Companies Focus – Global 11 VMs – Q2 2012 Results

The Q2 earnings season saw a raft of mixed results spanning the good, bad and ugly; thus creating a sense of disturbance. Even historically defensive sectors such as banking and oil/gas providing lesser safe-harbours than the case in the past, given high P/Es, low yields and their own PESTEL headwinds. All adding to the 'risk-on, risk-off volatility in the search for value.


Contradictory Signs -

So an an unsure and erratic milieu providing a reduced rational structure for general interpretation. Created by the contrasting “pro and con” results of now globally inter-connected continental macro-level surveys, together with at the micro-level the affect of highly managed earnings guidance from companies (to reflect or boost release sentiment), and critically, the market reliant announcements of influential administrators and politicians. All combine to generate what was predicted and became a sideways moving market with 'snap' sentiment swings of the market – propelled by high-frequency algorithmic auto-trading – and best benefiting short-hold weekly and monthly traders who seek-out the opportunities of 'trough-point' and 'peak-point' stock dynamics, or those long-term participants slowly and cautiously building up holdings when prices (even in low P/E companies) appear attractive.

Being cyclical in nature, auto manufacturers have been forced to ride the heavy weather sentiment of the markets, perhaps more so than most given the demands of heavy capex and working capital requirements.

This now most evidently seen in North America, as the previous short-term financial markets' optimism provided by QE1, QE2 and Operation Twist and the successful lean running of large-caps and SME companies runs into the headwind of revived but still relatively anaemic consumer spending, forcing companies to remain cautious, even in the low-interest (often corporate bond secured) lending environment.

So, whilst America solved its 'capacity obesity' problem with Chapter 11, whilst there may be very real regional structural concerns in Europe, history demonstrates that it is often the case that national economies and auto companies seem to prefer to maintain what could be regarded as 'fallow' capacity (even after the 2 plant closures in Italy and Belgium): for either future job creation or factory disposal (trade-sale or otherwise), whilst awaiting the eventual future economic upswing

Mid and long-term offer a distinct value creation promise in an ever expanding worldwide market, where the BRICS & CIVETS offer so much proven potential. But given Europe's familiarity, still relatively wealthy demographic, cultural links and easily influenced governments – especially now given the economic corporate advantage - an auto-executive's mind still no doubt thinks the company that conquers a now much enlarged Europe (and critically vie against strong Japanese and S.Korean competitors) then has the political and technical lead to conquer the world.

[NB Though FIAT's Marchionne calls for cross-continent European capacity reduction, most other CEOs well recognise the liquidity firing power that GM and FIAT-Chrysler have (intrinsically backed by US foreign policy and a fiscally enabled eased “US$”) to industrially 're-acquire' Europe].


Comparative Q2 2012 Results -

The accompanying graphic (data table) provides an overview of the Q2 results for the prime 'global 11' automakers, GM, Ford, VW, BMW, Daimler, FIAT-Chrysler, Renault-Nissan, Peugeot, Toyota, Honda and Hyundai.

[NB data sourced directly from Q2 / H1 company reports. It appears that for VW, Renault-Nissan, Peugeot and Hyundai, the exact details of a weaker April, May & June sales period have been intentionally absorbed into a general H1 depiction. For the purposes of basic calculation / assumption, the Q2 figures presented are half the H1 numbers presented].

To best provide direct comparison each of the primary accounting lines is examined on a company versus company basis. This across: Revenue / Net Profit / EPS / Liquidity vs Q2 2011 standing.


Revenue -
GM : $37.6bn vs $39.4 (-4.6%)
Ford : $33.3bn vs $35.5bn (-6%)
VW : €47.7bn vs €38.85 (+22%)
BMW : €19.2bn vs €17.9bn (+7%)
Daimler : €28.9bn vs €26.3bn (+10%)
FIAT-Chrysler : €21.5bn vs €13.2bn (+63%)
Renault-Nissan : €10.467bn vs €10.55bn (-0.8%)
Peugeot : €14.77bn vs €15.56bn) (-5%)
Toyota : Y5,501bn vs Y3,438bn (+60%)
Honda : Y2,435.9bn vs Y1,714.5bn (+42%)
Hyundai : KRW21,052bn vs 19,162bn (+9.9%)

Of these, it is apparent that the notional 'winners' regards Revenue improvement are FIAT-Chrysler, Toyota, Honda, and VW & Hyundai. But it must be noted that the Italian-American and Japanese producers come from respectively low bases, so 'easing' their improvement. Whilst the German and Korean producers maintains traction from their record high sales base.


Net Profit -
GM : $1.5bn vs $2.5bn (-40%)
Ford : $1.04bn vs $2.4bn (-56%)
VW : €4.4bn vs €3.25bn (+35%)
BMW : €1.28bn vs €1.77bn (-27.7%)
Daimler : €1.51bn vs €1.7bn (-11.17%)
FIAT-Chrysler : €358m vs €1.2bn (-70%)
Renault–Nissan : €393m vs €626.5m (-37%)
Peugeot : €-409.5m vs €403m (-200%)
Toyota : Y290.3bn vs Y1.1bn (+26,300%)
Honda : Y131.7bn vs Y31.7bn (+415%)
Hyundai : KRW2,550bn vs 2,310bn (+10.4%)

The 'winners' here are Toyota (by a massive degree), Honda, VW and Hyundai. The above remarks pertaining to the Japanese industrial / commercial 'bounce-back' are reflected here at the bottom line. This much contrasted the American duo's foundering as profitability is surpressed to build-up cash reserves and fund capex projects.


EPS -
GM : $0.90 vs $1.54 (-41%)
Ford : $0.26 vs $0.59 (-56%)
VW : €12.05 vs €10.04 (+20%)
BMW : €1.94 vs €2.07 (-6.3%)
Daimler : €1.34 vs €1.51(-11%)
FIAT-Chrysler :not stated
Renault-Nissan : €1.37 vs €2.24 (-39%)
Peugeot : €-1.365 vs €1.77 (-177%)
Toyota : Y91.67 vs Y0.37 (+24,770%)
Honda :Y73.09 vs Y17.64 (+414%)
Hyundai : not stated

Correlated to the outcome of the previous section, the 'winners' here are Toyota (by that massive leap), Honda, VW (and expectantly Hyundai, though not indicated by the company). Once again the reduced profitability of the Detroit 2 is viewed through still positive but much reduced EPS.


Operating Cash Flow -

GM : $3.8bn vs $5.0bn (-24%)
Ford : $0.8bn vs $2.3bn (-65.2%)
VW : €3.35bn vs €4.2bn (-20%)
BMW : €1.84bn vs €3.0bn (-39%)
Daimler : not stated
FIAT-Chrysler :€1.08bn vs €0.52bn (+300%)
Renault-Nissan : €541m vs €767m (-29.5%)
Peugeot : not stated
Toyota : Y702bn vs Y316bn (+222%)
Honda : Y737.43bn vs Y1,070bn (-31%)
Hyundai : not stated

Here FIAT-Chrysler and Toyota win by very wide margins, with Ford seen to suffer most.


Free Cash Flow -
GM : $1.7bn vs $3.8bn (-56%)
Ford : $1.77bn vs $0.46bn (+384%) estimated
VW : €0.995bn vs E1.46bn (-31.5%)
BMW : €853m
Daimler : €1.0bn vs €1.13bn (-11.51%)
FIAT-Chrysler : €0.39bn vs €0.11bn (+354%) estimated
Renault-Nissan : €-100m vs €60.5m (-265%)
Peugeot : €224.5m
Toyota : Y49bn vs 51bn (-3.9%)
Honda : Y64.36bn vs Y339.44bn (-81%)
Hyundai : not stated

The apparent 'winners' here seen to be Ford (in stark contrast to its OCF) and FIAT-Chrysler with more than a tripling of FCF YoY. These figures are only simplistic guestimates, but may have been officially unreleased to build-up greater 'rolled-up' FCF figures for a later Q3/Q4 release, given the power of the indicator to tempt investors. Suffering most is Renault (and presumably Peugeot) given their greatest exposure to Eurozone market troubles.


Liquidity -
GM : $38.5bn
Ford : $33.9bn
VW : €14.9bn vs €17bn (-14%) [$18.47bn]
BMW : €8.01bn vs €7.46bn (+7.5%) [$9.93bn]
Daimler : €12.09bn vs €9.84bn (+23%) [$15bn]
FIAT-Chrysler : €22.7bn vs €21.4bn (+6.5%) [$28.14bn].
Renault-Nissan : E11.1bn [$13.76bn]
Peugeot : €12.08bn [$15bn]
Toyota : Y1,728bn vs Y2,132bn (-19%) [$17.8bn]
Honda : Y1,247.1bn (cash & equiv) [$12.85bn].
Hyundai : KRW17,180bn (cash & equiv) [$15.15bn]

And finally, the importance of 'fiscal fire-power' during this transformative period is seen by the large reserves build-up by GM, Ford and FIAT-Chrysler, with VW and Toyota holding near equal value lower sums and Daimler, Hyundai and Peugeot close behind, with Renault-Nissan, Honda and BMW on lower levels.


Automakers' Positioning -

By the overtly simplistic indications of a) Revenue Increase, b) Net Profit, c) Earnings Per Share, d) Operating Cash Flow, e) Free Cash Flow and f) Liquidity, we see the dominant players per measure:

a) Revenue Increase: FIAT-Chrysler, Toyota, Honda, VW, Hyundai
b) Net Profit: Toyota, Honda, VW, Hyundai
c) EPS : Toyota, Honda, VW, (Hyundai assumed)
d) OCF : FIAT- Chrysler, Toyota
e) FCF: Ford, FIAT-Chrysler (estimated results)
f) Liquidity : GM, Ford, FIAT-Chrysler, VW, Toyota

Consistency goes to Toyota (5 of 6 placings), followed by VW & FIAT-Chrysler (4 of 6 placings), then Honda & Hyundai (3 of 6 placings), Ford (2 of 6 placings), GM (1 of 6 placings).

Unsurprisingly Renault-Nissan and Peugeot lagged heavily, but also too seemingly have BMW and Daimler failed to make a showing. This investment-auto-motives believes because of the BoD's operational consistency which provides slower but ongoing organic value creation, instead of the 'falter and rebound' growth opportunity seen by the aforementioned identified players.


Automaker's Context -

It became apparent some time ago that the dire effects of the credit crunch would most impact western mass market players with heavy exposure to their domestic markets, hence the experiences of previously GM and Chrysler, and now PSA, Renault and FIAT; with the premium/quality type producers with high export market exposure, demonstrated by BMW destined to fair far better, with the 'diversified premium' of Volkswagen and Daimler arguably on even more solid ground spanning B2C and B2C customers. The 'intermediates' of Toyota, Honda and Nissan were destined to sit between the two former groups, but themselves required internal re-structuring to remain competitive; this latterly ironically achieved as a consequence of the 'Great Eastern Japanese' disaster and the Thailand floods.

[NB The recent pan-Indian electrical power failures may induce a far smaller but significant force for auto-producer restructuring as companies seek to relocate to regions of assured power; aswell as obviously providing consulting and installation opportunities for major infrastructure players such as GE, Siemens etc]

As illustrated previously, perhaps the very obvious automotive beneficiary of the global downturn has been the strategically perfectly positioned Hyundai Motor Co with a balanced global sales and production foot-print and ever more attractive and price-compelling vehicle range. Whilst inside western markets for decades, its prime focus over the last decade was in BRIC and EM countries offering small cars and small trucks, then concentrating upon globally credible passenger vehicles as consumer expectations of the 'old-industrial' and 'emerged-industrial' countries began to merge.

However, as seen with the previous focus on Ford, western producers are positioned in course to return to strength if able to set their own paths: either through manifest strategic re-alignment of the intra-national business model (Ford), or through the deployment of large cash reserves via M&A and alliances (GM) or seeking - at smaller level – a combination of both (FIAT-Chrysler). The lessons learned within the US no doubt sought to be deployed by European companies / divisions.

The German corporates have remained strong thanks largely to the success born from the western boom years, their EM exporting models of 'visible' and 'invisible' products and services, the cautious retention of those cash cushions up until recently with now impressive CapEx programmes. These designed to secure industrial dominance domestically...in EM regions...and by virtue of the German 'home improvement plan' re-emphisising its historic role as Europe's industrial hub with powerful spokes now eminating north, west, south and east. .

Outlook -

So beneath the very apparent surface of the 2008-10 financial crisis, the EU sovereign debt and banking crisis, the natural disasters in Asia, the spectre of a technical or real double-dip recession, and so 'in turn' the outcome of heavily afflicted stock prices amongst many 'consumer cyclicals'... the necessary process of business re-invention has been under-way to re-position individual companies and the sector at large into the second decade of the 21st century and beyond.

Companies Focus – VM Basic Assessment (Part 1) - Reviewing the Fundamentals

The intention of this next two part weblog is to review the investment / investor standing of the world's best known auto-manufacturers.

Part 1 (herein) provides a “basic view” by using the standardised 'fundamentals' measure of the price-earnings calculation.

Part 2 (to follow) provides an “advanced view” by examining each companies' 'fundamentals' in greater detail. Through the construction of four graphs which depict the investment-auto-motives' perspective of 'coupled ratios'. This marrying two standard 'ratio' measures to better assess: a) Market Valuation, b) Profitability, c) Liquidity d) Debt.


The Global 'Macro' Picture -

By measure of international bourses, the global economy continues to 'shudder and shake' as a mix of very cautious macro sentiment mingles with what seem rapid 'risk-on, risk-off' equities vs bonds actions creating volatility.

In the USA, a much altered QE policy structure took the wind from the stock-market's sails, the presidential campaigning highlighting President Obama's desire to avert economic focus, whilst Romney obviously seeks to. The USA's previously strong bullishness has wained, America's prime indices the Dow Jones and NASDAQ illustrated that much turned mood. The DJ gave-away a sizeable 1000 points plus drop between its recent peak of 1st May and trough-bottom on 4th June, though has regained approximately half that lost value since. The NASDAQ peaked 26th March and bottomed on 4th June, showing a 366 point loss, and has regained a fifth or so of that loss since. So whilst the encouraging 'bottom-bounce' provides more confidence, the full extend of its strength is yet to be seen.

Europe of course continues to be blamed as the instigator of ongoing global economic drag. (Most notably as the prime disruptor of US prosperity, a bad citation by Obama given the EU's relatively small intake of US exports). However, the sovereign debt crisis continues to fester, the liquidity demands of the PIIGS debt-laden banking now exacerbated by Spain's calls for EcB monies and with the 'shorting' of Italy's 2-year government bonds; a flattening of the yield curve the same trend as seen prior to Greece's woes. Central of course is the fact that no general agreement has yet been obtained regards exactly how the E 1 trillion ESM (and old EFSF) could be made to operate, Germany's rightful viewpoint that there must be a type of securitization offered by recipient nations – ranging from gold to public assets – so as to avoid the 'moral hazard' problem that has already been witnessed by the empty promises of Greek and Spanish politicians, seeking to both gain liquidity yet also carry favour with voters by not implementing further austerity. Corporate stocks have undoubtedly suffered, with prices at record low, in turn delaying CapEx projects until greater stability appears. That has been indicated by the French, with the idea that yet another policy stimulus could primarily assist domestic producers. But that undoubtedly relies upon the release of ESM funding, so presently appears a PR tactic by President Hollande et al.

South America's desire to reduce its own cost-base and negate its exposure to 'cheap' Chinese imports has meant a quite severe policy response. This primarily via a hike in import duties, especially so upon non-Mercosaur-made vehicles, and efforts to try and re-foster a lean domestic industrial attitude, improving indigenous value-chain capabilities and prompting consumer spending on self-made goods – the previous weblog's mention of Brasil-Movimento motorcycles a good example. The national BOVESPA index hit a high of 68,394 on 13th March and hit a recent low of 52,481 as of 5th June, thus loosing 23% of its value, before rebounding to 55,651 recently.

At first glance, China's economic contraction appears even softer than expected given a growth slowdown to 6.5%, approximately half of its modern era double-digit rate. Yet the 22% YoY rise in vehicle sales in May illustrates what seems a dichotomy, when autos sales rates are supposed to typically reflect general GDP measures. The answer very probably lies with a possible over-statement of growth drop by the PRC government to stimulate 'incentivisation' by producers to maintain and grow consumption; none more so than the hyper-competitive automotive sector, reflected in the provision of a sales initiatives inland. Thus there seems a slowing of coastal generated growth off-set by new growth in 3rd and 4th tier cities and towns in more rural areas, thus a balancing of the national economy as coastal regions themselves seek to reduce cost-bases and so maintain a competitive differential in world markets in light of the deflationary forces in the Triad regions.

Here in the UK new deflationary concerns have resurfaced. The broad manufacturing sector (exempting autos) - previously a start performer throughout 2010 & 2011 - now showing signs of a marked slowdown given lacklustre domestic demand and now decreased EM export demand. That has generated political calls for sector-specific task-forces similar to that of the now politically much applauded Automotive Council, yet it must also be noted that whilst of definite value to the UK economy, the ramp-up in UK factory production of whole vehicles has been because of foreign VM (ie Nissan, Honda, Toyota) domestic capacity constraints previously caused by the Japanese tsunami. Previously the national economy had partially relied upon that important 'visible-trade' export buoyancy, both indigenously owned and foreign owned, but the weakened order book for UK companies and a possible contraction of UK vehicle exports as Japan returns to strength indicates declined value-creation. The BoE's £80bn 'funding for lending' scheme appears a moderate response given the need to both urge lending and contain a growing 3% RPI rate, yet given the caution of SME borrowing – described as the “UK's mittelstand-off by the FT – it is probable that the liquidity is instead directed at the UK stock market, across the FTSE100, 250 and possibly AIM, seeking new growth enterprises.


The World 'As Is' For Automakers -

The fragility of both consumer retail markets and the world's stock markets has for some time now created a delicate balancing act for automaker's CEO's, COO's and CFO's. With much of the Triad region's banking sector and consumers in respective 'deleveraging' mode, and wholesale finance erratic and expensive and dwindled deposit provision by car buyers, the need to protect corporate 'cash cushions' – build-up from CapEx minimisation and deferral - to provide self-financing has been the order of the day. Such internal funds used as no-cost “incentivisation levers” toward car buyers in regions where such prompting initiatives prove useful.

However, the mere existence of those cash cushions on balance sheets have not underpinned the stock-price positions of all, only those that are strategically best positioned. Others heavily exposed to retracted markets, notably Southern and 'fringe' Europe, aswell as 'core' France, have seen their stock values decline in relation to their EU exposure. This in turn, via a cross-sector dynamic, has dragged down the better positioned German companies' MarketCap valuations, though the strongest of those 3 tends to rebound soon after any bad news is absorbed, a sign of institutional investors' constant 'flight to quality', and profiteering reaction of day-traders.


Assessing the Auto-Makers -

Thus, given the erratic state of market dynamics, it would prove useful to gain greater insight into each company's “fundamentals”, so as to stave-off over-reaction to sentiment driven 'buy' or 'sell' actions in the broader marketplace.


Basic Comparison -

The following conveys the basic yet prime stock information per company:
(Prices as of market-close 15.06.2012).

Price P/E EPS Dividend

GM $21.74 6.54 3.32 none
Ford $10.35 2.23 4.71 1.93%
VW E116.80 3.25 36.50 2.47%
BMW E55.96 7.21 7.77 4.11%
Daimler E34.04 6.11 5.57 6.73%
FIAT SpA E3.66 3.23 1.13 none
Renault SA E31.10 4.05 7.68 3.73%
PSA E7.51 2.39 2.56 none
Toyota $76.50 33.67 2.27 1.65%
Honda $32.36 21.89 1.48 2.35%
Hyundai (EDR) E22.60 0.69 32.82 0.73%


Here we see a wide span of current valuations, much of course dependent upon the enterprise value of the firm and the amount of shares (of different classes) made available. Even so, the affect of recent history is readable within present valuations.

'New' GM's Chapter 11 financial restructuring via seen in its price, even though down 30% from its IPO price, it still holds credible price-earnings ratio when compared to its smaller Detroit counterpart, and relatively close to the sector average.

Ford's price essentially limited by the critical inhibitors of weighty debt servicing (by far the most amongst its peers) and the extra-ordinary gains of tax exemption which has boosted profitability, but not directly from the top-line. Though its much improved dividend has been welcomed by institutionals, its 'bottom of the class' price-earnings highlight future regional and PaT concerns.

VW Group's valuation the result of its inherent global reach, B2C & B2B product portfolio reach, and the controlling families' historical desire to be very hands-on by seeking to limit the number of shares in circulation. BMW has come under much pressure recently given the concerns about the impact of global economic contraction upon 'mass-premium' vehicles, yet also reflects the trait of 'family influence' and German institutional holding so as to seek to avoid the long-lasting damage of “vulture-like” short-selling. Its low price-earnings value seemingly a result of heavily constrained liquidity within Europe, which takes a heavy toll on such a large company - as opposed to the firm's innate operational efficiency.

Daimler's price-earnings figure shows strong resilience to both the general squeezed liquidity conditions, and investor concerns about the possible severe impact of a continued global down-turn upon. This probably because Daimler's broad exposure to various private-spend, commercial-spend and public-spend vehicle segments, means that it is also equally well placed for any new European economic revival when it arrives, especially regards early phase spending on HGVs and publicly funded Bus & Coach.

FIAT SpA (FIAT-Chrysler) share price reflects the double impact of high exposure to heavily retracted EU and Brazilian sales. Critically though, ongoing concerns about Italy's core market ability to balance austerity, introduce labour reform and rebound growth; even under the new 'technocratic' administration. This critical to FIAT so as to mimic USA traction by Chrysler.

Renault similarly suffers from an anaemic homeland, but has been assisted by the very supportive earnings gained from Nissan, so better supporting its share-price and price-earnings. Moreover, since partly government owned, there is a markets expectation that Renault stands as natural primary recipient of any supportive direct or indirect government assistance.

PSA's share-price has suffered more so, as Europe's #2 auto-maker and with greater EU market exposure and apparent lack of a 'government backstop' taking a greater toll and adding uncertainty. Though GM's announced intended 7% acquisition ironically induces short-term price reduction until the purchase is actually made – GM enjoying the fact – it also argues for long term value via disposal of PSA assets to GM and possibly others; though. the “platform-share” story still does not convince.

Toyota's price highlights its dichotomy: as a cornerstone of the Japanese economy, yet endured the earnings ravages of the 'tsunami effect' which assisted continued industrial restructuring using off-shore production. Its share price seen as the 'entry cost' by Japanese pension and insurance houses for ongoing stable dividend and for governmental recognition of national patriotism. However, as its earnings increase with a US and China sales rebound, and a possibly improved dividend yield, the result may be reduction the hefty price-earnings ratio that slowly attract foreign interest.

Honda's price and price-earnings ration reflects its less domestically entrenched position, its better dividend arguably showing its greater organisational flexibility and faith in its renewed interest to North American buyers; much needed given its 1.6% car-market share slip since 2010 to current 9%.

Hyundai shows itself to still arguably be an anathema as traded on European bourses; whilst a respective pillar of the Korean economy (with the biggest production plant in the world) it is not yet listed as an ordinary or preferred standard stock, but instead as a form of GDR (Global Deposit Receipt) seeking Euro capitalisation (a EDR); thus not commonly traded, but its underlying value characteristics suggest that Hyundai Motor may seek an ordinary listing in time.

Displaying the table again, investors could seek to simplistically plot the crop of global auto-makers, purely from the prime measure of price-earnings.

Price P/E EPS Dividend

GM $21.74 6.54 3.32 none
Ford $10.35 2.23 4.71 1.93%
VW E116.80 3.25 36.50 2.47%
BMW E55.96 7.21 7.77 4.11%
Daimler E34.04 6.11 5.57 6.73%
FIAT SpA E3.66 3.23 1.13 none
Renault SA E31.10 4.05 7.68 3.73%
PSA E7.51 2.39 2.56 none
Toyota $76.50 33.67 2.27 1.65%
Honda $32.36 21.89 1.48 2.35%
Hyundai (EDR) E22.60 0.69 32.82 0.73%

To plot as such, promotes the usual modelling of depicting the archetypes of 'growth stocks' and 'value stocks'. Given the maturity of the sector, its barriers to entry etc, a true 'growth stock' is rarely ever truly seen. Perhaps only in China between 1999-2008 when certain emergent indigenous auto-companies such as BYD Auto intentionally mustered high profile international PR brand campaigns around the apparent adoption of eco-tech/high-tech, supported by renowned names such as Warren Buffet. Instead, because of the inescapable cyclical impact of macro-conditions on the auto-sector, seasoned long-term investors tend to seek-out unloved auto-stocks during a dour economic climate such as today.

To this end, whilst during normal times (in the West) many asset classes are valued at 10x annual earnings, today the demarkation level of 5x has far more resonance given the market headwinds of cautious sentiment and tight liquidity.

Using this as a very simplistic guide, we see a ranked order of theoretical attraction: Hyundai (EDR*) @ 0.69, Ford @ 2.23, PSA @ 2.39, FIAT @ 3.23, VW @ 3.25 and Renault @ 4.05.

Beyond the 5x level, are: Daimler @ 6.11, GM @6.54, BMW @ 7.21, and far beyond the 10x level are Honda @ 21.89 and Toyota @ 33.67.

However, whilst figures give a good desk-top comparison, all must be seen in context, thus it is critical to view the bigger macro picture by reading between the lines of corporate actions vis a vis regional markets and economies.

The following provides a short picture of recent issues per VM.


Corporate “Headlines” -

GM
- Presently evaluating internal successor to Akerson.
- Akerson recognises 'profitability chasm' relative to best mainstream companies
- Reducing pension burden via group annuity contract with Pru Insurance (20% 1st tranche)
- Facing increasingly tough battle in all important China
- Bochum plant 'life extension' to 2016 for frozen union costs
- Seeking to once again re-animate Cadillac vs dominant German & Japanese premium models
- Notions of any new Republican administration 'dumping' its 26% holding unlikely, expected staged sales at predetermined price-points to ensure corporate price stability.

Ford
- Mulally expected to remain
- Expected to follow the 'annuity contract' route
- Already de-risked pension liabilities by re-weighting to fixed-income
- Critically recent entrant to China so holds consumer appeal
(its May YOY sales marginally above the surprising 22% market climb)
- Seeking to once again re-animate Lincoln (like GM's strategic need)
- Studying indigenous brand for China with JV partners
- Ford Credit regains 'investment grade' status (Moodys) raising $1.5bn recently
- Announced re-alignment of EU market plan appears slow reaction

VW
- Governance issues regards Mrs Peich's Boardroom election seem to diminish
- Successor to Winterkorn expected from restructured divisional management.
- EU May sales slide less than industry average (5.7% vs 8.7%)
- China's Jan-May sales boosted by 9.3% YoY (44% for Audi)
- Continued major China expansion via plant openings (4m unit target for 2018)
- Rational acquisition of Ducati followed by exploration of Navistar Truck holding.
- Remaining stake of Porsche AG to cost E4.5bn (E0.6bn increase).

BMW
- Reithofer maintains conservative stability
- Senior R&D and Purchasing execs swap roles to strengthen internal capabilities.
- New sales records for Q1: Asian growth of 9.1% Jan-May 2012
- China sales for May up 31.5% YoY
- Concept store opens in Paris on “George Cinq”
- i8 hybrid 'supercoupe' expected at E100,000 price level
- JV agreement with Toyota on Lithium battery R&D ratified

Daimler
- Zetsche maintains strategic leadership
- Bernhard retained on board as head of Mercedes Cars until 2018
- New car sales record in May, up 4% YoY
- Truck sales up 20% in Q1
- Long awaited introduction of 'conventional' A-class range
- New Citan small van allows entry against VW & PSA-FIAT Eurovans
- Smart brand to include scooters as of 2014
- Car2go / Europcar rental scheme spans 12 cities / 4000 vehicles

FIAT SpA (Chrysler)
- Marchionne continues as corporate lynch-pin & figurehead
- Cut in CapEx by E0.5bn to E7bn given European market compression
- Introduction of Serbian Kragujevac plant adds lower cost capacity
- Italian sales incentives include new petrol discount scheme
- EU sales down 17% Jan-May 2012
- Chrysler board expanded
- US sales for Chrylser up 30% from very low base in 13.4% market rise
- European R&D slows as US R&D maintained
- Annuity contract pension changes seen as uneccessary

Renault
- Carlos Ghosn cites “3-4 years stagnation” in Europe
- This negativity viewed as pressuring ministers to evoke state aid.
- Able to service Nissan with components during tsunami aftermath
- Star performer division Dacia cuts production to re-balance slower sales
- Renault badged (Dacia) Duster performs well in slowed Brazil
- EU sales down 19% Jan-May 2012

PSA
- Varin continues strategic efforts for major cost reduction and asset divestment
- Downsizing of 6000 posts by YE2012, Sevelnord plant & elsewhere
- Expected to dispose of 50% of GEFCO logistics subsiduary to PE consortium
(8 candidates emerged, 2-3 probably sharing the deal to preserve cash)
- China sales up approx 20% Ytd in May
- EU sales down 15% Jan-May 2012

Toyota
- $2.5bn bond issue announced to run between 2012-14
- Massive 87% YoY rise in US sales in May 2012
- NAFTA plants increase production by 64% Jan-May 2012
- Japan sales boosted by 125% (exc kei cars)

Honda
- President & CEO Takanobu Ito highlights share-holder value: to be seen
- NAFTA plants increase production by 67% Jan-May 2012
- Japan sales boosted by 48% (exc kei cars)
- Recall of Civic and other regulatory safety investigation in US

Hyundai
- Chairman Mong Koo Chung (holding 25% share-base) maintains solid control
- Worldwide sales up 8.1% in May YoY
- All new Sante Fe and Sonata models released helping model mix
- Doubling of production with Kibar Holding in Turkey
- Small car product recall in China, possibly used to cross-sell products / services
- S.Korean union calls to reduce flexible labour content (and so 'competence advantage').

[NB. European auto-execs meet this week under European Union supervision to discuss the possibility of a “factory-closure blueprint”; so as to discourage member states from offering incentives to protect local jobs at the cost of the broader efficiency of the Eurozone.

However, even as Marchionne (the idea's originator) cites, such an agreed outcome given the present conditions, looks unlikely.

Although it will be an opportunity for 'suffering' VMs (FIAT, PSA, Renault) to discuss JV projects. Additionally Brussels is also examining whether to introduce yet higher standards of CO2 emissions targets for new cars, a topic no doubt welcomed by FIAT & PSA]


Plotting VM Positions -

The accompanying chart provides a simplistic perspective of the respective positions of the global VMs vis a vis each other. The respective axis used are: the 'micro' of a company's price-earnings (P/E), and 'macro' which assimilates the general picture of that company's prime challenges / opportunities ('headwinds' vs 'tailwinds' with mid “transition zone” seperating the two). Though the P/E is a well recognised as an objective pseudo-scientific metric (and the 5x vs 10x demarkation has been mentioned), conversely, the assessment of exactly where a company sits in the macro picture depends upon a generalistic subjective summary, weighted by exposure to contracting, stable or expanding regional economies; and its competitive advantage / disadvantage therein.


Results -

Expectantly, the lower down the vertical P/E axis a firm sits the more enticing the value proposition appears for the investor, but this must be viewed against the 'real world' context.

Today that low price-earnings figures could be said to be either the outcome of innate pessimism regards a corporate turnaround, or the sign of cautious slow moving “viscous” market liquidity, or indeed a combine of both. Thus anything under 5x deserves close evaluation of operational health and prospects.

Those firms with higher P/E numbers between 5x & 10x presently tend to:

1. Have an intrinsic governmental 'safety-net' (ie too big to fail)
2. Comprise of anti-cyclical divisional-based business model
3. Historically demonstrated consistent value-creation

Contrastingly, the Japanese firms with (to western eyes) extreme P/E ratios above 20x or so are located in an ostensibly deflationary 'low-growth' homeland, which has experienced decades long 'pumped liquidity' programmes.

[NB This in turn has appeared to 'normalise' a Japanese firms valuation relative to the seemingly 'frothy' valuations of far newer high growth companies in China and across SE Asia. These notionally comparable valuations in turn assisting the book-building process behind ever ongoing M&A, cross-holding and JV process which has built modern industrial Asia].

Ironically, it may well be the massive differential between the 'poor' West and 'valuable' East that kick-starts the European revival in the mid-term future.

The chart and each respective corporate position speaks for itself.

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.

Macro Level Trends – Clean Tech Transportation – The Return of the 'Alternatives' Band Wagon

As seen recently, the greater any surge in oil price the more vocal the alternative energy crowd. None more so than clean tech companies who seize their opportunity for yet another 'moment in the sun'.

It is only to be expected of course, that those whose businesses are built upon a the CO2 reduction remit, and who typically critically suffer from the the cost differential between old and new technologies - should seek to take advantage of the general disgruntle created by what theorists would see as a sentiment-ruled market inefficiency.

Clean tech has an undeniable role to play in the future of power generation and personal & mass transportation. Yet before major leaps of faith are made, the true cost-benefit rationale for specific technical solutions married to specific uses must be made. A rationale made watertight at both macro and micro levels, and one which avoids proffering scenarios based upon an over-blown, fear-led basis.

This is the only way that both paradigm-evolving and paradigm-breaking clean tech solutions will be broadly adopted over time and ultimately make the 'big-picture' difference.

Historically, clean tech answers – especially in the automotive field, but elsewhere also – result from times of national or international recession. Why? Because such times are usually accompanied by volatile oil prices generated from geo-political unrest and the concomitant speculative markets' rush. In addition, the slow rebound of economic activity itself adds input cost pressures along the supply-chain so creating an inflation effect which loops back to oil price expectations, futures contracts and once again to speculative interest.

Within Europe, observers may try to simplistically parallel today's conditions to the 1956 Suez Crisis and 1973 O(A)PEC Embargo, but the context presently appears very different, given that UK military intervention in looks unlikely, which may create a general non-intervention template for NATO, using only UN mandates to affect remote influence.

Yet, even though concerns about oil-supply threats are realistically presently very remote - given that OPEC has quelled worries – recent events have once again driven sentiment to question the topic of imported oil and so re-highlight the level and efficacy of oil-use.

As many know, in response to that 1956 UK petroleum supply threat and pump-price concerns, Leonard Lord (then Chairman of Austin-Morris) briefed management to set about the task of creating a radically reformatted, but essential conventionally engineered, petrol-sipping small car. The Issigonis Mini was part of an economy (and economic) drive that was ostensibly similar in vein to the re-manufactured 1946 Beetle, the 1948 2CV and the 1955 600, and was itself partly born from this European competitive threat. These largely mechanically conventional yet evolved cars, then created a new age of more affordable, lower polluting, more enjoyable and safer motoring when compared to their pre-war counterparts: whether the heavy big-engined 'dinosaurs' or indeed the previous examples of small-cars, from the cycle-cars to the Austin 7 to the Ford Model-Y.

These auto-solutions which in turn helped generate national wealth were developers of the contemporary technical & economic paradigm, not breakers of that paradigm.

Yet also at that time more adventurous R&D efforts were at work in the UK, US and Europe, the former two bedazzled by the promise of EV's from the mid-1950s to the early 1970s. Whilst Germany forever sought to seize its technical lead in the manufacture of various gases – hydrogen of course a central theme. Rover Cars even explored jet inspired 'turbine technology' as part of Wilson's 'White Heat' rhetoric. But not unsurprisingly that future-tech programme developed little beyond exploratory prototyping, the economics of its business plan derisory compared to the ever greater capex and piece-cost efficiencies of ICE and its increasing performance proficiency.

In short, the business models devised by many future-tech ventures across most scientific energy realms did not stack-up, even when provided a commercial push-start by government or private capital.

Perhaps all the tormenting in the UK since its electrified city tram systems (born from the success of London Underground) had been joined by similar pantograph-fed trolley buses and a proliferation of (route-based) electric delivery vehicles – primarily the milk float. These notionally zero-emissions vehicles were themselves replaced by ICE-based successors when refurbishment costs of both vehicle fleets and aligned infrastructure proved too high – the milk float the only lasting representative given its very basic construction, its depot-based recharging base and its limited range non-varying delivery demands.

Industrial historians will cite that such national efforts and the more radical private ventures were born from a mixture of national 'new-age' optimism. Having seen massive progress in the early part of the 20th century and the need to physically and ideologically re-build after WW2, civil servants working with Keynesian mindsets had an effectual remit to spend the (often borrowed) public monies available. This optimism boosted by the 'tomorrow's world' stories presented by scientists, technical developers and inventors hoping to “change the world”.

Unfortunately, the transition from the essentially unrealistic protected public funding sphere into the commercial world proved impossible for many, even with the support of newly established innovation commercialisation agencies such as – here in the UK – the Industrial and Commercial Finance Corporation – which itself latterly developed into 3i. Failures typically arising from an inability to fully appreciate the true dynamics of B2C or B2B markets, as a result of 'blind new tech' insistence itself boosted by overtly optimistic marketing research and business plans.

Interestingly, placed between these 2 groups were (and are) mid-termist investors who saw an opportunity for what is effectively commercial arbitrage.

Their remit, to ride the wave of the new-tech dream so as to exploit the technical advances (or appearance thereof) made via the public purse, create a convincingly structures business from which to subtly 'threaten' the sector incumbent old-tech manufacturers. Thus positioning themselves as the archetype 'technology disruptor'.

Yet, given the primary interest in the investment story (ie maximum IRR over shortest period) such an investor takes one of 3 routes to exit his position:

1. grown to a point where seen to be credible as an IPO vehicle with a 'scale-up' story, and selling majority stakes.
2. ripened for 'trade-sale' to the old-guard industry itself, thus eliminating the new-tech competition.
3. achieve the IPO and continuing to evolve the business whilst publicly-listed so that any take-over – friendly or hostile - ultimately costs yet more and delivers greater investment returns.

Each party involved then plays a specific role in the process, respectively presenting: (long-term) 'environmental context' from government, (at-hand) 'technical opportunity' espoused by the pioneer, and (medium term) 'investment opportunity' by private equity.

This of course is not always the case, but the apparent strategic intent of developing and commercialisng innovation can be problematic as a consequence of the possible non-alignment of differing parties ultimate agendas.

Automotive manufacturers found themselves facing such a situation throughout the latter part of the last decade, having to attune to what appeared a real threat from the EV brigade, itself supported by eco-conscious international governments. Hence the push for in-house development of EVs along with primary focus on Hybrids, aswell as the purchasing of stakes in new EV ventures, such as Tesla by Daimler or Global Electric Motors by Chrysler.

[NB The fact that both EV companies simply adapted off-the-shelf vehicles as their base (sportscar and golf-buggy) as opposed to fully developing in-house vehicles, could be argued as a relatively low-cost the short-cut to creating a 'disruptive technology' business].

Yet given that VM's businesses are actually ICE focused, so they must primarily attend to their 'bread & butter' technology. A recent example being Daimler's JV intention with Rolls-Royce plc to take majority control of Tognum AG, German manufacturer of large engines generator sets across many sectors.

The acquisition presumably designed to maximise exposure to the expected truck-sector sales uplift, to broaden Daimler's sectoral reach, to leverage multi-party manufacturing synergies, to give greater global cross-marketing reach, to target rural-based, motorway-linked truck-fleet operators that often require independent in-situ power generation (esp in EM regions), and also add R&D prowess when tendering for military vehicle, specialist vehicle and marine propulsion projects.

Critically, by also gaining a foothold in the 'in-situ generator set' power market also places Daimler itself at the forefront of eco-tech regulatory demands and so learning. Learning which for Daimler assists its diesel (& general ICE) R&D development in emissions and noise - along with its usual eco-efforts in light structures, aerodynamics & mechanical parasitic loss in drive-train and chassis systems. Thus to an extent seemingly mimicking Honda's learning from its generator division, and as such should theoretically gain greater appreciation for power generation, delivery and use at a 'systems-level'.

Daimler then reflects the multi-aspect approach which most large long-lived VMs have had to take when periodically faced with assertions of technology-disruption possibilities, which in turn has driven greater innovations in their conventional technologies and provided them to explore self-involvement in broader industrial sector possibilities. It was seen in the US during 1930s-50s when GM, Ford and International Harvester expanded into household equipment for remote farms and more recently by PSA's efforts to create a rental-based consumer 'mobility package' via 'Mu'.

Of course not all clean tech ideals end in 'broken dreams', if anything the major improvements in CO2 reduction & fuel efficiency over the last 4 decades have been complimentary solutions which work with sympathetically with the PESTEL context; as opposed to the more visible attempts of 'paradigm-shift'.

Hence the success of programmes such as Brazil's previous conversion to bio-ethanols derived from agro-policy, the proliferation of CNG/LPG in Pakistan, Argentina, Iran and Brazil aswell as India's conversion of the aging Bombay taxi fleet to run on CNG. Though it should be noted that such CO2 reduction 'progress' is often politically motivated relative to the evident pollution problem (as seen with Los Angeles) or more typically the energy policy of any nation-state, itself dependent upon domestic natural resources and/or the (in)ability to properly secure the import of oil or petroleum.

This is precisely why Germany's automakers have always maintained an R&D capability focused on gas powered vehicles, ranging from CNG seven series (able to swallow the large gas cylinder) to hydrogen powered buses (able to package the fuel cell). But maintaining that kind of R&D capability for the 'last resort' good of the nation does not mean that ability naturally aligns – let alone lead – the major focus of BMW's, Daimler's or VW's commercially-based technology strategy which must pander to convention and the 'way of the world'.

Big picture changes are typically only achievable when driven by a governmental will that has both direct control of energy generation and transport issues aswell as sizable public funds to pay for the switch; this exemplified by the transportational electrification of Europe, the UK and US in the early 20th century. Yet even given this near omnipotent power for change, it seems that ultimately that maintenance of such an imposed 'alternative' system proves costly, and thus latter replacement programmes will favour 'normative' technologies that prove affordable, especially so during times of economic stress.

Hence progressive eco-change has greater chance of success if aligned – and so less disruptive - to both vested interests and end-users.

However, in direct contrast to Germany's broader energy & auto technology palette, those notionally other 'advanced' countries without a domestic auto-industry such as the UK, Spain, Norway, Switzerland and now (increasingly) Sweden, face an alternative dilemma.

They have a self-interest in promoting new and alternative technologies which at worst can serve as a national crisis back-stop (as seen by Germany) and at best can create a technology bridge into the future, by which other nations can be led.

Yet whilst a worthy cause, such progressive efforts are in reality partially-handicapped by not only the power of 'normative' conditions – such as the typically affordable oil-based global economy – but by a domestic industrial policy which seeks to attract a broad-base of FDI, some of which aligns to cutting edge eco-tech, others not.

[NB. Here in the UK we see government court the likes of leading- edge Toyota, Honda & BMW whilst also seeking to have China's SAIC re-instate the MG production which itself is based upon decades-old engineering, itself adapted to lesser Chinese tech-maturation demands by a UK engineering team].

But beyond the micro-level, perfect storms at the macro-level storms create seismic shifts – these apparent in 'normal' cyclical recessions. Yet massively exacerbated by the 2008-9 financial crisis.

Thus, unsurprisingly given the type and influence of external forces, an (historically prescribed) optimum technology path is to follow 'the middle way' – less Confucianism more necessary neo-conservatism. A viewpoint well articulated by Lord Brown here in the UK recently when assessing how the future of diminished government R&D funds should be utilised: the conclusion - better aligned to the realities of the short & mid-term than the sci-fi dreams of the long-term.

Prior to the financial crisis, the headway being made by clean tech companies appeared impressive. The consequence of a bough-wave of western governments' eco-ideology underpinned by massive (often leveraged) levels of liquidity seeking plausible homes, and birth of the carbon-credits exchange. This mix imbued even the most marginal of clean tech stories with a plausibility if set along a new-age chronology time-line. With governments broadly agreeing the intent of CO2 reduction rates to be achieved by 2030 or 2050, the general edict was that if mankind left his 'good works' to later rather than sooner, the more radical the technological solutions would need to be to contain the world's 'parts per billion' pollution rate.

Thus, the memory Al Gore's memorable 'stratospheric' CO2 chart still lingers today, even if the soundness of the science has been doubted given revelation of UEA massaged data.

However, our ability to re-act to that arguably over-blown eco-crisis has undeniably been tempered by the financial-crisis. Its consequences have now created a period when even the US $ and Euro have had the very foundations of their innate 'value' massively disrupted. Each currency's notional value arguably differing dependent upon the 'holding viewpoint': whether in domestic government hands, private enterprise hands, investment hands or in foreign hands.

This new era then demands far greater critical assessment of the viability of new eco-tech ventures, and even deeper due diligence of any company seeking such funds. This all the harder to do when the 2 foremost 'world reserve' currencies have become as fragile as the environment.

The necessary attitude of neo-conservatism toward the funding and R&D direction of eco-tech has unfortunately been undermined by the large schism between US and EU monetary policy approaches.

Contrasting QE philosophies demonstrate that whilst Europe stays candidly cautious, the US acts with immense hubris. This innate difference between monetary policy approaches will have sizable impact upon eco-investment rationale domestically, regionally and internationally.

In short, and in very general terms, the advent of European 'tight-money' and its need to co-ordinate strategic direction en mass means that it (predominately Germany & France) take greater time to assess and plot the courses of corporate and national eco-tech.

Contrarily, the US is now able to essentially throw money at self-developed and bought-in solutions, presumably then latterly applying an industrial-policy funnel to identify those solutions most appropriate for longer term refinement – ie those that fit into the contextual paradigm.

The following then expands upon this observation, itself relative to the previous web-log post 'Liquidity & Linkages”:

The US's massive QE actions beyond re-capitalising the banks and assisted select companies (GM & Chrysler) also appear intended to re-build the 'animal spirits' of Wall Street. This 'cheap money' as we see seeking-out various typically macro-theme-related opportunities, ranging from event-driven speculation regards specific commodities to taking additional equity stakes in those US companies with good EM exposures and sector relevancies.

Yet, given the need to create a renewed eco-centric US manufacturing base, such monies will be unquestionably directed at clean-tech. Beyond the prime expectation of a US shopping spree across the world to pick-up well-formed eco-tech, the question arises as to whether such monies spent within the US itself will be backed by truly meaningful business case expectations, or will liquidity be directed across the board, from the deserving good, to the questionably bad?

In contrast, here in Europe, the far more contained QE stance undertaken – directed by the Deutsche Bundesbank and Bank of England – means that liquidity whilst available is still relatively expensive, a consequence of banks having to charge high lending rates (over say LIBOR) to rebuild their own balance sheets. With the ECB seeking to raise rates and growing pressure inside the BoE to do likewise, the innate business case for any clean tech investment denominated in either Euros or Pounds must be truly convincing so as to combat the endemic cost of capital.

This very basic US vs Europe picture then appears to create very different, ideologically competing, investment agendas, and so competing behaviors between what are ostensibly competing parties seeking their individual eco-tech futures.

Unfortunately however, such macro-issues complicate what is already an increasingly fuzzy the commercial picture regards the investor purchase rationale and development routes for eco-tech.

Two examples, Modec and ITM Power are illustrated to highlight the current state of play.

Only up until very recently Modec, the electric van manufacturer, lauded as representing the new vehicular age. And as such was courted by US truck firm Navistar and struck a JV arrangement. As the FT reports, the firm had a business plan of selling 2000 e-vans per year, each costing £55,000. [As to what the split between adapted VM vans and own-design N2 vans and there exact pricing differential is unknown]. But only 400 were sold to the likes of UPS and FedEx, of which only 150 in the UK, 250 throughout Europe.

Untenable liabilities were discovered and it has now entered administration – in the hands of Zolfo Cooper advisory & restructuring – since auditors stated that it could not meet its £40m debt obligations (primarily to Federated Investments, itself owned by Lord Borwick, the founder of Modec).

As a result its capability to 'quietly change the world' has (momentarily at least) ceased. PE and 'trade' companies will undoubtedly be hovering over the company to gauge just how much money it will take to re-charge its commercial batteries. First in line would be Tanfield Group seeking to possibly replenish the operational capability and gain new products for its UK Smiths Electric Vehicles division, since it was acquired by its US sister company. Equally, Zolfi Cooper will also doubtless be reviewing the break-up value of Modec's core-competencies - whether in terms of any new prototypes, its technical demonstrators, any unsold/cancelled inventory, its production-line equipment, its engineering development hardware & software, its proprietry IPR and indeed the usefulness of its supposedly (or arguably not) 'EV knowledgeable' management and staff.

This unfortunate 'on the ground' occurance that reflects the 'tight procurement purse strings' era which stands in stark contrast to the present 'blue-sky' rousing of alternative-energy firms. They in turn undoubtedly argue that the time is right to invest into the next upswing of the eco-tech cycle, now that the trough has arrived. This reasoning no doubt the impetus for many 'tempus fugit' investment groups, as seen by the 'early trough' PE acquisition of Modec's battery supplier Axeon, and by the re-organisation of Tanfield Group's international divisions.

One such 'blue-sky' rouser enterprise is the Sheffield-based ITM Power, a young company that heralds the revolutionary capabilities of hydrogen in clean energy generation, as part of an ideal for a broader 'hydrogen economy'. It claims itself “a leading business in hydrogen systems for both niche and mass market applications”, its strategic reach is to try and gain footholds in both industrial and domestic energy use & generation, at both large and small-scale levels; offering:

A. 3 variants of (hydrogen producing) electrolysers (small, medium, large scales)
B. a hydrogen-vehicle refueller.
C. a hydrogen-based 'HHO' flame/torch fabrication unit that replicates conventional gas-bottle soft-metals brazing fabrication (ie excludes steel welding) but produces a pure flame for hi-quality work.

And thus far ITM has enjoyed R&D grants from UK government, regional & internationally for 6 projects from 6 bodies:

1. The Carbon Trust: (£108k of £241K lasting 5 months)
a new hydrocarbon ion exchange material with primary focus on automotive fuel cell applications,
2. Technology Strategy Board (CREO): (£247k of £3.8m lasting 36 months)
the adaption of ICE vehicles to Hydrogen fuel with primary focus on recaptured hydrogen emissions particulates (project includes VM & small company & university partners)
3. Technical Strategy Board (HydroGEN): (£239k of £2.3m lasting 30 months)
a solid polymer alkaline electrolyser, with primary focus on improved production of the ion exchange membrane (the heart of H20 to hydrogen conversion) (project included partners)
4. Technology Strategy Board: (£337k of £843k lasting 13 months).
A transportable high pressure fueling system for hydrogen ICE (HICE) vehicles. (includes partners)
5. Yorkshire-Forward: (£195k of £559k lasting 12 months)
development of a large electrolyser stack module
6. NextEnergy (Michigan state): ($81k of $129k lasting 10 months).
a small home-refuelling device for a hydrogen-powered car,

From this basic understanding, it appears that ITM's strategic business intent is to cast as broad a net as possible, presumably to demonstrate the feasibility of the 'hydrogen economy hypothesis' and increase potential client interest, potential investor interest and also to maximise its ability to secure government grant R&D funding. Thus its commercial and R&D activities appear to be plotted across a 'maturation time horizon'.

The 2 which appear to have closest relevance to the auto-sector are 'CREO' for adapted internal combustion engines, and 'HPRU' the development of a mobile 'hydro-car' re-fueling unit.

The CREO project is directed at ICE Emissions Optimisation with specific interests in re-capturing post combustion particles for re-circulation (ie akin to present ICE EGR & catalyst re-circ.), co-development partners being: Ford, Jaguar Land-Rover & Johnson Matthey [catalytic converters], and the university's of Liverpool, Bradford & Birmingham. The project provides for the build of 3 modified vehicles with on-board hydrogen generating fuel-stack, an adapted internal combustion engine and emissions capture equipment that recirculates exhaust pollutants.

The advantage then to demonstrate the use of Hydrogen relative to the conventional ICE motor - as opposed to powering an EV – to gain greater corporate & public credibility, the 'emissions recapture' aspect a high profile regulatory issue in petrol/diesel engine use, thus able to presumably convince government of its applicability. The advantages of much reduced CO2 output is of course countered by economic & vehicle mass disadvantages caused by the cost and weight of the hi-tech ancillary equipment. [NB the vehicle requires a draw-water-tank (water:1000kg/m3 whilst petrol: 737kg/m3), the weight of the fuel stack and the weight of the gas cylinder used to store the hydrogen. Thus aswell as adding cost, the functional downside is reduced GVW available for passengers / load given the additional weight the vehicle innately bears.

Such efforts then appear follow in the footsteps of advances made by Honda's FCX Clarity , which has come in prototype & continually evolved limited-series forms [200 units leased across US, Japan & Europe]. Yet critically the FCX functions as a clean-sheet designed hydrogen hybrid, unlike HICE which is an amalgam of technologies and party capabilities. Furthermore general estimates believe that the individual FCX vehicle build cost has been reduced from $1m in 2006 to $130,000 in 2010 having amortised the vehicle and critical component part costs over 200 production units, and more in-house development vehicles.

Thus whilst ITM and its collaborators are expected to make apparent strides in this area, the reality is that the UK & US are far beyond the Japanese who took this on as a dedicated, board-backed internal project since the mid 1990s, using substantial (supposedly nation-backed) resources to come this far.

In contrast the CREO project is a multi-interest format, so ITM's own reputational success depending upon the efforts / vagaries of others, these being: Ford UK and the laboratory resources of 3 universities. Whilst CREO then accords to the UK policy need to inter-connect big-business, entrepreneurship and academia, it leaves ITM as a hostage to the fortunes of the universities and the strategic intent of Ford. So, CREO's basic organisation and funding-well stands in direct contrast to the long-term efforts made by Honda, which even itself admits the very niche part hydrogen has to play. (Itself believed to be a Japanese equivalent to the German fuel-provison backstop, yet with greater potential for eventual independent use on Japan's peripheral islands).

Created in 2004, ITM was no doubt inspired by the likes of the publicly quoted Ballard Power Systems (on Toronto & NASDAQ exchanges). Yet Ballard took 12 years to list, then took another 14 years to decide that automotive fuel-cell technology had little chance of success, divesting of its dedicated division to Daimler & Ford, then concentrating upon fork-lifts and stationary gen-sets.

ITM Power's originators have structured company activities so as to appeal as being “multi-dimensional hydrogen”. In turn allowing them present a flow of periodic 'good news' stories from differing market sectors (generation, storage, auto & fabrication) so as to inch up its share-price as the achievements are relayed, even if expenditure and income levels between 2011 – 2013 depart from forecast. It is also assumed that the varying arms of the business will be ultimately hived-off to various other buyer types who wish to add to their own conventional R&D efforts, or wish to be seen as leading-edge within their own sphere, typically commercial interests in EM countries.

However, the major headwind facing the company is the populist understanding that it takes more electrical energy to split the H2O molecules in order to produce hydrogen, than the energy actually harnessed within combustible hydrogen. This contrasts to petroleum's large combustible energy index.

Similarly, eco-pioneering consumers reviewing fuel-cell devices for even low-end uses such as laptop and mobile phone recharging have come up against the cost wall, with the company HorizonFuelCell offering devices that give 20 hours of charge for the cost of $20 replacement canisters which themselves have a 30 day lifespan before required replacement used or not.
That $1 per hour cost is high by domestic standards against which it is measured even if arguably unfairly so given its standalone capability.

The obvious 'elephant in the room' for the automobile is the lack of current or indeed planned hydrogen fueling infrastructure in the UK or indeed across the world. There has been a miniscule effort thus far in Southern California and in Japan, the 'chicken and egg' commercialisation concerns prevail. With this ever-present headwind, the usual 'ramp-up' of scale idea has been followed by ITM, which is to have a specific user type adopt the trialling of hydrogen vehicles. That user-type operates a self-contained 'mobility sphere' with a close-proximity 'return-to-base' range. In this case ITM has attracted Stansted Airport and DHL for limited trials.

However, even if successful in attracting other small stepping-stone clients, the reality is that here in the UK (as within much of the West) the potential to properly commercialise the offering by attracting large state-owned vehicle fleets of is diminishing.

Those large and expansive 'public good' services that use such van & truck fleets such as Postal Services, National Health Services etc continue to be 'unbundled' into ever smaller, more efficient, business divisions resulting from of full/part privatisation. Reduced operational scale necessitates restricted procurement choice focused on the P&L as opposed to a broader social good, which then demands lower cost, well-supported, transport solutions. Even the already private large scale firms were forced to drop their eco-van initiatives in favour of the conventional, as seen with Modec's experience of UPS and FedEx; and when they return to zero-emissions vehicles, they will pick-up from where they left-off with EV's which can be charged from base with minimal infrastructure adaption.

Hence we witness ongoing structural changes that reduce ability to amortise the technology adoption costs over large scale vehicle fleets. Furthermore, exacerbating the structural problem from a regulatory standpoint, the ambition by governments to surcharge fossil fuel use via carbon credits and/or emissions caps has stumbled for fear of destabalising economic recovery, so maintaining the large price-gap between clean fuels and dirty fuels.

So whilst the 'small power/high cost' argument is incrementally being overcome by fuel-cell promoters, we still appear far from the day when better aligned market and regulatory contexts encourage consumers and commerce to pay either a small premium or a direct no-cost choice for being eco-saintly.

As cynics have stated over the years, “the hydrogen investment story is a good one”...”but the energy therein is inevitably 'potential' not 'kinetic' “.

Thus even with the assistance of syndicate partner Revolve Ltd (derived from Rousche Tech and with previous good Ford links) – any idea of playing the 'technology disruption' game using HICE looks presently far fetched. In the meantime the comparative shrinkage of UK & European vehicles relative to global TIV will mean that the voice of Ford UK and Ford Europe will grow ever weaker in Detroit. And even if EU CO2 regulations are some dramatically brought back onto the table it would appear that any serious attempt by FMC to develop hydrogen in Europe would be masterminded from its HQ in Cologne with German industrial backing (ie say via Linde Gases) and the other German automotive giants.

Thus investors will need to decide whether ITM truly represents a 'commercial arbitrage' entry & exit opportunity, yet to make that happen the company may have to look farther afield than originally planned.

Until recently within the green-tech community, there was a 'chalk & cheese' comparison between Modec and ITM.

From their similar 2004 births, although prescribed clean-tech, each represented 2 very different beasts, their capabilities & assets divergently different , and unsurprisingly attained 2 very different levels of achievement.

Modec, spun from Manganese Bronze's eMercury EV project was effectively a self-contained, ready to run enterprise, with inherited market appreciation for a more focused client-product offering. Apparently able to examine its closer market connections to take a more confident growth stance pertaining to cashflow and re-investment projections. As such it stood as a more 'crystillised' entity reflecting a conventional niche vehicle business. Even so, the consequences of the financial crisis had a devastating effect upon the business, leading to its demise.

The administrators no doubt working closely to the Borwick Group (holding 40%) and Navistar (holding 25%). No doubt conjoining forces to provide a new platform from which to grow a reborn EV company that can span Europe and NAFTA. Though it will find itself in a competitive field with the crop of current EV manufacturers joined by start-ups expected in the EU's 'PIIGS' periphery countries. Possibly seeing FIAT-Chrysler bring GEM into greater play, perhaps seeing SEAT add EVs as an income stream, or perhaps Piaggio's expansion; such efforts government assisted to reduce dire unemployment figures, such assistive fiscal policy measures then used to leverage e-vehicle pricing. Jamie Borwick guesses that there will be an EU TIV of 25k unit pa by 2020, yet even if the case early-phase profitability could be scarce if manufacturers are forced to once again seek volume to try and secure themselves, as was the story with Modec. Hence, the automotive industry's earliest days are still being re-lived in EVs and operational balance with deep funding resources will be necessary to maintain brand presence and momentum.

ITM Power plc by contrast is a very different animal to Modec, far more ethereal and seems to have felt its way forward, accumulating skills and capabilities over time. Yet done so at what seems a relatively slow rate, thus prompting questions about its formation and originators expectations. Its AIM listing (ticker ITM) appears to have given enough credence for latter-day government support. [NB. Ideally, given its exposure to capital markets and its substantial cash cushion, there is an innate paradox, which would ideally see the R&D grants repaid once the business has reached a certain level of income]. Thus even at 7 years old it still mimics the character of a very well funded 2nd stage start-up given its lack of income and EBIT & PBT losses expected into 2013 and possibly beyond, organic growth expectations denying EPS until seemingly well after. 2012 income of £0.6m, then trebling in 2013 seem to look to be optimistic expectations, whilst the volatility of its share price in the preceding 18 moths or so rise from 15p to peak at 78p in mid February 2011, now sitting at 55p, thus only 5p above its launch price in 2004, and well under the 320p price given at the additional share subscription in 2006.

ITM then has set about representing itself to market, an impressive website for the company size and slick financial reporting graphics, plus a good web-based operational reporting to the City – though to be frank, the CEO's 'persona of professionalism' in the all important video presentation could be much improved. All in all, beyond rhetoric of “moving from IPR to technology to products” and even trial partners appearing to “prove the commercialisation” of its auto-fuel offering, the company must be far more convincing in its ability to successfully operate within its niche given the macro and micro headwinds previously mentioned.

Recent years and ongoing conditions has made the art of valuing clean tech companies immensely fuzzy, the roller-coaster rides many have experienced resulting from over-blown tail-winds running up to 2008, and latter-day concerns about the loss of macro-economic support systems that were due to well be in place by now.

However, with an absence of priced-in 'expectation' and 'sentiment' it means that eco-tech companies can be better valued by their respective achievements to date and their place in the somewhat dour scheme of things relative to their place in the very broad clean-tech sector. Thus valuations can and should be better aligned to the usual metrics of market share, top-line revenues, cost-base rationalisation, margins, profitability ratios, cash-cushions and the very basic aspects of their prime assets versus liabilities.

This then should be the common-sense ideal, yet as described the US's ability to exploit its 'liquidity & linkages' means a possible distortion of purist valuation methods..

Admittedly this is set to re-invigorate the clean tech sector – which is no bad thing - but it is the level of distortion that is concerning. Investments should be made on sound business principles, when in fact the danger is that a new round of investment could simply replay the eco-tech expectations game. In which case little regard is given to the proven ability of clean tech to make itself felt in the real world, instead valuations built upon the schisms of the Wall Street shuffle between vying corporations to buy into clean tech to tell interesting strategy stories and buoy their own valuation levels.

If hefty enterprise valuations are achieved, only be met with trickle-stream incomes and ambitious scale-ups not achieved, then and such failed expectations would greater strain on the overall clean tech sector, thus highlighting the difference between inflated valuations and earnings reality and pulling the rug from under the sector once again.

Importantly, there is a danger that intrinsically good enterprises become unjustly similarly treated to the innately bad, and the broad-brush clean tech label sees 'the baby are thrown out with the bathwater'.

investment-auto-motives dearly hopes this will not be the case, and that greater focus is dirceted to those 'paradigm-aligned' innovators making small incremental but all-important evolutionary steps of conventional technologies. Supposed 'paradigm-shifters' often appear enticing and glamourous especially with high visibility on AIM, NASDAQ and dedicated GreenTech indices. Yet more attention should be drawn to those under the obvious investment radar.

Companies Focus – The Western 8 – Daimler AG: From Zero to Expectant Low Key Hero

The decision not to pay a FY2009 dividend by the Daimler board came as a shock to those more remote investors who for 14 years have simply become as used to seeing a dividend cheque roll-in as awaiting the morning sun rise.

But rightly, the Daimler board recognised that at a time of consumer markets' and capital markets' disruption, short term investor gains must be over-ruled by mid and long term performance concerns; the corporate ability to re-strengthen itself and create liquidity defences against unsettling times the prime issue. Close coupled, operationally attuned investors understood, forgave and in Q1 2010 saw a return of a conservative payment which still pays heed to the need for reserve holdings.

Whilst ideally a forthcoming dividend would have been welcomed, investment-auto-motives understands and ratifies Daimler's decision; for the offering of a small nominal sum would have been both disheartening to investors and lost operational leverage to the company.

As seen by the graphic, though ranked 3rd out of the Western 8, with the innate paradox of comparatively low immediate returns – this substantiated by VW and BMW standards – the investment-auto-motives' expectation (as now being seemingly delivered) was that Daimler's re-building of its defensive walls would create improved share-price valuations as opposed to simply early-phase liquidity returns. Given this early stage of the west's economic cycle upturn, the markets should and will be rewarding actions that substantiate corporate fundamentals, and not simply those that court investors via unsustainable cash payments.

At the other end of the business spectrum amongst the glitz, glamour and cost of Formula 1 racing, McLaren-Mercedes took 1st & 2nd in the recent Turkish Grand Prix, thanks largely to a massive error by their prime competition. As with the core business, Zetsche knows that continue success on the track aswell as in the board room and in capital markets will be dependent upon self determination rather than the misfortunes of others.

However, the Daimler board seem acutely aware of the level of investor goodwill pliabilityoit, recognising that for example its largest single shareholder, Abu Dhabi's Aabar Fund, is under pressure to restructure its financing and must show liquid income from its portfolio interests to gain less onerous loan rates.

Thus the Daimler balancing act continues across 2010, evidence of which was seen by its remarkable stated doubling of FY2010 earnings guidance in mid April, and for which it was rightly criticised, the news adding 7% on its MktCap on the day. Ultimately the only evidence of chicanery investors which to see regards Daimler is that which is appears on the F1 track. Daimler rebuked, it must be said that such still fragile times in rebuilding investor trust and so industrial might demands as much transparency as possible – a theme investment-auto-motives has constantly stated. Yet Daimler know that such out-performance in Q1 out-shines above momentary criticism.


Q1 2010 Performance -

As with its peers, top-line Revenue improved 13% to E21,187m (vs E18,679m in Q109), of which Western Europe accounted for E8.7bn (Germany's contribution E4.2bn), NAFTA E5,363m (of which US E4.7bn), Asia E3,707m (of which China E1,5bn, up 91% YoY). RoW was E3,414m (up 47% YoY)

This then shows the relative reliance on Germany (19.8% of sales), good news as only one of the few still healthy EU nations even if it took a comparably greater national TIV hit than its EU neighbours over the year. (Plus, reports of German unemployment data falling fast meets investment-auto-motives' expectations of national health). It also highlights the comparatively small contribution from China (7% of sales), highlighting the growth potential of luxury, executive and premium compact and premium small cars in medium term, aswell as in the longer term potential for the van, truck and bus businesses, with relative advantage to the Financial Services business as the PRC continues to de-regulate its capital market restrictions on foreign corporations.

The 13.4% revenue improved revenue was obviously achieved due to re-buoyed consumer markets but the bottom-line assisted via workforce reduction of 9,040 , approximately 3.4% of Q109's total.
Unlike some, Capital Investment grew to E783m (from E688m) – still historically moderate but positive – whilst R&D saw moderate growth to E1,134m (from E1,116m), the capitalized development cost essentially static at E336m (from E331m).

Cash inflow from operating activities declined to E1,957m (from E2,526m) which was a hefty 23% - and shows the rational for the previous dividend cut. Yet EBIT improved at E1,190m (from E-1,426m), whilst Net Profit returned back into to the black at E612m (from E-1,286m), now able to provide a per share dividend of E0.65 (vs E-1.40 loss in Q109).

FCF was up to E0.3bn (vs E-1.1bn a year ago) which was a welcome measure, whilst Net Liquidity in the Industrial business was E7.4bn (vs 7.3bn as of 2009YE).

This is good news, yet the optimistic future guidance – double its previous at over E4bn - is still only guidance and cannot be taken as a guarantee of ultimate YE performance. However that reactionary 7% rise in stock has been sustained with a near rebound to recent highs; assisted by Zetsche's prominent E4bn comment on the website, so the stock closing at just under E41.00 by 01.06.2010 close of trading, having hit a recent E41.45 peak.


Strategy -

In the last BMW post, investment-auto-motives highlighted the essential strategic difference between Daimler and BMW. Beyond its obviously more diversified vehicle portfolio with vans, trucks and buses, Daimler continues to operate as both self-serving in proprietary R&D aswell as 3rd-party industrial 'Integrator'. Whereas BMW as self-serving premium sector 'Dominator'

[NB versus VW as 'Propogator' of multi-platform, multi-segment technical solutions – the philosophy investment-auto-motives names “scale-x-tricks”©2010 (ie segment trickle-down and cross-over efficacy].

Daimler's regard for underpinning the business fundamentals relative to its own needs and that of the global auto-industry has thus generated a more expansive 'integration' strategy.

Hence in the Cars division building upon previous engine contract manufacturer for other VMs with the recently announced new alliance with Renault-Nissan – offering a symbolic 3% cross-holding. Zetsche and Ghosn rightly keen to gain technology transfer and so operational synergies in cars, vans and engines with obvious concomitant cost-savings, whilst presumably stringently defending each's separate product and brand identities from collusive dilution.

It was an open secret that Ghosn was open to such discussions given that 10 years on Renault-Nissan's cost-saving capabilities were running thin – even if denied come IR meetings or the AGN. Equally the needs for Daimler to:
1.Plug its glaring competitive gap via securing cost-efficient small/compact car development for its next generation A & B-class vehicles.
2.Seeking new clients for 3rd party sales of its large engines.
3.Recognising the opportunity for multi-brand (badge-engineered) cross-selling of its large vans (now that the Chrysler-Dodge contract is abating) to R-N, and in turn plugging the gap in its medium van portfolio with Renault derived vehicles.

Having had its fingers previously burned with Chrylser, wanting avoiding the political complexities of GMNA and recognising the limitations of Ford relationship, Daimler recognised that the reality of seeking a US alliance partner was impractical. Given its (and everyone's) typically slow progress and political, cultural and legal concerns in China, whilst it still affords massive future opportunity , the reality of generating another Sino alliance whilst with the potential to create major value looked unlikely given the PRC's wishes to reduce the number of China's manufacturers and its lack of technical advantage. India already has its small car ideology well under way, yet India's own manufacturers have already set up shop with Western others – Renault previously included with Mahindra, that JV now ended – but little immediate benefit was to be gained. Thus an EU partner and after much industry conjecture, the pragmatically right deal with Renault-Nissan; enabling ideally access to economies of scale and new contract markets for Daimler and improved quality for Renault-Nissan.

In an interesting move that demonstrates Germany's political and economic ambitions regards its leadership in intra & extra-EU industrial affairs, the recently increasingly fragile German-Russian relationship has been partially bolstered. The energy cost and supply issues surrounding Russian exported gas has been partially diffused by Daimler raised stake in Russia's KAMAZ truck business from 10 to 15%, commissioning Troika Dialog (via MoU) as the intermediate investment bank as the deal-maker & the EBRD as lender, 4% stock retainer, and contextual 'fixer' for the deal. Given Russia's collapsed truck and car markets, its desire to re-align its auto-industry to world-class capabilities and Moscow's recently (rightly) denied request for additional FDI from Renault to re-balance MktCap losses, this Daimler led deal – with now Renault linking - assists in helping to heal previous wounds between Moscow and Berlin and Moscow and Paris.

On the Indian sub-continent, Daimler sold its remaining and full 5.3% holding in TATA Motors. Management reports that it was done to benefit from TATA's 2009 rapid rise in stock-price, bringing in E303m, but it also highlights the concerns of confidentiality leakage and reduced project potential given the increasing TATA – FIAT relationship, as FIAT re-structures itself as separate cars and Industrial divisions, and undoubtedly seeks to leverage greater cross-connect with TATA's future product plans.

[NB Given Renault's retraction from Mahindra and Daimler's retraction from TATA, investment-auto-motives' conjects that Daimler-Renault-Nissan may well seek to acquire the struggling automotive operations of Hindustan Motors – now under Administrator's control. Taking the opportunity to leverage the thriving but typically technically aged Taxi market (ie Ambassador model) with a Hindustan (Dacia) Logan plant which can rely on a steady-state order book from the taxi trade, in which it has already made inroads. Critically, capacity also to be expanded to assemble beyond Dacia Logan, with Logan MCV, Dacia pick-up & van, Dacia Duster and latterly supplemented by Renault's LCVs and Daimler's MCVs. Such a move would give Daimler-Renault-Nissan a far greater latitude and largely independent control in accessing India's burgeoning car market; the growth of Dacia Taxis being the 'proof of the pudding' regards vehicle quality, much as Ambassadors were in their early years, as were Mercedes E-class taxis in Germany in the 1960s +].



Operations -

Cars:
Mercedes-Benz:
M-B's 'big-guns' have been fired what with the introduction of S & E-class over preceding quarters, now climbing in their market penetration and so offering sizable financial contribution. As seen below their well managed cyclical timing has been perfectly attuned to the western economic rebound in corporations, SME's and private 'self-rewarders'. Thus if the global economy remains stable, they will continue to climb their life-cycle/capacity curves and continue to add increasing income over the next 2-3 years to the Daimler Group. Additionally high margin variants such as E-class cabrio will be introduced as will lower volume but high-margin earners such as new (effectively face-lifted) R-class (presumably dependent upon CapEx amortisation rates of the under-performing Generation1 car), the new SLS AMG and what will be the new CLS 4-dr coupe (notionally the F-800 Style concept). The previous design re-orientation of C-class to prevail a more sporty attributes has buoyed its popularity and lengthened its effective lifecycle, the 2010 facelift a low-cost low-key effort which should be of limited drag on cash-burn.

A and B class remain the weak horses of the stable, that market weakness well recognised with far greater common parts sharing than previously to help balance the platform's books. Furthermore M-B has belated recognised that the innate character of the cars had to better align with BMW 1 series and Audi A1, the previous monobox designs whilst initiallyrward thinking in the early 1990s had become class staples by mass manufacturers in the segment and so premium producers recognised the need to offer something more brand attuned in a 2 box, lower roofline, package. That also opens the doors for B class's entry into the US which will in due course be of great advantage.

However, the truth remains that Merc's efforts within the small/compact car space have remained less than spectacular since the end of the 1st generation A-class, and so from a financial momentum perspective seems to have been value static if not value-destructive. The apparent rational behind NPD theory that retiring C & E class customers would be naturally drawn to downsized, easy access/egress cars seemed sound, yet sales figures have remained below par and the vehicles failed to draw new conquest young customer's to the brand given their innate conservatism. Change is coming but later than ideal, the effect of which in income terms will be 12 months + away.

A new threat has appeared in the guise of Audi's new A2. Although press confusion reigns as to its specification – A1 based or not -, investment-auto-motives suspects it will be replayed as a 'technical pathfinder' in both e-powertrain and alloy construction to make the functionality (if not business model) work, and very much as the 1st generation car was. This project effectively financially counter-balanced by the stylised yet conventional A1 with far greater sales base. Thus M-B must create a new identifiable and income generating space for its A & B class amongst what has become an increasingly crowded and competitive premium segment.

Maybach:
The 57 & 62 limousines are undoubtedly aging given their 13 year tenure, noticeable even with minor alterations and new series, yet the company understandably still selectively promotes to maintain profile. Product placement in film and TV with perhaps the greatest exposure. Just as the first 'Sex & the City' featured the then new GLK and S-class, so the second film newly released pointedly illustrates 4 Maybachs, an E-class momentarily shown (to highlight Maybach similarities) and the ever life-extended G-wagen. purposefully set upon the sandbanks of The Hampton' cognitively sequentially after the appearance of a SWB Land-Rover in the Persian desert – an effort to steal sales from L-R both in the Middle East and N.A. But prominence goes to the Maybachs as the choice of Abu Dhabi wealthy, and Daimler's notional nod to its largest shareholder, others who follow in the Daimler stock choice and of course its loyal Arabic client-base

Smart:
Being the trailblazer of the archetype city-car undoubtedly came at a cost for Daimler, the project breaking even almost a decade later. Whilst it created an iconic new brand and re-asserted Daimler's engineering prowess, it took a financial toll, the underperforming 4-door vehicle via the Mitsubishi JV adding to brand diversification expectations, but ultimately adding to fiscal woes.

As GM experienced with managing the second phase of its innovative Saturn brand and Toyota with Scion, the balance of criteria required to expand what is supposedly a different type of division means that conficts of interest appear between intra/inter-company synergies and the desire to retain identity. The 4-door Smart demonstrated the case well. However, given Daimler's need for small car project and production cost reduction and its desire to continue brand innovation it has decided to leverage the Renault alliance with shared architectures for new ForTwo & Twizzy, and new ForFour and Twingo. This then allows Daimler to maintain its industry 'Integration' ethos.

[NB investment-auto-motives role in pushing Daimler to 'sweat its Hambach assets'. This initiative then allows Daimler to play a central role in the continued market development of the archetype 'micro-city-car']

Equally A & B classes' comparatively low sales numbers means the need to create a low cost yet capable platform is all important to the financial success of Daimler compact cars, with the joint development of 3 & 4 cylinder engines theoretically combining a creative tension to reach married cost-reduction and improved quality levels. Daimler recognises that it should play a role in technical and supplier leadership in this dynamic arena, a field in which the likes of Toyota/Daihatsu and Honda have long reigned in Japan, with Daimler leveraging the lower Euro versus Higher Yen to gain broader Euro, US and RoW OEM sales access.

This was exactly the scenario that investment-auto-motives wanted to see develop for Daimler some time ago.


Van Division:
The alliance also of course highlights the potential for collaboration regards large, medium and small vans, each party able to plug the deficiencies of its counterpart. Whilst Daimler's presentation states 2 arenas of compatibility in a) developing a shared architecture for city-vans, and b) engine parts supply for medium vans – the level of synergies potential here, and its ultimate effect on the Cash Book and P&L seem to be being intentionally underplayed.

The competitiveness of the van sector has always been rife and early recognition that collaboration was the best form of unit margin protection; hence the early formation of Ford-Iveco, latter formation of FIAT-PSA's Sevel JV, Renault's role in supplying internally and externally to partner Nissan & Vauxhall/Opel. As the smaller medium sized market became crowded by these JVs, the Japanese and other incumbent EU majors like VW and Ford, Daimler moved its Mercedes Vans into the newly emerging large territory.

However the Renault relationship means that Mercedes Van can possibly access through 'badge-engineering' the MWB and SWB Trafic and Kangoo models for sale in RoW regions where Renault does not operate, or where Merc is well recognised but the present cost-level of Vito prohibits entry. These may include North America if jointly agreeable and the project costings (requiring requisite engineering & regulatory vehicle modification) prove the theory, where it could feasibly join the Mercedes Sprinter if/when the CKD agreement with Freightliner ends, as does contractual supply to Dodge.

The 'elephant in the room' regards the JV is the quality chasm between Renault and Mercedes, especially seemingly so on LCVs and MCVs. The real-world reliability and durability of Renault vehicles is under par compared to German and Japanese manufacturers, and has been known to be so for many years. Thus Daimler will need to integrate a comprehensive quality check system throughout product development phases, into production and track the JV vehicles for faults when in use. This will obviously be a project or divisional on-cost but must be calculated into the nominal cost-savings.

The good new for Daimler has been the upturn in van sales over the last 3 months or so, with corporations loosening budget control for the acquisition of required lower cost capital goods.
However, the renewed credit availability concerns mean that old and new customers will be trying to negotiate pricing and terms flexibility, thus Daimler must combat such revenue degradation with sensitive yet firm customer service stance, stating and re-stating the Daimler quality difference with as much technically available information from in-house and independent sources to convincingly illustrate their case. This so especially given the reality that the division's EBIT and RoS fell in Q1 2010 to E64m and 3.8% from Q409's E126m and 6.8%. As the market for mid-ground business capital expenditure improves (vs halted large and small scale capital goods) so Daimler should grasp the nettle to support its van business.


Truck Division:
Much the same story for the Truck division, with good re-growth over 2009 from 40k units to 77k units, but stalling slightly in Q1 2010, dropping to 72k. The major function of this was the major contraction of the NA market, whilst Asia picked up much of that slaes slack and sales in Europe and Latin America grew slightly. It appears that the truck division may not have re-structured as quickly and as drastically as it could have, no doubt expecting the usual up-tick in HGV sales as part and parcel of the early phase economic cycle up-turn. This is typical for truck building sector, what with more entrenched value in capital intensive, slower-build products and the slow addition to factory and dealer inventory levels (as with Agricultural, Construction and other Industrial goods).

Thus it was not until Q1 2010 that EBIT and RoS returned to a positive, but lowly E130m and 2.7%.

However, given the complexity of the business versus its simpler peers - including spread of model types across various classes, the inclusion of Freightliner business, and the ongoing cost of integrating the Mitsubishi Fuso truck business - Mercedes Truck has performed well to rebound as quickly once the level of required re-structuring was recognised and acted upon. However, even under duress conditions Mercedes Truck should be plotting steadily higher EBIT and RoS. Though of course as bigger ticket items truck replacement sales are still not as plentiful as large van replacement, the ability to shed inventory, ride the N.A recovery and L.A. Rising tide, better orchestrate build orders and importantly gain client deposits to assist cash-flow will be essential elements of the division's rebuilding exercise.


Bus Division:
The M-B Bus division appears to have been well served over Q109 to Q1 2010 by initially the global stimulus spending of international governments on infrastructure projects, and latterly the steady increase in capital expenditure by listed and privately held public transport companies, balancing the availability of credit with the EU commuter's shift away from car use and toward public transport. Such demand pull meant that normal dynamics did not apply, and so although the M-B model mix was less favourable demand allowed inventory to be shrunk and the order book to be boosted.

This then witnessed a Q109 EBIT and RoS of E65m and 7.2% fall to E23m and 2.2% by Q309 before rebounding to E41m and 4.1% by Q1 2010.

Whilst M-B Bus points to new coach models and variants, tour bus companies and indeed national coach companies will not be replacing their fleet in large numbers any time soon, even if numbers here do pick-up Instead it will be the municipal bus operators whether state-owned or private that will be seeking replacement and additional vehicles, the Hybrid Citero and Hybrid Orion seen as halo models that will be bought as the PR aspect of broader conventional fleet packages for EU/Asian and N.A. Operators respectively. Thus here with such Hybrid models available, even if not sold in large volumes, will act as the lever to retain and attain client interest. Add the onward growth of national, municipal and private bus operators through L.A. and thus the Bus Division should contribute a slow but strong and steady income stream to the Group.

Focus is seen relative to the Indian market, Following on the heels of Volvo, Daimler has started to introduce a line of modern coaches in the country for long-distance inter-city express-coach travel, an area seen by many as ripe for foreign company entry as an alternative for the burgeoning middle class over antiquated bus services and slow rail services.


Financial Services:
The typical and righteous strict Germanic attitude toward de-risking of credit-based assets has been a strong aspect of the Financial division's efforts over the majority of the last year. All large German carmakers - Daimler, VW & BMW – have deeply re-assessed their risk exposure.

Recognising the importance of the FS division in what are still uncertain, somewhat nebulous credit-enabled car-demand times, Daimler has cast a critical eye over its leasing and credit operations to both eliminate loan default risk and improve cross-selling of complimentary financial products to off-set income loss. Hence the joint initiative with Allianz SE to sell insurance.

Behind the customer-facing 'financial products pack', back-room operations have merged what were separate BeNeLux sections into a singular Netherlands based function. On a global regional basis, the (often intentionally) lost and newly gained contracts appear to reflect the typical expansion and contraction dynamics of the global car sector.


Financials -

The prime Q1 figures have been stated, but the key element of Net Liquidity in the Industrial business has come back into sharp focus with sovereign debt market problems and the possible return of pressure across the capital markets as creditors seek safe havens and/or a higher cost of loaned capital. Even with what appear calculation mistakes in its Q1 update charts, the interim report shows improvement of E100m to E7.4bn over the last financial quarter, the E300m from the TATA interest disposal and E600m from other operations degraded by the Working Capital drain of a stated E600m.

Within the Cars division, the improving model mix the Q409 & Q1 with new S and E-class providing an increase in average unit margins, aswell as adding to overall sales numbers, so boosting the income stream on a dual-fold basis, Q1 showing 276k units versus the previous Q109 quarter's 230k units. The QoQ improvement in EBIT for M-B Cars has been evident since Q109 with the new luxury and executive car influx over the last year, the RoS showing a remarkable turnaround from Q109's -12.4%, Q209's -3.2%, Q309's 3.5%, Q409's 5.3% and Q1 2010's 7.0%. The EBIT in that time rebounding from E-1,123m to E806m.

Within the Vans division, Q1 2010 Revenue rose to E1,697m from E1,291m, thus seeing a 31% increase, giving an EBIT of E64m from E-91m a year previously, this based on a 62% increase in unit sales at 46,655 units from a previous 28,834 units. As with Cars the EBIT balanced by a rebounding market demand and fixed-cost savings including a 9% workforce decline.

The real uptick coming from the EU, up 59%, Germany itself up 33%, whilst L.A, also saw a 49% increase. Worldwide M-B Vans was up 62%, Q1 2010 the tail period the then building B2B business confidence of Western Europe, prior to recent jitters.

Within the Truck division, the basic figures were: Unit sales of 70,557 (from 65,405) so up 8%, Revenue E4,873m (from E4,918) so -1% down, EBIT E130m (from E-142m), with a workforce reduction of -6% over the Q1 to Q1 period.

On a region by region basis, W.EU dropped 23% YoY, with Germany showing a fall of 31%, the US pulling with 10% increase to 15,089 nits from 13,748 units, and L.A (excluding Mexico) showing a 79% increase to 13,014 units from 7,282 units, Brazil itself showing a 81% increase thanks to a combination of strong economy sustained by tax breaks. RoW improved 9%. yet Daimler appears to believe it has missed out on portions of the BRIC+ success story and so has, as mentioned, created closer ties to Russia's Kamaz Truck.

Within the Bus division, full bodies and chassis deliveries increased to 8,396 units from 6,820 YoY, up 23%, so boosting Revenue to E1,011m from E904m. Yet even with a -4% reduction in workforce overhead costs, the EBIT dropped to E41m from E65m, down -37%. Whilst the delivery numbers on the surface look good, reading between the lines, it appears that the mix between full-body bus & coach and chassis-only deliveries is shifting toward the lesser value chassis sales. This is an unsurprising trend given the comparatively high-cost base of German skilled and semi-skilled workers relative to other regions. Over the last decade of so EM countries have become more proficient in acquiring and developing such body-building skills and (metal structure and plastic cosmetic) parts manufacturing capabilities, as part of their own national economic development models. This trend appears to have visibly surfaced over 2009, thus M-B Bus will need to continue to look closely at its place amongst the future dynamic of the industry, the Indian JV with Sutlej Motors for its inter-city coach indicating that it seeks an EM leadership position.

Within the Financial Services division, a rapid turnaround from Q109 EBIT losses of E167m saw QoQ improvement with the exception of Q3 at E-4m. Q1 2010 shows a positive E119m, (from a negative E-167m last year).

The basic detail released shows a total contract volume worth E59,863m, (down from E61,981) generating E3,061m in Revenue (from E3.150m) which after deductions gives the E119m. Of note is the 2% reduction in the division's workforce relative to a 6% increase in new business, showing the re-orientation of the business towards income streams with greater potential and less risk – such as additional – typically deal correlated - insurance products , these up 13% YoY thanks to a newly agreed distribution deal with Allianz SE


Conclusion -

For good historical reason, having sailed the stormy waters of the pas and been caught in a few storms, Dieter Zetsche today is recognised as the pair of stable hands on the tiller and mainsall of Daimler.

Although today's macro-economic and micro-economic circumstances are unlike anything from the past that can be used as a parallel guide, Daimler Group should theoretically benefit from the painfully slow yet staggered cyclical upturns in the US, UK and Western Europe – the order book for Cars, Vans, Trucks and Buses growing in that respective order given the vehicle replacement needs for the multi-various commercially-linked private and business consumption M-B ultimately services.

Yet that painful slowness also provides the required timeframe to re-orientate a large, broad and complex industrial organisation, even if not going as far as say FIAT in its split of Cars and Industrials. The upcoming remainder of the year should see both a steady state income primarily driven by E and S class reprieve regards investment pressures, whilst van demand stays on a steady upward trend, truck demand outside the EU remains strong, and bus demand probably grows though at a lesser pace than recently.

As ever, for the West, credit availability will be key, and vehicle purchase will continue to be based on pure rationale as for both small business and fleet buyers alike, the sweating of in-place vehicle assets will mean that the replacement cycle will be longer than seen over the last 15 years or so. The biggest ticket items such as the largest class semi-trailer trucks will stay depressed in historical terms with the ongoing effects of in the west, inter-fleet consolidation through business M&A, meaning that for many fleet attrition will have been the norm as older vehicles are sold and not replaced so that fleet size and so transport supply reflects the expected flat-lining of demand after the last year of B2B re-stocking. And in the east, a preferance for rigid smaller trucks of lesser GVW suited to roads and practicable purposes.

However, even with scattered market pot-holes such as this, the road ahead for Daimler looks more promising than for the typical mass manufacturer of mainstream cars given Daimler's positioning in premium passenger cars, its utility offering regards freight and passenger transport, its clear-headed handling of its Financial Services business. With as an over-arching aim, its vision to remain as leader in the realm of proprietary technology; through in-house R&D development into evolutionary tech systems & reach into the more esoteric, aswell as additional on the ground JV alliances with EM based domestic companies. Which when all combined continue to weave the corporation into the very fabric of the global auto-sector.