Monday, 28 September 2009

Company Focus – New GM – IPO Ambitions

Above and beyond the almost audible 'electric' buzz of Frankfurt - and its plethora of new-tech concepts - car-makers are having to face the present-day harsh commercial realities. Returned market-demand constraint after the retraction of government aid packages, major sector over-capacity and cut-to-the-bone new investment pressures that necessarily extend the life of present products mean that the industry is still in the throws of painful transformation.

For GM, the $50 billion 'bail-out' has provided at vast cost the time to re-evaluate and re-structure the corporation as 2 entities – old and new; with the ambition that certain divested US brands (Saturn, Hummer)(possibly Pontiac) and a 'de-commissioned' European division will reduce commercial drag as HQ centres on primary US, Chinese, Russian and Mercosur operations. Splittng the company into 'Good' and 'Bad' entities, the latter known as Motors Liquidation Co (ticker:MTLQQ), was an overdue requirement that has provided the base and critically perception of progress. The recent addition of Ron Bloom acting as Senior Council for Manufacturing Policy working in conjunction with Ed Whitacre and members of the new Board has undoubtedly shaken the very, previously complacent, foundations of GM. These appointments will be undertaking internal & external reviews so as to build a path forward.

The goal is an Initial Public Offering (IPO) of the New GM, an act that theoretically demonstrates the Board's and critically the Market's confidence in a new leaner, greener corporation that can equal not only its cross-town peer Ford, but critically Toyota, Honda, Nissan, Hyundai-Kia and VW – both at home and across the globe.

The IPO process is conventionally the chosen fund-accessing route after of years of company expansion, proven in its stability and capability, and in need of the typically far larger growth funds only available from public capital markets. However, whilst this is the historical norm, the IPO process has periodically been used to 'super-charge' the growth of a less-formed, supposedly 'under-scaled' (less proven?) operation; venture and growth financial backers keen to market the potential of the business model and so the company's ultimate market impact. Such actions were rife in IT & media with the dotcom boom and the ever-present promise from social-networking sites.

As a useful counter-point with New GM relevance, perhaps a good example of physical-online based commercial model today is the UK's online-grocery delivery company Ocado. It combines the customer access scale efficiencies of the web with a conventional delivery asset-base; thus more representative of a 21st century retailer with intrinsic value-chain connection. (In fact, because it is not in manufacturing with no production responsibility it is even more prescient to ultimate GM ambition surely!) Since establishing in 2002 this entity took much initial start-up and incubation funding to service: the offices, C2B & B2B communications infrastructure, depots and of course delivery trucks, and has only recently broken even. The 2006 backing of Goldman Sachs and certain high-level appointments led to speculation that the company would seek a 'quick-path' IPO; an action publicly announed in market frenzy of July 2009.

Thus, as we see IPO's can ultimately be typically a matured 'last-call' exercise for what are/were previously typically long privately held concerns, or as we've witnessed in the last 15 years more and more, a method to mature an under-scaled organisation. The latter's sale to both provide rich rewards for initial big-backers and providing a stable long-term growth and dividend model for long-hold investors such as institutionals, risk-averse individuals, as well as the possibility for sector peers/competitors to take stakes with the idea of latter-day M&A.

With its remit to repay the US tax-payer New GM was always going to seek its return to grace, and on-going viability, via the public capital markets; it is realistically the only plausible option open to it. Probably done so in a stepped or phased IPO manner, as befits the historical experiences of most privatised state-owned enterprises.

However, unlike the typical national utility (eg energy, telecoms or railway) company, with little or no competition, New GM must present itself to market with perhaps the most sophisticated 'shop-window-dressing' demands ever seen. The question is how exactly to take what was/is a 'smoke-stack' company and demonstrate it to be industrially and socially relevant and so of interest.

To do this New GM is re-moulding itself under the comprehensive multi-directional expertise of Whitacre (ex AT&T), Krebs (ex Burlington Northern Sante Fe), Isdell (ex Coca Cola), Marinello (Ceridian Corp), Russo (ex Alcatel-Lucent), Kresa (ex Northrup Grumman), Girsky (ex MorganStanley & GM), Bonderman (TPG), Akerson (Carlyle Group), Laskawy (ex E&Y) and Stephenson & Davis (Academia – Onterio & Georgia respectively)

Thus, beyond the continuing progressive external theme of socially responsible green(er)-vehicles,it seems that the internal theme is that the very foundation-stones are being put in place to possibly – ideally – transform the very being of New GM, its products and its operations.

The broad scope of Board member backgrounds demonstrate that GM has been forced – no doubt by its bankers and the government – to adopt fast and wide-reach cross-sector learning that moulds its future. Importantly for probable future 'parallel re-plays' regards both an efficiently managed IPO procedure and simultaneously the cherry-picking & adoption of the best 'operational enablers' from other sectors and companies. This wide-spectrum of influential members gives the New GM a new philosophical platform with broad strategic & operational reach by which to re-configure itself; thereby bringing-in the 2 main relevant features capital market seek: credibility and potential.

In short, credibility from 'old-hands' of the IPO process with good Wall Street connections, along with a master-plan of how to continually re-organise the company; the main element of which appears to be the out-sourcing of many 'non-core' activities to achieve a far more flexible, market reactive, and critically less capex intensive business structure. Also, investment-auto-motives suspects that, like FIAT-Chrysler, New GM will have used its Chinese partnership(s) learning with Shanghai Motor and Wuling Motor to evolve both culturally and legally a form a new corporate mentality toward alliances both inside and external to the auto-sector.

[NB SAIC, GM's partner in China, has reportedly agreed to inject an initial $147 million as part of the stock take-up, implicitly demonstrating to Chinese state, institutional and private investors its confidence in the re-formed US operations. This it is hoped by the Obama administration will assist the re-balancing of of the burdensome debtor-creditor relationship at the international budget level].

This is the good news, but equally there is need for great caution.

Whilst the General's broad-brush plan appears in place, the details appear quite sketchy at present, and the ultimate execution even more opaque.

New GM looks to be highlighting its new and improved features on its corporate windshield, no doubt well-versed at mimicking showroom floor advertising. As with the previous Ocado on-line grocery delivery business, New GM has endeavoured to utilise the re-ignited appeal of Web2.0 to add gravitas to its marketing strategy and customer reach. Its retail partnership with e-bay ( has had heavy press coverage and creates another on-line portal to its products, but any insightful analyst will recognise that the auction type purchasing model has lost its lustre in recent times as more and more complex variants have appeared for big-ticket items that have been seen to be overtly (legally) orchestrated in the seller's favour.

(This is not to say that the e-bay venture is prematurely doomed, simply that it will need to build-up credibility and belief given the opportunity for abuse that could emerge – one area being virtual inter-dealer competition creating value destruction, or the opposite with regional cartel-like arrangements. Simply to say the system needs careful managing and oversight from inside GM itself to become an important retailing channel).

Hence this is just one aspect of the full new and complex business equation that must be settled in both its operation and level income-stream contribution before Wall St and global financial analysts - on both sell and buy sides – can start to truly believe GM's new enterprise value price, as touted by the elected book-runners. The usual metrics will be furnished (ie price-earnings , price to book and price to assets) will of course be abound, but such measures will need more than rhetoric and hearsay and potentially over-valued intangibles/goodwill to enthuse what are still rightly very cautious investors.

Thus, investment-auto-motives believes that although there may be political pressure to undertake the IPO as soon as practically possible, the reported time-scale of Q1 2010 could prove to be far too early, especially if the US's real (not technical) economy stagnates or again falters over year-end and the Christmas period.

Remember, it was only July when GM went into Chapter 11, and although rapidly processed, a 6-7 month gestation period seems a very short time to fully-form an enterprise that must not only impress Wall St come IPO time, but also maintain traction thereafter if it is to build global investor confidence.

Yet again the maxim proves true...”what is good for GM is good for America”, but great care must be taken to ensure New GM is indeed fighting fit when it enters the financial and market arenas. Given the stakes for both GM and the US economy, any doubt should delay the IPO. For it is not just New GM's reputation, but America's as well.

Tuesday, 22 September 2009

Macro Level Trends – Turkish Autos A.S. – Creating a Counter-Cyclical Industry

Whilst advanced regions continue to address these stalling economic times, combining talk of stimulus package effect and the timing of exit strategies, other less developed countries are congratulating themselves for being on the flip-side of events.

Turkey, amongst other EM regions has had a history of economic roller-coaster rides, especially so during the precarious 1990s with quick succession boom & bust cycles that saw real interest rates run into double and even treble figures. But since the local 2001 crisis it has managed to contain fiscal and monetary policy so as to create a far more stable and sustainable platform, with the reported assistance of the IMF and World Bank.

[NB. These 2 august bodies were previously criticised as being over-zealous in recommending corrective action during the 97/98 Asian Tiger Crash and elsewhere, but it seems the level of inter-action with Turkey has set an appropriate model].

Thus it was with subtle glee that last week Deputy Prime Minister Ali Abacan (pronounced Abajan) took to the respective stages of Oxford University and the London School of Economics to espouse the restraint shown by the Turkish banking system which has bolstered economic stability. That restraint in place since 2001 resultant from regulatory reform. This engendered a reticence toward any type of overly exotic transaction and so gave very minimal exposure to the CDO and toxic asset debacle that has unfortunately infected advanced economies and provided sizable capital ratio cushions in domestic banks that have helped off-set the contraction of foreign sourced funds regards state and commercial investment.

Placed as a geographic, political and industrial 'intermediate' between the West and East, Turkey has enjoyed a level of sustained growth since the turn of the century not seen for decades, indeed some say not since its creation as a republic in 1923. The country enjoyed increasing export trade to Europe (its main trading partner), improved relations with neighbouring countries and a previously buoyant global economy. Growing FDI monies came from inward investment both commercially in factory, retail and offices and privately with foreigners choosing to buy comparatively inexpensive real estate in holiday areas. Add to this the boom-time of Istanbul, drawing-in provincial migrants, and Turkey effectively re-played the Spanish experience of the 1980s/90s with upward spiraling investment flows resulting from an entwined combination of FDI and encouraged domestic demand which led to construction demand and so fueled the demand spiral.

At an industrial level the likes of the historically influential families such as the Koc's and Sabanci's undertook sole projects and joint ventures projects with foreign firms spanning financial, automotive, consumer durables, food, retailing, IT, construction, chemicals, textiles, cement/aggregates, energy, tourism, defence and education.

In the automotive realm, a far from comprehensive list companies includes:

Koc -
(2007 income of US$39.5bn) -
Otokoc AS, TOFAS (Turk Otomobil Fabrikasi AS)(Koc-FIAT), Ford Otosan Otomotiv San AS (Ford Transit & Transit Connect) (Koc-Ford), KARSAN – POPAS (licensed PSA & Hyundai LCVs & contract manufacture to others), Kiraca (investment & trade group), Karland (parts distribution), Kirpart (parts manufacturing), (Koc-FIAT Kredi AS (captive finance credit), New Holland Trakmak Traktor, Otokar Otobus Karoseri San AS, Otomotiv Lastikleri Tevzi AS, Set Auto (covering Azerbaijan & Kazakhstan), Set Oto Tourism-AVIS, Sherbrook International Ltd (parts), Doktas Documculuk Tic Ve San (castings), and others.

Sabanci -
(2007 income of US$16bn) -
TEMSA (truck & bus), Bridgestone Rubber & Tyres, Toyota Motor, Mitsubishi Motor, Desas (commercial vehicles rental),

Other : Kibar Holding -
Hyundai vehicle assembly & metals processing.

Other : Anadolu Group -
Isuzu vehicle assembly. Lada & Kia importer & exporter

Other: Cukurova Group -
BMC Turkey LCV, HGV & Bus

Other: Ulusoy Conglomerate -
Volvo Turkey, HGV & Bus distribution & parts

Over the last decade, there has been recognition of and action toward an improved structural re-alignment of Turkey's auto-sector, given that increased industrial competition within a limited span of industrial capability had eroded profitability and so the value-adding nature of the sector. Importantly, the industry had to be better integrated into a more robust national industrial route-map, which itself derived from local and global conditions.

To answer the challenge the Koc Group prompted Inan Kirac - a local industry luminary – to create the Kiraca Auto. Ind. & Trade Inv. Group. Its remit was to: invest in unmet demand capacity, target the LCV segment(s) and “bring order to the chaos” of independent parts manufacturers by introducing new marketing & distribution models both domestically and for export. Acquisition of KARSAN to rationalise its operations and expand via additional licensed manufacturing aswell as acquisition of renowned parts manufacturing, parts distribution and marketing companies created a powerful holding company of 9 companies with sector influence.

From the perspective of Sabanci Holding Group - the 2nd largest conglomerate in Turkey with a seemingly lesser level of auto-activity - there appears less transformative industrial interventionism as a result of historic involvement and general holding compant strategy. Instead a continued focus upon expanded retailing opportunities, the OEM tyre margins as 'first-fit' and in the aftermarket, and the development of its bus & coach activities relative to the large European sector & market.

To set a broader context, Turkey's own auto-sector, with historic links to the US, UK, Italy, France and Germany, saw sustained growth from the 1960s onwards. Initially through initiatives such as the failed 1960s 'Devrim' (“Revolutionary Dream”) and 60s/70s/80s national Anadol Car initiative using Ford & Rootes Group mechanicals with Turkish manufactured fibre-glass multi-variant bodies. That national car solution - driven by the central agenda of affordability - grew vehicle demand which was latterly filled by JV deals with foreign OEM's; BMC, FIAT & Ford foremost as disposable income grew along with consumer expectations with Oyek-Renault soon following in 1969.

These sector agreements also effectively set the pattern for the industry at large for many years:
a) 'Commodity Car' for PV domestic demand – exemplified by Anadol followed by TOFAS 124 (Murat) & 131 (Sahin/Dogan/Kartal)
b) 'Flexible Platform' for LCV domestic demand – exemplified by Ford Otosan Transit (minibus, van, chassis-cab), but also Peugeot & BMC...providing the body construction and interior 'fit-out' capabilities that have allowed the coach & bus sector to flourish.

In comparison to the initial homogenous vehicles, early attempts were made at producing niche vehicles but were either still-born or short-lived These included a 'Turkish Sportscar' coupe called the STC-16 (based on the Anadol) which flailed due to the effects of the 1973 oil crisis (primarily input costs of oil based GRP body & 'knocked' consumer demand of small target market) and the small production run of the 'Bocek' (Bug) akin to a VW Dune-Buggy for the emerging coastal tourism regions. These limited (and perhaps too early) efforts for diversification were superceded by the effective re-entry of foreign vehicle assemblers for domestic and export markets including: Daimler. Opel, MAN AG, Toyota, Honda & Hyundai. Their presence assisting the broad intellectual improvement particularly in production engineering, manufacturing set-up (new and model swap-over) and operational production efficiency.

Interestingly, as with the historical likes of TATA in India, Turkish truck-bus companies were better positioned in terms of localised business models requiring previoulsy minimal R&D due to a strangle-hold markets and so have been comparatively protected. Thus BMC, Otokar and TEMSA have historically enjoyed more notional stability thus far. But as with TATA India, this is pseudo-protectionism has theoretically come to end with EU accession demands and of course WTO free-trade regulations. So though the local market will take time to see the fruits of enhanced competition as fleet buyers continue their typical default purchasing decisions to the likes of KARSAN, BMC & TEMSA times are changing, and companies have reacted accordingly.

The latter two companies are today heavily export orientated, and as such are having to invest in R&D to match the grade of the renowned European benchmark manufacturers that lead the world. With this as the benchmark, Turkey is having to integrate, develop, test and launch the highest levels of today's sophisticated technology solutions - from Euro VI regulations of engine emissions to intelligent 'self-aware' electronics systems that span much from GPS location 'e-tagging' to monitoring drive-cycles for in-service fleet costing.

As we see, it has essentially been the arrival of foreign VMs and OEMs that has enabled engineering and design technology transfer, and so gradual intellectual transfer. However, this process is arguably incumbered by a fragmented Turkish education system. Whilst the efforts of Koc Group in establishing the Koc University in 1993 (and other similar efforts such as Galatasaray University in 1992)are laudible, they are relatively recent and small-scale compared to the state-established efforts of Asian and S. American nations. More must be done to proactively support an extension of the Koc & Galatasaray schemes and the introduction of others, perhaps achieved as a public-private initiated exercise as an adjunct of military service. This would also enable the development of domestic defence engineering know-how which itself could be sold internationally.

Thus, as of today, whilst current arrangements have provided a useful synergy for foreign companies, the Turkish government and Turkish consumers, the question of Turkey's real industrial USP - its real differentiator - and the role of education in creating that, remains a high regard matter. A topic well-noted by Babacan's audience at the LSE.

Japan, S.Korea and now China created their own progression path through automotive, consumer durables and critically electronics - initially through JVs but moving onto self-sufficiency. Turkey in contrast has not to date been seen to similarly follow.

Instead, whilst Koc and Sabanci groups – the 'industrial arbiters' – indeed operate across many industrial sectors there has been mention that that the country hung too long onto the eroded competitiveness of its previously large textiles base and so lost industrial development traction. Recognising this in the 1990s it put overt belief, and disproportionate focus, into tourism and real-estate. But of course the manufacturing sector was quietly growing, having created its own domestically branded and contract manufacture base(s) for a broad range of white and brown goods (washing machines, TVs et al). However, it does seems that the domestic brands like BEKO (part of Koc-Arcelik) have not broken through into western consumer consciousness; even though BEKO is infact capacity-wise #3 in Europe.

Though of course westerners must remember that Turkey's historical and typical commercial trade ties lay with the CIS states, Russia and Middle East, and so for the most part Turkey has served essentially as a technology assimilator and product distributor for these regions.

The question is, "Does this relatively hidden industrial reality (from western gaze) provide the template for “Turkish Auto AS” today and into the future?". The answer must surely be "yes" but with a caveat.

Given the major impact felt by Turkey from heavily contracted western markets over the last 18 months or so (@approx 25%), and given the expected surge in economic development of the CIS over the next decade thanks to its hydro-carbons asset-base, massive agricultural potential and eager populace, it is expected that the newly announced Turkish economic roadmap will encompass the potential for the on-going positive 'CIS export effect' – either explicitly, or given the nature of Turkey's geo-political sensitivity, implicitly.

That continued CIS draw for what is essentially the replaying of 2nd hand technology transfer relative to its previous 'home game' achievement will be undoubtedly successful and so must be followed and exploited to good effect.

However, Turkey must also seek to find its own unique place through technological and manufacturing abilities and differentiation, so providing another road for economic growth by becoming ever more relevant to parallel (high-EM)and advanced B2B and B2C markets.

In the automotive arena, as the western world sits at this historic juncture created by constrained investment and the demands of eco-responsibility, Turkey may well be positioned to turn such challenges into opportunities. Seizing its abilities in low-cost volume manufacture through alternative materials and a low-cost labour-force to thereby potentially creating a new, 21st century automotive industry formula.

A formula that avoids the traditional demands of massive capital expenditure created by the 'Budd' manufacturing system requiring expensive stamping equipment and associated tooling. An alternative which instead combines modular, adaptable and so customisable lightweight component-systems and sets from which to create multi-various LCVs and PVs.

After the increasingly successful previous national efforts of 'Devrim' and 'Anadol', investment-auto-motives believes Mr Babacan, Mr Kirac and the Turkish government should seek to plot additional alternative paths for its highly important automotive industry. Potentially a case of “3rd time domestic success” (after Devrim & Anadol)perhaps using portions of the earned funds from the CIS region sales of conventional vehicles and re-cycling such monies towards eco-orientated vehicles and mobility solutions.

Turkey, given its position on the auto-sector value-curve has deployed its abilities well, but as time progresses so do the achievements of foreign entities, and so there is the danger of Turkey maintaining a sub-optimal competitive postion. It obviously recognises this, having both improved its ability during the process of industrial absorption, and now thanks to efforts of Inan Kirac et al, appreciates the need for industrial re-organisation of the status quo.

The question is "what next?" - how must that re-organisation be directed?

As perhaps a case-study for parallel learning or indeed inspiration, TATA decided to go 'bottom-up' in creating the Nano and along with it 'visioneering' the requisite engineering and infrastructure. Turkey should perhaps look 'top-down' to see how it can deploy its knowledge in creating not a car, but a new-era auto-sector using the best of its own self-directed, indigenous and affiliate resources.

Given the frustration of many CEE countries at present - holding their own auto-assets - its central role could grow even as far as orchestrating the knowledge and asset-base of CEE neighbours to one side (West) and western Middle Eastern neighbours to the other (East). This would create a geographical 'industrial S-shaped chicane' with Turkey at the central apex.

[NB, this recommendation sits in the middle of a broader geo-industrial context forwarded by investment-auto-motives. One that promotes the emergence of an Eco-Tech European Rainbow across the UK-Sweden-Norway-Germany (to the west) and a Premium Arabic sector emerge based on cultural association across Saudi Arabia, Kuwait & Qatar (to the east).

Hence a '3-pillar' plan spanning Northern Europe, the EurAsian region and Middle East].

Thus, just as Istanbul and Turkey itself spans 2 continents and 2 cultures, so the officials in Ankara should create the same dualistic outlook for the auto-sector; perhaps its most prominent industrial economic powerhouse. A dualistic outlook that builds-in the foundations of counter-cyclicity from 'old' and 'new' industrial models; themselves related to 20th century "conventional" and 21st century "advanced" whole vehicle & systems solutions.

For Turkey must continue to promote itself as a progressive independent thinker with pan EurAsian reach, tied not the past, or even the current but a global future.

Tuesday, 15 September 2009

Cross Industry Learning – Formula One & Professional Football – Qadbak's Venture into the Sports-Entertainment Sector

Since 2007 global investment groups have reined in their bullish horns and had to select stock market strategies and re-orientate their holding company portfolios to match the heavily weakened climate. Defensive investment took precedence for much of that period, and that mentality still purveys as we still see today with the new schizophrenic alignment of gold and bonds safety plays versus the band-wagon appetite for stocks.

But perhaps for the major SWF, large PE and major institutional players a return to Macro-Strategy investing – long-term interests derived from PESTEL trends – has come back to the fore. Thus many asset-seekers will have been assessing various sectors and their inherent characteristics across many geographical regions, which in itself raises the issues of regional interest rates, inflation levels and of course relative local currency FX rates – present and future.

Given the enormity of their petro-dollar reserves, the present energy constrains of global industry and the previous high consumption consumers, and construction slow-down locally, Middle-Eastern funds have been seeking new investment regimes. Regimes that will provide: all important financial stability, allow for the creation of a synergistic set of ideally inter-related holding interests which themselves additionally promote regional GCC industrial learning and so extended sector GCC economic coverage beyond oil & gas as part of their own regional and national growth agendas.

Understandably GCC funds – whether family based, SWF related, PE or publicly accessed – have had a long affinity with the petroleum & automotive industries, only natural given the co-reliance of local oil drilling to consumer's historic vehicle needs and aspirations. Thus interests in automotive companies go back to the 1930s, taking tranches of stock in initially American, UK Japanese, Korean and German companies.

Recent times have seen the likes of the Bahrain Mumtalakat Holding Company's buy into McLaren Group , quickly followed by EFAD-Adeem Investment Group (and affiliates) buy into Aston Martin Lagonda in 2007, and through 2008 KIA (Kuwait Investment Authority) taking a prime hold of Daimler AG only to be overtaken by Aabar Investments in 2009. [NB Dubai International Capital previously holding 2%].
To a certain degree the GCC region has effectively become the patron, sponsor and beneficiary of 21st century 'Advanced Autos'.

That rolling dynamic continues now with the Qadbak Investment Company taking a controlling interest in the Sauber Formula One team, having bought-out BMW's 80% stake at the reported price of £80 million. Qadbak, although based in Switzerland, represents the confidential investment concerns of royal and aristocratic Middle-Eastern & European families. [NB investment-auto-motives has reason to believe that connections link to the ruling Qatari Al-Thani family]. Primary representation is reported to be via Lionel Fischer.

Exact details are still very sketchy beyond seemingly optimistic about running in the 2010 season as a 14th placed late-comer team. Questions like powertrain supplier, driver line-up etc remain to be seen, though in all probability it would seem likely that BMW might still maintain contract supply and technical support for the team.

What is very interesting is the way that Qadbak Investments is following others down a portfolio strategy route that matches regional and global macro-plays with the Sports-Entertainment-Leisure industry. And particularly the dual interests in the high-profile business worlds of team-based F1 and club-level Football.

Back in June Qadbak bought Nottingham County Football Club via is Munto Finance Ltd investment vehicle. Headed by Peter Willett. The deal price & promise of future potential undoubtedly bolstered by the fact that it is the oldest football club in the world and the rub-off effect of the 2009 film 'The Damned United' which profiled Nottingham Forest's ex-club manager Brian Clough as a local hero. Recapturing those recession era glory-days rings true today, the business model probably targeting the three fan-based elements of: heritage, affordability and local club-land loyalty.

But of course behind the glitz and glamour is the fundamental business rationale of gaining dual income streams from both the team / club itself: through sponsorship deals & visitor gate receipts, product merchandising and the real-estate itself through annual & ground rents from commercial leasees and of course the long-term capital appreciation of the land & facility.

As such merging the sport with the asset-base, Qadbak follows in the footsteps of the likes of CVC Capital often represented by Nicholas Clarry with its interests in F1 commercial rights holder FOH (along with Bernie Ecclestone) and a related defensive off-set by owning portions of the F1 circuits themselves that host the F1 races, other motor-sport events and so much more in the way of entertainment events. Qadback will have also been influenced by the interest Dubai International Capital took in seeking, and still seeking, to acquire Liverpool Football Club; a sale outcome, like that of Notts County backed by the supporters who witnessed Arsenal's success with sponsorship money from Emirates airline of the UAE.

The GCC nations are undoubtedly having a massive influence in the 2009-2010 global investment agenda, the likes of Kuwait and Bahrain, along with Qatar perhaps the 'hardest hitters' given their relative geographical size, smaller populations and so very high relative GDP.

A desire to create broad-base, defensive portfolios is key; and although still interested in the financial sector's upturn - having had their fingers burnt by buying back into that arena too early during the fragility/volatility – the GCC states and families seek firm asset-backed deals with multiple income streams.
The Sports-Entertainment-Leisure industry has proven itself as a good provider to do so; becoming ever more family-centric and creating a commercial psychologically aligned 'pleasure-safe-space' ideally running 365 days per year with obvious weekend & holiday focus.

And of course Qadbak will be seeking to ensure mutual learning and synergy seeking between its efforts to infuse value-creation into Sauber F1 and the same with Notts County FC. Of course the 2 are not completely symmetrical in terms of cross-pollination of business ethos, ideas and operations, but they should provide for interesting corroborative exercises in seeking fundamental and additional yields.

For both will be nurtured for a period to provide traction and self-momentum before Qadbak's exit strategy and timing come to light. In the meantime expect Lionel Fischer and Peter Willett to be comparing notes on how to evolve 2 teams of relative sporting minnows into competitive piranha and simultaneously sweat and expand their respective physical and human asset-bases.

That psychology of winning will need to be evident on 'track & field' to match the one backing the books.

Friday, 11 September 2009

Industry Structure – Opel – Vauxhall – Magna, Merkel & the Opel “Coup de Grace”.

Conjecture as to the future for the core of GM Europe (Opel and Vauxhall) has been rife for many months. Since Detroit's announcement that it would divest of its European brands to concentrate on North America and China, both trade buyers and private equity have been clambering over initially SAAB, and latterly the big prize of Opel-Vauxhall.

Under different – more normal - economic and political circumstances the sale process may not have been as contorted as we've witnessed, the questions of constrained financial liquidity and election influenced 'real politik' bearing more heavily than would normally be the case.

After initial basic enquiries from various 'sniff-about' parties, the 2 ultimate prime candidates were of course presented in the shape of Magna International-Sberbank (the components and assembly company together with the Russian bank) and RHJ International (the industrial holdings company) vying head to head toward the finishing post.

As we now know, the winner proved to be Magna-Sberbank, the result seemingly born from the The Christian Democratic Union's political desire to be seen to be good country custodians so close the September 27th German General Election, and importantly maintain healthy political relations with Russia given its sizable bi-lateral energy trade agreements. Thus Angela Merkel has struck a decisive 'coup de grace' primarily for the CDU but arguably taken Opel out of its ongoing operational hiatus and given it new firm direction.

In the ideal of a commercially transactive perfect world – a far cry from today's environment - that intermission period would have stretched beyond the election date, so as to be based purely upon investment rational. However, government interventionism is the present reality in the auto-sector, and given that case, it seems that John Smith – GM's lead negotiator – tactically leveraged the moment. Previously announcing that GM might not sell Opel-Vauxhall after all and also possibly calling upon Detroit's Bob Lutz and Opel's Carl Peter Forster to pronounce opposing sale views – the latter staying 'on-side' with Merkel and the politicos. All to possibly add confusion to the mix and seek greater government assistance as the election date loomed.

As reported, Opel-Vauxhall is now shared as a 3-way entity between Magna-Sberbank with 55%, GM with 35% and the workforce with 10%. This allows the Canadian-Russian JV strategic control, GM still a major influence and value recipient – both in terms of negotiating operational transfer pricing of platforms and technology to NA and as latter-day stock beneficiary – and gives the workforce the fiscal incentive toward greater labour flexibility in helping re-shape the productivity competitiveness of the Opel-Vauxhall enterprise.

And of course that is key if the loss-making company is to resuscitate and prosper.

Magna offers a broad reach of mass-manufacturing competence across both low-value parts (such as metal stampings, metal castings, exterior and interior plastics) mid-value parts (such as powertrain ancilleries, transmission parts and fuel system parts) and high-value parts (such as electronic components and systems). And related to the latter is Magna's ambition to become a prime-mover regards 'alternative-drive' vehicles. This push for plug-in electric vehicles, as demonstrated by its acquisition of BluWav Systems LLC and its working with FMC on the all 2011 electric RV Focus programme.

[NB The true viability of that latter EV project - based seemingly on standard steel monocoque construction -raises immediate questions regards performance, cost and mass-market attraction terms. investment-auto-motives should hope to see Magna-Ford also work upon a 'baby-hybrid' system similar to that announced by SAAB on its 9-5; mating an 'electric launch/acceleration' motor with a conventional small capacity ICE unit to achieve both mass-market acceptance and provide 'unlimited' range. A rational intermediate step given the timeline to fully develop EV related lightweight structure/body, affordable light-mass battery technology and a sound EV business plan].

Beyond high-end R&D, Magna also recognises the constraints of the highly expert but limited span of Magna-Steyr's own R&D and vehicle development capabilities, so sees via Opel the opportunity for additional resource in this field that marry German expertise to that of Canadian, Austrian, S.Korean and Chinese locales.

Sberbank's involvement obviously provides access to additional funding for Opel – even with relatively constrained Russian banking liquidity. But critically it acts as an effectual broker and powerful point of entry to the lower cost Tier 1 & 2 & 3 levels of Russia's continually developing auto-industry. Sberbank itself unsurprisingly keen to maximise its central involvement in the full Russian value-chain. Done via GAZ cars, vans (inc the UK's LDV vans), large commercial vehicles, buses and auto-parts and its parent Russian Machines, itself under the umbrella of the commodity materials extractor and processor Basic Element group - of the famed Oleg Deripaska.

Such a conspicuously created set of alliance & conglomerate value-chain inter-relationships obviously suggests that a prime remit of the consortia is to effectively align capabilities, improve efficiencies, ride cross-sector business cycles and orchestrate multi-link transfer-pricing deals.

Fundamental to that is the engineering and related commercial deconstruction of the end-product - namely the car itself. Just as it has re-engineered the value chain, so Magna will hope to be able to re-engineer Opel vehicles themselves; undertaken via normative 'tear-down' whole vehicle, sub-systems and component parts appraisal for those areas Magna is unfamiliar with. Cost, weight and performance benchmarks will be acsertained, then the agenda set to equal or ideally better the measured parameters. But above all Russelsheim & elsewhere will be centred on cost-down above all else.

A certain level of re-engineering appraisal of Opel cars should have already taken place at GAZ given its ambitions to advance, but the Magna-Sberbank acquisition of Opel will now push that process far quicker and further. GM recognised this inevitability, hence the previous IPR dispute, something which now appears 'behind the scenes' notionally appeased.

Back to the high-level picture, and the question of Opel-Vauxhall production capacity re-alignment and associated plant and workforce fortunes is now at the forefront of newscasts.

The apparent sigh of relief in Germany is counter-pointed by a sigh of almost resignation elsewhere, especially so in the UK at Luton and Ellesmere Port. But should this be the case? Given the devalued British Pound (possibly to go further), the overtly strong Euro and the progressive flexible labour policies of the UK (to be undoubtedly maintained by a probable incoming Conservative government) the UK may have favourable tailwinds compared to its Spanish and Belgian counterparts, even if it cannot directly compete with CEE or Russian production centres, given the ability to 'ratchet-down' their local economies.

Interestingly, the Vauxhall-GAZ link could assist the Luton plant by putting commercial vehicle manufacture back into the hands of Vauxhall. As stated GAZ owns LDV, a company which boasts ownership of a relatively recently engineered multi-variant van platform – the Maxus. Presently Vauxhall assembles the Renault engineered Master & Trafic models under its own nameplates of Movano & Vivano. But this puts Vauxhall under the IPR and licensing mercy of Renault, a prime concern now given Renault's contractual 'walk-out' clause enacted if GM sells Vauxhall, as it has now effectively done. This perilous position is something Luton will want to escape not only to safeguard van production but also to better gain going forward given the good unit margins available on vans and the improving sales & revenues to be gained from a UK, European and Global economic upturn in due course which will heavily drive demand for LCVs nationally and internationally. Opel and Vauxhall will want to independently ride that wave, and could do so by 'appropriating' the LDV Maxus via GAZ (company sale or co-licensing deal) for its own use.

Such a favourable scenario, if tabled to the UK government's BIS office, would surely attract potential grant monies mentioned by Lord Mandleson. Such funds will not (rightly) compare to level of offering from Germany, Merkel and the CDU – offering a previous 1.5bn Euro bridging loan and 4.5bn future funding - instead monies forwarded should be in proportion to the required re-shaping of Vauxhall for future domestic stability and possibly even export competitiveness in niche (SVO) vehicles if it can prove itself and command a level of operational autonomy in the longer term.

For today and the short term however the battle for market share and 'share of mind' still looks harsh, especially so post national car-buying stimulus packages.

Efficiencies in the upstream value-chain through Magna are being strategically created, but now Magna-Sberbank must re-shape both the company itself to become a lean entity and critically critically re-consider the upstream portion of the value-chain – the products themselves, the retail channels and general environment and of course now with a new 'captive finance' house, balance the desire to push consumer lending with the need to maintain low default rates on new car loans so as to recycle the valuable liquidity back into the company and group for strategic integration and operational expansion.

And in relation to that is the question of how Opel, now effectively a Tier 0.5 entity can be leveraged to possibly become the centre of European client contract manufacture (inc Daimler, BMW & FIAT) and potentially regionally beyond.

Along with SAAB's and possibly Volvo's ownership change with BAIC and Geely, the new Opel-Vauxhall purveys a new era of substantial structural change in the European auto-sector.

Friday, 4 September 2009

Industry Structure – UK Autos plc – VDS : the High 'Talk' Differential

Having looked at the US' CARS scrappage schemes, investment-auto-motives now turns its attention to the UK government's version – VDS : the Vehicle Discount Scheme; started back in April.

Given that the UK has far smaller domestically owned production capacity - by far the greater of its 1.5m annual output Japanese & German owned with 75% exported – the immediate effect of domestic sales does not reach as far into the economic heartland; as it would have done decades ago. However, it was noted in Q109 that UK sales had dramatically dropped over 60% YoY given the credit crisis and something was to be done to slow the turmoil.

Hence, the Vehicle Discount Scheme that sees government subsidise new car buyers to the tune of up to £2,000 came into being soon after Lord Mandleson's awaited automotive industry announcement.

As with the US scheme, it has been touted a success given the slowed decline rate – to -17% by July YoY; though it could be argued that such the immediate sharp fall would have consequentially 'naturally' slowed.

Either way, Nissan, Toyota and Honda, the UK's mainstream car producers, have been able to re-start previously halted production shifts from Sunderland to Burnham to Swindon and elsewhere given the correlates to engine plants and regional/national suppliers.

But what is interesting is the consumer psychology and dynamic of car buying preference., with Ford (seemingly perennially) taking the top 2 sales spots with Fiesta and Focus – cars not made in the UK, but continued beneficiaries of the public's 'flight to safety'. Obviously given its UK manufacturing history, diminishing but strong popularity and massive advertising spend, Ford still holds a major “share of mind”. FMC enjoying the moment more than ever given GM and so Vauxhall's woes that for many with little auto-knowledge have overtones of the MG-Rover collapse and ensuing debacle.

By mid August the £330m the BIS scheme had induced 165,923 sales, many of which helped the July YtD figures showing a decline of -46% and August YtD figures of -40%; thus slowing the progressive rate of decline by approximately 14% & 20% respectively. Like the US, previously high inventory levels meant that there was much forecourt stock to be 'mopped-up', thus that there was not an immediate link-effect to UK manufacturing, much of that cautiously and temporarily expanded Japanese production being exported to Europe (given France, Germany and Italy's own incentive schemes) and elsewhere.

As mentioned, what is interesting is the difference between UK and US consumers in their VDS-CARS scheme choices. Whilst Ford has done well by virtue of GM and Chrysler 'dis-creditation' but the typical American buyer chose Toyota Corolla & Honda Civic as their #1 & #2 choices, so maintaining the decade long trend toward Japanese (and now S.Korean) car popularity. That same Japanese popularity has been happening in the UK, but far more slowly given the attachment to Ford and Vauxhall, and of course the level of smaller regional car competition from VW, PSA, FIAT, BMW-Mini & Daimler-Smart.

Even so, unless the UK buyer is an inhabitant of the North-East, East-Midlands or West with local production familiarity, it seems that concerns of their car-buying effect at a national economy level is lost or of little consequence. Whilst investment-auto-motives abhors protectionism writ large or small (as we saw with the lambasted “Buy American” campaign) it is interesting to note that Brits do not back their real-world national auto-industry. Yes it is Japanese (and including JLR Indian) owned, but such expenditure is still critical to the regional and national economy and has been part of those regions successful growth stories in the last 20+ years.

And that is far more than 'just a shame' because those Japanese companies and their associated suppliers are the key for the UK's motor industry into the future. Nissan, Toyota-Daihatsu and Honda's technological capabilities in small cars (esp 660cc Kei-cars), hybrid powertrains, lean-burn petrol & diesel engines and affiliated owned or JV battery knowledge is the leading edge of R&D development and so tomorrow's cars, and by virtue tomorrow's auto-industry.

Importantly, the ability to 'trickle-down' and 'infuse' such R&D solutions into Britain's luxury car sector – from the highs of Rolls-Royce, Bentley & McLaren down to Jaguar Land-Rover – means that the UK can leverage such knowledge. And moreover, the affordable integration of OTS (off the shelf) clean-tech will be critical for the niche UK industry players that so heavily rely on farmed-out powertrain, drivetrain and electronic systems.

The UK isn't the US where its niche vehicle builders rely upon generic GM (often Corvette) whole platforms. Its strength lies in its marque specific engineering specialisation and accordant USP, from Morgan to Bristol to Noble to Ginetta et al.

Thus investment-auto-motives believes that if the UK auto-sector (and nation) is to prosper as whole – and not simply buoy the retail sector with VDS – the government must subtly demonstrate just how critical the industry's inter-links truly are between the broad scope of auto-related companies, and critically the “Giant (progressive) Foreigners” and “Dwarf (adaptive) Locals”

As stated previously, investment-auto-motives is not an advocate of short-termist stimulus packages that run to dead-ends. But the difference between the UK and US 'appropriations' is made clear given the very different natures of their respective 'domestic' industries.

The trouble is that we suspect the present government has failed to truly grasp the complexities of subject at hand. You don't just simply pour medicine down a sickly patient's neck expecting a miraculous cure, you simultaneously provide the raison d'etre to re-invigourate.

Wednesday, 2 September 2009

Industry Structure – US Autos – CARS : Consequences of a “CARS 2” ?

September is upon us and justifiable concerns have at last grown over the basis of sustainable economic recovery. Of all the prime-pumping exercises from national stimulus monies, one of the most visible has undoubtedly been the 'Cash for Clunkers' exercise under the CARS pseudonym.

Intended to reprieve US auto manufacturing, kick-start consumer spending and reduce the US's carbon emissions levels, the Summer initiative has been announced as an administrative success given that the full CARS fund has been extended from $1bn to $3bn, and ultimately exhausted by deal-hunting shoppers.

However, as investment-auto-motives has previously highlighted, the CARS programme – whilst well intended – ultimately serves only as a momentary propagator of US industry which must continue to face the realities of continued structural reform. CARS has been a pleasurable diversion from that fact.

And so, as expected, now that the subsidy funding for vehicle purchases has ended, the market realities bites. The August sales figures have been reported and unfortunately for US Autos Inc, the ongoing consumer demand has tumbled sharply from the mid-year supported highs, and critically the monies appropriated have largely gone to Japanese and South Korean automakers, with only the best positioned Ford fairing relatively well.

Thus the results of CARS as expected, the 'mainstream quality' and 'mainstream value' foreign manufacturers (ie Japanese and Korean) boosted by the federal funding, the monies essentially 'wasted' on GM and Chrysler which could not draw consumer attention and conversion given their recent history and associative heavy credibility loss.

The picture detailed in sales and prime brand & product dynamics:

GM - 246,479 units vs 308,817 in Aug '08 / Pontiac sales up 23.3% (29,921) [driven by buyer demographic], Chevrolet sales down 9.2% (168,130 vehicles), Cadillac sales down 55% (6,931), Buick sales down 51.7% (8,612), Hummer >64% down.

Ford - 182,149 units vs 155,690 in Aug '08 / Focus, Fusion, Escape, F150

Chrysler - 93,222 units so down 15% / Chrysler brand down 23% (18,619); Jeep sales down 6% (22,041), Dodge sales down to 52,562 vehicles.

Toyota - 225,088 units so up 6.4% from 211,533 vehicles a year ago / Corolla ranked #1

Honda - 161,439 units so up 9.9% / Civic ranked #2, Honda brand up 15.2% (151,814), Acura sales down 36.2% (9,625).

Nissan - 105,312 units so down 2.9% /

Hyundai - 60,467 units so up 47% / Accent up 56% (10,099), Santa Fe up 41% (10,791), Genesis up 97% (2,316)

Kia - 40,198 units, so up 60.4% / Sportage >200% (7,558), Rio sales up approx 90% (6,961), Optima up 110% (7,461)..

VW - 24,823 units, so up 11.4% / Jetta up 14.8% (12,872), Tiguan up 69.7% (1,750)
Set in a broader context including Japan's 2.3% improved sales environment, Toyota and Honda are proving the current climate beneficiaries thanks to multi-national government incentives.

As GM's North American market concerns prevail - given these discouraging sales figures – it has tactically timed its announcement of its $300m JV investment in China with FAW to off-set the NA news.

As for industry comment, investment-auto-motives agrees with in as much as here have been “no surprises”, but must disagree with the presumption that to have started the CARS programme earlier (in March) when inventory and incentives were bleak would have assisted the automakers more. Consumer sentiment typically does not pick-up until May time, psychological outlook aligned to the seasonal weather, thus trying to perfectly time the programme's release and run was something not lost on the Administration Task Force,

Lastly, there is comment that SAAR at present and looking forward is less than 8m units, given an increasing trend of inventory depletion and retraction and the natural margin-seeking 'supply-demand effect' of prices slowly rising, so taking the wind out of sales. That is perhaps an overtly cynical outlook, more like 9.3m moving forward in investment-auto-motives' estimation.

So track the previous Q1/Q209 9.5m SAAR followed by 11.3m and even 15m (by over-zealous, possibly politically motivated internal planners) and the now 9.3m 'balanced reality' and the true industry capacity planning picture, which of course sets the tone for overhead and expected margins, looks very fuzzy indeed; especially for those 2 participants who are under enormous pressure to make their business models structurally sound.

The CARS programme came from good intention, but its effects may have led to greater uncertainty and problematic industrial planning – for both the industry and its governmental supervision. The CARS name evokes the similarly titled 2006 film intended to metaphorically (and humorously) highlight the ongoing structural change in US Autos Inc.

That process of structural change was always going to take time, but now the interventionist effect means it will now take longer to create that sound base from which to re-create the domestic industry.

Hence, the prospect of a “CARS 2” film in the making by Disney-Pixar, due for 2011, is all the poignant.

As investment-auto-motives has stated previously, GM may now need a 'Plan B' for its homeland operations. And the US government will need to think more laterally and creatively with plans X, Y & Z, if it is to combat the potential extensive 'W' “double-dip” or “slanted J” recession. [NB see previous post]. 2011 still seems a long way off, but it will take that long and possibly longer to re-shape American Autos Inc.