The adoption of clean energy solutions by the auto-industry, and critically the car-buying public, has long been a problematic, as intertwined practical, financial and psychological factors play primary roles inhibiting adoption.
Of course the Kyoto Protocol 'awakened' different nations at different rates, those with greatest technology advancement, regulatory power and social-engineering able to re-orientate resources to meet the climate challenge early – Japan being the best example with 'coercion' if not direct assistance in Toyota's and Honda's mass-productionisation of Prius and now Insight 2.
The almost omnipotent Chinese have 2 of those 3 macro-enablers at their authorities fingertips, whilst the 3rd, advanced technology, is only a short distance away in the form of their historically remote, but now commercially close, neighbour – Japan. Itself seeking product, service and IPR export to spur its own low growth economy. And remember the Chinese are familiar with modes of 'Clean Energy Transport' with electric bicycles and mopeds being the fundamentals of personal mobility for millions. Hence embracing a truly practical and convenient electric car is a far less daunting for first time buyers than for the Western populous. This is the theory at least, though of course the UAZ Jeep to the VW Santana could have been said to lay the populist perception of the 'adopted' Chinese car. But it could be argued that the Communist Party of China seeks to create a true national Chinese Car derived from the 'progressive' engineering concepts / demonstrators spot-lighted the Beijing Auto Show?
The West has obviously had greater commercial, financial and societal headwinds in terms of such a radical re-orientation of its personal and public mobility construct. Relative to the Car per se, there are enormous, and understandable, barriers to change; ranging across the:
1. Psychological (110 years of using the internal combustion engine and its attuned worldwide supporting infrastructure)
2. Attitudinal (where cars are effectively 'status ranked' according to ICE cubic capacity and conventional ICE engineering capability – see BMW and Mercedes)
3. Economic (the fact that the massive auto-industry – upstream to downstream- is orientated around ICE business model)
4. etc etc
However, as of literally today a confluence of issues and trends may be about to give alternative propulsion re-newed traction here in the United Kingdom, it's epi-centre: The City. The City, for all its current woes is political & geographic merged field reflecting 2 timely and important events, which if logically combined point to the the beginnings of what could be a major wave supporting electric vehicles.
Firstly, The City has been the facilitator of the just announced £12.4bn deal that saw France's EDF Energy buy control of British Energy (with expectations to sell-off a 25% stake to Centrica). That essentially proffers the nuclear-able skill set to both re-condition the UK's current 30 year old reactors and build a rumoured 4 new nuclear plants to provide the UK with much increased electricity capacity over the coming decades. Capacity that could charge electric vehicles.
Secondly, The City is the geographic and spiritual home of the London Black Cab, a vehicle which has always had a special genealogy and DNA set by the strict standards of the Public Carriage Office, itself obviously under UK government control. Such standards, in the interests of public policy, have historically made Black Cabs genetically different to mainstream cars, whether in terms of passenger capacity, maneuverability, standard of service etc etc. But today the PCO is under government pressure to transform the emissions output of the iconic taxi, which even lags mainstream people-carriers due to aged powertrains. Given London's leading role in transport policy (ie Congestion Charge & emissions reduction) there is a strong case to state that there is a governmental desire to see the Black Cab leapfrog forward to achieve the world-wide gold standard. That means that the vehicle and its design may have to undertake radical propulsion transformation, employing Plug-In Hybrid & All-Electric technology to ultimately conform with ever constricting policy guidelines which may well be being drafted.
investment-auto-motives appreciates the 'serendipity' of the present-day unfurling events.
The occurrence of engine fires on 8 TX4 vehicles (registered in mid 2005) in the space of 3 weeks required the PCO's withdrawal of an initial 10 Black Cabs from the road for inspection. A failure to determine the fire's cause lead to the temporary retraction of 500 driver licences for those operating other '56-plate' (mid-2006) vehicles to avoid the possibility of endangering the public. And now a further 70 later registered 2007 vehicles, sharing similar chassis numbers (and so specifications) have been suspended.
The PCO could well argue the point (and objectively conclude) that these unfortunate, non-isolated 8 similar accidents highlights a critical design flaw within the TX taxi range's aged powertrain set.
That in turn would call for a complete re-design of the TX's propulsion unit, which as part of a changed standards policy, would undoubtedly demand radical new emissions standards to be met, very probably matching or beating the European Commissions 120g/km target for (originally) 2012 – now being lobbied by automakers for postponement until 2015.
Thus the watershed agreement between EDF and Centrica that crystallizes the UK's energy policy to invest heavily in a new generation of nuclear powerplants, would logically and deductively, be aligned to a new impetus to invest in PI Hybrid and All-Electric powerplant technology for London's iconic taxis. An impetus that is being built-up in the presently on-going UK Automotive Inquiry which seeks to re-vitalise UK industry as a front-runner in green propulsion technology.
Manganese Bronze is the holding company of LTI Vehicles (formerly London Taxis International), the maker of the TX cabs and owner of Mann & Overton and KPM, arguably the duopolistic retailers of the vehicle in London. Importantly, MB also already has strategic interest in the electric propulsion arena. It has already created a network of technology alliances with the likes of Tanfield (owner of Smiths Electric Vehicles) to produce an EV taxi and for Hybrid technology utilises the knowledge of Azure Dynamics.
Thus MB is strategically “ahead of the curve” when it comes to regulatory demand set out for the PCO by Transport for London, a division of the Mayor's office. Interestingly TfL also introduced a second tier fleet of black taxi's based on Ford and other MPV type cars, created it was argued to “soak up additional un-met taxi-ride demand”. Fortuitously, this fleet can also soak-up the loss of the 600 or so TX's taken off the road in the interim.
investment-auto-motives believes we are witnessing the beginnings of a radical transformation of the Black Cab and the possible underpinnings to achieve the UK Inquiry's ambitions to transform the UK auto-sector .
That transformation, using the Black Cab fleet as a springboard, positively encourages production economies of scale that can be pragmatically commercially absorbed and amortised. Given the high-cost of such a niche vehicle, typically £35,000, a notional technology induced on-cost can obviously off-set as an item of depreciation on a cabbie or fleet operator's commercial accounts. That important ability could act as a half-way post to further 'volumising' electric vehicle propulsion sets for more mainstream fleet and ultimately private vehicle applications.
Strategically for MB, having set up a components sourcing and assembly partnership with Geely Automotive and a distribution office in the USA, hopes to both dramatically reduce assembly costs, so as to also absorb electric propulsion drivetrain costs in its ex-factory vehicle costs, and extend its global reach to both Beijing and New York; as each of those cities expect to introduce follow-on London-aligned taxi transport policies.
Thus with the EDF deal and Black Cab incidents, we suspect we are witnessing are confluence of events that will ultimately help mesh the needs and visions of UK Auto plc, itself and its accompanying players acting as a vanguard of public-private transport policy progress on the global stage.
Wednesday, 24 September 2008
Tuesday, 23 September 2008
Company Focus – General Motors – Avoided 'Shorts' and Looking 'Long'
The stock market is, as ever, a milieu of mixed opinion. It's that very fact that creates capital markets, a fact that over the last 11 days or so been the illustrated beyond doubt through the dominance of 'shorting', a much debated tri-part, tri-opinion trading strategy that speculatively injected the latterday major turmoil that further undermined the US financial sector.
The Fed and SEC stepped-in after the collapse of Lehman Bros and effective collapse of AIG to try and halt the blood-bath, effectively telling Capitol Hill of its actions after the event instead of seeking prior approval, as would be the norm.
A major aspect was of course the temporary and indeterminate prohibition of 'Shorting', the consequence of which wiped billions off of investment banks' capital values, and a threatened to continue as a trend amongst other theoretically less vulnerable sectors...such as industrials and autos.
As a safe measure, and recognising the acute contagion that could result, the regulatory authorities took a step-back to draft a list of those large companies that it considered essentially 'at threat' . General Motors, though of a relatively low market capital value compared to other 'high-value' corporations industries, is through its own propping-up of Delphi and other up and down-stream interlinks obviously still critical to the national economy and as such had to be protected.
But of course where the capital markets cannot short, investor sentiment will be evident enough in the rise of company stock sales, and GM's recent 11% plunge only adds to the pain of a 53% 12 month slide and noted as the worst performer in the Dow Jones Industrial Average Index.
Detroit is of course in the process of endeavouring to secure the initial $25bn low-interest loan from Congress and ironically as GM's price slides and it's rate of valuable cash burn increases (drawing on the final tranche of its final $3.5bn revolving credit line) so the need becomes more evident and incontestable from Congresses.
Though we agree with a Citi note that this doesn't yet demonstrate financial distress, GM having approximately $19bn cash at hand at end Q208. Yet equally it can't be denied that in these presently frozen financing conditions accompanied by declining global vehicle markets, that the corporate cupboard is being quickly depleted, even if not bare.
Most recognise that it will be the availability of corporate liquidity that will act as core- sustainance in the journey ahead, for however long that takes - a lesson was well learned by Japanese companies over the last low-growth 15 years. Not that the US is expected to experience such pain, simply that at such cash-critical times the need for an imminent $8bn to assist hefty operating costs is far more preferably achieved via Congress. This is undeniably a far more ameniable source compared to high cost bond issuance since Fitch re-rated GM onto “CCC” (6 grade into 'junk'/'high yield) or indeed running the risk of failing to ensure the underwriting and full market acceptance of additional equity issuance.
[NB. that rumoured/appropriated $8bn being unsurprisingly approximately one-third of the $25bn (initial) sum sought by Detroit's Big 3].
As things stand, the markets appear to be awaiting that critical Federal assistance and in the meantime rationally drawing down the price to both:
a) gain on the upswing of a very probable Fed announcement, and conversely
b) appropriation natural decline to have the stock find a natural p/e bottom to reflect what would be disappointing earnings outlook.
The biggest investor concerns are of course net income levels and the rate of 'cash burn'. Although Q307 & Q407 had hefty and record $37bn losses, the vast majority of that was due to deferred taxation and elected use of working capital, thus were seen to a degree as extra-ordinary factors unreflective of ordinary operating profit . However, although far smaller the Q108 and Q208 losses of $3.25bn and rapidly formed $18.7bn appear to be pure operating losses with Net Cash declining, Q107 at -$1.59bn and Q207 at -$2.2bn; down heavily from what were (in comparison) buoyant late 07 figures. Analysts and investors know that losses have been incurred on the back of an ever sickly North American home market, they are keen to see that the company retains enough cash to ensure it gets through this biting (now recognised) recession....and onward to 2011 to enable exploitation of an eventual US consumer upturn mid/end 2011.
However, over recent weeks the 'cash burn' question has grown more prescient given the the fact that the 'fiscally assistive' overseas EM markets (BRIC particularly) are now contracting rapidly. Although still in comparative growth mode, the level and speed of economic slow-down is concerning. Once confident Chinese, Russian & Indian consumers have, due to cultural impetus and lack of credit reliance, reacted quickly to the financial turmoil eroding domestic stock markets and so subsequent economic outlook. Only Brazil stands at best static, better than nothing, but of little effectual consequence relative to a large global corporation such as GM. Although market leaders in China and Russia their size and exposure to highly elastic, promiscuous and now cost conscious buyers will be problematic.
As margins in China have been squeezed over the last year due to the intensity of competition, so we'll see the same effect in Russia, though note not to the same degree. Just how it plays out it terms of model mix market demand and VM's reaction we'll have to see. But whereas slowdowns invariably boost small car sales – as seen in US and W.Europe – consumer's status-orientation is a dimension of emergent car markets that shouldn't be under-estimated, so careful regional planning will be required to balance production and costly import volumes of local portfolios.
Thus at this juncture, GM (like its Detroit brethren) faces yet another headwind. Unlike the former mid-stream UAW & legacy costs, or the upstream problems of price-spike oil and accordant massive input-price inflation, the focal concern at present is demand and profitable output. The adjustment of region EM demand will undoubtedly be required, and may halt EM projects to conserve cash, but equally important will be the need for GM to replicate its negotiational skills abroad (as seen with UAW, Delphi & now Congress relationships) to broker new business bases that suit the potentially dramatically changed commercial environments within the critical 4 EM regions. Even if BRIC growth is simply a 'hiccup' as some suggest, all the better to use this period to ensure improved margins at the earlier up-turn.
Speedy, large scale cost-savings across the board is what analysts will want to see to 'right-size' each regional division to suit the near and mid term, ie 2009-2011, so as to see GM pick-up across the globe post-2011.
But the biggest question remains, that today at the the company's centennial year, what shape should a 21st century GM take - structurally, operationally and fiscally?
Given the intrinsicly low profitability delivered by a traditional capital intensive mid-20th century business model, now better suited to Asian economies as seen by the Auto's C of G shift, in which direction should GM be moving? Importantly what is the routemap for getting there?
Yes there is the showcasing of the plug-in 'Volt' and the promise of a new world automotive dawn to combat energy price and security issues, but that will take many years to become the norm given technical, manufacturing and infrastructure headwinds. Thus even if the mechanical engineering that supports GM stays largely conventional (bounded at mild and mid hybrids), why should its operational/organisational structure remain the same?
Yes electric vehicles promise improved profitability when the technology with an inherent reduced BoM is enabled for mass manufacture, and efforts must be kept going But why stop there? Couldn't the nervana of profitability be extended further still by re-engineering the company as a whole, step by step by step? Effectively adding a commercial business model 'range-extender' of its own.
For even heavily regulated capital markets will want to see new realms of value extraction and those actions need not stop at the product, or indeed traditional operational activity. In a much changed world of consumer-corporate symbiosis, value extraction through philosophical transformation will be key, it should be part of a corporations own profit maximisation agenda and be intrinsically woven into CSR ideals.
For the moment, the future seems a long way off, nonetheless, GM investors – especially the 'large-slice' funds – will want to see how the pragmatic reactions to today's demands are aligned within the scope of long-term ambition.
Investors and Congress will not want to GM simply take another skip around the same old mulberry bush with private and tax-payer's money. Both deserve to see and recoup from far more.
The Fed and SEC stepped-in after the collapse of Lehman Bros and effective collapse of AIG to try and halt the blood-bath, effectively telling Capitol Hill of its actions after the event instead of seeking prior approval, as would be the norm.
A major aspect was of course the temporary and indeterminate prohibition of 'Shorting', the consequence of which wiped billions off of investment banks' capital values, and a threatened to continue as a trend amongst other theoretically less vulnerable sectors...such as industrials and autos.
As a safe measure, and recognising the acute contagion that could result, the regulatory authorities took a step-back to draft a list of those large companies that it considered essentially 'at threat' . General Motors, though of a relatively low market capital value compared to other 'high-value' corporations industries, is through its own propping-up of Delphi and other up and down-stream interlinks obviously still critical to the national economy and as such had to be protected.
But of course where the capital markets cannot short, investor sentiment will be evident enough in the rise of company stock sales, and GM's recent 11% plunge only adds to the pain of a 53% 12 month slide and noted as the worst performer in the Dow Jones Industrial Average Index.
Detroit is of course in the process of endeavouring to secure the initial $25bn low-interest loan from Congress and ironically as GM's price slides and it's rate of valuable cash burn increases (drawing on the final tranche of its final $3.5bn revolving credit line) so the need becomes more evident and incontestable from Congresses.
Though we agree with a Citi note that this doesn't yet demonstrate financial distress, GM having approximately $19bn cash at hand at end Q208. Yet equally it can't be denied that in these presently frozen financing conditions accompanied by declining global vehicle markets, that the corporate cupboard is being quickly depleted, even if not bare.
Most recognise that it will be the availability of corporate liquidity that will act as core- sustainance in the journey ahead, for however long that takes - a lesson was well learned by Japanese companies over the last low-growth 15 years. Not that the US is expected to experience such pain, simply that at such cash-critical times the need for an imminent $8bn to assist hefty operating costs is far more preferably achieved via Congress. This is undeniably a far more ameniable source compared to high cost bond issuance since Fitch re-rated GM onto “CCC” (6 grade into 'junk'/'high yield) or indeed running the risk of failing to ensure the underwriting and full market acceptance of additional equity issuance.
[NB. that rumoured/appropriated $8bn being unsurprisingly approximately one-third of the $25bn (initial) sum sought by Detroit's Big 3].
As things stand, the markets appear to be awaiting that critical Federal assistance and in the meantime rationally drawing down the price to both:
a) gain on the upswing of a very probable Fed announcement, and conversely
b) appropriation natural decline to have the stock find a natural p/e bottom to reflect what would be disappointing earnings outlook.
The biggest investor concerns are of course net income levels and the rate of 'cash burn'. Although Q307 & Q407 had hefty and record $37bn losses, the vast majority of that was due to deferred taxation and elected use of working capital, thus were seen to a degree as extra-ordinary factors unreflective of ordinary operating profit . However, although far smaller the Q108 and Q208 losses of $3.25bn and rapidly formed $18.7bn appear to be pure operating losses with Net Cash declining, Q107 at -$1.59bn and Q207 at -$2.2bn; down heavily from what were (in comparison) buoyant late 07 figures. Analysts and investors know that losses have been incurred on the back of an ever sickly North American home market, they are keen to see that the company retains enough cash to ensure it gets through this biting (now recognised) recession....and onward to 2011 to enable exploitation of an eventual US consumer upturn mid/end 2011.
However, over recent weeks the 'cash burn' question has grown more prescient given the the fact that the 'fiscally assistive' overseas EM markets (BRIC particularly) are now contracting rapidly. Although still in comparative growth mode, the level and speed of economic slow-down is concerning. Once confident Chinese, Russian & Indian consumers have, due to cultural impetus and lack of credit reliance, reacted quickly to the financial turmoil eroding domestic stock markets and so subsequent economic outlook. Only Brazil stands at best static, better than nothing, but of little effectual consequence relative to a large global corporation such as GM. Although market leaders in China and Russia their size and exposure to highly elastic, promiscuous and now cost conscious buyers will be problematic.
As margins in China have been squeezed over the last year due to the intensity of competition, so we'll see the same effect in Russia, though note not to the same degree. Just how it plays out it terms of model mix market demand and VM's reaction we'll have to see. But whereas slowdowns invariably boost small car sales – as seen in US and W.Europe – consumer's status-orientation is a dimension of emergent car markets that shouldn't be under-estimated, so careful regional planning will be required to balance production and costly import volumes of local portfolios.
Thus at this juncture, GM (like its Detroit brethren) faces yet another headwind. Unlike the former mid-stream UAW & legacy costs, or the upstream problems of price-spike oil and accordant massive input-price inflation, the focal concern at present is demand and profitable output. The adjustment of region EM demand will undoubtedly be required, and may halt EM projects to conserve cash, but equally important will be the need for GM to replicate its negotiational skills abroad (as seen with UAW, Delphi & now Congress relationships) to broker new business bases that suit the potentially dramatically changed commercial environments within the critical 4 EM regions. Even if BRIC growth is simply a 'hiccup' as some suggest, all the better to use this period to ensure improved margins at the earlier up-turn.
Speedy, large scale cost-savings across the board is what analysts will want to see to 'right-size' each regional division to suit the near and mid term, ie 2009-2011, so as to see GM pick-up across the globe post-2011.
But the biggest question remains, that today at the the company's centennial year, what shape should a 21st century GM take - structurally, operationally and fiscally?
Given the intrinsicly low profitability delivered by a traditional capital intensive mid-20th century business model, now better suited to Asian economies as seen by the Auto's C of G shift, in which direction should GM be moving? Importantly what is the routemap for getting there?
Yes there is the showcasing of the plug-in 'Volt' and the promise of a new world automotive dawn to combat energy price and security issues, but that will take many years to become the norm given technical, manufacturing and infrastructure headwinds. Thus even if the mechanical engineering that supports GM stays largely conventional (bounded at mild and mid hybrids), why should its operational/organisational structure remain the same?
Yes electric vehicles promise improved profitability when the technology with an inherent reduced BoM is enabled for mass manufacture, and efforts must be kept going But why stop there? Couldn't the nervana of profitability be extended further still by re-engineering the company as a whole, step by step by step? Effectively adding a commercial business model 'range-extender' of its own.
For even heavily regulated capital markets will want to see new realms of value extraction and those actions need not stop at the product, or indeed traditional operational activity. In a much changed world of consumer-corporate symbiosis, value extraction through philosophical transformation will be key, it should be part of a corporations own profit maximisation agenda and be intrinsically woven into CSR ideals.
For the moment, the future seems a long way off, nonetheless, GM investors – especially the 'large-slice' funds – will want to see how the pragmatic reactions to today's demands are aligned within the scope of long-term ambition.
Investors and Congress will not want to GM simply take another skip around the same old mulberry bush with private and tax-payer's money. Both deserve to see and recoup from far more.
Tuesday, 16 September 2008
Company Focus – Volvo Cars – the Revolving Wheel of Fortunes in Gothenburg
As Ford and its Detroit brethren court the senators and purse-string holders of Capitol Hill - seeking the initial $25bn tranche of an ideally $50bn+ deferred low cost Federal loan - so FMC must concurrently also scope the value and potential of its remaining asset base to determine its budget contingency and so mould appropriate forward strategy.
In an environment where GM has HUMMER up for sale, Chrysler seeks to divest of the Viper business and the former step by step dissolution of the once mighty Premier Automotive Group (PAG) has set an apparent precedent within Ford, no-one is surprised that in recent weeks there has been much conjecture surrounding the fate of Volvo Cars. And the rumour mill has fairly buzzed at the expected 'parachuting-in' of a seasoned Ford executive in the shape of Stephen Odell; replacing on 1st October the much respected, but presently poorly politically positioned, Fredrik Arp.
Volvo, although part of PAG, always retained far more independence than many other Ford holdings, its most noted peer Mazda. Whilst Volvo served by providing various new generation large & mid platforms for FMC en masse, the nub of the business was always Swede-centric so as to retain a sense of self when attempting to grow volume via its crop of large and mid X-overs and large, mid and compact cars.
Previous buoyant economic times allowed for that level of autonomy given that Gothenburg was philosophically integrated, even if not administratively, acting as Ford's centre of competence for AWD drivetrains, safety technology, telematics & ecological technologies. Critical elements which under PAG ideology were to create a low-cost technology trickle-down hardware & software streams into blue-oval's mainstream products to keep them as respective class-leaders.
However, it is that very synergy and level of inter-dependence that is now being questioned by Detroit, Gothenburg and of course the investment community. Once seen as the perfect 'half-way house' relationship under a different era, times and corporate structure have evolved since. As the world's economy looks to absorb perhaps the biggest financially induced shock yet with the collapse of Lehman Bros (and its resultant squeeze effects on margins, budgets and disposable consumer consumption) so American industrialists will be seeking risk-averse strategic courses in what are very very choppy waters.
As a consequence of the last year's increasing turmoil, rationalisation exercises have been underway at Volvo Cars for the last 2 quarters - ever since FMC quoted a Q108 loss of $151m and subsequent H108 loss of $271m (compared to a previous recent peak of $3m profits in H107). [Though of course FMC accounting and appropriation of expenditure vs income cannot be wholly ruled out as it itself seeks to convey better figures for core blue-oval operations]. Whether wholly market-induced or partially financially engineered, that rationalisation has taken the form of headcount reduction (1,400 white collar & 600 blue collar) and a general 5% output reduction subsequent to the previously announced Torslander site's activity reduction due for October.
But the sign of the times is senior management change. Where as Arp held great goodwill from Volvo's supplier-base, dealership-base and importantly governmental contacts, it was no doubt felt that such 'bon ami' was counter-productive to this new period which requires 'hard-ball' negotiating with all internal and external stake-holders. The fact that Odell is the first non-Swede to take the reins at Volvo (additionally supported by non-Swede Steven Armstrong as COO), we suspect, demonstrates the seriousness of the stance that FMC seeks to take; intentionally distancing itself. If it was simply a matter of Volvo 'tinkering', keeping the business as an 'arm length's division, the necessary ongoing restructuring and stakeholder conversations would have been better (politically) accomplished by Arp or another respected Swede. That appears not the case, Detroit wanted a direct line to Gothenburg and is using Odell to ensure that it is accomplished.
At the matter's heart, Odell will be weighing-up pro and counter arguments behind the strategic disposal of Volvo Cars versus complete absorption into FMC:
Basic, preliminary thoughts from investment-auto-motives regards the black and white scenario choices are as follows:
Scenario A - Divestment (“Opportunity Cost”) :
1. The need to tread a fine line between cherry-picking retained technologies, valuable transferable capabilities & facilities whilst maintaining a attractive entity that would muster potential buyers.
(This greatly influenced by FMC's future 'make vs buy' philosophy)
2. Assess the level of potentially 'fiscally encumbered' deflated asset values - land, buildings, plant etc. (Though this could be less than instinctively presumed given Sweden's fortunate apparently limited direct domestic banking exposure to the global credit crunch).
3. Evaluate the potentially loss of future competitive advantage in Safety, Telematics & Eco IPR
4. Identify 'best-fit' suitors (assisted by a NOMAD) between trade, MBO/LBO, PE and possibly governmental interests.
5. Negotiate contractual FMC support & non-compete clauses. (regions / time-frames etc)
6. Develop an alternative FMC strategy for 'from scratch' creation of new Eco-associative Brand
Scenario B - Volvo Retention (“Cost / Benefit”):
1. Press for Swedish government assistance (grant, subsidy, tax credit incentive etc)
2. Continued operational rationalisation merging Volvo into FMC , deleting double-count activities and severely contracting autonomy (ie 5 cylinder engine design and manufacture)
3. Negotiate extended supplier leverage & demand co-op project and plant / tooling investments.
4. Supplier initiatives to gain volume economies and reduce payment, logistics complexity
4. Cost-down on R&D and project engin'g to reduce the competitive gap against low cost regions.
5. Assess dealer-base ownership structure to improve 'ex factory - retail' margins & customer experience, CRM and create repeat buyer loyalty.
6. Critically evaluate Volvo's brand and product strategy with serious consideration of alternative secondary, separately positioned new look & feel or sub-brand.
7. Develop a robust FX hedging strategy for the near to mid term (1-3 years) for US$ volatility.
8. Seriously consider Volvo production in the US (on flexible Ford & Mercury lines) scaling up Volvo volume as the Mercury marque continues its inevitable decline; assisting unit margins.
Of course, these are only a few highline considerations amongst a myriad of issues for both scenarios. To fully assess the ramifications of each scenario and make a fully explored decision would take time, but time is a luxury that Odell very probably doesn't have.
FMC and Mulally have heard supportive sound-bites from the Tracinda PR machine, but equally it and other institutional investors want to see plausible solutions to the haemorrhaging of Ford's P&L and an evidently uncomfortable rate of cash-burn on the quarterly Balance Sheets. Thus the relaxed and amiable Mulally will be trying to manage shareholder expectations, retain goodwill and effectively buy time .
The investment community would unsurprisingly be particularly interested in the sale potential of Volvo, both as an investment vehicle in its own right, as the probable short-term upswing in FMC stock value as the market would perceive such an act as effectively “lifting a weight off the corporation's shoulders”. Indeed Odell's statements that “Volvo will be more standalone” positively courts such conjecture. So looking slightly deeper at Divestment, which parties might be interested in Volvo's acquisition? As ever, potential candidates derive from Trade, Private Equity or the latter-day sizable influence of Sovereign Wealth Funds (esp Arabic & Asian).
In regard to the general trade sales environment, given today's current and worsening contraction of credit availability in western markets - where corps are willing to buy expensive short term paper to cover short/mid-term operating – the bygone possibility of heavily leveraged strategic M&A has drastically demised.
There has been press speculation that Renault-Nissan might be a potential given the French company's interest at time of Volvo's sale to Ford, but given the Franco-Japanese's companies organically developed leaps forward in both safety and eco-tech in the interim, the worldwide marketing of upscale Infiniti competing directly against Volvo and Ghosn's own performance pressures to fulfill R-N shareholder expectation, an additional car company purchase is looking very remote when he (like many CEOs) seeks the benefits of alliance partnerships over the headache of financing and meshing a 3rd entity with little upturn.
PSA, now coming to the fore playing its strong small car range and CO2 credentials, could theoretically be interested in gaining a premium brand to both reach into that territory and gain further volume economies on its larger platforms, but PSA has historically favoured alliances not M&As – its imbued in the Peugeot-Citroen DNA - and seen yet again recently with Mitsubishi partnering on larger vehicles and diesel & electric powertrain solutions, and major emerging markets potential such as Russia & Brazil. Integrating Volvo might be biting off more than it could chew, and the very pragmatic Streiff, renowned for seeking efficiencies, recognises that.
As for the German's, would either BMW or Daimler, both with their own performance issues, want to acquire a foreign company after the respective Rover Group and Chrysler 'divorces'? Probably not. Reithofer and Zetsche recognise that jittery capital markets will want to see them sort their own house-keeping first and will not speculate so rashly with valuable cash at hand or costly debt; if indeed available. Volkswagen has been running well as the doyen of the auto-stocks, but as of today it has the internal & external political concerns regards integration into Porsche Holdings. Whilst that should theoretically be a smooth process of conjoining 2 well associated, already cooperative firms (eg Toureg/Cayenne, Panamericana & smaller siblings) the reality with inter-family power-struggles and the case being pursued against Porsche by the State of Lower Saxony (seeing itself as 'defender' of VW) means that the situation is far to messy to seriously consider a acquisition and integration.
This leaves FIAT as the last major European candidate, again a case of a conglomeration that has won investor favour with positive results over the last 4 years, led by Marchionne. But this 'turnaround architect' of FIAT's fortune is to leave Autos for Banking and serve the troubled investment bank UBS to do the same. However, whilst he has undoubtedly left FIAT all the stronger, he did pick-up FIAT Autos at the bottom of its cyclical trough, and it didn't require strategic and tactical brilliance to get back on track aided by major GM assistance, Ford partnering and provision of a good small car line-up and exploitation of the iconic 500. He is now leaving at what could be argued as a FIAT Autos peak, the task of the next CEO far harder as FIAT fights the international battle and suffers from a growing hyper-competitive home-market and European backyard. Relations with TATA and Chery will undoubtedly assist in reducing vehicle programme costs and accessing EM regions, but any interest in Volvo would need to be ideally mutually beneficial to all increasingly important partners, like the Jaguar platform conjecture for Maserati. Perhaps Volvo's acquisition could also aid the business cases for Alfa Romeo and Lancia, and piggy-back Volvo's international market presence (esp USA), but that 'fit of mutuality' would be critical.
Lastly from the Trade-Buy angle, this leaves the Indian and Chinese manufacturers – the big players like TATA, Maruti and Mahindra & Mahindra, aswell as SAIC, FAW, Dongfeng etc. The likes of TATA and SAIC have proven themselves to be M&A protagonists in the premium sector and are presently continuing to absorb their acquisitions. Both MG-Rover and Jaguar-Land Rover were bought for their base technology and future IPR potential as much as their upscale brand names.
Volvo would need to prove itself a compelling buy that could be easily absorbed into the host organisation, and with what are essentially major FMC hardware and political ties. Of the Indians and Chinese, given economic slow-downs in both countries, it will only be the cash rich and heavily committed that could make such move. Of the aggressive players, it is perhaps only TATA who, now experiencing that complexity of M&A transfer from FMC, is best positioned to managerially undertake such a venture. But credit analysts such as S&P and Moodys had already downgraded TATA for taking on too much risk and incurring deferred earnings when it acquired J-LR, before the real bite of the credit crunch. Another major distraction renewed focus on the Nano project's present manufacturing concerns. And it will be noted that whilst Jaguar, Land Rover and Volvo share similar market-segment territory, their respective construction techniques are markedly different and in the short-term hard to merge - Volvo's higher volume conventional (FMC) steel-based platforms vs Jaguar - Land Rover's aligned advanced construction solutions. So whilst there are undoubted product synergies to be had in the longer term, the 3 brands spanning cars and X-overs, the macro-economic issues of the here and now look to make even an under-valued Volvo as a stretch too far for the redoubted Ratan Tata right now.
Looking at Private Equity, one argument that could be theoretically constructed is that Tracinda (individually or as part of a consortium ie Arabic or Asian SWF) looking to take advantage of Volvo potential relative to an over-stretched Ford empire focused on its own core operations. Such an approach by Tracinda could, given its political clout with a Ford invested SWF, seek obtain Volvo Cars at a bargain Fire Sale price. Jerry York, could well be eyeing-up Volvo for Tracinda's own uses, knowing it would secure Ford's 'guaranteed' operational support (in procurement & development services) as Volvo Cars transforms into a legally independent entity.
However, if Volvo's unsecured future persists with FMC's increasing loss of patience and a PE consortium failure to grasp the mid/long term potential at a reasonable price, the ultimate arbiter could well be the Swedish government itself. Today's centre-right governmental stance will be an important factor in how the company is able to move forward. Unlike far more socialist predecessors this government unsurprisingly takes a far more capitalistic attitude but appreciates its responsibilities to its people. That a once semi-protectionist Sweden is today recognised as meshed within global trade; whether that be mobile phones, medical devises, vehicles or indeed the corporations that produce these products and associated services. Thus, whilst full nationalisation of Volvo Cars would not be entertained, it may well consider the idea (if presented the problem) of a government assisted initiative to ensure a domestic LBO/MBO could be undertaken. Done so if necessary to rebuild the company if, at worst case scenario, Ford did indeed asset-strip core capabilities that would take time and support to rebuild.
Ironically, this could well be a negotiation tactic used by Odell to gain governmental flexibility to 'help' Volvo during these dark days for Ford and Detroit; recognising Sweden's desire to maintain its national base of upscale car companies. Enterprises that have done much to put the Scandinavian country on the global stage over the last 50 years and commercial engines that add so much to the national economy.
But the reality is that presently, premium saloons, station wagons,, coupes and X-overs like the S/V-80, S/V-60, C-70, XC-70, XC-90 and possibly even upcoming XC-60 have been hit hard by the broader economic malaise. Sales forecasts are 400,000 units for 2008, down more than 12% from 2007's 457,000 units. The prime US market is down 23% YoY and down a hefty 49% in August alone. And whilst the smaller vehicles such as S40 and C30 were introduced their performance has been patchy, the S40 well received, the C30 far less so.
Thus Ford will have a major job of evaluating both the “Cost-Benefit” and “Opportunity Cost” of retaining or divesting of Volvo. It all too well knows the frustration that in today's Eco-orientated world, encompassing society's & the consumer's return to family values & community spirit, that the Volvo brand is indeed a gem. The problem, as ever under financially pressured periods, is the cost in terms of commitment, time and of course finances that it takes to polish that gem and make that emerald sparkle green.
In an environment where GM has HUMMER up for sale, Chrysler seeks to divest of the Viper business and the former step by step dissolution of the once mighty Premier Automotive Group (PAG) has set an apparent precedent within Ford, no-one is surprised that in recent weeks there has been much conjecture surrounding the fate of Volvo Cars. And the rumour mill has fairly buzzed at the expected 'parachuting-in' of a seasoned Ford executive in the shape of Stephen Odell; replacing on 1st October the much respected, but presently poorly politically positioned, Fredrik Arp.
Volvo, although part of PAG, always retained far more independence than many other Ford holdings, its most noted peer Mazda. Whilst Volvo served by providing various new generation large & mid platforms for FMC en masse, the nub of the business was always Swede-centric so as to retain a sense of self when attempting to grow volume via its crop of large and mid X-overs and large, mid and compact cars.
Previous buoyant economic times allowed for that level of autonomy given that Gothenburg was philosophically integrated, even if not administratively, acting as Ford's centre of competence for AWD drivetrains, safety technology, telematics & ecological technologies. Critical elements which under PAG ideology were to create a low-cost technology trickle-down hardware & software streams into blue-oval's mainstream products to keep them as respective class-leaders.
However, it is that very synergy and level of inter-dependence that is now being questioned by Detroit, Gothenburg and of course the investment community. Once seen as the perfect 'half-way house' relationship under a different era, times and corporate structure have evolved since. As the world's economy looks to absorb perhaps the biggest financially induced shock yet with the collapse of Lehman Bros (and its resultant squeeze effects on margins, budgets and disposable consumer consumption) so American industrialists will be seeking risk-averse strategic courses in what are very very choppy waters.
As a consequence of the last year's increasing turmoil, rationalisation exercises have been underway at Volvo Cars for the last 2 quarters - ever since FMC quoted a Q108 loss of $151m and subsequent H108 loss of $271m (compared to a previous recent peak of $3m profits in H107). [Though of course FMC accounting and appropriation of expenditure vs income cannot be wholly ruled out as it itself seeks to convey better figures for core blue-oval operations]. Whether wholly market-induced or partially financially engineered, that rationalisation has taken the form of headcount reduction (1,400 white collar & 600 blue collar) and a general 5% output reduction subsequent to the previously announced Torslander site's activity reduction due for October.
But the sign of the times is senior management change. Where as Arp held great goodwill from Volvo's supplier-base, dealership-base and importantly governmental contacts, it was no doubt felt that such 'bon ami' was counter-productive to this new period which requires 'hard-ball' negotiating with all internal and external stake-holders. The fact that Odell is the first non-Swede to take the reins at Volvo (additionally supported by non-Swede Steven Armstrong as COO), we suspect, demonstrates the seriousness of the stance that FMC seeks to take; intentionally distancing itself. If it was simply a matter of Volvo 'tinkering', keeping the business as an 'arm length's division, the necessary ongoing restructuring and stakeholder conversations would have been better (politically) accomplished by Arp or another respected Swede. That appears not the case, Detroit wanted a direct line to Gothenburg and is using Odell to ensure that it is accomplished.
At the matter's heart, Odell will be weighing-up pro and counter arguments behind the strategic disposal of Volvo Cars versus complete absorption into FMC:
Basic, preliminary thoughts from investment-auto-motives regards the black and white scenario choices are as follows:
Scenario A - Divestment (“Opportunity Cost”) :
1. The need to tread a fine line between cherry-picking retained technologies, valuable transferable capabilities & facilities whilst maintaining a attractive entity that would muster potential buyers.
(This greatly influenced by FMC's future 'make vs buy' philosophy)
2. Assess the level of potentially 'fiscally encumbered' deflated asset values - land, buildings, plant etc. (Though this could be less than instinctively presumed given Sweden's fortunate apparently limited direct domestic banking exposure to the global credit crunch).
3. Evaluate the potentially loss of future competitive advantage in Safety, Telematics & Eco IPR
4. Identify 'best-fit' suitors (assisted by a NOMAD) between trade, MBO/LBO, PE and possibly governmental interests.
5. Negotiate contractual FMC support & non-compete clauses. (regions / time-frames etc)
6. Develop an alternative FMC strategy for 'from scratch' creation of new Eco-associative Brand
Scenario B - Volvo Retention (“Cost / Benefit”):
1. Press for Swedish government assistance (grant, subsidy, tax credit incentive etc)
2. Continued operational rationalisation merging Volvo into FMC , deleting double-count activities and severely contracting autonomy (ie 5 cylinder engine design and manufacture)
3. Negotiate extended supplier leverage & demand co-op project and plant / tooling investments.
4. Supplier initiatives to gain volume economies and reduce payment, logistics complexity
4. Cost-down on R&D and project engin'g to reduce the competitive gap against low cost regions.
5. Assess dealer-base ownership structure to improve 'ex factory - retail' margins & customer experience, CRM and create repeat buyer loyalty.
6. Critically evaluate Volvo's brand and product strategy with serious consideration of alternative secondary, separately positioned new look & feel or sub-brand.
7. Develop a robust FX hedging strategy for the near to mid term (1-3 years) for US$ volatility.
8. Seriously consider Volvo production in the US (on flexible Ford & Mercury lines) scaling up Volvo volume as the Mercury marque continues its inevitable decline; assisting unit margins.
Of course, these are only a few highline considerations amongst a myriad of issues for both scenarios. To fully assess the ramifications of each scenario and make a fully explored decision would take time, but time is a luxury that Odell very probably doesn't have.
FMC and Mulally have heard supportive sound-bites from the Tracinda PR machine, but equally it and other institutional investors want to see plausible solutions to the haemorrhaging of Ford's P&L and an evidently uncomfortable rate of cash-burn on the quarterly Balance Sheets. Thus the relaxed and amiable Mulally will be trying to manage shareholder expectations, retain goodwill and effectively buy time .
The investment community would unsurprisingly be particularly interested in the sale potential of Volvo, both as an investment vehicle in its own right, as the probable short-term upswing in FMC stock value as the market would perceive such an act as effectively “lifting a weight off the corporation's shoulders”. Indeed Odell's statements that “Volvo will be more standalone” positively courts such conjecture. So looking slightly deeper at Divestment, which parties might be interested in Volvo's acquisition? As ever, potential candidates derive from Trade, Private Equity or the latter-day sizable influence of Sovereign Wealth Funds (esp Arabic & Asian).
In regard to the general trade sales environment, given today's current and worsening contraction of credit availability in western markets - where corps are willing to buy expensive short term paper to cover short/mid-term operating – the bygone possibility of heavily leveraged strategic M&A has drastically demised.
There has been press speculation that Renault-Nissan might be a potential given the French company's interest at time of Volvo's sale to Ford, but given the Franco-Japanese's companies organically developed leaps forward in both safety and eco-tech in the interim, the worldwide marketing of upscale Infiniti competing directly against Volvo and Ghosn's own performance pressures to fulfill R-N shareholder expectation, an additional car company purchase is looking very remote when he (like many CEOs) seeks the benefits of alliance partnerships over the headache of financing and meshing a 3rd entity with little upturn.
PSA, now coming to the fore playing its strong small car range and CO2 credentials, could theoretically be interested in gaining a premium brand to both reach into that territory and gain further volume economies on its larger platforms, but PSA has historically favoured alliances not M&As – its imbued in the Peugeot-Citroen DNA - and seen yet again recently with Mitsubishi partnering on larger vehicles and diesel & electric powertrain solutions, and major emerging markets potential such as Russia & Brazil. Integrating Volvo might be biting off more than it could chew, and the very pragmatic Streiff, renowned for seeking efficiencies, recognises that.
As for the German's, would either BMW or Daimler, both with their own performance issues, want to acquire a foreign company after the respective Rover Group and Chrysler 'divorces'? Probably not. Reithofer and Zetsche recognise that jittery capital markets will want to see them sort their own house-keeping first and will not speculate so rashly with valuable cash at hand or costly debt; if indeed available. Volkswagen has been running well as the doyen of the auto-stocks, but as of today it has the internal & external political concerns regards integration into Porsche Holdings. Whilst that should theoretically be a smooth process of conjoining 2 well associated, already cooperative firms (eg Toureg/Cayenne, Panamericana & smaller siblings) the reality with inter-family power-struggles and the case being pursued against Porsche by the State of Lower Saxony (seeing itself as 'defender' of VW) means that the situation is far to messy to seriously consider a acquisition and integration.
This leaves FIAT as the last major European candidate, again a case of a conglomeration that has won investor favour with positive results over the last 4 years, led by Marchionne. But this 'turnaround architect' of FIAT's fortune is to leave Autos for Banking and serve the troubled investment bank UBS to do the same. However, whilst he has undoubtedly left FIAT all the stronger, he did pick-up FIAT Autos at the bottom of its cyclical trough, and it didn't require strategic and tactical brilliance to get back on track aided by major GM assistance, Ford partnering and provision of a good small car line-up and exploitation of the iconic 500. He is now leaving at what could be argued as a FIAT Autos peak, the task of the next CEO far harder as FIAT fights the international battle and suffers from a growing hyper-competitive home-market and European backyard. Relations with TATA and Chery will undoubtedly assist in reducing vehicle programme costs and accessing EM regions, but any interest in Volvo would need to be ideally mutually beneficial to all increasingly important partners, like the Jaguar platform conjecture for Maserati. Perhaps Volvo's acquisition could also aid the business cases for Alfa Romeo and Lancia, and piggy-back Volvo's international market presence (esp USA), but that 'fit of mutuality' would be critical.
Lastly from the Trade-Buy angle, this leaves the Indian and Chinese manufacturers – the big players like TATA, Maruti and Mahindra & Mahindra, aswell as SAIC, FAW, Dongfeng etc. The likes of TATA and SAIC have proven themselves to be M&A protagonists in the premium sector and are presently continuing to absorb their acquisitions. Both MG-Rover and Jaguar-Land Rover were bought for their base technology and future IPR potential as much as their upscale brand names.
Volvo would need to prove itself a compelling buy that could be easily absorbed into the host organisation, and with what are essentially major FMC hardware and political ties. Of the Indians and Chinese, given economic slow-downs in both countries, it will only be the cash rich and heavily committed that could make such move. Of the aggressive players, it is perhaps only TATA who, now experiencing that complexity of M&A transfer from FMC, is best positioned to managerially undertake such a venture. But credit analysts such as S&P and Moodys had already downgraded TATA for taking on too much risk and incurring deferred earnings when it acquired J-LR, before the real bite of the credit crunch. Another major distraction renewed focus on the Nano project's present manufacturing concerns. And it will be noted that whilst Jaguar, Land Rover and Volvo share similar market-segment territory, their respective construction techniques are markedly different and in the short-term hard to merge - Volvo's higher volume conventional (FMC) steel-based platforms vs Jaguar - Land Rover's aligned advanced construction solutions. So whilst there are undoubted product synergies to be had in the longer term, the 3 brands spanning cars and X-overs, the macro-economic issues of the here and now look to make even an under-valued Volvo as a stretch too far for the redoubted Ratan Tata right now.
Looking at Private Equity, one argument that could be theoretically constructed is that Tracinda (individually or as part of a consortium ie Arabic or Asian SWF) looking to take advantage of Volvo potential relative to an over-stretched Ford empire focused on its own core operations. Such an approach by Tracinda could, given its political clout with a Ford invested SWF, seek obtain Volvo Cars at a bargain Fire Sale price. Jerry York, could well be eyeing-up Volvo for Tracinda's own uses, knowing it would secure Ford's 'guaranteed' operational support (in procurement & development services) as Volvo Cars transforms into a legally independent entity.
However, if Volvo's unsecured future persists with FMC's increasing loss of patience and a PE consortium failure to grasp the mid/long term potential at a reasonable price, the ultimate arbiter could well be the Swedish government itself. Today's centre-right governmental stance will be an important factor in how the company is able to move forward. Unlike far more socialist predecessors this government unsurprisingly takes a far more capitalistic attitude but appreciates its responsibilities to its people. That a once semi-protectionist Sweden is today recognised as meshed within global trade; whether that be mobile phones, medical devises, vehicles or indeed the corporations that produce these products and associated services. Thus, whilst full nationalisation of Volvo Cars would not be entertained, it may well consider the idea (if presented the problem) of a government assisted initiative to ensure a domestic LBO/MBO could be undertaken. Done so if necessary to rebuild the company if, at worst case scenario, Ford did indeed asset-strip core capabilities that would take time and support to rebuild.
Ironically, this could well be a negotiation tactic used by Odell to gain governmental flexibility to 'help' Volvo during these dark days for Ford and Detroit; recognising Sweden's desire to maintain its national base of upscale car companies. Enterprises that have done much to put the Scandinavian country on the global stage over the last 50 years and commercial engines that add so much to the national economy.
But the reality is that presently, premium saloons, station wagons,, coupes and X-overs like the S/V-80, S/V-60, C-70, XC-70, XC-90 and possibly even upcoming XC-60 have been hit hard by the broader economic malaise. Sales forecasts are 400,000 units for 2008, down more than 12% from 2007's 457,000 units. The prime US market is down 23% YoY and down a hefty 49% in August alone. And whilst the smaller vehicles such as S40 and C30 were introduced their performance has been patchy, the S40 well received, the C30 far less so.
Thus Ford will have a major job of evaluating both the “Cost-Benefit” and “Opportunity Cost” of retaining or divesting of Volvo. It all too well knows the frustration that in today's Eco-orientated world, encompassing society's & the consumer's return to family values & community spirit, that the Volvo brand is indeed a gem. The problem, as ever under financially pressured periods, is the cost in terms of commitment, time and of course finances that it takes to polish that gem and make that emerald sparkle green.
Wednesday, 10 September 2008
Industry Structure – China – From the Running Red Hot to Post Bubble Blues to the Opportunities Therein.
Whilst China captivated the world in the run-up to, and during, the Olympics, there have been many observers – from the Beijing Street-Hawker to Wall Street Trader – who have wondered how the economy would fare once the massive public expenditure programme ended. That programme preserved a level of social and fiscal confidence within the country since the domestic stock-market highs this time last year (with P/Es at 25-35) turned to massive down-turn capitulations in sector after sector..
For all the talk of normative corrections, setting stocks back on more conservative and realistic ratings, the once ravenous appetite that underpinned Chinese growth as state assets became privatised appears to have largely diminished. Many planned IPOs have been shelved or post-poned, only the very secure (such as railways and infrastructure) now welcomed by overtly conservative private investors recognising the importance of central government's essentially guaranteed funding plans.
Thus it seems that China is reflecting the dynamic of western markets of the last few years, now looking at low-yield, long-holds as the safest of bets in what's become a risky and volatile capital market, drastically eroded by formidable inflation a 12 year high. Inflation that in turn is adversely affecting operational profitability across the board, especially so for those industries with heavy CapEx, overhead, raw material and staffing costs.
Unsurprisingly so, from the consumer's perspective, that jittery socio-economic climate has been most recently evident and most forcefully felt in the auto-sector; as sales figures for August revert to the levels of 3 years ago. Locally based consultants state that the August figures are the result of the public's Olympic focus, and that 'normal service will resume' as new models and incentive packages arrived at end Q3 & through Q4.
However, there may reason to argue that after what has been a long period of over-incentivised sales, applied not only to older models but also to new, that the new car market (in qualitative sentiment terms, if not in quantitative statistics) has effectively been saturated. Also note that the voracious Chinese consumers have been quick to re-purchase newer vehicles at the 2 & 3 year mark, recognising the value of the deals on offer, but also inadvertently swelling nearly-new used car ranks and so in turn promoting the vicious spiral of undermining new car prices. Since there has been little bounce from the stock-market downturn consumer confidence has been slowly diminishing, no matter how highly anticipated the grand Olympic event.
Reviewing the year to date, CAAM stated average sales by mid year rose by 'only' 14.3% compared to a previous forecast of 20%. By August that figure was a rise of 13 percent [4.55m units]. Of course mid-teen figures would be magical in western markets. But in what has been a 'wonderland' of 25%+ growth in recent years, the expected slowdown to 20% (resulted as the volume ripple spreads wider but with less intensity) was unfortunately demonstrably over-optimistic. The law of diminishing returns hit harder than expected.
So in effect the Olympics, as a massive public works programme, only really served to try and delay and massage the downward rate of consumer confidence, having little real effect to re-invigourate the economy; even with the accompanying supportive use of fiscal policy directives that sought to revive faltered capital markets. Indeed, some of London's Chinese community saw the Olympics as a timely “smoke and mirrors” exercise to the world. And though a possibly overtly cynical view, it would make sense that the Communist Party might try and re-configure the prime elements & sectors of its industrial base whilst the world's attention is focused on the results of Chinese commercialism, and not the management of machinery behind the scenes.
So what does this mean for the Chinese auto-industry?
The critical element is of course the profitability of the general sector and the players therein, whether state transformed, JVs with foreign manufacturers (as the large producers are), spin-offs from other sectors (such as motorcycles & defence) or indeed privately backed newcomers.
In May 2004 the State Development & Reform Commission set out a new policy that would alter the face of the industry by an intended date of 2010. That ambition was the enlargement of domestic companies (through organic growth and via consolidation best exemplified by the SAIC-Nanjing merger) aswell as the forming of commercial relationships between domestic and foreign enterprises – a key aspect that stretches from the 1978 agreement between Beijing Jeep and Chrysler to the more recent one with Chery Auto.
These reforms were recognised as being necessary since the early part of this decade when it was understood that the economic miracle of rapid growth could not be sustained, especially since China relied so much on low-cost exports, and that other countries such as Vietnam, Kasakhstan, other ex Soviet regions and perhaps even North Korea, were placed as natural future low cost successors that could both generate internal growth and importantly attract foreign capital. Thus, to sustain Chinese growth in the long run, would need insightful economic management that both fiscally cooled and fiscally re-energised the nation as appropriate, increasingly relative to the global economy – even if the de-coupling theory was theoretically proven.
Thus the natural evolution of the auto-sector would witness its rapid rise / expansion, induce competitive forces which, in turn, would degrade margins. This along with the desire to plan the sectors direction for both vehicle and parts-makers (set on a world-stage) would effectively demand sector re-structuring before / by / soon after 2010.
investment-auto-motives posits that over the last year since the severe Beijing & Shenzen stock-market downturns that China, masked by the hype of the Olympics, is a watershed period for Chinese industry, across many sectors from mining to steel to autos to the ultimate ambition of high-value specialisms.
As publicly listed corporate prices remain low, with the potential to drop further in the short-term under operating pressures, well see an eventual swath of auto-sector M&As, very possibly reflecting recent events in Europe. The Schaeffler acquisition of Continental and Porsche's buy-into VW could be models by which private entities (whether trade, family or PE) procure very tempting targets that can either be: a) synergistically absorbed into the holding company, b) bought as undervalued concerns awaiting the upturn or c) bought with divestment or spin-off potential.
Beyond potentially undervalued listed companies more easily available to foreign interests, there is also potential for progressive smaller local firms to seize the opportunities of mergers, or at the very least, alliance relationships. As we've stated previously, that could be formed from many different strategic perspectives, specific to: volume efficiencies of same car models / architectures, vehicle portfolio expansion using eachother as OEM suppliers to 'fill-in' respective ranges, to simply looking at operational functional advantages utilising eachothers differing core competancies.
Of course the possibilities are not simply restricted to more the obvious horizontal dimension of the sector, but also vertically, where upstream suppliers or even downstream distributor-retailers seek to maximise value-chain efficiencies via logically justified acquisitions. As with Japanese and Korean forebears it is often the stronger but invisible parts-suppliers that have the financial muscle to catalyse the lower orders of the more visible weaker car-makers in the industry.
And from the financial philosophical viewpoint, between the high profile listed corporations and myriad of smaller local firms are the likes of Chery and its peers, itself well placed and ambitious with plans for 42 new models between Q208 & 2015. These able and growing firms that appear to have attained the best of both worlds from 100% Chinese ownership (and its attendant political connections) to the technology sharing being accrued from production agreements with the likes of FIAT and Chrysler on mid and small cars.
Rationalisation spreads beyond strategic and capital expenditure concerns. There is a major need to address general productivity costs in this high inflation era, so just as commodities and raw material prices are slowly being tamed, so the thorny issue of wage cost inflation will need to be dealt with, very probably done so with corporations' judicious use of 2 arguments: I) reduced profits demanding input cost adjustment across the board, II) the natural effects of wage deflation as new transport infrastructure provides work access and opportunity to what were previously agricultural workers (as occurred previously). [We concur with a recent UBS/Economist report that counters talk of emerging restrictions on Chinese labour supply. Demographics and Land Reform policy and mechanisation will ensure supply well past 2025]
To this macro-economic end, domestic and foreign investors will be keen to assess the opportunities that both emerge and those that must be investigated and generated. Therefore, bankers in the China, Europe, the Middle East and US will be 'mentally plotting' each type of company relative to their prime referance points, or core strengths, that envisage a re-positioning in the shuffling sector. Re-positions that prove themselves to be aligned to the 2004 Reform Ideal...that being...
Investment:
Under the Policies, the examination and approval system for domestic and foreign investment in car manufacturers is to be reformed into a dual system whereby certain projects require approval and others solely need to be filed for the record. The establishment of new sino-foreign joint ventures in automobile manufacturing requires approval by the SDRC. The Chinese party in a sino-foreign joint venture to manufacture complete cars, special purpose vehicles, agricultural transport vehicles and motorcycles is required to hold a majority share. If such manufacturer is a company limited by shares, one of the Chinese parties is required to hold a controlling stake that is bigger than the aggregate of the equity held by all foreign investors. Foreign investors in enterprises located inside export processing zones which manufacture cars and car engines for export may be permitted to have a majority share upon approval by the State Council. The Policies permit foreign investors to create two or more joint ventures in China to produce the same categories of vehicles, if they join forces with their existing Chinese partners to associate or merge with other companies in China.
A broad remit that has much scope for investment returns as the industry itself rationalises and thereafter takes advantage of a re-energised US & European opportunities as those economies pull out of their slump. Meanwhile, maximising the Emerging Market export & CKD possibilities that will be a strengthening thread before advanced market incursion.
For all the talk of normative corrections, setting stocks back on more conservative and realistic ratings, the once ravenous appetite that underpinned Chinese growth as state assets became privatised appears to have largely diminished. Many planned IPOs have been shelved or post-poned, only the very secure (such as railways and infrastructure) now welcomed by overtly conservative private investors recognising the importance of central government's essentially guaranteed funding plans.
Thus it seems that China is reflecting the dynamic of western markets of the last few years, now looking at low-yield, long-holds as the safest of bets in what's become a risky and volatile capital market, drastically eroded by formidable inflation a 12 year high. Inflation that in turn is adversely affecting operational profitability across the board, especially so for those industries with heavy CapEx, overhead, raw material and staffing costs.
Unsurprisingly so, from the consumer's perspective, that jittery socio-economic climate has been most recently evident and most forcefully felt in the auto-sector; as sales figures for August revert to the levels of 3 years ago. Locally based consultants state that the August figures are the result of the public's Olympic focus, and that 'normal service will resume' as new models and incentive packages arrived at end Q3 & through Q4.
However, there may reason to argue that after what has been a long period of over-incentivised sales, applied not only to older models but also to new, that the new car market (in qualitative sentiment terms, if not in quantitative statistics) has effectively been saturated. Also note that the voracious Chinese consumers have been quick to re-purchase newer vehicles at the 2 & 3 year mark, recognising the value of the deals on offer, but also inadvertently swelling nearly-new used car ranks and so in turn promoting the vicious spiral of undermining new car prices. Since there has been little bounce from the stock-market downturn consumer confidence has been slowly diminishing, no matter how highly anticipated the grand Olympic event.
Reviewing the year to date, CAAM stated average sales by mid year rose by 'only' 14.3% compared to a previous forecast of 20%. By August that figure was a rise of 13 percent [4.55m units]. Of course mid-teen figures would be magical in western markets. But in what has been a 'wonderland' of 25%+ growth in recent years, the expected slowdown to 20% (resulted as the volume ripple spreads wider but with less intensity) was unfortunately demonstrably over-optimistic. The law of diminishing returns hit harder than expected.
So in effect the Olympics, as a massive public works programme, only really served to try and delay and massage the downward rate of consumer confidence, having little real effect to re-invigourate the economy; even with the accompanying supportive use of fiscal policy directives that sought to revive faltered capital markets. Indeed, some of London's Chinese community saw the Olympics as a timely “smoke and mirrors” exercise to the world. And though a possibly overtly cynical view, it would make sense that the Communist Party might try and re-configure the prime elements & sectors of its industrial base whilst the world's attention is focused on the results of Chinese commercialism, and not the management of machinery behind the scenes.
So what does this mean for the Chinese auto-industry?
The critical element is of course the profitability of the general sector and the players therein, whether state transformed, JVs with foreign manufacturers (as the large producers are), spin-offs from other sectors (such as motorcycles & defence) or indeed privately backed newcomers.
In May 2004 the State Development & Reform Commission set out a new policy that would alter the face of the industry by an intended date of 2010. That ambition was the enlargement of domestic companies (through organic growth and via consolidation best exemplified by the SAIC-Nanjing merger) aswell as the forming of commercial relationships between domestic and foreign enterprises – a key aspect that stretches from the 1978 agreement between Beijing Jeep and Chrysler to the more recent one with Chery Auto.
These reforms were recognised as being necessary since the early part of this decade when it was understood that the economic miracle of rapid growth could not be sustained, especially since China relied so much on low-cost exports, and that other countries such as Vietnam, Kasakhstan, other ex Soviet regions and perhaps even North Korea, were placed as natural future low cost successors that could both generate internal growth and importantly attract foreign capital. Thus, to sustain Chinese growth in the long run, would need insightful economic management that both fiscally cooled and fiscally re-energised the nation as appropriate, increasingly relative to the global economy – even if the de-coupling theory was theoretically proven.
Thus the natural evolution of the auto-sector would witness its rapid rise / expansion, induce competitive forces which, in turn, would degrade margins. This along with the desire to plan the sectors direction for both vehicle and parts-makers (set on a world-stage) would effectively demand sector re-structuring before / by / soon after 2010.
investment-auto-motives posits that over the last year since the severe Beijing & Shenzen stock-market downturns that China, masked by the hype of the Olympics, is a watershed period for Chinese industry, across many sectors from mining to steel to autos to the ultimate ambition of high-value specialisms.
As publicly listed corporate prices remain low, with the potential to drop further in the short-term under operating pressures, well see an eventual swath of auto-sector M&As, very possibly reflecting recent events in Europe. The Schaeffler acquisition of Continental and Porsche's buy-into VW could be models by which private entities (whether trade, family or PE) procure very tempting targets that can either be: a) synergistically absorbed into the holding company, b) bought as undervalued concerns awaiting the upturn or c) bought with divestment or spin-off potential.
Beyond potentially undervalued listed companies more easily available to foreign interests, there is also potential for progressive smaller local firms to seize the opportunities of mergers, or at the very least, alliance relationships. As we've stated previously, that could be formed from many different strategic perspectives, specific to: volume efficiencies of same car models / architectures, vehicle portfolio expansion using eachother as OEM suppliers to 'fill-in' respective ranges, to simply looking at operational functional advantages utilising eachothers differing core competancies.
Of course the possibilities are not simply restricted to more the obvious horizontal dimension of the sector, but also vertically, where upstream suppliers or even downstream distributor-retailers seek to maximise value-chain efficiencies via logically justified acquisitions. As with Japanese and Korean forebears it is often the stronger but invisible parts-suppliers that have the financial muscle to catalyse the lower orders of the more visible weaker car-makers in the industry.
And from the financial philosophical viewpoint, between the high profile listed corporations and myriad of smaller local firms are the likes of Chery and its peers, itself well placed and ambitious with plans for 42 new models between Q208 & 2015. These able and growing firms that appear to have attained the best of both worlds from 100% Chinese ownership (and its attendant political connections) to the technology sharing being accrued from production agreements with the likes of FIAT and Chrysler on mid and small cars.
Rationalisation spreads beyond strategic and capital expenditure concerns. There is a major need to address general productivity costs in this high inflation era, so just as commodities and raw material prices are slowly being tamed, so the thorny issue of wage cost inflation will need to be dealt with, very probably done so with corporations' judicious use of 2 arguments: I) reduced profits demanding input cost adjustment across the board, II) the natural effects of wage deflation as new transport infrastructure provides work access and opportunity to what were previously agricultural workers (as occurred previously). [We concur with a recent UBS/Economist report that counters talk of emerging restrictions on Chinese labour supply. Demographics and Land Reform policy and mechanisation will ensure supply well past 2025]
To this macro-economic end, domestic and foreign investors will be keen to assess the opportunities that both emerge and those that must be investigated and generated. Therefore, bankers in the China, Europe, the Middle East and US will be 'mentally plotting' each type of company relative to their prime referance points, or core strengths, that envisage a re-positioning in the shuffling sector. Re-positions that prove themselves to be aligned to the 2004 Reform Ideal...that being...
Investment:
Under the Policies, the examination and approval system for domestic and foreign investment in car manufacturers is to be reformed into a dual system whereby certain projects require approval and others solely need to be filed for the record. The establishment of new sino-foreign joint ventures in automobile manufacturing requires approval by the SDRC. The Chinese party in a sino-foreign joint venture to manufacture complete cars, special purpose vehicles, agricultural transport vehicles and motorcycles is required to hold a majority share. If such manufacturer is a company limited by shares, one of the Chinese parties is required to hold a controlling stake that is bigger than the aggregate of the equity held by all foreign investors. Foreign investors in enterprises located inside export processing zones which manufacture cars and car engines for export may be permitted to have a majority share upon approval by the State Council. The Policies permit foreign investors to create two or more joint ventures in China to produce the same categories of vehicles, if they join forces with their existing Chinese partners to associate or merge with other companies in China.
A broad remit that has much scope for investment returns as the industry itself rationalises and thereafter takes advantage of a re-energised US & European opportunities as those economies pull out of their slump. Meanwhile, maximising the Emerging Market export & CKD possibilities that will be a strengthening thread before advanced market incursion.
Monday, 8 September 2008
Macro-Level Trends – Economic & Social Mesh – The Need for New Business Vehicles that Create Bridges to Optimism
As the mire of the current multi-trillion Dollar financial crisis keeps slowly unwinding, now contagion across the globe and yet to find a natural 'concrete' bottom various stakeholders are searching for the formula that will stem the decline.
It is generally accepted that the key is in understanding the construct and nature of risk present in the very complex, multi-tiered and heavily traded US mortgage market, so that confidence can be put back into investment decision-making and the banking sector can finally arrest the spiraling trend of quarter after quarter write-downs caused by having to bring back onto their balance sheets the nebulous financial instruments (eg CDOs etc) that are the eye of the storm.
Of course there are those (mainly large PE firms) who are buying the risk off of the banks at well below par, giving banks some added 'firm finance' and of course seeking sizable returns of their own – effectively betting that the “America Inc” will in turn provide market security and confidence. And with the Fed's effective takeover of Freddie Mac and Fannie May, that's precisely what has happened.
Whilst the Fed has intervened over the last year with 2 emergency interest rate changes, injected liquidity and 'guidence' of Bear Stearn's disposal, it had tried to appear as uninterfering as possible and tried to maintain an 'open markets' stance, only acting where necessary and with only with a light touch. That attitude some argue has led to little consequence - as with the lacklustre effect of the previous $600 per head tax rebate.
[NB. as of 15.09.08, the Federal Reserve's decision to not underpin Lehman Brothers, yet increase the collateral acceptance terms for lending to other banks demonstrates the fine-line it is having to walk to assist yet not prop the US's capital markets]
As the theory posits, in a global economy and market where information and capital flows instantaneously, a 'natural bottom' will eventually be found from which the US economy, and latterly the world economy, can rebound. But that 'natural bottom' is perhaps harder to find than anticipated. This exemplified by the LSE's very jittery movements last week before the Fed's announcement and the resultant massive 199bp leap today 08.09.08 before an IT problem halted over-frenzied trading. Hence Treasury Secretary Paulson's and the FHFA's Lockhart's decision to create a temporary stop-gap through the major assistance measure.
But for all the financial engineering that is being created behind the scenes to 'seize the opportunities within the present challenges', it is generally recognised that a further 18 months will pass, and perhaps longer given the core role that Freddie Mac &Fannie May play – and indeed its own outcome - before the seeds of growth (initially apparent in the commercial sphere as opposed to consumer world) will sprout. Realistically that means at the very earliest 2010 for business to start the value-creation trickle-down in society and the beginning of a re-bound in the housing market – the price of which may well have fallen on average 20% by then from its Q207 high. The general housing fall-out compounded by wave after wave of small-time landlords off-loading their property holdings as they decrease in capital value and annual yield; a trend occurring from Los Angeles to London to Lisbon.
The case is of course that across the US, UK, Europe, Japan and Australia that, even with incentives like Gordon Brown's temporary stamp duty concession, potential buyers with increasing living costs and new threats of unemployment (as seen by the US's recent 6.1% jobless reveal) are effectively in a state of limbo, lacking confidence to buy into their 2 biggest life purchases – houses and cars.
The evidence is clear: the US faces an annualised autos sales figure close to a lowly 14m units, the UK experiences the worst August sales environment since 1966 down 18% (the SMMT predicting a further 10% fall) and European sales fell 16% YoY in August.
Today automakers and the investment community are querying just how to deal with the situation beyond the down-turn norms of sector contraction, consolidation and alliance-forging and asset disposals. All of which make for new value creation, especially with the possibilities of full-scale sell-offs or commercial agreements with highly liquid foreign parties which, along with the flight from now risk-laden oil speculation, are helping to repatriate foreign dollar reserves back into the country.
However, whilst FDI and new latter-year ventures are welcome, both parties (bankers and automakers) should understand that such a momentous period of social and economic stagnation – the worst in 60 years according to Alistair Darling – also has embedded commercial promise if approached and executed properly. That means stepping back, philosophising and visioneering short, medium and long-term futures that may well co-related the utility of mobility and housing.
investment-auto-motives appreciates the enormity of getting the American and advanced countries' economies back on their feet, and the socio-economic effect that starting-over will have. (Unlike the EM / BRIC economies that simply face a periodic slow-down). The west is undergoing a major turnaround scenario that could possibly radically change the face of the population's perceptions – hence the calls from certain political corners for a re-focus on the human-centric measure of “GHP”(Gross Happiness Product) as opposed to the economic-centric GDP (Gross Domestic Product).
And it is this social re-alignment that takes place whilst the western economies are very slowly bottoming-out and picking-up that holds potential for advanced thinking commercial entities, devising new pertinent business models that offer combined 'holistic' products and services that satiate people's domestic and mobility needs within singular solutions, that give the populous a bridge (of high commercial profitability) to access future better times when they return.
Such visioneering will demand a merged concentration from both sides of the commercial equation, capital backers (leveraging their own business networks) and the still massively powerful and influential auto-industry. For it is at times like these that Creative Capital comes to the fore, for both financial fixed-income and quoted markets and the hard-pressed, but ultimately optimistic consumer.
It is generally accepted that the key is in understanding the construct and nature of risk present in the very complex, multi-tiered and heavily traded US mortgage market, so that confidence can be put back into investment decision-making and the banking sector can finally arrest the spiraling trend of quarter after quarter write-downs caused by having to bring back onto their balance sheets the nebulous financial instruments (eg CDOs etc) that are the eye of the storm.
Of course there are those (mainly large PE firms) who are buying the risk off of the banks at well below par, giving banks some added 'firm finance' and of course seeking sizable returns of their own – effectively betting that the “America Inc” will in turn provide market security and confidence. And with the Fed's effective takeover of Freddie Mac and Fannie May, that's precisely what has happened.
Whilst the Fed has intervened over the last year with 2 emergency interest rate changes, injected liquidity and 'guidence' of Bear Stearn's disposal, it had tried to appear as uninterfering as possible and tried to maintain an 'open markets' stance, only acting where necessary and with only with a light touch. That attitude some argue has led to little consequence - as with the lacklustre effect of the previous $600 per head tax rebate.
[NB. as of 15.09.08, the Federal Reserve's decision to not underpin Lehman Brothers, yet increase the collateral acceptance terms for lending to other banks demonstrates the fine-line it is having to walk to assist yet not prop the US's capital markets]
As the theory posits, in a global economy and market where information and capital flows instantaneously, a 'natural bottom' will eventually be found from which the US economy, and latterly the world economy, can rebound. But that 'natural bottom' is perhaps harder to find than anticipated. This exemplified by the LSE's very jittery movements last week before the Fed's announcement and the resultant massive 199bp leap today 08.09.08 before an IT problem halted over-frenzied trading. Hence Treasury Secretary Paulson's and the FHFA's Lockhart's decision to create a temporary stop-gap through the major assistance measure.
But for all the financial engineering that is being created behind the scenes to 'seize the opportunities within the present challenges', it is generally recognised that a further 18 months will pass, and perhaps longer given the core role that Freddie Mac &Fannie May play – and indeed its own outcome - before the seeds of growth (initially apparent in the commercial sphere as opposed to consumer world) will sprout. Realistically that means at the very earliest 2010 for business to start the value-creation trickle-down in society and the beginning of a re-bound in the housing market – the price of which may well have fallen on average 20% by then from its Q207 high. The general housing fall-out compounded by wave after wave of small-time landlords off-loading their property holdings as they decrease in capital value and annual yield; a trend occurring from Los Angeles to London to Lisbon.
The case is of course that across the US, UK, Europe, Japan and Australia that, even with incentives like Gordon Brown's temporary stamp duty concession, potential buyers with increasing living costs and new threats of unemployment (as seen by the US's recent 6.1% jobless reveal) are effectively in a state of limbo, lacking confidence to buy into their 2 biggest life purchases – houses and cars.
The evidence is clear: the US faces an annualised autos sales figure close to a lowly 14m units, the UK experiences the worst August sales environment since 1966 down 18% (the SMMT predicting a further 10% fall) and European sales fell 16% YoY in August.
Today automakers and the investment community are querying just how to deal with the situation beyond the down-turn norms of sector contraction, consolidation and alliance-forging and asset disposals. All of which make for new value creation, especially with the possibilities of full-scale sell-offs or commercial agreements with highly liquid foreign parties which, along with the flight from now risk-laden oil speculation, are helping to repatriate foreign dollar reserves back into the country.
However, whilst FDI and new latter-year ventures are welcome, both parties (bankers and automakers) should understand that such a momentous period of social and economic stagnation – the worst in 60 years according to Alistair Darling – also has embedded commercial promise if approached and executed properly. That means stepping back, philosophising and visioneering short, medium and long-term futures that may well co-related the utility of mobility and housing.
investment-auto-motives appreciates the enormity of getting the American and advanced countries' economies back on their feet, and the socio-economic effect that starting-over will have. (Unlike the EM / BRIC economies that simply face a periodic slow-down). The west is undergoing a major turnaround scenario that could possibly radically change the face of the population's perceptions – hence the calls from certain political corners for a re-focus on the human-centric measure of “GHP”(Gross Happiness Product) as opposed to the economic-centric GDP (Gross Domestic Product).
And it is this social re-alignment that takes place whilst the western economies are very slowly bottoming-out and picking-up that holds potential for advanced thinking commercial entities, devising new pertinent business models that offer combined 'holistic' products and services that satiate people's domestic and mobility needs within singular solutions, that give the populous a bridge (of high commercial profitability) to access future better times when they return.
Such visioneering will demand a merged concentration from both sides of the commercial equation, capital backers (leveraging their own business networks) and the still massively powerful and influential auto-industry. For it is at times like these that Creative Capital comes to the fore, for both financial fixed-income and quoted markets and the hard-pressed, but ultimately optimistic consumer.
Friday, 29 August 2008
Company Focus – Chrysler LLC – Snakes & Lazards: Seeking a New Den for Viper.
When Chrysler was being structurally re-modelled in the late 80s, it took an innovative stance with then new 'cab-forward' vehicles that were decidedly progressive vs GM's traditional, boxy cars and Ford's organically shaped, yet conventionally proportioned offerings.
'Cab-forward' was almost a metaphore for a radically forward-looking company, and as part of that ambition, 1989 witnessed Bob Lutz's re-creation of the spritually lost 'All American Sportscar'. It came in the shape of the Viper, the prototype shown at Detroit's NAAS that year. A new nameplate (with obvious snake derived links to Shelby's Cobra) for an all new low volume production premium priced sportscar. Viper was to have a 'halo-effect' for Dodge, recapturing the past glories of muscle-car names like Charger and Challenger, and adding kudos to the SRT performance division.
16 years on and Chrysler is in a very different position to its upward lift of the 1990s. It has ridden the economic wave of the 90s and early 2000s, having exploited more than any of the Big 3 the trend for and subsequent reliance upon what were high margin trucks and SUVs. But changing times and a flat economy have put Chrysler back at the bottom of the trough of the US industry's historically normative heavy cyclicity
So today, in the $4 per gallon era, as part of Cerberus' Project Genesis, Chrysler's management is undergoing a $1bn revenue raising exercise through “non-core” asset disposals, $500m of which has thus been achieved with sale of the Californian design centre to Daimler and a Brazilian engine plant to FIAT. And at a time where pertinent alliances such as those with Chery for small cars, Nissan for compact car and possibly FIAT for joint US production, Nardelli and La Sorda has rightly recognised that Dodge's dedicated, small-scale sportscar business is a management and fiscal distraction that should be sold. Hence Chrysler seniors are (possibly) euphemistically “listening” to potential suitors for Viper – the cars, the brand and perhaps the Conner Avenue production facility.
It could be said the financial PR machine is underway, Lazard's appointment will have undoubtedly prompted their own PR consultants to spread the word to generate external stimuli in the press and interest, Chrysler's apparent “come hither” stance part and parcel of the inducement process.
But to the crux of the debate and who exactly are the suitors for the Viper business?
The financial press' (Bloomberg etc's) first thoughts were of a trade buyer, an industry expert identifying Shelby, Panoz and Saleen. But whilst we come to these (top of the tree entities) further down, the majority of the US specialist trade posses non too surprising similarities which from vital perspectives of operational realities are not immediately viewed as overtly synergistic:
- Parental Backing/ Ownership -
often family business, small PE group, regional small bank or a division of a larger regional industrial entity that specialises in metal and composite fabrication.
[Viper was born from large VM capabilities and supported as a strategic pet project, thus may have not been ever truly exposed to realities of external funding assessment and independent, self-support. And Viper's current management may endeavour to stay with Chrysler as opposed to running the business on far smaller budgets and with closer owner / director examination}.
- Product Type -
Majority simply not up to Viper (ie large VM) Quality Standards, whether: styling sophistication (often limited due to less sophisticated forming techniques), engineering robustness (due to limited design, testing, re-engineering process) and feature content (due to incurred product build cost and lack of technology supplier relationships given low volumes)
[The internal styling, engineering, feature & quality demands to keep Viper at its current level, let alone improvements required to reach benchmark standards, may well stretch beyond the true competencies of other apparent 'peers']
- Brand Positioning
Most specialist sportscars seen as playboy's toys catering to finite scale sub-segments, seen as credible in that segment given product differentiation or purity, but not credible in mainstream
[Viper sits as a credible car due to its parentage, and as such sits in a rare middle-ground between the plethora of lower quality (often quirky) vehicles and the premium territory occupied by the likes of renowned Italian & British marques. This is a very lightly populated field by 'specialists' given that the predominance of $80-90K sportscars are from mainstream VMs and matured 'fully fledged' luxury sportscar companies].
- Technical Resources / Dependencies
Predominantly production orientated with no or little in-house development engineering capabilities. If a divisional part of a larger industrials holding company reliant upon sister relationships. New developments occur with injections of fresh capital usually via change of ownership.
[Viper was developed at a time of substantial corporate backing – Fed loans etc – and utilised much of Chrysler's large development resources to deliver a standard. Chrysler has kept Viper on par with legal requirements (ie emissions compliance of the all alloy V10 engine etc) but as Chrysler's own 'shape' changes will it actually deliver the levels of technical support present warm comments imply? NB this especially so for the now old V10 engine, the heart of the car].
- Procurement Leverage
Small scale purchase levels mean victims of being 'price takers not price makers'. No or limited relationships with advanced technology suppliers, having to lack feature and if needs be often source expensively through motor factor companies, not directly from disinterested suppliers..
[Viper is essentially a product of the Chrysler machine, its parts bin and a large “understanding”supplier base that assisted on Viper to maintain the customer relationship]
- Labour Costs
Critically must be maintained at low level and flexible compared to UAW or other semi-skilled standards, since the low volume business model relies on sizable labour, thus labour & variable input costs must be constrained to maintain viable profitability.
[Hardline labour negotiations would need to be undertaken with the Viper plant staff – if indeed the facility and same staff were retained - which although now excluded from renewed UAW agreed contracts will be required to swallow hard at reduction of pay and benefits]
- Distribution Networks
Low volume producers of specialist product have very limited,
often regionally based prime network of independent sales sites, which if have a better recognised name, is assisted by a further second tier of independent sales sites in other states / regions. The majority of sales are made from the factory's own showroom, with dealers typically displaying a makers car amongst other, alternative branded vehicles.
[Chrysler obviously has enjoyed the benefits of a massive dealer-base, who themselves have enjoyed the margins on Viper but also, for some less well located sites, somewhat cajoled. That broad national spread of dealers has been a major factor in both accessing the nationwide customer base and instilling confidence given Chrysler's credentials]
- Service Networks
Typically a specialist producer will have sold cars return to its factory for servicing and repair. Although the cars tend to be simple enough for 'mom & pop” garages to service, and could theoretically be done anywhere, the factory relationship is part of the car's ownership experience for the client and a factory stamped logbook for service & repair greatly assists vehicle residual values, keenly sought by pedantic follow-on buyers.
[Given Viper's parts bin basis, it is serviceable at any Chrysler approved, and other, garages; that was part of the car's appeal. But again, the size of the Chrysler service network plays a major role not typically accessible by a specialist producer. Agreements could be put in place but would they be honoured, especially by the independent garages of Chrysler service network?]
Those synergies would have to be primarily product and facility based, and whilst idealistically each of the smaller suitors would love to ride on the back of Viper's Chrysler connections to broaden its own nameplate, first thought impressions are that trying to grow through such an M&A would be very problematic, leaving both of the suitors caught in an operational middle-ground, a no-man's land.
Bloomberg's exploratory calls to Shelby, Panoz and Saleen – Viper's apparent low volume sportcar peers – demonstrate that they may not really, as of today, in the running. And that shouldn't be surprising.
Although perceptionally top of the tree and well positioned, appearances can be deceptive. Whilst are indeed those companies operate in the US niche sportscar sector they are in a very different, much smaller, less capable league in terms of financing and management scale.
investment-auto-motives is not overtly familiar with Panoz and Saleen in-house operations but had the pleasure of plant familiarisation at Shelby (nee Shelby American) in 2003.
As for 'match'?...
There's no need to give a potted history of Shelby, it's self-evident, but its evolutional business model, mow listed on NASDAQ (Caroll Shelby International) has fundamentally been as follows:
a) the in-house production of the limited edition specials of the authentic Cobra and other less successful 'update' ventures such as the Series 1 and 2.
b) the in-house production of enhanced VM product (notably Mustang GT's, GT-R's and KR's) now re-applied on modern Mustangs for the 2006 GT-H and 2007 GT500
c) the licensing of the Shelby name for use on VM produced cars (such as 70's Mustangs and 80's Chrysler product)
Las Vegas based Shelby Automotive has a spiritual link to Viper given that Carol Shelby has had project involvement from the car's inception and it has worn Shelby blue and white colours from early on and again as special edition homage colours in 2006 (GTS Blue). Thus the connection and lineage is apparent and has been used in Viper's marketing from the beginning. Shelby has not (to date) put his name on Viper though it is a possibility. As for buying the Viper business, evidence of past commercial behavior of minimal build involvement and maximum brand exploitation seems to preclude that likelihood. Although the business may have changed since our visit, at the time it was running lean in management and staff using the inmates of a local penitentiary to produce the panels for Cobra – the very essence of a low cost labour policy, and well away from Michigan's labour expectancies. Shelby (man and company) is a wiley ol' bird and would know every nook and cranny of the Viper business. As to whether the company would take on the commercial realities of an aged Viper vehicle and its accordant operational and commercial responsibilities...probably not.
Looking to its latterday spiritual successor and Irvine CA based Saleen operates as both a provider of performance enhanced special editions (of Ford Mustang and F-150) and S7 mid-engined supercar derived from racing. Its Ford links go back to 1983 when race-driver Steve Saleen started producing special edition Fords (much in the mould of Shelby in the 1960s). By 2003 links had grown string enough to use Saleen as a nominated supplier / assembler for the Ford GT supercar programme. To enable that Saleen opened a 200,000 sq ft facility in Troy Michigan which latterly created the Mustang GT-R. Thus would such company with such 25 year old Ford association and its own 'new' Michigan facility that can engineer a Ford based architecture from scratch be interested in buying what is effectively an updated 16 year old car (based on possibly defunct components) aswell as a second site at Conner Avenue? We think not.
South East of Las Vegas and Irvine in Hoschton Georgia we find Panoz Auto Developments, founded in 1989 by the father son duo Don & Dan Panoz. Along with its sister company to Panoz Motorsports Group, which in turn owns single seater constructors Van Dieman and G-Force, aswell as 3 racetracks in Ontario, Georgia and Florida (the renowned Sebring) held under the holding company titled Elan Motorsport Technologies. Panoz has produced 2 road cars: the Roadster, the Esperante in many variants used for road and SCCA racetrack, and most recently developing the Abruzzi. Race cars are LMP series developed for the American Le Mans 24 hour events that Panoz itself promoted. Perhaps most interestingly has been the development of the Hybrid car along with Zytec Engineering of the UK, giving Panoz a lead in designing for Green Racing. Like Saleen, Panoz has been historically linked with Ford for supply of Mustang powertrain and gearboxes, though these base units have been developed in due course. Keen to build truly independent Panoz designed vehicles it seems unlikely that the father & son duo would want to bring the Viper into their fold. Indeed as a competitor on the SCCA track the decline of the Viper would be all too welcome so as to effectively aid GT motorsport and American Sportscar retail ambitions.
Beyond the strategic corporate fit, of which there seems little at Shelby, Saleen and Panoz, there would need to be an ideally natural technical fit, by which we mean that platform dimensions (known as engineering hardpoints) should be similar so as to simply require re-skins and re-fits to produce 2 differently branded cars from one platform. Whilst there is a general construction similarity between Viper and Panoz (ie generic spaceframe & composite panelled exterior) this solution is the basis of many specialist builders – the global norm. Hardpoint dimensions of wheelbase, front/rear track, front bulkhead etc are very different – eg Viper W/B @ 98.8 inches vs Panoz W/B @ 106 inches.
Hennessy Performance Engineering of Houston Texas is perhaps most familiar with Viper as it produces the Hennessy Venom variant which has structural, suspension and powertrain enhancements. However, whilst Hennessy has a dedicated Viper section it also caters for a complete spectrum of manufacturers' vehicles, its raison d'etre being a broad spread to avoid 'all eggs in one basket' syndrome that many 'hot shops' have suffered from in the past. Hence its set-up and management capability wouldn't mirror the demands of running the comparatively massive Viper business.
So as stated, the 3 'top of the tree' suitors and latter 4th possibility are not immediately obvious cohorts unless the their respective finances and business models took a major change of direction.
They are some of the 187 small vehicle makers in the US today, and to put them and the Viper division in perspective investment-auto-motives demonstrates the structure of the industry & market using a 3 tiered model, highlighting Viper to be in the lightly populated middle-ground:
Level 1 – 'The Royals' (2000-4000 vol pa) – Ferrari, Lamborghini, Aston Martin etc
Level 2 – 'The Aspirants' (200-2000 vol pa) – Viper, Lotus, (TVR) etc
Level 3 – 'The Idealists' (20 – 200 vol pa) – the USA's 187 specialist car companies.
This landscape differentiates based upon 3 core criteria, though ultimately inter-connected:
a) Core Competence (Specialisation)
b) Brand Reputation (Price & Position)
c) Operational Leverage (Auto-Industry Relations)
Of the 187 bottom tier 'Idealists' (often backed by dream-fulfilling, legacy seeking business people like the Panoz family) the broad spectrum of builder can be sub-segmented into 18 distinct groups; each described by product genre and entity strengths. Thus investment-auto-motives has created broad-view picture of the A-Z builders, from American Street Rod to Van Genaddi and beyond.
Our exploration highlights the fact that for many businesses seeking to make a name in the sportscar world with reduced costs, reduced complexity and improved quality the obvious answer is to utilise a borrowed platform. The preferred solution is unsurprisingly Corvette, the ongoing king of mainstream US sportscars, and so providing a reliable low cost base, since 1953. Borrowing a platform obviously has its drawbacks in terms of creating a bespoke car, it will not have extreme performance parameters, but for many like Anteros and Dragon having much of the technical development (eg emissions & crash compliance) done is a major advantage, and so the pragmatic route forward.
Ideally Viper could offer a similar 'packaged solution' for present and new builders, but GM's and Corvette's relative stability vs Chrysler's and Viper's relative instability does not bode well, unless a radical step was taken by a lobbying specialist sector for government assistance in developing Viper as a new specialist platform alternative...a very unlikely outcome.
Given present conditions, investment-auto-motives posits the following scenarios based on likelihood & impact rated out of 10:
Scenario A : USA Sportscars Inc
Least Likely (2) – High Impact (8)
Under a newly announced government review of the US Auto-Sector, set-up as part of the far-reaching Energy Bill, the government sets aside funds to develop USA Niche Sportscar industrial competance. Done so utilising the Viper business, Chrysler and its Detroit peers as the cornerstone to developing the abilities of regional small-scale builders nationwide, to aid the growth of names like Shelby, Saleen, Panoz etc as worldclass vehicle constructors in their own right.
Scenario B: USA Trade Sale
Low Likelihood (3) – Mid Impact (5)
New developments that counter the aforementioned rationale for pessimism create a game-changing outcome. A hard-hitting big player backs a small name producer to buy Viper and develop 2 US nameplates in tandem, or an ambitious Supplier company acquires the business in order to demonstrate and create its own Tier 0.5 ambitions.
The present lack of liquidity in the banking sector would negate the investment community backing such as daring move, unless paralleled by Scenario A developments.
Scenario C: Private Equity Sale for Latter-Day Asian Disposal.
Mid Likelihood (6) – Low Impact (4)
A large PE firm, or more likely consortium, buys Viper from Chrysler (Cerberus) and looks to gain maximum value extraction by courting Asian (ie Chinese or Indian) players who seek an iconic brand for their growing international portfolio. The current plant and equipment in Conner Ave would be relocated to a new overseas production site enabling far lower cost achievement in what is a labour-intensive vehicle. The Michigan site would be used to create a US base for said company to fit their US growth strategy, possibly starting with a latter-day sportscar build using Asian sourced components.
As events stand investment-auto-motives believes Scenario C the most probable, given Cerberus' & Chrysler's time pressures and the impetus for Lazard to find a new parent that can maximise the value extraction from Viper Cars.
'Cab-forward' was almost a metaphore for a radically forward-looking company, and as part of that ambition, 1989 witnessed Bob Lutz's re-creation of the spritually lost 'All American Sportscar'. It came in the shape of the Viper, the prototype shown at Detroit's NAAS that year. A new nameplate (with obvious snake derived links to Shelby's Cobra) for an all new low volume production premium priced sportscar. Viper was to have a 'halo-effect' for Dodge, recapturing the past glories of muscle-car names like Charger and Challenger, and adding kudos to the SRT performance division.
16 years on and Chrysler is in a very different position to its upward lift of the 1990s. It has ridden the economic wave of the 90s and early 2000s, having exploited more than any of the Big 3 the trend for and subsequent reliance upon what were high margin trucks and SUVs. But changing times and a flat economy have put Chrysler back at the bottom of the trough of the US industry's historically normative heavy cyclicity
So today, in the $4 per gallon era, as part of Cerberus' Project Genesis, Chrysler's management is undergoing a $1bn revenue raising exercise through “non-core” asset disposals, $500m of which has thus been achieved with sale of the Californian design centre to Daimler and a Brazilian engine plant to FIAT. And at a time where pertinent alliances such as those with Chery for small cars, Nissan for compact car and possibly FIAT for joint US production, Nardelli and La Sorda has rightly recognised that Dodge's dedicated, small-scale sportscar business is a management and fiscal distraction that should be sold. Hence Chrysler seniors are (possibly) euphemistically “listening” to potential suitors for Viper – the cars, the brand and perhaps the Conner Avenue production facility.
It could be said the financial PR machine is underway, Lazard's appointment will have undoubtedly prompted their own PR consultants to spread the word to generate external stimuli in the press and interest, Chrysler's apparent “come hither” stance part and parcel of the inducement process.
But to the crux of the debate and who exactly are the suitors for the Viper business?
The financial press' (Bloomberg etc's) first thoughts were of a trade buyer, an industry expert identifying Shelby, Panoz and Saleen. But whilst we come to these (top of the tree entities) further down, the majority of the US specialist trade posses non too surprising similarities which from vital perspectives of operational realities are not immediately viewed as overtly synergistic:
- Parental Backing/ Ownership -
often family business, small PE group, regional small bank or a division of a larger regional industrial entity that specialises in metal and composite fabrication.
[Viper was born from large VM capabilities and supported as a strategic pet project, thus may have not been ever truly exposed to realities of external funding assessment and independent, self-support. And Viper's current management may endeavour to stay with Chrysler as opposed to running the business on far smaller budgets and with closer owner / director examination}.
- Product Type -
Majority simply not up to Viper (ie large VM) Quality Standards, whether: styling sophistication (often limited due to less sophisticated forming techniques), engineering robustness (due to limited design, testing, re-engineering process) and feature content (due to incurred product build cost and lack of technology supplier relationships given low volumes)
[The internal styling, engineering, feature & quality demands to keep Viper at its current level, let alone improvements required to reach benchmark standards, may well stretch beyond the true competencies of other apparent 'peers']
- Brand Positioning
Most specialist sportscars seen as playboy's toys catering to finite scale sub-segments, seen as credible in that segment given product differentiation or purity, but not credible in mainstream
[Viper sits as a credible car due to its parentage, and as such sits in a rare middle-ground between the plethora of lower quality (often quirky) vehicles and the premium territory occupied by the likes of renowned Italian & British marques. This is a very lightly populated field by 'specialists' given that the predominance of $80-90K sportscars are from mainstream VMs and matured 'fully fledged' luxury sportscar companies].
- Technical Resources / Dependencies
Predominantly production orientated with no or little in-house development engineering capabilities. If a divisional part of a larger industrials holding company reliant upon sister relationships. New developments occur with injections of fresh capital usually via change of ownership.
[Viper was developed at a time of substantial corporate backing – Fed loans etc – and utilised much of Chrysler's large development resources to deliver a standard. Chrysler has kept Viper on par with legal requirements (ie emissions compliance of the all alloy V10 engine etc) but as Chrysler's own 'shape' changes will it actually deliver the levels of technical support present warm comments imply? NB this especially so for the now old V10 engine, the heart of the car].
- Procurement Leverage
Small scale purchase levels mean victims of being 'price takers not price makers'. No or limited relationships with advanced technology suppliers, having to lack feature and if needs be often source expensively through motor factor companies, not directly from disinterested suppliers..
[Viper is essentially a product of the Chrysler machine, its parts bin and a large “understanding”supplier base that assisted on Viper to maintain the customer relationship]
- Labour Costs
Critically must be maintained at low level and flexible compared to UAW or other semi-skilled standards, since the low volume business model relies on sizable labour, thus labour & variable input costs must be constrained to maintain viable profitability.
[Hardline labour negotiations would need to be undertaken with the Viper plant staff – if indeed the facility and same staff were retained - which although now excluded from renewed UAW agreed contracts will be required to swallow hard at reduction of pay and benefits]
- Distribution Networks
Low volume producers of specialist product have very limited,
often regionally based prime network of independent sales sites, which if have a better recognised name, is assisted by a further second tier of independent sales sites in other states / regions. The majority of sales are made from the factory's own showroom, with dealers typically displaying a makers car amongst other, alternative branded vehicles.
[Chrysler obviously has enjoyed the benefits of a massive dealer-base, who themselves have enjoyed the margins on Viper but also, for some less well located sites, somewhat cajoled. That broad national spread of dealers has been a major factor in both accessing the nationwide customer base and instilling confidence given Chrysler's credentials]
- Service Networks
Typically a specialist producer will have sold cars return to its factory for servicing and repair. Although the cars tend to be simple enough for 'mom & pop” garages to service, and could theoretically be done anywhere, the factory relationship is part of the car's ownership experience for the client and a factory stamped logbook for service & repair greatly assists vehicle residual values, keenly sought by pedantic follow-on buyers.
[Given Viper's parts bin basis, it is serviceable at any Chrysler approved, and other, garages; that was part of the car's appeal. But again, the size of the Chrysler service network plays a major role not typically accessible by a specialist producer. Agreements could be put in place but would they be honoured, especially by the independent garages of Chrysler service network?]
Those synergies would have to be primarily product and facility based, and whilst idealistically each of the smaller suitors would love to ride on the back of Viper's Chrysler connections to broaden its own nameplate, first thought impressions are that trying to grow through such an M&A would be very problematic, leaving both of the suitors caught in an operational middle-ground, a no-man's land.
Bloomberg's exploratory calls to Shelby, Panoz and Saleen – Viper's apparent low volume sportcar peers – demonstrate that they may not really, as of today, in the running. And that shouldn't be surprising.
Although perceptionally top of the tree and well positioned, appearances can be deceptive. Whilst are indeed those companies operate in the US niche sportscar sector they are in a very different, much smaller, less capable league in terms of financing and management scale.
investment-auto-motives is not overtly familiar with Panoz and Saleen in-house operations but had the pleasure of plant familiarisation at Shelby (nee Shelby American) in 2003.
As for 'match'?...
There's no need to give a potted history of Shelby, it's self-evident, but its evolutional business model, mow listed on NASDAQ (Caroll Shelby International) has fundamentally been as follows:
a) the in-house production of the limited edition specials of the authentic Cobra and other less successful 'update' ventures such as the Series 1 and 2.
b) the in-house production of enhanced VM product (notably Mustang GT's, GT-R's and KR's) now re-applied on modern Mustangs for the 2006 GT-H and 2007 GT500
c) the licensing of the Shelby name for use on VM produced cars (such as 70's Mustangs and 80's Chrysler product)
Las Vegas based Shelby Automotive has a spiritual link to Viper given that Carol Shelby has had project involvement from the car's inception and it has worn Shelby blue and white colours from early on and again as special edition homage colours in 2006 (GTS Blue). Thus the connection and lineage is apparent and has been used in Viper's marketing from the beginning. Shelby has not (to date) put his name on Viper though it is a possibility. As for buying the Viper business, evidence of past commercial behavior of minimal build involvement and maximum brand exploitation seems to preclude that likelihood. Although the business may have changed since our visit, at the time it was running lean in management and staff using the inmates of a local penitentiary to produce the panels for Cobra – the very essence of a low cost labour policy, and well away from Michigan's labour expectancies. Shelby (man and company) is a wiley ol' bird and would know every nook and cranny of the Viper business. As to whether the company would take on the commercial realities of an aged Viper vehicle and its accordant operational and commercial responsibilities...probably not.
Looking to its latterday spiritual successor and Irvine CA based Saleen operates as both a provider of performance enhanced special editions (of Ford Mustang and F-150) and S7 mid-engined supercar derived from racing. Its Ford links go back to 1983 when race-driver Steve Saleen started producing special edition Fords (much in the mould of Shelby in the 1960s). By 2003 links had grown string enough to use Saleen as a nominated supplier / assembler for the Ford GT supercar programme. To enable that Saleen opened a 200,000 sq ft facility in Troy Michigan which latterly created the Mustang GT-R. Thus would such company with such 25 year old Ford association and its own 'new' Michigan facility that can engineer a Ford based architecture from scratch be interested in buying what is effectively an updated 16 year old car (based on possibly defunct components) aswell as a second site at Conner Avenue? We think not.
South East of Las Vegas and Irvine in Hoschton Georgia we find Panoz Auto Developments, founded in 1989 by the father son duo Don & Dan Panoz. Along with its sister company to Panoz Motorsports Group, which in turn owns single seater constructors Van Dieman and G-Force, aswell as 3 racetracks in Ontario, Georgia and Florida (the renowned Sebring) held under the holding company titled Elan Motorsport Technologies. Panoz has produced 2 road cars: the Roadster, the Esperante in many variants used for road and SCCA racetrack, and most recently developing the Abruzzi. Race cars are LMP series developed for the American Le Mans 24 hour events that Panoz itself promoted. Perhaps most interestingly has been the development of the Hybrid car along with Zytec Engineering of the UK, giving Panoz a lead in designing for Green Racing. Like Saleen, Panoz has been historically linked with Ford for supply of Mustang powertrain and gearboxes, though these base units have been developed in due course. Keen to build truly independent Panoz designed vehicles it seems unlikely that the father & son duo would want to bring the Viper into their fold. Indeed as a competitor on the SCCA track the decline of the Viper would be all too welcome so as to effectively aid GT motorsport and American Sportscar retail ambitions.
Beyond the strategic corporate fit, of which there seems little at Shelby, Saleen and Panoz, there would need to be an ideally natural technical fit, by which we mean that platform dimensions (known as engineering hardpoints) should be similar so as to simply require re-skins and re-fits to produce 2 differently branded cars from one platform. Whilst there is a general construction similarity between Viper and Panoz (ie generic spaceframe & composite panelled exterior) this solution is the basis of many specialist builders – the global norm. Hardpoint dimensions of wheelbase, front/rear track, front bulkhead etc are very different – eg Viper W/B @ 98.8 inches vs Panoz W/B @ 106 inches.
Hennessy Performance Engineering of Houston Texas is perhaps most familiar with Viper as it produces the Hennessy Venom variant which has structural, suspension and powertrain enhancements. However, whilst Hennessy has a dedicated Viper section it also caters for a complete spectrum of manufacturers' vehicles, its raison d'etre being a broad spread to avoid 'all eggs in one basket' syndrome that many 'hot shops' have suffered from in the past. Hence its set-up and management capability wouldn't mirror the demands of running the comparatively massive Viper business.
So as stated, the 3 'top of the tree' suitors and latter 4th possibility are not immediately obvious cohorts unless the their respective finances and business models took a major change of direction.
They are some of the 187 small vehicle makers in the US today, and to put them and the Viper division in perspective investment-auto-motives demonstrates the structure of the industry & market using a 3 tiered model, highlighting Viper to be in the lightly populated middle-ground:
Level 1 – 'The Royals' (2000-4000 vol pa) – Ferrari, Lamborghini, Aston Martin etc
Level 2 – 'The Aspirants' (200-2000 vol pa) – Viper, Lotus, (TVR) etc
Level 3 – 'The Idealists' (20 – 200 vol pa) – the USA's 187 specialist car companies.
This landscape differentiates based upon 3 core criteria, though ultimately inter-connected:
a) Core Competence (Specialisation)
b) Brand Reputation (Price & Position)
c) Operational Leverage (Auto-Industry Relations)
Of the 187 bottom tier 'Idealists' (often backed by dream-fulfilling, legacy seeking business people like the Panoz family) the broad spectrum of builder can be sub-segmented into 18 distinct groups; each described by product genre and entity strengths. Thus investment-auto-motives has created broad-view picture of the A-Z builders, from American Street Rod to Van Genaddi and beyond.
Our exploration highlights the fact that for many businesses seeking to make a name in the sportscar world with reduced costs, reduced complexity and improved quality the obvious answer is to utilise a borrowed platform. The preferred solution is unsurprisingly Corvette, the ongoing king of mainstream US sportscars, and so providing a reliable low cost base, since 1953. Borrowing a platform obviously has its drawbacks in terms of creating a bespoke car, it will not have extreme performance parameters, but for many like Anteros and Dragon having much of the technical development (eg emissions & crash compliance) done is a major advantage, and so the pragmatic route forward.
Ideally Viper could offer a similar 'packaged solution' for present and new builders, but GM's and Corvette's relative stability vs Chrysler's and Viper's relative instability does not bode well, unless a radical step was taken by a lobbying specialist sector for government assistance in developing Viper as a new specialist platform alternative...a very unlikely outcome.
Given present conditions, investment-auto-motives posits the following scenarios based on likelihood & impact rated out of 10:
Scenario A : USA Sportscars Inc
Least Likely (2) – High Impact (8)
Under a newly announced government review of the US Auto-Sector, set-up as part of the far-reaching Energy Bill, the government sets aside funds to develop USA Niche Sportscar industrial competance. Done so utilising the Viper business, Chrysler and its Detroit peers as the cornerstone to developing the abilities of regional small-scale builders nationwide, to aid the growth of names like Shelby, Saleen, Panoz etc as worldclass vehicle constructors in their own right.
Scenario B: USA Trade Sale
Low Likelihood (3) – Mid Impact (5)
New developments that counter the aforementioned rationale for pessimism create a game-changing outcome. A hard-hitting big player backs a small name producer to buy Viper and develop 2 US nameplates in tandem, or an ambitious Supplier company acquires the business in order to demonstrate and create its own Tier 0.5 ambitions.
The present lack of liquidity in the banking sector would negate the investment community backing such as daring move, unless paralleled by Scenario A developments.
Scenario C: Private Equity Sale for Latter-Day Asian Disposal.
Mid Likelihood (6) – Low Impact (4)
A large PE firm, or more likely consortium, buys Viper from Chrysler (Cerberus) and looks to gain maximum value extraction by courting Asian (ie Chinese or Indian) players who seek an iconic brand for their growing international portfolio. The current plant and equipment in Conner Ave would be relocated to a new overseas production site enabling far lower cost achievement in what is a labour-intensive vehicle. The Michigan site would be used to create a US base for said company to fit their US growth strategy, possibly starting with a latter-day sportscar build using Asian sourced components.
As events stand investment-auto-motives believes Scenario C the most probable, given Cerberus' & Chrysler's time pressures and the impetus for Lazard to find a new parent that can maximise the value extraction from Viper Cars.
Tuesday, 26 August 2008
Macro Level Trends – Industry Realpolitik – America Auto's SOS
As North American Automakers steel themselves during these watershed times and orchestrate strategic change through smaller vehicles and propulsion ancillaries, they look to the Senate and Congress to assist through these difficult waters. Hence reports of Detroit and the 'New Americans' (From Toyota to Hyundai) calling to draw upon the initial $3.75 billion of the alloted $25 billion from last year's Energy Bill that seeks to serve the auto-industry in changing its ways.
But as the governmental affairs people of any car-maker knows, all too often the rhetoric that is postulated on the floor all too easily turns into lip-service and decreased budget spend. Hence the push to begin to access those funds as soon as possible, to firstly ensure its acquisition and secondly, continue to lobby for additional $25 billion funds as the more socially spendthrift Democrats come to power. The timely call for assistance coming as GM & Ford combined lost $24.1 billion in Q208.
Obama has of course been leading the torch of energy change and even at one stage muted, though not confirmed, that $150 billion may be the required sum to re-organise the auto-sector to meet the challenges of this very different century. The foundation vehicle to that better tomorrow exists in the guise of 'Renewable Energy' and the 'Renewable Portfolio Standard' to include: nuclear generation, carbon capture and sequestration, energy efficiency and demand response programs.
The 2007 US Energy Bill set the cornerstones of both social and industrial understanding and the range of legislative 'weaponry' that would be rolled out. This year, amongst the plethora of issues raised by Congressmen to be included as Amendments to the Energy Bill, we see proposals that span a multitude of areas, the following providing only a flavour of this massively wide-reaching piece of historic public legislature:
a) declined Virginia's Governor to explore off-shore drilling
b) alternative energy capture via methods such as geothermal extraction
c) creation of national ocean energy research centres
d) active co-ordination of nano-science centres and IPR 'first calls'
e) et al
Importantly, the Proposed Ammendments to the US Senate Energy Bill heard between the 12-19th June 2008 that have direct influence on auto-industry direction, budget and behavior are as follows:
- SA 1527 *Extension of tariffs on imported ethanol to 2010
- SA 1532 *Fast-track (180 day approval) of higher blend ethanol (over 85% ethonaol) [Thune]
- SA 1534/65*Biofuels Investment Trust Fund
- SA 1543 *GEM Flex-Fuel Vehicles – expands definition to include M85 (85% methanol)
[Bayh, Brownback, Lieberman, Coleman, Salazar]
- SA 1558 *Healthcare for Hybrids – 10% re-imbursement to automakers on retiree costs in return that at least 50% is put toward fuel-efficient initiatives (R&D, production development, worker re-training) [Obama]
- SA 1563 *E85 Support for Retail Gas Stations
[Dorgan, Craig, Kerry]
- SA 1711 *Alternative CAFE Proposals (more lenient) – [Levin vs Bond positions]
- SA 1752 *Electric Drive Transportation Programme - Promotes the development of 'plug-in' electric vehicles, deploying near term programmes to electrify the transportation sector, and including electric drive vehicles in the fleet purchasing programs
[Salazar, Bayh, Brownback, Lieberman, Coleman, Cantwell, Lincoln, Clinton, Biden, Klobucher, Durban]
Ultimately realistic goals appear to be the driving force. The SA 1538 Clean Portfolio Standard which sought to 'stretch' the clean energy percentage mix attainment (of the SA 1537 Renewable Portfolio Standard from 2010 to 2030) was tabled, probably in the belief that it would be unattainable and cause industrial disruption in endeavouring to do so.
Interestingly, the SA 1546 proposal by DeMint “limitations on legislation that would drive up the cost of auto-fuel” was retracted or rejected. This could be construed to be a salutary political ploy (& play) to demonstrate Congress' dedication to the green cause; highlighting the willingness to cross traditional energy related boundaries born from social taboos (ie a high gas price). But of course we suspect there was a none too small aspect of political showboating behind the 'one-man-crusade' proposal. It was not exactly well backed, in the way that many of the directly auto-related issues were. Given the lack of names registered forwarding, seconding and thirding the motion proposal, we assume it to be a a rhetorical display and although passed, the wording very probably lightweight and tenuous.
On the surface, the same seems true of a possible disengenuous proposition to disallow the combined co-processing of renewable diesel and petroleum – SA 1800 [Kyl].
But perhaps the most absorbing motion was for that of the 'Gas Price Act' [Inhof & Thune] which whilst including some useful inititaives also included ideas for Indian Reserve land exploration – a very sensitive topic. So for all the apparent 'do-gooding' was undermined by the inclusion of a 'political bomb' that blew the motion out of the water; defeated by 52 to 43. Another case of staged dramatics, and outcomes, it seems.
However, the 'Sense of Congress Act' (requiring 25% renewable energy by 2025) seemed to answer the call set out by Al Gore's long standing, globe trotting 'Inconvenient Truth' campaign. The views of US politicians and their voters have gradually aligned to the 'awakening'. Whether ultimately scientifically proven or not – the detractors still there but increasingly marginalised – the politicos in DC have recognised that 'saving the planet' is a massive force for economic change, and one that is more easily embraced by the populous as the possible hardships of said change takes effect. As such the usual divisions in the ranks between Republicans & Democrats have been closed, an aligning of understanding and interests illustrating that the merits of major issues are not to be debated, instead the goals to be reached and the roadmap forward to do so.
This then bodes very well indeed for the American auto-industry and its case for sizable fund appropriation.
In its current deflated and weak state it will need major Federal assistance to properly get back on its feet. Yes the major problems such as the massive pensions and healthcare legacy costs are being transferred off of balance sheets and into UAW VEBAs, and as such will lighten the fiscal load on the Big 3. But even with this depleted baggage present-day headwinds such as experienced cost-push inflation of input prices, the concerns of possible longer-term stagnant Western markets, slowing Asian demand and the size of the international competition gap (esp against Asians) remains daunting.
Thus seniors in Detroit (and those in Wall Street should) well recognise that a weighty argument for hefty loans &/or grant subsidy, with reduced usage clauses, can be presented. Indeed, from the perfect storm of events, suggests that there has never been a better time for arguing the case.
But Detroit and its 'New American' cousins may need more than what might be seen as over-played Michigan-centric gambits to state its case. Even with the high number auto-empathetic Congressman (from Bayh to Salazar – see aforementioned list), or perhaps because of, investment-auto-motives believes that Washington may well call for an independent review, following on in the footsteps of similar exercises in Australia and, currently, the UK.
A US Auto-Industry Review would put metered argument into the debate and ensure a resultant balanced, far sighted and monitored process by which the much needed monies and off-sets - presently argued at a value of $50 billion but possibly rising to Obama's $150 billion - could be deployed in fundamentally re-shaping the sector. Old names like Detroit Diesel and Detroit Electric possibly reborn whilst southern states and newer players receive their quotient too. A full industry review born from fully understanding the cost to align Auto and Energy will we suspect bring forth a world of investment opportunity that both the VMs and industry backers.
For bond-buyers (and their brokers) such governmental involvement adds long-term security which will be evident in the re-rating of the Big 3 and so in due course promising to lift out of “junk”/High Yield territory. The present day short-termist bond-holders enjoying higher returns and no doubt holding default policies will be replaced by a greater field of institutionals who seek the safe plod of lower yield.
For stock-buyers the upside comes in two forms: the near and the long. Near term 'value-based' early buyers will see an intermediate upsurge in auto-stocks as confidence is injected back into the market, whilst once back on its feet and healthier the sector will attract 'growth-based' buyers.
These 2 groups short and long play groups would generally be characterised as private money vs public money.
As value-based seekers Private Equity and Hedge Funds buying into the sector via publicly traded stock would look to see this PIPE (Public Investment of Private Equity) as a natural follow-on strategy to their previous and current privately held auto-sector acquisitions. Acquisitions that were bought and turned-around to be held if warranted or sold off onto the listed public markets if they held greater ROI potential than trade buyers (who besides cash-rich family owned entities look thin on the ground right now).
And of course once the auto-industry, its players, their volatile valuations and public markets have stabilised, in a more confident national and global economic climate, the big Fund players will appreciate the long-term value growth that Autos brings as it has demonstrated itself to have pulled through the present, and dark, long-cycle trough.
But as Wall Street knows, the key element to the start of that upturn is government's appreciation of the systemic rewards that its own investment in the US auto-industry will bring.
To ascertain the investment levels demanded for the sector's re-structuring will take a full and comprehensive review, which given the global span of the Big 3 and the likes of Toyota, in turn will have relativity to Australia and the UK - and their own respective investment possibilities.
So Congress must understand the consequences of its actions as it seeks to appreciate the profoundness of its benefactor role.
But as the governmental affairs people of any car-maker knows, all too often the rhetoric that is postulated on the floor all too easily turns into lip-service and decreased budget spend. Hence the push to begin to access those funds as soon as possible, to firstly ensure its acquisition and secondly, continue to lobby for additional $25 billion funds as the more socially spendthrift Democrats come to power. The timely call for assistance coming as GM & Ford combined lost $24.1 billion in Q208.
Obama has of course been leading the torch of energy change and even at one stage muted, though not confirmed, that $150 billion may be the required sum to re-organise the auto-sector to meet the challenges of this very different century. The foundation vehicle to that better tomorrow exists in the guise of 'Renewable Energy' and the 'Renewable Portfolio Standard' to include: nuclear generation, carbon capture and sequestration, energy efficiency and demand response programs.
The 2007 US Energy Bill set the cornerstones of both social and industrial understanding and the range of legislative 'weaponry' that would be rolled out. This year, amongst the plethora of issues raised by Congressmen to be included as Amendments to the Energy Bill, we see proposals that span a multitude of areas, the following providing only a flavour of this massively wide-reaching piece of historic public legislature:
a) declined Virginia's Governor to explore off-shore drilling
b) alternative energy capture via methods such as geothermal extraction
c) creation of national ocean energy research centres
d) active co-ordination of nano-science centres and IPR 'first calls'
e) et al
Importantly, the Proposed Ammendments to the US Senate Energy Bill heard between the 12-19th June 2008 that have direct influence on auto-industry direction, budget and behavior are as follows:
- SA 1527 *Extension of tariffs on imported ethanol to 2010
- SA 1532 *Fast-track (180 day approval) of higher blend ethanol (over 85% ethonaol) [Thune]
- SA 1534/65*Biofuels Investment Trust Fund
- SA 1543 *GEM Flex-Fuel Vehicles – expands definition to include M85 (85% methanol)
[Bayh, Brownback, Lieberman, Coleman, Salazar]
- SA 1558 *Healthcare for Hybrids – 10% re-imbursement to automakers on retiree costs in return that at least 50% is put toward fuel-efficient initiatives (R&D, production development, worker re-training) [Obama]
- SA 1563 *E85 Support for Retail Gas Stations
[Dorgan, Craig, Kerry]
- SA 1711 *Alternative CAFE Proposals (more lenient) – [Levin vs Bond positions]
- SA 1752 *Electric Drive Transportation Programme - Promotes the development of 'plug-in' electric vehicles, deploying near term programmes to electrify the transportation sector, and including electric drive vehicles in the fleet purchasing programs
[Salazar, Bayh, Brownback, Lieberman, Coleman, Cantwell, Lincoln, Clinton, Biden, Klobucher, Durban]
Ultimately realistic goals appear to be the driving force. The SA 1538 Clean Portfolio Standard which sought to 'stretch' the clean energy percentage mix attainment (of the SA 1537 Renewable Portfolio Standard from 2010 to 2030) was tabled, probably in the belief that it would be unattainable and cause industrial disruption in endeavouring to do so.
Interestingly, the SA 1546 proposal by DeMint “limitations on legislation that would drive up the cost of auto-fuel” was retracted or rejected. This could be construed to be a salutary political ploy (& play) to demonstrate Congress' dedication to the green cause; highlighting the willingness to cross traditional energy related boundaries born from social taboos (ie a high gas price). But of course we suspect there was a none too small aspect of political showboating behind the 'one-man-crusade' proposal. It was not exactly well backed, in the way that many of the directly auto-related issues were. Given the lack of names registered forwarding, seconding and thirding the motion proposal, we assume it to be a a rhetorical display and although passed, the wording very probably lightweight and tenuous.
On the surface, the same seems true of a possible disengenuous proposition to disallow the combined co-processing of renewable diesel and petroleum – SA 1800 [Kyl].
But perhaps the most absorbing motion was for that of the 'Gas Price Act' [Inhof & Thune] which whilst including some useful inititaives also included ideas for Indian Reserve land exploration – a very sensitive topic. So for all the apparent 'do-gooding' was undermined by the inclusion of a 'political bomb' that blew the motion out of the water; defeated by 52 to 43. Another case of staged dramatics, and outcomes, it seems.
However, the 'Sense of Congress Act' (requiring 25% renewable energy by 2025) seemed to answer the call set out by Al Gore's long standing, globe trotting 'Inconvenient Truth' campaign. The views of US politicians and their voters have gradually aligned to the 'awakening'. Whether ultimately scientifically proven or not – the detractors still there but increasingly marginalised – the politicos in DC have recognised that 'saving the planet' is a massive force for economic change, and one that is more easily embraced by the populous as the possible hardships of said change takes effect. As such the usual divisions in the ranks between Republicans & Democrats have been closed, an aligning of understanding and interests illustrating that the merits of major issues are not to be debated, instead the goals to be reached and the roadmap forward to do so.
This then bodes very well indeed for the American auto-industry and its case for sizable fund appropriation.
In its current deflated and weak state it will need major Federal assistance to properly get back on its feet. Yes the major problems such as the massive pensions and healthcare legacy costs are being transferred off of balance sheets and into UAW VEBAs, and as such will lighten the fiscal load on the Big 3. But even with this depleted baggage present-day headwinds such as experienced cost-push inflation of input prices, the concerns of possible longer-term stagnant Western markets, slowing Asian demand and the size of the international competition gap (esp against Asians) remains daunting.
Thus seniors in Detroit (and those in Wall Street should) well recognise that a weighty argument for hefty loans &/or grant subsidy, with reduced usage clauses, can be presented. Indeed, from the perfect storm of events, suggests that there has never been a better time for arguing the case.
But Detroit and its 'New American' cousins may need more than what might be seen as over-played Michigan-centric gambits to state its case. Even with the high number auto-empathetic Congressman (from Bayh to Salazar – see aforementioned list), or perhaps because of, investment-auto-motives believes that Washington may well call for an independent review, following on in the footsteps of similar exercises in Australia and, currently, the UK.
A US Auto-Industry Review would put metered argument into the debate and ensure a resultant balanced, far sighted and monitored process by which the much needed monies and off-sets - presently argued at a value of $50 billion but possibly rising to Obama's $150 billion - could be deployed in fundamentally re-shaping the sector. Old names like Detroit Diesel and Detroit Electric possibly reborn whilst southern states and newer players receive their quotient too. A full industry review born from fully understanding the cost to align Auto and Energy will we suspect bring forth a world of investment opportunity that both the VMs and industry backers.
For bond-buyers (and their brokers) such governmental involvement adds long-term security which will be evident in the re-rating of the Big 3 and so in due course promising to lift out of “junk”/High Yield territory. The present day short-termist bond-holders enjoying higher returns and no doubt holding default policies will be replaced by a greater field of institutionals who seek the safe plod of lower yield.
For stock-buyers the upside comes in two forms: the near and the long. Near term 'value-based' early buyers will see an intermediate upsurge in auto-stocks as confidence is injected back into the market, whilst once back on its feet and healthier the sector will attract 'growth-based' buyers.
These 2 groups short and long play groups would generally be characterised as private money vs public money.
As value-based seekers Private Equity and Hedge Funds buying into the sector via publicly traded stock would look to see this PIPE (Public Investment of Private Equity) as a natural follow-on strategy to their previous and current privately held auto-sector acquisitions. Acquisitions that were bought and turned-around to be held if warranted or sold off onto the listed public markets if they held greater ROI potential than trade buyers (who besides cash-rich family owned entities look thin on the ground right now).
And of course once the auto-industry, its players, their volatile valuations and public markets have stabilised, in a more confident national and global economic climate, the big Fund players will appreciate the long-term value growth that Autos brings as it has demonstrated itself to have pulled through the present, and dark, long-cycle trough.
But as Wall Street knows, the key element to the start of that upturn is government's appreciation of the systemic rewards that its own investment in the US auto-industry will bring.
To ascertain the investment levels demanded for the sector's re-structuring will take a full and comprehensive review, which given the global span of the Big 3 and the likes of Toyota, in turn will have relativity to Australia and the UK - and their own respective investment possibilities.
So Congress must understand the consequences of its actions as it seeks to appreciate the profoundness of its benefactor role.
Monday, 18 August 2008
Industry Structure – German Supplier Sector – Continental & Schaeffler: Deutschland's Doing?
The German supplier sector has found itself under increasing pressure to evolve and compete as the rapidly shifting structural sands of the global supply network encompasses 'bottom-up' consolidation and retirement for North American firms to 'top-down' quality learning and expansion for Asian firms.
Caught in the middle-ground is Europe, none perhaps more exposed than Germany, a country that has built its second-half 20th century economic success on the back of superior, world-class engineering and technology. But the end of the 20th and beginning of 21st centuries have seen the quality chasm shrink as industrial education, development technology are adopted to nurture global-wide regional skills-bases.
As the supply-base at large treads a production path to the Near and Far East, chasing lower production costs and growing local markets - as we've seen with VM's - the centre of gravity moves East and the raison d'etre to create localised R&D and new product development centres grows. Renault, GM, Hyundai et al have been the arbiters of change and are persuading their suppliers to locally support. Most recently with the announced PSA-Mitsubishi green-field production plant venture in Russia's Kaluga area. (Since the noted success of Daimler's groundbreaking supplier-vested Smart build hub all VM's have lobbied for close-proximity supply to reduce logistics complexity and costs and maintain the production quality dialogue).
This trend comes at a time when the very fundamentals of supply-sector economics is being challenged as Eastern suppliers, with or without Western JV assistance, are able to design and deliver a plethora of 'low-value' components, primarily with metals casting & machining, metal fabrication and rubber products. That has fragmented the production bases of 'low', 'mid' and 'high-value' components engineering and production.
The problem for Germany is that the post-WW2 industrial policy that melded a socialist-market-economy mentality with the ambition of self-sufficiency – most notably evident at VW's Wolfsburg - which underpinned German industrial strength started to become its undoing when set against the modern globalised context that emerged in the 1990s. The German consensus between labour corporations and government – the sozialmarktwerkshaft – had for decades given high salaries to induce high productivity, backed by large public investments in education & training and governed by powerful legislation and regulation, especially so in labour contracts so as to create and spread wealth. Along with a monetary policy that maintained low inflation and a strong D-mark.
However, as Japan rose as an economic powerhouse, and the rest of Asia threatened – ultimately delayed by the 1998 Asian Crash - the Bundersbank, politicians such as Gerhard Schroder and think-tanks such as the Friedrich Ebert Foundation realised that Germany was becoming increasingly isolated from not just its more flexible, low cost European neighbours, but seriously disjointed from the rest of the world; and so perhaps at greatest risk of future economic shock.
The 'Wirtschaftswunder' (economic miracle from the 1950s-90s) was recognised to be redundant.
As a consequence German industry instigated what were seen to be radical reactionary reforms as European Integration and the beginning of Globalisation took hold, the competition gap in traditional industries such as coal, steel and engineering grew as a result and German unemployment swelled. Companies like Bayer, Hoescht and VolksWagen had to make their voices more loudly heard both on the public stage and within the halls of power, and did so.
A major driving force of that period was the auto-sector, underpinning the major export pillar that had started with the trickle of VW Beetles in the early years and led to conquering the world in the premium sector by the 90s; not forgetting the importance of trucks and of course auto-parts.
The breadth of automotive technology has grown immensely over the last 2 decades, the Germans and Japanese the major proponents and purveyers of that trend. As part of its long-held self-sufficiency ethos the German supplier-base expanded to maintain 'whole vehicle' capability; spanning from Basic Bearings (as we shall see with Schaeffler) to Bluetooth Telematics (Continental). But of course the sector consisted of many many privately-owned and publicly owned enterprises and it has been the progressive, forward thinking firms like Robert Bosch that actively encouraged the technical stretch, recognising that its USP lay in tomorrow's world (as large German tech traditionally had, from Braun to Siemans etc) and as a large international entity could see the world changing at first hand.
That ongoing learning duly permeated the German government, and whilst there has historically been a very close 'socialist' knit between government and industry (as seen by the existence of Supervisory Boards with nigh-on 50 year worker representation), the rate and impact of global change, compounded by demanding capital markets and massive inter-regional investment flows, meant that Germany needed to adapt and reform industrial outlook and policy. (That was 'assisted' by the influx of cheaper labour made available in 1989 with the fall of the Berlin Wall, that assisted in reducing part of the input cost equation). For the big German conglomerates like Bosch and Continental, already international in scale and operations, the changing governmental stance has been part of day to day business, indeed they helped drive it, but for the smaller concerns with domestic-centric operations the change has been daunting.
We stipulate 'daunting' because a higher proportion of German firms have been historically, and still are, family owned. (95% of Germany's 3m businesses are family controlled). Fortunately within industrial engineering they have enjoyed little strategic disruption on the back of an ever growing German automotive and engineered products demand. General business acumen and inter-family association has witnessed collaborations and takeovers in each industrial products segment; especially during economic downturns or hiatuses. But in essence, the smaller and mid-size firms (like Schaeffler) were essentially living in a protected, stable, insular eco-system that did not encourage the evolutional development experienced by more exposed firms in say the US, UK or Japan – the voracity of competition exposure was simply not as high.
But the last few years have seen the results of 'reformation trickle-down' from big corps back in the 1990s. Ten years on industrial re-alignment has start to take shape as the mid-large size enterprises within Deutschland GmbH. Companies that lived off of yesteryear glory days and often held back by traditionalist family power, have been forced to understand their individual industrial positions, thus broader national appreciation and latterly international management thinking have emerged.
This well exemplified by Schaeffler's acquisitions of LUK, INA & FAG in attempt to become a major concentrated national player with international reach across all continents. Broadening its product portfolio, increasing individual (Auto, Ind, Aero) sector & sub-segment market shares, generating economies of scale greatly needed to combat energy & materials input costs and reducing general sales & administration overhead. But critically, as Geissinger knew, the move was to avoid being trapped in the highly competitive, low-barrier entry, arena of precision bearings. In summary,the M&As have broadened the portfolio to include:
a) Schaeffler's,INA's, FAG's overlapping & complimentary bearings range (P/T & wheel hubs)
b)LUK's clutch & gearbox components
c) Schaeffler's & INA's engine (timing & drive) systems components
But as the growing company's dynamic CEO Jurgen Geissinger well knows Schaeffler Group is still an industrial minnow when it comes to vying on the world-stage, and he's recognised that heavy reliance in a few pockets is untenable, made all the more evident this month with European car sales down 8% this month, and US premium car sales heavily contracted, hitting the German premium brands hard, who in turn will be adding additional efforts in major procurement cost savings on low-value parts; in turn squeezing Schaeffler.
Hence his unsurprising strategy to strengthen the core bearings business via M&A of German peers and then to look at Schaeffler re-positioning itself as an industrial powerhouse far further up the value chain into sustainable, higher margin electrical and electronic systems territories. The latest of which are technologies like Lithium-Ion battery development & production and Intelligent Network Telematics for motoring's 'tomorrow's world' - disciplines Continental through its own efforts and previous purchase of Siemens VDO are industry leaders within.
[Although it has technical leadership in the R&D laboratory, it still needs to promote such innovation for industry and public acceptance, hence with its recent positive - we think overtly flattering - 'Consumer Acceptance of Electric Vehicle's' survey].
However, from Schaeffler's family owned, cash rich, perspective the timing of its interest in the far larger peer is near perfect. Frozen liquidity conditions in the credit-crunch fall-out have contracted, indeed battered, the stock-market. The upside for acquisition hungry hunters that many bourses are showcasing well below par prices for a host of sectors and companies, perhaps none more so undervalued as the listed, auto-related enterprises. Unsurprisingly the best deals to be seen are where the value-gap is greatest – and that means companies of major size with with high-value products and capabilities. As such Geissinger well knows Continental represents an attractive, value for money, prospect. Its divisions spanning a myriad of high-end, valuable technologies in:
a) Chassis & Safety
b) Powertrain
c) Interiors
And, per the norm, we have witnessed the usual negotiational 'courting dance' over the last few months as Schaeffler endeavours to courteously, yet forcefully, chase Continental taking increasing percentage of swap stakes via Merrill Lynch, openly highlighting its desire to take 30% of Conti but not be legally pressed into having to take and finance a latterday 50% controlling action – that German law presently demands. (NB Geissinger is hoping to ride the present day consensus for commercial legal reform and have the restrictive 'ownership onus' diluted to gain a powerful position within Conti but not be obliged to take on the weight of its legal requirements). This has all played out as his hostile initial bid of 70.12 Euros per Conti share has been improved to 75 Euros per share, and a thawing climate between the parties demonstrated by Conti's statement that “we will continue talks with the goal of reaching a solution to the benefit of the company as soon as possible”...”even as we evaluate other possibilities”. As to what degree Conti is really 'open' is debatable as reports indicate that it has been seeking 'White Knight' saviors from the Large Cap PE arena that could ensure a continuance of stability.
However, market conditions aren't great for PE and those large funds that have liquidity are spending much of their time reviewing the potential of investing in the diverse classes of asset and non-asset backed mortgage instruments banks recently had to put back on their balance sheets but are keen to offload at a discount (yet still ironically underwrite) to PE.
So the market understandably sees Continental as probably having to fight its own corner, and much of that will come down to the demands of its own institutional and large-holding investors. At the time of writing the share price just nudged over 74 Euros, not far off the 75 Euros offered. That we feel is the result of Conti's management 'persuading' (by whichever legal means possible) the price up to force Schaeffler in turn to re-offer at a higher level. Continental's management knows its value is well under-represented and is essentially pushing for time to 'run-up & run-out' Geissinger's bid.
At the opposite end of the spectrum, those customers which buy from both Schaeffler and Conti would rather see a friendly, magnanimous outcome rather than one which causes little operational disruption. And ideally see smooth possible absorption into an enlarged cost-saving entity which could pass-on a portion of those savings to customers. Theoretically possible, but pragmatically harder to obtain, especially if the Schaeffler family wish to see immediate returns on their M&A investment.
But whilst the individual players undertake their 'pitch and swing' bid tactics, there may be external government and industry observers who'll want to push to maintain a kind of unified front to German Auto. They recognise (as do the Schaeffler family) that Schaeffler's current position is untenable in the long-term and that has major ramifications for the economic livelihood of Herzogenaurach, its home town in Bavaria.
So ultimately, this episode in German industrial power-broking could be effected by the subtle influence of regional and national politics in seeking a fair result for all. One that avoids leaving Schaeffler in its long-term untenable position, and one that allows Conti to make use of the smaller companies good standing in precision, high quality mass components.
Exactly how the other primary stakeholders will react if this episode becomes a dilution of what should be an increasingly deregulated free, open market system is obvious, with much reaction resultant from their own expected growth forecasts. The likes of Capital Group (with its 2 Funds) ,Axa Group, Barclays Global Investors, Marsisco Capital, Societe General, Morgan Stanley-Wilmington and UBS will rightly have high expectations of Continental's longer term performance given the global growth of vehicle production and of course well recognise the traditional cycle of the auto-sector and the trough-point it now resides within.
So Schaeffler will have to pull something quite compelling out of the bag, or use its political might to help push through its bid. German industry has historically always been about a politically meshed group of powerful families, and as we see Porsche AG's inceasing hold over VW (both firms with major Porsche and Piech family interests) and the ever present Quandts at BMW, maybe Maria-Elisabeth Schaeffler & Georg Schaeffler and their sizable network will be plying invisible political moves to accompany her recent public PR appearances. This would accompany her 'Bavarian Order of Merit' as presented by Governor Stoiber and ex-German President Herzog.
This is indeed a testing time for Deutschland Auto GmbH, and appreciating the direction and nuances will be key for Continental's core investors as they in turn seek to see their preferred outcomes.
But too much political intervention raising the spectre of dilution to short or long term value-creation will not be welcomed.
Caught in the middle-ground is Europe, none perhaps more exposed than Germany, a country that has built its second-half 20th century economic success on the back of superior, world-class engineering and technology. But the end of the 20th and beginning of 21st centuries have seen the quality chasm shrink as industrial education, development technology are adopted to nurture global-wide regional skills-bases.
As the supply-base at large treads a production path to the Near and Far East, chasing lower production costs and growing local markets - as we've seen with VM's - the centre of gravity moves East and the raison d'etre to create localised R&D and new product development centres grows. Renault, GM, Hyundai et al have been the arbiters of change and are persuading their suppliers to locally support. Most recently with the announced PSA-Mitsubishi green-field production plant venture in Russia's Kaluga area. (Since the noted success of Daimler's groundbreaking supplier-vested Smart build hub all VM's have lobbied for close-proximity supply to reduce logistics complexity and costs and maintain the production quality dialogue).
This trend comes at a time when the very fundamentals of supply-sector economics is being challenged as Eastern suppliers, with or without Western JV assistance, are able to design and deliver a plethora of 'low-value' components, primarily with metals casting & machining, metal fabrication and rubber products. That has fragmented the production bases of 'low', 'mid' and 'high-value' components engineering and production.
The problem for Germany is that the post-WW2 industrial policy that melded a socialist-market-economy mentality with the ambition of self-sufficiency – most notably evident at VW's Wolfsburg - which underpinned German industrial strength started to become its undoing when set against the modern globalised context that emerged in the 1990s. The German consensus between labour corporations and government – the sozialmarktwerkshaft – had for decades given high salaries to induce high productivity, backed by large public investments in education & training and governed by powerful legislation and regulation, especially so in labour contracts so as to create and spread wealth. Along with a monetary policy that maintained low inflation and a strong D-mark.
However, as Japan rose as an economic powerhouse, and the rest of Asia threatened – ultimately delayed by the 1998 Asian Crash - the Bundersbank, politicians such as Gerhard Schroder and think-tanks such as the Friedrich Ebert Foundation realised that Germany was becoming increasingly isolated from not just its more flexible, low cost European neighbours, but seriously disjointed from the rest of the world; and so perhaps at greatest risk of future economic shock.
The 'Wirtschaftswunder' (economic miracle from the 1950s-90s) was recognised to be redundant.
As a consequence German industry instigated what were seen to be radical reactionary reforms as European Integration and the beginning of Globalisation took hold, the competition gap in traditional industries such as coal, steel and engineering grew as a result and German unemployment swelled. Companies like Bayer, Hoescht and VolksWagen had to make their voices more loudly heard both on the public stage and within the halls of power, and did so.
A major driving force of that period was the auto-sector, underpinning the major export pillar that had started with the trickle of VW Beetles in the early years and led to conquering the world in the premium sector by the 90s; not forgetting the importance of trucks and of course auto-parts.
The breadth of automotive technology has grown immensely over the last 2 decades, the Germans and Japanese the major proponents and purveyers of that trend. As part of its long-held self-sufficiency ethos the German supplier-base expanded to maintain 'whole vehicle' capability; spanning from Basic Bearings (as we shall see with Schaeffler) to Bluetooth Telematics (Continental). But of course the sector consisted of many many privately-owned and publicly owned enterprises and it has been the progressive, forward thinking firms like Robert Bosch that actively encouraged the technical stretch, recognising that its USP lay in tomorrow's world (as large German tech traditionally had, from Braun to Siemans etc) and as a large international entity could see the world changing at first hand.
That ongoing learning duly permeated the German government, and whilst there has historically been a very close 'socialist' knit between government and industry (as seen by the existence of Supervisory Boards with nigh-on 50 year worker representation), the rate and impact of global change, compounded by demanding capital markets and massive inter-regional investment flows, meant that Germany needed to adapt and reform industrial outlook and policy. (That was 'assisted' by the influx of cheaper labour made available in 1989 with the fall of the Berlin Wall, that assisted in reducing part of the input cost equation). For the big German conglomerates like Bosch and Continental, already international in scale and operations, the changing governmental stance has been part of day to day business, indeed they helped drive it, but for the smaller concerns with domestic-centric operations the change has been daunting.
We stipulate 'daunting' because a higher proportion of German firms have been historically, and still are, family owned. (95% of Germany's 3m businesses are family controlled). Fortunately within industrial engineering they have enjoyed little strategic disruption on the back of an ever growing German automotive and engineered products demand. General business acumen and inter-family association has witnessed collaborations and takeovers in each industrial products segment; especially during economic downturns or hiatuses. But in essence, the smaller and mid-size firms (like Schaeffler) were essentially living in a protected, stable, insular eco-system that did not encourage the evolutional development experienced by more exposed firms in say the US, UK or Japan – the voracity of competition exposure was simply not as high.
But the last few years have seen the results of 'reformation trickle-down' from big corps back in the 1990s. Ten years on industrial re-alignment has start to take shape as the mid-large size enterprises within Deutschland GmbH. Companies that lived off of yesteryear glory days and often held back by traditionalist family power, have been forced to understand their individual industrial positions, thus broader national appreciation and latterly international management thinking have emerged.
This well exemplified by Schaeffler's acquisitions of LUK, INA & FAG in attempt to become a major concentrated national player with international reach across all continents. Broadening its product portfolio, increasing individual (Auto, Ind, Aero) sector & sub-segment market shares, generating economies of scale greatly needed to combat energy & materials input costs and reducing general sales & administration overhead. But critically, as Geissinger knew, the move was to avoid being trapped in the highly competitive, low-barrier entry, arena of precision bearings. In summary,the M&As have broadened the portfolio to include:
a) Schaeffler's,INA's, FAG's overlapping & complimentary bearings range (P/T & wheel hubs)
b)LUK's clutch & gearbox components
c) Schaeffler's & INA's engine (timing & drive) systems components
But as the growing company's dynamic CEO Jurgen Geissinger well knows Schaeffler Group is still an industrial minnow when it comes to vying on the world-stage, and he's recognised that heavy reliance in a few pockets is untenable, made all the more evident this month with European car sales down 8% this month, and US premium car sales heavily contracted, hitting the German premium brands hard, who in turn will be adding additional efforts in major procurement cost savings on low-value parts; in turn squeezing Schaeffler.
Hence his unsurprising strategy to strengthen the core bearings business via M&A of German peers and then to look at Schaeffler re-positioning itself as an industrial powerhouse far further up the value chain into sustainable, higher margin electrical and electronic systems territories. The latest of which are technologies like Lithium-Ion battery development & production and Intelligent Network Telematics for motoring's 'tomorrow's world' - disciplines Continental through its own efforts and previous purchase of Siemens VDO are industry leaders within.
[Although it has technical leadership in the R&D laboratory, it still needs to promote such innovation for industry and public acceptance, hence with its recent positive - we think overtly flattering - 'Consumer Acceptance of Electric Vehicle's' survey].
However, from Schaeffler's family owned, cash rich, perspective the timing of its interest in the far larger peer is near perfect. Frozen liquidity conditions in the credit-crunch fall-out have contracted, indeed battered, the stock-market. The upside for acquisition hungry hunters that many bourses are showcasing well below par prices for a host of sectors and companies, perhaps none more so undervalued as the listed, auto-related enterprises. Unsurprisingly the best deals to be seen are where the value-gap is greatest – and that means companies of major size with with high-value products and capabilities. As such Geissinger well knows Continental represents an attractive, value for money, prospect. Its divisions spanning a myriad of high-end, valuable technologies in:
a) Chassis & Safety
b) Powertrain
c) Interiors
And, per the norm, we have witnessed the usual negotiational 'courting dance' over the last few months as Schaeffler endeavours to courteously, yet forcefully, chase Continental taking increasing percentage of swap stakes via Merrill Lynch, openly highlighting its desire to take 30% of Conti but not be legally pressed into having to take and finance a latterday 50% controlling action – that German law presently demands. (NB Geissinger is hoping to ride the present day consensus for commercial legal reform and have the restrictive 'ownership onus' diluted to gain a powerful position within Conti but not be obliged to take on the weight of its legal requirements). This has all played out as his hostile initial bid of 70.12 Euros per Conti share has been improved to 75 Euros per share, and a thawing climate between the parties demonstrated by Conti's statement that “we will continue talks with the goal of reaching a solution to the benefit of the company as soon as possible”...”even as we evaluate other possibilities”. As to what degree Conti is really 'open' is debatable as reports indicate that it has been seeking 'White Knight' saviors from the Large Cap PE arena that could ensure a continuance of stability.
However, market conditions aren't great for PE and those large funds that have liquidity are spending much of their time reviewing the potential of investing in the diverse classes of asset and non-asset backed mortgage instruments banks recently had to put back on their balance sheets but are keen to offload at a discount (yet still ironically underwrite) to PE.
So the market understandably sees Continental as probably having to fight its own corner, and much of that will come down to the demands of its own institutional and large-holding investors. At the time of writing the share price just nudged over 74 Euros, not far off the 75 Euros offered. That we feel is the result of Conti's management 'persuading' (by whichever legal means possible) the price up to force Schaeffler in turn to re-offer at a higher level. Continental's management knows its value is well under-represented and is essentially pushing for time to 'run-up & run-out' Geissinger's bid.
At the opposite end of the spectrum, those customers which buy from both Schaeffler and Conti would rather see a friendly, magnanimous outcome rather than one which causes little operational disruption. And ideally see smooth possible absorption into an enlarged cost-saving entity which could pass-on a portion of those savings to customers. Theoretically possible, but pragmatically harder to obtain, especially if the Schaeffler family wish to see immediate returns on their M&A investment.
But whilst the individual players undertake their 'pitch and swing' bid tactics, there may be external government and industry observers who'll want to push to maintain a kind of unified front to German Auto. They recognise (as do the Schaeffler family) that Schaeffler's current position is untenable in the long-term and that has major ramifications for the economic livelihood of Herzogenaurach, its home town in Bavaria.
So ultimately, this episode in German industrial power-broking could be effected by the subtle influence of regional and national politics in seeking a fair result for all. One that avoids leaving Schaeffler in its long-term untenable position, and one that allows Conti to make use of the smaller companies good standing in precision, high quality mass components.
Exactly how the other primary stakeholders will react if this episode becomes a dilution of what should be an increasingly deregulated free, open market system is obvious, with much reaction resultant from their own expected growth forecasts. The likes of Capital Group (with its 2 Funds) ,Axa Group, Barclays Global Investors, Marsisco Capital, Societe General, Morgan Stanley-Wilmington and UBS will rightly have high expectations of Continental's longer term performance given the global growth of vehicle production and of course well recognise the traditional cycle of the auto-sector and the trough-point it now resides within.
So Schaeffler will have to pull something quite compelling out of the bag, or use its political might to help push through its bid. German industry has historically always been about a politically meshed group of powerful families, and as we see Porsche AG's inceasing hold over VW (both firms with major Porsche and Piech family interests) and the ever present Quandts at BMW, maybe Maria-Elisabeth Schaeffler & Georg Schaeffler and their sizable network will be plying invisible political moves to accompany her recent public PR appearances. This would accompany her 'Bavarian Order of Merit' as presented by Governor Stoiber and ex-German President Herzog.
This is indeed a testing time for Deutschland Auto GmbH, and appreciating the direction and nuances will be key for Continental's core investors as they in turn seek to see their preferred outcomes.
But too much political intervention raising the spectre of dilution to short or long term value-creation will not be welcomed.
Friday, 8 August 2008
Micro-Level Trends – Leasing Writedown Charges – 3 Plays in Hard Times
As industry analysts, execs and observers well know, automakers have had long love affairs with auto-financing, For the industry's largest players on what have been for far too long 'sliver margins' from their core activity of vehicle production, auto-financing has provided improved margins that some have factored into their operational NPV & IRR calculations.
Hence over the last 20 years VM's have build-up large internal or closely allied finance houses that enable them to both improve the bottom line through deal value efficiencies and enable easier signing-up of buyers. But whilst most have understandably entered the domain, the last year has seen individual automakers adopt differing strategic attitudes to managing a consequence of the credit-crunch – namely the downward spiral of used car values and the 'gap-effect' between theoretical book-valuations and real-world market prices. Given the relative rapidity of the 'residuals fall-out' each automaker is having to best guide its own financial fortunes, and that means best managing the need for sizable provisions set against book-to-market paper losses.
Ironically given the never-ending tides of woeful news from Detroit, the US 'Big 3' may be better placed in this market melt-down than its oft considered better placed European premium players. Two of the three previously part-sold or fully spun-out their interests in what were in-house finance arms. GM sold 51% of GMAC (inc Nuvell & ResCap) to an investment consortium led by the private equity house Cerberus in November 2006. Cerberus also took Chrysler Finance off the accounts of the newly created Chrysler Motor LLC, effectively separating car production and auto-financing interests), which was the fundamental basis to allow Robert Nardelli to announce Chrysler's effective resignation from the auto-leasing business. We assume that he critically does not wish to expose the semi-fragile automaker to the vagaries of Chrysler Financial and critically allow it to maintain credit-worthiness buoyancy for ongoing re-financing of its own. (Chrysler Financial was last week able to secure only $25bn of a desired $30bn credit facility) And as for the 3rd of the trio, Ford, its Ford Motor Credit division (inc PRIMUS & unlike GMAC concerned only with auto-related loans) has staid within the FMC domain and accounts-base.
Unsurprisingly trucks and SUVs have been heavily hit by the devaluation trend and the undermining of the leasing business model, perhaps most notable with Chrysler's high profile in this arena has been a factor in Nardelli's decision, but the greatest proponent of the lease system has undoubtedly been the premium sector automakers that so critically relied upon the rising economic tide of the last 7 years or so to sell to small and medium sized business owners, select corporate fleet and of course the credit reliant aspirant private buyer. Hence we've seen BMW vocalise their earnings hit and provision building to a value of -$1.1bn whilst Audi and Daimler are yet to declare any paper losses as of yet. They appear to be endeavouring to contain the situation, at least for now, perhaps preferring to take their heavy hits later as similar European market problems emerge or smooth-out the provision requirement over a greater timescale to lessen the obvious quarterly, half-year and full year earnings. There is even the possibly that it will try and perceptively negate the lost investor confidence of write-downs by balancing the books with new capital inflows. As it stands it seems BMW are being more transparent than its German peers, possibly because with greater volumes the condition is comparatively harder to handle and mask.
Although given their size Detroit's 3 operate far higher lease and loan agreement volumes than the European upscale peers, their deal-mix of internally financed deals vs external financing is comparatively lower, so from that perspective it lessens the comparative impact upon their need to set aside provision. Since more of their cars go out onto the open market, as opposed to being held by factory-owned or associated dealers the effect of the major car valuations slide should be paradoxically less than the closely held and managed premium Germans, and of course Lexus. - Infiniti and Acura less so.
However, as with any situation there are multiple perspectives, and a fortunate one for the Germans, if less so for the Japanese, is that the weak Dollar vs strong Euro FX rate means that the provision building which will be billed in Euros is less painful than if the two currencies were trading at a greater historic equilibrium level. Of course that plus will be of little consolation given the level of 'dealer corralled' used exposure the German's and Lexus actually have.
Recent WSJ, FT and other reports have highlighted the German corporations aim to reduce US volume so as to align to new car market demand and to undoubtedly help prop-up the pricing of used cars and so lessen the potential amounts of damaging future write-downs.
And of course, even Toyota has been affected by the slow-down in consumer demand, whilst a beneficiary of many consumer's flight from risk, their Toyota and high-margin Lexus models have taken a battering in a weary US, resulting in a 28% slump in fiscal 1st quarter profits. Even so the earnings were better than expected mainly thanks to the extra-ordinary accounting item gained from interest-rate swap contract. However, even so we suspect the charge against used car values smallest of the industry; a consequence we feel of that run to safety by buyers. The company's intended production cuts will we feel provide buoyancy to their US used car sales as buyers fear/avoid buying new and instead look for quality near-new products. That in turn will help Toyota stay ahead of the pack as economic gloom continues to bite and possibly worsens.
As we view the situation today, the accompanying graphic (top right of this page) represents only a momentary, quickly compiled 'snap-shot' of expectation of individual automakers' write-down & provision-building approaches and tactics. Each according to one of 3 'shareholder expectation plays'
It is laid out as a 3x3 table illustrating the timing of each VM's write-down absorption vs the level of comparative 'hit'. The timing is labeled as “Early Absorption” (Q208-Q209), “Deferred Absorption” (Q408-Q409) and “Ideally Avoided Absorption”. Thus this overview tries to read between the lines of VM actions, and the way it is managing its US used car pool so as to best manage investor relations, whether that be with open early-days transparency to manage expectations (for perhaps an early latter day earnings come-back) or by deferring the hit and riding the present-day's 'on or above par' share price, or possibly trying to massage and manage its way out of the problem.
[NB These are only initial perceptions, not a fully analysed prognosis]
Hence over the last 20 years VM's have build-up large internal or closely allied finance houses that enable them to both improve the bottom line through deal value efficiencies and enable easier signing-up of buyers. But whilst most have understandably entered the domain, the last year has seen individual automakers adopt differing strategic attitudes to managing a consequence of the credit-crunch – namely the downward spiral of used car values and the 'gap-effect' between theoretical book-valuations and real-world market prices. Given the relative rapidity of the 'residuals fall-out' each automaker is having to best guide its own financial fortunes, and that means best managing the need for sizable provisions set against book-to-market paper losses.
Ironically given the never-ending tides of woeful news from Detroit, the US 'Big 3' may be better placed in this market melt-down than its oft considered better placed European premium players. Two of the three previously part-sold or fully spun-out their interests in what were in-house finance arms. GM sold 51% of GMAC (inc Nuvell & ResCap) to an investment consortium led by the private equity house Cerberus in November 2006. Cerberus also took Chrysler Finance off the accounts of the newly created Chrysler Motor LLC, effectively separating car production and auto-financing interests), which was the fundamental basis to allow Robert Nardelli to announce Chrysler's effective resignation from the auto-leasing business. We assume that he critically does not wish to expose the semi-fragile automaker to the vagaries of Chrysler Financial and critically allow it to maintain credit-worthiness buoyancy for ongoing re-financing of its own. (Chrysler Financial was last week able to secure only $25bn of a desired $30bn credit facility) And as for the 3rd of the trio, Ford, its Ford Motor Credit division (inc PRIMUS & unlike GMAC concerned only with auto-related loans) has staid within the FMC domain and accounts-base.
Unsurprisingly trucks and SUVs have been heavily hit by the devaluation trend and the undermining of the leasing business model, perhaps most notable with Chrysler's high profile in this arena has been a factor in Nardelli's decision, but the greatest proponent of the lease system has undoubtedly been the premium sector automakers that so critically relied upon the rising economic tide of the last 7 years or so to sell to small and medium sized business owners, select corporate fleet and of course the credit reliant aspirant private buyer. Hence we've seen BMW vocalise their earnings hit and provision building to a value of -$1.1bn whilst Audi and Daimler are yet to declare any paper losses as of yet. They appear to be endeavouring to contain the situation, at least for now, perhaps preferring to take their heavy hits later as similar European market problems emerge or smooth-out the provision requirement over a greater timescale to lessen the obvious quarterly, half-year and full year earnings. There is even the possibly that it will try and perceptively negate the lost investor confidence of write-downs by balancing the books with new capital inflows. As it stands it seems BMW are being more transparent than its German peers, possibly because with greater volumes the condition is comparatively harder to handle and mask.
Although given their size Detroit's 3 operate far higher lease and loan agreement volumes than the European upscale peers, their deal-mix of internally financed deals vs external financing is comparatively lower, so from that perspective it lessens the comparative impact upon their need to set aside provision. Since more of their cars go out onto the open market, as opposed to being held by factory-owned or associated dealers the effect of the major car valuations slide should be paradoxically less than the closely held and managed premium Germans, and of course Lexus. - Infiniti and Acura less so.
However, as with any situation there are multiple perspectives, and a fortunate one for the Germans, if less so for the Japanese, is that the weak Dollar vs strong Euro FX rate means that the provision building which will be billed in Euros is less painful than if the two currencies were trading at a greater historic equilibrium level. Of course that plus will be of little consolation given the level of 'dealer corralled' used exposure the German's and Lexus actually have.
Recent WSJ, FT and other reports have highlighted the German corporations aim to reduce US volume so as to align to new car market demand and to undoubtedly help prop-up the pricing of used cars and so lessen the potential amounts of damaging future write-downs.
And of course, even Toyota has been affected by the slow-down in consumer demand, whilst a beneficiary of many consumer's flight from risk, their Toyota and high-margin Lexus models have taken a battering in a weary US, resulting in a 28% slump in fiscal 1st quarter profits. Even so the earnings were better than expected mainly thanks to the extra-ordinary accounting item gained from interest-rate swap contract. However, even so we suspect the charge against used car values smallest of the industry; a consequence we feel of that run to safety by buyers. The company's intended production cuts will we feel provide buoyancy to their US used car sales as buyers fear/avoid buying new and instead look for quality near-new products. That in turn will help Toyota stay ahead of the pack as economic gloom continues to bite and possibly worsens.
As we view the situation today, the accompanying graphic (top right of this page) represents only a momentary, quickly compiled 'snap-shot' of expectation of individual automakers' write-down & provision-building approaches and tactics. Each according to one of 3 'shareholder expectation plays'
It is laid out as a 3x3 table illustrating the timing of each VM's write-down absorption vs the level of comparative 'hit'. The timing is labeled as “Early Absorption” (Q208-Q209), “Deferred Absorption” (Q408-Q409) and “Ideally Avoided Absorption”. Thus this overview tries to read between the lines of VM actions, and the way it is managing its US used car pool so as to best manage investor relations, whether that be with open early-days transparency to manage expectations (for perhaps an early latter day earnings come-back) or by deferring the hit and riding the present-day's 'on or above par' share price, or possibly trying to massage and manage its way out of the problem.
[NB These are only initial perceptions, not a fully analysed prognosis]
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