To One and All.
investment-auto-motives prides itself on its hard fought independence to provide objective advisory.
It is an independence which allows it sit centrally, and be triple-facing, toward the arenas of:
- the investment community
- government
- the auto-industry
The investment decision-making process toward either a singular project, an enterprise, a conglomerate or the breadth and depth of the auto-sector itself, requires that investment banks, private equity, trade-buyers and official authorities consider a broad spectrum of issues, levels, conflicting forces and alternative approaches.
The macro-economic investment waters have calmed greatly, the battering storms of 2007/8 subsiding whilst 2009 created a welcome, yet perhaps over-enthusiastic, rebound. 2009 was largely a sentiment driven market: cost-savings, retained liquidity and inferred 'good news' data ruled.
Governments provided QE reprieve. Auto-demand was much massaged. Sector winners & losers availed. Now all investors require insight, to see through the emerging mist created by enthusiastic over-reaction. The speedy turnaround from 'famine to feast' and starvation to over-indulgence can create systemic sickness if the process is not managed with restraint and objectivity by all 3 structural players.
2010 will prove tougher. Quantitative Easing diminished, consumer incentives withdrawn, the need for the banking sector's continued re-capitalisation for health and now the question of sovereign debt stability will continue to create squeezed credit conditions, engender risk-premiums and so marginally raise the cost of capital.
Yet, positively, large swells of liquidity seek safe-haven homes in these still-water times.
The economic mechanism is being largely re-set via the re-balancing of bonds & stocks, assisted by the assistive intermediate hybrid instruments (old and new), to give new growth platforms which in turn will encourage 'early cycle' M&A activity.
In short, the optimism of a still tentative, very slow yet welcome new beginning.
Upon this sentiment, as corporate balance sheets themselves, in time, start to re-gain content over style, far more than 'Good Will' to one and all.
investment-auto-motives... 2010 and onward.
Best Regards
Turan
Saturday, 26 December 2009
Monday, 21 December 2009
Macro Level Trends – Copenhagen Climate Summit – The Futility of Short Orders
After many months of rhetoric and hype that Copenhagen would lead to a cementing of international eco ambitions in turn leading to a global policy agreement, the stark economic realities that have beset many members of the G20 & G77 ultimately created the politics of disporia.
As supposedly the successor to Kyoto, the US and UK essentially took charge of matters, though perhaps idealising the application of the international cohesion created by generally united reaction to the financial crisis. Instead, seemingly for many it became a 'trap and pony show', both in terms of downsized ambitions and indeed as a euphemism the political subtleties emerging.
The core script, already previously beset by the recognition that no legally-binding agreements would be made, was written and re-written time and time again until it became almost an academic exercise of oxymoronic word-smithery – grandiose in appearance yet increasingly lacking any substance.
The most progressive proponents early on in talks were some of the fast growing EM nations such as Brazil, India and South Africa, presumably to have greater influence in proceeding and not alienate the US or UK, but early enthusiasm took a back-seat to the big picture economic - and regional social cohesion - interests of the EU and China.
The high ideals of CO2 reduction target of an 80% reduction by 2050, and global warming target of 1.5 degree (as opposed to 2 degree) limit became early casualties. As the high ideals crumbled so the innate, increasingly empty, politicking grew; coming to a head as President Obama & Premier Wen met. Their talks reportedly becoming (not surprisingly) ever increasingly fractious as China resented the US for its accusations of secret coal mines and its self appointment as policy policeman, and in turn the US seeks Chinese transparency given its concerns about China's growing geo-political influence in Asia through its regional exports of minerals and energy.
By the end the US, India, China, Brazil and South Africa agreed upon the disputed areas to be latterly considered, but with even an agreement to post-pone full ratification by a year, the hollowness of Copenhagen shines through, shorn of its central ideals; much as the hair on the heads of the environmental protestors outside were shorn in protest.
Perhaps the greatest symbolic illustration of the failure was the inability to even multi-laterally support the UN sponsored 'REDD' programme. It seeks to protect flora and fauna from the de-forestation effects of the logging industry in EM nations. [NB. it is reputed that the present rate of deforestation actually surpasses the CO2 levels of combined harms of the entire global transport sector, being the 2nd biggest 'emitter' at 20% of global output, only behind energy production].
By the end the only agreement made was that the world's poorer nations would be given $30bn (£19bn) of climate aid over the next 3 years, with that aid to increase to $100bn (£62bn) annually from 2020 – though this was sceptically met regards its power to do good.
Copenhagen reporters state that by the end there was a growing recognition by many that previous high expectations of massive carbon reduction in the near and medium term were unrealistic given the state of play for many national economies, supposedly rich and poor alike, and their political needs wants and desires.
The growing consensus implicitly projects that instead a new routemap should be considered, something beyond the realms of the conventional UN model that some would argue has run its historical course given the very changed geo-political landscape the 'global village' now sits within.
The irony is that this sad end was set in motion some time ago. The highly charged emotional rhetoric of 'green-speak' has set expectations both political and public. But demonstrated itself to be little more than a useful ideological vehicle for politicos and the possibility to align and direct massive public expenditure to big-budget yet ill-conceived schemes and projects across the industrial spectrum.
This emotional irrationality flies in the face of good investment governance and procedure, the sort practiced by the financially driven, results orientated private equity sector; and a mirror mentality of good stewardship of public funds by respected senior ranking officials.
[NB Relative to recent press comment, investment-auto-motives conjects that the reason that the £2.5bn of state aid for the UK auto-industry has not been immediately forthcoming is because Whitehall has yet to be convinced of its direct application towards long-term value creation. And instead seeks greater structural re-form and robustness for the UK auto-sector before providing sizeable monies].
So, looking forward...
We face a period where having convinced the majority of the public of the need for eco-behavior, the very modus operandi of international central governments, and its negative effect on presently unaligned unconvinced private investment, must alter.
Government must become far more concise in its industrial planning and thus provide a stable framework by which commercial enterprise can be guided.
Instead of political grand-standing and the questionable force-fitting of big-number yet shallowly devised economic modelling, far clearer multi-stage roadmaps must be drawn. Roadmaps which combine the virtues of financial conservatism and commercial creativity.
For the auto-industry itself, that means a far broader vision that the over-utopianised, panacea-like ideal swallowed by politicians and the public alike. We will not all be driving electric cars by the end of the decade given the complexity of PESTEL 'headwinds' that must be overcome. The EV does indeed have a role to play and should not at all be discounted, but its role as a solution provider for mass personal transit is specific and requires much social, commercial and product re-engineering. Eco-enthusiam should not overlook the technical frailties of purely electrically powered vehicles.
In relatively stable, circuit-type environments they have a definite role, as we see in factories or commercial premisis, and on golf courses and retirement villages - especially so in mid latitude regions. Environmental cleanliness, minimal temperature variance and other factors seemingly must be created and controlled to give the perfect world for relatively low-tech, low-cost EV solutions. Real world, weather dominant, applications in cities, suburbia and the country present very different challenges.
A graphic example of this surfaced coincidentally and serendipitously with the virtual collapse of Copenhagen.
The Eurostar rail service came to a grinding halt over the weekend because the electric motors of its locomotives could not operate with snow and chill-wind condition interference to the drive and control systems. Cold and moisture, though scientifically conductive for electricity, are not condusive to real world EV drive and control systems - let alone the repletion of stored battery energy.
The Eurostar fiasco serves as a reminder that political hyperbole must work in orchestration with technical achievement and a deliverable reality.
Thus as Christmas fast approaches the festive period offer a good reflective period for politicians and policy-makers around the world, to re-plot a truly tenable course forward. After all. Every element of the P+E+S+T+E+L formula must be balanced to create a progressive result.
As supposedly the successor to Kyoto, the US and UK essentially took charge of matters, though perhaps idealising the application of the international cohesion created by generally united reaction to the financial crisis. Instead, seemingly for many it became a 'trap and pony show', both in terms of downsized ambitions and indeed as a euphemism the political subtleties emerging.
The core script, already previously beset by the recognition that no legally-binding agreements would be made, was written and re-written time and time again until it became almost an academic exercise of oxymoronic word-smithery – grandiose in appearance yet increasingly lacking any substance.
The most progressive proponents early on in talks were some of the fast growing EM nations such as Brazil, India and South Africa, presumably to have greater influence in proceeding and not alienate the US or UK, but early enthusiasm took a back-seat to the big picture economic - and regional social cohesion - interests of the EU and China.
The high ideals of CO2 reduction target of an 80% reduction by 2050, and global warming target of 1.5 degree (as opposed to 2 degree) limit became early casualties. As the high ideals crumbled so the innate, increasingly empty, politicking grew; coming to a head as President Obama & Premier Wen met. Their talks reportedly becoming (not surprisingly) ever increasingly fractious as China resented the US for its accusations of secret coal mines and its self appointment as policy policeman, and in turn the US seeks Chinese transparency given its concerns about China's growing geo-political influence in Asia through its regional exports of minerals and energy.
By the end the US, India, China, Brazil and South Africa agreed upon the disputed areas to be latterly considered, but with even an agreement to post-pone full ratification by a year, the hollowness of Copenhagen shines through, shorn of its central ideals; much as the hair on the heads of the environmental protestors outside were shorn in protest.
Perhaps the greatest symbolic illustration of the failure was the inability to even multi-laterally support the UN sponsored 'REDD' programme. It seeks to protect flora and fauna from the de-forestation effects of the logging industry in EM nations. [NB. it is reputed that the present rate of deforestation actually surpasses the CO2 levels of combined harms of the entire global transport sector, being the 2nd biggest 'emitter' at 20% of global output, only behind energy production].
By the end the only agreement made was that the world's poorer nations would be given $30bn (£19bn) of climate aid over the next 3 years, with that aid to increase to $100bn (£62bn) annually from 2020 – though this was sceptically met regards its power to do good.
Copenhagen reporters state that by the end there was a growing recognition by many that previous high expectations of massive carbon reduction in the near and medium term were unrealistic given the state of play for many national economies, supposedly rich and poor alike, and their political needs wants and desires.
The growing consensus implicitly projects that instead a new routemap should be considered, something beyond the realms of the conventional UN model that some would argue has run its historical course given the very changed geo-political landscape the 'global village' now sits within.
The irony is that this sad end was set in motion some time ago. The highly charged emotional rhetoric of 'green-speak' has set expectations both political and public. But demonstrated itself to be little more than a useful ideological vehicle for politicos and the possibility to align and direct massive public expenditure to big-budget yet ill-conceived schemes and projects across the industrial spectrum.
This emotional irrationality flies in the face of good investment governance and procedure, the sort practiced by the financially driven, results orientated private equity sector; and a mirror mentality of good stewardship of public funds by respected senior ranking officials.
[NB Relative to recent press comment, investment-auto-motives conjects that the reason that the £2.5bn of state aid for the UK auto-industry has not been immediately forthcoming is because Whitehall has yet to be convinced of its direct application towards long-term value creation. And instead seeks greater structural re-form and robustness for the UK auto-sector before providing sizeable monies].
So, looking forward...
We face a period where having convinced the majority of the public of the need for eco-behavior, the very modus operandi of international central governments, and its negative effect on presently unaligned unconvinced private investment, must alter.
Government must become far more concise in its industrial planning and thus provide a stable framework by which commercial enterprise can be guided.
Instead of political grand-standing and the questionable force-fitting of big-number yet shallowly devised economic modelling, far clearer multi-stage roadmaps must be drawn. Roadmaps which combine the virtues of financial conservatism and commercial creativity.
For the auto-industry itself, that means a far broader vision that the over-utopianised, panacea-like ideal swallowed by politicians and the public alike. We will not all be driving electric cars by the end of the decade given the complexity of PESTEL 'headwinds' that must be overcome. The EV does indeed have a role to play and should not at all be discounted, but its role as a solution provider for mass personal transit is specific and requires much social, commercial and product re-engineering. Eco-enthusiam should not overlook the technical frailties of purely electrically powered vehicles.
In relatively stable, circuit-type environments they have a definite role, as we see in factories or commercial premisis, and on golf courses and retirement villages - especially so in mid latitude regions. Environmental cleanliness, minimal temperature variance and other factors seemingly must be created and controlled to give the perfect world for relatively low-tech, low-cost EV solutions. Real world, weather dominant, applications in cities, suburbia and the country present very different challenges.
A graphic example of this surfaced coincidentally and serendipitously with the virtual collapse of Copenhagen.
The Eurostar rail service came to a grinding halt over the weekend because the electric motors of its locomotives could not operate with snow and chill-wind condition interference to the drive and control systems. Cold and moisture, though scientifically conductive for electricity, are not condusive to real world EV drive and control systems - let alone the repletion of stored battery energy.
The Eurostar fiasco serves as a reminder that political hyperbole must work in orchestration with technical achievement and a deliverable reality.
Thus as Christmas fast approaches the festive period offer a good reflective period for politicians and policy-makers around the world, to re-plot a truly tenable course forward. After all. Every element of the P+E+S+T+E+L formula must be balanced to create a progressive result.
Thursday, 10 December 2009
Macro Level Trends – UK – The Economy Drive of All Time.
Once the white knights of the global financial fiasco, the western-world national account budgets have suffered a heavy toll over the last 12 months. Capital markets watched as the US further plundered its national deficit to support its stimulus and the UK did the same, leading the G20 with the over-ideological internationally co-ordinated financial response.
But of course different countries face different complex problems, and those star performers of the early part of the decade – the likes of the CEE region, Spain, Greece and Ireland that leveraged their low cost-bases & hyped-up asset values – are now suffering. Their 'thin' economic models have surfaced as the financial tide of private FDI and locally generated funding has withdrawn. Productivity has shrunk, GDP contracted, credit ratings slipped and credibility stymied, so creating a negative multiplier effect.
But the smaller brother nations, whilst more precarious, do not find themselves alone. Anything but. The US is publicly perceived as 'in hoc' to China given the respective $800bn trade deficit and the > $2 trillion Sino reserves. Germany & France find themselves caught in socially biased mixed economies which are popularly moving further to the left, but unlike the past where social-democracy could survive unfettered given the European competitive lead, such EU countries find themselves a very different global context – less post-colonial, more intrinsically post-modernist (ie post 20th-century).
But it is perhaps the UK that without the US political clout and noted as the EU laggard – the last to technically emerge from recession – that finds itself with perhaps the greatest future-forward transitional challenge to face. Today, the economy is at its lowest ebb in living memory.
As the UK government's National Statistics Office has reported: present GDP levels are at an average -5.2% over 2009, that average presented via a bottoming-out in Q209 and slight 'upturn' in Q309. The attached graphic highlights the UK's plight, with real GDP falling over 7% since Q108.
Of Q309, the greatest downturn was seen in the “distribution, hotel & catering” sector, this segment taking what could be regarded as a normative / expected hit as a cyclical consequence to previous period hits of primary industries (mining, agriculture), secondary industries (processing and production) and construction. Thus theoretically, the recession is working its way through, supported by the now ramped-down but still loose Quantitative Easing stimulus spending (1.2% of national GDP).
But that massive fiscal injection by the government into primarily the banking sector along with consumer incentivisation (ie the UK car scrappage scheme) has left public finances in a dire situation. At its heart the current or new-come government must steer the UK economy between the extremes of a Japan-like long-term minimal growth scenario and that of an over-extended QE policy generating M4 liquidity to give a false impression of substantial growth which invites hard to handle inflationary pressures. Keen to avoid both, Mervyn King et al on the BoE's Monetary Policy Committee must now work in conjunction with broader industrial policy-makers to regenerate the economy, especially so since many of the fiscal levers have already been effectively exhausted.
In summary, the concerning environment is as follows: a budget deficit of £175bn approx (of a £800bn PSBR), a trade deficit of £8.3 as of November (down from a previously better 7.8% 'helped' by car exports) and unemployment standing at (an 'official' though suspectedly unrepresentative) 8%.
And so it is in this already concerning context that the UK Treasury Minister yesterday highlighted his government's need to take the nation's accounts yet further into the red to eventually alleviate the pain, the aim to half the national debt by 2014. The measures of reduced public sector expenditure nominally by -12 to -15% and the efforts to increase income via steeper taxation are of course expected, though sensitively deployed. A theoretically pertinent element here is the application of the Low Carbon Transport initiative, which alleviates company car tax on electric cars and vans. And though good news for the likes of Smiths Electric and Modec that convert and manufacture e-vans, the real effect in increasing zero emissions e-vehicles on UK roads will be realistically negligible given the chicken-and-egg dichotomy of of e-charging infrastructure that has to date seen little real investment; especially so outside of inner-London.
So Alistair Darling's announcement was par for the course, yet still elicited little corporate or public belief as to how his (or any) government would or could engage a plan of national economic growth. For it is the question of long-term industrial planning, beyond the rhetoric of the “Green Economy”, that UK & foreign corporations and the public at large ponder.
The disparity gap between the rhetoric and reality has perhaps grown to an all time high. The very function of a supposedly knowledge economy shown to be in schism when theoretically highly qualified graduates work in 'chicken-cell' call-centres, inanimate computer servers as opposed to human brains are the real knowledge hubs, and the street graffiti artist 'Banksy' depicts better social commentary 'advertising' than the famed creative media 'shops' of Soho Square. Disaffection runs rife through all age groups, but perhaps most prevalent in the productive critical 30 & 40-somethings - over and above the comfortably off Baby-Boomers or their cyber-space'd (almost self-consciously removed) teenage grand-children.
[NB. The book 'Fantasy Island', authored by Elliot & Atkinson, although not yet read by investment-auto-motives, appears to give a good rounded account of the UK's present PESTEL position]
Inevitably, planning the country's industrial future is perhaps the most important task for the highest echelons of the UK establishment that sit in Whitehall. One only hopes they have a good appreciation of the size of that task, the complexity of the journey and ultimately the required outcome. But given past performance of only limited advancement and holistically orchestrated demonstration, there are 101 million reasons to think not.
However, to this end we will undoubtedly see the re-emergence of greater central planning – even under probable future Tory governance – which administratively echoes the 'reign' of the National Economic Development Council of 1962 – 92. Though unlike NDEC, the primary 3 way conversation must be between government, industry and finance. The latter replacing seat of the 'old world – old view' unions that ruled and stalled Britain the 1960s and 70s.
As a result, investment-auto-motives imagines new Economic Development Committees (neo-NDC's) will be born relative to each systemically-important industrial sector. And as such the remit of an automotive sector strategy council will take and progress the recent findings of the UK Motor Industry Report.
Presently in the broader forum, the re-balancing of investment in government bonds, corporate bonds, hybrid instruments such as convertible bonds and newly emergent 'CoCo's and renewed belief in fundamentally strong stocks will slowly but surely provide a new platform for growth.
Equally a platform must be built for the future of UK Autos, one which includes investment-auto-motives' previously mentioned need for a synergistic relationship between imported Tier 1 technologies and national NPD and local build competences. That probably means a re-birth of the 1981 British Technology Group, the conjoined forces of the then National Research and Development Council and the Development Corporation. Today the Sept of BIS (nee BERR) seems to be setting the scene for that eventuality to promote industrial efficiency and innovation – through probably today a PPI scheme, given the contextual background of government owned large UK banks and the need for wholesale sector transformation.
And so today is set in the context of historical economic cycles, rises and slumps necessitating the use of alternate associative loose and tight industrial planning.
As the progressive Chinese automaker BYD sets its sights on Los Angeles as its entry-point for its clean-tech cars, the UK must ask itself how it can best serve itself in this arena.
Today's UK auto-industry spans a plethora of scale and capabilities, yet must be essentially re-worked as an intelligent, interactive network to maximise change and productivity.
Today's low production run e-vans are of little impact and realistically commercially unviable. So the structural climb to large scale mass mobility that offers very low & zero emissions CO2 vehicles, perhaps engineered, produced and retailed in a very different manner via a very different business model and set of capabilities is today still practically a long-reach aim; even if on the fringes pieces of the jigsaw are being slowly put into place.
But of course different countries face different complex problems, and those star performers of the early part of the decade – the likes of the CEE region, Spain, Greece and Ireland that leveraged their low cost-bases & hyped-up asset values – are now suffering. Their 'thin' economic models have surfaced as the financial tide of private FDI and locally generated funding has withdrawn. Productivity has shrunk, GDP contracted, credit ratings slipped and credibility stymied, so creating a negative multiplier effect.
But the smaller brother nations, whilst more precarious, do not find themselves alone. Anything but. The US is publicly perceived as 'in hoc' to China given the respective $800bn trade deficit and the > $2 trillion Sino reserves. Germany & France find themselves caught in socially biased mixed economies which are popularly moving further to the left, but unlike the past where social-democracy could survive unfettered given the European competitive lead, such EU countries find themselves a very different global context – less post-colonial, more intrinsically post-modernist (ie post 20th-century).
But it is perhaps the UK that without the US political clout and noted as the EU laggard – the last to technically emerge from recession – that finds itself with perhaps the greatest future-forward transitional challenge to face. Today, the economy is at its lowest ebb in living memory.
As the UK government's National Statistics Office has reported: present GDP levels are at an average -5.2% over 2009, that average presented via a bottoming-out in Q209 and slight 'upturn' in Q309. The attached graphic highlights the UK's plight, with real GDP falling over 7% since Q108.
Of Q309, the greatest downturn was seen in the “distribution, hotel & catering” sector, this segment taking what could be regarded as a normative / expected hit as a cyclical consequence to previous period hits of primary industries (mining, agriculture), secondary industries (processing and production) and construction. Thus theoretically, the recession is working its way through, supported by the now ramped-down but still loose Quantitative Easing stimulus spending (1.2% of national GDP).
But that massive fiscal injection by the government into primarily the banking sector along with consumer incentivisation (ie the UK car scrappage scheme) has left public finances in a dire situation. At its heart the current or new-come government must steer the UK economy between the extremes of a Japan-like long-term minimal growth scenario and that of an over-extended QE policy generating M4 liquidity to give a false impression of substantial growth which invites hard to handle inflationary pressures. Keen to avoid both, Mervyn King et al on the BoE's Monetary Policy Committee must now work in conjunction with broader industrial policy-makers to regenerate the economy, especially so since many of the fiscal levers have already been effectively exhausted.
In summary, the concerning environment is as follows: a budget deficit of £175bn approx (of a £800bn PSBR), a trade deficit of £8.3 as of November (down from a previously better 7.8% 'helped' by car exports) and unemployment standing at (an 'official' though suspectedly unrepresentative) 8%.
And so it is in this already concerning context that the UK Treasury Minister yesterday highlighted his government's need to take the nation's accounts yet further into the red to eventually alleviate the pain, the aim to half the national debt by 2014. The measures of reduced public sector expenditure nominally by -12 to -15% and the efforts to increase income via steeper taxation are of course expected, though sensitively deployed. A theoretically pertinent element here is the application of the Low Carbon Transport initiative, which alleviates company car tax on electric cars and vans. And though good news for the likes of Smiths Electric and Modec that convert and manufacture e-vans, the real effect in increasing zero emissions e-vehicles on UK roads will be realistically negligible given the chicken-and-egg dichotomy of of e-charging infrastructure that has to date seen little real investment; especially so outside of inner-London.
So Alistair Darling's announcement was par for the course, yet still elicited little corporate or public belief as to how his (or any) government would or could engage a plan of national economic growth. For it is the question of long-term industrial planning, beyond the rhetoric of the “Green Economy”, that UK & foreign corporations and the public at large ponder.
The disparity gap between the rhetoric and reality has perhaps grown to an all time high. The very function of a supposedly knowledge economy shown to be in schism when theoretically highly qualified graduates work in 'chicken-cell' call-centres, inanimate computer servers as opposed to human brains are the real knowledge hubs, and the street graffiti artist 'Banksy' depicts better social commentary 'advertising' than the famed creative media 'shops' of Soho Square. Disaffection runs rife through all age groups, but perhaps most prevalent in the productive critical 30 & 40-somethings - over and above the comfortably off Baby-Boomers or their cyber-space'd (almost self-consciously removed) teenage grand-children.
[NB. The book 'Fantasy Island', authored by Elliot & Atkinson, although not yet read by investment-auto-motives, appears to give a good rounded account of the UK's present PESTEL position]
Inevitably, planning the country's industrial future is perhaps the most important task for the highest echelons of the UK establishment that sit in Whitehall. One only hopes they have a good appreciation of the size of that task, the complexity of the journey and ultimately the required outcome. But given past performance of only limited advancement and holistically orchestrated demonstration, there are 101 million reasons to think not.
However, to this end we will undoubtedly see the re-emergence of greater central planning – even under probable future Tory governance – which administratively echoes the 'reign' of the National Economic Development Council of 1962 – 92. Though unlike NDEC, the primary 3 way conversation must be between government, industry and finance. The latter replacing seat of the 'old world – old view' unions that ruled and stalled Britain the 1960s and 70s.
As a result, investment-auto-motives imagines new Economic Development Committees (neo-NDC's) will be born relative to each systemically-important industrial sector. And as such the remit of an automotive sector strategy council will take and progress the recent findings of the UK Motor Industry Report.
Presently in the broader forum, the re-balancing of investment in government bonds, corporate bonds, hybrid instruments such as convertible bonds and newly emergent 'CoCo's and renewed belief in fundamentally strong stocks will slowly but surely provide a new platform for growth.
Equally a platform must be built for the future of UK Autos, one which includes investment-auto-motives' previously mentioned need for a synergistic relationship between imported Tier 1 technologies and national NPD and local build competences. That probably means a re-birth of the 1981 British Technology Group, the conjoined forces of the then National Research and Development Council and the Development Corporation. Today the Sept of BIS (nee BERR) seems to be setting the scene for that eventuality to promote industrial efficiency and innovation – through probably today a PPI scheme, given the contextual background of government owned large UK banks and the need for wholesale sector transformation.
And so today is set in the context of historical economic cycles, rises and slumps necessitating the use of alternate associative loose and tight industrial planning.
As the progressive Chinese automaker BYD sets its sights on Los Angeles as its entry-point for its clean-tech cars, the UK must ask itself how it can best serve itself in this arena.
Today's UK auto-industry spans a plethora of scale and capabilities, yet must be essentially re-worked as an intelligent, interactive network to maximise change and productivity.
Today's low production run e-vans are of little impact and realistically commercially unviable. So the structural climb to large scale mass mobility that offers very low & zero emissions CO2 vehicles, perhaps engineered, produced and retailed in a very different manner via a very different business model and set of capabilities is today still practically a long-reach aim; even if on the fringes pieces of the jigsaw are being slowly put into place.
Friday, 4 December 2009
Micro-Level Trends – US Autos Inc – Government Aided Gangland Detroit?
The intended consequence of the CARS programme did indeed assist hard hit domestic manufacturers by buoying sales (though largely foreign) and so helped forestall what was seen as a possible collapse of the US auto-sector, and its national economic repercussions.
Though appreciative of the need to assist the sector to reform as far more socially relative and competitive, investment-auto-motives was not a supporter of the scale and cost of CARS and the level of government intervention that has resulted in GM and Chrysler. Believing instead that these 2 entities should have worked largely within the structure of market forces and normative Chapter 11 processes, with the heavily constrained credit conditions requiring government aid, but done so on a far more pragmatic basis.
Instead today we see the outcome of less than financially & economically sound principles forming a picture that almost defies the principles of capitalism that historically is the cornerstone of the US.
The newly emergent picture of a further de-stabalised auto-sector is summed-up by the recent news that GM and Ford will increase Q1, 2010 production by 25% each. Whilst no criticism can be made of Ford given its independent standing (if we discount clean-tech Federal funding) to leverage its muscle, the Obama administration should recognise that GM vis a vis the underdog Chrysler sits in a very different position.
Taking a look at the massive November sales disparity between Chrysler vs Ford & GM, and their dual announcements to hike production, it seems that the bigger pair are 'ganging-up' against Chrysler to possibly flood the market with new vehicles which will enable them to gain market share through probably the age old value-destruction tactic of discounting and incentives. In short it appears that Ford & GM – recognising the strength of Japanese and Korean peers - seek instead to erode Chrysler's small slice of the pie yet further.
Whilst such hard-ball play presumably does not infringe into anti-competition/anti-trust legal territory given the number of players within & level of fragmentation of the US car market, it does appear that GM is utilising the financial bolster given to it (& Chrysler) intended to “save” US Autos Inc as a weapon against its smaller, weaker counterpart.
If GM was in Ford's position of self-sufficiency there would be no argument, but it is not. It is largely government owned and as such, in the spirit of the nation, should act with accordant perspicacity. GM will of course argue that part of its remit is to return government monies as soon as possible and so must earn its way to do so; thus it finds itself in the age-old paradox.
The US administration must address the issue, and so quickly and fairly. For let us not forget that beyond the direct and indirect aid given to Chrysler, the company's only 'white knight' in the form of FIAT SpA, effectively saved the company from full and final liquidation. FIAT effectively saved jobs and by virtue saved state and federal budgets from yet further deficit strain.
Thus the Administration has a moral and ethical duty to ensure that Chrysler itself – a vehicle of the future economic upturn - is not beaten-up too badly by what seems a new “Gangland Detroit”, and Marchionne and his Chrysler executives should raise the matter with Washington. After all what is the point of saving two industrial 'brothers in arms' only to have one seemingly take an overtly offensive stance against the other after the fact?
As investment-auto-motives stated previously, in truth commerce and government should only really be mixed when devising national economic policy. When forced to converge during times of economic malaise, the interaction - including financial assistance - should be as limited and pragmatic as is feasible. Otherwise, as we witness today, the interplay of massaged commerce becomes a very messy affair that requires further disentangling and attention.
And by default it seems that FIAT SpA becomes ever more marginalised as it seeks to rebuild Chrysler in the near future from what will possibly be yet an even lower sales, revenue and income base.
As Frederick Henderson steps down from a short but well regarded financially-focused role as GM's CEO, and Chairman Ed Whitacre seeks out his replacement, the new incumbent will require a broader and deeper appreciation of the new domestic environs GM must critically credibly operate within. That means a different business mindset, alternative tactical weaponry and changed market-targeted (alliance-based) strategies.
At a time when US Autos Inc needs to overcome its innate systemic problems, it should be working in greater unison, not attacking its own to gain a single percentage here or there. Otherwise the raison d'etre of the massive financial aid packages and incurred budget deficits – as investment-auto-motives speculated – simply becomes counter productive to the US auto-industry, foreign trade investment interests (ie FIAT) and ultimately the US nation itself.
Gangs of any ilk are akin to petty children in playgrounds, or small town adolescent groups that in reality have power over little. Such a mentality should not serve as the hidden or implicit industrial basis of a presently stalled world super-power. The US and international trade & FDI deserves and require better governance.
Though appreciative of the need to assist the sector to reform as far more socially relative and competitive, investment-auto-motives was not a supporter of the scale and cost of CARS and the level of government intervention that has resulted in GM and Chrysler. Believing instead that these 2 entities should have worked largely within the structure of market forces and normative Chapter 11 processes, with the heavily constrained credit conditions requiring government aid, but done so on a far more pragmatic basis.
Instead today we see the outcome of less than financially & economically sound principles forming a picture that almost defies the principles of capitalism that historically is the cornerstone of the US.
The newly emergent picture of a further de-stabalised auto-sector is summed-up by the recent news that GM and Ford will increase Q1, 2010 production by 25% each. Whilst no criticism can be made of Ford given its independent standing (if we discount clean-tech Federal funding) to leverage its muscle, the Obama administration should recognise that GM vis a vis the underdog Chrysler sits in a very different position.
Taking a look at the massive November sales disparity between Chrysler vs Ford & GM, and their dual announcements to hike production, it seems that the bigger pair are 'ganging-up' against Chrysler to possibly flood the market with new vehicles which will enable them to gain market share through probably the age old value-destruction tactic of discounting and incentives. In short it appears that Ford & GM – recognising the strength of Japanese and Korean peers - seek instead to erode Chrysler's small slice of the pie yet further.
Whilst such hard-ball play presumably does not infringe into anti-competition/anti-trust legal territory given the number of players within & level of fragmentation of the US car market, it does appear that GM is utilising the financial bolster given to it (& Chrysler) intended to “save” US Autos Inc as a weapon against its smaller, weaker counterpart.
If GM was in Ford's position of self-sufficiency there would be no argument, but it is not. It is largely government owned and as such, in the spirit of the nation, should act with accordant perspicacity. GM will of course argue that part of its remit is to return government monies as soon as possible and so must earn its way to do so; thus it finds itself in the age-old paradox.
The US administration must address the issue, and so quickly and fairly. For let us not forget that beyond the direct and indirect aid given to Chrysler, the company's only 'white knight' in the form of FIAT SpA, effectively saved the company from full and final liquidation. FIAT effectively saved jobs and by virtue saved state and federal budgets from yet further deficit strain.
Thus the Administration has a moral and ethical duty to ensure that Chrysler itself – a vehicle of the future economic upturn - is not beaten-up too badly by what seems a new “Gangland Detroit”, and Marchionne and his Chrysler executives should raise the matter with Washington. After all what is the point of saving two industrial 'brothers in arms' only to have one seemingly take an overtly offensive stance against the other after the fact?
As investment-auto-motives stated previously, in truth commerce and government should only really be mixed when devising national economic policy. When forced to converge during times of economic malaise, the interaction - including financial assistance - should be as limited and pragmatic as is feasible. Otherwise, as we witness today, the interplay of massaged commerce becomes a very messy affair that requires further disentangling and attention.
And by default it seems that FIAT SpA becomes ever more marginalised as it seeks to rebuild Chrysler in the near future from what will possibly be yet an even lower sales, revenue and income base.
As Frederick Henderson steps down from a short but well regarded financially-focused role as GM's CEO, and Chairman Ed Whitacre seeks out his replacement, the new incumbent will require a broader and deeper appreciation of the new domestic environs GM must critically credibly operate within. That means a different business mindset, alternative tactical weaponry and changed market-targeted (alliance-based) strategies.
At a time when US Autos Inc needs to overcome its innate systemic problems, it should be working in greater unison, not attacking its own to gain a single percentage here or there. Otherwise the raison d'etre of the massive financial aid packages and incurred budget deficits – as investment-auto-motives speculated – simply becomes counter productive to the US auto-industry, foreign trade investment interests (ie FIAT) and ultimately the US nation itself.
Gangs of any ilk are akin to petty children in playgrounds, or small town adolescent groups that in reality have power over little. Such a mentality should not serve as the hidden or implicit industrial basis of a presently stalled world super-power. The US and international trade & FDI deserves and require better governance.
Wednesday, 25 November 2009
Macro-Level Trends – Combating CO2 – Waking Up to a Downsized Electric Vehicle Dream?
Electric Vehicles are seen as a major part of the panacea to 'detox' the planet of its CO2 ills. And of course, theoretically within the whole-system argument of the negative (oil) 'well-to-wheel' versus better (power) 'plant to (battery) pack', the argument stands if the energy is created in a zero emissions manner.
This of course highlights the questionable feasibility of carbon sequestration, wind-generation, solar-power and other new-age clean-tech solutions relative to their proven older counterpart nuclear (fission); which whilst generating clean energy poses the drawback of waste disposal.
And so, like the green recycling logo itself, the never-ending discussion goes round and round and round. Doing so primarily between oppositional extremes: that of the scatter-logical alarmist approach “try anything at any cost to save the planet as quickly as possible!” in contrast to the overtly-cautious approach that posits “need for a balanced cost-risk-reward”.
The climate change campaign origins of meteorological academia obviously provided the (arguably simplistic) graph-based 'shock & awe' effect, as presented by Al Gore on his global lecture tour. That information awoke western society along with the weighty support document compiled by Sir Nicholas Stern.
Thus today, through a process of slow absorption, the western world has largely accepted CO2 cause, even if the argument's dissemination has not been seen to go through the process of 'hypothesis + antithesis = synthesis' that would have added gravitas. Of course, such a process appears 'only academic' relative to the limited time-frame to save the planet. Something all the more ironic given the campaign's origins.
Even so a growing profile of climate change skepticism is appearing, the counter-argument raising its head recently in the financial press. The doubts aired by the fringe deployed by those guarded, economically squeezed, nations which are all too aware of the financial consequences of signing-up to the successor of the Kyoto Protocol, at what will be a water-shed Copenhagen Summit.
Thus, whilst largely 'on-side' with the anti-C02 camp, the public looks on in bemusement, unable to understand the level of eco-hype versus eco-reality. And as a consequence, so the ideal level eco-action versus the attainable level of eco-action, Copenhagen then, becomes yet another milestone of confusion and ideological fragmentation.
As partial arbiters and history-makers themselves, industry sector CEOs and Boards stand in a similar position, being seen to be 'on-side' through green initiatives and good CSR, but also appreciating that they individually cannot be eco-extremists – especially so during such financially constrained times – given their obligation to corporate stability and shareholders. Overt eco-martyrdom has the flip-side concern of share-price suicide....something perhaps best illustrated in the energy sector itself.
So it is within this ethereal, juxtaposed milieu that automotive manufacturers must develop their corporate stance – both implicitly and explicitly.
They must tread a careful path that demonstrates that they are well-attuned to the CO2 agenda – especially in the public arena, are able to leverage their own R&D development, as well as directing such R&D to incorporate available government assisted funding, to create a multiplier effect. Yet still acknowledge that economic rationality must prevail in maintaining the technical conventionality and financial guardianship that underpins the viability of the commercial enterprise to its ultimate owners.
Executives must showcase their long-term corporate vision, yet also demonstrate a viable path to that far-off point. Different companies from different countries undertake this remit relative to their innate cultures, national sensibilities and interests, and executable R&D capabilities.
Thus Japan's historically conservative Toyota has in the last 20 years set out its 100 year plans, done so in virtual secrecy, with the edict that “eco-actions speaking louder than words”. Hence its low-key introduction of original Prius in the mid 1990s, sound technical development and proof of case in the real-world as a precursor to (self-congratulating) marketing campaigns. Choosing the Hybrid route (and so influencing Honda) via proven Ni-MH battery technology, Toyota has sold over 2 million vehicles (primarily in Prius1,2,3 forms) in the last 15 years.
That is an annual average take-up rate of 133,333 per year, excluding the exponential effect of manufacturing ramp-up and broadened geographical reach. This must be regarded as the industry benchmark given its first to market attempt and achievement using proven technology fed into today's (historically little altered) road infrastructure. At its core Toyota objectively appreciated that the Hybrid Ni-MH solution requires nothing outside of the automaker's control, thus was and is the 'de facto' solution.
The company recognised early-on that reliance upon external 'macro-level enablers' dictated by the political & financial circumstances & whims of disperse global governments was not a basis to progress its future. Its own domestic experience with the relatively stable, progressive Japanese government operating a relatively controlled society demonstrated the realistic headwinds. And let us not forget that Japan has been the technical tour de force for much of the late 20th century, which along with its lack of oil independence, is why it was glad to originally host the Kyoto Summit and review alternative auto-industry paths.
In contrast to Toyota's cautious achievement we have other international auto companies that laud the wonders of other technology solutions.
Some high-up the tech-curve are little more than Lab-bench proven. Whilst others (like the Lithium-Ion battery) sit effectively mid-stream and offer technology transfer exercises into the auto-sector in Hybrid guise (eg Daimler) and EV guise (Tesla). But given their respective experiences and volumes, these are hardly proven achievements that encourage mainstream adoption, since these integration cases do not reflect the heavy duty-cycle requirements that an EV version of a conventional mainstream sedan or 5-door hatchback would demand. Such vehicle uses demand far more than Li-on's originally envisaged requirement relative to its adoption in low power uses in consumer electronics.
Thus as with the case of GM's Volt 'range extender' car (offering massaged 200mpg+ figures) the promises of near-term mainstream future-tech seems all the less plausible given a heavily subsidised $35,000 sticker price (vs Prius' $22,000 & Insight's $19,000). Instead it seems a recycled re-run of GM's infamous Motoramas of the 1930s & 1950s - technological 'Tomorrow's Worlds' that never emerge.
But as perhaps the greatest proclaimer of the present day is Renault-Nissan.
Carlos Ghosn's achievements and ambitions at Renault-Nissan are well recognised. Changing times and corporate fortunes means that he has had to evolve from the renowned 'Le Cost-Cutter' a decade ago into the nouvelle 'L' Homme Electrique ' of recent years. Given Renault's part-national ownership (now perhaps under greater grip given the recent financial aid) and France's international push of EDF as a nuclear energy provider, it should be no surprise that there is an alignment of national industrial policy interests and so impetus to parallel EDF's and Renault-Nissan's future fortunes.
Overt EV-mania that has gripped the press in the last 5 years, assisted by automaker proclamations (of which Renault is the loudest), has generated accordant expectancy. Yet that expectancy which still has a long road to travel to be realised en mass, and if/when doing so will provisionally take a different form in terms of vehicle perception to that hyped and expected.
Even for the French, its experience of EVs - whether adapted standard vehicles (such as the PSA 106 EV & Partner EV) or indeed concept EVs (such as the PSA Tulip with associated rental scheme business model tested in La Rochelle) – have been comparatively small and isolated 'baby steps' relative to the size of the task. And let us not forget that these French-centric efforts with amenable government fleets and regional administrations were undertaken within far more conducive economic climates.
Today – even for French bureaucrats - whilst the technology may have improved the situational context has undoubtedly deteriorated. Furthermore, the innate business model(s) required at both ends of the value chain are still being developed.
At one end (upstream/micro-level) :
- the question of whole vehicle packaging
- the massive reduction of vehicle mass
- technology real-world prove-out of Li-on
- battery and EV manufacturing scale-up.
At the other end (downstream/macro-level):
- slack international governmental progress to develop a credible EV routemap
(especially in co-aligning regulatory reform of the road-space to accommodate radically different advanced battery-centric architectures).
- the budgetary pressure on governments not to fulfill their national and state pledges to subsidies the EV agenda.
- the lack of developmental progress regards 'holistic' powergrid development, including vehicle e-feed infrastructure.
- OPEC's apparent determination to maintain 'affordable oil' through additional capacity investment
- the question of merging historically separate oil & electric energy providers at the retail level to sell petroleum/diesel & electricity fuels side by side at the pump.
Already large chunks of public funds have been directed at volume manufacturers, vehicle start-ups and other participant players within energy & transport that appear 'big on talk but little on delivery'. As mentioned in previous posts, part of the reason for such slow progress is that often the era of 'technology disruption' (real or perceived) is that a great number of variables must be aligned to bring in a new norm, and that broad promise of fundamental change can be exploited by less than honourable interlopers that seek to gain from the overt investment enthusiasm of government and privateers. But beyond the opportunity for unethical practices, the very process of the multi-various economic agents working perfectly in orchestra is indeed problematic. [NB that is why historically greater technical progress is made in wartime conditions; when greater use of central planning is enforced, at the literal cost of public finances].
So such a land of promise, like an oasis, often appears closer than the foibles of everyday reality permits.
This oxymoronic state of affairs is highlighted in a recent WSJ interview with Carlos Ghosn, with his counter-point statements that: "our forecast is that sales of EVs will be 10% of the total market...by 2020"... versus... "EVs will move up slowly, not taking the market by storm"
Let us conject upon the credibility of the former statement...”10%..by 2020”. We can project forward (using VW's 2018 figures) that the global market will be 30% higher than today's (55m units) at 73m, and a few years thereafter reach 75m units, that means that Renault forecasts that approximately 7.5m EVs will be sold. This means that over the next 10 years an average of 750,000 EVs must be sold each year, discounting the ramp-up effect. This figure compares to the 133,333 units sold by Toyota using a far more mainstream technology & vehicle type over the 15 year period to date
It is thus no wonder Mr Ghosn must play both roles of optimistic 'preacher' and conservative 'prudent'.
For the present time, with Copenhagen upon us, it seems that the PESTEL context of conflicting issues and agendas that can be encapsulated as “eco-idealism versus economic handicaps” means that neither conventional car-makers, unconventional 'start-ups', the financial community nor governments are truly able to initiate the required change into a true EV world within the foreseeable future. Ultimately, each party looks to the other and rhetoric continues to overshadow tangible progress.
So, the word of warning is that investors must see conditions for true EV traction before the possibly hollow perception is priced into corporate MarketCap valuations. For whilst the auto-industry certainly needs buoyancy aids, they need to be credible and not the stuff of possibly damaging technology story bubbles.
investment-auto-motives objectivity means that it has no axe to grind, except that of that of private investors (the core of capitalism) being fully informed, by competent boards and management, and not led along possible garden paths, no matter how well intentioned.
However, to end on a more positive note that demonstrates a realistic step toward an EV participantt future, at the beginning of the year investment-auto-motives made an informal recommendation that Daimler exploit its use as a licensor/contract builder of its >smart ForTwo vehicle architecture. (It is perhaps the most 'package perfect' product that encapsulates the generic form & lightweight mass of a small 2-seater city car. Perhaps the best proven mainstream vehicle - along with the previous generation 'sandwich floor' A-class - for EV tailorisation. Thus at the recommendation's heart proposing that Daimler become a strategic enabler and benefactor from global JV agreements using ICE and EV powertrains.
That identified and recommended opportunity is now being reportedly taken-up by Daimler & Renault, with mention that the Twizy EV concept will be born from ForTwo, after a conventionally powered 2 seater is created.
The EV dream has been downsized for the near and mid-term, but is all the more 'real-world' practicable for doing so by being familiar and off-setting high-cost EV powertrain and e-control costs with a recently 'break-even' amortised platform.
So whilst there is a long road to still undertake, “Bravo” to Monsieur Ghosn and “Biefall” to Doktor Zetsche for taking the first plausible step.
As the struggle goes on to maintain the world with less than 550ppm (parts per million), the take-up of electric cars will seem indeterminably slow given the reality of government rhetoric over action and relatively tiny funding for such a major societal transition.
In truth, they may continue to grow stature as the 'good taste' preserve of a 'local elite' within the wealthier inner-suburbs of major metropolises within Europe's London, Paris, Berlin, Amsterdam, and the outer reach enclaves elsewhere, such as US's Silicon Valley, New York State Hamptons, Newport Beach, Santa Barbara, Carmel etc.
But whilst such EV popularity grows and has an affect, it will do so only at a comparatively tiny relative to the major CO2 reduction enablers of clean-tech ICE and Hybrid vehicles. Since, given its omnipotence, it will be evolved technology that takes centre stage in the CO2 battle as the economy regains a slow positive momentum between 2011-2013, and so perversely could, along with feeble budget-constrained government infrastructure efforts, suffocate the progress of tentative 'real-world' city-centric EV.
This of course highlights the questionable feasibility of carbon sequestration, wind-generation, solar-power and other new-age clean-tech solutions relative to their proven older counterpart nuclear (fission); which whilst generating clean energy poses the drawback of waste disposal.
And so, like the green recycling logo itself, the never-ending discussion goes round and round and round. Doing so primarily between oppositional extremes: that of the scatter-logical alarmist approach “try anything at any cost to save the planet as quickly as possible!” in contrast to the overtly-cautious approach that posits “need for a balanced cost-risk-reward”.
The climate change campaign origins of meteorological academia obviously provided the (arguably simplistic) graph-based 'shock & awe' effect, as presented by Al Gore on his global lecture tour. That information awoke western society along with the weighty support document compiled by Sir Nicholas Stern.
Thus today, through a process of slow absorption, the western world has largely accepted CO2 cause, even if the argument's dissemination has not been seen to go through the process of 'hypothesis + antithesis = synthesis' that would have added gravitas. Of course, such a process appears 'only academic' relative to the limited time-frame to save the planet. Something all the more ironic given the campaign's origins.
Even so a growing profile of climate change skepticism is appearing, the counter-argument raising its head recently in the financial press. The doubts aired by the fringe deployed by those guarded, economically squeezed, nations which are all too aware of the financial consequences of signing-up to the successor of the Kyoto Protocol, at what will be a water-shed Copenhagen Summit.
Thus, whilst largely 'on-side' with the anti-C02 camp, the public looks on in bemusement, unable to understand the level of eco-hype versus eco-reality. And as a consequence, so the ideal level eco-action versus the attainable level of eco-action, Copenhagen then, becomes yet another milestone of confusion and ideological fragmentation.
As partial arbiters and history-makers themselves, industry sector CEOs and Boards stand in a similar position, being seen to be 'on-side' through green initiatives and good CSR, but also appreciating that they individually cannot be eco-extremists – especially so during such financially constrained times – given their obligation to corporate stability and shareholders. Overt eco-martyrdom has the flip-side concern of share-price suicide....something perhaps best illustrated in the energy sector itself.
So it is within this ethereal, juxtaposed milieu that automotive manufacturers must develop their corporate stance – both implicitly and explicitly.
They must tread a careful path that demonstrates that they are well-attuned to the CO2 agenda – especially in the public arena, are able to leverage their own R&D development, as well as directing such R&D to incorporate available government assisted funding, to create a multiplier effect. Yet still acknowledge that economic rationality must prevail in maintaining the technical conventionality and financial guardianship that underpins the viability of the commercial enterprise to its ultimate owners.
Executives must showcase their long-term corporate vision, yet also demonstrate a viable path to that far-off point. Different companies from different countries undertake this remit relative to their innate cultures, national sensibilities and interests, and executable R&D capabilities.
Thus Japan's historically conservative Toyota has in the last 20 years set out its 100 year plans, done so in virtual secrecy, with the edict that “eco-actions speaking louder than words”. Hence its low-key introduction of original Prius in the mid 1990s, sound technical development and proof of case in the real-world as a precursor to (self-congratulating) marketing campaigns. Choosing the Hybrid route (and so influencing Honda) via proven Ni-MH battery technology, Toyota has sold over 2 million vehicles (primarily in Prius1,2,3 forms) in the last 15 years.
That is an annual average take-up rate of 133,333 per year, excluding the exponential effect of manufacturing ramp-up and broadened geographical reach. This must be regarded as the industry benchmark given its first to market attempt and achievement using proven technology fed into today's (historically little altered) road infrastructure. At its core Toyota objectively appreciated that the Hybrid Ni-MH solution requires nothing outside of the automaker's control, thus was and is the 'de facto' solution.
The company recognised early-on that reliance upon external 'macro-level enablers' dictated by the political & financial circumstances & whims of disperse global governments was not a basis to progress its future. Its own domestic experience with the relatively stable, progressive Japanese government operating a relatively controlled society demonstrated the realistic headwinds. And let us not forget that Japan has been the technical tour de force for much of the late 20th century, which along with its lack of oil independence, is why it was glad to originally host the Kyoto Summit and review alternative auto-industry paths.
In contrast to Toyota's cautious achievement we have other international auto companies that laud the wonders of other technology solutions.
Some high-up the tech-curve are little more than Lab-bench proven. Whilst others (like the Lithium-Ion battery) sit effectively mid-stream and offer technology transfer exercises into the auto-sector in Hybrid guise (eg Daimler) and EV guise (Tesla). But given their respective experiences and volumes, these are hardly proven achievements that encourage mainstream adoption, since these integration cases do not reflect the heavy duty-cycle requirements that an EV version of a conventional mainstream sedan or 5-door hatchback would demand. Such vehicle uses demand far more than Li-on's originally envisaged requirement relative to its adoption in low power uses in consumer electronics.
Thus as with the case of GM's Volt 'range extender' car (offering massaged 200mpg+ figures) the promises of near-term mainstream future-tech seems all the less plausible given a heavily subsidised $35,000 sticker price (vs Prius' $22,000 & Insight's $19,000). Instead it seems a recycled re-run of GM's infamous Motoramas of the 1930s & 1950s - technological 'Tomorrow's Worlds' that never emerge.
But as perhaps the greatest proclaimer of the present day is Renault-Nissan.
Carlos Ghosn's achievements and ambitions at Renault-Nissan are well recognised. Changing times and corporate fortunes means that he has had to evolve from the renowned 'Le Cost-Cutter' a decade ago into the nouvelle 'L' Homme Electrique ' of recent years. Given Renault's part-national ownership (now perhaps under greater grip given the recent financial aid) and France's international push of EDF as a nuclear energy provider, it should be no surprise that there is an alignment of national industrial policy interests and so impetus to parallel EDF's and Renault-Nissan's future fortunes.
Overt EV-mania that has gripped the press in the last 5 years, assisted by automaker proclamations (of which Renault is the loudest), has generated accordant expectancy. Yet that expectancy which still has a long road to travel to be realised en mass, and if/when doing so will provisionally take a different form in terms of vehicle perception to that hyped and expected.
Even for the French, its experience of EVs - whether adapted standard vehicles (such as the PSA 106 EV & Partner EV) or indeed concept EVs (such as the PSA Tulip with associated rental scheme business model tested in La Rochelle) – have been comparatively small and isolated 'baby steps' relative to the size of the task. And let us not forget that these French-centric efforts with amenable government fleets and regional administrations were undertaken within far more conducive economic climates.
Today – even for French bureaucrats - whilst the technology may have improved the situational context has undoubtedly deteriorated. Furthermore, the innate business model(s) required at both ends of the value chain are still being developed.
At one end (upstream/micro-level) :
- the question of whole vehicle packaging
- the massive reduction of vehicle mass
- technology real-world prove-out of Li-on
- battery and EV manufacturing scale-up.
At the other end (downstream/macro-level):
- slack international governmental progress to develop a credible EV routemap
(especially in co-aligning regulatory reform of the road-space to accommodate radically different advanced battery-centric architectures).
- the budgetary pressure on governments not to fulfill their national and state pledges to subsidies the EV agenda.
- the lack of developmental progress regards 'holistic' powergrid development, including vehicle e-feed infrastructure.
- OPEC's apparent determination to maintain 'affordable oil' through additional capacity investment
- the question of merging historically separate oil & electric energy providers at the retail level to sell petroleum/diesel & electricity fuels side by side at the pump.
Already large chunks of public funds have been directed at volume manufacturers, vehicle start-ups and other participant players within energy & transport that appear 'big on talk but little on delivery'. As mentioned in previous posts, part of the reason for such slow progress is that often the era of 'technology disruption' (real or perceived) is that a great number of variables must be aligned to bring in a new norm, and that broad promise of fundamental change can be exploited by less than honourable interlopers that seek to gain from the overt investment enthusiasm of government and privateers. But beyond the opportunity for unethical practices, the very process of the multi-various economic agents working perfectly in orchestra is indeed problematic. [NB that is why historically greater technical progress is made in wartime conditions; when greater use of central planning is enforced, at the literal cost of public finances].
So such a land of promise, like an oasis, often appears closer than the foibles of everyday reality permits.
This oxymoronic state of affairs is highlighted in a recent WSJ interview with Carlos Ghosn, with his counter-point statements that: "our forecast is that sales of EVs will be 10% of the total market...by 2020"... versus... "EVs will move up slowly, not taking the market by storm"
Let us conject upon the credibility of the former statement...”10%..by 2020”. We can project forward (using VW's 2018 figures) that the global market will be 30% higher than today's (55m units) at 73m, and a few years thereafter reach 75m units, that means that Renault forecasts that approximately 7.5m EVs will be sold. This means that over the next 10 years an average of 750,000 EVs must be sold each year, discounting the ramp-up effect. This figure compares to the 133,333 units sold by Toyota using a far more mainstream technology & vehicle type over the 15 year period to date
It is thus no wonder Mr Ghosn must play both roles of optimistic 'preacher' and conservative 'prudent'.
For the present time, with Copenhagen upon us, it seems that the PESTEL context of conflicting issues and agendas that can be encapsulated as “eco-idealism versus economic handicaps” means that neither conventional car-makers, unconventional 'start-ups', the financial community nor governments are truly able to initiate the required change into a true EV world within the foreseeable future. Ultimately, each party looks to the other and rhetoric continues to overshadow tangible progress.
So, the word of warning is that investors must see conditions for true EV traction before the possibly hollow perception is priced into corporate MarketCap valuations. For whilst the auto-industry certainly needs buoyancy aids, they need to be credible and not the stuff of possibly damaging technology story bubbles.
investment-auto-motives objectivity means that it has no axe to grind, except that of that of private investors (the core of capitalism) being fully informed, by competent boards and management, and not led along possible garden paths, no matter how well intentioned.
However, to end on a more positive note that demonstrates a realistic step toward an EV participantt future, at the beginning of the year investment-auto-motives made an informal recommendation that Daimler exploit its use as a licensor/contract builder of its >smart ForTwo vehicle architecture. (It is perhaps the most 'package perfect' product that encapsulates the generic form & lightweight mass of a small 2-seater city car. Perhaps the best proven mainstream vehicle - along with the previous generation 'sandwich floor' A-class - for EV tailorisation. Thus at the recommendation's heart proposing that Daimler become a strategic enabler and benefactor from global JV agreements using ICE and EV powertrains.
That identified and recommended opportunity is now being reportedly taken-up by Daimler & Renault, with mention that the Twizy EV concept will be born from ForTwo, after a conventionally powered 2 seater is created.
The EV dream has been downsized for the near and mid-term, but is all the more 'real-world' practicable for doing so by being familiar and off-setting high-cost EV powertrain and e-control costs with a recently 'break-even' amortised platform.
So whilst there is a long road to still undertake, “Bravo” to Monsieur Ghosn and “Biefall” to Doktor Zetsche for taking the first plausible step.
As the struggle goes on to maintain the world with less than 550ppm (parts per million), the take-up of electric cars will seem indeterminably slow given the reality of government rhetoric over action and relatively tiny funding for such a major societal transition.
In truth, they may continue to grow stature as the 'good taste' preserve of a 'local elite' within the wealthier inner-suburbs of major metropolises within Europe's London, Paris, Berlin, Amsterdam, and the outer reach enclaves elsewhere, such as US's Silicon Valley, New York State Hamptons, Newport Beach, Santa Barbara, Carmel etc.
But whilst such EV popularity grows and has an affect, it will do so only at a comparatively tiny relative to the major CO2 reduction enablers of clean-tech ICE and Hybrid vehicles. Since, given its omnipotence, it will be evolved technology that takes centre stage in the CO2 battle as the economy regains a slow positive momentum between 2011-2013, and so perversely could, along with feeble budget-constrained government infrastructure efforts, suffocate the progress of tentative 'real-world' city-centric EV.
Tuesday, 17 November 2009
Industry Structure – GM & Opel – A Temporary Case of Irrational Exuberance?
“Irrational Exuberance” was once the phenomena of stock markets, yet it now seems that such misplaced optimism can be found in the annuls of a still heavily shocked and sedated western auto-sector.
Recent weeks witnessed a U-Turn of attitude in the RenCen at Detroit, after 'New GM' decided to remove the sale of Adam Opel GmbH from the negotiating table. The heady mix of intra & inter-national industrial policy-making, the social strings of financial aid packages and business-centric strategy formulation ultimately clashed, and the triangular relationship of the 3 prime stakeholders - GM, Magna-Sberbank-GAZ and Angela Merkel – pulled and torn.
The protagonist GM has decided that it should, after all, direct the future of its European division, parachuting in Nick Reilly from his successes at GM Asia-Pac to take the reins from Carl Peter-Forster, his role at Opel presumably seen as untenable given his preference for the unit's sale to the the Canadian auto-supplier and Russian bank that would have given GAZ its much needed transformation.
Unable to arrive at a satisfactory conclusion, it has rebuked the Russian backed offer on strategic grounds relating to IPR, R&D, Russian sales territory and longer term global competitiveness implications. Its stance is understandable, given the strategic importance of Opel as GM's medium car creation hub, and the opportunity the relatively new SCCS platform (created as a JV with FIAT) offers a rival automaker such as GAZ which can leverage to its own export advantage Magna components pricing, low cost labour & overhead and its geo-political position between Europe, the CIS states and 'Chindia'.
Unsurprisingly GM does not wish to 'hand on a plate' its relatively knowledge advanced division to an arguably better placed competitor. But it must in due course and at some point acknowledge that something radical must be done to alter the very DNA of Opel as part of an environment reactive evolutionary process if the company is to not simply survive on the largess of state sponsorship in the face of withering consumer attraction.
Critics rightly judge GM by its historical lack of good parenting toward Opel and the 21st century mis-management of its own North American operations, since Detroit has indeed been less than adept in profitably operating such a sprawling monolith - with typical internal & legacy conflictions - caught in a ravenous sea of global sector change.
The 'New GM' with new leadership and a largely new board seeks to redress such criticism, but realistically can it? What exactly will it do to redress the situation and specifically the Opel GmbH challenge?
Recent news indicates it seems to be replaying the 'set-play' recently created in the US by GMNA, which effectively draws in state and union stakeholder for interim term survival. Read between the news-report lines and this appears to be the case; GM using US and EU aid finance aswell as its own rebuoyed balance sheet.
But let us not forget the fact that the political will to keep financially bolstering under-performing companies is withering, and the fact that GM's improved balance-sheet is only – re-iterate 'only' – a function of a macro-enabled external assistance(s).
These being:
1. a fast-track (investor debilitating) Chapter 11 procedure,
2. massive financial injections from Washington ($13.4bn of which still sits in Treasury escrow)
3. the CARS 'cash for clunkers' scrappage scheme which effectively drove an estimated 50% of GM dealership footfall in the period (& with the by-product that it actually benefited Toyota, Honda, Hyundai and Ford far more so than GM).
4. it is effectively US tax-payer cash that repays Opel's E1.5bn bridging loan from the German tax-payer – done so to eradicate the implicitly socialist agenda of the 'custodial' Opel Trust
Given that this is the reality, GM though better placed, is not in a position convey any swagger, or indeed “irrational exuberance”. For its is far from out of the woods in the US, and especially not so relative to Opel's diminished prowess in Europe.
Removing the remit and need for the Opel Trust is indeed a good development, since it partially de-shackles management, but instead of simply re-running the 'GMNA set-play' of state & union equity provision – and thus simply replacing one set of shackles with others - a truly viable plan of action is needed to re-shape Opel. One to suit its diminished place within the EU consumer market yet of possibly more marked importance to a global GM and indeed a global auto-sector.
And it is from the hopeful 'lessons learnt' by way of the Magna-Sberbank-GAZ consortium that GM Europe must re-invent itself.
Such aspiration may or may not be the case, we shall have to wait and see.
In the meantime, instead of an Opel sale, GM has arrived at its own plan, one which reduces the level of German aid reliance and so presumably freeing itself from much of the present plant & labour overhead obligation. Following the FIAT lead with a pan-European approach it seeks to spread the $3bn cost and load of re-structure across various EU nations and labour unions, with $1.48bn of company capital re-directed from Detroit to Russelsheim and beyond.
GM states that Opel has enough liquidity to maintain operations (effectively 'as is') but lacks the resources to undertake the full re-structure required.
So beyond the lower level contribution of EU state and union aid – including 'only' hundreds of millions of Euros from Germany vs the previous E2.2bn relative to the Magna deal – the largest slice of such additional resource presently look to come from the US Treasury.
It will be of little doubt that as GM was negotiating with Magna as to the IPR package made available for sale, it would have also been convincing the Obama Administration of Opel's central strategic role to the company given its R&D exposure to Germany's advanced eco-engineering sector that realistically downplays high-cost EV and hybrid R&D for that of low-cost clean diesel development. Whilst the Japanese may have the petrol-NiMH hybrid lead, GMNA may realistically wish to ultimately pursue a more conventional path for all the rhetoric of presently limited available US-made hybrids or next generation L-ion range-extender vehicles (NB GM Volt est $35,000 vs Toyota prius $22,000!)
Beyond the US's own intrinsic benefit from Opel (ie Germanic) know-how, and we see that with FIAT & RHJ International still probably in the background, GM recognises that Opel's constituent parts of: R&D capabilities, project development assets (HR, IT, studios, test-cells, tracks etc), plants and company dealerships and company land can be very probably further sweated. The company is less than the sum of its parts as a whole, but what if the parts themselves can be informally or formally hived-off?
Investment-auto-motives suspects that even if Opel's full and final sale is not imminent, a new period of corporate asset re-evaluation is so. Led by Reilly he will note: the EU's supplier base ambitions to become Tier0.5 players (not still discounting Magna); FIAT's own growth ambitions (yet cogniscent of historical FIAT-CCCP relationships), and lastly and very importantly his experience of China's auto-industry structural growth path with GM seeking a leading role.
The new Opel plan is ultimately an interim step, and undoubtedly will mean a required metaphysical 'deconstruction' of the entity. Exactly how that comes to play out in the future remains unclear. At one extreme via a 'GMNA set-play' Opel GmbH could be floated to become an AG or more likely an SE via an IPO to reflate its value. At the other extreme it could become a discreet set of self-propelled cost-centres, acting as an eco-engineering house, contract manufacturer, Tier0.5 player and yet more; tasked to compete within the GM empire (esp vs NA & China) to drive down costs and improve quality, and indeed reach out beyond GM to assist at a price in the development of BRIC auto-sectors.
As President Obama talks trade with President Hu Jintoa, that old adage of “what's good for GM is good for America...” is given the additional line “...is good for Sino-American relations”
However, for the moment that is a far-horizon possibility.
Any present GM jubilence should be recognise as only a momentary respite in the battle for GM transformation, since reports of Frederic Henderson's self-pronounced reliance on near-term sales which will now slacken after CARS will not provide GMNA with the momentum to turn the corner.
Hence it must look critically at the corporate and sector functions of Adam Opel GmbH.
Recent weeks witnessed a U-Turn of attitude in the RenCen at Detroit, after 'New GM' decided to remove the sale of Adam Opel GmbH from the negotiating table. The heady mix of intra & inter-national industrial policy-making, the social strings of financial aid packages and business-centric strategy formulation ultimately clashed, and the triangular relationship of the 3 prime stakeholders - GM, Magna-Sberbank-GAZ and Angela Merkel – pulled and torn.
The protagonist GM has decided that it should, after all, direct the future of its European division, parachuting in Nick Reilly from his successes at GM Asia-Pac to take the reins from Carl Peter-Forster, his role at Opel presumably seen as untenable given his preference for the unit's sale to the the Canadian auto-supplier and Russian bank that would have given GAZ its much needed transformation.
Unable to arrive at a satisfactory conclusion, it has rebuked the Russian backed offer on strategic grounds relating to IPR, R&D, Russian sales territory and longer term global competitiveness implications. Its stance is understandable, given the strategic importance of Opel as GM's medium car creation hub, and the opportunity the relatively new SCCS platform (created as a JV with FIAT) offers a rival automaker such as GAZ which can leverage to its own export advantage Magna components pricing, low cost labour & overhead and its geo-political position between Europe, the CIS states and 'Chindia'.
Unsurprisingly GM does not wish to 'hand on a plate' its relatively knowledge advanced division to an arguably better placed competitor. But it must in due course and at some point acknowledge that something radical must be done to alter the very DNA of Opel as part of an environment reactive evolutionary process if the company is to not simply survive on the largess of state sponsorship in the face of withering consumer attraction.
Critics rightly judge GM by its historical lack of good parenting toward Opel and the 21st century mis-management of its own North American operations, since Detroit has indeed been less than adept in profitably operating such a sprawling monolith - with typical internal & legacy conflictions - caught in a ravenous sea of global sector change.
The 'New GM' with new leadership and a largely new board seeks to redress such criticism, but realistically can it? What exactly will it do to redress the situation and specifically the Opel GmbH challenge?
Recent news indicates it seems to be replaying the 'set-play' recently created in the US by GMNA, which effectively draws in state and union stakeholder for interim term survival. Read between the news-report lines and this appears to be the case; GM using US and EU aid finance aswell as its own rebuoyed balance sheet.
But let us not forget the fact that the political will to keep financially bolstering under-performing companies is withering, and the fact that GM's improved balance-sheet is only – re-iterate 'only' – a function of a macro-enabled external assistance(s).
These being:
1. a fast-track (investor debilitating) Chapter 11 procedure,
2. massive financial injections from Washington ($13.4bn of which still sits in Treasury escrow)
3. the CARS 'cash for clunkers' scrappage scheme which effectively drove an estimated 50% of GM dealership footfall in the period (& with the by-product that it actually benefited Toyota, Honda, Hyundai and Ford far more so than GM).
4. it is effectively US tax-payer cash that repays Opel's E1.5bn bridging loan from the German tax-payer – done so to eradicate the implicitly socialist agenda of the 'custodial' Opel Trust
Given that this is the reality, GM though better placed, is not in a position convey any swagger, or indeed “irrational exuberance”. For its is far from out of the woods in the US, and especially not so relative to Opel's diminished prowess in Europe.
Removing the remit and need for the Opel Trust is indeed a good development, since it partially de-shackles management, but instead of simply re-running the 'GMNA set-play' of state & union equity provision – and thus simply replacing one set of shackles with others - a truly viable plan of action is needed to re-shape Opel. One to suit its diminished place within the EU consumer market yet of possibly more marked importance to a global GM and indeed a global auto-sector.
And it is from the hopeful 'lessons learnt' by way of the Magna-Sberbank-GAZ consortium that GM Europe must re-invent itself.
Such aspiration may or may not be the case, we shall have to wait and see.
In the meantime, instead of an Opel sale, GM has arrived at its own plan, one which reduces the level of German aid reliance and so presumably freeing itself from much of the present plant & labour overhead obligation. Following the FIAT lead with a pan-European approach it seeks to spread the $3bn cost and load of re-structure across various EU nations and labour unions, with $1.48bn of company capital re-directed from Detroit to Russelsheim and beyond.
GM states that Opel has enough liquidity to maintain operations (effectively 'as is') but lacks the resources to undertake the full re-structure required.
So beyond the lower level contribution of EU state and union aid – including 'only' hundreds of millions of Euros from Germany vs the previous E2.2bn relative to the Magna deal – the largest slice of such additional resource presently look to come from the US Treasury.
It will be of little doubt that as GM was negotiating with Magna as to the IPR package made available for sale, it would have also been convincing the Obama Administration of Opel's central strategic role to the company given its R&D exposure to Germany's advanced eco-engineering sector that realistically downplays high-cost EV and hybrid R&D for that of low-cost clean diesel development. Whilst the Japanese may have the petrol-NiMH hybrid lead, GMNA may realistically wish to ultimately pursue a more conventional path for all the rhetoric of presently limited available US-made hybrids or next generation L-ion range-extender vehicles (NB GM Volt est $35,000 vs Toyota prius $22,000!)
Beyond the US's own intrinsic benefit from Opel (ie Germanic) know-how, and we see that with FIAT & RHJ International still probably in the background, GM recognises that Opel's constituent parts of: R&D capabilities, project development assets (HR, IT, studios, test-cells, tracks etc), plants and company dealerships and company land can be very probably further sweated. The company is less than the sum of its parts as a whole, but what if the parts themselves can be informally or formally hived-off?
Investment-auto-motives suspects that even if Opel's full and final sale is not imminent, a new period of corporate asset re-evaluation is so. Led by Reilly he will note: the EU's supplier base ambitions to become Tier0.5 players (not still discounting Magna); FIAT's own growth ambitions (yet cogniscent of historical FIAT-CCCP relationships), and lastly and very importantly his experience of China's auto-industry structural growth path with GM seeking a leading role.
The new Opel plan is ultimately an interim step, and undoubtedly will mean a required metaphysical 'deconstruction' of the entity. Exactly how that comes to play out in the future remains unclear. At one extreme via a 'GMNA set-play' Opel GmbH could be floated to become an AG or more likely an SE via an IPO to reflate its value. At the other extreme it could become a discreet set of self-propelled cost-centres, acting as an eco-engineering house, contract manufacturer, Tier0.5 player and yet more; tasked to compete within the GM empire (esp vs NA & China) to drive down costs and improve quality, and indeed reach out beyond GM to assist at a price in the development of BRIC auto-sectors.
As President Obama talks trade with President Hu Jintoa, that old adage of “what's good for GM is good for America...” is given the additional line “...is good for Sino-American relations”
However, for the moment that is a far-horizon possibility.
Any present GM jubilence should be recognise as only a momentary respite in the battle for GM transformation, since reports of Frederic Henderson's self-pronounced reliance on near-term sales which will now slacken after CARS will not provide GMNA with the momentum to turn the corner.
Hence it must look critically at the corporate and sector functions of Adam Opel GmbH.
Tuesday, 10 November 2009
Macro Level Trends – US Transportation – Berkshire Hathaway's “Burlington Berties”
Though investment-auto-motives obviously focuses directly upon the car industry and its players, an overtly narrow and blinkered view must be avoided given the inter-sector connectedness of companies such as Daimler, FIAT, TATA etc, the cross-fertilisation of technology and of course the major macro PESTEL trends and accordant sector schisms that highlight investment opportunities.
Such opportunities come either within a sector as a result of conventional dynamics or, as importantly, promote opportunity within an alternative sector as a consequence or by-product.
Such – investment-auto-motives believes – adds to the weight of Berkshire Hathaway's full purchase of BNSF (nee Burlington Northern Santa Fe), at $100 per share (approx $44bn).BH already had substantial interest in the second largest freight-railroad company in the USA, and appreciates the convention of a slow but stable yield through dividends and MktCap growth; the rational core of a 'utilities' orientated enterprise.
However, Buffet and Munger also recognised that an opportunity was arising as a result of the perfect storm appearing over the horizon for trucking sector.
The harsh US recession has sharply curtailed road-freight shipping, the obvious consequence of now misaligned supply and demand curves generating a substantial slack in the trucking system that has driven down prices as competition became fierce and as a consequence has forced the one-man 'owner-operator' truckers and small-scale 'independent' firms to either exit or consolidate.
Moreover, the combination of essentially frozen credit markets frozen to small business and SME's and the 2010 legal requirement (as of 01.01.2010) for the sale of only new emissions compliant semi-trailer tractor units (as part of the US's efforts to cut CO2), means that large chunks of the trucking sector's capacity will effectively disappear.
Taking Class 7 as a sector median, new truck sales peaked at 131,000 units in 1999, with the 2008 low of 49,000 (see pictorial graph). Daimler highlighted the ongoing situational drag in its Q309 results presentation reletive to its Class 8-10 tractor units which have performed worse than even Class-7 trucks, portending the 'pull-forward' 2010 North American truck sales into 2009, so undermining 2010/11 production and therefor by virtue US and Canadian 2010/11/12 shipping capacity.
This then leaves a short-fall in cross-country shipping capacity when the economic recovery begins proper. And given the scale of the down-turn – economic data-sets urging financial analogies to the Great Depression & WW2 – it is no surprise that the BH duo see today's present circumstances as a re-run of their formative experiences in the 1950s.
Hence, whilst these new “Burlington Berties” like to convey the conventional, conservative 'slow and steady' typical nature of rail-road investment to the outside world and BH's own mom & pop and institutional stock-holders who themselves garner risk-aversity, the sector's own metaphorical 'train' that has had to date grind uphill against the pricing pressures of trucking and other rail sector competitors nears the headwind summit.
The other side a theoretical case of a much improved downhill progress assisted with tailwinds such as declined competition, infrastructure grants from the US and Federal governments, greater pricing power and over the next decade (and possibly beyond) much improved 'sustainable' margins.
Furthermore, BNSF has tried encourage 'railfans' to effectively patrol portions of its track. This appears to be part of psychological shift for the younger demographic toward rail relative to an expected reduction in car reliance – the 17m TIV unit production of 2007 seen as a historical peak – so promoting rail as a form of near-point intra-regional leisure travel with overtones of yesteryear glamour via streamlined stainless-steel Burlington Zephyr locomotives pulling upmarket carriages and observation cars with on-board entertainment.
Such a possible initiative could be related to an important broader contextual agenda.
investment-auto-motives also believes that US industry could well undertake a greatly increased level of commercially-led philosophical & practical integration – something akin to spectrum of interactivity - from 'arms-length' collaboration to direct M&A. That could see Berkshire Hathaway and similar other large PE holding companies act as a powerful 'rationalising forces' that encourage sector cross-fertilisation, innovation, efficiency-seeking and new business models to enhance concomitant ROI.
Moreover, given the increasing level of corporate social responsibility relative to 'under-the-umbrella' workforces, unemployment and housing dilemmas, there could feasibly be a return of 'Guardian Corporations' which through a modern equivalent to yesteryear 'garden-factories' and company-build villages actually house and possibly educate. Such efforts also have the benefit of reducing inherent labour costs and offer holding companies the ability to buy real-estate and acreage and build at below par values, to latterly sell-off the housing stock as the economic shape of the country itself re-evolves over time.
Hence, figures such as Buffett, Munger, those with honourable reputations on Wall Street and Industrialists like BNSF's & GM's Whitacre acting as enabling 'Generals'.
The 'Burlington' name itself was re-appropriated across various areas of the USA in the mid 19th century, and of course originates from the historic links to Britain; specifically the fashionable commercial ('Society') 'Arcade' built beside the Lord of Devonshire's home Burlington House in London's Piccadilly. The house itself became home to the Royal Academy, itself a philosophical cornerstone for the Arts and Science that underpinned Britain's own industrial revolution.
Hopefully Berkshire Hathaway's own paradoxical 'Burlington Berties' – given their modesty, humbleness & bee-like activity - have such similar grand ambitions for a much needed 21st century US industrial revolution.
Post Script...
[NB. Belief in the forthcoming strength and resultant reward of rail-freight container transport on the back of continued strong economic growth has been the raison d'etre for Blackstone GPV Capital Partners to buy 37.5% of Gateway Rail Freight Ltd in India].
Such opportunities come either within a sector as a result of conventional dynamics or, as importantly, promote opportunity within an alternative sector as a consequence or by-product.
Such – investment-auto-motives believes – adds to the weight of Berkshire Hathaway's full purchase of BNSF (nee Burlington Northern Santa Fe), at $100 per share (approx $44bn).BH already had substantial interest in the second largest freight-railroad company in the USA, and appreciates the convention of a slow but stable yield through dividends and MktCap growth; the rational core of a 'utilities' orientated enterprise.
However, Buffet and Munger also recognised that an opportunity was arising as a result of the perfect storm appearing over the horizon for trucking sector.
The harsh US recession has sharply curtailed road-freight shipping, the obvious consequence of now misaligned supply and demand curves generating a substantial slack in the trucking system that has driven down prices as competition became fierce and as a consequence has forced the one-man 'owner-operator' truckers and small-scale 'independent' firms to either exit or consolidate.
Moreover, the combination of essentially frozen credit markets frozen to small business and SME's and the 2010 legal requirement (as of 01.01.2010) for the sale of only new emissions compliant semi-trailer tractor units (as part of the US's efforts to cut CO2), means that large chunks of the trucking sector's capacity will effectively disappear.
Taking Class 7 as a sector median, new truck sales peaked at 131,000 units in 1999, with the 2008 low of 49,000 (see pictorial graph). Daimler highlighted the ongoing situational drag in its Q309 results presentation reletive to its Class 8-10 tractor units which have performed worse than even Class-7 trucks, portending the 'pull-forward' 2010 North American truck sales into 2009, so undermining 2010/11 production and therefor by virtue US and Canadian 2010/11/12 shipping capacity.
This then leaves a short-fall in cross-country shipping capacity when the economic recovery begins proper. And given the scale of the down-turn – economic data-sets urging financial analogies to the Great Depression & WW2 – it is no surprise that the BH duo see today's present circumstances as a re-run of their formative experiences in the 1950s.
Hence, whilst these new “Burlington Berties” like to convey the conventional, conservative 'slow and steady' typical nature of rail-road investment to the outside world and BH's own mom & pop and institutional stock-holders who themselves garner risk-aversity, the sector's own metaphorical 'train' that has had to date grind uphill against the pricing pressures of trucking and other rail sector competitors nears the headwind summit.
The other side a theoretical case of a much improved downhill progress assisted with tailwinds such as declined competition, infrastructure grants from the US and Federal governments, greater pricing power and over the next decade (and possibly beyond) much improved 'sustainable' margins.
Furthermore, BNSF has tried encourage 'railfans' to effectively patrol portions of its track. This appears to be part of psychological shift for the younger demographic toward rail relative to an expected reduction in car reliance – the 17m TIV unit production of 2007 seen as a historical peak – so promoting rail as a form of near-point intra-regional leisure travel with overtones of yesteryear glamour via streamlined stainless-steel Burlington Zephyr locomotives pulling upmarket carriages and observation cars with on-board entertainment.
Such a possible initiative could be related to an important broader contextual agenda.
investment-auto-motives also believes that US industry could well undertake a greatly increased level of commercially-led philosophical & practical integration – something akin to spectrum of interactivity - from 'arms-length' collaboration to direct M&A. That could see Berkshire Hathaway and similar other large PE holding companies act as a powerful 'rationalising forces' that encourage sector cross-fertilisation, innovation, efficiency-seeking and new business models to enhance concomitant ROI.
Moreover, given the increasing level of corporate social responsibility relative to 'under-the-umbrella' workforces, unemployment and housing dilemmas, there could feasibly be a return of 'Guardian Corporations' which through a modern equivalent to yesteryear 'garden-factories' and company-build villages actually house and possibly educate. Such efforts also have the benefit of reducing inherent labour costs and offer holding companies the ability to buy real-estate and acreage and build at below par values, to latterly sell-off the housing stock as the economic shape of the country itself re-evolves over time.
Hence, figures such as Buffett, Munger, those with honourable reputations on Wall Street and Industrialists like BNSF's & GM's Whitacre acting as enabling 'Generals'.
The 'Burlington' name itself was re-appropriated across various areas of the USA in the mid 19th century, and of course originates from the historic links to Britain; specifically the fashionable commercial ('Society') 'Arcade' built beside the Lord of Devonshire's home Burlington House in London's Piccadilly. The house itself became home to the Royal Academy, itself a philosophical cornerstone for the Arts and Science that underpinned Britain's own industrial revolution.
Hopefully Berkshire Hathaway's own paradoxical 'Burlington Berties' – given their modesty, humbleness & bee-like activity - have such similar grand ambitions for a much needed 21st century US industrial revolution.
Post Script...
[NB. Belief in the forthcoming strength and resultant reward of rail-freight container transport on the back of continued strong economic growth has been the raison d'etre for Blackstone GPV Capital Partners to buy 37.5% of Gateway Rail Freight Ltd in India].
Friday, 6 November 2009
Industry Structure – GM & Opel – No Real U-Turns in a EinBahnStrasse.
The recent news that General Motors had altered its decision regards the sale of its Adam Opel division to Magna-Sberbank has created shock-waves through the industry; not least in Ontario, Nizhny Novgorod, Moscow, Berlin and Brussels.
Magna International's Stronach, GAZ's Deripaska and Sberbank's Gref, having thought it was only a matter of crossing the t's & dotting the i's will be fuming at the lost opportunity to re-align their interests in both the massive European Tier 0.5 arena and rapidly enhance a large, update sections of the Russian auto-industry and grow B2B and B2C banking expansion.
In Germany, Angela Merkel has rebuked with distain, having heard the news just as she departed from a Washington trip - but the fortunate paradox for her government is that having been re-elected on the back of a massive Opel aid package, which undoubtedly worried Treasury officials and instigated the concerns of the EU Commission, is that her government's fiscal and regulatory woes have now been greatly diminished.
Whilst in Brussels, the EU Competition Commissioner Neile Kroese can retract the regulator's claws now it seems that any future GM aid requests will be legitimately spread across the region relative to the national industrial and jobs impact. Across town however, the private equity company RHJ International (held by Ripplewood and Rothschild interests) can smile once again as its initial business proposal previously beaten by Magna-Sberbank can be potentially re-tuned and re-submitted to the GM Board.
Whilst GM remarks that the Russian related Magna deal had too many negative strategic implications for both the company and no doubt Washington aswell, GM cannot possibly operate Opel AG in the same form. It may quote the delights of improved revenues over the last 2 quarters for the North American and European divisions, but without government bail-out monies and (pointedly) stimulus generated / subsidised consumer spending GM could not boast such a claim. In real terms there has been improvement in NA with the divestment of portions of its asset portfolio and much talk of a latter-day IPO, but its European arm is still loosing ground in the region, literally through market share and practically via overweight obligations relative to underweight productivity and capacity. As stated in the past, the idea for the profitability of the crammed EU marketplace and so the regional industry would have been to see Opel/Vauxhall disappear completely; its assets sold-off to other PE and trade-buyers with VM and Tier 0.5 & Tier 1 interests.
Thus the Magna deal would have assisted in the positive restructuring of the region, but the manner in which it was undertaken with so much German financial bias showed it to be less than 'democratic' to others such as RHJ International and other interested parties such as FIAT Auto.
The recent deal-retraction news has typically brought the usual government rhetoric and counterpoint union cheer in the UK versus union dismay in Germany, but for Opel/Vauxhall itself as a commercial entity it travels down a One-Way-Street (an EinBahnStrasse) of massive structural re-alignment. That achieved either through far more low-cost parts procurement from outside the EU, labour reduction and flexibility, plant closure(s) and dealer-rationalisation. However, the obvious and correct objection is that vitally previous management did not achieve this requirement throughout its loss-making era, hence its being put up for sale.
Thus the hopefully new path for Opel/Vauxhall is that it instead be put back under the reality of the commercial spotlight by GM's Henderson, Whitacre et al in Detroit, the representatives of the Autos Task Force in Washington, and crucially objective, insightful and independent advisors who understand both micro and macro-level requirements necessary to re-shape the over-bloated and lack-lustre animal that is Adam Opel AG. This of course must be done relative to those micro-macro trends.
Presently for GM, relative to the big-picture EU issues, we have a sharp juxtaposition emerging which must be dually exploited. The somewhat painful ratification of the Lisbon Treaty further integrates policy of mainland national administrations, yet this level of Federal Statism is vehemently countered by the UK's (expected) next government. The Conservative Party recognition is that Lisbon ratification without critical 'get-out-clause' stipulations endangers the competitive trade position of the UK – a country which from the economic perspective is in a far worse off than its EU neighbours given debt-to-GDP levels and other indicators. The UK, with its weakened Sterling currency seeks to benefit from the £ vs Euro differential, both intra-regionally throughout the EU and inter-nationally across the world.
Thus the GM Board must be ready to exploit the political fracture by ensuring that the new political harmonisation of the EU mainland allows it both any nation-based fiscal benefits (aid or taxation dispensations) whilst highlighting its need for operational freedom to restructure through partial or even 'sum-of-parts' whole divestment to PE and trade buyers....which puts RHJ International and FIAT Auto back in the frame, especially so since FIAT's Marchionne and his generals have achieved a similar singular nation-based rationalisation programme for FIAT Auto that could act as a template for GM's progress with Opel.
Objectively, the dead-weight of Opel has been a drag on the European automotive sector's fortunes - ask any CEO of any local car company 'off-the-record' and he'll say similar. Hence, in a globalised world the component entities of the EU, or en block, can not and should not act as a nanny-state. Do to so only undermines regional automakers and the futures of their employees and local economies.
Thus whilst there may now be nation-based aid with arms-length oversight from Brussels, it should be short-termist whilst GM Opel and its bankers seek alternative retained and divested futures for the Opel/Vauxhall's assets – both tangible (plant, R&D centres, admin offices etc) and intangible (brand, IPR, etc).
Capital markets, though over-bought in recent times, are on a historical trend basis slowly strengthening. This together with the pressure to break-up of banking roles & remits means that 'Productivity-Push' will (as investment-auto-motives has long stated) be the real focus for M&A , Fixed Income and Convertibles deal-making across Wall Street, The City, Brussels, Paris, Milan and Frankfurt
So for the future of Adam Opel AG (inc Vauxhall), Round 1 may have ended but the bell will soon ring for Round 2 in the fight for GM profitability.
Magna International's Stronach, GAZ's Deripaska and Sberbank's Gref, having thought it was only a matter of crossing the t's & dotting the i's will be fuming at the lost opportunity to re-align their interests in both the massive European Tier 0.5 arena and rapidly enhance a large, update sections of the Russian auto-industry and grow B2B and B2C banking expansion.
In Germany, Angela Merkel has rebuked with distain, having heard the news just as she departed from a Washington trip - but the fortunate paradox for her government is that having been re-elected on the back of a massive Opel aid package, which undoubtedly worried Treasury officials and instigated the concerns of the EU Commission, is that her government's fiscal and regulatory woes have now been greatly diminished.
Whilst in Brussels, the EU Competition Commissioner Neile Kroese can retract the regulator's claws now it seems that any future GM aid requests will be legitimately spread across the region relative to the national industrial and jobs impact. Across town however, the private equity company RHJ International (held by Ripplewood and Rothschild interests) can smile once again as its initial business proposal previously beaten by Magna-Sberbank can be potentially re-tuned and re-submitted to the GM Board.
Whilst GM remarks that the Russian related Magna deal had too many negative strategic implications for both the company and no doubt Washington aswell, GM cannot possibly operate Opel AG in the same form. It may quote the delights of improved revenues over the last 2 quarters for the North American and European divisions, but without government bail-out monies and (pointedly) stimulus generated / subsidised consumer spending GM could not boast such a claim. In real terms there has been improvement in NA with the divestment of portions of its asset portfolio and much talk of a latter-day IPO, but its European arm is still loosing ground in the region, literally through market share and practically via overweight obligations relative to underweight productivity and capacity. As stated in the past, the idea for the profitability of the crammed EU marketplace and so the regional industry would have been to see Opel/Vauxhall disappear completely; its assets sold-off to other PE and trade-buyers with VM and Tier 0.5 & Tier 1 interests.
Thus the Magna deal would have assisted in the positive restructuring of the region, but the manner in which it was undertaken with so much German financial bias showed it to be less than 'democratic' to others such as RHJ International and other interested parties such as FIAT Auto.
The recent deal-retraction news has typically brought the usual government rhetoric and counterpoint union cheer in the UK versus union dismay in Germany, but for Opel/Vauxhall itself as a commercial entity it travels down a One-Way-Street (an EinBahnStrasse) of massive structural re-alignment. That achieved either through far more low-cost parts procurement from outside the EU, labour reduction and flexibility, plant closure(s) and dealer-rationalisation. However, the obvious and correct objection is that vitally previous management did not achieve this requirement throughout its loss-making era, hence its being put up for sale.
Thus the hopefully new path for Opel/Vauxhall is that it instead be put back under the reality of the commercial spotlight by GM's Henderson, Whitacre et al in Detroit, the representatives of the Autos Task Force in Washington, and crucially objective, insightful and independent advisors who understand both micro and macro-level requirements necessary to re-shape the over-bloated and lack-lustre animal that is Adam Opel AG. This of course must be done relative to those micro-macro trends.
Presently for GM, relative to the big-picture EU issues, we have a sharp juxtaposition emerging which must be dually exploited. The somewhat painful ratification of the Lisbon Treaty further integrates policy of mainland national administrations, yet this level of Federal Statism is vehemently countered by the UK's (expected) next government. The Conservative Party recognition is that Lisbon ratification without critical 'get-out-clause' stipulations endangers the competitive trade position of the UK – a country which from the economic perspective is in a far worse off than its EU neighbours given debt-to-GDP levels and other indicators. The UK, with its weakened Sterling currency seeks to benefit from the £ vs Euro differential, both intra-regionally throughout the EU and inter-nationally across the world.
Thus the GM Board must be ready to exploit the political fracture by ensuring that the new political harmonisation of the EU mainland allows it both any nation-based fiscal benefits (aid or taxation dispensations) whilst highlighting its need for operational freedom to restructure through partial or even 'sum-of-parts' whole divestment to PE and trade buyers....which puts RHJ International and FIAT Auto back in the frame, especially so since FIAT's Marchionne and his generals have achieved a similar singular nation-based rationalisation programme for FIAT Auto that could act as a template for GM's progress with Opel.
Objectively, the dead-weight of Opel has been a drag on the European automotive sector's fortunes - ask any CEO of any local car company 'off-the-record' and he'll say similar. Hence, in a globalised world the component entities of the EU, or en block, can not and should not act as a nanny-state. Do to so only undermines regional automakers and the futures of their employees and local economies.
Thus whilst there may now be nation-based aid with arms-length oversight from Brussels, it should be short-termist whilst GM Opel and its bankers seek alternative retained and divested futures for the Opel/Vauxhall's assets – both tangible (plant, R&D centres, admin offices etc) and intangible (brand, IPR, etc).
Capital markets, though over-bought in recent times, are on a historical trend basis slowly strengthening. This together with the pressure to break-up of banking roles & remits means that 'Productivity-Push' will (as investment-auto-motives has long stated) be the real focus for M&A , Fixed Income and Convertibles deal-making across Wall Street, The City, Brussels, Paris, Milan and Frankfurt
So for the future of Adam Opel AG (inc Vauxhall), Round 1 may have ended but the bell will soon ring for Round 2 in the fight for GM profitability.
Monday, 2 November 2009
Parallel Learning – Motor Sports – Business Modeling Over Three Centuries & Beyond.
Maintaining the motor sports theme from the last post, the past weekend witnessed what must the the opposite poles of motor sport. Abu Dhabi hosted the 2009 World F1 championship's last race at brand new Yas Marina track...and in complete contrast almost simultaneously... in London the Apsley House Gate of Hyde Park bore the beginning of the Royal Automobile Club's annual London to Brighton Veteran Car Rally.
Thus, Sunday 1st November showcased not only the opposite ends of the chronological spectrum of the motorcar but also the diametrically opposed human sensibilities that create both spectacles.
Whilst in Saudi the F1 circus demonstrates the necessary 21st century technologies of carbon fibre, micro-second e-systems intelligence and KERs 'energy harvesting', in London the 500 or so largely 19th century technically derived cars quite literally 'paraded' wooden construction, hand operated advance-retard ignition tinkering and the constant kinetic energy concentration to maintain precious momentum. Behind the wheel, it was a case of the consummate hired professional driver contrasted against consummate owner-operator amateur.
Amongst the throng of setting-sun spectators at Marina Yas – implicitly the 'new' Monaco - sipping 'over-the-yard-arm' drinks the corporate influence held sway; Daimler's Dieter Zetsche socialising with his Aabar Investment associates (holding 10% of Daimler) in the McLaren-Mercedes' Pits or indeed the swathes of corporate hospitality and 'ex-pat' oglers. A drizzling London morning in contrast had its 'sun-up' spectators of all ages and backgrounds wear their winter coat, propping up an umbrella in on hand and sipping a flask-dispensed cup of coffee on the other, miraculously clapping as each block of the released vintage cars chugged onto Hyde Park Corner, saving their greatest cheers for the late starters who just about managed to get their car running, the driver as gleeful as if he had indeed 'won' the rally – which from an almost spiritual perspective – s/he had!
The point is that these were two very different events in almost every dimension, but they and every other type of motor-sport event should be intellectually deconstructed to better understand how new business models can be created from the merging of the core components: people, place and products. F1 and the London-Brighton are two types of evolved 'automotive circus' amongst the many today – both commercial and cultural. From the big-bucks budgets of say LMP, GT, NASCAR, DTM or WRC racing to the amateur world largely born from of regional street racing - started by those late 1940s US Hot-Rodders, that 'animal-spirit' echoed in a very different way by the Philippino 'Bone-Bike' racers.
The combination of (wo)men and machines, invariably lead to competition and spectacle at whatever level of the social strata. And as those machines become an ever greater part of people's and nation's culture so new spectacles are born. At one level say the RAC's Brighton run, Goodwood's Revival or as pure showcase Hurlingham's Salon Prive or Pebble Beach. At the other extreme the car's totem as independence provider for the economically-involved young has merged with other aspects of youth culture to create a realm of testerone-fueled spectacles, from 70s urban US Hispanic low-riding to 90s Japan's initiatian of 'Drifting' to the global phenomenon of audio/music 'sound-offs' (demonstrating the power of the owner's, audio-system). All this alongside the conventional desire for speed and spectacle provided by '(engine) chips and (body) kits'. In short 'auto-individuality' set within a context of 'auto-tribalism'.
Thus as we see most evidently purveyed by the newness of Middle Eastern F1 and the antiquarian nature of London-Brighton, global auto-culture is broad and varied, and regionally sits along national, populace GDP, time and cultural dimensions.
As stated previously, the world has indeed become a global village, but that apparent shrinkage has only highlighted the microcosmic detail that investors, the auto-industry, real-estate and entertainment worlds should better understand, build and harvest. “Long live the Car-nival !”
Thus, Sunday 1st November showcased not only the opposite ends of the chronological spectrum of the motorcar but also the diametrically opposed human sensibilities that create both spectacles.
Whilst in Saudi the F1 circus demonstrates the necessary 21st century technologies of carbon fibre, micro-second e-systems intelligence and KERs 'energy harvesting', in London the 500 or so largely 19th century technically derived cars quite literally 'paraded' wooden construction, hand operated advance-retard ignition tinkering and the constant kinetic energy concentration to maintain precious momentum. Behind the wheel, it was a case of the consummate hired professional driver contrasted against consummate owner-operator amateur.
Amongst the throng of setting-sun spectators at Marina Yas – implicitly the 'new' Monaco - sipping 'over-the-yard-arm' drinks the corporate influence held sway; Daimler's Dieter Zetsche socialising with his Aabar Investment associates (holding 10% of Daimler) in the McLaren-Mercedes' Pits or indeed the swathes of corporate hospitality and 'ex-pat' oglers. A drizzling London morning in contrast had its 'sun-up' spectators of all ages and backgrounds wear their winter coat, propping up an umbrella in on hand and sipping a flask-dispensed cup of coffee on the other, miraculously clapping as each block of the released vintage cars chugged onto Hyde Park Corner, saving their greatest cheers for the late starters who just about managed to get their car running, the driver as gleeful as if he had indeed 'won' the rally – which from an almost spiritual perspective – s/he had!
The point is that these were two very different events in almost every dimension, but they and every other type of motor-sport event should be intellectually deconstructed to better understand how new business models can be created from the merging of the core components: people, place and products. F1 and the London-Brighton are two types of evolved 'automotive circus' amongst the many today – both commercial and cultural. From the big-bucks budgets of say LMP, GT, NASCAR, DTM or WRC racing to the amateur world largely born from of regional street racing - started by those late 1940s US Hot-Rodders, that 'animal-spirit' echoed in a very different way by the Philippino 'Bone-Bike' racers.
The combination of (wo)men and machines, invariably lead to competition and spectacle at whatever level of the social strata. And as those machines become an ever greater part of people's and nation's culture so new spectacles are born. At one level say the RAC's Brighton run, Goodwood's Revival or as pure showcase Hurlingham's Salon Prive or Pebble Beach. At the other extreme the car's totem as independence provider for the economically-involved young has merged with other aspects of youth culture to create a realm of testerone-fueled spectacles, from 70s urban US Hispanic low-riding to 90s Japan's initiatian of 'Drifting' to the global phenomenon of audio/music 'sound-offs' (demonstrating the power of the owner's, audio-system). All this alongside the conventional desire for speed and spectacle provided by '(engine) chips and (body) kits'. In short 'auto-individuality' set within a context of 'auto-tribalism'.
Thus as we see most evidently purveyed by the newness of Middle Eastern F1 and the antiquarian nature of London-Brighton, global auto-culture is broad and varied, and regionally sits along national, populace GDP, time and cultural dimensions.
As stated previously, the world has indeed become a global village, but that apparent shrinkage has only highlighted the microcosmic detail that investors, the auto-industry, real-estate and entertainment worlds should better understand, build and harvest. “Long live the Car-nival !”
Monday, 26 October 2009
Industry Structure – The F1 World Tour – The Shared Traits of Donington Park & Dr Parnassus
The globalisation model has always relied on the seemless interaction of the 'new world' merging successfully with the 'old world'. That interaction became increasingly frictionless with Marshall McLuhan famously stated that since the 1960s we have lived in the 'global village', such is the technological inter-connectedness of the modern-world.
Beyond the more ethereal realm of telecommunications and into the physical, that marriage of a 'global village' and of advanced technology is perhaps best exemplified by Formula One. A now high exposure, highly commercialised 'sports-entertainment complex' which has created its own hyper-reality-world. An alternative reality in which the human psyche sits mid-distance between physical tangibility and the more remote yet powerfully immersive regions of cyber-space and the human imagination. For motor-sport enthusiasts and the public alike it is hyper-reality (see Baudrillard & Eco), engendered by its history, myth and expectation; a background presence that regionally comes alive only once a year with a weekend bonanza, and where dreams become reality.
Without doubt, F1 is the spiritual successor of the traveling circus. With that showmanship in mind, the show much be ever 'bigger and brighter', drawing inspiration from all quarters to for 48 hours present the biggest show on earth.
Presently the century old silver-screen serves-up 'The Imaginarium of Dr Parnassus' at cinemas. On-screen the central character, the good Doctor leader of a famtasy show for the mind, finds himself peddling via horse and cart a show from a bye-gone age that has become evermore ineffectual and irrelevant to the expectations of the modern ausience – even though the esoteric offering is in itself a wonderful delight.
Dr Parnassus is lost between old and new worlds, that is until the new arrival of a 'johnny-cum-lately' with better commercial instincts and new ideas to update the show.
The film's plot serves as an analogy to the 'old-world' vs 'new-world' situation facing the owners of British motor racing circuits – none more so than Donington Park, the poor cousin to Brands Hatch, Silverstone and Goodwood.
In the world of Formula One, the iconic names of Monaco, Spa-Francorchamps, Nurburgring, Silverstone and Suzuka trade on a combination of their international repute and inter-continental accessibility. Whilst the newer global tracks such as Sepang (Malaysia), Shanghai (China), Sakhir (Bahrain), Istanbul (Turkey) and Yas Marina (Abu Dhabi), are able to offer a 21st century experience thanks largely to hefty government funding seeking a recognition and status on the global stage.
Within the UK, the fight for the modern home of motor-sport has been an ongoing process since Brooklands lost its monopolistic lead in the late 1920s with in I933 Donington Park heralding the first sealed-track. As the best of its type at the time it hosted the British round of the World Grand Prix through the 1930s until its WW2 closure and Silverstone's effective over-taking of Donington Park in 1948 and its secured F1 title since 1987.
For decades Donington Park found itself in the same constrained circumstances as Dr Parnassus, an offering – centered on its asset-base - that was initially slowly but now quickly becoming outdated compared to the modern ilk, enjoying only periodic small infrastructure adjustments limited to the those only strictly necessary to maintain basic BRDC club standards.
The motorcycle, car and truck race loyalist crowd maintain a core audience, and so revenue from gate-receipts, restaurant covers and commercial leasee rents provides an income; but it seems this is a low level of revenue compared to its international peers. In truth, given the history and nature of the circuit-loyal crowd, the basic provision service has worked, since those who typically attend for “the machines and the action”, not the odd spectacle and social schmoozing. They generally have lesser disposable incomes and so lower levels of personal expenditure. In retail parlance, Donington is more of a provincial Morrisons than a city-centre Waitrose. Indeed, those who have historically attended Donington Park prefer the fact that 'the Park' is anything but 'slick' and retains an innate 'pantina' of a yesteryear heyday. To them Donington feels to be 'theirs'.
Yet beyond the sentiment, economic and corporate ambitions effectively demand a 'sweating of assets' and so the idea of business re-modeling has been a constant part – if less than a reality - of Donington's past. The interactive circle of event-type affects crowd demographic and crowd-capacity, a formulae in which hiked consumer expenditure on a per capita basis is reasoned to against multiple revenue streams to provide a new business rationale.
This process has been as much part of Donington history as the wheels that circumnavigate the track. But the reality has been somewhat different, and so the incumbent circuit operator has instead been forced to exploit the differing crowd type's cultural affinities. Thus since the 1980s, “Donington Park” itself became as recognise for hosting 'The Monsters of Rock' concerts, and the latter-dau spin-off 'Ozzfest'; aswell as ad-hoc events for other musical genres. Efforts to host other event types, nominally fairs and conventions, have been less successful relative to the powerful offerings of conventional event halls which have increased in number, ground space, inter-rivallry and so reduced the per metre squared hosting costs to exhibitors (ie Manchester Arena, Birmingham Exhibition Centre, London O2 Arena, Docklands Arena etc).
So although additional service provision to attract other types of customer has been tentatively tried, the improvement in income in recent times was as a default consequence to a social / consumer trend. That of the rise in sports-bike popularity and ownership between 1997 and 2007 amongst the deep-pocket 'mid-life crisis' male from the suburbs. Unfortunately with the economic downturn and re-shifting of social perceptions that crowd has been diminishing of late as disposable expenditure becomes constrained and 'Boys Toys' became unaffordable luxuries.
So for all past hopes and temporary gains, Donington is typically viewed as the 'working (wo)man's' circuit, its populist association perhaps more so with 2-wheels than 4-wheels (even with BTCC & other events). 'The Park' is home to World Championship Superbikes, the British Motorcycle GP and 'Revivalist' Classic machine races. So, in bike terms a combination of both Silverstone & Goodwood's as per cars.
However, that seemingly ever-present ambition to regain the 1930s Grand Prix glory-days – echoing names such as Nuvolari, Rosemeyer and Shuttleworth - has been a long-held draw. Especially so since the circuit, estate & house's 'Laird' Tom Wheatcroft, moved his large collection of GP cars into a specially build exhibition space in 1973.
However it took 34 years, when in 2006 the newly formed company Donington Ventures Leisure Ltd (DVLL), led by Simon Gillett and advised by the Wheatcroft brothers, took up the 'dormant opportunity'. A 150 year lease on the circuit was agreed and an agreement with Bernie Ecclestone's FOM (Formula One Management) to host the British F1 event for 2010 and the following 10 years.
Critically this was subject to the facility's major upgrading.
This as many observers have noted gave Ecclestone - as the effective F1 operations puppet-master - the ability to play Silverstone against Donington (& vice versa) relative to the world-class infrastructure standards required to ensure to maintain and raise the glamourous reputation of F1.
However, progress in developing the Donington circuit by DVLL proved slow and painful; a cost to the company's credibility. The Q109 DVLL debenture flailed, months after it was cited by the Wheatcroft estate as having fallen into rent arrears; thus seeking re-payment or repatriation of the circuit. Though an out of court settlement was reached this negative episode undoubtedly made any additional 3rd party investors sensitive to questioning the innate shape and health of the company. This realised when the company, facing breach of contract with FOM, set out on 14.10.09 to secure a further funding via issue of £135m corporate bonds with Citi acting as the book-runner.
Even though the offer was promising to pay a 15% coupon over 7 years and was presented at a 10% discount investors shied away. Beyond the sizable immediate problems, there is surely a belief within the investment community that
a) the circuit development could not be completed within the given timescale to host the 2010 British GP
b) even if miraculously built would have incurred diminished scope & scale of required facilities,
c) 'skimped' build-quality
d) high potential of full project completion cost over-runs.
All of which blight the investment equation.
Furthermore, to the external observer, it is rational to expect Mr Ecclestone's contunation as a 'utility maximiser', thus to better service FOM's own interests by possibly switching between his effective suppliers (Donington vs Silverstone). FOM could have re-negotiated that claus at an future time with DVLL, both knowing that Silverstone was FOM's fall-back position. Ecclestone would have presented it as only reasonable, to maximise circuit rivalry and so raise the bar of British F1's competence and international standing.
Thus it seems that DVLL, if financially sound, may be forced to simply run Donington 'as is', dispensing of the ambitious future CEO Simon Gillett sought. There is of course the option of selling the 148 year lease it holds – or a portion thereof - to another 3rd party; if indeed one is at all interested. For its marketable value must incur heavy discounting given the present low valuations of commercial property (esp within the leisure industry), the strain put on the FOM relationship and the realistic level of yield and capital growth available from the circuit.
In all probability, the circuit will return to the Wheatcroft estate, either sold-back for a nominal sum or returned by contractual default. Thus, to be managed by a small events team of in-house staff until at future point in time, possibly beyond a decade away, a new business-buzz can be attached to the circuit's future potential, so attracting new lease-holders and their campaigning for infrastructure investment.
In lieu of a new F1 Donington era, the Wheatcroft Estate, may simply have to book the circuit to its long-term assets section of the balance sheet, probably doing so as 'development class land' which though heavily discounted in the present market, should bounce-back in due course proving useful addition in due course to the Wheatcroft capital-base.
The Donington loyalists will be happy at the unchanged state of their home circuit, much of the patina remaining, and the F1 circus will carry on at Silverstone.
In the 'Imaginarium of the F1 Business', the innate complexity, politics and alliances of the machine means that perhaps not everything is as its seems. But, unlike the Dr Parnassus analogy, at least Donington's soul remains intact.
Beyond the more ethereal realm of telecommunications and into the physical, that marriage of a 'global village' and of advanced technology is perhaps best exemplified by Formula One. A now high exposure, highly commercialised 'sports-entertainment complex' which has created its own hyper-reality-world. An alternative reality in which the human psyche sits mid-distance between physical tangibility and the more remote yet powerfully immersive regions of cyber-space and the human imagination. For motor-sport enthusiasts and the public alike it is hyper-reality (see Baudrillard & Eco), engendered by its history, myth and expectation; a background presence that regionally comes alive only once a year with a weekend bonanza, and where dreams become reality.
Without doubt, F1 is the spiritual successor of the traveling circus. With that showmanship in mind, the show much be ever 'bigger and brighter', drawing inspiration from all quarters to for 48 hours present the biggest show on earth.
Presently the century old silver-screen serves-up 'The Imaginarium of Dr Parnassus' at cinemas. On-screen the central character, the good Doctor leader of a famtasy show for the mind, finds himself peddling via horse and cart a show from a bye-gone age that has become evermore ineffectual and irrelevant to the expectations of the modern ausience – even though the esoteric offering is in itself a wonderful delight.
Dr Parnassus is lost between old and new worlds, that is until the new arrival of a 'johnny-cum-lately' with better commercial instincts and new ideas to update the show.
The film's plot serves as an analogy to the 'old-world' vs 'new-world' situation facing the owners of British motor racing circuits – none more so than Donington Park, the poor cousin to Brands Hatch, Silverstone and Goodwood.
In the world of Formula One, the iconic names of Monaco, Spa-Francorchamps, Nurburgring, Silverstone and Suzuka trade on a combination of their international repute and inter-continental accessibility. Whilst the newer global tracks such as Sepang (Malaysia), Shanghai (China), Sakhir (Bahrain), Istanbul (Turkey) and Yas Marina (Abu Dhabi), are able to offer a 21st century experience thanks largely to hefty government funding seeking a recognition and status on the global stage.
Within the UK, the fight for the modern home of motor-sport has been an ongoing process since Brooklands lost its monopolistic lead in the late 1920s with in I933 Donington Park heralding the first sealed-track. As the best of its type at the time it hosted the British round of the World Grand Prix through the 1930s until its WW2 closure and Silverstone's effective over-taking of Donington Park in 1948 and its secured F1 title since 1987.
For decades Donington Park found itself in the same constrained circumstances as Dr Parnassus, an offering – centered on its asset-base - that was initially slowly but now quickly becoming outdated compared to the modern ilk, enjoying only periodic small infrastructure adjustments limited to the those only strictly necessary to maintain basic BRDC club standards.
The motorcycle, car and truck race loyalist crowd maintain a core audience, and so revenue from gate-receipts, restaurant covers and commercial leasee rents provides an income; but it seems this is a low level of revenue compared to its international peers. In truth, given the history and nature of the circuit-loyal crowd, the basic provision service has worked, since those who typically attend for “the machines and the action”, not the odd spectacle and social schmoozing. They generally have lesser disposable incomes and so lower levels of personal expenditure. In retail parlance, Donington is more of a provincial Morrisons than a city-centre Waitrose. Indeed, those who have historically attended Donington Park prefer the fact that 'the Park' is anything but 'slick' and retains an innate 'pantina' of a yesteryear heyday. To them Donington feels to be 'theirs'.
Yet beyond the sentiment, economic and corporate ambitions effectively demand a 'sweating of assets' and so the idea of business re-modeling has been a constant part – if less than a reality - of Donington's past. The interactive circle of event-type affects crowd demographic and crowd-capacity, a formulae in which hiked consumer expenditure on a per capita basis is reasoned to against multiple revenue streams to provide a new business rationale.
This process has been as much part of Donington history as the wheels that circumnavigate the track. But the reality has been somewhat different, and so the incumbent circuit operator has instead been forced to exploit the differing crowd type's cultural affinities. Thus since the 1980s, “Donington Park” itself became as recognise for hosting 'The Monsters of Rock' concerts, and the latter-dau spin-off 'Ozzfest'; aswell as ad-hoc events for other musical genres. Efforts to host other event types, nominally fairs and conventions, have been less successful relative to the powerful offerings of conventional event halls which have increased in number, ground space, inter-rivallry and so reduced the per metre squared hosting costs to exhibitors (ie Manchester Arena, Birmingham Exhibition Centre, London O2 Arena, Docklands Arena etc).
So although additional service provision to attract other types of customer has been tentatively tried, the improvement in income in recent times was as a default consequence to a social / consumer trend. That of the rise in sports-bike popularity and ownership between 1997 and 2007 amongst the deep-pocket 'mid-life crisis' male from the suburbs. Unfortunately with the economic downturn and re-shifting of social perceptions that crowd has been diminishing of late as disposable expenditure becomes constrained and 'Boys Toys' became unaffordable luxuries.
So for all past hopes and temporary gains, Donington is typically viewed as the 'working (wo)man's' circuit, its populist association perhaps more so with 2-wheels than 4-wheels (even with BTCC & other events). 'The Park' is home to World Championship Superbikes, the British Motorcycle GP and 'Revivalist' Classic machine races. So, in bike terms a combination of both Silverstone & Goodwood's as per cars.
However, that seemingly ever-present ambition to regain the 1930s Grand Prix glory-days – echoing names such as Nuvolari, Rosemeyer and Shuttleworth - has been a long-held draw. Especially so since the circuit, estate & house's 'Laird' Tom Wheatcroft, moved his large collection of GP cars into a specially build exhibition space in 1973.
However it took 34 years, when in 2006 the newly formed company Donington Ventures Leisure Ltd (DVLL), led by Simon Gillett and advised by the Wheatcroft brothers, took up the 'dormant opportunity'. A 150 year lease on the circuit was agreed and an agreement with Bernie Ecclestone's FOM (Formula One Management) to host the British F1 event for 2010 and the following 10 years.
Critically this was subject to the facility's major upgrading.
This as many observers have noted gave Ecclestone - as the effective F1 operations puppet-master - the ability to play Silverstone against Donington (& vice versa) relative to the world-class infrastructure standards required to ensure to maintain and raise the glamourous reputation of F1.
However, progress in developing the Donington circuit by DVLL proved slow and painful; a cost to the company's credibility. The Q109 DVLL debenture flailed, months after it was cited by the Wheatcroft estate as having fallen into rent arrears; thus seeking re-payment or repatriation of the circuit. Though an out of court settlement was reached this negative episode undoubtedly made any additional 3rd party investors sensitive to questioning the innate shape and health of the company. This realised when the company, facing breach of contract with FOM, set out on 14.10.09 to secure a further funding via issue of £135m corporate bonds with Citi acting as the book-runner.
Even though the offer was promising to pay a 15% coupon over 7 years and was presented at a 10% discount investors shied away. Beyond the sizable immediate problems, there is surely a belief within the investment community that
a) the circuit development could not be completed within the given timescale to host the 2010 British GP
b) even if miraculously built would have incurred diminished scope & scale of required facilities,
c) 'skimped' build-quality
d) high potential of full project completion cost over-runs.
All of which blight the investment equation.
Furthermore, to the external observer, it is rational to expect Mr Ecclestone's contunation as a 'utility maximiser', thus to better service FOM's own interests by possibly switching between his effective suppliers (Donington vs Silverstone). FOM could have re-negotiated that claus at an future time with DVLL, both knowing that Silverstone was FOM's fall-back position. Ecclestone would have presented it as only reasonable, to maximise circuit rivalry and so raise the bar of British F1's competence and international standing.
Thus it seems that DVLL, if financially sound, may be forced to simply run Donington 'as is', dispensing of the ambitious future CEO Simon Gillett sought. There is of course the option of selling the 148 year lease it holds – or a portion thereof - to another 3rd party; if indeed one is at all interested. For its marketable value must incur heavy discounting given the present low valuations of commercial property (esp within the leisure industry), the strain put on the FOM relationship and the realistic level of yield and capital growth available from the circuit.
In all probability, the circuit will return to the Wheatcroft estate, either sold-back for a nominal sum or returned by contractual default. Thus, to be managed by a small events team of in-house staff until at future point in time, possibly beyond a decade away, a new business-buzz can be attached to the circuit's future potential, so attracting new lease-holders and their campaigning for infrastructure investment.
In lieu of a new F1 Donington era, the Wheatcroft Estate, may simply have to book the circuit to its long-term assets section of the balance sheet, probably doing so as 'development class land' which though heavily discounted in the present market, should bounce-back in due course proving useful addition in due course to the Wheatcroft capital-base.
The Donington loyalists will be happy at the unchanged state of their home circuit, much of the patina remaining, and the F1 circus will carry on at Silverstone.
In the 'Imaginarium of the F1 Business', the innate complexity, politics and alliances of the machine means that perhaps not everything is as its seems. But, unlike the Dr Parnassus analogy, at least Donington's soul remains intact.
Tuesday, 20 October 2009
Micro Level Trends – Corporate Financing 2009 – Convertible Bonds Show Their Worth to Investors
The beginning of 2009 was undeniably very dour. Essentially frozen credit markets, a free-falling stock market, sizable risk premium spreads between anything but AAA rated bonds versus government instruments, and the repatriation of FDI monies to US$ & JapÒ° homelands demonstrated a 'flight to safety' by investors not seen in modern history.
A combination of corporate need to access liquidity for working capital and investor expectations of a better tomorrow down the road created the perfect storm for the return of the convertible bond – a hybrid type of issue itself born from preceding tumultuous eras and so perfectly suited to the start of 2009. From a low base-level of C-B sales, the innate risk-reward structure of this asset-class matched general sentiment; that sentiment in turn assisted by the forced sell-off of 'in-play' notes by hedge-funds seeking to re-build their own cash levels. This over-discounting presented a powerful buy opportunity given their mirroring of the near-mid market picture, the above base-rate yield and above comparable normal bond coupon.
As others have remarked “2008 was the year for banking re-capitalization, whilst 2009 was the year for corporate re-capitalization”. Whilst that process was relatively stable for the banking sector with a separation of obvious winners and losers via allocated government and investor funds, has been a testing time for other sector CFOs and indeed true long-term investors themselves. This so because it has been traders - a relatively small number of market participants with powerful leverage - that has as over-excited the market since its 3rd March bottom.
As previously stated, investment-auto-motives was at the beginning of the year concerned about the occurrence of a market rally sustained by the the sentiment reaction of “less than bad news” mixed with the illusionary effects of 'cost-cut achieved earnings'. History implies that such an event was almost always going to happen, but the verocity and timespan (as more value is priced into ever positive next quarter earnings) has been surprising. When the DJIA crossed 10,000 at the end of play on October 14th the jubilation at the NYSE was monumental. And more to the point, having dropped and returned, climbing to 10,110 as of 1.30pm on 19th October, the emerging attitude is that it is sustainable.
But of course speedy effectively arbitrage-led trading floors are last place to look for the bigger-picture perspective; that's the remit of sector analysts and behind them economists.
Given the sense of caution at the start of the year created by real-world tensions which prompted in favour of 'coupon & upside' convertible bonds, it seems that the market has indeed been heavily distorted given the 'supercharging' of the FTSE, S&P, DAX. That supercharging based on a mixture of emotionally driven sentiment and very probably almost heroic achievements regards the financial engineering of the corporate balance sheet. This enabled via ongoing cost-cutting and the re-cycling of the capital 'float' obtained from both enhanced MarketCap thanks to the markets and accessed liquidity, whether from in-place roll-over credit agreements or indeed any higher-cost credit made available. And of course there is always the ability to 'manage expectations' with overly conservative pre-reporting announcements, only to 'surprisingly' surpass them come reporting day
Every tool in the tool-box will have been used over and over again.
As the FT recently illustrated, for mega-cap and large-cap global enterprises with sizable EM exposure and income (50-60%) there is an 'off-set' of inter-regional fortunes, foreign earnings assisted by conversion through the weak US$. For other small-cap (and private SMEs) with typically far greater homeland exposure or sector-specific vagaries the picture appears less positive.
So for the present, the S&P100 and FTSE 100 players are carrying the whole market, and by virtue providing possible false hope for their smaller and less flexible/capable peers simply because they are similar sector inhabitants.
Q309 earnings season, has been well underway with first Alcoa's better than expected results and the financial sector continuing its expected buoyant run thanks to greater private savings and released government liquidity serving commercial and private lending, with brokers doing well from the 6-month rally witnessed. And more recently Apple Inc has 'beat the Street' with its results.
But in the broader picture both B2B and B2C arenas have ongoing fragility as we see from heavy industry Caterpillar and in consumer high-street retail. This is set against what most market observers believe to be a frothy market. And that mixture of realism vs over-optimism points to future stock declines, whether rapid or orderly.
Back to corporate financing and the previous trend toward convertible bonds
{NB. itself promoted by investment-auto-motives – see spring marketing campaign picture in the web-log picture space].
Of late some CEOs have been bleating about their 'hit' from C-Bs.
Their concern that at the time their issuing new releases of convertible bonds – though happy at the thought of potentially paying coupon at under par – that the ensuing stock-market rise would be slow and steady. So theoretically providing at some mid-term point a normative conversion rate when the instrument matured and morphed into equity. But of course the monumental rally has delivered 'fat' present valuations which given the stepped timescales of the call-options on convertible bonds (typically at 3-6 month intervals) have seen investors happily convert at well over the expected conversion level. That some CEOs say has afflicted their enterprises with rapid and large-scale capital retraction and for a time over-weight equity commitments.
Though convertibles were a relatively small slice of the market it was a powerful force in recreating a sense of confidence which helped to start the rally. Now that those early-birds seek to lock-in their gains, like other rally risers, those same market predictors may well be seeking to sell-on their newly acquired equity, thus maintaining the share-holder obligation by the firm, but with newly added pressures.
This process in itself could add weight to the speed of any market decline via the snowball effect, as holders recognise the bubble nature of the ride, convert and get-out. For the US, UK and Europe that in turn could create downward-pressure conditions which corrects and normalizes the market. The positive outcome being that economic and corporate fundamentals taking centre-stage (as is so necessary) in the valuation process.
With the market froth disappearing and less consequential room for corporate financial engineering, the ongoing need for working and investment capital will be required given the scale of intra-sector and inter-sector structural change still necessary.
Thus we saw the return of the convertible bond popularity between February and June 2009. And we could see a similar, though at smaller volume, replay in 2010.
For whilst the banking sector has seen a good 3 quarter run, many are questioning its strength given the level of 'toxic-asset write-downs' and still to be absorbed (considered only 50-65% complete) and the requirement to repay tax-payer 'bail-out' monies. If the banking sector begins to falter itself it will react with (sensibly) over-riding caution thus effectively retracting current 'liquidity-transfer' levels toward industry and consumers.
This inescapable reality, along with the previously mentioned 'top of market' equity selling, plus possible additional pressure created by reduced foreign earnings for big-cap companies negatively affected by 'stimulus-retraction' in China / Japan / India, could create the perfect storm for taking the wind out of present-day economic and equity-driven sails.
Though painful, this process would help to normalize the contorted present conditions, both on Wall Street and Main Street, and spread risk back across proportionately to broader asset genres – also slowing the present gold-run and any possible near future commodity speculation.
If this process does indeed happen, governments and regulators must endeavour to stop the pendulum swinging too far negatively. It must stabalise what have been highly pendulous conditions. More than ever, the market en mass must not charge back in and repeat the process. Such a scenario would only be economically self-defeating and put off the real long-term traction at micro and macro levels so desperately required.
Thus in the meantime mid-term to long-term investors must seek to philosophically 'strip-down' all corporations to ascertain their real values via true transparency – both offered from Board-level and through in-depth research. This a necessity before looking to once again take up any, though far more scant (and thus potentially more attractive, relative to company characteristics) future convertible bond issuance.
[NB. investment-auto-motives' autumn/fall marketing campaign pictorially depicts this call to transparency and objectivity].
A combination of corporate need to access liquidity for working capital and investor expectations of a better tomorrow down the road created the perfect storm for the return of the convertible bond – a hybrid type of issue itself born from preceding tumultuous eras and so perfectly suited to the start of 2009. From a low base-level of C-B sales, the innate risk-reward structure of this asset-class matched general sentiment; that sentiment in turn assisted by the forced sell-off of 'in-play' notes by hedge-funds seeking to re-build their own cash levels. This over-discounting presented a powerful buy opportunity given their mirroring of the near-mid market picture, the above base-rate yield and above comparable normal bond coupon.
As others have remarked “2008 was the year for banking re-capitalization, whilst 2009 was the year for corporate re-capitalization”. Whilst that process was relatively stable for the banking sector with a separation of obvious winners and losers via allocated government and investor funds, has been a testing time for other sector CFOs and indeed true long-term investors themselves. This so because it has been traders - a relatively small number of market participants with powerful leverage - that has as over-excited the market since its 3rd March bottom.
As previously stated, investment-auto-motives was at the beginning of the year concerned about the occurrence of a market rally sustained by the the sentiment reaction of “less than bad news” mixed with the illusionary effects of 'cost-cut achieved earnings'. History implies that such an event was almost always going to happen, but the verocity and timespan (as more value is priced into ever positive next quarter earnings) has been surprising. When the DJIA crossed 10,000 at the end of play on October 14th the jubilation at the NYSE was monumental. And more to the point, having dropped and returned, climbing to 10,110 as of 1.30pm on 19th October, the emerging attitude is that it is sustainable.
But of course speedy effectively arbitrage-led trading floors are last place to look for the bigger-picture perspective; that's the remit of sector analysts and behind them economists.
Given the sense of caution at the start of the year created by real-world tensions which prompted in favour of 'coupon & upside' convertible bonds, it seems that the market has indeed been heavily distorted given the 'supercharging' of the FTSE, S&P, DAX. That supercharging based on a mixture of emotionally driven sentiment and very probably almost heroic achievements regards the financial engineering of the corporate balance sheet. This enabled via ongoing cost-cutting and the re-cycling of the capital 'float' obtained from both enhanced MarketCap thanks to the markets and accessed liquidity, whether from in-place roll-over credit agreements or indeed any higher-cost credit made available. And of course there is always the ability to 'manage expectations' with overly conservative pre-reporting announcements, only to 'surprisingly' surpass them come reporting day
Every tool in the tool-box will have been used over and over again.
As the FT recently illustrated, for mega-cap and large-cap global enterprises with sizable EM exposure and income (50-60%) there is an 'off-set' of inter-regional fortunes, foreign earnings assisted by conversion through the weak US$. For other small-cap (and private SMEs) with typically far greater homeland exposure or sector-specific vagaries the picture appears less positive.
So for the present, the S&P100 and FTSE 100 players are carrying the whole market, and by virtue providing possible false hope for their smaller and less flexible/capable peers simply because they are similar sector inhabitants.
Q309 earnings season, has been well underway with first Alcoa's better than expected results and the financial sector continuing its expected buoyant run thanks to greater private savings and released government liquidity serving commercial and private lending, with brokers doing well from the 6-month rally witnessed. And more recently Apple Inc has 'beat the Street' with its results.
But in the broader picture both B2B and B2C arenas have ongoing fragility as we see from heavy industry Caterpillar and in consumer high-street retail. This is set against what most market observers believe to be a frothy market. And that mixture of realism vs over-optimism points to future stock declines, whether rapid or orderly.
Back to corporate financing and the previous trend toward convertible bonds
{NB. itself promoted by investment-auto-motives – see spring marketing campaign picture in the web-log picture space].
Of late some CEOs have been bleating about their 'hit' from C-Bs.
Their concern that at the time their issuing new releases of convertible bonds – though happy at the thought of potentially paying coupon at under par – that the ensuing stock-market rise would be slow and steady. So theoretically providing at some mid-term point a normative conversion rate when the instrument matured and morphed into equity. But of course the monumental rally has delivered 'fat' present valuations which given the stepped timescales of the call-options on convertible bonds (typically at 3-6 month intervals) have seen investors happily convert at well over the expected conversion level. That some CEOs say has afflicted their enterprises with rapid and large-scale capital retraction and for a time over-weight equity commitments.
Though convertibles were a relatively small slice of the market it was a powerful force in recreating a sense of confidence which helped to start the rally. Now that those early-birds seek to lock-in their gains, like other rally risers, those same market predictors may well be seeking to sell-on their newly acquired equity, thus maintaining the share-holder obligation by the firm, but with newly added pressures.
This process in itself could add weight to the speed of any market decline via the snowball effect, as holders recognise the bubble nature of the ride, convert and get-out. For the US, UK and Europe that in turn could create downward-pressure conditions which corrects and normalizes the market. The positive outcome being that economic and corporate fundamentals taking centre-stage (as is so necessary) in the valuation process.
With the market froth disappearing and less consequential room for corporate financial engineering, the ongoing need for working and investment capital will be required given the scale of intra-sector and inter-sector structural change still necessary.
Thus we saw the return of the convertible bond popularity between February and June 2009. And we could see a similar, though at smaller volume, replay in 2010.
For whilst the banking sector has seen a good 3 quarter run, many are questioning its strength given the level of 'toxic-asset write-downs' and still to be absorbed (considered only 50-65% complete) and the requirement to repay tax-payer 'bail-out' monies. If the banking sector begins to falter itself it will react with (sensibly) over-riding caution thus effectively retracting current 'liquidity-transfer' levels toward industry and consumers.
This inescapable reality, along with the previously mentioned 'top of market' equity selling, plus possible additional pressure created by reduced foreign earnings for big-cap companies negatively affected by 'stimulus-retraction' in China / Japan / India, could create the perfect storm for taking the wind out of present-day economic and equity-driven sails.
Though painful, this process would help to normalize the contorted present conditions, both on Wall Street and Main Street, and spread risk back across proportionately to broader asset genres – also slowing the present gold-run and any possible near future commodity speculation.
If this process does indeed happen, governments and regulators must endeavour to stop the pendulum swinging too far negatively. It must stabalise what have been highly pendulous conditions. More than ever, the market en mass must not charge back in and repeat the process. Such a scenario would only be economically self-defeating and put off the real long-term traction at micro and macro levels so desperately required.
Thus in the meantime mid-term to long-term investors must seek to philosophically 'strip-down' all corporations to ascertain their real values via true transparency – both offered from Board-level and through in-depth research. This a necessity before looking to once again take up any, though far more scant (and thus potentially more attractive, relative to company characteristics) future convertible bond issuance.
[NB. investment-auto-motives' autumn/fall marketing campaign pictorially depicts this call to transparency and objectivity].
Friday, 16 October 2009
PESTEL Trends – Technology Transfer – The Dyson Bladeless Fan
The 'Multiplier Effect' is a phrase generally much loved by economists, and today much hyped by politicians relative to the expected positive results from recent massive stimulus spend. But of course its root lays in the laws of physics (from particulate to quantum). And as of today, that important difference is critically highlighted by the announcement of the Bladeless Fan from (James) Dyson. A physical examplar and useful allegory.
Why?
Because in essence it demonstrates the philosophical and policy-led 'about turn' required to regenerate the global economy. To re-direct it through 180 degrees from the now exhausted and disqualified 'credit-pull' variety of economic growth to one of 'productivity push'. In short, for the horse to be put back in-front of the cart by means of meaningful inventive progress that generates meaningful B2B and B2C demand. True progressive conceptual innovation over false static repackaging.
Just as there needs to be a new 'fundamentalism' in the manner that objective investors view the capital markets – rationality over emotionality - so society and its consumption en mass is returning to a new age of reason. The Copenhagen talks approach the Kyoto Protocol ideals will be tested, the outcome seen to either kick-start a new eco-participatory era or very possibly flail under the political reality of EM region economy-building demands. If this is the case, it will ironically be the politicians looking at both industry and the populace to make the difference.
Given the fragility of the politics, the onus is increasingly looking to be upon the consumer expectations which in turn must be met by industry. And importantly that puts an upstream onus on every corporate participant within every sector of industry. That by default puts the onus onto the R&D departments of all industrial players which by virtue (and investment reality) demands that the very commercial nature of R&D and the resultant IPR can be applied as broadly as possible as improved solutions for new age challenges.
That calls for inter-disciplinary interaction, whether via an investment group's holding-company portfolio, a conglomerate structure, joint-ventures, corporate spin-offs into new arenas or M&A to acquire and broadly-deploy new solutions.
In short the eco-demands of today and tomorrow create greater commercial pressures, yet greater concomitant rewards.
Whilst investment-auto-motives intentionally has both broad and deep investment related remits spanning the macro and the micro, it understandably tends to spotlight directly related auto-industry issues and current affairs topics. Thus, at the micro-level steers toward the corporate components of the industry's value chain – from raw materials procurement and processing to Tier 3, 2 & 1 suppliers (single sector or multi-sector), to VMs themselves, to the dealer-base (corporate, affiliated or independent), to consumer credit furnishers, to auto-insurance providers and lastly the general aftermarket suppliers and distributors.
Given the maturity of the industry and typical barriers to entry ( ie high CapEx, brand lineage & credibility, historical distribution agreements etc etc) the company names mentioned are all to well known ranging from say Basic Element Group to say Arcelor-Mittal to say GKN to say FIAT Auto to say Pendragon or CarMax to GMAC to GEIKO to say MoPar to say Halfords. For the most part the names are indelibly linked and recognised.
And whilst the industry itself, in its conventional form, runs through yet another typical phase of regional consolidation and re-shaping to align itself with the global economic and business cycles, the shifting sands at the edge of the sector created by PESTEL trends highlights the potentiality of non-typical companies and solutions.
By this investment-auto-motives does not necessarily infer the theoretical industry disruptive effect of pure EVs – there are still sizable barriers of regulatory, technical and commercial natures to overcome related to these vehicles. Instead the more feasible and commercially tractable routeway to 'improved autos' is the re-engineering of the conventional systems and methods we have in place today and which make-up the the reality of our economy. This instead of the largely hot-air rhetoric of introducing a 'tomorrow's world' ideology that practically appears light years away.
The reality is that western governments do not have the funds to transpose us into a new world, and the east which is far more liquid has already invested in conventional technology to date. Thus whilst it is right to applaud efforts to increase renewable energy technology and the EV ideology and set proportionate funds aside to develop such technologies (along with concise project monitoring to ensure “bang for buck”, the industrial reality of the auto-sector must dictate a logic of evolution over revolution.
In this regard Sir James Dyson's bladeless fan is a useful tool – both as possibly a directly applicable engineering solution to vehicle engineering and as an inspirational case-study.
[NB. Of course with the Dyson brand so closely related to advanced electrical consumer goods there is an argument regards its applicability as an EV manufacturer in its own right].
Like Dyson's previous ball-barrow, cyclone vacuum cleaner and ball-upright vacuum cleaner, the fundamentals of a conventional design have been re-assessed and improved upon. Of course advancement means improved functionality and so differentiation and thus pricing power, and that has been the Dyson matra to date. But just as the cyclone vacuum was a self-confessed technology transfer from industrial filtration systems to a domestic application, we must ask ourselves whether the principles of the bladeless fan can be adapted to other fields – such as automotive design?
Conventional ICE powertrains are water/liquid-cooled, but the present-day trend for them to shrink in relative cubic capacity and in cases the actual number of cylinders so associated heat build-up and dissipation declines, prompting the possibility of utilising an air-cooled system. This provides the benefit of a) simplified engine block design and manufacture b) sizable weight reduction from a waterless system c) avoidance of conventional radiator weight, cost and engine-bay packaging complexity (assisting front-end crash performance) d) avoidance of weight, cost and parasitic energy depletion from mechanically or electrically driven ancillaries – such as the radiator fan itself.
“Water cooled versus air-cooled” is a question that arises when any new small vehicle project given 'clean-sheet' status by the Board; it is one of the fundamentals of the early stage decision tree. But historically given the level 'sunk-cost' (financially and culturally) in multi-platform common systems and the normative order-capacity agreements put in place to secure discounts with suppliers, much of the engineering component packaging is effectively 'a given' when a new project is embarked upon. Hence the self-fulfilling systemic circle.
However, there have of course been evolutional advancements at a systems level generation after generation and through technical trickle-down – typically orientated toward powertrain and chassis systems as the additional cost of a new solution is first absorbed by high-margin/low volume products and latterly reached low-margin/high-volume products. 'e-systems' solutions ranging from e-steering to the e-accelerator to now e-regenerative brakes are reflective of the influence and integration of of e-systems. Thus new solutions are introduced.
So whilst chassis and powertrain have ostensibly seen the main focus, what of the engine cooling and and the physically linked HVAC ? Ostensibly little has altered, except the typical attuning of radiator & fan size and materials along with CAD enabled dynamic thermal management. As for HVAC, there have been efforts regards miniaturization and simplicity.
But taking things back to first principles – such an an air-cooled ICE engine – allows for new thinking and solutions. Thus with technology transfer in mind, it is almost natural that the Dyson bladeless fan solution be conceptually incorporated into both CAD-based and physical powertrain prototypes relative to next generation lightweight small vehicle packages
As an integrated element of the HVAC system – inter-feeding feeding air instead of conventional liquid – the fan-ring could sit in frontt of, or directly over, a normal small engine block or possiblyseparatedd and physically 'finned' cylinders – as with old-style exposed motorcycle boxer (eg BMW) or V-twin (eg Harley-Davidson) engines.
And latterly as the commercialisation and consumer demand of pure EV cars grow, such simple integrated solutions can critically act as 'technical transition enablers' allowing the creation of dual powertain (ICE or EV) platforms - and so act as stepping stones toward the EV dream.
This Dyson inspired example is of course derived simply from the recent press release, as opposed to the fully exhaustive research and assessment required – a task investment-auto-motives believes lays at the feet of national and international government.
And beyond the responsibility of government it is surely in the investment community's interest to bolster such activity. By far of the majority of 'Green Funds' created have looked at – and largely been cautious of – radical renewable-energy technologies – with accordant (self-interested) scientific over-hype and usually complex deployment scenarios.
So it is no surprise that the investment sector has learned from recent lessons, made all the more prosaic from still cautious credit and capital markets, and are increasingly looking to the the eco-directed R&D from within the bowels of each sector (materials processing to building construction) and also the opportunities for technology transfer.
In this regard Dyson's bladeless fan appears to cut both ways, and all funds from VC's to last-phase to indeed the institutionals should be assessing and creating that commercial 'white-space'.
Why?
Because in essence it demonstrates the philosophical and policy-led 'about turn' required to regenerate the global economy. To re-direct it through 180 degrees from the now exhausted and disqualified 'credit-pull' variety of economic growth to one of 'productivity push'. In short, for the horse to be put back in-front of the cart by means of meaningful inventive progress that generates meaningful B2B and B2C demand. True progressive conceptual innovation over false static repackaging.
Just as there needs to be a new 'fundamentalism' in the manner that objective investors view the capital markets – rationality over emotionality - so society and its consumption en mass is returning to a new age of reason. The Copenhagen talks approach the Kyoto Protocol ideals will be tested, the outcome seen to either kick-start a new eco-participatory era or very possibly flail under the political reality of EM region economy-building demands. If this is the case, it will ironically be the politicians looking at both industry and the populace to make the difference.
Given the fragility of the politics, the onus is increasingly looking to be upon the consumer expectations which in turn must be met by industry. And importantly that puts an upstream onus on every corporate participant within every sector of industry. That by default puts the onus onto the R&D departments of all industrial players which by virtue (and investment reality) demands that the very commercial nature of R&D and the resultant IPR can be applied as broadly as possible as improved solutions for new age challenges.
That calls for inter-disciplinary interaction, whether via an investment group's holding-company portfolio, a conglomerate structure, joint-ventures, corporate spin-offs into new arenas or M&A to acquire and broadly-deploy new solutions.
In short the eco-demands of today and tomorrow create greater commercial pressures, yet greater concomitant rewards.
Whilst investment-auto-motives intentionally has both broad and deep investment related remits spanning the macro and the micro, it understandably tends to spotlight directly related auto-industry issues and current affairs topics. Thus, at the micro-level steers toward the corporate components of the industry's value chain – from raw materials procurement and processing to Tier 3, 2 & 1 suppliers (single sector or multi-sector), to VMs themselves, to the dealer-base (corporate, affiliated or independent), to consumer credit furnishers, to auto-insurance providers and lastly the general aftermarket suppliers and distributors.
Given the maturity of the industry and typical barriers to entry ( ie high CapEx, brand lineage & credibility, historical distribution agreements etc etc) the company names mentioned are all to well known ranging from say Basic Element Group to say Arcelor-Mittal to say GKN to say FIAT Auto to say Pendragon or CarMax to GMAC to GEIKO to say MoPar to say Halfords. For the most part the names are indelibly linked and recognised.
And whilst the industry itself, in its conventional form, runs through yet another typical phase of regional consolidation and re-shaping to align itself with the global economic and business cycles, the shifting sands at the edge of the sector created by PESTEL trends highlights the potentiality of non-typical companies and solutions.
By this investment-auto-motives does not necessarily infer the theoretical industry disruptive effect of pure EVs – there are still sizable barriers of regulatory, technical and commercial natures to overcome related to these vehicles. Instead the more feasible and commercially tractable routeway to 'improved autos' is the re-engineering of the conventional systems and methods we have in place today and which make-up the the reality of our economy. This instead of the largely hot-air rhetoric of introducing a 'tomorrow's world' ideology that practically appears light years away.
The reality is that western governments do not have the funds to transpose us into a new world, and the east which is far more liquid has already invested in conventional technology to date. Thus whilst it is right to applaud efforts to increase renewable energy technology and the EV ideology and set proportionate funds aside to develop such technologies (along with concise project monitoring to ensure “bang for buck”, the industrial reality of the auto-sector must dictate a logic of evolution over revolution.
In this regard Sir James Dyson's bladeless fan is a useful tool – both as possibly a directly applicable engineering solution to vehicle engineering and as an inspirational case-study.
[NB. Of course with the Dyson brand so closely related to advanced electrical consumer goods there is an argument regards its applicability as an EV manufacturer in its own right].
Like Dyson's previous ball-barrow, cyclone vacuum cleaner and ball-upright vacuum cleaner, the fundamentals of a conventional design have been re-assessed and improved upon. Of course advancement means improved functionality and so differentiation and thus pricing power, and that has been the Dyson matra to date. But just as the cyclone vacuum was a self-confessed technology transfer from industrial filtration systems to a domestic application, we must ask ourselves whether the principles of the bladeless fan can be adapted to other fields – such as automotive design?
Conventional ICE powertrains are water/liquid-cooled, but the present-day trend for them to shrink in relative cubic capacity and in cases the actual number of cylinders so associated heat build-up and dissipation declines, prompting the possibility of utilising an air-cooled system. This provides the benefit of a) simplified engine block design and manufacture b) sizable weight reduction from a waterless system c) avoidance of conventional radiator weight, cost and engine-bay packaging complexity (assisting front-end crash performance) d) avoidance of weight, cost and parasitic energy depletion from mechanically or electrically driven ancillaries – such as the radiator fan itself.
“Water cooled versus air-cooled” is a question that arises when any new small vehicle project given 'clean-sheet' status by the Board; it is one of the fundamentals of the early stage decision tree. But historically given the level 'sunk-cost' (financially and culturally) in multi-platform common systems and the normative order-capacity agreements put in place to secure discounts with suppliers, much of the engineering component packaging is effectively 'a given' when a new project is embarked upon. Hence the self-fulfilling systemic circle.
However, there have of course been evolutional advancements at a systems level generation after generation and through technical trickle-down – typically orientated toward powertrain and chassis systems as the additional cost of a new solution is first absorbed by high-margin/low volume products and latterly reached low-margin/high-volume products. 'e-systems' solutions ranging from e-steering to the e-accelerator to now e-regenerative brakes are reflective of the influence and integration of of e-systems. Thus new solutions are introduced.
So whilst chassis and powertrain have ostensibly seen the main focus, what of the engine cooling and and the physically linked HVAC ? Ostensibly little has altered, except the typical attuning of radiator & fan size and materials along with CAD enabled dynamic thermal management. As for HVAC, there have been efforts regards miniaturization and simplicity.
But taking things back to first principles – such an an air-cooled ICE engine – allows for new thinking and solutions. Thus with technology transfer in mind, it is almost natural that the Dyson bladeless fan solution be conceptually incorporated into both CAD-based and physical powertrain prototypes relative to next generation lightweight small vehicle packages
As an integrated element of the HVAC system – inter-feeding feeding air instead of conventional liquid – the fan-ring could sit in frontt of, or directly over, a normal small engine block or possiblyseparatedd and physically 'finned' cylinders – as with old-style exposed motorcycle boxer (eg BMW) or V-twin (eg Harley-Davidson) engines.
And latterly as the commercialisation and consumer demand of pure EV cars grow, such simple integrated solutions can critically act as 'technical transition enablers' allowing the creation of dual powertain (ICE or EV) platforms - and so act as stepping stones toward the EV dream.
This Dyson inspired example is of course derived simply from the recent press release, as opposed to the fully exhaustive research and assessment required – a task investment-auto-motives believes lays at the feet of national and international government.
And beyond the responsibility of government it is surely in the investment community's interest to bolster such activity. By far of the majority of 'Green Funds' created have looked at – and largely been cautious of – radical renewable-energy technologies – with accordant (self-interested) scientific over-hype and usually complex deployment scenarios.
So it is no surprise that the investment sector has learned from recent lessons, made all the more prosaic from still cautious credit and capital markets, and are increasingly looking to the the eco-directed R&D from within the bowels of each sector (materials processing to building construction) and also the opportunities for technology transfer.
In this regard Dyson's bladeless fan appears to cut both ways, and all funds from VC's to last-phase to indeed the institutionals should be assessing and creating that commercial 'white-space'.
Tuesday, 13 October 2009
Macro Level Trends – China & HUMMER – Transporting Global Military Might.
In China the first day of October celebrates 'National Day', marking the establishment of the PRC, under the Communist Party. This year saw an extra-ordinary effort of 'show-boating' by the country to mark its 60th anniversary – a mark of symbolism as much to the rest of the world as to its own people.
To western eyes that celebration may have seemed somewhat surreal, starting at 2.00am GMT, the President Hu Jintao wearing the eponymous Mao tunic took centre stage, standing upright through the roof-hatch of China's own near simulacrum of a Rolls-Royce Phantom. But with a Chinese twist on the world-class benchmark limousine manufactured by Hongqi, the adapted HQD model – even larger than the phantom - had a re-worked face that reflected the 'glorious past' of Chinese auto marques. That past which ironically were themselves reworks of Eastern European styles derived from US influence which served the Soviet-Sino Communist Bloc for decades.
(As a side bar note also the Geely GE model which mimics the Rolls).
This is not to deride China to any degree, simply that its auto-sector, having arrived so comparatively late, has been a historical story of adaption – firstly from those Czech cars to the American influence of Beijing Jeep in the early 1980s to the almost Baudrillard-like hyper-realism of the Hongqi and Geely GE.
China today finds itself both having to be attuned to our globalised culture where semiotics / symbolism plays such an important role, yet also maintain its own symbolic lineage. This was perhaps the core reason why the Presidential procession appeared so contrived. It may have seemed amateurish to some, but every element serves a purpose.
Perhaps the greatest example of that contrivance were the exteriors of the tanks, missile carriers and other military transport vehicles. For they demonstrated the very paradoxical nature of China's present-day identity, merging both a show-casing of the (to us) distant past and a promising future. This was done via juxtaposed use of 'pixalation-camouflage' paintwork derived straight from a computer video game imagery and white-wall tyres that cognitively demonstrate cleanliness, order, discipline. Thus for western eyes a twisted mix of automotive cultures eras from well before 1949 to well beyond 2009.
Yes, the pixilated liveries combined with white-wall tyres may seem daft, but the aesthetic was unarguably powerful. Almost straight from the Director's mind's-eye, storyboards and edit-suit of 1960s distopian future-scope films like A Clockwork Orange or Fahrenheit 451. Something - unlike the slick latter-day retro-futurist efforts of Brazil, Blade-Runner or The Fifth Element – that was very psychologically jarring. Although all processions are directed, this one appeared almost cinematographically so.
Whist the direction of the 60th anniversary procession was undoubtedly minute perfect, the direction of the country's automotive sector – under the present 5 year plan – has been more questionable to foreign observers.
The past success of speedy and massive economic growth encouraged a plethora of state-derived, joint-venture and all new domestic producers; some as extensions of other industrial works,others as new start-up companies. At one point in mid 2007 there were over 220 enterprises vying for success. Unsurprisingly over-capacity resulted. Recognising this, the current plan called for a consolidation and contraction of the sector, so as to overcome the overt value-destroying nature of sector and to enter a new maturer and value-creating phase. We witness that today as those domestic firms either struggle and close, are merged into bigger fish, or grow as those big-fish. But more so there has been Chinese international ambition as auto-makers try to follow the state plan for globalised Chinese enterprise.
Thus western eyes have been on the likes of BAIC and Geely in their pronouncements regards US divestments in the form SAAB and Volvo...and critically HUMMER.
Unlike GM's other generally questionable off-loaded brands, HUMMER was divested, candidate contested and sold relatively easily and quickly; the successful joint-buyers being Sichuan Tengzhong Heavy Industrial Machine Company (to hold 80%) and entrepreneur Suolang Duoji (to hold 20% via his company Lumena resources Ltd, a sodium sulphate processing company also based in Sichuan). They take the brand, trademark, further trade-names as well as importantly the IPR of the company. A deal struck at a remarkably low $150 million, which includes GM's agreement to manufacture the vehicles until 2012.
Thus, investment-auto-motives sees the deal as much an 'entente-cordial' between the US and Chinese administrations which usurps what would have been far more contracted negotiations on a purely commercial basis had there not been such a desire for as much 'lassez-faire' bi-lateral trade as possible.
Importantly, set against the bigger context the HUMMER deal is not as simple as the “shameful loss of an American icon” as some US blog-commentators quote, but a major step for China in becoming the world's supplier of military transport might.
China has already mimicked the original HUMVEE/H1 with various copy-cat cars (as per Rolls-Royce), but whilst arguably the highest form of flattery, ownership of the original brand has been viewed as vital by Beijing both in terms of innate symbolism as a world player (as seen with IBM laptop – Lenovo) and on pure commercial grounds – militaristic and civilian.
The original HUMVEE has been in service with numerous sovereign & national armies, navies and air-forces across the globe, manufactured between 1992 and 2006 (the Mishawaka, Indiana factory built in 1984) with of course its H1 civilian twin and smaller 'conspicuous consumption' H2 and H3 siblings offered to the 'suburban cowboy' set phased-in over the following 14 years. Today HUMMER is assembled in the original Indiana plant (H1, H2), Shreveporte, Louisiana (H3), Port Elizabeth, South Africa (H3) and licensed build in Kalingrad, Russia (H2). Under Sichuan Tengzhong Heavy Industry it appears that it will be business as usual in the US with a new Detroit HQ created, but whilst many expect yet another 'lift and shift' operation of the US tooling, frames etc investment-auto-motives suspects that whilst so for H2 and H3, H1 will remain in situ with a replicant set of tooling, set-frames et al created for a new production site in Sichuan or thereabouts.
Though the allocation data for the international fleet size/car parc for military HUMVEEs is not immediately available, it is a fact that the vehicles are incontestably aging. If we assert that the peak of production & delivery was during the late 1990s, then much of the fleet is already 10 years old, with oldest US vehicles about 20 years old. Thus Sichuan Tzenghong will have 3 main goals:
1.Production of new HUMVEE vehicles for China's own massive appetite
2.Repair & Reconditioning of the large international HUMVEE fleet
3.Introduction of HUMMER as a new domestic consumer brand
Thus critically, Sichuan Tengzhong now has both global reach given its worldwide plants and critically both military and civilian operations. This provides the ability to directly replace GM by servicing the world's forces with a full portfolio for medium-size, medium (off-road) ability vehicles across “Dark Green” (front-line theatre of war), “Light Green” (intermediate range) and “White” (non-combat/logistics) operations.
The standardisation of vehicle fleets achieved via expanded 'modularisation' and package-protected technically-specific variants has been an ongoing ambition of international MoDs given the cost efficiencies attained from homogeneity and of the growing trend toward combined mult-force operations under NATO and UN banners requiring inter- interoperability. (This in turn applicable to Red-Cross, Red-Crescent & now Red-Star emergency aid and Peace Corps operations)
Broadening the view, whilst the Chinese have now taken the 'Medium' weight category with HUMVEE, India has already seized the opportunity to 'sew-up' the Light' weight category with both its own 'old' 4x4 products and the newer Land Rover vehicles, specifically “White Discovery” and “Light & Dark Green” Defender – themselves seeking learning from previous mid 1990s 'Wolf' (attack vehicle) and 'Pulse' (ambulance) projects which have themselves begot ongoing fleet repair & maintainance contracts).
Looking back to China, and the plethora of heavy military transport machinery on show at the 60th anniversary celebration intentionally demonstrated the front-line power of China. And whilst undeniably it has a sizable intermediary and logistics fleet derived from ex-Soviet and homegrown products, the PRC high command recognised that to be integrated as a world-player that 'back-office' capability had to be both updated and (globally) co-ordinated.
So instead of simply buying the relevant apples, given its massive US$ reserves and the current positive FX benefit of the Yuan vs US$, it instead bought the whole apple stall. Moreover, very importantly by buying HUMMER China has now effectively become a co-optive international partner amongst the leading G20 nations.
And for its own benefit HUMMER will bring a long-horizon of demand from its newly purchased global vehicle parc centred around the key values of:
1.Affordability (for stretched western defence budgets)
2.Durability (from innate design)
3.Inter-changeability (important for rapid response and in the field repair)
4.Flex-tech (providing mission specific 'strip & re-build' 4x4 platforms)
In an age when arguably much of the use of military might on the international stage relates to the social unrest induced from national fracturing – primarily in Africa, CIS states, S. America - peacekeeping and nation-building is the remit of the day.
And as we've historically seen with Jeep, Land-Rover and UAZ, such HUMMER 'birth-origins' make for a powerful brand that stretches with credibility into the realms of commercial utility vehicles ranging from the 'low plains' of agriculture to industry to infrastructure work, right across to the 'high-plains' adventure and expedition.
Jeep conquered Europe and Asia in the 1940s, Land Rover conquered Africa in the 1950s & 1960s, UAZ conquered Siberia in the 1970s and Toyota conquered EM regions in the 1980s and the Arctic in the 2000s.
HUMMER will now conquer China and commercially harness the world beyond.
So although front of stage the discordant sight of a mock Rolls-Royce set amongst an ocean of people and war equipment creates that image of a distopian future-scope to western eyes, let us not be blinded by first impressions. The purchase of HUMMER perhaps says more about China's global integration to an international business & political audience than the choreography played-out by the PRC for its own citizens and the general global audience.
To western eyes that celebration may have seemed somewhat surreal, starting at 2.00am GMT, the President Hu Jintao wearing the eponymous Mao tunic took centre stage, standing upright through the roof-hatch of China's own near simulacrum of a Rolls-Royce Phantom. But with a Chinese twist on the world-class benchmark limousine manufactured by Hongqi, the adapted HQD model – even larger than the phantom - had a re-worked face that reflected the 'glorious past' of Chinese auto marques. That past which ironically were themselves reworks of Eastern European styles derived from US influence which served the Soviet-Sino Communist Bloc for decades.
(As a side bar note also the Geely GE model which mimics the Rolls).
This is not to deride China to any degree, simply that its auto-sector, having arrived so comparatively late, has been a historical story of adaption – firstly from those Czech cars to the American influence of Beijing Jeep in the early 1980s to the almost Baudrillard-like hyper-realism of the Hongqi and Geely GE.
China today finds itself both having to be attuned to our globalised culture where semiotics / symbolism plays such an important role, yet also maintain its own symbolic lineage. This was perhaps the core reason why the Presidential procession appeared so contrived. It may have seemed amateurish to some, but every element serves a purpose.
Perhaps the greatest example of that contrivance were the exteriors of the tanks, missile carriers and other military transport vehicles. For they demonstrated the very paradoxical nature of China's present-day identity, merging both a show-casing of the (to us) distant past and a promising future. This was done via juxtaposed use of 'pixalation-camouflage' paintwork derived straight from a computer video game imagery and white-wall tyres that cognitively demonstrate cleanliness, order, discipline. Thus for western eyes a twisted mix of automotive cultures eras from well before 1949 to well beyond 2009.
Yes, the pixilated liveries combined with white-wall tyres may seem daft, but the aesthetic was unarguably powerful. Almost straight from the Director's mind's-eye, storyboards and edit-suit of 1960s distopian future-scope films like A Clockwork Orange or Fahrenheit 451. Something - unlike the slick latter-day retro-futurist efforts of Brazil, Blade-Runner or The Fifth Element – that was very psychologically jarring. Although all processions are directed, this one appeared almost cinematographically so.
Whist the direction of the 60th anniversary procession was undoubtedly minute perfect, the direction of the country's automotive sector – under the present 5 year plan – has been more questionable to foreign observers.
The past success of speedy and massive economic growth encouraged a plethora of state-derived, joint-venture and all new domestic producers; some as extensions of other industrial works,others as new start-up companies. At one point in mid 2007 there were over 220 enterprises vying for success. Unsurprisingly over-capacity resulted. Recognising this, the current plan called for a consolidation and contraction of the sector, so as to overcome the overt value-destroying nature of sector and to enter a new maturer and value-creating phase. We witness that today as those domestic firms either struggle and close, are merged into bigger fish, or grow as those big-fish. But more so there has been Chinese international ambition as auto-makers try to follow the state plan for globalised Chinese enterprise.
Thus western eyes have been on the likes of BAIC and Geely in their pronouncements regards US divestments in the form SAAB and Volvo...and critically HUMMER.
Unlike GM's other generally questionable off-loaded brands, HUMMER was divested, candidate contested and sold relatively easily and quickly; the successful joint-buyers being Sichuan Tengzhong Heavy Industrial Machine Company (to hold 80%) and entrepreneur Suolang Duoji (to hold 20% via his company Lumena resources Ltd, a sodium sulphate processing company also based in Sichuan). They take the brand, trademark, further trade-names as well as importantly the IPR of the company. A deal struck at a remarkably low $150 million, which includes GM's agreement to manufacture the vehicles until 2012.
Thus, investment-auto-motives sees the deal as much an 'entente-cordial' between the US and Chinese administrations which usurps what would have been far more contracted negotiations on a purely commercial basis had there not been such a desire for as much 'lassez-faire' bi-lateral trade as possible.
Importantly, set against the bigger context the HUMMER deal is not as simple as the “shameful loss of an American icon” as some US blog-commentators quote, but a major step for China in becoming the world's supplier of military transport might.
China has already mimicked the original HUMVEE/H1 with various copy-cat cars (as per Rolls-Royce), but whilst arguably the highest form of flattery, ownership of the original brand has been viewed as vital by Beijing both in terms of innate symbolism as a world player (as seen with IBM laptop – Lenovo) and on pure commercial grounds – militaristic and civilian.
The original HUMVEE has been in service with numerous sovereign & national armies, navies and air-forces across the globe, manufactured between 1992 and 2006 (the Mishawaka, Indiana factory built in 1984) with of course its H1 civilian twin and smaller 'conspicuous consumption' H2 and H3 siblings offered to the 'suburban cowboy' set phased-in over the following 14 years. Today HUMMER is assembled in the original Indiana plant (H1, H2), Shreveporte, Louisiana (H3), Port Elizabeth, South Africa (H3) and licensed build in Kalingrad, Russia (H2). Under Sichuan Tengzhong Heavy Industry it appears that it will be business as usual in the US with a new Detroit HQ created, but whilst many expect yet another 'lift and shift' operation of the US tooling, frames etc investment-auto-motives suspects that whilst so for H2 and H3, H1 will remain in situ with a replicant set of tooling, set-frames et al created for a new production site in Sichuan or thereabouts.
Though the allocation data for the international fleet size/car parc for military HUMVEEs is not immediately available, it is a fact that the vehicles are incontestably aging. If we assert that the peak of production & delivery was during the late 1990s, then much of the fleet is already 10 years old, with oldest US vehicles about 20 years old. Thus Sichuan Tzenghong will have 3 main goals:
1.Production of new HUMVEE vehicles for China's own massive appetite
2.Repair & Reconditioning of the large international HUMVEE fleet
3.Introduction of HUMMER as a new domestic consumer brand
Thus critically, Sichuan Tengzhong now has both global reach given its worldwide plants and critically both military and civilian operations. This provides the ability to directly replace GM by servicing the world's forces with a full portfolio for medium-size, medium (off-road) ability vehicles across “Dark Green” (front-line theatre of war), “Light Green” (intermediate range) and “White” (non-combat/logistics) operations.
The standardisation of vehicle fleets achieved via expanded 'modularisation' and package-protected technically-specific variants has been an ongoing ambition of international MoDs given the cost efficiencies attained from homogeneity and of the growing trend toward combined mult-force operations under NATO and UN banners requiring inter- interoperability. (This in turn applicable to Red-Cross, Red-Crescent & now Red-Star emergency aid and Peace Corps operations)
Broadening the view, whilst the Chinese have now taken the 'Medium' weight category with HUMVEE, India has already seized the opportunity to 'sew-up' the Light' weight category with both its own 'old' 4x4 products and the newer Land Rover vehicles, specifically “White Discovery” and “Light & Dark Green” Defender – themselves seeking learning from previous mid 1990s 'Wolf' (attack vehicle) and 'Pulse' (ambulance) projects which have themselves begot ongoing fleet repair & maintainance contracts).
Looking back to China, and the plethora of heavy military transport machinery on show at the 60th anniversary celebration intentionally demonstrated the front-line power of China. And whilst undeniably it has a sizable intermediary and logistics fleet derived from ex-Soviet and homegrown products, the PRC high command recognised that to be integrated as a world-player that 'back-office' capability had to be both updated and (globally) co-ordinated.
So instead of simply buying the relevant apples, given its massive US$ reserves and the current positive FX benefit of the Yuan vs US$, it instead bought the whole apple stall. Moreover, very importantly by buying HUMMER China has now effectively become a co-optive international partner amongst the leading G20 nations.
And for its own benefit HUMMER will bring a long-horizon of demand from its newly purchased global vehicle parc centred around the key values of:
1.Affordability (for stretched western defence budgets)
2.Durability (from innate design)
3.Inter-changeability (important for rapid response and in the field repair)
4.Flex-tech (providing mission specific 'strip & re-build' 4x4 platforms)
In an age when arguably much of the use of military might on the international stage relates to the social unrest induced from national fracturing – primarily in Africa, CIS states, S. America - peacekeeping and nation-building is the remit of the day.
And as we've historically seen with Jeep, Land-Rover and UAZ, such HUMMER 'birth-origins' make for a powerful brand that stretches with credibility into the realms of commercial utility vehicles ranging from the 'low plains' of agriculture to industry to infrastructure work, right across to the 'high-plains' adventure and expedition.
Jeep conquered Europe and Asia in the 1940s, Land Rover conquered Africa in the 1950s & 1960s, UAZ conquered Siberia in the 1970s and Toyota conquered EM regions in the 1980s and the Arctic in the 2000s.
HUMMER will now conquer China and commercially harness the world beyond.
So although front of stage the discordant sight of a mock Rolls-Royce set amongst an ocean of people and war equipment creates that image of a distopian future-scope to western eyes, let us not be blinded by first impressions. The purchase of HUMMER perhaps says more about China's global integration to an international business & political audience than the choreography played-out by the PRC for its own citizens and the general global audience.
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