The ongoing release of Q3 2015 results for global auto-players adds encouragement for the Europeans especially. Volkswagen Group had managed (ever so aptly) to pull 'a rabbit out of the
hat' for itself regards unaffected engine types on diesel emissions ahead of its US sales drive efforts; until the EPA's new , broadened concerns about VW 4x4s, Audi and Porsche. And the investment community re-assesses to what degree
VW stock might now represent a level of fair value, much depending upon the rationalisation of worst case extra-ordinary costs.
Likewise, partly
depending on the possibility of another 'Draghi Put', investors are
also sizing-up the potential tail-winds for the remaining European
makers, especially so after what have been strong recent rises by
some. Recent peaks possibly sold-off before any such ECB announcement regards further QE, depending upon the actions of America's Fed.
The Ferrari IPO has thus far gone well, the speedy release of positive Q3 data (especially from NA) demonstrating FCA's seemingly perfected timing. Pitched at a time of much strengthened 'green shoots' of the global economic trough, whilst hardly a 'pop', recent performance has pleased many and appears to offer much in the long-term. But just how quickly the ambition
of an extra 2,000 unit sales can be achieved, and just how well Maranello
is able to balance the supply and pricing balance, will underpin the
level of future traction.
This weblog however –
in a very brief manner – looks to Ferrari's British rival, Aston
Martin, itself seemingly fiercely independent since its divestment
from its previous parent Ford in 2007.
In The Beginning -
The names Bamford and
Martin will mean little to all except the automotive cogniscenti, yet
their brainchild, born from an initial retailing venture of another
make, led to their component coupling (or 'engineering integration'
in today's parlance) to create their own marque. By 1947 the firm's
later owner and svengali, David Brown (of tractor fame), added the
Lagonda name-plate; with the lesser publicly known Tickford added in
1955.
Thus, it was these 3
men who provided the business recognition and impetus Achieved by way of
hill-climbing, circuit racing and so gaining an air of
playboy caddishness. Enhanced again in a small way by Ian Fleming's creation of James Bond and the swap of a Speed 6 Bentley for an Aston Martin DB2, this effect magnified with the arrival of Bond's on screen adventures and choice of the now legendary DB5. The Bond franchise and AML now mutually supportive cohorts.
But behind the
entrancement of the silver screen and film-set, throughout its
history AM / AML has in in fact had a myriad of trials and
tribulations. Previously very much exposed to the closely aligned UK,
European and American economic cycles; with the 1970s a particularly
troublesome period seeing three changes of ownership. The 1980s saw
improvement as strong petro-dollar earnings were translated into new funding and a
more robust business approach was deployed under Victor Gauntlett's efforts and the 'V' car range. As the previously free-flowing oil-money contracted so new rounds of investment were secured from shipping sector entrepreneurs, for a time at least.
Ford's Stabilisation
Era -
In recognition of the
need to stabilise the business at every level, from parts procurement routes to dealer confidence, it was recognised that a strong parent was required, and so by 1987 Ford had taken a
small stake, later taking effective strategic, operational and investment
control in 1991; initially under Walter Hayes, later under (ex BMW) Wolfgang Reitzle's PAG division..
It was the might of the
Ford empire that updated AML in so many ways, from financing to the
provision of new engineering possibilities and production sites to
enable sustainable volume increases. A maximisation of cross PAG
group synergies allowed for cost reduction of secondary systems and
ancillary parts, whilst simultaneously developing the engineering
heart of the marque to reinvigorate its own persona. The then new
Gaydon based HQ, enhanced design and production facilities and
vitally the ability to grow into new rest of world markets.
Present Consortium
Owners -
Having very effectively
created a successful turnaround and providing a strong business
model, Ford sold a majority stake AML in 2007 to a consortium headed
by David Richards, advised by John Singers and the additional
liquidity of Kuwait's Investment Dar and Adeem Investment.
Although in good shape
as an ongoing concern, Ford very fortunately timed the disposal very
well, with the 2008 Financial Crisis about to appear on the horizon.
However, unlike
previous eras, since the Richards' take-over with Middle-Eastern
backing, AML has managed to maintain a greater “red ink stability”
through-out the major downturn which would have devastated the
company in its former guises. It has incurred losses but
proportionately, to a lesser degree than previously, and with a
better promised global markets future ahead.
The loss in 2013 was
£-25m, and that of 2014 £-73m. The last FY very nearly triple the
former year's. This expected given the effective age of the
face-lifted product range (Vanquish S, DB9, V8 and V12 Vantage and
Rapide S models) versus presently generally newer or greatly updated
offerings from rivals.
However, this is not to
say that the firm has managed all aspects its re-financing needs
well, as will be seen later regards recently issued debt financing.
The product pipeline,
if good, will obviously reverse income trends, whilst ongoing
cost-cutting in overhead and workforce headcount will also
contribute.
The Product and Brand
Story -
As for that pipeline,
whilst the Vulcan 'hypercar' seeks to reimpose AM as 'master of the
GT universe' (and provides a track parallel to One-77), the true
income earners will be direct replacement models and the 2019
introduction of a new segment car: the DBX cross-over coupe; said to
be aimed at the female and Chinese, and indeed Chinese female
clientel.
And as a key part of
that re-strengthening process is the creation of Bond's DB10, the
latest offering which appears to offer a mixed bag proposation:
merging a very limited edition series á
la previous Zagato associated efforts, and partly akin to a
hi-concept piece such as the CC100, and new DP 100 'Gran
Turismo' video game concept.
Ten have been made for
the movie 'spectre', with a single one of these (in 'as new'
condition) to be auctioned to raise income. However, given the
'simplicity' of the outer-skin construction by way of expansive mould
panels, it appears likely that the other cars will be in time
re-bodied with new panels, refurnished internally and sold at a high
price to car collectors.
This approach to drive
demand and limit supply of an icon vehicle, a useful counter-point to
the ongoing expansion of standard range model volumes.
Critically under the
current owners, it broadened its operational mindset, so as to try
and become truly meaningful to those who enjoy high net worth
lifestyles, and indeed those who aspire. Not simply in the creation
of personalised and boutique cars, adding to per unit margins through
the Q section (named after Bond's boffin colleague), but by seeking
to provide a palette of purchase possibilities for its broadening
international client set, from artworks to silver-ware. With likewise
for the aspirational, seeking to imbue an upper-middle class spirit
through associative caché
merchandising efforts with the likes of Hackett (polo shirts and
other clothing). This desire to better integrate the AM brand into
the upper echelons of British culture, assisted by the Royal Warrant
bestowed in 1982, and so its heritage and cultural associations.
Thus having seen Ford
set the fundamentals of the business right, and a sustained track of
innovation development provided by the 'mix and match' “VH”
vehicle architecture system (allowing for lengthened and shortened
engineering hard-points), it was only natural that Richards et al,
whilst adding to the DNA of the marque with racing prowess of the
DB9R (and arguably over-stretching with LMP series efforts), would
seek to expand AM's reach into luxury consumer markets.
[NB in a manner, the
'Gran Turismo' DP 100 concept, with heavy LMP overtones substitutes a
virtual race car on screen at far less cost than developing a real
LMP car, and arguably reaching a bigger audience, so as to better
connect Aston Martin to global video game culture].
Previous Bad Brand
'Map-Reading' -
One mistake however -
as then mentioned by investment-auto-motives – was not the idea of
a small city car, but its execution.
Its appearance was the
need to off-set AM's high emissions levels by also producing a
low-carbon vehicle; very valid. And indeed the idea to re-configure
an off the shelf, ready-made donor vehicle was the only feasible
option available, the Toyotal iQ the best in its class for
build-quality and packaging innovation. But the idea to create a
'Mini-Me' Aston Martin named Cygnet was flawed from the beginning,
smacking far to much of the comical 'Austin Powers' than the suave
James Bond. The original business model was for it to be sold as a
second city car in conjunction with sports car sales. But for those
who seek exclusivity, it had neither authenticity nor taste, and so
privately mocked by the old guard and potential new buyers alike.
Instead, the vehicle
would have better served as either a 'left of field' taster – or
“amuse bouche” - for Lagonda (though obviously the polar opposite
in segmentation and pricing) or as a trinket-type of purchase, akin
to the upmarket novelty items of some of London's best silver-smiths.
With that could have come Austin Power's intrinsic light-hearted “oh
behave” attitude, and so a new dimension to AM's modernist 'cad' or
'flaneur' personality. It should not have been the loss-maker it
obviously was, and could have had an altogether better 'back-story'
that that of a supposedly sporty city car whose underpinnings (ie
short wheelbase, high roof) were the very opposite; a poor parallel
to the brilliance of original 1959 Mini Cooper S.
Yet Broadened Brand
'Psycho-Geography' -
But at least, even if
in an odd and successful way, it set a path of new possibilities for
the company, now seen with rumour of al all electric AM model, and
later models, so as to off-set the corner-stone of V12 and V8 engines
as 'core brand propositions'.
The U-turn that was
Cygnet was recognised as inconceivable for the slow and progressive
relaunch of the Lagonda marque. Its first iteration of vehicle being
the Rapide based Taraf, more upright and formal than the AM 4-door
fast-back, and first offered to Middle-Eastern buyers with a reported
price-point of £696,000. This then part of a new era growth
strategy.
New Era Planning -
Here the DB10 plays its
new role, taking on dual characters, both as the iconic V-configured,
tyre-melting successor to the original DB5, but intentionally given
the low-slope nose of an aerodynamically optimised mid-engine
sportscar (akin to a Ferrari or McLaren). The renowned yet subtly
reshaped AM grille is applied, though arguably not quite wholly
successfully given the near impossibility of achieving an optimum
outcome on a low nose car; so 'demoting' the grille's prominence; and
said to be akin to an under-slung shark's mouth.
Moreover the DB10,
whilst notionally seen to re-utilise the DB5's falling 'belt-line' is
in fact (very knowingly) mimicking aspects of the Porsche 911's side
profile, this even more apparent in the thin 911-esque rear
tail-lights, and its overall foot-print. Deliberate overtones of
competitor marques so as to keep AM market relevant in the mind's eye
of the potential buyers.
Its remit to move-on
public's perception of the brand forward, via its inherent design (or
at least styling). Since 2001 AM has relied upon Ian Callum's very
successful interpretation of 'classical' GT proportions and forms,
first extolled in the original Vanquish, thereafter re-interpreted on
each model. As the flagship car, Vanquish set the innate aesthetic of
the cars over the last 15 years and for a few more yet.
Whilst a 'new look' is
necessary, the question remains, just how successful can any new look
be in comparison to such a successful previous era generation.
Undoubtedly that
success has demonstrably reconnected and strengthened the pre-2001
diluted marque identity with both old and new clientel, to such an
extend that whilst hardly 'make or break', the degree to which
Aston's aesthetic DNA is altered is an obviously important issue:
'evolution' versus 'semi-revolution' versus 'revolutionary'. To
assist that transition, increasing use of 'signature' and 'corollary'
detailing has been brought into play (grille shape relative to lamp
shape, BIW feature lines and light lines etc) to provide enough
creative freedom to alter overall shape and proportions whilst
maintaining elements that underpin marque personality. This then the
future.
However, the fact is
that the current range based originally upon that classicism has
inevitably grown more baroque, and so eventually aesthetically
clumsy, as face-lifts demanded lengthened side-strakes, enlarged
bonnet louvres etc.
DB10 then creates a
clean aesthetic base which can be re-proportioned and altered to suit
the model portfolio; and as such is the innate physical
representation of what AML argues is a new business era (so as to
coincide with the regional and global economic cycles).
Indeed, the DB10 then
is both a tactical stop-gap and revenue generator. Its far reaching
impact through Bond movie product placement whilst seeking to stop AM
customers from migrating to Ferrari, McLaren or Porsche before the
replacement cars reach dealers. And as seen, the vehicle able to
attract the attention of worldwide HNW car collectors.
It appears the case
that the DB10's rear thin lamp unit has been derived from the name of
the 1923 light-car record attempt. A retrospective cultural nuance,
which sits well when providing the inspiration story to for
customers; so that they too feel 'in the know' and have dinner-table
stories to tell their friends.
Also it seems obvious
that the car's 'shark nose' mimics the available low front of hybrid
and all-electric sportscars (Tesla's first iteration to Porsche 918),
thus visually reflects this idiom.
A Business Platform of Technical JVs -
As is well known, a few
years ago Aston Martin provided Daimler AG with 5% of its ownership,
so as to introduce both high development cost technology systems
which the UK firm could not rationally fund, and install a new
compliance aligned generation of 'ready made' AMG sourced V8 engines.
Although it has
partially developed EV systems (via its own “Q Section”) the
heavy 'financing draw' is almost akin to that of the electric motors,
so commendably is to rely upon advances made at Daimler-AMG.
That relationship was
created by former boss, now Non-Exec Chairman, Dr Ulrich Bez and both
firm's mutual desire to explore and procure the most capable pure
electric and eco-orientated drive trains. Given the reliance on large
capacity ICE power-plants in standard cars, such knowledge was the
obvious strategic next step for both. Daimler has created its own
751hp SLS based model EV.
So as to balance the
organisational equation at AML, Dr Andrew Palmer was given the post
of CEO, having delivered the Nissan Leaf EV programme and acquainted
with the hybrid technology pipeline for Nissan's 'near-luxury' arm
Infiniti. Daimler and Infiniti agreed upon an eco-technology
development and manufacturing JV interest some years ago.
The Second Century Plan
-
The headline news about
Andrew Palmer's ambition is - unsurprisingly like that of Ferrari –
to have Aston Martin perceived akin to the apparent peer set of
luxury goods makers. In his word's, more aligned to ”Tod's,
Ferragamo, Gucci, Prada and Hermés”.
An
obvious desire given their generally highly rated capital markets
valuations; so seemingly increasing brand perceptions, broadening the
products and merchandise buyer set and critically providing easier
and less costly routes to future funding, so as to create improved
business model stability over the long term, and avoidance of the
'boom and bust' experiences of the past, and critically to allow
continued independence.
However,
there should be a word of caution in trying too hard to mimic others.
Especially
if pressured by the agent provocateurs both internally (the
consortium looking for eventual exit) and those within the capital
markets who desire a future of blue-book running, window-dressing,
investor road-shows, fee-earnings and proprietary trading.
Devil
in the Detail -
The
innate nature of a legendary car company, whilst believed to be akin
to a luxury goods company, is far more subtle and complex. Especially
since, unlike a leather goods, watch-making or couture firm, a large
part of production involves not age old simple handicrafts of plush
yet basic materials, with creation maintained wholly in-house, but
the development, procurement and warranty provision of highly
advanced supplier owned vehicle systems and components.
The
luxury goods companies mentioned are different, and maintain
effectively full-control of a simple process, from basic materials
buying to labour intensive production to boutique retailing. Their
success and profit margins then come from the innate ability to –
in relative terms – charge a heavily veblanistic influenced high
price point for products which contain a lot of low and mid-value
labour content.
AML
has learned to apply this for its very limited edition 'atelier' cars
such as One-77 and its Q division very heavily adapted / bespoke
adaptions of its other cars, but unlike the French or Italian luxury
goods firms, such a contributory function may not be able to be
deployed across its core business. Thus whilst it seeks to have the
'halo effect' of 'atelier' shine down upon the higher volume lesser
cars, inevitably the central business models of 'artwork' vs
'boutique' vs 'mid-volume niche' demand different business emphasis.
This is not to say that overall it cannot work, simply that there is
a grown complexity which AML must well understand, effectively a
'3-in-1' model.
[NB
the 3-in-1 phrase deliberately used given its engineering lubrication
overtones. That approach, through proficient business acumen
translated directly into engineering strategy effectively lubricating
the structure and wheels of the firm. Indeed this recognised as a
4-in-1 approach when the Heritage classic AML renovation business at
Newport Pagnell is included, which provides an obviously large
perceptual contribution to the marque].
We
have seen the success of 'production commoditisation' of personal
technology, such as Apple Inc's iPhones made by Foxconn in China,
wholly sensible given the product type, buyer type and massive level
of brand loyalty. However, whilst parallel learning is useful – and
be thought an ideal alternative model by some in the semi-luxury car
business (eg Tesla and Elon Musk and his backers) if AML were to seek
to directly apply any such simplistic parallel it would be naïve at
best and fool-hardy at worst.
Nevertheless,
whilst caution needs to be applied (especially regards operational
over-stretch) AML has become far more intelligent in the manner it
now seeks to combat the previously devastating onslaught of economic
down-turns, and to better ride the opportunities from the up-turn
wave.
As to the innards of
the business model, as with the past vision of Reitzle's PAG
division, to create 'centres of technical competence' amongst its
constituent subsidiary firms, it appears that AML seeks to likewise
cherry-pick and install overtly high cost technical advances which
lay beyond its own scope and capabilities.
After the unsuccessful
attempt at the luxury city car that was Cygnet, and the rebirth of
Lagonda via the more limousine-esque Taraf, questions abound regards
the right business strategy. Part of this was the recognition that it
was deemed better to maintain the V12 appeal, off-set with the 'no
emissions' solution that is the pure EV. The latest showcase of that
ideal has been the RapidE, its remit evident in the subtle
name-change of the 4-door coupe Rapide. The FT reports that the
buy-out group China Equity has provided £50m for its development.
Financially 'Taken for
a Ride' ? -
Product, whilst vital,
however makes up only one ingredient of a successful business.
Whilst likewise
strategy, procurement, distribution and (increasingly) consumer
financing provide important contributions, it is perhaps the cost of
capital to a firm which dictates an ability to run as a profitable
entity and provide a return to shareholders.
In this regard, AML
itself appears to have been perhaps overly narrow when seeking its
revolving finance needs, specifically the 'coupon' rate agreements
both in 2011 and in 2015.
The FT also reports
that in 2011 AML issued £304m worth of 'Senior Secure' Notes at a
rate of 9.25%, whilst in March 2015 it issued £165m worth of 'PIK'
(Payment In Kind) Notes at 10.25%. This excluding the £200m new
funding from its majority owners Investment DAR (Kuwait) and
InvestIndustrial (Italy).
As stated earlier,
investment-auto-motives suspects that whilst AML product pipeline is
in a relative 'trough', the company itself, with new products to be
launched into slowly re-expanding global markets - is very probably
in better overall shape, and has higher potential, than a cursory
review might suggest.
However, although
various managers associated with poor decisions of the past have gone
- ”leaving the Cygnet (inc £12.6m impairment) and smoke” - and
the product strategy agenda is restricted to core vehicles, given the
future need to re-expand into the future, as the much touted 'luxury
goods company' means that the issue of strategic decision-making:
people, processes and crucial creativity should perhaps be considered
more deeply than before.
The Aston Martin brand
itself obviously has a very high degree of 'goodwill', that may be
baked into its accounts with far less trickery than is the case with
many other firms, so whilst rightly any finance provider will
drill-down to tangible asset values and general EV/EBITDA and similar
formulae; the company has perhaps far more valuation leeway than it
appears has been recognised by hard-negotiating lenders.
Whilst not knowing
which individuals, firms or institutions bought the notes, it appears
that AML's stand-in CFO Vikram Bhatia (after Hanno Kerner's
departure) has either faced limited finance sourcing options, or (on the
surface) has simply been unable to gain a balanced and advantageous deal,
by paying such high rates in 2015 (after Kerner's own poor deal in
2011).
This during a period of
expansionary fiscal policies and “near zero” rate monetary
policies by the Fed, BoE and ECB (now considering going beyond -0.2%
overnight rates), and in a period when other firms of far lesser
status are paying in the region of 6-7.5% to attract buyers to their
own 'Junk Bonds'.
More likely, for
possibly internally agreed strategic reasons Bhatia has sourced
financing from an Indian entity. So required to cover the high base
rates of the BoI, and the typically greater additional margin for
such lending. If so the March 2015 note would have been bought at a
GBP to INR rate of 1 : 92, versus the current rate of 1 : 99; much
obviously depending upon how the note was structured, whether in
Sterling or Rupee.
If the case, this could
very well have been undertaken to access India's often tightly
controlled links to its internal market, one of the few slightly more
robust EM regions, and be connected to ongoing or future distribution
and dealer-base expansion, or indeed possibly latter-day ties with
TATA Motors (ie JLR) or Mahindra or others). This done to off-set the
many lost sales in the far larger Chinese market.
Even so, appears that
the lenders have dissected AML's position and (typically) over-played
the risk dimension of the firm. Otherwise even with any strategic
imperative, it seems odd that AML would be satisfied to pay 'over the
odds' for sums involved.
Basic Key Figures -
In summary, the recent
FT report states:
Unit Sales
2013 – 4,200
2014 – 3,500 (approx)
[50% 2007 figure]
Revenues / EBIT /
PbT
2013 - £515m / £1.5m
/ £-25m
2014 - £468m / £-18m
/ £-72m
To End -
Unlike the very
necessary showmanship seen by Ferrari with its NYSE IPO, presently
Aston Martin Lagonda is very much in the shadows. Now undertaking a
vital commercial re-configuration to cut costs whilst simultaneously
using the 007 film 'Spectre' to re-emphasise innately British
credentials spanning brilliance to brutishness.
However, whilst James
Bond can call upon the deep pockets of The UK Treasury to fund his
fictional exploits, AML must either make full use of 'their man in
India' (if the suspicion is indeed true) or find far cheaper sources
of new era funding.
Ideally both: this
seemingly seen with the £50m investment by China (terms unknown).
Remolding the company
so as to be seen akin to an idealised luxury goods company is one
thing, and beset with expectations and problems...but without what
must be a 'new era' history of much reduced cost of capital, future
investors – IPO sought or otherwise – will be reticent at what
they see as innate immediate value destruction.
Bond's DB5 was able to
deflect bullets with its rear screen shield, and overpriced 'Junk Bonds' may
have played their role at a critical time, but future long term investors should perhaps seek greater input into the origins of future borrowing, and so avoid any possibility of “having the wool pulled over their eyes”.
