Friday, 23 September 2011

Macro Level Trends - Brazil – 360 degree Planning to Self-Generate a Very Different 21st Century

The mixture of slowed and contracting global passenger car markets, set against what was a previously strong rebound in global production capacity expansion, has set global mainstream manufacturers the task of re-balancing procurement ordering, manufacturing schedules and inventory levels.

Signs of a 2011 global slowdown were already noted by Q3 2010, yet the combination of the 'Fukushima Effect' in March disrupting global trade (esp in autos), the slow growth of the US and the ongoing EU debt crisis has made H2 2011 a pointedly concerning period for investors, industrialists, economists and national policy-makers; the latter now faced with IMF calls for policy alteration which endangers undoing 'fiscal consolidation' progress made to date.

In the automotive realm corporate seniors are seeking-out preferred geographic battle-grounds from which they might assert advantage so help to maintain the earnings traction of the last few years.

Today, although a partially and recently slowed market, Brazil is viewed as a firm favourite by VMs, given the seemingly never-ending negativity elsewhere. The following very briefly depict the regional pictures which have led to the tactical re-focus on Brazil – though of course the country has been viewed as 'highly strategic' for the last 20 years.

Previously, the North American auto-market re-buoyed thanks to a mix of massive QE programme injections boosting the stock market and the highly important re-stocking of corporate inventories from previous historic lows. Tentative economic confidence was undoubtedly generated but its life-span – so closely tied to QE – was questionable, even during the process. However, it along with radical corporate restructuring gave GM and Chrysler the salvation of boosted sales to surpass newly assigned break-even points.

That in turn gave them what could be termed an unfair advantage over Detroit peer Ford, and importantly the group of non-US global VMs - specifically mainstream producers of VW, Toyota, Nissan Honda, Mazda, Mitsubishi and Hyundai-Kia - which whilst trying to conquer the US have also had to combat a number of headwinds. These being primarily: domestic manufacturer's QE enabled credit tailwinds, their expansive N.A. dealership networks, and the re-emergence of the 'Made in America' conscienciousness amongst US car buyers. Whilst useful to the restructured, vehicle focused FIAT SpA by way of new product, production and distribution synergies with Chrysler, all other VMs have well recognised the up-hill struggle of selling within the USA and Canada, even if they operate transplant factories in the country. Since here and now even that previous advantage - under a level playing field - has been diminished. As seems the US stereotype, freer flowing credit is the prime car-buying determinate, as seen by 2005's record sales TIV of 17.4m, 2006's 17m, 2007's 16.4m, viewed against 2008's 13.5m, 2009's 10.6m, 2010's 11.8m and the 2011 SAAR of 12.1m.

A less uneven playing field existed in Europe, yet far from truly even given France's major bail-outs of its 2 prime VMs versus smaller assistance packages in Germany and 'fiscal spread' efforts in the UK. Though not a resuscitation on the US scale, such direct and indirect assistance together with varying levels of operational down-sizing helped re-energise the market and draw mainstream VMs earnings power into the black once more. Yet the return to the low earnings / no earnings 'European norm' only served to demonstrate the futility of the battle for some, themselves forced into ongoing ever more drastic operational change.

Whilst boosted in 2009 & 2010, in 2011 northern EU markets have experienced general 5% declines or so, whilst southern Europe has seen sales slides of 18-30% over consecutive monthly periods. In contrast the re-afforded 'homeland footholds' US manufacturers were given by government, most European operators have had to re-shape with greater adeptness to capitalism's prime principles. Europe's historically more constrained automotive TIV (compared to the US), and the absence of government incentives, means that sales are being largely driven by product quality those vehicles that maintain good residual values promote replacement purchase, whilst dealers are trying to manage 'pre-loved' inventory to both maintain used car values and critically support new car price floors. The broad credit environment has demonstrably shrunk, its contraction low-end mass market VMs which previously relied upon 'flexible terms' to obtain sales for customers. Instead however, internally 'captive' credit arms are being rebuilt whilst trying to balance volume vs risk exposure profiles of its credit-enabled buyers. As such (enlarged) EU car sales rose, collapsed and re-rose as seen by the following years: 2005: 15.25m, 2006 15.82m, 2007: 16m, 2008: 14.3m, 2009: 14.1m 2010: 11.8m, with 2011 expected at 12.1m

In Japan, the consequences of Fukushima and the nations ever-ongoing de-leveraging process have subdued sales, with a new focus on lower cost 'kei' small vehicles. Vying for ownership of this important Japanese and later European small product market the seeming sore-point in the previously announced Suzuki & VW joint venture. Yet as seen by sales figures, the economic shrinkage has been ongoing; 2008 with 4.2m passenger cars sold, 2009 offering 3.2m sales.

[NB this itself could well have been politically induced given Japan's probable desire to re-unite JV amongst its own players; as was the case in the 1950s-60s in Japan's first homeland kei-car phenomenon. But mindset and probable industrial consolidation leaves little opportunity for non-Japanese mainstream players across the islands' prefectures].

China's automotive market has slowed markedly, and though still world-leading in size and growth (having posted 13.5m in 2009), it seems that the PRC leadership wishes to use the contraction period as one of homeland rejuvenation as part of its own industrial planning schedule. Thus again a mix of homeland backed producers, credit squeezes and less 'exploratory' consumers indicates tougher times for all but the wholly entrusted. VW will maintain its standing, but even GM and its apparently historically entrenched Buick brand will probably suffer more so compared to the deified German producer as a natural consequence of overt brand familiarity. Not a question of familiarity breeding contempt - far from it - but the reality that the marketplace is a very different animal to 5 or 10 years ago. China of course has seen monumental growth thus far: 2008 car sales of 5.7m units, 2009 sales of 8.4m units (+47%). That jump necessitating governmental interaction to slow vehicle expansion patterns for infrastructure capacity and economic stability reasons.

The boom and bust of Russia, created by commodities demand surges and arguably directed by politico-entrepreneurial forces, makes it hard for product and industrial planning for the global VMs. Hence the desire to become engrained via indigenous producers, such as Renault with Avtovaz, to reduce the overall 'corporate regional risk profile' - the 'hit or miss' effect. Thus a case of 'slow and steady' for most VMs ranging from Ford to GM to Toyota to Chinese players like Great Wall and Chery. Russian volatility was seen over 2008-9 with the quickly risen car market plunging from 2.9m units to 1.46m units (-49%).

VMs operating in India, whilst less obviously so politico-entrepreneurially controlled, must balance product offerings in primary tier-1 and tier-2 cities within an economic growth environment that also fosters high inflation. Furthermore, though one country, the strength of its largely self-governing regions (spanning capitalist, mixed market and socialist mindsets) means that India cannot be viewed as a singular entity, Historically then, those VMs seeking step-by-step tentative entrances into India to build-up presence have been thwarted by a mix of national-level issues such as high import duties, aswell as region-related issues spanning from poor logistics to the 'greasing of (officials) palms'. Additionally for foreign VMs, Indian mass manufacturer itself has in the past been thwarted by the need for high % local-parts content policies – all to the theoretical good – but the quality levels of which have typically undermined the foreign VM's own product quality, a problem when a foreign badge carries a quality expectation from the consumer. And the aforementioned inflation volatility only adds to procurement-cost and sales-pricing schisms of arguably inferior quality components.

Whilst JVs have indeed been created, only Suzuki has truly undergone the operating pains of becoming entrenched via Maruti; that FDI relationship in turn providing the incremental improvement lessons for the domestic producers themselves, thus gaining a greater grasp over their country with the right industrial and commercial business models. Nonetheless, the 17% sales TIV growth in cars between 2008-9, from 1.54m units to 1.81m units (+14.2%) highlights a voracious country demand when conditions allow.

The annual new vehicle sales decline and growth figures which 'book-end' either side of the last decade (2001 vs 2010) tell the critical story.

USA: 17.5m vs 11.8m units
Japan: 5.9m vs 5.0m units
Germany: 3.6m vs 3.2m units
France: 2.8m vs 2.7m
UK: 2.8 vs 2.3m units
Italy: 2.7m vs 2.2m units
Spain: 1.7m vs 1.1m units
Canada: 1.6m vs 1.6m
S. Korea: 1.5m vs 1.5m

China: 2.4m vs 18m units
Brazil: 1.6m vs 3.5m units*
India: 0.9m vs 3.0m units
S. Africa: 0.37 vs 0.49m units
Poland: 0.35m vs 0.39m units
Argentina: 0.17m vs 0.7m units
Turkey: 0.12 vs 0.8m units

This seemingly slow but powerful global seismic shift was exacerbated in 2008-9, whence worldwide TIV capacity shrank from 64m units to 60.5m units, showing a 5.5% overall decline. This demonstrated that new EM/Eastern demand had yet to offset Triad/Western fall-off; even though China's new car demand proved demonstrably greater than that of the US.

Given this historic shift in demand patterns, multi-national VMs' prime attention has been devoted to their commercial positioning in BRIC+ nations. China obviously the primary catchment focus; but those expansionary ambitions accompanied by the PRC's intrinsically self-regarding political & commercial acumen. This then represented and still represents 'high hurdles' for the majority of VMs that had not devoted previous consecutive years toward building an 'entente cordial' (consisting primarily of technology transfer).

In this global opportunity context, a smaller but seemingly far more realistic and reachable proposition is Latin America / MERCOSUR, with of course 'The Federative Republic of Brazil' the central target..

Over the 2008-9 period of sharp global 5.5% shrinkage, Brazilian TIV rose by 11.4%. This is indeed impressive, but at first glance doesn't hope to match the 'kinetic growth' of the PRC or 'potential growth' of India. The prime difference however - well noted by observers including capital markets and IMF – is that Brazil had reached a certain plateau of ongoing economic and social stability.

Brazil's socio-political history has been both fragile and volatile, but the military regime that effectively ruled between 1964 & 1989, was superseded by the 'Nuvo Republica', and whilst chronologically a short time-line, the country today exhibits ever smaller reflections of autocratic control that had been present for hundreds of years under different names. The industrial and political elite still of course have influence, but the once deeply divisive social idealisms generated by the communist ideology has been replaced by a progressive mixed-market mentality, one equally apparent in neighbouring Argentina, Chile, Venezuela etc with ever evolving presence and influence across the less advanced nations of Latin America.

To this end Brazil has become 'the' progressive socio-economic role-model throughout MERCOSUR and many worldwide EM regions, and the high visibility of new car ownership, itself propelling used car ownership, perhaps the greatest advertisement for the country. The following depicts Brazil's year on year vehicle sales over the last decade:

2001: 1.6m
2002: 1.48m
2003: 1.43m
2004: 1.58m
2005: 1.71m
2006: 1.93m
2007: 2.46m
2008: 2.82m
2009: 3.14m
2010: 3.51m

The driving force was of course the combination of Brazil's commodities export boom and increasing socio-economic liberalisation, shifting yesteryear mindsets toward the free-marketeering of industry and commerce. This displayed by the dynamic growth of the BOVESPA stock exchange* (view postscript).

[NB the term 'commodities boom' could be read as a short-hand reference to overall swelling economic growth activity, though undeniably set in motion by the exportation of natural resource wealth spanning: oil / petroleum / ethanol; iron ore for steel-making; semi-precious metals for industry; agricultural foodstuffs, bio-fuels and fertiliser; general timber logging (inc. rare hardwoods), aswell as low to mid-value consumer and industrial goods able to previously deploy low cost labour and cost-amortised old generation capital equipment].

The vehicle market's 220% expansion over the decade was of course built upon fundamentally sound economic success, enabling a secure framework of growth for both private commerce and state-service employment, thus able to massively energise consumer demand.

Yet the part of that expansion in both business and consumer circles was also 'supercharged' by the increasing availability of credit – seemingly intrinsic to the second half of the modern economic cycle - available from both auto-maker's captive credit houses aswell as the plethora of external sources.

The majority of Brazilian car buyers are naturally very price sensitive, a consequence of decades of instability and austerity. However car-makers also noted an increased elasticity in the Brazilian market created by the proliferation of buyer types, from the small band of newly wealthy, to the re-emergence of a sizeable middle-class wishing to 'publicise' their status to the creation of broad working class now with increased disposable income levels. As a consequence a greater number of vehicle types were demanded (as seen by import trends) influencing product planning choices in order to expand brand product portfolios – at model and variant levels – so stretching the pricing ladder upward and so improve unit margins and corporate profitability.

This then, typical of a swelling consumer culture, was well understood and exploited by the established incumbents: VW, FIAT, GM & Ford. The size and shape of the 'pie' also convincing previously exited players such as Renault & PSA to re-instigate, marginal players such as the Japanese VMs to expand vehicle portfolios, and attracted newcomers such as S.Korea's Hyundai-Kia in cars and India's Mahindra within the light truck sector.

The 2011 picture is as follows:

FIAT – 22.3% market share from 23.2% (loosing ground)
[3 plants / 530 dealers / 16,000 employees}

VW – 23.3% market share from 22.5% (gaining ground)
[4 plants / 418 dealers / 25,400 employees]

GM – 19.4% from 20.5% (loosing ground)
[4 plants / 377 dealers / 23,000 employees]

FORD – 9.2% from 10.1% (loosing ground)
[4 plants / 449 dealers / 10,600 employees]

[3 plants / 244 dealers / 5226 employees]

[2 plants / 136 dealers / 3500 employees]

[1 plant / 123 dealers / 3,425 employees]

[1 plant / 159 dealers / 1740 employees]

[1 plant / 25 dealers / N-A]

Thus in a relatively short period, although the market-size has expanded year on year, so too has the competitive climate. The temperature has increased yet further with entry of Chinese corporations such as Chery Auto Co and JAC Auto Co importing vehicles to target the dominant A & B-segments (approx cars of 1.0-1.3L class). Chinese market share in Brazil is approximately 3.3%, a speedy climb from 0% over the last 18 moths. It is a trend seemingly enabled by what has been the increasing availability of credit to even low income earners with stable re-payment histories. Good news for China seeking its own hi-potential export markets, but of growing concern to the established auto-makers, amongst which VW, GM & FIAT have been decade long economic stalwarts.

Critically of note is the fact that Chinese producers have had to overcome an import tax of up to 35% per unit, which whilst more easily absorbed a decade ago when China's input cost were far lower, adds what may very probably be an intolerable cost-weight on importers shoulders. Thus the cars offered today may in fact be strategically offered 'loss-leaders' so as to gain market foot-hold.

The government then has had to balance the lobbying of its pseudo-indigenous producers that are concerned about the seeming Chinese-import advantage, against the significant FDI promises made by various Chinese VMs and OEMs.

To partially cool the short-term temperature of the competitive climate, the it was recently announced that those vehicles which were not domestically manufactured would attract a two-tier tariff system: 7% if 'MERCOSUR made' (ie with 65% or more local content) and, 37% for imported vehicles. This then on-top of the present import-duty system.

Thus whilst seeming to stave-off immediate foreign competition, the government also recognises that Chinese manufacturers will now need to fulfil their pledges of producing inside Brazil, thus aiding mid and long-term FDI, employment and general national economic contribution.

After what has been a boom period, we now witness see a cooling of the Brazilian economy - due to the Chinese & Asian slow-down – yet it is an economy that still simmers briskly with comparative gusto. Even though turned 'off the boil', the 3.1% GDP growth in Q2 2011 sits against previous levels of 4.1% in Q1 2011, and 5% in Q4 2010. Though this appears a world away from the 9% or so for Q2 and Q1 2010, as with the physical universe, all in the economic universe is relative That 3.1% compares well to the 20 year average rate of 3.26%. that rate achieved even with very turbulent periods of 1992 and 2009. It appears then that the country's Finance Ministry and Central Bank has become adept at reading and reacting to the macro-environment and any consequential shock-waves..

A natural consequence of the recent 'cooling' has been the partial timely removal of the previous broad credit availability to lower income earners and those businesses & individuals with higher credit risk profiles. This action stems from the inevitable increase in the cost of wholesale borrowing as capital markets contract and from the reaction to an increase in loan defaults.

This in turn should play to the advantage of the 'indigenous VMs' – the bigger the more so - with balance sheet strength, capacity utilisation efficiencies and pan-national dealer networks: providing greater defensive resolve. However, what cannot be discounted is the size of 'homeland' backing each auto-maker can muster. The question of wholesale-available finance may be a determining factor above and beyond the usual criteria of model-mix contribution, efficiency cost savings etc.

The fact that the USA is embarking upon another round of liquidity easing (by another method) indicates that GM (presently far below its IPO price) will be an expected beneficiary, as will Chrysler an Ford. FIAT with arecent credit downgrade invariably sits in a different place, and though no doubt possibly frustrated by the increasingly illiquid and costly Italian capital markets may through Chrysler wish to access lower-cost liquidity from the USA thanks to the Federal Reserve. Thus in this cooled period GM & FIAT could theoretically play hard-ball against VW, the Japanese and S.Koreans by effectively buying market share through vehicle discounting etc. VW however will probably choose to maintain unit margins through manufacturing and inventory management and worry less about the threat to market share. It probably recognises (as history indicates) that it should not enter into pricing wars which only serve to diminish brand respect and residual values, creating the value-destruction spiral of low margins and higher production costs (pushed by volume) seen with the previous demise of GM and Chrysler' s North American operations.

As has been historic choice and necessity, VW, the Japanese and now S.Koreans will endeavour to build their Latin American presence through quality, not price; really the only option also available to PSA. Whilst it appears that GM, FIAT-Chrysler, Renault, the Chinese and possibly Indians (excluding TATA's JLR), will battle in Brazil and beyond using business models reliant upon wholesale financing models as much as product models, wholesale models reliant upon long term devaluation of the US$ for 're-generative funding', and long-term currency FX strength of the Yuan and Rupee.

Tomorrow then is a very different ball-game to that of yesterday, let alone yesteryear.

'Yesteryear' was a frustrating period when incumbent VMs such as VW, FIAT, GM and Ford who were effectively forced to 'lay-low' for the previous fiscally constrained decades – often forming JVs to 'sit-tight' in marketplace until better days appeared.

'Yesterday' - the late 1990s and 2000s - allowed for a disentanglement of previously formed co-dependencies, perhaps best exemplified by Ford's 'piggy-backing' of Renault platforms and VW powertrains. In turn it provided for major over-hauls of their Brazilian organisations, across: design, development, manufacturing and sales, so as to eradicate older product lines (which had served well) and introduce new products that were far more globally aligned and modern yet critically intrinsically engineered to Brazilian roads and Brazilian buyers' not so deep pockets. .

'Today' we see an emerged confident country with its own 'Nuvo-Americana Couture' represented by indigenous products like FIAT's Nuvo-Uno, the expected spiritual successor to the VW Gol and other national vehicles, but the dynamics of the industry mean that although such 'Brazilian Couture' is displayed, look below the hemline and it is also accompanied by what true internationalists consider the feet-dragging of a 'Flip-Flop' tariff policy.

And that is something which investment-auto-motives expects to see periodically emerge as and when Latin America seeks to temporarily protect itself over the coming years, mimicking Brazil's movements.

The Brazilian success story has meant an ongoing appreciation of the Real, that constant upward re-valuation bow viewed by Brazilian politicians as out of kilter with the general trend of an unstated but nevertheless unambiguous global currency depreciation war. The cooling of the Chinese economy - along with those neighbouring SE Asian countries which are intrinsically linked – has recently muted demand for Brazilian exports. Thus Brazil has been hit by both FX induced and basic export demand induced headwinds; a story it shares with it primary trade partner China.

Moreover, that FX differential has undermined its standing as low cost producer of basic consumer items, with perhaps the most apparent examples being the influx of Indian, Chinese and CIS made beach-clothing. Thus culturally, a case of even Brazilian 'national dress' of flip-flops, vests, shorts and swim-wear being lost from the grasp of domestic producers.

As noted, this concern has recently expanded to include the nation's car industry.

Brazil's ascendancy, its relative economic peaking amongst its EM peers and the disadvantages consequences have become increasingly noted amongst politicians, Hence recent calls for global regulatory bodies to effectively 'name and shame' those whose actions reflect subtle policy-ploys for currency manipulation.

But beyond the political lambasting, Brazil today finds itself in a similar position to China a couple of years ago. The diminishing of export markets and a rising currency base means that Brazil must now become more inwardly focused, developing greater internal economic activity and so B2B and B2C demand, to off-set lost export earnings. 2011+ economic traction must be generated.

The most visible example of this policy re-orientation is the hosting of the 2016 Olympic Games which inevitably serves as a medium-term fiscal catalyst. But Brazil must look beyond the Games' usual raft of stadiums and the creation of 'legacy infrastructure' projects so as to maintain and indeed broaden a philosophy of multi-aspect led growth. Not to do so repeats the experiences of Abu Dhabi and UEA countries, where the ostensibly private-sector construction boom provided what became a flawed second economic pillar alongside oil.

The real-estate asset base is of course of undeniable importance, and of use in economic policy formation, but as all now recognise, must be counter-balanced by tangible value-adding across the economic board.

Such lessons of the distant and near past however appear to have been absorbed in Brazil, indeed its own mid-20th century history offering a powerful successful case study. Thus, even before winning the Olympics Bid, projects were seemingly well under way to try and mimic the economic miracle seen in the 1950s & 1960s industrial.

To this end, coastal areas and inland plains far beyond the major cities of Rio de Janeiro and Sao Paulo were identified as new economic development regions. Effectively viewed as 3rd tier new towns – behind 2nd tiers such as Salvador, Brasilia, Fortaleza & Belo Horizonte – which could provide both national access to the globalised world (and vice versa) through large-dock ports and new and improved internal highways improving logistics. Both then serving as vehicles for additional national economic activity founded upon new regional activity which itself would stem domestic migration toward the two 1st tier cities, which themselves have become 'choked' by overpopulation physically and economically.

To promote this new economic age, new ports along the full seaboard have been identified and are in the process of being built, created in tandem with co-aligned industrial and commercial centres. One planned port that will be able to provide easier access for shipping is near the historic port of Vitoria in the state of Espirito Santo; an old harbour with logistical disadvantages. But it is the 'super port' near Sao Joao da Barra, called “Superporto do Acuto” to the NE of Rio de Janeiro, that represents the countries export and import future. One designed to house the largest ships in the world so as to reduce transportation costs and thus improve the profit margin for shipping owners and their corporate customers alike.

Such green-field port development allows for well considered and properly designed infrastructure, attracting both heavy industry reliant on exports and lighter mass-assembly industries (such a s vehicles) which both procure inward-bound components from a plethora of foreign lands, and are able to sent their products outward-bound with pricing, quality and time-line assurances.

Sao Joao da Barra is due to officially open in 2012, and the complimentary industrial parks that surround the port will typically reflect Brazilian industrial activity that has undergone both sector consolidation via M&A and efficiency seeking via updated methods.

Thus Brazil's renewed industrial agenda will focus upon the efficient processing, semi-finishing and distribution of higher-value steel products and plastics, as opposed to simply the shipping of raw and graded iron ore and oil & ethanol; which underpinned much of the export-led success story recently. Besides serving other industrial sectors such as construction with rolled-steel and coiled-steel. this then also importantly provides the processed materials of sheet-steel, flat-aluminium, structural platform for expansion of vehicle-making facilities.

However, the very question of Brazilian asset ownership is one that has become rather fraught in recent years, even with the intermediary ownership mechanism of the BOVESPA. This perhaps especially amongst the olde worlde industrial players of Europe and the USA relative to Chinese interest.

Once Brazil was seen as a natural extension of their global power-base, an attitude very well illustrated by Henry Ford's own Fordlandia project based inside the Amazon forest and seeking value-chain advantage through timber, rubber and soy access (for plastics). But China's recent but prolific arrival on the world stage has immeasurably shifted the geo-economic 'power-base', one which has offered new negotiating alternative for those in prime positions such as Brazil; itself seeking not only China's hefty FDI packages but access to China's massive and progressive business and consumer markets.

Expectantly so, the various sub-segments of Brazil's broad vehicle industry is seen as a key mutual economic enabler. The complexity of the vehicle manufacturing sector, with depth and breadth of supply chain and retail links, offers a myriad of commercial opportunity. And the resultant 'unit output' of the vehicle itself enables the daily transportation of the masses, the haulage of goods, raw materials, part-finished goods & completed goods, the mobilisation of the commercial salesperson, service technician and repair technician and the very turning of the soil and reaping of the crop that will serve both Brazilian and Chinese life-improvement ambitions.

This policy of 'new order industrialisation' then supports the GDP input-mix, which in 2010 consisted of 5.6% agriculture, 28.6% industry & 67.4 services, and which provided a notional per capita GDP of US$10,500 – though realistically with deep earnings divides. It also steers an alternative balanced path compared to other EM countries which have chosen to bypass 'smokestack' industrialisation straight into service-based growth; this either forced by lack of natural resources, or the ambition to leap-frog into 'advanced country' status.

Importantly though the 'nuvo-industrialisation' of Brazil looks set to go much further than the size and scale seen in its mid-20th century modernisation plan; a plan in which Brasilia became the showcase. A scheme which could infact makes the Brasilia Plan look modest and antiquated, and has a far greater effect on the auto-sector.

The four central tenants behind the 1957 'Brasilia Plan' were to:

- create an administrative centre with high-brow ideals & ethnic melting-pot
- reach into the hinterland so as to aid exploitation of natural resources
- to create a modern, planned city of discreet areas
- to create a motorised city

Hence, its administrators came from the various 'rainbow' of ethnic cultures, the city map was/is that of an aeroplane silhouette illustrating its distant location deep in the heartland, its commercial, industrial and retail activity-sectors were set according to the prevailing modernist outlook, and its scale was not 'humanist' but 'motorist' in the North American manner of the period, hence dispersed sections and grand boulevards. Brasilia helped set Brazil into the global consciousness and was thus deemed a Brazilian success to this day.

Sixty-Five years later from that grandiose statement, investment-auto-motives believes that Brazilian seniors seek to undertake Brasilia 2.0.

The premis of a recent UK television programme was to research into what were described as sizeable 'lost populations of the Amazon', people and large townships reported by Amerigo Vespucci in the very early 1500s. Though of questionable credibility given his probable desire to upstage Christopher Columbus and seek political advantage with the King of Portugal, Vespucci claimed that the River and Forest supported a mass civilization. The programme's thesis was that this discovery undoes contemporary opinion of the Amazon as 'virgin' forest; with an assertion that the whole area was shaped by man for agricultural, residential and commercial purposes in previous ages.

This, investment-auto-motives suspects, could be the very beginning of an argument presented by the Brazilian government. One to re-utilise the nominally protected Amazon through a an eco-initiative of (an initially) sparse populace settlement plan.

Importantly it recognises that although upon its own sovereign province, Brazil must credibly convince the world at large of its intentions and outcomes of its new settlers. It will probably cite that accessing the country's interior will massively improve living standards for its future populace, especially so for those who presently live in semi-squalid and crime-ridden slums of the 'Favellas'; squeezed onto inner-city hillsides. Those in marginalised housing would be re-settled in the outer reaches of sovereign territory; whilst also ensuring protection over its natural resources (which like Greenland's oil reserves have become of such interest to other nations) using forest management techniques that have long been in use in Europe.

Thus Brasilia may seek to convince its social appropriation of its own forest area by positing the theory that certain academics have arrived at: that previously populated small localised sites were inter-connected by a network of tracks through and across the forest floor, creating a low-impact, highly sustainable progressive society. Instead of broad concrete boulevards, individual sectors, monumental buildings and broad vistas, Brasilia 2.0 could be the very opposite.

This may appear remote conjecture, something of little consequence to the Brazilian auto sector, but its latter-day ramifications could be huge. Such an outcome, if properly orchestrated, then has massive long-term potential for Brazil's 'pseudo-indigenous' auto-manufacturers, allowing them to fast-forward both their Brazilian R&D and that within the US, Germany, Italy, Japan, S.Korea, India and China.

At first, the idea of possibly millions of vehicles running through the Amazon forest appears absurd and ethically monstrous, but if those cars, trucks and buses were garnered through 'low CO2' technology mixes (small cc ICE, hybrid, plug-in hybrid and EV), the CO2 absorbing forestlands could in fact be vehicle's natural home. Arguably far far better than the open skies and smog-bands of Los Angeles or Beijing, and part of the reason why green-cities like London and Paris have not suffered as much, indeed with their own plans for wide scale tree re-planting.

[NB expert opinion views the typical broad-leaf mature tree as absorbing 1 tonne of CO2 over its lifetime of about 100 years].

Depending upon progress and pressures, such a radically re-orientated Brazilian future could be perhaps only 20-30 years away, and thus must be something seniors in the Brazilian auto-sector alongside its national association – ANFAVEA – should seriously contemplate.

From a 'here and now' investment perspective, the ongoing expansion and increasingly complexity of the Brazilian auto-sector, even in its conventional vein and supported by a very well balanced economic base, should offer an ever broadening horizon of investment opportunities.

Some of its smaller Latin neighbours may enjoy comparatively faster growth rates over the mid-term via their own commodity booms, but many of those will come with their own as of yet unresolved political and social tensions. Brazil may be relatively conservative for fast reacting 'risk-on risk-off' players, but for the automotive-sector investor it has reached a level of credibility and opportunity that leaves many other advanced and EM counterparts standing in the shade.

The present 'cool breeze' should be welcomed as a time to reflect and properly assess.

Post Script

The BOVESPA grew from a near zero-rated flat-line between 1989 and January 1994, grew on a steadily trend path until March 2004 reaching approx 23,000 on its index, the dramatically climbing to a record of 73,516 in May 2008, rapidly fell to approx 30,000 (as a new floor) by late 2008 as a result of the Wall St collapse, rose sharply with constant hover peaks at approx 72,000 before now settling at about 56,000 in Sept 2011.

investment-auto-motives suspects there will be a gradual new “correction” to about 50,000 as the news regards a systemic slowdown of the global economy takes effect and short and mid-term investors 'take profits'.

This should however provide a positive effect by re-stabalising the national stock market at a new foundational floor offering improved p/e ratios whilst Brazilian corporations re-assess their operational efficiencies and new companies are publicly listed, so as to provide future investor value-creation simultaneous to a latter-day upturn of the global economic cycle.

Friday, 16 September 2011

Company Focus - Snap On Inc. – Seeking to Maintain its Grip on the Auto-Trade.

In contrast to the previous post - viewing the localised macro-economic impetus of 'automotive glamour' -. this post is pointedly directed at the opposite end of the spectrum; one company that operates within a largely 'invisible' sub-sector which nevertheless acts as a cornerstone to the auto-sector across assembly, maintenance and repair arenas.

The subject, that of hand & service tools. The company: Snap-On - USA originated and publicly listed.

Presently at the macro-level the United States of America appears to be essentially re-shaping itself economically. The importance of a deflated US$ and cost base cannot be under-estimated, two fundamental parts of its effort to regain economic and inter-linked cultural global control. Whilst apparently officially on hold (given the extended 0% base rate announcement), the official re-deployment of a QE3 may still be waiting in the wings. Those 'Fed printed' sums used to continue a managed decline of the global reserve currency for the sake of US exports, but also critically to possibly provide the funds for an American-led liquidity injection into the ravaged EU Periphery sovereign debt markets - so as to stave-off or limit China's own 'EU rescue' interests.

From this perspective, the US$ looks to be the ever lengthened 'wrench handle' of international 'monetary leverage', whilst each of the EU's individual over-indebted countries could be seen as requiring precisely sized 'complimentary sockets'. Ironically then under this highly plausible scenario, as US debt is 'ratcheted-up', so the captive pressure applied upon near-default EU states becomes ever more acute.

[NB This, EU and MENA politicians no doubt well understand, an economic grasp on S.Europe to maintain influence, akin to the E.Europe 'missile shield' located to repel Russian influence. In short the re-emergence of US geo-political assertion].

Perhaps much to Athenian dismay then, never has Archimedes' phrase been so apt: “Give me a lever long enough, and a fulcrum on which to place it, and I shall move the world”.

The iconic Snap-On ratchet and socket-set then not only serves as a metaphor for America's mid-term geo-political influence over a fractured Southern Europe (and by virtue over the MENA region), but in its physical self is an industrial essential to the American way of life; a fundamental appliance for the economic rebuild of the nation.

The firm 'Snap-on' was established in 1920, exploiting the inter-changeable socket on single wrench idea first patented in 1863 by a J.J. Richardson.

One founding partner was a Joseph Johnson, whose initials 'serendipitously' reflect Richardson's. Whether the other founding partner William Seidemann purposefully chose Joseph Jackson to lend apparent 'authenticity' by association, whether Jackson himself altered his original name or whether of truly serendipitous nature (rare, given that manipulate is often masked as coincidence), the originator's initials were indeed duly connected. In 1920 the company started commercialisation of the 'wrench & multi-socket' – initially using 10 sockets on 5 wrench sizes.

To simultaneously gain a wider geographic coverage, avoid high production start-up costs and circumnavigate the close relationships between hardware shop owners and the existing tool trade, Snap-On chose to sell its products via a fleet of cars & vans. Using the capabilities of two new partners, Mssrs Stanton & Palmer, this enabled it to deal directly with the end-users within the then burgeoning US motor trade of the time, from car dealers to farm mechanics. This mobile distribution method allowed a fine tuning of production levels to demand levels, so enabling more efficient cash-flow management and avoiding the build-up of typical 'capital trapped' large stock inventory levels.

This lean-run, self-sustaining business model then allowed it to survive the ravages of the 1929-32 Great Depression, to benefit from Roosevelt's 'New Deal' spending and to again benefit from the USA's WW2 militarisation programmes.

It entered international markets in 1931, also in that decade offering credit / hire purchase to customers and was publicly listed as Snap-on Inc in 1939. (ticker NYSE: SNA).

However, it was focus on the automotive sector allowed it ride the ever upward growth of Detroit between 1920 and the late 1970s, the emergence of dominant town dealers, multi-brand dealers, semi-professional and home-garage mechanics spanning servicing, maintenance& repair aswell as automotive hobby segments such as hot-rods and muscle cars. Secondary arenas were other tertiary mechanical utility & hobby items such as ride-on mowers, motorcycles, power-boats and later quad-bikes, buggies etc. In response to the growth of the market, and so to serve immediately, company vans were turned into fully-stocked mobile retailing units. And critically, since the early 1980s it has nurtured a close association to genres of motorsport via sponsorship of both the Penske team in NASCAR and more recently a 'Funny-Car' dragster teams in NHRA.

Because the tools were precision die-cast and machined, comprised of a superior steel content and carried a life-time guarantee their quality became generally proven. This allowed the brand to become viewed as 'tool of choice' and the company to generate and maintain higher margins within an industry typically under constant competitive pricing pressure (strategic & tactical), thus cost-reduction pressure and scale-up pressure; all the hallmarks of a 'commoditized' industry. Thus Snap-On, along with (typically) nation-centric others sought to maintain a marked perceptional difference between itself and competitor-set; intentionally positioning itself from early-on within the top band of 'premium' vs 'middle-ground' vs 'price-sensitive' hand tools.

The renowned Swedish tool manufacturer Bahco was acquired in 1999 to provide greater international market reach, a secondary 'mid-point' brand application and capture operational manufacturing, back-office and presumably distribution synergies between the companies. Additionally the original premium product line '100% USA made' has been supplemented by an 'affordable' series called Blue Point, often manufactured outside the USA, primarily in SE Asia, the items are presented as offering Snap-On quality at a lower price point.

Thus 2 'sister' product lines have been created which not only provide a greater price-point coverage in top and mid tiers, but the use of the Blue brand colouring competes against and defends against other blue-branded automotive tool producers.

Regulatory and consumer forces of course forced the technical sophistication and complexity of vehicles, requiring diagnostic equipment for initially emissions control testing, but becoming critical to the service and repair of vehicles with ever evolving 'intelligent brain' functions. This led Snap On to develop a series of diagnostic equipment which in Europe is branded 'Sun'.

Today the company is led by Nicholas T Pinchuk, holding both posts of Chairman and CEO, and is comprised of 3 division – the following from company website sources showing 2010 income mix:

Snap-On Tools – 35%
Commercial & Industrial - 35%
Repair Systems & Information - 28%
Financial Services - 2%

Its 2010 geographic market share being:
North America - 65%
Europe - 25%
Asia-Pacific - 8%
RoW - 2%

Thus as is evident, there is innate heavy reliance upon N.A. And the EU, together providing 90% of sales, whilst in roads into Asia and beyond have been – by international corporation standards, especially those say of Automotive VMs – very limited.

This is undoubtedly because historically, and especially since WW2, emerging Asian, Chinese, Indian and Latin American countries have sought to formally or informally protect the foundations of their hand tool industries from foreign competition. Such countries recognising that not only was the sector fundamental to the economic growth of the nation itself, but critically inter-twined with affordable DIY mechanics of older car-parc vehicles, the servicing of increasingly capital intensive industrial plant in evolving manufacturing bases and would underpin the expanding auto-dealership numbers and demands from internal and regional growth in car, truck, bus and coach purchase and use. In short, the indigenous hand-tool sector was/is crucial to EM growth, expecting its increasing sophistication to align general GDP growth. In short locally playing Snap-On's own boom experience between 1920 and 1970 in the USA.

Thus unlike say the likes of McDonalds or Starbucks, where EM countries could invite, learn and mimic new sector learning, even though patiently present in-market it seems Asia and RoW markets (excluding anglo-Australia) have essentially repelled Snap-On for mass application – instead seemingly serving targeted business sub-segments.

Thus, such areas have been 'a very hard to crack', a painful but realistic view of business affairs.

This intrinsic, long-time headwind against what is presumed as a natural geographic extension of its core auto-trade support activities has undoubtedly underpinned its efforts to grow and capture business from alternative sources, hence development of income streams such as government, military and others (see below).

As stated, thus beyond core 'front of shop' retail offerings of: Hand Tools, Power Tools, Tool Storage, Basic Diagnostics and Shop Equipment, there has been a concerted effort to climb the value-ladder by also targeting 'packaged service' offerings to capture higher-value later stage technical and commercial developments orientated around automotive. Areas in which though the core product offering may differ little to the garage retail arm, can be sold in a different large scale and support-driven manner so adding 'costing' and 'timing' dimensions to the proven 'quality'. These new arms then designed to generate close relationships which provide typically larger 'single customer' sales orders and long term ties.

The previously mentioned primary 2 divisions created were 'Commercial & Industrial' and 'Repair Systems and Information'. Each now provides similar and near level of income stream to hand-tools. Together they represent 63% of income and includes buyers from:

- Transportation services,
- General industrial,
- Government,
- Education,
- Agricultural,
- (Other [ad hoc] commercial applications).

So garages & dealerships, and now these additional clients, were then sold developed products and services, including:

- Proprietary software
- Vehicle service information
- Equipment repair services
- Training
- Product procurement facilitation,
- Business management systems,
- Tele-diagnostics.

So, in essence, Snap-On reacted to the need to broaden its business net and thus segmental catchment area.

Yet throughout, 'serving in the shadows' (at only 2% of revenue) has been the Financial Services Group, consisting of 'Snap-On Credit' a US based entity which finances domestic and foreign franchisees.

[NB As highlighted at the beginning of this web-log, because of the USA's global 're-creditization drive', investment-auto-motives expected to see disproportionate growth in the firm's Financial Services division from its present low level, so re-energising its other divisions].

Historical financial reporting show the following:

Net Sales in 2008 were: $2,853m, in 2009 were $2,362m (-17%) and 2010 were $2,619m. Q1 & Q2 2011 trending shows an FY2011 expectation of $2,844 (base), which investment-auto-motives will be modified by 5% slow down in H2 2011 giving FY2011 of $2773m, thus posting slight improvement over preceding year.
CoGS in 2008 were $-1,567m, in 2009 were $-1,305m and 2010 were $-1,408m, showing
that consecutive annual 'CoGS absorption rates' of: 54.9%, 55.2% and 53.76% for respective years, thus averaging 54.6%.
Operating Expenses in 2008 were $-933m, in 2009 were $-824m and 2010 were $-894, and as such show themselves to respectively be 33%, 35% and 34% of Net Sales value, averaging 34%.
EBIT in 2008 were $358m, in 2009 were $205m, and in 2010 were $277m, respectively showing 12.5%, 8.7% and 10.6% of Net Sales.
Net Earnings in 2008 were $237m, in 2009 were $134m and in 2010 were $186m, respectively showing 8.3%, 5.7% and 7.1% of Net Sales.
Basic EPS in 2008 was $4.12, in 2009 was $2.33 and in 2010 was 3.22

Whilst the top-line reporting of 'Net Sales' is seen as a creditable 'true reflection' of income, reporting, investors should be concerned with – and seek transparency in - the annual level of discounted, damaged, missing and stolen items. Provided by category would provide even greater confidence given that the retail-like Snap-On business model (with added complexity) is arguably open to abuse by junior management, staff, franchisees etc, operating a black-market in such goods which only goes to undermine the brand itself.

Equally, such 'invisibility' may be used by less consciousness management to manipulate the Net Sales figures.
For FY2010 Snap-On publicised a MarketCap of $3.5bn, revenue of $2.6bn, 130 country coverage, and claims itself to be “one of the few publicly listed companies that has paid a consecutive quarterly cash dividend without interruption or reduction”, offering an annualised average of 2.1% per annum.

The 2011 'Outlook' expectation from it's 2010 SEC filed report mentions “expansion in emerging a range of $55 million to $65 million. Snap-on also expects to incur $11 million of higher year-over-year pension expense in 2011 largely due to the amortization of investment losses incurred in 2008 related to its domestic pension plan assets. Interest expense on the $250 million of senior notes issued in December 2010 will approximate $2.7 million per quarter in 2011. Snap-on anticipates that its full year 2011 effective income tax rate will approximate 33%”.

Three financial reporting quarters on, and today Bloomberg figures indicate that the a mix of less robust S&P and recognition amongst investors of the company's limited exposure to BRIC+ regions, has deflated the MarketCap toward $2.9bn.

However, as seen by very basic trended forecasting, amended for the H2 2011 slow-down, investment-auto-motives expects Snap-On Inc. to post a FY2011 Net Sales figure at about $2,773m, excluding FX effects worth $9.1 in Q1 and $30m in Q2, giving an annual 'run-rate' of about $78.2, which may well be booked into the last Q4 and FY reporting, or earlier if cause to do so.

The turmoil of 2008, the deep 'North Atlantic Recession' and prevalent investor focus on BRIC's and newer second-phase EMs, will have woken Snap-On from any complacency that may have become historically ingrained.

Pinchuk's undertaking of both key senior roles obviously raises corporate governance issues, since a listed company (unlike private) ideally has 2 mutually respected but independently minded seats.

Such a dual role may be consensually agreed amongst stock-holders and the BoD for expediency purposes, typically seen if a company has previously experienced a period of ideological dead-lock between seniors. But typically the dual role format tends to happen in periods of necessary company structural change requiring the clarity and free-hand of single leadership: AT&T. A good example.

However, given Snap-On's generally stable history - 'turning the handle' of its pseudo monopolistic position - the former cause then does not then seem the case. Instead the latter hypothesis of structural change looks to be the case, with management and institutional investors alike very probably recognising that the 'American Century' upon which Snap-On rode has indeed faltered in the face of the 'Risen East'.

As such the company may require structural reformation across the full business, including the Finance division which accounts for only 2% of income.

However, the first division seemingly 'taken to task' looks to be the core of its hand-tools division., given that its self-styled All-American 'business boundaries' incur greater over-head costs: Being largely 'All American', 'American made' and using its own and franchised fleet-based sales force, increasing costs have undoubtedly been baked-in over the years. Yet given the nature of the business and service proposition – and inherent costs therein – there seems few major cost-saving opportunities to be had, instead ongoing efforts at cost constraint in salaries, wages, overhead etc,

However, the one field open to structural change is that of procurement. Snap-On looks to be seeking ongoing change in procurement sourcing and practice to try and secure its profitability, beyond the organic sales boost and positive FX effects of the US$.

It is unknown whether Chairman & CEO Nicholas T Pinchuk is directly connected/related to the Ukranian steel-magnete Viktor Pinchuk, yet it seems probable given the name's geographic and Askenazi origins. Both men work within international supply and demand of metals, with Viktor Pinchuk having official ties to the USA's Peterson Institute and Brookings Institute.

His personal interests are as an influential individual in Ukraine (married to daughter of a former President) and operates the Interpipe (Steel) Group and an investment firm with portfolio assets relating to: the production of pipes and tubes, railway-carriage wheels, speciality steels & alloys, and general associated machinery. Reports indicate that he in turn appears to have business relations with another powerful Ukrainian, Rinat Akhmetov, his broad interests in metals mining, processing and production via System Capital Management group (SCM) which includes the prime subsidiary of Metinvest Holding Co. Metinvest has a number of steelworks including: Azovstal Iron & Steel, Ilyich Steel & Iron, Yenakiieve Iron & Steel, Promet Steel, Spartan (UK), Tremetal (Italy) and American assets.

Thus Snap-On's CEO appears to have reason for and links to 2 of Ukraine's primary power-brokers across the vertically integrated world of Ukranian steel manufacture. The consolidation of which, when added to the sizable 'easy-reach' resources, should provide a price-reduced basis so important for western steel procurement to improved margins.

This, investment-auto-motives believes will play a fundamental role – probably already underway – for the necessary structural change in Snap-On Inc's procurement and production methods at raw material, semi-finished product and possibly contract manufactured levels. These actions greatly enabled by Interpipe. The 'EastOneGroup' investment company's holdings and those of Metinvest Holding Co.

So whilst Snap-On executives and management rhetoric is not at all wrong in highlighting that... “Snap On is positioned for the future with favourable vehicle population trends, increasing vehicle complexity, growing demand in emerging markets and significant opportunities in industries
outside of vehicle repair”...they also no doubt quietly recognise to themselves that the availing opportunity may not be wholly open to themselves given past experience of EM markets.

To compensate for this, they recognised that a significant business re-structuring was inevitable

This initiative theoretically promote profitability and notionally stock-holder quarterly yields. However, it seems that Snap-On instead seeks to re-invest the monies accrued from input-level cost-savings to continue to maintain a hold over US domestic, Canadian, Mexican, European and Australian markets, whilst also continuing to try and 'crack the nut' of EM markets.

The firm says it will....”Enhance the franchise network to reach more vehicle repair technicians....Expand in the garage [sector] with shop owners and managers....Extend to critical industries outside of vehicle repair....Build in emerging markets where vehicle repair and critical industries are in early stages”

The problem Snap-On faces though is arguably a long-held 'saturation' of North America, very challenging competition in its 'intermediate markets' such as Mexico and most European countries and possibly increasing resistance from EM countries as they seek to retain the benefits of their home market vehicle sector growth.

The consequential challenge is that the company must try and be both 'internally dynamic' to conjure ways of meeting the headwinds, whilst appearing 'external stable' so as to maintain its stock-holder persona.

A very brief perusal of web-based company information ascertaining to executive pay packages suggests that the senior management team are 'incentivised' on a long-term basis via deferred rewards. This then fits in with the 'mature and stable' character of the company, yet by its very nature may deter from what are seen as risky strategic and operational changes, changes that may be of true long-term benefit.

Any executive remuneration committee which may exist, or indeed major stock-holders at AGM appointee soundings, would have to weigh-up both elements. Yet it seems that Snap-On largely lives 'under the radar' for ant type of investor activism given its cornerstone entrenchment within institutional investors. Institutional investors may wish to assert the need for some of the C-suite pay-packages to reflect this so as to invigorate the company, if not already the case.

In conclusion then, Snap-On has proved itself to be the historical tool-set of choice amongst the auto-trade professionals, general trades-people and discerning garage based DIY enthusiasts. And for much of its history Snap-On has offered credit lines to many of its customers from young apprentices setting-up the initial stages of their careers to well established firms. But today much of those wholesale bought credit-lines are used to under-pin and expand the coverage of its franchisees, operating single or multiple retail vans.

The 2009-10 stock rally driven by QE boosted America's economic and commercial sentiment, so assisting Snap-On's rebound, yet that has slowed of late and Q2 2011 looks noticeably slower than H1.

The Fed's 2-year held 0% policy looks to boost internal capital expenditure on plant and equipment for many light-engineering firms such as Snap-On, but the company's apparently large property portfolio which underpinned its historical growth and previous non-current asset valuations could well be viewed as requiring re-evaluation, especially so if as is suspected, portions of its manufacturing work could be increasingly contracted-out, thus reducing its production sites down to those of strategic importance and end-phase 'product-finishing' . This then reducing the considerable OpEx costs that absorb around 35% of Net Sales.

This then should boost domestic sales margins considerably, boosted again by the ultimately expected QE3 that may arrive in 2013 or so.

Importantly, there looks an opportunity to re-build the company's presence in 'Periphery Europe', especially so as heavy investments in plant looks to be post-poned so requiring additional expenditure on plant maintenance etc, but specifically the substantial loss of the new car market in the PIIGS countries mean their national car-parcs will age and so provide a fundamental base for trade-professionals, semi-professionals and home garage mechanics.

In this light the combination of a much deflated industrial and service cost-base coupled with American liquidity injections – probably in slow 'abyss-point' phased stages – means the high potential a renewed under-pinning of the economic foundations across 'Peripheral Europe'.

[NB Treasury Secretary Time Geithner's visit to the G7 conference in Marseilles and to Poland focused on Greek debt woes looks to verify this 're-creditization' thesis].

This picture has yet to arrive, but when it does, it will reflect the words of one of the olde worlde's yesteryear industrialists: Gianni Agnelli of FIAT. Commenting upon post WW2 Italy...”we'd had credit in United States, credit from the Bank of America, credit from the Import-Export Bank and the 'start-up' appeared”. History then set to repeat itself.

Snap-On then has an assured future in the US, has ongoing acceptance in Mexico and Latin America and by the above-mentioned action should maintain and possibly grow its hold on a 're-credited' Southern Europe.

But the pan-Asian and especially Chinese & Indian markets look to remain illusive given official & unofficial forms of domestic market protection toward domestic heavy-plant and specialist light tool-making sectors, thus future Eastern EM growth continues to look muted in the near and medium term, all the more so with the Australian economic slow-down.

But below the surface it looks to be radically altering its cost base, prescient for the Tools division, and moreover should be analysing new market opportunities.

One such is ts Blue-Point line, which could be made to expand across new hand-tool markets and perhaps even enter other spheres. Obvious is the bicycle dealer and home repair market - since blue is also the corporate colour of 'Park (bicycle) Tool', a US firm with increasing exposure in the country. Blue-Point could feasibly steal its thunder via direct competition or acquisition. Such a move would fit the recent bicycle trend across specific regions of the US which have witnessed 're-urbanisation' of city centres (eg Seattle, Portland etc), a trend which is set to grow. This would partially off-set the expected loss of sales to home-based car mechanics as such work becomes harder given car/truck sophistication. However, it may also be viewed internally and publicly as a retro-grade step, away from high margin business areas and obviously prone to low-cost competitors.

However, such companies with long histories, apparently deep pockets and typically loose supervision processes in the mid and lower quarters of the organisation are far more prone to 'parasitic losses' both in materials / stock and general labour-productivity. So whilst executives seek restructuring opportunities and managers execute the general operations, much should be done to ensure that portions of this good work are lost via less than scrupulous employee actions. One would assume that the high US and international unemployment rate would deter, but all to often such periods generate low morale and pilfering. Actions to halt such should be introduced, informing staff and investors alike to ensure a tightly run ship is run, and as importantly seen to be run.

This includes reporting of top-line revenues above Net Sales. This then would help to ensure that that a zero-tolerance corporate attitude, and share-owning attitude, is made clear toward lost, damaged and stolen products.

investment-auto-motives thence believes that the company will continue its low-key but stable operating basis, growth levels, operational profitability and share-holder returns. Thus acting very much as the 'defensive', 'utilities-esque' persona it long developed and sustained.

But the business model (as of course with many) is open to abuse, and whilst offering stable returns, could and should be made as transparent as possible. In age age of investor disillusion with old smoke-stack industries of the West and increasing concerns over automotive related investments – eg GM at $21 when listed at $33 – and the still large returns seen in EM regions, the Chairmen and CEOs of even legendary firms must demonstrate their company's worth to even what were previously compliant institutional investors.

Whilst QE provides the short-term boost, as ever corporate fundamentals reflecting industrial foundations ultimately create the future.

Here and now, it looks like Snap-On seeks the benefits of the Southern European commercial 'package deals' where its own Sun brand could shine.

Friday, 9 September 2011

Macro Level Trends – UK Socio-Economic Boost – London's Arabic Car-nival

The numerics of '9/11' have been engrained into the global mindset, from New York to New Delhi. Today, on the verge of the 10th anniversary, whilst conspiracy theorists will debate the matter for years to come, the atrocities of that day coupled with Iraq's apparent WMD's launched the global 'War on Terror'. Led by the US and accompanied by its closest allies across Europe and Asia., this defiant action arguably either exacerbated cultural frictions or stymied equivalent large scale attacks.

Nonetheless, other attacks – which induced their own numerological phrases - temporarily scarred the psyche of London, Glasgow, Madrid, Mumbai and New Delhi (now once again). Whilst the population of Iraq has had to endure an everyday war and watched the disintegration of their homeland.

Through the actions of the 'complicit few' and the 'reactionary mighty', towns, cities and whole populations the world over were gradually converted toward metal and physical 'fortresses'; fear generated rumour and speculation fed by the emergence of observational technologies which at times appeared verge on state totalitarianism. The people's of both the east and the west led increasingly insular lives, where the term 'globalisation' meant little more than cheap imported goods from China, streams of Eastern Europeans and Mexicans respectively entering Western Europe and the USA and the arrival of 'Bollywood'. Yet beyond the usual 'pros & cons', globalisation was also conveyed by nightly TV depictions of the fall of the twin towers, the 'Shock & Awe', 'the fight for Baghdad', 'the capture of hearts and minds', 'Abu Graibe', 'Guantanimo Bay',etc etc.

The world-wide cultural implosion was immense and massively damaging.

Christians in the Middle East arguably experienced the same kind of disdainful treatment and general distrust as became the 'demonised' everyday norm for Muslims in the West. Equally, within India the early-mid portion of the decade saw a renewal of societal 'fault-lines' that had taken 50 years to nearly re-coupled. Wherever a person lived, if his/her name and face was that of the 'enemy' the basic aspects of everyday life shifted immeasurably; from the limiting of basic opportunities to the explosion of casually accepted blatant racism; so emphasising the notion of self-reliance. Many (but not all) indigenous people became blind to their actual everyday experiences with 'the opposite'. True empirical personal experiences – even for those living in major metropolitan areas – accounted for little, mentalities shaped by subtle word-play, soft propaganda rhetoric, social expectations and a sense of belonging.

The cultural differences became a 'them and us' thematic played and re-played. It may have made individual nations artificially feel more cohesive, united and stronger but the fact is that most people were simply observational bystanders to the real events, though themselves 'sucked in' by perceptional re-shaping and a technically enabled panopticon, an apparent 'all seeing eye' within one's own country, down-played by the likes of 'entertainment' series such as Big Brother. Ironically whether an Al Qaeda operative in the mountains of Afghanistan or a morning commuter in Birmingham, the personal-world was/is lost via the 'eye in the sky' military drone and city-centre CCTV. So simply by virtue of your name not 'fitting-in', that morning commute and indeed possibly whole working day made a person feel like a watched outsider.

[NB To those people their 'inside-outsider' experiences will probably never be forgotten and it is testament to their personal and group tolerance that far greater social 'spill-overs' have not indeed occurred. For ten years, by indigenous people and state alike they were made to feel like the 'enemy within' when perfectly innocent].

The Orwellian age certainly came. With it a (wrongful) near mass acceptance of the private becoming blurred with the public domain. In times of crisis national security does indeed necessitate greater observation of the populace. Yet after WW2 Churchill instigated the withdrawal of the wartime British identity card; and it should be hoped that similarly in what now appears a far less threatening external world that the costly apparatus of state security too can be gradually but dramatically scaled down.

Today, ten years on from that fateful day, the western world has been forced to undergo a tremendous re-shaping of itself, society additionally moulded by the long-reach after-effects of the 2008 financial crisis. As part of that broad-brush economic outcome clear and present dangers have surfaced in the form of the inter-connection - indeed seeming mutual dependency - between sovereign/public and banking-sector funding. Western household purses and national purses deep in the red, the re-capitalised banking purse is still viewed as extremely fragile and regulatory reforms chided as extra burdens.

Three years ago at the collapse of Lehman Brothers, certain 'backstop investors' rallied to the call to save the day. Warren Buffett of course stepped-in at Goldman Sachs - for a price. Whilst previously in late 2007 Citi Group was underpinned by Abu Dhabi Investment Co. shareholder, injecting $7.6bn; the second time it acted as a white knight within 10 years. Of course Buffet & ADIC recognised the long-term benefits of their actions, yet much of the (average) public would have been astounded to know that it was a mix of Arabic good intent and a willingness to wait for returns in the long-run, that saved the day in the midst of the ongoing 'War on Terror'.

In a similar manner here in London, the past 2 to 3 years has witnessed a marked surge of inflow of Arab monies from the private leisure and spending habits of elite families largely from the United Arab Emirates. An inflow that has helped to keep the wheels of the city's central area local economy spinning, which whilst somewhat hidden by the economic buoyancy of 2009 & 2010 became very apparent throughout the spring and summer of 2011.

It appears that with the general UK economy and financial services linked London economy markedly loosing traction, there has been a very real and meaningful effort by Arabic families to spent a lengthier time in London and as a by-product spend greater sums of personal wealth. This won't have been overtly recognised by the tourist or casual observer, but for those living and working in Knightsbridge and surrounds, the usual summer 'Arab Invasion' has been even more obvious this summer.

Obvious are the sightings of groups of Arab ladies in the Qatari owned Harrods, aswell as Harvey Nichols and Selfridges. Dressed in black or partial black: full covering Hijab dresses for the older and more conservative to simple loose khimar headscarfs for the fashion-conscious and more liberal younger generation - eager to show-off both their figures and designer clothes. With either themselves or chauffer-assistants carrying what appear as copious shopping bags on a daily basis; from the shop to the awaiting limousine to the London house, apartment or hotel suite. These big-ticket items bought on an almost daily basis for themselves, husbands, friends etc, all of which boosts store sales and pays salaries and overhead.

[NB There have typically been 'bemoans' from locals about the Middle Eastern arrival, typically stemming from the changed feel of a store compared to winter clientèle. Yet it should also be remarked that some Arab women can be 'short, sharp and discourteous', effectively looking down upon retail assistants, aswell as holding up traffic (esp black cab drivers) when crossing local roads; this typically an intentional sign of class/wealth de-markation. This of course may be the cultural norm at home especially with one's own servants, yet unfortunately earns a level of disrespect in London. Thus as ever, the guilty few 'indict' the well intentioned and well behaved many].

Less obvious are the spending habits of their teenage children, who whilst periodically clamouring over expensive store items are more likely to be seen effectively 'playing' around the area and in Hyde Park. Their favourite forms of transport being the Boris Bike scheme, upon which they ride seemingly 24/7, renting the hi-priced pedal-cabs for fun and errand trips and taking black taxis for the trip into the West End and back, aswell as a constant fascination with the 'peddlo' boats on the Serpentine lake. The per hour spend rate of these youngsters would undoubtedly shock even the most generous UK parents, but again that money for local services is going to TfL, the pedal-cab companies whose own riders recognise the tipping benefit of providing Arabic rugs and music, the Royal Parks franchisee providing the boats and a plethora of officially licensed black cab drivers who have seen a marked decrease in taxi-rides from domestic customers private and commercial.

(Often loose from parental restrictions or away from home, some children may have a tendency toward what will be viewed boisterous behaviour. The two most prolific are dangerous cycling amongst the younger teens annoying drivers and pedestrians and spitting to the floor amongst the mid teens, seemingly a combine of Arabic social nuance and the influence of urban street culture).

This more fractious side of the 'Arab Invasion' has been well aired, from a weekly anonymous column writer for a respect weekend broadsheet - providing a second hand account from his clients - to the locals and tourists who populate a near=by pub. Some locals even think it drole to intentionally leave empty packets of Camel cigarettes strategically placed – a far more childish act by those that should know better when compared to the unthinking escapades of peddling Arab youth.

Yet for all the accidental faux-pas of the Arabic community they have not only helped prop-up the central London economy, the influential Al-Thani's have demonstrated their interest in maintaining and boosting London traditions, so as to add to the social fabric of the city.

Two Harrods' related transport elements 'old' and 'new' seek to maintain and develop local tradition.

Firstly is the iconic horse-drawn delivery van. Although it may well be 'part & parcel' of the store owners 'obligations' (very possibly written into the contract of sale) nevertheless, the franchise holder who stables the beautifully kept horses 'plys his wears' 8 days a year adding immeasurably to the grandeur of the SW1 surrounds, providing a truism to the nearby road of South Carriage Drive, aswell as of course underpinning the character of the Harrods brand.

Secondly, since April 1st 2011 has been the creation of a Harrods' London Tour Bus, which unlike the usual modern tour buses uses a classic Routemaster model to evoke the spirit of London, a model now only seen on the 2 London Heritage routes (Nos 9 & 15). Three buses operate in conjunction with Premium Tours and their green and gold livery and open top deck make for a 'sterling sight' around town.

However, most obvious aspect of the Arabic annual arrival is the influx of imported super-cars and limousines bearing Arabic script registration plates. These tend to accompany other London-housed vehicles kept all year round, the UK cars typically wearing personal number plates relating to the car model or owner, or a 'Q' identifier in the middle of the plate representing 'short-stay' registration or a 'D' identifier which indicates diplomatic issue.

However, even by previous annual standards, 2010 and 2011 were significant years for the amount of Arabic owned cars brought to London.

In essence, a true 'Car-nival'.

Reports estimate the value of those imported cars in 2011 alone reached £80m, this a very real possibility when one considers that given that models such as the Bugatti Veyron are priced at £1m+ each with special editions £1.3m+. Add the large number of various personal cars, family sedans & 4x4s and staff cars aswell other items such as motorcycles and 'toys' such as quad-bikes etc: the overall value is sizeable indeed.

Whether exaggerated or not, the very fact that the cars have indeed been transported from those GCC countries to the UK has meant significant income for those companies which offer premium vehicle transportation services.

Moreover, when inside the country the cars typically require scheduled valeting and with the super-car models typically undergoing 'top-to-toe' servicing and parts from respected UK dealers across: Rolls-Royce, Bentley, Aston Martin, Koenigsegg, Ferrari, Lamborghini, Porsche, Mercedes, BMW & Audi.

Furthemore, a plethora of black (typically security staff) Range Rovers are strewn around the SW1 vicinity, cars which may dominate the street-scape elsewhere become liitle more than an (intendedly) anonymous backdrop to the league of extra-ordinary machines.

This year offered the following, no doubt only a fraction amongst a larger contingent
Been more visual play than other years

Two Bugatti Veyron's (including a L'Edition Centenaiire, its white pearlescent paint a nice reference to Gulf pearl divers of old)
McLaren-Mercedes SLR Convertible
Rolls Royce Phantom convertible (matt white)
Two Maybach Coupes
Two Maybach 57 Limousines
Two 'Gullstream' adaptions of the Mercedes SLS by FAB Design
Various Porsche GT 2 & 3
Various Bentley Continental Flying Spur saloons
(the most entertaining of which appear in matt pink body-finish, see Post Script).
(investment-auto-motives nick-named these the 'Flying Painted Ladies' in a nod to the Ealing Comedy film)
Various Porsche Cayennes

Conspicuous by their absence – at least to investment-auto-motive's – were the Al-Thani's own Royal fleet of powder-blue cars, its Koenigsegg CCXR and Lamborghini Murcielago which caused such a stir last year. “Discretion...” no doubt seen as “...the better part of valour”.

[NB Conversely, unlike the 'Flying Painted Ladies' it must be said that some of the highly adapted vehicles that have undergone expensive but insensitive cosmetic alterations do border the ungainly and gaudy, the 'designwork' less than sensitive to the original design intent of the cars. However others, such as one Cayenne witnessed (in white & black) far more restrained and thus pleasing].

Yet the 'Sloane Street Pageant' is not all about imported foreign 'bling' vehicles. The periodic appearance of a classic British vehicles creates a counter-balance, whether in the form of a local Rolls-Royce Silver Cloud III, Series 1 Jaguar E-Type, Speed 6 Bentley, Alvis TE21, or even the stark shape of a Series 1 SWB Land Rover. There is even a retrospective conversion of a stock Mini adapted into a mock-Radford Mini.

In its own subtle manner of less conspicuous modern-age consumption, there is a local Bristol Fighter in orange, which elicits a 'Pavlovian' head-turning reaction.

Of course it was precisely amongst this vehicular throng that McLaren Automotive sited its flagship London viewing room space at 1 Hyde Park: positioned the top of Sloane Street in the commercial and touristic heart of SW1.

All these cars then make for a wonderful contrast and compare exercise, and add a layer of automotive interest to the equally mixed architecture. In effect, a 'rolling showroom and museum' which allows interested passers-by to take a close-up viewing not available to most; a wonderful combination of the London MotorExpo, Beaulieu Motor Museum and Salon Prive.

A left-leaning oppositional argument posits that during this dour economic time, such display of hyper-consumerism may appear out of kilter and possibly insensitive. Indeed a true realisation of Guy Debord's 'Society of the Spectacle' (1967): in which “the history of human life can be understood as the decline of being into having, and having into merely appearing...the historic moment in which the commodity completes its colonization of social life”

From the philosophical standpoint, the case (by Debord) is well made, and he effectively posthumously states “j'accuse” to the participants and viewers of the 'Arab Car-nival' alike.

Yet this is also precisely why this informal everyday summer pageant must be viewed as playing a far more important role than simply one of 'peasants ogling the elite'.

The parked and moving vehicle processions not only add a much needed up-beat relief to Londoners themselves, with colour, glamour and sophistication; but add an expected 'London-zing' for those UK citizens visiting the capital on holiday or business.

Whatever age and whether from Southport or South Yorkshire they consciously or sub-consciously seek to immerse themselves into an upscale experience, one that otherwise for the most part only tends to exists for the majority of the population in a very manufactured form via TV or the local premium gym or golf club. Not to say central London is the only monopolistic enclave of wealth and sophistication, of course most cities and counties have their own special quarters, just that London given its size and central draw should indeed match the oft hyped expectation.

And in this manner the Arabic supercar owners are presenting a form of street-scape theatre.

However, there is also a far more serious aspect which relates to Britain's own industrial future.

investment-auto-motives believes that the vehicles of the 'Arab Influx' offer an automotive 'dream-scape' which has for the most part been lost, especially to the young.

The previously rising wealth of the nation allowed families to place new or nearly-new cars on their driveways. Hence, the yesteryear lived desire for the luxurious, sporting and glamorous has been largely lost, satiated (even now) by credit-boosted sales incentives and the creep of premium badges into compact car territory. Equally what was once behind the hallowed glass of the smart dealership and made all the more remote by the wait for a driving licence, has become 'available' through the virtual (ie hyper-real) video game console and produced TV shows and music videos. Ever more involving driving games and the cyber-ability to instantaneously upgrade the model 'owned' on screen. In cyber space everyone is driving an Enzo or Zonda. Although physically unreal, the game experience mean that the teenager (indeed now the 20-30-something 'kidults') partially feel that he/she has 'been there'. This perhaps a substitutional necessity because real-world ownership or involvement with an Enzo or Zonda feels so remote. More so than that Jaguar or Rover saloon sat behind 1960s plate-glass. Thus whilst the hyper-real evocation of supercars has both raised their aspirational quotient, the process itself only serves to demonstrate that the real is in reality far further away; hence reliance on the superficial..

The real-world 'Car-nival' then makes the typically virtual truly tangible..
And in a way this 'materialisation' of the virtual could be a future consumption trend that affects our socio-economic foundations.

In a very unstructured notion, investment-auto-motives believes that - in the Jean Baudrillardian sense - whilst in the 20th century, cinema, TV, gaming etc blurred the subject (person) and object (screen) boundaries through a one-way absorption of person into the screen, the 21st century could see a reversal of the process. Whereby that which is apparently pluralistic yet ephemeral on-screen becomes - through a process of personal decision-making – leads to a singularly chosen or designed virtual item that is assembled to produced a tangible 'self-designed' product &/or service.

It of course already happens in a manner with internet-based car retailing, colour choices, decal graphics and options & accessories can be built-up on screen and viewed before placing a personal order system; though of course it represents a small percentage of sales compared to the usual inventory-based sales system.

But such methods have been emerging, and the likes of ebay, on-line retailing, open-source networking, mass-personalisation, and even hands-on make-do-and-mend attitudes to personal repair and re-creation those trends which combined are the component parts of this seemingly emerging new era. When coalesced, a future 'Arcadia' developed by social and technical structures ranging from: altered vintage clothing (enabled by the individual) to localised character batch-built production (enabled by 'associate' employees) to rapid prototype produced items (enabled by advanced systems & materials).

This a reversal of contemporary 'throw-away' consumption, allowing for greater media-enabled participation of the 'discerning' consumer. Thus a future western world of less rabidly bought and consumed 'clutter', and more infrequently purchased but better considered and detailed 'special pieces'.

The supercar represents exactly this, akin to Savile Row tailoring: the limited edition or bespoke. And whereas Roland Barthes gave the (then) modern car [ie original Citroen DS] the mantle of representing man's supreme achievement by stating the 'Car as Cathedral', that honour now goes to the Supercar. NASA of course surpassed the DS by placing man on the moon, but the Bugatti Veyron supposedly has greater (self regulating) computing power than the Apollo missions.

Thus the Supercar espouses and marries both technology and craftsmanship; the Morgan Aeromax upholding that maxim at one-tenth the price of the Bugatti Veyron.

Unlike most modern cars, they are items which not only absorb the emotion they absorb the intellect, something that supercar brands have long appreciated and traded upon. You won't here a Vectra, Mondeo, Megane or 308 driver discussing vehicle mass-distribution, pendulum forces, the importance of unsprung weight or indeed the technical heritage of their brand, but the like is learned and passed-on by supercar and sportscar drivers – whether the pub bore or not is another matter!

For most 20-somethings, 30-somethings and definitely 40-somethings - unless financially able to afford to join the supercar club – personal interest diminishes to little more than a passing interest on a TV programme or car magazine; the necessities of 'making ends meet' and 'getting by' instilling the 'dis-illusionment' of adulthood.

Conversely and critically though, for unencumbered, imaginative youngsters & teenagers the visual and technical exoticness of supercars can be wholly absorbing: items like gull-wing doors, air-brakes, exposed-view mid-mounted engines, over-sized brake callipers, gas-filled tyres and general packaging-led (or not) unconventional aesthetic and styling.

The informal 'Arab Car-nival' then is important precisely because it wows the 'wide-eyed' little boy or girl and intelligently enchants the teenager who views a Veyron, Aventador, MP4-12C, SLR, Vantage or 599. To them it is not purely as a spectacle, as is to the adult, but something spectacular.

All this makes for a wonderful day out and memories for children and parents alike, and for car-mad and tech-savvy teenagers & 20-somethings wielding camera-phones and video cameras, a type of automotive safari seeking out the next 'catch'.

This all undoubtedly adds to future generation's interest in vehicles, engineering and technology

And it is here that such cars – scientifically advanced in so many ways – should be viewed by policy-makers and educationalists as central hubs for STEM subjects learning. These cars and brands can acting as an enjoyable intellectual portal into various sub-disciplines from general physics to biologically inspired engineering, to materials science & chemistry and nano-technology and so far beyond.

Furthermore, business studies and perhaps even the oft dry realms of academic economics could be made real by reviewing and considering the commercial aspect of supercar manufacture and retailing & after-sales service.

Cars and supercars in particular should be better used as case-study materials, and much of the modern scientific and commercial world made accessible through these 'entry portals' for young minds.

[NB This is why investment-auto-motives was so keen that the educational remit of the BBC retain its links with Formula One motorsport even after the hand-over of race coverage rights to Sky].

Simply by enjoying and displaying their expensive and enthralling cars, the Arab gentlemen (and indeed many ladies) are very probably already having a marked effect in shaping young minds.

And is is by virtue of their innate level of wealth that – whilst not careless - they are not overtly protective of their vehicles (as so many regular premium car-owners tend to be, keeping the car parked away from crowds and the possibility of minor damage). As a result the cars are 'available' for people and especially children and teenagers to get close to them; the very antithesis of the barrier-defended motorshow stand in which only the select few can walk up to the cars.

Thus whilst most viewers show respect to car and owners – mostly out of positive 'shock & awe' – those small children who are unaware yet still enthralled are not lambasted by owners as hands (sticky or not) roam over the paintwork. In short there is not any of the stuffiness or intentionally inferred class-divide on the streets of SW1 as would be found in other supercar environs.

By far the best thing has been the humour and goodwill is accompanied the cars, infact created by the cars. So it is little surprise that whilst creations like the afore-mention Bentley 'Fast Painted Ladies' may be viewed as ranging from unorthodox to 'not the done thing' to downright tacky, the fact is that cars reflect the 'entertainment value' of the light-hearted Arabic 'show'. Moreover, owners have shown themselves to be more than willing to have their cars photographed by fans and tourists alike, and today (perhaps unlike the past) try to both entertain the crowds whilst typically trying to stay within the bound of the law.

[NB whilst there have been undoubtedly a few moments of over-exuberance, the owner drivers have during day-time hours at least been largely courteous drivers keeping well within the general driving laws. There appears to have been a year on year evolutionary change in attitudes, for the far better].

Whilst there may be a few bad instances it seems that as a group their has been a commensurate effort to try and dispel the image of the careless, irresponsible Arab playboy who throws money at problems to make them disappear. Instead today wanting to contribute to the look and feel of Sloane Street by way of a glamorous parade of cars that well match the glamorous parade of shops, and some of the GCC's most high profile investment pieces.

The emergence of this summer-time show did not escape the notice of PSA's senior management when they had the road-going concept car 'GT by Citroen' built and paraded around Kensington's 'Arab-circuit' last summer. This then is an understandable PR act by Citroen, so as to try and elevate their brand perception through on-street demonstrate directly to high-net worth shoppers and tourists alike.

But it would indeed be a great shame if the 'Arab Car-nival' were to be commercially high-jacked by automakers vying for public profile. Such efforts over-done only serve to ultimately undermine the enjoyment of the social phenomenon that has emerged. A direct comparison to say that of the Notting Hill carnival is plainly ridiculous given the Afro-Caribbean event's scale and varied demographic, but the notion of spoiling the general organic spectacle with obvious commercial overtones is prescient. Fortunate for Citroen that they arrived early with their visual coup, and by doing so re-animated Barthes phrase.

So the annual car-nival did indeed come to London, and still can be viewed albeit in a more muted manner as the GCC visitors return home now that temperatures have become more amenable.

But for those who don't live or visit London, investment-auto-motives hopes the following youtube clips offer an enjoyable insight.

Let's hope for a similar show again next year....”inshallah!”. After all, the London economy may very well still require such 'off-set spending' from the GCC, and more importantly, such a wonderful melding of (previously distorted) cultures is undoubtedly all for the good.

Let us then hope, whilst the victims of 9/11 and Iraq will never be forgotten, the that everyday world should not be allowed to once again dramatically falter socially nor economically through inter-regional misrepresentation and so misapprehension.

Post Script:

The emergence of alternative matt-finish colourways (eg pink) have been deployed to 'cock a snook' at the now very passé black matt re-spray treatments which came into being about 4 years ago, then trickling-down into the wealthier suburbs. Here, the typical example is that of an older premium car with personal plate and matt-black colour used to 'pep-up' the vehicle and disguise its real age. As such it has become a distinguishing feature (economic indicator) of the declining 'arriviste' hit by the financial crisis.

Friday, 2 September 2011

Macro Level Trends – Iran Autos – Shifting Sands in the New FDI Hub of the Middle East

This month UNCTAD (the United Nations Conference on Trade and Development) presented a report which stated that Iran had experienced record FDI figures of over US$3.6bn in 2010, this then the reverse of generally declining FDI activity across the west (as it shudders) and the east as it seeks economic 'cooling' to avoid overt inflation and minimise the value-gap with the west. Moreover, it contrasts with the decline seen in GCC countries such as Saudi Arabia, Kuwait & Qatar.

Iranian FDI grew by approximately 20% in comparison to 2009's $3 bn, this though a comparative 'top-up' relative to the overall 140% growth injection across 2008-2010, from $1.6bn to that $3.6bn. 'On the ground' analysts suspect that a sizeable portion is derived from the Iranian government bringing back its assets from foreign shores as opportunities shrink. In a global FDI arena worth $1,243bn in 2010, that $3.6 appears but a trickle. Yet look more closely and the re-stabalisation of Iraq (itself an obvious FDI attractor) plus new dynamic 'Arab Spring' mood across MENA sets a revised economic template for the whole region, one into which Iran is already well connected and seeks to be ever more so.

[NB In total $11.9bn came from abroad: that $3.6 bn as FDI, plus $7.4 bn in the form of international commercial bank loans, plus approximately $900 million consisting of loans and projects from international development banks].

Given Iran's central geo-political location, historical background, strong national identity, size of its population, the country has always maintained what appears as an independent character. That character has in turn been supported and lambasted by both western super-powers (old and contemporary) and that of its northern 'neighbour' Russia and the defunct USSR.

Thus, from an external perspective, political dealings for those superpowers that had, have or intend (ie China) to regional influence have been complex. Oil of course has been the prime interest of outsiders, and historically no matter which the country's leadership (faithist or administrative), from the early 20th century external interests in the oil fields have created a subtler though arguably more powerful near-east alternative to the far east's 'Great Game'.

In our energy hungry world the west's high hopes of a truly green, minimal carbon foot-print world have been dashed. The 'Fukushima' event created concern over nuclear energy generation, plus the retraction of government subsidies toward 'late break-even' eco-projects, mean that oil (and fossils fuels in general) in reality remain the world's staple energy source. Of course there will continue efforts to 'unhook from oil' for the reasons of national energy security and emissions reduction – and investment-auto-motives philosophically supports those which are indeed truly viable; such as hybrid powertrains - but for most, and the world's motorists in particular (even painting the mass hybrid adoption picture in the west), petroleum will remain as the primary energy source.

For those countries that have generous oil reserves and pumping and refining capacity, the commodity inevitably retains its 'black-gold' status, the prime issues leaders then face is how to simultaneously 'spread the wealth', protect that wealth via SWF's etc, and critically educationally mould populations so that broader associated-oil and non-oil sectors can be developed to grow the economy and thus living standards. And by doing so allowing their country's to 'plug-into' the global economy.

The question of 'indigenous character' and 'external influences' have perhaps had greater impact on Iran than any other country in the Middle East. Unlike its much smaller Emirate counter-parts with greater western influence & allegiance, or indeed those smaller MENA countries with arguably more entrenched Islamic ideologies, because of its position and size Iran has historically been able to both retain its own Persian (vs Arabic) cultural character, whilst also seeking to create its own path forward in a somewhat unique manner. Yet it also recognised after 1979 that it would need to create an alternative future for itself whilst maintaining core beliefs so as to become attractive enough to court FDI, economic know-how and technical transfer from other leading nations, from both the west and the far east.

So whilst it remains represented as a pariah to areas of the west, and has in the past seemingly stood alone within the region, the sands of time have shifted and so too external perceptions of the state; especially so as eastern interests have become more obvious. With this emerging change so medium to large sized commercial opportunities and interests become increasingly available; albeit it by what seems a slow and erratic process given the existence of prevailing cautious and optimistic attitudes.

There is perhaps no better example than the decades long interest by successive leaderships in developing the indigenous automotive industry. Recognising its fundamental power to transform a national economy through both the physical liberation of its populace for both trade and leisure purposes, but as importantly to assist in the technical, scientific and commercial education of its people. The auto sector, as with the oil sector, has been no less than a powerful 'vehicle of change' for Iran.

In recognition of this, in1967 the government created IDRO (the Industrial Development & Renovation Organisation [of Iran]), as the prime state-led arbiter. Today it still holds a powerful sway over much of Iran's primary, secondary and tertiary industries, yet has also well understood the need for sector specific privatisation programmes to attract private and foreign funds to as to modernise and grow industry.

The original auto-sector 'seeds' were Iran Khodro (IKCO) in 1962 and SAIPA (Societe Annonyme Iranienne de Production Automobile) in 1967.

IKCO started with the licensed production of the Rootes Hillman Hunter called the Paykan, essentially the national car' which ran for 40 years, replaced in, 2000 by the all new Iran designed Samand & Soren based on the Peugeot 405 platform. Its successor the 'Dena' is reported for release in 2012, and has close cosmetic overtones to the Mitsubishi Evo.

SAIPA was formed in 1966 and undertook similar licensed production with the Citroen Dyane & Mehari and Renault 5 & 21, adding the Nissan Junior pick-up, various models sourced from Hyundai-KIA and Citroen's Xantia; the latter using 90%+ locally produced components. By 2000 the company had created its own model the Caravan MPV. Also in 2000 SAIPA bought 51% of Pars Khodro to include the Citroen C5, the new C5 and under a JV arrangement (Renault-Pars) the Renault Logan (known as the SAIPA Tondar 90). In 2008 SAIPA released its own 231 'national engine', followed by the self-created 'Tiba' C-segment car intended for 200k units per year production rates.

Pars Khodro was formally established in 1967 having previously build GM products as a contract manufacturer and then licensing America's AMC's Rambler until 1974. It also built the AMC Jeep under licence and formed a JV with GM to produce several GM products under the Chevrolet badge; the 1981 Revolution cutting commercial ties with GM. Thereon the company took on Nissan's Patrol, and in 1997 acquired the Renault 5 rights from SAIPA. 51% of its share-hold was sold to SAIPA in 2000.

Though the notional 'seeds' of the sector, and have indeed created a full-spectrum supplier base, today the combined capacity of Iran Khodro & SAIPA produce approx 95% of all Iranian vehicle capacity. Conversely, private Iranian manufacturing companies have been established in the past but unless of a specific low-level nature, have typically had limited life-cycles due to dependence upon a single licensed vehicle (with its own competitive life time-frame), or in instances have been brought into the government controlled fold.

Between the major-scale government linked companies and the small-scale privates are the Iranian-Foreign joint ventures.

Like other protective and arguably insular states it has sought to be the prime player in the drafting of FDI trade conditions and general commercial agreements. As such – as with any emergent country with economic agents drawn from the power-base – the framework for market access has been that of Joint Venture deals. Those foundations and learning then allowed Iran to nurture its own 'sovereign standing' as national manufacturers were created using a mix of directly purchased foreign parts, licensed manufactured parts and internally developed skills and manufacturing.

Aspects of this learning (often enforced via trade sanctions) promoted the creation of 'hybridised' or 'Frankenstein' products: creations stemming from either a need or opportunity to engineer vehicles from 'mix and match' systems, typically the mating of separately designed and sourced bodies & powertrains. For example, the P.K. was a car made by Pars Khodro P.K. (2000 - 05) used a Renault 5 body and KIA Pride engine, whilst the Iran Khodro Peugeot ROA used a 405 body placed upon on the chassis/engine of an older Paykan.

Even with internalised learning, it was recognised that the quality of domestically made components and whole vehicles was falling behind the quality standards being set by international companies. To aid further learning about world class standards Iran relaxed the importation duties on both foreign made parts, and indeed whole vehicle imports. In 2003 a 10-year ban on vehicle imports was lifted with importation duties reduced from 147% to 90%. In FY2007 US$ 2,058,016,004 worth of all types of motor vehicles has been imported to Iran, with a 270% growth of imported passenger cars between 2005 to 2008.

It is hoped that the learning absorbed will further domestic design, engineering and testing capability to ultimately export vehicles further across the region than has been the case thus far and with ambitions further afield relative to EM countries. In this mould the idea of the 'world car' project grew, using well proven mechanicals from originally French licensed sources (PSA-Renault) to create or rather re-engineer a model suited to the demanding suburban and rural roads of EM countries. However this project was effectively overtaken by Renault's own efforts to recreate Dacia using its own cost-absorbed second-generation platforms, the success of Sandero etc models plain to see – even so inside Iran.

Today there are over 25 indigenous and foreign JV automotive vehicle manufacturing concerns, excluding the broad supply chain that grew up to serve the assembly plants and the periodic emergence of niche car producers targeting the small but growing leisure car market

The major entities whilst typically unknown to those outside Iran are cornerstones of the economy and as such whilst have undergone privatisation programmes of their own, the government with its typically 25% holding stakes still exerts a great deal of influence over the activities and destinies of those listed companies.

[NB non-comprehensive by nonetheless lengthy listing of automotive-sector companies is provided as a Post-Script addition].

The liberalisation of Iranian capital markets through the slow but locally powerful development of the 1967 TSE (Tehran Stock Exchange) [aswell as other initiatives], has been a critical driving force in the industrial and commercial development of the country. Today the TSE comprises of over 350 companies, its full market capitalisation in the region of US$ 106bn and a p/e of 7.3, up measurably from the 5.5 in 2009, or indeed 4.1 the preceding year. Unsurprisingly in direct relation the average yield given has dropped from the highs of 14.5% in 2007 and 15.8% in 2009.

Unlike many other MENA exchanges the TSE is open to foreign purchasers, and the recent inflows of cash would explain the softening of the notional 'profit spread' between p/e and yields.

The stock market itself saw bullish rises over the beginning of the year, in excess of 22%, however, Iran Investment Monthly (published by Turquoise Partners) highlighted the drop-off in market confidence in May as a result of political unease connected to Iran's ongoing nuclear ambitions. June saw a continuation of constrained and cautious activity with a month end 4% drop before pulling back 2%. July experienced a 2.5% gain on the back of sustained oil & commodity price confidence. Trading was also muted in the run-up companies presented their (Iranian calendar) Q1 earnings results.

But more importantly for domestic and foreign automotive investors that general May downturn appears to have been exacerbated by the recent pseudo-political interventions in the automotive industry.

Parliament has formed an investigation group to scrutinise the type and level of company ownership transfers within auto-industry over the past year. Reports suggest that approximately 40% of the ownership has changed as a result of the trades by the major shareholders of Iran Khodro Co. and Saipa Co. Parliament suspects that the companies had engaged in a share repurchasing practice via some of their subsidiaries. Such moves then, if proven (and if indeed the case – and not simply rumour-mongering to depress share prices, which itself is unethical) vehemently oppose the liberalisation of Iran's industrial sectors through ongoing privatisation plans aimed at reducing state ownership. Parliament also repealed a 5% block transaction of Iran Khodro Co. during May which provided additional uncertainty for auto-sector investors.

Market observers will be seeking a demonstration of political will which - if proven – admonishes and punishes those managers and executives were involved. Moreover, from a regulatory perspective there looks to be a need to close any administrative loop-holes that allowed the cited stock-repurchase to occur.

The industry was also impacted by the governments decision to de-value the Rial by 10% or so in June. Whilst good news for commodity exporters, seeing a growth in demand, the sizeable quantities of foreign sourced components then created a very real headwind regards input prices.

For the near-term a cloud has indeed appeared on the vehicle sector's investment near-horizon.

However, this apparent expose also should allows for re-focus on the Iranian auto sector by investment professionals around the Middle East and perhaps further afield, equities investors and private equity companies alike themselves de-constructing the sector to identity 'value' or 'growth' auto companies, aswell as mapping-out the sector to identity matched synergies for M&A.

Looking to the mid and long-term and the Iranian picture looks increasingly improved year on year.

Though the government has export plans for its motor vehicles, the domestic market should see steady growth as long as the recent unpalatable inflationary environment can be contained. From the societal perspective of the macro PESTEL order, 2 high profile events have and are taking place which will provide a medium term and long-term boost to general consumerism and personal transport needs and demands.

The first has been the completion of a $830m shopping mall project in Shiraz (build by the UEA group Royalstar). The Fars Shopping Complex houses 2.500 individual shops (the world's greatest concentration) over mall in terms of the number of shops over 420,000 sq m of retail space (the world's 4th biggest). The project also includes a luxury 5* hotel, an amusement park and convention and exhibition centres.

This landmark complex sets a new. higher bar for Iranian consumerism and commercialism, the social ramifications will be to draw more people into the realms of aspirational lifestyles and enhanced shopping and mixed-venue experiences. Importantly it will add additional 'upscale colour' to the fabric of Shiraz's and regional society, the raised expectations of which will perpetuate a 'keeping up with the Sharifi's' mentality. The aspirant shopping mall car park in turn acts as catalyst for attitudinal outlook and expectations regards car ownership: its status-seeking and replacement cycle.

This then is a commercial enterprise giving a basis for regional-influence.
On a far bigger national basis is a state sponsored home-building ambition.

The ambitious Mehr Housing Plan seeks to build around one million affordable homes per year that could have real impact on the domestic car market. The government has budgeted for a vast amount of resource (liquidity and man-power) to this plan and construction has begun at a rapid pace. It is expected that the effect on the car market is three-fold:

1. It is 'shovel-ready' work for a broad span of the workforce, labourers to managers, all of which enjoy the psychological comfort of stable income, thus able to either trade-up in used car market or indeed buy new.
2. The plan has shifted the norms of housing supply curve, the additional capacity already having a draw-down affect on house prices; which in turn provides greater disposable income for singles, couples and families which can be used for new vehicle purchase.
3. the built houses will encourage those new house buyers to change their lifestyle by incorporating either their first car, a trade up or new car purchase. New homes tend to psychologically propagate replacement of personal vehicles aswell.

[NB it should be recognised however that the naturally more cautious, conservative and debt-averse peoples of Iran and the Middle-East are not as easily influenced by the notion of aspiration, so the 'lifestyle' changes in car ownership prompted by shopping habits and new homes should not be directly compared to that of historic western patterns. There is an effect, but undertaken with greater consideration and less urgency. Moreover the present high inflation rate will deter any near term debt-enabled private automotive purchases, the May CPI rate being 21% YoY].

Even with this innate caution, the EUI forecasts that new car registrations will reach 1.8m units in FY2011 and nearly 2.0m units in FY2012. (Having risen from 1.3m in 2007, 1.45m in 2008, 1.56m in 2009, 1.67m in 2010.

These social factors then provide the basis of demand, but currency stability issues still need to be addressed to provide the foundational confidence to enjoy Iran's new era.

To this end, the Central Bank of Iran has presented plans for currency reform so that a new denomination replacing the Rial (and its plethora of zeros) may instil more confidence both internally aswell as on the global stage, seemingly in a bid to provide greater cross-border currency flows than has been the historical case, though it comes with a risk of short-term inflation, as seen with the introduction of the Euro and amended Turkish Lira. The change-over to a more Arabic name will need to be paralleled by monetary and fiscal initiatives to create a sound platform, with the seeming ambition to create a currency parity between the New Rial and US$, less so to influence cross-Atlantic trade than to present an equivalent basis from which to improve commerce across MENA.

[NB It should be noted though that previously the necessary cross-border currency FX transactions represented a sizeable slice of the Iranian financial sector, given the amount of public and commercial inflows/outflows, and so any reduction in this activity must be off-set with growth in new financial service provisions].

If achieved real progress will have been made in instilling domestic and indeed regional export confidence.

One governmental element however may cause political and so policy and policy execution stability. That is the apparent philosophical gap that has appeared between Iran's Supreme Leader the Grand Ayatollah Ali Khamenei and the President Mahmoud Ahmadinejad, reports suggesting that the former is dismayed by the level of power being wielded by the President and political associates. With one year until the country's President elections the kudos accrued by the President for his home-building plans and staunch defense of Iran on the global stage have indeed made him a nation favourite – indeed Middle Eastern favourite – but a political disruption could occur (with possible social consequences) if it is felt by national elders that the role of Ayatollah has become diminished, which itself appears to go against the realms of Iranian Islamism.

For now however, the political waters looks relatively calm with greater focus recognised and demanded on social and economic issues, including presumably the future size, shape and role of the Iranian auto-industry

In 2009 the researchers Javad Abedini and Nicolas Peridy released an economics-orientated report titled “The Emergence of Iran in the World Car Industry: An Estimation of its Export Potential”.

The well researched report highlighted that over the previous 10 years Iran had indeed emerged as a major car producer, but due to delays in economic reforms, domestic vehicle exports have not increased as much as local production and consumption. The research used various academic modelling and calculation techniques such as: data sets of exporting and importing countries, sectoral variables (production, tariffs etc), original variables (expectations, hysteresis), a decade time-scale and 4 vehicle type production groups, “ new theoretical developments of the gravity equation”, Hausman-Taylor modelling and “dynamic estimators”...all to create an assumed empirical bilateral trade model from which ultimate export potential is calculated. An undoubted academic achievement demonstrating the power of broad-reach multiple inputs to arrive at an apparently credible output result.

To quote: “The results show that Iranian the then current car exports are about 100 times less than their fitted values. This indicates that there is a significant export potential for Iran, especially toward India, China, Russia, as well as smaller neighbours: Turkey, Pakistan, Central Asian countries). As a result, Iran could become the major auto supplier in the Middle East. However, this requires the completion and success of ongoing economic reforms.

Given the nature of this very general weekly essay, investment-auto-motives has not viewed the intricate detail of the modelling process, and indeed praises the authors for its thoroughness in data capture, modelling procedure and recommendations for Iranian industrial and specifically automotive sector reform.

Infact, investment-auto-motives also agrees that Iran could become a far greater major player in vehicle manufacturing for export across MENA, Sub-Sahara Africa, CIS states and possibly EM Latin America, since these regions large in both geographical area, political progress, economic development 'toward the western model' and demographic potential.

However, opposing the reports conclusion's, investment-auto-motives sincerely believes that Iran will not be able to ultimately export vehicles in large quantities to India or China.

Both have already become respective EM champions within small car production and medium car production,and their state and conglomerate owned truck, bus and van companies are continuing to forge commercial direct links with more advanced western producers. Their market growth of cars, x-overs, SUVs, van, truck and HGV demand has emphasised parallel JV collaboration across the supply and value chains. Whilst similarly expectations of retailing and after-market 'leap-frog' improvement will arrive, especially so in India, since China has already modelled itself on western consumer influence and retail environment methods.

The Abedini-Peridy results concluded that “Iranian current car exports are about 100 times less than their fitted values”, these seemingly heavily swayed by the 'apparent academic potential' of India & China.

Unfortunately the world's truly powerful forces, political, social and economic, cannot be easily captured, transformed into data sets and run through computer models, they are instead very real immutable influences which have already set the ground rules and boundaries of realistic Iranian export potential. To be accidentally misled or be irrationally optimistic about operating at only 1% of export potential is not just demonstrating naïveté about sector developments elsewhere, but to be, blind to the dynamics of historical, contemporary and future forces.

However, China may well present an opportunity, albeit on a smaller income scale than apparent by China's huge population. Iran does indeed offer the pre-text of 'Muslim-esque' vehicles, and these may be of interest to those Muslim Chinese who wish to emphasis their personal identity. They tend to live in the north-west of the country, along the Central Asia border (Xingjiang, Ningxiam Gansu & Quinghai) ascribed as 'the Quran Belt'. Yet furthest from the wealthier Eastern sea-board and of heavy agricultural leaning, whilst pockets of primary industry are present the regional income levels are far lower than urbanised counterparts. Thus any market development Iran wishes to capture may take longer than anticipated and indeed may eventually be undermined by the strength of large Chinese VMs and Russian entrant brands. Exploration of the strategic Sino-Muslim opportunity then must be viewed as a long-term commitment expecting initial and on-going 'sunken costs' and late-phase break-even.

Thus Iran undoubtedly has a favourable future if it can implement on-going broad-brush reforms across economic policy and industry restructuring so as to to un-tap its full potential. Yet those efforts, whilst not dis-counting export possibilities, must be primarily directed internally so as to continue to transform the quality of life for its inhabitants and equally aid to the never-ending need for the constant updating of industrial knowledge and processes.

However, those external efforts to raise Iran's public profile across the world – vehicle exports being a major lever – should continue to be directed at the proven and plausible geographic target areas of MENA, Sub-Sahara Africa, the CIS countries and 'second-tier' Latin American countries.

For the very sake of national and brand credibility, Iran Khodro, SAIPA, Pars Khodro et al must plot their international path very carefully so as to ensure international respect. That is best served via building a strong an resilient automotive force via what is perhaps the most critical judge and enabler of its capabilities – the capital markets.

Iran of course seeks to replay the historical automotive journeys of the Germans, Japanese and S.Koreans; each took their own steady path, through what was then a less complicated and less fiercely competitive landscape.

This is indeed a time of 'shifting sands' for the Iranian auto-sector, domestically and internationally, but with insightful planning and efficient delivery that path of self-enabling progress can very probably be extended, but relies upon an expansion of the broad national automotive capability and the ability to constantly navigate its way.

Post Script:

A non-comprehensive list of Iranian automotive companies follows:

IDRO Affiliated:

Vehicle Manufacturers:
Iran Khodro Group – inc Iran Khodro Co. (IKCO)(cars) & Iran Khodro Diesel Co.(trucks, buses), SAIPA Group – inc Pars Khodro Co. (cars), SAPIA Diesel Co. (trucks, buses), Zamyad Co.

Parts Suppliers:
Govah Co, Iran Auto Parts Mfg Co (IPACO), Supplying Auto Parts Co (SAPCO), Khawar Parts Prod Co. (KPP Co), Mehvarsazan Co., Mehrcam Pars Co., Top Service Co., Vehicle Axle Mfg Co. (VAM), Iran Khodro Spare Parts & After Sales Services Co. (ISACO), Desco, Iran Heavy Diesel Engine Mfg Co. (DESA), Sane Co., Indamin-SAIPA mfg Co., Kaveh Khodro SAIPA Co., Mega Motor Co., Plasco Kar SAIPA Co., Sazeh Gostar SAIPA Co., SAIPA Anzin Co., Iran Radiator Co., Charkheshgar Co., SAIPA Piston Co., SAIPA Malleable Co., IKD Engineering & Procuremnet Co., Iranian Diesel Eng Mfg Co. (IDEM), Mashhad Wheel Mfg Co.(MWM),

Capital Goods Machine Tools Suppliers
Technology in Auto Ind Advanced Mfg Co.(TAM), SAIPA Heavy Diesel-Iran Heavy Diesel Mfg Co., Press Iran Co., Abzaran Co., SAIPA Engineering Mfg, Iran Heavy Dies Mfg Co.(IHDM),

After Sales Service:
Rena Tech Services Co., Spare Parts Production & Dev Services of Pars Khodro Co., SAIPA Yadak Trading Co,

Joint Venture Affliated:
Renault Iran – Iran Khodro & Pars Khodro
(Renault)Dacia Iran – Pars Khodro
(Renault) Nissan Iran – Pars Khodro
Peugeot SA Iran – Iran Khodro
Citroen Iran - SAIPA
Mercedes Benz – Iran Khodro
Deawoo Iran – Kerman Auto Industries (Cielo & Matiz models)
Qirui/Chery (QQ) Iran – Keman Auto Industries (QQ model)
Proton Iran - Zagross Khodro Industrie Co (Wira, Gen2, Impian models)
Volkswagen Iran - BAMCO / Kerman Auto Industries (Gol, Bora, Eurovan models)
BMW Iran - Persia Khodro
Hyundai Iran – Kerman Auto Industries (Verna model) / Rain Khodrosazan
Mazda Iran - Bahman Group [since 1952] (3-wheelers, pick-ups, 323 models)
Mitsubishi (Pajero) Iran - Bahman Group (1997 model)
Nissan (Patrol) Iran – Zamyad Group (production ended 1998)
Toyota (LandCruiser 70) Iran – FATH Industrial (production ended)
Land Rover (Series 2/Defender) Iran – Morrotab Group (1962 to date)
Ssangyong (Musso) Iran – Morrotab Group
Great Wall Iran – DIAR Industries (SUV models)
Magirus-Deutz/MAN Iran – Zarin Khodro Ind. (various truck & 4x4 models)
Kamaz Iran - Rakhsh Khodro Diesel
JAC Iran - Rakhsh Khodro Diesel

[NB FIAT's involvement, signing agreement with Pars Group but not yet commencing production, has been reported over the years. Its Chrysler links and US government funding have generated protests by a small anti-Iranian / pro-Israel group. Presumably with the government funds re-paid FIAT will have a freer hand to join its competitors in the Iranian market. Not to do so not only prohibits a national income stream but could possibly generate a boycott of FIAT vehicles across the MENA].

Niche Vehicle Production:
Renus Corporation – 2+2 personal car (Anna model cabrio & hard-top)
Farassa Simili S1 – sports car (Lotus Seven / Westfield / Caterham model)
JMC company (UK) – leisure vehicles (R40 model)
Shahbazzadeh Co. - Retro roadster (Faria model) 5-seat convertible (Elana model)
Talash Motive Powers Ind Co.- motorcycles & 3-wheelers

After-market Performance Tuning and Body Accessories:
Demik Tuning Co - Iran Khodro, Saipa, Peugeot, Pars Khodro.

Privately Affiliated:
Kish Khodro (cars) founded 1998 (40% Iranian State Bank, 9% BMS Co (UK), 51% private capital.
Shahab Khodro (buses, coaches) founded 1962
Khodro Kaveer (cars)
Khodro kaveer is an automobile company based in Yazd, Iran . Established in 2002, it makes BMC and Cumitas cars.