Sweden and Norway have historically been periodic enemies and allies; mid 19th century political pressures even generating the idea of a Scandinavian united kingdom with the addition of Denmark to compete against rising German influence. Though that proposal by Charles XV of Sweden didn't arise, the relative late-coming of the industrial revolution and globalisation undoubtedly galvanised their symbiotic relationship. A dualism that sought ever greater regional industrial and financial strength versus an initially an increasingly competitive Europe, and more recently, Rest of World.
Since its birth effectively for 1915 with SKF/Volvo trucks and 1924 for Volvo cars, and the 1947 for SAAB, Swedish Automotive has benefited from Norwegian oil reserves and dual-country petroleum refining. Although Norway is the world's 7th largest oil exporter, gaining 25% of its GDP from its black-gold', and Sweden has claimed it seeks to have a 100% non-fossil-fuel car parc by 2025, the realistic inter-dependency between cars and oil to date - and crucially into the mid-term – cannot be refuted.
Having to juggle the Scandinavian set of economic & ecological ideals against the constraints of today's regional economic concerns and its related effects upon intra-regional, self-protecting, industrial policy-making, is becoming increasingly fraught.
Prime examples of the fragile situation have come to light recently with:
1. The “repatriated” PE investment of a near confirmed SAAB (with EIB-Norwegian-Russian backing) and now possibly Volvo Cars (via US led Crown Consortium with respective US-Swedish backing)
2. The objection to the VW-Porsche amalgamation by Norges Bank Investment Management – Norway's State Pension Fund, a division of the nation's Central Bank.($325bn asset-base Q408)
Scandinavia's industrial luminaries well recognise the massive global-wide potential for the 'eco-premium' brand foundations of its 2 well-regarded 'homeland' marques. However, whilst the future looks good, the present-day financing for both companies is still not fully secured; respectively drawn from confirmed and proposed Scandinavian PE sources – the latter requited if the Chinese Geely bid fails. Even with big-name and big-family investors behind the deals - such as Bard Eker & Augie Fabela and possibly the Wallenbergs – both firms have needed interim EIB (national-government-backed) bridging finance given the eased but still tentative access to held & borrowed capital.
(Understandably, the Swedish government is not keen to work itself into a political corner, the way arguably the US government has with GM, so is reliant on the EIB as partial funding intermediary with heavy-weight domestic investment groups refining future business-models and long-term funding).
Thus Volvo & SAAB require a level of subtle protectionism of their own until they are past their re-formation phase.
Furthermore, Valmet Automotive, the Finnish contract vehicle manufacturer is also threatened by the VW-Porsche plan given its reliance on the Porsche Boxster contract (as of 1997) and Porsche Cayman contract (as of 2005), these high-margin contracts due to end in 2012. Having watched the resultant Merkel-Magna that so benefits German workers, it will be concerned that all future Porsche assembly will be undertaken in Stuttgart and potentially Wolfsburg. Valmet is undoubtedly concerned about loss of income, its order book replaced now with only low volume Fisker PHEV sports-saloon and low-margin TH!NK City car and Garia Golf Car assembly. {NB Valmet and Investinor – the Norwegian government backed fund - have interests in the recently re-capitalised TH!NK Global).
However, investment-auto-motives expects Valmet will also be used by SAAB and Volvo as a continued Special Vehicle Operations base for their own Hybrid, PHEV & niche series variants. This should help balance the order book, and it is believed that this initiative will be used as a showcase to re-attract Porsche's patronage.
To the crux of the matter...
...investment-auto-motives conjects that given the level of official and unofficial inter-play between Sweden, Norway and Finland, that Sweden with its powerful investor-base and Finland with its own Norwegian interests, could have added additional weight to Norges Bank Investment Management's Norwegian objection of the merging of VW and Porsche.
This does not of course preclude Norge's own primary concerns regards the alleged dis-proportionate benefit gained by the Porsche and Piech families from the M&A relative to smaller stock holders – Norges Bank reported being VW's 7th largest stock-holder – but simply that there may be important related strategic side-issues that effect the maintainance of Scandinavia's own investment / economic harmony.
The objection itself sent to the VW supervisory board cited that the deal..“fails to assure that the plans will benefit VW shareholders equitably....neither does the information available assure us that the conflicts of interest have been handled satisfactorily. In total, therefore the deal appears unacceptable” [especially since] “Porsche is in more need of the transaction than VW”.
Such investor interloping could well intendedly slow the legal process of VW-Porsche integration, this in turn slowing the project-specific platform/technology sharing that VW seeks to integrate from Porsche into Audi and vice-versa. For as we've seen with BMW's Efficient Dynamics vehicles there is real potential for the German's to undermine, or at least mimic, the intrinsic “eco-premium DNA” of SAAB and Volvo and so their USP in the regional and global automotive marketplaces.
Eco-Premium hatch-backs, saloons, coupes and convertibles are the play-book for the revitalisation of “Scandinavian Autos AB”, and Sweden – as it should - will be greatly concerned about Germany's momentum in this arena; particularly Audi relative to the B, C, C/D & E segments and Porsche relative to dedicated & shared-tech coupe & convertible variants. Moreover, Opel's new owner Magna International seeks to re-structure and re-establish Opel, very probably as both continued in-market presence and use of Opel assets for 3rd party contract manufacturing.
Thus whilst certain sections of Scandinavia will not wish to antagonise German clientele, there is a far bigger picture 'industrial interest story' that emerges from the very inter-connectedness of the region and the emerging threat from a structurally radically altered German auto-sector.
This means that the vitally important abilities of situational analysis and interpretation will have to be concise, as will the accordant sensitive activism that follows. So far Scandinavia and Norges Bank Investment Management seems to have handled the situation well and passive-aggressively, a rare example of activism on behalf of publicly-held monies.
Others from similarly placed peers, from Californian CALPERS to Singaporean GIC funds, would do well to watch how Norges conducts itself from here on, a case-study of our times regards the guardianship of public monies set within a complex political context.
International Economics and International Diplomacy, as ever, consequential bed-fellows.
But for one and all, a case no doubt of: “watch this space”...or...”ur denne mellomrum” (Norwegian)...”se den har utrymme” (Swedish)...”katsella nyt kuluva asettaa” (Finnish).
Friday, 9 October 2009
Monday, 5 October 2009
Company Focus – Penske Corp & Saturn Cars – Running Rings Around GM?
GM's over-due decision to undertake massive structural reform, including its divestment of non-core businesses, ultimately came later than it ideally should have. As a forced consequence of the bail-out package from the US administration, the shedding of the corporate load has been necessarily quick and in the most dire of commercial environments.
However, such times and events often make for the capture of undervalued commercial opportunities for visionary investors, but only if they can create a truly viable business plan or if such an acquisition strategically fits an investors portfolio.
GM has been keen to showcase the potential of its orphaned brands to international trade and PE buyers, and so almost 'natural' homes seem to have been found for Hummer and SAAB, with respectively China's Tengzhong Heavy Industry (assisting its truck and defense segment ambitions) and Koeniggseg-BAIC (seeking to combine & 'cost-off-set' high-cost advanced technology with low-cost mass production efficiencies). Pontiac, for the moment appears 'lame & stabled', GM unsure of its future – whether to re-invent it, sell it or simply close it - but promoting its available inventory via the on-line venture with e-bay in the meantime.
That leaves the Saturn brand, the relative baby of the brand family, being only 24 years old from its inception as the affordable yet innovative choice; targeted at the growing band of consumers heading to Japanese vehicles. Formed in effectively a different era, and created outside the 'family-pressures' of the GM empire, it was touted as “a different kind of car company” that should have ideally created learning and possibly set a template for the whole of GM. Unfortunately, yet typically, the financial pressures of the early 1990s and under-achieved over-ambitious sales expectations – always a danger of any new project, let alone a new company - dictated that Saturn's operations be brought closer to the empire itself.
The zenith of sales was in 1994 at 286,000 units as an 'event-driven' consequence of the US consumer pulling out of the recession, buying as a young adult 1st new car, 2nd GM family car or in many instances as a safe option for parent bought college kids. But even so, the ever present GM 'production efficiencies snowball' meant that even by 1996 over 290,000 units were being manufactured with fewer consumers interested, and even by 1999 over 275,000 units built; all adding to inventory and margin pressures. Note that Toyota picked-up on the GenY trend with its Scion marque and Hyundai-Kia squeezed price-wise from 'bottom-up' so further depleting Saturn's market relevance, USP and pricing power.
Part of that ever optimistic build schedule was created by the rationality dictated that within GM both the product-line and the managerial and administrative operations be ever more greatly integrated to Detroit HQ's direct needs. Part of that endemic 'rationality' was the internal need to satisfy the production appetite of GM's many US plants – all part of the vicious circle. And so as a consequence Saturn's variously successful/unsuccessful distinct aesthetic was watered-down until from the turn of the century onward the cars were little more than badge engineered cars with origins from GM's international divisions.
Given the brands relative lack of sales success post-1995 vs its Japanese competitors, Saturn's product strategy and new-model year management became ever more reactive, dis-located and compromised, this itself eroding product and brand credibility. That effect, plus the unofficial abandonment of price ceiling and floor between it and its 'step-up' Chevrolet sibling division, meant that the onus was put on Saturn dealers to deliver volume. Done so via reduced pricing and incentives, which obviously eroded margin and helped the value destruction spiral for all GM divisions and its dealer-base. The 2007 eco-orientated 'Green-Line' variant type was added to the performance-orientated 2004 'Red-Line' variant, appearing to be easily digested differentiators offering advanced technologies such as the BAS Mild-Hybrid, but there have been criticisms of its availability
So that is the tale of history, so similar to other previous flailing, now extinct, US marques over the decades that tried to re-invent themselves at the bottom of the price-rung.
Thus, as part of New GM's more globally relevant re-invention of itself with Chevy, Buick, Cadillac & GMC, the Saturn division with its financial drag on the corporation created by logistically complex and costly assembly procedures and declining sales simply had to be hived-off.
With that news some months back, interested parties started to review the business hoping to find new “what if” scenarios based on alternative business templates and criterion; so undertaking differing levels of due-diligence and moulding different types business plans.
A core function of any new business plan had to be the attainment of market-relevant products (smaller cars and X-overs) at drastically reduced cost; through via either:
a) 'Transfer' procurement from GM using current/future platforms for Aura (Epsilon2), Theta (Vue) & Lambda (Outlook) and ideally Astra (Delta)
b) Contract procurement of a foreign manufactured product(s) not available in the US, but with minimal alteration, able to meet US crash and emissions regulations.
c) Self-manufacture with greatly lowered BoM (Bill of Material) costs, labour assembly costs and overhead cost.
[NB. So as not to undermine its own small and compact car sales with Chevy & Buick, New GM has expressly announced that it will not offer contracted manufacture of Astra].
Thus for interested parties this GM divestment set out both undoubted challenges and possible opportunities, with the ideally perfect scenarios played-out as an orderly step-by-step fusion of a), b) and c).
Expectantly, with such a plan in mind, one individual came to the fore.
Virtually as soon as the news was announced, on June 5th Penske Corp, run by Roger Penske, the renowned industry veteran and veritable hero of the stereotypical blue-collar man. His auto-conglomerate's reach across various activities have been built-up over the last 2 decades since his successful motor racing days and now include:
1.Retail (inter/national) with Penske Automotive Group (NYSE ticker: PAG). The 2nd largest sales network in the world with 40 brands and 310 sites new & used) across US, Puerto Rico, UK & other with consumer-credit, insurance, after-parts and 25 crash-repair centres. (Previously UnitedAuto). Also distributes Daimler Smart's “for-two” A-segment car in US.
2.Retail (California) with Penske Motor Group
3.Truck Leasing – a JV with GE Leasing – inc Penske Logistics for supply chain deliveries
4.VM Motori SpA (51%) – with strong GM Powertrain manufacture licence deals & additional Truck-lite/Davco distribution activities
5.Racing – the old heart of Penske, historically inc NASCAR, CART, Indy, ALMS & F1
Thus given Penske Corporations business portfolio, with industrial habitation either side (upstream & downstream) of the typical car company, enabling even greater synergies via a car assembly operation has surely been in Roger Penske's mind for years. But undoubtedly always done so with the edict of pure operational rationality as opposed to the (often mis-placed) kudos of owning a car company.
With that objectivity front of mind Penske would have tried to construct minimum-risk/high-reward strategies – for entry, ongoing operation and ultimate exit of Saturn Motors.
Entry :
investment-auto-motives believes that Penske would have had critical discussions with the intentional start-up V-Vehicle Company – the CA & GA based potential builder of eco-orientated cross-over vehicle in receipt of substantial Energy Bill funding. V-Vehicle's business model was based around the development of GM Vue (actual or type) car to be produced in a southern non-union ex-GM plant. Given the 2 companies' mutual focus on the Vue, the potential to create - via JV or latter M&A - the “Saturn-V” cross-brand nameplate was presumably seen as highly relevant. Since it re-calls the NASA rocket ('67-'73) and fortuitously echoes the Cadillac “V-series” sub-brand. Also note that Penske would have been prompted by New GM & Cadillac's possible incursion on the race-scene, via GM's Performance Division's relationship with Pratt& Miller creating Le Mans success with Corvette C5-R. New GM may surely try to boost Cadillac in the same way so mimicking the likes of other premium mainstream marques, eg Audi.
Continued Operations :
Though the initial deal with GM was for the contract manufacture of mid-size cross-overs – thus a non-compete clause regards sedans & hatchbacks – Penske would need to develop the Saturn brand in the medium-long term with an expanded range of vehicles which importantly included cars given their increasing return penetration of the NA and global market.
Thus Penske broached talks with S. Korea's Samsung Motors - 70% owned by Renault and officially title abbreviation to RSM – to create a JV. An unsurprising move given the obvious advantages and adherence to the aforementioned “a-b-c” plan. It seems that whilst the RSM management were amiable to the proposal – and were being seen by their immediate seniors to be busy exploring - unsurprisingly the RSM Board (consisting of Renault and Nissan senior representatives) were not. For Penske it was the perfect 'future-proofing' exercise, but in truth, given the core proposal of Renault-Nissan product/platform sharing in the US, it was always a tetchy proposal. On paper Penske tried to fulfillllll Ghosn's wish for an NA partner with low contractual demands, but Nissan obviously recognised that if it wants to expand its volume in the US via an “underling brand” (the mirror opposite of Infiniti) it could do so directly using Renault Dacia leverage, or alternatively, create an affordable non-cannabalistic business model on its own, much as Toyota has done with Scion.
Hence, an expectantly failed approach to a major auto-maker with substantial US market stake. But surely Penske will have been looking at other possible options and substitute partners.
He will be viewing the outcome of the GM Opel / Magna-Sberbank-GAZ talks, and the 'policing role' the EU will be playing regards the German government's possibly illegal 'as is deal' struck with Magna International. Beyond the jobs and unions issue, Penske will pay special regard to the IPR allocation of Opel technologies. This includes the “re-appropriation” of the important Delta2 platform (ie Astra), which under Magna hands could become a core contract-manufacture base for non-compete clients vs Opel...such as US based Penske; and possibly closer to home even possibly SAAB.
[NB the SAAB influenced aesthetic of the original Saturn L-series sedan, raising the spectre of future shared platform engineering from Magna].
Furthermore, for Magna the very possibility of other non-compete clients in other regions or segments opens the door for contract manufacture on behalf of Chinese VM's seeking global expansion.
Exit :
With such a Magna offered solution to expand the required Penske product range and more. Since with possible latter-day, platform attuned, Magna-Sino co-relationships, Penske could be perfectly positioned. Sino auto-maker's themselves ideally seeking to play-out a combination of Euro-proven technology on a relatively small scale basis before 'scaling-up' for the US. Thus such techno-regional synergies via Magna and Penske would prove highly beneficial.
Unsurprisingly, a potential Penske-Sino alliance or full disposal would be a dream exit scenario for Roger Penske.
Yet, for the moment, so so much depends on the fractioustate of play in Germany and the EU for such a scenario to evolve. investment-auto-motives believes that Roger Penske and RHJ International / Ripplewood Capital, should be in discussion right about now regards the possible political machinations that effect the ultimate re-structuring of Opel/Vauxhall. The frictional heat caused between Brussels/London and Berlin could yet fall to Penske's advantage.
However, such times and events often make for the capture of undervalued commercial opportunities for visionary investors, but only if they can create a truly viable business plan or if such an acquisition strategically fits an investors portfolio.
GM has been keen to showcase the potential of its orphaned brands to international trade and PE buyers, and so almost 'natural' homes seem to have been found for Hummer and SAAB, with respectively China's Tengzhong Heavy Industry (assisting its truck and defense segment ambitions) and Koeniggseg-BAIC (seeking to combine & 'cost-off-set' high-cost advanced technology with low-cost mass production efficiencies). Pontiac, for the moment appears 'lame & stabled', GM unsure of its future – whether to re-invent it, sell it or simply close it - but promoting its available inventory via the on-line venture with e-bay in the meantime.
That leaves the Saturn brand, the relative baby of the brand family, being only 24 years old from its inception as the affordable yet innovative choice; targeted at the growing band of consumers heading to Japanese vehicles. Formed in effectively a different era, and created outside the 'family-pressures' of the GM empire, it was touted as “a different kind of car company” that should have ideally created learning and possibly set a template for the whole of GM. Unfortunately, yet typically, the financial pressures of the early 1990s and under-achieved over-ambitious sales expectations – always a danger of any new project, let alone a new company - dictated that Saturn's operations be brought closer to the empire itself.
The zenith of sales was in 1994 at 286,000 units as an 'event-driven' consequence of the US consumer pulling out of the recession, buying as a young adult 1st new car, 2nd GM family car or in many instances as a safe option for parent bought college kids. But even so, the ever present GM 'production efficiencies snowball' meant that even by 1996 over 290,000 units were being manufactured with fewer consumers interested, and even by 1999 over 275,000 units built; all adding to inventory and margin pressures. Note that Toyota picked-up on the GenY trend with its Scion marque and Hyundai-Kia squeezed price-wise from 'bottom-up' so further depleting Saturn's market relevance, USP and pricing power.
Part of that ever optimistic build schedule was created by the rationality dictated that within GM both the product-line and the managerial and administrative operations be ever more greatly integrated to Detroit HQ's direct needs. Part of that endemic 'rationality' was the internal need to satisfy the production appetite of GM's many US plants – all part of the vicious circle. And so as a consequence Saturn's variously successful/unsuccessful distinct aesthetic was watered-down until from the turn of the century onward the cars were little more than badge engineered cars with origins from GM's international divisions.
Given the brands relative lack of sales success post-1995 vs its Japanese competitors, Saturn's product strategy and new-model year management became ever more reactive, dis-located and compromised, this itself eroding product and brand credibility. That effect, plus the unofficial abandonment of price ceiling and floor between it and its 'step-up' Chevrolet sibling division, meant that the onus was put on Saturn dealers to deliver volume. Done so via reduced pricing and incentives, which obviously eroded margin and helped the value destruction spiral for all GM divisions and its dealer-base. The 2007 eco-orientated 'Green-Line' variant type was added to the performance-orientated 2004 'Red-Line' variant, appearing to be easily digested differentiators offering advanced technologies such as the BAS Mild-Hybrid, but there have been criticisms of its availability
So that is the tale of history, so similar to other previous flailing, now extinct, US marques over the decades that tried to re-invent themselves at the bottom of the price-rung.
Thus, as part of New GM's more globally relevant re-invention of itself with Chevy, Buick, Cadillac & GMC, the Saturn division with its financial drag on the corporation created by logistically complex and costly assembly procedures and declining sales simply had to be hived-off.
With that news some months back, interested parties started to review the business hoping to find new “what if” scenarios based on alternative business templates and criterion; so undertaking differing levels of due-diligence and moulding different types business plans.
A core function of any new business plan had to be the attainment of market-relevant products (smaller cars and X-overs) at drastically reduced cost; through via either:
a) 'Transfer' procurement from GM using current/future platforms for Aura (Epsilon2), Theta (Vue) & Lambda (Outlook) and ideally Astra (Delta)
b) Contract procurement of a foreign manufactured product(s) not available in the US, but with minimal alteration, able to meet US crash and emissions regulations.
c) Self-manufacture with greatly lowered BoM (Bill of Material) costs, labour assembly costs and overhead cost.
[NB. So as not to undermine its own small and compact car sales with Chevy & Buick, New GM has expressly announced that it will not offer contracted manufacture of Astra].
Thus for interested parties this GM divestment set out both undoubted challenges and possible opportunities, with the ideally perfect scenarios played-out as an orderly step-by-step fusion of a), b) and c).
Expectantly, with such a plan in mind, one individual came to the fore.
Virtually as soon as the news was announced, on June 5th Penske Corp, run by Roger Penske, the renowned industry veteran and veritable hero of the stereotypical blue-collar man. His auto-conglomerate's reach across various activities have been built-up over the last 2 decades since his successful motor racing days and now include:
1.Retail (inter/national) with Penske Automotive Group (NYSE ticker: PAG). The 2nd largest sales network in the world with 40 brands and 310 sites new & used) across US, Puerto Rico, UK & other with consumer-credit, insurance, after-parts and 25 crash-repair centres. (Previously UnitedAuto). Also distributes Daimler Smart's “for-two” A-segment car in US.
2.Retail (California) with Penske Motor Group
3.Truck Leasing – a JV with GE Leasing – inc Penske Logistics for supply chain deliveries
4.VM Motori SpA (51%) – with strong GM Powertrain manufacture licence deals & additional Truck-lite/Davco distribution activities
5.Racing – the old heart of Penske, historically inc NASCAR, CART, Indy, ALMS & F1
Thus given Penske Corporations business portfolio, with industrial habitation either side (upstream & downstream) of the typical car company, enabling even greater synergies via a car assembly operation has surely been in Roger Penske's mind for years. But undoubtedly always done so with the edict of pure operational rationality as opposed to the (often mis-placed) kudos of owning a car company.
With that objectivity front of mind Penske would have tried to construct minimum-risk/high-reward strategies – for entry, ongoing operation and ultimate exit of Saturn Motors.
Entry :
investment-auto-motives believes that Penske would have had critical discussions with the intentional start-up V-Vehicle Company – the CA & GA based potential builder of eco-orientated cross-over vehicle in receipt of substantial Energy Bill funding. V-Vehicle's business model was based around the development of GM Vue (actual or type) car to be produced in a southern non-union ex-GM plant. Given the 2 companies' mutual focus on the Vue, the potential to create - via JV or latter M&A - the “Saturn-V” cross-brand nameplate was presumably seen as highly relevant. Since it re-calls the NASA rocket ('67-'73) and fortuitously echoes the Cadillac “V-series” sub-brand. Also note that Penske would have been prompted by New GM & Cadillac's possible incursion on the race-scene, via GM's Performance Division's relationship with Pratt& Miller creating Le Mans success with Corvette C5-R. New GM may surely try to boost Cadillac in the same way so mimicking the likes of other premium mainstream marques, eg Audi.
Continued Operations :
Though the initial deal with GM was for the contract manufacture of mid-size cross-overs – thus a non-compete clause regards sedans & hatchbacks – Penske would need to develop the Saturn brand in the medium-long term with an expanded range of vehicles which importantly included cars given their increasing return penetration of the NA and global market.
Thus Penske broached talks with S. Korea's Samsung Motors - 70% owned by Renault and officially title abbreviation to RSM – to create a JV. An unsurprising move given the obvious advantages and adherence to the aforementioned “a-b-c” plan. It seems that whilst the RSM management were amiable to the proposal – and were being seen by their immediate seniors to be busy exploring - unsurprisingly the RSM Board (consisting of Renault and Nissan senior representatives) were not. For Penske it was the perfect 'future-proofing' exercise, but in truth, given the core proposal of Renault-Nissan product/platform sharing in the US, it was always a tetchy proposal. On paper Penske tried to fulfillllll Ghosn's wish for an NA partner with low contractual demands, but Nissan obviously recognised that if it wants to expand its volume in the US via an “underling brand” (the mirror opposite of Infiniti) it could do so directly using Renault Dacia leverage, or alternatively, create an affordable non-cannabalistic business model on its own, much as Toyota has done with Scion.
Hence, an expectantly failed approach to a major auto-maker with substantial US market stake. But surely Penske will have been looking at other possible options and substitute partners.
He will be viewing the outcome of the GM Opel / Magna-Sberbank-GAZ talks, and the 'policing role' the EU will be playing regards the German government's possibly illegal 'as is deal' struck with Magna International. Beyond the jobs and unions issue, Penske will pay special regard to the IPR allocation of Opel technologies. This includes the “re-appropriation” of the important Delta2 platform (ie Astra), which under Magna hands could become a core contract-manufacture base for non-compete clients vs Opel...such as US based Penske; and possibly closer to home even possibly SAAB.
[NB the SAAB influenced aesthetic of the original Saturn L-series sedan, raising the spectre of future shared platform engineering from Magna].
Furthermore, for Magna the very possibility of other non-compete clients in other regions or segments opens the door for contract manufacture on behalf of Chinese VM's seeking global expansion.
Exit :
With such a Magna offered solution to expand the required Penske product range and more. Since with possible latter-day, platform attuned, Magna-Sino co-relationships, Penske could be perfectly positioned. Sino auto-maker's themselves ideally seeking to play-out a combination of Euro-proven technology on a relatively small scale basis before 'scaling-up' for the US. Thus such techno-regional synergies via Magna and Penske would prove highly beneficial.
Unsurprisingly, a potential Penske-Sino alliance or full disposal would be a dream exit scenario for Roger Penske.
Yet, for the moment, so so much depends on the fractioustate of play in Germany and the EU for such a scenario to evolve. investment-auto-motives believes that Roger Penske and RHJ International / Ripplewood Capital, should be in discussion right about now regards the possible political machinations that effect the ultimate re-structuring of Opel/Vauxhall. The frictional heat caused between Brussels/London and Berlin could yet fall to Penske's advantage.
Monday, 28 September 2009
Company Focus – New GM – IPO Ambitions
Above and beyond the almost audible 'electric' buzz of Frankfurt - and its plethora of new-tech concepts - car-makers are having to face the present-day harsh commercial realities. Returned market-demand constraint after the retraction of government aid packages, major sector over-capacity and cut-to-the-bone new investment pressures that necessarily extend the life of present products mean that the industry is still in the throws of painful transformation.
For GM, the $50 billion 'bail-out' has provided at vast cost the time to re-evaluate and re-structure the corporation as 2 entities – old and new; with the ambition that certain divested US brands (Saturn, Hummer)(possibly Pontiac) and a 'de-commissioned' European division will reduce commercial drag as HQ centres on primary US, Chinese, Russian and Mercosur operations. Splittng the company into 'Good' and 'Bad' entities, the latter known as Motors Liquidation Co (ticker:MTLQQ), was an overdue requirement that has provided the base and critically perception of progress. The recent addition of Ron Bloom acting as Senior Council for Manufacturing Policy working in conjunction with Ed Whitacre and members of the new Board has undoubtedly shaken the very, previously complacent, foundations of GM. These appointments will be undertaking internal & external reviews so as to build a path forward.
The goal is an Initial Public Offering (IPO) of the New GM, an act that theoretically demonstrates the Board's and critically the Market's confidence in a new leaner, greener corporation that can equal not only its cross-town peer Ford, but critically Toyota, Honda, Nissan, Hyundai-Kia and VW – both at home and across the globe.
The IPO process is conventionally the chosen fund-accessing route after of years of company expansion, proven in its stability and capability, and in need of the typically far larger growth funds only available from public capital markets. However, whilst this is the historical norm, the IPO process has periodically been used to 'super-charge' the growth of a less-formed, supposedly 'under-scaled' (less proven?) operation; venture and growth financial backers keen to market the potential of the business model and so the company's ultimate market impact. Such actions were rife in IT & media with the dotcom boom and the ever-present promise from social-networking sites.
As a useful counter-point with New GM relevance, perhaps a good example of physical-online based commercial model today is the UK's online-grocery delivery company Ocado. It combines the customer access scale efficiencies of the web with a conventional delivery asset-base; thus more representative of a 21st century retailer with intrinsic value-chain connection. (In fact, because it is not in manufacturing with no production responsibility it is even more prescient to ultimate GM ambition surely!) Since establishing in 2002 this entity took much initial start-up and incubation funding to service: the offices, C2B & B2B communications infrastructure, depots and of course delivery trucks, and has only recently broken even. The 2006 backing of Goldman Sachs and certain high-level appointments led to speculation that the company would seek a 'quick-path' IPO; an action publicly announed in market frenzy of July 2009.
Thus, as we see IPO's can ultimately be typically a matured 'last-call' exercise for what are/were previously typically long privately held concerns, or as we've witnessed in the last 15 years more and more, a method to mature an under-scaled organisation. The latter's sale to both provide rich rewards for initial big-backers and providing a stable long-term growth and dividend model for long-hold investors such as institutionals, risk-averse individuals, as well as the possibility for sector peers/competitors to take stakes with the idea of latter-day M&A.
With its remit to repay the US tax-payer New GM was always going to seek its return to grace, and on-going viability, via the public capital markets; it is realistically the only plausible option open to it. Probably done so in a stepped or phased IPO manner, as befits the historical experiences of most privatised state-owned enterprises.
However, unlike the typical national utility (eg energy, telecoms or railway) company, with little or no competition, New GM must present itself to market with perhaps the most sophisticated 'shop-window-dressing' demands ever seen. The question is how exactly to take what was/is a 'smoke-stack' company and demonstrate it to be industrially and socially relevant and so of interest.
To do this New GM is re-moulding itself under the comprehensive multi-directional expertise of Whitacre (ex AT&T), Krebs (ex Burlington Northern Sante Fe), Isdell (ex Coca Cola), Marinello (Ceridian Corp), Russo (ex Alcatel-Lucent), Kresa (ex Northrup Grumman), Girsky (ex MorganStanley & GM), Bonderman (TPG), Akerson (Carlyle Group), Laskawy (ex E&Y) and Stephenson & Davis (Academia – Onterio & Georgia respectively)
Thus, beyond the continuing progressive external theme of socially responsible green(er)-vehicles,it seems that the internal theme is that the very foundation-stones are being put in place to possibly – ideally – transform the very being of New GM, its products and its operations.
The broad scope of Board member backgrounds demonstrate that GM has been forced – no doubt by its bankers and the government – to adopt fast and wide-reach cross-sector learning that moulds its future. Importantly for probable future 'parallel re-plays' regards both an efficiently managed IPO procedure and simultaneously the cherry-picking & adoption of the best 'operational enablers' from other sectors and companies. This wide-spectrum of influential members gives the New GM a new philosophical platform with broad strategic & operational reach by which to re-configure itself; thereby bringing-in the 2 main relevant features capital market seek: credibility and potential.
In short, credibility from 'old-hands' of the IPO process with good Wall Street connections, along with a master-plan of how to continually re-organise the company; the main element of which appears to be the out-sourcing of many 'non-core' activities to achieve a far more flexible, market reactive, and critically less capex intensive business structure. Also, investment-auto-motives suspects that, like FIAT-Chrysler, New GM will have used its Chinese partnership(s) learning with Shanghai Motor and Wuling Motor to evolve both culturally and legally a form a new corporate mentality toward alliances both inside and external to the auto-sector.
[NB SAIC, GM's partner in China, has reportedly agreed to inject an initial $147 million as part of the stock take-up, implicitly demonstrating to Chinese state, institutional and private investors its confidence in the re-formed US operations. This it is hoped by the Obama administration will assist the re-balancing of of the burdensome debtor-creditor relationship at the international budget level].
This is the good news, but equally there is need for great caution.
Whilst the General's broad-brush plan appears in place, the details appear quite sketchy at present, and the ultimate execution even more opaque.
New GM looks to be highlighting its new and improved features on its corporate windshield, no doubt well-versed at mimicking showroom floor advertising. As with the previous Ocado on-line grocery delivery business, New GM has endeavoured to utilise the re-ignited appeal of Web2.0 to add gravitas to its marketing strategy and customer reach. Its retail partnership with e-bay (gm.ebay.com) has had heavy press coverage and creates another on-line portal to its products, but any insightful analyst will recognise that the auction type purchasing model has lost its lustre in recent times as more and more complex variants have appeared for big-ticket items that have been seen to be overtly (legally) orchestrated in the seller's favour.
(This is not to say that the e-bay venture is prematurely doomed, simply that it will need to build-up credibility and belief given the opportunity for abuse that could emerge – one area being virtual inter-dealer competition creating value destruction, or the opposite with regional cartel-like arrangements. Simply to say the system needs careful managing and oversight from inside GM itself to become an important retailing channel).
Hence this is just one aspect of the full new and complex business equation that must be settled in both its operation and level income-stream contribution before Wall St and global financial analysts - on both sell and buy sides – can start to truly believe GM's new enterprise value price, as touted by the elected book-runners. The usual metrics will be furnished (ie price-earnings , price to book and price to assets) will of course be abound, but such measures will need more than rhetoric and hearsay and potentially over-valued intangibles/goodwill to enthuse what are still rightly very cautious investors.
Thus, investment-auto-motives believes that although there may be political pressure to undertake the IPO as soon as practically possible, the reported time-scale of Q1 2010 could prove to be far too early, especially if the US's real (not technical) economy stagnates or again falters over year-end and the Christmas period.
Remember, it was only July when GM went into Chapter 11, and although rapidly processed, a 6-7 month gestation period seems a very short time to fully-form an enterprise that must not only impress Wall St come IPO time, but also maintain traction thereafter if it is to build global investor confidence.
Yet again the maxim proves true...”what is good for GM is good for America”, but great care must be taken to ensure New GM is indeed fighting fit when it enters the financial and market arenas. Given the stakes for both GM and the US economy, any doubt should delay the IPO. For it is not just New GM's reputation, but America's as well.
For GM, the $50 billion 'bail-out' has provided at vast cost the time to re-evaluate and re-structure the corporation as 2 entities – old and new; with the ambition that certain divested US brands (Saturn, Hummer)(possibly Pontiac) and a 'de-commissioned' European division will reduce commercial drag as HQ centres on primary US, Chinese, Russian and Mercosur operations. Splittng the company into 'Good' and 'Bad' entities, the latter known as Motors Liquidation Co (ticker:MTLQQ), was an overdue requirement that has provided the base and critically perception of progress. The recent addition of Ron Bloom acting as Senior Council for Manufacturing Policy working in conjunction with Ed Whitacre and members of the new Board has undoubtedly shaken the very, previously complacent, foundations of GM. These appointments will be undertaking internal & external reviews so as to build a path forward.
The goal is an Initial Public Offering (IPO) of the New GM, an act that theoretically demonstrates the Board's and critically the Market's confidence in a new leaner, greener corporation that can equal not only its cross-town peer Ford, but critically Toyota, Honda, Nissan, Hyundai-Kia and VW – both at home and across the globe.
The IPO process is conventionally the chosen fund-accessing route after of years of company expansion, proven in its stability and capability, and in need of the typically far larger growth funds only available from public capital markets. However, whilst this is the historical norm, the IPO process has periodically been used to 'super-charge' the growth of a less-formed, supposedly 'under-scaled' (less proven?) operation; venture and growth financial backers keen to market the potential of the business model and so the company's ultimate market impact. Such actions were rife in IT & media with the dotcom boom and the ever-present promise from social-networking sites.
As a useful counter-point with New GM relevance, perhaps a good example of physical-online based commercial model today is the UK's online-grocery delivery company Ocado. It combines the customer access scale efficiencies of the web with a conventional delivery asset-base; thus more representative of a 21st century retailer with intrinsic value-chain connection. (In fact, because it is not in manufacturing with no production responsibility it is even more prescient to ultimate GM ambition surely!) Since establishing in 2002 this entity took much initial start-up and incubation funding to service: the offices, C2B & B2B communications infrastructure, depots and of course delivery trucks, and has only recently broken even. The 2006 backing of Goldman Sachs and certain high-level appointments led to speculation that the company would seek a 'quick-path' IPO; an action publicly announed in market frenzy of July 2009.
Thus, as we see IPO's can ultimately be typically a matured 'last-call' exercise for what are/were previously typically long privately held concerns, or as we've witnessed in the last 15 years more and more, a method to mature an under-scaled organisation. The latter's sale to both provide rich rewards for initial big-backers and providing a stable long-term growth and dividend model for long-hold investors such as institutionals, risk-averse individuals, as well as the possibility for sector peers/competitors to take stakes with the idea of latter-day M&A.
With its remit to repay the US tax-payer New GM was always going to seek its return to grace, and on-going viability, via the public capital markets; it is realistically the only plausible option open to it. Probably done so in a stepped or phased IPO manner, as befits the historical experiences of most privatised state-owned enterprises.
However, unlike the typical national utility (eg energy, telecoms or railway) company, with little or no competition, New GM must present itself to market with perhaps the most sophisticated 'shop-window-dressing' demands ever seen. The question is how exactly to take what was/is a 'smoke-stack' company and demonstrate it to be industrially and socially relevant and so of interest.
To do this New GM is re-moulding itself under the comprehensive multi-directional expertise of Whitacre (ex AT&T), Krebs (ex Burlington Northern Sante Fe), Isdell (ex Coca Cola), Marinello (Ceridian Corp), Russo (ex Alcatel-Lucent), Kresa (ex Northrup Grumman), Girsky (ex MorganStanley & GM), Bonderman (TPG), Akerson (Carlyle Group), Laskawy (ex E&Y) and Stephenson & Davis (Academia – Onterio & Georgia respectively)
Thus, beyond the continuing progressive external theme of socially responsible green(er)-vehicles,it seems that the internal theme is that the very foundation-stones are being put in place to possibly – ideally – transform the very being of New GM, its products and its operations.
The broad scope of Board member backgrounds demonstrate that GM has been forced – no doubt by its bankers and the government – to adopt fast and wide-reach cross-sector learning that moulds its future. Importantly for probable future 'parallel re-plays' regards both an efficiently managed IPO procedure and simultaneously the cherry-picking & adoption of the best 'operational enablers' from other sectors and companies. This wide-spectrum of influential members gives the New GM a new philosophical platform with broad strategic & operational reach by which to re-configure itself; thereby bringing-in the 2 main relevant features capital market seek: credibility and potential.
In short, credibility from 'old-hands' of the IPO process with good Wall Street connections, along with a master-plan of how to continually re-organise the company; the main element of which appears to be the out-sourcing of many 'non-core' activities to achieve a far more flexible, market reactive, and critically less capex intensive business structure. Also, investment-auto-motives suspects that, like FIAT-Chrysler, New GM will have used its Chinese partnership(s) learning with Shanghai Motor and Wuling Motor to evolve both culturally and legally a form a new corporate mentality toward alliances both inside and external to the auto-sector.
[NB SAIC, GM's partner in China, has reportedly agreed to inject an initial $147 million as part of the stock take-up, implicitly demonstrating to Chinese state, institutional and private investors its confidence in the re-formed US operations. This it is hoped by the Obama administration will assist the re-balancing of of the burdensome debtor-creditor relationship at the international budget level].
This is the good news, but equally there is need for great caution.
Whilst the General's broad-brush plan appears in place, the details appear quite sketchy at present, and the ultimate execution even more opaque.
New GM looks to be highlighting its new and improved features on its corporate windshield, no doubt well-versed at mimicking showroom floor advertising. As with the previous Ocado on-line grocery delivery business, New GM has endeavoured to utilise the re-ignited appeal of Web2.0 to add gravitas to its marketing strategy and customer reach. Its retail partnership with e-bay (gm.ebay.com) has had heavy press coverage and creates another on-line portal to its products, but any insightful analyst will recognise that the auction type purchasing model has lost its lustre in recent times as more and more complex variants have appeared for big-ticket items that have been seen to be overtly (legally) orchestrated in the seller's favour.
(This is not to say that the e-bay venture is prematurely doomed, simply that it will need to build-up credibility and belief given the opportunity for abuse that could emerge – one area being virtual inter-dealer competition creating value destruction, or the opposite with regional cartel-like arrangements. Simply to say the system needs careful managing and oversight from inside GM itself to become an important retailing channel).
Hence this is just one aspect of the full new and complex business equation that must be settled in both its operation and level income-stream contribution before Wall St and global financial analysts - on both sell and buy sides – can start to truly believe GM's new enterprise value price, as touted by the elected book-runners. The usual metrics will be furnished (ie price-earnings , price to book and price to assets) will of course be abound, but such measures will need more than rhetoric and hearsay and potentially over-valued intangibles/goodwill to enthuse what are still rightly very cautious investors.
Thus, investment-auto-motives believes that although there may be political pressure to undertake the IPO as soon as practically possible, the reported time-scale of Q1 2010 could prove to be far too early, especially if the US's real (not technical) economy stagnates or again falters over year-end and the Christmas period.
Remember, it was only July when GM went into Chapter 11, and although rapidly processed, a 6-7 month gestation period seems a very short time to fully-form an enterprise that must not only impress Wall St come IPO time, but also maintain traction thereafter if it is to build global investor confidence.
Yet again the maxim proves true...”what is good for GM is good for America”, but great care must be taken to ensure New GM is indeed fighting fit when it enters the financial and market arenas. Given the stakes for both GM and the US economy, any doubt should delay the IPO. For it is not just New GM's reputation, but America's as well.
Tuesday, 22 September 2009
Macro Level Trends – Turkish Autos A.S. – Creating a Counter-Cyclical Industry
Whilst advanced regions continue to address these stalling economic times, combining talk of stimulus package effect and the timing of exit strategies, other less developed countries are congratulating themselves for being on the flip-side of events.
Turkey, amongst other EM regions has had a history of economic roller-coaster rides, especially so during the precarious 1990s with quick succession boom & bust cycles that saw real interest rates run into double and even treble figures. But since the local 2001 crisis it has managed to contain fiscal and monetary policy so as to create a far more stable and sustainable platform, with the reported assistance of the IMF and World Bank.
[NB. These 2 august bodies were previously criticised as being over-zealous in recommending corrective action during the 97/98 Asian Tiger Crash and elsewhere, but it seems the level of inter-action with Turkey has set an appropriate model].
Thus it was with subtle glee that last week Deputy Prime Minister Ali Abacan (pronounced Abajan) took to the respective stages of Oxford University and the London School of Economics to espouse the restraint shown by the Turkish banking system which has bolstered economic stability. That restraint in place since 2001 resultant from regulatory reform. This engendered a reticence toward any type of overly exotic transaction and so gave very minimal exposure to the CDO and toxic asset debacle that has unfortunately infected advanced economies and provided sizable capital ratio cushions in domestic banks that have helped off-set the contraction of foreign sourced funds regards state and commercial investment.
Placed as a geographic, political and industrial 'intermediate' between the West and East, Turkey has enjoyed a level of sustained growth since the turn of the century not seen for decades, indeed some say not since its creation as a republic in 1923. The country enjoyed increasing export trade to Europe (its main trading partner), improved relations with neighbouring countries and a previously buoyant global economy. Growing FDI monies came from inward investment both commercially in factory, retail and offices and privately with foreigners choosing to buy comparatively inexpensive real estate in holiday areas. Add to this the boom-time of Istanbul, drawing-in provincial migrants, and Turkey effectively re-played the Spanish experience of the 1980s/90s with upward spiraling investment flows resulting from an entwined combination of FDI and encouraged domestic demand which led to construction demand and so fueled the demand spiral.
At an industrial level the likes of the historically influential families such as the Koc's and Sabanci's undertook sole projects and joint ventures projects with foreign firms spanning financial, automotive, consumer durables, food, retailing, IT, construction, chemicals, textiles, cement/aggregates, energy, tourism, defence and education.
In the automotive realm, a far from comprehensive list companies includes:
Koc -
(2007 income of US$39.5bn) -
Otokoc AS, TOFAS (Turk Otomobil Fabrikasi AS)(Koc-FIAT), Ford Otosan Otomotiv San AS (Ford Transit & Transit Connect) (Koc-Ford), KARSAN – POPAS (licensed PSA & Hyundai LCVs & contract manufacture to others), Kiraca (investment & trade group), Karland (parts distribution), Kirpart (parts manufacturing), (Koc-FIAT Kredi AS (captive finance credit), New Holland Trakmak Traktor, Otokar Otobus Karoseri San AS, Otomotiv Lastikleri Tevzi AS, Set Auto (covering Azerbaijan & Kazakhstan), Set Oto Tourism-AVIS, Sherbrook International Ltd (parts), Doktas Documculuk Tic Ve San (castings), and others.
Sabanci -
(2007 income of US$16bn) -
TEMSA (truck & bus), Bridgestone Rubber & Tyres, Toyota Motor, Mitsubishi Motor, Desas (commercial vehicles rental),
Other : Kibar Holding -
Hyundai vehicle assembly & metals processing.
Other : Anadolu Group -
Isuzu vehicle assembly. Lada & Kia importer & exporter
Other: Cukurova Group -
BMC Turkey LCV, HGV & Bus
Other: Ulusoy Conglomerate -
Volvo Turkey, HGV & Bus distribution & parts
Over the last decade, there has been recognition of and action toward an improved structural re-alignment of Turkey's auto-sector, given that increased industrial competition within a limited span of industrial capability had eroded profitability and so the value-adding nature of the sector. Importantly, the industry had to be better integrated into a more robust national industrial route-map, which itself derived from local and global conditions.
To answer the challenge the Koc Group prompted Inan Kirac - a local industry luminary – to create the Kiraca Auto. Ind. & Trade Inv. Group. Its remit was to: invest in unmet demand capacity, target the LCV segment(s) and “bring order to the chaos” of independent parts manufacturers by introducing new marketing & distribution models both domestically and for export. Acquisition of KARSAN to rationalise its operations and expand via additional licensed manufacturing aswell as acquisition of renowned parts manufacturing, parts distribution and marketing companies created a powerful holding company of 9 companies with sector influence.
From the perspective of Sabanci Holding Group - the 2nd largest conglomerate in Turkey with a seemingly lesser level of auto-activity - there appears less transformative industrial interventionism as a result of historic involvement and general holding compant strategy. Instead a continued focus upon expanded retailing opportunities, the OEM tyre margins as 'first-fit' and in the aftermarket, and the development of its bus & coach activities relative to the large European sector & market.
To set a broader context, Turkey's own auto-sector, with historic links to the US, UK, Italy, France and Germany, saw sustained growth from the 1960s onwards. Initially through initiatives such as the failed 1960s 'Devrim' (“Revolutionary Dream”) and 60s/70s/80s national Anadol Car initiative using Ford & Rootes Group mechanicals with Turkish manufactured fibre-glass multi-variant bodies. That national car solution - driven by the central agenda of affordability - grew vehicle demand which was latterly filled by JV deals with foreign OEM's; BMC, FIAT & Ford foremost as disposable income grew along with consumer expectations with Oyek-Renault soon following in 1969.
These sector agreements also effectively set the pattern for the industry at large for many years:
a) 'Commodity Car' for PV domestic demand – exemplified by Anadol followed by TOFAS 124 (Murat) & 131 (Sahin/Dogan/Kartal)
b) 'Flexible Platform' for LCV domestic demand – exemplified by Ford Otosan Transit (minibus, van, chassis-cab), but also Peugeot & BMC...providing the body construction and interior 'fit-out' capabilities that have allowed the coach & bus sector to flourish.
In comparison to the initial homogenous vehicles, early attempts were made at producing niche vehicles but were either still-born or short-lived These included a 'Turkish Sportscar' coupe called the STC-16 (based on the Anadol) which flailed due to the effects of the 1973 oil crisis (primarily input costs of oil based GRP body & 'knocked' consumer demand of small target market) and the small production run of the 'Bocek' (Bug) akin to a VW Dune-Buggy for the emerging coastal tourism regions. These limited (and perhaps too early) efforts for diversification were superceded by the effective re-entry of foreign vehicle assemblers for domestic and export markets including: Daimler. Opel, MAN AG, Toyota, Honda & Hyundai. Their presence assisting the broad intellectual improvement particularly in production engineering, manufacturing set-up (new and model swap-over) and operational production efficiency.
Interestingly, as with the historical likes of TATA in India, Turkish truck-bus companies were better positioned in terms of localised business models requiring previoulsy minimal R&D due to a strangle-hold markets and so have been comparatively protected. Thus BMC, Otokar and TEMSA have historically enjoyed more notional stability thus far. But as with TATA India, this is pseudo-protectionism has theoretically come to end with EU accession demands and of course WTO free-trade regulations. So though the local market will take time to see the fruits of enhanced competition as fleet buyers continue their typical default purchasing decisions to the likes of KARSAN, BMC & TEMSA times are changing, and companies have reacted accordingly.
The latter two companies are today heavily export orientated, and as such are having to invest in R&D to match the grade of the renowned European benchmark manufacturers that lead the world. With this as the benchmark, Turkey is having to integrate, develop, test and launch the highest levels of today's sophisticated technology solutions - from Euro VI regulations of engine emissions to intelligent 'self-aware' electronics systems that span much from GPS location 'e-tagging' to monitoring drive-cycles for in-service fleet costing.
As we see, it has essentially been the arrival of foreign VMs and OEMs that has enabled engineering and design technology transfer, and so gradual intellectual transfer. However, this process is arguably incumbered by a fragmented Turkish education system. Whilst the efforts of Koc Group in establishing the Koc University in 1993 (and other similar efforts such as Galatasaray University in 1992)are laudible, they are relatively recent and small-scale compared to the state-established efforts of Asian and S. American nations. More must be done to proactively support an extension of the Koc & Galatasaray schemes and the introduction of others, perhaps achieved as a public-private initiated exercise as an adjunct of military service. This would also enable the development of domestic defence engineering know-how which itself could be sold internationally.
Thus, as of today, whilst current arrangements have provided a useful synergy for foreign companies, the Turkish government and Turkish consumers, the question of Turkey's real industrial USP - its real differentiator - and the role of education in creating that, remains a high regard matter. A topic well-noted by Babacan's audience at the LSE.
Japan, S.Korea and now China created their own progression path through automotive, consumer durables and critically electronics - initially through JVs but moving onto self-sufficiency. Turkey in contrast has not to date been seen to similarly follow.
Instead, whilst Koc and Sabanci groups – the 'industrial arbiters' – indeed operate across many industrial sectors there has been mention that that the country hung too long onto the eroded competitiveness of its previously large textiles base and so lost industrial development traction. Recognising this in the 1990s it put overt belief, and disproportionate focus, into tourism and real-estate. But of course the manufacturing sector was quietly growing, having created its own domestically branded and contract manufacture base(s) for a broad range of white and brown goods (washing machines, TVs et al). However, it does seems that the domestic brands like BEKO (part of Koc-Arcelik) have not broken through into western consumer consciousness; even though BEKO is infact capacity-wise #3 in Europe.
Though of course westerners must remember that Turkey's historical and typical commercial trade ties lay with the CIS states, Russia and Middle East, and so for the most part Turkey has served essentially as a technology assimilator and product distributor for these regions.
The question is, "Does this relatively hidden industrial reality (from western gaze) provide the template for “Turkish Auto AS” today and into the future?". The answer must surely be "yes" but with a caveat.
Given the major impact felt by Turkey from heavily contracted western markets over the last 18 months or so (@approx 25%), and given the expected surge in economic development of the CIS over the next decade thanks to its hydro-carbons asset-base, massive agricultural potential and eager populace, it is expected that the newly announced Turkish economic roadmap will encompass the potential for the on-going positive 'CIS export effect' – either explicitly, or given the nature of Turkey's geo-political sensitivity, implicitly.
That continued CIS draw for what is essentially the replaying of 2nd hand technology transfer relative to its previous 'home game' achievement will be undoubtedly successful and so must be followed and exploited to good effect.
However, Turkey must also seek to find its own unique place through technological and manufacturing abilities and differentiation, so providing another road for economic growth by becoming ever more relevant to parallel (high-EM)and advanced B2B and B2C markets.
In the automotive arena, as the western world sits at this historic juncture created by constrained investment and the demands of eco-responsibility, Turkey may well be positioned to turn such challenges into opportunities. Seizing its abilities in low-cost volume manufacture through alternative materials and a low-cost labour-force to thereby potentially creating a new, 21st century automotive industry formula.
A formula that avoids the traditional demands of massive capital expenditure created by the 'Budd' manufacturing system requiring expensive stamping equipment and associated tooling. An alternative which instead combines modular, adaptable and so customisable lightweight component-systems and sets from which to create multi-various LCVs and PVs.
After the increasingly successful previous national efforts of 'Devrim' and 'Anadol', investment-auto-motives believes Mr Babacan, Mr Kirac and the Turkish government should seek to plot additional alternative paths for its highly important automotive industry. Potentially a case of “3rd time domestic success” (after Devrim & Anadol)perhaps using portions of the earned funds from the CIS region sales of conventional vehicles and re-cycling such monies towards eco-orientated vehicles and mobility solutions.
Turkey, given its position on the auto-sector value-curve has deployed its abilities well, but as time progresses so do the achievements of foreign entities, and so there is the danger of Turkey maintaining a sub-optimal competitive postion. It obviously recognises this, having both improved its ability during the process of industrial absorption, and now thanks to efforts of Inan Kirac et al, appreciates the need for industrial re-organisation of the status quo.
The question is "what next?" - how must that re-organisation be directed?
As perhaps a case-study for parallel learning or indeed inspiration, TATA decided to go 'bottom-up' in creating the Nano and along with it 'visioneering' the requisite engineering and infrastructure. Turkey should perhaps look 'top-down' to see how it can deploy its knowledge in creating not a car, but a new-era auto-sector using the best of its own self-directed, indigenous and affiliate resources.
Given the frustration of many CEE countries at present - holding their own auto-assets - its central role could grow even as far as orchestrating the knowledge and asset-base of CEE neighbours to one side (West) and western Middle Eastern neighbours to the other (East). This would create a geographical 'industrial S-shaped chicane' with Turkey at the central apex.
[NB, this recommendation sits in the middle of a broader geo-industrial context forwarded by investment-auto-motives. One that promotes the emergence of an Eco-Tech European Rainbow across the UK-Sweden-Norway-Germany (to the west) and a Premium Arabic sector emerge based on cultural association across Saudi Arabia, Kuwait & Qatar (to the east).
Hence a '3-pillar' plan spanning Northern Europe, the EurAsian region and Middle East].
Thus, just as Istanbul and Turkey itself spans 2 continents and 2 cultures, so the officials in Ankara should create the same dualistic outlook for the auto-sector; perhaps its most prominent industrial economic powerhouse. A dualistic outlook that builds-in the foundations of counter-cyclicity from 'old' and 'new' industrial models; themselves related to 20th century "conventional" and 21st century "advanced" whole vehicle & systems solutions.
For Turkey must continue to promote itself as a progressive independent thinker with pan EurAsian reach, tied not the past, or even the current but a global future.
Turkey, amongst other EM regions has had a history of economic roller-coaster rides, especially so during the precarious 1990s with quick succession boom & bust cycles that saw real interest rates run into double and even treble figures. But since the local 2001 crisis it has managed to contain fiscal and monetary policy so as to create a far more stable and sustainable platform, with the reported assistance of the IMF and World Bank.
[NB. These 2 august bodies were previously criticised as being over-zealous in recommending corrective action during the 97/98 Asian Tiger Crash and elsewhere, but it seems the level of inter-action with Turkey has set an appropriate model].
Thus it was with subtle glee that last week Deputy Prime Minister Ali Abacan (pronounced Abajan) took to the respective stages of Oxford University and the London School of Economics to espouse the restraint shown by the Turkish banking system which has bolstered economic stability. That restraint in place since 2001 resultant from regulatory reform. This engendered a reticence toward any type of overly exotic transaction and so gave very minimal exposure to the CDO and toxic asset debacle that has unfortunately infected advanced economies and provided sizable capital ratio cushions in domestic banks that have helped off-set the contraction of foreign sourced funds regards state and commercial investment.
Placed as a geographic, political and industrial 'intermediate' between the West and East, Turkey has enjoyed a level of sustained growth since the turn of the century not seen for decades, indeed some say not since its creation as a republic in 1923. The country enjoyed increasing export trade to Europe (its main trading partner), improved relations with neighbouring countries and a previously buoyant global economy. Growing FDI monies came from inward investment both commercially in factory, retail and offices and privately with foreigners choosing to buy comparatively inexpensive real estate in holiday areas. Add to this the boom-time of Istanbul, drawing-in provincial migrants, and Turkey effectively re-played the Spanish experience of the 1980s/90s with upward spiraling investment flows resulting from an entwined combination of FDI and encouraged domestic demand which led to construction demand and so fueled the demand spiral.
At an industrial level the likes of the historically influential families such as the Koc's and Sabanci's undertook sole projects and joint ventures projects with foreign firms spanning financial, automotive, consumer durables, food, retailing, IT, construction, chemicals, textiles, cement/aggregates, energy, tourism, defence and education.
In the automotive realm, a far from comprehensive list companies includes:
Koc -
(2007 income of US$39.5bn) -
Otokoc AS, TOFAS (Turk Otomobil Fabrikasi AS)(Koc-FIAT), Ford Otosan Otomotiv San AS (Ford Transit & Transit Connect) (Koc-Ford), KARSAN – POPAS (licensed PSA & Hyundai LCVs & contract manufacture to others), Kiraca (investment & trade group), Karland (parts distribution), Kirpart (parts manufacturing), (Koc-FIAT Kredi AS (captive finance credit), New Holland Trakmak Traktor, Otokar Otobus Karoseri San AS, Otomotiv Lastikleri Tevzi AS, Set Auto (covering Azerbaijan & Kazakhstan), Set Oto Tourism-AVIS, Sherbrook International Ltd (parts), Doktas Documculuk Tic Ve San (castings), and others.
Sabanci -
(2007 income of US$16bn) -
TEMSA (truck & bus), Bridgestone Rubber & Tyres, Toyota Motor, Mitsubishi Motor, Desas (commercial vehicles rental),
Other : Kibar Holding -
Hyundai vehicle assembly & metals processing.
Other : Anadolu Group -
Isuzu vehicle assembly. Lada & Kia importer & exporter
Other: Cukurova Group -
BMC Turkey LCV, HGV & Bus
Other: Ulusoy Conglomerate -
Volvo Turkey, HGV & Bus distribution & parts
Over the last decade, there has been recognition of and action toward an improved structural re-alignment of Turkey's auto-sector, given that increased industrial competition within a limited span of industrial capability had eroded profitability and so the value-adding nature of the sector. Importantly, the industry had to be better integrated into a more robust national industrial route-map, which itself derived from local and global conditions.
To answer the challenge the Koc Group prompted Inan Kirac - a local industry luminary – to create the Kiraca Auto. Ind. & Trade Inv. Group. Its remit was to: invest in unmet demand capacity, target the LCV segment(s) and “bring order to the chaos” of independent parts manufacturers by introducing new marketing & distribution models both domestically and for export. Acquisition of KARSAN to rationalise its operations and expand via additional licensed manufacturing aswell as acquisition of renowned parts manufacturing, parts distribution and marketing companies created a powerful holding company of 9 companies with sector influence.
From the perspective of Sabanci Holding Group - the 2nd largest conglomerate in Turkey with a seemingly lesser level of auto-activity - there appears less transformative industrial interventionism as a result of historic involvement and general holding compant strategy. Instead a continued focus upon expanded retailing opportunities, the OEM tyre margins as 'first-fit' and in the aftermarket, and the development of its bus & coach activities relative to the large European sector & market.
To set a broader context, Turkey's own auto-sector, with historic links to the US, UK, Italy, France and Germany, saw sustained growth from the 1960s onwards. Initially through initiatives such as the failed 1960s 'Devrim' (“Revolutionary Dream”) and 60s/70s/80s national Anadol Car initiative using Ford & Rootes Group mechanicals with Turkish manufactured fibre-glass multi-variant bodies. That national car solution - driven by the central agenda of affordability - grew vehicle demand which was latterly filled by JV deals with foreign OEM's; BMC, FIAT & Ford foremost as disposable income grew along with consumer expectations with Oyek-Renault soon following in 1969.
These sector agreements also effectively set the pattern for the industry at large for many years:
a) 'Commodity Car' for PV domestic demand – exemplified by Anadol followed by TOFAS 124 (Murat) & 131 (Sahin/Dogan/Kartal)
b) 'Flexible Platform' for LCV domestic demand – exemplified by Ford Otosan Transit (minibus, van, chassis-cab), but also Peugeot & BMC...providing the body construction and interior 'fit-out' capabilities that have allowed the coach & bus sector to flourish.
In comparison to the initial homogenous vehicles, early attempts were made at producing niche vehicles but were either still-born or short-lived These included a 'Turkish Sportscar' coupe called the STC-16 (based on the Anadol) which flailed due to the effects of the 1973 oil crisis (primarily input costs of oil based GRP body & 'knocked' consumer demand of small target market) and the small production run of the 'Bocek' (Bug) akin to a VW Dune-Buggy for the emerging coastal tourism regions. These limited (and perhaps too early) efforts for diversification were superceded by the effective re-entry of foreign vehicle assemblers for domestic and export markets including: Daimler. Opel, MAN AG, Toyota, Honda & Hyundai. Their presence assisting the broad intellectual improvement particularly in production engineering, manufacturing set-up (new and model swap-over) and operational production efficiency.
Interestingly, as with the historical likes of TATA in India, Turkish truck-bus companies were better positioned in terms of localised business models requiring previoulsy minimal R&D due to a strangle-hold markets and so have been comparatively protected. Thus BMC, Otokar and TEMSA have historically enjoyed more notional stability thus far. But as with TATA India, this is pseudo-protectionism has theoretically come to end with EU accession demands and of course WTO free-trade regulations. So though the local market will take time to see the fruits of enhanced competition as fleet buyers continue their typical default purchasing decisions to the likes of KARSAN, BMC & TEMSA times are changing, and companies have reacted accordingly.
The latter two companies are today heavily export orientated, and as such are having to invest in R&D to match the grade of the renowned European benchmark manufacturers that lead the world. With this as the benchmark, Turkey is having to integrate, develop, test and launch the highest levels of today's sophisticated technology solutions - from Euro VI regulations of engine emissions to intelligent 'self-aware' electronics systems that span much from GPS location 'e-tagging' to monitoring drive-cycles for in-service fleet costing.
As we see, it has essentially been the arrival of foreign VMs and OEMs that has enabled engineering and design technology transfer, and so gradual intellectual transfer. However, this process is arguably incumbered by a fragmented Turkish education system. Whilst the efforts of Koc Group in establishing the Koc University in 1993 (and other similar efforts such as Galatasaray University in 1992)are laudible, they are relatively recent and small-scale compared to the state-established efforts of Asian and S. American nations. More must be done to proactively support an extension of the Koc & Galatasaray schemes and the introduction of others, perhaps achieved as a public-private initiated exercise as an adjunct of military service. This would also enable the development of domestic defence engineering know-how which itself could be sold internationally.
Thus, as of today, whilst current arrangements have provided a useful synergy for foreign companies, the Turkish government and Turkish consumers, the question of Turkey's real industrial USP - its real differentiator - and the role of education in creating that, remains a high regard matter. A topic well-noted by Babacan's audience at the LSE.
Japan, S.Korea and now China created their own progression path through automotive, consumer durables and critically electronics - initially through JVs but moving onto self-sufficiency. Turkey in contrast has not to date been seen to similarly follow.
Instead, whilst Koc and Sabanci groups – the 'industrial arbiters' – indeed operate across many industrial sectors there has been mention that that the country hung too long onto the eroded competitiveness of its previously large textiles base and so lost industrial development traction. Recognising this in the 1990s it put overt belief, and disproportionate focus, into tourism and real-estate. But of course the manufacturing sector was quietly growing, having created its own domestically branded and contract manufacture base(s) for a broad range of white and brown goods (washing machines, TVs et al). However, it does seems that the domestic brands like BEKO (part of Koc-Arcelik) have not broken through into western consumer consciousness; even though BEKO is infact capacity-wise #3 in Europe.
Though of course westerners must remember that Turkey's historical and typical commercial trade ties lay with the CIS states, Russia and Middle East, and so for the most part Turkey has served essentially as a technology assimilator and product distributor for these regions.
The question is, "Does this relatively hidden industrial reality (from western gaze) provide the template for “Turkish Auto AS” today and into the future?". The answer must surely be "yes" but with a caveat.
Given the major impact felt by Turkey from heavily contracted western markets over the last 18 months or so (@approx 25%), and given the expected surge in economic development of the CIS over the next decade thanks to its hydro-carbons asset-base, massive agricultural potential and eager populace, it is expected that the newly announced Turkish economic roadmap will encompass the potential for the on-going positive 'CIS export effect' – either explicitly, or given the nature of Turkey's geo-political sensitivity, implicitly.
That continued CIS draw for what is essentially the replaying of 2nd hand technology transfer relative to its previous 'home game' achievement will be undoubtedly successful and so must be followed and exploited to good effect.
However, Turkey must also seek to find its own unique place through technological and manufacturing abilities and differentiation, so providing another road for economic growth by becoming ever more relevant to parallel (high-EM)and advanced B2B and B2C markets.
In the automotive arena, as the western world sits at this historic juncture created by constrained investment and the demands of eco-responsibility, Turkey may well be positioned to turn such challenges into opportunities. Seizing its abilities in low-cost volume manufacture through alternative materials and a low-cost labour-force to thereby potentially creating a new, 21st century automotive industry formula.
A formula that avoids the traditional demands of massive capital expenditure created by the 'Budd' manufacturing system requiring expensive stamping equipment and associated tooling. An alternative which instead combines modular, adaptable and so customisable lightweight component-systems and sets from which to create multi-various LCVs and PVs.
After the increasingly successful previous national efforts of 'Devrim' and 'Anadol', investment-auto-motives believes Mr Babacan, Mr Kirac and the Turkish government should seek to plot additional alternative paths for its highly important automotive industry. Potentially a case of “3rd time domestic success” (after Devrim & Anadol)perhaps using portions of the earned funds from the CIS region sales of conventional vehicles and re-cycling such monies towards eco-orientated vehicles and mobility solutions.
Turkey, given its position on the auto-sector value-curve has deployed its abilities well, but as time progresses so do the achievements of foreign entities, and so there is the danger of Turkey maintaining a sub-optimal competitive postion. It obviously recognises this, having both improved its ability during the process of industrial absorption, and now thanks to efforts of Inan Kirac et al, appreciates the need for industrial re-organisation of the status quo.
The question is "what next?" - how must that re-organisation be directed?
As perhaps a case-study for parallel learning or indeed inspiration, TATA decided to go 'bottom-up' in creating the Nano and along with it 'visioneering' the requisite engineering and infrastructure. Turkey should perhaps look 'top-down' to see how it can deploy its knowledge in creating not a car, but a new-era auto-sector using the best of its own self-directed, indigenous and affiliate resources.
Given the frustration of many CEE countries at present - holding their own auto-assets - its central role could grow even as far as orchestrating the knowledge and asset-base of CEE neighbours to one side (West) and western Middle Eastern neighbours to the other (East). This would create a geographical 'industrial S-shaped chicane' with Turkey at the central apex.
[NB, this recommendation sits in the middle of a broader geo-industrial context forwarded by investment-auto-motives. One that promotes the emergence of an Eco-Tech European Rainbow across the UK-Sweden-Norway-Germany (to the west) and a Premium Arabic sector emerge based on cultural association across Saudi Arabia, Kuwait & Qatar (to the east).
Hence a '3-pillar' plan spanning Northern Europe, the EurAsian region and Middle East].
Thus, just as Istanbul and Turkey itself spans 2 continents and 2 cultures, so the officials in Ankara should create the same dualistic outlook for the auto-sector; perhaps its most prominent industrial economic powerhouse. A dualistic outlook that builds-in the foundations of counter-cyclicity from 'old' and 'new' industrial models; themselves related to 20th century "conventional" and 21st century "advanced" whole vehicle & systems solutions.
For Turkey must continue to promote itself as a progressive independent thinker with pan EurAsian reach, tied not the past, or even the current but a global future.
Tuesday, 15 September 2009
Cross Industry Learning – Formula One & Professional Football – Qadbak's Venture into the Sports-Entertainment Sector
Since 2007 global investment groups have reined in their bullish horns and had to select stock market strategies and re-orientate their holding company portfolios to match the heavily weakened climate. Defensive investment took precedence for much of that period, and that mentality still purveys as we still see today with the new schizophrenic alignment of gold and bonds safety plays versus the band-wagon appetite for stocks.
But perhaps for the major SWF, large PE and major institutional players a return to Macro-Strategy investing – long-term interests derived from PESTEL trends – has come back to the fore. Thus many asset-seekers will have been assessing various sectors and their inherent characteristics across many geographical regions, which in itself raises the issues of regional interest rates, inflation levels and of course relative local currency FX rates – present and future.
Given the enormity of their petro-dollar reserves, the present energy constrains of global industry and the previous high consumption consumers, and construction slow-down locally, Middle-Eastern funds have been seeking new investment regimes. Regimes that will provide: all important financial stability, allow for the creation of a synergistic set of ideally inter-related holding interests which themselves additionally promote regional GCC industrial learning and so extended sector GCC economic coverage beyond oil & gas as part of their own regional and national growth agendas.
Understandably GCC funds – whether family based, SWF related, PE or publicly accessed – have had a long affinity with the petroleum & automotive industries, only natural given the co-reliance of local oil drilling to consumer's historic vehicle needs and aspirations. Thus interests in automotive companies go back to the 1930s, taking tranches of stock in initially American, UK Japanese, Korean and German companies.
Recent times have seen the likes of the Bahrain Mumtalakat Holding Company's buy into McLaren Group , quickly followed by EFAD-Adeem Investment Group (and affiliates) buy into Aston Martin Lagonda in 2007, and through 2008 KIA (Kuwait Investment Authority) taking a prime hold of Daimler AG only to be overtaken by Aabar Investments in 2009. [NB Dubai International Capital previously holding 2%].
To a certain degree the GCC region has effectively become the patron, sponsor and beneficiary of 21st century 'Advanced Autos'.
That rolling dynamic continues now with the Qadbak Investment Company taking a controlling interest in the Sauber Formula One team, having bought-out BMW's 80% stake at the reported price of £80 million. Qadbak, although based in Switzerland, represents the confidential investment concerns of royal and aristocratic Middle-Eastern & European families. [NB investment-auto-motives has reason to believe that connections link to the ruling Qatari Al-Thani family]. Primary representation is reported to be via Lionel Fischer.
Exact details are still very sketchy beyond seemingly optimistic about running in the 2010 season as a 14th placed late-comer team. Questions like powertrain supplier, driver line-up etc remain to be seen, though in all probability it would seem likely that BMW might still maintain contract supply and technical support for the team.
What is very interesting is the way that Qadbak Investments is following others down a portfolio strategy route that matches regional and global macro-plays with the Sports-Entertainment-Leisure industry. And particularly the dual interests in the high-profile business worlds of team-based F1 and club-level Football.
Back in June Qadbak bought Nottingham County Football Club via is Munto Finance Ltd investment vehicle. Headed by Peter Willett. The deal price & promise of future potential undoubtedly bolstered by the fact that it is the oldest football club in the world and the rub-off effect of the 2009 film 'The Damned United' which profiled Nottingham Forest's ex-club manager Brian Clough as a local hero. Recapturing those recession era glory-days rings true today, the business model probably targeting the three fan-based elements of: heritage, affordability and local club-land loyalty.
But of course behind the glitz and glamour is the fundamental business rationale of gaining dual income streams from both the team / club itself: through sponsorship deals & visitor gate receipts, product merchandising and the real-estate itself through annual & ground rents from commercial leasees and of course the long-term capital appreciation of the land & facility.
As such merging the sport with the asset-base, Qadbak follows in the footsteps of the likes of CVC Capital often represented by Nicholas Clarry with its interests in F1 commercial rights holder FOH (along with Bernie Ecclestone) and a related defensive off-set by owning portions of the F1 circuits themselves that host the F1 races, other motor-sport events and so much more in the way of entertainment events. Qadback will have also been influenced by the interest Dubai International Capital took in seeking, and still seeking, to acquire Liverpool Football Club; a sale outcome, like that of Notts County backed by the supporters who witnessed Arsenal's success with sponsorship money from Emirates airline of the UAE.
The GCC nations are undoubtedly having a massive influence in the 2009-2010 global investment agenda, the likes of Kuwait and Bahrain, along with Qatar perhaps the 'hardest hitters' given their relative geographical size, smaller populations and so very high relative GDP.
A desire to create broad-base, defensive portfolios is key; and although still interested in the financial sector's upturn - having had their fingers burnt by buying back into that arena too early during the fragility/volatility – the GCC states and families seek firm asset-backed deals with multiple income streams.
The Sports-Entertainment-Leisure industry has proven itself as a good provider to do so; becoming ever more family-centric and creating a commercial psychologically aligned 'pleasure-safe-space' ideally running 365 days per year with obvious weekend & holiday focus.
And of course Qadbak will be seeking to ensure mutual learning and synergy seeking between its efforts to infuse value-creation into Sauber F1 and the same with Notts County FC. Of course the 2 are not completely symmetrical in terms of cross-pollination of business ethos, ideas and operations, but they should provide for interesting corroborative exercises in seeking fundamental and additional yields.
For both will be nurtured for a period to provide traction and self-momentum before Qadbak's exit strategy and timing come to light. In the meantime expect Lionel Fischer and Peter Willett to be comparing notes on how to evolve 2 teams of relative sporting minnows into competitive piranha and simultaneously sweat and expand their respective physical and human asset-bases.
That psychology of winning will need to be evident on 'track & field' to match the one backing the books.
But perhaps for the major SWF, large PE and major institutional players a return to Macro-Strategy investing – long-term interests derived from PESTEL trends – has come back to the fore. Thus many asset-seekers will have been assessing various sectors and their inherent characteristics across many geographical regions, which in itself raises the issues of regional interest rates, inflation levels and of course relative local currency FX rates – present and future.
Given the enormity of their petro-dollar reserves, the present energy constrains of global industry and the previous high consumption consumers, and construction slow-down locally, Middle-Eastern funds have been seeking new investment regimes. Regimes that will provide: all important financial stability, allow for the creation of a synergistic set of ideally inter-related holding interests which themselves additionally promote regional GCC industrial learning and so extended sector GCC economic coverage beyond oil & gas as part of their own regional and national growth agendas.
Understandably GCC funds – whether family based, SWF related, PE or publicly accessed – have had a long affinity with the petroleum & automotive industries, only natural given the co-reliance of local oil drilling to consumer's historic vehicle needs and aspirations. Thus interests in automotive companies go back to the 1930s, taking tranches of stock in initially American, UK Japanese, Korean and German companies.
Recent times have seen the likes of the Bahrain Mumtalakat Holding Company's buy into McLaren Group , quickly followed by EFAD-Adeem Investment Group (and affiliates) buy into Aston Martin Lagonda in 2007, and through 2008 KIA (Kuwait Investment Authority) taking a prime hold of Daimler AG only to be overtaken by Aabar Investments in 2009. [NB Dubai International Capital previously holding 2%].
To a certain degree the GCC region has effectively become the patron, sponsor and beneficiary of 21st century 'Advanced Autos'.
That rolling dynamic continues now with the Qadbak Investment Company taking a controlling interest in the Sauber Formula One team, having bought-out BMW's 80% stake at the reported price of £80 million. Qadbak, although based in Switzerland, represents the confidential investment concerns of royal and aristocratic Middle-Eastern & European families. [NB investment-auto-motives has reason to believe that connections link to the ruling Qatari Al-Thani family]. Primary representation is reported to be via Lionel Fischer.
Exact details are still very sketchy beyond seemingly optimistic about running in the 2010 season as a 14th placed late-comer team. Questions like powertrain supplier, driver line-up etc remain to be seen, though in all probability it would seem likely that BMW might still maintain contract supply and technical support for the team.
What is very interesting is the way that Qadbak Investments is following others down a portfolio strategy route that matches regional and global macro-plays with the Sports-Entertainment-Leisure industry. And particularly the dual interests in the high-profile business worlds of team-based F1 and club-level Football.
Back in June Qadbak bought Nottingham County Football Club via is Munto Finance Ltd investment vehicle. Headed by Peter Willett. The deal price & promise of future potential undoubtedly bolstered by the fact that it is the oldest football club in the world and the rub-off effect of the 2009 film 'The Damned United' which profiled Nottingham Forest's ex-club manager Brian Clough as a local hero. Recapturing those recession era glory-days rings true today, the business model probably targeting the three fan-based elements of: heritage, affordability and local club-land loyalty.
But of course behind the glitz and glamour is the fundamental business rationale of gaining dual income streams from both the team / club itself: through sponsorship deals & visitor gate receipts, product merchandising and the real-estate itself through annual & ground rents from commercial leasees and of course the long-term capital appreciation of the land & facility.
As such merging the sport with the asset-base, Qadbak follows in the footsteps of the likes of CVC Capital often represented by Nicholas Clarry with its interests in F1 commercial rights holder FOH (along with Bernie Ecclestone) and a related defensive off-set by owning portions of the F1 circuits themselves that host the F1 races, other motor-sport events and so much more in the way of entertainment events. Qadback will have also been influenced by the interest Dubai International Capital took in seeking, and still seeking, to acquire Liverpool Football Club; a sale outcome, like that of Notts County backed by the supporters who witnessed Arsenal's success with sponsorship money from Emirates airline of the UAE.
The GCC nations are undoubtedly having a massive influence in the 2009-2010 global investment agenda, the likes of Kuwait and Bahrain, along with Qatar perhaps the 'hardest hitters' given their relative geographical size, smaller populations and so very high relative GDP.
A desire to create broad-base, defensive portfolios is key; and although still interested in the financial sector's upturn - having had their fingers burnt by buying back into that arena too early during the fragility/volatility – the GCC states and families seek firm asset-backed deals with multiple income streams.
The Sports-Entertainment-Leisure industry has proven itself as a good provider to do so; becoming ever more family-centric and creating a commercial psychologically aligned 'pleasure-safe-space' ideally running 365 days per year with obvious weekend & holiday focus.
And of course Qadbak will be seeking to ensure mutual learning and synergy seeking between its efforts to infuse value-creation into Sauber F1 and the same with Notts County FC. Of course the 2 are not completely symmetrical in terms of cross-pollination of business ethos, ideas and operations, but they should provide for interesting corroborative exercises in seeking fundamental and additional yields.
For both will be nurtured for a period to provide traction and self-momentum before Qadbak's exit strategy and timing come to light. In the meantime expect Lionel Fischer and Peter Willett to be comparing notes on how to evolve 2 teams of relative sporting minnows into competitive piranha and simultaneously sweat and expand their respective physical and human asset-bases.
That psychology of winning will need to be evident on 'track & field' to match the one backing the books.
Friday, 11 September 2009
Industry Structure – Opel – Vauxhall – Magna, Merkel & the Opel “Coup de Grace”.
Conjecture as to the future for the core of GM Europe (Opel and Vauxhall) has been rife for many months. Since Detroit's announcement that it would divest of its European brands to concentrate on North America and China, both trade buyers and private equity have been clambering over initially SAAB, and latterly the big prize of Opel-Vauxhall.
Under different – more normal - economic and political circumstances the sale process may not have been as contorted as we've witnessed, the questions of constrained financial liquidity and election influenced 'real politik' bearing more heavily than would normally be the case.
After initial basic enquiries from various 'sniff-about' parties, the 2 ultimate prime candidates were of course presented in the shape of Magna International-Sberbank (the components and assembly company together with the Russian bank) and RHJ International (the industrial holdings company) vying head to head toward the finishing post.
As we now know, the winner proved to be Magna-Sberbank, the result seemingly born from the The Christian Democratic Union's political desire to be seen to be good country custodians so close the September 27th German General Election, and importantly maintain healthy political relations with Russia given its sizable bi-lateral energy trade agreements. Thus Angela Merkel has struck a decisive 'coup de grace' primarily for the CDU but arguably taken Opel out of its ongoing operational hiatus and given it new firm direction.
In the ideal of a commercially transactive perfect world – a far cry from today's environment - that intermission period would have stretched beyond the election date, so as to be based purely upon investment rational. However, government interventionism is the present reality in the auto-sector, and given that case, it seems that John Smith – GM's lead negotiator – tactically leveraged the moment. Previously announcing that GM might not sell Opel-Vauxhall after all and also possibly calling upon Detroit's Bob Lutz and Opel's Carl Peter Forster to pronounce opposing sale views – the latter staying 'on-side' with Merkel and the politicos. All to possibly add confusion to the mix and seek greater government assistance as the election date loomed.
As reported, Opel-Vauxhall is now shared as a 3-way entity between Magna-Sberbank with 55%, GM with 35% and the workforce with 10%. This allows the Canadian-Russian JV strategic control, GM still a major influence and value recipient – both in terms of negotiating operational transfer pricing of platforms and technology to NA and as latter-day stock beneficiary – and gives the workforce the fiscal incentive toward greater labour flexibility in helping re-shape the productivity competitiveness of the Opel-Vauxhall enterprise.
And of course that is key if the loss-making company is to resuscitate and prosper.
Magna offers a broad reach of mass-manufacturing competence across both low-value parts (such as metal stampings, metal castings, exterior and interior plastics) mid-value parts (such as powertrain ancilleries, transmission parts and fuel system parts) and high-value parts (such as electronic components and systems). And related to the latter is Magna's ambition to become a prime-mover regards 'alternative-drive' vehicles. This push for plug-in electric vehicles, as demonstrated by its acquisition of BluWav Systems LLC and its working with FMC on the all 2011 electric RV Focus programme.
[NB The true viability of that latter EV project - based seemingly on standard steel monocoque construction -raises immediate questions regards performance, cost and mass-market attraction terms. investment-auto-motives should hope to see Magna-Ford also work upon a 'baby-hybrid' system similar to that announced by SAAB on its 9-5; mating an 'electric launch/acceleration' motor with a conventional small capacity ICE unit to achieve both mass-market acceptance and provide 'unlimited' range. A rational intermediate step given the timeline to fully develop EV related lightweight structure/body, affordable light-mass battery technology and a sound EV business plan].
Beyond high-end R&D, Magna also recognises the constraints of the highly expert but limited span of Magna-Steyr's own R&D and vehicle development capabilities, so sees via Opel the opportunity for additional resource in this field that marry German expertise to that of Canadian, Austrian, S.Korean and Chinese locales.
Sberbank's involvement obviously provides access to additional funding for Opel – even with relatively constrained Russian banking liquidity. But critically it acts as an effectual broker and powerful point of entry to the lower cost Tier 1 & 2 & 3 levels of Russia's continually developing auto-industry. Sberbank itself unsurprisingly keen to maximise its central involvement in the full Russian value-chain. Done via GAZ cars, vans (inc the UK's LDV vans), large commercial vehicles, buses and auto-parts and its parent Russian Machines, itself under the umbrella of the commodity materials extractor and processor Basic Element group - of the famed Oleg Deripaska.
Such a conspicuously created set of alliance & conglomerate value-chain inter-relationships obviously suggests that a prime remit of the consortia is to effectively align capabilities, improve efficiencies, ride cross-sector business cycles and orchestrate multi-link transfer-pricing deals.
Fundamental to that is the engineering and related commercial deconstruction of the end-product - namely the car itself. Just as it has re-engineered the value chain, so Magna will hope to be able to re-engineer Opel vehicles themselves; undertaken via normative 'tear-down' whole vehicle, sub-systems and component parts appraisal for those areas Magna is unfamiliar with. Cost, weight and performance benchmarks will be acsertained, then the agenda set to equal or ideally better the measured parameters. But above all Russelsheim & elsewhere will be centred on cost-down above all else.
A certain level of re-engineering appraisal of Opel cars should have already taken place at GAZ given its ambitions to advance, but the Magna-Sberbank acquisition of Opel will now push that process far quicker and further. GM recognised this inevitability, hence the previous IPR dispute, something which now appears 'behind the scenes' notionally appeased.
Back to the high-level picture, and the question of Opel-Vauxhall production capacity re-alignment and associated plant and workforce fortunes is now at the forefront of newscasts.
The apparent sigh of relief in Germany is counter-pointed by a sigh of almost resignation elsewhere, especially so in the UK at Luton and Ellesmere Port. But should this be the case? Given the devalued British Pound (possibly to go further), the overtly strong Euro and the progressive flexible labour policies of the UK (to be undoubtedly maintained by a probable incoming Conservative government) the UK may have favourable tailwinds compared to its Spanish and Belgian counterparts, even if it cannot directly compete with CEE or Russian production centres, given the ability to 'ratchet-down' their local economies.
Interestingly, the Vauxhall-GAZ link could assist the Luton plant by putting commercial vehicle manufacture back into the hands of Vauxhall. As stated GAZ owns LDV, a company which boasts ownership of a relatively recently engineered multi-variant van platform – the Maxus. Presently Vauxhall assembles the Renault engineered Master & Trafic models under its own nameplates of Movano & Vivano. But this puts Vauxhall under the IPR and licensing mercy of Renault, a prime concern now given Renault's contractual 'walk-out' clause enacted if GM sells Vauxhall, as it has now effectively done. This perilous position is something Luton will want to escape not only to safeguard van production but also to better gain going forward given the good unit margins available on vans and the improving sales & revenues to be gained from a UK, European and Global economic upturn in due course which will heavily drive demand for LCVs nationally and internationally. Opel and Vauxhall will want to independently ride that wave, and could do so by 'appropriating' the LDV Maxus via GAZ (company sale or co-licensing deal) for its own use.
Such a favourable scenario, if tabled to the UK government's BIS office, would surely attract potential grant monies mentioned by Lord Mandleson. Such funds will not (rightly) compare to level of offering from Germany, Merkel and the CDU – offering a previous 1.5bn Euro bridging loan and 4.5bn future funding - instead monies forwarded should be in proportion to the required re-shaping of Vauxhall for future domestic stability and possibly even export competitiveness in niche (SVO) vehicles if it can prove itself and command a level of operational autonomy in the longer term.
For today and the short term however the battle for market share and 'share of mind' still looks harsh, especially so post national car-buying stimulus packages.
Efficiencies in the upstream value-chain through Magna are being strategically created, but now Magna-Sberbank must re-shape both the company itself to become a lean entity and critically critically re-consider the upstream portion of the value-chain – the products themselves, the retail channels and general environment and of course now with a new 'captive finance' house, balance the desire to push consumer lending with the need to maintain low default rates on new car loans so as to recycle the valuable liquidity back into the company and group for strategic integration and operational expansion.
And in relation to that is the question of how Opel, now effectively a Tier 0.5 entity can be leveraged to possibly become the centre of European client contract manufacture (inc Daimler, BMW & FIAT) and potentially regionally beyond.
Along with SAAB's and possibly Volvo's ownership change with BAIC and Geely, the new Opel-Vauxhall purveys a new era of substantial structural change in the European auto-sector.
Under different – more normal - economic and political circumstances the sale process may not have been as contorted as we've witnessed, the questions of constrained financial liquidity and election influenced 'real politik' bearing more heavily than would normally be the case.
After initial basic enquiries from various 'sniff-about' parties, the 2 ultimate prime candidates were of course presented in the shape of Magna International-Sberbank (the components and assembly company together with the Russian bank) and RHJ International (the industrial holdings company) vying head to head toward the finishing post.
As we now know, the winner proved to be Magna-Sberbank, the result seemingly born from the The Christian Democratic Union's political desire to be seen to be good country custodians so close the September 27th German General Election, and importantly maintain healthy political relations with Russia given its sizable bi-lateral energy trade agreements. Thus Angela Merkel has struck a decisive 'coup de grace' primarily for the CDU but arguably taken Opel out of its ongoing operational hiatus and given it new firm direction.
In the ideal of a commercially transactive perfect world – a far cry from today's environment - that intermission period would have stretched beyond the election date, so as to be based purely upon investment rational. However, government interventionism is the present reality in the auto-sector, and given that case, it seems that John Smith – GM's lead negotiator – tactically leveraged the moment. Previously announcing that GM might not sell Opel-Vauxhall after all and also possibly calling upon Detroit's Bob Lutz and Opel's Carl Peter Forster to pronounce opposing sale views – the latter staying 'on-side' with Merkel and the politicos. All to possibly add confusion to the mix and seek greater government assistance as the election date loomed.
As reported, Opel-Vauxhall is now shared as a 3-way entity between Magna-Sberbank with 55%, GM with 35% and the workforce with 10%. This allows the Canadian-Russian JV strategic control, GM still a major influence and value recipient – both in terms of negotiating operational transfer pricing of platforms and technology to NA and as latter-day stock beneficiary – and gives the workforce the fiscal incentive toward greater labour flexibility in helping re-shape the productivity competitiveness of the Opel-Vauxhall enterprise.
And of course that is key if the loss-making company is to resuscitate and prosper.
Magna offers a broad reach of mass-manufacturing competence across both low-value parts (such as metal stampings, metal castings, exterior and interior plastics) mid-value parts (such as powertrain ancilleries, transmission parts and fuel system parts) and high-value parts (such as electronic components and systems). And related to the latter is Magna's ambition to become a prime-mover regards 'alternative-drive' vehicles. This push for plug-in electric vehicles, as demonstrated by its acquisition of BluWav Systems LLC and its working with FMC on the all 2011 electric RV Focus programme.
[NB The true viability of that latter EV project - based seemingly on standard steel monocoque construction -raises immediate questions regards performance, cost and mass-market attraction terms. investment-auto-motives should hope to see Magna-Ford also work upon a 'baby-hybrid' system similar to that announced by SAAB on its 9-5; mating an 'electric launch/acceleration' motor with a conventional small capacity ICE unit to achieve both mass-market acceptance and provide 'unlimited' range. A rational intermediate step given the timeline to fully develop EV related lightweight structure/body, affordable light-mass battery technology and a sound EV business plan].
Beyond high-end R&D, Magna also recognises the constraints of the highly expert but limited span of Magna-Steyr's own R&D and vehicle development capabilities, so sees via Opel the opportunity for additional resource in this field that marry German expertise to that of Canadian, Austrian, S.Korean and Chinese locales.
Sberbank's involvement obviously provides access to additional funding for Opel – even with relatively constrained Russian banking liquidity. But critically it acts as an effectual broker and powerful point of entry to the lower cost Tier 1 & 2 & 3 levels of Russia's continually developing auto-industry. Sberbank itself unsurprisingly keen to maximise its central involvement in the full Russian value-chain. Done via GAZ cars, vans (inc the UK's LDV vans), large commercial vehicles, buses and auto-parts and its parent Russian Machines, itself under the umbrella of the commodity materials extractor and processor Basic Element group - of the famed Oleg Deripaska.
Such a conspicuously created set of alliance & conglomerate value-chain inter-relationships obviously suggests that a prime remit of the consortia is to effectively align capabilities, improve efficiencies, ride cross-sector business cycles and orchestrate multi-link transfer-pricing deals.
Fundamental to that is the engineering and related commercial deconstruction of the end-product - namely the car itself. Just as it has re-engineered the value chain, so Magna will hope to be able to re-engineer Opel vehicles themselves; undertaken via normative 'tear-down' whole vehicle, sub-systems and component parts appraisal for those areas Magna is unfamiliar with. Cost, weight and performance benchmarks will be acsertained, then the agenda set to equal or ideally better the measured parameters. But above all Russelsheim & elsewhere will be centred on cost-down above all else.
A certain level of re-engineering appraisal of Opel cars should have already taken place at GAZ given its ambitions to advance, but the Magna-Sberbank acquisition of Opel will now push that process far quicker and further. GM recognised this inevitability, hence the previous IPR dispute, something which now appears 'behind the scenes' notionally appeased.
Back to the high-level picture, and the question of Opel-Vauxhall production capacity re-alignment and associated plant and workforce fortunes is now at the forefront of newscasts.
The apparent sigh of relief in Germany is counter-pointed by a sigh of almost resignation elsewhere, especially so in the UK at Luton and Ellesmere Port. But should this be the case? Given the devalued British Pound (possibly to go further), the overtly strong Euro and the progressive flexible labour policies of the UK (to be undoubtedly maintained by a probable incoming Conservative government) the UK may have favourable tailwinds compared to its Spanish and Belgian counterparts, even if it cannot directly compete with CEE or Russian production centres, given the ability to 'ratchet-down' their local economies.
Interestingly, the Vauxhall-GAZ link could assist the Luton plant by putting commercial vehicle manufacture back into the hands of Vauxhall. As stated GAZ owns LDV, a company which boasts ownership of a relatively recently engineered multi-variant van platform – the Maxus. Presently Vauxhall assembles the Renault engineered Master & Trafic models under its own nameplates of Movano & Vivano. But this puts Vauxhall under the IPR and licensing mercy of Renault, a prime concern now given Renault's contractual 'walk-out' clause enacted if GM sells Vauxhall, as it has now effectively done. This perilous position is something Luton will want to escape not only to safeguard van production but also to better gain going forward given the good unit margins available on vans and the improving sales & revenues to be gained from a UK, European and Global economic upturn in due course which will heavily drive demand for LCVs nationally and internationally. Opel and Vauxhall will want to independently ride that wave, and could do so by 'appropriating' the LDV Maxus via GAZ (company sale or co-licensing deal) for its own use.
Such a favourable scenario, if tabled to the UK government's BIS office, would surely attract potential grant monies mentioned by Lord Mandleson. Such funds will not (rightly) compare to level of offering from Germany, Merkel and the CDU – offering a previous 1.5bn Euro bridging loan and 4.5bn future funding - instead monies forwarded should be in proportion to the required re-shaping of Vauxhall for future domestic stability and possibly even export competitiveness in niche (SVO) vehicles if it can prove itself and command a level of operational autonomy in the longer term.
For today and the short term however the battle for market share and 'share of mind' still looks harsh, especially so post national car-buying stimulus packages.
Efficiencies in the upstream value-chain through Magna are being strategically created, but now Magna-Sberbank must re-shape both the company itself to become a lean entity and critically critically re-consider the upstream portion of the value-chain – the products themselves, the retail channels and general environment and of course now with a new 'captive finance' house, balance the desire to push consumer lending with the need to maintain low default rates on new car loans so as to recycle the valuable liquidity back into the company and group for strategic integration and operational expansion.
And in relation to that is the question of how Opel, now effectively a Tier 0.5 entity can be leveraged to possibly become the centre of European client contract manufacture (inc Daimler, BMW & FIAT) and potentially regionally beyond.
Along with SAAB's and possibly Volvo's ownership change with BAIC and Geely, the new Opel-Vauxhall purveys a new era of substantial structural change in the European auto-sector.
Friday, 4 September 2009
Industry Structure – UK Autos plc – VDS : the High 'Talk' Differential
Having looked at the US' CARS scrappage schemes, investment-auto-motives now turns its attention to the UK government's version – VDS : the Vehicle Discount Scheme; started back in April.
Given that the UK has far smaller domestically owned production capacity - by far the greater of its 1.5m annual output Japanese & German owned with 75% exported – the immediate effect of domestic sales does not reach as far into the economic heartland; as it would have done decades ago. However, it was noted in Q109 that UK sales had dramatically dropped over 60% YoY given the credit crisis and something was to be done to slow the turmoil.
Hence, the Vehicle Discount Scheme that sees government subsidise new car buyers to the tune of up to £2,000 came into being soon after Lord Mandleson's awaited automotive industry announcement.
As with the US scheme, it has been touted a success given the slowed decline rate – to -17% by July YoY; though it could be argued that such the immediate sharp fall would have consequentially 'naturally' slowed.
Either way, Nissan, Toyota and Honda, the UK's mainstream car producers, have been able to re-start previously halted production shifts from Sunderland to Burnham to Swindon and elsewhere given the correlates to engine plants and regional/national suppliers.
But what is interesting is the consumer psychology and dynamic of car buying preference., with Ford (seemingly perennially) taking the top 2 sales spots with Fiesta and Focus – cars not made in the UK, but continued beneficiaries of the public's 'flight to safety'. Obviously given its UK manufacturing history, diminishing but strong popularity and massive advertising spend, Ford still holds a major “share of mind”. FMC enjoying the moment more than ever given GM and so Vauxhall's woes that for many with little auto-knowledge have overtones of the MG-Rover collapse and ensuing debacle.
By mid August the £330m the BIS scheme had induced 165,923 sales, many of which helped the July YtD figures showing a decline of -46% and August YtD figures of -40%; thus slowing the progressive rate of decline by approximately 14% & 20% respectively. Like the US, previously high inventory levels meant that there was much forecourt stock to be 'mopped-up', thus that there was not an immediate link-effect to UK manufacturing, much of that cautiously and temporarily expanded Japanese production being exported to Europe (given France, Germany and Italy's own incentive schemes) and elsewhere.
As mentioned, what is interesting is the difference between UK and US consumers in their VDS-CARS scheme choices. Whilst Ford has done well by virtue of GM and Chrysler 'dis-creditation' but the typical American buyer chose Toyota Corolla & Honda Civic as their #1 & #2 choices, so maintaining the decade long trend toward Japanese (and now S.Korean) car popularity. That same Japanese popularity has been happening in the UK, but far more slowly given the attachment to Ford and Vauxhall, and of course the level of smaller regional car competition from VW, PSA, FIAT, BMW-Mini & Daimler-Smart.
Even so, unless the UK buyer is an inhabitant of the North-East, East-Midlands or West with local production familiarity, it seems that concerns of their car-buying effect at a national economy level is lost or of little consequence. Whilst investment-auto-motives abhors protectionism writ large or small (as we saw with the lambasted “Buy American” campaign) it is interesting to note that Brits do not back their real-world national auto-industry. Yes it is Japanese (and including JLR Indian) owned, but such expenditure is still critical to the regional and national economy and has been part of those regions successful growth stories in the last 20+ years.
And that is far more than 'just a shame' because those Japanese companies and their associated suppliers are the key for the UK's motor industry into the future. Nissan, Toyota-Daihatsu and Honda's technological capabilities in small cars (esp 660cc Kei-cars), hybrid powertrains, lean-burn petrol & diesel engines and affiliated owned or JV battery knowledge is the leading edge of R&D development and so tomorrow's cars, and by virtue tomorrow's auto-industry.
Importantly, the ability to 'trickle-down' and 'infuse' such R&D solutions into Britain's luxury car sector – from the highs of Rolls-Royce, Bentley & McLaren down to Jaguar Land-Rover – means that the UK can leverage such knowledge. And moreover, the affordable integration of OTS (off the shelf) clean-tech will be critical for the niche UK industry players that so heavily rely on farmed-out powertrain, drivetrain and electronic systems.
The UK isn't the US where its niche vehicle builders rely upon generic GM (often Corvette) whole platforms. Its strength lies in its marque specific engineering specialisation and accordant USP, from Morgan to Bristol to Noble to Ginetta et al.
Thus investment-auto-motives believes that if the UK auto-sector (and nation) is to prosper as whole – and not simply buoy the retail sector with VDS – the government must subtly demonstrate just how critical the industry's inter-links truly are between the broad scope of auto-related companies, and critically the “Giant (progressive) Foreigners” and “Dwarf (adaptive) Locals”
As stated previously, investment-auto-motives is not an advocate of short-termist stimulus packages that run to dead-ends. But the difference between the UK and US 'appropriations' is made clear given the very different natures of their respective 'domestic' industries.
The trouble is that we suspect the present government has failed to truly grasp the complexities of subject at hand. You don't just simply pour medicine down a sickly patient's neck expecting a miraculous cure, you simultaneously provide the raison d'etre to re-invigourate.
Given that the UK has far smaller domestically owned production capacity - by far the greater of its 1.5m annual output Japanese & German owned with 75% exported – the immediate effect of domestic sales does not reach as far into the economic heartland; as it would have done decades ago. However, it was noted in Q109 that UK sales had dramatically dropped over 60% YoY given the credit crisis and something was to be done to slow the turmoil.
Hence, the Vehicle Discount Scheme that sees government subsidise new car buyers to the tune of up to £2,000 came into being soon after Lord Mandleson's awaited automotive industry announcement.
As with the US scheme, it has been touted a success given the slowed decline rate – to -17% by July YoY; though it could be argued that such the immediate sharp fall would have consequentially 'naturally' slowed.
Either way, Nissan, Toyota and Honda, the UK's mainstream car producers, have been able to re-start previously halted production shifts from Sunderland to Burnham to Swindon and elsewhere given the correlates to engine plants and regional/national suppliers.
But what is interesting is the consumer psychology and dynamic of car buying preference., with Ford (seemingly perennially) taking the top 2 sales spots with Fiesta and Focus – cars not made in the UK, but continued beneficiaries of the public's 'flight to safety'. Obviously given its UK manufacturing history, diminishing but strong popularity and massive advertising spend, Ford still holds a major “share of mind”. FMC enjoying the moment more than ever given GM and so Vauxhall's woes that for many with little auto-knowledge have overtones of the MG-Rover collapse and ensuing debacle.
By mid August the £330m the BIS scheme had induced 165,923 sales, many of which helped the July YtD figures showing a decline of -46% and August YtD figures of -40%; thus slowing the progressive rate of decline by approximately 14% & 20% respectively. Like the US, previously high inventory levels meant that there was much forecourt stock to be 'mopped-up', thus that there was not an immediate link-effect to UK manufacturing, much of that cautiously and temporarily expanded Japanese production being exported to Europe (given France, Germany and Italy's own incentive schemes) and elsewhere.
As mentioned, what is interesting is the difference between UK and US consumers in their VDS-CARS scheme choices. Whilst Ford has done well by virtue of GM and Chrysler 'dis-creditation' but the typical American buyer chose Toyota Corolla & Honda Civic as their #1 & #2 choices, so maintaining the decade long trend toward Japanese (and now S.Korean) car popularity. That same Japanese popularity has been happening in the UK, but far more slowly given the attachment to Ford and Vauxhall, and of course the level of smaller regional car competition from VW, PSA, FIAT, BMW-Mini & Daimler-Smart.
Even so, unless the UK buyer is an inhabitant of the North-East, East-Midlands or West with local production familiarity, it seems that concerns of their car-buying effect at a national economy level is lost or of little consequence. Whilst investment-auto-motives abhors protectionism writ large or small (as we saw with the lambasted “Buy American” campaign) it is interesting to note that Brits do not back their real-world national auto-industry. Yes it is Japanese (and including JLR Indian) owned, but such expenditure is still critical to the regional and national economy and has been part of those regions successful growth stories in the last 20+ years.
And that is far more than 'just a shame' because those Japanese companies and their associated suppliers are the key for the UK's motor industry into the future. Nissan, Toyota-Daihatsu and Honda's technological capabilities in small cars (esp 660cc Kei-cars), hybrid powertrains, lean-burn petrol & diesel engines and affiliated owned or JV battery knowledge is the leading edge of R&D development and so tomorrow's cars, and by virtue tomorrow's auto-industry.
Importantly, the ability to 'trickle-down' and 'infuse' such R&D solutions into Britain's luxury car sector – from the highs of Rolls-Royce, Bentley & McLaren down to Jaguar Land-Rover – means that the UK can leverage such knowledge. And moreover, the affordable integration of OTS (off the shelf) clean-tech will be critical for the niche UK industry players that so heavily rely on farmed-out powertrain, drivetrain and electronic systems.
The UK isn't the US where its niche vehicle builders rely upon generic GM (often Corvette) whole platforms. Its strength lies in its marque specific engineering specialisation and accordant USP, from Morgan to Bristol to Noble to Ginetta et al.
Thus investment-auto-motives believes that if the UK auto-sector (and nation) is to prosper as whole – and not simply buoy the retail sector with VDS – the government must subtly demonstrate just how critical the industry's inter-links truly are between the broad scope of auto-related companies, and critically the “Giant (progressive) Foreigners” and “Dwarf (adaptive) Locals”
As stated previously, investment-auto-motives is not an advocate of short-termist stimulus packages that run to dead-ends. But the difference between the UK and US 'appropriations' is made clear given the very different natures of their respective 'domestic' industries.
The trouble is that we suspect the present government has failed to truly grasp the complexities of subject at hand. You don't just simply pour medicine down a sickly patient's neck expecting a miraculous cure, you simultaneously provide the raison d'etre to re-invigourate.
Wednesday, 2 September 2009
Industry Structure – US Autos – CARS : Consequences of a “CARS 2” ?
September is upon us and justifiable concerns have at last grown over the basis of sustainable economic recovery. Of all the prime-pumping exercises from national stimulus monies, one of the most visible has undoubtedly been the 'Cash for Clunkers' exercise under the CARS pseudonym.
Intended to reprieve US auto manufacturing, kick-start consumer spending and reduce the US's carbon emissions levels, the Summer initiative has been announced as an administrative success given that the full CARS fund has been extended from $1bn to $3bn, and ultimately exhausted by deal-hunting shoppers.
However, as investment-auto-motives has previously highlighted, the CARS programme – whilst well intended – ultimately serves only as a momentary propagator of US industry which must continue to face the realities of continued structural reform. CARS has been a pleasurable diversion from that fact.
And so, as expected, now that the subsidy funding for vehicle purchases has ended, the market realities bites. The August sales figures have been reported and unfortunately for US Autos Inc, the ongoing consumer demand has tumbled sharply from the mid-year supported highs, and critically the monies appropriated have largely gone to Japanese and South Korean automakers, with only the best positioned Ford fairing relatively well.
Thus the results of CARS as expected, the 'mainstream quality' and 'mainstream value' foreign manufacturers (ie Japanese and Korean) boosted by the federal funding, the monies essentially 'wasted' on GM and Chrysler which could not draw consumer attention and conversion given their recent history and associative heavy credibility loss.
The picture detailed in sales and prime brand & product dynamics:
GM - 246,479 units vs 308,817 in Aug '08 / Pontiac sales up 23.3% (29,921) [driven by buyer demographic], Chevrolet sales down 9.2% (168,130 vehicles), Cadillac sales down 55% (6,931), Buick sales down 51.7% (8,612), Hummer >64% down.
Ford - 182,149 units vs 155,690 in Aug '08 / Focus, Fusion, Escape, F150
Chrysler - 93,222 units so down 15% / Chrysler brand down 23% (18,619); Jeep sales down 6% (22,041), Dodge sales down to 52,562 vehicles.
Toyota - 225,088 units so up 6.4% from 211,533 vehicles a year ago / Corolla ranked #1
Honda - 161,439 units so up 9.9% / Civic ranked #2, Honda brand up 15.2% (151,814), Acura sales down 36.2% (9,625).
Nissan - 105,312 units so down 2.9% /
Hyundai - 60,467 units so up 47% / Accent up 56% (10,099), Santa Fe up 41% (10,791), Genesis up 97% (2,316)
Kia - 40,198 units, so up 60.4% / Sportage >200% (7,558), Rio sales up approx 90% (6,961), Optima up 110% (7,461)..
VW - 24,823 units, so up 11.4% / Jetta up 14.8% (12,872), Tiguan up 69.7% (1,750)
Set in a broader context including Japan's 2.3% improved sales environment, Toyota and Honda are proving the current climate beneficiaries thanks to multi-national government incentives.
As GM's North American market concerns prevail - given these discouraging sales figures – it has tactically timed its announcement of its $300m JV investment in China with FAW to off-set the NA news.
As for industry comment, investment-auto-motives agrees with Edmonds.com in as much as here have been “no surprises”, but must disagree with the presumption that to have started the CARS programme earlier (in March) when inventory and incentives were bleak would have assisted the automakers more. Consumer sentiment typically does not pick-up until May time, psychological outlook aligned to the seasonal weather, thus trying to perfectly time the programme's release and run was something not lost on the Administration Task Force,
Lastly, there is comment that SAAR at present and looking forward is less than 8m units, given an increasing trend of inventory depletion and retraction and the natural margin-seeking 'supply-demand effect' of prices slowly rising, so taking the wind out of sales. That is perhaps an overtly cynical outlook, more like 9.3m moving forward in investment-auto-motives' estimation.
So track the previous Q1/Q209 9.5m SAAR followed by 11.3m and even 15m (by over-zealous, possibly politically motivated internal planners) and the now 9.3m 'balanced reality' and the true industry capacity planning picture, which of course sets the tone for overhead and expected margins, looks very fuzzy indeed; especially for those 2 participants who are under enormous pressure to make their business models structurally sound.
The CARS programme came from good intention, but its effects may have led to greater uncertainty and problematic industrial planning – for both the industry and its governmental supervision. The CARS name evokes the similarly titled 2006 film intended to metaphorically (and humorously) highlight the ongoing structural change in US Autos Inc.
That process of structural change was always going to take time, but now the interventionist effect means it will now take longer to create that sound base from which to re-create the domestic industry.
Hence, the prospect of a “CARS 2” film in the making by Disney-Pixar, due for 2011, is all the poignant.
As investment-auto-motives has stated previously, GM may now need a 'Plan B' for its homeland operations. And the US government will need to think more laterally and creatively with plans X, Y & Z, if it is to combat the potential extensive 'W' “double-dip” or “slanted J” recession. [NB see previous post]. 2011 still seems a long way off, but it will take that long and possibly longer to re-shape American Autos Inc.
Intended to reprieve US auto manufacturing, kick-start consumer spending and reduce the US's carbon emissions levels, the Summer initiative has been announced as an administrative success given that the full CARS fund has been extended from $1bn to $3bn, and ultimately exhausted by deal-hunting shoppers.
However, as investment-auto-motives has previously highlighted, the CARS programme – whilst well intended – ultimately serves only as a momentary propagator of US industry which must continue to face the realities of continued structural reform. CARS has been a pleasurable diversion from that fact.
And so, as expected, now that the subsidy funding for vehicle purchases has ended, the market realities bites. The August sales figures have been reported and unfortunately for US Autos Inc, the ongoing consumer demand has tumbled sharply from the mid-year supported highs, and critically the monies appropriated have largely gone to Japanese and South Korean automakers, with only the best positioned Ford fairing relatively well.
Thus the results of CARS as expected, the 'mainstream quality' and 'mainstream value' foreign manufacturers (ie Japanese and Korean) boosted by the federal funding, the monies essentially 'wasted' on GM and Chrysler which could not draw consumer attention and conversion given their recent history and associative heavy credibility loss.
The picture detailed in sales and prime brand & product dynamics:
GM - 246,479 units vs 308,817 in Aug '08 / Pontiac sales up 23.3% (29,921) [driven by buyer demographic], Chevrolet sales down 9.2% (168,130 vehicles), Cadillac sales down 55% (6,931), Buick sales down 51.7% (8,612), Hummer >64% down.
Ford - 182,149 units vs 155,690 in Aug '08 / Focus, Fusion, Escape, F150
Chrysler - 93,222 units so down 15% / Chrysler brand down 23% (18,619); Jeep sales down 6% (22,041), Dodge sales down to 52,562 vehicles.
Toyota - 225,088 units so up 6.4% from 211,533 vehicles a year ago / Corolla ranked #1
Honda - 161,439 units so up 9.9% / Civic ranked #2, Honda brand up 15.2% (151,814), Acura sales down 36.2% (9,625).
Nissan - 105,312 units so down 2.9% /
Hyundai - 60,467 units so up 47% / Accent up 56% (10,099), Santa Fe up 41% (10,791), Genesis up 97% (2,316)
Kia - 40,198 units, so up 60.4% / Sportage >200% (7,558), Rio sales up approx 90% (6,961), Optima up 110% (7,461)..
VW - 24,823 units, so up 11.4% / Jetta up 14.8% (12,872), Tiguan up 69.7% (1,750)
Set in a broader context including Japan's 2.3% improved sales environment, Toyota and Honda are proving the current climate beneficiaries thanks to multi-national government incentives.
As GM's North American market concerns prevail - given these discouraging sales figures – it has tactically timed its announcement of its $300m JV investment in China with FAW to off-set the NA news.
As for industry comment, investment-auto-motives agrees with Edmonds.com in as much as here have been “no surprises”, but must disagree with the presumption that to have started the CARS programme earlier (in March) when inventory and incentives were bleak would have assisted the automakers more. Consumer sentiment typically does not pick-up until May time, psychological outlook aligned to the seasonal weather, thus trying to perfectly time the programme's release and run was something not lost on the Administration Task Force,
Lastly, there is comment that SAAR at present and looking forward is less than 8m units, given an increasing trend of inventory depletion and retraction and the natural margin-seeking 'supply-demand effect' of prices slowly rising, so taking the wind out of sales. That is perhaps an overtly cynical outlook, more like 9.3m moving forward in investment-auto-motives' estimation.
So track the previous Q1/Q209 9.5m SAAR followed by 11.3m and even 15m (by over-zealous, possibly politically motivated internal planners) and the now 9.3m 'balanced reality' and the true industry capacity planning picture, which of course sets the tone for overhead and expected margins, looks very fuzzy indeed; especially for those 2 participants who are under enormous pressure to make their business models structurally sound.
The CARS programme came from good intention, but its effects may have led to greater uncertainty and problematic industrial planning – for both the industry and its governmental supervision. The CARS name evokes the similarly titled 2006 film intended to metaphorically (and humorously) highlight the ongoing structural change in US Autos Inc.
That process of structural change was always going to take time, but now the interventionist effect means it will now take longer to create that sound base from which to re-create the domestic industry.
Hence, the prospect of a “CARS 2” film in the making by Disney-Pixar, due for 2011, is all the poignant.
As investment-auto-motives has stated previously, GM may now need a 'Plan B' for its homeland operations. And the US government will need to think more laterally and creatively with plans X, Y & Z, if it is to combat the potential extensive 'W' “double-dip” or “slanted J” recession. [NB see previous post]. 2011 still seems a long way off, but it will take that long and possibly longer to re-shape American Autos Inc.
Thursday, 27 August 2009
Macro-Level Trends – Global Economic Outlook – The Need to Heed Roubini's 'Fundamentalism'.
The 6 month stock-market rally that began in March has been so warmly welcomed by investors that it could be said to have mirrored the rise in climate temperature graphs in the northern hemisphere. Better than expected Q1 and H1 earnings news (ie “less bad”) combined with the desire to jump upon any positive economic indicator news (no matter how simplistic) combined with the good weather saw stock graphs the world-over climb, climb, climb.
On January 4th investment-auto-motives presented the case for concern regards the timing and speed of any substantial recovery, stating that even a mid-year pick-up – as we've expectantly witnessed - appeared too soon given the weight of negative forces apparent across the board – from the innately weak structure of the majority of the banking sector to the 'consumer fall-out' to come.
The nature of this unprecedented, de-stabalised, era means that the reactive and ongoing opposing forces of basic economics, corporate retraction, government demand interventionism and capital market's sentiment (driven by trader frustration) has set the scene for constant re-shifting of focus and so changing expectation. The fundamentals for a return to global confidence were not in place back in January and, whilst the storm has waned and liquidity has started to pump very slowly through the system, those fundamentals are still not truly in place these 8 months later.
March to date's upswing – from stock prices to consumer confidence - looks to be misplaced probably largely driven by irrational behavior driven by 'recession fatigue' and 'blind faith'. And for capital markets, the drive to move stagnant liquidity across various asset classes.
Unsurprisingly, the near 6 month rapid stock rally has divided opinion between the 'fundamentalists' best extolled by academia and the 'sentimentalists' best typified by fund management firms. Opposing viewpoints perhaps best showcased by the recent (23.08.09) FT article by Nuriel Roubini “vs” Lazlo Birinyi's (26.08.09) WSJ rebuttal. In summary “dead-cat bounce” vs “1st phase of bull market”.
As professional market-watchers understand, the reality is that the stock graph path (whether singular company, sector or cross-sector index) is created by the ongoing tussle between macro- micro fundamentals ('assisted' by theoretical valuation metrics) and sentiment. However, at present, the 2 are diametrically heavily opposed. And since fundamentals are the effectively the 'centre of gravity' for markets – the rationality – we can only assume that there will be an inflection and a trending downward at some point when present stock-holders recognise the 'hot air' of the market and sell through the 'greater fool theory' to lock-in amazing gains.
Obviously, much of the buying has been in the belief that company stock is undervalued, but was there really that much previous undervaluing for the market to jump so high so quickly? (ie S&P500 YTD from bottom of 666 to present high of 1,028). Or is it really ultimately a case of the 'old dogs' of the market, who've seen it all before, recognising and riding the (rare but typical) post-melt-down re-active rally?
It is indeed a moment of sunshine amongst the storm clouds, but the distant horizon still looks very murky, as described by Roubini in that FT article.
Unfortunately, but realistically, “on the same page” as the NYU professor, investment-auto-motives
now takes a look at his comments and provides additional (often auto-sector centric) comment.
Nuriel Roubini – Market Outlook 23.08.09
“3 prime questions”:
1.When Bottom-Out?
2.Shape of Recovery?
3.Possibility of Re-lapse?
To paraphrase ...
1. When Bottom-Out?
Roubini - “Q408 & Q109 mirrored contraction seen in early stages of the Great Depression”... “it appears that market will bottom-out in Q409”...”Asia, Latin America, France, Germany, Japan & Australia re-growing now”...”but: US, UK, Spain, Italy other Eurozone members (mostly CEE) will not see positive growth until 2010”.
Asia's sustainable self-propelling growth capability and ability to 'weather the storm' has proven it's level of de-coupling from the west, and though present regional GDP growth, consumption and capital investment is lower than the previous headiness, the acute-nature of the massive Asian populace to spend and save rationally – this dictated by circumstance and aversion to credit - provides the strength for balanced continued growth through consumption and investment. In contrast, the US and Europe will continue to be undermined by 'real-world' ongoing credit retraction and 'virtual' consumer incentive packages as seen in autos and now consumer durables. The latter “positive manipulation” ultimately disruptive to market and production planning and so capital investment planning, with the potential of creating a false-bottom that quickly dissipates.
The key for the West is still the structure and true fragility of the banking system, something which has been subtly masked by the support of systemic big-name players (socialised losses), recent 'stellar' & 'better than expected' results. Banks have been forced into 'liquidity retention' through preservation of government 'bail-out' cash, calling-in debt and formulating onerous lending policies.
This perfect-storm combination allowed for recent 'good-news' earnings, but it is short lived. Thus the financial system is still largely effectually 'seized' until it can draw in further sector investment (ie PE and elsewhere) that allows the brakes to be released.
Such additional monies will largely come from investors who will want to see their bank's loan book' consisting of sound customers (possibly government guaranteed) and possibly assured lending to associated interests – either to broad sector relative industrial holding companies or to the more promising (perhaps dominant) sector players.
Thus the complexity is in re-organising both the west's banking system and the core of its industrial structure. And that can only be done properly and efficiently when a period of rational 'fundamentalism' prevails over 'sentimentalism'. The sentimentalism drives stock volatility but unfortunately also undermines focus on the much needed banking and industrial re-structuring.
2. Shape of Recovery?
Roubini - “we'll see a more U-shaped recovery than V-shaped”.
investment-auto-motives believes it will verge on “slanted J” with very slow recovery due to the aforementioned inter-woven structural complexities and their widespread relative issues:
A. Unemployment Drag
“<10% > affecting consumer demand and bank losses”...” and loss of 'skills capability' amongst the workforce in turn affecting productivity growth”.
That figures could rise higher than the 10%, and well above the 9% or so in general international official statistics. As with the UK's 3-day week in the 1970s, there will probably be a re-calibration of working hours for the individual and a division of labour across the typical working week. Unemployment will rise and stay high until the industrial re-structuring occurs and new working templates are drawn-up which allow for labour flexibility (via part-time work) and suppress / contain overhead costs.
B. Case of Solvency not just Liquidity
Roubini - “de-leveraging has not yet fully 'worked through the system”...and so...“confines the ability of banks to lend, consumers to buy and companies to invest”.
The western stimulus packages have acted as a temporary fix, socialising seeming swathes but in reality only a portion of lost value. Continued uncertainty and sporadic use of 'marked-to-market' valuations on corporate balance sheets mean that there has not been a clean process of 'downward re-ratcheting'; aswell as the concern regards still properly unidentifiable 'toxic asset' types. And the inherent necessary act of moving portions of these losses from private sector to public sector in turn
limits both transparency and the basic financial transmission mechanism.
C. National Budget Deficits
Roubini - “countries with current account deficits badly positioned as populace needs to save more set against context of falling asset prices, shrinking incomes and unemployment threat”.
The US and UK are obviously prime instances here, the former running a (conservative) $1.58 trillion deficit, with expected (conservative) $9 trillion over the next 10 years. Having reached the limits of public spending and precious little private investment incentive, such countries appear to face a period of economic stagnation; Keynesian 'prime-pumping' a used and now unavailable alternative.
D. The Financial System
Roubini - “despite support, still heavily damaged”...”the shadow banking system largely disappeared, traditional (retail) banks still have $ trillions of bad debts & securities to swallow whilst still being under-capitalised”.
An issue highlighted previously, but a worst case scenario – not out of the question – is partial banking seizure as more bad news surfaces and investors big & small decide to hold off supporting the banks. Bloomberg reports that the FDIC has identified 146 'problem banks' which could deplete already shrunken FDIC reserves. More bank failures result in yet further sector contraction and more M&A consolidation as geographically useful 'bolt-ons' are acquired by often including foreign firms (BRIC+) seeking targeted US & western market coverage – see Brazilian ambitions. Furthermore, the examples of previous privately funded US, UK and German bank re-capitalisation that burned the fingers of GCC and other investors, mean that yet stricter financing demands will need to be met; including amongst other requisites, the continuation of more 'covenant-rich' agreements behind convertible bond deals which offer swaps to not common but preferential shares.
(Those supporting the banks will want the 'Buffett-esque' agreement Berkshire Hathaway gained from Goldman Sachs).
E. Weak Profitability
Roubini - “caused by poor earnings from incurred low growth caused by debt repayment”
Earnings also effected by reduced credit ratings and so in-coming investment which was possibly partially re-cycled into dividend payment for Q209's good results. Therefore the generally increasing cost of capital (ie risk premium) when available, and other deflationary headwinds could act as disincentives so lowering productivity through skeleton staffing and the likelihood of minimal &/or deferred investment.
F. Public-Private Sector “Re-Leveraging”
Roubini - “the public sector creates large fiscal deficits and risks 'crowd-out' of private expenditure”
The stimulus effect will fizzle-out by early 2010 thence requiring replacement by greater private investment contribution to continue any prevailing growth. This may well not be in place.
G. Global Imbalance
Roubini - “there is expectation of a continued narrowing of the global deficit-savings imbalance”...[ie western deficit excluding Japan & German vs the general EM surplus)....
“But if demand does not grow in surplus countries, then counterpoint growth will not occur in deficit countries, so delaying global upturn”.
The concern is that Asia and EM regions do not maintain the 'demand-pull' previously seen for western goods and services. This is a real concern, not because the consumer demand or investment demand is not there, but because western products and knowledge can be replicated either domestically or by other regionally close-by nations. EM regions may well have reached a self-reliant 'tipping-point' in everything from car production to electronics R&D to beyond, the Japanese and South Koreans acting as the new 'Pseudo West' in growing areas of technology and skills transfer.
He states there are also 2 further reasons (X & Y) giving rise to a 'drop-back' and so W-shaped recovery:
3. Possibility of Re-Lapse?
X Quantitative Easing
Roubini – “the inherent risks associated with exit strategies from massive fiscal and monetary easing mean administrations are between a rock and a hard place”
If policy-makers raise taxes / cut spending / re-absorb QE liquidity... to fight the budget deficit and PSBR over-spend they will strangle consumer confidence, so raising the spectre of stag-deflation.
But if they maintain large deficits and over-spend then bond-markets will naturally expect a rise in long-term inflation, and so charge higher bond yield rates as a risk premium to off-set the probability of monetary devaluation. Increased bond yields will produce a domino-effect on capital borrowing interest rates and so stifle recovery, possibly leading to stagflation.
However QE - a blunt but useful monetary policy instrument for demand management– is an inexact science, given its typical use as a last resort. And whilst certain elements of the QE mix can be theoretically managed, the reality is that much of the economic boost is largely unguidable in the complexities of a mixed-economy and once in place hard to track. Thus it has a history of either little identifiable downstream effect or creates the overt-boost that economists fear leads to rapid inflation. Just as the UK and Gordon Brown lead the G20 in its answer to the crisis – including the prominent use of QE - the BoE's Monetary Policy Committee maintains on-going belief in the tool by injecting a further £175bn, with possibly more to come in November.
The QE moves are viewed as successful thus far in quelling the financial fall-out, but it is hard to truly gauge its real affect. One thing is clear, that QE statements tend to weaken the homeland currency in the FX war which is so prevalent at the moment, so helping the argument for much needed export led growth. That puts pressure on maintaining free and open bi-lateral and multi-lateral trade agreements, which are in turn presently under subtle but intense protectionist pressures - let alone the general global fight for currency devaluation - and so create additional concerns regards national QE exit strategies.
Y – Commodity Inflation
Roubini - “concerns that Oil, Energy & Food prices are now rising faster than fundamentals warrant, and could be driven higher by excess liquidity”.
Unworked capital is a concern for all money managers, especially those in SWFs and the downsized hedge fund sector. Thus there is an argument to say such dormant capital is being 'over-allocated' to defensive plays such as Commodities (both in material purchase and hold and futures contracts) that are directly linked to relatively buoyant EM consumer demand. .So inadvertently prices are driven higher and higher with the potential to reach a shock-point before collapsing, as we saw previously with $145 p/b oil.
The argument set forward is that the new shock level is a more sensitive $100, would damage confidence if a similar re-bound contraction occurred. For the moment larger than expected US oil reserves have knocked the Texas Intermediate spot price back to $71.43, indicating a $75 ceiling at present. However, if stocks keep unfathomably rallying it would send signals to traders to keep piling into oil and other base commodities, and as we saw previously the greater it climbs the harder it will fall – to the detriment of market confidence and the case for rationality that so badly needed.
Roubini summarises that “the recovery is likely to be aneamic and below trend in advanced economies, and there is a big risk of double-dip 'W' recession”.
investment-auto-motives believes that economists will have to add the term “slanted J” to truly reflect the scenario being played out between 2007-2012. But in all actuality the semantics pale into insignificance relative to the need for the market to act with true objectivism. And that may be harder than ever given the pressure that hedge funds are under to provide investor returns, even with their lesser fee models - for they may relish a period of “range-volatility” and the 'double plays' and 'high-spreads' such a financial climate offers.
To summize, excluding hedge-fund market antagonism, investors will need to understand the very foundations of their business interests, to ascertain the very 'nuts and bolts' of typical enterprise construct to gauge its present, near-term and long-term worth. Rather than the grandiose (generally y opaque) investment plans of old, this new era demands old style 'bread and butter' business evaluation that in turn demands company transparency. That means seeing the acute detail of the big picture.
As many will know, investment-auto-motive's own marketing strap-line from its 2006 beginning has been to implore clients to “think small” - referring not only to its boutique size and level of 'focus' - but as an important guiding philosophy when analysing the myriad of critical criteria of a company and/or sector.
Uber-conservatism is the order of the day, required when reviewing trading businesses of any age or indeed the hypothetical business models that this historical juncture will see emerge. Let's hope most market constituents (primarily institutionals & PE) are on the same page as investment-auto-motives.
Since stability must be put back into the market, and that can only come from sensibly formed MarketCap and p/e ratios, with such valuations based upon a firm's true operating revenues and true 'marked to market' asset-backed worth. Stability will not come from the 'sentimentalism' of promiscuous sector-jumping speculators or over-nervy desperate traders that have created the recent, effectively baseless, over-confidence.
All must return to the premis of economic and financial 'fundamentalism', if we are to create real traction, a smaller but healthier economy and the prospect of well supported long-term growth.
On January 4th investment-auto-motives presented the case for concern regards the timing and speed of any substantial recovery, stating that even a mid-year pick-up – as we've expectantly witnessed - appeared too soon given the weight of negative forces apparent across the board – from the innately weak structure of the majority of the banking sector to the 'consumer fall-out' to come.
The nature of this unprecedented, de-stabalised, era means that the reactive and ongoing opposing forces of basic economics, corporate retraction, government demand interventionism and capital market's sentiment (driven by trader frustration) has set the scene for constant re-shifting of focus and so changing expectation. The fundamentals for a return to global confidence were not in place back in January and, whilst the storm has waned and liquidity has started to pump very slowly through the system, those fundamentals are still not truly in place these 8 months later.
March to date's upswing – from stock prices to consumer confidence - looks to be misplaced probably largely driven by irrational behavior driven by 'recession fatigue' and 'blind faith'. And for capital markets, the drive to move stagnant liquidity across various asset classes.
Unsurprisingly, the near 6 month rapid stock rally has divided opinion between the 'fundamentalists' best extolled by academia and the 'sentimentalists' best typified by fund management firms. Opposing viewpoints perhaps best showcased by the recent (23.08.09) FT article by Nuriel Roubini “vs” Lazlo Birinyi's (26.08.09) WSJ rebuttal. In summary “dead-cat bounce” vs “1st phase of bull market”.
As professional market-watchers understand, the reality is that the stock graph path (whether singular company, sector or cross-sector index) is created by the ongoing tussle between macro- micro fundamentals ('assisted' by theoretical valuation metrics) and sentiment. However, at present, the 2 are diametrically heavily opposed. And since fundamentals are the effectively the 'centre of gravity' for markets – the rationality – we can only assume that there will be an inflection and a trending downward at some point when present stock-holders recognise the 'hot air' of the market and sell through the 'greater fool theory' to lock-in amazing gains.
Obviously, much of the buying has been in the belief that company stock is undervalued, but was there really that much previous undervaluing for the market to jump so high so quickly? (ie S&P500 YTD from bottom of 666 to present high of 1,028). Or is it really ultimately a case of the 'old dogs' of the market, who've seen it all before, recognising and riding the (rare but typical) post-melt-down re-active rally?
It is indeed a moment of sunshine amongst the storm clouds, but the distant horizon still looks very murky, as described by Roubini in that FT article.
Unfortunately, but realistically, “on the same page” as the NYU professor, investment-auto-motives
now takes a look at his comments and provides additional (often auto-sector centric) comment.
Nuriel Roubini – Market Outlook 23.08.09
“3 prime questions”:
1.When Bottom-Out?
2.Shape of Recovery?
3.Possibility of Re-lapse?
To paraphrase ...
1. When Bottom-Out?
Roubini - “Q408 & Q109 mirrored contraction seen in early stages of the Great Depression”... “it appears that market will bottom-out in Q409”...”Asia, Latin America, France, Germany, Japan & Australia re-growing now”...”but: US, UK, Spain, Italy other Eurozone members (mostly CEE) will not see positive growth until 2010”.
Asia's sustainable self-propelling growth capability and ability to 'weather the storm' has proven it's level of de-coupling from the west, and though present regional GDP growth, consumption and capital investment is lower than the previous headiness, the acute-nature of the massive Asian populace to spend and save rationally – this dictated by circumstance and aversion to credit - provides the strength for balanced continued growth through consumption and investment. In contrast, the US and Europe will continue to be undermined by 'real-world' ongoing credit retraction and 'virtual' consumer incentive packages as seen in autos and now consumer durables. The latter “positive manipulation” ultimately disruptive to market and production planning and so capital investment planning, with the potential of creating a false-bottom that quickly dissipates.
The key for the West is still the structure and true fragility of the banking system, something which has been subtly masked by the support of systemic big-name players (socialised losses), recent 'stellar' & 'better than expected' results. Banks have been forced into 'liquidity retention' through preservation of government 'bail-out' cash, calling-in debt and formulating onerous lending policies.
This perfect-storm combination allowed for recent 'good-news' earnings, but it is short lived. Thus the financial system is still largely effectually 'seized' until it can draw in further sector investment (ie PE and elsewhere) that allows the brakes to be released.
Such additional monies will largely come from investors who will want to see their bank's loan book' consisting of sound customers (possibly government guaranteed) and possibly assured lending to associated interests – either to broad sector relative industrial holding companies or to the more promising (perhaps dominant) sector players.
Thus the complexity is in re-organising both the west's banking system and the core of its industrial structure. And that can only be done properly and efficiently when a period of rational 'fundamentalism' prevails over 'sentimentalism'. The sentimentalism drives stock volatility but unfortunately also undermines focus on the much needed banking and industrial re-structuring.
2. Shape of Recovery?
Roubini - “we'll see a more U-shaped recovery than V-shaped”.
investment-auto-motives believes it will verge on “slanted J” with very slow recovery due to the aforementioned inter-woven structural complexities and their widespread relative issues:
A. Unemployment Drag
“<10% > affecting consumer demand and bank losses”...” and loss of 'skills capability' amongst the workforce in turn affecting productivity growth”.
That figures could rise higher than the 10%, and well above the 9% or so in general international official statistics. As with the UK's 3-day week in the 1970s, there will probably be a re-calibration of working hours for the individual and a division of labour across the typical working week. Unemployment will rise and stay high until the industrial re-structuring occurs and new working templates are drawn-up which allow for labour flexibility (via part-time work) and suppress / contain overhead costs.
B. Case of Solvency not just Liquidity
Roubini - “de-leveraging has not yet fully 'worked through the system”...and so...“confines the ability of banks to lend, consumers to buy and companies to invest”.
The western stimulus packages have acted as a temporary fix, socialising seeming swathes but in reality only a portion of lost value. Continued uncertainty and sporadic use of 'marked-to-market' valuations on corporate balance sheets mean that there has not been a clean process of 'downward re-ratcheting'; aswell as the concern regards still properly unidentifiable 'toxic asset' types. And the inherent necessary act of moving portions of these losses from private sector to public sector in turn
limits both transparency and the basic financial transmission mechanism.
C. National Budget Deficits
Roubini - “countries with current account deficits badly positioned as populace needs to save more set against context of falling asset prices, shrinking incomes and unemployment threat”.
The US and UK are obviously prime instances here, the former running a (conservative) $1.58 trillion deficit, with expected (conservative) $9 trillion over the next 10 years. Having reached the limits of public spending and precious little private investment incentive, such countries appear to face a period of economic stagnation; Keynesian 'prime-pumping' a used and now unavailable alternative.
D. The Financial System
Roubini - “despite support, still heavily damaged”...”the shadow banking system largely disappeared, traditional (retail) banks still have $ trillions of bad debts & securities to swallow whilst still being under-capitalised”.
An issue highlighted previously, but a worst case scenario – not out of the question – is partial banking seizure as more bad news surfaces and investors big & small decide to hold off supporting the banks. Bloomberg reports that the FDIC has identified 146 'problem banks' which could deplete already shrunken FDIC reserves. More bank failures result in yet further sector contraction and more M&A consolidation as geographically useful 'bolt-ons' are acquired by often including foreign firms (BRIC+) seeking targeted US & western market coverage – see Brazilian ambitions. Furthermore, the examples of previous privately funded US, UK and German bank re-capitalisation that burned the fingers of GCC and other investors, mean that yet stricter financing demands will need to be met; including amongst other requisites, the continuation of more 'covenant-rich' agreements behind convertible bond deals which offer swaps to not common but preferential shares.
(Those supporting the banks will want the 'Buffett-esque' agreement Berkshire Hathaway gained from Goldman Sachs).
E. Weak Profitability
Roubini - “caused by poor earnings from incurred low growth caused by debt repayment”
Earnings also effected by reduced credit ratings and so in-coming investment which was possibly partially re-cycled into dividend payment for Q209's good results. Therefore the generally increasing cost of capital (ie risk premium) when available, and other deflationary headwinds could act as disincentives so lowering productivity through skeleton staffing and the likelihood of minimal &/or deferred investment.
F. Public-Private Sector “Re-Leveraging”
Roubini - “the public sector creates large fiscal deficits and risks 'crowd-out' of private expenditure”
The stimulus effect will fizzle-out by early 2010 thence requiring replacement by greater private investment contribution to continue any prevailing growth. This may well not be in place.
G. Global Imbalance
Roubini - “there is expectation of a continued narrowing of the global deficit-savings imbalance”...[ie western deficit excluding Japan & German vs the general EM surplus)....
“But if demand does not grow in surplus countries, then counterpoint growth will not occur in deficit countries, so delaying global upturn”.
The concern is that Asia and EM regions do not maintain the 'demand-pull' previously seen for western goods and services. This is a real concern, not because the consumer demand or investment demand is not there, but because western products and knowledge can be replicated either domestically or by other regionally close-by nations. EM regions may well have reached a self-reliant 'tipping-point' in everything from car production to electronics R&D to beyond, the Japanese and South Koreans acting as the new 'Pseudo West' in growing areas of technology and skills transfer.
He states there are also 2 further reasons (X & Y) giving rise to a 'drop-back' and so W-shaped recovery:
3. Possibility of Re-Lapse?
X Quantitative Easing
Roubini – “the inherent risks associated with exit strategies from massive fiscal and monetary easing mean administrations are between a rock and a hard place”
If policy-makers raise taxes / cut spending / re-absorb QE liquidity... to fight the budget deficit and PSBR over-spend they will strangle consumer confidence, so raising the spectre of stag-deflation.
But if they maintain large deficits and over-spend then bond-markets will naturally expect a rise in long-term inflation, and so charge higher bond yield rates as a risk premium to off-set the probability of monetary devaluation. Increased bond yields will produce a domino-effect on capital borrowing interest rates and so stifle recovery, possibly leading to stagflation.
However QE - a blunt but useful monetary policy instrument for demand management– is an inexact science, given its typical use as a last resort. And whilst certain elements of the QE mix can be theoretically managed, the reality is that much of the economic boost is largely unguidable in the complexities of a mixed-economy and once in place hard to track. Thus it has a history of either little identifiable downstream effect or creates the overt-boost that economists fear leads to rapid inflation. Just as the UK and Gordon Brown lead the G20 in its answer to the crisis – including the prominent use of QE - the BoE's Monetary Policy Committee maintains on-going belief in the tool by injecting a further £175bn, with possibly more to come in November.
The QE moves are viewed as successful thus far in quelling the financial fall-out, but it is hard to truly gauge its real affect. One thing is clear, that QE statements tend to weaken the homeland currency in the FX war which is so prevalent at the moment, so helping the argument for much needed export led growth. That puts pressure on maintaining free and open bi-lateral and multi-lateral trade agreements, which are in turn presently under subtle but intense protectionist pressures - let alone the general global fight for currency devaluation - and so create additional concerns regards national QE exit strategies.
Y – Commodity Inflation
Roubini - “concerns that Oil, Energy & Food prices are now rising faster than fundamentals warrant, and could be driven higher by excess liquidity”.
Unworked capital is a concern for all money managers, especially those in SWFs and the downsized hedge fund sector. Thus there is an argument to say such dormant capital is being 'over-allocated' to defensive plays such as Commodities (both in material purchase and hold and futures contracts) that are directly linked to relatively buoyant EM consumer demand. .So inadvertently prices are driven higher and higher with the potential to reach a shock-point before collapsing, as we saw previously with $145 p/b oil.
The argument set forward is that the new shock level is a more sensitive $100, would damage confidence if a similar re-bound contraction occurred. For the moment larger than expected US oil reserves have knocked the Texas Intermediate spot price back to $71.43, indicating a $75 ceiling at present. However, if stocks keep unfathomably rallying it would send signals to traders to keep piling into oil and other base commodities, and as we saw previously the greater it climbs the harder it will fall – to the detriment of market confidence and the case for rationality that so badly needed.
Roubini summarises that “the recovery is likely to be aneamic and below trend in advanced economies, and there is a big risk of double-dip 'W' recession”.
investment-auto-motives believes that economists will have to add the term “slanted J” to truly reflect the scenario being played out between 2007-2012. But in all actuality the semantics pale into insignificance relative to the need for the market to act with true objectivism. And that may be harder than ever given the pressure that hedge funds are under to provide investor returns, even with their lesser fee models - for they may relish a period of “range-volatility” and the 'double plays' and 'high-spreads' such a financial climate offers.
To summize, excluding hedge-fund market antagonism, investors will need to understand the very foundations of their business interests, to ascertain the very 'nuts and bolts' of typical enterprise construct to gauge its present, near-term and long-term worth. Rather than the grandiose (generally y opaque) investment plans of old, this new era demands old style 'bread and butter' business evaluation that in turn demands company transparency. That means seeing the acute detail of the big picture.
As many will know, investment-auto-motive's own marketing strap-line from its 2006 beginning has been to implore clients to “think small” - referring not only to its boutique size and level of 'focus' - but as an important guiding philosophy when analysing the myriad of critical criteria of a company and/or sector.
Uber-conservatism is the order of the day, required when reviewing trading businesses of any age or indeed the hypothetical business models that this historical juncture will see emerge. Let's hope most market constituents (primarily institutionals & PE) are on the same page as investment-auto-motives.
Since stability must be put back into the market, and that can only come from sensibly formed MarketCap and p/e ratios, with such valuations based upon a firm's true operating revenues and true 'marked to market' asset-backed worth. Stability will not come from the 'sentimentalism' of promiscuous sector-jumping speculators or over-nervy desperate traders that have created the recent, effectively baseless, over-confidence.
All must return to the premis of economic and financial 'fundamentalism', if we are to create real traction, a smaller but healthier economy and the prospect of well supported long-term growth.
Friday, 21 August 2009
Industry Structure – EU Supplier Sector – Re-Forming the Sector
Although August & September are typically a quieter period for capital and money markets, they are also the time of the summer & fall conventions; a European notable being the Frankfurt Motorshow with adjunct conferences.
For global auto-industry investors, the associated heavy focus on US Autos and its supplier base has momentarily switched to Europe. North America has seen much its sector M&As and acquisitions given the activity highs between 2004-07, with the latter 07-09 financial fall-out pulling more suppliers into bankruptcy which has allowed PE to cherry-pick below-value enterprises that should benefit from GM and Chrysler's quick-routed Chapter 11 emergence, and the first to benefit FMC..
Thus, now US investment eyes have crossed the water to Europe.
Recognising that the EU supplier sector has lagged the US in its downturn due to latter-day credit-crunch shock-effect , more disparately placed car manufacturers and the now waning support of government to offer yet further 'bail-out' funds to individual companies beyond those already publicised.
So increasingly, EU member governments are looking to Brussels to take on the burden of 'supportive reform', thus the EIB (European Investment Bank) has stepped into the fray to offer bridge financing to the systemically important vehicle manufacturing and parts supply players as an interim step to the re-building of Europe's car and light commercial vehicle industry. And as such takes on the role of partial arbiter for the sector's future.
[NB. the EIB will be acting as a self-interested agent of change given that it must itself be seen to invest in companies with sound long-term fundamentals that underpin EU prosperity and thus so its own 'Loan Book' & Capital Ratio can support its own triple-A credit rating. (It's 'mission' as “The Bank Promoting European Objectives”)
Unfortunately, automotive/personal mobility per se does not seem to appear as an RDI (Research, Development & Innovation) focus for the EIB. investment-auto-motives prompts the EIB to encapsulate this highly economically important arena ].
Thus at present industry observers and the investment community alike now watch over Europe.
Just as it did with the North America and its regional sector collapse. That NA process is still of course ongoing, its own decline starting as early as 2004 with listed and privately held companies bitten by the contractual – and for some sole supplier - leverage that Detroit's Big 3 had over them; those 3 themselves in turn caught in a spiral of value-destruction created by legacy costs and an unforgiving marketplace.
For Europe, although EU members are often thought to act in concert, the 'Brussels reality' is unsurprisingly somewhat different; especially so during such decisive, watershed times as these. The 'beggar thy neighbour' reaction of individual members to the banking crisis, and more recent 'back-door' subtle protectionism enaction, shows that Europe still has broad economic policy frailties stemming from member states of diverse economic foundations, sizes, specific industrial sector 'GDP generators' and resultant attitudes.
This complex context is the terrain that today both supplier company board chairmen & directors and private equity industrial portfolio & fund managers must appreciate in detail if they are to respectively compile their futures. And given that today's only partially thawed liquidity that is preferably done as collaborating agents, given PE's effective ownership of allocatable financing capital and what should be in-depth board-level knowledge of their own company.
Presently PE – much US based - is looking at the European supplier base to both obtain synergistic 'bolt-on' capability to currently held enterprises in North American and as eco-tech enablers with migrational prospects into the US, Canada and 'down the road' Mexico – as part of NAFTA pact trading conditions. Thus PE is looking typically for the near age-old idioms of manufacturing & geographic market scalability and technical competitive advantage – 2 basic tenants of enterprise. (The recent Obama espoused Modec-Navistar/International JV offers an examplar of the latter trend.)
Thus the Aug-Sept conference season sees the SupplierBusiness conference in Frankfurt on Sept 17th. Executives from Tier0.5, Tier 1 and Tier 2 supply companies along with banking representatives and big hitters from the PE world – Wilbur Ross of WL Ross & Co a key-note speaker, as is Philip Wylie, now with boutique investment bank Houlihan Lokey.
The conference will typically be 'abuzz' with conjecture as to potential sector consolidation deals and where exactly the EU supply-sector sits today in a tri-sected arena of ICE, Hybrids and EVs, vs a very forward looking Japan, re-surgent S.Korea, the giants of India and China, the capital flows into Taiwan etc etc.
The Modec-Navistar venture will set a tone regards the tech-transfer of EU capability, but the segment as a whole must maintain its view and momentum forward; even if major “value-curve M&As” such as the Schaeffler-Continental amalgam are suffering heavily at present.
investment-auto-motives highlights the EU potential, possibly via the EIB, to follow Berkshire Hathaway's lead with BYO – an enterprise created from 'conjoined twins': an electronics producer and automotive manufacturer. An example that highlights the present and future need for cross-sector pollination.
Thus at this time Brussels (with the assistance of CLEPA) should be creating a broad EU Supplier Sector Roadmap, a guidance template of sorts that states to the world the aspirations of the EU for its multiple Tier levels, incumbents and possible & probable new entrants.
Private equity has had its fingers burned to a degree in the US because of the combination of a less than rounded and detailed industrial policy, now greatly exacerbated by the previous seizure and now cautious dynamic of capital markets. The EU must take heed and learn, perhaps indeed sensitively using the US experience to its own advantage in seeking locally appropriated funds and FDI for a new era.
In the meantime, expect the investment community at the SupplierBusiness conference - titled “A New Direction for Suppliers – A Radical Industry Reconfiguration?” - to be wandering the hall with compiled lists of the key financial ratios of each company at hand, balance sheet numerics of core assets (ie without intangibles) vs liabilities, privately critiqued corporate strategies and importantly SWOT analysis of incumbent management
Futhermore, regards hot-topic 'bar talk', the recent WSJ press report that hedge-funds may be short-selling VW given its Porsche related dealings, which if ultimately occurs puts yet more pressure on VW and its EU suppliers. In such a move the hedge funds would be acting as 'cats' amongst EU supply-base 'pigeons'; which could in due course net useful 'pigeon pie' for PE.
Given Frankfurt's role as a major European financial hub, financial analysts should already be running “what if” scenarios that will be priced into the FSE listings – even going so far as to question of VW's sustainability in the DAX.
Definitely a case of “watch this (sector) space” until the industry chatter resumes on September 17th.
For global auto-industry investors, the associated heavy focus on US Autos and its supplier base has momentarily switched to Europe. North America has seen much its sector M&As and acquisitions given the activity highs between 2004-07, with the latter 07-09 financial fall-out pulling more suppliers into bankruptcy which has allowed PE to cherry-pick below-value enterprises that should benefit from GM and Chrysler's quick-routed Chapter 11 emergence, and the first to benefit FMC..
Thus, now US investment eyes have crossed the water to Europe.
Recognising that the EU supplier sector has lagged the US in its downturn due to latter-day credit-crunch shock-effect , more disparately placed car manufacturers and the now waning support of government to offer yet further 'bail-out' funds to individual companies beyond those already publicised.
So increasingly, EU member governments are looking to Brussels to take on the burden of 'supportive reform', thus the EIB (European Investment Bank) has stepped into the fray to offer bridge financing to the systemically important vehicle manufacturing and parts supply players as an interim step to the re-building of Europe's car and light commercial vehicle industry. And as such takes on the role of partial arbiter for the sector's future.
[NB. the EIB will be acting as a self-interested agent of change given that it must itself be seen to invest in companies with sound long-term fundamentals that underpin EU prosperity and thus so its own 'Loan Book' & Capital Ratio can support its own triple-A credit rating. (It's 'mission' as “The Bank Promoting European Objectives”)
Unfortunately, automotive/personal mobility per se does not seem to appear as an RDI (Research, Development & Innovation) focus for the EIB. investment-auto-motives prompts the EIB to encapsulate this highly economically important arena ].
Thus at present industry observers and the investment community alike now watch over Europe.
Just as it did with the North America and its regional sector collapse. That NA process is still of course ongoing, its own decline starting as early as 2004 with listed and privately held companies bitten by the contractual – and for some sole supplier - leverage that Detroit's Big 3 had over them; those 3 themselves in turn caught in a spiral of value-destruction created by legacy costs and an unforgiving marketplace.
For Europe, although EU members are often thought to act in concert, the 'Brussels reality' is unsurprisingly somewhat different; especially so during such decisive, watershed times as these. The 'beggar thy neighbour' reaction of individual members to the banking crisis, and more recent 'back-door' subtle protectionism enaction, shows that Europe still has broad economic policy frailties stemming from member states of diverse economic foundations, sizes, specific industrial sector 'GDP generators' and resultant attitudes.
This complex context is the terrain that today both supplier company board chairmen & directors and private equity industrial portfolio & fund managers must appreciate in detail if they are to respectively compile their futures. And given that today's only partially thawed liquidity that is preferably done as collaborating agents, given PE's effective ownership of allocatable financing capital and what should be in-depth board-level knowledge of their own company.
Presently PE – much US based - is looking at the European supplier base to both obtain synergistic 'bolt-on' capability to currently held enterprises in North American and as eco-tech enablers with migrational prospects into the US, Canada and 'down the road' Mexico – as part of NAFTA pact trading conditions. Thus PE is looking typically for the near age-old idioms of manufacturing & geographic market scalability and technical competitive advantage – 2 basic tenants of enterprise. (The recent Obama espoused Modec-Navistar/International JV offers an examplar of the latter trend.)
Thus the Aug-Sept conference season sees the SupplierBusiness conference in Frankfurt on Sept 17th. Executives from Tier0.5, Tier 1 and Tier 2 supply companies along with banking representatives and big hitters from the PE world – Wilbur Ross of WL Ross & Co a key-note speaker, as is Philip Wylie, now with boutique investment bank Houlihan Lokey.
The conference will typically be 'abuzz' with conjecture as to potential sector consolidation deals and where exactly the EU supply-sector sits today in a tri-sected arena of ICE, Hybrids and EVs, vs a very forward looking Japan, re-surgent S.Korea, the giants of India and China, the capital flows into Taiwan etc etc.
The Modec-Navistar venture will set a tone regards the tech-transfer of EU capability, but the segment as a whole must maintain its view and momentum forward; even if major “value-curve M&As” such as the Schaeffler-Continental amalgam are suffering heavily at present.
investment-auto-motives highlights the EU potential, possibly via the EIB, to follow Berkshire Hathaway's lead with BYO – an enterprise created from 'conjoined twins': an electronics producer and automotive manufacturer. An example that highlights the present and future need for cross-sector pollination.
Thus at this time Brussels (with the assistance of CLEPA) should be creating a broad EU Supplier Sector Roadmap, a guidance template of sorts that states to the world the aspirations of the EU for its multiple Tier levels, incumbents and possible & probable new entrants.
Private equity has had its fingers burned to a degree in the US because of the combination of a less than rounded and detailed industrial policy, now greatly exacerbated by the previous seizure and now cautious dynamic of capital markets. The EU must take heed and learn, perhaps indeed sensitively using the US experience to its own advantage in seeking locally appropriated funds and FDI for a new era.
In the meantime, expect the investment community at the SupplierBusiness conference - titled “A New Direction for Suppliers – A Radical Industry Reconfiguration?” - to be wandering the hall with compiled lists of the key financial ratios of each company at hand, balance sheet numerics of core assets (ie without intangibles) vs liabilities, privately critiqued corporate strategies and importantly SWOT analysis of incumbent management
Futhermore, regards hot-topic 'bar talk', the recent WSJ press report that hedge-funds may be short-selling VW given its Porsche related dealings, which if ultimately occurs puts yet more pressure on VW and its EU suppliers. In such a move the hedge funds would be acting as 'cats' amongst EU supply-base 'pigeons'; which could in due course net useful 'pigeon pie' for PE.
Given Frankfurt's role as a major European financial hub, financial analysts should already be running “what if” scenarios that will be priced into the FSE listings – even going so far as to question of VW's sustainability in the DAX.
Definitely a case of “watch this (sector) space” until the industry chatter resumes on September 17th.
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