Friday, 24 June 2011

Macro Level Trends - UK Auto-Industry - Government Assistance: Granting Pertinent Patronage.

As has been well publicised and recognised, the UK is moving through perhaps an unprecedented period in its economic history. It is one - as the national agenda rhetoric highlights - in which the country must quite literally 're-produce' itself, a re-orientation of national productivity that increasingly counter-balances sectors such as financial, retail and services, toward that which has greater industrial content.

The coalition government now seeks to address this issue, but must also do so relative to the character and dynamics of the UK's capital markets, those crucially 'systemic' arenas that prove themselves to be such boosters or barriers to industrial innovation; though in practice it is the sentiment and actions of the intermediary banking sector, institutional investors, hedge-funds and indeed stakeholder company directors that are the ultimate arbiters of success or failure, depending upon their incentives and indeed executive and managerial capabilities.

The fundamentals of economic theory dictates that capital is automatically drawn to those companies which best perform for the stock-holder, and withdrawn from those that do not perform. Yet reality and theory have been proven time and again to be out-of-kilter.

At the micro-level an example might be the ability to 'window-dress' effectively for an IPO launch guided by an influential NomAd might bring-in an oversubscribed book-run so able to either pitch a higher listing price or sell a greater number of shares. Whilst at the macro-level the ramifications of (typically geo-political) 'Black Swans' massively affect market bearishness, and so the ability to finance or re-finance.

Whilst capital markets are re-energised and corporates view stock-buy backs as best use of their cash-piles, the after-effects of the massive volatility created by the 'Great Recession' is still undoubtedly with us, and has created sub-surface ripples that have in turn created economic, social and cross-border political fractures. The national government interventionism of 2008/9 that saw administrations 'step-into and save'' to varying degrees systemically important national sectors across the US, UK & Europe. That action in turn led to a markets focus toward the exposure and sustainability of sovereign debt levels, which in turn highlighted the need for varying degrees of national economic re-structuring across the West.

Hence, in physiological terms, we have seen the immediate need and availability of 'financial plasma' (liquidity), superseded by a bandaging of what are essentially open-wound problems, the Grecian case thankfully both the worst and smallest example (relative to national productivity measures, typically GDP).

The notional Western world now ostensibly demonstrates itself as akin to region of 4 very different economic areas, the US, 'core' EU, 'periphery' EU and the 'integrational' EU (the recently joined member countries). The European financial implosion means that the previous economic ties created in the 1990s and 2000s are today being politically tested, Germany of course acting as the EU guardian.

Set within this western context, there may be yet another dichotomy growing, possibly creating yet another area of interest conflict.

It involves the increasingly global (ie EM) outlook of the corporate profit agenda set against the structural timeline necessary for many western countries to 're-inflate' themselves. This time around, those countries cannot necessarily rely on the previously expected 're-buoying' of their economies by the multi-national corporates.

[NB An example is GM, global-reach in nature but in a cyclical sector and so cannot escape the global headwind, thus for the last 3 months slipping 10% below its IPO launch price and so undermining short-term stock purchase and thus now negating the idea of a powerful 'productivity push'].

This then puts greater onus on national-centric SME's and governmental ability to orchestrate economic re-inflation.

Whilst the liquidity for SMEs has improved their typically right conservative mindset means that business are running intentionally as self-funding enterprises, arguably limiting their growth potential but also importantly limiting their exposure to business risk during this slow-growth period. The drip-fed liquidity passing through the banking sector at the behest of government toward SMEs appears to be being proactively worked by investment banking to push M&A activity in the SME realm, a greater opportunity for faster growth - on paper at least - through mergers and acquisitions.

However, even with the M&A upturn, such a picture of slow growth across much of the West typically generates calls for further governmental economic expansion efforts.

The UK's industrial base is undoubtedly back in the spot-light, the BBC tasked to 'educate, inform and entertain' giving us a nation-trotting Evan Davis to demonstrate that our apparent post-industrial age still has gleaming examples of world-class manufacture. Cited examples: BAe, GKN, McLaren, Land Rover and Brompton bicycles.

The programme titled 'Made in Britain' then is a blatant and very necessary exercise to re-generate national self-belief.

But equally it should not unintendedly and accidentally deceive, as may have been the case with the illustration of 'superior brazing' technique on Brompton's bicycle frames. Brazing whilst a craft of sorts is in real terms a world-wide, low-value, labour intensive applicational activity; something that can be seen from the street repair shops of India to the factories of China. What may be described as a 'premium quality' lost craft in the West is anything but in the rest of the world – a staple of everyday manufacture and repair.

The first episode was however peppered with further contradictions of its broader argument. Including the fact that high-value manufacturing employs less workers, so is not an automatic answer for the unskilled jobless and unskilled. And that the housing boom swallowed much of the lost industrial heartland via property development, when that boom actually gave a new lease of life for what were defunct character buildings; a sizable proportion of the New Labour funded 'new business' schemes using such properties flailing as white elephants as a result of poor business acumen / execution].

'Made in Britain' was not of course tasked to provide a truly reflective assessment of each company within regional & global competitive contexts, (ie to demonstrate UK manufacturing within the detailed global scheme of things).

This is however, industry's & government's role.

As such Whitehall mandarins will find themselves posited between those optimistic (television & factory tour) demonstrations of UK technical prowess and advantage, whilst simultaneously pressured for "vital" financial and general assistance. Companies doing so will subtly and knowingly convey themselves as 'regional heros' and even 'nation-savers'.

When it was necessary the UK government stepped into the fray to support the economy and important manufacturing sectors. Monies have historically been directed to support both 'supply-side' and 'demand-side' aspects, the most obvious being incentive 'green-field' and 'brown-field' developments' for large VMs such as Nissan, Honda & BMW Mini, whilst latterly the vehicle scrappage scheme which spurred the automotive retail sector.

Government assistance then is most visibly directed at large scale business, attracting and keeping multi-nationals that play a major part in the national economy by virtue of their export value, and in the regional economy by virtue of the trickle-down of workers' earnings into housing, shopping and leisure activities in the region.

At the polar opposite government rightly directs funds toward R&D aimed at true and directly applicable 'breakthrough' learning and technologies which can provide the UK with the potential for international competitive advantage.

What government should not be called to do is to act in the role of a business support device for those medium-sized companies that operate in the broad middle-ground, yet over the years have failed to prove themselves as truly capable by virtue of comparison against their international peer group. Such companies will have probably been established for decades to reach such operational maturity, yet have not created the firm foundations required from which soundly judged expansion can proceed. Such companies typically outwardly espouse a specialist capability that differentiates itself from competitors, yet their histories may show multiple expansions and contractions in that middle ground, which have proven unsustainable, to the detriment of not only the growth prospects of the firm, but to the stability of employees at all levels, and as such probably not served as the economic cornerstone to its region, and the broader economy

Such firms will have instead been through multiple 're-generations', the financing made available very probably based upon the historic goodwill, and / or initial achievements, of the brand. But in contrast to a well orchestrated and proven rise to superiority over its competitors (through technical & operational competence) such firms have proven themselves to time after time failed to deliver their rhetoric.

Unfortunately, many quarters of the City (& Wall St et al) tend to have an overtly warm-hearted attitude toward the fringes of the auto-sector, especially those that operate in the 'sexy' arena of motorsports, sportscars and luxury cars; unsurprising given that such expensive products and event past-times hold such personal appeal to a coterie of bankers or private equity executives etc. Becoming involved in this sphere where real items of social interest are designed, assembled and driven seems a world away from the 'dryness' of corporate accounts, IRR & ROE rates and the like for say a paper manufacturer or the plethora of service-based companies.

Hence historically a desire to be part of the sector, thus an influential individual or team at that, has often created an air of overt-enthusiasm about the SME auto-company, one in which management can relay overtly optimistic business plans that come under lesser scrutiny than might otherwise be so. Indeed investment professionals can be drawn into believing a company's planned future sales forecasts, these based upon the seeming enormous current or trended sales in a specific sportscar or luxury segment or segments set by the major VMs, accompanied by the legendary phrase "we only need a tiny percentage of that segment".

The fact is that the business plans created by niche manufacturers in the UK have tended to be optimistic so as to make the project and business numbers work. Thus the numerous failings over the years which have both undermined the sector, regional economic confidence and from a Whitehall perspective national economic confidence.

Instead, the better long-term path to 'glory brand' niche vehicle growth has been stewardship by a powerful VM parent. But even this simple formula does not provide automatic success, much depends upon the innate capabilities and (internal political) interests of that parent. Hence we saw Aston-Martin strengthen impressively under Ford's previous ownership, and we witness Rolls-Royce and Bentley grown and now protected by BMW and VW respectively,

In unfortunate stark contrast we see that Lotus Cars has made little true progress (even with its co-company Lotus Engineering as a supposed aid) under Malaysia's largely state-owned Proton. The initial mutual expectancy of Malaysian-UK FDI propelling both the VM's development capabilities to become a global player and the NM's path to Ferrari-like success proving wholly empty over the last 15 years. (Note that F1's Team Lotus and Group Lotus, the holding company of 'Cars and Engineering', are not commercially linked).

Additionally, the success story that was Noble Cars lost its originator in a board-room tussle, whilst the previously 'lost' Ginetta Cars has been reborn thanks the patronage and funds of an entrepreneur who made his wealth in the retirement-home sector. And as a sad recent story has been the fall into administration of that venerable marque Bristol Cars in March this year, now bought by Swiss-based KamKorp, formed as a holding company seeking to mix and match automotive brands and technologies (including Frazer-Nash and ICE & EV, then reportedly sold to China's Xinjiang No1 Tractor Company, a state-owned enterprise).

Two shining examples however appear in the form of McLaren Cars and Morgan Motors, the former demonstrating the ability to commercialise F1 race-track success and the latter ever the demure steward of heyday yesteryear British motoring, though it too offers advanced engineering solutions wrapped in retrospective tailoring.

The automotive sphere is then for the external investor complex indeed, very often ironically the smaller the firm the more complexity, often borne from a mix of unrealistic ambitions mixed and personal/management egos which influence intra-company political infighting and hinder both the strategic and operational. Furthermore, increasing cross-border ownership may also create a frictional effect between owners aswell as owners and managers, though this is not always the case when partial foreign ownership resides with 'hands-off' owners as seen with McLaren and Aston Martin and their Middle-Eastern PE and SWF owners.

It is into this world that government officials and the civil service at large - carrying the promise or intent of assistance - must tread both open eyed and carefully.

The recent call from Lotus Cars for an assistance package highlights the caution required. The Norfolk company was unsuccessful in its 'first-round' application from the £1.4bn Regional Growth Fund. Monies were however provided for JLR, Bentley and Nissan. A 'second-round' application is available to those who were unsuccessful, Lotus now submitted an application for £10m funding as a tiny fraction of a stated £500m business expansion plan. This finance requirement is apparently split as £120m from parent Proton, and £270m of which comes from a conglomerate of Asian banks.

However, add the government's £10m to the seemingly 'assured' pot and it only reaches £400m, thus £100m short. Presumably this would be raised either by seeking notes or debentures from the City, selling additional company shares privately or even by offering a partial IPO. If this is the case it makes no sense for the firm to be legally & no doubt obligation bound to the government for such a small sum. If the business case for a major vehicle portfolio expansion is compelling, so requiring the necessary infrastructure build, then Proton, the Asian banks and the City would be happy to offer the funds more easily than a cash-strapped government, albeit at a higher cost of capital. Equally given the scale of the necessary investment the threat to otherwise 'off-shore' additional assembly jobs (to Magna Steyr in Austria or Valmat in Finland) appears odd.

This then would follow in the footsteps of Jaguar Land Rover's recent £1bn bond offer (@8% yield), and also that of Aston Martin's latter £304m bond offer (@ approx 9% yield). This demonstrates the present buoyancy in the City for backing soundly prepared business cases.

Additionally regards production outsourcing: both Magna Steyr and Valmat would undoubtedly seek to take a greater slice of unit-margin profits recognising they can do in-lieu of a client's CapEx savings. This also goes against the rational that sees Aston Martin relocate its Rapide production from Graz to Gaydon, and Porsche's decision to return its fringe production from Finland to Germany so as to make use of ironically lower cost homeland capacity and production schedules.

Industrial policy-making and any grants that accompany it must of course be both informed, balanced and be critically truly assistant in nature, providing a valuable fiscal resource for both the strategic prospects of the firm in question, and providing an assured trickle-down to other co-related commercial third parties also working in a pioneering field, or able to offer a 'multiplier-effect' through a company's employees to boost the local economy. Ideally both. Thus any single grant provided must make contextual sense, 'inwardly' relative to a truly convincing business rational presented by a firm's executive, and 'outwardly' relative to its socio-economic impact.

The groundwork must be under-taken thoroughly by government departments such as the Business Innovation & Skills (BIS) and its sub-divisional Regional Growth Funds (RGF), acting with the same due-diligence that any professional investor would undertake when parting with large sums.

The required slimming of government staffing to redress the budget deficit should not be used as an excuse when delivering what are now critically valuable public funds into the hands of private industry.

The past has seen a flood of public monies wasted on companies and projects that would have been seen as undeserving by private investment eyes, the then Regional Development Agencies (RDA) whose remit it was to nurture new commerce, but seemingly more adroit at forwarding funds toward enterprises and enterprise ideas which had little in the way of truly critiqued business plans so little hope of survival. The evident moral hazard for public funds channeled via state resources is that the process drives the outcome, when of course the reverse should be the case.

The other danger is that once funds are signed-off and provided, any delay in the work and progress made due to unforeseen occurrences beyond a firm's control (often relating to the actions of 3rd parties) means an ultimate drain of initial cash without agreed delivery. Here, governments can find themselves caught in a situation were they are induced to throw good money after bad to ensure the promised outcome.

Alternatively, having initially been convinced and 'bought-into' a scheme, the very act may well tempt additional private finance which sees government involvement as providing a security blanket of sorts even if not explicitly offered. This only adds to the moral hazard, and can give the incentive to a less than honest firm to stretch-out the work at hand – a well recognised theme that runs from small firm R&D projects to major PPI contracts for IT or construction.

Therefor it seems only sensible that in this age of public funding constraint, the rule-book be re-assessed with a possible tighten of grant provision terms and conditions.

It is stated that investment-auto-motives is unfamiliar with this arena, and has no deep knowledge of the present system, but addenda and possibly even new rules may need to be drafted and inserted into such agreements to ensure that funds are indeed used wisely and have accountability.

Any new rules should have powers that are concomitant to the level of funding sought, and the type of project and company to which they are to be directed. If not already in place, a stepped or tiered governance system providing increasing transparency as the in sum in question rises should be the ethos reflected in the provision structure. The level of oversight should also be tied to the likelihood of enterprise failure, higher propensities to do so more typical relative to start-up and early-phase companies, such as incubator-type efforts or those with typical VC type characteristics.

This is not the place to provide a detailed description of such an improved and more accountable system...but if not already in practice, a very basic yet powerful element should be that any company seeking a grant (or indeed loan or other financial instrument) should be willing to open its books: both submitted accounts [P&L, Balance Sheet & Cash Book) and its management accounts. For standard analysis, and if deemed necessary, forensic-type accounting examination, for the period spanning the former 5 years, or if younger since inception. It should also provide a full description of any sub-divisional companies with agreement that these accounts be also made available for inspection. Equally, the credibility of the BoD and company officers should be reviewed, from both the perspectives of previous general conduct (ie having no 'strikes' against them relative to previous failed businesses, especially questionable collapse) and that a majority percentage of the BoD (possibly 70% or near) have professional track-records that relate directly to the sector the business operates within.

This would be important yet simple matters to review, but ideally the BIS and RGFs would create a due-diligence template based on the prime principles that investment banks and private equity use, with a level of accordant leeway as deemed necessary, thus able to ensure that near best practice or adapted benchmark practice is deployed.

The issue of government grants is a broad and deep issue, but as perhaps an important socio-economic enabler, depending on the business type, the provision of grants might also be connected to the corporate provision of allied new housing schemes in areas of either high-priced housing or of inadequate housing (capacity & standard) within the area. So re-emphasising the kind of yesteryear CSR that has been absent for decades, the loss of that ideal bemoaned when Kraft bought Cadbury given its Bournville village history.

[NB Though this 'social hook' has in recent years been integrated into the planning permission consent requirement relative to major supermarkets' development sites].

The future of the UK's prosperity undoubtedly rests on its ability to reduce its manufacturing cost-base, both for domestic and export demand maximisation and to re-invigorate company accounts so aiding the long-term investment story.

Thus today at a time when government is struggling to pay-down the deficit and maintain public contentment, the provision of government grants to industry should have not only better targeting, oversight and outcome analysis, but critically – as and when feasible - have a social dimension that aids the country's social and economic cohesiveness.

Saturday, 18 June 2011

Company Focus - Torotrak - 'Gearless Wonder' or 'Toothless Wonder'?

The early phase plausibility of the divergent fiscal policies between UK and US administrations will be tested in 6 to 12 months time. The real economy of both countries - not simply the 'paper-based' capital markets variety of the City & Wall St - would expect to see green, albeit small, stable economic shoots.

But for the moment the here and now still sits in the realms of Monetarist versus Keynesian theory.

The UK's decision has been to pull-back hard on the reins of national bite the bullet of harsh but necessary economic expectantly deliver a fundamental restructuring of national production & service provision (the reform of NHS & Education most prevalent)...and to avoid Europe's heavy regulatory demands. It is a formula that has worked before under Conservative rule, previous cabinets successively championing the economic growth power of a lassez-faire attitude towards capital and labour markets flexibility.

Similarly the US also holds its breath in this period, but its expansionist view under-pinning its fiscal planning has created a very different situation for itself, and as such is now beyond the cusp of a truly new era. The interconnection of a deepened national budget deficit and the provision of 'free money' (via QE & QE2 prime-pumping exercises) has expectantly buoyed Wall St and so corporate America. That should then support a productivity-push that builds employment and so drives consumer spending. Yet that 'free money' has also contributed to creating a global commodities boom which has stoked input-cost inflation and consequentially reduced already restricted consumer-power.

The run-out of the second of QE exercise is imminent, but Wall St has predictably reacted negatively over recent weeks and given that stock bourses are the de facto economic indicators, by virtue US (and more widespread) economic health has been called into question. This of course noted by Congress and Ben Bernanke alike, no doubt predicted by both. And so this issue has become the prime Washington backdrop, discussion regards the pro's and con's of an extension of the national debt ceiling creating major cracks between ideological left and right. Unsurprisingly, Republican's feel that a metaphorical gun has been put to their heads, whilst Democrats maintain an almost evangelical belief in the ever-extended Keynesian solution. That stance now hardened by the rhetoric of a 'future lost decade' by Larry Summers, whilst Ben Bernanke counters by airing the possibility of QE3, (real or not) intended to muster a new rally in trader sentiment and so avoid an equities slip or even plunge.

These 2 massively divergent pictures then convey the 'slow but steady' UK attitude to new growth versus the more optimistic (naïve yet bombastic) 'Atlantic City' attitude of the US. It is a schism that many UK based yet export orientated medium sized enterprises must factor into their strategic planning. Having to decide the timescale & expansion rates of these two regions relative to their own sector, an increasingly important consideration given the contraction of growth prospects in the well established EM regions.

Torotrak plc is such a company: operating in the arena of mechanical power transmission, it is an IPR innovator, developer and partner-producer of alternative' gearbox systems directed at a range of customers spanning: VMs & Tier 1s of the automotive sector, Off-Highway vehicles such as the construction & agricultural fields, and specialist vehicle applications, such as leisure and functional small vehicles, including off-road buggies, ATVs and ride-on lawn-mowers.

The company's primary UK - US link is evident within its shareholder register, and includes a large US Tier 1 'traditional' gearbox manufacturer, a large UK bank and a number of Nominee companies which legally represent (though some say ''mask') other unknown interests.

It stands in what could be described as the unconventional, notionally 'advanced' realms of mechanical engineering, though base principles offered were developed in the former half of the 20th century - though little deployed given the dominance of standardised principles and systems and parts that came to pass, this primarily driven by the cost-benefit rationality of vehicle planners and the close tie that formed between VMs and their Tier 1s. These 'alternative' gearboxes have been widely used in specialist vehicles from tanks to snowmobiles, had relative success with HGVs, and perhaps had its most memorable car application by DAF (1960s/70s) thereafter used by Volvo on its 360 small car. They have been periodically used by major vehicle manufacturers, though historically done so to either increase in-house learning and experience of CVTs, or to create intentional competitive threat to incumbent suppliers, so as to both gain pricing reductions on standard technologies, to progress their own nominated supplier's R&D, aswell as to demonstrate eco-tech efforts to governments so as to attract financial contribution toward plant build or obtain easement of financial burden.

Torotrak was effectively born in 1988 as a spin-off from the British Technology Group (BTG), a body created to create the conditions for commercial leverage of those patents and IPR that was inside stagnant or declining UK firms - in this case Leyland Trucks

Torotrak describes itself as "the world’s foremost developer of full-toroidal traction drive technology. The company conducts research and develops applications in the field of variable drive transmissions. Torotrak’s continuously variable transmissions (CVT), infinitely variable transmissions (IVT) and variable ratio drive units reduce energy consumption and harmful emissions, whilst also delivering outstanding levels of control, functionality and performance".

Thus, it was established to align intellectual capabilities with the ever necessary VM corporate need for fuel-efficient, CO2 reducing solutions, able to benefit from the eco-engineering challenge that the late 20th and early 21st century posed. An era of corporate-fleet CAFE measurement and reduction in personal carbon footprints, and of notional expensive 'peak-oil' and 'oil-spikes'.

[NB Though the former belief counters the formation of EM's national oil companies, the untapped reserves of Arctic beds and other regions, and the latter typically driven by short-run speculation].

However, nonetheless there is no doubt that 'on-paper' its eco-technological focus, re-emphasising and developing fringe technologies, places Torotrak in a favourable position, to both help save the world and by virtue to offer investor confidence and returns.

To initially create an investor-friendly high profile and so interest, Torotrak was publicly listed in 1998 with an initial capital of £50m. Considering its size it appears as a sardine amongst the whales in its elected sector within the FT's FTSE pink pages, sat as it is amongst leviathans such as VW, Ford, Toyota and GKN Yet it sits most intendedly within 'Autos & Parts', when it could have listed (or swapped) under 'Industrial Engineering', 'Industrial General' or indeed under 'Technology Hardware' had it wanted to experience/play either 'defensiveness' or 'risk-on' sentiment. 'Auto & Parts' avoids these market-shifting vagaries and allows it to stand-out in 'preferred company' – no doubt seeking to gain from the perception of an operational parallel to GKN and its 'ownership' of power-transmitting CV joints, and providing a ranked name-place designed to intentionally reside between GKN & Toyota, the Torotrak name with obvious visual & phonetic similarities to the Japanese corporate name .

As is self-evident, the rational of the initial listing was to inject a core valuation which reflecting the potential of an IPR/Developer -centric company, trying to evoke similar investor attitude as was the case at the time toward Silicon Valley's IT sector.

Undoubtedly, the listing initiative was to trace a valuation growth path so as to become a desirable target. Its final sale valuation to have ideally reflected a combine of both basic company value (assets, IPR value, order book, inventory etc) and gain of an additional price premium effectively auctioned from the competing VM giants, each with historically sizable acquisition pots.

At 'worst', without a trade sale, the company to be sold to Private Equity, and to be used as a bolt-on for broader automotive sector ambitions, or possibly to use it as a 'centrifugal hub' around which could be build (with other bolt-ons) a compelling IPR-leading industrial conglomerate.

However, the commercial reality which underpins an ultimate enterprise value and the investment theory which its accords unfortunately rarely mesh seamlessly; as is seen so often in the eco-tech sphere, given the real-world variables that impact upon investors' final analysis.

In 2000 Toyota retracted from a licensing agreement, GM doing likewise 2 years later. By 2003, the initial business strategy of targeting premium car and SUV sectors had flailed. A new management team was installed, including Dick Elsy (ex original FreeLander Project Director at Land Rover and later at Jaguar Cars)as CEO.

So from this appointment it seems the original and supposedly ended ambition was still secretly on the table, executives and management still hoping for a breakthrough high value contract, whilst presenting itself as broadening the client appeal of its systems by targeting other vehicle segments and sectors.

This necessitating a form of 'reverse-engineering' to try and achieve large design and production cost savings which would be necessary to befit a BOM (Bill of Materials) budget suited to smaller vehicles (at piece cost) and to demonstrate cost effectiveness for use on smaller volume niche vehicles such as in the AG-CON sector and elsewhere.

In 2005 a licence was agreed with Carraro SpA in Italy for application in tractor transmissions. Later that year an agreement was formed with MTD Holding Inc. in Ohio, manufacturers of powered equipment for lawns and gardens, the agreement to form a JV company named Infinitrak LLC for the technologies use on a specific power band of products.

With these wins under its belt Torotrak went back to the capital markets in 2007 to obtain £6.7m via a new equity placement, used to buoy the balance sheet and illustrate the company's sound financial standing to prospective clients. Late 2007 saw a broad, non-exclusive licence agreement formed with India's TATA Motor, the technology notionally ascribed to 4 segments: passenger cars, light goods vehicles, medium & heavy commercial vehicles and construction equipment.

But without a direct vehicle application, or worked into a model development programme, investment-auto-motives considered the apparent 'deal' at the time as little more than a mutually beneficial 'good news' PR story. One that helped to give both companies apparent long-term 'investment legs' at a critical time of liquidity squeeze just before the financial crisis hit. The fact that the CVT-IVT technology has only been notionally ascribed to the 2011 (Nano-like) Pixel concept car (seen at Geneva in March) appears to support the assumption that the TATA relationship has been used as a carrot for investors. Thus it appears that no real-world TATA product using the system has been marketed to date since the 2007 agreement.

In March 2009 an £8.44m licensing agreement was struck with the US company Allison Transmission Inc, simultaneously taking a prime 10% (approx) sharehold at £2.4m (valuing Torotrak at approximately £24m at the time) to develop applications for small & medium-size trucks & buses and taking a non-exclusive arrangement for future large truck applications. Torotrak to receive the monies split over the 2009 & 2010 FY accounting periods. Importantly the deal gave Allison an option to secure worldwide exclusivity across the commercial vehicle arena, excluding previously agreed licences (ie TATA).

Given the TATA and Allison agreements, the outcome appears to be that effective application ownership is realistically split between TATA in India & SE Asia and Allison across the US and RoW. This allows Allison to then able to operationally block any threat from TATA regards the US truck market using the tech as its USP, and provides a counter to Daimler's eco-tech efforts integrated into its own broad European market and its filtration into its American truck brand portfolio. This of assistance to boosting its own IPO hopes reported in late February.

There will of course be payment terms included in the agreements, presumably based on the norm of either an annual royalty or number of CVT-IVT units produced. Given that licensee's typically decline a fixed royalty agreement given the inflexibility of such a fixed cost, although undisclosed outside the company, it is expected that production-linked agreements were formed.

If as expected, this then means that Torotrack is dependent upon TATA and Allison deploying the technology if it is to see an income boost and provide annually income stability.

Herein is the rub.

TATA and Allison have build massive production and sales empires based upon conventional technology gearboxes, each effectively a 'sun' empire around which thousands of privately owned small, medium and large 'satellite' businesses operate in the sphere of gearbox service, repair and re-conditioning. Whilst Europe and Japan consumers and fleet operators have more open views about transmission technologies (given typical dealership attachment - though still largely conservative), the USA and India are effectively entrenched in the 'old world' by virtue of greater distances traveled, and conditions met by cars and trucks and so a need for a broad continental network of relatively local, capable and low-priced repairers knowledgeable of conventional gearbox technology.

On the surface CVT-IVT would be best suited to 'self-contained' and in-house serviced truck fleets and bus fleets, better able to relate and cater to the 'alternative gearbox', but of course such fleets are eventually replaced and sold-off, and residual prices of the vehicles attained are critical to typically cash-strapped fleet managers, and their accountants, the booked heavy depreciation rates usually of little importance to their type of business models.

Thus investment-auto-motives must highlight the real-world potential for mainstream adoption of truck and car CVT-IVT, and thus has a concern about the ultimate value such production-linked payments will bring to Torotrak's investors.

Torotrak has had undeniable success targeting its system at the vehicle fringe, specifically the Outdoor Power Equipment (OPE) market for ride-on lawn mowers via the JV 'piggy-backing' with America's MTD Products. But whilst the created LLC's US location was necessary its physical and managerial remoteness was always a concern, giving the locational advantage to MTD and an ability to make greater visible and invisible operational demands.

That came to pass with a disagreement raised about the level of profit margin. As apparent small investor blogger and Torotrak shareholder Micheal Walters comments “Given that MTD was selling complete ride-on mowers, the actual cost of the transmission could be a relatively small part of the whole package. Torotrak needed to make a decent margin on transmissions, whereas MTD could make profits at other stages in mower production”. This would appear theoretically true, but a notional cost-breakdown of a ride-on mower highlights the relatively high cost of the powertrain units, this only increased from using a new system. Thus the financial crisis's hit on the DIY garden products and professional maintenance services sectors was hard, given that it is a leisure pursuit, thus circumstances demanding cost-down requirement and leading to possible pricing games played by MTD with its suppliers.

In January it was reported that Torotrak & MTD have agreed to restructure their arrangements to include royalty payments instead of direct margin receipts, with the UK partner taking back £1.6m in cash. Beyond partnering with MTD Torotrak is now free to court other competitor manufacturers in the field, including Toro which itself outsources the manufacture of its lower range of products to MTD group. Thus the near namesake Torotrak should, if successful, be able to capture greater ultimate reward from Toro and others.

[NB Both Torotrak and Toro well recognise their brand-powers as having etymological relation to the Latin/Spanish/Portugese for Bull with its referance to 'the land', and no doubt see the growth of Latin America's middle class and its future demand for US style homes and gardens. The 'lifestyle' aspect including the additional accompanying growth of both 'amateurised' & 'professionalised' lawn leisure and sports (inc golf, soccer, baseball, tennis, etc) needing course and field maintenance, and the expected growth of municipal parks: - trends that under-pin their OPE ambitions beyond the USA and Canada].

But of real practical value and USP advantage in this sector is Torotrak's ability to provide a transmission solution that allows a lawn-mowing tractor vehicle to undertake a near 180 degree about turn between 'strip-runs'. A clever trick that was seen on the TATA Pixel concept movie, but of greater practical application for large lawn gardeners.

Back to the here and now, and Torotrak is exploring other avenues closer to its spiritual automotive home.

These include:

- a flywheel-based mechanical-hybrid KERS powertrain system with Volvo Cars.
- a supercharger development programme as part of an alliance with Rotrex

Whilst these 2 projects look impressive as a bridge to the eco-tech future, the immediate concern for investors is conversion to income.

The KERS (Kenetic Energy Recovery System) project is a self-developed marriage of CVT & KERS, its basic premis attractive to Volvo Cars for exploration as part of its 'DRIVe toward Zero' (emissions) strategy. Yet a majority, if not all, of the project's funding comes not from Volvo but from the Swedish Energy Agency, which provided SKr 6.57m (Swedish Kroner). The system reportedly uses a 20cm carbon-fibre flywheel housed in a vacuum and uses electro-magnetic forces (between stator and housing) as the 'gear'- transfer device. The system no doubt works in laboratory/workshop conditions, in similar clean environments, or via a 'controlled condition' demonstrator vehicle, but investment-auto-motives believes that the sophistication and sensitivity of the device is unsuited to the life-span durability and longevity of the average car.

The programme thus being used by Torotrak to earn intermediate income so as to off-set overhead costs and used by Volvo management as an R&D promoter to its Chinese masters at Geely, themselves ideally seeking an alternative affordable technology to Japan's very successful electro-hybrid technology.

As for practical, applicable outcome and a consequential long-lived income stream for Torotrak, it appears doubtful, unless the Chinese can be persuaded to take over the mid and long-term funding of such an 'elastic' R&D programme.

A 50-50 JV alliance was formed with Denmark's Rotrex in May 2010. Called 'Rotrak' it aims to combine the core competences of the 2 firms, marrying a variable speed traction drive to supercharging technology in a bid to find a viable solution for adding power to downsized vehicle engines. To re-quote a portion of the official announcement:

“A conventional turbocharger struggles at low speed, particularly in these smaller engines. Better low-speed boost can be achieved but it is complex and costly, the firms note. Supercharging is the main alternative, but the fixed ratio between engine and supercharger speeds means that if boost is optimized for low-end response, then energy is wasted at higher engine revs”. And to re-quote Dick Elsy's words: “Adding Torotrak’s scalable variable speed traction drive to Rotrex’s technology will overcome many of the compromises that affect current pressure-charging systems.”.

In contrast to other previous unconvincing efforts, this project has the fundamentals of creating a much needed new leap forward for the stabalisation and constant & proportional air-feed dynamics for the internal combustion engine. The fundamentals appear sound, so the question investors must ask is about the deliverability of the project to meet VM and Tier 1 demands, specifically that of cost and life-span durability, a reduced parts count for the item made in high-tolerance yet affordable manufacturing conditions undoubtedly key.

The official project announcement stated that “independent analysts estimate that the market for pressure-charged gasoline engines will grow from the current global level of 2.5 million units per year (in 2009) to 12 million by 2016. The more established market for diesel pressure-charging is predicted to grow from 10.5 million to 16.1 million units in the same period”.

These figures are probably over-egged, with a level of 8 million petrol engines and 14m diesel engines more likely given the recent global economic contraction. So the project's business model assumptions should include conservative cautiousness when forecasting not only segment demand rates, but also the pricing elasticity and NPV & IRR rates deemed tenable to attract and keep targeted clients that have prime interest in such an elegant solution. Ideally they would be able to create a brand-relative technology story around the supercharger to enable their own pricing premium and thus maintain the Rotrak commercial connection for the long term.

This project then bodes well as an important 'bread and butter' income provider, the details of the arrangement obviously critical, but the 15% stake taken in Rotrex provides a base of mutual confidence.

This small note of optimism relative to an incremental step in engine technology must however be balanced by the reality of pragmatism that pervades throughout the auto-industry. That is the reticence to replace the tried and tested principles and components with 'revolutionary' replacement solutions. And this appears the case for gearboxes, as exemplified by VMs preference to use ever increasing gear ratios: the once standard 3 replaced by 4 replaced by 5, then 6 and even 7 enabled by similarly evolutionary clutch technology – Audi's DSG gearbox a good indicator.

The innate truth that has emerged is that (unsurprisingly) the large western VMs prefer to develop in-house or as a direct JV project with a Tier 1 supplier, so as to maintain direct control of IPR and are not 'put under the heel' of dependence on a single supplier, typically strategically combining IPR ownership with the agreed contract for manufacture. Such 'self-destiny' has been seen with past CVT efforts of Fuji-Subaru, Ford-FIAT, Nissan, Honda, VW-Audi and BMW, even though some of those names have willingly undertaken projects with Torotrak.

[NB. the BMW Mini CVT has attracted heavy criticism in N. America from customer complaints and a National Sales Company that has little/no direct ability to solve the problem].

[NB. In contrast to these CVT offerings, Toyota's 'Synergy Drive' system used on its Hybrid models is not defined as CVT since it transmits 2 power inputs – engine & electric motor – to drive-shaft outputs].

[NB. Ford displayed the Torotrak CVT-based 'B-Max' concept at Geneva in March, but as with TATA's Pixel, the technology may well be being used as part of Ford's
desire to demonstrate a future-forward attitude, FMC also seperately stating it is reviewing CVT for 'secondary-power' uses].

Like western VMs and Tier 1's, a similar 'self-reliant' attitude prevails within China, here though its domestic manufacturers typically utilise proven and cheap previous generation technologies that have been adopted and adapted from joint venture partnerships with western VMs. This enables them to effectively buy and control dated but still usable and critically scalable 'technology platforms'. This attitude directly aimed at power-train and electronics, but less so toward the local abilities in chassis systems (though not necessarily advanced control) and in exterior and interior trim & hardware which affect the customer 'look & feel'.

Though Geely may well hope for a positive outcome from Volvo's 'Flybrid' R&D work, it will no doubt focus its primary work and technology stratgey on replicating the incremental improvements that have been seen in the US and Europe in the past, more attendant at exploiting these phased-in and cost-reduced advances for domestic brand applications.

Thus for the present, if one were to plot a 'probability versus impact' chart for Torotrak's mid-term ventures, a greater chance of success lays with maintaining a strong continued focus on the OPE sector having already had a direct impact and grown its profile therein, and the potential of engine ancillary systems – though by no means assured given the potential for VM's or Tier 1s to develop their own supercharge induction control systems, whether mechanically or electronically controlled.

The TATA Pixel concept (as shown including smart-phone operated doors and its Torotrak-enabled pivot-turn park & drive feature) also bodes potential, especially since the FIAT 'twin-air' 500 has set a precedent for downsized city car engines, and the fact that FIAT & TATA collaborate closely at Board level, thus projecting the possibility of FIAT & TATA variants of a future small car platform mating the 'twin-air' engine and a CVT-IVT gearbox. Torotrak must then maintain close contact with both firms to promote the progression of such a project, giving a truly credible European market 'A' segment vehicle, spun-off from the basic Nano architecture.

In the meantime, Torotrak should identify mid-ground possibilities that are positioned between the reality of the OPE market of ride-on lawn-tractors and the conceptual reach of city-cars. In terms of GVW (ie passenger capacity + added load + full fuel) and product complexity & business model detail, that appears to point back into the varying forms of ATV in both leisure and military guises – the latter of course adding greater commercial credibility, and offering the necessary budget flexibility for proof of performance.

This is something the BoD surely know to be the only feasible path forward, the requirement of course – as has been the bugbear for so long – is delivery of the strategy.

In the 13 years since market listing the company's valuation has ridden the general cyclical highs and lows of the Auto & Parts sector. In recent years the sector was of course heavily depressed by the consumer consequences of the financial crisis, then boosted by western & Chinese governments' small car purchase incentive schemes. Torotrak's share price however is more volatile than the large American, German and Japanese VMs or indeed GKN, since it is less frequently traded at lower volumes, heavily affected by both sentiment of the general market, but perhaps more so by the influence of director's dealings, short-term profit maximisers and indeed the inducement of both these combined factors (as noted in general shareholder discussion boards).

A need for a renewed confidence in Torotrak's operation was recognised as long over-due, hence the internal 'top-down' shake-up that has slimmed the BoD numbers to reduce overhead costs, seen Directors take a 10% pay cut, seen the appointment of the well connected John Weston as Chairman (as of 1st June) and no doubt recognises a need to re-assess its methods regards client prospecting and capture.

Yet the company is still effectively strategically led by the 'Two Muscateers' of Dick Elsy and Nick Barter - highly knowledgeable and well respected veterans of Ford, Rover Group & JLR. This though indicates that Torotrak is still hunting for the 'Big Game' catches available from high-volume premium cars and SUVs. This no doubt subtly done in quiet corners whilst it more publicly hunts out the lesser prey in the meantime.

Hence we come full circle to the experiences of 1998 and 2003, with the idea that the CVT-IVT application for automatic large cars is inevitable. History has proven that assumption, with Nissan specifically develop a produced and proven CVT for it Japan's old model Gloria, USA Murano, Altima (ie 3.5L+ engines), and Toyota creating high-torque/high-power 'partial CVT' for its Lexus models GS 450h and LS600h.

This then obviously sets a premis that Nissan could additionally deploy this CVT on its Infiniti range, and potentially licence it to others including Jaguar. Thus setting (in this case) Torotrak & Nissan as potential opponents or collaborators.

Elsy and Barter no doubt holds a similar broad view to investment-auto-motives, in that Japanese & German technology re-appropriation will continue to be fundamental to the UK auto sector, so replaying in a more arms length, commercialised manner, the sort of technology trickle-down that came to pass when BMW bought Rolls Royce and VW bought Bentley. But whereas their architectures are set in Germany, it is TATA that acts as the parent and technology strategy intermediary on behalf of Jaguar & Land Rover, and as long as they do so Torotrak no doubt suspects it has a chance of 'Bagging the Jaguar'.

Jaguar's powertrain R&D over recent years has benefited from from a two-pronged perspective, with monies made available from the government's Technology Strategy Board (upon which Nick Barter sits). The most publicised have been those which had greatest political clout pertaining to EV and Range-Extended EV engineering related 'LimoGreen' project and its successor the REEVolution project. However, JLR was also able to investigate a more pragmatic ICE-based solution, Torotrak and others working as a consortium, using CVT to couple the cars' rear differential with 'Flybrid' (flywheel) technology.

This then theoretically allows Torotrak to integrate its CVT-IVT systems into the heart of UK premium vehicle manufacturing, but evaluation prototypes even if prove of theory on the test-bed, typically have a far harder time clearing the commercial hurdle that sees additional cost undoubtedly added to a full vehicle programme and to the unit cost (in components and labour-time) added to the factory vehicle.

A number of production vehicles could indeed be built as part of limited series for broader evaluation of the system's pros and cons, but that does not mean that 'Flybrid' will automatically become a standard-fit technology

The BoD has proven to have incredible patience and indeed staying power given that it took until 2009-10 to post a maiden profit of only £200,000. This appeared then a new phase of profitability.

But the Q1 2011 pre-tax loss result of £2.9m on revenues of £4.7m appeared expected, the share-price dipping to a new low of 20p by the end of February. This low attracted 'growth' stock-pickers and the price gained traction, a steady up-trend created by the Volvo 'Flybrid' story, sending the stock to 60.25p (reaching a 5 year high) by the Friday LSE close.

So investors are indeed re-energised with Torotrak. From here they must make a choice as to whether to ride the positive sentiment, or peer behind the eco-tech curtain to critically assess strategy, operations and corporate accounts.

The historic lacklustre performance of the company has only really rewarded those close stock watchers who have bought and sold their interests on the basis of expected volatility, and by nature in turn creating that volatility.

Torotrak must prove itself to be far more than than a trading-play for the cynical short-termist investor. For a company that initially listed 13 years ago at 300p, to now reach the 'heady heights' of 60p today is an unfortunate state of affairs, both for the company itself and the credibility of UK automotive eco-tech.

Its future fortunes – good, indifferent or poor - appears to be largely in the hands of Allison Transmission and those large 'invisible' investors who are very probably PE players looking to create industrial links for technology deployment, as seen with OPE. TATA has a role to play in shaping its fortunes but would be brave indeed to use effectively sector unproven technology as its launch pad into the Euro small car sector.

The 'Gearless Wonder' need not stay the 'Toothless Wonder' but there are heavy headwinds which continue to vie against its displaying itself as a hub of deployable British innovation and so obtaining meaningful value creation.

A dose or two of old fashioned British pragmatism – as opposed to Americanesque 'Atlantic City' optimism – would provide a powerful outlook from this renewed startpoint now that the MarketCap sits at this unprecedented level.

Wednesday, 8 June 2011

Macro Level Trends - Bahrain Grand Prix - Maintaining National Policy Steering & Traction

Since the initial uprising in Tunisia, followed by Egypt, most prevalent in Libya, the idealised potential outcome of the 'Arab Spring' as a force for change has been the centre-stage issue across the GCC and MENA.

How the actions of each country ultimately play-out toward a political and leadership end remains to be seen. The apparent popular opinion is that the absence or disposion of the ruling elite and their parliamentary powers will be replaced by a consensual, truly representation model.

Yet the true ideological spectrum between opposites of 'autocratic aristocracy' and apparent 'socialist democracy' is vast and complex. Regime change outcomes rarely the result of harmonious agreement, but realised through social leverage & rhetoric, in short playing to the crowd with promises easily made but ultimately far harder to keep, even if indeed the promise be genuine.

History is witness to the battles of regime change and indeed its failures. From a short-lived Cromwellian 'Protectorate' England of 1653-59, the French 'Terreur' period of 1793-4, post-WW1 German Socialism, and more recently the failings of Ukranian 'democracy' which reportedly has done little for the people en mass. Power and wealth instead switches to the hands of a different, new self-styled, often ego-centric, leadership.

Thus we have yet to retro-spectively witness whether the 'Arab Spring' brings about a new era of speedily injected positivism, or one of factional political infighting. History typically suggests the latter, which should be a warning to both incumbent 'leaderships' and the apparent 'freedom fighters'.

But of course, the reality is far more complex than portrayed.

As past examples have shown, leadership struggles inevitably create internal disruption and in turn economic disruption, so creating failing conditions across all of society, from the everyday workings of the public-sector to the strategic decision-making of the private sector. The reality of economic stability suffers at the hands of social idealism.

This appears the case in Bahrain.

Debate continues about the hosting of the Bahrain Grand Prix.

The original event date of 13th March was post-poned under the mounting pressure of social demonstration, the GP Asia series already abandoned. Bernie Ecclestone's FOM (Formula One Management) consulted the FIA, participant race teams and Bahraini officials and a new consensual date was reset for 30th October.

However new reports state that even that re-instated date is likely to been canceled.

This it appears is due to the race teams reticence to participate, this reticence no doubt generated by their corporate sponsors' understandable unwillingness to perceptually afflict their brands with the stain of metaphorical blood. It is after all a sensitive issue for all involved, and at this point in time, with stock markets stuttering, corporations are having to act defensively on the PR front. Thus the reticence of the F1 teams is equally understandable given their reliance on sponsorship.

However, without wanting to appear deliberately controversial, investment-auto-motives believes that the race should be run in an alternative format, for the long-term economic and social sake of Bahrain. A middle-way should be sought.

One that demonstrates to the people why F1 should be viewed not as a glamorous and frivolous 'western' event but critical as an economic hub, a wealth generator and of strategic industrial-policy importance for the population at large.

The cancellation of the F1 event would be a time-tabling inconvenience to FIA, and a re-scheduling inconvenience and cost to the teams. But to be candid they see it as little more than a track destination, focus instead realistically limited to their near-term goal of driver and constructor championships, technical attention directed at the track layout and facilities with commercial attention directed at maintaining sponsorship good-will.

Thus the sport itself is little effected by a Bahraini cancellation, the reported £24m loss for FOM hard to swallow but nevertheless able to do so given the global demand for hosting F1. Other EM nations offer welcoming open arms, themselves hoping to re-play the Bahraini/GCC F1 model backed by growing petro-dollar SWF pots.

But to Bahrain, the F1 event serves not only as a great national day of motor-sport which gathers a car-crazy population, nor does it simply spot-light Bahrain on the world-map as an emergent powerhouse or as a tourist destination. The F1 event demonstrates an economic growth path for the country itself. As the pinnacle of motorsport adeptly aligned to aerospace materials and science it serves as a technology platform demonstrator, its advanced technology aligned to many spheres from eco-power engineering & generation to creation of private light aircraft design and assembly, these but only 2 derivative applications that have been seen to assist ambitious EM nations.

Beyond of course it also represents a retail opportunity through merchandising for the events held at the track/stadia, merchandise which can be manufactured or assembled in Bahrain.

But critically, the F1 race highlights the infrastructural investment put in place to serve not only F1, nor only motor-sports, but the very nub of leisure-based industries that will help the cross-cultural integration of Bahraini's whatever their Islamic interpretation or their ancestral homeland.

In short, it gives a focus to the nation from which many social, economic and technical advantages have already been derived, and must continue to be derived. On the surface it may look like a vanity project for the Bahraini Royals and their guests, but the multiplier effect is proven, and appears to have much potential remaining therein.

The loss of a Grand Prix event cannot be conceivably compared to the loss of human life seen in the demonstrations. But if well managed a resumed Bahrain GP could act as to portray an optimistic future for the country, instead of the fractious one presently being transmitted to the world.

That means finding a solution that is amenable to all stake-holders.

To this end, investment-auto-motives believes that the race should take place on 30th October as re-scheduled, in a sensitive manner.

But that it may have to do so with the basic 'rules' the event re-written. As for the hosting itself by the Al-Khalifa Royal family, less ostentatious glamour - thus in keeping with Islamic tradition - and greater explanation of F1's strategic role for the national good. If social unrest continues with likelihood that the race attract demonstration, it should be run as a televised yet 'closed' event, this not simply as an order by the ruling elite directed at the public, but themselves displaying their similar abstention / deprival ; the race still run to demonstrate the Bahraini promise and contribution to Grand Prix as part of its 'international economic pact'

The race teams should agree with their sponsors as a uniform understanding that corporate sponsorship decals will not be displayed, thus cars run 'naked' in the spirit of both social understanding and the teams and drivers implored to drive as true gentlemen, reflecting their heroic forebears and demonstrating an ethical standard which itself could be more broadly influential.

The easy ploy for all concerned is to abandon the Bahrain GP Race, but this would simply demonstrate to the world that major advances made by the Gulf nations are being internally eroded - so replaying the age-old negative Arab stereotype.

The more difficult but historically significant ploy is to re-interpret the challenge as an opportunity, all stakeholders - Crown Prince Salman Al-Khalifa, Bernie Ecclestone, Team Bosses & Sponsors - intent on demonstrating to Bahraini's and the world alike that a sensitive 'one-off' an alternative formula can be attained.

One that is able to display the true nature of F1 as both social glue (without typical propaganda) and as serving as a (well communicated) foundation-stone to technological comprehension and self-competence and so as critical economic pillar.

Wednesday, 1 June 2011

Extraordinary Note – “Going for a Ride” on the (PR) "Magic Bus"?

As a PPS in the last essay, a good luck message was offered to those responsible for the prototype testing of the New Bus for London project. - known as NB4L or Routemaster II.

This was put in as an addendum to the essay the following day, after a radio announcement stated that vehicle would undergo testing at Millbrook Testing Ground.

However, in an extra-ordinary posting, investment-auto-motives further questions the project.

From basic desk research, it now appears that the 'prototype-test' could well have been used as a photo-opportunity for the project, the Mayor taking the driver's seat and driving in an understandably gingerly manner – with a short 22 second video posted on youtube.

Unfortunately the clip leaves a less than convincing impression.

The bus itself seen driven looks more akin to a powered mock-up as opposed to the types of test-vehicles which would fully utilise Millbrook's facilities. These would be either an 'undressed mule' for chassis and power-train testing of new components, or a fully fledged production prototype, which as the name infers would be tested to production specification (as part of the shake-down process typically related to trim and hardware items).

However, this does not appear the case with NB4L. Look closely at the supposed prototype and a one's eye can see the same light-brown coloured internal surfaces on the wind-screen lower and driver's partition (either in hand-laid fibre-glass or MDF/fibre-board) as is apparent on the mock-up vehicle.

This then is at best confusing, and suggests that a mock-up is being touted as a prototype, when the two are normally constructed in very different ways for very different objectives – purely aesthetic conveyance versus robust engineering prove-out. Should it not instead be termed a 'demonstrator', in which case it should not even be at Millbrook.

To alleviate any misunderstanding (and to generate mass interest prior to launch) TfL and should provide a dedicated project website with videos, project schedule, engineering milestones & methods – including the types of pre-production buses built - and count-down to the launch day itself.

The £11m worth of monies that have been accorded so far are in reality supposed to be an investment in the city's infrastructure, and not at best a vanity project as suggested, or at worst, a far more costly red & 'white elephant'; to which additional funds must be directed after the official launch. There should be no 'catch-22' here.

A web-site of this nature would provide as much 'transparency' as the windows of the bus itself, and demonstrates that ultimately a worthy vehicle will be delivered to London.

And in doing so, would provide a magazine platform for the science, technology & engineering 'engagement' that the UK so desperately needs from its crop of youngsters.

Put them in the cold and it is yet another generation that will not return, focused instead on far more financially rewarding arenas. Such a mistake was made years ago, and now the UK is having to pay an excruciatingly heavy price.