Business commentators and politicians alike highlight that the economic downturn has bottomed-out and slow recover, has begun - even if metric indicators and general sentiment don't necessarily reflect that optimism. Even so, with the crisis period behind us, it is now time to review the very foundations of society and commerce.
The very fact that alternative measures of social development to GDP growth have been discussed - best exemplified by the criteria of a 'happiness index' - intrinsically demonstrates that a different philosophical light is being applied to this post near-melt-down era.
In short the party is over and we must re-attune to the post belle-epoch.
This unfortunately has haunting echoes reminiscent of the end Austro-Hungarian empire. A time when conflicting macro forces fragmented what had previously been a large and complete entity. Today we see the fractures appear through the EU and even calls for the continued UK's devolution of its component parts. That down-turn in the Balkans a century ago created a weak cellular structure across the region, one which after a period of geographic separation, economic isolation and populus demoralization saw a red-curtain, drawn over what had been a prosperous empire.
That curtain latterly fortified with 'iron', and the positive capitalist tenants of freedom and social / technical / economic progress generated by the individual's will eliminated under a cloud of non-progressive, static, 'state-imbued' homogenity.
It would 60 years and three lost generations to banish that cloud.
Fundamental historic change is slow, and as such we may presently be at the thin-end of such a wedge, yet Europe and the United States cannot be allowed to fall into such a trap. One where a slowly increasing level of statism (as we've arguably already seen develop here in the UK)morphs into an ever deepening Nanny state which approaches a subtle genre of totalitarianism; within which the forward-thinking individuals becomes part of the disillusioned masses as a result of ongoing socio-economic stagnation.
Yet realistically economic stagnation is where the West presently stands, and is in real danger of repeating and possibly extending beyond Japan's lost decade. Economic eyes are most definitely focused upon the primary and secondary EM regions as the previous decade's and future decades' growth engine.
Today the West, saved from collapse, sits in stagnant economic circumstances, with now even BRIC demand slowed and global liquidity seemingly decisively split. directed either towards 'systemic survivalism' by national and intra-regional bodies, or toward volatile, event-driven 'risk-on' / 'risk-off' moves by capital markets players viewing disperse asset classes and global regions.
The once steady and secure capital markets could be presently said to be almost bi-polar in its behavior. The prime tenants of (global) market exchange – the rational value of mutually beneficial goods and services – is seemingly increasingly eroded, the economic woes affecting political relationships, and hence political relationships effecting economic woes.
The arisen consequences of the almost broken western capital markets has incurred an era of hyper-Keynsianism, one in which government involvement moves well beyond the basic guardianship of Adam Smith's free-market economic rational, towards an ever increasing false 'magic roundabout' model; one in which an ethos of seeking true practical added-value to engender growth is substituted for an ethereal notion of added-value.
For the UK that means the massively enlarged circulation of 'wooden pounds', initially through the 1990s and 2000s by ever fatter state employers expensed by a ballooning PSBR and budget deficit, and now under a 'survivalist' policy of QE. The increased generation and distribution of 'wooden pounds' obviates lost innate value.
So what we in effect witness is a renewed clash of the opposing forces of the UK's mixed economy, stretched to their limits and ending in a plausible 'snap'. The expense of creating the euphamistic 'social good' having become fiscally intolerable as the realistion hits that any real value creation in the UK is created by an ever slimmer section of educated, pro-active society via market demanded specialist activities.
Without the emergence of economic model change the UK heads ever quicker towards the ridiculous anathema seen in 2nd world countries, where a plethora of lowly paid government officials push paper through an inefficient system or effectively dig and re-fill holes - the archetype being the policemen who stands on a remote isolated roundabout guiding non-existent traffic.
The fact is that only small sections of specialist industry within the UK has kept abreast of global change and the pace of global competition. China and India forge ahead in developing domestic capabilities, typically riding 'piggy-back' on western knowledge through JV enterprise to achieve in 25 years what took the west 100 years. This is the qualitative, yet on a quantitative front the ravenous demand by EM nations supercharges standards of living and so educational aspiration and so intellectual capability and so commercial achievement.
Few beyond senior business spheres have spelled out this truism, but a country, region or individual whilst positively becoming 'psychologically centered' by diverting attention away from on 'material fetishism', cannot truly develop on the world stage by sticking its head in the sand and extolling a creedo of quango-pressured false-happiness when the excruciating reality is slow a economic decline as the falling living standards create a macro-destructive downward spiral..
For the UK, where the commercial core of a once tangible manufacturing base was supplanted by a post-industrial service economy which was turbo-charged by credit and asset bubbles, today's 'sine qua non' of value-addition must relate both to practical domestic need and international demand.
Ironically, just like its supposedly poor-cousin Southern European counterparts, it must address the fact of finding new inward facing and new outward facing avenues for meaningful national economic development.
As perhaps the world's greatest historic social mobility enabler and economic trickle-down contributor, the car and the auto-industry undeniably have a massive part to play in this development. The high-value activities undertaken at the top of the vehicle-value pyramid can and should contribute as alongside the greater hailed sectors of: Finance, IT, Media, Telco, Pharma, Bio-Gen etc etc.
But critically market and industrial reality, private funding and the hyper-rational investment eye, must conquer over the all to apparent innate idealism that misdirects publicly funded grand-scheme social change programmes. Change must come through a process of slow stable evolution, not radical revolution, which links the PESTEL realities of today to a preferential future context.
As Ben Bernanke and Mervyn King seek to defer their QE exit strategies and the 2 economies continue to falter, so the need for critical structural economic reform to attain high-value productivity becomes increasingly necessary.
The car and the US and UK car industries could and should be used as a vehicle to aid the visibility of such practicable change.
Friday, 26 February 2010
Tuesday, 23 February 2010
Company Focus – Renault-Nissan – 'Le Cost Cutter' Returns, Awaiting an Indian Summer.
Stock Price (Paris @ 23.02.2010, 16.50 GMT)
Ordinary : Euro 30.43
In conclusion to the overview of the 'Western 8' automakers, Renault is put under the spotlight, having announced its FY09 results on 12.02.2010.
Renault-Nissan was instigated by Carlos Ghosn in 1999, to effectively create a 21st century auto-manufacturing model which had both global breadth across markets and segmentational depth within these markets. An entity that had mutual synergies & compliments, an entity which operating with “twin-pillars” could maximise the advantages of cross-shared ownership and so dual determination without the political and operational problems of fully fledged integration.
Mutual platform & systems rationality was of course the primary driver, which along with the integration of Samsung Motor, assisted in the initial years a dramatic cut in development costs and economies of scale which enabled greater production flexibility and critically cost-leverage over a broad basket of EU, Japanese, Asian and South American suppliers, all intent on 'coat-tail growth'.
The productivity improvement of platform sharing (Renault-derived on B & C segment, Nissan-derived on D, E & 4x4, Samsung-derived on niche) undoubtedly assisted on cost-savings, a level of intra-corporate competition intentionally created by Ghosn in the search for efficiency, but also pragmatically sharing best practice and learning across the empire. All though was not initially rosy, as Nissan was forced to adopt Renault sourced systems on small cars, the quality gap between the 2 marques became evident, Nissan's reputation suffering at the customer level with more 'things gone wrong' whilst under warranty, which cost national sales companies and Nissan HQ new parts costs, dealer-fit charges and internal demands that its parent Renault design to a quality standard not a cost standard.
The difference was wholly evident in earlier generation product comparisons too. Though Nissan had had good quality, its general cosmetic appeal had been lost through successive spirals of conservatism – itself driven largely by the contracting and so conservative Japanese domestic market in the 1990s and a loss of direction in the US. In direct contrast though, Renault had been able to overcome its almost endemic sub-par general quality standards by focusing upon the 3 critical customer deal-winners of the time: aesthetics, safety and credit. That focus on differential styling, NCAP test star ratings (tending to BIC) and easy access credit, firstly turned around the UK and German consumer's perceptions of Renault (even if only relatively superficial) and secondly attracted more people (of varying credit status it must be said) to drive away.
But of course Renault's claim to fame throughout the 2000s was its re-generation of Romania's Dacia as perhaps the core CEE brand, with commercial reach into selected western Europe countries and into the 'Near East'. The Logan in its variant forms and Sandero now account for nearly 257,000+ units pa in 2008.
[NB. though the dramatic CEE downturn will have significantly cut that number. Unfortunately although an inexpensive option for W.Euro buyers, the cars' mass, size and use of less advanced technology means that the loss of CEE Dacia sales have in all probability only been slightly off-set by western buyers given that it is not a 'scrappage scheme' contender. However Renault was well placed with its own cars in A & B segments].
That was the 1999-2007 success story, but of course as with its mass-market peers, Renault has been heavily hit by the consumer fall-out effect of the economic crisis, so reliant upon the French government's Euro3bn soft loan, and the demand-driver effect of EU nation-state scrappage schemes through 2009 and variously into 2010.
A paper based critique of annual and monthly YoY figures gives theoretical hope, market TIVs - thanks to incentives - showing a weak upward trend. However, the fact that so much government liquidity has been pumped into the EU and US car markets to seemingly stabalise consumption does engender the argument that once removed the downward effect may well continue, and data highlighting that approximately 50% recent sales have simply been pull-forward or indeed the opportunity jumped upon by opportunist (less scrupulous) buyers.
As highlighted in the FY09 presentation, Renault has been a visible beneficiary, its sales for the most 'flat' (hovering at a median average of 0.5%) across most of its international markets. However, the UK, Brazil, Turkey and Iran do show full-year slight losses, though for the UL and Turkey turning positive with H2 YoY comparisons. Thus as the year ended it was only Brazil and Iran in the red, and respectively only by 0.1% and 2.0% (Renault Iran consisting of just Tondar [Dacia] sedan & 'old' Megane). On a sales basis the company out-performed its peers as a beneficiary of the EU scrappage boost. The A-segment TIV increased 29%, whilst Renault gained 34%, whilst the B-segment rose 8% and Renault gained 12%. In the C-segment, whilst the TIV dropped -6%, its new Megane gained 15%. As a small-impact comparison that other segments (D/E) dropped -14%, whilst it lost -34%. However, as the EU's #1 LCV manufacturer it managed to beat heavy YoY segment losses of -30%, with a -24% loss.
As with all enterprises in the current climate, the company has been keen to demonstrate its recognised importance of liquidity and working capital.
Thus highlighted its H109 & H209 efforts respectively focused on initially securing delayed transactions to creditors (accounts payables) [giving +E486m] and latterly securing timetabled transactions from debtors (accounts receivables) [giving +E640m] (The use of any 'factoring' used, if any, was not given). Added to this was 'liquidation' of inventory stock [giving +E1,372m], plus further savings +E425m, thus proving a “WCR” contribution of E2,923m (approximately E3bn).
[NB it will not go unnoticed by many that this is of the same magnitude as France's 'soft-loan' to Renault].
Alongside the liquidity issue, is that of driven cost-savings given the loss of revenues. Carlos Ghosn having gained his nick-name as 'Le Cost Cutter' back in the late 90s, has a decade later, been required to once again lead that task with COO Patrick Pelata, and together they have had to be seen beating the income slide at fixed and variable levels. At a fixed level, 2009 was compared with 2007 and 2008 datum points, highlighting that the majority of fixed cost reduction for G&A and Manufacturing was extracted in 2008, whilst 2009 saw more punitive extractions across R&D, Net CapEx and Marketing.
Given the typical massive guzzle of the auto-industry's capital expenditure, such hard times are calling for a modified approach relating to core products and plant. With this approach Renault sizeably cut Net CapEx and the capitalised and expensed portions of R&D, leaving it -33% down compared to peak 2007 figures ('09: E3,108m vs '08: E4,342m vs '07: E4,631m). In contrast, G&A is down -20% over these 3 years.
Given the alternative annual focus on fixed-cost plant (hardware [2009]) versus people (software [2008]), it appears that a new cost-initiative may need to be made in G&A & Marketing in 2010, with moreover more efforts regards variable costs in these arenas as well as of course across production sites. Exact detail about how Ghosn/Pelata 'play' these initiatives to show YoY cost-savings (ie hardware vs software, and fixed vs variables) would be of great interest to the analyst community, though may of course be showing Renault's 'hand', beyond the cost-reduction determinant presented for variable costs.
YoY revenues were down approximately 11% (E33,712m) compared to 2008 restated figures (E37,791m). The critical operating margin fell from 0.9% (E326m) to -1.2% (E-396m) so down YoY by -2.1%. 'Other' operating income and expenses fell from E-443m to E-559m.
Net financial income and expenses down from E441 to a negative E-404m, so dropping E-845m.
'Associated Companies' fell from E437m to a negative E-1,561, so dropping E-1,998m (ie nearly E2bn). (This included Nissan E-902m – though pulling back well in Q3/Q4, Volvo Truck E-301m, Avtovaz E-370m, Other E12m).
Including current and deferred taxes (these staying relatively flat) and the Net Income for 2009 dropped from E599m previously to a negative E-3,068m, so down E-3,667m. Looking at Debt, FCF and Liquidity Reserves, debt levels have reduced YoY from E7,944m to E5,921m, cashflow now sits at 2,088m, and Liquidity (cash & commercial credit lines) has improved from E4.8bn to E9.5bn. Of the Debt, E1.1bn is payable in 2010, decelerating until 2013 when E1.4bn matures, but the real hit comes in 2014, when E4.1bn matures, the Government's E3bn, plus E1.1bn.
Renault's global market TIV outlook expects 2010 to show a -10% decline in Europe, -10% in EuroMed (Balkans, Turkey, NW Africa), “Stability” in S.America & Asia/Africa, and +10% increase in EuroAsia (Russia & ex-CIS states).
Renault states that even though 2010 will be tough it will show +FCF through 2010 due to:
1. “A gain of EU market share in declining TIV”
2. “Extraction of alliance synergies”
3. “Taking cost savings further”
4. “Sustaining a high level of WCR efficiency”
Of these investment-auto-motives believes:
1. “A gain of EU market share in declining TIV”
Renault will probably follow the typical French norm of within the matured EU of “buying market-share” (akin to PSA behavior) via maintained (or even expanded) capacity of plants - given nominal inventory depletion. The group's captured-finance house RCI able to play a key role in doing so given its stated good performance in 2009 and implicit backing from the French wholesale finance sector.
However, the strong product momentum Ghosn mentions, whilst on paper looks 'interesting' with cabrios like Megane and new Wind, will very probably suffer when put up to hard scrutiny...unless Ghosn has immediate suprises in store; which looks doubtful.
Twingo & Clio experienced sales boosts thanks to the scrappage scheme, but their innate conservative look, does little to separate them from the field, with new generation face-lifts adding little product appeal, hence the aforementioned Renault pricing power plays expected. Megane has performed and will sustain sales due to its point in its lifecycle, though without detail of internal forecasts business model expectation are hard to judge. The large cars will struggle as they have historically done. Critically, Renault has arguably over-filled the A-C segment with variants, many of which appear heavily overlapping in practical terms, even if not on paper, the plethora of MPV & 'Grand' (extended wheelbase) variants now either encroached by taller standard cars, or encroaching upon larger siblings. Thus, as with other makers desperate to fill niches, a level of product redundancy appears apparent as seen with the customer reaction to Modus, possibly repeated on a mooted Clio-Scenic (unless it proves the natural dimensional successor to Megane Scenic Mk1).
Planners have been desperate to create volume off of singular platforms to drive theoretical economies of scale, yet if production volumes do not actually meet market demand for forecast volumes, and product must must discounted on the dealer-floor then the validity of the planning exercise has been futile and ultimately for the investor, value destroying.
[NB the case of the “tail wagging the dog” has been proven all too real throughout auto-industry history, as the economic requirement for volume becomes the determinant corporate driver, not the attuned understanding of the marketplace true demand type and levels. Instead, as we see with French industry and previously US industry, volumes simply increase a manufacturer's in-market pricing power].
On the LCV front Renault tends to lead EU sales given its broad-span product portfolio from B-segment CDVs (car derived vans) right up to its class 7 HGVs and sizable dealer network. But the core products are the Traffic and Master, this latter van seeing model replacement this year. Renault has also maintained its manufacturing JV with Opel, assembled in GM's Luton, UK plant, and also rebadges product for Nissan Europe. Presumably Ghosn will be expecting the LCV and Truck markets to rebound from their heavy lows prior to proper traction in passenger cars in line with the economic upturn; when it eventually arrives, and will be directing RCI to prime business & fleet buyers with attractive finance terms.
Given present EU market constraint, Renault is undeniably looking for additional volume from the EM regions.
Brazil is presently 'flat' due to its own economic constraint caused by depleted commodities exports so whilst awaiting return, which is largely related to Chinese materials demand. As such, Renault like others is required to 'cherry-pick' its regional investment bets with the BRIC region during this global lull.
Russia, previously a rapid growth country has witnessed a heavy economic and consumer demand slump, 2009 car sales 50% down YoY. Although Ghosn was put under pressure by Russian production partner AvtoVAZ, he rightly did not cave-in to demands for additional liquidity, even at the threat of Renault equity dilution.
India saw Renault's relatively arrival late compared to the Japanese and Germans, but since 2007 Renault formed its 1st Indian JV with TATA in assembly of old generation Trafic vans. A 2nd JV with Mahindra & Mahindra to produce the (Dacia) Logan in Nashik, Maharashtra (at 50,000 units pa) and has invested in Chennai (to produce 400,000 units pa). A 3rd JV with Bajaj regards the concept development of a low cost “1-Lakh” car to compete with TATA's Nano. Thus it has set a synergies based template for car, van and truck JV's, aiding both the technical development of its Indian domestic partners and provides market access for its own indigenously manufactured and imported vehicles. Critically, the Parisian Board will be closely watching India to maintain its growth path as the other BRIC nations falter or slow.
China, and the Dongfeng-Renault relationship ran into trouble in mid 2009 after supposed Renault product defect problems. The original planned production plant in Huadu, Guangzhou City has been handed to Dongfeng-Nissan, probably to enable Nissan to maintain its sales lead. Although Renault cars will also be built there in realistically relatively limited numbers. Although Renault has been present in China for some time - though not as long as PSA - the ongoing capacity constraint regards domestic production leaves the company at a severe disadvantage compared to other, far better market-engrained western competitors, and so has in effect to catch-up with EU peers like the almost iconic VW (and sub-brands) and GM and late arriving but quickly established Japanese.
Thus for the present, although Renault may gain a larger share of the shrunken EU cake in the short term, it seems that Renault's primary BRIC focus is set upon India.
2. “Extraction of alliance synergies”
A decade since formation of the Nissan alliance and synergies have undoubtedly been captured, these opportunities creating challenges of their own both in-house and externally in the markeplace – everything from the previously mentioned operational problems of Nissan product quality defects through to at a strategic level the avoidance of product clash in regions and segments. But overall the alliance template created has worked inside the corporation's twin organisations, culture clashes largely avoided and efficiencies created.
Such lessons learnt though on a smaller scale, and the organisation of management inter-faces somewhat different, should serve the Avtovaz, TATA, Mahindra, Baja alliances and in time develop influence at corporate and perhaps political levels at Dongfeng & the regional PRC Administration.
In short Renault is having to create an evolved corporate template that is perhaps best described as a halfway house between its Nissan experience and that of smaller-scale regional partnerships such as Oyak-Renault in Turkey, or IDRO-Renault in Iran.
These developments are of course promising and already bearing fruit, such as Logan's reach into Asia. But the type of synergy-seeking will be very different to the technically based, new platform programme work achieved with Nissan – work that is well-structure and attains obvious cost-savings results. The synergies sought with its new partners will be far more market driven, and less 'controllable', with Renault having to diplomatically balance its 'ownership' of product and process with the political and cultural demands of its partners and the typically more volatile consumer demand of EM regions.
3. “Taking cost savings further”
This is perhaps the most visible sign of Renault's dedication to its future, competitive shape.
Though Renault shows a declining R&D and CapEx ratio relative to revenues, it seems increasingly hard to see exactly how it will attain the levels of cost savings without jeopardising future competitiveness. That is unless it possibly demands that Nissan become the major R&D extoller, and simply buys-in at cost the evolved technology with the hope of a maintained, and indeed increased, Yen vs Euro&Dollar differential - so assisting Nissan EU & US exports.
It seems inevitable that Renault is hard-pushed to create a more cost-drive value chain using BRIC located suppliers that are able to supply locally assembled cars (ostensibly the standard B-low cost Logan platform) with production capability for technically superior yet similar parts for EU-specified unit sales. This then provides R-N with a BRIC supplier base that is already effectively a generation ahead in terms of the ability to supplying for next generation local cars. And so Renault appears to have continued its philosophy of 'step-ahead, lowered cost' components sourcing, this created by the technical & procurement strategy template put in place originally for Logan and its CEE markets.
Thus the theory has been proven by CEE Logan and to an extent in Brazil, and so is shown to be viable. But the internal trends of these very different BRIC regions are very different to the CEE where Dacia was first and dominant. Renault cannot ensure such market and industrial dominance over the BRIC regions, especially so given its presently low capacity/volume levels. Instead of replaying the CEE model on an isolated basis in per region, it may need to consider creating a BRIC network of suppliers as a short-medium term solution, depending upon local BoM costs. Sub-assembly costs, FX relations, global shipping and local storage costs.
In short it will be harder to replay the Nissan or Logan cost-efficiency models given less control of a softer, more volatile macro-context.
4. “Sustaining a high level of WCR efficiency”
The creation and protection of Working Capital is of course a key determinant of long-term survival and success in such fragile economic times. For car-makers operating with global reach and so open to a broader palette of macro-economic influence it is vital. Thus no surprise that Renault highlights WC as a prime corporate lever, Ghosn knows that's investors wish to see that prime indicator of operational health.
But in these extra-ordinary times, given that Renault infact reached-out for the much needed $3bn aid-package, the present level of WCR seems far less credible, since it was not wholly the result of managerial acumen or astute capital management. Instead the capital markets could effectively assume that Renault (and PSA) knew that the socially-biased government as a large shareholder would ultimately come to its rescue and so as a consequence were previously more lax regards the honing of a truly efficient WC attitude. Had it been, it would perhaps not have required the E3bn, or if so, not as much.
Instead it is seen to be on par with PSA when the 2 companies are intrinsically very different, and demonstrating an awareness of “WCR” importance now seems almost a case of “closing the stable door after the horse has bolted”, if not verging on the hypocritical.
Instead it should perhaps highlight its ambitions via a more pertinent investor indicator Whilst BMW typically focuses upon RoCE and PSA now highlights its focus on Operating Margin, Renault will need to find an equally convincing 'financial hook', beyond still important but diminishingly so liquidity levels.
Vying against PSA on the Operating Margin measure, which itself is set against the “top-5 benchmark” could be that hook to regain credibility and a guide of relative future performance.
Renault will have to fight hard in Europe and Brazil whilst awaiting its 'Indian Summer', so should be seen to avoid simply buying market share via reduced margins; for that is a tactic that more investor-friendly companies (eg VW, Daimler, BMW, Honda) learned to avoid long ago.
In that respect relative to these 'capital-cautious' times, Renault must not be seen to be a quasi-nationalistic enterprise, but instead the truly globally capable, globally integrated, fiscally prudent blue-chip Ghosn envisaged.
The partial sale of Renault F1, and intended real-estate divestments help to illustrate the required mentality, but it must be seen not just in the Board's tactics or intentions, but created throughout the organisation down to a change in the innate reliance upon Renault's volume muscle and accordant pricing power.
Ordinary : Euro 30.43
In conclusion to the overview of the 'Western 8' automakers, Renault is put under the spotlight, having announced its FY09 results on 12.02.2010.
Renault-Nissan was instigated by Carlos Ghosn in 1999, to effectively create a 21st century auto-manufacturing model which had both global breadth across markets and segmentational depth within these markets. An entity that had mutual synergies & compliments, an entity which operating with “twin-pillars” could maximise the advantages of cross-shared ownership and so dual determination without the political and operational problems of fully fledged integration.
Mutual platform & systems rationality was of course the primary driver, which along with the integration of Samsung Motor, assisted in the initial years a dramatic cut in development costs and economies of scale which enabled greater production flexibility and critically cost-leverage over a broad basket of EU, Japanese, Asian and South American suppliers, all intent on 'coat-tail growth'.
The productivity improvement of platform sharing (Renault-derived on B & C segment, Nissan-derived on D, E & 4x4, Samsung-derived on niche) undoubtedly assisted on cost-savings, a level of intra-corporate competition intentionally created by Ghosn in the search for efficiency, but also pragmatically sharing best practice and learning across the empire. All though was not initially rosy, as Nissan was forced to adopt Renault sourced systems on small cars, the quality gap between the 2 marques became evident, Nissan's reputation suffering at the customer level with more 'things gone wrong' whilst under warranty, which cost national sales companies and Nissan HQ new parts costs, dealer-fit charges and internal demands that its parent Renault design to a quality standard not a cost standard.
The difference was wholly evident in earlier generation product comparisons too. Though Nissan had had good quality, its general cosmetic appeal had been lost through successive spirals of conservatism – itself driven largely by the contracting and so conservative Japanese domestic market in the 1990s and a loss of direction in the US. In direct contrast though, Renault had been able to overcome its almost endemic sub-par general quality standards by focusing upon the 3 critical customer deal-winners of the time: aesthetics, safety and credit. That focus on differential styling, NCAP test star ratings (tending to BIC) and easy access credit, firstly turned around the UK and German consumer's perceptions of Renault (even if only relatively superficial) and secondly attracted more people (of varying credit status it must be said) to drive away.
But of course Renault's claim to fame throughout the 2000s was its re-generation of Romania's Dacia as perhaps the core CEE brand, with commercial reach into selected western Europe countries and into the 'Near East'. The Logan in its variant forms and Sandero now account for nearly 257,000+ units pa in 2008.
[NB. though the dramatic CEE downturn will have significantly cut that number. Unfortunately although an inexpensive option for W.Euro buyers, the cars' mass, size and use of less advanced technology means that the loss of CEE Dacia sales have in all probability only been slightly off-set by western buyers given that it is not a 'scrappage scheme' contender. However Renault was well placed with its own cars in A & B segments].
That was the 1999-2007 success story, but of course as with its mass-market peers, Renault has been heavily hit by the consumer fall-out effect of the economic crisis, so reliant upon the French government's Euro3bn soft loan, and the demand-driver effect of EU nation-state scrappage schemes through 2009 and variously into 2010.
A paper based critique of annual and monthly YoY figures gives theoretical hope, market TIVs - thanks to incentives - showing a weak upward trend. However, the fact that so much government liquidity has been pumped into the EU and US car markets to seemingly stabalise consumption does engender the argument that once removed the downward effect may well continue, and data highlighting that approximately 50% recent sales have simply been pull-forward or indeed the opportunity jumped upon by opportunist (less scrupulous) buyers.
As highlighted in the FY09 presentation, Renault has been a visible beneficiary, its sales for the most 'flat' (hovering at a median average of 0.5%) across most of its international markets. However, the UK, Brazil, Turkey and Iran do show full-year slight losses, though for the UL and Turkey turning positive with H2 YoY comparisons. Thus as the year ended it was only Brazil and Iran in the red, and respectively only by 0.1% and 2.0% (Renault Iran consisting of just Tondar [Dacia] sedan & 'old' Megane). On a sales basis the company out-performed its peers as a beneficiary of the EU scrappage boost. The A-segment TIV increased 29%, whilst Renault gained 34%, whilst the B-segment rose 8% and Renault gained 12%. In the C-segment, whilst the TIV dropped -6%, its new Megane gained 15%. As a small-impact comparison that other segments (D/E) dropped -14%, whilst it lost -34%. However, as the EU's #1 LCV manufacturer it managed to beat heavy YoY segment losses of -30%, with a -24% loss.
As with all enterprises in the current climate, the company has been keen to demonstrate its recognised importance of liquidity and working capital.
Thus highlighted its H109 & H209 efforts respectively focused on initially securing delayed transactions to creditors (accounts payables) [giving +E486m] and latterly securing timetabled transactions from debtors (accounts receivables) [giving +E640m] (The use of any 'factoring' used, if any, was not given). Added to this was 'liquidation' of inventory stock [giving +E1,372m], plus further savings +E425m, thus proving a “WCR” contribution of E2,923m (approximately E3bn).
[NB it will not go unnoticed by many that this is of the same magnitude as France's 'soft-loan' to Renault].
Alongside the liquidity issue, is that of driven cost-savings given the loss of revenues. Carlos Ghosn having gained his nick-name as 'Le Cost Cutter' back in the late 90s, has a decade later, been required to once again lead that task with COO Patrick Pelata, and together they have had to be seen beating the income slide at fixed and variable levels. At a fixed level, 2009 was compared with 2007 and 2008 datum points, highlighting that the majority of fixed cost reduction for G&A and Manufacturing was extracted in 2008, whilst 2009 saw more punitive extractions across R&D, Net CapEx and Marketing.
Given the typical massive guzzle of the auto-industry's capital expenditure, such hard times are calling for a modified approach relating to core products and plant. With this approach Renault sizeably cut Net CapEx and the capitalised and expensed portions of R&D, leaving it -33% down compared to peak 2007 figures ('09: E3,108m vs '08: E4,342m vs '07: E4,631m). In contrast, G&A is down -20% over these 3 years.
Given the alternative annual focus on fixed-cost plant (hardware [2009]) versus people (software [2008]), it appears that a new cost-initiative may need to be made in G&A & Marketing in 2010, with moreover more efforts regards variable costs in these arenas as well as of course across production sites. Exact detail about how Ghosn/Pelata 'play' these initiatives to show YoY cost-savings (ie hardware vs software, and fixed vs variables) would be of great interest to the analyst community, though may of course be showing Renault's 'hand', beyond the cost-reduction determinant presented for variable costs.
YoY revenues were down approximately 11% (E33,712m) compared to 2008 restated figures (E37,791m). The critical operating margin fell from 0.9% (E326m) to -1.2% (E-396m) so down YoY by -2.1%. 'Other' operating income and expenses fell from E-443m to E-559m.
Net financial income and expenses down from E441 to a negative E-404m, so dropping E-845m.
'Associated Companies' fell from E437m to a negative E-1,561, so dropping E-1,998m (ie nearly E2bn). (This included Nissan E-902m – though pulling back well in Q3/Q4, Volvo Truck E-301m, Avtovaz E-370m, Other E12m).
Including current and deferred taxes (these staying relatively flat) and the Net Income for 2009 dropped from E599m previously to a negative E-3,068m, so down E-3,667m. Looking at Debt, FCF and Liquidity Reserves, debt levels have reduced YoY from E7,944m to E5,921m, cashflow now sits at 2,088m, and Liquidity (cash & commercial credit lines) has improved from E4.8bn to E9.5bn. Of the Debt, E1.1bn is payable in 2010, decelerating until 2013 when E1.4bn matures, but the real hit comes in 2014, when E4.1bn matures, the Government's E3bn, plus E1.1bn.
Renault's global market TIV outlook expects 2010 to show a -10% decline in Europe, -10% in EuroMed (Balkans, Turkey, NW Africa), “Stability” in S.America & Asia/Africa, and +10% increase in EuroAsia (Russia & ex-CIS states).
Renault states that even though 2010 will be tough it will show +FCF through 2010 due to:
1. “A gain of EU market share in declining TIV”
2. “Extraction of alliance synergies”
3. “Taking cost savings further”
4. “Sustaining a high level of WCR efficiency”
Of these investment-auto-motives believes:
1. “A gain of EU market share in declining TIV”
Renault will probably follow the typical French norm of within the matured EU of “buying market-share” (akin to PSA behavior) via maintained (or even expanded) capacity of plants - given nominal inventory depletion. The group's captured-finance house RCI able to play a key role in doing so given its stated good performance in 2009 and implicit backing from the French wholesale finance sector.
However, the strong product momentum Ghosn mentions, whilst on paper looks 'interesting' with cabrios like Megane and new Wind, will very probably suffer when put up to hard scrutiny...unless Ghosn has immediate suprises in store; which looks doubtful.
Twingo & Clio experienced sales boosts thanks to the scrappage scheme, but their innate conservative look, does little to separate them from the field, with new generation face-lifts adding little product appeal, hence the aforementioned Renault pricing power plays expected. Megane has performed and will sustain sales due to its point in its lifecycle, though without detail of internal forecasts business model expectation are hard to judge. The large cars will struggle as they have historically done. Critically, Renault has arguably over-filled the A-C segment with variants, many of which appear heavily overlapping in practical terms, even if not on paper, the plethora of MPV & 'Grand' (extended wheelbase) variants now either encroached by taller standard cars, or encroaching upon larger siblings. Thus, as with other makers desperate to fill niches, a level of product redundancy appears apparent as seen with the customer reaction to Modus, possibly repeated on a mooted Clio-Scenic (unless it proves the natural dimensional successor to Megane Scenic Mk1).
Planners have been desperate to create volume off of singular platforms to drive theoretical economies of scale, yet if production volumes do not actually meet market demand for forecast volumes, and product must must discounted on the dealer-floor then the validity of the planning exercise has been futile and ultimately for the investor, value destroying.
[NB the case of the “tail wagging the dog” has been proven all too real throughout auto-industry history, as the economic requirement for volume becomes the determinant corporate driver, not the attuned understanding of the marketplace true demand type and levels. Instead, as we see with French industry and previously US industry, volumes simply increase a manufacturer's in-market pricing power].
On the LCV front Renault tends to lead EU sales given its broad-span product portfolio from B-segment CDVs (car derived vans) right up to its class 7 HGVs and sizable dealer network. But the core products are the Traffic and Master, this latter van seeing model replacement this year. Renault has also maintained its manufacturing JV with Opel, assembled in GM's Luton, UK plant, and also rebadges product for Nissan Europe. Presumably Ghosn will be expecting the LCV and Truck markets to rebound from their heavy lows prior to proper traction in passenger cars in line with the economic upturn; when it eventually arrives, and will be directing RCI to prime business & fleet buyers with attractive finance terms.
Given present EU market constraint, Renault is undeniably looking for additional volume from the EM regions.
Brazil is presently 'flat' due to its own economic constraint caused by depleted commodities exports so whilst awaiting return, which is largely related to Chinese materials demand. As such, Renault like others is required to 'cherry-pick' its regional investment bets with the BRIC region during this global lull.
Russia, previously a rapid growth country has witnessed a heavy economic and consumer demand slump, 2009 car sales 50% down YoY. Although Ghosn was put under pressure by Russian production partner AvtoVAZ, he rightly did not cave-in to demands for additional liquidity, even at the threat of Renault equity dilution.
India saw Renault's relatively arrival late compared to the Japanese and Germans, but since 2007 Renault formed its 1st Indian JV with TATA in assembly of old generation Trafic vans. A 2nd JV with Mahindra & Mahindra to produce the (Dacia) Logan in Nashik, Maharashtra (at 50,000 units pa) and has invested in Chennai (to produce 400,000 units pa). A 3rd JV with Bajaj regards the concept development of a low cost “1-Lakh” car to compete with TATA's Nano. Thus it has set a synergies based template for car, van and truck JV's, aiding both the technical development of its Indian domestic partners and provides market access for its own indigenously manufactured and imported vehicles. Critically, the Parisian Board will be closely watching India to maintain its growth path as the other BRIC nations falter or slow.
China, and the Dongfeng-Renault relationship ran into trouble in mid 2009 after supposed Renault product defect problems. The original planned production plant in Huadu, Guangzhou City has been handed to Dongfeng-Nissan, probably to enable Nissan to maintain its sales lead. Although Renault cars will also be built there in realistically relatively limited numbers. Although Renault has been present in China for some time - though not as long as PSA - the ongoing capacity constraint regards domestic production leaves the company at a severe disadvantage compared to other, far better market-engrained western competitors, and so has in effect to catch-up with EU peers like the almost iconic VW (and sub-brands) and GM and late arriving but quickly established Japanese.
Thus for the present, although Renault may gain a larger share of the shrunken EU cake in the short term, it seems that Renault's primary BRIC focus is set upon India.
2. “Extraction of alliance synergies”
A decade since formation of the Nissan alliance and synergies have undoubtedly been captured, these opportunities creating challenges of their own both in-house and externally in the markeplace – everything from the previously mentioned operational problems of Nissan product quality defects through to at a strategic level the avoidance of product clash in regions and segments. But overall the alliance template created has worked inside the corporation's twin organisations, culture clashes largely avoided and efficiencies created.
Such lessons learnt though on a smaller scale, and the organisation of management inter-faces somewhat different, should serve the Avtovaz, TATA, Mahindra, Baja alliances and in time develop influence at corporate and perhaps political levels at Dongfeng & the regional PRC Administration.
In short Renault is having to create an evolved corporate template that is perhaps best described as a halfway house between its Nissan experience and that of smaller-scale regional partnerships such as Oyak-Renault in Turkey, or IDRO-Renault in Iran.
These developments are of course promising and already bearing fruit, such as Logan's reach into Asia. But the type of synergy-seeking will be very different to the technically based, new platform programme work achieved with Nissan – work that is well-structure and attains obvious cost-savings results. The synergies sought with its new partners will be far more market driven, and less 'controllable', with Renault having to diplomatically balance its 'ownership' of product and process with the political and cultural demands of its partners and the typically more volatile consumer demand of EM regions.
3. “Taking cost savings further”
This is perhaps the most visible sign of Renault's dedication to its future, competitive shape.
Though Renault shows a declining R&D and CapEx ratio relative to revenues, it seems increasingly hard to see exactly how it will attain the levels of cost savings without jeopardising future competitiveness. That is unless it possibly demands that Nissan become the major R&D extoller, and simply buys-in at cost the evolved technology with the hope of a maintained, and indeed increased, Yen vs Euro&Dollar differential - so assisting Nissan EU & US exports.
It seems inevitable that Renault is hard-pushed to create a more cost-drive value chain using BRIC located suppliers that are able to supply locally assembled cars (ostensibly the standard B-low cost Logan platform) with production capability for technically superior yet similar parts for EU-specified unit sales. This then provides R-N with a BRIC supplier base that is already effectively a generation ahead in terms of the ability to supplying for next generation local cars. And so Renault appears to have continued its philosophy of 'step-ahead, lowered cost' components sourcing, this created by the technical & procurement strategy template put in place originally for Logan and its CEE markets.
Thus the theory has been proven by CEE Logan and to an extent in Brazil, and so is shown to be viable. But the internal trends of these very different BRIC regions are very different to the CEE where Dacia was first and dominant. Renault cannot ensure such market and industrial dominance over the BRIC regions, especially so given its presently low capacity/volume levels. Instead of replaying the CEE model on an isolated basis in per region, it may need to consider creating a BRIC network of suppliers as a short-medium term solution, depending upon local BoM costs. Sub-assembly costs, FX relations, global shipping and local storage costs.
In short it will be harder to replay the Nissan or Logan cost-efficiency models given less control of a softer, more volatile macro-context.
4. “Sustaining a high level of WCR efficiency”
The creation and protection of Working Capital is of course a key determinant of long-term survival and success in such fragile economic times. For car-makers operating with global reach and so open to a broader palette of macro-economic influence it is vital. Thus no surprise that Renault highlights WC as a prime corporate lever, Ghosn knows that's investors wish to see that prime indicator of operational health.
But in these extra-ordinary times, given that Renault infact reached-out for the much needed $3bn aid-package, the present level of WCR seems far less credible, since it was not wholly the result of managerial acumen or astute capital management. Instead the capital markets could effectively assume that Renault (and PSA) knew that the socially-biased government as a large shareholder would ultimately come to its rescue and so as a consequence were previously more lax regards the honing of a truly efficient WC attitude. Had it been, it would perhaps not have required the E3bn, or if so, not as much.
Instead it is seen to be on par with PSA when the 2 companies are intrinsically very different, and demonstrating an awareness of “WCR” importance now seems almost a case of “closing the stable door after the horse has bolted”, if not verging on the hypocritical.
Instead it should perhaps highlight its ambitions via a more pertinent investor indicator Whilst BMW typically focuses upon RoCE and PSA now highlights its focus on Operating Margin, Renault will need to find an equally convincing 'financial hook', beyond still important but diminishingly so liquidity levels.
Vying against PSA on the Operating Margin measure, which itself is set against the “top-5 benchmark” could be that hook to regain credibility and a guide of relative future performance.
Renault will have to fight hard in Europe and Brazil whilst awaiting its 'Indian Summer', so should be seen to avoid simply buying market share via reduced margins; for that is a tactic that more investor-friendly companies (eg VW, Daimler, BMW, Honda) learned to avoid long ago.
In that respect relative to these 'capital-cautious' times, Renault must not be seen to be a quasi-nationalistic enterprise, but instead the truly globally capable, globally integrated, fiscally prudent blue-chip Ghosn envisaged.
The partial sale of Renault F1, and intended real-estate divestments help to illustrate the required mentality, but it must be seen not just in the Board's tactics or intentions, but created throughout the organisation down to a change in the innate reliance upon Renault's volume muscle and accordant pricing power.
Thursday, 18 February 2010
Company Focus – PSA Group – Poor Hunting In the Lion's Den
PSA Group Stock Price (Paris @ 18.02.2010, 23.00 GMT)
Ordinary: Euro 20.41
PSA was formally created on the verge of 1974 by the sheltering of the then flailing Citroen brand under the Peugeot umbrella. A few years later, with sound finances and corporate optimism Chrysler Europe was integrated into the group, yet overburdened by complexities and cash drain the previous memory of essentially an independently run and successful Peugeot, the company was to see 5 years of blight between 1980-85.
This episode taught the Peugeot family much about the importance of independence, created by the ability to 'run lean', the core enabler to do so the philosophy of a 'pick & mix' technical and product strategy with external parties. That formula re-built the company through the 1990s, and by the late 90s was seen as the grandmaster of reduced level, high impact CapEx capability, common platform & components between Peugeot & Citroen enabling at the time impressive margins for such a marginal player.
Having expanded its sales of affordable, youthful cars to a plethora of new customers throughout the age range, broadened national markets (Germany & the UK being prime volume regions), and created joint ventures with Iran and China to enter new markets using amortised platforms (405 & ZX respectively) cracks started to appear in 2006. Folz's 11 year reign came to a close in 2007 when the ex-Airbus Streiff was appointed, but reportedly his style created personality clashes with the family and management led to his dismissal quickly after the loss-making FY08 results were announced.(To present a counterpoint, Streiff's unpopularity could have also been a case of 'hard truths' not wanting to be heard and intransigent management). Into the breach stepped ex-Corus man Varin, presumably the Peugeot family and others believing his more consensual style and deeper knowledge of the upstream value-chain given his steel industry acumen would be of more immediate and consequential assistance.
[NB investment-auto-motives believes that the Peugeot family's possible intent is to create a far greater inter-connected, conglomerate model Chinese PSA division. Able to drive down raw material costs through a PSA owned value chain and critically better orchestrate flexible transfer costs between sections of the vertical chain to suit the Chinese & regional economic cycle].
The recent report of perhaps PSA's worst ever financial year - after previous year on year losses – demonstrates the urgency of re-organising the company as a viable entity. In a recent Financial Times 'View From the Top' interview, Varin appeared 'upbeat' to the camera about the Euro3bn loan (at 6% interest) given by the French government (as with Renault) to effectively bail them out of the woes generated by the collapse of credit and consumer markets. Varin was keen to focus on the recent rise in capacity utilisation, something he knows is a key metric to financial analysts, stating that by H209 it was running at 92%, yet also oxymoronically stated that capacity will be cut by 25% between 2008-2012. This we suspect is simply the consequence of only slightly reduced production set against a modelled forecast of 2012 global TIV demand, thus the 25% figure appears somewhat concocted.
Given that to date the EU region is well over-capacity producing 14.5m units versus 12.5m sales, and that only one (Belgian GM) plant has been shuttered, surface impression is that the Euro3bn aid is indeed being used to maintain PSA status quo, presumably in the hope that when the economic uplift returns and so car-demand returns, PSA will be in a strong competitive position But future EU TIV looks 'flat' to 2020 and probably beyond; thus no case of 'a rising tide lifting all boats'. Until that slight uplift to the perpetual 'flat-line', as the EU's #2 largest auto-maker strengthened with state aid it will seemingly fight its way forward to that point – possibly via a price war. By similarly producing an almost a flat YoY volume of cars in the short-term will increase levels of product and plant amortisation, which in turn provides a per unit cost reduction, and so enable price reductions on the dealer floor. Thus a case of pricing-power to buy market-share also assisted via generous credit if feasible via PSA Banque and additional 'goodies' incentives. Thus PSA re-enacts its downturn play-book, as we saw with the extended run-out strategy of 206 to claw-in sales.
Given PSA's stature as now a pseudo-nationalised entity, Varin may well see this European market scenario as the only one available given the envelope of conflicting forces he must operate within -ie government paid job-creation vs structural cost cutting.
That is the present-day's pragmatic look behind the still well stocked dealer inventories and PSA's own 'shop window' consisting of an attention grabbing, almost intendly distracting, sizable concept car family stretching across is 2 core brands and newer DS sub-brand. The reality behind the glitz looks far less glamorous, and demonstrates that the company must continue to properly address its cost-structure, product direction, product mix /cadence and overall brand & product(s) appeal.
As regards its cost-structure, little looks achievable in Europe given the implicit promise to keep buoying French economy, only perhaps feasible in the CEE and in tandem with its Toyota JV on its A-segment cars (107/ C1 / Aygo). Indeed we suspect that PSA will be heavily reliant upon Toyota's present position and ability to re-negotiate broad parts cost savings given a combination of its woes due to its massive volume recalls, and the presumed intent to only slightly change the basic specification of the platform and variant cars. Better PSA cost-savings look probable elsewhere in the EM regions, as scale efficiencies are built-up and once again amortisation plays a critical role in BoM (Bill of Material) reduction.
Product Direction will be key as it tries to balance the continued phase-by-phase roll-out of aging product over various regions, against now very immediate, well gleaned consumer perceptions.
The Corporate Forward Plan as presented three months ago on 12.11.09, sets out the broad PSA strategy template, which derived from PESTEL trends highlights the need for:
1. Global Reach given growth & demographics in EM regions (esp Asia)
2. Urbanisation demanding cleaner vehicles
3. Convergent Worldwide CO2 Regulations
4. New Products & Services to cater for changed global demand.
Whilst PSA is undertaking typical CO2 reduction initiatives regards next generation vehicles (mass, aero, powertrain efficiency, etc) on ICE cars, it also states that it wants to attain 20% market-share for Hybrids and EVs by 2020, its effort promoted by demonstrators such as its diesel-hybrid and its rear axle e-motor as integrated into the front ICE engined 'PROLOGUE Hymotion4' SUV. It presents a catalogue of eco-solutions ranging from engine capacity downsizing (industry norm) to 'start-stop' to L-ion EVs. And like Daimler et al, divides car usage types into 3 categories: “Urban, Peri-Urban & Polyvalent”.
As part of what it lauds as an alternative approach - “new services for new customers” - it offers 2 types of EVs, one homegrown in the form of an electric CV per brand (Partner & Berlingo) and what is essentially a badge engineered Mitsubishi MiEV, (iOn & C-ZERO). History and circumstances indicate however that such efforts may well be more of a PR exercise to keep PSA in the competitive fray. Since PSA has offered electric CVs in the past, such projects being short-lived to the high-cost of such niche volume vehicles being largely restricted to temporarily cash-rich, pro-green municipality customers. And the Mitsubishi e-car offered in its 2 variant forms has had only moderate success in homeland Japan and is yet to undergo market-trials in Oregan, USA. Thus the 2 PSA cars will be in reality market-trial cars, and so any production forecasts presently given must be treated with caution - ie 100,000 units over next 5 years.
[NB that 20,000 pa figure represents only 0.61% of the 3,260,400 annual sales (2008 figure) and critically also includes the E-vavacity e-scooter, which investment-auto-motives' suspects makes up a large percentage of the 100,000 unit estimate. Thus the direct car contribution appears minimal].
Also of note is the exploration of creating an in-house (variable) vehicle rental-based business model, that follows in the footsteps of other French transport initiatives such as the bike-based 'Velo'. Under the name of 'Mu' it offers a Pay-Per-Use model via a pre-paid client card, and offers various 'fringe' vehicles relative to use; suggesting use of a 3008 for weekends, e-scooter for immediate use, (e)bike for half day ride and baby seats or a van for occasional need. This type of complimentary business model has been a constant byline in the industry, ranging from Ford's previous ownership of Hertz to its similar 'Indigo' exploration.
As a multi-vehicle manufacturer and with changing EU mobility habits, the management team has struck a chord with the modern green psyche. Its prime aim of course to generate up-front liquidity via the pre-paid cards. However, as a purely commercial enterprise it runs up against fairly entrenched competition, and would need to be willingly backed at scale and done so at a probably loss-making level for some years until it gained public recognition. Also the business fundamentals of appropriate cyber-physical retail channels, inventory logistics management etc are complex, with what may seem parallel case studies (such as Velo) generally simpler and critically typically commercially fudged given sunk-cost government funding for social good. Indeed such an initiative may well have been required for the French Euro3bn soft-loan. Hence the 2010 roll-out in Paris, Berlin and elsewhere (not yet announced) will be closely watched, and analyst/investor quizzing of the business's very basics should be justifiably expected.
Hence, whilst useful PSA 'feel-good' stories, the EV and Mu initiatives must be considered as icing on the cake. What matters is the business ingredients, mix and quality of the fundamental PSA cake across the primary Autos division and as an adjunct the health of its other smaller divisions: Faurecia, Gefco, Banque PSA Finance, Motorcycles, P-C Moteurs and Process Conception Ingenierie.
Unsurprisingly, the recent 10th February FY09 presentation was one of optimism, highlighting the ongoing turnaround in fortunes especially given the H2 sales lift. EU passenger car market-share was up by 14.3% in Q4, and 13.7% for full year, EU commercial vehicle sales was up to 22.2% market-share and global market-share was up to 5.1%. But in total, units sales were down 2.2% YoY to 3,188,000 (assembled & CKD) units. As a CO2 count, of these approximately 1m emitted 130g/km or less, and of those, 750,000 emitted 120g/km or less.
But importantly, over 2008/9, PSA's previously broadly considered unique sales proposition by the capital markets as a low CO2 car company stalled in comparison with fast-approaching competitors.
In short PSA due to whatever restrictions – technical, managerial etc - did not best utilise the previous lead it had, largely we suspect because of the necessary 'extended amortisation basis' the business presently runs upon (eg 206+).
[NB investment-auto-motives made note of this in 2008 and due to degraded PSA product appeal – ie 'guppy mouth' fronted and pick & mix styled Peugeots, style over substance Citroens and a cobbled DS proposition - did not share the general enthusiasm for the group's YoY prospects, and notes that in part new sales have been a result of poor quality vehicle returns, displeased lease-plan buyers tempted into new Citroen sales via price and credit incentives by dealers to 'shift metal' Thus, the seeds of PSA misfortune were being sewn in 2007].
However, as of today, all recognise the role that the Euro3bn soft-loan played, apportioned to reduce net debt from E2.9bn to E2bn, assist working capital and probably allow unhindered transfer of large stock inventory sales to be booked more or less directly into positive FCF (of E300m).
However, such financial engineering could not stem the major loss of E1.161bn.
In the face of such losses the age-old, auto-industry reaction to creeping value-destruction is typically the search for scale-efficiency. A route well understood and exploited by Renault given its decade-long relationship with Nissan. Understandably given its failed past attempts to build volume in this manner (ie 1977 with Chrysler Europe) PSA looks to build such scale and savings via technical alliances as it has generally successfully done (though less rewardingly in recent years) and we suspect the idea of building greater self-styled industrial verticality in EM regions to access both growing markets and so volume scale, and simultaneously self-direct the value chain.
This is a longer term ambition, and whilst being slowly built PSA should look to the probable advantages of creating yet further alliance relationships: with as present possibilities: BMW, Mitsubishi and Toyota.
The BMW idea, long mentioned on the grapevine, would theoretically provide BMW with cross the board savings on Mini and/or a tentative 0-series, something it would well appreciate, and provide via joint engineering PSA with improved product quality...possibly leading to improved in-house NPD acumen if it could adopt BMW's rigorous methodology. As Eurozone members there would be no fluctuating currency problem to better budget by, and such an alliance would politically assist the ideology of a united Europe, a hot topic at the moment. Indeed the venture could possibly enable low-cost EIB funding if it could be seen to have effect on the global stage.
A second option is to create a parallel model to Renault-Nissan, very probably with present ally Mitsubishi, given its small car capability (inc e-vehicles), the Japanese company's need for medium car leverage vs Japanese peers and its 4x4 competence (as seen with the 3008 project). Moreover such a R-N parallel (PSA-M) could indeed be cross-linked into Renault-Nissan on a project / regional basis, providing a bigger strategic possibility envelope for all companies involved with either direct lateral, indirect vertical or indirect diagonal strategy options. This would presumable also assist with all the individual party's needs to create a sustainable base to credibly compete in the upscale premium sector. (ie PSA to piggy-back Nissan's Infiniti).
As an alternative is the possibility to create a stronger alliance with Toyota, building upon the present A-segment JV, thus able to 'piggy back' Toyota's own massive cost-down achievements. Here PSA's Varin could feasibly lead steel procurement talks with global steel mills, and Toyota could lead component talks to achieve dual gains.
Varin's presentation highlights his desire to mimic the median financial achievements of the top-5 best performing industry players in hitting a 6% operating margin of E3.3bn on E50bn annual turnover, which when questioned by the FT was indicated as between 3-5 years.
Today, PSA sits in a somewhat precarious position running at 1% “recurring operating income” (E550m on E54.3bn turnover), so to fill that aforementioned profitability gap by 5% appears a huge task within 4 years. Of the E3.3bn required, he states 30% will come from Sales & Marketing (as we read typical incentives tied with vehicle replacement/upgrade offers), 15% from high growth markets (ie China, India, Brazil, Russia & RoW) and 55% from Production, Development and SG&A.
This latter section representing 55% suggests there is much fat-reduction to be had, and it is here that investors will want to see vital transparency. To achieve that level of uptick suggests that Mr Varin already has PSA's primary steel procurement contracts already signed and future technical alliance's secured, possibly with French political help, even if he is not letting on about any procurement coups today. This though is but inference, much more needs to be seen to give the capital markets true assurance.
Ordinary: Euro 20.41
PSA was formally created on the verge of 1974 by the sheltering of the then flailing Citroen brand under the Peugeot umbrella. A few years later, with sound finances and corporate optimism Chrysler Europe was integrated into the group, yet overburdened by complexities and cash drain the previous memory of essentially an independently run and successful Peugeot, the company was to see 5 years of blight between 1980-85.
This episode taught the Peugeot family much about the importance of independence, created by the ability to 'run lean', the core enabler to do so the philosophy of a 'pick & mix' technical and product strategy with external parties. That formula re-built the company through the 1990s, and by the late 90s was seen as the grandmaster of reduced level, high impact CapEx capability, common platform & components between Peugeot & Citroen enabling at the time impressive margins for such a marginal player.
Having expanded its sales of affordable, youthful cars to a plethora of new customers throughout the age range, broadened national markets (Germany & the UK being prime volume regions), and created joint ventures with Iran and China to enter new markets using amortised platforms (405 & ZX respectively) cracks started to appear in 2006. Folz's 11 year reign came to a close in 2007 when the ex-Airbus Streiff was appointed, but reportedly his style created personality clashes with the family and management led to his dismissal quickly after the loss-making FY08 results were announced.(To present a counterpoint, Streiff's unpopularity could have also been a case of 'hard truths' not wanting to be heard and intransigent management). Into the breach stepped ex-Corus man Varin, presumably the Peugeot family and others believing his more consensual style and deeper knowledge of the upstream value-chain given his steel industry acumen would be of more immediate and consequential assistance.
[NB investment-auto-motives believes that the Peugeot family's possible intent is to create a far greater inter-connected, conglomerate model Chinese PSA division. Able to drive down raw material costs through a PSA owned value chain and critically better orchestrate flexible transfer costs between sections of the vertical chain to suit the Chinese & regional economic cycle].
The recent report of perhaps PSA's worst ever financial year - after previous year on year losses – demonstrates the urgency of re-organising the company as a viable entity. In a recent Financial Times 'View From the Top' interview, Varin appeared 'upbeat' to the camera about the Euro3bn loan (at 6% interest) given by the French government (as with Renault) to effectively bail them out of the woes generated by the collapse of credit and consumer markets. Varin was keen to focus on the recent rise in capacity utilisation, something he knows is a key metric to financial analysts, stating that by H209 it was running at 92%, yet also oxymoronically stated that capacity will be cut by 25% between 2008-2012. This we suspect is simply the consequence of only slightly reduced production set against a modelled forecast of 2012 global TIV demand, thus the 25% figure appears somewhat concocted.
Given that to date the EU region is well over-capacity producing 14.5m units versus 12.5m sales, and that only one (Belgian GM) plant has been shuttered, surface impression is that the Euro3bn aid is indeed being used to maintain PSA status quo, presumably in the hope that when the economic uplift returns and so car-demand returns, PSA will be in a strong competitive position But future EU TIV looks 'flat' to 2020 and probably beyond; thus no case of 'a rising tide lifting all boats'. Until that slight uplift to the perpetual 'flat-line', as the EU's #2 largest auto-maker strengthened with state aid it will seemingly fight its way forward to that point – possibly via a price war. By similarly producing an almost a flat YoY volume of cars in the short-term will increase levels of product and plant amortisation, which in turn provides a per unit cost reduction, and so enable price reductions on the dealer floor. Thus a case of pricing-power to buy market-share also assisted via generous credit if feasible via PSA Banque and additional 'goodies' incentives. Thus PSA re-enacts its downturn play-book, as we saw with the extended run-out strategy of 206 to claw-in sales.
Given PSA's stature as now a pseudo-nationalised entity, Varin may well see this European market scenario as the only one available given the envelope of conflicting forces he must operate within -ie government paid job-creation vs structural cost cutting.
That is the present-day's pragmatic look behind the still well stocked dealer inventories and PSA's own 'shop window' consisting of an attention grabbing, almost intendly distracting, sizable concept car family stretching across is 2 core brands and newer DS sub-brand. The reality behind the glitz looks far less glamorous, and demonstrates that the company must continue to properly address its cost-structure, product direction, product mix /cadence and overall brand & product(s) appeal.
As regards its cost-structure, little looks achievable in Europe given the implicit promise to keep buoying French economy, only perhaps feasible in the CEE and in tandem with its Toyota JV on its A-segment cars (107/ C1 / Aygo). Indeed we suspect that PSA will be heavily reliant upon Toyota's present position and ability to re-negotiate broad parts cost savings given a combination of its woes due to its massive volume recalls, and the presumed intent to only slightly change the basic specification of the platform and variant cars. Better PSA cost-savings look probable elsewhere in the EM regions, as scale efficiencies are built-up and once again amortisation plays a critical role in BoM (Bill of Material) reduction.
Product Direction will be key as it tries to balance the continued phase-by-phase roll-out of aging product over various regions, against now very immediate, well gleaned consumer perceptions.
The Corporate Forward Plan as presented three months ago on 12.11.09, sets out the broad PSA strategy template, which derived from PESTEL trends highlights the need for:
1. Global Reach given growth & demographics in EM regions (esp Asia)
2. Urbanisation demanding cleaner vehicles
3. Convergent Worldwide CO2 Regulations
4. New Products & Services to cater for changed global demand.
Whilst PSA is undertaking typical CO2 reduction initiatives regards next generation vehicles (mass, aero, powertrain efficiency, etc) on ICE cars, it also states that it wants to attain 20% market-share for Hybrids and EVs by 2020, its effort promoted by demonstrators such as its diesel-hybrid and its rear axle e-motor as integrated into the front ICE engined 'PROLOGUE Hymotion4' SUV. It presents a catalogue of eco-solutions ranging from engine capacity downsizing (industry norm) to 'start-stop' to L-ion EVs. And like Daimler et al, divides car usage types into 3 categories: “Urban, Peri-Urban & Polyvalent”.
As part of what it lauds as an alternative approach - “new services for new customers” - it offers 2 types of EVs, one homegrown in the form of an electric CV per brand (Partner & Berlingo) and what is essentially a badge engineered Mitsubishi MiEV, (iOn & C-ZERO). History and circumstances indicate however that such efforts may well be more of a PR exercise to keep PSA in the competitive fray. Since PSA has offered electric CVs in the past, such projects being short-lived to the high-cost of such niche volume vehicles being largely restricted to temporarily cash-rich, pro-green municipality customers. And the Mitsubishi e-car offered in its 2 variant forms has had only moderate success in homeland Japan and is yet to undergo market-trials in Oregan, USA. Thus the 2 PSA cars will be in reality market-trial cars, and so any production forecasts presently given must be treated with caution - ie 100,000 units over next 5 years.
[NB that 20,000 pa figure represents only 0.61% of the 3,260,400 annual sales (2008 figure) and critically also includes the E-vavacity e-scooter, which investment-auto-motives' suspects makes up a large percentage of the 100,000 unit estimate. Thus the direct car contribution appears minimal].
Also of note is the exploration of creating an in-house (variable) vehicle rental-based business model, that follows in the footsteps of other French transport initiatives such as the bike-based 'Velo'. Under the name of 'Mu' it offers a Pay-Per-Use model via a pre-paid client card, and offers various 'fringe' vehicles relative to use; suggesting use of a 3008 for weekends, e-scooter for immediate use, (e)bike for half day ride and baby seats or a van for occasional need. This type of complimentary business model has been a constant byline in the industry, ranging from Ford's previous ownership of Hertz to its similar 'Indigo' exploration.
As a multi-vehicle manufacturer and with changing EU mobility habits, the management team has struck a chord with the modern green psyche. Its prime aim of course to generate up-front liquidity via the pre-paid cards. However, as a purely commercial enterprise it runs up against fairly entrenched competition, and would need to be willingly backed at scale and done so at a probably loss-making level for some years until it gained public recognition. Also the business fundamentals of appropriate cyber-physical retail channels, inventory logistics management etc are complex, with what may seem parallel case studies (such as Velo) generally simpler and critically typically commercially fudged given sunk-cost government funding for social good. Indeed such an initiative may well have been required for the French Euro3bn soft-loan. Hence the 2010 roll-out in Paris, Berlin and elsewhere (not yet announced) will be closely watched, and analyst/investor quizzing of the business's very basics should be justifiably expected.
Hence, whilst useful PSA 'feel-good' stories, the EV and Mu initiatives must be considered as icing on the cake. What matters is the business ingredients, mix and quality of the fundamental PSA cake across the primary Autos division and as an adjunct the health of its other smaller divisions: Faurecia, Gefco, Banque PSA Finance, Motorcycles, P-C Moteurs and Process Conception Ingenierie.
Unsurprisingly, the recent 10th February FY09 presentation was one of optimism, highlighting the ongoing turnaround in fortunes especially given the H2 sales lift. EU passenger car market-share was up by 14.3% in Q4, and 13.7% for full year, EU commercial vehicle sales was up to 22.2% market-share and global market-share was up to 5.1%. But in total, units sales were down 2.2% YoY to 3,188,000 (assembled & CKD) units. As a CO2 count, of these approximately 1m emitted 130g/km or less, and of those, 750,000 emitted 120g/km or less.
But importantly, over 2008/9, PSA's previously broadly considered unique sales proposition by the capital markets as a low CO2 car company stalled in comparison with fast-approaching competitors.
In short PSA due to whatever restrictions – technical, managerial etc - did not best utilise the previous lead it had, largely we suspect because of the necessary 'extended amortisation basis' the business presently runs upon (eg 206+).
[NB investment-auto-motives made note of this in 2008 and due to degraded PSA product appeal – ie 'guppy mouth' fronted and pick & mix styled Peugeots, style over substance Citroens and a cobbled DS proposition - did not share the general enthusiasm for the group's YoY prospects, and notes that in part new sales have been a result of poor quality vehicle returns, displeased lease-plan buyers tempted into new Citroen sales via price and credit incentives by dealers to 'shift metal' Thus, the seeds of PSA misfortune were being sewn in 2007].
However, as of today, all recognise the role that the Euro3bn soft-loan played, apportioned to reduce net debt from E2.9bn to E2bn, assist working capital and probably allow unhindered transfer of large stock inventory sales to be booked more or less directly into positive FCF (of E300m).
However, such financial engineering could not stem the major loss of E1.161bn.
In the face of such losses the age-old, auto-industry reaction to creeping value-destruction is typically the search for scale-efficiency. A route well understood and exploited by Renault given its decade-long relationship with Nissan. Understandably given its failed past attempts to build volume in this manner (ie 1977 with Chrysler Europe) PSA looks to build such scale and savings via technical alliances as it has generally successfully done (though less rewardingly in recent years) and we suspect the idea of building greater self-styled industrial verticality in EM regions to access both growing markets and so volume scale, and simultaneously self-direct the value chain.
This is a longer term ambition, and whilst being slowly built PSA should look to the probable advantages of creating yet further alliance relationships: with as present possibilities: BMW, Mitsubishi and Toyota.
The BMW idea, long mentioned on the grapevine, would theoretically provide BMW with cross the board savings on Mini and/or a tentative 0-series, something it would well appreciate, and provide via joint engineering PSA with improved product quality...possibly leading to improved in-house NPD acumen if it could adopt BMW's rigorous methodology. As Eurozone members there would be no fluctuating currency problem to better budget by, and such an alliance would politically assist the ideology of a united Europe, a hot topic at the moment. Indeed the venture could possibly enable low-cost EIB funding if it could be seen to have effect on the global stage.
A second option is to create a parallel model to Renault-Nissan, very probably with present ally Mitsubishi, given its small car capability (inc e-vehicles), the Japanese company's need for medium car leverage vs Japanese peers and its 4x4 competence (as seen with the 3008 project). Moreover such a R-N parallel (PSA-M) could indeed be cross-linked into Renault-Nissan on a project / regional basis, providing a bigger strategic possibility envelope for all companies involved with either direct lateral, indirect vertical or indirect diagonal strategy options. This would presumable also assist with all the individual party's needs to create a sustainable base to credibly compete in the upscale premium sector. (ie PSA to piggy-back Nissan's Infiniti).
As an alternative is the possibility to create a stronger alliance with Toyota, building upon the present A-segment JV, thus able to 'piggy back' Toyota's own massive cost-down achievements. Here PSA's Varin could feasibly lead steel procurement talks with global steel mills, and Toyota could lead component talks to achieve dual gains.
Varin's presentation highlights his desire to mimic the median financial achievements of the top-5 best performing industry players in hitting a 6% operating margin of E3.3bn on E50bn annual turnover, which when questioned by the FT was indicated as between 3-5 years.
Today, PSA sits in a somewhat precarious position running at 1% “recurring operating income” (E550m on E54.3bn turnover), so to fill that aforementioned profitability gap by 5% appears a huge task within 4 years. Of the E3.3bn required, he states 30% will come from Sales & Marketing (as we read typical incentives tied with vehicle replacement/upgrade offers), 15% from high growth markets (ie China, India, Brazil, Russia & RoW) and 55% from Production, Development and SG&A.
This latter section representing 55% suggests there is much fat-reduction to be had, and it is here that investors will want to see vital transparency. To achieve that level of uptick suggests that Mr Varin already has PSA's primary steel procurement contracts already signed and future technical alliance's secured, possibly with French political help, even if he is not letting on about any procurement coups today. This though is but inference, much more needs to be seen to give the capital markets true assurance.
Tuesday, 16 February 2010
Company Focus – FIAT Group SpA – Cross-Breeding Pandas & Rams and Playing Desert Island Discs, All On Reduced Group Rations.
FIAT Group Stock Price (Milan @ 16.02.2010, 17.25 GMT)
Preferred – Euro 4.8075
Ordinary – Euro 7.8800
FIAT Auto is perhaps recognised as the most ambitious of present-day manufacturers. It's strategy to leverage its much improved health over the decade, maintain investor belief in the company and exploit the US governments restricted options to negotiate the operational integration of, and share-holding in, Chrysler LLC.
On paper, the synergies of the two entities look compelling from geographic & product portfolio fronts. FIAT gains a powerful 'piggy-backed' entry point into North America, and Chrysler gains relatively low-cost access to a suite of re-engineered, re-badged small & compact cars. Moreover FIAT is assisted with US government grants to ease the domestic's transition to a more eco-orientated company, and Chrysler new stake-holders are more closely aligned as the UAW recognises the part it must play in regenerating the company.
On the surface, this plan that substantially remodels the face of western industry, looks relatively simple, and during less harsh economic times it would indeed be. But there is a growing argument that the typically high cash-burn required to speedily merge operations, platforms etc will have to be tempered given re-emerging negative macro-economic concerns.
Having had the credit crisis followed by the banking crisis, EU and US economies are now hampered at fiscal supply and demand ends. The respective culprits being:
a) the possible EU contagion of sovereign debt default, one ramification of which is the tightening & costs of wholesale & corporate lending
b) the US' ongoing weak employment data, weak housing data and a strengthening US Dollar all of hamper the underlying fundamentals of the domestic economy and so consumption
[NB investment-auto-motives believes the German 'hard stewardship' stance towards Greece to be the correct for long-term EU stability. The converse, of Greece's self or otherwise expulsion from the bloc, would provide a medium-term opportunity of national currency devaluation and so economic 'pull-back', but as Merkel recognises an isolation of Greece, perhaps followed by Italy, Spain and Portugal creates the context for Sarkozy's ideology of an effectively French-led 'Mediterranean Club' economic bloc, which obviously undermines the EU rationale).
Relative to this last point, such a 'Club Med' entente cordiale would obviously boost Med-regional trade and economics, and add to the consumer-base of FIAT et al in time, but the structural consequences for the EU would mean a re-ratcheting of the EU cost-base (western & CEE) which would severely constrain passenger and commercial vehicle demand. This is the issue which the likes of a possibly 'Club-Med' pro FIAT, Renault & PSA would have to confront.
In regard to the FIAT story 'as is' thus far, having previously planned on an expected 2010 global economic rebound FIAT started the wheels of FIAT-Chrysler integration early in 2009, done so at apace given the US administration's expectations and injection of public finance.
[NB. In 2008 investment-auto-motives was far less optimistic having foreseen the 2010 picture)
In retrospect was it the right call and the right time?
Whilst 2007 was a good year per se, FIAT ended 2008 in a less than prolific position. Before its Chrysler tie-up FIAT had only $5bn in liquid cash at hand, down from $9.2bn a year earlier, and had just prior to the tie-up, $7.6bn in debt. The initial forecast that 2009 would bring $3.7bn in profit was later heavily discounted when reality hit to an expected “in excess” of $387m – thus a tenth of previous. Thus although with the assistance of US governmental financial aid and a pre-pack bankruptcy process (which largely - via disregarded creditor rights - cleansed the balance sheet) FIAT was perhaps in a less plausible position than appeared. By May 22nd 09 it had a FCF of approximatley Euro 1bn and reduced its debt-burden to under Euro 5bn.
However, given that the stars will never be perfectly aligned, especially so during such volatile times, FIAT 'walked up the plate' when few others dared.
Although perhaps overtly upbeat in public about FIAT's position and abilities given that at the time it was riding its product peak, presumably the 3 primary governing figures: Cordero di Montezemolo, Elkann & Marchionne have considered alternative fall back scenarios in case all did not go according to plan with a 2010 economic rebound. Fall back plans that presumably consist of more than appeals for individual EU nation-sate funds.
Given the poor national balance sheets of most except France & Germany, sovereign backed funding has become increasingly scarce. And moreover, it will be largely Germany & France that 'bails-out' at-risk neighbours, so diminishing cash availability for pan-EU conglomerates. Thus companies must look back to financial intermediaries & markets, but even this normal option still looks fragile given the muted demand for fixed-income and equities. At a time when new fears are emerging and gains are being 'locked-in' through sell-offs, the previous demand for corporate bonds has diminished at all but the highest credit rates, and stocks – looking overbought by many and still not aligned to fundamentals – are wavering and looking to trade 'sideways' as has been the historical norm after a post-crisis rally.
Thus Marchionne and the FIAT Group Board may have to consider alternative scenarios and measures to keep the FIAT-Chrylser integration rolling.. These in effect, to either:
1. maintain the present level of funding to merge FIAT-Chrysler – probably via asset divestment,
2. slow the merging process - which could compromise the promise of 'early' US generated income
Either way, as with GM, the ideal of any short-term IPO of the new FIAT Auto division presently seems premature given the now lost stability of 2009's macro and micro conditions. 2010 income reduction seems inevitable as geographically patchy and diluted secondary vehicle stimulus initiatives - as seen in the UK but not in Germany - consequentially subdue consumer sentiment .
Looking slightly more closely at “2nd round” stimulus beneficiaries, although the UK has extended its scheme until March, FIAT looks not to be a prime beneficiary given its current aging and unrelated model mix compared to Ford, VW, Renault & even PSA.
In the UK The 500 model is typically an emotional purchase as opposed to rational purchase choice driving 'scrappage sales' and whilst it will undoubtedly be lifted, the degree of that lift is debatable. More concerning for FIAT is that Panda suffers against more accomplished rivals, and face-lifted Punto-Evo realistically offers little draw beyond possibly value-destructive finance deals and incentives given the cosmetic compromise necessary for US & RoW market entry ASAP (as probably a Dodge alongside Lancia originated Chrysler variants.
With lesser gains from the UK and given Germany's decision not to repeat its scrappage scheme, FIAT must now look to its Italian homeland as a prime supporter via “2nd round stimulus”, and hope that it can once again buoy domestic sales to maintain the 2009 average of 33%. The “1st round stimulus” enables Italian car market sales to stay flat from 2008 to 2009, with just under 50% of all sales (Italian TIV 2.16m units) driven by the scrappage scheme which offered E1,500 rebate on specific low CO2 new cars. Expectantly FIAT benefited massively, but the when the government cash was withdrawn by year end the effects were immediate. January new car sales plummeted dramatically by 30%.
To counteract, Claudio Scajola - the Italian Economic Development Minister – stated that the scheme is being revived from February onwards, but there remains an implicit expectation by the government that FIAT does not shutter the Termini Imeresi plant in Sicily. Indeed, a good measure of real politik has emerged, the government seemingly trying to play FIAT against the Italian public and also seemingly the EU commission as it tries to inextricably link assistance to jobs.
As reported, the Termini Imeresi plant has become a prime examplar of national industrial strategy and private commercial strategy creating inevitable friction. With EU and national funding available for eco-enterprises, the over-optimistic business plan 'cooing' of private equity firm Cimino & Associates that hails to be the saviour of Termini Imeresi, puts pressure on FIAT to take the electric vehicle initiative so as to maintain Sicillian production and so assist the local economy. But, as Marchionne well knows – but will have a hard time convincing Ministers – the core-pillars of the Cimini business plan are overtly optimistic and effectually unrealistic: especially regards production capacity (ie sales) and the number of jobs to be saved. Given the close-knitted business and political network of Italy, it would not be a surprise is the Cimini proposition was in actuality quickly compiled and publicly released simply to try and force Marchionne's hand.
On a more immediate and realistic investment note, Marchionne recently signed the FIAT – OAO Sollers Euro 2.4bn agreement to create an Italian-Russian JV for vehicle production in Naberezhnye Chelny, Tatarstan The 50:50 partnership will produce FIAT-Chrysler cars from 2016, 10% of which will be for export, and assists in FIAT's reach into other EM markets beyond Brazil.
However, in the meantime FIAT faces an immediate concern.
The emerging product gap that has been described would be of lesser consequence for the Group under normal cyclical operating conditions when the Group as an entity can ride specific sector downturns. But as stated we face very turbulent times.
Due to the previous demands of Gianni Agnelli and the Italian government – given FIAT's national impact - Fiat Group is set-up as a (theoretically) counter-cyclical conglomerate, its Commercial Vehicle division, its Supplier Parts section and 'Agri-Con' business typically offering well aligned off-set income streams relative to the broad market spread of Autos. But within today's highly irregular business environment the usual sector-cyclical growth pattern has faltered, thus the normal upturn in the economic cycle which fosters demand in the Agri-Con, Commercial Vehicle and Parts businesses – as would be expected - has not arrived. And worryingly the EU, a prime market for FIAT, still continues to stagger.
Thus both critical dimensions of the FIAT Group – the innate strength of Autos & the off-set effect of the Other divisions – seem respectively lacking in potency and 'out of kilter'. This is not an inconsequential issue, such headwinds indicate that a very concerning funding gap could feasibly appear.
As with other global companies, FIAT Group has had to rely upon the EM regions of Brazil and India to sustain earnings momentum through 2009, and looks to lean on these regions once more in Q1 & Q2 2010, especially if the 'promised' Italian assistance doesn't come forthwith. FIAT Auto reported a Q409 profit of Euro 470m ($665.4m), down from Euro 691m for Q408. But there was a
Q409 loss of Euro-281m (-397m) due to sharp decline in truck and equipment sales to agriculture and construction sectors.
With global car markets looking to largely shrink once again this year with the exception of China as 'flat' and continued growth in India, FIAT will need to leverage its TATA connections more than ever. It will need to maintain scaled-back production levels, probably necessarily 'incentivise' its way through to drive revenue, even at the cost of margin in most markets and critically be seen to decisively win the Termini Imeresi battle with government via a well executed case that highlights the Cimini Plan as unrealistic, and indeed very possibly value-destructive for the tax-payer.
Instead, Marchionne knows that such a necessary move puts the Termini Imeresi ball back into his court, which may not be a bad thing if FIAT can gain appropriated Italian and EU funds to build viable small ICE-based eco-cars – perhaps similar to Daimler's smart and the new peer crop – that can be package protected or retro-fitted with e-motors.
But for the moment even with FIAT's impressive capital investment efforts due to pay of in the long-term, that problematic product gap, the concerning divisional cyclical gap and what could be an emerging fiscal gap regards working capital (especially for Chrysler integration & the UST loan payments) remains the top priorities for cautionary investors of all ilks.
Preferred – Euro 4.8075
Ordinary – Euro 7.8800
FIAT Auto is perhaps recognised as the most ambitious of present-day manufacturers. It's strategy to leverage its much improved health over the decade, maintain investor belief in the company and exploit the US governments restricted options to negotiate the operational integration of, and share-holding in, Chrysler LLC.
On paper, the synergies of the two entities look compelling from geographic & product portfolio fronts. FIAT gains a powerful 'piggy-backed' entry point into North America, and Chrysler gains relatively low-cost access to a suite of re-engineered, re-badged small & compact cars. Moreover FIAT is assisted with US government grants to ease the domestic's transition to a more eco-orientated company, and Chrysler new stake-holders are more closely aligned as the UAW recognises the part it must play in regenerating the company.
On the surface, this plan that substantially remodels the face of western industry, looks relatively simple, and during less harsh economic times it would indeed be. But there is a growing argument that the typically high cash-burn required to speedily merge operations, platforms etc will have to be tempered given re-emerging negative macro-economic concerns.
Having had the credit crisis followed by the banking crisis, EU and US economies are now hampered at fiscal supply and demand ends. The respective culprits being:
a) the possible EU contagion of sovereign debt default, one ramification of which is the tightening & costs of wholesale & corporate lending
b) the US' ongoing weak employment data, weak housing data and a strengthening US Dollar all of hamper the underlying fundamentals of the domestic economy and so consumption
[NB investment-auto-motives believes the German 'hard stewardship' stance towards Greece to be the correct for long-term EU stability. The converse, of Greece's self or otherwise expulsion from the bloc, would provide a medium-term opportunity of national currency devaluation and so economic 'pull-back', but as Merkel recognises an isolation of Greece, perhaps followed by Italy, Spain and Portugal creates the context for Sarkozy's ideology of an effectively French-led 'Mediterranean Club' economic bloc, which obviously undermines the EU rationale).
Relative to this last point, such a 'Club Med' entente cordiale would obviously boost Med-regional trade and economics, and add to the consumer-base of FIAT et al in time, but the structural consequences for the EU would mean a re-ratcheting of the EU cost-base (western & CEE) which would severely constrain passenger and commercial vehicle demand. This is the issue which the likes of a possibly 'Club-Med' pro FIAT, Renault & PSA would have to confront.
In regard to the FIAT story 'as is' thus far, having previously planned on an expected 2010 global economic rebound FIAT started the wheels of FIAT-Chrysler integration early in 2009, done so at apace given the US administration's expectations and injection of public finance.
[NB. In 2008 investment-auto-motives was far less optimistic having foreseen the 2010 picture)
In retrospect was it the right call and the right time?
Whilst 2007 was a good year per se, FIAT ended 2008 in a less than prolific position. Before its Chrysler tie-up FIAT had only $5bn in liquid cash at hand, down from $9.2bn a year earlier, and had just prior to the tie-up, $7.6bn in debt. The initial forecast that 2009 would bring $3.7bn in profit was later heavily discounted when reality hit to an expected “in excess” of $387m – thus a tenth of previous. Thus although with the assistance of US governmental financial aid and a pre-pack bankruptcy process (which largely - via disregarded creditor rights - cleansed the balance sheet) FIAT was perhaps in a less plausible position than appeared. By May 22nd 09 it had a FCF of approximatley Euro 1bn and reduced its debt-burden to under Euro 5bn.
However, given that the stars will never be perfectly aligned, especially so during such volatile times, FIAT 'walked up the plate' when few others dared.
Although perhaps overtly upbeat in public about FIAT's position and abilities given that at the time it was riding its product peak, presumably the 3 primary governing figures: Cordero di Montezemolo, Elkann & Marchionne have considered alternative fall back scenarios in case all did not go according to plan with a 2010 economic rebound. Fall back plans that presumably consist of more than appeals for individual EU nation-sate funds.
Given the poor national balance sheets of most except France & Germany, sovereign backed funding has become increasingly scarce. And moreover, it will be largely Germany & France that 'bails-out' at-risk neighbours, so diminishing cash availability for pan-EU conglomerates. Thus companies must look back to financial intermediaries & markets, but even this normal option still looks fragile given the muted demand for fixed-income and equities. At a time when new fears are emerging and gains are being 'locked-in' through sell-offs, the previous demand for corporate bonds has diminished at all but the highest credit rates, and stocks – looking overbought by many and still not aligned to fundamentals – are wavering and looking to trade 'sideways' as has been the historical norm after a post-crisis rally.
Thus Marchionne and the FIAT Group Board may have to consider alternative scenarios and measures to keep the FIAT-Chrylser integration rolling.. These in effect, to either:
1. maintain the present level of funding to merge FIAT-Chrysler – probably via asset divestment,
2. slow the merging process - which could compromise the promise of 'early' US generated income
Either way, as with GM, the ideal of any short-term IPO of the new FIAT Auto division presently seems premature given the now lost stability of 2009's macro and micro conditions. 2010 income reduction seems inevitable as geographically patchy and diluted secondary vehicle stimulus initiatives - as seen in the UK but not in Germany - consequentially subdue consumer sentiment .
Looking slightly more closely at “2nd round” stimulus beneficiaries, although the UK has extended its scheme until March, FIAT looks not to be a prime beneficiary given its current aging and unrelated model mix compared to Ford, VW, Renault & even PSA.
In the UK The 500 model is typically an emotional purchase as opposed to rational purchase choice driving 'scrappage sales' and whilst it will undoubtedly be lifted, the degree of that lift is debatable. More concerning for FIAT is that Panda suffers against more accomplished rivals, and face-lifted Punto-Evo realistically offers little draw beyond possibly value-destructive finance deals and incentives given the cosmetic compromise necessary for US & RoW market entry ASAP (as probably a Dodge alongside Lancia originated Chrysler variants.
With lesser gains from the UK and given Germany's decision not to repeat its scrappage scheme, FIAT must now look to its Italian homeland as a prime supporter via “2nd round stimulus”, and hope that it can once again buoy domestic sales to maintain the 2009 average of 33%. The “1st round stimulus” enables Italian car market sales to stay flat from 2008 to 2009, with just under 50% of all sales (Italian TIV 2.16m units) driven by the scrappage scheme which offered E1,500 rebate on specific low CO2 new cars. Expectantly FIAT benefited massively, but the when the government cash was withdrawn by year end the effects were immediate. January new car sales plummeted dramatically by 30%.
To counteract, Claudio Scajola - the Italian Economic Development Minister – stated that the scheme is being revived from February onwards, but there remains an implicit expectation by the government that FIAT does not shutter the Termini Imeresi plant in Sicily. Indeed, a good measure of real politik has emerged, the government seemingly trying to play FIAT against the Italian public and also seemingly the EU commission as it tries to inextricably link assistance to jobs.
As reported, the Termini Imeresi plant has become a prime examplar of national industrial strategy and private commercial strategy creating inevitable friction. With EU and national funding available for eco-enterprises, the over-optimistic business plan 'cooing' of private equity firm Cimino & Associates that hails to be the saviour of Termini Imeresi, puts pressure on FIAT to take the electric vehicle initiative so as to maintain Sicillian production and so assist the local economy. But, as Marchionne well knows – but will have a hard time convincing Ministers – the core-pillars of the Cimini business plan are overtly optimistic and effectually unrealistic: especially regards production capacity (ie sales) and the number of jobs to be saved. Given the close-knitted business and political network of Italy, it would not be a surprise is the Cimini proposition was in actuality quickly compiled and publicly released simply to try and force Marchionne's hand.
On a more immediate and realistic investment note, Marchionne recently signed the FIAT – OAO Sollers Euro 2.4bn agreement to create an Italian-Russian JV for vehicle production in Naberezhnye Chelny, Tatarstan The 50:50 partnership will produce FIAT-Chrysler cars from 2016, 10% of which will be for export, and assists in FIAT's reach into other EM markets beyond Brazil.
However, in the meantime FIAT faces an immediate concern.
The emerging product gap that has been described would be of lesser consequence for the Group under normal cyclical operating conditions when the Group as an entity can ride specific sector downturns. But as stated we face very turbulent times.
Due to the previous demands of Gianni Agnelli and the Italian government – given FIAT's national impact - Fiat Group is set-up as a (theoretically) counter-cyclical conglomerate, its Commercial Vehicle division, its Supplier Parts section and 'Agri-Con' business typically offering well aligned off-set income streams relative to the broad market spread of Autos. But within today's highly irregular business environment the usual sector-cyclical growth pattern has faltered, thus the normal upturn in the economic cycle which fosters demand in the Agri-Con, Commercial Vehicle and Parts businesses – as would be expected - has not arrived. And worryingly the EU, a prime market for FIAT, still continues to stagger.
Thus both critical dimensions of the FIAT Group – the innate strength of Autos & the off-set effect of the Other divisions – seem respectively lacking in potency and 'out of kilter'. This is not an inconsequential issue, such headwinds indicate that a very concerning funding gap could feasibly appear.
As with other global companies, FIAT Group has had to rely upon the EM regions of Brazil and India to sustain earnings momentum through 2009, and looks to lean on these regions once more in Q1 & Q2 2010, especially if the 'promised' Italian assistance doesn't come forthwith. FIAT Auto reported a Q409 profit of Euro 470m ($665.4m), down from Euro 691m for Q408. But there was a
Q409 loss of Euro-281m (-397m) due to sharp decline in truck and equipment sales to agriculture and construction sectors.
With global car markets looking to largely shrink once again this year with the exception of China as 'flat' and continued growth in India, FIAT will need to leverage its TATA connections more than ever. It will need to maintain scaled-back production levels, probably necessarily 'incentivise' its way through to drive revenue, even at the cost of margin in most markets and critically be seen to decisively win the Termini Imeresi battle with government via a well executed case that highlights the Cimini Plan as unrealistic, and indeed very possibly value-destructive for the tax-payer.
Instead, Marchionne knows that such a necessary move puts the Termini Imeresi ball back into his court, which may not be a bad thing if FIAT can gain appropriated Italian and EU funds to build viable small ICE-based eco-cars – perhaps similar to Daimler's smart and the new peer crop – that can be package protected or retro-fitted with e-motors.
But for the moment even with FIAT's impressive capital investment efforts due to pay of in the long-term, that problematic product gap, the concerning divisional cyclical gap and what could be an emerging fiscal gap regards working capital (especially for Chrysler integration & the UST loan payments) remains the top priorities for cautionary investors of all ilks.
Friday, 12 February 2010
Company Focus – BMW AG – Running Leaner Than Ideal Requires Ongoing Efficient Corporate Dynamics
BMW Stock Price (Frankfurt @ 12.02.2010, 16.25 GMT)
Preferred – Euro 21.61
Ordinary – Euro 28.85
BMW AG was undoubtedly hit hardest by the de-leveraging of western capital & consumer markets. Having enjoyed what could be viewed as the auto-industry's most impressive historic corporate rise through the 1980s, 1990s and much of the 2000s, the newer BMW management have had to alter its normative 'onward marching' modus operandi. Instead developing a combat campaign aimed at minimising consumer ground-loss and speeding structural reform, with what for BMW has been perhaps its most conservative, inward-facing, mentality in 40 years.
That about-face in management style was perhaps best witnessed in the tumble of BMW stock price during the crisis. The market's fear-factor, as ever, perhaps over-played the CapEx losses, but arguably just as equally valid is the over-play of optimism BMW stock has enjoyed during the 2009 equities rally, the company's Q309 report happy to demonstrate BMW's superior performance compared to 'Prime Auto' and the DAX30. From a 30th June 2009 re-base (of 100), by September end, BMW Common Stock enjoyed 133%, BMW Preferred Stock enjoyed 123% versus the DAX30 's 118% and 'Prime Autos' 104.5%. Thus as BMW management were still in the midst of still fighting to rationalise the corporation as a whole, the markets driven seemingly by over-charged sentiment foresaw a less dismal, indeed possibly far brighter, future for BMW AG.
[NB investment-auto-motives suspects that given Germany's need to lead the EU by example, lessen the national impact and in the run-up to its general election, there could feasibly have been leveraged an overt need to support an industrially optimistic self-fulfilling prophecy by the German institutionals, some of which themselves had been greatly assisted by Berlin's advocacy of targeted capital injections into systemically important players. Hence the possible 'belief-in' and support of German industry was a possible implicit expectation by the government, itself seeking re-election].
Prior to this latter-day period BMW management perhaps belated appreciated to forecast the crisis, but once comprehended endeavored to align operations to the very changed conditions seen over the last two and a half years. It recognised, as is the norm in contractionary times, that new BMW branded product identity had to both acquiesce to the less optimistic, anti-experimental western market mentality, aswell as creating a broader attraction within the more 'consumer-sporadic' EM regions. Thus the previous avante-garde brand aesthetic of 'flame-surface' was naturally superseded by less complex yet still deeply sculpted forms, with critically a far more 'Asiatic' influence upon lamp-cluster styling. Thus the central 3-series and 5-series models were reigned-in to once again become the front-runner, vanguard models in terms of core BMW identity and importantly to try and support profit margins. But under such conditions, gross margin, RoS, Net Margin and of course RoE were always destined to be the victims of circumstance.
As part of the build into a new era the BMW brand, ahead of Mercedes & Audi, has gained populist visibility with its ever-increasing Efficient Dynamics eco-initiative, which appears to on purely ecological basis set its cars considerably ahead of German rivals and nearly on-par with hybrid-powertrain Lexus models, using attuned conventional engineering and specific eco-tech solutions such as regenerative braking.
[NB as time progresses, we shall see theoretically all auto-manufacturers gain greater mpg & CO2 g/km figures. Product de-specification will enable reduced costs and accordant weight reduction. A probably low-fluctuation in oil price will enables greater use of larger and quality-improved lightweight plastics - as seen in the 1980s Citroen BX hood/bonnet. Bluff fronts-ends with wide gaping (airflow resistant) grills will be replaced by smoother-profiled noses and greater application of controlled under-body aero-dynamics improvements will respectfully assist Cd & CdA figures. And beyond other such conventional 'fixes' are specific eco-tech introductions ranging from start-stop to parallel and full hybrid technologies, and possibly the practical ideal of road-wheel or prop-shaft electrical generators, by far supplanting today's regenerative braking mechanisms.
However, in practical applicational terms BMW does indeed appear to be leading this transformational change today, just as Ford was in the early 1980s with Sierra, Taurus etc].
Thus BMW is increasingly well positioned as the present-day eco-premium carmaker, given Volvo & SAAB's periodic absence from what should ideologically be their 'eco-thrones'.
But in the meantime, the western demand for BMW branded products has taken a serious knock-back given that it more than other premium carmakers was able to, to a degree, financially engineer its success during the boom years via a mixture of marginal under-supply to maintain inelastic dealer-led pricing, dealer vehicle buy-backs to control used vehicle stock and residual prices and of course the innate power of BMW Financing. It was a self-perpetuating model which over the last 2 years has been partially fractured, and BMW is keen to rebuild.
Management is obviously keen to once again take control of the 3-way 'Productivity-Inventory-Demand' equation, and doing so will be the foundations to regaining industry-leading RoCE margins. Whether that profitability benchmark for a mass-manufacturer is once again achievable is open to question given the very different position BMW sits today, compared to its origins and growth story over the last 25 years. But investors less availed to the true dynamics of the sector will expect to see a return to the same levels of BMW's investor magic in due course – primarily driven by China volumes, if not directly enabled by the split appropriation of BMW-Brilliance profits.
A new 5-series will launch in 2010 so bolstering sales, and possible capture of E-class customers. However, unlike Daimler and E-class, BMW is having to be more tentative, so it follows largely in the 3-series format of styling conservativism. The off-set to that is 5-series Gran Turismo, but as to whether a 7-series derived, high-riding, hatch-back exec car is attractive to SMEs and private buyers is not yet apparent. The 'mixed-bag' various-cross-over formula in this segment has generated very mixed results ie poor R-class / good CLS / questionable X6. And so highlights the importance of getting the formula right for sales success, and not simply as a paper-based exercise driven by budget-hungry chief engineers keen to stretch platform capacities so as to reduce per unit costs which adds hypothetical weight to their board-room negotiating for corporate resources. Thus the X6 and 5-series GT could be said to be a test of BMW's management acumen as it battles to contain costs yet offer meaningful product.
But BMW's real concern is 1-series outside of its home market. It never became the Golf beater envisaged, especially so latterly, as consumers sought 'defensive' auto-purchases and VW grew the sub-brand equity of 'Golf' and its close-proximity variants. Previous mention that BMW seeks an alliance with another EU player (ie PSA or Daimler) must surely be re-visited as an investor-debate topic, the option being that it may develop a volume small car production business model with China Brilliance or indeed explores a JV with Japanese or Korean player (perhaps in tandem with PSA ie Mitsubishi or other). The problem is of course maintaining BMW product quality & driving dynamics standards – something a JV makes all the harder due to product compromise. Thus inevitably BMW will explore the technical option of inter-breeding 1-series and Mini, especially as VW Audi's A1 enters the fray, though given the very different packaging, engineering hardpoints etc, one or the other of BMW vehicles will demonstrably suffer from the compromise.
7-series has become for many an anathema, especially so in contrast to a very progressive S-class, which still essentially 'owns' China's large chauffeured-market and has made in-roads against 7-series elsewhere. Again, whilst holding its ground BMW must re-orientate the car so as to offer something very different yet credible whilst ideally maintaining RR Ghost and 5-series technical synergies.
In short, the BMW brand portfolio is indeed being renewed and the mix theoretically better, but the launch of 3 & 5-series (plus the X6 and 5GT creations) in the midst of the ongoing global economic drag will inevitably hit sales, and the previously devised project business models & IRRs, hard. The introduction of what should be a successful X1 (drawing from X3 and non-BMW) looks to buoy income, but realistically it will be a hard slog as BMW re-aligns to today's 'new norm' in the Triad.
The Mini division has unsurprisingly come under strain in the Triad region, even with the economic stimulus packages that have boosted the sales of smaller cars. As described in previous posts, Mini as a premium-positioned small car has passed its demand peak, the 2nd generation even though effectively all new Mini did not gain the renewed recognition given its visual proximity to the Mk 1 model, and so relied on new variants (eg Clubman & new Countryman). The fact that BMW had to balance a Mk 2 car in the Triad with an all new Mini entry in Asia always meant a law of diminishing returns in western markets. Reithoffer, Robertson and general management are seemingly pinning great hopes on the Countryman's urban-4x4 appeal to bolster the brand.
Industry observers have questioned the level of overlap between Clubman and Countryman,but investment-auto-motives' closer inspection leads us to believe BMW's strategy regards platform-utility maximisation, respective product positioning and divergent product attributes (ie Clubman's space versus Clubman's style) is valid. What is questionable however is volume expectation from these variants. Though not explicitly made public, investment-auto-motives believes that BMW management expectations may be higher than ultimately achieved.
With the intent of creating a modern classic the Mk2 car was visually little changed from its predecessor. The variant models obviously add alternative styles, but if not already tabled, the core 3 door hatchback must be given a long-life design plan which maintaining basic body shape and proportions, provides more impact regards nose and tail treatments. Likewise, a full exploration of 'Mini' (in the round) is once again due to better appreciate its place and future directional possibilities.
The Rolls-Royce division leads into 2010 with the Ghost model, smaller than Phantom, more sporting to combat Bentley, higher in forecast volume and contributing sizable margins borne from far greater BMW (7-series) systems sharing. As Bentley's Continental Flying Spur range ages, and the front-end look of new Mulsanne splits opinion (even if historically derived), the Baby Rolls looks to be the natural beneficiary, probable latter-day coupe and convertible variants selected in preference to Bentley GT and GTC.
Importantly, Ghost's pre-order book will have theoretically drawn-in valuable liquidity to possibly assist the RR division's ideal of self-financing – something we imagine is an implicit demand of BMW and a target of Tom Purves, RR CEO. [NB. As such, as a last resort for future funding, BMW would have a very attractive divestment opportunity, presumably retaining a large stake-hold].
However, negative RR concerns at present relate to defaulted/returned cars and the actual level of Ghost pre-orders – both issues combined possibly creating a heavy headwind. The possibility of higher than forecast payment defaults on 2008/9 sold Phantoms would have obviously decreased cashflow and increased the pre-owned inventory as cars were reconvened. This then puts pressure on independent RR dealers & BMW Finance to either drop residual values in search of sales, or set against short-term assets on the balance sheet at artificially high marked to market value. For those that also maintain classic Edwardian to 1950s RR stock that have enjoyed appreciating auction rates those used car values can be supported 'en mass' by classic counterparts, but for dealers without such classic stock, the value of recent 2007-9 pre-owned Phantoms cannot be 'assisted' within the general inventory dealer arrangement, thus create greater drag for BMW's RR Motors division on new Phantom pricing. The second concern is Ghost pre-orders. BMW's January YoY figures show a sales increase of 135%, which is we regard somewhat lacklustre given the revenue boost new Ghost was expected to provide, but we suspect Ghost has effectively become a for RR Motors revenue stream largely a Phantom substitute, increased sales balanced against reduced margins, Purves himself battling internally with Munich to maintain original contract-pricing for Ghost sub-structures and systems, whilst Reithoffer argues than RR should pay more to assist the BMW group as a whole. If RR is to remain the golden child, in terms of profit margins and the option to divest, Purves will probably stand his ground; but it is a topic more activist BMW investors should investigate more fully.
Ultimately for the BMW group, improving YoY sales data for January of +16% indicates that - unless a double-dip recession tales hold - the group-wide sales trough of 2008/9 has been passed. Yet given economic fragility in the West, and increasingly concerning in the East - if a China contraction effect takes hold – means that BMW still faces severe challenges.
But for the moment the W.Europe January increase of 1.5% (to 38,495 units), the CEE increase of 19% (to 2,237 units), Russia rising by 20% (1,129 units), N. America of 8.7% (16,608 units of which US accounts 15,410), Central America 10% (to 836 units), S. America 99% (1,057 units). In Asia as a whole sales rose by 74.6%, of which Chinese sales improved by 122% (11,919 units) [possibly due to the 'credit-effect' sales rush as highlighted in the previous Daimler posting].
The Motorcycle Division's unit sales increased by 2.2%, which reflects both the increased general demand for 2 wheeled transport in the Triad region, but negatively also BMW's missed opportunity to capture this surge, given its division's CoG in large tourer, sports-tourer, Enduro & super-sports segments. The largely failed commuter C1 project of the late 1990s saw BMW retrench to its core big-bike position, but it recognised the changing dynamics of global commuting (as did peers like Piaggio, Honda et al) hence its acquisition of Husqvana bikes & quadbikes in 2007. It still has not however, re-written the personal transport commuting rule-book, as undoubtedly intended. The MegaCity solo/duo leaning concept car born from BMW R&D's marriage of car and bike technologies looks more like an attention grabber to keep BMW looking advanced, rather than a pragmatic, revenue earning offering.
The Finance Division has obviously come under pressure in recent years, caught between the periodically shut, and still only partially open window for wholesale corporate funding. As a result BMW Finance was tasked in Q309 with seeking regionally-based 'official banking' and 'extended credit' licenses for Germany, France, Italy, US (banking licenses), and for India (extended credit license).As of yet no update has been given. It was also claimed that extra-ordinary EU funding would accessed once amenable, but recent sovereign credit concerns over Greece, Portugal, Spain etc indicates that liquidity will be directed at sustaining national balance sheets, so largely unavailable for wholesale, corporate & consumer access.
To conclude, BMW Group's prime aim has been to re-structure to the new norm. yet maintaining room for future re-growth, this achieved by the “balancing of retail vs residual vs volume”, generic levers for most car companies but historically far more sensitive for BMW. Critically BMW is having to manage its dealerbase, recognising that to hard a squeeze will pressurise their own working capital availability and so long-term survival prospects. BMW undoubtedly wants to see its dealerbase remain as is,string and healthy to help improve future sales volumes so as to break-even the capacity cost and move healthily into the black once more with buoyed FCF.
BMW missed its Q309 results expectations, and whilst better news arrives from across the globe in terms of sales, the battle to recovery is still harsh. FY09 results will be telling as to how well Reithoffer et al in Munich are controlling the situation....but for the moment it is still a case of rational investors holding their breath regards the corporate fundamentals...BMW is still in the fog, and little sign of either a powerfully combined product portfolio or financing flexibility provides a convincing case for immediate progress.
As such the juggling of balls between the Financial Services division and the Autos division looks set to continue, and whilst Q4's optimistic general economic outlook may well have translated into greater numbers of sold cars at the time, once again economic fundamentals and capital markets sentiment has soured somewhat whilst the Q4 purchasing trend by global SMEs that affects the premium-car sector may have been but momentary wind to BMW's sails.
By January end 2010 the outlook (as we predicted) is set to be tougher and BMW will need to - like Daimler - demonstrate its tactical and strategic planning...but unlike Daimler & VW its cash-cushion is far smaller, so far more dependent upon the criticality of recycled, squeezed and retained working capital management far more. That will frazzle supplier and dealer-network relationships, and will test the oft heard mention of the BMW family culture.
Preferred – Euro 21.61
Ordinary – Euro 28.85
BMW AG was undoubtedly hit hardest by the de-leveraging of western capital & consumer markets. Having enjoyed what could be viewed as the auto-industry's most impressive historic corporate rise through the 1980s, 1990s and much of the 2000s, the newer BMW management have had to alter its normative 'onward marching' modus operandi. Instead developing a combat campaign aimed at minimising consumer ground-loss and speeding structural reform, with what for BMW has been perhaps its most conservative, inward-facing, mentality in 40 years.
That about-face in management style was perhaps best witnessed in the tumble of BMW stock price during the crisis. The market's fear-factor, as ever, perhaps over-played the CapEx losses, but arguably just as equally valid is the over-play of optimism BMW stock has enjoyed during the 2009 equities rally, the company's Q309 report happy to demonstrate BMW's superior performance compared to 'Prime Auto' and the DAX30. From a 30th June 2009 re-base (of 100), by September end, BMW Common Stock enjoyed 133%, BMW Preferred Stock enjoyed 123% versus the DAX30 's 118% and 'Prime Autos' 104.5%. Thus as BMW management were still in the midst of still fighting to rationalise the corporation as a whole, the markets driven seemingly by over-charged sentiment foresaw a less dismal, indeed possibly far brighter, future for BMW AG.
[NB investment-auto-motives suspects that given Germany's need to lead the EU by example, lessen the national impact and in the run-up to its general election, there could feasibly have been leveraged an overt need to support an industrially optimistic self-fulfilling prophecy by the German institutionals, some of which themselves had been greatly assisted by Berlin's advocacy of targeted capital injections into systemically important players. Hence the possible 'belief-in' and support of German industry was a possible implicit expectation by the government, itself seeking re-election].
Prior to this latter-day period BMW management perhaps belated appreciated to forecast the crisis, but once comprehended endeavored to align operations to the very changed conditions seen over the last two and a half years. It recognised, as is the norm in contractionary times, that new BMW branded product identity had to both acquiesce to the less optimistic, anti-experimental western market mentality, aswell as creating a broader attraction within the more 'consumer-sporadic' EM regions. Thus the previous avante-garde brand aesthetic of 'flame-surface' was naturally superseded by less complex yet still deeply sculpted forms, with critically a far more 'Asiatic' influence upon lamp-cluster styling. Thus the central 3-series and 5-series models were reigned-in to once again become the front-runner, vanguard models in terms of core BMW identity and importantly to try and support profit margins. But under such conditions, gross margin, RoS, Net Margin and of course RoE were always destined to be the victims of circumstance.
As part of the build into a new era the BMW brand, ahead of Mercedes & Audi, has gained populist visibility with its ever-increasing Efficient Dynamics eco-initiative, which appears to on purely ecological basis set its cars considerably ahead of German rivals and nearly on-par with hybrid-powertrain Lexus models, using attuned conventional engineering and specific eco-tech solutions such as regenerative braking.
[NB as time progresses, we shall see theoretically all auto-manufacturers gain greater mpg & CO2 g/km figures. Product de-specification will enable reduced costs and accordant weight reduction. A probably low-fluctuation in oil price will enables greater use of larger and quality-improved lightweight plastics - as seen in the 1980s Citroen BX hood/bonnet. Bluff fronts-ends with wide gaping (airflow resistant) grills will be replaced by smoother-profiled noses and greater application of controlled under-body aero-dynamics improvements will respectfully assist Cd & CdA figures. And beyond other such conventional 'fixes' are specific eco-tech introductions ranging from start-stop to parallel and full hybrid technologies, and possibly the practical ideal of road-wheel or prop-shaft electrical generators, by far supplanting today's regenerative braking mechanisms.
However, in practical applicational terms BMW does indeed appear to be leading this transformational change today, just as Ford was in the early 1980s with Sierra, Taurus etc].
Thus BMW is increasingly well positioned as the present-day eco-premium carmaker, given Volvo & SAAB's periodic absence from what should ideologically be their 'eco-thrones'.
But in the meantime, the western demand for BMW branded products has taken a serious knock-back given that it more than other premium carmakers was able to, to a degree, financially engineer its success during the boom years via a mixture of marginal under-supply to maintain inelastic dealer-led pricing, dealer vehicle buy-backs to control used vehicle stock and residual prices and of course the innate power of BMW Financing. It was a self-perpetuating model which over the last 2 years has been partially fractured, and BMW is keen to rebuild.
Management is obviously keen to once again take control of the 3-way 'Productivity-Inventory-Demand' equation, and doing so will be the foundations to regaining industry-leading RoCE margins. Whether that profitability benchmark for a mass-manufacturer is once again achievable is open to question given the very different position BMW sits today, compared to its origins and growth story over the last 25 years. But investors less availed to the true dynamics of the sector will expect to see a return to the same levels of BMW's investor magic in due course – primarily driven by China volumes, if not directly enabled by the split appropriation of BMW-Brilliance profits.
A new 5-series will launch in 2010 so bolstering sales, and possible capture of E-class customers. However, unlike Daimler and E-class, BMW is having to be more tentative, so it follows largely in the 3-series format of styling conservativism. The off-set to that is 5-series Gran Turismo, but as to whether a 7-series derived, high-riding, hatch-back exec car is attractive to SMEs and private buyers is not yet apparent. The 'mixed-bag' various-cross-over formula in this segment has generated very mixed results ie poor R-class / good CLS / questionable X6. And so highlights the importance of getting the formula right for sales success, and not simply as a paper-based exercise driven by budget-hungry chief engineers keen to stretch platform capacities so as to reduce per unit costs which adds hypothetical weight to their board-room negotiating for corporate resources. Thus the X6 and 5-series GT could be said to be a test of BMW's management acumen as it battles to contain costs yet offer meaningful product.
But BMW's real concern is 1-series outside of its home market. It never became the Golf beater envisaged, especially so latterly, as consumers sought 'defensive' auto-purchases and VW grew the sub-brand equity of 'Golf' and its close-proximity variants. Previous mention that BMW seeks an alliance with another EU player (ie PSA or Daimler) must surely be re-visited as an investor-debate topic, the option being that it may develop a volume small car production business model with China Brilliance or indeed explores a JV with Japanese or Korean player (perhaps in tandem with PSA ie Mitsubishi or other). The problem is of course maintaining BMW product quality & driving dynamics standards – something a JV makes all the harder due to product compromise. Thus inevitably BMW will explore the technical option of inter-breeding 1-series and Mini, especially as VW Audi's A1 enters the fray, though given the very different packaging, engineering hardpoints etc, one or the other of BMW vehicles will demonstrably suffer from the compromise.
7-series has become for many an anathema, especially so in contrast to a very progressive S-class, which still essentially 'owns' China's large chauffeured-market and has made in-roads against 7-series elsewhere. Again, whilst holding its ground BMW must re-orientate the car so as to offer something very different yet credible whilst ideally maintaining RR Ghost and 5-series technical synergies.
In short, the BMW brand portfolio is indeed being renewed and the mix theoretically better, but the launch of 3 & 5-series (plus the X6 and 5GT creations) in the midst of the ongoing global economic drag will inevitably hit sales, and the previously devised project business models & IRRs, hard. The introduction of what should be a successful X1 (drawing from X3 and non-BMW) looks to buoy income, but realistically it will be a hard slog as BMW re-aligns to today's 'new norm' in the Triad.
The Mini division has unsurprisingly come under strain in the Triad region, even with the economic stimulus packages that have boosted the sales of smaller cars. As described in previous posts, Mini as a premium-positioned small car has passed its demand peak, the 2nd generation even though effectively all new Mini did not gain the renewed recognition given its visual proximity to the Mk 1 model, and so relied on new variants (eg Clubman & new Countryman). The fact that BMW had to balance a Mk 2 car in the Triad with an all new Mini entry in Asia always meant a law of diminishing returns in western markets. Reithoffer, Robertson and general management are seemingly pinning great hopes on the Countryman's urban-4x4 appeal to bolster the brand.
Industry observers have questioned the level of overlap between Clubman and Countryman,but investment-auto-motives' closer inspection leads us to believe BMW's strategy regards platform-utility maximisation, respective product positioning and divergent product attributes (ie Clubman's space versus Clubman's style) is valid. What is questionable however is volume expectation from these variants. Though not explicitly made public, investment-auto-motives believes that BMW management expectations may be higher than ultimately achieved.
With the intent of creating a modern classic the Mk2 car was visually little changed from its predecessor. The variant models obviously add alternative styles, but if not already tabled, the core 3 door hatchback must be given a long-life design plan which maintaining basic body shape and proportions, provides more impact regards nose and tail treatments. Likewise, a full exploration of 'Mini' (in the round) is once again due to better appreciate its place and future directional possibilities.
The Rolls-Royce division leads into 2010 with the Ghost model, smaller than Phantom, more sporting to combat Bentley, higher in forecast volume and contributing sizable margins borne from far greater BMW (7-series) systems sharing. As Bentley's Continental Flying Spur range ages, and the front-end look of new Mulsanne splits opinion (even if historically derived), the Baby Rolls looks to be the natural beneficiary, probable latter-day coupe and convertible variants selected in preference to Bentley GT and GTC.
Importantly, Ghost's pre-order book will have theoretically drawn-in valuable liquidity to possibly assist the RR division's ideal of self-financing – something we imagine is an implicit demand of BMW and a target of Tom Purves, RR CEO. [NB. As such, as a last resort for future funding, BMW would have a very attractive divestment opportunity, presumably retaining a large stake-hold].
However, negative RR concerns at present relate to defaulted/returned cars and the actual level of Ghost pre-orders – both issues combined possibly creating a heavy headwind. The possibility of higher than forecast payment defaults on 2008/9 sold Phantoms would have obviously decreased cashflow and increased the pre-owned inventory as cars were reconvened. This then puts pressure on independent RR dealers & BMW Finance to either drop residual values in search of sales, or set against short-term assets on the balance sheet at artificially high marked to market value. For those that also maintain classic Edwardian to 1950s RR stock that have enjoyed appreciating auction rates those used car values can be supported 'en mass' by classic counterparts, but for dealers without such classic stock, the value of recent 2007-9 pre-owned Phantoms cannot be 'assisted' within the general inventory dealer arrangement, thus create greater drag for BMW's RR Motors division on new Phantom pricing. The second concern is Ghost pre-orders. BMW's January YoY figures show a sales increase of 135%, which is we regard somewhat lacklustre given the revenue boost new Ghost was expected to provide, but we suspect Ghost has effectively become a for RR Motors revenue stream largely a Phantom substitute, increased sales balanced against reduced margins, Purves himself battling internally with Munich to maintain original contract-pricing for Ghost sub-structures and systems, whilst Reithoffer argues than RR should pay more to assist the BMW group as a whole. If RR is to remain the golden child, in terms of profit margins and the option to divest, Purves will probably stand his ground; but it is a topic more activist BMW investors should investigate more fully.
Ultimately for the BMW group, improving YoY sales data for January of +16% indicates that - unless a double-dip recession tales hold - the group-wide sales trough of 2008/9 has been passed. Yet given economic fragility in the West, and increasingly concerning in the East - if a China contraction effect takes hold – means that BMW still faces severe challenges.
But for the moment the W.Europe January increase of 1.5% (to 38,495 units), the CEE increase of 19% (to 2,237 units), Russia rising by 20% (1,129 units), N. America of 8.7% (16,608 units of which US accounts 15,410), Central America 10% (to 836 units), S. America 99% (1,057 units). In Asia as a whole sales rose by 74.6%, of which Chinese sales improved by 122% (11,919 units) [possibly due to the 'credit-effect' sales rush as highlighted in the previous Daimler posting].
The Motorcycle Division's unit sales increased by 2.2%, which reflects both the increased general demand for 2 wheeled transport in the Triad region, but negatively also BMW's missed opportunity to capture this surge, given its division's CoG in large tourer, sports-tourer, Enduro & super-sports segments. The largely failed commuter C1 project of the late 1990s saw BMW retrench to its core big-bike position, but it recognised the changing dynamics of global commuting (as did peers like Piaggio, Honda et al) hence its acquisition of Husqvana bikes & quadbikes in 2007. It still has not however, re-written the personal transport commuting rule-book, as undoubtedly intended. The MegaCity solo/duo leaning concept car born from BMW R&D's marriage of car and bike technologies looks more like an attention grabber to keep BMW looking advanced, rather than a pragmatic, revenue earning offering.
The Finance Division has obviously come under pressure in recent years, caught between the periodically shut, and still only partially open window for wholesale corporate funding. As a result BMW Finance was tasked in Q309 with seeking regionally-based 'official banking' and 'extended credit' licenses for Germany, France, Italy, US (banking licenses), and for India (extended credit license).As of yet no update has been given. It was also claimed that extra-ordinary EU funding would accessed once amenable, but recent sovereign credit concerns over Greece, Portugal, Spain etc indicates that liquidity will be directed at sustaining national balance sheets, so largely unavailable for wholesale, corporate & consumer access.
To conclude, BMW Group's prime aim has been to re-structure to the new norm. yet maintaining room for future re-growth, this achieved by the “balancing of retail vs residual vs volume”, generic levers for most car companies but historically far more sensitive for BMW. Critically BMW is having to manage its dealerbase, recognising that to hard a squeeze will pressurise their own working capital availability and so long-term survival prospects. BMW undoubtedly wants to see its dealerbase remain as is,string and healthy to help improve future sales volumes so as to break-even the capacity cost and move healthily into the black once more with buoyed FCF.
BMW missed its Q309 results expectations, and whilst better news arrives from across the globe in terms of sales, the battle to recovery is still harsh. FY09 results will be telling as to how well Reithoffer et al in Munich are controlling the situation....but for the moment it is still a case of rational investors holding their breath regards the corporate fundamentals...BMW is still in the fog, and little sign of either a powerfully combined product portfolio or financing flexibility provides a convincing case for immediate progress.
As such the juggling of balls between the Financial Services division and the Autos division looks set to continue, and whilst Q4's optimistic general economic outlook may well have translated into greater numbers of sold cars at the time, once again economic fundamentals and capital markets sentiment has soured somewhat whilst the Q4 purchasing trend by global SMEs that affects the premium-car sector may have been but momentary wind to BMW's sails.
By January end 2010 the outlook (as we predicted) is set to be tougher and BMW will need to - like Daimler - demonstrate its tactical and strategic planning...but unlike Daimler & VW its cash-cushion is far smaller, so far more dependent upon the criticality of recycled, squeezed and retained working capital management far more. That will frazzle supplier and dealer-network relationships, and will test the oft heard mention of the BMW family culture.
Monday, 8 February 2010
Company Focus – General Motors – Pulling Back to Fitness, Preparing for Public Markets & Looking Far Beyond.
Although obviously not presently listed on the NYSE or other bourses, GM's intention to re-list as soon as practicable, predicates that investment-auto-motives maintains an overview of unfolding events.
GM has obviously been through major changes over the last 18 months, recast effectively as 2 companies – the 'new GM' and Motors Liquidation Co – with more recently amendments made at Board level with some of the faces that made up the 'American Industrial Establishment' moving-on, and replaced by others; the most significant of which was Ed Whitacre appointed as Chairman in June 2009.
By December he was appointed as Interim-CEO, and after reportedly a 2 month executive search for new CEO, Whitacre was named Chairman and CEO on 25th January. This then mirrors his dual role at AT&T – a role he kept for 17 years! Asked how long he would hold this dual-role, the answer was indefinite, but unlike AT&T, his primary role at GM is to cast the foundations internally and externally that prepares 'new' GM for a second coming on the public capital markets.
There has been criticism from the financial press that such dual appointments can make for over-authoritarian corporate regimes, the power-base centralised with the Board and senior executives given little more than implementation roles. Of course the counter-argument is that testing times, such as those now at GM, require definite leadership, the high ideals of consensus possibly leading to the worst of committee outcomes. Thus, it seems that Washington via the 'pseudo-czar' of Ron Bloom (now assisted from a labour-position by Ed Montgomery) has rightly encouraged the idea of 'The General's General', assisted by promoted executives and amenable work-force representation that enables the continued reformatting of GM. A reformatting that seeks in due course to excite the capital markets about a brighter, leaner, greener and globally competitive future.
Asked whether additional Presidential or COO appointments would be made, Whitacre stated that such roles would not be created. Thus a picture forms where Whitacre will be working in a partial, critically intentional, vacuum so as not to become embroiled in the everyday fire-fighting. Instead working as closely with Governmental officials and Wall Street bankers as he is with his own Board and top tier. This then, given previous IPO experience with AT&T, allows him to best understand what both these 2 primary exiting and entering stakeholders require from GM to administer a successful transition from state to private ownership. Relatedly, the promise to payback a slice of the government loan by June effectively reduces the government's share, thus simultaneously creating a greater portion of privately available GM equity. This then provides GM itself with greater decision-making freedom as to exactly how much equity it should offer versus self-held.
Thus far the GM recovery plan has seemingly gone well. Certain divisions sit in limbo awaiting sale, or have been so, within the 'invisible twin' of Motors Liquidation Co (ie Saturn, Pontiac versus Hummer, SAAB) and MLC's own volatile stock-price mirrors event-driven speculation.
Interestingly and appropriately GM has taken different vender-strategies with differing buyers, Hummer sold for a lowly $150m cash (possibly to aid US-Sino relations) whilst SAAB was sold to the consortium fronted by Spyker under a deal sees GM retain $300m worth of equity and take $74m cash. Given the technical-supply relationship a maintained stake was always expected, but what wasn't, was the high level of stake versus minimal cash received; thus ostensibly a paper-based deal.
GM's main focus however, has obviously been its domestic market and operations, with the dual benefits of a major 'weight-loss' bankruptcy filing chronologically superseded by the major aid of Washington's CARS scrappage programme – even if GM was not a primary beneficiary. Such surgeory and rehabilitationn has enabled a stabalising of NA market-share and, as Whitacre reports, achieved the metrics laid out by the internally stewarded GM viability plan. At exactly what level those performance metrics set, and by what degree they were bettered, remains confidential, but investors will require convincing of the self-generated leap made given the massive regulatory and fiscal assistance of the state, and the implicit nature of a seemingly coterie-coddled behind the scenes process as opposed to a commercially naked one.
However, for all the criticism GM has re-bounded well on the product front. The European devised Insignia, badged as Buick Regal in China and the NA, well positioned as a handsome lower exec sector affordable vehicle. The 2010 Astra exudes a matured distinction in the C-segment. The S.Korean (GMDAT) devised Chevrolet Beat (also badged Matiz, and Spark for Asia-Pacific) holds a youthful funky appeal to global markets (Euro and US markets from Q1 2010).
So top-line earnings look set to be boosted from a broad centre-ground yet meaningful market appeal.
In reality the US tax-payers money allowed GM to temporarily massage its business model, able to heavily discount its once sizable vehicle inventory, push stock onto dealers at reduced rates to shed production excess whilst re-aligning new vehicle supply capacity to match lowered forecast demand, yet theoretically maintain margins on new release vehicles such as Insignia and Beat/Spark. Thus it has been able to play both the unit-margins card in the D-segment in Europe and as a result of China-US exportation, and the volume-profit card in the B segment across regions, though the S.Korean Won has risen of late compared to previous ongoing weakness.
In mind of, but beyond, the currency effects of global operations, GM effectively seeks to re-invent itself as a right-sized, capable and prosperous modern car company.
Washington has done what it can, arguably far more than economically rational, to enable that metamorphosis. The Chairman and CEO is now tasked with stewarding the transition back to a commercially viable global entity. Once the extended scrappage schemes (eg UK's) that have kept the industry on life-support only those with buoyant balance sheets and attractive products will be able to fight for their respective share of the shrunken 'normalised' markets, and be able to maintain CapEx momentum.
Investors will want to see GM as a clean sheet company, having shed its remaining major operational issues; such as the arbitration filings by “some 500/600” NA dealers.
[NB that very approximate sum was uttered by Whitacre, demonstrating his somewhat removed position from the coal-face].
In contrast to the overtly relaxed, laid-back conference persona the top-brass of GM seemingly espouse, future investors will need substantive convincing that the 'massaged momentum' expected to be seen in financial statements over the next 6 months - as a precursor to the IPO - can be latterly maintained.
In sports parlance, GM's future, for investors and all stakeholders alike, must be considered as a long-haul marathon, not simply an IPO sprint. Today, GM pushes-off of the starting blocks with new vigor and presently less incumbered by a diminished competitor set. Importantly, the renewed Board hopefully offering fresh-thinking to bolster Walter Borst's Congressional promise, must look far beyond the attractive fluttering 'ticker-tape'.
That contention and possible dilemma is the core task that the now all-powerful Whitacre must balance. In this respect GM is a very different beast to AT&T – conglomerate divestment as opposed to conglomerate build, cost-cutting as opposed to competence building, erratic as opposed to stable capital market conditions and international competition as opposed to domestic focus.
Ed Whitacre's obviously astute knowledge of, and progressive introduction to GM, of the TelCo business model means that new GM into the future morphs into a very different beast.
[NB, as stated some time ago, investment-auto-motives conjects that one potential scenario sees the formation of 'GEM', with GE & GM creating a new 'Intel-e-Drive' division, possibly hastened via the acquisition of Chrysler's GEM electric car division].
Ed Whitacre mentioned a stay of two to three years, yet given Bob Lutz's oft return in what should be a stable, 'heir apparent' world of NPD, the mass revision of the complete GM business template indicates that Whitacre's stay looks set to be far longer than announced.
GM has obviously been through major changes over the last 18 months, recast effectively as 2 companies – the 'new GM' and Motors Liquidation Co – with more recently amendments made at Board level with some of the faces that made up the 'American Industrial Establishment' moving-on, and replaced by others; the most significant of which was Ed Whitacre appointed as Chairman in June 2009.
By December he was appointed as Interim-CEO, and after reportedly a 2 month executive search for new CEO, Whitacre was named Chairman and CEO on 25th January. This then mirrors his dual role at AT&T – a role he kept for 17 years! Asked how long he would hold this dual-role, the answer was indefinite, but unlike AT&T, his primary role at GM is to cast the foundations internally and externally that prepares 'new' GM for a second coming on the public capital markets.
There has been criticism from the financial press that such dual appointments can make for over-authoritarian corporate regimes, the power-base centralised with the Board and senior executives given little more than implementation roles. Of course the counter-argument is that testing times, such as those now at GM, require definite leadership, the high ideals of consensus possibly leading to the worst of committee outcomes. Thus, it seems that Washington via the 'pseudo-czar' of Ron Bloom (now assisted from a labour-position by Ed Montgomery) has rightly encouraged the idea of 'The General's General', assisted by promoted executives and amenable work-force representation that enables the continued reformatting of GM. A reformatting that seeks in due course to excite the capital markets about a brighter, leaner, greener and globally competitive future.
Asked whether additional Presidential or COO appointments would be made, Whitacre stated that such roles would not be created. Thus a picture forms where Whitacre will be working in a partial, critically intentional, vacuum so as not to become embroiled in the everyday fire-fighting. Instead working as closely with Governmental officials and Wall Street bankers as he is with his own Board and top tier. This then, given previous IPO experience with AT&T, allows him to best understand what both these 2 primary exiting and entering stakeholders require from GM to administer a successful transition from state to private ownership. Relatedly, the promise to payback a slice of the government loan by June effectively reduces the government's share, thus simultaneously creating a greater portion of privately available GM equity. This then provides GM itself with greater decision-making freedom as to exactly how much equity it should offer versus self-held.
Thus far the GM recovery plan has seemingly gone well. Certain divisions sit in limbo awaiting sale, or have been so, within the 'invisible twin' of Motors Liquidation Co (ie Saturn, Pontiac versus Hummer, SAAB) and MLC's own volatile stock-price mirrors event-driven speculation.
Interestingly and appropriately GM has taken different vender-strategies with differing buyers, Hummer sold for a lowly $150m cash (possibly to aid US-Sino relations) whilst SAAB was sold to the consortium fronted by Spyker under a deal sees GM retain $300m worth of equity and take $74m cash. Given the technical-supply relationship a maintained stake was always expected, but what wasn't, was the high level of stake versus minimal cash received; thus ostensibly a paper-based deal.
GM's main focus however, has obviously been its domestic market and operations, with the dual benefits of a major 'weight-loss' bankruptcy filing chronologically superseded by the major aid of Washington's CARS scrappage programme – even if GM was not a primary beneficiary. Such surgeory and rehabilitationn has enabled a stabalising of NA market-share and, as Whitacre reports, achieved the metrics laid out by the internally stewarded GM viability plan. At exactly what level those performance metrics set, and by what degree they were bettered, remains confidential, but investors will require convincing of the self-generated leap made given the massive regulatory and fiscal assistance of the state, and the implicit nature of a seemingly coterie-coddled behind the scenes process as opposed to a commercially naked one.
However, for all the criticism GM has re-bounded well on the product front. The European devised Insignia, badged as Buick Regal in China and the NA, well positioned as a handsome lower exec sector affordable vehicle. The 2010 Astra exudes a matured distinction in the C-segment. The S.Korean (GMDAT) devised Chevrolet Beat (also badged Matiz, and Spark for Asia-Pacific) holds a youthful funky appeal to global markets (Euro and US markets from Q1 2010).
So top-line earnings look set to be boosted from a broad centre-ground yet meaningful market appeal.
In reality the US tax-payers money allowed GM to temporarily massage its business model, able to heavily discount its once sizable vehicle inventory, push stock onto dealers at reduced rates to shed production excess whilst re-aligning new vehicle supply capacity to match lowered forecast demand, yet theoretically maintain margins on new release vehicles such as Insignia and Beat/Spark. Thus it has been able to play both the unit-margins card in the D-segment in Europe and as a result of China-US exportation, and the volume-profit card in the B segment across regions, though the S.Korean Won has risen of late compared to previous ongoing weakness.
In mind of, but beyond, the currency effects of global operations, GM effectively seeks to re-invent itself as a right-sized, capable and prosperous modern car company.
Washington has done what it can, arguably far more than economically rational, to enable that metamorphosis. The Chairman and CEO is now tasked with stewarding the transition back to a commercially viable global entity. Once the extended scrappage schemes (eg UK's) that have kept the industry on life-support only those with buoyant balance sheets and attractive products will be able to fight for their respective share of the shrunken 'normalised' markets, and be able to maintain CapEx momentum.
Investors will want to see GM as a clean sheet company, having shed its remaining major operational issues; such as the arbitration filings by “some 500/600” NA dealers.
[NB that very approximate sum was uttered by Whitacre, demonstrating his somewhat removed position from the coal-face].
In contrast to the overtly relaxed, laid-back conference persona the top-brass of GM seemingly espouse, future investors will need substantive convincing that the 'massaged momentum' expected to be seen in financial statements over the next 6 months - as a precursor to the IPO - can be latterly maintained.
In sports parlance, GM's future, for investors and all stakeholders alike, must be considered as a long-haul marathon, not simply an IPO sprint. Today, GM pushes-off of the starting blocks with new vigor and presently less incumbered by a diminished competitor set. Importantly, the renewed Board hopefully offering fresh-thinking to bolster Walter Borst's Congressional promise, must look far beyond the attractive fluttering 'ticker-tape'.
That contention and possible dilemma is the core task that the now all-powerful Whitacre must balance. In this respect GM is a very different beast to AT&T – conglomerate divestment as opposed to conglomerate build, cost-cutting as opposed to competence building, erratic as opposed to stable capital market conditions and international competition as opposed to domestic focus.
Ed Whitacre's obviously astute knowledge of, and progressive introduction to GM, of the TelCo business model means that new GM into the future morphs into a very different beast.
[NB, as stated some time ago, investment-auto-motives conjects that one potential scenario sees the formation of 'GEM', with GE & GM creating a new 'Intel-e-Drive' division, possibly hastened via the acquisition of Chrysler's GEM electric car division].
Ed Whitacre mentioned a stay of two to three years, yet given Bob Lutz's oft return in what should be a stable, 'heir apparent' world of NPD, the mass revision of the complete GM business template indicates that Whitacre's stay looks set to be far longer than announced.
Thursday, 4 February 2010
Company Focus – Daimler AG – E-Class & Global SMEs Provide Welcome Momentary Respite, But No Time To Procrastinate On The Cash Cushion
Daimler Stock Price (NYSE @ 14.30 on 04.02.2010)
$ 47.93
Daimler's Mercedes marque was historically the choice of the successful yet perhaps more somberly minded small and medium-sized business owner, the E-class symbolic of repute, respectability and longevity. The S-class was born to simultaneously feed the 1970s emergent demands from captains of European industry and petro-dollar rich Arabia, Maybach in turn re-playing that role in the 2000s. As the once separate remits and capabilities of the E & S class 4-door cars started to overlap, Daimler 'diversified' the E-class into an ever array of body-variants and relative 'characterisation' (eg Wagon/Estate vs Convertible) which in turn generated the successful CLS 4-door coupe.
[NB. This is of course to say nothing of the evolution of C, A & B Class & >smart, all which have had their own varying degree of success].
But in recent months it appears to have been Daimler's historical CofG – the E-class – which has assisted corporate fortunes and been the foundational strength behind revenue in a slowly emerging, yet still fragile, post crisis market.
The styling of the new 2009 model car set out to provide the Merc veteran with a new personality, a far more aggressive 'face', more dynamic side-elevation and varying levels of rear arch 'haunch' relative to body-style that mimics the Bentley aesthetic signature.
However, whilst undeniably cosmetically progressive, the most powerful generator of E-class purchases in Q409 & Q1 2010 has been the thawing of corporate credit in the US and W.Europe and paradoxically the very opposite in China. In the west, after what have been a tortuous 2008/9, those SME business owners still trading (albeit at low levels) and the C-suite execs who've internally driven corporate restructuring, have respectively rewarded themselves, or been awarded by Boards keen to retain talent, the provision of a new E-class. Critically it has been the marriage of accessible liquidity/credit, the model's best in class residual value, and - if running a fleet - the ability to negotiate discounted deals across cars & commercial vehicles, that has tempted western business owners & CFOs toward Daimler.
Indeed businesses are themselves using the Mercedes choice as a hallmark of their respectability and stability during this still dour economic phase. And for business lenders themselves, they guide their clients to buy company assets that maintain worth, for the sake of the balance sheet, and are relatively liquid in case of the need for quick resale to provide working capital liquidity if necessary. The Mercedes E-class qualifies on both counts. In mixed parlance, it has returned to its historical role as the consummate company 'investment vehicle'.
Ironically, in China it has been the very opposite micro-economic forces which have generated the major boost in E-class sales over the last few months.
The PRC's administration has in recent history been engaged in generally loose fiscal policy throughout much of the decade, weakened regulation suited to the growth of state backed enterprise, then in turn the use of massive reserves (US$ & Yuan) to provide free-flow financing to new enterprise, sectors and commerce. The average 10% GDP growth demonstrates the success. But that success became supercharged and by late 2008 the stock-market bubble was intentionally deflated, whilst post-Beijing Olympics it was recognised that China had to slow its rapid growth to stem domestic inflation, which in turn damaged the country's engrained low cost-structure and thus squeezed what was internationally seen as an unfairly undervalued Renminbi. Thus domestic economic policy and international relations have set the PRC government the task of maintaining the historic FX related productivity-gap, so in turn having to control-cool the economy. The major sign of this is heavily reduced lending to private & semi-private enterprise, this January's data showing the effective negative level of credit/liquidity decline to come.
That knowledge was well understood throughout November, December 09, thus Chinese business owners and senior level executives have been spending company cash on 'motivational incentives' in the knowledge that doing so later this year may not be an option, the notion of being seen to be excessive during future spend-thrift times, a social faux pas.
Thus on a turnover basis, Daimler has pleasingly witnessed a 26% YoY increase in E-class unit sales, contributing to the 13% Q409 vs Q408 improvement in total vehicle sales.
In what by historical norms historically a terrible US market, Daimler's YoY sales decrease bettered that of the luxury market TIV, with a -15% fall vs -21% fall. However, the tail end of 2009 and beginning of 2010 witnessed sizable 46% general sales improvement in a January YoY comparison, of which E-class improved by 116% and C-class 33%, whilst in the SUV sector M-class improved 42% and GLK 38%.
In Europe, unsurprisingly given the level of German domestic stimulus and electioneering related assistance to the economy, the homeland performed relatively well for Daimler, down 'only' -12% YoY, whilst the remainder of Europe actually saw an increase of 6% YoY, perhaps highlighting the better credit terms Mercedes buyers generally enjoy given their typical socio-economic profiles.
The UK led the sales rally with an increase of 46% YoY, a reflection seen by some that the UK led into the recession but also leads out of a technical recession.
But it is China over 2009 that buoys the majority of Mercedes momentum with sales up by 65% (70,100 vs 42,600 units, with December showing a 200+% YoY increase for largely we suspect the reasons previously outlined. S-class also maintains its relative ownership of the luxury sedan market, with 40% of sales for the sector.
Asia-Pacific as a whole saw 2009 economic bullishness convert into a 13% improvement in Mercedes sales, with a massive 77% YoY growth for December, possibly reflecting a mix of general enthusiasmm and those who believed China's economic curve was 'topping-out' and so given the level of Asia-Pac'seconomicc inter-relatedness, the reason to buy in the good times before the naturally expected slowdown. Positively, India – less trade connected to China – saw a 500% M-B sales growth in January YoY, though notably from a miserly high double-digit base, adding little to the bottom-line, but demonstrating retained M-B enthusiasm amongst older customers.
[NB S. Korea's own NPS state pension fund's own increased diversification into western European infrastructure plays - such as its 17% of the UK's Gatwick Airport – indicates the region's own slowed expectation of SE Asia's slowing].
[NB. Relative too India, sociologically M-B must combat a level of cultural dismissal from the 30-50 age group which has a partially entrenched view that Mercedes symbolises the older 'inward-looking' businessman of yesteryear, and not the globally aware (often globally educated) entrepreneur or corporate executive of today].
February 18th sees Daimler's annual investor's and analysts press conference, whilst preliminary full 2009 figures are made available on 2nd March. Until then as seen above, Daimler are understandably trying to assist positive external perceptions with typical good news stories.
Daimler has perhaps been best positioned as the 'middle player' within the exec market: between an over-capacity BMW, an increasingly popular globalised Audi (esp China/India) and (momentarily) 'Toyota-tainted' Lexus. As such expectantly the best all-round performer; given its continued resonance in testing times. Thus the resulting sales picture, regionally & globally, is on par with expectation that it would “beat the market” and gain executive share of mind and hence share of market. And again, expectantly, Daimler has targeted its biggest EU nations (Germany & UK) as its pillars of rebound growth.
As highlighted in previous conference calls, one real concern is whether the company is having to effectively 'buy market share' through reduced profit margins given the level of discount the likes of BMW and Audi can muster relative respectively to volume-leverage on 5-series and margin-leverage enabled by VW's scale. The typical corporate line from is that Daimler will not de-value its relatively new offering, especially as its 'volume x contribution' mix at the one-year stage is in normal times the earnings peak of any new model.
Another concern pertains to the level of flexibility Daimler has to further push cost-containment measures on its procurement and assembly of C, E & S-class cars, the large percentage of which are manufactured in Germany. Whilst C-class will gain US production to reduce assembly & distribution costs and negate the volatile Dollar-Euro FX gap, this does not occur until 2014 as part of what appears an implicit pledge to the German government and public. In the meantime, Daimler can only wish that the Dollar-Euro gap continues to shrink so as to aid the differential and avoid the additional overhead of FX hedging insurance.
With what seems little flexibility in its conventional cost-cutting regime at the assembly level at home, pressure bears upon other production regions (at lower volume) to slim costs and boost margins. However, as inflation costs rise so savings on input costs - if indeed attainable given that suppliers know such regions are important to Daimler – may be limited if any. Faced with this homeland vs RoW 'catch 22'. This circumstance of reaching an immoveable cost-floor will push Daimler to seek greater alliance co-operation with other EU based but ideally global-reach or global-ambition players: hence the rational regards previous BMW &/or PSA alliance regards Mini, A-class & B-class does not disappear. In the short-term Daimler should still seek procurement cost-containment measures and initiatives across its full range of vehicles, probably able to cite and endeavour to pass-on any 'unofficially sanctioned' dealer-floor discounting percentages levels it has been forced to absorb.
Like much of its European brethren, Daimler's breadth as both passenger and commercial vehicle manufacturer is core to its business model, and though recently painful, will provides dual strengths throughout the upward cycle of economic recovery once firmly underway. This is yet to happen in a fully fledged, convincing manner, though positive signs have appeared – as seen with EU & US sales. Working aligned to the fragile recovery will of course be key, but as stated previously Daimler is in the position of offering SME owners and corporations 'safe-have' choices when renewing their executive and operational vehicle fleets. But we have seen so far only tentative signs, and so presently Daimler's position and immediate success is not secured.
The company faces the positional paradox of being operationally constrained due to unavoidable political-economic pledges, yet awaiting the beginnings of true regional and global macro-economic pull to assist its conservative yet potentially powerful business model. The real problem it and peers face, is the apparent forthcoming Chinese & correlated Asia-Pac slowdown. This would affect most regions except a seemingly self perpetuating India, where unfortunately Daimler's own sales exposure is still rather limited relative to other regional sales capacities and it must overcome the culturally acquired/inherited resistance previously stated.
Hence in the meantime Daimler must carry-on 'as is'.
No doubt continuing to fill the good-news vacuum by credibly presenting itself as the auto-sector's Delphic Oracle on the issue of advanced low-CO2 future vehicles. But it is not enough to bias focus upon high-brow R&D strategy, when analysts want to see credible, yet understandably diminished, on-the-ground revenue-boosting and cost-cutting efforts. Finding additional ways to streamline costs, divest of remaining non-core assets, and the forging of additional alliance connections will better 'cut the mustard' at present. Of the latter, perhaps the most obvious related to the contract manufacture of its commercial vehicles for others as its Dodge partnership possibly reaches a natural end due to FIAT-Chrysler.
Dr Zetsche, Mr Uebber as CFO et al have done well to cautiously steer the group through such trecherous waters over recent years given the collapse in luxury car sales. It's decision to go to the bond markets in 2009 to add to its cash-pile whilst the liquidity-window was open was a wise move, so adding to its cash pile, totalling Euro 13.4bn ($19.2bn) in mid 2009. This good news given the CFO's statement that only Euro 8-9bn was needed annually (though we suspect Euro 9-10bn).
By Q309 Daimler had Industrial Cash Reserves of approx Euro 8.6bn + Financial Cash Reserves of
approx Euro 2.8bn, in all totalling Euro 11.498bn. The recent sales surge in the US, UK and China is indeed welcome, both industrial and captive finance divisions benefiting, and will undoubtedly be directed straight to its cash coffers. But present indicators depicts that this recent boost in all probability will be short-lived.
Given an appetite for self-funding companies investors will be pleased by Daimler's liquidity security, the recent top-up welcome, but equities investors in particular want to see strategic and tactical movement...to see the foundations of the next growth phase, to come in due course, being built. The longer that takes, combined with the signs of a possibly extended recession, the greater pressure that Daimler's cash pile be given back to the shareholders.
E-class and US & Chinese company-buyers have demonstrated their regard for Mercedes-Benz, Daimler AG must seize the evident goodwill to demonstrate its future worth to its clients and capital markets.
$ 47.93
Daimler's Mercedes marque was historically the choice of the successful yet perhaps more somberly minded small and medium-sized business owner, the E-class symbolic of repute, respectability and longevity. The S-class was born to simultaneously feed the 1970s emergent demands from captains of European industry and petro-dollar rich Arabia, Maybach in turn re-playing that role in the 2000s. As the once separate remits and capabilities of the E & S class 4-door cars started to overlap, Daimler 'diversified' the E-class into an ever array of body-variants and relative 'characterisation' (eg Wagon/Estate vs Convertible) which in turn generated the successful CLS 4-door coupe.
[NB. This is of course to say nothing of the evolution of C, A & B Class & >smart, all which have had their own varying degree of success].
But in recent months it appears to have been Daimler's historical CofG – the E-class – which has assisted corporate fortunes and been the foundational strength behind revenue in a slowly emerging, yet still fragile, post crisis market.
The styling of the new 2009 model car set out to provide the Merc veteran with a new personality, a far more aggressive 'face', more dynamic side-elevation and varying levels of rear arch 'haunch' relative to body-style that mimics the Bentley aesthetic signature.
However, whilst undeniably cosmetically progressive, the most powerful generator of E-class purchases in Q409 & Q1 2010 has been the thawing of corporate credit in the US and W.Europe and paradoxically the very opposite in China. In the west, after what have been a tortuous 2008/9, those SME business owners still trading (albeit at low levels) and the C-suite execs who've internally driven corporate restructuring, have respectively rewarded themselves, or been awarded by Boards keen to retain talent, the provision of a new E-class. Critically it has been the marriage of accessible liquidity/credit, the model's best in class residual value, and - if running a fleet - the ability to negotiate discounted deals across cars & commercial vehicles, that has tempted western business owners & CFOs toward Daimler.
Indeed businesses are themselves using the Mercedes choice as a hallmark of their respectability and stability during this still dour economic phase. And for business lenders themselves, they guide their clients to buy company assets that maintain worth, for the sake of the balance sheet, and are relatively liquid in case of the need for quick resale to provide working capital liquidity if necessary. The Mercedes E-class qualifies on both counts. In mixed parlance, it has returned to its historical role as the consummate company 'investment vehicle'.
Ironically, in China it has been the very opposite micro-economic forces which have generated the major boost in E-class sales over the last few months.
The PRC's administration has in recent history been engaged in generally loose fiscal policy throughout much of the decade, weakened regulation suited to the growth of state backed enterprise, then in turn the use of massive reserves (US$ & Yuan) to provide free-flow financing to new enterprise, sectors and commerce. The average 10% GDP growth demonstrates the success. But that success became supercharged and by late 2008 the stock-market bubble was intentionally deflated, whilst post-Beijing Olympics it was recognised that China had to slow its rapid growth to stem domestic inflation, which in turn damaged the country's engrained low cost-structure and thus squeezed what was internationally seen as an unfairly undervalued Renminbi. Thus domestic economic policy and international relations have set the PRC government the task of maintaining the historic FX related productivity-gap, so in turn having to control-cool the economy. The major sign of this is heavily reduced lending to private & semi-private enterprise, this January's data showing the effective negative level of credit/liquidity decline to come.
That knowledge was well understood throughout November, December 09, thus Chinese business owners and senior level executives have been spending company cash on 'motivational incentives' in the knowledge that doing so later this year may not be an option, the notion of being seen to be excessive during future spend-thrift times, a social faux pas.
Thus on a turnover basis, Daimler has pleasingly witnessed a 26% YoY increase in E-class unit sales, contributing to the 13% Q409 vs Q408 improvement in total vehicle sales.
In what by historical norms historically a terrible US market, Daimler's YoY sales decrease bettered that of the luxury market TIV, with a -15% fall vs -21% fall. However, the tail end of 2009 and beginning of 2010 witnessed sizable 46% general sales improvement in a January YoY comparison, of which E-class improved by 116% and C-class 33%, whilst in the SUV sector M-class improved 42% and GLK 38%.
In Europe, unsurprisingly given the level of German domestic stimulus and electioneering related assistance to the economy, the homeland performed relatively well for Daimler, down 'only' -12% YoY, whilst the remainder of Europe actually saw an increase of 6% YoY, perhaps highlighting the better credit terms Mercedes buyers generally enjoy given their typical socio-economic profiles.
The UK led the sales rally with an increase of 46% YoY, a reflection seen by some that the UK led into the recession but also leads out of a technical recession.
But it is China over 2009 that buoys the majority of Mercedes momentum with sales up by 65% (70,100 vs 42,600 units, with December showing a 200+% YoY increase for largely we suspect the reasons previously outlined. S-class also maintains its relative ownership of the luxury sedan market, with 40% of sales for the sector.
Asia-Pacific as a whole saw 2009 economic bullishness convert into a 13% improvement in Mercedes sales, with a massive 77% YoY growth for December, possibly reflecting a mix of general enthusiasmm and those who believed China's economic curve was 'topping-out' and so given the level of Asia-Pac'seconomicc inter-relatedness, the reason to buy in the good times before the naturally expected slowdown. Positively, India – less trade connected to China – saw a 500% M-B sales growth in January YoY, though notably from a miserly high double-digit base, adding little to the bottom-line, but demonstrating retained M-B enthusiasm amongst older customers.
[NB S. Korea's own NPS state pension fund's own increased diversification into western European infrastructure plays - such as its 17% of the UK's Gatwick Airport – indicates the region's own slowed expectation of SE Asia's slowing].
[NB. Relative too India, sociologically M-B must combat a level of cultural dismissal from the 30-50 age group which has a partially entrenched view that Mercedes symbolises the older 'inward-looking' businessman of yesteryear, and not the globally aware (often globally educated) entrepreneur or corporate executive of today].
February 18th sees Daimler's annual investor's and analysts press conference, whilst preliminary full 2009 figures are made available on 2nd March. Until then as seen above, Daimler are understandably trying to assist positive external perceptions with typical good news stories.
Daimler has perhaps been best positioned as the 'middle player' within the exec market: between an over-capacity BMW, an increasingly popular globalised Audi (esp China/India) and (momentarily) 'Toyota-tainted' Lexus. As such expectantly the best all-round performer; given its continued resonance in testing times. Thus the resulting sales picture, regionally & globally, is on par with expectation that it would “beat the market” and gain executive share of mind and hence share of market. And again, expectantly, Daimler has targeted its biggest EU nations (Germany & UK) as its pillars of rebound growth.
As highlighted in previous conference calls, one real concern is whether the company is having to effectively 'buy market share' through reduced profit margins given the level of discount the likes of BMW and Audi can muster relative respectively to volume-leverage on 5-series and margin-leverage enabled by VW's scale. The typical corporate line from is that Daimler will not de-value its relatively new offering, especially as its 'volume x contribution' mix at the one-year stage is in normal times the earnings peak of any new model.
Another concern pertains to the level of flexibility Daimler has to further push cost-containment measures on its procurement and assembly of C, E & S-class cars, the large percentage of which are manufactured in Germany. Whilst C-class will gain US production to reduce assembly & distribution costs and negate the volatile Dollar-Euro FX gap, this does not occur until 2014 as part of what appears an implicit pledge to the German government and public. In the meantime, Daimler can only wish that the Dollar-Euro gap continues to shrink so as to aid the differential and avoid the additional overhead of FX hedging insurance.
With what seems little flexibility in its conventional cost-cutting regime at the assembly level at home, pressure bears upon other production regions (at lower volume) to slim costs and boost margins. However, as inflation costs rise so savings on input costs - if indeed attainable given that suppliers know such regions are important to Daimler – may be limited if any. Faced with this homeland vs RoW 'catch 22'. This circumstance of reaching an immoveable cost-floor will push Daimler to seek greater alliance co-operation with other EU based but ideally global-reach or global-ambition players: hence the rational regards previous BMW &/or PSA alliance regards Mini, A-class & B-class does not disappear. In the short-term Daimler should still seek procurement cost-containment measures and initiatives across its full range of vehicles, probably able to cite and endeavour to pass-on any 'unofficially sanctioned' dealer-floor discounting percentages levels it has been forced to absorb.
Like much of its European brethren, Daimler's breadth as both passenger and commercial vehicle manufacturer is core to its business model, and though recently painful, will provides dual strengths throughout the upward cycle of economic recovery once firmly underway. This is yet to happen in a fully fledged, convincing manner, though positive signs have appeared – as seen with EU & US sales. Working aligned to the fragile recovery will of course be key, but as stated previously Daimler is in the position of offering SME owners and corporations 'safe-have' choices when renewing their executive and operational vehicle fleets. But we have seen so far only tentative signs, and so presently Daimler's position and immediate success is not secured.
The company faces the positional paradox of being operationally constrained due to unavoidable political-economic pledges, yet awaiting the beginnings of true regional and global macro-economic pull to assist its conservative yet potentially powerful business model. The real problem it and peers face, is the apparent forthcoming Chinese & correlated Asia-Pac slowdown. This would affect most regions except a seemingly self perpetuating India, where unfortunately Daimler's own sales exposure is still rather limited relative to other regional sales capacities and it must overcome the culturally acquired/inherited resistance previously stated.
Hence in the meantime Daimler must carry-on 'as is'.
No doubt continuing to fill the good-news vacuum by credibly presenting itself as the auto-sector's Delphic Oracle on the issue of advanced low-CO2 future vehicles. But it is not enough to bias focus upon high-brow R&D strategy, when analysts want to see credible, yet understandably diminished, on-the-ground revenue-boosting and cost-cutting efforts. Finding additional ways to streamline costs, divest of remaining non-core assets, and the forging of additional alliance connections will better 'cut the mustard' at present. Of the latter, perhaps the most obvious related to the contract manufacture of its commercial vehicles for others as its Dodge partnership possibly reaches a natural end due to FIAT-Chrysler.
Dr Zetsche, Mr Uebber as CFO et al have done well to cautiously steer the group through such trecherous waters over recent years given the collapse in luxury car sales. It's decision to go to the bond markets in 2009 to add to its cash-pile whilst the liquidity-window was open was a wise move, so adding to its cash pile, totalling Euro 13.4bn ($19.2bn) in mid 2009. This good news given the CFO's statement that only Euro 8-9bn was needed annually (though we suspect Euro 9-10bn).
By Q309 Daimler had Industrial Cash Reserves of approx Euro 8.6bn + Financial Cash Reserves of
approx Euro 2.8bn, in all totalling Euro 11.498bn. The recent sales surge in the US, UK and China is indeed welcome, both industrial and captive finance divisions benefiting, and will undoubtedly be directed straight to its cash coffers. But present indicators depicts that this recent boost in all probability will be short-lived.
Given an appetite for self-funding companies investors will be pleased by Daimler's liquidity security, the recent top-up welcome, but equities investors in particular want to see strategic and tactical movement...to see the foundations of the next growth phase, to come in due course, being built. The longer that takes, combined with the signs of a possibly extended recession, the greater pressure that Daimler's cash pile be given back to the shareholders.
E-class and US & Chinese company-buyers have demonstrated their regard for Mercedes-Benz, Daimler AG must seize the evident goodwill to demonstrate its future worth to its clients and capital markets.
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