Thursday, 27 January 2011

Macro Level Trends – North Africa – Regional Transformation in the (Broadcast) Air

The recent regional unrest seen in Tunisia has been broadcast throughout Europe and the world as the beginning of a North African democratisation process and regional populace empowerment.

Whether wholly correct or not remains to be seen, since the alternate reality could in fact be simply local aggitational forces supposedly acting from good intention that simply wants greater power and financial reward for itself. Moreover, this action also providing opportunity for associated thugs and looters to act selfishly, ransacking Presidential and family homes and cars under pretense.

As the novelist Gustave Flaubert remarked “there is no truth, only perception”, himself then familiar with Tunisia's Carthage region having researched for the 1862 book 'Salammbo'*.

Yet the idea of political and ultimately economic shake-up for the region has undoubtedly been aired. An expectation of possible change now spreading across from Tunisia through Egypt to Jordan, with the collapse of the reportedly 'western-backed' government in the Lebanon, and latterly similar calls in Yemen.

Incumbent ruling families and politicos have faced popular broadcast criticism, now that this medium is in the supposed hands of the masses, yet in all probability leveraged by the activist few. TV pictures show city-centre disturbances, with 'representative' talking heads, whilst the 'democratisation' of media communications make it easy to create the appearance of a large ground-swell of opinion, the twitter-function amassing crowds who may simply follow rather than actually think from their own free will. If a true reflection, the irony could not be more prosaic. As the writer Evgeny Morozov highlights, the dark-side of the web may well be used to simply create new dictatorships.

Unfortunately, the attitude of the 'silent majority' who themselves have no web-connection will probably not be heard, most seeking everyday peace alongside economic growth that trickles through to all in society. Whilst the disenfranchised, angry young men will follow those who appear articulate and educated, who in turn direct and utilise the following.

However, that said, the endemic culture of 'greased palms' that exists in the region (aswell as of course elsewhere) makes for a sound reason for administrative reform. The question being in what form and how quickly? A worthy ambition, even if heard before to seemingly no avail.

Socio-political thinkers will quickly appreciate that the call for change now has emanated from a juxtaposition of increasing wealth in the region and the ability to communicate, thus the real issue is as to who owns the region's now bright future?

The most recent generally available GDP figures attest that Tunisia has seen volatile but stabalising growth since 1960, only in 3 separate years with negative growth, the last of those in 1986, the 2008 figure at a respectable 4%; with a 5% average over the last decade. The country enjoys a broad spectrum of economic activities across Primary, Secondary and Tertiary realms which includes (for our interest) car parts manufacture. Unsurprisingly, Europe is its primary trade region (approx 75% of exports & imports), whilst The World Economic Forum views it as the most competitive of the 40 assessed African nations.

Its geo-politically dual-facing location as a past and potential 'Istanbul' of North Africa has not been forgotten by international powers, with much Arab derived investment being witnessed with the 'Mediterranean Gate' built as Tunis' New City, Tunis Financial Harbour (Africa's off-shore financial centre), the new Tunis Sports Park, and Tunis Telecom City (the IT hub of N.Africa), the Civil Nuclear power ambition (using the culturally connected French capability) and the Desertec ambition, by which the desert-lands are converted into massive 'solar power fields'.

As the pattern of globalisation continues, so greater interests are taken in what were once seen as fringe regions, which by default become 'intermediary zones', Arabic North Africa ostensibly now in that position, having seen largely stable economic growth over the last decade: 2010 figures sourced by the Economist Intelligence Unit showing Algeria 4.0%, Morocco 3.8%, Libya 4.0%, Egypt 5.5%, with 'associative' (non-African) Lebanon 5.8%, Jordan 3.5%, Syria 4.6%,

Thus the region, in a comparative growth development reference to lacklustre 'advanced countries' and still rapacious 'BRIC regions', sits squarely in the middle. Like all burgeoning EM nations which must decide how to best proceed with domestic issues and foreign relations.

Yet the internal and external forces are apparent, the two primary issues aired being:
a) the spread of domestic wealth as a domestic concern.
b) human rights issues as an international (G20 / UN) concern.

It is also well recognised that the economic problems currently experienced by Southern Europe – with the real concern of year on year stagnancy - could be in a great part relieved by greater interaction with N.Africa, especially so in the corporate transfer of lower value internal or locally outsourced activities from Europe's higher cost-base; as seen thus far by the car parts sector and aero sector in Tunisia. European CEOs have been eyeing the region for decades, but never has the timing been so prescient as now, given the European sovereign-debt fracture and the need for S.European governments to find economic solutions.

[NB. Though the newly created E 440bn+ European bail-out fund has attracted bond-buyers, these creditors will push for S. European change now that the notion that creditors should feel much of any incurred default pain].

In an interesting precursor to the recent upheaval for structural change, France's President Sarkozy aired the idea of forming a 'Club-Med' ideology some 6 or so years ago, it in reality acting as a new economic bloc. Unsurprisingly, after the German efforts for EU unification between 1989 and 1999, such a possibility of EU separation, is viewed in Berlin with great disdain. Whilst the 'PIIGS' sovereign debt problems add massive strain, the creation of a 'Club-Med' bloc could theoretically create political frictions that turn the clock back hundreds of years. Thus 'Club-Med' adds an additional strain on Merkel - Sarkozy relations.

Yet with or without such an drastic scenario of European collapse, the Christian EU and the Arabic North Africa must find a way to coalesce with far greater ease. Given that France essentially has an historic cultural foothold in the region (from energy to automotive), so Europe's 2 other great powers, the UK and Germany must forge relationships and so garner greater influence with the region. Simplistically, the French, UK, German involvement could all to easily appears like a case of history repeating itself, though obviously not quite as heavy-handed as the Sykes-Picot agreement of 1916, and presently without the ideology of a united pan African Arabic state, given the problems the Maghreb members to unify. But greater integration has always been the aim of Arab Nationalists, using alternative methods to do so, the use of the common belief system the most obvious, just as Europe was essentially created from a singular use of an orthodoxy.

Europe in its current state was ostensibly created by, and in reaction to, the once mighty Roman Empire, itself developed from Antiquarian Greece, itself a development from Phoenician society set within the Near East.

Whilst Northern and Western Europe came into its own from the 11th century onward , for much of our theologically modeled history (ie the last 2011 years AD) and well beyond, the centre of the 'civilised' western world was the Mediterranean region. It was the 'trade-bowl' that gave the Romans, Greeks and Ottomans regional interaction, wealth and influence, stretching from the 'eastern sea wall' of the Levant across to the Atlantic 'mouth'. It marked a broad intermingling within an economic eco-system, involving the various original largely Phoenician, pagan Semite** tribes in the east to the Egyptian derived Millares & Tartarssos in Almerian Spain. In short, the obvious pre-curser to the globalisation seen today – a commercial one essentially created by Phonecian regulation via trade agreements and Egypto-Persian derived technology in the form of weighty sea-going vessels.

Obviously, the Mediterranean has also been the prime focus of various power struggles and long-lasting dynasties, yet realistically the effectual end of Ottoman rule by the late 19th century saw North Africa become a global economic backwater as its agriculture base became controlled by western european colonization, the main actors of which had other more abundant colonies with more easily controlled populaces. In the 20th century the region became little more than a geo-strategic coastline, with of course the creation of Israel in 1947, and since a focus of regional unrest for religious theologies which realistically are the veneer of power interests that date back over two millenia.

Yet the 2008 financial crisis and the resulting consequences, set in the stark juxtaposition of a quickly risen China with its own soft-power global ambitions, sets a new light upon the North African coastline and interior. One in which old and new power-bases seek to gain a greater hold as part of their own soft-power 'global grasp'. The question that sits like an elephant in the room is who's grasp is greatest yet softest for the leaders and populations of this predominantly Islamic world? East or West?

Unsurprisingly, much like the ignored wall-flower at the village-hall dance who's hand is taken-up by a late arrival, the previously over-looked Arab leaders have been enjoying their time in the sun having been effectively in the shade for decades. Renewed options provided by newcomers with their own interests and so a new 'dance-ticket'.

It is the potential of solar-based clean-energy networks (linked to the EU) via sub-sea cables that is the scenario set-up by Europe, yet alongside the 'tommorow's world imagineering is the age-old need for traditional fossil-fuel access by the West. Especially so if OPEC re-directs much of its reserves and capacity to meet the demand-pull of 'Chindia' and Asia – thus exemplified by BP's recent and necessarily pragmatic extended foothold in Libya.

For the East (Near & Far), beyond the oil-agenda, Arabic & Asian minds appear tuned to long-term influence and reach into the long-awaited 'African Promise'. The Islamic world working 'top-down' from N & NE coastlines, whilst the Chinese – and less so Indians given the history - continue to (albeit fractiously) 'ingratiate' themselves with infrastructure-build for trade-importation deals that have given welcome development, jobs, extended consumer cultures and broadened and deepened local economies in the continent.

Thus a form of re-colonization is apparent, but this time the North African and Sub-Saharan African inhabitants believe they have far greater influence over their own futures.

So what of the role of the Auto Industry within North African and African economic development?

Renault and PSA undoubtedly have expectations of regaining their old African ground given their previous and current hold on the Arabic North. But tough competition comes from foreign auto-companies, the present prime player being Hyundai-Kia which enjoyed initial regional market success in Turkey via local build, from which it could extend into N.African presence. And of course Africa is the prime destination for Chinese export vehicles of the present and critically, the future. So, although seen to be on the fringes of corporate operations - and not core to immediate strategic focus – the North African picture is being periodically assessed by global car-makers, the recent social turbulence once again giving reason to review near, medium and long-term growth scenarios.

In 2009 after French political assistance Renault opened a greenfield factory in Casablanca, Morocco, titled SOMACA it produces the Dacia Logan, Logan MCV, Kangoo and Sandero models for domestic use and export both regionally and to Europe. The Moroccan market 2007 TIV reached 100K units pa, and has been stable at that level since, of which Renault takes approximately 30%, yet reflects 60% of all locally assembled cars.
In 2008/9 – as reaction against EU TIV collapse - the previously sparse Moroccan vehicle line-up was massively buoyed by introduction of Laguna Coupe, Clio RS, Koleos and Dacia Symbol, with new generation replacements for Laguna, Megane, Scenic and Kangoo. 2008 saw the creation of the
'Renault Tanger Mediterrenne' industrial complex in Tangiers, creating a 2nd assembly site with access to Tangiers Port for export of Logan-platform based vehicles in 2012, both northwards into the Mediterranean Basin and for the western/southern African coastline. As is to be expected, Morocco has and will continue to act as the market-template for Renault throughout the region.
The once mighty Peugeot 404/504 was the archetype North African car, the 504 having been manufactured between 1968-2009 (latterly also in China), yet PSA lost market-share as its own new cars were met by strong French and international competition. PSA is still however the lead importer of cars into Morocco.

Algeria has no passenger car production, instead vehicle manufacture devoted to trucks and buses via the SNVI plant near Algeria City, itself supplied by components manufactured by domestic Tier 1 and Tier 2 companies which sit under the UPIAM trade association. The government policy regards cars specifically has been to create a domestic parts & trade 'eco-system' for the typically older car-parc that exists, to bolster manufacturing and service capability, this assisted by the 2005 introduction of the 'MOT test'. This apparent increased level of market size, (240k cars sold annually), the technological improvement and professional service, all together used as argument by the Algerian administration to attract automotive FDI in the parts and equipment sectors. As regards passenger car manufacture, it appears that the government have been trying to 'play-off' Renault and Hyundai against each other, yet neither have committed to an Algerian plant, Renault seeming the less likely given its 2 production hubs in Morocco, and so Hyundai no doubt seeking very favourable terms to do so. Car sales slipped slightly in 2009 standing at 232K units imported, whilst H1 2010 sales saw a marked decrease by about 18%, thought to be reflective of high inventory levels sat with the countries 34 car dealers. The expected FY figure was 236k units, but that appears unlikely, essentially showing flat YoY trend. However, the 2015 expectation is for 300k units. The national car-parc remains schizophrenic, with 57% of vehicles over 20 years old, and 22% being 5 years old or younger. External reports state that this represents large potential for new car sales, yet realistically it could also create what seem to be odd market dynamics as the used market stays solid relative to the inflow of new imported car with the ethos “why buy new”? Even so, for new cars sales in H1 2010 Renault holds 32%, whilst the next largest slice of 12% is held by Hyundai Motor. Interestingly a trio of companies hold 9.5% each, these being: Toyota-Daihatsu, PSA and GM Chevrolet.

Libya has been brought back into the international fold in recent years, and as such there appears to be greater domestic and FDI investment efforts. On the auto front, projects such as Algubtan Automotive's JV with FIAT-Alfa Romeo demonstrate a desire to create world standard dealerships on the outskirts of Tripoli. The capital also saw the 2nd Libyan Motor Show in November 2010, which showcased a broad range of products, but the commercial presentation events listing was unfortunately thin, with representation from only one dealership group and hydraulics experts, thus highlighting the lack of industry substance behind the show, something seemingly to be addressed for the 2011 show with cooperation from a broader range of presenters related to Transport. A key commercial market that has grown is the self-import of foreign vehicles, given that certain dealerships appear to have a hold on specific branded imports and given what appears a monopolistic position, offer little in terms of customer back-up – a 1 year or 25,000km product warranty seeming the norm. Hence the growth of self-import agents which offer greater cost savings from direct factories, or offer a service of importing cars from neighbouring countries such as Tunisia. The Libyan car-parc has about 2.2m vehicles, which compared to the 5.7m populace makes it one of the highest ownership rates in the region, 1 vehicle for every 2.6 people. Given Libya's oil reserves it is no surprise that its past has seen the country use its petro-dollars to invest in the auto-industry. In 1976 it took 9.6% of FIAT for $250m.

Today's context begs the question “could such an exercise be repeated” to perhaps bolster both FIAT SpA (Auto) and FIAT Industrial in due course? And create a prime economic bridge across the Mediterranean, as discussed previously to assist the re-emergence of Italy and S.Europe? Indeed, could Algeria or Tunis (or a dual national JV) take an interest in VW's loss-making Spanish divison SEAT? Such cross-ties could be beneficial if calculated properly.

Such exercises undertaken in the face of the Chinese Dragon.

After European 'de-colonization' it was the Japanese that established a presence for high quality vehicles in mainland Africa; engrained since Toyota's Land-Cruiser's over-powering of Land-Rover, with later robust vehicles such as Hi-Lux & Corolla, other Japanese such as Nissan and Mitsubishi also creating a following for long-lasted new and used vehicles, this preference now joined with a rising preference for Korean made vehicles in the mainstream and German in luxury. (typically used imports)

Over the last few years of African growth, the legal and illegal grey-import markets for used foreign-registered cars has witnessed a marked shift. The staple of Japanese vehicle demand has grown with a preference for younger cars and trucks., but also a marked growth in imported used luxury SUVs (typically Mercedes and Ford), especially so from the US as its own consumers relinquishes the high-ride gas-guzzler – that high-ride, soft-suspension character suited to the typical pot-holed road or rough trail in Sub-Sahara Africa.

However, the present African future appears to belong to the Chinese, have already gained political grasp in Sub-Sahara countries – such as Malawi's $1bn FDI since 2006 – and exported a number of their domestic auto-brands as a follow-up to agriculture and construction equipment - a natural corollary.

Thus the continued motorisation of the continent at large demonstrates the growing demand – albeit far slower and more patchy than other EM regions. The controlling factions of the various Arabic states of course wish to gain sovereign economic wealth and stability from this upward trend in GDP and so create their own automotive economic 'eco-systems', both inter-regionally and inter-nationally – as seen by the Lebanese efforts to bring the (Nissan) Infiniti brand to Britain- as highlighted in a previous post when the Emir of Qatar met with Her Majesty Queen Elizabeth II here in London.

And it was to economically booming Qatar that Arabic ministers went recently to visit the Qatari Motor Show and meet with the Emir - who himself stands at the cultural cross-roads between east and west – indicating the pivotal role of the automotive sector.

Today, North Africa looks to be the compelling prospect for regenerated growth for Southern Europe, and the future for western Arabia looks to be less so in the hands of the street crowds and twitters, and more in the hands of corporate leaders, western diplomats and those who can seize power in those apparently troubled countries.

Post Script
* 'Flaubert's novel 'Salaambo' is set in Carthage during the 3rd century BC, with the name 'Salammbo' referenced in western high and low culture - from opera to film to video game.
** In a true historical sense the term semitic and so 'anti-semitic' relates to all peoples of the region.

Thursday, 20 January 2011

Micro-Level Trends – Auto Business Models – 'Open Your Eyes' to Additional 'Plate Spinning'

As many will remember, James Bond's Aston Martin DB5 featured revolving number plates, from British to French regulation nomenclature. External to the car's store of other gadgetry, this 'plate spinning' capability allowed for re-invention to suit the changed environment.

It is a useful metaphor in this day and age, since whilst the title of 'Automaker' reflects a prime function of a firm – its origins and most visible offering – companies have over the last century and into the 21st century become far broader in their operational remit.

Value capture for the greatest value creation has been the historical imperative, and unsurprisingly that has meant the conglomeration of those previously separate links of the value chain that offered best reward. From raw materials acquisition all the way through to the after-sales 'experience'.

The fables of Henry Ford's expansion of his employee customer-base - via the $5 per day wages model – went hand in hand with FMC's expansion of autonomy for its materials supply – via the South American siting of 'Fordlandia and 'Belterra'' to access forestry for wood and rubber. Beyond reducing the cost of FMC's input prices, it was seen as a grand schema to essentially colonize S. America (or $.America as some commentators then proclaimed it) to help unify the continent.

Thus in the early part of the 20th century, the automobile was seen as an economic force for global change and good, woven into foreign policy hopes. Yet the latter half of the century such failed attempts in what was a 'de-colonizing' era auto-saw companies re-orientate and re-focus upon the up-stream elements of retail and associated consumer (and thus inter-connected wholesale) financing.

Such actions were of course reflective of the specific economic growth period (ie the stage of capitalism per se), and so as the national context changed so too did economic interaction. Compare Ford to FIAT, the latter of which existed in a very different, pro-socialist environment which held far longer onto the associated downstream activities which fed its factories. (Arguably, right up until this year, and arguably still not fully de-tangled).

By the 1990s the new business mould was set, by which time finance played as greater a part in income capture as vehicle production, with disposals of what were integrated supply-chain vendors such as Delphi and Visteon by GM and Ford, though of course they rightly took full advantage of purchasing supplier shares when times proved prudent, so as to gain greater hold on ensuring supply feed and pricing.

Yet in the main, once through the recessionary early 90s, buoyant capital markets and economies allowed for ever greater vehicle sales to new customers and an ever cheapening cost of capital through which the sales could be obtained. This symbiotic relationship strengthened by the purchase of external finance houses (to gain immediate scale and create cross-tie selling opportunities) and the creation of internal finance companies so as to grow internal capabilities and keep a sharper eye upon the vehicle vs financing inter-relationship: especially important for managing the fine balance between fleet-sales and the managing of used cars' residual values.

In essence car-makers - thanks to Wall Street's own advisory opportunism and stock listing demands - become bankers.

Whilst such actions may fly in the face of the idea of core-competencies, automakers expanded their capabilities to prove that they were as adept in this field as in manufacturing cars and trucks, indeed the activity helped them maintain credit ratings and thus investor interest.
Thus history demonstrates that the larger automakers had become (critically) systemic components of a nation's or region's economy, and in the US's case, the argument for 'bail-outs' was hard to combat, even if the execution created grounds for criticism.

[NB As seen by the Congressional Oversight Report dated 13th January which all too lightly slaps the hand of the Obama administration for the irreparable loss of public funds, by selling the first GM stock tranche at $33 instead of the calculated $45 required to fulfill the public purse. This investment-auto-motives believes was done so as to leave 'much meat on the GM bone' by which the stock market itself could benefit – the 15% rise since IPO listing demonstrating that assumption.

[Interestingly, compare GM to the upcoming Facebook IPO, in which US buyers cannot participate – is the latter seen as too much of a bubble risk to the US index? An interesting academic case study].

Whilst the corporate interaction between vehicle sales and financing is of course nothing new, by 2007 the scale and management task in maintaining this symbiosis, with its tentacle-like extensions – grew to massive proportions.

Here history itself provides a lesson, exemplified by Pierre Alexandre Darraq in 1890s France. His interest in the automobile was purely financial. The income promise generated by (the short-lived achievement of) mass-manufacture, tied to associated 3rd party financing a polar opposite to his contemporaries' engineering focus to create a legacy.

Playing one side of the financing coin, Darraq company share issuances took place in Germany (to Opel), in Britain (with the Darraq Co), in Italy (to the pre-curser of Alfa Romeo) and in Spain; all as part of pan-European strategy devised seemingly by certain French bank. Playing the other side of the coin, consumer finance was offered via those companies and/or the French bank at lower than market rates. (Though sold to the obviously wealthy who did not need credit, the financing was viewed as part of a quid pro quo relationship).

Thus the dualistic interplay is age old, especially where a holding company is formed, an understandable part of its own business model, such 'plate spinning' very much part of the necessary work for successful commercial 'take-off'.

As the early pioneering decades gave way to those which saw efficiently honed production, the very nature of an expanding global automotive market also demanded geographical expansion of company abilities. Later, the effective commoditization of the car - generated by the wash of financing - meant that corporations had construct themselves as scale-driven competitors, and so effectively become 'lead-share market-makers', a pattern seen since the 1930s in the USA everytime an economic downturn consequentially expelled the smaller firms.

However, cars and trucks of course became central to the national economic model in all mid-stage industrialised countries. And as GDP slowly increased so did the public's comfort and level of expectation, hence old automakers joined by new. All having to create empires which could handle a myriad of requirements; across procurement, logistics, manufacturing, marketing, design, development, retailing etc etc.

Such 'plate-spinning' became ever more complex, and the ability to manage a specific portion and/or portions of the internal value-chain became the lever(s) of competitive advantage. From lean manufacture to life-cycle planning to R&D strategy to brand development to product personality and feature content to retail spaces to today's reach of 'concierge service' (this trikling-down from luxury and into the premium sector).

As a natural consequence, the number of plates that must be spun by an individual company - or indeed competitor peer set - depends greatly upon the expectation of the customer, competitor action, and of course a corporate desire to engage into and exceed both client and foe mindsets. All in order to raise its ability to massage the client perception, attitude, reaction and of course ultimately, the company's top line. The ultimate goal to create price inelasticity as a central tenent of the business model.

Obviously, this most prevalent for those within the luxury product realm, themselves now increasingly the 'centre of gravity' for western-world production and export.

Unlike their 'commoditized' opposites in price-sensitive sectors, premium and luxury brands are to a great extent the 'lifestyle purveyors and intermediaries' which form part of a wealthy client's 'reality'.

As part of such a 'reality manipulation' remit, they must offer 'Life Extensions' (to co-opt the parlance of the film Vanilla Sky). To offer something previously never experienced, or to do so with greater aplomb.

Yet, what can you give the man or woman with everything?

Vanilla Sky's main character David Aames is the man with everything: a publishing empire, a Park Avenue apartment, a classic Ford Mustang (though he literally dreams of a Ferrari 25OGTO), and an 'FB' girlfriend with model looks. No man could seemingly want more. But what David really wants is love and reliability, attachment and security.

In today's socially-frenetic hyper-consumerist culture where constant change rules as the norm, those central humanistic desires appear to be spiralling-away in ever decreasing circles within the human experience. The humanistic desire replaced by brand-connections in the retail and virtual realms.

This is only a part of the PESTEL environment in which any B2C company (automotive especially) must participate and offer, with varying levels of the psychological and esoteric.

Once upon a time something like an 4th hand used Toyota provided these innate satisfiers to a newly licensed 16/17 year-old teenager. Yet that, and far beyond, is something that even the likes of Bentley, Rolls-Royce & Maybach must proffer to the ever so world-weary forty-something adults that are 'cash-rich and time-poor'.

Such ability to engineer delight often depends on the size of the vehicle programme budget, its boundaries dictating the level of innovative freedom allowed; with ideally such innovation derived from pre-phase R&D efforts.

When not part of a bigger corporation with funds to throw at innovation, it may be harder still. Thus for the likes of Aston Martin and its smaller peers to orchestrate such innovation, there is greater reliance upon internal imagination. A need for dedicated and innovative personnel who can add product/brand psychological value, both during concept gestation, and through wholly idiosyncratic 'created experiences' once the car is in the client's hands with the brand melding into their hearts.

AML an others of course already recognise the theory of this , with the efforts to create a world of 'Aston Martin' that goes beyond the sector norm of track-days and VIP events, via the brand pillar of amateur race-team support and up-scale merchandise. To do so, it has embraced the realms of 'art' to both create lifestyle links and brand-associations. However, presently it seems directed at the 'petit-bourgeois' yet monied provincial buyers - that no doubt represent much of the client-base - who likes to see an 'arty' picture of his/her car on their lounge or dining room wall. But in such a world, customers must be psychologically led, if anything, to balance the obvious (and income necessary) typical mind-set chasing. AML and others need more than replicating the metal assuage of the 1980s Testarossa on the boy's bedroom wall.

Compare this with FIAT's seeming arms-length efforts to strike at the heart of the London art establishment, with a Tate Britain gallery showing an 'old-new built 126' showing the 1970s vs 2000s vehicle time-warp (with inference of panel match build quality), and an original 1960s 500 held by a seeming giant child's hand with inference of the new 500 being a life-toy for the fully grown adult today.

And in turn, see FIAT's work with Ferrari via Ferrari Heritage (car reconstruction), Ferrari's client 'Race Stable' (for special edition models, and Ferrari World for the tourists of the Middle-East.

Today, more than ever, from London's Berkeley Square to Beijing's Regent area, luxury product companies are faced with a slow but strong rebound in the West within which loyalist and new clients will want to see new marque dimensions and personifications – both as distinct to the company and as a personal 'rub-off''.

In the Near and Far East, the seeming continuous stream of new GCC and Asian clients, once past the novelty of acquisition and 'arrived' ownership may also expect a level of marque (and to them by default associative cultural) immersion.

This luxury realm learning of course should trickle-down in time to lower sectors, brands and products.

Recently the global component supply chains were fractured and are re-set via ongoing M&A, internal company efficiencies are being strictly maintained for FCF & working capital purposes, necessarily buoyant balance sheets are kept for investor interest, and within that 're-set' context board members and their non-execs must be prepared to reach ever further-out. Into new exploratory and uncomfortable areas, to spin yet more additional plates set-up within the value chain and across the retail realm.

This new era has only just begun, and the doors of consumer and corporate perception are being expanded.

Lastly, Dr Piech and Porsche AG (as was) was derided for becoming “a Hedge Fund with a car company attached”. It was only its commitment to both itself and customers that allowed it to become so. Though much to the chagrin and envy of its competitors who were given a clear lesson in how a high margin auto-business evolved over decades could give high FCF from which to create a synergistic financial powerhouse. Businesses that could be both autonomous yet mutual rewarding, and all furthermore, all to the German national good. (Ferdinand Piech may well privately think “I'm a legend”, and considered arrogant for doing so, but ultimately he is right.

Moreover, today and situated to the east, South Korea's Hyundai Motor marches forward, with conglomerate interests in its own brokerage house to trade its way into the future via close contact with the capital markets; a model Chinese exporters will no doubt mimic with even greater strength in times to come.

Thus, just as James Bond kept his plates spinning relative to the environment, so must the auto-industry.

As 'Vanilla Sky' asserts in its opening* and closing sequences...“Open Your Eyes”.

*Post Script:
the opening sequence also depicts the TV showing Audrey Hepburn's 'Sabrina', like most of her films demonstrating character self-development, a Directorial short-hand for Vanilla Sky's plot-line.

Though perhaps such a viewpoint is relevant to the US auto-industry today, it might gain greater impetus from 'Billion Dollar Brain', since all investors, companies and governments must think extremely deeply as the sector is re-moulded.

Thursday, 13 January 2011

Macro-Level Trends – The Global Stock Market – Re-Invigorating Western Capitalism

The ensuing ramifications of the 2008 financial crisis now known as 'The Great Recession' has perhaps had greatest impact on those old-order industrial sectors which are intrinsically entwined with national, regional and international economies. Unsurprisingly, non more so than the auto-industry.

Investors' perspectives are typically as broad as the myriad of investor-types, attitudes and mentalities that exist. Yet in a 'post-apocalyptic' western world, capital markets have been seen to act (on the surface) as highly reactionary and at times irrationally. However those speedy and massive capital movements across borders and in and out of sectors simply reflect the broad reality that strategists & traders are acting in what they see as a rational basis – even if herd-like in appearance - given the fact that recent years have been largely characterised by macro-event-driven fear and opportunity.

Since the CDO banking fiasco and economic collapse, capital has sprinted between initially safe-haven government and municipal bonds, back into over-sold western equities markets, driven commodities, supported record gold, recently backed out of European sovereign debt, and into EM regions. Now teetering about the credibility of US Muni-bond spreads.

The front pages of the financial press must of course report market realities, those essentially reflecting the market's insecurity about the dynamic of Mohammed El-Erian's 'new norm'. (Though Bill Gross no-doubt sees the Muni-issue as presently 'over-highlighted' given PIMCO's necessary preference for bond-sector stability).

Hence today, the dynamic of event-driven, 'front-page', sensationalist trading appears to have dislocated those old-order investment attitudes. Some observers stating that the chaotic state of macro-conditions and the innate nature of large-scale IT-driven institutional trading essentially makes a mockery of old fashioned stock-picking: whether value-based or growth based.

The argument is that today's innately inter-connected market, across far more regions, far more sectors and far more financial instruments, makes for far greater complexity and trading interaction. Thus algorithmic processing far more capable than the analytical capabilities of individuals given the smaller known analytical universe the machine recognises versus the person-specific analytical methodology an individual uses, from say deep due-diligence to say a momentarily identified sector arbitrage.

[NB This 'Machines vs Men' debate could feasibly set-out an argument for a greater fragmentation and separation of markets, trading platforms, share-issue types etc, arguably setting the human trading market as a supposedly intelligent 'back-stop' to the possibility of extreme swings arguably created by machine-traded market. Such debate is best left to the fringes of regulators and policy-makers, posing such hypothetical structural reform scenarios to academia. They themselves are obviously presently focused on far more basic liquidity and solvency structural issues].

Yet the Man vs Machine reality exists, and as the public of the western world set themselves the task of re-saving to 'initially survive, then latterly prosper', so more people – having lost faith in state institutions, managed pensions, a housing collapse and facing extended working lives - may wish to create their own investment portfolios or at the very least take far more personal interest in shaping their own financial futures.

In this manner, Europe and the more lassez-faire portions of Asia & South America could be set to replay the stake-holder society of 1950s America with the US itself also seeing a Tea-Party led resurgence of 'individualistically-led capitalism'.

Thus, the hypothesis set forward is of an obviously IT-enables yet far more human-centric global stock-market, one that sees a greater education of participants and so stock-prices greater influences by at the very least pseudo-rationality of pertinent valuation models. Whilst of course there is regional income disparity for individuals, this is slowly reducing, so could be presented as an ideal way to eventually re-stabalise global capitalism and see 'Capitalism 2.0 evolve'.

When people at last recognise the diminished role of the state, and so themselves become technically, philosophically and attitudinally 'connected' to a reformed capitalism.

At that point they will be better able to observe the world around them, understand the goods and service industries that generate and convey value. People themselves will start to leverage their own understanding about their personal economic inter-connection with the world at large; as both a participant in value-creation and a direct beneficiary of it. Exacting knowledge of various stock and bond valuation methods might be distant, but the knowledge now available on-line should in time empower them.

The irony is that here and now, the very existence of an IT enabled world highlights the gaping attitudinal chasm that exists between East & West.

Today the ambitious Indian or Pakistani ten year old 'slumdogs', pushed on by family to escape the endemic poverty-cycle uses access to an intermittent, dial-up connection to view the Mumbai stock exchange, so copying the behavoir of the coffee-shop addicted, laptop wielding middle-classes. He or she does not have the money to buy stocks, but nonetheless wishes to understand and master the process upon which Mumbai and India is being developed, and has boosted fortunes for the likes of the TATAs and Hindujas, aswell as sections of middle class. Without access to a sound, formal education and the associative opportunities, he must find them himself.

Yet, all the while in Europe and the US, a trend for 'social infantilism' sees many adults retreat ever more into IT created virtual fantasy worlds. The environment is intendedly one of fantasy where the player feels a sense of empowerment unparalleled in the real world, with a pretence of power and fortune some on-line 'communities' do offer through on-line currencies and 'virtual-gold'; with a distant promise of game-points or virtual currency converted to physical cash if you play the game well enough.

The innate irony is that those western adults have, instead of learning the methods, patterns and trends of the real-world to better themselves, simply absolved themselves in 'this world' for a sense of achievement in an alternative universe, often with its own simplistic mini-economy, reflecting a modern-day Monopoly board, hence the pretence of real-world capitalism.

But those auto-motivated, auto-didactic, aspirant 'slumdog millionaires' of tomorrow don't need converting to capitalism, or indeed escape from it to a virtual simplified state. Those children live it every single day, and are not fooled by the illusionary numbers or false promises of virtual escapism. Instead recognise that they must invest in themselves, even if it be in a necessarily informal, ad-hoc and very sporadic manner given their circumstances.

Thus today, in this new period of rebalancing global economies reflected by a 'World Inc' philosophy, individuals in the west must ask itself “which side of that trade” they must position themselves? The real world, or the expansing virtual world. Yes the two are merging economically, and have merged perceptionally for many, but the size of value creation mechanisms that can benefit the individual through 'on-line game play' vs 'physical tangible work' still remain massively disproportionate.

Since many of the poor of the east cannot afford to metaphorically 'play games' with their lives, it seems almost shameful - and an indictment on our society - that many western adults fritter away their valuable time and learning doing that very same thing.

Friday, 7 January 2011

Company Focus – FIAT SpA (Auto) – Divide & Conquer? Or The Emperor's New Clothes?

Unsurprisingly, the new year starts-off with debate about FIAT Group's seemingly long awaited decision to split its conglomerate structure effectively in half; creating a Cars division and an Industrials division. The rationale is to provide greater autonomy for each section, the central element of that being the ability for each to provide greater transparency for external investors, allowing greater focus and understanding about the details of the specific company accounts, its current operational condition and the strategies set in place to grow.

For FIAT SpA (Autos) that means the ability to demonstrate FIAT's need to restructure, especially so in Italy to regain competitiveness, aswell as need for timely amalgamation of stock-ownership and operational corollary with Chrysler LLC. Such re-invention necessary to try and become a greater singular automotive force on the world stage, with the dangerous counterpoint of possible long-term eventual extinction for both the European and American companies if there general health is not markedly improved.

For FIAT Industrials, today's record-high foodstuff prices and global production pressures generate an impetus to better steer the agricultural division of its 'AgCon' business, this perhaps more important than previously thought given the lacklustre construction uptake in the west and the slowing of what was frenzied infrastructure projects in EM and RoW markets. The Truck section also requires close attention, given the fragility of the sector's rebound since 2008. This means the need to rationalise its own structure into well honed core-competencies, and manage the devolution from FIAT cars with an aim of generating new alliances with regional EM players in chosen growth fields; creating similar global reach relationships to the FIAT-TATA arrangements in Cars.

Having been historically financially interwoven – under the premis that FIAT Group could offer its shareholders the confidence of an 'cyclically off-set' empire – the separation of these previous 'Siamese twins' says much about the expectations and ambitious aspirations of senior management, aswell as the seeming desire of the Agnelli descendants to cash-in and probably diversify their own investment interests, these new interests in turn, very probably acting as a bridge for latter-day involvement by the newly listed FIAT companies.

The two FIAT separate companies debuted on the Milan stock exchange on Monday. The original Fiat Auto comprising of a passenger cars operation and vans operation, and the FIAT Industrials section which spans a myriad of sectors from a medium/heavy-weight truck division, spanning the value-chain of vehicle parts and the vehicle build process itself, to its well known involvement in Agricultural and Construction machinery under a portfolio set of acquired brands, aswell as other interests.

Auto ('Cars, Vans and FIAT Powertrain') itself has had greater inter-connectivity in recent years given the strategic impetus to gain efficiencies and the market demand for small van derived cars. Though both cars and vans are largely self-governing given their largely different market focus, the new Board will undoubtedly expect to see greater philosophical alignment so as to hone reporting structures, spread best practice and reduce overhead and piece cost (especially so from FPT) as part of that remit.

Industrial ('Trucks, AgCon, Parts et al) will need to gain a greater global reach and professionalism,the new transparency gained from the split, thus forcing greater responsibility and accountability upon each sub-division.

As highlighted in a post sometime ago, when the conglomerate's split was mentioned, of secondary interest to investors will be how the Elkann's (John & Lapo) and relatives decide to re-invest via the family owned/shared investment vehicles - Exor SpA (previously Giovanni Agnelli's 'IFIL' and Giovanni Agnelli e C. Sapaz, its close collaborating 'parent' vehicle).

As highlighted by investment-auto-motives at the time of the accidental series of Ferrari 458 fires, these holding groups act as a leading light for FIAT (Group), taking stakes in companies that prove of value-added worth to themselves and FIAT, ideally with mutual benefits. At the time investment-auto-motives noted the swapped holding interests in Switzerland's SGS - a the quality methodology and assurance company – which could be leveraged to ensure product and process improvement across the FIAT-Chrysler.

And unsurprisingly, Exor undertook new interests inside India and China through 2010, signing a private equity partnership agreement 6 months ago, and looking for additional – no doubt synergistic – opportunities.

[NB Exor appears to hold a narrowly diversified interest – excluding the breadth of (34.5%) FIAT Group – which pertains to: global property via 2 funds, business services via 2 companies, financial services via 3 companies, and tourism and entertainment via tour companies / a new tv/media 'space' entity / and major holding in Juventus football team. Exor's structure includes Agnelli e C Sapaz's hold of 54.1% Ordinary Stock, and 39.2% Preferred Stock). (This beyond EXOR SpA's self-hold of 2.6% and 13.3% respectively)].

With specific regard to the newly floated FIAT companies, major stock-price fluctuation at their appearance in Milan has been essentially as expected. Though not privy to the exact details given the manner in which the road-shows would have been marketed to an Italian orientated investor base - which itself may have had a level of political expectation hoisted upon it given FIAT's importance to the economy. So the 5% rise by FIAT SpA (Auto) and the 3% rise by FIAT Industrial on the first day of trading (to their E7.00 and E9.00 levels) were essentially foreseeable given the absolute need to best orchestrate the launches to keep all new and old stakeholders satisfied; their combined Market Capitalisation, then slightly higher that the old FIAT Group valuation.

[NB The fact that floatation investors envisaged 25% greater value in the Industrial company relative to the Cars company highlights the over-riding attitude relative to each's present competitive (global) position at this point of the 're-emergence' economic cycle].

The Car company's immediate 5% rise could be said to equates to the handling/experience of GM's re-floatation, though it managed only 3% in early trading. Yet whilst FIAT SpA did manage greater initial impact, much of this must be purely speculative as stocks partially traded across domestic and international institutional hands. Yet, with lesser orchestrated tail-winds that GM, flat-line trading looks probable for near-term trading given the real headwinds facing FIAT.

The present pertinent question of course relates to the future, and the ability for FIAT Spa (Auto) to achieve its ambition and so provide credible stockholder interest and future confidence.

Presently, beyond the very tough European challenge, and much needed boost from FIAT's S. American division, a great portion of that – theoretically at least - lies with Chrysler and its expected 're-bound' position.

As mentioned by investment-auto-motives' recent blogs and the Christmas direct marketing campaign, Washington's ongoing reliance on additional financial stimulus so devaluing the US$ effectively creates a a context for global FX 'stage management'. GM is a prime beneficiary, as is Ford and of course, one imagines, Chrysler - as Detroit's #3. Unsurprisingly this ongoing pseudo-protectionist move by the US administration is the less than popular amongst world leaders, given the economic and social ramifications it causes.

Nevertheless, the desire to deflate the US$ via QE2, provides a dual boost to the US economy, at home and abroad. At home it of course circulates greater domestic money levels (esp credit access – the modern equivalent for many of fiat currency), whilst internationally it allows for 'US pricing-power' vis a vis local competition. This move can only be of massive indirect assistance to Detroit, especially GM and Ford which can enjoy boosted repatriated earnings given the effective FX arbitrage..

[NB Critically, the advantageous FX leverage provides an ability to offer a discounted pricing strategy to its foreign markets, and/or enhanced product-spec provision to attract buyers on product grounds within those regions it wishes to avoid any subsequent 'pricing crush' by better positioned large local competitors].

Equally, the ramification for the world's other (non-US) auto-manufacturers is that the profit boost generated by inflated US sales demand will be only be deflated when the income stream is converted back into homeland currency. Furthermore, there will be at an initial competitive loss outside the US – at home and abroad – until the Europeans, Japanese and S. Korean's can restructure their own domestic and trans-plant's cost-base.

This is the prime drive for the likes of VW and Nissan to locally produce with the US or NAFTA, an action already under way by FIAT itself with Mexican production of the vanguard FIAT 500 for the USA, and its intention to use Chrysler factories to latterly co-produce FIAT and Alfa Romeo branded vehicles.

The rush for Marchionne et al is to create a Chrysler that can benefit from FX stage-management, thereby undermining GM and Ford's own attacks in Europe and S. America on FIAT.

However, unlike GM's or Ford's truly global footprints, Chrysler is at best patchy, with general world-wide coverage but far less in-market presence than its foes – mutual piggy-backing with FIAT (and vice versa) central to the alliance ambition.

Chrysler has had a history of world-wide expansion, over-reach and subsequent contraction; this the case with its Valiant brand in Australia in the 1960s, the failed efforts of loose alliance with the UK's Rootes Group and France's Simca-Matra in the 1970s and the formal marriage with Daimler in the 1990s. The 1960s effort failed due to the inability to fight GM & Ford in the far reaches of the globe. In the 1970s from 'combined doubled troubles' and in the 1990s from an unwillingness to relinquish Detroit control even when under the parental strictures of Daimler. (This last element being due to a mixture of improved profitability through the buoyant era and a politically over-sensitive German owner).

This history will be undoubtedly well understood by Marchionne, hence what seems a firmer grasp upon Chrysler, very necessary given the circumstances.

Chrysler proved its ability to bounce-back in the late 1980s with government assistance and Iaccoca leadership, a dual impetus that gave the freedom to produce truly contemporary products, as seen by its cabin-forward sedans and (Matra inspired) MPVs. But it does not enjoy such a free-hand today, nor does it have the grasp on the US market it had 3 decades ago. Indeed FIAT's very rationale for platform engineering hardpoints, bundled sub-systems and parts-bin efficiencies indicates ultimately a greater alignment of product types between the companies – even if masked as well as possible - so as to generate as large an economy of scale as possible. Its a platform sharing philosophy that worked so well for GM in the distant past, VW in modern times and sets the global standard. But it is also potentially prohibitive for Chrysler in recapturing its independent spirit and being Detroit's 'radical forward thinker', the role it has undertaken to historically rebound.

Moreover, the present Chrysler product line is at best uninspiring, the previous value-destruction and Chapter 11 re-structuring period prohibiting the much needed broad product investment; investment which FIAT now offers, but with its own strings. Indeed, after a dearth of new vehicles, near-term new product launches emerging thus far are the Chrysler 200C, and latterly new 300C (seen at Detroit this week). The former is important as a core product in critical midsize sector, but in itself is only a natural replacement for the mid-size Sebring, and so constrained by overtly conservative project business case pressures, given its critical role in insuring steady 2011 cash-flow. As also expected, the face-lifted 300C looses its uniqueness, now matched to the 200C to provide a fresher unifying corporate face - at least cost - but in the process loosing its original appeal, and expected to become a US rental fleet staple which whilst ensuring income unfortunately also damages the very usedful 'perceptional niche' old 300C had created.

The 200C's gestation period experienced much internal 'politicking' as Chrysler management initially tried to engineer the model from the higher-cost platform of the more expensive 300C, presumably to try retain the lead design rights and so maintain an element of internal power. This, not surprisingly failed. Yet unable to gain timely development access FIAT's own platforms or its prime R&D programmes, the new 200C is essentially a re-skin of Sebring. Thus whilst enjoying a) the definite benefit of amortised tooling costs, b) other 'in-house' efficiencies, and c) product launch scheduling that matches US demand up-tick for mid-size vehicles, the new 200C itself is rather lacklustre versus its competition. This is something FIAT and Chrysler undoubtedly recognise internally, the role of the model to strategically 'tread water' until the new batch of cars arrive 18 months later.

However, this in turn will put pressure on dealers to generate sales, which although aided by a reduction by $875 over old Sebring at launch, may in turn call for incentive programmes to meet (the probably over-estimated) 200C sales projections, and to set against GM and Ford's own larger leverage of customer credit availability. US customers also recognise their own bargaining position and so Chrysler, in its comparatively weaker state, may have to settle with 'less bucks for the bang' per unit. With this the case for 200C and later 300C the remainder of much of the aging product-line may also see likewise.

With this danger coming after the previous poorly received mid-size Dodge Avenger - which itself saw a cost-efficient 2010 facelift - the top-line revenue stream continues to come under pressure. Part of the damage limitation exercise will be to have 200C attract migratory customers as an in-house alternative, with perhaps even bigger Avenger trade-in give-aways to purchase the new 2010 Dodge Journey CUV.

Moreover, until Chrysler-Dodge's compact & small cars appears in early 2012 and 2013 there is nothing to fend-off its Detroit peers with their own more convincing line-up, (Ford in stark contrast able to enjoy the financial fruits of its precursing global platform efforts, latterly followed by GM).

The truth of the matter also is that Dodge's brand/product management has been ever more compromised over the years, given its #3 status versus is siblings, so affecting co-developed vehicles and thus brand integrity. Although re-awakened names like Charger hoped to recapture the glory days, as is 'New Challenger' the mixed milieu of vehicle types and characters only tied-together through the loose connection of stylised radiator grilles and at best style-influenced lamps. Amongst the international competition this now seems almost a parody of itself, increasingly on now a par with the latter-days of Pontiac before being extinguished as a GM nameplate. That action was no doubt welcomed by Dodge seeking Pontiac's pseudo-sporty clientele, but it is also a massive wake-up call for Marchionne. Also, the ability to exploit the Jeep brand will have to wait until 2013 when a new suite of vehicles arrive, thankfully seemingly re-injecting the characterful 'Jeep machismo' lost on Compass and Patriot, albeit done so for the urban enclave and thus smaller cars. The Ram pick-ups, whilst long in the tooth will derive a modicum of sales success from the slow 'American rebuild', however the previous Dodge van section - which used Daimler vans – has been discontinued, FIAT not able to provide a new generation of FIAT derived vans until 2012, and so creating an income vacuum.

In short, Chrysler's real attractiveness as a value-creating vehicle manufacturer does not dramatically increase until at the earliest mid 2012. Thus whilst Marchionne's hope for a 2011 Chrysler floatation is no doubt still on course, investors will have to wait 6-8 months to see the beginnings of real earnings traction generated from sizable input cost reductions, the up-tick in US demand and an ability to offer true 'US market relativity'.

Thus investors in both FIAT SpA and latterly Chrysler may have to 'factor-in' a stock price discount for Chrysler's floatation, waiting time until the all-new products arrive.

Just over a month ago FIAT provided a press release to clarify its position relative to its stake in Chrysler, the core message being that to raise its current 20% ownership level by a further 15% requires the achievement of 3 distinct 'performance events' to be obtained before 2013, each pertaining to additional 5% tranches. These being when:

1. the regulatory approval (and FIAT commitment) to produce the 'FIRE' engine family in the US
2. Chrysler gains $1.5bn+ revenues from outside NAFTA, inc Mercosaur distribution agreements
3. the regulatory approval to produce a US made vehicle using FIAT platform giving 40mpg+.

(These supposed hurdles however do not appear as onerous, part of the expected FIAT strategy to gain US and NAFTA access. However, much depends upon the state of the US market through 2010/2011 at both wholesale credit supply and consumer demand ends. Aswell as of course is the ability of FIAT to expedite these projects– which given its powerful position with the US senate as FDI propagator, and Mercosaur governments as well established corporate cornerstone, is achievable).

Interestingly however, even if not achieved, FIAT has the recourse to use a primary call option to acquire the additional 15% from 2013. Furthermore, FIAT can also access a second call option at the 2013 mark which gives an additional 16%, so giving an effective 51% ownership. (However a provisional part of the agreement with the US & Canadian governments is that not more than 49% may be gained until the outstanding UST loan remains unpaid, thus negating the all important additional 2% that tips ownership rights until so). The 'Considerations' of these call options payable at a rate commensurate with an EBITDA multiple calculation taken from other automakers' 'average reference EBITDAs' though not to exceed the FIAT multiple.

Thus as the FT highlighted, it would be in FIAT's interest to favourably manage its EBITDA and so share-price relationship at a lower-value to latterly pick-up the Chrysler shares. Though this is far easier theorised than actually done, unless Marchionne has a truly prolific and well detailed plan to re-build FIAT's capabilities base - and so set its overall cost base – in close marginal alignment with its global revenue curve. Thereby intentionally under-cutting the Plan's Trading Margin projections for the next few years, perhaps with the implicit backing of Exor / Agnell-Sapaz and other Italian institutional share-holders who support his ambitious long-term 'bigger picture' ideology (this appearing the case given the choice of only trading both the new FIAT stocks only on the Milanese Bourse, although old 'SpA car' stock remains on Paris & Frankfurt exchanges). Part of the incurred cost-base of that ideology, that possibly intentionally tames margin spreads, appears to be the large 30% increase in European retail sites, these probably 'factory owned' to also take advantage of the gradual increase in commercial property values over the next 5 years or so.

As capital markets once again start to become jumpy, the deferring of could be a tempting tactic indeed. Since to do so would negate the need for heavy direct investment in the US prior to the market's TIV being seen to be truly steady, a new low-level but real concern that emerges on the back of recent worries about the contagion of national and regional debt. If these concerns do emerge as increasingly sound, or even appear to be from press reporting, the probable course with Washington consensus would be to focus upon S. America first and foremost, so building US aligned political bridges via FIAT-Chrysler elsewhere in the SA region. US foreign policy could well turn to generating a notion of the 'Americas homeland' much as it did in the 1930s with autos and cinema - especially so given seeming increasing US foreign relations discord with the rest of the world.

Given little opposition by Washington and recognised as a long-term industrial ally, FIAT could feasibly take its additional 15% worth of call options and start to 'walk-up' to a possible hefty 49% before the UST is fully paid-off, then acquire at relative low cost the remaining 2%. As was set-out in its initial negotiation with Washington prior to post Chapter-11 involvement, flexibility and freedom was baked into the arrangement.

Set within this macro-perspective is the central role of FIAT Powertrain (FPT) as a critical enabler to both FIAT SpA (Auto) and of course Chrysler given the obvious 'disadvantageous hole' it presently poses in relation to US and increasingly global CAFE regulations. As such it is an innate component of the new growth engine, for the company itself aswell as the American economy.

Particularly so, because the new FIAT SpA company can now 'play macro and micro tunes' with FPT. Firstly via its macro-promise of weighty FDI potential as itself seeks US growth and the desire to climb the value-ladder (so training the workforce), and secondly, the micro-ability to better manage the transfer pricing of engines and transmissions between FPT and assembly plants. This done through both 'purchase levers' of increased order numbers, greater direct control of FPT's own strategic course within a FIAT SpA strategic context, the ability to hard-bargain with its own now semi-remote FIAT Industrial supplier base, (eg Teksid for castings etc) and the opportunity to use such Italian-centric cost-cutting agreements as a pricing/service template for supplier deals elsewhere. This of course most pertinent to those agreeing to serve any new FIAT-Chrysler engine factory in the US, since FIAT could use its own counter-ploy of creating/expanding its FIAT Industrials production base in the US. It would be rationale to using the (AgCon) Case New Holland Company's tractor engine supply sub-division as a base location for any exploratory project team, given the close links between FPT and CNH engines. Even if though on surface inspection the specifications are technically very different, the engine procurement, build and test regime is essentially the same, so promoting the thesis for same-site or regional located car engine production

Thus whilst Autos and Industrials are publicly listed in Milan separately, to not leverage their inter-relationship in whatever way feasible is hardly creditable. investment-auto-motives suspects that Exor & Giovanni Agnelli e C Sapaz, seeks to maximise near-term exploitation of the AgCon element of FIAT Industrial, especially so for the CNH Company given its advantageous position as a high-value, high-demand US exporter, exploiting the FX differential and the present record-pricing of agricultural commodities and so sector interest in farm machinery. Hence FIAT's rebuttle of competitor AGCO's acquisition interest in CNH.

This then, from a prime FIAT shareholder perspective, would form a follow-on US cyclical play of initially AgCon and latterly Autos, using the shoulders of the former as a strategic enabler for the latter. In essence typical conglomerate behavior, but undertaken by a now 'loose' corollary.

The reality is that the 'singular head' of Exor, Giovanni Agnelli e C Sapaz actioned through Marchionne and his senior generals was always designed to provide the best of both worlds for a partially dismembered FIAT as it fights for its global future; a reality not lost on the market and industry observers.

However, the formal separation of Autos and Industrials – the latter now unprotected by Cars – theoretically gives the ability to negotiate greater BoM (Bill of Materials) flexibility for FIAT-Chrysler, not just from the Powertrain value-chain, but across the full stretch of vehicle systems and vehicle build operations, so drawing better deals from Magneti Marelli and Comau. This applied not just in Italy, Poland, Turkey and other present build centres, but critically serving its US ambitions.

Those foreign ambitions, made clear by the automotive transplants - with the Bursa, Turkey factory now also acting as a contract production centre for Opel AG - set the dour but realistic tone for homeland FIAT workers. Although union rhetoric of resistance continues, staff undoubdtedly increasingly recognise their own squeezed position between a competitive outside world and the decline of political and social support from a previously left-leaning nanny state. Thus it is a given that Marchionne will win the day in achieving Italian reforms that reduce the FIAT cost-base, boost domestic productivity and so aid much needed European production & sales centre profitability.

[FIAT has established new companies to run both Mirafiori (Turin) plant and the Pomigliano d'Arco (Naples) plant, with only the FIOM union to be persuaded. The Mirafiori deal will be put to the vote of workers this month, but FIOM announced that its members will down tools for eight hours on January 28 against the separate agreements; largely seen as an symbolic but essentially empty protest to save face].

Thus in Europe FIAT is making progress, but the question remains as to if this progress will be undermined by the dark near horizon of future EU car sales, FIAT perhaps more prone than any other Euro-manufacturer given its overt reliance on the economic fortunes of Italy and its contracting Mediterranean neighbours (the now infamous 'PIGS'). Thus the Italian efforts, whilst worthy may only serve to keep the company's European operations' 'head above the water' in the short and medium term.

As is well recognised, the new FIAT SpA (Autos) must achieve turnarounds and marked progress in all its global operations, this not did-counting profitable cost-centre of Brazil and other portions of S. America, which have served as the cash injectors for the company over the last few years. As their economies slow due to slightly declined commodities exports to China/Asia, so the unit margins of present production will be proportionately undermined, thus requiring ever tighter production scheduling and reduced overheads to match prevailing demand, this undertaken as the slow-down is used to plan and build a second Brazilian factory in Pernambuco between 2011-14, adding further capacity to the 800,000 units currently available in Minas Gerais state.

The all important 5 Year plan presented by Marchionne in April 2010 was extremely well timed, riding the buoyant sentiment of capital markets that had re-bounded at an amazing rate over the previous year, driven partly by 'disaster-avoidance relief' and partly by pure rally speculation. Thus impeccable timing with the use of the last 8 months to tell the 'FIAT separation story', illustrating the consummate professionalism of himself, his team and more pointedly FIAT's investment banking advisors which were able to 'read' the recent period; and taking the opportunity to exploit that window of opportunity when presenting the new FIAT SpA and FIAT Industrial companies.

[NB Dow Jones reported on 13.12.2010 that both companies had signed a EUR4.2 billion financing package with a group of banks, the Italian stock exchange filing stating that the package includes a three-year Euro1.6 billion revolving credit facility with a syndicate of 23 banks and a Euro2.4 billion term loan with a one-year maturity and a one-year extension option, which is not syndicated. The monies used for 'general corporate purposes' and working capital needs. The operation's lead arrangers and bookrunners were Intesa Sanpaolo SpA's Banca IMI SpA, Barclays Bank PLC's Barclays Capital, BNP Paribas, Citigroup Global Markets Ltd., Credit Agricole, Societe Generale, Royal Bank Of Scotland and Unicredit].

That April 2010 plan set out the challenge and opportunity for FIAT Group, the 2010-2014 period planned to see the Group Balance Sheet is planned to move from holding a Net Debt of Euro>5bn, to provide a Net Cash position of Euro3.4bn by 2014. This driven by Group Revenues planned at a CAGR of 13.1% per annum, giving Euro93bn in 2014, Group Trading Profits rising from 2.2% in 2010 to 7.3% by 2014, and providing a Group Net Income of Breakeven in 2010 and Euro4.9bn in 2014 giving an EPS of Euro3.80 to investors.

For Autos alone, the '6 Pillars' of the Plan are:
1) European TIV rebound to pre-crisis levels by 2014 (16m cars & 2.2m LCVs),
2) Optimal use of FIAT-Chrysler facilities without fiscal drag of new plant CapEx.
3) Full integration of FIAT & Chrysler product portfolios
4) Commitment to develop Alfa Romeo as a Premium 'full line' brand.
5) Strong growth in Latin America
6) Optimal allocation of product development (costs) between FIAT & Chrysler.

Present conditions indicate that:

1) the European TIV will not rebound to pre-crisis levels given the consumer demand ramifications created by the sovereign debt crisis, any new TIV buoyancy to be seen in Germany, France, UK and Scandinavia, which will see their 'national champions' prevail due to renewed nationalistic attitudes and improving wholesale credit conditions available to and homeland and major German, Japanese and Korean producers. Thus creating an environment for a sizable 'FIAT Fight' as VW, BMW, Renault and Ford seek to increasingly quash the squeezed European abilities Opel and FIAT.

2) Production facility optimisation is predominantly aimed at Europe as part of that 'FIAT Fight', utilising restructured FIAT plants to add Chrysler product assembly (eg Lancia-Chrysler) and so improve European capacity utilisation, with added ambition of producing high-margin D-segment cars to boost overall per unit income levels. Thus concentrating D-segment production across 3 brands (including Alfa Romeo). Ideologically, the 3 brands mimica 'near-luxury' perceptional positioning akin to that of Mercedes (Chrysler), Audi (Lancia) and BMW (Alfa Romeo). Though this value-driven era indicates a plausible strategy, its seems inevitable that this effort may only be relatively successful for Alfa, by reducing R&D and production costs, because Lancia still remains ostensibly a niche brand, whilst Chrysler's European successes have been lower volume 'trad-character cars' such as PT Cruiser & 300C, which is now passe, thus providing the new conventional range with little European attraction. Thus the 400K per annum target for D-segment cars – so boosting margins - presently by 2011 standards at least appears untenable.

3) Integration of the FIAT and Chrysler product portfolios is a prime requirement, especially so relative to new model generation in B and C-segments. This will be the crux in deploying new product/brand faces that span broad market segments and geographies with a plethora of well-targeted vehicles. Whilst an obvious goal, the critical aspect will be execution, both in terms of direct product appeal, the overall project and unit costs and critically the need to demonstrate much improved 'quality', these ideals of course often at odds with each other as focus on one or two elements undermine the other. Whilst the FIAT baseline capabilities in all areas have improved over the last decade, the ability to deliver a polished triumvirate for itself and Chrysler remains questionable, though the opportunity has clearly arisen. Best in class global learning from both the Japanese & Germans should have been baked into the co-creational development process to ensure proportionate success-factor criteria is demonstrably integrated into this effort, Though it is appreciated that FIAT cannot easily replicate the sophisticated (decades long) technical strategy path which both its competitor nations have innately build-into their dual aspect - quality improvement & simultaneous cost-amortisation - design and production methodologies..

4) The commitment to develop Alfa Romeo as a Premium 'full line' brand is as Marchionne well knows key to the future success of FIAT-Chrysler. Having enjoyed success previously, the flailed demand for Alfa in recent years a consequence of its direct exposure to the peaks and troughs of the economic cycle in all regions and the need to re-enter B & C segments with credibility. Mito and new Guilia have achieved this, with encouraging initial sales figures. Yet this necessary strategic action to enter more mainstream segments also re-orientates the perceptional centre of gravity of the brand at a lower-level, this a consequence of the necessary reaction to macro-economic headwinds. But also notably a disadvantage avoided by the premium German marques since they introduced their B and C segment cars during more boom times when D and E segment cars maintained demand and so held their centres of gravity. This means that Alfa Romeo must add yet greater impetus in its D, E and coupe, cabrio and sportscar efforts as well as maintaining its mid-car variant expansion (hitting the US in 2012) to be seen as a truly belonging to 'premium'. An unfair result given the effort and success previously engendered but a true reflection of its challenge, especially so for credible US re-entry and impact in China, India and Asian markets.

5) Strong FIAT brands growth in Latin America – seen in the near-term - is perhaps the central element to maintain the investment community's belief in new FIAT SpA. Any lost advantage will be viewed dimly by analysts given the historic stronghold and so the accompanying spring-board effect, especially pertinent as the small yet meaningful economic headwinds facing Mercosaur should be a time of exploitation for the strongest in the region (ie FIAT, VW and Ford). Here lies the importance of the B-segment's New 'Novo Uno', created with Latin American functionality 'squarely in mind'. Though cosmetically intendedly very 'naive', to provide broad appeal, its SUV-esque overtones and higher-ride provide for an effective 'bang for the buck' statement and should engender effective Brazilian feeling equating to almost that of a new national car given its indigenous design remit.

6) Allocation of product development between FIAT & Chrysler to yield optimum cost. This seemingly the strong basis rationalisation of NPD work, pointedly indicating that C-segment being predominantly designed and manufactured in the the USA / NAFTA region, presumably given the generally smaller per unit margins based upon the level of NAFTA domestic sale volumes and the idea that the US$ will resist inflation so as to offer worthwhile export opportunities if deemed fit. This also indicates the 'theoretic reasonableness' (as seen indicated in point 2) that the higher priced lower volume D & E segment models can off-set a higher project and unit cost base relative to FIAT's own Italian competencies with more advanced large cars (eg Maserati, Ferrari) aswell as the opportunity for Pan-European JVs, aswell as an intrinsically more sophisticated European 'premium' supplier base.

Thus the theory of the presented case underpinning the 5 year plan is hard to fault, as it appears the most – possibly only credible way forward for FIAT's growth and survival – hence Marchionne's belief and gusto. A real concern however is just how well placed this necessary demonstration of confidence actually is given the business's strategic contexts at both macro and micro levels?

After a disasterous 2008, FIAT's efforts in 2009 – boosted by massive European green-car stimulus packages – were salvaged, and it went on to enjoy the benefits of a downsized, leaner commercial entity in 2010.
Q1 2010 saw Auto's Revenues up 20% YoY to E7,334m and saw Auto's Trading Profit improve sevenfold to E196m. (NB. when grouped with a sizable CNH contribution and others saw Group Trading Profit returned into the black at E352m, and Group Net Loss reduced to E-21m (from E-411m)).
Q2 2010 saw Auto's Revenues up 6.7% YoY to E7,927m and Autos Trading Profit improve 18.9% to E270m. (NB. when grouped with CNH contribution and others saw Group Trading profit reach E651m, twice the previous Q209 period, and Group Net Profit reach E113m.
Q3 2010 saw Autos Revenues up 1.3% YoY to E7,090m and Autos Trading Profit improve by 1% to E210m. (NB when grouped with CNH contribution and others saw group Trading profit reach E586m, up 90% over Q309, and Group Net Profit reach E190m)

As depicted here and (highlighted by the FT) the Non-Autos portion of the then combined conglomerate offered the greater part of the trading profit boost given its much smaller revenue size, demonstrating itself to be proportionately greater value than Autos, hence its greater MarketCap valuation when floated.

However, what is of greater concern for Autos is the ability to match 2010 sales and income figures given the repeal of government stimulus measures which so helped Q3,Q409 and Q1,Q2 2010 and the dousing effect of hard-hit consumer confidence on as a result of constrained national budgets and its reduced support for primarily state related but also partial private enterprise, employment over 2011. The beginning of that hit may well be seen in the Q4 2010 sales figures reported on 23rd January, which ordinarily would have a contraction effect on FY2010 - precursing dashed expectatencies for a strongly continued Autos rebound in 2011.

Yet countering expectation, FIAT SpA appears to have micro-managed its reaction to events by recently announcing raised guidance for the fiscal year 2010, expecting to report FY 2010, Revenues in excess of E55bn (up from over E50 bn), Trading Profit a minimum of E2bn (up from E1.1bn) and Net Profit of approximately E0.4bn (up from breakeven). The exact details of how this is achieved will no doubt be examined carefully.

On its new floatation day of 3rd January FIAT SpA climbed 5% or so (having corrected to approx E7 on the Paris Bourse) and has traded effectively flat over the following 3 days, now sitting at E7.48 whilst the market takes time to properly re-analise the company's potential.

As a contrast FIAT Industrial opened on 3rd January at E9.03 and closed the same day up 3%, fell to E8.68 two days later and now stands at a rebounded E9.05.

The one question that analysts will be asking themselves is to what end that shared E3b loan will be used between the 2 companies, especially assuming a pattern of Revenue and Net Profit divergence between Autos and Industrials. The use of a near 0% interest loan given by Industrials to Autos at some future point, perhaps mid year, might - if found in both companies' Q3 2011 accounts – be very telling indeed.

But ultimately the need to split Autos and Industrials always made sense as we enter a very new age which presently proffers at first sight such a distinctive and profitable cyclical play for the Agnelli descendents and other follower type investors. The real interest however lies in the organisational depth and schedule timing of the operational and financial inter-plays between the now distant siblings.

The decision to 'divide and conquer' remains powerful and prescient, the only question for FIAT SpA is the ability to manage the perceptions of non-core / latter-day investors that sit outside of Italy. Since Marchionne sits as the notional FIAT Empreror, his personal ease and a wardrobe of trade-mark jumpers will need to appease any hint – warranted or not - of FIAT SpA's possible short-term 'nakedness'.

The holiday season over, the new year dance has begun, but a slow, steady Milanese Waltz - however attired - is undoubtedly more preferable to unsure present European capital markets than any immediate flirtatious Parisienne Burlesque. Yet, the inclusion of any Latin Waltz choreography would also be welcomed if much more than simply a 'Vida-Loca' tease.