Evident difficulties exist when creating a viable business model for what is effectively a low volume performance marque. By its very virtue, it must rely upon the sporting cornerstones of advanced chassis dynamics, the immediacy of power and a unique aesthetic in order to maintain its differentiation and so provide its brand USP.
Automotive history is littered with well intended, highly ambitious but ultimately flawed, commercial thinking by company owners and overtly biased management. People that thought advanced product design alone, without the usual tenants of business management, would create success - from the post-war Tucker Torpedo to NSU's Ro80, and many more names besides.
Indeed, such experiences are not only limited to names of the past, but also appear in the histories of today's players.
Two names that have had a fair share of fruitless, over-ambitious and ultimately value-destructive efforts have been Jaguar and Maserati.
The former with the XJ13 and XJ220 and the latter – under De Tomaso - with the Deauville and the Bi-Turbo range. Of course no 2 examples are ever the same since no 2 set of circumstances are the same, but these items do reflect Jaguar's failed efforts of 'supercardom' in the prosperous 1960s & lean 1980s, whilst Maserati's historical instances result from attempts to battle previous commercial decline, trying to recapture former glory during the PESTEL headwinds of the 1970s a& 1980s.
Jaguar's commercial is in the history books: from William Lyons' 1922 establishemnt of the Swallow Side-Car Company and onward to empire building with milestones such as the XK120, E-Type and series 1 XJ as its arguable peak. And onto the marque's unfortunate tarnishing under the BLMC/BMH umbrella in the 1970s onto 1980s Privatisation under Sir John Egan, onto the 1989 Ford take-over and more recently TATA's relatively recent purchase. Unfortunately for many of those years Jaguar has been a commercial under-performer, this condition created by a mixture of customer migration to markedly better competitors and the downward spiral of lesser revenues inducing reduced core-competances and the influence of parentally enforced higher agendas from BLMC to the process of privatisation to FMC's PAG to now arguably TATA's broader issue conglomerate requirements.
The Maserati brothers established themselves in 1914 as contract-builders for others' GP aspirations. Their own Trident logo appeared in 1926, bought-out by the Orsi family, wisely and effectively switching from race to road car production with increasing success until its commercial heyday in the 1960s. Purchased by Citroen in 1968 ostensibly to raise its own profile and share technology (eg SM), it fell into receivership as part of Citroen's 1974 bankruptcy, only saved by the Italian state GEPI fund as a lifeline bridge before being bought by De Tomaso. Chrysler took a stock slice with the all-important 1993 FIAT full purchase providing stability and expertise; especially so with Ferrari's 50% stake so providing technical resource.
To add more detail of its past problematic experiences, Maserati was effectively 'lost' for 40 years due to poor direction in the mid-1960s, the 1970s downturn, raging 1980s competition and a 'climb-back' in the 1990s - even Lancia aruably better positioned. From 1968 onward various efforts were made, the most interesting perhaps the 4-door Deauville concept mimicking a futuristic Jaguar XJ. That was followed with efforts like the 2-door Longchamp mimicking the Mercedes 2+2 SLC, and the Bigua/Bi-Turbo (latterly Qvale Mangusta and MG X-Power SV, that last tag desperately trying to evoke Lamborghini). Thus a period of brand disorientation, lacklustre products, lost credibility and for De Tomaso and for FIAT until only very recently a cash-burning money-pit. MAserati exemplified the hard task of turning around and reviving a past glory name.
However, the Deauville case-study is prescient today since it attempted a 'modernised' Jaguar XJ (and was an interesting Italianate precursor to Jaguar XJ Kensington concept by Giugiario which heavily latterly influenced Lexus (GS) design identity.
The crux of the matter is that the Deauville concept was not simply an attempt to find a renewed identity but clearly an effort to court the imagination of Jaguar's then quite unsure, uncomfortable management given the massive whole left by Lyon's departure. Appearing in 1970 it came 18 months after the 1968 launch of the series 1 XJ, and effectively a clear statement that Maserati – itself at a major juncture with then Citroen's new ownership – wanted to build alliance with another low volume prestige marque. The pretext was not only for the Italian sub-division but Citroen itself as a manner of walking up the price ladder with a 4-door SM to replace DS.
Thus the Italians and the French well understood the opportunity to gain economies of scale and the opportunity to re-appropriate parts from diverse parts-bins enabling lower cost additional vehicle development.
Remember that this was at a time when the UK Pound had been decimalised and the UK was on the verge of Common Market / EEC entry. So Maserati (& Citroen) would have undoubtedly thought that their implicit proposal to the UK producer had fortune on its side. It was not to be.
That alliance could have offset the flailing fortunes of the luxury collaborators given the oil crisis impact on production volumes and so commercial viability. But Jaguar's focus was UK & BMC-centric given the dire-straits of the period and the level of government (Stokes/Ryder)intervention including funds. For all the pro-EU chatter, any migration would have been politically and socially hapless.
Ultimately, if Maserati and Jaguar hadn't been such national icons with innate marketable potential to Trade-Buyers, Private Equity and Public Markets, both would have diminished in the 1970s. Thier names and supposed future potential saved them.
Today, some 40 years later, those same micro-level and macro-level drivers have converged. Global financial contraction, retracted luxury car sales, tumbling revenues, slashed operating budgets and onerous clean-tech requirement highlight the importance of inter-regional volume efficiencies made possible broader open-market, globalised B2B and B2C trade.
[NB investment-auto-motives' recomendation for a Northern European Eco-Tech 'Regional Rainbow'].
The tenants for regional alliance-building between low-volume producers has oome into being since the BRICs surged and now hold economic stability, whilst the West peaked in 2007, stalling heavily since and now running effectively on empty. Italy and India recognised this trend and informally commercially re-coupled, as they did previously in the 1950s onwards with the Premier-FIAT 500 & 1100 and the myriad of Piaggio & Lambretta JV scooters and 3-wheelers.
But 40 years on it was TATA's turn, and from a very different position.
Given their conglomerate natures and divisional mirroring FIAT & TATA have formed what externally appears a warm relationship; primarily between Ratan Tata and Sergio Marchionne. Tata invited to sit on FIAT's Board as part of their synergy seeking aspirations. The Board will have tasked senior management to seek-out cost-savings, product improvement initiatives, overall core-competence building, inter-company divisional procurement and divestment opportunities.
TATA's purchase of Jaguar-Land Rover was seen as a momentous opportunity for the ambitious company thriving on Indian and (at the time) global growth (thru' TATA Steel & IT Consulting Services). Given the informal FIAT tie there has been natural conjecture that Jaguar and Maserati should form a JV given their similar market positions, similarly sized and specified large saloon/sedan, coupe and convertible vehicles and their limited internal resources vs the German & Japanese competition. Such an accord primarily allows for the cross-application of aluminium structures, platforms and knowledge. So bringing down capital investment, general overhead, per unit costs and enabling their respective R&D budgets to focus upon more customer tangable brand-specific systems focus.
Moreover, and very importantly, FIAT's Chairman Luca Cordero di Montezemolo recognises the commercial pressures facing Ferrari from both reduced F1 Sponsorship revenues and contraction of orders for the Maranello factory. He will not want Maserati to weigh upon Ferrari once again given the financial and technical assistance it has previously provided. So no doubt ordered Maserati to find alternative paths to sustain itself. Let us not forget that Cordero di Montezemolo will have his eyes on the massive Indian potential for Ferrari F1 followers that will draw-back corporate sponsorship to Ferrari aswell as the large potential for car sales to the ever growing entrepreneurial and upper middle classes; aswell of course the ocean of merchandising potential India offers. Ratan Tata obviously has major influence in the region, a fact well known by Coredero di Montezemolo for many years.
2009, and the ideology of that 1970 Deauville toward a cross-fertilisation appears to have come into being with the New Jaguar XJ and Quattroporte. [NB Although no official statement has been released from either party since it would not be in their interests to do so]. However, investment-auto-motives conjects that the TATA-FIAT relationship has now borne the off-spring of the soft-coalition toward new product development.
Very crude basic research (consisting of the visual overlay of vehicle side-views) suggests that the New Jaguar XJ appears to share very similar dimensions with the Quattroporte Bellagio Touring concept (seen as a possible variant or replacement). Apparent in the engineering hard-points for : front-bulk-head / windscreen cowl, A-post lower, front lamp positions and nose/grille section height. Regards the latter, the Jaguar appears to take a similar front lamp dimensions to current Quattroporte, whilst the facelifted 2009 Quattroporte take a new lamp shape closer to the Gran Turismo Coupe. Furthermore, the New XJ's rear approximates the Quattroporte in boot/trunk shut-lines (although placed higher), to accommodate the inward diagonal what look to be shared rear lamp cluster armatures - both cars offering brake lights formed from 2 lines of diagonal LEDs. Lastly and very interestingly, the Jaguar's rear lamps are very evocative of Lancia's treatment created from previous generation Thesis forward and even seen on the Ypsilon city-car. [NB. Similar styling treatment also appears on Nissan's large cars and Infiniti line-up]. This suggests that the XJ vehicle platform would also be used for future large Lancias, and exploited further given the Maserati-Alfa Romeo connection (seen in the sub-structure of the retro-esque 8C) with FIAT's desire to create truly sporting (RWD) Alfas. I.E. the sub-structure would also be utilised as broadly as possible to revitalise FIAT's premium marques as part of its own global growth strategy. Add Jaguar's Daimler marque to the frey and FIAT-TATA hopes to set battle against the large sections of the high margin business BMW, Mercedes, VW and Lexus hold.
Higher level industrial policy-making between Tata and Marchionne & Cordero di Montezemolo, will of course ensure that future large cars meet and better regulatory emissions standards via clean-tech applications. With the Maserati aluminium base dating from late 2003 (designed in 2001/02) that left the newer aluminium Jaguar platform (from Alcan-Novelis) to take the lead for the alliance – especially so given the trickel-down available from the UK government's sponsoring of Jaguar and R&D partners to create the 'Limo-Green' PHEV system. [NB another fuel cell based system is being explored but realistically it will no or very little commercial success].
What is interesting is the subtle balance of power apparently being demonstrated by the New XJ taking on such a close form to its FIAT owned sibling. It is not beyond the realms of logical speculation to purport that either FIAT demanded direct influence over the XJ vehicle 'packaging' and so resultantly 'styling envelope'. More likely, given the long-play industrial game, Ratan Tata probably indicated that the XJ should be closely aligned to the Quattroporte so as to demonstrate to Jaguar management the future NPD-policy regards shared engineering DNA. In effect a reversal of the 1970 Maserati overture to Jaguar, given the benefit it bears with promised FIAT derived volumes for the XJ platform – spread over Maserati, Lancia, Alfa-Romeo and possibly even Arbath.
In short Jaguar becomes to Maserati that which TATA Cars is to FIAT Auto in India - the enabling industrial mechanism which in turn is fed by FIAT global reach.
So the XJ appears to be being utilised as more than simply a car, and more than simply a platform for shared use. The company effectively utilised as a 'commercial vehicle' in its own right espousing greater operational integration of FIAT-TATA and their respective coverage of the automotive markets, sectors, the value-chain and relative core-competencies.
Such aims are of course laudable in terms of the theories of value creation for both parties – TATA recognising FIAT's new reach into North America via Chrysler and FIAT well understanding the influence TATA conglomerate has (from steel manufacture to IT) on the Asian sub-continent. But how has this inter-company bridge-building affected Jaguar – more specifically the chimera-like XJ?
To be candid, at this point in time it does not appear overly positive regards western market expectations in the short-medium term given segment conditions and the consumer flight to (German/Japanese) brand safety, but may be greatly buoyed by the the aspirant desires of the upper-middle class Indian buyer.
The XJ follows the XF which was the real retro mould-breaker for the company. However, ideally that mould should have been broken far far earlier in the early 2000s or well before – the S-Type a mistake in itself. [NB, no a case of 20/20 hindsight, an arguement stated at the time].
[NB. Latterly in 2002 investment-auto-motives provided recommendation for a quick yet robust 'transformation' response – see website: http://www.investment-auto-motives.com/credentials.html ]
By 2008, when the XF appeared, Lexus and the Germans had, with their market gravitas, moved the game forward substantially both in terms of popularly received aesthetic and product credibility. Jaguar has been forced to play catch-up, leaping (forgive the pun) forward vehicle generations but caught-out by the acceptable level of brand-product stretch. The limited numbers of XF in and around major UK and other European cities indicates that the car has unfortunately not lived up to initial expectation.And PR efforts like the XFR Bonneville record-speed car – whilst good for the morale of few in the engineering community – are in reality costly, low impact, no-£-return exercises.
Thus XF has not blazed the trail required to clear an easy path for XJ, due to a mixture of headwinds such as:
a) oxymoronic 'aggressive-defensive' styling leading to a muted public reaction,
b) later than ideal diesel engine availability
c) the economic downturn which hit the 'mid-exec' (D/E) segment hard
d) the pricing power of major competitors
The last point very poignient, competitors often with in-house or affiliated 'captive finance' houses and so better able to weather the credit-crisis fall-out where credit availability contributed historically disproportionately to new car sales.
New XJ whilst a natural successive 'big-brother' to XF - from the front & side views – is a radical departure from 'Old' XJ as has been the intention. But the level of success is highly debatable, especially regards the Audi-esque glass-house and overtly alien rear-view. (There could be an argument made by officiandos that the rear light lenses mimic the Series 3 XJ by Giugiario but that would be a poor effort of persuasion given the little recognition of that fact by the public at large).
In the west, during these fragile economic times that have retracted consumer mentality there is a 'flight to safety' – to the known and importantly socially acceptable - as we see with Ford's re-popularisation in mainstream segments and BMW, Daimler and Lexus 'softening' so as not to repel current or potential customers.
Whilst a bold step forward was needed, there is a real danger that Jaguar has stepped forward but also not quite as straight and true as necessary. Such bold moves can prove useful regards brand direction but often that takes time to execute with the public playing acceptance catch-up and the auto-producer having to absorb the lack of popularity, sales and so income revenue in the short-medium term. The likes of Ford were able to do it with 'Aero' Sierra and BMW latterly with 'Flame Surface' 5 series et al, but both those companies were well financially cushioned when they took the leap, able to swallow the initial fall-off of revenue.
TATA's previous revealed Jaguar-Land Rover's Q1 financial losses, now combined with recent press reports of FY08 losses for the UK business unit (of £641.5m / $1.2bn inc actuarial pension losses). Undoubtedly aired to highlight to the UK government the company's need for short-term aid financing. The State BIS (nee BERR) Office, run by Lord Mandleson, reportedly offering $175m over 6 months versus TATA's £500m amount from the UK over 12 months and an EIB loan worth £340m. [NB excluding exceptional items such as Jaguar's sale of AML shares in 2007, entity's PbT/L was £-38.3m in '07 and £-34.1m in 08].
The majority of financing appears to come from J-LR banking relationships to the tune of £100m and $486m for the Jan-May 09 period, a mixture of regular external banking and TATA internal banking agreements with a stated LoI from TATA to provide further roll-over facilities. Given the Q1 problems TATA had in securing its own funding during the liquidity freeze, it had to understandably resort to appealing to the Indian public; something very sombre and reminiscent of previous struggling periods. More recently impressive Q2 results were attained by TATA Motors (excluding J-LR drag) thanks to improved commodities/materials and FX cost shifts. Even so a portion of those J-LR monies to prop-up a luxury car maker will have ironically come from the pockets of the Indian working class, themselves socially eager (some say pressured) to be seen to believe in the TATA Group.
Similarly, it may well be that social cohesiveness in India that comes to Jaguar's eventual rescue.
Although separatist by old caste notions and differences in creed, there is a growing notion of 'Indian-ess' created by economic growth and success. The betterment of the nation proudly exemplified on the global stage via achievement in sports (ie cricket previously and today F1 involvement) and world-class industry as seen with TATA's purchase of Corus & J-LR and Mittal's previous acquisition of Arcelor. This slowly emerging unity of social cohesiveness obviously emerged after 1948 Independence, subtly witnessed across private, social and commercial spheres, driven by the paradox of wanting to both assimilate 'the Best of British' from its colonial past but also be seen to beat the British - and other nations - at their own game.
Thus the upper middle classes and exec-set of India recognise at an ephemeral level that what is good for Jaguar is good for India, and so can appease themselves in the feeling that such luxurious consumption is not as socially crass as was viewed in the past. Indeed the purchase of Jaguar (& Land Rover) products actually promotes Indian industrial income, this expected to rise in the future as greater managerial, engineering, IT, administrative and production jobs are passed to Indians and the products themselves co-manufactured in local plants effectively boasting that the apparent 'best in the world' is “made in India”.
Thus it could well be Indian-ness rather than innate British-ness that buoys Jaguar's hopes in the short, medium and long-term.
To sum-up the central theme of this essay: "a current test-case of the platform-sharing ideology" – the past and present aligned forces highlight the potential for the TATA-FIAT initiative; but also highlight the importance of execution.
The use of shared platforms and components is of course as old as the auto-industry itself, with much devoted to the edict that what is out of sight is out of mind. PSA has been traditionally seen as the leader in this field given the 66% level of share by parts count, and 79% by parts value, in the mid 1990s. But as seen with Ford's Premier Automotive Group the push for economies can dilute the marque experience.
Jaguar has effectively been co-dependent since 1989 under Ford, now seemingly with FIAT. From an output high of 130,000 units (over 4 platforms) in 2002, production/sales dropped to a low of 60,485 units in 2007, rebounding to 65,350 units in 2008. Critically these were split between 2 steel structures (X-Type & S-Type/XF) and 2 aluminium structures (XK & XJ), an intolerable situation.
Although X-Type is now discontinued, Jaguar unlike its peers does not have the immediate ability to leverage the momentum of self-sustained volume nor standardised platform bases. It will probably need to migrate next generation XF to full or (at least) semi-aluminium structure to align its R&D & Manufacturing strategies, unhinge itself from the heavy burden of traditional pressed-steel vehicle production and critically to reach/better the 120g/km fleet average eco-target across its fleet. Thus it must both continue to develop its own structural core-competencies derived from Alcan-Novelis (ideally also sold externally as IPR license or contract manufacturer) and continue to effectively borrow conventional mid and small car platform technology from other OEMs or Tier0.5s; most probably FIAT given today's ties or possibly 'New Opel' (from either Magna or RHJI) to access COTS 'pre-packaged' clean-diesel technology.
To reach such a far off growth goal – which must be implicit with Ratan Tata - Jaguar must first underpin its current ethos as a re-vitalised, self-styled “niche player”. Today's task to improve unit margin profitability developed from mid-scale, 'advanced architecture' manufacturing methods. Production ties between the large sedans (XJ/Quattroporte/Lancia 'Limo')and latterly large coupes (XK/Gran Turismo/8C replacement/ Lancia 'Gamma') would help reach the optimal 100,000 unit production run for the architecture. Doing so is especially important given the recent rises in aluminium purchasing costs that are only headed higher given the industrial demand squeeze on the material.
Moreover, Sergio Marchionne's own endeavour to limit FIAT CapEx spending across operations where possible, thus utilising the best current platforms and technology at hand and from alliance partners to update aging product (such as Quattroporte) and stretch-out product life-cycles on the newer available platforms and modules. The CapEx issue especially prevalent given Maserati's YoY Q2 drop in unit sales by 48.3%, equal to a hefty 45.9% revenue reduction, only balanced by severe operational cost containment. [NB Q2 revenue of E111m vs E205m last year, and Q2 of E2m vs E12m last year].
FIAT appears to have timed their Maserati efforts well, exploiting the 2003-2007 period of high growth which was especially fortunate for its buyer set; many of whom either work/worked in high-finance or were commercially closely related to it. Now that such revenue has declined it appears to have leveraged the TATA connection to probably share a next generation platform and so avoid much of the development and productionisation pain and overhead.
Thus, investment-auto-motives believes this describes the 'behind the scenes' reality of the dynamic between TATA and FIAT, a context of relationship building requiring 'given ground' in this instance by Jaguar at a TATA group operational level so impacting product development freedoms.
The New XJ seems to visually demonstrate the inherent compromises that must be made from such a position given the assumed heavy influence of FIAT Auto and its own platform strategy needs. That is not to say that New Jaguar is doomed, simply that it must face a new and very different future largely dependent on the social dynamic and economic engine of India and SE Asia. And much of that depends on whether Jaguar itself can persuade that XF and XJ truly are Jaguars, which given their obvious overtures to to Lexus and Audi by design, and Maserati by default, could be argued as failing to stand on its own “4 feet”.
So, “Mas-Cat-Raiding” or 'Masquarading'? The semantics and tautology are clear, but it will be the Indian buyer that decides whether to call (in cricketing parlance) “In” or “Out”. And TATA-FIAT must learn from the exercise.
Whatever the outcome, the Jaguar-Maserati connection demonstrates the industry critical issue of the need to form alliances yet maintain marque integrity. History demonstrates that this is a very hard objective to achieve, especially so for the partner with lesser leverage. And it is here, with the likes of an academic and in-depth Jaguar-Maserati case-study, that the auto-sector must continue to learn and appreciate the political nuances, corporate subtleties and product consequences of such alliances – the good, the bad and the remote possibility of the unintended ugly.
It is a lesson that the crop of newly 'independent' car-makers that have spun-off from 'Old GM' will need to learn – from SAAB to Hummer to Saturn to Pontiac, as well as very probably the Ford divestment of Volvo when capital markets are re-inflated. For investors will want to see that merged economies of scale can be obtained whilst maintaining marque uniqueness.
Otherwise their investment strategy will simply be to ride the sector upturn and exit before consumer confidence diminishes in a brand. Such resultant – arguably circumstantially enforced - investor behavior will only return the sector to its former poor NPV modelling, low IRR and so low RoI experience; something all involved are keen to avoid.
Monday, 3 August 2009
Friday, 24 July 2009
Macro-Level Trends – H209 Outlook – False Prophets of a False Dawn
Q2/H1 Reporting season is upon us and the general 'not so bad as expected' news appears has lifted markets spirits. No where near the 'animalistic spirits' that drive the market in ordinary times but still apparent cautious optimism.
Yet the 10 day rally period seen across US, Euro and Asia to date sits within the broader context of liquidity constraint – thus trader (not necessarily purist investor) behavior seems to be charging the markets; jumping on any positive signal - no matter how thin – and trading sentiment and volatility instead of fundamentals. Thus we find ourselves in a period of trader vs investor schism.
Of course behind this dynamic is the fact that cash-conscious publicly traded companies on every western exchange are desperate to be seen as investor picks; thereby able to leverage their improved MarketCap to draw financing from either directly off the balance sheet or able to better bargain with bank or bond lenders. All obviously in order to improve cash-flow conditions, working capital and so ease operating pressures both internally and on either side of their creditor-debtor chain.
Recent press has been full of the 'good-news' stories highlighting the day after day upward trending, the 8-month high of the S&P500 and analyst-beating Q2 earnings; from everyone from across the industrial board, from Coca-Cola in consumables, to e-bay in retailing, to Caterpillar in capital goods, to Xerox in IT, to Merck & Bristol-Meyers & Wyeth in pharmaceuticals, and of course (as expected) the more than buoyant results from the more sound “good” financial such as Goldman Sachs and JP Morgan, and even heavily reduced but still positive results from others like Amex.
In Autos, Hyundai as expected performed well making hay domestically (p 15% at home) and leveraging customer attraction efforts in North America at the expense of GM, Chrysler and even Toyota during this tumultuous period; also gaining from the FX effect of a weak Won. And Ford beat analyst expectations with lower than forecast losses, so demonstrating the combined effects of of internal turnaround progress, the “cash for clunkers” programme and migrational US market assistance.
Fairing less well the likes of McDonalds, UPS,Eastman Chemical, EuroTunnel, NCR, Ericssonn, Microsoft, Amazon & Hynix Semiconductor; the last of these tech and cyber-space businesses highlighting that IT and web2.0 have not been as immune as previously thought.
So a mixed bag of results. But what really lays behind the good news stories? Is there substance or are western markets creating a momentary “over-exuberance” primarily via traders and the positive overnight effect of the west-east regions?
Whilst many results have beaten gloomy analyst predictions, and are of course sector influenced (eg the 'recessionary comfort food' factor of Hershey's or the 'global stimulus gain' of Caterpillar Inc), the broad reality is surely that there is a 'counter-point-effect' taking place between continued downbeat macro-fundamental measures (ie those in recent US unemployment and UK GDP retraction) and the ability of corporate management to both take drastic restructuring steps and legitimately re-orientate accounting procedure to boost quarterly results. These could be deferring capital investment, changing inventory values via switching between FIFO to LIFO (especially under today's deflationary times), delaying supplier payments, use of 'extra-ordinaries' eg digging into the provision pot, altering capital goods' depreciation or maintaining old/better asset valuations. The options are varied and many, and during such pressured times firms are undoubtedly re-discovering such pain-relieving financial-engineering tactics.
But it must be said that investors are looking well beyond the top and bottom-line figures, just as CFA's and forensic accountants are well versed in reading the subtleties of accounts so investors are increasingly looking for YoY and QoQ like for like readability, simplicity and general transparency. The best of corporations have realised this and have over the last year or so become more detailed in their reporting, conveying more of their forward-looking business strategies when appropriate can even gain investor credibility by reducing dividends or indeed giving non-payment to demonstrate their financial prudence.
Thus the Q2 season seems marked by CEO's and CFO's continued positioning “between the devil and the deep blue sea”. Whilst the market will trade on transient good news and traders will seek to effectively arbitrage sentiment and trading volumes/patterns the longer-term independent investor must see past the white-noise of volatility and much of the rhetoric from media 'experts' and talking heads who are keen to talk-up their own holdings.
Given western economy realities the world is looking for a rebound in BRIC regions to pull the west from its mire, led by export driven western companies. These for the time being relate to infrastructure and associated sectors (eg mining, commodities and steel-processing and IT hardware and systems) and the push for further globalised (and consolidated) agriculture in China, Asia & Africa. In the medium term select western goods should gain traction again as Asian consumers loosen their discretionary spend wallets.
But it must be stated that China et al obviously seek greater gain from their rebound given their foreign reserve currency holdings and desire to own a greater portion of the global value chain, especially in natural resources, their inbound transportation and outbound transportation of export goods. For hard-pressed western companies and governments who want to ride the Chinese rebound to provide domestic commercial growth, an expanding money supply and returned consumer spending to buoy western economies that will be a hard pill to swallow.
The threat of implicit protectionism has been rising via subtle trade policy changes both in the west and Asia, but for the sake of all concerned this must be avoided. Ironically, given what seems a very deflated state of the western auto-industry, it can continue to provide an inspirational vehicle for open door trade policies and so improve international diplomacy. [NB, even if the Opel-BAIC deal looks doomed due to both German domestic political issues and the reality of BAIC trying to amalgamate the 2 very different enterprises].
Western markets need more than the present over-reaction to less than bad news. Western companies need demand pull from BRIC nations to kick-start their own corporate growth ambitions and so domestic local and national economy fortunes.
Thus the investment community whilst possibly copying their trader counterparts for near term gains, may need to undertake subtle firms of activism toward both their own company-stock interests and toward government.
Ordinarily, when the economic transmission mechanism is running smoothly and top-down (PESTEL) and bottom-up (accounting) evaluations can be made the 'efficient markets' theory has legitimacy. But today we still sit within an uncertain period, especially so given that much of the banking write-downs reportedly necessary have not taken place and so fundamentally undermines sound long-term value-creation.
The western economic engine, whilst previously saved from totally stalling, still needs attention and full comprehension of the problem and its solution. The recent rally we've could well be the result of over-charged optimism, just as a stalling engine can experience a temporary power surge from erroneous air being sucked-into the manifold from a vacuum leak. Hope/sentiment is that vacuum, and the fortuitous Q2 earnings results that erroneous rush of air.
Yet the 10 day rally period seen across US, Euro and Asia to date sits within the broader context of liquidity constraint – thus trader (not necessarily purist investor) behavior seems to be charging the markets; jumping on any positive signal - no matter how thin – and trading sentiment and volatility instead of fundamentals. Thus we find ourselves in a period of trader vs investor schism.
Of course behind this dynamic is the fact that cash-conscious publicly traded companies on every western exchange are desperate to be seen as investor picks; thereby able to leverage their improved MarketCap to draw financing from either directly off the balance sheet or able to better bargain with bank or bond lenders. All obviously in order to improve cash-flow conditions, working capital and so ease operating pressures both internally and on either side of their creditor-debtor chain.
Recent press has been full of the 'good-news' stories highlighting the day after day upward trending, the 8-month high of the S&P500 and analyst-beating Q2 earnings; from everyone from across the industrial board, from Coca-Cola in consumables, to e-bay in retailing, to Caterpillar in capital goods, to Xerox in IT, to Merck & Bristol-Meyers & Wyeth in pharmaceuticals, and of course (as expected) the more than buoyant results from the more sound “good” financial such as Goldman Sachs and JP Morgan, and even heavily reduced but still positive results from others like Amex.
In Autos, Hyundai as expected performed well making hay domestically (p 15% at home) and leveraging customer attraction efforts in North America at the expense of GM, Chrysler and even Toyota during this tumultuous period; also gaining from the FX effect of a weak Won. And Ford beat analyst expectations with lower than forecast losses, so demonstrating the combined effects of of internal turnaround progress, the “cash for clunkers” programme and migrational US market assistance.
Fairing less well the likes of McDonalds, UPS,Eastman Chemical, EuroTunnel, NCR, Ericssonn, Microsoft, Amazon & Hynix Semiconductor; the last of these tech and cyber-space businesses highlighting that IT and web2.0 have not been as immune as previously thought.
So a mixed bag of results. But what really lays behind the good news stories? Is there substance or are western markets creating a momentary “over-exuberance” primarily via traders and the positive overnight effect of the west-east regions?
Whilst many results have beaten gloomy analyst predictions, and are of course sector influenced (eg the 'recessionary comfort food' factor of Hershey's or the 'global stimulus gain' of Caterpillar Inc), the broad reality is surely that there is a 'counter-point-effect' taking place between continued downbeat macro-fundamental measures (ie those in recent US unemployment and UK GDP retraction) and the ability of corporate management to both take drastic restructuring steps and legitimately re-orientate accounting procedure to boost quarterly results. These could be deferring capital investment, changing inventory values via switching between FIFO to LIFO (especially under today's deflationary times), delaying supplier payments, use of 'extra-ordinaries' eg digging into the provision pot, altering capital goods' depreciation or maintaining old/better asset valuations. The options are varied and many, and during such pressured times firms are undoubtedly re-discovering such pain-relieving financial-engineering tactics.
But it must be said that investors are looking well beyond the top and bottom-line figures, just as CFA's and forensic accountants are well versed in reading the subtleties of accounts so investors are increasingly looking for YoY and QoQ like for like readability, simplicity and general transparency. The best of corporations have realised this and have over the last year or so become more detailed in their reporting, conveying more of their forward-looking business strategies when appropriate can even gain investor credibility by reducing dividends or indeed giving non-payment to demonstrate their financial prudence.
Thus the Q2 season seems marked by CEO's and CFO's continued positioning “between the devil and the deep blue sea”. Whilst the market will trade on transient good news and traders will seek to effectively arbitrage sentiment and trading volumes/patterns the longer-term independent investor must see past the white-noise of volatility and much of the rhetoric from media 'experts' and talking heads who are keen to talk-up their own holdings.
Given western economy realities the world is looking for a rebound in BRIC regions to pull the west from its mire, led by export driven western companies. These for the time being relate to infrastructure and associated sectors (eg mining, commodities and steel-processing and IT hardware and systems) and the push for further globalised (and consolidated) agriculture in China, Asia & Africa. In the medium term select western goods should gain traction again as Asian consumers loosen their discretionary spend wallets.
But it must be stated that China et al obviously seek greater gain from their rebound given their foreign reserve currency holdings and desire to own a greater portion of the global value chain, especially in natural resources, their inbound transportation and outbound transportation of export goods. For hard-pressed western companies and governments who want to ride the Chinese rebound to provide domestic commercial growth, an expanding money supply and returned consumer spending to buoy western economies that will be a hard pill to swallow.
The threat of implicit protectionism has been rising via subtle trade policy changes both in the west and Asia, but for the sake of all concerned this must be avoided. Ironically, given what seems a very deflated state of the western auto-industry, it can continue to provide an inspirational vehicle for open door trade policies and so improve international diplomacy. [NB, even if the Opel-BAIC deal looks doomed due to both German domestic political issues and the reality of BAIC trying to amalgamate the 2 very different enterprises].
Western markets need more than the present over-reaction to less than bad news. Western companies need demand pull from BRIC nations to kick-start their own corporate growth ambitions and so domestic local and national economy fortunes.
Thus the investment community whilst possibly copying their trader counterparts for near term gains, may need to undertake subtle firms of activism toward both their own company-stock interests and toward government.
Ordinarily, when the economic transmission mechanism is running smoothly and top-down (PESTEL) and bottom-up (accounting) evaluations can be made the 'efficient markets' theory has legitimacy. But today we still sit within an uncertain period, especially so given that much of the banking write-downs reportedly necessary have not taken place and so fundamentally undermines sound long-term value-creation.
The western economic engine, whilst previously saved from totally stalling, still needs attention and full comprehension of the problem and its solution. The recent rally we've could well be the result of over-charged optimism, just as a stalling engine can experience a temporary power surge from erroneous air being sucked-into the manifold from a vacuum leak. Hope/sentiment is that vacuum, and the fortuitous Q2 earnings results that erroneous rush of air.
Tuesday, 21 July 2009
PESTEL Trends – the US Future – “Fly-Drive Me to the Moon”?
We live in a period of massive innovation demand. Most notably clean-tech related from a grand political CO2 agenda as a 'social-good' for the masses, and from the individual's perspective ever increasing expectations towards 24/7 communications and ethically responsible mobility. Such trends have been building for some years, different ethical factions of society promoting lifestyle alternatives and choices derived from personal energy responsibility. From cyber-commuting to walking and cycling to the use of (literally) less carbon exhaustive vehicles – whether ICE powered, hybrid-drive or full EV based.
Historically technical progress has been achieved and trickled-down to commercial enterprise and so mass consumption from ambitious, hi-tech endeavours. Efforts that were largely state sponsored, combining (additional resource) exploration with the need for defending ever geographically increasing national interests. Examples span from Pheonician & Greek times scouting African and Persian coastal waters, latterly the Scandinavian and Spanish cross-Atlantic traverses in search of the riches of the New World, right-up to JFK's promise to land a man on the moon; which would demonstrate the American century and provide a strategic defence advantage in the face of a then cold war.
With exploration came the pushing of natural boundaries, the overcoming of these challenges served scientific enlightenment with new knowledge and thus synthesised innovation: from the creation of the Trireme in 500 BC, the honed development of the Galleon & Caravel in the 16th century to the breathtaking achievement that was the Apollo space-craft. The 40th year of the moon-landings is of course now upon us, and although it has never left the background of the popular consciousness, the anniversary is all the more prescient given America's renewed vow to re-visit our lunar satellite and possibly reach further beyond into the solar system. However, the down-to-earth problems of a negative 'over-reach' in short & mid-term economic budget deficit & PSBR, added to the growing costly domestic challenges of rising unemployment costs and health reform costs means that galactic grand schemes today appear a long-way off.
However, thankfully the spirit of man – even the singular man – is indomitable; so where there is a will there is a way.
Given this ever-lasting edict, it is prescient that 40 years on the US should gather the former knowledge gained all those years ago, combine it with latter-day learning, review the 'pure' and 'applied' technical research and create industrial policy development paths to independently self-propel into the future in its chosen direction. For man's spiritual growth and the nation's economic growth.
Space and military R&D has provided various commercial applications over the years, primarily in the computing, communications, energy storage and materials realms - the latter toward extreme environment alloys & ceramic compounds. Typically work is initially maintained in the public-realm due to the vagaries of tech-transfer (re)development timetables and indefinite project costs. Thus unsurprisingly advanced materials and processes must be largely subsidised and ammortised by the state in military, medical and university research applications – themselves expanding R&D knowledge – before solutions can be practicably targeted at and adopted by the commercial world.
The specific gestation and incubation period and locations vary depending upon the political, social, and commercial context, but the role of PPFI (Public-Private Funding Initiatives) ever more present to encourage a smoother transition from state to commercial worlds and, as we see with QinetiQ in the UK, a growing appreciation that public capital markets can be leveraged to assist both R&D agencies and associated in-house projects. Effectively treating hi-tech engineering R&D in the same manner as Pharmaceutical. This in turn providing new funding methods based on IPR rights and future income streams. (NB the speedy return to this alternative funding model by investors and financial agents as a partial substitute to the ongoing capital accessing problem companies are experiencing).
Very broadly and basically, this is the financing context to the typical hi-tech innovation curve, though as stated much depends on the myriad of variables [NB see the myriad of 'Innovation-Push' & 'Adopter-Pull' theories available].
Today we witness the auto-sector slowly fragmenting and slowly re-forming as companies old and new diminish and grow (eg GM vs BYD) and the very philosophy of personal mobility is put under the social spotlight with emergent reduced CO2 solutions being offered in powertrains, structures and C3 (central command control) telematics. Thus there is a juxtaposition of evolutionary development of the ICE engine and conventional vehicle components versus (series or parallel) hybrid and electric powertrains which given their respective packaging and range issues pose concomitant questions about suitable vehicle structures.
[NB. Today, it seems Toyota is by far ahead on petrol-electric hybrids given the Prius-effect, and now PSA gains credibility with a publicised low cost diesel-hybrid switchable 4WD drive system as seen on the 3008].
But whilst the tech-transfer of space-specific knowledge in structures, heat management and energy storage naturally aligns to its Aeronautical counterpart, only the structures element seems to have trickled-down to land craft, and that primarily via the performance necessity (and budgets) of high-level motor-sport. Given the conventional funding context (previously described) this is the normal route. But whilst it provides a pathway of sorts, technology realistically may not come to the masses – the average vehicle buyer – for decades if at all. The realities of commercial adoption play a major role for innovation spread given that private commercial enterprise seeks rightly to inherently minimise risk and maximise profits.
[NB the R&D vs Risk assumptions vary greatly depending on industrial sector in question and so the relatively low cost innovation of say 'quick-reaction' computer software or consumer electronics hardware is in stark contrast to automotive given their very different R&D procedures, product platform bases, business cultures etc].
It is well known that certain entrepreneurs often from the IT sector are trying to re-orientate the automotive world, with what are a wide spectrum range of product types, mobility-services and business model foundations; with variable credibility and variable eventual success.
The electric vehicle (both ZEV and LEV) of course is one genre that has attracted much exploration and attention, ranging from the marketing of Chinese made electric bicycles, scooters and 3-wheeler commercial/passenger vehicles to new start-up companies at either end of the ambition spectrum – from homegrown e-motorcycles to adapted 'integrated e-systems' vehicles using a COTS vehicle basis to JV ventures that combine volume vehicle and battery manufacturers set within state sponsored new infrastructure agreements.
Many appreciate that the electric vehicle trend has a 'back-to-the-future' aspect, those start-ups trying to leverage the learning accumulated 100 years ago, with names like Detroit Electric and so many others. And so it will be that this burgeoning industry must also look back to only 40 years ago, when perhaps the most advanced electric vehicle was constructed by GM-Delco – the Lunar Roving Vehicle.
Contracted-out by NASA-Marshall to Boeing Aerospace, and sub-contracted to General Motors, the LRV was perhaps the most intellectually intensive EV ever built, demanding engineering solutions that pushed structural, drive-train and energy storage envelopes. It was a (de)foldable lightweight skeletal structure appointed with 4 in-hub motors for 4WD & 4WS (10 foot turning circle), communications equipment and electrical output sockets to power on-board and external ancillary equipment. It had a mass of 209 kg but offered a payload of 490 kg and was 10 feet long x 6 feet wide (ie equal to the length of the1959 Mini). Power was provided by two 36-volt silver-zinc potassium hydroxide non-rechargable batteries with a capacity of 121 A·h. These were used to power the drive and steering motors and also a 36 volt utility outlet mounted on front of the LRV to power the communications relay unit or the TV camera.
Interestingly, the silver-zinc battery chemistry used for LRV has 3 significant advantages over lithium ion It is safer because it lacks the volatile cathode makeup that leads to a thermal runaway, it’s very green since both silver and zinc are non-toxic as well as recyclable, and, perhaps most importantly, it packs 40% more energy for a given volume than lithium ion. Silver-zinc has a long history, used by the military and aerospace where programs could afford to pay for the higher-priced silver in exchange for increased energy density. But of course cost is a prime commercial factor, hence the automotive R&D focus on lithium-ion.
[NB. Even so just as L-ion is being developed to reduce its performance weaknesses, intensive focus should continue to be applied to silver-zinc's structural configurations and re-chargability – as the like of Intel Capital is doing via Zpower].
40 years on and that vehicle and it successors for 2020 exploration (with undoubtedly extended ranges) could be said to offer a possible general specification for dedicated lower speed ZEV urban vehicles of the near term. Today's electric cars are for the most part either adapted from mainstream vehicles or made to try and look like conventional cars so as to be normal enough for marketplace acceptance.
This practice is typical and understandable: if we look back in history, the first cars whether gasoline or electric were styled as horseless carriages.
However, attempting to effectively retro-fit a 'new/alternative' technology into the perceptual envelope of conventional cars is both technically sub-optimal (esp regards structural mass vs range issues) and essentially disingenuous, since by doing so it effectively and unfortuitously encourages the general public to compare apples against oranges dressed as apples. Moreover, electric vehicle companies have the headwind of having to design these oranges to qualify within the legislative realms (esp crash safety) of these apples (conventional cars) unless specific regional legislature has been developed to allow these low speed vehicles onto limited speedway roads.
This has of course happened in certain areas of the USA, but even so there is an obvious social usage chasm between the car and (golf-cart derived) NEV – the latter seen as little more than a joke by many, something belonging to the social fringes of golf-resorts, retirement villages & locales and (mocked) university campus officials. Although sportscar related efforts are trying to change the perception of EVs, there is presently a world of difference between a prototype Mercedes SLS e-Drive (incidentally using hub-motors that are probably sourced from F1 development) and what is being offered as a suitable commuter / shopping vehicle.
Hybrids like Prius and Insight of course fill that middle ground of acceptability, but no EV – even the very limited edition and costly Smart EV & Mitsubushi i-Miev - realistically fulfils the cost/benefit consumer gap. [NB the BMW Mini EV and FIAT 500 EV are still largely R&D and PR exercises given their packaging deficiencies and done largely extol the virtues of BMW & FIAT mainstream eco-tech efforts like 'start-stop' and 'brake re-generation'].
If new-era nuclear-power electricity generation - presently the only feasible clean energy source - is to feed the legions of EVs often described by prompted forecast there is a need for government, enterprise and consumers to re-consider the specific uses and aesthetic forms of alternative types of vehicle – their function derived from their purpose – just as the LRV did. Just as a tractor or HGV / semi-trailer does. Just as a bicycle, boat or airplane does. Just as an Arab stallion or a Clydesdale mare do; respectively suited to racing and ploughing. The case to be set forward of “horses for courses”.
But within this context, enterprise must also appreciate that the public at large views limited capability vehicles differently from the broad capability car or light-truck. And so as long as the direct comparison remains sets a very different price on that capability...one that the industry will not like but must consider when formulating real-world business models that must comprise everything from the cost of production to the life-service of a vehicle.
And to that 'perceptional' end, Obama's words about re-conquering space and the simultaneous desire to protect our planet from our own ravages sets the context to re-orientate the perception of the public at large and the vehicle buying consumer. But it is not an easy task, as previous similar failed efforts with heavily sunken finances litter automotive history.
Perhaps the last words of this short essay are best heard from Charles Lindbergh, the renowned aviator, NACA (later NASA) adviser, son of Detroit and little known 'green guardian', who through his own perseverance of Spirit (of St Louis) promoted transportation innovation:
“All the achievements of mankind have value only to the extent that they preserve and improve the quality of life”....”the human future depends on our ability to combine the the knowledge of science and the wisdom of the wilderness”.
Such words are the philosophical touch-stone for future eco-tech mobility solutions, much of which will depend on an improved cross-fertilisation of ideas from a myriad of different scientific & industrial sectors and sources.
Historically technical progress has been achieved and trickled-down to commercial enterprise and so mass consumption from ambitious, hi-tech endeavours. Efforts that were largely state sponsored, combining (additional resource) exploration with the need for defending ever geographically increasing national interests. Examples span from Pheonician & Greek times scouting African and Persian coastal waters, latterly the Scandinavian and Spanish cross-Atlantic traverses in search of the riches of the New World, right-up to JFK's promise to land a man on the moon; which would demonstrate the American century and provide a strategic defence advantage in the face of a then cold war.
With exploration came the pushing of natural boundaries, the overcoming of these challenges served scientific enlightenment with new knowledge and thus synthesised innovation: from the creation of the Trireme in 500 BC, the honed development of the Galleon & Caravel in the 16th century to the breathtaking achievement that was the Apollo space-craft. The 40th year of the moon-landings is of course now upon us, and although it has never left the background of the popular consciousness, the anniversary is all the more prescient given America's renewed vow to re-visit our lunar satellite and possibly reach further beyond into the solar system. However, the down-to-earth problems of a negative 'over-reach' in short & mid-term economic budget deficit & PSBR, added to the growing costly domestic challenges of rising unemployment costs and health reform costs means that galactic grand schemes today appear a long-way off.
However, thankfully the spirit of man – even the singular man – is indomitable; so where there is a will there is a way.
Given this ever-lasting edict, it is prescient that 40 years on the US should gather the former knowledge gained all those years ago, combine it with latter-day learning, review the 'pure' and 'applied' technical research and create industrial policy development paths to independently self-propel into the future in its chosen direction. For man's spiritual growth and the nation's economic growth.
Space and military R&D has provided various commercial applications over the years, primarily in the computing, communications, energy storage and materials realms - the latter toward extreme environment alloys & ceramic compounds. Typically work is initially maintained in the public-realm due to the vagaries of tech-transfer (re)development timetables and indefinite project costs. Thus unsurprisingly advanced materials and processes must be largely subsidised and ammortised by the state in military, medical and university research applications – themselves expanding R&D knowledge – before solutions can be practicably targeted at and adopted by the commercial world.
The specific gestation and incubation period and locations vary depending upon the political, social, and commercial context, but the role of PPFI (Public-Private Funding Initiatives) ever more present to encourage a smoother transition from state to commercial worlds and, as we see with QinetiQ in the UK, a growing appreciation that public capital markets can be leveraged to assist both R&D agencies and associated in-house projects. Effectively treating hi-tech engineering R&D in the same manner as Pharmaceutical. This in turn providing new funding methods based on IPR rights and future income streams. (NB the speedy return to this alternative funding model by investors and financial agents as a partial substitute to the ongoing capital accessing problem companies are experiencing).
Very broadly and basically, this is the financing context to the typical hi-tech innovation curve, though as stated much depends on the myriad of variables [NB see the myriad of 'Innovation-Push' & 'Adopter-Pull' theories available].
Today we witness the auto-sector slowly fragmenting and slowly re-forming as companies old and new diminish and grow (eg GM vs BYD) and the very philosophy of personal mobility is put under the social spotlight with emergent reduced CO2 solutions being offered in powertrains, structures and C3 (central command control) telematics. Thus there is a juxtaposition of evolutionary development of the ICE engine and conventional vehicle components versus (series or parallel) hybrid and electric powertrains which given their respective packaging and range issues pose concomitant questions about suitable vehicle structures.
[NB. Today, it seems Toyota is by far ahead on petrol-electric hybrids given the Prius-effect, and now PSA gains credibility with a publicised low cost diesel-hybrid switchable 4WD drive system as seen on the 3008].
But whilst the tech-transfer of space-specific knowledge in structures, heat management and energy storage naturally aligns to its Aeronautical counterpart, only the structures element seems to have trickled-down to land craft, and that primarily via the performance necessity (and budgets) of high-level motor-sport. Given the conventional funding context (previously described) this is the normal route. But whilst it provides a pathway of sorts, technology realistically may not come to the masses – the average vehicle buyer – for decades if at all. The realities of commercial adoption play a major role for innovation spread given that private commercial enterprise seeks rightly to inherently minimise risk and maximise profits.
[NB the R&D vs Risk assumptions vary greatly depending on industrial sector in question and so the relatively low cost innovation of say 'quick-reaction' computer software or consumer electronics hardware is in stark contrast to automotive given their very different R&D procedures, product platform bases, business cultures etc].
It is well known that certain entrepreneurs often from the IT sector are trying to re-orientate the automotive world, with what are a wide spectrum range of product types, mobility-services and business model foundations; with variable credibility and variable eventual success.
The electric vehicle (both ZEV and LEV) of course is one genre that has attracted much exploration and attention, ranging from the marketing of Chinese made electric bicycles, scooters and 3-wheeler commercial/passenger vehicles to new start-up companies at either end of the ambition spectrum – from homegrown e-motorcycles to adapted 'integrated e-systems' vehicles using a COTS vehicle basis to JV ventures that combine volume vehicle and battery manufacturers set within state sponsored new infrastructure agreements.
Many appreciate that the electric vehicle trend has a 'back-to-the-future' aspect, those start-ups trying to leverage the learning accumulated 100 years ago, with names like Detroit Electric and so many others. And so it will be that this burgeoning industry must also look back to only 40 years ago, when perhaps the most advanced electric vehicle was constructed by GM-Delco – the Lunar Roving Vehicle.
Contracted-out by NASA-Marshall to Boeing Aerospace, and sub-contracted to General Motors, the LRV was perhaps the most intellectually intensive EV ever built, demanding engineering solutions that pushed structural, drive-train and energy storage envelopes. It was a (de)foldable lightweight skeletal structure appointed with 4 in-hub motors for 4WD & 4WS (10 foot turning circle), communications equipment and electrical output sockets to power on-board and external ancillary equipment. It had a mass of 209 kg but offered a payload of 490 kg and was 10 feet long x 6 feet wide (ie equal to the length of the1959 Mini). Power was provided by two 36-volt silver-zinc potassium hydroxide non-rechargable batteries with a capacity of 121 A·h. These were used to power the drive and steering motors and also a 36 volt utility outlet mounted on front of the LRV to power the communications relay unit or the TV camera.
Interestingly, the silver-zinc battery chemistry used for LRV has 3 significant advantages over lithium ion It is safer because it lacks the volatile cathode makeup that leads to a thermal runaway, it’s very green since both silver and zinc are non-toxic as well as recyclable, and, perhaps most importantly, it packs 40% more energy for a given volume than lithium ion. Silver-zinc has a long history, used by the military and aerospace where programs could afford to pay for the higher-priced silver in exchange for increased energy density. But of course cost is a prime commercial factor, hence the automotive R&D focus on lithium-ion.
[NB. Even so just as L-ion is being developed to reduce its performance weaknesses, intensive focus should continue to be applied to silver-zinc's structural configurations and re-chargability – as the like of Intel Capital is doing via Zpower].
40 years on and that vehicle and it successors for 2020 exploration (with undoubtedly extended ranges) could be said to offer a possible general specification for dedicated lower speed ZEV urban vehicles of the near term. Today's electric cars are for the most part either adapted from mainstream vehicles or made to try and look like conventional cars so as to be normal enough for marketplace acceptance.
This practice is typical and understandable: if we look back in history, the first cars whether gasoline or electric were styled as horseless carriages.
However, attempting to effectively retro-fit a 'new/alternative' technology into the perceptual envelope of conventional cars is both technically sub-optimal (esp regards structural mass vs range issues) and essentially disingenuous, since by doing so it effectively and unfortuitously encourages the general public to compare apples against oranges dressed as apples. Moreover, electric vehicle companies have the headwind of having to design these oranges to qualify within the legislative realms (esp crash safety) of these apples (conventional cars) unless specific regional legislature has been developed to allow these low speed vehicles onto limited speedway roads.
This has of course happened in certain areas of the USA, but even so there is an obvious social usage chasm between the car and (golf-cart derived) NEV – the latter seen as little more than a joke by many, something belonging to the social fringes of golf-resorts, retirement villages & locales and (mocked) university campus officials. Although sportscar related efforts are trying to change the perception of EVs, there is presently a world of difference between a prototype Mercedes SLS e-Drive (incidentally using hub-motors that are probably sourced from F1 development) and what is being offered as a suitable commuter / shopping vehicle.
Hybrids like Prius and Insight of course fill that middle ground of acceptability, but no EV – even the very limited edition and costly Smart EV & Mitsubushi i-Miev - realistically fulfils the cost/benefit consumer gap. [NB the BMW Mini EV and FIAT 500 EV are still largely R&D and PR exercises given their packaging deficiencies and done largely extol the virtues of BMW & FIAT mainstream eco-tech efforts like 'start-stop' and 'brake re-generation'].
If new-era nuclear-power electricity generation - presently the only feasible clean energy source - is to feed the legions of EVs often described by prompted forecast there is a need for government, enterprise and consumers to re-consider the specific uses and aesthetic forms of alternative types of vehicle – their function derived from their purpose – just as the LRV did. Just as a tractor or HGV / semi-trailer does. Just as a bicycle, boat or airplane does. Just as an Arab stallion or a Clydesdale mare do; respectively suited to racing and ploughing. The case to be set forward of “horses for courses”.
But within this context, enterprise must also appreciate that the public at large views limited capability vehicles differently from the broad capability car or light-truck. And so as long as the direct comparison remains sets a very different price on that capability...one that the industry will not like but must consider when formulating real-world business models that must comprise everything from the cost of production to the life-service of a vehicle.
And to that 'perceptional' end, Obama's words about re-conquering space and the simultaneous desire to protect our planet from our own ravages sets the context to re-orientate the perception of the public at large and the vehicle buying consumer. But it is not an easy task, as previous similar failed efforts with heavily sunken finances litter automotive history.
Perhaps the last words of this short essay are best heard from Charles Lindbergh, the renowned aviator, NACA (later NASA) adviser, son of Detroit and little known 'green guardian', who through his own perseverance of Spirit (of St Louis) promoted transportation innovation:
“All the achievements of mankind have value only to the extent that they preserve and improve the quality of life”....”the human future depends on our ability to combine the the knowledge of science and the wisdom of the wilderness”.
Such words are the philosophical touch-stone for future eco-tech mobility solutions, much of which will depend on an improved cross-fertilisation of ideas from a myriad of different scientific & industrial sectors and sources.
Saturday, 11 July 2009
Company Focus – 'New' General Motors Company – All Change at the RenCen and Around the Globe.
General Motors has emerged from bankruptcy proceedings in a record time of 39 days -thanks to the 363 procedure - astounding investors, industry executives and indeed re-structuring lawyers given the minimum of 90 days expected. Justifiably the 'old' bond-holders will continue to feel marginalised given the 60.8% stake now owned by Washington – costing approximately $1bn for each 1.22% - the 17.5% by the UAW, 11.7% by the Canadian Government and remaining 10% left to 'old GM' MLC (Motors Liquidation Company) and by virtue its equity and debt-holders.
[NB. The 'old' GM free-float rallied on the 'exit' news from a fluctuating range of $0.35 to a close of $1.15 on Friday (10.07.09) giving it a MktCap of $702.25m].
Thus the Board's remit is to both create a vision for tomorrow and simultaneously effectively dismantle and divest 'Liquidation Motors' of yesteryear. Whilst Whitacre, Henderson and Lutz perform much of the former - including a new e-bay based venture, the latter will probably be left to Whitacre, Isdell, Kresa, Laskawy & Kidder working with the investment banking community. The search to find suitable domestic and foreign trade and PE customers continues for the divested brands, product inventories, plants, tooling and land assets. Their job to create compelling 'Blue-Books' possibly for complete divisions but more probably on a part-by-part basis, the latter with the potential to release greater capital value generated by a wider audience.
Thus today even the New GM appears a world away from the long-term vision of 'General Mobility' – with concomitant new vehicle modes and business models - that it seeks under Whitacre. Many, including ourselves, will question the efficacy of the lightening-quick bankruptcy exit, but it must be assumed that although not formally 'pre-packaged' per se, the resultant animal is close in shape to the desired outcome by both Washington and GM itself.
But whilst Henderson et al maintain the GM publicity machine of 'customer focus' and 'star products' that buoys consumer – indeed American – confidence, others from Wall St, the City, Moscow's Presnensky, HK's Choong Wan, Seoul's Cheonggyecheon, Shanghai's Lujiazui & Beijing's own financial district will all have representatives clammering over GM's remaining 'toxic assets'. Assets which if utilised by others with low cost structures should have surprising inherent value. Penske's bid for Saturn and BAIC's bid for Opel should start a stampede.
Thus although the Washington – Beijing relationship has been tetchy in the recent past, this opportunity for bi-lateral and global trade which also aids the fragile US$-Renmimbi balance should be welcomed, as indeed will Washington glad to see immediate returns.
[NB. The 'old' GM free-float rallied on the 'exit' news from a fluctuating range of $0.35 to a close of $1.15 on Friday (10.07.09) giving it a MktCap of $702.25m].
In another potentially conspired twist of fate, that will cause more old bond-holder consternation, GM has along with Chrysler & Nissan North America agreed to loan Ford monies that will be passed-on to the quasi-dependent but bankrupt Visteon (itself filing 28.05.09). That occurrence obviously entwines the US auto-industry and we suspect was done so at the behest of Steven Rattner's Auto Task Force Team, so as to ensure Detroit helps itself by creating a collaborative culture rather than the historically normal competitive one – a case of value creation rather than value destruction. This of course stabilizes Visteon and allows for the precedent that a greater emphasis on 'common systems engineering' will prevail which will reduce development costs, inventory count, manufacturing overheads & variables, and logistics costs.
Thus at last Detroit is creating a very loose kind of chaebol system, that being the crucial basis of previous Japanese and S. Korean operating methods that both reduced costs and allowed for quicker new model development programmes. This probably an outcome of the efforts by Senator Bob Corker that created the covenant-like 'bail conditions' for GM.
Beneath the rebirth spin, the question must be what does GM realistically have that can transpose the PR into successful achievement? Viewing from afar, it has a crop of 30-something/40-something managers who have been essentially elevated by this historic occurrence. No doubt Henderson et al will be pep-talking those people: paralleling their 'opportunity' to that of John DeLorean's rapid rise. So the chance to re-make GM, now focused upon a slimmer brand portfolio of Chevrolet, Buick, Cadillac and GMC, with much needed debt-reduction boosting the balance sheet massively
[NB. Debt down from $176bn to $48bn according to the WSJ vs the FT's report of $54.4bn to $17.3bn. GM itself states it as $11bn excluding $9bn of preferred stock and could - ie probably will - alter under new accounting terms].
Given the new heavy marketing stance, Bob Lutz is now saying how he is really a marketing man at heart, having 'illegally' spent the majority of his career in product strategy and development. All part of the usual staged corporate rally cry that Detroit has mustered at such times to bolster belief both internally and critically externally.
So assuming that the operational management has been appropriately cut-to-shape and does have the experience and competence, what of the new Board? An entity which must combine the balancing act of creating strategic futures will the task of cherry-picking the recommended operational initiatives? The WSJ yesterday reported what much of the new board will look like, those members who are departing and those to take their new seats.Under new Chairman Ed Whitacre, Henderson carries on his good work as CEO including the direct responsibility for GMNA, [Nick Reilly now with International Ops (GMIO)] whilst Bob Lutz takes a Vice-Chair post probably charged with running the smaller Auto-Strategy Board & Auto-Product Board, and critically building the confidence of the remaining US dealer-base and pepping-up critical BRIC+ regional business divisions. Other names come and go.
As mentioned in the previous post, Stephen Girsky plays a pivotal role given his ability to see both side of the management-ownership equation. Although former Kodak CEO George Fisher departs, six current Board Execs remain including: former Coca-Cola Chairman Neville Isdell, ex Northrup Grumman CEO Kent Kresa ex E&Y Chairman Phil Laskawy. The appointment by the Obama administration of former investment banker Robert Kidder to GM aswell as Chrysler demonstrates the ideal of sector inter-connectedness that Washington seeks.
Thus the Board's remit is to both create a vision for tomorrow and simultaneously effectively dismantle and divest 'Liquidation Motors' of yesteryear. Whilst Whitacre, Henderson and Lutz perform much of the former - including a new e-bay based venture, the latter will probably be left to Whitacre, Isdell, Kresa, Laskawy & Kidder working with the investment banking community. The search to find suitable domestic and foreign trade and PE customers continues for the divested brands, product inventories, plants, tooling and land assets. Their job to create compelling 'Blue-Books' possibly for complete divisions but more probably on a part-by-part basis, the latter with the potential to release greater capital value generated by a wider audience.
Thus today even the New GM appears a world away from the long-term vision of 'General Mobility' – with concomitant new vehicle modes and business models - that it seeks under Whitacre. Many, including ourselves, will question the efficacy of the lightening-quick bankruptcy exit, but it must be assumed that although not formally 'pre-packaged' per se, the resultant animal is close in shape to the desired outcome by both Washington and GM itself.
But whilst Henderson et al maintain the GM publicity machine of 'customer focus' and 'star products' that buoys consumer – indeed American – confidence, others from Wall St, the City, Moscow's Presnensky, HK's Choong Wan, Seoul's Cheonggyecheon, Shanghai's Lujiazui & Beijing's own financial district will all have representatives clammering over GM's remaining 'toxic assets'. Assets which if utilised by others with low cost structures should have surprising inherent value. Penske's bid for Saturn and BAIC's bid for Opel should start a stampede.
Thus although the Washington – Beijing relationship has been tetchy in the recent past, this opportunity for bi-lateral and global trade which also aids the fragile US$-Renmimbi balance should be welcomed, as indeed will Washington glad to see immediate returns.
Thus it should not be such a wonder that Motors Liquidation Company has attracted so much attention, much of it speculative in the short-term but arguably with such international interest providing longer-term sustainability. Especially so if seperated-off as a strategic holding company for unhurried investors. Thus MLC may have firmer grounds for market confidence than perhaps many presently think.
Sometimes it pays better to be rationally contrarian...to 'think small'.
Monday, 6 July 2009
Macro-Level Trends – 'New' General Motor Co – Stars & Stripes Industrial Policy-Making Knotted by Orion's Bow-Tie
A CEO's remit is to harness the economic conditions of the day to maximise the investment, growth and returns potential of his/her organisation. Even if that organisation be in a rather unconventional state of play (ie Chapter 11) and under alternative effective ownership (ie Government & UAW) in what is supposed to be a capitalist society that CEO must make coherent rational choices, especially so if s/he seeks to create long-term stability from what have been fragile foundations.
Thus few industry observers will fault Frederick Henderson for siting 'New' GM's proposed small car-plant in Orion Township – Michigan, given the state's contribution of $779m in tax-credits over the next 20 years, other local incentives totaling $102m and a federal pot of £130m for local worker training. But the present realpolitik, which obviously includes Washington's $50bn+ of bail-out financing, wasn't lost on Orion's peer bid-competitors in Spring Hill, Tennessee and Janesville, Wisconsin. The Republican representatives of those locales reportedly concerned by what they see as a misrepresentation of a winning criteria based on CSR attributes instead of pure business-case fundamentals. [NB. The reported criteria spans a diverse range of issues both CSR and purely commercial, thus it is suggested that it was infact the 'spun' PR reporting regards 'eco' & 'community' that provided the fuel for the fire].
However, investment-auto-motives believes that in the interest of pure economic theorum, that it must be stated that the Michigan siting of the small-car plant, although in the short-term an attractive package, is still highly questionable. That is unless 'New' GM can somehow radically change the economics of the traditional US car-manufacturing business which is inherently tied to incompatible global cost-competitiveness throughout the US-centric value-chained.
But with new Board under new Chairman (ex AT&T) Edward E Whitacre Jnr, consisting of primarily government overseers & UAW figures there is a heavy reliance on the know-how of 'old-guard' GM management that (with all due respect) are not known for radical auto engineering and production approaches. Thus the Board with all the best intentions appears caught between a business case that must parallel car-market reality (at 9.9m-10.1m SAAR) that necessitates lowest-cost approaches, and the inherent external & internal pressures of what is now effectively a state-run enterprise. Whilst Whitacre will have the strategic perspective of transforming New GM into something with 'Telco' form (ie product service contracts and bolt-on packages) the only real informed Board-member is Stephen Girsky (now a UAW representive) from the Rattner Task Force; given that he sat alongside Wagoner in years gone by, and best understands the shape and form of the global company. Given his dual-role experiences, he is the real power-player in the broad schema.
As stated the realpolitik cannot be under-estimated, but the fact that New GM proposes to manufacture sub-compact (B-class) segment vehicles in Michigan still seems concerning. Even given the new lower Tier 2 UAW wage-rates ($14-16.23 per hour) that arguably compete with Southern states' labour rates they do not compete with Asian rates. Nor is there the flexibility to compete in the future as the US Administration seeks to raise the minimum wage from $6.55 to $7.25; that 70c raise will in turn indubitably push 'semi-skilled' rates up by $1 or more, so widening the cost-gap between Michigan, its southern counterparts, and particularly Mexico and BRIC regions which are 'enjoying' deflationary pressures to improve their auto-industry cost structures.
[NB. It was for very good reasons that Chrysler decided to manufacture its proposed Hornet sub-compact in China with its JV partner Chery – now possibly TATA-Chery given FIAT's acquisition].
New GM's small car should look something akin to the 'BEAT' concept which won an on-line potential-buyers poll in 2007 is a segment-adjusted interpretation of the new-age Chevrolet aesthetic (as also seen with Volt) due for production release in 2010. That B-class platform named 'Gamma2' has been developed by GMDAT in Inchen, S. Korea so much of the development costs will have been born by the relatively buoyant Asian subsidiary. Thus we suspect that the programme cost has been divorced from the (heavily subsidised) production cost, and much of the high-value systems (esp electronics) will be sourced from S. Korea, so therefore producing a 'feasible' business-case for Orion's small-car on paper.
In essence, Orion is acting in the same manner as the notional transplant production facility, ironically its new owner (the US Government) able to leverage both the reduced cost of overseas engineering development and exploit the deflationary pricing resultant from the re-structuring of weak chaebols ongoing in S. Korea and the FX rate fall of the Won vs Dollar.
(The irony of a present centre-left US administration benefiting from global capitalism is not lost! But of course the tenants of Adam Smith's 1776 ideology is about the exploitation of regional core competences...so all to the good).
However, the fact remains that even with such 'priced-in' costs that make the small-car programme apparently workable, it is the very basics of the US Administration's fiscal and monetary policies (ie heavy stimulus spending plans combined with M3's “Quantitative Easing” that threaten the mid-long-term viability of the BEAT/AVEO to New GM vs foreign manufacturer's such as Toyota, Hyundai within the US.
For, investment-auto-motives is bearish on the mid-term, believing that any apparent new growth will infact be little more than an illusionary mixture of a (possibly heavily) devalued Dollar combined with spiralling price inflation initially created by artificial wage-price adjustment. That perception of growth (primarily in observed data sets) will neither be true 'demand pull' nor 'productivity push', but a consequence of today's pump-priming actions, that in turn could well choke the US economy, and so set it for a dreaded invisible 'L-shaped' future.
If and when such a scenario plays out, New GM may endeavour to add margin to the small car programme by resorting to Buick, Cadillac and even possibly GMC branded variants that will try an d piggy-back the luxo-small car trend that appeared after the Merc A-Class, Brabus Smart and continues with the Aston Martin (Lagonda) Cygnet based on the Toyota iQ [see last posting]. (The Buick version would sit under or replace the Buick Sail in China, that car possibly brought to the US so expanding today's limited 3 car vehicle range; with also a mooted 'Wildcat Gran Sport' inspired coupe as a halo vehicle).
Thus we are back to a replay of the economic circumstances of the 1970s which in turn prompted the invention of mid-size Buicks and Cadillacs that assisted group revenue at the time, but helped to diminish the brand equity of both once illustrious marques. Of course GM must now pay as much, and realistically more, attention to China's marketplace, so the US will increasingly become second fiddle with S. America on the other side of the regional product strategy sandwich.
At that point, GM will once again need to re-create itself again as a 'Brand Broker' and that is when we'll see the legacy of Edward Whitacre Jnr via new business modelling
That work will need to happen asap for in the meantime, if our economic conjecture* proves correct, the New GM is yet another phase of what is a long journey of transformation.
Post Script
* Our fundamental yet academically undetailed economic conjecture parallels Prof Niall Ferguson's edict. In essence, that today's economic reality is best understood as a re-modeled hybrid construction of various past depression/heavy recession experiences. Thus is not a direct replay but involves different elements of various US (1930s/70s), European (1930s/70s), Japanese (1990s/2000s) and Asian (1990s) experiences and so requires a 'weighted basket' of countering policy reactions to suit.
Thus few industry observers will fault Frederick Henderson for siting 'New' GM's proposed small car-plant in Orion Township – Michigan, given the state's contribution of $779m in tax-credits over the next 20 years, other local incentives totaling $102m and a federal pot of £130m for local worker training. But the present realpolitik, which obviously includes Washington's $50bn+ of bail-out financing, wasn't lost on Orion's peer bid-competitors in Spring Hill, Tennessee and Janesville, Wisconsin. The Republican representatives of those locales reportedly concerned by what they see as a misrepresentation of a winning criteria based on CSR attributes instead of pure business-case fundamentals. [NB. The reported criteria spans a diverse range of issues both CSR and purely commercial, thus it is suggested that it was infact the 'spun' PR reporting regards 'eco' & 'community' that provided the fuel for the fire].
However, investment-auto-motives believes that in the interest of pure economic theorum, that it must be stated that the Michigan siting of the small-car plant, although in the short-term an attractive package, is still highly questionable. That is unless 'New' GM can somehow radically change the economics of the traditional US car-manufacturing business which is inherently tied to incompatible global cost-competitiveness throughout the US-centric value-chained.
But with new Board under new Chairman (ex AT&T) Edward E Whitacre Jnr, consisting of primarily government overseers & UAW figures there is a heavy reliance on the know-how of 'old-guard' GM management that (with all due respect) are not known for radical auto engineering and production approaches. Thus the Board with all the best intentions appears caught between a business case that must parallel car-market reality (at 9.9m-10.1m SAAR) that necessitates lowest-cost approaches, and the inherent external & internal pressures of what is now effectively a state-run enterprise. Whilst Whitacre will have the strategic perspective of transforming New GM into something with 'Telco' form (ie product service contracts and bolt-on packages) the only real informed Board-member is Stephen Girsky (now a UAW representive) from the Rattner Task Force; given that he sat alongside Wagoner in years gone by, and best understands the shape and form of the global company. Given his dual-role experiences, he is the real power-player in the broad schema.
As stated the realpolitik cannot be under-estimated, but the fact that New GM proposes to manufacture sub-compact (B-class) segment vehicles in Michigan still seems concerning. Even given the new lower Tier 2 UAW wage-rates ($14-16.23 per hour) that arguably compete with Southern states' labour rates they do not compete with Asian rates. Nor is there the flexibility to compete in the future as the US Administration seeks to raise the minimum wage from $6.55 to $7.25; that 70c raise will in turn indubitably push 'semi-skilled' rates up by $1 or more, so widening the cost-gap between Michigan, its southern counterparts, and particularly Mexico and BRIC regions which are 'enjoying' deflationary pressures to improve their auto-industry cost structures.
[NB. It was for very good reasons that Chrysler decided to manufacture its proposed Hornet sub-compact in China with its JV partner Chery – now possibly TATA-Chery given FIAT's acquisition].
New GM's small car should look something akin to the 'BEAT' concept which won an on-line potential-buyers poll in 2007 is a segment-adjusted interpretation of the new-age Chevrolet aesthetic (as also seen with Volt) due for production release in 2010. That B-class platform named 'Gamma2' has been developed by GMDAT in Inchen, S. Korea so much of the development costs will have been born by the relatively buoyant Asian subsidiary. Thus we suspect that the programme cost has been divorced from the (heavily subsidised) production cost, and much of the high-value systems (esp electronics) will be sourced from S. Korea, so therefore producing a 'feasible' business-case for Orion's small-car on paper.
In essence, Orion is acting in the same manner as the notional transplant production facility, ironically its new owner (the US Government) able to leverage both the reduced cost of overseas engineering development and exploit the deflationary pricing resultant from the re-structuring of weak chaebols ongoing in S. Korea and the FX rate fall of the Won vs Dollar.
(The irony of a present centre-left US administration benefiting from global capitalism is not lost! But of course the tenants of Adam Smith's 1776 ideology is about the exploitation of regional core competences...so all to the good).
However, the fact remains that even with such 'priced-in' costs that make the small-car programme apparently workable, it is the very basics of the US Administration's fiscal and monetary policies (ie heavy stimulus spending plans combined with M3's “Quantitative Easing” that threaten the mid-long-term viability of the BEAT/AVEO to New GM vs foreign manufacturer's such as Toyota, Hyundai within the US.
For, investment-auto-motives is bearish on the mid-term, believing that any apparent new growth will infact be little more than an illusionary mixture of a (possibly heavily) devalued Dollar combined with spiralling price inflation initially created by artificial wage-price adjustment. That perception of growth (primarily in observed data sets) will neither be true 'demand pull' nor 'productivity push', but a consequence of today's pump-priming actions, that in turn could well choke the US economy, and so set it for a dreaded invisible 'L-shaped' future.
If and when such a scenario plays out, New GM may endeavour to add margin to the small car programme by resorting to Buick, Cadillac and even possibly GMC branded variants that will try an d piggy-back the luxo-small car trend that appeared after the Merc A-Class, Brabus Smart and continues with the Aston Martin (Lagonda) Cygnet based on the Toyota iQ [see last posting]. (The Buick version would sit under or replace the Buick Sail in China, that car possibly brought to the US so expanding today's limited 3 car vehicle range; with also a mooted 'Wildcat Gran Sport' inspired coupe as a halo vehicle).
Thus we are back to a replay of the economic circumstances of the 1970s which in turn prompted the invention of mid-size Buicks and Cadillacs that assisted group revenue at the time, but helped to diminish the brand equity of both once illustrious marques. Of course GM must now pay as much, and realistically more, attention to China's marketplace, so the US will increasingly become second fiddle with S. America on the other side of the regional product strategy sandwich.
At that point, GM will once again need to re-create itself again as a 'Brand Broker' and that is when we'll see the legacy of Edward Whitacre Jnr via new business modelling
That work will need to happen asap for in the meantime, if our economic conjecture* proves correct, the New GM is yet another phase of what is a long journey of transformation.
Post Script
* Our fundamental yet academically undetailed economic conjecture parallels Prof Niall Ferguson's edict. In essence, that today's economic reality is best understood as a re-modeled hybrid construction of various past depression/heavy recession experiences. Thus is not a direct replay but involves different elements of various US (1930s/70s), European (1930s/70s), Japanese (1990s/2000s) and Asian (1990s) experiences and so requires a 'weighted basket' of countering policy reactions to suit.
Tuesday, 30 June 2009
Company Focus – Aston Martin Lagonda – Cygnet Signifies an Alternative Business Stream
The WSJ today reports that Aston Martin Lagonda and Toyota have agreed a platform/vehicle sharing arrangement with the iQ city car.
To be known as the Cygnet under an AML marque, the strategic aim appears to enable both regulatory adherence regards CO2 emissionsf its V12 and V8 the DBS, DB9 and V8 Vantage & Volante supercars and provide reach into affluent yet congested and increasingly restricted global city-centres.
Of course initial reaction to the idea of a Aston badge adorning the front and rear of an iQ is “shock-horror”, but of course there will be far more rational and detail behind the initiative. As the economic slow-down bites into conventional business at Gaydon and capacity & revenue sharply, Ulrich Bez et al will deploy a plan of action designed to battle the historic norm of AML's generational demise as the supercar business-cycle sweeps into a trough.
It is generally recognised that unlike the Aston brand, the revived Lagonda marque is not “set in stone” by the public's perception. (Indeed its periodic re-emergence has been a both svelte AM saloon body variants in the '80s and previously the then shocking 1970s Townsend designed angular vehicle. It's original 1920s and 30s guise is lost to most except marque connoisseurs). Hence it's re-invention can be made theoretically from a blank canvas, and that it exactly what AML did with the Lagonda concept X-over vehicle at Geneva 09.
That car was used to demonstrate a new forward looking era for the revived marque, one which rode the X-over trend by marrying the DNA of a Porsche Cayenne, Range Rover and Bentley, The remit to produce something alternative for the uber-luxury set of target clienteleee that span the globe and have outer-city homes; from contemporary weekend beach-side houses in The Hamptons to luxury weekend Khaymas (tents) in thdesert-landsds of the Arabic Gulf - in indeed both! This select latter group could well apply to the part-owners of AML: the Adeem investment consortium.
So whilst the Geneva car presented something of the alternative new Lagonda, the story appears not to end there. There was mention of a sedan vehicle, which given that the X-over is based on a Mercedes GL platform would suggest that a sedan would be evolved from an S-Class or E-Class base, cementing a Daimler inter-relationship which also offers new 'eco-tech' solutions (such as L-ion hybrids) and critically would also strengthen the inter-relationship of GCC SWF and PE funds given Adeem's AML interests and Abu Dhabi's $2.7bn Aabar Investment Fund buy-in to Daimler in March along with (and slightly diluting) the the Kuwait Investment Authority holding.
As we see today, the reports of the AML-Toyota city car alliance alters partially 'given' perceptions that the other AML cars would be born from Daimler given Stuttgart's willingness to seek alliances. (ie suggested Daimler-BMW small car). However it seems that the the A-B class platform and Smart Car base were either not put on the table for debate - perhaps Daimler demanding retained sole usage - or the limited ability to alter the A-class and Smart's aesthetic to suit another brand's design cues with in the latter's case the added disadvantage of sub-optimal NVH (noise, vibration, harshness) driving characteristics.
So AML it seems needed another borrowed platform to provide credibility to inhabit the premium city-car segment. So providing an urban-focused radically different counterpoint product to the previously displayed X-over. One that not only fitted the luxury city-car genre, but also by establishing a second stake in the ground so far away from the original indicated the potential stretch & span (ie market segment coverage) of the Lagonda brand.
Now the Lagonda Wings are truly stretched!
But investment-auto-motives suspects that AML has also taken on this 2nd strategic partner to enable dual access possibilities to eco-tech powertrains from Daimler & Lexus for fitment to next generation supercars such as the successor to the soon to arrive Aston Rapide and a probable sister Lagonda variant. And increasingly beyond the 30mph/50kph + speed limits of suburban roads and motorways / freeways / autobahns, Lagondas will have to operate inside city-centre LEV and ZEV environs (from London to Singapore) that will demand alternative propulsion solutions.
Lagonda has the task of creating an identity from scratch his purports that the Lagonda marque will offer an alternative driving and passenger experience. To do this it appears to be rightly looking across the spectrum and history of personal travel. Remember the word sedan in auto-terms originates from the sedan chair, of which there was even a Lagonda names version.
To be known as the Cygnet under an AML marque, the strategic aim appears to enable both regulatory adherence regards CO2 emissionsf its V12 and V8 the DBS, DB9 and V8 Vantage & Volante supercars and provide reach into affluent yet congested and increasingly restricted global city-centres.
Of course initial reaction to the idea of a Aston badge adorning the front and rear of an iQ is “shock-horror”, but of course there will be far more rational and detail behind the initiative. As the economic slow-down bites into conventional business at Gaydon and capacity & revenue sharply, Ulrich Bez et al will deploy a plan of action designed to battle the historic norm of AML's generational demise as the supercar business-cycle sweeps into a trough.
It is generally recognised that unlike the Aston brand, the revived Lagonda marque is not “set in stone” by the public's perception. (Indeed its periodic re-emergence has been a both svelte AM saloon body variants in the '80s and previously the then shocking 1970s Townsend designed angular vehicle. It's original 1920s and 30s guise is lost to most except marque connoisseurs). Hence it's re-invention can be made theoretically from a blank canvas, and that it exactly what AML did with the Lagonda concept X-over vehicle at Geneva 09.
That car was used to demonstrate a new forward looking era for the revived marque, one which rode the X-over trend by marrying the DNA of a Porsche Cayenne, Range Rover and Bentley, The remit to produce something alternative for the uber-luxury set of target clienteleee that span the globe and have outer-city homes; from contemporary weekend beach-side houses in The Hamptons to luxury weekend Khaymas (tents) in thdesert-landsds of the Arabic Gulf - in indeed both! This select latter group could well apply to the part-owners of AML: the Adeem investment consortium.
So whilst the Geneva car presented something of the alternative new Lagonda, the story appears not to end there. There was mention of a sedan vehicle, which given that the X-over is based on a Mercedes GL platform would suggest that a sedan would be evolved from an S-Class or E-Class base, cementing a Daimler inter-relationship which also offers new 'eco-tech' solutions (such as L-ion hybrids) and critically would also strengthen the inter-relationship of GCC SWF and PE funds given Adeem's AML interests and Abu Dhabi's $2.7bn Aabar Investment Fund buy-in to Daimler in March along with (and slightly diluting) the the Kuwait Investment Authority holding.
As we see today, the reports of the AML-Toyota city car alliance alters partially 'given' perceptions that the other AML cars would be born from Daimler given Stuttgart's willingness to seek alliances. (ie suggested Daimler-BMW small car). However it seems that the the A-B class platform and Smart Car base were either not put on the table for debate - perhaps Daimler demanding retained sole usage - or the limited ability to alter the A-class and Smart's aesthetic to suit another brand's design cues with in the latter's case the added disadvantage of sub-optimal NVH (noise, vibration, harshness) driving characteristics.
So AML it seems needed another borrowed platform to provide credibility to inhabit the premium city-car segment. So providing an urban-focused radically different counterpoint product to the previously displayed X-over. One that not only fitted the luxury city-car genre, but also by establishing a second stake in the ground so far away from the original indicated the potential stretch & span (ie market segment coverage) of the Lagonda brand.
Now the Lagonda Wings are truly stretched!
But investment-auto-motives suspects that AML has also taken on this 2nd strategic partner to enable dual access possibilities to eco-tech powertrains from Daimler & Lexus for fitment to next generation supercars such as the successor to the soon to arrive Aston Rapide and a probable sister Lagonda variant. And increasingly beyond the 30mph/50kph + speed limits of suburban roads and motorways / freeways / autobahns, Lagondas will have to operate inside city-centre LEV and ZEV environs (from London to Singapore) that will demand alternative propulsion solutions.
Lagonda has the task of creating an identity from scratch his purports that the Lagonda marque will offer an alternative driving and passenger experience. To do this it appears to be rightly looking across the spectrum and history of personal travel. Remember the word sedan in auto-terms originates from the sedan chair, of which there was even a Lagonda names version.
However, crucially the marque's name is actually a transmogrification, derived from 17th century wealthy Venetian's calling for “La Gondolier” for canal-way carriage .
Furthermore, Lagonda was once synonymous with the forerunners of today's powerboats, the V12 car engines used for propulsion and that water-land connection promoted numerous wooden-body and boat-tailed vehicle creations.
So it seems AML, Dr Bez & Adeem are indeed, through the Cygnet initiative, following that change in social & business tidal flow - using high-quality, visionary external business partners exemplifed by Daimler and now Toyota. This exercise demonstrates their "(signet) ring of confidence", and will (intendendly) be the talk of the Henley Royal Regatta this weekend.
Monday, 22 June 2009
Industry Practice – Formula One – Competing for Pole Position in the F1 Business Model.
It was a very long time ago that motorsports were the amateur sport of choice for European gentlemen. Today, homage runs such as the Mille-Miglia is where the leisured money is directed , even if behind the scenes passionate classic car owners also consider the importance of Mille-Miglia vehicle valuations, keeping P&L and balance sheet accounts as an important “aside”.
As a raw commercial counterpoint to VSCC, RAC and other leisure-class racing, Grand Prix's post WW2 popularisation has grown exponentially, with it snowballed commercial rewards. Firstly from day & weekend gate receipts, from track advertising, then from vehicle/team sponsorship and of course in the last 30 years from global TV transmittance. As F1 popularity expanded so increasing multi-stream revenues were devised and implemented, the monies enabled the sport's participants to hone every dimension of their competitiveness, from R&D facilities that led to the paradigm-shift of carbon fibre to the use of telematics to the offered sizable salaries that drew top driver talent.
Unsurprisingly, as that ever expanding liquidity pot attracted business acumen, deals and contracts followed leading to what has essentially become the agenda- driven forces of power-broking parties.
The FIA regulates the sport - presided by Max Mosley - and prescribes the specification 'formula' to which the race-cars must accord. Whilst it was Bernie Ecclestone that created the modern template, as a past team owner of Brabham he saw the value of the sport's commercial rights potential back in the late 70s, In doing so set-up FOCA (Formula One Constructors Association) with Mosley, then as legal council, to fight the cause for commercial change which he/they won.
A finance vehicle was created called FOPA (Formula One Promotions & Administration) which split the income as: 47% to the Teams, 30% FIA and 23% to FOPA (ie Ecclestone). FOPA latterly morphed into FOM (Formula One Management) and FOA (Formula One Administration) under the Alpha Prema investment umbrella with latter-day CVC Capital Partner's; interest thereby taking on much of the operational responsibility and financial rewards of the sport.
Thus for nigh on 3 decades these 2 prime arbiters of F1 have orchestrated, with understandable periodic tensions; the Teams obliged to take their cut as prescripted. But Grand Prix's exponential popularisation based on national patriotism and auto-brand affiliation has both encouraged and demanded a ballooning of financial injection – F1 has been the veritable financial snowball. YoY F1 grew as the dynamic global advertising medium, Team inter-rivalry pushing R&D limits that required, and were met by, increasing corporate sponsorship spend; as was regional race-track infrastructure spend.
This means that where once the FIA garnered much of the income from motorsport, latterly split that growing pot from event operators and TV broadcasters to Ecclestone's FOM/FOA , the rise of 'Team Turnover' means that billions of US$ the sport has encouraged is being handled by the Teams. Unsurprisingly, they have argued for some years that the former 47% agreement - and the associated 5 Concorde Agreements – do not represent a fair/true representation of level of their contribution or share of the sport's profitability. As to the size of that 'contribution' to the sport, FormulaMoney's calculations and research estimates the top 8 Teams 2008 budgets to total $2.906bn, of which only $771 represents sponsorship contract fees, the remainder (>$2bn) made up of manufacturer's and constructor's monies.
[NB. Whilst the manufacturers undoubtedly have a case to set forward, those sponsorship numbers do appear low and may be a result of dramatically cut-back 2008 corporate marketing budgets, whilst the incurred Team costs presented could be taken from the more buoyant 2006/7 seasons, so generating such a wide 'manufacturer contribution' gap. Such figures as always must be drilled into to understand the underlying accounting sources and exceptions. Such self-regarding evidence will of course be expected from all 3 parties].
Today ironically, the cyclical wheel of progress becomes apparent once again.
Just as Ecclestone as an ex-team owner leveraged combined Team's muscle in the 70s, so now 35 years on, Flavio Briatore - ex Benetton owner and now Renault Team MD – is undertaking a similar move with FOTA (Formula One Team Association) with the acumen and influence of FOTA's founder Ferrari/FIAT's President, Luca Cordero di Montezemolo. [NB Cordero di Montezemolo's previous condemnation of FIA regulations regards the 2005 US GP's single tyre per race controversy].
So, today there are 3 in a bed within the GP kingdom, the latest of which FOTA – a body born from the frustration - continues to recoil against the FIA prescribed 2010 season team budget capping at $40m. This represents a fraction of modern team budgets and is what FOTA calls “resource restriction”. (Given the fact that today's pit-stop crew consists of 26 members each undertaking a specific task, and the size of other team HR 'service demands' such as trailer staff and complementary guest overhead the FIA will try to present a case for Team fiscal over-indulgence).
However, in the face of such growing criticism, FOTA threatens that to operate normally, at near today's cost levels, it will form a breakaway championship; thus carrying-away with it the big auto-names such as Ferrari, Renault, McLaren, BMW Sauber, Toyota, Brawn GP, Red Bull and Torro Rosso, threatening to leave F1 with only the commercially low-yielding Williams and Force India.
Thus today we witness a re-run of the historic schisms that have been part and parcel of any sport as differing power-players endeavour to maximise their 'take' relative to media spend – seen in UK football over the last 5-10 years and seen with Kerry Packer in Australian cricket back in the 1970s.
Thus, eventual outcome will be decided by the influence of the global TV audience, and critically their waking hours. For it is the ability to reach that expanding audience that forms the very foundations of a 21st century GP business model. Just as the sport expanded into EM regions from Istanbul to Shanghai, and so was forced to schedule night races – re-formated as a new dimension in F1 – to access western hemisphere audiences, so the 21st century business demands will also shape the GP business model.
Such a format - created by Briatore and Ecclestone - is already being laid-out under the GP2 Series banner; the feeder series for F1 which replaced F3000. The GP2 Series operates as GP2 and GP2 Asia, the remit of which is to create an Asian-based mirror to its western counterpart; incorporating an intended bias to Middle-Eastern and Asian drivers to whom EM audiences feel a greater connection. Ecclestone's FOM owns the TV rights and since the GP2 races are held a support events to F1 races, there appears strong evidence that it is being used as a template for an improved business model format for F1 itself.
However, the FIA although an income beneficiary well understands the FOM GP2 strategy to wrestle control, and so a year ago announced a countermeasure – a competing interest - via the return of F2 in 2009. Stock vehicle chassis and engines are supplied by MotorSportVision (MSV) with the vehicle designwork done by Williams – hence William's loyalty to F1's and the FIA's status quo. But MSV also acts as promoter of the race-series so with no doubt ambitions to emulate Ecclestone's FOM success.
Given GP2's “lead”, this of course begs the question, can F2 truly compete or will it be required to buy-out Ecclestone GP2 interests to gain commercial traction?
investment-auto-motives suspects it will, and in the process create F2 and F2 Asia: more formalised templates for a longer-term traditional F1 and a new F1 Asia.
FOTA, whose members are perhaps the prime players, well understands the global potential of the sport as both a massive income generator in its own right as well as the 'magic halo' for their own brands and road-vehicles – none more so than Ferrari, understandably the greatest protagonist.
Details as to whether FOTA has managed to persuade financial backers remains unclear, as would the championship's name/title, though the existence of A1GP – based on 'National Teams' does raise questions as to how that could be leveraged, by FOTA or indeed the FIA and FOM in F1.
[NB RAB Capital as 80% A1GP shareholder will be keen to 'turbocharge' its investment bought from A1GP founder His Highness Sheikh Maktoum Hasher Al Maktoum – probably partly by using GCC SWF monies to create a competing set of GCC Teams].
As the FIA endeavours to rationalise the engineering difference between F1 vehicles, laying out what FOTA detractors state as “generic basic skateboard chassis that reduces Team innovation”, could the real end-game be to effectively swap-over F1 participants? In essence promoting the possibilities for:
1. Shifting automakers into their own alternative field of conventional ICE technology.
2. Introducing Nation-based Teams using greater eco-tech powertrains :
This echoes the 1930s Auto-Union/Merc Silver Arrows era where national budgets were directed at GP – this time however it is the US Government who as owners of much of the US auto industry could display US.
3. Thereby creating a roadmap for latter-year 'demand-pull' for the automakers to buy back into F1 as representing National Champions :
It is suspected that the Briatore-Sarkozy and Cordero di Montezemolo – Berlesconi links are strong enough to complete this outcome in the years ahead.
For the moment the Mosley, Ecclestone, Briatore & Cordero di Montezemolo self-interested 'scripts' continue.
Notes...
[NB As an aside MSV has its testing facilities in Bedfordshire UK, a county also houses Nissan's UK/European development centre known as NTEC and houses various motorsport R&D and production centres. Interestingly, the recent government review of the UK auto-industry calls for a new ideology called 'Test-Bed UK' which appears to focus on extolling the virtues of the region, with nearby Northamptonshire, and possibly make it an auto-sector clean-tech hub with trickle-down tech from F1, F2 etc into mainstream production cars].
As a raw commercial counterpoint to VSCC, RAC and other leisure-class racing, Grand Prix's post WW2 popularisation has grown exponentially, with it snowballed commercial rewards. Firstly from day & weekend gate receipts, from track advertising, then from vehicle/team sponsorship and of course in the last 30 years from global TV transmittance. As F1 popularity expanded so increasing multi-stream revenues were devised and implemented, the monies enabled the sport's participants to hone every dimension of their competitiveness, from R&D facilities that led to the paradigm-shift of carbon fibre to the use of telematics to the offered sizable salaries that drew top driver talent.
Unsurprisingly, as that ever expanding liquidity pot attracted business acumen, deals and contracts followed leading to what has essentially become the agenda- driven forces of power-broking parties.
The FIA regulates the sport - presided by Max Mosley - and prescribes the specification 'formula' to which the race-cars must accord. Whilst it was Bernie Ecclestone that created the modern template, as a past team owner of Brabham he saw the value of the sport's commercial rights potential back in the late 70s, In doing so set-up FOCA (Formula One Constructors Association) with Mosley, then as legal council, to fight the cause for commercial change which he/they won.
A finance vehicle was created called FOPA (Formula One Promotions & Administration) which split the income as: 47% to the Teams, 30% FIA and 23% to FOPA (ie Ecclestone). FOPA latterly morphed into FOM (Formula One Management) and FOA (Formula One Administration) under the Alpha Prema investment umbrella with latter-day CVC Capital Partner's; interest thereby taking on much of the operational responsibility and financial rewards of the sport.
Thus for nigh on 3 decades these 2 prime arbiters of F1 have orchestrated, with understandable periodic tensions; the Teams obliged to take their cut as prescripted. But Grand Prix's exponential popularisation based on national patriotism and auto-brand affiliation has both encouraged and demanded a ballooning of financial injection – F1 has been the veritable financial snowball. YoY F1 grew as the dynamic global advertising medium, Team inter-rivalry pushing R&D limits that required, and were met by, increasing corporate sponsorship spend; as was regional race-track infrastructure spend.
This means that where once the FIA garnered much of the income from motorsport, latterly split that growing pot from event operators and TV broadcasters to Ecclestone's FOM/FOA , the rise of 'Team Turnover' means that billions of US$ the sport has encouraged is being handled by the Teams. Unsurprisingly, they have argued for some years that the former 47% agreement - and the associated 5 Concorde Agreements – do not represent a fair/true representation of level of their contribution or share of the sport's profitability. As to the size of that 'contribution' to the sport, FormulaMoney's calculations and research estimates the top 8 Teams 2008 budgets to total $2.906bn, of which only $771 represents sponsorship contract fees, the remainder (>$2bn) made up of manufacturer's and constructor's monies.
[NB. Whilst the manufacturers undoubtedly have a case to set forward, those sponsorship numbers do appear low and may be a result of dramatically cut-back 2008 corporate marketing budgets, whilst the incurred Team costs presented could be taken from the more buoyant 2006/7 seasons, so generating such a wide 'manufacturer contribution' gap. Such figures as always must be drilled into to understand the underlying accounting sources and exceptions. Such self-regarding evidence will of course be expected from all 3 parties].
Today ironically, the cyclical wheel of progress becomes apparent once again.
Just as Ecclestone as an ex-team owner leveraged combined Team's muscle in the 70s, so now 35 years on, Flavio Briatore - ex Benetton owner and now Renault Team MD – is undertaking a similar move with FOTA (Formula One Team Association) with the acumen and influence of FOTA's founder Ferrari/FIAT's President, Luca Cordero di Montezemolo. [NB Cordero di Montezemolo's previous condemnation of FIA regulations regards the 2005 US GP's single tyre per race controversy].
So, today there are 3 in a bed within the GP kingdom, the latest of which FOTA – a body born from the frustration - continues to recoil against the FIA prescribed 2010 season team budget capping at $40m. This represents a fraction of modern team budgets and is what FOTA calls “resource restriction”. (Given the fact that today's pit-stop crew consists of 26 members each undertaking a specific task, and the size of other team HR 'service demands' such as trailer staff and complementary guest overhead the FIA will try to present a case for Team fiscal over-indulgence).
However, in the face of such growing criticism, FOTA threatens that to operate normally, at near today's cost levels, it will form a breakaway championship; thus carrying-away with it the big auto-names such as Ferrari, Renault, McLaren, BMW Sauber, Toyota, Brawn GP, Red Bull and Torro Rosso, threatening to leave F1 with only the commercially low-yielding Williams and Force India.
Thus today we witness a re-run of the historic schisms that have been part and parcel of any sport as differing power-players endeavour to maximise their 'take' relative to media spend – seen in UK football over the last 5-10 years and seen with Kerry Packer in Australian cricket back in the 1970s.
Thus, eventual outcome will be decided by the influence of the global TV audience, and critically their waking hours. For it is the ability to reach that expanding audience that forms the very foundations of a 21st century GP business model. Just as the sport expanded into EM regions from Istanbul to Shanghai, and so was forced to schedule night races – re-formated as a new dimension in F1 – to access western hemisphere audiences, so the 21st century business demands will also shape the GP business model.
Such a format - created by Briatore and Ecclestone - is already being laid-out under the GP2 Series banner; the feeder series for F1 which replaced F3000. The GP2 Series operates as GP2 and GP2 Asia, the remit of which is to create an Asian-based mirror to its western counterpart; incorporating an intended bias to Middle-Eastern and Asian drivers to whom EM audiences feel a greater connection. Ecclestone's FOM owns the TV rights and since the GP2 races are held a support events to F1 races, there appears strong evidence that it is being used as a template for an improved business model format for F1 itself.
However, the FIA although an income beneficiary well understands the FOM GP2 strategy to wrestle control, and so a year ago announced a countermeasure – a competing interest - via the return of F2 in 2009. Stock vehicle chassis and engines are supplied by MotorSportVision (MSV) with the vehicle designwork done by Williams – hence William's loyalty to F1's and the FIA's status quo. But MSV also acts as promoter of the race-series so with no doubt ambitions to emulate Ecclestone's FOM success.
Given GP2's “lead”, this of course begs the question, can F2 truly compete or will it be required to buy-out Ecclestone GP2 interests to gain commercial traction?
investment-auto-motives suspects it will, and in the process create F2 and F2 Asia: more formalised templates for a longer-term traditional F1 and a new F1 Asia.
FOTA, whose members are perhaps the prime players, well understands the global potential of the sport as both a massive income generator in its own right as well as the 'magic halo' for their own brands and road-vehicles – none more so than Ferrari, understandably the greatest protagonist.
Details as to whether FOTA has managed to persuade financial backers remains unclear, as would the championship's name/title, though the existence of A1GP – based on 'National Teams' does raise questions as to how that could be leveraged, by FOTA or indeed the FIA and FOM in F1.
[NB RAB Capital as 80% A1GP shareholder will be keen to 'turbocharge' its investment bought from A1GP founder His Highness Sheikh Maktoum Hasher Al Maktoum – probably partly by using GCC SWF monies to create a competing set of GCC Teams].
As the FIA endeavours to rationalise the engineering difference between F1 vehicles, laying out what FOTA detractors state as “generic basic skateboard chassis that reduces Team innovation”, could the real end-game be to effectively swap-over F1 participants? In essence promoting the possibilities for:
1. Shifting automakers into their own alternative field of conventional ICE technology.
2. Introducing Nation-based Teams using greater eco-tech powertrains :
This echoes the 1930s Auto-Union/Merc Silver Arrows era where national budgets were directed at GP – this time however it is the US Government who as owners of much of the US auto industry could display US.
3. Thereby creating a roadmap for latter-year 'demand-pull' for the automakers to buy back into F1 as representing National Champions :
It is suspected that the Briatore-Sarkozy and Cordero di Montezemolo – Berlesconi links are strong enough to complete this outcome in the years ahead.
For the moment the Mosley, Ecclestone, Briatore & Cordero di Montezemolo self-interested 'scripts' continue.
Notes...
[NB As an aside MSV has its testing facilities in Bedfordshire UK, a county also houses Nissan's UK/European development centre known as NTEC and houses various motorsport R&D and production centres. Interestingly, the recent government review of the UK auto-industry calls for a new ideology called 'Test-Bed UK' which appears to focus on extolling the virtues of the region, with nearby Northamptonshire, and possibly make it an auto-sector clean-tech hub with trickle-down tech from F1, F2 etc into mainstream production cars].
Thursday, 18 June 2009
Company Focus – VVC: the V Vehicle Co – Sweating the US Tax Dollar to Geographically & Structurally Re-Configure US Autos Inc.
At a time when the US Government's “Cash for Guzzlers” initiative is being criticised as yet more "good money thrown after bad" at the auto-sector, the supplier base is outwardly frustrated at its declined application for funds. Having seen GM and Chrysler given massive bridge-financing, now the retail-base is seemingly favoured to whittle away the hundreds of thousands of cars and trucks held by bloated dealer inventories.
Of course from an industry structure perspective, that decision to deny supplier-base financing will be seen to be the correct one in due course. At present the Obama Administration must content with:
1. the ongoing stresses in the banking sector (that could demand additional funds even after stress-testing given the write-down levels still to come and need for sector re-structuring).
2, the problems of state-level funding which at present sees a plethora of states already well into the red.
3. the momentus budget deficit that must be addressed.
But critically, the US supplier-base must be re-drafted as a new power-house that operates far further up the value curve, not for the most part the myriad of uncompetitive small to medium size enterprises born from Detroit's glory days and little changed in that time. Visteon and Delphi - the supposed advanced guard - have been destroying value for years, so what chance the less capable? The supplier base acts as the sector's corner-stone and must be transformed to meet the operational and market challenges of today and tomorrow.
As we know, there are various new enterprise start-ups looking to take advantage of the large scale macro-economic forces presently re-shaping industry. Such efforts range from Asian imported electric 3-wheelers, to nascient radical concept companies pushing the limits of consumer acceptance, to the likes of Fisker trying to re-create from farmed-out 3rd party systems, to the Buffet backed BYO that appears to have the remit of productionising in mass quantities automotive clean-tech.
Today, although working quietly behind the scenes for 3 years, comes San Diego's V-Vehicle Company (VVC), with an announcement that it seeks to re-open a former GM-Delphi production facility in Monroe, NE Louisiana with the intention of building “environmentally friendly vehicles”. Welcomed by Governor Bobby Jindall, the firm has secured $67m in direct state funding and a further $12m in workforce training given the employment opportunities for approximately 1,400 people. So at a time when questions are being asked about the ROI the taxpayer expects to see from GM and Chrysler, what is on offer from the V-Vehicle Co, given that the phrase “environmentally friendly vehicles” is very nebulous?
Perhaps the headline player is financier T Boone Pickens of Texas oil and now wind farm fame, as part of a consortium of investors. They include the Silicon Valley venture capitalists Ray Lane Managing Partner at PE Buy-Out firm Kleiner Perkins Caufield & Buyers (who as COO helped orchestrate stellar results at Oracle Corp between 1996-2000), John Doerr an IT 'deity' also of KPCB and Louisiana businessman James Davison, who owns the Monroe plant itself
2008 SEC filings (19.03.08) report the head of management team as Frank Varasano, Founder & CEO (also ex Oracle Corp and ex Booz Allen Hamilton Eng & Man'g division) whilst other Directorships include the names of: Druskin (Chairman) Deason, Blodgett, Krauss, Miller & Sullivan.
In a bid to add industry expertise and product development credibility, the newly appointed Head of Design is Tom Matano, formerly head of Mazda Design USA (renowned as the father of Miata/MX-5), ex Gm , ex BMW and latterly an academic stint as course head at the S.F. School of Industrial Design.
Reaction in the blogosphere (jalopnik.com etc) has ranged from the positive to the down-right cynical, but is clear is that if it wishes to succeed V-Vehicle Company must appear with a greater public credibility than it currently has. “Google” the firm's name and no company website appears, simply short press reports that highlight the calibre of investors and management and the Louisiana 'good news' story. 3 years on from founding and one would have hoped that V-Vehicle would have been running a story-board marketing campaign that highlights, from the beginning the phases of development the enterprise has gone through, so building good PR and credibility.
As it presently stands the firm is being seen by some as just another tax-money swallower with little real promise. Basic research suggests is seen as either:
a) promoting little toward technical innovation [ie e-cars or hybrids] in the 'clean car' game
or
b) lacks economies of to reduce product costs and so nurture manufacturing success.
The V-Vehicle Co must combat this negativity with its own communications strategy that moves beyond the inability to mention corporate or product range detail due to the competitive nature of the automotive start-up sector. Paranoia is typical in auto and investment circles but it must be balanced by a public discourse.
As for that level of technical progress on offer, perhaps the name “VVC” intrinsically portends to the technical reality to be ultimately served; since this acronym was officially born for lean-burn ICE engines bearing VVC-Variable Valve Control. The concept vehicle shown under wraps appears to be a mid-size SUV, displayed at a crucial point in time when the Gas Guzzler Scrappage comes into being, thereby hinting that V-Vehicle Co can allow the consumer to “have his [SUV] cake”.
As such this is a poignant example of policy-setting instigating idealised public good in environmental and economic realms through the encouragement of private enterprise in untapped / dormant geographical regions.
As investment-auto-motives noted through the previous 'Auto-Antenna' reports in 2006, the sub-text of the film 'CARS' was to highlight to the American public the shift in the C of G of the American auto-sector manufacturing from the north to the south.
Initially through foreign transplants by the likes of BMW in Spartanberg South Carolina, Daimler in Tuscaloosa County Alabama and Hyundai-Kia in Montgomery County Alabama; and more recently via new enterprises under the 'clean-tech' banner. Louisiana is obviously fighting back for its competitive position in the state vs state war for tomorrow's lean and profitable US auto-industry given its role in propagating regional economic growth.
Thus V-Vehicle Company may not be the most auto-sector's most technically transformative initiative, but it may well be that apparent core of creative conservatism that provides the firm foundations for commercial success. Past quotes from Ray Lane indicate that the exercise is more about the reconstruction of the structure of a typical car company to enhance profitability than radical product focus. As a successful exercise is doing so would add much value regards the future restructuring of the sector itself, both downstream and upstream of the value-chain.
Of course, that is still a long way off, much depending on the product and service to be proposed, the manufacturing quality at launch and beyond and of course the ability to run what is a niche vehicle company in what will still be very testing times as cautious consumers sway toward better known, established brands.
However, investment-auto-motives suspects that the real exit strategy of the “New American Motors” could well be to sell-on the concern - primarily its low cost production asset-base – to other US market focused players, thereby providing a good consulting revenue for KPCB and ROI for the investor consortium.
The enterprise's smaller size and scale perhaps best suited to a new entry Asian player, or a current southern state operator seeking additional niche vehicle manufacturing capacity or an ambitious global expander such as FIAT-Chrysler, seeking the ideal of new markets, new segments and much improved structural profitability within those geographic and product-place locations.
In this industrial matching of Silicon Valley's finance, San Diego's entrepreneurialism and Monroe's regional support, there is undoubtedly a sense that rationality pervades, and that with liquidity still so so precious "none like it hot"*
* referencing the (Marilyn) Monroe movie set in Coronado, San Diego County.
Of course from an industry structure perspective, that decision to deny supplier-base financing will be seen to be the correct one in due course. At present the Obama Administration must content with:
1. the ongoing stresses in the banking sector (that could demand additional funds even after stress-testing given the write-down levels still to come and need for sector re-structuring).
2, the problems of state-level funding which at present sees a plethora of states already well into the red.
3. the momentus budget deficit that must be addressed.
But critically, the US supplier-base must be re-drafted as a new power-house that operates far further up the value curve, not for the most part the myriad of uncompetitive small to medium size enterprises born from Detroit's glory days and little changed in that time. Visteon and Delphi - the supposed advanced guard - have been destroying value for years, so what chance the less capable? The supplier base acts as the sector's corner-stone and must be transformed to meet the operational and market challenges of today and tomorrow.
As we know, there are various new enterprise start-ups looking to take advantage of the large scale macro-economic forces presently re-shaping industry. Such efforts range from Asian imported electric 3-wheelers, to nascient radical concept companies pushing the limits of consumer acceptance, to the likes of Fisker trying to re-create from farmed-out 3rd party systems, to the Buffet backed BYO that appears to have the remit of productionising in mass quantities automotive clean-tech.
Today, although working quietly behind the scenes for 3 years, comes San Diego's V-Vehicle Company (VVC), with an announcement that it seeks to re-open a former GM-Delphi production facility in Monroe, NE Louisiana with the intention of building “environmentally friendly vehicles”. Welcomed by Governor Bobby Jindall, the firm has secured $67m in direct state funding and a further $12m in workforce training given the employment opportunities for approximately 1,400 people. So at a time when questions are being asked about the ROI the taxpayer expects to see from GM and Chrysler, what is on offer from the V-Vehicle Co, given that the phrase “environmentally friendly vehicles” is very nebulous?
Perhaps the headline player is financier T Boone Pickens of Texas oil and now wind farm fame, as part of a consortium of investors. They include the Silicon Valley venture capitalists Ray Lane Managing Partner at PE Buy-Out firm Kleiner Perkins Caufield & Buyers (who as COO helped orchestrate stellar results at Oracle Corp between 1996-2000), John Doerr an IT 'deity' also of KPCB and Louisiana businessman James Davison, who owns the Monroe plant itself
2008 SEC filings (19.03.08) report the head of management team as Frank Varasano, Founder & CEO (also ex Oracle Corp and ex Booz Allen Hamilton Eng & Man'g division) whilst other Directorships include the names of: Druskin (Chairman) Deason, Blodgett, Krauss, Miller & Sullivan.
In a bid to add industry expertise and product development credibility, the newly appointed Head of Design is Tom Matano, formerly head of Mazda Design USA (renowned as the father of Miata/MX-5), ex Gm , ex BMW and latterly an academic stint as course head at the S.F. School of Industrial Design.
Reaction in the blogosphere (jalopnik.com etc) has ranged from the positive to the down-right cynical, but is clear is that if it wishes to succeed V-Vehicle Company must appear with a greater public credibility than it currently has. “Google” the firm's name and no company website appears, simply short press reports that highlight the calibre of investors and management and the Louisiana 'good news' story. 3 years on from founding and one would have hoped that V-Vehicle would have been running a story-board marketing campaign that highlights, from the beginning the phases of development the enterprise has gone through, so building good PR and credibility.
As it presently stands the firm is being seen by some as just another tax-money swallower with little real promise. Basic research suggests is seen as either:
a) promoting little toward technical innovation [ie e-cars or hybrids] in the 'clean car' game
or
b) lacks economies of to reduce product costs and so nurture manufacturing success.
The V-Vehicle Co must combat this negativity with its own communications strategy that moves beyond the inability to mention corporate or product range detail due to the competitive nature of the automotive start-up sector. Paranoia is typical in auto and investment circles but it must be balanced by a public discourse.
As for that level of technical progress on offer, perhaps the name “VVC” intrinsically portends to the technical reality to be ultimately served; since this acronym was officially born for lean-burn ICE engines bearing VVC-Variable Valve Control. The concept vehicle shown under wraps appears to be a mid-size SUV, displayed at a crucial point in time when the Gas Guzzler Scrappage comes into being, thereby hinting that V-Vehicle Co can allow the consumer to “have his [SUV] cake”.
As such this is a poignant example of policy-setting instigating idealised public good in environmental and economic realms through the encouragement of private enterprise in untapped / dormant geographical regions.
As investment-auto-motives noted through the previous 'Auto-Antenna' reports in 2006, the sub-text of the film 'CARS' was to highlight to the American public the shift in the C of G of the American auto-sector manufacturing from the north to the south.
Initially through foreign transplants by the likes of BMW in Spartanberg South Carolina, Daimler in Tuscaloosa County Alabama and Hyundai-Kia in Montgomery County Alabama; and more recently via new enterprises under the 'clean-tech' banner. Louisiana is obviously fighting back for its competitive position in the state vs state war for tomorrow's lean and profitable US auto-industry given its role in propagating regional economic growth.
Thus V-Vehicle Company may not be the most auto-sector's most technically transformative initiative, but it may well be that apparent core of creative conservatism that provides the firm foundations for commercial success. Past quotes from Ray Lane indicate that the exercise is more about the reconstruction of the structure of a typical car company to enhance profitability than radical product focus. As a successful exercise is doing so would add much value regards the future restructuring of the sector itself, both downstream and upstream of the value-chain.
Of course, that is still a long way off, much depending on the product and service to be proposed, the manufacturing quality at launch and beyond and of course the ability to run what is a niche vehicle company in what will still be very testing times as cautious consumers sway toward better known, established brands.
However, investment-auto-motives suspects that the real exit strategy of the “New American Motors” could well be to sell-on the concern - primarily its low cost production asset-base – to other US market focused players, thereby providing a good consulting revenue for KPCB and ROI for the investor consortium.
The enterprise's smaller size and scale perhaps best suited to a new entry Asian player, or a current southern state operator seeking additional niche vehicle manufacturing capacity or an ambitious global expander such as FIAT-Chrysler, seeking the ideal of new markets, new segments and much improved structural profitability within those geographic and product-place locations.
In this industrial matching of Silicon Valley's finance, San Diego's entrepreneurialism and Monroe's regional support, there is undoubtedly a sense that rationality pervades, and that with liquidity still so so precious "none like it hot"*
* referencing the (Marilyn) Monroe movie set in Coronado, San Diego County.
Sunday, 14 June 2009
Micro-Level Trends - Swedish Swag-ger - Koenigsegg Automotive & SAAB AB
investment-auto-motives continues to be encouraged by GM's divestment and structural reform process. The divestment of regional divisions and lacklustre brands a much overdue necessity, though of course there emerges a broader sector-related philosophical tension regards the handling of the $42m outstanding debt to 3 Illinois pension funds. That set a dangerous precedent that undermines the confidence of high-tier bond-holders across 'smoke-stack' America.
As recommended some time ago by ourselves, this unprecedented massive unbundling of America Inc means that GME's (effectively national-based) fragmentation has at last come to light - a very neccessary step on the path forward.
And as such, the opportunity arises for an effective springboard toward re-newed regional automotive policy-setting given the greatly shifting macro-context that sees the very notion of personal and mass mobility altering; from car usage patterns to the concept of the car itself, through to the very make-up of a global industry at large. In short societal change is requiring industry to undergoing a slow but powerful alteration in the search of new era economics and profitability.
However, as press commentary conveys - most prevalent being the FT's Paul Betts - a snap-shot of sector's present phase of re-structuring could be said to indicate a sense of 'de-consolidation' as the likes of Hummer, GMC, Pontiac, Saturn and arguably Jaguar & Land-Rover set adrift from their previous parents temporarily undermine the conventional "economies of scale" understanding; toward effectual "dis-economies" in the short-term. But instead, what we are rather perhaps witnessing is only a very necessary momentary fracturing before full and proper re-calibration on a global scale takes place. Such occurrences were perhaps not so evident previously given the trend for regional-centric consolidation, but now a critical juncture given Indian, Chinese & SWF involvement (ie their much needed liquidity) and of course the effectual re-structuring of the capital and money markets.
Thus we are in very very different days of far greater complexity, with more 'players' with different pressures and obligations having to reference much changed consumer, economic and funding terrain [NB the corporate bond issuance trend in lieu of normal credit-lines along with the consolidation of PE such as BlackRock-Barclays GI].
Thus it must be noted that Wall St & City investment banks, regional state funders such as the EIB and globally-linked lenders such as the IMF along with national governments are seeking to maximise the world-wide asset allocation of the sector to underpin long-term growth and enable global trade at sector and capital market levels.
So, the political communities and M&A book-runners within investment banks and advisory are seeking to best align under-performing assets with alternative new owners. That means seeing past the normative 'Horizontal Value-Chain Integration' (though still valid as with FIAT-Chrysler) to seek greater long-term sector stability and of course value creation potential to be had from "Vertical Integration" & "Diagonal Integration". Whether that be at industry level through either typical conglomerate leverage of major EM corporations (eg TATA), or at fund level via the synergy-seeking of investment holding companies within a portfolio (eg RHJ International).
Interestingly the case of Koenigsegg's interest in SAAB appears to play-out a mixture of both.
Although at first glance reminiscent of the 'David & Goliath' actions of Shaeffler on Continental and Porsche on Volkswagen, this latest minnow-swallows-giant deal could potentially offer a more cohesive rationale. The prime elements of the 'deal menu' being: capability integration (at management and technical levels) and a more stable, conventional financing framework given the mix of Swedish Government/European Investment Bank backing to the value of a reported $1bn, together with what appears reputable, industrial savvy privateer funding.
investment-auto-motives highlighted the potential for the Nordic marques of SAAB & Volvo some time ago. Given their prime positions as globally recognised 'national champions' set within a low-key but prevalent 'eco' and 'progressive' industrial economic agenda.
Thus, today we see Sweden taking-up the 'national cause' - no doubt with political persuasion from Stockholm - via Koenigsegg's interest in SAAB; the deal reportedly taking an "unconventional" shape. Though a world away in terms of present business size, production capacity & turnover, the potential for ideological and operational alignment seems apparent.
Even so, much depends upon:
a) SAAB being properly operationally re-structured via present court supervision.
b) The Riksdag being brave enough to weather the 'social storm' of further redundancy
c) Koenigsegg being able to quickly organically expand its operations so as to strategically service and philosophically lead its larger business twin.
This will be the entry strategy for the consortium of PE parties that include: Christian Koenigsegg, Baard Eker (an industrialist who owns Eker Group Holdings which in turn owns 49% of SAAB & is backer of the new Koenigsegg stake), possibly Dag Alexander Hoeili (an original part-backer of Koenigsegg Automotive) and the Swedish nation itself - a nation that embraces the idea of independence and self-determination both industrially and economically.
And to do so obviously means nurturing value creation by suppressing all dimensions of the cost base, building a strong 2-way 'parent-daughter' relationship, re-casting SAAB as a true premium marque and broadening the horizons for Koenigsegg Cars (as seen with the 2009 Quant concept).
Identifying the 'value gap' appears to have been the forte of Christian Erland Harald von Koenigsegg - the founder of the Sportscar Company. The progenee of an aristocratic Germanic-Swedish family, he used the capital gained from Alpraaz AB - the successful fish wholeseller & trading company - to initially fund Koenigsegg Automotive AB. (The company's logo and car's badge is derivative of the family's coat-of-arms).
The company's factory is based at Angelholm Airport within 2 aircraft hangers that previously housed fighter jets, so the spiritual link to SAAB given its links with the aero industry (ie SAAB Viggen aircraft) is very apparant. The factory move to the airport can be seen as either serendipitous or a very well orchestrated credibility building exercise.
Sweden's politicians have a strong voice in promoting industrial capability and growth, and appear to act as catalysts for inter-corporate co-operation for the good of the country. Thus Volvo previously assisted Koenigsegg in the mid-90s with wind tunnel testing, crash testing and powertrain sourcing from its parent Ford. Thus it is seen that the Riksdag well-recognises the need to develop a niche 'high-value' advanced auto-sector that can act as both deliverer and beneficiary of inter-sector technical transfer. Thus Koenigsegg is nurtured as the crown of Sweden's niche car sector; a vital component part of national industrial agenda to serve technology, components and sportcar trade across B2B and B2C markets domestically and globally.
investment-auto-motives therefore believes Stockholm is seizing the present opportunity to re-mould the country's core asset-base. (Just as so many other nations are, perhaps the most high-profile being China's Chinalco endeavour with the Australian assets of Rio Tinto).
The SAAB deal was announced on June 11th by Koenigsegg, is set to close by early July, demonstrating the urgency to get deals settled before competitors and general market sentiment can alter the deal-landscape.
So whilst the above provides the context, what is the core M&A rationale?
Observed as the unloved cousin in the GM stable, SAAB has supposedly been loss-making since its purchase from the Wallenburgs in the late 90s (as a reaction to Ford's creation of the previous PAG). But there is a distinct possibility that GM loaded SAAB with GME and GMNA development and purchasing costs to lighten their own financial burden, that in turn possibly exerted greater pressure on SAAB management which in turn annually set forth ever greater volume forecasts/goals to absorb overhead. Furthermore being a low-volume, low priority element of Detroit's globally dictated product/platform development schedule, meant that their was little autonomy regards product management (specification, variants and development & launch timing). Such restrictions lead to the current 9-5 (SAAB's core product) becoming 12 years old in a very competitive segment, thus detracting from consumer appeal. Additionally forced JV projects seeking synergies - such as Subaru SW & Cadillac X-over - whilst providing a nominal contract design & production income vitally constrained what would have otherwise been independent management decisions and accordantly improved income planning.
It was this inadvertent vicious circle of encumbered Detroit top-down decision-making that led to year on year under-performing growth (vis a vis its Volvo peer) and eventual sales demise. The years of GM antipathy meant that SAAB was swimming naked as the (credit) tide retracted.
However SAAB Bidders (including Ira Leon Rennert's Renco Group PE firm, Merbanco group of Wyoming investors and a previously rumoured FIAT) see the brand and company as the unpolished diamond, with potential to re-obtain its former glory typified historically by the original Sasson concept, the 60s & 70s rally wins, the 99 Turbo, the iconic Cabrio and vitally as the "understated thinking (wo)man's" brand.
Undoubtedly for Sweden it is the ability to bring back SAAB into the national fold, hence the willingness to back the enterprise. That back-stop financing provides a sizable level of risk-aversion for Eker and Koenigsegg on which they can build their own risk-reward business modelling. And given the current favourable political and consumer climate toward 'eco-engineering' and clean-tech the SAAB (& Volvo) brands given their Scandanavian roots perhaps hold a special place in the 'consumer psycho-space' and the zeitgeist - Premium Eco. These 2 marques are arguably set apart and positively positioned as the Sporty (SAAB) and Functional (Volvo) dimensions of that high-value product arena.
The deal allows Koenigsegg to capture what GM reckons to be $500m worth of plant and liquidity in addition to the $150m cash and cash convertibles on the present balance sheet. As to whether GM will retain a strategic sharehold (of 105 or under) is yet to be understood but it would make for a far better operational relationship in the short-medium term given that there will be platform licensing and general service agreements in place to ensure technical support for the re-born company.
So what of the SAAB & Koenigsegg similarities? And how has SAAB CEO Jan-Ake Jonsson been presenting the company's natural alignment and untapped potential?
SAAB originated from Sasson's original concept as being Aero and Weight focused regards its engineering ethos; progressive & sporty in direct contrast to Volvo's conventional boxy functionalism. Koenigsegg is obviously Aero & Materials focused given its supercar remit. Thus their theoretically exists a white-space for SAAB to return to its purist design roots, the new advanced engineering parent acting as the enabler. R&D work to date by both parties demonstrates interests in bio-fuel & flex-fuel powertrain solutions, the CCXR mooted as the 1st 'green' supercar in 2007. [NB whilst E85 orientated, realistically high-grade bio-ethanol production is still limited especially since the retraction in bio-fuel investment; and though many point to Brazil/Mexico's infrastructure as 'the possibility' they tend to use lower quality grade fuel compared to NA or Euro). As stated, a new concept called Quant was recently shown at Geneve 2009, conceptually a solar-electric 4dr supercar; supposedly created for an unspecified customer, but in reality probably to try and create a market demand 'pull' and critically gain credibility for the SAAB bid.
Importantly it is expected that Koenigsegg will seek to leverage use of its in-house eco-tech IPR for application in SAAB's niche and follow-up mainstream powertrains. This to provide welcome cross-company income streams from engineering development, perhaps sale of full IPR to SAAB or on a per unit royalties basis regards eventual mass production. Furthermore such internal sales allow for more flexible transfer pricing as and when necessary to boost or reduce either party's turnover or cost-base.
Business Strategy
This approach appears to indicate that Koenigsegg apparently wishes to raise profile by:
1. Becoming 'the' prominent player of advanced engineering applied to volume production.
2. Use its core competencies as the catalyst of metamorphosis at SAAB
3. Use SAAB to access off-the-shelf, lower cost front-engined architectures (Epsilon 2 to broaden own product range - (vs Merc CLS, Maserati Quattroporte, Porsche Panamera, Aston Martin Rapide, Tesla Bluestar/Whitestar, Fisker[Quantum] Karma) -and use Delta platform for smaller footprint vehicles.
4. The creation of a fully fledged Engineering Consulting division for external client work
5. Providing opportunity for Koenigsegg to access Opel-Magna given technical origins
6. The opportunity for Koenigsegg's eco-developed GM-SAAB platforms to be offered for contract manufacturing purposes to 3rd party '21C' car companies that focus on brand and outsource all manufacturing and build. (see below)
Importantly, NB the link between the Koenigsegg Quant name and the Fisker-Quantum JV. This could be coincidence, but also possibly suggests that Koenigsegg wishes to associate with Quantum for access to its PHEV technology. This could in turn lead to SAAB platforms being used for smaller future Fisker cars so providing contract manufacturing income.
Product Strategy -
To critically take-control of product planning and implementation using adapted Epsilon2 platform (9-5), adapted Delta platform (9-3), thus able to focus on high-value systems improvement (eg powertrain, drivetrain, chassis, electrical) since low-value capital intensive BIW (Body) system already in place.
The marriage of small and large operations that are respectively advanced and conventional offers a new spectrum of possibilities:
1. The opportunity to leverage a supercar name for SAAB via cross-over branding ties.
2. Thus create a new premium/performance division for SAAB similar to Mercedes AMG, BMW M-Sport, FIAT Abarth et al
3. Possible 3 tier product orientations of: Base > Viggen (sport) / Griffen (lux) > Koenigsegg
4. This would theoretically enable stretch beyond the current credibility constrained price ladder so reaching into BMW, Audi and Merc buyer territory.
Engineering Strategy -
The deal suggests the possibility of the formation of a 'technology bridge' between niche & mass.
1 As stated focus on systems differentiation to build the brand(s)
2. To migrate advanced materials from niche to mainstream use.
2. So growing volumes and gaining efficiencies of scale.
3. Thereby providing innate product performance (speed and mpg) differentiation.
4. Being seen to apply Koenigsegg's engineering ethos & build quality principles into SAAB.
Design Strategy -
1. To gain greater cross-range aesthetic cohesion which has been lost.
2. Presently the SAAB styling cue palette is overlayed onto less than optimal body dimensions, proportions and forms).
3. Maximise the opportunity to regain the conceptual purity of Sixten Sason's design language sympathetic to aero and modernist functionality.
4. (As re-layed by the reference-point created by the 'Aero X' concept).
5. 'this will be a prime element of SAAB's rebound and so the upcoming vehicles (9-5, 9-3, 9-4X etc) together espouse a 'clean cohesiveness'.
[NB 'stretched' & 'lost' product identities have arisen given merging of segment distinctions, constant aesthetic meddling and constraints of multi-marque platforms].
Manufacturing Strategy -
Need to wholly rationalise plant operations:
1. Maximise capacity utilisation in Trollhatten to improve unit margins (ideally >100%=120K +)
2. End contract manufacture agreements (eg Magna build of Cabrio)
3. Reduce parts count and logistics costs using high % common parts (undoubtedly an objective of Aero-X.
4. Possibly set-up SVO (Special Vehicle Operations division) for niche series projects prospecting and delivery (though ideally using main-line build process for manufacture).
Brand / Marketing Strategy -
1. Major opportunity to create the 1st credible eco-performance orientated premium car brand
2. Need to re-invent SAAB in consumer's eyes and mid-space
3. Need for new approach to avoid being lost in marketing comms 'white noise'
3. The possibility to open up the world of global Motorsport to SAAB via itself & Koenigsegg
3. To recapture Rally heritage and run at Le Mans (LMP1, GT1)
4. Ultimately create a new market space SAAB and Koenigsegg can 'own'.
Thus SAAB enters a new era with a possible new parent, but what of the long-term distant business view, that of investment collection. The ideal exit strategy may well be already formulated or could be a more distant, fluid expectation.
Business Exit Strategy -
A. To possibly sell SAAB to either an Asian Trade buyer with global ambitions, maintaining a strategic stake for continued dividend and capital earnings and business links.
B. To possibly sell to a PE firm, latter-day Hedge Fund (as that sector pulls-back) or SWF. Indeed would the Wallenberg's be interested in re-purchasing their former stake to GM?
C. If / when SAAB has excess sizable liquidity after paying-off state debts, the possibility to sell Koenigsegg to SAAB in a reverse take-over, thereby providing what should be impressive ROI for Eker & Koenigsegg.
Whilst far from a completed deal, with what seems an intricate level of mass detail regards the deal structure itself and confirmation of funding sources, the marriage of 2 such entities could create conditions for a successful re-birth of SAAB and the mutual reciprocation of far greater credibility for the rapidly expanding supercar manufacturer with what seem - by reading between the lines - ambitious plans for itself and Sweden.
investment-auto-motives highlighted the opportunity to be had from GM and GME fracturing / divestment, and proposed and prompted the idea of a Northern European 'eco-tech rainbow' centred on the Scandinavian, Germanic and UK automotive value-chain.
As with our participation in Australia's auto-industry re-orientation, we are proud to have played the subtle role of debate catalyst for Northern Europe; recommending with broad-brush direction how the industrial asset-base(s) of the region should be re-comprised to create value through a new eco-roadmap.
As recommended some time ago by ourselves, this unprecedented massive unbundling of America Inc means that GME's (effectively national-based) fragmentation has at last come to light - a very neccessary step on the path forward.
And as such, the opportunity arises for an effective springboard toward re-newed regional automotive policy-setting given the greatly shifting macro-context that sees the very notion of personal and mass mobility altering; from car usage patterns to the concept of the car itself, through to the very make-up of a global industry at large. In short societal change is requiring industry to undergoing a slow but powerful alteration in the search of new era economics and profitability.
However, as press commentary conveys - most prevalent being the FT's Paul Betts - a snap-shot of sector's present phase of re-structuring could be said to indicate a sense of 'de-consolidation' as the likes of Hummer, GMC, Pontiac, Saturn and arguably Jaguar & Land-Rover set adrift from their previous parents temporarily undermine the conventional "economies of scale" understanding; toward effectual "dis-economies" in the short-term. But instead, what we are rather perhaps witnessing is only a very necessary momentary fracturing before full and proper re-calibration on a global scale takes place. Such occurrences were perhaps not so evident previously given the trend for regional-centric consolidation, but now a critical juncture given Indian, Chinese & SWF involvement (ie their much needed liquidity) and of course the effectual re-structuring of the capital and money markets.
Thus we are in very very different days of far greater complexity, with more 'players' with different pressures and obligations having to reference much changed consumer, economic and funding terrain [NB the corporate bond issuance trend in lieu of normal credit-lines along with the consolidation of PE such as BlackRock-Barclays GI].
Thus it must be noted that Wall St & City investment banks, regional state funders such as the EIB and globally-linked lenders such as the IMF along with national governments are seeking to maximise the world-wide asset allocation of the sector to underpin long-term growth and enable global trade at sector and capital market levels.
So, the political communities and M&A book-runners within investment banks and advisory are seeking to best align under-performing assets with alternative new owners. That means seeing past the normative 'Horizontal Value-Chain Integration' (though still valid as with FIAT-Chrysler) to seek greater long-term sector stability and of course value creation potential to be had from "Vertical Integration" & "Diagonal Integration". Whether that be at industry level through either typical conglomerate leverage of major EM corporations (eg TATA), or at fund level via the synergy-seeking of investment holding companies within a portfolio (eg RHJ International).
Interestingly the case of Koenigsegg's interest in SAAB appears to play-out a mixture of both.
Although at first glance reminiscent of the 'David & Goliath' actions of Shaeffler on Continental and Porsche on Volkswagen, this latest minnow-swallows-giant deal could potentially offer a more cohesive rationale. The prime elements of the 'deal menu' being: capability integration (at management and technical levels) and a more stable, conventional financing framework given the mix of Swedish Government/European Investment Bank backing to the value of a reported $1bn, together with what appears reputable, industrial savvy privateer funding.
investment-auto-motives highlighted the potential for the Nordic marques of SAAB & Volvo some time ago. Given their prime positions as globally recognised 'national champions' set within a low-key but prevalent 'eco' and 'progressive' industrial economic agenda.
Thus, today we see Sweden taking-up the 'national cause' - no doubt with political persuasion from Stockholm - via Koenigsegg's interest in SAAB; the deal reportedly taking an "unconventional" shape. Though a world away in terms of present business size, production capacity & turnover, the potential for ideological and operational alignment seems apparent.
Even so, much depends upon:
a) SAAB being properly operationally re-structured via present court supervision.
b) The Riksdag being brave enough to weather the 'social storm' of further redundancy
c) Koenigsegg being able to quickly organically expand its operations so as to strategically service and philosophically lead its larger business twin.
This will be the entry strategy for the consortium of PE parties that include: Christian Koenigsegg, Baard Eker (an industrialist who owns Eker Group Holdings which in turn owns 49% of SAAB & is backer of the new Koenigsegg stake), possibly Dag Alexander Hoeili (an original part-backer of Koenigsegg Automotive) and the Swedish nation itself - a nation that embraces the idea of independence and self-determination both industrially and economically.
And to do so obviously means nurturing value creation by suppressing all dimensions of the cost base, building a strong 2-way 'parent-daughter' relationship, re-casting SAAB as a true premium marque and broadening the horizons for Koenigsegg Cars (as seen with the 2009 Quant concept).
Identifying the 'value gap' appears to have been the forte of Christian Erland Harald von Koenigsegg - the founder of the Sportscar Company. The progenee of an aristocratic Germanic-Swedish family, he used the capital gained from Alpraaz AB - the successful fish wholeseller & trading company - to initially fund Koenigsegg Automotive AB. (The company's logo and car's badge is derivative of the family's coat-of-arms).
The company's factory is based at Angelholm Airport within 2 aircraft hangers that previously housed fighter jets, so the spiritual link to SAAB given its links with the aero industry (ie SAAB Viggen aircraft) is very apparant. The factory move to the airport can be seen as either serendipitous or a very well orchestrated credibility building exercise.
Sweden's politicians have a strong voice in promoting industrial capability and growth, and appear to act as catalysts for inter-corporate co-operation for the good of the country. Thus Volvo previously assisted Koenigsegg in the mid-90s with wind tunnel testing, crash testing and powertrain sourcing from its parent Ford. Thus it is seen that the Riksdag well-recognises the need to develop a niche 'high-value' advanced auto-sector that can act as both deliverer and beneficiary of inter-sector technical transfer. Thus Koenigsegg is nurtured as the crown of Sweden's niche car sector; a vital component part of national industrial agenda to serve technology, components and sportcar trade across B2B and B2C markets domestically and globally.
investment-auto-motives therefore believes Stockholm is seizing the present opportunity to re-mould the country's core asset-base. (Just as so many other nations are, perhaps the most high-profile being China's Chinalco endeavour with the Australian assets of Rio Tinto).
The SAAB deal was announced on June 11th by Koenigsegg, is set to close by early July, demonstrating the urgency to get deals settled before competitors and general market sentiment can alter the deal-landscape.
So whilst the above provides the context, what is the core M&A rationale?
Observed as the unloved cousin in the GM stable, SAAB has supposedly been loss-making since its purchase from the Wallenburgs in the late 90s (as a reaction to Ford's creation of the previous PAG). But there is a distinct possibility that GM loaded SAAB with GME and GMNA development and purchasing costs to lighten their own financial burden, that in turn possibly exerted greater pressure on SAAB management which in turn annually set forth ever greater volume forecasts/goals to absorb overhead. Furthermore being a low-volume, low priority element of Detroit's globally dictated product/platform development schedule, meant that their was little autonomy regards product management (specification, variants and development & launch timing). Such restrictions lead to the current 9-5 (SAAB's core product) becoming 12 years old in a very competitive segment, thus detracting from consumer appeal. Additionally forced JV projects seeking synergies - such as Subaru SW & Cadillac X-over - whilst providing a nominal contract design & production income vitally constrained what would have otherwise been independent management decisions and accordantly improved income planning.
It was this inadvertent vicious circle of encumbered Detroit top-down decision-making that led to year on year under-performing growth (vis a vis its Volvo peer) and eventual sales demise. The years of GM antipathy meant that SAAB was swimming naked as the (credit) tide retracted.
However SAAB Bidders (including Ira Leon Rennert's Renco Group PE firm, Merbanco group of Wyoming investors and a previously rumoured FIAT) see the brand and company as the unpolished diamond, with potential to re-obtain its former glory typified historically by the original Sasson concept, the 60s & 70s rally wins, the 99 Turbo, the iconic Cabrio and vitally as the "understated thinking (wo)man's" brand.
Undoubtedly for Sweden it is the ability to bring back SAAB into the national fold, hence the willingness to back the enterprise. That back-stop financing provides a sizable level of risk-aversion for Eker and Koenigsegg on which they can build their own risk-reward business modelling. And given the current favourable political and consumer climate toward 'eco-engineering' and clean-tech the SAAB (& Volvo) brands given their Scandanavian roots perhaps hold a special place in the 'consumer psycho-space' and the zeitgeist - Premium Eco. These 2 marques are arguably set apart and positively positioned as the Sporty (SAAB) and Functional (Volvo) dimensions of that high-value product arena.
The deal allows Koenigsegg to capture what GM reckons to be $500m worth of plant and liquidity in addition to the $150m cash and cash convertibles on the present balance sheet. As to whether GM will retain a strategic sharehold (of 105 or under) is yet to be understood but it would make for a far better operational relationship in the short-medium term given that there will be platform licensing and general service agreements in place to ensure technical support for the re-born company.
So what of the SAAB & Koenigsegg similarities? And how has SAAB CEO Jan-Ake Jonsson been presenting the company's natural alignment and untapped potential?
SAAB originated from Sasson's original concept as being Aero and Weight focused regards its engineering ethos; progressive & sporty in direct contrast to Volvo's conventional boxy functionalism. Koenigsegg is obviously Aero & Materials focused given its supercar remit. Thus their theoretically exists a white-space for SAAB to return to its purist design roots, the new advanced engineering parent acting as the enabler. R&D work to date by both parties demonstrates interests in bio-fuel & flex-fuel powertrain solutions, the CCXR mooted as the 1st 'green' supercar in 2007. [NB whilst E85 orientated, realistically high-grade bio-ethanol production is still limited especially since the retraction in bio-fuel investment; and though many point to Brazil/Mexico's infrastructure as 'the possibility' they tend to use lower quality grade fuel compared to NA or Euro). As stated, a new concept called Quant was recently shown at Geneve 2009, conceptually a solar-electric 4dr supercar; supposedly created for an unspecified customer, but in reality probably to try and create a market demand 'pull' and critically gain credibility for the SAAB bid.
Importantly it is expected that Koenigsegg will seek to leverage use of its in-house eco-tech IPR for application in SAAB's niche and follow-up mainstream powertrains. This to provide welcome cross-company income streams from engineering development, perhaps sale of full IPR to SAAB or on a per unit royalties basis regards eventual mass production. Furthermore such internal sales allow for more flexible transfer pricing as and when necessary to boost or reduce either party's turnover or cost-base.
Business Strategy
This approach appears to indicate that Koenigsegg apparently wishes to raise profile by:
1. Becoming 'the' prominent player of advanced engineering applied to volume production.
2. Use its core competencies as the catalyst of metamorphosis at SAAB
3. Use SAAB to access off-the-shelf, lower cost front-engined architectures (Epsilon 2 to broaden own product range - (vs Merc CLS, Maserati Quattroporte, Porsche Panamera, Aston Martin Rapide, Tesla Bluestar/Whitestar, Fisker[Quantum] Karma) -and use Delta platform for smaller footprint vehicles.
4. The creation of a fully fledged Engineering Consulting division for external client work
5. Providing opportunity for Koenigsegg to access Opel-Magna given technical origins
6. The opportunity for Koenigsegg's eco-developed GM-SAAB platforms to be offered for contract manufacturing purposes to 3rd party '21C' car companies that focus on brand and outsource all manufacturing and build. (see below)
Importantly, NB the link between the Koenigsegg Quant name and the Fisker-Quantum JV. This could be coincidence, but also possibly suggests that Koenigsegg wishes to associate with Quantum for access to its PHEV technology. This could in turn lead to SAAB platforms being used for smaller future Fisker cars so providing contract manufacturing income.
Product Strategy -
To critically take-control of product planning and implementation using adapted Epsilon2 platform (9-5), adapted Delta platform (9-3), thus able to focus on high-value systems improvement (eg powertrain, drivetrain, chassis, electrical) since low-value capital intensive BIW (Body) system already in place.
The marriage of small and large operations that are respectively advanced and conventional offers a new spectrum of possibilities:
1. The opportunity to leverage a supercar name for SAAB via cross-over branding ties.
2. Thus create a new premium/performance division for SAAB similar to Mercedes AMG, BMW M-Sport, FIAT Abarth et al
3. Possible 3 tier product orientations of: Base > Viggen (sport) / Griffen (lux) > Koenigsegg
4. This would theoretically enable stretch beyond the current credibility constrained price ladder so reaching into BMW, Audi and Merc buyer territory.
Engineering Strategy -
The deal suggests the possibility of the formation of a 'technology bridge' between niche & mass.
1 As stated focus on systems differentiation to build the brand(s)
2. To migrate advanced materials from niche to mainstream use.
2. So growing volumes and gaining efficiencies of scale.
3. Thereby providing innate product performance (speed and mpg) differentiation.
4. Being seen to apply Koenigsegg's engineering ethos & build quality principles into SAAB.
Design Strategy -
1. To gain greater cross-range aesthetic cohesion which has been lost.
2. Presently the SAAB styling cue palette is overlayed onto less than optimal body dimensions, proportions and forms).
3. Maximise the opportunity to regain the conceptual purity of Sixten Sason's design language sympathetic to aero and modernist functionality.
4. (As re-layed by the reference-point created by the 'Aero X' concept).
5. 'this will be a prime element of SAAB's rebound and so the upcoming vehicles (9-5, 9-3, 9-4X etc) together espouse a 'clean cohesiveness'.
[NB 'stretched' & 'lost' product identities have arisen given merging of segment distinctions, constant aesthetic meddling and constraints of multi-marque platforms].
Manufacturing Strategy -
Need to wholly rationalise plant operations:
1. Maximise capacity utilisation in Trollhatten to improve unit margins (ideally >100%=120K +)
2. End contract manufacture agreements (eg Magna build of Cabrio)
3. Reduce parts count and logistics costs using high % common parts (undoubtedly an objective of Aero-X.
4. Possibly set-up SVO (Special Vehicle Operations division) for niche series projects prospecting and delivery (though ideally using main-line build process for manufacture).
Brand / Marketing Strategy -
1. Major opportunity to create the 1st credible eco-performance orientated premium car brand
2. Need to re-invent SAAB in consumer's eyes and mid-space
3. Need for new approach to avoid being lost in marketing comms 'white noise'
3. The possibility to open up the world of global Motorsport to SAAB via itself & Koenigsegg
3. To recapture Rally heritage and run at Le Mans (LMP1, GT1)
4. Ultimately create a new market space SAAB and Koenigsegg can 'own'.
Thus SAAB enters a new era with a possible new parent, but what of the long-term distant business view, that of investment collection. The ideal exit strategy may well be already formulated or could be a more distant, fluid expectation.
Business Exit Strategy -
A. To possibly sell SAAB to either an Asian Trade buyer with global ambitions, maintaining a strategic stake for continued dividend and capital earnings and business links.
B. To possibly sell to a PE firm, latter-day Hedge Fund (as that sector pulls-back) or SWF. Indeed would the Wallenberg's be interested in re-purchasing their former stake to GM?
C. If / when SAAB has excess sizable liquidity after paying-off state debts, the possibility to sell Koenigsegg to SAAB in a reverse take-over, thereby providing what should be impressive ROI for Eker & Koenigsegg.
Whilst far from a completed deal, with what seems an intricate level of mass detail regards the deal structure itself and confirmation of funding sources, the marriage of 2 such entities could create conditions for a successful re-birth of SAAB and the mutual reciprocation of far greater credibility for the rapidly expanding supercar manufacturer with what seem - by reading between the lines - ambitious plans for itself and Sweden.
investment-auto-motives highlighted the opportunity to be had from GM and GME fracturing / divestment, and proposed and prompted the idea of a Northern European 'eco-tech rainbow' centred on the Scandinavian, Germanic and UK automotive value-chain.
As with our participation in Australia's auto-industry re-orientation, we are proud to have played the subtle role of debate catalyst for Northern Europe; recommending with broad-brush direction how the industrial asset-base(s) of the region should be re-comprised to create value through a new eco-roadmap.
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