Frederick Henderson has announced a proposal directed at Government & its Bond-Holders. That GM could swap 50% of the loan-value from its Government bail-out for corporate equity, and if agreed by Washington (and the UAW given other conditions) then offer bondholders 225 shares of its common stock for every $1,000 of principal they held – reducing outstanding debt by $3bn to $24bn.
This would obviously alleviate a heavily pressured balance sheet by a reported $20bn; a seemingly agreeable notion. But given the stock-swap conditions of the UAW VEBA agreement already in place, the notion would appropriate 89% held by Government and UAW, leaving only 11% as a 'free-float'.
Although much derided by recent events, and some might have it otherwise, we still live in a Capitalist economy that relies upon the re-strengthening of financial markets and associated intermediaries and participants, and critically broad-scale investor confidence. So whilst the GM proposal could offer a mid-term respite for the company at large, it begs the question as to why it should indeed still stay a listed enterprise?
The markets reacted well to the news, but that seems to be simply yet another case of momentary irrational exuberance as event-driven traders believe that the Nanny State will take care of the company and its investors. The long-term holders of equity at least are probably more skeptical.
The truth of the matter is that present incumbent money managers, hedge funds, institutionals and 'GM loyalist' 'Mam & Pop' investors will have been heavily dismayed by the level of value destruction from the company seen in recent years and further recently exacerbated by the 'cents on the dollar' 'haircuts' that were previously mentioned. Now this Government directed debt-for-equity swap dilutes the present share-holder's standing, GM offering that all of the $27bn public debt outstanding be transferred into 10% equity.
Mutiny is an ugly prospect, one accorded more to yesteryear Captains than today's metaphorical 'Generals', but such fractious days could witness a new level of investor activism from the most conservative of quarters. An activism that surpasses the recent social activism in terms of striking at the heart of the, and maintaining the cause for the very model of capitalism; one of a variety that has not yet been seen in US economic history.
When it is highlighted that the offer must be accepted and contractually signed-off by May 26th, just 6 days before the June 1st GM deadline set by Government it looks increasingly remote as a viable proposition given the level of investor discontentment.
Frederick Henderson also re-iterated the idea that he is open to, and been working on, GM's admission to Chapter 11; hoping that his counter-parties in Government and Wall Street fear that such proceedings could indeed take years given the commercial operating complexity of GM.
Restructuring talks and plans are of course still ongoing. And as part of that is the idea that the company could formally split and set itself out under the guises of 'Good GM' (comprising of Chevy, Buick, Cadillac & GMC) vs a 'Bad GM' (ie Saturn, Pontiac, Hummer, SAAB & Opel), This possibility follows the same conjectural possibility aired previously for the US banking sector and its supposedly 'toxic' assets. Indeed their has been comment that the 'Good' could take stakes in the 'Bad' to aid restructuring possibilities and inject latter-day confidence.
[Such a 'Bad GM' would of course either divest tangible and intangible assets, be restructured under very different stakeholder conditions or merged with another enterprise able to leverage a far better cost-structures, so giving those presently poor profitability brands the opportunity for feasible turn-around and so providing latter-day value-extraction opportunities].
In the meantime additional re-sizing and cost-saving efforts continue in the form of dealership rationalisation, workforce reduction, plant closures and of course the much muted partial sale of Adam Opel AG – with FIAT SpA presently seen as a front-runner vs a supposed number of unnamed candidates.
Henderson says GM aims to operationally 'break-even' at 10m units p.a. , and that is part of the reason we suspect it has centred itself around the 4 obvious high-synergy divisions in cars and trucks. Using the March '(Jan-Mar Vehicle Delivery' statement recently issued, the US will provide for approximately 1.7m units in 2009 if present conditions do not abate, down 48.8% for the YoY period of which 40% derived from cars vs 58% from SUVs & light trucks. This basic mix demonstrates GM's lacklustre (GMDAT sourced) presence in the small and compact car segments.
As for the topical primary issue of bond-holder reaction and sentiment toward the proposed deal, most have, and will, see it as nothing but GM being seen by Government to be doing something to be pro-active, even if that something is less than realistic. For both the Detroit and Washington players must know that given fund managers' primary 'guardianship' of their investor's interests and their highly important role as 'capital market transmission mechanisms' the offer is untenable.
In the transparent game of chicken being played, those on Wall Street, in Connecticut, Massachusetts, California, Miami and elsewhere will view it as water off a duck's back; as they devise their own scenario outcomes for the auto-sector's over-haul and their own thematic and target plays.
For if GM were indeed to be taken over by Washington and the UAW that would tantamount to Nationalisation. Western economies are undoubtedly variations of the 'mixed-economy' model, but the US, as a global leader of free-trade and anti-protectionism, cannot resort to such coddling of over-ripe, matured industry structures; and the Administration more than knows it.
To do so would undermine its very standing and leave it open it to slights that GM & the USA's industrial policy had more in common with the likes of flailed state-policies such as Malaysia's Proton in Malaysia or the government-owned CIS automakers that have been operationally stagnant due.
Such accusations may over-state the case, but would anybody want 11% of such an entity in what would be effectively be in the medium term at least a planned industry? Not likely. At a time when even T-Bills are loosing attraction, a state-run car company - with its inherent undoubtedly 're-tabled' social agenda pressures – looks even less attractive.
Ultimately, the debt for equity argument is a valid one, but the retained debt vs new equity issuance mix must be a balanced equation if GM and the auto-sector is to heal and the financial markets are to function healthily.
Though the Bankruptcy Judge sits awaiting and the lengthy road of due process runs to the horizon, perhaps it is time that an independent panel of cross-discipline luminaries be appointed as the tri-party arbitor and 'macro' & 'micro' solutions seeker.?
Monday, 27 April 2009
Thursday, 23 April 2009
Company Focus – Porsche & VW – Sparring Partners
'Parry' and 'Counter-Parry'...the sparring between Porsche and VW has rarely stopped throughout the 62 years that two companies have been formally associated.
2008 witnessed the revelation that Wiedeking had been (allegedly) secretly buying-up options trades through 3rd parties on the derivatives markets, allowing a Q109 stake in VW of 50.8%. At a reported cost/debt of Euro 9bn, some commentators think that the stake-holding was build-up at a heavy price, especially so given a debt-servicing level of Euro 500m per annum.
Of course, three and half years ago when the Porsche CEO set out on the quest for VW, capital markets were strong and lenders were convinced of the massive commercial potential of a more formalised commercial integration. Although the current financial terrain and its associated sentiment has shifted massively, and thereby raised the loan-criterion bar visibly, there are few M&A deals in stable, matured industries that hold the kind of RoI potential that a melded Porsche-VW or indeed VW-Porsche offers – especially so in the Auto-Sector and the credentials of the 2 participants.
And that is why, at this prescient moment, that Piech has decided to subtly employ the press as communicators of his renowned strategic acumen. VW will have 'run the numbers' on Porsche Holdings and recognised that changed funding conditions could be a possible cause of fragility allied to its apparent reliance on its VW share dividends. Seeing the 'opening', he seems to have attempted to simultaneously divert analysts' attention away from VW's near-term contraction and toward the better commercial prospect of the medium-long term.
The crucial truth is that the combined forces of VW & Porsche make for a very attractive commercial proposition.
With its recent 'position of power' Porsche has been able to deploy VW platforms and production-lines to its advantage through the probable use of highly advantageous 'transfer-pricing' terms for Cayenne and Panamera. At the heart of the Stuttgart company's business model is the avoidance of 'bounding itself up' with capital intensive plant and infrastructure beyond its production of the iconic 911 – hence Boxster & Caymen built by Valmet in Sweden (with overspill at Stuttgart) and Cayenne built in VW's Bratislava facility (NB previous 924/8 build at Audi's Neckersulm plant).
Importantly, the VW joint venture partnership remains the key for Porsche to access non-traditional, mainstream segments; as the successful Cayenne project has demonstrated, and the Panamera project seeks to replicate. Thus Porsche understandably wishes to leverage VW capability but done so at arms length to reduce CapEx, management responsibility and importantly remain remote from the political expectations and incumbencies that larger car production entails in Germany. Why change a winning formula is the ethos in Stuttgart, and to maintain the stability of that formula meant increasing its power in the relationship; and by doing so defending VW itself from aggressive external attack.
VW Group also well recognises the potential advantages of greater integration, and understandably wishes to control the 'special relationship'. Although investment-auto-motives is not privvy to exact transfer-pricing details between the 2 parties, we suspect that they are heavily in favour of Porsche at present – especially vis a vis Valmet - and that will surely be a rub for Piech and the senior management team who are now under pressure to increase build-cost vs ex-factory margins on all cars produced – its own and contracted. But more importantly Porsche plays a different potential role.
The accompanying graphic illustrates VW Group's brand stable, depicted as a triangle to highlight the general volume and pricing relationship. It appears that as VW built its portfolio, it intentionally maintained a 'white space' or 'vacuum' for Porsche between its Audi and Lamborghini & Bentley divisions. It serves as a crucial 'Missing Link' to a completed brand portfolio, which if/when filled by Porsche would provide substantial Group leverage for volume/capacity, R&D strategies (inc Group trickle-down), robust platform strategy formulation, procurement / production / logistics economies of scale and of course consolidation of general administration and associated reduced overhead costs. Such a marriage would provide substantial fixed and variable cost advantages.
But critically of course for VW Group it would allow it to once again 're-run' its highly effective 'adjusted-common-platform' modus operandi that reduces costs and promotes margin at model, division and group levels. It could underpin a massive growth ambition for Porsche, providing for a 'Baby Cayenne' derived from Audi Q5 (already in the product pipeline) and importantly Audi-based front-engined sedans, coupes and coupe-cabriolets that would allow Porsche to compete on-par (relative to fundamental product technical architecture) against BMW, Mercedes, Maserati, Jaguar and Lexus. Panamera is viewed as a landmark product; only the start of something potentially massive for Porsche.
Both parties recognise that Porsche, through VW capabilities, could follow in the 'growth model' footsteps of BMW Cars, but able to do so without the operating baggage of a traditional 'self-assembly' car company. And that is the value of Porsche.
Indeed investment-auto-motives conjects that the Porsche operating model itself is an ambition of Piech, and could in time be replicated by the rest of the Group as VW itself seeks to outsource production to JV (VW-controlled) Tier 0.5 companies.
Thus, on the day that Martin Winterkorn gave his Q109 update to investors, the struggle by VW to regain self-determination begins. Because it knows that although Porsche Automobile Holdings SE would be unlikely to blatantly draw upon VW liquidity (if able to obtain 75% hold) to prop-up its own Balance Sheet use, it could create a battle over 'at hand' and 'provisioned' cash as it seeks to re-direct VW cash toward a bias of its own shared-platform projects, their engineering provider/integrator (via Porsche Engineering) and so could portionally re-direct liquidity.
Both Wiedeking & Piech recognise the importance of VW's current assets and the pivotal role they will play in paving the way to a successful future.
2008 witnessed the revelation that Wiedeking had been (allegedly) secretly buying-up options trades through 3rd parties on the derivatives markets, allowing a Q109 stake in VW of 50.8%. At a reported cost/debt of Euro 9bn, some commentators think that the stake-holding was build-up at a heavy price, especially so given a debt-servicing level of Euro 500m per annum.
Of course, three and half years ago when the Porsche CEO set out on the quest for VW, capital markets were strong and lenders were convinced of the massive commercial potential of a more formalised commercial integration. Although the current financial terrain and its associated sentiment has shifted massively, and thereby raised the loan-criterion bar visibly, there are few M&A deals in stable, matured industries that hold the kind of RoI potential that a melded Porsche-VW or indeed VW-Porsche offers – especially so in the Auto-Sector and the credentials of the 2 participants.
And that is why, at this prescient moment, that Piech has decided to subtly employ the press as communicators of his renowned strategic acumen. VW will have 'run the numbers' on Porsche Holdings and recognised that changed funding conditions could be a possible cause of fragility allied to its apparent reliance on its VW share dividends. Seeing the 'opening', he seems to have attempted to simultaneously divert analysts' attention away from VW's near-term contraction and toward the better commercial prospect of the medium-long term.
The crucial truth is that the combined forces of VW & Porsche make for a very attractive commercial proposition.
With its recent 'position of power' Porsche has been able to deploy VW platforms and production-lines to its advantage through the probable use of highly advantageous 'transfer-pricing' terms for Cayenne and Panamera. At the heart of the Stuttgart company's business model is the avoidance of 'bounding itself up' with capital intensive plant and infrastructure beyond its production of the iconic 911 – hence Boxster & Caymen built by Valmet in Sweden (with overspill at Stuttgart) and Cayenne built in VW's Bratislava facility (NB previous 924/8 build at Audi's Neckersulm plant).
Importantly, the VW joint venture partnership remains the key for Porsche to access non-traditional, mainstream segments; as the successful Cayenne project has demonstrated, and the Panamera project seeks to replicate. Thus Porsche understandably wishes to leverage VW capability but done so at arms length to reduce CapEx, management responsibility and importantly remain remote from the political expectations and incumbencies that larger car production entails in Germany. Why change a winning formula is the ethos in Stuttgart, and to maintain the stability of that formula meant increasing its power in the relationship; and by doing so defending VW itself from aggressive external attack.
VW Group also well recognises the potential advantages of greater integration, and understandably wishes to control the 'special relationship'. Although investment-auto-motives is not privvy to exact transfer-pricing details between the 2 parties, we suspect that they are heavily in favour of Porsche at present – especially vis a vis Valmet - and that will surely be a rub for Piech and the senior management team who are now under pressure to increase build-cost vs ex-factory margins on all cars produced – its own and contracted. But more importantly Porsche plays a different potential role.
The accompanying graphic illustrates VW Group's brand stable, depicted as a triangle to highlight the general volume and pricing relationship. It appears that as VW built its portfolio, it intentionally maintained a 'white space' or 'vacuum' for Porsche between its Audi and Lamborghini & Bentley divisions. It serves as a crucial 'Missing Link' to a completed brand portfolio, which if/when filled by Porsche would provide substantial Group leverage for volume/capacity, R&D strategies (inc Group trickle-down), robust platform strategy formulation, procurement / production / logistics economies of scale and of course consolidation of general administration and associated reduced overhead costs. Such a marriage would provide substantial fixed and variable cost advantages.
But critically of course for VW Group it would allow it to once again 're-run' its highly effective 'adjusted-common-platform' modus operandi that reduces costs and promotes margin at model, division and group levels. It could underpin a massive growth ambition for Porsche, providing for a 'Baby Cayenne' derived from Audi Q5 (already in the product pipeline) and importantly Audi-based front-engined sedans, coupes and coupe-cabriolets that would allow Porsche to compete on-par (relative to fundamental product technical architecture) against BMW, Mercedes, Maserati, Jaguar and Lexus. Panamera is viewed as a landmark product; only the start of something potentially massive for Porsche.
Both parties recognise that Porsche, through VW capabilities, could follow in the 'growth model' footsteps of BMW Cars, but able to do so without the operating baggage of a traditional 'self-assembly' car company. And that is the value of Porsche.
Indeed investment-auto-motives conjects that the Porsche operating model itself is an ambition of Piech, and could in time be replicated by the rest of the Group as VW itself seeks to outsource production to JV (VW-controlled) Tier 0.5 companies.
Thus, on the day that Martin Winterkorn gave his Q109 update to investors, the struggle by VW to regain self-determination begins. Because it knows that although Porsche Automobile Holdings SE would be unlikely to blatantly draw upon VW liquidity (if able to obtain 75% hold) to prop-up its own Balance Sheet use, it could create a battle over 'at hand' and 'provisioned' cash as it seeks to re-direct VW cash toward a bias of its own shared-platform projects, their engineering provider/integrator (via Porsche Engineering) and so could portionally re-direct liquidity.
Both Wiedeking & Piech recognise the importance of VW's current assets and the pivotal role they will play in paving the way to a successful future.
Thursday, 16 April 2009
Macro-Level Trends - UK Autos PLC - Subsidising Britain's "Green & Pleasant Land" to Good Effect
Many will remember the formation of 'great expectations' prior to last Christmas (Q408), as the British government endeavoured to curry-favour with the domestic auto-industry, stating that it would provide an assistance package to alleviate the commercial pressures created by these unprecedented times. That package totalled £2.5bn, of which £2.3bn was a loan format, much of that from the EIB, with the remaining £200m allocated for subsidised investment (of which £35m was for training).
Although exacting detail of the full £2.5bn fiscal allotment still remains opaque, Lord Mandelson & Geoff Hoon (respectively representing Business & Transport departments) announced that £250m will be directed at the new car sales of PHEVs and EVs. This money is designed as a 'consumer-pull incentive', with purchase subsidies ranging from £2,000 to £5,000.
First impressions substantiate investment-auto-motive's previous Q107 assumption that public monies would be used to retain the goodwill of the now well-established Japanese 'transplant' companies. Toyota, Honda and Nissan obviously operate large manufacturing concerns here in the UK and are of course leaders (with Mitsubishi) in hybrid and EV designed cars. The government recognises that retaining that goodwill and industrial presence will in turn create a technically advanced, eco-orientated, supply-base.
This national productivity asset when allied to continued flexible labour policies and equally flexible sterling FX policy (as we see today with the weak £GB), historically low interest rates and so in due course cost of capital, all work together to create a solid foundation from which to attain new UK standards regards:
1. 'Greener' high-volume mainstream vehicle manufacturing base.
2. 'Greener' modules, components & parts supply sector
3. Viable access to eco-technology for the numerous specialist vehicle manufacturers
4. Strengthened Domestic economies at 'intra-sector' & 'inter-sector' local and national levels.
5. A strengthened Foreign Export base to assist National Debt and PSBR levels.
6. 'Snowball' attraction of further FDI from Eastern 'liquid' commercial enterprises (eg BYD Auto), PE and SWFs
Thus British politicians understand that the progress made by the Japanese over the last 15 years or so in the field of hybrid and electric vehicles plays a major part in the long-term fortune of the UK auto-sector and the national economy itself – even if the short-term news of lay-offs etc has been temporarily painful.
Toyota Manufacturing UK at Burnaston assembles Auris & Avensis whilst its Deeside plant produces engines. The new larger hybrid Prius (model #ZVW30) [inc Plug-In variant] will have been designed in conjunction with Avensis & Auris, sharing base platform and high parts content, so logically will have been productionised for Burnaston. New Avensis also uses a new generation Deeside built hybrid 'synergy-drive' engine partly funded by a £100m grant in 2007. So it seems the previous question UK produced Toyota hybrids looks to have been crystallised. Both Gordon Brown & Geoff Hoon have been previous unveiling VIPs for TMUK, and both appreciate the global commercial power and technical leadership of the company [Toyota alone claims to have invested £2.56bn to date and employs 13,000 people].
Honda UK at Swindon assembles Civic, CR-V and is rushing in production of the Jazz small car to match market sentiment. But its big global news is obviously the release of Insight2 – a new hybrid designed as a smaller competitor to Prius3. And like its homeland peer, that car will have been created as part of a holistic platform strategy, in this case derived from Civic. So Swindon should be capable of producing Insight2 from the same flexi-production line on either 'batch' or 'to order' basis. Logically, production planners would have used the 2 month non-production period of February & March to switch CR-V production-line to the very different Jazz orientation, and possibly set-out the Civic line to include the extra complexity of Insight2 as and when it should be given the UK go-ahead.
Nissan Manufacturing UK (NMUK) at Sunderland produces Micra (and variants) and Qashqui (and variant), operating in conjunction with a regional R&D Technology Centre & Administrative Hub located at Cranfield; with claims that it produces 20% of the UK's passenger car export volumes. Having suffered in the early part of the decade Nissan leant heavily on Renault as it sought to re-align its model range across predominantly small cars, 4x4s & cross-overs in Europe, with latterly Carlos Ghosn's proclamation that EV would be a major pillar of Nissan's future strategy, even if he does not discount other hardware and energy solutions for CO2 reduction. That EV future created with Renault and R-N business partners ranging from Project Better Place & the Israeli government to US State & Federal agencies (eg Pheonix, AZ) to China's Ministry of Industry & IT to create the critical e-charging infrastructure. [11 world-wide agreements in place as of Q208]. And like its peers with Prius-Avensis & Insight-Civic, its the ability to create platforms with multiple powertrain options that is key. Hence, previously Nissan showcased the Cube EV, itself a variant from the Micra/March platform – with claims that a full EV line-up will be available by 2012 ranging from the Cube to compacts to sedans to MPVs to sportscars. [Highly debatable as a volume offering in our opinion given the stretch on resources and endemic technical limitations; more a case of low volume 'crafted' EV variants for positive publicity within that timeframe. However creating such segment specific Evs even at low volume will provide invaluable engineering and business plan learning). Thus the Micra production line in Sunderland – or an offshoot of it - appears feasibly able to assemble the Cube EV for the UK and Euro markets, but Nissan must lobby for increased e-charge infrastructure beyond the £20m currently set aside.
However, there is general sentiment amongst industry analysts is that electric and plug-in hybrid cars are unlikely to be adopted widely in the short-medium term without generous incentives to underwrite the cars’ typically higher purchase price.
As we saw with Prius1 & Prius2, much of the cars price suppression for market acceptability came from Toyota's swallowing of costs as a loss-leader tactic. Of course the ramped volumes of Prius gave economies of scale that reduced Toyota's Ni-MH battery and motor costs, and to a certain lesser extent the same can be said of Honda after its less successful Civic hybrid effort. And Nissan-Panasonic will have created detailed business cases for each of their EV model-lines, though-based on only outline volume forecasts. These e-drive R&D and production costs will still be substantive compared to standard ICE – and even ICE developments - given that on national, regional and global TIV terms the number of 'early-adopter' consumers who absorbed the brunt of the apportioned development costs has been comparatively small.
Geoff Hoon said that incentives announced on Thursday would help to make electric cars a “real option” for motorists. But of course much depends on varying consumer types vehicle usage needs, their attitude & 'psychographic' and of course the allotment of the £2000-5000 subsidies. With specific reference to EV options they need to be awarded in a manner that pro-actively rewards newer and better vehicles, and not simply propping-up old yesteryear models. To do so would simply create an evolutional vacuum in which the extended life of the “Noddy Car” type of EV would tarnish the genre and public attraction; which would do more harm than good.
Britain's policy-makers are now catching-up with EU contemporaries that have been 'incentivising' low-carbon cars - ie Denmark, Norway, France & Portugal - which have tax-based policies. The UK looks unready to go that far yet, given the reliance on motoring tax and the massive fiscal deficits that need financing. So Gordon Brown's announcement that he wanted all cars on Britain’s roads to be electric or hybrid by 2020 looks unrealistically-optimistic; especially so given the increasing likelihood of a Conservative government winning the next election and David Cameron's pledge to be fiscally responsible which probably means increasing taxation across all fronts – consumer durables included.
For the UK at least, that means the UK auto-industry, led by its Japanese 'Sensi' should create 'must have' rational yet highly attractive products. Vehicles which engender a sector-snowball effect in their wake for the development of a new 'eco-tech' industrial terrain for Britain's “Green and Pleasant Land”.
Although exacting detail of the full £2.5bn fiscal allotment still remains opaque, Lord Mandelson & Geoff Hoon (respectively representing Business & Transport departments) announced that £250m will be directed at the new car sales of PHEVs and EVs. This money is designed as a 'consumer-pull incentive', with purchase subsidies ranging from £2,000 to £5,000.
First impressions substantiate investment-auto-motive's previous Q107 assumption that public monies would be used to retain the goodwill of the now well-established Japanese 'transplant' companies. Toyota, Honda and Nissan obviously operate large manufacturing concerns here in the UK and are of course leaders (with Mitsubishi) in hybrid and EV designed cars. The government recognises that retaining that goodwill and industrial presence will in turn create a technically advanced, eco-orientated, supply-base.
This national productivity asset when allied to continued flexible labour policies and equally flexible sterling FX policy (as we see today with the weak £GB), historically low interest rates and so in due course cost of capital, all work together to create a solid foundation from which to attain new UK standards regards:
1. 'Greener' high-volume mainstream vehicle manufacturing base.
2. 'Greener' modules, components & parts supply sector
3. Viable access to eco-technology for the numerous specialist vehicle manufacturers
4. Strengthened Domestic economies at 'intra-sector' & 'inter-sector' local and national levels.
5. A strengthened Foreign Export base to assist National Debt and PSBR levels.
6. 'Snowball' attraction of further FDI from Eastern 'liquid' commercial enterprises (eg BYD Auto), PE and SWFs
Thus British politicians understand that the progress made by the Japanese over the last 15 years or so in the field of hybrid and electric vehicles plays a major part in the long-term fortune of the UK auto-sector and the national economy itself – even if the short-term news of lay-offs etc has been temporarily painful.
Toyota Manufacturing UK at Burnaston assembles Auris & Avensis whilst its Deeside plant produces engines. The new larger hybrid Prius (model #ZVW30) [inc Plug-In variant] will have been designed in conjunction with Avensis & Auris, sharing base platform and high parts content, so logically will have been productionised for Burnaston. New Avensis also uses a new generation Deeside built hybrid 'synergy-drive' engine partly funded by a £100m grant in 2007. So it seems the previous question UK produced Toyota hybrids looks to have been crystallised. Both Gordon Brown & Geoff Hoon have been previous unveiling VIPs for TMUK, and both appreciate the global commercial power and technical leadership of the company [Toyota alone claims to have invested £2.56bn to date and employs 13,000 people].
Honda UK at Swindon assembles Civic, CR-V and is rushing in production of the Jazz small car to match market sentiment. But its big global news is obviously the release of Insight2 – a new hybrid designed as a smaller competitor to Prius3. And like its homeland peer, that car will have been created as part of a holistic platform strategy, in this case derived from Civic. So Swindon should be capable of producing Insight2 from the same flexi-production line on either 'batch' or 'to order' basis. Logically, production planners would have used the 2 month non-production period of February & March to switch CR-V production-line to the very different Jazz orientation, and possibly set-out the Civic line to include the extra complexity of Insight2 as and when it should be given the UK go-ahead.
Nissan Manufacturing UK (NMUK) at Sunderland produces Micra (and variants) and Qashqui (and variant), operating in conjunction with a regional R&D Technology Centre & Administrative Hub located at Cranfield; with claims that it produces 20% of the UK's passenger car export volumes. Having suffered in the early part of the decade Nissan leant heavily on Renault as it sought to re-align its model range across predominantly small cars, 4x4s & cross-overs in Europe, with latterly Carlos Ghosn's proclamation that EV would be a major pillar of Nissan's future strategy, even if he does not discount other hardware and energy solutions for CO2 reduction. That EV future created with Renault and R-N business partners ranging from Project Better Place & the Israeli government to US State & Federal agencies (eg Pheonix, AZ) to China's Ministry of Industry & IT to create the critical e-charging infrastructure. [11 world-wide agreements in place as of Q208]. And like its peers with Prius-Avensis & Insight-Civic, its the ability to create platforms with multiple powertrain options that is key. Hence, previously Nissan showcased the Cube EV, itself a variant from the Micra/March platform – with claims that a full EV line-up will be available by 2012 ranging from the Cube to compacts to sedans to MPVs to sportscars. [Highly debatable as a volume offering in our opinion given the stretch on resources and endemic technical limitations; more a case of low volume 'crafted' EV variants for positive publicity within that timeframe. However creating such segment specific Evs even at low volume will provide invaluable engineering and business plan learning). Thus the Micra production line in Sunderland – or an offshoot of it - appears feasibly able to assemble the Cube EV for the UK and Euro markets, but Nissan must lobby for increased e-charge infrastructure beyond the £20m currently set aside.
However, there is general sentiment amongst industry analysts is that electric and plug-in hybrid cars are unlikely to be adopted widely in the short-medium term without generous incentives to underwrite the cars’ typically higher purchase price.
As we saw with Prius1 & Prius2, much of the cars price suppression for market acceptability came from Toyota's swallowing of costs as a loss-leader tactic. Of course the ramped volumes of Prius gave economies of scale that reduced Toyota's Ni-MH battery and motor costs, and to a certain lesser extent the same can be said of Honda after its less successful Civic hybrid effort. And Nissan-Panasonic will have created detailed business cases for each of their EV model-lines, though-based on only outline volume forecasts. These e-drive R&D and production costs will still be substantive compared to standard ICE – and even ICE developments - given that on national, regional and global TIV terms the number of 'early-adopter' consumers who absorbed the brunt of the apportioned development costs has been comparatively small.
Geoff Hoon said that incentives announced on Thursday would help to make electric cars a “real option” for motorists. But of course much depends on varying consumer types vehicle usage needs, their attitude & 'psychographic' and of course the allotment of the £2000-5000 subsidies. With specific reference to EV options they need to be awarded in a manner that pro-actively rewards newer and better vehicles, and not simply propping-up old yesteryear models. To do so would simply create an evolutional vacuum in which the extended life of the “Noddy Car” type of EV would tarnish the genre and public attraction; which would do more harm than good.
Britain's policy-makers are now catching-up with EU contemporaries that have been 'incentivising' low-carbon cars - ie Denmark, Norway, France & Portugal - which have tax-based policies. The UK looks unready to go that far yet, given the reliance on motoring tax and the massive fiscal deficits that need financing. So Gordon Brown's announcement that he wanted all cars on Britain’s roads to be electric or hybrid by 2020 looks unrealistically-optimistic; especially so given the increasing likelihood of a Conservative government winning the next election and David Cameron's pledge to be fiscally responsible which probably means increasing taxation across all fronts – consumer durables included.
For the UK at least, that means the UK auto-industry, led by its Japanese 'Sensi' should create 'must have' rational yet highly attractive products. Vehicles which engender a sector-snowball effect in their wake for the development of a new 'eco-tech' industrial terrain for Britain's “Green and Pleasant Land”.
Sunday, 12 April 2009
Macro-Level Trends - JP Morgan-Chase & Chrysler - When "Social Activism" Hurts the Economy.
As the issues at the heart of the US Autos malais snowball and the tri-partite stake-holders, consisting of the VMs, the UAW and Investors, seek to understandably defend their positions, the danger of illogical cognitive entrenchment within certain quarters grows.
This appears to be the recent case where US social activists have called for a boycott of JP Morgan Chase. The protest centres around the bank’s opposal to the government proposal/demand that it should cancel a large portion of Chrysler's debt to theoretically keep the embattled Detroit carmaker afloat.
The activism of the Firedoglake blogsite and Progress Michigan, an advocacy group, argue that JPMorgan - as a recipient of billions of dollars in taxpayers’ money - has a duty to help save jobs at Chrysler.
What is not understood by these people is that Wall St, like it or not, is the economic heart and engine of the country and portions of the world - even today in its depleted state. Unlike Chrysler's case - where it could be argued that in a market of over-capacity it is not a 'core' or financially viable entity and deserves to be treated as Lehman Brothers was - JP Morgan-Chase acts as a major artery to the financial heart.
Thus objectively the needs and rationality of public assistance funding is very different indeed. JP Morgan-Chase's case maintains systemic harmony, whilst Chrysler's public assistance (esp without FIAT intervention) effectively keeps the unviable entity on life-support.
The activist groups have urged JPMorgan clients to transfer their accounts to a local bank or credit union, and to cut up their Chase credit cards. One member of a Facebook group set up by the activists commented on Thursday that "if [JP Morgan] wants our money, they’d better do what they can to save our jobs".
Such overt 'socialism' may at first impression appear worthy by its sentiment, but given the true complexities of the US economy, is ultimately ridiculous, short-sighted and myopic. JP Morgan-Chase's primary duty of care is not to Chrysler's UAW members, but to the dual 'wards' of its investors and the broad US populous & beyond, developing its own strength as a financial intermediary. A role as critical entity between (state-guaranteed) public depositors, business depositors, the financial markets and on the counter-side those businesses and people that have respective growth and consumption plans - thus the prime actors of the economy.
Of course negotiations between the bank and the government are on-going, but an overly steep "haircut" regards the Chrysler debt holdings would undermine the banking company, its banking peers and their shareholders. Banks presently need to show as strong as possible Balance Sheets and P&Ls if they are to lead other industrial sectors and the rest of the economy out of this worrisome period for all.
That is not to say that it should not abstain from such a 'haircut", but simply that it should not leave itself exposed to catch a consequential head-cold. Thus a ratio-rate and other options must be agreed, but debt-holders across the US would be done a dis-service if that "hair-cut" was too severe.
Such an action would severely dismay those who are now buying debt in the raft of troubled US comapanies and so keeping them liquid and trading. This critical body of domestic and foreign institutions, PE and individuals today see corporate notes and bonds as not the generally 'risk-free' instruments they used to be (given today's poor ratings) but as last ports of call before retrenching from the markets altogether; which would result in a further collapse of the economic framework - one that would be irreversable.
The government previously proposed that JP Morgan-Chase and its peers Citi (@ $1bn), Goldman Sachs and Morgan Stanley (@2.5bn) accept approximately 29c on the $, which given their top-tier lien status and secured assets was obviously unnacceptable - and seen as simply a 'low-ball' negotiating ploy by Washington. Since then negotiations have upped the the dollar ratio rate and suggested debt for equity swaps - but realistically the short-medium term equity value of Chrysler 'as is' is debatably worthless (ie Marchionee's 'no cash' proposal offer).
So the banks may be happier to see a bancruptcy outcome and seizure of tangible and goodwill assets; knowing that such assets would be greatly prized by South Korean, Chinese and Indian auto-firms from Tier2 suppliers through to ambitious VMs, acquisitions undertaken individually or as a broader consortium. So too the highly-liquid world of eastern 'transactional agents' such as eastern SWFs and PE which are presently cash-rich and hunting for underpriced asset opportunities with obvious exit strategies.
Given the UAW's realistic 'minimal-clout' position within the Chrysler restructuring discussions, as the lower-tier beneficiaries it may find itself in the ironic positioning of seeking to quell those 'social activists' who may have greater success within the latter GM negotiations given GM's size and comparitive historical social responsibility.
Ultimately, no-one would want to disbar the right for free speech, it is after all a central tenant of US democracy. But such complex matters demand more understanding and attention than simplistic banner-waving, air-wave chatter and cyber-chatter. All parties face a hard task of turning America around, but that can only be done on the basis of a strong hub. And that 'financial fulcrum' is the banking sector. The longer it is malnourished, the longer the US's economic and social pain.
This appears to be the recent case where US social activists have called for a boycott of JP Morgan Chase. The protest centres around the bank’s opposal to the government proposal/demand that it should cancel a large portion of Chrysler's debt to theoretically keep the embattled Detroit carmaker afloat.
The activism of the Firedoglake blogsite and Progress Michigan, an advocacy group, argue that JPMorgan - as a recipient of billions of dollars in taxpayers’ money - has a duty to help save jobs at Chrysler.
What is not understood by these people is that Wall St, like it or not, is the economic heart and engine of the country and portions of the world - even today in its depleted state. Unlike Chrysler's case - where it could be argued that in a market of over-capacity it is not a 'core' or financially viable entity and deserves to be treated as Lehman Brothers was - JP Morgan-Chase acts as a major artery to the financial heart.
Thus objectively the needs and rationality of public assistance funding is very different indeed. JP Morgan-Chase's case maintains systemic harmony, whilst Chrysler's public assistance (esp without FIAT intervention) effectively keeps the unviable entity on life-support.
The activist groups have urged JPMorgan clients to transfer their accounts to a local bank or credit union, and to cut up their Chase credit cards. One member of a Facebook group set up by the activists commented on Thursday that "if [JP Morgan] wants our money, they’d better do what they can to save our jobs".
Such overt 'socialism' may at first impression appear worthy by its sentiment, but given the true complexities of the US economy, is ultimately ridiculous, short-sighted and myopic. JP Morgan-Chase's primary duty of care is not to Chrysler's UAW members, but to the dual 'wards' of its investors and the broad US populous & beyond, developing its own strength as a financial intermediary. A role as critical entity between (state-guaranteed) public depositors, business depositors, the financial markets and on the counter-side those businesses and people that have respective growth and consumption plans - thus the prime actors of the economy.
Of course negotiations between the bank and the government are on-going, but an overly steep "haircut" regards the Chrysler debt holdings would undermine the banking company, its banking peers and their shareholders. Banks presently need to show as strong as possible Balance Sheets and P&Ls if they are to lead other industrial sectors and the rest of the economy out of this worrisome period for all.
That is not to say that it should not abstain from such a 'haircut", but simply that it should not leave itself exposed to catch a consequential head-cold. Thus a ratio-rate and other options must be agreed, but debt-holders across the US would be done a dis-service if that "hair-cut" was too severe.
Such an action would severely dismay those who are now buying debt in the raft of troubled US comapanies and so keeping them liquid and trading. This critical body of domestic and foreign institutions, PE and individuals today see corporate notes and bonds as not the generally 'risk-free' instruments they used to be (given today's poor ratings) but as last ports of call before retrenching from the markets altogether; which would result in a further collapse of the economic framework - one that would be irreversable.
The government previously proposed that JP Morgan-Chase and its peers Citi (@ $1bn), Goldman Sachs and Morgan Stanley (@2.5bn) accept approximately 29c on the $, which given their top-tier lien status and secured assets was obviously unnacceptable - and seen as simply a 'low-ball' negotiating ploy by Washington. Since then negotiations have upped the the dollar ratio rate and suggested debt for equity swaps - but realistically the short-medium term equity value of Chrysler 'as is' is debatably worthless (ie Marchionee's 'no cash' proposal offer).
So the banks may be happier to see a bancruptcy outcome and seizure of tangible and goodwill assets; knowing that such assets would be greatly prized by South Korean, Chinese and Indian auto-firms from Tier2 suppliers through to ambitious VMs, acquisitions undertaken individually or as a broader consortium. So too the highly-liquid world of eastern 'transactional agents' such as eastern SWFs and PE which are presently cash-rich and hunting for underpriced asset opportunities with obvious exit strategies.
Given the UAW's realistic 'minimal-clout' position within the Chrysler restructuring discussions, as the lower-tier beneficiaries it may find itself in the ironic positioning of seeking to quell those 'social activists' who may have greater success within the latter GM negotiations given GM's size and comparitive historical social responsibility.
Ultimately, no-one would want to disbar the right for free speech, it is after all a central tenant of US democracy. But such complex matters demand more understanding and attention than simplistic banner-waving, air-wave chatter and cyber-chatter. All parties face a hard task of turning America around, but that can only be done on the basis of a strong hub. And that 'financial fulcrum' is the banking sector. The longer it is malnourished, the longer the US's economic and social pain.
Wednesday, 8 April 2009
Industry Practice – VW China – When Case Studies Prove All Too Academic
Business Schools have for some time now firmly been in the business of business. As commercial enterprises in their own idiom, they by rights, should be at the cutting edge of business learning; delving deeper and uncovering the truisms of commercial best practice across all spheres. From the high-brow philosophical such as innate structure of capitalism (as we see today) to the more everyday, directly applicable, such as the sector or company exemplar case-study; intended to illuminate understanding through best practice or abysmal failure.
The 2 obvious cases written into the annuls of the auto-industry being Toyoda/Toyota's Jidoka/Kaizen ethos encapsulated by the TPS system (that has supposedly become sector ubiquitous - though has it really?) versus Ford's painful business losses with Edsel.
Given its scale and capital intensiveness, the auto-industry has long been academia's hobby-horse, often used as a high-profile, publicly digestible, valid illustration for the theories behind the advancement of general management theory. Though to be candid, very little true, auto-industry specific, advancements have been made – possibly because many Masters and PhD researchers see it as a matured, yesteryear, smoke-stack industry which is endemically stuck in a paradigm. There are of course specialist research centres such as 'CAR' in Ann Arbor (led by David Cole) and Cardiff Business School's 'CAIR' (led by Paul Nieuwenhuis - since Garyl Rhys' retirement), but general dedication to progressing the automotive learning curve across other realms of academia seems largely absent – the auto-industry used as a case-study contextual backdrop for general theory rather than true conceptual advancement – a great shame given the spectrum of activity to be observed and critiqued.
The commercialisation of education – rightly most prevalent with business schools - was intended to generate market competition and so raise the bar of academic standards. The level of research publication has long been a primary measures of an educational establishment's prowess, its productive output which makes it a seemingly attractive proposition for new 'clients' (students) that in turn generate fees and growth. But in such an age where quantity over-rides quality, the very value and nature of post-graduate research is put in perilous danger as it gathers toward and rides populist or salable business concepts; the universities themselves caught between the tenants of true learning that aids industry and commerce versus the need to be seen to be current, news-worthy and so externally viewed as an attractive service offering.
This is perhaps especially so the case for the plethora of establishments that cannot boast the pedigree - and concomitant 'high-achiever centripetal attraction' - of the old-guard such as Harvard, MIT, 'Ox-bridge', LSE, INSEAD et al; but are forced by the very nature of the enterprise culture to grow. Especially so as supposed 'intellectual lights' across the developing regions of the world that are hungry for the western educational model.
Thus the inherent pressure leads Vice-Chancellors, Deans, Governors and commercially-orientated faculty to all to often create a research-base & structure erected by thematic popularism and corporate jargonism rather than perhaps the real enterprise issues of today, tomorrow, medium-term, long-term and far- future. Given the massive tide of investor, corporate, public and academic interest in BRIC+ Emerging Markets, and their influence on global economics, it is right that a large proportion of focus and effort is directed at the market, consumer and corporate behavior in EM regions. But, there is a world of difference between re-conveying age-old business learning concepts in a new EM setting and the reality of pushing the boundaries of truly progressive learning that has real-world application for general commercial and specific corporate-model advancement.
Sadly, this appears the case with a UK university research piece highlighted in a recent 'Emerging Markets' press pull-out item. [NB it is the press' remit to simply report what it considers useful academic intelligence, not to qualify the foundational basis of such].
In the desire to concoct an attractive and importantly salable research product, a research duo from an English & Scottish universities spend 5 years (as what must have been part of PhD) evaluating the fortunes of 30 renowned (Western) multi-national companies & brands within that most dynamic of BRIC+ economic whirlwinds - China. The duo use Volkswagen as their headline, illustrative test-case so as to try to prove their argument.
The argument set forward is that “rigidity” evident in 4 guises (corporate, strategic, operational & mindset) has been a prime contributor of “poor-performance” for the surveyed MNC's in the 2003-08 period. The central theme is that these corporations failed to stay aware of fast changing consumer and regulatory (environment) conditions, rendering existing beliefs and practices irrelevant.
They apparently simplistically state that in 2003 VW held 30% of the Chinese car market, yet in 2008 that figure fell to 17.3%, with an accordant slip in profitability to in 2008 “failing to reach break-even”, while sales & market-share by rivals (eg GM, Toyota, Honda) has increased.
VW it is claimed: “misjudged the market, assuming that China as an EM that previously accepted lower specification models would continue to favour cheaper VW cars that sold well in other international markets”. Thus, “the company failed to anticipate the dynamic patterns of local demand and under-estimated of the dazzling increase in investment by its global and local rivals”...”this rigidity to change casts shadows over the company's ambitious growth plans in China”
But just how plausible are these assertions, if Volkswagen Group China (VGC) is reviewed in the round and in situational context?
Yes of course VW has lost market-share as the veritable consumer revolution gained power over the 03-08 period. It was only to be expected, and well understood by VW, that its once overwhelmingly dominant (pseudo-monopolistic) position as the government's favoured JV partner would slowly fade as the potential promise of the economic & consumer revolution became reality thereby massively enlarging the TIV (total industry volume) for all players, old and new alike. The official automotive body CAAM states that between 2002-2007 production erupted from 1.09m units to 4.95m units; for that period representing an annual growth of 35%. However, post Q308 that growth has slowed to just below 20% as the Chinese economy continued to retract on the back of housing and stock-market contraction lag effects and the recent record 'pull-back' in exports.
But looking at those 'good years' and beforehand, VW grew its product portfolio from 1 car (the iconic 1984 Santana) to in 2009 15 models - 8 models from Shanghai-VW (covering VW & Skoda brands) and 7 from FAW-VW (covering VW & Audi brands). [NB VWC will claim 44 models but this figure bear relation to model variants, ie powertrain and trim variants – 26 of those produced in China). However, interestingly the original Santana in normal 'Classic' and face-lifted 'Vista' guise still a core product and a consistent top-2 sales ranked model for VGC.
Thus given its endemic history in the country and boasting that it responsible for 20% of all of China's automotive sector investment, VGC finds itself spanning the greatest consumer demand remit: from that robust, well loved Santana amongst taxi-drivers and value-seeking consumers to the offering of premium Audi cars giving European cache and in the case of LWB A6, limousine service that is part and parcel of a stratified society.
Thus the academics' central tenant that VWC has not kept apace with competition in terms of looks unfounded, and it must be stated that their prime-identifier of 'specification' as the competitive benchmark is overtly generalistic and somewhat naive given the very high market regard for price and reliability.
But of course the market itself is stratified across many types of buyer/user – functionality, life-stage, demographic and psychological orientation – creating a wide milieu.
To a large extent, it was the recently emergent, 'nouveau-riche' lower-middle class that many of those new domestic auto-producers – that the academics pitch against VW – sought out. Using older platform technologies from Japanese and Korean origins with low Cap-Ex and high labour content, they were able to create often simply face-lifted or copy-cat cars that had an appearance of modernity, with specificational 'bells & whistles', but little product integrity selling at low-end prices. To maintain long-term standing VW were correct in not chasing the ball of such a margin, profit & credibility de-basing game.
That 'gold-rush mentality' led to the expected consequence of eventual over-capacity taking effect from late 2007 onwards, the new squeeze of seeming ever-elastic, downward market-pricing chasing away the marginal cost economies of scale, and so diminishing the once highly attractive business model born from 'sparkly lower-end and even medium-priced' cars. Only those 'new domestics' that organically evolved their own strength, or well vetted 'bolt-on' acquisitions or were a sub-division of a financially conglomerate will continue to survive.
[But this period of domestic contraction and consolidation will have been closely observed by the investment community and trade-buyers with perhaps overt banker influence. Portfolio acquisitions throughout the value chain from suppliers to dealers will be eyed by PE and banking advisors, as will the opportunity for 'Value' and 'Growth' stock-picking as we've recently witnessed here in an 'Auto-Rebound' Europe on the back of national stimulus packages; which could pale in comparison besides China's allocation of its $5 trillion].
The academics also cite the market-share growth success of peer foreign firms such as GM, Toyota and Honda as evidence of VWC's malaise. But it must be stated that GM, whilst in situ for some years with the Buick brand consciously maintained a relatively low profile for some time instead of 'taking-on' VW earlier, waiting until the consumer boom to sell its Buick cars and latter-day utility orientated Chevrolets. Whilst the Japanese were relative late-comers to the market, specifically waiting for a point of market maturity to slowly satiate the consumer demand and maintain pricing.
Thus in actuality VWC has had to play a much more complex game compared to the niche ploys of the majority of domestic new comers and the entry-timing ploys of its MNC peers. As such, given the consistent rise in sales for VW, Skoda and Audi brands it has done so successfully. It has grown Chinese sales from 910,000 units in FY07 to 1,024,000 units in 2008; thereby up 12.5% YoY - according to Hans Dieter Potsche's recent presentation at the corporation's Citigroup London Roadshow on 16.03.09.[Of these 844,000 were VW, 119,000 were Audi, 59,300 were Skoda]
Looking forward the Chinese and Global market is heavily down YoY, so all manufacturers – domestic and foreign – will be adjusting capacity to re-align. But for VW the important introduction of the Lavida mid-sized saloon at end-08, and roll-out of eco sub-branded variants will add marketing fire-power. But perhaps of real consequence and advantage to VW is the 'de-frothing' of the car-market as the 'momentary joy-rider' consumers fall-away and it returns to its previous normative characteristics set by YoY core customers that seek trusted brands, value for money at purchase / through life / residual value and not necessarily cheapness and gimmicks. And importantly a trusted brand. This return of conservatism will mean flatter but more stable sales growth for which VW is well positioned.
This very basic analysis suggests that VWC has not lost its way, instead using recent times and the current period to re-strengthen its hold on the Chinese market via greater localised parts sourcing and assembly, improved product management (as with Lavida's development story as a China only car), the use of its 3 brands Skoda-VW-Audi to target core segment [and importantly re-highlight that the public] aswell as maintaining R&D & plant investment
Thus, from academia's perspective, a research focal-point that juxtaposes the audience interests of a Blue-Chip firm and EM market evolution is undoubtedly alluring. But our concern is that VW as a case-study seems to have been 'back-fitted' into a pre-determined hypothesis – to prove that its 'commercial gold' had lost its lustre. Even though brief, closer inspection undermines the evidence set forth.
From a big-picture perspective, there is very probably an argument that can be favourably presented that highlights that the 'structural shape' of large-scale heavy-industry enterprises born from statist-roots should be assessed; to ensure that the commercial creature naturally evolves 'in-tune' with emerging consumer market demands and is not inadvertently stifled and constricted by an endemically bureaucratic culture yields painfully slow transformation.
Thus as China as a country transforms from a production-led culture to a market-led culture, so the pros and cons of the Joint-Venture enterprise system which VWC, its 14 sub-holdings, and many other MNCs are founded upon should be rightly questioned. Does such an enterprise culture befit a 21st century China?
Of course there will always be the notion that such reports are used as political propaganda, as 'intellectual mechanisms of leverage' to engender structural change within the very heart of Chinese 'Command-Capitalism'. Whether orchestrated or not, there seems just cause for a continued liberalisation of China's industrial structure, because it in turn serves as the vehicle for the evolution and maturation of its domestic financial markets framework; an area which even with recent examples of 'exploring burned fingers' [ie Blackstone * US Banks]must be developed to create a fully fledged 'free-market' economy that is entwined with the global finance infrastructure.
However, whilst the efforts of such academics are undoubtedly meant to serve as platforms for discussion and progress, there simply must be greater constructs of argument if the hypothesis is not to be discredited by a sound antithesis. Instead in the best academic tradition the 2 must be conjoined to provide sound progressive synthesis.
The 2 obvious cases written into the annuls of the auto-industry being Toyoda/Toyota's Jidoka/Kaizen ethos encapsulated by the TPS system (that has supposedly become sector ubiquitous - though has it really?) versus Ford's painful business losses with Edsel.
Given its scale and capital intensiveness, the auto-industry has long been academia's hobby-horse, often used as a high-profile, publicly digestible, valid illustration for the theories behind the advancement of general management theory. Though to be candid, very little true, auto-industry specific, advancements have been made – possibly because many Masters and PhD researchers see it as a matured, yesteryear, smoke-stack industry which is endemically stuck in a paradigm. There are of course specialist research centres such as 'CAR' in Ann Arbor (led by David Cole) and Cardiff Business School's 'CAIR' (led by Paul Nieuwenhuis - since Garyl Rhys' retirement), but general dedication to progressing the automotive learning curve across other realms of academia seems largely absent – the auto-industry used as a case-study contextual backdrop for general theory rather than true conceptual advancement – a great shame given the spectrum of activity to be observed and critiqued.
The commercialisation of education – rightly most prevalent with business schools - was intended to generate market competition and so raise the bar of academic standards. The level of research publication has long been a primary measures of an educational establishment's prowess, its productive output which makes it a seemingly attractive proposition for new 'clients' (students) that in turn generate fees and growth. But in such an age where quantity over-rides quality, the very value and nature of post-graduate research is put in perilous danger as it gathers toward and rides populist or salable business concepts; the universities themselves caught between the tenants of true learning that aids industry and commerce versus the need to be seen to be current, news-worthy and so externally viewed as an attractive service offering.
This is perhaps especially so the case for the plethora of establishments that cannot boast the pedigree - and concomitant 'high-achiever centripetal attraction' - of the old-guard such as Harvard, MIT, 'Ox-bridge', LSE, INSEAD et al; but are forced by the very nature of the enterprise culture to grow. Especially so as supposed 'intellectual lights' across the developing regions of the world that are hungry for the western educational model.
Thus the inherent pressure leads Vice-Chancellors, Deans, Governors and commercially-orientated faculty to all to often create a research-base & structure erected by thematic popularism and corporate jargonism rather than perhaps the real enterprise issues of today, tomorrow, medium-term, long-term and far- future. Given the massive tide of investor, corporate, public and academic interest in BRIC+ Emerging Markets, and their influence on global economics, it is right that a large proportion of focus and effort is directed at the market, consumer and corporate behavior in EM regions. But, there is a world of difference between re-conveying age-old business learning concepts in a new EM setting and the reality of pushing the boundaries of truly progressive learning that has real-world application for general commercial and specific corporate-model advancement.
Sadly, this appears the case with a UK university research piece highlighted in a recent 'Emerging Markets' press pull-out item. [NB it is the press' remit to simply report what it considers useful academic intelligence, not to qualify the foundational basis of such].
In the desire to concoct an attractive and importantly salable research product, a research duo from an English & Scottish universities spend 5 years (as what must have been part of PhD) evaluating the fortunes of 30 renowned (Western) multi-national companies & brands within that most dynamic of BRIC+ economic whirlwinds - China. The duo use Volkswagen as their headline, illustrative test-case so as to try to prove their argument.
The argument set forward is that “rigidity” evident in 4 guises (corporate, strategic, operational & mindset) has been a prime contributor of “poor-performance” for the surveyed MNC's in the 2003-08 period. The central theme is that these corporations failed to stay aware of fast changing consumer and regulatory (environment) conditions, rendering existing beliefs and practices irrelevant.
They apparently simplistically state that in 2003 VW held 30% of the Chinese car market, yet in 2008 that figure fell to 17.3%, with an accordant slip in profitability to in 2008 “failing to reach break-even”, while sales & market-share by rivals (eg GM, Toyota, Honda) has increased.
VW it is claimed: “misjudged the market, assuming that China as an EM that previously accepted lower specification models would continue to favour cheaper VW cars that sold well in other international markets”. Thus, “the company failed to anticipate the dynamic patterns of local demand and under-estimated of the dazzling increase in investment by its global and local rivals”...”this rigidity to change casts shadows over the company's ambitious growth plans in China”
But just how plausible are these assertions, if Volkswagen Group China (VGC) is reviewed in the round and in situational context?
Yes of course VW has lost market-share as the veritable consumer revolution gained power over the 03-08 period. It was only to be expected, and well understood by VW, that its once overwhelmingly dominant (pseudo-monopolistic) position as the government's favoured JV partner would slowly fade as the potential promise of the economic & consumer revolution became reality thereby massively enlarging the TIV (total industry volume) for all players, old and new alike. The official automotive body CAAM states that between 2002-2007 production erupted from 1.09m units to 4.95m units; for that period representing an annual growth of 35%. However, post Q308 that growth has slowed to just below 20% as the Chinese economy continued to retract on the back of housing and stock-market contraction lag effects and the recent record 'pull-back' in exports.
But looking at those 'good years' and beforehand, VW grew its product portfolio from 1 car (the iconic 1984 Santana) to in 2009 15 models - 8 models from Shanghai-VW (covering VW & Skoda brands) and 7 from FAW-VW (covering VW & Audi brands). [NB VWC will claim 44 models but this figure bear relation to model variants, ie powertrain and trim variants – 26 of those produced in China). However, interestingly the original Santana in normal 'Classic' and face-lifted 'Vista' guise still a core product and a consistent top-2 sales ranked model for VGC.
Thus given its endemic history in the country and boasting that it responsible for 20% of all of China's automotive sector investment, VGC finds itself spanning the greatest consumer demand remit: from that robust, well loved Santana amongst taxi-drivers and value-seeking consumers to the offering of premium Audi cars giving European cache and in the case of LWB A6, limousine service that is part and parcel of a stratified society.
Thus the academics' central tenant that VWC has not kept apace with competition in terms of looks unfounded, and it must be stated that their prime-identifier of 'specification' as the competitive benchmark is overtly generalistic and somewhat naive given the very high market regard for price and reliability.
But of course the market itself is stratified across many types of buyer/user – functionality, life-stage, demographic and psychological orientation – creating a wide milieu.
To a large extent, it was the recently emergent, 'nouveau-riche' lower-middle class that many of those new domestic auto-producers – that the academics pitch against VW – sought out. Using older platform technologies from Japanese and Korean origins with low Cap-Ex and high labour content, they were able to create often simply face-lifted or copy-cat cars that had an appearance of modernity, with specificational 'bells & whistles', but little product integrity selling at low-end prices. To maintain long-term standing VW were correct in not chasing the ball of such a margin, profit & credibility de-basing game.
That 'gold-rush mentality' led to the expected consequence of eventual over-capacity taking effect from late 2007 onwards, the new squeeze of seeming ever-elastic, downward market-pricing chasing away the marginal cost economies of scale, and so diminishing the once highly attractive business model born from 'sparkly lower-end and even medium-priced' cars. Only those 'new domestics' that organically evolved their own strength, or well vetted 'bolt-on' acquisitions or were a sub-division of a financially conglomerate will continue to survive.
[But this period of domestic contraction and consolidation will have been closely observed by the investment community and trade-buyers with perhaps overt banker influence. Portfolio acquisitions throughout the value chain from suppliers to dealers will be eyed by PE and banking advisors, as will the opportunity for 'Value' and 'Growth' stock-picking as we've recently witnessed here in an 'Auto-Rebound' Europe on the back of national stimulus packages; which could pale in comparison besides China's allocation of its $5 trillion].
The academics also cite the market-share growth success of peer foreign firms such as GM, Toyota and Honda as evidence of VWC's malaise. But it must be stated that GM, whilst in situ for some years with the Buick brand consciously maintained a relatively low profile for some time instead of 'taking-on' VW earlier, waiting until the consumer boom to sell its Buick cars and latter-day utility orientated Chevrolets. Whilst the Japanese were relative late-comers to the market, specifically waiting for a point of market maturity to slowly satiate the consumer demand and maintain pricing.
Thus in actuality VWC has had to play a much more complex game compared to the niche ploys of the majority of domestic new comers and the entry-timing ploys of its MNC peers. As such, given the consistent rise in sales for VW, Skoda and Audi brands it has done so successfully. It has grown Chinese sales from 910,000 units in FY07 to 1,024,000 units in 2008; thereby up 12.5% YoY - according to Hans Dieter Potsche's recent presentation at the corporation's Citigroup London Roadshow on 16.03.09.[Of these 844,000 were VW, 119,000 were Audi, 59,300 were Skoda]
Looking forward the Chinese and Global market is heavily down YoY, so all manufacturers – domestic and foreign – will be adjusting capacity to re-align. But for VW the important introduction of the Lavida mid-sized saloon at end-08, and roll-out of eco sub-branded variants will add marketing fire-power. But perhaps of real consequence and advantage to VW is the 'de-frothing' of the car-market as the 'momentary joy-rider' consumers fall-away and it returns to its previous normative characteristics set by YoY core customers that seek trusted brands, value for money at purchase / through life / residual value and not necessarily cheapness and gimmicks. And importantly a trusted brand. This return of conservatism will mean flatter but more stable sales growth for which VW is well positioned.
This very basic analysis suggests that VWC has not lost its way, instead using recent times and the current period to re-strengthen its hold on the Chinese market via greater localised parts sourcing and assembly, improved product management (as with Lavida's development story as a China only car), the use of its 3 brands Skoda-VW-Audi to target core segment [and importantly re-highlight that the public] aswell as maintaining R&D & plant investment
Thus, from academia's perspective, a research focal-point that juxtaposes the audience interests of a Blue-Chip firm and EM market evolution is undoubtedly alluring. But our concern is that VW as a case-study seems to have been 'back-fitted' into a pre-determined hypothesis – to prove that its 'commercial gold' had lost its lustre. Even though brief, closer inspection undermines the evidence set forth.
From a big-picture perspective, there is very probably an argument that can be favourably presented that highlights that the 'structural shape' of large-scale heavy-industry enterprises born from statist-roots should be assessed; to ensure that the commercial creature naturally evolves 'in-tune' with emerging consumer market demands and is not inadvertently stifled and constricted by an endemically bureaucratic culture yields painfully slow transformation.
Thus as China as a country transforms from a production-led culture to a market-led culture, so the pros and cons of the Joint-Venture enterprise system which VWC, its 14 sub-holdings, and many other MNCs are founded upon should be rightly questioned. Does such an enterprise culture befit a 21st century China?
Of course there will always be the notion that such reports are used as political propaganda, as 'intellectual mechanisms of leverage' to engender structural change within the very heart of Chinese 'Command-Capitalism'. Whether orchestrated or not, there seems just cause for a continued liberalisation of China's industrial structure, because it in turn serves as the vehicle for the evolution and maturation of its domestic financial markets framework; an area which even with recent examples of 'exploring burned fingers' [ie Blackstone * US Banks]must be developed to create a fully fledged 'free-market' economy that is entwined with the global finance infrastructure.
However, whilst the efforts of such academics are undoubtedly meant to serve as platforms for discussion and progress, there simply must be greater constructs of argument if the hypothesis is not to be discredited by a sound antithesis. Instead in the best academic tradition the 2 must be conjoined to provide sound progressive synthesis.
Wednesday, 1 April 2009
Industry Structure - US Autos Inc - GM's Need for its own G20 inspired 'A-Team'
As the press has re-iterated time after time, President Obama has a long list of domestic and international issues to address. As he and the other G20 leaders meet today, at London's Excel Centre on the River Thames, discussion will obviously centre upon the fractious issues of:
1. Additional Stimulus Packages - their size, speed & alignment; to feed additional liquidity into the seemingly ever absorbent sponge of the global financial system.
[As a pre-cursor to that debate, George Soros spoke yesterday (31.03.09) at the LSE Business School, extolling the need for governments to recognise the role of SDRs (Special Drawing Rights) as a powerful unitary & unifying currency instrument].
2. Regulatory Reform - at national & international levels; Gordon Brown probably using Lord Turner's recent report as a template offering; noting the absence of a Glass-Steagall-like measure which suggests that a level of 'inter-play' between Retail & Investment is desired to rally international economies (esp given the massive Chinese/Asian savings-base).
3. Anti-Protectionism - the willingness to brave domestic wrath; as poignantly demonstrated by Obama's hard-line with Detroit only a few days before. [NB France, Italy, Russia, et al]
That last point has of course has been a primary bone of contention in the mid-west US, especially given the close yet policy-sensitive Obama-Granholm relationship; and the President's own ability to lead his Michigan-based Democrat voters through hard policy terrain. The fiscal backing of Detroit via Auto-Aid packaged was awarded contingent demands that it transform, but subsequent 'term-reports' stating "can do better" has of course led to the loss of Wagoner as perhaps the symbolic gesture of change. Better extremely late than never, and an initiative which must lead to a natural critique of the whole of GM's Board for future effectiveness.
As part of that change-mechanism Obama has of course installed change-agents like Steven Rattner, Ron Bloom, Diana Farrell & Brian Deese. Critics state that the innate auto-industry knowledge of this important team leaves much to be desired. None having actually worked within the innards of the sector highlights the concern that they cannot truly discern the depths of the 'truisms' set forward by all stake-holding parties: GM & Chrysler, the UAW, the corporate bond-holders et al - excluding the internal demands of the public budget setters within the Treasury Dept itself. Even a team of 30+ advisors cannot provide the type of 'second-nature' understanding and judgements required.
Even so, the onus to create viable, indeed prosperous, industrial policy framework for US Autos, rests on the shoulders of Rattner & Bloom because with their previous incarnations as Lazard Freres & Co investment bankers they will should know how to ultimately create a viable investment framework. Previous Wall St and present White House posts require them to maximise company and intra-sector value-creation; done so by deconstructing all the prime elements of the US automotive industry (with its international links) and setting out a formula for its re-construction.
This re-orientation of such a large contingent of the US economy will provide short, medium and long-term impetus into the banking sector and financial markets. Book Runners, Underwriters and Investors should gain confidence in the very process sector re-structuring aswell of course the ROI potential of a re-aligned - more efficient / customer-centric / more profitable - industry.
Howver, at present even the creation of such a necessary template seems far off, given Washington's 'bounce-back' of the auto-maker's strategic plans laid-out this week, and the presently entrenched positions of Bond-holders and the UAW - each of the 3 main constituents looking to eachother for 'next-move' compromise. The FT equates the situation to a 3-D chess board and the WSJ re-quotes Rattner's analogy regards the "complexity of a Rubik's Cube".
Reports state that Washington sees Chrysler as the immediate problem child given its smaller scale comparative to big fiscal demands. So with a 1 month dead-line, eyes are perhaps presently more narrowly focused upon the Chrysler-FIAT alliance talks. This in turn has set the context that Chrysler could seek other additional new alliance partners to steady its fate; which would engender a return to its normative, historical rescue stratagems. However the alliance model appears a favoured route for many players given the operating concerns of other withering VMs (such as Opel, PSA & TATA). Such a large consortium could lead to a new US-Euro-Asia 'tri-continental' alliance template that theoretically out-guns Renault-Nissan's bi-continental structure that has been so powerful in synergy seeking and capacity strengthening.
[Marchionne has very probably been reviewing this schema for FIAT's long-term survival].
(NB commendation to Paul Betts of the FT for also recognising and espousing this possibility).
With G20 and internationalism as the contextual backdrop, Washington would undoubtedly welcome such an outline plan, if the basic tenants of inter-party notional agreement can be set within the new 30-day return deadline.
Ironically looking toward GM, it could be argued that the company has been the very spirit and ethos of the G20 ethos given its global reach and influence over the last 80 years.
As Wagoner departs and COO/CFO Henderson becomes new CEO, we will hopefully see a new focus regards a deep and meaningful calculation of the innate $ value of the global business empire. As accounting and auditing methods & regulations seek greater global alignment, it is indeed timely that an internal-audit that de-constructs and values every aspect of the GM empire be undertaken; a truly indepth exercise that seeks to identify intrinsic value throughout the build-process inventory and far beyond. From the combined value of millions of 5mm washers sitting in production-line feed boxes to the field-stacked and dealer-stacked inventory of unsold and unpaid vehicles - from homeland Alabama to Zhong County in China.
GM veteran Henderson reputedly understands every operational dimension of the empire. As such will be privvy to the nooks and crannies of the company's international financial architecture - perhaps particularly where 'fair-value' or 'mark-to-market' estimations may have been overly pessimistic, or where land values haven't been formally updated for a good number of years. This knowledge, along with the raft of continued changes in plant closures, lay-offs and dealer consolidation should - obviated by symbolic CEO change - demonstrate the rapid need for change.
investment-auto-motives previously backed the notion of the auto-aid package for North America, given level of integration the sector has with the economy and its connections to European, Asian and EM regions. [NB investment-auto-motives did not back comparatively substantive 'crutch-support' for the UK or European sectors given their relatively advanced state]. But to our dismay, since that initial Bush announcement progress has been painfully slow. Detroit will undoubtedly point a finger at Washington given the governmental transition and tardiness in setting up a capable Autos-Governance Team, whilst Washington will point its finger at Detroit for being so demonstrably inept to react to visible sector trends, and the recent inability to charter a viable course forward, hardly out of the harbour with a still over-laiden boat and over-optimistic 'weather-outlook' today.
Although eyes are on Chrysler given its shorter dead-line date, its intrinsic 'boom & bust' experiences that have seen it create alliance-relationships time after time, aswell as its private ownership status, suggests that such operational flexibility & a 'simple' stake-holder model that it is more able to react as necessary to evolve and survive into a new state of being with buoyant business model.
GM is a very different beast, far larger and far less flexible in nature. A once dominant breed of automaker who's business model is 50 years past its prime and as such continues to diminish. Domestically re-sized with each recession but still having to bare an overtly heavy 'legacy' load, with now even the previously 'off-set' divisions in Europe & China under attack from the dual pincer squeeze of prestigious and affordable competitor brands squeezing the mainstream.
The evident fiscal and structural inefficiencies of GM come to light, and though there are probably the previously mentioned 'accounting rabbits to be pulled from regional hats' such tactics are at best medium-term salvos.
The world had changed immensely for GM even before the consequences of the global financial fiasco. GMAC was undoubtedly a prime player within that fiasco, but also acted as a major support pillar to GM before the markets and it crumbled. Thankfully the 51% sell-off to Cerberus helped diminish GM's own CDO-linked balance-sheet liabilities, a very necessary and timely exercise whos immediate benefit out-weighed the long-term rebound advantages of GMAC as a Bank Holding Co and a TARP recipient.
That means that GM's ability to lean on financial engineering as much as vehicle engineering has largely diminished. And that is undoubtedly a good thing. Like similar manufacturers shawn of their finance houses, the real picture of vehicle manufacturing efficiency, productivity and profitability will come into vivid focus. And that is a very necessary paradigm-shift for government and investors alike.
As such GM and US Autos will be looking to Rattner & Bloom to separate the 'wheat from the chaff'. They will need to undertake full and frank 'top-down', 'bottom-up' and truly 'holistic' analysis of GM and the whole sector to better understand how The General and sector participants would best re-structure and evolve.
Never before has GM, the US Auto-Sector, the US Administration and the international community needed an 'A-Team' to prevail as much as today - generating and executing an accomplished action plan.
Inadvertently or not, GM may be 'the' real-world, sector-giant, 'live' case-study for the G20. Highlighted as a real-time example affected by the forces of global flux - its possible regional or divisional break-up a definitive 'tour de force' of US anti-protectionist sentiment.
Perhaps the G20 summit will mobilize a very different set of auto-sector-centric heroes that promote the philosophy of international trade - at financial and physical levels -to assist in the re-alignment of a US industry that for far too long has exhibited a general trend for diminishing marginal returns. To do so would boost investor confidence and oil the cogs of seized financial markets.
Thus, as an epilogue, it must be the pinnicle of irony that it was GM itself that manufactured the now serendipitously titled GMC G20 Van that transported those TV-based 'A-Team' heroes!
1. Additional Stimulus Packages - their size, speed & alignment; to feed additional liquidity into the seemingly ever absorbent sponge of the global financial system.
[As a pre-cursor to that debate, George Soros spoke yesterday (31.03.09) at the LSE Business School, extolling the need for governments to recognise the role of SDRs (Special Drawing Rights) as a powerful unitary & unifying currency instrument].
2. Regulatory Reform - at national & international levels; Gordon Brown probably using Lord Turner's recent report as a template offering; noting the absence of a Glass-Steagall-like measure which suggests that a level of 'inter-play' between Retail & Investment is desired to rally international economies (esp given the massive Chinese/Asian savings-base).
3. Anti-Protectionism - the willingness to brave domestic wrath; as poignantly demonstrated by Obama's hard-line with Detroit only a few days before. [NB France, Italy, Russia, et al]
That last point has of course has been a primary bone of contention in the mid-west US, especially given the close yet policy-sensitive Obama-Granholm relationship; and the President's own ability to lead his Michigan-based Democrat voters through hard policy terrain. The fiscal backing of Detroit via Auto-Aid packaged was awarded contingent demands that it transform, but subsequent 'term-reports' stating "can do better" has of course led to the loss of Wagoner as perhaps the symbolic gesture of change. Better extremely late than never, and an initiative which must lead to a natural critique of the whole of GM's Board for future effectiveness.
As part of that change-mechanism Obama has of course installed change-agents like Steven Rattner, Ron Bloom, Diana Farrell & Brian Deese. Critics state that the innate auto-industry knowledge of this important team leaves much to be desired. None having actually worked within the innards of the sector highlights the concern that they cannot truly discern the depths of the 'truisms' set forward by all stake-holding parties: GM & Chrysler, the UAW, the corporate bond-holders et al - excluding the internal demands of the public budget setters within the Treasury Dept itself. Even a team of 30+ advisors cannot provide the type of 'second-nature' understanding and judgements required.
Even so, the onus to create viable, indeed prosperous, industrial policy framework for US Autos, rests on the shoulders of Rattner & Bloom because with their previous incarnations as Lazard Freres & Co investment bankers they will should know how to ultimately create a viable investment framework. Previous Wall St and present White House posts require them to maximise company and intra-sector value-creation; done so by deconstructing all the prime elements of the US automotive industry (with its international links) and setting out a formula for its re-construction.
This re-orientation of such a large contingent of the US economy will provide short, medium and long-term impetus into the banking sector and financial markets. Book Runners, Underwriters and Investors should gain confidence in the very process sector re-structuring aswell of course the ROI potential of a re-aligned - more efficient / customer-centric / more profitable - industry.
Howver, at present even the creation of such a necessary template seems far off, given Washington's 'bounce-back' of the auto-maker's strategic plans laid-out this week, and the presently entrenched positions of Bond-holders and the UAW - each of the 3 main constituents looking to eachother for 'next-move' compromise. The FT equates the situation to a 3-D chess board and the WSJ re-quotes Rattner's analogy regards the "complexity of a Rubik's Cube".
Reports state that Washington sees Chrysler as the immediate problem child given its smaller scale comparative to big fiscal demands. So with a 1 month dead-line, eyes are perhaps presently more narrowly focused upon the Chrysler-FIAT alliance talks. This in turn has set the context that Chrysler could seek other additional new alliance partners to steady its fate; which would engender a return to its normative, historical rescue stratagems. However the alliance model appears a favoured route for many players given the operating concerns of other withering VMs (such as Opel, PSA & TATA). Such a large consortium could lead to a new US-Euro-Asia 'tri-continental' alliance template that theoretically out-guns Renault-Nissan's bi-continental structure that has been so powerful in synergy seeking and capacity strengthening.
[Marchionne has very probably been reviewing this schema for FIAT's long-term survival].
(NB commendation to Paul Betts of the FT for also recognising and espousing this possibility).
With G20 and internationalism as the contextual backdrop, Washington would undoubtedly welcome such an outline plan, if the basic tenants of inter-party notional agreement can be set within the new 30-day return deadline.
Ironically looking toward GM, it could be argued that the company has been the very spirit and ethos of the G20 ethos given its global reach and influence over the last 80 years.
As Wagoner departs and COO/CFO Henderson becomes new CEO, we will hopefully see a new focus regards a deep and meaningful calculation of the innate $ value of the global business empire. As accounting and auditing methods & regulations seek greater global alignment, it is indeed timely that an internal-audit that de-constructs and values every aspect of the GM empire be undertaken; a truly indepth exercise that seeks to identify intrinsic value throughout the build-process inventory and far beyond. From the combined value of millions of 5mm washers sitting in production-line feed boxes to the field-stacked and dealer-stacked inventory of unsold and unpaid vehicles - from homeland Alabama to Zhong County in China.
GM veteran Henderson reputedly understands every operational dimension of the empire. As such will be privvy to the nooks and crannies of the company's international financial architecture - perhaps particularly where 'fair-value' or 'mark-to-market' estimations may have been overly pessimistic, or where land values haven't been formally updated for a good number of years. This knowledge, along with the raft of continued changes in plant closures, lay-offs and dealer consolidation should - obviated by symbolic CEO change - demonstrate the rapid need for change.
investment-auto-motives previously backed the notion of the auto-aid package for North America, given level of integration the sector has with the economy and its connections to European, Asian and EM regions. [NB investment-auto-motives did not back comparatively substantive 'crutch-support' for the UK or European sectors given their relatively advanced state]. But to our dismay, since that initial Bush announcement progress has been painfully slow. Detroit will undoubtedly point a finger at Washington given the governmental transition and tardiness in setting up a capable Autos-Governance Team, whilst Washington will point its finger at Detroit for being so demonstrably inept to react to visible sector trends, and the recent inability to charter a viable course forward, hardly out of the harbour with a still over-laiden boat and over-optimistic 'weather-outlook' today.
Although eyes are on Chrysler given its shorter dead-line date, its intrinsic 'boom & bust' experiences that have seen it create alliance-relationships time after time, aswell as its private ownership status, suggests that such operational flexibility & a 'simple' stake-holder model that it is more able to react as necessary to evolve and survive into a new state of being with buoyant business model.
GM is a very different beast, far larger and far less flexible in nature. A once dominant breed of automaker who's business model is 50 years past its prime and as such continues to diminish. Domestically re-sized with each recession but still having to bare an overtly heavy 'legacy' load, with now even the previously 'off-set' divisions in Europe & China under attack from the dual pincer squeeze of prestigious and affordable competitor brands squeezing the mainstream.
The evident fiscal and structural inefficiencies of GM come to light, and though there are probably the previously mentioned 'accounting rabbits to be pulled from regional hats' such tactics are at best medium-term salvos.
The world had changed immensely for GM even before the consequences of the global financial fiasco. GMAC was undoubtedly a prime player within that fiasco, but also acted as a major support pillar to GM before the markets and it crumbled. Thankfully the 51% sell-off to Cerberus helped diminish GM's own CDO-linked balance-sheet liabilities, a very necessary and timely exercise whos immediate benefit out-weighed the long-term rebound advantages of GMAC as a Bank Holding Co and a TARP recipient.
That means that GM's ability to lean on financial engineering as much as vehicle engineering has largely diminished. And that is undoubtedly a good thing. Like similar manufacturers shawn of their finance houses, the real picture of vehicle manufacturing efficiency, productivity and profitability will come into vivid focus. And that is a very necessary paradigm-shift for government and investors alike.
As such GM and US Autos will be looking to Rattner & Bloom to separate the 'wheat from the chaff'. They will need to undertake full and frank 'top-down', 'bottom-up' and truly 'holistic' analysis of GM and the whole sector to better understand how The General and sector participants would best re-structure and evolve.
Never before has GM, the US Auto-Sector, the US Administration and the international community needed an 'A-Team' to prevail as much as today - generating and executing an accomplished action plan.
Inadvertently or not, GM may be 'the' real-world, sector-giant, 'live' case-study for the G20. Highlighted as a real-time example affected by the forces of global flux - its possible regional or divisional break-up a definitive 'tour de force' of US anti-protectionist sentiment.
Perhaps the G20 summit will mobilize a very different set of auto-sector-centric heroes that promote the philosophy of international trade - at financial and physical levels -to assist in the re-alignment of a US industry that for far too long has exhibited a general trend for diminishing marginal returns. To do so would boost investor confidence and oil the cogs of seized financial markets.
Thus, as an epilogue, it must be the pinnicle of irony that it was GM itself that manufactured the now serendipitously titled GMC G20 Van that transported those TV-based 'A-Team' heroes!
Subscribe to:
Posts (Atom)