Friday, 28 October 2011

Macro Level Trends – India Autos (Part 1) – Mid-Term Re-Assessment of the 2016 Plan

With the stagnancy previously witnessed in US markets and emergence of the Eurozone crisis , institutional investors, investment banking divisions and long-term individual retail investors have been scouring those late-industrialised (notionally EM) countries for good news growth stories.

The beyond BRICs story is well understood, many of the investment pioneers for some time looking to the 'Next 11' countries across S.America, MENA and CIS regions, with the vanguard of the pioneers evaluating the long-term pictures of those still largely closed sections of Asia, such as Myanmar (old Burma), Sri Lanka, and even North Korea given its commercial exportation of its labour into neighbouring areas such as Mongolia.

Whilst off of the mainstream radar, the 'Next 11' have seen ever increasing levels of both FDI and where possible company stock purchases from foreign sources, yet the now well established BRICS whose economies have softened in recent times given the diminished export reliance upon the West, because of their innate size, still pose alluring interest for western investors.

China has undoubtedly seen contraction, but growth rates are still impressive compared to a stagnant West, with a massive internal demand being policy-moulded to shift from savings and property investment toward and expansion of private consumption. Russia's boom and bust record may well repeat itself as with boom-times what with Putin re-appearing increasingly front and centre on the political stage and seemingly set for a come-back when a much needed global recovery may come into being, itself assisted by Russian commodities exportation. Brazil is mimicking China's policy approach of internalised demand given the natural decrease in its own China-led exports of various commodities , political focus now upon a reduction of the livings standards gap between the 'haves' and 'have-nots', where budget surpluses can be transformed into new infrastructure, housing, shovel-ready jobs and and a broader, deeper consumer class.

But what of India?

India Overview -

India by contrast appears 'dynamically positioned' somewhat between Brazil and Russia, sat in a sphere where the socio-economic base for improvement is immense given its 1.21bn population and the theoretical room for commercial opportunity equally large. Yet the political and bureaucratic fragmentation of the 3.3m square mile landmass, the historically entrenched hierarchies and arguably impeded monetary flows have arguably simultaneously undermined and yet paradoxically structurally supported economic growth and social well-being.

Since its Independence in 1947 it operated a largely socialist orientated 'mixed' economic policy, its technological advances largely based upon imported and licensed 1950s/60s technologies from the British, Italians and Germans, many of those products in the form of scooters, motorcycles, three-wheelers still manufactured (with periodic modifications) to this day, whilst the iconic Hindustan Motor Ambassador car has only recently been discontinued, though still very visible around the country.

The recent edition of The Economist (22-28 Oct) provides a very insightful overview regards the present state of affairs inside India.

Given the turbulence in the western world, it notes the seeming paradox that the heavily regulated country has yet been able to create and maintain growth. That done so thanks to a mix of often family-led conglomerate enterprise, internally malleable yet perfectly legal accounting practices, the ongoing new middle-class desire for 'prosperity-goods', an adaptation of that mid-stream consumer culture for adoption by the 'bottom of the pyramid' by way of discreet 'single-shot' packaging (extending the cigarette sales method) and modification of products to suit necessarily price sensitive user needs. These functional and emotional consumer needs met by both entrenched conglomerates, state-owned businesses and a mix of 'public-private' companies.

Interestingly, though there are a few big-name exceptions in IT and e-commerce, the general rule appears to be that the true entrepreneurial class has been very much conspicuous by its absence over the last decade. This then apparently in stark contrast to the new business trend which emerged in the 1990s after the decreed 1991 “official” abandonment of the 'Raj Licences' in operation since 1947.

That very fact seems to suggest that those previous entrepreneurial engagements typically within the IT enabled sphere of software development, BPO and corporate call-centres may have been somehow intentionally promoted or possibly subtly sponsored, given the pressing need for India to quickly enter the various realms of the expanding service sector, thus able to simultaneously broaden its commercial activities, climb onto higher rungs of the value-ladder (especially regards software) , put large sections of its massive young labour force to work in more educationally useful arenas and simultaneously quickly join the ranks of the developed world, albeit still with a 'developing' bulk to administer.

The 1990s was indeed a period of rapid technological and social change for many advanced countries, but the greatest 'value-gap' leap to be gained was undoubtedly by India. The emergence of software and IT consulting divisions amongst old-name conglomerates - themselves able to internally leverage and so develop such knowledge – plus the new crop of start-ups and 'new-age' publicly listed companies on the Delhi & Mumbai Exchanges stand as a testament to the era.

In contrast, whilst the 1990s were a phase of very obvious progressive new industry commercial transition, the 2000s appears to have been a phase of seemingly slower but potentially as powerful metamorphosis of its smoke-stack industries. Automotive perhaps the most obvious, with a national recognition to leverage its labour-force and geographic position and once again reach outward (as it did in the 1950s) to absorb global best practice. The prompter for this being the Indian Auto-Sector's 10 year plan.

The Automotive Sector -

The raised levels of personal wealth, amongst the 'old money' industrialists, the 'new money' entrepreneurs and a much inflated new middle-class within metro and urban areas, have been plain to see. With a far less powerful 'ripple effect' wave expanding outward from 1st, 2nd & 3rd tier cities into countryside towns and villages by way of 'repatriated' presents and earned incomes for grand-parents, parents, siblings and children.

The last 20 years of economic expansion, educational improvement and consumer aspiration – itself formed by Bollywood and Western 'lifestyle' depiction – has dramatically altered urban and suburban life, whilst partially doing so at least perceptionally via the satellite TV in the broad rural 'hinterlands'. And of course there is no greater symbol, of that upward rise in social mobility than the motor vehicle itself both metaphoric and physical. This the case whether scooter, motorcycle, car, and specifically in recent recent the desire amongst the upper middle classes for the SUV.

Whilst the proliferation of HGV, MCV and LCV trucks and commercial 'pygmy' 3/4-wheelers visibly highlight the ongoing expansion of trade across suburbs, cities and the country at large. The once rickety aged long-distance bus – once little different to the local route bus – is undergoing a technological transformation (often with foreign input) thanks to a mix of drivers; namely inter-city route competition, a still uncomfortable '1930s' train service and the emergence of low cost airlines. And similarly, a drive for improved economies of scale, delivery reliability & speed aswell as market share growth ambitions has led to truck manufacturers seeking to better serve road-haulier companies with ever better trucks, larger payloads, containerisation and better ergonomics assisting the process.

Yet it has been the car industry, given its scale and so economic impact as a new value provider, that led to India's realisation that it must re-align and modernise its auto-industry and the players therein.

India's Automotive Mission Plan (2006-2016) -

The ten-year plan was presented in 2006 by the Ministry of Heavy Industries and Public Enterprises, at the time noting that since 1991's de-regulation of the sector, FDI had indeed flowed into India from foreign VMs and production figures had increased from 2m units to 9.7m units over the preceding 15 years.

Even more poignantly today, the report's preface noted that “the increasing pull of India on the one hand and the near stagnation in markets such as USA, EU & Japan on the other, have worked as a push factor for shifting new capacities and FDI to India.” Moreover the preface noted that by 2006 “increasing competition in auto companies has not only resulted in multiple choices for Indian consumers at competitive costs, it has also ensured an improvement in productivity by almost 20% a year in the auto industry, which is one of the highest in Indian manufacturing”.

In order for this transformation to continue the Development Council on Automotive & Allied Industries selected various stakeholders from industry, state planning and academia to form a task force that could plot a 10 year plan. Itself to noted that the obstacles of future growth were to be identified and removed, that infrastructure development was key, and that a 'flat playing field' be created so that all new investors – domestic and foreign – could undertake far more transparent investment decision analysis.

The Automotive Mission Plan (AMP) was the outcome: “to map challenges, set targets and evolve mission mode for implementation of agreed milestones”...”examining policy parameters as well as manufacturing infrastructure, addressing issues ranging from induction of technology to labour law reforms to R&D needs, fiscal and policy parameters, HR development, growth of domestic demand and exports and environmental and safety concerns”.

The primary conclusions were:

1. To improve previous rapid manufacturing growth, so as to move beyond the 'lowly' 2.37% share of world production (66.5m vehicles in 2005) and rise well above the 0.3% of global international automotive trade that India then held.

2. Recognition that to attract the higher-value, correlated technical & IPR activities of R&D, NPD, Testing etc. a level of manufacturing competitiveness was necessary which derived from measurable efficiencies in the deployment of plant capital and labour (the basics of CapExp & ROI).

3. Recognition that the Indian business model to date – depending upon an abundance of cheap labour, weak currency, low interest rates and concessional duty structure, were in the long-run, untenable. [As has come to pass]. Thus a need for expansion via vertical and horizontal integration into auto-associated business areas – from metals to petroleum products to vehicle aftersales - that were viewed by another government agency as offering high potential. Also recognising an outcome effect to assist the agricultural sector via greater mechanisation

4. Recognition that expansion of the new middle class (est 450m in 2006) would be sustained only via leveraging India's innate advantages: a trained workforce at competitive cost, improving credit facility conditions and local availability of raw materials. These to be used to attain 2 prime ambitions of producing “best quality products at lowest cost to consumers” and “developing & assimilating latest sector technology”.

5. Recognition that an improvement in trained manpower and infrastructure improvement was necessary, with the use of “specialised and industry specific initiatives”. To this end National Automotive Resting and R&D Infrastructure Project (NATRIP) introduced for testing, certification and homologation needs. A similar effort required for education, training, development, market analysis and formulation and dissemination of courses.

6. Noted that the auto-industry has organically grown in cluster formations, “linked by commonalities and complimentaries” primarily in Manesar in the North, Pune in the West and Chennai in the South, Jamshedpur-Kolkata in the East and Indore in the Centre. These areas to be of special development activities for education and infrastructure (transportation & communication), streamlining of government institutions to assist the process.

7. “The Automotive Mission Plan intends to double the contribution of the automotive sector in GDP terms by 2016, taking turnover to $145m through the special emphasis of exporting small cars, MUVs (utility vehicles), 3-wheelers, 2-wheelers and auto components”.

2006 to Date -

The period after the release of the plan has shown itself to be positive indeed, the figures below – provided by the Society of Indian Automobile Manufacturers (SIAM) - highlighting the maintained traction of the indigenous sector.

Sector Turnover:
2004-5: $20,896m
2005-6: $27,011m
2006-7: $34,285m
2007-8: $36,612m
2008-9: $38,238m

Domestic Production (units)
Comm.Vehicles vs Cars vs 3-wheelers vs 2-wheelers:
2004-5: 353,703 vs 1,209,876 vs 374,445 vs 6,529,829
2005-6: 391,083 vs 1,309,300 vs 434,423 vs 7,608,697
2006-7: 519,982 vs 1,545,223 vs 556,126 vs 8,466,666
2007-8: 549,006 vs 1,777,583 vs 500,660 vs 8,026,681
2008-9: 416,870 vs 1,838,593 vs 497,020 vs 8,419,792
2009-10: 567,556 vs 2,357,411 vs 619,194 vs 10,512,903
2010-11: 752,735 vs 2,987,296 vs 799,553 vs 13,376,451

Domestic Sales (units)
Comm.Vehicles vs Cars vs 3-wheelers vs 2-wheelers:
2004-5: 318,430 vs 1,061,572 vs 307,862 vs 6,209,765
2005-6: 351,041 vs 1,143,076 vs 359,920 vs 7,052,391
2006-7: 467,765 vs 1,379,979 vs 403,910 vs 7,872,334
2007-8: 490,494 vs 1,549,882 vs 364,781 vs 7,249,278
2008-9: 384,194 vs 1,552,703 vs 349,727 vs 7,437,619
2009-10: 532,721 vs 1,951,333 vs 440,392 vs 9,370,951
2010-11: 676,408 vs 2,520,421 vs 526,022 vs 11,790,305

Exports (units)
Comm.Vehicles vs Cars vs 3-wheelers vs 2-wheelers:
2004-5: 29,940 vs 166,402 vs 66,795 vs 366,407
2005-6: 40,600 vs 175,572 vs 76,881 vs 513,169
2006-7: 49,537 vs 198,452 vs 143,896 vs 619,644
2007-8: 58,994 vs 218,401 vs 141,225 vs 819,713
2008-9: 42,625 vs 335,729 vs 148,066 vs 1,004,174
2009-10: 45,009 vs 446,145 vs 173,214 vs 1,140,058
2010-11: 76,279 vs 453,479 vs 269,967 vs 1,539,590

These figures then show:
A near doubling of the sector's value in monetary turnover between the accounting years 2005-6 to 2008-9.
Production statistics show a 160% increase for trucks between 2005-6 and 2010-11, a 195% rise in car production, 165% rise in 3-wheeler manufacture and 161% rise in 2-wheeler assembly.
Sales-wise, a 212% rise in commercial vehicle sales over the 7 year period, a 237% increase in cars, a 171% in 3-wheelers and a 190% in 2-wheelers.
Export-wise, a 254% rise in truck exports, 272% for cars (demonstrating its ambition as small car export hub), an impressive 404% in 3-wheelers and mighty 420% rise in the exportation of scooters and motorcycles.

Volume unit statistics of course do tell the full investment-reward story, but are able to depict the trend toward far greater road-based mobilisation for individuals and the masses. A more than doubling of new car use illustrates the size and consumer power of the new upper-middle class. The quadrupling of new motorcycle sales not only shows the consumption habits of the the new lower-middle class but implicitly suggests that the used 2-wheeler market is being made more accessable to those previously nearer to the 'bottom of the pyramid'.

Importantly during this period, whilst the impact of the western financial crisis was marked in 2008-9, a rampant rebound in production, sales and export levels was indeed experienced, which may have led to many in the country's industry becoming over-optimistic about the immediate and mid-term outlook. The emergence of the recent global economic slow-down, in which China's “heavy or soft landing” holds so much sway, will have done much to rein-in overt enthusiam.

To assign the dramatic scale-up and investment rewards seen between 2004-2010 to the 2006 plan would be an obvious folly, since such results are directly related to the industrial planning, FDI reasoning and infrastructure building of the previous 'paper-based' era. The positive and negative outcomes of the 2006-2016 plan – and importantly if not the ability to forecast events, the in-built flexibility to react to events - may only start to be judged from 2012 onwards.

India's Major Players -
(Passenger Cars)

The seemingly innately entrenched famous Indian brands stemmed from either pre-1947 typically family enterprises, from formation in the 'Socialist Era' between typically 1947 to its depletion in 1980 and thereafter from the formation of joint ventures with foreign manufactures. These companies were typically charged by the state to satisfy and develop variously different automotive sectors, typically in a chronological manner as the country's economy expanded, so offering better and more costly transport choices, from trucks and 2/3-wheelers to cars and premium vehicles.

The Car and SUV main players and their respective models today are:

Maruti-Suzuki –
800, Alto, Alto K10, Omni, Gypsy, Estilo, Wagon R, Eeco, A-Star, Ritz, Swift, SX4, Dzire, Grande Vitara, Kizashi

Tata Motors -
Nano, Indica, Vista, Indigo (CS & XL), Manza, Sumo, Grande, Venture, Safari, Xenon, Aria
(this excludes Jaguar Land Rover vehicles and those offered via Tata dealers in co-operation with FIAT)

Mahindra & Mahindra -
Major, Xylo, Scorpio, Bolero, Thar, Verito, Genio, XUV500.

ICML (Sonalika Group) -
Rhino Rx (variants of same basic model)

Premier Automobiles Limited -
RiO (Kia)

Hindustan Motors -
servicing discontinued Ambassador and retail channel for Japan's Mitsubishi Motor products

Present Market Conditions -

Recently released figures from SIAM indicate that cumulative (all segment)YoY production growth has been maintained through 2011, the April – September figures showing a 16.6% rise YoY, with a September production rate 19% above the previous year's monthly output.
Cumulative (all segment) sales growth appears to continue to be impressive rated at 14.4% across the April-Sept period, and at near 20% for September specifically.

However, in reality the recorded sales have been a 'mixed bag' dependent upon segment type. 'All Passenger Vehicles' showing 6-month growth levels at 1.84% YoY. An exact breakdown of figures is unavailable, but SIAM's report states that Passenger Cars declined by -1.36% in the period, whilst MUVs climbed nearly 10% and Vans climbed nearly 20%. All products categorised in Commercial Vehicles (thus LCVs, MCVs and HGVs) saw a YoY increase of 17.5%, LCVs at 29%, MCVs & HGVs at 6%. Three-wheeler sales were mixed, goods versions up 16.5% whilst passenger verisons declined by 3.7%. Two-wheelers saw growth of 17.4%, mopeds by 13.5%, scooters by 23% and motorcycles by 16.5%.

In the export realm, all vehicle groups amalgamated saw a rise of 32% YoY for the similar period,
Passenger Vehicles up 21%, Commercial Vehicles up 36%, Three-Wheelers up 50% and Two -wheelers up 32%.

This then indicates that as a general trend much of the industry, its production base and demand base appears fundamentally sound, indeed in rude health given the expansion rates in some sectors, especially those B2B related.

However, the general trend drop to 2% in domestic passenger cars sales should be a cause for concern, no doubt a result of the nation's inflation rate deterring credit-enabled sales amongst inhabitants of the new middle-class, and the increasing likelihood of global conditions slowing national growth and optimism.

Interestingly, the SIAM report appeared not to mention a full breakdown of manufacturing, segment by segment, just providing an overall multi-segment impression of all being good. This, investment-auto-motives believes, is an intentional ploy by the Indian authorities to hide the real state of affairs presently inflicted on the nations car market.

Maruti-Suzuki, the well respected and largest manufacturer of small & compact vehicles (cars,4x4s and CVs) has seen a major decline in its sales over September, down 21% for all vehicles, the drop attributed to production capacity issues restricted by labour-issues at the Manesar plant.

Web reports state that “Maruti-Suzuki saw a decline of -23.5% in its best-selling compact class brands such as Maruti 800, Alto, A-Star and WagonR, with the total sales at 37,324 as against 48,780 in the same (September) period last year. The mid-size compact car segment, which includes brands such as Swift, Estilo and Ritz, fell by 9.3% at 19,722 units as compared to 21,749. The.Dzire model dropped 9.9% in sales at 9,411 units from 8,566 units reported in September, 2010. Sales of sedan segment cars including SX4 (mini SUV) declined dramatically by 90% in the month under-review and stood at 196 units as compared to 1,965 units in the same period in 2010”.

It is believed that the very well market and policy attuned Maruti-Suzuki may have actually welcomed the production problems, recognising that any such precursor to an Indian economic slow-down would help slim production levels and so deplete any sizeable factory and dealer inventories that may exist after the ongoing previous production and demand boom.

Other manufacturers may be enjoying the Maruiti-Suzuki partial absence from the market, and may be maintaining their own output levels relatively high tt actual demand to enable per unit ex-factory cost efficiencies which may be translated into vehicle discounts within the marketplace. Or possibly seeking to sell the vehicles at greater 'scale-discount' levels to dealer groups who will in turn be required to hold those vehicles on their own inventories (instead of those of the manufacturer) seeking to possibly maintain forecourt levels over the mid-term and their own maintain margins as a safeguard against similar labour problems spreading to hit other VMs.

Thus the domestic demand in passenger cars may be faltering as consumer's own confidence starts to wane in the face of greater purchase headwinds. This s not to say the general mid and long-term growth trend is under any threat of being de-stabalised – almost an impossibility given the massive potential still to be gained form the burgeoning upper and lower new middle classes.

Simply that the global economic headwind troubles appear to be strengthening, and with it a realisation amongst the generally well informed Indian populace that belt-tightening measures in family budgets are necessary.

This belt-tightening will very probably be seen by corporate India, which will in turn start to diminish sales of Cvs at the higher and lower ends of the segment spectrum, ie HGVs and commercial 3-wheelers.

The EM Slow-Down -

As seen, India's auto-sector did not escape the B2B and B2C consumption contraction created by the 2008 financial crisis, however it did re-rise over the following 2 years with traction that saw it surpass the previous record production, sales and export levels This then showed the strength of the then EM economies that had, for a period, ostensibly decoupled from reliance upon the West. An 'economic circularity' had indeed grown, especially between Brazil and China and Africa and China. But the more western-facing and politically western-entwined India, with its own historic frictions and competitiveness concerns with China, was not so able to distance itself from the Triad regions, indeed its close industrial links such as with Japan's Suzuki and more recently Britain's Jaguar Land Rover arguably prohibit – in the near and mid-term at least - any effort to do so.

However, although investment-auto-motives believes that large sections of broader EM economies have indeed de-coupled, the problem facing India – like so many other progressive nations – has been a slow degradation of intrinsic international commercial competitiveness. Its own successful growth story has driven up input-price pressures (esp so regards qualified labour), pushed up domestic inflation rates with a 2010 CPI peak of 10% (showing 9% today) which in turn affected the upward re-valuation of the Rupee on FX currency markets, and critically for some time hindered the investment compulsion for Indian companies without access to lower cost foreign capital markets.

In summary, the previously ever reliable 'value-gap' that boosted Indian commerce across global markets had been diminished and yet a credit-financing trap had emerged (as admitted by TATA Motors) for many. A similar story was being run in China and Brazil, but perhaps not to the same extend as India, with seemingly more fluid internal capital markets available and the previously mentioned lower level of reliance upon the West.

Moreover, the socio-political events that have over the last year come to pass in the Middle East may have added greater discomfort for India.

Exports to the GCC region and across MENA countries will have contracted given the political and socio-economic upheaval across the region, whether in 'new' countries such as Libya and Egypt to steady sovereign states such as Saudi Arabia and the UEA. So trade initiatives such as the truck CKD trade agreement with Oman – itself small and intra-regionally GCC trade dependent and keen to enlarge its own truck-assembly centre - will have in some way been affected; whether relative to numbers of units imported and assembled, to the rate of plant expansion, itself key for Oman's economic development.

Seeking New Export Hopes -

This and other aspects may be behind the recent softening of India's stance with Pakistan, specifically regards WTO rules pertaining to Pakistan's exporting to the EU, but perhaps more tellingly the fact that visa requirements for Pakistani business people in India will be relaxed, so as to nurture increasing trade.

This then necessary to help lower Indian ex-factory costs through alternative or relocated supply chain companies, a seeming political move to demonstrate a greater willingness to deal with Islamic countries (now that the terrorist threat has abated) and perhaps an effort to be seen to unhinge India from its historic and overt western reliance. If indeed so, probably undertaken for internal and popularist reasons so as to try and better unite the country. What ever the reasons, any emergent new trade agreement with Pakistan would serve as seemingly much needed alternative export route for the Indian auto-sector. The mutuality between the two countries being specifically the respective production and demand for more rudimentary yet robust 2-wheeler, 3-wheeler, truck and bus offerings, which have been adapted and devised as personal and mass transport solutions for 'developing' areas with poor roads, only basic infrastructure and unreliable public transport networks.

Thus expansion into this market (and similar) would allow India to leverage far more secure relations, its own FDI efforts toward a bridging supply base and perhaps high-labour content assembly base, in turn allowing homeland company's own workforces to be moulded around focus upon higher value activities within up-stream R&D and down-stream Retail.

[NB Any outsourcing of work to Pakistani sub-contractors must avoid any temptation by Indian middle management to “show who is boss” in face to face roles with Pakistan suppliers. Corporate policy diktat created and used as necessary for all Hindus, Sikhs, Muslims etc interacting over the border or indeed within company offices in India].

Conclusion -

Like its EM counterparts, the Indian vehicle market saw monumental growth throughout the last decade, a doubling of vehicle manufacturing output regards cars and trucks and a quadrupling of output regards scooters, mopeds and motorcycles.

[NB it was the latter segment's dynamics, not that of conventional cars', that led TATA Motor to seek out consumer segment migration opportunities (from bikes to cars) with its previoulsy notional “1 Lakh” Nano model].

This has been the understandable levl of optimism throughout the recent past, where a supercharged Indian economy, build on the back of global B2B and B2C demand across all spheres from commodities mining to west-to-east BPO activities, all of which were captured by India's longstanding conglomerates and underpinned a massive expansion of what had been the previous decade's new Start-Ups.

That in turn added not just ongoing confidence in the burgeoning middle classes, but a true sense of personal wealth (at long last) generated by earnings that could be tangibly touched in their pockets, viewed in their bank accounts and provided a sense of economic, personal and social well being; those funds, much of which was saved given natural instict, to service the country's investment needs through both governmental and private enterprise schemes.

1991 onward has shown itself to be very probably the most transformative period in India since colonial times; this time to the benefit of those who were willing to be trained, educated and work hard in the ever 'pseudo-american' corporate arena or through private effort. The mix of IT empowerment, closely allied conglomerate structures, youthful enthusiasm and an increasing attitude toward free-marketeering – even if not actually state enabled - was the mingled bed-rock for the growth seen across all vehicle groups.

Whilst undoubtedly Indian auto-manufacturing did not escape the reverberations of the 2008 financial crisis, the EM propulsion story made it but an temporary aberration.

However, today the global slowdown looks to create very real headwinds for the Indian manufacturing success story.

Headwinds which look all the more severe and all the more likely to see a 'hard-landing' (unlike China's ability to manage a soft-landing) when the dis-connect between India's high internal inflation rate and a markedly risen Rupee is set into the context of a not so subtle global devaluation war.

[NB the Rupee's high value cannot even be exploited in FX markets given that India, being resource rich, typically buys-in/imports little in the way of commodities, and even of that which it does, the present picture would discourage such actions, so unable to leverage the currency strength].

That Indian slowdown has started to appear increasingly worse, especially versus other BRIC nations which can arguably better sustain a necessary model of internal investment-led policies from SWF and similar monies & higher levels of consumption demand so recycled into indigenous investment. As growth contracts in those old BRIC nations growth contract, little Indian assistance is given by a stagnating EU stagnates.

The rare glimmer of hope may be the US, where its (possibly over-stated) 2.5% growth rate of late offers hope of economic traction and a corporate led slow slow recovery. But of those US corporates, far less BPO and similar will be fed to India given the internal requirement to provide American jobs. Right now, the US looks to its home advantage.

This then serves up India's business leaders with a very challenging menu to address; the auto-sector perhaps with one of the greatest economic exposures, and one which perhaps only striong balance sheets will be able to deftly deal with.

This will be reviewed in a following web-log, which looks to the business positioning of the various main players, but before that assessment, the next web-log provides an outline of how the India looked to the future, and perhaps realised that overt radical strategic change of its sector - as explored - would be both untenable and indeed a false panacea.

In the meantime, given the arisen picture, the not so subtle 'India Interest' template that sees the milieu-mix of closely knit historic families, senior business leaders and administrative 'governors', looks like it could well be about to be subtly re-activated to ensure as smoother a path as posible into the near term rocky future.

The next few years then may well be ones of auto-sector change, whence any surplus fat will need to be stripped away from company operations, corporate business models re-honed, and whereby the very characteristics of the country's internal demand, export ideals, and very probably manufacturing structures are re-assessed.

2012 may well indeed then be seen as a very necessary re-evaluation point relative to the 2006-16 plan, a time when the ambitions of the latter 4 years – especially regards higher value activities – are re-examined, plotted and quickly implemented.

“अच्छे दुर-दुर भारत "...”Good Luck, India”.

Saturday, 22 October 2011

Macro Level Trends – Eastern Europe – Creating Self-Propulsion as the Eurozone Seeks its 'Lasting Solution'.

Angela Merkel and the neo-conservative element of the Christian-Democratic Party presently seek the panacea of a 'lasting solution' to the European Debt Crisis. Ideally, that would consist of solutions which not only ideally settle the immediate fiscal concern, the mid-term economic structural concern and long-term social concern. Also, to ultimately prohibit or ring-fence through regulatory means any possible re-occurance of the present-day 'fall-out' stemming from the financial instruments of the future.

EU Woes & Possible Fix -

The German Chancellor well recognises that the EU project must be saved and thereafter maintained if a healthy global economy is to be restored, all too conscious that if the Eurozone project were to disintegrate, whether quickly or slowly, an economic 'dark-age' for the region riddled with traits from nationalistic protectionism to xenophobia might well hang over the continent for decades to come.

She and many others are no doubt keen to ensure that in the future any similar systemic threat to the Eurozone should not be imported, as appears the case here. Future financial innovation therefore may need to be ring-fenced and operate within a better regulated 'quarantined environment'.

Presently, given the immediate need to save the EU, if questioned the Chancellor might react initially very negatively to a proposal Britain's Lord Owen recently tabled. It relays that 'miscreant EU countries' be allowed enter an alternatively created, less economically stringent, trading-bloc consisting of the EU's neighbouring non-member European countries. A trading group not to be viewed as a 'sin-bin', but seemingly as a 'half-way house', whereby greater freedoms are available than perhaps the Stability & Growth Pact allows to re-arrange a country's economic framework. Thereafter able to re-enter the EU upon renewed ratification of economic self-responsibility.

[NB This 'prescription' approximates the 'Economic Rainbow' (trade-bloc) hypothesis set forward some time ago by investment-auto-motives. Itself a broader-reach arrangement for nother European countries, critically inviting Germany given its political and technical leadership role it plays within the European mainland. This basic premis was previously forwarded to a number of independent Cross-Benchers in the House of Lords, along with a number of other UK auto-centric web-log essays].

As with any regional bloc with 'borderless trade' aim, the implicit longer term objective of the Eurozone is continual enlargement, a necessary goal to combat the emergent powers of the 21st century; namely: EurAsian (Russia-CIS), APTA-ASEAN (Asia-Pacific), MERCOSUR-ALADI (S.American), SACU-ECOWAS (S&W Africa), and of course a regenerated NAFTA possibly with CARIFORM (N.America & Caribbean). Moreover the BBC's 'Asian Report' programme states that bi-lateral trade between China and ASEAN constituents reached over $320bn in 2010 and is expected to reach over $500bn by 2015.

Today, those 'other' trade-bloc members are reaping the rewards of still very buoyant EM regional trade, and surely interpret the period ahead as “our economic wave”. The EU obviously still holds massive economic powers,but the fact that innate political complexity exists and the fact that 'sovereign identity' is such a culturally engrained phenomenon, means that unless a 'lasting solution' can be found the EU's global power-base will be consequentially eroded. Those that hold anti-EU attitudes may cheer, but in a global context may ultimately find themselves sat on the fringes of a 'backwater Europe'.

Solution Seeking -

Potential solutions range from the norm of overseen internal economic restructuring practices, the implementation of ESFS & ESFM mandates, through to radical ideas such as newly created 'economic mutuality zones' whereby the private sector of a creditor country could access the resources (mineral, productive, or human) of a debtor country, this done either physically inside a debtor country as necessary for primary extraction, or the creation of an economic zone in another non-partisan country (perhaps allied to free-trade areas), or indeed, given the power of the internet inside an IT enabled cyber-space world.

This might be viewed as colonialism 'by the back-door', but could also be viewed akin to China's 'foreign-city' concept, or Dubai's 'World Islands' creation, or indeed as an evolution of cyber-space's 'Second Life'. The critical aspect that the mutual creditor-debtor countries create their own version.

Such initiatives could be instigated by a re-balanced IMF &/or World Bank, along with the input of EM nations, who in the mid-term look to have a far greater role in the bail-out of the Eurozone.

This then allows for a type of economic 'bridge-loan' to be created and a methodology for full repayment – including critically toward private-sector creditors. Surely a far more preferable and reasonable outcome than the present system were rightful creditors are forced to endure the highly damaging 'anti-investor' pains of creditor hair-cuts.

CEE – A Spectrum of EU Exposure -

Geographically entwined, yet ideologically increasingly remote, is Central and Eastern Europe (CEE), a region which has experienced veritable transformation since the collapse of the Iron Curtain two decades ago.

The then 'poor cousin' of Europe was able to leverage a number of factors which had previously wilted under the heavy-diktat of Communism and the fiscal lethargy of Socialism: particularly a willing, aspirant yet demanding young labour-force and creation of new dynamic capital markets at retail and wholesale levels.

Therefore, the primary advantage for the 'Baltic & Balkans' was its 'cost-benefit' equation for multi-nationals, regional SMEs and its new crop of entrepreneurs, across most commercial spheres. The CEE offered massive opportunities for technical and service improvements generated by a low-cost yet willing young populace offering the prize of sizeable profit margins. An opportunity which spread across all industrial sectors at the 'Primary' level of agriculture and commodities extraction, at the 'Secondary' level of processing and 'Tertiary' level of R&D, development (hardware and software) and sales & service. Moreover, innovation could be identified and developed given the broad and deep educational template in operation throughout the Prussian, Austro-Hungarian and Communist periods.

The fact that Eastern Europe's growth was based upon economic fundamentals - as with 'late developing' Asia, S.America – was in sharp contrast the West: increasingly 'non-value-adding', increasingly 'credit-driven', and increasingly 'bubble-forming; arguably 'ethereal' West.

[NB The financial services sector is often mistakenly viewed as increasingly 'ethereal', yet whilst a portion of the investment banking sector created the now wryly named 'weapons of mass destruction', it must be remembered that inside Europe the framework and methods of London, Paris, Frankfurt remain critically important to both national and global economies, in fact more so as the world's need for finance and its allied services grows so spreading new wealth to many and extracating others from their respective poverty traps. This will continue as presumably other 'iron curtain' countries such as North Korea also transform, as we see with Cuba].

In the present-day, it is Eastern Europe which continues to attract attention given that many of its national inhabitants appear to have far less exposure to the Eurozone drag, though of course those typically with closer physical proximity to the EU or would were themselves were newly formed and so economically aspirational, undertook greater efforts to become more closely entwined during the boom era.

[NB Thus as illustrated by the 'spectrum' description (see below) to presume that the CEE is wholly free from any economic contagion would be naïve, especially given the size of the EU's banking ownership influence on what appears distinctly CEE and so separate financial corporations. Hence there may be calls for a 'contagion check' with associated 'stress-tests' to assess to what degree whether Eastern European banks of all ilks (owned, semi-owned and independent) are affected].

However, with the rapid reversal of fortunes, today a basic macro-interpretation is that being outside of the EU has become a whirlwind advantage.

A recent Financial Times video piece presented “thought experiment” findings from economists at the EBRD (European Bank for Reconstruction & Development), whose prime concern it is to assist the ongoing remoulding of the continent's innate economic structure. As such the EBRD sought to see which of the CEE countries would be most and least affected by a theoretical 'economic seizure' of the EU. To do so it collated 3 measures which together amount to full economic exposure, consisting of 'exports', 'external debt' and (EU) 'FDI'

The following list ranks the most exposed toward the least exposed. Additionally investment-auto-motives has included each country's population figures, presented as a proxy reflecting the degree of internal economic activity and so strength presumably available – though no population pyramids were viewed. These then provide an important dual perspective: level of potentially damaging EU exposure v the economic 'pulling-power' of the population.

The accompanying graph depicts the findings for easier digestion, and groups the CEE countries the EBRD listed into those which sit clear in the “high ground”, those which are positioned the tenable “mid ground”, and those that are vulnerable in the “low ground”.

“High Ground”

Russia -
8% Exports
6% External Debt
8% FDI
Total Exposure 24%
Population 143m
No EU Membership

Turkey -
6% Exports
11% External Debt
9% FDI
Total Exposure 26%
Population 73m
No EU Membership

“Mid Ground”

Ukraine -
5% Exports
25% External Debt
8% FDI
Total Exposure 38%
Population 46m
No EU Membership

Poland -
17% Exports
14% External Debt
24% FDI
Total Exposure 55%
Population 38m
Joined EU in 2004

Romania -
16% Exports
21% External Debt
22% FDI
Total Exposure 59%
Population 22m,
Joined EU in 2007

Kazakhstan -
16% Exports
4% External Debt
17% FDI
Total Exposure 37%
Population 16.6m
No EU Membership

Lithuania -
15% Exports
2% External Debt
10% FDI
Total Exposure 27%
Population 3.2m
Joined EU in 2004

Estonia -
24% Exports
3% External Debt
23% FDI
Total Exposure 50%
Population 1.34m
Joined EU in 2004

“Low Ground”

Hungary -
33% Exports
32% External Debt
40% FDI
Total Exposure 105%
Population approx 10m
Joined EU in 2004

Slovak Republic -
32% Exports
46% External Debt
36% FDI
Total Exposure 114%
Population 5m
Joined EU in 2009

Bulgaria -
18% Exports
36% External Debt
58% FDI
Total Exposure 112%
Population 7.5m,
Joined EU in 2007

Croatia -
7% Exports
22% External Debt
43% FDI
Total Exposure 72%
Population 4.3m
No EU Membership

Slovenia -
32% Exports
23% External Debt
23% FDI
Total Exposure 78%
Population 2m,
Joined EU in 2007

[Interestingly, Serbia was not included by the EBRD].
[NB obviously the labels are notionally descriptive only, and do not relate to true topography]

Increased Headwinds for “Low Ground” Nations -

Thus we easily see that a combination of high exposure to the EU and smaller populations puts Hungary, the Slovak Republic, Bulgaria, Croatia and Slovenia into potentially increasingly problematic economic 'straight-jackets'; possibly finding themselves without the ability to extract themselves from EU related woes and ultimately possibly 'on paper' without tenable national economies.

This then would create conditions for social unrest (agitated by cultural & religious differences) and black-market economies, in effect a return to the the latter days of the Soviet era and the tumultuous period seen in the early 1990s; such problems which were paradoxically supposed to be thereafter banished via the EU mechanism.

This depiction of a possible future is not a truism, but a very simplistic 'big picture' evolution of the ERBD's risk analysis tool. However, no doubt the reality is that analytical corners of the global capital markets have very probably already begun to assess the economic 'shape' that is Eastern Europe in a similar 'traffic light' manner.

Renewal of the Regional Balkan Identity -

Undoubtedly, the local populace of each of these highly affected nations feels somewhat betrayed by their politicians for entering into what now appears a 'Faustian pact' of debt, by their Mediterranean EU neighbours for poor banking, fiscal and sovereign governance, by Brussels for poorly managing the EU Project and possibly even by Germany - as the region's political and economic powerhouse - for not 'care-taking' of the region.

Thus a possible outcome is that these Balkan countries seek to distance themselves from the grasp of Brussels, and try and set out their own agendas, going so far as to create a mini-economic block of its own; much as was the case under Soviet rule.

Re-affirming national and local identities is typical of reactionary behaviour, returning to age-old ideas and ideals of self-reliance that sit at the core of Balkan culture, originating from centuries-long tough times. So whilst the Euro continues to be the formal currency of exchange, it would come as no surprise if other fringe value systems - especially in rural regions - come back into being; systems such as goods bartering and the return of close-knit, co-operative village life. Unfortunately, such circumstances also offer opportunity to black-marketeers, and the potential to fall backward toward a corruption-led socio-political system.

However, turning challenges into opportunities, any general social dynamic back toward 'localism' can offer new potential for the commercial world, for multi-nationals, regional SMEs and entrepreneurs.

One example particularly appears to shine and could be said to lead the way, Renault's purchase and substantial backing of Dacia in Romania

As with the Skoda story further north, what was once a 'lost' and previously culturally important nameplate was re-energised to not only provide economic uplift and generate innate Romanian pride, but through a well planned and executed business model exerted export strength by spreading its name throughout the CEE, through Russia, Turkey and Northern Africa, and now throught Western Europe. Renault had previously licenced its products to the 'old' Dacia during Soviet-era, which itself had leveraged the cultural connotations of historic Romania. But critically Dacia became the archetype of a 'local reconstructed brand', in its case brand and product values synonymous with ideals of:relative simplicity, durability and longevity yet without a rudimentary harshness that may be said to reflect the region's very persona.

National & Regional Economic Re-Assessment -

As a precursory initiative then, each of the potentially troubled countries should start to re-assess the fundamentals of its national and intra-national economies. The group must individually and en mass consider what 'infrastructure and instruments' they can deploy so as to underpin any necessary economic re-bound which may be required if indeed the EU starts to disintegrate. That economic template will need to be fundamentally sound and can last for decades to come.

Thus, much of the improved social, industrial & commercial infrastructure that came into being through EU involvement, but itself often owned by multi-national corporations, would serve to be used in creating the new Balkan spirit. And it appears the case that given the heavy sovereign debt loads of those “Low Ground” countries, that portions of government or EU owned infrastructure be sold to private enterprise so as to both pay down the debt and to ensure a sweating of the asset-base.

However, one serious headwind incurred has been the upward inflationary pressure that the Euro currency exerted across the Balkans; this previously seen in wage-spiral inflation and exemplified by the startling (fundamentally unsound) rise house-price and land-price appreciation.

Hence, there needs to be major reformation of the region's cost base across labour, land and possibly utilities-service pricing. This preferably achieved internally through government created caps on wages and salaries, with efforts deployed to both realistically adjust property prices so that the present over-valuation which has recently impeded sales can be overcome. An internally achieved process far better than a broad-scale 'market correction' of perhaps greater proportions.

Importantly, the economic importance of the automotive industry should once again be recognised.

It has experienced a truly impressive 'Phase 1' era, and now CEE countries must involve themselves as co-architects alongside multi-national corporations and local SMEs for what could well be a more locally reflective 'Phase 2' era. The building blocks of industrial investment has and continues to be formed from the 'Phase 1' – fundamentals that provide scale and efficiency - may be utilised at a later date with greater sensitivity and reflectivity of the collective Balkan peoples during a 'Phase 2' era.

The 'Phase 1' Era -

Prior to the official formation of the EU (in 1999) and throughout its enlargement (in 2004, 2007 and 2009) the auto-sector has been both recipient and propagator of economic value. A very basic web-located 2008 report by social academic M. Guidote states:

“by 1996, foreign-owned enterprises and joint ventures accounted for 85% of the production of the motor industry in Hungary, 82% in Poland, and 67% in Czech Republic, posting the highest degree of FDI penetration within their manufacturing sectors”.

Thus, the foundation stones for a new manufacturing and economic growth era within the CEE were being set well before politicians finalised formal agreements.

Beyond the aforementioned Dacia re-birth initiative, perhaps the best example nations have been the Czech Republic with the attraction of VW-Skoda, PSA-Toyota & Hyundai-Kia assembly plants and their respective closely-coupled supply base, along with the regeneration of Poland's (previous era) auto-industry gaining FDI from Ford, FIAT and GM (having absorbed Daewoo). Other examples include wholly new investments were made in Hungary by Suzuki, Audi and GM Opel, in the former East Germany by BMW, Porsche, GM Opel and VW in East Germany, and in the Slovak Republic by PSA.

FDI does indeed have its detractors, yet undeniably in those regions that have experienced previous ongoing stagnation or depletion of the local economy it will produce much needed brown-field and green-field investment. To re-quote the Guidote report:

“FDI inflow did result in speedy and deep-seated restructuring of foreign invested enterprises, which included organizational restructuring, technology transfer, worker training, the transfer of Western management structures and practices, and new production strategies and organization. It also increased quality and competitiveness of produced goods, resulted in productivity gains and expanded production and sales, both domestically and abroad”.

The New Reality -

The auto-industry itself is of course comprised of value-seeking corporations and companies with typically private equity interests during periods of fundamental change – as seen today given the contagion into core Europe through the banking sector from severe concerns about the sovereign debt of the 'PIIGS' periphery.

With what presently appears as the 'death-throws' of modern Europe, companies, shareholders and even large tracts of private equity well recognise the recently slowed growth but still far lusher 'green grass' of Chinese, Asian, S.American and now Pan-Arabic EM countries.

That sets a stark contrast to Europe, the “low ground” CEE countries and even perhaps their more tenable CEE neighbours. Most CEE members, those especially inside the analogous “low ground”, must address this investment, and so socio-economic, fact.

Where once much of the CEE was a natural destination suited to the necessarily high CapEx investment costs off-set by low-cost, widely available and willing labour-force, inevitably the rising standards of wealth and so people's expectations and ambitions has dramatically shifted the playing field for both indigenous exporting companies and critically multi-national VMs; very much noted by their current and potential shareholders.

Building Scale & Market Penetration -
As stated, the most obvious apparent supporter of the Balkan region has been France's Renault, no doubt a strategic ploy governed by various factors including: the then emergence of the enlarged EU, the a need to focus on a region away from Germany's immediate sphere of influence, and the probable ability to politically influence the region if necessary. This then the geo-political aspect of what has been proven to be an excellent business case relative to Balkan regional demand and export opportunity.

Renault's initiative and experience – together with VW's previous dedication to Skoda – set the benchmark industrial templates for other VMs who sought and seek to take advantage of the broad CEE market, together with critically, the expected 'new territory' EM markets further east, into the CIS countries.

Hence, as well known, a new round of automotive pioneering is presently underway, Renault now once again redeploying its 'EM industrial playbook' with Russia's Avtovaz (seeking 51%), GM also with Avtovaz, whilst FIAT SpA purchased the majority (67%) share of Serbia's Zastava - the remainder with the government – demonstrates its desire to better re-capture the spoils of past Soviet-era relationships.

The Possible 'Phase 2' Era -

Thus, very generally, we have seen how the southern CEE area has obviously become heartland of 21st century automotive production; the now almost iconic Dacia Logan itself a magnet of industrial attraction.

As its models proliferated on the X90 platform, beyond original Logan, Dacia's production soon outgrew Romanian capacity constraints and logistics disadvantages, hence Renault set-up CKD assembly and all new production plants in other EM regions further afield. Yet the Romanian 'home' plant of Mioveni still operates with full or near full capacity, the company reporting a production build of over 1.5m units thus far since 2004. The mix split as: 674,028 Logan sedan, 345,135 Logan MCV, 41,649 Logan Van, 25,323 Logan Pick-Up, 320,426 Sandero (hatchback), 64,508 Sandero Stepway (x-over).

FIAT had a long established relationship with Moscow and other Soviet administration centres since Italy's own 1950s industrial reformation. This led to licencing and production agreements with Russia's LADA from the 1960s and, more specifically in this case, with Serbia's Zastava from 1954 until with ever loosening and re-tightening ties to this day. Zastava's failed attempt at independence using the Yugo moniker in the 1980s, along with the 1990s Serbian war, a failed attempt at 'aftermath re-structuring' by the World Bank and what seems little more than a subsidy seeking exercise by one Amercan entrepreneur in 2002, meant that FIAT's approach in 2008 was agreed. It was the only viable process for re-establishing the company (ie the Kragujevic plant) as a FIAT production centre. However there is a high likelihood of a re-emergence for the Zastiva brand, positioned as an entry-level marque under FIAT in CEE & CIS markets, and set either head-on against Dacia or more probably positioned slightly below (given Dacia's market progress and raised brand equity).

Hence the future potential of Romanian and Serbian manufacturing capacity alone looks increasingly impressive (excluding other CEE countries). Dacia's plant currently has an annual output of approximately 250,000 units out of a maximum 350,000 given recent plant expansion plans. Zastiva's plant will be expected to produce – as a guestimate by investment-auto-motives – something in the order of 200,000 by the mid of the decade, from a production capacity of 400,000.

Thus by 2020, both facilities could be producing 750,000+ units.

This scale then offers potential for industrial 'piggy-baking', existing and new locally-led firms able to purchase off-the-shelf structures, systems and components, and perhaps even use R&D or back-office functions from the VMs, to create their own, or as likely, JV, new products and services that befit regional demand.

Regional Recapture of its 'Lost' Identities -

The regeneration of Dacia and Zastava brands, along with the re-freshening of Russia's LADA and GAZ products seen of late, together with attempts for Volga, shows a willingness to resuscertate and re-vitalise of what had been either under-performing or 'lost' local brands. With that loss, came an intrinsic loss in regional and local identities.

Of course not all of the CEE's past nameplates are suitable for resurrection, given that they themselves are lost in the annuls of time. This a consequence of: poor sales during the 1910s/20s versus better developed European vehicles, the Communist insistence of alpha-numeric
vehicle identities, unworthy nameplates, and 'best-forgotten' marketing attempts in later years.

Two of the latter 'species' would appear to be Poland's “FSO”, the nationalistic 'home branding' of FIAT cars, and the already mentioned Yugo, the butt of so many western jokes to Serbian embarrassment

Thus any other future nameplates worthy of re-appraisal should intrinsically convey “strong respect” or “strong attachment”. Given these basic parameters, investment-automotives believes that there are other 'ex-Eastern Bloc' brands which could – with the right business models – attract broad consumer bases from an ever widening yet ever more fragmenting and discerning CEE market place.

The psychological associative power of using place-name identity has of course been intrinsic to mass consumerism, especially so in the car world. Serving as examples have been:
- Austin in the 1950s using the Westminster moniker for its large car to reflect authority
- Ford in the 1960s using Cortina, Capri, Granada & Fiesta name to reflect 'escapist' dreamscapes for British car buyers, the names themselves politically motivated given the then formation of the European Common Market, and Ford's desire to access the souther countries of Italy & Spain
- VW when building SEAT using typically Spanish place-names of Ibiza, Toledo & Alhambra. This later leaning toward Arabic/Moorish culture continued in VW badged cars such as Touran, Toureg & Tiguan

We live in an era that has in part shifted 'cultural responsibility'. Where once it was the domain of private individuals living in villages, towns and feudal states, it has for some time been re-generated and re-presented (both well and badly) by the commercial world eager to seek authenticity, legitimacy and customer connection. Thus the corporations themselves, arguably saviours yet exploiters of cultural identity, so have a corporate social responsibility to be as true as possible when organising events, sponsoring local sports teams or creating products.

The “Low Road” Forward -

From very brief analysis, investment-auto-motives believes that the “Low Ground” countries with vital assistance from its “Mid Ground” physical neighbours, and long-term interaction with “High Ground” counterparts, may be able to, on an automotive level at least, produce, consume and perhaps export their way through any future economic downturn.

But it must be noted that the vehicle manufacturing base of the “Low Ground” countries themselves is presently very small. To this end it should seek to build a vehicle assembly and manufacturing sector that is complimentary and inter-connected to that of the VMs presently operating in elsewhere around the region, specifically that in Romania (Renault-Dacia) and that which will be forthcoming Serbia (FIAT-Zastava).

Very simplistically, the primary activators to do so would be:

- exploiting the manufacturing scale set in place by neighbours
- the identification of local, regional & foreign demographic needs / wants /desires
- the identification of specialist B2B vehicle markets & attraction of established players
- the re-vitalisation of 'lost' but meaningful regional brands & nameplates
- the integration of (simple to complex) eco-tech solutions to add USP.
- the demonstration of CEE original thinking* at product, process and business model levels.

* it was the demonstration of original and innovative thinking from the industrial intelligentsia of the CEE in the early 20th century that set it apart, concentration, creativity & tenacity leading to solutions that create high-value products to this day.

Conclusion -

Creating the perfect conditions and formulae for the CEE's “Low Ground” self-emergence will not be easy, especially so if EU fiscal contagion does indeed spread.

But either with 'soft' or 'hard' economic landings the task of re-creating itself as a substantive self-willed and self-directing entity looks to be a necessary task that must be embarked upon – the sooner the better.

This is not to convey that the EU entwined CEE countries in the Balkans should seek to extricate themselves from Brussels, indeed undoubtedly, as stated, much good has been forthcoming. Yet it will also be recognised that the positive benefits that EU membership was able to infer came as a result of a 'rising tide' in a then more closely coupled global economy.

{NB As investment-auto-motives has previously mentioned, ironically the west appeared to be questioning the inter-relationship 'coupling' of East and West at a time it was wholly evident, but now hopes it is indeed the case when EM nations may seek to de-couple).

Given the 'Low Ground' countries physical proximity, and so logistical links, to lower cost areas such as Turkey and CIS states, aswell as the new economic opportunity in 'New Egypt' and 'New Libya', the Balkans could seek to position itself specifically as a “second-order” economy providing mid-value production capabilities in various sectors, aswell as an enhanced 'trade-gate' into Central Europe.

What ever the outcome, and although not immediately obvious, the broadly negative EU picture means that there is a real urgency for the “Low Ground” CEE countries to re-assess their economic fundamentals.

In the meantime all members of the Eurozone and CEE should well understand Angela Merkel's call for a 'lasting solution' which necessitates deep structural reforms, a proven and critically self-imposed manner that merges present-day mechanisms of the IMF with a country's own true commitment. Yet members should also try and devise less painful, more palatable routes which reflects today's very different geo-political & technology-based economic reality.

But of course time is of the essence, by Sunday, or Wednesday or the following Sunday, we 'should' see an outcome. What is required is an interconnected, multi-layered solution that offers short term advantage to all, yet avails long-term security aswell.

The future prosperity of half a billion people depend upon it, but in the meantime 'exposed' regions like the “Low Ground” CEE countries would be wise to at least theoretically construct their own life boats.

Friday, 14 October 2011

Company Focus – Swedish Automobile NV – Seeking to Avoid a “Swan-Song”

The automotive sector in Sweden has over the last few years endured what is - even by its tumultuous historical standards – an agonising period.

The decision by Ford to eradicate its Premier Automotive Group (PAG) back in the mid 2000s eventually saw Volvo Car Corp. sold in 2010 to the Chinese group Zhejiang Geely, as the tail-end exercise; after divestment the British brands: Aston Martin Lagonda, Land Rover & Jaguar.


GM under even greater strain to re-structure – ultimately via Chapter 11 – sought similar disposal having underpinned the SAAB Automobile brand with its platforms, yet having seen little financial return; arguably the result of enforced group R&D cost-absorption into the Swedish entity, itself paradoxically 'hands-tied' regards in-house technical & product development, marketing impetus and corporate budgetary spend. The heavy spiral of demise is seen SAAB's annual sales figures: 125.5k units in 2007, 89k units in 2008 and 21k in 2009. However, 2010 did produce an up-tick giving 32k units, though against an in-house target of 50K units.

During GM's disposal period, SAAB's former MD, Jan-Ake Jonsson effectively said that de-merger from GM was a blessing in disguise, enabling the company to start afresh with new investment and freer hand.

Notionally, this appeared the case, but the aftermath of the 2008 financial crisis combined with the complexity of the investment community, consisting of multi-party value-seeking from both PE and trade buyers - each trying to devise their own high-priced exit-strategies and conversely low-cost entry points – has made the secure future of SAAB a somewhat drawn-out affair. Seemingly at its heart are the two prime factors of a) the ability to set a valuation on a presently poorly performing company with illustrious brand history; thus the elasticity of accounting goodwill, and b) the tactical machinations that have arisen between seller and potential buyers, each trying to demonstrate their respective attitudes of a 'seller's market' vs a 'buyer's market'.

Emergence of Spyker NV / Swedish Automobile -

Recent history initially saw GM offer SAAB to Koenigsegg Group (backed by China's BAIC), the deal faltering, but with BAIC taking the vehicle platform IPR for previous generation 9-3 & 9-5 cars. Alternate SAAB company interest came from GENII Capital and Spyker NV, with a sale was finalised to the latter on 23.02.2010 for $400m, a seemingly ambitious task given the manufacturing size and methods chasm between the niche supercar maker that is Spyker Cars and SAAB AB. However, the Dutch based NV entity was/is a holding company controlled by Victor Muller which sits above the far more apparent manufacturing activity 'below', and was obviously tempted by the opportunity to continue SAAB operations, seeking new era possibilities, whilst supported by GM's platform and technologies contract-service agreement.

[NB For further background details and commentary, please view the investment-auto-motives web-logs dated June 2009, January 2010 and April 2011].

On 25.02.2011, it was announced that the supercar production arm Spyker Cars would be sold to Vladimir Antonov for E15m, with a further E18m consideration to be paid over successive stages; thereby valuing the Spyker Cars business at E33m That notional deal looked to have been tied into Mr Antonov's relinquishment of his previous interests in the company, necessarily sold-off as a condition bt GM for the sale of SAAB to the holding company Spyker Cars NV.
In mid 2011 Mr Muller announced that the corporate name Spyker NV would be replaced by Swedish Automotive NV, and continue in its public listing on NYSE Euronext Amsterdam using the ticker 'SWAN'. The new name obviously intendedly chosen to give far greater weight to the SAAB ownership, but also put an onus on the Swedish government and the European Commission to continue assisting the struggling SAAB during an 'intermediate' period. The almost poetic intonation was to proffer the idea that the 'ugly duckling transforms into the swan'.

Surviving this 'Intermediary Period' -

Thus far that intermediate period has lasted well over 20 months, and prior to the purchase consisted of 'soft bankruptcy' proceedings through the Stockholm courts for corporate restructuring and a E400m loan from the European Investment Bank in February 2010, this backed by Sweden's National Debt Office to allow ongoing operations and thus try to save jobs in Trollhatten and maintain a core competency of volume vehicle manufacture inside Sweden after the 'loss' of Volvo AB. By March 2011 E260m of that credit facility had been drawn. Exactly how long that intermediate period was to last was and seems still is indeterminate.

On 08.09.2011 Swedish Automobile NV filed for bankruptcy protection against its list of creditors, many from SAAB's supply-base who have themselves had to cope with income volatility as SAAB's financing taps have been turned off, on, reduced, stopped etc, thus affecting production and supply chain demand and payments.

Chinese Investment Hopes -

New investment finance for SAAB has apparently been discussed with a number of external parties, the most hopeful 'solution' originating from a Chinese share sale. Initial interest came in May 2011 from 'Pang Da Automobile Trade Co' from Tangshan, one of China's largest vehicle dealership groups, with 1,200 multi-brand franchise stores and retail sales of 470,000 units, thus offering a powerful and geographically broad point-of-sale outlet for SAAB in China. But the necessary intent to manufacture in market so as to reduce production costs meant that Pang Da required a manufacturing alliance. This appeared in the form of a joint partnership approach between 'Pang Da' and 'China Youngman Group' of Zhejiang. Youngman itself a manufacturer primarily of coach/bus and truck with increasingly passenger car content, using in each respective sector the licencing vehicle basis of Neoplan coach, MAN truck and assembly of Proton compact cars and Proton-Lotus sporstcars.

Global Contraction Woes -

But given the mixture of typical power struggle negotiations and heavily deflated stock markets across Europe and now China, the still relevant magic formulae of Swedish Auto & Pang Da & Youngman Group of Zhejiang, is looking increasingly fragile.

This is illustrated by respective stock prices.

Most notably Pang Da's price plummeted on Wed 10th October from 28 Yuan to 10 Yuan in a space of minutes, presently (midday Friday 14th October) hovering around 11 Yuan.

Swedish Auto (SWAN) presently sits at E1.03, thus giving a MarketCap of E25.6m (having seen 52-week highs and lows of E6.12 and E0.35).

Exacerbating Stock Volatility -

It appears that the release of contrastingly 'dour' and 'upbeat' comments from Pang Qinghua – Chairman of 'Pang Da' – sharply affected SWAN's share-price. His comments perhaps intentionally used to demonstrate Pang Da's influence and 'muscle' over SWAN, given his position as presently the only tenable strategic investor sat at the negotiating table. Moreover those contrasting statements may have been used as a (remote-control) 'depress and buy' tactic to gain greater (in)direct influence over SWAN – though it must be stated that this hypothesis is wholly unsubstantiated.

SWAN's Counter -

Recognising Swedish Automobile's ever more marginalised position - sat between headwinds from consumer & capital markets and the apparent machinations of its 'saviour' – Mssrs Muller (CEO) & Huganholtz (Chairman) have apparently sought to intentionally extend SAAB's period of 'animated suspension' by both:

- Seeking bankruptcy protection
- Divesting of the Spyker Cars business.

Bankruptcy Protection -

As previously mentioned, a filing was submitted on 08.09.2011, its intention to yet again clear the largely creditor-set hurdles facing SWAN, but with the undoubted intention of encouraging Swedish and European stakeholders to once again financially backstop SAAB with enforced creditor haircuts, and very probably further liquidity provision from the European Investment Bank (to protect original monies) and probably a second guarantee from Sweden's National Debt Office.

However, as is all too obvious, that government finances across Europe are being put under prolific strain, the cost of capital markets derived finance acting s a deterrent to additional sovereign borrowing, and that that which is probably majority directed at national banking systems; even if denied in principle. This in turn now profoundly effects the EIB's ability to raise finance and sharpens both the type of projects funded and the criteria therein; typically infrastructure based initiatives in fast-growing regions. Thus additional reliance upon the EIB may not be forthcoming. A possible secondary approach to the European Investment Fund – an operationally independent sub-division of the EIB – could be made. But its prime remit is the SME realm 'future-forward' companies and projects. Whilst SAAB could well highlight its R&D work as pertinent, its very scale could well disqualify any application, and even if accepted the funds provided only small relative to the magnitude required.

Thus, a second European 'bail-out' of SAAB looks increasingly unlikely. Instead, the less economically constrained homeland Sweden could provide a financial backstop...but at a price. Sweden has of course been a very light casualty of the EU debt crisis, having worked its own way through national busget 'fiscal contraction' over preceding years – indeed as an exapmlar to the UK. It could offer assistance via its own banking system with a lender such as the government owned SBAB Bank AB. However its own business headwinds (even excluding the impact of European economic contraction) has affected the banks's credit rating by Moody's – set as of 05.09.2011 on a “negative outlook”, thus increasing the cost of its wholesale funding and so lending rates.

[NB investment-auto-motives believes this “outlook” rating to be overly harsh given the comparatively strong economy, GDP growth rates of 5.5% in 2010 and 4% in 2011, and a respected 'Geni co-efficient' showing social cohesion / stability].
Thus the only provider of non-commercial assistance at this time is the Swedish government].

Sale of Spyker Cars -

The sale of the sportscar business has been muted over the last year, the CEO himself stating in the H1 2011 report that managing both SAAB & Spyker businesses only adds complexity and that more importantly innate share-holder value could be lost given the cash burn and future funding requirement demanded by Spyker Cars.

Muller and Huganholtz also well recognised that SWAN had to be seen to be proactive in financially supporting SAAB (as it could) if it was to garner external respect and so a greater likelihood of assistance.

The fact that no sale had been made to Vladimir Antonov through the year – as previously proclaimed – highlighted a changed mentality at SWAN, one in which investment-auto-motives believes Muller & Huganholtz recognised the 'foreign aid' power of America's QE programmes and the US$'s ability to meet the firm's immediate and possibly long-term financing needs.

Thus, the reported sale of Spyker Cars to North Street Capital (of Connecticut, Massechussettes, USA) for between $42m & $44m, looks to be at face value a semi-forced action, one which provides a the finances for a partial funding stream for SAAB, which it is hoped to be matched and bettered by external (state) lenders, as was the case previously; but moreover importantly creates the potential for a US funding bridge.

[NB North Street Capital LP is a dual aspect 'macro-play' and 'venture capital' investment house, based in Greenwich, Connecticut, USA]

Critically, the full cash-sale funds are able to be booked directly and immediately to the balance sheet, which would have not been the case with a sale to Antonov.

Advantageously, Swan has benefited from a rise of approximately E10m in Spyker Cars' valuation over the last 9 months. This then generates questions about the valuation methods North Street used, but probably in part answered by North Street's expectation that the US$ will continue its path of decline, thus allowing to 'over-pay' now, so as to 'over-book' later; with what is imagined as a healthier Spyker Cars business in the coming years boosted by the enlarged differential effect of the US$ vs Euro FX spread.

It seems only natural for a VC firm with PE money goes bargain hunting in the industrial margins, especially so in luxury goods arenas which have high (USA) potential and appear notionally under-valued at this point of the (unnaturally distended) economic cycle.

The problem Spyker Cars however does face is momentum and development headwinds. Sales have slackened over preceding years since its 2006 sales high, and it undoubtly requires substantial technical investment with probable 'piggy-backing' of a VM's support to grow its model portfolio . Namely the D8 and E8 models showcased thus far, and the ongoing development needs of current C8 and C12. (investment-auto-motives believes that the C12 body will in reality be the true next generation C8).

With SAAB's future presently unsecured - for all the PR rhetoric - the previously 'assured' Sedan & SUV platforms provision has been heavily undermined. In this light North Street Capital must surely have an industrial partner at hand with an MoU or greater in place, or a knowing demand from other PE firms in the US' 'secondaries market' who themselves have such holding interests.

Furthermore, besides the turnaround and FX-related potential, one can only assume that North Street investors will been placated of natural concerns about the acquisition of Spyker Cars with details regards (amongst other factors) the size of its wholly owned asset-base and size of deposit-paid order book. Only such 'backstops' would offer immediate purchase rational, but even then the substance of even these price-supports should be seen to be highly convincing.

However, investment-auto-motives believes that in the current climate that the hedge fund industry and associated PE houses are being forced to appear active, and as such may well be pinning deals on the eventual USA rebound, the rise in demand for niche luxury cars and the FX supercharger effect.

SWAN Forcing China's Hand -

Any funding bridge to date has been in the hands of Pang Da who had previously promised some weeks ago, but not yet delivered a goodwill payment of approximately Skr670m / $95.8m / E70m.

It had previously placed an order for 2000 SAAB cars in June and provided a deposit of Skr45m, but financing and production problems meant that those cars were not delivered by the September deadline and are still awaited.

SWAN's American deal – with its portence of an increasingly closer US relationship – appears to have ruffelled Pang Qinghua, who stated on 12.10.2011 that SAAB's bankruptcy appeal effectively distinguished the agreement between SWAN and Pang Da Auto Co. That set-off alarm bells in Holland and Sweden and a joint statement from SWAN and Pang Da was later made to re-enforce both parties commitment to the venture.

Though it is clear that Pang Da will have understandably become very frustrated at the absence of its vehicle deliveries, all the while China's car market demand waining in the midst of the country's heavy economic contraction; thus as and when the cars do arrive they may sit on dealer forecourts for some time and require discounting themselves, which only goes to undermine the premium character and pricing that both SAAB and Pang Da seek to grow both businesses.

The SAAB AB Sale -

Since the disposal of SAAB by GM the future of the company, whilst extolled as 'bright' by associated executives and enthusiastic brand fans, was also recognised as precarious by auto-industry knowledgables and the number crunchers of the investment community.

To buoy sentiment and maintain customer and brand loyalty a number of websites / web-logs were created by both Spyker NV / Swedish Automobile NV and supportive loyalists, These are the official 'insider' website named, and the 'unofficial' support website Though each appears to exist independently, investment-auto-motives assumes that there is a high level of information feed from the former to the latter to as best possible allay customer and investor fears and create interest stories during this 'intermediate period'.

That period of uncertainty appeared to start to draw to a close with the arrival of Pang Da and Youngman, the duo offering Skr2.2bn / E230m for a 24% stake in SAAB; thus valuing the firm at Skr9.16bn / E958m.

With the 2000 vehicle order presenting what appears a new 'promised land' for much boosted SAAB product distribution, immensely lower-cost manufacturing (even with China's inflationart climate) and the associative economies of scale available.

But will the offer, even if well intended as seems the case, be able to transform SAAB's fortunes? In short, can Pang Da and Youngman themselves deliver the goods? .

Credibility of the Chinese Approach -

The SAAB ambition undoubtedly bolsters the Chinese entrepreneurs' domestic ambitions, adding further premium European brands to Pang Da's dealerships, so raising its own brand equity, and providing a new industrial platform from which to operate effectively afresh.

All that Pang Da 'brings to the table' seems obvious enough, its broad dealer coverage able to penetrate the main metro centres of China and tier 1 & 2 cities. The only question for SAAB is to what degree those dealers are able to positively reflect SAAB's products, brand values and desired customer service levels. Unless a company is able to be hands-on to both proffer itself and by virtue protect itself, the stark price-led realities of the Chinese car market mean that there is a danger of even 'quality' products being heavily discounted as local dealers feel is necessary to 'shift metal'.

It has been muted that any new 'Chinese SAAB' would be dedicated to the home market, with little interest in global markets, thereby increasing the likelihood that any 'unprotected' foreign brand would become victim to the cost-down, scale-up business mentality that drives any 'commoditised' sector.

Thus to truly ensure SAAB's good fortunes in China, Swedish Automobile would need to create an agreement with Pang Da that their brand is not commoditised, to do so ensuring that SAAB is sold in an aligned or even bespoke retail environment. Given the level of hyper-competition inside China and the dealer expensed CapEx to create such showrooms, this appears very unlikely. And whilst SAAB could be mutually buoyed if sold with parallel brands such as Volvo or say Alfa Romeo or Nissan's Infiniti, the reality is that multi-franchise dealers (across the price ladder) tend to provide greater incentives to sell their better branded inventory, the innate sales mentality necessary in mainstream brands contaminating slow moving upper brand models.

So whilst the sales opportunity over the short, mid and long terms looks huge, pitching the brand as necessary is all important: a reason why European luxury fashion goods makers have been so hands-on with their retailing strategies.

The picture is further complicated by the 'manufacturing promise' offered.

Investment-auto-motives suspects that in its ambitions to become a major player in passenger car production,Youngman itself may well be trying to digest an opportunity / challenge that proves bigger than itself. And that stems from its present and intended manufacturing methods, what appears a leap-frog of (possibly misplaced) faith.

Whilst the manufacturing process is little different between coach/truck and niche sportscars, in its ciurrent domain, this is a world away from mainstream car production. The former is based upon low CapEx levels set against a high labour content for 'slow assembly'; with an ability to easily purchase and utilise low-tech tooling such as fabrication frames, roll-through carrier-dollys and the like, in effect very yesteryear operations. The process for volume car-making is wholly different, requiring high CapEx costs for 'fast assembly' via body-panel steel press tools, robotic welding stations, dip baths, paint shop, (hanging) car-body travelators, powertrain 'stuff-up' stations, etc etc.

This of course is philosophically well understod by Youngman, but the ability to 'leap-frog' in the desired manner is highly complex. It has some experience, but realistically very little, gained from exploring a partnership deal with Malaysia Proton, at a time when Proton had built its Proton City manufacturing plant, and latterly sought Chinese partners to access cheap componentry and ideally sell-on ownership of the new plant infrastructure.

However, Youngman's actual previous business arrangement (and experience) with Proton extended to little more than factory tours and ultimately resulted in simply the desired importation of fully built Gen2 model cars, re-badging as 'Eurostar' by Youngman for domestic sale.. An agreement was signed in 2007 with 'intention' for 30,000 cars yet it is understood that only a few thousand cars were actually delivered and re-badged. The highly hoped 'saving' of Proton from the Chinese did not emerge, and talks of selling Proton to Youngman, or indeed licensing the Gen2 model for Chinese manufacture, did not progress. So whilst Youngman managers no doubt learned more about high volume production systems its unwillingness or prohibited inability to proceed meant transferable and deployable learning was halted.

Proton itself may have felt misled, so 'giving-up' its production 'secrets' (overhead costs, input costs per vehicle, factory-gate pricing, organisational methods etc etc) whilst Youngman paid a small price by way of re-badged cars for the experience.

All at SAAB will of course be weary of a similar repeat by Youngman, especially given its lack of experience with quality-led vehicle mass-manufacture.

However, one of the greatest stumbling block and so barriers to credibility is that it that Pang Da – Youngman have openly stated that they yet to apply to the PRC leadership for approval of the SAAB deal, the former citing that it is for its smaller partner to do given that it would be necessarily judged by the PRC leadership as a merger of vehicle producers.

This 'handing-over' of deal progress responsibility appears to be part of the 'modus operandi' in stalling and negitiating, though ironically such a production-centric issue (as seemingly deemed by PRC M&A regulations) did not stop Pang Da's CEO from announcing the deal void when SAAB sought bankruptcy proceedings.

This seemingly intentional greying of responsibilities between the two Chinese partners then only serves to discredit what are presented (and periodically shown to be with cash deposits) as honourable intentions.

As things presently stand SWAN very possibly internally views the ultimate outcome of any deal as less than ideally desired.

A E70m bridging loan from Youngman agreed on 12th September, has now reportedly been received by SAAB which will be welcomed, with further monies expected on 22nd October. This then starts to cement the deal, though of course opt-out clauses and re-imbursement payments will have no doubt been agreed should the deal be terminated.

Youngman as Chinese Auto-Sector 'Intermediary Agent' -

Having described the core capabilities and general industrial shape of Youngman, which prescribes an 'unnatural fit' (unlike say BAIC,SAIC, FAW and similar large operational others) there may be reason to believe that Youngman may be operating as an 'Intermediary Agent' for want of a better title.

China's current Five Year Plan calls for rationalisation of domestic industry players, thus the biggest companies cannot be seen to be scouting for additional foreign brands to incorporate into their portfolios, whether JV or indeed wholly owned. Thus there is a real chance that Youngman is either being deployed or presented itself as a legitimate co-buyer for SAAB, its advantage being in that as a fringe player it has limited funding levels and so can legitimately pursue relatively 'low ball' bids. It would enlarg its stock-hold over time at a steady affordable rate, with its own strategic exit of selling what is ostensibly the SAAB brand and any other late stage advantageous IPR to another major Chinese producer, very possibly BAIC (which already acquired the previous generation platform design rights) or Geely (the buyer of Volvo).

This would then follow a similar play to the 'dissection and re-amalgamation' of MG and Rover (Roewe).

Moreover, with such a coupling the PRC leadership may wish to creates a 'pseudo-Trollhatten' metropolitan area, something that matches its 'pseudo-Wolfsburg' (relative to VW) as part of its own New Towns urbanisation programme. Each of which has specific globally-related architectural and cultural 'reflections' mated to specific 'industrial / service' local economies. These in turn intended to draw in FDI and immigrant (from home nations) advanced skills workers, so that a progression of (brand specific) technical advancement can be made where it was otherwise 'left-off' whence China bought the corporation.

SWAN & SAAB's Current Position -

Undoubtedly, Muller and all executives are seeking a way forward, away from what have been tortuous times; seemingly all avenues explored whilst obvioulsy still seeking the right avenue for SAAB's value maximisation and so SWAN's profitability and shareholder attraction.

Given the challenge, it represents a commercial situation that few would want to face, the size of the challenge well recognised by those PE firms that took an initial interest in SAAB yet walked-away.

Although the 'Chinese solution' is being progressed – albeit painfully for all – more advantageous alternative courses may become available if and when the global and so western economies start to gain positive traction. There is no doubt that Corporate America and portions of Corporate Europe sit on mountains of liquidty which their own investors are calling to be either used in logical, truly value adding acquisitions, or to be dispensed in the form of dividends. Thus American and European Chairmen and CEOs are now expected to plot wise courses for tomorrow's earnings levels.

This then broadens the picture for SAAB as to who else may be willing to 'adopt' SAAB. Given the present funding constraints inside SAAB, which very possibly could be maintained even with Chinese capture, Muller et al would be wise to re-think the notion of stitching together a harmonious JV or indeed JVs which allow SAAB to 'piggy-back' another's ready-made platforms and systems sets.

Ideal Strategic Options -

In reality SAAB must seek out a capable partner that can provide off-the-shelf and easily adaptable platforms spanning all major segments so that SAAB can create quickly and to budget a compelling family of properly develop, yet intrinsically differentiated vehicles for both global and Chinese clients.

The following provides a very basic overview of possibilities:

- Ford Motor Co: using well amortised but capable platforms and systems sets and providing development and procurement synergies with the up-scale Lincoln marque.

- Renault-Nissan: giving corollaries with Infiniti and assisting the Renault marques need to climb the price ladder, as being forged by competitor PSA.

[NB this being the 'preferred' route for SAAB proposed by investment-auto-motives when SAAB was put up for sale by GM, then being negotiated with GENII Capital, Bernie Ecclestone and the Renault F1 team, allowing for horizontal and vertical integration].

- Hyundai-Kia: able to use low-cost S.Korean produced sub-structures and devise a convergence and divergence technology strategy with Hyundai's Genesis marque
- Daimler AG: to lodge SAAB as a 'sandwich filler' brand, a feasible 'underling' to Mercedes whilst 'overling' to Smart, and so better defend against renewed competition from Alfa Romeo and other lower-premium sporty marques.

- New GM: leveraging the European arm, Opel, offering as contract manufacturers its new generation powertrain and platforms to SAAB, thus absorbing cost for both, and both co-creating mutually deployable technology strategies for the mid-premium (SAAB) and lower premium (Opel's new target position) segments. However, doing so might re-create operational constraint problems of old, especially if GM is unable to grow its profitability as first thought at its IPO – a very real possibility given global economic and consumer preference headwinds presently faced.

Any alliance idea would very probably exclude the majority of Japanese corporates since they tend to prefer 'sole control' of their own destinies; with perhaps Suzuki-Maruti in India a rare exception to the historically set rule.

However, the previous arrangement with Subaru – previously deployed via GM – could offer JV potential as Eastern and Western faces of the same technology sets, both maybe able to re-foster mutual histories in rallying (though very separate eras) thus deploying selectively applied USPs in AWD systems and low-centre of gravity boxer engines.

It almost very definitely excludes a tie-up with TATA's Jaguar Land Rover, since TATA would wish to retain aluminium-led advanced body-structures and new powertrain systems for itself as much needed differentiators, and look to be considering possible technology share with FIAT's Maserati (as both fight their way against the Germans & Japanese) through Ratan TATA's Italian relationship.

A multi-VM 'amalgum' approach might be optimal if seeking to secure as much design freedom as possible, utlising various sources for under-body body structures, power-train families and electronics systems,. But such a 'freedom path' would induce not only highly sets of JV agreements to be create and maintained by executives, but also a heavy management burden for procurement and engineering teams. The technical complexity of sourcing from different geneological DNA pools inly adds to the multi-product brand-coalescence challenge.

Conclusion -

Presently, the 'Chinese solution' appears theoretically ideal for the long-term security of SAAB, and for the profit maximisation SWAN. Indeed it is the only viable route forward available to Victor Muller and Swedish Automobile NV, and for investors with SWAN it seems to offer a 'big prize' reward for the troublesome and volatile ride.

But look more closely at the innate structure of the parties involved and that ideal starts to demonstrate some fundamental flaws. This is why investment-auto-motives suspects that the Youngman element of the JV arrangement may ultimately serve as an 'intermediary agent'.

This is not to say that SAAB and SWAN cannot access and capture the Chinese market, simply that the route into China, and so leveraging the Chinese market, may well be even more disconcerting than has been the case thus far.
Pang Da and Youngman may not be corporate assimilations of Lewis Carol's “Walrus & Carpentor” but SAAB is ostensibly at the behest of both when walking quite literally into a foreign territory.

Thus, it is imperative that SWAN start to re-assess the potential for working with a western VM that has presence, credibility and political leverage in China.
Whilst that had not been an option previously, due to 2008-9 'fire-fighting' and subsequent organisational restructuring, the subsequent financial cushioning inside many American and European corporates have put them in prime predatory positions. For Boards of Directors there is a stark choice emerging that either targets be sought or investor demands for increased dividends be satiated.

Unlike previous periods of exacerbated p/e levels, such value and growth hunting is becoming actively encouraged by progressive investors keen to see their own investments put to work.

This then is a very positive backdrop for SAAB and SWAN.
Since both has little choice but to traverse what seems a grey and winding commercial rouite into China, it could do far worse than encourage the accompaniment of a major western VM, preferably one already well established in China to provide financial and political support.

The ideal outcome would be for Swedish Automobile to create a commercial structure for SAAB that gives a 24% hold to Pang Da & Youngman, a 24% hold to another and 52% hold to SWAN.

The 'slow boat' analogy regards China entry is both over-used and unimaginative, but at least with a better balanced control of tiller and throttle, the comparatively little swan's own onward journey may be far less frenetic.