s auto-industry Relative to these firsts, “Quantity vs Quality” was the comparitor byword through the 1980s and ‘90s. However, such once perhaps all too true generalisations have been diminished over the last decade as both counterparts and all automakers adopted eachother’s best practices.
The rest of the story behind Toyota’s rise and GM’s decline hardly needs retelling; summed up in the words “Corolla”,“Camry”, “Lexus”, “Scion” and “70s Oil Crisis”, “80s unreliability”,”90s incurred costs”, “00s near collapse”. OK, these summaries are overtly simplistic, but they do demonstrate the very different management approaches and routeways that each company has trodden.
For Toyota it was successful products = successful business
For GM it was successful business = successful products.
This isn’t surprising given each company’s roots and linked contemporary cultures. The detail focus of Kiichiro Toyoda is today matched by the fervency of Katsuaki Watanabe. In comparison, the big picture appreciation of William Durant & Alfred P Sloane is just as evident in Rick Wagoner. Beyond culture, both are inextricably tied to their respective national politics, especially their country's position in the international scheme of things. From that context they have very different levels of political leverage on the global stage, the US and GM far more able.
Financial analysts pitch for Toyota as the more apparently, very obvious value-creation machine given a near perfect 50 year growth track record generated from product performance, market penetration and customer loyalty; the core Toyota attributes spanning Mainstream, Luxury and Small segments. As stated today’s financial figures are worth a thousand words. And pertinently Toyota has tried to be as self-supporting as possible, maintaining independence and growing its own sub-company and cross-holding network as supporting pillars of that endeavour.
In comparison GM has been the very antithesis, cyclically changing shape often to react to and befit changing US and global business conditions, and a major client of the US bulge bracket (and beyond) banking.
In truth the 2 are very very different beasts, driven by very very different national business cultures that prominently reflect the historic differences between East and West Capitalism.
GM has obviously worked wonders in re-developing global ambitions with efforts such as the Daewoo takeover to form GMDAT, Russian interests with Avtovaz, Chinese interests with Shanghai GM and Wuling GM.. The Japanese were slower in developing JV interests, only having done so on almost a project basis and opposed to business basis, hence later to partner with the likes of PSA on European small cars and legally necessarily with FAW Sichuan Toyota & FAW Tianjin Toyota - preferring to stay as independent as possible.
But what of the future?
Toyota although prodigious hasn’t ever rushed forward to grow, it’s late entry into BRIC+ regions evident and sometimes (wrongly) criticised. Those in the know, including itself, recognise that Toyota’s amazing reputation has preceded before it, as those emerging markets that all are keen to jump-into, have long been the domain of the 3rd/4th hand import Toyota, Nissan and Mitsubushi in the form of pick-ups, vans, mini-buses and cars. It was the durability of these vehicles that made Toyota’s name by the mid 80s in developing regions as far afield as the Baltics to Mozambique. LandCruiser dominating Land-Rover said it all in the extreme climate of Africa. So continued slow but meaningful product push will continue to be the lead business philosophy in the US and as slow but strong followers in BRIC+ regions. (Expect the Toyota low-cost car in development to provide both massive volume and major cost savings)
For GM perhaps a very different story. At this critical point in its history all possibilities must surely be places on the table and assessed. And perhaps the most radical is the reversal of Durrant’s ideology that brought many nameplates and companies together to for ‘The General’. Would it be inconceivable to break-up the giant into smaller, more distinct, regional or divisional parts? Indeed is that part of the ultimate game plan with the newly globalised Chervrolet playing a leading role? Small Cars made in Korea and India, Compact and Mid in China, Medium and X-Overs in the US etc? Creating a newly re-structures General that could be fragmented to create higher value off-spring. Perhaps…but there’s some time to go yet. Perhaps when we see the signs of such a truly ‘horizontal’ (not old vertical) strategy become apparent, and when the value chain behind such a will is streamlined, will we see dramatic turn of fortune in investor confidence and stock-price climb.
But what of the meantime, that intermediary period. What of the migration of Jim Press et al from Toyota America to GM NA? Could that be a sign of the 2 car-makers seeking a possible coalition through what will certainly be testing times for the American market. A NUMMI Part 2? Or less complex, other shared/dual badge-engineering vehicles, spiritual successors to the 1972 Chevy-Isuzu LUV pick-up. (Toyota still has a sharehold of Isuzu). Possibilities across all those vehicles with over-capacity vs segment demand cannot be ruled out.
There'll be much discussion in the Board rooms of Detroit and Nagoya.
Wednesday, 23 January 2008
Macro-Level Trends – Global Auto-Economics - General Outlook
The last 5 years have witnessed a schism of industrial and economic growth between notionally ‘advanced’ and ‘emerging’ regions.
Triad stock markets managed to remain buoyant thanks to general cross-sector performance, corporate performance underpinned by retained profits (cash-building) in large-caps and liquidity access bulging the balance sheets of mid and small caps.. High M&A activity, contained labour costs and relaxed corporate tax policies all assisting in boosting margins and sentiment. But in the last 12-18 months cost-push inflation has made itself evident, Eastern demand for energy, commodities and raw materials sorely affecting Triad general overhead & production costs. Thankfully, these creeping costs were off-set by the other ‘inert’ variables mentioned; the general picture concerning but risk-manageable. Triad growth would have been judged ‘healthy’ under normal historical circumstances – above par infact.
Obviously however, the last 5 years has seen the rise and rise of the BRIC+ nations, massively out-performing ‘old-markets’ progress, and so the similar story rolls-on today….but since mid 2007, with far greater contrast.
Besides the massive knock-on effects of the credit-crunch – rapidly constraining previously highly reliant corp liquidity & dividends – in the same period we have seen yet further dramatic rises in energy and commodity prices thanks to an ever more fragile geo-political conditions (Russia, OPEC, Venezuela. [As stated in the previous web-post, the mantle of ‘oil power’ has massively shifted in the last decade]. This ‘bottom-up’, production-linked inflation has now been joined by a ‘top-down’, consumer-linked version driven by domestic energy and food costs, thereby severely affecting consumer durables demand such as automobiles – a major dampening effect exacerbated by the critical, reduced credit access that enables auto-purchase.
Hence economic fundamentals have over the last 2 Qtrs rapidly deteriorated, the spiralling consequences of which have been apparent with the new year stock-market hard-hitting sell-offs, first apparent on the NYSE & NASDAQ, and this week through European, Japanese and Asian bourses. Theoretically the world’s economic framework has been decoupled from the US and in self-supporting demand that seems true, but under the visible surface indicators of international trade and Balance of Payment flows, more than ever the sub-surface, invisibly integrated financial framework demonstrates the spiders-web that has undone BRIC+ confidence in the last few days.
The previously positive outlook of banking, enterprise and policy-advisory economists massively altered.
Whether the theoretical ramifications of yesterday’s Emergency Federal Reserve Bank interest rates cut to 3.5% (down 75 base-points) has the trickle-through desired, we’ll have to wait and see. And although it has seen immediate US market reaction (in house-building stocks etc) how it will plays out to cautious US consumers and nervous global markets is anyone’s guess.
In the meantime, we can’t help but remember Alan Greenspan’s prognosis of late ’06 that the mature West has peaked after 2 centuries of industrialisation, looking at a slow trend of decline, with the future effectively belonging to Asia. That slow trend will obviously have periodic plummets and returns of its own, as we’ve just experienced.
Prior to the new year panic that improvement was expected at FY09, the FY08 expected as the trough. The EIU/Economist provides the global GDP overview:
Region ’07 ’08 ‘09
US 3.8% 1.8% 2.6%
UK 3.0% 1.9% 2.2%
Euro 2.7% 1.8% 2.0%
M-E (Saudi) 4.5% 6.0% 5.6%
China 15.0% 10.1% 9.6%
India 8.9% 7.7% 7.2%
Asia (Korea) 5.3% 4.7% 4.7%
Japan 1.7% 1.4% 1.7%
The reality of that ’08 decline came sharply and more heavily, we suspect, than these December Forecast figures illustrate. The next 2 years promise to require yet greater commitment from national and international companies to apply ever more reactive, flexible, risk-aware management policies. If not a case of manning the life-boats (thanks to the Fed’s actions) it will be a case of throwing overboard non-core divisions, functions, product-lines etc to pair-down corporate vessel weight.
For large automakers the efficiency drives we’ve seen for so many years in this ever tightening climate continue; investing in top-end intellectual capital to help steer whilst off-loading unproductive assets, whether plant, labour etc in an attempt to maintain momentum and critically ROI, ROE and focus on EBIT and ROCE. Of course given the present financing climate those who need to seek additional funding may be shocked by the risk-premium and spread lenders seek even with the US$ rate cut.
But undeniably that major cut will encourage investment both domestically by the US “Big” 3 to a degree and “New Domestics” (Toyota, Hyundai, BMW etc) to a far greater degree who have surely been $ hoarding their US earnings to maximise their investment value at such a time. They will be watching to see if the Fed can maintain the new rate given the inflationary pressures previously mentioned.
The rest of the global economy - especially Japan and S. Korea - will be watching on.
In terms of regional and global volume growth, the forecasts provided in Q407 by the likes of Autofacts, Polk etc were looking over-optomistic given the new year sell-off shock. This week we previously expected a 3-5% global capacity and sales drop (US data already priced-in), but the re-newed optimism should (again) theoretically be felt and return confidence to Q407 expectations. However weak US fundamentals such as reported employment figures and retail sales (that account for 70% of US economic growth) could, if continued, once again undermine the regional and global TIV for automakers and their suppliers.
We will undoubtedly see another round of rationalisation, stretching from the US to Europe, Japan and ‘Chi-ndia’. This made all the more possible by the 3 party inter-continental alliances that seem to be order of the day; such as Chrysler-Chery-Fiat and possibly Chrysler?-Renault-Nissan.
Triad stock markets managed to remain buoyant thanks to general cross-sector performance, corporate performance underpinned by retained profits (cash-building) in large-caps and liquidity access bulging the balance sheets of mid and small caps.. High M&A activity, contained labour costs and relaxed corporate tax policies all assisting in boosting margins and sentiment. But in the last 12-18 months cost-push inflation has made itself evident, Eastern demand for energy, commodities and raw materials sorely affecting Triad general overhead & production costs. Thankfully, these creeping costs were off-set by the other ‘inert’ variables mentioned; the general picture concerning but risk-manageable. Triad growth would have been judged ‘healthy’ under normal historical circumstances – above par infact.
Obviously however, the last 5 years has seen the rise and rise of the BRIC+ nations, massively out-performing ‘old-markets’ progress, and so the similar story rolls-on today….but since mid 2007, with far greater contrast.
Besides the massive knock-on effects of the credit-crunch – rapidly constraining previously highly reliant corp liquidity & dividends – in the same period we have seen yet further dramatic rises in energy and commodity prices thanks to an ever more fragile geo-political conditions (Russia, OPEC, Venezuela. [As stated in the previous web-post, the mantle of ‘oil power’ has massively shifted in the last decade]. This ‘bottom-up’, production-linked inflation has now been joined by a ‘top-down’, consumer-linked version driven by domestic energy and food costs, thereby severely affecting consumer durables demand such as automobiles – a major dampening effect exacerbated by the critical, reduced credit access that enables auto-purchase.
Hence economic fundamentals have over the last 2 Qtrs rapidly deteriorated, the spiralling consequences of which have been apparent with the new year stock-market hard-hitting sell-offs, first apparent on the NYSE & NASDAQ, and this week through European, Japanese and Asian bourses. Theoretically the world’s economic framework has been decoupled from the US and in self-supporting demand that seems true, but under the visible surface indicators of international trade and Balance of Payment flows, more than ever the sub-surface, invisibly integrated financial framework demonstrates the spiders-web that has undone BRIC+ confidence in the last few days.
The previously positive outlook of banking, enterprise and policy-advisory economists massively altered.
Whether the theoretical ramifications of yesterday’s Emergency Federal Reserve Bank interest rates cut to 3.5% (down 75 base-points) has the trickle-through desired, we’ll have to wait and see. And although it has seen immediate US market reaction (in house-building stocks etc) how it will plays out to cautious US consumers and nervous global markets is anyone’s guess.
In the meantime, we can’t help but remember Alan Greenspan’s prognosis of late ’06 that the mature West has peaked after 2 centuries of industrialisation, looking at a slow trend of decline, with the future effectively belonging to Asia. That slow trend will obviously have periodic plummets and returns of its own, as we’ve just experienced.
Prior to the new year panic that improvement was expected at FY09, the FY08 expected as the trough. The EIU/Economist provides the global GDP overview:
Region ’07 ’08 ‘09
US 3.8% 1.8% 2.6%
UK 3.0% 1.9% 2.2%
Euro 2.7% 1.8% 2.0%
M-E (Saudi) 4.5% 6.0% 5.6%
China 15.0% 10.1% 9.6%
India 8.9% 7.7% 7.2%
Asia (Korea) 5.3% 4.7% 4.7%
Japan 1.7% 1.4% 1.7%
The reality of that ’08 decline came sharply and more heavily, we suspect, than these December Forecast figures illustrate. The next 2 years promise to require yet greater commitment from national and international companies to apply ever more reactive, flexible, risk-aware management policies. If not a case of manning the life-boats (thanks to the Fed’s actions) it will be a case of throwing overboard non-core divisions, functions, product-lines etc to pair-down corporate vessel weight.
For large automakers the efficiency drives we’ve seen for so many years in this ever tightening climate continue; investing in top-end intellectual capital to help steer whilst off-loading unproductive assets, whether plant, labour etc in an attempt to maintain momentum and critically ROI, ROE and focus on EBIT and ROCE. Of course given the present financing climate those who need to seek additional funding may be shocked by the risk-premium and spread lenders seek even with the US$ rate cut.
But undeniably that major cut will encourage investment both domestically by the US “Big” 3 to a degree and “New Domestics” (Toyota, Hyundai, BMW etc) to a far greater degree who have surely been $ hoarding their US earnings to maximise their investment value at such a time. They will be watching to see if the Fed can maintain the new rate given the inflationary pressures previously mentioned.
The rest of the global economy - especially Japan and S. Korea - will be watching on.
In terms of regional and global volume growth, the forecasts provided in Q407 by the likes of Autofacts, Polk etc were looking over-optomistic given the new year sell-off shock. This week we previously expected a 3-5% global capacity and sales drop (US data already priced-in), but the re-newed optimism should (again) theoretically be felt and return confidence to Q407 expectations. However weak US fundamentals such as reported employment figures and retail sales (that account for 70% of US economic growth) could, if continued, once again undermine the regional and global TIV for automakers and their suppliers.
We will undoubtedly see another round of rationalisation, stretching from the US to Europe, Japan and ‘Chi-ndia’. This made all the more possible by the 3 party inter-continental alliances that seem to be order of the day; such as Chrysler-Chery-Fiat and possibly Chrysler?-Renault-Nissan.
Tuesday, 22 January 2008
Industry Structure – Israel – Piloting to 100,000 EVs.
To pessimistic ears ‘Project Better Place’ sounds like the title of a Sci-Fi movie or ecological high-school campaign. But that easily remembered catch-all name sums up the basic philosophy of the Palo Alto software entrepreneur Shai Agassi. A man on a mission to advance the cause and viability of the electric car, to be hopefully achieved through the ‘prove-out’ of his Californian sourced “L-ion” (lithium-ion) batteries
The news of his ambition, strengthened by a Renault-Nissan/PBP alliance, has spread like wildfire through the general and industry press since the Israeli government announced its intentions to aid the eco-venture to the tune of an initial $200m, so as to create an electric re-charge infrastructure (through either on-street posts or re-charge stations - probably linked to conventional fuel stations) and create an economic environment of consumer goodwill.
Obviously an ‘at cost’ business model, which would charge buyers the very expensive full value of L-ion technology would dramatically fail. To overcome this hurdle Agassi has adopted the ‘cell-phone’ business model which charges the consumer a monthly amount based on usage (mileage), similar to the call minutes philosophy of network providers. Thus the technology is effectively subsidized and made available at a fraction of production cost and a variable based usage revenue absorbs the initial high fixed technology cost.
The key is a business focus on infrastructure & usage rather than product; a version of the much lauded ‘service-value’ pricing model that has gained cross-industry interest, as opposed to a ‘product-value’ pricing model. The foundations of the business ideology is reaching an expanded, continuous, downstream revenue stream.
Of course, given Israel’s governmental encouragement (taxation incentives as directed subsidies) the business model can’t be yet said to be wholly viable, the Public-Private-Partnership approach key to its creation and development as opposed to the stand or fall of free-market economics So judging the immediate viability of the business in what are unaligned consumer and cost conditions isn’t the point. The point is to nurture a new automotive chapter that could, in time, have large-scale global ramifications for big, 'self-contained' conurbations and close satellite townships.
Everyone recognises that the very point of the commercial exercise is to act as a pilot programme to study, amend and create the (socio-technological) basis for ultimately a financially viable, indeed revenue maximising, business case. One that allows for a copy+ regime of spin-off ventures around the world.
Of course the political dimension for Israel is not lost on anyone. The energy security agenda of western governments is a high priority, as is reliance on what have been near record real oil prices. Israel’s obvious broader geo-politics reside with what is a domestically highly-networked set of close cities along the coastline (Hefa, Netanya, Tel-Aviv, Ashqelon) and an inland sizeable Jerusalem together spanning much of the 7 million population. Given that the round trip between Tel-Aviv & Jerusalem is only 75 miles, the (stated) 125 mile battery range should prove itself.
PBP’s major investor is Idan Ofer (of Israel Corp fame) who’s put-up $100m to obviously explore new energy related opportunities beyond his oil shipping & refining core interests. Also, ex-World Bank President James D Wolfesohn has taken a minority stake.
As an alternative energy automotive test bed, many parties will be interested in watching the roll-out, whether they be:
1. VMs (obviously R-N, but including China’s Chery)
2. Metro-Access Charge Cities (eg London, New York, Paris, Singapore, (LA)
3. Oil / New Energy Companies (eg BP ‘Beyond Petrolium)
For VM’s the issue of technology viability, longevity and cost is key to assessing the broader uptake. For Metro-Access Charge Cities it will be the real-world travel patterns & infrastructure costs. And for Oil/New Energy Cos it will be the efficiency of what is conventionally called the ‘well to wheel’ cost chain; now possibly titled ‘plant to propshaft’. [Today the vast majority of drill-worthy oil reserves are held by non US national oil companies, so they must seek additional non-oil-derived energy businesses].
And one should not forget that this ‘future vehicle’ exercise centred on electricity is set against a broad western energy policy (from the US to UK to France and Australia) that favours the development of new ‘clean generation’ nuclear power plants that will provide a sizeable portion of each country’s energy needs for the next 30 years & beyond; the stations themselves born from state energy security directives.
Much will of course depend on vehicle uptake and credibility – these reliant upon the Israeli government, Renault-Nissan and PBP’s successfully managing the 3 way balancing act of: economic rationale, consumer desirability and core-tech reliability.
Whilst the auto-industry has witnessed, and sometimes craeted, many off the wall, fly-by-night innovations, this deeply considered test-bed venture could very well set the basic tenants for an additional possibility for inter-urban vehicle usage in the 21st century.
Edwardian auto-engineers often believed Electric Cars superior to their petrol counter-parts, but the external factors such petrol’s availability & convenience won the day. Over one hundred years on they may look-down from above and eventually see their long wished for credible infrastructure put into place.
So the final word goes to Agassi himself (expecting to make 100,000 units): “the Israelis can control the externalities and give it a chance to flourish or fail”. All will most definitely watch intently.
The news of his ambition, strengthened by a Renault-Nissan/PBP alliance, has spread like wildfire through the general and industry press since the Israeli government announced its intentions to aid the eco-venture to the tune of an initial $200m, so as to create an electric re-charge infrastructure (through either on-street posts or re-charge stations - probably linked to conventional fuel stations) and create an economic environment of consumer goodwill.
Obviously an ‘at cost’ business model, which would charge buyers the very expensive full value of L-ion technology would dramatically fail. To overcome this hurdle Agassi has adopted the ‘cell-phone’ business model which charges the consumer a monthly amount based on usage (mileage), similar to the call minutes philosophy of network providers. Thus the technology is effectively subsidized and made available at a fraction of production cost and a variable based usage revenue absorbs the initial high fixed technology cost.
The key is a business focus on infrastructure & usage rather than product; a version of the much lauded ‘service-value’ pricing model that has gained cross-industry interest, as opposed to a ‘product-value’ pricing model. The foundations of the business ideology is reaching an expanded, continuous, downstream revenue stream.
Of course, given Israel’s governmental encouragement (taxation incentives as directed subsidies) the business model can’t be yet said to be wholly viable, the Public-Private-Partnership approach key to its creation and development as opposed to the stand or fall of free-market economics So judging the immediate viability of the business in what are unaligned consumer and cost conditions isn’t the point. The point is to nurture a new automotive chapter that could, in time, have large-scale global ramifications for big, 'self-contained' conurbations and close satellite townships.
Everyone recognises that the very point of the commercial exercise is to act as a pilot programme to study, amend and create the (socio-technological) basis for ultimately a financially viable, indeed revenue maximising, business case. One that allows for a copy+ regime of spin-off ventures around the world.
Of course the political dimension for Israel is not lost on anyone. The energy security agenda of western governments is a high priority, as is reliance on what have been near record real oil prices. Israel’s obvious broader geo-politics reside with what is a domestically highly-networked set of close cities along the coastline (Hefa, Netanya, Tel-Aviv, Ashqelon) and an inland sizeable Jerusalem together spanning much of the 7 million population. Given that the round trip between Tel-Aviv & Jerusalem is only 75 miles, the (stated) 125 mile battery range should prove itself.
PBP’s major investor is Idan Ofer (of Israel Corp fame) who’s put-up $100m to obviously explore new energy related opportunities beyond his oil shipping & refining core interests. Also, ex-World Bank President James D Wolfesohn has taken a minority stake.
As an alternative energy automotive test bed, many parties will be interested in watching the roll-out, whether they be:
1. VMs (obviously R-N, but including China’s Chery)
2. Metro-Access Charge Cities (eg London, New York, Paris, Singapore, (LA)
3. Oil / New Energy Companies (eg BP ‘Beyond Petrolium)
For VM’s the issue of technology viability, longevity and cost is key to assessing the broader uptake. For Metro-Access Charge Cities it will be the real-world travel patterns & infrastructure costs. And for Oil/New Energy Cos it will be the efficiency of what is conventionally called the ‘well to wheel’ cost chain; now possibly titled ‘plant to propshaft’. [Today the vast majority of drill-worthy oil reserves are held by non US national oil companies, so they must seek additional non-oil-derived energy businesses].
And one should not forget that this ‘future vehicle’ exercise centred on electricity is set against a broad western energy policy (from the US to UK to France and Australia) that favours the development of new ‘clean generation’ nuclear power plants that will provide a sizeable portion of each country’s energy needs for the next 30 years & beyond; the stations themselves born from state energy security directives.
Much will of course depend on vehicle uptake and credibility – these reliant upon the Israeli government, Renault-Nissan and PBP’s successfully managing the 3 way balancing act of: economic rationale, consumer desirability and core-tech reliability.
Whilst the auto-industry has witnessed, and sometimes craeted, many off the wall, fly-by-night innovations, this deeply considered test-bed venture could very well set the basic tenants for an additional possibility for inter-urban vehicle usage in the 21st century.
Edwardian auto-engineers often believed Electric Cars superior to their petrol counter-parts, but the external factors such petrol’s availability & convenience won the day. Over one hundred years on they may look-down from above and eventually see their long wished for credible infrastructure put into place.
So the final word goes to Agassi himself (expecting to make 100,000 units): “the Israelis can control the externalities and give it a chance to flourish or fail”. All will most definitely watch intently.
Monday, 21 January 2008
Macro-Economic Trends – Europe - Capital Funding & Expenditure in Turbulent Times
Top of mind for Boards and CFOs are undoubtedly the prominent economic issues of: Credit Squeeze and Cost-Push Inflation. These dramatically affect Capital Expenditure and Operational Cash Flow plans. Central Banks recognise this and have sought to alleviate the pressure on industry and the possibility of a downward (fear induced) fiscal spiral through injected liquidity. Additionally, working with government(s) to seek inflation restraint policies to avoid the very real possibility of a hard-landing, lengthier recession.
The expanding effects of what was originally considered a localised US credit-crunch are making themselves more apparent globally, as the complexity and international reach of structured investment vehicles (such as collateralised debt obligations) have become apparent; whether from Australian municipal investments to broader Asian commercial paper and at every debt tranche, from Grade A, to Second Lien, to Mezzanine to their original roots in High Yield.
Rapid transparency has been encouraged to maintain market confidence, after the shocks of the US’s Fannie May and UK’s Northern Rock and the major write-downs for the likes of Citi and Merrill Lynch. Banking and market commentators are keen to ratify that much of the discount process has been undertaken, 'proven' by the recent stake-buying of foreign Sovereign Wealth Funds and other private equity interests. So seen to be trading at below historic P/E, the western banks, now going through rapid organisational contraction, are often cited as general value stocks, growth dependent on short vs long term Bond Yield curves/margins and of course sound new lending policies.
That means that once operational efficiencies are implemented there will be room to generate improved margins. Given present stock-market fragility, such margins are seen to derive from general retail banking (as an ever cautious public decides to save) and fixed income (as debt providers and corporate bond brokers); the auto-makers obvious clients.
Both the publicly listed and privately held automotive sector companies have experienced general investor caution given the ramifications of business model credit reliance and consumer's employment confidence. This lack of business traction witnessed by the 20% and 5-9% drop in US and European automotive share prices (respectively) have led to tremors in the sector, some analysts commenting that there's been an over-reaction providing new investment opportunities. We think there are such opportunities given dilligent research.
Having secured long-term funding throughout 2006/7 the US Big 3 have undoubtedly escaped the worst of the credit-crunch consequences. Although much of their funding was secured with (for them) the unusual need of asset backed securitization, the structured deals made then (rates & clauses) will no doubt look ‘ameniable’ relative to the undoubted likelihood of higher cost borrowing if the banking sector is to rise again. Those costs may well be born by the many US tier1, 2 & 3 suppliers that have yet to formalise re-structuring; putting ever greater strain on their already surpressed business models given automaker cost-down pressures and materials/currency headwinds.
So it seems that the US Big 3 have escaped the worst by securing their CapEx and Ops Funding early, what does this mean for their European peers?
European news of late has been mixed given initial thoughts that it might escape the downturn. But injected ECB liquidity to prop-up the markets, given a strong Euro and increasing European banking exposure to SIVs/CDOs, did little to quell worries, instead small but persistant stock sell-offs further threatening the outlook, which in turn have prompted calls for an ECB rate cut.
As far as specific lenders are concerned, ultimately a contrasting set of mortgage debt-default winners and losers will become apparent and we’ll see accordant lending policies & rates emerge; dependent on individual level of write-downs and level of reliance on flagging US, UK and Eurozone economies. Those banks with stronger balance sheets may look to either maintain a conservative lending policy or seek to out-compete their wounded rivals, but given the major slow-down in corporate borrowing (largely due to far reduced M&A activity) the banking sector will be hunting for new fixed-income sales, Automakers will be waiting to see what may be on offer, but we suspect that of the future deals done we’ll see many more ‘debt for equity swap’ made between those stronger (on par valued) banks and any weakened (undervalued) auto-makers. The weakened banks may well seek-out those VMs with higher FCF to directly service any higher return deals, perhaps attracting VMs who don't wish to see their own share-holding dilution. Watch this space.
Now to basically preview the positions of the European automakers:
French auto-producers, although theoretically well placed as low CO2 car-makers, have come under pressure to rationalise. A falling French domestic demand and relatively strong Euro have hurt profits, also tempered by the inflation rises in what were previously attractive lower cost EU production regions such as Spain and E.Europe. The strong voice of Sarkozy’s and his cabinet have subtly been questioning the benefits of French industrial unification. Part of that, whether a Renault-PSA agreement of sorts could both drive component purchase efficiencies, assist French suppliers in scaling-up volume (eg PSA’s Faurecia & Gefco), and help assist in reaching 'equilibrium' with labour costs (As seen with the new pay agreement signed on 18.01.08). As for the funding climate, both Streiff at PSA and Ghosn at Renault have set out their plans to reach 5.5-6% and 9% margins by 2010. Given that much of that expansion will continue to come from emerging markets, and the expected higher cost of long-term Euro-sourced financing at 4% - 5% if the ECB turns from monetary dove to hawk), we would not be surprised if such projects are funded locally through JV partners to access lower cost funds. Or more likely utlise dual currency agreements. This would allow an offset of current Euro strength (though declining) vs probable local currency relative weaknesses. As with the possible PSA-Mitsubishi deal for a new Russian factory, access to Mitsubishi sourced Yen funding would seem credible depending on Yen-Rubel Futures figures.
For Renault, perhaps a similar story, seeking independent or dual funding deals between it’s historic lenders (BNP-Paribas/Credit Agricole/Calyon & Societe Generale/) and Chinese, Russian, Indian, Mexican etc banks.[Given the similar knock-down to hit French banking we suspect that government will expect some national banking involvement in foreign investment projects given the national/regional economy’s direct interest].
But, if dovish, the ECB’s muted rate cut should be good news for domestic investment impetus, the recent labour agreements helping to secure a new platform of confidence in French industry after so much labour concern in recent times. We expect that domestic investment to come in the form of expanded high-value R&D activities and possibly lower CapEx/ higher variable cost manual intensive niche car build lines to endeavour to buoy French VM brand credibility in the face of ever intensive German, Japanese and Korean competition.
In Germany, real worries concern the export dent from the beginnings of the generally agreed US recession. BMW, Mercedes and VW/Audi are rightly worried about not only unit volume drop, but a maintained weak $ policy which obviously erodes margins with the forex pressure. Although the muted ECB rate reduction (to possibly 3.5%) would deflate the Euro, the luxury makers specifically must now seek alternatives. Given US market importance, the obvious ideal is the expansion of localised lower cost, $ paid parts sourcing and production. VW’s decision to join BMW & Daimler with a US plant of its own expected in April; though we suspect given its US market aspirations the decision simply needs rubber-stamping at that time. Without the plant ambitions “to take on Toyota” and reach 1m US sales by 2018 looks empty indeed..
As cut-backs are made at home to reign in costs (such as BMW’s 8,000 redundancy package) and the possibility of further VW cuts given present Porsche AG power, the German VMs are unsurprisingly looking to protect their US share and expand BRIC+ share, believing that any European market shrinkage can be off-set. Thus once again the strong Euro is the prime factor in seeking funding paths for US & BRIC+ projects; especially given political pressure to extend the use of the Euro as a globally acceptable currency on par with the $ (very unlikely at present, but that will probably not stop political efforts).
For VW it may once again soon caught between the intentions of Porsche and Government, given a recently announced draft legislation designed to overcome the abolished ‘VW Law’ (protecting regional labour interests) that gave Porsche far more commercial flexibility but diminished local government rights. If the white paper looks to be gaining favour, VW-Porsche management will have only a finite timeframe in which to act if it wishes further rationalisation before an eventual Bill is passed. Many think that the airing of the draft is simply to curry voter favour, the reality of conversion small given the European Court ruling – VW-Porsche must certainly hope so, but if it does appear to carry weight (via an economically disenfranchised electorate) then management will seek to maximise change as soon as possible, and that would have funding ramifications (eg extended voluntary redundancy payments) under a shrinkage of Wolfsburg activities and possible translocation of plant to foreign shores.
For Italy, the revived FIAT shows the way forward for automaker reform, much on the back of past GM involvement & recent Ford collaboration and its focus on "Neo-Liberal" emerging economies. Investors are happy with progress, but seek continued value-extraction given the Chery engine & vehicle production alliance, the all important future re-entry into the US, aswell as the benefits accrued from the Ergom acquisition and Severstal links. Given FIAT’s organic and geographic growth position and small to luxury brand stable we imagine FIAT will continue to be a favourably viewed for the underwriting of fixed income, debt-equity swaps, additional stock floats and continued M&A.
Although ahead of the auto-crowd, CEO Marchionne recognises and makes public the need to speed up the re-construction of Alfa Romeo if it is to fulfil its global potential and contribute proficiently to the bottom line. Given the undoubted heavy expenditure on this initiative (inter-related to the re-born Abarth brand) we would hope to see detailed plans and updates on Alfa’s ongoing CapEx long-term demands (such as corporate-owned US dealerships) and more immediate evident a ramp-up of US market-entry ‘re-launch’ needs (as illustrated by the 8C supercar release).
All in all, these are undoubtedly tougher times for many European automakers to demonstrate their future earnings potential, much of which is expected to come from expansion beyond the Euro-zone, primarily in US & BRIC+ markets.
The funding of what are often ambitiously touted expansion plans will in this 'cold funding climate' may demand conservative re-appraisal, requiring far more business plan and risk management details. The historic reality of such (smaller scale) initiatives have often been driven by over-optimistic ideas regards speed of implementation and captured growth, Fiat’s previous efforts are prime case studies, by which they will have learned.
The major difference today of course is the stabilisation of what were once highly promising but ultimately economically volatile markets Globalisation seems to have come, the theory ironically proven by Eastern growth and Western Contraction.
Within that environment, liquidity for a time, may be scarce for all but the best credit-rated organisations and even for them with more stringent conditions. Whilst many US and European banks re-build their ‘written-down’ balance sheets and Eastern SWFs come to their aid, it looks ever more certain that the European VMs will need to dip further into their own current asset / cash reserves for immediate expenditure, until banks settle once again. Not necessarily a bad thing given the related boost of confidence such action theoretically show and of course this method far reduces the cost of borrowing, notionally developing a stronger mid-term balance sheet.
Important will be the maintained US$ & Euro valuation differential, given that much of the overseas expansion will be paid for in US Dollars, possibly more advantageous now than ever, even with the US revenue headwinds, depending on the size of the CapEx 'bet'.
And there-in is the age-old dilemma and rub - the paradoxical need to conservatively present bigger pay-off bets to automakers themselves and their current and future investors.
The expanding effects of what was originally considered a localised US credit-crunch are making themselves more apparent globally, as the complexity and international reach of structured investment vehicles (such as collateralised debt obligations) have become apparent; whether from Australian municipal investments to broader Asian commercial paper and at every debt tranche, from Grade A, to Second Lien, to Mezzanine to their original roots in High Yield.
Rapid transparency has been encouraged to maintain market confidence, after the shocks of the US’s Fannie May and UK’s Northern Rock and the major write-downs for the likes of Citi and Merrill Lynch. Banking and market commentators are keen to ratify that much of the discount process has been undertaken, 'proven' by the recent stake-buying of foreign Sovereign Wealth Funds and other private equity interests. So seen to be trading at below historic P/E, the western banks, now going through rapid organisational contraction, are often cited as general value stocks, growth dependent on short vs long term Bond Yield curves/margins and of course sound new lending policies.
That means that once operational efficiencies are implemented there will be room to generate improved margins. Given present stock-market fragility, such margins are seen to derive from general retail banking (as an ever cautious public decides to save) and fixed income (as debt providers and corporate bond brokers); the auto-makers obvious clients.
Both the publicly listed and privately held automotive sector companies have experienced general investor caution given the ramifications of business model credit reliance and consumer's employment confidence. This lack of business traction witnessed by the 20% and 5-9% drop in US and European automotive share prices (respectively) have led to tremors in the sector, some analysts commenting that there's been an over-reaction providing new investment opportunities. We think there are such opportunities given dilligent research.
Having secured long-term funding throughout 2006/7 the US Big 3 have undoubtedly escaped the worst of the credit-crunch consequences. Although much of their funding was secured with (for them) the unusual need of asset backed securitization, the structured deals made then (rates & clauses) will no doubt look ‘ameniable’ relative to the undoubted likelihood of higher cost borrowing if the banking sector is to rise again. Those costs may well be born by the many US tier1, 2 & 3 suppliers that have yet to formalise re-structuring; putting ever greater strain on their already surpressed business models given automaker cost-down pressures and materials/currency headwinds.
So it seems that the US Big 3 have escaped the worst by securing their CapEx and Ops Funding early, what does this mean for their European peers?
European news of late has been mixed given initial thoughts that it might escape the downturn. But injected ECB liquidity to prop-up the markets, given a strong Euro and increasing European banking exposure to SIVs/CDOs, did little to quell worries, instead small but persistant stock sell-offs further threatening the outlook, which in turn have prompted calls for an ECB rate cut.
As far as specific lenders are concerned, ultimately a contrasting set of mortgage debt-default winners and losers will become apparent and we’ll see accordant lending policies & rates emerge; dependent on individual level of write-downs and level of reliance on flagging US, UK and Eurozone economies. Those banks with stronger balance sheets may look to either maintain a conservative lending policy or seek to out-compete their wounded rivals, but given the major slow-down in corporate borrowing (largely due to far reduced M&A activity) the banking sector will be hunting for new fixed-income sales, Automakers will be waiting to see what may be on offer, but we suspect that of the future deals done we’ll see many more ‘debt for equity swap’ made between those stronger (on par valued) banks and any weakened (undervalued) auto-makers. The weakened banks may well seek-out those VMs with higher FCF to directly service any higher return deals, perhaps attracting VMs who don't wish to see their own share-holding dilution. Watch this space.
Now to basically preview the positions of the European automakers:
French auto-producers, although theoretically well placed as low CO2 car-makers, have come under pressure to rationalise. A falling French domestic demand and relatively strong Euro have hurt profits, also tempered by the inflation rises in what were previously attractive lower cost EU production regions such as Spain and E.Europe. The strong voice of Sarkozy’s and his cabinet have subtly been questioning the benefits of French industrial unification. Part of that, whether a Renault-PSA agreement of sorts could both drive component purchase efficiencies, assist French suppliers in scaling-up volume (eg PSA’s Faurecia & Gefco), and help assist in reaching 'equilibrium' with labour costs (As seen with the new pay agreement signed on 18.01.08). As for the funding climate, both Streiff at PSA and Ghosn at Renault have set out their plans to reach 5.5-6% and 9% margins by 2010. Given that much of that expansion will continue to come from emerging markets, and the expected higher cost of long-term Euro-sourced financing at 4% - 5% if the ECB turns from monetary dove to hawk), we would not be surprised if such projects are funded locally through JV partners to access lower cost funds. Or more likely utlise dual currency agreements. This would allow an offset of current Euro strength (though declining) vs probable local currency relative weaknesses. As with the possible PSA-Mitsubishi deal for a new Russian factory, access to Mitsubishi sourced Yen funding would seem credible depending on Yen-Rubel Futures figures.
For Renault, perhaps a similar story, seeking independent or dual funding deals between it’s historic lenders (BNP-Paribas/Credit Agricole/Calyon & Societe Generale/) and Chinese, Russian, Indian, Mexican etc banks.[Given the similar knock-down to hit French banking we suspect that government will expect some national banking involvement in foreign investment projects given the national/regional economy’s direct interest].
But, if dovish, the ECB’s muted rate cut should be good news for domestic investment impetus, the recent labour agreements helping to secure a new platform of confidence in French industry after so much labour concern in recent times. We expect that domestic investment to come in the form of expanded high-value R&D activities and possibly lower CapEx/ higher variable cost manual intensive niche car build lines to endeavour to buoy French VM brand credibility in the face of ever intensive German, Japanese and Korean competition.
In Germany, real worries concern the export dent from the beginnings of the generally agreed US recession. BMW, Mercedes and VW/Audi are rightly worried about not only unit volume drop, but a maintained weak $ policy which obviously erodes margins with the forex pressure. Although the muted ECB rate reduction (to possibly 3.5%) would deflate the Euro, the luxury makers specifically must now seek alternatives. Given US market importance, the obvious ideal is the expansion of localised lower cost, $ paid parts sourcing and production. VW’s decision to join BMW & Daimler with a US plant of its own expected in April; though we suspect given its US market aspirations the decision simply needs rubber-stamping at that time. Without the plant ambitions “to take on Toyota” and reach 1m US sales by 2018 looks empty indeed..
As cut-backs are made at home to reign in costs (such as BMW’s 8,000 redundancy package) and the possibility of further VW cuts given present Porsche AG power, the German VMs are unsurprisingly looking to protect their US share and expand BRIC+ share, believing that any European market shrinkage can be off-set. Thus once again the strong Euro is the prime factor in seeking funding paths for US & BRIC+ projects; especially given political pressure to extend the use of the Euro as a globally acceptable currency on par with the $ (very unlikely at present, but that will probably not stop political efforts).
For VW it may once again soon caught between the intentions of Porsche and Government, given a recently announced draft legislation designed to overcome the abolished ‘VW Law’ (protecting regional labour interests) that gave Porsche far more commercial flexibility but diminished local government rights. If the white paper looks to be gaining favour, VW-Porsche management will have only a finite timeframe in which to act if it wishes further rationalisation before an eventual Bill is passed. Many think that the airing of the draft is simply to curry voter favour, the reality of conversion small given the European Court ruling – VW-Porsche must certainly hope so, but if it does appear to carry weight (via an economically disenfranchised electorate) then management will seek to maximise change as soon as possible, and that would have funding ramifications (eg extended voluntary redundancy payments) under a shrinkage of Wolfsburg activities and possible translocation of plant to foreign shores.
For Italy, the revived FIAT shows the way forward for automaker reform, much on the back of past GM involvement & recent Ford collaboration and its focus on "Neo-Liberal" emerging economies. Investors are happy with progress, but seek continued value-extraction given the Chery engine & vehicle production alliance, the all important future re-entry into the US, aswell as the benefits accrued from the Ergom acquisition and Severstal links. Given FIAT’s organic and geographic growth position and small to luxury brand stable we imagine FIAT will continue to be a favourably viewed for the underwriting of fixed income, debt-equity swaps, additional stock floats and continued M&A.
Although ahead of the auto-crowd, CEO Marchionne recognises and makes public the need to speed up the re-construction of Alfa Romeo if it is to fulfil its global potential and contribute proficiently to the bottom line. Given the undoubted heavy expenditure on this initiative (inter-related to the re-born Abarth brand) we would hope to see detailed plans and updates on Alfa’s ongoing CapEx long-term demands (such as corporate-owned US dealerships) and more immediate evident a ramp-up of US market-entry ‘re-launch’ needs (as illustrated by the 8C supercar release).
All in all, these are undoubtedly tougher times for many European automakers to demonstrate their future earnings potential, much of which is expected to come from expansion beyond the Euro-zone, primarily in US & BRIC+ markets.
The funding of what are often ambitiously touted expansion plans will in this 'cold funding climate' may demand conservative re-appraisal, requiring far more business plan and risk management details. The historic reality of such (smaller scale) initiatives have often been driven by over-optimistic ideas regards speed of implementation and captured growth, Fiat’s previous efforts are prime case studies, by which they will have learned.
The major difference today of course is the stabilisation of what were once highly promising but ultimately economically volatile markets Globalisation seems to have come, the theory ironically proven by Eastern growth and Western Contraction.
Within that environment, liquidity for a time, may be scarce for all but the best credit-rated organisations and even for them with more stringent conditions. Whilst many US and European banks re-build their ‘written-down’ balance sheets and Eastern SWFs come to their aid, it looks ever more certain that the European VMs will need to dip further into their own current asset / cash reserves for immediate expenditure, until banks settle once again. Not necessarily a bad thing given the related boost of confidence such action theoretically show and of course this method far reduces the cost of borrowing, notionally developing a stronger mid-term balance sheet.
Important will be the maintained US$ & Euro valuation differential, given that much of the overseas expansion will be paid for in US Dollars, possibly more advantageous now than ever, even with the US revenue headwinds, depending on the size of the CapEx 'bet'.
And there-in is the age-old dilemma and rub - the paradoxical need to conservatively present bigger pay-off bets to automakers themselves and their current and future investors.
Thursday, 17 January 2008
Company Focus – Ford at NAIAS ’08: The Explorer of New Models?
Something new, pertinent and powerful was hoped for from Ford at this year's Detroit 2008. At first glance the Verve compact and New Explorer concept don't appear to be the Big Punch; but look deeper at the latter and Ford appears to have subtley risen to the occaission. It demonstrates the mission to bridge the obvious “Explorer Chasm” that has hit it so hard in recent years. But possibly more so, if intellectually deconstructed, the concept attempts to explore the central tenents of the traditional automotive business case. 2 Explorer Models.
With regard to the vehicle itself, Dearborne has taken best ingredients of the ‘old skool’ SUV, reduced the fat-content, and instilled diet-conscious features. Essentially, an ‘Explorer Lite’, fulfilling the new-age masses’ need for big-car security, fuel efficiency and reduced carbon footprint.
Looking at the impetus behind the design strategy, Ford clearly wants to correlate the familial DNA of a new Explorer to that of the prestigious solid appeal of the Land Rover Discovery leaving the Ford brand stable. Just as it seeks to earn from L-R’s sale to TATA, so it wishes to, very wisely, retain a subtle visual Land Rover effect for ever aspirant mainstream buyers. [eg proud arches, clamshell hood, recessed side-glass] Exploiting the similarities doesn’t end with styling. Given the advanced construction materials & techniques incorporated into the LR3 Disco, a great deal of weight-saving engineering should be directly transferable between the closely related (but in parts materially different) Land-Rover T5 base and Ford U2 platform.
Exchange what are in industry terms archaic engines with a family of 30% more efficient ‘Ecoboost’ types, replace portions of the previously steel exterior skin panels with composite/LW steel versions and update the driveline system with a higher tolerance, reduced energy-loss replacement, and latterly a hybrid unit, and the making of a re-born modern classic is evident.
Thus Ford product planners have been intelligent enough to wring (metaphorically and literally) every ounce of brand, technical and cash-flow value out of Land Rover, using the extract as the re-launch catalyst for what was previously their biggest earner to potentially re-earn its crown.
Ford recognises that the public – American especially – prefers big cars when socially-economically viable, and so have endeavoured to provide an optimal solution.
But for Ford, this new car also encompasses more than genetic homage to Discovery. We believe the 2003 Ford Model U concept (a landmark philosophical statement) also serves to inject engineering elements into New Explorer, the basis and consequences of which reach into the very core of Ford's downstream and upstream Operations:
1. Technically:
For example through the possibility of exploiting bio-derived cellulose technology for specific skin panels.[This extraction process also features this year at Detroit for use as an alternative fuel-type with the GM-Coskata agreement. Could such an extraction process when massively scaled up provide both materials and fuel? Much R&D to be done, but the proposition is theoretically feasible].
2. Fundamentally:
Model U, just as with the original Model T, is we understand far more than simply a car. Like its spiritual predessor, it is a product derived from re-considering the conventional auto-maker’s business model. Looking at the reason d'etre for alternative material applications and the associated logistics chain, looking at the fundamentals of vehicle assembly and looking at altering the conventional purchase process.
So although New Explorer appears on the surface to be simply a mild concept vehicle, the technical, marketing and critically business-case ramifications could be prolific.
It demonstrates that behind the scenes at Ford, senior management has thought deeply indeed about how to creatively yet robustly structure the value-chain of the company. New Explorer highlights a willingness to best utilise and re-formulate transferable intellectual advantage (from in this case Land Rover), but perhaps “New Explorer” is not simply a vehicle moniker, but reflects the inherent management ideology of a “New Ford”.
That means looking beyond convention, to new horizons, possibilities and partners when seeking New Value Creation. As we’ve previously stated, we expect Ford and TATA to maintain close collaboration, and we suspect Ford will encourage TATA (and possibly assist) to fund continued high-value Land Rover R&D so that both partners can exploit that all important SUV/CUV technical trickle-down for many years to come.
But that looks to be just one thread of a re-shaped corporation that, potentially, could set a rapid pace of commercial change for volume auto-makers.
“New Explorer” = “New Ford” - Modern interpretations of classic themes?
With regard to the vehicle itself, Dearborne has taken best ingredients of the ‘old skool’ SUV, reduced the fat-content, and instilled diet-conscious features. Essentially, an ‘Explorer Lite’, fulfilling the new-age masses’ need for big-car security, fuel efficiency and reduced carbon footprint.
Looking at the impetus behind the design strategy, Ford clearly wants to correlate the familial DNA of a new Explorer to that of the prestigious solid appeal of the Land Rover Discovery leaving the Ford brand stable. Just as it seeks to earn from L-R’s sale to TATA, so it wishes to, very wisely, retain a subtle visual Land Rover effect for ever aspirant mainstream buyers. [eg proud arches, clamshell hood, recessed side-glass] Exploiting the similarities doesn’t end with styling. Given the advanced construction materials & techniques incorporated into the LR3 Disco, a great deal of weight-saving engineering should be directly transferable between the closely related (but in parts materially different) Land-Rover T5 base and Ford U2 platform.
Exchange what are in industry terms archaic engines with a family of 30% more efficient ‘Ecoboost’ types, replace portions of the previously steel exterior skin panels with composite/LW steel versions and update the driveline system with a higher tolerance, reduced energy-loss replacement, and latterly a hybrid unit, and the making of a re-born modern classic is evident.
Thus Ford product planners have been intelligent enough to wring (metaphorically and literally) every ounce of brand, technical and cash-flow value out of Land Rover, using the extract as the re-launch catalyst for what was previously their biggest earner to potentially re-earn its crown.
Ford recognises that the public – American especially – prefers big cars when socially-economically viable, and so have endeavoured to provide an optimal solution.
But for Ford, this new car also encompasses more than genetic homage to Discovery. We believe the 2003 Ford Model U concept (a landmark philosophical statement) also serves to inject engineering elements into New Explorer, the basis and consequences of which reach into the very core of Ford's downstream and upstream Operations:
1. Technically:
For example through the possibility of exploiting bio-derived cellulose technology for specific skin panels.[This extraction process also features this year at Detroit for use as an alternative fuel-type with the GM-Coskata agreement. Could such an extraction process when massively scaled up provide both materials and fuel? Much R&D to be done, but the proposition is theoretically feasible].
2. Fundamentally:
Model U, just as with the original Model T, is we understand far more than simply a car. Like its spiritual predessor, it is a product derived from re-considering the conventional auto-maker’s business model. Looking at the reason d'etre for alternative material applications and the associated logistics chain, looking at the fundamentals of vehicle assembly and looking at altering the conventional purchase process.
So although New Explorer appears on the surface to be simply a mild concept vehicle, the technical, marketing and critically business-case ramifications could be prolific.
It demonstrates that behind the scenes at Ford, senior management has thought deeply indeed about how to creatively yet robustly structure the value-chain of the company. New Explorer highlights a willingness to best utilise and re-formulate transferable intellectual advantage (from in this case Land Rover), but perhaps “New Explorer” is not simply a vehicle moniker, but reflects the inherent management ideology of a “New Ford”.
That means looking beyond convention, to new horizons, possibilities and partners when seeking New Value Creation. As we’ve previously stated, we expect Ford and TATA to maintain close collaboration, and we suspect Ford will encourage TATA (and possibly assist) to fund continued high-value Land Rover R&D so that both partners can exploit that all important SUV/CUV technical trickle-down for many years to come.
But that looks to be just one thread of a re-shaped corporation that, potentially, could set a rapid pace of commercial change for volume auto-makers.
“New Explorer” = “New Ford” - Modern interpretations of classic themes?
Wednesday, 16 January 2008
Company Focus – Hyundai Kia Automotive Group – Brokering New Futures?
After a long, quiet period of what seemed suspended animation, the Hyundai Kia Automotive Group appears ‘back on the boil’. Implementing the conglomerate’s new era strategy was obviously dependent on the official outcome of its chairman’s fortunes.
For much of 2007 the South Korean public, Seoul stock-market and the auto-industry at large, have all waited to see exactly what future role Chung Mong-Koo would play. His role was undeniable, simply whether having to orchestrate from afar, or lead from the front. The September outcome was an expected one, witnessing his ‘freedom to rule’ underpinning a fresh sense of ambition exemplified by:
1. the target of a 20% rise in sales for 2008
2. the planned purchase of a 30% Shinhueng Securities stake.
The new sales targets, aiming to grow from 3.97m units to 4.8m, demonstrate the pace of change Hyundai Motor management believe is required to get back on track, the additional units coming from new Chinese and India plants coming on stream in what are recognised as primary markets. These come after previous highly successful plant investments in the US, Turkey and Slovakia.
Hyundai recognising some time ago that a “Japanese Quality-Korean Price” growth strategy was fundamental to the massive US market where domestic automakers where failing to provide lower-priced quality cars and for emerging markets where it could undercut Japanese marques and quickly gain a following. To this end the auto-industry essentially watched with wonder as the company rode this near perfect business model, becoming the 6th largest global VM.
But it wasn’t an easy ride. The 1997 Tiger economy crash and the domestic slowdown that followed demonstrated the need to export quality cars. And as the well managed domestic economy thrived once again South Korea became a proportionately more expensive country to produce in and export from; Hyundai faced with rising domestic overhead, across the board production costs given China’s exacerbation of Asian materials, energy etc demand and a strengthening Won. This lead to a tightening of local plant operations which dismayed Korean workers causing ultimately little affect strike action. Actually assisting the company by deflating production capacity and inventory. However, these combined challenges simply drove Hyundai to seek globally efficient production, localised production in major markets linked to regional research & engineering centres to ensure the catering of consumer tastes and to network with the local component supply base to avoid currency fluctuation problems and grow buyer-supplier relationships.
Today Hyundai’s achievements are self-evident, especially so in the US where it has achieved high consumer survey rankings year after year for more and more vehicle types. The initial 1980s baptism of fire in the US and continued tenacity there has created the learning and foundations for international spread. So as the tried and tested ‘glocalisation’ model marches onward it seems that the company’s senior staff are perhaps looking beyond the perfecting of car-making to other powerful business solutions to enhance corporate strength; especially so given Chinese and Indian ambitions to follow rapidly in their footsteps.
Given Korea’s industrial foundation in electronics (ie Samsung, LG etc) and a historical chaebol culture (though much divided after 1997) the country's long distinct competitive advantage over its Asian peers has been the field of electronics and semi-conductors. Relative to auto-electronics, whilst Hyundai does not profess itself to be further advanced than the Big 6 VMs in areas such as the development of Whole Vehicle Electronic Architecture (eg Canbus) / Genaral Telematics / Intelligent Transport Systems / Advanced Power Systems (eg 42V); given the essential core competence of Korea as an electronics hub and leader, these – long-awaited - breakthrough technologies could potentially be first made real by Hyundai. Yes it may have fallen behind from the likes of GM with OnStar and Ford with Sync technologies, but could the company leverage the electronics intellect of the nation to radically advance the electronic ‘consumer delivery’ content of its vehicles?
As mentioned, the once powerful chaebol network is today ‘fractured’. But if Hyundai Motor’s ambitions reflect our conjecture, the need to reconstruct a highly efficient vertically and horizontally integrated industrial base would be paramount.
Hyundai Motor already encompasses a low-value-creation, but obviously vitally important, steel division. But whilst publicly it proudly mentions electronics innovation, as far as we can assess, there is a disjoint in PR and the real-world ability to compete with benchmark competitors in the fields of hybrid propulsion, vehicle electrical architectures and user-interface info-media.
This leads us onto the possible powerful rationale for the 30% purchase of the Shinhueng Securities Brokerage.
The non-too-informative party line from Hyundai stands as: ““Our financial business remains small relative to our group size,”…“We have been considering entering the securities market as a long-term development agenda as we believe we could enhance synergies with the automobile business.” Yes there are definite financial synergies with the Financial Services and Card divisions, the addition of a brokerage to lure across present customers into playing the booming stock market (and latterly add a banking arm) makes sense indeed.
But is there another, closer to home, reason? Possibly.
We cannot discount the fact that various blue-chip players (from Banks to Construction Materials companies) could be securing brokerage assets to negate the (costly and sometimes problematic) ‘middle-man’ when seeking large scale purchases of other complimetary Korean companies…effectively endeavouring to slowly re-build chaebol conglomerates.
With very high competition for the acquisition of western sector counterparts and little political leverage to acquire often effectively protected emerging market peers, Korea’s industry leaders may be looking to re-group; each (if like Hyundai) have reached natural plateau of industrial core-competance.
Thus Hyundai may seek the dual advantages of:
1. a new revenue stream taking stock buy/sell commissions (from institutional & public clients) during a bull Korean market (with brokerage sector consolidation also promising to lift margins)
2. enabling direct access to global financial exchanges to buy-up complimentary sector company stock, their corporate bonds and possibly company notes.
This is only conjectural, but is the fundamental consideration too far fetched?
We don’t think so. The 5% Hyundai & 3.2% Kia stock drops at the announcement will be greatly reverted if this dual strategy ideal is ultimately unveiled.
For much of 2007 the South Korean public, Seoul stock-market and the auto-industry at large, have all waited to see exactly what future role Chung Mong-Koo would play. His role was undeniable, simply whether having to orchestrate from afar, or lead from the front. The September outcome was an expected one, witnessing his ‘freedom to rule’ underpinning a fresh sense of ambition exemplified by:
1. the target of a 20% rise in sales for 2008
2. the planned purchase of a 30% Shinhueng Securities stake.
The new sales targets, aiming to grow from 3.97m units to 4.8m, demonstrate the pace of change Hyundai Motor management believe is required to get back on track, the additional units coming from new Chinese and India plants coming on stream in what are recognised as primary markets. These come after previous highly successful plant investments in the US, Turkey and Slovakia.
Hyundai recognising some time ago that a “Japanese Quality-Korean Price” growth strategy was fundamental to the massive US market where domestic automakers where failing to provide lower-priced quality cars and for emerging markets where it could undercut Japanese marques and quickly gain a following. To this end the auto-industry essentially watched with wonder as the company rode this near perfect business model, becoming the 6th largest global VM.
But it wasn’t an easy ride. The 1997 Tiger economy crash and the domestic slowdown that followed demonstrated the need to export quality cars. And as the well managed domestic economy thrived once again South Korea became a proportionately more expensive country to produce in and export from; Hyundai faced with rising domestic overhead, across the board production costs given China’s exacerbation of Asian materials, energy etc demand and a strengthening Won. This lead to a tightening of local plant operations which dismayed Korean workers causing ultimately little affect strike action. Actually assisting the company by deflating production capacity and inventory. However, these combined challenges simply drove Hyundai to seek globally efficient production, localised production in major markets linked to regional research & engineering centres to ensure the catering of consumer tastes and to network with the local component supply base to avoid currency fluctuation problems and grow buyer-supplier relationships.
Today Hyundai’s achievements are self-evident, especially so in the US where it has achieved high consumer survey rankings year after year for more and more vehicle types. The initial 1980s baptism of fire in the US and continued tenacity there has created the learning and foundations for international spread. So as the tried and tested ‘glocalisation’ model marches onward it seems that the company’s senior staff are perhaps looking beyond the perfecting of car-making to other powerful business solutions to enhance corporate strength; especially so given Chinese and Indian ambitions to follow rapidly in their footsteps.
Given Korea’s industrial foundation in electronics (ie Samsung, LG etc) and a historical chaebol culture (though much divided after 1997) the country's long distinct competitive advantage over its Asian peers has been the field of electronics and semi-conductors. Relative to auto-electronics, whilst Hyundai does not profess itself to be further advanced than the Big 6 VMs in areas such as the development of Whole Vehicle Electronic Architecture (eg Canbus) / Genaral Telematics / Intelligent Transport Systems / Advanced Power Systems (eg 42V); given the essential core competence of Korea as an electronics hub and leader, these – long-awaited - breakthrough technologies could potentially be first made real by Hyundai. Yes it may have fallen behind from the likes of GM with OnStar and Ford with Sync technologies, but could the company leverage the electronics intellect of the nation to radically advance the electronic ‘consumer delivery’ content of its vehicles?
As mentioned, the once powerful chaebol network is today ‘fractured’. But if Hyundai Motor’s ambitions reflect our conjecture, the need to reconstruct a highly efficient vertically and horizontally integrated industrial base would be paramount.
Hyundai Motor already encompasses a low-value-creation, but obviously vitally important, steel division. But whilst publicly it proudly mentions electronics innovation, as far as we can assess, there is a disjoint in PR and the real-world ability to compete with benchmark competitors in the fields of hybrid propulsion, vehicle electrical architectures and user-interface info-media.
This leads us onto the possible powerful rationale for the 30% purchase of the Shinhueng Securities Brokerage.
The non-too-informative party line from Hyundai stands as: ““Our financial business remains small relative to our group size,”…“We have been considering entering the securities market as a long-term development agenda as we believe we could enhance synergies with the automobile business.” Yes there are definite financial synergies with the Financial Services and Card divisions, the addition of a brokerage to lure across present customers into playing the booming stock market (and latterly add a banking arm) makes sense indeed.
But is there another, closer to home, reason? Possibly.
We cannot discount the fact that various blue-chip players (from Banks to Construction Materials companies) could be securing brokerage assets to negate the (costly and sometimes problematic) ‘middle-man’ when seeking large scale purchases of other complimetary Korean companies…effectively endeavouring to slowly re-build chaebol conglomerates.
With very high competition for the acquisition of western sector counterparts and little political leverage to acquire often effectively protected emerging market peers, Korea’s industry leaders may be looking to re-group; each (if like Hyundai) have reached natural plateau of industrial core-competance.
Thus Hyundai may seek the dual advantages of:
1. a new revenue stream taking stock buy/sell commissions (from institutional & public clients) during a bull Korean market (with brokerage sector consolidation also promising to lift margins)
2. enabling direct access to global financial exchanges to buy-up complimentary sector company stock, their corporate bonds and possibly company notes.
This is only conjectural, but is the fundamental consideration too far fetched?
We don’t think so. The 5% Hyundai & 3.2% Kia stock drops at the announcement will be greatly reverted if this dual strategy ideal is ultimately unveiled.
Tuesday, 15 January 2008
Industry Practice - Detroit Auto Show 07-08 – Reading Between the [Model] Lines
The 2008 NAIAS is underway this week for press and industry participants. This show obviously demonstrates the US Big 3’s intentions, domestically and globally, and should be assessed to better appreciate the effects their immediate and longer-term strategic directions will yield. Detroit sets a tone and provides clues as to which vehicular arenas these VMs will be seeking to gain competitive, sales and margin advantage. 2008 looks to offer a lowly 15-15.5m US volume, so we hope the Big 3 look to product advantage messages and not another round of value destroying sales incentives at home, whilst offering new hope in the global battle.
As today's FT depicts, GM & Ford have seen a halving of their share-price over the last decade compared to a doubling of Toyota's. So will this year see the start of re-surgence after the year end large stock sell-off at the news of an expected US recession hitting autos and housing hardest? Only time will tell, but with such dark clouds hovering all will have to search harder to identify those auto-related areas (from R&D companies to core-parts suppliers to diesel and bio fuel distributors) that promise worthwhile returns. But let us not immediately discount Detroit's Big 3, instead viewing them as indicators of value arenas most obviously seen by the GM-Coskata new-ethanol-energy partnership announced.
Beyond the obvious clutch of new concepts and NA model releases, that illustrate immediate product availability, we would hope to see informational updates from the US Big 3 on those ‘marker’ vehicles from 2007 to demonstrate that they were indeed under development, enabling critical business and projects assessment, and not just used as old-fashioned show-stoppers.
GM [3.82m units in 2007]
Talk of Detroit ’07 (indeed much of the year) was the much lauded Chevrolet Volt and the ideal of the viable ‘electric car’ via the E-Flex propulsion system – in reality a hybrid electric motor & recharge/drive flex-fuel engine. Central to the industry talk was of course cost and GM ‘deliverability’ given the reliance on advanced L-Ion battery pack. A formal update on R&D/project progress would be in order to maintain investor and public belief in the proposal – especially regards L-Ion - since history lessons suggest that the radical concepts shown during lean & fuel crisis years don’t come to fruition as oil prices eventually subsume to historic norms. However, even if not fully delivered, we see Volt intrinsically pushing the development and cost-down of hybrid technology (for mid-size eg Malibu) through the GM hybrid alliance with other automakers.
For ’08 unsurprisingly we would hope to see a continued focus on small & compact cars given the impetus of 3-way concepts competition of last year (ie Beat, Groove, Trax), The successor being seen as a desperately needed successor to Aveo (sedan & 5) and GMDAT small cars. We believe/hope that development work was already well under way with the trio’s winner simply a public ‘car-clinic’ ratification of chosen style). Investment and industry circles would be keen to view any updates on platform and BIW adaptability to cost-consciously modify such a high volume platform over its lifetime and across brand/global variants. Interesting would be the ‘package protection’ potential for efficient 3-cylinder rear-engine, low spec –low cost variants (specifically powertrain) replacing the highly popular Matiz formula across India/Asia (less so China now).
Cadillac is highlighted with the CTS Coupe again, CTS-V, Escalade Hybrid and Provoq concept after Lincoln’s good show in 07. But in truth, the angular ‘Stealth’ Cadillac style is long-in-the-tooth. A much needed radical change in 2001 it was destined to age quickly, especially against the European set, and so newcomers such as the Coupe and Provoq/BRX, although ‘different’ relative to competitors, aren’t as aesthetically sophisticated. In truth Cadillac desperately needs a new design direction with importantly a better considered, more broadly applicable, palette philosophy if it is to maintain momentum and compete against what look to be handsome ‘clean’ future Lincolns.
SAAB’s re-re-release of the 9-4X as a premium cross-over against the Germans, Infiniti, Lexus, Lincoln etc promises to make waves in the segment, sell well and produce good revenues. Originally touted on a Cadillac base, then the Subaru Tribeca base, the vehicle is now apparently derived from within the GM stable again. If the case, the margins will obviously better the transfer price agreed with Subaru, but to be honest we would have rather seen the vehicle developed from Tribeca, launched earlier to gain a foothold in the segment, and grow SAAB credientials & revenue. However, at least from the perspective of product integrity and appeal, we have greater hopes for this model than sister sedans/hatches. In this sector SAAB has greater brand relevance in balancing 4x4 ownership against the eco social zeitgeist – the acceptable face of 4x4s if you will. Although the concept looks good, the ‘finish’ of final product will be key, and we suspect that SAAB's design & engineering development team will have a freer hand if based on perhaps the global AWD Theta platform.
SAAB design has been through a transition period of late, many of the 9-2, 9-3 & 9-5 cars obvious unsuccessful aesthetic ‘grafts’ from sister company models, but the 9-4X should be more successful. Given BMW X3’s lack of market favour, and yet to be released Audi Q5 and Merc baby GL, the 9-4X looks like a very promising proposal indeed for those seeking a ‘high-minded’ premium European alternative.
2007 saw SAAB sell a lowly 133,000 units globally (vs Volvos 600,000) so the contribution the new car makes should very conservatively hit the 175,000 target SAAB HQ seeks. We believe this car and successors, as a more integrated part of the GM multi-brand platform design process, may well have the credentials to lift SAAB substantially, and if successor product is as appealing, to reach 320,000 over the next 5-7 years, given perceived Eco credentials and migrants wishing to find alternatives to ‘aggressive’ German marques.
Critically, to maintain its uniqueness SAAB must return to its purist (Sixten Sason) design roots to do so. However, the theoretical sizeable per unit margins available to recoup should provide the SAAB division with technical flexibility to lead in specific USP technology (esp weight, aero & safety) so as to avoid GM platform ‘dilution’; the type of which we’ve seen in recent years. Given SAAB’s small voice in the GM empire, maintaining a heavyweight divisional champion is still very necessary.
Trucks, although suffering a downturn (GM down 4% for 2007), still provide massive revenues that need to be protected in the face of Toyota, Nissan & of course Ford F-series. Cylinder De-activation technology has been adopted for highway conditions. However, given legislative CAFÉ/CO2 pressures, beyond the Yukon Hybrid announcement, we would like to see the technology brought to the Silverado truck line, enhanced volumes reducing hybrid system costs and providing buyer reason to stay with profitable full-size trucks.
Ford [2.57m units in 2007]
We expect Ford to provide something interesting and possibly provocative this year given GM’s Volt success in the limelight last year. Marry GM’s perceptional advantage with the release of real-world Malibu and add Ford’s 24% drop in ’07 car sales (due to ageing Mustang and Insipid Taurus) and Blue Oval should be coming out fighting at Detroit ’08 to maintain external confidence. 2007 was the year it lost its 75 year #2 spot to Toyota so we want to see the signs of a comeback.
Last year saw J Mays unveil the Airstream concept, which along with Peter Horbury’s SuperChief truck concept (named after the classic train) demonstrate that Ford is trying to continue and capture the essence of American-Icons, a natural onward direction given re-works of Thunderbird, GT40, Mustang etc. Under the continued ‘Bold Moves’ campaign we expect Ford to expand ‘characterisation’ as a blue-oval theme which (like Retro-Futurist Beetle, New Mini, New 500 etc) demonstrate Design’s role in moulding perception to deliver higher margin products.
‘Airstream’ looks to re-invent the Mini-Van formulae, injecting interest into the much declined segment. The truth is that mono-volume vehicles continue offer fundamentally right attributes in our multi-role lives, so variations on theme Like airstream) much needed.
[To maximise profitability, ideally the industry would offer only modifiable monoboxes as mainstream high volume vehicles, today’s ostensibly very different and costly variants reduced to variants of. Think the MPV business model (Zafira, Scenic etc) further stretched to include a spectrum of cost efficient, appealing variants from limousines to camper-vans utilising a broad spectrum of exterior & interior fittings].
‘Interceptor’ was also shown in ’07 depicting a brutalist, performance interpretation of mid-large sedans. Born from the 4-door Mustang ideal married with public’s love of muscular F-series for those who want a 'big-bad' sedan (a la 300C) or with the need to economically ‘trade-down’. Investment-auto-motives believes that Interceptor could beyond sedans, pave the way for a car-derived pick-up come back in the US (and answer the criticisms of Dodge’s larger Rampage concept in ’06). Such ‘Utes’ have always been popular in Australia and Ford’s Falcon Ute a legend. Create an Interceptor inspired Ute for the US and Australia from a semi-monocoque base (new E8 Falcon) and we could see a re-popularisation of the genre (utilisng V6 twin turbos instead of the 'dirty' V8) in the face of Green Consciousness. Could Ford steal the legend from GM and its El Camino (and rumour of a Holden based Pontiac GS8) without cannibalising existing truck sales? The Brutalist Ute = “Brute”. Very probably under review at present.
Again like GM, Ford will need to be seen doing something on the F-series to maintain waning fleet and public interest given that trucks = 62% of sales and 12% drop YOY. Invisible cost-down, gas mileage and imaginative features are key, maintaining close sales relationships with the corporate and private building trade.
In ’08 Ford will undoubtedly be touting the new Jaguar XF and Land Rover LRX concepts at Detroit as it moves into the final few months of negotiation with TATA, so window-dressing and talking-up potential US volumes will be order of the day behind the scenes.
Chrysler [2.1m units in 2007]
Under Cerberus, we expect to see Chrysler, Jeep and Dodge produce future offerings that demonstrate the march of progress under the PE firm. The small Hornet concept being developed with Chery was well received both in product and business case form, so we expect to see more of the same acumen at Detroit, even if over-played with the exploitation of their ENVI Propulsion R&D programme.
Chrysler Cars has done well within Minivan segment decline, capturing increased market share, as would have been hoped given its Minivan reputation born from its 1980s origination of the formula. So we expect to see new re-inventions of the type, in size and feature, as seen with the L-ion powered parallel hybrid Eco-Voyager, concept to assist Chrysler’s prime position in this vital segment. In reality expect a mid-size MPV for global markets that utilises Bluetec diesel technology originated from Daimler.
The Nassau of ’07 was well received demonstrating a willingness to break into compact segment territory with what seems a pertinent upscale offering, recognising that its mid-large cars, minivans &SUVs are under threat in the US and to create something far more appropriate for ROW markets, especially Europe and China.
The Firepower concept, utilising the Dodge Viper base, looks to be little more than a publicity attempt at trying to maintain Chrysler as a mid-point near luxury contender.
Given the lacklustre sales performance of the far cheaper, higher volume Cross-Fire, this may be an attempt to simply provide a Maserati-esque niche volume halo car. As such the on-paper business case could be created to offer a high margin project, but relative contribution from maybe 1-2000 vehicles will be miniscule for accounting purposes.
Jeep has little to show this year since the large relatively recent product roll-out Patriot and Compass. Given worries about its 4x4 image it uses the show to showcase the intended incorporation of Green technologies via the application of alternative fuel and hybrid systems (inc L-Ion) packs and light construction materials, aluminium frames and composite skin panels as seen in the Renegade small ‘City Jeep’ concept.
But once again, this is corporate show-boating. The current Jeep vehicle portfolio will have to work hard to maintain momentum for some time and given less than wonderful domestic and global market reaction to Compass and Patriot that will be hard to do.
Dodge has expanded its brand over the last few years with car based products to counter-balance overtly heavy truck reliance, the Challenger muscle-car most visible.
But in truth the newish cars brought to market have been unremarkable. The vehicle portfolio is somewhat of a misnomer, trying to elicit Challenger personality in all but woefully failing to do so. Relative to IRR, we imagine probably the worst (ie cost inefficient) line-up for years even though they are theoretically low-cost created variants.
The Dodge Zeo is the last of the Chrysler ENVI-based concept trio, another ‘remote’ car based on a the popular Coupe 2+2 package a la RX-8. And the performance R/T Caravan notionally stretches the popular Minivan’s appeal.
Cerberus and Chrysler are offerng promises of the future as opposed to concrete products of today that would markedly raise income levels for Cerberus in the near term. For Cerberus focus is really on operational efficiencies and the leverage of JVs. Detroit ’08 is really being used to demonstrate the internal pace of change for the #3 US car-maker, to allay public fears regards its US based plants and enthuse the investment community about it’s bright ‘turnaround’ future.
“Jam Tomorrow” is the unsurprising story from Detroit’s Big 3, re-echoing the message of recent years that financiers are well aware of and having to wear in the expectation of the promised 09 and beyond bounce-back. This contrasts against the strides of progress made by the Japanese, Koreans and the continued credibility demonstrations coming from the Chinese 5, including EV claims using current (ie non L-ion) technology.
At this point we see implicitly that a number of new vehicle programmes underway for US producers, bearing little fruit in the short-medium term and weighed down by economic gloom and fulsome inventories. Instead, value-seekers within auto may well best identify those parts-producers who are well placed from these NPD programmes, both at home and abroad. Obviously the idealised adoption of L-ion technology makes the headlines, bouying R&D and supplier valuations, as does the national focus on bio-fuel R&D, development, refining and distribution.
But reading between the (model) lines we see a presently small, but concerted effort, of a multi-VM mandate backing a US diesel push. Showcased in domestic both pick-ups and German supercars, the looks to be pinzer attack on the public's consciousness to slowly accept the MPG & CO2 'inevitability' of clean, high performance diesels, forcasted to grow from 3% of US vehicle sales today to 15% by 2015.
As today's FT depicts, GM & Ford have seen a halving of their share-price over the last decade compared to a doubling of Toyota's. So will this year see the start of re-surgence after the year end large stock sell-off at the news of an expected US recession hitting autos and housing hardest? Only time will tell, but with such dark clouds hovering all will have to search harder to identify those auto-related areas (from R&D companies to core-parts suppliers to diesel and bio fuel distributors) that promise worthwhile returns. But let us not immediately discount Detroit's Big 3, instead viewing them as indicators of value arenas most obviously seen by the GM-Coskata new-ethanol-energy partnership announced.
Beyond the obvious clutch of new concepts and NA model releases, that illustrate immediate product availability, we would hope to see informational updates from the US Big 3 on those ‘marker’ vehicles from 2007 to demonstrate that they were indeed under development, enabling critical business and projects assessment, and not just used as old-fashioned show-stoppers.
GM [3.82m units in 2007]
Talk of Detroit ’07 (indeed much of the year) was the much lauded Chevrolet Volt and the ideal of the viable ‘electric car’ via the E-Flex propulsion system – in reality a hybrid electric motor & recharge/drive flex-fuel engine. Central to the industry talk was of course cost and GM ‘deliverability’ given the reliance on advanced L-Ion battery pack. A formal update on R&D/project progress would be in order to maintain investor and public belief in the proposal – especially regards L-Ion - since history lessons suggest that the radical concepts shown during lean & fuel crisis years don’t come to fruition as oil prices eventually subsume to historic norms. However, even if not fully delivered, we see Volt intrinsically pushing the development and cost-down of hybrid technology (for mid-size eg Malibu) through the GM hybrid alliance with other automakers.
For ’08 unsurprisingly we would hope to see a continued focus on small & compact cars given the impetus of 3-way concepts competition of last year (ie Beat, Groove, Trax), The successor being seen as a desperately needed successor to Aveo (sedan & 5) and GMDAT small cars. We believe/hope that development work was already well under way with the trio’s winner simply a public ‘car-clinic’ ratification of chosen style). Investment and industry circles would be keen to view any updates on platform and BIW adaptability to cost-consciously modify such a high volume platform over its lifetime and across brand/global variants. Interesting would be the ‘package protection’ potential for efficient 3-cylinder rear-engine, low spec –low cost variants (specifically powertrain) replacing the highly popular Matiz formula across India/Asia (less so China now).
Cadillac is highlighted with the CTS Coupe again, CTS-V, Escalade Hybrid and Provoq concept after Lincoln’s good show in 07. But in truth, the angular ‘Stealth’ Cadillac style is long-in-the-tooth. A much needed radical change in 2001 it was destined to age quickly, especially against the European set, and so newcomers such as the Coupe and Provoq/BRX, although ‘different’ relative to competitors, aren’t as aesthetically sophisticated. In truth Cadillac desperately needs a new design direction with importantly a better considered, more broadly applicable, palette philosophy if it is to maintain momentum and compete against what look to be handsome ‘clean’ future Lincolns.
SAAB’s re-re-release of the 9-4X as a premium cross-over against the Germans, Infiniti, Lexus, Lincoln etc promises to make waves in the segment, sell well and produce good revenues. Originally touted on a Cadillac base, then the Subaru Tribeca base, the vehicle is now apparently derived from within the GM stable again. If the case, the margins will obviously better the transfer price agreed with Subaru, but to be honest we would have rather seen the vehicle developed from Tribeca, launched earlier to gain a foothold in the segment, and grow SAAB credientials & revenue. However, at least from the perspective of product integrity and appeal, we have greater hopes for this model than sister sedans/hatches. In this sector SAAB has greater brand relevance in balancing 4x4 ownership against the eco social zeitgeist – the acceptable face of 4x4s if you will. Although the concept looks good, the ‘finish’ of final product will be key, and we suspect that SAAB's design & engineering development team will have a freer hand if based on perhaps the global AWD Theta platform.
SAAB design has been through a transition period of late, many of the 9-2, 9-3 & 9-5 cars obvious unsuccessful aesthetic ‘grafts’ from sister company models, but the 9-4X should be more successful. Given BMW X3’s lack of market favour, and yet to be released Audi Q5 and Merc baby GL, the 9-4X looks like a very promising proposal indeed for those seeking a ‘high-minded’ premium European alternative.
2007 saw SAAB sell a lowly 133,000 units globally (vs Volvos 600,000) so the contribution the new car makes should very conservatively hit the 175,000 target SAAB HQ seeks. We believe this car and successors, as a more integrated part of the GM multi-brand platform design process, may well have the credentials to lift SAAB substantially, and if successor product is as appealing, to reach 320,000 over the next 5-7 years, given perceived Eco credentials and migrants wishing to find alternatives to ‘aggressive’ German marques.
Critically, to maintain its uniqueness SAAB must return to its purist (Sixten Sason) design roots to do so. However, the theoretical sizeable per unit margins available to recoup should provide the SAAB division with technical flexibility to lead in specific USP technology (esp weight, aero & safety) so as to avoid GM platform ‘dilution’; the type of which we’ve seen in recent years. Given SAAB’s small voice in the GM empire, maintaining a heavyweight divisional champion is still very necessary.
Trucks, although suffering a downturn (GM down 4% for 2007), still provide massive revenues that need to be protected in the face of Toyota, Nissan & of course Ford F-series. Cylinder De-activation technology has been adopted for highway conditions. However, given legislative CAFÉ/CO2 pressures, beyond the Yukon Hybrid announcement, we would like to see the technology brought to the Silverado truck line, enhanced volumes reducing hybrid system costs and providing buyer reason to stay with profitable full-size trucks.
Ford [2.57m units in 2007]
We expect Ford to provide something interesting and possibly provocative this year given GM’s Volt success in the limelight last year. Marry GM’s perceptional advantage with the release of real-world Malibu and add Ford’s 24% drop in ’07 car sales (due to ageing Mustang and Insipid Taurus) and Blue Oval should be coming out fighting at Detroit ’08 to maintain external confidence. 2007 was the year it lost its 75 year #2 spot to Toyota so we want to see the signs of a comeback.
Last year saw J Mays unveil the Airstream concept, which along with Peter Horbury’s SuperChief truck concept (named after the classic train) demonstrate that Ford is trying to continue and capture the essence of American-Icons, a natural onward direction given re-works of Thunderbird, GT40, Mustang etc. Under the continued ‘Bold Moves’ campaign we expect Ford to expand ‘characterisation’ as a blue-oval theme which (like Retro-Futurist Beetle, New Mini, New 500 etc) demonstrate Design’s role in moulding perception to deliver higher margin products.
‘Airstream’ looks to re-invent the Mini-Van formulae, injecting interest into the much declined segment. The truth is that mono-volume vehicles continue offer fundamentally right attributes in our multi-role lives, so variations on theme Like airstream) much needed.
[To maximise profitability, ideally the industry would offer only modifiable monoboxes as mainstream high volume vehicles, today’s ostensibly very different and costly variants reduced to variants of. Think the MPV business model (Zafira, Scenic etc) further stretched to include a spectrum of cost efficient, appealing variants from limousines to camper-vans utilising a broad spectrum of exterior & interior fittings].
‘Interceptor’ was also shown in ’07 depicting a brutalist, performance interpretation of mid-large sedans. Born from the 4-door Mustang ideal married with public’s love of muscular F-series for those who want a 'big-bad' sedan (a la 300C) or with the need to economically ‘trade-down’. Investment-auto-motives believes that Interceptor could beyond sedans, pave the way for a car-derived pick-up come back in the US (and answer the criticisms of Dodge’s larger Rampage concept in ’06). Such ‘Utes’ have always been popular in Australia and Ford’s Falcon Ute a legend. Create an Interceptor inspired Ute for the US and Australia from a semi-monocoque base (new E8 Falcon) and we could see a re-popularisation of the genre (utilisng V6 twin turbos instead of the 'dirty' V8) in the face of Green Consciousness. Could Ford steal the legend from GM and its El Camino (and rumour of a Holden based Pontiac GS8) without cannibalising existing truck sales? The Brutalist Ute = “Brute”. Very probably under review at present.
Again like GM, Ford will need to be seen doing something on the F-series to maintain waning fleet and public interest given that trucks = 62% of sales and 12% drop YOY. Invisible cost-down, gas mileage and imaginative features are key, maintaining close sales relationships with the corporate and private building trade.
In ’08 Ford will undoubtedly be touting the new Jaguar XF and Land Rover LRX concepts at Detroit as it moves into the final few months of negotiation with TATA, so window-dressing and talking-up potential US volumes will be order of the day behind the scenes.
Chrysler [2.1m units in 2007]
Under Cerberus, we expect to see Chrysler, Jeep and Dodge produce future offerings that demonstrate the march of progress under the PE firm. The small Hornet concept being developed with Chery was well received both in product and business case form, so we expect to see more of the same acumen at Detroit, even if over-played with the exploitation of their ENVI Propulsion R&D programme.
Chrysler Cars has done well within Minivan segment decline, capturing increased market share, as would have been hoped given its Minivan reputation born from its 1980s origination of the formula. So we expect to see new re-inventions of the type, in size and feature, as seen with the L-ion powered parallel hybrid Eco-Voyager, concept to assist Chrysler’s prime position in this vital segment. In reality expect a mid-size MPV for global markets that utilises Bluetec diesel technology originated from Daimler.
The Nassau of ’07 was well received demonstrating a willingness to break into compact segment territory with what seems a pertinent upscale offering, recognising that its mid-large cars, minivans &SUVs are under threat in the US and to create something far more appropriate for ROW markets, especially Europe and China.
The Firepower concept, utilising the Dodge Viper base, looks to be little more than a publicity attempt at trying to maintain Chrysler as a mid-point near luxury contender.
Given the lacklustre sales performance of the far cheaper, higher volume Cross-Fire, this may be an attempt to simply provide a Maserati-esque niche volume halo car. As such the on-paper business case could be created to offer a high margin project, but relative contribution from maybe 1-2000 vehicles will be miniscule for accounting purposes.
Jeep has little to show this year since the large relatively recent product roll-out Patriot and Compass. Given worries about its 4x4 image it uses the show to showcase the intended incorporation of Green technologies via the application of alternative fuel and hybrid systems (inc L-Ion) packs and light construction materials, aluminium frames and composite skin panels as seen in the Renegade small ‘City Jeep’ concept.
But once again, this is corporate show-boating. The current Jeep vehicle portfolio will have to work hard to maintain momentum for some time and given less than wonderful domestic and global market reaction to Compass and Patriot that will be hard to do.
Dodge has expanded its brand over the last few years with car based products to counter-balance overtly heavy truck reliance, the Challenger muscle-car most visible.
But in truth the newish cars brought to market have been unremarkable. The vehicle portfolio is somewhat of a misnomer, trying to elicit Challenger personality in all but woefully failing to do so. Relative to IRR, we imagine probably the worst (ie cost inefficient) line-up for years even though they are theoretically low-cost created variants.
The Dodge Zeo is the last of the Chrysler ENVI-based concept trio, another ‘remote’ car based on a the popular Coupe 2+2 package a la RX-8. And the performance R/T Caravan notionally stretches the popular Minivan’s appeal.
Cerberus and Chrysler are offerng promises of the future as opposed to concrete products of today that would markedly raise income levels for Cerberus in the near term. For Cerberus focus is really on operational efficiencies and the leverage of JVs. Detroit ’08 is really being used to demonstrate the internal pace of change for the #3 US car-maker, to allay public fears regards its US based plants and enthuse the investment community about it’s bright ‘turnaround’ future.
“Jam Tomorrow” is the unsurprising story from Detroit’s Big 3, re-echoing the message of recent years that financiers are well aware of and having to wear in the expectation of the promised 09 and beyond bounce-back. This contrasts against the strides of progress made by the Japanese, Koreans and the continued credibility demonstrations coming from the Chinese 5, including EV claims using current (ie non L-ion) technology.
At this point we see implicitly that a number of new vehicle programmes underway for US producers, bearing little fruit in the short-medium term and weighed down by economic gloom and fulsome inventories. Instead, value-seekers within auto may well best identify those parts-producers who are well placed from these NPD programmes, both at home and abroad. Obviously the idealised adoption of L-ion technology makes the headlines, bouying R&D and supplier valuations, as does the national focus on bio-fuel R&D, development, refining and distribution.
But reading between the (model) lines we see a presently small, but concerted effort, of a multi-VM mandate backing a US diesel push. Showcased in domestic both pick-ups and German supercars, the looks to be pinzer attack on the public's consciousness to slowly accept the MPG & CO2 'inevitability' of clean, high performance diesels, forcasted to grow from 3% of US vehicle sales today to 15% by 2015.
Monday, 14 January 2008
Industry Practice - Strategic Planning - Theoretically Simple - Practically Complex
It is an obvious statement to make; that the internal value chain of a company (ie it's procedural functions from Purchasing to Distribution and supportive functions) needs to be aligned to create an industrial entity that best serves the consumer-base within its competitive environmentment and the broader macro-economic context. To this end the strategic planning process serves to adapt the direction and shape of a company, so enable optimum profitability.
The form a strategic plan takes depends greatly on the individual situation of a firm, its ambitions and management mentality. It is an internally generated response to the less controllable elements of the real-world, from market behavoir (B2B/B2C) to financing conditions to of course competitor actions. At the higher-level still, is the prime issue that CEOs and their Boards must contend in shaping longer-term decisions: the overall (perhaps cyclical) dynamics of their sector set within (inter)-national industrial policy; itself moulded by the situational analysis of government dvisors (inc. financiers) to drive economic growth.
Given the Car's social symbolism [freedom & status] and technical complexity [ball-bearings to hard-drives], throughout the 20th & early 21st centuries the auto-indutsry has massively influenced the world we live & work within; perhaps more than any other industrial activity. The results of this changed world are in turn re-shaping the agendas, strategic directions and innate structures of the auto-industry. CO2, congestion & 'travel value' pricing apparent in the west, versus the social mobility & industrial develelopment of BRIC+ regions. (These two apparently opposing forces are actually far more aligned in terms of industry opportunity than many first thought - effectively balancing the automotive needs, and solutions, of west & east).
Of course different industry players (auto-makers, parts-makers & distributor-retailers) have experienced dramatic change over the last decade. Mature firms having to operationally re-align to simply survive, whilst emergent firms have to contend with the very opposite problem of rapid expansion. Both mature western firms and infant eastern firms are faced with what seem like the constant re-sizing demands, along with M&A threats and opportunities. Turbulent times at both ends of the spectrum at present, eventually resulting in an enlarged, more harmonious and efficient world-wide industrial network.
More than ever, corporate success resides in the detailed precision and rapid implementation of strategic planning, spanning from big-picture PESTEL level to the opportunity potential of the single customer/product. So defining strategy must be more than the notional and overly simplistic text-book exercise, but it should not become an overtly time-sapping laborious, bureaucratic task. It must lead to more than the sum of its parts, containing inspiration yet also reservation. As for the methodologies used, there still remains a myriad of developmental types - ranging from the sole edicts of bought-in high-cost, blue-chip management consultants to internally-empowered attempts at scenario planning, to the marriage of both.
Whatever process used, it must be sympathetic yet enlightening; undertaken in a way that is internally 'believed' (ie credible) and also able to generate new perspectives and insights by which to guide corporate direction. Whether highlighting new 'drivers' that dramatically affect corporate course or if (specifically unintentionally) ratifying the previously prescribed path, the practice of strategy formulation and planning must be both in-step with general industry consensus yet also find areas of competitive advantage within PESTEL and Value Chain arenas everytime the exercise is undertaken. Without these new insights, the practice becomes tainted and eventually worthless.
Ultimately of course company culture and inherent political feifdoms (functional or otherwise) hold the power to sway the undertaking and outcome of what is ideally a non-currupted, apolitical, measurable, cause/effect/reaction process. This may be idealistic, but it is the role of the CEO and Board to maintain a vigilant eye on procedings, step by step by step. If possible, employing a team of rounded, cross-functionally insightful, high-ranking, middle-management and junior staff to act as the project team so as to encompass all viewpoints (internal & external) and to moderate any potential for over-zealous 'over-weighting' of input information and assessment rationale.
'investment-auto-motives' understands strategic planning to be the very core of company success and must encompass informed inputs (info, data, trends), critically openminded analysis and unprescribed outputs. Of course, much of what results will not shock management into radical change - that isn't the point, they should already be abreast of things - but it should provide a critical eye of the 'drivers of change'. Each piece of the puzzle critiqued fully so leading to new specific insights which are be merged to produce the new big-picture view.
In essence: "Deconstruct Today to Reconstruct Tomorrow".
And there has never been a more pertinant time in the auto-industry to hone the process and seek new growth horizons.
Under today's stressed credit conditions the financial community and broader capital markets seek greater confidence in their automotive investments. Whether to support fixed income, debt swaps or floating stock, they will demand greater and greater leadership acumen from the industry at large and offer capital to those who best see the path forward through the complex terrain.
To this end, although each is in an individually unique postion, best practice methods (if not obviously content) should be shared across VM's, Parts Producers and Distributor-Retailers. For the combination of an informed all will raise the efficiency of the industry at large, producing ever bigger pictures that Wall Street and The City can work with to assist Value Creation.
The form a strategic plan takes depends greatly on the individual situation of a firm, its ambitions and management mentality. It is an internally generated response to the less controllable elements of the real-world, from market behavoir (B2B/B2C) to financing conditions to of course competitor actions. At the higher-level still, is the prime issue that CEOs and their Boards must contend in shaping longer-term decisions: the overall (perhaps cyclical) dynamics of their sector set within (inter)-national industrial policy; itself moulded by the situational analysis of government dvisors (inc. financiers) to drive economic growth.
Given the Car's social symbolism [freedom & status] and technical complexity [ball-bearings to hard-drives], throughout the 20th & early 21st centuries the auto-indutsry has massively influenced the world we live & work within; perhaps more than any other industrial activity. The results of this changed world are in turn re-shaping the agendas, strategic directions and innate structures of the auto-industry. CO2, congestion & 'travel value' pricing apparent in the west, versus the social mobility & industrial develelopment of BRIC+ regions. (These two apparently opposing forces are actually far more aligned in terms of industry opportunity than many first thought - effectively balancing the automotive needs, and solutions, of west & east).
Of course different industry players (auto-makers, parts-makers & distributor-retailers) have experienced dramatic change over the last decade. Mature firms having to operationally re-align to simply survive, whilst emergent firms have to contend with the very opposite problem of rapid expansion. Both mature western firms and infant eastern firms are faced with what seem like the constant re-sizing demands, along with M&A threats and opportunities. Turbulent times at both ends of the spectrum at present, eventually resulting in an enlarged, more harmonious and efficient world-wide industrial network.
More than ever, corporate success resides in the detailed precision and rapid implementation of strategic planning, spanning from big-picture PESTEL level to the opportunity potential of the single customer/product. So defining strategy must be more than the notional and overly simplistic text-book exercise, but it should not become an overtly time-sapping laborious, bureaucratic task. It must lead to more than the sum of its parts, containing inspiration yet also reservation. As for the methodologies used, there still remains a myriad of developmental types - ranging from the sole edicts of bought-in high-cost, blue-chip management consultants to internally-empowered attempts at scenario planning, to the marriage of both.
Whatever process used, it must be sympathetic yet enlightening; undertaken in a way that is internally 'believed' (ie credible) and also able to generate new perspectives and insights by which to guide corporate direction. Whether highlighting new 'drivers' that dramatically affect corporate course or if (specifically unintentionally) ratifying the previously prescribed path, the practice of strategy formulation and planning must be both in-step with general industry consensus yet also find areas of competitive advantage within PESTEL and Value Chain arenas everytime the exercise is undertaken. Without these new insights, the practice becomes tainted and eventually worthless.
Ultimately of course company culture and inherent political feifdoms (functional or otherwise) hold the power to sway the undertaking and outcome of what is ideally a non-currupted, apolitical, measurable, cause/effect/reaction process. This may be idealistic, but it is the role of the CEO and Board to maintain a vigilant eye on procedings, step by step by step. If possible, employing a team of rounded, cross-functionally insightful, high-ranking, middle-management and junior staff to act as the project team so as to encompass all viewpoints (internal & external) and to moderate any potential for over-zealous 'over-weighting' of input information and assessment rationale.
'investment-auto-motives' understands strategic planning to be the very core of company success and must encompass informed inputs (info, data, trends), critically openminded analysis and unprescribed outputs. Of course, much of what results will not shock management into radical change - that isn't the point, they should already be abreast of things - but it should provide a critical eye of the 'drivers of change'. Each piece of the puzzle critiqued fully so leading to new specific insights which are be merged to produce the new big-picture view.
In essence: "Deconstruct Today to Reconstruct Tomorrow".
And there has never been a more pertinant time in the auto-industry to hone the process and seek new growth horizons.
Under today's stressed credit conditions the financial community and broader capital markets seek greater confidence in their automotive investments. Whether to support fixed income, debt swaps or floating stock, they will demand greater and greater leadership acumen from the industry at large and offer capital to those who best see the path forward through the complex terrain.
To this end, although each is in an individually unique postion, best practice methods (if not obviously content) should be shared across VM's, Parts Producers and Distributor-Retailers. For the combination of an informed all will raise the efficiency of the industry at large, producing ever bigger pictures that Wall Street and The City can work with to assist Value Creation.
Friday, 11 January 2008
Industry Structure - Malaysia - Profiting from Proton
Since its birth in 1983 as the national car-maker, Proton has historically been viewed with scant regard within the global auto arena. The government funding used to set-up and support the corporation - as part of the national economic development plan - did for a long period succeed in creating what was touted as a viable, growth driven entity. But as we know, that was only really made possible by a heavy-handed protectionist policy that effectively denied a level playing field for foreign competitors. Only the Daihatsu-linked state-backed Perodua was able to enter the fray. However by the end of the 90s, this was to change, so action was needed improve the car-maker's abilities and fortunes.
To do so Proton bought Group Lotus outright in 1999 (from Luxembourg's ACBN Holdings), but the consultancies acquisition has neither re-directed the fortunes of either parent or child. The expected relationship was based on mutuality of need - expertise for Proton and funding for Lotus - but political and fiscal pressures haven't generated the idealised synergies. Yes there's been good Proton product portfolio improvement in a short timeframe (including a new family of engines) but not enough to elevate the cars to US/European/Japanese standards now expected both domestically and for advanced global markets such as it's target top 3: UK, South Africa & Australia.
In the west Proton is an entry-level player, so has suffered from the rounds of heavy price discounting that has become the norm for mid-life vehicles by the large VMs and of course the crop of affordable brands such as Hyundai and Skoda. Such pressurised markets negate the competitive price advantage 'alternative brands' like Proton once enjoyed; add the disadvantage of a sporadic dealer network and poor residual values and the UK, SA and Australian export drives - although long-lasting - have been fruitless in the attempt to off-set the long expected domestic sales decline that has now come to pass.
The catalyst was the end of the AFTA agreement exclusion (providing a scaled reduction of import/CBU tariffs), opening the doors to those foreign makers that hadn't already set up assembly plants to by-pass the previous barriers. Ultimately, the momentum of globalisation yielded an influx of new car opportunities for the general public, which they seized, Proton sales suffering dramatically - down from 60% of the market in 2002 to 23% today; equalling 130k units pa.
This output figure represents only 13% of the output capacity of the firm's manufacturing capacity, dramatically raised in recent years by the creation of 'Proton City', a PPP (Private-Public-Partnership) funded modern production hub that seeks to dramatically improve Proton & Malaysia's operational capabilities. The aim to demonstrate Malaysia's advantages as an apparently world-class auto-centre for manufacture and distribution; competing with Thailand as the "Detroit of SE Asia". Under the AFTA free-trade threat Ministers recognised the need to re-shape its domestic auto-industry, essentially broadening its remit, and using Proton itself as the mechanism for industrial policy change. To develop a plan that fits Proton and Malaysia into the broader, rapidly changing, highly competitive Asian framework; transformation led by the Chinese and Indians.
The core strategy behind the Proton City plant was to provide a massive hike in regional volume capacity, much needed given economic growth forecasts of the region. The idea is that the capacity would offer one or more combined stragetic choices:
1. to entice a western auto-maker to buy a significant stake in Proton
2. to sell the capacity to a western or VM on a lease/rental basis
3. to create a sound parts and assembly supply chain to feed burgeoning inter-regional demand.
4. to produce re-badged Proton cars on behalf of 'new' Asian auto companies...leading...
5. to become a Tier 0.5 VM client-focused producer (like Magna-Steyr etc)
6. to allow Proton sell-on technology and IPR to 'new' Asian producers
To date:
1. no western VM (eg VW, GM, PSA) has taken a serious interest in buying Proton, their focus on BRIC regions that offer better direct sales opportunities.
2. The idea of selling capacity to essentially contract-in assembly work is still top of mind.
3. Efforts to do so taking time given the differing interests of high profile Malays that own much of the parts-base
4. An agreement has been struck with China's Youngman to badge-engineer cars under the Europestar brand. 30,000 Gen2 cars to be supplied, with eventual additional models (ie BLM)
5. Although negotiations have taken place, no concrete progress forward (yet).
6. This essentially puts Proton/Malaysia in the role of technology broker to needy 'new' entrants, re-emphasising the need to exploit and grow Lotus Engineering's powertrain, chassis and body R&D.
In terms of tangible progress, there have been only a few positive announcements, and a few 'leaked' but incorrect press releases that served to try and bouy shareprice. However, as stated in point 4, one success story are the first few tentative steps in a Chinese supply deal.
However this has only slightly supported company prospects and financial markets are still weary of a bad (if not worse) case scenerio as an eventual outcome if the Chinese supply strategy falters. The biggest blow came from the retraction of VW's interest in forming a JV, Proton's stock-price plummeted 20% and has hardly recovered, leaving the share-price (and MarketCap) about half of what it was a year ago. Given their stake-building the government backed Khazanah Nasional (investment fund) and Employees Provident Fund (social security arm) have been hit hard, but their purchase actions were very probably prompted to help stop a possible worse blood-letting if more stock had been held by reactionary parties.
So what next?
At present Proton as an independent car company looks very shaky, with little direct foreign investment on the horizon. The oft touted possibility of creating the exportable 'Islamic Car' is as 'idealistic', unlikely and remote as ever since plainly other Muslim countries like Iran, Morocco, Turkey, Pakistan and Uzbekhistan plainly have car-making ambitions of their own via the more stable route of using western partners. Domestically, Western and Asian VMs operate freely in the domestic market and have to a point carved-up the segments for themselves. Thus the only viable route forward is courting of the new automakers, promoting the country's long association with, and high population-mix, of ethnic Chinese & Indian Malays. Although they personally have less political weight than the more priveliged indigenous Malays, they would act as front-men to bolster cross-border relations.
Many will say the die has been set (forgive the manufacturing pun) and what we are witnessing is Proton's metamorphosis (possible death and rebirth) as a very different entity. That process of change will take time, and Proton management are in the process of best managing that change:
a. forging links with future business partners
b. endeavouring to utilise its current vehicle range as an intermediatory instrument
c. assisting newcomers to bring cars to their own market
d. laying the foundations for what could essentially be B2B contract supply of products & services.
The most interesting proposition, to sensitive to formally air, is perhaps the wholesale divestment of Proton to a Chinese or Indian player, a firm looking for geographic expansion, immediate access to market and a sizeable slice of TIV (like Proton's 23%...remember that's better than Ford, GM or Chrysler's own domestic slice).
The stumbling block to such a radical direction may be the close-knit culture and interests of Malaysian government, finance and commerce who are both politically tied to Proton (in the interest of votes) and have major commercial interests in parts and distribution. But that's not to say that further examination of the transformation process is not warranted. If there's greater value-creation 'angle' to be extracted the powers that be will undoubtedly have open minds.
But given the export 'isolated' geographic location of Malysia relative to the heart of Asia, its industrial cost-base, the country's lack of a true engineering skills-base, the limited opportunity as the Muslim Car and critically the very directed flow of Automotive Asia-Pacific investment, the odds look - at a first glance at least - presently unfortunately appear stacked against it.
The government does indeed have a hard task on its hands. It's given Proton a few more years to find a viable survival plan, thereafter (it says) there are no promises. We believe that if there is no credible 3rd party interest in a JV and the China/India supply strategy doesn't grow, that the Malays may not have an alternative but to amalgamate Proton with Perodua to theoretically create an effectively nationalised body to maintain the the momentum in what is a very important contributor to the national budget and perhaps seek new opportunities as a bigger, better and far more cost-efficient 'national conglomerate'.
To do so Proton bought Group Lotus outright in 1999 (from Luxembourg's ACBN Holdings), but the consultancies acquisition has neither re-directed the fortunes of either parent or child. The expected relationship was based on mutuality of need - expertise for Proton and funding for Lotus - but political and fiscal pressures haven't generated the idealised synergies. Yes there's been good Proton product portfolio improvement in a short timeframe (including a new family of engines) but not enough to elevate the cars to US/European/Japanese standards now expected both domestically and for advanced global markets such as it's target top 3: UK, South Africa & Australia.
In the west Proton is an entry-level player, so has suffered from the rounds of heavy price discounting that has become the norm for mid-life vehicles by the large VMs and of course the crop of affordable brands such as Hyundai and Skoda. Such pressurised markets negate the competitive price advantage 'alternative brands' like Proton once enjoyed; add the disadvantage of a sporadic dealer network and poor residual values and the UK, SA and Australian export drives - although long-lasting - have been fruitless in the attempt to off-set the long expected domestic sales decline that has now come to pass.
The catalyst was the end of the AFTA agreement exclusion (providing a scaled reduction of import/CBU tariffs), opening the doors to those foreign makers that hadn't already set up assembly plants to by-pass the previous barriers. Ultimately, the momentum of globalisation yielded an influx of new car opportunities for the general public, which they seized, Proton sales suffering dramatically - down from 60% of the market in 2002 to 23% today; equalling 130k units pa.
This output figure represents only 13% of the output capacity of the firm's manufacturing capacity, dramatically raised in recent years by the creation of 'Proton City', a PPP (Private-Public-Partnership) funded modern production hub that seeks to dramatically improve Proton & Malaysia's operational capabilities. The aim to demonstrate Malaysia's advantages as an apparently world-class auto-centre for manufacture and distribution; competing with Thailand as the "Detroit of SE Asia". Under the AFTA free-trade threat Ministers recognised the need to re-shape its domestic auto-industry, essentially broadening its remit, and using Proton itself as the mechanism for industrial policy change. To develop a plan that fits Proton and Malaysia into the broader, rapidly changing, highly competitive Asian framework; transformation led by the Chinese and Indians.
The core strategy behind the Proton City plant was to provide a massive hike in regional volume capacity, much needed given economic growth forecasts of the region. The idea is that the capacity would offer one or more combined stragetic choices:
1. to entice a western auto-maker to buy a significant stake in Proton
2. to sell the capacity to a western or VM on a lease/rental basis
3. to create a sound parts and assembly supply chain to feed burgeoning inter-regional demand.
4. to produce re-badged Proton cars on behalf of 'new' Asian auto companies...leading...
5. to become a Tier 0.5 VM client-focused producer (like Magna-Steyr etc)
6. to allow Proton sell-on technology and IPR to 'new' Asian producers
To date:
1. no western VM (eg VW, GM, PSA) has taken a serious interest in buying Proton, their focus on BRIC regions that offer better direct sales opportunities.
2. The idea of selling capacity to essentially contract-in assembly work is still top of mind.
3. Efforts to do so taking time given the differing interests of high profile Malays that own much of the parts-base
4. An agreement has been struck with China's Youngman to badge-engineer cars under the Europestar brand. 30,000 Gen2 cars to be supplied, with eventual additional models (ie BLM)
5. Although negotiations have taken place, no concrete progress forward (yet).
6. This essentially puts Proton/Malaysia in the role of technology broker to needy 'new' entrants, re-emphasising the need to exploit and grow Lotus Engineering's powertrain, chassis and body R&D.
In terms of tangible progress, there have been only a few positive announcements, and a few 'leaked' but incorrect press releases that served to try and bouy shareprice. However, as stated in point 4, one success story are the first few tentative steps in a Chinese supply deal.
However this has only slightly supported company prospects and financial markets are still weary of a bad (if not worse) case scenerio as an eventual outcome if the Chinese supply strategy falters. The biggest blow came from the retraction of VW's interest in forming a JV, Proton's stock-price plummeted 20% and has hardly recovered, leaving the share-price (and MarketCap) about half of what it was a year ago. Given their stake-building the government backed Khazanah Nasional (investment fund) and Employees Provident Fund (social security arm) have been hit hard, but their purchase actions were very probably prompted to help stop a possible worse blood-letting if more stock had been held by reactionary parties.
So what next?
At present Proton as an independent car company looks very shaky, with little direct foreign investment on the horizon. The oft touted possibility of creating the exportable 'Islamic Car' is as 'idealistic', unlikely and remote as ever since plainly other Muslim countries like Iran, Morocco, Turkey, Pakistan and Uzbekhistan plainly have car-making ambitions of their own via the more stable route of using western partners. Domestically, Western and Asian VMs operate freely in the domestic market and have to a point carved-up the segments for themselves. Thus the only viable route forward is courting of the new automakers, promoting the country's long association with, and high population-mix, of ethnic Chinese & Indian Malays. Although they personally have less political weight than the more priveliged indigenous Malays, they would act as front-men to bolster cross-border relations.
Many will say the die has been set (forgive the manufacturing pun) and what we are witnessing is Proton's metamorphosis (possible death and rebirth) as a very different entity. That process of change will take time, and Proton management are in the process of best managing that change:
a. forging links with future business partners
b. endeavouring to utilise its current vehicle range as an intermediatory instrument
c. assisting newcomers to bring cars to their own market
d. laying the foundations for what could essentially be B2B contract supply of products & services.
The most interesting proposition, to sensitive to formally air, is perhaps the wholesale divestment of Proton to a Chinese or Indian player, a firm looking for geographic expansion, immediate access to market and a sizeable slice of TIV (like Proton's 23%...remember that's better than Ford, GM or Chrysler's own domestic slice).
The stumbling block to such a radical direction may be the close-knit culture and interests of Malaysian government, finance and commerce who are both politically tied to Proton (in the interest of votes) and have major commercial interests in parts and distribution. But that's not to say that further examination of the transformation process is not warranted. If there's greater value-creation 'angle' to be extracted the powers that be will undoubtedly have open minds.
But given the export 'isolated' geographic location of Malysia relative to the heart of Asia, its industrial cost-base, the country's lack of a true engineering skills-base, the limited opportunity as the Muslim Car and critically the very directed flow of Automotive Asia-Pacific investment, the odds look - at a first glance at least - presently unfortunately appear stacked against it.
The government does indeed have a hard task on its hands. It's given Proton a few more years to find a viable survival plan, thereafter (it says) there are no promises. We believe that if there is no credible 3rd party interest in a JV and the China/India supply strategy doesn't grow, that the Malays may not have an alternative but to amalgamate Proton with Perodua to theoretically create an effectively nationalised body to maintain the the momentum in what is a very important contributor to the national budget and perhaps seek new opportunities as a bigger, better and far more cost-efficient 'national conglomerate'.
Subscribe to:
Posts (Atom)