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

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

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

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


The Global 'Macro' Picture -

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

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

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

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

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

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


The World 'As Is' For Automakers -

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

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


Assessing the Auto-Makers -

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


Basic Comparison -

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

Price P/E EPS Dividend

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


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

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

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

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

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

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

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

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

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

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

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

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

Price P/E EPS Dividend

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

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

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

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

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

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

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


Corporate “Headlines” -

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Plotting VM Positions -

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


Results -

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

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

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

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

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

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

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

The chart and each respective corporate position speaks for itself.

Micro Level Trends – European Auto Stocks – German “Growth Picks” Contrast Gallic “Value Picks”.

As European economic disarray appears to slowly subside (even in the face of Greek & Spanish intransigence) observers of European auto stocks will have noted the major divergence that has appeared between the well positioned premium biased German producers, and the flailing mainstream French and Italian manufacturers.

[NB American owned GM Europe and Ford of Europe, dragging down their respective homeland good news stories].

The broad picture forming is that auto-sector equities investors presently sit within what could be described as "Act 2 of 3".

Having witnessed successful corporations both feed and become swept up by the voracious bull market that has run since October 2011, the investment community now looks to those by-passed and unloved entities which themselves are in the doldrums and look ripe for orchestrated funding and strategic nurturing.

The following provides outline of the forces that have, and continue, to support the German auto industry – which itself assists massively in financially the re-floating the EU ambition - whilst also highlighting the major market challenges yet investment opportunities for French and Italian companies at VM, Niche Manufacturer and Supply Chain Level.


The Present Picture -

North America shows the signs of maintaining a slow tentative structural recovery. China has confidently managed its passage through a successful 'soft-landing' via internally directed fiscal & monetary measures, so arguably demonstrating its ability regards self-containment and self-sufficiency. Japan continues to deploy a strong Yen (relative to the international FX basket) to serve internal infrastructure re-build programmes and overseas M&A ambitions. Brazil begins what appears a pseudo-protectionist stance over its currency and its prime manufacturing base so as to stabilise its own Mercosur fortunes given its global exportation slowdown. The Middle-East experiences the social and political pains of a new pro-Arabic yet 'centralist' transition period which seeks to economically integrate the vast MENA region so as to provide “regional balance” vis a vis Western, Latin, American, Asian and Chinese power-houses.


Europe -

Throughout this very unsettling period of new-era globalisation, European leaders recognised the need to band together to overcome the resulting frictions from the regional sovereign debt crisis; recognising that a truly 'broken Europe' would relegate the majority of EU members into a 21st century 'dark age'. The channelling of largely German liquidity through ESFS & ESFM vehicles has undoubtedly helped to quell intra-national and markets' fears, whilst the long-haul recovery of Greece will ultimately set the re-structuring benchmark – in terms of depth and timetable - for the more reticent Spanish and Portugese.

To the possible wry delight of slightly shaken but mostly unstirred EM nations, the real consequence of the western originated 'global financial crisis' was most evidently seen in the US and across Europe; the former arguably through the turmoil whilst the EU remains effectively a 3-speed destination for investors.


The German Powerhouse -

The financial problems of the European debt crisis were effectively laid at the feet of German politicians, the Bundesbank, the EcB and critically the German populace; by way of its high productivity rate & personal savings levels. Whilst the political and central bankers were able to formulate 'loans for austerity measures' toward the 'PIIGS' countries, the real concern through 2009-11 was whether Germany itself would be over-burdened by its neighbours.

As a result of the disenchantment with all things Greek, Italian, Spanish, Portugese and Irish, the German consumer became increasingly patriotic regards personal expenditure. To such an extent that the domestic economy 'powered through' the fragile period, as seen by the sale of cars increasing by 9% in 2011; a marked contrast to all other contracting EU car markets.

This then has created a condition wherein Germany once again stands as continent's prime economic engine, with France in reality offering little assistance as it battles its own banking sector woes and confines itself for the most part to its own national economic agenda.

Thus, until the EU 'de-coupled' UK finds certain economic traction, Germany sits effectively alone as the sole bright light within the fractured EU region.

Yet it has provided the indigenous German trio of VW, BMW & Daimler (aswell as to a lesser degree Opel and Ford) with a very welcome, somewhat 'inelastic', demand floor.


Fractured Europe / Fractured World -

Thus, as described initially the physically separate continents and their associated indigenous trading blocs within the world are perhaps far more fractured today than at any time over the last two decades; Europe's own dis-unity serving to underline the 'new norm' that re-orientates corporate, political and social agendas.


The Corporate Challenge -

As a result the plethora of multi-national corporations – ranging from investment banks to foodstuff providers – have effectively de-centralised so as to better morph regional divisions and operations to better suit the specific micro-climate. Then more adeptly positioned to acutely manage a portfolio of enterprises that must best evolve within that exacting micro-climate yet within the corporate realm: ranging from the immediacy of locally sourced financing availability and its associated costs, to the far-horizon of 'visioneering' process of how the regional market will develop, all the while necessarily maintaining the cohesion standard operating practice, as delineated by HQ. So a very testing time for regional executives, whether those of GE in Asia or TATA in Europe, and perhaps more so for the Board of Directors who must maintain corporate integration whilst maximising regional opportunities and minimising regional risks.


Europe's Entrenched Auto Players -

Europe's mainstream VMs have, for the most part, long been participants in worldwide markets, though of course each with varying distant past and recent history success. However, many including PSA, Renault, FIAT and GME still have a legacy bias to their homeland and European markets, marques such as Citroen, Skoda, Dacia, Opel, Vauxhall and Lancia with respectively greater perceived social and industrial connection to the home market. Whilst they themselves were intrinsic to local positive economic history thus obtaining a once entrenched (ie captive) customer base of private, fleet or government sales, that grip has weakened as a result of de-regulation and open borders policy-making.

That story of gradually eroded market share only bucked by PSA's expansionary growth at Citroen (piggy-backing Peugeot's previous 30 year success story), and VW's and Renault's 'parenting' of Skoda and Dacia as the CEE states became meshed with Western Europe.

Incoming Japanese and latterly Korean 'imported' competition, plus the competitive pressure of intra-regional sales, plus the EU's own enlargement created the impetus for necessary for yesteryear structural change, winners and losers diverging: PSA moving out of Renault's shadow to become the EU's second largest producer and Dacia re-established as a pan-regional and export oriented brand, whilst Lancia – like America's old premium brands - struggled to recapture past glory.

Whilst French and Italian producers have long recognised the EU market threat posed by new entrants, they have been largely impotent to tackle the threat by themselves broaching new high potential markets; Renault's American history with AMC an example, as was FIAT's own previous US market efforts; whilst even Audi retracted for many years. Similarly efforts in China and India have been lacklustre compared to the in-roads made by VW, GM, Ford, Toyota, Suzuki etc. Instead it seems that international expansion will continue to be limited to S.America and the MENA region, so almost destined to re-play the experiences of previous decades. Hence Marchionne's daring ploy with Chrysler to break the cycle.

This is not to say that PSA, Renault and FIAT cannot continue to nurture the broad growth opportunities in Brazil and Argentina, even with the former's monumental sector slow-down from its previous fast - indeed over-paced – growth. Simply that the expected renewed growth in North Africa and Near East will require far greater effort and patience to extract new 'national car' and auto-assembly deals (such as that seen previously with Iran's Khodro and the large Tangier's facility) because of greater competitive interest from VW Group (orientating SEAT's model naming toward the Arabic-Moorish), China's various state affiliated car companies seeking price-led export markets and India's TATA, Maruti and Mahindra seeking foreign growth.


Adjusting to the 'New Norm' -

However, those previous periods of adjustment may appear mild compared to the shock of the financial crisis, the reactionary surgical measures immediately required, and the ongoing rounds of surgeory and sector rehabilitation still needed.

Between 2007 and 2010 car sales fell from a record high of 15.5m to the low of 13.2m units, a low not seen since 1997. Governmental 'liquidity pump-priming' certainly saved Renault & PSA (receiving E2bn each), aswell as FIAT, and to a lesser extent assisting the German trio also. This financing initiative together with VMs own rapid cost-cutting and efficiency-seeking efforts and an improvement in general credit conditions for producers and buyers through 2009-11, together helped to stave off what would have been a socially disastrous auto-sector collapse.

Vitally important is the fact that over 15.1m car units were manufactured inside the EU in 2010, indicating a very simplistic 1.7m unit regional over-capacity.

Any argument that import levels (worth E22bn in 2010) adds further 'burden' to such over-capacity is countered by recognising that EU exports (worth E76.5bn) provide a wide trade surplus. However, imports are primarily mainstream vehicles and so can be argued as 'value destructive' to certain key segments in which 'national champions' operate. Whilst a high percentage of exported vehicles are typically in the premium segment where 'national champions' do not operate and so cannot benefit.

This additionally highlights the divergent fortunes of Europe's automotive players.


Slow But Powerful 'Creative Destruction' -

An argument can be posited that a far greater level of 'creative destruction' immediately following the financial crisis (engendered by less state interventionism) would actually have better served the sector in the long run.

However, this viewpoint may be cited as essentially “academic”. Since many of the intermediate private equity entities which notionally could have 'hoovered-up' liquidated assets were unable to access sufficient finance to do so; themselves in danger aversion and capital repair modes. Furthermore, many large auto-sector focused PE entities were already extremely busy executing 'turnarounds' at American and Canadian Tier 1 & 2 suppliers, exploring the bones of Chrysler and assessing new pseudo 'ground floor' investment in the GM re-listing.

It is then perhaps expedient to consider the PE community's attitude toward auto-sector restructures within the US and across Europe as respectively 'speedy' versus 'slow'.

Wall Street's Lehman Brother's 'moment' and the Sovereign Debt Crisis whilst inter-connected played out over slightly separate successive time-frames, and thus arguably allow for those tranches of America's enhanced liquidity, along with European Stability liquidity, to be invested into EU assets. Europe to see simultaneously merged FDI and 'self-help' funding, the former rationally directed at EU target companies and facilities where the business case (ideally US-EU synergistic) convinces.


The United States of Europe -

This structural difference an important distinction between the regions.

The American ability for a 'pre-pack' Chapter 11 full-scale restructuring of GM and Chrysler through a singular national legal framework, an amenable New York court system, and critically an 'on-board' UAW & general public; sits in stark contrast with the web of corporate, legal and social complexity that exists within Europe.

European leaders must wake-up to this American-European schism, and recognise the danger of slipping further behind the US, China and the increasingly strong economic blocs within Asia and Latin America.

However, in the meantime, the reality of intra-national European differences prevails, which in turn provides potential opportunities for non-European VMs and Supply Chain players to 'slice and dice' the body of the poorly performing members of the EU auto-sector. To obtain 'bolt-on' acquisitions which suit their own strategic ambitions across R&D, technical development, productivity, distribution and market-share.

[NB The 7% interest of GM in PSA might be viewed as part of this process of structural transformation].

In 2010 ACEA (the European Automobile Manufacturer's Association) noted in its yearly report that...”The automotive sector in Europe is highly competitive, supporting 12 million jobs, contributing significantly to economic prosperity. It supplies quality products worldwide and invests more in R&D than any other sector. Steps must be taken to ensure it emerges with strength from the economic downturn, ready to take advantage of market growth”.

Exactly which multi-national VM, which Tier 1 & Tier 2 companies, which distribution enterprises and which retailing groups come to finally benefit from the flux through FDI or Restructuring funding remains to be seen.


Conclusion -

VW AG, BMW AG and Daimler AG are deservedly flying high here and now, with indeed much to yet be gained as the macro-forces in Germany, North America, slowly the UK and eventually Europe provide what could be described as a domino earnings impetus. With of course China's own sustained growth also creating local and regional demand pull for these marques.

Yet the trickle-down of sizable ECB liquidity will undoubtedly eventually improve and re-energise national and regional EU market conditions. Simultaneously an offering a new generation of CO2 conscious vehicles from Peugeot SA, Renault SA and FIAT SpA should be able to excite still cost conscious but more spendthrift consumers, the VMs also theoretically able exercise historic near-reach export market opportunities.

Those valuation uplifts so desperately desired, themselves initially driven by a host of 'bottom-feeding' stock buyers, may possibly be attracted by adding greater 'pictorial detail' and 'aspirational clarity' to what for the most part are typically dry outlook summaries.

This era is obviously one of reflection and 'next move' strategising by company boards. And whilst highly confidential information cannot be leaked, it might prove useful to start relaying in broad terms the fundamentals of corporate intentions. Something that mimics a crystallised near-term ambition, as with VW's move on Porsche, with a far-horizon ideal – such as Toyota's legendary 100 year plan.

In the new age of 100 year (UK) government bonds, no doubt targeted at cash-rich corporations aswell as global pension funds, it makes sense for those auto-players presently in reduced circumstances to weave their substantive corporate intent into the minds of global investors.

Companies Focus – 2009 Auto Sector Performance – Will FY09 Earnings Reflect 2010 Pulling Power?

Macro-economic forces across the globe presently seem to almost conspire against an easy pull-out of these dour times. China's altered monetary stance to cool asset class bubbles, Europe sovereign debt problems, a US caught between Democrat's calls for fulsome regulatory reform vs Republican's concerns about consequentially impeded investment & growth, to now major shudders through SE Asian capital markets caused by the first aforementioned issue.

As markets hold their breath, so do western automakers, recognising the revenue off-set that the Eastern consumer brought, stepping into the shoes of reduced, yet stimulus supported, western consumption. As Asia pauses for thought and EU & US budget attention lessens the likelihood of a second year of scrappage incentives (even if FIAT's Marchionne should like to see one), both CEOs and investors weigh-up what Q1 2010 will bring.

Unsurprisingly, the publicity noise and glare of the banking sector's massively buoyed FY09 earnings (and related bonus pots) undoubtedly over-shadows investor and public reaction to industrial sector earnings.

Financials were dramatically lifted over the last 3 quarters thanks to: a rapacious equities rebound (possibly overdone) earning brokerage fees and proprietary fund returns, mandate earnings from client companies seeking lower-cost funding via bond and convertibles markets and scouring for prime M&A deals offering advisory fees and credit-line products.

In comparison the story for much of the rest of the matured western commercial base has been one of caution in the face of continued lack-lustre supply-side and demand-side economic indicators, and more importantly, very tight management budgeting schedules. The majority of CEOs & CFOs continue to expel non-core operational activities, finesse cash-flows and under-take the typical end of decade strategic reviews with greater vigour - so as to be in the right shape for the “new normality” (to quote PIMCO's Mohammed El- Erian).

This continuous cost-cutting march has become almost business as usual within the Auto sector. Perhaps less highly visible but more acute amongst the western supplier-base as it re-organises both internally and sector-structurally to meet this “new normality” pertaining to a heavily flattened consumer demand for new vehicles, within which the down-sizing product trend reads as inherently reduced per unit profitability. Hence, in quiet but large measure the supplier operations continue to shift toward Mexico, the CEE region and of course BRIC areas; either as transplant ventures or JVs with local companies depending upon national legislation and/or cultural climate. The perfect storm that engenders the move continues as EM vehicle demand continues apace – even if slightly slowed – and the ongoing pressures to reduce costs intensify across the board, from: plant & office fixed costs, to raw material, component, sub-assembly, labour & GA.

2008-9 saw the automotive centre stage move undeniably and irrevocably eastwards.

That dynamic is of course also mirrored by the volume car-makers with primary exposure to the Triad regions, facing similar macro-challenges but in reality positioned subtly differently relative to their own product and structural 'SWOT's & 'TOWS' – even if the typical group-think of stock market reaction rarely differentiates. As a consequence of both that generalised herd instinct versus the varying analytical comparator penchants of auto-sector analysts, CEO and CFOs must of course manage investor and analyst expectations.

The recent years of flux have meant dedication to hard cost-cutting QoQ, with an attendant optimistic broadcast of a brighter, eco-green tinted tomorrow with long awaited reflated revenues. Naturally the law of diminishing (marginal) returns meant that the initial 'top-line' benefits gained inevitably decreased as COGS caught-up with turnover. As such the force of commercial headwinds intrinsically increased; the counterpoint deflationary force on input costs of little real effect given suppliers' own determination to maintain their own margins, via maintained pricing where possible and 're-scheduled' credit and debit payments.

Invariably the old mantra that 'cash is king' came to demonstrate its truism, as has the importance of structural integrity provided by strategic 'shape & direction' . Those corporations that had either accumulated liquidity (eg VW, FIAT, Honda, Hyundai) or were able to ably raise it (eg Ford) and importantly were attuned to the new C of G in global purchasing demand for smaller cars were better set to face the incoming, and still ongoing, storm. Consequentially, those corporations that were more naturally aligned to A,B,C segments due to originating domestic market & prime market characteristics were able to ride the wave. And furthermore, the firms that had been through relatively recent restructuring (best exemplified by externally-imposed Hyundai & self-imposed Ford) were structurally light enough to gain a greater boost from that surge in small car sales.

However, in contrast to these examplars of near singular global products, the power and future potential of regional leaders with multi-brand, intra-platform marque-engineering mastery cannot be ignored – especially if credible. Perhaps best demonstrated by VW's grasp on Europe-China (re-run with the new A3 platform after old A4), perhaps the benchmark for FIAT-Chrysler's ambitions of Euro-Americas synergies (initially a 'badge engineered' for N.America). With of course the onward march of Chinese manufacturers seeking domestic domination via consolidation and accordant economies of scale and brand/product positioning – effectively mirroring Alfred Sloane's philosophy when creating GM through the 1920s.

This then sets the scene to date, so what of investors' expectations from the major western manufacturers for Q409, FY09 and 2010?

To answer this, as a pre-cursor to the Q409 /Q1 2010 report, over the next 8 web-log posts investment-auto-motives provides broad-level snapshots derived from its Q3/Q409 forecast report, adding latter-day intelligence from recent events, official public statements (earnings guidence and otherwise) & generally inferred corporate direction for the constituent 8 major western producers.