The growing Arabian unrest across the MENA region has of course create new dynamics in the markets. Unsurprisingly the period has been fortuitous for event-driven funds with a natural propensity - indeed remit - to speculate effects upon oil prices and in turn its effects upon specific sectors (inc autos) and the impact on the western economic re-growth story.
At such times sentiment rules over facts, and although the Libyan export output is minimal, and OPEC has stated that it will attune pumping, reserves and exports to maintain its underpinning of western rebound, oil touched $120 a barrel - well passed the intrinsic $100 psychological barrier.
Unsurprisingly, the now well-worn adage about the west being 'hostage to oil' is rolled out once again by vested interests. Realism becomes blurred by sensationalism, and the previous high-hope alternative energy answers still look somewhat blue-sky.
The small-scale electric car manufacturers like Fisker and Tesla make the most of the moment by re-featuring their premium price-tagged "sports-saloons" in stark contrast to the massive slashes of municipal budgets that were intended to support public-space e-charging and Renault's seeming about turn on the future of e-cars given the alleged internal spying which purportedly put corporate secrets of its EV business model into Chinese hands.
Thus the imminent picture gives short-term driven hedge-funds a reason to smile, whilst 'green investors' experience ever greater confusion from the conflicting signs in the press and on the mid-term horizon.
However, the Middle-Eastern dynamic and the 'real-world' lack of an alternative to oil, does provide additional impetus to the argument that conventional auto-propulsion and auto-structure technologies (ie ICE propelled & hybrid propelled) & (steel, aluminium and now emergent mass-composite shells) must continue to be developed as the only realistic way forward for auto-manufacture.
In tandem, over the course of the last decade or so governments have been re-evaluating the commercial and social use patterns of cars, trucks and heavy-goods vehicles as part of 'systems' approach to reducing CO2 and other emissions. Multiple approaches typically seeing an expansion of CO2 related vehicle taxation schemes - at purchase and in use - aswell as of course the development of toll-charged access to city-centres. Parallel schemes being periodically debated about the 'pricing' vehicle access to specific rural domains typically protected for its natural beauty or importance to the environment. Whilst towns of historic importance - such as Salisbury – prefer to have their incoming tourists adopt a park-and-ride scheme where the car is left on the urban periphery, buses used to provide a 'hi-capacity - low impact' mobility solution.
Thus, re-appropriating car-use has been perhaps the #1 issue for western town-planners in recent decades. Here in the UK the 2000s has witnessed a distinct turnabout from when the emergence of a car-culture gave rise to grid-type layouts for post-WW2 'New Towns' like Milton Keynes, and auto-mobility initiated grand road schemes; Birmingham's 'Spaghetti Junction' the grande archetype.
And the innate desire to re-populate cities and towns with increasingly 'mixed use' spaces which effectively means office & residential, has effectively marginalised car-ownership, car needs supposedly met (and arguably not so) by the rise of shared-use rental type arrangements on offer, either independently for an area, or as part of a residential 'brown-field' re-development site.
However, whilst planners seek ever improved mobility answers, the use of broad-brush 'panacea solutions' invariably lead to a loss of a town or city's unique character and dynamicism. Very few urban areas in the 'old world' have been developed from a masterplan, most simply evolving, with even those that were substantially re-modeled (such as Baron Hausmann's Paris) themselves expanding outward without accordance to any concomitant evolutionary plan. Every town and city imbues an inherent uniqueness, but all too often such character was pockmarked by US-style automotive-based town planning as a consequence of modernisation. - Coventry perhaps the worst culprit in its desire to be seen as the Midland's very own Detroit.
Today, the rule of the car has diminished even if the essential role of the car has not, yet the loudest voices petitioning any new urban mobility schema are typically anti-car, and so massively divergent criteria are put onto the shoulders of planners, ones which reflect the diametrically opposing forces of 'ideals' versus 'necessities' born from the gap between prominent well-intentioned activists and the silent majority who whilst broadly concerned by social & climate issues also seek minimal impingement of their innate freedom of mobility.
Thus in the UK and other European countries, just as there was high-ambition and over-commitment to planning for the car in the 1950s, 60s & 70s, so today we face the possibility of 'over-committing' to intendedly non-vehicular planning. PESTEL trends highlight that the car will of course not play the transformational role it once did, but equally negating the car's true social function could lead to the eventual possibility that, in years to come, the mobility of a local populace becomes increasingly restricted by virtue of the very fact that the car (per se) becomes heavily marginalised – especially so in the popular perception & consciousness - and so bit by bit people's very expectations of their 'mobility sphere' diminishes.
This then - whilst seemingly far-fetched by the apparent abundance of cars – is one real scenario outcome, and the fact that even in London the effects of the economic down-turn have seen a relatively rapid contraction of what were once heavier traffic flows during evening weekend and weekday leisure hours. Traffic flows which whilst problematic, also highlighted the fruits of economic buoyancy and personal freedoms.
As ever, typically the ideological pendulum swings too far in one direction, then counter-wise, too far in the opposite ideological direction.
The City & the Car then must come to a better and more synergistic relationship, one based on social, economic and technical reality; as opposed to one based upon high ideology. The past evidence of which conveys that any specific era-led dogma has its own limited time-frame, and moreover, aesthetically 'freezes' the area in a specific point in time; so unintentionally dating the town, when all should be 'timeless' in their own idiosyncratic manner, its qualities derived from its historic origins.
This is perhaps where successful towns differ from the unsuccessful, inherent heritage protected whilst seamlessly adapting to changing real-world conditions. Of course the more important and wealthy the town the more sensitivity to its 'living history', yet that phrase has a pertinent echo which is applicable to all: from Chaucer's medieval Canterbury with its clerical and agricultural heartland, to Orwell's Wigan reflecting a social strength in adversity.
Each town and region is specific, yet the development of Cambridge may offer insight as to how to create a synergistic and sensitive City-Car development scheme distinct to the character and needs of a town. [NB 'Insight' not 'Template'].
Of course as the pre-eminent seat of learning – alongside Oxford – with architectural masterpieces created from the wealthy patronage of bygone days and a separate demographic and intrinsic 'high-brow' mentality, it sits as 'chalk & cheese' compared to other far more typical UK urban centres.
It is fondly nicknamed the city of 'bridges and bicycles' given its Roman origins on the River Cam and the century-old propensity for inter-collegiate travel by bicycle.
Indeed, the bike adds to the very fabric and 'contextuality' of the town, the traditional sturdy bicycle with handlebar-mounted wicker basket has become so 'de rigueur' that it is used by non-student locals of all ages and backgrounds to emphasize their personal connection to the town.
[NB The more aspirant younger local female 'Townies' (as opposed to the student 'Gownies') ride around on new retro-esque Pashley's, with 'peddle pusher' Capri pants and classic boating shoes...looking every bit the part except for the 'tell-tale' aspects of newness (so endemic in social snobbery) and an obviously provincial local accent. The Cambridge icon is even used in a modified form as an intended counter-culture statement by one young black guy, who rides his 'low-rider style' with low seat and high bars, thereby 'cross-breeding' two adopted cultures: the typical Don's bicycle and the SoCal low-rider bike, which is currently en vogue in UK hip-hop & 'Grime' circles, but was typically build for the children of 2nd generation Mexicans to mimic their father's low-rider car].
Thus for Cambridge (perhaps more so than Oxford) the bike serves as a contextual part of the town-scape, an almost organic element that grew naturally and has been socially interwoven. This a counter-point to London's bike rental scheme, which whilst laudable in its aims, can at times seem at odds – especially safety-wise – with the much faster moving capital city.
Thus, in Cambridge the bicycle, the car and the bus appear to have far greater confluence, no doubt a result of organic growth and greater sensitivity regards mobility planning, This perhaps in no small part due to the fact that many of the colleges actually own land within the town and so act with a greater sense of stewardship, as opposed to the far more process-driven mentalities of many local council planners.
One very visible aspect is the 'automatic courden' of motor vehicle access to the historic centre on weekend evenings. Tourists particularly note the use of discreet road-embedded automatic barrier poles, which silently fall and rise to allow only taxi-cabs into the centre, thereby massively reducing congestion and deterring the usual entry of loud and vexatious youth in their cars, which obviously spoil the tranquility and atmosphere of the town for locals and all important visitors.
As a consequence mobility issues appear to be addressed at the local level by parties with a direct involvement. Whilst this echoes the current government's Big Society ideal, such local stakeholder participation is obviously far easier to address in Cambridge given its lineage and propensity for self-governance, than many others across the country in stark contrast.
However, whether obvious at the surface or hidden below, the innate local character remains and should serve as a cultural reference-point when developing mobility solutions as part of a greater effort in maintaining, recapturing or simply servicing the town, city or region.
To this end, because the bus, tram, car and bicycle operate as the moving parts of the landscape these too should be viewed not simply from their functional 'people-moving' perspective which necessitates vehicle-specific route-ways and courdening, but as critical moving parts of the aesthetic whole which play a role in creating a local culture and consciousness.
Today, we see greater 'localisation' in obvious progress, from the national independence movement reflected in the administrative separation of Scotland & Wales, to the appearance of 'Free' schools with intentions for far greater parent-led involvement. Equally, we see greater conscientiousness regards the formula and origins of food-stuffs, given greater concerns about nutrition and sustainable 'food-miles'.
'Localisation' has thus become part of the 21st century narrative that underpins society, our manufacturing & service industries aswell of course regional and national economies.
To this end investment-auto-motives believes that the car still has a major part to play in the transport eco-systems being developed, and that the eco-mobility solutions being created should reflect regional character and needs so as to re-instigate regional connection and pride. The two prominent themes of eco-sustainability and character should be part of the basic DNA of future UK manufactured, assembled and serviced goods. Transport goods spanning:
1. human powered vehicles of greater variety and flexibility – as seen in Europe.
2. electric & ICE powered scooters developing the 'migratory' user rational of the BMW C1, Piaggio MP3 etc.
3. a new breed of urban-focused small passenger car, ICE & Hybrid propelled of light-weight construction which also offer immediate long-range convenience at the 'expense' of rarely used 'performance' capabilities. These created as '4-type' vehicle palette (which includes Gordon Murray's T25 concept funded by the UK's Technology Board, and utilises the R&D and proven small vehicle packaging abilities of foreign automakers with concomitant FDI opportunity)
The 'auto-manifesto' to also leverage the localisation possibilities generated from 'Micro-Factory Retailing' as more recently espoused by Cardiff Business School's Centre for Automotive Research, and seemingly intrinsic to the T25 'i-Stream' build process.
[NB Here the functional origins of the Morgan Car Co could serve as inspiration 100 years on, itself born from the local transport needs of its Founder 'HFS' in Malvern Link, Worcestershire].
4. a new breed of urban-focused medium-sized utility vehicle (van & pick-up), with prime requisites of lightweight constructional, on par GVW load-carrying capabilities to current vehicles, highly efficient vehicle packaging layout to provide maximum space utilisation and intelligent space-use solutions both internally and externally.
As presented in the last web-log article, investment-auto-motives believes the US will be deploying a good portion of its QE & QE2 raised funds to effectively 'buy-in' its much needed 21st century eco-tech capabilities, through M&A of cash-backed US companies and target European, Japanese and S.Korean companies whose R&D sits at the leading edge of eco-tech. This enabled by the ongoing consolidation of intercontinental stock-exchanges, and the still evident use of implicit and explicit 'soft-power' policies. [NB see “Liquidity & Linkages” 19.02.2011]
For good reason given its more limited economic and global reach powers, Britain sits in direct contrast to the US. Its more constrained availability of liquidity and its political position means that it must think very differently, more independently in developing its own eco-tech capabilities – thereby raising its own R&D capabilities - and with far more of a bi-partisan spirit toward internationalism, thus effectively a friendlier face than perhaps the case for the US. This reality well reflected in the mantra of the London School of Economics with its focus on 'strategic diplomacy'.
Thus the UK enters the second decade of the 21st century with a major challenge of re-invigorating its economic growth, as a much needed '2nd Act', after the well entrenched need to cut the national deficit.
Critics were right to highlight the loss of manufacturing capability – especially apparent given Germany's ability to ride the recession – yet were also wrong to deride the critical input of the UK's Financial Services sector.
As investment-auto-motives trusts it has demonstrated, building a new Britain which is inspired by its inspirational true heart and creates a tenable future, depends upon the intelligent coalescence of manufacturing and finance, and upon the intelligent coalescence of localism and internationalism, so as to powerfully develop and psychologically embrace the much needed eco-tech which can serve personal and mass transport solutions throughout our very individual and charismatic cities, towns and regions across the land.
Saturday, 26 February 2011
Saturday, 19 February 2011
Macro Level Trends – 3 Speed Global Economy – The American Rebound ...via “Liquidity & Linkages”?
It is no secret that much of the dynamic within western capital markets over the last 3 years has been largely macro-driven.
The financial flee of 2007/8 was partially stemmed by massive government stimulus packages across the US and Europe, with thereafter investment managers necessarily more attuned to long 'macro-plays' in EM regions and commodities, and contra short-plays in western currencies and sovereign-bonds, all the while stock-picking those companies best positioned to ride the recession, ranging from low-risk utilities to Asia-exposed luxury goods houses.
The necessary national re-capitalisation of western banking allowed those in-house investment-banking arms to help themselves, their own required contraction of proprietary trading desks and other front & back office activities creating leaner entities which could in turn better benefit from extracting the global value to be had, which in turn boosted the banks liquidity levels so helping to meet new capital reserve expectations and so increasing confidence of stability.
Of course for the US in particular, the Quantitative Easing packages have assisted the process, Wall Street metaphorically indebted to Washington whilst it is literally indebted to the world, China especially so. The massive first and secondary rounds of QE created concerns for much of the world's other governments and central banks, since it's hyper-Keynesian stance flies directly in the face of the conservative 'economic consolidation' stances the UK and European administrations have elected to pursue, the southern European nations begrudging participants in this very necessary action. The prime US vs European differentiator is concern about QE-linked re-bound inflation or indeed the stagflation paradox of rising prices within an economically stagnant environment.
Thus popular perception garnered from economic text-books' theorums is that via QE the USA believes it can 'spend' its way out of the deep recession. Whilst part of rational, allowing for the provision of 'social stability' spending through welfare benefits and the like, the fact that large stretches of old industrial (unionised) America are irrevocably lost to foreign shores or less labour constrained 'new domestic' manufacturers (eg BMW, Hyundai), plus the increasingly marginalised US export-base (of capital goods, aircraft, defence equipment, cars and service-support) means that the idea of 'spending its way' out of recession has had its detractors.
So could there be another rationale for the massive QE programmes, beyond the dollar devaluation advantages which help to explain the willingness to bare the massive and increasing weight of national debt-servicing?
[NB as FT Video highlights, projections show debt-servicing levels to rise well above average in 2012/13, hitting the 2% average in 2012 with $330bn annual interest, and 4% GDP and $900bn in annual interest payments by 2020. The GDP ratio % level is not concerning but the total amount is more worrying given the real eventual drag on the ability for national and state spending].
US debt-servicing of this magnitude has of course been a prime underlying concern for capital markets when not thence diverted by European sovereign-debt woes, its superseded by the recent social unrest in the Arab world. The US debt focus has returned as international funds partially move-out of China and other 'macro-China' related EM countries as concerns about either the regional over-heating or the quelling of a possible bubble grow. That has meant returning to western safe-havens with the German 'pfandbrief' (ie covered corporate [inc bank] bonds) popular in Europe, but the T-Bill remains the most visible instrument.
Whilst US 'growth' and 'value' stocks have enjoyed renewed favour, the notional safety of Treasury Bonds has buoyed. Through the crisis US Bonds became increasingly unpopular and even saw the historical inversion of the short vs long-term yield relationship which still exists today as investors continue to worried about the long-term possibility of Federal bankruptcy – an end-point scenario created by a domino-effect of inter-state bankruptcies.
[NB This 'inversion' seen in the 30 year Bond yield demands have recently seen a rise, edging to 5% compared to the 2-year Bond yield demands at near 1%, and so previously poor sales of the 3-year Bill given its lowly returns]
However, like Einstein's theory, within the economic universe all things are relative, and recently that 'black-hole' worry appears to have eased – even though its fundamentals still presently remain . As a consequence, the recent 10-year Bill offering worth $24bn on 11.02.2011 (via the usual Fed auction) saw a dramatic 70% take-up and so the spread drop as institutional investors dropped their coupon return expectations, preferring to merely park their monies. This then either infers that they are concerned about fewer near-term investment opportunities, or simply wish to offset the slight EM slowdown.
Though the markets react to near-term economic reasoning and crowd behavior, the broader US position begs a very pertinent question:
“What is the ultimate ambition of the Federal Reserve & Washington?”
The obvious answer is “to get America back on its economic feet again”. But how exactly? Even with good news stories such as 'junk-bond' default yields narrowing, the picture still looks grim given that the impetus of federal and state level spending is heavily curtailed by having to meet budget cuts thus cannot inject monies into society, and the fact that the still large & fragile unemployment figures are paralleled by necessary static-wage or deflationary-wage in the corporate world. A devalued dollar and exports will assist to a point, but without sufficient domestic activity in what is still by far the world's largest economy, the economic motor will only hiccup and lurch, a smooth running depending upon the right fuel, mixed in the right proportion, injected into the system at the right temperature – more easily done in combustion engines than national economies.
Yet the technological inference is wholly intended, since the US must recapture its once lead grid-position in the global technology race, and whilst it maintains its grasp on Defence, IT and Software – now at critical intersects within the worldwide web – with additionally Pharma, it must regain its abilities in the other physically related eco-tech realms: ranging from all vehicle types to housing and commercial construction, and from 'new-age' consumer goods to internal-use and exportable capital goods.
It is within this context that investment-auto-motives believes that Washington's true ambition is to buy-back its once global technological lead, using the 'printed money' from QE and Wall Street to do so.
[NB. In this manner it will re-run its own play-book from the beginning of the 20th century, an example being the acquisition of the then German technological lead in electrical capital goods and consumer goods manufacture.
The 1890s saw the consolidation of the German electrical sector under the 3 big names of AEG, Siemens and Halske-Schuckert. The 2 latter merged whilst AEG was became the General Electric Co, which in turn purchased S-H-S assets, so relieving the technology gap the US had in the face of its burgeoning immigration and urban growth].
Today's contextual position is presently very different to the USA's in the 1900s, yet the need to re-grow its R&D and manufacturing base in physically tangible high-value 'eco-goods' (of all types) is very much a concern. An like any time-constrained, competitively pressured CEO seeking to climb the value-ladder for his/her own company, the default position to 'Acquire' as opposed to the growth pains endured via 'Organic Expansion' has been noted for its efficacy time and time again.
Having created the 'Liquidity' for international acquisition, the next task is to create the 'Linkages'.
As has been well argued by financial journalists, the need to consolidate the world's capital market exchanges has been a pressing challenge since the emergence of alternative platforms (OTC and other exchanges such as the lamented 'dark pools'). The wave of possible imminent exchange consolidation began with the SGX (Singapore) - ASX (Australia) tie-up, which in turn prompted the idea for a LSE (UK) - TMX Canada venture, this possibility pushing the recently announced NYSE Euronext - Deutsche Bourse relationship. This in turn setting-off rumour that a consortium of smaller exchanges comprising of the NASDAQ OMX Group / CME Group / Inter-Continental Exchange Group (ICE) all combine to bid for NYSE Euronext (and or) Deutsche Borse. And lastly (for now at least) the respectively US and European entities of BATS and Chi-X combine to potentially create the largest cash-equities trading platform, even though they have no 'clearing house'.
Thus today we see a rash of potential consolidations take place that vie to gain the trading volumes expected from the release of the QE $ liquidity created and much of which is still stored within the heightened capital reserves of bank balance sheets, on the books of US corporations and within the cash-shells created by private equity and hedge funds.
Thus whilst the Liquidity waits, the Linkages are being created along the lines of greatest capital markets' rationality; all in the face of the US eco-tech acquisition potential which has already shown aspects of its intention.
Previous web-blog posts serve as prime examples of the activity seemingly underway. Previously we saw Navistar's JV with the UK's Modec; possibly limited to a JV due to constrained corporate funding at the time prohibiting a full acquisition.
More recently for readers n the last few posts, we saw BorgWarner strategically purchase Sweden's Haldex Traction Systems for a relatively small sum. (investment-auto-motives would not be surprised to see BorgWarner separately list the Traction Systems division whilst holding onto a major share so as to feed the US – Swedish NASDAQ OMG Group with a purportedly eco-tech participant).
But it is the last post pertaining to the decision by the UK's Williams GP Holdings to list on the Deutsche Bourse which perhaps provides the best example which soundly supports the presented hypothesis of 'Liquidity & Linkages'.
The UK based Williams GP Holdings (at first glance) represents a leading light in the eco-engineering of vehicles, given that its F1 targeted engineering conduces a need for lightweight construction materials and increasingly sophisticated 'hybridised' combustion engines. (The less sophisticated American race series comprising of of Indy 'open wheelers' & NASCAR 'pseudo-sedans'' do not have such a technological nor IPR reach as F1).
In short and very simplistically, F1construction and propulsion techniques holds the eventual regulatory formula for superseding generations of passenger cars, trucks and specialist vehicles. And just as Navistar sought Modec's propulsion systems, so a plethora of US industry players will need to seek-out and purchase other similarly parallel technologies which form part of their own technology roadmap. This done so via friendly or potentially hostile M&A.
This to play-out from 2012 onward, once this round cross-border Exchange tie-ups are resolved.
This is all to the good of the much needed American rebound, which sees an initially underpinning of co-listed companies on Wall St and other global exchanges, as a consequence the rising valuations of which in turn nurtures investment spending and internal demand for educationally attuned employees. Thus the American rebound appears to be liquidity-driven, the QE monies used to capture international tech advances and IPR.
In the face of this prevalent scenario, the question the rest of the world must ask – Northern Europe, Japan and S.Korea in particular – is: “what must we do in the face of this liquidity-charged challenge?”
The balancing act of combining economic and industrial policies which both serve the 'greater good' of globalisation, whilst simultaneously protecting any domestic industrial strategic advantage which serves the national economy, has never been greater.
Ironically, it may be exactly this that pushes China to become more 'international' in its financial and regulatory dealings as it possibly seeks to replicate the American stance in wooing other nations' technology.
Given Germany's tech-lead, and as obvious target for 'tech-fishing', this then sets the future context for its DAX 30 participants and those operating below the that 'radar'. Within the auto-sector then the likes of Daimler, BMW, VW, BASF (for plastics and bonding chemicals) with also critically Continental (which absorbed Siemens Auto and assisted GM's Volt programme).
Whilst Merkel and her cabinet try and maintain some kind of European macro-economic order via her 'head-girl' role in the ESF programme, Berlin will not be unaware of the eventual industrial dynamics that could unfold. Although somewhat ironic, the Churchillian quote that “those who fail to learn the lessons of history are doomed” may be ringing about the hall of the Riechstag.
America's second coming could about to begin given the buoyancy on Wall St. Washington proffering an alternative Churchill quote: “history will be kind to me, for I intend to write it”.
1912 was a watershed year in the US – European dynamic.
2012 could see history repeating itself, this time the “Liquidity & Linkages” pertaining to the bigger picture of the whole advanced world.
The financial flee of 2007/8 was partially stemmed by massive government stimulus packages across the US and Europe, with thereafter investment managers necessarily more attuned to long 'macro-plays' in EM regions and commodities, and contra short-plays in western currencies and sovereign-bonds, all the while stock-picking those companies best positioned to ride the recession, ranging from low-risk utilities to Asia-exposed luxury goods houses.
The necessary national re-capitalisation of western banking allowed those in-house investment-banking arms to help themselves, their own required contraction of proprietary trading desks and other front & back office activities creating leaner entities which could in turn better benefit from extracting the global value to be had, which in turn boosted the banks liquidity levels so helping to meet new capital reserve expectations and so increasing confidence of stability.
Of course for the US in particular, the Quantitative Easing packages have assisted the process, Wall Street metaphorically indebted to Washington whilst it is literally indebted to the world, China especially so. The massive first and secondary rounds of QE created concerns for much of the world's other governments and central banks, since it's hyper-Keynesian stance flies directly in the face of the conservative 'economic consolidation' stances the UK and European administrations have elected to pursue, the southern European nations begrudging participants in this very necessary action. The prime US vs European differentiator is concern about QE-linked re-bound inflation or indeed the stagflation paradox of rising prices within an economically stagnant environment.
Thus popular perception garnered from economic text-books' theorums is that via QE the USA believes it can 'spend' its way out of the deep recession. Whilst part of rational, allowing for the provision of 'social stability' spending through welfare benefits and the like, the fact that large stretches of old industrial (unionised) America are irrevocably lost to foreign shores or less labour constrained 'new domestic' manufacturers (eg BMW, Hyundai), plus the increasingly marginalised US export-base (of capital goods, aircraft, defence equipment, cars and service-support) means that the idea of 'spending its way' out of recession has had its detractors.
So could there be another rationale for the massive QE programmes, beyond the dollar devaluation advantages which help to explain the willingness to bare the massive and increasing weight of national debt-servicing?
[NB as FT Video highlights, projections show debt-servicing levels to rise well above average in 2012/13, hitting the 2% average in 2012 with $330bn annual interest, and 4% GDP and $900bn in annual interest payments by 2020. The GDP ratio % level is not concerning but the total amount is more worrying given the real eventual drag on the ability for national and state spending].
US debt-servicing of this magnitude has of course been a prime underlying concern for capital markets when not thence diverted by European sovereign-debt woes, its superseded by the recent social unrest in the Arab world. The US debt focus has returned as international funds partially move-out of China and other 'macro-China' related EM countries as concerns about either the regional over-heating or the quelling of a possible bubble grow. That has meant returning to western safe-havens with the German 'pfandbrief' (ie covered corporate [inc bank] bonds) popular in Europe, but the T-Bill remains the most visible instrument.
Whilst US 'growth' and 'value' stocks have enjoyed renewed favour, the notional safety of Treasury Bonds has buoyed. Through the crisis US Bonds became increasingly unpopular and even saw the historical inversion of the short vs long-term yield relationship which still exists today as investors continue to worried about the long-term possibility of Federal bankruptcy – an end-point scenario created by a domino-effect of inter-state bankruptcies.
[NB This 'inversion' seen in the 30 year Bond yield demands have recently seen a rise, edging to 5% compared to the 2-year Bond yield demands at near 1%, and so previously poor sales of the 3-year Bill given its lowly returns]
However, like Einstein's theory, within the economic universe all things are relative, and recently that 'black-hole' worry appears to have eased – even though its fundamentals still presently remain . As a consequence, the recent 10-year Bill offering worth $24bn on 11.02.2011 (via the usual Fed auction) saw a dramatic 70% take-up and so the spread drop as institutional investors dropped their coupon return expectations, preferring to merely park their monies. This then either infers that they are concerned about fewer near-term investment opportunities, or simply wish to offset the slight EM slowdown.
Though the markets react to near-term economic reasoning and crowd behavior, the broader US position begs a very pertinent question:
“What is the ultimate ambition of the Federal Reserve & Washington?”
The obvious answer is “to get America back on its economic feet again”. But how exactly? Even with good news stories such as 'junk-bond' default yields narrowing, the picture still looks grim given that the impetus of federal and state level spending is heavily curtailed by having to meet budget cuts thus cannot inject monies into society, and the fact that the still large & fragile unemployment figures are paralleled by necessary static-wage or deflationary-wage in the corporate world. A devalued dollar and exports will assist to a point, but without sufficient domestic activity in what is still by far the world's largest economy, the economic motor will only hiccup and lurch, a smooth running depending upon the right fuel, mixed in the right proportion, injected into the system at the right temperature – more easily done in combustion engines than national economies.
Yet the technological inference is wholly intended, since the US must recapture its once lead grid-position in the global technology race, and whilst it maintains its grasp on Defence, IT and Software – now at critical intersects within the worldwide web – with additionally Pharma, it must regain its abilities in the other physically related eco-tech realms: ranging from all vehicle types to housing and commercial construction, and from 'new-age' consumer goods to internal-use and exportable capital goods.
It is within this context that investment-auto-motives believes that Washington's true ambition is to buy-back its once global technological lead, using the 'printed money' from QE and Wall Street to do so.
[NB. In this manner it will re-run its own play-book from the beginning of the 20th century, an example being the acquisition of the then German technological lead in electrical capital goods and consumer goods manufacture.
The 1890s saw the consolidation of the German electrical sector under the 3 big names of AEG, Siemens and Halske-Schuckert. The 2 latter merged whilst AEG was became the General Electric Co, which in turn purchased S-H-S assets, so relieving the technology gap the US had in the face of its burgeoning immigration and urban growth].
Today's contextual position is presently very different to the USA's in the 1900s, yet the need to re-grow its R&D and manufacturing base in physically tangible high-value 'eco-goods' (of all types) is very much a concern. An like any time-constrained, competitively pressured CEO seeking to climb the value-ladder for his/her own company, the default position to 'Acquire' as opposed to the growth pains endured via 'Organic Expansion' has been noted for its efficacy time and time again.
Having created the 'Liquidity' for international acquisition, the next task is to create the 'Linkages'.
As has been well argued by financial journalists, the need to consolidate the world's capital market exchanges has been a pressing challenge since the emergence of alternative platforms (OTC and other exchanges such as the lamented 'dark pools'). The wave of possible imminent exchange consolidation began with the SGX (Singapore) - ASX (Australia) tie-up, which in turn prompted the idea for a LSE (UK) - TMX Canada venture, this possibility pushing the recently announced NYSE Euronext - Deutsche Bourse relationship. This in turn setting-off rumour that a consortium of smaller exchanges comprising of the NASDAQ OMX Group / CME Group / Inter-Continental Exchange Group (ICE) all combine to bid for NYSE Euronext (and or) Deutsche Borse. And lastly (for now at least) the respectively US and European entities of BATS and Chi-X combine to potentially create the largest cash-equities trading platform, even though they have no 'clearing house'.
Thus today we see a rash of potential consolidations take place that vie to gain the trading volumes expected from the release of the QE $ liquidity created and much of which is still stored within the heightened capital reserves of bank balance sheets, on the books of US corporations and within the cash-shells created by private equity and hedge funds.
Thus whilst the Liquidity waits, the Linkages are being created along the lines of greatest capital markets' rationality; all in the face of the US eco-tech acquisition potential which has already shown aspects of its intention.
Previous web-blog posts serve as prime examples of the activity seemingly underway. Previously we saw Navistar's JV with the UK's Modec; possibly limited to a JV due to constrained corporate funding at the time prohibiting a full acquisition.
More recently for readers n the last few posts, we saw BorgWarner strategically purchase Sweden's Haldex Traction Systems for a relatively small sum. (investment-auto-motives would not be surprised to see BorgWarner separately list the Traction Systems division whilst holding onto a major share so as to feed the US – Swedish NASDAQ OMG Group with a purportedly eco-tech participant).
But it is the last post pertaining to the decision by the UK's Williams GP Holdings to list on the Deutsche Bourse which perhaps provides the best example which soundly supports the presented hypothesis of 'Liquidity & Linkages'.
The UK based Williams GP Holdings (at first glance) represents a leading light in the eco-engineering of vehicles, given that its F1 targeted engineering conduces a need for lightweight construction materials and increasingly sophisticated 'hybridised' combustion engines. (The less sophisticated American race series comprising of of Indy 'open wheelers' & NASCAR 'pseudo-sedans'' do not have such a technological nor IPR reach as F1).
In short and very simplistically, F1construction and propulsion techniques holds the eventual regulatory formula for superseding generations of passenger cars, trucks and specialist vehicles. And just as Navistar sought Modec's propulsion systems, so a plethora of US industry players will need to seek-out and purchase other similarly parallel technologies which form part of their own technology roadmap. This done so via friendly or potentially hostile M&A.
This to play-out from 2012 onward, once this round cross-border Exchange tie-ups are resolved.
This is all to the good of the much needed American rebound, which sees an initially underpinning of co-listed companies on Wall St and other global exchanges, as a consequence the rising valuations of which in turn nurtures investment spending and internal demand for educationally attuned employees. Thus the American rebound appears to be liquidity-driven, the QE monies used to capture international tech advances and IPR.
In the face of this prevalent scenario, the question the rest of the world must ask – Northern Europe, Japan and S.Korea in particular – is: “what must we do in the face of this liquidity-charged challenge?”
The balancing act of combining economic and industrial policies which both serve the 'greater good' of globalisation, whilst simultaneously protecting any domestic industrial strategic advantage which serves the national economy, has never been greater.
Ironically, it may be exactly this that pushes China to become more 'international' in its financial and regulatory dealings as it possibly seeks to replicate the American stance in wooing other nations' technology.
Given Germany's tech-lead, and as obvious target for 'tech-fishing', this then sets the future context for its DAX 30 participants and those operating below the that 'radar'. Within the auto-sector then the likes of Daimler, BMW, VW, BASF (for plastics and bonding chemicals) with also critically Continental (which absorbed Siemens Auto and assisted GM's Volt programme).
Whilst Merkel and her cabinet try and maintain some kind of European macro-economic order via her 'head-girl' role in the ESF programme, Berlin will not be unaware of the eventual industrial dynamics that could unfold. Although somewhat ironic, the Churchillian quote that “those who fail to learn the lessons of history are doomed” may be ringing about the hall of the Riechstag.
America's second coming could about to begin given the buoyancy on Wall St. Washington proffering an alternative Churchill quote: “history will be kind to me, for I intend to write it”.
1912 was a watershed year in the US – European dynamic.
2012 could see history repeating itself, this time the “Liquidity & Linkages” pertaining to the bigger picture of the whole advanced world.
Saturday, 12 February 2011
Company Focus – Williams Grand Prix Holdings – Remoulding Itself for Future Good Years.
It was recently announced that Sir Frank Williams of motor racing fame, was to publicly list his company Williams Grand Prix Holdings upon the Frankfurt Bourse. Having seen monumental change in the world of F1 over recent years, race-teams and their backing companies have had to significantly re-adjust to the new-norm seen in the sport. Change created by not only alterations in technical regulations set by the FIA to close the competitive chasm between teams, but also the major contraction in R&D and operational budgets as consequence of the corporate sponsorship squeeze from the previous financial crisis.
This generated a period of cash-burn for most teams during the lean period, and so necessary new impetus to both raise new funds and be hyper-critical regards the 'cost-benefit' of expenditure in manner not seen in F1 for decades.
Not surprisingly, the sourcing of team funds has been perhaps the most critical of issues as the sport re-emerges for a newer, more responsible era.
That issue perhaps most pertinent for Williams GP, given arguably an untenable present long-term position, squeezed between the funding prowess of top teams and EM backed newcomers, aswell as suffering from lack of technical reach seen by the 'podium 3'. Competitiveness on the grid is still correlated to budget spend, top talent and operational strength costs. Thus we see the 'well-off' Ferrari, McLaren-Mercedes & Red Bull Racing who have proven their performance to date quickly rebound in sponsorship levels. There has been a re-emergence of vehicle manufacturers' own factory-teams, including Renault, Mercedes and BMW-owned Sauber. Aswell as plethora of newer names ranging from new-entrants from EM countries with strong corporate backing, such as Force India, HRT-Cosworth (though based in Spain) and Marussia Virgin Racing. And lastly old GP names like Lotus-Renault, itself Malaysian backed.
Thus even though holding the #4 position from the 2010 season, and so envy of many below, the competitive and operational headwinds for Williams appear substantial and it has had to act. Being seen to do so now with its floatation roadshow in which it seeks to sell 27.4% of the business in order to better secure its future, and recapture its glorious past, as seen in the mid-1990s. That sentiment was all apparent at the IPO presentation, with the period's winning Williams-Renault race-car proudly displayed next to Sir Frank & Patrick Head (co-founders), Adam Parr (chairman) and Toto Wolff (non-exec): a typical modern board formula in a company seeking regeneration of revered seniors and far-reach financiers.
Over the last 50 years of so Grand Prix motor racing has been through a development trend that is the envy of many other sports. From the early post war days of amateur mechanics and drivers, its popularity grew alongside that of mass European car culture, drivers such as Juan Manuel Fangio and Sterling Moss and became heroes, representing combined virtues of gentlemanly competitiveness.
It was the external influence of television that acted as a watershed – especially so colour television in the late 1960s in Europe - and with that direct reach into peoples homes came a new era wherein the grand prix cars themselves became not only 'mechanical platforms' to modify and tweek between races, but critically four wheeled sponsorship 'marketing platforms'. For Formula 1 - its name derived from the FIA regulatory formula dictated – a new age appeared in which a team's budget size became directly linked to its ability to innovate and robustly operate within F1's regional traveling circus. Thus with the increased stakes laid on the table by expectant sponsors, so the pressures grew on teams to win, and the combine of 'gentlemanly-competitiveness' became distinctly tilted, a 'by hook or by crook' attitude prevailing until as the participants themselves joked at the time, Grand Prix has morphed from traveling circus to that of a globe-trotting mad-house; the wheels of which spun ever faster.
(Frank) Williams Racing was born into this watershed era, informally set-up in the early 1960s as to serve his personal auto-racing interests in saloon cars and Formula 3, and matured with the “employment” of Piers Courage* as team driver in F2 in 1968, and F1 in 1969 using a surreptitiously purchased Brabham car which gave success, much to Brabham's chagrin.
Thus unlike other GP participants such as John Cooper, Jack Brabham and Bruce McLaren who were self-constructors of cars , Frank Williams instead initially played the role of 'broker', conjoining other people's separate technological skills and driving skills into one 'Williams' package.
[NB * drivers like the Eton educated Piers Courage (of Courage brewery family) personified the 'old-world' 'old-money' atmosphere that that was quickly disappearinghaving previously stretched from before the likes of 'Tiger' Tim Birkin & Joel Woolf Bernato at Bentley in the 1920s up until Lord Heskith's Racing outfit in the mid 1970s for which James Hunt drove. Hunt exemplified the new 'playboy' guise of driver, the correlate of which Heskith perpetuated with latter Penthouse magazine sponsorship. And so the innate transformation into a new type of GP commercial structure was set].
Williams used a used a De Thomaso-Ford designed chassis-engine configuration in 1970, then a previous season '70 March vehicle for 1971. 1972 financial backing by Motul Oils and Politoys gave the funds to buy a new March to run for the season and create an in-house build facility, so as to critically allow for construction control giving the FX3 chassis. For '73 these backers were replaced by Marlboro (cigarettes) and Iso (fridge producers), evolving the chassis into the FX3B. These backers exited for '74, the strained team finances meaning strategic allocation of finite resources over the season, gaining a single point for the year. For '75 a new FW04 chassis and mixed drivers set gave a second place in the German GP bringing in much needed funds. For '76 Williams sold 60% of the ongoing Racing concern to the oil magnet Walter Wolf, renaming the outfit as Walter Wolf Racing which also brought on-board the Heskith team car.
Frank Williams' own self-determination was being lost, and understandably unhappy he left to set set-up Williams Grand Prix Engineering in 1977 along with Patrick Head who had been the previous team's chief engineer, and backed by sponsors Saudi Airlines. Success came within a few years, winning in '79 and taking a championship titles in '80, in '82, in '86, in '87 (drivers title),
Patrick Head has been Williams' right-hand-man as technical director until 2004, then taking on a more broad business remit. He designed the FW10 car in 1984 which gave the team its first carbon-fibre constructed chassis, which mated with turbo-charged Honda engines gave the team near equal standing with the likes of Ferrari and McLaren who seemed to previously enjoy a technical lead. Honda's engine supply switch to McLaren left Williams using below par Judd engines for '88 and so momentary loss of competitive momentum for the company during that year. This was re-energised by the Renault engine deal of 1989 and largely supported the teams track prowess.
In the 1990s Head brought in Adrian Newey as chassis designer, and Williams became dominant in the sport, between '91-'97 seasons taking 5 constructor titles and 4 driver titles. With such glory and shared internal recognitioncomes management friction, and so Newey eventually departed for McLaren. (Indeed Head mentored many up-and-coming F1 designers who have since moved to other teams, Ross Brawn perhaps being the most visible now principle of his own team, having bought out Honda GP in 2009).
After the '91-'97 winning streak, '98 onwards was less auspicious Williams forced to use Mecachrome engines (ie blue-printed 'pattern-type' Renault engines produced by Mechachrome with no/little R&D support) and an old-specification, regulations modified car. This chassis-engine combine of an effectually un-evolved car leaving Williams off-pace. Between 2000-05 BMW engines were adopted, with in 2000 finishing 3rd in the constructor's championship, 2001 3rd again, 2002 improving to 2nd, 2003 2nd again, 2004 dropping to 4th, 2005 dropped again to 5th. An acrimonious relationship developed between Williams and BMW given lack of success and in 2006 BMW bough Sauber Racing to set up its own team. In 2006 Williams used Cosworth engines but dropped to 8th in the constructors' title, in 2007 regaining to 4th with AT&T sponsorship, 2008 saw drop to 8th as Williams Toyota, 2009 up slightly to 7th and reaching 6th in 2010 using the 'old' Cosworth engine package and re-adorned with AT&T sponsorship.
Hence 'Williams F1' as it became known, has had a volatile ride, both frustrated by its inability to compete against the big-hitters such as McLaren-Mercedes, Ferrari and now the emergent Red Bull Racing (Renault engined). It effectively sits at a half-way-house, neither previously attached to the engine supply and R&D resources of a major car producer, nor with the substantial financial backing of a owner-sponsor such as Red Bull. Thus it must find its own way forward, as it always has seeking that magical combine of genius chassis/vehicle engineering and supply of state of the art F1 engines. Thus little in real terms has changed internally for Sir Frank Williams, but what has changed has been the contextual environments that Williams Racing has had to cope with, both in terms of the ferocity of competition and the ability to access financing – during what has been a period of fiscal drought - to keep the business moving forward.
Thus in recent years he and Patrick Head have had to perform the typical strategic task of 'situational analysis', no doubt with the assistance of the company's bankers, who themselves recognised the reality of the untenable situation Williams Racing faced.
In notional terms, the downturn years between 2008-2010 should have theoretically offered Williams F1 a golden opportunity for revival, given that major auto-company backed teams such as Toyota, Honda and BMW left Grand Prix and the budget's of competitor teams were heavily slashed given the pull-back in corporate advertising spend. Yet though the budget differentials did undoubtedly shrink, the effectual gain the top 3 teams had gathered over the preceding years allowed them to maintain dominance.
Moreover, even though AT&T is a large-cap firm with the steady typical income of most infrastructure firms, no doubt even it had to shrink its F1 contribution over that 3 year period, hence the 2010 car's decals (the FW32) show the additional 'broad-basket' spread of sponsorship from others such as primarily Philips (electronics), PDVSA (Venezuelan), Bridgestone (tyres), Perelli (tyres), Thomson Reuters (newsfeed), Randstad (recruiters), Oris (watches), Green Flag (vehicle rescue), GAC (logistics), RBS (banking) etc. In short in shows the new dominance of those companies well positioned to face the future out of the western down-turn, and demonstrates the almost diminutive participation by the banking world, as with with the largely UK government owned RBS (Royal Bank of Scotland). Williams also displays its own logo with the wording 'Hybrid Power' alluding to its own engineering capabilities.
Thus Williams has had to massively re-draw its sponsorship base, seeking much from few such as the Dutch and Venezuelan, and little from many others, the new FW33 2011 season car recently announced no doubt seeing similar prime sponsorship swapping relative to the geography of each world championship race, yet the Venezuela decal appearing in publicity shots as that country's literal tourism and investment vehicle.
Of course for the last 40 years, running a race-team has been as much about gaining as many income streams as possible, and so expanding the commercial base to add stability, growth and provide cash-cushions for leaner times. This apparent from 'up-stream' pursuits such as design, engineering and the manufacture of standard race series single seaters, aswell as 'down-stream' brand related activities such as typical merchandising activities ranging from logo applications on T-shirts, umbrellas and the like, through to more coherent brand extension efforts such (as for the F1 world) use on production cars., and latterly the creation of consumer experiences such as FIAT's Ferrari World theme park.
Similarly, beyond the 'shirts and caps' merchandising, Williams previously bridged the perceptional association between F1 & production cars with its engine supply partner Renault in the mid '90s. The co-branded Clio Williams model came in 2 series and sat at the top of the Renault performance brand tree. (This tie-in initiative preceded by the Mini Cooper, Lotus Cortina, Sunbeam Lotus and latterly by Honda's 'Jordan' Civic; a natural commercial conclusion for any winning auto-manufacturer that can gain additional credibility via the racing association).
However, today in stark commercial terms this past is but a faded, distant memory of little application presently, given the team's improved but 'off-podium' performance and no relationship with a major car manufacturer.
[NB the car caused a mini craze amongst Paris' own financial playboy "pilots" to personally re-run the infamous early morning city-scape race film 'C'etait un Rendezvous' - see youtube - but obviously not condoned then or now]
Similarly a decade previously Williams undertook the engineering for the Group B Metro 6R4 (4WD) campaigned in the 1984 World Rally Championships by Austin-Rover, yet likewise a distant memory.
[NB Even if that engineering know-how were maintained these 26 years on, it would probably be of little real-world application today given that the car was designed as a dedicated longitudinal mid-engined supercar, and truly valuable current 4WD IPR serves the need for FWD derived transverse architectures – see previous post regards the BorgWarner purchase of Haldex – with Haldex holding similar patents on the niche market of mid-engined 4WD systems].
Prior to the engine supply deal with BMW in 2000, Williams' Motorsport division was commissioned to produce LMP class cars for BMW which ran in and won the 1999 '24 Hours Le Mans' race, this engineering project creating valuable external links that would be latterly leveraged.
More recently, in 2008 Williams tendered for the vehicle build contract to supply the re-emergent Formula 2 series announced by the FIA, last seen in 1985. However, it expectantly lost-out to Jonathan Palmer's own offering, itself a close-coupled derivation from MotorSportVision's own previously well received low-cost single seater business model, itself set within the MSV motorsport business hub which also owns/manages race tracks and thus has the prime remit of creating its own synergistic activities, which also draws it closer to the needs of the FIA. Williams Engineering, was thus left to 're-appropriate' its basic vehicles concept and market it under another guise.
Thus, recent years have not been kind to Williams both on and off the F1 circuit, and the recent situational analysis demonstrates that real headwinds remain, the need to create a truly viable business plan core to its long term survival; the beginning of which is the the ability to attract long-term, 'long-hold' investors ideally with something useful in the way of commercial synergies to also bring to the table.
Hence the re-appraisal of its commercial activities and funding sources from chairman Adam Parr (in post since 2006) and his more recent non-exec Torgan Christian Wolff. The conclusion reached being company floatation on the buoyant Frankfurt exchange.
[NB From only a very surface evaluation of Williams' contextual circumstances, it is a conclusion which investment-auto-motives also believes to be the firm's best funding path].
Of all stock exchanges the Frankfurt Bourse is undoubtedly the best upon which to list. This because of Germany's comparatively buzzing economy thanks to exports and healthy domestic demand, hence it has the focus of global investors and the very pertinent fact that the Bourse represents a true 'meeting place' between the many types 'old-school' German industrial companies which have the dual facets of stout conservatism in their operational outlook and enjoyed the export wave of recent years related to cars and capital goods.
Thus a virtual hive for both investors and floatation-seekers with interested in automotive related companies. This has been obviously to Parr and Wolff.
[NB Parr joined Williams in 2006 having worked as an investment banker in equities analysis, Mining sector M&A, then within Mining and also passed the Bar. Wolff is an investor within the German auto-sector, with primary interests in HWA AG and BRR Rallye Racing. HWA AG directly supports Daimler's own national saloon car race team (in the DTM) and produces limited edition road cars, whilst BRR Rallye Racing is a specialist rally-race parts retailer. Wolff is also an amateur FIA accredited racing driver].
Here in the UK, although over the worst of the financial crisis it is recognised that in this new 3-speed global economy (#1Asia, #2 USA, #3 Europe exc Germany) that a seemingly 'natural' listing on the LSE's AIM would be at the present time an irrational route. Instead taking a place on the Deutsche Borse is far more prosaic, since not only the 'hive' mentioned for the sector, but also because the Bourse is itself in in talks with the NYSE regards alliance or merger, so as to create a western exchange powerhouse which would be metaphorically 'turbo-charged' compared to other 'naturally-aspirated' exchanges.
This then potentially avails Williams Grand Prix Holdings to the 2 most prolific western exchanges, which sit in their favourable positions thanks to their respective nation-state stances on industrial/export policy and fiscal/devaluation policy, and so garnered investment activity.
Thus for Sir Frank, Head, Parr and Wolff it is the only realistic track to take.
Moreover, investment-auto-motives believes it is intended to put the company right under the noses of Daimler, BMW and VW AG. So as to both tempt the idea of mutually rewarding engine supply deals into the future (even after the BMW experience), and more importantly to tempt the idea of a German auto-manufacturer actually buying into Williams to support their own F1 ambitions. Having already witnessed the Mercedes factory team enter the grid aswell as supplying engines to others, the possibility of BMW wanting to extend its reach beyond its poorer performing Sauber (#8 in 2010) must not be dismissed. And moreover, in such a 'German context' Williams would surely be ecstatic at any possibility of courting VW AG, given VW's previous motorsports involvement with its Audi LMP wins at Le Mans and its desire to maintain global reach; thus a Williams-Audi arrangement via VW shareholding in Williams GP Holdings might be the Board's ultimate goal.
The Williams GP future starts here, and having taken the correct road with the Deutsche Bourse must now demonstrate itself as having a sound business model for the company at large, beyond the purely track ambitions of the F1 team. The two are obviously synergistic, but every aspect of the company's capabilities must be viewed 'in the round' and beyond the typical GP obsession.
Track success of course brings its rewards, both financially via sponsorship deals for the following season aswell as opening up opportunities elsewhere, Williams knows this all too well. It must have kicked itself after its mid-90s golden era for not having exploited the opportunity more so, then having to watch its greatest rival McLaren latterly enjoy the F1, merchandising and SLR niche-car production fruits with its race-partner Mercedes, fruits that gave a new state-of-the-art business base, and today the ability to develop the carbon-fibre based McLaren MP4-12C supercar, thus adding to its own production car legacy after the iconic F1 model.
This example of such F1 and commercial success of its rivals is no doubt both a bug-bear and an inspiration for Williams GP Holdings. This time round calls for not only adroit engineering InsPiRation in which the 'IPR'* content is fully exploited (as we see with its own 'hybrid' self-advertising), but also critically either a need for greater business acumen than seen in the mid 90s or an improvement in execution abilities of the plan at large.
As the board wholly appreciates, steering an F1 business is as hard as steering an F1 car, and reaches far beyond the correlate of Qualifying and Quarterly results. Ultimately, both undoubtedly benefit from the essential control of that all important competitive 'red mist'.
Post Script*
IPR & technology trickle-down appeared to be a central theme in the private equity firm Genii's previous wish to purchase SAAB, so that it may create commercial and technology couplings with its Renault F1 stakehold.
This generated a period of cash-burn for most teams during the lean period, and so necessary new impetus to both raise new funds and be hyper-critical regards the 'cost-benefit' of expenditure in manner not seen in F1 for decades.
Not surprisingly, the sourcing of team funds has been perhaps the most critical of issues as the sport re-emerges for a newer, more responsible era.
That issue perhaps most pertinent for Williams GP, given arguably an untenable present long-term position, squeezed between the funding prowess of top teams and EM backed newcomers, aswell as suffering from lack of technical reach seen by the 'podium 3'. Competitiveness on the grid is still correlated to budget spend, top talent and operational strength costs. Thus we see the 'well-off' Ferrari, McLaren-Mercedes & Red Bull Racing who have proven their performance to date quickly rebound in sponsorship levels. There has been a re-emergence of vehicle manufacturers' own factory-teams, including Renault, Mercedes and BMW-owned Sauber. Aswell as plethora of newer names ranging from new-entrants from EM countries with strong corporate backing, such as Force India, HRT-Cosworth (though based in Spain) and Marussia Virgin Racing. And lastly old GP names like Lotus-Renault, itself Malaysian backed.
Thus even though holding the #4 position from the 2010 season, and so envy of many below, the competitive and operational headwinds for Williams appear substantial and it has had to act. Being seen to do so now with its floatation roadshow in which it seeks to sell 27.4% of the business in order to better secure its future, and recapture its glorious past, as seen in the mid-1990s. That sentiment was all apparent at the IPO presentation, with the period's winning Williams-Renault race-car proudly displayed next to Sir Frank & Patrick Head (co-founders), Adam Parr (chairman) and Toto Wolff (non-exec): a typical modern board formula in a company seeking regeneration of revered seniors and far-reach financiers.
Over the last 50 years of so Grand Prix motor racing has been through a development trend that is the envy of many other sports. From the early post war days of amateur mechanics and drivers, its popularity grew alongside that of mass European car culture, drivers such as Juan Manuel Fangio and Sterling Moss and became heroes, representing combined virtues of gentlemanly competitiveness.
It was the external influence of television that acted as a watershed – especially so colour television in the late 1960s in Europe - and with that direct reach into peoples homes came a new era wherein the grand prix cars themselves became not only 'mechanical platforms' to modify and tweek between races, but critically four wheeled sponsorship 'marketing platforms'. For Formula 1 - its name derived from the FIA regulatory formula dictated – a new age appeared in which a team's budget size became directly linked to its ability to innovate and robustly operate within F1's regional traveling circus. Thus with the increased stakes laid on the table by expectant sponsors, so the pressures grew on teams to win, and the combine of 'gentlemanly-competitiveness' became distinctly tilted, a 'by hook or by crook' attitude prevailing until as the participants themselves joked at the time, Grand Prix has morphed from traveling circus to that of a globe-trotting mad-house; the wheels of which spun ever faster.
(Frank) Williams Racing was born into this watershed era, informally set-up in the early 1960s as to serve his personal auto-racing interests in saloon cars and Formula 3, and matured with the “employment” of Piers Courage* as team driver in F2 in 1968, and F1 in 1969 using a surreptitiously purchased Brabham car which gave success, much to Brabham's chagrin.
Thus unlike other GP participants such as John Cooper, Jack Brabham and Bruce McLaren who were self-constructors of cars , Frank Williams instead initially played the role of 'broker', conjoining other people's separate technological skills and driving skills into one 'Williams' package.
[NB * drivers like the Eton educated Piers Courage (of Courage brewery family) personified the 'old-world' 'old-money' atmosphere that that was quickly disappearinghaving previously stretched from before the likes of 'Tiger' Tim Birkin & Joel Woolf Bernato at Bentley in the 1920s up until Lord Heskith's Racing outfit in the mid 1970s for which James Hunt drove. Hunt exemplified the new 'playboy' guise of driver, the correlate of which Heskith perpetuated with latter Penthouse magazine sponsorship. And so the innate transformation into a new type of GP commercial structure was set].
Williams used a used a De Thomaso-Ford designed chassis-engine configuration in 1970, then a previous season '70 March vehicle for 1971. 1972 financial backing by Motul Oils and Politoys gave the funds to buy a new March to run for the season and create an in-house build facility, so as to critically allow for construction control giving the FX3 chassis. For '73 these backers were replaced by Marlboro (cigarettes) and Iso (fridge producers), evolving the chassis into the FX3B. These backers exited for '74, the strained team finances meaning strategic allocation of finite resources over the season, gaining a single point for the year. For '75 a new FW04 chassis and mixed drivers set gave a second place in the German GP bringing in much needed funds. For '76 Williams sold 60% of the ongoing Racing concern to the oil magnet Walter Wolf, renaming the outfit as Walter Wolf Racing which also brought on-board the Heskith team car.
Frank Williams' own self-determination was being lost, and understandably unhappy he left to set set-up Williams Grand Prix Engineering in 1977 along with Patrick Head who had been the previous team's chief engineer, and backed by sponsors Saudi Airlines. Success came within a few years, winning in '79 and taking a championship titles in '80, in '82, in '86, in '87 (drivers title),
Patrick Head has been Williams' right-hand-man as technical director until 2004, then taking on a more broad business remit. He designed the FW10 car in 1984 which gave the team its first carbon-fibre constructed chassis, which mated with turbo-charged Honda engines gave the team near equal standing with the likes of Ferrari and McLaren who seemed to previously enjoy a technical lead. Honda's engine supply switch to McLaren left Williams using below par Judd engines for '88 and so momentary loss of competitive momentum for the company during that year. This was re-energised by the Renault engine deal of 1989 and largely supported the teams track prowess.
In the 1990s Head brought in Adrian Newey as chassis designer, and Williams became dominant in the sport, between '91-'97 seasons taking 5 constructor titles and 4 driver titles. With such glory and shared internal recognitioncomes management friction, and so Newey eventually departed for McLaren. (Indeed Head mentored many up-and-coming F1 designers who have since moved to other teams, Ross Brawn perhaps being the most visible now principle of his own team, having bought out Honda GP in 2009).
After the '91-'97 winning streak, '98 onwards was less auspicious Williams forced to use Mecachrome engines (ie blue-printed 'pattern-type' Renault engines produced by Mechachrome with no/little R&D support) and an old-specification, regulations modified car. This chassis-engine combine of an effectually un-evolved car leaving Williams off-pace. Between 2000-05 BMW engines were adopted, with in 2000 finishing 3rd in the constructor's championship, 2001 3rd again, 2002 improving to 2nd, 2003 2nd again, 2004 dropping to 4th, 2005 dropped again to 5th. An acrimonious relationship developed between Williams and BMW given lack of success and in 2006 BMW bough Sauber Racing to set up its own team. In 2006 Williams used Cosworth engines but dropped to 8th in the constructors' title, in 2007 regaining to 4th with AT&T sponsorship, 2008 saw drop to 8th as Williams Toyota, 2009 up slightly to 7th and reaching 6th in 2010 using the 'old' Cosworth engine package and re-adorned with AT&T sponsorship.
Hence 'Williams F1' as it became known, has had a volatile ride, both frustrated by its inability to compete against the big-hitters such as McLaren-Mercedes, Ferrari and now the emergent Red Bull Racing (Renault engined). It effectively sits at a half-way-house, neither previously attached to the engine supply and R&D resources of a major car producer, nor with the substantial financial backing of a owner-sponsor such as Red Bull. Thus it must find its own way forward, as it always has seeking that magical combine of genius chassis/vehicle engineering and supply of state of the art F1 engines. Thus little in real terms has changed internally for Sir Frank Williams, but what has changed has been the contextual environments that Williams Racing has had to cope with, both in terms of the ferocity of competition and the ability to access financing – during what has been a period of fiscal drought - to keep the business moving forward.
Thus in recent years he and Patrick Head have had to perform the typical strategic task of 'situational analysis', no doubt with the assistance of the company's bankers, who themselves recognised the reality of the untenable situation Williams Racing faced.
In notional terms, the downturn years between 2008-2010 should have theoretically offered Williams F1 a golden opportunity for revival, given that major auto-company backed teams such as Toyota, Honda and BMW left Grand Prix and the budget's of competitor teams were heavily slashed given the pull-back in corporate advertising spend. Yet though the budget differentials did undoubtedly shrink, the effectual gain the top 3 teams had gathered over the preceding years allowed them to maintain dominance.
Moreover, even though AT&T is a large-cap firm with the steady typical income of most infrastructure firms, no doubt even it had to shrink its F1 contribution over that 3 year period, hence the 2010 car's decals (the FW32) show the additional 'broad-basket' spread of sponsorship from others such as primarily Philips (electronics), PDVSA (Venezuelan), Bridgestone (tyres), Perelli (tyres), Thomson Reuters (newsfeed), Randstad (recruiters), Oris (watches), Green Flag (vehicle rescue), GAC (logistics), RBS (banking) etc. In short in shows the new dominance of those companies well positioned to face the future out of the western down-turn, and demonstrates the almost diminutive participation by the banking world, as with with the largely UK government owned RBS (Royal Bank of Scotland). Williams also displays its own logo with the wording 'Hybrid Power' alluding to its own engineering capabilities.
Thus Williams has had to massively re-draw its sponsorship base, seeking much from few such as the Dutch and Venezuelan, and little from many others, the new FW33 2011 season car recently announced no doubt seeing similar prime sponsorship swapping relative to the geography of each world championship race, yet the Venezuela decal appearing in publicity shots as that country's literal tourism and investment vehicle.
Of course for the last 40 years, running a race-team has been as much about gaining as many income streams as possible, and so expanding the commercial base to add stability, growth and provide cash-cushions for leaner times. This apparent from 'up-stream' pursuits such as design, engineering and the manufacture of standard race series single seaters, aswell as 'down-stream' brand related activities such as typical merchandising activities ranging from logo applications on T-shirts, umbrellas and the like, through to more coherent brand extension efforts such (as for the F1 world) use on production cars., and latterly the creation of consumer experiences such as FIAT's Ferrari World theme park.
Similarly, beyond the 'shirts and caps' merchandising, Williams previously bridged the perceptional association between F1 & production cars with its engine supply partner Renault in the mid '90s. The co-branded Clio Williams model came in 2 series and sat at the top of the Renault performance brand tree. (This tie-in initiative preceded by the Mini Cooper, Lotus Cortina, Sunbeam Lotus and latterly by Honda's 'Jordan' Civic; a natural commercial conclusion for any winning auto-manufacturer that can gain additional credibility via the racing association).
However, today in stark commercial terms this past is but a faded, distant memory of little application presently, given the team's improved but 'off-podium' performance and no relationship with a major car manufacturer.
[NB the car caused a mini craze amongst Paris' own financial playboy "pilots" to personally re-run the infamous early morning city-scape race film 'C'etait un Rendezvous' - see youtube - but obviously not condoned then or now]
Similarly a decade previously Williams undertook the engineering for the Group B Metro 6R4 (4WD) campaigned in the 1984 World Rally Championships by Austin-Rover, yet likewise a distant memory.
[NB Even if that engineering know-how were maintained these 26 years on, it would probably be of little real-world application today given that the car was designed as a dedicated longitudinal mid-engined supercar, and truly valuable current 4WD IPR serves the need for FWD derived transverse architectures – see previous post regards the BorgWarner purchase of Haldex – with Haldex holding similar patents on the niche market of mid-engined 4WD systems].
Prior to the engine supply deal with BMW in 2000, Williams' Motorsport division was commissioned to produce LMP class cars for BMW which ran in and won the 1999 '24 Hours Le Mans' race, this engineering project creating valuable external links that would be latterly leveraged.
More recently, in 2008 Williams tendered for the vehicle build contract to supply the re-emergent Formula 2 series announced by the FIA, last seen in 1985. However, it expectantly lost-out to Jonathan Palmer's own offering, itself a close-coupled derivation from MotorSportVision's own previously well received low-cost single seater business model, itself set within the MSV motorsport business hub which also owns/manages race tracks and thus has the prime remit of creating its own synergistic activities, which also draws it closer to the needs of the FIA. Williams Engineering, was thus left to 're-appropriate' its basic vehicles concept and market it under another guise.
Thus, recent years have not been kind to Williams both on and off the F1 circuit, and the recent situational analysis demonstrates that real headwinds remain, the need to create a truly viable business plan core to its long term survival; the beginning of which is the the ability to attract long-term, 'long-hold' investors ideally with something useful in the way of commercial synergies to also bring to the table.
Hence the re-appraisal of its commercial activities and funding sources from chairman Adam Parr (in post since 2006) and his more recent non-exec Torgan Christian Wolff. The conclusion reached being company floatation on the buoyant Frankfurt exchange.
[NB From only a very surface evaluation of Williams' contextual circumstances, it is a conclusion which investment-auto-motives also believes to be the firm's best funding path].
Of all stock exchanges the Frankfurt Bourse is undoubtedly the best upon which to list. This because of Germany's comparatively buzzing economy thanks to exports and healthy domestic demand, hence it has the focus of global investors and the very pertinent fact that the Bourse represents a true 'meeting place' between the many types 'old-school' German industrial companies which have the dual facets of stout conservatism in their operational outlook and enjoyed the export wave of recent years related to cars and capital goods.
Thus a virtual hive for both investors and floatation-seekers with interested in automotive related companies. This has been obviously to Parr and Wolff.
[NB Parr joined Williams in 2006 having worked as an investment banker in equities analysis, Mining sector M&A, then within Mining and also passed the Bar. Wolff is an investor within the German auto-sector, with primary interests in HWA AG and BRR Rallye Racing. HWA AG directly supports Daimler's own national saloon car race team (in the DTM) and produces limited edition road cars, whilst BRR Rallye Racing is a specialist rally-race parts retailer. Wolff is also an amateur FIA accredited racing driver].
Here in the UK, although over the worst of the financial crisis it is recognised that in this new 3-speed global economy (#1Asia, #2 USA, #3 Europe exc Germany) that a seemingly 'natural' listing on the LSE's AIM would be at the present time an irrational route. Instead taking a place on the Deutsche Borse is far more prosaic, since not only the 'hive' mentioned for the sector, but also because the Bourse is itself in in talks with the NYSE regards alliance or merger, so as to create a western exchange powerhouse which would be metaphorically 'turbo-charged' compared to other 'naturally-aspirated' exchanges.
This then potentially avails Williams Grand Prix Holdings to the 2 most prolific western exchanges, which sit in their favourable positions thanks to their respective nation-state stances on industrial/export policy and fiscal/devaluation policy, and so garnered investment activity.
Thus for Sir Frank, Head, Parr and Wolff it is the only realistic track to take.
Moreover, investment-auto-motives believes it is intended to put the company right under the noses of Daimler, BMW and VW AG. So as to both tempt the idea of mutually rewarding engine supply deals into the future (even after the BMW experience), and more importantly to tempt the idea of a German auto-manufacturer actually buying into Williams to support their own F1 ambitions. Having already witnessed the Mercedes factory team enter the grid aswell as supplying engines to others, the possibility of BMW wanting to extend its reach beyond its poorer performing Sauber (#8 in 2010) must not be dismissed. And moreover, in such a 'German context' Williams would surely be ecstatic at any possibility of courting VW AG, given VW's previous motorsports involvement with its Audi LMP wins at Le Mans and its desire to maintain global reach; thus a Williams-Audi arrangement via VW shareholding in Williams GP Holdings might be the Board's ultimate goal.
The Williams GP future starts here, and having taken the correct road with the Deutsche Bourse must now demonstrate itself as having a sound business model for the company at large, beyond the purely track ambitions of the F1 team. The two are obviously synergistic, but every aspect of the company's capabilities must be viewed 'in the round' and beyond the typical GP obsession.
Track success of course brings its rewards, both financially via sponsorship deals for the following season aswell as opening up opportunities elsewhere, Williams knows this all too well. It must have kicked itself after its mid-90s golden era for not having exploited the opportunity more so, then having to watch its greatest rival McLaren latterly enjoy the F1, merchandising and SLR niche-car production fruits with its race-partner Mercedes, fruits that gave a new state-of-the-art business base, and today the ability to develop the carbon-fibre based McLaren MP4-12C supercar, thus adding to its own production car legacy after the iconic F1 model.
This example of such F1 and commercial success of its rivals is no doubt both a bug-bear and an inspiration for Williams GP Holdings. This time round calls for not only adroit engineering InsPiRation in which the 'IPR'* content is fully exploited (as we see with its own 'hybrid' self-advertising), but also critically either a need for greater business acumen than seen in the mid 90s or an improvement in execution abilities of the plan at large.
As the board wholly appreciates, steering an F1 business is as hard as steering an F1 car, and reaches far beyond the correlate of Qualifying and Quarterly results. Ultimately, both undoubtedly benefit from the essential control of that all important competitive 'red mist'.
Post Script*
IPR & technology trickle-down appeared to be a central theme in the private equity firm Genii's previous wish to purchase SAAB, so that it may create commercial and technology couplings with its Renault F1 stakehold.
Friday, 4 February 2011
Company Focus – BorgWarner – Seeking Additional Traction via Haldex
The rebound of capital markets over the last few years have been fertile ground for a resurgence in M&A activity. Though of course press coverage highlights the major events such as the G20, ESF, DAVOS and geo-political unrest, those unaware of the M&A stories have been asleep at their laptops.
Activity has not (unsurprisingly) been on a par with 'pre-crash' levels, yet during this opportune period, CEOs & CFOs have been re-assessing their own company's capabilities, devolving typically non-core divisions/sections and re-structuring to suit the new era: one that presently sees a trend of 3-speed global growth across Asia, the US and Europe. The likes of FIAT perhaps the most high-profile of cases, whilst many others Tier 1, Tier 2 and Retail cases take place 'under the radar'.
A major part of such industrial re-alignment across sectors and companies is of course the requirement to 're-shape' the product (and service) offering. 'Bolt-on' acquisitions of synergistic companies have typically been the norm – especially during such economic cyclical troughs - given the 'growing pains' of alternative organic expansion, which is better undertaken during a less frenetic, steady income, era.
Hence with the intention of creating stable and strong business models, company board members and their bankers scour their respective sector nationally and internationally for suitable matches, these target companies typically rated by a lists of various important criteria to arrive at what on paper look like good matches. From then on of course is the 'mating game. This ideally undertaken on friendly, mutually rewarding terms between like-minded boards. However, even at these capital conscious times, the amalgam of internal corporate cash 'war-chests' and the investment banking desire to create M&A activity for fees and economic resurgence, means that the day of the hostile takeover – so often seen near the top of the cycle – is far from dormant.
As for the automotive sector, even throughout the financial crisis private equity players such as WL Ross were wrapping their hands with joy, especially in the US, well appreciating how the Washington Bail-Outs of GM and Chrysler would have downstream impact on their and the more general American supplier base. However, unsurprisingly given the de-leveraging of capital markets, it has been trade-buyers that have been most active.
Hence at the Tier 1 level the speedy ongoing formation of entities such as IAC (International Automotive Components) controlled from Luxembourg with global reach and important US grasp, with the intent to compete head to head with the likes of Magna International.
Magna International itself evolving as its founding family's (James Stronach et al) hold on the company is slowly released, as seen by the swap of his/their Magna control for its horse race-course assets; recognising that the separate demands of sports-entertainment versus auto-parts manufacture do not make for a merry mix for external shareholders, even if originally co-created for personal and corporate entertainment reasons.
Of course IAC and MI are but two high-profile and relatively young companies, yet re-structuring activity has of course been ongoing with names of older, well engrained traditional supply base companies decade after decade, themselves the core of trade-buyer M&A in the auto-sector
One recent announcement was long-lived American BorgWarner's acquisition of the 'Traction Systems' division from the Swedish Haldex Group. Auburn Hills made and agreement with Stockholm for $205m, the deal strengthening the technology base of the US entity,and effectively freeing the Swedish to concentrate on its primary operations.
The BorgWarner name (itself derived from combination) is renowned for powertrain & drivetrain parts and systems manufacture, most notably transmissions/gearboxes, but also in relation to clutches, engine valve-timing, turbo-charging, exhaust gas recirculation, radiator fans & shutters, cold-start systems, coils, and tire-pressure monitoring systems; these under the 'Engine' division.
However, increasingly over the years the important theme of 'vehicle dynamic capability' has become a core aspect of BorgWarner's own VM client's concerns, and so one it must seek to address by strengthening its 'Drivetrain Group' which comprises of 'Transmission Systems' & 'Torq-Transfer Systems'. This division focuses upon the method by which engine-power is transmitted through gearboxes and drive-shafts to ensure the desired level of ultimate vehicle traction control. This ranges from: the challenges of 'wheel-spin' and 'wheel-lift' in performance driving at corners, to those set by road-surface water & ice, aswell of course various off-road environments ranging from rock to sand to mud to ice, all set on varying slopes.
The span of the topic alone is immense, let alone the ability to integrate into into the demands of mass manufacture of various vehicle architectures, hence BorgWarner's interest in the expertise and proficiency of Haldex.
For all VMs and their suppliers alike the once fringe demand for 4WD/AWD of some 30 years ago became mainstream with the consumer adoption of SUVs, whether truck-based as in the US previously, or car-based as seen at first in Japan and soon after Europe. The SUV softened into the SAV and has today become a mainstream variant of all global volume manufacturers, and so integrated into new product programmes.
So although 4WD or on-demand AWD was first seen as part of the aspirational-set with Land Rover, Jeep, Toyota and Mitsubishi, intrinsic to 'gentry farming' & safari/jungle adventure, its capability has trickle-down to now pass beyond those esoteric psychologically motivated lifestyle statements of European car buyers and become what is seen as a rational consumption choice. For many the AWD advantage is tangable, the loss of seasonally adjusted car-prep participation (such as snow-chains) and adverse experiences such as recently increasingly severe winters - which can make even urban roads impassable without AWD – all support a trend for such vehicle specification demand in Europe, the US and Japan. In short they expect their cars to be capable even in heavy winter or rural environments, because the expectation over 20 years has been slowly but strongly created, even if only ever used for a few days or one week of the year.
Conversely in fast growing EM regions, there is a strong argument that the real-world driving conditions of BRIC+ nations range from near perfect on newly laid interstate roads to utterly atrocious in suburban and rural areas with little or no tarmac laid. And even in many large city centres, the old road has crumbled into fissures and pot-holes that put great demand onto the suspensions of conventional cars. This is why for years the major VMs created alternative body strengthening and suspension set-ups for what were termed the developing regions – the basic Euro, US or Japanese car itself was adapted to cope with the adversity.
Thus although seen as modern per se by their prime symbolic cities, large portions of EM regions do still necessitate an alternative type of more robust, more capable car – hence the SUV characteristics of FIAT's new B-segment car - the Nouvo Uno – designed by Brazilians for South Americans.
The evolving business interest for BorgWarner and its clients, lies within the product and consumer 'intersection' of these 2 previously disparate 'Advanced' and 'Developing' commercial worlds. Combine the US/Euro/Japan consumer preference for the 'rest assured' AWD feeling (with periodic use) and the BRIC+ consumer need for AWD and there is a convergence of what was separate regional demand into a unified 'glocal demand' for smaller AWD technology packages.
Yet this too poses a major technological challenge for VMs and their suppliers alike, since AWD vehicles intrinsically are less energy/fuel efficient than 2WD counterparts given additional mechanical weight and the parasitic losses through the extra hardware on-board. So the VM-Supplier challenge is to create AWD systems that can also meet the ecological demands set by ever more stringent regulation; such as CAFE-type demands on the auto-industry itself, aswell as consumer-relative eco-demands such as vehicle purchase and use taxation demands relative to CO2 and NoX emissions.
Thus for BorgWarner, given the mass-market reward of small AWD set against the technological development challenge, the best solution was to buy-in the capability and so bolster internal advantage before either a competitor did so. Also likely was a case for VW Group to acquire the division as part of its own large investment programme – which has seen other small companies snapped up in Europe (eg Karmann and Guigario) - and given that VW, Audi, Skoda, SEAT, Lamborghini, Bugatti all use Haldex systems; and importantly the company also sells to VW's competitors: GM, Volvo, Land Rover, Saab.
Thus the BorgWarner board must have viewed its own drivetrain technology capabilities as becoming potentially uncompetitive and indeed increasingly unrequited had it not bought 'Haldex Traction'.
As for Haldex, the Swedish name is renowned in auto-engineering circles as being at the forefront of drivetrain-control development and manufacturer, with special expertise in increasingly 'intelligent' (ie on-demand) four wheel drive systems. In the last 15 years its prime offering is an AWD system designed specifically for front-wheel-drive architectures. Known as LSC – Limited Slip Coupling- it has been through various generational iterations, and sits as the primary sales product in conjunction to the traditional rear-wheel-drive based layouts which today sits under the XWD title; this offering traditional mechanical and newly developed electro-mechanical packages. These FWD and RWD systems created so to match the prevalent trend of developing 'cross-over' 4WD vehicles from typically standard FWD drivetrains of C-segment and B-segment vehicles.
Moreover, given its national roots Haldex is invariably seens as an AWD transmissions provider to 'homeland' Volvo and SAAB. Yet these companies' previous ownershipp by Ford and GM meant increased US & international supply contract competition for Haldex, which though off-set by VW Group & Hyundai-Kia contracts internationally, meant that domestic manufacturing demand would continue to diminish. The unwillingness of Sweden's government to 'save' Volvo and SAAB, instead respectively sold to China's Geely and Holland's Spyker (with probably intent to sell on to a Chinese auto-maker) was the effectual 'nail in the coffin' for large scale homeland production.
To help combat this contextual headwind and sector competition, the company has sought to also climb the value chain by offering development assistance and manufacture of 'niche' 4WD systems for the supercar segment. Notable contract wins with VW's Bugatti & Lamborghini given the VW Group association, with the Siesto Elemento concept at the Paris Motor Show underpinned by its system, even if PR touted as Lamborghini's own.
Yet 'Traction Systems' is the smallest of Heldex's 3 divisions, compared with 'Vehicle Systems' and 'Hydraulic Systems'. Given the 'dislocation' of its AWD manufacturing geography and growing competitionn from both established and newly emerging AWD systems peers, it seems that Haldex's Swedish management thought it fit to hive-off the section given the 'headwinds' of AWD manufacturing sector trends when set upon focus on the 2 prime divisions which deal with commercialvehicless and the growth potential of supply to Truck producers and Agricultural and Construction equipmentmanufacturerss, at the start of the new apparent economic upturn.
Recognising the macro-trends of the auto-sector and the importance of EM regions, Haldex built factories in China, Brazil, Mexico, India and Hungary, to compliment US and German plants. These obviously span the 3 operations, but also provide a sound geo-strategic basis for buyers that reaches far beyond the typical 'window dressing' seen by sellers, so making the 'Traction Systems' division very attractive to trade buyers.
At first glance the $205m agreed for the division – its capabilities and the goodwill of the Haldex name (if also sold) - appears to be rather cheap. Yes, Haldex Group like others within the supply chain had been suffering through 2008/2009, but the contraction of its group income stream of about -33% between 2008-09, was not reflected in the Traction Systems division which itself saw only -17% YoY drop, giving SEK 850m in 2009 (approx $119m*) compared to SEK 1,021m (approx $143m*) in 2008. [NB* FX rate used: 1 SEK = $0.14 over last year average].
Of course as an external observer, one cannot see the details of the 'closed-book' deal, that BorgWarner would have perused, able to disentangle 'Traction' from 'Group' figures. But one would expect that the semi-specialist division should have offered an operating margin that was substantially higher than the Group figure that wavered over preceding years. A 6% operating margin even in 2009 and could grow to 8% in potential good years not too far away.
So using that Op Margin average of 6% on 2009 income should have seen $7.14m profit, and on 2008 income sees $8.6m. If we expect a nominal 20% improvement for 2010 so matching car-demand return we see 2010 income rise back to $143m, which at 6% margin gives $8.6m.
Thus the $205m represents a price paid multiple of x24.
This may be notionally high compared to typical stock-market p/e ratios, but shows the willingness of the buyer to pay a notionally premium price in a distorted market period for something it sees as critical to its own future, aswell as also recognising the competitor-peer threat which took the effective 'auction' for Haldex so high.
But BorgWarner also recognises that with a global client base and burgeoning X-over vehicle segment with great EM potential, it has its inherent scale and global marketing reach on its side, so able to open new doors at Ford, Renault-Nissan, PSA, Toyota, Daimler, BMW, FIAT-Chrysler, Honda, and especially so in China with a good in-house or JV proposal. It can now leverage an offering which comprises of efficient pricing models (ie multi-buy deals) for new customers that the small largely Swedish team at Haldex under divisional V-P Ulf Ahlen simply could not.
Thus it has commercial and cultural leverage that it rightly sees as well justifying the calculated x24 p/e price. BorgWarner's press release highlighted that the division was purchased for less than its estimated FY2011 sales revenue figure -
ie thus to CEO Tim Manganello's eyes (and those of investment-auto-motives)gained at a bargain price given its potential.
With its new parent able to 'offer the world' Haldex Traction will undoubtedly be under R&D pressure to advance its LSC mechanism both in terms of performance and cost – possibly creating 2 separate design paths to do so for Triad vs EM regions, to advance the applicability of its XWD package and to encourage concept development and new-client uptake of its electro-rear axle technology so as to gain market traction and confidence.
In summary up until the last few years Haldex Traction has not quite sat on its laurels since 1998, developing its core product all along, but also enjoyed the ride created by its momentum. Now it must ready itself for scale-up whilst maintaining quality at a cost, and additionally create a new buzz by targeting relative niche product in the hybrid drivetrain world.
As for that possibility, Toyota and Honda are the best established, well-ahead in the eco-tech game but in Toyota's case has for the first time in its history started to look at externally adopted technology. Honda given its smaller size and mindset may not be so pliable. But the set of eco-tech followers within the realms of other VMs should convert to good new client prospects and opportunities.
The promise is most definitely there for the Traction division to play a vital new role within BorgWarner. Doing so both culturally as an innovation inspiration within the corporation, and presumably able to offer a disproportionately positive income contribution to the Group in due course.
It seems the BorgWarner board has recaptured the company's "spring in its step".
Activity has not (unsurprisingly) been on a par with 'pre-crash' levels, yet during this opportune period, CEOs & CFOs have been re-assessing their own company's capabilities, devolving typically non-core divisions/sections and re-structuring to suit the new era: one that presently sees a trend of 3-speed global growth across Asia, the US and Europe. The likes of FIAT perhaps the most high-profile of cases, whilst many others Tier 1, Tier 2 and Retail cases take place 'under the radar'.
A major part of such industrial re-alignment across sectors and companies is of course the requirement to 're-shape' the product (and service) offering. 'Bolt-on' acquisitions of synergistic companies have typically been the norm – especially during such economic cyclical troughs - given the 'growing pains' of alternative organic expansion, which is better undertaken during a less frenetic, steady income, era.
Hence with the intention of creating stable and strong business models, company board members and their bankers scour their respective sector nationally and internationally for suitable matches, these target companies typically rated by a lists of various important criteria to arrive at what on paper look like good matches. From then on of course is the 'mating game. This ideally undertaken on friendly, mutually rewarding terms between like-minded boards. However, even at these capital conscious times, the amalgam of internal corporate cash 'war-chests' and the investment banking desire to create M&A activity for fees and economic resurgence, means that the day of the hostile takeover – so often seen near the top of the cycle – is far from dormant.
As for the automotive sector, even throughout the financial crisis private equity players such as WL Ross were wrapping their hands with joy, especially in the US, well appreciating how the Washington Bail-Outs of GM and Chrysler would have downstream impact on their and the more general American supplier base. However, unsurprisingly given the de-leveraging of capital markets, it has been trade-buyers that have been most active.
Hence at the Tier 1 level the speedy ongoing formation of entities such as IAC (International Automotive Components) controlled from Luxembourg with global reach and important US grasp, with the intent to compete head to head with the likes of Magna International.
Magna International itself evolving as its founding family's (James Stronach et al) hold on the company is slowly released, as seen by the swap of his/their Magna control for its horse race-course assets; recognising that the separate demands of sports-entertainment versus auto-parts manufacture do not make for a merry mix for external shareholders, even if originally co-created for personal and corporate entertainment reasons.
Of course IAC and MI are but two high-profile and relatively young companies, yet re-structuring activity has of course been ongoing with names of older, well engrained traditional supply base companies decade after decade, themselves the core of trade-buyer M&A in the auto-sector
One recent announcement was long-lived American BorgWarner's acquisition of the 'Traction Systems' division from the Swedish Haldex Group. Auburn Hills made and agreement with Stockholm for $205m, the deal strengthening the technology base of the US entity,and effectively freeing the Swedish to concentrate on its primary operations.
The BorgWarner name (itself derived from combination) is renowned for powertrain & drivetrain parts and systems manufacture, most notably transmissions/gearboxes, but also in relation to clutches, engine valve-timing, turbo-charging, exhaust gas recirculation, radiator fans & shutters, cold-start systems, coils, and tire-pressure monitoring systems; these under the 'Engine' division.
However, increasingly over the years the important theme of 'vehicle dynamic capability' has become a core aspect of BorgWarner's own VM client's concerns, and so one it must seek to address by strengthening its 'Drivetrain Group' which comprises of 'Transmission Systems' & 'Torq-Transfer Systems'. This division focuses upon the method by which engine-power is transmitted through gearboxes and drive-shafts to ensure the desired level of ultimate vehicle traction control. This ranges from: the challenges of 'wheel-spin' and 'wheel-lift' in performance driving at corners, to those set by road-surface water & ice, aswell of course various off-road environments ranging from rock to sand to mud to ice, all set on varying slopes.
The span of the topic alone is immense, let alone the ability to integrate into into the demands of mass manufacture of various vehicle architectures, hence BorgWarner's interest in the expertise and proficiency of Haldex.
For all VMs and their suppliers alike the once fringe demand for 4WD/AWD of some 30 years ago became mainstream with the consumer adoption of SUVs, whether truck-based as in the US previously, or car-based as seen at first in Japan and soon after Europe. The SUV softened into the SAV and has today become a mainstream variant of all global volume manufacturers, and so integrated into new product programmes.
So although 4WD or on-demand AWD was first seen as part of the aspirational-set with Land Rover, Jeep, Toyota and Mitsubishi, intrinsic to 'gentry farming' & safari/jungle adventure, its capability has trickle-down to now pass beyond those esoteric psychologically motivated lifestyle statements of European car buyers and become what is seen as a rational consumption choice. For many the AWD advantage is tangable, the loss of seasonally adjusted car-prep participation (such as snow-chains) and adverse experiences such as recently increasingly severe winters - which can make even urban roads impassable without AWD – all support a trend for such vehicle specification demand in Europe, the US and Japan. In short they expect their cars to be capable even in heavy winter or rural environments, because the expectation over 20 years has been slowly but strongly created, even if only ever used for a few days or one week of the year.
Conversely in fast growing EM regions, there is a strong argument that the real-world driving conditions of BRIC+ nations range from near perfect on newly laid interstate roads to utterly atrocious in suburban and rural areas with little or no tarmac laid. And even in many large city centres, the old road has crumbled into fissures and pot-holes that put great demand onto the suspensions of conventional cars. This is why for years the major VMs created alternative body strengthening and suspension set-ups for what were termed the developing regions – the basic Euro, US or Japanese car itself was adapted to cope with the adversity.
Thus although seen as modern per se by their prime symbolic cities, large portions of EM regions do still necessitate an alternative type of more robust, more capable car – hence the SUV characteristics of FIAT's new B-segment car - the Nouvo Uno – designed by Brazilians for South Americans.
The evolving business interest for BorgWarner and its clients, lies within the product and consumer 'intersection' of these 2 previously disparate 'Advanced' and 'Developing' commercial worlds. Combine the US/Euro/Japan consumer preference for the 'rest assured' AWD feeling (with periodic use) and the BRIC+ consumer need for AWD and there is a convergence of what was separate regional demand into a unified 'glocal demand' for smaller AWD technology packages.
Yet this too poses a major technological challenge for VMs and their suppliers alike, since AWD vehicles intrinsically are less energy/fuel efficient than 2WD counterparts given additional mechanical weight and the parasitic losses through the extra hardware on-board. So the VM-Supplier challenge is to create AWD systems that can also meet the ecological demands set by ever more stringent regulation; such as CAFE-type demands on the auto-industry itself, aswell as consumer-relative eco-demands such as vehicle purchase and use taxation demands relative to CO2 and NoX emissions.
Thus for BorgWarner, given the mass-market reward of small AWD set against the technological development challenge, the best solution was to buy-in the capability and so bolster internal advantage before either a competitor did so. Also likely was a case for VW Group to acquire the division as part of its own large investment programme – which has seen other small companies snapped up in Europe (eg Karmann and Guigario) - and given that VW, Audi, Skoda, SEAT, Lamborghini, Bugatti all use Haldex systems; and importantly the company also sells to VW's competitors: GM, Volvo, Land Rover, Saab.
Thus the BorgWarner board must have viewed its own drivetrain technology capabilities as becoming potentially uncompetitive and indeed increasingly unrequited had it not bought 'Haldex Traction'.
As for Haldex, the Swedish name is renowned in auto-engineering circles as being at the forefront of drivetrain-control development and manufacturer, with special expertise in increasingly 'intelligent' (ie on-demand) four wheel drive systems. In the last 15 years its prime offering is an AWD system designed specifically for front-wheel-drive architectures. Known as LSC – Limited Slip Coupling- it has been through various generational iterations, and sits as the primary sales product in conjunction to the traditional rear-wheel-drive based layouts which today sits under the XWD title; this offering traditional mechanical and newly developed electro-mechanical packages. These FWD and RWD systems created so to match the prevalent trend of developing 'cross-over' 4WD vehicles from typically standard FWD drivetrains of C-segment and B-segment vehicles.
Moreover, given its national roots Haldex is invariably seens as an AWD transmissions provider to 'homeland' Volvo and SAAB. Yet these companies' previous ownershipp by Ford and GM meant increased US & international supply contract competition for Haldex, which though off-set by VW Group & Hyundai-Kia contracts internationally, meant that domestic manufacturing demand would continue to diminish. The unwillingness of Sweden's government to 'save' Volvo and SAAB, instead respectively sold to China's Geely and Holland's Spyker (with probably intent to sell on to a Chinese auto-maker) was the effectual 'nail in the coffin' for large scale homeland production.
To help combat this contextual headwind and sector competition, the company has sought to also climb the value chain by offering development assistance and manufacture of 'niche' 4WD systems for the supercar segment. Notable contract wins with VW's Bugatti & Lamborghini given the VW Group association, with the Siesto Elemento concept at the Paris Motor Show underpinned by its system, even if PR touted as Lamborghini's own.
Yet 'Traction Systems' is the smallest of Heldex's 3 divisions, compared with 'Vehicle Systems' and 'Hydraulic Systems'. Given the 'dislocation' of its AWD manufacturing geography and growing competitionn from both established and newly emerging AWD systems peers, it seems that Haldex's Swedish management thought it fit to hive-off the section given the 'headwinds' of AWD manufacturing sector trends when set upon focus on the 2 prime divisions which deal with commercialvehicless and the growth potential of supply to Truck producers and Agricultural and Construction equipmentmanufacturerss, at the start of the new apparent economic upturn.
Recognising the macro-trends of the auto-sector and the importance of EM regions, Haldex built factories in China, Brazil, Mexico, India and Hungary, to compliment US and German plants. These obviously span the 3 operations, but also provide a sound geo-strategic basis for buyers that reaches far beyond the typical 'window dressing' seen by sellers, so making the 'Traction Systems' division very attractive to trade buyers.
At first glance the $205m agreed for the division – its capabilities and the goodwill of the Haldex name (if also sold) - appears to be rather cheap. Yes, Haldex Group like others within the supply chain had been suffering through 2008/2009, but the contraction of its group income stream of about -33% between 2008-09, was not reflected in the Traction Systems division which itself saw only -17% YoY drop, giving SEK 850m in 2009 (approx $119m*) compared to SEK 1,021m (approx $143m*) in 2008. [NB* FX rate used: 1 SEK = $0.14 over last year average].
Of course as an external observer, one cannot see the details of the 'closed-book' deal, that BorgWarner would have perused, able to disentangle 'Traction' from 'Group' figures. But one would expect that the semi-specialist division should have offered an operating margin that was substantially higher than the Group figure that wavered over preceding years. A 6% operating margin even in 2009 and could grow to 8% in potential good years not too far away.
So using that Op Margin average of 6% on 2009 income should have seen $7.14m profit, and on 2008 income sees $8.6m. If we expect a nominal 20% improvement for 2010 so matching car-demand return we see 2010 income rise back to $143m, which at 6% margin gives $8.6m.
Thus the $205m represents a price paid multiple of x24.
This may be notionally high compared to typical stock-market p/e ratios, but shows the willingness of the buyer to pay a notionally premium price in a distorted market period for something it sees as critical to its own future, aswell as also recognising the competitor-peer threat which took the effective 'auction' for Haldex so high.
But BorgWarner also recognises that with a global client base and burgeoning X-over vehicle segment with great EM potential, it has its inherent scale and global marketing reach on its side, so able to open new doors at Ford, Renault-Nissan, PSA, Toyota, Daimler, BMW, FIAT-Chrysler, Honda, and especially so in China with a good in-house or JV proposal. It can now leverage an offering which comprises of efficient pricing models (ie multi-buy deals) for new customers that the small largely Swedish team at Haldex under divisional V-P Ulf Ahlen simply could not.
Thus it has commercial and cultural leverage that it rightly sees as well justifying the calculated x24 p/e price. BorgWarner's press release highlighted that the division was purchased for less than its estimated FY2011 sales revenue figure -
ie thus to CEO Tim Manganello's eyes (and those of investment-auto-motives)gained at a bargain price given its potential.
With its new parent able to 'offer the world' Haldex Traction will undoubtedly be under R&D pressure to advance its LSC mechanism both in terms of performance and cost – possibly creating 2 separate design paths to do so for Triad vs EM regions, to advance the applicability of its XWD package and to encourage concept development and new-client uptake of its electro-rear axle technology so as to gain market traction and confidence.
In summary up until the last few years Haldex Traction has not quite sat on its laurels since 1998, developing its core product all along, but also enjoyed the ride created by its momentum. Now it must ready itself for scale-up whilst maintaining quality at a cost, and additionally create a new buzz by targeting relative niche product in the hybrid drivetrain world.
As for that possibility, Toyota and Honda are the best established, well-ahead in the eco-tech game but in Toyota's case has for the first time in its history started to look at externally adopted technology. Honda given its smaller size and mindset may not be so pliable. But the set of eco-tech followers within the realms of other VMs should convert to good new client prospects and opportunities.
The promise is most definitely there for the Traction division to play a vital new role within BorgWarner. Doing so both culturally as an innovation inspiration within the corporation, and presumably able to offer a disproportionately positive income contribution to the Group in due course.
It seems the BorgWarner board has recaptured the company's "spring in its step".
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