Frederick Henderson has announced a proposal directed at Government & its Bond-Holders. That GM could swap 50% of the loan-value from its Government bail-out for corporate equity, and if agreed by Washington (and the UAW given other conditions) then offer bondholders 225 shares of its common stock for every $1,000 of principal they held – reducing outstanding debt by $3bn to $24bn.
This would obviously alleviate a heavily pressured balance sheet by a reported $20bn; a seemingly agreeable notion. But given the stock-swap conditions of the UAW VEBA agreement already in place, the notion would appropriate 89% held by Government and UAW, leaving only 11% as a 'free-float'.
Although much derided by recent events, and some might have it otherwise, we still live in a Capitalist economy that relies upon the re-strengthening of financial markets and associated intermediaries and participants, and critically broad-scale investor confidence. So whilst the GM proposal could offer a mid-term respite for the company at large, it begs the question as to why it should indeed still stay a listed enterprise?
The markets reacted well to the news, but that seems to be simply yet another case of momentary irrational exuberance as event-driven traders believe that the Nanny State will take care of the company and its investors. The long-term holders of equity at least are probably more skeptical.
The truth of the matter is that present incumbent money managers, hedge funds, institutionals and 'GM loyalist' 'Mam & Pop' investors will have been heavily dismayed by the level of value destruction from the company seen in recent years and further recently exacerbated by the 'cents on the dollar' 'haircuts' that were previously mentioned. Now this Government directed debt-for-equity swap dilutes the present share-holder's standing, GM offering that all of the $27bn public debt outstanding be transferred into 10% equity.
Mutiny is an ugly prospect, one accorded more to yesteryear Captains than today's metaphorical 'Generals', but such fractious days could witness a new level of investor activism from the most conservative of quarters. An activism that surpasses the recent social activism in terms of striking at the heart of the, and maintaining the cause for the very model of capitalism; one of a variety that has not yet been seen in US economic history.
When it is highlighted that the offer must be accepted and contractually signed-off by May 26th, just 6 days before the June 1st GM deadline set by Government it looks increasingly remote as a viable proposition given the level of investor discontentment.
Frederick Henderson also re-iterated the idea that he is open to, and been working on, GM's admission to Chapter 11; hoping that his counter-parties in Government and Wall Street fear that such proceedings could indeed take years given the commercial operating complexity of GM.
Restructuring talks and plans are of course still ongoing. And as part of that is the idea that the company could formally split and set itself out under the guises of 'Good GM' (comprising of Chevy, Buick, Cadillac & GMC) vs a 'Bad GM' (ie Saturn, Pontiac, Hummer, SAAB & Opel), This possibility follows the same conjectural possibility aired previously for the US banking sector and its supposedly 'toxic' assets. Indeed their has been comment that the 'Good' could take stakes in the 'Bad' to aid restructuring possibilities and inject latter-day confidence.
[Such a 'Bad GM' would of course either divest tangible and intangible assets, be restructured under very different stakeholder conditions or merged with another enterprise able to leverage a far better cost-structures, so giving those presently poor profitability brands the opportunity for feasible turn-around and so providing latter-day value-extraction opportunities].
In the meantime additional re-sizing and cost-saving efforts continue in the form of dealership rationalisation, workforce reduction, plant closures and of course the much muted partial sale of Adam Opel AG – with FIAT SpA presently seen as a front-runner vs a supposed number of unnamed candidates.
Henderson says GM aims to operationally 'break-even' at 10m units p.a. , and that is part of the reason we suspect it has centred itself around the 4 obvious high-synergy divisions in cars and trucks. Using the March '(Jan-Mar Vehicle Delivery' statement recently issued, the US will provide for approximately 1.7m units in 2009 if present conditions do not abate, down 48.8% for the YoY period of which 40% derived from cars vs 58% from SUVs & light trucks. This basic mix demonstrates GM's lacklustre (GMDAT sourced) presence in the small and compact car segments.
As for the topical primary issue of bond-holder reaction and sentiment toward the proposed deal, most have, and will, see it as nothing but GM being seen by Government to be doing something to be pro-active, even if that something is less than realistic. For both the Detroit and Washington players must know that given fund managers' primary 'guardianship' of their investor's interests and their highly important role as 'capital market transmission mechanisms' the offer is untenable.
In the transparent game of chicken being played, those on Wall Street, in Connecticut, Massachusetts, California, Miami and elsewhere will view it as water off a duck's back; as they devise their own scenario outcomes for the auto-sector's over-haul and their own thematic and target plays.
For if GM were indeed to be taken over by Washington and the UAW that would tantamount to Nationalisation. Western economies are undoubtedly variations of the 'mixed-economy' model, but the US, as a global leader of free-trade and anti-protectionism, cannot resort to such coddling of over-ripe, matured industry structures; and the Administration more than knows it.
To do so would undermine its very standing and leave it open it to slights that GM & the USA's industrial policy had more in common with the likes of flailed state-policies such as Malaysia's Proton in Malaysia or the government-owned CIS automakers that have been operationally stagnant due.
Such accusations may over-state the case, but would anybody want 11% of such an entity in what would be effectively be in the medium term at least a planned industry? Not likely. At a time when even T-Bills are loosing attraction, a state-run car company - with its inherent undoubtedly 're-tabled' social agenda pressures – looks even less attractive.
Ultimately, the debt for equity argument is a valid one, but the retained debt vs new equity issuance mix must be a balanced equation if GM and the auto-sector is to heal and the financial markets are to function healthily.
Though the Bankruptcy Judge sits awaiting and the lengthy road of due process runs to the horizon, perhaps it is time that an independent panel of cross-discipline luminaries be appointed as the tri-party arbitor and 'macro' & 'micro' solutions seeker.?
Monday, 27 April 2009
Thursday, 23 April 2009
Company Focus – Porsche & VW – Sparring Partners
'Parry' and 'Counter-Parry'...the sparring between Porsche and VW has rarely stopped throughout the 62 years that two companies have been formally associated.
2008 witnessed the revelation that Wiedeking had been (allegedly) secretly buying-up options trades through 3rd parties on the derivatives markets, allowing a Q109 stake in VW of 50.8%. At a reported cost/debt of Euro 9bn, some commentators think that the stake-holding was build-up at a heavy price, especially so given a debt-servicing level of Euro 500m per annum.
Of course, three and half years ago when the Porsche CEO set out on the quest for VW, capital markets were strong and lenders were convinced of the massive commercial potential of a more formalised commercial integration. Although the current financial terrain and its associated sentiment has shifted massively, and thereby raised the loan-criterion bar visibly, there are few M&A deals in stable, matured industries that hold the kind of RoI potential that a melded Porsche-VW or indeed VW-Porsche offers – especially so in the Auto-Sector and the credentials of the 2 participants.
And that is why, at this prescient moment, that Piech has decided to subtly employ the press as communicators of his renowned strategic acumen. VW will have 'run the numbers' on Porsche Holdings and recognised that changed funding conditions could be a possible cause of fragility allied to its apparent reliance on its VW share dividends. Seeing the 'opening', he seems to have attempted to simultaneously divert analysts' attention away from VW's near-term contraction and toward the better commercial prospect of the medium-long term.
The crucial truth is that the combined forces of VW & Porsche make for a very attractive commercial proposition.
With its recent 'position of power' Porsche has been able to deploy VW platforms and production-lines to its advantage through the probable use of highly advantageous 'transfer-pricing' terms for Cayenne and Panamera. At the heart of the Stuttgart company's business model is the avoidance of 'bounding itself up' with capital intensive plant and infrastructure beyond its production of the iconic 911 – hence Boxster & Caymen built by Valmet in Sweden (with overspill at Stuttgart) and Cayenne built in VW's Bratislava facility (NB previous 924/8 build at Audi's Neckersulm plant).
Importantly, the VW joint venture partnership remains the key for Porsche to access non-traditional, mainstream segments; as the successful Cayenne project has demonstrated, and the Panamera project seeks to replicate. Thus Porsche understandably wishes to leverage VW capability but done so at arms length to reduce CapEx, management responsibility and importantly remain remote from the political expectations and incumbencies that larger car production entails in Germany. Why change a winning formula is the ethos in Stuttgart, and to maintain the stability of that formula meant increasing its power in the relationship; and by doing so defending VW itself from aggressive external attack.
VW Group also well recognises the potential advantages of greater integration, and understandably wishes to control the 'special relationship'. Although investment-auto-motives is not privvy to exact transfer-pricing details between the 2 parties, we suspect that they are heavily in favour of Porsche at present – especially vis a vis Valmet - and that will surely be a rub for Piech and the senior management team who are now under pressure to increase build-cost vs ex-factory margins on all cars produced – its own and contracted. But more importantly Porsche plays a different potential role.
The accompanying graphic illustrates VW Group's brand stable, depicted as a triangle to highlight the general volume and pricing relationship. It appears that as VW built its portfolio, it intentionally maintained a 'white space' or 'vacuum' for Porsche between its Audi and Lamborghini & Bentley divisions. It serves as a crucial 'Missing Link' to a completed brand portfolio, which if/when filled by Porsche would provide substantial Group leverage for volume/capacity, R&D strategies (inc Group trickle-down), robust platform strategy formulation, procurement / production / logistics economies of scale and of course consolidation of general administration and associated reduced overhead costs. Such a marriage would provide substantial fixed and variable cost advantages.
But critically of course for VW Group it would allow it to once again 're-run' its highly effective 'adjusted-common-platform' modus operandi that reduces costs and promotes margin at model, division and group levels. It could underpin a massive growth ambition for Porsche, providing for a 'Baby Cayenne' derived from Audi Q5 (already in the product pipeline) and importantly Audi-based front-engined sedans, coupes and coupe-cabriolets that would allow Porsche to compete on-par (relative to fundamental product technical architecture) against BMW, Mercedes, Maserati, Jaguar and Lexus. Panamera is viewed as a landmark product; only the start of something potentially massive for Porsche.
Both parties recognise that Porsche, through VW capabilities, could follow in the 'growth model' footsteps of BMW Cars, but able to do so without the operating baggage of a traditional 'self-assembly' car company. And that is the value of Porsche.
Indeed investment-auto-motives conjects that the Porsche operating model itself is an ambition of Piech, and could in time be replicated by the rest of the Group as VW itself seeks to outsource production to JV (VW-controlled) Tier 0.5 companies.
Thus, on the day that Martin Winterkorn gave his Q109 update to investors, the struggle by VW to regain self-determination begins. Because it knows that although Porsche Automobile Holdings SE would be unlikely to blatantly draw upon VW liquidity (if able to obtain 75% hold) to prop-up its own Balance Sheet use, it could create a battle over 'at hand' and 'provisioned' cash as it seeks to re-direct VW cash toward a bias of its own shared-platform projects, their engineering provider/integrator (via Porsche Engineering) and so could portionally re-direct liquidity.
Both Wiedeking & Piech recognise the importance of VW's current assets and the pivotal role they will play in paving the way to a successful future.
2008 witnessed the revelation that Wiedeking had been (allegedly) secretly buying-up options trades through 3rd parties on the derivatives markets, allowing a Q109 stake in VW of 50.8%. At a reported cost/debt of Euro 9bn, some commentators think that the stake-holding was build-up at a heavy price, especially so given a debt-servicing level of Euro 500m per annum.
Of course, three and half years ago when the Porsche CEO set out on the quest for VW, capital markets were strong and lenders were convinced of the massive commercial potential of a more formalised commercial integration. Although the current financial terrain and its associated sentiment has shifted massively, and thereby raised the loan-criterion bar visibly, there are few M&A deals in stable, matured industries that hold the kind of RoI potential that a melded Porsche-VW or indeed VW-Porsche offers – especially so in the Auto-Sector and the credentials of the 2 participants.
And that is why, at this prescient moment, that Piech has decided to subtly employ the press as communicators of his renowned strategic acumen. VW will have 'run the numbers' on Porsche Holdings and recognised that changed funding conditions could be a possible cause of fragility allied to its apparent reliance on its VW share dividends. Seeing the 'opening', he seems to have attempted to simultaneously divert analysts' attention away from VW's near-term contraction and toward the better commercial prospect of the medium-long term.
The crucial truth is that the combined forces of VW & Porsche make for a very attractive commercial proposition.
With its recent 'position of power' Porsche has been able to deploy VW platforms and production-lines to its advantage through the probable use of highly advantageous 'transfer-pricing' terms for Cayenne and Panamera. At the heart of the Stuttgart company's business model is the avoidance of 'bounding itself up' with capital intensive plant and infrastructure beyond its production of the iconic 911 – hence Boxster & Caymen built by Valmet in Sweden (with overspill at Stuttgart) and Cayenne built in VW's Bratislava facility (NB previous 924/8 build at Audi's Neckersulm plant).
Importantly, the VW joint venture partnership remains the key for Porsche to access non-traditional, mainstream segments; as the successful Cayenne project has demonstrated, and the Panamera project seeks to replicate. Thus Porsche understandably wishes to leverage VW capability but done so at arms length to reduce CapEx, management responsibility and importantly remain remote from the political expectations and incumbencies that larger car production entails in Germany. Why change a winning formula is the ethos in Stuttgart, and to maintain the stability of that formula meant increasing its power in the relationship; and by doing so defending VW itself from aggressive external attack.
VW Group also well recognises the potential advantages of greater integration, and understandably wishes to control the 'special relationship'. Although investment-auto-motives is not privvy to exact transfer-pricing details between the 2 parties, we suspect that they are heavily in favour of Porsche at present – especially vis a vis Valmet - and that will surely be a rub for Piech and the senior management team who are now under pressure to increase build-cost vs ex-factory margins on all cars produced – its own and contracted. But more importantly Porsche plays a different potential role.
The accompanying graphic illustrates VW Group's brand stable, depicted as a triangle to highlight the general volume and pricing relationship. It appears that as VW built its portfolio, it intentionally maintained a 'white space' or 'vacuum' for Porsche between its Audi and Lamborghini & Bentley divisions. It serves as a crucial 'Missing Link' to a completed brand portfolio, which if/when filled by Porsche would provide substantial Group leverage for volume/capacity, R&D strategies (inc Group trickle-down), robust platform strategy formulation, procurement / production / logistics economies of scale and of course consolidation of general administration and associated reduced overhead costs. Such a marriage would provide substantial fixed and variable cost advantages.
But critically of course for VW Group it would allow it to once again 're-run' its highly effective 'adjusted-common-platform' modus operandi that reduces costs and promotes margin at model, division and group levels. It could underpin a massive growth ambition for Porsche, providing for a 'Baby Cayenne' derived from Audi Q5 (already in the product pipeline) and importantly Audi-based front-engined sedans, coupes and coupe-cabriolets that would allow Porsche to compete on-par (relative to fundamental product technical architecture) against BMW, Mercedes, Maserati, Jaguar and Lexus. Panamera is viewed as a landmark product; only the start of something potentially massive for Porsche.
Both parties recognise that Porsche, through VW capabilities, could follow in the 'growth model' footsteps of BMW Cars, but able to do so without the operating baggage of a traditional 'self-assembly' car company. And that is the value of Porsche.
Indeed investment-auto-motives conjects that the Porsche operating model itself is an ambition of Piech, and could in time be replicated by the rest of the Group as VW itself seeks to outsource production to JV (VW-controlled) Tier 0.5 companies.
Thus, on the day that Martin Winterkorn gave his Q109 update to investors, the struggle by VW to regain self-determination begins. Because it knows that although Porsche Automobile Holdings SE would be unlikely to blatantly draw upon VW liquidity (if able to obtain 75% hold) to prop-up its own Balance Sheet use, it could create a battle over 'at hand' and 'provisioned' cash as it seeks to re-direct VW cash toward a bias of its own shared-platform projects, their engineering provider/integrator (via Porsche Engineering) and so could portionally re-direct liquidity.
Both Wiedeking & Piech recognise the importance of VW's current assets and the pivotal role they will play in paving the way to a successful future.
Thursday, 16 April 2009
Macro-Level Trends - UK Autos PLC - Subsidising Britain's "Green & Pleasant Land" to Good Effect
Many will remember the formation of 'great expectations' prior to last Christmas (Q408), as the British government endeavoured to curry-favour with the domestic auto-industry, stating that it would provide an assistance package to alleviate the commercial pressures created by these unprecedented times. That package totalled £2.5bn, of which £2.3bn was a loan format, much of that from the EIB, with the remaining £200m allocated for subsidised investment (of which £35m was for training).
Although exacting detail of the full £2.5bn fiscal allotment still remains opaque, Lord Mandelson & Geoff Hoon (respectively representing Business & Transport departments) announced that £250m will be directed at the new car sales of PHEVs and EVs. This money is designed as a 'consumer-pull incentive', with purchase subsidies ranging from £2,000 to £5,000.
First impressions substantiate investment-auto-motive's previous Q107 assumption that public monies would be used to retain the goodwill of the now well-established Japanese 'transplant' companies. Toyota, Honda and Nissan obviously operate large manufacturing concerns here in the UK and are of course leaders (with Mitsubishi) in hybrid and EV designed cars. The government recognises that retaining that goodwill and industrial presence will in turn create a technically advanced, eco-orientated, supply-base.
This national productivity asset when allied to continued flexible labour policies and equally flexible sterling FX policy (as we see today with the weak £GB), historically low interest rates and so in due course cost of capital, all work together to create a solid foundation from which to attain new UK standards regards:
1. 'Greener' high-volume mainstream vehicle manufacturing base.
2. 'Greener' modules, components & parts supply sector
3. Viable access to eco-technology for the numerous specialist vehicle manufacturers
4. Strengthened Domestic economies at 'intra-sector' & 'inter-sector' local and national levels.
5. A strengthened Foreign Export base to assist National Debt and PSBR levels.
6. 'Snowball' attraction of further FDI from Eastern 'liquid' commercial enterprises (eg BYD Auto), PE and SWFs
Thus British politicians understand that the progress made by the Japanese over the last 15 years or so in the field of hybrid and electric vehicles plays a major part in the long-term fortune of the UK auto-sector and the national economy itself – even if the short-term news of lay-offs etc has been temporarily painful.
Toyota Manufacturing UK at Burnaston assembles Auris & Avensis whilst its Deeside plant produces engines. The new larger hybrid Prius (model #ZVW30) [inc Plug-In variant] will have been designed in conjunction with Avensis & Auris, sharing base platform and high parts content, so logically will have been productionised for Burnaston. New Avensis also uses a new generation Deeside built hybrid 'synergy-drive' engine partly funded by a £100m grant in 2007. So it seems the previous question UK produced Toyota hybrids looks to have been crystallised. Both Gordon Brown & Geoff Hoon have been previous unveiling VIPs for TMUK, and both appreciate the global commercial power and technical leadership of the company [Toyota alone claims to have invested £2.56bn to date and employs 13,000 people].
Honda UK at Swindon assembles Civic, CR-V and is rushing in production of the Jazz small car to match market sentiment. But its big global news is obviously the release of Insight2 – a new hybrid designed as a smaller competitor to Prius3. And like its homeland peer, that car will have been created as part of a holistic platform strategy, in this case derived from Civic. So Swindon should be capable of producing Insight2 from the same flexi-production line on either 'batch' or 'to order' basis. Logically, production planners would have used the 2 month non-production period of February & March to switch CR-V production-line to the very different Jazz orientation, and possibly set-out the Civic line to include the extra complexity of Insight2 as and when it should be given the UK go-ahead.
Nissan Manufacturing UK (NMUK) at Sunderland produces Micra (and variants) and Qashqui (and variant), operating in conjunction with a regional R&D Technology Centre & Administrative Hub located at Cranfield; with claims that it produces 20% of the UK's passenger car export volumes. Having suffered in the early part of the decade Nissan leant heavily on Renault as it sought to re-align its model range across predominantly small cars, 4x4s & cross-overs in Europe, with latterly Carlos Ghosn's proclamation that EV would be a major pillar of Nissan's future strategy, even if he does not discount other hardware and energy solutions for CO2 reduction. That EV future created with Renault and R-N business partners ranging from Project Better Place & the Israeli government to US State & Federal agencies (eg Pheonix, AZ) to China's Ministry of Industry & IT to create the critical e-charging infrastructure. [11 world-wide agreements in place as of Q208]. And like its peers with Prius-Avensis & Insight-Civic, its the ability to create platforms with multiple powertrain options that is key. Hence, previously Nissan showcased the Cube EV, itself a variant from the Micra/March platform – with claims that a full EV line-up will be available by 2012 ranging from the Cube to compacts to sedans to MPVs to sportscars. [Highly debatable as a volume offering in our opinion given the stretch on resources and endemic technical limitations; more a case of low volume 'crafted' EV variants for positive publicity within that timeframe. However creating such segment specific Evs even at low volume will provide invaluable engineering and business plan learning). Thus the Micra production line in Sunderland – or an offshoot of it - appears feasibly able to assemble the Cube EV for the UK and Euro markets, but Nissan must lobby for increased e-charge infrastructure beyond the £20m currently set aside.
However, there is general sentiment amongst industry analysts is that electric and plug-in hybrid cars are unlikely to be adopted widely in the short-medium term without generous incentives to underwrite the cars’ typically higher purchase price.
As we saw with Prius1 & Prius2, much of the cars price suppression for market acceptability came from Toyota's swallowing of costs as a loss-leader tactic. Of course the ramped volumes of Prius gave economies of scale that reduced Toyota's Ni-MH battery and motor costs, and to a certain lesser extent the same can be said of Honda after its less successful Civic hybrid effort. And Nissan-Panasonic will have created detailed business cases for each of their EV model-lines, though-based on only outline volume forecasts. These e-drive R&D and production costs will still be substantive compared to standard ICE – and even ICE developments - given that on national, regional and global TIV terms the number of 'early-adopter' consumers who absorbed the brunt of the apportioned development costs has been comparatively small.
Geoff Hoon said that incentives announced on Thursday would help to make electric cars a “real option” for motorists. But of course much depends on varying consumer types vehicle usage needs, their attitude & 'psychographic' and of course the allotment of the £2000-5000 subsidies. With specific reference to EV options they need to be awarded in a manner that pro-actively rewards newer and better vehicles, and not simply propping-up old yesteryear models. To do so would simply create an evolutional vacuum in which the extended life of the “Noddy Car” type of EV would tarnish the genre and public attraction; which would do more harm than good.
Britain's policy-makers are now catching-up with EU contemporaries that have been 'incentivising' low-carbon cars - ie Denmark, Norway, France & Portugal - which have tax-based policies. The UK looks unready to go that far yet, given the reliance on motoring tax and the massive fiscal deficits that need financing. So Gordon Brown's announcement that he wanted all cars on Britain’s roads to be electric or hybrid by 2020 looks unrealistically-optimistic; especially so given the increasing likelihood of a Conservative government winning the next election and David Cameron's pledge to be fiscally responsible which probably means increasing taxation across all fronts – consumer durables included.
For the UK at least, that means the UK auto-industry, led by its Japanese 'Sensi' should create 'must have' rational yet highly attractive products. Vehicles which engender a sector-snowball effect in their wake for the development of a new 'eco-tech' industrial terrain for Britain's “Green and Pleasant Land”.
Although exacting detail of the full £2.5bn fiscal allotment still remains opaque, Lord Mandelson & Geoff Hoon (respectively representing Business & Transport departments) announced that £250m will be directed at the new car sales of PHEVs and EVs. This money is designed as a 'consumer-pull incentive', with purchase subsidies ranging from £2,000 to £5,000.
First impressions substantiate investment-auto-motive's previous Q107 assumption that public monies would be used to retain the goodwill of the now well-established Japanese 'transplant' companies. Toyota, Honda and Nissan obviously operate large manufacturing concerns here in the UK and are of course leaders (with Mitsubishi) in hybrid and EV designed cars. The government recognises that retaining that goodwill and industrial presence will in turn create a technically advanced, eco-orientated, supply-base.
This national productivity asset when allied to continued flexible labour policies and equally flexible sterling FX policy (as we see today with the weak £GB), historically low interest rates and so in due course cost of capital, all work together to create a solid foundation from which to attain new UK standards regards:
1. 'Greener' high-volume mainstream vehicle manufacturing base.
2. 'Greener' modules, components & parts supply sector
3. Viable access to eco-technology for the numerous specialist vehicle manufacturers
4. Strengthened Domestic economies at 'intra-sector' & 'inter-sector' local and national levels.
5. A strengthened Foreign Export base to assist National Debt and PSBR levels.
6. 'Snowball' attraction of further FDI from Eastern 'liquid' commercial enterprises (eg BYD Auto), PE and SWFs
Thus British politicians understand that the progress made by the Japanese over the last 15 years or so in the field of hybrid and electric vehicles plays a major part in the long-term fortune of the UK auto-sector and the national economy itself – even if the short-term news of lay-offs etc has been temporarily painful.
Toyota Manufacturing UK at Burnaston assembles Auris & Avensis whilst its Deeside plant produces engines. The new larger hybrid Prius (model #ZVW30) [inc Plug-In variant] will have been designed in conjunction with Avensis & Auris, sharing base platform and high parts content, so logically will have been productionised for Burnaston. New Avensis also uses a new generation Deeside built hybrid 'synergy-drive' engine partly funded by a £100m grant in 2007. So it seems the previous question UK produced Toyota hybrids looks to have been crystallised. Both Gordon Brown & Geoff Hoon have been previous unveiling VIPs for TMUK, and both appreciate the global commercial power and technical leadership of the company [Toyota alone claims to have invested £2.56bn to date and employs 13,000 people].
Honda UK at Swindon assembles Civic, CR-V and is rushing in production of the Jazz small car to match market sentiment. But its big global news is obviously the release of Insight2 – a new hybrid designed as a smaller competitor to Prius3. And like its homeland peer, that car will have been created as part of a holistic platform strategy, in this case derived from Civic. So Swindon should be capable of producing Insight2 from the same flexi-production line on either 'batch' or 'to order' basis. Logically, production planners would have used the 2 month non-production period of February & March to switch CR-V production-line to the very different Jazz orientation, and possibly set-out the Civic line to include the extra complexity of Insight2 as and when it should be given the UK go-ahead.
Nissan Manufacturing UK (NMUK) at Sunderland produces Micra (and variants) and Qashqui (and variant), operating in conjunction with a regional R&D Technology Centre & Administrative Hub located at Cranfield; with claims that it produces 20% of the UK's passenger car export volumes. Having suffered in the early part of the decade Nissan leant heavily on Renault as it sought to re-align its model range across predominantly small cars, 4x4s & cross-overs in Europe, with latterly Carlos Ghosn's proclamation that EV would be a major pillar of Nissan's future strategy, even if he does not discount other hardware and energy solutions for CO2 reduction. That EV future created with Renault and R-N business partners ranging from Project Better Place & the Israeli government to US State & Federal agencies (eg Pheonix, AZ) to China's Ministry of Industry & IT to create the critical e-charging infrastructure. [11 world-wide agreements in place as of Q208]. And like its peers with Prius-Avensis & Insight-Civic, its the ability to create platforms with multiple powertrain options that is key. Hence, previously Nissan showcased the Cube EV, itself a variant from the Micra/March platform – with claims that a full EV line-up will be available by 2012 ranging from the Cube to compacts to sedans to MPVs to sportscars. [Highly debatable as a volume offering in our opinion given the stretch on resources and endemic technical limitations; more a case of low volume 'crafted' EV variants for positive publicity within that timeframe. However creating such segment specific Evs even at low volume will provide invaluable engineering and business plan learning). Thus the Micra production line in Sunderland – or an offshoot of it - appears feasibly able to assemble the Cube EV for the UK and Euro markets, but Nissan must lobby for increased e-charge infrastructure beyond the £20m currently set aside.
However, there is general sentiment amongst industry analysts is that electric and plug-in hybrid cars are unlikely to be adopted widely in the short-medium term without generous incentives to underwrite the cars’ typically higher purchase price.
As we saw with Prius1 & Prius2, much of the cars price suppression for market acceptability came from Toyota's swallowing of costs as a loss-leader tactic. Of course the ramped volumes of Prius gave economies of scale that reduced Toyota's Ni-MH battery and motor costs, and to a certain lesser extent the same can be said of Honda after its less successful Civic hybrid effort. And Nissan-Panasonic will have created detailed business cases for each of their EV model-lines, though-based on only outline volume forecasts. These e-drive R&D and production costs will still be substantive compared to standard ICE – and even ICE developments - given that on national, regional and global TIV terms the number of 'early-adopter' consumers who absorbed the brunt of the apportioned development costs has been comparatively small.
Geoff Hoon said that incentives announced on Thursday would help to make electric cars a “real option” for motorists. But of course much depends on varying consumer types vehicle usage needs, their attitude & 'psychographic' and of course the allotment of the £2000-5000 subsidies. With specific reference to EV options they need to be awarded in a manner that pro-actively rewards newer and better vehicles, and not simply propping-up old yesteryear models. To do so would simply create an evolutional vacuum in which the extended life of the “Noddy Car” type of EV would tarnish the genre and public attraction; which would do more harm than good.
Britain's policy-makers are now catching-up with EU contemporaries that have been 'incentivising' low-carbon cars - ie Denmark, Norway, France & Portugal - which have tax-based policies. The UK looks unready to go that far yet, given the reliance on motoring tax and the massive fiscal deficits that need financing. So Gordon Brown's announcement that he wanted all cars on Britain’s roads to be electric or hybrid by 2020 looks unrealistically-optimistic; especially so given the increasing likelihood of a Conservative government winning the next election and David Cameron's pledge to be fiscally responsible which probably means increasing taxation across all fronts – consumer durables included.
For the UK at least, that means the UK auto-industry, led by its Japanese 'Sensi' should create 'must have' rational yet highly attractive products. Vehicles which engender a sector-snowball effect in their wake for the development of a new 'eco-tech' industrial terrain for Britain's “Green and Pleasant Land”.
Sunday, 12 April 2009
Macro-Level Trends - JP Morgan-Chase & Chrysler - When "Social Activism" Hurts the Economy.
As the issues at the heart of the US Autos malais snowball and the tri-partite stake-holders, consisting of the VMs, the UAW and Investors, seek to understandably defend their positions, the danger of illogical cognitive entrenchment within certain quarters grows.
This appears to be the recent case where US social activists have called for a boycott of JP Morgan Chase. The protest centres around the bank’s opposal to the government proposal/demand that it should cancel a large portion of Chrysler's debt to theoretically keep the embattled Detroit carmaker afloat.
The activism of the Firedoglake blogsite and Progress Michigan, an advocacy group, argue that JPMorgan - as a recipient of billions of dollars in taxpayers’ money - has a duty to help save jobs at Chrysler.
What is not understood by these people is that Wall St, like it or not, is the economic heart and engine of the country and portions of the world - even today in its depleted state. Unlike Chrysler's case - where it could be argued that in a market of over-capacity it is not a 'core' or financially viable entity and deserves to be treated as Lehman Brothers was - JP Morgan-Chase acts as a major artery to the financial heart.
Thus objectively the needs and rationality of public assistance funding is very different indeed. JP Morgan-Chase's case maintains systemic harmony, whilst Chrysler's public assistance (esp without FIAT intervention) effectively keeps the unviable entity on life-support.
The activist groups have urged JPMorgan clients to transfer their accounts to a local bank or credit union, and to cut up their Chase credit cards. One member of a Facebook group set up by the activists commented on Thursday that "if [JP Morgan] wants our money, they’d better do what they can to save our jobs".
Such overt 'socialism' may at first impression appear worthy by its sentiment, but given the true complexities of the US economy, is ultimately ridiculous, short-sighted and myopic. JP Morgan-Chase's primary duty of care is not to Chrysler's UAW members, but to the dual 'wards' of its investors and the broad US populous & beyond, developing its own strength as a financial intermediary. A role as critical entity between (state-guaranteed) public depositors, business depositors, the financial markets and on the counter-side those businesses and people that have respective growth and consumption plans - thus the prime actors of the economy.
Of course negotiations between the bank and the government are on-going, but an overly steep "haircut" regards the Chrysler debt holdings would undermine the banking company, its banking peers and their shareholders. Banks presently need to show as strong as possible Balance Sheets and P&Ls if they are to lead other industrial sectors and the rest of the economy out of this worrisome period for all.
That is not to say that it should not abstain from such a 'haircut", but simply that it should not leave itself exposed to catch a consequential head-cold. Thus a ratio-rate and other options must be agreed, but debt-holders across the US would be done a dis-service if that "hair-cut" was too severe.
Such an action would severely dismay those who are now buying debt in the raft of troubled US comapanies and so keeping them liquid and trading. This critical body of domestic and foreign institutions, PE and individuals today see corporate notes and bonds as not the generally 'risk-free' instruments they used to be (given today's poor ratings) but as last ports of call before retrenching from the markets altogether; which would result in a further collapse of the economic framework - one that would be irreversable.
The government previously proposed that JP Morgan-Chase and its peers Citi (@ $1bn), Goldman Sachs and Morgan Stanley (@2.5bn) accept approximately 29c on the $, which given their top-tier lien status and secured assets was obviously unnacceptable - and seen as simply a 'low-ball' negotiating ploy by Washington. Since then negotiations have upped the the dollar ratio rate and suggested debt for equity swaps - but realistically the short-medium term equity value of Chrysler 'as is' is debatably worthless (ie Marchionee's 'no cash' proposal offer).
So the banks may be happier to see a bancruptcy outcome and seizure of tangible and goodwill assets; knowing that such assets would be greatly prized by South Korean, Chinese and Indian auto-firms from Tier2 suppliers through to ambitious VMs, acquisitions undertaken individually or as a broader consortium. So too the highly-liquid world of eastern 'transactional agents' such as eastern SWFs and PE which are presently cash-rich and hunting for underpriced asset opportunities with obvious exit strategies.
Given the UAW's realistic 'minimal-clout' position within the Chrysler restructuring discussions, as the lower-tier beneficiaries it may find itself in the ironic positioning of seeking to quell those 'social activists' who may have greater success within the latter GM negotiations given GM's size and comparitive historical social responsibility.
Ultimately, no-one would want to disbar the right for free speech, it is after all a central tenant of US democracy. But such complex matters demand more understanding and attention than simplistic banner-waving, air-wave chatter and cyber-chatter. All parties face a hard task of turning America around, but that can only be done on the basis of a strong hub. And that 'financial fulcrum' is the banking sector. The longer it is malnourished, the longer the US's economic and social pain.
This appears to be the recent case where US social activists have called for a boycott of JP Morgan Chase. The protest centres around the bank’s opposal to the government proposal/demand that it should cancel a large portion of Chrysler's debt to theoretically keep the embattled Detroit carmaker afloat.
The activism of the Firedoglake blogsite and Progress Michigan, an advocacy group, argue that JPMorgan - as a recipient of billions of dollars in taxpayers’ money - has a duty to help save jobs at Chrysler.
What is not understood by these people is that Wall St, like it or not, is the economic heart and engine of the country and portions of the world - even today in its depleted state. Unlike Chrysler's case - where it could be argued that in a market of over-capacity it is not a 'core' or financially viable entity and deserves to be treated as Lehman Brothers was - JP Morgan-Chase acts as a major artery to the financial heart.
Thus objectively the needs and rationality of public assistance funding is very different indeed. JP Morgan-Chase's case maintains systemic harmony, whilst Chrysler's public assistance (esp without FIAT intervention) effectively keeps the unviable entity on life-support.
The activist groups have urged JPMorgan clients to transfer their accounts to a local bank or credit union, and to cut up their Chase credit cards. One member of a Facebook group set up by the activists commented on Thursday that "if [JP Morgan] wants our money, they’d better do what they can to save our jobs".
Such overt 'socialism' may at first impression appear worthy by its sentiment, but given the true complexities of the US economy, is ultimately ridiculous, short-sighted and myopic. JP Morgan-Chase's primary duty of care is not to Chrysler's UAW members, but to the dual 'wards' of its investors and the broad US populous & beyond, developing its own strength as a financial intermediary. A role as critical entity between (state-guaranteed) public depositors, business depositors, the financial markets and on the counter-side those businesses and people that have respective growth and consumption plans - thus the prime actors of the economy.
Of course negotiations between the bank and the government are on-going, but an overly steep "haircut" regards the Chrysler debt holdings would undermine the banking company, its banking peers and their shareholders. Banks presently need to show as strong as possible Balance Sheets and P&Ls if they are to lead other industrial sectors and the rest of the economy out of this worrisome period for all.
That is not to say that it should not abstain from such a 'haircut", but simply that it should not leave itself exposed to catch a consequential head-cold. Thus a ratio-rate and other options must be agreed, but debt-holders across the US would be done a dis-service if that "hair-cut" was too severe.
Such an action would severely dismay those who are now buying debt in the raft of troubled US comapanies and so keeping them liquid and trading. This critical body of domestic and foreign institutions, PE and individuals today see corporate notes and bonds as not the generally 'risk-free' instruments they used to be (given today's poor ratings) but as last ports of call before retrenching from the markets altogether; which would result in a further collapse of the economic framework - one that would be irreversable.
The government previously proposed that JP Morgan-Chase and its peers Citi (@ $1bn), Goldman Sachs and Morgan Stanley (@2.5bn) accept approximately 29c on the $, which given their top-tier lien status and secured assets was obviously unnacceptable - and seen as simply a 'low-ball' negotiating ploy by Washington. Since then negotiations have upped the the dollar ratio rate and suggested debt for equity swaps - but realistically the short-medium term equity value of Chrysler 'as is' is debatably worthless (ie Marchionee's 'no cash' proposal offer).
So the banks may be happier to see a bancruptcy outcome and seizure of tangible and goodwill assets; knowing that such assets would be greatly prized by South Korean, Chinese and Indian auto-firms from Tier2 suppliers through to ambitious VMs, acquisitions undertaken individually or as a broader consortium. So too the highly-liquid world of eastern 'transactional agents' such as eastern SWFs and PE which are presently cash-rich and hunting for underpriced asset opportunities with obvious exit strategies.
Given the UAW's realistic 'minimal-clout' position within the Chrysler restructuring discussions, as the lower-tier beneficiaries it may find itself in the ironic positioning of seeking to quell those 'social activists' who may have greater success within the latter GM negotiations given GM's size and comparitive historical social responsibility.
Ultimately, no-one would want to disbar the right for free speech, it is after all a central tenant of US democracy. But such complex matters demand more understanding and attention than simplistic banner-waving, air-wave chatter and cyber-chatter. All parties face a hard task of turning America around, but that can only be done on the basis of a strong hub. And that 'financial fulcrum' is the banking sector. The longer it is malnourished, the longer the US's economic and social pain.
Wednesday, 8 April 2009
Industry Practice – VW China – When Case Studies Prove All Too Academic
Business Schools have for some time now firmly been in the business of business. As commercial enterprises in their own idiom, they by rights, should be at the cutting edge of business learning; delving deeper and uncovering the truisms of commercial best practice across all spheres. From the high-brow philosophical such as innate structure of capitalism (as we see today) to the more everyday, directly applicable, such as the sector or company exemplar case-study; intended to illuminate understanding through best practice or abysmal failure.
The 2 obvious cases written into the annuls of the auto-industry being Toyoda/Toyota's Jidoka/Kaizen ethos encapsulated by the TPS system (that has supposedly become sector ubiquitous - though has it really?) versus Ford's painful business losses with Edsel.
Given its scale and capital intensiveness, the auto-industry has long been academia's hobby-horse, often used as a high-profile, publicly digestible, valid illustration for the theories behind the advancement of general management theory. Though to be candid, very little true, auto-industry specific, advancements have been made – possibly because many Masters and PhD researchers see it as a matured, yesteryear, smoke-stack industry which is endemically stuck in a paradigm. There are of course specialist research centres such as 'CAR' in Ann Arbor (led by David Cole) and Cardiff Business School's 'CAIR' (led by Paul Nieuwenhuis - since Garyl Rhys' retirement), but general dedication to progressing the automotive learning curve across other realms of academia seems largely absent – the auto-industry used as a case-study contextual backdrop for general theory rather than true conceptual advancement – a great shame given the spectrum of activity to be observed and critiqued.
The commercialisation of education – rightly most prevalent with business schools - was intended to generate market competition and so raise the bar of academic standards. The level of research publication has long been a primary measures of an educational establishment's prowess, its productive output which makes it a seemingly attractive proposition for new 'clients' (students) that in turn generate fees and growth. But in such an age where quantity over-rides quality, the very value and nature of post-graduate research is put in perilous danger as it gathers toward and rides populist or salable business concepts; the universities themselves caught between the tenants of true learning that aids industry and commerce versus the need to be seen to be current, news-worthy and so externally viewed as an attractive service offering.
This is perhaps especially so the case for the plethora of establishments that cannot boast the pedigree - and concomitant 'high-achiever centripetal attraction' - of the old-guard such as Harvard, MIT, 'Ox-bridge', LSE, INSEAD et al; but are forced by the very nature of the enterprise culture to grow. Especially so as supposed 'intellectual lights' across the developing regions of the world that are hungry for the western educational model.
Thus the inherent pressure leads Vice-Chancellors, Deans, Governors and commercially-orientated faculty to all to often create a research-base & structure erected by thematic popularism and corporate jargonism rather than perhaps the real enterprise issues of today, tomorrow, medium-term, long-term and far- future. Given the massive tide of investor, corporate, public and academic interest in BRIC+ Emerging Markets, and their influence on global economics, it is right that a large proportion of focus and effort is directed at the market, consumer and corporate behavior in EM regions. But, there is a world of difference between re-conveying age-old business learning concepts in a new EM setting and the reality of pushing the boundaries of truly progressive learning that has real-world application for general commercial and specific corporate-model advancement.
Sadly, this appears the case with a UK university research piece highlighted in a recent 'Emerging Markets' press pull-out item. [NB it is the press' remit to simply report what it considers useful academic intelligence, not to qualify the foundational basis of such].
In the desire to concoct an attractive and importantly salable research product, a research duo from an English & Scottish universities spend 5 years (as what must have been part of PhD) evaluating the fortunes of 30 renowned (Western) multi-national companies & brands within that most dynamic of BRIC+ economic whirlwinds - China. The duo use Volkswagen as their headline, illustrative test-case so as to try to prove their argument.
The argument set forward is that “rigidity” evident in 4 guises (corporate, strategic, operational & mindset) has been a prime contributor of “poor-performance” for the surveyed MNC's in the 2003-08 period. The central theme is that these corporations failed to stay aware of fast changing consumer and regulatory (environment) conditions, rendering existing beliefs and practices irrelevant.
They apparently simplistically state that in 2003 VW held 30% of the Chinese car market, yet in 2008 that figure fell to 17.3%, with an accordant slip in profitability to in 2008 “failing to reach break-even”, while sales & market-share by rivals (eg GM, Toyota, Honda) has increased.
VW it is claimed: “misjudged the market, assuming that China as an EM that previously accepted lower specification models would continue to favour cheaper VW cars that sold well in other international markets”. Thus, “the company failed to anticipate the dynamic patterns of local demand and under-estimated of the dazzling increase in investment by its global and local rivals”...”this rigidity to change casts shadows over the company's ambitious growth plans in China”
But just how plausible are these assertions, if Volkswagen Group China (VGC) is reviewed in the round and in situational context?
Yes of course VW has lost market-share as the veritable consumer revolution gained power over the 03-08 period. It was only to be expected, and well understood by VW, that its once overwhelmingly dominant (pseudo-monopolistic) position as the government's favoured JV partner would slowly fade as the potential promise of the economic & consumer revolution became reality thereby massively enlarging the TIV (total industry volume) for all players, old and new alike. The official automotive body CAAM states that between 2002-2007 production erupted from 1.09m units to 4.95m units; for that period representing an annual growth of 35%. However, post Q308 that growth has slowed to just below 20% as the Chinese economy continued to retract on the back of housing and stock-market contraction lag effects and the recent record 'pull-back' in exports.
But looking at those 'good years' and beforehand, VW grew its product portfolio from 1 car (the iconic 1984 Santana) to in 2009 15 models - 8 models from Shanghai-VW (covering VW & Skoda brands) and 7 from FAW-VW (covering VW & Audi brands). [NB VWC will claim 44 models but this figure bear relation to model variants, ie powertrain and trim variants – 26 of those produced in China). However, interestingly the original Santana in normal 'Classic' and face-lifted 'Vista' guise still a core product and a consistent top-2 sales ranked model for VGC.
Thus given its endemic history in the country and boasting that it responsible for 20% of all of China's automotive sector investment, VGC finds itself spanning the greatest consumer demand remit: from that robust, well loved Santana amongst taxi-drivers and value-seeking consumers to the offering of premium Audi cars giving European cache and in the case of LWB A6, limousine service that is part and parcel of a stratified society.
Thus the academics' central tenant that VWC has not kept apace with competition in terms of looks unfounded, and it must be stated that their prime-identifier of 'specification' as the competitive benchmark is overtly generalistic and somewhat naive given the very high market regard for price and reliability.
But of course the market itself is stratified across many types of buyer/user – functionality, life-stage, demographic and psychological orientation – creating a wide milieu.
To a large extent, it was the recently emergent, 'nouveau-riche' lower-middle class that many of those new domestic auto-producers – that the academics pitch against VW – sought out. Using older platform technologies from Japanese and Korean origins with low Cap-Ex and high labour content, they were able to create often simply face-lifted or copy-cat cars that had an appearance of modernity, with specificational 'bells & whistles', but little product integrity selling at low-end prices. To maintain long-term standing VW were correct in not chasing the ball of such a margin, profit & credibility de-basing game.
That 'gold-rush mentality' led to the expected consequence of eventual over-capacity taking effect from late 2007 onwards, the new squeeze of seeming ever-elastic, downward market-pricing chasing away the marginal cost economies of scale, and so diminishing the once highly attractive business model born from 'sparkly lower-end and even medium-priced' cars. Only those 'new domestics' that organically evolved their own strength, or well vetted 'bolt-on' acquisitions or were a sub-division of a financially conglomerate will continue to survive.
[But this period of domestic contraction and consolidation will have been closely observed by the investment community and trade-buyers with perhaps overt banker influence. Portfolio acquisitions throughout the value chain from suppliers to dealers will be eyed by PE and banking advisors, as will the opportunity for 'Value' and 'Growth' stock-picking as we've recently witnessed here in an 'Auto-Rebound' Europe on the back of national stimulus packages; which could pale in comparison besides China's allocation of its $5 trillion].
The academics also cite the market-share growth success of peer foreign firms such as GM, Toyota and Honda as evidence of VWC's malaise. But it must be stated that GM, whilst in situ for some years with the Buick brand consciously maintained a relatively low profile for some time instead of 'taking-on' VW earlier, waiting until the consumer boom to sell its Buick cars and latter-day utility orientated Chevrolets. Whilst the Japanese were relative late-comers to the market, specifically waiting for a point of market maturity to slowly satiate the consumer demand and maintain pricing.
Thus in actuality VWC has had to play a much more complex game compared to the niche ploys of the majority of domestic new comers and the entry-timing ploys of its MNC peers. As such, given the consistent rise in sales for VW, Skoda and Audi brands it has done so successfully. It has grown Chinese sales from 910,000 units in FY07 to 1,024,000 units in 2008; thereby up 12.5% YoY - according to Hans Dieter Potsche's recent presentation at the corporation's Citigroup London Roadshow on 16.03.09.[Of these 844,000 were VW, 119,000 were Audi, 59,300 were Skoda]
Looking forward the Chinese and Global market is heavily down YoY, so all manufacturers – domestic and foreign – will be adjusting capacity to re-align. But for VW the important introduction of the Lavida mid-sized saloon at end-08, and roll-out of eco sub-branded variants will add marketing fire-power. But perhaps of real consequence and advantage to VW is the 'de-frothing' of the car-market as the 'momentary joy-rider' consumers fall-away and it returns to its previous normative characteristics set by YoY core customers that seek trusted brands, value for money at purchase / through life / residual value and not necessarily cheapness and gimmicks. And importantly a trusted brand. This return of conservatism will mean flatter but more stable sales growth for which VW is well positioned.
This very basic analysis suggests that VWC has not lost its way, instead using recent times and the current period to re-strengthen its hold on the Chinese market via greater localised parts sourcing and assembly, improved product management (as with Lavida's development story as a China only car), the use of its 3 brands Skoda-VW-Audi to target core segment [and importantly re-highlight that the public] aswell as maintaining R&D & plant investment
Thus, from academia's perspective, a research focal-point that juxtaposes the audience interests of a Blue-Chip firm and EM market evolution is undoubtedly alluring. But our concern is that VW as a case-study seems to have been 'back-fitted' into a pre-determined hypothesis – to prove that its 'commercial gold' had lost its lustre. Even though brief, closer inspection undermines the evidence set forth.
From a big-picture perspective, there is very probably an argument that can be favourably presented that highlights that the 'structural shape' of large-scale heavy-industry enterprises born from statist-roots should be assessed; to ensure that the commercial creature naturally evolves 'in-tune' with emerging consumer market demands and is not inadvertently stifled and constricted by an endemically bureaucratic culture yields painfully slow transformation.
Thus as China as a country transforms from a production-led culture to a market-led culture, so the pros and cons of the Joint-Venture enterprise system which VWC, its 14 sub-holdings, and many other MNCs are founded upon should be rightly questioned. Does such an enterprise culture befit a 21st century China?
Of course there will always be the notion that such reports are used as political propaganda, as 'intellectual mechanisms of leverage' to engender structural change within the very heart of Chinese 'Command-Capitalism'. Whether orchestrated or not, there seems just cause for a continued liberalisation of China's industrial structure, because it in turn serves as the vehicle for the evolution and maturation of its domestic financial markets framework; an area which even with recent examples of 'exploring burned fingers' [ie Blackstone * US Banks]must be developed to create a fully fledged 'free-market' economy that is entwined with the global finance infrastructure.
However, whilst the efforts of such academics are undoubtedly meant to serve as platforms for discussion and progress, there simply must be greater constructs of argument if the hypothesis is not to be discredited by a sound antithesis. Instead in the best academic tradition the 2 must be conjoined to provide sound progressive synthesis.
The 2 obvious cases written into the annuls of the auto-industry being Toyoda/Toyota's Jidoka/Kaizen ethos encapsulated by the TPS system (that has supposedly become sector ubiquitous - though has it really?) versus Ford's painful business losses with Edsel.
Given its scale and capital intensiveness, the auto-industry has long been academia's hobby-horse, often used as a high-profile, publicly digestible, valid illustration for the theories behind the advancement of general management theory. Though to be candid, very little true, auto-industry specific, advancements have been made – possibly because many Masters and PhD researchers see it as a matured, yesteryear, smoke-stack industry which is endemically stuck in a paradigm. There are of course specialist research centres such as 'CAR' in Ann Arbor (led by David Cole) and Cardiff Business School's 'CAIR' (led by Paul Nieuwenhuis - since Garyl Rhys' retirement), but general dedication to progressing the automotive learning curve across other realms of academia seems largely absent – the auto-industry used as a case-study contextual backdrop for general theory rather than true conceptual advancement – a great shame given the spectrum of activity to be observed and critiqued.
The commercialisation of education – rightly most prevalent with business schools - was intended to generate market competition and so raise the bar of academic standards. The level of research publication has long been a primary measures of an educational establishment's prowess, its productive output which makes it a seemingly attractive proposition for new 'clients' (students) that in turn generate fees and growth. But in such an age where quantity over-rides quality, the very value and nature of post-graduate research is put in perilous danger as it gathers toward and rides populist or salable business concepts; the universities themselves caught between the tenants of true learning that aids industry and commerce versus the need to be seen to be current, news-worthy and so externally viewed as an attractive service offering.
This is perhaps especially so the case for the plethora of establishments that cannot boast the pedigree - and concomitant 'high-achiever centripetal attraction' - of the old-guard such as Harvard, MIT, 'Ox-bridge', LSE, INSEAD et al; but are forced by the very nature of the enterprise culture to grow. Especially so as supposed 'intellectual lights' across the developing regions of the world that are hungry for the western educational model.
Thus the inherent pressure leads Vice-Chancellors, Deans, Governors and commercially-orientated faculty to all to often create a research-base & structure erected by thematic popularism and corporate jargonism rather than perhaps the real enterprise issues of today, tomorrow, medium-term, long-term and far- future. Given the massive tide of investor, corporate, public and academic interest in BRIC+ Emerging Markets, and their influence on global economics, it is right that a large proportion of focus and effort is directed at the market, consumer and corporate behavior in EM regions. But, there is a world of difference between re-conveying age-old business learning concepts in a new EM setting and the reality of pushing the boundaries of truly progressive learning that has real-world application for general commercial and specific corporate-model advancement.
Sadly, this appears the case with a UK university research piece highlighted in a recent 'Emerging Markets' press pull-out item. [NB it is the press' remit to simply report what it considers useful academic intelligence, not to qualify the foundational basis of such].
In the desire to concoct an attractive and importantly salable research product, a research duo from an English & Scottish universities spend 5 years (as what must have been part of PhD) evaluating the fortunes of 30 renowned (Western) multi-national companies & brands within that most dynamic of BRIC+ economic whirlwinds - China. The duo use Volkswagen as their headline, illustrative test-case so as to try to prove their argument.
The argument set forward is that “rigidity” evident in 4 guises (corporate, strategic, operational & mindset) has been a prime contributor of “poor-performance” for the surveyed MNC's in the 2003-08 period. The central theme is that these corporations failed to stay aware of fast changing consumer and regulatory (environment) conditions, rendering existing beliefs and practices irrelevant.
They apparently simplistically state that in 2003 VW held 30% of the Chinese car market, yet in 2008 that figure fell to 17.3%, with an accordant slip in profitability to in 2008 “failing to reach break-even”, while sales & market-share by rivals (eg GM, Toyota, Honda) has increased.
VW it is claimed: “misjudged the market, assuming that China as an EM that previously accepted lower specification models would continue to favour cheaper VW cars that sold well in other international markets”. Thus, “the company failed to anticipate the dynamic patterns of local demand and under-estimated of the dazzling increase in investment by its global and local rivals”...”this rigidity to change casts shadows over the company's ambitious growth plans in China”
But just how plausible are these assertions, if Volkswagen Group China (VGC) is reviewed in the round and in situational context?
Yes of course VW has lost market-share as the veritable consumer revolution gained power over the 03-08 period. It was only to be expected, and well understood by VW, that its once overwhelmingly dominant (pseudo-monopolistic) position as the government's favoured JV partner would slowly fade as the potential promise of the economic & consumer revolution became reality thereby massively enlarging the TIV (total industry volume) for all players, old and new alike. The official automotive body CAAM states that between 2002-2007 production erupted from 1.09m units to 4.95m units; for that period representing an annual growth of 35%. However, post Q308 that growth has slowed to just below 20% as the Chinese economy continued to retract on the back of housing and stock-market contraction lag effects and the recent record 'pull-back' in exports.
But looking at those 'good years' and beforehand, VW grew its product portfolio from 1 car (the iconic 1984 Santana) to in 2009 15 models - 8 models from Shanghai-VW (covering VW & Skoda brands) and 7 from FAW-VW (covering VW & Audi brands). [NB VWC will claim 44 models but this figure bear relation to model variants, ie powertrain and trim variants – 26 of those produced in China). However, interestingly the original Santana in normal 'Classic' and face-lifted 'Vista' guise still a core product and a consistent top-2 sales ranked model for VGC.
Thus given its endemic history in the country and boasting that it responsible for 20% of all of China's automotive sector investment, VGC finds itself spanning the greatest consumer demand remit: from that robust, well loved Santana amongst taxi-drivers and value-seeking consumers to the offering of premium Audi cars giving European cache and in the case of LWB A6, limousine service that is part and parcel of a stratified society.
Thus the academics' central tenant that VWC has not kept apace with competition in terms of looks unfounded, and it must be stated that their prime-identifier of 'specification' as the competitive benchmark is overtly generalistic and somewhat naive given the very high market regard for price and reliability.
But of course the market itself is stratified across many types of buyer/user – functionality, life-stage, demographic and psychological orientation – creating a wide milieu.
To a large extent, it was the recently emergent, 'nouveau-riche' lower-middle class that many of those new domestic auto-producers – that the academics pitch against VW – sought out. Using older platform technologies from Japanese and Korean origins with low Cap-Ex and high labour content, they were able to create often simply face-lifted or copy-cat cars that had an appearance of modernity, with specificational 'bells & whistles', but little product integrity selling at low-end prices. To maintain long-term standing VW were correct in not chasing the ball of such a margin, profit & credibility de-basing game.
That 'gold-rush mentality' led to the expected consequence of eventual over-capacity taking effect from late 2007 onwards, the new squeeze of seeming ever-elastic, downward market-pricing chasing away the marginal cost economies of scale, and so diminishing the once highly attractive business model born from 'sparkly lower-end and even medium-priced' cars. Only those 'new domestics' that organically evolved their own strength, or well vetted 'bolt-on' acquisitions or were a sub-division of a financially conglomerate will continue to survive.
[But this period of domestic contraction and consolidation will have been closely observed by the investment community and trade-buyers with perhaps overt banker influence. Portfolio acquisitions throughout the value chain from suppliers to dealers will be eyed by PE and banking advisors, as will the opportunity for 'Value' and 'Growth' stock-picking as we've recently witnessed here in an 'Auto-Rebound' Europe on the back of national stimulus packages; which could pale in comparison besides China's allocation of its $5 trillion].
The academics also cite the market-share growth success of peer foreign firms such as GM, Toyota and Honda as evidence of VWC's malaise. But it must be stated that GM, whilst in situ for some years with the Buick brand consciously maintained a relatively low profile for some time instead of 'taking-on' VW earlier, waiting until the consumer boom to sell its Buick cars and latter-day utility orientated Chevrolets. Whilst the Japanese were relative late-comers to the market, specifically waiting for a point of market maturity to slowly satiate the consumer demand and maintain pricing.
Thus in actuality VWC has had to play a much more complex game compared to the niche ploys of the majority of domestic new comers and the entry-timing ploys of its MNC peers. As such, given the consistent rise in sales for VW, Skoda and Audi brands it has done so successfully. It has grown Chinese sales from 910,000 units in FY07 to 1,024,000 units in 2008; thereby up 12.5% YoY - according to Hans Dieter Potsche's recent presentation at the corporation's Citigroup London Roadshow on 16.03.09.[Of these 844,000 were VW, 119,000 were Audi, 59,300 were Skoda]
Looking forward the Chinese and Global market is heavily down YoY, so all manufacturers – domestic and foreign – will be adjusting capacity to re-align. But for VW the important introduction of the Lavida mid-sized saloon at end-08, and roll-out of eco sub-branded variants will add marketing fire-power. But perhaps of real consequence and advantage to VW is the 'de-frothing' of the car-market as the 'momentary joy-rider' consumers fall-away and it returns to its previous normative characteristics set by YoY core customers that seek trusted brands, value for money at purchase / through life / residual value and not necessarily cheapness and gimmicks. And importantly a trusted brand. This return of conservatism will mean flatter but more stable sales growth for which VW is well positioned.
This very basic analysis suggests that VWC has not lost its way, instead using recent times and the current period to re-strengthen its hold on the Chinese market via greater localised parts sourcing and assembly, improved product management (as with Lavida's development story as a China only car), the use of its 3 brands Skoda-VW-Audi to target core segment [and importantly re-highlight that the public] aswell as maintaining R&D & plant investment
Thus, from academia's perspective, a research focal-point that juxtaposes the audience interests of a Blue-Chip firm and EM market evolution is undoubtedly alluring. But our concern is that VW as a case-study seems to have been 'back-fitted' into a pre-determined hypothesis – to prove that its 'commercial gold' had lost its lustre. Even though brief, closer inspection undermines the evidence set forth.
From a big-picture perspective, there is very probably an argument that can be favourably presented that highlights that the 'structural shape' of large-scale heavy-industry enterprises born from statist-roots should be assessed; to ensure that the commercial creature naturally evolves 'in-tune' with emerging consumer market demands and is not inadvertently stifled and constricted by an endemically bureaucratic culture yields painfully slow transformation.
Thus as China as a country transforms from a production-led culture to a market-led culture, so the pros and cons of the Joint-Venture enterprise system which VWC, its 14 sub-holdings, and many other MNCs are founded upon should be rightly questioned. Does such an enterprise culture befit a 21st century China?
Of course there will always be the notion that such reports are used as political propaganda, as 'intellectual mechanisms of leverage' to engender structural change within the very heart of Chinese 'Command-Capitalism'. Whether orchestrated or not, there seems just cause for a continued liberalisation of China's industrial structure, because it in turn serves as the vehicle for the evolution and maturation of its domestic financial markets framework; an area which even with recent examples of 'exploring burned fingers' [ie Blackstone * US Banks]must be developed to create a fully fledged 'free-market' economy that is entwined with the global finance infrastructure.
However, whilst the efforts of such academics are undoubtedly meant to serve as platforms for discussion and progress, there simply must be greater constructs of argument if the hypothesis is not to be discredited by a sound antithesis. Instead in the best academic tradition the 2 must be conjoined to provide sound progressive synthesis.
Wednesday, 1 April 2009
Industry Structure - US Autos Inc - GM's Need for its own G20 inspired 'A-Team'
As the press has re-iterated time after time, President Obama has a long list of domestic and international issues to address. As he and the other G20 leaders meet today, at London's Excel Centre on the River Thames, discussion will obviously centre upon the fractious issues of:
1. Additional Stimulus Packages - their size, speed & alignment; to feed additional liquidity into the seemingly ever absorbent sponge of the global financial system.
[As a pre-cursor to that debate, George Soros spoke yesterday (31.03.09) at the LSE Business School, extolling the need for governments to recognise the role of SDRs (Special Drawing Rights) as a powerful unitary & unifying currency instrument].
2. Regulatory Reform - at national & international levels; Gordon Brown probably using Lord Turner's recent report as a template offering; noting the absence of a Glass-Steagall-like measure which suggests that a level of 'inter-play' between Retail & Investment is desired to rally international economies (esp given the massive Chinese/Asian savings-base).
3. Anti-Protectionism - the willingness to brave domestic wrath; as poignantly demonstrated by Obama's hard-line with Detroit only a few days before. [NB France, Italy, Russia, et al]
That last point has of course has been a primary bone of contention in the mid-west US, especially given the close yet policy-sensitive Obama-Granholm relationship; and the President's own ability to lead his Michigan-based Democrat voters through hard policy terrain. The fiscal backing of Detroit via Auto-Aid packaged was awarded contingent demands that it transform, but subsequent 'term-reports' stating "can do better" has of course led to the loss of Wagoner as perhaps the symbolic gesture of change. Better extremely late than never, and an initiative which must lead to a natural critique of the whole of GM's Board for future effectiveness.
As part of that change-mechanism Obama has of course installed change-agents like Steven Rattner, Ron Bloom, Diana Farrell & Brian Deese. Critics state that the innate auto-industry knowledge of this important team leaves much to be desired. None having actually worked within the innards of the sector highlights the concern that they cannot truly discern the depths of the 'truisms' set forward by all stake-holding parties: GM & Chrysler, the UAW, the corporate bond-holders et al - excluding the internal demands of the public budget setters within the Treasury Dept itself. Even a team of 30+ advisors cannot provide the type of 'second-nature' understanding and judgements required.
Even so, the onus to create viable, indeed prosperous, industrial policy framework for US Autos, rests on the shoulders of Rattner & Bloom because with their previous incarnations as Lazard Freres & Co investment bankers they will should know how to ultimately create a viable investment framework. Previous Wall St and present White House posts require them to maximise company and intra-sector value-creation; done so by deconstructing all the prime elements of the US automotive industry (with its international links) and setting out a formula for its re-construction.
This re-orientation of such a large contingent of the US economy will provide short, medium and long-term impetus into the banking sector and financial markets. Book Runners, Underwriters and Investors should gain confidence in the very process sector re-structuring aswell of course the ROI potential of a re-aligned - more efficient / customer-centric / more profitable - industry.
Howver, at present even the creation of such a necessary template seems far off, given Washington's 'bounce-back' of the auto-maker's strategic plans laid-out this week, and the presently entrenched positions of Bond-holders and the UAW - each of the 3 main constituents looking to eachother for 'next-move' compromise. The FT equates the situation to a 3-D chess board and the WSJ re-quotes Rattner's analogy regards the "complexity of a Rubik's Cube".
Reports state that Washington sees Chrysler as the immediate problem child given its smaller scale comparative to big fiscal demands. So with a 1 month dead-line, eyes are perhaps presently more narrowly focused upon the Chrysler-FIAT alliance talks. This in turn has set the context that Chrysler could seek other additional new alliance partners to steady its fate; which would engender a return to its normative, historical rescue stratagems. However the alliance model appears a favoured route for many players given the operating concerns of other withering VMs (such as Opel, PSA & TATA). Such a large consortium could lead to a new US-Euro-Asia 'tri-continental' alliance template that theoretically out-guns Renault-Nissan's bi-continental structure that has been so powerful in synergy seeking and capacity strengthening.
[Marchionne has very probably been reviewing this schema for FIAT's long-term survival].
(NB commendation to Paul Betts of the FT for also recognising and espousing this possibility).
With G20 and internationalism as the contextual backdrop, Washington would undoubtedly welcome such an outline plan, if the basic tenants of inter-party notional agreement can be set within the new 30-day return deadline.
Ironically looking toward GM, it could be argued that the company has been the very spirit and ethos of the G20 ethos given its global reach and influence over the last 80 years.
As Wagoner departs and COO/CFO Henderson becomes new CEO, we will hopefully see a new focus regards a deep and meaningful calculation of the innate $ value of the global business empire. As accounting and auditing methods & regulations seek greater global alignment, it is indeed timely that an internal-audit that de-constructs and values every aspect of the GM empire be undertaken; a truly indepth exercise that seeks to identify intrinsic value throughout the build-process inventory and far beyond. From the combined value of millions of 5mm washers sitting in production-line feed boxes to the field-stacked and dealer-stacked inventory of unsold and unpaid vehicles - from homeland Alabama to Zhong County in China.
GM veteran Henderson reputedly understands every operational dimension of the empire. As such will be privvy to the nooks and crannies of the company's international financial architecture - perhaps particularly where 'fair-value' or 'mark-to-market' estimations may have been overly pessimistic, or where land values haven't been formally updated for a good number of years. This knowledge, along with the raft of continued changes in plant closures, lay-offs and dealer consolidation should - obviated by symbolic CEO change - demonstrate the rapid need for change.
investment-auto-motives previously backed the notion of the auto-aid package for North America, given level of integration the sector has with the economy and its connections to European, Asian and EM regions. [NB investment-auto-motives did not back comparatively substantive 'crutch-support' for the UK or European sectors given their relatively advanced state]. But to our dismay, since that initial Bush announcement progress has been painfully slow. Detroit will undoubtedly point a finger at Washington given the governmental transition and tardiness in setting up a capable Autos-Governance Team, whilst Washington will point its finger at Detroit for being so demonstrably inept to react to visible sector trends, and the recent inability to charter a viable course forward, hardly out of the harbour with a still over-laiden boat and over-optimistic 'weather-outlook' today.
Although eyes are on Chrysler given its shorter dead-line date, its intrinsic 'boom & bust' experiences that have seen it create alliance-relationships time after time, aswell as its private ownership status, suggests that such operational flexibility & a 'simple' stake-holder model that it is more able to react as necessary to evolve and survive into a new state of being with buoyant business model.
GM is a very different beast, far larger and far less flexible in nature. A once dominant breed of automaker who's business model is 50 years past its prime and as such continues to diminish. Domestically re-sized with each recession but still having to bare an overtly heavy 'legacy' load, with now even the previously 'off-set' divisions in Europe & China under attack from the dual pincer squeeze of prestigious and affordable competitor brands squeezing the mainstream.
The evident fiscal and structural inefficiencies of GM come to light, and though there are probably the previously mentioned 'accounting rabbits to be pulled from regional hats' such tactics are at best medium-term salvos.
The world had changed immensely for GM even before the consequences of the global financial fiasco. GMAC was undoubtedly a prime player within that fiasco, but also acted as a major support pillar to GM before the markets and it crumbled. Thankfully the 51% sell-off to Cerberus helped diminish GM's own CDO-linked balance-sheet liabilities, a very necessary and timely exercise whos immediate benefit out-weighed the long-term rebound advantages of GMAC as a Bank Holding Co and a TARP recipient.
That means that GM's ability to lean on financial engineering as much as vehicle engineering has largely diminished. And that is undoubtedly a good thing. Like similar manufacturers shawn of their finance houses, the real picture of vehicle manufacturing efficiency, productivity and profitability will come into vivid focus. And that is a very necessary paradigm-shift for government and investors alike.
As such GM and US Autos will be looking to Rattner & Bloom to separate the 'wheat from the chaff'. They will need to undertake full and frank 'top-down', 'bottom-up' and truly 'holistic' analysis of GM and the whole sector to better understand how The General and sector participants would best re-structure and evolve.
Never before has GM, the US Auto-Sector, the US Administration and the international community needed an 'A-Team' to prevail as much as today - generating and executing an accomplished action plan.
Inadvertently or not, GM may be 'the' real-world, sector-giant, 'live' case-study for the G20. Highlighted as a real-time example affected by the forces of global flux - its possible regional or divisional break-up a definitive 'tour de force' of US anti-protectionist sentiment.
Perhaps the G20 summit will mobilize a very different set of auto-sector-centric heroes that promote the philosophy of international trade - at financial and physical levels -to assist in the re-alignment of a US industry that for far too long has exhibited a general trend for diminishing marginal returns. To do so would boost investor confidence and oil the cogs of seized financial markets.
Thus, as an epilogue, it must be the pinnicle of irony that it was GM itself that manufactured the now serendipitously titled GMC G20 Van that transported those TV-based 'A-Team' heroes!
1. Additional Stimulus Packages - their size, speed & alignment; to feed additional liquidity into the seemingly ever absorbent sponge of the global financial system.
[As a pre-cursor to that debate, George Soros spoke yesterday (31.03.09) at the LSE Business School, extolling the need for governments to recognise the role of SDRs (Special Drawing Rights) as a powerful unitary & unifying currency instrument].
2. Regulatory Reform - at national & international levels; Gordon Brown probably using Lord Turner's recent report as a template offering; noting the absence of a Glass-Steagall-like measure which suggests that a level of 'inter-play' between Retail & Investment is desired to rally international economies (esp given the massive Chinese/Asian savings-base).
3. Anti-Protectionism - the willingness to brave domestic wrath; as poignantly demonstrated by Obama's hard-line with Detroit only a few days before. [NB France, Italy, Russia, et al]
That last point has of course has been a primary bone of contention in the mid-west US, especially given the close yet policy-sensitive Obama-Granholm relationship; and the President's own ability to lead his Michigan-based Democrat voters through hard policy terrain. The fiscal backing of Detroit via Auto-Aid packaged was awarded contingent demands that it transform, but subsequent 'term-reports' stating "can do better" has of course led to the loss of Wagoner as perhaps the symbolic gesture of change. Better extremely late than never, and an initiative which must lead to a natural critique of the whole of GM's Board for future effectiveness.
As part of that change-mechanism Obama has of course installed change-agents like Steven Rattner, Ron Bloom, Diana Farrell & Brian Deese. Critics state that the innate auto-industry knowledge of this important team leaves much to be desired. None having actually worked within the innards of the sector highlights the concern that they cannot truly discern the depths of the 'truisms' set forward by all stake-holding parties: GM & Chrysler, the UAW, the corporate bond-holders et al - excluding the internal demands of the public budget setters within the Treasury Dept itself. Even a team of 30+ advisors cannot provide the type of 'second-nature' understanding and judgements required.
Even so, the onus to create viable, indeed prosperous, industrial policy framework for US Autos, rests on the shoulders of Rattner & Bloom because with their previous incarnations as Lazard Freres & Co investment bankers they will should know how to ultimately create a viable investment framework. Previous Wall St and present White House posts require them to maximise company and intra-sector value-creation; done so by deconstructing all the prime elements of the US automotive industry (with its international links) and setting out a formula for its re-construction.
This re-orientation of such a large contingent of the US economy will provide short, medium and long-term impetus into the banking sector and financial markets. Book Runners, Underwriters and Investors should gain confidence in the very process sector re-structuring aswell of course the ROI potential of a re-aligned - more efficient / customer-centric / more profitable - industry.
Howver, at present even the creation of such a necessary template seems far off, given Washington's 'bounce-back' of the auto-maker's strategic plans laid-out this week, and the presently entrenched positions of Bond-holders and the UAW - each of the 3 main constituents looking to eachother for 'next-move' compromise. The FT equates the situation to a 3-D chess board and the WSJ re-quotes Rattner's analogy regards the "complexity of a Rubik's Cube".
Reports state that Washington sees Chrysler as the immediate problem child given its smaller scale comparative to big fiscal demands. So with a 1 month dead-line, eyes are perhaps presently more narrowly focused upon the Chrysler-FIAT alliance talks. This in turn has set the context that Chrysler could seek other additional new alliance partners to steady its fate; which would engender a return to its normative, historical rescue stratagems. However the alliance model appears a favoured route for many players given the operating concerns of other withering VMs (such as Opel, PSA & TATA). Such a large consortium could lead to a new US-Euro-Asia 'tri-continental' alliance template that theoretically out-guns Renault-Nissan's bi-continental structure that has been so powerful in synergy seeking and capacity strengthening.
[Marchionne has very probably been reviewing this schema for FIAT's long-term survival].
(NB commendation to Paul Betts of the FT for also recognising and espousing this possibility).
With G20 and internationalism as the contextual backdrop, Washington would undoubtedly welcome such an outline plan, if the basic tenants of inter-party notional agreement can be set within the new 30-day return deadline.
Ironically looking toward GM, it could be argued that the company has been the very spirit and ethos of the G20 ethos given its global reach and influence over the last 80 years.
As Wagoner departs and COO/CFO Henderson becomes new CEO, we will hopefully see a new focus regards a deep and meaningful calculation of the innate $ value of the global business empire. As accounting and auditing methods & regulations seek greater global alignment, it is indeed timely that an internal-audit that de-constructs and values every aspect of the GM empire be undertaken; a truly indepth exercise that seeks to identify intrinsic value throughout the build-process inventory and far beyond. From the combined value of millions of 5mm washers sitting in production-line feed boxes to the field-stacked and dealer-stacked inventory of unsold and unpaid vehicles - from homeland Alabama to Zhong County in China.
GM veteran Henderson reputedly understands every operational dimension of the empire. As such will be privvy to the nooks and crannies of the company's international financial architecture - perhaps particularly where 'fair-value' or 'mark-to-market' estimations may have been overly pessimistic, or where land values haven't been formally updated for a good number of years. This knowledge, along with the raft of continued changes in plant closures, lay-offs and dealer consolidation should - obviated by symbolic CEO change - demonstrate the rapid need for change.
investment-auto-motives previously backed the notion of the auto-aid package for North America, given level of integration the sector has with the economy and its connections to European, Asian and EM regions. [NB investment-auto-motives did not back comparatively substantive 'crutch-support' for the UK or European sectors given their relatively advanced state]. But to our dismay, since that initial Bush announcement progress has been painfully slow. Detroit will undoubtedly point a finger at Washington given the governmental transition and tardiness in setting up a capable Autos-Governance Team, whilst Washington will point its finger at Detroit for being so demonstrably inept to react to visible sector trends, and the recent inability to charter a viable course forward, hardly out of the harbour with a still over-laiden boat and over-optimistic 'weather-outlook' today.
Although eyes are on Chrysler given its shorter dead-line date, its intrinsic 'boom & bust' experiences that have seen it create alliance-relationships time after time, aswell as its private ownership status, suggests that such operational flexibility & a 'simple' stake-holder model that it is more able to react as necessary to evolve and survive into a new state of being with buoyant business model.
GM is a very different beast, far larger and far less flexible in nature. A once dominant breed of automaker who's business model is 50 years past its prime and as such continues to diminish. Domestically re-sized with each recession but still having to bare an overtly heavy 'legacy' load, with now even the previously 'off-set' divisions in Europe & China under attack from the dual pincer squeeze of prestigious and affordable competitor brands squeezing the mainstream.
The evident fiscal and structural inefficiencies of GM come to light, and though there are probably the previously mentioned 'accounting rabbits to be pulled from regional hats' such tactics are at best medium-term salvos.
The world had changed immensely for GM even before the consequences of the global financial fiasco. GMAC was undoubtedly a prime player within that fiasco, but also acted as a major support pillar to GM before the markets and it crumbled. Thankfully the 51% sell-off to Cerberus helped diminish GM's own CDO-linked balance-sheet liabilities, a very necessary and timely exercise whos immediate benefit out-weighed the long-term rebound advantages of GMAC as a Bank Holding Co and a TARP recipient.
That means that GM's ability to lean on financial engineering as much as vehicle engineering has largely diminished. And that is undoubtedly a good thing. Like similar manufacturers shawn of their finance houses, the real picture of vehicle manufacturing efficiency, productivity and profitability will come into vivid focus. And that is a very necessary paradigm-shift for government and investors alike.
As such GM and US Autos will be looking to Rattner & Bloom to separate the 'wheat from the chaff'. They will need to undertake full and frank 'top-down', 'bottom-up' and truly 'holistic' analysis of GM and the whole sector to better understand how The General and sector participants would best re-structure and evolve.
Never before has GM, the US Auto-Sector, the US Administration and the international community needed an 'A-Team' to prevail as much as today - generating and executing an accomplished action plan.
Inadvertently or not, GM may be 'the' real-world, sector-giant, 'live' case-study for the G20. Highlighted as a real-time example affected by the forces of global flux - its possible regional or divisional break-up a definitive 'tour de force' of US anti-protectionist sentiment.
Perhaps the G20 summit will mobilize a very different set of auto-sector-centric heroes that promote the philosophy of international trade - at financial and physical levels -to assist in the re-alignment of a US industry that for far too long has exhibited a general trend for diminishing marginal returns. To do so would boost investor confidence and oil the cogs of seized financial markets.
Thus, as an epilogue, it must be the pinnicle of irony that it was GM itself that manufactured the now serendipitously titled GMC G20 Van that transported those TV-based 'A-Team' heroes!
Tuesday, 24 March 2009
Macro-Level Trends – Germany Autos GmbH – Opel's Need for a Miraculous Lightening Bolt from Above....”Tiel Zwei”
As stated in the last item, Adam Opel's CEO has the unenviable position of having to metaphorically juggle the many balls of a growing number of corporate, financial and political stakeholders.
The recent episode of the dealer-base offering to prop-up the flailing GM division could well have been concocted behind closed doors between Opel seniors & the dependent dealers as a way of trying to force the Government's hand, recognising that the complexities and 'payback' of such an arrangement could only have worked with a complicit 'tax-payer backed' agreement from the the CDU (Christlich Demokratishe Union Deutschlands).
Angela Merkel, holding her ground, was having none of it, recognising the publicised initiative as simply a ruse within today's environment of 'Realpolitik'. But that and similar moves have played to the CDU's left-leaning co-alition partners – the SPD (Sozialdemokratishe Partei Deutschlands) - who given their prevalent socialist ideology are using such external efforts to leverage their own cause for re-election.
Given that the industrial heartlands of Germany are feeling economic pain, the mass populous Ruhr and Breman areas already SPD core areas are unfortunately (but understandably) becoming more and more persuaded the the party line of “social justice” - even if the debate regards the national budget accounting projections for such works are conveniently side-lined.
Part of that potentially ballooning budget deficit and GDP ratio is the issue of Adam Opel GmbH. With Lower Saxony's recently defended (19.9%) ' VW Law' re-setting a precedent, the Northern, Western & NorthWestern populous of comfortably-off factory workers, office staff and sections of management – the people who's prosperity soared thanks to fiscal conservatism and German productive efficiency – are waiting with baited breath for a similar deal for Opel.
This flawed “VW solution” has been prompted by apparent calls to do so from the SPD in the Bundestag chamber accompanied by the Labour Minister's (Olaf Scholz's) pronouncement in last weekend's national newspaper (Die) Bild – its tabloid content wrapped in a broadsheet format an unfortunate powerful conveyor of social influence.
The unsurprising retort from the CDU's Volker Kauder was that it would set a precedent for 'cross-the-board' sector and company bail-outs and must be resisted. Instead of the anti-market notions of Opel's partial (or even full) nationalisation, he repeated the line that Germany would be willing to provide state guarantees to Opel but it must first present a convincing turnaround plan. Whether that argument is real or yet another example of a tactic in 'Realpolitik' remains to be seen, given that GM HQ is pointedly seeking $4.5bn / €3.3bn in loan guarantees from European states, Germany financially the most heavily exposed given the size of Opel's innate car producing capacity and the associated 29,000 jobs.
Merkel's fractious relationship with her French peer Sarkozy has done nothing to assist her cause in recent weeks as he seeks to placate his public by having Renault re-shuffle / swap its production builds of Clio & Twingo between E.European and France; and by doing so thereby straining relations with Brussels given the 'spirit' of conditional EU financing.
Beyond the outward politics, the real problem emerging, as GM seeks to relinquish its stake in Adam Opel GmbH, is who would be willing to invest in the company? The government's distancing itself is understandable, probably less a result of business case dissuasion than it conveys and more a case of recognising that it would not be in the best interests of the public purse or ongoing economic transformation. But discounting one obvious candidate does not reveal an obvious other.
Unless a virtual protectorate of the state (France, Italy), the very basic tenants of traditional car-making have forced the industry to lower cost regions; the consequences of failing to do so now ever so evident in Detroit and across North America.
However, 'on paper' Opel could have a brighter future in a very different mould if it is given a level of free reign by GMHQ. Opel is a major contingent of GMNA's survival since it plays the role of medium car design developer (to S. Korea's GMDAT's small car division) as it presently provides the platforms and much of the technology know-how for small efficient powertrains that GMNA seek to re-balance its own domestic portfolio with. The Korean made small cars that have been shipped to the US with affixed Chevrolet badges have been poorly received given their engineering weaknesses, but the Saturn re-branded Opel derived cars, though small in number and incorrectly positioned, have won a modicum of favour.
The problem for any Opel investor seeking to profit from Opel's previous and current high-standing within the GM global empire is that, of course, much of the core design development capabilities could be transferred to GMNA leaving behind an operating enterprise that contains little beyond an empty shell. Potentially, whilst Opel flounders in Europe ill-equipped and short of capital, its operational DNA could be used to revive GMNA's engineering base that in turn pumps out small and medium cars from lower cost US, Canadian and vitally Mexican 'Maquiladora' factories.
This notion cannot be lost on Merkel or any 'white knight' investors, but of course as with any transaction the devil is in the detail of deal due diligence, sale contractual agreement and post-takeover due diligence.
But in the meantime, the German Government perhaps needs to undertake its own Opel Audit to better understand and assess how a very differently structured Opel could possibly enter a new age. That's what a number of international PE firms, Tier1s and 0,5s, the Chinese auto-sector and even GM (as a back-up plan) may well be doing at present.
Merkel should not be moved by public or GM/Opel pressures, but she and her cabinet would be wise to see how exactly Opel could be re-configured to suit different possible suitors with differing entry strategies.
The recent episode of the dealer-base offering to prop-up the flailing GM division could well have been concocted behind closed doors between Opel seniors & the dependent dealers as a way of trying to force the Government's hand, recognising that the complexities and 'payback' of such an arrangement could only have worked with a complicit 'tax-payer backed' agreement from the the CDU (Christlich Demokratishe Union Deutschlands).
Angela Merkel, holding her ground, was having none of it, recognising the publicised initiative as simply a ruse within today's environment of 'Realpolitik'. But that and similar moves have played to the CDU's left-leaning co-alition partners – the SPD (Sozialdemokratishe Partei Deutschlands) - who given their prevalent socialist ideology are using such external efforts to leverage their own cause for re-election.
Given that the industrial heartlands of Germany are feeling economic pain, the mass populous Ruhr and Breman areas already SPD core areas are unfortunately (but understandably) becoming more and more persuaded the the party line of “social justice” - even if the debate regards the national budget accounting projections for such works are conveniently side-lined.
Part of that potentially ballooning budget deficit and GDP ratio is the issue of Adam Opel GmbH. With Lower Saxony's recently defended (19.9%) ' VW Law' re-setting a precedent, the Northern, Western & NorthWestern populous of comfortably-off factory workers, office staff and sections of management – the people who's prosperity soared thanks to fiscal conservatism and German productive efficiency – are waiting with baited breath for a similar deal for Opel.
This flawed “VW solution” has been prompted by apparent calls to do so from the SPD in the Bundestag chamber accompanied by the Labour Minister's (Olaf Scholz's) pronouncement in last weekend's national newspaper (Die) Bild – its tabloid content wrapped in a broadsheet format an unfortunate powerful conveyor of social influence.
The unsurprising retort from the CDU's Volker Kauder was that it would set a precedent for 'cross-the-board' sector and company bail-outs and must be resisted. Instead of the anti-market notions of Opel's partial (or even full) nationalisation, he repeated the line that Germany would be willing to provide state guarantees to Opel but it must first present a convincing turnaround plan. Whether that argument is real or yet another example of a tactic in 'Realpolitik' remains to be seen, given that GM HQ is pointedly seeking $4.5bn / €3.3bn in loan guarantees from European states, Germany financially the most heavily exposed given the size of Opel's innate car producing capacity and the associated 29,000 jobs.
Merkel's fractious relationship with her French peer Sarkozy has done nothing to assist her cause in recent weeks as he seeks to placate his public by having Renault re-shuffle / swap its production builds of Clio & Twingo between E.European and France; and by doing so thereby straining relations with Brussels given the 'spirit' of conditional EU financing.
Beyond the outward politics, the real problem emerging, as GM seeks to relinquish its stake in Adam Opel GmbH, is who would be willing to invest in the company? The government's distancing itself is understandable, probably less a result of business case dissuasion than it conveys and more a case of recognising that it would not be in the best interests of the public purse or ongoing economic transformation. But discounting one obvious candidate does not reveal an obvious other.
Unless a virtual protectorate of the state (France, Italy), the very basic tenants of traditional car-making have forced the industry to lower cost regions; the consequences of failing to do so now ever so evident in Detroit and across North America.
However, 'on paper' Opel could have a brighter future in a very different mould if it is given a level of free reign by GMHQ. Opel is a major contingent of GMNA's survival since it plays the role of medium car design developer (to S. Korea's GMDAT's small car division) as it presently provides the platforms and much of the technology know-how for small efficient powertrains that GMNA seek to re-balance its own domestic portfolio with. The Korean made small cars that have been shipped to the US with affixed Chevrolet badges have been poorly received given their engineering weaknesses, but the Saturn re-branded Opel derived cars, though small in number and incorrectly positioned, have won a modicum of favour.
The problem for any Opel investor seeking to profit from Opel's previous and current high-standing within the GM global empire is that, of course, much of the core design development capabilities could be transferred to GMNA leaving behind an operating enterprise that contains little beyond an empty shell. Potentially, whilst Opel flounders in Europe ill-equipped and short of capital, its operational DNA could be used to revive GMNA's engineering base that in turn pumps out small and medium cars from lower cost US, Canadian and vitally Mexican 'Maquiladora' factories.
This notion cannot be lost on Merkel or any 'white knight' investors, but of course as with any transaction the devil is in the detail of deal due diligence, sale contractual agreement and post-takeover due diligence.
But in the meantime, the German Government perhaps needs to undertake its own Opel Audit to better understand and assess how a very differently structured Opel could possibly enter a new age. That's what a number of international PE firms, Tier1s and 0,5s, the Chinese auto-sector and even GM (as a back-up plan) may well be doing at present.
Merkel should not be moved by public or GM/Opel pressures, but she and her cabinet would be wise to see how exactly Opel could be re-configured to suit different possible suitors with differing entry strategies.
Wednesday, 18 March 2009
Macro-Level Trends – Germany Autos GmbH – Opel's Need for a Miraculous Lightening Bolt from Above
As the G20 summit approaches there looks to be continued friction of ideology between the likes of the 'prime-pumping' Prime Minister Brown & President Sarkozy, and the altogether more 'spend-thrift' Chancellor Merkel. As stated in previous posts, Germany has had a hard 25 year journey to reach today's far more open market-orientated socio-political mentality, and weaning the public off of a German Nanny State has been worthwhile in terms of revolutionising its productive efficiency, commercial acumen and ultimately standing regards 'high-value' goods & services upon the world stage.
Though it is suffering, as all are today, with exports down and a deflated economy, Merkel recognises the dangers of returning her country to a less than globally competitive entity. So whilst the Chancellor and her cabinet have balked and succumbed to the desperation of state funding intervention, it is not on the proportionate scale of the likes of her European neighbours or the USA.
Instead, she has been a key proponent of expanding the role of the IMF to assist the global financial challenge, a call latterly supported by the French President.
Where the 2 differ significantly is with regard to Keynesian economic theory that surges national indebtedness to support industry and the consumer in the fight to re-inflate the business, consumer and financial marketplaces. Though Germany was ultimately forced to save its highly exposed large financial enterprises, to keep the financial system from collapsing, has been trying to draw a line in the sand against the calls of the broader private business sector for assistance. Merkel caught between the conscientious righteousness of economic responsibility and the houndings of business leaders, strong unions and consumers.
Unlike the populist seeking Sarkozy, who appears to be re-introducing a manner of 'de Gaullism' Merkel is willing to wear public wrath. France's massive directly injected state support for its national auto-industry stands at $8.8bn as of Feb 09 (primarily split between Renault & PSA), whilst Germany has stated that it will alot $1.9bn, done so indirectly as a scrap-incentive scheme for cars over 9 years old.
Caught between a rock and hard place (its GM parent and a to date staunch political stance) perhaps the most high profile 'casualty' of the recession is Adam Opel AG. Although the prime business of GM Europe (and in global terms a generally/historically positive revenue earner) the effects of slow-to-thaw wholesale credit and massively loss of confidence in the consumer-base, means that even this historical 'solid performer' has stalled heavily.
And moreover, Carl-Peter Forster - the company's inveterately professional CEO – recognises that the longer Opel is caught in the intricacies of the political realm, the longer and greater the suffering within marketplace against its national and international peers; which with greater cash reserves, brand consumer relevance and product cache would like to see Europe's 20% or so overcapacity be cut through the loss of Opel. Non more so than VW Group, BMW Group and Daimler Group who will be happy to see the 'market discounting effect' Opel could be said to use to hold market-share eradicated; and so enable improved margin, RoS and ultimately RoI. And as 'role-playing' national participants of that painful German economic progression (which Merkel does not want to slip) they will have strong voices in Berlin against any form of 'favoured' assistance.
Merkel knows that she can't be seen to promote the double-standards of such favouritism, and also recognises that the national accounts cannot support the equal assistance given to Opel for all Germany's volume producers. And that even if it could, that little would change for the relative strength sector inhabitants in the medium term. Opel simply gaining a stay of execution for a finite period until either finally pulled under by its parent, marginalised in the market by far more competitive peers or at best acquired by a (probably) Chinese Auto-Firm in years to come for a 'low-ball' price intent on using the brand and dealer-base as part of its own global expansion ambition. Thus, if that is truly the most likely outcome for Opel, why inject so much government cash in the firm – updating plant and products - only to have such valuable assets sold off under par value?
In the meantime, after his discussion with Karl-Theodor zu Guttenberg (the German Economics Minister), the ever up-beat Rick Wagoner appears to be playing Merkel off against her public via the press, with quoted reports saying he thinks German politicians are “really getting into this” (ie the idea of state aid). Guttenburg's response was unsurprisingly rather less enthusiastic, stating that Berlin was looking to see exactly what GM was putting on the table first, and what the Opel corporate plan could viability deliver, before it cited political promises.
GM's need to divest responsibility and consider radical global re-structuring has been conveyed by its pronouncements that it would be happy to “cede control of GM Europe” (inc Vauxhall & SAAB) for $4.3bn, and it appears that it may be exploiting the the implicit threat of Opel following SAAB into bankruptcy proceedings; a very unpopular thought across Russelsheim & nearby Frankfurt.
Opel's November '08 call for a credit guarantee against parental GM failure was mutedly responded to, without credible confirmation from Berlin. And SolarWorld's speedy proposition – in response to that guarantee call - as a potential 'white knight' purchaser looks about as incredulous now as it did then given the credit-heavy terms of the bid and the aforementioned frozen wholesale finance markets. Slightly more realistically, last week the Opel dealer-base stated it would create a semi-private/semi-public holding company with government backing that would acquire Opel using a % cut of future car sales as a payment schedule. Better, but still not wholly tenable from a political perspective.
So as things stand Wagoner and Merkel metaphorically stand face to face, neither blinking...with Carl-Peter Forster forced to strategically and operationally juggle balls as best he can to keep Opel trading under harsh conditions in the short-term. But at least he has the dealers on side, and that demonstrates his acute strategic acumen as a retained leader if any new Opel enterprise is born from which ever eventual quarter.
Of course many will point to Lower Saxony's 19.9% hold in Volkswagen and the social democratic reasoning it was embedded and has since been defended (to Porsche's chagrin). A similar set-up for Opel may be the last bastion of political compromise Merkel may be willing to cede if all else fails. And at times such as these, ironically, that pressure may come from her own party recognising the political consequences of the zeitgeist.
But if Germany wishes to stay the spiritual leader for a globally competitive, inter-regionally trade-friendly EU, even that may be too high a price to pay as the likes of China, India & Russia eye up European car markets as part of their resurgence plans. Politically, German industry may have to be seen to be 'internationalist' for ameniable 'quid pro quo' relations; especially so given VW, BMW and Daimler's interests in the BRIC economies.
The longer-term international success of the German car industry at large depends on a successful outcome of that G20 meeting. The formal agenda highlights the role of the IMF in setting a global regulatory financial framework; but implicitly the newer G8+/G20 members will be looking at Germany as perhaps the central proponent of cross-border industrial markets goodwill....and just perhaps the fate of Opel as the examplar of 'deeds supporting words'.
Though it is suffering, as all are today, with exports down and a deflated economy, Merkel recognises the dangers of returning her country to a less than globally competitive entity. So whilst the Chancellor and her cabinet have balked and succumbed to the desperation of state funding intervention, it is not on the proportionate scale of the likes of her European neighbours or the USA.
Instead, she has been a key proponent of expanding the role of the IMF to assist the global financial challenge, a call latterly supported by the French President.
Where the 2 differ significantly is with regard to Keynesian economic theory that surges national indebtedness to support industry and the consumer in the fight to re-inflate the business, consumer and financial marketplaces. Though Germany was ultimately forced to save its highly exposed large financial enterprises, to keep the financial system from collapsing, has been trying to draw a line in the sand against the calls of the broader private business sector for assistance. Merkel caught between the conscientious righteousness of economic responsibility and the houndings of business leaders, strong unions and consumers.
Unlike the populist seeking Sarkozy, who appears to be re-introducing a manner of 'de Gaullism' Merkel is willing to wear public wrath. France's massive directly injected state support for its national auto-industry stands at $8.8bn as of Feb 09 (primarily split between Renault & PSA), whilst Germany has stated that it will alot $1.9bn, done so indirectly as a scrap-incentive scheme for cars over 9 years old.
Caught between a rock and hard place (its GM parent and a to date staunch political stance) perhaps the most high profile 'casualty' of the recession is Adam Opel AG. Although the prime business of GM Europe (and in global terms a generally/historically positive revenue earner) the effects of slow-to-thaw wholesale credit and massively loss of confidence in the consumer-base, means that even this historical 'solid performer' has stalled heavily.
And moreover, Carl-Peter Forster - the company's inveterately professional CEO – recognises that the longer Opel is caught in the intricacies of the political realm, the longer and greater the suffering within marketplace against its national and international peers; which with greater cash reserves, brand consumer relevance and product cache would like to see Europe's 20% or so overcapacity be cut through the loss of Opel. Non more so than VW Group, BMW Group and Daimler Group who will be happy to see the 'market discounting effect' Opel could be said to use to hold market-share eradicated; and so enable improved margin, RoS and ultimately RoI. And as 'role-playing' national participants of that painful German economic progression (which Merkel does not want to slip) they will have strong voices in Berlin against any form of 'favoured' assistance.
Merkel knows that she can't be seen to promote the double-standards of such favouritism, and also recognises that the national accounts cannot support the equal assistance given to Opel for all Germany's volume producers. And that even if it could, that little would change for the relative strength sector inhabitants in the medium term. Opel simply gaining a stay of execution for a finite period until either finally pulled under by its parent, marginalised in the market by far more competitive peers or at best acquired by a (probably) Chinese Auto-Firm in years to come for a 'low-ball' price intent on using the brand and dealer-base as part of its own global expansion ambition. Thus, if that is truly the most likely outcome for Opel, why inject so much government cash in the firm – updating plant and products - only to have such valuable assets sold off under par value?
In the meantime, after his discussion with Karl-Theodor zu Guttenberg (the German Economics Minister), the ever up-beat Rick Wagoner appears to be playing Merkel off against her public via the press, with quoted reports saying he thinks German politicians are “really getting into this” (ie the idea of state aid). Guttenburg's response was unsurprisingly rather less enthusiastic, stating that Berlin was looking to see exactly what GM was putting on the table first, and what the Opel corporate plan could viability deliver, before it cited political promises.
GM's need to divest responsibility and consider radical global re-structuring has been conveyed by its pronouncements that it would be happy to “cede control of GM Europe” (inc Vauxhall & SAAB) for $4.3bn, and it appears that it may be exploiting the the implicit threat of Opel following SAAB into bankruptcy proceedings; a very unpopular thought across Russelsheim & nearby Frankfurt.
Opel's November '08 call for a credit guarantee against parental GM failure was mutedly responded to, without credible confirmation from Berlin. And SolarWorld's speedy proposition – in response to that guarantee call - as a potential 'white knight' purchaser looks about as incredulous now as it did then given the credit-heavy terms of the bid and the aforementioned frozen wholesale finance markets. Slightly more realistically, last week the Opel dealer-base stated it would create a semi-private/semi-public holding company with government backing that would acquire Opel using a % cut of future car sales as a payment schedule. Better, but still not wholly tenable from a political perspective.
So as things stand Wagoner and Merkel metaphorically stand face to face, neither blinking...with Carl-Peter Forster forced to strategically and operationally juggle balls as best he can to keep Opel trading under harsh conditions in the short-term. But at least he has the dealers on side, and that demonstrates his acute strategic acumen as a retained leader if any new Opel enterprise is born from which ever eventual quarter.
Of course many will point to Lower Saxony's 19.9% hold in Volkswagen and the social democratic reasoning it was embedded and has since been defended (to Porsche's chagrin). A similar set-up for Opel may be the last bastion of political compromise Merkel may be willing to cede if all else fails. And at times such as these, ironically, that pressure may come from her own party recognising the political consequences of the zeitgeist.
But if Germany wishes to stay the spiritual leader for a globally competitive, inter-regionally trade-friendly EU, even that may be too high a price to pay as the likes of China, India & Russia eye up European car markets as part of their resurgence plans. Politically, German industry may have to be seen to be 'internationalist' for ameniable 'quid pro quo' relations; especially so given VW, BMW and Daimler's interests in the BRIC economies.
The longer-term international success of the German car industry at large depends on a successful outcome of that G20 meeting. The formal agenda highlights the role of the IMF in setting a global regulatory financial framework; but implicitly the newer G8+/G20 members will be looking at Germany as perhaps the central proponent of cross-border industrial markets goodwill....and just perhaps the fate of Opel as the examplar of 'deeds supporting words'.
Wednesday, 11 March 2009
Business Opportunity - UK Public Transport – Object Lessons for teaching US Greyhounds to Chase the UK's National Rabbits
These recessionary times - predicated as "the Age of Turbulence by Alan Greenspan - creates the harsh conditions that not only gives rise to sector consolidation and renewal (as we see with Autos) but for a period creates distinctive winners and losers.
The collapse of the private vehicle market has obviously sent global rictures of pain felt by the auto-supplier, manufacturer and dealer sectors. Weakened disposable income through all levels of the social strata has affected the public en mass and so alter their mobility behavior. Investors and markets instinctively recognise that in such straitened times Porter's Five Forces play-out more fervently, and the Substitutional Effect takes hold. As the depth of pockets shrink so the consumer downgrades his/her normative (pseudo-luxury) habits, substituting with cheaper products and services.
Here in the UK the most obvious battleground is in food retailing, the lower-end stores (Asda, Morrison, Aldi etc) stealing custom from the mainstream (Sainsburys, Tesco etc), but more subtle has been the shift in mobility purchase patterns. As new car sales sharply retract to record modern lows, so replacement buyers are either a) looking to better value used car purchases, b) not replacing at all if a 2nd family car (of lesser utility), c) replacing a commuter car with maybe a low-cost motorcycle, and lastly more amenably d) looking to public transport options.
Thus across the nation public transport has been the counter-point beneficiary to the shift in consumers' mobility needs (NB 'needs' replacing pseudo-luxury 'wants' or 'desires'.
The UK Government, as part of its drive towards reduced CO2 and the normative 'social-contract' has been proactive in PR and policy-spending, perhaps best regionally illustrated by the London example under the previous and current Mayors. For all their criticism of empty day-time running, London's swarm of European-made 'Bendy-Buses' added capacity and so mobility ease for the city's commuters at rush hour periods and weekend visitors.
That story of regional bus growth has been similar up and down the country, providing a greater business rationale for the bus (and rail) operating companies. Just as we see consolidation presently in Autos, during the Autos boom-time there was a period of rationalisation for that once plethora of bus operators.
Perhaps the greatest protagonist/activist was FirstGroup, an Aberdeen based FTSE 100 enterprise led by Sir Moir Lockhead, that grew rapidly in the days of operator-deregulation, abundant liquidity/leverage and ambition. After an original MBO and incarnations as GRT and FirstBus (after M&A with peer Badgerline), it became FirstGroup when it encompassed rail aswell after the privatisation and break-up of British Rail (including passenger & freight) and operates a 'light-rail' tram service in London. Today it is a sizable empire that spans the Western Hemisphere, across: the UK, Ireland, Sweden, Denmark, Germany, Canada and the USA (having sold-off its previous Hong-Kong interest).
With competitors such as StageCoach and Arriva, perhaps the greatest (bitter?) rivalry is with National Express, having been questionably banned from competing against for the East Anglia rail franchise.
Given the size, dynamicism and complexity of the UK public-service mobility market, FirstGroup will want to maintain as great a hold as possible given that massive revenue stream and theoretical relative stability of the city & regional UK market.
Changing social trends and shifting government social policy are growing opportunities in the public mobility sphere, perhaps the most high-profile currently being the growing propensity for longer-distance travelling school-children. For the UK, inter-school 'allied' teaching and the growth of extra-curriculum activities (eg sports events, educational excursions and increased school holiday trips) requires a greater capacity for 'student transit'. That once small but burgeoning market was previously fed by private companies, often private enterprise consisting of little more than a single-person operator or perhaps couple running a small fleet of 2-5 mini-buses. But that amateur style, convenient and lucrative at the time for small scale operators has passed, safety and responsibility issues arose, semi-piecemeal school transportation budgets altered and greater 'full-service' demands have arisen. A time of re-orientation, privateer retraction and sector consolidation.
To summarise, the model for UK student transit is presently undergoing continued transition toward a US style template, one that offers new opportunities for larger scale enterprises throughout its value-chain - from mini-bus manufacture (as described in the previous LDV item dated 25.02.09) to fleet operation for the very well placed FirstGroup.
As stated, First Group own US interests. Crucially these interests include perhaps the 2 most iconic brands in the US bus sector. And given the cultural influence the US has had on the world via TV & Hollywood, more importantly, both these brands are indelibly imprinted into the psyche of the US & UK public at large. These 'priceless' assets are of course:
1) Yellow School Bus (previously operated by Laidlaw under the FirstStudent division)
2) Greyhound Bus Lines (previously owned by Laidlaw
[NB Laidlaw acquired by FirstGroup on 07.02.07]
Infact, the UK has been adopting a US style 'school-bus' service for some time, as early as 2000 infact, with FirstStudent UK - a subdivision of FirstStudent, migrating the template from its US parent for Hampshire & Dorset schemes. As such, FirstGroup has been able to transfer and exploit the years of embedded operational learning endemic within FirstStudent USA and the Laidlaw Company - possibly including influence as a political lobbyist (an almost formal and de facto activity in the US). Instead of starting from scratch, FG has utilised its own large regional bus service infrastructures as the 'linch-pin' of the new service.
As of Q308, 185 UK full-size Yellow buses had been running in selective areas nationwide as part of an exploratory scheme that started 5 years previously. To paraphrase Nicola Shaw (MD of FirstBusUK) "FG's survey results from Yorkshire indicated that a high proportion (85%) of 1500 parents surveyed preferred the improved security of the SchoolBus idea". Various business models have been explored ranging from 100% LEA (Local Education Authority) financing through to wholly private payments by parents - estimated up to about a 5 Pounds. [However the exact criteria that gave rise to the 85% preference was not reported - did Yorkshire operate the no-fee model?] A Government Commission set up by David Blunkett in mid 2008 is due to report soon, but it seems almost inconceivable that the government will not expand the scheme given the massive funding now being appropriated to school-based social-policy infrastructure projects.
[ This is also the mentality of the UK van-maker LDV's Board, given it's recent niche marketing of yellow school mini-buses for the UK]
Juxtaposing FG's current full-size SchoolBus against LDV's small-size mini-bus highlights the shifting-sands of the school transportation sector. Those large buses are useful for high-mileage, high-capacity pick-up rural areas, but a very different product is needed for suburban and urban fleets ranging from midi-size (ie the Hoppa Bus) to small van based minibuses. Al the same, there's a lucrative and growing business model for respected and credible operators like FirstGroup which provides a non-cyclical and expanding element to its holdings; adding yet further 'defensive' properties to its already 'defensive' investment nature for lower-risk, long term investors.
That investment mindset is all the prevalent given today's dour times, and so companies like FG will have to consider exactly how it might best perform under such conditions, maximising their 'take' from the on-going headwinds.
As such if the recession/depression becomes more 'long-U', 'W' or even 'long L' in character, stretching into the mid and long-term of 3-7 years, would it not prove beneficial for FirstGroup to exploit the Greyhound brand and, just as it has done with 'Yellow School Bus', bring that US icon to the UK. It would follow in the footsteps, or rather tire-tracks, of Airstream of recent years and help further cement US-UK business, social & political relations.
Greyhound Lines has a certain mix of both romanticism and affordability. Indeed part of its mystique (for foreigners at least) has been in the past the (only) transport of choice for those 'down at heel'; ranging from dust-bowl migrants in the 1930s, the Beatniks of the 1940s & 50s and even stylized 'down and outs' such as Dustin Hoffman's Rizzo in the 1969 film Midnight Cowboy heading for 'a better place' (ie Florida). In short Greyhound Lines is bound together in the fabric of Youth Culture and the American Dream.
That youth culture is being targeted under FirstGroup in the US, directing advertising toward 18-24 year olds and the large and burgeoning Hispanic community. And at long last, after years of 'out of character' updating, its livery is now being returned to reflect its glory-days of the 1950s using 'aluminium gray/grey' and accent blue and white along with accordant modernisation of bus-terminals and depots.
Add together the tightened travel budgets of the UK, the global 'perceptional reach' of the Greyhound brand and its revitalisation and there could well be an argument set forth for FG to introduce the Greyhound brand to the UK, relating to the modern young Beatniks who travel widely & frequently (as seen via EasyJet & Ryan Air) given their lack of responsibility aswell as elements of the lower-end over-60s 'Saga-set' who as Baby-Boomers well recognise the Greyhound allure. And beyond all those others who seek cheaper travel than short-haul air, expensive rail or indeed relatively expensive national UK coach-travel offers.
Could Greyhounds catch the ' Rabbit-ear' coaches of National Express? The 21st century equivalent to the early 20th century Charabang?
The UK public bus scene is set for a period of learning and possibly a 'day at the races'.
The collapse of the private vehicle market has obviously sent global rictures of pain felt by the auto-supplier, manufacturer and dealer sectors. Weakened disposable income through all levels of the social strata has affected the public en mass and so alter their mobility behavior. Investors and markets instinctively recognise that in such straitened times Porter's Five Forces play-out more fervently, and the Substitutional Effect takes hold. As the depth of pockets shrink so the consumer downgrades his/her normative (pseudo-luxury) habits, substituting with cheaper products and services.
Here in the UK the most obvious battleground is in food retailing, the lower-end stores (Asda, Morrison, Aldi etc) stealing custom from the mainstream (Sainsburys, Tesco etc), but more subtle has been the shift in mobility purchase patterns. As new car sales sharply retract to record modern lows, so replacement buyers are either a) looking to better value used car purchases, b) not replacing at all if a 2nd family car (of lesser utility), c) replacing a commuter car with maybe a low-cost motorcycle, and lastly more amenably d) looking to public transport options.
Thus across the nation public transport has been the counter-point beneficiary to the shift in consumers' mobility needs (NB 'needs' replacing pseudo-luxury 'wants' or 'desires'.
The UK Government, as part of its drive towards reduced CO2 and the normative 'social-contract' has been proactive in PR and policy-spending, perhaps best regionally illustrated by the London example under the previous and current Mayors. For all their criticism of empty day-time running, London's swarm of European-made 'Bendy-Buses' added capacity and so mobility ease for the city's commuters at rush hour periods and weekend visitors.
That story of regional bus growth has been similar up and down the country, providing a greater business rationale for the bus (and rail) operating companies. Just as we see consolidation presently in Autos, during the Autos boom-time there was a period of rationalisation for that once plethora of bus operators.
Perhaps the greatest protagonist/activist was FirstGroup, an Aberdeen based FTSE 100 enterprise led by Sir Moir Lockhead, that grew rapidly in the days of operator-deregulation, abundant liquidity/leverage and ambition. After an original MBO and incarnations as GRT and FirstBus (after M&A with peer Badgerline), it became FirstGroup when it encompassed rail aswell after the privatisation and break-up of British Rail (including passenger & freight) and operates a 'light-rail' tram service in London. Today it is a sizable empire that spans the Western Hemisphere, across: the UK, Ireland, Sweden, Denmark, Germany, Canada and the USA (having sold-off its previous Hong-Kong interest).
With competitors such as StageCoach and Arriva, perhaps the greatest (bitter?) rivalry is with National Express, having been questionably banned from competing against for the East Anglia rail franchise.
Given the size, dynamicism and complexity of the UK public-service mobility market, FirstGroup will want to maintain as great a hold as possible given that massive revenue stream and theoretical relative stability of the city & regional UK market.
Changing social trends and shifting government social policy are growing opportunities in the public mobility sphere, perhaps the most high-profile currently being the growing propensity for longer-distance travelling school-children. For the UK, inter-school 'allied' teaching and the growth of extra-curriculum activities (eg sports events, educational excursions and increased school holiday trips) requires a greater capacity for 'student transit'. That once small but burgeoning market was previously fed by private companies, often private enterprise consisting of little more than a single-person operator or perhaps couple running a small fleet of 2-5 mini-buses. But that amateur style, convenient and lucrative at the time for small scale operators has passed, safety and responsibility issues arose, semi-piecemeal school transportation budgets altered and greater 'full-service' demands have arisen. A time of re-orientation, privateer retraction and sector consolidation.
To summarise, the model for UK student transit is presently undergoing continued transition toward a US style template, one that offers new opportunities for larger scale enterprises throughout its value-chain - from mini-bus manufacture (as described in the previous LDV item dated 25.02.09) to fleet operation for the very well placed FirstGroup.
As stated, First Group own US interests. Crucially these interests include perhaps the 2 most iconic brands in the US bus sector. And given the cultural influence the US has had on the world via TV & Hollywood, more importantly, both these brands are indelibly imprinted into the psyche of the US & UK public at large. These 'priceless' assets are of course:
1) Yellow School Bus (previously operated by Laidlaw under the FirstStudent division)
2) Greyhound Bus Lines (previously owned by Laidlaw
[NB Laidlaw acquired by FirstGroup on 07.02.07]
Infact, the UK has been adopting a US style 'school-bus' service for some time, as early as 2000 infact, with FirstStudent UK - a subdivision of FirstStudent, migrating the template from its US parent for Hampshire & Dorset schemes. As such, FirstGroup has been able to transfer and exploit the years of embedded operational learning endemic within FirstStudent USA and the Laidlaw Company - possibly including influence as a political lobbyist (an almost formal and de facto activity in the US). Instead of starting from scratch, FG has utilised its own large regional bus service infrastructures as the 'linch-pin' of the new service.
As of Q308, 185 UK full-size Yellow buses had been running in selective areas nationwide as part of an exploratory scheme that started 5 years previously. To paraphrase Nicola Shaw (MD of FirstBusUK) "FG's survey results from Yorkshire indicated that a high proportion (85%) of 1500 parents surveyed preferred the improved security of the SchoolBus idea". Various business models have been explored ranging from 100% LEA (Local Education Authority) financing through to wholly private payments by parents - estimated up to about a 5 Pounds. [However the exact criteria that gave rise to the 85% preference was not reported - did Yorkshire operate the no-fee model?] A Government Commission set up by David Blunkett in mid 2008 is due to report soon, but it seems almost inconceivable that the government will not expand the scheme given the massive funding now being appropriated to school-based social-policy infrastructure projects.
[ This is also the mentality of the UK van-maker LDV's Board, given it's recent niche marketing of yellow school mini-buses for the UK]
Juxtaposing FG's current full-size SchoolBus against LDV's small-size mini-bus highlights the shifting-sands of the school transportation sector. Those large buses are useful for high-mileage, high-capacity pick-up rural areas, but a very different product is needed for suburban and urban fleets ranging from midi-size (ie the Hoppa Bus) to small van based minibuses. Al the same, there's a lucrative and growing business model for respected and credible operators like FirstGroup which provides a non-cyclical and expanding element to its holdings; adding yet further 'defensive' properties to its already 'defensive' investment nature for lower-risk, long term investors.
That investment mindset is all the prevalent given today's dour times, and so companies like FG will have to consider exactly how it might best perform under such conditions, maximising their 'take' from the on-going headwinds.
As such if the recession/depression becomes more 'long-U', 'W' or even 'long L' in character, stretching into the mid and long-term of 3-7 years, would it not prove beneficial for FirstGroup to exploit the Greyhound brand and, just as it has done with 'Yellow School Bus', bring that US icon to the UK. It would follow in the footsteps, or rather tire-tracks, of Airstream of recent years and help further cement US-UK business, social & political relations.
Greyhound Lines has a certain mix of both romanticism and affordability. Indeed part of its mystique (for foreigners at least) has been in the past the (only) transport of choice for those 'down at heel'; ranging from dust-bowl migrants in the 1930s, the Beatniks of the 1940s & 50s and even stylized 'down and outs' such as Dustin Hoffman's Rizzo in the 1969 film Midnight Cowboy heading for 'a better place' (ie Florida). In short Greyhound Lines is bound together in the fabric of Youth Culture and the American Dream.
That youth culture is being targeted under FirstGroup in the US, directing advertising toward 18-24 year olds and the large and burgeoning Hispanic community. And at long last, after years of 'out of character' updating, its livery is now being returned to reflect its glory-days of the 1950s using 'aluminium gray/grey' and accent blue and white along with accordant modernisation of bus-terminals and depots.
Add together the tightened travel budgets of the UK, the global 'perceptional reach' of the Greyhound brand and its revitalisation and there could well be an argument set forth for FG to introduce the Greyhound brand to the UK, relating to the modern young Beatniks who travel widely & frequently (as seen via EasyJet & Ryan Air) given their lack of responsibility aswell as elements of the lower-end over-60s 'Saga-set' who as Baby-Boomers well recognise the Greyhound allure. And beyond all those others who seek cheaper travel than short-haul air, expensive rail or indeed relatively expensive national UK coach-travel offers.
Could Greyhounds catch the ' Rabbit-ear' coaches of National Express? The 21st century equivalent to the early 20th century Charabang?
The UK public bus scene is set for a period of learning and possibly a 'day at the races'.
Thursday, 5 March 2009
Macro-Level Trends – London Emissions Initiative – The 'E'-Car Rental Scheme
London, it can be argued, has been one of the vanguard cities in the global effort to combat climate change. The introduction of the Congestion Charge reportedly reduced not only city-centre traffic but as a consequence lowered CO2, particulate & pollutant-levels originating from tail-pipes. Policy-makers intend to spread the coverage of low CO2 areas up to the M25 motorway boundary area by the early part of the next decade, phasing-in truck and van prohibitions and dis-incentives.
The UK Government has of course instigated efforts directed toward the automotive arena as part of its CO2 reduction manifesto, perhaps best exemplified by the LowCVP – the Low Carbon Vehicle Partnership. Now in its 5th year it's chronological experience has been one of “2003/4 over-optimism”, “2005/6/7 Uncertainty & Review” and latterly “2008/9 New Market Requirements”. Encompassing cars, trucks and buses, perhaps its primary claim to fame thus far has been the facilitator of manufacturer voluntary Fuel Economy & CO2 vehicle labeling for the new car buying public; whilst other efforts relate to Vehicle-Tech, BioFuels and Driver Awareness campaigns.
In that 5 year period, the UK has also witnessed political orientation of the local/regional governance model toward City Mayors, given the authority with making change happen and following the footsteps of New York's Giuliano & Bloomberg. For London, it's first Mayor Ken Livingstone introduced the Congestion Charge, as described, with today's current incumbent Boris Johnson ensuring that policy is expanded and supported with other initiatives. Perhaps most high-profile is the re-introduction of an updated vehicle successor to the iconic London (Routemaster) Bus of yesteryear. Something to capture the hearts and minds of Londoners and 2012 Olympic tourists - this exercise itself mimicking the previous re-modelling of the Classic London Black Taxi.
Such public transport efforts are laudable, and recognised as only one side of the CO2 coin, the more complex and problematic is that of changing the private behavior of car-buyers and the public's driving habits and expectations en mass; a hard task given the 60 years + of automotive freedom enjoyed by the masses.
Electric cars have been a small but rising contingent of London's street-scapes over the last 5 years. The qualitative PR spin witnessing Captains of Industry visiting the IoD, or the odd MP entering Westminster Palace's gates has been quantitatively backed-up by a 'band-of-brothers' of every-day users from the more progressive creative sectors (ie media, arts, design etc). Trying to spread that 'early-adopter' behavior, Boris Johnson and his No2 Kulveer Ranger mid last year set-out the criterion for an expanded use of electric vehicles under the Electric Working Group for London title; primarily focused on developing infrastructure (eg charging points). A sub-committee is the Electric Vehicles Partnership created to work as a facilitator with the auto-industry. To re-quote Ranger at the London Motor Show : “We don’t want green cars to be seen as a lifestyle choice for eco warriors. We want them to be an attractive option for everyone”.
9 months on, earlier this week, The Evening Standard proclaimed that EVs were coming, reporting that Boris is adopting a Parisian style public-private vehicle-rental 'business model' which embraces the use of both bicycles and EVs as zero-carbon personal mobility solutions.
As perhaps the first and more widely available EV, the G-Wiz sold by GoingGreen has realistically had the stranglehold on the City, the Indian manufactured vehicle appearing to be 9 out of every 10 private EVs. The YoY growth in EV sales drew in other entrants, the most notable being the NICE Car Company; which from start-up, faltered, went into receivership and was bought-over by a supplier.
NICE's attractively broad product range targeting private and commercial buyers alike, was highly undermined by very aggressive product pricing and tenuous supply arrangements & agreements aggravated credit-crunch. To illustrate, the Z-eo (an A-segment car made by China's Jiayuan) cost £14,000 and the 'toy-car' proportioned MyCar cost £8,000. NICE's commercial range was possibly even more aggressive pricing with a £44,000 electric version of FIAT's Doblo small van and other products only given a TBA regards their pricing; TBA eponymous with a lack of business model credibility and supplier 'tie-down' and possibly even product design fundamentals. An illustration of that is was the 'promise' of the electric FIAT 500-e adapted by Micro-vett. Given FIAT's global reach focus investment-auto-motives suspects that the EV concept was promoted, indeed touted, by FIAT SpA to perceptually 'keep-up' BMW's Mini-e, which at great internal cost is being rolled out. FIAT itself has showcased a 2-cylinder hybrid 500, something technically feasible vs the technical barriers to engineer a full 4 seat 500 EV (The Mini had to use the rear passenger space for the battery stack). The only truly tenable car was the Mega-City manufactured by Aixam Mega - the French 'Quadricycle' auto-maker.
investment-auto-motives long-believed that the NICE Car Company was knowingly or unknowingly viewed as a strategic 'lead-in' foot-hold by its far more powerful suppliers. This has indeed been the case, with NICE's over-ambitious plans and capital 'over-reach' leading to its demise and put into administration last November. January saw its asset acquired by Aixam-Mega Ltd (the French company's UK sub-division).
Just as G-wiz had the effective monopoly to date, so Aixam view potential for the Mega-Cit y to become the new de-riguer EV for private buyers, luring new Ev buyers and stealing re-newel customers from G-Wiz who want something designed aesthetically closer to a conventional modern car – something the G-wiz's awkward boxiness and effectively 2 seat limitations could never really do.
More-over, Aixam-Mega has gained footholds within regional local authorities such as those on the South Coast, showing their capabilities (and limitations) in the public-services domain. Thus we expect that such experiences will have been shared from county/city council to county/city council...none perhaps more interested than London Boroughs, TfL (Transport for London) and the Mayor's Office.
Thus investment-auto-motive's expects that Aixam-Mega is primely positioned to benefit from the Electric Car rental scheme now proposed. Especially so now it has the asset of the 're-born' NICE Car Company's Ladbrook Grove location in West London which can act as a regional administration and service base. It is thought that TfL itself would not want to administer the scheme, unless it has a mandate to create further departments in these high unemployment times. Better still to farm the project out to private enterprise, as councils have done with so many public-sector services; old (such as sports centres) and new (such as e-car rental).
Doing so would Allow Aixam-Mega to transpose the direct/in-direct learning gained from the Parisian Velib bike hire scheme.
In the meantime, the London Mayor will be trying to persuade the UK's Transport Secretary, Geoff Hoon, that London deserves "sizable chunk" of the £250m government money put in place to support electric initiatives. Johnson wants to see at least half the 8,000 vehicle fleet owned by the Greater London Authority replaced by electric vehicles as soon as possible.
Aixam-Mega, may not be as desperate as LDV Vans (see previous post) for the UK governmental goodwill regards electric vehicles, but Aixam-Mega will undoubtedly utilise the Mayor's initiative to maintain its UK position against its French peers of: Ligiers, MicroCar, JDM & Chatanet.
The UK Government has of course instigated efforts directed toward the automotive arena as part of its CO2 reduction manifesto, perhaps best exemplified by the LowCVP – the Low Carbon Vehicle Partnership. Now in its 5th year it's chronological experience has been one of “2003/4 over-optimism”, “2005/6/7 Uncertainty & Review” and latterly “2008/9 New Market Requirements”. Encompassing cars, trucks and buses, perhaps its primary claim to fame thus far has been the facilitator of manufacturer voluntary Fuel Economy & CO2 vehicle labeling for the new car buying public; whilst other efforts relate to Vehicle-Tech, BioFuels and Driver Awareness campaigns.
In that 5 year period, the UK has also witnessed political orientation of the local/regional governance model toward City Mayors, given the authority with making change happen and following the footsteps of New York's Giuliano & Bloomberg. For London, it's first Mayor Ken Livingstone introduced the Congestion Charge, as described, with today's current incumbent Boris Johnson ensuring that policy is expanded and supported with other initiatives. Perhaps most high-profile is the re-introduction of an updated vehicle successor to the iconic London (Routemaster) Bus of yesteryear. Something to capture the hearts and minds of Londoners and 2012 Olympic tourists - this exercise itself mimicking the previous re-modelling of the Classic London Black Taxi.
Such public transport efforts are laudable, and recognised as only one side of the CO2 coin, the more complex and problematic is that of changing the private behavior of car-buyers and the public's driving habits and expectations en mass; a hard task given the 60 years + of automotive freedom enjoyed by the masses.
Electric cars have been a small but rising contingent of London's street-scapes over the last 5 years. The qualitative PR spin witnessing Captains of Industry visiting the IoD, or the odd MP entering Westminster Palace's gates has been quantitatively backed-up by a 'band-of-brothers' of every-day users from the more progressive creative sectors (ie media, arts, design etc). Trying to spread that 'early-adopter' behavior, Boris Johnson and his No2 Kulveer Ranger mid last year set-out the criterion for an expanded use of electric vehicles under the Electric Working Group for London title; primarily focused on developing infrastructure (eg charging points). A sub-committee is the Electric Vehicles Partnership created to work as a facilitator with the auto-industry. To re-quote Ranger at the London Motor Show : “We don’t want green cars to be seen as a lifestyle choice for eco warriors. We want them to be an attractive option for everyone”.
9 months on, earlier this week, The Evening Standard proclaimed that EVs were coming, reporting that Boris is adopting a Parisian style public-private vehicle-rental 'business model' which embraces the use of both bicycles and EVs as zero-carbon personal mobility solutions.
As perhaps the first and more widely available EV, the G-Wiz sold by GoingGreen has realistically had the stranglehold on the City, the Indian manufactured vehicle appearing to be 9 out of every 10 private EVs. The YoY growth in EV sales drew in other entrants, the most notable being the NICE Car Company; which from start-up, faltered, went into receivership and was bought-over by a supplier.
NICE's attractively broad product range targeting private and commercial buyers alike, was highly undermined by very aggressive product pricing and tenuous supply arrangements & agreements aggravated credit-crunch. To illustrate, the Z-eo (an A-segment car made by China's Jiayuan) cost £14,000 and the 'toy-car' proportioned MyCar cost £8,000. NICE's commercial range was possibly even more aggressive pricing with a £44,000 electric version of FIAT's Doblo small van and other products only given a TBA regards their pricing; TBA eponymous with a lack of business model credibility and supplier 'tie-down' and possibly even product design fundamentals. An illustration of that is was the 'promise' of the electric FIAT 500-e adapted by Micro-vett. Given FIAT's global reach focus investment-auto-motives suspects that the EV concept was promoted, indeed touted, by FIAT SpA to perceptually 'keep-up' BMW's Mini-e, which at great internal cost is being rolled out. FIAT itself has showcased a 2-cylinder hybrid 500, something technically feasible vs the technical barriers to engineer a full 4 seat 500 EV (The Mini had to use the rear passenger space for the battery stack). The only truly tenable car was the Mega-City manufactured by Aixam Mega - the French 'Quadricycle' auto-maker.
investment-auto-motives long-believed that the NICE Car Company was knowingly or unknowingly viewed as a strategic 'lead-in' foot-hold by its far more powerful suppliers. This has indeed been the case, with NICE's over-ambitious plans and capital 'over-reach' leading to its demise and put into administration last November. January saw its asset acquired by Aixam-Mega Ltd (the French company's UK sub-division).
Just as G-wiz had the effective monopoly to date, so Aixam view potential for the Mega-Cit y to become the new de-riguer EV for private buyers, luring new Ev buyers and stealing re-newel customers from G-Wiz who want something designed aesthetically closer to a conventional modern car – something the G-wiz's awkward boxiness and effectively 2 seat limitations could never really do.
More-over, Aixam-Mega has gained footholds within regional local authorities such as those on the South Coast, showing their capabilities (and limitations) in the public-services domain. Thus we expect that such experiences will have been shared from county/city council to county/city council...none perhaps more interested than London Boroughs, TfL (Transport for London) and the Mayor's Office.
Thus investment-auto-motive's expects that Aixam-Mega is primely positioned to benefit from the Electric Car rental scheme now proposed. Especially so now it has the asset of the 're-born' NICE Car Company's Ladbrook Grove location in West London which can act as a regional administration and service base. It is thought that TfL itself would not want to administer the scheme, unless it has a mandate to create further departments in these high unemployment times. Better still to farm the project out to private enterprise, as councils have done with so many public-sector services; old (such as sports centres) and new (such as e-car rental).
Doing so would Allow Aixam-Mega to transpose the direct/in-direct learning gained from the Parisian Velib bike hire scheme.
In the meantime, the London Mayor will be trying to persuade the UK's Transport Secretary, Geoff Hoon, that London deserves "sizable chunk" of the £250m government money put in place to support electric initiatives. Johnson wants to see at least half the 8,000 vehicle fleet owned by the Greater London Authority replaced by electric vehicles as soon as possible.
Aixam-Mega, may not be as desperate as LDV Vans (see previous post) for the UK governmental goodwill regards electric vehicles, but Aixam-Mega will undoubtedly utilise the Mayor's initiative to maintain its UK position against its French peers of: Ligiers, MicroCar, JDM & Chatanet.
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