The previous essay / web-log ended with the metaphor of the UK's auto-engineering sector moving beyond 'teaching the world to fish' so as to continue to develop the service aspect of the 'manufacturing-service' equation, whilst importantly still re-invigorating the manufacturing element.
It mentioned the need to create, maintain and repair allegorical 'rods, nets and boats'. Beyond the automotive world, the notion is well exemplified by a ship named the 'Wave Centennial' whose captain and crew have the task of repairing the multitude of under-sea internet transmission cables that carry the load demands of billions of users. Thus a critical and very high value service.
Yet the necessary re-balancing of the UK and Western economy from overt financial to manufacturing-service and from being credit-driven to productivity-driven requires much more than efforts to re-adjust import and export levels to re-set the 'visible' and 'invisible' Balance of Trade figures.
To generate innate good economic health the UK and West must 'dive deeper', moving beyond the surface of basic industrial & service activities to re-discover a seemingly lost sense of old-fashioned 'home-economics'. The essential meaning of that phrase has been increasingly diluted over the last century, where once it meant 'broad household management' it eventually became little more than a school-subject title which by the 1980s served-up tasteless staple recipes.
Yet, 'home-economics' derived its name from 'economics' which in turn derived its name from the Latin 'œconomican', in turn from the Ancient Greek 'oikonomia'.
The 20th century's productivity and wealth story ended with the 'throw-away age' where the notion of repair became little less than a social disgrace, an attitude that would have been truly an anathema to our Victorian predecessors who at all social levels demanded maximum value extraction from an item (ie its extended life-time) and when seemingly eventually exhausted sold to a merchant or trader, not simply thrown-away. This type of sagacity was typically learned the hard way by the older generation and is retained in all but a few of the modern young who now themselves face a very different 'austerity age' of their own.
Japan has famously experiences its own 'de-leveraging' process over the last 15 years or so, and has been both informally and formally academically reviewed by the West for lessons learned of what economic policies appear to work and those that do not. However, it has been the legendary involvement of an older generation of Japanese housewives, who acting en mass (though not orchestrated pe se) have helped to buoy their own savings and that of the Tokyo FX exchange via their support of the Yen carry-trade over the last decade.
The memories of WW2 famine and necessary post-war thriftiness were attitudinally engrained, and slowly the older Japanese generation recognised that they needed to understand global events, dynamics and the fiscal inter-relationships; in short a self-propelled need for broader fiscal understanding and knowledge at the personal level.
Of course, a similar remembrance of the 'austerity years' still exists here in Britain but the ability to pass-on such learning amongst families has been diminished by the fragmentation of society both geographically, and critically attitudinally, given the propensity of a media and media-device propelled American 'bling' culture.
Sixty years ago British men caustically complained that their recently arrived American allies were “over-paid, over-sexed and over-here”. As natural romantic and illicit targets, Britain's women-folk enjoyed the foreign GI's attention, their disposable income, imported cigarettes, bubble-gum and stockings. But many also recognised the 'fly by night' nature of such affairs and retained a sense of self-dignity albeit on very limited income without the attentions of seemingly rich American cousins.
In later years many of these upright slightly older ladies banded back together, given the changed face of the UK due to immigration, 'modern attitudes' etc. The prime focal-point for doing so was the Women's Institute. A haven for similar-mindedness; indeed a pavilion club-house for old-fashioned values.
The Women's Institute – better known as the “WI” - was established by Canadian Adelaide Hoodless in 1897, and was inaugurated in Britain during WW1 in 1915, with a clear agenda to engage the women of Britain's rural regions to become more engaged in community matters and to importantly raising national food production yields. It critically retains its 'Jam & Jerusalem' spirit, which whilst initially appearing as respectively cosseted, remote, spurious and deeply jingoistic, appears to in reality translate as conveying the values of personal productivity and staunchness – values that are very much needed for Britain's 21st century challenge.
It does this with a remit to educate, gain new skills and act as a campaigning body for various social causes.
[NB As with any nation-centric organisation it could of course be argued that it operates as a type of social-engineering entity; pressing top-down agendas. This accusation also levelled at the boy-scouts, girl-guides pre-WW1 and Salvation Army. The converse argument forms around social-cohesion. Though of course in all such organisations a seeming 'rank and file' structure is formed. So whilst not of personal interest to an 'individualist' it does indeed serve a national, public and personal need for many].
The WI then has undoubtedly retained its primary position as the spiritual home of 'home-economics'. Its jam-making activity may be an easy target for external humorists, but when viewed in the in the original 'œconomican' and 'oikonomia' sense, this flippant representation belies an important income stream which promotes the idea of self-sufficiency.
Economic Governance has always been at the very heart of the body, each and every one of the WI's 6,500 nationwide groups (containing 205,000 members) must have a nominated Treasurer, reporting on a weekly or monthly basis the income and expenditure of the group, and provide overview of the group account.
By virtue of acting as a role model, this very action then encourages each its members to take a responsible attitude to money; both regards family and personal expenditure. This a desperately needed lesson for many single women and single-mum households often living beyond their means, given the supposed social pressures 'for acceptance' that exist today; though often a case of 'one-up(wo)manship'
As is often the case with organisations built upon old-fashioned values and softer activities, the age of the constituent membership tends to reflect and reinforce the constituent mentality. And so the WI's average membership age is well over 40, more akin to a lawn-green bowls club or bingo parlour than say a 'hi-impact' gym class.
The constant search for newer, younger blood has always been a central challenge facing the WI, the youth and even middle-aged put off by the image - true or not - of a stuffy self-contained world. It conjures pictures of a 'blue-rinse brigade' led by officious 'Little Hitlers', with the central corps venting quiet anger via bad impressions and bitter sarcasm within their own cliques. The image then little different to the worst traits of the hierarchical regime set into public schools, the civil service or armed forces.
This stereotypical portrait, along with the apparent time-heavy demands, unsurprisingly does not sit well with the over-worked, over-stressed modern young woman.
To try and dispel this image the WI has undertaken various initiatives, many successful, some far less so. Central has been the publication of its in-house magazine, now printed on recycled paper, yet this below-the-line medium has also been bolstered by above-the-line PR efforts.
Amongst the most persuasive was the 2003 film Calender Girls, based on a true story, showing how the 'sister-ship' could both raise funds for a member's husband's medical treatment and simultaneously 'jivvy-up' the WI's image through the production of a (near) nude calender. This has since been reborn in 2010 as a UK touring stage-show.
Less flattering was a 2006 television documentary programme which spotlighted a newly set-up group on the Isle of Wight. It depicted the WI's effort to attract a new generation of members, one with open minds and fresh approaches. A newly established group created on the Isle of Wight was identified for this 'fly on the wall' approach. But the programme only served to highlight (and possibly create) the divisions between old and new, primarily by spotlighting the innate differences between the modest, low-key WI establishment and a set of newcomers with high personal wealth, overt 'professionalism' and a dynamic nature who appeared to have the ambition of usurping the WI leadership.
The new group's leader proclaimed her/their feats of local membership and income growth, through a series of high-priced high-profile talking events. A plausible paid-speaker invited to attend was a Royal Estates ex-Head Gardener. Less plausible were outside professionals such as a divorce lawyer and a plastic surgeon, effectively touting for business; presumably paid to do so!
Thus whilst on paper it appeared a 'successful' group, the 'WI guardians' apparently viewed the group's financial success as simply a consequence of local pricing elasticity. The exactitude of this high 'revenue-pull' was then implicitly questioned when it was mentioned that the necessary formal Treasurer's report was not being adhered to. Instead, within the informal setting of a kitchen table (seemingly her own) the group leader mentioned to a few 'close' members the amount of money made on a previous event
This then raised questions central to good governance.
[NB Although not explicitly stated in this case, in practice, such a loose seemingly 'cabalistic affair' is typical of the manner in which a few prime-placed people can siphon-off funds by 'skimming from the top', informally circulate a nominal profit figure and later have this ratified (by consensus) at a later a formal meeting}.
Whether by editorship design or not, even to the television viewer the group leadership appeared to have a fractious, “gung-ho”, nouveau riche money-making attitude more akin to a VC backed 'start-up' firm. The personal accoutrements of Louis Vitton handbags and Chanel sun-glasses provided a silent commentary to the WI elite.
As an absorbing public interest story it conveyed (intendedly or not) ideas about 'the right kind' vs 'the wrong kind' for the core of the WI - ie those that meld-in and are their for good moralistic reason versus those who are pushy and self-interested.
In short, the programme indicated that 'they don't make girls like they used to'!
Even though the search for the right kind of new blood is hard, the WI must continue its own transformational journey, whilst vitally retaining core ethics and a culture which perpetuates 'participation', 'information' and 'education' for its members.
However, the ongoing modernisation must not only attract well rounded younger members, it must also seek to do more than simply cover costs at local, regional & national levels.
Those at the WI HQ well know that must try and constantly build its profitability, so that it may in turn build an institutional nest egg; from which it can better service itself into tomorrow and the broader public at large.
This means reviewing and undertaking benchmark practices at 'income' and 'savings' levels. That means absorbing how the modern world operates commercially and understanding how other august institutions save and prosper. As such, investment-auto-motives believes that the following 2-tier 'earnings' & 'investment' model should be used to stimulate further internal dialogue at the WI headquarters in central London:
Earnings -
(Membership and Commercial Activity)
Today the organisation has its own trading arm named 'WI Enterprises', it offers both WI Cookery courses to the general public and owns & operates educational courses through its wholly owned Denman College based in Berkshire. But there is as ever an impetus to grow its influence and income through membership numbers and trading activities.
To assist the former with impact on the latter, a very general template which could be adopted is to attract new 20-something & 30-something members by creating activity parallels with the manner in which women assisted the nation in WW2. This would build upon the recent fashion-trend for 1940s glamour and 'make-do-and-mend' chic, and parallel the social urban trends for self-adapted clothes and the big uptake of a knitting culture amongst the anti-street fashion brigade that has arisen in response to the 'bling' culture seen on TV programmes such as 'The Only Way is Essex' and 'Made in Chelsea'. As such the attitude is of the wholly old fashioned British 'middle-class', and very much reflects a female socio-psychology engrained in British culture which harks back to the principle self-improved, self-reliant but romantic Elizabeth Bennett from Jane Austin's Pride & Prejudice.
As such WW2 groups such as the 'Land Girls', the WAAF, the WRENS, the various female transport & ambulance corps, aswell as individual figures from history such as Amy Johnson and perhaps today's Alison Streeter. These would serve as useful group identities with associated activities that demonstrate female self-sufficiency, grounded in the yesteryear but also linked to today.
This then would mean broadening the WI educational remit to far beyond the perceptions of jam-making and general cookery; although still vitally important.
An obvious avenue would be to fill the knowledge gap that exists between women (and increasingly men) and the car, its maintenance and the automotive service and repair industry at large. Through self-ignorance and then doubt, women have been obvious targets for less than decent garage owners and mechanics. It can be well argued, with some justification, that women have only themselves to blame (as have ignorant men), and that they allow themselves to be exploited. But equally the automotive world has been typically foreign to females, and often intentionally kept that way, and channels have not been created to assist their improved knowledge.
Of course commerce has been quick to jump on the opportunity of serving the female-only market such as the insurance industry with Sheila's Wheels and the like; now denied by Brussel's EU edict as a sexist action. Whilst the likes of UDO have created - on a superficial level at least - female-friendly publications for car maintenance.
This is a domain that the WI could leverage and exploit to serve its single, divorced and widowed members by expanding courses at Denham College and nationwide. No dount considered previously, this of course replicates the kinds of evening courses that can be found across the country at Further Education colleges. But the uptake by females in this arena, though larger than in the past, is still small compared to the potential for mass group learning.
The motor-vehicle is but one arena, a few others male-dominated until obviously being (amongst many more):
- DIY
- Home Repair
- Personal Finance etc.
Such commercial based education programmes born from a community naturally lead to the merchandising of products and so the WI brand. WI-logo'd green/grey/blue overalls with a retro-chic mock 'WW2 services' aesthetic could be just one product outcome.
[NB As an aside, yet demonstrating the self-sufficiency trend amongst young females, investment-auto-motives suspects that the fashion retailer 'All Saints' is being used as an 'intermediary buying vehicle' to obtain many of the UK previously dispersed stock of old hand-turned Singer sowing machines.
They appear in their thousands as part of the impressive shop display across London and the country. As this display stock will need to be eventually removed and sold, the 'invisible' wholesale buyer of the stock may well have cornered the UK market in the machines.
The WI may wish to approach All Saints retailers senior management / owners and seek to make an offer for these sewing-machines to ensure that they can eventually find deserving homes amongst real users; and not simply profit the pocket a possible hoarding recipient speculator].
Hence, the WI must try and create its own “economic eco-system” by which it can both produce value, consume value and manage/invest the marginal profits thereby gained.
Wealth Retention & Growth -
Hence, the WI must try and create its own “economic eco-system” by which it can both produce value, consume value and manage/invest the marginal profits thereby gained.
Amongst the broader realm of UK institutions 'best-practice' may be reflected in the efforts of university endowment funds to be more participatory. They have historically tended to 'outsource' their fund management activities to typically one or more investment banks, brokerages or investment planning enterprises such as a 'family wealth' firms, with little interactivity themselves.
However, in recent years – especially after the 2008 crash - a greater emphasis has been on those institutions to take on a greater level of self-responsibility, so as to 'de-risk'. One such has been the renowned University of Cambridge and the creation of its So whilst still using external money managers it will incorporating a small in-house skeleton-staffed office able to pay closer attention to the day to day dynamics of capital markets and draw up asset-allocation structures/ratios (equities vs bonds vs commodities vs derivatives vs real estate) to create a stable investment portfolio, itself created from the monies brought-in from offering one of the world's best educational environments.
Cambridge University then has created through preceding centuries and the late 20th/early 21st centuries both a solid 'business foundation' and now increasingly solid 'investment foundation' that will help not only itself in retaining its standards and primacy, but also assisting those from far less wealthy backgrounds through ever expansing scholarships etc to ensure it attracts the best students and post-graduate researchers.
If not already the case – which it may well be - this then could serve as a strategic and operational template for the WI.
An additional template that offers learning is to review the investment criteria and staffing levels of Sovereign Wealth Funds, more and more transparency growing in this arena, though it would be fair to say that different countries - indeed funds - offer differing levels of information.
Beyond this, the legendary investment approach of Berkshire Hathaway's Buffett & Munger would prove useful.
They have created an eco-system wherein its stock-holders typically buy a broad-span of products from cookies to shoes from BH's own portfolio companies. In this case it is blatant self-interest of the BH investor to 'buy from themselves ' - a model that goes back throughout tribal history, notably Jews (to this day), Ancient Greek traders, Mormons, immigrant Chinese etc.
This then goes against the ethos of 'indiscriminate free-trade', and should not be favoured in general commerce and national trade - though often is. But regards the WI a good case could be made that it lends itself to both cultural roots (as a UK institution, and presumably predominantly Church of England) whilst also serving the broader national agenda of 'mass self-improvement' and thereby 'nation-improving'.
The WI would then take a position somewhere in the middle of the economic-model spectrum: reaching from from 'communism' to 'socialism' to 'co-operative capitalism' to 'stakeholder capitalism' (eh John Lewis Group) to 'investor self-interest' (BH) to 'raw capitalism'].
Whilst the WI has been financially self-sustaining since 1926 when sponsorship funding from the Board of Agriculture was withdrawn, it might perhaps seek to (re)learn those lessons currently being digested by the National Trust which is now forced to create a self-sustaining model. In turn the NT could look through the WI's 'history books' to view its 1920s & 1930s methods.
Of course, the WI probably does not have the type of 'property-bank' enjoyed by the National Trust which is presumably concreted into of 'non-current' asset valuations on the balance sheet, nor has it direct access to family & male membership fees and incomes.
Nevertheless lessons could be learned by comparing the ways and methods of the WI and NT to mutual advantage.
It should therefore act in the combined manners of a private equity holding company which seeks to create a set of synergistic enterprises (horizontally or vertically or diagonally across the value-chain), whilst also looking to defend and grow part of its wealth with the classical use of compounding interest, now having to access foreign currency deposits to ensure better rates of interest than available in the stagnant West.
The WI will reach its centenary in 2015, and in the run up to that auspicious occasion it might wish to re-set and crystalise its operational agenda, one by which it can ensure it may enjoy another fruitful 100 years as an increasingly potent instrument assisting women to help both their families and as a result the broader public interest.
If ever a body proffered both intrinsic economies of scale and growth potential it is the WI.
And at a time when intelligent young women have noted that the seemingly endemic penchant for designer handbags has started to reek with a tainted odour, all WI members would do well to remember that their involvement must be more about “ethical commercial brawn” and less about “handbags at dawn”.
As Henry Ford stated, “whether you think you can or whether you think you cannot...you are absolutely right”.
Good Luck to the Women's Institute and the enhancement of its commercial traction as it approaches its centenary.
Friday, 29 July 2011
Friday, 22 July 2011
Micro-Level Trends – UK Engineering Services Sector – Assessing the Future
"Sell a man a fish and he will eat for a day, teach a man to fish and he will eat for a lifetime"
This old saying reflects the 'global positioning' dilemma that presently faces the UK, Western Europe, the US, Japan and South Korea; all eager strengthen each's respective ties with China, SE Asia, India, the CIS and S.America.
Having been respective chronological leaders of the industrial revolution, mass manufacture, quality improvement and broad value-chain conglomerates, each of those 'advanced' countries individually sit on different 'co-ordinates' at the high-end of the value-chain. One where the provision of high-end technologies and the provision of services merge and are expected to deliver both national and international wealth generation via domestic (private, corporate, state) consumption and as export packages sold directly to other advanced and emerging countries in either B2B or B2C formats.
This then indicates that amongst the advanced countries each will look to specialise its offering, using the notion of competitive national advantage to do so, whilst the innate historical story relative to emerging countries is that they will try to broaden their own value-chain span relative to the size of its population – the bigger the greater the incentive to create economic foundations and cyclical stability. This evidently re-run time and again since, mid-nineteenth century USA and 21st century China the choice examples.
Yet within this globalisation model, there has always been a level of political and commercial friction between the 'developed' and 'emergent', the former keen to be the technological and economic broker, both plying its student with specific 'fish' whilst also 'teaching to fish', whilst the student has sought more directly given fish whilst also seeking to hasten the 'fishing lesson'. And of course as a defining influence in itself is the willingness of the student to absorb the intrinsic 'soft-power' cultural expectancies of the master.
This picture approximates the reality of commercial and industrial international relations, and so the development speed of EM nations. The cases of similarly sized Brazil versus Pakistan, or Mexico versus Philippines, or Taiwan versus Syria contrasting historical examples.
Thus not surprisingly the general spread of economic well-being has historically followed a cultural course of 'least resistance', commerce and industry naturally attracted to similar conditions. This altered over the latter half of the 20th century as many Middle-Eastern & Asian countries saw it in their interests to welcome elements of the Anglo-Globalisation model, whether by historical precedence of by self desire, but of course the split of the profitable proceeds between 'teacher' and 'student' was always a major bone of contention; a larger population giving proportionately greater negotiating leverage.
Like its European & American counter-parts, the UK has been a disseminator of automotive sector technologies and services, starting in the 1930s when Austin licensed the tooling and construction of its legendary Austin 7 small car model to both BMW and Nissan so that the UK may be an influential force as part of its industrial foreign policy. In the early1960s Austin offered its larger Oxford model to India's Hindustan Motors named the Ambassador, Reliant & the Rootes Group developed Turkey's (2nd) national car the Otosan Anadol, and Rootes licenced its Hillman Hunter to Iran as the Paykan (*see below).
[NB FIAT, Renault & PSA did likewise. FIAT in the 1960s to India's Premier Motor and USSR/CCCP countries AutoVAZ-Lada, Polski-FIAT & Zastava, Spain's SEAT, Turkey's Tofas, Pakistan's Raja Motors and North Korea's PMC. Renault has previously offered licenses to Iran's Samar, Turkey's Oyak-Renault. *PSA had newly acquired Rootes Group when it offered Iran the 'Paykan' technology licence, this displaced by successive PSA sedan and hatch models since)And of course Ford, GM and Chrysler's early international reach is self-evident].
Historically then it was well recognised by the leaderships of EM countries that the development of a national vehicle industry in truck, bus and car forms was a necessary critical step in achieving economic growth, satisfied populace and international standing.
Yet that development model has not been without frustrations, since dependence upon foreign technology, IPR and general knowledge was typically one step removed from the real advances being made and enjoyed by a foreign 'teachers' homeland. The understandable ploy from the West/TRIAD nations has been to provide EM government's with previous generation platform & technologies – partly since less sophisticated mechanics etc were better suited to rougher local conditions and partly to ensure a technology-gap between the 'teacher' and 'student' countries which would theoretically be maintained as newer generation vehicles were constantly evolved and then passed-on to EM countries.
For those EMs with fast-paced effectively 'clean-sheet' development ambitions such as Malaysia in the 1980s/1990s, this technical disadvantage was something it sought to overcome. Having licensed 'old' Mitsubushi technologies and platforms to supply the tooling for Proton – its national champion mass manufacturer – it then sought to bypass the technology disadvantage by purchasing a renowned western automotive engineering & sportscar firm, Group Lotus. The intent was to have UK engineers rapidly develop its own next generation models and export those to international markets as both entry level vehicles in mature western markets and gain market share in EM Islamic countries from the local western-backed companies given the more sophisticated 'new generation' product offering.
This important aspect of what was Malaysia's own economic grand-plan did not come to pass. This resulting from:
- the operational problems of having its cars developed 'remotely' even with some project engineers shipped to Malaysia.
- Malaysia's 2nd national champion Perodua (based on Daihatsu/Toyota tech) was successful.
- western entry-level car markets became so competitive (Hyundai, Dacia etc).
- Islamic countries' own badge-engineered marques were tightly linked to home economies (though Proton has gained licencing contracts in pro-Islamic Iran).
- Seemingly 'new generation' platforms introduced into EM regions by VW, Hyundai, Dacia.
In recent years Proton (read Malaysia) has been assessing strategic coupling with other foreign VMs.2006 talks with Germany's VW failed to secure agreement, 2009 saw a contract-manufacturing agreement for 15-30k units with China's Jianhua Youngmann for its Europestar brand, whilst recently in March 2011 a 'strategic partnership evaluation' MoU was signed for a n investigative project that ran 2 months, so far instigating replacement of the Proton Perdana with the Fuga.
This in effect puts Proton on the same technology-source track as its homeland competitor Perodua, which sources from Toyota/Daihatsu. It then also re-affirms the notion that Proton has been seeking to dispose of Lotus Group, given that it did not receive the technology and marketing boost initially expected from the original 1996 64% purchase, nor from its 100% takeover in 2003. The divergence of Proton and Lotus fortunes also appears evident in Lotus's highly ambitious strategic planning, trying to create a whole new future for itself given the apparent inability to rely on further Proton financing
For the UK's auto-engineering sector, the example of Malaysia's Proton and its inter-relationship with Lotus serves as a useful case-study, representing:
- domestic policy ambitions of EM countries keen to develop their own benchmark auto-sectors
- their initial reliance upon established VMs for technology platforms
- the desire to un-hook themselves from this dependent position as soon as practicable.
- reliance on European engineering consulting firms to do so (ie via core-competence acquisition)
- the frictions created as both 'parent & child' seek maximise their gain (knowledge vs finance)
- the possibility of strategic failure given separate 'parent & child' agendas.
- the need for EM countries to seek alternative outsourcing models with the western firms
- the need for western design and engineering companies to react with appropriate new models
Of course these conditions have not appeared 'over night' and this broad description of unfolding events and perceptions is very general; the boundaries and exactitude of any single business relationship between an EM country seeking UK engineering services dependent upon the specific details of those firms involved: eg state vs private ownership, funding position, executives' operational freedoms etc. But it nevertheless provides general template of understanding of the dynamic that has emerged between typically East and West.
This was crystallised when China's SAIC employed Ricardo Consulting as the prime intermediaries in developing its Roewe range of cars derived from Rover's 75, 45 and 25 after its own 'lift & shift' of tooling from Longbridge. SAIC demanded that a new seperate project-based company be created as a 'half-way house' to avoid/reduce the possibility and impact of operational problems. The created intermediary was titles Ricardo (2010) Consulting Ltd, which itself was fully acquired by SAIC in 2007 and renamed the SIAC UK Technical Centre. Whilst largely UK based. UK engineers were also posted to China to assist the project transfer locally and assist the initial stages of duplicating the UK technical centre with a mirror-image technical base.
The obvious strategic aim of SAIC - and many of China's new VMs - is to develop a domestic HR and capital goods (IT, test-beds, test-cells) engineering skill-set which in turn allows for the creation of world-class vehicles at a proportionately lower cost base than all other nations. This is no secret.
Russia likewise must update and develop its indigenous auto-sector.
Having witnessed cases such as Malaysia, Russia decided to have its 2 primary vehicle makers OAO Avtovaz and OAO GAZ use contrasting strategic paths. The scale of the challenge was arguably greater for car producer Avtovaz, so Moscow decided that the internal leverage from a strategic partnership with Renault-Nissan would provide the speediest route to develop the supplier-base, provide access to benchmark platforms to revitalise core models and thereby give access to leading technical developments. To do so it gave Renault an initial 25% stake, with Renault now seeking 50%. Alternatively GAZ sought the foreign-tech 'lift & shift' option, purchasing Chrysler's Sebring/Stratus line of large cars for its premium brand Volga, whilst acquiring the UK's LDV vans so as to immediately update its GAZelle commercial vehicle portfolio.
These then necessary actions if Russia wishes to not only satisfy national demand, but stave-off foreign brands in the home market and retain & create export markets throughout the CIS, China and worldwide EM nations.
[NB investment-auto-motives previously highlighted the ambitions of Russian supercar maker MARUSSIA in a previous essay / web-log; noting its purchase of two UK firms related to motorsport engineering and motorsports events management].
Thus the changing face of global auto production, much influenced by the strategic choices of large EM nations, sets a challenge to the UK's auto-engineering sector. A challenge which is becoming increasingly apparent and possibly concerning.
The automotive engineering realm spans a broad realm of activities, some 'high-value', some 'mid-value', some relatively 'low-value'. An engineering project, whether for whole new car or facelifted car will contain varying proportions of these value-levels, the 'all new' product arena containing a greater amount of 'high & mid' value work given the demand for wholly new approach. The same also the case for sub-systems or module work across body, power-train, chassis, electrical, and trim.
Possibly because of the absence of domestic VM car manufacturers, the UK engineering-sector (at a surface level) looks to become increasingly split between high-value work typically seen in the specialist realms of Formula One, general motor-sports & specialist machines (AGCON & marine) and the low-value work generated from 'packaged outsourcing' from other countries' vehicle manufacturers.
'Packaged Outsourcing' is colloqially known as 'bums on seats engineering', and has typically undertaken by large US multinationals such as MSX International that rely on both large scale efficiencies and internal flexibility to create service offerings to VMs, often using project-based staff previously from the homeland & international operations of GM, Ford and Chrysler. Its innate business model devised to offer lower rate 'bums on seats' engineering packages to VMs. (As a profit margin-builder, it also offers 'mid-value' engineering solutions to a VMs national sales company in any specific region, if it thinks bearing the cost of re-engineering an otherwise unavailable vehicle worthwhile for local market demand. Typically the cost would be split between VM and NSC as cost-diffused market-test exercise).
The UK auto-engineering sector typically contains SME sized companies with backgrounds in more specialised engineering spheres typically relating to powertrain, chassis and (niche vehicle) structures, an emergence of eco-engineering including LEVs and EVs over the last 20 years.
However, such specialised business have historically tended suffer from the peaks and troughs of broad economic cycles. In good times client budgets are deep, whether from a VM's R&D cost-centre seeking alternative solutions, from better sponsored motorsports (F1 to WRC to UK touringcar to entry-band single-seater development) to niche vehicle business start-ups to an increased demand for specialist off-road vehicles by government and privatised utility companies. But in poorer times of economic downturn or stagnancy, such specialist auto-engineering firms tend to have to broaden their net and seek-out new work. They obviously seeking to both cover base operating overhead costs and seek to create stronger long-term relationships with influential clients by undertaking less profitable work.
This has been the perennial dilemma for the UK's auto-engineering firms when trying to forecast future work-flow opportunities and possibilities. Thus the more enlightened firms, seeking to overcome the income distortions of the economic cycle, have sought to broaden their remit in as flexible manner as possible so as to access mid-value and low-value work as necessary. This a near necessity for those that are publicly listed, rely on investor capital and need to demonstrate operational stability to attract long-term investors and so their Market Capitalisation.
It is also a consequence of VMs increasing tendency to retain 'in-house' the high-value aspects of their R&D and new product programmes, this especially so the case of Germans and Japanese who's brand equity is closely correlated to technological prowess.
This appears the case with Ricardo Engineering, relative to its work on the BMW small-block straight six engine – mentioned in the previously posted essay / web-log.
[NB The following is by no means indicative of a full and proper company review, nor its operational strategy / efficiency nor comment on future profitability].
Though it now spans whole vehicle and multiple sub-systems engineering, Ricardo is renowned as a powertrain specialist, harking back founder Harry Ricardo's roots. Yet on a now completed BMW motorcycle engine/gearbox project the firm essentially served as a mid-low value service provider; nominally stepping on the toes of the likes of MSX and notionally operating beyond their specialism.
Very basically, the development process – in this case for a new engine – typically consists of the following individual project phases:
1. product investigation, broad conceptualisation & technical targets.
2. detailed concept packaging + mating of ancillary components.
3. on-screen (3D) model development.
4. prototype(s) build & test.
5. (supplier) production-engineering input.
6.early-phase 'pre-production' functionality testing.
7. sign-off and full production.
Of course given that it was very probably seen as a core BMW AG project it is not surprising that much of the work was undertaken in-house, the first and final blocks necessarily so. Ricardo took responsibility for phases 3, 4 and 6, which in reality represent a large bulk of the project's lower value work, consisting of a high number of 'screen-jockey' & 'test-cell technician' man-hours in what is a saturated supply market thus able to command generally low rates.
Ricardo will have no doubt been able to improve its sold-rates above the' global market bottom' given its broad portfolio of proprietry IT development software, specific software sold at different rates depending upon the perceived technical advantage offered. This opportunity to create 'corners of differentiation' seen in software, is not equally possible in the commodity-priced 'test-bed' arena
Thus much of the projects innate profitability will have been in convincing BMW of the need to use as many software applications as possible for as many man-hours as possible.
From an overtly simplistic short-term ROE, ROI perspective, this BMW project would have added little to Ricardo's profit margin measures. But if this project had been raised by 'sector informed' shareholders will have been argued as a necessary strategic step to highlight the 'development software capabilities' and so forge relationships and credibility with the German VMs, and demonstrates the 'to-hand' service provision of the company's German-located Schwabisch Gmund test-cells.
Ricardo Engineering then saw it as a strategic imperative then to 'follow the Germans' and act as a smaller, European bound, version of MSX; using the basic 'bums on seats' work – albeit in 'sliced and diced' software specific manner, as a foundation-stone to building what it hopes will be a long term lucrative deal with BMW, ideally able to recapture the work levels seen when Ricardo took on aspects of the 'whole vehicle' engineering task of the 2001 New MINI. As a UK produced BMW product the German's sought out capable UK engineering consultancies to deliver that car - as with Rolls-Royce – but today the 'homeland repatriation' of German VM's work means that those UK companies seeking close relationships must meet German technical expectations and benchmarks at below German industrial rates.
For a UK firm this then means preserving a more costly German office, the high standards of which are maintained by CapEx investment and high quality German management & staff, whilst to off-set this prospecting / retention cost, simultaneously seeking cost-base reductions across its activities in the UK and elsewhere.
Ricardo's belief appears to be that if a UK engineering firm with its own esteemed track record in specialist markets can continue to built good German relationships, it will be able to carve-out an ever broadening and well defended business proposition and investment model. Seemingly seeking to set world-class engineering sector standards, and extending its 'knowledge reach' from niche-volume to mass-volume arenas. Able then able to offer its top-tier capabilities to worldwide clients from Europe, America, Chinese, Indian, Russia and EM nations.
From the broad UK sector perspective, Ricardo's German learning (ideally from a combine of VW-BMW-Daimler) to provide the credibility and know-how as the necessary resource option for domestic clients such Jaguar, Land Rover (in turn parent TATA Motors strengthening the UK-India link). Furthermore, as a ripple-effect, Britain's numerous small scale vehicle producers - who themselves are often reliant upon outsourced engineering solutions to gain market differentiation – then have access to world-class engineering standards which on a 'whole vehicle' or 'sub-systems' basis can be selectively instilled into their products to match international quality standards.
The loss of the indigenous large-scale British car industry undoubtedly shook-up any innate complacency that existed within the auto-engineering consulting sphere, yet that loss was replaced by a high level of FDI coming in the form of 'replacement' trans-plant factories from Nissan, Honda, Toyota, and willing new 'parents' of BMW, VW & TATA. The Germans provided world-class technology platforms and modules which effectively revived MINI, Rolls-Royce and Bentley marques, whilst the Indians provided both a financing-platform and assisted-access to what will be a massive new market for JLR.
Through-out this long transition period of the 'big players' the other client-segment of UK motorsports has itself been through volatile times, what was a vibrant broad-scope field hit very hard by the fall-out of the 2008 financial crisis, its own financing base slashed and technology development programmes either cancelled or heavily modified. Yet FIA regulations and the like have sought to push technical boundaries of various motorsports – the 'eco' agenda obvious - so that learning can be trickled-down into road-cars.
Each of the UK's auto-engineering firms is typically idiosyncratic relative to people and cultures, but efforts to 'de-risk' their innate business models by broadening their service provision across multiple sectors and client-types has been typical when economic slow-downs occur – typically a case of 'rapidly off the motorsports gas peddle' and then 'heel and toe-ing' VM clients and alternative others.
The rise of the EV provided a for a while strong secondary fiddle for auto-engineering firms, able to access the income of both government scheme funding and VC funding, but much of the EV expectation has collapsed with the collapse of the credit boom, turning back to ICE based hybrids and LEV projects.
The greatest concern however has been the tendency for VMs to maintain and grow internal engineering competancies. The was typically the case with Germans and Japanese but even they appear to have renewed vigour to do so given a combine of both their ICE and Hybrid technical leadership and the re-emergence of a self-dependent attitude within nations that must look after their own national interests whilst also acting as prime economic agents for their respective geographic regions. S. Korea will probably also follow a similar route, wishing to protect any advances in their consumer electronics fields that can be integrated into their vehicles to provide a competitive edge, aswell as trying to add in-house powertrain and chassis competence.
This then makes for an evermore complex web of challenges and opportunities for UK auto-engineering firms.
The 1960s/70s yesteryear route to business growth and success was born from creating a cup winning race-team or assisting race-teams within a burgeoning motorsports arena. That has now become a centric business-world unto itself, although the lower ranks of the sport may still offering valuable design contracts when conditions suit. That old era garnered contracts from VMs to adapt mass-models into special sporting edition model-lines, sporty chassis dynamics & enhanced engine BHP, and with an extra fee obtained for co-branding. But much of the notionally high margin pricing failed to materialise on the VM's Cash Book and P&L account, so latterly similar projects were created in-house to bind engineering knowledge, marketing punch and defined profitability.
Engineering sector evolution saw the M&A of names and capabilities, companies tended to follow either a horizontal 'diversification' route combining once separate spheres (ie Auto, AGCON, Military, Marine, Rail etc) to gain varied markets access in the hope of a gaining a counter-cyclical activities, or tended to vertical 'integration' so as to extract greater efficiencies from the value-chain and demonstrate sector reach and expertise, with intention to preserve portions of the feasted profits in economic famine.
Today, the engineering sector remains broadly multi-faceted, yet given its commercial profile with VMs & SME producers aswell as a high public profile via motorsports it is automotive-engineering which understandably holds perhaps greatest investor attraction.
Of course different investor types, ranging from low-risk institutionals to technology-led VCs, will seek out (very) different types of engineering firm, slow and steady operators through to technology 'moon-shot' start-ups.
Yet, the age old investor promise of a company creating a technological leap that becomes integrated into millions of vehicles remains, a notion which certain sector players well recognise when defining and re-defining themselves. If founder-owned or PE-owned typically seeking to maximise that perception as part a semi or full exit strategy via either the secondary PE market, an IPO or trade-sale to another engineering firm, much depending upon the details of the firm's innate structure and proposition.
This then represents the dynamic at the more fluid end of the sector, typically closer to the type of conceptual engineering related to transformative eco-tech and its place with motorsports.
Conversely, at the opposite end of the spectrum amongst volume vehicle producers, because of VM self-interests it has become far less probable that 'moon-shot' ideas are adopted, the 'not invented here' syndrome becoming increasingly endemic. This is well known by the well established engineering firms and thus they have sought to create business models which provide low-cost 'commodity' engineering services, the 'bums on seats' work mentioned previously.
Each of Britain's auto-engineering firms of course sets its own strategy accordingly, yet as a whole Britain must recognise that the general 'shape' of its auto-engineering base has very probably already started to increasingly look like the silhouette of an hour-glass / sand-timer, a bulge of (F1-type) 'transformative eco-tech' at the top, a thin waist middle-ground (held by in-house VM) and a 'bums on seats' bulge at the base.
Maintaining it F1, high-end motorsport and 'transformative eco-tech' capabilities should be par for the course if a new generation of engineers can be suitably educated and trained by academia & firms; the establishment of an educational centre at Silverstone demonstrating the commitment to do so.
Operating in the realms of commodity engineering is untenable unless British firms – ideally dedicated outsourcing firms - can duplicate the MSX model across India, Russia and China, using their UK staff as lead engineers to educate local populations – thus effectively duplicating the Ricardo (2010) Consulting experience. To try and compete at home in such a competitive arena is obviously foolish given the cost-base, especially so given the ambitions of TATA Group and other similarly styled ASEAN conglomerates to do so.
Yet there is also the massive 'waist-land' of that hour-glass. Yes it is understandably occupied and highly protected by global VMs, but that does not theoretically prohibit the UK from 'designing a better mousetrap'. The evolutional design of powertrain systems, chassis systems, body-systems, electrical systems is the norm, and the UK has proven itself in the past with cases such as the Coventry Climax engine, the K-Series engine, 4WD All-Terrain Response Control, mixed-material structures and attack blast-defence materials. But its lack of a mass-manufacturing champion and directly R&D supporting supply-base meant that it fell behind too, in areas such as 'lean burn' VVT (although adopted), CANBUS electronics and 'bio-flex' body surfaces.
It also means adding greater onus to VM support services that span the design and development process. The obvious being new a new breakthrough generation of IT software either leased or sold, ideally compatible with, but reaching beyond, the likes of CATIA, NX etc. Beyond the ethereal world is that of the physical and disciplines such as 3-D modelling and prototyping, which although
gaining good press coverage has failed to yet become fully fledged industry tool, leaving VMs to set out scale models, exterior and interior bucks, working-mules and production prototypes. Progress in this area would assist the time and cost of physical development work. And beyond this is the very idea of 'creativity' itself, possibly overlapping the activities of education research and firms to assist EM nations especially to better create their own creative cultures.
Thus creating close 'confidant' relationships with the volume manufacturers and their Tier 1 suppliers in Germany, Japan, S. Korea, India, China, Brazil and the USA will continue to be critical, so as to create meaningful dialogues about the engineering challenges and aspirations sought by their mass manufacturers.
The UK must recapture its eminence as a respected engineering nation, and to do so means generating ideas and IPR that can directly assist clients given the constricted technical and production boundaries they themselves must work within.
"Sell a man a fish and he will eat for a day, teach a man to fish and he will eat for a lifetime"
The next stage surely must be to “sell the man a better fishing rod, a better net, a boat....set the rod, mend the net and refurbish the boat, etcetera, etcetera, etcetera”.
This old saying reflects the 'global positioning' dilemma that presently faces the UK, Western Europe, the US, Japan and South Korea; all eager strengthen each's respective ties with China, SE Asia, India, the CIS and S.America.
Having been respective chronological leaders of the industrial revolution, mass manufacture, quality improvement and broad value-chain conglomerates, each of those 'advanced' countries individually sit on different 'co-ordinates' at the high-end of the value-chain. One where the provision of high-end technologies and the provision of services merge and are expected to deliver both national and international wealth generation via domestic (private, corporate, state) consumption and as export packages sold directly to other advanced and emerging countries in either B2B or B2C formats.
This then indicates that amongst the advanced countries each will look to specialise its offering, using the notion of competitive national advantage to do so, whilst the innate historical story relative to emerging countries is that they will try to broaden their own value-chain span relative to the size of its population – the bigger the greater the incentive to create economic foundations and cyclical stability. This evidently re-run time and again since, mid-nineteenth century USA and 21st century China the choice examples.
Yet within this globalisation model, there has always been a level of political and commercial friction between the 'developed' and 'emergent', the former keen to be the technological and economic broker, both plying its student with specific 'fish' whilst also 'teaching to fish', whilst the student has sought more directly given fish whilst also seeking to hasten the 'fishing lesson'. And of course as a defining influence in itself is the willingness of the student to absorb the intrinsic 'soft-power' cultural expectancies of the master.
This picture approximates the reality of commercial and industrial international relations, and so the development speed of EM nations. The cases of similarly sized Brazil versus Pakistan, or Mexico versus Philippines, or Taiwan versus Syria contrasting historical examples.
Thus not surprisingly the general spread of economic well-being has historically followed a cultural course of 'least resistance', commerce and industry naturally attracted to similar conditions. This altered over the latter half of the 20th century as many Middle-Eastern & Asian countries saw it in their interests to welcome elements of the Anglo-Globalisation model, whether by historical precedence of by self desire, but of course the split of the profitable proceeds between 'teacher' and 'student' was always a major bone of contention; a larger population giving proportionately greater negotiating leverage.
Like its European & American counter-parts, the UK has been a disseminator of automotive sector technologies and services, starting in the 1930s when Austin licensed the tooling and construction of its legendary Austin 7 small car model to both BMW and Nissan so that the UK may be an influential force as part of its industrial foreign policy. In the early1960s Austin offered its larger Oxford model to India's Hindustan Motors named the Ambassador, Reliant & the Rootes Group developed Turkey's (2nd) national car the Otosan Anadol, and Rootes licenced its Hillman Hunter to Iran as the Paykan (*see below).
[NB FIAT, Renault & PSA did likewise. FIAT in the 1960s to India's Premier Motor and USSR/CCCP countries AutoVAZ-Lada, Polski-FIAT & Zastava, Spain's SEAT, Turkey's Tofas, Pakistan's Raja Motors and North Korea's PMC. Renault has previously offered licenses to Iran's Samar, Turkey's Oyak-Renault. *PSA had newly acquired Rootes Group when it offered Iran the 'Paykan' technology licence, this displaced by successive PSA sedan and hatch models since)And of course Ford, GM and Chrysler's early international reach is self-evident].
Historically then it was well recognised by the leaderships of EM countries that the development of a national vehicle industry in truck, bus and car forms was a necessary critical step in achieving economic growth, satisfied populace and international standing.
Yet that development model has not been without frustrations, since dependence upon foreign technology, IPR and general knowledge was typically one step removed from the real advances being made and enjoyed by a foreign 'teachers' homeland. The understandable ploy from the West/TRIAD nations has been to provide EM government's with previous generation platform & technologies – partly since less sophisticated mechanics etc were better suited to rougher local conditions and partly to ensure a technology-gap between the 'teacher' and 'student' countries which would theoretically be maintained as newer generation vehicles were constantly evolved and then passed-on to EM countries.
For those EMs with fast-paced effectively 'clean-sheet' development ambitions such as Malaysia in the 1980s/1990s, this technical disadvantage was something it sought to overcome. Having licensed 'old' Mitsubushi technologies and platforms to supply the tooling for Proton – its national champion mass manufacturer – it then sought to bypass the technology disadvantage by purchasing a renowned western automotive engineering & sportscar firm, Group Lotus. The intent was to have UK engineers rapidly develop its own next generation models and export those to international markets as both entry level vehicles in mature western markets and gain market share in EM Islamic countries from the local western-backed companies given the more sophisticated 'new generation' product offering.
This important aspect of what was Malaysia's own economic grand-plan did not come to pass. This resulting from:
- the operational problems of having its cars developed 'remotely' even with some project engineers shipped to Malaysia.
- Malaysia's 2nd national champion Perodua (based on Daihatsu/Toyota tech) was successful.
- western entry-level car markets became so competitive (Hyundai, Dacia etc).
- Islamic countries' own badge-engineered marques were tightly linked to home economies (though Proton has gained licencing contracts in pro-Islamic Iran).
- Seemingly 'new generation' platforms introduced into EM regions by VW, Hyundai, Dacia.
In recent years Proton (read Malaysia) has been assessing strategic coupling with other foreign VMs.2006 talks with Germany's VW failed to secure agreement, 2009 saw a contract-manufacturing agreement for 15-30k units with China's Jianhua Youngmann for its Europestar brand, whilst recently in March 2011 a 'strategic partnership evaluation' MoU was signed for a n investigative project that ran 2 months, so far instigating replacement of the Proton Perdana with the Fuga.
This in effect puts Proton on the same technology-source track as its homeland competitor Perodua, which sources from Toyota/Daihatsu. It then also re-affirms the notion that Proton has been seeking to dispose of Lotus Group, given that it did not receive the technology and marketing boost initially expected from the original 1996 64% purchase, nor from its 100% takeover in 2003. The divergence of Proton and Lotus fortunes also appears evident in Lotus's highly ambitious strategic planning, trying to create a whole new future for itself given the apparent inability to rely on further Proton financing
For the UK's auto-engineering sector, the example of Malaysia's Proton and its inter-relationship with Lotus serves as a useful case-study, representing:
- domestic policy ambitions of EM countries keen to develop their own benchmark auto-sectors
- their initial reliance upon established VMs for technology platforms
- the desire to un-hook themselves from this dependent position as soon as practicable.
- reliance on European engineering consulting firms to do so (ie via core-competence acquisition)
- the frictions created as both 'parent & child' seek maximise their gain (knowledge vs finance)
- the possibility of strategic failure given separate 'parent & child' agendas.
- the need for EM countries to seek alternative outsourcing models with the western firms
- the need for western design and engineering companies to react with appropriate new models
Of course these conditions have not appeared 'over night' and this broad description of unfolding events and perceptions is very general; the boundaries and exactitude of any single business relationship between an EM country seeking UK engineering services dependent upon the specific details of those firms involved: eg state vs private ownership, funding position, executives' operational freedoms etc. But it nevertheless provides general template of understanding of the dynamic that has emerged between typically East and West.
This was crystallised when China's SAIC employed Ricardo Consulting as the prime intermediaries in developing its Roewe range of cars derived from Rover's 75, 45 and 25 after its own 'lift & shift' of tooling from Longbridge. SAIC demanded that a new seperate project-based company be created as a 'half-way house' to avoid/reduce the possibility and impact of operational problems. The created intermediary was titles Ricardo (2010) Consulting Ltd, which itself was fully acquired by SAIC in 2007 and renamed the SIAC UK Technical Centre. Whilst largely UK based. UK engineers were also posted to China to assist the project transfer locally and assist the initial stages of duplicating the UK technical centre with a mirror-image technical base.
The obvious strategic aim of SAIC - and many of China's new VMs - is to develop a domestic HR and capital goods (IT, test-beds, test-cells) engineering skill-set which in turn allows for the creation of world-class vehicles at a proportionately lower cost base than all other nations. This is no secret.
Russia likewise must update and develop its indigenous auto-sector.
Having witnessed cases such as Malaysia, Russia decided to have its 2 primary vehicle makers OAO Avtovaz and OAO GAZ use contrasting strategic paths. The scale of the challenge was arguably greater for car producer Avtovaz, so Moscow decided that the internal leverage from a strategic partnership with Renault-Nissan would provide the speediest route to develop the supplier-base, provide access to benchmark platforms to revitalise core models and thereby give access to leading technical developments. To do so it gave Renault an initial 25% stake, with Renault now seeking 50%. Alternatively GAZ sought the foreign-tech 'lift & shift' option, purchasing Chrysler's Sebring/Stratus line of large cars for its premium brand Volga, whilst acquiring the UK's LDV vans so as to immediately update its GAZelle commercial vehicle portfolio.
These then necessary actions if Russia wishes to not only satisfy national demand, but stave-off foreign brands in the home market and retain & create export markets throughout the CIS, China and worldwide EM nations.
[NB investment-auto-motives previously highlighted the ambitions of Russian supercar maker MARUSSIA in a previous essay / web-log; noting its purchase of two UK firms related to motorsport engineering and motorsports events management].
Thus the changing face of global auto production, much influenced by the strategic choices of large EM nations, sets a challenge to the UK's auto-engineering sector. A challenge which is becoming increasingly apparent and possibly concerning.
The automotive engineering realm spans a broad realm of activities, some 'high-value', some 'mid-value', some relatively 'low-value'. An engineering project, whether for whole new car or facelifted car will contain varying proportions of these value-levels, the 'all new' product arena containing a greater amount of 'high & mid' value work given the demand for wholly new approach. The same also the case for sub-systems or module work across body, power-train, chassis, electrical, and trim.
Possibly because of the absence of domestic VM car manufacturers, the UK engineering-sector (at a surface level) looks to become increasingly split between high-value work typically seen in the specialist realms of Formula One, general motor-sports & specialist machines (AGCON & marine) and the low-value work generated from 'packaged outsourcing' from other countries' vehicle manufacturers.
'Packaged Outsourcing' is colloqially known as 'bums on seats engineering', and has typically undertaken by large US multinationals such as MSX International that rely on both large scale efficiencies and internal flexibility to create service offerings to VMs, often using project-based staff previously from the homeland & international operations of GM, Ford and Chrysler. Its innate business model devised to offer lower rate 'bums on seats' engineering packages to VMs. (As a profit margin-builder, it also offers 'mid-value' engineering solutions to a VMs national sales company in any specific region, if it thinks bearing the cost of re-engineering an otherwise unavailable vehicle worthwhile for local market demand. Typically the cost would be split between VM and NSC as cost-diffused market-test exercise).
The UK auto-engineering sector typically contains SME sized companies with backgrounds in more specialised engineering spheres typically relating to powertrain, chassis and (niche vehicle) structures, an emergence of eco-engineering including LEVs and EVs over the last 20 years.
However, such specialised business have historically tended suffer from the peaks and troughs of broad economic cycles. In good times client budgets are deep, whether from a VM's R&D cost-centre seeking alternative solutions, from better sponsored motorsports (F1 to WRC to UK touringcar to entry-band single-seater development) to niche vehicle business start-ups to an increased demand for specialist off-road vehicles by government and privatised utility companies. But in poorer times of economic downturn or stagnancy, such specialist auto-engineering firms tend to have to broaden their net and seek-out new work. They obviously seeking to both cover base operating overhead costs and seek to create stronger long-term relationships with influential clients by undertaking less profitable work.
This has been the perennial dilemma for the UK's auto-engineering firms when trying to forecast future work-flow opportunities and possibilities. Thus the more enlightened firms, seeking to overcome the income distortions of the economic cycle, have sought to broaden their remit in as flexible manner as possible so as to access mid-value and low-value work as necessary. This a near necessity for those that are publicly listed, rely on investor capital and need to demonstrate operational stability to attract long-term investors and so their Market Capitalisation.
It is also a consequence of VMs increasing tendency to retain 'in-house' the high-value aspects of their R&D and new product programmes, this especially so the case of Germans and Japanese who's brand equity is closely correlated to technological prowess.
This appears the case with Ricardo Engineering, relative to its work on the BMW small-block straight six engine – mentioned in the previously posted essay / web-log.
[NB The following is by no means indicative of a full and proper company review, nor its operational strategy / efficiency nor comment on future profitability].
Though it now spans whole vehicle and multiple sub-systems engineering, Ricardo is renowned as a powertrain specialist, harking back founder Harry Ricardo's roots. Yet on a now completed BMW motorcycle engine/gearbox project the firm essentially served as a mid-low value service provider; nominally stepping on the toes of the likes of MSX and notionally operating beyond their specialism.
Very basically, the development process – in this case for a new engine – typically consists of the following individual project phases:
1. product investigation, broad conceptualisation & technical targets.
2. detailed concept packaging + mating of ancillary components.
3. on-screen (3D) model development.
4. prototype(s) build & test.
5. (supplier) production-engineering input.
6.early-phase 'pre-production' functionality testing.
7. sign-off and full production.
Of course given that it was very probably seen as a core BMW AG project it is not surprising that much of the work was undertaken in-house, the first and final blocks necessarily so. Ricardo took responsibility for phases 3, 4 and 6, which in reality represent a large bulk of the project's lower value work, consisting of a high number of 'screen-jockey' & 'test-cell technician' man-hours in what is a saturated supply market thus able to command generally low rates.
Ricardo will have no doubt been able to improve its sold-rates above the' global market bottom' given its broad portfolio of proprietry IT development software, specific software sold at different rates depending upon the perceived technical advantage offered. This opportunity to create 'corners of differentiation' seen in software, is not equally possible in the commodity-priced 'test-bed' arena
Thus much of the projects innate profitability will have been in convincing BMW of the need to use as many software applications as possible for as many man-hours as possible.
From an overtly simplistic short-term ROE, ROI perspective, this BMW project would have added little to Ricardo's profit margin measures. But if this project had been raised by 'sector informed' shareholders will have been argued as a necessary strategic step to highlight the 'development software capabilities' and so forge relationships and credibility with the German VMs, and demonstrates the 'to-hand' service provision of the company's German-located Schwabisch Gmund test-cells.
Ricardo Engineering then saw it as a strategic imperative then to 'follow the Germans' and act as a smaller, European bound, version of MSX; using the basic 'bums on seats' work – albeit in 'sliced and diced' software specific manner, as a foundation-stone to building what it hopes will be a long term lucrative deal with BMW, ideally able to recapture the work levels seen when Ricardo took on aspects of the 'whole vehicle' engineering task of the 2001 New MINI. As a UK produced BMW product the German's sought out capable UK engineering consultancies to deliver that car - as with Rolls-Royce – but today the 'homeland repatriation' of German VM's work means that those UK companies seeking close relationships must meet German technical expectations and benchmarks at below German industrial rates.
For a UK firm this then means preserving a more costly German office, the high standards of which are maintained by CapEx investment and high quality German management & staff, whilst to off-set this prospecting / retention cost, simultaneously seeking cost-base reductions across its activities in the UK and elsewhere.
Ricardo's belief appears to be that if a UK engineering firm with its own esteemed track record in specialist markets can continue to built good German relationships, it will be able to carve-out an ever broadening and well defended business proposition and investment model. Seemingly seeking to set world-class engineering sector standards, and extending its 'knowledge reach' from niche-volume to mass-volume arenas. Able then able to offer its top-tier capabilities to worldwide clients from Europe, America, Chinese, Indian, Russia and EM nations.
From the broad UK sector perspective, Ricardo's German learning (ideally from a combine of VW-BMW-Daimler) to provide the credibility and know-how as the necessary resource option for domestic clients such Jaguar, Land Rover (in turn parent TATA Motors strengthening the UK-India link). Furthermore, as a ripple-effect, Britain's numerous small scale vehicle producers - who themselves are often reliant upon outsourced engineering solutions to gain market differentiation – then have access to world-class engineering standards which on a 'whole vehicle' or 'sub-systems' basis can be selectively instilled into their products to match international quality standards.
The loss of the indigenous large-scale British car industry undoubtedly shook-up any innate complacency that existed within the auto-engineering consulting sphere, yet that loss was replaced by a high level of FDI coming in the form of 'replacement' trans-plant factories from Nissan, Honda, Toyota, and willing new 'parents' of BMW, VW & TATA. The Germans provided world-class technology platforms and modules which effectively revived MINI, Rolls-Royce and Bentley marques, whilst the Indians provided both a financing-platform and assisted-access to what will be a massive new market for JLR.
Through-out this long transition period of the 'big players' the other client-segment of UK motorsports has itself been through volatile times, what was a vibrant broad-scope field hit very hard by the fall-out of the 2008 financial crisis, its own financing base slashed and technology development programmes either cancelled or heavily modified. Yet FIA regulations and the like have sought to push technical boundaries of various motorsports – the 'eco' agenda obvious - so that learning can be trickled-down into road-cars.
Each of the UK's auto-engineering firms is typically idiosyncratic relative to people and cultures, but efforts to 'de-risk' their innate business models by broadening their service provision across multiple sectors and client-types has been typical when economic slow-downs occur – typically a case of 'rapidly off the motorsports gas peddle' and then 'heel and toe-ing' VM clients and alternative others.
The rise of the EV provided a for a while strong secondary fiddle for auto-engineering firms, able to access the income of both government scheme funding and VC funding, but much of the EV expectation has collapsed with the collapse of the credit boom, turning back to ICE based hybrids and LEV projects.
The greatest concern however has been the tendency for VMs to maintain and grow internal engineering competancies. The was typically the case with Germans and Japanese but even they appear to have renewed vigour to do so given a combine of both their ICE and Hybrid technical leadership and the re-emergence of a self-dependent attitude within nations that must look after their own national interests whilst also acting as prime economic agents for their respective geographic regions. S. Korea will probably also follow a similar route, wishing to protect any advances in their consumer electronics fields that can be integrated into their vehicles to provide a competitive edge, aswell as trying to add in-house powertrain and chassis competence.
This then makes for an evermore complex web of challenges and opportunities for UK auto-engineering firms.
The 1960s/70s yesteryear route to business growth and success was born from creating a cup winning race-team or assisting race-teams within a burgeoning motorsports arena. That has now become a centric business-world unto itself, although the lower ranks of the sport may still offering valuable design contracts when conditions suit. That old era garnered contracts from VMs to adapt mass-models into special sporting edition model-lines, sporty chassis dynamics & enhanced engine BHP, and with an extra fee obtained for co-branding. But much of the notionally high margin pricing failed to materialise on the VM's Cash Book and P&L account, so latterly similar projects were created in-house to bind engineering knowledge, marketing punch and defined profitability.
Engineering sector evolution saw the M&A of names and capabilities, companies tended to follow either a horizontal 'diversification' route combining once separate spheres (ie Auto, AGCON, Military, Marine, Rail etc) to gain varied markets access in the hope of a gaining a counter-cyclical activities, or tended to vertical 'integration' so as to extract greater efficiencies from the value-chain and demonstrate sector reach and expertise, with intention to preserve portions of the feasted profits in economic famine.
Today, the engineering sector remains broadly multi-faceted, yet given its commercial profile with VMs & SME producers aswell as a high public profile via motorsports it is automotive-engineering which understandably holds perhaps greatest investor attraction.
Of course different investor types, ranging from low-risk institutionals to technology-led VCs, will seek out (very) different types of engineering firm, slow and steady operators through to technology 'moon-shot' start-ups.
Yet, the age old investor promise of a company creating a technological leap that becomes integrated into millions of vehicles remains, a notion which certain sector players well recognise when defining and re-defining themselves. If founder-owned or PE-owned typically seeking to maximise that perception as part a semi or full exit strategy via either the secondary PE market, an IPO or trade-sale to another engineering firm, much depending upon the details of the firm's innate structure and proposition.
This then represents the dynamic at the more fluid end of the sector, typically closer to the type of conceptual engineering related to transformative eco-tech and its place with motorsports.
Conversely, at the opposite end of the spectrum amongst volume vehicle producers, because of VM self-interests it has become far less probable that 'moon-shot' ideas are adopted, the 'not invented here' syndrome becoming increasingly endemic. This is well known by the well established engineering firms and thus they have sought to create business models which provide low-cost 'commodity' engineering services, the 'bums on seats' work mentioned previously.
Each of Britain's auto-engineering firms of course sets its own strategy accordingly, yet as a whole Britain must recognise that the general 'shape' of its auto-engineering base has very probably already started to increasingly look like the silhouette of an hour-glass / sand-timer, a bulge of (F1-type) 'transformative eco-tech' at the top, a thin waist middle-ground (held by in-house VM) and a 'bums on seats' bulge at the base.
Maintaining it F1, high-end motorsport and 'transformative eco-tech' capabilities should be par for the course if a new generation of engineers can be suitably educated and trained by academia & firms; the establishment of an educational centre at Silverstone demonstrating the commitment to do so.
Operating in the realms of commodity engineering is untenable unless British firms – ideally dedicated outsourcing firms - can duplicate the MSX model across India, Russia and China, using their UK staff as lead engineers to educate local populations – thus effectively duplicating the Ricardo (2010) Consulting experience. To try and compete at home in such a competitive arena is obviously foolish given the cost-base, especially so given the ambitions of TATA Group and other similarly styled ASEAN conglomerates to do so.
Yet there is also the massive 'waist-land' of that hour-glass. Yes it is understandably occupied and highly protected by global VMs, but that does not theoretically prohibit the UK from 'designing a better mousetrap'. The evolutional design of powertrain systems, chassis systems, body-systems, electrical systems is the norm, and the UK has proven itself in the past with cases such as the Coventry Climax engine, the K-Series engine, 4WD All-Terrain Response Control, mixed-material structures and attack blast-defence materials. But its lack of a mass-manufacturing champion and directly R&D supporting supply-base meant that it fell behind too, in areas such as 'lean burn' VVT (although adopted), CANBUS electronics and 'bio-flex' body surfaces.
It also means adding greater onus to VM support services that span the design and development process. The obvious being new a new breakthrough generation of IT software either leased or sold, ideally compatible with, but reaching beyond, the likes of CATIA, NX etc. Beyond the ethereal world is that of the physical and disciplines such as 3-D modelling and prototyping, which although
gaining good press coverage has failed to yet become fully fledged industry tool, leaving VMs to set out scale models, exterior and interior bucks, working-mules and production prototypes. Progress in this area would assist the time and cost of physical development work. And beyond this is the very idea of 'creativity' itself, possibly overlapping the activities of education research and firms to assist EM nations especially to better create their own creative cultures.
Thus creating close 'confidant' relationships with the volume manufacturers and their Tier 1 suppliers in Germany, Japan, S. Korea, India, China, Brazil and the USA will continue to be critical, so as to create meaningful dialogues about the engineering challenges and aspirations sought by their mass manufacturers.
The UK must recapture its eminence as a respected engineering nation, and to do so means generating ideas and IPR that can directly assist clients given the constricted technical and production boundaries they themselves must work within.
"Sell a man a fish and he will eat for a day, teach a man to fish and he will eat for a lifetime"
The next stage surely must be to “sell the man a better fishing rod, a better net, a boat....set the rod, mend the net and refurbish the boat, etcetera, etcetera, etcetera”.
Friday, 15 July 2011
Macro Level Trends - EU Economic Fracture - Powering Member States' National Agendas
The previous 2-speed EU (exemplified by a 'core' of Germany-France vs the 'periphery' PIGS states) is now being described as a 3-speed with Spain, Belgium and Italy viewed as 'soft-core', a label now applied to France, the markets now recognising that it cannot realistically be viewed as strong as Germany.
European woes continued this week as the contagion-effect of national debt worries spread across from Greece into Italy, participants within the capital markets are concerned about remaining in situ with large exposure, understandably skittish about being ultimately forced by Brussels to take the 'creditor haircuts' which look increasingly necessary on to support national well-being and EU unity.
This week saw the markets react to Italy's exposure as the world's 3rd biggest debt market at E 1.6 trillion ($2.23 tr), one in which liquidity has become less 'fluid' and more 'viscous' under the skittish conditions, Italy itself now viewed as moved from 'soft core' position to 'peripheral', this reflected by a 18% appreciation of its 10-year bond yield since 1st January (peaking at 20%) vs Germany's -5%.
Thus in effect we see a 're-rating' of the French and Italian economies, the former also unfortunately tied-into Italy as perhaps the biggest creditor within the Italian debt market, itself holding $393 billion.
Long-term capital markets confidence in a nation's debt servicing capabilities is of course a construct of that country's structural economic strength and the political ability to withdraw monies from households, firms and public expenditure. As is obvious, the stronger the economy the less pain induced. The weaker the economy the more pain, often consequentially creating a negative downward spiral in which the very government revenues themselves undergo real-world contraction, so de-stabilising the ability to pay the national debt.
[NB Though 'in denial' this is now the USA's emergent position].
Thus we see that Germany and Italy presently stand-on contrasting 'solid' and 'crumbling' economic foundations, the stereo-types, proving true, and presenting the administrations of both countries with respective macro and micro challenges.
Whilst an increased 'freedom of capital' through international exchanges has propelled globalisation, the very structure of a country's own commercial foundations and its financial exposure has now come to the fore for not just Germany and Italy, but for all in the West.
'Economic planning' is a term more associated with China's state-apparatus and those countries that were once deemed '3rd world', but it is a notion which remains subtly implicit in Scandinavia and Germany whilst seemingly gladly abandoned by southern Europe after post-WW2 reconstruction and 'rural-region improvement; effectively ended by the early-1980s.
However, the collapse of Communism meant that West Germany (FDR) had to plan for the 'digestion' of the old East Germany (GDR), thus in reality economic planning has been intrinsic to the Germany governmental mindset since 1945; indeed arguably since the early 1930s hyper-inflation and so since 1936. During that era of course Germany and Italy formed ever closer technical ties in the hope for forming an influential economic bloc of its own – this ambition assisted by annexation, effectively a land & commodities seizure - thus concerning Britain and leading to WW2.
Today the picture looks very different, economic ties are and have been maintained - with examples such as VW's purchase of the sportscar maker Lamborghini SpA, the styling house Giugiaro & intent toward Alfa Romeo – but that relationship has been massively over-shadowed by Germany & China, the recent $15bn trade agreement.
The ability to understand and indeed form the future has been the key to a country's commercial and global success; the industrial age reflected by Britain's initial iron-work innovations through to Japan's more recent innovations with hybrid-propulsion; both technical advances commercialised, in turn providing national power at home and abroad. Both examples quickly integrated into broader realms of formalised national economic planning by forward-looking governments. However, economic advancement is typically an evolutional process reliant upon the refinement and scale-efficiencies of conventional technologies that sit within an envelope dictated by the PESTEL norm, and so the internal combustion engine today still sits unequivocally centre stage.
Advancement of ICE from 2-stroke to 4-stroke, to hemispherical cylinder heads, to aluminium & plastics applications, to lean-burn technologies to cylinder de-activation and more means that ongoing MPG & Km/L improvements – along with lightweight body structures – mean that evolutional efficiencies can be typically engineered into future generation vehicles. This 'steady state' improvement process then in tune with real-world infrastructure and allied industries and for the firm itself critically not disruptive to past, present and future CapEx plans.
The planning of new generation engine families sits at the heart of a 'full-span' automotive producer, and encompasses a broad realm of internal and supplier participants. Given an approximate 20+ year life-span of the typical 'family' of engines (ie derived from the same prime parts) the need to plot a convincing path for both the engine's programme delivery and its 'life-cycle' applications is critical. This ideally woven into the broader (implicit or explicit) national economic plan.
[NB perhaps the simplest prime example is the original VW Beetle frame and its boxer engine, designed initially to provide spin-off variants for military use, with post-war applications in van and coupe forms. This a relatively simple are wholly aligned example of the technical planning behind war-time and peace-time economic planning].
However, there is no doubt that the ability to 'synergise' the technical planning of a multi-national 'homeland champion' firm and the domestic & foreign economic ambitions of government is a critical exercise.
And it is here, in the ICE power-train arena, that the relatively recent launches and announcements of FIAT's 'twin-air' engine and BMW's 'small-straight 6' provide interesting cases for evaluation that reflect the innate planning mindset difference between two structurally different companies from two culturally different homelands.
The 2 cylinder 875cc 'twin-air' is a small capacity super-charged unit developed by FIAT's powertrain company FPT, one with philosophical historic links to the original 2-cylinder Topolino (Little Mouse) and Nouvo Cinquecento (500). Thus it was intentionally designed for small car use, but as of yet the ideal lightweight small car has yet to be developed, though past concepts show ideas around a light-bodied Seicento vehicle. It was also designed with the idea that it could be accompany an electric motor to create a true hybrid power-train system
Though showcased on the 'Panda Aria' and destined for Panda use in Italy, 'twin-air' has gained most profile in the retro-styled present 500. This a far larger and weightier car than the original Cinquecento (940 kg mass vs 499 kg mass) and sold to customers on its CO2 eco-credentials of 92g/km, its 'spritely' city performance due to mix of pressure-fed unit offering 85HP and low-end gearbox ratios.
Beyond homeland application, FIAT Power Train (FPT) will have created the engine with contract manufacturing aims in mind, an element of the FIAT demerger into separately listed Cars and Industrial companies, FPT itself rationally split between the two, concept work staying with Cars and production with Industrials. This then means that Cars can conceptualise other vehicles around 'twin-air' (as ICE only or as hybrid-linked) and the Industrials company can seek outside 3rd party VM customers for contract manufacture. Thus a prime remit is that they must find a new client-base for the 'twin-air' engine, a 4th engine type directed at small cars to be added to the portfolio of larger petrol and diesel engines directed primarily at commercial vehicle markets.
A notional first client would be Ford since the 500 shares its basic architecture with the Ford Ka, so theoretically it could also be installed in this city-car. But whether Ford will choose to do so when it itself has designed a small capacity CVT-linked engine is questionable. Ford will very probably want a single family engine solution which can span eco-to-performance variants given desire to recapture the sporty small car niche against Twingo, Fox/Polo etc, so would ostensibly seen an engine architecture which has in-built machining flexibility of bore & stroke dimensions, aswell as mating to various gearbox types. (This is not to say it might not wish experiment with 'twin-air' for R&D or marketing purposes on a limited installation, but the re-engineering project costs in this still fiscally tight budget environment would probably prohibit such a move).
So FIAT will need to look further afield through Europe, Japan and Asia. This means almost 'automatically' beyond the self-sufficient Germans, though there could be the possibility of a JV with VW's SEAT, harking back to the FIAT derived Spanish cars of yesteryear, though it could be potentially planning to strike at the city-car heartland (v Smart) given its lack-lustre results in B & C segments throughout the EU, this though would also strike at FIAT's ambition; if so a JV unlikely.
Contract manufacture to France would seem more tenable, though the larger Renault less likely to be courted than PSA given established links, especially so if either were to create a PSA-FIAT JV for a next generation city-car that supercedes the innovative but unloved 1007.
Further afield potential lies in India with TATA's Nano and its derivatives (such as Pixel) aswell as possibly being used as a technology base to re-liven the Maruti 800 or indeed even a new Hindustan-Premier small car. Thus 'twin-air' would follow in the Indian footsteps of Vespa Scooter, FIAT-Premier 1100 etc.
FPT will try to sell the unit to Japan's small car fraternity led by (largely Toyota owned) Daihatsu, Suzuki with its Indian small car base which itself contract manufactures for Nissan. 'twin-air' could then play a part in a possible new kei-car revolution as part of Japan's own rebuilt and its Asian production ambitions.
The greatest paper-based potential is of course China, driven by its own internally directive-led requirement to reduce CO2 in coastal cities whilst also boosting its state-owned car companies access to next generation foreign technology. The Agnelli heirs through their investment vehicle EXOR and Sergio Marchionne may well see 'twin air' as one of their prime bargaining chips to grow their own FIAT interests in China. This the typical exchange basis of market access for technology access so attractive to PRC leaders. But the real question lies with the Chinese consumer and his/her willingness to buy a 2-cylinder engine. Even if proficient as the 'twin-air' undoubtedly is, It has perceptional over-tones of 'rudimentary', akin to a motor-scooter engine. And so probably undesired even in a Chinese-badged entry-level car, let alone a foreign import vehicle from Italy, the land of Prada and the Gucci 500.
However, all this 'potential' is still far from assured with no doubt confidential conversations with these 'prime-potentials'. For the short-term FIAT must rely on itself and its close governmental connections to ensure the initial pay-back of the 'twin-air' project. The sales of the 'twin-air' undoubtedly broaden the 500's appeal, but it is realistically this is an Italian proposition for the near-term, emotionally a closer 'reflection' of the original 'Dolce Vita' icon, whilst rationally answering the by-pass need of expectantly heavier vehicle taxation demands that the cash-starved government will set.
FIAT Industrial-FPT will probably also seek to either dissolve or not-extend relations with its regional sales partners around the world (eg IVECO in the UK), creating its own international sales force so as to regain the 'lost' commission-margins on unit sales, thus boosting top and bottom-line income figures on what it sees as a high-margin cars-directed business stream. But this is still some time away before coming into fruition, much dependent on the technology strategies of other VMs, who themselves may be pressured by internal need for powertrain scale (eg Ford) or for any 're-emerged' Indian producers enticed/pressured by whole vehicle 'badge-engineering' deals which would suit their necessarily low-overhead, frugally man-powered, re-start operation.
Thus it appears that FIAT wishes to replay a well trodden path of its industrial past, understandably directing new technology development at its home market needs whilst viewing the theoretical potential for such a eco-solution amongst previous JV partners and new EM based partners. Yet the world is a very different place compared to its exports not just of the 60s and 70s, but even that of 'technology diffusion' projects in even relatively recent years.
The broad-brush PESTEL potential of the 'twin-air' engine programme no doubt makes sense when posited on paper as part of a big-picture strategy vision to split FIAT into two halves, provide respective autonomies and court investor interests. But very close inspection of the real-world conditions must be undertaken when 'twin-air' is being marketed as an installation package to others.
Ultimately the ambition of 'scale-up' or 'replacement capacity' of production depends upon not only the actual extent of 3rd party demands, but also upon practically 'lining up those ducks into a row' that produces a steady flow of demand, production consistency and thus income consistency - for not only FIAT but Italy itself. Much of the 'twin-air's' future fortune then lies outside of Marchionne's direct control, instead marketing the unit to build the FPT order-book.
Such a 'mixed market' manufacturing ambition dependent upon internal and external demand balance inherently imbues a higher level of income-stream risk both in securing the 3rd party orders and in securing them; something investors in FIAT Industrial may wish to consider when forecasting its income expectations. This income variability to the internal value-chain is not so wide within companies which produce solely for themselves, especially so if the technology developed plays a defining role as central to brand values themselves.
This is the case with BMW's more controlled and exacting attitude toward technical application, production scale-up and income stream assurance, the case presented here being its new innovative small-straight six cylinder engine.
The straight six cylinder engine has become BMW's hallmark, kept alive long after other marques 'moved-on' with V-pattern sixes – although of course BMW also uses IL4, V8 and V12; but the company legendary straight six was retained and constantly refined to provide a unique brand character of combined smooth power delivery, C of G dynamic balance and RWD vehicle packaging. The straight six then is integrated into BMW Car's DNA. But the company also has a legendary Motorcycle division, in which the Tourer-bike has carved a highly regarded idiosyncratic niche and competitive advantage.
BMW has now combined these 2 'brand levers' by way of developing a 1600cc small-block straight-six engine for instillation into its 1600GT/L motorcycle model-line. Though not a first in using a straight six on a bike – American custom-builder renowned for it – it is the first to design the engine from scratch and install the unit transversely on a bike: the all new small-bore design required to comply with the bike-frame's width itself rooted in cornering angles and mass transfer tolerances.
At first sight this may look like little more than a BMW ego-boosting exercise displaying its technical capabilities to add brand distinction to its Tourers.
But investment-auto-motives believes that Munich has intentionally build the small straight-six into its bikes as part of a new technology design, build and real-world prove-out that will eventually feed into its small cars and sports cars. The short length engine allowing for a unique transverse straight-six either front or rear 'mid-mounted', aswell as conventionally laid out in a longitudinal fashion. Here, with improved engine bay packaging, to assist either crash protection when front mounted or luggage capacity when rear mounted. Moreover, its smaller size enables the coupling of hybrid-power ancillaries.
Thus in an age of necessary engine capacity down-sizing BMW seeks to retain its mechanical heart through shrinkage rather than replacement with an alternative 'sub-standard' unit. Furthermore, it could possibly replace its current IL4s with this unit to re-apply the 'BMW standard' from city cars to 3, 4 & 5 series, additionally 6,7 & 8 series as potential hybrids.
Of particular interest would be its possible use on the MegaCity ' i ' labelled city-car product. Although engineered as a lightweight EV to conquer this customer space, as a 'fall-back' option, the engine could be physically halved and re-engineered as a 3 cylinder 800cc unit and installed into the carbon-fibre sub-structure to give what would be a ground-breaking Low Emissions Vehicle (LEV).
[NB The FT reports that E46m of German regional government funding will assist the E368m MegaCity EV project costs, this to be reviewed by EU officials to ensure that the provison of the funding adheres to EU assistance criteria. Given the perilous state of EU finances, a clause could be added which claws-back the funds if indeed the primary EV path fails to deliver and the small ICE path is followed. A mutually suitable arrangement could be that the E46m is offered with no premium to the EcB base-rate. If ultimately MegaCity production is split between EV & LEV to maximise market acceptance, a % of claw-back format should be used, based on either the split between EV & LEV installation project costs or as a ratio of the production split over the first full production year].
A 'halved' 3-pot engine then offers competition to FIAT's 'twin-air' and Daimler's Smart unit.
As can be seen, the innate advantage that BMW has over its rivals (excluding Honda) is that as a broad-spectrum vehicle producer - spanning cars, quad-bikes, motorcycles - it can explore technical synergies across vehicle genres which provide an automatic advantage in both conceptual thinking and execution. Within execution it has a 'Russian Dolls' ability to scale-up the production capacity of such transferable technologies when passed on from the motorcycles division to the cars division. (Indeed, the former can even be feasibly be used as an sub-module assembler for the cars division if the business case proved worthy and factory & labour capacity was freely available).
This separate but closely couples twin division corporate structure (excluding the 3rd finance division) thus allows for intellectual conceptualistion, R&D exploration and 'scaled production' freedoms that are rarely found within other volume manufacturers; since historically they have typically shed non-core production activities to allow for single sector business concentration, the disposed division thus financial injections to do so.
This is an understandable rational and indeed prescient to the basics of the capital markets investment philosophy, one that the magic formula of scale to set economies to set pricing power to set market share capture, all adding to unit and operating margins, profitability and ultimately shareholder yield and market capitalisation value.
This then indeed is the magical set-formula in a sector where a company or companies can effectively plan to control the arena, usually in a sector's initial flourish or after major economic disruption, when they have access to funding that allows them to buy flailing competitors. It was the approach taken by William Durant and Alfred P Sloane at GM and has been the standard expansion model ever since.
This 'American' finance-driven approach has its roots (largely in part) stemming back to 16th century Italy, this method employed by the Medici banking clan to maintain and control its various interests in various trades; the template propagated and used worldwide ever since.
Though of course German bankers are well attuned to German corporate ambitions, the country's combination of regional 'feudal-industrialist' families with onus on technical education for the masses. This has meant that the 'German' approach continues to be one of economic advancement through close-knit relationships and technical progression - even though 'feudal-industrialists' such as the Quandts are far less 'hands-on'.
[NB Unsurprisingly it was the German model that Japan looked to pre and post WW2].
This then illustrates the German attitude toward long-term technical planning which has very deep roots in supporting a diverse vehicle industry and supply base which in turn economically and literally underpin its nation's expansion; and that of many others. This industrial reach seen by VW Group's Piech's desire to create an ever broader conglomerate spanning from (Porsche) sportscars to (MAN-Scania) heavy trucks, and Daimler's vehicle portfolio which spans from (Smart) city-cars to (UniMog) off-road vehicles.
The Italian v German difference then at its heart can be simplistically distinguished as a 'micro-level' attitude versus a 'macro-level' attitude. Yet the inter-relation of a politically-led national industrial agenda and the socio-economic importance of big business - especially in apparently 'socialist' countries – add additional shades of complexity to that simplistic fundamental description.
Italy's post-war rebuild period, saw the state effectively set central-control demands of its industrialist families, the Agnelli's of course prime intermediaries. Long forgotten examples of product & brand diversification were deemed necessary to re-build Italy and maintain its momentum, 'empty segments' were to be filled by those companies with spare capacity, thus leading to (to our eyes) oddities like the Alfa Romeo T10 'Autotutto' small van. The volatile Italian economy and harsh export conditions and environments meant that FIAT eventually swallowed-up many of the flailing domestic marques (in the GM manner) , today having interests spanning Piaggio scooters & mini-trucks to of course Ferrari SpA.
This should then give it the ability to (like the Germans) explore cross-company and inter-company synergies. Yet although interesting new products do periodically arrive on the fringes – like the Piaggio MP3 tilting 3 wheeler – the FIAT's historical modus operandi toward scale-efficiencies of passenger car platforms, and one would think a core competence by now, is witnessed again with the Chrysler acquisition.
A 'scale ambition' thus dominates over ideas of truly 'engineering the brand' or 'technical visioneering', both of which require deep technical planning with long-term commitment, especially so when properly married.
The Italian-American stance is then 'corporo-sociocratic'.
The German stance is then 'aristo-technocratic'
Much of this of course influences – and is influenced by – intrinsic cultural behaviours which tend to either the short-term or long-term, this much influenced by the general attitude of company owners, whether privately held or publicly held or if mixed with institutional investors the critical attitudinal alignment of mingled-ownership. Since these form the primary raison d'etre regards the appointment of specific Chairman, CEO and senior executives and so the very structure of the company.
It is here the innate differences between BMW AG and FIAT (Autos & Industrials) become apparent. Specifically, the relative simplicity of BMW's 3 divisional entity compared against FIAT's conglomerate complexity, now its dual company, multi-divisional form.
That simplicity allowed for a rapid BMW rebuild in the 1960s after its 1950s financial woes, it allowed the Quandt family to exercise acumen when appointing senior executives ever since, and allowed it to act unhindered when it seized Rover Group to capture MINI, sell-on the unwanted brands and acquire Rolls-Royce. It has allowed it to build the Motorcycle division slowly but surely taking 'ownership' of Tourer and 'Dakar' segments. And critically it allowed for total control of the key arenas of R&D and financial services, thereby creating a systemic and coalescing industrial eco-system for itself, its stakeholders and as a contributor to Germany at large.
Yet without a stable political, economic, financing and social environment BMW would have faltered. A post-war stability was engendered through West German unity and the 'protestant work ethic' (to quote Prof Ferguson) which underpinned the rising value of the Deutschmark. That allowed for an 'easier' well managed incorporation of the GDR in 1989 whilst the FX currency advantage promoted a favourable accommodation of the new Euro in 1999, which coupled to booming EM export markets over the last decade. A 60 year era of general domestic and international stability by which BMW itself flourished.
Historically, it could be argued that FIAT has been of lesser service to itself than to the Agnelli family, the Italian finance community or indeed the immediate government-led policy needs of Italy itself. But then as the national champion it was perhaps always given greater operational freedoms and indeed policy-led directions and assistance than would have been the case elsewhere. This especially so in old Eastern bloc states where FIAT had become a major (often sole) automaker. These circumstances gave it a form of insularity and pseudo-protection for many decades, but the massive globalisation era of 1990s & 2000s and collapse of CIS markets highlighted just how competitively remote FIAT had become on the world stage.
It too suffered from the instability of mid-late 20th century Italy, where politics where as volatile as the Italian economy and thus the Lira. Though consumerism grew a general unease amongst the populace & workforce meant that their emotional investment remained regional & local. FIAT's national geographic reach meant that it became a type of de-facto 'nanny state', a mentality only now eroding. However, its now abandoned role of corporate welfare provider along with the concerning condition of national finances threatens social stability; public-sector budget contraction and necessary private and corporate de-leveraging means increased societal angst.
The powering of the national economic agenda within the ever more complex and less obvious international back-drop is of course the primary challenge facing EU member and western governments. Concerned about loosing the headway gained over 2009-11, the bond markets are informally but effectively constantly 'stress-testing' the innate worth of all EU states'; hence: 'core', 'soft-core' and 'periphery'.
Beyond the detail of country-specific econometrics, this then puts each of the countries placed within those 'bands' on a different 'investment footing'. Whilst those place in 'core' and 'soft-core' realms have the foundational strength to re-buoy – resulting from the 'circularity of corporate activity, more dynamic labour markets and educational/training structures - the real concerns lay with the acute socio-economic structures of the 'periphery' where corporate activity is heavily dented and those educated or young will typically seek opportunity outside the country or region. This concern was all to obvious by the lacklustre reaction at the 'Grecian Fire-Sale' meeting held at the Claridges hotel in London only a few weeks ago, when officials sought asset valuations for the 25% of national assets offered for privatisation.
As multi-national companies with broad geographic foot-prints, the destiny of BMW and FIAT are of course not wholly predetermined by the national economic outlook, though it must be noted that beside Renault there are perhaps no other volume auto-manufacturers whose fortunes are as heavily dictated by domestic sales.
At 'surface reading' though BMW and FIAT fortunes look to be divergent.
Like VW and Daimler, whilst it continues to grow internationally, BMW has the innate 'feudal-technocratic' incentive to remain an intrinsic part of the German economy, one which even under possible EU collapse will feed-into and feed-from the global economy.
FIAT must attune its products to a deflating Italy whilst simultaneously trying to maintain and grow its Latin American position. FIAT's Latin-link was undoubtedly part of Washington's reason to approve the FIAT-Chrysler deal, but as FIAT-Chrysler the company will be dependent upon Washington largesse – in the form of QE3 or new incentive schemes – to maintain and its US sales base.
The truly interesting note to consider was that China's Premier visited the UK, Germany & Hungary, effectively discounting Italy and the periphery; though China has offered the idea of support if necessary.
This then leaves the US to effectively help to prop-up Italy, by feeding its heavily pressured debt markets with a possibly unavoidable QE3 that would also help Ireland (given a reading between the lines of Obama's speech in Ireland.
Thus, today Northern Europe ostensibly looks East.
Whilst Southern Europe and the 'periphery' looks West.
Not quite the ideological divide historically seen between the Germanic tribes and Roman Empire, but apparent nonetheless.
This divide sets out the possibility of another notional route; one which Sarkozy 'interestingly' predicated as a Mediterranean economic bloc. The 'EU periphery' to coalesce with those newly re-formed countries that constitute the the 'Arab Spring'.
Leaderships of the 'junk-status' countries then have a trio of options, each progression path with numerous pros and cons. But whichever path is chosen the reality is that their countries cannot avoid the task of restructuring to make sense relative to a new economic bloc order and that inside a new global order.
The German-led route would involve broad-brush industrial planning by which Greece, Italy etc would essentially subsume themselves, but in return gain critical FDI and technology orientated projects which would vitally enhance both their commercial platform (especially if tied to privatised industries) and boost educational change.
The American-led route offers liquidity made available from continued Federal Reserve borrowing, yet the necessary privatisation and de-leveraging path would be more quickly initiated, longer ran (to extract deep value) and arguably harder felt, since such countries would have to follow in the train of the US which itself is on its own mighty devaluation path. This might require that resurrected 'old' currencies be informally tied to the the US$, with those countries of true concern directly pegged, so as to provide Washington with FDI and import good pricing assurances.
The Med-Bloc-led route offers the concept of a newly created world, one in which the 'EU periphery' could act as the lead instigators. But the massive cost-base chasm that exist between old-Europe and new-MENA would need to be leveled as soon as possible to ensure political harmony, which would require a quick and hard de-leveraging process that would generate the spectre of 'suffering' Christians compared to 'up-lifted' Muslims; this then creating social angst. Moreover, the argument that the periphery could re-run an EU type project for themselves whilst also containing their own national woes appears feeble; with additionally few major corporations akin to FIAT, Santander etc to assist in its development.
[NB MENA's economic development then seems more likely through Northern European &/or full EU, UK and Scandinavian involvement]
As important component parts of their respective homeland economies, BMW and FIAT presently face very different futures. These scenarios and their fortunes result from the innate differences between the respective 'far horizon technical planning' and 'mid-horizon financial planning' cultures, intrinsic to country and company.
Yet despite the differences, they will continue to act as the 'connecting rods' between their own 'mechanical engines' and the broader 'economic engine'. FIAT's supercharged 'twin-air' unit is a good metaphor for the listing of its Cars and Industrials divisions. And BMW's mini-bloc straight- six could be an allegory of Europe's 'senior 6' members to provide a balanced delivery of soft-power in order to drive the EU-project straight and true.
European woes continued this week as the contagion-effect of national debt worries spread across from Greece into Italy, participants within the capital markets are concerned about remaining in situ with large exposure, understandably skittish about being ultimately forced by Brussels to take the 'creditor haircuts' which look increasingly necessary on to support national well-being and EU unity.
This week saw the markets react to Italy's exposure as the world's 3rd biggest debt market at E 1.6 trillion ($2.23 tr), one in which liquidity has become less 'fluid' and more 'viscous' under the skittish conditions, Italy itself now viewed as moved from 'soft core' position to 'peripheral', this reflected by a 18% appreciation of its 10-year bond yield since 1st January (peaking at 20%) vs Germany's -5%.
Thus in effect we see a 're-rating' of the French and Italian economies, the former also unfortunately tied-into Italy as perhaps the biggest creditor within the Italian debt market, itself holding $393 billion.
Long-term capital markets confidence in a nation's debt servicing capabilities is of course a construct of that country's structural economic strength and the political ability to withdraw monies from households, firms and public expenditure. As is obvious, the stronger the economy the less pain induced. The weaker the economy the more pain, often consequentially creating a negative downward spiral in which the very government revenues themselves undergo real-world contraction, so de-stabilising the ability to pay the national debt.
[NB Though 'in denial' this is now the USA's emergent position].
Thus we see that Germany and Italy presently stand-on contrasting 'solid' and 'crumbling' economic foundations, the stereo-types, proving true, and presenting the administrations of both countries with respective macro and micro challenges.
Whilst an increased 'freedom of capital' through international exchanges has propelled globalisation, the very structure of a country's own commercial foundations and its financial exposure has now come to the fore for not just Germany and Italy, but for all in the West.
'Economic planning' is a term more associated with China's state-apparatus and those countries that were once deemed '3rd world', but it is a notion which remains subtly implicit in Scandinavia and Germany whilst seemingly gladly abandoned by southern Europe after post-WW2 reconstruction and 'rural-region improvement; effectively ended by the early-1980s.
However, the collapse of Communism meant that West Germany (FDR) had to plan for the 'digestion' of the old East Germany (GDR), thus in reality economic planning has been intrinsic to the Germany governmental mindset since 1945; indeed arguably since the early 1930s hyper-inflation and so since 1936. During that era of course Germany and Italy formed ever closer technical ties in the hope for forming an influential economic bloc of its own – this ambition assisted by annexation, effectively a land & commodities seizure - thus concerning Britain and leading to WW2.
Today the picture looks very different, economic ties are and have been maintained - with examples such as VW's purchase of the sportscar maker Lamborghini SpA, the styling house Giugiaro & intent toward Alfa Romeo – but that relationship has been massively over-shadowed by Germany & China, the recent $15bn trade agreement.
The ability to understand and indeed form the future has been the key to a country's commercial and global success; the industrial age reflected by Britain's initial iron-work innovations through to Japan's more recent innovations with hybrid-propulsion; both technical advances commercialised, in turn providing national power at home and abroad. Both examples quickly integrated into broader realms of formalised national economic planning by forward-looking governments. However, economic advancement is typically an evolutional process reliant upon the refinement and scale-efficiencies of conventional technologies that sit within an envelope dictated by the PESTEL norm, and so the internal combustion engine today still sits unequivocally centre stage.
Advancement of ICE from 2-stroke to 4-stroke, to hemispherical cylinder heads, to aluminium & plastics applications, to lean-burn technologies to cylinder de-activation and more means that ongoing MPG & Km/L improvements – along with lightweight body structures – mean that evolutional efficiencies can be typically engineered into future generation vehicles. This 'steady state' improvement process then in tune with real-world infrastructure and allied industries and for the firm itself critically not disruptive to past, present and future CapEx plans.
The planning of new generation engine families sits at the heart of a 'full-span' automotive producer, and encompasses a broad realm of internal and supplier participants. Given an approximate 20+ year life-span of the typical 'family' of engines (ie derived from the same prime parts) the need to plot a convincing path for both the engine's programme delivery and its 'life-cycle' applications is critical. This ideally woven into the broader (implicit or explicit) national economic plan.
[NB perhaps the simplest prime example is the original VW Beetle frame and its boxer engine, designed initially to provide spin-off variants for military use, with post-war applications in van and coupe forms. This a relatively simple are wholly aligned example of the technical planning behind war-time and peace-time economic planning].
However, there is no doubt that the ability to 'synergise' the technical planning of a multi-national 'homeland champion' firm and the domestic & foreign economic ambitions of government is a critical exercise.
And it is here, in the ICE power-train arena, that the relatively recent launches and announcements of FIAT's 'twin-air' engine and BMW's 'small-straight 6' provide interesting cases for evaluation that reflect the innate planning mindset difference between two structurally different companies from two culturally different homelands.
The 2 cylinder 875cc 'twin-air' is a small capacity super-charged unit developed by FIAT's powertrain company FPT, one with philosophical historic links to the original 2-cylinder Topolino (Little Mouse) and Nouvo Cinquecento (500). Thus it was intentionally designed for small car use, but as of yet the ideal lightweight small car has yet to be developed, though past concepts show ideas around a light-bodied Seicento vehicle. It was also designed with the idea that it could be accompany an electric motor to create a true hybrid power-train system
Though showcased on the 'Panda Aria' and destined for Panda use in Italy, 'twin-air' has gained most profile in the retro-styled present 500. This a far larger and weightier car than the original Cinquecento (940 kg mass vs 499 kg mass) and sold to customers on its CO2 eco-credentials of 92g/km, its 'spritely' city performance due to mix of pressure-fed unit offering 85HP and low-end gearbox ratios.
Beyond homeland application, FIAT Power Train (FPT) will have created the engine with contract manufacturing aims in mind, an element of the FIAT demerger into separately listed Cars and Industrial companies, FPT itself rationally split between the two, concept work staying with Cars and production with Industrials. This then means that Cars can conceptualise other vehicles around 'twin-air' (as ICE only or as hybrid-linked) and the Industrials company can seek outside 3rd party VM customers for contract manufacture. Thus a prime remit is that they must find a new client-base for the 'twin-air' engine, a 4th engine type directed at small cars to be added to the portfolio of larger petrol and diesel engines directed primarily at commercial vehicle markets.
A notional first client would be Ford since the 500 shares its basic architecture with the Ford Ka, so theoretically it could also be installed in this city-car. But whether Ford will choose to do so when it itself has designed a small capacity CVT-linked engine is questionable. Ford will very probably want a single family engine solution which can span eco-to-performance variants given desire to recapture the sporty small car niche against Twingo, Fox/Polo etc, so would ostensibly seen an engine architecture which has in-built machining flexibility of bore & stroke dimensions, aswell as mating to various gearbox types. (This is not to say it might not wish experiment with 'twin-air' for R&D or marketing purposes on a limited installation, but the re-engineering project costs in this still fiscally tight budget environment would probably prohibit such a move).
So FIAT will need to look further afield through Europe, Japan and Asia. This means almost 'automatically' beyond the self-sufficient Germans, though there could be the possibility of a JV with VW's SEAT, harking back to the FIAT derived Spanish cars of yesteryear, though it could be potentially planning to strike at the city-car heartland (v Smart) given its lack-lustre results in B & C segments throughout the EU, this though would also strike at FIAT's ambition; if so a JV unlikely.
Contract manufacture to France would seem more tenable, though the larger Renault less likely to be courted than PSA given established links, especially so if either were to create a PSA-FIAT JV for a next generation city-car that supercedes the innovative but unloved 1007.
Further afield potential lies in India with TATA's Nano and its derivatives (such as Pixel) aswell as possibly being used as a technology base to re-liven the Maruti 800 or indeed even a new Hindustan-Premier small car. Thus 'twin-air' would follow in the Indian footsteps of Vespa Scooter, FIAT-Premier 1100 etc.
FPT will try to sell the unit to Japan's small car fraternity led by (largely Toyota owned) Daihatsu, Suzuki with its Indian small car base which itself contract manufactures for Nissan. 'twin-air' could then play a part in a possible new kei-car revolution as part of Japan's own rebuilt and its Asian production ambitions.
The greatest paper-based potential is of course China, driven by its own internally directive-led requirement to reduce CO2 in coastal cities whilst also boosting its state-owned car companies access to next generation foreign technology. The Agnelli heirs through their investment vehicle EXOR and Sergio Marchionne may well see 'twin air' as one of their prime bargaining chips to grow their own FIAT interests in China. This the typical exchange basis of market access for technology access so attractive to PRC leaders. But the real question lies with the Chinese consumer and his/her willingness to buy a 2-cylinder engine. Even if proficient as the 'twin-air' undoubtedly is, It has perceptional over-tones of 'rudimentary', akin to a motor-scooter engine. And so probably undesired even in a Chinese-badged entry-level car, let alone a foreign import vehicle from Italy, the land of Prada and the Gucci 500.
However, all this 'potential' is still far from assured with no doubt confidential conversations with these 'prime-potentials'. For the short-term FIAT must rely on itself and its close governmental connections to ensure the initial pay-back of the 'twin-air' project. The sales of the 'twin-air' undoubtedly broaden the 500's appeal, but it is realistically this is an Italian proposition for the near-term, emotionally a closer 'reflection' of the original 'Dolce Vita' icon, whilst rationally answering the by-pass need of expectantly heavier vehicle taxation demands that the cash-starved government will set.
FIAT Industrial-FPT will probably also seek to either dissolve or not-extend relations with its regional sales partners around the world (eg IVECO in the UK), creating its own international sales force so as to regain the 'lost' commission-margins on unit sales, thus boosting top and bottom-line income figures on what it sees as a high-margin cars-directed business stream. But this is still some time away before coming into fruition, much dependent on the technology strategies of other VMs, who themselves may be pressured by internal need for powertrain scale (eg Ford) or for any 're-emerged' Indian producers enticed/pressured by whole vehicle 'badge-engineering' deals which would suit their necessarily low-overhead, frugally man-powered, re-start operation.
Thus it appears that FIAT wishes to replay a well trodden path of its industrial past, understandably directing new technology development at its home market needs whilst viewing the theoretical potential for such a eco-solution amongst previous JV partners and new EM based partners. Yet the world is a very different place compared to its exports not just of the 60s and 70s, but even that of 'technology diffusion' projects in even relatively recent years.
The broad-brush PESTEL potential of the 'twin-air' engine programme no doubt makes sense when posited on paper as part of a big-picture strategy vision to split FIAT into two halves, provide respective autonomies and court investor interests. But very close inspection of the real-world conditions must be undertaken when 'twin-air' is being marketed as an installation package to others.
Ultimately the ambition of 'scale-up' or 'replacement capacity' of production depends upon not only the actual extent of 3rd party demands, but also upon practically 'lining up those ducks into a row' that produces a steady flow of demand, production consistency and thus income consistency - for not only FIAT but Italy itself. Much of the 'twin-air's' future fortune then lies outside of Marchionne's direct control, instead marketing the unit to build the FPT order-book.
Such a 'mixed market' manufacturing ambition dependent upon internal and external demand balance inherently imbues a higher level of income-stream risk both in securing the 3rd party orders and in securing them; something investors in FIAT Industrial may wish to consider when forecasting its income expectations. This income variability to the internal value-chain is not so wide within companies which produce solely for themselves, especially so if the technology developed plays a defining role as central to brand values themselves.
This is the case with BMW's more controlled and exacting attitude toward technical application, production scale-up and income stream assurance, the case presented here being its new innovative small-straight six cylinder engine.
The straight six cylinder engine has become BMW's hallmark, kept alive long after other marques 'moved-on' with V-pattern sixes – although of course BMW also uses IL4, V8 and V12; but the company legendary straight six was retained and constantly refined to provide a unique brand character of combined smooth power delivery, C of G dynamic balance and RWD vehicle packaging. The straight six then is integrated into BMW Car's DNA. But the company also has a legendary Motorcycle division, in which the Tourer-bike has carved a highly regarded idiosyncratic niche and competitive advantage.
BMW has now combined these 2 'brand levers' by way of developing a 1600cc small-block straight-six engine for instillation into its 1600GT/L motorcycle model-line. Though not a first in using a straight six on a bike – American custom-builder renowned for it – it is the first to design the engine from scratch and install the unit transversely on a bike: the all new small-bore design required to comply with the bike-frame's width itself rooted in cornering angles and mass transfer tolerances.
At first sight this may look like little more than a BMW ego-boosting exercise displaying its technical capabilities to add brand distinction to its Tourers.
But investment-auto-motives believes that Munich has intentionally build the small straight-six into its bikes as part of a new technology design, build and real-world prove-out that will eventually feed into its small cars and sports cars. The short length engine allowing for a unique transverse straight-six either front or rear 'mid-mounted', aswell as conventionally laid out in a longitudinal fashion. Here, with improved engine bay packaging, to assist either crash protection when front mounted or luggage capacity when rear mounted. Moreover, its smaller size enables the coupling of hybrid-power ancillaries.
Thus in an age of necessary engine capacity down-sizing BMW seeks to retain its mechanical heart through shrinkage rather than replacement with an alternative 'sub-standard' unit. Furthermore, it could possibly replace its current IL4s with this unit to re-apply the 'BMW standard' from city cars to 3, 4 & 5 series, additionally 6,7 & 8 series as potential hybrids.
Of particular interest would be its possible use on the MegaCity ' i ' labelled city-car product. Although engineered as a lightweight EV to conquer this customer space, as a 'fall-back' option, the engine could be physically halved and re-engineered as a 3 cylinder 800cc unit and installed into the carbon-fibre sub-structure to give what would be a ground-breaking Low Emissions Vehicle (LEV).
[NB The FT reports that E46m of German regional government funding will assist the E368m MegaCity EV project costs, this to be reviewed by EU officials to ensure that the provison of the funding adheres to EU assistance criteria. Given the perilous state of EU finances, a clause could be added which claws-back the funds if indeed the primary EV path fails to deliver and the small ICE path is followed. A mutually suitable arrangement could be that the E46m is offered with no premium to the EcB base-rate. If ultimately MegaCity production is split between EV & LEV to maximise market acceptance, a % of claw-back format should be used, based on either the split between EV & LEV installation project costs or as a ratio of the production split over the first full production year].
A 'halved' 3-pot engine then offers competition to FIAT's 'twin-air' and Daimler's Smart unit.
As can be seen, the innate advantage that BMW has over its rivals (excluding Honda) is that as a broad-spectrum vehicle producer - spanning cars, quad-bikes, motorcycles - it can explore technical synergies across vehicle genres which provide an automatic advantage in both conceptual thinking and execution. Within execution it has a 'Russian Dolls' ability to scale-up the production capacity of such transferable technologies when passed on from the motorcycles division to the cars division. (Indeed, the former can even be feasibly be used as an sub-module assembler for the cars division if the business case proved worthy and factory & labour capacity was freely available).
This separate but closely couples twin division corporate structure (excluding the 3rd finance division) thus allows for intellectual conceptualistion, R&D exploration and 'scaled production' freedoms that are rarely found within other volume manufacturers; since historically they have typically shed non-core production activities to allow for single sector business concentration, the disposed division thus financial injections to do so.
This is an understandable rational and indeed prescient to the basics of the capital markets investment philosophy, one that the magic formula of scale to set economies to set pricing power to set market share capture, all adding to unit and operating margins, profitability and ultimately shareholder yield and market capitalisation value.
This then indeed is the magical set-formula in a sector where a company or companies can effectively plan to control the arena, usually in a sector's initial flourish or after major economic disruption, when they have access to funding that allows them to buy flailing competitors. It was the approach taken by William Durant and Alfred P Sloane at GM and has been the standard expansion model ever since.
This 'American' finance-driven approach has its roots (largely in part) stemming back to 16th century Italy, this method employed by the Medici banking clan to maintain and control its various interests in various trades; the template propagated and used worldwide ever since.
Though of course German bankers are well attuned to German corporate ambitions, the country's combination of regional 'feudal-industrialist' families with onus on technical education for the masses. This has meant that the 'German' approach continues to be one of economic advancement through close-knit relationships and technical progression - even though 'feudal-industrialists' such as the Quandts are far less 'hands-on'.
[NB Unsurprisingly it was the German model that Japan looked to pre and post WW2].
This then illustrates the German attitude toward long-term technical planning which has very deep roots in supporting a diverse vehicle industry and supply base which in turn economically and literally underpin its nation's expansion; and that of many others. This industrial reach seen by VW Group's Piech's desire to create an ever broader conglomerate spanning from (Porsche) sportscars to (MAN-Scania) heavy trucks, and Daimler's vehicle portfolio which spans from (Smart) city-cars to (UniMog) off-road vehicles.
The Italian v German difference then at its heart can be simplistically distinguished as a 'micro-level' attitude versus a 'macro-level' attitude. Yet the inter-relation of a politically-led national industrial agenda and the socio-economic importance of big business - especially in apparently 'socialist' countries – add additional shades of complexity to that simplistic fundamental description.
Italy's post-war rebuild period, saw the state effectively set central-control demands of its industrialist families, the Agnelli's of course prime intermediaries. Long forgotten examples of product & brand diversification were deemed necessary to re-build Italy and maintain its momentum, 'empty segments' were to be filled by those companies with spare capacity, thus leading to (to our eyes) oddities like the Alfa Romeo T10 'Autotutto' small van. The volatile Italian economy and harsh export conditions and environments meant that FIAT eventually swallowed-up many of the flailing domestic marques (in the GM manner) , today having interests spanning Piaggio scooters & mini-trucks to of course Ferrari SpA.
This should then give it the ability to (like the Germans) explore cross-company and inter-company synergies. Yet although interesting new products do periodically arrive on the fringes – like the Piaggio MP3 tilting 3 wheeler – the FIAT's historical modus operandi toward scale-efficiencies of passenger car platforms, and one would think a core competence by now, is witnessed again with the Chrysler acquisition.
A 'scale ambition' thus dominates over ideas of truly 'engineering the brand' or 'technical visioneering', both of which require deep technical planning with long-term commitment, especially so when properly married.
The Italian-American stance is then 'corporo-sociocratic'.
The German stance is then 'aristo-technocratic'
Much of this of course influences – and is influenced by – intrinsic cultural behaviours which tend to either the short-term or long-term, this much influenced by the general attitude of company owners, whether privately held or publicly held or if mixed with institutional investors the critical attitudinal alignment of mingled-ownership. Since these form the primary raison d'etre regards the appointment of specific Chairman, CEO and senior executives and so the very structure of the company.
It is here the innate differences between BMW AG and FIAT (Autos & Industrials) become apparent. Specifically, the relative simplicity of BMW's 3 divisional entity compared against FIAT's conglomerate complexity, now its dual company, multi-divisional form.
That simplicity allowed for a rapid BMW rebuild in the 1960s after its 1950s financial woes, it allowed the Quandt family to exercise acumen when appointing senior executives ever since, and allowed it to act unhindered when it seized Rover Group to capture MINI, sell-on the unwanted brands and acquire Rolls-Royce. It has allowed it to build the Motorcycle division slowly but surely taking 'ownership' of Tourer and 'Dakar' segments. And critically it allowed for total control of the key arenas of R&D and financial services, thereby creating a systemic and coalescing industrial eco-system for itself, its stakeholders and as a contributor to Germany at large.
Yet without a stable political, economic, financing and social environment BMW would have faltered. A post-war stability was engendered through West German unity and the 'protestant work ethic' (to quote Prof Ferguson) which underpinned the rising value of the Deutschmark. That allowed for an 'easier' well managed incorporation of the GDR in 1989 whilst the FX currency advantage promoted a favourable accommodation of the new Euro in 1999, which coupled to booming EM export markets over the last decade. A 60 year era of general domestic and international stability by which BMW itself flourished.
Historically, it could be argued that FIAT has been of lesser service to itself than to the Agnelli family, the Italian finance community or indeed the immediate government-led policy needs of Italy itself. But then as the national champion it was perhaps always given greater operational freedoms and indeed policy-led directions and assistance than would have been the case elsewhere. This especially so in old Eastern bloc states where FIAT had become a major (often sole) automaker. These circumstances gave it a form of insularity and pseudo-protection for many decades, but the massive globalisation era of 1990s & 2000s and collapse of CIS markets highlighted just how competitively remote FIAT had become on the world stage.
It too suffered from the instability of mid-late 20th century Italy, where politics where as volatile as the Italian economy and thus the Lira. Though consumerism grew a general unease amongst the populace & workforce meant that their emotional investment remained regional & local. FIAT's national geographic reach meant that it became a type of de-facto 'nanny state', a mentality only now eroding. However, its now abandoned role of corporate welfare provider along with the concerning condition of national finances threatens social stability; public-sector budget contraction and necessary private and corporate de-leveraging means increased societal angst.
The powering of the national economic agenda within the ever more complex and less obvious international back-drop is of course the primary challenge facing EU member and western governments. Concerned about loosing the headway gained over 2009-11, the bond markets are informally but effectively constantly 'stress-testing' the innate worth of all EU states'; hence: 'core', 'soft-core' and 'periphery'.
Beyond the detail of country-specific econometrics, this then puts each of the countries placed within those 'bands' on a different 'investment footing'. Whilst those place in 'core' and 'soft-core' realms have the foundational strength to re-buoy – resulting from the 'circularity of corporate activity, more dynamic labour markets and educational/training structures - the real concerns lay with the acute socio-economic structures of the 'periphery' where corporate activity is heavily dented and those educated or young will typically seek opportunity outside the country or region. This concern was all to obvious by the lacklustre reaction at the 'Grecian Fire-Sale' meeting held at the Claridges hotel in London only a few weeks ago, when officials sought asset valuations for the 25% of national assets offered for privatisation.
As multi-national companies with broad geographic foot-prints, the destiny of BMW and FIAT are of course not wholly predetermined by the national economic outlook, though it must be noted that beside Renault there are perhaps no other volume auto-manufacturers whose fortunes are as heavily dictated by domestic sales.
At 'surface reading' though BMW and FIAT fortunes look to be divergent.
Like VW and Daimler, whilst it continues to grow internationally, BMW has the innate 'feudal-technocratic' incentive to remain an intrinsic part of the German economy, one which even under possible EU collapse will feed-into and feed-from the global economy.
FIAT must attune its products to a deflating Italy whilst simultaneously trying to maintain and grow its Latin American position. FIAT's Latin-link was undoubtedly part of Washington's reason to approve the FIAT-Chrysler deal, but as FIAT-Chrysler the company will be dependent upon Washington largesse – in the form of QE3 or new incentive schemes – to maintain and its US sales base.
The truly interesting note to consider was that China's Premier visited the UK, Germany & Hungary, effectively discounting Italy and the periphery; though China has offered the idea of support if necessary.
This then leaves the US to effectively help to prop-up Italy, by feeding its heavily pressured debt markets with a possibly unavoidable QE3 that would also help Ireland (given a reading between the lines of Obama's speech in Ireland.
Thus, today Northern Europe ostensibly looks East.
Whilst Southern Europe and the 'periphery' looks West.
Not quite the ideological divide historically seen between the Germanic tribes and Roman Empire, but apparent nonetheless.
This divide sets out the possibility of another notional route; one which Sarkozy 'interestingly' predicated as a Mediterranean economic bloc. The 'EU periphery' to coalesce with those newly re-formed countries that constitute the the 'Arab Spring'.
Leaderships of the 'junk-status' countries then have a trio of options, each progression path with numerous pros and cons. But whichever path is chosen the reality is that their countries cannot avoid the task of restructuring to make sense relative to a new economic bloc order and that inside a new global order.
The German-led route would involve broad-brush industrial planning by which Greece, Italy etc would essentially subsume themselves, but in return gain critical FDI and technology orientated projects which would vitally enhance both their commercial platform (especially if tied to privatised industries) and boost educational change.
The American-led route offers liquidity made available from continued Federal Reserve borrowing, yet the necessary privatisation and de-leveraging path would be more quickly initiated, longer ran (to extract deep value) and arguably harder felt, since such countries would have to follow in the train of the US which itself is on its own mighty devaluation path. This might require that resurrected 'old' currencies be informally tied to the the US$, with those countries of true concern directly pegged, so as to provide Washington with FDI and import good pricing assurances.
The Med-Bloc-led route offers the concept of a newly created world, one in which the 'EU periphery' could act as the lead instigators. But the massive cost-base chasm that exist between old-Europe and new-MENA would need to be leveled as soon as possible to ensure political harmony, which would require a quick and hard de-leveraging process that would generate the spectre of 'suffering' Christians compared to 'up-lifted' Muslims; this then creating social angst. Moreover, the argument that the periphery could re-run an EU type project for themselves whilst also containing their own national woes appears feeble; with additionally few major corporations akin to FIAT, Santander etc to assist in its development.
[NB MENA's economic development then seems more likely through Northern European &/or full EU, UK and Scandinavian involvement]
As important component parts of their respective homeland economies, BMW and FIAT presently face very different futures. These scenarios and their fortunes result from the innate differences between the respective 'far horizon technical planning' and 'mid-horizon financial planning' cultures, intrinsic to country and company.
Yet despite the differences, they will continue to act as the 'connecting rods' between their own 'mechanical engines' and the broader 'economic engine'. FIAT's supercharged 'twin-air' unit is a good metaphor for the listing of its Cars and Industrials divisions. And BMW's mini-bloc straight- six could be an allegory of Europe's 'senior 6' members to provide a balanced delivery of soft-power in order to drive the EU-project straight and true.
Thursday, 7 July 2011
Micro Level Trends – Corporate Tactics – Competition & Ethics in a Slowed Era
The much improved global TIV seen through-out 2009-10 appears to be somewhat undermined in the short-term by the fiscal contraction moves of China. Whilst long-term optimism is undiminished and large CapEx projects adding to (or indeed re-filling) global capacity continue, a planned slowing of Chinese growth has obvious consequences for not only the domestic demand - which had hitherto off-set the previous Western slowdown – but also commodity exporting EM regions own car-markets given that their economies rely so heavily on Beijing's economic decisions.
As such the growth trends of global TIV will slow and auto-companies must re-play (though to a far lesser degree) the corporate re-alignment exercise. An exercise which must re-balance: production capacity, factory & dealer inventory levels, the client-supply rate and residual pricing. The slackening of demand-pull then has a knock-on effect through the supply chain which must be orchestrated in an orderly manner so as to maintain revenue and earnings traction.
Whereas the Western economic rebound allowed manufacturers to 'ride the wave', boosted by the previoulsy heavy round of cost-cutting, the short-term requires greater 'nuance and fettle' both internally and externally; as opposed to the previous need for swathes of change to ensure previous survival and upturn reaction.
Every BoD well recognises that the enlarged pie of the marketplace will consequentially shrink, thus must either try to maintain market-share or seek bold expansion, and consequentially every BoD and their managers will be re-assessing and re-defining the core of their 'competitive spirit'.
Exactly how that translates is dependent upon the company's own cultural personality, highly influenced by that of its senior individuals. Yet the ever raised stakes of corporate success or failure typically sees a stretching of the moral-code of competitive action, this witnessed especially so in the arena of tactical initiatives intended to undermine a competitor large or small, and argued internally as on the 'supporting-fringe' of the overall corporate strategic ambition.
Hence today, with automakers facing still distressed consumers, a buyer's market in the fleet sector and cautiousness in new-car plans amongst company directors, both volume manufacturers, intermediate manufacturers (such as Jaguar and Aston Martin) and niche producers are having to rely ever more so on marketing and PR to do much of the 'heavy-lifting' required to maintain unit sales.
Marketing and PR are essentially about broadcasting messages, and more often than not a very singular message, to external audiences and various stake-holders. These messages cover a broad span of requirement and intent: from the filing of company activity reports to regulatory bodies or stock exchanges as legal obligation, to the construct of ethereal value-systems that underpin the brand, to the sphere of hard-hitting, contentious issue-based messages that seek to engender an emotional reaction.
Such messages rely upon a mix of pertinence and boldness, but can be separated by their ultimate intent: whether to positively bolster one's own company or to negatively undermine that of the prime competition.
The act of 'antagonism' seems to have been part of the conflict psyche since the dawn of time, part of the pre-human condition which in its more sophisticated form has unfortunately become an unfortunate staple of the modern society and so corporate world. This psychological tool honed by some from the school playground all the way through to the environs of middle-management, in a belief that corporate life reflects war-like conditions. The teachings of Sun-Tzu and other war-craft gurus become the prevailing attitude; dramatising the corporate arena that of a Roman arena.
Hence, the use of contrived antagonism should be considered deeply beforehand, since the underlying implicit messages sent to the competitor is that of creative bankruptcy and self-regarded weakness; let alone the less than virtuous moral and ethical stance.
Of course 'antagonism' per se comes in various forms, all of which sit at varying positions along a broad grey-scale spectrum, from the application of the light-hearted message to that of the dark-hearted.
The following provide four examples where antagonism – at varying points of that grey-scale - has been intentionally deployed to varying degrees of ultimate 'success':
- Audi's confrontational poster campaign versus BMW
- Jaguar's 'hostile-bid' launch of the new XF diesel
- Aston Martin's use of the 'JOTA' moniker
- VW Group's stated desire to acquire FIAT's Alfa Romeo
Audi -
In its least extreme guise antagonism is conveyed as light-hearted banter within peer-company advertising, local advertising standards panels the arbiter of advertising standards rules. A well known American example being the poster/ bill-board-battle between Audi and BMW previously located on Santa Monica Boulevard. Audi used a regular sized bill-board for its then new A4 campaign which posited “Your move BMW”.
Recognising the locational importance of the site, prime for stationary rush hour drivers, BMW 'replied' by temporarily installing a neighbouring bill-board five times the size of Audi's, answering with the strap-line “Checkmate”.
In reaction again, Audi stated “Chess? No thanks, I'd Rather be Driving”. A lacklustre and frankly embarrassing response.
The initial antagonistic strike therefor back-fired heavily.
Jaguar -
Since the provision of corporate life-support from TATA Motors in 2008 (with its £2.3bn acquisition of JLR & £1bn injection) Jaguar Cars has been under mounting pressure to demonstrate its mettle, especially so as the smaller sibling to Land-Rover but with larger potential market-share, and even more since the announcement that an annualised average of £1bn of investment will be ploughed-into JLR over the coming 5 years. JLR is touted to have been TATA's bread-winner in 2010, contributing £1.04bn to its FY2010 results. JLR margins were announced as comparable to that of the German trio – even that of Porsche - but of this, the major contributor was very probably Land Rover given its ASEAN sales success and level of amortised cost. Also, investment-auto-motives suspects that this level of turnaround would have been internally supported to boost JLR's net financial figures as a precursor to the notion of a 2012 IPO, as reported by India's 'Economic Times'.
Beyond Jaguar's restricted 3-car product range, which is far smaller than the segmentally broader & deeper German marques, it also faces the challenge of trying to rebuild its innate 'brand equity' to match its historic 'brand profile'. Jaguar then has no alternative but to be seen to fight hard, by both its paymasters TATA, and for realistic survival in very competitive premium car segments.
As part of this demonstration of worthiness is decided to 'press launch' its new face-lifted '2012' XF in BMW's hometown of Munich – a very considered and intentional display of antagonism. The car was driven wearing its 'camouflage coat' of black-and white, so as not to give-away exacting visual cues, which could, but that camouflage on German soil also conveying its 'war paint'. This idea for Jaguar to assert itself in the German 3's backyard will have been agreed by JLR's TATA supremo Carl-Peter Forster and the company's CEO Ralf Speth. Thus goading their previous employers.
Yet whilst an interesting stunt, generating press-coverage and buoying internal sentiment amongst, it is doubtful that BMW's Reithofer, Daimler's Zetsche or VW-Audi's Winterkorn will be distracted nor quaking at Jaguar's provocation.
However, the innate 'message' was primarily directed not toward the German 3, but toward the investment community and German car buyers. This then will provide 'split-returns'. Whilst the former may recognise the late sector-entry into IL4 cylinder diesel technology as advantageous for Jaguar by opening up an important new sub-segment, the latter will no doubt remain resolutely nationalistic in car-buying habits. This espousing a form of 'Germany unity' vis a vis the EU's Grecian crisis – thus presently seen as innately unpatriotic to buy a foreign brand of vehicle.
The provocative 'Munich Munch' then may provide a useful temporary PR story, but such stances of 'showing one's teeth' must be backed-up by the true ability to compete. And that relies upon a powerful, prurient and very visible translation of that £5bn investment plan.
A recent FT article quoted an Indian consultant as stating that Jaguar's “product range [was] designed by Ford”...”concern now would whether TATA could step up to the mark with the next generation of models”. It should be noted that Jaguar has always maintained an in-house design and development capability, it simply previously used FMC available design-hardware, FMC platforms / components and FMC production facilities to reduce cross the board costs. However, as the consultant rightly points out the onus is now on TATA to provide the technical strategy plan backing.
This investment-auto-motives believes will partly be derived from FIAT-Chrysler given Ratan TATA's close links with FIAT and the 'sporting platform' interplay between Jaguar-Maserati-Alfa Romeo, with Chrysler and a possibly re-emergent Daimler able to derive a 'comfort platform'. (See previous blog-posts conveying this vision in 2008-9). Another Italian-tie being the Jaguar b99 concept produced by Bertone.
The obvious question then is “if Jaguar has such faith in itself then why the constant – and seemingly age old – self-comparison to the Germans?” In nature, a Jaguar sits alone at the top of the predatory hierarchy, it knows its station and has no need to postulate.
Aston Martin Racing -
AMR is the factory racing team and special-edition model developer for Aston Martin; itself formed from AML's desire for race-win kudos and technical-supply capabilities of Prodrive. Since 2005 AMR has participated within the four GT classes (1,2,3,4) running coupe cars and the Le Mans Prototype (LMP1) through a Lola JV in 2009 & 2010. With varying successes AMR has become an increasingly high-profile particpant in European and US motorsport.
In 2010 it created an alliance with JOTA Sport, the race-team arm of the JOTA group of companies, itself only recently created from the race interests of its co-owners, one a well-known businessman with 'fast-track' amateur racing status, the other an AMR factory driver.
However, the JOTA name was not borne from a whim, though no doubt unstated, automotive connoisseurs will now that the name 'Jota' originally applied to a race-edition of Lamborghini's 1960s Muira, then latterly applied to a Diablo in 1995 and more recently in 2008 notionally applied as a moniker for the Murcielago replacement or possibly a Ferrari Enzo type halo-car.
Undoubtedly AML and AMR have been watching the impressive progress made at Lamborghini over the last 10 years, and well know that if the VW-owned Italian firm were to formally return to track racing with a factory-backed team, it would in all probability be called 'JOTA' given the pedigree.
Thus, investment-auto-motives believes that JOTA racing (and possibly the JOTA group of companies) was infact intentionally created as part of a preceding plan so as to take perceptional ownership of the 'JOTA' name (on the race track) and place it squarely into AMR's hands. This then helps to hinder both any plan VW-Lamborghini may have for factory-backed entry into 21st century motorsports, and furthermore hopes to reduce the sales potential of the 2012 'Enzo-type' product produced by the Sant' Agata Bolognese company.
An alternative 'take' on this is that JOTA Sport also seek to actually gain business from VW-Lamborghini, by offering an 'off-the-shelf' racing outfit which could manage its tentative racing affairs, effectively outsourcing the work, and thereby for AMR avoiding the potential of facing a VW-factory created race team, which would possibly piggy-back upon the experience of the Audi LMP team and the Porsche GT teams.
In short, AMR's alliance with JOTA is one of both obvious antagonism but also about 'damage limitation' regards its potential for future motorsports success. For JOTA, there is the possibility of a later-day sell-out to VW-Lamborghini if it can prove its performance as an 'outsourced-outfit'; one that AMR today knows very well.
An interesting case where the antagonism created is done so with the hope of a greater strategic pay-off. How this will be received by the Italians & Germans remains to be seen.
As such, investment-auto-motives believes that AML/AMR should have instead developed its own secondary supportive identity, the pre-planning of such perhaps incorporating another great name of the past from the broad stable of race identities which span man and machine. Just as Audi re-emphasises its Auto Union heritage with the Rosemeyer & Nuvolari names on concept cars, could that race team JV been alternatively creatively developed instead of targeting the jugular of Lamborghini. It may now recognise just how big a threat AML/AMR imagined it to be, and steer a new course head on.
[NB If this scenario plays-out positively - highly debatable – the JOTA outsourcing scenario could feasibly open-up a future strategic alliance between AML and VW-Lamborghini in a post 2016 era, this when the now renewed Ford technical agreement ends. This then adds potential for a 3rd party to join in technical offering to AML alongside Ford and a presently tabled alliance with Daimler. Though it should be noted that VW's interest would very probably only be crystalised as that of an active shareholder - to initially affect competition restrictions versus Porsche, Audi & Lamborghini and be part of an intricate plan of long-term synergies. This scenario still yet long-away].
VW Group -
The foundations of Germany's industrial success has typically been laid by generations of family businesses, few more revered than the Porsche and Piech families. Their members have from birth been moulded to undertake their roles and responsibilities to the company and the country itself.
This necessary attitude – depending upon personality type and standing - can however become overtly brusque, blunt and intentionally antagonistic toward competitors
Volkswagen's Chairman Ferdinand Piech holds high regard, and tends to be pragmatic in outlook and frank when communicating expectations.
So was the case when he claimed that FIAT's ultimate long-term survival and stability lay in liquidating the value of Alfa Romeo, these funds deployed to solidly construct FIAT-Chrysler. It is no secret that Piech has eyed Alfa Romeo for years and the statement was an implicit sell recommendation of Alfa Romeo to VW Group. FIAT's Sergio Marchionne's simple reply was that “it is not for sale” recognising the ploy for what it was, preferring to gain funding from the de-coupling of FIAT's Cars and Industrial divisions and the intended 2012 IPO of Chrysler.
Piech & Marchionne know all to well that the future of FIAT-Chrysler would be boosted enormously if Alfa Romeo could add product quality and corporate operational efficiency to its possession of strong styling and emotive brand – elements that Piech knows VW AG can offer. But Marchionne knows that Alfa is key to supporting the brand ladder, volume pyramid and group technical strategy, the crux of the matter is the need for Alfa to provide both consistent unit margins year-in year-out and stable-growth volume levels.
Piech's antagonistic 'press piece' antagonism was wholly intended to explicitly sway public and investor opinion, deride his competitor when under operating pressure and indeed to keep the notion of an Alfa sale on the theoretical table by always 'planting the seed'. It was a cheap shot but with very broad resonance and possible / eventual implications.
Whether such antics are 'part and parcel' of a successful chairman's method is debatable, but in this instance not unusual given Piech's style and ambition. And it was no doubt the case that the content of his words played well with his executive team, VW Group en mass, the national public pysche and politician's desire to further Germany's industrial reach and economic certainty.
Conclusion:
As seen, intentional antagonism appears in various ways, used for various ends. Its use is believed to be part and parcel of the 'corporate game' and seemingly accords to teachings of Sun-Tzu's 'Art of War' philosophy. It is used in connection with desire for either a specific issue conquest or as part of the long-game in supposedly wearing-away a competitor's resolve.
But unlike armies in the theatre of war, corporations exist in far more complex environments which can in-turn dilute the intended effect, create an unwanted reaction or in this age of corporate responsibility induce negative sentiments from the ever-widening stakeholder community; a community aided by IT and the media-sphere in which the once separate perceptions of investors, consumers and competitors are becoming more aligned and more concentric.
As the West needs to desperately re-build its economic foundations the opportunity for seizing the moment is indeed tempting, but a new era of informal, but well defined 'co-opetition' would be better to assist the prevailing fortunes of most companies, and as a consequence deliver greater stability bolstering corporate valuations, so improving the atmosphere for long-term investor commitment and the stable growth of bond and stock markets.
Now on the verge of a possible global slowdown that could put the West into another reverse gear, the leaders of Western companies should simultaneously try and move the economic gear-lever from 'PARK' to 'DRIVE'. Our mixed-market economies are of course at the behest of capital markets and the volatility still endemic and risk-premium demands means that resurgence will not be automatic. But setting the right ethical business tone will help to ensure it doesn't stall quite as easily as could be the case otherwise. At least in the short-term, such a refreshed positively attuned tactical attitude is one Chairman and CEOs could and should adopt.
Post Script:
In stark contrast to such 'antagonism' comes Ford's decision to retract advertising with the News of the World newspaper given its involvement in numerous phone-hacking cases.
Ford has be seen to have 'done the right thing', though it well recognises that its actions will play-out positively in the eyes of its middle-England customers by 'seizing the moral high-ground'.
Whether a case of good CSR, brand and reputational damage limitation or cynical opportunist PR is open to debate, but it does provide - at least on a surface level – an example of positive corporate leadership, and the very antithesis of being an antagonistic.
Furthermore, it also appears that Rupert Murdoch's closure of the NOTW paper should permit NewsCorp to 're-right' its slipped moral standing, ahead of its UK expansion aims. Aswell of course a re-structure of HR & IT resources within its media, print, web & TV channels.
However, at least the topic of commercial ethics is spotlighted.
As such the growth trends of global TIV will slow and auto-companies must re-play (though to a far lesser degree) the corporate re-alignment exercise. An exercise which must re-balance: production capacity, factory & dealer inventory levels, the client-supply rate and residual pricing. The slackening of demand-pull then has a knock-on effect through the supply chain which must be orchestrated in an orderly manner so as to maintain revenue and earnings traction.
Whereas the Western economic rebound allowed manufacturers to 'ride the wave', boosted by the previoulsy heavy round of cost-cutting, the short-term requires greater 'nuance and fettle' both internally and externally; as opposed to the previous need for swathes of change to ensure previous survival and upturn reaction.
Every BoD well recognises that the enlarged pie of the marketplace will consequentially shrink, thus must either try to maintain market-share or seek bold expansion, and consequentially every BoD and their managers will be re-assessing and re-defining the core of their 'competitive spirit'.
Exactly how that translates is dependent upon the company's own cultural personality, highly influenced by that of its senior individuals. Yet the ever raised stakes of corporate success or failure typically sees a stretching of the moral-code of competitive action, this witnessed especially so in the arena of tactical initiatives intended to undermine a competitor large or small, and argued internally as on the 'supporting-fringe' of the overall corporate strategic ambition.
Hence today, with automakers facing still distressed consumers, a buyer's market in the fleet sector and cautiousness in new-car plans amongst company directors, both volume manufacturers, intermediate manufacturers (such as Jaguar and Aston Martin) and niche producers are having to rely ever more so on marketing and PR to do much of the 'heavy-lifting' required to maintain unit sales.
Marketing and PR are essentially about broadcasting messages, and more often than not a very singular message, to external audiences and various stake-holders. These messages cover a broad span of requirement and intent: from the filing of company activity reports to regulatory bodies or stock exchanges as legal obligation, to the construct of ethereal value-systems that underpin the brand, to the sphere of hard-hitting, contentious issue-based messages that seek to engender an emotional reaction.
Such messages rely upon a mix of pertinence and boldness, but can be separated by their ultimate intent: whether to positively bolster one's own company or to negatively undermine that of the prime competition.
The act of 'antagonism' seems to have been part of the conflict psyche since the dawn of time, part of the pre-human condition which in its more sophisticated form has unfortunately become an unfortunate staple of the modern society and so corporate world. This psychological tool honed by some from the school playground all the way through to the environs of middle-management, in a belief that corporate life reflects war-like conditions. The teachings of Sun-Tzu and other war-craft gurus become the prevailing attitude; dramatising the corporate arena that of a Roman arena.
Hence, the use of contrived antagonism should be considered deeply beforehand, since the underlying implicit messages sent to the competitor is that of creative bankruptcy and self-regarded weakness; let alone the less than virtuous moral and ethical stance.
Of course 'antagonism' per se comes in various forms, all of which sit at varying positions along a broad grey-scale spectrum, from the application of the light-hearted message to that of the dark-hearted.
The following provide four examples where antagonism – at varying points of that grey-scale - has been intentionally deployed to varying degrees of ultimate 'success':
- Audi's confrontational poster campaign versus BMW
- Jaguar's 'hostile-bid' launch of the new XF diesel
- Aston Martin's use of the 'JOTA' moniker
- VW Group's stated desire to acquire FIAT's Alfa Romeo
Audi -
In its least extreme guise antagonism is conveyed as light-hearted banter within peer-company advertising, local advertising standards panels the arbiter of advertising standards rules. A well known American example being the poster/ bill-board-battle between Audi and BMW previously located on Santa Monica Boulevard. Audi used a regular sized bill-board for its then new A4 campaign which posited “Your move BMW”.
Recognising the locational importance of the site, prime for stationary rush hour drivers, BMW 'replied' by temporarily installing a neighbouring bill-board five times the size of Audi's, answering with the strap-line “Checkmate”.
In reaction again, Audi stated “Chess? No thanks, I'd Rather be Driving”. A lacklustre and frankly embarrassing response.
The initial antagonistic strike therefor back-fired heavily.
Jaguar -
Since the provision of corporate life-support from TATA Motors in 2008 (with its £2.3bn acquisition of JLR & £1bn injection) Jaguar Cars has been under mounting pressure to demonstrate its mettle, especially so as the smaller sibling to Land-Rover but with larger potential market-share, and even more since the announcement that an annualised average of £1bn of investment will be ploughed-into JLR over the coming 5 years. JLR is touted to have been TATA's bread-winner in 2010, contributing £1.04bn to its FY2010 results. JLR margins were announced as comparable to that of the German trio – even that of Porsche - but of this, the major contributor was very probably Land Rover given its ASEAN sales success and level of amortised cost. Also, investment-auto-motives suspects that this level of turnaround would have been internally supported to boost JLR's net financial figures as a precursor to the notion of a 2012 IPO, as reported by India's 'Economic Times'.
Beyond Jaguar's restricted 3-car product range, which is far smaller than the segmentally broader & deeper German marques, it also faces the challenge of trying to rebuild its innate 'brand equity' to match its historic 'brand profile'. Jaguar then has no alternative but to be seen to fight hard, by both its paymasters TATA, and for realistic survival in very competitive premium car segments.
As part of this demonstration of worthiness is decided to 'press launch' its new face-lifted '2012' XF in BMW's hometown of Munich – a very considered and intentional display of antagonism. The car was driven wearing its 'camouflage coat' of black-and white, so as not to give-away exacting visual cues, which could, but that camouflage on German soil also conveying its 'war paint'. This idea for Jaguar to assert itself in the German 3's backyard will have been agreed by JLR's TATA supremo Carl-Peter Forster and the company's CEO Ralf Speth. Thus goading their previous employers.
Yet whilst an interesting stunt, generating press-coverage and buoying internal sentiment amongst, it is doubtful that BMW's Reithofer, Daimler's Zetsche or VW-Audi's Winterkorn will be distracted nor quaking at Jaguar's provocation.
However, the innate 'message' was primarily directed not toward the German 3, but toward the investment community and German car buyers. This then will provide 'split-returns'. Whilst the former may recognise the late sector-entry into IL4 cylinder diesel technology as advantageous for Jaguar by opening up an important new sub-segment, the latter will no doubt remain resolutely nationalistic in car-buying habits. This espousing a form of 'Germany unity' vis a vis the EU's Grecian crisis – thus presently seen as innately unpatriotic to buy a foreign brand of vehicle.
The provocative 'Munich Munch' then may provide a useful temporary PR story, but such stances of 'showing one's teeth' must be backed-up by the true ability to compete. And that relies upon a powerful, prurient and very visible translation of that £5bn investment plan.
A recent FT article quoted an Indian consultant as stating that Jaguar's “product range [was] designed by Ford”...”concern now would whether TATA could step up to the mark with the next generation of models”. It should be noted that Jaguar has always maintained an in-house design and development capability, it simply previously used FMC available design-hardware, FMC platforms / components and FMC production facilities to reduce cross the board costs. However, as the consultant rightly points out the onus is now on TATA to provide the technical strategy plan backing.
This investment-auto-motives believes will partly be derived from FIAT-Chrysler given Ratan TATA's close links with FIAT and the 'sporting platform' interplay between Jaguar-Maserati-Alfa Romeo, with Chrysler and a possibly re-emergent Daimler able to derive a 'comfort platform'. (See previous blog-posts conveying this vision in 2008-9). Another Italian-tie being the Jaguar b99 concept produced by Bertone.
The obvious question then is “if Jaguar has such faith in itself then why the constant – and seemingly age old – self-comparison to the Germans?” In nature, a Jaguar sits alone at the top of the predatory hierarchy, it knows its station and has no need to postulate.
Aston Martin Racing -
AMR is the factory racing team and special-edition model developer for Aston Martin; itself formed from AML's desire for race-win kudos and technical-supply capabilities of Prodrive. Since 2005 AMR has participated within the four GT classes (1,2,3,4) running coupe cars and the Le Mans Prototype (LMP1) through a Lola JV in 2009 & 2010. With varying successes AMR has become an increasingly high-profile particpant in European and US motorsport.
In 2010 it created an alliance with JOTA Sport, the race-team arm of the JOTA group of companies, itself only recently created from the race interests of its co-owners, one a well-known businessman with 'fast-track' amateur racing status, the other an AMR factory driver.
However, the JOTA name was not borne from a whim, though no doubt unstated, automotive connoisseurs will now that the name 'Jota' originally applied to a race-edition of Lamborghini's 1960s Muira, then latterly applied to a Diablo in 1995 and more recently in 2008 notionally applied as a moniker for the Murcielago replacement or possibly a Ferrari Enzo type halo-car.
Undoubtedly AML and AMR have been watching the impressive progress made at Lamborghini over the last 10 years, and well know that if the VW-owned Italian firm were to formally return to track racing with a factory-backed team, it would in all probability be called 'JOTA' given the pedigree.
Thus, investment-auto-motives believes that JOTA racing (and possibly the JOTA group of companies) was infact intentionally created as part of a preceding plan so as to take perceptional ownership of the 'JOTA' name (on the race track) and place it squarely into AMR's hands. This then helps to hinder both any plan VW-Lamborghini may have for factory-backed entry into 21st century motorsports, and furthermore hopes to reduce the sales potential of the 2012 'Enzo-type' product produced by the Sant' Agata Bolognese company.
An alternative 'take' on this is that JOTA Sport also seek to actually gain business from VW-Lamborghini, by offering an 'off-the-shelf' racing outfit which could manage its tentative racing affairs, effectively outsourcing the work, and thereby for AMR avoiding the potential of facing a VW-factory created race team, which would possibly piggy-back upon the experience of the Audi LMP team and the Porsche GT teams.
In short, AMR's alliance with JOTA is one of both obvious antagonism but also about 'damage limitation' regards its potential for future motorsports success. For JOTA, there is the possibility of a later-day sell-out to VW-Lamborghini if it can prove its performance as an 'outsourced-outfit'; one that AMR today knows very well.
An interesting case where the antagonism created is done so with the hope of a greater strategic pay-off. How this will be received by the Italians & Germans remains to be seen.
As such, investment-auto-motives believes that AML/AMR should have instead developed its own secondary supportive identity, the pre-planning of such perhaps incorporating another great name of the past from the broad stable of race identities which span man and machine. Just as Audi re-emphasises its Auto Union heritage with the Rosemeyer & Nuvolari names on concept cars, could that race team JV been alternatively creatively developed instead of targeting the jugular of Lamborghini. It may now recognise just how big a threat AML/AMR imagined it to be, and steer a new course head on.
[NB If this scenario plays-out positively - highly debatable – the JOTA outsourcing scenario could feasibly open-up a future strategic alliance between AML and VW-Lamborghini in a post 2016 era, this when the now renewed Ford technical agreement ends. This then adds potential for a 3rd party to join in technical offering to AML alongside Ford and a presently tabled alliance with Daimler. Though it should be noted that VW's interest would very probably only be crystalised as that of an active shareholder - to initially affect competition restrictions versus Porsche, Audi & Lamborghini and be part of an intricate plan of long-term synergies. This scenario still yet long-away].
VW Group -
The foundations of Germany's industrial success has typically been laid by generations of family businesses, few more revered than the Porsche and Piech families. Their members have from birth been moulded to undertake their roles and responsibilities to the company and the country itself.
This necessary attitude – depending upon personality type and standing - can however become overtly brusque, blunt and intentionally antagonistic toward competitors
Volkswagen's Chairman Ferdinand Piech holds high regard, and tends to be pragmatic in outlook and frank when communicating expectations.
So was the case when he claimed that FIAT's ultimate long-term survival and stability lay in liquidating the value of Alfa Romeo, these funds deployed to solidly construct FIAT-Chrysler. It is no secret that Piech has eyed Alfa Romeo for years and the statement was an implicit sell recommendation of Alfa Romeo to VW Group. FIAT's Sergio Marchionne's simple reply was that “it is not for sale” recognising the ploy for what it was, preferring to gain funding from the de-coupling of FIAT's Cars and Industrial divisions and the intended 2012 IPO of Chrysler.
Piech & Marchionne know all to well that the future of FIAT-Chrysler would be boosted enormously if Alfa Romeo could add product quality and corporate operational efficiency to its possession of strong styling and emotive brand – elements that Piech knows VW AG can offer. But Marchionne knows that Alfa is key to supporting the brand ladder, volume pyramid and group technical strategy, the crux of the matter is the need for Alfa to provide both consistent unit margins year-in year-out and stable-growth volume levels.
Piech's antagonistic 'press piece' antagonism was wholly intended to explicitly sway public and investor opinion, deride his competitor when under operating pressure and indeed to keep the notion of an Alfa sale on the theoretical table by always 'planting the seed'. It was a cheap shot but with very broad resonance and possible / eventual implications.
Whether such antics are 'part and parcel' of a successful chairman's method is debatable, but in this instance not unusual given Piech's style and ambition. And it was no doubt the case that the content of his words played well with his executive team, VW Group en mass, the national public pysche and politician's desire to further Germany's industrial reach and economic certainty.
Conclusion:
As seen, intentional antagonism appears in various ways, used for various ends. Its use is believed to be part and parcel of the 'corporate game' and seemingly accords to teachings of Sun-Tzu's 'Art of War' philosophy. It is used in connection with desire for either a specific issue conquest or as part of the long-game in supposedly wearing-away a competitor's resolve.
But unlike armies in the theatre of war, corporations exist in far more complex environments which can in-turn dilute the intended effect, create an unwanted reaction or in this age of corporate responsibility induce negative sentiments from the ever-widening stakeholder community; a community aided by IT and the media-sphere in which the once separate perceptions of investors, consumers and competitors are becoming more aligned and more concentric.
As the West needs to desperately re-build its economic foundations the opportunity for seizing the moment is indeed tempting, but a new era of informal, but well defined 'co-opetition' would be better to assist the prevailing fortunes of most companies, and as a consequence deliver greater stability bolstering corporate valuations, so improving the atmosphere for long-term investor commitment and the stable growth of bond and stock markets.
Now on the verge of a possible global slowdown that could put the West into another reverse gear, the leaders of Western companies should simultaneously try and move the economic gear-lever from 'PARK' to 'DRIVE'. Our mixed-market economies are of course at the behest of capital markets and the volatility still endemic and risk-premium demands means that resurgence will not be automatic. But setting the right ethical business tone will help to ensure it doesn't stall quite as easily as could be the case otherwise. At least in the short-term, such a refreshed positively attuned tactical attitude is one Chairman and CEOs could and should adopt.
Post Script:
In stark contrast to such 'antagonism' comes Ford's decision to retract advertising with the News of the World newspaper given its involvement in numerous phone-hacking cases.
Ford has be seen to have 'done the right thing', though it well recognises that its actions will play-out positively in the eyes of its middle-England customers by 'seizing the moral high-ground'.
Whether a case of good CSR, brand and reputational damage limitation or cynical opportunist PR is open to debate, but it does provide - at least on a surface level – an example of positive corporate leadership, and the very antithesis of being an antagonistic.
Furthermore, it also appears that Rupert Murdoch's closure of the NOTW paper should permit NewsCorp to 're-right' its slipped moral standing, ahead of its UK expansion aims. Aswell of course a re-structure of HR & IT resources within its media, print, web & TV channels.
However, at least the topic of commercial ethics is spotlighted.
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