Foreword -
Further to recently releases of the USA's Q2 'earnings season', the important implication for American and global economic growth - and the vital role that out of favour 'smoke-stack' 'blue-chips' must play - this article (with relevant alterations) remains in place given its broad prescience.
Introduction -
Ford Motor Company, like its cross-town competitor GM, presently sits in what could be viewed as a stock-market quagmire. A mixture of ongoing investor caution and retracted global growth outlook mean that its share price has only recently seen an upturn from a previous ongoing slide, which previously 'bottomed' at $8.84, rebounded momentarily to $9.10 and slipped thereafter to close on Friday's at $9.00 exactly..
Ford's Recent Standing -
As seen with the recent investment-auto-motives web-log which featured the 'coupled ratios' assessment of the global 11 VMs in Q1 2012, Ford appeared to perform relatively under-par vs the best of its American European, Japanese and Korean rivals across various measures. All except for its singular apparent 'great achievement' in Q1 2012 profitability,
In the Market Valuation Ratios terms, the firm appears highly attractive with a P/E near x2, (relative to others in the x3,x4,x5 and above), but its P/B level of near x2.5 far exceeded its peers which sat around, if not well under, the standard demarkation of x1.
As for the Profitability Ratios, Ford shone, beating all others by a fantastic gap, with 14% profit margin, and approximately 200% return on equity. However, this performance was very much boosted by an extra-ordinary tax deferral in the period, so could not be taken as a conventional reading; with instead Daimler, BMW, Hyundai and VW showing a scale of best conventional results.
Regards Liquidity Ratios, Ford faired badly, with a relatively high current ratio measure and low operational cashflow measure versus the majority of its international competitors; only Daimler and PSA posting lower cashflows (because of very different positive and negative reasons). However, importantly Ford's low cashflow showing – like Daimler – highlights its dedication to CapEx investment in EM regions, illustrating a desire to be ahead of the slowed global market, ready for its healthy return to be best seen in BRICs and CIVETS in future years.
Debt Ratios conveyed that Ford sits just on the margins of acceptability; as rated as 1:4 total cash vs total debt. This bettered by a small degree the likes of Toyota, Daimler, BMW and PSA; but critically was itself slightly worse than suffering Renault, and well beaten by Hyundai, Honda and VW on a 1:3 standing, FIAT on 1:2 and (critically for domestic investors) GM within the 1:1 rating; results of the Chapter 11 sequence and successful previous IPO fund raising.
Reading between the lines of the measures' results, it is inferred that Ford is ultimately in advance of GM regards proportionate global investment programming, this itself a consequence of its ability to leverage its more standardised yet technically better vehicle platforms, which evolved from the “ONEFORD” initiative.
The Q1 & Q2 Corporate 'Take-Away' -
The Q1 2012 earnings announcement and analysts conference saw CEO Alan Mulally seek to broadcast the following positive points:
- The 11th consecutive quarterly pre-tax operating profit; with positive Automotive operating-related cash flow.
- Wholesale volume and revenue slightly lower YoY.
- The highest operating profit in North America since 2000
- Strong performance at Ford Credit
- Profitable in South America
- Losses in Europe and Asia Pacific Africa.
- Reconfirmed 2012 FY PbT about equal 2011
- This driven by strong North America performance.
- New actions to de-risk FMC's pension obligations.
- Continued investment
- Stronger worldwide product lineup
- Remains on track to achieve the mid-decade outlook
- Paid first quarterly dividend since 2006 & declared a Q2 dividend
- Renegotiated revolving credit facility with a total of $9 billion to near YE 2015
The Q2 2012 announcement by CEO Mulally and CFO/EVP Shanks communicated the following:
- The 12th consecutive quarterly pre-tax operating profit, with positive Automotive operating-related cashflow.
- Importantly USA market share down by 1.7% (at 15.6%)
- Yet North America and Captive Credit divisions provide the 'heavy lifting'.
- NA providing 10% Operating profit, with >$12bn sales total (solid NA H1)
- South America, slightly betters break-even (but Revenue down 21%)
- Asia-Pacific and Africa incur losses (Revenue up 10%, but high Capex)
- European woes continue with greater losses (Revenue down 21%)
- Wholesale volumes down 5% (at 1.4m units) YoY
- Revenue down 6% (at $33bn) YoY
- Pre-tax Operating Profit down $1bn (at $1.8bn) YoY
- H1 PbT (exc special items) down $1.6bn (at 4.1bn)
- H1 PbT for Autos of $3.2bn (5.6% Op Profit)
- Q2 portion was $1.8bn ($1.4bn Autos / $447m Credit)
- Net Income down $2.5bn (at $2.4bn)
- EPS of $0.30 ($0.19 lower YoY)
- Lower PaT and deferred tax impact YoY
- Fitch & Moodys up-rate Ford to “Investment Grade”
- New Escape model in North America launched
- New (lower cost Romanian made) B-Max launched
- Additional production shifts / capacity in USA.
- New Thailand facility 'ramped-up'
- Completed sale of 2 US based components plants (incurring PbT special losses)
- Q2 saw 'mark-to-market' loss on value of Mazda holding.
- $27.3bn Automotive Gross Cash (up $700m vs Q1)
Product Pipeline -
With all regions except North America, China and India seeing TIV contractions, a regionally aligned, segment aligned and attractive model range is vitally important.
Mulally et al believe that the Q1 announcement regards new and face-lifted model introductions provide FMC with a good competitive position; which from basic consideration, does indeed appear the case. New Fusion targeted at N.America (in H2) with Lincoln MKZ concept adding a halo effect, the SUV-esque EcoSport & Kuga favourable to BRIC markets, as is new (Mazda-based) Ranger pick-up, and the Tourneo concept promising important entry into the EM mainstream of compact MPVs, with B-MAX and Fiesta ST aligned to partially redress under-peformance in Europe.
Vital has been the company's additional 30% of Chinese production capacity obtained via the opening of the CFMA Chongqing assembly plant, so giving a national output of 600,000 units.
In the US, 4 million SYNC-enabled systems have been delivered, and announcement that SYNC would soon be introduced into Europe beginning with new B-MAX.
But overall NA volume has been affected by discontinuation of the full-size sedan Crown Victoria and small pick-up Ranger, both of which were ostensibly fleet bought vehicles.
Selling Into Tough Global Conditions -
The new IMF report revised its forecasts downward on the worlds prime economies from its April to July projections between 2012 and 2013.
Europe has experienced painful contraction which looks unlikely to diminish soon, most regional VMs – except the fortunate Germans - tabling a compelling argument for general capacity reduction, assembly plant closures, labour-force reductions and altered pay / conditions agreements. This a slow but seemingly positive process as union leaders at last appear to recognise the immense size of the task required to compete within what is now an era of worldwide cost deflation.
South America has emphatically slowed over the last year, but promises a 'V' shaped recovery as is seen to be the case with 'powerhouse' Brazil, as itself re-aligns from externally sourced commodities based growth toward semi-protected domestic productivity with higher national and regional consumption patterns.
China sees policy-led slowed growth rates as part of an intention to avoid feeding what outsiders have claimed to be a high-risk 'property bubble', the evidence of tier 1 and tier 2 inland cities seeing speculative building showing signs of pre-burst dynamics. The government's intention is that disposable income now re-directed away from property will be willingly spent upon consumer goods and services, automobiles an economic agenda priority given the positive effect on inland employment and living standards.
All of Asia seeing reduced growth as a consequence of China's economic slowing and self-orientation, so notably reducing near-term trade reliance across its Asia-Pacific neighbours.
Russia though perceptively growing from domestic and foreign investment still awaits the typical next 'Putin-play' of oil and gas export linked economic growth, and whilst this expectation affords 'trough-point' investment in that specific sector – including specialist vehicle purchase - (hence the BP-TNK friction), there will be a lag before the broader economy feels the upswing to once again drive passenger car production and see the likes of populist LADA rebound in its new form.
Thus presently, amongst the once fabled BRIC economies, only Brazil maintains anything close to past-trend growth rates, though this perhaps only the result of coming back from a much declined base.
However, as all well note, pan-Asia remains a powerful force for the mid-term, with especially strong traction in Indonesia & Vietnam (amongst the wider global CIVETS).
North America, having seemingly steadied the economic boat and heading toward the end of year presidential election, seems to appear quietly optimistic yet cautious given the S&P 500's traction since last December, the short May drop, and the recent rebound to date. This undoubtedly the dual effects of a slowed global economy, assisting ongoing safe-haven US stock buying from foreigners and Americans, the usual pre-election fervour build-up prior to November, and the notion that either outcome will be investor-friendly: either an immediate new stock-boosting QE3 action expected from the Democrats or capitalism friendly mid-term policy promises from the Republicans. Ideas of a “Third Way - Grand Bargain” that see both sides reaching coalition-type policy-setting agreements, whilst discussed in Washington's inner-circles, presently looks unlikely given the massive ideological divide between the parties.
However, even amongst the now entrenched dour economic the IMF heralds reason for renewed cautious optimism.
In world terms the IMF downgrade is only slight, with July's report still showing a global lift from approx 3.5% growth in 2012 to 3.9% in 2013. It sees the general set of 'advanced economies' (ie the Triad) lifting from 1.3% to 1.9% - an impressive near 50% improvement which can only be alloted to European and American 'pull'*. It sees the EM set lifting from 5.5% to 5.9% - itself lifted by primarily Brazil and India, themselves respectively rising by 2.5% to 4.2% and 6% to 6.5%.
[NB investment-auto-motives believes that the IMF predictions of America's contribution from 2% to 2.1% is overly pessimistic, and that of the Eurozone's -0.2% to 0.8% (ie 1%) jump overly optimistic].
The IMF is of course not a crystal ball or arbiter of growth, and is often highly criticised, but the underlying macro-sentiment behind the forecasts shows greater world optimism than that seen across last year's DAVOS and G20 sentiment.
North American & Chinese Reliance -
Whilst Brazil and India are still included as new era auto-market cornerstones, it seems that for Ford especially it is the world's 2 largest car markets that will be the prime fighting territories.
As per America...
The US, Canada, plus the inclusion of Mexico to comprise the NAFTA area, have of course historically been Detroit's “Big 3” backyard enclave. Trade terms between the US-Mexican border have been ever 'melting' to secure both comparatively cheaper Mexican production, and with national growth, the tapping into a vitally enlarged mid-continental marketplace. Yet even with Mexican amalgamation and boost, the US by far remains the automotive sales heartland even in its weakened condition.
Fortunately the “Big 3” experienced a domestic competitive reprieve during the recent turbulent period. The previous decades-long never-ending pressure from Toyota, Honda, Nissan was temporarily reduced as Japan was forced to literally re-structure its industrial base after the Fukushima disaster, so disrupting parts supply to US factories and Japanese exports. And the astoundingly maintained FX strength of the Euro throughout its own crisis (seemingly supported by Chinese foreign reserve 'multi-currency basket-buying') prohibited what should theoretically have been a powerful cross-Atlantic export drive by the German firms; though the Dollar vs Euro differential benefited FIAT's capital injections into Chrysler.
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But those reprieves are now waning. Japan's VMs rapid re-ramping of US and Japanese production levels are aided by calls from BoJ insiders for new QE measures to boost domestic demand and provides a tailwind for exports. And the strength of the Euro has now declined to new lows, giving greater incentive for Germans to undertake a pronounced US export drive, as American business owners and wealthier private buyers start to reconsider new car purchases, the US credit arms of the German producers able to now obtain low rated wholesale finance from both sides of the Atlantic.
This then puts renewed pressures on at least the “Big 2” to provide compelling product and credit propositions, with the likelihood being a return to past patterns, whereby Ford produces the stronger 'product-pull' given its technical lead and GM the stronger 'credit-pull' given its buoyant cash position.
The saving grace for GM, Ford and Chrysler has been the strength of US agriculture, one of the few commercial sectors showing confidence. Higher commidity prices have come from a mixture of improved volume yields in certain crops, and ironically expectations of a limited output of corn because of recent drought conditions in the Mid-West. Whether achieved profits originate from crop volumes or crop scarcity, farmers appear to be profiting, which bodes well for the supporting commercial activities around farming.
Ford is expected to be a prime beneficiary, given its massive sales base for its F-series trucks (esp 150 & 250 series), the Ford constantly out-selling GM's Silverado and Dodge's Ram. Moreover, as was demonstrated in the 1990s, the profit margin provided by F-series is amongst the best – if not the best - of the FMC vehicle portfolio.
Thus, for this very early stage of possible US economic traction, Ford appears best place amongst the Big 3.
As per China...
Industry observers will be aware, Ford's foray into China has by been relatively recent, GM well ahead of its blue oval rival. But GM sales have been in decline in the face of ever stiffer upscale foreign products in China and the rapid advancement of China's domestic offerings in the mainstream market.
In this context newcomer Ford appears in the ascendant providing a well balanced proposition, whilst GM appears in the slow descendent, thus Ford possibly seizing the competitive high-ground with “mainstream quality” and “Americana” mantles, seen by Chinese buyers vis a vis Toyota and Honda.
However, unlike GM which used the notionally mid-scale Buick yesteryear to entice the newly motorised middle-classes, and has seemingly since lost the brand's former perception of pseudo-luxury, it is presumed Ford has few delusions about its capability to vie against the German and Japanese car-makers in the luxury sectors; so with low expectations for Lincoln and instead targeting the raised profile and increased popularity of the blue-oval cars.
Given that VW, Honda, Toyota, Nissan and Hyundai are the respected foreigners (in ranked order) in the senior levels of the mainstream Chinese market, it seems very likely that Ford will find a place within this crowd, thanks to product prowess and critical entry into a much stabilised and less frenetic marketplace compared to preceding years. Ford's possible fortunes very probably at the relative expense of GM (though itself will of course still grow at a slower pace in the more controlled but still expanding marketplace. Instead it may be the likes of Chrysler, PSA, Renault and FIAT that find the barriers to full and proper Chinese entry ever harder.
The Need for a US-Centric Productivity Push -
Although the Q2 earnings season started with Alcoa's slipped results and the weaker than expected results of others such as Bank of America, the general earnings trend thus far has been a little brighter than generally estimated.
Retained cash and lean operations have allowed many US corporations to create much needed sound new commercial footings, with freer credit than elsewhere amongst 'advanced nations' when sought by company Treasurers – this seen in Ford's own improved rolling credit facility – and cross-sector slimmed workforces that at last recognise the reality of present-day business pressures.
However, with 'financial deleveraging' still continuing across portions of banking, government budgetary re-alignment at federal and state levels, and of course the most visible amongst consumers at large – weaning off of credit (for the time being) and building-up savings – it seems the case that no or very little economic support can be found by way of sizeable public or private spending.
The consequence is that the only comparatively healthy realm is the corporate sector.
With such a tumultuous experience over the last 4 years company management and boards have understandably been necessarily entrenched into a defensive attitude of self-preservation.
However, the fact remains that the US (and indeed UK) now must rely upon the notion of a slow, cautious well executed 'productivity push' from within the corporate world to eventually properly resuscitate the broad economy. This is a task that (as the UK's PM David Cameron points out) may take until 2020 to achieve a wide social reach, from top to bottom of the social stratas. Yet just like that much implored recessionary imperative of house-building, the US, UK and Europe is only at the foundation digging and securing stage of the whole economic re-construction task.
Hence, the west now inhabits a fiscal and monetary arena where 'supply-side economics' is realistically the only route to economic, social, national and intra-national improvement.
To this end, national governments and national people's across the Triad region must understand that even though the IMF's forecasts have true reason for optimism, as seen by the raft of heavily damaged corporate and private equity firm share prices, that optimism emerges from a very low economic baseline, and so the economic 'trickle-down' process will take some years. A period throughout which CEOs and CFOs will need to maintain a very necessary cautionary stance regards domestic investment and cost-containment, even in the face of what is publicised as 'easy money' from the Fed and intermediary banks.
That money, flowing through investment and retail banks, will of course need to be directed toward both stable blue-chip companies and smaller SME's via those two routes respectively, yet the health of the SME ultimately relies upon, or is in tandem with, the blue-chip. So stabilising the large-cap constituents of US (especially EU and global) stock markets, so that investors start to truly believe there is innate value down the road, and not just as a defensive move - remains the prime economic
motive.
Furthermore...
Given that this era is such a transformative one, the re-orientation of whole commercial sectors and the companies within is part of the slow but vitally important process, so that the future firm foundations of the broader economy can be built from the solid foundations of the now highly vital corporate world.
Ford Motor Company, as history has demonstrated, along with its industry peers (GM, FIAT-Chrysler and the remaining global VMs, plus those other multi-sector counter-parts, will as of 2012 play the prime roles in re-energising the western and global economies.
This period then is one of strategic option analysis to decide what shape of company will provide the best returns for shareholders and returns for broader commercial and private society.
Strategic Options -
With admittedly little detailed consideration, the following 3 strategic route-ways are highlighted by investment-auto-motives as potential growth possibilities for FoMoCo.
These intentionally drawn from the company's own history given its century-long existence, and its past proven ability to undertake value-creating 'horizontal' ventures across the automotive and consumer spectrum.
“Back to the Future #1” :
Commercial Vehicle Expansion -
Though today the blue oval adorns cars, pick-up trucks and small & midi vans, it once sat upon a plethora of heavier commercial vehicle types, including large trucks, semi-trailer tractor units and coach & buses (aswell as agricultural tractors for a time). In the past Ford expanded its product portfolio on a regional basis by both adapting pre-existing typically American vehicle designs for new markets, by designing all new product in-house with an expanding capability thanks to the economic boom, and when beneficial by acquiring struggling local specialist vehicle companies, the latter undertaken on both sides of the Atlantic ocean. These strategies seen in Britain during the 1950s and 60s by Ford of Britain initially under the 'Ford Thames' sub-brand (which itself licensed to Enro of Spain) and later simply under the 'Ford' moniker with the division thereafter sold to Italy's Iveco in 1986. With the plethora of German, French, Italian and Scandanavian HGV brands in Europe, Ford saw little commercial promise.
However, of course, in its US homeland, the company's rooted exposure to commercial vehicles and tractors meant that it had always maintained CV and Heavy Duty Truck (psuedo-HGV) sections, with more recently portfolio expansion 'downward' The previous introductions of an LCV class of vans via the Euro-sourced small Connect and (US rated) 'compact' Transit, and the now promised 'sub-compact' Tourneo, have complimented and bolstered the legendary large E-series van range.
The iconic F-series truck range remains centre-stage, and is perhaps critically important to corporate income, as previously mentioned. It has been expanded throughout the last decade to offer an incrementally bigger vehicle family via increases in overall dimensions, GVW, powertain capacity / BHP, towing weights etc; hence now psuedo-HGV when offering a 5th wheel either bolted directly to chassis or to load bed. Critically for 2012 F-series 550 now offers a PTO (power take off unit) used to drive ancillery equipment when the vehicle is either stationary (ie in generator mode) or when moving to power snowploughs etc. This allows the vehicle to undertake certain agricultural, construction and infrastructure roles, a true competitive advantage at this low-point phase of this particularly drawn-out economic cycle, since large infrastructure build projects are part of the economic panacea.
Offered seemingly only on the 550, it means that Ford seeks to tempt all utility customers / buyers (fleet, corporate, SME's and independent 'tradies') into the higher spec and higher prices 550 as part of America's and its own regeneration process.
The 2012 discontinuation of the smaller Ranger pick-up in North America means that all customers must purchase the costlier F-series, thus improving Ford's large truck volumes and so margins.
“Back to the Future #2” :
Vehicle Rental Firm Acquisition -
The natural synergies between vehicle producers and vehicle renters is obvious.
It is a marriage that dates back to 1925 when GM part-purchased Hertz (Drive-Ur-Self) taking the remaining stake in 1943, when its price was depressed by WW2.
The well established mutual advantages recognised in 1987 when Ford purchased Hertz, by then a well formed international vehicle rental firm with massive appetite for new vehicles.
As part of its own renaissance efforts, Chrysler took a interest in the sector in 1989/90 when it amalgamated Dollar and Thrifty concerns to form the basis of the modern company.
Such a natural bolt-on acquisition builds a near guaranteed downstream demand-base, which with the stable requirement of large fleet customers, provides the foundational basis for a near-confirmed, steady base level of factory output, so assisting general capacity planning, which in turn underpins new and maintenance investment levels and raised base-level amortisation rates on new and face-lift product programmes.
Importantly, it provides for a near-assured cash generative income stream which itself boosts immediate cash-flow. It creates a mini economic eco-system in as mush as rental car customers are effectively able to test-drive the company's new and existing products for a period, and if feeling comfortable and impressed, are themselves more likely to purchase a Ford branded vehicle in the future. Furthermore, it means that more new vehicles are seen on public roads, which in turn whets the public's desire.
However, it does mean the trade-off between immediate production and income gains versus the recognition that a large volume of ex-rental vehicles will be hitting the used car market within the usual 18-month and 24-month time-frame. So requiring more pro-active used vehicle inventory management across both factory and independent dealers to maintain decent residual values, with necessary avoidance of the typical 'pricing cannibalisation' that occurs with large inventory influx.
Though the company holds a proportionately smaller cash-cushion than many other multi-national auto companies – GM especially so – there might be the ability to commercially leverage interests in the vehicle rental sector, via M&A or JV or looser alliance, and so replay the much needed 'boost effect' seen in the 1980s & 1990s.
This will of course also be the strategic perspectives of GM and FIAT-Chrysler.
But Hertz, Dollar Thrifty and Avis Budget are all stock-market listed, with Market Caps of $5.01bn, 2.24bn and $1.53bn respectively. Complete purchase by Ford of a top-tier player is then is highly unlikely, with perhaps a partial purchase more complex and problematic depending upon the strategic interests of the other major shareholders. The alternative to seek to buy-out a privately held company for total control, yet this brings the problem of much reduced geographical business footprint and thus vehicle volume take.
An investment-auto-motives weblog item looked at the investment potential of the US vehicle rental sector some time ago, when there was rumour that Dollar Thrifty was seeking to buy-up either Hertz or Budget Avis. It was noted that the sector is effectively split into 3 tiers of company size. At the top the aforementioned 'big 3', with in the middle tier: National, Enterprise & Alamo, and in the bottom tier: Ace, Kemwell and Payless.
Exactly how that triple-tier sector is philosophically dissected by Ford (and its Detroit foes) remains to be seen, but it seems that vehicle rental company interests will be back on the table for all.
“Back to the Future #3” :
Consumer 'Needs' Satiation -
The emergence of the automobile age in the 1920s and 1930s was arguably the pinnacle of a far broader consumer-products wave of the time, spanning radios, vacuum cleaners, sewing machines, washing machines, refrigerators, freezers, air conditioners, food mixers, dishwashers etc. The basic materials of steel, rubber and thermo-set plastics and the division of labour, moving-line assembly methods were ostensibly closely related between differing product types, from cars to cookers, so it was inevitable that the large auto-companies sought to maximise production efficiencies and cross-sector market potential by enveloping a consumer good company into a car-maker's fold. White goods, brown goods and cars became for a period more closely related than most ever knew. This best illustrated by GM 's ownership of Frigidaire between 1919 and 1979.
Ford however was largely absent from such consumer diversity, with the only manufacturing diversion being WW2 military manufacturer of jeeps and aircraft (Tri-Motor and Liberty).
Yet the IT age has seen a significant merging of IT and automotive technologies. Inside the inner working of a vehicle there has been digital dash instruments, CANBUS systems, pre-programmed pro-active and reactive safety systems and ever finer programming of drivetrain and chassis systems. But whilst this is viewed as part and parcle of electro-mechanical evolution, the last decade has seen IT become instrinsic to the external workings of the vehicle, toward ever better (driver and passenger) 'user-enablement'.
In recent years Ford and all major VMs have sought to design their vehicles with GPS and internet and connectivity, so that the car can either itself act as a mobile communications device able to inter-connect to a myriad of infotainment services etc, and/or itself become a power and telecoms 'host' for personal devices ranging across smart-phones, tablets, notebooks, laptops et al via increasingly standardised 'plug-and-play' docking ports.
Hence Ford's commercial relationship with Microsoft, having adopted its basic software operating architecture / system named SYNC as the communications enabling system.
The availability of vastly cheaper 'data warehousing' has effectively nurtured emergence of the 'Data-Cloud' / 'Cloud' ' / 'Cloud Computing, which when coupled with a trend toward the data storage 'de-contenting' of consumer's own smart-phones, tablets and net-books, means that a new watershed era has begun (started by social networking) wherein private individuals, corporate workers and government workers will increasingly rely upon the ethereal (and ultimately corporate owned) 'Cloud'
[NB investment-auto-motives will retain its 'off-cloud' data-storage privacy policy].
However, this ongoing theme of progress, and the need to seemlessly connect with the 'cloud', has required Microsoft to introduce a new generation of operating platforms, so accompanying SYNC with the new LYNC.
Critically, having been under pressure from youth orientated Apple in consumer and games markets, the emergence of other software providers and on-line product/service providers such as Google, and heavily impacted by the post-2008 recession because of much reduced business spending, Microsoft is having to re-write its own play-book, which has involved growing alliance interests with other corporate giants such as Ford.
Hence, the enhanced merging of what were once very separate commercial sector products & services are a necessary part of co-creating what has now become a dimensionally fluid human existence: across the wholly physical world, the wholly virtual world and of course the expanding merged (cyborg-type) world where IT becomes both crutch and enabler.
So whilst Ford did not participate in the first consumer revolution in the 1920s, it looks to take a leading role in that of the 2020s, and must seek to maximise industrial synergies to do so.
Ford's New Tools for the American & Global Task -
So Ford's initiative to include its 'new tools' of a PTO on the F550, and the 'cloud-connectivity' to be deployed across all its vehicles, is a necessary move to reinvigorate the US commerce both domestically and internationally; and in turn reinvigorate the broader world economy.
Creating the US 'Productivity Push' -
As highlighted earlier, and witnessed by the Occupy Wall Street movement and dire public angst and suffering across all supposed classes, there is now a need for a US-centric 'productivity push'.
Each of these strategic route-way possibilities would then serve both Ford, and the broader American economy, regards the very necessary aim of a much needed 'supply-side' led 'productivity push'.
Indeed, all US companies led by Washington and local federal bodies will no doubt have been reviewing how to best re-create and feed a new and improved American industrial society. Whilst also seeking to unburden commerce of any previously incurred, then bearable but now problematic, policy disincentives.
However, of even greater consequence is the ability to create a very well structures, integrally meshed, highly fluid and high efficient renewed, broad-reach US-industrial complex.
It is only this type of thinking at company and national levels, which comprises of an “industrial inter-connectedness philosophy”, will provide for a speedy and sustained economic upturn. And so create the foundations for a long serving eco-directed, new industrial society.
Creating a “Value Triangle” at Ford -
Any forward-thinking, ideally visionary, company seeks to create a commercial footprint that can maximise synergies across those sectors which are viewed as both dynamic and critical. This a necessary executive task when assessing how to move from present strategic standing toward a more advantageous future position – simplistically evoked by the quandrants (and deep-view evolved co-ordinates) of the BCG Matrix.
To this end, in decades past we have seen companies almost constantly assessing the M&A potential for backward and forward 'vertical' integration along its internal value-chain, across the 'horizontal' of market-related product, segment and sector couplings, and periodically investigation into the less usual 'diagonal' which typically sets out longer-term broad span ambitions.
But during the more recent dotcom era a more 'connective' business mindset evolved.
This necessarily originating from the financial limitations internal to new business start-ups, and the supportive VC community's need for risk-reduction via business plan re-modelling. Though then the credit boom years, those highly sensitive 'capital application' experiences are now replayed in corporate boardrooms, because of reduced global investment liquidity. But ironically, this capital-squeezed reality must be seen to be within a broader context, where those companies that can best inter-connect with each other and B2B and B2C markets will take a disproportionately larger share of tomorrow's rewards – if planned and executed well.
Never in modern times then has so much future global potential been riding on such limited financial resources; the balancing fulcrum being that of human ingenuity. This is indeed a critical period for companies in setting out their stall for the remainder of the 21st century.
FoMoCo's High Potential 'Magic Triangle' Formula -
Ford + Microsoft + Vehicle Rental Co. ….........(see accompanying graphic).
Conclusion -
The global economic downturn that has become apparent in 2012 has create a yet greater competitive platform upon which global VMs must operate.
A renewed atmosphere of austerity has become especially apparent in the Triad region, and has become all too apparent in even the fire-fighting ploys of premium players such as BMW.
To maintain its traction it well recognised the value of sponsoring the London Olympic games now underway. But instead of offering a lump-sum of cash and deploying its logo on screens, as has been the case with Coca Cola, P&G etc, BMW UK & its Munich Headquarters had the prescient insight to offering a reported 3,000 new cars to the Olympic committee, to be used as road registered 'Olympic Torch' UK tour cars and participants' general transport vehicles. At a time when new car sales have declined across the board, this means that BMW will soon be bringing 3,000 or so pre-registered 'demonstrator-type' vehicles to the UK market, with vitally important concomitant price reductions, handled by its dealer network and sold with the notional cache of 'Olympic vehicles'.
At a time when Daimler, Audi and BMW have been targeting rental market players in Europe, and recognised the bottom-line boost effects of such an initiative, all other VMs that operate in the mid-stream – especially those such as Ford with its maintained strong pricing strategy – must take note.
A well considered execution of rental market sourced capacity-boosting with accompanying credible marketing tactics must be considered by Ford; especially so in Europe with far lesser need in the US. This is not to say it should re-run anything like the well remembered GT 500 Hertz Mustang initiative of the 1960s – played out again in 2006 to commemorate - but that it should re-think the possibilities.
At a time when Ford and FIAT are at the bottom of the EU plant efficiency rankings, the all-new American vehicle offerings cold be regionally out-manouvered by the aging revamped Italian products, when seeking to re-popularise their respective cars.
For Ford the US will continue to provide firm footings, and NA will seemingly see the company through to the rebound of EM and European markets...but its venerable technologically superior vehicles may themselves need an improved 'push from the re-starting blocks' in the sprint for returned near-term market share, and long-term share of mind.
The general investment community - and investment-auto-motives specifically – continue to closely follow the VM pack as each player seeks to best gauge and react to the immediate US tailwind and global hurdles.
Showing posts with label FIAT. Show all posts
Showing posts with label FIAT. Show all posts
Sunday, 29 July 2012
Tuesday, 19 June 2012
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.
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.
Tuesday, 20 March 2012
Micro Level Trends – European Auto Stocks – German “Growth Picks” Contrast Gallic “Value Picks”.
As European economic disarray appears to slowly subside (even in the face of Greek & Spanish intransigence) observers of European auto stocks will have noted the major divergence that has appeared between the well positioned premium biased German producers, and the flailing mainstream French and Italian manufacturers.
[NB American owned GM Europe and Ford of Europe, dragging down their respective homeland good news stories].
The broad picture forming is that auto-sector equities investors presently sit within what could be described as "Act 2 of 3".
Having witnessed successful corporations both feed and become swept up by the voracious bull market that has run since October 2011, the investment community now looks to those by-passed and unloved entities which themselves are in the doldrums and look ripe for orchestrated funding and strategic nurturing.
The following provides outline of the forces that have, and continue, to support the German auto industry – which itself assists massively in financially the re-floating the EU ambition - whilst also highlighting the major market challenges yet investment opportunities for French and Italian companies at VM, Niche Manufacturer and Supply Chain Level.
The Present Picture -
North America shows the signs of maintaining a slow tentative structural recovery. China has confidently managed its passage through a successful 'soft-landing' via internally directed fiscal & monetary measures, so arguably demonstrating its ability regards self-containment and self-sufficiency. Japan continues to deploy a strong Yen (relative to the international FX basket) to serve internal infrastructure re-build programmes and overseas M&A ambitions. Brazil begins what appears a pseudo-protectionist stance over its currency and its prime manufacturing base so as to stabilise its own Mercosur fortunes given its global exportation slowdown. The Middle-East experiences the social and political pains of a new pro-Arabic yet 'centralist' transition period which seeks to economically integrate the vast MENA region so as to provide “regional balance” vis a vis Western, Latin, American, Asian and Chinese power-houses.
Europe -
Throughout this very unsettling period of new-era globalisation, European leaders recognised the need to band together to overcome the resulting frictions from the regional sovereign debt crisis; recognising that a truly 'broken Europe' would relegate the majority of EU members into a 21st century 'dark age'. The channelling of largely German liquidity through ESFS & ESFM vehicles has undoubtedly helped to quell intra-national and markets' fears, whilst the long-haul recovery of Greece will ultimately set the re-structuring benchmark – in terms of depth and timetable - for the more reticent Spanish and Portugese.
To the possible wry delight of slightly shaken but mostly unstirred EM nations, the real consequence of the western originated 'global financial crisis' was most evidently seen in the US and across Europe; the former arguably through the turmoil whilst the EU remains effectively a 3-speed destination for investors.
The German Powerhouse -
The financial problems of the European debt crisis were effectively laid at the feet of German politicians, the Bundesbank, the EcB and critically the German populace; by way of its high productivity rate & personal savings levels. Whilst the political and central bankers were able to formulate 'loans for austerity measures' toward the 'PIIGS' countries, the real concern through 2009-11 was whether Germany itself would be over-burdened by its neighbours.
As a result of the disenchantment with all things Greek, Italian, Spanish, Portugese and Irish, the German consumer became increasingly patriotic regards personal expenditure. To such an extent that the domestic economy 'powered through' the fragile period, as seen by the sale of cars increasing by 9% in 2011; a marked contrast to all other contracting EU car markets.
This then has created a condition wherein Germany once again stands as continent's prime economic engine, with France in reality offering little assistance as it battles its own banking sector woes and confines itself for the most part to its own national economic agenda.
Thus, until the EU 'de-coupled' UK finds certain economic traction, Germany sits effectively alone as the sole bright light within the fractured EU region.
Yet it has provided the indigenous German trio of VW, BMW & Daimler (aswell as to a lesser degree Opel and Ford) with a very welcome, somewhat 'inelastic', demand floor.
Fractured Europe / Fractured World -
Thus, as described initially the physically separate continents and their associated indigenous trading blocs within the world are perhaps far more fractured today than at any time over the last two decades; Europe's own dis-unity serving to underline the 'new norm' that re-orientates corporate, political and social agendas.
The Corporate Challenge -
As a result the plethora of multi-national corporations – ranging from investment banks to foodstuff providers – have effectively de-centralised so as to better morph regional divisions and operations to better suit the specific micro-climate. Then more adeptly positioned to acutely manage a portfolio of enterprises that must best evolve within that exacting micro-climate yet within the corporate realm: ranging from the immediacy of locally sourced financing availability and its associated costs, to the far-horizon of 'visioneering' process of how the regional market will develop, all the while necessarily maintaining the cohesion standard operating practice, as delineated by HQ. So a very testing time for regional executives, whether those of GE in Asia or TATA in Europe, and perhaps more so for the Board of Directors who must maintain corporate integration whilst maximising regional opportunities and minimising regional risks.
Europe's Entrenched Auto Players -
Europe's mainstream VMs have, for the most part, long been participants in worldwide markets, though of course each with varying distant past and recent history success. However, many including PSA, Renault, FIAT and GME still have a legacy bias to their homeland and European markets, marques such as Citroen, Skoda, Dacia, Opel, Vauxhall and Lancia with respectively greater perceived social and industrial connection to the home market. Whilst they themselves were intrinsic to local positive economic history thus obtaining a once entrenched (ie captive) customer base of private, fleet or government sales, that grip has weakened as a result of de-regulation and open borders policy-making.
That story of gradually eroded market share only bucked by PSA's expansionary growth at Citroen (piggy-backing Peugeot's previous 30 year success story), and VW's and Renault's 'parenting' of Skoda and Dacia as the CEE states became meshed with Western Europe.
Incoming Japanese and latterly Korean 'imported' competition, plus the competitive pressure of intra-regional sales, plus the EU's own enlargement created the impetus for necessary for yesteryear structural change, winners and losers diverging: PSA moving out of Renault's shadow to become the EU's second largest producer and Dacia re-established as a pan-regional and export oriented brand, whilst Lancia – like America's old premium brands - struggled to recapture past glory.
Whilst French and Italian producers have long recognised the EU market threat posed by new entrants, they have been largely impotent to tackle the threat by themselves broaching new high potential markets; Renault's American history with AMC an example, as was FIAT's own previous US market efforts; whilst even Audi retracted for many years. Similarly efforts in China and India have been lacklustre compared to the in-roads made by VW, GM, Ford, Toyota, Suzuki etc. Instead it seems that international expansion will continue to be limited to S.America and the MENA region, so almost destined to re-play the experiences of previous decades. Hence Marchionne's daring ploy with Chrysler to break the cycle.
This is not to say that PSA, Renault and FIAT cannot continue to nurture the broad growth opportunities in Brazil and Argentina, even with the former's monumental sector slow-down from its previous fast - indeed over-paced – growth. Simply that the expected renewed growth in North Africa and Near East will require far greater effort and patience to extract new 'national car' and auto-assembly deals (such as that seen previously with Iran's Khodro and the large Tangier's facility) because of greater competitive interest from VW Group (orientating SEAT's model naming toward the Arabic-Moorish), China's various state affiliated car companies seeking price-led export markets and India's TATA, Maruti and Mahindra seeking foreign growth.
Adjusting to the 'New Norm' -
However, those previous periods of adjustment may appear mild compared to the shock of the financial crisis, the reactionary surgical measures immediately required, and the ongoing rounds of surgeory and sector rehabilitation still needed.
Between 2007 and 2010 car sales fell from a record high of 15.5m to the low of 13.2m units, a low not seen since 1997. Governmental 'liquidity pump-priming' certainly saved Renault & PSA (receiving E2bn each), aswell as FIAT, and to a lesser extent assisting the German trio also. This financing initiative together with VMs own rapid cost-cutting and efficiency-seeking efforts and an improvement in general credit conditions for producers and buyers through 2009-11, together helped to stave off what would have been a socially disastrous auto-sector collapse.
Vitally important is the fact that over 15.1m car units were manufactured inside the EU in 2010, indicating a very simplistic 1.7m unit regional over-capacity.
Any argument that import levels (worth E22bn in 2010) adds further 'burden' to such over-capacity is countered by recognising that EU exports (worth E76.5bn) provide a wide trade surplus. However, imports are primarily mainstream vehicles and so can be argued as 'value destructive' to certain key segments in which 'national champions' operate. Whilst a high percentage of exported vehicles are typically in the premium segment where 'national champions' do not operate and so cannot benefit.
This additionally highlights the divergent fortunes of Europe's automotive players.
Slow But Powerful 'Creative Destruction' -
An argument can be posited that a far greater level of 'creative destruction' immediately following the financial crisis (engendered by less state interventionism) would actually have better served the sector in the long run.
However, this viewpoint may be cited as essentially “academic”. Since many of the intermediate private equity entities which notionally could have 'hoovered-up' liquidated assets were unable to access sufficient finance to do so; themselves in danger aversion and capital repair modes. Furthermore, many large auto-sector focused PE entities were already extremely busy executing 'turnarounds' at American and Canadian Tier 1 & 2 suppliers, exploring the bones of Chrysler and assessing new pseudo 'ground floor' investment in the GM re-listing.
It is then perhaps expedient to consider the PE community's attitude toward auto-sector restructures within the US and across Europe as respectively 'speedy' versus 'slow'.
Wall Street's Lehman Brother's 'moment' and the Sovereign Debt Crisis whilst inter-connected played out over slightly separate successive time-frames, and thus arguably allow for those tranches of America's enhanced liquidity, along with European Stability liquidity, to be invested into EU assets. Europe to see simultaneously merged FDI and 'self-help' funding, the former rationally directed at EU target companies and facilities where the business case (ideally US-EU synergistic) convinces.
The United States of Europe -
This structural difference an important distinction between the regions.
The American ability for a 'pre-pack' Chapter 11 full-scale restructuring of GM and Chrysler through a singular national legal framework, an amenable New York court system, and critically an 'on-board' UAW & general public; sits in stark contrast with the web of corporate, legal and social complexity that exists within Europe.
European leaders must wake-up to this American-European schism, and recognise the danger of slipping further behind the US, China and the increasingly strong economic blocs within Asia and Latin America.
However, in the meantime, the reality of intra-national European differences prevails, which in turn provides potential opportunities for non-European VMs and Supply Chain players to 'slice and dice' the body of the poorly performing members of the EU auto-sector. To obtain 'bolt-on' acquisitions which suit their own strategic ambitions across R&D, technical development, productivity, distribution and market-share.
[NB The 7% interest of GM in PSA might be viewed as part of this process of structural transformation].
In 2010 ACEA (the European Automobile Manufacturer's Association) noted in its yearly report that...”The automotive sector in Europe is highly competitive, supporting 12 million jobs, contributing significantly to economic prosperity. It supplies quality products worldwide and invests more in R&D than any other sector. Steps must be taken to ensure it emerges with strength from the economic downturn, ready to take advantage of market growth”.
Exactly which multi-national VM, which Tier 1 & Tier 2 companies, which distribution enterprises and which retailing groups come to finally benefit from the flux through FDI or Restructuring funding remains to be seen.
Conclusion -
VW AG, BMW AG and Daimler AG are deservedly flying high here and now, with indeed much to yet be gained as the macro-forces in Germany, North America, slowly the UK and eventually Europe provide what could be described as a domino earnings impetus. With of course China's own sustained growth also creating local and regional demand pull for these marques.
Yet the trickle-down of sizable ECB liquidity will undoubtedly eventually improve and re-energise national and regional EU market conditions. Simultaneously an offering a new generation of CO2 conscious vehicles from Peugeot SA, Renault SA and FIAT SpA should be able to excite still cost conscious but more spendthrift consumers, the VMs also theoretically able exercise historic near-reach export market opportunities.
Those valuation uplifts so desperately desired, themselves initially driven by a host of 'bottom-feeding' stock buyers, may possibly be attracted by adding greater 'pictorial detail' and 'aspirational clarity' to what for the most part are typically dry outlook summaries.
This era is obviously one of reflection and 'next move' strategising by company boards. And whilst highly confidential information cannot be leaked, it might prove useful to start relaying in broad terms the fundamentals of corporate intentions. Something that mimics a crystallised near-term ambition, as with VW's move on Porsche, with a far-horizon ideal – such as Toyota's legendary 100 year plan.
In the new age of 100 year (UK) government bonds, no doubt targeted at cash-rich corporations aswell as global pension funds, it makes sense for those auto-players presently in reduced circumstances to weave their substantive corporate intent into the minds of global investors.
[NB American owned GM Europe and Ford of Europe, dragging down their respective homeland good news stories].
The broad picture forming is that auto-sector equities investors presently sit within what could be described as "Act 2 of 3".
Having witnessed successful corporations both feed and become swept up by the voracious bull market that has run since October 2011, the investment community now looks to those by-passed and unloved entities which themselves are in the doldrums and look ripe for orchestrated funding and strategic nurturing.
The following provides outline of the forces that have, and continue, to support the German auto industry – which itself assists massively in financially the re-floating the EU ambition - whilst also highlighting the major market challenges yet investment opportunities for French and Italian companies at VM, Niche Manufacturer and Supply Chain Level.
The Present Picture -
North America shows the signs of maintaining a slow tentative structural recovery. China has confidently managed its passage through a successful 'soft-landing' via internally directed fiscal & monetary measures, so arguably demonstrating its ability regards self-containment and self-sufficiency. Japan continues to deploy a strong Yen (relative to the international FX basket) to serve internal infrastructure re-build programmes and overseas M&A ambitions. Brazil begins what appears a pseudo-protectionist stance over its currency and its prime manufacturing base so as to stabilise its own Mercosur fortunes given its global exportation slowdown. The Middle-East experiences the social and political pains of a new pro-Arabic yet 'centralist' transition period which seeks to economically integrate the vast MENA region so as to provide “regional balance” vis a vis Western, Latin, American, Asian and Chinese power-houses.
Europe -
Throughout this very unsettling period of new-era globalisation, European leaders recognised the need to band together to overcome the resulting frictions from the regional sovereign debt crisis; recognising that a truly 'broken Europe' would relegate the majority of EU members into a 21st century 'dark age'. The channelling of largely German liquidity through ESFS & ESFM vehicles has undoubtedly helped to quell intra-national and markets' fears, whilst the long-haul recovery of Greece will ultimately set the re-structuring benchmark – in terms of depth and timetable - for the more reticent Spanish and Portugese.
To the possible wry delight of slightly shaken but mostly unstirred EM nations, the real consequence of the western originated 'global financial crisis' was most evidently seen in the US and across Europe; the former arguably through the turmoil whilst the EU remains effectively a 3-speed destination for investors.
The German Powerhouse -
The financial problems of the European debt crisis were effectively laid at the feet of German politicians, the Bundesbank, the EcB and critically the German populace; by way of its high productivity rate & personal savings levels. Whilst the political and central bankers were able to formulate 'loans for austerity measures' toward the 'PIIGS' countries, the real concern through 2009-11 was whether Germany itself would be over-burdened by its neighbours.
As a result of the disenchantment with all things Greek, Italian, Spanish, Portugese and Irish, the German consumer became increasingly patriotic regards personal expenditure. To such an extent that the domestic economy 'powered through' the fragile period, as seen by the sale of cars increasing by 9% in 2011; a marked contrast to all other contracting EU car markets.
This then has created a condition wherein Germany once again stands as continent's prime economic engine, with France in reality offering little assistance as it battles its own banking sector woes and confines itself for the most part to its own national economic agenda.
Thus, until the EU 'de-coupled' UK finds certain economic traction, Germany sits effectively alone as the sole bright light within the fractured EU region.
Yet it has provided the indigenous German trio of VW, BMW & Daimler (aswell as to a lesser degree Opel and Ford) with a very welcome, somewhat 'inelastic', demand floor.
Fractured Europe / Fractured World -
Thus, as described initially the physically separate continents and their associated indigenous trading blocs within the world are perhaps far more fractured today than at any time over the last two decades; Europe's own dis-unity serving to underline the 'new norm' that re-orientates corporate, political and social agendas.
The Corporate Challenge -
As a result the plethora of multi-national corporations – ranging from investment banks to foodstuff providers – have effectively de-centralised so as to better morph regional divisions and operations to better suit the specific micro-climate. Then more adeptly positioned to acutely manage a portfolio of enterprises that must best evolve within that exacting micro-climate yet within the corporate realm: ranging from the immediacy of locally sourced financing availability and its associated costs, to the far-horizon of 'visioneering' process of how the regional market will develop, all the while necessarily maintaining the cohesion standard operating practice, as delineated by HQ. So a very testing time for regional executives, whether those of GE in Asia or TATA in Europe, and perhaps more so for the Board of Directors who must maintain corporate integration whilst maximising regional opportunities and minimising regional risks.
Europe's Entrenched Auto Players -
Europe's mainstream VMs have, for the most part, long been participants in worldwide markets, though of course each with varying distant past and recent history success. However, many including PSA, Renault, FIAT and GME still have a legacy bias to their homeland and European markets, marques such as Citroen, Skoda, Dacia, Opel, Vauxhall and Lancia with respectively greater perceived social and industrial connection to the home market. Whilst they themselves were intrinsic to local positive economic history thus obtaining a once entrenched (ie captive) customer base of private, fleet or government sales, that grip has weakened as a result of de-regulation and open borders policy-making.
That story of gradually eroded market share only bucked by PSA's expansionary growth at Citroen (piggy-backing Peugeot's previous 30 year success story), and VW's and Renault's 'parenting' of Skoda and Dacia as the CEE states became meshed with Western Europe.
Incoming Japanese and latterly Korean 'imported' competition, plus the competitive pressure of intra-regional sales, plus the EU's own enlargement created the impetus for necessary for yesteryear structural change, winners and losers diverging: PSA moving out of Renault's shadow to become the EU's second largest producer and Dacia re-established as a pan-regional and export oriented brand, whilst Lancia – like America's old premium brands - struggled to recapture past glory.
Whilst French and Italian producers have long recognised the EU market threat posed by new entrants, they have been largely impotent to tackle the threat by themselves broaching new high potential markets; Renault's American history with AMC an example, as was FIAT's own previous US market efforts; whilst even Audi retracted for many years. Similarly efforts in China and India have been lacklustre compared to the in-roads made by VW, GM, Ford, Toyota, Suzuki etc. Instead it seems that international expansion will continue to be limited to S.America and the MENA region, so almost destined to re-play the experiences of previous decades. Hence Marchionne's daring ploy with Chrysler to break the cycle.
This is not to say that PSA, Renault and FIAT cannot continue to nurture the broad growth opportunities in Brazil and Argentina, even with the former's monumental sector slow-down from its previous fast - indeed over-paced – growth. Simply that the expected renewed growth in North Africa and Near East will require far greater effort and patience to extract new 'national car' and auto-assembly deals (such as that seen previously with Iran's Khodro and the large Tangier's facility) because of greater competitive interest from VW Group (orientating SEAT's model naming toward the Arabic-Moorish), China's various state affiliated car companies seeking price-led export markets and India's TATA, Maruti and Mahindra seeking foreign growth.
Adjusting to the 'New Norm' -
However, those previous periods of adjustment may appear mild compared to the shock of the financial crisis, the reactionary surgical measures immediately required, and the ongoing rounds of surgeory and sector rehabilitation still needed.
Between 2007 and 2010 car sales fell from a record high of 15.5m to the low of 13.2m units, a low not seen since 1997. Governmental 'liquidity pump-priming' certainly saved Renault & PSA (receiving E2bn each), aswell as FIAT, and to a lesser extent assisting the German trio also. This financing initiative together with VMs own rapid cost-cutting and efficiency-seeking efforts and an improvement in general credit conditions for producers and buyers through 2009-11, together helped to stave off what would have been a socially disastrous auto-sector collapse.
Vitally important is the fact that over 15.1m car units were manufactured inside the EU in 2010, indicating a very simplistic 1.7m unit regional over-capacity.
Any argument that import levels (worth E22bn in 2010) adds further 'burden' to such over-capacity is countered by recognising that EU exports (worth E76.5bn) provide a wide trade surplus. However, imports are primarily mainstream vehicles and so can be argued as 'value destructive' to certain key segments in which 'national champions' operate. Whilst a high percentage of exported vehicles are typically in the premium segment where 'national champions' do not operate and so cannot benefit.
This additionally highlights the divergent fortunes of Europe's automotive players.
Slow But Powerful 'Creative Destruction' -
An argument can be posited that a far greater level of 'creative destruction' immediately following the financial crisis (engendered by less state interventionism) would actually have better served the sector in the long run.
However, this viewpoint may be cited as essentially “academic”. Since many of the intermediate private equity entities which notionally could have 'hoovered-up' liquidated assets were unable to access sufficient finance to do so; themselves in danger aversion and capital repair modes. Furthermore, many large auto-sector focused PE entities were already extremely busy executing 'turnarounds' at American and Canadian Tier 1 & 2 suppliers, exploring the bones of Chrysler and assessing new pseudo 'ground floor' investment in the GM re-listing.
It is then perhaps expedient to consider the PE community's attitude toward auto-sector restructures within the US and across Europe as respectively 'speedy' versus 'slow'.
Wall Street's Lehman Brother's 'moment' and the Sovereign Debt Crisis whilst inter-connected played out over slightly separate successive time-frames, and thus arguably allow for those tranches of America's enhanced liquidity, along with European Stability liquidity, to be invested into EU assets. Europe to see simultaneously merged FDI and 'self-help' funding, the former rationally directed at EU target companies and facilities where the business case (ideally US-EU synergistic) convinces.
The United States of Europe -
This structural difference an important distinction between the regions.
The American ability for a 'pre-pack' Chapter 11 full-scale restructuring of GM and Chrysler through a singular national legal framework, an amenable New York court system, and critically an 'on-board' UAW & general public; sits in stark contrast with the web of corporate, legal and social complexity that exists within Europe.
European leaders must wake-up to this American-European schism, and recognise the danger of slipping further behind the US, China and the increasingly strong economic blocs within Asia and Latin America.
However, in the meantime, the reality of intra-national European differences prevails, which in turn provides potential opportunities for non-European VMs and Supply Chain players to 'slice and dice' the body of the poorly performing members of the EU auto-sector. To obtain 'bolt-on' acquisitions which suit their own strategic ambitions across R&D, technical development, productivity, distribution and market-share.
[NB The 7% interest of GM in PSA might be viewed as part of this process of structural transformation].
In 2010 ACEA (the European Automobile Manufacturer's Association) noted in its yearly report that...”The automotive sector in Europe is highly competitive, supporting 12 million jobs, contributing significantly to economic prosperity. It supplies quality products worldwide and invests more in R&D than any other sector. Steps must be taken to ensure it emerges with strength from the economic downturn, ready to take advantage of market growth”.
Exactly which multi-national VM, which Tier 1 & Tier 2 companies, which distribution enterprises and which retailing groups come to finally benefit from the flux through FDI or Restructuring funding remains to be seen.
Conclusion -
VW AG, BMW AG and Daimler AG are deservedly flying high here and now, with indeed much to yet be gained as the macro-forces in Germany, North America, slowly the UK and eventually Europe provide what could be described as a domino earnings impetus. With of course China's own sustained growth also creating local and regional demand pull for these marques.
Yet the trickle-down of sizable ECB liquidity will undoubtedly eventually improve and re-energise national and regional EU market conditions. Simultaneously an offering a new generation of CO2 conscious vehicles from Peugeot SA, Renault SA and FIAT SpA should be able to excite still cost conscious but more spendthrift consumers, the VMs also theoretically able exercise historic near-reach export market opportunities.
Those valuation uplifts so desperately desired, themselves initially driven by a host of 'bottom-feeding' stock buyers, may possibly be attracted by adding greater 'pictorial detail' and 'aspirational clarity' to what for the most part are typically dry outlook summaries.
This era is obviously one of reflection and 'next move' strategising by company boards. And whilst highly confidential information cannot be leaked, it might prove useful to start relaying in broad terms the fundamentals of corporate intentions. Something that mimics a crystallised near-term ambition, as with VW's move on Porsche, with a far-horizon ideal – such as Toyota's legendary 100 year plan.
In the new age of 100 year (UK) government bonds, no doubt targeted at cash-rich corporations aswell as global pension funds, it makes sense for those auto-players presently in reduced circumstances to weave their substantive corporate intent into the minds of global investors.
Friday, 15 July 2011
Macro Level Trends - EU Economic Fracture - Powering Member States' National Agendas
The previous 2-speed EU (exemplified by a 'core' of Germany-France vs the 'periphery' PIGS states) is now being described as a 3-speed with Spain, Belgium and Italy viewed as 'soft-core', a label now applied to France, the markets now recognising that it cannot realistically be viewed as strong as Germany.
European woes continued this week as the contagion-effect of national debt worries spread across from Greece into Italy, participants within the capital markets are concerned about remaining in situ with large exposure, understandably skittish about being ultimately forced by Brussels to take the 'creditor haircuts' which look increasingly necessary on to support national well-being and EU unity.
This week saw the markets react to Italy's exposure as the world's 3rd biggest debt market at E 1.6 trillion ($2.23 tr), one in which liquidity has become less 'fluid' and more 'viscous' under the skittish conditions, Italy itself now viewed as moved from 'soft core' position to 'peripheral', this reflected by a 18% appreciation of its 10-year bond yield since 1st January (peaking at 20%) vs Germany's -5%.
Thus in effect we see a 're-rating' of the French and Italian economies, the former also unfortunately tied-into Italy as perhaps the biggest creditor within the Italian debt market, itself holding $393 billion.
Long-term capital markets confidence in a nation's debt servicing capabilities is of course a construct of that country's structural economic strength and the political ability to withdraw monies from households, firms and public expenditure. As is obvious, the stronger the economy the less pain induced. The weaker the economy the more pain, often consequentially creating a negative downward spiral in which the very government revenues themselves undergo real-world contraction, so de-stabilising the ability to pay the national debt.
[NB Though 'in denial' this is now the USA's emergent position].
Thus we see that Germany and Italy presently stand-on contrasting 'solid' and 'crumbling' economic foundations, the stereo-types, proving true, and presenting the administrations of both countries with respective macro and micro challenges.
Whilst an increased 'freedom of capital' through international exchanges has propelled globalisation, the very structure of a country's own commercial foundations and its financial exposure has now come to the fore for not just Germany and Italy, but for all in the West.
'Economic planning' is a term more associated with China's state-apparatus and those countries that were once deemed '3rd world', but it is a notion which remains subtly implicit in Scandinavia and Germany whilst seemingly gladly abandoned by southern Europe after post-WW2 reconstruction and 'rural-region improvement; effectively ended by the early-1980s.
However, the collapse of Communism meant that West Germany (FDR) had to plan for the 'digestion' of the old East Germany (GDR), thus in reality economic planning has been intrinsic to the Germany governmental mindset since 1945; indeed arguably since the early 1930s hyper-inflation and so since 1936. During that era of course Germany and Italy formed ever closer technical ties in the hope for forming an influential economic bloc of its own – this ambition assisted by annexation, effectively a land & commodities seizure - thus concerning Britain and leading to WW2.
Today the picture looks very different, economic ties are and have been maintained - with examples such as VW's purchase of the sportscar maker Lamborghini SpA, the styling house Giugiaro & intent toward Alfa Romeo – but that relationship has been massively over-shadowed by Germany & China, the recent $15bn trade agreement.
The ability to understand and indeed form the future has been the key to a country's commercial and global success; the industrial age reflected by Britain's initial iron-work innovations through to Japan's more recent innovations with hybrid-propulsion; both technical advances commercialised, in turn providing national power at home and abroad. Both examples quickly integrated into broader realms of formalised national economic planning by forward-looking governments. However, economic advancement is typically an evolutional process reliant upon the refinement and scale-efficiencies of conventional technologies that sit within an envelope dictated by the PESTEL norm, and so the internal combustion engine today still sits unequivocally centre stage.
Advancement of ICE from 2-stroke to 4-stroke, to hemispherical cylinder heads, to aluminium & plastics applications, to lean-burn technologies to cylinder de-activation and more means that ongoing MPG & Km/L improvements – along with lightweight body structures – mean that evolutional efficiencies can be typically engineered into future generation vehicles. This 'steady state' improvement process then in tune with real-world infrastructure and allied industries and for the firm itself critically not disruptive to past, present and future CapEx plans.
The planning of new generation engine families sits at the heart of a 'full-span' automotive producer, and encompasses a broad realm of internal and supplier participants. Given an approximate 20+ year life-span of the typical 'family' of engines (ie derived from the same prime parts) the need to plot a convincing path for both the engine's programme delivery and its 'life-cycle' applications is critical. This ideally woven into the broader (implicit or explicit) national economic plan.
[NB perhaps the simplest prime example is the original VW Beetle frame and its boxer engine, designed initially to provide spin-off variants for military use, with post-war applications in van and coupe forms. This a relatively simple are wholly aligned example of the technical planning behind war-time and peace-time economic planning].
However, there is no doubt that the ability to 'synergise' the technical planning of a multi-national 'homeland champion' firm and the domestic & foreign economic ambitions of government is a critical exercise.
And it is here, in the ICE power-train arena, that the relatively recent launches and announcements of FIAT's 'twin-air' engine and BMW's 'small-straight 6' provide interesting cases for evaluation that reflect the innate planning mindset difference between two structurally different companies from two culturally different homelands.
The 2 cylinder 875cc 'twin-air' is a small capacity super-charged unit developed by FIAT's powertrain company FPT, one with philosophical historic links to the original 2-cylinder Topolino (Little Mouse) and Nouvo Cinquecento (500). Thus it was intentionally designed for small car use, but as of yet the ideal lightweight small car has yet to be developed, though past concepts show ideas around a light-bodied Seicento vehicle. It was also designed with the idea that it could be accompany an electric motor to create a true hybrid power-train system
Though showcased on the 'Panda Aria' and destined for Panda use in Italy, 'twin-air' has gained most profile in the retro-styled present 500. This a far larger and weightier car than the original Cinquecento (940 kg mass vs 499 kg mass) and sold to customers on its CO2 eco-credentials of 92g/km, its 'spritely' city performance due to mix of pressure-fed unit offering 85HP and low-end gearbox ratios.
Beyond homeland application, FIAT Power Train (FPT) will have created the engine with contract manufacturing aims in mind, an element of the FIAT demerger into separately listed Cars and Industrial companies, FPT itself rationally split between the two, concept work staying with Cars and production with Industrials. This then means that Cars can conceptualise other vehicles around 'twin-air' (as ICE only or as hybrid-linked) and the Industrials company can seek outside 3rd party VM customers for contract manufacture. Thus a prime remit is that they must find a new client-base for the 'twin-air' engine, a 4th engine type directed at small cars to be added to the portfolio of larger petrol and diesel engines directed primarily at commercial vehicle markets.
A notional first client would be Ford since the 500 shares its basic architecture with the Ford Ka, so theoretically it could also be installed in this city-car. But whether Ford will choose to do so when it itself has designed a small capacity CVT-linked engine is questionable. Ford will very probably want a single family engine solution which can span eco-to-performance variants given desire to recapture the sporty small car niche against Twingo, Fox/Polo etc, so would ostensibly seen an engine architecture which has in-built machining flexibility of bore & stroke dimensions, aswell as mating to various gearbox types. (This is not to say it might not wish experiment with 'twin-air' for R&D or marketing purposes on a limited installation, but the re-engineering project costs in this still fiscally tight budget environment would probably prohibit such a move).
So FIAT will need to look further afield through Europe, Japan and Asia. This means almost 'automatically' beyond the self-sufficient Germans, though there could be the possibility of a JV with VW's SEAT, harking back to the FIAT derived Spanish cars of yesteryear, though it could be potentially planning to strike at the city-car heartland (v Smart) given its lack-lustre results in B & C segments throughout the EU, this though would also strike at FIAT's ambition; if so a JV unlikely.
Contract manufacture to France would seem more tenable, though the larger Renault less likely to be courted than PSA given established links, especially so if either were to create a PSA-FIAT JV for a next generation city-car that supercedes the innovative but unloved 1007.
Further afield potential lies in India with TATA's Nano and its derivatives (such as Pixel) aswell as possibly being used as a technology base to re-liven the Maruti 800 or indeed even a new Hindustan-Premier small car. Thus 'twin-air' would follow in the Indian footsteps of Vespa Scooter, FIAT-Premier 1100 etc.
FPT will try to sell the unit to Japan's small car fraternity led by (largely Toyota owned) Daihatsu, Suzuki with its Indian small car base which itself contract manufactures for Nissan. 'twin-air' could then play a part in a possible new kei-car revolution as part of Japan's own rebuilt and its Asian production ambitions.
The greatest paper-based potential is of course China, driven by its own internally directive-led requirement to reduce CO2 in coastal cities whilst also boosting its state-owned car companies access to next generation foreign technology. The Agnelli heirs through their investment vehicle EXOR and Sergio Marchionne may well see 'twin air' as one of their prime bargaining chips to grow their own FIAT interests in China. This the typical exchange basis of market access for technology access so attractive to PRC leaders. But the real question lies with the Chinese consumer and his/her willingness to buy a 2-cylinder engine. Even if proficient as the 'twin-air' undoubtedly is, It has perceptional over-tones of 'rudimentary', akin to a motor-scooter engine. And so probably undesired even in a Chinese-badged entry-level car, let alone a foreign import vehicle from Italy, the land of Prada and the Gucci 500.
However, all this 'potential' is still far from assured with no doubt confidential conversations with these 'prime-potentials'. For the short-term FIAT must rely on itself and its close governmental connections to ensure the initial pay-back of the 'twin-air' project. The sales of the 'twin-air' undoubtedly broaden the 500's appeal, but it is realistically this is an Italian proposition for the near-term, emotionally a closer 'reflection' of the original 'Dolce Vita' icon, whilst rationally answering the by-pass need of expectantly heavier vehicle taxation demands that the cash-starved government will set.
FIAT Industrial-FPT will probably also seek to either dissolve or not-extend relations with its regional sales partners around the world (eg IVECO in the UK), creating its own international sales force so as to regain the 'lost' commission-margins on unit sales, thus boosting top and bottom-line income figures on what it sees as a high-margin cars-directed business stream. But this is still some time away before coming into fruition, much dependent on the technology strategies of other VMs, who themselves may be pressured by internal need for powertrain scale (eg Ford) or for any 're-emerged' Indian producers enticed/pressured by whole vehicle 'badge-engineering' deals which would suit their necessarily low-overhead, frugally man-powered, re-start operation.
Thus it appears that FIAT wishes to replay a well trodden path of its industrial past, understandably directing new technology development at its home market needs whilst viewing the theoretical potential for such a eco-solution amongst previous JV partners and new EM based partners. Yet the world is a very different place compared to its exports not just of the 60s and 70s, but even that of 'technology diffusion' projects in even relatively recent years.
The broad-brush PESTEL potential of the 'twin-air' engine programme no doubt makes sense when posited on paper as part of a big-picture strategy vision to split FIAT into two halves, provide respective autonomies and court investor interests. But very close inspection of the real-world conditions must be undertaken when 'twin-air' is being marketed as an installation package to others.
Ultimately the ambition of 'scale-up' or 'replacement capacity' of production depends upon not only the actual extent of 3rd party demands, but also upon practically 'lining up those ducks into a row' that produces a steady flow of demand, production consistency and thus income consistency - for not only FIAT but Italy itself. Much of the 'twin-air's' future fortune then lies outside of Marchionne's direct control, instead marketing the unit to build the FPT order-book.
Such a 'mixed market' manufacturing ambition dependent upon internal and external demand balance inherently imbues a higher level of income-stream risk both in securing the 3rd party orders and in securing them; something investors in FIAT Industrial may wish to consider when forecasting its income expectations. This income variability to the internal value-chain is not so wide within companies which produce solely for themselves, especially so if the technology developed plays a defining role as central to brand values themselves.
This is the case with BMW's more controlled and exacting attitude toward technical application, production scale-up and income stream assurance, the case presented here being its new innovative small-straight six cylinder engine.
The straight six cylinder engine has become BMW's hallmark, kept alive long after other marques 'moved-on' with V-pattern sixes – although of course BMW also uses IL4, V8 and V12; but the company legendary straight six was retained and constantly refined to provide a unique brand character of combined smooth power delivery, C of G dynamic balance and RWD vehicle packaging. The straight six then is integrated into BMW Car's DNA. But the company also has a legendary Motorcycle division, in which the Tourer-bike has carved a highly regarded idiosyncratic niche and competitive advantage.
BMW has now combined these 2 'brand levers' by way of developing a 1600cc small-block straight-six engine for instillation into its 1600GT/L motorcycle model-line. Though not a first in using a straight six on a bike – American custom-builder renowned for it – it is the first to design the engine from scratch and install the unit transversely on a bike: the all new small-bore design required to comply with the bike-frame's width itself rooted in cornering angles and mass transfer tolerances.
At first sight this may look like little more than a BMW ego-boosting exercise displaying its technical capabilities to add brand distinction to its Tourers.
But investment-auto-motives believes that Munich has intentionally build the small straight-six into its bikes as part of a new technology design, build and real-world prove-out that will eventually feed into its small cars and sports cars. The short length engine allowing for a unique transverse straight-six either front or rear 'mid-mounted', aswell as conventionally laid out in a longitudinal fashion. Here, with improved engine bay packaging, to assist either crash protection when front mounted or luggage capacity when rear mounted. Moreover, its smaller size enables the coupling of hybrid-power ancillaries.
Thus in an age of necessary engine capacity down-sizing BMW seeks to retain its mechanical heart through shrinkage rather than replacement with an alternative 'sub-standard' unit. Furthermore, it could possibly replace its current IL4s with this unit to re-apply the 'BMW standard' from city cars to 3, 4 & 5 series, additionally 6,7 & 8 series as potential hybrids.
Of particular interest would be its possible use on the MegaCity ' i ' labelled city-car product. Although engineered as a lightweight EV to conquer this customer space, as a 'fall-back' option, the engine could be physically halved and re-engineered as a 3 cylinder 800cc unit and installed into the carbon-fibre sub-structure to give what would be a ground-breaking Low Emissions Vehicle (LEV).
[NB The FT reports that E46m of German regional government funding will assist the E368m MegaCity EV project costs, this to be reviewed by EU officials to ensure that the provison of the funding adheres to EU assistance criteria. Given the perilous state of EU finances, a clause could be added which claws-back the funds if indeed the primary EV path fails to deliver and the small ICE path is followed. A mutually suitable arrangement could be that the E46m is offered with no premium to the EcB base-rate. If ultimately MegaCity production is split between EV & LEV to maximise market acceptance, a % of claw-back format should be used, based on either the split between EV & LEV installation project costs or as a ratio of the production split over the first full production year].
A 'halved' 3-pot engine then offers competition to FIAT's 'twin-air' and Daimler's Smart unit.
As can be seen, the innate advantage that BMW has over its rivals (excluding Honda) is that as a broad-spectrum vehicle producer - spanning cars, quad-bikes, motorcycles - it can explore technical synergies across vehicle genres which provide an automatic advantage in both conceptual thinking and execution. Within execution it has a 'Russian Dolls' ability to scale-up the production capacity of such transferable technologies when passed on from the motorcycles division to the cars division. (Indeed, the former can even be feasibly be used as an sub-module assembler for the cars division if the business case proved worthy and factory & labour capacity was freely available).
This separate but closely couples twin division corporate structure (excluding the 3rd finance division) thus allows for intellectual conceptualistion, R&D exploration and 'scaled production' freedoms that are rarely found within other volume manufacturers; since historically they have typically shed non-core production activities to allow for single sector business concentration, the disposed division thus financial injections to do so.
This is an understandable rational and indeed prescient to the basics of the capital markets investment philosophy, one that the magic formula of scale to set economies to set pricing power to set market share capture, all adding to unit and operating margins, profitability and ultimately shareholder yield and market capitalisation value.
This then indeed is the magical set-formula in a sector where a company or companies can effectively plan to control the arena, usually in a sector's initial flourish or after major economic disruption, when they have access to funding that allows them to buy flailing competitors. It was the approach taken by William Durant and Alfred P Sloane at GM and has been the standard expansion model ever since.
This 'American' finance-driven approach has its roots (largely in part) stemming back to 16th century Italy, this method employed by the Medici banking clan to maintain and control its various interests in various trades; the template propagated and used worldwide ever since.
Though of course German bankers are well attuned to German corporate ambitions, the country's combination of regional 'feudal-industrialist' families with onus on technical education for the masses. This has meant that the 'German' approach continues to be one of economic advancement through close-knit relationships and technical progression - even though 'feudal-industrialists' such as the Quandts are far less 'hands-on'.
[NB Unsurprisingly it was the German model that Japan looked to pre and post WW2].
This then illustrates the German attitude toward long-term technical planning which has very deep roots in supporting a diverse vehicle industry and supply base which in turn economically and literally underpin its nation's expansion; and that of many others. This industrial reach seen by VW Group's Piech's desire to create an ever broader conglomerate spanning from (Porsche) sportscars to (MAN-Scania) heavy trucks, and Daimler's vehicle portfolio which spans from (Smart) city-cars to (UniMog) off-road vehicles.
The Italian v German difference then at its heart can be simplistically distinguished as a 'micro-level' attitude versus a 'macro-level' attitude. Yet the inter-relation of a politically-led national industrial agenda and the socio-economic importance of big business - especially in apparently 'socialist' countries – add additional shades of complexity to that simplistic fundamental description.
Italy's post-war rebuild period, saw the state effectively set central-control demands of its industrialist families, the Agnelli's of course prime intermediaries. Long forgotten examples of product & brand diversification were deemed necessary to re-build Italy and maintain its momentum, 'empty segments' were to be filled by those companies with spare capacity, thus leading to (to our eyes) oddities like the Alfa Romeo T10 'Autotutto' small van. The volatile Italian economy and harsh export conditions and environments meant that FIAT eventually swallowed-up many of the flailing domestic marques (in the GM manner) , today having interests spanning Piaggio scooters & mini-trucks to of course Ferrari SpA.
This should then give it the ability to (like the Germans) explore cross-company and inter-company synergies. Yet although interesting new products do periodically arrive on the fringes – like the Piaggio MP3 tilting 3 wheeler – the FIAT's historical modus operandi toward scale-efficiencies of passenger car platforms, and one would think a core competence by now, is witnessed again with the Chrysler acquisition.
A 'scale ambition' thus dominates over ideas of truly 'engineering the brand' or 'technical visioneering', both of which require deep technical planning with long-term commitment, especially so when properly married.
The Italian-American stance is then 'corporo-sociocratic'.
The German stance is then 'aristo-technocratic'
Much of this of course influences – and is influenced by – intrinsic cultural behaviours which tend to either the short-term or long-term, this much influenced by the general attitude of company owners, whether privately held or publicly held or if mixed with institutional investors the critical attitudinal alignment of mingled-ownership. Since these form the primary raison d'etre regards the appointment of specific Chairman, CEO and senior executives and so the very structure of the company.
It is here the innate differences between BMW AG and FIAT (Autos & Industrials) become apparent. Specifically, the relative simplicity of BMW's 3 divisional entity compared against FIAT's conglomerate complexity, now its dual company, multi-divisional form.
That simplicity allowed for a rapid BMW rebuild in the 1960s after its 1950s financial woes, it allowed the Quandt family to exercise acumen when appointing senior executives ever since, and allowed it to act unhindered when it seized Rover Group to capture MINI, sell-on the unwanted brands and acquire Rolls-Royce. It has allowed it to build the Motorcycle division slowly but surely taking 'ownership' of Tourer and 'Dakar' segments. And critically it allowed for total control of the key arenas of R&D and financial services, thereby creating a systemic and coalescing industrial eco-system for itself, its stakeholders and as a contributor to Germany at large.
Yet without a stable political, economic, financing and social environment BMW would have faltered. A post-war stability was engendered through West German unity and the 'protestant work ethic' (to quote Prof Ferguson) which underpinned the rising value of the Deutschmark. That allowed for an 'easier' well managed incorporation of the GDR in 1989 whilst the FX currency advantage promoted a favourable accommodation of the new Euro in 1999, which coupled to booming EM export markets over the last decade. A 60 year era of general domestic and international stability by which BMW itself flourished.
Historically, it could be argued that FIAT has been of lesser service to itself than to the Agnelli family, the Italian finance community or indeed the immediate government-led policy needs of Italy itself. But then as the national champion it was perhaps always given greater operational freedoms and indeed policy-led directions and assistance than would have been the case elsewhere. This especially so in old Eastern bloc states where FIAT had become a major (often sole) automaker. These circumstances gave it a form of insularity and pseudo-protection for many decades, but the massive globalisation era of 1990s & 2000s and collapse of CIS markets highlighted just how competitively remote FIAT had become on the world stage.
It too suffered from the instability of mid-late 20th century Italy, where politics where as volatile as the Italian economy and thus the Lira. Though consumerism grew a general unease amongst the populace & workforce meant that their emotional investment remained regional & local. FIAT's national geographic reach meant that it became a type of de-facto 'nanny state', a mentality only now eroding. However, its now abandoned role of corporate welfare provider along with the concerning condition of national finances threatens social stability; public-sector budget contraction and necessary private and corporate de-leveraging means increased societal angst.
The powering of the national economic agenda within the ever more complex and less obvious international back-drop is of course the primary challenge facing EU member and western governments. Concerned about loosing the headway gained over 2009-11, the bond markets are informally but effectively constantly 'stress-testing' the innate worth of all EU states'; hence: 'core', 'soft-core' and 'periphery'.
Beyond the detail of country-specific econometrics, this then puts each of the countries placed within those 'bands' on a different 'investment footing'. Whilst those place in 'core' and 'soft-core' realms have the foundational strength to re-buoy – resulting from the 'circularity of corporate activity, more dynamic labour markets and educational/training structures - the real concerns lay with the acute socio-economic structures of the 'periphery' where corporate activity is heavily dented and those educated or young will typically seek opportunity outside the country or region. This concern was all to obvious by the lacklustre reaction at the 'Grecian Fire-Sale' meeting held at the Claridges hotel in London only a few weeks ago, when officials sought asset valuations for the 25% of national assets offered for privatisation.
As multi-national companies with broad geographic foot-prints, the destiny of BMW and FIAT are of course not wholly predetermined by the national economic outlook, though it must be noted that beside Renault there are perhaps no other volume auto-manufacturers whose fortunes are as heavily dictated by domestic sales.
At 'surface reading' though BMW and FIAT fortunes look to be divergent.
Like VW and Daimler, whilst it continues to grow internationally, BMW has the innate 'feudal-technocratic' incentive to remain an intrinsic part of the German economy, one which even under possible EU collapse will feed-into and feed-from the global economy.
FIAT must attune its products to a deflating Italy whilst simultaneously trying to maintain and grow its Latin American position. FIAT's Latin-link was undoubtedly part of Washington's reason to approve the FIAT-Chrysler deal, but as FIAT-Chrysler the company will be dependent upon Washington largesse – in the form of QE3 or new incentive schemes – to maintain and its US sales base.
The truly interesting note to consider was that China's Premier visited the UK, Germany & Hungary, effectively discounting Italy and the periphery; though China has offered the idea of support if necessary.
This then leaves the US to effectively help to prop-up Italy, by feeding its heavily pressured debt markets with a possibly unavoidable QE3 that would also help Ireland (given a reading between the lines of Obama's speech in Ireland.
Thus, today Northern Europe ostensibly looks East.
Whilst Southern Europe and the 'periphery' looks West.
Not quite the ideological divide historically seen between the Germanic tribes and Roman Empire, but apparent nonetheless.
This divide sets out the possibility of another notional route; one which Sarkozy 'interestingly' predicated as a Mediterranean economic bloc. The 'EU periphery' to coalesce with those newly re-formed countries that constitute the the 'Arab Spring'.
Leaderships of the 'junk-status' countries then have a trio of options, each progression path with numerous pros and cons. But whichever path is chosen the reality is that their countries cannot avoid the task of restructuring to make sense relative to a new economic bloc order and that inside a new global order.
The German-led route would involve broad-brush industrial planning by which Greece, Italy etc would essentially subsume themselves, but in return gain critical FDI and technology orientated projects which would vitally enhance both their commercial platform (especially if tied to privatised industries) and boost educational change.
The American-led route offers liquidity made available from continued Federal Reserve borrowing, yet the necessary privatisation and de-leveraging path would be more quickly initiated, longer ran (to extract deep value) and arguably harder felt, since such countries would have to follow in the train of the US which itself is on its own mighty devaluation path. This might require that resurrected 'old' currencies be informally tied to the the US$, with those countries of true concern directly pegged, so as to provide Washington with FDI and import good pricing assurances.
The Med-Bloc-led route offers the concept of a newly created world, one in which the 'EU periphery' could act as the lead instigators. But the massive cost-base chasm that exist between old-Europe and new-MENA would need to be leveled as soon as possible to ensure political harmony, which would require a quick and hard de-leveraging process that would generate the spectre of 'suffering' Christians compared to 'up-lifted' Muslims; this then creating social angst. Moreover, the argument that the periphery could re-run an EU type project for themselves whilst also containing their own national woes appears feeble; with additionally few major corporations akin to FIAT, Santander etc to assist in its development.
[NB MENA's economic development then seems more likely through Northern European &/or full EU, UK and Scandinavian involvement]
As important component parts of their respective homeland economies, BMW and FIAT presently face very different futures. These scenarios and their fortunes result from the innate differences between the respective 'far horizon technical planning' and 'mid-horizon financial planning' cultures, intrinsic to country and company.
Yet despite the differences, they will continue to act as the 'connecting rods' between their own 'mechanical engines' and the broader 'economic engine'. FIAT's supercharged 'twin-air' unit is a good metaphor for the listing of its Cars and Industrials divisions. And BMW's mini-bloc straight- six could be an allegory of Europe's 'senior 6' members to provide a balanced delivery of soft-power in order to drive the EU-project straight and true.
European woes continued this week as the contagion-effect of national debt worries spread across from Greece into Italy, participants within the capital markets are concerned about remaining in situ with large exposure, understandably skittish about being ultimately forced by Brussels to take the 'creditor haircuts' which look increasingly necessary on to support national well-being and EU unity.
This week saw the markets react to Italy's exposure as the world's 3rd biggest debt market at E 1.6 trillion ($2.23 tr), one in which liquidity has become less 'fluid' and more 'viscous' under the skittish conditions, Italy itself now viewed as moved from 'soft core' position to 'peripheral', this reflected by a 18% appreciation of its 10-year bond yield since 1st January (peaking at 20%) vs Germany's -5%.
Thus in effect we see a 're-rating' of the French and Italian economies, the former also unfortunately tied-into Italy as perhaps the biggest creditor within the Italian debt market, itself holding $393 billion.
Long-term capital markets confidence in a nation's debt servicing capabilities is of course a construct of that country's structural economic strength and the political ability to withdraw monies from households, firms and public expenditure. As is obvious, the stronger the economy the less pain induced. The weaker the economy the more pain, often consequentially creating a negative downward spiral in which the very government revenues themselves undergo real-world contraction, so de-stabilising the ability to pay the national debt.
[NB Though 'in denial' this is now the USA's emergent position].
Thus we see that Germany and Italy presently stand-on contrasting 'solid' and 'crumbling' economic foundations, the stereo-types, proving true, and presenting the administrations of both countries with respective macro and micro challenges.
Whilst an increased 'freedom of capital' through international exchanges has propelled globalisation, the very structure of a country's own commercial foundations and its financial exposure has now come to the fore for not just Germany and Italy, but for all in the West.
'Economic planning' is a term more associated with China's state-apparatus and those countries that were once deemed '3rd world', but it is a notion which remains subtly implicit in Scandinavia and Germany whilst seemingly gladly abandoned by southern Europe after post-WW2 reconstruction and 'rural-region improvement; effectively ended by the early-1980s.
However, the collapse of Communism meant that West Germany (FDR) had to plan for the 'digestion' of the old East Germany (GDR), thus in reality economic planning has been intrinsic to the Germany governmental mindset since 1945; indeed arguably since the early 1930s hyper-inflation and so since 1936. During that era of course Germany and Italy formed ever closer technical ties in the hope for forming an influential economic bloc of its own – this ambition assisted by annexation, effectively a land & commodities seizure - thus concerning Britain and leading to WW2.
Today the picture looks very different, economic ties are and have been maintained - with examples such as VW's purchase of the sportscar maker Lamborghini SpA, the styling house Giugiaro & intent toward Alfa Romeo – but that relationship has been massively over-shadowed by Germany & China, the recent $15bn trade agreement.
The ability to understand and indeed form the future has been the key to a country's commercial and global success; the industrial age reflected by Britain's initial iron-work innovations through to Japan's more recent innovations with hybrid-propulsion; both technical advances commercialised, in turn providing national power at home and abroad. Both examples quickly integrated into broader realms of formalised national economic planning by forward-looking governments. However, economic advancement is typically an evolutional process reliant upon the refinement and scale-efficiencies of conventional technologies that sit within an envelope dictated by the PESTEL norm, and so the internal combustion engine today still sits unequivocally centre stage.
Advancement of ICE from 2-stroke to 4-stroke, to hemispherical cylinder heads, to aluminium & plastics applications, to lean-burn technologies to cylinder de-activation and more means that ongoing MPG & Km/L improvements – along with lightweight body structures – mean that evolutional efficiencies can be typically engineered into future generation vehicles. This 'steady state' improvement process then in tune with real-world infrastructure and allied industries and for the firm itself critically not disruptive to past, present and future CapEx plans.
The planning of new generation engine families sits at the heart of a 'full-span' automotive producer, and encompasses a broad realm of internal and supplier participants. Given an approximate 20+ year life-span of the typical 'family' of engines (ie derived from the same prime parts) the need to plot a convincing path for both the engine's programme delivery and its 'life-cycle' applications is critical. This ideally woven into the broader (implicit or explicit) national economic plan.
[NB perhaps the simplest prime example is the original VW Beetle frame and its boxer engine, designed initially to provide spin-off variants for military use, with post-war applications in van and coupe forms. This a relatively simple are wholly aligned example of the technical planning behind war-time and peace-time economic planning].
However, there is no doubt that the ability to 'synergise' the technical planning of a multi-national 'homeland champion' firm and the domestic & foreign economic ambitions of government is a critical exercise.
And it is here, in the ICE power-train arena, that the relatively recent launches and announcements of FIAT's 'twin-air' engine and BMW's 'small-straight 6' provide interesting cases for evaluation that reflect the innate planning mindset difference between two structurally different companies from two culturally different homelands.
The 2 cylinder 875cc 'twin-air' is a small capacity super-charged unit developed by FIAT's powertrain company FPT, one with philosophical historic links to the original 2-cylinder Topolino (Little Mouse) and Nouvo Cinquecento (500). Thus it was intentionally designed for small car use, but as of yet the ideal lightweight small car has yet to be developed, though past concepts show ideas around a light-bodied Seicento vehicle. It was also designed with the idea that it could be accompany an electric motor to create a true hybrid power-train system
Though showcased on the 'Panda Aria' and destined for Panda use in Italy, 'twin-air' has gained most profile in the retro-styled present 500. This a far larger and weightier car than the original Cinquecento (940 kg mass vs 499 kg mass) and sold to customers on its CO2 eco-credentials of 92g/km, its 'spritely' city performance due to mix of pressure-fed unit offering 85HP and low-end gearbox ratios.
Beyond homeland application, FIAT Power Train (FPT) will have created the engine with contract manufacturing aims in mind, an element of the FIAT demerger into separately listed Cars and Industrial companies, FPT itself rationally split between the two, concept work staying with Cars and production with Industrials. This then means that Cars can conceptualise other vehicles around 'twin-air' (as ICE only or as hybrid-linked) and the Industrials company can seek outside 3rd party VM customers for contract manufacture. Thus a prime remit is that they must find a new client-base for the 'twin-air' engine, a 4th engine type directed at small cars to be added to the portfolio of larger petrol and diesel engines directed primarily at commercial vehicle markets.
A notional first client would be Ford since the 500 shares its basic architecture with the Ford Ka, so theoretically it could also be installed in this city-car. But whether Ford will choose to do so when it itself has designed a small capacity CVT-linked engine is questionable. Ford will very probably want a single family engine solution which can span eco-to-performance variants given desire to recapture the sporty small car niche against Twingo, Fox/Polo etc, so would ostensibly seen an engine architecture which has in-built machining flexibility of bore & stroke dimensions, aswell as mating to various gearbox types. (This is not to say it might not wish experiment with 'twin-air' for R&D or marketing purposes on a limited installation, but the re-engineering project costs in this still fiscally tight budget environment would probably prohibit such a move).
So FIAT will need to look further afield through Europe, Japan and Asia. This means almost 'automatically' beyond the self-sufficient Germans, though there could be the possibility of a JV with VW's SEAT, harking back to the FIAT derived Spanish cars of yesteryear, though it could be potentially planning to strike at the city-car heartland (v Smart) given its lack-lustre results in B & C segments throughout the EU, this though would also strike at FIAT's ambition; if so a JV unlikely.
Contract manufacture to France would seem more tenable, though the larger Renault less likely to be courted than PSA given established links, especially so if either were to create a PSA-FIAT JV for a next generation city-car that supercedes the innovative but unloved 1007.
Further afield potential lies in India with TATA's Nano and its derivatives (such as Pixel) aswell as possibly being used as a technology base to re-liven the Maruti 800 or indeed even a new Hindustan-Premier small car. Thus 'twin-air' would follow in the Indian footsteps of Vespa Scooter, FIAT-Premier 1100 etc.
FPT will try to sell the unit to Japan's small car fraternity led by (largely Toyota owned) Daihatsu, Suzuki with its Indian small car base which itself contract manufactures for Nissan. 'twin-air' could then play a part in a possible new kei-car revolution as part of Japan's own rebuilt and its Asian production ambitions.
The greatest paper-based potential is of course China, driven by its own internally directive-led requirement to reduce CO2 in coastal cities whilst also boosting its state-owned car companies access to next generation foreign technology. The Agnelli heirs through their investment vehicle EXOR and Sergio Marchionne may well see 'twin air' as one of their prime bargaining chips to grow their own FIAT interests in China. This the typical exchange basis of market access for technology access so attractive to PRC leaders. But the real question lies with the Chinese consumer and his/her willingness to buy a 2-cylinder engine. Even if proficient as the 'twin-air' undoubtedly is, It has perceptional over-tones of 'rudimentary', akin to a motor-scooter engine. And so probably undesired even in a Chinese-badged entry-level car, let alone a foreign import vehicle from Italy, the land of Prada and the Gucci 500.
However, all this 'potential' is still far from assured with no doubt confidential conversations with these 'prime-potentials'. For the short-term FIAT must rely on itself and its close governmental connections to ensure the initial pay-back of the 'twin-air' project. The sales of the 'twin-air' undoubtedly broaden the 500's appeal, but it is realistically this is an Italian proposition for the near-term, emotionally a closer 'reflection' of the original 'Dolce Vita' icon, whilst rationally answering the by-pass need of expectantly heavier vehicle taxation demands that the cash-starved government will set.
FIAT Industrial-FPT will probably also seek to either dissolve or not-extend relations with its regional sales partners around the world (eg IVECO in the UK), creating its own international sales force so as to regain the 'lost' commission-margins on unit sales, thus boosting top and bottom-line income figures on what it sees as a high-margin cars-directed business stream. But this is still some time away before coming into fruition, much dependent on the technology strategies of other VMs, who themselves may be pressured by internal need for powertrain scale (eg Ford) or for any 're-emerged' Indian producers enticed/pressured by whole vehicle 'badge-engineering' deals which would suit their necessarily low-overhead, frugally man-powered, re-start operation.
Thus it appears that FIAT wishes to replay a well trodden path of its industrial past, understandably directing new technology development at its home market needs whilst viewing the theoretical potential for such a eco-solution amongst previous JV partners and new EM based partners. Yet the world is a very different place compared to its exports not just of the 60s and 70s, but even that of 'technology diffusion' projects in even relatively recent years.
The broad-brush PESTEL potential of the 'twin-air' engine programme no doubt makes sense when posited on paper as part of a big-picture strategy vision to split FIAT into two halves, provide respective autonomies and court investor interests. But very close inspection of the real-world conditions must be undertaken when 'twin-air' is being marketed as an installation package to others.
Ultimately the ambition of 'scale-up' or 'replacement capacity' of production depends upon not only the actual extent of 3rd party demands, but also upon practically 'lining up those ducks into a row' that produces a steady flow of demand, production consistency and thus income consistency - for not only FIAT but Italy itself. Much of the 'twin-air's' future fortune then lies outside of Marchionne's direct control, instead marketing the unit to build the FPT order-book.
Such a 'mixed market' manufacturing ambition dependent upon internal and external demand balance inherently imbues a higher level of income-stream risk both in securing the 3rd party orders and in securing them; something investors in FIAT Industrial may wish to consider when forecasting its income expectations. This income variability to the internal value-chain is not so wide within companies which produce solely for themselves, especially so if the technology developed plays a defining role as central to brand values themselves.
This is the case with BMW's more controlled and exacting attitude toward technical application, production scale-up and income stream assurance, the case presented here being its new innovative small-straight six cylinder engine.
The straight six cylinder engine has become BMW's hallmark, kept alive long after other marques 'moved-on' with V-pattern sixes – although of course BMW also uses IL4, V8 and V12; but the company legendary straight six was retained and constantly refined to provide a unique brand character of combined smooth power delivery, C of G dynamic balance and RWD vehicle packaging. The straight six then is integrated into BMW Car's DNA. But the company also has a legendary Motorcycle division, in which the Tourer-bike has carved a highly regarded idiosyncratic niche and competitive advantage.
BMW has now combined these 2 'brand levers' by way of developing a 1600cc small-block straight-six engine for instillation into its 1600GT/L motorcycle model-line. Though not a first in using a straight six on a bike – American custom-builder renowned for it – it is the first to design the engine from scratch and install the unit transversely on a bike: the all new small-bore design required to comply with the bike-frame's width itself rooted in cornering angles and mass transfer tolerances.
At first sight this may look like little more than a BMW ego-boosting exercise displaying its technical capabilities to add brand distinction to its Tourers.
But investment-auto-motives believes that Munich has intentionally build the small straight-six into its bikes as part of a new technology design, build and real-world prove-out that will eventually feed into its small cars and sports cars. The short length engine allowing for a unique transverse straight-six either front or rear 'mid-mounted', aswell as conventionally laid out in a longitudinal fashion. Here, with improved engine bay packaging, to assist either crash protection when front mounted or luggage capacity when rear mounted. Moreover, its smaller size enables the coupling of hybrid-power ancillaries.
Thus in an age of necessary engine capacity down-sizing BMW seeks to retain its mechanical heart through shrinkage rather than replacement with an alternative 'sub-standard' unit. Furthermore, it could possibly replace its current IL4s with this unit to re-apply the 'BMW standard' from city cars to 3, 4 & 5 series, additionally 6,7 & 8 series as potential hybrids.
Of particular interest would be its possible use on the MegaCity ' i ' labelled city-car product. Although engineered as a lightweight EV to conquer this customer space, as a 'fall-back' option, the engine could be physically halved and re-engineered as a 3 cylinder 800cc unit and installed into the carbon-fibre sub-structure to give what would be a ground-breaking Low Emissions Vehicle (LEV).
[NB The FT reports that E46m of German regional government funding will assist the E368m MegaCity EV project costs, this to be reviewed by EU officials to ensure that the provison of the funding adheres to EU assistance criteria. Given the perilous state of EU finances, a clause could be added which claws-back the funds if indeed the primary EV path fails to deliver and the small ICE path is followed. A mutually suitable arrangement could be that the E46m is offered with no premium to the EcB base-rate. If ultimately MegaCity production is split between EV & LEV to maximise market acceptance, a % of claw-back format should be used, based on either the split between EV & LEV installation project costs or as a ratio of the production split over the first full production year].
A 'halved' 3-pot engine then offers competition to FIAT's 'twin-air' and Daimler's Smart unit.
As can be seen, the innate advantage that BMW has over its rivals (excluding Honda) is that as a broad-spectrum vehicle producer - spanning cars, quad-bikes, motorcycles - it can explore technical synergies across vehicle genres which provide an automatic advantage in both conceptual thinking and execution. Within execution it has a 'Russian Dolls' ability to scale-up the production capacity of such transferable technologies when passed on from the motorcycles division to the cars division. (Indeed, the former can even be feasibly be used as an sub-module assembler for the cars division if the business case proved worthy and factory & labour capacity was freely available).
This separate but closely couples twin division corporate structure (excluding the 3rd finance division) thus allows for intellectual conceptualistion, R&D exploration and 'scaled production' freedoms that are rarely found within other volume manufacturers; since historically they have typically shed non-core production activities to allow for single sector business concentration, the disposed division thus financial injections to do so.
This is an understandable rational and indeed prescient to the basics of the capital markets investment philosophy, one that the magic formula of scale to set economies to set pricing power to set market share capture, all adding to unit and operating margins, profitability and ultimately shareholder yield and market capitalisation value.
This then indeed is the magical set-formula in a sector where a company or companies can effectively plan to control the arena, usually in a sector's initial flourish or after major economic disruption, when they have access to funding that allows them to buy flailing competitors. It was the approach taken by William Durant and Alfred P Sloane at GM and has been the standard expansion model ever since.
This 'American' finance-driven approach has its roots (largely in part) stemming back to 16th century Italy, this method employed by the Medici banking clan to maintain and control its various interests in various trades; the template propagated and used worldwide ever since.
Though of course German bankers are well attuned to German corporate ambitions, the country's combination of regional 'feudal-industrialist' families with onus on technical education for the masses. This has meant that the 'German' approach continues to be one of economic advancement through close-knit relationships and technical progression - even though 'feudal-industrialists' such as the Quandts are far less 'hands-on'.
[NB Unsurprisingly it was the German model that Japan looked to pre and post WW2].
This then illustrates the German attitude toward long-term technical planning which has very deep roots in supporting a diverse vehicle industry and supply base which in turn economically and literally underpin its nation's expansion; and that of many others. This industrial reach seen by VW Group's Piech's desire to create an ever broader conglomerate spanning from (Porsche) sportscars to (MAN-Scania) heavy trucks, and Daimler's vehicle portfolio which spans from (Smart) city-cars to (UniMog) off-road vehicles.
The Italian v German difference then at its heart can be simplistically distinguished as a 'micro-level' attitude versus a 'macro-level' attitude. Yet the inter-relation of a politically-led national industrial agenda and the socio-economic importance of big business - especially in apparently 'socialist' countries – add additional shades of complexity to that simplistic fundamental description.
Italy's post-war rebuild period, saw the state effectively set central-control demands of its industrialist families, the Agnelli's of course prime intermediaries. Long forgotten examples of product & brand diversification were deemed necessary to re-build Italy and maintain its momentum, 'empty segments' were to be filled by those companies with spare capacity, thus leading to (to our eyes) oddities like the Alfa Romeo T10 'Autotutto' small van. The volatile Italian economy and harsh export conditions and environments meant that FIAT eventually swallowed-up many of the flailing domestic marques (in the GM manner) , today having interests spanning Piaggio scooters & mini-trucks to of course Ferrari SpA.
This should then give it the ability to (like the Germans) explore cross-company and inter-company synergies. Yet although interesting new products do periodically arrive on the fringes – like the Piaggio MP3 tilting 3 wheeler – the FIAT's historical modus operandi toward scale-efficiencies of passenger car platforms, and one would think a core competence by now, is witnessed again with the Chrysler acquisition.
A 'scale ambition' thus dominates over ideas of truly 'engineering the brand' or 'technical visioneering', both of which require deep technical planning with long-term commitment, especially so when properly married.
The Italian-American stance is then 'corporo-sociocratic'.
The German stance is then 'aristo-technocratic'
Much of this of course influences – and is influenced by – intrinsic cultural behaviours which tend to either the short-term or long-term, this much influenced by the general attitude of company owners, whether privately held or publicly held or if mixed with institutional investors the critical attitudinal alignment of mingled-ownership. Since these form the primary raison d'etre regards the appointment of specific Chairman, CEO and senior executives and so the very structure of the company.
It is here the innate differences between BMW AG and FIAT (Autos & Industrials) become apparent. Specifically, the relative simplicity of BMW's 3 divisional entity compared against FIAT's conglomerate complexity, now its dual company, multi-divisional form.
That simplicity allowed for a rapid BMW rebuild in the 1960s after its 1950s financial woes, it allowed the Quandt family to exercise acumen when appointing senior executives ever since, and allowed it to act unhindered when it seized Rover Group to capture MINI, sell-on the unwanted brands and acquire Rolls-Royce. It has allowed it to build the Motorcycle division slowly but surely taking 'ownership' of Tourer and 'Dakar' segments. And critically it allowed for total control of the key arenas of R&D and financial services, thereby creating a systemic and coalescing industrial eco-system for itself, its stakeholders and as a contributor to Germany at large.
Yet without a stable political, economic, financing and social environment BMW would have faltered. A post-war stability was engendered through West German unity and the 'protestant work ethic' (to quote Prof Ferguson) which underpinned the rising value of the Deutschmark. That allowed for an 'easier' well managed incorporation of the GDR in 1989 whilst the FX currency advantage promoted a favourable accommodation of the new Euro in 1999, which coupled to booming EM export markets over the last decade. A 60 year era of general domestic and international stability by which BMW itself flourished.
Historically, it could be argued that FIAT has been of lesser service to itself than to the Agnelli family, the Italian finance community or indeed the immediate government-led policy needs of Italy itself. But then as the national champion it was perhaps always given greater operational freedoms and indeed policy-led directions and assistance than would have been the case elsewhere. This especially so in old Eastern bloc states where FIAT had become a major (often sole) automaker. These circumstances gave it a form of insularity and pseudo-protection for many decades, but the massive globalisation era of 1990s & 2000s and collapse of CIS markets highlighted just how competitively remote FIAT had become on the world stage.
It too suffered from the instability of mid-late 20th century Italy, where politics where as volatile as the Italian economy and thus the Lira. Though consumerism grew a general unease amongst the populace & workforce meant that their emotional investment remained regional & local. FIAT's national geographic reach meant that it became a type of de-facto 'nanny state', a mentality only now eroding. However, its now abandoned role of corporate welfare provider along with the concerning condition of national finances threatens social stability; public-sector budget contraction and necessary private and corporate de-leveraging means increased societal angst.
The powering of the national economic agenda within the ever more complex and less obvious international back-drop is of course the primary challenge facing EU member and western governments. Concerned about loosing the headway gained over 2009-11, the bond markets are informally but effectively constantly 'stress-testing' the innate worth of all EU states'; hence: 'core', 'soft-core' and 'periphery'.
Beyond the detail of country-specific econometrics, this then puts each of the countries placed within those 'bands' on a different 'investment footing'. Whilst those place in 'core' and 'soft-core' realms have the foundational strength to re-buoy – resulting from the 'circularity of corporate activity, more dynamic labour markets and educational/training structures - the real concerns lay with the acute socio-economic structures of the 'periphery' where corporate activity is heavily dented and those educated or young will typically seek opportunity outside the country or region. This concern was all to obvious by the lacklustre reaction at the 'Grecian Fire-Sale' meeting held at the Claridges hotel in London only a few weeks ago, when officials sought asset valuations for the 25% of national assets offered for privatisation.
As multi-national companies with broad geographic foot-prints, the destiny of BMW and FIAT are of course not wholly predetermined by the national economic outlook, though it must be noted that beside Renault there are perhaps no other volume auto-manufacturers whose fortunes are as heavily dictated by domestic sales.
At 'surface reading' though BMW and FIAT fortunes look to be divergent.
Like VW and Daimler, whilst it continues to grow internationally, BMW has the innate 'feudal-technocratic' incentive to remain an intrinsic part of the German economy, one which even under possible EU collapse will feed-into and feed-from the global economy.
FIAT must attune its products to a deflating Italy whilst simultaneously trying to maintain and grow its Latin American position. FIAT's Latin-link was undoubtedly part of Washington's reason to approve the FIAT-Chrysler deal, but as FIAT-Chrysler the company will be dependent upon Washington largesse – in the form of QE3 or new incentive schemes – to maintain and its US sales base.
The truly interesting note to consider was that China's Premier visited the UK, Germany & Hungary, effectively discounting Italy and the periphery; though China has offered the idea of support if necessary.
This then leaves the US to effectively help to prop-up Italy, by feeding its heavily pressured debt markets with a possibly unavoidable QE3 that would also help Ireland (given a reading between the lines of Obama's speech in Ireland.
Thus, today Northern Europe ostensibly looks East.
Whilst Southern Europe and the 'periphery' looks West.
Not quite the ideological divide historically seen between the Germanic tribes and Roman Empire, but apparent nonetheless.
This divide sets out the possibility of another notional route; one which Sarkozy 'interestingly' predicated as a Mediterranean economic bloc. The 'EU periphery' to coalesce with those newly re-formed countries that constitute the the 'Arab Spring'.
Leaderships of the 'junk-status' countries then have a trio of options, each progression path with numerous pros and cons. But whichever path is chosen the reality is that their countries cannot avoid the task of restructuring to make sense relative to a new economic bloc order and that inside a new global order.
The German-led route would involve broad-brush industrial planning by which Greece, Italy etc would essentially subsume themselves, but in return gain critical FDI and technology orientated projects which would vitally enhance both their commercial platform (especially if tied to privatised industries) and boost educational change.
The American-led route offers liquidity made available from continued Federal Reserve borrowing, yet the necessary privatisation and de-leveraging path would be more quickly initiated, longer ran (to extract deep value) and arguably harder felt, since such countries would have to follow in the train of the US which itself is on its own mighty devaluation path. This might require that resurrected 'old' currencies be informally tied to the the US$, with those countries of true concern directly pegged, so as to provide Washington with FDI and import good pricing assurances.
The Med-Bloc-led route offers the concept of a newly created world, one in which the 'EU periphery' could act as the lead instigators. But the massive cost-base chasm that exist between old-Europe and new-MENA would need to be leveled as soon as possible to ensure political harmony, which would require a quick and hard de-leveraging process that would generate the spectre of 'suffering' Christians compared to 'up-lifted' Muslims; this then creating social angst. Moreover, the argument that the periphery could re-run an EU type project for themselves whilst also containing their own national woes appears feeble; with additionally few major corporations akin to FIAT, Santander etc to assist in its development.
[NB MENA's economic development then seems more likely through Northern European &/or full EU, UK and Scandinavian involvement]
As important component parts of their respective homeland economies, BMW and FIAT presently face very different futures. These scenarios and their fortunes result from the innate differences between the respective 'far horizon technical planning' and 'mid-horizon financial planning' cultures, intrinsic to country and company.
Yet despite the differences, they will continue to act as the 'connecting rods' between their own 'mechanical engines' and the broader 'economic engine'. FIAT's supercharged 'twin-air' unit is a good metaphor for the listing of its Cars and Industrials divisions. And BMW's mini-bloc straight- six could be an allegory of Europe's 'senior 6' members to provide a balanced delivery of soft-power in order to drive the EU-project straight and true.
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