Friday, 29 October 2010

Micro Level Trends – UK Trade & Investment – From the Middle East, to Infiniti & Beyond.

It is during the more testing of economic periods – such as now – that the importance of long-established royal relationships between countries comes to the fore; in re-strengthening the intra-national basis for mutually beneficial trade, industry and commerce.

As seen from the S.Korea meeting, whilst G20+ politicians discuss exactly what the architecture of international agreements, and diplomats are tasked with shaping the building blocks that form cross-border business relationship building; very often the cement which forms necessary strong bonds is mixed and spread at the social level between royals.

This week the the Queen, heading the House of Windsor, has hosted the visit of the Emir of Qatar, heading the House of Al-Thani. The important implicit pretext of maintaining mutual interests between the UK and Qatar and ideally strengthening the level of commercial interaction.

Such initiatives are welcomed at a time when the very notion of national sovereignty – and its financial and diplomatic power - has re-emerged via the important deployment of SWF monies as a major contribution in stemming and rebuilding the previous loss of confidence in capital markets and the economy at large. Whether that was the Middle-Easts re-capitalisation of CitiGroup, or indeed the re-capitalisation of General Motors (North America) with Canadian governmental finance made available, presumably under the ultimate auspices of the UK's Queen's Council.

Thus, we see the very real relevance of 'global back-stop' sovereign governance.

The desire to grow and protect historic trade routes between the 2 regions (as part of the East-West network) and the early 20th century discovery of oil in the Peninsula, has meant that typically the UK's relationship with the Middle-East has been low-key but strong. The tribulations such as concerns about yesteryear UK imperialism, the Suez Crisis and the early 21st concerns regards international terrorism, in the bigger historical context, problems that were (and will be) overcome.

In recent years, Qatar has taken a leading role within the Middle-East in building ties with the UK, its efforts building upon those by Bahrain and Kuwait in the arenas of real estate & automotive (Aston Martin Lagonda). Qatar, through the QIA SWF monies and other vehicles, has (as the FT well illustrated) in 2007 invested a 25.9% stake in Sainsbury's, bought 15.1% of the London Stock Exchange and took a lead share in the (now 'Mutually Royally Re-Worked' and aesthetically far improved) Chelsea Barracks redevelopment scheme that same year. In 2008 helped to underpin Barclays with a 6.8% stake. And in 2010 bought Harrods (from Egyptian Mohammed Al-Fayed) aswell as the Park House site in Oxford Street. These purchases therefor nearing £7 billion.

Of course, such deals are part of a larger, mutually beneficial, reciprocal arrangement which sees portions of trade monies effectively recycled between the UK and Qatar to buoy their respective balance of trade figures: the UK importing CNG and LPG from Qatar via its South Wales storage and distribution centre, as part of its desire to nurture trade and to burn cleaner fossils fuels for its own energy needs.

Nothing mentioned thus far is a revelation, but beneath the surface of such highly visible UK and Mid-East relationships is an ever growing level of smaller scale trade, something noted some time ago by investment-auto-motives via observation of central London retail, and recently highlighted by the FT's Video section which 'snap-shots' Egypt's now outward-bound stance; with examples such as Azza Fahmy (jewellery), Sewedy Cables (industrial electrical) and Citidel Capital (PE firm) based in Cairo. Thus, Egypt and its Arabic neighbours are becoming more export orientated with the confidence to use both local private equity funds and buoyant company balance sheets to make their mark on the international scene. Perhaps in particular London and the UK scene given good historical links and Britain's reputation for speedy economic recuperation during times of economic malaise.

But perhaps the most high profile case in point sits within the automotive retail arena.

Nissan's Infiniti brand launched in the UK in August, making a high-profile appearance on Piccadilly, located opposite The Ritz hotel and next-door to Audi, all as a firm positional statement. This showroom acts as the prestige flagship store, and accompanies a more operationally centric sites in Reading and Birmingham, with plans to open further showrooms in Bristol, Cambridge, Nottingham, Stockport, Leeds, Newcastle, Glasgow & Belfast – so targeted points country-wide.

As part of its marketing initiative to demonstrate Infiniti's soul, the spirit of Japan's 'Adeyaka' has been espoused, the term indigenously used within old Japanese to reflect the essence of 'Japanese artistry', and different interpretations of which are used to convey the persona: from use of Japanese calligraphy to mimic the feature lines of its cars, to the idea of a 'boutique hotel' as part of its showroom image, to an in-house magazine titled Adeyaka that is intrinsically art orientated.

Of note is what appears a collaboration of Japanese & Arabic cultures, with website and magazine graphics displaying 21st century computer-created renditions of traditional Islamic geometric patterns, and the Adeyaka soundtrack seemingly a mixed overlay of calming Japanese and Arabic melody. The use of a cross-marketing exercise with Cirque du Soleil, also conveys the central brand notion of 'a modern twist on a classical theme': raison d'etre of the French acrobatic troupe

The brand arrives as part of Renault-Nissan's strategy to grow Infiniti beyond its previous US boundaries, where the brand was ostensibly devised as effectively a re-badge exercise to utilise Nissan's large car platforms and take on Toyota's Lexus and Honda's Acura. Initially launched with one overtly conventional car the range broadened via the addition of smaller 'badge-engineered' products. The lack of sales success in Japan and the US augured more radical design thinking resulting in the idiosyncratic 'curvy' J30: offering a very different premium car aesthetic as a way to try and stand out from Japanese rivals. However, this strategy the effort failed to truly excite prospective US customers, and the brand whilst holding a steady in sales terms never reached Acura figures, and so very wide of Lexus numbers.

Yet, Nissan recognised it would be a long slog, with the Renault tie up in 1999 adding renewed impetus regards financing, resources much if which is strategically driven by Renault's own failed 'on-off' efforts thus far to create an up-market French brand, having tried to offer avantegarde premium Avantime and Vel Satis models, with Laguna as the supposed 'bridge'.

Hence, the strategic and very necessary role of Infiniti as the R-N group's premium brand has come ever greater to the fore over recent years as mainstream car sales took a heavy hit and additional/complimentary unit margin profitability has been perhaps the prime assessment criteria in the midst of the E3bn of French government support and investor calls for factory closures. Moreover, the recent technical cooperative agreement between Renault-Nissan and Daimler, not only aims to provide both parties with reduced cost quality components, but should critically allow Infiniti to access 'non-obvious' Daimler technology, just as the Germans look to utilise added-advantage from Infiniti's Japanese sourced technologies. But critically, R-N & Daimler talks will have discussed how Infiniti can be used to target BMW & Audi (hence its Piccadilly 'confrontational' positioning). So as to draw-fire in the long-term from Daimler.

This is undoubtedly a welcomed move by GCC fund managers given that Daimler itself is 9.1% owned by Abu Dhabi's Aabar Investment (Aabar itself interestingly taking 40% of Daimler's Tesla stake) and Kuwait's Investment Authority holds 6.9%; with Renault-Nissan holding 3.1% (as at 31.08.2010).

This may appear to undermine Qatar's own stakeholder interests in VW Group, owners of Audi, but in reality the sales volume differential between Audi and Infiniti is presently huge, with Audi due to grow further yet driven by the Chinese market, other EM regions, new entrant vehicles like the sub-compact A1 and new conventional A2 and further economies of scale from the VW group at large. So whilst Infiniti appears to 'sit on the doorstep' of Audi, there is little threat to the Audi (thus VW Group) income stream - and so the size of Qatar's SWF dividends from VW AG - given the bigger picture dynamic.

In contrast to the US experience, Infiniti did however enjoy greater success in the Arab world, largely due to the credibility and respect that Nissan had build-up over the preceding 20 years with the hardy 4x4 Patrol and conservative but ever-reliable sedans. That engineering edge gave Infiniti a gateway into the region which it took, and although still behind Lexus, ahead of Acura. In tandem with this for global publicity purposes it used product placement in the film 'Three Kings', which set in the first Gulf War, set Infiniti convertibles amongst Rolls-Royces et al amongst the disposed despot's luxury car stable amongst.

This then sets the Arabic context to the Infiniti division's global sales aspirations, setting itself out as the alternative brand to the obvious German and Japanese, with efforts towards additional markets primarily in Western Europe, Russia and the higher net worth regions of Asia.

Thus, whilst the RymCo UK proprietorship nameplate is somewhat unknown to the casual showroom visitor in Piccadilly, it should come as little surprise to the worldly observer that the UK market reach for Infiniti is financially backed by the UK arm of a locally publicly listed Lebanese company: the Rasamny-Younis Motor Company. RymCo UK seemingly employing a mix of auto-retail experienced senior management, the average fixed cost-base reduced with the use of enthusiastic younger sales staff. The sales onus is on the level of personal service offered (with valet car pick-up & delivery) along with the Infiniti (entry-strategy) staple of offering a highly specified car for comparable cost to its lesser equipped claimed competitors.

RymCo is Infiniti's partner in its home territory, and the most important vehicle distributor/dealer in the Lebanon. The company was set-up in 1934 and distributed Fords, GM (Holden), Chrysler, aswell as consumer durables such as Colgate toothpaste and Palmolive soaps. Honda and Datsun/Nissan was added in the 1960s, whilst afterward truck distribution and sales for GMC, Nissan Diesel and China's FAW became important contributor to turnover. It has been present in the UK for some years, and today operates across the Middle-East, the US, Japan, Europe and China.

[NB The FAW interaction begs the question that does RymCo see itself as a foreign-region importer of Chinese cars and trucks in due course].

No doubt RymCo also prides itself on the fact that whilst the financial crisis caused untold contraction to western enterprises, seeing car sales collapse, it was able to boast of Lebanese-market unit sales growth in cars of 74% for 2007 (vs 2006) & 84% for 2008 (vs 2007). (Thereby gaining public recognition from Carlos Ghosn, CEO of Renault-Nissan, and himself of Lebanese parental extraction, though born in Brazil)

Though many Middle-Eastern countries and firms have displayed a renewed confidence and improved ability, it can not be denied that (as the FT reports) there are industrial structural and cultural challenges to be overcome.

The executive director of Egypt's government assistance agency highlights the restriction of middle and large capital funding at the local level for foreign investment. An additional challenge is that of the typical foreign-held viewpoints regards the operational commitment by Arab businesses to FDI projects, especially regards their desire for a use of their local labour force so as to stimulate local county-scale economies.

The answers to these and other questions should be addressed firmly and clearly by Arabic businesses and rationally absorbed by foreign representatives seeking FDI, so as to ascertain the true and feasible synergies between the interacting parties, and importantly not to create an unintentional stalemate and so loss of faith between what are typically more urgently motivated westerners (seeking to tick the boxes of development plans) and the more philosophically orientated middle-easterners who seek a level of security and stability to be delivered by outside of their direct cultural influence and so comfort zone. Thus, in the question of expectational manufacturing FDI into Europe or indeed Asia, Arabic companies may need to demonstrate their own manufacturing cost base and national development ambitions time and time again to show their rational for domestic production if it appears a sticky issue.

It is no surprise that to date Arabic investment fields in foreign lands have been typically real-estate (eg Chelsea Barracks), reputation trusted retail (eg Harrods), large corp banking (Citi & Barclays) aswell as reputational global manufacturing (eg Daimler & VW).

These are undoubtedly lower-risk options in what Arabs probably see – for good reason - as a world of higher-risk possibilities. Understandably investors are forced to trust either the asset-base's innate value, the integrity of the management team, and ideally a combination of both. Add a cultural difference into the equation and what appears of medium risk to a western investor possibly borders exotic to a more cautious (wo)man from the Middle-East.

To this end, international success stories such as RymCo - and similar scale peers from around the Arab-world - should serve as models for the small yet ambitious enterprises; ones that see themselves with a place within the regional, continental and world-wide business and investment arena.

This should ultimately be a win-win for Anglo-Arabic relations as British companies identify low-cost sourcing and/or manufacturing opportunities generated by an increasingly skilled Arabic workforce using modern methods, with the possibility of a counter-point skills transfer sees the previously lost-skills of specialist crafts fields either brought back to the UK or indeed possibly newly introduced.

Today Arabic SWFs and cash-laden companies cautiously seek new investment opportunities in foreign climates, both within their usual asset-classes and beyond; this exploration undoubtedly governed by the need for mutual synergy relationships that importantly allow for what they see as appropriate levels of shared return at financial, corporate development and structural development levels.

Thus it does not seem too far a point of conjecture to suggest that as the Qatari Emir rested in Windsor Castle, that his thoughts turned to the efforts and experiences of Lebanese RymCo, its UK HQ situated only a short distance westward down the M4 corridor in Reading.

For the brighter future of the UK, Qatar and Anglo-Arabic relations investment-auto-motives does indeed hope so.

Thursday, 21 October 2010

Macro Level Trends – UK Eco Investment – Incorporating Green Banking

In the midst of a Comprehensive Spending Review which markedly alters the relationship of the state and the British economy, the ideology of a new state sponsored 'Green Investment Bank' dedicated to eco-commerce has understandably shrunken. The overtly grand aspirations for eco-tech that were set before the financial crisis – and which swallowed massive sums in direct and indirect aid - has had to be trimmed to reflect the new financial and political reality.

The headline (figure) of which has been a reduction in available monies from £6bn to £2bn. But such adaption of size, scope and roles of various systemically critical economic agents is, in the Green Bank's case, not necessarily such a bad development. As with much else of Chancellor Osborne's policy, the core action is consolidation of effort and finances for greater applied force, consequential influence and ultimate achievement.

From a global eco-competitiveness standpoint, the UK undoubtedly lags; given the progress made in Asia (ie Japan, S.Korea), Europe (ie Germany, France) and the US. It is said that the global market is worth $3 trillion, of which the UK holds less than 5%. Current UK exports equal £10 billion, versus Germany's £50 billion. And by 2020, it is estimated that more Germans will be working in Eco-commerce than within its car industry. [NB investment-auto-motives suspects German policy is to use its own auto-industry as a technical and organisational 'spring-board' toward that aim]. Thus the “ability to share risk and foster innovation” is noted as key.

The structure and methods of a Green Investment Bank was explored between January-July 2010 via a team led by (ex-Merrill Lynch) Bob Wigley, with Lord Stern advising, and a broad selection of contributors. As perhaps the prime vehicle for attaining the 2050 CO2 reduction goal of 80%, the objectives of that Conservative party generated Commission were to:

- Recommend a bank funding mechanism which includes both 'Green Bonds' and Private Capital
- Ascertain the likely value/size of funds to be managed (using a US model with 10:1 ratio)
- Identify the Bank's investment criteria centred around high-growth and low-carbon companies.
- Offer guidance on Bank Governance relative to any differences in Public & Private Oversight.
- Understand how to ensure an appropriate geographic balance of investment

To summarise the Commissions findings were:

- That £550 billion is required by 2020 to achieve a sustainable low carbon economy.
- Interventionism should be used to overcome 'market failures & investment barriers'; primarily:
“market investment capacity limits”, “limited utility balance sheet capacity”, “political & regulatory risk given policy-driven returns expectations and the history of changing policy”, “confidence gaps for investors linked to technology risks / policy transparency / high capitalisation levels”, “the challenge of making numerous but individually small projects attractive to institutional investors”.
- Interventionism tooo also be used to: “ensure de-carbonisation targets are met”, “energy security & growth”, “reduction to exposure of high/volatile fuel prices”, “creation of a large number of businesses and jobs”, “address underlying externalities”.
- Operationally it should work under strict guidelines so as to not 'crowd-out' the private sector:
“to leave the private sector to open and execute all viable deals, only acting as a public partner in deals that necessitate involvement to attract private investment” (for the overall public good),

Thus the Green Investment Bank (GIB) seeks to alter the eco-investment landscape, by managing & ideally mitigating investor risk, rather than increasing the current hi-risk / hi-reward quotient.

Such a mandate comes as no surprise, though free-marketeers may be rightly concerned about the level of interventionism plied: at what point does positive interventionism become state direction ?

Yet, the call for co-ordination and the under-pinning of investor confidence to create tomorrow's 'eco world' is hard to fault; especially given the recent past. Creating an investor environment of relative stability via a more harmonious PESTEL equation seems to be key.

As seen by the financial crisis and bursting of the housing bubble, for far too long the tail of the capital markets wagged the dog of the real economy. These still recent events and their consequential concerns re-highlight the very rationality behind the call for stability that brought about the creation of the original (olde worlde) capital markets. Then newly formed capital markets in Persia/Levant, Florence, Amsterdam and London that had to deal with the task of major economic reform given changing PESTEL conditions. Their remit: to create a commercial and trading environment in which harmonious relationships would serve all stakeholders - banking, commerce and the nation at large.

Of course, the changing landscape of events in diplomacy, trade routes, new goods, adapted and new vessels aswell as the core enterprise organisation and the very nature of competition honed investor perception, much as these and many more factors do today. But objective fundamentals largely ruled even if short-lived 'land-grab' and 'commodity' bubbles periodically arose from the overt entwined polemics of disingenuous over-enthusiasm and self-interest feeding off of greed. But during those periods, a level of damage limitation prevailed, generally within the circumscribed and circumspect circles of wealthy merchants, Lloyds names and such. People who could afford to 'venture' portions of their wealth. Today's capital markets are made-up for the most part by the paper-wealth of those many millions who realistically cannot afford to 'venture' – the 1929 crash being the stepping-stone between these 2 worlds. Thus whilst the dynamic of the investment foreground appears similar, the background is not.

Today, more than ever, the requisite harmony between banking, commerce and the nation is critical, done so set against the prevailing disruptive yet opportunistic winds of macro and micro change.

Beyond the prime aim of assisting in reaching CO2 reduction targets (80% by 2050), surely this is the philosophical remit of the new 'UK Green Investment Bank', such sentiment behind its very ethos, structure, capability and delivery.

Yet, how best to achieve this is the hot-topic of the day, with two ministerial level camps emerging debating the prime aspects of Role & Responsibilities', 'Bank Funding Methods' and 'Marketable Products'.

[NB To the layman recent press reports tend to infer that the split may appear to be over 'free-markets' versus 'overt-interventionist' ideologies*. (See Post Script below). Though as seen by the report, this not in actuality the case given the 'PPP' format the GIB takes].

The devil then instead appears to be in the detail of the recommendations:.

Roles & Responsibilities:
1) To amalgamate and centralise the efforts of CO2 relevant quangos, retaining core skills.
2) To absorb recommendations from the recent National Audit Office Report
3) Further analysis of the role of GIB across the UK and the use of devolved administrations
4) Implications of GIB for Government Policy; esp regards Infrastructure UK.

Funding Methods:
A) Gov't Funding for dispersion of Grants,
B) Operational Funding via Green Bonds, Green ISAs, GIB Debt Fund, Levy on Energy Bills
C) Initial GIB Capitalisation to support A & B, via Private & State-Owned Bank capital injections, Use of Bank Levy and Bank Bonus Taxes, Proceeds from Sale of Government Assets and UK Revenues from EU ETS Auctions.

Financial Products offered:
1) Early Stage Grants,
2) Equity Co-Investment,
3) Wholesale Capital,
4) Mezzanine Debt,
5) Purchase Offers for Competed Renewable Assets,
6) Purchase & Securitisation of Project Finance Loans,
7) Insurance Products,
8) Long-Term Carbon Price Underwriting.

Such debate is of course very necessary as part of a process to exactly hone the very nature of the enterprise. To enable its efficient start-up (via an Act of Parliament) and be capital markets relative and sensitive. It had been hoped that process would have completed by early October, ahead of the Comprehensive Spending Revue, but no so; it is far more important to create the right form of entity than to hit nominal reporting deadlines.

The political and bureaucratic debate will continue, yet whilst creating the right framework for the GIB is vitally important, equally so will be its ability to act as an efficient investment catalyst when formed, in situ and operational.

Critically, the GIB must be seen to be highly intelligent regards the commercialisation fields of eco-tech and eco-service, and not simply as a second-hand recipient of knowledge (right or wrong) from private investor circles. This will of course span the various sub-sectors by which the CO2 reduction task is classified, including atmospheric discharge across: Energy Generation / Domestic / Industrial / Transport etc arenas..

Here, along with other eco-tech spheres, the importance of GIB knowledge regards the UK and global auto-industry will be critical. Knowledge that delves far deeper than the headlines of CO2 discharge responsibility levels. As both an incorporator of self-developed technology, an adopter of transferred technology, aswell as its potential as a tech-disseminator to other sectors, the industry must be recognised as a central enabler and facilitator toward the CO2 reduction ambition.

But behind the emotionally charged rhetoric and diatribe must be objective knowledge to understand the complexity of the issue.

Given the level of 'green-wash' and 'green-mania' previously apparent, the emergence of a green-tech bubble seemed inevitable, indeed investment-auto-motives believes that new entrant players in the western auto-industry today still enjoy a level of press-driven exposure which massages popular perception thus in turn intendedly 'over-drives' a company's market capitalisation levels which by supposed virtue of credibility then attracts government grants. Thus playing the 'capital markets game' which stalls on promises year after year, delivering little to actually 'save the planet', yet maintaining an illusion of progress.

The following cases provide an overview:

Tesla Motor has sold just over 1000 units of an 'eco-bling' novelty car with little functionality which has had a truly miniscule real-world impact, yet vaults its MktCap at near $1.8bn since it IPO'd 12% of the company in mid 2010; all on the promise of tomorrow. A recent SEC release states that it will run a JV with Toyota for a RAV4 EV, a replay of something Toyota did a decade ago which foundered.

At the opposite end of scale, as GM's IPO relisting approaches the new revelation is that Volt is in reality a hybrid vehicle, something that investment-auto-motives always suspected, so as to deliver a tenable car. The Volt hype spanned years, the new revelation thus demonstrates a cynical play on the public's and capital markets' 'naïve green consciousness' to date. Volt as a hybrid is technically and commercially more feasible, but gains no competitive edge versus leaders Toyota or Honda, instead essentially playing slow catch-up to the pack-leaders further the limited in-roads made by hybrid-Siverado, hybrid-Vue, hybrid-Malibu.

Nissan's Leaf EV compact sedan will be coming to market in late 2011/12, essentially trying to follow in the footsteps of the original 1997 Prius, but moving the eco goal-posts further. It too has had enjoyed massive PR exposure, but the reality is that whilst being based on a standard platform (bad technically but good commercially) it will represent only a small fraction of that platform's volume output. As an example the Sunderland UK plant manufactures 400,000 units p.a, exporting four-fifths. The accompanying satellite battery-pack plants set-up have a capacity of 40,000 units, yet it is expected that the first 3 years will see a real average output of 10,000 'married' bodies and packs; so approximately 2.5% of the Nissan factory's output – not (for the foreseeable future) the overnight game-changer that has massaged public understanding, nor indeed has set high-expectations for economic regeneration areas such as Sunderland.

The latter twin of Jaguar Land-Rover has had sporadic in-house access to hybrid technology for nearly 2 decades as part of the then Rover Group and Ford. There was chief engineer discussion regards the cross-brand learning and applicability of Mini Metro based 'series' and 'parallel' hybrid formats. This tech was considered as the ideal solution for Land Rover's military customers, providing little or no 'thermal signature' that could be traced for a vehicle in combat conditions. As to where such efforts sit today is of course confidential.
However, the Jaguar lag in developing an in-house or even bought-in hybrid system for use on XJ and XF has been disappointing. Execs with point to the instability caused by Ford's disposal of Jaguar on R&D policy, and by the financing concerns TATA Group had when it took-on JLR, but in truth Jaguar should have done far more far sooner as part of its own premium brand catch-up strategy.
The XJ LimoGreen project has been operating for some years now, yet even a very recent press article highlights that no introduction date has been identified, only that whilst the 'range-extender' (in reality read hybrid) technology is operative, the question is scale and so component piece price - the chicken and egg cycle. In reality it appears that progress on LimoGreen (which includes Lotus Engineering and Caparo Engineering) accords to the influx of government funds.
Many years ago investment-auto-motives openly recommended that as an interim 'saviour step' Jaguar ought to ally (formally or informally) with Toyota's Lexus to obtain much needed, speedy market differentiation, packaging hybrids into 'more classically sculpted counterparts' to a more contempoary Lexus. Instead Jaguar aesthetically mimicked Lexus in aspects of form and detailing, whilst directing efforts at modern diesels thus severely lagging in the hybrid stakes against the Japanese and relative to hybrid-demanding US, Chinese and Japanese customers. The recent article seems to indicate only more of the same expectancy for TATA-Jaguar to rely on government funds; funds which are now severely restricted.

Such initiatives when well intended and executed are indeed welcome as part of a multi-solution Eco reduction strategy. But it cannot be denied that the reality of CO2 step change will be smaller and more conventional than typically imagined, and primarily concerns ongoing eco-development of the ubiquitous, globally economically integrated and so value-adding, internal combustion engine.

These aforementioned 4 examples of 'tomorrow's world' must be objectively seen to suffer at best from corporate over-statement for brand differentiation, middling a reliance on government funds for eco-progression, and at worst, open to accusations of manipulation of eco-investor enthusiasm.

History illustrates that such investor-directed, auto-sector-disruptive, 'jam-tomorrow' enterprises are by no means without precedent; and every industry has had its cases promising radically new tomorrow's. The important matter today for the UK, the US and Europe is that industry-directed investment funds from whichever sources - institutionals, private equity, SWFs or even hedge funds - must be allied to truly plausible, reduced risk offerings across the vertical value-chain, and in both final product and service realms.

As the catalyst of conventional risk-averse investor consciousness, the new UK Green Investment Bank must demonstrate itself able to see through the 'eco-haze' so as to set UK and global eco-development on a firm footing. GIB must demonstrate its own credibility as an intelligent lender in this undeniably important field.

The long-term ambition of GIB must surely be to move from public ownership to private ownership via a private treaty sale or perhaps floatation in the years to come, when the more radical of the innovations and sub-sectors it backed becomes near mainstream, so leaving plenty of meat on the bone for the latter-day buyer(s).

Thus, it would appear an obvious step forward to provide the UK Green Bank with a 2-step growth path.

Initially, between 2011 and say 2015 limiting itself to the role of 'simple' grant, loan and other basic provider so a stable conduit toward larger eco-commerce, with an accordant in-built level of risk-aversion with perhaps covenant-heavy capital availability that implies. With latterly, 2015 onwards tranche by tranche disposal into private hands, developing as a broader 'sophisticated' products provider. Thus by implication of greater freedoms, broader access to UK and international capital markets, with a seemingly greater level of risk exposure theoretically counter-balanced by a more robust global economy and by then an engrained consumer eco-behaviour that is far less timid, and more exploratory than perhaps today.

Post Script*

To have delineated the new Green Bank as a copy+ of a conventional investment bank, it would have acted as market reactive conduit between the spectrum of capital markets and the commercial end-user. So obtaining liquidity at a market rate (LIBOR, other reactive-rate or bond-rate), and selling-on the available liquidity with either no a given margin, no doubt dependent upon the health of the market 'push', the commercial demand 'pull' and the required demands of the Treasury in its efforts to plug the UK debt deficit. This approach no doubt thus providing a sense of real-world 'eco-commerciality' whilst also demonstrating the UK's desire to be seen as a friend of the capital markets (so assisting credit-ratings) aswell as possibly presenting a Green Investment Bank vehicle / model / format which the UK could promote across the world; itself promoting the innovative spirit of the UK's financial services sector.

In contrast, to have delineated the GIB as simply a re-organised government entity, now with far less though centralised financial muscle, would have led to a sense of even greater incredibility both within Whitehall, but especially across the capital markets and industry / commerce. Yes, it would have no doubt had greater 'non-negotiable' powers regards regulation and interventionism, but interaction with the external business world would have undoubtedly suffered, so in effect pseudo-control without the real power to alter the direction, structure and growth pace of the UK economy].

Thursday, 14 October 2010

Micro-Level Trends – Auto Advertising – The Importance of Message Coherence for Credibility, and so Top & Bottom-Line Profitability

Typically investment-auto-motives provides a helicopter investment perspective towards industry, and whilst comment is made upon product and operations, focus is rarely given to specific areas of the internal 'value-adding' value-chain. Unless of course it has pertinent contribution to a specific period of performance, noted via its quarterly, bi-annual or annual accounts. These typically refer to: input cost changes, new product introductions, levels of plant utilisation efficiency or similar otherwise.

As a change of tack, the following comments upon the internally generated yet externally directed world of advertising, which acts as the consumer-orientated counter-play toward expanding sales, and so the top-line revenue; relative to all internally directed efforts which seek to maximise the differential relative to bottom-line income and residual net and per-share profitability.

Obviously, both sides of the supply-demand equation must work at peak levels to maximise the potential of the auto-firm, yet whilst much has been recently focused on directly measurable input costs (ie sourcing costs, inventory levels, labour costs etc), perhaps less focus – because of its nebular nature - has been directed at marketing, and specifically, the role and success of advertising. An area which has seen much change and given great debate outside of the automotive arena.

Advertising's fortunes have obviously been framed by the fortunes of the western auto-industry at large, but given the old adage that “necessity is the mother of invention” needs to be more thoughtfully considered; at both 'channel' and 'connection' levels. There are still good examples of auto-advertising out there, but equally there has been an increase in poorly directed and/or executed efforts, with blame no doubt apportioned to both parties: auto-client and ad agency.

But first, context:

Since the retraction of stimulus monies the automotive markets of the developed economies have once again dwindled. Up on 2008 lows, but not gaining the traction that many auto execs said the Triad regional markets would.

The contrast in the relative level of cut volume between the US and Europe has been stark, the American domestic players recognising the level of re-structuring needed and taking-out approximately 3 million units annually. Whilst simultaneously, the 'national champion' Europeans have made what appear very conservative contractions, as part of their own politically influenced agendas, expecting domestic buyers to re-inflate their industry once economic strength prevails.

So highly interventionist approaches of respective governments either side of the Atlantic. Yet, although EU contraction has been called for, it is only now that GM-Opel intends to close its Antwerp,Belgian plant after the lack of new investor interest. [NB the plant produces the C-segment Astra model which was only partly boosted by the CO2 car stimulus packages – relative to Corsa - but the platform production of which must now be aligned to true EU & periphery market demand, and take advantage of less costly component supplier options].

Caught between the credit-squeeze and collapsed markets all producers paired-back operating input costs – through supplier and labour re-negotiations – which enabled a financial rebound from Q209 to Q2 2010. However that much needed re-bound, whilst dramatic, was short-lived. This event a natural and foreseeable consequence to what was in reality manipulated US and EU auto-markets. This matter of particular concern to those manufacturers without, or generally less, exposure to broad EM coverage which presently counter-balances flagging home market performance.

The wise players made the most of the 2009/10 boost by conserving cash. Even going so far as to momentarily halt shareholder dividends to help the re-strengthening effort – as seen prominently by Dr Zeitsche at Daimler – for the sake of future growth. Such measured, investor-relative acts applauded by investment-auto-motives. Very recently, even Renault - the prime beneficiary of state interventionism, and so apparent 'anti-capitalism' has re-orientated 180 degrees. By selling its $4.2bn 'B-share' stake in Volvo truck it un-hooks itself from Paris's political expectations, any incumbent labour-relations headwinds and critically demonstrates its commitments to capital markets. This in contrast to GMNA's 'blunder' when it ran US advertisements inferring that GMNA had re-paid its bail-out monies in full. A less than true reflection of the proportionate pay-back reality that reportedly saw monies transferred from one government funded source to another.

Thus today, any economic observer recognises the irony of the situation where within the western automotive environment, the very basics of nationally-aligned classical economic theory has been turned on its head, even if GMNA is fighting hard to re-instate such conditions with its IPO.

Yet today, beyond the shallowness of any political figure-pointing and cat-calling, at the operational coal-face, western auto-makers are having to once again pair-back to the bone any non-core overhead costs whilst simultaneously seeking revenue maximisation, so as to try and maintain at least a modicum of the re-buoyed profit margins (or indeed reduced losses) recently enjoyed.

In what is a savage marketplace, this means that corporate brands and their vehicle-lines are having to vie for share of mind with the hope that it translates to eventual share of market. Of course, prior to potential buyers actually gaining a close-up view of a vehicle itself in the showroom, a broader public perception must be moulded across the popular consciousness to attract people onto corporate web-sites and into showrooms.

Populist advertising in all its forms – above the line, below the line, direct and now viral – by far plays the biggest role.

[NB However, alternative 'perception massagers' have re-emerged beyond the now crude efforts of obvious product placement in the media. The most notable being Ford UK's use of the film 'Made in Dagenham'. It uses a plot-line (ie message platform) which has contemporary relevance by juxtaposing the very real needs for UK industrial cost re-alignment in the mid 1960s alongside the changing nature of labour relations – the former very much in the background, whilst the latter sits very much in the foreground. Yet it is a feel-good movie which ultimately has a positive rub-off effect on the Ford persona, seen to be at the vanguard of 'fair' labour-relations negotiations, an important persona to hold if Ford intends to continue its investment levels in the UK, at Dagenham (now solely an engine plant) and elsewhere].

But as stated, by far the greatest 'immediate-effect' influence is typical car advertising. It spans a myriad of strategic and tactical aims, depending upon the corporation, the economic climate, competitor actions, etc etc. That spectrum of far-reach, medium-term and immediate objectives is of course governed by a host of internal issues, perhaps the most important of which is the 'stretch' and impact of what are in reality – and by historical standards – anemic marketing budgets, often necessitating less regionality and more generality. A complaint you'll hear in the advertising world itself, as the creative envelope for regional or national nuance is reduced, and so supposedly the adverts impact/

Even though TV continued to convey the heady days of early 1960s MadMen - living an Upper East-Side lifestyle further down-town on Madison Avenue, the 2010 western reality is very, very different. Advertising executives and account-handlers may well thanking the fact that a plethora of media-entrenched trendy 20-somethings still see the role as an 'advertising creatives' as 'it'; since the laws of supply and demand obviously hold true in employee selection and pay-levels.

So, the erosion of corporate budgets should not automatically mean a reduction in creativity and so consumer impact. Yet whether by virtue of risk-averse corporate clients or indeed risk-averse advertising executives, the attraction and impact of much automotive advertising has lessened and indeed in certain instances become almost generic to TV advertising themes in general for all kinds of products and services.

As such it is not surprising when adverts are remembered for their graphics or music, but consumer recollection of the thing actually being advertised is poor. The importance of brand/product message relative to the creative execution is of course all important.

As such the following looks at various vehicle TV adverts recently shown in the UK, highlighting from (by subjective standards) most successful to least successful.

The Good:

VW Brand:
At what are cost-conscious, risk averse times, VW has maintained a focus on its historical key brand values. Volkswagen UK has pushed its Golf and Polo advertising by focusing on both price and reputation, and closely cross-relating the TV campaign with Bill-Board campaign; therefor creating the circularity of a simple message.
The TV advert shows a bill-board poster operative attaching the fly-sheets and telephoning his boss to questioning the last one (highlighting the price) to be pasted. To him it is an anomaly and cannot believe that the price is right given the brand. Besides highlighting the obvious apparent cost-saving, the very fact that the advert uses a bill-board means that there is a direct cross-relate for viewers when they indeed see the real world bill-boards.
Hence a merging of the virtual and real advertising realms, which re-enforces the central message that VW offers an affordable level of high quality: a central message that is deeply engrained within the brand's history for intelligence and rationality. Moreover, the questioning nature of the central character reflects the general state of mind of consumers today, seeking-out a rational, value-based truth that drives the purchase process in such times.
Thus a price led campaign for what is seen as perhaps the most emotionally and financially stable of automotive vehicle purchases, and as such re-crystallises and re-ratifies the engrained cultural understanding of VW.

Mini SAV (“Countryman”):
This advert immediately gains by the fact that the car is essentially new. Although seen as a derivative model from the Mini family, it shares platform parts with BMW's X1, and its product positioning demonstrates itself to be so removed from Clubman that it is indeed an all new car. – the first ever conventional 5 door Mini given additional differentiation by being a city SUV/SAV; and popularly coined as “Countryman” though this badge does not appear on the car.
Yet within the initial UK advert although prominent the car is not the star as such.
It is the hyper-real visual setting of young, fashion conscious, ironically mud-averse city-dwellers, 'playing' in a green field with the backdrop of Canary Wharf. The ad-agency seems to have encapsulated the ideology of the 'city-farm' and transposes it over the car and the people. This is the opposite of old-world SUV advertising by the likes of Land-Rover which, by the nature of the origins of its products, previously aligned itself with the true country-side and broader world adventurism (safari, jungle etc), with at most the correlate of weekday city and weekend country-escape.
Mini playfully shows the ironic reality that purveys the reality of a limited off-road yet trendy citySUV; the flip-side (indeed “flippant side”) of the 4WD notion previously conveyed with 'old-money' overtones and the overlaying the countryside dream.
Here BMW does well in creating and re-enforcing the idea of the car's use as a psychological escape machine rather than a truly physical one. Unlike the former poor Mini advertising - 'Mini Adventure' - which was ill conceived from the brand's birth and ran on far too long – the product itself doing much of the marketing 'heavy-lifting' - this vehicle specific advert recognises the irony and plays upon the satire and humour of the car and indeed the self-recognition withing the potential buyers own lifestyle.
This advert echoes the character of the car which in turn echoes the character of hyper-fantasist urban consumerism; yet shows a conscious cultural depth via its self-mockery, which will resonate with a percentage of culture-literate Mini All4 buyers.

Audi R8 Spyder:
This advert for Audi's comfortable supercar, plays upon the central idea of (technical) juxtaposition, which imbues the old “Vorsprung Durch Technik” (“Advancement through Technology”).
It sets the overtone of yesteryear technology in the form of oil-dripping, noisy, Stock-Car Hot-Rods raging in frantic, uncontrolled chaos within the background of an all-white 'clean' arena. So presenting a philosophical contrast of today's 'dirty car' set within the need for a clean eco-friendly environment. The noise abates and into the chaos enters a serene white R8 - an obvious alignment/allegory to its clean surroundings, which masterfully dodges the 'dinosaur pack', and is accompanied by an angelic choral audio track. Having beaten the crowd it comes to rest with the tag-line “mirror, signal, out-manoeuvre”, once again referencing its acknowledgement of the changing face of (super)car motoring”.
This well considered advert, unlike many obvious 'mainstream lifestyle' efforts, highlights the R8 product itself in a very different ethereal setting.. All the cars have no driver, and so have lives of their own which adds to the contrast in personalities between the crowd and the Audi. Given the price-point of the car, the alternative and intelligent execution is refreshing, so reflecting the higher cerebral and emotional expectancies of its target audience, yet also mesmerising the mainstream which has a VW Group rub-off to VW cars.
[NB Interestingly, the vast white arena is populated with colourful cars also has overtones of an art gallery, and its walls and doors carry painted alpha-numeric position codes (eg B9), which reflects not just an space-futurism but also infers chess-board positions so a competitive edge, aswell as mimicking the alpha-numeric code Audi uses (eg R8). The driverless 'angry' cars also culturally reference the 1974 film 'The Cars that Ate Paris' which highlights a destructive localised automotive economy ].

The Average:

Nissan Juke:
This new B-segment citySUV was initiallyyyy introduced to the UK public by using the effective segway of a sign-off message for Juke when advertising the facelifted version of its larger sibling 'Qashqai'.It was given a colourful mischievous personality reflective of its more radical styling and youth.
The dedicated 'Little Star' advert uses the now near cliché of an empty urban night-time backdrop to present a context of 'otherness', with use of neon and fluorescent flicker-stark lighting to provide a jarring yet ethereal effect indicating the world waking-up to Juke's arrival. The use of Gen'Y' / Gen 'A' 'clubbing' characters are seen heading home after a night out, the with the 'safe come-down' psychological effect of the slowly paced female vocalised 'twinkle twinkle little star' soundtrack. It cross-references to toy cars, bunnies and the like aswell as public transport. All together trying to effect a message of offering diverse, uber-cool city lifestyle combined with pyschological security and connection references to childhood and thus 'safe-playfulness'. This diverse milieu of effects intended to draw in different demographic groups at various life-stages, but particularly pointed to young families where the parents wish to remain fashionable, couples and singleton buyers that seek the life-affirming idea of 'exciting but safe'.
To this end the advert diverges from the product's initial characterisation alongside Qashqai, though seen to be necessarily progressive. But the contextual references are cliched, and indeed mixed.

Ford Fiesta:
The 'This is Now' campaign has been running for a few years now, as part of the Fiesta's need to grow its female and young couple target demographic. The July forward advert primarily shows a montage of interesting excerpts of a young couple's life, interposed by periodic thru-windscreen shots of the couple inside the car, inferring that it is the 'lifestyle enabler'.
By using supposedly jerky time-lapse cinema-photography and other surrealist efforts, the advert references certain 1980s pop videos by the likes of Talking Heads, this itself based on the recent '80's' cultural phenomenon playing out at street-level in London and elsewhere in the UK (Boy George and Marilyn look-a-likes abound in the West End!)
Ultimately the advert mentally connects to its target demographic by virtue of its formulaic component ingredients, but as with so many adverts, the medium and not the product ends up as the central message.
This is not surprising given that Fiesta has such a broad customer base, from targeting provincial 20-somethings that see themselves as London Trendies, to rationally motivated German pensioners to Mexican young families and far beyond. So the persona of the product is manufactured via targeted advertising relative to region and buyer-type. This the typical character of much 'global goods' advertising.

The Bad:

Kia '7 Year Warranty':
Hyundai owned Kia provides the 'value-conscious' portion of the Hyundai-Kia equation. Thus is vehicles are, though far better than previously, still bought for cost and function reasons, a raison d'etre well understood by Kia UK. To maintain its competitiveness in this harsh field, Kia extended its new car warranty to 7 years, thus demonstrably longer than European or Japanese peers.
Such a simple yet powerful brand message obviously does not require a convoluted advert, yet to bolster brand equity should be executed both conceptually and visually with aplomb.
Unfortunately, the 'Leading Thinkers' advert does neither. Supposedly humourous, it uses brainiac academics and scientists sat in an auditorium to see and state the obvious and see the light. But it is a parody that does not really 'carry', and as such was a lost opportunity for Kia. Undoubtedly the central simple message of a 7-year warranty will drive more foot-flow through dealerships, but little additional brand-building has been accomplished, which is a shame given the exploratory efforts and ground gained that vehicles such as the unconventional Soul have achieved.
This was a prime opportunity to visually demonstrate why Kia has true belief in its product's engineering integrity which enables the long-life warranty. Whether scientifically explained or just creatively inferred, much more could have been done to align what are obvious multi-issue corporate objectives.
Ultimately it seems an obvious case of limited budget allocation, or poor project direction and/or limited creative solution provision. No matter which, this advert reflects a low-tide level of corporate and agency interaction.

The Ugly

SAAB 9-5:
SAAB was always seen as the poor cousin under GM stewardship, but now has been taken over by The Dutch firm Spyker, under a broader holding company. Prior to the GM disposal, SAAB was touting its re-invention with new era concept cars, the new owners presumably providing greater management freedoms at Trollhatten to achieve their aim of a differentiated premium car brand that can grow UK and global sales. Thus, the recent UK ad campaign should have publicised the intent and ability to offer the exec car market something new and meaningful, at brand and vehicle levels.
Unfortunately the advert, set in an unconvincingly stylised old drawing office layout, consists of the formulaic depictions of leaves and sky, a paper plane (referencing SAAB's past but lost on most), with 'brand value' words of : “power”, “heritage”, “inspiration” shown. Generally a weak brand and product message. (However, even the ad-director / agency thinks its being clever by giving the paper-planes a sound-track with the lyrics “I've got stories you don't know”. Almost an in-joke on the public, for the art-director community that is designed to win ad-direction awards as opposed to sell a powerful purchase convincing message to the public. The sign-off is “Anything but Ordinary”, when infact the advert is very much that.
Ultimately it tries to be too clever for its own good and as a result dismally fails in conveying what should be an important message and so fails the corporate client.
This should be of major concern to SAAB UK, Trollatten HQ, Spyker Cars and the parent holding company that is trying to rebuild the brand and Swedish company.

The very nature of what has been a near century of a media-led world means that the presented imagery forges citizens' own perceptions, understandings and ultimately experiences of the man-made world around them. The idea of 'hyper-reality' and simulacrumhas become so engrained in popularist understanding that they have become central tenants of the very world that is newly created; as initially seen by re-made films, to recycled fashion ideas, to the merging of physical & cyber realms via console game play, to products that are self referential their classic origins – as seen with VW Beetle, BMW Mini, FIAT 500 in product form and Citroen DS in brand form.

As many have noted, the western world has been post-modern (ie the re-played use of eclectic and re-invented sources) for many decades

As such it would be only natural to believe that the once diverse realms of profit-driven commercialism and exploratory creativity have co-coalesced. And in some sense they have, even it be in a very formulaic sense when devising vehicle products and then marketing/advertising them. Indeed, the process itself should theoretically deliver consumer-directed, high-appeal products, are immediate hits and profit maximisers.

In one way the commercial creative world of various creatively interactive disciplines are thought to be closer than ever, after all, all the 'Gen Yers' and 'Gen Aers' working are from the same cultural background as so should share mutual outlooks. But equally so the level of progressive originality has arguably dissipated, into something less and less meaningful to culture-savvy audiences and consumer groups.

This means that the general consumer / automotive world is a very different to the one which created the iconic long-live products and ad campaigns of the past, and as seen over the last 40 years advertising has played an increasingly important role to massage lifestyle and aspirational perceptions when the very offering of the product itself is less and less understood and so meaningful. Consumer's beliefs and expectations are filtered through the 'media machine', in stark contrast to the hands-on experience of say a 1950s car magazine, the annual Motorshow and the local dealer showroom.

That multi-level media complexity relative to the different buyer-types is what needs to be properly understood and controlled by automotive executives and their senior managers, and is a very pertinent aspect of how investors themselves should assess the management capability of any auto-firm.

Such good appreciation is evident in the echoed simplicity of VW's adverts which exactly 'hit the spot' of consumer consciousness today, whilst at the other extreme, SAAB's generic advert ultimately performs very little service whatsoever for a re-capitalised, reborn firm that is supposed to be the very antithesis of the generic, homogenous consumer durable.

This is part of the reason why the large yet well-controlled VW (with Audi) holds its place as an investor favourite, and why SAAB must dramatically sharpen-up its outward appearance and character via Ad-Land, if its new era is to truly make its mark amongst the premium Euro-set.

Long gone are yesteryear days of Issigonis philosophically considered Mini, designed for practical needs of a mobility-hungry nation focused on the 'magic enabling mechanism' of the car itself.
50 years on the world is very different, even for new mobility nations. And as such, today's “Twinkle Twinkle Little Star” evocation of the Sunderland build Nissan Juke, represents a very average effort by a risk-averse client and ad-agency to generate target-buyer attention for what has ultimately become a relatively short-lived, consumer durable. Juke has gained popularity and should continue to do well in the UK and abroad thanks to its styling.

But such efforts represents an auto-dream for the individual, public at large and the client corporation. It must be constructive and compelling, and not represent something that is self-directed, self-congratulatory and open to accusations of self-aggrandisement. Its real remit to generate car purchase motives a long long time ago.

Of the 7 very short case-studies presented, 4 fail in their remit. Whilst 2 of the best 3 are from the same corporation though reflecting very different vehicle types and ad campaigns. The failed 4 show mediocre and possible mis-management at corporate and agency level, whilst the best 3 illustrate harmony of the process.

Today, more than ever the auto-industry is about “the money” given the fact that the western world is about 'the economy stupid!”. That means ever clearer lines of strategic assessment and expanded due-diligence will be drawn by investors as to how to deeply judge car-makers across the full spectrum of their internal value-chains and their outwardly directed efforts.

And at a time when a single mainstream vehicle programme costs over $1.5bn just to engineer, this figure excluding massive overhead costs and major additional marketing & advertising costs, the onus is to get the strategic and operational formulae exactly right to maintain investor's interest.

Moreover, this 'game' is critical to the very health of national and international economies, so little margin for error. Thus a billion and one reasons to get it right.