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 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 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 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.

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.

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 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

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.

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.

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 -
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)

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'

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.

Saturday, 3 July 2010

Companies Focus – The Western 8 : FIAT SpA – Re-Building the Economic Engine & Adjusting the Power Control Mechanism.

Compared to the operational simplicity of most mainstream car companies, FIAT SpA compares to a Rubik's Cube, over the years its may different divisions 'sliced and diced' relative to the purveying economic age.

To the Agnelli forebears and today's Board and executives, the beast's complex conglomerate structure has provided both economically cyclical headaches and up-lifts, and as the innate heart of Italian industrial manufacturing has served as the linch-pin of the country's idealised internal economic stability and a primary conductor of export/foreign market income.

Its portfolio of car marques aggregated and split relative to reformed business models, its commercial vehicles section multi-variously in-house and narrow or with JV broad reach, its Agricultural Construction machinery section swallowing acquired brands and spitting them out as a combine harvester would, a components business' on-off profitability akin to the characteristics of electro-mechanical brakes, a castings/forgings business that has seemingly baked-in intentionally low costings and a production plant business internally caught in a 'catch 22' of schizophrenic labour relations given its efficiency function versus FIAT's paternal persona.

Today, FIAT SpA faces the two prime internal challenges of volume growth to gain scale efficiencies (and remain a prime player) and brand/product consumer connection creating the sales base.

[NB the conventional car-maker thinking of production-led sales is a necessary evil for FIAT given its past & position].

With the corporation also facing the the two prime external challenges of ever reducing government support – especially so in these budget constrained times – and what seems sections of an increasingly entrenched labour force.

[NB. The latter almost intentionally naive to the realities of hyper-competitive globalised production, some southern region Mezzogiorno unions apparently still viewing state and industrial aided funding a near social right stemming from the 1950s 'Cassa per il Mezzogiorno' era].

It is these 4 headwinds which foresighted auto-sector observers and CEO Marchionne recognised almost a decade ago, the fact that narrow footprint auto-makers (specifically Renault, VW & FIAT) must set out new transformational courses.

The capture of Chrysler is of course intended to meet the volume and broad market penetration needs, whilst the recently announced split of FIAT SpA into separately (ultimately listed) FIAT Autos (inc Chrysler) and FIAT Industrials intends to create stand-alone entities.

Their new conspicuousness inherently demands strengthened strategy & management capabilities, highlights the need for labour reform given their 'lean-running', requires greater accounting transparency (so better spotlighting employee productivity costs) and so intendedly entice investor interest by demonstrating that the worst of 'old FIAT' has been jettisoned in favour of a leaner, cost-centre conscious and so globally competitive set of loose network companies.

Having laid out the vision through a 5 hour presentation in April, the hard task of ensuring full exploitation of FIAT-Chrysler synergies has started, aswell as creating the beginning of an equally robust structural platform for the new Industrial division.

Q1 2010 Performance -

The Group as a whole has benefited from the 2009 & early 2010 economic resuscitation, yet the massive rebound in Autos sales as a direct result of state incentives (not true economic strength) which also boosted the Parts subsiduaries, has at Group level, been somewhat undermined by a still slow recovery in the Commercials and AgCon (Agricultural & Construction) sections.

Overall Group Q1 2010 Revenues improved by 14.7% to E12.926bn, giving a measured Trading Profit of E352m (versus E-48m in the preceding Q1), more than half the contribution given by the cars business. A 'walk through' to Net Result shows the impact of accounting deductions from the Trading Profit level. From E352m Trading Profit no exceptional charges were levied so offering a similar E352 Operating Profit. From this is deducted E-250m for Financial Charges, whilst E55 was forthcoming from investment income, giving a PbT Result of E157m with a PaT (rather Loss after Tax) of E-21m

The Car & LCV division's worldwide sales increased by 14.1% YoY in Q1, with FGA seeing an 8% rise (to 387k units from 358k units), Lancia seeing a 45% rise (to 29k from 20k units), Alfa-Romeo seeing 7% rise (to 22k units from 21k units), and LCVs up 44% (to 95k units from 44k units). YoY worldwide sales from 2008 to 2009 staid virtually flat at 2.15m units.

European car sales were up appreciably in Q1 YoY thanks to the tail-end effect of scrappage schemes, the up-lift giving a 20% buoyancy effect to the general market & TIV. However, FIAT share in the EU dropped -0.3% to 8.6%, even with slight seemingly momentary gains in the UK and Spain; the external prime markets of Germany and France down -2.5% & -0.6% respectively.

Whilst Car & LCV production was reduced by -6.5% since Q409 to align with reduced demand, the fact that units sold increasingly diverge from units registered (Q1 showing 532k units sold versus 580k registered) shows that dealers are pre-registering unsold cars in order to give them negotiation leeway with customers so as to 'shift metal'. FIAT states that a fight is imminent for sales, and so it appears that

FIAT proudly claims the Cars division to have been in the black throughout the recession except for Q109. Cars division Revenue reached E7.33bn, of which FGA (FIAT, Lancia, Alfa-Romeo Arbath) represented E6.8bn (up 22% YoY), whilst the operationally separating Maserati and Ferrari saw E127m (up 10.4%) and E414m (down -6.1%) respectively. Cars division Trading Profit reached E196m of which FGA was E153m, (with Maserati E39m & Ferrari E4m), due primarily to lift in volumes, favourable model mix and contribution from the LCV section. Importantly for FGA, favourable FX conditions of an ever-weakening Euro off-set the substantial sales drop in Germany as scrappage incentives were eased. Maserati maintained momentum thanks to demand for GranTurismo cabrio, whilst Ferrari supposedly suffered awaiting ramp-up of the F458 Italia.

LCVs faired better than Cars in terms of European market share, with a 1.4% increase to 13.5% market capture., primarily due to new Doblo compact van.

The Commercial (Iveco) division has suffered in W.EU as the general economic weakness seen in H209 amongst corporate vehicle buyers continued into Q1 2010. Whilst the Q1 TIV in light trucks grew by 2%, medium trucks lost -20% and heavy trucks a massive -33%. The company made marginal progress in light and heavy segment sales of 0.7% and 1% increases respectively.

Yet within these harsh conditions Iveco provided a Revenue increase of 11.2% to E1.69bn, and a Trading Profit of E3m (versus E-12m last year), reflecting what appears good leadership regards early-stage cost-containment, efficient marketing methods and seeming leverage of internal credit avenues to offer client credit.

However, Iveco's previous reasonable expectation of 2010 sales (W.EU +2.5%, E.EU Flat, LA approx +5%) will have been undermined by the later-date EU sovereign debt crisis. This has direct ramifications of even tighter budget control for all European based truck users'; from SMEs to large fleet. Thus with associative CapEx reductions, customer truck re-placement schedules will be (yet again) extended, which in turn keeps the pressure on Iveco in Europe.

The Components & Systems division provided a Revenue of E2.91bn, and a Trading Profit of E32m, this dramatically up thanks to the previous passenger & LCV demand pull.

The AgCon (CNH) division provided a Revenue of E2.57bn (roughly flat relative to 2009, giving a Trading Profit of E127m; results reflecting the softening of NA tractor demand and soft EU area AgCon requirements, these off-set by growing RoW demand for agricultural and construction equipment.

Other second tier corporate divisions and eliminations generated a top-line Revenue Profit/Loss of E-1.59bn, which in turn gave a Trading Profit/Loss of E-6m.

By end Q1 the Group's Net Financial Result saw reduced deficit to E-21m from the previous year's E-411m. Net Industrial Debt rose by E0.3bn to E4.7bn between YE09 and Q1, this E0.3bn increase reportedly off-set by cash-flow increase and efficiency cost capture. The corporate cash-cushion saw a E1.2bn cash burn through Q1, down to E11.2bn from YE09's E12.4bn

Strategic -

FIAT's vehicle sales are approximately split as: 1/3 Italy, 1/3 EU (ex Italy) and 1/3 Brazil; the remaining RoW accounting for roughly 5%. This shows FIAT dominance and so reliance upon 3 markets, 2 of which are essentially inter-connected and 2 of which are singular countries. It is of little surprise that the company wishes to reach into alternative, theoretically counter-cyclical, regions of NA and other EM areas such as Russia, India and China, and stretch its current penetration of the near & Middle East. Critically Marchionne (in contrast to PSA) views that global coverage is the only route to tenable long-term existence; this echoed by Renault-Nissan and effectively pre-played and defended by GM, Ford, VW, Daimler, BMW, Toyota, Honda, Hyundai-Kia.

Obviously given the Chrysler purchase and still massive US consumer demand, North America is a primary objective. And so the FIAT 500 introduction will be followed by Alfa Romeo, Abarth variants of FIAT cars and latterly FIAT branded vehicles. As is known Lancia cars are being re-engineered and newly engineered to meet NA specification, as are FIAT vans, thus through 'badge engineering' providing for a suite of new passenger car and commercials vehicles, branded as Chryslers and Dodges.

Beyond this tactical approach to entwine the US and Italian companies, the previously mentioned 'top-down' Italian brand introduction strategy would be a natural consequence given the price-position and halo effects of Ferrari and Maserati profile in NA; a reality hard fought and providing the best 'hook' on which to hang latter-day serial introductions.

And to this end FIAT understands the need to better correlate the prestige of Ferrari to the US historic variable reputations of the other family marques.

Differing yet recent FT reports pointedly demonstrate this as a Group ambition baked into the Ferrari business agenda. Ferrari executives' desirous to leverage the prime visibility platform of Formula One by finally breaking through into US auto-culture - thus the forefront of the American populace's consciousness. To do so would set historical precedent. The search for that 'golden formula' has led Cordero di Montezemolo to discuss the backing of a new US based Ferrari team with Chad Hurley, the creator of with close affiliation to Google. This is perhaps the obvious 'close-connect' and cost-efficient marketing channel for a younger target demographic that is new to Alfa-Romeo, Abarth & FIAT and who, unlike their parents, don't harbour poor memories of those brands in the US and Canada. Moreover, reaching toward the more open and brand promiscuous young would help bridge the generation gap. The hypothesis seems to be that by enthusing the young into following F1, the typically NASCAR & Indy Car loyal father would follow.

This is a laudible creative position to take, yet the recession itself may have indeed strengthened America's psychological connection to things 'All American' including motorsport.

Moreover, with this a context, FIAT seniors know that the prime sports TV channels of ESPN or HBO would be hard pressed to agree transmittal of US & Worldwide F1 races given their advertisers'/sponsors' requirement to attract certain viewing figures. Speed TV specialising in MotorSport is an alternative, but the YouTube option was no doubt deemed far more cost-effective relative to the risk-reward, relative to any TV subsidy probably required, let alone the contractual issues to be had with Bernie Eccelstone's FOMA, who hold global F1 TV rights.

Across in Europe FGA and Chrysler took additional steps in integrating EU distribution operations. Whilst still early days and primarily relative to logistics and vehicle shipping, this action will ultimately bolster Chrysler's continental presence enormously since the post 2000 shrinkage of the Chrysler-Jeep dealer-base.

In Russia, a Memorandum of Understanding has been signed with Stollers for local production of cars and SUVs, thereby moving beyond the Avtovaz agreement to strengthen JV ties and resultantly the local FIAT model portfolio. Moreover, a new agreement has been recently finalised with Kamaz to broaden JV activities by manufacturing and marketing CNH Agricultural & Construction equipment

The given impression is that Ferrari & Maserati, as not part of FGA, will remain with the Exor investment vehicle - the family holding company - operating withits own allied and seperate interests once Autos and Industrials are formerly split and floated.

This is of course a very wise move given the present under-performance of the supercar and GT companies thus availing Exor to a latter-day surge in sales and profitability as the western economy rejoins the prosperity of EM economies: the effective support-pillar for luxury vehicle demand in recent years. Moreover, in addition to today's high price-point model range, new more affordable models will be introduced - primarily so at Maserati – which can utilise FGA-Chrysler common platforms & components, so able to reduce its procurement costs by exploiting already partially 'baked-in' & possibly fully amortised costs. The natural avenue to enable increased unit margins and so overall Maserati & Ferrari profitability, monies attributable directly to the parent holding company and so to Elkann, other Agnelli relatives and other investor parties.

Company seniors recognise that 2 of their 3 prime car markets will heavily contract (Italy) and sizably contract (EU), leaving only a still buoyant Brazil to take up the slack. Yet even with the additional capacity generated by Brazil's near-term 5-8% pa growth rate, its substitution effect alone looks unlikely off-set the levels of Italian and EU shrinkage. Moreover, as Brazilian market leader (at 23.5%) FIAT must be acutely aware of share erosion from competitors, just as it surpassed VW Brazil in recent years, but has witnessed its share slip 2% as the market expanded; thus it is no surprise that the new Uno model has been developed in Brazil with the task of maintaining FIAT's leading market position. Hence to combat, critical advances must be made throughout Latin & Central America versus the regional leaders GM & VW and the increasing threat from #4 Ford and new entrant Koreans (Hyundai-Kia & Renault-Samsung).

From ma RoW perspective, the other good news story should come from Russia, given its role as a primary commodities exporter, and thus theoretically an early rebound economy. More immediate though of lesser market value, there are currently strong economic fundamentals for the Near East and North Africa. But of course FIAt sees China & India as primary long-term markets beyond North America, so constant activity will be expected there.

[NB South Africa to marginally contract as natural recoil post World Cup boost].

Operational -

Since the partial acquisition of the flailing US player, FIAT SpA's automotive interests comprises of the historically generated FGA portfolio of Italian marques – Ferrari & Maserati accounted separately – and Chrysler LLC.

The Pan-European government scrappage incentives served FIAT badged cars well through 2009 and early 2010, but investment-auto-motives believes the schemes' retraction will have sizable consequences for FIAT cars given that such a helpful 'FIAT skew' – especially to aging Panda & Grande /Evo Punto - is now effectively lost.

May saw the introduction of the new B-segment Uno model which has been largely conspicuous by its absence in recent years in the FIAT model range. As mentioned in previous posts the Brazilian developed and targeted vehicle is expected to perform well across Brazil, other Latin countries and other EM regions where FIAT has a good foothold. Designed as a clean and simple 'grown-up' Panda with chunky soft-roader appearance instilling good ground clearance and suspension travel for pot-holed roads, the car is essentially an EM product. Out of step with EU B-segment cars and close in DNA spirit to Doblo, there is a concern that it will not manage to counteract the consumer slack in W.EU countries given its more rudimentary appearance, though should be well received by CEE countries and areas beyond the Baltics such as Turkey.

In FIAT's favour it should provide influence over any yet to be revealed 2011 styling upate of smaller Panda which has always sat between the two aesthetic stools of functionality vs sophistication. The similar volumes and proportions would allow Panda to visually mimic Uno, and done so with relatively little CapEx spend since only exterior panels, trim and lamp clusters would be renewed.

In the struggling Alfa-Romeo camp small Mito has been followed by compact Giulietta so as to bolster what have been terrible – and value destroying – sales figures at around 100k pa. The small cars developed from FIAT sister platforms have in their early stages gained credibility as spiritual successors and will re-build Alfa's relevance in the now hotly contested premium small cars segments. However, as with all cars Italian and especially so Alfa, non-Italian markets quality and durability will be a key factor in re-building the marque's reputation as more than slickly styled short lifespan cars.

But the recognised avenue to improving sales volumes and unit margins it will be greatly assisted by the morphing of Lancia and Chrysler product development and manufacturing capacity, Lancia essentially offering small and compact cars to its sibling (essentially re-inventing the yesteryear Neon and others) whilst Chrysler offers large cars, MPVs, SUVs (and to FIAT pick-up trucks).

And partly underpinning the 5 Year Plan is the new inter-connected 3-tier platform range for mini, small, compact cars, each offering flexible wheelbase, flexible wheel track, flexible body length and flexible body width which set together seeks to gain greatly increased scale efficiencies.

However, auto-sector analysts much be wary of possible number-fudging that can occur regards platform numbers and reached and forecast volumes. These figures are typically open to broad interpretation by those generating them and there are no defined methods of exactly calculation.
Each manufacturer will have its own method (by parts count and parts value) and though of course internally understands the exactitude of platform details is understandably loathed to publish such sensitive data – the lack of pure transparency in externally calculable NPD progress a frustration.

Equally, investors should remain cognoscenteee of the claims that FIAT and others make regards the reduction of programme timelines for new product development, the general case being that complete platform platform changes take an industry average of 24-30 months, whilst new model variants anregenerateded replacement series vehicle from the same platform can be developed in typically 15-20 months. So the oft proclaimed time and cost savings for new model programmes can be largely contributed to the fact that so much less original engineering much take place. The same of course true for powertrain programmes from standard engine and gearbox families. However, the ideal for as much common structures & parts standardisation as feasible without detrimental effect on brand experience is of course true, so assisting across the board NPD efforts.

Given its importance to the group – and Italian economic well-being previously - the Commercial arm has always sought to balance the need for cost-competitiveness versus breadth of product offering, hence its use of car platforms, joint venture partnerships, historical competitor acquisitions and coverage of what it sees as specialised high-value business such as military and emergency service vehicles.

Rebranded as 'Professional' 2 years ago has a broad vehicle range spanning the commercial needs of sole-traders, SMEs, mid and large private fleet, utility fleet aswell as public & municipal.
It encompasses the historic acquisition of various Italian, German & UK businesses and consists of: FIAT designed car based city vans, car derived LCVs (via a JV with PSA & Tofas) (spinning-off the Qubo MPV), small vans (via its Sevel 'Eurovan' JV with PSA), large-sized vans and associated chassis-cab trucks (again via a PSA JV), plus midi-HGVs and large HGVs in the form of trucks, buses & coaches, aswell as specialist military and commercial conversion services and dedicated task vehicles.

Truck, Bus & Specialist:
As mentioned, the H2 2010 outlook now looks bleaker than forecast in March given the ramifications of the EU sovereign debt crisis and the raising cost of capital for SME and fleet operators.

Thus company executives must obviously recognise Iveco must partially off-set near-term 'lost' new product sales income with an income expansion of its parts and service dealings. A tertiary initiative to ideally corroborate with the FIAT Professional division to avail lower cost transport relative CapEx solutions where useful. Such an inter-divisional agreement (possibly of 2-way use for Iveco) must be based on meaningful successful sale transfer/commission rates and sound non-compete criteria

However, even with such initiatives, it is still Parts & Service that must do the 'heavy lifting' so must market themselves adequately – even under budgetary constraint themselves - to demonstrate the economic value of parts replacement and control systems monitoring to customers by providing extended truck life at on/near optimum running specification so as to reduce overall vehicle running costs. Such an effort could also include 'sympathetic driver' training or sum such, installing one or more of the acutely knowledgeable factory staff into 'Iveco Gurus', much as the likes of Rolls-Royce and Land-Rover recognised to do many years ago.

Such efforts may need to bridge the income chasm until late 2012 when a combination of expectedly eased capital markets and regulatory demands for Euro IV emissions compliance. Moreover Iveco expects a return to a “normalized” level of EU sales – relative to 2008 volume – by 2014, and a gradual YoY increase in product demand to that renewed high. But given such ongoing fiscally fragile times, it may only be the Euro IV demand that creates a late 2012 nominal surge, with thereafter flat sales through 2013 and no 2014 peak, thus with the possibility of little real earlier demand pull that substantiates the stepped YoY forecast. This plausible scenario has obvious consequences for the ideal of a gradual build-up of plant utilisation, presently well under-capacity at only approximately 44% utilisation of its 191K full capacity. Thus Iveco would have to 'swallow' a greater portion of the unproductive over-head costs over a greater timescale, which has obvious impact on the division's contribution to Group income.

The saving grace is as ever Brazil and China, with the former seeing the new model launch of the medium sized rigid body Vertis model formed on a lower cost Chinese parts supplied and module built platform, which should theoretically offer additional unit margin, or if the market contracts, necessary pricing elasticity. The heavy class trucks see a major modification in 2011, whilst Euro V adaptions are made in 2012 where required in light & medium classes.

Regional in-market presence is being nurtured with 'hub & spoke' official dealership numbers growing from 44 sites in 2006, 79 in 2009 and expected 90 by YE2010. Conversely the number of authorised workshops is maintained at 15 so as to re-route custom to official dealers thus offering better client experience and on-sell opportunities.

As demand for conventional trucks slipped IVECO put greater focus on growing its Specialist HGV section, consisting of Defence Vehicles (Iveco DV), Fire-Fighting Vehicles and Construction Task-Tailored Vehicles.

Fire-Fighting competence is being expanded beyond municpal applications and into Airport Emergency support vehicles, whilst Construction Task products will evolve from present and new customers. The DV section cater for across the board 'Light Green' activities ranging from reconnaissancee & tactical with LMV (light multi-role vehicle) to its patrol MPV (medium protected vehicle) to the 6x6 HGV for off-highway single container transport to 8x8 semi-off-highway for multi-loads and offers what seems limited capability in Dark Green Fighting Vehicles. As the theatre of war changes to smaller regional-specific conflicts new products are being developed to assist. However, this 'game-change' to armoured patrol and adapted logistics vehicles broadens the business opportunity to far more firms, small and large, and so Iveco will be increasingly competing
against emergent companies and JVs such as Force Protection Inc & Ricardo Engineering.

Italy as with the UK and others seeks Defence Goods exports to bolster balance of trade payments, Whilst Iveco may hold its position in logistics expanding sales in LMV & MPV segments may be harder beyond Italian forces needs given the level of new competition. However, Iveco's standing in Brazil and Latin America should make it the obvious choice for re-equipping Latin forces so as to maintain as much efficiency as possible in central sourced purchasing, scale discounts and in the field critical component commonality.

The Bus & Coach section's continued rationalisation is necessary given the reduced sector TIV in W.EU and thus increased competition in this already well populated arena, which has seen a sizemic shift in cost-base importance and increased the necessary flexibility regards internal versus external coach-building activities.

Moreover the Iveco 'bendy' (articulated) city-bus faces greater competition from Daimler, MAN, Volvo, Scania and other domestic manufacturers in EM regions.

Given the shrinkage in western public expenditure budgets and the constraint on private company balance sheets the bus and coach replacement schedule will theoretically be worse than the truck demand profile. Furthermore in a bid to evolve their own economic bases EM regions will continue t use the JV business model which for the proprietary technology provider (here Iveco) relies on volume given the profit-share split between JV partners. Thus much depends upon the realisation of infrastructure build programmes – which is country specific: China of course the most prolific, whilst Brazil & India drag their feet regards road upgrading. Moreover, in the non BRIC EM regions user expectations and requirements may be drastically different and so (again for economic development) body-building and interior fit operations – typically on used chassis cabs -may be locally sourced and rudimentary.

[NB Iveco holds 3 Chinese JVs across the 3 truck/bus classes, one with Naveco, and 2 with SAIC for structure & powertrain (via Iveco FPT)].

Thus Iveco bus will need to carefully map-out the changing terrain to appreciably grow its bus & coach section, taking close attention at the 'old guard' and newcomer competitor set, let alone reach its overtly optimistic 2014 capacity target of 450k units and E80m allocated profit share.

2010 for Iveco shows increased CapEx supporting 3 replacement model programmes, thus incurring a reduction in the ideal CapEx vs Depreciation balance and so increasing cash burn. The ratio metric of CapEx (excluding R&D) to Depreciation rises from 0.72 in 2009 to 2.76 in 2011.

Until the EU's recent financial stumble, the 2010 Net Revenues forecast looked amenable at E7.9bn versus E7.2bn in 2009. However Italian fiscal contraction plus EU contraction and now even Chinese slight contraction seem very unlikely to be off-set by Brazilian demand, so the whilst a 'double dip' recession in the west is unlikely the 'forward slanted J' of minimal growth drag that investment-auto-motives predicted in late 2008 looks to undermine even recent conservative Iveco estimates.

Components & Production Systems:
The components and manufacturing systems subsidiaries enjoyed a welcome uplift, piggy-backing the renewed EU demand in low CO2 small and compact cars through 2009 and early 2010, and of course surging BRIC regional sales growth. Having experienced relatively heavy restructuring in 2008-9 (given the innate Italian constriction on labour policy) the 3 divisions were better 'shaped' tin terms of the workforce, input & output inventory levels, with only the sales and receivables elements of their accounts put under pressure from the Group at large; this in itself forcing efficiency seeking.

Magneti Marelli:
This division offers multi-systems components and modules spanning: lighting, powertrain control systems, shock absorbers (variant solutions), suspension modules, in-car electronic display & control systems, large section plastic housings (eg dashboard, bumper sets), after-market parts, and Racing sector engineering services and specialist parts.

Already globally 'in place' with production plants, R&D facilities and Applications centres, it represents one of the cornerstones in delivering Marchionne's 5 year global expansion plan for FIAT Auto.

Its 2009 (& 2010E) Revenue was/to be generated in the following manner: by source mix, regional mix & systems mix.
Income Source Balance: 50% FIAT Captive & 50% External
Regional Mix: 52% (68%) EU, 22% CEE, 18% (21%) Mercosaur., 3% (5%) NAFTA, 3% (4%) China, 2% (2%) RoW
Systems Mix: 26% (30%) Lighting, 11% (13%) Electronics, 18% (17%) Powertrain, 45% (40%) Remainder (ie Shocks, suspension modules, plastic housings, exhaust and after market).

This shows that whilst the product mix is changing for the better, that 45-40% of income is derived from what is realistically 'low-value' products. These suffer from large pricing-elasticity due to both competitor severity in the arena from China, India, Thailand and Latin America aswell as high exposure to volatile input pricing relative to commodities prices. Lighting at 30-26% of Revenue represents essentially mid-value, whilst only a combined 29-30 % from Electronics & Powertrain represent 'high-value' pricing business models. This the case even though MM describes itself as in the 'high-end' components business, though observers will recognise that 'organic shift' as opposed to 'acquisitional shift' takes longer but delivers greater embedded internal knowledge.

[NB. The need for western players to walk-up (indeed jump-up) the value-ladder within the sector was perhaps best exemplified by Continental AG's acquisition of various Electronics players including Siemens VDO Automotive].

However, even with 'only' 29% from such high-stream income, MM illustrates that its R&D competence sits across a broad scope of slow, medium and faster growth electronic technology disciplines, highlighting its coverage in all but EV related Battery Propulsion Systems and Syncronous Motors. However even with such coverage investment-auto-motives suggests that MM is a 'fast-follower' as opposed to market leader, which whilst assisting the mainstream FIAT marque arguably detracts from Alfa-Romeo's, Lancia's & Abarth's more advanced customer facing technology needs (as opposed to inherently engineered 'invisible' solutions such as the Multi-Air induction system in Alfa's). Although an in-car infotainment strategy has been established across the family of brands using modular tech packs, more may have to be done to further generate brand differentiation between FIAT, Arbarth, Alfa and Lancia

MM's 2014 business ambitions of holding EU's E1bn sales, expanding NAFTA's E0.3bn, expanding Latin America's E0.1bn, increasing Asia's E0.2bn with 'full-line' BRIC presence do not surprise. Nor does continued 'captive supply' to FGA and Ferrari-Maserati clients, and achieving a competitive cost base. Essentially reflecting the intent to build on today's business foundations.

The dynamic of recently increased sales shows that MM is successfully availing itself to BRIC located customers, with 80% of all new business in these regions across high and mid-value component bases – typically the case given the in situ presence of low-value suppliers often initially nation-state backed.

The natural correlated concern is that with 45-40% of income derived from low-value items, there is the potential that clients and even FGA (once listed) could source from elsewhere more cheaply, thus potentially strangling that income stream quite quickly. So managing the transition up the value-curve will be critical and in the mid-term could feasibly generate conditions for low-value tooling, plant and land asset disposals.

The CapEx profile is similar to the trucks division, cash demand ramping-up over 2010 and peaking in 2011on new technology programmes in support of next generation Cars & LCVs. However the Capex (exc R&D) vs Depreciation metrics are less severe, rising from 2009's 1.17 to 2010's 1.28 to 2011's 1.71, before sharply falling and returning to 1.17 in 2012 and deflating thereafter.

Less ambitious financial targets over the next few years - as compared to the truck division counterpart – highlight that MM management recognise the pitfall of over-promising on what could ultimately be disappointing performance; which given the transition state of the company illustrates a welcome conservatism.

However with the additional supply of mid and high value parts to its new Chrysler client, that underplay of income levels may well have been purposefully presented so as to beat guidance and so analysts expectations over 2010 and 2011.

FIAT Powertrain Technologies produce power delivery solutions for use in various engine types/applications. A simple overview of the business mix shows an overwhelming 84% of revenues generated from FIAT Group (63% FGA, 15% Iveco, 6% CNH). By application it shows 72% of revenues from Cars & LCVs, 17% from Heavy-Duty (on & Off Highway), 8% Industrial, 2% Power Generation, and 2% Marine.

Technology delivery over previous years has been welcomed by of course FIAT, the motoring press and FIAT loyalist customers, however as with Magneti Morelli delivery, FPT seems to operate as both a 'fast follower' in the case of dual-clutch gearboxes and MultiAir which is essentially a VVT-based systems (developed in Japan 20 years ago) allied with 4 valves per cylinder and turbo-charging. As id often the case behind the PR, much of the lauded ICE-based technology advancement is simply solution re-adoption instead of true origination.

However, there is probably room for improvement and so profitability, via not only Hybrid, EV, CNG opportunity creation, but most importantly through continued operational efficiency seeking and the creation of well defined 'cost' & 'performance' strategies for its different client bases: FGA versus external western and eastern OEM parties.

If FPT can pull-out cost from MultiAir it could conceivable make it 'the' (contract manufactured) adopted engine of choice for others, much as VM did cor commercial diesels. And developing MultiAir 2's successor to be significantly better performing – possibly through innovative polishing methods for improved 'porting', so airflow, so better stratified combustion – would give FIAT brands vehicle spec sheet competitive advantage. In the world of ICE powertrain, it is often not the original that commercially succeeds, but the hard to achieve and perfect (as the Japanese saw with VVT in the late 1980s). In this regard marriage of proven MultiAir and GDI combination, together with reliable and durable turbo-charging, should theoretically assist FPT on the global stage. Yet as stated honing the basic principles of petrol & diesel combustion is ultimately preferential to bolt-on sub-system improvement (ie fuel delivery & burned gas expulsion)

The extension of a small package, dual dry clutch technology for A & B segment vehicles is investment-auto-motives believes a welcome route forward, since although less relevant in its base form for mass use (applicable to only the higher power & torque performance variants ie Abarth), importantly offers the opportunity to create hybrid small cars via the attachment of an electric motor – something seen as a far more real-world practical solution that realistically city-bound small pure EVs.

FPT's goal is to raise the level of its contract manufacturing to 'non-captive' 3rd parties from 9% in 2009 to 24% in 2014, something almost achieved given that 95% of that has has already been contracted.

Like other European OEMs, FIAT wishes to develop diesel-hybrid engines that give better fuel-efficiency and off-road characteristics than the petro-electric systems developed by the Japanese and Americans, something much needed by Chrysler large car, large trucks and Jeep 4x4s. However whilst that could become a US advantage versus Ford and GM, FPT may struggle to create better small capacity diesel-hybrid units versus the likes of PSA, VW, BMW& Daimler given their innate knowledge of advanced diesels and sizable R&D capabilities. Since this technology is such a competitive advantage it would also look unlikely that FPT could contract manufacture for others unless it brought something to market far quicker or created an unrivalled technology lead. Instead expected as an Alliance type agreement, as has so often been the case with powertrain ventures.

Having installed much of its CapEx previously for MultiAir etc programmes, FPT has been enjoying an ongoing reduction until a low level plateau is reached in 2012-2014. 2010 should see near breakeven if projections materialise, yet as with FIAT Autos fragile EU sales position, that might be delayed into 2011 unless FPT can manage internal cost savings to off-set ant revenue shortfall; something almost expected by the investment community to raise the new Industrials' credibility. Thereafter breakeven a 2% annual improvement in trading margin is forecast, though no doubt predicated on achieving the set plan for obtaining non-captive clients.

The real challenge to FPT will be FGA's theoretical ability to buy in engines from elsewhere. Though not seen as a real threat, the HQ intent is to allow FGA to pressurise its internal sibling to better or meet benchmark contract rates which in turn improves its own competitiveness.

Producer of cast and machined steel and aluminium engine parts, typically cylinder heads, with FGA as the prime client. Steel foundries/facilities in France, Poland, Portugal, Mexico, Brazil & China. Aluminium facilities in Italy and Brazil.

The two key business pillars are to continue production efficiency gains (capacity utilization) and fulfil FIAT-Chrysler volume growth, with the Steel section aligning to stable EU capacity whilst growing in Mercosaur & China, and Aluminium directed at Mercosaur growth.

As part of FIAT Group's own need to reduce vehicle mass, Teksid's will be increasing its Aluminium business to its parent from 60% to 80% over the coming years, across all its international assembly operations. Steel products will grow as natural consequence of global TIV increase, with approximately 45% of capacity directed at FIAT.

The Chinese JV operation with SAIC has historically provided the best EBITDA at 20% of top-line revenue. A relatively cautious earnings forecast that maintains a flat revenue, loss-making 2009 & 2010, pulls the group back into the black by 2012 with E0.7bn revenue and 0.2% trading margin. Thereafter revenue and profitability is forecast to increase as a result of serving FIAT-Chrysler growth and the increase in the broader market. This income effect greatly assisted by the CapEx (exc R&D) vs Depreciation profile which past its peak has a steady downward trajectory till 2014.

The obvious concern for Teksid has less to do with its parental demand than that of the exposure of its external client-base to under-cutting in-situ and new entry competitors. Recognition of the threat this has no doubt been the impetus to maintain a near 50:50 production balance, and improve its higher-value aluminium business. As was always set to be the case (now illustrated by Jeff Immelt's comments on China even in high-end products) EM region joint venture agreements are inherently set to be agreed, exploited and eventually extinguished by the host country given as its own (often state backed) companies become more adept and so reduce partner reliance. This is especially so the case for low-value, relatively simple manufacture such as cylinder head casting and machining.

The fact that Teksid and Comau earnings projections were combined in the April presentation highlights the manner in which FIAT HQ sees their corollary in developing new technology solutions and accordant production methods & systems. Perhaps as never before has their been such an inter-dependence so as to move their operations up the production and assembly value-chain.

But once again, whilst there may inference from Comau's multi-industrial sector view, FIAT investors – especially in the new Industrial business to be floated – will want to be informed well beforehand as to what that industry servicing plan looks like.

The obvious expectation is Teksid's move into aluminium vehicle structures and possibly acquisition of a carbon-fibre structures specialist via Ferrari connections and so mimicing BMW's purchase of the carbon fibre parts supplier SGL.

The company supplies automated production equipment and support services for FIAT Group companies and external clients, its 21st century ambition to be a leading figure in delivering plant solutions to emerging economies. Its main presence given the dynamic of the past decade has been in Latin America supporting FIAT's factory in Brazil (2nd largest in the world) & Argentina. Mercosaur accounts for 2/3 of its workforce. Its broad customer base spans Autos, Trucks/Bus, AgCon, Rail, Aeronautical, New Energy, Petroleum and Steel sectors.

The company has witnessed a level of restructuring between 2006-9 but perhaps not as vicious as in other divisions given the buoyancy of Brazil and the multitude of customer types and so multiple sector aligned cost-centres. Yet it also has seemingly instilled a much needed discipline by which the company could be better centrally controlled, using standard operating procedures across each sub-division, improving training, a 'Make vs Buy' philosophy which both drives down costs and ensures quality betterment and improved cash management. Presumably using a zero-plus based budgeting approach instead of possible previous rolling budget allocations – a very necessary approach.

In truth the April presentation gave little useful information, let alone detailed information, regards the business development approach each sub-unit would follow to as a combined entity reach its 2014 revenue goal of E1.4bn from today's E1.1bn. Simply stating that Auto would remain largely stable, a 300% improvement in 'Applications' (ie resources and so income rewards) is the target for Non-Auto sectors, whilst 50% rise would be seen in Services. Equally revenues would be largely static in EU & NAFTA, with 25% growth in Mercosaur and 200% in China & India. FIAT Group reliance to drop from 29% to 22%.

Looking across its 2010-14 forecast, expecting to experience a break-even in Trading Margin in 2010 from 2009's -3.8% loss, it moves on to 1.2% in 2011, 1.6% in 2012, and doubles 2 years later.

With Autos effectively stable, AgCon vehicle build solutions essentially recycling conventional technology, the large worldwide infrastructure projects worldwide in Rail* ongoing yet toned down, high-cost New Energy projects exposed due to national subsidy cuts, Comau may well have to overtly lean on Aeronauticalll programmes such as Embraer's lower cost private jet order book and the slow rebound in Petroleum and Steel sectors as they appear, any cost saving enablers very welcome given the slow early phase profitability margins expected in those safe-harbour sectors.

[* NB Comau is expected to play a part in Luca Cordero di Montezemolo's ambition to create a private high-speed rail system in Italy].

As part of what should be FIAT Group's exploratory vanguard in advanced technology production systems and as a pathfinder instrument for technology transfer Comau appears to require better guidance and transparency if it is to play a seemingly necessary lead role in the new Industrials division.

Agricultural & Construction Equipment (CNH):
CNH manufactures and retails a broad spectrum of specialist AgCon machinery, typically includingg CombineHarvesterss, Large Tractors,Ancillaryy Crop items, aswell as Light & Heavy Earthmoving machines.

It proclaims to have enjoyed a smaller but more steady and sustainable business model compared to the 'boom & bust' of (what it sees as) its main rivals of America's Caterpillar and John Deere. [NB Though unlike CAT, John Deere maintained improved performance over CNH in 2009, at 5% RoS on x2 of its Operating Profit – Thus JD still the effective benchmark]

AG has been its primary springboard with its previous acquisition of competitors it sits as either a leading or Top 2 player in Europe, North America & Latin America, with a fall-off to 5th in RoW markets, big name players undermined by different agricultural regimes (smaller holdings) and the importance of either historical local manufacturers or lower-cost brands from Japan, Korea and China.

Global commodity prices undermined equipment acquisition as the momentous rise between 2006-2008 in crop and food stuff prices encouraged sales and procurement orders only to be cancelled by the sharp deflation as the western recession hit. The fiscal steady-state of the economy generated by very low broad inflation levels in the west and reducing inflation in EM regions sets the theoretical scene for a more stabalised agricultural economy as commodity prices – even if historically high - settle-out on longer-term trends.

Thus large Tractor and Combine sales in NA are expected to decrease across the next few years as new machine assets are deployed and typically constricted access to funding by western farmers necessitates the extended use of older machinery, which in turn boosts productivity margins. In Europe the situation looks 'flat', due to credit conditions and the retraction of state subsidies on bio-fuel cultivation.

In direct contrast the BRIC & other EM consumption demand for arable and live-stock ever increases, and so underpins the short-term and long-term pictures relevant to differing investment horizons for both FIAT/CMH itself and its group investment backers. This demonstrated by the promise of exploiting Brazil's Central Plateau and thus the E1bn AG & CE plant in Sorocaba, with a production capacity of 8k units per year machinery and the continent's largest parts fabrication/distribution base. The CIS offers the greatest immediate growth potential, yet also the greatest threat by historically entrenched local firms offering more antiquated (but crucially easily fixable) machinery. Here the story will be to convince operators to switch to CNH via easier credit availability and proven product support.

With regards the demand for Construction equipment, unsurprisingly the same proffered story of BRIC and EM demand pull, with the optimism of a recent rebound in NA housing starts diminished as purchase tax incentives are retracted. In Europe the construction industry continues to wain, especially in what were the fast developing regions of Spain, the CEE, with little or no off-set from the stagnant economies of Northern nations. Brazil remains a shining star as major infrastructure projects expect to come on stream, the slow state backed ideals probably over-taken by private enterprise (eg as in the case of the Acu Superport) in readyness to host the World Cup & Olympic Games.

Given the importance of Brazil within the EM good news story, what appears significant NPD development has been put in place across all Vehicle types and relative power/size segments so as to continue feeding from the Brazilian trough and keeping its dominant position.

Industrial and commercial JVs continue to flourish in Russia, Turkey, Uzbekistan, Pakistan, India, China & Japan; with and without equity cross-holdings depending on partner size and long-term intent, the most recent of which is an extend agreement with Kamaz (as previously mentioned).

Cost containment and reduction in group purchasing through 2008 and 2009 was highlighted by FIAT, a notionally expected result given the deflationary consequences from the financial crisis across much of the upstream supply chain between material extraction, processing and component manufacture. Given FIAT's ownership of Teksid, Magneti Marelli and Comau, group gains in this area were expected to be better than far less vertically integrated peers, and seemingly have been. Though investors would have presumed to see a far greater smoothing of the deflation curve to instill a sense of internal cost control and so easier modeling of management's forward budget. However it seems that FIAT were instead more avidly keen to show that substantial drop in input costs that perhaps present a better story than the one available for internal management accounting.

However, such cost savings are at risk of being lost as the FIAT workforce increases – up 3% in Q1 alone. Much is of course seems typically politically motivated (by the MoED), FIAT used as an employment and economic steadier, with Marchionne proclaiming he would like to see FIAT double its Italian production capacity, a tacit aspect of his negotiational stance for labour flexibility with the national unions. Yet there is once again the danger that jobs are being created for their own sake, instead of direct added-value to the company. This seems the case with the Q1 activity with 5,600 new positions allocated.

Whilst the continued vehicle demand pull of Latin American and FIAT's need to fight for regional market share compel job increases in a buoyant market – even if over-egged due to political pressures, conversely the 2,600 additions to 'Materials Handling' in Italy and Serbia beg the question about direct (monetary) value contribution; even if partially off-set by the loss of 1000 'near age' retirees. Indeed during a period of re-alignment – especially regards EU production – the addition of upstream jobs could seem almost perverse, especially given that no measures of firm economic up-tick are present that could ordinarily arguably call for the additional manning of upstream activities ahead of an expected strong down-stream demand.

Chrysler LLC:
The potential for FIAT-Chrysler synergies on technical and geographic grounds is obviously highly rewarding, especially if achieved on large project formats quickly and efficaciously. The scope has been identified and work under way evaluating and implementing cross-company advantage, the creation of a Chrysler small car product line, with Dodge use of LCVs and Iveco commercial vehicles central to its early success in North American.

Not since the Iaccoca turnaround of the early 1980s has so much been at stake for Chrysler's near, mid and long-term futures, so early delivery of the compact car formula (in the previous Neon vein)
should if taken into buyers hearts should provide the working capital and possibly more to fully execute the plan. The central concern is of course maintaining the sharp rise in market share Chrysler enjoyed as government funding allowed it to incentive sales of its aging and out-moded product range. A WSJ report showed a 300C with $2k cash-back, but bargained hard the dealers know they much offer far more on what are increasingly comparatively expensive product only devaluing on the forecourt.

Thus Chrysler's aim to to maintain its share by substituting 'give-away' larger vehicles with price stable compact cars which critically do not undermine Chrysler per unit margins with above industry (or even parallel industry) average warranty costs. Given the need to speedily re-engineer Lancia cars to NA regulations and specifications, that may be much to expect.

Financials -
FIAT Group
With regards to cashflow – as previously mentioned - FIAT Industrial division added a further E-0.3bn in debt over the Q1 2010 quarter, increased from E-4.418bn to E-4.707bn.

The company highlights the Car section's: a) positive cashflow from operations, b) efficient factory and dealer inventories levels, c) an acceleration in recovering scrappage scheme receivables (E448m outstanding at Q1end, fully recovered by end Q3), d) Capital Expenditure balanced with Depreciation & Amortisation.

However, there has been a E-248m reduction in Working Capital availability so although positive at E262m there appears a degradation in re-cyclable liquid funds. The exclusion of Vehicle Buy-Back costs in the D&A (and balance associated Capex) items generate opaqueness, since its latter-day inclusion would skew direct comparison of the figures, thus may now have been excluded to provide a greater perceived balance. This 'balancing act' would have impinged on Capital Expenditure allocation and spend, detail of which would have been useful to gauge any latter-day income slippage.

The scrappage scheme receivables schedule no doubt partly reflects the various scheme end-dates of different nation states, but there must also be consideration that FIAT may have re-structured its internal capture of these receivables to flatten/smooth-out the income curve across the first three quarters of 2010, so assisting positive income latterly when the income effect of scrappage would have nominally previously ceased.

The Net Industrial Cashflow position (including CapEx and the buoyancy of investment receipts) showed a E-335m position. Add the tailwind of a positive FX conversion effect and the E-0.3bn (actually E-289m) change in Industrial Net Debt to E4.7bn becomes apparent; this garnered from direct bank debt, as opposed to the higher cost of funding from capital markets, so also reducing Cash Maturity demands.

However the Financial Services section has a debt level almost 260% bigger, at E12.1bn, up E0.6bn since YE09.

The obvious task of the Consolidated Net debt of E16.8bn, up E0.9bn from YE09, is to cushion the Group through what are still tentative times regards liquidity availability and use.

Looking at the larger Gross Debt picture, in addition to the reduction in Cash Maturity levels, ABS/Securitization levels rose to attain lower cost funding as did the Sale of Receivables (ie Factoring) so as to ensure earlier though reduced level receipts. Gross Debt was reduced between YE09 and Q1 by E0.2bn, sitting at E28.3bn.

The greatest concern lies with the debt maturation timescale, since the largest sum of E5.0bn is payable by Q1 2011, E4.7b of which is due by end 2010. The following year sees a similar sum, only after which debt maturity levels soften considerably. Off-setting this is of-course Cash & Marketable Securities, and here it must be noted that E2.3bn of the E3.8bn Sale of Receivables valuation has been sold to divisional finance arms, so effectively recycling the debt through the conglomerate.

In the Q1 presentation FIAT SpA stated it planned to reach a Trading Profit > E1.1bn and cut debt down to above E5bn.

Financials -
Chrysler LLC

A year on from its Chapter 11 restructuring thanks to direct and indirect Washington support by way of equity stakes, debt reduction and artifical consumer incentives, Chrysler appears ever healthier. Recent Q409 to Q1 2010 measures in:

US & Canadian Market Share: up from 8.1% to 9.1% & 11.6% to 13.7%.
Net Revenues: up from $9,434m to $9,687m
'Modified EBITDA': 398m to 787m
The latter of which boosted income and operating profitability ratios (rated against % of Net Revenue). This in turn had a massive effect on the bottom line
Operating Profit/Loss: from $-297m to $143m
Net Loss: rising from Q4's $-6,291m to Q1's $-197m.
Cash (& Equivalents): from $5,877m to $7,367m
Liquidity: from $8,278 to $9,768m

This then seems an explicit accounting basis to demonstrate a first time positive operating profit for the benefit of both the capital markets and government. Yet realistically that was achieved due to the substantial effect of the 'Modified EBITDA' which appears to have eradicated a host of normally baked in items for company and sector comparison; including: Interest, Taxation, Depreciation and Amortisation elements, aswell as negating Employee Benefits costs, Restructuring costs, Accounting Principles gains & losses and other financial loss.

In the company's favour the liquidity cushion has grown to include: the aforementioned cash cushion at $7.4bn, plus the US Treasury loan at $1.7bn, plus a Canadian EDC loan at C$721m; totaling $9.8bn

Conclusion -

As seems obvious, in reaction to the previous financial crisis, consumer retraction and subsequent capital markets contraction, FIAT saw the opportunity to necessarily re-shape the organisation so as to better benefit from the eventual economic upturn. Thus it presently resides in a transitional operational phase which whilst good for the mid and far term generates operational disruption that must be managed in as proficient a manner as possible; the interplay between product offering, production capacity and financial reporting all important.

Thus a diagnosis of short-term pain for the reward of long-term gain.

Managing expectations is precisely what the 2010-2014 Five Year Plan presented in April was intended to do, to show a gradual return to business profitability and sustainability. It is meant to instill confidence of FIAT's grasp of the big picture and its capability to manage its future.

Yet, for the near-term at least macro-economic headwinds continue and dominate, undermining what should have – and previously looked like – economic traction in the broader western market economy that should have provided for FIAT's (and others') first steps.

Headwinds include heavy reliance on the Italian car market which itself will suffer from the combined effects of retracted scrappage incentives and the consumer fall-out of governmental austerity measures. This similar to other southern EU member states such as Greece and Spain, but with the obvious consequences for a nationally economically engrained domestic car-maker (vis a vis the relative small impact of Spain's SEAT's impact on VW's bottom line).

Furthermore beyond the purely economic negative impact, it is expected that the low-level emotionally charged social fractiousness stirred by social upheaval (such as national labour reforms) could add to the retracted Italian consumption pain. The remaining private buyers 'consumption patterns' consciously & sub-consciously negating Italian goods in preference to better perceived substitute competitor vehicles – ie Renault/Dacia, (ironically) SEAT & Hyundai-Kia.

[NB Thus FIAT must tip-toe its way through the public flack with well conceived tactical PR and marketing campaigns, the content of which highlights both the need for change relative to the global context and yet illustrates the opportunity that lies ahead. (ie very much in the mould of Ford's 'Bold Moves' campaign a few years ago, as part of its managing its transitional identity].

FIAT views the EU market as shrinking by -15% across 2010 with most prominent falls in Germany and Italy, yet still believes it will maintain its current slice of market share, presumably thanks largely to the new Uno

Tailwinds that support FIAT SpA's near-term corporate valuation are few and far between at present and only really include the boost from FIAT's hold on Brazil's various vehicle markets: Cars, LCVs, HGVs and AgCon markets, these in turn supporting the in-house supply-base of Teksid, MagnetiMorelli and Comau. Brazil is recognised by FIAT and observers as its revenue crutch during this tight period.

As the FIAT car-parc across the EU ages so the company must seek to serve both its recent buyers of new cars and indeed serve non-affiliated used FIAT car buyers with service and product packages which can both achieve additional revenue streams and importantly retain their loyalty to the brand, so assisting latter-day new car purchase levels and buoying used car prices which have an inter-relate to new car residual pricing.

To off-set EU slow/stagnant demand conditions, exploring what can be done in the after-market arena for FIAT vehicles should be a topic that rises up the corporate agenda, especially as the cars often pass into the hands younger drivers across the EU. Thus replaying the decades long Italian experience of latter-owner vehicle modification would put FIAT in the driving seat in this sector, and allow it to grasp a portion of the income that both specialist and generic motorist outlets have grown in recent years especially across Italy, UK, Germany, Benelux and E.EU. Having re-introduced the Abarth brand it seems only natural to replay Carl Abarth's original raison d'etre with new market-relative bias toward the cosmetic alongside performance.

Keen to show that FIAT is much more than cars and LCVs, during these consumer constrained times it was no surprise when the announcement was made to split the conglomerate to gain both better management accountability and internal and investor transparency.

The near term will be no doubt tentative and internally fractious as the soft-culture in both management and labour camps that gave certain freedoms and enabled the possible massaging of divisional balance sheets (to suit the group) gives way to something far more exacting in cultural and accounting senses. The spirit of internal competitiveness hopefully generating something close to idealised 'co-opetition'.

This evolution is what all facets and members of the investment community must surely wish to see emerge, as it both monitors FIAT SpA value 'as is' today and closely follows activity to forecast the mid-term values of separately publicly listed (and so funded) Cars & Industrials entities.

Here in the UK, this weekend sees the social events calender offering both Goodwood's Festival of Speed, glorifying Italian motorsport achievement, and the Royal Henley Regatta. The events might well see either Elkann, Cordero di Montezemolo or Marchionne individually rubbing shoulders with other seniors in financial and industrial circles. If so, the innate irony of a certain yesteryear FIAT car would not be lost on them. 25 years ago the Rega*ta Weekend station wagon experienced very different receptions in North vs South America, so laying the market terrain until now.

Watching the 'Rowing Eights' from the river bank might remind them of the struggle for supremacy amongst 'Western Eight' auto players, and indeed others, for the 'mid-horizon' promise from the USA and RoW. More presciently, the blue bow-ties and blazers of the might convey subtle messages of the Ford and GM opposition. Retro-chic Boaters may be order of the day for the HRR crowd , but if subtle overtones are played out, a tube-transported roll-down Panama may be more suitable headgear given FIAT's need to deploy modern media, conjoin the Americas and channel FIAT's global trade.

For investors, the 2010 – 2014 presentation was indeed compelling and made acute sense for each business unit, the 2 new parent companies and for Exor.

Yet much like Henley's bankside view of a sculling race, the grand romantic picture only skims the surface of the necessary hard graft and exemplary execution.

The manner in which FIAT SpA deals with the short-term struggle will convey its longer term abilities...that is the real 'Italian Job'...

...and, as ever, a truly independent, London-based investment-auto-motives will continue to comment on FIAT SpA & FIAT-Chrysler progress as neccessary to keep the investment community informed.