Micro-Level Trends – Auto Business Models – 'Open Your Eyes' to Additional 'Plate Spinning'

As many will remember, James Bond's Aston Martin DB5 featured revolving number plates, from British to French regulation nomenclature. External to the car's store of other gadgetry, this 'plate spinning' capability allowed for re-invention to suit the changed environment.

It is a useful metaphor in this day and age, since whilst the title of 'Automaker' reflects a prime function of a firm – its origins and most visible offering – companies have over the last century and into the 21st century become far broader in their operational remit.

Value capture for the greatest value creation has been the historical imperative, and unsurprisingly that has meant the conglomeration of those previously separate links of the value chain that offered best reward. From raw materials acquisition all the way through to the after-sales 'experience'.

The fables of Henry Ford's expansion of his employee customer-base - via the $5 per day wages model – went hand in hand with FMC's expansion of autonomy for its materials supply – via the South American siting of 'Fordlandia and 'Belterra'' to access forestry for wood and rubber. Beyond reducing the cost of FMC's input prices, it was seen as a grand schema to essentially colonize S. America (or $.America as some commentators then proclaimed it) to help unify the continent.

Thus in the early part of the 20th century, the automobile was seen as an economic force for global change and good, woven into foreign policy hopes. Yet the latter half of the century such failed attempts in what was a 'de-colonizing' era auto-saw companies re-orientate and re-focus upon the up-stream elements of retail and associated consumer (and thus inter-connected wholesale) financing.

Such actions were of course reflective of the specific economic growth period (ie the stage of capitalism per se), and so as the national context changed so too did economic interaction. Compare Ford to FIAT, the latter of which existed in a very different, pro-socialist environment which held far longer onto the associated downstream activities which fed its factories. (Arguably, right up until this year, and arguably still not fully de-tangled).

By the 1990s the new business mould was set, by which time finance played as greater a part in income capture as vehicle production, with disposals of what were integrated supply-chain vendors such as Delphi and Visteon by GM and Ford, though of course they rightly took full advantage of purchasing supplier shares when times proved prudent, so as to gain greater hold on ensuring supply feed and pricing.

Yet in the main, once through the recessionary early 90s, buoyant capital markets and economies allowed for ever greater vehicle sales to new customers and an ever cheapening cost of capital through which the sales could be obtained. This symbiotic relationship strengthened by the purchase of external finance houses (to gain immediate scale and create cross-tie selling opportunities) and the creation of internal finance companies so as to grow internal capabilities and keep a sharper eye upon the vehicle vs financing inter-relationship: especially important for managing the fine balance between fleet-sales and the managing of used cars' residual values.

In essence car-makers - thanks to Wall Street's own advisory opportunism and stock listing demands - become bankers.

Whilst such actions may fly in the face of the idea of core-competencies, automakers expanded their capabilities to prove that they were as adept in this field as in manufacturing cars and trucks, indeed the activity helped them maintain credit ratings and thus investor interest.
Thus history demonstrates that the larger automakers had become (critically) systemic components of a nation's or region's economy, and in the US's case, the argument for 'bail-outs' was hard to combat, even if the execution created grounds for criticism.

[NB As seen by the Congressional Oversight Report dated 13th January which all too lightly slaps the hand of the Obama administration for the irreparable loss of public funds, by selling the first GM stock tranche at $33 instead of the calculated $45 required to fulfill the public purse. This investment-auto-motives believes was done so as to leave 'much meat on the GM bone' by which the stock market itself could benefit – the 15% rise since IPO listing demonstrating that assumption.

[Interestingly, compare GM to the upcoming Facebook IPO, in which US buyers cannot participate – is the latter seen as too much of a bubble risk to the US index? An interesting academic case study].

Whilst the corporate interaction between vehicle sales and financing is of course nothing new, by 2007 the scale and management task in maintaining this symbiosis, with its tentacle-like extensions – grew to massive proportions.

Here history itself provides a lesson, exemplified by Pierre Alexandre Darraq in 1890s France. His interest in the automobile was purely financial. The income promise generated by (the short-lived achievement of) mass-manufacture, tied to associated 3rd party financing a polar opposite to his contemporaries' engineering focus to create a legacy.

Playing one side of the financing coin, Darraq company share issuances took place in Germany (to Opel), in Britain (with the Darraq Co), in Italy (to the pre-curser of Alfa Romeo) and in Spain; all as part of pan-European strategy devised seemingly by certain French bank. Playing the other side of the coin, consumer finance was offered via those companies and/or the French bank at lower than market rates. (Though sold to the obviously wealthy who did not need credit, the financing was viewed as part of a quid pro quo relationship).

Thus the dualistic interplay is age old, especially where a holding company is formed, an understandable part of its own business model, such 'plate spinning' very much part of the necessary work for successful commercial 'take-off'.

As the early pioneering decades gave way to those which saw efficiently honed production, the very nature of an expanding global automotive market also demanded geographical expansion of company abilities. Later, the effective commoditization of the car - generated by the wash of financing - meant that corporations had construct themselves as scale-driven competitors, and so effectively become 'lead-share market-makers', a pattern seen since the 1930s in the USA everytime an economic downturn consequentially expelled the smaller firms.

However, cars and trucks of course became central to the national economic model in all mid-stage industrialised countries. And as GDP slowly increased so did the public's comfort and level of expectation, hence old automakers joined by new. All having to create empires which could handle a myriad of requirements; across procurement, logistics, manufacturing, marketing, design, development, retailing etc etc.

Such 'plate-spinning' became ever more complex, and the ability to manage a specific portion and/or portions of the internal value-chain became the lever(s) of competitive advantage. From lean manufacture to life-cycle planning to R&D strategy to brand development to product personality and feature content to retail spaces to today's reach of 'concierge service' (this trikling-down from luxury and into the premium sector).

As a natural consequence, the number of plates that must be spun by an individual company - or indeed competitor peer set - depends greatly upon the expectation of the customer, competitor action, and of course a corporate desire to engage into and exceed both client and foe mindsets. All in order to raise its ability to massage the client perception, attitude, reaction and of course ultimately, the company's top line. The ultimate goal to create price inelasticity as a central tenent of the business model.

Obviously, this most prevalent for those within the luxury product realm, themselves now increasingly the 'centre of gravity' for western-world production and export.

Unlike their 'commoditized' opposites in price-sensitive sectors, premium and luxury brands are to a great extent the 'lifestyle purveyors and intermediaries' which form part of a wealthy client's 'reality'.

As part of such a 'reality manipulation' remit, they must offer 'Life Extensions' (to co-opt the parlance of the film Vanilla Sky). To offer something previously never experienced, or to do so with greater aplomb.

Yet, what can you give the man or woman with everything?

Vanilla Sky's main character David Aames is the man with everything: a publishing empire, a Park Avenue apartment, a classic Ford Mustang (though he literally dreams of a Ferrari 25OGTO), and an 'FB' girlfriend with model looks. No man could seemingly want more. But what David really wants is love and reliability, attachment and security.

In today's socially-frenetic hyper-consumerist culture where constant change rules as the norm, those central humanistic desires appear to be spiralling-away in ever decreasing circles within the human experience. The humanistic desire replaced by brand-connections in the retail and virtual realms.

This is only a part of the PESTEL environment in which any B2C company (automotive especially) must participate and offer, with varying levels of the psychological and esoteric.

Once upon a time something like an 4th hand used Toyota provided these innate satisfiers to a newly licensed 16/17 year-old teenager. Yet that, and far beyond, is something that even the likes of Bentley, Rolls-Royce & Maybach must proffer to the ever so world-weary forty-something adults that are 'cash-rich and time-poor'.

Such ability to engineer delight often depends on the size of the vehicle programme budget, its boundaries dictating the level of innovative freedom allowed; with ideally such innovation derived from pre-phase R&D efforts.

When not part of a bigger corporation with funds to throw at innovation, it may be harder still. Thus for the likes of Aston Martin and its smaller peers to orchestrate such innovation, there is greater reliance upon internal imagination. A need for dedicated and innovative personnel who can add product/brand psychological value, both during concept gestation, and through wholly idiosyncratic 'created experiences' once the car is in the client's hands with the brand melding into their hearts.

AML an others of course already recognise the theory of this , with the efforts to create a world of 'Aston Martin' that goes beyond the sector norm of track-days and VIP events, via the brand pillar of amateur race-team support and up-scale merchandise. To do so, it has embraced the realms of 'art' to both create lifestyle links and brand-associations. However, presently it seems directed at the 'petit-bourgeois' yet monied provincial buyers - that no doubt represent much of the client-base - who likes to see an 'arty' picture of his/her car on their lounge or dining room wall. But in such a world, customers must be psychologically led, if anything, to balance the obvious (and income necessary) typical mind-set chasing. AML and others need more than replicating the metal assuage of the 1980s Testarossa on the boy's bedroom wall.

Compare this with FIAT's seeming arms-length efforts to strike at the heart of the London art establishment, with a Tate Britain gallery showing an 'old-new built 126' showing the 1970s vs 2000s vehicle time-warp (with inference of panel match build quality), and an original 1960s 500 held by a seeming giant child's hand with inference of the new 500 being a life-toy for the fully grown adult today.

And in turn, see FIAT's work with Ferrari via Ferrari Heritage (car reconstruction), Ferrari's client 'Race Stable' (for special edition models, and Ferrari World for the tourists of the Middle-East.

Today, more than ever, from London's Berkeley Square to Beijing's Regent area, luxury product companies are faced with a slow but strong rebound in the West within which loyalist and new clients will want to see new marque dimensions and personifications – both as distinct to the company and as a personal 'rub-off''.

In the Near and Far East, the seeming continuous stream of new GCC and Asian clients, once past the novelty of acquisition and 'arrived' ownership may also expect a level of marque (and to them by default associative cultural) immersion.

This luxury realm learning of course should trickle-down in time to lower sectors, brands and products.

Recently the global component supply chains were fractured and are re-set via ongoing M&A, internal company efficiencies are being strictly maintained for FCF & working capital purposes, necessarily buoyant balance sheets are kept for investor interest, and within that 're-set' context board members and their non-execs must be prepared to reach ever further-out. Into new exploratory and uncomfortable areas, to spin yet more additional plates set-up within the value chain and across the retail realm.

This new era has only just begun, and the doors of consumer and corporate perception are being expanded.

Lastly, Dr Piech and Porsche AG (as was) was derided for becoming “a Hedge Fund with a car company attached”. It was only its commitment to both itself and customers that allowed it to become so. Though much to the chagrin and envy of its competitors who were given a clear lesson in how a high margin auto-business evolved over decades could give high FCF from which to create a synergistic financial powerhouse. Businesses that could be both autonomous yet mutual rewarding, and all furthermore, all to the German national good. (Ferdinand Piech may well privately think “I'm a legend”, and considered arrogant for doing so, but ultimately he is right.

Moreover, today and situated to the east, South Korea's Hyundai Motor marches forward, with conglomerate interests in its own brokerage house to trade its way into the future via close contact with the capital markets; a model Chinese exporters will no doubt mimic with even greater strength in times to come.

Thus, just as James Bond kept his plates spinning relative to the environment, so must the auto-industry.

As 'Vanilla Sky' asserts in its opening* and closing sequences...“Open Your Eyes”.


*Post Script:
the opening sequence also depicts the TV showing Audrey Hepburn's 'Sabrina', like most of her films demonstrating character self-development, a Directorial short-hand for Vanilla Sky's plot-line.

Though perhaps such a viewpoint is relevant to the US auto-industry today, it might gain greater impetus from 'Billion Dollar Brain', since all investors, companies and governments must think extremely deeply as the sector is re-moulded.

Company Focus – VW AG – St James's and the Giant Piech

VW Share Price (@ 12.36pm 29.01.2010)
- Ordinary : Euro 64.96
- Preference: Euro 57.54

From the Upper East Side and St James's comes news that members of the hedge fund industry have been considering how best to buoy their own coffers, heavily sunk in part by what they consider misrepresentation by Porsche management at the time of the intended VW buy-out.

As history has shown, that intention was given a swift about-turn as over-extended by debt, Porsche was swallowed by VW AG. A second critique comes from institutional investors, concerned at the price VW is paying for Porsche Holdings AG, with the conjecture that the Piech and Porsche families will be the major beneficiaries at the cost of large shareholders.

In Germany, where the machinations of industrial engineering meets financial engineering, Prof. Ferdinand Piech sits centre-stage seemingly unperturbed.

Unquestionably the strongest of the Europeans presently, VW's 2009 turnover has been greatly assisted by still relatively strong sales in its Chinese & Brazilian strong-holds, add to which the benefit provided as a substantial recipient of EU scrappage schemes. The VW Group, its core and satellite brands and a now well entrenched with eco-sub-brands assisting (eg Bluemotion, GreenLine etc) could be argued as having to date largely won the eco-perception battle amongst the public. This volume & profile mix ensured VW had a record number of deliveries in 2009 at 6.29m units (+1.1% YoY). As such VW presently 'sits pretty'.

Beyond the market sqawk, VW has auto-sector strength, in terms of market share, model mix, pricing power with consumers, the introduction of the low-cost A3 platform, industry leading flexible manufacture across sites, and on the back of these the ability to drive economies of scale with international component suppliers relative to local and Euro FX conditions.

Moreover the stated cross-sharing alliance with Suzuki is a positive sector-shifting move. It obviously chosen as a pragmatic alternative to the heavy investment required, and long-pay-back period of a new, advanced tech, small car programme (ie Up! In contrast to 2nd world Fox). We suspect it's manifest agenda was two-fold: To protect still highly prized liquidity on the balance sheet and hasten the launch of a market leading small car under Polo.

At the strategic level, beyond a reduced cost option versus domestic development, the alliance also creates geographic, further fiscal and strategic options and opportunities: Piech has witnessed Machionne and Ghosn develop direct and indirect Indian ties with respectively TATA and Bajaj, and shrewdly sees a possible greater value-adding multi-play via Suzuki with:

1. Europe – possibly replaying the PSA-Toyota manufacturing alliance in a CEE location
2. India – piggy-backing Suzuki-Maruti presence in manufacturing and distribution.
3. Japan – dual forces with enhanced VW presence to take advantage of Toyota woes.
4. S. America – dual forces to squeeze VW competitors (esp Ford & FIAT)
5. Financing – Ability to tap liquid Japanese banks at 0.1% base-rate thru' probable weakening Yen
6. Strategy – Ability to tap into Suzuki's broad and deep 'cars to quads to motor-cycles' capability.

In short, as Europe starts to enter its own 'Kei' car' era, VW wishes to leverage learning and synergies from perhaps the world's best small car maker with expansive personal mobility reach.

Within its core of Western Europe it identifies the A & B segments as its prime targets, given what it sees (or perhaps likes to purvey) as a lack of variant model presence across: notchback, estate, MPV, van , coupe, cabrio & roadster variants.

Q309 reported data shows that VW Group holds #1 in Germany( with 21% market share) , China & Brazil and holds 11.7% of global TIV (up from 10% YoY), but warns of caution for 2010 even if well placed in EM markets such as India and Russia.

The VW brand shows success with Jan-Sept 09 deliveries up 1.5%, September of major benefit seeing a 22.8% (extra-ordinary) single month rise (mainly due to local & global scrappage incentive schemes for lower CO2 emissions smaller cars . Internationally Gol maintains its performance in Mercosaur region whilst in China Jetta, (Newish) Lavida and Passat benefit from the both return 'loyalty' purchases and 'flight to safety' migration from other newer (less proven) Chinese domestic automakers.

In recent presentations (ie Hans Dieter Potsche) VW tries to demonstrate how it created firm foundations through the boom period. This then provides room to proactively manage through the economic trough and maintain focus upon the typical efficiency levers:

a) “Working Capital optimisation” via efficacious inventory management,
b) “Constant CapEx review”,
c) “Maximise Liquidity”,
d) “Cost Discipline”,
e) “Flexible Labour Contracts”,
f) “Managing Production Capacity”.

The Q309 report stated an increased CapEx to Sales Revenue quotient of 5.7% (from 4.9%), now quoted as industry standard, is largely the result of the ratio-effect due to declined sales revenues

VW states that E25.8bn is to be invested over next 3 years (2010-1012), of which E19.9bn CapEx directed at property, pant and equipment. Approximately E10bn of that will be spend directly in Germany, presumably to demonstrate its commitment to the German people and importantly grow favour with Lower Saxony (its 20% 'supervisory' shareholder).

VW Group's product strategy foundations will continue as normal with a "multi-brand modular matrix" strategy previously seen with the A4 platform since the mid 1990s, now extended in technical sophistication and model reach with the slightly smaller FWD A3 platform set (known as MQB) [with the larger RWD set known as MLB]. This includes greater integration of automatic gearboxes which highlights the ambition toward greater US and non-EU mix.

New plant and equipment acquisition and investment are noted relative to construction of a new USA plant due for 'SoP' in 2011, and Porsche (platform & capability) integration with its purchase of the Karmann Osnabruck (niche vehicle) site.

However, amongst the positive SEAT continues to struggle and is the Achilles heal of the group, its offering of married practicality & sportiness effectively unrecognised due to lack of brand resonance amongst consumers. However, after decades of various motorsport campaigning, SEAT has had 2009 WTCC success, the most high profile of which were #1,#2,#3,#4 positions at the Brazilian round. This theoretically creates a launch-pad for the brand in Brazil, with the possibility to leverage SEAT's cultural connections to the 'old world'.


With few other automakers as well placed we conject that Ferdinand Piech will be using his strong corporate performance, with liquidity, to combat institutional investor concerns regards over-payment for the Porsche division. However, it is that corporate liquidity that has also drawn the eyes of the aggrieved US hedge funds and the reported considered $1bn filing.

It is conceivable that this action has been stirred so as to both gain much sought after cash - given the level of recent fund withdrawls - from VW, and to possibly dampen the present Porsche share price so that hedge-funds could purchase Porsche stock at a discount prior to the beginning of the VW's own Porsche stock buy-back. Thus ironically possibly using VW sourced cash to purchase a hiked Porsche stock to help compensate for the original massive losses.

However, recent news highlights that it is the UK's St James's players that prefer a less confrontational approach. There is still much value left in the giant VW 'peach', it appears both St James's and Prof. Peich well recognise that fact.