Friday, 26 August 2011

Company Focus – BYD – Business Model Cracks Demand More Than 'Green Wash' Rhetoric

This week the WSJ described the concerning events at BYD the Chinese “IT, Auto & New Energy” company formed from its battery manufacturing core, and which heralds itself as an automotive eco-angel.

Its H1 2011 profits dropped by 90% to Y275.36m compared to a year earlier, reportedly to a slump in car sales. Reports suggest that this heavy knock to profitability has sharply deteriorated its green-car ambitions. As the WSJ headline ran: “BYD Sales Darken 'Green' Plans”.

Ever upward market dynamics encouraged BYD to continually add extra spare production capacity, giving a 2011 capacity of 700k units. However, whilst January sales gave 52k units, February, March and April posted a flat-line of 40k units per month which may have presumed a new sales floor. Unfortunately May saw only 32k or so cars sold and June 26k units, so heavily impacting what had been for years an ever expansionary business expectation. Reported 2011 plant capacity of 700k units overwhelms (optimistic)projected sales of 360k units; thus showing a dismal 52% plant utilisation rate and unsustainable commercial basis

Beyond questions surrounding the basic management of the firm and its ability to read the market and equate CapEx & R&D expenditure, this news will undoubtedly also raise questions regards its innate business model, its operational capabilities and its credibility as a truly green vehicle producer.

It is this prescient image by which it differentiates itself both in its home market and by which it seeks to extol abroad for foreign sales traction.

This crisis of confidence also highlights the manner in which eco-tech – or at least the promise of high-return, long-term eco-tech – is both capitalised and managed. It is a question pertinent in both the East and the West. Yet although the past credit-crazed conditions in the West did indeed arguably 'supercharged' eco-style over eco-substance, reduced liquidity means greater awareness and business model critiquing. In contrast though although economic cooling has taken effect in China, and the markets are substantially down over their previous highs, the fact that there is so much liquidity (both RMB & Dollar based) still available in Beijing, Shanghai and Hong Kong indicates that the potential for yet further apparent eco-tech bubbles – or at least overt over-enthusiam – may not have been extinguished.

The immediate BYD lesson demonstrates that it was a mixture of previous stock-price hype and the firm's inability to read market & PESTEL conditions which led it to its recent sell-off. But more so, the obvious chasm that exists between BYD's real-world 'bread and butter' operations of building conventional cars in a conventional manner and without deep acumen versus those investor perceptions – created by the company itself – of an eco-engineering led enterprise that can truly call itself the 'Chinese Toyota'

The past decade has been one of increasing colour and complexity for the varying types of investor with focus on the auto-sector investor. In answer to the regulatory loose yet ethically powerful edicts of the original 1992 Kyoto Protocol vehicle manufacturers old and new have seemingly endeavoured to both develop technical solutions and access funds for doing so.

Since Toyota's original 1996 revolutionary and revelationary Prius prototype vehicle a veritable matrix of enterprise types and solutions emerged. Unsurprisingly that meant established VMs improving conventional ICE emissions whilst 'left of centre' new arrivals such as Tesla, Fisker and a host of others set about offering alternative power-plants, typically EV by nature given the previous 'promises' it comprised. The ability to tap directly into both governmental funding at start-up and development phases and be welcomed by the then buoyant capital markets seeking green investment opportunities only served to boost the apparent green-tech opportunity.

Yet as mentioned in previous essays, the conditions that were created offered a 'feeding trough' for new green-tech enterprises, one which could be abused by knowledgeable participants with marketing hype, absorbing much in the way of funds, providing demonstrator and limited series vehicles, yet whose promise fails to materialise due to a mixture of near empty rhetoric and changed macro conditions. Ultimate ambitions could indeed be that of 'planet saviour', but equally and more realistically for the business-savvy, such 'disruptive technology' can also be sold-off to established market encumbants, in a manner which itself maximises returns.

The ability to bring real-world EVs and LEVs to market is indeed onerous, and really only within the capabilities and desires of major VMs. Yet whilst PSA has sold 2500 or so of such vehicles in car and small van form, Renault-Nissan promotes its overtly ambitious (ie untenable) 2016 EV plans for 1.5m vehicles and BMW showcases the i3, the pragmatic reality looks very different. That reality has taken the shape of Hybrid power-train technology JVs between BMW & PSA and Daimler & Renault. In the meantime GM and Ford roll-out US hybrids at low volumes periodically. And as well known Toyota leads by far (across brands and models) with Honda seeking to replicate. Yes you may well see a prominantly placed Nissan Leaf if you live in a large conurbation, but such trialled cars are more about public exposure and brand halos than as true income streams.

But by the greatest impact has arguably been the creation of stepped phase ICE based product improvements in standard vehicles, aswell as the introduction of green credential sub-brands: VW's 'bluemotion', Skoda's 'green-line', SEAT's eco-motive', Ford's 'econetic', Opel/Vauxhall's 'ecoflex', Volvo's 'e-drive' and Mercedes' blue-efficiency', whilst BMW has engineered-in its 'efficient dynamics' ethos.

This then depicts the scene from the western perspective, where old and new manufacturers came to market from the opposing angles of evolutionary vs revolutionary, and where investment-auto-motives predicts both will eventually arrive at the pragmatic hybrid powertrain solution; an end-point well understood by most of Japan's engineers and execs well over a decade ago.

This then the experience of Triad region manufacturers, capital markets and car-buyers.

The commencement of the 21st century 'green decade' also had a perceptional effect in China, but perhaps more so in the minds of green-entrepreneurs, banking executives, and capital markets than arguably the case with the average new car buyer.

The burgeoning new middle class took to the roads thanks to the policy-led intended 'perfect storm' which leveraged JV knowledge between domestic & foreign producers, induced massive FDI, recycled export earnings into new credit forms for internal consumptive growth and created a plethora of domestic companies and brands now still being concentrically absorbed by planned auto-sector consolidation. The game-play was typical from both state company and new private company angles: appropriate foreign vehicle platforms via JV or licensing, compel state funding, refine the business model and access capital markets funding and grow the business with consumer-centric strategies regionally and nationally.

However, the inclusion of green-tech as a customer-led business differentiator was largely an anathema given market demands for as affordable yet as prestigious cars as possible. Yet that was precisely the apparent business platform and product differentiator that was seized upon by the Shenzen company BYD Auto Co, led by Founder & Chairman,Wang Chuan-fu.

Unlike the masses of similarly styled competitors - who had re-played the west's early 20th century auto-sector development model creating car companies from other commercial engineering entities – the battery producer BYD approached the matter in a far more calculating manner. It presented itself as looking further down the road to the emergent 'eco-horizon'. Where, in time, it could position itself into the similar unique position held by Toyota's sub-brand Prius.

Hence in 2002 BYD bought up the small auto-manufacturer Tsinchuan Automobile Co Ltd, creating BYD Auto in 2003, and set about the task of creating China's first eco-sensitive auto-maker. Its primary commercial remit: to appear more advanced than its competitors and on par with leading Japanese and European auto-makers.

For the last 6 years or so its approach of near 'copy-cat' designs (to Toyota & Honda's global models) along with supportive financing has made BYD the poster-child of Sino industry.

Whilst its foreign role-models have been critical of its methods, within its protected domestic industry walls, the company has delivered 2 very popular cars since its original 'Flyer' model, and has grown an expanded model range. Those popular cars are the small F0 (formerly F1) and compact F3 as the primary production focus; supported by the mid-size F6 and G3. These 4 models combined have been the cash-cows, seemingly maintaining a balance between lower margins on high volume small & compact cars and larger margins on lower volume mid-size cars. More recent models are the F8, S8 & M6.

The company obviously has its product supporters and detractors, the video web-share site has been used to promote positive and negative lights. BYD's Vietnam distributor depicting coverage of a sexy female advertising photo-shoot, whilst another filmed the supposed poor vehicle quality at a motorshow demonstrating the 'poor door-shut'; yet this ostensibly looks like a staged effect given the repetition of the same force applied to achieve a 'bounce-back' off the door jam/lock. Notionally independent videos from the 'ChinaCarsForum' depicts the crash-tests undertaken by C-NCAP, set-up by the Chinese authorities as a counterpart to the Euro NCAP crash and assessment process.

However, the good, bad or indifferent BYD product quality is not the focus of this posting; it is the solidity of the 'green credentials' that BYD proffers, the strength of the implicit vs explicit achievement, the boost-effect such a stance has had to investor interest and the manner in which the business appears to have been managed.

From this perspective, BYD has indeed produced the much vaulted eco-cars in the manner of F3DM and F6DM plug-in hybrids and the E6 MPV with full-electric drive, hence an EV. Yet the production figures for these cars is astonishingly small compared to their conventionally powered counterparts. The F3DM & F6DM were showcased in 2008 as a pre-cursor to the Beijing Olympic games and the F3DM used in the event's fleet of eco-cars along with those 50 or so cars similarly engineered by competitor Chery. Since then, the F6DM has never been build whilst the F3DM sold 48 units to government agencies in 2009 and 417 units to government and public in 2010. In 2010 the E6 MPV was showcased, with 40 units used as taxis in Shenzen for 'field-tests'. And in mid 2011 the S6DM SUV appeared.

For comparison purposes, 520,000 or so BYD cars were sold in 2010, thus the eco-variants represent about 0.08% of production volumes. At that level accusations of corporate 'green-washing' look substantiated, since if the company were wholly serious and dedicated to the cause, it would have not only produced far more eco-variants but would have also had those variants tested in batches 'in house' by both professional technician-testing teams and by allowing its management and staff to use and critique the vehicles much as any regular auto-producer does in its normal operations. Indeed since the eco-cars themselves were not all-new models need necessary protection from industry spies and press photographers the impetus would have been to deploy as many cars as feasible to run as development 'test-beds'.

This should have been part and parcel of operations from the very beginning and could have been ramped-up in size and learning in parallel to the scaled-up production and so income contribution from its conventional ICE powered cars sold.

The following from company sources shows the annual production totals to date, and breakdown of 2010 sales by model:

2010: 519,800 units
2009: 448,000 units
2008: 170,000 units
2007: 85,942 units
2006: 55,038 units
2005: 16,000 units

2010 domestic sales by models:
F0: 148,457 units
F3: 264,364 units (including 417 units of F3DM)
G3: 50,416 units
F6: 51,651 units
E6: 33 units
S8: 7 units

Notionally approximately 1% of the production total could have been devoted to eco-variant testing, thus providing 160 cars in 2005, 550 in 2006, 860 in 2007, 1700 in 2008, 4500 in 2009 and 5200 in 2010.

Given interest in foreign export markets (see end-note), and particularly the US market for eventual mass-entry, the F3DM in limited numbers is also currently being 'field-tested' by HACLA (the Housing Authority for the City of Los Angeles). This is supposedly a precursor to 2012 market entry along with the E6 model, The PHEV compact car to be priced at $28,500 and the EV MPV at $35,000.

The recommended 1% eco-production level would have exceeded BYD's in house testing capabilities, but could have then been deployed in a far more even 'field-test' manner both in China and elsewhere. The present method appears very much to be under 'controlled conditions', given the Shenzen taxi service's home-town links to BYD and the apparent 'routed drive circuit' at HACLA which looks to mimic the closed-loop operations of delivery e-vehicles. Thus both test-beds do not reflect real-world conditions.

It appears that the field-tests created have been done so so as not to stretch the capabilities of the embedded technology whilst also not of a scale that would demand much heavier R&D cost absorption.

[NB Hybrid Development - It should be noted that Toyota's initial phase of hybrid development between 1990-2000 on a conventionally engineered small sedan car cost well over US$1bn and was underpinned by average annual vehicle production of 4.5m units per year. Infact that production waivered between 4m in 1990 to 3.1m in 1995 to 6m in 2000, yet all the way through the hybrid project was protected and funded by the BoD.

NB EV Development - investment-auto-motives has stated time and again that present EV systems (battery set, controller & ancilleries and motor) are not suitable for a conventionally engineered steel monocoque vehicles, whatever battery chemistry option is used type, hence German manufacturer's preference to develop carbon-fibre and aluminium structure vehicles for all important weight reduction and range extension].

The WSJ highlights company sourced figures for R&D spending as increasing YoY from 2007-10,from RMB 0.65bn (US$97.5m) to RMB 1.4bn (US$210m), with H1 2011 numbers showing a pro-rata annual decline. Whilst the figures are not broken down into the separate divisions, if we presume the Autos arm took half the R&D budget it would have provided a steady state rise from approximately US$50m to US$105m. This is meagre by global standards, but the Chinese cost base should have allowed sizeable green-tech achievements, more so than the number of 'field-test' cars publicly announced.

The purported 'grand vision' – if indeed ever truly present - has been at best misdirected; the those eco-cars created simply used as showcase vehicles to promote the BYD brand whilst simultaneously providing a halo-effect over their standard model counterparts. That conveying the idea to customers that they, through the apparent kudos of their cars, are part of a green-revolution. Thus in reality well orchestrated PR to boost the brand profile and so production car demand.

But the lamentable number of PHEV and EV 'field-test' cars created relative to the number of conventional production in comparison to conventional ICE cars indicate a level of cynical 'green-wash' by which sales could be maximised and R&D costs minimised in an effort to create an investment and profitability 'snowball'.

Last year's announcement of a JV with Daimler titled 'Shenzen BYD Daimler New Technology Co' created to give BYD access hybrid and electric drive-train technologies (and Daimler to lower cost production) only serves to demonstrate that BYD in effect had/has very little in its 'R&D cupboard'. As described, R&D did have the significance portrayed, production and short-term profitability took precedence.

However, whilst BYD's management seemingly well understood the competitiveness of the market-place - hence its key differentiator of 'eco' - it seemingly failed to recognise the degree of consumer demand elasticity directly tied to government incentive schemes (providing a pricing incentive) and to the expanding economy (providing a feel-good-factor incentive). As incentives were retracted, and indeed dis-incentives to car ownership introduced in some areas, and the economy cooled so did market demand markedly.

The argument now set forth by the company that this sales decline has ruptured the green development plans looks spurious given the basic but powerful evidence previously presented.

Instead BYD as a parent company and BYD Auto Co itself sit at mutual watersheds.

BYD Co Ltd must:

A. Decide if it does indeed have the executive and management capability to operate its three arms effectively: IT, Autos and New Energy.
B. If not, then consider divestment of the Autos arm, retaining partial share-holder interests.

BYD Auto Co must:

1. massively re-shape structurally to befit the new era in reduced domestic vehicle demand.
2. seek-out ways to either divest of fill the 'idle' 48% plant utilisation gap, by way of:
3a. secure additional export arrangements beyond Bahrain, Russia & Caribbean
3b. secure contract manufacture arrangements with other Chinese VMs
3c. secure deeper alliance relationship(s) with foreign partner(s).

From the London perspective BYD looks like a prime full or partial take-over target for either a flourishing domestic auto-player, or as likely, by a western manufacturer with large cash reserves, in situ Sino JV enterprise encompassing a strategic intent for greater access into the Chinese market.

Doing so would immediately access both BYD Auto's 360k 2011 production volume and critically allow access to the spare capacity of 240k+ units annually. Importantly it provides a Chinese domestic sub-brand that sits (in price point terms) below its in situ own brand that typically holds a foreign brand premium over rivals.

This exactly what GM China did when buying a portion of the small passenger-van maker Wuling Motor. However, that was enabled through GM's own JV with SAIC, something which no doubt was critical to the ruling party at the time. That may have reflected a long-held explicit/implicit precedent that any access to a smaller domestic company may only be done via an already established Chinese JV; and as the home economy inevitably shrinks slightly in the near-term such a viewpoint may hold as strong today.

Theoretically, the accessing of BYD could be undertaken by a host of western manufacturers including VW, BMW, Daimler, Renault-Nissan, PSA, Ford, GM & FIAT-Chrysler, each with Sino JV partners and any of which could feasibly argue the case for acquisition.

But given that BYD already recently formed a 50:50 JV company with Daimler in late May to enable 'Chinese electric car' technology share, it stands as obvious candidate for full or partial acquisition interest, then giving it direct access to BYD Auto for low-cost (properly managed) R&D and platform co-development, and allowing it access to BYD's own 'technology core' of consumer-electronics batteries and consumables.

But critically it allows Daimler the option to either:

A. Persuade BYD shareholders of the advantages in selling off the Auto division.
B. Reverse integrate the listed BYD into the private 50:50 JV, so as to create a newly formed parallel German-Sino battery company which has strong German links and various exit-strategy options.

These are still very early days, and this is but unprompted conjecture, yet Daimler's Dr Zetsche must be musing such possibilities now that BYD's own share-price is at near record lows.

Undeniably BYD in its first incantation (2003-2011) has for some been an investment bonanza for some, its original HK listed shares announced at HK$10.50 having recorded took a steady trajectory to high levels of HK$85 (US$10.90) resulting from a combine of the 10% interest taken by Berkshire Hathaway owned Mid-America, the exuberance of the Beijing-Shanghai-HK capital markets and the unlimited potential for 'converting' the American motorist toward a 'plugged-in' automotive future.

But today BYD stock hovers at HK$16.20 (US$2.08)

And even that needs to be deconstructed to ascertain exactly which corporate divisions are offering what levels of potential value creation or value destruction.

Some long-term BYD investors who bought in during the stock's acceleration – themselves absorbed by the notional potential for the marriage of old and new technologies to transform the car market - will undoubtedly feel let-down. Indeed taken for a ride, albeit notionally in an eco-friendly investment vehicle.

Furthermore, the resignation of the Vice Chairman Mr Xia Zhi-bing prior to the results announcement (on 5th August) albeit as stated on “personal grounds”, will have prompted external parties that some kind of disagreement at board level did emerge, that Mr Xia wished to sensitively seperate himself and by simple virtue of the announcement casts a partial shadow over the company; with special attention drawn to its accounting and profits distribution methods.

BYD must now prove itself as not simply a promoter of eco-tech through PR, advertising and 'green light' graphic annual reports, but as the entity it conveyed itself to be. The BYD Auto story thus far only serves to highlight the dangers inherent in long-term investment in China via its public markets, it highlights a story of a firm that partially succeeded in conquering the small car market through a mix of external consumer and public 'green-washing' and internal ramp-up of YoY scale efficiencies so as to try and buy market share when time became apparent.

To continue to leverage the brand perception BYD Auto has built-up over recent years it will now need to re-invent itself: fulfilling its eco-rhetoric with advanced engineering actions, and able to demonstrate itself as a knowledgeable and efficient manufacturer of conventional cars. These 2 individual strategic threads will be hastened by the inclusion of a foreign partner, so BYD's next challenge is to truly entwine both strands to truly set itself apart.

It must re-present itself not as the naïve automotive 'Green Horn' nor as the peddler of 'Green Wash' but as nothing less than the the 'Green Hornet'; a comic book character who sought a better world assisted by his own advanced technology vehicle.

However, from the prime perspective of investment purposes, the investment community will now need to critically examine the organisational and monetary fundamentals of the company, and to assist its own future growth BYD Autos must become a more independent and transparent entity in its own right.

Friday, 19 August 2011

Macro Level Trends - EU - Re-Viewing, Re-Fuelling & Re-Orienting the German Locomotive

The fundamental reality about the need for large scale economic and social reform across the EU may now have finally been digested by 'periphery' and even 'soft-core' country leaders. Until now it seemed that a ridiculous 'game of chicken' has been played-out amongst political leaders in reaction to financial market movements, but the economic growth figures for Europe in Q2 2011 are cause for increased concern, the German industrial hub itself - the European 'wunderkind, vormund und lokomotive' - may have momentarily run out of steam.

As investment-auto-motives has previously related, the fracture of Europe due to the fiscal mismanagement of 'periphery' countries is an event which has damaged even Germany's belief in the EU project, even though the central architect. Its own conservative population vexed by the apparent 'live for today', 'Manyana' attitude of its southern neighbours which exploited and assisted 'boom & bust'. Indeed betrayal is perhaps a better descriptor. In turn, the previous level of 'goodwill elasticity' necessary to traverse the rough road which leads to a unified Europe – an elasticity effectively created from Germany's own previous re-unification - has been seemingly stretched to near 'snapping point'.

Hence today is a watershed period for Germany, one in which it looks to its own short and medium term needs, as opposed to the long-term all encompassing ideology.

Yet given early & mid 20th century history, such an emergent attitude cannot be seen to be politically motivated, it must instead be a natural consequence of economic outcome, an outcome which clearly demonstrates that Germany itself is no longer able to 'carry the EU crowd'.

Over the last 3 years, with the boost from export income and internal restructuring of major corporations, Germany was indeed able to 'service' its role as lead EU member, the drop-off of previous European demand for its high quality consumer goods had been counter-acted by demand from China and Asia. Yet whilst the likes of VW, BMW and Daimler were able to announce extremely good earnings over the Q2 period given their foreign markets exposure, it appears that the broader realms of smaller German industry – the 'Mittelstand' and general supply chain – has suffered as a result of fast decline in Chinese and Asian exports, and possibly from a greater pricing pressure and payment scheduling from its own national champion auto-makers.

[NB if the latter issue is indeed the case, presumably the acceptance of the Mittelstand to swallow such terms was as part of a broader German export drive to gain market share abroad, and perhaps as an intended by-product allows the all important SME's which underpin the large corporates to instigate renewed cost containment measures of their own so ensuring boosted profits tomorrow.
However, this still doesn't detract from the apparent cut in capital goods orders previously enjoyed].

Even so, here and now the picture looks bleak.

Those Q2 2011 EU economic growth figures indicate that whilst the EU as a whole grew a measly 0.2%, within that the 'mighty' Germany grew by only 0.1% and France virtually nothing. The 'EU core' then, whilst exhibiting a notionally stronger structural economic framework itself has suffered greatly over April, May & June. This then creates the possible conditions for a 'downward spiral' inside Europe, where even a reticent Germany cannot physically afford to assist its neighbours aswell as securing itself during a period of increasing unemployment and thus government cost.

That will serve as a wake-up call as much for the 'periphery' nations - expectant of Germany - as for Merkel and her Christian Democrats party. Such an apparently vivid 'unquestionable reality' then greatly alters the negotiation playing field between (largely) Northern and Southern Europe. It re-writes the script from that of a set-piece drama of to-ing and fro-ing bounded by political ideology, to instead something which could slip into the realms of continental tragedy as Germany becomes forced to retract its level of commitment to the EU project; still of course in place as a member but renouncing its lead role and indeed seeking other self-preservation and self-enhancement scenarios.

Forming a future for the 'national good' is of course part and parcel of any country's economic planning agenda, yet that attitude and the level of effort applied therein is in itself moulded by past and present experiences. For Germany the emergence of the EU sovereign debt crisis itself highlights the age-old and still present cultural differences between Teutonic and Latin temperaments and world-views, the former long-term and broad, the later less so, that irresponsibility only compounded by yesterday's and today's 'begging bowl' expectations.

Critically, this political and cultural friction may well have instigated a low-level - but nonetheless important - desire by Germany to re-evaluate more deeply its relationships with economically 'right-leaning' and 'conservative' others, specifically: the UK, Scandinavia, Russia, Balkan countries, Turkey, the GCC area and CIS states.

And given the shudder of western stock markets recently such a desire could well gain greater momentum in order to create a new order of industrial, social and so economic reciprocity.

If the old adage that "a week is a long time in politics" is indeed true, the angst felt across western financial markets over the last 2 weeks or so has appeared as a "hellish eternity".

Watching US and French bank stocks initially plummet then regain traction, only to see the FTSE fall 4.5% on Thursday – itself dragged down by bank shares - has re-generated cause for concern. Questions about the innate substance of the West's banking sector and its strength to overcome near-term economic adversity are re-raised. Lost confidence and short-selling became, for a time, the nightmare of 2008 relived. Although immediate 'over-reactions' also hail a prime time to buy, and so re-plug the market, innate doubt still echoes.

This event demonstrates that although the last 2-3 years have buoyed corporate stock confidence, resultent from the boost effects of those early public & private measures such as QE1, sector restructuring & corporate 're-shaping'; such confidence may have naturally diminished relative to the law of marginal returns.

So, today without such immediately available and powerful 'confidence injections' which created that upward trajectory of stock prices, it may be well to assume that the next 2 quarters or so could well witness 'see-saw' market instability: nominal profit gains from previous price floors quickly captured, a reactive market then rapidly deflating stocks and so effectively creating a trend which ostensibly 'flat-lines' the market between short-run 'floors and ceilings'.

This the story for the US at least, and without any of Mr Taleb's 'Black Swans'.

Europe however, without such a singular macro-approach could well see a period of where its bigger indexes are affected by smaller but more frequent stock falls, given a combination of a typically less reactive market compared to the US, yet set within a context of greater EU intra-national complexity which is prone to more varied 'intra-national shock sources'. The reveal that German national productivity has been so massively hit perhaps the greatest real-world shock.

This very generalised market-read then derives from recent interventionism on both sides of the Atlantic.

Firstly, the initial news that the Federal Reserve would retain a "0%" base rate until mid 2013 perhaps went against the view that a inched-up base rate might be introduced along with a far smaller QE3 exercise so as to try and stave-off core inflation and maintain a modicum of fiscal stimulation. But such an obvious QE replay may have yet spooked the markets and seen a USD out-flow, so instead (as well observed by the FT's Lex video/column) the Fed sought to gain a QE3 type of outcome by effectively lengthening the 0% rate and thus promoting short-term (2-year) government bond sales. (As John Authors highlights) this then depicts itself as QE3 “by the back door”. The initial view then of a more tangible QE3 accompanied by a slight raise in rates appears to have be deemed a 'self-cancelling', and may have indeed started calls for wage demand increased in private and public sectors, thus hampering the de-leveraging process. Instead, the 0% announcement provides a notional firm foundation.

By its very nature it conveys an inexpensive borrowing climate. A climate useful to both the US government to service its national debt obligations and importantly those well-placed US national and multi-national companies which can seize advantage of an ensured no-cost borrowing period and combine it with their substantial cash reserves. (Global Finance magazine quotes 3rd party research indicating that US S&P500 companies have over $1.1 trillion available in cash & cash equivalent reserves). So whilst Washington 'kicks the debt can down the road', the private sector will be looking at a 'round 2' opportunity to re-shape their businesses at home and abroad. The steady flow of poor domestic economic indicators the basis for a new round of domestic cost-containment. Whilst they are also able to identify M&A targets both at home and importantly abroad in across first and second-order EM regions which have respectively entered BRIC slow-down and “next 12” stability periods.

That initially dour but opportunistic US macro-policy play is counter-pointed by the complexity, political friction and so economic stagnancy of the EU.

The creation of the ECB's 'ESF' (European Stability Fund) and IMF's EFF (Extended Fund Facility) to 'bail-out' indebted 'periphery countries' has indeed succeed in deflecting the markets' attention from ravaging those fragile economies – at least for now. However, unlike say the Middle East where a rapid fall-off in private sector activity since 2008 has been replaced by petro-dollar supported public sector activity and new PPI schemes, Europe has the dual challenge of still constrained private sector activity and cross-region fiscal inability by governments to try and pump-prime productive activity; having already used such measures previously to little lasting effect. An invisible fracture of the EU has inevitably appeared as a consequence of the sovereign debt crisis, even to the point where expected new members such as Poland (and especially Turkey) are becoming more reluctant to push the entry procedure, at least until the present situation has receeded. Moreover, there is a real concern in Brussels and Berlin that the 'paper-based' austerity packages put in place for Greece and Portugal are effectively unworkable, the requirements of workforce and industrial structural reform unable to simultaneously deliver the required government income to meet the targets set. The bail-out assistance funds are to be delivered on a 'gateway' basis, a common-sense approach to ensure incentivised progress in reforms and state income, whilst limiting IMF & ESF exposure. Yet given the oppositional forces created by simultaneous reform and income, it also heralds a drawn-out period of growth stagnation.

As a result the global financial markets are undoubtedly taking black & white viewpoints on their corporates and governments. A necessary action so as to limited risk, dissect the good from the bad and furthermore examine the plainly ugly across the larger exchanges and indices. Examination of the 'ugly' so as to identify immediate divestment and 'break-up' scenarios for cross-border sector consolidation.

Professional investors will be critically assessing their portfolios relative to these prime criteria:

- corporate home country
- its non-EU business exposure
- western hemisphere sector dynamics
- overall balance sheet structure

All normative assessment criteria not so subtly re-jigged, now with added opportunity and threat.

But what of the broader, global picture?
What are the ramifications of this tough period in EU relations?

As previously stated, investment-auto-motives suspects Germany is using this period to as quietly as possible restructure itself from top-down.

Efforts such as Volkswagen AG's efforts to build its truck empire via the capture of remaining shares in MAN AG and absorption of Scania are well reported and obviously grab the headlines. Yet the family-led members of the massively broad, inter-connected and powerful Mittelstand are almost certainly re-aligning themselves either structurally through M&A, through mutual share-base capture and thus have the protection and synergies of 'chaebols' (so as to repel 'hostile' private equity) or via greater financial interweaving with specific T&C's which effectively act as pseudo 'poison-pill'.

The 2008 financial crisis effectively put Germany on 'amber alert', the problems created for its financial sector having major ripples for the country's bastion of its industrial sector. The EU soveriegn debt crisis will ratcheted that alert level higher. An outcome has been closer relations to Russia to ensure oil and gas energy supplies (with probably a reassessment of its own clean coal supplies) and closer relations with China as demonstrated by the Sino-German trade pact worth E15bn (to take effect after the present Chinese slowdown). Germany then is quietly re-plotting its contribution to, and part in, mid and latter term global growth.

In recognition of the 2008 financial crisis and its long-term effect on Europe, some years ago investment-auto-motives presented the notion of the 'Eco-Rainbow', a collaborative meeting of government minds in the realm of automotive eco-tech that could span from the UK across Scandanavia and to Germany, creating a trade-pact between those nations that had both advanced engineering capabilities, scale and (global-leadership) credibility.

The notion was to try and replicate the eco-credentials of Japan, through both the development of independent solutions and the use of Japan-linked solutions via absorbing the best of its own 'transplant'-available technologies.

To ensure the eventual need for manufacturing cost-reduction, that 'Rainbow' was adjoined to a 'reverse S' chicane, that ran from Germany into Poland & Russia across the Balkans and into Turkey.

This trade path would not only allow for lower production costs, as is typically the case, but also importantly provide a host of other mutual advantages:

Eastern Europe would provide:
- direct access to commodities and input materials required for production.
- a younger, incentivised & flexible labour-force
- agro-products for 'Rainbow'homeland food production

In return Western Europe would provide
- advanced eco-engineering solutions across various sectors (auto as pioneer)
- educational opportunities via universities, R&D centres etc
- financial centres to service nest-generation eco-companies (production & retail)

However, since the notion of the 'Rainbow ' & 'Chicane' were formed the ultimate depth of the EU sovereign debt crisis, the strained relations and indeed now the questionable will of western financial markets & corporates to ensure a productivity push even in the mid-term – given concerns about necessary deleveraging – potentially means that any technological gain that north-west and northern Europe may have over other regions (esp Japan and S.Korea) could be lost without effective encouragement from collaborating governments.

Moreover, the time has arrived for the UK, Scandinavia and Germany to form closer cultural and business relationships with the Near and Middle East; both those re-shaped countries in North Africa and those more sensitively royal ruled countries of the GCC. As investment-auto-motives highlighted just before the emergence of the 'Arab Spring' the MENA region was set for medium pace growth of 4-7% annually, but since the dynamic changes some local observers believe that growth potential sits toward the higher-end. Demands made by the populace for a broader education which builds upon Islamic foundations (ie deploying basic tenants into Sharia-type Finance so as to underpin ethically orientated CSR commerce and thus links to eco-solutions business) indicate that new opportunity has arisen as part of the MENA region's need and desire to broaden its historical industrial base beyond rigid petro-centric planning and infrastructure. Of course 'petro-centricity' must remain given its importance but should also offer greater spin-off potential that perhaps is the case today, which in turn link to eco-tech and advances possible across the board in automotive, transport and other arenas. The MENA dynamic then highlights mid & long-term opportunity for eco-tech players in NW & N Europe, as both an eventual supply region in parallel to the Balkans and as an eventual large and culturally more uniform market which still has a very close affinity to nature and enjoys the kudos of advanced-world credibility.

Hence, the British-Scandinavian-Germanic 'Rainbow' and Russian-CEE-Turkish 'Chicane' should be coupled to MENA by the Arabic letter 'dād' (which when overlaid the region circumscribes arab unity - see graphic).

Through this template and process an eco-tech based economic affiliation can be explored and co-created, thus creating a vital geo-economic chain of interests that fosters both progress and stability.

The 'German locomotive' previously pulled the ever enlarging EU up-hill through the 1990s and 2000s, yet once past its true private-sector productivity peak that train 'over-ran' on the downward slope laden with the weight of unsustainable credit. It had morphed into a region-wide version of the legendary Brussels 'gravy-train'. Today the German locomotive has momentarily "decoupled, stopped at its home-station station and considers a set of points on the line. The German machine is being assessed for condition, re-serviced, re-fuelled and presently re-orientated, and the country's economic engineers could well be seeking alternative routes.

Friday, 12 August 2011

Company Focus - Brompton Bicycles Ltd – Peddling New Ideas for New Income Streams

Recent web-log essays have looked at the broader social fringes of the automotive world: the manner in which the Women's Institute could re-align to include vehicle knowledge as part of its educational choices for its membership, and relative to the future of the BBC, how the world of Formula One should be leveraged as a springboard or hub for the teaching of 'STEM' subjects for both UK and worldwide citizens.

This web-log piece, returns closer to natural 'stomping ground' for investment-auto-motives - that of auto-sector investment opportunity – this time on the far horizon; yet maintains the intendedly alternative social perspective previously deployed.

In doing so, the juxtaposition and coalescence between the automotive world of the vehicle and that of the 'socially good' bicycle is broadly evaluated, with special focus on the British bicycle-maker Brompton given its recently seen willingness to push the envelope of its business model.

The car as we know it today has undergone over 100 years of technical evolution, its earliest origins formed in large part by early pioneers who re-appropriated bicycle technologies and those of other spheres to create the earliest mass manufactured machines. Prior to the revolution that was Ford's Model T, the Edwardian era of the early 20th century on both sides of the Atlantic saw a plethora of lightweight vehicles which given their bicycle origins became known as CycleCars & Quadricycles. Indeed Henry Ford's own first car was a Quadricycle

Some manufacturers such Britain's Rover - producer of the Safety Bicycle - chose early-on to take the route of manufacturing heavier, more robust and luxurious cars for those with means, but other producers whose names have since been consigned to the history books, chose the lightweight route which offered the possibility of exploiting their 'in-situ' manufacturing methods, supplier capabilities, workforce know-how and distribution network.

The CycleCar in its earliest form effectively died-out across Europe and the US by the mid 1920s thanks to the strength of international economic growth. Yet after WW2 those conquered or destitute countries (ie Germany, Japan & France) whose national economies were mired in woe applied heavy taxation demands upon larger classes of (typically imported) vehicle, with the respective national economic agendas orchestrated to promote local manufacture with minimal means to kick-start domestic consumption and so revive the economy.

The small Quadricycle derived car/vehicle was then given a regulated, protected environment in which to thrive. As the natural order would necessarily dictate, these cars became 're-worked' as products formed by the popularisation and 'inter-bred hybridisation' of the motorcycle and motor-scooter. This especially so in economically tight post WW2 Italy which exported its affordable motoring packages to India and across S.E. Asia.

But it was Japan where such economy of pragmatic thought, economy of local transport need and economies of national scale came into being, creating the Kei-car foundations on which modern Japan was born.

In the West & Triad region, the relationship between vehicle manufacturer and bicycle manufacturer then has been a distant one since those early origins, the result of very different fortunes throughout the 20th century as general wealth creation saw the rise of cars and the decline of bikes. The only real exceptions being Honda and BMW who have distinct Cars and Motorcycle divisions, yet encourage idea cross-fertilisation.

Yet broadly speaking that once intrinsic relationship between cars and (motor) bicycles has been long lost, however the eco-future married with long-term structural economic constraints provides the 'big-picture' backdrop which looks to once again encourage vehicle down-sizing and personal transport reconsideration. This is in the earliest of days, yet the visionary work of Daimler with its smart brand, efforts such as Gordon Murray's T25/T27, BMW's reveal of its i3 car and now Audi's showcasing of its UrbanConcept (albeit in only graphic rendering form) highlight the move to alternative 'small-scope' mass mobilisation.

However, the last 20 years has witnessed periodic couplings of the two spheres when specific (typically premium) auto-makers thought they might 'exercise & maximise' their merchandising power and income by applying their brand name to bicycles that were either considered close fit reletive to their 'design DNA', were slightly altered to encompass such attributes, or were considered sufficiently unique to wear the brand. Given that an auto-producer cannot devote much of its resources to designing bicycles, the business case has typically been that of pure contract manufacture for a short run of 'high impact' PR exercises or as additional show-room objects added to the vehicle accessories list or sold as a birthday present for the car buyer's children or partner.

Marques such as Ferrari and Land Rover are good examples, but most efforts viewed as 'strategic brand initiatives' with the P&L of such ventures less closely scrutinized, and they range from the 'artfully prosaic' to genuine efforts to try and kick-start new business streams.

Ferrari has variously offered bikes have ranged from male orientated hi-tech 'set-up' racing machines that grace a clients' own home-homage 'Ferrari garage' through to 2-wheeled 'boulevard cruisers' for uber-fashion conscious females that peddle around Porto Fino marina, up La Croissette in Cannes or along the Rue de la Paix in Paris. Given the deep pockets of Ferrari clients it is expected that the 'art-bikes' ensure good margins and very limited but good public brand exposure where its cars are apt not to go.

Land Rover sought to exploit the mid 1990s onward social trend for 'out-door lifestyles', the trend upon which its 4WD vehicles sales were largely based. As such it contracted the manufacture of L-R branded mountain bikes which of course paralleled the off-road image of its vehicles. But unlike say Ferrari the move was seen as more pragmatic, since between the purchase of the vehicle and the bike sat a realm of accessories purchase possibilities, from the necessary bike-rack that sat on the tailgate to L-R branded all-weather clothing, the possibility to sell in-car seat cover-alls, heavy duty floor-mats, branded caps etc. And more recently as a much more cynical marketing exercise it has tried to offer race bikes with the Range Rover decal.

But in recent years it has been BMW's MINI that has tried to best catch and ride the 'urban-zeitgeist' with its own branded folding bicycle. Whilst seen as just another logo'd bike by many, the cogniscenti will know that the original 1959 Issigonis Mini and one 'sub-species' of folding bicycle named the Moulton share an item of gas/air suspension technology and thus in part a shared lineage created by the inventor Alex Moulton. Thus whilst oblivious to some new MINI customers BMW has well understood how the brand personality of its car and social trends for commuter bikes have been 'pseudo-authentically' melded together via the Moulton heritage; a very post-modern marriage. Yet it did not strike a deal with Moulton Bicycles, nor did it form an agreement with its competitor Brompton Bicycles; instead choosing to use an (as yet) unknown contract producer on which to apply its MINI logo.

[NB here then the business ambition of MINI UK seeking maximum profit margins on the item may have for some in BMW grated against the 'authenticity' element. Yet just as MINI was a popular re-invention of the original, more style than pure design substance, so too will be the folding bicycle, only reminiscent of Moulton in a very post-modern manner].

To bicycling connesseurs of the folding ilk, Moulton's creation - still made today in Bradford upon Avon in various forms – still ranks as the most elegant solution, its 'birdcage' construction more 1950s Maserati than 1890s Rover Safety. But to many commuters and shoppers without such engineering insight, it is perhaps the Brompton folding bicycle that has a special place in their heart, itself produced in Brentford, London, at an annual rate of 22k units.

In a previous article that reviewed the future of British industry through the lens of the BBC's 'Made in Britain' series, investment-auto-motives was critical of the programme editors for highlighting the 'crafted welding' of the company's bicycle frames; not because they are not well fabricated, but simply because such fabrication is not truly a 'high-value' differentiator when good seam welding can be found on the back streets of EM countries. This then was not a criticism of Brompton, but one of our UK perception.

Nevertheless with great aplomb Brompton's BoD have see fit to try and dispel any notions of brand commoditisation, possible accusation of the company 'resting on its laurels' and being a 'one-trick pony'; albeit one born from invention.

It recent months and weeks Brompton have revealed efforts to try and capture two additional income streams beyond its core range of bicycles.

The first has been to replicate the 'Boris Bike' idea seen in London, where by bicycles are rented from bike stations (docking centres). Brompton's idea merges this created trend with that more typically seen say in Holland, where people use bicycles to reach the local train station and for general errands and trips. Thus the company has seen fit to create its own Brompton bike stations in the bike-parks of railway stations, yet because the product can fold-down to a small 'cube' it is able to sit inside what are effectively bike storage boxes. This is then 'reverse engineered' commercial solution, arrived at by merging the Boris Bike philosophy with that of the train station / airport luggage locker. The first installation has been at Guildford station in Surrey itself serviced by SouthWest Trains, and builds upon a previous 'tie-in' effort to have commuters adopt fold-up bikes which of course are far more amenable on public transport.

This then provides the company with a win-win situation. It can access new customers to either trial the bike before purchasing their own, or create a wholly new stream of rental customers. The initiative then calls for a ramp-up in production which presumably allows the procurement manager to negotiate better supplier terms on price and payment schedules. Additionally given Brompton's ability to fabricate steel it presumably has also manufactured the 'bike lockers' into which its products are stored, so as to keep the exploratory exercise project costs to a minimum whilst also retaining the ability to produce a proprietary 'in-house' object with ever greater production efficiency, and important aspect if the project does become successful.

The second initiative is less innovative in its origins but does appear to develop an emergent theme of late; that of durable yet aesthetically pleasing cycle-wear which melds cycling functionality with everyday office and leisure fashionability, The so named Brompton 'Oratory Jacket' has intended overtones of the English public school system for both those 'old boys and girls' aswell as appealing to those with such social aspiration, and as such at first appears a typically 'academic' corduroy item; yet it proffers the additional traits such as: high visibility day-glo strips on the inside of turn-up sleeves and the rear vent (flap), under-arm zips for ventilation, an e-devices holder and an extendable back section – taken from field-sports jacket designs -which allows the back to be broadened when leaning forward to ride. It then appears a very well conceived item which adopts and adapts the best of eons of tailoring know-how and modern coated fibres in basic construction to offer a very well 'hybridised' day-wear cycling solution. At £250 it is not cheap but is on par with off-the-peg jackets by the likes of Barbour, Beretta et al, yet it does not compete with them. Though press reports have been mixed the existence, of the item demonstrates Brompton's willingness to broaden its commercial horizon and reinforce its English/British personality.

The bike-locker rental system then is aimed at attracting a new client group and potentially impressive income stream. The Oratory jacket seeks to satisfying current clients, lure new clients into the Brompton fold and critically open doors to the lucrative world of premium branded true-leisure clothing that has the credibility of real functionality (unlike so much logo'd fashion leisure clothing).

Brompton has then moved from one income stream of its bicycles – though broadening in model range to compete with Moulton and others – to casting its net over 3: bike sales, bike rental and clothing.

The company's reach to move beyond UK sales reliance over the years by growing European, American and Asian distribution footprints was a vital move to aid income stability and growth – exports accounting for 70% of production - but the 3 pronged enterprise provides an even better economic base by which to defend the business from what have been cyclical fiscal and fashion trends, thus less prone to the past fluctuations of bicycle sales alone - even though now on a better pan-continental standing.

Thus the recent past has seen Brompton 'cherry-pick' with perspicacity those inter-linked yet self-contained commercial areas. A new rental customer may never choose to actually but a bike, and a rider of another make of bicycle may well be loyal to his/her bike's brand yet wear Brompton's Oratory jacket (don't be surprised if ladies start wearing the men's jacket and so requiring the company to create a female version).

To re-assert, critically then, these 3 business arenas are linked yet independent. Furthermore, the 2 additional spheres are ones in which Brompton can greatly influence the cost bases. Directly control costs in the case of the bike-locker from self-manufacture. And in the case of it clothing range, choose from a broad range of UK and international suppliers depending upon popularity and production demand. Indeed, it may be possible to create a scale-chain by which newly introduced high-end clothes are produced at home, whilst also utlising foreign producers for more mass manufactured items.

Vitally, Brompton recognises the need to control its own destiny and to do so “cuts its coat according to its cloth”.

So the near-term and mid-term horizon is set and should provide its management with enough operational challenges and rewards over the next 5-10 years.

But what of the 15-20 year horizon? What should Brompton be considering in its present 'blue-sky' thinking? Yes that is a long way off, but the innovative London-based company may wish to adopt the the type of 'unlimited connected thinking' that Soichiro Honda instilled in his company; one born from the production of mating the bicycle with the small petrol engine, and which all these years later today has formed a level of high-minded, socially orientated technical leadership which leads the world and which is intrinsic to Japan's role as eco-technology deployer to the world.

As people more readily use and acclimatise to bikes, so their perceptions of what constitutes a car will also alter. Many have already questioned why cars must be as they are, recognising that vehicles have typically become overt status symbols based on a level of engineered performance which is little if ever deployed.

The bicycle-car connection has been asserted by BMW MINI, but it is the yesteryear Quadricycle that perhaps is most apposite.

As stated, though lost to most people now, it was an item in many guises that garnered popularity at the very beginning of the motoring age; from the 1890s to the early 1920s . It was the natural offspring of mating efficient bicycle technology (tubular frame, spoked wheels, chain and cog-sets, etc) with the internal combustion engine.

Over 30 years or so of use, best seen by early Morgan Cars models (and later Reliant Cars models), it eventually giving rise to the legendary Austin 7, FIAT Topolino, with far greater long-lived existence in Europe, re-born again after WW2. Small cars in the economically bare nations of Germany, Italy & France. Aircraft know-how created the eponymous 'bubble-cars' as the Heinkel Kabine, Messerschmitt KR200 & BMW Isetta to help get Germany back on its feet. In France the Quadricycle has effectively never gone away, always there in the popular consciousness through the 2CV (the 'oversized' intelligent Quadricycle), and still forms respectible competition to the conventional car. (This was not lost on PSA when it tried the 1007 aimed at older people who seek a simple but functional car). Instead, in France the Quadricycle as once was has been constantly re-formatted over the decades, today meeting client's greater demands for comfort and reduced demand for speed, and are generically known as 'MicroCars': with companies such as MicroCar, Axiam-Mega, Chatenet and Acrea supplying various types of consumer demand.

Indeed BMW well recognises the importance of understanding small lightweight cars, and this was part of the reason it acquired Husqvarna – well known for its Quadbike knowledge – so as to feed into future blue-sky car projects such as the i3 and i8, aswell as capturing that growing market which to date has been dominated by Daimler's Smart.

Brompton Bicycle is obviously at the beginning of a new era in its own history. It has learned by bitter experience to become self-reliant, let down by foreign JV partners in the past in which its tooling and IPR was unreturned and exploited, its trust apparently abused.

Thus it now works very much with an understandable, close-controlled 'in-house' mentality to ensure it recoups the rewards of its own hard work. It is not so much a self-serving approach and self-preserving one. Yet it obviously does not detract from the sense of imagination and innovation, indeed very probably serves to heighten such a culture; something reflected by Ford's early days (after his previous exploitation) and has existed historically throughout Honda.

As the UK and West in general faces its own headwinds akin to the economic reconstruction of Europe in the late 1940s and 1950s - one dependent upon a “productivity push” when the cost-base has been necessarily deflated - so it must adopt a similar stance to breach the future. Though it cannot be as fiercely protective of itself as an SME, given that international free-trade is a necessary and vital economic component, it must nevertheless be as broad-minded, exploratory and challenging.

More than perhaps ever it needs to generate new industrial creations that have resonance nationally and internationally.

Whilst the rest of the UK auto-sector and indeed government and the banking-sector is tasked with industrial rejuvenation, the long-term may well belong to a new breed of 'Light-4' vehicle constructors which can exploit their own regional manufacturing capabilities, taking the best from the world of advanced materials and LEV power-trains to serve the changing needs of the western demographic.

To mixed reception and public comment, this is something that the ex McLaren designer Gordon Murray has done, exactly how successful it will eventually become is open to (hopefully intelligent) debate, its production process as forward-looking as the vehicle. Ratan Tata's edict created the Nano which though not yet at its promised price point in India (dependent upon scale efficiencies) has been engineered in Indian and Western specifications. And Japan will continue to leverage its historic lead via the likes of Daihatsu and Honda.

In 15 - 20 years time Brompton may well be one of those evolved personal transport providers, the innovative 'Dyson' (or indeed 'Moulton' or 'Murray') of the 'Light-4', with a raft of inter-linked business interests to defray reliance on its core product range, and itself able to create new complimentary business streams, as it has now done with bicycles.

Though 'Limited' in company status today, its shareholders could well see the attractions of a public listing in years to come. Given its admirable eco-credentials it is already on the way to being viewed as a socially positive 'PLC' - a 'Public Limitless Company'.

Post Script -
The semantics of the terms 'CycleCar' and 'Quadricycle' are all important given their connotations of overt simplicity, meagreness, exposure to risk and discomfort. Ideally a knew term should be used to provide the public with less subconscious resistance to the notion of the simple small car / vehicle. After minimal thought, investment-auto-motives proposes the simple term “Light-4” - from the use of 'four-in-hand' light horse(s) carriage driving – yet also has overtones of the safety associated with the term “4WD” or “4x4”.

Thursday, 4 August 2011

Micro Level Trends - Formula One & the BBC – Maintaining a 'Down the Road' Focus.

The stagnant home economy is taking its toll across many industrial and service sectors. Given its high public profile the impact of necessary fiscal consolidation is perhaps most apparent at the BBC. As part of its cost-saving initiatives it has revealed that it will be sharing its 'free-to-air' transmission rights to Formula One in the UK with NewsCorp BSkyB's own subscription and 'pay-to-see' services.

Whilst negotiations about the matter had been ongoing for some years - to the apparent previous chagrin of Bernie Ecclestone's Formula One Management company which notionally prefers 'free-to-air' - it looks as if the tumultuous drop in BSkyB's share price, which came as an effect of the NewsCorp scandal, necessitated a positive news story to support a new price-floor for the stock.

[NB BSkyB's share price averaged 830p from early March to the beginning of July, peaking at 850p before plummeting to 695p, generating gains to 740p before once again falling to 694p (as of mid-day on 03.08.2011)].

This intimates that James Murdoch at BSkyB has tried to creating a critical new price floor at 700p.

As a commercially driven entity BSkyB of course has a responsibility to its shareholders, and as part of the conglomerate holding that is NewsCorp may have a ripple-effect upon perceptions of its parent, even though NewsCorp was disallowed from expanding its own stake in the TV operator. Nevertheless, even with a smaller share-holding than it would ideally like, this good news story at BSkyB may be counted by investors as part of the ultimate necessary re-stabalisation effort, something needed given the recent general global 'sell-off' generated by the USA's QE3 action.

The news that BSkyB has indeed gained access to UK TV transmission rights for F1 will be welcome news to the Saudi Arabian Prince Alwaleed bin Talal. A majority shareholder in NewsCorp, an avid motor-sports fan and a (non-political) interests in F1 helping to develop alternative business streams in Saudi Arabia, he will enjoy viewing the synergies between personal investment and personal hobby become ever more integrated.

investment-auto-motives previously published an essay titled 'Gordon Bennett Steering Rupert Murdoch's Legacy'. It set the hypothesis that the latter modern multi-media baron may wish to replicate the efforts of the former Edwardian newspaper baron, by shaking-up the then new and now re-emerging automotive sector through the sponsorship / 'ownership'. A process of global TV rights capture - region by region – would then put BSkyB in the sports 'driving seat', effectively replacing Ecclestone and FOM.

It would also mean that Murdoch-Sky could then, with FIA co-operation, play an effective role in moulding the sports future technology strategy, where new tech prove-out and vital entertainment value can be mated, the successful elements of which – as as historically been the case – trickle-down to production supercars and beyond. This in turn creates a broader automotive-centric investment network for informed investors such as Prince Alwaleed bin Talal, which in turn creates an investment template for the those growing institutionals, private equity and individual investors across MENA and other EM regions, giving them access to 'progressive capitalism'.

To the present, and the deal struck between BSkyB and the BBC (having held exclusive rights since 2009) was one which appears to be in BSkyB's favour. From 2012 it would broadcast all the F1 Grand Prix events from across the world, including practice sessions and qualifying session. The BBC would schedule only half of the actual races, but cover practice and qualifying – with of course coverage of the British GP 'non-negotiable'.

This then creates the fundamentals for a 'switch-over' consumer pattern. Those already with Sky will watch all aspects through Sky, but those GP fans who have been BBC loyalists will watch practice and qualifying for all races as is the case now, but will be foced to 'switch-over' to Sky Sports to watch an 'uncovered' races.

For the two TV channels this 'switch-over' model then both allows Sky Sports to attract viewers directly from the BBC for a notionally steady growth of subscribers and viewers. Equally this approach creates a 'over-lap' business model at the operational level; whereby GP event specific staffing costs 'on site' internationally can be shared, a co-ordinated 'ramp-down' of personnel and costs for the BBC and 'ramp-up' for Sky Sports.

[NB Though nation specific broadcasters have in EM regions have much improved their abilities and coverage of GP events, previous reliance by the BBC on external broadcasters has been patchy, hence its retention of its own international O/B (outside broadcast) section].

This then appears a good example of medium-term 'co-opetition', both commercial organisations able to share costs during the 2012-2018 time-frame, with presumably the BBC abdicating its role far sooner than 2018.

Reports indicate that the BBC pays £40m per year for transmittal rights to FOM, excluding the costs of BBC Sport's O/B units. One report indicates that “£25m will be saved” from the 'co-opetition', though whether on an annual basis (one presumes so) or lifetime basis is not made clear.

The agreement though must have had had the endorsement of Ecclestone's FOM in order to proceed. As stated he much preferred the idea of a 'free-to-air' system of F1 coverage, but no doubt also well recognises the trend that western viewers themselves have been heavily effected by demographic,lifestyle, interests and viewing changes.

Thus whilst the BBC as the UK's national TV champion could command a certain level of viewing figures for the Sunday events - though domestically weather dependent and so periodically volatile at 6-10m viewers - a paid-for system by Sky will attract a smaller number of viewers but with greater consistency and regulatory given their 'sunk cost' subscription fee and 'inelastic' demand generated by their GP loyalty.

Thus for BSkyB and James Murdoch, this long-awaited conquest over the BBC substantiates his 'cause' to break the still strong stranglehold the corporation has over UK radio and television.

The loosening of its stranglehold over F1 however should raise questions about exactly how it now goes about offering “information, education and entertainment” in this sports sphere- one that has so much influence on the UK's own automotive sector.

Without doubt and for obvious reasons, the bias of Formula One coverage has been typically event specific, with more general website commentary via navigation of the BBC (Sport) portal and access to its 'iplayer' re-play function.

Yet over the years Formula One has also inadvertently also helped to underpin one of the BBC's 21st century success stories: that of its reborn Top Gear programme over the last 10 years or so. Top Gear's car-fanaticism includes direct commentary and celebrity invitation links with the Formula One world, indeed its old and new incarnations of the mythical 'Stig' is based on the notion of the anonymous yet super-heroic race-driver. The glass top coffee-table positioned between seats on the studio-stage is the polished block of an old Renault F1 engine. The studio itself housed inside a hanger on a race-track.

In short the relationship between F1 and the BBC is inalienable. And it is something that the BBC must continue to recognise and support for the good of the UK economy.

[NB When the then new 2002 Top Gear programme initially 'stalled' during the very first 3 episodes Turan Ahmed advised its Executive Producer by informal letter that it must add a more diverse studio audience, far greater number of women and people of multi-cultural backgrounds as opposed to the heavily biased 'boys club' presentation. That was put into practice and the show grew to have massive female and international appeal, since spun off for international viewing and international licensing].

Top Gear then was moulded as an automotive entertainment programme, yet it also recognised that it must serve the informational and educational remit of the BBC, hence its adaptation of the 'Scrapheap Challenge' format (from competitor Channel 4) into its own engineering challenge excerpts. Indeed Top Gear itself became an effective BBC spring-board, using 2 of its 3 presenters - Hammond and May - to front other programmes with a technical bent, hobby, engineering and science related aimed at youngsters and families.

These then both serves, and draws from, a fascination with the technical and its accordant paraphernalia, generating a subtle yet powerful feed-back loop between Formula One and broader 'STEM' subjects personal learning. One example is that of Hammond's exploration into the use of exotic materials, specifically the use of magnesium alloy as a central element of light and strong F1 car wheels, highlighting its pros and cons.

Today then Top Gear and its presenter enabled spin-off programmes acts as the philosophical intermediary between the ethereal world of F1 glamour & competition and the mundane reality of being sat in motorway traffic jam. It is in part a manufactured psychological world by which the 'race-track grid' meets 'urban gridlock'.Yet it is also of major influence on real world of driving aspirations and habits – the 'cool wall' highly symbolic to the suburban masses - and thus part of the 'social motor' that propels the UK motor industry at a retail level, partly at a production level and thus eventually at the supplier level.

The BBC and Top Gear then have become a concomitant part of the UK's – and indeed international - economic hub.

The 'Beeb' still retains a Royal Charter remit to serve the British nation; (indeed via the World Service influence on a broader scale). Historic precedence demonstrates its lead role in educating the nation(s).

Of course the Open University has 'carried the torch' since 1971, allowing generations of otherwise 'educationally abandoned' people to improve their being, their contributional effect to society at large and improve their life prospects. Yet also in regular programming there have been old-generation self-styled technical educators such as Raymond Baxter who's time with the RAF lend an air of knowledge and authority, whilst today in the educational realms of BBC2 & BBC4 the 'amateur professor' has given way to truly learned Ph.D wielding presenters plucked from academia to provide insightful exposure of their fields.

Today's and tomorrow's teenagers are angst-ridden about the debt-cost of education – 'god' or otherwise – and so will increasingly seek-out more affordable 'distance learning' options offered by an ever broadening number of old and new players in this education-space.

It seems inevitable then that the BBC must seek to continue to develop a socially pro-active stance, especially regards learning, and must find meaningful avenues by which to do so to inter-link technical exposure, awareness, interest and aspiration amongst successive generations.

Yes the BBC faces headwinds such as a time-tabled stepped-shrinkage of its TV licence income, and faces strong competitors such as Pearson Education with its links to the Financial Times etc, yet it strategic re-shaping is enabled by the advent of multi-media devices and channels as well as the wealth of its archive and power of its brand.

Yet also because the massive project that is the 're-orientation' of the BBC is philosophically far harder to assess and execute than would be the case for say a start-up business (which would typically operate in only one, well targeted, media space) there is innate complexity to the process.

Viewing the decentralisation and commercialisation of the BBC, one would expect each of its cost-centre divisions – both outward 'client-facing' & inward 'operationally-facing' – to potentially be sold through private equity and possibly onto public stock markets; especially so educational units.

Hence, the organisation faces the challenge of balancing its social remit with that of a commercial remit: and this requires that it be very cognisant of the strategic choices it makes.

To date the BBC's 'monetisation' efforts started with 'Christmas Special' vinyl records in the 1970s, sales BBC Symphony Orchestra records, the packaged video and DVD availability of some of the 70+ years of TV, film & radio archive stock (sold via BBC Enterprises and its shops) and to a B2B client-base of other international TV broadcasters the contractual 'lease and license' contract successes of BBC Worldwide.

The greatest challenge for the BBC then is what content and offering to retain and what to divest. It must then endeavour “not to throw the baby out with the bath-water”, especially given its role “to educate...& entertain”. Content and associated programming – rightly remains – at the heart of the debate.

Yet as we – business-people, government, academia and the public – essentially look over 'Stagnant Britain' and in regions a 'Broken Britain', the role and power of the BBC with its powerful cultural influence and their links to very real socio-economic worlds should not be overlooked or under-estimated.
The Beeb certainly does not have the pseudo 'soft' Big-Brother hold over the country it once did, but with its 'care-taking' social role, it still serves as both a 'reflector', a 'dialogue forum' and a 'promoter' of 21st century Britain. A Britain which now desperately requires an economic 'kick-start' of sizeable historic proportions.

The BBC has links to Formula One which stretch back generations, and whilst it has seemingly necessarily seen fit to share and eventually divest its live Grand Prix broadcasting rights to BSkyB, it should nevertheless continue to 'show-case' the world of Formula One technology in order to create an education and knowledge trickle-down of its own.

As the Silverstone Racing Circuit becomes a 21st century educational hub for global F1 and motorsport, so the BBC will surely align its own course to become an increasingly 'tucked-in' and able to exploit the slip-stream. To do less than this would fail both its role and the UK at large given its necessary desire to grow its 'earning potential' from the global-wide 'learning potential'.