GM, like its Detroit siblings, will continue to feel the pinch of economic woe within the US economy (see previous post). So, as with many multi-nationals across most sectors, as US operations “re-align for tomorrow”, there has been distinct focus upon growth expectation and reliance within developing regions. Rebound from the tiger economies crash of 1998 and the emergence of China and India have demonstrated the power of East vs West, and some feel may have perhaps taken up a disproportionate share of senior management’s focus in many a corporation. But rewards only come after hard work, as GM’s previous efforts of buying into, turning around and exploiting the Daewoo/GM-DAT division demonstrate, now paying-off handsomely.
In the middle ground, economically and geographically, is of course Europe, with essentially very fragmented characteristics if we observe W. Europe market dynamics vs E.Europe and of course the nature of car-buying demands of consumers themselves. Whilst the socio-economic effects of European integration and globalisation have started to re-balance the previous stark differences, the automotive old-guard, GM the archetype, have had to consistently re-assess operational strategies and critically brand and product offerings.
Detroit’s Big 3 have historically always played-out different strategies on the world-stage, ‘The General’ always concerned with maintaining volume and scale, less adventurous in product designs, and keen to stand in the middle-ground of conventionality. But Where as Alfred P Sloane recognised the need to offer a ladder of brands in the US in the 1920s, that recognition was starkly lacking throughout the 1980s and 90s in Europe, Ford’s previous efforts with the previous PAG, demonstrating GM’s lack of foresight. (GM, as stated, was quietly nurturing Daewoo whilst PAG had the spotlight).Whilst times have changed, and along with them Ford’s strategic direction, it has oft been commented that GM Europe, given its leverage, does suffer from a lack of brand-scope. Detroit may have been keen not to repeat the inefficiencies experienced of decaying (and discontinued) US brands, and so have kept GME limited to the 2 primary core marques plus SAAB and the ‘re-energised’ Cadillac
It is this latter ‘migratory’ brand that has for what seems eons to have caused periodic optimism and despair within the European context. Whilst at home Cadillac has experienced its fair share of lacklustre, if not slated, products (esp Cimarron, Allante) the periodic escapades into European territory consistently disappointed, low volumes sold through independent distributors across Germany, Holland, Switzerland etc. Infact, the buyer types of Cadillacs in Europe were viewed/stereotyped as modern-day ‘Spivs’ or aspirant but failed older playboys desperate for kudos and social prestige, which understandably socially invisibly tarnished the American brands reputation. But beyond this, a primary factor was the European expectation of what a Quality Premium car should deliver…Cadillac was never really in the running. Thus over the years the European industry has watched Cadillac’s European Invasion Campaigns come and go.
But in recent years, given the squeeze on US sales, GM has once again decided to pitch for Europe, this time maximising platform synergies with SAAB and Opel to assist mutual business cases and so provide ‘dedicated’ product for Europe which also allows for an extended smaller car model line for North America; as probably anticipated. The corporate push witnessed today, is perhaps GM’s greatest effort at getting the American brand accepted, as it psychologically associates with the Chevrolet brand expansion.
This, fortunately or unfortunately, comes on the back of a previous youth-orientated popularity for the full-size Escalade SUV that started within the Gangsta & R&B music fields and became notorious as a music-video prop. This exposure gave Cadillac a new ‘edge’, bringing the brand back into a niche area of the mass-popular consciousness. Like the reputation gained with European ‘Spivs’ just how accordant it is with Cadillac’s own brand-orientation desires is debatable, pros and cons with the route of re-emergence.
To European eyes at least, the hard-edged, angular ‘Stealth’ aesthetic is an alternative to the far more sophisticated surface treatments of other aspirant and premium brands. In the US of course it has become absorbed since its shocking introduction in 1999 through concept cars and importantly avant-garde films like The Matrix. Cadillac Europe must be hoping that the linearity of their cars could catch on as it did with Jeep’s Cherokee in the early-mid 1990s in Europe, but given the lack of a similar social trend impetus and some say jarring visuals, this ambition may be rather optimistic.
As of today, the apparent GM commitment to Europe is clear, specifically developed model(s) to suit size and driving requirements of Europeans, with for the first time, all of its UK cars reportedly now with right hand drive. While the onus is on European dealers to shift metal, now that there is an ‘expansive’ 5 vehicle line-up, the industry and investors recognise that in truth it is only the beginning of what has to be a sustained campaign that must be supported across all marketing fronts if the brand is to find a modicum of favour. Getting to this point has been a major achievement for GM, including no doubt political disputes within the GME engineering base relative to project cost absorption for the ‘adapted’ BLS. Of course such friction is a small pain for the Renaissance Centre seniors who have global ambitions for the once revered brand, especially pertinent to act quickly when the likes of Nissan’s Infiniti brand seeks to join the premium sector party, the competitive threat of which is all too obvious.
But has it acted too quickly in its desire for geographic spread? Main concerns are product integrity and model name recognition and connotation. Whilst product quality has undoubtedly improved the European auto-press still rates Cadillac lower across many measures, and perhaps more importantly, the European premium buyer can’t (yet?) position Cadillac within their own frames of referance – “truly individual or odd-ball”? And remember, aspirant car-buyers are amongst the most conservative and cautious relative to what the neighbours, fellow colleagues or squash-club members may think.
For that reason the C segment BLS is a very important benchmark of the brand’s credibility within Europe and especially in the UK & Germany where a disproportionate of premium cars are sold. As for CTS and STS cars, although size-wise different, their generic graphic similarities may be misunderstood by European buyers, wondering why 2 sizes of what appears the same car are made available; since no-one has done that since BMW did with it’s 3,5,7 series since the late 80s. Of course there is perhaps greater hope for the cross-over SRX, but relative to the Germans, Land Rover and Japanese and the fact that focus is on smaller sized CUVs (eg Q3, X3, GLK) it is oversized and part of a diminishing larger cross-over segment. Lastly is Escalade, which will probably sell relatively well and hit low volume targets given the cache in certain circles, but it has visually softened which doesn’t help its image and in reality although very good on a per unit margin basis, lacks the volume to be a true income provider.
GM obviously hopes Cadillac will start playing an increasingly important role in GME’s revenue stream, but it still has a long way to go (perhaps 5-10 years) before the marque is taken seriously. And it will have to adapt if it wishes to remain in the running, especially so in the question of size and fuel-efficiency in today’s ever so carbon-sensitive social and economic atmospheres. But here comes the rub.......small Caddys have historically been the faltering-point for the brand so is a small Cadillac essentially an oxymoron? (Especially given the recent emphasis of ‘Big and Brash’ by Escalade). Big car persona in increasingly more compact dimensions? This can be done with monobox packaging, but doesn't that fly in the face of Cadillac's big-car/3 box silhouette?
It’s an oft re-visted hypothesis by GM that theoretically the division could eventually make a major contribution as a global player; but getting it to that point has proved elusive to date. Indeed, even its standing as a true premium player in the US market was lost years ago, so, playing devil’s advocate, what exactly does Cadillac stand for today, and what values are GM actually exporting? It’s an answer lost to many.
The ‘Art & Science’ design philosophy that sits behind the near decade old styling was pertinent in re-inventing Cadillac and extending its connection to a more youthful audience (beyond the traditional grey-market) within North America. GM must now seriously consider how it approaches that yet another re-invention for the world at large, since whilst there may be a major distribution push underway, without a robust, meaningful message and a crop of more (philosophically not necessarily technically) advanced cars the substantial efforts seen thus far could readily flounder.
It may seem a stretch given their rivalry, but if Cadillac and subsequently Lincoln do decide to play permanently on the European and world stages, then they should demonstrate exactly what ‘American Luxury’ (to use Lincoln’s design phrase) stands for. Ironically Lincoln’s recent brand philosophy re-orientation was based on the original 1960s re-interpretation of European Luxury. It was at that point that Cadillac’s chrome & big-tailfin iconography died out to be replaced by Lincoln’s more tasteful and successful clean-linearity and de-cluttered detail. Today perhaps the 2 brands should discuss how they could individually represent both sides of the same American coin…or perhaps $100 Bill.
Business and social surveys suggest that the global public’s perception of ‘Brand America’ is at an all time low. But a new dawn is emerging within the American socio-political consciousness, and developments are being closely watched by the rest of the world. Perhaps too GM could utilise this probable new era of change to export its own relevant Modern-Americana message? That may seem a far fetched basis for brand management – but it highlights the need to re-represent itself in what is possibly a broadly hostile competitor & consumer environment. It must endeavour to produce new image & PR formulas that may appear radical but that capture old and new personas of the marque.
investment-auto-motives believes Cadillac can plant new roots in Europe and beyond, but it must be far-sighted and creative in how it reaches the heart of new buyers. That may mean radical initiatives beyond compass-bearing concept cars, being seen to be on the streets as something very unique, with perhaps the creation of a select Cadillac Club with lifestyle connotations and fringe benefits. At its root, it must be about far more than the historic demands of Detroit to swim unprepared against a strong tide. All good swimmers know to swim (think) laterally across the unbeatable currents and riptide.
Finally to add yet another metaphor, comparing Cadillac’s European campaign to that of the British forces’ WW2 European efforts may appear to stretch the sentiment, but to quote Churchill:
“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."
And that is what Wagoner, the GM Board and Cadillac managers must recognise.
Thursday, 28 February 2008
Wednesday, 27 February 2008
Macro-Level Trends – US Fiscal Policy – Where Next for US Automakers?
In contrast to what seems a relatively healthy picture for European automakers - see last post - the recent reporting of very bearish US econometric indicators have made for an anxious atmosphere questioning “what now?” throughout US industry, its financial structures and of course global observers that were keen to see an early resolution negating a lengthening the US recession.
Obviously key issues are:
1. Interest Rate Policy
2. Unemployment Rates
3. Housing Market/Pricing Dynamics
4. Consumer Sentiment Trends
5. Productivity Measures
Interest Rates -
The Federal Reserve’s previous heavy interest rate cut has not had the immediate effect hoped for upon many of the intended ‘shadows’; the continuation the financial market’s fragility the most visible. It will possibly provide a small effect against inflation growth (yet to really be seen given the lag) and continued the US $ slide. But of course economic policy outcomes aren’t achieved overnight. Given recent Fed statements, policy analysts expect Bernanke to continue in the same vein believing that it is the most powerful and visible macro-economic lever to combat the negativity within industrial investment and housing purchase sentiment. As a consequence, the weakened dollar will theoretically also attract foreign inward investment and raise the attraction of US exports.
Unemployment Trends -
Whilst the theory is sound, senior industrialists also recognise that whilst Bernanke can set the context, they must create the internal operational conditions for survivability and growth. And management theory suggests that the near term will require organisational restructuring to reduce higher cost overhead and variables; since little can be done to reduce increasingly costly input costs (energy, raw materials etc) much of that cost-saving will be workforce related, now more available since the UAW contract agreements. And as with notional academic fiscal theory: “when interest rates drop, unemployment rises”. This increase in unemployment and knock-on effect in consumer confidence (adding to housing concerns) will obviously affect auto-sales.
Housing Market Dynamics -
Given that the foundation of American growth over the last decade has been high domestic consumer demand created through loose credit, itself based on a burgeoning housing asset class, it is not surprising that Wall St, The City and other major financial centres and bourses have kept a close eye on US housing data. So the S&P/Case-Shiller Home Price Index was jumped upon when it released its Dec ’07 figures. Measuring the prime 20 metro areas in the country, results demonstrated a bleak picture, December showing a 9.1% YoY drop, extending the rate of decline beyond the 7.7% November YoY figure.
Nationwide (beyond the prime 20 regions) the drop still stands at a heavy 8.9%, the worst decline in 20 years. Forecasters such as Global Insight expect that rate to continue downward through 2008 given the macro-pressures, a Bloomberg survey revealing an expected 9.7% drop.
This 12th quarter period decline was well pre-empted by a slow-down in the house-building sector a long-while ago, many real estate developers having to operate at skeleton levels, hold their breath, and (as with Kimball Hill Inc) look at the possibility of filing for Chapter 11. Undoubtedly there’ll be house-builder consolidation take place and this may be the time for automakers to start talking to national and regional home-builders about new inter-related home and auto purchase financing schemes and alternative business models? (see 03.01.08 post – “Remodelling the Structural Economics of Autos & Housing”)
Consumer Confidence –
Needless to say from the ‘feeling on the street’ things have (over the last 6 months especially) deteriorated. Officially recognised records highlight a 5 year low in sentiment as illustrated by New York’s Consumer Confidence Board, their survey showing a 75 point in their index, a rapid decline from January’s 87.3, and well below forecast. The usual real-world sentiment headwinds are to blame – energy prices & food prices especially - even if official RPI price inflation statistics conveniently exclude these 2 important effectors. The social psychographic is perhaps most evident with household improvement spending, the housing-retail interlink strained heavily, as seen by Home Depot EoY results, the Q407 portion most effected.
Productivity –
Prices and Core Inflation have been the major stories here, whilst measures saw a 1% rise in general productivity, input prices saw a rise of 7.1%, the highest in 27 years, since the 1981 recession. Given that context, greatest concerns are over a mini (or perhaps not so mini) stagflationary effect where static/minimal growth is heavily outpaced by price inflation. This in turn generates worries about demand for consumer equalising wage costs rises and so an ongoing inflationary spiral. Of course combating such a picture is a central part of the Monetarist Theory preferred by the US, UK et al, so there will be governmental persuasion to maintain operational price controls where possible, and that means labour costs (see above).
So what does this all mean for Autos?
Industry watchers will recognise that it means an onward march of productivity and revenue improvement to effectively tread-water, in the short-mid term at least. Corporate revival plans for Detroit’s Big 3 may need slight retuning, though for the most part, this possible recession had been factored-in plans, the US economic pull-out predicted for 2010, so long-term strategies accordant with that scenario.
However, it will mean another round of efficiencies seeking from production plants, work-force, suppliers etc that could well see a push for higher volume runs of standardised specification vehicles, the ‘simplicity’ of which could be sold-on to aid what was once a dizzying array of consumer choice.
Infact, GM, Ford and Chrysler should now be researching what constitutes best-fit specification models for their production order relative to the near-term US marketplace, so much will be demanded of the current and future vehicle line product planners to be sure they can maximise production and sales efficiency. That’s not to say that they end up with the ‘Black Model T’ scenario, simply that dealers could be asked to encourage certain consumer choices that will in time stand them in good stead for re-sale. Hence managing the internal value-chain to reduce ‘fringe’ product will be key.
Interestingly, given the housing woes, there have been reports of trends and issues that could provide a housing-related hiatus for Autos, in what seem bleak times.
Firstly, it has been reported that whilst (especially recent) homebuyers have let their mortgage repayments slip, they have maintained the willingness/ability to spend on Autos, leisure and disposable goods – unwilling to give up the consumer dream even if their own homes are foreclosed. The consumer psychology maybe that whilst the perfect ‘own home’ dream may be distant, that the ‘enjoy now – pay later’ attitude has not declined, infact given the lack of the ‘big-dream’ (house) that this disappointment may be offset with jewellery, consumer goods, holidays etc…to make life worthwhile.
Secondly, there may be an increasing prevalence that foreclosures don’t happen as quickly, if in some circumstances, at all.
There is a precedent being set that homeowners facing foreclosure can demand proof that a foreclosure notice is accompanied by the relative home-loan note. Since these notes were sold on and on and on to 3rd, 4th, 5th parties within the complex SIV & CDO financial instruments that created the ‘credit-crunch’, their exact whereabouts and actual proprietary ownerships have become hard to locate, the record keeping behind the deal-making seriously lacking. Thus, there will undoubtedly follow a trend by those facing repossession to utilise this technical loop-hole in delaying or quashing foreclosure; assisting security and spending confidence
Both of these trends may, if actually more prevalent than suspected, help ease the imagined clamp-down in auto-sales expected from the ever worsening official metrics. Whilst not to any extend a panacea, similar ‘invisible’ trends and issues must be identified and presented to demonstrate that the auto-market may not succumb to an apparent ‘melt-down’ below 15.0m units
Obviously key issues are:
1. Interest Rate Policy
2. Unemployment Rates
3. Housing Market/Pricing Dynamics
4. Consumer Sentiment Trends
5. Productivity Measures
Interest Rates -
The Federal Reserve’s previous heavy interest rate cut has not had the immediate effect hoped for upon many of the intended ‘shadows’; the continuation the financial market’s fragility the most visible. It will possibly provide a small effect against inflation growth (yet to really be seen given the lag) and continued the US $ slide. But of course economic policy outcomes aren’t achieved overnight. Given recent Fed statements, policy analysts expect Bernanke to continue in the same vein believing that it is the most powerful and visible macro-economic lever to combat the negativity within industrial investment and housing purchase sentiment. As a consequence, the weakened dollar will theoretically also attract foreign inward investment and raise the attraction of US exports.
Unemployment Trends -
Whilst the theory is sound, senior industrialists also recognise that whilst Bernanke can set the context, they must create the internal operational conditions for survivability and growth. And management theory suggests that the near term will require organisational restructuring to reduce higher cost overhead and variables; since little can be done to reduce increasingly costly input costs (energy, raw materials etc) much of that cost-saving will be workforce related, now more available since the UAW contract agreements. And as with notional academic fiscal theory: “when interest rates drop, unemployment rises”. This increase in unemployment and knock-on effect in consumer confidence (adding to housing concerns) will obviously affect auto-sales.
Housing Market Dynamics -
Given that the foundation of American growth over the last decade has been high domestic consumer demand created through loose credit, itself based on a burgeoning housing asset class, it is not surprising that Wall St, The City and other major financial centres and bourses have kept a close eye on US housing data. So the S&P/Case-Shiller Home Price Index was jumped upon when it released its Dec ’07 figures. Measuring the prime 20 metro areas in the country, results demonstrated a bleak picture, December showing a 9.1% YoY drop, extending the rate of decline beyond the 7.7% November YoY figure.
Nationwide (beyond the prime 20 regions) the drop still stands at a heavy 8.9%, the worst decline in 20 years. Forecasters such as Global Insight expect that rate to continue downward through 2008 given the macro-pressures, a Bloomberg survey revealing an expected 9.7% drop.
This 12th quarter period decline was well pre-empted by a slow-down in the house-building sector a long-while ago, many real estate developers having to operate at skeleton levels, hold their breath, and (as with Kimball Hill Inc) look at the possibility of filing for Chapter 11. Undoubtedly there’ll be house-builder consolidation take place and this may be the time for automakers to start talking to national and regional home-builders about new inter-related home and auto purchase financing schemes and alternative business models? (see 03.01.08 post – “Remodelling the Structural Economics of Autos & Housing”)
Consumer Confidence –
Needless to say from the ‘feeling on the street’ things have (over the last 6 months especially) deteriorated. Officially recognised records highlight a 5 year low in sentiment as illustrated by New York’s Consumer Confidence Board, their survey showing a 75 point in their index, a rapid decline from January’s 87.3, and well below forecast. The usual real-world sentiment headwinds are to blame – energy prices & food prices especially - even if official RPI price inflation statistics conveniently exclude these 2 important effectors. The social psychographic is perhaps most evident with household improvement spending, the housing-retail interlink strained heavily, as seen by Home Depot EoY results, the Q407 portion most effected.
Productivity –
Prices and Core Inflation have been the major stories here, whilst measures saw a 1% rise in general productivity, input prices saw a rise of 7.1%, the highest in 27 years, since the 1981 recession. Given that context, greatest concerns are over a mini (or perhaps not so mini) stagflationary effect where static/minimal growth is heavily outpaced by price inflation. This in turn generates worries about demand for consumer equalising wage costs rises and so an ongoing inflationary spiral. Of course combating such a picture is a central part of the Monetarist Theory preferred by the US, UK et al, so there will be governmental persuasion to maintain operational price controls where possible, and that means labour costs (see above).
So what does this all mean for Autos?
Industry watchers will recognise that it means an onward march of productivity and revenue improvement to effectively tread-water, in the short-mid term at least. Corporate revival plans for Detroit’s Big 3 may need slight retuning, though for the most part, this possible recession had been factored-in plans, the US economic pull-out predicted for 2010, so long-term strategies accordant with that scenario.
However, it will mean another round of efficiencies seeking from production plants, work-force, suppliers etc that could well see a push for higher volume runs of standardised specification vehicles, the ‘simplicity’ of which could be sold-on to aid what was once a dizzying array of consumer choice.
Infact, GM, Ford and Chrysler should now be researching what constitutes best-fit specification models for their production order relative to the near-term US marketplace, so much will be demanded of the current and future vehicle line product planners to be sure they can maximise production and sales efficiency. That’s not to say that they end up with the ‘Black Model T’ scenario, simply that dealers could be asked to encourage certain consumer choices that will in time stand them in good stead for re-sale. Hence managing the internal value-chain to reduce ‘fringe’ product will be key.
Interestingly, given the housing woes, there have been reports of trends and issues that could provide a housing-related hiatus for Autos, in what seem bleak times.
Firstly, it has been reported that whilst (especially recent) homebuyers have let their mortgage repayments slip, they have maintained the willingness/ability to spend on Autos, leisure and disposable goods – unwilling to give up the consumer dream even if their own homes are foreclosed. The consumer psychology maybe that whilst the perfect ‘own home’ dream may be distant, that the ‘enjoy now – pay later’ attitude has not declined, infact given the lack of the ‘big-dream’ (house) that this disappointment may be offset with jewellery, consumer goods, holidays etc…to make life worthwhile.
Secondly, there may be an increasing prevalence that foreclosures don’t happen as quickly, if in some circumstances, at all.
There is a precedent being set that homeowners facing foreclosure can demand proof that a foreclosure notice is accompanied by the relative home-loan note. Since these notes were sold on and on and on to 3rd, 4th, 5th parties within the complex SIV & CDO financial instruments that created the ‘credit-crunch’, their exact whereabouts and actual proprietary ownerships have become hard to locate, the record keeping behind the deal-making seriously lacking. Thus, there will undoubtedly follow a trend by those facing repossession to utilise this technical loop-hole in delaying or quashing foreclosure; assisting security and spending confidence
Both of these trends may, if actually more prevalent than suspected, help ease the imagined clamp-down in auto-sales expected from the ever worsening official metrics. Whilst not to any extend a panacea, similar ‘invisible’ trends and issues must be identified and presented to demonstrate that the auto-market may not succumb to an apparent ‘melt-down’ below 15.0m units
Monday, 25 February 2008
Macro-Level Trends – Financial Markets - European Auto Stocks Highlighted
Auto stocks, often recognised (and perhaps overly generalised) for their long cyclical behaviour and current harsh headwinds, appear when fundamentally right, to be back in favour amongst investment bank analysts. Bearing that in mind, whilst the US (VMs & Suppliers) players ‘right-size’ and re-structure, the Japanese maintain cautious slow growth and Koreans face increased price competition, it is a European trio that appear best placed.
For Lehman Brothers’ analysts looking at cross-sector portfolios the European trio of Daimler AG, Renault SA and PSA SA appear to be the vanguard of bright automotive prospects, and it’s a perspective that investment-auto-motives shares (see previous posts: 19.02.08 Daimler / 29.01.08 PSA / 08.01.08 Renault).
The only previous reservation related to the ‘drag’ created by Nissan USA upon the overall performance of the Renault-Nissan alliance, but more recent events such as the critically important Renault-Avtovaz JV finalised recently have once again catapulted Renault’s prospects counter-balancing Nissan.
Daimler given its divorce from Chrysler (including well negotiated liabilities), sector-leading product margins and imminent product wave that sees near complete portfolio renewal within 2.5 years and stock-buyback campaign perhaps demonstrates itself as the best low-risk high-reward option of the recommended Europeans.
PSA appears to back on form after some 3 years of being lost, relying on its well established reputation for technical and product alliances to maximise engineering efficiencies, whilst continuing to extract as great a differentiation as possible between Peugeot and Citroen whilst obviously sharing as much technical hardware as possible, something it has done admirably to date.
Of course whilst the industry talks-up the surge effect of BRIC+ markets, investors recognise that it will be those who can best position themselves in the dominant ‘old markets’ flattening, squeeze and possible shake-out that will win respect and investor Euros, Pounds, Dollars etc.
The writing has been on the wall for some time that those producing premium vehicles, small cars and LCVs would be best placed to face the future, and that future has arrived. Interesting to note that, like others Lehman’s appears to think Fiat success may have slowed, even with the new small 500s launch and a diverse set of group divisions each apparently well placed. Of course shared production 500s don’t hold the margins of Fiat’s own B segment cars, and undoubtedly the rumour Marchionne’s extended responsibilities within the Banking world would not have helped the Italian companies prospects given the weight of contribution Marchionne and Autos have played in recent years.
To surmise, interesting to at last see this trio recommended, done so primarily with reference to the undervalued Auto-sector standing of the Dow Jones Stoxx Autos & Parts index, down 30% since Oct 29th against the Stoxx 600 – the worst of 18 sector performers. Given that this trend-line gap grew so markedly evident so quickly, it’s no surprise that it warranted such investigation and revealed what industry experts already recognised as fundamentally right opportunities.
Zeitsch, Streiff and Ghosn will be happy to see the investment world at large take note.
For Lehman Brothers’ analysts looking at cross-sector portfolios the European trio of Daimler AG, Renault SA and PSA SA appear to be the vanguard of bright automotive prospects, and it’s a perspective that investment-auto-motives shares (see previous posts: 19.02.08 Daimler / 29.01.08 PSA / 08.01.08 Renault).
The only previous reservation related to the ‘drag’ created by Nissan USA upon the overall performance of the Renault-Nissan alliance, but more recent events such as the critically important Renault-Avtovaz JV finalised recently have once again catapulted Renault’s prospects counter-balancing Nissan.
Daimler given its divorce from Chrysler (including well negotiated liabilities), sector-leading product margins and imminent product wave that sees near complete portfolio renewal within 2.5 years and stock-buyback campaign perhaps demonstrates itself as the best low-risk high-reward option of the recommended Europeans.
PSA appears to back on form after some 3 years of being lost, relying on its well established reputation for technical and product alliances to maximise engineering efficiencies, whilst continuing to extract as great a differentiation as possible between Peugeot and Citroen whilst obviously sharing as much technical hardware as possible, something it has done admirably to date.
Of course whilst the industry talks-up the surge effect of BRIC+ markets, investors recognise that it will be those who can best position themselves in the dominant ‘old markets’ flattening, squeeze and possible shake-out that will win respect and investor Euros, Pounds, Dollars etc.
The writing has been on the wall for some time that those producing premium vehicles, small cars and LCVs would be best placed to face the future, and that future has arrived. Interesting to note that, like others Lehman’s appears to think Fiat success may have slowed, even with the new small 500s launch and a diverse set of group divisions each apparently well placed. Of course shared production 500s don’t hold the margins of Fiat’s own B segment cars, and undoubtedly the rumour Marchionne’s extended responsibilities within the Banking world would not have helped the Italian companies prospects given the weight of contribution Marchionne and Autos have played in recent years.
To surmise, interesting to at last see this trio recommended, done so primarily with reference to the undervalued Auto-sector standing of the Dow Jones Stoxx Autos & Parts index, down 30% since Oct 29th against the Stoxx 600 – the worst of 18 sector performers. Given that this trend-line gap grew so markedly evident so quickly, it’s no surprise that it warranted such investigation and revealed what industry experts already recognised as fundamentally right opportunities.
Zeitsch, Streiff and Ghosn will be happy to see the investment world at large take note.
Friday, 22 February 2008
Macro-Level Trends – City Vehicle Access Charging - Stuttgart vs London vs The World
Porsche AG & GB have, in the interests if their clients and business, decided to rebuke the Mayor of London’s insistence that many Porsche owners will have to pay a dramatically increased (now £25) Congestion Charge, as cars such as Cayenne and 911 emit what are now measured as relatively high levels of CO2 and pollutants. Porsche hopes that its protest will enable a debate that will ‘highlight the folly of the plan’, giving the Mayor’s office 2 weeks to respond before requesting a judicial review from the High Court.
Such a clash was always on the cards, from the earliest days of the inter/intra-urban scheme, as the initiative to differentiate the levels & types of offenders – and penalise accordingly – was to be rolled-out. It first started with a rise in Resident’s Parking Fees in West London for the ‘high-polluting’ 4x4 brigade, a newly introduced (as of Feb 4th) Low Emissions Zone across all of London, a clamp-down on HGVs and MCVs, aswell as the ongoing nationwide higher rated road fund license fees, now accompanied by the £25 shock revelation due for introduction in October ’08.
Reading between the lines, it appears that the Mayor expects that luxury car owners will be mostly resigned to paying the extended charge for their ‘privilege’, and such as scheme would prompt premium auto-makers to advance their efforts in providing low emissions variants using hybrid powertrains (that attract charge exemption) or alternative ‘clean’ traditional combustion and propulsion solutions. (The Lexus RX400h and LS600h already bypass the regulatory charge on the basis that they are notionally low-polluting hybrids – a notion that many ‘greens’ have protested against given the cubic capacity of the IC engines)
But of course many of London’s Porsche owners, like their 4x4 counterparts, simply see the initiative as Ken Livingstone’s over-taxing of the ‘easy prey’ wealthy, claiming that the tax revenues and real-world pollution reduction have done little to improve City life for both those using public transport and car drivers alike.
The truth is that what we presently witness are the extremes of proposal and proactive debate; London is indeed at the vanguard of implementing such congestion charging schemes that are presently being tested, deployed and planned elsewhere – from New York to Paris to Hong Kong and beyond. And as such it is treading the path of greatest resistance to see what is ‘wearable’ (in terms of taxation and prohibition) by car drivers, businesses, fleet operators and ultimately taxi providers.
But at its heart the Porsche vs Ken Livingstone furore is really reactionary polar opposite interests, standing firm to a great extent to be critically being seen to take a hard-line by associative stakeholders (inc. Porsche GB’s London clientel). If it reaches court, Porsche will describe the heavy R&D expenditure undertaken to provide Cayenne and the up-coming Pan-Am spin-off with hybrid units, it’s constant efforts to clean-up its IC engines and other technological advances such as ‘recaptured braking’ it shares with other German premium VMs and their technically advanced supplier-base.
We expect the planned £25 charge will be contested by other car-makers such as BMW, Mercedes, Audi, Jaguar, Land-Rover to name obvious marques, joining forces as a powerful voice via the SMMT and European trade associations, in an effort to contain Livingstone’s plan with a far reduced levy of perhaps £10-15, which still provides substantial additional revenue over and above the current £8 flat fee,
Automakers recognise that the London model is setting a possibly world-wide precedent, and must act to ensure that overly zealous punitive penalties are not imposed both in London and eventually elsewhere. Of course they may seek to find new sales possibilities which could of-set the impact and costs of their ‘guilty’ vehicles, so it may be a case of watching this space to see what propositions the likes of Porsche could offer, from tree-planting to charge-absorption.
Of course there is a small crop of car-makers who see this seismic shift in local government policy as an opportunity. As described in a previous post, Tesla perhaps the most obvious and poignant given its ambitions of an electric large luxury saloon codenamed White Star; that would seek to displace the likes of BMW’s 5 series and Mercedes’ E-Series, as the eco-friendly, tax-exemptive alternative; presently seeking $250m in funding and US government grants to produce the car.
‘Green Financing Funds’ have come to the fore in recent years, typified by solar and wind farms and technologies, but is it an arena that the Mayor maybe prepared to invest London’s municipal funds into, if they embrace new-technology vehicles? And wouldn’t the world renowned London Taxi Cab be a perfect showcase for such a venture….perhaps the Mayor through London Taxis International (Manganese Bronze & Geely) and possibly Tesla, should start considering the possibility of leading by example? As many critics, no doubt including Porsche, will point out, present day cabs although compliant are hardly leading the (hybrid/electric) charge.
The London Taxi is being touted by LTI-Geely as the possible transferable icon to all major global cities, and since they too are implementing or seriously considering urban charging, then the advanced London Cab could be a prosperous undertaking in a well planned, forward looking, Private-Public Finance Initiative.
Such a clash was always on the cards, from the earliest days of the inter/intra-urban scheme, as the initiative to differentiate the levels & types of offenders – and penalise accordingly – was to be rolled-out. It first started with a rise in Resident’s Parking Fees in West London for the ‘high-polluting’ 4x4 brigade, a newly introduced (as of Feb 4th) Low Emissions Zone across all of London, a clamp-down on HGVs and MCVs, aswell as the ongoing nationwide higher rated road fund license fees, now accompanied by the £25 shock revelation due for introduction in October ’08.
Reading between the lines, it appears that the Mayor expects that luxury car owners will be mostly resigned to paying the extended charge for their ‘privilege’, and such as scheme would prompt premium auto-makers to advance their efforts in providing low emissions variants using hybrid powertrains (that attract charge exemption) or alternative ‘clean’ traditional combustion and propulsion solutions. (The Lexus RX400h and LS600h already bypass the regulatory charge on the basis that they are notionally low-polluting hybrids – a notion that many ‘greens’ have protested against given the cubic capacity of the IC engines)
But of course many of London’s Porsche owners, like their 4x4 counterparts, simply see the initiative as Ken Livingstone’s over-taxing of the ‘easy prey’ wealthy, claiming that the tax revenues and real-world pollution reduction have done little to improve City life for both those using public transport and car drivers alike.
The truth is that what we presently witness are the extremes of proposal and proactive debate; London is indeed at the vanguard of implementing such congestion charging schemes that are presently being tested, deployed and planned elsewhere – from New York to Paris to Hong Kong and beyond. And as such it is treading the path of greatest resistance to see what is ‘wearable’ (in terms of taxation and prohibition) by car drivers, businesses, fleet operators and ultimately taxi providers.
But at its heart the Porsche vs Ken Livingstone furore is really reactionary polar opposite interests, standing firm to a great extent to be critically being seen to take a hard-line by associative stakeholders (inc. Porsche GB’s London clientel). If it reaches court, Porsche will describe the heavy R&D expenditure undertaken to provide Cayenne and the up-coming Pan-Am spin-off with hybrid units, it’s constant efforts to clean-up its IC engines and other technological advances such as ‘recaptured braking’ it shares with other German premium VMs and their technically advanced supplier-base.
We expect the planned £25 charge will be contested by other car-makers such as BMW, Mercedes, Audi, Jaguar, Land-Rover to name obvious marques, joining forces as a powerful voice via the SMMT and European trade associations, in an effort to contain Livingstone’s plan with a far reduced levy of perhaps £10-15, which still provides substantial additional revenue over and above the current £8 flat fee,
Automakers recognise that the London model is setting a possibly world-wide precedent, and must act to ensure that overly zealous punitive penalties are not imposed both in London and eventually elsewhere. Of course they may seek to find new sales possibilities which could of-set the impact and costs of their ‘guilty’ vehicles, so it may be a case of watching this space to see what propositions the likes of Porsche could offer, from tree-planting to charge-absorption.
Of course there is a small crop of car-makers who see this seismic shift in local government policy as an opportunity. As described in a previous post, Tesla perhaps the most obvious and poignant given its ambitions of an electric large luxury saloon codenamed White Star; that would seek to displace the likes of BMW’s 5 series and Mercedes’ E-Series, as the eco-friendly, tax-exemptive alternative; presently seeking $250m in funding and US government grants to produce the car.
‘Green Financing Funds’ have come to the fore in recent years, typified by solar and wind farms and technologies, but is it an arena that the Mayor maybe prepared to invest London’s municipal funds into, if they embrace new-technology vehicles? And wouldn’t the world renowned London Taxi Cab be a perfect showcase for such a venture….perhaps the Mayor through London Taxis International (Manganese Bronze & Geely) and possibly Tesla, should start considering the possibility of leading by example? As many critics, no doubt including Porsche, will point out, present day cabs although compliant are hardly leading the (hybrid/electric) charge.
The London Taxi is being touted by LTI-Geely as the possible transferable icon to all major global cities, and since they too are implementing or seriously considering urban charging, then the advanced London Cab could be a prosperous undertaking in a well planned, forward looking, Private-Public Finance Initiative.
Wednesday, 20 February 2008
Micro-Level Trends – Value Chain Management – Sourcing from China
This month sees the London School of Economics host the China debate, presentations and events seeking to address the critical macro-economic and directly relative commercial questions that lie at the heart of increased simpatico in Sino-Western relations.
For the auto-industry at large, CHINA has been writ large for some time, offering what may seem stark worrisome challenges and unsure opportunities relative to each and every company’s own standing. For much of the supply-side of the industry, the hard-earned business and cultural learning that large multinationals such as Chrysler, VW, GM etc have absorbed seems daunting. Of course whilst the VMs are keen to obtain the benefits of lower-cost China sourced components – expecting much of the relative cost saving to be passed on from their suppliers – the supplier-base itself is tasked with the challenge of managing and balancing the risk-reward see-saw. This the case for Original Equipment Manufacture suppliers and their up-stream counterparts the After-Market supply sector.
The optimism and cynicism of western companies can be demonstrated in the long-held, and heavily engrained, quote that “anything is possible, but everything is difficult” The core of this notion derives from the obvious geographical, historical, political and social construct differences that make the melding of such 2 apparently alien cultures hard (but hopefully worthwhile).
The reward aspect of the risk-reward is obvious, we would not be entertaining the issue otherwise, so it is the risk element that grasps management’s attention. In summary, and in no particular order, the prime ‘big-picture’ issues are:
1. Linguistics Barrier
2. Informational Access Barrier & ‘Gaps’
3. Lack of Litigational Recourse
4. Regional Time Difference Barrier
5. Geo-Political Risk
6. Currency Exchange Rate Risks
At the operational level, company concerns are over:
A. Quality Defect Issues
B. Delivery Schedules
C. Payment Terms & Receipts
D. Integrity of the Chinese Sub-Supplier Chain
E. IPR Confidentiality
F. ‘Stolen’ Customer-Base
Each of these problems can be a minefield in its own right, but perhaps the greatest concern for western suppliers of what are increasingly becoming higher-value components with greater design and development investment is the issue of IPR and Design Rights, and the likelihood of the proprietry knowledge being blatently stolen or ‘accidentally’ released to a 3rd party. That has most certainly been the case in the Auto-Industry, not just at component level but at whole car level with what appear to be carbon copies of vehicles such as BMW’s X5 and Daimler’s Smart being created and sold within the price sensitive yet highly aspirant general consumer-base. The truth it seems is that, possibly across the world, ethics and business are not good bedfellows. But the west, if frustrated is tolerant of such behavoir given the supply promise from China.
Undoubtedly trust is key, so firstly trying to establish those Chinese suppliers that are trustworthy, with good track record and reputation, is vital when seeking such a critical new business partner. It is here that the beginnings of the language gap and informational deficit start to show. However, both western and Chinese governments, commercial associations and increasingly cross-border ‘business solutions’ agents, and now supplier information exchanges, have come to the fore, especially in recent years. Thus, whilst the internet search engines (like Google, Yahoo, Baidu etc) appears to be the panacea for general information finding within one’s own culture, it’s usefulness rapidly diminishes across language chasms. But the web is bringing together targeted audiences as and when the mutually beneficial source-customer information is constructed, often by industry associations, trade bodies and increasingly trade press seizing the opportunity given their advertising and subscriptions contacts.
Once a singular, or crop, of potential suppliers have been identified comes the process of identifying operational ‘fit’. This will obviously include:
1. Capacity / Volume Capabilities
2. Quality Assurance
3. Product Range
4. Design Ability
5. Core Competance(s)
6. Beneficial Sister Companies or Sub-Divisions
7. Export & Logistics Ability
8. Their Own Supply Chain Management Systems to ensure future improved
a) Cost
b) Quality
c) Speed
9. A demonstration that they are committed to developing in-house English language skills –
Critical for across the board communication (from PMs to R&D to Legal staff)
10. Willingness to undertake of Non-Disclosure Agreements and Non-Compete Agreements
These basic measures will theoretically assist and help protect the interests of western companies buying-in Chinese sourced items.
However, what can’t be denied is the very real chasm that divides Western and Chinese commercial appreciation and interests, themselves evolved from very different cultures and customs from very different social and ideological constructs. The road to successful business interaction is undoubtedly long and rocky, but a willingness to be open and communicative by both parties is essential to build the trust required to obtain the early days 'quick-wins' that will underpin the ideal long-term gains originally conceived.
For the auto-industry at large, CHINA has been writ large for some time, offering what may seem stark worrisome challenges and unsure opportunities relative to each and every company’s own standing. For much of the supply-side of the industry, the hard-earned business and cultural learning that large multinationals such as Chrysler, VW, GM etc have absorbed seems daunting. Of course whilst the VMs are keen to obtain the benefits of lower-cost China sourced components – expecting much of the relative cost saving to be passed on from their suppliers – the supplier-base itself is tasked with the challenge of managing and balancing the risk-reward see-saw. This the case for Original Equipment Manufacture suppliers and their up-stream counterparts the After-Market supply sector.
The optimism and cynicism of western companies can be demonstrated in the long-held, and heavily engrained, quote that “anything is possible, but everything is difficult” The core of this notion derives from the obvious geographical, historical, political and social construct differences that make the melding of such 2 apparently alien cultures hard (but hopefully worthwhile).
The reward aspect of the risk-reward is obvious, we would not be entertaining the issue otherwise, so it is the risk element that grasps management’s attention. In summary, and in no particular order, the prime ‘big-picture’ issues are:
1. Linguistics Barrier
2. Informational Access Barrier & ‘Gaps’
3. Lack of Litigational Recourse
4. Regional Time Difference Barrier
5. Geo-Political Risk
6. Currency Exchange Rate Risks
At the operational level, company concerns are over:
A. Quality Defect Issues
B. Delivery Schedules
C. Payment Terms & Receipts
D. Integrity of the Chinese Sub-Supplier Chain
E. IPR Confidentiality
F. ‘Stolen’ Customer-Base
Each of these problems can be a minefield in its own right, but perhaps the greatest concern for western suppliers of what are increasingly becoming higher-value components with greater design and development investment is the issue of IPR and Design Rights, and the likelihood of the proprietry knowledge being blatently stolen or ‘accidentally’ released to a 3rd party. That has most certainly been the case in the Auto-Industry, not just at component level but at whole car level with what appear to be carbon copies of vehicles such as BMW’s X5 and Daimler’s Smart being created and sold within the price sensitive yet highly aspirant general consumer-base. The truth it seems is that, possibly across the world, ethics and business are not good bedfellows. But the west, if frustrated is tolerant of such behavoir given the supply promise from China.
Undoubtedly trust is key, so firstly trying to establish those Chinese suppliers that are trustworthy, with good track record and reputation, is vital when seeking such a critical new business partner. It is here that the beginnings of the language gap and informational deficit start to show. However, both western and Chinese governments, commercial associations and increasingly cross-border ‘business solutions’ agents, and now supplier information exchanges, have come to the fore, especially in recent years. Thus, whilst the internet search engines (like Google, Yahoo, Baidu etc) appears to be the panacea for general information finding within one’s own culture, it’s usefulness rapidly diminishes across language chasms. But the web is bringing together targeted audiences as and when the mutually beneficial source-customer information is constructed, often by industry associations, trade bodies and increasingly trade press seizing the opportunity given their advertising and subscriptions contacts.
Once a singular, or crop, of potential suppliers have been identified comes the process of identifying operational ‘fit’. This will obviously include:
1. Capacity / Volume Capabilities
2. Quality Assurance
3. Product Range
4. Design Ability
5. Core Competance(s)
6. Beneficial Sister Companies or Sub-Divisions
7. Export & Logistics Ability
8. Their Own Supply Chain Management Systems to ensure future improved
a) Cost
b) Quality
c) Speed
9. A demonstration that they are committed to developing in-house English language skills –
Critical for across the board communication (from PMs to R&D to Legal staff)
10. Willingness to undertake of Non-Disclosure Agreements and Non-Compete Agreements
These basic measures will theoretically assist and help protect the interests of western companies buying-in Chinese sourced items.
However, what can’t be denied is the very real chasm that divides Western and Chinese commercial appreciation and interests, themselves evolved from very different cultures and customs from very different social and ideological constructs. The road to successful business interaction is undoubtedly long and rocky, but a willingness to be open and communicative by both parties is essential to build the trust required to obtain the early days 'quick-wins' that will underpin the ideal long-term gains originally conceived.
Tuesday, 19 February 2008
Company Focus – Daimler AG – De-Coupled & Self-Determining a Bright Future
Last week Dr Dieter Zetsche had good reason to be proud, the raison d’etre of independence vindicated. From what seems only a short while since the untangling of Daimler-Chrysler, the de-shackled organisation has proven its theory of a de-restricted Daimler when given free reign will perform. The associated €500m cash burn in re-structuring costs more than off-set by the €2.2bn ‘relief’ of legacy etc responsibility; limited by a $1bn 5 year exposure guarantee.
In essence, the FY2007 results demonstrate that there has been a renewed sense of self, responsibility and accountability (generated by the CORE initiative) across company’s 5 divisions, all except the Finance division turning-in notable pre-tax YoY growth:
MB Cars - €2977m growth (€915m to €3,892m)
Daimler Trucks – €340m growth (€1,107m to €1,447m_
Daimler Vans, Buses & Other- €711m growth (€277m to €988)
Daimler Finance - €185m drop (€218m to €33m)
To demonstrate the tangibility of a singular Daimler, great effort has gone into demonstrating long-term stock-holding value; primarily by undertaking, and promising to continue, the share-buyback scheme rewarding previous investors and promising improved dividends and probable capital returns for present and future investors via the share cancellation/reduction policy. This action greatly assisting in raising the Equity Ratio for Daimler Group from 16.5% in ’06 to 26.8% in ’07 - this trend sustained with a recommended retained use of €10.4bn of the €12.4b net earnings, the remaining €2.0bn used for dividends.
Much of that revenue and profitability stemmed from strength in the MB Cars and Daimler Truck groups with additional income from investment dividends, disposal of EADS stock and other sources such as Japanese real estate sales. Looking at the core contributors…
2007 was a record sales year for MB Cars, and company forecasts expect even better for 2008 and beyond as premium segment car sales growth rates are projected to outpace mainstream segments in 5 of its 7 identified global markets: namely North America, Latin America, Eastern Europe, Russia, China and Japan. As MB had planned, much of the re-structuring groundwork for the division paid-off, assisted by increased global volumes, and improved product mix and better efficiencies/capacity utilization which effectively reduced both fixed operational overhead and variable (labour, parts) costs. These overcame the negatives of: a strong Euro vs weak Dollar & weak Yen & controlled weak Yuan; the need to financially and operationally support a weakened supplier base to ensure components logistics; increasing raw material costs. This last issue is set to escalate as steel producers agree to a general 65% increase in basic iron ore prices and a 71% in higher quality material. Steel producers obviously cannot absorb that level of rise, even with their higher efficient, consolidated mills and operations. Thus inevitably car-makers will have to partially absorb these costs. This critical economic driver will prompt further exploration in the viability of alternative materials such as aluminium alloys and green sourced plastic composites that will also assist in required CO2 reduction. MB Cars may be able to utilise and scale-up learning from Maybach and McLaren projects to eventually integrate across the whole vehicle range.
The Cars group saw a hit from the loss of 2 poor performing Smart models (Roadster & ForFour), but the new ForTwo city car showed the maintained interest of triad markets, as it becomes an urban mobile staple, that market favour extended since available in diesel, electric and soon to be hybrid versions. New Class has been warmly welcomed as the core product finally ‘splits’ into comfort vs sport characters, the latter given more freedom to chase BMW 3 series, Audi, Lexus etc models. The board will be hoping that MB can technically prove itself in Ride & Handling regards with an ideally broadened breadth of R&H ability; so as to seriously contend within the sporting sedan arena. As a consequence of improved platform ‘tune-ability’, E series will also offer more sporting credentials (to vie against 5 series and Jaguar XF) as the two MB cars share the same technology set – a demand that we believe is overdue but finally here. But it is the massive raft of new vehicle introductions that will underpin MB success over the next 2 years; these effectively replacing the complete present line-up of cars and adding a crucially important baby Cross-Over.
Beyond product, MB has made specific efforts to improve dealer and customer satisfaction, apparently leaping up the CSI ranks for both parties. Much of that has been to overcome previous product quality issues, so whilst S&M budget spend has probably had to wear much of the cost in the form of warranty costs, dealer upgrade costs and 3rd party incentives, we imagine that as product quality improves, so the S&M ‘contingencies’ overhead should diminish in the years to come and hopefully customer loyalty is re-build and reduces advertising and communications S&M spend aswell.
However, NA product actions will continue to be key and the high hopes for new GLK, bluetec diesel variants and critical appeal of new C class, on paper, bode well for a downsizing American consumer-base. As ever though, much will depend on the ferocity of peer group competition, and VW Group’s NA intentions could possibly squeeze MB if the fragile economics of the region continue – Audi in a better position from a parent group volume scale perspective.
Contrasting the NA ‘squeeze’, China, Russia and India are the obvious current ‘stars’; sales up by 53%, 65% and 8% respectively, and accruing undoubtedly high unit margins thanks to localised plant investment and dealer network expansion – today at 80, 38, 27 locations respectively.
The ultimate aim is to create a RoS of 10%, which given the low 2005 base of -1.5% and subsequent ’06 3.5% and ’07 9.1% (a strong leap indeed) looks achievable if the recent steel price rise shock can be contained with continued pressure on cost reduction in other areas.
For Trucks, the NA market should rebound from a ’06-’07 cyclical downturn caused by regulatory requirement and economic jitters. Operators should continue to buy into new products that conform to new emission regulation standards and provide much needed improved fuel-efficiency and residual value. Daimler Trucks, as one would imagine, endeavours to be technical leaders in the sector and thus gained from early adopter fleet buyers. Remaining regions are expected to maintain, and possibly slightly exceed ’07 volumes.
The Trucks RoS improvement goal of 3.1% (in ’04) to 8.0% (in ’10) looks feeble versus the cars figures, but of course the real margins available in trucks and the service support revenue streams dwarf passenger cars. Of course the BRIC+ sales will continue to add the 29%+ of ’07 revenues via:
The ‘sweating’ of current Brazilian market leadership with local and adapted trucks
Development of a Russian plant and distribution & service network expansion
Indian JV with Hero announced
Chinese (probable JV) negotiations under way.
Vans and Buses should experience improved uptake thanks to new variants of Sprinter and increasing public transport expenditure in Asian and Russian regions as a consequence of rapid economic growth and improved infrastructure and public mobility demands. Once again, given the major ‘mark-up’ available on vans and a much needed efficiency and standardisation programme should seek to balance customer specification demand vs engineering and manufacturing efficacy.
The Finance arm has had the major challenge of creating a complete new organisation to cover the NA market, given that MB Finance was previously integrated with Chrysler. (The Finance arm was of major interest to Cerberus given its own 51% share in GMAC and the obvious possibilities for operational integration). Thus the ‘hit’ of new set-up costs is not surprising, though the efficiency of the new operation and its lending terms and conditions, given the soft consumer market, is of interest to analysts. And as expected, the stated desire for globally homogeneous procedures, systems, and IT infrastructure will need to be championed if the division is to achieve the desired 14% RoE it seeks. The balancing act comes with endeavouring to integrate such common practice with the support partner companies working with MB Finance in the new entry regions such as India, Russia, China, Malaysia, Japan and the UAE.
In summary, Dieter Zetsche has spent the last 4 years evolving Project CORE to reach this watershed year. He and his team created the fundamentals across the board to set-up the company post ’07 and beyond, the de-coupling of Chrysler demonstrating the operational leaps the German group has made, both at home and overseas. The importance of MB Cars within the group is obvious and since it is about to experience what should be a 2-4 year ‘sweet-spot’ with an all new vehicle range, the short and medium term outlook appears bright indeed, and Daimler should continue to shine as the automotive sector’s star performer – at least until Porsche & BMW come back on track which should be around ‘09/’10. That leaves Daimler standing in the limelight if it can:
1. Contain the fierce 65% steel inflation on-cost
2. Continue product platform integration
3. Improve foreign plant capacities & utilisation
4. Hedge against the prime export market currencies
5. Truly achieve stated product quality and customer satisfaction goals
In essence, the FY2007 results demonstrate that there has been a renewed sense of self, responsibility and accountability (generated by the CORE initiative) across company’s 5 divisions, all except the Finance division turning-in notable pre-tax YoY growth:
MB Cars - €2977m growth (€915m to €3,892m)
Daimler Trucks – €340m growth (€1,107m to €1,447m_
Daimler Vans, Buses & Other- €711m growth (€277m to €988)
Daimler Finance - €185m drop (€218m to €33m)
To demonstrate the tangibility of a singular Daimler, great effort has gone into demonstrating long-term stock-holding value; primarily by undertaking, and promising to continue, the share-buyback scheme rewarding previous investors and promising improved dividends and probable capital returns for present and future investors via the share cancellation/reduction policy. This action greatly assisting in raising the Equity Ratio for Daimler Group from 16.5% in ’06 to 26.8% in ’07 - this trend sustained with a recommended retained use of €10.4bn of the €12.4b net earnings, the remaining €2.0bn used for dividends.
Much of that revenue and profitability stemmed from strength in the MB Cars and Daimler Truck groups with additional income from investment dividends, disposal of EADS stock and other sources such as Japanese real estate sales. Looking at the core contributors…
2007 was a record sales year for MB Cars, and company forecasts expect even better for 2008 and beyond as premium segment car sales growth rates are projected to outpace mainstream segments in 5 of its 7 identified global markets: namely North America, Latin America, Eastern Europe, Russia, China and Japan. As MB had planned, much of the re-structuring groundwork for the division paid-off, assisted by increased global volumes, and improved product mix and better efficiencies/capacity utilization which effectively reduced both fixed operational overhead and variable (labour, parts) costs. These overcame the negatives of: a strong Euro vs weak Dollar & weak Yen & controlled weak Yuan; the need to financially and operationally support a weakened supplier base to ensure components logistics; increasing raw material costs. This last issue is set to escalate as steel producers agree to a general 65% increase in basic iron ore prices and a 71% in higher quality material. Steel producers obviously cannot absorb that level of rise, even with their higher efficient, consolidated mills and operations. Thus inevitably car-makers will have to partially absorb these costs. This critical economic driver will prompt further exploration in the viability of alternative materials such as aluminium alloys and green sourced plastic composites that will also assist in required CO2 reduction. MB Cars may be able to utilise and scale-up learning from Maybach and McLaren projects to eventually integrate across the whole vehicle range.
The Cars group saw a hit from the loss of 2 poor performing Smart models (Roadster & ForFour), but the new ForTwo city car showed the maintained interest of triad markets, as it becomes an urban mobile staple, that market favour extended since available in diesel, electric and soon to be hybrid versions. New Class has been warmly welcomed as the core product finally ‘splits’ into comfort vs sport characters, the latter given more freedom to chase BMW 3 series, Audi, Lexus etc models. The board will be hoping that MB can technically prove itself in Ride & Handling regards with an ideally broadened breadth of R&H ability; so as to seriously contend within the sporting sedan arena. As a consequence of improved platform ‘tune-ability’, E series will also offer more sporting credentials (to vie against 5 series and Jaguar XF) as the two MB cars share the same technology set – a demand that we believe is overdue but finally here. But it is the massive raft of new vehicle introductions that will underpin MB success over the next 2 years; these effectively replacing the complete present line-up of cars and adding a crucially important baby Cross-Over.
Beyond product, MB has made specific efforts to improve dealer and customer satisfaction, apparently leaping up the CSI ranks for both parties. Much of that has been to overcome previous product quality issues, so whilst S&M budget spend has probably had to wear much of the cost in the form of warranty costs, dealer upgrade costs and 3rd party incentives, we imagine that as product quality improves, so the S&M ‘contingencies’ overhead should diminish in the years to come and hopefully customer loyalty is re-build and reduces advertising and communications S&M spend aswell.
However, NA product actions will continue to be key and the high hopes for new GLK, bluetec diesel variants and critical appeal of new C class, on paper, bode well for a downsizing American consumer-base. As ever though, much will depend on the ferocity of peer group competition, and VW Group’s NA intentions could possibly squeeze MB if the fragile economics of the region continue – Audi in a better position from a parent group volume scale perspective.
Contrasting the NA ‘squeeze’, China, Russia and India are the obvious current ‘stars’; sales up by 53%, 65% and 8% respectively, and accruing undoubtedly high unit margins thanks to localised plant investment and dealer network expansion – today at 80, 38, 27 locations respectively.
The ultimate aim is to create a RoS of 10%, which given the low 2005 base of -1.5% and subsequent ’06 3.5% and ’07 9.1% (a strong leap indeed) looks achievable if the recent steel price rise shock can be contained with continued pressure on cost reduction in other areas.
For Trucks, the NA market should rebound from a ’06-’07 cyclical downturn caused by regulatory requirement and economic jitters. Operators should continue to buy into new products that conform to new emission regulation standards and provide much needed improved fuel-efficiency and residual value. Daimler Trucks, as one would imagine, endeavours to be technical leaders in the sector and thus gained from early adopter fleet buyers. Remaining regions are expected to maintain, and possibly slightly exceed ’07 volumes.
The Trucks RoS improvement goal of 3.1% (in ’04) to 8.0% (in ’10) looks feeble versus the cars figures, but of course the real margins available in trucks and the service support revenue streams dwarf passenger cars. Of course the BRIC+ sales will continue to add the 29%+ of ’07 revenues via:
The ‘sweating’ of current Brazilian market leadership with local and adapted trucks
Development of a Russian plant and distribution & service network expansion
Indian JV with Hero announced
Chinese (probable JV) negotiations under way.
Vans and Buses should experience improved uptake thanks to new variants of Sprinter and increasing public transport expenditure in Asian and Russian regions as a consequence of rapid economic growth and improved infrastructure and public mobility demands. Once again, given the major ‘mark-up’ available on vans and a much needed efficiency and standardisation programme should seek to balance customer specification demand vs engineering and manufacturing efficacy.
The Finance arm has had the major challenge of creating a complete new organisation to cover the NA market, given that MB Finance was previously integrated with Chrysler. (The Finance arm was of major interest to Cerberus given its own 51% share in GMAC and the obvious possibilities for operational integration). Thus the ‘hit’ of new set-up costs is not surprising, though the efficiency of the new operation and its lending terms and conditions, given the soft consumer market, is of interest to analysts. And as expected, the stated desire for globally homogeneous procedures, systems, and IT infrastructure will need to be championed if the division is to achieve the desired 14% RoE it seeks. The balancing act comes with endeavouring to integrate such common practice with the support partner companies working with MB Finance in the new entry regions such as India, Russia, China, Malaysia, Japan and the UAE.
In summary, Dieter Zetsche has spent the last 4 years evolving Project CORE to reach this watershed year. He and his team created the fundamentals across the board to set-up the company post ’07 and beyond, the de-coupling of Chrysler demonstrating the operational leaps the German group has made, both at home and overseas. The importance of MB Cars within the group is obvious and since it is about to experience what should be a 2-4 year ‘sweet-spot’ with an all new vehicle range, the short and medium term outlook appears bright indeed, and Daimler should continue to shine as the automotive sector’s star performer – at least until Porsche & BMW come back on track which should be around ‘09/’10. That leaves Daimler standing in the limelight if it can:
1. Contain the fierce 65% steel inflation on-cost
2. Continue product platform integration
3. Improve foreign plant capacities & utilisation
4. Hedge against the prime export market currencies
5. Truly achieve stated product quality and customer satisfaction goals
Thursday, 14 February 2008
Parallel Industry Learning – China – Leveraging Foreign Brand Power
As 2007 year-end corporate results come in the level of contribution from China is plain to see. Projected growth potential seemingly exponential as the country’s economy continues to grow at unprecidented levels for its size, an apparent golden goose for domestic and foreign industry, the latter reliant upon WTO business reforms that will give independent access to the massive consumer-base.
Meanwhile, in Beijing and Shenzhen much is talked about the continued pace of change seen in recent years to better integrate China into the global economy, epitomised by the highly symbolic 2008 Olympic Games with the motto “One Dream – One World”. And so the corporate long-term strategies of western corporations such as VW, Coca Cola, Visa, Nike etc are aligned to optimistic scenarios for business opportunity and commercial influence going forward.
Typical optimism is seen with GM, its recent Asia-Pacific results (see yesterday’s essay) ‘dented’ by the high level of Chinese investment taking place – at a rate of $1bn per annum. China has proven to have come into its own after more than 20 years of waiting. A dominant ‘revenue well’ that many wish to drink from, indeed many would wish to ‘cap’ for themselves. Today, given the explosive rate of growth, the veritable glut of old stalwart and new domestic automotive companies involved makes the idea of market dominance look far fetched.
So given that dominance (in the old SAIC-VW paradigm) is remote, how should a foreign automaker create the best-prospect conditions to attract consumer and market favour? Thereby raising sales volume, allowing greater pricing command, successfully promote high-margin options up-take and so maximise profitability?
A vital clue may come from a recently published report from the consulting world which investigates the ‘acceptability levels’ of foreign branded products and services to the indigenous Chinese consumer. Marketing and Economics 101 states that brand perception is key to pricing policy. The report specifically sought to understand which industrial sectors could best benefit from these perceptions. Foreign brand acceptability ranked as follows:
#1 Automobiles
#2 Apparel
#3 Consumer Electronics (eg laptops & audio)
#4 White Goods
#5 Household Furnishings
#6 Financial Services
Unsurprisingly, given their social symbolism and semantic references, cars ranked highest.
Chinese government and the close-coupled industrialists have log recognised this overtly obvious conclusion, and so have demonstrated an understandably fervent ‘lock’ on their auto-industry, keen to be the primary beneficiaries of the country’s eventual inexhaustible demands for cars, especially so highly regarded marques. Hence the 20 year negotiation struggle between Shanghai and the western automakers to reach hard-won ‘agreeable’ compromise solutions that came in the form of joint venture enterprises.
[Interestingly the Japanese weren’t so keen to ‘give away’ their potential and have relatively smaller JV output agreements, presumably thinking they can properly enter later, as the market opens, under less harsh terms? Of course Sino-Japanese history has a bearing but investment-auto-motives believes Japan has an ulterior market entry strategy as seen for other BRIC+ regions – “come in later but better”]
Such Chinese self-interest has ruled western company China revenue ambitions, off the record many would complain about Chinese demands for IPR and technology insights and transfer that are beyond the immediate scope of the mutually agreed project; recognising that their partners seek to draw-out all they can for the own ambitions of advanced technology independence – the usual twists and turns of high-end business dealings. So given that the bias of power possibly lies with the domestic realm, how can foreign VMs best challenge that political dominance?
Back to the issue of Brand Favourability, and the answer may come in the form of western corporations acting inter-dependently, in orchestra, through a unified exportation of their respective nation’s premium brand power. Looking at the industry sector rankings of the survey and the triumvirate of “Autos, Apparel & Consumer Electronics” could well demonstrate to “the whole is greater than the sum of the parts” – presenting a “United Front of Brands” for the US, UK, Germany, France, Italy & Sweden. In this manner individual nations could philosophically combine their domestic brands as presented to the Chinese consumer, thereby adding mutual support, a singular understandable façade, and critically networked brand leverage.
Hence to expedite this notion, we could see the following nationally-derived brand hierarchies & associations evolved to ‘educate’ the less worldly-wise aspirational sections of Chinese society:
US -
Lincoln & Cadillac/ Ralph Lauren & Calvin Klein / Harmon Karden
Buick / Tommy Hilfiger / Apple
Chevrolet / Levis / XXXX
UK -
Rolls-Royce / New & Lingwood / Bowers & Wilkins
Bentley / Dunhill / Cambridge Audio
Jaguar / Aquascutum / XXXX
Land Rover / Barbour / XXXX
Germany -
Maybach / Helmut Lang / XXXX
Mercedes / Birkenstock / Siemens
BMW / Hugo Boss / Bosche
Audi / Jil Sander / Loewe
France -
(Bugatti) / Chanel & Dior / LVMH branded Electronics?
(Secondary New Brand) / Pierre Cardin & Karl Lagerfeld /
“Initial” (Renault) / Jean Paul Gaultier / XXXX
Peugeot / XXXX / Bull Computer
Citroen / XXXX / Thomson
Italy -
Ferrari / Prada & Versace/ Alessi
Maserati / Armani / XXXX
Alfa-Romeo / Emanual Ungaro / XXXX
Lancia / Valentino / XXXX
Fiat / XXXX / XXXX
Sweden -
Koenigsegg / Viktor & Rolf / Hasselblad
Volvo / H&M / Ericsson
SAAB / Filippa K / XXXX
These incomplete examples are for basic illustration purposes only, thus the presented relativity of brand equity and pros & cons of association would require full investigation, expansion and re-alignment. However, in a similar format National Brand Centres could be created separately or together within high-end Chinese retail arenas and shopping malls.
From the perspective of a specific nation’s export potential, such an initiative could provide a launch platform to latterly introduce national brands in the lesser amenable sectors such as White Goods, Household Furnishings and Financial Services; in turn creating premium positions above today’s preferred Chinese producers and service providers Indeed the relatively powerful Auto-companies could act as the initiators and power-brokers in the scheme, acting as Agents and taking a percentage of the value of goods sold. After all, for the smaller unknowns from the weak sectors, what could be better than to ride the coat-tails of renowned marques.
This commercial ‘nation-building’ parallels DisneyWorld’s EPCOT Center, where since the 1960s Americans and tourists alike have been able to experience products and cultures from around the globe. A latter-day renowned example of similar ‘hyper-realities’ is Las Vegas’ re-interpretations of: New York, Paris & Venice with more to come. And perhaps the most ambitious recent effort is Dubai’s “The World” consisting of 300 man-made islands. China’s emergent middle classes are keen to taste the world beyond (WTO figures suggest 100m Chinese tourists by 2020) and western auto-makers and corporations could help pave the way through their consumer experiences). Infact similar to the Las Vegas initiative, China has already started to create mock theme-parks mimicking different countries – the UK one of the first built. These could be used as the initial obvious ‘hubs’ for the nationalistic export drive.
The recently celebrated Chinese New Year proclaims and welcomes The Rat, associated with bringing prosperity and the attributes of aggression, charm and order. Perhaps it is now time for western VMs to form a foreign Rat Pack and demonstrate a ‘Co-operative Capitalism’ of which renowned Economic Theorist and Nobel Prize winner John Nash would be proud.
Meanwhile, in Beijing and Shenzhen much is talked about the continued pace of change seen in recent years to better integrate China into the global economy, epitomised by the highly symbolic 2008 Olympic Games with the motto “One Dream – One World”. And so the corporate long-term strategies of western corporations such as VW, Coca Cola, Visa, Nike etc are aligned to optimistic scenarios for business opportunity and commercial influence going forward.
Typical optimism is seen with GM, its recent Asia-Pacific results (see yesterday’s essay) ‘dented’ by the high level of Chinese investment taking place – at a rate of $1bn per annum. China has proven to have come into its own after more than 20 years of waiting. A dominant ‘revenue well’ that many wish to drink from, indeed many would wish to ‘cap’ for themselves. Today, given the explosive rate of growth, the veritable glut of old stalwart and new domestic automotive companies involved makes the idea of market dominance look far fetched.
So given that dominance (in the old SAIC-VW paradigm) is remote, how should a foreign automaker create the best-prospect conditions to attract consumer and market favour? Thereby raising sales volume, allowing greater pricing command, successfully promote high-margin options up-take and so maximise profitability?
A vital clue may come from a recently published report from the consulting world which investigates the ‘acceptability levels’ of foreign branded products and services to the indigenous Chinese consumer. Marketing and Economics 101 states that brand perception is key to pricing policy. The report specifically sought to understand which industrial sectors could best benefit from these perceptions. Foreign brand acceptability ranked as follows:
#1 Automobiles
#2 Apparel
#3 Consumer Electronics (eg laptops & audio)
#4 White Goods
#5 Household Furnishings
#6 Financial Services
Unsurprisingly, given their social symbolism and semantic references, cars ranked highest.
Chinese government and the close-coupled industrialists have log recognised this overtly obvious conclusion, and so have demonstrated an understandably fervent ‘lock’ on their auto-industry, keen to be the primary beneficiaries of the country’s eventual inexhaustible demands for cars, especially so highly regarded marques. Hence the 20 year negotiation struggle between Shanghai and the western automakers to reach hard-won ‘agreeable’ compromise solutions that came in the form of joint venture enterprises.
[Interestingly the Japanese weren’t so keen to ‘give away’ their potential and have relatively smaller JV output agreements, presumably thinking they can properly enter later, as the market opens, under less harsh terms? Of course Sino-Japanese history has a bearing but investment-auto-motives believes Japan has an ulterior market entry strategy as seen for other BRIC+ regions – “come in later but better”]
Such Chinese self-interest has ruled western company China revenue ambitions, off the record many would complain about Chinese demands for IPR and technology insights and transfer that are beyond the immediate scope of the mutually agreed project; recognising that their partners seek to draw-out all they can for the own ambitions of advanced technology independence – the usual twists and turns of high-end business dealings. So given that the bias of power possibly lies with the domestic realm, how can foreign VMs best challenge that political dominance?
Back to the issue of Brand Favourability, and the answer may come in the form of western corporations acting inter-dependently, in orchestra, through a unified exportation of their respective nation’s premium brand power. Looking at the industry sector rankings of the survey and the triumvirate of “Autos, Apparel & Consumer Electronics” could well demonstrate to “the whole is greater than the sum of the parts” – presenting a “United Front of Brands” for the US, UK, Germany, France, Italy & Sweden. In this manner individual nations could philosophically combine their domestic brands as presented to the Chinese consumer, thereby adding mutual support, a singular understandable façade, and critically networked brand leverage.
Hence to expedite this notion, we could see the following nationally-derived brand hierarchies & associations evolved to ‘educate’ the less worldly-wise aspirational sections of Chinese society:
US -
Lincoln & Cadillac/ Ralph Lauren & Calvin Klein / Harmon Karden
Buick / Tommy Hilfiger / Apple
Chevrolet / Levis / XXXX
UK -
Rolls-Royce / New & Lingwood / Bowers & Wilkins
Bentley / Dunhill / Cambridge Audio
Jaguar / Aquascutum / XXXX
Land Rover / Barbour / XXXX
Germany -
Maybach / Helmut Lang / XXXX
Mercedes / Birkenstock / Siemens
BMW / Hugo Boss / Bosche
Audi / Jil Sander / Loewe
France -
(Bugatti) / Chanel & Dior / LVMH branded Electronics?
(Secondary New Brand) / Pierre Cardin & Karl Lagerfeld /
“Initial” (Renault) / Jean Paul Gaultier / XXXX
Peugeot / XXXX / Bull Computer
Citroen / XXXX / Thomson
Italy -
Ferrari / Prada & Versace/ Alessi
Maserati / Armani / XXXX
Alfa-Romeo / Emanual Ungaro / XXXX
Lancia / Valentino / XXXX
Fiat / XXXX / XXXX
Sweden -
Koenigsegg / Viktor & Rolf / Hasselblad
Volvo / H&M / Ericsson
SAAB / Filippa K / XXXX
These incomplete examples are for basic illustration purposes only, thus the presented relativity of brand equity and pros & cons of association would require full investigation, expansion and re-alignment. However, in a similar format National Brand Centres could be created separately or together within high-end Chinese retail arenas and shopping malls.
From the perspective of a specific nation’s export potential, such an initiative could provide a launch platform to latterly introduce national brands in the lesser amenable sectors such as White Goods, Household Furnishings and Financial Services; in turn creating premium positions above today’s preferred Chinese producers and service providers Indeed the relatively powerful Auto-companies could act as the initiators and power-brokers in the scheme, acting as Agents and taking a percentage of the value of goods sold. After all, for the smaller unknowns from the weak sectors, what could be better than to ride the coat-tails of renowned marques.
This commercial ‘nation-building’ parallels DisneyWorld’s EPCOT Center, where since the 1960s Americans and tourists alike have been able to experience products and cultures from around the globe. A latter-day renowned example of similar ‘hyper-realities’ is Las Vegas’ re-interpretations of: New York, Paris & Venice with more to come. And perhaps the most ambitious recent effort is Dubai’s “The World” consisting of 300 man-made islands. China’s emergent middle classes are keen to taste the world beyond (WTO figures suggest 100m Chinese tourists by 2020) and western auto-makers and corporations could help pave the way through their consumer experiences). Infact similar to the Las Vegas initiative, China has already started to create mock theme-parks mimicking different countries – the UK one of the first built. These could be used as the initial obvious ‘hubs’ for the nationalistic export drive.
The recently celebrated Chinese New Year proclaims and welcomes The Rat, associated with bringing prosperity and the attributes of aggression, charm and order. Perhaps it is now time for western VMs to form a foreign Rat Pack and demonstrate a ‘Co-operative Capitalism’ of which renowned Economic Theorist and Nobel Prize winner John Nash would be proud.
Wednesday, 13 February 2008
Company Focus - GM - Nearing the Positive Tipping Point
For the majority of long-term GM investors the reporting of its Q407 and CY07 results will have been as expected, the headline good news that it was the ‘exception’ of a $38.3bn tax charge seen in Q3 that caused much of the red-ink. Exclude this and it hopes to convey the message that the situation is improving to the point of near operational break-even – only $23m short.
The same underlying ‘healthy before tax’ story applies for GM Europe demonstrating a $55m operating profit before a comparatively massive tax hit resulting in a $524m loss. GME hit hardest in the 4th quarter as local consumer sentiment declined and a strong € maintained. Even so the not so hard to read-between-the-lines message is that there was a considerable near 9% increase in unit sales (totalling 2.2m units), even with a German orientated softer Q4. Opel/Vauxhall and critically Chevrolet (GMDAT sourced) compact and small cars contributed greatly to an increasingly attractive product mix.
The future replacement of Meriva with the far more design-flair ‘Corsa+’ raises hopes for additional GM fire-power in this important sector. Countering this success is the evident slow turnaround of SAAB and greater expectations from compact (Astra), mid-size (Vectra) large (Signum) cars – this last especially so - which though stylistically handsome have perhaps been let down by the badge snobbery, fine competitor products and a discerning and promiscuous marketplace. So it must be said that Russelsheim HQ, Strategy & Design still has much to do to increase the attractiveness regards higher margin products to maintain profile in mainstream markets. The Solstice based new GT sports assists as a halo product to a degree, but the cars need to better stand-up for themselves. As for LCVs, the Renault sourced Vivaro and ageing Combo don’t assist brand clarity and whilst undoubtedly provide plausible margins, more must be done to align LCV vehicles with themselves and the Opel brand at large if it wishes to steal share from PSA and Fiat.
As for GM North America, not much surprise as the search for operational break-even proves elusive in such harsh conditions, though traction is being created. The slightly improved operating loss of $1.5bn (beating last year’s $1.6bn) once reported after tax being $3.3 (vs $7.5bn reported for FY06, critically excluding special items, that probably make the improvement gap appear greater). Usual headwinds [commodity prices, FX rates] were accompanied by the much needed dealer stock and rental sales reduction initiatives; but reportedly countered by a stronger product mix engendering higher pricing and greatly reduced manufacturing and legacy costs – the hard-won outcome of previous initiatives. Keen to point-out the consistently improved revenue per vehicle (based on non-GAAP principles) – as part of the major structural change ideal since 2005 – this important measure of effective productivity can be seen to contribute to North American 2007 and beyond investment levels. The year on year picture of improved Net Revenue per Unit* looks like:
2007- $21,487
2006 -$20,189
2005 -$19,425
2004 -$19,417
2003 -$19,160
Of course to quote GM “revenue per unit = gross revenue less sales incentives”, but as we know whilst the direct costs of obvious price discounting has been apparently
contained, the truth is that the demands of the market saw increased non-price incentives with the inclusion of ‘thrown-in’ feature deals and (esp Q1-Q3 2007) the ease of credit terms stretched. So whilst Revenue per Unit appears consistently improved, we suspect the in-direct real costs don’t flatter to the same extent.
The launch of a new core product in the shape of Malibu will have improved the mix for 07 & 08 enormously, dealers knowing the extent of Detroit pressure and regards their own profitability, keen to rapidly replace old stock with the new car. This was, we believe, implicitly well understood by GM management & their dealerbase, who knew that Malibu uptake was (probably) a key measure by which to judge those ‘committed’ dealers set against the context of the network rationalisation programme.
But of course the pace and pressure of change within GMNA is critical if it is to maintain progress of structural change required to instill stakeholder confidence, the key measure/metric offered that of Structural Costs vs Revenue; driving down from 34% in 2005 to an eventual 23% in 2012; much dependent upon release from pensions and health costs and the ability to fully implement the ‘letter and spirit’ of the recent UAW flexibility agreements.
Also relative to NA is the ongoing Delphi re-structuring, and GM’s obvious interest, highlights the possibility of Delphi not securing the required support needed from the financial markets, raising the prospect of GM bring the firm back into the fold once legacy costs have been negated and possible UAW membership buy-outs occur. This would leave a buoyant entity either able to assist GM Auto by incurring greater transfer pricing costs as a strong, comprehensive corporation, or possibly see the spin-off of specific low-value divisions and plant to foreign supplier with NA expansion plans. This saga has yet to play out but much will depend, we suspect, on the possible Democrat Government decision to back inward investment to aid an auto-industry recovery, or at the very least offer tax incentives to re-integrate elements of the US supply chain into VM structures.
Demonstrably, the central pillars of positive earnings came from the emerging nations represented by GLAAM and GMAP divisions.
GLAAM demonstrated a stellar 19% improvement in units sales to 2.1m, improving revenues by 50% and earnings (BT) to a near 500% for Q407 YoY; thanks to a 1% market share growth in Brazil and 2% for Argentina. GM (Chevrolet) is well positioned in these markets with a strong range of mid-point vehicles vs Ford’s good but ‘thin’ portfolio, Fiat’s older, broader but ‘sporadic’ range, Honda’s & PSA’s ‘targeted’ small range, Renault’s 4 cars, Toyota’s Corolla and VW’s limited but high volume small & compact family. Hence GM has a good portfolio to benefit from continued market expansion, even if probably not up to Ford’s well managed 15% margin achievement in the region (thanks to ‘thin’ small car range and high contribution from F-series trucks)
GMAP, representing an oft considered the ‘golden goose’ region demonstrated the reality of sustaining auto-operations, with a post-tax income of $681m, down considerably from 2006 at $1.2bn. However, this does (as stated) demonstrate the high confidence in the region, the results highlighting the substantial level of regional investment. As expected the Chinese JVs and Holden proferred much of the contribution given the respective continued product & volume expansion in China and improved margins made at Holden via GMDAT sourced vehicles. The output and success of GMDAT products demonstrated the success of a generic multi-regional (effectively global) vehicle line that has set the corner-stone of Chevrolet expansion outside NA. Having incurred great financial and structural strain with the absorption of Deawoo the strategic results are clearly being demonstrated.
The question from here-on in, is obviously the speed at which GMDAT can itself be disseminated into Indian and Chinese operations, benefiting from a decoupling from the higher-cost supply base in Korea. Perhaps the Chevrolet regional ‘benchmark’ is the somewhat dated, but highly integrated Tavera which boasts 98% local content. Based on the previous Isuzu Panther, the local supply industry has simply reproduced the required component sets. GM will be assisting Indian suppliers to possibly to the same with the under-the-skin parts for next generation Aveo, SRV, Optra to both assist local sourcing and of course assist ex-factory pricing.
But of course China stays in the limelight with GM’s “explosive growth” of 20% (generally in line with market expansion). Management seeks to grow with 5 new products over Cadillac, Buick, Opel, Chevrolet & SAAB offerings, capital expenditure rated at $1bn pa to 2010.
GMAC’s 20% improved auto-financing performance was understandably dwarfed by ResCap losses of $4.3bn, $2.3bn attributable to GM with its 49% holding. Cerberus’ buy-in and 51% stake assisted backed liquidity at $22.7bn, a substantial reserve that will underpin GMAC’s re-structuring and re-newel, ready for the housing market upturn expected in 2010.
investment-auto-motives believes GM, Cerberus & GMAC could lead the way in setting a new profitability model relative to the consumer investment relationship between housing and vehicles. This is an arena that deserves full and proper investigation to enquire as to how their fiscal relativity (in terms of consumer perspective and purchase cycles) can be best exploited to serve auto-makers and their affiliated finance division. We previously reviewed such possibilities in an earlier essay (see 03.01.08: Macro Level Trends – Remodelling the Structural Economics of Autos & Housing), but at this crucial juncture of ResCap & GMAC re-structuring all stake-holder parties should ‘explore to exploit’ – the obvious being the integration of 3/5/7 year auto-loans into what will probably be longer-term residential loans.
To summize…
GM is back on course, though slower in practical progress than originally intended by Wagoner and the Board. 2007 saw successful UAW talks which will deploy continued benefits shortly that even with a deflated US market should improve profitability in due course. However, it is critical that at this time, a broad span of creative strategic solutions are sought across the board, from R&D to design and development (replicating GMDAT success) to the global platforms ideal to protected flexible manufacturing methods that allow generic products to latterly spawn into possibly more regionally succinct vehicles as the markets demand greater regional consumer-connected sensitivity. Of course, the balance is to find the mid-point of variability vs margin maximisation, but such considerations will come in due course.
For the moment the fundamentals of the business are indeed being put right, even if, under these turbulent times, the jittery financial markets may have over-discounted corporate valuations. From here on in the key will be for the charismatic Wagoner to maintain investor confidence over the short-medium-term, until western economic buoyancy returns. And a few more structural alterations in GM’s rebuild (like a part absorption of a stronger Delphi or acquisition of international prime dealers) may well assist.
The same underlying ‘healthy before tax’ story applies for GM Europe demonstrating a $55m operating profit before a comparatively massive tax hit resulting in a $524m loss. GME hit hardest in the 4th quarter as local consumer sentiment declined and a strong € maintained. Even so the not so hard to read-between-the-lines message is that there was a considerable near 9% increase in unit sales (totalling 2.2m units), even with a German orientated softer Q4. Opel/Vauxhall and critically Chevrolet (GMDAT sourced) compact and small cars contributed greatly to an increasingly attractive product mix.
The future replacement of Meriva with the far more design-flair ‘Corsa+’ raises hopes for additional GM fire-power in this important sector. Countering this success is the evident slow turnaround of SAAB and greater expectations from compact (Astra), mid-size (Vectra) large (Signum) cars – this last especially so - which though stylistically handsome have perhaps been let down by the badge snobbery, fine competitor products and a discerning and promiscuous marketplace. So it must be said that Russelsheim HQ, Strategy & Design still has much to do to increase the attractiveness regards higher margin products to maintain profile in mainstream markets. The Solstice based new GT sports assists as a halo product to a degree, but the cars need to better stand-up for themselves. As for LCVs, the Renault sourced Vivaro and ageing Combo don’t assist brand clarity and whilst undoubtedly provide plausible margins, more must be done to align LCV vehicles with themselves and the Opel brand at large if it wishes to steal share from PSA and Fiat.
As for GM North America, not much surprise as the search for operational break-even proves elusive in such harsh conditions, though traction is being created. The slightly improved operating loss of $1.5bn (beating last year’s $1.6bn) once reported after tax being $3.3 (vs $7.5bn reported for FY06, critically excluding special items, that probably make the improvement gap appear greater). Usual headwinds [commodity prices, FX rates] were accompanied by the much needed dealer stock and rental sales reduction initiatives; but reportedly countered by a stronger product mix engendering higher pricing and greatly reduced manufacturing and legacy costs – the hard-won outcome of previous initiatives. Keen to point-out the consistently improved revenue per vehicle (based on non-GAAP principles) – as part of the major structural change ideal since 2005 – this important measure of effective productivity can be seen to contribute to North American 2007 and beyond investment levels. The year on year picture of improved Net Revenue per Unit* looks like:
2007- $21,487
2006 -$20,189
2005 -$19,425
2004 -$19,417
2003 -$19,160
Of course to quote GM “revenue per unit = gross revenue less sales incentives”, but as we know whilst the direct costs of obvious price discounting has been apparently
contained, the truth is that the demands of the market saw increased non-price incentives with the inclusion of ‘thrown-in’ feature deals and (esp Q1-Q3 2007) the ease of credit terms stretched. So whilst Revenue per Unit appears consistently improved, we suspect the in-direct real costs don’t flatter to the same extent.
The launch of a new core product in the shape of Malibu will have improved the mix for 07 & 08 enormously, dealers knowing the extent of Detroit pressure and regards their own profitability, keen to rapidly replace old stock with the new car. This was, we believe, implicitly well understood by GM management & their dealerbase, who knew that Malibu uptake was (probably) a key measure by which to judge those ‘committed’ dealers set against the context of the network rationalisation programme.
But of course the pace and pressure of change within GMNA is critical if it is to maintain progress of structural change required to instill stakeholder confidence, the key measure/metric offered that of Structural Costs vs Revenue; driving down from 34% in 2005 to an eventual 23% in 2012; much dependent upon release from pensions and health costs and the ability to fully implement the ‘letter and spirit’ of the recent UAW flexibility agreements.
Also relative to NA is the ongoing Delphi re-structuring, and GM’s obvious interest, highlights the possibility of Delphi not securing the required support needed from the financial markets, raising the prospect of GM bring the firm back into the fold once legacy costs have been negated and possible UAW membership buy-outs occur. This would leave a buoyant entity either able to assist GM Auto by incurring greater transfer pricing costs as a strong, comprehensive corporation, or possibly see the spin-off of specific low-value divisions and plant to foreign supplier with NA expansion plans. This saga has yet to play out but much will depend, we suspect, on the possible Democrat Government decision to back inward investment to aid an auto-industry recovery, or at the very least offer tax incentives to re-integrate elements of the US supply chain into VM structures.
Demonstrably, the central pillars of positive earnings came from the emerging nations represented by GLAAM and GMAP divisions.
GLAAM demonstrated a stellar 19% improvement in units sales to 2.1m, improving revenues by 50% and earnings (BT) to a near 500% for Q407 YoY; thanks to a 1% market share growth in Brazil and 2% for Argentina. GM (Chevrolet) is well positioned in these markets with a strong range of mid-point vehicles vs Ford’s good but ‘thin’ portfolio, Fiat’s older, broader but ‘sporadic’ range, Honda’s & PSA’s ‘targeted’ small range, Renault’s 4 cars, Toyota’s Corolla and VW’s limited but high volume small & compact family. Hence GM has a good portfolio to benefit from continued market expansion, even if probably not up to Ford’s well managed 15% margin achievement in the region (thanks to ‘thin’ small car range and high contribution from F-series trucks)
GMAP, representing an oft considered the ‘golden goose’ region demonstrated the reality of sustaining auto-operations, with a post-tax income of $681m, down considerably from 2006 at $1.2bn. However, this does (as stated) demonstrate the high confidence in the region, the results highlighting the substantial level of regional investment. As expected the Chinese JVs and Holden proferred much of the contribution given the respective continued product & volume expansion in China and improved margins made at Holden via GMDAT sourced vehicles. The output and success of GMDAT products demonstrated the success of a generic multi-regional (effectively global) vehicle line that has set the corner-stone of Chevrolet expansion outside NA. Having incurred great financial and structural strain with the absorption of Deawoo the strategic results are clearly being demonstrated.
The question from here-on in, is obviously the speed at which GMDAT can itself be disseminated into Indian and Chinese operations, benefiting from a decoupling from the higher-cost supply base in Korea. Perhaps the Chevrolet regional ‘benchmark’ is the somewhat dated, but highly integrated Tavera which boasts 98% local content. Based on the previous Isuzu Panther, the local supply industry has simply reproduced the required component sets. GM will be assisting Indian suppliers to possibly to the same with the under-the-skin parts for next generation Aveo, SRV, Optra to both assist local sourcing and of course assist ex-factory pricing.
But of course China stays in the limelight with GM’s “explosive growth” of 20% (generally in line with market expansion). Management seeks to grow with 5 new products over Cadillac, Buick, Opel, Chevrolet & SAAB offerings, capital expenditure rated at $1bn pa to 2010.
GMAC’s 20% improved auto-financing performance was understandably dwarfed by ResCap losses of $4.3bn, $2.3bn attributable to GM with its 49% holding. Cerberus’ buy-in and 51% stake assisted backed liquidity at $22.7bn, a substantial reserve that will underpin GMAC’s re-structuring and re-newel, ready for the housing market upturn expected in 2010.
investment-auto-motives believes GM, Cerberus & GMAC could lead the way in setting a new profitability model relative to the consumer investment relationship between housing and vehicles. This is an arena that deserves full and proper investigation to enquire as to how their fiscal relativity (in terms of consumer perspective and purchase cycles) can be best exploited to serve auto-makers and their affiliated finance division. We previously reviewed such possibilities in an earlier essay (see 03.01.08: Macro Level Trends – Remodelling the Structural Economics of Autos & Housing), but at this crucial juncture of ResCap & GMAC re-structuring all stake-holder parties should ‘explore to exploit’ – the obvious being the integration of 3/5/7 year auto-loans into what will probably be longer-term residential loans.
To summize…
GM is back on course, though slower in practical progress than originally intended by Wagoner and the Board. 2007 saw successful UAW talks which will deploy continued benefits shortly that even with a deflated US market should improve profitability in due course. However, it is critical that at this time, a broad span of creative strategic solutions are sought across the board, from R&D to design and development (replicating GMDAT success) to the global platforms ideal to protected flexible manufacturing methods that allow generic products to latterly spawn into possibly more regionally succinct vehicles as the markets demand greater regional consumer-connected sensitivity. Of course, the balance is to find the mid-point of variability vs margin maximisation, but such considerations will come in due course.
For the moment the fundamentals of the business are indeed being put right, even if, under these turbulent times, the jittery financial markets may have over-discounted corporate valuations. From here on in the key will be for the charismatic Wagoner to maintain investor confidence over the short-medium-term, until western economic buoyancy returns. And a few more structural alterations in GM’s rebuild (like a part absorption of a stronger Delphi or acquisition of international prime dealers) may well assist.
Monday, 11 February 2008
Industry Structure - Australian Auto - Tentative Steps in New Directions
Through its history Australia’s remote geography, colonial & commercial ties and relatively small population (only now 20m) means it has had much domestic and export induced flux. Mitsubishi’s (5th Feb) decision to close its MMAL Clovelly Park plant, after the Lonsdale engine plant closure, demonstrates the latter of the consistent ‘boom & bust’ experience.
The ‘Australianisation’ of Detroit & Birmingham products (from successful Valiants to the infamous Leyland P76), were always thought to be key to developing the archetype Aussie motor. Of course Holden and Ford were the historical victors with basic longlasting, adaptable, evolved large cars & utes; the Holden vs Ford rivalry still present in the ‘blue-collar’ public consciousness – but like elsewhere, rapidly declined given Japanese product uptake in small and medium cars and SUVs, Toyota king.
The supplier system that grew to support the Big 3/4/5 (inc BMC/Mitsubishi) was greatly assisted with government incentives, infact the auto-sector still is to this day. But all know that previous Japanese & Korean (now Chinese) export pressures have consistently squeezed the real viability of the domestic industry; but its importance to (especially) the South Australian economy means that it is at times artificially supported. Inward investment made by the Japanese when it requires additional global capacity or sees an opportunity to steal local market share – as it did with the 6-cylinder large cars.
The reaction was (and debatably still should be) to climb the value chain with more higher-value systems, R&D (esp IT based electrical architecture arenas. But that is hard when efforts aren’t automatically incorporated into an aligned domestic industry and Koreans and Taiwanese can undertake a similar, arguably more integrated, track.
It’s an oft discussed matter, but Australia needs to find it’s USP, part of which could be following Israel’s lead in the realm of urban EVs given the country’s somewhat insular large cities, and probably plug-in hybrid diesel large cars that can operate locally and drive interstate as required (esp relative to Ford, GM, Toyota’s large fleet customer base). The state research department - CSIRO - has taken steps to further this possibility, bringing together over 80 suppliers to produce a new 'aXcessAustralia' concept car, following on from previous versions that looked at BIW and 2 stroke powertrains, and working with the GM-H in development of the hybrid ECOmmodore concept.
Of course, this idealised new direction doesn't mean that the industry will alter overnight and that that Holden, Ford and Toyota don’t have conventional operational futures. They surely do if they can achieve export plans and incorporate smaller car production (as we see with Ford and Fiesta), and use such revenues to take a lead within their respective empires in specific new energy solutions. Such action, broadening their scope of operations into far greater R&D integration, would reduce the historic cyclical ‘boom & bust’ we’ve seen, encouraging a stable growth trend based on IPR, development and systems & vehicle manufacture instead.
So the new Rudd government should entertain these few key strategic thoughts and look to back and make South Australia a centre of electrical powertrain & diesel hybrid excellence - beyond the usual PR rhetoric of co-ordinated, but often un-linked, projects such as that from the University of South Australia.
Government, Holden & Ford could use this as their domestic and additional export nuclei. The kernal of the ideology is inherent in the GMC Denali XT Concept, developed by Holden Design and shown at the Chicago Auto Show this week. Although it could potentially be an export earner for GM-H, it's the advanced mechanics it contains, that are key to future local industry health. Australia maintain its momentum in this field, renowned since the Cross-Australia Solar Challenges that have made the country and new energy so symbiotic.
To this end the 'AXcessAustralia' industry development dream will, for its second trick, need to itself 'plug-into' leading edge larger scale ventures supported by influential backers - and here, Tesla Motor and the Isreali EV initiative appear to be at the operational and social fore. Australia, should perhaps involve itself here and now to endeavour to create that new industrial roadmap.
The ‘Australianisation’ of Detroit & Birmingham products (from successful Valiants to the infamous Leyland P76), were always thought to be key to developing the archetype Aussie motor. Of course Holden and Ford were the historical victors with basic longlasting, adaptable, evolved large cars & utes; the Holden vs Ford rivalry still present in the ‘blue-collar’ public consciousness – but like elsewhere, rapidly declined given Japanese product uptake in small and medium cars and SUVs, Toyota king.
The supplier system that grew to support the Big 3/4/5 (inc BMC/Mitsubishi) was greatly assisted with government incentives, infact the auto-sector still is to this day. But all know that previous Japanese & Korean (now Chinese) export pressures have consistently squeezed the real viability of the domestic industry; but its importance to (especially) the South Australian economy means that it is at times artificially supported. Inward investment made by the Japanese when it requires additional global capacity or sees an opportunity to steal local market share – as it did with the 6-cylinder large cars.
The reaction was (and debatably still should be) to climb the value chain with more higher-value systems, R&D (esp IT based electrical architecture arenas. But that is hard when efforts aren’t automatically incorporated into an aligned domestic industry and Koreans and Taiwanese can undertake a similar, arguably more integrated, track.
It’s an oft discussed matter, but Australia needs to find it’s USP, part of which could be following Israel’s lead in the realm of urban EVs given the country’s somewhat insular large cities, and probably plug-in hybrid diesel large cars that can operate locally and drive interstate as required (esp relative to Ford, GM, Toyota’s large fleet customer base). The state research department - CSIRO - has taken steps to further this possibility, bringing together over 80 suppliers to produce a new 'aXcessAustralia' concept car, following on from previous versions that looked at BIW and 2 stroke powertrains, and working with the GM-H in development of the hybrid ECOmmodore concept.
Of course, this idealised new direction doesn't mean that the industry will alter overnight and that that Holden, Ford and Toyota don’t have conventional operational futures. They surely do if they can achieve export plans and incorporate smaller car production (as we see with Ford and Fiesta), and use such revenues to take a lead within their respective empires in specific new energy solutions. Such action, broadening their scope of operations into far greater R&D integration, would reduce the historic cyclical ‘boom & bust’ we’ve seen, encouraging a stable growth trend based on IPR, development and systems & vehicle manufacture instead.
So the new Rudd government should entertain these few key strategic thoughts and look to back and make South Australia a centre of electrical powertrain & diesel hybrid excellence - beyond the usual PR rhetoric of co-ordinated, but often un-linked, projects such as that from the University of South Australia.
Government, Holden & Ford could use this as their domestic and additional export nuclei. The kernal of the ideology is inherent in the GMC Denali XT Concept, developed by Holden Design and shown at the Chicago Auto Show this week. Although it could potentially be an export earner for GM-H, it's the advanced mechanics it contains, that are key to future local industry health. Australia maintain its momentum in this field, renowned since the Cross-Australia Solar Challenges that have made the country and new energy so symbiotic.
To this end the 'AXcessAustralia' industry development dream will, for its second trick, need to itself 'plug-into' leading edge larger scale ventures supported by influential backers - and here, Tesla Motor and the Isreali EV initiative appear to be at the operational and social fore. Australia, should perhaps involve itself here and now to endeavour to create that new industrial roadmap.
Thursday, 7 February 2008
Company Focus – BMW AG – Details Please
The once revered BMW continues to experience troublesome times within investment circles. Over-shadowed in general performance terms by its nemesis Daimler and now criticised for lack of expected detail in turning around corporate fortunes under the ‘Number ONE’ initiative launched in Q407. Even though all divisions and associated fundamental revenues are 'up' according to the November interim report of Q1-Q3 2007 figures and recent press release (Full results in March)
BMW must surely hope that the well intended investor roadshow (across London, New York and Boston) hasn’t backfired by raising investor expectations for greater transparency, only to inadvertently dash the hopes, creating greater pessimism. Add to that bad news the CEO’s inability to attend all events because of flu and the perception is that he may be trying to distance himself from the immediate criticism and reactionary 3% stock price fall.
On the surface the headlines of the ‘Number ONE’ improvement march look good. Specifically the cost-containment programme forecasting a 3% per annum saving in material costs from 2008 to 2012 (achieving €4bn), along with €500m pa in labour cost reduction from 2009. This all part of a drive to regain a ROS of 8-10% by 2012, from 5.6% today. This figure may not enthuse compared to the early 1990s heyday, but BMW is a very different beast, facing very different challenges, so a 3-4% increase will be well won.
But unsurprisingly, given the lack of detail, it has been hard for analysts to piece together the jigsaw that provides that level of cost reduction and ROS ambition. Primary cost-containment concerns are:
1. Increasing commodity prices, look set to increase with mining sector (energy & resources) costs rising, ravenous Asian demand and probable consolidation (ie the outcome of the BHP Billiton – Rio Tinto – Chinalco M&A affair)
2. Rising higher-value component costs (eg electronics) as a result of a re-structuring (& profit seeking) of the supply chain [see the Continental overview]
3. Possible ‘real-world’ social and political resistance to reduced and more flexible labour force requirement.
The issue of cost containment, and the desire to see the detailed action plan, is more critical than ever given the gloomy picture for vehicle sales in ‘advanced markets’. With a US market forecast drop of 1m units (from 15.5 to 14.5 as stated on Q307 and Q108 respectively), and perhaps if lucky an at best repeat 1% growth in Europe, the traditional revenue generating regions plainly can’t be milked as before - even if what are still considered fragile new BRIC markets are doing well- and so the onus falls on cost-cutting to maintain fundamental operational momentum.
One worry is that the size of the US (#1 market) and UK (#3 market) credit shocks have not yet been fully felt. Although the perception of BMW customers in these 2 prime markets is that of ‘well-offs’ with higher than average disposable income, the real picture may be slightly different; many more than imagined stretching their purses to afford the aspirant brand and not likely to repeat buy when trade-in time comes. For those less financially exposed, but still cautious, their conservative nature may well see them keep their vehicles longer than originally intended, or if trading-in, trade down to a smaller vehicle, or at best repeat purchase but with a far less options loaded car (NB. remember how much BMW makes on its options uptake).
If that’s the US & UK story what about Europe?
Economic indicators suggest that the German home (#2) market should fair comparatively well over 2008, supporting demand for much loved BMWs well beyond Munich. There is at present, after the rounds of labour relations negotiations that set standards for pay throughout the country, a sense that the industrial base and economic heartland is being socially and financially invested in – and this brings a sense of consumer security; along with importantly the comfort factor of relative escape from the global credit-crunch.
The remaining European countries, even previously booming Eastern Europe, appear to be more cautious. The ECB recently negatively revised growth expectation from 2.6% GDP in H207 to 1.6% GDP. More social/consumer unease relative to employment security and general inflation has been the catalyst in seeing the continuance of product and brand ‘trading-down’. An attractive crop of smaller segment cars (which have infact grown dimensionally if not semantically) from the likes of Fiat, VW, Skoda, PSA and Koreans and Japanese have scored highly with cost-conscious buyers.
It is well recognised that for 30 years the BMW 3-series has been the automakers’ profitability icon, truly ‘wunderbar’, the volume+margin revenue benchmark. 3-series was supported by a level of decades long economic growth in the west that looks to have now peaked, though counter-balanced by BRIC regions. The question is can BMW perform without such high levels of contribution from that core vehicle asset? (It’s presently 37% of entire range sales, but could it diminish if its sales plataeu in the critical emerging regions?)
Of course the company has adapted with changing times with provision of 1-series and Mini, cars pitched (respectfully) poorly and well to consumer trends for smaller cars, character cars and importantly CO2 compliant cars with green credentials. And it is here we’ve recently seen BMW really push in the PR stakes, promoting its CO2 reduction technology advances (across the vehicle range with “EfficientDynamics”) in high circulation auto-press publications; demonstrating their big-picture impact on a fleet/volume basis….the message being “stay brand loyal and be green”, knowing that buyers are indeed thinking twice before buying BMW again.
Thus, given the pressures from traditional markets, it is welcome news that BMW achieved record sales revenues in 2007, up 14.3% YoY to €56bn from €49bn, generated from record sales of over 1.5m units, up from 1.37m. Of course, much has been gained from demand in emerging markets (pretty much all VMs reliant on this off-set flat western sales).
Back to expectations of the future, and along with a lack cost reduction clarity, analysts may have been weary of the decreased level of R&D, project and plant capital expenditure (relative to revenues) over the next 4 years - even with an expected 5% output/sales increase. This may infact be a good sign, given what appear to be positive ongoing talks with Daimler regards a shared next generation small car platform - so are the figures presented reflective of BMW holding back, and reducing, necessary capital to back such a fiscally attractive venture? Possibly.
On another R&D & CapEx note, investment-auto-motives believes that the acquisition of the motorcycle and quad-bike maker Husqvana will provide major new product impetus in the 5-10 year timescale, the technical solutions of quads in particular developed and transferred to a possible new crop of urban focused Bikes, Quads & City Cars that BMW is very well placed to create. Our conjecture is that it may endeavour to break down the perceptional technical barriers between 2 wheels and 4 and bridge the ideological and technical gap between Bike and Car divisions, possibly creating a new division/function that marries the presently very seperate architecture & drivetrain technologies in the search for 'Lean Vehicles'.
Ultimately BMW looks to be taking the opportunity to put its house in order during this periodic downturn, looking forward the expected US economic 'pick-up' in 2009/10, which will re-boost Asian regions' domestic demand which (whilst de-coupled) will gain from the US upturn.
That doesn’t help immediate concerns, but investors must push harder if they want to see exactly how the fiscal savings derived from 'Number ONE' will be achieved and put to good use.
And as we've said before, BMW must open its doors (literally to the Fitz Building and BMW Technik) if it wants to maintain confidence. The market sees BMW as a leading innovator, part of its USP, so will expect to see related investment that supports and differentiates the brand as the premium tranches of all segments come under new PESTEL pressures.
BMW must surely hope that the well intended investor roadshow (across London, New York and Boston) hasn’t backfired by raising investor expectations for greater transparency, only to inadvertently dash the hopes, creating greater pessimism. Add to that bad news the CEO’s inability to attend all events because of flu and the perception is that he may be trying to distance himself from the immediate criticism and reactionary 3% stock price fall.
On the surface the headlines of the ‘Number ONE’ improvement march look good. Specifically the cost-containment programme forecasting a 3% per annum saving in material costs from 2008 to 2012 (achieving €4bn), along with €500m pa in labour cost reduction from 2009. This all part of a drive to regain a ROS of 8-10% by 2012, from 5.6% today. This figure may not enthuse compared to the early 1990s heyday, but BMW is a very different beast, facing very different challenges, so a 3-4% increase will be well won.
But unsurprisingly, given the lack of detail, it has been hard for analysts to piece together the jigsaw that provides that level of cost reduction and ROS ambition. Primary cost-containment concerns are:
1. Increasing commodity prices, look set to increase with mining sector (energy & resources) costs rising, ravenous Asian demand and probable consolidation (ie the outcome of the BHP Billiton – Rio Tinto – Chinalco M&A affair)
2. Rising higher-value component costs (eg electronics) as a result of a re-structuring (& profit seeking) of the supply chain [see the Continental overview]
3. Possible ‘real-world’ social and political resistance to reduced and more flexible labour force requirement.
The issue of cost containment, and the desire to see the detailed action plan, is more critical than ever given the gloomy picture for vehicle sales in ‘advanced markets’. With a US market forecast drop of 1m units (from 15.5 to 14.5 as stated on Q307 and Q108 respectively), and perhaps if lucky an at best repeat 1% growth in Europe, the traditional revenue generating regions plainly can’t be milked as before - even if what are still considered fragile new BRIC markets are doing well- and so the onus falls on cost-cutting to maintain fundamental operational momentum.
One worry is that the size of the US (#1 market) and UK (#3 market) credit shocks have not yet been fully felt. Although the perception of BMW customers in these 2 prime markets is that of ‘well-offs’ with higher than average disposable income, the real picture may be slightly different; many more than imagined stretching their purses to afford the aspirant brand and not likely to repeat buy when trade-in time comes. For those less financially exposed, but still cautious, their conservative nature may well see them keep their vehicles longer than originally intended, or if trading-in, trade down to a smaller vehicle, or at best repeat purchase but with a far less options loaded car (NB. remember how much BMW makes on its options uptake).
If that’s the US & UK story what about Europe?
Economic indicators suggest that the German home (#2) market should fair comparatively well over 2008, supporting demand for much loved BMWs well beyond Munich. There is at present, after the rounds of labour relations negotiations that set standards for pay throughout the country, a sense that the industrial base and economic heartland is being socially and financially invested in – and this brings a sense of consumer security; along with importantly the comfort factor of relative escape from the global credit-crunch.
The remaining European countries, even previously booming Eastern Europe, appear to be more cautious. The ECB recently negatively revised growth expectation from 2.6% GDP in H207 to 1.6% GDP. More social/consumer unease relative to employment security and general inflation has been the catalyst in seeing the continuance of product and brand ‘trading-down’. An attractive crop of smaller segment cars (which have infact grown dimensionally if not semantically) from the likes of Fiat, VW, Skoda, PSA and Koreans and Japanese have scored highly with cost-conscious buyers.
It is well recognised that for 30 years the BMW 3-series has been the automakers’ profitability icon, truly ‘wunderbar’, the volume+margin revenue benchmark. 3-series was supported by a level of decades long economic growth in the west that looks to have now peaked, though counter-balanced by BRIC regions. The question is can BMW perform without such high levels of contribution from that core vehicle asset? (It’s presently 37% of entire range sales, but could it diminish if its sales plataeu in the critical emerging regions?)
Of course the company has adapted with changing times with provision of 1-series and Mini, cars pitched (respectfully) poorly and well to consumer trends for smaller cars, character cars and importantly CO2 compliant cars with green credentials. And it is here we’ve recently seen BMW really push in the PR stakes, promoting its CO2 reduction technology advances (across the vehicle range with “EfficientDynamics”) in high circulation auto-press publications; demonstrating their big-picture impact on a fleet/volume basis….the message being “stay brand loyal and be green”, knowing that buyers are indeed thinking twice before buying BMW again.
Thus, given the pressures from traditional markets, it is welcome news that BMW achieved record sales revenues in 2007, up 14.3% YoY to €56bn from €49bn, generated from record sales of over 1.5m units, up from 1.37m. Of course, much has been gained from demand in emerging markets (pretty much all VMs reliant on this off-set flat western sales).
Back to expectations of the future, and along with a lack cost reduction clarity, analysts may have been weary of the decreased level of R&D, project and plant capital expenditure (relative to revenues) over the next 4 years - even with an expected 5% output/sales increase. This may infact be a good sign, given what appear to be positive ongoing talks with Daimler regards a shared next generation small car platform - so are the figures presented reflective of BMW holding back, and reducing, necessary capital to back such a fiscally attractive venture? Possibly.
On another R&D & CapEx note, investment-auto-motives believes that the acquisition of the motorcycle and quad-bike maker Husqvana will provide major new product impetus in the 5-10 year timescale, the technical solutions of quads in particular developed and transferred to a possible new crop of urban focused Bikes, Quads & City Cars that BMW is very well placed to create. Our conjecture is that it may endeavour to break down the perceptional technical barriers between 2 wheels and 4 and bridge the ideological and technical gap between Bike and Car divisions, possibly creating a new division/function that marries the presently very seperate architecture & drivetrain technologies in the search for 'Lean Vehicles'.
Ultimately BMW looks to be taking the opportunity to put its house in order during this periodic downturn, looking forward the expected US economic 'pick-up' in 2009/10, which will re-boost Asian regions' domestic demand which (whilst de-coupled) will gain from the US upturn.
That doesn’t help immediate concerns, but investors must push harder if they want to see exactly how the fiscal savings derived from 'Number ONE' will be achieved and put to good use.
And as we've said before, BMW must open its doors (literally to the Fitz Building and BMW Technik) if it wants to maintain confidence. The market sees BMW as a leading innovator, part of its USP, so will expect to see related investment that supports and differentiates the brand as the premium tranches of all segments come under new PESTEL pressures.
Wednesday, 6 February 2008
Industry Structure – China – 2008+ Prognosis
Given the massive BRIC+ growth story of the last 5 years, and China’s leading role within that context, the obvious question facing investment analysts is to what degree the new year financial markets fall-out will impede future growth; if at all. We are of the opinion that whilst a de-coupling of direct macro-economic interest between Asia and the US has undoubtedly occurred, the recent stock-market tremors felt throughout the east demonstrate the underlying inter-dependence, and highlight the important role, of financial markets. Markets which to date have been the driving force behind continued Asian, specifically Chinese, expansion.
Even before recent tremors there was an understanding that the multitude of Chinese auto-makers could not be sustained given the voracity of competition that has seen an erosion of vehicle prices and subsequently margins. Governmental policy reaction was to push for overseas expansion to help ‘de-pressurise’ the local market.
As ever, there are mixed opinions regards the size and pace of consolidation amongst Chinese VMs – especially so the politically prompted state-sanctioned organisations that have “socially” vested interests in maintaining their primary positions – ie FAW, Nanjing, Shanghai, Beijing, Dongfeng & Guangshou. Hence, we have recently witnessed SAIC’s take-over of Nanjing MG set to produce an enlarged heavyweight; something that was very much “on the cards” given the previous respective Rover & MG acquisitional synergies of the two parties.
To what degree their state controlled counterparts, the previous auto & defense spin-out corporations (eg Brilliance, BYD, Chery, Changfeng, Chang’an, Changhe &Hafei), aswell as private others (eg Geely & Great Wall) may be prompted to similarly act is open to debate, but much of the raison d’etre for M&A will of course depend on market dynamics and maintained profitability levels,
2007 saw the market grow by 22% and 2008 growth forecast is at 20%, so ironically such circumstances (on paper) would expect to see an even greater number of new entrants appear, especially so as a result of as spin-off enterprises from present incumbents to dissuade truly new entrants from trying to take a (segment/regional) slice of the enlarged pie. But forecasts and projections are rarely perfectly correct, companies cannot rely on ‘a rising tide lifting all boats’ so will continue strategic risk management. Thus the Chinese domestics, ever the realists, will be looking to defend their positions by:
1. Continued major financial support from highly liquid state & private funds, within a protected market
2. Governmental influence of R&D strategies (eg EVs, Hybrids) under the “Harmonious Development” policy that underpins CNH3&4 etc.
3. Further extracting technical knowledge from European, American and Japanese JV partners…trying to leap the ‘fit & finish’ gap.
4. Amalgamating Chinese operations and continue cross interests (as in sharing technical expertise gained from said JVs)
5. Demonstrate to domestic buyers that Chinese can equal Japanese & German quality
6. Recognising the fact that scale equals leverage across all fronts; from R&D ventures to dealer network
7. Continuation of export plans, focused on cost sensitive emerging regions, specifically Chery, Geely, FAW & Yutong
8. Continuation of foreign plant plans, focused on BRIC & North America
9. Developing allied platforms, modules & component strategies with ambitious Chinese suppliers (eg Wanxiag, Xinyi Glass, Norstar, Minth, Tong Yang etc.)
[NB 2005 was first year parts exports exceeded imports]
10. Learning from previous Chinese overseas expansion eg:
a) Haier – conservative approach building local US business – success story
b) TCL – European M&A failing due to cultural management differences
c) Lenovo – successful dualistic approach leveraging best of IBM & Legend
Although Chinese companies have benefited from foreign JVs, learning a great deal about component and vehicle quality, the truth is that to date they have, because of limited production technology access and little market elasticity, biased cost over appeal. This previously suited a bourgeoning unsophisticated, cost-conscious domestic market, but times have changed. Personal aspiration, rising disposable income and VM inter-rivalry, have raised marketplace expectations, evident from the move out of small hatchbacks into compact sedans, even though smaller cars benefit greatly from taxation state tax-breaks.
Chinese buyers have long recognised the quality differential between advanced ‘foreign’ cars (from JVs) and pure domestic product – the proof is in residual values. Since Eric Thun’s 1996 observation of the previous massive ‘quality gap’ (see ‘Changing Lanes in China, Cambridge University Press 2006) for over a decade the situation has remained the same. Although the gap has decreased measurably, it is still top of mind for new and 2nd hand a car-buyers alike. Domestic VMs will continue their improvement march, knowing it is key to gaining product credibility, consumer confidence, improved profitability and ultimately independence from JV partners.
As result many domestic VMs, like the Japanese & Koreans beforehand who had to start without an auto-history, have undertaken a copy+ product design approach, mimicking where possible the styles of Japanese, Korean and German cars. Hence, as we saw at the over 60% of the aesthetic of Chinese own brand cars are essentially copied, the rate even higher at 80% for SUVs. This partially a result of the origins of the donor platform (esp SUVs where Isuzu was so prevalent), but primarily driven by the need to keep development costs as low as possible yet also retain a stylistic familiarity with one or more more prestigious ‘foreign’ cars. Hence we see:
Large Cars –
FAW Redflag HQ3 (direct) relativity to Toyota Crown Majesta
Medium Cars –
Chery Eastar to Daewoo Magnus
Brilliance Splendour to BMW 3 series
Compact Cars –
BYD F3 to FAW-Toyota Corolla (front & side)
BYD F3 to Honda Fit sedan (rear)
Maple Hysoul 305 to Audi A4 (front grill treatment – misguided effort)
Maple Marindo MB to Cadillac CTS (rear treatment – misguided effort)
Jiangnan Chaunqi to Buick Excelle
Small Cars -
Chery QQ to Deawoo Matiz (renowned example)
Tongtian Glow to VW Polo
GWM Florid to Toyota Yaris
GWM Perey to Nissan Note
GWM Cool Bear to Toyota Scion xB
City (A segment) Cars -
Shaunghuan S6 to Daimler Smart
MPVs -
Fengxing Jingyi to Mitsubishi Grandis
Sports & Convertible Cars -
BYD F8 to Mercedes Benz CLK (frontal styling)
BYD F8 to Renault Megan CC (rear styling)
Cross-Overs -
Shaunghaun SCEO to BMW X5 (renowned)
Feidi UFO to Toyota RAV4 3dr
Chery Tiggo to Toyota RAV4 5dr
SUVs -
GWM Hover to Suzuki Axiom
Huanghai Qisheng to Hyundai Santa Fe
Huanghai Aolong to Ssangyong Rexton
Shaunghaun Laibao S-RV to Honda CR-V
Tianman Hero to Kia Sorento
Zotye 2008 to FAW-Toyota (Daihatsu) Terios
Specialist 4x4 -
Dongfeng Hanma to Hummer H1
Concept Cars -
Changfeng Liebao CS7 to Hyundai HCD9 Talus (‘broadly’)
The copy+ avenue has been chosen (by primarily independents) because it has been proven to work. Instead of trying, probably unsuccessfully, to start from scratch with absolutely no brand or product equity, the copy+ formula allows for basic connotation, if not absolute replication. In short it endeavours to mark a new brand’s position and provide credibility. [NB. Nissan and BMW started with re-badged Austin 7s build under licence].
And don’t think this is always done without the original foreign automaker’s consent, often agreements are made to replicate cars under a local brand where the foreign manufacturer has no intention (or been prohibited) from competing in the segment (eg FAW Redflag & Toyota Crown Majesta). Infact investment-auto-motives believe that for some time there have been tacit agreements in place between western and copy+ eastern makers to ascertain the exact 'west-east' price differential of a multitude of components, building up to complete vehicles. Re-manufactured original components spread across a singular or various copy+ car(s) allows for a direct comparison of quality-matching and cost-down – much needed by western VMs if they are to source parts from Chinese Tier 1s and 2s so as to revive their profitability. Every VM performs cost-assessment exercises on competitor cars, this is simply an extension of the same.
Whilst the copy+ game is an optimum strategic direction for ‘new’ automakers, success of course depends upon perfected execution, and in this regard, there is a broad spectrum of ‘winners’ and ‘losers’. Much obviously depends upon the basic platform being used, whether:
A. derived from the original VM to match the original perfectly
B. similar in engineering ‘hardpoints’ to approximate the original well
C. very dissimilar in ‘hardpoints’ so making for fundamentally poor match
Each Chinese VM has started from very different places, depending upon the vehicle sourcing agreements made, both at initial start-up and again in terms of re-negotiating newer platforms or the ability to produce their own. And the abovementioned list of vehicle results clearly demonstrate the levels of success achieved, some like the Zotye 2008 a very close interpretation to the Terios, whilst others like the Shaunghaun Laibao S-RV are, because of basic oversized dimensions, is a remote approximation to the Honda CR-V. Now whilst western eyes can criticise, the truth is that what looks like a ridiculous re-interpretation may well work if the segment has very little differentiation – as has been the case to date with the SUV segment heavily biased to Isuzu Trooper platform Thus an ‘oversized CR-V’ is at least seen to be more contemporary, if to our eyes aesthetically awkward.
Having looked closely at product trends, what about the structure of the industry itself?
As stated in a previous Chinese Industry post (09.01.08), the primary question is how the industry will need to consolidate; even with the continued growth levels that to date haven’t stopped the trend of discounting.
To our minds, there are 5 basic rationales:
1. Specific product-relative consolidation
2. Segment-relative consolidation
3. Vehicle portfolio expansion consolidation
4. Regional-orientated producer consolidation
5. Big Fish-Little Fish consolidation
#1 is the most obvious, directly encompassing commercial ventures with exactly the same, or very closely related, product types. We saw this with (SAIC) Roewe-MG, and could viably see a similar in the 4x4/SUV sector, many players long reliant upon old generation Toyota Landcruiser, Isuzu Trooper/Rodeo & Mitsubishi Pajero base vehicles. These include Beijing, Changfeng Liebao, Changfeng Yangzi, Dadi, Dadi Chengdu, Fudi, Fuqi, Jiangling/Windwind, Qinling Isuzu, Shaunghuan, Shuguang, Tianma,Yema and ,Zhongxing.
Given that fact that some of these brands also have extensive assembly operations in emerging regions such as Russia, Turkey, Egypt, Ukraine etc, we firmly believe that there is major potential to seek economies of scale by amalgamating what are mostly disparate 4x4 operators with aging product and an endangered future.
There are other ‘similar product’ arguments that are too detailed to relay here.
#2 offers the same scaling sentiment as #1 but from a specific segment perspective, specifically: utility pick-ups, utility 4x4s, small minivans, small ‘older’ platform cars, etc etc.
#3 relates to the ambitions of those VMs who wish to plug the gaps in their vehicle ranges as soon as possibly, ideally gaining additional technology knowledge in the process – using the M&A of such target companies to do so.
#4 pertains to either state-influenced or private network wish to forge a stronger local industrial base through amalgamation, perhaps in the attempt to take a structural lead within China.
#5 is simply the scenario of the bigger players (FAW, Dongfeng, SAIC, Beijing, Changan etc) seeking, trough acquisition, dispense with regional/sector small fry competition, absorbing their smaller volumes and critically gaining what is potentially untapped extra plant capacity.
In truth, all these factors will play a role in the evolution of the Chinese auto-industry, thus investment-auto-motives continues to monitor the scene closely and is in the process of drawing up probable best-fit, optimal M&A deal scenarios.
Even before recent tremors there was an understanding that the multitude of Chinese auto-makers could not be sustained given the voracity of competition that has seen an erosion of vehicle prices and subsequently margins. Governmental policy reaction was to push for overseas expansion to help ‘de-pressurise’ the local market.
As ever, there are mixed opinions regards the size and pace of consolidation amongst Chinese VMs – especially so the politically prompted state-sanctioned organisations that have “socially” vested interests in maintaining their primary positions – ie FAW, Nanjing, Shanghai, Beijing, Dongfeng & Guangshou. Hence, we have recently witnessed SAIC’s take-over of Nanjing MG set to produce an enlarged heavyweight; something that was very much “on the cards” given the previous respective Rover & MG acquisitional synergies of the two parties.
To what degree their state controlled counterparts, the previous auto & defense spin-out corporations (eg Brilliance, BYD, Chery, Changfeng, Chang’an, Changhe &Hafei), aswell as private others (eg Geely & Great Wall) may be prompted to similarly act is open to debate, but much of the raison d’etre for M&A will of course depend on market dynamics and maintained profitability levels,
2007 saw the market grow by 22% and 2008 growth forecast is at 20%, so ironically such circumstances (on paper) would expect to see an even greater number of new entrants appear, especially so as a result of as spin-off enterprises from present incumbents to dissuade truly new entrants from trying to take a (segment/regional) slice of the enlarged pie. But forecasts and projections are rarely perfectly correct, companies cannot rely on ‘a rising tide lifting all boats’ so will continue strategic risk management. Thus the Chinese domestics, ever the realists, will be looking to defend their positions by:
1. Continued major financial support from highly liquid state & private funds, within a protected market
2. Governmental influence of R&D strategies (eg EVs, Hybrids) under the “Harmonious Development” policy that underpins CNH3&4 etc.
3. Further extracting technical knowledge from European, American and Japanese JV partners…trying to leap the ‘fit & finish’ gap.
4. Amalgamating Chinese operations and continue cross interests (as in sharing technical expertise gained from said JVs)
5. Demonstrate to domestic buyers that Chinese can equal Japanese & German quality
6. Recognising the fact that scale equals leverage across all fronts; from R&D ventures to dealer network
7. Continuation of export plans, focused on cost sensitive emerging regions, specifically Chery, Geely, FAW & Yutong
8. Continuation of foreign plant plans, focused on BRIC & North America
9. Developing allied platforms, modules & component strategies with ambitious Chinese suppliers (eg Wanxiag, Xinyi Glass, Norstar, Minth, Tong Yang etc.)
[NB 2005 was first year parts exports exceeded imports]
10. Learning from previous Chinese overseas expansion eg:
a) Haier – conservative approach building local US business – success story
b) TCL – European M&A failing due to cultural management differences
c) Lenovo – successful dualistic approach leveraging best of IBM & Legend
Although Chinese companies have benefited from foreign JVs, learning a great deal about component and vehicle quality, the truth is that to date they have, because of limited production technology access and little market elasticity, biased cost over appeal. This previously suited a bourgeoning unsophisticated, cost-conscious domestic market, but times have changed. Personal aspiration, rising disposable income and VM inter-rivalry, have raised marketplace expectations, evident from the move out of small hatchbacks into compact sedans, even though smaller cars benefit greatly from taxation state tax-breaks.
Chinese buyers have long recognised the quality differential between advanced ‘foreign’ cars (from JVs) and pure domestic product – the proof is in residual values. Since Eric Thun’s 1996 observation of the previous massive ‘quality gap’ (see ‘Changing Lanes in China, Cambridge University Press 2006) for over a decade the situation has remained the same. Although the gap has decreased measurably, it is still top of mind for new and 2nd hand a car-buyers alike. Domestic VMs will continue their improvement march, knowing it is key to gaining product credibility, consumer confidence, improved profitability and ultimately independence from JV partners.
As result many domestic VMs, like the Japanese & Koreans beforehand who had to start without an auto-history, have undertaken a copy+ product design approach, mimicking where possible the styles of Japanese, Korean and German cars. Hence, as we saw at the over 60% of the aesthetic of Chinese own brand cars are essentially copied, the rate even higher at 80% for SUVs. This partially a result of the origins of the donor platform (esp SUVs where Isuzu was so prevalent), but primarily driven by the need to keep development costs as low as possible yet also retain a stylistic familiarity with one or more more prestigious ‘foreign’ cars. Hence we see:
Large Cars –
FAW Redflag HQ3 (direct) relativity to Toyota Crown Majesta
Medium Cars –
Chery Eastar to Daewoo Magnus
Brilliance Splendour to BMW 3 series
Compact Cars –
BYD F3 to FAW-Toyota Corolla (front & side)
BYD F3 to Honda Fit sedan (rear)
Maple Hysoul 305 to Audi A4 (front grill treatment – misguided effort)
Maple Marindo MB to Cadillac CTS (rear treatment – misguided effort)
Jiangnan Chaunqi to Buick Excelle
Small Cars -
Chery QQ to Deawoo Matiz (renowned example)
Tongtian Glow to VW Polo
GWM Florid to Toyota Yaris
GWM Perey to Nissan Note
GWM Cool Bear to Toyota Scion xB
City (A segment) Cars -
Shaunghuan S6 to Daimler Smart
MPVs -
Fengxing Jingyi to Mitsubishi Grandis
Sports & Convertible Cars -
BYD F8 to Mercedes Benz CLK (frontal styling)
BYD F8 to Renault Megan CC (rear styling)
Cross-Overs -
Shaunghaun SCEO to BMW X5 (renowned)
Feidi UFO to Toyota RAV4 3dr
Chery Tiggo to Toyota RAV4 5dr
SUVs -
GWM Hover to Suzuki Axiom
Huanghai Qisheng to Hyundai Santa Fe
Huanghai Aolong to Ssangyong Rexton
Shaunghaun Laibao S-RV to Honda CR-V
Tianman Hero to Kia Sorento
Zotye 2008 to FAW-Toyota (Daihatsu) Terios
Specialist 4x4 -
Dongfeng Hanma to Hummer H1
Concept Cars -
Changfeng Liebao CS7 to Hyundai HCD9 Talus (‘broadly’)
The copy+ avenue has been chosen (by primarily independents) because it has been proven to work. Instead of trying, probably unsuccessfully, to start from scratch with absolutely no brand or product equity, the copy+ formula allows for basic connotation, if not absolute replication. In short it endeavours to mark a new brand’s position and provide credibility. [NB. Nissan and BMW started with re-badged Austin 7s build under licence].
And don’t think this is always done without the original foreign automaker’s consent, often agreements are made to replicate cars under a local brand where the foreign manufacturer has no intention (or been prohibited) from competing in the segment (eg FAW Redflag & Toyota Crown Majesta). Infact investment-auto-motives believe that for some time there have been tacit agreements in place between western and copy+ eastern makers to ascertain the exact 'west-east' price differential of a multitude of components, building up to complete vehicles. Re-manufactured original components spread across a singular or various copy+ car(s) allows for a direct comparison of quality-matching and cost-down – much needed by western VMs if they are to source parts from Chinese Tier 1s and 2s so as to revive their profitability. Every VM performs cost-assessment exercises on competitor cars, this is simply an extension of the same.
Whilst the copy+ game is an optimum strategic direction for ‘new’ automakers, success of course depends upon perfected execution, and in this regard, there is a broad spectrum of ‘winners’ and ‘losers’. Much obviously depends upon the basic platform being used, whether:
A. derived from the original VM to match the original perfectly
B. similar in engineering ‘hardpoints’ to approximate the original well
C. very dissimilar in ‘hardpoints’ so making for fundamentally poor match
Each Chinese VM has started from very different places, depending upon the vehicle sourcing agreements made, both at initial start-up and again in terms of re-negotiating newer platforms or the ability to produce their own. And the abovementioned list of vehicle results clearly demonstrate the levels of success achieved, some like the Zotye 2008 a very close interpretation to the Terios, whilst others like the Shaunghaun Laibao S-RV are, because of basic oversized dimensions, is a remote approximation to the Honda CR-V. Now whilst western eyes can criticise, the truth is that what looks like a ridiculous re-interpretation may well work if the segment has very little differentiation – as has been the case to date with the SUV segment heavily biased to Isuzu Trooper platform Thus an ‘oversized CR-V’ is at least seen to be more contemporary, if to our eyes aesthetically awkward.
Having looked closely at product trends, what about the structure of the industry itself?
As stated in a previous Chinese Industry post (09.01.08), the primary question is how the industry will need to consolidate; even with the continued growth levels that to date haven’t stopped the trend of discounting.
To our minds, there are 5 basic rationales:
1. Specific product-relative consolidation
2. Segment-relative consolidation
3. Vehicle portfolio expansion consolidation
4. Regional-orientated producer consolidation
5. Big Fish-Little Fish consolidation
#1 is the most obvious, directly encompassing commercial ventures with exactly the same, or very closely related, product types. We saw this with (SAIC) Roewe-MG, and could viably see a similar in the 4x4/SUV sector, many players long reliant upon old generation Toyota Landcruiser, Isuzu Trooper/Rodeo & Mitsubishi Pajero base vehicles. These include Beijing, Changfeng Liebao, Changfeng Yangzi, Dadi, Dadi Chengdu, Fudi, Fuqi, Jiangling/Windwind, Qinling Isuzu, Shaunghuan, Shuguang, Tianma,Yema and ,Zhongxing.
Given that fact that some of these brands also have extensive assembly operations in emerging regions such as Russia, Turkey, Egypt, Ukraine etc, we firmly believe that there is major potential to seek economies of scale by amalgamating what are mostly disparate 4x4 operators with aging product and an endangered future.
There are other ‘similar product’ arguments that are too detailed to relay here.
#2 offers the same scaling sentiment as #1 but from a specific segment perspective, specifically: utility pick-ups, utility 4x4s, small minivans, small ‘older’ platform cars, etc etc.
#3 relates to the ambitions of those VMs who wish to plug the gaps in their vehicle ranges as soon as possibly, ideally gaining additional technology knowledge in the process – using the M&A of such target companies to do so.
#4 pertains to either state-influenced or private network wish to forge a stronger local industrial base through amalgamation, perhaps in the attempt to take a structural lead within China.
#5 is simply the scenario of the bigger players (FAW, Dongfeng, SAIC, Beijing, Changan etc) seeking, trough acquisition, dispense with regional/sector small fry competition, absorbing their smaller volumes and critically gaining what is potentially untapped extra plant capacity.
In truth, all these factors will play a role in the evolution of the Chinese auto-industry, thus investment-auto-motives continues to monitor the scene closely and is in the process of drawing up probable best-fit, optimal M&A deal scenarios.
Monday, 4 February 2008
Parallel Learning – Corporate Financing Models – The Case for ‘Stock Cars’?
For the average Joe & Joanna, their purchase of a new vehicle has virtually no extended economic relationship to the chosen auto-manufacturer beyond the price paid and credit terms agreed.
A vital question must surely be: "can a VM extend the basis of the economic relationship further still?" Academics and Executives alike have long looked at the extended up-stream value chain activities to provide additional revenue streams; exploring insurance, servicing, fuelling etc. This is recognised as the conventional ‘beyond’ upon which the fundamentals of a brand-enterprise is based.
However, investment-auto-motives believes that brand preference and through-life loyalty could provide an alternative, simpler option for directly raising capital from buyers. The clue is in the title and it’s called ‘Stock Cars’.
The simple, but potentially powerful, concept would be to directly link the product purchase to availability of a new (secondary) company stock. A subordinate class that infers no voting rights and probably without the liquidity of Ordinary shares, but provides other compensatory advantages.
The theory connects the totems of brand loyalty to commercial success, providing a bridge between a consumer’s emotional attachment of the product to the continued success of the company that created that brand magic in the first instance.
As Marketing 101 states: good products, designed for purpose and user satisfaction, engenders brand attachment and in turn develops a respect for the automotive company. Good companies produce good products & services which in turn drive the successful growth of the company. Ferrari and Toyota demonstrate the polar extremes of the basic model.
Perhaps the most prevalent examples today are the likes of Apple, Google, YouTube and SecondLife. In short there’s a philosophical melding of company and buyer, best exemplified by the shareware communities that invest their time and financial donations to a commercial cause.
These examples aren’t meant as direct comparables to vehicle buyers, but they do show the level of inter-connectivity that is evolving.
Our thesis is that repeat car buyers, who’ve taken the brand to heart and have become ambassadors, are able to literally buy into, and help fund, the continued success of the company. It can be described as an emotionally created, rationally developed, literal value (adding) chain.
From the consumer perspective, the opportunity to buy-into the brand (beyond the car) instils the very essence of a co-operative relationship, and obviously from the corporate perspective, it allows for additional, stable and known-cost, fund raising that is used to once again serve the customer via improved product R&D, Quality etc.
Ordinarily the inter-connection between the Balance Sheet and Product is the firm’s Finance arm that provides credit (eg GMAC, Ford Credit etc). So given that the infrastructure is broadly in place, could it not additionally arrange (via an in-house or associate broker) such new corporate financial instruments.
(Take the theory to a natural conclusion and the company could source much of its short and long term debt directly from its customer-base at reduced interest rates given the ‘mutuality’ of 2 parties)
Although the basic ‘Stock-Car’ idea invites obvious questioning regards the actual cost of raising capital through stock creation, and the detriment to present shareholders, the idea could have important merits in as much as the new group of stock buyers would not be purely motivated by stock performance and dividends received - unlike a traditional institutional or private buyer.
Perhaps the best example of an emotionally attached, extremely supportive, shareholder groups are those related to football clubs like Manchester United Supporter’s Trust (MUST), or indeed the financial interest Arsenal, Tottenham, etc supporters have in their publicly floated club companies.
The idea would be to use such examples as best practice case studies, reviewing how it could be achieved for the auto-industry. The first obvious step is the inclusion of brand specific classic & contemporary car clubs with enthusiastic participants, eventually broadening the scheme out.
Of course different brands have different levels of following, and critically, different types of customer (brand loyalist) types each with different appreciation for such a scheme – a Bentley customer perhaps rather more adroit with the idea of share-ownership than a Skoda owner, but their enthusiasm ironically possibly similar?
But although the premium brands (R-R, Bentley, Merc, BMW etc) look to be the obvious start point for such a scheme, their present-day relatively high ROI levels and general credit-worthiness wouldn’t perhaps necessitate the scheme (for the time being).
Perhaps other more pertinent companies are the likes of the (now global) Chevrolet, or Skoda, or even more relative TATA or Chinese auto-companies. The indigenous loyalty of ‘Chindia’ is extremely high - national pride, cultural connections and being seen to do the right thing well renowned. To this end, could the ‘Stock-Car’ scheme be developed in these regions, especially in the area of mass-motoring as we’ve recently witnessed with the TATA Nano.
From this perspective, it could actively involve the lower levels of the burgeoning new middle-class in additionally contributing (beyond the cost of the car) to the growth or their nation’s industrial base and economic success, aswell as introduce them into the idea of stock-markets, the workings of the broader financial world. And for the companies themselves, their customers become more than simple users, they become psychologically intrinsically linked to ‘their’ brand.
A vital question must surely be: "can a VM extend the basis of the economic relationship further still?" Academics and Executives alike have long looked at the extended up-stream value chain activities to provide additional revenue streams; exploring insurance, servicing, fuelling etc. This is recognised as the conventional ‘beyond’ upon which the fundamentals of a brand-enterprise is based.
However, investment-auto-motives believes that brand preference and through-life loyalty could provide an alternative, simpler option for directly raising capital from buyers. The clue is in the title and it’s called ‘Stock Cars’.
The simple, but potentially powerful, concept would be to directly link the product purchase to availability of a new (secondary) company stock. A subordinate class that infers no voting rights and probably without the liquidity of Ordinary shares, but provides other compensatory advantages.
The theory connects the totems of brand loyalty to commercial success, providing a bridge between a consumer’s emotional attachment of the product to the continued success of the company that created that brand magic in the first instance.
As Marketing 101 states: good products, designed for purpose and user satisfaction, engenders brand attachment and in turn develops a respect for the automotive company. Good companies produce good products & services which in turn drive the successful growth of the company. Ferrari and Toyota demonstrate the polar extremes of the basic model.
Perhaps the most prevalent examples today are the likes of Apple, Google, YouTube and SecondLife. In short there’s a philosophical melding of company and buyer, best exemplified by the shareware communities that invest their time and financial donations to a commercial cause.
These examples aren’t meant as direct comparables to vehicle buyers, but they do show the level of inter-connectivity that is evolving.
Our thesis is that repeat car buyers, who’ve taken the brand to heart and have become ambassadors, are able to literally buy into, and help fund, the continued success of the company. It can be described as an emotionally created, rationally developed, literal value (adding) chain.
From the consumer perspective, the opportunity to buy-into the brand (beyond the car) instils the very essence of a co-operative relationship, and obviously from the corporate perspective, it allows for additional, stable and known-cost, fund raising that is used to once again serve the customer via improved product R&D, Quality etc.
Ordinarily the inter-connection between the Balance Sheet and Product is the firm’s Finance arm that provides credit (eg GMAC, Ford Credit etc). So given that the infrastructure is broadly in place, could it not additionally arrange (via an in-house or associate broker) such new corporate financial instruments.
(Take the theory to a natural conclusion and the company could source much of its short and long term debt directly from its customer-base at reduced interest rates given the ‘mutuality’ of 2 parties)
Although the basic ‘Stock-Car’ idea invites obvious questioning regards the actual cost of raising capital through stock creation, and the detriment to present shareholders, the idea could have important merits in as much as the new group of stock buyers would not be purely motivated by stock performance and dividends received - unlike a traditional institutional or private buyer.
Perhaps the best example of an emotionally attached, extremely supportive, shareholder groups are those related to football clubs like Manchester United Supporter’s Trust (MUST), or indeed the financial interest Arsenal, Tottenham, etc supporters have in their publicly floated club companies.
The idea would be to use such examples as best practice case studies, reviewing how it could be achieved for the auto-industry. The first obvious step is the inclusion of brand specific classic & contemporary car clubs with enthusiastic participants, eventually broadening the scheme out.
Of course different brands have different levels of following, and critically, different types of customer (brand loyalist) types each with different appreciation for such a scheme – a Bentley customer perhaps rather more adroit with the idea of share-ownership than a Skoda owner, but their enthusiasm ironically possibly similar?
But although the premium brands (R-R, Bentley, Merc, BMW etc) look to be the obvious start point for such a scheme, their present-day relatively high ROI levels and general credit-worthiness wouldn’t perhaps necessitate the scheme (for the time being).
Perhaps other more pertinent companies are the likes of the (now global) Chevrolet, or Skoda, or even more relative TATA or Chinese auto-companies. The indigenous loyalty of ‘Chindia’ is extremely high - national pride, cultural connections and being seen to do the right thing well renowned. To this end, could the ‘Stock-Car’ scheme be developed in these regions, especially in the area of mass-motoring as we’ve recently witnessed with the TATA Nano.
From this perspective, it could actively involve the lower levels of the burgeoning new middle-class in additionally contributing (beyond the cost of the car) to the growth or their nation’s industrial base and economic success, aswell as introduce them into the idea of stock-markets, the workings of the broader financial world. And for the companies themselves, their customers become more than simple users, they become psychologically intrinsically linked to ‘their’ brand.
Friday, 1 February 2008
Industry Structure – United Kingdom – Auto IPR: Increased Profitability Returns
Since the fracturing and effective collapse of British Leyland – selling on Jaguar and Land Rover to private and BAE interests – the UK’s auto-industry has been heavily reliant upon inward investment. At the VM level, that pattern was inaugurated by Nissan at Sunderland in the early 80s, followed latterly by Honda’s self sufficiency drive have been an Austin-Rover bed-fellow and more recently BMW’s nurturing of Mini and Rolls-Royce. Today we wait upon SAIC and the promise of Longbridge’s re-opening for a reborn (if Chinese) MG.
Such investments and operational know-how by world-class Japanese and German companies have undoubtedly re-energised what was once a rapidly faltering domestic industry to produce in recent years record production levels. Reports from the SMMT and other commentators highlight that the UK auto-industry is in rude health and in turn provides economic stimulation for parts and services suppliers for the ‘New Domestic’, employees and of course local economies. That cannot be denied, and given that the halcyon days of indigenous volume British car-making are long-gone, it is a strong economic industrial base that must be appreciated.
Whilst investment-auto-motives is purely focused on investment interests wherever they may be, and as such is politically impartial, we seek to ascertain how the UK (and it’s privately and publicly held companies) can best play a role in the future of an ever more global and eastward-shifting industry.
[Many of course think that the sale of Jaguar – Land Rover to TATA leaves nothing left of British volume manufacturing, but of course Ford is American even if its long-held association often felt otherwise. Of course UK industry observers have long recognised that the JLR sale is the last remnant of a desired post-industrial shift that’s been evident for 30 years].
Moving upstream UK Auto is, and has long been, centred on service and consulting sectors, specifically recognised for engineering R&D, design & development and projects talents – a function of diversified and improved labour-force education and the power of information technology. But when such skills are being rapidly organically emulated, or even more quickly bought-in and directly replicated (eg SAIC-Ricardo), what core competencies and differential services are left to offer?
Of course the likes of Ricardo, Lotus Engineering (and other similarly positioned Europeans like Pininfarina) have sought to exploit and try to control the shifting sands by working with the emerging eastern VMs, opening commercial and project offices to take advantage of the demand for western expertise. Unlike much of UK car-manufacture which sees an essential outflow of national revenue transformed into Yen or Euro company profits, the R&D and Engineering acumen still manages to provide an inward income stream converting Remnembi or Rupee into Sterling.
For nigh on a decade engineering consultancies have recognised that foreign VMs and new engineering services providers would soon be able to provide for themselves the fundamentals of basic development engineering resource – or “bums on seats engineering” as it’s known in the trade. For UK and western companies, this of course puts the onus more and more onto higher-value, increasingly technically complex and intellectually rigorous R&D services. This has been ‘conveniently’ matched by the call by advanced nations to seek technical solutions for the much debated topic of climate change and the focus subject of CO2 abatement.
The economic ramifications and opportunities are self evident, from the creation of new carbon trading bourses, governmental revenue earning taxation hindering those companies that do not partake in the sea-change and of course technical exploration, development, application and scalability – whether that be new solutions for naturally sourced clean energy (solar/wind/wave/bio-fuels etc) or man-made integrated powerplants (eg EVs, hybrids and fuel-cells utilising emerging L-ion or super-capacitor electrical storage forms)
From an investment perspective value creation is value creation wherever it may be, but within the UK and relative to C02 and new-energy requirements where exactly is that? Whilst we hear of US, European and even claimed Chinese advances the UK seems to hide its light under a bushel. Yes we’ve seen the commercialisation of university R&D spin-offs and even the privatisation of military research units for broader ‘real-world’ industrial and consumer application, but in truth little is heard about the conversion and commercial results of such IPR.
Of course commercial sensitivity plays an enormous role in what is released, but we think that the role of government has much to do to encourage investor publicity and subsequent commercialisation of such IPR. This has finally started with the transformation on 28.06.07 of what was the old DTI into 2 separate but conjoined departments individually focused upon:
1. Traditional Business – Dept for Business, Enterprise & Reg. Reform
2. IPR & Application – Dept for Innovation, Universities & Skills
Of course many will say it is still early days for the affects of such governmental change to take real economic effect. But in reality all stakeholders – from University Professors to Research Heads to Investment Banks and Venture Funds to Government Policy-makers and enablers need to work closely, intensely and quickly to ensure that a sound IPR commercialisation ‘delivery channel’ is formed and is then proven to work.
Names like Porton Capital’s (Tech Fund) and Circus Capital’s (Science & Innov Fund) and others are seen as leaders in this field and so, although understandably sensitive, could be used as case study examples of how to improve the efficacy and return margins of the IPR to Reality process.
The heart of the true UK auto-industry in effect has 2 chambers - that of the renowned niche vehicle makers (Lotus, Westfield, Bristol etc) - and that of an ever more important chamber of Innovation Transference. And in terms of ultimate commercialised global value the latter will have far more investment potential in terms of ROI and ROC than much of the labour intensive former that with typified by TVR we see relocate overseas.
Such investments and operational know-how by world-class Japanese and German companies have undoubtedly re-energised what was once a rapidly faltering domestic industry to produce in recent years record production levels. Reports from the SMMT and other commentators highlight that the UK auto-industry is in rude health and in turn provides economic stimulation for parts and services suppliers for the ‘New Domestic’, employees and of course local economies. That cannot be denied, and given that the halcyon days of indigenous volume British car-making are long-gone, it is a strong economic industrial base that must be appreciated.
Whilst investment-auto-motives is purely focused on investment interests wherever they may be, and as such is politically impartial, we seek to ascertain how the UK (and it’s privately and publicly held companies) can best play a role in the future of an ever more global and eastward-shifting industry.
[Many of course think that the sale of Jaguar – Land Rover to TATA leaves nothing left of British volume manufacturing, but of course Ford is American even if its long-held association often felt otherwise. Of course UK industry observers have long recognised that the JLR sale is the last remnant of a desired post-industrial shift that’s been evident for 30 years].
Moving upstream UK Auto is, and has long been, centred on service and consulting sectors, specifically recognised for engineering R&D, design & development and projects talents – a function of diversified and improved labour-force education and the power of information technology. But when such skills are being rapidly organically emulated, or even more quickly bought-in and directly replicated (eg SAIC-Ricardo), what core competencies and differential services are left to offer?
Of course the likes of Ricardo, Lotus Engineering (and other similarly positioned Europeans like Pininfarina) have sought to exploit and try to control the shifting sands by working with the emerging eastern VMs, opening commercial and project offices to take advantage of the demand for western expertise. Unlike much of UK car-manufacture which sees an essential outflow of national revenue transformed into Yen or Euro company profits, the R&D and Engineering acumen still manages to provide an inward income stream converting Remnembi or Rupee into Sterling.
For nigh on a decade engineering consultancies have recognised that foreign VMs and new engineering services providers would soon be able to provide for themselves the fundamentals of basic development engineering resource – or “bums on seats engineering” as it’s known in the trade. For UK and western companies, this of course puts the onus more and more onto higher-value, increasingly technically complex and intellectually rigorous R&D services. This has been ‘conveniently’ matched by the call by advanced nations to seek technical solutions for the much debated topic of climate change and the focus subject of CO2 abatement.
The economic ramifications and opportunities are self evident, from the creation of new carbon trading bourses, governmental revenue earning taxation hindering those companies that do not partake in the sea-change and of course technical exploration, development, application and scalability – whether that be new solutions for naturally sourced clean energy (solar/wind/wave/bio-fuels etc) or man-made integrated powerplants (eg EVs, hybrids and fuel-cells utilising emerging L-ion or super-capacitor electrical storage forms)
From an investment perspective value creation is value creation wherever it may be, but within the UK and relative to C02 and new-energy requirements where exactly is that? Whilst we hear of US, European and even claimed Chinese advances the UK seems to hide its light under a bushel. Yes we’ve seen the commercialisation of university R&D spin-offs and even the privatisation of military research units for broader ‘real-world’ industrial and consumer application, but in truth little is heard about the conversion and commercial results of such IPR.
Of course commercial sensitivity plays an enormous role in what is released, but we think that the role of government has much to do to encourage investor publicity and subsequent commercialisation of such IPR. This has finally started with the transformation on 28.06.07 of what was the old DTI into 2 separate but conjoined departments individually focused upon:
1. Traditional Business – Dept for Business, Enterprise & Reg. Reform
2. IPR & Application – Dept for Innovation, Universities & Skills
Of course many will say it is still early days for the affects of such governmental change to take real economic effect. But in reality all stakeholders – from University Professors to Research Heads to Investment Banks and Venture Funds to Government Policy-makers and enablers need to work closely, intensely and quickly to ensure that a sound IPR commercialisation ‘delivery channel’ is formed and is then proven to work.
Names like Porton Capital’s (Tech Fund) and Circus Capital’s (Science & Innov Fund) and others are seen as leaders in this field and so, although understandably sensitive, could be used as case study examples of how to improve the efficacy and return margins of the IPR to Reality process.
The heart of the true UK auto-industry in effect has 2 chambers - that of the renowned niche vehicle makers (Lotus, Westfield, Bristol etc) - and that of an ever more important chamber of Innovation Transference. And in terms of ultimate commercialised global value the latter will have far more investment potential in terms of ROI and ROC than much of the labour intensive former that with typified by TVR we see relocate overseas.
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