During the St Petersburg International Economic Forum in mid June, President Medvedev espoused the stance for continued diversification and modernization of the Russian economy. Its ambition to become "a cornerstone of the new world economic order". Amongst the high profile intentions are Moscow as a powerful financial hub, and the creation of a 'Silicon Valley'. Such initiatives assisted by FDI incentives.
The financial press however reports that the transition from broad national ambition to distinct, actionable policy-setting to create a delivery mechanism has proved less than successful. Those with an ideological or political counterpoint view highlighting the failure of the state to properly address everyday door-step issues, let alone grande plans. The recent fire-fighting debacle seen during the recent heat-wave provides the tinder for such allegations regards state incompetence. However, the homeland priority of a heavily diminished 2010 wheat crop could be said to counter this picture, publicly reflecting strong leadership to the people - even if an 'invisible outcome' would be to latterly release the commodity into the global market for a higher price.
Of course the apparatus of industrial modernization – visible and invisible - is distinctly separate from the newspaper headlines and regional politicking. Instead largely crafted by both the slow evolution of a massive but dinosaur-like ex-state infrastructure, and the faster joint venture collaborations with international corporations. Acting as catalysts within and alongside this mix are the role of domestic entrepreneurs, with as a not so small aside, the issue of their funding bases.
Undeniably, as with all countries, partiality of multiple interests obviously exists, but perhaps in Russia a little more obvious given the high profile of oligarchs and associates, than might be the case in other countries. To many since the collapse of communism the famed Churchillian quote that “Russia is a riddle, wrapped in a mystery, inside an enigma” stands more prophetic than ever. The fractious BP-TNK relationship in the oil sector perhaps the archetype case in point for today's and tomorrow's international business students.
However, as part of its metamorphoses from 'emerging' to 'advanced' status, the country has obviously been keen to re-generate its sizable automotive industry. And over the last decade has been successful in attracting FDI from global manufacturers, themselves keen to participate in a previous boom, with still high potential once the region gets back on track.
[NB Putin well recognises this reality, and so seems happy to slow WTO accession so as to create an 'FDI window of opportunity' (reflected in a reversal of normative import tariff reductions) which provides a more immediate route to industrial impetus.
Bodies such as OAR (Association of Russian Automakers) and AEB (Association of European Business' Auto Manufacturers' committee) act as umbrella and co-ordination agents to assist the ambition; especially so in providing the reliable domestic sales reporting and product regulation harmonization so required to assist the business fundamentals of credible market data and access.
To this end, factories were built by GM, Ford, BMW, Daimler, Renault, PSA, Hyundai-Kia, Mitsubishi etc, with the new comers from China in the guise of Chery, Great Wall etc chosing to use Russia as a stepping stone for their European entry strategies. As politically determined, simultaneously this foreign interest has enabled growth of its home capability via an improving supplier-base to periodically re-engineer long-in-the-tooth domestic vehicles, whilst also leveraging JV accessed foreign technology.
Whilst some legendary USSR names such as ZIL and Moskvitch effectively changed their operational shape through their own efforts to try and re-acclimatise, including purveying 'retro-chic' in old and new guises, others have been, and are in the process of being, reborn.
AvtoVaz initially joined with GM to largely produce Chevrolet badged Opel Astras until 2008, which whilst commercially unsuccessful was far more useful for knowledge and capabilities absorption. This JV model set the necessary template, and was more recently superseded when AvtoVaz joined with Renault-Nissan to update Lada. GAZ (owned by Basic Element – Russian Machines') bought Chrysler's mid-size car tooling with limited market success badged as Volga, and has toyed with the idea of re-generating the old Volga brand as 'retro-esque'. It also critically bought the UK's LDV van company to bolster the commercial vehicles section, yet the UK assets where eventually sold to private equity group China Venture. Elsewhere ex-Ford senior management took seats on the Board of Kamaz Truck, indicating likely co-operation.
[NB Thus the Russian auto industry is effectively seen to come full circle from the days when Moskvitch licenced Opel designs and Lada (like other eastern bloc companies) replicated FIAT].
Moreover, this approach to leverage 'piggy-backed' technology now seems to sit central to new premium positioned niche vehicle ambitions.
The Russian interest in niche vehicles has always been prevalent, from specialist military devices to home-grown adaptations of cars grey-imported from Poland and Germany, but perhaps first came properly into view during Russia's commodity exporting and industrial boom years when Russian businessmen had cash and incentive to do so.
Nikolai Smolensky bought the UK's TVR in 2004 (from ex oil man Peter Wheeler), split the company into 3 divisions* and shipped much of the tooling to Russia, choosing the near-namesake Tver as the supposed new home. [NB the company had been rationally split into 3 areas as presumed to be exploited or re-sold to other investment groups as ongoing concerns: they are: 1. Motors (IPR & Brand), 2. Power (Parts & Spares), 3. Blackpool Automotive (Factory and Manufacturing Assets). Although understandably disliked by the TVR faithful, that action helped jump-start Russia's own considerations of its own upmarket niche vehicle industry.
That perception was assisted by the creation and (15 unit) sale of the impressive Russo-Baltique Impression in 2006, which aped and enlarged the legendary carrozerria styles of the 1920s/30s, bodies seen on cars such as the Bugatti 57CS Atalante Coupe, Lago, Hispano-Suiza, Delahaye et al. The car was presented as what would have naturally evolved had the operation continued beyond 1919. [NB Russo-Baltique existed between 1909-1919 in St Petersburg & Moscow]
Yet to date little had emerged as properly engineered, broadly certified and market successful. The TVR tooling was rumoured to have been sent to Turin in Italy, and then onto the near name-sake town of Tver in Russia; but this appears more of a PR motivated story than solidly proven as a basis for new manufacture.
The blow of the 2007/8 financial melt-down created a major Russian recession with over-leveraged conglomerates such as Basic Element having to restructure under external debt and internal efficiency pressures. As a consequence of the country's rapid industrial re-structuring – essentially from bottom-up and demanding massive cash injections (as seen by Avtovaz vying Renault on its 25% stake) – the remote fringe ideals and focus of creating a Russian niche sportscar / luxury car market, appeared periodically halted.
However, moving into this picture at that time, apparently spotting the future opportunity, was Nikolai Fomenko - a domestically renowned musician, actor, motor-sports driver and presenter of Russia's Top Gear TV programme..
[NB investment-auto-motives suspects a low-profile yet well-connected 'backer' has identified the present opportunity to create something anew, exploiting the low point of the financial crisis 'after-shock' within the economic cycle. Given his background and public familiarity, Fomenko has seemingly been positioned as the high profile front-man].
'His' idea for “all new Russian supercar” and luxury brand titled MARUSSIA (aired in 2006).
However, given the lack of quality domestic niche manufacturing capability - which in recent history has seen variable levels of niche sporting car sophistication - the MARUSSIA business model would have to look further afield to access both (ostensibly) ready-made platforms and access higher levels of engineering and fit & finish.
From investment-auto-motives' external view, the fundamental business plan appears to 'simply' overlay new body/bodies, accompanying cabin re-engineering and the additional of multi-media services, to position the MARUSSIA marque in 'luxury sporting' territory. This essentially combines the typically distinct arenas set out by front-engined luxury coupes and mid-engined sporting/track cars. The closest parallel is perhaps the limited series Maserati MC12 – itself derived from Ferrari Enzo, the synthesis of both cars developing other limited editions.
Thus MARUSSIA's self-proclaimed ethos is the age-old automotive scheme of adding greater comfort and practicality features to 'bear-bones' credible/proven sporting origins; Bentley, Bugatti and Alfa Romeo good yesteryear illustrations. The difference here is that these British, French and Italian companies both fully designed and modified such vehicles as the 4.5 Litre, the Atalante and the 8C. MARUSSIA must short-cut such conventions given its limited capabilities.
However, an additional twist to the business model is that MARUSSIA offers a 're-body' service, which at first impression seems to mirror the yesteryear exercise of re-bodying a vehicle to suit different seasons or fashions – very much in the old carrozeria mode. However, Fomenko says without giving detail that this is not quite the case. [NB A latter-day re-body initiative was to be part of Daimler's >smart brand business vision, its ForTwo car designed to enable the swapping of different coloured skin panels]. However, Fomenko apparently states that his offering neither parallels that 'pick & mix' exercise. Exactly what he means by the “re-body service” is thus not yer clear.
Fomenko has been promoting the venture with an overtly philosophical stance, driven by what he describes as his own 'ideological' perspective; something that no doubt chimes well with the Russian mentality. Reasonable enough as part of the marketing ploy, yet the real operational trick – especially given Russian economic and capability constraints – is to pull together the business package by effectively outsourcing the prime and 'added-value' elements of the proposition.
This process, balancing resources vs cost vs product capability - is the archetypal 'triangular heart' of the niche vehicle business model; seen decade after decade across the globe.
He claims to have developed a new mid-engined supercar from what he would have the world believed as 'from scratch', intended to compete against, and sit squarely between the likes of Ferrari/Lamborghini and Bentley. This as a consequence of Russia's wealthy turning to the more comfortable, practicle and liveable Bentley on Russia's poor roads, after enjoying Ferrari/Lamborghini but frustrated by the infrastructure limitations that prohibit use and damage vehicles. Moreover, B1 is set to compete against Koenigsegg, Spyker, McLaren, Venturi et al, aswell as – one would think – Pagani's Zonda.
Furthermore, the original B1 model has also been developed into an additional B2 variant to give the brand and products greater breadth and so wider customer appeal/
[NB By no coincidence the MARUSSIA badge/logo mimics the iconic badge used by MARCHAL, the maker of headlamps for the finest marques in the pre-WW2 years – the metaphor of 'leading light' not lost on classic car connoisseurs].
At first rudimentary glance, given the fact that Fomenko drives an Audi Q7 SUV (from VW Group) and mentions Italian design assistance on B1, it was conceivable that he would ideally use the solid supply source of VW's last-generation - well proven and much amortised – platforms. Thus VW AG would also strengthen its business and political ties with Russia, something very much needed given the level of mass market competition, and Fomenko could use Q7 as the base for his F2 SUV.
Thus investment-auto-motives' original hypothesis was that the B1 was derived from the 2002-2011 Lamborghini Murciellago. But closer inspection of the cars front-end 'hardpoints' such as screen shape and wheel-centre to screen A-post relationship proved otherwise. Instead, its proportions and general form and detailing (such as exhaust outlet positioning) tentatively appears closer to the Pagani Zonda. This would make sense given Fomenko's mention of Italian design/engineering, and Pagani's need to generate an income to service the R&D and production requirements of its next advanced generation of supercars.
However, its seems that for various reasons (including Zonda's IPR protection, exploitation of Russia's own metals resources & processing development, aswell as ease of Russian build), Zonda's has not divulged its core-competence expertise in carbon-fibre race structures. Instead the MARUSSIA B1 uses an aluminium semi-monocoque which accords to early Zonda models and reflects the more conventional construction method used by the 2002-2010 Lamborghini Murciellago. This older construction method better befits new supercar business models which require greater business case elasticity given their unproven nature. (Zonda itself is developing its new generation cars from its R CS model). However, the B1 does incorporate a level of carbon fibre application but largely includes use of a supposedly advanced polyurethane material, which whilst not proving leading-edge theoretically provides nominal weight saving at reasonable costs.
MARUSSIA was shown in 2008 in Moscow, 2009 at Frankfurt, and April 2010 in Monaco, comes in the aforementioned 2 guises: the original B1 incorporates various 'generic' and specific supercar cues from competitor and past cars, aswell as the Zonda-esque small 'bubble' cabin and broad flanks – derived from FIA GT1 and LMP racing.
The B1was showcased alongside Virgin Racing's F1 team given Marussia's partner status, no doubt to provide Virgin with Russian exposure, aswell as the obvious halo/credibility rub-off from F1 - and shared engine use - for Marussia (ie using two versions of a V6 'Marussia-Cosworth' engines, a 3.0L naturally aspirated and 2.8L turbo-charged).
[NB A possible sponsorship link could also feasibly be agreed with MARUSSIA to run at Le Mans and similar Series races such as Sebring and Daytona so as to help raise its and Virgin's international profile alongside F1].
The B2 (2+2) takes-on a more geometric front & side look with a different vertical A-post style windscreen that aids entry/egress, 2-window side DLO graphic and an archetype aerodynamic tear-drop roof profile (with usual Kamm tail) so as to accommodate 4 people. It has an unusual appearance given the coupe cabin volume and treatment, which in part reflects a supposed functionalism which stylistically echoes the intendedly differentiated Avions Voisin cars from the 1920s/30s.
However, oddly the dimensional specifications for the car as listed on the official website are the same as the B1. Of course as much similarity as possible reduced cost but given its differing remit seems strange, especially regards height given head room requirements and an apparent visual difference. It is suspected that the B2 specs are little more than copy+ of B1 for simple website publishing.
In addition to the cars is the intention to develop a performance SUV vehicle, as showcased by the F2 concept in Moscow in May 2010. This is logical given wealthy Russian's demand for large SUVs, however the treatment as shown does leave much to be desired
The eventual vehicle portfolio then will essentially mimic Porsche's & Aston Martin Lagonda's use of sportscars and performance 4x4. (Porsche also of course offers coupes and coupe saloon, the latter also offered by AML. Aston Martin Lagonda also offers its 'novel' city car sourced from Toyota).
Thus in product positioning and model portfolio, MARUSSIA follows in the path of 2 legendary companies. However, given the need to markedly differentiate its products from their origins means that their vehicles' innate cosmetic and functional DNA is somewhat 'different' or 'interesting'.
The B1 two-seat mid-engined supercar appears the most conventional, whilst the 2+2 packaging of the B2 version suffers typical 2+2 M-E packaging faults, whilst its use as a 'product bridge' to the cosmetically 'alternative' F2 SUV, means that it is compromised on the aesthetic front aswell as the packaging front.
Ironically given its mid-engined layout, the B1 names itself a 'Grand Turismo Sport Coupe', something nominally associated with front engined road cars which allows for adequate rear storage. However the B1's reference is to the FIA's GT racing class. This then has obvious connetation to Maserati's GranTurismo Coupe & Convertible.
[NB It also correlates to TVR's 1960s Grantura model name, so possibly leaves the door open for latter-day operational synergies with a resurrected TVR]
As for the B2, things from this admitted distance look unclear, especially the subject of a shared wheelbase with B1 which would compromise either one or the other.
[NB the idea of 'long cabin' 2+2 or 4 seater laid-out within a mid-engined car package has long been seen as 'the worst of both worlds' since it leads to a heavily compromised product basis on dynamic performance grounds given the loss of true mid-engined positioning and on passenger occupancy grounds given rear leg & head-room squeeze. Though it 'works' as a theoretical USP on paper, historical precedents demonstrate the limited appeal: the less than successful 1980s Ferrari GT4 & Mondial, and more recent 2006 Lotus Europa. Typically 2+2 M-E based cars are created either to build-up the volume basis for a project's business case, or to extend the life-cycle of a platform seeking either required additional volume to realise original business case ambitions, or to try and maximise margins from a previously amortised base].
Given the apparent use of an adapted Pagani Zonda frame, investment-auto-motives believes margin maximisation is MARUSSIA's intention, whilst the Pagani desire is to licence old technology for an additional income stream.
As is to be expected, and all to typical within the start-up arena, a certain amount of press chasing and public story-telling is being told by Fomenko to support the project and business.
To this end the B1 and B2 have supposedly designed wholly on computer via advanced CAD systems, aiding the speed of development and enabling a quicker market launch, since this supposedly negates the need for typical running prototypes, the full prove-out process supposedly achieved via computer hardware programmes and rig-testing of a single vehicle.
This again is somewhat questionable, since throughout the history of CAD use such assertions have been made, the reality being that initial customers end-up as the trialling process that irons out problems that a mass manufacturer would solve during in-house trialling. The prototype trialling process is of course a costly one, and so for small start-up businesses with limited liquidity it makes sense to create a business model which modifies a proven platform, enables niggle-fixing from customer feedback and critically shortens the period between set-up and supply costs and customer revenue receipts.
Getting the Overhead and CapEx budget balanced by the Income Receipts is the most important element of any new business, especially so in the auto-motive sector. The failure to do so has been the downfall of many ventures over the last century, and is the reason why (rightly) the investment community generally prefers the pragmatic attitude of the businessman to the perfectionist attitude of the inventor-engineer.
With no doubt help from other more low-profile colleagues, Nikolai Fomenko, ever the showman will need to balance marque enthusiasm, commercial practicality, product delivery and ongoing support to be taken seriously by customers. That is the real challenge given that MARUSSIA is still in its infancy, with the possibility that its eyes are bigger than its belly.
However, Fomenko indicates that a production volume of 100-150 units would be “ a good result”, though it is not clear whether that 100 figure equals the project's financial break-even, and the additional units profit. Or whether it requires 150 vehicles to reach break-even. It is an important point to make that such a 50% variation is highly unusual when assessing the viability of a niche manufacture vehicle project. Whilst exacting figures are understandably in-credible, a reduction in the volume's effective 'spread' would be deemed very necessary to pin down the business case.
To this end MARUSSIA must present itself well and convincingly to an international crowd.
Fomenko's ultimate ideal, as presented to latter-day investors, could well be piggy-back Pagani to build reputation and credibility in the near term – ie over the next decade - then to piggy-back a bigger sourcing partner such as Lamborghini (ie VW Group) to gain production efficiencies.
This would appear to be a notionally stable long-term plan if viable.
Yet, even with greater levels of FDI pumped into Russian capital markets, seeking higher-value returns than available in the West or Japan, given the past foreign investment concerns in Russia, there will be a need by any foreign investor to see tangible returns and/or growth evidence. An immediate ROI 'bang for the buck' directing capital to the likes of commodities, metals, telecoms and state-support initiatives. Whilst for VC orientated entities, the need to have far greater transparency throughout the infancy stages of any start-up company; critically to ensure allotted funding is fully accountable and provides visible early-stage business traction.
That future FDI that President Medvedev seeks will have investor procedural demands of its own, but especially, and necessarily, so in the relatively complex, costly and politicised world of national supercars.
Ironically, even with the current pro-Russia stance of global capital markets, in such non-conventional capital plays, it will be the Russian who will act the bulls and the FDI outsiders the legendary Russian bear.
Sunday, 29 August 2010
Friday, 20 August 2010
Company Focus – GM – Investor Road-Show Prospecting with a Necessarily Low Key “Yippee IPO”
The North American operations of the new General Motors Company has experienced a remarkable ride over the last 12 months or so. Its $60bn+ financial life-line and a politically generated 'fast-track' Chapter 11 restructuring designed to provide it with a lease of new life; so as to play its part in the economic regeneration of the US, and end the domestic value-destruction drag within the company's global empire.
Undoubtedly a radically re-shaped entity. It saw 8 brands slashed to 4: banishing non-performing divisional marques and those out of kilter with prevailing social trends. It saw an essentially cannibalistic dealer-base much contracted*: re-setting showroom catchment areas and enabling pricing power. It saw product specification rationalisation: the resurgent days of “more combinations than stars in the universe” gone. It saw the number of preferred supplier numbers shrunken: to offer contract security in return for discounts driven by economies of scale. It saw product engineering rationalisation: as new vehicle programmes were determined 'global' instead of 'local'. It saw the UAW recognise the scale of the challenge, necessarily altering its historic left-ward stance to rightwards: the reality of the enormous GMNA challenge and government persuasion showing its need to be part of the solution, not the problem. It saw major national support: from the large Energy Department loans from the out-going Bush administration, to the unprecedented Quantitative Easing measures from President Obama, which not only provided the 'bail-out' monies but doubly support the company (and the sector) with”Cash for Clunkers”
[*NB allegations flying back and forth within public web forums that the dealer rationalisation programme was supposedly heavily influenced by the Dem vs Rep campaign donation choices of GM auto-dealers].
Never in the US auto-sector's history has so much change been seen. As a result of that drastic surgeory which spanned major liposuction, cardio-vascular re-routing and skeletal support, the organic element of the company is indisputably different.
However, akin to any over-weight, artery clogged, arthritic patient, the surgeory can only normalise the organic. As important, if not more so, is mental (ie cultural) re-orientation For three reasons: to avoid re-lapse into destructive old habits, to recognise the reality (ie 'new norm') of the surrounding environment (of the global automotive arena, and GMNA's objective place within it) and to set-out a health improvement regime which re-builds understanding, character and innate strength.
This was always was set to be the substantial post-apocalyptic challenge – and it has now arrived.
Yet after so much positive yet painful traction, enabled by 'text-book' actions and oiled by Washington, as the company nears the eve of its IPO – for an expected 20% disposal of the government stake – two events of a macro and micro nature, point to a behind the scenes reality at GM which is marring the bright future previously painted.
1.At the macro-level, the candid description of the all to real re-emerging macro-economic headwinds availing themselves, depicted in the Risks (ie caveat) section of the S-1 document submitted to the SEC yesterday as part of the IPO procedure.
2.At the micro-level, the very surprising departure of Chairman Ed Whitacre, having seen successful emergence from Chapter 11 and offered two quarters of seemingly successful financial results.
Although not privvy to an inside view of the restructuring, investment-auto-motives has long been cautious about the reality behind the all too typical necessary but potentially over-played corporate bravado. In short questioning “what the store really looks like behind the Wall Street directed window-dressing”?
The question that always beset New GM was “in what manner would it approach re-listing onto public capital markets”? Of course much was dependent upon the positive or negative dynamics of those markets themselves, setting the scene for relative economic confidence throughout the economy and especially so the institutional and mom & pop investor. That said, once the market sharply rebounded from its March 2009 low-point, the rapidity of that rise – holding steady after 6 months and sustained for 14 months - essentially set the scene for an early presentation of New GM.
Market dynamics fitted well with the government's need to claw back its 'investment' in the company and so, given the record breaking valuation and size of the eventual full listing, commissioned the full gamut of Wall Street's big name investment banks to both act as book-runners and under-writers.
But since the recent topping-out of western capital markets, thanks to corporate earnings driven by a mixture of tail-end cost-savings and inventory re-building, unsurprisingly the age of what seemed continued, unfettered, but foundationally unproven jubilation has been somewhat scuppered.
This has engendered a 'reality check' amongst both touting corporate executives and their agent bankers. It is a very necessary reaction which in the larger context should help prevent the bursting of a mini-bubble. And crucially at the corporate level instills a conservative atmosphere of reasoned valuation.
Thus GM's change of tack. From a 'full steam ahead' stance to something more cautious. The initial reported intention of an all-out offering of Washington's & Ontario's complete stake, so riding buoyant market sentiment as a switch play from what seemed a bond bubble, has altered dramatically in the cold light of recent market jitters. Equity buys have slowed for even proven 'risk-off' buys such as infrastructure, pharma and sections of consumer retail, so the market acceptance of a large scale GM offering – even a stretch in itself – would have consequently diminished.
This is the reality which GM wisely conveyed in its S-1 filing, that 'risk-off' sentiment detailed by the still lack-lustre recovery in the US, Europe's economic drag and perhaps most importantly the contraction of vehicle demand in China as the PRC seeks to re-align its own economy; given the slowed demand-pull from export regions which by default helps keep the Renminbi tracking slightly lower.
Thus GM's S-1 recognition of a concerning slowed phase in the global economy must be seen to be seen, with GM no doubt an understanding that with slowed Chinese domestic demand hitting commodity imports along with increasing world-wide food-stuff prices, that even rebuoyed South American car demand may suffer as well; so seeing demand deflation across the globe.
But what of Ed Whitacre's untimely departure?
It is unexpected given his stand-by-thee reputation build at AT&T. Of course it was well recognised that he was parachuted into GM specifically to lend gravitas to and managerially underpin the floatation process, that is seemingly his craft. Yet as insightful financial press editorials have stated: the job is far from done, even if the environmental market conditions have changed. As has been reported. the CEO's role has been handed from the charismatic long-serving Wagoner, to the accounts clinical Henderson, to the re-orchestrational Whitacre and now to the more entrepreneurially renowned Dan Akerson.
Most interestingly, Akerson holds an MD position as Buy-Out Head at the private equity firm Carlyle Group.
Ideally Whitacre would have kept to his word of (to paraphrase) “not going anywhere for sometime”, since this would have given a much needed stability to GM mid and senior tier management, who quite frankly must be continually bemuddled even as corporate confidence builds. But the appointment of Akerson highlights perhaps not only greater care to pitch GM properly to the market, but also allow it to fairly value and dispose of its remaining interests in the essentially defunct Motors Liquidation Corporation.
The 'old GM' company - still with creditors in toe - has the remit of off-loading what are essentially reams of 'rust-belt' properties and plant Such asset disposal is typically not the remit or capability of typical auto-executives, their focus better directed in running the active side of the business. So instead, who better than a knowledgeable, value-driven, and deal savvy private equity player to undertake the role?
Brown-field industrial plots here and now seem to be the last asset class on people's minds, but of course it will be Chinese, Indian and SE Asian firms, who whilst cash-rich and enjoying steady income streams will be on the look-out for western acquisition deals throughout North America and Europe. As a way-in to serve the still sizable GM across the range of different vehicles systems: from possibly the likes of TATA in body construction, Bharat Forge in powertrain and suspension castings, Geely affiliated companies in trim and interiors and other Chinese companies in electrical and electronic harnesses and 'black-box'.
Identifying 'fair-value' asset disposal prices will be key, as will a 'simple and clean' no-nonsense agreements to enable quick legal conveyance of the properties and plant. If not as successful as planned in selling to overseas buyers, GM may need to look at the possibility of passing on such redundant land to the government as a part of an equity return deal. This would assist both GM and the government in terms of re-apportioning soft and hard assets to their natural places, GM holding more of its own equity and the state holding more of its own terra firma, but for better mid-term confidence and an improved outcome for long-term national prosperity, the attraction of Eastern FDI cannot be understated.
On paper the production active side of GM's business model has been reset to reach breakeven at an annual market volume (TIV) of 10.5m, given a maintained and projected market-share of approximately 20%.
[NB. Maintaining that 20% will be key, as recent marketing campaigns such as the 5-year/100,000 mile vehicle warranty highlights. Yet the level of competition is still severe, as seen by Hyundai's 7-year warranty, the need for Toyota to reclaim its dominance, Honda, Nissan & Suzuki incursion, aswell as critically the North American growth ambition of VW, Ford's retained hold and the obvious return of Chrysler (and latterly FIAT) as market forces].
GM cannot simply rest on its laurels of a transformation job well done under Whitacre, nor can it expect the capital markets to accept that miraculously all is now well, nor can it expect a windfall from its MLC asset-disposals, nor can it expect the future helping hand of Washington.
As the year-end IPO deadline approaches GM must be seen to be more far more than it has been. It has by Chapter 11 default escaped its image of endemic irresponsibility and mis-management.
But now New GM must present itself to be far more than a possible case of 'fur coat and no knickers'. This viewpoint generated by recent issues such as: partnership with a sub-prime lender to support sales volumes (vis a vis Washington's expectations), concerns regards the proliferation of creditor-warranty and convertible bonds related 'class-B' shares, and the surprisingly large reported pensions drag carried-over: which could not be culled under Chapter 11 given the scale of GM's social legacy.
Yes, GM enters a new phase, one in which it will be undoubtedly tested, but as with any buyer of a car, let alone a car company, it will need to have been 'tried and tested', before fully convincing the capital markets.
Theoretically, having ridden the support wave over the last year,its present $32bn cash pile would allow it to prove itself without the need for immediate new capital injections. If all is truly stable, that would surely be the expectation from investors, and the acid test for GM. Thus avoiding the IPO as effectively an avenue to 'Lemon Aid'. Exactly how it conducts itself throughout this new period of 'stretch' of retracted consumer demand will be testament to its current and future capability.
Whilst Akerson is promoting divestment potential the fundamentals of the IPO's confidence relies upon operational acumen, and drafting a tenable payment schedule from its investment funds to meet its still weighty pensions obligations without having to 'bet the farm' on high risk choices.
These irredoubtable and crucial facts are recognised by the financial press, sector analysts on both side of the buy-sell deal and critically Washington itself. And no doubt by Akersen himself.
Having come so far, no matter how 'lady-like' its appearance, GM cannot afford to 'pull a fast one' on the markets, expecting a latter case of a rising tide lifting all boats. This IPO registration process is vitally important for the corporation and the country. Certain quarters of the press have already hinted that "Dan Akerson's number should be up", but we can only allow investor 'registration numbers' to tell the ultimate tale. Black versus Red labels are all to easy to affix before the event. Yes it may be a strenuous hill-climb yet, but that all important S-1 document at least highlights the bumps in the road ahead, even if the possibility of black-ice is not overtly mentioned.
So, from the basic operational and balance sheet out-look, investment-auto-motives is yet to be convinced of GM's fully-recovered return. But that declaration of horizon risk indicates an renewed atmosphere of prudence at GM which should be welcomed, even if investor breath must still be cautiously held whilst fully assessing the floatation worthiness of the GM vehicle itself.
Undoubtedly a radically re-shaped entity. It saw 8 brands slashed to 4: banishing non-performing divisional marques and those out of kilter with prevailing social trends. It saw an essentially cannibalistic dealer-base much contracted*: re-setting showroom catchment areas and enabling pricing power. It saw product specification rationalisation: the resurgent days of “more combinations than stars in the universe” gone. It saw the number of preferred supplier numbers shrunken: to offer contract security in return for discounts driven by economies of scale. It saw product engineering rationalisation: as new vehicle programmes were determined 'global' instead of 'local'. It saw the UAW recognise the scale of the challenge, necessarily altering its historic left-ward stance to rightwards: the reality of the enormous GMNA challenge and government persuasion showing its need to be part of the solution, not the problem. It saw major national support: from the large Energy Department loans from the out-going Bush administration, to the unprecedented Quantitative Easing measures from President Obama, which not only provided the 'bail-out' monies but doubly support the company (and the sector) with”Cash for Clunkers”
[*NB allegations flying back and forth within public web forums that the dealer rationalisation programme was supposedly heavily influenced by the Dem vs Rep campaign donation choices of GM auto-dealers].
Never in the US auto-sector's history has so much change been seen. As a result of that drastic surgeory which spanned major liposuction, cardio-vascular re-routing and skeletal support, the organic element of the company is indisputably different.
However, akin to any over-weight, artery clogged, arthritic patient, the surgeory can only normalise the organic. As important, if not more so, is mental (ie cultural) re-orientation For three reasons: to avoid re-lapse into destructive old habits, to recognise the reality (ie 'new norm') of the surrounding environment (of the global automotive arena, and GMNA's objective place within it) and to set-out a health improvement regime which re-builds understanding, character and innate strength.
This was always was set to be the substantial post-apocalyptic challenge – and it has now arrived.
Yet after so much positive yet painful traction, enabled by 'text-book' actions and oiled by Washington, as the company nears the eve of its IPO – for an expected 20% disposal of the government stake – two events of a macro and micro nature, point to a behind the scenes reality at GM which is marring the bright future previously painted.
1.At the macro-level, the candid description of the all to real re-emerging macro-economic headwinds availing themselves, depicted in the Risks (ie caveat) section of the S-1 document submitted to the SEC yesterday as part of the IPO procedure.
2.At the micro-level, the very surprising departure of Chairman Ed Whitacre, having seen successful emergence from Chapter 11 and offered two quarters of seemingly successful financial results.
Although not privvy to an inside view of the restructuring, investment-auto-motives has long been cautious about the reality behind the all too typical necessary but potentially over-played corporate bravado. In short questioning “what the store really looks like behind the Wall Street directed window-dressing”?
The question that always beset New GM was “in what manner would it approach re-listing onto public capital markets”? Of course much was dependent upon the positive or negative dynamics of those markets themselves, setting the scene for relative economic confidence throughout the economy and especially so the institutional and mom & pop investor. That said, once the market sharply rebounded from its March 2009 low-point, the rapidity of that rise – holding steady after 6 months and sustained for 14 months - essentially set the scene for an early presentation of New GM.
Market dynamics fitted well with the government's need to claw back its 'investment' in the company and so, given the record breaking valuation and size of the eventual full listing, commissioned the full gamut of Wall Street's big name investment banks to both act as book-runners and under-writers.
But since the recent topping-out of western capital markets, thanks to corporate earnings driven by a mixture of tail-end cost-savings and inventory re-building, unsurprisingly the age of what seemed continued, unfettered, but foundationally unproven jubilation has been somewhat scuppered.
This has engendered a 'reality check' amongst both touting corporate executives and their agent bankers. It is a very necessary reaction which in the larger context should help prevent the bursting of a mini-bubble. And crucially at the corporate level instills a conservative atmosphere of reasoned valuation.
Thus GM's change of tack. From a 'full steam ahead' stance to something more cautious. The initial reported intention of an all-out offering of Washington's & Ontario's complete stake, so riding buoyant market sentiment as a switch play from what seemed a bond bubble, has altered dramatically in the cold light of recent market jitters. Equity buys have slowed for even proven 'risk-off' buys such as infrastructure, pharma and sections of consumer retail, so the market acceptance of a large scale GM offering – even a stretch in itself – would have consequently diminished.
This is the reality which GM wisely conveyed in its S-1 filing, that 'risk-off' sentiment detailed by the still lack-lustre recovery in the US, Europe's economic drag and perhaps most importantly the contraction of vehicle demand in China as the PRC seeks to re-align its own economy; given the slowed demand-pull from export regions which by default helps keep the Renminbi tracking slightly lower.
Thus GM's S-1 recognition of a concerning slowed phase in the global economy must be seen to be seen, with GM no doubt an understanding that with slowed Chinese domestic demand hitting commodity imports along with increasing world-wide food-stuff prices, that even rebuoyed South American car demand may suffer as well; so seeing demand deflation across the globe.
But what of Ed Whitacre's untimely departure?
It is unexpected given his stand-by-thee reputation build at AT&T. Of course it was well recognised that he was parachuted into GM specifically to lend gravitas to and managerially underpin the floatation process, that is seemingly his craft. Yet as insightful financial press editorials have stated: the job is far from done, even if the environmental market conditions have changed. As has been reported. the CEO's role has been handed from the charismatic long-serving Wagoner, to the accounts clinical Henderson, to the re-orchestrational Whitacre and now to the more entrepreneurially renowned Dan Akerson.
Most interestingly, Akerson holds an MD position as Buy-Out Head at the private equity firm Carlyle Group.
Ideally Whitacre would have kept to his word of (to paraphrase) “not going anywhere for sometime”, since this would have given a much needed stability to GM mid and senior tier management, who quite frankly must be continually bemuddled even as corporate confidence builds. But the appointment of Akerson highlights perhaps not only greater care to pitch GM properly to the market, but also allow it to fairly value and dispose of its remaining interests in the essentially defunct Motors Liquidation Corporation.
The 'old GM' company - still with creditors in toe - has the remit of off-loading what are essentially reams of 'rust-belt' properties and plant Such asset disposal is typically not the remit or capability of typical auto-executives, their focus better directed in running the active side of the business. So instead, who better than a knowledgeable, value-driven, and deal savvy private equity player to undertake the role?
Brown-field industrial plots here and now seem to be the last asset class on people's minds, but of course it will be Chinese, Indian and SE Asian firms, who whilst cash-rich and enjoying steady income streams will be on the look-out for western acquisition deals throughout North America and Europe. As a way-in to serve the still sizable GM across the range of different vehicles systems: from possibly the likes of TATA in body construction, Bharat Forge in powertrain and suspension castings, Geely affiliated companies in trim and interiors and other Chinese companies in electrical and electronic harnesses and 'black-box'.
Identifying 'fair-value' asset disposal prices will be key, as will a 'simple and clean' no-nonsense agreements to enable quick legal conveyance of the properties and plant. If not as successful as planned in selling to overseas buyers, GM may need to look at the possibility of passing on such redundant land to the government as a part of an equity return deal. This would assist both GM and the government in terms of re-apportioning soft and hard assets to their natural places, GM holding more of its own equity and the state holding more of its own terra firma, but for better mid-term confidence and an improved outcome for long-term national prosperity, the attraction of Eastern FDI cannot be understated.
On paper the production active side of GM's business model has been reset to reach breakeven at an annual market volume (TIV) of 10.5m, given a maintained and projected market-share of approximately 20%.
[NB. Maintaining that 20% will be key, as recent marketing campaigns such as the 5-year/100,000 mile vehicle warranty highlights. Yet the level of competition is still severe, as seen by Hyundai's 7-year warranty, the need for Toyota to reclaim its dominance, Honda, Nissan & Suzuki incursion, aswell as critically the North American growth ambition of VW, Ford's retained hold and the obvious return of Chrysler (and latterly FIAT) as market forces].
GM cannot simply rest on its laurels of a transformation job well done under Whitacre, nor can it expect the capital markets to accept that miraculously all is now well, nor can it expect a windfall from its MLC asset-disposals, nor can it expect the future helping hand of Washington.
As the year-end IPO deadline approaches GM must be seen to be more far more than it has been. It has by Chapter 11 default escaped its image of endemic irresponsibility and mis-management.
But now New GM must present itself to be far more than a possible case of 'fur coat and no knickers'. This viewpoint generated by recent issues such as: partnership with a sub-prime lender to support sales volumes (vis a vis Washington's expectations), concerns regards the proliferation of creditor-warranty and convertible bonds related 'class-B' shares, and the surprisingly large reported pensions drag carried-over: which could not be culled under Chapter 11 given the scale of GM's social legacy.
Yes, GM enters a new phase, one in which it will be undoubtedly tested, but as with any buyer of a car, let alone a car company, it will need to have been 'tried and tested', before fully convincing the capital markets.
Theoretically, having ridden the support wave over the last year,its present $32bn cash pile would allow it to prove itself without the need for immediate new capital injections. If all is truly stable, that would surely be the expectation from investors, and the acid test for GM. Thus avoiding the IPO as effectively an avenue to 'Lemon Aid'. Exactly how it conducts itself throughout this new period of 'stretch' of retracted consumer demand will be testament to its current and future capability.
Whilst Akerson is promoting divestment potential the fundamentals of the IPO's confidence relies upon operational acumen, and drafting a tenable payment schedule from its investment funds to meet its still weighty pensions obligations without having to 'bet the farm' on high risk choices.
These irredoubtable and crucial facts are recognised by the financial press, sector analysts on both side of the buy-sell deal and critically Washington itself. And no doubt by Akersen himself.
Having come so far, no matter how 'lady-like' its appearance, GM cannot afford to 'pull a fast one' on the markets, expecting a latter case of a rising tide lifting all boats. This IPO registration process is vitally important for the corporation and the country. Certain quarters of the press have already hinted that "Dan Akerson's number should be up", but we can only allow investor 'registration numbers' to tell the ultimate tale. Black versus Red labels are all to easy to affix before the event. Yes it may be a strenuous hill-climb yet, but that all important S-1 document at least highlights the bumps in the road ahead, even if the possibility of black-ice is not overtly mentioned.
So, from the basic operational and balance sheet out-look, investment-auto-motives is yet to be convinced of GM's fully-recovered return. But that declaration of horizon risk indicates an renewed atmosphere of prudence at GM which should be welcomed, even if investor breath must still be cautiously held whilst fully assessing the floatation worthiness of the GM vehicle itself.
Sunday, 15 August 2010
Macro Level Trends – UK plc – “R&D&R” : Adding the Element of "Realisation” to the R&D Agenda
This third and last commentary regards the UK's current industrial state of play unashamedly uses an excerpt of classic literature to once again (poignantly) echo Lord Brown's all important point: that the nation's R&D agenda – between 'Pure' and 'Applied' must be better managed.
To re-emphasis, the correlation of 'value-added' technological solutions versus 'time' to exploitation, has rarely ever been so critical.
[NB investment-auto-motives titles this new era 'RADAR' : derived from the extension of the term R&D into R&D&R – the latter 'R' suffix highlighting 'Realisation'. RADAR is intentionally used as a metaphor given its role as an examplar of technological development and application which quite literally altered Britain's future at a critical juncture of its own history].
As Business Secretary Vince Cable seeks to address the innate problems of the country's productivity mechanism - and the 'value-added' nature of its output - a pertinent section from Jonathan Swift's “Gulliver's Travels” (circa 1726) is undoubtedly timely.
It is taken from Gulliver's 3rd adventurous trip, reaching Lagado, where he reveiws the role and manner of the indigenous sciences. Whilst Swift was overtly light-hearted in its case-studies, he importantly raises questions regards the less than wise deployment of resources.
[NB An innate irony presents itself given that Swift questions the role and delivery of Lagado's 'Acadamies' whilst his central sentiments are being presented by Lord Brown, who some 284 years later the President of the Royal Acadamy of Engineering. It is a small irony I'm sure both would enjoy].
…....................................................................................
Gulliver's Travels / Chapter 5
“The academy is not an entire single building, but a continuation of several houses on either side of the street, which growing waste, was purchased and put to that use.
I was received today by a very kindly warden, and went for many days to the academy. Every room hath in it one or more projectors [NB scientific developers]; and I believe, I could not be in fewer than five hundred rooms.
The first man I saw was of meagre aspect, with sooty hands and face, his hair and beard long, ragged, and singed in several places. His clothes, shirt and skin were all the same colour. He had been eighty years upon a project for extracting sunbeams out of cucumbers, which were to be put into vials hermetically sealed, and let out to warm the air in raw, inclement summers. He told me he did not doubt, in eight years more, he should be able to supply the governor's gardens with sunshine at a reasonable rate; but he complained that his stock was low, and entreated me to give him something as an encouragement to ingenuity, especially since this had been a very dear season for cucumbers. I made him a small present, for my Lord had furnished me with money on purpose, because he knew their practice of begging from all who go to see them.
I saw another at work to calcine ice into gun-powder, who likewise showed me a treatise he had written concerning the malleability of fire, which he intended to publish.
There was a most ingenious architect, who had contrived a new method for building houses, by beginning at the roof, and working downwards to the foundation, which he justified to me, by the like practice of those two prudent insects, the bee and the spider.
There was a man born blind, who had several apprentices in his own condition: their employment was to mix colours for painters, which their master taught them to distinguish by feeling and smelling. It was, indeed, my misfortune to find them, at that time, not very perfect in lessons, and the professor himself happened to be generally mistaken: this artist is much encouraged and esteemed by the whole fraternity”.
....................................................................................
Today, as perhaps never before, the nation's own 'RADAR' capability must be commissioned to qualify and quantify the output from the UK's public and private investment R&D agenda.
To re-emphasis, the correlation of 'value-added' technological solutions versus 'time' to exploitation, has rarely ever been so critical.
[NB investment-auto-motives titles this new era 'RADAR' : derived from the extension of the term R&D into R&D&R – the latter 'R' suffix highlighting 'Realisation'. RADAR is intentionally used as a metaphor given its role as an examplar of technological development and application which quite literally altered Britain's future at a critical juncture of its own history].
As Business Secretary Vince Cable seeks to address the innate problems of the country's productivity mechanism - and the 'value-added' nature of its output - a pertinent section from Jonathan Swift's “Gulliver's Travels” (circa 1726) is undoubtedly timely.
It is taken from Gulliver's 3rd adventurous trip, reaching Lagado, where he reveiws the role and manner of the indigenous sciences. Whilst Swift was overtly light-hearted in its case-studies, he importantly raises questions regards the less than wise deployment of resources.
[NB An innate irony presents itself given that Swift questions the role and delivery of Lagado's 'Acadamies' whilst his central sentiments are being presented by Lord Brown, who some 284 years later the President of the Royal Acadamy of Engineering. It is a small irony I'm sure both would enjoy].
…....................................................................................
Gulliver's Travels / Chapter 5
“The academy is not an entire single building, but a continuation of several houses on either side of the street, which growing waste, was purchased and put to that use.
I was received today by a very kindly warden, and went for many days to the academy. Every room hath in it one or more projectors [NB scientific developers]; and I believe, I could not be in fewer than five hundred rooms.
The first man I saw was of meagre aspect, with sooty hands and face, his hair and beard long, ragged, and singed in several places. His clothes, shirt and skin were all the same colour. He had been eighty years upon a project for extracting sunbeams out of cucumbers, which were to be put into vials hermetically sealed, and let out to warm the air in raw, inclement summers. He told me he did not doubt, in eight years more, he should be able to supply the governor's gardens with sunshine at a reasonable rate; but he complained that his stock was low, and entreated me to give him something as an encouragement to ingenuity, especially since this had been a very dear season for cucumbers. I made him a small present, for my Lord had furnished me with money on purpose, because he knew their practice of begging from all who go to see them.
I saw another at work to calcine ice into gun-powder, who likewise showed me a treatise he had written concerning the malleability of fire, which he intended to publish.
There was a most ingenious architect, who had contrived a new method for building houses, by beginning at the roof, and working downwards to the foundation, which he justified to me, by the like practice of those two prudent insects, the bee and the spider.
There was a man born blind, who had several apprentices in his own condition: their employment was to mix colours for painters, which their master taught them to distinguish by feeling and smelling. It was, indeed, my misfortune to find them, at that time, not very perfect in lessons, and the professor himself happened to be generally mistaken: this artist is much encouraged and esteemed by the whole fraternity”.
....................................................................................
Today, as perhaps never before, the nation's own 'RADAR' capability must be commissioned to qualify and quantify the output from the UK's public and private investment R&D agenda.
Friday, 6 August 2010
Address to The House of Lords
The previous post applauds the informed reaction of Lord Brown and Mr Dennis in appreciating the macro and micro-level challenges the UK faces in generating a new era of industrial & economic value creation.
The following re-presents a letter from investment-auto-motives addressed to pertinant independent Cross-bench Peers of the House of Lords, with the aim of highlighting the level of challenge and providing a contextual background, the combine of which calls for a new 'UK Auto Industry Manifesto'.
The letter is provided here for the interests of my web-blog readers from investment, governmental and industry spheres.
.......................................................................................
The House of Lords
Palace of Westminster
London
SW1A OPW
14th April 2010
Re: Fiscal Consolidation & the Need for a 'UK Automotive Industry Manifesto'
My Lords & Lady,
Perhaps as never before in Britain's modern history has the need for truly independent judgment been greater to set the country back on course, domestically and internationally.
This letter and its enclosures are intended for yourselves and ideally copied to other wholly independent Cross-Bench Peers as well as members of the Science & Technology Committee; thus those who have non-partisan associative interest and baring – formal or otherwise - on the future of '21st century Industrial Britain'.
The list of published reports from the House indicates that scant legal & associative policy regard has been given to the indigenous automotive sector over the last two decades. This is unsurprising, a consequence of the decline of British owned mass-manufacture in a notional post-industrial age; with instead primary attention directed at the Kyoto ambition of curbing vehicle emissions as part of the bigger global CO2 reduction ambition.
Yet the two – industry & the eco-challenge - are undoubtedly concomitant.
Presently attention is drawn to the future by way of Bills attendant to: digital communications, genomic medicine, nano-tech, the electronic micro-chip etc; such disciplines now set against the very real regard of “Setting Priorities for Publicly Funded Research” given the sizable retraction of near-mid term public expenditure.
For the UK, and indeed much of the West, a concerning 'activity chasm' has emerged as a consequence of prolific macro-economic headwinds and the level of ecological challenge. That chasm will only be bridged by the effective and efficient use of the country's public and private resources - from availability of capital, to the promotion of the enterprise base, to the nourishment of the inherent human intellect.
The bursting of the credit-bubble demonstrates just how fragile the UK economy has become, portions of our population now economically disconnected; the 'credit-pull' for (often nefarious) personal consumption has exhausted, and instead, today, there is a new requirement for 'productivity-push'.
Just as the 19th century gave rise to mass industry and the 20th to mass consumption, so the 21st demands a re-formation of both sides of the equation, to meet this new era's demands.
As such, the full cross-section of UK industry, services & commerce requires re-examination and where necessary re-orientation to become: aligned, harmonious, productive and create meaningful value in the economic sense, the rational utility sense and even the emotional reward sense at both national and personal levels.
To this end, the full value chain of the British automotive sector, along with its incumbent foreign-owned manufacturers, and potential inter-regional co-operation, must be considered in-depth as an 'economic re-generator' given the ever present need for personal & public mobility, which in itself is historically proven as a cornerstone in promoting increasing economic activity.
All too often 'automotive' is seen as yesteryear because the conventional 20th century mass-manufacture 'Budd-system' business model is now typically better served by the socio-economic dynamics of the developing world. That perception whilst valid is not the whole story, discounting the reality and increasing relevance of alternative business models that focus upon advanced technologies and niche manufacture. Yet the UK's historical, formative, connection to these 'old' and 'new' sectors means that it operates higher-up the value-curve, with concomitant IPR leadership and effective operational know-how.
Whilst the recent rehabilitation of coal-mining is applauded as in the national interest, the automotive industry - although mis-perceived as 'old' - can be viewed in a similar vain, since the sector is so diverse and multi-faceted as to be more comparable to a reformable Rubik's cube - ie with the ability to re-shape itself both throughout the value-chain: from component supplier to assembler to retailer to maintenance & thru' life services provider; and indeed in time as a whole.
Thus it is my sincere belief that through insightful guidance at government, investor and enterprise level, that the UK automotive industry has a compelling role to play in both the wealth generation and well-being of the nation.
The enclosed items present the sole originally intended 3-page web-log item titled 'Fiscal Consolidation & the Need for a UK Auto Manifesto'. (The accompanying diagram illustrating the global 'trickle-down' achievable).
Yet to give this 'call to action' improved context, a compendium of selected web-log essays has been compiled providing various inputs for 'big-picture' food for thought. Hence a cross-section of items seeks to paint a portrait of the prime issues and trends facing the sector, including:
- The required 'economy drive' to dig the UK out of national indebtedness
- The danger of over-ideological personal transport initiatives such as TfL's bicycle scheme.
- The need to generate tangible added-value across the UK, US & Europe (Parts 1,2 & 3)The investor prompted need for continued western auto-industry restructuring.
- The importance of R&D: direct applications and technology transfer, with Dyson example
- The increasing importance of the small car, with Aston-Martin-Lagonda City-Car example
- The recognition that pure EVs have a near-term limited role, with Daimler-Renault example
- The need to consider vehicle manufacture & usage patterns relative to metro-mobility and metro-rehabilitation needs, using Las Vegas as hypothetical model.
- The 'dis-joint' of near-mid term currency markets as prompter for auto-sector value-seeking.
From a truly independent voice, this call to consider the role and shape of 'UK Auto plc' has no political bias or stance and prohibits its use as such. Instead it simply promotes the idea of improved industrial thinking & policy-setting that must be addressed from 'top-down', seeking to increase the momentum of the recent UK Motor Industry Inquiry, and critically poses the question as to how the country can best utilise its high & mid-value capabilities on global & national stages: the latter with overt reliance on auto-retail.
Napoleon's disparaging adage that 'Britain is a country of shop-keepers' may be all too true today given the realities of manufacturing efficiencies elsewhere and the necessary need for free-trade to lift all nations. Yet the high national cost of the Automotive Assistance Plan that generated the sale of foreign made and owned vehicles only serves to highlight that the UK should recapture that lost wealth. Extolling its world-leading development capabilities via the production of its own (exported) low-CO2, high-value vehicles. In short part of a re-aligned national business model which delivers economic consistency – an automotive whole far beyond the sum of its parts
Yours sincerely
Mr Turan Ahmed MA
investment-auto-motives
London.
The following re-presents a letter from investment-auto-motives addressed to pertinant independent Cross-bench Peers of the House of Lords, with the aim of highlighting the level of challenge and providing a contextual background, the combine of which calls for a new 'UK Auto Industry Manifesto'.
The letter is provided here for the interests of my web-blog readers from investment, governmental and industry spheres.
.......................................................................................
The House of Lords
Palace of Westminster
London
SW1A OPW
14th April 2010
Re: Fiscal Consolidation & the Need for a 'UK Automotive Industry Manifesto'
My Lords & Lady,
Perhaps as never before in Britain's modern history has the need for truly independent judgment been greater to set the country back on course, domestically and internationally.
This letter and its enclosures are intended for yourselves and ideally copied to other wholly independent Cross-Bench Peers as well as members of the Science & Technology Committee; thus those who have non-partisan associative interest and baring – formal or otherwise - on the future of '21st century Industrial Britain'.
The list of published reports from the House indicates that scant legal & associative policy regard has been given to the indigenous automotive sector over the last two decades. This is unsurprising, a consequence of the decline of British owned mass-manufacture in a notional post-industrial age; with instead primary attention directed at the Kyoto ambition of curbing vehicle emissions as part of the bigger global CO2 reduction ambition.
Yet the two – industry & the eco-challenge - are undoubtedly concomitant.
Presently attention is drawn to the future by way of Bills attendant to: digital communications, genomic medicine, nano-tech, the electronic micro-chip etc; such disciplines now set against the very real regard of “Setting Priorities for Publicly Funded Research” given the sizable retraction of near-mid term public expenditure.
For the UK, and indeed much of the West, a concerning 'activity chasm' has emerged as a consequence of prolific macro-economic headwinds and the level of ecological challenge. That chasm will only be bridged by the effective and efficient use of the country's public and private resources - from availability of capital, to the promotion of the enterprise base, to the nourishment of the inherent human intellect.
The bursting of the credit-bubble demonstrates just how fragile the UK economy has become, portions of our population now economically disconnected; the 'credit-pull' for (often nefarious) personal consumption has exhausted, and instead, today, there is a new requirement for 'productivity-push'.
Just as the 19th century gave rise to mass industry and the 20th to mass consumption, so the 21st demands a re-formation of both sides of the equation, to meet this new era's demands.
As such, the full cross-section of UK industry, services & commerce requires re-examination and where necessary re-orientation to become: aligned, harmonious, productive and create meaningful value in the economic sense, the rational utility sense and even the emotional reward sense at both national and personal levels.
To this end, the full value chain of the British automotive sector, along with its incumbent foreign-owned manufacturers, and potential inter-regional co-operation, must be considered in-depth as an 'economic re-generator' given the ever present need for personal & public mobility, which in itself is historically proven as a cornerstone in promoting increasing economic activity.
All too often 'automotive' is seen as yesteryear because the conventional 20th century mass-manufacture 'Budd-system' business model is now typically better served by the socio-economic dynamics of the developing world. That perception whilst valid is not the whole story, discounting the reality and increasing relevance of alternative business models that focus upon advanced technologies and niche manufacture. Yet the UK's historical, formative, connection to these 'old' and 'new' sectors means that it operates higher-up the value-curve, with concomitant IPR leadership and effective operational know-how.
Whilst the recent rehabilitation of coal-mining is applauded as in the national interest, the automotive industry - although mis-perceived as 'old' - can be viewed in a similar vain, since the sector is so diverse and multi-faceted as to be more comparable to a reformable Rubik's cube - ie with the ability to re-shape itself both throughout the value-chain: from component supplier to assembler to retailer to maintenance & thru' life services provider; and indeed in time as a whole.
Thus it is my sincere belief that through insightful guidance at government, investor and enterprise level, that the UK automotive industry has a compelling role to play in both the wealth generation and well-being of the nation.
The enclosed items present the sole originally intended 3-page web-log item titled 'Fiscal Consolidation & the Need for a UK Auto Manifesto'. (The accompanying diagram illustrating the global 'trickle-down' achievable).
Yet to give this 'call to action' improved context, a compendium of selected web-log essays has been compiled providing various inputs for 'big-picture' food for thought. Hence a cross-section of items seeks to paint a portrait of the prime issues and trends facing the sector, including:
- The required 'economy drive' to dig the UK out of national indebtedness
- The danger of over-ideological personal transport initiatives such as TfL's bicycle scheme.
- The need to generate tangible added-value across the UK, US & Europe (Parts 1,2 & 3)The investor prompted need for continued western auto-industry restructuring.
- The importance of R&D: direct applications and technology transfer, with Dyson example
- The increasing importance of the small car, with Aston-Martin-Lagonda City-Car example
- The recognition that pure EVs have a near-term limited role, with Daimler-Renault example
- The need to consider vehicle manufacture & usage patterns relative to metro-mobility and metro-rehabilitation needs, using Las Vegas as hypothetical model.
- The 'dis-joint' of near-mid term currency markets as prompter for auto-sector value-seeking.
From a truly independent voice, this call to consider the role and shape of 'UK Auto plc' has no political bias or stance and prohibits its use as such. Instead it simply promotes the idea of improved industrial thinking & policy-setting that must be addressed from 'top-down', seeking to increase the momentum of the recent UK Motor Industry Inquiry, and critically poses the question as to how the country can best utilise its high & mid-value capabilities on global & national stages: the latter with overt reliance on auto-retail.
Napoleon's disparaging adage that 'Britain is a country of shop-keepers' may be all too true today given the realities of manufacturing efficiencies elsewhere and the necessary need for free-trade to lift all nations. Yet the high national cost of the Automotive Assistance Plan that generated the sale of foreign made and owned vehicles only serves to highlight that the UK should recapture that lost wealth. Extolling its world-leading development capabilities via the production of its own (exported) low-CO2, high-value vehicles. In short part of a re-aligned national business model which delivers economic consistency – an automotive whole far beyond the sum of its parts
Yours sincerely
Mr Turan Ahmed MA
investment-auto-motives
London.
Monday, 2 August 2010
Macro Level Trends - UK Autos plc - "Future-Scoping" from a Convincing Double Act.
In a very timely manner, Julia Banner's current exhibition at Tate Britain highlights the danger of UK's engineering sector plunging to earth; in an age of hyper competition from supposedly 'advanced' and nominally 'emerging' nations.
In a prosaic metaphor she hangs a de-commissioned Harrier Jump Jet from the ceiling, its nose centimetres from the floor, whilst in an adjoining space, a paint-stripped and mirror polished Jaguar Fighter lays belly-up on the floor, as if downed fowl - resting on canopy, wing-tip and tail.
The best of art has always been a pertinent comment of the era, and whilst an overly obvious metaphor for the eyes of more profound minds, it is undoubtedly a powerful juxtaposition, citing the UK's industrial fragility within the backdrop of a building literally built from Tate & Lyle's proceeds of trade and industrial might of the Victorian era.
The innate message is clear to the masses
In sync comes (ex-BP) Lord Brown's call - as President of the Royal Society of Engineers - to the Department for Business, Innovation & Skills.
A call for a National Science Review that looks at the necessary measures required to re-balance the £4 billion per annum public expenditure, his assertion that the current funding ratio between far horizon 'Applied' versus near-horizon 'Pure' must be altered.
This call has been lambasted as short-sighted and reactionary by certain quarters of the financial press, and rebuked by Lord Rees - President of the Royal Society: known for its 'blue-sky' thinking; (where Lord Brown is also a Fellow). * Please see Post Script.
But Lord Brown is absolutely correct in this assertion....realistically "there is no alternative"...and realism must at this time prevail over esoteric ambitions.
Given not only the state of the nation's fiscal woes, but that of its relatively declined knowledge and advanced capabilities base in the face of fast-track BRIC+ nations.
PM Cameron's (ostensibly trade) visit to India highlighted that such nations can now licence and build UK designed aero-structures, as seen with Hindustan Aero's deal to construct India's own Hawks to BAE specifications. The (admittedly high-value) avionics and engine packages have still been sold direct from the UK by BAE Systems and Rolls-Royce, providing £500m & £200m programmes respectively. Whilst in the private aircraft realm we see only this month the launch of Brazil's Embraer small jet plane, and of course in China ambitions to match Boeing and Airbus in the mid and large commercial plane segment.
So the progress made by what were once seen as automatic – indeed desperate - recipients of UK aero-tech, highlights the changed world the west must now address in its own industrial policy-making.
Under greater pressure still is the UK Auto-sector, given its lower order technological demands. In a similar call to Parliament's Automotive Industry Reception, Ron Dennis (Chairman of McLaren) requested additional government assistance, his solution comprising of:
1. Education: additional effort to attract would be students to STEM subjects (Science, Technology, Engineering & Maths)
(plus extra curricula activities such as the Formula Student 600cc race car competition)
2. New Tax breaks for R&D efforts
3. The idea of 'collective achievement'
4. Cultural change in schools toward 'courageous experimentation', not 'fear'
Now this 4-point plan may be simplistic, arguably far too lightweight (in its current presented guise) to be taken seriously as a 'Vision for Britain' but it highlights some of the basic elements that are undoubtedly required. In his own words, it is not "rocket science".
[NB With all due respect, although Dennis partially decries the student shift to the 'social sciences' (media etc etc), the reality is that ultimately a marriage of STEM subjects and the Arts is required, with moreover an injection of a 3rd disciplinary mentality: namely Business & Finance methods and processes.
At the educational level investment-auto-motives whole-heartedly believes that "Renaissance (wo)Man" needs to be re-born in the UK to propel the capability of its knowledge-base. This has always the central philosophy of Turan Ahmed's and a central USP of investment-auto-motives].
However, ultimately the discussion of exactly how the UK progresses to generate future industrial value-creation is at long last being tabled.
It may be seen by some purveyors of the more esoteric sciences that it all smacks of picking winners and losers. Such a blinkered approach undoubtedly will not prevail, whilst positively a better and stronger value chain can be created between (public & private) investment, academia and industry.
To sum-up, in a reversal use of the overtly coarse phrase "its all about the economy, stupid!"
At present such truisms presented so harshly are desperately required.
Post Script*
One presentation at the London School of Economics last year was given by a New York University lecturer, the supposed contributing originator and part-backer of (to quote) a "Chug Chug" machine - that had supposedly gained Royal Society interests.
Supposedly designed to extract CO2 directly from the atmosphere (presumably in a tree-like manner, as opposed to Carbon Capture & Storage of power-stations**), no explanation of the machine's mechanicals were presented even at theoretical level. The young yet 'savvy' student audience saw the proposition as advanced as ludicrous.
It did the Royal Society no favours either, potentially seen by the LSE audience as a 'crack-pot' body, which is far from the truth given its illustrious origins and members. However such presentations only serve to assist the cultural chasm between science and economics – the very last thing needed.
PPS**
The issue of CCS is presently being discussed by the House of Lords
In a prosaic metaphor she hangs a de-commissioned Harrier Jump Jet from the ceiling, its nose centimetres from the floor, whilst in an adjoining space, a paint-stripped and mirror polished Jaguar Fighter lays belly-up on the floor, as if downed fowl - resting on canopy, wing-tip and tail.
The best of art has always been a pertinent comment of the era, and whilst an overly obvious metaphor for the eyes of more profound minds, it is undoubtedly a powerful juxtaposition, citing the UK's industrial fragility within the backdrop of a building literally built from Tate & Lyle's proceeds of trade and industrial might of the Victorian era.
The innate message is clear to the masses
In sync comes (ex-BP) Lord Brown's call - as President of the Royal Society of Engineers - to the Department for Business, Innovation & Skills.
A call for a National Science Review that looks at the necessary measures required to re-balance the £4 billion per annum public expenditure, his assertion that the current funding ratio between far horizon 'Applied' versus near-horizon 'Pure' must be altered.
This call has been lambasted as short-sighted and reactionary by certain quarters of the financial press, and rebuked by Lord Rees - President of the Royal Society: known for its 'blue-sky' thinking; (where Lord Brown is also a Fellow). * Please see Post Script.
But Lord Brown is absolutely correct in this assertion....realistically "there is no alternative"...and realism must at this time prevail over esoteric ambitions.
Given not only the state of the nation's fiscal woes, but that of its relatively declined knowledge and advanced capabilities base in the face of fast-track BRIC+ nations.
PM Cameron's (ostensibly trade) visit to India highlighted that such nations can now licence and build UK designed aero-structures, as seen with Hindustan Aero's deal to construct India's own Hawks to BAE specifications. The (admittedly high-value) avionics and engine packages have still been sold direct from the UK by BAE Systems and Rolls-Royce, providing £500m & £200m programmes respectively. Whilst in the private aircraft realm we see only this month the launch of Brazil's Embraer small jet plane, and of course in China ambitions to match Boeing and Airbus in the mid and large commercial plane segment.
So the progress made by what were once seen as automatic – indeed desperate - recipients of UK aero-tech, highlights the changed world the west must now address in its own industrial policy-making.
Under greater pressure still is the UK Auto-sector, given its lower order technological demands. In a similar call to Parliament's Automotive Industry Reception, Ron Dennis (Chairman of McLaren) requested additional government assistance, his solution comprising of:
1. Education: additional effort to attract would be students to STEM subjects (Science, Technology, Engineering & Maths)
(plus extra curricula activities such as the Formula Student 600cc race car competition)
2. New Tax breaks for R&D efforts
3. The idea of 'collective achievement'
4. Cultural change in schools toward 'courageous experimentation', not 'fear'
Now this 4-point plan may be simplistic, arguably far too lightweight (in its current presented guise) to be taken seriously as a 'Vision for Britain' but it highlights some of the basic elements that are undoubtedly required. In his own words, it is not "rocket science".
[NB With all due respect, although Dennis partially decries the student shift to the 'social sciences' (media etc etc), the reality is that ultimately a marriage of STEM subjects and the Arts is required, with moreover an injection of a 3rd disciplinary mentality: namely Business & Finance methods and processes.
At the educational level investment-auto-motives whole-heartedly believes that "Renaissance (wo)Man" needs to be re-born in the UK to propel the capability of its knowledge-base. This has always the central philosophy of Turan Ahmed's and a central USP of investment-auto-motives].
However, ultimately the discussion of exactly how the UK progresses to generate future industrial value-creation is at long last being tabled.
It may be seen by some purveyors of the more esoteric sciences that it all smacks of picking winners and losers. Such a blinkered approach undoubtedly will not prevail, whilst positively a better and stronger value chain can be created between (public & private) investment, academia and industry.
To sum-up, in a reversal use of the overtly coarse phrase "its all about the economy, stupid!"
At present such truisms presented so harshly are desperately required.
Post Script*
One presentation at the London School of Economics last year was given by a New York University lecturer, the supposed contributing originator and part-backer of (to quote) a "Chug Chug" machine - that had supposedly gained Royal Society interests.
Supposedly designed to extract CO2 directly from the atmosphere (presumably in a tree-like manner, as opposed to Carbon Capture & Storage of power-stations**), no explanation of the machine's mechanicals were presented even at theoretical level. The young yet 'savvy' student audience saw the proposition as advanced as ludicrous.
It did the Royal Society no favours either, potentially seen by the LSE audience as a 'crack-pot' body, which is far from the truth given its illustrious origins and members. However such presentations only serve to assist the cultural chasm between science and economics – the very last thing needed.
PPS**
The issue of CCS is presently being discussed by the House of Lords
Wednesday, 28 July 2010
Micro Level Trends – The UK e-Car Incentive – Plugging-In to Hot Air which will Condense in the Long Run
It has been announced that the UK government's much vaulted £5,000 subsidy towards the purchase of alternative energy cars (worth £43m in all by OLEV) will stay in place. This is an unexpected outcome given the size and speed of national and regional budget cuts that Chancellor Osborne rightly states must be implemented in the short and mid term.
But should it be unexpected given the political and budgetary realities of the situation?
Could the announcement, no matter how well intentioned, infact represent a reality where the monies apparently made available are hard to access in practice due to (in)inadvertently constrained terms and conditions of the scheme and the realities of the EV and ULEV marketplace?
Could its true purpose instead be a much needed 'rally-cry' to foreign manufacturers of advanced powertrain systems that to quote Transport Secretary Richard Hammond, “the UK is open for business”. This in itself should be applauded, yet the consumer realities and so immediate carbon-footprint reduction impact, of the scheme may be less so.
Given the unpopularity generated by the deep budget cuts needed to reduce the nation's debt levels, investment-auto-motives (itself a naysayer of current EV capabilities and business models) believes that the exercise to 'greenify' London and the country, no matter how well intentioned today, may contribute little.
As read in financial and trade press, the retained grant offers £5,000 toward 25% of the cost of a new vehicle which has either Fuel-Cell, Full Electric or Plug-In Hybrid powertrains, which comply with safety, reliability, performance and warranty standards set by the Office for Low Emission Vehicles.
That may appear poignant and indeed generous, but look to see exactly what cars are available and the offer starts to lose traction.
To start – in reverse order - there are no Fuel-Cell vehicles currently in production besides limited series buses and trucks, with only prototype fuel-cell cars being evaluated by the R&D departments of global manufacturers such as most notably Honda, and in addition small often VC backed start-ups. [NB. the latter demonstrating mis-allocation of private capital for anything but military vehicles].
The EV has of course made an impact in London to a smaller extent other UK metropolises. Most visiblee in the ground-breaking yet oft mocked 'Noddy-esque' Reva G-Wiz purchased by high-profile (typically 'City' & Media) execs seeking green credentials; yet the car's sales havewanedd as its product life-cycle peaked and recession appeared.
A new model has been created and Reva apparently seeks factory/assembly space outside of its homeland India. [NB this topic may be on PM Cameron's agenda during his current international-trade agenda - beyond the prominent nuclear talks]. Yet immediate promise for Reva looks doubtful given that it has only reportedly sold 3,000 cars over the years (up to Jan) 2010, and its updated re-style whilst looking better, is largely a re-skin of a very basic, less than truly crash-worthy structure.
Effectively replacing the G-Wiz has been France's Axiam-Mega EV, derived from the Country's popular quadricycle sector which typically uses small capacity ICE. More conventional in stature and looks, the car is more 'grown-up' and has the backing of a large industrial corporate, having acquired the assets of the flailed NICE (No Internal Combustion Engine) Co based in West London.
Other 'commute' and 'city-delivery' vehicles are available from Chinese sourced MyCar, Ze-O.
Adapted conventional cars include Daimler's >smart. BMW's Mini, FIAT's e500, PSA's C1 & 107 and Mitsubishi's i-MiEV (also badged by PSA), but these are available only as limited series 'test-bed' fleet, much of which has been deployed.
[NB. investment-auto-motives believes that beyond the ground gained by Daimler's local use >smart EV, the only truly convincing EV (& ULEV) project to potentially satisfy all of the required economic, technical, legal and consumer demand parameters is the BMW MegaCity programme. This seats 3 or 4 instead of 2 and scale-up & cost-down robust lightweight carbon-fibre structures which can be 'dressed' on standard production lines, so heavily reducing the need for costly EU labour and maintaining product quality].
So regards pure EVs, presently little beyond the Axiam Mega which effectively replaced Reva, is presently even approaching convincing, though highly priced for its capabilities, whilst the adapted mainstream models if even available are extremely expensive (eg i-MiEV at £25k).
[NB Axiam Mega has entered the UK to essentially grow its ICE business as a new era parallel to Reliant Motors (4 wheeled Kitten) of old]. But the numbers of EVs sold will in actuality remain intrinsically limited and low.
The big EV story (literally) is of course the much publicised Nissan Leaf sedan, which packages all necessary electrical systems into a compact saloon format, and critically for the UK includes Sunderland assembly.[NB investment-auto-motives expects this in reality to be a 'halo' variant model with ICE also]. But that is not expected for launch until 2013, when in the midst of an expectantly improved UK economy, the present subsidy (or its size) will probably be long gone, depending on the results of the first review due in Jan 2012, short months ahead of the Olympics.
Plug-In Hybrid is now available as a development of 'standard' hybrid technology, notably from Toyota and the 'ever-green' Prius (in its ZVW30 guise).
At the end of the day of course, to access the grant funds depends on actually fulfilling the prescribed remit of product capability and importantly meeting the criteria that on the surface states “25% of the vehicle price, up to £5,000”. This appears to be key, and as ever, much is in the exact wording of the offer – especially so the inter-dependence of X% and £X - and its relativity to real-world circumstances.
This would suggest that such an eligible car would cost £20,000, but the smaller cars from India, France and China do not appear to meet the prescribed benchmark product standards, whilst the larger EV cars from global manufacturers made available have either been already acquired (on a monitoring basis) and cost well above the £20,000 apparent set limit. [NB the Nissan Leaf is expected at £28,350 before incentive subsidy and so £23,350 if applied].
Of the Plug-In hybrids, Honda is not set to launch a PHEV until mid 2012 and then only in Japan & US, thus practically irrelevant given geographic availability and chronologically beset given the Jan 2012 grant review point.
General Motors still highlights the benefits of Chevrolet Volt/Opel Ampera given its 'range-extender' (ie ICE back-up) package which supposedly offers 350 miles of travel. Yet it is being touted at $41,000, well out of the ball-park for the majority of compact sedan buyers, and probably the majority of which will go to car rental companies; to acclimatise the public and generate production efficiencies - as seen with Nissan's Leaf.
This then leaves Toyota's Plug-In Prius as the only real beneficiary of the £43m grant scheme, given its expected launch soon. The car uses L-ion battery technology instead of the more convention Ni-MH in the standard (non-plug) car, and will represent an important volume scale-up of the L-ion application which should reduced what are presently wide cost differentials between the lower cost Ni-MH and more expensive L-ion. However, given that only the less popular base variant of the Prius (the T3) costs beats the theoretically nominal £20,000 limit (by only £145) versus £21,510 T4 variant and £22,960 Sprint variant, the expected take up would be less than immediately imagined for all Prius sales.
Thus, it seems that the “eco-car grant” has been viewed through the 'political telescope', and the resultant perspective demonstrates that the relatively low cost of the big PR exercise would, if extinguished, would contribute little to the nation's budget deficit reduction efforts.
Instead, from first impressions, it seems to offer a greater 'bang for the buck' for governmental PR, than for eco-conscious consumers given the possible 'invisible devil in the detail'.
If the UK's new car buyers wish to 'save the world' they could well end up having to pay a higher price than initially expected to do so.
However, even if not of immediate 'greening' impact given their small scale, positively, the very existence of alternative energy vehicles means a continued pressure on ICE, conventional hybrid, power systems and body structure technology advancement...to deliver better carbon-footprints and so lower oil consumption at more realistically amenable market pricing.
The 'eco-grant' may prove hollow when properly examined, and indeed could be viewed as international trade & FDI prompters with Japanese and French trade partners, but they at least highlight the UK's desire to improve the sustainable mobility model and both welcome-in and push-out across the board technological advances that act as economic generators in their own right.
And of course, if that £43m cannot be practically spent, it will add a small chunk to the deficit reduction process.
Congestion charges may have been added to Parking Meter charges, and the 'Lovely Rita Meter Maid' may be not so well loved today, but both in Park Lane or Penny Lane, the Conservative-Lib Dem coalition will be watching the proverbial pennies so that the pounds can look after themselves – much to the pleasure of City and IMF international bankers.
The song 'Penny Lane' mentions the “banker with his motor car”, and the fact that “he never wears a mac in the pouring rain...very strange'. Well “the banker waited for his trim” and will receive it judging by the slimmed Q2 2010 bonus pot.
That will be the reality for public spending too, even if presently over-dressed in 'electric blue'.
But should it be unexpected given the political and budgetary realities of the situation?
Could the announcement, no matter how well intentioned, infact represent a reality where the monies apparently made available are hard to access in practice due to (in)inadvertently constrained terms and conditions of the scheme and the realities of the EV and ULEV marketplace?
Could its true purpose instead be a much needed 'rally-cry' to foreign manufacturers of advanced powertrain systems that to quote Transport Secretary Richard Hammond, “the UK is open for business”. This in itself should be applauded, yet the consumer realities and so immediate carbon-footprint reduction impact, of the scheme may be less so.
Given the unpopularity generated by the deep budget cuts needed to reduce the nation's debt levels, investment-auto-motives (itself a naysayer of current EV capabilities and business models) believes that the exercise to 'greenify' London and the country, no matter how well intentioned today, may contribute little.
As read in financial and trade press, the retained grant offers £5,000 toward 25% of the cost of a new vehicle which has either Fuel-Cell, Full Electric or Plug-In Hybrid powertrains, which comply with safety, reliability, performance and warranty standards set by the Office for Low Emission Vehicles.
That may appear poignant and indeed generous, but look to see exactly what cars are available and the offer starts to lose traction.
To start – in reverse order - there are no Fuel-Cell vehicles currently in production besides limited series buses and trucks, with only prototype fuel-cell cars being evaluated by the R&D departments of global manufacturers such as most notably Honda, and in addition small often VC backed start-ups. [NB. the latter demonstrating mis-allocation of private capital for anything but military vehicles].
The EV has of course made an impact in London to a smaller extent other UK metropolises. Most visiblee in the ground-breaking yet oft mocked 'Noddy-esque' Reva G-Wiz purchased by high-profile (typically 'City' & Media) execs seeking green credentials; yet the car's sales havewanedd as its product life-cycle peaked and recession appeared.
A new model has been created and Reva apparently seeks factory/assembly space outside of its homeland India. [NB this topic may be on PM Cameron's agenda during his current international-trade agenda - beyond the prominent nuclear talks]. Yet immediate promise for Reva looks doubtful given that it has only reportedly sold 3,000 cars over the years (up to Jan) 2010, and its updated re-style whilst looking better, is largely a re-skin of a very basic, less than truly crash-worthy structure.
Effectively replacing the G-Wiz has been France's Axiam-Mega EV, derived from the Country's popular quadricycle sector which typically uses small capacity ICE. More conventional in stature and looks, the car is more 'grown-up' and has the backing of a large industrial corporate, having acquired the assets of the flailed NICE (No Internal Combustion Engine) Co based in West London.
Other 'commute' and 'city-delivery' vehicles are available from Chinese sourced MyCar, Ze-O.
Adapted conventional cars include Daimler's >smart. BMW's Mini, FIAT's e500, PSA's C1 & 107 and Mitsubishi's i-MiEV (also badged by PSA), but these are available only as limited series 'test-bed' fleet, much of which has been deployed.
[NB. investment-auto-motives believes that beyond the ground gained by Daimler's local use >smart EV, the only truly convincing EV (& ULEV) project to potentially satisfy all of the required economic, technical, legal and consumer demand parameters is the BMW MegaCity programme. This seats 3 or 4 instead of 2 and scale-up & cost-down robust lightweight carbon-fibre structures which can be 'dressed' on standard production lines, so heavily reducing the need for costly EU labour and maintaining product quality].
So regards pure EVs, presently little beyond the Axiam Mega which effectively replaced Reva, is presently even approaching convincing, though highly priced for its capabilities, whilst the adapted mainstream models if even available are extremely expensive (eg i-MiEV at £25k).
[NB Axiam Mega has entered the UK to essentially grow its ICE business as a new era parallel to Reliant Motors (4 wheeled Kitten) of old]. But the numbers of EVs sold will in actuality remain intrinsically limited and low.
The big EV story (literally) is of course the much publicised Nissan Leaf sedan, which packages all necessary electrical systems into a compact saloon format, and critically for the UK includes Sunderland assembly.[NB investment-auto-motives expects this in reality to be a 'halo' variant model with ICE also]. But that is not expected for launch until 2013, when in the midst of an expectantly improved UK economy, the present subsidy (or its size) will probably be long gone, depending on the results of the first review due in Jan 2012, short months ahead of the Olympics.
Plug-In Hybrid is now available as a development of 'standard' hybrid technology, notably from Toyota and the 'ever-green' Prius (in its ZVW30 guise).
At the end of the day of course, to access the grant funds depends on actually fulfilling the prescribed remit of product capability and importantly meeting the criteria that on the surface states “25% of the vehicle price, up to £5,000”. This appears to be key, and as ever, much is in the exact wording of the offer – especially so the inter-dependence of X% and £X - and its relativity to real-world circumstances.
This would suggest that such an eligible car would cost £20,000, but the smaller cars from India, France and China do not appear to meet the prescribed benchmark product standards, whilst the larger EV cars from global manufacturers made available have either been already acquired (on a monitoring basis) and cost well above the £20,000 apparent set limit. [NB the Nissan Leaf is expected at £28,350 before incentive subsidy and so £23,350 if applied].
Of the Plug-In hybrids, Honda is not set to launch a PHEV until mid 2012 and then only in Japan & US, thus practically irrelevant given geographic availability and chronologically beset given the Jan 2012 grant review point.
General Motors still highlights the benefits of Chevrolet Volt/Opel Ampera given its 'range-extender' (ie ICE back-up) package which supposedly offers 350 miles of travel. Yet it is being touted at $41,000, well out of the ball-park for the majority of compact sedan buyers, and probably the majority of which will go to car rental companies; to acclimatise the public and generate production efficiencies - as seen with Nissan's Leaf.
This then leaves Toyota's Plug-In Prius as the only real beneficiary of the £43m grant scheme, given its expected launch soon. The car uses L-ion battery technology instead of the more convention Ni-MH in the standard (non-plug) car, and will represent an important volume scale-up of the L-ion application which should reduced what are presently wide cost differentials between the lower cost Ni-MH and more expensive L-ion. However, given that only the less popular base variant of the Prius (the T3) costs beats the theoretically nominal £20,000 limit (by only £145) versus £21,510 T4 variant and £22,960 Sprint variant, the expected take up would be less than immediately imagined for all Prius sales.
Thus, it seems that the “eco-car grant” has been viewed through the 'political telescope', and the resultant perspective demonstrates that the relatively low cost of the big PR exercise would, if extinguished, would contribute little to the nation's budget deficit reduction efforts.
Instead, from first impressions, it seems to offer a greater 'bang for the buck' for governmental PR, than for eco-conscious consumers given the possible 'invisible devil in the detail'.
If the UK's new car buyers wish to 'save the world' they could well end up having to pay a higher price than initially expected to do so.
However, even if not of immediate 'greening' impact given their small scale, positively, the very existence of alternative energy vehicles means a continued pressure on ICE, conventional hybrid, power systems and body structure technology advancement...to deliver better carbon-footprints and so lower oil consumption at more realistically amenable market pricing.
The 'eco-grant' may prove hollow when properly examined, and indeed could be viewed as international trade & FDI prompters with Japanese and French trade partners, but they at least highlight the UK's desire to improve the sustainable mobility model and both welcome-in and push-out across the board technological advances that act as economic generators in their own right.
And of course, if that £43m cannot be practically spent, it will add a small chunk to the deficit reduction process.
Congestion charges may have been added to Parking Meter charges, and the 'Lovely Rita Meter Maid' may be not so well loved today, but both in Park Lane or Penny Lane, the Conservative-Lib Dem coalition will be watching the proverbial pennies so that the pounds can look after themselves – much to the pleasure of City and IMF international bankers.
The song 'Penny Lane' mentions the “banker with his motor car”, and the fact that “he never wears a mac in the pouring rain...very strange'. Well “the banker waited for his trim” and will receive it judging by the slimmed Q2 2010 bonus pot.
That will be the reality for public spending too, even if presently over-dressed in 'electric blue'.
Saturday, 24 July 2010
Micro Level Trends - New GM & AmeriCredit – Scuppering Hard Won Investor Credibility.
Having given GM the benefit of the doubt, by ranking it higher than FIAT in the Western 8 company commentaries, investment-auto-motives revisits the New GM story given recent events.
Since its emergence from fast-track Chapter 11, the intention was that General Motors could demonstrate itself as a very different beast. Value-creation versus previous value destruction.
Yet a year on having enjoyed the clunkers stimulus mini-boom that saw it post first time promised profits, the enterprise's purchase of AmeriCredit – the finance company – for $3.5bn shows a return to its old ways of boosting sales volume via the attraction of sub-prime credit rated buyers.
Yes the cost is only one-tenth of its buoyant cash reserves, and it is the norm for an auto-player to exercise captive finance capabilities, and the ability to access ever wider-opening B2B and B2C credit windows would be typically expected of a large VM. But given New GM's position as the 'prodigal son' in what are still far from normal – indeed 'new norm' conditions – is it not scuppering its own supposed success story, even if the deal does provide avenues to Canadian and Lease markets?
There has been recent mention that only 4% of current US vehicle sales are to sub-prime buyers, no doubt reflecting the reality of 2008/9 when credit availability to all but the best rated was very limited. Yet there has also been industry rumour that even well positioned, nominally reputable Honda sells 21% of its vehicles in N.A to poorly rated customers. That press quoted figure may well have been relative prior to the credit-crunch.
Yet the mid-point of these two capital market condition extremes suggests that - as today - with easier flowing credit up to 15% of the vehicle market consists of less reputable customers.
[NB the recent up-tick in Harley Davidson sales will have been influenced by such amenable credit availability].
That said, just over an eighth of the TIV is a large slice, and something which would undoubtedly provide additional boost to The New General, but given that GM seeks to float by year-end it's P&L and Balance Sheet should be proving itself to investors. This done so without cash-flows and bottom lines being partially propped up by fringe sales which in the not so distant past have proven to be the thin end of a problematic wedge generated by negative feedback loops regards vehicle residual values. The production and inventory levels are seismically shifted downward, but the inadvertent process of 'pulling the rug from under itself' still stands up to scrutiny.
As the much publicised IPO deadline date approaches New GM will be trying every trick in the book to boost sales – including Ed Whitacre's efforts to have its NomAds and Book-Runners agree to purchase GM vehicles as part of their business terms. This is understandable as a demonstration of inter-company unity between client and service provider, and obviously provides higher profile ownership demographics for GM. But metaphorically scrapping the 'bottom of the barrel' so soon after 're-birth' might be judged by many an investor (institutional and individuals) as something to query if indeed that 15% is needed to provide demonstrable margin above the operating overhead.
The view might be that Washington is recouping part of its bail-out expenditure by in effect passing the still largely unproven auto-parcel to not only investors, but GM customers themselves who are literally buying back into the company with good faith under the belief that the old ways are gone and GM is part of the new American economic era.
Of course the counter-point argument to such tabled negativity is that given the recent poor H1 reporting fortunes of much of the financial sector, the ability to acquire a fully fledged, legally enabled captive finance house here and now is a good move. And in so much investment-auto-motives would not disagree. Presuming the avoidance of any double-dip recession, given the historical precedent and believing in slow but stable economic traction, then building-up renewed captive finance capabilities that extend customer reach and can be exploited to cross-sell vis a vis Alley (with its Bank status) undoubtedly makes complete sense.
But what must be clearly highlighted to the world at large, especially so in the IPO count-down, is the Q3 & Q4 sales mix by customer credit rating. At the very least to demonstrate that AmeriCredit truly 'only' truly represents that reported fringe 4%. Only by doing so and convincingly demonstrating that sub-prime accounts for a very small percentage of financing deals will New GM maintain any form of very necessary credibility.
But in the desire to exploit the new captive finance ability the temptation to super-charge sales through massaged deals may prove very tempting. Especially so if it can prompt poor rated buyers to use Ally (itself under pressure to lend) for access to smaller sized upfront deposit sums for AmeriCredit. In effect on the books of the 2 companies themselves, cross-balancing the vehicle purchase deal; akin to an accumulator.
But, at the broader level, investment-auto-motives poses the question that begs “ to what extent has the AmeriCredit purchase been politically generated?” - given that it only provides a supposed 4% sales boost.
This period of renewed US economic unease would undoubtedly be exacerbated if the folks on Main Street were to retract even the limited current spend behavior which is keeping the economy ticking over; albeit at a much reduced rate. The feel good factor is all important, and it is well known that during times of economic strain it is the far more positively elastic consumptive patterns of society's lower ranks that maintains the consumptive flow. Where the middle-classes pull in their horns, others with less of a responsible stake-holder mentality seize the moment: as demonstrated by a portion of 'cash for clunkers' beneficiaries.
Thus could the AmeriCredit purchase by GM – which the name in itself smacks of the country's (delusional) liquidity well-being – have been fully condoned by Washington? Or even prompted by it, given its (and Canada's) desire to monetise and partially exit their combined 72% equity hold in New GM?
It all my look good in the short-term for GM, AmeriCredit, (Ally) and Washington D.C., but is there not a danger that instead it will be consumers and business that are left 'holding a possibly crying baby' in the short to medium term?
In which case, the desperate desire to re-inflate the economy on sound principles, stays little more than circular rhetoric. Investors – that bedrock of the economy – need convincing, and so in this case there must be a reversal of the old GM adage.
Today, what is good for the American economy must set the precedent for the ongoing transformation of New GM (as seen with www.gmreinvention.com). Not to recognise this truism and the measures required that underpin it would be a disservice to investors, the company and public alike.
Since its emergence from fast-track Chapter 11, the intention was that General Motors could demonstrate itself as a very different beast. Value-creation versus previous value destruction.
Yet a year on having enjoyed the clunkers stimulus mini-boom that saw it post first time promised profits, the enterprise's purchase of AmeriCredit – the finance company – for $3.5bn shows a return to its old ways of boosting sales volume via the attraction of sub-prime credit rated buyers.
Yes the cost is only one-tenth of its buoyant cash reserves, and it is the norm for an auto-player to exercise captive finance capabilities, and the ability to access ever wider-opening B2B and B2C credit windows would be typically expected of a large VM. But given New GM's position as the 'prodigal son' in what are still far from normal – indeed 'new norm' conditions – is it not scuppering its own supposed success story, even if the deal does provide avenues to Canadian and Lease markets?
There has been recent mention that only 4% of current US vehicle sales are to sub-prime buyers, no doubt reflecting the reality of 2008/9 when credit availability to all but the best rated was very limited. Yet there has also been industry rumour that even well positioned, nominally reputable Honda sells 21% of its vehicles in N.A to poorly rated customers. That press quoted figure may well have been relative prior to the credit-crunch.
Yet the mid-point of these two capital market condition extremes suggests that - as today - with easier flowing credit up to 15% of the vehicle market consists of less reputable customers.
[NB the recent up-tick in Harley Davidson sales will have been influenced by such amenable credit availability].
That said, just over an eighth of the TIV is a large slice, and something which would undoubtedly provide additional boost to The New General, but given that GM seeks to float by year-end it's P&L and Balance Sheet should be proving itself to investors. This done so without cash-flows and bottom lines being partially propped up by fringe sales which in the not so distant past have proven to be the thin end of a problematic wedge generated by negative feedback loops regards vehicle residual values. The production and inventory levels are seismically shifted downward, but the inadvertent process of 'pulling the rug from under itself' still stands up to scrutiny.
As the much publicised IPO deadline date approaches New GM will be trying every trick in the book to boost sales – including Ed Whitacre's efforts to have its NomAds and Book-Runners agree to purchase GM vehicles as part of their business terms. This is understandable as a demonstration of inter-company unity between client and service provider, and obviously provides higher profile ownership demographics for GM. But metaphorically scrapping the 'bottom of the barrel' so soon after 're-birth' might be judged by many an investor (institutional and individuals) as something to query if indeed that 15% is needed to provide demonstrable margin above the operating overhead.
The view might be that Washington is recouping part of its bail-out expenditure by in effect passing the still largely unproven auto-parcel to not only investors, but GM customers themselves who are literally buying back into the company with good faith under the belief that the old ways are gone and GM is part of the new American economic era.
Of course the counter-point argument to such tabled negativity is that given the recent poor H1 reporting fortunes of much of the financial sector, the ability to acquire a fully fledged, legally enabled captive finance house here and now is a good move. And in so much investment-auto-motives would not disagree. Presuming the avoidance of any double-dip recession, given the historical precedent and believing in slow but stable economic traction, then building-up renewed captive finance capabilities that extend customer reach and can be exploited to cross-sell vis a vis Alley (with its Bank status) undoubtedly makes complete sense.
But what must be clearly highlighted to the world at large, especially so in the IPO count-down, is the Q3 & Q4 sales mix by customer credit rating. At the very least to demonstrate that AmeriCredit truly 'only' truly represents that reported fringe 4%. Only by doing so and convincingly demonstrating that sub-prime accounts for a very small percentage of financing deals will New GM maintain any form of very necessary credibility.
But in the desire to exploit the new captive finance ability the temptation to super-charge sales through massaged deals may prove very tempting. Especially so if it can prompt poor rated buyers to use Ally (itself under pressure to lend) for access to smaller sized upfront deposit sums for AmeriCredit. In effect on the books of the 2 companies themselves, cross-balancing the vehicle purchase deal; akin to an accumulator.
But, at the broader level, investment-auto-motives poses the question that begs “ to what extent has the AmeriCredit purchase been politically generated?” - given that it only provides a supposed 4% sales boost.
This period of renewed US economic unease would undoubtedly be exacerbated if the folks on Main Street were to retract even the limited current spend behavior which is keeping the economy ticking over; albeit at a much reduced rate. The feel good factor is all important, and it is well known that during times of economic strain it is the far more positively elastic consumptive patterns of society's lower ranks that maintains the consumptive flow. Where the middle-classes pull in their horns, others with less of a responsible stake-holder mentality seize the moment: as demonstrated by a portion of 'cash for clunkers' beneficiaries.
Thus could the AmeriCredit purchase by GM – which the name in itself smacks of the country's (delusional) liquidity well-being – have been fully condoned by Washington? Or even prompted by it, given its (and Canada's) desire to monetise and partially exit their combined 72% equity hold in New GM?
It all my look good in the short-term for GM, AmeriCredit, (Ally) and Washington D.C., but is there not a danger that instead it will be consumers and business that are left 'holding a possibly crying baby' in the short to medium term?
In which case, the desperate desire to re-inflate the economy on sound principles, stays little more than circular rhetoric. Investors – that bedrock of the economy – need convincing, and so in this case there must be a reversal of the old GM adage.
Today, what is good for the American economy must set the precedent for the ongoing transformation of New GM (as seen with www.gmreinvention.com). Not to recognise this truism and the measures required that underpin it would be a disservice to investors, the company and public alike.
Saturday, 17 July 2010
Parallel Learning – M&A Case Study – Finding a PlayBoy Friend.
The ever ongoing demand for structural and organisational change in the auto-sector sees senior management changes at Ford and Volvo. Stephen Odell steps across from Sweden to Germany tasked as FMC's new European Head, and Volvo takes on its new Geely related Chairman in the guise of Li Shufu, with Olov Olsson as new Vice Chairman.
Quite obviously, during all periods of renewal the status quo is questioned.
Especially so after the pain experienced by the auto-sector over the last 3 years, eased only in part by near morphine like applications from the state to the largest VMs which dulled the pain yet left the need for deep and near constant surgeory. Board-level capability at steering their ship through what has been a prolonged period of treacherous waters has never been so apparent, dividing the wheat from the chaff in identifying those that were prepared, those who quickly reacted and those who flailed.
At this time, as the waters quell, no matter what condition that ship, the Board must endeavour to understand the broad scope of the future, beyond the all too typical “Narrow-Scoping” of “good / middling / bad” business development scenarios which illustrate only more of the same strategic and operational approaches leading to varying levels of success.
What may be deemed (Futurological) “Broad-Scoping” has normally been undertaken only in the best of times, riding high on market returns and as a darling of the capital markets; when immediate pressures are absent and the scale of internal 'fire-fighting' small.
That is the time for blue-sky thinking is it not?
Perhaps not always so.
Beyond his/her independent viewpoints and contribution on other general company matters, it is the special remit of the Non-Executive to think more broadly about the future of his/her commercial 'ward'. The very nature of the role means distance from immediate internal 'busyness', and so theoretically mentally open to a far wider range of inspirational influence - this especially the case if holding similar positions across 2 or more industrial sectors, or multiple positions throughout a single sector's value-chain.
Beyond an M&A ideas generator, such an individual must be the voice of external objective reason during the corporate 'broad-scoping' exercise. Prompted by management trends or capital market dynamics, overtly nave or ambitious middle and senior management may be unduly swayed and enthused by well intentioned outside third parties such as high-profile consultants or financiers seeking copy+ book-running deals. These sorts of quasi-independent contributors can of course be very useful for introducing alternative perspectives, yet it is both management's and the Board's remit to counter-balance the world of the possible with the world of the feasible.
Typically within M&A realms (and indeed IPO realms) 'Big Tomorrow' stories are underpinned by high impact presentations crammed with well set-out argument in which a small enterprise which rides today's & tomorrow's 'dynamic trends' requires the resources and scale-up abilities afforded by a new corporate guardian. The theoretical synergies of the 'May to December' relationship is laid-out with of course the full intent to excite the larger, more secure 'broad-scoping' enterprise. The ideal of stability meets dynamism is for all to see. What is often less clear is the ability for the 'broad-scoping' entity to critically and honestly assess what such patronage brings.
[NB Of course the same 'mating game' is played with the capital markets.
Presently here in the UK it is truly in-credible that the much publicised Ocado floatation seeks a valuation x50 p/e, at a time when solid, asset laden businesses hold x9 to x12 p/e, and long after China's own x30 p/e push has been deflated. On this basis, the Ocado 'Big Tomorrow' story which in reality is little more than a delivery service for Waitrose, in time others, and possibly itself, should not be viewed on par with a successful 'sector disruptor'. It plainly is not, no matter what how much PR spin is created around it. It will instead simply be positioned to take-over individual supermarket's own delivery fleet. This is indeed worthy, but the present business model - well critiqued in The Economist - is out of kilter with the smaller, local scale requirement which works around local customer dynamics].
Thus there will be many many occasions in all sectors when a 'light presented in the dark' will be highly misleading and indeed possibly graven – especially if it is in actuality seeks a parasitic stance. An entity at which first appears friendly but inadvertently shows itself to hold an alternative self-regard agenda, is of course to be avoided at all cost.
Thus the substance of the case presented here, is that any 'broad-scoping' enterprise must lay out its own firm criteria by which it judges an M&A match to offer the foundations of success – at strategic, operational and bottom-line levels.
Part and parcel of this procedure for the auto-sector is the need to learn from the external world, both from within a firm's own sphere, and from further afield in other industrial and commercial realms.
Such a case study that may be of merit is the (still very early) M&A possibility between FriendFinder Networks' $210m offer for Playboy Enerprises Inc.
At first appearance it seems like an odd mis-match between the new and old worlds of a contemporary dating website and a renowned Men's magazine publisher. However beyond a diverse range of websites (including men orientated building materials), the former also operates AdultFriendFinder and own Penthouse Magazine.
Its brand coverage across magazine publishing, television and of course the web reflects Playboy's own coverage and so on the surface highlights synergies. So in the typical M&A value-creation models that espouse 'horizontal', vertical' or 'diagonal' integration, there is seen to be overlap.
Obviously there is scope to build a pricing-based ladder model, placing a higher-brow Playboy over a more overtly sensationalist, pornographically driven Penthouse. But the wish to build the adult-entertainment side of the FriendFinder Network business also reflects the desire and need to cross-feed consumer traffic.
The relationship between the Carris.com reel packaging business and FriendFinder may not be immediately apparent, but the inter-link between construction sites and the 'show-reel' aspect of adult films is none the less their and subconsciously strong. Moreover, the relationship site FriendFinder links across to AdultFriendFinder for those relationship website visitors that may not have found the prospect of love, yet instead seek prospects for near term physical gratification, and of course inter-linked again is Penthouse (and would be Playboy) for immediate visual gratification.
Thus, as is the ambition of most portfolio holding companies, FriendFinder Networks seeks to build an effective and efficient consumer feed-through and circulation model which both maximises capture and spend.
In regard to the automotive sector, it has a history of 'vertically' leveraging its supply-side value chain, and 'horizontally' leveraging the R&D, development and production processes, as seen through-out historical M&A's, from GM's origination to pass-the-parcel of Chrysler (eg Rootes, Daimler & FIAT)
Most illustrative are Henry Ford's early days with agrarian supplies from lumber, to rubber to soy plants (for body frames, tyres, seals and pipes to plastic mouldings) to GM's creation of the multi-systems Delphi supply base to Ford's more recent acquisition and disposal of Hertz Rent-a-Car. (This exploitation of vertical integration replayed by the Japanese, Koreans and Chinese).
In latter days, looking forever up to the top of the value-curve - re-positioning western auto-companies as brand enterprises (reflecting Jacques Nasser's ideal) - many alternative mobility models have been dreamt-up; and either largely left on the drawing board: as with INDEGO, or tentatively introduced: as with PSA's Mu
[NB see the review of PSA in investment-auto-motives' previous post].
However, whilst this reflects a more visionary CRM stance, is there more?
Whilst the worldwideweb has undoubtedly been exploited by auto-companies expanding beyond the normative channel advertising vein – from 30 seconds TV slots to viral Marketing to Corporate Messaging to Consumer Feedback – the previously described 'network feed' pattern enabled by the web – and as being exploited by FriendFinder Networks – may offer an alternative philosophical viewpoint by which auto-execs can survey the access points and transfer channels of their terrain.
Of course even though evolving heavy industry manufacturing companies tied to the realities of balancing stretched B2B relationships to today's more fragile B2C patterns, They must attend to required but not over-played expenditures in capital equipment, supporting the supply & distribution chains, and maintaining as much captive control of dealer and customer credit finance as possible.
But looking elsewhere into the very different worlds of other industries which themselves focus on CRM and the systemic captive through-put of customer attention and spend is an increasingly critical feature of a modern - and capital markets attractive - automotive company.
But in that search for identifying, creating and leveraging the potential of the future, Execs and Non-Execs alike must temper the 'fast charge' business model idealism with an objective outlook that underpins a slower yet stronger built reality that firmly demonstrates the firm's measurable and true innate value.
Quite obviously, during all periods of renewal the status quo is questioned.
Especially so after the pain experienced by the auto-sector over the last 3 years, eased only in part by near morphine like applications from the state to the largest VMs which dulled the pain yet left the need for deep and near constant surgeory. Board-level capability at steering their ship through what has been a prolonged period of treacherous waters has never been so apparent, dividing the wheat from the chaff in identifying those that were prepared, those who quickly reacted and those who flailed.
At this time, as the waters quell, no matter what condition that ship, the Board must endeavour to understand the broad scope of the future, beyond the all too typical “Narrow-Scoping” of “good / middling / bad” business development scenarios which illustrate only more of the same strategic and operational approaches leading to varying levels of success.
What may be deemed (Futurological) “Broad-Scoping” has normally been undertaken only in the best of times, riding high on market returns and as a darling of the capital markets; when immediate pressures are absent and the scale of internal 'fire-fighting' small.
That is the time for blue-sky thinking is it not?
Perhaps not always so.
Beyond his/her independent viewpoints and contribution on other general company matters, it is the special remit of the Non-Executive to think more broadly about the future of his/her commercial 'ward'. The very nature of the role means distance from immediate internal 'busyness', and so theoretically mentally open to a far wider range of inspirational influence - this especially the case if holding similar positions across 2 or more industrial sectors, or multiple positions throughout a single sector's value-chain.
Beyond an M&A ideas generator, such an individual must be the voice of external objective reason during the corporate 'broad-scoping' exercise. Prompted by management trends or capital market dynamics, overtly nave or ambitious middle and senior management may be unduly swayed and enthused by well intentioned outside third parties such as high-profile consultants or financiers seeking copy+ book-running deals. These sorts of quasi-independent contributors can of course be very useful for introducing alternative perspectives, yet it is both management's and the Board's remit to counter-balance the world of the possible with the world of the feasible.
Typically within M&A realms (and indeed IPO realms) 'Big Tomorrow' stories are underpinned by high impact presentations crammed with well set-out argument in which a small enterprise which rides today's & tomorrow's 'dynamic trends' requires the resources and scale-up abilities afforded by a new corporate guardian. The theoretical synergies of the 'May to December' relationship is laid-out with of course the full intent to excite the larger, more secure 'broad-scoping' enterprise. The ideal of stability meets dynamism is for all to see. What is often less clear is the ability for the 'broad-scoping' entity to critically and honestly assess what such patronage brings.
[NB Of course the same 'mating game' is played with the capital markets.
Presently here in the UK it is truly in-credible that the much publicised Ocado floatation seeks a valuation x50 p/e, at a time when solid, asset laden businesses hold x9 to x12 p/e, and long after China's own x30 p/e push has been deflated. On this basis, the Ocado 'Big Tomorrow' story which in reality is little more than a delivery service for Waitrose, in time others, and possibly itself, should not be viewed on par with a successful 'sector disruptor'. It plainly is not, no matter what how much PR spin is created around it. It will instead simply be positioned to take-over individual supermarket's own delivery fleet. This is indeed worthy, but the present business model - well critiqued in The Economist - is out of kilter with the smaller, local scale requirement which works around local customer dynamics].
Thus there will be many many occasions in all sectors when a 'light presented in the dark' will be highly misleading and indeed possibly graven – especially if it is in actuality seeks a parasitic stance. An entity at which first appears friendly but inadvertently shows itself to hold an alternative self-regard agenda, is of course to be avoided at all cost.
Thus the substance of the case presented here, is that any 'broad-scoping' enterprise must lay out its own firm criteria by which it judges an M&A match to offer the foundations of success – at strategic, operational and bottom-line levels.
Part and parcel of this procedure for the auto-sector is the need to learn from the external world, both from within a firm's own sphere, and from further afield in other industrial and commercial realms.
Such a case study that may be of merit is the (still very early) M&A possibility between FriendFinder Networks' $210m offer for Playboy Enerprises Inc.
At first appearance it seems like an odd mis-match between the new and old worlds of a contemporary dating website and a renowned Men's magazine publisher. However beyond a diverse range of websites (including men orientated building materials), the former also operates AdultFriendFinder and own Penthouse Magazine.
Its brand coverage across magazine publishing, television and of course the web reflects Playboy's own coverage and so on the surface highlights synergies. So in the typical M&A value-creation models that espouse 'horizontal', vertical' or 'diagonal' integration, there is seen to be overlap.
Obviously there is scope to build a pricing-based ladder model, placing a higher-brow Playboy over a more overtly sensationalist, pornographically driven Penthouse. But the wish to build the adult-entertainment side of the FriendFinder Network business also reflects the desire and need to cross-feed consumer traffic.
The relationship between the Carris.com reel packaging business and FriendFinder may not be immediately apparent, but the inter-link between construction sites and the 'show-reel' aspect of adult films is none the less their and subconsciously strong. Moreover, the relationship site FriendFinder links across to AdultFriendFinder for those relationship website visitors that may not have found the prospect of love, yet instead seek prospects for near term physical gratification, and of course inter-linked again is Penthouse (and would be Playboy) for immediate visual gratification.
Thus, as is the ambition of most portfolio holding companies, FriendFinder Networks seeks to build an effective and efficient consumer feed-through and circulation model which both maximises capture and spend.
In regard to the automotive sector, it has a history of 'vertically' leveraging its supply-side value chain, and 'horizontally' leveraging the R&D, development and production processes, as seen through-out historical M&A's, from GM's origination to pass-the-parcel of Chrysler (eg Rootes, Daimler & FIAT)
Most illustrative are Henry Ford's early days with agrarian supplies from lumber, to rubber to soy plants (for body frames, tyres, seals and pipes to plastic mouldings) to GM's creation of the multi-systems Delphi supply base to Ford's more recent acquisition and disposal of Hertz Rent-a-Car. (This exploitation of vertical integration replayed by the Japanese, Koreans and Chinese).
In latter days, looking forever up to the top of the value-curve - re-positioning western auto-companies as brand enterprises (reflecting Jacques Nasser's ideal) - many alternative mobility models have been dreamt-up; and either largely left on the drawing board: as with INDEGO, or tentatively introduced: as with PSA's Mu
[NB see the review of PSA in investment-auto-motives' previous post].
However, whilst this reflects a more visionary CRM stance, is there more?
Whilst the worldwideweb has undoubtedly been exploited by auto-companies expanding beyond the normative channel advertising vein – from 30 seconds TV slots to viral Marketing to Corporate Messaging to Consumer Feedback – the previously described 'network feed' pattern enabled by the web – and as being exploited by FriendFinder Networks – may offer an alternative philosophical viewpoint by which auto-execs can survey the access points and transfer channels of their terrain.
Of course even though evolving heavy industry manufacturing companies tied to the realities of balancing stretched B2B relationships to today's more fragile B2C patterns, They must attend to required but not over-played expenditures in capital equipment, supporting the supply & distribution chains, and maintaining as much captive control of dealer and customer credit finance as possible.
But looking elsewhere into the very different worlds of other industries which themselves focus on CRM and the systemic captive through-put of customer attention and spend is an increasingly critical feature of a modern - and capital markets attractive - automotive company.
But in that search for identifying, creating and leveraging the potential of the future, Execs and Non-Execs alike must temper the 'fast charge' business model idealism with an objective outlook that underpins a slower yet stronger built reality that firmly demonstrates the firm's measurable and true innate value.
Saturday, 10 July 2010
Companies Focus – The Western 8 : PSA Peugeot-Citroen – Losing the EU Reactivity in its Hub & Spoke Business Model
PSA, although larger than its Gallic peer Renault, beyond its French homeland has always given the impression of a somewhat smaller entity. A persona in no part due to its cleaving of production & sales figures between its dual Peugeot & Citroen brands, its smaller penetration within its semi-global footprint with tied to ex-colonial regions, and the fact that throughout the 20th century the Peugeot family owners – now holding 30.3% - and senior management have seemingly purposefully chosen to stand back from the limelight, with an innate mantra of “products not personalities”, best shown by Pierre Peugeot's role model behavior.
Given the 15th century roots and impressive but low key multi-sector growth throughout the industrialisation era, the Peugeot family have understandably long held almost baronial ownership, influence and autonomy as most precious; the redrawing of the familial lion passant in January 2010 emphasising the point.
Thus it is perhaps no surprise why the PSA board made up of, and led by, family members have typically appointed CEOs with deep industrial understanding but typically from non-Auto companies – Folz from aluminium & electronics, Streiff from aerospace and latterly Philippe Varin from steel. Such appointments seemingly intend for leverage of a CEO's innate knowledge and access of complimentary industrial sectors (ie 'input' or 'development'); whilst not exposing the family to possibility that a CEO will 'company hop' across the auto-sector, and so possibly engendering (corporate secrecy) betrayal.
As is well established, in almost ironic reflection of the separate Peugeot bicycle company, PSA Peugeot Citroen (still integrally holding the scooter division) operates a 'Hub & Spoke' business formula. One in which a theoretically cost-conscious, omnipotent central HQ deploys its evolved and strategically aligned small car core-competence whilst also: buying-in required fringe products/technologies, selling-on proprietary technology to 3rd parties and forming strategic R&D / manufacturing / retail alliances.
That philosophy has been officially transposed into the PSA production System, an approach that maximises scale efficiencies within, and externally to other parties with over-lapping strategic goals. In physical terms it means 3 internal PSA platforms, one of which is to be extended as a core enabler in 2012 and beyond; aswell as 2 platforms deals with FIAT on LCVs & MPVs, 1 platform deal with Toyota for the A city car segment, 1 platform deal with Mitsubishi for SUV and 1 with FIAT & TOFAS for LCVs. And in Q1 it renewed its agreement to develop and manufactured a shared 4 cylinder engine with BMW AG.
In an age of unforeseen 'Black Swans' creating consequential global economic and political turbulence, the family no doubt see themselves as proven right to protect PSA's innately flexible business model, yet given its comparative smaller industrial weight it must perhaps also act more quickly and nimbly than its larger peers to identify and secure areas of advantage with other (typically EM located) parties beyond its primary sphere and influence.
In doing so given that PSA is a very different beast to its archetype multi-national peers, Varin and his lieutenants must proffer different raison d'etres to compose alternative alliance virtues, the diesel technology lead the attraction for the industry at large and ability to sell modern or near-modern product to the national car companies of EM nations as part of their own economic development plans. These then have been to the 2 external alliance hooks to date, whilst internal alliance hooks have provided for the 'plugging' of PSA product portfolio gaps (eg Mitsubishi Outlander), model specific alliance manufacturing to defray plant investment risk (eg Toyota Aygo) and 'PSA brand advancement' initiatives (eg enabled by Mitusibishi iMEV electric vehicle).
Q1 2010 Performance -
Group Revenue increased by 27.5% from E10.97bn to E14bn compared to Q109; so reflecting the general upward trend of a rising tide of the time. Group worldwide sales for the YoY period increased to 914,000 units.
The Autos section individually posted a 22.4% increase YoY to E10.619bn, up from E8.678bn in the preceding year. As is evident, Q1 still enjoyed the tailwinds of various national scrappage schemes. Being well positioned PSA gained share in that period, cars & LCVs up from 13.5% and ending at 14.6%. Greatest gain were was in Italy, up 1.8% to take 11.6% of the local market.
Having experienced an early boost, executives previously forecast that the EU market will shrink YoY by 9% given the reduction in broadscale Keynesian economic policy and adoption of a far more Monetarist fiscal tightening approach.
Faurecia:
This subsidiary which manufactures various vehicle module systems sets enjoyed a vaulting 59.5% rise in Q1 Revenues, reaching E3.2bn from E2.0bn in the preceding year.
Gefco:
The subsidiary logistics company saw a 27% rise in Revenues as its Q1 figures reached E842m, up from E664m.
PSA Banque:
The captive financial arm of the group saw marginal decline in Q1, Revenues down by -1.1%
However, the company did not release any profit or loss figures in Q1, a fact which investment-auto-motives' believes was sanctioned by the Board so that investors and the French government would not witness a 'see-sawing' of corporate income fortunes as the tailwind of the EU scrappage schemes came to an abrupt halt. Thus done in order to manage expectations and present a smoother income distribution picture over H1, H2 and FY2010.
H1 2010 Performance -
Global auto markets sales increased by 13%, led by China at 27% and Latin America at 11%, whilst European sales was very variable, France up 6%, UK up 19%, Spain up 38%, Germany down -27%, CEEC down -13%.
H1 sales figures reached a new high of 1,856,000 units, so up 16.9% if CKD figures are incorporated. Of this fully assembled vehicles represent 1,618,000 so 16.8%, and CKD kits represent 237,000 (a rise of 18% YoY, mostly from Peugeot). European sales rose 1% to 14.6% market share when including for EU, EFTA & Croatian figures. PSA's reliance on Europe declined slightly, with non-European regions accounting for 36% versus 34% a year previously. PSA maintained its lead in small & compact LCVs, yet in a sector that grew 9.4% YoY only gained 0.4% market share to 22.4%.
Yet, at a time when PSA should have been 'mopping-up' towards the latter-end of the European 'perfect storm', the 1% increase is (as expected) disappointing. The levels of artificially generated consumer demand growth for low CO2, affordable cars (PSA's hallmark) may not be seen again, even if a double dip recession does take hold. Similarly, the rising-tide in LCV growth has only seen a near equivalence maintained, when PSA should have been in the LCV driving seat.
Thus investment-auto-motives believes that the opportunity that arose was under-played, and partially mismanaged, probably as a result of overt constriction on NPD budgets as part of group-wide cost-saving efforts which kept the company effectively treading water, and relying on consumer purchase discounts and incentives necessary to shift factory and dealer inventory, keeping cars sales buoyant, which enabled it to reach its 'record' sales figures. Figures achieved probably at the cost of per unit profitability margins.
For Citroen, the unfortunate late introduction of new C3 in Q409 meant that the division was bereft of product, it will have been 'pushing old product' such as C1 and old C3, but critically had (and has) no C2 model. C3 Picasso mini-MPV was perhaps its only tenable model to befit the scrappage scheme incentives, but the lack of attractive siblings demonstrated Citroen's effectual absence from the dynamic market.
For Peugeot, the aged 107 offers little attraction even if an apt vehicle, whilst a mid-2009 face-lifted on the 3 year old 207 was too subtle to be of commercial effectiveness, thus simply kept it in the running in the middle of the pack, as opposed to its 'rightful' position of 'front & centre'.
Strategic -
Outside of homeland France PSA's dual identities, both hinder and help the group at large. Unlike other OEM's typical single marque dealerships, its history of dual brand dealerships has muddled the market offering. The innate PSA experience at the critical purchase decision point has been mixed; one of almost paradox given each brand's 'dueling for buyer attention' created by the price-point and target market differentiation. [NB Citroen pitched as affordable to a family market, whilst Peugeot pitched higher, to more sporty singletons and couples]. That mixed message of single sire dealerships made even more opaque with the introduction of Citroen's DS models, which reach into Peugeot territory.
Of course the efficiency and market(s) reach rational of running dual-brand dealerships for the corporation and dealers alike is of course beyond the historical picture still compelling, especially so in these financially constrained times that require the sweating of a locational asset. Recognising this corporate schizophrenia as an integral issue driving the need for a brands identity update – relative to brand perception & experience - PSA had Citroen and Peugeot logos redrawn. (Moreover, new corporate messages were generated: Citroen as “Creative Technologie” & Peugeot as “Motion & Emotion). Both now depicted in the polished metal badge that has become the auto-sector's homogenous requirement. This then negates the old colour clash between Peugeot Blue and Citroen Red on all corporate identity items ranging from stationary to advertising to dealership facades and provides a level of unity between the brands and throughout each's marketing communications palette.
However, whilst undoubtedly good for the corporation and dealers in the mid-term , the change forces a sizable overhead cost to dealers, since good corporate identity change programmes span a raft of areas well beyond the door-top signage of a forecourt, including full exterior, full interior and the use of corporate prescribed desks, chairs, picture frames, etc etc to ensure all dealer convey the same corporate persona. Usually prescribed to its 3rd party agents in the early phase of an economic recession, those agents not in booming EM regions will be resisting change, especially as they see their monthly sales figures reduce as the scrappage effect fades.
The consequences of this will probably for a period further muddle the Peugeot-Citroen identity on the high street and in retail parks across the UK, Germany, Italy and perhaps most so in France, as a renewed corporate identity roll-out creates a patchwork of dealership facades: the new 'chrome' vs old 'blue & red', sites which further erodes the perceptional integrity of the business. To avoid this highly probable outcome PSA will need to be both firm in its implementation, yet be flexible enough to maintain good dealer relations – so necessary during this time of economic flux. A partial subsidy of the roll-out programme is the typical answer (with latter-day claw back of the sum from dealer margins), yet whilst such a solution does ensure quick adoption, it does create a drag on near term quarterly profits.
The corporate R&D strategy of course spans the 5 prime systems areas of: a) structure, b) powertrain, c) chassis, d) electrical & electronics and e) trim & hardware. And in recognition of its own strength and competitor strengths PSA maintains a focus on Powertrain, its future-view of which includes high-efficiency diesels, dual-role hybrid technology which sees the electric motor fitted as a complementary item added in almost a 'bolt-on' manner to the the secondary axle, and the seeming perennial slow maturation of EVs.
PSA's diesel capability has long been recognised by the public since the 404 model with Peugeot trying to maintain that reality and impression via motorsport such as Le Mans (with Audi diesels literally close-by), the WRC and other privateer team links with various endurance racing..
Importantly, Q1 saw the announcement of a 3 cylinder turbo engine being developed. With a 175m budget this looks like an adaption of a 4 cylinder architecture as opposed to what would be a more expensive new engine family.
With regard to hybrid tech strategy, PSA is following both conventional and unconventional routes, the latter as seen with the introduction of the 3008HYbrid4, the intention is to use exploit low-cost applications methods which instead of being intrinsically built-into the prime powertrain of the car (as with Prius or latter diesel 308Hy) or indeed optionally mated to the gearbox (as with FIAT), is instead a very separate entity which requires as least engineering interference with the prime mover unit as possible, and instead develops a structural package protection policy affecting small sections of the platform rear to house a rear axle electric motor and battery space.
[NB This was has been the conventional approach for hybrids throughout their 20th century development - eradicating the problems experienced from the hub-driven Lohner-Porsche yet maintaining its dual systems simplicity – and most prominent in military applications to provide both short-term silent running and optional 4WD].
Thus through Bosche co-developed systems, PSA though later to market with hybrids is theoretically well placed to in time 'steal the march' over less frugal petro-electric hybrid systems offered by others.
At the geographic level the BRIC regions and other 'secured' EM nations are of course a major focus for PSA, as for all western VMs seeking future growth.
China:
China has obviously offered growth in recent years as its economy flourished, and even with the slight slowdown seen in recent months, will continue to do so given PSA's long established market presence. H1 2010 saw a 49% sales increase YoY.
Its operational presence has been buoyed by the fact that a new JV agreement is to be signed with Changan Motor which provides a second manufacturing avenue given the long established JV with Dong Feng (DPCA) now running with available capacity of 450k pa via 2 plants and another Powertrain plant with 640k pa engine capacity and 375k pa gearboxes. This production 'homeland' formed a base from which PSA was able to build Chinese presence for Faurecia, GEFCO, PSA Banque (market entry via Bank of China), and latterly R&D capabilities (titled the China Tech Centre) in Caohejing, Shanghai, which both encourages local supply-chain strength and modifies vehicles to meet national consumer expectations. This capability works reciprocally with the Tongji University's Institute of Automotive Studies, the recent fruition of which was the April debut of the Metropolis concept – the first notionally Chinese concept car developed. And recently an exhibition partner for the French stand at the Shanghai World Expo.
[NB. Present press reported regards the evolving 'remoteness' of PRC attitudes to foreign company presence may or may not be being over-stated. Yet it seems that given long recognised Auto Policy which necessitates the consolidation of the domestic auto-industry that PRC officials will implicitly “balance” the interest levels of foreign interest companies. To this end, investment-auto-motives believes that given its effective role as an early entrenched sector development 'agent', PSA will have the innate advantage over its peer Renault which may increasingly need to rely upon its Nissan standing in the country. Hence although sector shrinkage will continue to proceed, PSA is not in danger of being marginalised given its deep involvement to date along with of course VW & GM].
Presently China accounts for 14% of PSA Autos sales, up from 10% in 2009, which highlights the disjuncture between the 2 markets over the period.
However, historically ranked as the 3rd foreign brand, it can be argued that Citroen is more susceptible to the intrusion of other non-Chinese marques from Japan and S.Korea aswell as China's own championing brands such as Geely, BYD, Great Wall etc. Hence the introduction of Peugeot 5 yeas ago. In obvious contrast to the near static product management of ZX in its former years, PSA must demonstrate a near constant model evolution policy that sees low cost but truly noticeable aesthetic modification every 18 months or so; very much aligned to the USA's 1950s new model year ethos of 'planned obsolescence' creating an ever-changing surface impression to avidly promiscuous consumers for what are in effect long serving, highly amortised platforms and architectures.
[NB investment-auto-motives proffers that in doing so, an additional income stream could be obtained from a newly created separate after-sales unit, with the remit of offering to (same shape) older model buyers, cosmetic update packs which imitate the features on previous model years, and negates the oft seen poor efforts of used car personalisation that can damage brand perception. This thereby maintains a constant design lead yet allows for a sizable after-sales opportunity in parts and service to perpetuate demand for new and near new vehicles in what is possibly the world's harshest auto-retail environment].
Riding on the back of Citroen standing and offering something akin to Euro-sportiness, the Chinese sales of Peugeot cars have climbed ever upward, reaching 410k units in 2009
Russia:
In Russia, Moscow, St Petersberg and regional surrounds experienced a -7.6 % YoY sales decrease for H1 2010.
Assembled vehicles from the (Mitsubishi JV) Kaluga facility (110 miles south of Moscow) came on stream in April, though the initial plan of 75k units pa may be reduced. The E470m plant was designed with an annual capacity of 150k units which was intended to serve a 100k 2010 Russian sales ambition generated in late 2007, but a massively declined car market has of course undermined that target.
[NB the original 150k capacity has been officially reduced to 125k, very probably to demonstrate better plant utilisation rates when the factory ramps up production].
Moreover it reportedly caused a massive over-stock of vehicle inventory, which has sat as a virtually unattended glut on the runways of a fringe airport near St Petersberg for a year. Conjecture presents that given the inability to properly secure these sites that the criminal fraternity will have been tempted to steal whole vehicles and parts for black-market export to the Balkans, Greece, Turkey & CIS.
Mercosaur:
Whilst Latin America generally saw sales plummet in 2009, Brazil and surrounds saw an 11% YoY increase for H1 2010, so theoretically aiding the goal of reaching 500k units pa in the mid-term.
Q1 saw both Brazil and Argentina lift 17% or so, PSA beating the market trend with a 20% rise.
PSA currently holds 5.3% Mercosaur market share, something it intends to buoy with the capacity exapansion of its Porto Real plant in Brazil and Palomar facility in Argentina, the cost bases of which to be assisted by the establishment of a regional Procurement School.
The ambition is to become a top 4 producer in Brazil, so displacing either FIAT, VW, GM or Ford,: all of which have appreciably higher regional share. The PSA Board views a #1 position in the Argentinian market as the prime stepping stone. However, having seen Argentinian gains of 26% in 2007, 2% in 2008 and -22% in 2009, even in a market up 20% so far this year (peaking at 37% in March) the performance of PSA is uncertain given its lower ranked position, unless its new Hoggar car derived pick-up manages to steal hearts and minds.
India:
The Asian sub-continent has been a frustrating arena for PSA, with previous attempt(s) flailing. However in the last year PSA re-affirms its intent not to miss out on such present day lost sales, and the obvious large future potential. Chennai – the small car manufacturing & export hub of the country – has once again been notionally nominated as an ideal location, but for the production of mid-sized cars: presumably in the Logan mould, so following Renault's entry strategy (beyond its own Bajaj JV small car intent).
This is one where western OEMs avoid head-on small car competition with the likes of Maruti-Suzuki or TATA, and instead push the sale of affordable compact saloons and hatch-backs, thus following the path of Ford and others.
Yet it also follows a similar effort over a decade ago with the 309 in partnership with local producers Premier Motor. This stumbled due to an overlap of various issues, including immature market, low sales and worker demands raising per unit labour costs, and claimed low support of the service network by TVS (Chennai) and others. Moreover Premier Motor also undertook a renewed agreement with FIAT to assemble the cheaper Uno which undercut the 309. The outcome for PSA was to see the Peugeot name spotlighted in consumer issues press, somewhat staining its reputation, having pulled out in 2001 has waited a decade for a re-entry attempt.
[NB Given the present heavily declined position of Hindustan Motor – losing R-3326.37 Lahk in
Q1 2010 – the company aswell as rationalising operations and expanding Mitsubishi licensed vehicles may well be seeking additional JV projects or full alliances. This will not have been unnoticed by PSA executives – as indeed that of other western VMs – and investment-auto-motives expects that the basis of a mutual agreement between PSA and Hindustan Motor will have been explored, possibly engaging latter-day 3-way talks between the parties given the PSA-Mitsubishi alliance link already in place, in a near copy+ of the Russian Kaluga agreement].
Having previously conducted feasibility studies PSA believes it must operate at above the 5 Lahk mark to both separate itself from the centre of the mass market, presenting a price differential on the local value ladder, between a lower set Peugeot and higher set Citroen. R-introduction set for mid 2011.
Viewing PSA concept cars, last year's Peugeot BB1 city-car with unorthodox 'twin scooter seating' arrangement was really an exercise to publicly demonstrate the company's attention regards small car products such as Smart ForTwo, BMW's upcoming MegaCity and France's own established Axiam Mega (which acquired the UK's NICE Car Co). The recent SR1 simply sets-out the future styling tone, which see Peugeot a much needed return to handsome conservatism after what as been a period of deliberately provocative unbalanced proportions (esp front vs rear), general form and oversized trim and hardware such as grill and lamps, The SR1 heralds back to the much lauded Pininfarina designed 'clean' 'thin-lamp' 406 coupe, and in doing so should convey improved product qualities and quality that will help maintain pricing levels.
For Citroen, following the 2CV inspired Revolte from last year, the GQbyCitroen concept which allied the division with GQ magazine appears little more than a March/April 2010 marketing initiative, exploiting a computer rendered concept car as an 'Advertorial' truing to reach a higher disposable income target market audience which would not ordinarily consider Citroen. Physically real – even if really another PR exercise is the Survolt race EV, premiered at Le Mans presently.
And as previously stated PSA China illustrated the Metropolis concept, still bound to a computer screen and reflecting SR1 cues, but essentially declaring the maturation of its local self and in a broader sense China's own improving R&D skills.
As for the future of the DS line, the 'High-Rider' offers a second DS model derived from the 3008 Hybrid4 platform, offering instead a 3dr coupe package
Given the creation of a more upscale DS line, industry observers have been questioning about the creation of a low-level line to compete against Renault's Dacia in specific EM regions. Jean-Marc Gales (Head of Peugeot-Citroen brands) has not outwardly refuted the idea and given the in-roads Dacia has made in both EM and latterly 'advanced' areas, it must be top of mind even if not explicitly sat on the Board agenda. Gale adds fuel to the conjectural fire by stating that such an initiative would be (obviously) not centred on the EU, presumably instead driving demand from near-east stronghold countries and India.
Mu by Peugeot:
Mu was previously launched to demonstrate PSA's commitment to the 21st century ideology of 'a la carte' personal mobility, offering a one-stop-shop service for the individual, couples and families to order and experience a selection of 'mood & mode' appropriate, low carbon footprint travel solutions. The service ranges from bicycles to scooters to cars, MPVs and vans to in due course EVs.
Introduced in Paris, it is now available from Peugeot owned dealers in Berlin, London, Madrid, Brussels and Milan, due for extension into other 2nd tier cities in these countries aswell as the Netherlands and Portugal.
It has won Automotive News' LEADER award in the distribution category, and with over 200,000 website hits has spawned public interest from press stories, yet exactly how many take up the service remains to be seen. At the very least even if ultimately unsuccessful as a transport rental model operated by PSA dealers the initiative does allow PSA to claim corporate social responsibility bragging rights aswell as increasing footfall into corporate owned dealerships, a percentage of which will be converted to conventional vehicle sales.
However, ultimately the roll-out of Mu should be applauded given the sweating of the PSA asset-base in terms of dealer locations and broad product portfolio, as long as undertaken as a constrained, high impact initiative that is not expected to perform overnight, but instead gains ground across Europe's metro-centres year after year. It must then have a 5-10 year commitment with ideally separate and detailed cost-centre financial reporting.
Given the auto-sectors long-held desire to re-orientate aspects of its business model to reach over into the typically warmer investment waters of 'hi-tech consumerism', PSA with investment banker assistance, will probably be moulding Mu as necessary to attract PE 'eco-scheme' interests prior to an ideally envisaged long-term IPO; the process of which allows PSA to enter untapped global metropolitan areas as a precursor to growing PSA in low exposure and uncharted regions.
Thus the role of the allied 'Peugeot City' sites (seen first at Rue de Chateudun, Paris in March) is to set a new alternative retailing tone. It is set out with 4 distinct zones: 'Lab' (visual vehicle personal spec facility via touch-screen), 'Novelty' (for brand news updates), 'Urbanilty' (for communicating Peugeot's mobility philosophy ie prompting bicycle and scooter use) and 'Advice' which acts as a conventional purchase and finance agreement desk). Latter locations include Warsaw & Riyadh.
[NB investment-auto-motives conjects that PSA will indeed introduce a second sub-brand (akin to DS) which will compete against Dacia, Skoda and others in the entry-level section of segments. And given the manner in which DS sits above, so “CV” appears to be a powerful nomenclature to sit below the 2 primary Citroen and Peugeot brands].
Operational -
Cars:
The beginning of the year started with a tinge of dismay as PSA announced the recall of 100,000 107 & C1 cars that were deemed to have inherent problems given their twin manufacture with the Toyota Aygo in the Czech republic.
Of the recent & soon to be introduced new models: 5008, DS3 Racing and RCZ, although they do fill the product cadence pipeline, they do not in themselves significantly lift vehicle mix and so income contribution as typically new conventional mainstream product would. RCZ is a halo product to lift the image of Peugeot and although seemingly well conceived from a 'parts-bin' view, so limiting project investment and time to market, and per unit margin, its limited numbers offer a small financial contribution. DS3 Racing, though in greater numbers is derived from the same raison d'etre, indeed it seems the ethos of the sub-brand itself. Whilst sales will be greater than RCZ as a cheaper more practical car, its volume and reduced margins still adds relatively little contribution at this critical time.
The 5008 is a slightly different beast, as a compact 'high-ride' CUV, serving as the 7 seat variant to its 3008 sibling introduced last year; that earlier core variant due to take much of the PSA Lion's share in this segment. Given its 308 platform roots and the development of the vehicle type from MPV-SUV-hatchback roots, the 3008/5008 can be regarded as 'fringe mainstream' given that monospaces account for 19.4% of sales in France, 14.3% in Germany, 13.5% in Span, 13.1% in Italy and 11.7% in the UK. Thus whilst the physically longer 5008 may add additional sales and possibly good unit margins (depending on accounting methods), it will be the 3008 which serves well throughout the remainder of 2010.
[As described in previously posted PSA comment, the DS sub-brand – intended as a Mini competitor – is only really a compelling proposition to French buyers given the sub-brand's relevance to the French popular consciousness (and even then only really to older people such as the 'grey set)' who seek something petite, Francaise et avec 'la difference'; thus not a product platform (in its current guise) for Pan- European or worldwide product success].
The new 408 sedan and variants is launched worldwide in H2. In a change from the historical norm of a separate model line, in a bid to harmonise and scale-up platform efficiencies, the new car is effectively an (rear overhang) extended 308 given a boot/trunk and saloon profile. This marked change, from a poor-performing low level pseudo-exec EU-centric car, better suits the compact sedan demands of EM regions.
Citroen C5 is also additionally launched in China, whilst Latin America gains the 408, C3 Aircross and Hoggar (208 pick-up)
To maintain public profile PSA ran two new RCZ coupes at the Nurburgring 24 Hour race in May, taking first & second its class (sub 2.0L diesel); one of the cars driven by Jean-Phillipe Peugeot – Vice Chairman of the Supervisory Board. It was of course both a pre-cursor to the LMP event at Le Mans and a celebration of Peugeot's 200 years since official formation in 1810, together an effort to raise Peugeot credibility amongst the dominant 'sporting class' Germans.
And lastly, to demonstrate its self-styled leadership role in CO2 friendly cars, PSA states that it will:
by 2010-end introduce 3 models that reach 99g/km or less (207*, C3*, DS3* – Airdream etc spec. engineered) [NB* the substantially higher list prices of these type of eco cars from all manufacturers, to cover project engineering costs and set an eco-premium precedent)
at 2010-end introduce an EV
in 2011 introduce diesel hybrid variants of 3008 and DS5
in 2012 introduce a plug-in 3008 (rated at 50g/km)
Faurecia:
Though Q1 was relatively quite, company ambitions regards Chinese expansion were realised in June and July, having seen its sales double over the last year thanks to continued business relations and a prior rebound in the domestic market (before the recent slip).
June saw it take an 18.75% stake in Xuyang Group of Changchun, Jilin Province.. This company owned by the local municipality supplies to FAW (including FAW-VW). In detail, the various systems divisions are to be split as:
Seating : 60% Faurecia vs 40% Xuyang
Interiors: as above
Accoustics & Interior Trim: 40% Faurecia vs 60% Xuyang
And on 2nd July it finalised a cooperation agreement with Geely and Limin for exterior and interior systems for all of Geely's brands manufactured out of 5 new plants currently under construction. These include 'Emgrand', 'Englon' (the London Taxi JV) & 'Gleagle'
GEFCO:
Little operational news has been announced from GEFCO HQ regards performance to date, however beyond winning an industry award, the downside has been a notice from the (soon defunct) FSA to its UK division.
Dated 26th April 2010 it states that GEFCO – amongst others - had not supplied details of their Retail Mediation Activities Returns (RMAR's) within the required time period.
Whilst the revocation of FSA approval may be seen as simply the regulatory body trying to show its teeth before its disbandment, it still highlights the poor business practices and possibly business culture of GEFCO UK Ltd, something GEFCO HQ and PSA HQ should take seriously if it is to demonstrate itself as a truly untinged entity when seeking credit market related activities in various regions.
PSA Banque:
Q1 saw the division access a E1.8bn from capital markets as like many CFOs it sought to exercise beneficial conditions given possible credit contraction possibilities on the horizon.
As with all auto-producers, deployment and exploitation of captive finance houses have been recognised as key to retaining access to wholesale credit markets. As a result of previous reliance on a few key western locations – as has been the historical norm – the credit crunch and EU sovereign debt problems have forced producers to set-up far more market localised in-house financing operations, acting as the intermediary between less problematic local wholesale credit markets and the pent-up potential demand of dealers and consumers. Thus reaching further into BRIC+ territories has been a primary management focus over the last year.
In this vein in January PSA has announced its regional licence completion for PSA Banque RUS in Russia, taking over AIG's previous operations and taking a 98% stake, a necessary move given PSA's small but evolving market share and availability of PSA product from the local assembly facility in Kaluga.
Financials -
Unfortunately PSA transparency in this field has become ever more opaque, which unfortunately gives the impression of budget allocation struggles having absorbed the 'life-saving' E3bn soft-loan last year/
The FY2009 report tried to balance an overall dark picture of (reduced) debt (to E1,993m from E2,906m) and operating losses (of E689m) with the upbeat highlight of a positive FCF (at E809m).
Such a bias to demonstrating healthy liquidity has of course been normal modus operandi for most VMs, well recognising that organisational and balance sheet re-dress to demonstrate the availability of working capital was viewed as key – even if the other accounting fundamentals flailed. Unfortunately for PSA the balance sheet – from an officially interpreted distance - appears more stretched than its peers, which whilst also suffering aren't quite as much, and typically have greater strategic and operational strength behind them.
To add further liquidity a E500m 5 year corporate bond issuance was offered, with as a counter-measure against debt over-exposure and so credit-rating mark-down, a partial bond buy-back initiated to the value of E244,950,000 for previous 10 year bonds issued in 2001. Theoretically given the end of life timing, with few if any coupon payments remaining, they would have been bought-back at near par value, and seems a case of recycling funds to sustain fixed income markets standing.
Conclusion -
Just as the hub & spoke design of a bicycle wheel is able to absorb and reflect external shocks, with simple change of spokes as necessary, so the Peugeot family have exploited such a flexible organisational format to maintain control and quickly access areas of competitive advantage & competitive equalisation.
However, the creation the organisational structure and the ability to exploit the advantages it affords very much depends upon fully understanding the dynamics of external forces. PSA's ability over the last 20 years to receive pertinent market intelligence, formulate required action and and execute has been part of its innate being that allows it to maintain its level of independence and supposed flexibility.
But the inability to react harmoniously to recent 'perfect storm' events highlights what could be evolving invisible stresses from within, and the very real need to make speedy progress in the Group Performance Plan that seeks to re-balance the apparent massive inefficiencies that have crept in over the last 5-7 years.
Investment-auto-motives external observation presents a case where PSA has partially suffocated its prime European offering so as to strengthen RoW operational capabilities and offerings in its 'holy grail' EM regions. A pertinent internal geo-political case of being sat between 'a rock and a hard place', and possibly fearful reaction having 'not watching the farm'.
Hence, real-world absence from the all important EU small car watch, whilst over-focusing executive, management and staff resource upon the extension reach of: non-EU areas, new entry into CUV segment, introduction of high-line DS. In addition expended effort to proactively manage public and investor perceptions - via concept cars, halo cars, PR & marketing initiatives such as Mu & Peugeot City - rather than fundamental realities of the business.
Such observations cannot be simply brushed aside, especially so if indicative of an inherent inability to evenly spread attention as necessary and implement all important required product actions to retain a once highly competitive position.
Of course EM attention, NPD attention and Retail Channel attention are all critically necessary. Especially so when a company is trying to escape its near overt 2/3 sales dependence upon a singular regional market, within which it relies upon tight segment(s) concentration. In this mould it is similar to say FIAT but is under greater pressure to be seen to be doing something relatively radical as it does not enjoy the similar foreign footprint or market standing of FIAT or other peers.
Yet giving away the home advantage in such a core arena as small cars only ultimately precipitates a far harder fight both at home and abroad. After all it is the commercial reality of net income and working capital levels that underpins the transition of ' PSA Futurology' into successful commercial extension achievements.
At a time when the corporation offers “Jam Tomorrow” - and adding seeming sizable sums to its fixed cost-base to do so - it must be seen to be capable of baking its bread and spreading its butter as convincingly at home as in the almost self-perpetuating EM regions.
Far more exacting detailed transparency about the exact ingredients (costs), recipe (targets) and baking fortunes (results) would be welcomed by near-term large scale institutional shareholders, mid-term governmental debt-holders and longer-term (Mu linked) expectation from possible private equity.
For PSA the development of Mu was undoubtedly undertaken to formulate a powerful yeast in the ostensibly cloying dough of the western auto-sector. However, although brilliantly dreamt-up as a brand name given its overtones of electrically-charged particle mobility, it also more recognisably represents the value of a friction co-efficient between 2 forces.
Thus PSA's real task is to better secure near-term value-creation as solid stepping stones to its more esoteric long-term goals. Doing so will regenerate its own credibility and reduce any level of investor frustration and friction.
Given the 15th century roots and impressive but low key multi-sector growth throughout the industrialisation era, the Peugeot family have understandably long held almost baronial ownership, influence and autonomy as most precious; the redrawing of the familial lion passant in January 2010 emphasising the point.
Thus it is perhaps no surprise why the PSA board made up of, and led by, family members have typically appointed CEOs with deep industrial understanding but typically from non-Auto companies – Folz from aluminium & electronics, Streiff from aerospace and latterly Philippe Varin from steel. Such appointments seemingly intend for leverage of a CEO's innate knowledge and access of complimentary industrial sectors (ie 'input' or 'development'); whilst not exposing the family to possibility that a CEO will 'company hop' across the auto-sector, and so possibly engendering (corporate secrecy) betrayal.
As is well established, in almost ironic reflection of the separate Peugeot bicycle company, PSA Peugeot Citroen (still integrally holding the scooter division) operates a 'Hub & Spoke' business formula. One in which a theoretically cost-conscious, omnipotent central HQ deploys its evolved and strategically aligned small car core-competence whilst also: buying-in required fringe products/technologies, selling-on proprietary technology to 3rd parties and forming strategic R&D / manufacturing / retail alliances.
That philosophy has been officially transposed into the PSA production System, an approach that maximises scale efficiencies within, and externally to other parties with over-lapping strategic goals. In physical terms it means 3 internal PSA platforms, one of which is to be extended as a core enabler in 2012 and beyond; aswell as 2 platforms deals with FIAT on LCVs & MPVs, 1 platform deal with Toyota for the A city car segment, 1 platform deal with Mitsubishi for SUV and 1 with FIAT & TOFAS for LCVs. And in Q1 it renewed its agreement to develop and manufactured a shared 4 cylinder engine with BMW AG.
In an age of unforeseen 'Black Swans' creating consequential global economic and political turbulence, the family no doubt see themselves as proven right to protect PSA's innately flexible business model, yet given its comparative smaller industrial weight it must perhaps also act more quickly and nimbly than its larger peers to identify and secure areas of advantage with other (typically EM located) parties beyond its primary sphere and influence.
In doing so given that PSA is a very different beast to its archetype multi-national peers, Varin and his lieutenants must proffer different raison d'etres to compose alternative alliance virtues, the diesel technology lead the attraction for the industry at large and ability to sell modern or near-modern product to the national car companies of EM nations as part of their own economic development plans. These then have been to the 2 external alliance hooks to date, whilst internal alliance hooks have provided for the 'plugging' of PSA product portfolio gaps (eg Mitsubishi Outlander), model specific alliance manufacturing to defray plant investment risk (eg Toyota Aygo) and 'PSA brand advancement' initiatives (eg enabled by Mitusibishi iMEV electric vehicle).
Q1 2010 Performance -
Group Revenue increased by 27.5% from E10.97bn to E14bn compared to Q109; so reflecting the general upward trend of a rising tide of the time. Group worldwide sales for the YoY period increased to 914,000 units.
The Autos section individually posted a 22.4% increase YoY to E10.619bn, up from E8.678bn in the preceding year. As is evident, Q1 still enjoyed the tailwinds of various national scrappage schemes. Being well positioned PSA gained share in that period, cars & LCVs up from 13.5% and ending at 14.6%. Greatest gain were was in Italy, up 1.8% to take 11.6% of the local market.
Having experienced an early boost, executives previously forecast that the EU market will shrink YoY by 9% given the reduction in broadscale Keynesian economic policy and adoption of a far more Monetarist fiscal tightening approach.
Faurecia:
This subsidiary which manufactures various vehicle module systems sets enjoyed a vaulting 59.5% rise in Q1 Revenues, reaching E3.2bn from E2.0bn in the preceding year.
Gefco:
The subsidiary logistics company saw a 27% rise in Revenues as its Q1 figures reached E842m, up from E664m.
PSA Banque:
The captive financial arm of the group saw marginal decline in Q1, Revenues down by -1.1%
However, the company did not release any profit or loss figures in Q1, a fact which investment-auto-motives' believes was sanctioned by the Board so that investors and the French government would not witness a 'see-sawing' of corporate income fortunes as the tailwind of the EU scrappage schemes came to an abrupt halt. Thus done in order to manage expectations and present a smoother income distribution picture over H1, H2 and FY2010.
H1 2010 Performance -
Global auto markets sales increased by 13%, led by China at 27% and Latin America at 11%, whilst European sales was very variable, France up 6%, UK up 19%, Spain up 38%, Germany down -27%, CEEC down -13%.
H1 sales figures reached a new high of 1,856,000 units, so up 16.9% if CKD figures are incorporated. Of this fully assembled vehicles represent 1,618,000 so 16.8%, and CKD kits represent 237,000 (a rise of 18% YoY, mostly from Peugeot). European sales rose 1% to 14.6% market share when including for EU, EFTA & Croatian figures. PSA's reliance on Europe declined slightly, with non-European regions accounting for 36% versus 34% a year previously. PSA maintained its lead in small & compact LCVs, yet in a sector that grew 9.4% YoY only gained 0.4% market share to 22.4%.
Yet, at a time when PSA should have been 'mopping-up' towards the latter-end of the European 'perfect storm', the 1% increase is (as expected) disappointing. The levels of artificially generated consumer demand growth for low CO2, affordable cars (PSA's hallmark) may not be seen again, even if a double dip recession does take hold. Similarly, the rising-tide in LCV growth has only seen a near equivalence maintained, when PSA should have been in the LCV driving seat.
Thus investment-auto-motives believes that the opportunity that arose was under-played, and partially mismanaged, probably as a result of overt constriction on NPD budgets as part of group-wide cost-saving efforts which kept the company effectively treading water, and relying on consumer purchase discounts and incentives necessary to shift factory and dealer inventory, keeping cars sales buoyant, which enabled it to reach its 'record' sales figures. Figures achieved probably at the cost of per unit profitability margins.
For Citroen, the unfortunate late introduction of new C3 in Q409 meant that the division was bereft of product, it will have been 'pushing old product' such as C1 and old C3, but critically had (and has) no C2 model. C3 Picasso mini-MPV was perhaps its only tenable model to befit the scrappage scheme incentives, but the lack of attractive siblings demonstrated Citroen's effectual absence from the dynamic market.
For Peugeot, the aged 107 offers little attraction even if an apt vehicle, whilst a mid-2009 face-lifted on the 3 year old 207 was too subtle to be of commercial effectiveness, thus simply kept it in the running in the middle of the pack, as opposed to its 'rightful' position of 'front & centre'.
Strategic -
Outside of homeland France PSA's dual identities, both hinder and help the group at large. Unlike other OEM's typical single marque dealerships, its history of dual brand dealerships has muddled the market offering. The innate PSA experience at the critical purchase decision point has been mixed; one of almost paradox given each brand's 'dueling for buyer attention' created by the price-point and target market differentiation. [NB Citroen pitched as affordable to a family market, whilst Peugeot pitched higher, to more sporty singletons and couples]. That mixed message of single sire dealerships made even more opaque with the introduction of Citroen's DS models, which reach into Peugeot territory.
Of course the efficiency and market(s) reach rational of running dual-brand dealerships for the corporation and dealers alike is of course beyond the historical picture still compelling, especially so in these financially constrained times that require the sweating of a locational asset. Recognising this corporate schizophrenia as an integral issue driving the need for a brands identity update – relative to brand perception & experience - PSA had Citroen and Peugeot logos redrawn. (Moreover, new corporate messages were generated: Citroen as “Creative Technologie” & Peugeot as “Motion & Emotion). Both now depicted in the polished metal badge that has become the auto-sector's homogenous requirement. This then negates the old colour clash between Peugeot Blue and Citroen Red on all corporate identity items ranging from stationary to advertising to dealership facades and provides a level of unity between the brands and throughout each's marketing communications palette.
However, whilst undoubtedly good for the corporation and dealers in the mid-term , the change forces a sizable overhead cost to dealers, since good corporate identity change programmes span a raft of areas well beyond the door-top signage of a forecourt, including full exterior, full interior and the use of corporate prescribed desks, chairs, picture frames, etc etc to ensure all dealer convey the same corporate persona. Usually prescribed to its 3rd party agents in the early phase of an economic recession, those agents not in booming EM regions will be resisting change, especially as they see their monthly sales figures reduce as the scrappage effect fades.
The consequences of this will probably for a period further muddle the Peugeot-Citroen identity on the high street and in retail parks across the UK, Germany, Italy and perhaps most so in France, as a renewed corporate identity roll-out creates a patchwork of dealership facades: the new 'chrome' vs old 'blue & red', sites which further erodes the perceptional integrity of the business. To avoid this highly probable outcome PSA will need to be both firm in its implementation, yet be flexible enough to maintain good dealer relations – so necessary during this time of economic flux. A partial subsidy of the roll-out programme is the typical answer (with latter-day claw back of the sum from dealer margins), yet whilst such a solution does ensure quick adoption, it does create a drag on near term quarterly profits.
The corporate R&D strategy of course spans the 5 prime systems areas of: a) structure, b) powertrain, c) chassis, d) electrical & electronics and e) trim & hardware. And in recognition of its own strength and competitor strengths PSA maintains a focus on Powertrain, its future-view of which includes high-efficiency diesels, dual-role hybrid technology which sees the electric motor fitted as a complementary item added in almost a 'bolt-on' manner to the the secondary axle, and the seeming perennial slow maturation of EVs.
PSA's diesel capability has long been recognised by the public since the 404 model with Peugeot trying to maintain that reality and impression via motorsport such as Le Mans (with Audi diesels literally close-by), the WRC and other privateer team links with various endurance racing..
Importantly, Q1 saw the announcement of a 3 cylinder turbo engine being developed. With a 175m budget this looks like an adaption of a 4 cylinder architecture as opposed to what would be a more expensive new engine family.
With regard to hybrid tech strategy, PSA is following both conventional and unconventional routes, the latter as seen with the introduction of the 3008HYbrid4, the intention is to use exploit low-cost applications methods which instead of being intrinsically built-into the prime powertrain of the car (as with Prius or latter diesel 308Hy) or indeed optionally mated to the gearbox (as with FIAT), is instead a very separate entity which requires as least engineering interference with the prime mover unit as possible, and instead develops a structural package protection policy affecting small sections of the platform rear to house a rear axle electric motor and battery space.
[NB This was has been the conventional approach for hybrids throughout their 20th century development - eradicating the problems experienced from the hub-driven Lohner-Porsche yet maintaining its dual systems simplicity – and most prominent in military applications to provide both short-term silent running and optional 4WD].
Thus through Bosche co-developed systems, PSA though later to market with hybrids is theoretically well placed to in time 'steal the march' over less frugal petro-electric hybrid systems offered by others.
At the geographic level the BRIC regions and other 'secured' EM nations are of course a major focus for PSA, as for all western VMs seeking future growth.
China:
China has obviously offered growth in recent years as its economy flourished, and even with the slight slowdown seen in recent months, will continue to do so given PSA's long established market presence. H1 2010 saw a 49% sales increase YoY.
Its operational presence has been buoyed by the fact that a new JV agreement is to be signed with Changan Motor which provides a second manufacturing avenue given the long established JV with Dong Feng (DPCA) now running with available capacity of 450k pa via 2 plants and another Powertrain plant with 640k pa engine capacity and 375k pa gearboxes. This production 'homeland' formed a base from which PSA was able to build Chinese presence for Faurecia, GEFCO, PSA Banque (market entry via Bank of China), and latterly R&D capabilities (titled the China Tech Centre) in Caohejing, Shanghai, which both encourages local supply-chain strength and modifies vehicles to meet national consumer expectations. This capability works reciprocally with the Tongji University's Institute of Automotive Studies, the recent fruition of which was the April debut of the Metropolis concept – the first notionally Chinese concept car developed. And recently an exhibition partner for the French stand at the Shanghai World Expo.
[NB. Present press reported regards the evolving 'remoteness' of PRC attitudes to foreign company presence may or may not be being over-stated. Yet it seems that given long recognised Auto Policy which necessitates the consolidation of the domestic auto-industry that PRC officials will implicitly “balance” the interest levels of foreign interest companies. To this end, investment-auto-motives believes that given its effective role as an early entrenched sector development 'agent', PSA will have the innate advantage over its peer Renault which may increasingly need to rely upon its Nissan standing in the country. Hence although sector shrinkage will continue to proceed, PSA is not in danger of being marginalised given its deep involvement to date along with of course VW & GM].
Presently China accounts for 14% of PSA Autos sales, up from 10% in 2009, which highlights the disjuncture between the 2 markets over the period.
However, historically ranked as the 3rd foreign brand, it can be argued that Citroen is more susceptible to the intrusion of other non-Chinese marques from Japan and S.Korea aswell as China's own championing brands such as Geely, BYD, Great Wall etc. Hence the introduction of Peugeot 5 yeas ago. In obvious contrast to the near static product management of ZX in its former years, PSA must demonstrate a near constant model evolution policy that sees low cost but truly noticeable aesthetic modification every 18 months or so; very much aligned to the USA's 1950s new model year ethos of 'planned obsolescence' creating an ever-changing surface impression to avidly promiscuous consumers for what are in effect long serving, highly amortised platforms and architectures.
[NB investment-auto-motives proffers that in doing so, an additional income stream could be obtained from a newly created separate after-sales unit, with the remit of offering to (same shape) older model buyers, cosmetic update packs which imitate the features on previous model years, and negates the oft seen poor efforts of used car personalisation that can damage brand perception. This thereby maintains a constant design lead yet allows for a sizable after-sales opportunity in parts and service to perpetuate demand for new and near new vehicles in what is possibly the world's harshest auto-retail environment].
Riding on the back of Citroen standing and offering something akin to Euro-sportiness, the Chinese sales of Peugeot cars have climbed ever upward, reaching 410k units in 2009
Russia:
In Russia, Moscow, St Petersberg and regional surrounds experienced a -7.6 % YoY sales decrease for H1 2010.
Assembled vehicles from the (Mitsubishi JV) Kaluga facility (110 miles south of Moscow) came on stream in April, though the initial plan of 75k units pa may be reduced. The E470m plant was designed with an annual capacity of 150k units which was intended to serve a 100k 2010 Russian sales ambition generated in late 2007, but a massively declined car market has of course undermined that target.
[NB the original 150k capacity has been officially reduced to 125k, very probably to demonstrate better plant utilisation rates when the factory ramps up production].
Moreover it reportedly caused a massive over-stock of vehicle inventory, which has sat as a virtually unattended glut on the runways of a fringe airport near St Petersberg for a year. Conjecture presents that given the inability to properly secure these sites that the criminal fraternity will have been tempted to steal whole vehicles and parts for black-market export to the Balkans, Greece, Turkey & CIS.
Mercosaur:
Whilst Latin America generally saw sales plummet in 2009, Brazil and surrounds saw an 11% YoY increase for H1 2010, so theoretically aiding the goal of reaching 500k units pa in the mid-term.
Q1 saw both Brazil and Argentina lift 17% or so, PSA beating the market trend with a 20% rise.
PSA currently holds 5.3% Mercosaur market share, something it intends to buoy with the capacity exapansion of its Porto Real plant in Brazil and Palomar facility in Argentina, the cost bases of which to be assisted by the establishment of a regional Procurement School.
The ambition is to become a top 4 producer in Brazil, so displacing either FIAT, VW, GM or Ford,: all of which have appreciably higher regional share. The PSA Board views a #1 position in the Argentinian market as the prime stepping stone. However, having seen Argentinian gains of 26% in 2007, 2% in 2008 and -22% in 2009, even in a market up 20% so far this year (peaking at 37% in March) the performance of PSA is uncertain given its lower ranked position, unless its new Hoggar car derived pick-up manages to steal hearts and minds.
India:
The Asian sub-continent has been a frustrating arena for PSA, with previous attempt(s) flailing. However in the last year PSA re-affirms its intent not to miss out on such present day lost sales, and the obvious large future potential. Chennai – the small car manufacturing & export hub of the country – has once again been notionally nominated as an ideal location, but for the production of mid-sized cars: presumably in the Logan mould, so following Renault's entry strategy (beyond its own Bajaj JV small car intent).
This is one where western OEMs avoid head-on small car competition with the likes of Maruti-Suzuki or TATA, and instead push the sale of affordable compact saloons and hatch-backs, thus following the path of Ford and others.
Yet it also follows a similar effort over a decade ago with the 309 in partnership with local producers Premier Motor. This stumbled due to an overlap of various issues, including immature market, low sales and worker demands raising per unit labour costs, and claimed low support of the service network by TVS (Chennai) and others. Moreover Premier Motor also undertook a renewed agreement with FIAT to assemble the cheaper Uno which undercut the 309. The outcome for PSA was to see the Peugeot name spotlighted in consumer issues press, somewhat staining its reputation, having pulled out in 2001 has waited a decade for a re-entry attempt.
[NB Given the present heavily declined position of Hindustan Motor – losing R-3326.37 Lahk in
Q1 2010 – the company aswell as rationalising operations and expanding Mitsubishi licensed vehicles may well be seeking additional JV projects or full alliances. This will not have been unnoticed by PSA executives – as indeed that of other western VMs – and investment-auto-motives expects that the basis of a mutual agreement between PSA and Hindustan Motor will have been explored, possibly engaging latter-day 3-way talks between the parties given the PSA-Mitsubishi alliance link already in place, in a near copy+ of the Russian Kaluga agreement].
Having previously conducted feasibility studies PSA believes it must operate at above the 5 Lahk mark to both separate itself from the centre of the mass market, presenting a price differential on the local value ladder, between a lower set Peugeot and higher set Citroen. R-introduction set for mid 2011.
Viewing PSA concept cars, last year's Peugeot BB1 city-car with unorthodox 'twin scooter seating' arrangement was really an exercise to publicly demonstrate the company's attention regards small car products such as Smart ForTwo, BMW's upcoming MegaCity and France's own established Axiam Mega (which acquired the UK's NICE Car Co). The recent SR1 simply sets-out the future styling tone, which see Peugeot a much needed return to handsome conservatism after what as been a period of deliberately provocative unbalanced proportions (esp front vs rear), general form and oversized trim and hardware such as grill and lamps, The SR1 heralds back to the much lauded Pininfarina designed 'clean' 'thin-lamp' 406 coupe, and in doing so should convey improved product qualities and quality that will help maintain pricing levels.
For Citroen, following the 2CV inspired Revolte from last year, the GQbyCitroen concept which allied the division with GQ magazine appears little more than a March/April 2010 marketing initiative, exploiting a computer rendered concept car as an 'Advertorial' truing to reach a higher disposable income target market audience which would not ordinarily consider Citroen. Physically real – even if really another PR exercise is the Survolt race EV, premiered at Le Mans presently.
And as previously stated PSA China illustrated the Metropolis concept, still bound to a computer screen and reflecting SR1 cues, but essentially declaring the maturation of its local self and in a broader sense China's own improving R&D skills.
As for the future of the DS line, the 'High-Rider' offers a second DS model derived from the 3008 Hybrid4 platform, offering instead a 3dr coupe package
Given the creation of a more upscale DS line, industry observers have been questioning about the creation of a low-level line to compete against Renault's Dacia in specific EM regions. Jean-Marc Gales (Head of Peugeot-Citroen brands) has not outwardly refuted the idea and given the in-roads Dacia has made in both EM and latterly 'advanced' areas, it must be top of mind even if not explicitly sat on the Board agenda. Gale adds fuel to the conjectural fire by stating that such an initiative would be (obviously) not centred on the EU, presumably instead driving demand from near-east stronghold countries and India.
Mu by Peugeot:
Mu was previously launched to demonstrate PSA's commitment to the 21st century ideology of 'a la carte' personal mobility, offering a one-stop-shop service for the individual, couples and families to order and experience a selection of 'mood & mode' appropriate, low carbon footprint travel solutions. The service ranges from bicycles to scooters to cars, MPVs and vans to in due course EVs.
Introduced in Paris, it is now available from Peugeot owned dealers in Berlin, London, Madrid, Brussels and Milan, due for extension into other 2nd tier cities in these countries aswell as the Netherlands and Portugal.
It has won Automotive News' LEADER award in the distribution category, and with over 200,000 website hits has spawned public interest from press stories, yet exactly how many take up the service remains to be seen. At the very least even if ultimately unsuccessful as a transport rental model operated by PSA dealers the initiative does allow PSA to claim corporate social responsibility bragging rights aswell as increasing footfall into corporate owned dealerships, a percentage of which will be converted to conventional vehicle sales.
However, ultimately the roll-out of Mu should be applauded given the sweating of the PSA asset-base in terms of dealer locations and broad product portfolio, as long as undertaken as a constrained, high impact initiative that is not expected to perform overnight, but instead gains ground across Europe's metro-centres year after year. It must then have a 5-10 year commitment with ideally separate and detailed cost-centre financial reporting.
Given the auto-sectors long-held desire to re-orientate aspects of its business model to reach over into the typically warmer investment waters of 'hi-tech consumerism', PSA with investment banker assistance, will probably be moulding Mu as necessary to attract PE 'eco-scheme' interests prior to an ideally envisaged long-term IPO; the process of which allows PSA to enter untapped global metropolitan areas as a precursor to growing PSA in low exposure and uncharted regions.
Thus the role of the allied 'Peugeot City' sites (seen first at Rue de Chateudun, Paris in March) is to set a new alternative retailing tone. It is set out with 4 distinct zones: 'Lab' (visual vehicle personal spec facility via touch-screen), 'Novelty' (for brand news updates), 'Urbanilty' (for communicating Peugeot's mobility philosophy ie prompting bicycle and scooter use) and 'Advice' which acts as a conventional purchase and finance agreement desk). Latter locations include Warsaw & Riyadh.
[NB investment-auto-motives conjects that PSA will indeed introduce a second sub-brand (akin to DS) which will compete against Dacia, Skoda and others in the entry-level section of segments. And given the manner in which DS sits above, so “CV” appears to be a powerful nomenclature to sit below the 2 primary Citroen and Peugeot brands].
Operational -
Cars:
The beginning of the year started with a tinge of dismay as PSA announced the recall of 100,000 107 & C1 cars that were deemed to have inherent problems given their twin manufacture with the Toyota Aygo in the Czech republic.
Of the recent & soon to be introduced new models: 5008, DS3 Racing and RCZ, although they do fill the product cadence pipeline, they do not in themselves significantly lift vehicle mix and so income contribution as typically new conventional mainstream product would. RCZ is a halo product to lift the image of Peugeot and although seemingly well conceived from a 'parts-bin' view, so limiting project investment and time to market, and per unit margin, its limited numbers offer a small financial contribution. DS3 Racing, though in greater numbers is derived from the same raison d'etre, indeed it seems the ethos of the sub-brand itself. Whilst sales will be greater than RCZ as a cheaper more practical car, its volume and reduced margins still adds relatively little contribution at this critical time.
The 5008 is a slightly different beast, as a compact 'high-ride' CUV, serving as the 7 seat variant to its 3008 sibling introduced last year; that earlier core variant due to take much of the PSA Lion's share in this segment. Given its 308 platform roots and the development of the vehicle type from MPV-SUV-hatchback roots, the 3008/5008 can be regarded as 'fringe mainstream' given that monospaces account for 19.4% of sales in France, 14.3% in Germany, 13.5% in Span, 13.1% in Italy and 11.7% in the UK. Thus whilst the physically longer 5008 may add additional sales and possibly good unit margins (depending on accounting methods), it will be the 3008 which serves well throughout the remainder of 2010.
[As described in previously posted PSA comment, the DS sub-brand – intended as a Mini competitor – is only really a compelling proposition to French buyers given the sub-brand's relevance to the French popular consciousness (and even then only really to older people such as the 'grey set)' who seek something petite, Francaise et avec 'la difference'; thus not a product platform (in its current guise) for Pan- European or worldwide product success].
The new 408 sedan and variants is launched worldwide in H2. In a change from the historical norm of a separate model line, in a bid to harmonise and scale-up platform efficiencies, the new car is effectively an (rear overhang) extended 308 given a boot/trunk and saloon profile. This marked change, from a poor-performing low level pseudo-exec EU-centric car, better suits the compact sedan demands of EM regions.
Citroen C5 is also additionally launched in China, whilst Latin America gains the 408, C3 Aircross and Hoggar (208 pick-up)
To maintain public profile PSA ran two new RCZ coupes at the Nurburgring 24 Hour race in May, taking first & second its class (sub 2.0L diesel); one of the cars driven by Jean-Phillipe Peugeot – Vice Chairman of the Supervisory Board. It was of course both a pre-cursor to the LMP event at Le Mans and a celebration of Peugeot's 200 years since official formation in 1810, together an effort to raise Peugeot credibility amongst the dominant 'sporting class' Germans.
And lastly, to demonstrate its self-styled leadership role in CO2 friendly cars, PSA states that it will:
by 2010-end introduce 3 models that reach 99g/km or less (207*, C3*, DS3* – Airdream etc spec. engineered) [NB* the substantially higher list prices of these type of eco cars from all manufacturers, to cover project engineering costs and set an eco-premium precedent)
at 2010-end introduce an EV
in 2011 introduce diesel hybrid variants of 3008 and DS5
in 2012 introduce a plug-in 3008 (rated at 50g/km)
Faurecia:
Though Q1 was relatively quite, company ambitions regards Chinese expansion were realised in June and July, having seen its sales double over the last year thanks to continued business relations and a prior rebound in the domestic market (before the recent slip).
June saw it take an 18.75% stake in Xuyang Group of Changchun, Jilin Province.. This company owned by the local municipality supplies to FAW (including FAW-VW). In detail, the various systems divisions are to be split as:
Seating : 60% Faurecia vs 40% Xuyang
Interiors: as above
Accoustics & Interior Trim: 40% Faurecia vs 60% Xuyang
And on 2nd July it finalised a cooperation agreement with Geely and Limin for exterior and interior systems for all of Geely's brands manufactured out of 5 new plants currently under construction. These include 'Emgrand', 'Englon' (the London Taxi JV) & 'Gleagle'
GEFCO:
Little operational news has been announced from GEFCO HQ regards performance to date, however beyond winning an industry award, the downside has been a notice from the (soon defunct) FSA to its UK division.
Dated 26th April 2010 it states that GEFCO – amongst others - had not supplied details of their Retail Mediation Activities Returns (RMAR's) within the required time period.
Whilst the revocation of FSA approval may be seen as simply the regulatory body trying to show its teeth before its disbandment, it still highlights the poor business practices and possibly business culture of GEFCO UK Ltd, something GEFCO HQ and PSA HQ should take seriously if it is to demonstrate itself as a truly untinged entity when seeking credit market related activities in various regions.
PSA Banque:
Q1 saw the division access a E1.8bn from capital markets as like many CFOs it sought to exercise beneficial conditions given possible credit contraction possibilities on the horizon.
As with all auto-producers, deployment and exploitation of captive finance houses have been recognised as key to retaining access to wholesale credit markets. As a result of previous reliance on a few key western locations – as has been the historical norm – the credit crunch and EU sovereign debt problems have forced producers to set-up far more market localised in-house financing operations, acting as the intermediary between less problematic local wholesale credit markets and the pent-up potential demand of dealers and consumers. Thus reaching further into BRIC+ territories has been a primary management focus over the last year.
In this vein in January PSA has announced its regional licence completion for PSA Banque RUS in Russia, taking over AIG's previous operations and taking a 98% stake, a necessary move given PSA's small but evolving market share and availability of PSA product from the local assembly facility in Kaluga.
Financials -
Unfortunately PSA transparency in this field has become ever more opaque, which unfortunately gives the impression of budget allocation struggles having absorbed the 'life-saving' E3bn soft-loan last year/
The FY2009 report tried to balance an overall dark picture of (reduced) debt (to E1,993m from E2,906m) and operating losses (of E689m) with the upbeat highlight of a positive FCF (at E809m).
Such a bias to demonstrating healthy liquidity has of course been normal modus operandi for most VMs, well recognising that organisational and balance sheet re-dress to demonstrate the availability of working capital was viewed as key – even if the other accounting fundamentals flailed. Unfortunately for PSA the balance sheet – from an officially interpreted distance - appears more stretched than its peers, which whilst also suffering aren't quite as much, and typically have greater strategic and operational strength behind them.
To add further liquidity a E500m 5 year corporate bond issuance was offered, with as a counter-measure against debt over-exposure and so credit-rating mark-down, a partial bond buy-back initiated to the value of E244,950,000 for previous 10 year bonds issued in 2001. Theoretically given the end of life timing, with few if any coupon payments remaining, they would have been bought-back at near par value, and seems a case of recycling funds to sustain fixed income markets standing.
Conclusion -
Just as the hub & spoke design of a bicycle wheel is able to absorb and reflect external shocks, with simple change of spokes as necessary, so the Peugeot family have exploited such a flexible organisational format to maintain control and quickly access areas of competitive advantage & competitive equalisation.
However, the creation the organisational structure and the ability to exploit the advantages it affords very much depends upon fully understanding the dynamics of external forces. PSA's ability over the last 20 years to receive pertinent market intelligence, formulate required action and and execute has been part of its innate being that allows it to maintain its level of independence and supposed flexibility.
But the inability to react harmoniously to recent 'perfect storm' events highlights what could be evolving invisible stresses from within, and the very real need to make speedy progress in the Group Performance Plan that seeks to re-balance the apparent massive inefficiencies that have crept in over the last 5-7 years.
Investment-auto-motives external observation presents a case where PSA has partially suffocated its prime European offering so as to strengthen RoW operational capabilities and offerings in its 'holy grail' EM regions. A pertinent internal geo-political case of being sat between 'a rock and a hard place', and possibly fearful reaction having 'not watching the farm'.
Hence, real-world absence from the all important EU small car watch, whilst over-focusing executive, management and staff resource upon the extension reach of: non-EU areas, new entry into CUV segment, introduction of high-line DS. In addition expended effort to proactively manage public and investor perceptions - via concept cars, halo cars, PR & marketing initiatives such as Mu & Peugeot City - rather than fundamental realities of the business.
Such observations cannot be simply brushed aside, especially so if indicative of an inherent inability to evenly spread attention as necessary and implement all important required product actions to retain a once highly competitive position.
Of course EM attention, NPD attention and Retail Channel attention are all critically necessary. Especially so when a company is trying to escape its near overt 2/3 sales dependence upon a singular regional market, within which it relies upon tight segment(s) concentration. In this mould it is similar to say FIAT but is under greater pressure to be seen to be doing something relatively radical as it does not enjoy the similar foreign footprint or market standing of FIAT or other peers.
Yet giving away the home advantage in such a core arena as small cars only ultimately precipitates a far harder fight both at home and abroad. After all it is the commercial reality of net income and working capital levels that underpins the transition of ' PSA Futurology' into successful commercial extension achievements.
At a time when the corporation offers “Jam Tomorrow” - and adding seeming sizable sums to its fixed cost-base to do so - it must be seen to be capable of baking its bread and spreading its butter as convincingly at home as in the almost self-perpetuating EM regions.
Far more exacting detailed transparency about the exact ingredients (costs), recipe (targets) and baking fortunes (results) would be welcomed by near-term large scale institutional shareholders, mid-term governmental debt-holders and longer-term (Mu linked) expectation from possible private equity.
For PSA the development of Mu was undoubtedly undertaken to formulate a powerful yeast in the ostensibly cloying dough of the western auto-sector. However, although brilliantly dreamt-up as a brand name given its overtones of electrically-charged particle mobility, it also more recognisably represents the value of a friction co-efficient between 2 forces.
Thus PSA's real task is to better secure near-term value-creation as solid stepping stones to its more esoteric long-term goals. Doing so will regenerate its own credibility and reduce any level of investor frustration and friction.
Subscribe to:
Posts (Atom)