Friday, 29 April 2011

Company Focus - Indian Motorcycles – 'Sweet-Spot' Timing from PE to Trade, as Polaris Adds Industrial Mass.

Indian Motorcycles is a prime example of a once legendary brand which having suffered historic atrophy is seen as a proposition for a 'renaissance recovery'. Depending upon the complexity of the situation such propositions will be viewed as target acquisitions for private equity, ripe for business re-evaluation and resuscitation, exited via Secondary Market sale, an MBO or ideally bought-over by a synergistic trade-buyer. The trade buyer seeking to typically eliminate the nascent 3rd party competition and by adding a new brand broaden their own portfolio, market-base and sales potential.

Such is the case with Indian Motorcycles.

Indian Motorcycles then sits as a minnow inside centre of a large and complex commercial bike world, its approximate annual output of 1000 bikes is dwarfed by H-D's 23,000.

A century ago that picture was reversed, established in 1901 it was far bigger than H-D up until WW1, their rankings reversed from the 1920s onwards until today, though with a few resurge years such as 1940. The prime models of Chief (v-twin engine), Scout (v-twin) and Four (IL4).

The last 80 years has seen various attempts at recapturing that early success, merged into duPont Motors, sold to Ralph B Rogers for light-bike focus, sold onto Brockhouse Engineering which re-badged imported Royal Enfields in the 1950, sold to the UK's AMC in 1960 (not related to US AMC automobiles), the name 'adopted' by entrepreneur Floyd Clymer in 1962 to produce mopeds and 2 big bikes, the name allegedly sold to an LA lawyer in 1970 who had products produced in Taiwan until 1977, thereafter brand ownership disputes until 1998. The Indian name was given to an amalgam of firms headed by the California Motorcycle Co which began Gilroy CA production of a new Chief model in 1999, a Scout in 2001 but liquidated in 2003.

Such false-starts and re-starts all too typical with 'renaissance brands', the 'fits & starts' of commercial activity typically generated by an imbalance of new 'personality' owner ambitions set against an unrealistic heavy-headwind situational context.

However, when purchased by a PE firm with sensitivity to its history, philosophy and can re-mould and pass-on the regenerated small enterprise to a distinctly large, well-aligned company, it will offer a far better chance of success; if handled with care and attention given the new structural foundations in place.

Indian Motorcycles has now entered this phase of maturation, having been essentially yet again re-formed in 2006 with the majority-ownership of the London-based PE firm Stellican Ltd, and now recently sold onto Polaris Industries on 19.04.2011. Polaris manufactures of utility, leisure and defence-sector off-road vehicles, typically comprising of Quad-bikes / ATVs, 2WD / 4WD / 6WD buggies, 'Neighbourhood Vehicles' and Snowmobiles, having extracted from water-based vessels after a brief stint. Polaris also critically owns Victory Motorcycles.

Victory bikes are retro-styled large and medium-sized cruisers designed to compete directly against the monolith that is H-D. Its model range consists of 'Tourer' and 'Cruiser' variants – the latter large and medium – with effectively 3 trim levels: EightBall 'Base', Standard & 'Ness' Premium, the latter reflecting a co-branding the well respected 'Arlen Ness' bike builders; altogether offering 18 different bike variants.

Stellican describes itself as specialising in 'distressed situations', 'value situations' & 'special situations' related to old-economy businesses, although it has explored alternative arenas such as sports entertainment, with Italy being prime territory. Its focus however seems to be the regeneration of legendary names from whom which the lustre has faded. A good previous example of how it seeks to create value being the re-unification of nameplate and build-capability for the legendary wooden boat builders Chris-Craft, the American equal of the classic Riva; done so by buying the name from Rupert Murdoch's NewsCorp (see previous essay) (which also highlights the the subtle brand-capture and hold role which appears to NewsCorp play).

Stellican states its (very typical) PE investment criteria as seeking:

- Leading market share.
- Good brand, franchise or reputation, whether current or past.
- Solid asset backing, including preferably non-core assets.
- Potential to increase earnings and return on capital employed.
- Actual or potential high cash generation.
- Strong management team.

[NB These strengths then offer various PE plays in re-shaping a company, especially so where non-core assets can be disposed to re-invest back into the company, or the funds from which can be re-deployed elsewhere by a PE firm, or useful to repay client repayment demands without sacrificing core growth capital or associated yields. This part of general Balance Sheet restructuring. The other facets are self-explanatory].

Extracting such internal value will have been part & parcel of the purchase and sale of Indian Motorcycles, given that it started production afresh in 2006 at what appears a Stellican funded site in Kings Mountain, North Carolina site. This physical asset then 'returned to pasture' with the company's sale to Polaris Industries and transferal of Indian tooling and inventory to its own Spirit Lake, Iowa site. Thus then able to either re-deploy or sell the Kings Mountain site.

From an external perspective, re-deploy appearing the better option given the site's somewhat remote 'captive' location, low regional labour costs promoting high-manual content, sub-assembly activities for dispatch to Chris-Craft Industries.

But what of the Indian Motorcycle back-story?

Stellican would have noted that Victory Motorcycles had been established in 1998 with aim of gaining headway into the massive sales success and so notional market development created by the demographic and geographic reach of Harley-Davidson. That growth story was still robust in 2006, a decade into the sales boom, though obviously prior to the 2008 financial crash. Victory then was eager to replicate Harley success but knowingly lacked the pedigree, instead seeking to invent itself as neo-classical, very much in the retro-vain of the period. Yet it still lacked Harley authenticity, a trait that Stellican saw as able to effectively arbitrage with the Indian nameplate.

Thus Stellican (like so the many others previously) saw Indian as the perfect, centrally positioned renaissance brand, with endemic history it had greater authenticity than the neo-classical offerings from Polaris or indeed the Japanese, and as such a more plausible up-scale alternative to Harley for both new and migratory middle-aged bikers.

The emergence of the middle-aged, white-collar, motorcycle rider in the late 1990s, inflated the market for expensive, accessory-laden 'Weekend-Toy' motorcycles across the US, UK, Europe with latterly uptake in EM regions. Whilst a few of this new crop of 21st century 'suburban cowboys' were drawn to superbike territory, emulating the hero status of real-life GP and TT riders, the vast majority bought cruiser bikes. These less dangerous, more practical and crucially far more conspicuous when parked outside the pub / bar; the ordering of a soft-drink little more than a conversation starter to highlight the beast sat outside.

Nine times in ten, that beast was/is a 'HOG', the nickname for a Harley-Davidson apparent in its stock ticker. And so true to the tenants of deep consumer-psychology that middle aged Sunday rider believes himself (or increasingly herself) to be part of a counter-culture motor-cycle tribe with anthology spanning from the silver-screen's Easy Rider to 'Hells Angels' chapters that live on the outlaw fringes to the idea of a Springsteen-esque 'Steel-Town Joe', all this supposed 'Socking it to the Man' repaid by the 9-5 escapism of the 'Sturgis' bike festival – the veritable bikers Mecca - though don't dare mention those "damned A'rabs" and the price of gas!

Such is the H-D social cult that has flourished in the good times and bad; the economic waves well ridden by H-D's executives over the decades though obviously assisted by its near monopoly of the market . The times of economic woe only paradoxically add to the anti-hero persona even if bike sales for the company tend to heavily flag under the fluttering stars and stripes at a dealership, as seen over 2008-9.

It is within this world of Cruisers, Soft-Tails and Hard-Tails that that Indian Motorcycles has been fighting for recognition and market-share, a world almost unto itself, well apart from that of BMW's ownership of sensible Tourers, Enduro-bikes & Enduro-Hybrids, KTM's Paris-Dakar roots, Honda's ownership of 'Lazy-Bikers' with GoldWing and supply to the police and services fleets, and at extremes wholly separate from Honda's and Suzuki's ownership of the sports-bike market, even if H-D markets Sportster and Cafe-Racer types, given that its Buell brand was created for patriotic performance but discontinued since 2009 (along with H-D's sale of MV Augusta).

As if not hard enough for Indian to combat a heavily re-focused H-D alone with its market grasp, the Japanese VM's product lines periodically see cruiser-bike introductions which vary from mimicking H-D to alternative characters. Furthermore other once legendary brands have been reborn, from British Triumph in the mid 1990s building well beyond its Bonneville associations, to very recently the re-appearance of the 1920s Brough Superior – as ridden by Lawrence of Arabia - at the very top of the market and hand-built to order. Royal Enfield having become entrenched a basic transport in India for decades has sought to re-ignite its own Retro-British look & feel with models like its olive green Military Bullet for export back into the West. And to add yet further complexity and competition for Indian Motorcycles is the smaller but high value custom / “kustom” branch of the market, where cruisers are specified and built on a bespoke basis by dedicated firms of modern craftsmen akin to the origins of Arlen Ness, seeking similarly to make their name through high-value clients and projects.

[NB there is also the self-builder operating out of home garage, shed or even front room, inspired by bike magazines, the efforts of these individuals and clubs feeding back to influence the mainstream, though of only cultural interest to Indian Motorcycles, since these people are typically the antithesis of the luxury market that Indian seeks].

For the management at Polaris Industries all this is very familiar territory, before and since the creation of Victory Motorcycles back in 1998 and adoption of the (father-sons) Ness names to boost the upstarts credibility.

However creating market traction for itself has been a problem and the use of the Ness name on a brand that offers value-pricing ('spec-for-spec') against H-D (as exemplified by its 'Bobber' model which sits $3,500 or so under) is intrinsically confusing, and so undermines brand integrity, even if on paper the amalgam looks positive and as a central part of its own top-spec model-lines.

Through exploitation of the Polaris distribution-base Victory Motorcycles has had notionally broad US reach and international presence in major cities. However its marketing platform and client presentation leaves much to be desired. Typically co-located with Polaris retailers for both pragmatic and apparent synergistic reasons - given the corollary of off-road & on-road leisure pursuits – this set-up reflects in the sub-divisional organisation of Polaris Industries more than the ideal shop window. The probable effect of shared space retailing is that Victory Bikes is seen as an 'add-on' to Polaris and thus unable to stand-alone. Though it might appear otherwise to the internal perspective with need to keep tight budget control, clean-chromed stylised boulevard cruiser bikes and dirt-machines, no matter how able and toy-like, do not make for good showroom partners, sending-out distinctly different messages, even if the central idea of cross-selling appears appealing and has indeed enjoyed success to date.

Thus Victory whilst probably successful in rural areas with dual-use clients, has been unable to present itself with the same high degree of professionalism as Harley-Davidson, when indeed it must appear to be superior in terms of urban street presence, window display and customer service. The need to improve marketplace presentation then is a driving force in combining Victory and Indian nameplates, the two (unlike quads & buggies) able to stand side by side the urban/suburban bike showroom.

This headwind in creating a costly dealership network was no doubt was part of Stellican's rational for exiting from Indian Motorcycles, recognising the need to find a new and able 'steward' for the century-old marque. And beyond distribution and retail, Stellican would have noted the high engineering development costs required to make Indian truly superior to Harley-Davidson.

Biker web-forums state that Stellican noted the quality problems that the older 'Gilroy Indians' suffered using Taiwan sourced-parts early-on in its ownership, and sought to address this issue as part of its re-build of the Indian brand reputation. This done by creating the manufacturing base in Kings Mountain, North Carolina, and approving specific but basic re-engineering projects to improve product quality as part of the quality march beyond the H-D benchmark, which could then prove itself as worthy in the low-volume niche luxury sector - the only tenable re-start point (esp for a PE firm) where all important levels of unit margin could theoretically speak for itself. However, its does appear that the level of 1999 product re-engineering has been quite low over the last 10 years, directed at the powertrain of the Chief model, Stellican very probably seeking to both cure the major engineering / specification problems whilst simultaneously maximise company profitability so as to create an attractive vehicle for full or partial exit.

The attraction of Victory Motorcycles for Polaris was to obviously create a second motorcycle business that could sit above H-D, just as Victory Motorcycles sits below. Thus with the idea of creating lower and upper pricing boundaries for H-D, and in time, the intent to eat its way into that massive middle-ground that H-D occupies.

Thus it seems probable that beyond the costs of ideally creating an all-new dealership network - with web-linked BTO assistance, but still invariably required - Polaris Industries must also maintain the march of product quality; both undoubtedly costly exercise s. The overhead operating costs of Indian can now however be reduced as – depending upon internal cost-centre accounting methods used – it is able to share its backroom operating and administrative costs within the Polaris empire, this cost-saving providing for incoming cashflow to be directed at product development and retail development, though realistically it probably only offers small room for such manouvres, the majority of funding very probably born from Polaris with greater access to investment capital than would be the case for Indian or Victory separately – though latterly plausible when the 2 siblings have been better merged.

investment-auto-motives sees the Stellican sale of Indian to Polaris as at a 'sweet-spot' moment. June sees the end of the Federal Reserve's Quantitative Easing measures, which pumped so much liquidity into Wall Street to both prop-up the banks, re-generate the investment markets and provide cash for activity-based (rather than asset-bubble) commercial lending. Having seen phases 1 & 2 completed the White House wants to see the liquidity trickle-through into the real economy, ie US industry, which having been through re-structuring, cost-abatement and created savings-cushions where possible has used such in-house cash for acquisitions and seeks to access low-cost bank borrowing to finance new-era expansion plans.

Polaris Industries then in buying Indian Motorcycles exemplifies itself as a constituent part of the crucial pillar in the US administration's desire to see a 'productivity push' economic recovery, one in which US products and associated services like Victory & Indian can ride the global bow-wave that Harley-Davidson created...selling a piece of ideological free-spirited, but high priced, Americana to the world.

It was that very free-wheeling spirit that the infamous writer Hunter S Thompson sought in the mid 1970s when he wrote his counter-culture classic 'Fear & Loathing in Las Vegas", a booze and drug-fuelled adventure into the Nevada desert as cover-journalist for the Mint 400 desert race (since revived)...

“I bought a beer and watched the bikes checking in. Many 405 Husquavarnas...many Yamahas, Kawasakis, a few 500 Triumphs, Maicos, here and there a CZ, a Pursang...No Hogs in this league, not even a Sportster”.

Whilst such literary overtones of H-D's absence might live in Victory's & Indian's fantasy, the fact is that they were created, revived and now sit pillion together with the direct intent to wallow within Hog territory. But perhaps not uncoincidentally, Victory's 'Vegas' models give an impression to Polaris executives that H-D cannot stay forever the grand-daddy of cruisers.

But, in the meantime, in the motorcycling world of 'Urban Cowboys', Polaris still needs to find a strategy that provides an “Indian Victory”. Their strategic and operational unification will prove undoubtedly advantageous, yet whilst the road ahead will be tough, it does offer much once western economies have re-bounded and eastern luxury-toy consumers seek the non-obvious.

However, one is clear...the Hog will be first at both troughs, so Polaris will need to identify exactly how it can configure and espouse its 'lower and upper' marques. 70% of the Polaris share-holding is held by the US institutionals, a community now seeking greater governance and possibly semi-supervisory input given the performance boost many pensions funds require. Though Polaris management are aligned with its 7% share-hold, the instututionals should seek greater transparency in both strategy formulation and operational execution than has been the case in the past.

In the meantime, shareholders and management alike will be overjoyed at the 21% stock-price leap that Polaris saw on 20.04.2011 (a week after the Indian purchase) when management announced that its FY2011 dividend of $5.53 would beat analysts expectations of $4.87, the share-price hit $110.28, the highest peak since 1987. Whether the announcement was made 'optimistically' to assist stock-favour and thus assist MarketCap valuation and so strategic funding remains to be seen, but the interest in Polaris' future from the capital markets is obviously palpable, given its place in the 're-making of America'.

“Roast the Hog” might well be a motivational saying in Spirit Lake, but beyond surveying Hog territory as it has done Polaris must create its own territories which accord with the mentalities and aspirations of specific client types. Moreover it must better understand the Hog's psyche, its strengths and weaknesses, and that will take some doing, given its own recent 're-centering' and its undoubted self-analysis. That an imperative so as to build its own on-road divisional tribe and its own 'H-D counter-culture'.

That appears to have started in Victory with the 2010 CORE concept bike implicitly taking the brand in the direction of 'naked elegance' using the archetype Bobber-build mentality as its new centre of philosophical gravity created by an ex-BMW (Designworks CA) bike designer. That leaves Indian as the more flamboyant heavily-bodied sibling.

This model for aesthetics then well matches the tenants of respective 'lower & upper' basic business models which sees the relativity of basic production costs echoed in Victory and Indian pricing points and so unit margins

As for a suitable signature tune for Polaris's newly expanded motorcycle division, the antidote and antithesis to H-D's links with Steppenwolf's “Born to be Wild” or “The Pusher” could well be Rufus Wainright's..."Ain't Heavy"

“The road is Long...”.

Thursday, 28 April 2011

The Royal Wedding

On this eve, this small voice adds to the chorus across the land in wishing the House of Windsor the very best for the future.

Buckingham Palace and Clarence House will have received cards with verses aplenty, from other Royals, the Nobility, the Clergy and the Public. Yet let us hope that whilst the happy couple become ever more entwined, that Prince William - the future King - remains very much his own person, as The Queen has obviously done throughout her reign.

That said, it would be undoubtedly advantageous to see both Princes working collaboratively in their duties both private and public, and so at long last extinguishing that awful phrase ascribed to Royal scions; thus adding personal and professional weight to the wedding roles millions have witnessed, in turn adding Royal and British strength in the eyes of the world.

For at this time and onward, Britain itself seeks its new future, and in this regard may the words of past notables such as Lord Halifax and offer as much guidance as the wishes of the people offer support.

Yet, the final words at this special time are left to Goethe, and echoes as much for the country at large as for the happy couple...

" Love does not dominate, it cultivates".

Blessings to All.

Saturday, 23 April 2011

Micro Level Trends - Formula One - "Gordon Bennett!"...Murdoch Seeks Re-Configuration

Born as the son of a regional 'press-baron', Rupert Murdoch has arguably surpassed the achievements of other legendary 'father-son' press-barons, himself expanding the NewsCorp empire's commercial reach across the globe. The media conglomerate holds too many newspaper, magazine, book, TV, film, web-site and sports names to list, but primary titles being: Dow Jones, The Wall Street Journal, Fox, 20th Century Fox, SKY (inc. BSkyB & ITV in the UK), STAR TV, LAP TV. National Geographic and MySpace.

The corporate build strategy has been both vertical and horizontal, building inter-connected backward and forward value chains, aswell as exploiting geographical expansion as 2nd world countries morphed into EM regions; thus typical conglomerate activity. Thus Murdoch and NewsCorp have been seen as both a welcome antidote to monopolistic national-service media, or as villainous global press giant intent on world domination.

Of course, whatever the viewpoint, NewsCorp is a NASDAQ listed company and as such participant in the frenzied growing media sector alongside the likes of TimeWarner and the Walt Disney Co, aswell as challenged by a raft of 'arriviste' EM region TCT (Television-Communications-Technology) companies who themselves seek home advantage.

Murdoch's latest reported ambition is to take control of the effective management and so media rights to Formula One motorsport – a much coveted sphere given its global TV reach and track & team sponsorship deals. The equally ambitious and tenacious Bernie Ecclestone has been the 'F1 supremo' for decades, himself building-up both his 'ownership' of the sport as effectively its publicity broker whilst also maintaining and raising the standard of the sport's glamour and commerciality, largely by ensuring that the financial injections into infrastructure by government backed 'new world' EM countries are paralleled to a lesser extent by 'old world' countries re-investing in their F1 racetracks.

Thus, Ecclestone has undoubtedly been the driving force behind the sport, adding global exposure through new infrastructure and media transmittal, which in turn drove ever more valuable commercial sponsorship deals which in turn generated bigger R&D and operational budgets for the F1 teams involved. A veritable virtuous circle of value-building until the 2008 financial crisis effectively 're-set the chronograph' for the sport, which alongside broadly changed FIA regulations to both flatten the playing field between dominant and new-entry teams and introduce new realms of eco-tech into the F1 cars which should theoretically provide technology trickle-down years later into VM's own road cars.

Murdoch well understands how the shape of the sport has developed, and recognises that from a broad-brush valuation perspective, now at just past the bottom of the economic cycle and with renewed traction, F1 itself sits at the beginning of a new era. He sees the new & renewed infrastructure that can draw entertainment-seeking crowds for F1 and other events / festivals, he recognises its global reach for massive audience viewing potential, and critically believes that 'public access' to F1 – and so its potential commerciality (value-advantage) - is limited by present-day TV, website and general media rights.

It seems he wants to do for F1 what SKY did for the televisual and experiential evolution of football / soccer, in which it bought the TV rights and added new user-functionalities by which the user could better command his/her interactive viewing and so personal enjoyment of the game. But beyond this, Murdoch sees the commercial value of world-wide mobile-phone user-bases and the ever increasing importance of smart-phone connectivity, which is transforming (and leading) people's interests and thus disposable spending profiles.

Hence the reported talks with Carlos Slim Helu and America Movil. His Mexico City based mobile telecoms network, itself with sizable EM market reach across Mexico, Latin America, the Caribbean aswell as 'low-end' USA. It sits as the world's 4th largest network provider to 265m users and has laid over 290,000 kms of fibre optic cable, the most expansive coverage yet.

Beyond telecoms Carlos Slim Helu has interests in aluminium and tyres, thus natural corollaries to the motor industry, and sought in 2008 to buy the Honda F1 team, with his sub-company Telmex now sponsoring Sauber F1 in 2011 season.

Of course none of this is lost on Bernie Ecclestone or CVC Capital Partners, his latter-day business partners in FOM (Formula One Management), the impact of the TCT sector a highly visible force for F1's commercial evolution given team sponsorship by the likes of AT&T, newer team entries by Virgin(Media) and of course that Sauber F1 deal with Telmex.

The eco-tech re-orientation of F1 in its vehicle development has arguably made for a greater and more direct link between F1 high-tech and next generation premium and mainstream cars, which is all to the eco-good and re-energisation of western automotive manufacturing. But the real challenge for those that lead the entertainment face of F1 is to grow its global commerciality. The obvious question for the investment community is “who is best placed to commercially grow that external face of the F1 business model?”.

By the very nature of the reported bid offer Murdoch intimates that Ecclestone & CVC have limited means to do so when compared to the leverage a JV between NewsCorp & America Movil, the former's influence 'inside' the sport, whilst the latter's influence 'external' through a plethora of media networks and channels.

Beyond stating in typical style that the report of a Murdoch bid is “rubbish”, Ecclestone & CVC will probably ultimately counter that his/their track record is the “proof of the pudding” and that they as the 'F1 brokers' are at ease sitting in that chair. Themselves then able to access the type of technical media advantage Murdoch-Slim offers through FOM's own self-created enterprises with TCT partners. Simply then a 'business as usual' extension using other media operators and telco providers, theoretically similar to having companies such as the UK's ITV bid for F1 transmittal rights, the television network accompanies by the telco network..

The F1 website naturally defends the Ecclestone position, interestingly however, itself leveraged to suggest a F1 Ecclestone 2010 valuation of £6bn - £7bn. Furthermore, as a remote voice-box for Ecclestone & CVC it tries to rub salt into the issue by stating that if indeed a sale agreement was reached it would include a premium 'over-payment' due to the fact that Murdoch used his Sky News business editor Mark Kleinman to initially air the possible bid, instead of approaching privately.

So, the typical political confutation of such a matter roles on.

Yet, as ever in the complex world of business – especially in F1 - there are differing layers of possibility to any commercial imperative – especially so when involving an intrenched F1 supremo and a global press-baron.

Firstly, the leaked news story by Sky News could have been conceived as a first-step to initially buoy both NewsCorp and America-Movil's respective NASDAQ stockmarket valuations.

Secondly, such a move also re-ignites concerns for Eccelstone that the threat of a rival race series re-emerges in this case a successor to A1GP, conjured up between Murdoch and the team bosses to once again ply pressure on FOM given the re-tabling of the 'F1 Concorde Agreement' with the FIA (Federation Internationale de l'Automobile) which provides the basis for the profit-sharing of commercial rights income. Here it would be no surprise if Murdoch has been wooing team bosses with better paper-based income projections under his business model, given that any take-over bid would be better achieved with persuaded team bosses. Thus an agreement could have been privately made to have Murdoch publicise his bid intention at this critical juncture.

Motorsport seniors equate the involvement of a press-barons as both positive and negative, useful for injecting (always much needed) cash into the sport, but weary in the knowledge that the sport itself serves the purpose of a publicity vehicle for the press-baron's own commercial interests. It is an echo that harks back to James Gordon Bennett II, the legendary American originator of the Gordon Bennett Cup who offered recognition and reward to those American, English and German pioneers who counter the competitive technical advantage the French auto-manufacturers had at the very end of the 19th century. Critically his races being nationality-based set the traditional national colours/liveries for GP cars over the decades to come, but were latterly lost with private team involvement and commercial sponsorship.

The 'national race' idea was the core- philosophy behind the failed (but ever notionally hovering) A1GP race series, a championship intrinsically built around the car-manufacturers participating in F1, but seeking greater share of the commercial rights revenues which FOM and Ecclestone – CVC received. Thus A1GP was created as both a threat and bargaining chip in negotiations with FOM in the lead-up years to the previous Concorde Agreement in which F1 participants agree revenue share. It served its purpose to an extend, but eventually failed when VMs backed-away from the project, faced with depleting motorsport budgets, improved Concorde terms and unwillingness to leave the top-table that is traditional Grand Prix., even if it meant re-creating the origins of Grand Prix as A1GP (now notionally titled A10GP) promise.

For that promise, by default of being 'nation-based', means that a motorsports based international technology race could arise, today the likes of Venezuela, Russia or indeed China able to buy its way to winning, just as Germany did during the 1930s with Auto Union and Mercedes' 'Silver Arrows'. That then would only quicken the pace of brain-drain and technology shift from the Triad countries to the EM nations.

However, as a press-baron with undoubted Asian, Latin and global power, some might think Mr Murdoch could indeed feasibly orchestrate such a a re-direction of the sport via his involvement, simultaneously breaking what from an outside perspective appears an 'old boys club' hold on GP / F1, even if historically there have been successive power-grips on the sport. In doing so, effectively re-locating the power-base from 'insiders' (Ecclestone once a GP team boss) to an 'outsider'.

The concern inside F1 is that the championship itself might become subservient to, and so negatively re-shaped by, the commercial agenda of Mssrs Murdoch & Slim. The major concern being a loss of F1's 'aspirational aura' which serves 2 critical issues. 'F1 Aspiration' underpins the intrinsic business model which functions on a top-down basis (from premium hotel viewing balcony for Royalty to the availability of Ferrari merchandise in London’s premium Regent Street). And 'F1 Aspiration' also serves as a national development template for EM and developing nations, seen as both a national coup which puts it on the international map and furthermore the associated infrastructure provides an engine of economic growth both as a F1 tourist destination and as an entertainment centre for other cultural and commercial events.

Ecclestone has then built a true worldwide F1 legacy, one which he will not give-away easily, even if that means CVC sensibly taking the money if agreed terms could be met, Ecclestone might well want to remain as 'Chairman of the F1 Board' with a new partner replacing CVC (whom ever that might be) to protect his legacy. The typical 'GP hero' attitude is to drive to the very end.

Thus Ecclestone might be willing to replace CVC with another effectively silent-partner, but instead of simply being a collaborative party, Rupert Murdoch's ultimate intend must be to break the FOM powerhouse, and install his own commercial model.

Ecclestone calls the news story "Rubbish", yet is no doubt well aware of the intention, a parallel play of Murdoch's son James's effort to break the BBC's power-base relative to BSkyB's own growth hopes.

The accompanying diagram to this post (only available for the length of the post itself) shows investment-auto-motive's perception of the 'new' commercial model that would be ultimately proposed by Murdoch & Slim / NewCorp-America Movil.

It depicts the F1 commercial arena in a Venn Diagram style, on the left hand side 'F1's external world': that of the transmittal network and portals, and on the right hand side 'F1's internal world' depicting a matrix structure of teams and sponsors'. The tie-up between NewsCorp and America-Movil would be a natural one of complimentary operational activities and geographical coverage, thus setting the scene for infrastructure and customer portal ' interface, able to span Triad & EM worldwide reach.

This global reach, multi-portal business model would then theoretically allow Murdoch-Slim to demonstrate a 'supercharged' business model thus able to offer a more sizable income stream to the F1 Teams through the Concorde Agreement; itself possibly unchanged in terms of percentage splits. In short the divisions of the pie stay similar, but the pie itself grows. The model also gives Murdoch-Slim a reciprocity, since their empires could then probably better directly solicit the individual sponsors of the F1 Teams, the philosophy being that NewsCorp and America-Movil could offer a one-stop-shop multi-faceted global advertising base, thus the sponsors/clients could either save on advertising costs via their 'wholesale advertising' package, or with similar budget better target their messages.

This effort undoubtedly also has China in its sights given the size of its burgeoning car market and Murdoch's own marriage to Chinese-born Wendi Deng Murdoch (with his own Anglo-Chinese scions to control the business in later years.

To conclude, NewsCorp & America Movil have comprised an alternative F1 commercial model that better interlinks the 'internal' and 'external' facets of the motorsport, thus probably able to reach a broader and deeper worldwide audience. Yet simultaneously, its overtly commercialist attitude also generates a very real risk to the brand integrity and 'social good works' the present commercial model under its prime orchestrator has been able to achieve.

The future of F1 depends on a morphing of the innately commercial, a deepening of the motorsport's innate 'old personality' (where levels of honour matches the level of glamour) and where these two facets can be overlayed onto the national cultures of Em and developing countries.

F1 can be orchestrated to be a vehicle for economic and social good, aswell as financially a lucrative platform; the future of the sport and its socio-economic and cultural trickle-down depends on such a holistic attitude.

James Gordon Bennett himself, would no doubt have much to say, yet his own legacy towards a world of general improvement still has as much resonance in the 21st century,as it had at the very beginning of the 20th century.

Friday, 15 April 2011

Company Focus - MG Cars – 'New No1' Meets 'Old No 1', Or Does It?

Recent press reports have (yet again) been generated about the re-buoy of the MG marque here in the UK, the most recent a day or so ago, regards the launch of production for the new MG6 fastback & saloon in Longbridge. It appears welcome news, but the pertinent question which must be asked is “to what degree is the report simply another premature good news story?”

Nanjing Automotive's acquisition of the MG name and assets in July 2005 struck a partial death-knell for the British motor industry. It went the same way as Rover Cars had done to Chinese counterpart SAIC (Shanghai Automotive Industry Corporation), which itself latterly absorbed state owned Nanjing in late 2007 and thus MG as part of a plan to re-unify what were common platforms as part of its search for scale and efficiencies.

[ NB. SAIC spans the vehicle sector value-chain both vertically and horizontally, from parts manufacturer to whole vehicle to distribution and retail, and similarly for trucks, buses and motorcycles, aswell as operating well known JVs with the likes of GM, VW, Bosch, Visteon and others, selling 2.72m units in 2009, and 3.58m units in 2010].

Such broad-based re-structuring of what had been British assets undertaken from China unsurprisingly to British eyes took time, given that SAIC's primary focus has been on its fast growing domestic market, and so the development of its pseudo-British Roewe brand as a near phonetically pronounced version of Rover to Chinese ears and eyes.

But during much of the intervening period the old industrial heartland of the Longbridge site and factory in Birmingham was dormant, unsure whether it was ripe for brownfield re-development as a residential area, whether to be re-dedicated as an eco-van production centre by a SAIC affiliated company, or indeed to be of mixed use: industrial, commercial and residential.

Interestingly and tellingly about its UK focus, SAIC's UK based holding company reports to the SAIC Motor Technical Centre in Shanghai, and its main remit thus far has been to create and manage its UK Technical Centre, which itself was a next-step strategic action from its Sino-UK development team between SAIC & Ricardo Engineering during the original 2005 asset 'lift & shift' to China and developing initial domestic models.

Many promises by Nanjing and then SAIC had been made over the intervening years about a re-emergence of full MG production, specifically of the TF sportscars which was reported as re-launched with Longbridge production in 2008, but actual production numbers have been minimal, the FT reporting approximately only 1000 sold to date, whilst the Autocar website forum highlighted in 2009 that in its best month it sold 65 units.

The forum highlights what many car enthusiasts believe: that with its lack of on-street visibility the new car was/is conspicuous by its absence, with a good portion of those apparently sold appearing on the used car market within one year of purchase at two-thirds the new sticker price. MG-Rover enthusiast forums have been abuzz with periodic promised developments, but yet to see true substance.

Thus the recent press release by MG UK is welcome, but will be taken with a pinch of salt by industry observers and enthusiasts.

The production of MG6 will reportedly consist of the import of Chinese fabricated body-shells and 400 line-side fitters will dress the body with components. But the released press photos viewed via the enthusiasts website show little more than a few 'completed' MG6s and a picture of a team-signed car completed car. The photos of the Longbridge production area looks highly unconvincing, since there is little evidence of production 'ramp-up', all the accoutrements of 'ramp-up' production-line are absent.

There are none of the usual multi-coloured, multi-sized component bins that sit track-side from which fitters collect and fit individual parts. There is little evidence of facility and production line layout which accords different stage 'fitting stations' for various assembly phases, seen typically by bin clusters and over-head signage. And there are no line-side break-out areas of table and bench on which workers take a short (typically 15 minute) break.

Furthermore, whilst local assembly/'dress' of imported bodies would would befit the business model of a CKD operation, the body itself would typically arrive as a BIW (body in white), that is to say a fabricated shell that has been only first-primed, ie without its finished colour, since the long-distance shipment of colour-finished bodies is notoriously hazardous given the 'prang and dent' conditions of sea-shipping. Thus it would be the norm to ship an unpainted BIW, have any digs/dents re-worked at the assembly site and have the whole body painted at the same site that 'dress' takes place. Shipping painted bodies whilst unusual could be done, but raises the probability for a far harder re-working of paint-surfaces once the body has arrived.

Another oddity is to see that the painted body as pictured sits floor level on its own wheels. This again is an oddity since ordinarily the body as seen without windows or interior would sit in a travel-frame (ironically pictured behind) to give fitters easier access to the car, including wheel-hub assembly and steering geometry pre-setting before the wheels are attached. Thus the picture does not befit the operational line-side reality, and so looks to all intense purposed 'staged'.

Of course, the cars could be shipped from China on its wheels with all mechanical and geometries set, requiring only exterior and interior trim fitment, glass insertion and end of assembly quality checking / PDI. But if that were the case why are the travel-frames still pictured? They may be intended for greater latter-day volumes, but even that would then sit in direct contrast to the seeming build-model, and other factory items would also be present.

In short, the photos from the press release look unconvincing, and as such MG6 is in danger of simply being a short-lived production run as seen by the MGTF example. Of course SAIC will be trying to get the cost element of the MG6 business model right, especially after the lack-lustre experience of TF. Indeed the reality may be that it sees new MG6 as little more than a small-step in creating a beach-head in the UK and Europe and so may well be pointedly simply stage-managing the process of appearing to be in market via the Longbridge site and its apparent 40 dealer network, many of which are stalwart MG-Rover dealers from yesteryear.

Of course getting the timing right for a fully fledged focus on the UK is critical, especially during this struggling economic period which could be variously argued as either opportunistic or problematic. But stage managing public and government perceptions has done little for SAIC's UK reputation thus far, and so could do more harm than good if there is indeed little substance to the PR blurb, as seems the case here.

The essential problem for SAIC's management of MG is that it wants to present itself as a re-born classic marque, a badge that sits perceptually mid-way between say the heritage of Morgan and technological slant of McLaren.

And indeed if MG UK were truly small scale and independent in ownership, or were of a skunk-works nature within SAIC (as MGF project was at Rover Group) it very probably could develop a successful typical niche car business model. Given the wealth of MG & MGF heritage it would have to resuscitate the previously resuscitated marque with true product and dealer focus, with latterly a bigger brother to MGTF which mimics an updated MG RV8 (not MG SV) so as to offer through 2 base cars with price-related variants, British counterparts to the European and Japanese 'personal' vehicles spanning Renault Wind to Porsche Cayman. That now all the harder to achieve with the abandoned production of MGTF.

But the SAIC parental pressure is to seize eventual scale and mass market penetration by offering MG badge 4-door 'family' cars, thus mimicking via an operational short-cut what is witnessed Rover Group to do in the late 1990s. The import difference being that Rover Group was arguably forced to do so (as it had previously with MG Maestro/Montego) due to group financial pressures, something SAIC does not face, instead export market ambition being its aim.

So the British management team have been stuck between 'a rock and a hard place', seemingly unable to access the China-focused resources (ie funds) to properly develop MG as a distinct sportscar company into the 21st century – so important for its once again lost credibility - instead pushed to create what is essentially a brand-led marketing platform for what will ultimately be mass-volume vehicles, which may or may not deliver MG brand and product values.

SAIC no doubt wants a 'British BMW' or 'UK Audi', but its (culturally-based) sensitivities about the timescale and methods for getting there are arguably unknowingly absent, thus investment-auto-motives suspects that since SAIC's takeover of MG Longbridge it has been a case of the 'fast-forward' Chinese pushiness that has served China so well at home ultimately clashing with the British team's cultural sensitivity to the brand and deep pyscho-dynamics of the UK car marketplace, these issues exacerbated by over-ambitious Chinese created business models and Chinese led cost controls that are possibly incompatible.

Yet it must also be remembered that for the Chinese foreign-shore ventures are very alien, and as such, by Chinese standards the social and business differences are huge, not only between the 'simplicity' and 'sophistication' of Chinese and European business approaches, but the innate difference between the consumer ferociousness for newness in a rapidly growing China, versus a far greater history of consumer experience in the economically stagnant Europe.

Thus the potential for differences in outlook and approach both strategically and operationally have been immense between MG UK and SAIC, and beyond the macro-picture complexities, may be a micro-part for MG's stilted and slow re-growth in the UK.

However, beyond the cultural issues, it must be noted that SAIC has focused its main efforts on the UK R&D function, creating its SAIC/MG UK based “Global Design Centre” as a twin to its main Shanghai R&D office. It role has been to assist SAIC develop spin-off variants from the Roewe 750 platform and devise an additional 4 correlated (AP12) platforms, with a parallel role of re-engineering previously Chinese market dedicated vehicles for greater UK/European acceptance – the stiffening of the MG6's suspension settings an example - but also spanning cosmetics and emissions issues.

As CarMagazine highlights the MG6 is a watershed car for not just SAIC but China per se given its role as its first proper step for export ambitions. It is a mileu of old and new, with use of the Rover 75's front sub-frame, a re-engineered 1.8L K-series engine and use of items like the old fuse-box, but of course much else, especially cosmetically, is necessarily new. The magazine's review liked the car in general but bemused its poor quality materials and fit & finish, something which MG Uk says will be bettered before launch, but realistically cannot be given the level of costly and time sapping re-engineering that would have to take place.

As a presentation tactic offering the launch car as a 1.8L Turbo makes sense, it evokes MG's sport spirit more than an atmospherically charged engine or diesel, and no doubt SAIC management see themselves as offering a European 'pony car' with 'muscle-car' intonations in a British wrapper. The overall product plan appears to be: 2011: 1.8T Hatchback (Fastback) and Saloon / 2012: 1.9D / 2013 1.9T, 2.5D, 2.5T / 2014 Facelift, Estate, 1.5D / 2015 1.5T, 2.5. And the 2011 pricing for MG6 is – S variant at £15,495, SE variant at £16,995, TSE variant at £18,995. (The MGTF still available with basic 135 car at £14,213, and stylepack variant at £14,800.

MG said the car would aim to compete with rivals’ similarly sized models such as the Skoda Octavia and Ford Mondeo and Focus. As such it replicates the pricing model that Rover-MG used at the turn of the 21st century, essentially pitched between different segments.

However, whilst the new MG6 appears to tick all the specification boxes MG UK will have a hard time convincing the British public of the new 80% Chinese made vehicle offering, since for all its notional positives it has none of the basic charm of a true 2 door convertible or hardtop that befits the badge, nor is it even truly British made with evocations of MG craftsmanship, nor will it ultimately be of limited production series and so perceptually raised by its rarity in true niche car manner.

On the surface and on paper the SAIC business model of 'selling coals to Newcastle' with MG back to the British looks enticing: a massively re-structured cost-base using far cheaper Chinese sourced parts assembled by a cost-constrained UK labour force with a nominally legendary brand in a price competitive new era marketplace via 40 or so dealers. But as former Rover Group executives well recognised when MG and Rover was sold to the Chinese, both brands had lost their way by the late 1990s given the competence of German and Japanese competition in both dedicated sportscar and sporting saloon spheres, the natural 'affordable' and competent newcomer to this arena now seen with Hyundai's newest sub-brand 'Genesis'.

MG6 and its expected later smaller sibling MG3, and a reported MG5 (possibly the saloon MG6) will attract attention, but the question is who exactly will buy the cars when past MG enthusiasts will be dismayed by what are effectively badge-engineered cars whilst general new car buyers wanting a desirable will be drawn to the usual suspects. That leaves those who like the idea of the MG badge - wanting something different to the norm yet also affordable – but also critically typically meaning a 'provincial demographic' with shorter purse-strings.

Very similar to the buyers of other (diminished) fringe brands: ie Pontiac, Mercury, Oldsmobile etc, where the latter-day offerings were taken up by lower salaried females and price-keen older people grey market keen for apparent style at typically heavily discounted prices.

This was the arena in which MG and Rover played before their UK demise, and whilst perhaps a natural start-point for a Chinese owned company, having to grow from scratch, since it can afford to buy market share by swallowing such discounts given its nominally greater unit margins. But it could ultimately be a self-limiting opportunity for growth if the “wrong sort” are seen to be the typical new MG driver, and possibly the brand tainted forever; as was the case in the US.

This is why is was so so important to reclaim its origins, as MGF did in a contemporary manner in 1995. It is also the reason why investment-auto-motives believes that as an independent voice, SAIC would best serve itself by providing proper funds and culturally sensitive oversight to properly develop a parallel new sportscar line using UK design and engineering know-how, adding much needed character and gravitas and which acts as the brand's sporting and commercial hub.

In the critical role of 'Trade Ambassador' during this present era, Prince Andrew presented the 'Chinese Investor of the Year' Award 2010 to SAIC's Head of Strategic Planning, Mr Cheng Jinglei, for the Sino investment made thus far in Birmingham, thus adding to its trophy cabinet given the 2008 KPMG award for Chinese Inward Investment presented by Lord Digby Jones, ex-Trade Minister.

Critics might lambast such 'prescribed' awards but the truth is that such 'cultural oiling' is pertinent and necessary given the unavoidable, inadvertent cultural business frictions that exist at the operational level between China and British ways.

Yes, the £5m directed, as an addition to the the previous £40m FDI, may be a drop in the ocean compared to the massive Capex levels of the global auto-industry, but we must remember that China is still feeling its way through foreign markets and will rightly not be rushed. And equally it must know that FDI recipients at both government and enterprise levels will not allow themselves to be taken advantage of in the face of the massive “Sino-promise”.

But equally, FDI intent and reality cannot be stage managed, as seems the case relative to MG6 and Longbridge given the absence of critical factory equipment in the press photos.

[NB investment-auto-motives would be glad to be proven wholly wrong in this supposition].

Baby-steps then are in order in such UK-Chinese relations, and they may seem almost imperceptible given the size & scale of historic auto-activities at Longbridge.
But at a time when so many historic auto-brands have been lost, and today even SAAB* teetering on a cliff-edge, at least MG – though perhaps diminished in its character – still exists thanks to Sino funds, and efforts to maintain good international relations.

Cecil Kimber – MG's founder – built his first proper MG (called 'Old No. 1') dedicated to endurance and performance. It is an ideology that would be well remembered by MG's Chinese owners and British management developing the company into the future.

As 'Kim' knew proof of concept is everything to last the distance, a new unfudged, clearly directed and well-supported MG business model fundamental to do so.

Ultimately, investment-auto-motives believes, it may be the SAIC to publicly list MG on both Shanghai and London exchanges, maintaining a majority holding itself but also prompting institutionals and private buyers to buy a portion of what it hopes will be its European and Chinese success story.

In the football world many have bought their small but emotionally valuable parts of Old Trafford, Highbury, White Hart Lane etc, with Williams F1 doing likewise recently for both motorsport fans and investors seeking eco-tech exposure.

For SAIC, gaining a global profile for MG which is able to combines the 'counterbalances' of both brand-enthusiast and professional investor to separately buoy stock-price and enterprise value may well be the ultimate strategic goal.

To that end many in the West Midlands, the City and the Palace of Westminster, will chant "Long Live Longbridge".

Friday, 8 April 2011

Macro Level Trends – The New Energy Squeeze – The 'Fukushima Fall-Out' of Electrical Capacity Constraint

The trends of today it is said typically provide the picture of tomorrow, and relative to the drive for eco-friendly vehicles two prevalent trends - one macro, one micro - appear to point to a concerning (electrical) energy squeeze for the Triad regions.

The worldwide political fall-out of Fukushima's nuclear accident has effectively created a moratorium on new generation nuclear power-station builds across the globe; nowhere seemingly immune no matter what the reality of local geography/seismology. This then means that incumbent nuclear stations will be retro-fitted for continued use via lifecycle extension and that the greater part of the world's additional energy needs for faster growing EM countries will have to come from fossil-fueled power-stations.

The West and Japan relative to their own eco-ambitions then sit in an uncomfortable middle-ground, between ambition and reality. One in which energy availability itself for the first time in modern industrial and consumer history looks to become an increasingly finite resource. And as such will require greater monitoring, appropriated use and thus inevitably greater cost burdens for industry, commerce and people.

Given this emerging scenario, the oil companies amongst others might well point out the innate irony: that it is in this new context - a sociological 'new norm' which parallels the economic version - that the ideal of hybrid and full-electric vehicles are now being nurtured. However, this new reality is not seemingly recognised by many, and poses sharp contrast to the eco-car scenarios previously envisaged where an EV user could re-charge his/her vehicle battery over-night – to re-quote that much banded saying - "for pennies".

As the very basics of Economics purvey, the nature of finite resources is that they ultimately engender a balancing demand-supply price-mechanisms. And it is relative to this, in parallel to our 'green consciousness', that an emergent corners of the energy & auto sectors have grown and merged on a hypothesis for more efficient 'intelligent energy' supply and use..

'Smart-Grid' is a term which has come to pass into common commercial parlance, yet realistically little has been achieved thus far at any national-level. The proliferation of e-charging spots which appeared in city-centres as promotional facilitators for EVs – and seeming apotheosis of the ideal - in truth no more than unintelligent 'dumb' charging terminals that smart-grid enthusiasts philosophically abhor.

Instead in the best free-markets notion, instead of a state-led 'top-down' immersion in the eco-ideal the commercial world prefers consumer-led or at least consumer-inspired change, building on present-day usage of electrical, gas and water meters, and so the most visible developments of smart-systems directed at home and industry, considered as offering greater market opportunities and thus more robust eco-consumer orientated business models.

Since the Kyoto Protocol, Japan has of course led the automotive eco-tech, very probably due to the fact that it historically has been 'energy constrained' what with its need to import oil and now its nuclear sector effectively frozen. Just as Toyota's Prius was created to help answer the 'oil' constraint, so after Fukushima and a new 'electrical constraint', so Toyota and others will be pushing the boundaries to retrieve 'more from less'. Lesser known outside of Japan is Toyota's involvement in house-construction aswell as as its famous 100-year plan, so it comes as no surprise that (as the FT quotes) its CEO and family scion Akio Toyoda says "we must find a planet-friendly way of using electricity", Toyoda conveying a world in which people "dialogue" with their cars relative to their required use.

To try and create this "dialogue" is the newly announced $12m JV between Toyota and Microsoft. Its aim to develop an intelligent-link systems between (wo)man and car and home via their hand-held smart-phones using 'cloud computing' so as to provide remote viewing of vehicle energy levels within a Hybrid's or EV's battery pack, allows for automatic 'topping-up' via home charging, and a 'remote control' of the vehicle functions: the one described being cabin pre-heating on chilly mornings.

[NB exactly how energy efficient such convenience functions truly are when presumably using neccessarily high Watt / Amp electric-element heating is open to debate].

Such an effort by these two corporate giants is hardly surprising, both Microsoft and Toyota have seen their respective brand powers diminish, the software firm relative of course to Apple and Google aswell as other smaller enterprise efforts to change the playing-field in IT, whilst Toyota's recent history of a series of vehicle call-backs tarnished its reputation for product quality, even if it could be argued that it was able to gain by passing the buck (literally) onto its suppliers. Both companies needed to re-assess their strategic directions over the last few years, and this initiative appears to be a high-profile reaction to their much changed competitive environs and providing a possible new business platform and brand differentiator.

Given the merging of Auto & IT, both companies wanting to be major players in automotive evolution & indeed revolution for this a very different new era for Triad regions. For Microsoft it is set to provides a second-tier of vehicle intelligence that moves beyond its SYNC multi-media platform exploited with Ford. For Toyota it adds a rational new step-forward dimension to its Hybrid lead: now offering Prius & Aurus, and showcasing a 7-seater Prius for 2012 and a Yaris hybrid concept. So beyond rolling out eco-cars, it wants to be seen to lead responsible eco-consumerism.

[NB. The early 21st century rise of personal mobile IT devices, with the specific growth of smart-phone & 'applications' ("Apps") technology, now supported by the 'Cloud' builds a semi-virtual world in which the 'interface' is becoming ever more a prime-broker between the individual and the world at large. Philosophically, the emergent semi-virtual world the physical world has become comprises of 3 aspects: the human...reliant upon personal technology...itself reliant upon the network (the web). Jean Baudrillard's & Umberto Eco's ideas of a semi-virtual world reliant on symbolism which is increasingly indistinguishable from the physical world has never been so apt, from Seoul to San Francisco to even the Piazza San Piedro in olde worlde Rome. (Increasingly in tourist locations visitors are 'looking' at what is physically infront of them by viewing pictures/text/sound on smart-phones). Baudrillard cited the Car (using the iconic Citroen DS) as imbuing man's creative spirit and public wonder that was once the reserve of the Gothic cathedral. Ironically the near omnipotence of the Catholic Church and its 'all-seeing eye under god' which monitored past society has arguably morphed into a less obvious but more possibly more intrusive 'cloud' assisted networked world].

So the world at large, and specifically in the Triad region (inc S.Korea), is increasingly connected, yet energy-wise is becoming increasingly sparse. And as any first-grade economics student knows: connectivity and scarcity are basic tenants of economics.

The classical economist David Ricardo set out the discipline's theorum of 'competitive advantage' in his book 'The Principles of Political Economy', stating an 'each to his own' capability by which countries and individuals could best utilise their innate resources to best economic advantage, developing and concentrating capability as necessary to create competitive advantage.

This basic viewpoint was not lost at the namesake but unrelated Ricardo Engineering, a company which has been a prime-mover to seize its place as an 'engineering integrator' for both old-world and new-world auto-technologies. It recognised that personal mobility developments were to be set within the broader energy framework – much as it was in the early 20th century when petrol's portability and innate combustable power led to its dominance.

Thus Ricardo set itself the task of moving centre-stage relative to new and old world demands, becoming the theoretical and practical protagonist in the eco-auto sphere, with a large PR push to raise its profile amongst both old and new clients and importantly the capital markets'. Given its previous public listing liquidity availability and enterprise valuation buoyancy were always high on the agenda, these credit squeeze of late demanding greater attention given to the equities, bonds and notes investment arena.

As a listed company it sought to regain both real and importantly perceived renewed competitive advantage by positioning itself centre-point between old and new worlds, this central positioning strengthened by a wide capability reach spanning from the practical of design, development and manufacture related to conventional ICE tech, through to engineering solutions provision for Hybrid and EVs, through to the arguably esoteric and pseudo-academic by participating in the scenario-plotting of vehicle-linked 'intelligent energy networks' and indeed the creation of consequentially opportunistic new business modeling. Thus its set out to both retain its past - as seen with the co-design and manufacture of McLaren's road car engine,
aswell as active as a research partner in the many UK based eco-research programmes, aswell as EU efforts such as the MERGE Project which itself is directed at forming a tenable picture for Smart-Grids and e-Vehicle Charging, especially so regards the critical issue of harmonised standards for the 2020-2030 time frame.

Here Ricardo works with 4 other UK participants, amongst an EU body of 18, Ricardo along with Germany's TU the project's primary influencers.

The outcome of the EU's MERGE initiative - combined with similar efforts in the US & Japan - are intended to ultimately act as the industrial foundations for consumer directed initiatives such as that seen by the Toyota - Microsoft JV. Thus a development of lower and upper complimentary layers.

MERGE spans the UK, Ireland, Portugal, Spain, Greece, Belgium, Germany & Sweden, yet it must be noted that presently such grand plans for eco-change have been undermined by the ramifications of the financial crisis; in particular the Euro-soveriegn debt crisis. Ireland & Greece have imposed austerity measures as part of their pact to take EU central funds from the E60bn European Stability Mechanism. Portugal and Spain had previously refused the austerity route in face of public national pressure, but Portugal has announced it too will access the ESM meaning tough oversight expected from Brussels (and indeed Germany & the UK as exposed lenders).

The contrast today is clear, since the fore-running ideology of MERGE was formed at a time of prosperity and aspiration, when 'new world' ideals were supported by higher national GDP earnings and had the availability of a supercharged credit-driven financing environment. The general optimistic for broad-based e-charge networks thus found government fiscal backing and promoted a climate by which the likes of BetterPlace - whose Isreali roots underpinned a political agenda for de-coupling from petroleum – could muster interest.

It was to this buoyant eco-platform that carmakers had to react, both seizing the new-tech arena for themselves and in a pragmatic manner, utilising their eco-tech R&D work as marketing messages that would provide a halo-effect to the ICE propelled cars that make up their real income stream.

Critics may argue that many carmakers – excluding Toyota and Honda – have been little more than cynical, commercially-minded opportunists but the reality is that whilst PHEVs and EVs are far from being the majority of vehicles on our roads, the eco-impetus has pushed their R&D and critically put pressure on ICE development which given its market dominance has an arguably greater overall ecological effect: the CO2 g/km reductions in new cars over the last decade tell a convincing story.

Indeed whilst the press and the auto-industry has been inundated with research, reports and good news stories relating to advanced eco-tech, little has been mentioned about the status quo, and its the global good of eco-tech developed ICE powered cars, nor indeed the structural economic good that the system already in place offers.

The development of nations and peoples should be based upon balanced perspectives, and in this regard oil and petroleum has had a very bad ride of late, ranging from the Gulf of Mexico BP spill (the BP drilling ban now overturned) to oil price volatility concerns which translates into higher input costs for industry and consumer.

However, the oil industry's infrastructure has been in place for over a century, its has served Western economic development in that time and now serves EM development, Venezuela being a prime example. The sector constitutes not only a vertical value-chain but over recent decades we have witnessed it create a lateral value-chain which feeds into it at many links along the vertical, from safety-equipment engineering on drill-rig platforms to the creation of multi-product convenience shops at petrol stations, and in turn the bolt-on of petrol stations to supermarkets which have allowed for price savings in bulk fuel buying by supermarkets to be translated into petrol price savings. The oil sector then has undoubtedly provided immense economic good and is intrinsic to the economic activity of the modern world: from allowing the stock-piling of oil to serve national interests when necessary, to the ability of an individual to ironically but responsibly walk or cycle to their nearest petrol station to do food shopping.

Thus whilst we forever read about the emergence of PHEVs and EVs, society is guilty of demonising petroleum and the conventionally powered car.

Thus a balance must be struck when intelligently discussing the future of the car and the industrial sectors that support personal mobility. To overtly promote EVs which still are far from proven given the functional shortcomings in range performance and more limited climatic operational window is a fallacy. To single-mindedly promote only ICE based vehicles too is a fallacy when Hybrid technology is proven, and EVs presently have a utility limited role in contained environments (eg industrial parks, gated communities, academic campus or leisure parks) and distance specific delivery routes.

But we must also be aware of each technology's own limitations, especially during this fiscally finite time, and so be realistic about the innate scenario development and associated business modeling.

We will no doubt see in time a greater proliferation of PHEVs and EVs, but they should be born into a consumer and commercial environment that sustains them. The “top-up for pennies” argument that has been deployed to date will in the mid-term falter as the 'Fukushima Effect' of constrained electrical energy supply takes hold, the electrical capacity also constrained by costly and/or ineffectual solar-wind-wave green-tech projects which provide a minute amount of power, and by the restraints upon 'dirty' fossil-fuel powered stations awaiting 'clean' type builds.

This then sets the picture for 'Smart-Grids', one where more limited electrical energy creates a re-drawn pricing curve, and one where the onus is put on the user to think smartly with his/her use of associated technologies – as seen by the Toyota – Microsoft initiative.

This new era of electrical energy constraint then also creates the foundations for a successor to ENRON, itself an energy market broker between competing power-generation companies, buying and selling blocks of current and future energy; plus possibly creating a similar market for the consumer market where by energy is bought by the private individual on a more frequent market basis, not unlike cash-equities, bond or 'alternatives' dealing markets. Hence we could see the end of quarterly bills and the emergence of metered energy bought immediately - much like that used in rental accommodation over the decades in the UK and elsewhere – but in this case offering the user much more flexibility about his/her energy use.

In conclusion, petroleum still has by far the major sway over automobile production and use, and will continue to do so. The emergence of PHEVs and EVs have put a philosophical pressure on ICE, but ironically the 'in-use' pricing differential though remaining a broad spread will contract as the electricity generation capacity and reserves start to diminish.

The greatest irony could be that whilst we've been bombarded by the idea of “post peak”, “limited oil” over the last decade as part of the eco-tech story, the real-world story could well be that of “limited electricity”, so by virtue slowing the development of the EV unless the 'Smart-Grid' hypothesis can made tangible.

As David Ricardo and Harry Ricardo would have well recognised, the 'Smart-Grid' scenario will very probably need to be in place as a precursor to the consumer's full acceptance of EVs.

Friday, 1 April 2011

Company Focus – Spyker & SAAB – Creating a Network of Foreign 'Russian Dolls'.

Spyker Cars has been back in the news over the last month when the announcement was made that ts parent holding company 'Spyker Cars NV' has signed an MoU with UK based CPP Global Holdings Ltd for the sale of sportscar division. The deal worth E32m in total, E15m paid initially with E17m to be paid from future earnings, and these monies used by the NV holding company to pay-down accrued debt generated after the purchase of SAAB Automobile AB in 2010.

And over the last few days Vladimir Antonov announced his buy back into the NV Holding Co – which critically owns SAAB Auto – after having been forced to sell his 29% stake at the behest of GM as a condition of the SAAB sale to Spyker NV.

The new Spyker Cars and Spyker NV activity belies what investment-auto-motives believes to be continued efforts by Russia's big players to create ownership of a network of foreign automotive enterprises that will underpin Russia's national ambition to become a global automotive powerhouse.

Let us start by looking at the Spyker Holding Company:

Beyond relieving the pressure of immediate debt payment pressures, the sale of the Niche Car unit allows the Euronext listed NV body to give more Board level focus to the development of SAAB of Sweden. Indeed the sale of the sportscar arm to CPP was not wholly out of the blue given that CPP has assembled Spyker Cars product on a contract manufacturer basis since 2009.

CPP is a manufacturer of prototype parts, an assembler of previous niche vehicles and also specialises in bespoke coachwork (ie body) fabrication. Its UK location offers the Spyker sportcars division a broader and deeper supply-base when compared with its previous assembly in Zeewolde, Holland, and offers stronger links to varied vehicle systems development.

[NB Reports that CPP builds large-sized coaches (buses) appear a fallacy, simply journalistic misunderstanding of the term 'coachworks'].

The divestment of the sportscar section from NV's direct control and its own money worries means that it looks less likely that SAAB cars in the immediate future will mix-and-match engineering DNA with Spyker. Initial strategic review saw co-branding opportunities of Spyker special editions of mainstream SAAB models – from base, to Viggen to Spyker. These now appears more remote; though still plausible in the long-term.

Thus, the Holding Co Spyker NV recognised that it must address the more pressing commercial issues at SAAB AB: sales volumes dropping to below 32,000 in 2010, with recent product initiatives such as 'new' 9-5 and model-line improvements doing little to boost sales. Unit margins heavily pressured given the factory's low utilisation rate, in-turn squeezing working capital which has been highlighted by news reports that cashflow problems meant that five suppliers went unpaid in recent months. This then damaging the firm's reputation and very probably causing very real strain inside Scandinavia's small supplier network. The WSJ reports that SAAB cannot even afford to cover debt interest payments which were approximately $40m last year, showing SAAB to be little more than starving minnow versus the global automotive giants.

It was thought that the original investment exit for the listed Holding Co would have been sale of SAAB to either a foreign trade buyer or alternatively identifying a well positioned PE buyer; the latter to either overtake the previous lead stake-holder role that Vladimir Antonov had played and to share the PE interests with the UAE's Mubadala Development Company, which itself took 17% in 2005 (also holding 5% of Ferrari).

[NB. Russian banker and entrepreneur Vladimir Antonov - via Bankas Snoras – had secured a 29% stake in the company in 2007, but was required to sell-out as part of GM demands when it sold SAAB, given reports of connections to organised crime by Swedish authorities; this dismissed by Spyker CEO Victor Muller; yet not so far rescinded by the Swedish government].

The initial hope when buying SAAB was that it could be sold-onto a cash-rich Chinese VM having to vie against SAIC with its Euro-brand interests and Geely the owner of Volvo - in which case BYD might be a useful fit given the eco-credential it is trying to build. Alternatively sold to an Indian firm to vie against TATA's ownership of Jaguar-Land Rover – in this case Mahindra or Maruti obvious candidates: Mahindra expanding into saloon car production beyond 4WDs, and Maruti creating a new arm to supplement its JV with Suzuki. As was the case with TATA with Jaguar-Land Rover, the idea was that such buyers would also wish to step-in at a point at which SAAB's darkest days, set with a plan for improvement.

So over the last year or so, Spyker NV has had the dual tasks of both being seen to generate a SAAB 'turnaround': created market traction for its rebound, whilst also privately marketing the company to other trade and PE buyers.

Yet whilst the mass manufacturers were boosted by small-car green stimulus packages over 2009-2010, and premium vehicle manufacturers saw SME's and wealthy private replace their up-market vehicles on the basis of the economic rebound in that period, SAAB has been effectively stuck between these 2 stools, operating as it does in the more limited 'lower executive' segment. From an operational standpoint SAAB of course still relies upon GM for its basic platforms, the agreement of which in the sale from GM to Spyker very probably has a scale-demand dimension: the smaller the demand for the platform / modules, the greater the unit cost per vehicle.

At the time of the GM sale of SAAB, whilst many were optimistic about an immediate turnaround by Spyker, investment-auto-motives was less so, recognising the level of headwind that both in-house SAAB management and its new senior Spyker executives faced. Given the finite balance of presumed overall unit cost versus sales volume and pricing, it was always going to be very heavy going to magically re-energise the company in such tight operational conditions. This is why investment-auto-motives considered the alternative GENII PE offer more practicable given a business model that relied on co-partnering with Renault and a motorsport dimension. Yet, wisely, even GENII in a better position than Spyker retracted its offer, leaving Spyker as the bid-winner for SAAB.

It was always recognised by informed industry executives and investment bankers that SAAB needed a cash-rich parent with very good industrial connections, so as to be willing to undergo the inevitable cash-burn and create a new industrial foundation. In the modern era, here in the west, there are very few such parties, necessary risk-adversity the necessary ploy over the last few years.

In contrast although Russian oligarchs have also suffered with the economic downturn – well exemplified by the previous value devastation of Deripaska's Basic Element – Russia has ridden the mini commodities boom of late and so oligarch's fortunes have generally faired better than most.

It is in this light that Vladimir Antonov has re-entered the scene, recently publicising the fact that he had submitted the forms to Sweden’s national debt office seeking a change of control at SAAB. The application a procedural necessity given that the Swedish government had partially exposed itself to SAAB's future by partly guaranteeing Spyker's purchase of SAAB. It seems that Antonov has had an eye on SAAB for some time, courting the brand's classic car community in various ways.

[NB Given his Russian roots, exacting information in English is hard to find about Mr Antonov, for it appears that his wikipedia entry has slight bias, given that it ends with the use of 'Vladimir' when discussing his purchase of Portsmouth football club; thus offering an overtly friendly tone].

However, it seems apparent that the sale of Spyker's niche car business to 'CPP' will have been endorsed – indeed even probably orchestrated – by him, since Dunn & Bradstreet reports that he has interests in CPP via Conversgroup (UK) Ltd and Snoras Development, associated to Snoras Bank.

CPP in turn has links with 'Bowler Off-Road', manufacturers of Paris-Dakar style vehicles, aswell as 'Bowler Spirit' which offers Off-Road Rally training and race support. Conversgroup is also represented in the UK by 'Workforce Bank', its business inter-relations with these 'loosely consorting' companies unknown.

By 'connecting the dots' it seems that Antonov seeks to create a UK automotive stronghold consisting of: a niche manufacturing hub married to complimentary involvement in motorsports at product and service levels. This probably assisted by the UK based 'Workforce Bank'. This network can then be 'plugged into' the needs of SAAB, now possible with his direct control of SAAB via Spyker NV.

Thus consequentially he appears to have aspirations for a UK-Swedish – and presumably inevitably UK-Swedish-Russian – activity base. A base aimed at high-value manufacturing and events that both serves SAAB and non-SAAB clients, and ultimately creating a multi-tiered inter-connected business template which investment-auto-motives believes would either be separately recreated within Russia, or melded into Russia at some point in the future.

This suggests that Russia's industrial and FDI policy seeks to reach into the business base and operational capabilities of the UK, to in time drip-feed such models and skills into own homeland – not unsurprising given Russia's desire to continue massively updating its own automotive capabilities via foreign coupling – as seen with Avtovaz etc.

This is also supported by the Russo-UK activities of MARUSSIA Motors.

Some time ago investment-auto-motives posted an item on MARUSSIA Motors, an enterprise backed by Andrey Cheglakov and fronted by Nikolay Fomenko. It has apparently developed prototype versions of 'Russian' supercars and a sports-SUV. It sponsored the Virgin F1 team in 2010 and in February took a sizable shareholding in the Virgin F1 race team, now named MARUSSIA – Virgin Racing. It also publicises via the Virgin F1 website, its intentions to open its showrooms in various prime cities, including London.

Here then, investment-auto-motives sees direct compatibilities and synergies between Spyker Cars and MARUSSIA Motors, both set to initially target wealthy Russians through creation of aesthetically different supercars and sports-SUV. Both also reaching directly into the UK's automotive skills base for technical and operational skills via CPP and Virgin F1, together spanning high-profile track-based and off-road motor-sports.

But what of the SAAB fit into this emerging picture?

Russia undoubtedly needs a globally recognised auto-brand which it can exploit as a lead world-export marque, and SAAB fits that mould perfectly. From a world-view, the co-geography of Russia and Scandinavia means it sees the to opportunity to leverage the persona of Sweden / Scandinavia given its very positive overtones of “hi-tech + eco-consciousness + social cohesion”, regional values that are baked into both Volvo and SAAB's own characters, (though it must be said that SAAB has much work to do to 'reclaim itself'). With a Russian owned SAAB such 'positive overtones' could then be accorded to other Russian owned and made goods. But critically with SAAB in Russian hands it means that with concomitant investment the massive spare capacity of ex-state Russian plants can be exploited to powerfully ramp-up SAAB's volumes, with the opportunity to co-develop SAAB and Russian branded platforms, aswell as creating a premium systems technology link between SAAB and Spyker and MARUSSIA.

So in effect the moves being made now by Antonov are a '3-way Pincer' approach by the Russian to create a 'global stage' profile, generate 're-appropriated' self-learning and set-out a national template for new generation exported vehicles. The supercar efforts directed at the home market, Middle-East and European fringes, SAAB maintained globally and Russian branded cars exported to CIS countries, China and SE Asia (as opposed to Europe and America which hold less marketing promise).

Returning to the 'modus operandi':

The WSJ reports that the Spyker NV holding company which operates SAAB currently has a battered balance sheet, as mentioned unable to cover its debt payments, let alone pay for business and capex plans. It needs at least €300 million of equity just to be able to generate enough free cash flow to cover principle interest payments, according to calculations by the Dow Jones 'Investment Banker' which itself is based upon very moderate capex outlay.

Thus it seems that SAAB has little other options, Spyker NV's attitude being pro-Antonov, prompting the Swedish government and GM to do likewise, otherwise seeing the failure of SAAB with consequential job losses at Trollhatten and Stockholm. However, whilst the Swedish government feels possible public pressure to ensure SAAB's future – especially after guaranteeing its EU loan – GM might indeed take a different stance, possibly wanting to see another poorly performing brand discontinued given its own closing of 4 portfolio brand during its restructure. SAAB's disappearance could mean greater opportunity for Buick and Cadillac; though in reality that argument is a real 'stretch' given their very different historic brand values and customer types. But in the new BRIC-led world of burgeoning consumer the case could be nonetheless argued, especially versus Buick in China.

But what is Vladimir Antonov's ultimate aim?

investment-auto-motives believes that in this free-market era, he wishes to create an 'Antonov' equivalent in automotive that his namesake created for aeronautical under previous communist rule. To this end, it seems no coincidence that he chose Spyker given its innate combine of auto & aero as depicted in its logo: a wheel & propeller. Nor should we forget the fact that SAAB's origins are whose origins were also aeronautical, thus a similar combine.

Moreover, he is more than aware of the origination and brand/logo symmetries between the Spyker- SAAB and BMW – its logo symbolic of a propeller's visual strobe-effect – a similar effect drawn centre of the Spyker logo.

In its earliest days Spyker proved itself to the emergent class of wealthy motorists through the endurance races such as the Peking-Paris Rally of the Edwardian era, and embraced early innovations in all-wheel drive, all-wheel braking and robust 6-cylinder power-plants and more. These origins strike a chord for Antonov, which he expects others to recognise through modern re-interpretation; both philosophical and literal.

Today the niche company and its loosely-linked former holding company form what appears as an intrinsic foreign industrial web, one created to eventually give Russia a domestically-owned, forward-looking 21st century auto-sector that has both 'Eurasian' reach and covers premium, upper mid and entry-level vehicle classes. A Russian auto-sector which then compliments its indigenous self-containment in base-materials, metals and plastics processing and of course oil. The ambition is huge given where Russia stands today, but it appears to be pulling the necessary parts together.

It might not be quite as intricate and complex as that famous Churchillian quote would have us believe, but it nonetheless appears to warrant further examination by the investment community as well as raising questions by UK and other governments regards the very futures of their own auto-sector.

In this case, the UK, Sweden and Russia need to find a 'win-win-win' outcome.