It has become a given fact that recession and depression periods are revitalised via the initiation of socio-economically positive infrastructure projects.
History Foretells -
Through the ages spanning 16th, 17th, 18th, 19th & 20th centuries, concentration on the private and public development of roadways, canals, railways, radio & tv air-waves, airports and of course the physical & ethereal route-ways of the internet's 'information superhighway', have when instigated singularly and combined have created new economic platform(s) from which commercial, industrial, service and leisure activities have benefited.
Such engrained and 'default-position' policy practice, offering short-term build and re-build fiscal opportunity, combined with the long-term economic facilitation, have consistently delivered new eras for national, continental and worldwide enhancement. From Britain's 17th century ward and county toll-roads, the UK and colonial India's steam-powered railways, the inter-state road networks of pre & post-WW2 America & Europe, the revolutionary 'bullet trains' of 1980s Japan. With most prominently the explosion of scale-enabled Chinese socio-economic growth, thanks to the snowball inter-connectivity effect of various aforementioned solutions within 21st century China.
[NB China simply re-playing the American 19th & 20th century 'play-book' of marrying foreign innovation with domestic scale. (The US having used German, French & British sourced technologies to make is economic leap)].
Such historical precedence is etched into the consciousness of economic advisors, politicians and international financing agencies such as the IMF, EBRD et al.
The UK's Present Paradox -
However, the great majority of such infrastructure projects undertaken in Britain over the last 100 years or so have either been state initiated, state generated or exploitation of previously state-owned infrastructure. This ranging from amalgamation of the once separate London omnibus & underground companies, the creation of a standardised national electrical grid, the first official motorway (the M1 & later tributary motorways) to private interest leverage of the old GPO telephone network under BT stewardship to roll-out the world-wide-web.
But today the state that is now being retitled 'Great Britain' is caught in similar fiscal straits to those of the 18th and early 19th century'. Then having 'over-stretched' in the financing of international expansion, paving the way for privateers such as the East India Company. Today the akin situation arguably even worse. This the result of parallel military over-stretch (especially over the last 2 decades) but additionally weighted down by the 'economic baggage' of being the wrong-side of an ever-widening 'global competition gap' across intermediate value manufacturing and services plus the hefty and seemingly growing cost of the nation's social security bill, itself the consequence of a ageing population and a near 'lost' young generation. Themselves sat midway between the debt-fear of higher education and its 'real-world' merits, versus similarly or even better educated foreign students who have gained either free or low cost education.
These innate headwinds centred around a record national debt, empty government coffers, squeezed notional middle-class, sense of the 'broken-promise' handed to the Facebook generation, and to add further pain, a sense of real caution by western corporations and institutional investors about investing in a much deflated Britain.
[NB Please see Post Script for investment-auto-motive's more optimistic viewpoint of the much criticised 100 year gilt offering].
The current headwinds leave the UK in a truly paradoxical situation.
Never has such a major revitalisation effort been as badly needed as today, yet equally never has there been such an enormous state funding vacuum. Whilst the UK's sovereign debt standing still enjoys an investment grade AAA standing thanks to unavoidable 'austerity measures' – itself put on 'negative outlook' by the Ratings Agencies – which compared to EU country grades is strong, the fact remains that the required 'deep-pocket' UK infrastructure spending is seen with unease by many traditional institutional investors; especially so western pension funds (corporate and private) which must address reducing their immediate and mid-term exposure to greying population bases.
Looking Abroad -
There appears little option than for the UK to court 'deep pocket' foreign funds, with no doubt leanings to the SWF monies that have been accrued by China by way of its foreign reserve holdings, the Middle East's petro-dollars, Singapore's trading income and perhaps even to the newer SWF operators from Latin America and even perhaps Africa.
The ongoing central investment philosophy typical of most – albeit as part of a broader risk-return portfolio - is to provide liquidity for multi-decade, low risk, 'utility' type programmes. Programmes which also typically provide value-chain synergies with their own country's economic platform and ambitions.
A typical (though simplified) scenario would be that the SWF country offering the funding is itself able to provide the 'up-stream' raw materials for the project in question, whilst also able to gain valuable 'downstream' learning about the implemented programme for later domestic adoption
[NB Hence the interests of Australia's Macquarie Group directed interests in a CO2 sensitive and cost conscious Europe, for latter stage implementation across the states of New South Wales and Victoria, this future programme offering such a benchmark example afterward to progressive SE Asian countries].
The Foreign Precedents -
Of course, as with the ownership issue raised by Congress in the USA regards Chinese acquisition approaches of its Port Authorities, there is the political and nationalistic dimension to foreign funding, involvement and ultimately ownership.
However, whilst the US may e viewed as jingoistic the rebuffel of China obviously came at a time when foreign policy sensitivity was at an all time high, in the midst of Iraq & Afghanistan. Perhaps then justifiable because of the very scale of US Port traffic, its life-line to the US economy, aswell as of course the potential for increased terrorist threat in addition to usual contraband and illegal shipment concerns.
However, a more laissez faire UK and Europe should have less concern over projects which are physically internal – as opposed coastal – and pose no or little potential for national defence or social threat.
And indeed, that very viewpoint has enabled foreign owners to take an interest in UK infrastructure; providing it does not oppose what seems an expected graduated risk aversion policy..
Spain's Ferrovial Group acquired 56% of BAA plc and reverted the company back to Limited company status, sharing ownership with Canada's 'Caisse-Quebec' and Singapore's GIC soveriegn wealth fund. Whilst more recently, China's own SWF, the China Investment Corporation (CIC) bought nearly 9% of Thames Water, itself a sub-divisional holding of Australian Macquarie Group's 'European Infrastructure' Fund.
[NB investment-auto-motives has previously commented on the possible exploratory potential of adapting 'air-side' traffic management systems (which orchestrates road vehicles and planes) to use on public and private highways].
A Progressive, Not Copy-Book, UK Programme -
Infrastructure planning - especially so of roads - has rarely ever been a 'blank sheet' 'blue-sky' exercise. Whilst the olde-worlde 'advanced' countries learnt from each other, understandably more recently economically emerged nations have typically deployed a 'copy-book exercise' reflective of endemic American influence and style. Such acutely referential planning schemes and signage graphics intended to promote the country's perception of 'advanced' and '1st world' image. This aspirational conveyance engrained as similar other projects such as national skyscrapers and city shopping malls. Moreover, it may indeed be 'dis-functional' not to do so, since many past EM countries have emerged as a consequence of direct US influence and as such sought to utilise proven practice and demonstrate cultural kinship as part of its own economic growth path.
But an olde-worlde economy obviously does not have the luxury of planning from a 'clean sheet'. It must heavily adapt as opposed to simplistically adopt; seeking to marry early and mid 20th century roadways with 21st century technological advancement. Satellite enabled GPS technology may have 'over-laid' the simulacra of an electronic map over old roads, and been used to good effect even with glitches, but the task of inter-connecting and organising both the old physical and new ethereal worlds into a unified, intelligent entity appears to still be in its gestation phase.
As such, the overall shape of a contemporary road infrastructure programme, seeking to efficiently manage nationwide traffic-flow and generate additional income streams, is very different to that of a copy-book EM nation exercise.
Its ambitions and challenges far greater, its programme activity chain more complex encompassing more stakeholders and the infrastructure investment formula more informed and nuanced. Hence convincing the proposed financier of project credibility, time-cost-quality attainability and return on investment assurance becomes a far greater challenge – but also indeed opportunity - than is the case with ground-up development in an EM region.
Given the innate scale of that challenge, it perhaps then makes sense to set the ultimate goal sought even higher; to create 'leap-frog' infrastructure advancement. So that ultimately the overall cost and delivery pains undergone provides for a truly long-lasting and critically income earning transport solution. This requires the deployment of ever more sophisticated risk management approaches to macro and micro manage the overall programme and its separate individual projects.
If necessary, and not already the case, such ambitions may require the re-modelling of infrastructure planning approaches. Planners and financiers should then perhaps create a three-tier approach, reflecting the typical business modelling 'staircase' of high / medium / low ambitions set against like-wise costings schedules.
This enables the flexibility for some of those inevitably failed high ambitions to become naturally absorbed into the lower tier solution. Naturally contingencies would be put in place to ensure the planners and builders do not immediately 'default' to the lowest and easiest deliverable position, and instead under an incentive and pressure to perform, would need to work more closely between themselves and critically with new R&D integrating third parties, instead of what appears the typical manner of 'throwing the plans over the wall to be built'.
It is only such a modified infrastructure planning and delivery approach, centred around 'new perspective' possibilities that will deliver a wholly evolved new road infrastructure.
A New Perspective -
This then a holistic re-vision of the component parts that constitute 21st century road infrastructure.
Undertaken to improve all aspects of transportation usage and so policy-setting direction: spanning road safety, network efficiency and CO2 impact. Instigation of a fundamental 'wide-aperture' review which explores every dimension of road infrastructure; ranging from the very basics of material-types and construction methods used in building various 'road architectures' through to understanding how individual journey requirements and the overall capacity of the traffic network might benefit from the emergence of 'cloud computing'.
Thus spanning across re-assessment of 'age-old' conventions to exploration of the 'new-age' possibilities.
One area ripe for a new era of in-depth research and development – in parallel with the myriad of arenas - is that of road surfaces.
Evolving the Road -
Road materials science, development and implementation over the last 100 years appears (to the layman) to be ironically almost snail-like in its progress. No doubt because of real-world constraint aspects such as the traditional (and so well understood) cost-quality-durability equation and of course the apparent need for road surface standardisation .
Yet even so, the development of modern 'tarmac' (tarmacadam), tarvia and asphalt concrete might be argued as 'arrested development' by an advanced guard of progressive civil engineers, road safety campaigners and indeed the automotive industry itself.
This sits in stark contrast to the hard-pressed consumer-led and regulatory-led advances made in vehicle engineering. Undoubtedly, as part of its own advancement the car became ever more capable primarily because of inter-product competition and the sales and income reward available to progressive manufacturers. The car necessarily had to adapt to the roadway; from the invention of the pneumatic tyre to that of ever more survivable crash structures to that of Anti-Lock Braking Systems, which themselves are used for Traction Control Systems - which must arguably compensate for unfavourable road conditions.
Moreover, whilst vehicle capabilities have improved by leaps and bounds, the regulatory environment and thus the road infrastructure is still stuck somewhere in 1959.This was the year that Britain's M1 motorway was opened and the national speed limit of 70mph (10mph above the A-road) was established when nearly all the cars on the road, exempting sports-cars, struggled to reach that limit, trundling along at 50mph and 60mph given their mechanical capabilities. Today , and for many years since, even a notional 'city-car' easily surpasses that boundary-point, with greater bhp, more gears and higher gearing and can stop far more easily given the inventions previously described.
Thus even with today's inherently un-evolved road limitations cars and drivers are perhaps more restrained – given inbuilt capabilities - than their counterparts half a century ago.
An answer to one part of the infrastructure jigsaw then perhaps requires a true meeting of minds between what have typically been very conservative infrastructure builders (using 'age-old' proven materials for known durability performance and cost) and the necessarily far more exploratory nature of car manufacturers and their supplier networks.
Primarily to improve – via scientific exploration and R&D – the dynamic properties of the road surface and tyre relationship – ie mutually evolving tyre composition and advanced surface materials, which ideally provide for reduced constant speed and increasing speed friction whilst also providing greater grip characteristics for braking.
This the most obvious avenue of exploration that could improve general safety, reduce driver fatigue, improve behaviour etc.
And at its futuristic extreme, there perhaps could be a day when a privately constructed and operated road offered a 'scaletrix' type electrical feed built into the centre-line of the road to pass electrical current to the under-body “road-brushes” of a petrol-electric or diesel-electric hybrid vehicle, so one-day overcoming the distance limitation inherent in electric vehicles' given limited battery charge storage and the inconvenience of overnight or plug-in charging. Under such a scenario, the driver would simply pay for the electricity used on the journey, and could indeed lead to the idea of group managed 'car-trains' that offer massive efficiency savings as depicted 50 years ago by GM's Futurama exhibitions and been 'prototyped' (via cruise-control sensing) ever since.
Whilst a distant view perhaps 30+ years away, such road planning could make roads 'future-proofed' just as cars are 'package-protected' today in their engineering development.
'Unbundling' the Department for Transport -
The UK's Department for Transport has a plethora of past and present scientific research and development projects, with no doubt efforts for cross-pollination of results to gain additional learning. Yet to the average 'put-upon' UK motorist there seems little evident advanced thinking and implementation, beyond the usual traffic management practices of speed camaras, ill considered generically implemented safety measures and reduced parking capacity – all or none of which may be related to the DfT's R&D work.
Whilst the DfT's internal R&D work, along with that of R&D at the 7 Research Councils, has undoubtedly been useful and beneficial to society. Yet whilst the costs may be understood by the senior few, it seems likely that the actual value of the work itself – theorised, in testing phase or implemented - is hard to ultimately socially and commercially value. Those costs borne by the UK public are absorbed by the UK motorist and broader population, yet the average – critically uninformed - motorist is not prive to the socio-economic good achieved.
The socio-economic importance of this this 'invisible' work should be given greater profile, as should a transparent ability for the private sector and commercial world to understand its cost structure; no doubt also surely a concern for the Treasury seeking to make spending reductions by out-sourcing non-confidential operations.
If the Ministry of Defence was able to divest a DERA function by way of QinetiQ in 2001, and the likes of Cobham plc along with many others are able to operate both privately and efficiently in areas of state interest, then it appears a natural consequence that the DfT should seek to divest major portions of its costly in-house activities regards road R&D and infrastructure.
Promoting Competitive Commercial Interests -
As part of the UK's own road infrastructure renaissance, now to be expectantly paid for by foreign concerns and respective income seeking agenda, it may be argued that a similar 'spirit of progressive competition' should be fostered. Indeed must be fostered.
It is only by doing so that the presently disparate yet increasing number of stakeholder sectors involved in road infrastructure might be better coalesced into a far more powerful, transformative force – to the good of the UK's entrepreneurial health, that of the economy and that of the public good to society in general.
It should be remembered that the invention of the legendary safety device the “cat's eye” was conceived outside of officialdom by the singularly minded Percy Shaw in 1933, who then patented the invention, developed it and manufactured the item via 'Reflecting Roadstuds Ltd' from 1935 onward. Today seen the world over and having saved countless lives.
Such private party 'visioneering' should be nurtured.
Nurturing The New Perspective -
Whilst vehicle evolution will continue to benefit buyers, drivers, passengers and society in general, the prime question posed by this web-log is...
...“how the roadway itself – in physical and network form – can better evolve to suit modern-day vehicles of all types and various user requirements, whilst offering potential for additional ROI / income streams?”
Such a question opens-up the issue beyond traditional practice and the conventional envelope 'norm' which presently sees what appears a massive unintentional gulf between various stakeholders: government policy-setting, road & environment planning bodies, civil engineering construction sector, vehicle producers & autos supply chain, road-side commercial interests reflected by the retail and hospitality sectors and critically the core interests of large-fund investor types such as SWFs (singular and combined) and the increasingly cautious institutional investor base.
Infrastructure Programme 'Bundling' -
Relative to the broader road infrastructure picture, there looks to be a good possibility of 're-grouping' (ie operational bundling) in the infrastructure sector, seeking to create new 21st century delivery mechanisms consisting of a closely linked corroborative 'vertical' value-chain. So seeking to consolidate the traditional loosely-linked or short-linked vertical value chain, aswell as posing a new operational challenge to those players which primarily operate on a 'horizontal' 'business consolidation' basis. (Though undoubtedly they to will grow in their fashion given the global opportunity to do so).
[NB No doubt this a critical part of the intention of those infrastructure funds that have been formed to date].
Conclusion -
Compared to step-change examples of yesteryear, infrastructure planning in Britain's over the last 60 years has been a shadow of its former self. Partly a result of the car having come into its own as transport king by the 1960s, seen in the re-moulding of town-scapes, the building of the motorway network and creation of the near hallowed town and village by-pass.
But today, Britain 'cracks and creeks' visibly and audibly. Visibly from the weight of network over-capacity across the motorways, A-roads, B-roads and elsewhere, with accordant loss of logistical efficiency. Audibly from the frustrated private motorist, company motorist and corporate fleet operator, all of whom are unable to understand the opaque cost-benefit equation of the scaled road fund licence and hefty fuel tax, and would be better served by an evidently clear road pricing mechanism with inherently clear investment impetus and advantages.
Thus a radical overhaul of the UK's road infrastructure is required and the vision that is painted by government must be one of clear advantage to all from the motorist to R&D scientists, to vehicle producers to civil engineering companies to network operators to the SWFs offering funds for what must be very well constructed infrastructure business cases.
Post Script -
Though there has been heavy criticism of the Treasury's 100 year gilt offering given its lacklustre coupon by historical standards and the exposure to inflation and interest rate volatility, investment-auto-motives suspects that recipient buyers will do so for mixed reasons – politic reasons for Eastern buyers and cultural reasons for Western buyers.
Politically 'BRIC' and 'Next 11' corporations – themselves 'backed by national SWFs' - would presumably gain good favour so promoting a 'quid quo pro' approach when seeking FDI 'incentivisation'.
Conversely, in an increasingly marginalised West, the 'olde-worlde' powers of the UK, Europe, America and even Japan would seek to help safeguard each-other's long-term interests by participating in intra-national and intra-regional debt purchase programmes. The near parity value of Sterling and Euro assisted by the ECB liquidity initiative and the UK's still far stronger rating by Fitch, Moody's and S&P creates a good basis for such mutuality. Whilst the US Dollar could feasibly re-strengthen over the long-term to ultimately meet Sterling and Euro valuation. This 'united west' scenario even more plausible if the growing national and regional protectionist mindset that has been seen becomes very much a part of the 'new norm'].
Wednesday, 28 March 2012
Tuesday, 20 March 2012
Micro Level Trends – European Auto Stocks – German “Growth Picks” Contrast Gallic “Value Picks”.
As European economic disarray appears to slowly subside (even in the face of Greek & Spanish intransigence) observers of European auto stocks will have noted the major divergence that has appeared between the well positioned premium biased German producers, and the flailing mainstream French and Italian manufacturers.
[NB American owned GM Europe and Ford of Europe, dragging down their respective homeland good news stories].
The broad picture forming is that auto-sector equities investors presently sit within what could be described as "Act 2 of 3".
Having witnessed successful corporations both feed and become swept up by the voracious bull market that has run since October 2011, the investment community now looks to those by-passed and unloved entities which themselves are in the doldrums and look ripe for orchestrated funding and strategic nurturing.
The following provides outline of the forces that have, and continue, to support the German auto industry – which itself assists massively in financially the re-floating the EU ambition - whilst also highlighting the major market challenges yet investment opportunities for French and Italian companies at VM, Niche Manufacturer and Supply Chain Level.
The Present Picture -
North America shows the signs of maintaining a slow tentative structural recovery. China has confidently managed its passage through a successful 'soft-landing' via internally directed fiscal & monetary measures, so arguably demonstrating its ability regards self-containment and self-sufficiency. Japan continues to deploy a strong Yen (relative to the international FX basket) to serve internal infrastructure re-build programmes and overseas M&A ambitions. Brazil begins what appears a pseudo-protectionist stance over its currency and its prime manufacturing base so as to stabilise its own Mercosur fortunes given its global exportation slowdown. The Middle-East experiences the social and political pains of a new pro-Arabic yet 'centralist' transition period which seeks to economically integrate the vast MENA region so as to provide “regional balance” vis a vis Western, Latin, American, Asian and Chinese power-houses.
Europe -
Throughout this very unsettling period of new-era globalisation, European leaders recognised the need to band together to overcome the resulting frictions from the regional sovereign debt crisis; recognising that a truly 'broken Europe' would relegate the majority of EU members into a 21st century 'dark age'. The channelling of largely German liquidity through ESFS & ESFM vehicles has undoubtedly helped to quell intra-national and markets' fears, whilst the long-haul recovery of Greece will ultimately set the re-structuring benchmark – in terms of depth and timetable - for the more reticent Spanish and Portugese.
To the possible wry delight of slightly shaken but mostly unstirred EM nations, the real consequence of the western originated 'global financial crisis' was most evidently seen in the US and across Europe; the former arguably through the turmoil whilst the EU remains effectively a 3-speed destination for investors.
The German Powerhouse -
The financial problems of the European debt crisis were effectively laid at the feet of German politicians, the Bundesbank, the EcB and critically the German populace; by way of its high productivity rate & personal savings levels. Whilst the political and central bankers were able to formulate 'loans for austerity measures' toward the 'PIIGS' countries, the real concern through 2009-11 was whether Germany itself would be over-burdened by its neighbours.
As a result of the disenchantment with all things Greek, Italian, Spanish, Portugese and Irish, the German consumer became increasingly patriotic regards personal expenditure. To such an extent that the domestic economy 'powered through' the fragile period, as seen by the sale of cars increasing by 9% in 2011; a marked contrast to all other contracting EU car markets.
This then has created a condition wherein Germany once again stands as continent's prime economic engine, with France in reality offering little assistance as it battles its own banking sector woes and confines itself for the most part to its own national economic agenda.
Thus, until the EU 'de-coupled' UK finds certain economic traction, Germany sits effectively alone as the sole bright light within the fractured EU region.
Yet it has provided the indigenous German trio of VW, BMW & Daimler (aswell as to a lesser degree Opel and Ford) with a very welcome, somewhat 'inelastic', demand floor.
Fractured Europe / Fractured World -
Thus, as described initially the physically separate continents and their associated indigenous trading blocs within the world are perhaps far more fractured today than at any time over the last two decades; Europe's own dis-unity serving to underline the 'new norm' that re-orientates corporate, political and social agendas.
The Corporate Challenge -
As a result the plethora of multi-national corporations – ranging from investment banks to foodstuff providers – have effectively de-centralised so as to better morph regional divisions and operations to better suit the specific micro-climate. Then more adeptly positioned to acutely manage a portfolio of enterprises that must best evolve within that exacting micro-climate yet within the corporate realm: ranging from the immediacy of locally sourced financing availability and its associated costs, to the far-horizon of 'visioneering' process of how the regional market will develop, all the while necessarily maintaining the cohesion standard operating practice, as delineated by HQ. So a very testing time for regional executives, whether those of GE in Asia or TATA in Europe, and perhaps more so for the Board of Directors who must maintain corporate integration whilst maximising regional opportunities and minimising regional risks.
Europe's Entrenched Auto Players -
Europe's mainstream VMs have, for the most part, long been participants in worldwide markets, though of course each with varying distant past and recent history success. However, many including PSA, Renault, FIAT and GME still have a legacy bias to their homeland and European markets, marques such as Citroen, Skoda, Dacia, Opel, Vauxhall and Lancia with respectively greater perceived social and industrial connection to the home market. Whilst they themselves were intrinsic to local positive economic history thus obtaining a once entrenched (ie captive) customer base of private, fleet or government sales, that grip has weakened as a result of de-regulation and open borders policy-making.
That story of gradually eroded market share only bucked by PSA's expansionary growth at Citroen (piggy-backing Peugeot's previous 30 year success story), and VW's and Renault's 'parenting' of Skoda and Dacia as the CEE states became meshed with Western Europe.
Incoming Japanese and latterly Korean 'imported' competition, plus the competitive pressure of intra-regional sales, plus the EU's own enlargement created the impetus for necessary for yesteryear structural change, winners and losers diverging: PSA moving out of Renault's shadow to become the EU's second largest producer and Dacia re-established as a pan-regional and export oriented brand, whilst Lancia – like America's old premium brands - struggled to recapture past glory.
Whilst French and Italian producers have long recognised the EU market threat posed by new entrants, they have been largely impotent to tackle the threat by themselves broaching new high potential markets; Renault's American history with AMC an example, as was FIAT's own previous US market efforts; whilst even Audi retracted for many years. Similarly efforts in China and India have been lacklustre compared to the in-roads made by VW, GM, Ford, Toyota, Suzuki etc. Instead it seems that international expansion will continue to be limited to S.America and the MENA region, so almost destined to re-play the experiences of previous decades. Hence Marchionne's daring ploy with Chrysler to break the cycle.
This is not to say that PSA, Renault and FIAT cannot continue to nurture the broad growth opportunities in Brazil and Argentina, even with the former's monumental sector slow-down from its previous fast - indeed over-paced – growth. Simply that the expected renewed growth in North Africa and Near East will require far greater effort and patience to extract new 'national car' and auto-assembly deals (such as that seen previously with Iran's Khodro and the large Tangier's facility) because of greater competitive interest from VW Group (orientating SEAT's model naming toward the Arabic-Moorish), China's various state affiliated car companies seeking price-led export markets and India's TATA, Maruti and Mahindra seeking foreign growth.
Adjusting to the 'New Norm' -
However, those previous periods of adjustment may appear mild compared to the shock of the financial crisis, the reactionary surgical measures immediately required, and the ongoing rounds of surgeory and sector rehabilitation still needed.
Between 2007 and 2010 car sales fell from a record high of 15.5m to the low of 13.2m units, a low not seen since 1997. Governmental 'liquidity pump-priming' certainly saved Renault & PSA (receiving E2bn each), aswell as FIAT, and to a lesser extent assisting the German trio also. This financing initiative together with VMs own rapid cost-cutting and efficiency-seeking efforts and an improvement in general credit conditions for producers and buyers through 2009-11, together helped to stave off what would have been a socially disastrous auto-sector collapse.
Vitally important is the fact that over 15.1m car units were manufactured inside the EU in 2010, indicating a very simplistic 1.7m unit regional over-capacity.
Any argument that import levels (worth E22bn in 2010) adds further 'burden' to such over-capacity is countered by recognising that EU exports (worth E76.5bn) provide a wide trade surplus. However, imports are primarily mainstream vehicles and so can be argued as 'value destructive' to certain key segments in which 'national champions' operate. Whilst a high percentage of exported vehicles are typically in the premium segment where 'national champions' do not operate and so cannot benefit.
This additionally highlights the divergent fortunes of Europe's automotive players.
Slow But Powerful 'Creative Destruction' -
An argument can be posited that a far greater level of 'creative destruction' immediately following the financial crisis (engendered by less state interventionism) would actually have better served the sector in the long run.
However, this viewpoint may be cited as essentially “academic”. Since many of the intermediate private equity entities which notionally could have 'hoovered-up' liquidated assets were unable to access sufficient finance to do so; themselves in danger aversion and capital repair modes. Furthermore, many large auto-sector focused PE entities were already extremely busy executing 'turnarounds' at American and Canadian Tier 1 & 2 suppliers, exploring the bones of Chrysler and assessing new pseudo 'ground floor' investment in the GM re-listing.
It is then perhaps expedient to consider the PE community's attitude toward auto-sector restructures within the US and across Europe as respectively 'speedy' versus 'slow'.
Wall Street's Lehman Brother's 'moment' and the Sovereign Debt Crisis whilst inter-connected played out over slightly separate successive time-frames, and thus arguably allow for those tranches of America's enhanced liquidity, along with European Stability liquidity, to be invested into EU assets. Europe to see simultaneously merged FDI and 'self-help' funding, the former rationally directed at EU target companies and facilities where the business case (ideally US-EU synergistic) convinces.
The United States of Europe -
This structural difference an important distinction between the regions.
The American ability for a 'pre-pack' Chapter 11 full-scale restructuring of GM and Chrysler through a singular national legal framework, an amenable New York court system, and critically an 'on-board' UAW & general public; sits in stark contrast with the web of corporate, legal and social complexity that exists within Europe.
European leaders must wake-up to this American-European schism, and recognise the danger of slipping further behind the US, China and the increasingly strong economic blocs within Asia and Latin America.
However, in the meantime, the reality of intra-national European differences prevails, which in turn provides potential opportunities for non-European VMs and Supply Chain players to 'slice and dice' the body of the poorly performing members of the EU auto-sector. To obtain 'bolt-on' acquisitions which suit their own strategic ambitions across R&D, technical development, productivity, distribution and market-share.
[NB The 7% interest of GM in PSA might be viewed as part of this process of structural transformation].
In 2010 ACEA (the European Automobile Manufacturer's Association) noted in its yearly report that...”The automotive sector in Europe is highly competitive, supporting 12 million jobs, contributing significantly to economic prosperity. It supplies quality products worldwide and invests more in R&D than any other sector. Steps must be taken to ensure it emerges with strength from the economic downturn, ready to take advantage of market growth”.
Exactly which multi-national VM, which Tier 1 & Tier 2 companies, which distribution enterprises and which retailing groups come to finally benefit from the flux through FDI or Restructuring funding remains to be seen.
Conclusion -
VW AG, BMW AG and Daimler AG are deservedly flying high here and now, with indeed much to yet be gained as the macro-forces in Germany, North America, slowly the UK and eventually Europe provide what could be described as a domino earnings impetus. With of course China's own sustained growth also creating local and regional demand pull for these marques.
Yet the trickle-down of sizable ECB liquidity will undoubtedly eventually improve and re-energise national and regional EU market conditions. Simultaneously an offering a new generation of CO2 conscious vehicles from Peugeot SA, Renault SA and FIAT SpA should be able to excite still cost conscious but more spendthrift consumers, the VMs also theoretically able exercise historic near-reach export market opportunities.
Those valuation uplifts so desperately desired, themselves initially driven by a host of 'bottom-feeding' stock buyers, may possibly be attracted by adding greater 'pictorial detail' and 'aspirational clarity' to what for the most part are typically dry outlook summaries.
This era is obviously one of reflection and 'next move' strategising by company boards. And whilst highly confidential information cannot be leaked, it might prove useful to start relaying in broad terms the fundamentals of corporate intentions. Something that mimics a crystallised near-term ambition, as with VW's move on Porsche, with a far-horizon ideal – such as Toyota's legendary 100 year plan.
In the new age of 100 year (UK) government bonds, no doubt targeted at cash-rich corporations aswell as global pension funds, it makes sense for those auto-players presently in reduced circumstances to weave their substantive corporate intent into the minds of global investors.
[NB American owned GM Europe and Ford of Europe, dragging down their respective homeland good news stories].
The broad picture forming is that auto-sector equities investors presently sit within what could be described as "Act 2 of 3".
Having witnessed successful corporations both feed and become swept up by the voracious bull market that has run since October 2011, the investment community now looks to those by-passed and unloved entities which themselves are in the doldrums and look ripe for orchestrated funding and strategic nurturing.
The following provides outline of the forces that have, and continue, to support the German auto industry – which itself assists massively in financially the re-floating the EU ambition - whilst also highlighting the major market challenges yet investment opportunities for French and Italian companies at VM, Niche Manufacturer and Supply Chain Level.
The Present Picture -
North America shows the signs of maintaining a slow tentative structural recovery. China has confidently managed its passage through a successful 'soft-landing' via internally directed fiscal & monetary measures, so arguably demonstrating its ability regards self-containment and self-sufficiency. Japan continues to deploy a strong Yen (relative to the international FX basket) to serve internal infrastructure re-build programmes and overseas M&A ambitions. Brazil begins what appears a pseudo-protectionist stance over its currency and its prime manufacturing base so as to stabilise its own Mercosur fortunes given its global exportation slowdown. The Middle-East experiences the social and political pains of a new pro-Arabic yet 'centralist' transition period which seeks to economically integrate the vast MENA region so as to provide “regional balance” vis a vis Western, Latin, American, Asian and Chinese power-houses.
Europe -
Throughout this very unsettling period of new-era globalisation, European leaders recognised the need to band together to overcome the resulting frictions from the regional sovereign debt crisis; recognising that a truly 'broken Europe' would relegate the majority of EU members into a 21st century 'dark age'. The channelling of largely German liquidity through ESFS & ESFM vehicles has undoubtedly helped to quell intra-national and markets' fears, whilst the long-haul recovery of Greece will ultimately set the re-structuring benchmark – in terms of depth and timetable - for the more reticent Spanish and Portugese.
To the possible wry delight of slightly shaken but mostly unstirred EM nations, the real consequence of the western originated 'global financial crisis' was most evidently seen in the US and across Europe; the former arguably through the turmoil whilst the EU remains effectively a 3-speed destination for investors.
The German Powerhouse -
The financial problems of the European debt crisis were effectively laid at the feet of German politicians, the Bundesbank, the EcB and critically the German populace; by way of its high productivity rate & personal savings levels. Whilst the political and central bankers were able to formulate 'loans for austerity measures' toward the 'PIIGS' countries, the real concern through 2009-11 was whether Germany itself would be over-burdened by its neighbours.
As a result of the disenchantment with all things Greek, Italian, Spanish, Portugese and Irish, the German consumer became increasingly patriotic regards personal expenditure. To such an extent that the domestic economy 'powered through' the fragile period, as seen by the sale of cars increasing by 9% in 2011; a marked contrast to all other contracting EU car markets.
This then has created a condition wherein Germany once again stands as continent's prime economic engine, with France in reality offering little assistance as it battles its own banking sector woes and confines itself for the most part to its own national economic agenda.
Thus, until the EU 'de-coupled' UK finds certain economic traction, Germany sits effectively alone as the sole bright light within the fractured EU region.
Yet it has provided the indigenous German trio of VW, BMW & Daimler (aswell as to a lesser degree Opel and Ford) with a very welcome, somewhat 'inelastic', demand floor.
Fractured Europe / Fractured World -
Thus, as described initially the physically separate continents and their associated indigenous trading blocs within the world are perhaps far more fractured today than at any time over the last two decades; Europe's own dis-unity serving to underline the 'new norm' that re-orientates corporate, political and social agendas.
The Corporate Challenge -
As a result the plethora of multi-national corporations – ranging from investment banks to foodstuff providers – have effectively de-centralised so as to better morph regional divisions and operations to better suit the specific micro-climate. Then more adeptly positioned to acutely manage a portfolio of enterprises that must best evolve within that exacting micro-climate yet within the corporate realm: ranging from the immediacy of locally sourced financing availability and its associated costs, to the far-horizon of 'visioneering' process of how the regional market will develop, all the while necessarily maintaining the cohesion standard operating practice, as delineated by HQ. So a very testing time for regional executives, whether those of GE in Asia or TATA in Europe, and perhaps more so for the Board of Directors who must maintain corporate integration whilst maximising regional opportunities and minimising regional risks.
Europe's Entrenched Auto Players -
Europe's mainstream VMs have, for the most part, long been participants in worldwide markets, though of course each with varying distant past and recent history success. However, many including PSA, Renault, FIAT and GME still have a legacy bias to their homeland and European markets, marques such as Citroen, Skoda, Dacia, Opel, Vauxhall and Lancia with respectively greater perceived social and industrial connection to the home market. Whilst they themselves were intrinsic to local positive economic history thus obtaining a once entrenched (ie captive) customer base of private, fleet or government sales, that grip has weakened as a result of de-regulation and open borders policy-making.
That story of gradually eroded market share only bucked by PSA's expansionary growth at Citroen (piggy-backing Peugeot's previous 30 year success story), and VW's and Renault's 'parenting' of Skoda and Dacia as the CEE states became meshed with Western Europe.
Incoming Japanese and latterly Korean 'imported' competition, plus the competitive pressure of intra-regional sales, plus the EU's own enlargement created the impetus for necessary for yesteryear structural change, winners and losers diverging: PSA moving out of Renault's shadow to become the EU's second largest producer and Dacia re-established as a pan-regional and export oriented brand, whilst Lancia – like America's old premium brands - struggled to recapture past glory.
Whilst French and Italian producers have long recognised the EU market threat posed by new entrants, they have been largely impotent to tackle the threat by themselves broaching new high potential markets; Renault's American history with AMC an example, as was FIAT's own previous US market efforts; whilst even Audi retracted for many years. Similarly efforts in China and India have been lacklustre compared to the in-roads made by VW, GM, Ford, Toyota, Suzuki etc. Instead it seems that international expansion will continue to be limited to S.America and the MENA region, so almost destined to re-play the experiences of previous decades. Hence Marchionne's daring ploy with Chrysler to break the cycle.
This is not to say that PSA, Renault and FIAT cannot continue to nurture the broad growth opportunities in Brazil and Argentina, even with the former's monumental sector slow-down from its previous fast - indeed over-paced – growth. Simply that the expected renewed growth in North Africa and Near East will require far greater effort and patience to extract new 'national car' and auto-assembly deals (such as that seen previously with Iran's Khodro and the large Tangier's facility) because of greater competitive interest from VW Group (orientating SEAT's model naming toward the Arabic-Moorish), China's various state affiliated car companies seeking price-led export markets and India's TATA, Maruti and Mahindra seeking foreign growth.
Adjusting to the 'New Norm' -
However, those previous periods of adjustment may appear mild compared to the shock of the financial crisis, the reactionary surgical measures immediately required, and the ongoing rounds of surgeory and sector rehabilitation still needed.
Between 2007 and 2010 car sales fell from a record high of 15.5m to the low of 13.2m units, a low not seen since 1997. Governmental 'liquidity pump-priming' certainly saved Renault & PSA (receiving E2bn each), aswell as FIAT, and to a lesser extent assisting the German trio also. This financing initiative together with VMs own rapid cost-cutting and efficiency-seeking efforts and an improvement in general credit conditions for producers and buyers through 2009-11, together helped to stave off what would have been a socially disastrous auto-sector collapse.
Vitally important is the fact that over 15.1m car units were manufactured inside the EU in 2010, indicating a very simplistic 1.7m unit regional over-capacity.
Any argument that import levels (worth E22bn in 2010) adds further 'burden' to such over-capacity is countered by recognising that EU exports (worth E76.5bn) provide a wide trade surplus. However, imports are primarily mainstream vehicles and so can be argued as 'value destructive' to certain key segments in which 'national champions' operate. Whilst a high percentage of exported vehicles are typically in the premium segment where 'national champions' do not operate and so cannot benefit.
This additionally highlights the divergent fortunes of Europe's automotive players.
Slow But Powerful 'Creative Destruction' -
An argument can be posited that a far greater level of 'creative destruction' immediately following the financial crisis (engendered by less state interventionism) would actually have better served the sector in the long run.
However, this viewpoint may be cited as essentially “academic”. Since many of the intermediate private equity entities which notionally could have 'hoovered-up' liquidated assets were unable to access sufficient finance to do so; themselves in danger aversion and capital repair modes. Furthermore, many large auto-sector focused PE entities were already extremely busy executing 'turnarounds' at American and Canadian Tier 1 & 2 suppliers, exploring the bones of Chrysler and assessing new pseudo 'ground floor' investment in the GM re-listing.
It is then perhaps expedient to consider the PE community's attitude toward auto-sector restructures within the US and across Europe as respectively 'speedy' versus 'slow'.
Wall Street's Lehman Brother's 'moment' and the Sovereign Debt Crisis whilst inter-connected played out over slightly separate successive time-frames, and thus arguably allow for those tranches of America's enhanced liquidity, along with European Stability liquidity, to be invested into EU assets. Europe to see simultaneously merged FDI and 'self-help' funding, the former rationally directed at EU target companies and facilities where the business case (ideally US-EU synergistic) convinces.
The United States of Europe -
This structural difference an important distinction between the regions.
The American ability for a 'pre-pack' Chapter 11 full-scale restructuring of GM and Chrysler through a singular national legal framework, an amenable New York court system, and critically an 'on-board' UAW & general public; sits in stark contrast with the web of corporate, legal and social complexity that exists within Europe.
European leaders must wake-up to this American-European schism, and recognise the danger of slipping further behind the US, China and the increasingly strong economic blocs within Asia and Latin America.
However, in the meantime, the reality of intra-national European differences prevails, which in turn provides potential opportunities for non-European VMs and Supply Chain players to 'slice and dice' the body of the poorly performing members of the EU auto-sector. To obtain 'bolt-on' acquisitions which suit their own strategic ambitions across R&D, technical development, productivity, distribution and market-share.
[NB The 7% interest of GM in PSA might be viewed as part of this process of structural transformation].
In 2010 ACEA (the European Automobile Manufacturer's Association) noted in its yearly report that...”The automotive sector in Europe is highly competitive, supporting 12 million jobs, contributing significantly to economic prosperity. It supplies quality products worldwide and invests more in R&D than any other sector. Steps must be taken to ensure it emerges with strength from the economic downturn, ready to take advantage of market growth”.
Exactly which multi-national VM, which Tier 1 & Tier 2 companies, which distribution enterprises and which retailing groups come to finally benefit from the flux through FDI or Restructuring funding remains to be seen.
Conclusion -
VW AG, BMW AG and Daimler AG are deservedly flying high here and now, with indeed much to yet be gained as the macro-forces in Germany, North America, slowly the UK and eventually Europe provide what could be described as a domino earnings impetus. With of course China's own sustained growth also creating local and regional demand pull for these marques.
Yet the trickle-down of sizable ECB liquidity will undoubtedly eventually improve and re-energise national and regional EU market conditions. Simultaneously an offering a new generation of CO2 conscious vehicles from Peugeot SA, Renault SA and FIAT SpA should be able to excite still cost conscious but more spendthrift consumers, the VMs also theoretically able exercise historic near-reach export market opportunities.
Those valuation uplifts so desperately desired, themselves initially driven by a host of 'bottom-feeding' stock buyers, may possibly be attracted by adding greater 'pictorial detail' and 'aspirational clarity' to what for the most part are typically dry outlook summaries.
This era is obviously one of reflection and 'next move' strategising by company boards. And whilst highly confidential information cannot be leaked, it might prove useful to start relaying in broad terms the fundamentals of corporate intentions. Something that mimics a crystallised near-term ambition, as with VW's move on Porsche, with a far-horizon ideal – such as Toyota's legendary 100 year plan.
In the new age of 100 year (UK) government bonds, no doubt targeted at cash-rich corporations aswell as global pension funds, it makes sense for those auto-players presently in reduced circumstances to weave their substantive corporate intent into the minds of global investors.
Tuesday, 13 March 2012
Micro Level Trends – PSA & GM Alliance – The Alliance Mismatch...Yet Why The JV May 'Steel A March' on EU Auto-Sector Structural Reform
Industry and financial press discussion about the recent announcement of an alliance between PSA & GM has understandably been prolific.
investment-auto-motives' Previous Perspective -
Adding to the debate about conjectural value creation versus value destruction, on 28.02.2012 investment-auto-motives provided what it considers the end-game perspective between American and French interests. Specifically the hypothesis of GM seeking to 'return' the Chevrolet brand to France – the originator's own ancestaral homeland - so as to conquer those mainstream markets which the likes of Peugeot, Citroen & Renault (& FIAT) have ruled over decades. This done by purchasing and re-envigorating divested plants across France (as well as Italy and Spain) which provide for archetypical GM volume scale-led and US$ credit enabled empire building.
GM's 'Horizontal EU Expansion' Ambition -
Driven by the central issue of European production over-capacity and structural reform, that web-log of a few weeks ago sought to highlight how the very process of broad continental sector reform hastened by rapid need for corporate right-sizing amongst the national champion European VMs would provide the perfect storm for GM to re-invent itself inside Europe given its own much reduced 'balance sheet baggage' and the support of Federal Reserve enabled low cost liquidity exercises such as the various $2.3tr QE actions, $400bn Operation Twist and the recent initiation of 'Sterilised QE'.
That overview then gave the conjectural far-horizon view, and though aspects of the short-term were described, so providing the cautionary view on the alliance, it would serve to perhaps better explain why the synergies cited by PSA and GM are in reality far less tangible – especially so regards the key element of shared engineering platforms - than the corporate IR publicity machines headline grabbing rhetoric.
Exploiting The Trans-Atlantic Bourse -
The revelation of the cross-company dialogue which has been ongoing in earnest since early January is now well recognised by the investment community as seeking to create a 'good news' story with positive immediate and long-term effects on both company's respective share prices. A Franco-American hand-holding story especially pertinent in buoying stock prices given the corollary between the US and Europe by way of the NYSE-Euronext exchange - a conceivable case of pragmatic 'reverse pseudo financial engineering' – and the fact that the US is gaining economic traction whilst Europe is seemingly over the worst of its economic melt-down fears. Thus on the surface, a highly logical alliance given both company's European production woes, orchestrated as timed to macro-economic perfection; thus designed to impress Wall St, Paris & the City of London.
Managing Investor's Perceptions -
In reaction Volkwagen CEO Martin Winterkorn, who last week proclaimed that the alliance between GM & PSA essentially ratifies VW's synergy seeking in its own (brand differentiated) platform and systems sharing ethos.
However, whilst Winterkorn sought to proclaim VW's position as industry leader in this arena, there exists a very real difference between VW Group - as a unified entity that operates 100% holds over its divisional brands - and the new PSA-GM alliance. Whereas VW operates with singular control (as ingrained by Ferdinand Piech and seen with Porsche's eventual total absorption), the real-world dualistic demands of the PSA-GM alliance partners, driven by individual parent companies own strategic agendas, invariably means that it will not be able to act a decisively nor as deeply as the VW foe.
[NB Respective share-price and MarketCap valuation differences between VW and GM and PSA, highlights that point. As of 1.00pm GMT on 12.03.2012 : VW was E127.65 per ordinary share with MktCap of E59.39bn, GM was $25.62 and a MktCap of $40.11bn, PSA was E11.86 and MktCap of E2.69bn].
But Where is the Real GM-PSA Story? -
This is not to say that there is no synergistic operational overlap that can be leveraged for sizable 'behind the scenes' cost-down measures. Simply that investment-auto-motives believes that the ultimate outcome from the alliance may not provide the level of cost-saving that has been reported.- ie the overtly enormous $125bn purchasing pool first mentioned – given the lack of true synergies that can be captured which itself primarily results from the necessary need to defend core operations and primary product lines from intervention and thus interruption.
There undoubtedly are overlaps, the essential co-operative product stream to be highlighted where specific products can be targeted, but they in themselves will not provide the kind of 'supercharged' financial savings and income that the alliance message sought to propagate.
[NB. Beyond the alliance structure, GM and PSA are of course individual entities, and so the creation of the alliance hardly means that each is now “uninvestable”.
Instead, much depends upon both company's individual performance at cost and income levels. So, present and future proven progress in: regional markets (with +ve & -ve TIV trends), the divestment of redundant assets (as seen at both GM in its Chapter 11 procedure & recently at PSA), the strength of its technical strategy path which must marry regulatory demand with consumer needs and desires, the overall cost containment achievements spanning commodities and parts procurement, R&D , vehicle development & production out-sourcing , the 'externalities' impact of ongoing part-government ownership at GM and the dilution-effect of equity raising at PSA, etc etc etc. As ever, the grouped fundamentals, which must be grasped from the investor perspective to provide the ability to ascertain the 'sweet-spot' timing as to take either institutional, SWF, PE or private retail interests in these companies].
However, the central theme of this web-log is to convey the belief by investment-auto-motives that there is less innate 'investment power' within the new PSA-GM alliance than has been communicated by what are now mutually corroborative corporate PR machines.
[NB Exclamation by the popular car press states that critics say GME-PSA house has “ruinous dry rot, yet the pair are responding by building an extension”. This unfortunately over-emotionalises the necessary 'situational analysis' required].
Even so, it is only fair that the primary 'headlines' of the announcement be re-stated.
The JV Headlines -
- “Joint savings of $2 billion a year within five years”,
- “$125 billion purchasing power to be pooled”
- “Combined total of 12.5 million units”*
[NB * PSA annual build of 3.5m units / GM of 9.0m units].
Tim Zimmerman, Peugeot UK's Managing Director mentioned that “The terms of the alliance should be clear by the end of the year, and at the start we’ll make savings on commodities like steel. As the alliance progresses further, there’ll be savings on components, modules and platforms.” PSA's Director-General Frederic St Geours, a lead architect of the collaboration Alliance, has stated that alliance work started in earnest on 1st March, co-ordination via an 8-strong steering committee made up of four directors from both parties.
A main function of that committee will be to oversee what appears to be 4 matrix-type project teams which consist of multi-disciplinary departmental experts (ranging from procurement to engineering to production) which target a notionally identified 4 platform types:
1. B-segment platform(s)
2. D-segments platform(s)
3. Crossovers platform(s)
4. MPV platform(s).
The following very basically dissects the 'parts in the sum' to evaluate whether the 'sum of the parts' do indeed add up to 'more than the whole' as both alliance partners appear believe, and hope to convince investors.
Product Analysis -
The highlighting of 4 apparently very different vehicle types looks impressive, with seeming potential to accrue mass savings over what seem 4 distinct arenas; however, the reality is that since the emergence of 'module system sets' (pioneered by Ford & Toyota, Daimler, BMW and indeed PSA) the base 'platform' engineering of visually separate product lines is no longer wholly separate and distinct. Advanced IT systems and software have were developed to enable the creation of 'systems sets' which provide for far greater 'engineering exchange' in body structure, powertrain, chassis, electrical/electronic, trim & hardware across not only model variants, but across different models within a specific segment and importantly in recent years even across different segments.
[NB. Such engineering corroberation between A & B, B & C and C & D segment vehicles is much of the reason that basic vehicle dimensions have grown over the last few decades].
This basic explanation then demonstrates that increasingly MPV and Cross-Over engineering systems have merged, indeed Chevrolet's use of the separate terms to direct prospective customers viewing its European website toward the same product offerings highlight the trend of technical merge between these two once distinct classes. Moreover, the fact is that whilst there are smaller siblings of the same genre, the D-segment actually encompasses the majority of larger, space-functional MPVs and Cross-Overs, so a D-segment car (in its own sedan, coupe, wagon, body variants) will share much of the under-pinnings of a similarly foot-print sized MPV and Cross-Over.
Thus items 2, 3 & 4 listed by the alliance are in fact to a great extent the very same engineering platform base. But, any idea of a deeply ingrained platform share agreement which includes mutual R&D, engineering development and 'productionisation' appears hollow. Instead of heavy R&D and operational spend on such a platform, investment-auto-motives believes that PSA will simply in the medium term adopt and adapt (ie brand engineer) its partner's GM vehicles across the D-segment, thus effectually replacing the agreement with Mitsubishi and relieving itself of costly large car responsibilities.
[NB Since the demise of the Peugeot 505, history has proven it economically untenable for PSA to create its own platform in this field, though its does (at a reducing rate of loss) so as to appear a full-line producer (thanks to increased module share 'into' the 508 and to French government and French fleet sales].
However, whilst there may seem potential for far-horizon collaboration for a D-segment (mid-size in US) sedan and its variants, the fact that the majority of sales for this sized car are in North America and China – both GM strongholds – thus give GM the scale advantage, so the engineering eminance and so disadvantages PSA. Importantly, GM must necessarily maintain near total control over this platform to ensure its core American model Malibu can compete directly against the Ford Fusion (& Taurus), Honda Accord, Toyota Camry and now Hyundai Sonata & Kia Optima on both production cost vehicle attributes. Thus, the ability for PSA to notionally co-develop and so influence its base engineering for Peugeot, Citroen and DS attributes looks highly unlikely, more so since the 8th generation Malibu will be introduced in 2013, making it virtually impossible for PSA to 'mould' the car to its requirements, thus would either be forced to simply 'badge engineer' or to undertake an ill-advised 'SAAB-esque' approach.
[NB The SAAB experience under GM being that it had to add the high cost of a 'DNA' re-design programme to the original 'percentagised' development cost of the base car programme. Both these CapEx and R&D expenditures then required to be ammortised over dwindling sales volumes].
As for the mutual development of a B-segment platform, as investment-auto-motives stated in its previous essay, this segment has now become key to all volume manufacturers. The the case given that this segment has in recent decades it has held the largest portion of global industry TIV, with that trend set to grow because of continued economic expansion in 'BRIC' & 'Next 11' EM markets have a proclivity for compact cars, and the fact that the 'developed' 'triad markets (Europe, N.America and Japan) continue to 'down-size' in car size due to reduced spending power and an ageing population which seeks smaller car running costs and manouvrability.
As a result, it seems incomprehensible that any volume manufacturers - especially GM and PSA given their growth ambitions – would seek to share their individual control over such a critical issues as product, strategic and income destinies.
It was stated outright by both alliance partners that exploration of the A-segment was not included in the alliance, this it is assumed because of the in-house capability at GM which stems from its Korean operations, and the fact that PSA will very probably seek to retain commercial JV links with Toyota for future generations of Aygo/107/C1.
And it was equally stated that the C-segment would not be mutually explored because of PSA's recent introduction of the new 408 which will have approximately an 8 year lifespan, thus not to be replaced until 2018-19.
Thus all the conventional car arenas offer little collaborative space.
A Focus on Commercial Vehicles -
The only alternative arena is commercial vehicles, ie Vans and their myriad of model and variant types. Here, investment-auto-motives believes, the present JV experience of Chrysler-Daimler (ie not Daimler-Chrysler alliance of old) has had an important affect on GM & PSA executives.
Chrysler has ostensibly 'off-shored' a major part of its US commercial vehicle division by 're-badging' (and critically 'de-costing') Mercedes-Benz van products as its own under the Dodge brand.
It is suspected by investment-auto-motives that GM will undertake a similar strategy within Europe, done so by switching partners from Renault (from which its uses Master and Trafic models) to PSA, so as to fill capacity at its Luton van production centre in Luton, UK. Given that PSA already relies upon its FIAT alliance to produce its 'Eurovans' in both 'Sevel Sud' (Italy) and 'Sevel Nord' (France), the situation in turn generates conjecture that GM will join this duo as a third partner.
Steeling The Far Reach Competitive March -
Given the higher portion of metal content of box-vans – on a parts count and systems-value basis - this PSA-FIAT-GM joint venture could then better impose its will for raw materials discounting from global steel suppliers; an arena which Philippe Varin of course knows intimately.
Conclusion & Hypothesis -
To summarise, from the all important product perspective there appears little immediate and indeed medium-term scope for major cost-cutting exercises beyond that offered by the creation of a new commercial vehicles triumvirate group.
However, that group and associated conjoined commercial enterprise may seek to lay the foundations for broader materials procurement leverage on behalf of the passenger cars divisions within PSA and GM.
This then suggests the possibility that the PSA-FIAT-GM commercial vehicles group latterly spin-off a raw materials buying entity – essentially an intermediate broker - which could perhaps better serve the industrial bargaining needs of PSA & GM, and indeed become a co-ordinator for a much enlarged European Chevrolet (as described) aswell as other European based indigenous producers (eg Renault, VW, BMW, Daimler) aswell as present Asian 'transplant' producers (eg Hyundai-Kia) and possibly Chinese manufacturers (eg Geely, SAIC, BYD, Great Wall).
Given the lack of deep product and product programme rational behind the GM-PSA alliance, there must exist other compelling reasoning.
So the possibility may well exist that whilst GM expands horizontally further into Europe via PSA's production base, PSA itself could as well as climbing the value-ladder with the 'transport solution' ideology that is 'Mu', also seek to descend the value-ladder into the world of low-value metals, but as a broker not direct supplier, then possibly broadening to brokering higher value metals and materials which are becoming ever more critical to vehicle structures to achieve low CO2 targets by 2020 and 2050.
Thus, the rational of the GM-PSA alliance could then be far deeper than anyone imagined, with far greater consequences for structural reform of European car-making.
The rightly self-congratulatory Volkswagen (sat on its net liquidity cash cushion of E17bn) - like those at BMW & Daimler - might wish to consider more deeply the far-horizon consequences this conjectural hypothesis holds.
But for VM competitors and the myriad of investor types alike, the synergies of the GM-PSA alliance itself offers little immediate excitement. Instead, it seems a necessary case of reading between the lines to understand the true logic, and here the hypothetical influence appears set on the 'invisible' far horizon. That of necessary corporate structural change 'horizontally' and 'vertically' that can both serve and gain reward from the sector's own evolution as determined by a changed EU market demand dynamics and the broader competitive environment.
investment-auto-motives' Previous Perspective -
Adding to the debate about conjectural value creation versus value destruction, on 28.02.2012 investment-auto-motives provided what it considers the end-game perspective between American and French interests. Specifically the hypothesis of GM seeking to 'return' the Chevrolet brand to France – the originator's own ancestaral homeland - so as to conquer those mainstream markets which the likes of Peugeot, Citroen & Renault (& FIAT) have ruled over decades. This done by purchasing and re-envigorating divested plants across France (as well as Italy and Spain) which provide for archetypical GM volume scale-led and US$ credit enabled empire building.
GM's 'Horizontal EU Expansion' Ambition -
Driven by the central issue of European production over-capacity and structural reform, that web-log of a few weeks ago sought to highlight how the very process of broad continental sector reform hastened by rapid need for corporate right-sizing amongst the national champion European VMs would provide the perfect storm for GM to re-invent itself inside Europe given its own much reduced 'balance sheet baggage' and the support of Federal Reserve enabled low cost liquidity exercises such as the various $2.3tr QE actions, $400bn Operation Twist and the recent initiation of 'Sterilised QE'.
That overview then gave the conjectural far-horizon view, and though aspects of the short-term were described, so providing the cautionary view on the alliance, it would serve to perhaps better explain why the synergies cited by PSA and GM are in reality far less tangible – especially so regards the key element of shared engineering platforms - than the corporate IR publicity machines headline grabbing rhetoric.
Exploiting The Trans-Atlantic Bourse -
The revelation of the cross-company dialogue which has been ongoing in earnest since early January is now well recognised by the investment community as seeking to create a 'good news' story with positive immediate and long-term effects on both company's respective share prices. A Franco-American hand-holding story especially pertinent in buoying stock prices given the corollary between the US and Europe by way of the NYSE-Euronext exchange - a conceivable case of pragmatic 'reverse pseudo financial engineering' – and the fact that the US is gaining economic traction whilst Europe is seemingly over the worst of its economic melt-down fears. Thus on the surface, a highly logical alliance given both company's European production woes, orchestrated as timed to macro-economic perfection; thus designed to impress Wall St, Paris & the City of London.
Managing Investor's Perceptions -
In reaction Volkwagen CEO Martin Winterkorn, who last week proclaimed that the alliance between GM & PSA essentially ratifies VW's synergy seeking in its own (brand differentiated) platform and systems sharing ethos.
However, whilst Winterkorn sought to proclaim VW's position as industry leader in this arena, there exists a very real difference between VW Group - as a unified entity that operates 100% holds over its divisional brands - and the new PSA-GM alliance. Whereas VW operates with singular control (as ingrained by Ferdinand Piech and seen with Porsche's eventual total absorption), the real-world dualistic demands of the PSA-GM alliance partners, driven by individual parent companies own strategic agendas, invariably means that it will not be able to act a decisively nor as deeply as the VW foe.
[NB Respective share-price and MarketCap valuation differences between VW and GM and PSA, highlights that point. As of 1.00pm GMT on 12.03.2012 : VW was E127.65 per ordinary share with MktCap of E59.39bn, GM was $25.62 and a MktCap of $40.11bn, PSA was E11.86 and MktCap of E2.69bn].
But Where is the Real GM-PSA Story? -
This is not to say that there is no synergistic operational overlap that can be leveraged for sizable 'behind the scenes' cost-down measures. Simply that investment-auto-motives believes that the ultimate outcome from the alliance may not provide the level of cost-saving that has been reported.- ie the overtly enormous $125bn purchasing pool first mentioned – given the lack of true synergies that can be captured which itself primarily results from the necessary need to defend core operations and primary product lines from intervention and thus interruption.
There undoubtedly are overlaps, the essential co-operative product stream to be highlighted where specific products can be targeted, but they in themselves will not provide the kind of 'supercharged' financial savings and income that the alliance message sought to propagate.
[NB. Beyond the alliance structure, GM and PSA are of course individual entities, and so the creation of the alliance hardly means that each is now “uninvestable”.
Instead, much depends upon both company's individual performance at cost and income levels. So, present and future proven progress in: regional markets (with +ve & -ve TIV trends), the divestment of redundant assets (as seen at both GM in its Chapter 11 procedure & recently at PSA), the strength of its technical strategy path which must marry regulatory demand with consumer needs and desires, the overall cost containment achievements spanning commodities and parts procurement, R&D , vehicle development & production out-sourcing , the 'externalities' impact of ongoing part-government ownership at GM and the dilution-effect of equity raising at PSA, etc etc etc. As ever, the grouped fundamentals, which must be grasped from the investor perspective to provide the ability to ascertain the 'sweet-spot' timing as to take either institutional, SWF, PE or private retail interests in these companies].
However, the central theme of this web-log is to convey the belief by investment-auto-motives that there is less innate 'investment power' within the new PSA-GM alliance than has been communicated by what are now mutually corroborative corporate PR machines.
[NB Exclamation by the popular car press states that critics say GME-PSA house has “ruinous dry rot, yet the pair are responding by building an extension”. This unfortunately over-emotionalises the necessary 'situational analysis' required].
Even so, it is only fair that the primary 'headlines' of the announcement be re-stated.
The JV Headlines -
- “Joint savings of $2 billion a year within five years”,
- “$125 billion purchasing power to be pooled”
- “Combined total of 12.5 million units”*
[NB * PSA annual build of 3.5m units / GM of 9.0m units].
Tim Zimmerman, Peugeot UK's Managing Director mentioned that “The terms of the alliance should be clear by the end of the year, and at the start we’ll make savings on commodities like steel. As the alliance progresses further, there’ll be savings on components, modules and platforms.” PSA's Director-General Frederic St Geours, a lead architect of the collaboration Alliance, has stated that alliance work started in earnest on 1st March, co-ordination via an 8-strong steering committee made up of four directors from both parties.
A main function of that committee will be to oversee what appears to be 4 matrix-type project teams which consist of multi-disciplinary departmental experts (ranging from procurement to engineering to production) which target a notionally identified 4 platform types:
1. B-segment platform(s)
2. D-segments platform(s)
3. Crossovers platform(s)
4. MPV platform(s).
The following very basically dissects the 'parts in the sum' to evaluate whether the 'sum of the parts' do indeed add up to 'more than the whole' as both alliance partners appear believe, and hope to convince investors.
Product Analysis -
The highlighting of 4 apparently very different vehicle types looks impressive, with seeming potential to accrue mass savings over what seem 4 distinct arenas; however, the reality is that since the emergence of 'module system sets' (pioneered by Ford & Toyota, Daimler, BMW and indeed PSA) the base 'platform' engineering of visually separate product lines is no longer wholly separate and distinct. Advanced IT systems and software have were developed to enable the creation of 'systems sets' which provide for far greater 'engineering exchange' in body structure, powertrain, chassis, electrical/electronic, trim & hardware across not only model variants, but across different models within a specific segment and importantly in recent years even across different segments.
[NB. Such engineering corroberation between A & B, B & C and C & D segment vehicles is much of the reason that basic vehicle dimensions have grown over the last few decades].
This basic explanation then demonstrates that increasingly MPV and Cross-Over engineering systems have merged, indeed Chevrolet's use of the separate terms to direct prospective customers viewing its European website toward the same product offerings highlight the trend of technical merge between these two once distinct classes. Moreover, the fact is that whilst there are smaller siblings of the same genre, the D-segment actually encompasses the majority of larger, space-functional MPVs and Cross-Overs, so a D-segment car (in its own sedan, coupe, wagon, body variants) will share much of the under-pinnings of a similarly foot-print sized MPV and Cross-Over.
Thus items 2, 3 & 4 listed by the alliance are in fact to a great extent the very same engineering platform base. But, any idea of a deeply ingrained platform share agreement which includes mutual R&D, engineering development and 'productionisation' appears hollow. Instead of heavy R&D and operational spend on such a platform, investment-auto-motives believes that PSA will simply in the medium term adopt and adapt (ie brand engineer) its partner's GM vehicles across the D-segment, thus effectually replacing the agreement with Mitsubishi and relieving itself of costly large car responsibilities.
[NB Since the demise of the Peugeot 505, history has proven it economically untenable for PSA to create its own platform in this field, though its does (at a reducing rate of loss) so as to appear a full-line producer (thanks to increased module share 'into' the 508 and to French government and French fleet sales].
However, whilst there may seem potential for far-horizon collaboration for a D-segment (mid-size in US) sedan and its variants, the fact that the majority of sales for this sized car are in North America and China – both GM strongholds – thus give GM the scale advantage, so the engineering eminance and so disadvantages PSA. Importantly, GM must necessarily maintain near total control over this platform to ensure its core American model Malibu can compete directly against the Ford Fusion (& Taurus), Honda Accord, Toyota Camry and now Hyundai Sonata & Kia Optima on both production cost vehicle attributes. Thus, the ability for PSA to notionally co-develop and so influence its base engineering for Peugeot, Citroen and DS attributes looks highly unlikely, more so since the 8th generation Malibu will be introduced in 2013, making it virtually impossible for PSA to 'mould' the car to its requirements, thus would either be forced to simply 'badge engineer' or to undertake an ill-advised 'SAAB-esque' approach.
[NB The SAAB experience under GM being that it had to add the high cost of a 'DNA' re-design programme to the original 'percentagised' development cost of the base car programme. Both these CapEx and R&D expenditures then required to be ammortised over dwindling sales volumes].
As for the mutual development of a B-segment platform, as investment-auto-motives stated in its previous essay, this segment has now become key to all volume manufacturers. The the case given that this segment has in recent decades it has held the largest portion of global industry TIV, with that trend set to grow because of continued economic expansion in 'BRIC' & 'Next 11' EM markets have a proclivity for compact cars, and the fact that the 'developed' 'triad markets (Europe, N.America and Japan) continue to 'down-size' in car size due to reduced spending power and an ageing population which seeks smaller car running costs and manouvrability.
As a result, it seems incomprehensible that any volume manufacturers - especially GM and PSA given their growth ambitions – would seek to share their individual control over such a critical issues as product, strategic and income destinies.
It was stated outright by both alliance partners that exploration of the A-segment was not included in the alliance, this it is assumed because of the in-house capability at GM which stems from its Korean operations, and the fact that PSA will very probably seek to retain commercial JV links with Toyota for future generations of Aygo/107/C1.
And it was equally stated that the C-segment would not be mutually explored because of PSA's recent introduction of the new 408 which will have approximately an 8 year lifespan, thus not to be replaced until 2018-19.
Thus all the conventional car arenas offer little collaborative space.
A Focus on Commercial Vehicles -
The only alternative arena is commercial vehicles, ie Vans and their myriad of model and variant types. Here, investment-auto-motives believes, the present JV experience of Chrysler-Daimler (ie not Daimler-Chrysler alliance of old) has had an important affect on GM & PSA executives.
Chrysler has ostensibly 'off-shored' a major part of its US commercial vehicle division by 're-badging' (and critically 'de-costing') Mercedes-Benz van products as its own under the Dodge brand.
It is suspected by investment-auto-motives that GM will undertake a similar strategy within Europe, done so by switching partners from Renault (from which its uses Master and Trafic models) to PSA, so as to fill capacity at its Luton van production centre in Luton, UK. Given that PSA already relies upon its FIAT alliance to produce its 'Eurovans' in both 'Sevel Sud' (Italy) and 'Sevel Nord' (France), the situation in turn generates conjecture that GM will join this duo as a third partner.
Steeling The Far Reach Competitive March -
Given the higher portion of metal content of box-vans – on a parts count and systems-value basis - this PSA-FIAT-GM joint venture could then better impose its will for raw materials discounting from global steel suppliers; an arena which Philippe Varin of course knows intimately.
Conclusion & Hypothesis -
To summarise, from the all important product perspective there appears little immediate and indeed medium-term scope for major cost-cutting exercises beyond that offered by the creation of a new commercial vehicles triumvirate group.
However, that group and associated conjoined commercial enterprise may seek to lay the foundations for broader materials procurement leverage on behalf of the passenger cars divisions within PSA and GM.
This then suggests the possibility that the PSA-FIAT-GM commercial vehicles group latterly spin-off a raw materials buying entity – essentially an intermediate broker - which could perhaps better serve the industrial bargaining needs of PSA & GM, and indeed become a co-ordinator for a much enlarged European Chevrolet (as described) aswell as other European based indigenous producers (eg Renault, VW, BMW, Daimler) aswell as present Asian 'transplant' producers (eg Hyundai-Kia) and possibly Chinese manufacturers (eg Geely, SAIC, BYD, Great Wall).
Given the lack of deep product and product programme rational behind the GM-PSA alliance, there must exist other compelling reasoning.
So the possibility may well exist that whilst GM expands horizontally further into Europe via PSA's production base, PSA itself could as well as climbing the value-ladder with the 'transport solution' ideology that is 'Mu', also seek to descend the value-ladder into the world of low-value metals, but as a broker not direct supplier, then possibly broadening to brokering higher value metals and materials which are becoming ever more critical to vehicle structures to achieve low CO2 targets by 2020 and 2050.
Thus, the rational of the GM-PSA alliance could then be far deeper than anyone imagined, with far greater consequences for structural reform of European car-making.
The rightly self-congratulatory Volkswagen (sat on its net liquidity cash cushion of E17bn) - like those at BMW & Daimler - might wish to consider more deeply the far-horizon consequences this conjectural hypothesis holds.
But for VM competitors and the myriad of investor types alike, the synergies of the GM-PSA alliance itself offers little immediate excitement. Instead, it seems a necessary case of reading between the lines to understand the true logic, and here the hypothetical influence appears set on the 'invisible' far horizon. That of necessary corporate structural change 'horizontally' and 'vertically' that can both serve and gain reward from the sector's own evolution as determined by a changed EU market demand dynamics and the broader competitive environment.
Tuesday, 6 March 2012
Macro Level Trends – The Falkland Isles – Determining an Innovative Alternative (Energy) Course from Re-Cycled Oil Funds.
Recent weeks have seen a perceptible build-up of irritation between Britain and Argentina over the sovereignty of The Falkland Isles. And because of historical precedence, possibly connotations regards the neighbouring region Southern Georgia and the Sandwich Islands.
The proposal by Buenos Aires to effectively boycott UK goods and services, soon after the docking prohibition of 2 British cruise-ships, is stated as a reaction to what it describes as 'militarisation' of the territory, including what is regards as the highly symbolic gesture by stationing Prince William on the Isles. This action described as effectively “entirely routine” by the Foreign Office.
Background -
'The Falklands' consists the 2 main islands of West and East Falkland, the capital Stanley located on the East, plus another 776 far smaller islands. Britain has held, inhabited and defended the archipelago since 1833 (and 1755 in South Georgia's case), 1982 the last evident re-assertion of its ownership.
The 1982 Falklands War is of course etched into the political and social memories of both countries, initiated when Argentina's then junta government, led by General Galtieri, ordered the invasion of both territories, and so impelling Britain to act.
Fringe voices at the time believed that the war served as a public distraction from both countries' economic woes. Whilst such an argument might be re-aired today, the central matter far beyond 'distraction stories' is that of natural resource wealth.
Resource Wealth -
Oil exploration is gaining greater interest, and so may add massive economic boost over and above the long-standing but lower value activities if fishing and farming. The possibility of such 'black gold' providing a far more local and UK national energy security at reduced cost and of course the foreign earnings income from oil exportation into Latin America and further afield .
Reuters provided succinct précis of the issue in mid February, when it highlighted that the 'upstream' oil exploration company Rockhopper discovered the 'SeaLion' field in 2010. Ongoing activity by Rockhopper appears to indicate positive exploratory signs, the reaction from one oil orientated investment research house being that it understood a 10-25% chance of successful strike within the 8 billion barrel field; possibly providing an oil income of $167bn over the following 20 years and so a tax & royalty provision of $10.5bn.
This would be partially used in defending the realm, partially adding to the UK's own central coffers and in itself suggests that any such additional income would revolutionise the lives of the 3,000 people who inhabit the territories.
Thus such revelations about the potential of oil has unsurprisingly created renewed intra-national relationship tensions. Britain seeking to subtly demonstrate its national commitment and re-assurance to the islanders, whilst Argentina seeks to gain favour with its calls on the UN to cite the UK as an aggressor.
UK press reports state that Argentina, with a much depleted trade surplus due to necessary imports of natural gas, is under increasing pressure to find new energy sources, the South Atlantic its hunting ground.
Talk of Renewed War -
UK national media speculation – typically narrow in debate given the sound-bite age - obviously reflects upon the victory of 1982, re-animates popular consciousness in the battle of Goose Green and seeks out quotes from retired Major-General's and 'national heroes' such as the much admired Simon Weston.
[NB Weston undoubtedly admired for his personal endurance and compassion by the public, as opposed to any notional 'war hero' status].
The popular newspapers abound then with a re-telling of the 1982 story and the given perspectives of 'talking head' politicians, diplomats and soldiers; a particular favourite item being the 'what if' scenario of renewed combat, the expectation of British success and the present 'capability gap' to ensure such success.
The popular press then highlights what appears the 'Hobson's Choice' of willingly waging a new war 30 years on, if indeed “jaw-jaw” diplomacy breaks-down, versus the idea of loosening sovereign ties to aid supposed goodwill with Argentina and Latin America.
The following provides a very basic and obvious outline of these two options. Critically it seeks to move the debate further by indicating a third option; one which combines a strengthening of Britain's South Atlantic position in The Falklands along with greater scientific and trade engagement with Argentina, Brazil, Chile and Peru and
Option 1 – Secured UK Sovereignty through New War
Option 2 – Shared Sovereignty regards Off-shore & On-Shore Rights
Option 3 – Secured UK Sovereignty UK investment and innovation
Option 1 – New War
Only one generation and well inside living memory the events of 1982 could be blamed for stirring what should be national pride into low-level jingoism, on both sides. Whilst arguably seeping nationalistic feelings into the minds of the mass populous, must also be recognised as very seperate from the actuality of planning for, and undertaking combat – whether reactive, or proactive. No doubt both countries are running hypothetical exercises based upon self and allied capabilities and so 'scenario planning' possible events and courses.
However, much like in 1982, the support of national allies looks doubtful indeed, this reasoning based upon the the inexactitude of the 'spoils' to be had, which in any case appear small by international standards.
This leaves Argentina and Britain as sole adversaries.
The mere scale of the UK defence force (2009 figures) was 198,000 troops in its standing army and 212,000 reservists. This versus Argentina's 73,000 strong standing army, no reservists, but 31,000 in paramilitary uniform. These then reflect man-power ratios of 2.7 to 1 in the UK's favour regards respective standing armies. And including reservist / paramilitary rises to near 4 to 1 in the UK's favour. Whilst the UK force has and is shrinking, Argentina recognises that its absorption in Iraq and Afghanistan are much diminished, and unlike 1982 the UK has far fewer troops stationed in the fixed positions, as was the case with Germany versus the Communist Eastern Bloc threat and in outposts such as Hong Kong.
In the meantime whilst Argentina obviously has the locational advantage, it also has a very lengthy border to patrol, greater social instability to contain if civil unrest does appear and cannot feasibly rely upon neighbours for support given the much desired internal and intra-national stability that has appeared in the region thanks to economic reforms, open markets and continued if slowed FDI.
Based on these very simplistic facts, the break-out of war looks unlikely. Indeed, the very fact that the UK cannot deploy an aircraft carrier as it did 30 years ago – to fore-shorten the war - indicates that hostilities would be a lengthy war of attrition.
Option 2 – Shared Sovereignty
One more irreverent political discussion programme opened the debate to a wider context, inviting a guest to offer the counter argument of sharing the isle's sovereignty. So as to also be recognised as Islas Malvinas.
It was stated that the UK (in words to such effect) “ought to realise its much diminished global role and capabilities” given the rising economic and political power of Latin America itself. The argument set-out being that that such a move of 'shared sovereignty' would provide the UK with greater links with the giant that is Brazil via Argentina as an intermediate.
This counterpoint certainly has a simplistic appeal in offering (potentially economically costly) goodwill. Yet in reality it could be seen as a sign of 'cowering' to Argentina and thus instigate greater 'give-aways' in other political and commercial terms with the region. And thus critically very probably provides little 'real politik' reward relative to the UK's relationship with Latin America.
Moreover, the history of the 180 year British rule over the islands, the ancestry of the indigenous population, the price paid in 1982, the national scientific interests in the notionally 'near-by' South Georgia (ie the British Antarctic Survey), plus the latter possibility of striking oil essentially dictate that the very idea of sharing of the isles, nor in-shore waters, nor off-shore waters will not be entertained by the British government on behalf of its people.
There could however, be an alternative method for substantiating British rule and simultaneously create better relations with Argentina and Latin America. And this would be by fundamentally altering the 'value-adding role' The Falklands plays.
Option 3 – UK (& EU) Investment and Innovation
The title of this web-blog is 'Determining an Innovative Alternative (Energy) Course from Re-Cycled Oil Funds'.
Its double-fold message being that an alternative path may be created which circumnavigates the threat of future war by nurturing The Falklands to become a highly regarded global centre of excellence for alternative energy capture and exploitation.
Te initiative to be substantively financed by any latter-day successful oil-field finds, after initial direct investment by the British government and allied eco-tech orientated British industry; consisting of companies both with and without Northern European subsidiaries and parents.
[NB Here government liquidity should be funnelled via the Green Investment Bank – within or additional to its £3bn set-up fund – with perhaps a dedicated Falklands division. The BIS to appropriate a portion of its start-up funding].
Thus in effect investment-auto-motives' proposal calls for the creation of an eco-tech 'landing-stage' in the Falklands for UK and Northern European sourced eco-tech and eco-models, the islands then utilised as a trade 'spring-board' for Latin America expansion.
[NB It is expected that Northern European partners would also exploit this route to market, either as a primary avenue, or as a complimentary strategy].
Thus providing for far stronger philosophical co-interests via R&D and commercial trade links between the UK and its Overseas territory and in turn better business connectivity with Scandinavia, Germany etc.
Which in turn creates far more meaningful and regionally influential British reach across the Strait of Magellan. To ideally provide both 'thought leadership' and act as a new enterprise hub which integrates itself into Latin American technical and ecological ambitions, so positively influencing economic development.
Thus developing the Falkland activity base beyond its historical leaning toward primary industries and associated 'orbital' value-chain linked businesses, into areas that are future-forward, so as to evolve its very perception to the outside world; including world agencies such as the UN.
This is not to say that the islands would be completely transformed into a kind of politically motivated, Disney-esque technological business park Far from it, its origins, history are ever present in Falklander's lives and surroundings, so far too important to loose. Instead its past should serve as inspiration.
[NB. That physical reflection of the “Falkland persona” married with with other intrinsically British vernacular architecture, typified by the Arts & Crafts movement].
This new secondary activity layer of 21st century eco-R&D and eco-commercialism, would be naturally woven into the original “fishing & farming” heartland. It would itself parallel and indeed be partially underpinned by the 'self-sufficiency', non-materialistic heartland which is central to Falkland persona.
[NB. It seems that The Falkland's remoteness has somewhat protected it from modern-day influence, and as a result it still enjoys the positive values and charms of 1950s Britain. To such an extend that former Governor-Generals drove an old London Black Cab right up until the vehicle's 'retirement' in late 2010. This as both a directly euphemistic link to London, to espouse the 'Best of Britain' and so that it might be easily serviced and repaired]
Moreover, such an important UK ambition which fosters trade and so averts war could possibly be an adapted extension of the 'non-threatening' ethics and principles reflected with the Antarctic Treaty System, which has seen such great international co-operation.
Eco-projects and commercialisation would span eco-habitation, eco-mobility and eco-industry; agriculture obviously forming a cornerstone.
[NB investment-auto-motives expects that such cross-fertilisation between eco-sectors would have immense ramifications for the automotive world, especially so for the small and medium sized agricultural enterprises that deal in higher value crops (such as cocoa) in much of 'hilly' developing Latin America. (In contrast to the heavily mechanised 'pampas' of Brazil and Argentina].
So, to conclude, the present challenge that is the The Falklands should instead be viewed as a critical 21st century opportunity by both the UK and Argentina. No side seeks “gun-boat diplomacy, let alone out-right war, especially so in today's fragile global economic climate.
Instead both nations should see an alternative, long-horizon outcome that serves both interests. And The Falklands, serving as the eco-tech and eco-commerce bridge between Europe and S.America in 'safe& secure' British hands is that very solution.
investment-auto-motives sincerely wishes that this alternative outlook assists in the avoidance of spilling both sides blood, both today and in the years to come.
The proposal by Buenos Aires to effectively boycott UK goods and services, soon after the docking prohibition of 2 British cruise-ships, is stated as a reaction to what it describes as 'militarisation' of the territory, including what is regards as the highly symbolic gesture by stationing Prince William on the Isles. This action described as effectively “entirely routine” by the Foreign Office.
Background -
'The Falklands' consists the 2 main islands of West and East Falkland, the capital Stanley located on the East, plus another 776 far smaller islands. Britain has held, inhabited and defended the archipelago since 1833 (and 1755 in South Georgia's case), 1982 the last evident re-assertion of its ownership.
The 1982 Falklands War is of course etched into the political and social memories of both countries, initiated when Argentina's then junta government, led by General Galtieri, ordered the invasion of both territories, and so impelling Britain to act.
Fringe voices at the time believed that the war served as a public distraction from both countries' economic woes. Whilst such an argument might be re-aired today, the central matter far beyond 'distraction stories' is that of natural resource wealth.
Resource Wealth -
Oil exploration is gaining greater interest, and so may add massive economic boost over and above the long-standing but lower value activities if fishing and farming. The possibility of such 'black gold' providing a far more local and UK national energy security at reduced cost and of course the foreign earnings income from oil exportation into Latin America and further afield .
Reuters provided succinct précis of the issue in mid February, when it highlighted that the 'upstream' oil exploration company Rockhopper discovered the 'SeaLion' field in 2010. Ongoing activity by Rockhopper appears to indicate positive exploratory signs, the reaction from one oil orientated investment research house being that it understood a 10-25% chance of successful strike within the 8 billion barrel field; possibly providing an oil income of $167bn over the following 20 years and so a tax & royalty provision of $10.5bn.
This would be partially used in defending the realm, partially adding to the UK's own central coffers and in itself suggests that any such additional income would revolutionise the lives of the 3,000 people who inhabit the territories.
Thus such revelations about the potential of oil has unsurprisingly created renewed intra-national relationship tensions. Britain seeking to subtly demonstrate its national commitment and re-assurance to the islanders, whilst Argentina seeks to gain favour with its calls on the UN to cite the UK as an aggressor.
UK press reports state that Argentina, with a much depleted trade surplus due to necessary imports of natural gas, is under increasing pressure to find new energy sources, the South Atlantic its hunting ground.
Talk of Renewed War -
UK national media speculation – typically narrow in debate given the sound-bite age - obviously reflects upon the victory of 1982, re-animates popular consciousness in the battle of Goose Green and seeks out quotes from retired Major-General's and 'national heroes' such as the much admired Simon Weston.
[NB Weston undoubtedly admired for his personal endurance and compassion by the public, as opposed to any notional 'war hero' status].
The popular newspapers abound then with a re-telling of the 1982 story and the given perspectives of 'talking head' politicians, diplomats and soldiers; a particular favourite item being the 'what if' scenario of renewed combat, the expectation of British success and the present 'capability gap' to ensure such success.
The popular press then highlights what appears the 'Hobson's Choice' of willingly waging a new war 30 years on, if indeed “jaw-jaw” diplomacy breaks-down, versus the idea of loosening sovereign ties to aid supposed goodwill with Argentina and Latin America.
The following provides a very basic and obvious outline of these two options. Critically it seeks to move the debate further by indicating a third option; one which combines a strengthening of Britain's South Atlantic position in The Falklands along with greater scientific and trade engagement with Argentina, Brazil, Chile and Peru and
Option 1 – Secured UK Sovereignty through New War
Option 2 – Shared Sovereignty regards Off-shore & On-Shore Rights
Option 3 – Secured UK Sovereignty UK investment and innovation
Option 1 – New War
Only one generation and well inside living memory the events of 1982 could be blamed for stirring what should be national pride into low-level jingoism, on both sides. Whilst arguably seeping nationalistic feelings into the minds of the mass populous, must also be recognised as very seperate from the actuality of planning for, and undertaking combat – whether reactive, or proactive. No doubt both countries are running hypothetical exercises based upon self and allied capabilities and so 'scenario planning' possible events and courses.
However, much like in 1982, the support of national allies looks doubtful indeed, this reasoning based upon the the inexactitude of the 'spoils' to be had, which in any case appear small by international standards.
This leaves Argentina and Britain as sole adversaries.
The mere scale of the UK defence force (2009 figures) was 198,000 troops in its standing army and 212,000 reservists. This versus Argentina's 73,000 strong standing army, no reservists, but 31,000 in paramilitary uniform. These then reflect man-power ratios of 2.7 to 1 in the UK's favour regards respective standing armies. And including reservist / paramilitary rises to near 4 to 1 in the UK's favour. Whilst the UK force has and is shrinking, Argentina recognises that its absorption in Iraq and Afghanistan are much diminished, and unlike 1982 the UK has far fewer troops stationed in the fixed positions, as was the case with Germany versus the Communist Eastern Bloc threat and in outposts such as Hong Kong.
In the meantime whilst Argentina obviously has the locational advantage, it also has a very lengthy border to patrol, greater social instability to contain if civil unrest does appear and cannot feasibly rely upon neighbours for support given the much desired internal and intra-national stability that has appeared in the region thanks to economic reforms, open markets and continued if slowed FDI.
Based on these very simplistic facts, the break-out of war looks unlikely. Indeed, the very fact that the UK cannot deploy an aircraft carrier as it did 30 years ago – to fore-shorten the war - indicates that hostilities would be a lengthy war of attrition.
Option 2 – Shared Sovereignty
One more irreverent political discussion programme opened the debate to a wider context, inviting a guest to offer the counter argument of sharing the isle's sovereignty. So as to also be recognised as Islas Malvinas.
It was stated that the UK (in words to such effect) “ought to realise its much diminished global role and capabilities” given the rising economic and political power of Latin America itself. The argument set-out being that that such a move of 'shared sovereignty' would provide the UK with greater links with the giant that is Brazil via Argentina as an intermediate.
This counterpoint certainly has a simplistic appeal in offering (potentially economically costly) goodwill. Yet in reality it could be seen as a sign of 'cowering' to Argentina and thus instigate greater 'give-aways' in other political and commercial terms with the region. And thus critically very probably provides little 'real politik' reward relative to the UK's relationship with Latin America.
Moreover, the history of the 180 year British rule over the islands, the ancestry of the indigenous population, the price paid in 1982, the national scientific interests in the notionally 'near-by' South Georgia (ie the British Antarctic Survey), plus the latter possibility of striking oil essentially dictate that the very idea of sharing of the isles, nor in-shore waters, nor off-shore waters will not be entertained by the British government on behalf of its people.
There could however, be an alternative method for substantiating British rule and simultaneously create better relations with Argentina and Latin America. And this would be by fundamentally altering the 'value-adding role' The Falklands plays.
Option 3 – UK (& EU) Investment and Innovation
The title of this web-blog is 'Determining an Innovative Alternative (Energy) Course from Re-Cycled Oil Funds'.
Its double-fold message being that an alternative path may be created which circumnavigates the threat of future war by nurturing The Falklands to become a highly regarded global centre of excellence for alternative energy capture and exploitation.
Te initiative to be substantively financed by any latter-day successful oil-field finds, after initial direct investment by the British government and allied eco-tech orientated British industry; consisting of companies both with and without Northern European subsidiaries and parents.
[NB Here government liquidity should be funnelled via the Green Investment Bank – within or additional to its £3bn set-up fund – with perhaps a dedicated Falklands division. The BIS to appropriate a portion of its start-up funding].
Thus in effect investment-auto-motives' proposal calls for the creation of an eco-tech 'landing-stage' in the Falklands for UK and Northern European sourced eco-tech and eco-models, the islands then utilised as a trade 'spring-board' for Latin America expansion.
[NB It is expected that Northern European partners would also exploit this route to market, either as a primary avenue, or as a complimentary strategy].
Thus providing for far stronger philosophical co-interests via R&D and commercial trade links between the UK and its Overseas territory and in turn better business connectivity with Scandinavia, Germany etc.
Which in turn creates far more meaningful and regionally influential British reach across the Strait of Magellan. To ideally provide both 'thought leadership' and act as a new enterprise hub which integrates itself into Latin American technical and ecological ambitions, so positively influencing economic development.
Thus developing the Falkland activity base beyond its historical leaning toward primary industries and associated 'orbital' value-chain linked businesses, into areas that are future-forward, so as to evolve its very perception to the outside world; including world agencies such as the UN.
This is not to say that the islands would be completely transformed into a kind of politically motivated, Disney-esque technological business park Far from it, its origins, history are ever present in Falklander's lives and surroundings, so far too important to loose. Instead its past should serve as inspiration.
[NB. That physical reflection of the “Falkland persona” married with with other intrinsically British vernacular architecture, typified by the Arts & Crafts movement].
This new secondary activity layer of 21st century eco-R&D and eco-commercialism, would be naturally woven into the original “fishing & farming” heartland. It would itself parallel and indeed be partially underpinned by the 'self-sufficiency', non-materialistic heartland which is central to Falkland persona.
[NB. It seems that The Falkland's remoteness has somewhat protected it from modern-day influence, and as a result it still enjoys the positive values and charms of 1950s Britain. To such an extend that former Governor-Generals drove an old London Black Cab right up until the vehicle's 'retirement' in late 2010. This as both a directly euphemistic link to London, to espouse the 'Best of Britain' and so that it might be easily serviced and repaired]
Moreover, such an important UK ambition which fosters trade and so averts war could possibly be an adapted extension of the 'non-threatening' ethics and principles reflected with the Antarctic Treaty System, which has seen such great international co-operation.
Eco-projects and commercialisation would span eco-habitation, eco-mobility and eco-industry; agriculture obviously forming a cornerstone.
[NB investment-auto-motives expects that such cross-fertilisation between eco-sectors would have immense ramifications for the automotive world, especially so for the small and medium sized agricultural enterprises that deal in higher value crops (such as cocoa) in much of 'hilly' developing Latin America. (In contrast to the heavily mechanised 'pampas' of Brazil and Argentina].
So, to conclude, the present challenge that is the The Falklands should instead be viewed as a critical 21st century opportunity by both the UK and Argentina. No side seeks “gun-boat diplomacy, let alone out-right war, especially so in today's fragile global economic climate.
Instead both nations should see an alternative, long-horizon outcome that serves both interests. And The Falklands, serving as the eco-tech and eco-commerce bridge between Europe and S.America in 'safe& secure' British hands is that very solution.
investment-auto-motives sincerely wishes that this alternative outlook assists in the avoidance of spilling both sides blood, both today and in the years to come.
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