Macro-Level Trends – Germany Autos GmbH – Opel's Need for a Miraculous Lightening Bolt from Above....”Tiel Zwei”

As stated in the last item, Adam Opel's CEO has the unenviable position of having to metaphorically juggle the many balls of a growing number of corporate, financial and political stakeholders.

The recent episode of the dealer-base offering to prop-up the flailing GM division could well have been concocted behind closed doors between Opel seniors & the dependent dealers as a way of trying to force the Government's hand, recognising that the complexities and 'payback' of such an arrangement could only have worked with a complicit 'tax-payer backed' agreement from the the CDU (Christlich Demokratishe Union Deutschlands).

Angela Merkel, holding her ground, was having none of it, recognising the publicised initiative as simply a ruse within today's environment of 'Realpolitik'. But that and similar moves have played to the CDU's left-leaning co-alition partners – the SPD (Sozialdemokratishe Partei Deutschlands) - who given their prevalent socialist ideology are using such external efforts to leverage their own cause for re-election.

Given that the industrial heartlands of Germany are feeling economic pain, the mass populous Ruhr and Breman areas already SPD core areas are unfortunately (but understandably) becoming more and more persuaded the the party line of “social justice” - even if the debate regards the national budget accounting projections for such works are conveniently side-lined.
Part of that potentially ballooning budget deficit and GDP ratio is the issue of Adam Opel GmbH. With Lower Saxony's recently defended (19.9%) ' VW Law' re-setting a precedent, the Northern, Western & NorthWestern populous of comfortably-off factory workers, office staff and sections of management – the people who's prosperity soared thanks to fiscal conservatism and German productive efficiency – are waiting with baited breath for a similar deal for Opel.

This flawed “VW solution” has been prompted by apparent calls to do so from the SPD in the Bundestag chamber accompanied by the Labour Minister's (Olaf Scholz's) pronouncement in last weekend's national newspaper (Die) Bild – its tabloid content wrapped in a broadsheet format an unfortunate powerful conveyor of social influence.

The unsurprising retort from the CDU's Volker Kauder was that it would set a precedent for 'cross-the-board' sector and company bail-outs and must be resisted. Instead of the anti-market notions of Opel's partial (or even full) nationalisation, he repeated the line that Germany would be willing to provide state guarantees to Opel but it must first present a convincing turnaround plan. Whether that argument is real or yet another example of a tactic in 'Realpolitik' remains to be seen, given that GM HQ is pointedly seeking $4.5bn / €3.3bn in loan guarantees from European states, Germany financially the most heavily exposed given the size of Opel's innate car producing capacity and the associated 29,000 jobs.

Merkel's fractious relationship with her French peer Sarkozy has done nothing to assist her cause in recent weeks as he seeks to placate his public by having Renault re-shuffle / swap its production builds of Clio & Twingo between E.European and France; and by doing so thereby straining relations with Brussels given the 'spirit' of conditional EU financing.

Beyond the outward politics, the real problem emerging, as GM seeks to relinquish its stake in Adam Opel GmbH, is who would be willing to invest in the company? The government's distancing itself is understandable, probably less a result of business case dissuasion than it conveys and more a case of recognising that it would not be in the best interests of the public purse or ongoing economic transformation. But discounting one obvious candidate does not reveal an obvious other.

Unless a virtual protectorate of the state (France, Italy), the very basic tenants of traditional car-making have forced the industry to lower cost regions; the consequences of failing to do so now ever so evident in Detroit and across North America.

However, 'on paper' Opel could have a brighter future in a very different mould if it is given a level of free reign by GMHQ. Opel is a major contingent of GMNA's survival since it plays the role of medium car design developer (to S. Korea's GMDAT's small car division) as it presently provides the platforms and much of the technology know-how for small efficient powertrains that GMNA seek to re-balance its own domestic portfolio with. The Korean made small cars that have been shipped to the US with affixed Chevrolet badges have been poorly received given their engineering weaknesses, but the Saturn re-branded Opel derived cars, though small in number and incorrectly positioned, have won a modicum of favour.

The problem for any Opel investor seeking to profit from Opel's previous and current high-standing within the GM global empire is that, of course, much of the core design development capabilities could be transferred to GMNA leaving behind an operating enterprise that contains little beyond an empty shell. Potentially, whilst Opel flounders in Europe ill-equipped and short of capital, its operational DNA could be used to revive GMNA's engineering base that in turn pumps out small and medium cars from lower cost US, Canadian and vitally Mexican 'Maquiladora' factories.

This notion cannot be lost on Merkel or any 'white knight' investors, but of course as with any transaction the devil is in the detail of deal due diligence, sale contractual agreement and post-takeover due diligence.

But in the meantime, the German Government perhaps needs to undertake its own Opel Audit to better understand and assess how a very differently structured Opel could possibly enter a new age. That's what a number of international PE firms, Tier1s and 0,5s, the Chinese auto-sector and even GM (as a back-up plan) may well be doing at present.

Merkel should not be moved by public or GM/Opel pressures, but she and her cabinet would be wise to see how exactly Opel could be re-configured to suit different possible suitors with differing entry strategies.

Macro-Level Trends – Germany Autos GmbH – Opel's Need for a Miraculous Lightening Bolt from Above

As the G20 summit approaches there looks to be continued friction of ideology between the likes of the 'prime-pumping' Prime Minister Brown & President Sarkozy, and the altogether more 'spend-thrift' Chancellor Merkel. As stated in previous posts, Germany has had a hard 25 year journey to reach today's far more open market-orientated socio-political mentality, and weaning the public off of a German Nanny State has been worthwhile in terms of revolutionising its productive efficiency, commercial acumen and ultimately standing regards 'high-value' goods & services upon the world stage.

Though it is suffering, as all are today, with exports down and a deflated economy, Merkel recognises the dangers of returning her country to a less than globally competitive entity. So whilst the Chancellor and her cabinet have balked and succumbed to the desperation of state funding intervention, it is not on the proportionate scale of the likes of her European neighbours or the USA.

Instead, she has been a key proponent of expanding the role of the IMF to assist the global financial challenge, a call latterly supported by the French President.

Where the 2 differ significantly is with regard to Keynesian economic theory that surges national indebtedness to support industry and the consumer in the fight to re-inflate the business, consumer and financial marketplaces. Though Germany was ultimately forced to save its highly exposed large financial enterprises, to keep the financial system from collapsing, has been trying to draw a line in the sand against the calls of the broader private business sector for assistance. Merkel caught between the conscientious righteousness of economic responsibility and the houndings of business leaders, strong unions and consumers.

Unlike the populist seeking Sarkozy, who appears to be re-introducing a manner of 'de Gaullism' Merkel is willing to wear public wrath. France's massive directly injected state support for its national auto-industry stands at $8.8bn as of Feb 09 (primarily split between Renault & PSA), whilst Germany has stated that it will alot $1.9bn, done so indirectly as a scrap-incentive scheme for cars over 9 years old.

Caught between a rock and hard place (its GM parent and a to date staunch political stance) perhaps the most high profile 'casualty' of the recession is Adam Opel AG. Although the prime business of GM Europe (and in global terms a generally/historically positive revenue earner) the effects of slow-to-thaw wholesale credit and massively loss of confidence in the consumer-base, means that even this historical 'solid performer' has stalled heavily.

And moreover, Carl-Peter Forster - the company's inveterately professional CEO – recognises that the longer Opel is caught in the intricacies of the political realm, the longer and greater the suffering within marketplace against its national and international peers; which with greater cash reserves, brand consumer relevance and product cache would like to see Europe's 20% or so overcapacity be cut through the loss of Opel. Non more so than VW Group, BMW Group and Daimler Group who will be happy to see the 'market discounting effect' Opel could be said to use to hold market-share eradicated; and so enable improved margin, RoS and ultimately RoI. And as 'role-playing' national participants of that painful German economic progression (which Merkel does not want to slip) they will have strong voices in Berlin against any form of 'favoured' assistance.

Merkel knows that she can't be seen to promote the double-standards of such favouritism, and also recognises that the national accounts cannot support the equal assistance given to Opel for all Germany's volume producers. And that even if it could, that little would change for the relative strength sector inhabitants in the medium term. Opel simply gaining a stay of execution for a finite period until either finally pulled under by its parent, marginalised in the market by far more competitive peers or at best acquired by a (probably) Chinese Auto-Firm in years to come for a 'low-ball' price intent on using the brand and dealer-base as part of its own global expansion ambition. Thus, if that is truly the most likely outcome for Opel, why inject so much government cash in the firm – updating plant and products - only to have such valuable assets sold off under par value?

In the meantime, after his discussion with Karl-Theodor zu Guttenberg (the German Economics Minister), the ever up-beat Rick Wagoner appears to be playing Merkel off against her public via the press, with quoted reports saying he thinks German politicians are “really getting into this” (ie the idea of state aid). Guttenburg's response was unsurprisingly rather less enthusiastic, stating that Berlin was looking to see exactly what GM was putting on the table first, and what the Opel corporate plan could viability deliver, before it cited political promises.

GM's need to divest responsibility and consider radical global re-structuring has been conveyed by its pronouncements that it would be happy to “cede control of GM Europe” (inc Vauxhall & SAAB) for $4.3bn, and it appears that it may be exploiting the the implicit threat of Opel following SAAB into bankruptcy proceedings; a very unpopular thought across Russelsheim & nearby Frankfurt.

Opel's November '08 call for a credit guarantee against parental GM failure was mutedly responded to, without credible confirmation from Berlin. And SolarWorld's speedy proposition – in response to that guarantee call - as a potential 'white knight' purchaser looks about as incredulous now as it did then given the credit-heavy terms of the bid and the aforementioned frozen wholesale finance markets. Slightly more realistically, last week the Opel dealer-base stated it would create a semi-private/semi-public holding company with government backing that would acquire Opel using a % cut of future car sales as a payment schedule. Better, but still not wholly tenable from a political perspective.

So as things stand Wagoner and Merkel metaphorically stand face to face, neither blinking...with Carl-Peter Forster forced to strategically and operationally juggle balls as best he can to keep Opel trading under harsh conditions in the short-term. But at least he has the dealers on side, and that demonstrates his acute strategic acumen as a retained leader if any new Opel enterprise is born from which ever eventual quarter.

Of course many will point to Lower Saxony's 19.9% hold in Volkswagen and the social democratic reasoning it was embedded and has since been defended (to Porsche's chagrin). A similar set-up for Opel may be the last bastion of political compromise Merkel may be willing to cede if all else fails. And at times such as these, ironically, that pressure may come from her own party recognising the political consequences of the zeitgeist.

But if Germany wishes to stay the spiritual leader for a globally competitive, inter-regionally trade-friendly EU, even that may be too high a price to pay as the likes of China, India & Russia eye up European car markets as part of their resurgence plans. Politically, German industry may have to be seen to be 'internationalist' for ameniable 'quid pro quo' relations; especially so given VW, BMW and Daimler's interests in the BRIC economies.

The longer-term international success of the German car industry at large depends on a successful outcome of that G20 meeting. The formal agenda highlights the role of the IMF in setting a global regulatory financial framework; but implicitly the newer G8+/G20 members will be looking at Germany as perhaps the central proponent of cross-border industrial markets goodwill....and just perhaps the fate of Opel as the examplar of 'deeds supporting words'.

Business Opportunity - UK Public Transport – Object Lessons for teaching US Greyhounds to Chase the UK's National Rabbits

These recessionary times - predicated as "the Age of Turbulence by Alan Greenspan - creates the harsh conditions that not only gives rise to sector consolidation and renewal (as we see with Autos) but for a period creates distinctive winners and losers.

The collapse of the private vehicle market has obviously sent global rictures of pain felt by the auto-supplier, manufacturer and dealer sectors. Weakened disposable income through all levels of the social strata has affected the public en mass and so alter their mobility behavior. Investors and markets instinctively recognise that in such straitened times Porter's Five Forces play-out more fervently, and the Substitutional Effect takes hold. As the depth of pockets shrink so the consumer downgrades his/her normative (pseudo-luxury) habits, substituting with cheaper products and services.

Here in the UK the most obvious battleground is in food retailing, the lower-end stores (Asda, Morrison, Aldi etc) stealing custom from the mainstream (Sainsburys, Tesco etc), but more subtle has been the shift in mobility purchase patterns. As new car sales sharply retract to record modern lows, so replacement buyers are either a) looking to better value used car purchases, b) not replacing at all if a 2nd family car (of lesser utility), c) replacing a commuter car with maybe a low-cost motorcycle, and lastly more amenably d) looking to public transport options.

Thus across the nation public transport has been the counter-point beneficiary to the shift in consumers' mobility needs (NB 'needs' replacing pseudo-luxury 'wants' or 'desires'.
The UK Government, as part of its drive towards reduced CO2 and the normative 'social-contract' has been proactive in PR and policy-spending, perhaps best regionally illustrated by the London example under the previous and current Mayors. For all their criticism of empty day-time running, London's swarm of European-made 'Bendy-Buses' added capacity and so mobility ease for the city's commuters at rush hour periods and weekend visitors.

That story of regional bus growth has been similar up and down the country, providing a greater business rationale for the bus (and rail) operating companies. Just as we see consolidation presently in Autos, during the Autos boom-time there was a period of rationalisation for that once plethora of bus operators.

Perhaps the greatest protagonist/activist was FirstGroup, an Aberdeen based FTSE 100 enterprise led by Sir Moir Lockhead, that grew rapidly in the days of operator-deregulation, abundant liquidity/leverage and ambition. After an original MBO and incarnations as GRT and FirstBus (after M&A with peer Badgerline), it became FirstGroup when it encompassed rail aswell after the privatisation and break-up of British Rail (including passenger & freight) and operates a 'light-rail' tram service in London. Today it is a sizable empire that spans the Western Hemisphere, across: the UK, Ireland, Sweden, Denmark, Germany, Canada and the USA (having sold-off its previous Hong-Kong interest).

With competitors such as StageCoach and Arriva, perhaps the greatest (bitter?) rivalry is with National Express, having been questionably banned from competing against for the East Anglia rail franchise.

Given the size, dynamicism and complexity of the UK public-service mobility market, FirstGroup will want to maintain as great a hold as possible given that massive revenue stream and theoretical relative stability of the city & regional UK market.

Changing social trends and shifting government social policy are growing opportunities in the public mobility sphere, perhaps the most high-profile currently being the growing propensity for longer-distance travelling school-children. For the UK, inter-school 'allied' teaching and the growth of extra-curriculum activities (eg sports events, educational excursions and increased school holiday trips) requires a greater capacity for 'student transit'. That once small but burgeoning market was previously fed by private companies, often private enterprise consisting of little more than a single-person operator or perhaps couple running a small fleet of 2-5 mini-buses. But that amateur style, convenient and lucrative at the time for small scale operators has passed, safety and responsibility issues arose, semi-piecemeal school transportation budgets altered and greater 'full-service' demands have arisen. A time of re-orientation, privateer retraction and sector consolidation.

To summarise, the model for UK student transit is presently undergoing continued transition toward a US style template, one that offers new opportunities for larger scale enterprises throughout its value-chain - from mini-bus manufacture (as described in the previous LDV item dated 25.02.09) to fleet operation for the very well placed FirstGroup.

As stated, First Group own US interests. Crucially these interests include perhaps the 2 most iconic brands in the US bus sector. And given the cultural influence the US has had on the world via TV & Hollywood, more importantly, both these brands are indelibly imprinted into the psyche of the US & UK public at large. These 'priceless' assets are of course:

1) Yellow School Bus (previously operated by Laidlaw under the FirstStudent division)
2) Greyhound Bus Lines (previously owned by Laidlaw

[NB Laidlaw acquired by FirstGroup on 07.02.07]

Infact, the UK has been adopting a US style 'school-bus' service for some time, as early as 2000 infact, with FirstStudent UK - a subdivision of FirstStudent, migrating the template from its US parent for Hampshire & Dorset schemes. As such, FirstGroup has been able to transfer and exploit the years of embedded operational learning endemic within FirstStudent USA and the Laidlaw Company - possibly including influence as a political lobbyist (an almost formal and de facto activity in the US). Instead of starting from scratch, FG has utilised its own large regional bus service infrastructures as the 'linch-pin' of the new service.

As of Q308, 185 UK full-size Yellow buses had been running in selective areas nationwide as part of an exploratory scheme that started 5 years previously. To paraphrase Nicola Shaw (MD of FirstBusUK) "FG's survey results from Yorkshire indicated that a high proportion (85%) of 1500 parents surveyed preferred the improved security of the SchoolBus idea". Various business models have been explored ranging from 100% LEA (Local Education Authority) financing through to wholly private payments by parents - estimated up to about a 5 Pounds. [However the exact criteria that gave rise to the 85% preference was not reported - did Yorkshire operate the no-fee model?] A Government Commission set up by David Blunkett in mid 2008 is due to report soon, but it seems almost inconceivable that the government will not expand the scheme given the massive funding now being appropriated to school-based social-policy infrastructure projects.

[ This is also the mentality of the UK van-maker LDV's Board, given it's recent niche marketing of yellow school mini-buses for the UK]

Juxtaposing FG's current full-size SchoolBus against LDV's small-size mini-bus highlights the shifting-sands of the school transportation sector. Those large buses are useful for high-mileage, high-capacity pick-up rural areas, but a very different product is needed for suburban and urban fleets ranging from midi-size (ie the Hoppa Bus) to small van based minibuses. Al the same, there's a lucrative and growing business model for respected and credible operators like FirstGroup which provides a non-cyclical and expanding element to its holdings; adding yet further 'defensive' properties to its already 'defensive' investment nature for lower-risk, long term investors.

That investment mindset is all the prevalent given today's dour times, and so companies like FG will have to consider exactly how it might best perform under such conditions, maximising their 'take' from the on-going headwinds.

As such if the recession/depression becomes more 'long-U', 'W' or even 'long L' in character, stretching into the mid and long-term of 3-7 years, would it not prove beneficial for FirstGroup to exploit the Greyhound brand and, just as it has done with 'Yellow School Bus', bring that US icon to the UK. It would follow in the footsteps, or rather tire-tracks, of Airstream of recent years and help further cement US-UK business, social & political relations.

Greyhound Lines has a certain mix of both romanticism and affordability. Indeed part of its mystique (for foreigners at least) has been in the past the (only) transport of choice for those 'down at heel'; ranging from dust-bowl migrants in the 1930s, the Beatniks of the 1940s & 50s and even stylized 'down and outs' such as Dustin Hoffman's Rizzo in the 1969 film Midnight Cowboy heading for 'a better place' (ie Florida). In short Greyhound Lines is bound together in the fabric of Youth Culture and the American Dream.

That youth culture is being targeted under FirstGroup in the US, directing advertising toward 18-24 year olds and the large and burgeoning Hispanic community. And at long last, after years of 'out of character' updating, its livery is now being returned to reflect its glory-days of the 1950s using 'aluminium gray/grey' and accent blue and white along with accordant modernisation of bus-terminals and depots.

Add together the tightened travel budgets of the UK, the global 'perceptional reach' of the Greyhound brand and its revitalisation and there could well be an argument set forth for FG to introduce the Greyhound brand to the UK, relating to the modern young Beatniks who travel widely & frequently (as seen via EasyJet & Ryan Air) given their lack of responsibility aswell as elements of the lower-end over-60s 'Saga-set' who as Baby-Boomers well recognise the Greyhound allure. And beyond all those others who seek cheaper travel than short-haul air, expensive rail or indeed relatively expensive national UK coach-travel offers.
Could Greyhounds catch the ' Rabbit-ear' coaches of National Express? The 21st century equivalent to the early 20th century Charabang?

The UK public bus scene is set for a period of learning and possibly a 'day at the races'.

Macro-Level Trends – London Emissions Initiative – The 'E'-Car Rental Scheme

London, it can be argued, has been one of the vanguard cities in the global effort to combat climate change. The introduction of the Congestion Charge reportedly reduced not only city-centre traffic but as a consequence lowered CO2, particulate & pollutant-levels originating from tail-pipes. Policy-makers intend to spread the coverage of low CO2 areas up to the M25 motorway boundary area by the early part of the next decade, phasing-in truck and van prohibitions and dis-incentives.

The UK Government has of course instigated efforts directed toward the automotive arena as part of its CO2 reduction manifesto, perhaps best exemplified by the LowCVP – the Low Carbon Vehicle Partnership. Now in its 5th year it's chronological experience has been one of “2003/4 over-optimism”, “2005/6/7 Uncertainty & Review” and latterly “2008/9 New Market Requirements”. Encompassing cars, trucks and buses, perhaps its primary claim to fame thus far has been the facilitator of manufacturer voluntary Fuel Economy & CO2 vehicle labeling for the new car buying public; whilst other efforts relate to Vehicle-Tech, BioFuels and Driver Awareness campaigns.

In that 5 year period, the UK has also witnessed political orientation of the local/regional governance model toward City Mayors, given the authority with making change happen and following the footsteps of New York's Giuliano & Bloomberg. For London, it's first Mayor Ken Livingstone introduced the Congestion Charge, as described, with today's current incumbent Boris Johnson ensuring that policy is expanded and supported with other initiatives. Perhaps most high-profile is the re-introduction of an updated vehicle successor to the iconic London (Routemaster) Bus of yesteryear. Something to capture the hearts and minds of Londoners and 2012 Olympic tourists - this exercise itself mimicking the previous re-modelling of the Classic London Black Taxi.

Such public transport efforts are laudable, and recognised as only one side of the CO2 coin, the more complex and problematic is that of changing the private behavior of car-buyers and the public's driving habits and expectations en mass; a hard task given the 60 years + of automotive freedom enjoyed by the masses.

Electric cars have been a small but rising contingent of London's street-scapes over the last 5 years. The qualitative PR spin witnessing Captains of Industry visiting the IoD, or the odd MP entering Westminster Palace's gates has been quantitatively backed-up by a 'band-of-brothers' of every-day users from the more progressive creative sectors (ie media, arts, design etc). Trying to spread that 'early-adopter' behavior, Boris Johnson and his No2 Kulveer Ranger mid last year set-out the criterion for an expanded use of electric vehicles under the Electric Working Group for London title; primarily focused on developing infrastructure (eg charging points). A sub-committee is the Electric Vehicles Partnership created to work as a facilitator with the auto-industry. To re-quote Ranger at the London Motor Show : “We don’t want green cars to be seen as a lifestyle choice for eco warriors. We want them to be an attractive option for everyone”.

9 months on, earlier this week, The Evening Standard proclaimed that EVs were coming, reporting that Boris is adopting a Parisian style public-private vehicle-rental 'business model' which embraces the use of both bicycles and EVs as zero-carbon personal mobility solutions.
As perhaps the first and more widely available EV, the G-Wiz sold by GoingGreen has realistically had the stranglehold on the City, the Indian manufactured vehicle appearing to be 9 out of every 10 private EVs. The YoY growth in EV sales drew in other entrants, the most notable being the NICE Car Company; which from start-up, faltered, went into receivership and was bought-over by a supplier.

NICE's attractively broad product range targeting private and commercial buyers alike, was highly undermined by very aggressive product pricing and tenuous supply arrangements & agreements aggravated credit-crunch. To illustrate, the Z-eo (an A-segment car made by China's Jiayuan) cost £14,000 and the 'toy-car' proportioned MyCar cost £8,000. NICE's commercial range was possibly even more aggressive pricing with a £44,000 electric version of FIAT's Doblo small van and other products only given a TBA regards their pricing; TBA eponymous with a lack of business model credibility and supplier 'tie-down' and possibly even product design fundamentals. An illustration of that is was the 'promise' of the electric FIAT 500-e adapted by Micro-vett. Given FIAT's global reach focus investment-auto-motives suspects that the EV concept was promoted, indeed touted, by FIAT SpA to perceptually 'keep-up' BMW's Mini-e, which at great internal cost is being rolled out. FIAT itself has showcased a 2-cylinder hybrid 500, something technically feasible vs the technical barriers to engineer a full 4 seat 500 EV (The Mini had to use the rear passenger space for the battery stack). The only truly tenable car was the Mega-City manufactured by Aixam Mega - the French 'Quadricycle' auto-maker.

investment-auto-motives long-believed that the NICE Car Company was knowingly or unknowingly viewed as a strategic 'lead-in' foot-hold by its far more powerful suppliers. This has indeed been the case, with NICE's over-ambitious plans and capital 'over-reach' leading to its demise and put into administration last November. January saw its asset acquired by Aixam-Mega Ltd (the French company's UK sub-division).

Just as G-wiz had the effective monopoly to date, so Aixam view potential for the Mega-Cit y to become the new de-riguer EV for private buyers, luring new Ev buyers and stealing re-newel customers from G-Wiz who want something designed aesthetically closer to a conventional modern car – something the G-wiz's awkward boxiness and effectively 2 seat limitations could never really do.

More-over, Aixam-Mega has gained footholds within regional local authorities such as those on the South Coast, showing their capabilities (and limitations) in the public-services domain. Thus we expect that such experiences will have been shared from county/city council to county/city council...none perhaps more interested than London Boroughs, TfL (Transport for London) and the Mayor's Office.

Thus investment-auto-motive's expects that Aixam-Mega is primely positioned to benefit from the Electric Car rental scheme now proposed. Especially so now it has the asset of the 're-born' NICE Car Company's Ladbrook Grove location in West London which can act as a regional administration and service base. It is thought that TfL itself would not want to administer the scheme, unless it has a mandate to create further departments in these high unemployment times. Better still to farm the project out to private enterprise, as councils have done with so many public-sector services; old (such as sports centres) and new (such as e-car rental).
Doing so would Allow Aixam-Mega to transpose the direct/in-direct learning gained from the Parisian Velib bike hire scheme.

In the meantime, the London Mayor will be trying to persuade the UK's Transport Secretary, Geoff Hoon, that London deserves "sizable chunk" of the £250m government money put in place to support electric initiatives. Johnson wants to see at least half the 8,000 vehicle fleet owned by the Greater London Authority replaced by electric vehicles as soon as possible.

Aixam-Mega, may not be as desperate as LDV Vans (see previous post) for the UK governmental goodwill regards electric vehicles, but Aixam-Mega will undoubtedly utilise the Mayor's initiative to maintain its UK position against its French peers of: Ligiers, MicroCar, JDM & Chatanet.

Company Focus - LDV Vans - From Here to 'E'-ternity?

Given LDV's low-profile and comparatively small operations, industry insiders will be more than familiar with the ever-resurgent ability to re-invent itself. Many argue that it has had to as each and every self re-invention stutters in the face of ever increasingly harsh European and global competition in the LCV (light commercial vehicle) market.

As the big-boys (Ford, Renault, PSA, Fiat, Daimler, VW etc) continue to create powerful JVs amongst eachother and broaden commercial product portfolios by maintaining and developing car derived vans (& vice-versa) that merge utility & private sectors, so LDV has found the going ever-tougher.

To paraphrase Alice in Wonderland as a pertinent illustration "you have to run faster just to stay where you are". Thus, the LDV Board, and the company's parental owners, have had to utilise lateral thinking and unorthodoxy to continue.

But of course a company is a very dynamic entity, to be shaped in prevailing macro-circumstances and re-shaped as appropriate to release potential at operational (revenue) and strategic (M&A) levels. And that was the intent of Sun Capital Partners who bought LDV out of administration in 2005, by inserting a senior management team consisting of ex-Ford Martin Leach and ex-AT Kearney Steve Young to re-create the business as an attractive saleable and ongoing proposition. SunCap and LDV combined appeared to have devised a 3-pronged strategy:
A) Ensure manufacture of a contemporary, competitive van. Done so by completing the acquisition of the design and production rights to their Korean JV with Daewoo (when Daewoo failed).
B) Strengthen the firm's capabilities to create an attractive vendor sale proposition. So LDV bought 80.1% of Stadco Birmingham Pressings and looked Eastwards to cash-rich 'oligarch' Russia for prospective M&A buyers (following the TVR - Smolenski route).
C) Seek out new niches converting market challenges into market opportunities.
Looking at these 'intents'...

The introduction of the Maxus did indeed at long last provided a credible successor to "Sherpa+". SunCap we suspect turned a useful profit for the PE firm when it re-organized and sold LDV Ltd to Oleg Deripaska's GAZ Group (as part of its own, Russian Machines and Basic Element's growth plans) for a reported £50m on 31.07.06. And lastly, since then the van-maker continues to seek out those all important new niche plays such as School Mini-buses.

However, for the most part LDV has been and continues to be effectually a pseudo-nationalised domestic van-maker. Its largest constituent customers comprising of government bodies and agencies such as Local Authorities, TV Licensing, the Royal Mail, the Emergency Services, National Utility companies and similar that have a formal or implicit remit to 'Buy British' when possible.

[Perhaps the irony of ironies was the creation of council schemes titled LDVs (Local Delivery Vehicles) created to develop regional campaigns & amenities...the title-creators perhaps didn't have to far to look for inspiration and in turn LDV Vans must have been hoping the synergy was ultimately more commercial than solely etymological !]

Indeed for much of the entity's history as chronologically Leyland, Freight-Rover, Leyland-DAF and LDV Ltd throughout the 1990s and 2000s it was effectively 'national-fleet' sponsorship that has provided the majority of the firm's revenue.

And whilst it has reportedly been running an accounts deficit since 2004, for much of the 90s LDV will have theoretically been generating sizable profits as the product offering consisted of the ever re-engineered Sherpa Van (under Convoy & Pilot) so utilising cost-reduced 'old-generation' parts, largely amortised tooling and a flexible labour force. But that was obviously a strategy of diminishing returns as the ever reducing low cost-low benefit equation became an unsustainable business model.

So much changed for the business model when Maxus was wholly absorbed, even if at a discounted price from Daewoo administrators, possibly biting of more than LDV could chew given the productivity/competitiveness chasm between a small LDV and its far larger foreign rivals.

Of course Maxus is a well-applauded effort, a desperately needed modern successor that appears on par with its competitor-set. But of course the prime disadvantage is that of small volume vs its far higher volume peer group which either benefits from iconic status (Ford Transit) or JV alliances (Renault-Nissan-Vauxhall, PSA-FIAT) or earned reputation (VW, Toyota). As FT diagrams highlight using SMMT figures (see yesterday's 24.02.09), LDV averaged sales of 6,050 units per month through-out 2008 within a market-place TIV of >300,000 units, equaling approximately a 2% market share. That's a very small number indeed for viability when the brand is effectively sponsored by national interests and to a great extent the tax-payer.

For GAZ and the LDV Board the intention was the effective short-term duplication of LDV van production at GAZ's Nizhny Novgorod site; initially assembling vans from CKD (complete knock-down) kits freighted from the UK then building-up capability to build from locally produced replica specification parts. The target was 50,000 vehicles in 2009. Had that plan to essentially migrate and rename LDV as GAZ been achieved, then the marginalisation of the UK operation could have been 'carried' in the short-term, until the scale and efficiencies had been built-up enough overseas to in turn provide a low-cost production source for LDV in the UK, which in time could have re-built its credibility and latterly perhaps be unified as GAZ-LDV or simply badged GAZ in the UK.

But of course the consequences of the global financial crisis dealt a major blow to Deripraska's finances, presently seeking to re-structure much of the primary entities within his Basic Element empire. Importantly he divested of his Magna International holding which perhaps says much about his changed automotive agenda. And so critically that appears not to include LDV for the moment, GAZ's grand plans at best look to be put on hold. Hence the aired idea of a yet another MBO for the van company, very probably as an inherent aspect of the recent £30m government funding aid request.

[GAZ appears stretched itself now with perhaps with very little liquidity given the cost of re-design and production of the Volga Siber, an adapted Chrysler Sebring. That vehicle itself could now hurt GAZ as a cash-burner given the retraction of middle-class Russian spending the car was aimed at].

The £30m plea was rightly refused and would have been hypocritical of government to assist a Russian owned entity when it equally rebuffed Jaguar Land Rover's parent TATA for direct state aid.

Instead assistance, in due course, appears to be on the horizon as part of the general industry's £2.3bn Green-Tech package that seeks to assist UK companies over the expensive R&D cost hurdles in trying to re-orientate the sector towards clean-technology propulsion solutions. Auto-industry execs bemoan the tardiness of fund provision, complaining of ever weakening markets and commercial enterprises, but they may have to wait a while longer until such funds can be put through a repaired banking system with confidence. The fragility of the financial intermediaries will be the governments reason or excuse for perhaps not feeding the clean-tech funds as quickly as desired.

In the meantime LDV will be another firm that must follow trend and seek to eventually operate at a skeletal level, 'right-sizing' as necessary until the 'green-shoots' re-appear.

And those green-shoots could be sizable and plentiful indeed, given the climate challenge remit by way of carbon-footprint targets that all national bodies and agencies must work towards. A major element of administrative CO2 pollution beyond the HVAC exhaust of civil service buildings and end-of-life re-cycling sites s of course the automotive fleet. Whilst low CO2 hybrid cars have been and will be procured from the likes of Toyota and Honda (and others to come), the question posed regards commercial vehicles is slightly more problematic given the lack of mainstream hybrid and all electric product.

There is product available, as eco-conscious supermarkets have been trialling for home delivery, from the likes of Smiths Vehicles and Modus Vehicles, but the number operating compared to actual fleet size is small indeed; cited as “test” and “experimental”. Thus it is unsurprising that Erik Ebardson (Chairman of GAZ) states that “the [LDV] base case is a viable diesel van company with a future in electric vehicles”. Hence LDV's public statement that it is looking for a business partner to extend into full production apparently successful EVV1 model product trialling. (A strangely short product trial of only 3 months given the Nov 08 start of trial announcement). This in effect that means partnering with either a known EV vehicle maker or powertrain producer. So who may be in the running?

Smith Electric Vehicles is effectively out, tied to Ford given the Transit Connect and Transit-based Ampere and Edison. Modec supplies its own small vans (that could theoretically accompany Maxus) and works to develop 3rd party interests such as that with Manganese Bronze's LTI TX4e Ev Taxi. (Moreover it's production facility was officially opened by David Cameron, presently destined as the next Prime Minister as so a possible clean-tech funding favourite). And lastly there are Zytec and Azure Dynamics as powertrain designers/providers.
So of this UK crop, Modec appears, on paper, as a favoured potential partner given core-competencies, track record and political association.

But even if the Modec partnership prevails, LDV is set against a competitor set that was not only quicker to market, but offers a greater vehicle range. Ford-Smith's provides 2 mid and small vans, whilst FIAT Professional offer no less than 4 vans: Ducato (vs Maxus) with smaller Scudo, Doblo & Fiorino underlings.

Viewed solely as a private enterprise, presently on very fragile ground LDV's present ambitions of a partial EV ambition would generate skepticism for any typical analyst given the lack of internal resources the firm holds.

But if viewed as a private entity operating within the psuedo-monopoly of preferred government & 'national' supplier, the future could take on a very different light....there is a light at the end of the tunnel, but it still looks somewhat distant from the present gloom; perhaps another 8 months of contraction and consolidation to reduce fixed and variable costs as much as possible which will mean workforce retrenchment, the use of multi-skilling and perhaps a temporary closure of the labour intensive Special Vehicle Operations function depending on the present Order Book. Today that Book looks slim, but the future Book should fill in due course, as it historically has done with the advent of government spending.

2010 onwards will see the positive ramifications of the massive budget deficits being dug today, LDV should be thankful for the current adoption Keynsian economic policy even if the wait is indeed painful.

Business Opportunity – Sweden's Krone Joules – Re-invigorating National Assets

The news of SAAB's bankruptcy filing was altogether not unexpected. Further to a reported loss-making run stretching from 2001 until now, set against the extremely fragile state of GM accounts and the pressure to show Congress recovery steps, as the weakest brand portfolio member SAAB was ever destined.

Given (GM's) standard practice not to reveal individual company results under the parent umbrella, there could be an argument set-forward that it was GM internal accounting that has consistantly over-loaded Trollhatten operations with group-wide costs year on year. Done so under the auspices to 'trickle-down' Swedish systems and component quality into mainstream operations, but also providing the benefit of pulling-out cost from North American & European operations. But SAAB knows that given the long-time cash hemorrhaging of NA and recent troubles of Germany & UK, that 'transferable cost' argument which has undoubtedly been delivered time and time again in Detroit, is now purely academic.

Corporate submissions to the Swedish authorities show that on paper SAAB lost Skr2.19m in '07 compared to Skr2.90 in '06, which whilst showing a slight upturn over that year, was effectively torpedoed by an atrocious 2008.

The truth is that back in the late 90s when GM management belatedly concluded the need to match Ford with its own Euro-premium marque acquisition, the only remaining 'wall-flower' that hadn't been asked to dance was SAAB. Unfortunately, the pair were mismatched from the start. GM a hulking none-to-sensitive Quarter-Back type, with a modus operandi apparently formed from limited knowledge, and so unsubtle steps applied with overt gusto. This, versus a small overtly sensitive, intelligent and demure type of girl who took time and patience to coax-out the best. After some years of trodden toes and knocked knees, she was eventually hoisted upon his feet to dance his way, and so there formed a critical disconnected with only a veneer of her former self outwardly shown.

That forced relationship now appears greatly diminished, and destined to be over by 2010.
The insolvency action heard on 20.02.09 at the Vanersborg court included the appointment of an Official Administrator who could ultimately act as a welcome White Knight. One that provides the fair maiden with her highly valued independence.

That Knight is reportedly Stockholm-based law firm Lofalk Advokatbyra AB. Able to provide an initial 3 month alleviation from creditor pressures, time for CEO Jan Aake Johnsson to plan a restructure and importantly seek new financial stakes from 3rd parties under the Swedish government's Skr25bn / $3.1bn loan guarantee scheme. [ Provided to SAAB & Volvo after ruling-out a complete nationalisation].

Those stakes could possibly come from: the incumbent share-holder Investor AB (the Wallenberg's family wealth firm), a Swedish led domestic or international cartel, or the aired possibility of GM sourced liquidity to ease the transition; but offered only with a conditional state guarantee. And of course there is the prickly idea of converting creditor debt into reduced debt or debt for equity convertibles.

To gain that investment Johnsson will have to ensure the turn-around plan looks clearly viable. This obviously means negotiations with suppliers on parts costs (eg Autoliv, Continental, BASF)... talks with unions regards labour rates and social benefits... discussions with dealers about ex-factory re-pricing of cars, accessories & parts... and of course debt re-scheduling with SEB Bank and other lender and equity holders. So much to be done, but the CEO appears upbeat regards core financing, giving the impression he has been tentatively addressing this looming issue over the last 6 months.

Unlike the US's Chapter 11, the Swedish system demands visible and meaningful progress within 3 months if the Administrator is not to fully wind-down the company – it cannot crawl along protected but in a zombie state as we see happen in the US (as could be the possibility for GMNA).

That plan includes 3 new models replacing an aged 2 (9-3 & 9-5) and an additional small (9-1) stemming from the Aero-X concept. But such a plan put to action asap would demand the continued use of GM or other VM platforms, probably the Astra platform, hence GM's previous intention to have an undecided car built alongside its DNA-sibling in Russelsheim. Of course that whilst the theoretical business case may look sound on paper with, as ever, optimistic volumes and cost savings the truth of the matter is that once the development programme gets underway the 'cost reality' bites and accountancy-led compromises are made. The North American initiative between SAAB & Subaru that re-skinned Impreza and Tribeca demonstrated the 'ugly-ducking' consequences.

And SAAB's have been ugly ducklings for some time, caught between the limitations of shared engineering (especially engineering hardpoints and surface form parametres), probably limited budgets and a push for intrinsic SAAB individuality. The present set of cars have perhaps been the worst ever, aesthetically caught in the transition stage between 2 evolutionary design themes. That's not unusual, infact a norm for the industry as facelifted cars take on the elements of the next new models. But the fact is that 9-3 and 9-5 metamorphosis toward tomorrow's aircraft aesthetic looks very cheaply done for maximum effect, the headlight and grille surrounds that indicate tomorrow's face look little more than tacky, gaudy 'stick-on' trim – a world away from the modernist aero-design ideals of Sixten Sason & Gunner Ljungstrom.

In today's highly competent premium segment under GM governance the mainstream saloons have become little more a pastiche of their former selves. Thankfully restraint has been applied to the iconic convertible which could perhaps serve as the ideological centre-point looking forward - SAAB's equivalent to BMW's 3 series coupe or Mini's Cooper S – the Centre of Gravity for the brand.

But that is tomorrow, and given the major headwinds facing the company as a very very marginal player on the global stage, it has much to contend with. With 0.4% of the European market, it produced only 93,300 cars in '08. With a workforce of just over 4,100 that gave an average of less than 25 cars per employee. SAAB obviously isn't a Rolls Royce or Maybach to support such a poor productivity ratio, and the auto-analysts more than know it; many stating the firm will simply whither away in due course given the heavy cost-disadvantage.

Its national peer Volvo finds itself in a similar. if not quite so precarious position, producing 366,249 vehicles in 2008; so in capacity terms is 4 times the size of its national rival. And similarly, it too is looking to create its own future once released from the Ford fold
Although ostensibly to date rivals operating on the outer fringes of the premium segment, their similar positions as relative small-fry players 'versus the world' (ie Germans & Japanese) and palpable shared cultural values highlights their match as ideal candidates for a 'co-opetition' agreement.

Both were adopted by powerful parents only to be arguably diluted and discarded, so why not band together under the umbrella of national interest to formulate a strategic framework that seeks technical step-change and provide scale efficiencies in architecture and major sub-systems that enable a mutuality yet provide enlarged scope for critical brand differentiation?

To, in time, discharge themselves from complete dependence upon a 'major benefactor', they need to eventually create their own proprietary mid-high volume flexible platform systems that offer a broad design/packaging envelope to enable a potentially broad portfolio of vehicle types.

In the short-medium term this avenue could be pursued using borrowed solutions from the worlds best flexi-architecture producers. Perhaps aligning its methods to the operational ethos of PSA which leverages best-practice multi-alliances and Toyota's own highly evolved flexible production lines. Overtones of the previous NedCar effort with Mitsubishi may be unavoidable but the essential aim is to create as close as possible reach to the mass-customisation production-line. That short-medium term strategy would eventually morph into the medium-long term ultimate goal of home-grown proprietary advanced structures which offer a step forward in materials engineering & package configurability.

This would provide Swedish industrial independence. An independence born from eco-tech that not only acts as a salient global market USP but provides a technology basis that can be made internationally salable to old guard & new-comer automakers via platforms, sub-systems & IPR. Such independence would provide a dual (B2C & B2B) revenue stream for Sweden and undeniably attract latter-day inward foreign investment.

Such a policy develops the present-day local advantage. As a consequence of national policy, innate culture, and Ford & GM's global R&D orientation, Sweden has developed as a centre for safety, clean-tech propulsion, telematics and efficiency-seeking of ICE propulsion. Thus instead of selling the nation's crown jewels to the Americans (or others) Sweden could sweat its assets for wholly its own gain. Converting Crown Jewels into “Krone Joules”.

As investment-auto-motives suggested previously, such a nationally orientated policy could well be set within an international eco-industrial policy for the Scandinavian & German auto-sectors. In effect utilisng each country's innate core-competencies through-out the value-chain and across differing production scales. As such if planned properly SAAB & Volvo could be re-energised as the centre-piece players of tomorrow's GreenWorld, a remotely conjoined relationship that marries developmental and production efficiencies with marque uniqueness.

It is a road that the likes of VW-Porsche have trodden with veritable success, a road similarly trodden by Jaguar-Land Rover that has provided much needed access to lightweight, hi-content aluminium structures that were desperately needed.

Automotive history highlights that alliances only tend to work, paying dividends, when both parties are nationalistically and culturally aligned. (When they are not there is little point as each party tends to pull in its own direction so fracturing the tie). As of today, there can be perhaps none closer, none ideologically better suited than a Swedish government inspired 'Green-Car' SAAB – Volvo scenario.

Macro Level Trends – US Autos Inc – Automotive Committee Displaces Autocratic Superman

After the substantial rhetoric regards the nomination of a theoretically all knowing, all powerful Saviour figure in the form of a 'Car Czar', it appears that the the new Administration has concluded that a panel-type structure would be better suited to the task of steering a U-turn for US Autos. Having sought-out candidates that ideally imbued the dual capabilities of Lee Iaccoca & Jack Welch the annals of the Automakers, Wall Street and Government could not deliver.

Theoretically, natural candidates would have been the ex-Auto executives who migrated to PE. The likes of Jacques Nasser at (JP Morgan's) One Equity Partners, Tom Stallkamp at Ripplewood Holdings and Cerberus' David Thursfield and Wolfgang Bernhard (now recently returned to Daimler). But of course of those a number will have obviously aligned interests. Perhaps the best nominee would have been Nasser given his 7 year remoteness from operating as a direct (ex Ford) CEO and his (additionally) more visionary strategic competence. But this seems an academic possibility now.

Though there is a wealth of discipline-centric talent, the very fact that such people move to PE firms as advisors after climbing the automotive corporate ladder, suggests that this convention (at such a rarefied altitude) infact creates the chasm of cross-disciplinary ability that should exist between/across these macro-economic worlds.

And at a time such as now that convention appears to be a major draw-back.
As for the PE-sourced names, the re-structuring experts who might have taken such a post reportedly directly under Paul Volcker are conspicuous by there absence. That is not surprising, the arenas of financial engineering and auto-engineering are, as stated, unfortunately worlds apart. And from an intrinsic professional PE perspective, given this 're-birth' period of historical proportions, why would they wish to place themselves as the constrained central architect of the hurricane, when being external means potential access to the valuable flying debris? [However, there is still speculation that Steven Rattner of Quandrangle Group could advise without such a high-public profile].

Thus, without such apparent 'super-men' with requisite breadth and depth of understanding of Autos and Finance, the necessary broad spectrum of knowledge required can only be drawn from a panel. And, seemingly after the apparent political-positioning between Geithner and Volcker, that panel will now propose to (Treasury Secretary) Tim Geithner and (White House National Economic Council Head) Larry Summers.

As a key component of the Presidential Task Force, ex-Lazard's Ron Bloom will be helping to lead the way with Stephen Girsky as his No.2; and pertinently not donning the 'Car Czar' title. That title is unfortunately seen by many more as a Crown of Thorns, given present abysmal industry conditions reflected by the diametrically opposed ideologies of stake-holder parties, which need to be converged and aligned by the lead negotiator. US Autos appears to remain a very 'hot-potato' that few if any are willing to wholly risk their professional reputation upon.

Today of course is an intermediate deadline date for progress reporting on the Big Three's turnaround plans, prior to the full recommendations at March-end. Given their relative independence, seeking only fall-back financing and comparatively good corporate housing-keeping, Ford's details should notionally be waved through. It is of course GM and Chrysler that remain the real headaches for Congress, with sitting closely in the background the Supplier-sector's recent remonstration for $25bn in subsidies, soft-loans and loan guarantees.
As for GM and Chrysler a credible road-map forward which is amenable, or made prescriptive, to stake-holders must be formulated as both burn through the substantial cash drip-feed previously alloted in a 1st round and recently requested as a 2nd call. [GM: $18bn + $13.4bn = $21.4bn / Chrysler : $4bn + $3bn = $7bn].

That roadmap will need to co-align the interests of all incumbents. Presently that indicates that the central 'creditor' parties may need to recede and take a major 'hair-cut' on their positions if they are to maintain their interests in ongoing concerns. But of course Corporate Bondholders and UAW members have very different ultimate aims.

The former (generally institutionals) depending upon their expectations of the 'liquidity freeze' time-line may well wish to seize assets to in turn liquidate for much needed balance sheet cash; but that could back-fire as a PR disaster – short term gain for long-term pain. As a tabled compromise they seek senior/preferred equity for holding the risk, in leu of coupon and goodwill for assisting in heavy reduction of public debt levels needed by government.
The latter, the UAW, should be far more predisposed the need to maintain GM and Chrysler status quo if the VEBA arrangement previously agreed that swaps 'legacy' debt-for-equity is to be of ultimate worth.

At present it looks as if the Geithner-Summers partnership will be the prime evaluators and negotiators, advised in turn by the Auto-Committee. But much of course depends upon the full and final recommendation plans delivered as to whether GM and Chrysler can indeed create viable futures leaning upon government and foreign auto-sector partners as crutches for the near & medium term.

At present the obvious question is who is properly qualified assess those plans? The Committee is apparently still being formed yet the March-end deadline, and the possibility for Chapter 11 proceedings, looms ominously.

The yesteryear formulation of the American Motor Corporation (AMC) out of failed firms will be a case study from the past lodged in the back of observer's and player's minds. AMC's marginalised product line and unsustainable business plans led to its eventual demise and put the firm, and the legendary Jeep brand, into the hands of Renault (and the French Government) for a time.

At present the likelihood of an amalgamated GM-Chrylser looks very remote given the distinct lack of direct benefits and numerous disadvantages. (That is unless Obama et al seek to create an enlarged Tier 0.5 manufacturing model that would migrate the VM's assets and liabilities to Visteon and Delphi backed with government guarantee? However, that could smack of protectionism go against US investor interests given the accordant covenant conditions (& de-rail Wilbur Ross' holdings strategy) and so could be the US's industrial undoing.

So for the present, that Autocratic Superman looks to be not American but instead FIAT's Marchionne. Thus Chrysler looks to have a light at the end of the tunnel, even if a painful one for Cerberus and Daimler seeing their equity stakes dramatically de-valued. The real question still pertains to GMNA. The General in North America has already been demoted in the eyes of the consumer, but will government decide to ultimately disseminate his ranks? Better a slimmed, re-allocated and able force than over-populated sedantary starvation.

If GM's plans don't convince Geithner, Summers et all, they will need to balance politically 'off-set auto-initiatives'. Off-set in as much as that they will need to both create a new US industrial format that convinces present stakeholders and critically create confidence for foreign VMs and non-domestic investors.

The ideology of an American Motors needs to be born again, but perhaps in a very different guise.

Parallel Learning – Investment Vehicles – The Cognitive Interlink between Classic Cars and Financial Instruments.

In the current gloom, with Mervyn King's comments delaying the BoE's timeline for re-bound growth expectation, the odd moment of blue sky provides anticipation of Spring. Whilst the industry holds its breath during the liquidity stall, rapidly pares back overhead & hoards cash if possible, the recent £2.3bn UK Auto-Aid announcement gives some hope in the longer term.

In the meantime, by way of a welcomed momentary distraction, today (12.02.09) heralds the Preview Evening of this Summer's Salon Prive. Held in Fulham, London, the event highlights a veritable cornucopia of rare and classic automotive masterpieces, from the carrozzeria and specialist car-makers of what presently seem a glamorous bygone age.

Given the social mix of the event spanning many facets of the financial and automotive sectors, there'll be 2 prime topics for conversation that centre around the term “SIV”:

a) the present efforts to 'find bottom' in the financial markets by actually identifying a market value for the toxic asset SIVs (Structured Investment Vehicles) brought back onto banks' balance sheets.

b) the New-Year 'barn-find' discovery of a very rare SIV (Special Interest Vehicle) in the form of a 1937 Bugatti Type 57S Atalante (perhaps only second in provenance to the iconic Royale) and valued at £3m.

Observers might think that the two happen to simply share an acronym, but if we explore further, there is very useful parallel learning to be gained - re-directing the regenerative norms of the classic car field to the problematic financial instruments which have become the bain of Big-Bank CEO's, Auditors, Regulators and critically Governments world-wide.

It centres on the notion and perspective of value...the core of economics and trading; and how they alter given differing sets of conditions.

Economic philosophising - the Vienna School particularly - may well be in vogue at present, from the re-delivery of George Soros' Theory of Reflexivity to Richard Bronk's call for the use of greater imagination in economic modelling. But instead of seeking to co-align 'homo-economus' with 'homo-sociologicus' and 'homo-romanticus', investment-auto-motives simply provides a very pertinent and useful analogy, from the world of classic-cars and auto-engineering to the world of high-finance and financial-engineering; with Joseph Schumpeter and the ideology of 'creative-destruction' the philosophical bridge:

Firstly, it must be stated that the analogy looks at the broad classic car market as opposed to the very very niche concours d'elegance of level as proffered by Salon Prive or its American & worldwide counterparts such as Pebble Beach et al. (Many of these vehicles could be considered beyond a AAA rating given their rarity and condition, which as with distinguished art, arguably sets their investment value beyond even the grade of certain once solid national sovereign debt (eg Spain, Greece).

Thus we turn to the general classic car market comprising of numerous and variable quality vehicles that succinctly align to that hot corner of the financial derivatives market populated by broad spectrum of variable quality asset-backed securities and bond types. Items 'chopped and shopped' to create the now eponymous range of 'exotic financials' now regarded 'toxic'. Most visibly the CDS (Credit Default Swap) and its variants CDS (squared), CDS (tripled) etc.

The Structured Investment Vehicle was essentially a process of ever-stretching (and so ever-diluting) the strong fundamentals of certain low-exposure. low-risk ABS products by mixing them with weaker and weaker ABS products. Though at the time it would have been argued otherwise, and its heart it was effectively creating the perception of soundness and value, largely exploiting the then buoyant market confidence; done so through the heavily tranched modelling process that used thin quality veneers and the accordant kudos from association.

In essence an object lesson of the manipulation of aesthetics and provenance...an object lesson in the manipulation of perception..

And of course aesthetics and provenance are the central elements of the classic car world. Whether for a scant & demure 1959 Mini or or a grandiose 1928 Springfield Rolls-Royce Phantom 1 Brewster Coupe; a fine gloss of paint, gleaming bright-work and the respective implied previous ownership of Alec Issigonis and Warren Buffett and the cars take-on an extra-ordinary significance and so value too.

But of course the majority of classic cars do not hold such standing, instead having an innate value generated by the interplay of fundamental utilitarian worth (whether 'prestine', 'solid', a 'runner', 'donor' for components or 'scrap') and the level of collectivist or individual's enthusiasm for the said car and of course the sale environment (whether a breakers yard or Bonhams). At its core the value relationship comes down to an array of complex value judgements – and they of course change given prevailing circumstances which themselves change and can be created by accordant agents some wholly independent others with concomitant interests...the make-up of any market.

So as is the norm, SIV products whether classic cars or financial instruments will accord to prevailing market perception, they can be the 'belle de jour' or 'passe'.

Of course complex markets often include 'market-makers' that act as intermediaries and instigators, and such agents seek to maximise market dynamicism and return potential and by subtly orientating the market through 'perceptional massage'. And that means optimising current conditions and creating new conditions.

In the investment banking arena that is the very remit of the creative banker....to cerebrally manufacture new value-creation products that accord to regulatory principles/boundaries and can generate significant return. That was the brief behind the presently extinct financial exotica...or are they actually simply dormant?

Good capitalism depends on new value, and now that these mixed-bag value items are being parked into nationally/ privately held 'bad-banks' or similar 'toxic-dumps' the question must be asked whether these instruments can be disassembled? Once in that (national, PE or PIPE backed) 'breakers-yard' the requirement is to sift through the component parts of the 'SIV mountain' to identify the good/usable/valuable from the (at least in the near-mid term) completely valueless.

That is the issue that both Governmental Chancellors and Private Equity firms are grappling with at present. Yes the exotic instruments constitutes a complex array of entangled risk-levels but many will quietly whisper that 'where there's muck there's brass”.

Just as the vehicle-breaker became the vehicle-dismantler and now is titled 'vehicle-recycler', seperating re-useable from scrap components, so there must be a case for the creation of such an entity within the financial world to investigate and identify the component parts of Structured Investment Vehicles that hold presently invisible yet hidden value.

Yes, the ABS's & CDS's of the recent past may have with time become less and less visibly worthy, but just as a newly refprmed and ultimately valuable car can be built from the sum of the parts of many other scrap vehicles, it will be 'creative-destruction' and 'perceptional norms' that once again give rise to a new phoenix - just as it did 20 years ago for the original sound set of Gen1 SIVs?

This evening at Salon Prive people will look over just a few examples of automotive beauty and value; a few examples that underlie many more. The point is that those rolling sculptures owe their existence to the recycling of donor-parts and the creativity of responsible craftsmen.

Because barn-find Bugattis are very much the exception to the rule...a notion that will not be lost on Governments, Private Equity and Investment Banking Luminaries.

Macro-Level Trends – France SA – 'Poli-ticking' the National Box

The French auto-sector has had a long history of governmental intervention, decade upon decade of industry steering and propulsion as regional economic trends have required. Up until only recently, the modern world and its international industry players have espoused the criticality of free-market trading and free-market sourced capital, but times have changed and France may well, for the moment, laud its auto-political inter-relationship as the ideal match even if that model.

Although once the anathema to the norm, as the US props-up its sector with numerous billions of Dollars, the UK sourced 2.3 billion Pounds for its 'industrial transition', Germany & Italy essentially underwrite their sectors and the EU becomes a possible 'integrative lender' via EIB monies; it is all too apparent that the much of the global car industry has become a weighty short-term burden (tho' arguably long-term asset) to nations' own sets of domestic accounts.
Thus its comes as no surprise that President Sarkozy has unveiled a much awaited 'rescue package' for the domestic entities of Renault and PSA. Each will receive 3 billion Euros at a favourable interest rate of 6-7%, well above the ECB's recently announced (and probably long-lasting) 2% so theoretically providing national coffers with positive cash-flow over the next 5 years.

(There is an argument that the application of collaborative 'quantitative easing' could momentarily but rapidly surge the EU economy and so demand a major rate hike response that exceeds 6% but that looks to have been discounted).

The assistance is undoubtedly useful to Ghosn and Streiff, indeed possibly a 'super-charged' boost given that both French firms are already far better placed than European counterparts; with either a luxury-bent or far more diverse stable of auto-brands and/or conglomerate industrial divisions. But that Sarkozy & top-table assistance comes at a high price given the demands that : no domestic jobs be lost with all national plants kept open and so the avoidance of R&D and assembly migration to lower cost regions.

Both CEO's recognise that the large proportion of future growth lies in emerging nations, even if those regions have been heavier hit by the down-turn their socio-economic & market fundamentals position them well for quicker rebound and continued long-term growth. So both Heads will want to use that additional liquidity to fund future non-EU expansion but also maintain respective technology leads in their fields – Renault Diesels & EVs and PSA Diesels and Platform Modularity – so as to try and hold a firm grip on the essentially slow-growth, transitional yet still very valuable EU region.

And beyond, Ghosn, Streiff and their counterparts recognise that consequential to this period of major change is their position in the latter-day global automotive order. Recognising the importance of the outcome to the EU auto-sector may have been the impetus behind the recent rumour of a possible PSA-BMW alliance. (investment-auto-motives questioned Luxembourg's EU Minister recently at an EU seminar on the origins of this rumour, whether the corporations were endeavouring to at least look to be 'ahead of the political ball' or if alliance exploration was subtly suggested by Brussels? Typically the answer was non-committal).

Back to the Renault-PSA situation, and investors very mildly welcomed the aid-package news, the FT reporting that respectively shares were up 1.4% and 3.7% in early trading and maintaining a steady rate climb to 17.35 and 15.25 Euros by mid afternoon today. The post announcement steady trading seems to be related to what could be a long period of situational assessment, as analysts weight the pros and cons of the package conditions or await corporate decisions as to if and how they will allot the governmental monies. Critical of course is the issue of limited or possibly altogether abandoned intermediate dividends. That could give rise to all but domestic and 'EU pliant' institutionals deciding to exit their holdings if there's no other commercially driven story that increases its MarketCap growth potential.

And we suspect although the headline conditions have been reported, that there may well be numerous other less visible aspects of the deal that further unite the interests and capabilities of French industry.

Previously mentioned in other posts, internally, Ghosn may well be progressing the co-coalescence of Renault-Nissan's EV ambitions with France's own nuclear capabilities currently internationally extolled via EDF; including understandably Japan. At present Renault appears to be in a hiatus of sorts, having received much of the pay-off of its investment in the Dacia brand & model variants during the Eastern European economic boom, awaiting the revenue from its $1bn 25% stake in Russian Avtovaz's new car family and relying on heavy marketing push (ie incentives and ad spend) for its mainstream European models, which have suffered in non-domestic EU countries without the sustained level of design differentiation.

At PSA, its long maintained policy of technology and model alliances with other manufacturers should see a reduction in both its core and tertiary model development programme costs. Of particular interest is the continued Mitsubishi alliance which could fast-track the Japanese company's own EV knowledge into PSA, perhaps best exemplified by the Mi-EV Kei car that would be a real-world 'real-car' alternative to many of the EV models originating from France, Sweden, India and China today. (As an aside, we could well see TATA copy the Mi-EV with an battery powered variant of the similarly packaged Nano in due course).

In summary, the news of the French aid finance is undoubtedly welcomed by: the recipient companies and their suppliers (eg Valeo presently solely and JV developing battery packs and hybrid-drive units as it seeks to climb the value-chain); undoubtedly so the still over populated national dealer-base (like the US), and of course the automotive labour force.

The question that obviously emerges is “to what degree has Sarkozy bought his popularity at the expense of a truly rationalised and efficient French auto-sector”?

He will probably argue that greater EU & Japanese industrial co-operation will off-set what appears to be yet another raft of French protectionism, but ultimately it will be Ghosn and Streiff who will apply the light or heavy hand when 'poli-ticking the national box' as they seek to best balance their firm's global interests.

[Post Script - And to that end, Ghosn's recent announcement demonstrates that Nissan will become leaner and leaner, increasingly more reliant upon Renault. It will 'right-size': global capacity, its CapEx commitments, now over-populated workforce (retrenching 9.5%/20,000 of its global workforce) to combat the weak market, fragile liquidity access and the strong Yen. The big 'cost-saving' numbers being banded by him puts him back in the mould of 'le cost cutter' that gave him his reputation some years ago; now more than ever focused delivering a mix of high global small car volumes and the 'leapfrog' tech of Electric Vehicles via a new Nissan corporate structure].

Micro-Level Trends – Powertrain Engineering – Battery Technology's Opposite Poles.

Batteries typically operate via the conductivity 'charge flow' between +ve and -ve poles, thus the technology requires the existence of polar opposites to create power. But whilst necessary within technology itself, it is debatable as whether such polar opposite stances hold true for the development of the battery industry itself, and so the development of (Series & Parallel) Hybrids, PHEVs and full EVs.

And that has been the case for many years as different R&D houses, battery-manufacturers and automakers battle to distinguish which 'technology-play' would be most advantageous. The array of options have been spawned by the spectrum of vehicle types that exist and by the alternative battery (chemistry & structure) possibilities that exist, created from 150 years of research and from a plethora of applications. Of course the consumer electronics industry has been the prime client in recent decades requiring hi-performance, compact powerpacks that evolved the battery's own R&D efforts down a particular path that leading to the broad adoption of Lithium-Ion (L-ion) technology.

Historically different 'powerpack' solutions have been born from different requirements, even in the auto-industry, ranging from the tried and tested Lead-Acid re-fillable type to the sealed L-A type to latter-day lightweight but limited - life compact Gel-Pack types used for motor racing.
As we've seen over the last 5 years or so, the 'holy grail' is the viable use of L-ion in vehicles, and its spin-off derivative Lithium Polymer (Li-poly). Thus Labs have been trying to both extend the innate advantages of the tech and reduce the endemic disadvantages. To summarise the +ves and -ves of L-ion are:

Positives: a) the ability to configure battery layouts as necessary within given package b) lightweight c) high open-circuit voltage possibilities d) no 'memory-effect' e) low self-discharge rate

Negatives: i) very poor 'shelf-life' – quick loss of potency if not immediately used ii) irreversible capacity loss at median-high temperatures (such as under-bonnet environs) iii) high-internal resistance limits 'high-drain' loads such as power-tools and full EVs iv) safety features required adding cost, utility & warranty issues.

The indisputable 'real-world', high-production tech leaders of the automotive arena are Toyota and Honda with the respective Prius (Gen 3) and Insight (Gen 2). They have opted for the known 'tried and tested' Nickel Metal Hydride (Ni-MH) battery option to actually put series-hybrid cars on the road. That option may not be as sexy as L-ion, or offer the theoretical panacea of possibilities, but viability won-over as a preferred route back in 1998 to: actually create the new 'eco' segment, produce cars that would meet the high reliability standards that are core to brand values and allow incremental performance, weight-reduction and cost-down improvement to the chosen battery technology.

In contrast western auto-producers have chosen to endeavour to work on a fast-track route towards the L-ion solution, whilst proffering 'inter-mediate' (relatively low-volume) Ni-MH hybrid vehicles. GM in particular has vaulted the L-ion Volt concept for some time and recently announced it had chosen LG Chem as its preferred development/production partner (over Canada's A123 Systems) relying on the creation of a 'Manganese Spinal Cathode' to help overcome some of the major L-ion disadvantages. Daimler are pseudo-testing the battery via the niche produced S-class Bluetec [NEC and Samsung doing likewise]. Advances in Nano-technology such as those at MIT and Stanford are progressing the cause, but barriers are still yet to be overcome.

Thus the auto-industry has and continues to remain split regards the routes for adoption of battery technology. And that is because the matter is complex indeed, the number of technology, business and user considerations and variables means there is no simple answer, and that we suspect was much of the reason as to why these Japanese auto-makers effectively went down the evolutionary route for Prius and Insight, playing safe to further differentiate themselves – into possibly an unsalable position - within the mainstream sedan segments they had fought hard to own. (After all, 'Disruptive Tech' has created little disruption in 100 years of ICE-based cars, even the small-step of the Wankel-Rotor engine only ultimately used as a periodic product story for Mazda). However, that doesn't mean Toyota and Honda are not exploring non-Ni-MH alternatives.

But of course Nissan, with Renault parentage, is co-opted to align itself with French industrial policy that propagates nuclear-sourced electricity, and so the raison d'etre for pushing all the way to full EVs. Thus Nissan, largely via Renault and its efforts with the Israeli government and Project Better Place, is Ghosn's 'Disruptive' bete noir for his No 1 & 2 ranked counterparts in Japan; the newly re-appointed Toyoda and Fukui at Toyota and Honda respectively.
Of course that commitment toward truly clean-energy supply chains has been ongoing since Japan held the Kyoto Summit, itself taking on the mantle to live-up to the high ideals of the accord. Although the accord was legally non-binding, participant countries including the US were castigated for not doing more sooner.

In comparison Japan and a commercially 'shadowing' S.Korea elected to re-strengthened their own industrial prowess to lead the world in eco-tech. For Japan, much of that drive was undertaken as a dual initiative between government and industry, utilising a mix of tax-gathered monies and buoyant corporate balance sheets; themselves created as hostile take-over defense mechanisms during an era of Japanese economic stagnation. (investment-auto-motives has long believed since 2005 that the the lessons learned from the Japanese 'precursor-model' would be instructive for the west – as has come to pass). In contrast, S.Korea was able to predominantly ride the previous global growth and utilise to good effect its own capital markets (including PIPE allocations), FDI and a portion of public funds to climb the manufacturing value-chain and equal & better Japan in certain tech arenas – as LG Chem's apparent progress in L-ion has shown.

However, although the technical complexities and ultimate ROI levels of the 'L-ion Battery Race' are still to be truly ascertained, the event of the global financial melt-down and subsequent global provision of national stimulus packages (with aligned private funding initiatives) have prompted Electronics Corporations and Battery R&D Companies to demonstrate their conviction in growth plans with the recent spate of M&A and new plant announcements. No matter whether a relatively new L-ion tech-leader – scaling-up consumer electronics capabilities – or a traditional low-tech Lead Acid or Ni-MH commodity-battery producer, none wish to not be seen at least in the running; so important is the rhetoric around L-ion.

Hence GS Yuasa's alliance with Honda, NEC's joint venture with Nissan, Toshiba's tie with VW, Panasonic’s Y807bn takeover bid for Sanyo and even Toshiba's re-entry into the L-ion's denizen with its proprietary SCiB variant.

The race is of course based upon demand forecasts that premium battery tech will be required to power continued and voracious new demand across:

1. consumer electronics (phones, laptops, net-books, mp3s, e-books etc)
2. integration into vehicle powertrain systems
3. use as storage devices for clean tech energy systems (solar, wind, wave etc)

Forecasts (as ever) are the impetus behind the systems, and whilst exact volumes are debatable, the apparent future demand does indeed look conducive to at the very least be seen to be proactive in the arena to satiate investor confidence and maintain perceptions of brand progress.

Research agencies (with arguably vested interests) state that “We are on the cusp of mass production now – that is why there is a sense of urgency,” but it seems that the core issues 'ghosts' of technical and production scale-up issues have yet to be fully exorcised. Instead there is a sense that companies are prepared to deal with arising problems as they emerge, a consequence for many feeling compelled that they have to run before they are truly comfortable walking. And importantly, the industry's tech-speak with raft of scientific formulae and algorithmic control jargon can be used to bamboozle and convince the majority of non-techies in government and investment circles who hold the developmental purse strings. Rather like the web-based tech-boom of the late 1990s, much apparent promise may lay in intendedly heavily science-laden business plans.

For today, within an environment of stalled and limited liquidity, commercial enterprises that are currently enjoying sector limelight appreciate the intense level of intra-sector competition to access monies from the national public purse and from aggressive private financing sources; themselves under pressure to sweat dormant funds.

Never in recent history will those business plans be so important. Let us hope that the recent era of creative accounting in the ethereal financial sector is not replaced by overtly creative business planning in what is supposedly a conservative sector.

And lastly, perhaps instead of a possible irrational dash for cash that could fragment the sector and its efforts, the critical importance of the power storage industry 's products to society may call for a more holistic approach between government(s) and the investment community. One that ascertains a possibly more plausible, viable R&D and productionisation framework for L-ion+ and other next generation technologies.

If the Green Call is to be answered powerfully and rationally, it makes sense that the apparent polar opposite concerns of Lord Stern and Lord Lawson for unhindered technical exploration versus rational investment thinking be ultimately combined in a dual-aspect approach. And that the apparent polar opposite +ves and -ves of Ni-MH vs L-ion be fully appreciated and appropriated.