The European and US auto-sectors enjoyed the temporary reprieve given by the various national scrappage schemes, but now reality hits and possibly much harder than previously expected. The profitability crunch now heightened by the fact that the mining industry has re-tabled the notion of sector consolidation – long on the cards – to improve its own performance; especially now that China has been identified as a net importer of coal, this demonstrating its economic hunger and continued demand for base commodities.
As expected, the Rio Tinto - BHP Billiton concept of up-stream production integration is obviously growing increasingly real, the companies managing expectations over the last few months, with today, a letter in the FT from the legal and external affairs executive indicatively not only defending the position, but highlighting the fight it is willing to take on to achieve the ambition.
Understandably, the global industrial base is holding its breath given the possible consequential outcome, and so presents its case to relative sector bodies - in the automotive case, the voice of Europe's ACEA now being heard vying against this “duopolistic” intend. However, even it must know that to state that such a move was unexpected would be disingenuous.
The growing gap between iron ore's long-term contract price and its near-term spot price has been growing over the last year, ever since the equities rebound and miner's angst that they had ultimately locked-in their contract prices too early, but had little choice given the fragility of sentiment at the time. The 2009 commodities surge led to a historic watershed in the negotiational stance between iron ore miners and steelmakers when on 30th March the usual benchmark setting, first-round Japanese talks effectively changed the game for all. The previous annually set price agreements (based on average mid-term trend pricing) were abandoned, instead becoming a quarterly event with direct relevance to spot prices.
Having been a victim of the price/inflation turnaround the miners were keen to make-up ground, and it seems to ensure supply for its rapidly re-aligning industrial base Japan was happy to oblige as was a similarly keen China, itself experiencing a lesser re-alignment. That sets a new price of between US$110-120 per tonne for the Q2 2010, hence up 100% over the 2009 contract settlement price. 'Wet finger in the air' predictions from sector analysts indicate that the biggest 3 miners: Rio-Tinto, BHP-Billiton & Vale would enjoy a $5bn boost to bottom-line performance.
In what appears a tactic to essentially get ahead of the future demand curve, attract investment capital and so increase capacity, efficiencies and further improve profits, Rio & BHP are fighting hard to demonstrate the advantages of its proposition. It says Chinese Walls will create split between the combined upstream and still separate downstream components of their operations, so gaining the best of both worlds: creating scale-efficiency at source (primarily W. Australian mines) and encouraging sales and marketing competitiveness at the retail level to its customers.
For the large capacity steelmakers primarily operating in hungry markets, the price increase can be ammortised over the capacity and steel type, with of course probable scale-ordering discounts made quietly available. This silent but expected reality would best serve India's ArcelorMittal; No1 by a tonnage processing factor of x3. And so in effect ArcelorMittal can afford to let Japan's Nippon and China's Boasteel and their 'brethren' set a global price that it very probably won't have to pay. Equally S.Korea's POSCO with similar processing tonnage to the Japanese and a lesser structural cost to endure should theoretically have the ability to swallow the revised prices; indeed this action possibly expected by the relevant national governments as part of their ongoing export drives and cross-sector, cross-economy profitability hopes to maintain economic balance; assisted by the Won's recent international deflation as a consequence of the Renminbi's maintained FX stance.
But it will be the comparatively smaller others like TATA, US Steel, NucorCorp, Severstal, Corus etc with less of a bargaining stance that will be forced to pass-on the 12 month price increase (of $380 to $550 to $725 by Q2 end for high-quality hot-rolled) to try maintain their own margins.
[NB investment-auto-motives expects that the steel-sector's smaller players will in due course need to consolidate further, primarily via allegiances with a few M&As to maintain negotiating strength, whether the Rio-BHP consolidation is enacted or not].
Thus, for the vehicle industry, whilst China and Japan very probably intends to swallow the iron-ore price via absorption at the steel-processing level and as part of operations overhead at the manufacturing level (possibly with relative in-place tax relief), others vehicle producers elsewhere will be forced to pass-on much if not all of the input price hike.
That is bad news for the US, Europe & Russia. In India TATA may have the ability to re-jig its transfer-cost arrangements so as to reduce the on-shock to its burgeoning customer base (especially obviously on Nano). Whilst in Brazil, the local big 4 – VW, GM, FIAT & Ford – will probably be able to gain government assistance in compelling the local supply-chain to partially suppress local consumption pricing – probably adding any lost component 'invisibly' into iron-ore and steel export pricing.
So, at first glance, the big losers appear to be GM, Ford, FIAT-Chrysler, VW, PSA, Renault, BMW , and Daimler. Thus yet again, for the nth time, the western region structural cost bases of these manufacturers will come under pressure, especially so now that the expected volume decline appears now the green consumer incentives have disappeared and governments cannot afford to replay them.
Obviously investors will be keen to see just how prepared these companies are to react to the input price hike, the advantage of scale, platform / systems / parts commonality being key, whilst also recognising the importance of CEO's and CFO's proven performance in previously locking-in long-term contracts with steel-suppliers. In relation to the last issue, any that did will be sure to convey that to the investment community.
The ramifications present the all too familiar juxtaposition of 'winners & losers'. For the near-mid term.
The former camp consisting of VW Group leveraging purchasing scale and commonality, Ford on the same basis and Renault-Nissan absorbing into previously cost-amortised 'old' platforms. Although both BMW & Daimler are a long way from leveraging the production scale increases from next generation small cars, basic business-model economics indicates that they can better absorb the on-cost given their premium position, internal ability to create a pricing elasticity, and the ability to adopt alternative materials (aluminium or composites) where brand/model relative.
[NB the aluminium price slowly falling as large national inventories are being run-down].
In the latter camp, PSA may well have leveraged Varin's steel-supply know-how but it still faces ongoing structural and model portfolio headwinds,, whilst FIAT-Chrysler – even though working rapidly towards - have yet to realise the volume efficiencies Marchionne envisaged, which in itself it is suspected will take longer than envisaged unless Chrysler effectively buys its US market share.
Critically this will be a harsh test for GM-Opel having been assisted through its restructuring, and it will need to re-demonstrate its EU production sites' commercial viability.
Thus, for the European view, the bet is that the relative positions of EU 8 are little changed – the sun will still shine for some, cloud for others. What is of consequence is the level of 'hit' each takes given individually maintained vs individually weakened sales volumes the endemic relative structural costs by unit, platform and marginal productivity site measures, and critically the methods announced by executive teams to combat this newly emerged massive headwind.
Pressure then once again builds, this time though with little apparent reprieve, and so the western industrial base for all steel-linked consumer goods – from cars to fridges - is put under the micro-scope to see if cracks appear, so in turn presenting re-structuring and/or alliance opportunities.
Some will crack....but the best of the crop – strategically attuned & operationally fit – have far from any intention in doing so. As the impinging price war rages at the input level, so no doubt the default position for the wavering mass manufacturers will be to create a price war at the dealer level, so as to try and create a virtuous cycle of spiraling volume and reduced per unit costs. That internally generated sales-focus pressure may be their all too typical undoing.
Yet more rounds of the same to come no doubt, whilst the intelligent producers look to balance-sheet strength and diminished-cost asset acquisitions across both the US & Euro regions. The ramifications of the commodities pricing wave throughout the sector are yet to be seen. A case of 'watch this space' as the automotive intelligensia leverage the resultant circumstances.
Showing posts with label US Auto Sector. Show all posts
Showing posts with label US Auto Sector. Show all posts
Wednesday, 14 April 2010
Tuesday, 6 April 2010
Macro Level Trends – US Metro Rehabilitation – Navigating Las Vegas through the Economic Desert
Recently reported upbeat US technical data has prompted Presidential Senior Advisor Larry Summers to state that the country approaches “escape velocity” in its bid for attained self-sustaining growth. For millions of citizens that technical data and the overtly positive rhetoric may presently appear as yet another examplar within the realms of that all too familiar quote regards statistics.
Yet, unquestionably the US administration must move beyond its stance on China's foreign reserve surplus in re-balancing global liquidity, and regenerate its economic base, building its way out of Main Street's tough recession. The topic of infrastructure, and its endemic relationship with the prime tenants of ecological responsibility and the individual, of course will play perhaps the primary role in the re-building of the US. But today - unlike J Edgar Hoover's relatively basic 'New Deal' that saw a geographically diverse population 're-centred' for infrastructure building projects from the agricultural dust-bowls of the Mid-West to unprofitable mining towns in Virginia – a new more expansive and forward thinking philosophy is required to regenerate America.
In a bitter twist of fate, one of the most desperate cities that requires the boost of such initiative is Las Vegas itself, once the 'escapist' older satellite town to Boulder City - created to house the construction workers of the New Deal's iconic Hoover Dam.
Given its relative youth and very murky origins, the 20th century story of Las Vegas is a well known addition to the US's history books. However having expanded rapidly over the last 15 years or so, it is the 21st century's near-term that must provide new solutions to meet the challenges that emerged when the economy rapidly contracted; effectively leaving economic devastation as the reality behind the glitzy facade of the city.
Of course recessions are typically a time of new build, the advantages of reduced labour & materials costs leveraged to bolster project costs, business models and of course add to the good of the local economy. Though not quite on the legendary scale of the Hoover Dam, Vegas has been espousing the regenerational agenda of 'City-Center', a reportedly different entertainment venue for regional residents and tourists alike in contrast to the character and remit of its Casino-related surrounds. Instead, it endeavor to bring 'culture' per se to Las Vegas via what is in reality a re-baked version of regurgitated 'Euro-Modernism': as seen before in Miami's 1930s originally 'clean' 'Ocean Drive Deco', this momentarily re-diverted by Lapidus hotels & Lincoln Drive's “Too Much is Never Enough” re-creation in the 1950s (that simply overlayed vibrant tones over simple geometric structures), and perhaps last seen back in the 'Euro' guise of Ford's 1961-69 Lincoln Continental.
Of course for Las Vegas after such pseudo-architectural landmarks like the kitsch original Flamingo and The Sands, the 1960s onwards brought on the idiom of the commercially successful but characterless 'decorated sheds' and 'neon boxes'; perhaps best illustrated by The Mint.
However, whilst an architectural atrocity that added no cultural value to the roadscape The Mint inadvertently assisted in growing the soul of city auto-culture in the guise of the The Mint 400 off-road race between 1968 and 1977– latterly put into legend As the Great American Desert Race - as a counterpoint to the better known and older Baja 1000.
The Mint 400 has been revived and runs annually from its Fremont Street start-point, but critically it nourished the small core of Vegas auto-culture. Today beyond that renowned desert race of Hunter S Thompson lore, it takes the form of NHRA Drag-Racing derived from its illegal start-point of counter-culture youth origins across America but perhaps most emblematic on the old Vegas Strip – very apt – to the running of NASCAR at the Vegas Speedbowl.
The business park grounds surrounding the Speedbowl also happens to be home of the US auto-legend Shelby - which today goes by the holding company name of Carroll Shelby International Inc since 2003, previously in the guise of Shelby American, that name now reborn as the manufacturing subsidiary of CSI (ticker CSBI:OTC for 'over the counter' stock trades).
[NB CSBI is today 06.04.2010 trading at $0.26, a quarter of the value it reached on 25.02.08, demonstrating the decimation to the national and local economy].
For today's media-connected, TV referential popular society that 'CSI' nomenclature has obvious overtones to the TV series CSI: Las Vegas. Whilst that may have been an obvious cognitive tool happily the only connection Shelby has to the judicial system has been the use of the prison system's low cost labour in the formation of 'hand-lay-up' composite body-shell surfaces (hoods, fenders, doors etc) for its niche Cobra and Series One cars.
In the dour economic climate of this Nevada state desert town, this picture of knocked automotive niche manufacturing confidence sits in apparent contrast to the overtly upbeat tones of the local Mayor et al regards the expensive 'City-Centre' initiative – something touted as an economic savior. It's true role as a commercially profitable cultural centre remains to be seen, though as with the case of any newly announced maximum capacity passenger aircraft that proffers space and new experiences like on-board gyms the reality ultimately reverts back to normal business practices and maximum capacity utilisation. This may be ultimately the case with City-Center, where good social intentions that seek to change the character of the city fall to the way-side as the demand-cycle for cheap accommodation picks-up as part of the recessionary-busting effort.
City-Center is perhaps the expected reaction to the recession, an evolution of the 1930s build initiative, this time using largely private funds (even if tussled over) of MGM Mirage and Dubai World. It at least demonstrates the much needed fluid and symbiotic interaction of private capital and an assistive town administration, and highlights an effort to think beyond the (neon) box for the social and commercial good.
And whilst it may be far more typical Vegas style 'Show than Substance' it highlights the need for the city to become self-sustaining in a re-balance of its commercial, productive and wealth creating base. Moreover, just as it became a leading examplar of the credit-bubble, the metropolitan area growing at historic record rates with the explosion of housing construction, so perhaps now the challenge is to re-mould the city as a model of future-thinking.
That means strategically reviewing its geographic and philosophical position, understanding its innate industrial capabilities that lay beyond the gaming tables, show stages, service hospitality to the self-sustaining practical nature of its businesses and inhabitants that once built a city in the desert. That spirit may have heavily depleted as Vegas's character changed with the boom times, but that character needs to be regained.
Look behind the surface and today the outskirts of Vegas into Paradise, Winchester and Enterprise counties are experiencing the same type of retraction as inner-city Detroit experienced over decades as the indigenous car industry slowly shriveled to new global conditions. This of course, it is hoped, is an exaggerationn of the troubles facing Las Vegas, but the wake-up call is clear that alternative growth models beyond City-Centre and ever lasting discounted hotel-room pricing.
.
As part of this exercise the automotive soul of Vegas should be re-examined to see what else can be built to serve a new era, vehicles beyond the generic limousine Lincoln Towncars, stretched Hummers, yellow cabs, Detroit-sourced white rental cars, police black & whites, and periodic appearances of Elvis' pink Cadillac that run up to 'drive-through' churches furnishing marriage services.
2011 sees a new electorial mayor, after 3 terms of Goodman, and s/he should pose that question to the City and get answers that go far further than simply the usual 'taking heads'.
It may be an over-used example that now has become about as kitsch as Vegas itself, but that original winning attitude of Carroll Shelby that originally took the seemingly unconvincing shell of an AC Ace and fitting it with the massive energy of the 427 power-plant, does serve as a lesson for the municipal ambitions of the city. Ambitions that could seek to create a self-sustaining ethos in everything from water-resources to personal mobility. With unemployment running high and the local prison system likely to see influx, the innate costs of the value-chain are probably at an all time (price parity) low.
Perhaps there is no-where better that could merge a can-do attitude with the American fascination for the automobile, recognising than whilst old fashioned mass-manufactured 'Detroit Iron' resides in the heart, the future calls for a vehicle type and manufacturing system that should be radically different, something far more in-tune with the needs of the earth, local-economies and local individuals. Look at the desert racers (and indeed the swamp racers of the Deep South) and it is obvious the ingenuity for auto-re-creation is there; prompted by a 'Strip' ethos that could see lightweight as key for the goal of fuel economy and US energy security.
Buggies parade the desert sands, why not an on-road philosophical equivalents of very different shapes and sizes, If 1960s European sportscars were revered as 'rolling sculpture' why not the case for 'rolling architecture' in Vegas, where the 'neon boxes' are made to move?
Carroll Shelby held an Ace up his sleeve forty years ago that changed the face of US autos. Time now that the Obama & Las Vegas' administrations back Private Equity resources, possible PPI schemes & Main Street America's capabilities, to fabricate an Ace of their own.
Evolutionary development in nature show how desert beetles are able to navigate their way around a parched Nevada landscape; and a similar 'fit for purpose' philosophy should be part of the US Auto sector's localised re-invention where plausible and amenable.
The sooner Las Vegas starts its re-invention, not glamourising its seedy past, yet merging excitement and its new (City-Center) higher ideals in way that creates something truly avante-garde, the better for it and the whole of the US.
Yet, unquestionably the US administration must move beyond its stance on China's foreign reserve surplus in re-balancing global liquidity, and regenerate its economic base, building its way out of Main Street's tough recession. The topic of infrastructure, and its endemic relationship with the prime tenants of ecological responsibility and the individual, of course will play perhaps the primary role in the re-building of the US. But today - unlike J Edgar Hoover's relatively basic 'New Deal' that saw a geographically diverse population 're-centred' for infrastructure building projects from the agricultural dust-bowls of the Mid-West to unprofitable mining towns in Virginia – a new more expansive and forward thinking philosophy is required to regenerate America.
In a bitter twist of fate, one of the most desperate cities that requires the boost of such initiative is Las Vegas itself, once the 'escapist' older satellite town to Boulder City - created to house the construction workers of the New Deal's iconic Hoover Dam.
Given its relative youth and very murky origins, the 20th century story of Las Vegas is a well known addition to the US's history books. However having expanded rapidly over the last 15 years or so, it is the 21st century's near-term that must provide new solutions to meet the challenges that emerged when the economy rapidly contracted; effectively leaving economic devastation as the reality behind the glitzy facade of the city.
Of course recessions are typically a time of new build, the advantages of reduced labour & materials costs leveraged to bolster project costs, business models and of course add to the good of the local economy. Though not quite on the legendary scale of the Hoover Dam, Vegas has been espousing the regenerational agenda of 'City-Center', a reportedly different entertainment venue for regional residents and tourists alike in contrast to the character and remit of its Casino-related surrounds. Instead, it endeavor to bring 'culture' per se to Las Vegas via what is in reality a re-baked version of regurgitated 'Euro-Modernism': as seen before in Miami's 1930s originally 'clean' 'Ocean Drive Deco', this momentarily re-diverted by Lapidus hotels & Lincoln Drive's “Too Much is Never Enough” re-creation in the 1950s (that simply overlayed vibrant tones over simple geometric structures), and perhaps last seen back in the 'Euro' guise of Ford's 1961-69 Lincoln Continental.
Of course for Las Vegas after such pseudo-architectural landmarks like the kitsch original Flamingo and The Sands, the 1960s onwards brought on the idiom of the commercially successful but characterless 'decorated sheds' and 'neon boxes'; perhaps best illustrated by The Mint.
However, whilst an architectural atrocity that added no cultural value to the roadscape The Mint inadvertently assisted in growing the soul of city auto-culture in the guise of the The Mint 400 off-road race between 1968 and 1977– latterly put into legend As the Great American Desert Race - as a counterpoint to the better known and older Baja 1000.
The Mint 400 has been revived and runs annually from its Fremont Street start-point, but critically it nourished the small core of Vegas auto-culture. Today beyond that renowned desert race of Hunter S Thompson lore, it takes the form of NHRA Drag-Racing derived from its illegal start-point of counter-culture youth origins across America but perhaps most emblematic on the old Vegas Strip – very apt – to the running of NASCAR at the Vegas Speedbowl.
The business park grounds surrounding the Speedbowl also happens to be home of the US auto-legend Shelby - which today goes by the holding company name of Carroll Shelby International Inc since 2003, previously in the guise of Shelby American, that name now reborn as the manufacturing subsidiary of CSI (ticker CSBI:OTC for 'over the counter' stock trades).
[NB CSBI is today 06.04.2010 trading at $0.26, a quarter of the value it reached on 25.02.08, demonstrating the decimation to the national and local economy].
For today's media-connected, TV referential popular society that 'CSI' nomenclature has obvious overtones to the TV series CSI: Las Vegas. Whilst that may have been an obvious cognitive tool happily the only connection Shelby has to the judicial system has been the use of the prison system's low cost labour in the formation of 'hand-lay-up' composite body-shell surfaces (hoods, fenders, doors etc) for its niche Cobra and Series One cars.
In the dour economic climate of this Nevada state desert town, this picture of knocked automotive niche manufacturing confidence sits in apparent contrast to the overtly upbeat tones of the local Mayor et al regards the expensive 'City-Centre' initiative – something touted as an economic savior. It's true role as a commercially profitable cultural centre remains to be seen, though as with the case of any newly announced maximum capacity passenger aircraft that proffers space and new experiences like on-board gyms the reality ultimately reverts back to normal business practices and maximum capacity utilisation. This may be ultimately the case with City-Center, where good social intentions that seek to change the character of the city fall to the way-side as the demand-cycle for cheap accommodation picks-up as part of the recessionary-busting effort.
City-Center is perhaps the expected reaction to the recession, an evolution of the 1930s build initiative, this time using largely private funds (even if tussled over) of MGM Mirage and Dubai World. It at least demonstrates the much needed fluid and symbiotic interaction of private capital and an assistive town administration, and highlights an effort to think beyond the (neon) box for the social and commercial good.
And whilst it may be far more typical Vegas style 'Show than Substance' it highlights the need for the city to become self-sustaining in a re-balance of its commercial, productive and wealth creating base. Moreover, just as it became a leading examplar of the credit-bubble, the metropolitan area growing at historic record rates with the explosion of housing construction, so perhaps now the challenge is to re-mould the city as a model of future-thinking.
That means strategically reviewing its geographic and philosophical position, understanding its innate industrial capabilities that lay beyond the gaming tables, show stages, service hospitality to the self-sustaining practical nature of its businesses and inhabitants that once built a city in the desert. That spirit may have heavily depleted as Vegas's character changed with the boom times, but that character needs to be regained.
Look behind the surface and today the outskirts of Vegas into Paradise, Winchester and Enterprise counties are experiencing the same type of retraction as inner-city Detroit experienced over decades as the indigenous car industry slowly shriveled to new global conditions. This of course, it is hoped, is an exaggerationn of the troubles facing Las Vegas, but the wake-up call is clear that alternative growth models beyond City-Centre and ever lasting discounted hotel-room pricing.
.
As part of this exercise the automotive soul of Vegas should be re-examined to see what else can be built to serve a new era, vehicles beyond the generic limousine Lincoln Towncars, stretched Hummers, yellow cabs, Detroit-sourced white rental cars, police black & whites, and periodic appearances of Elvis' pink Cadillac that run up to 'drive-through' churches furnishing marriage services.
2011 sees a new electorial mayor, after 3 terms of Goodman, and s/he should pose that question to the City and get answers that go far further than simply the usual 'taking heads'.
It may be an over-used example that now has become about as kitsch as Vegas itself, but that original winning attitude of Carroll Shelby that originally took the seemingly unconvincing shell of an AC Ace and fitting it with the massive energy of the 427 power-plant, does serve as a lesson for the municipal ambitions of the city. Ambitions that could seek to create a self-sustaining ethos in everything from water-resources to personal mobility. With unemployment running high and the local prison system likely to see influx, the innate costs of the value-chain are probably at an all time (price parity) low.
Perhaps there is no-where better that could merge a can-do attitude with the American fascination for the automobile, recognising than whilst old fashioned mass-manufactured 'Detroit Iron' resides in the heart, the future calls for a vehicle type and manufacturing system that should be radically different, something far more in-tune with the needs of the earth, local-economies and local individuals. Look at the desert racers (and indeed the swamp racers of the Deep South) and it is obvious the ingenuity for auto-re-creation is there; prompted by a 'Strip' ethos that could see lightweight as key for the goal of fuel economy and US energy security.
Buggies parade the desert sands, why not an on-road philosophical equivalents of very different shapes and sizes, If 1960s European sportscars were revered as 'rolling sculpture' why not the case for 'rolling architecture' in Vegas, where the 'neon boxes' are made to move?
Carroll Shelby held an Ace up his sleeve forty years ago that changed the face of US autos. Time now that the Obama & Las Vegas' administrations back Private Equity resources, possible PPI schemes & Main Street America's capabilities, to fabricate an Ace of their own.
Evolutionary development in nature show how desert beetles are able to navigate their way around a parched Nevada landscape; and a similar 'fit for purpose' philosophy should be part of the US Auto sector's localised re-invention where plausible and amenable.
The sooner Las Vegas starts its re-invention, not glamourising its seedy past, yet merging excitement and its new (City-Center) higher ideals in way that creates something truly avante-garde, the better for it and the whole of the US.
Monday, 1 February 2010
Company Focus – Ford Motor Co – Finally In the Black & Awaiting the US Fiesta Boost...But is it Presently Over-Bought?
FMC Stock Price (as of NYSE close 01.02.2010) -
US$11.12
The old Henry Ford saying that “an aeroplane takes off against the wind” surely must have been Alan Mulally's constant mantra since his appointment as CEO what now seems an age ago. He pledged much of Ford's major asset-base as collateral for a 18bn loan in 2006 that would underpin the liquidity needs of a global company requiring major turnaround under the ONEFORD initiative.
That decision to divest of PAG brand (the last of which was Volvo recently sold to China's Geely in late December) allied to a plan to 'globalise' the number of platforms / component-sets, create attractive vehicles and lead the way with UAW cost-cutting talks has proven undeniably effective. They were simple and obvious requirements that Ford has met.
Having got the fundamentals of the business model right, the market and balance sheet gains would in due course be achieved as Ford battled past less effective competition. But that competitive edge was supercharged by the fracturing and dissolution of GM & Chrysler; the cross-town foes seen to become effectively impotent as quick-track bankruptcy courts, government largesse and Italian optimism saved their skins as an increasing disillusioned customer base shopped elsewhere. The last bastion of a credible US autos player – that Saint Elsewhere for US loyalists – was FMC.
Perhaps not since the invention and popularisation of the Model T has Ford been so popular, but that has only really come thanks to the surrounding direct competitor flailing massively – to which we can obviously add the credibility loss at Toyota due to its defective accelerator problem.
Thus it has been a perfect storm of loss of competitor credibility and the consumer purchase surge of the CARS programme that has allowed FMC to recapture such a large slice of domestic market share in such a short time. Add the cost-savings put in place by ONEFORD and the recent frantic activity to renegotiate credit-lines and quietly issue new stock and the consequences drive straight to the P&L bottom line.
As a result, in Q409 Ford manages to stem its historic run of domestic losses, and across all divisions except Volvo posted positive results, leaving the Group with a Q4 PbT of £1.8bn. However, for FY09 whilst CARS and similar international schemes boosted Ford Credit's earnings, the regional vehicle divisions themselves continued as a mixed bag of performers at the PbT level. S. America shining in comparison, Europe just about creeping into the black, but N. America, Asia and Volvo varyingly in the red, with additional debt servicing and re-valuations pulling the total Automotive section performance down to $-1.4bn. This however demonstrates the size of losses at Ford diminishing in a continued bid to cultivate investor favour.
If we review FMC's stock-price over the last 9 months Ford has been perhaps a global performer. Discounted heavily along with GM in 2008/Q09, the General's entry into bankruptcy demonstrated Ford's glaring difference. Knocked down to just over $1 in February/March (stated by investment-auto-motives at the time), the company stock has charged back; but not simply in line with say the DJIA upturn, but well well beyond, today sitting at just over $11. Thus as that sole effective Detroit player, it attracted far more attention and perhaps speculative liquidity than it should have done rationally.
During a period when the US stock market desperately required financial rationality, how could the 'fundamentals perspective' of FMC have been driven so low, and now arguably too high? Companies simply do not feasibly grow their worth by approximately 1000% over 9 months even in the best of circumstances. A reasonable argument is that the heavy Q109 over-discounting has been rectified, and today the stock sits in line with growth from what should have been a higher base-line. On the surface this is justified, but amongst the hulla-baloo of the strong equities market up-tick, ineffectual autos-competition and FMC consumer gains (greatly boosted the Ford Credit division) it seems that the central concern of maintaining sensible sustainable traction in light of FMC's heavy debt-burden was, for a time forgotten.
That, as an issue, is now back on the table,. So FMC must be being seen to both service debt to its primary rolling credit-providers (GS and HSBC), its largely institutional bond-buyers and assortment of (new & old) stock, whilst critically keeping FMC P&L in the black.
What is of real concern to those fringe investors without collateral is the question of the innate value of those assets held by primary charges and the concern about the Federal Reserve's monetary policy. The assets were valued at 2006 prices which reflected near top-of-market conditions. Since then commercial real-estate, plant, tooling, vehicle inventory and proprietary retail space values have been heavily deflated under strict mark-to-market conditions.
Ford obviously continues to pay-down much of that original $18bn 'home improvement loan', and effectively replaces it and subsequent rolling-credit chunk by chunk with contingently raised capital instruments whilst it has access at historically low rates. The FY09 debt servicing itself cost $292m.
As for asset valuation, from preliminary FY09 reporting, FMC appears to have adjusted its asset-base valuation necessary to reflect market conditions, but at just $-6m for FY09 it begs the question as to whether the figures prescribed in the re-valuation of marked-to-market are truly reflective or whether they simply accord to the necessary accounting obligation? Although not privvy to private figures, let us remember that the $18bn loan in 2006 was very probably based upon the normative 80% ratio-rule for asset value – hence valuing FMC (tangibles + intangibles, such as the Blue Oval itself) at approximately $22.5bn. Thus to see only 3 years later, after the massive asset bubble deflation the US has incurred (say optimistically -20%), a discounting of only $-6m over the last 12 months does appear somewhat questionable to the critical investor, even if obviously within the bounds of accounting legality.
As the capital markets have noted, present FMC debt stands at $34.3bn, of which the vast majority of $32.3bn is directly attributable to the US.
[NB Theoretically, this 'circularity' should be great for the US economy as Ford draws in foreign earnings to pay-off homeland debt to largely homeland companies. But unfortunately this situation - of the country's only presently viable automaker taking ostensibly all its credit from US capital sources - only serves to undermine US foreign-trade policy standing relative to criticism about an implicit US-centrism. And in light of the Obama administration now prohibiting the “too big to fail” maxim in the banking sector, should it also not look also to its inter-related risk-exposure across commercial sectors? Or is the 'circularity' implicitly viewed as a much needed mechanism in the revival of the US economy's fortunes?].
Of that $34.3bn debt, 'only' 50% is presently secured asset-backed' debt from the original Mulally debt plan. This much reduced exposure from an estimated previous 80% could account for Ford's seeming ability to marginalise its asset value re-valuation and avoid the critical gaze of non-secured lenders, and re-valuations of greater measure could feasibly destabalise the whole apple cart. Understandably from Mulally's and Booth's perspective, they wish to smooth-away any possible investor concerns. Critically FMC is keen to highlight that against the $34.3bn debt, it holds $25.5bn in liquid cash and short-term convertibles. Add the $11bn or so market capitalisation figure stated in its EoY report – presumably taken from the recent market peak - and the very simplistic calculation that $25.5bn + $11bn = $36.5bn. Hence this figure meets the debt obligation with $2.2bn spare.
FMC hasn't but could, point out its option to re-mortgage the remaining 50% of assets to secure further liquidity, even if against the will of higher grade non-directly asset backed investors. To do so however, would appear foolhardy in all but the most severe of times.
However, given the still fragile economic environment, future investors recognising their place low down the ladder, should place ever harsher criteria against their investment decisions. Taken to investment stress-testing extremes, 50% of the current FMC cash-pile is asset-backed and so effectively not presently owned by FMC – it's liquidation of course realistically depending upon the remote case of default. But, as stated, those so in the lowest tranches must run worst case scenarios. So in turn a 'bare-bones' re-calculation strips out half the liquidity and adds the equity (MktCap) value. Therefore, $12.25bn + $11bn = $22.25bn. This then is about $8bn under the present debt level, yet of course excludes the remaining 'free' asset-base, which can theoretically be used to re-inject that $12.25bn.
But, could it actually raise that sum in this day and age given the very different conditions to Q306? The Volvo & SAAB deals, the latter especially made up of massive equity buy-in from the vendor, perhaps demonstrates the unease about automotive asset valuations at present. Such fragility is undoubtedly great for cash rich PE firms and trade buyers, but bodes less well for low order investors.
This is not to say FMC is a basket case, far from it since the ONEFORD progress and concomitant FY09 results demonstrate the level of structural progress made to date. But simply that regards timing of the investment sweet-spot may be well passed, both in terms of equities for the moment (having seen its mega rally) and in terms of fixed income instruments, given the 'top-up' needs of the company prior to what appears to be a period of future partially internally generated self-funding – in part from Ford Credit revenues.
The new Fiesta is being introduced in North America now, but until May and the model's production ramp-up in Mexico, the cars will be shipped from Germany to ensure quality. This of course means initial unit margins will be low, indeed possibly negative, given the very low margins provided from German manufacture, the reduced but still sizable US$ : Euro FX differential and of course the relative inelasticity of US retail pricing vis a vis Japanese and Korean peers.
Until Mexico produces the Fiesta en mass, probably from Q3 2010 onwards, FMC will not be able to seize the small car opportunity. Whilst in other regions, as the stimulus spending that gave Fiesta such a boost diminishes, so either capacity or unit margins will come under pressure. Fiesta is perhaps Ford's prime global player and its role should not be under-estimated especially in Europe but as it slowly melds into the normative competitive background and competition grows with new launches (eg new Opel Corsa, Renault Clio4, Peugeot 209, Mini Countryman etc) so increasingly Ford will rely upon US and Chinese markets, with only the former of these arguably generating initial large volumes for the model without the profit slice removed, as obviously demanded by its Chinese JV partner Changan (CFMA).
Thus whilst Ford's health has undeniably improved, as Mulally himself points out 2010 will still be a tough year with an expectation to become solidly profitable, but no guarantee. For that reason and those mentioned previously about “arriving late to the show” investors must show caution for their own and FMC's own medium term good.
US$11.12
The old Henry Ford saying that “an aeroplane takes off against the wind” surely must have been Alan Mulally's constant mantra since his appointment as CEO what now seems an age ago. He pledged much of Ford's major asset-base as collateral for a 18bn loan in 2006 that would underpin the liquidity needs of a global company requiring major turnaround under the ONEFORD initiative.
That decision to divest of PAG brand (the last of which was Volvo recently sold to China's Geely in late December) allied to a plan to 'globalise' the number of platforms / component-sets, create attractive vehicles and lead the way with UAW cost-cutting talks has proven undeniably effective. They were simple and obvious requirements that Ford has met.
Having got the fundamentals of the business model right, the market and balance sheet gains would in due course be achieved as Ford battled past less effective competition. But that competitive edge was supercharged by the fracturing and dissolution of GM & Chrysler; the cross-town foes seen to become effectively impotent as quick-track bankruptcy courts, government largesse and Italian optimism saved their skins as an increasing disillusioned customer base shopped elsewhere. The last bastion of a credible US autos player – that Saint Elsewhere for US loyalists – was FMC.
Perhaps not since the invention and popularisation of the Model T has Ford been so popular, but that has only really come thanks to the surrounding direct competitor flailing massively – to which we can obviously add the credibility loss at Toyota due to its defective accelerator problem.
Thus it has been a perfect storm of loss of competitor credibility and the consumer purchase surge of the CARS programme that has allowed FMC to recapture such a large slice of domestic market share in such a short time. Add the cost-savings put in place by ONEFORD and the recent frantic activity to renegotiate credit-lines and quietly issue new stock and the consequences drive straight to the P&L bottom line.
As a result, in Q409 Ford manages to stem its historic run of domestic losses, and across all divisions except Volvo posted positive results, leaving the Group with a Q4 PbT of £1.8bn. However, for FY09 whilst CARS and similar international schemes boosted Ford Credit's earnings, the regional vehicle divisions themselves continued as a mixed bag of performers at the PbT level. S. America shining in comparison, Europe just about creeping into the black, but N. America, Asia and Volvo varyingly in the red, with additional debt servicing and re-valuations pulling the total Automotive section performance down to $-1.4bn. This however demonstrates the size of losses at Ford diminishing in a continued bid to cultivate investor favour.
If we review FMC's stock-price over the last 9 months Ford has been perhaps a global performer. Discounted heavily along with GM in 2008/Q09, the General's entry into bankruptcy demonstrated Ford's glaring difference. Knocked down to just over $1 in February/March (stated by investment-auto-motives at the time), the company stock has charged back; but not simply in line with say the DJIA upturn, but well well beyond, today sitting at just over $11. Thus as that sole effective Detroit player, it attracted far more attention and perhaps speculative liquidity than it should have done rationally.
During a period when the US stock market desperately required financial rationality, how could the 'fundamentals perspective' of FMC have been driven so low, and now arguably too high? Companies simply do not feasibly grow their worth by approximately 1000% over 9 months even in the best of circumstances. A reasonable argument is that the heavy Q109 over-discounting has been rectified, and today the stock sits in line with growth from what should have been a higher base-line. On the surface this is justified, but amongst the hulla-baloo of the strong equities market up-tick, ineffectual autos-competition and FMC consumer gains (greatly boosted the Ford Credit division) it seems that the central concern of maintaining sensible sustainable traction in light of FMC's heavy debt-burden was, for a time forgotten.
That, as an issue, is now back on the table,. So FMC must be being seen to both service debt to its primary rolling credit-providers (GS and HSBC), its largely institutional bond-buyers and assortment of (new & old) stock, whilst critically keeping FMC P&L in the black.
What is of real concern to those fringe investors without collateral is the question of the innate value of those assets held by primary charges and the concern about the Federal Reserve's monetary policy. The assets were valued at 2006 prices which reflected near top-of-market conditions. Since then commercial real-estate, plant, tooling, vehicle inventory and proprietary retail space values have been heavily deflated under strict mark-to-market conditions.
Ford obviously continues to pay-down much of that original $18bn 'home improvement loan', and effectively replaces it and subsequent rolling-credit chunk by chunk with contingently raised capital instruments whilst it has access at historically low rates. The FY09 debt servicing itself cost $292m.
As for asset valuation, from preliminary FY09 reporting, FMC appears to have adjusted its asset-base valuation necessary to reflect market conditions, but at just $-6m for FY09 it begs the question as to whether the figures prescribed in the re-valuation of marked-to-market are truly reflective or whether they simply accord to the necessary accounting obligation? Although not privvy to private figures, let us remember that the $18bn loan in 2006 was very probably based upon the normative 80% ratio-rule for asset value – hence valuing FMC (tangibles + intangibles, such as the Blue Oval itself) at approximately $22.5bn. Thus to see only 3 years later, after the massive asset bubble deflation the US has incurred (say optimistically -20%), a discounting of only $-6m over the last 12 months does appear somewhat questionable to the critical investor, even if obviously within the bounds of accounting legality.
As the capital markets have noted, present FMC debt stands at $34.3bn, of which the vast majority of $32.3bn is directly attributable to the US.
[NB Theoretically, this 'circularity' should be great for the US economy as Ford draws in foreign earnings to pay-off homeland debt to largely homeland companies. But unfortunately this situation - of the country's only presently viable automaker taking ostensibly all its credit from US capital sources - only serves to undermine US foreign-trade policy standing relative to criticism about an implicit US-centrism. And in light of the Obama administration now prohibiting the “too big to fail” maxim in the banking sector, should it also not look also to its inter-related risk-exposure across commercial sectors? Or is the 'circularity' implicitly viewed as a much needed mechanism in the revival of the US economy's fortunes?].
Of that $34.3bn debt, 'only' 50% is presently secured asset-backed' debt from the original Mulally debt plan. This much reduced exposure from an estimated previous 80% could account for Ford's seeming ability to marginalise its asset value re-valuation and avoid the critical gaze of non-secured lenders, and re-valuations of greater measure could feasibly destabalise the whole apple cart. Understandably from Mulally's and Booth's perspective, they wish to smooth-away any possible investor concerns. Critically FMC is keen to highlight that against the $34.3bn debt, it holds $25.5bn in liquid cash and short-term convertibles. Add the $11bn or so market capitalisation figure stated in its EoY report – presumably taken from the recent market peak - and the very simplistic calculation that $25.5bn + $11bn = $36.5bn. Hence this figure meets the debt obligation with $2.2bn spare.
FMC hasn't but could, point out its option to re-mortgage the remaining 50% of assets to secure further liquidity, even if against the will of higher grade non-directly asset backed investors. To do so however, would appear foolhardy in all but the most severe of times.
However, given the still fragile economic environment, future investors recognising their place low down the ladder, should place ever harsher criteria against their investment decisions. Taken to investment stress-testing extremes, 50% of the current FMC cash-pile is asset-backed and so effectively not presently owned by FMC – it's liquidation of course realistically depending upon the remote case of default. But, as stated, those so in the lowest tranches must run worst case scenarios. So in turn a 'bare-bones' re-calculation strips out half the liquidity and adds the equity (MktCap) value. Therefore, $12.25bn + $11bn = $22.25bn. This then is about $8bn under the present debt level, yet of course excludes the remaining 'free' asset-base, which can theoretically be used to re-inject that $12.25bn.
But, could it actually raise that sum in this day and age given the very different conditions to Q306? The Volvo & SAAB deals, the latter especially made up of massive equity buy-in from the vendor, perhaps demonstrates the unease about automotive asset valuations at present. Such fragility is undoubtedly great for cash rich PE firms and trade buyers, but bodes less well for low order investors.
This is not to say FMC is a basket case, far from it since the ONEFORD progress and concomitant FY09 results demonstrate the level of structural progress made to date. But simply that regards timing of the investment sweet-spot may be well passed, both in terms of equities for the moment (having seen its mega rally) and in terms of fixed income instruments, given the 'top-up' needs of the company prior to what appears to be a period of future partially internally generated self-funding – in part from Ford Credit revenues.
The new Fiesta is being introduced in North America now, but until May and the model's production ramp-up in Mexico, the cars will be shipped from Germany to ensure quality. This of course means initial unit margins will be low, indeed possibly negative, given the very low margins provided from German manufacture, the reduced but still sizable US$ : Euro FX differential and of course the relative inelasticity of US retail pricing vis a vis Japanese and Korean peers.
Until Mexico produces the Fiesta en mass, probably from Q3 2010 onwards, FMC will not be able to seize the small car opportunity. Whilst in other regions, as the stimulus spending that gave Fiesta such a boost diminishes, so either capacity or unit margins will come under pressure. Fiesta is perhaps Ford's prime global player and its role should not be under-estimated especially in Europe but as it slowly melds into the normative competitive background and competition grows with new launches (eg new Opel Corsa, Renault Clio4, Peugeot 209, Mini Countryman etc) so increasingly Ford will rely upon US and Chinese markets, with only the former of these arguably generating initial large volumes for the model without the profit slice removed, as obviously demanded by its Chinese JV partner Changan (CFMA).
Thus whilst Ford's health has undeniably improved, as Mulally himself points out 2010 will still be a tough year with an expectation to become solidly profitable, but no guarantee. For that reason and those mentioned previously about “arriving late to the show” investors must show caution for their own and FMC's own medium term good.
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