Saturday, 26 November 2011

Micro Level Trends – UK Niche Industry (Part 1) – National Economic Revitalisation via Miles of Smiles

The last web-log looked at how a long established but little known private African company sought to extract value by matching its competence in van fabrication with the very real 'workaday' needs of its nation.

This investigation looks at a specific sector of the of UK auto-industry, similarly inhabited by a plethora of private companies, yet one reliant on a similar assembly production skill-set - though with more exacting standards – directed at the camper-van and motor-home 'leisure' market.

Thus whilst focused on technically similar products – converted vans and specialist body built chassis cabs - the 'erratic vs stable' developmental experience of the companies' very different continents and country's over the last 50 years fostered very different commercial market ends.

[NB though it must be remembered that the previously mentioned KVM does indeed provide safari / tour / camping vehicle solutions as commissioned].

However, within Britain, the previous general upward trajectory that lasted those 50 years with periodic lulls, is now well recognised as the last portion of a western dominated golden-age in global trade, an era which has now come to an abrupt end. Whilst Britain is far better placed than many of its European neighbours from a Debt:GDP perspective, it does not have the liquidity fire-power that the US can muster nor its geo-political strength, as recently seen by US visits to the Pacific Rim.

Thus whilst on the right fiscal constraint path to engender mid-term balancing of national budgets, realistically the growth element so desperately sought and discussed here and now, is still some time away. Britain has a very tough upward economic battle and new growth 'green shoots' can only be expected to 'take' and prosper in the right fiscal, regulatory and societal climate...a climate not yet arrived.

Yet there is an obvious imperative that the efforts undertaken by which to stimulate tomorrow's growth should be crafted in the near-term.

To assist this end, investment-auto-motives reviews the UK motor-caravan sector from 3 perspectives, to be relayed over the following weeks.

Part 1 – Social Dynamic: affects the marketplace.
Part 2 – Sector Participants: must assess the terrain and 'visioneer'.
Part 3 – Eco-Tech Transfer: from fringe to mainstream habitation.

In its own 'below the radar' manner the UK's motor-camping sector may be able to provide a relatively small but important contribution to that growth, acting on a local and regional level firm by firm, but also at a national level across various synergistic industrial sectors. investment-auto-motives views this segment as perhaps having the capability - acting in concert with many others - to operate as a small but useful 'economic starter-motor' which in turn assists a re-modelled 'national economic engine' which itself adopts 'eco-tech' learning for broader application from the motor-caravan sector itself; the sector in turn a funnel for best practice acquired from foreign leaders in 'green-tech'.

The following then is a very general overview of the British camper-van & motor-home sector, part of the far broader 'leisure camping' industry.

Motor-Camping in Context -

Whilst investment-auto-motives believes that it is the arena of motor-camping that can serve as a fundamental catalyst toward a revitalised eco-tech orientated future, it must be recognised as one aspect of a muti-dimensional arena.

Today camping per se spans from the very low priced to very expensive.

Ranging across: pseudo-disposable two-man tents directed at music festivals through lightweight walking & cycle-touring dedicated equipment; motor-bike tour items; the towed trailer-caravan segment covering tiny 'aero-pods' for small hatchback cars right up to large 5th wheel trailers for heavy duty pick-up trucks; typically large static-site caravans; chalets of varying standards and the more recent introduction of 'glamping' – a portmanteu of 'glamourous camping' - which encompasses luxuriously appointed themed tents, from Red-Indian Tepee to African Safari to Bedouin tents

Dramatic Growth of Camping -

Statistics gathered by the Office for National Statistics show that in 2009 a total of 5.43 million
camping trips, an massive increase of 29% compared to the previous year. It appears a watershed year since this number the overtook official recordings of B&B (Bed and Breakfast) stays in conventional buildings which itself attracted 4.98 million stays.

[NB however, it should be noted that the propensity for campers to undertake more trips through the year is generally greater than for those who use B&B accommodation. It should also be recognised that because that because the B&B is often the lower cost option for business trips (especially touring groups such blue-collar manual labourers) this may muddy the official statistics].

The ONS stated that in 2010 holiday visits abroad decreased by 12 per cent to 36.9 million compared to 2009, highlighting a trend for low cost nation-based holidays (ie camping) and for post financial crisis 'staycations'. So a definite expectation that couples and families had philosophically migrated to the homeland outdoors alternative.

The Middle-Class Rallye -

During mid 2010 the Telegraph newspaper reported a survey of 2,000 professionals from the AB1 socio-economic group, which discovered that over half were considering a camping trip that year, using their domestic bedding and travel technology like iPod docking stations.

The department store John Lewis noted the same year that wedding-list requests for camping equipment had increased by 44%.

This 'outdoorsy and stoic' British attitude bolstered and engrained by the now ubiqitous appearances of the 'Keep Calm & Carry On' sign on everything from mugs to T-shirts, providing a new sense of pseudo-defiant and semi-pioneering community...nicely complemented and balanced by the 'mix and match' opportunities afforded by the Kath Kidson range of countryside flora inspired goodies.

When the economy becomes tough, for the British middle classes the pragmatic meets the poetic. That sense of romanticism increasingly focused upon a recently grown consciousness for 'regionalism' and 'authenticity', harking back to a previous age of the rural idyll, exemplified by the popularity of local produce, farmers' markets, organic food, and arts and crafts – a less travelled idealised route toward William Morris rather than the much travelled one to Morrissons supermarket; even if that be the reality when stocking up for Cumbria or the Dales.

Even if presented in such a hyper-real manner, such outdoor activity allows the parents of 'molly-coddled', 'cotton-wool wrapped' 21st century children, to become albeit for a short but important time notionally re-connected with nature

For many of the 20-something set the activity is a natural extension to their lifestyle juxtaposition of summer music festival and travel-bound low budget gap years, cemented by and weight of accrued educational and travelling debt

A Clash of Holiday Cultures -

So whilst the conventional package holiday for families, couples and singles is far from dead and buried, this trend toward self-sufficiency and budget consciousness looks to perhaps become even higher up the leisure agenda thanks to the corporate and share-price suffering of the holiday firm Thomas Cook which demonstrating the financial woes of a contraction in general UK-outbound international travel and over-exuberance during its ravenous M&A period. It may or may not be “too big to fail”, all dependent upon re-financing methods, but for a new generation (ironically of all ages) that seeks partly packaged self-discovery culture imbued travel over the heavily faded 'attractions' of the Meditteranean, the watershed at Thomas Cook might be said to reflect a much re-orientated expectation of summer holidays themselves.

The 'back to nature' zeitgeist continues with an expected record attendance at the National Caravan, Motorhome and Camping Show to be held at London's EXCEL centre in February 2012

Of course, much of this new era is to be experienced under canvas, reminiscent of Scouting and Girl-Guides, and intentionally in dynamic contrast to the 1970s style experience for many of static caravans or chalets. But to avoid the worst of the weather there is a growing popularity for the motorised alternative.

Car-hitched caravanning has undoubtedly seen a remarkable re-emergence through the 2000s thanks to an ageing yet relatively wealthy grey-population who seek greater convenience and comfort from the car-caravan formula and don't care about the supposed 'caravan stigma'.

Focus on Motor-Camping -

But there has perhaps been a possibly greater upturn in demand and use of the smaller class of motor-caravans – ie camper-vans as opposed to motor-homes – by a younger demographic with shallower pockets; more cost effective and arguably for much of the year a more functional alternative to the car & caravan; given its innate self-propulsion, passenger car utility and van-like attributes throughout the holiday period, and if owned, throughout the full year.

A Renewed Camper-Van Culture

The re-emergence of camper-van is of course a cultural phenomenon much driven by the media and popular culture portrayal. The massive re-popularisation of the iconic VW camper (the Type 2) in original Split-Screen and later Bay Window guises comes from a merging of the previous retro-chic (as seen with New Beetle, New Mini & New Cinquecento) and the emergent hippy-esque counter-culture in reaction to suffocating corporatisation and 'packaged label-led lifestyles'.

But that rejection – or at least weekend and holiday period rejection – of the conventional by ironically employees of big corporates and authorities, is not just amongst the 20-somethings. Today's 30-somethings are not quite 'xerox' breed replicants of the '30-something' generation as depicted by the 1987-91 US television series of the same name.

Twenty years on things are different, even for 40-somethings. Though not wholly unlike that 'yuppy' era in terms of aspiration – an ever present human trait – today there appears greater attitudinal and lifestyle balance.

This reflected in the way that a 45 year old father might wear the same T-shirt, baggy ¾ length shorts and footwear as his wife, 7 year old son and indeed 5 year old daughter. Today the dynamic of many young families is that of extended youth for the parents and integration into that youth for the children, with an onus on a healthy pursuits lifestyle where gym membership has been replaced or complimented by the use of the functional family MPV, SUV or sporting estate car to enable weekend cycling trips and school-holiday camping trips.

Thus even with the supposed demise of the motherly school-run MPV, the 'FUNctional' vehicle in its many shapes is still very much with us, necessarily so as home owners once again re-discover their practical nature, having to recall what their dads taught them, and using the family vehicle for DIY materials haulage and trips to the recycling centre.

“Practicality” and “Regionalism” have become the contemporary watchwords.

Leading the Philosophical Convoy -

Unsurprisingly the near fetishistic world of TV food, and its conveying lens, reflects much of this. Herein for years the British public has grown-up with an enthusiastic, seemingly class-defying and multi-culturally inclusive national champion in the form of a now not quite so young, family man: Jamie Oliver.

His own televisual travels highlight the transcendence. Previously zooming around London on his scooter, then touring Southern Europe in his immaculate, expensive and much desired Split-Screen VW Kombi; but more recently whilst reviewing the foreign influence on British cuisine, doing so in an ex-army Bedford TK/MK truck, converted to house a wooden 'pub/kitchen'. The well known 1960s aspirational VW bus then replaced by a now little known odd-ball truck, reminiscent of a motorised old style Gypsy Caravan or the New Age Travellers of the early 1980s. Yet in its manufactured self a twist on the merged “Keep Calm...Kath Kidson” formula.

[NB the programme shows Jamie driving the large truck, but also a Land Rover Defender in certain scenes, thus beyond usual product placement by Land Rover, investment-auto-motives suspects that there is a possibility that TATA, the India conglomerate and maker of trucks and owner of Land Rover, may be seeking to co-align future truck imports / assembly in the UK, and so use the beneficial cross-relate to Land Rover vehicles]

A Convoy Derived from 'Glocalisation' -

The euphemistic term 'Glocalisation' has perhaps been over applied and misused in recent times, but undoubtedly reflects the backdrop to the emergent middle class 'eco-convoy' centred around camping.

Globalisation was emphatically the trend across the late 1990s and the 2000s decade, where West met East by way of not only a new round of western brand expansion across the globe, but for many 'Generation X & Yers' and the new 'Gen 21' general travel has become part of the life expectation. Those hoards of Backpackers themselves still seek new sights, but their own ageing into familydom and the constraints of the economic macro-reality indicates that such travel will be less 'global roaming' and more 'regional discovery'.

And of course, here in the UK much of the European discovery to be had was actually undertaken by young and not so young Australians and South Africans. And it was their own backgrounds of 'outdoors' living and camping that enabled them to embrace tent and van living when travelling across Europe.

New Market Entrants -

To serve that social shift new Van Rental business models were either created of imported, so expanding the UK market beyond the former more expensive, up-scale and older boundaries. The UK arrival of Australia & New Zealand's 'Wicked Campers' allowed ANZACs and now Brits to trek across the UK and Europe, the firm offering anything from a weekend package to a 3 month Van-Tour package.

[NB However, it seems that the firm advertises its campers as 'cars' since not only are many passenger car derived (ie MPVs) but done so to circumnavigate (gas and electricity use) safety laws]

Furthermore, others entered the sector using the classic VW camper as prime attraction, though typically in a smaller way, from the renting-out of a small fleet by enterprises like Devon Cool Campers or home-owned classic (less expensive) Bay-Window VW camper-van such as Hippy-Campers – a tactic also adopted by some established caravan dealers. Others modified other van and vehicle types into campers even if some realistically are not wholly fit for purpose.

It was clear then, that the traditional up-scale professionally converted and thus generally expensive camper-van and motor-home sector had been joined by – though not directly attacked – by a very different species of product.

The Japanese Experience -

Since the 2008 financial crisis and recognition that the future for the West looks far more economically subdued – at last recognised by as 'the new norm' – economists have almost delighted in the ability to apply parallel case studies from elsewhere; none more prosaic that Japan's 'lost decade'. This the obvious parallel given Japan's advanced country status meant that it was the vanguard of what has come to pass, and its painful ongoing process of cost-base devaluation

The cost-cutting constraints imposed on Japanese corporations so as to remain competitive came into lay in the mid 1990s, and of course impacted employee stability. The tale of redundant salary men (though less so women) has been told in Japanese film since. Less cinematic, but far more interesting have been the real-life social and consumer dynamic that took place as part of that process. Japanese growth over the 1980s saw a consumer boom in sales of smaller 4x4s and MPV's many of which were given mini RV (Recreational Vehicle) personalities. Nissan Prarie, Mitsubishi Space Wagon were of this ilk, later joined by special variants of Toyota Previa and Nissan Serena

Ironically though given the propensity to work by salary-men and take little holiday time, these vehicles sat outside homes, offices and shopping malls. Holidays that were taken were typically a flight away to a different part of Japan or to a foreign shore. The downturn ironically brought the RVs into being. Holidays by worried staff and management became far more regional, using the RV-car as the 'living pod', often parked in hotel car-parks so that the hotel's leisure facilities could be used on a pay-for day basis.

Corporate and independent hotel owners of course were partly angered given that rooms were left empty whilst singles, couples and sometimes families 'lived' in the car park, but they did offer a much needed trickle of an income stream which often was not turned down, both for financial reasons and indeed for humanitarian ones, since hotel management and staff knew that they could be themselves soon in a similar marginalised position, whilst corporate owners felt obliged not to turn their backs on their fellow Japanese countryman, and so instead turn a blind-eye.

Of course parallels are rarely 100% truisms, and general western society and the aligned corporate mentality is far more fragmented than the Japanese case, so a direct correlate and expectation cannot be drawn or expected.

However, Japan's long and drawn out technical recession markedly changed a previously heavily engrained attitude and behaviour, by which low-cost camping across city, suburban and usual rural areas became a necessary outcome. That in turn generated a true need for innate functionality from what had been stylised almost falsely functional products, and indeed it seems created new business opportunities in serving these new low-cost consumer groups, very much akin to the 'street-food' trend seen by van vendors in the USA.

So, we see that Japan's much changed conditions, now partly reflected in the UK, altered the basic dynamic of society and its leisure-time activities.

Back to Britain -

As part of the economic re-orientation drive to make the UK less reliant on services (esp financial) and more so materially productive sectors, television and general media have over the last few years spawned a subtle 'nationalistic' agenda. The visible 'book-ends' of this push have been the more serious 'Made in Britain' short series and book presented by Evan Davis and covering 'high-value' industries, contrasting by the more humourous 'Ade in Britain' presented by 'Ade' Edmondson spanning the local foods and traditions of various counties.

Such programmes then help to notionally 'nudge' the mindset of the populace, but far more meaningful and intelligent efforts must be undertaken by a more meaningfully merged mindset of British industry, British financing and International financing.

Yet as the FT has recently explained, whilst the financial institutions and intermediaries of cash-rich foreign countries appear happy to invest sums toward primarily large infrastructure projects with long run, low yield but steady 'utility' type payback schedules, Britain's own financing houses face the far more difficult task of understanding the current dynamic an the more nuanced challenges and opportunities therein.

The Challenge Ahead -

Thus all industrial sectors should perhaps better describe the contextual situation which they face. And the motor-caravan sector should do likewise. This especially the case given the 'boom and bust' experiences endured. These swings have many companies – especially those family owned - understandably and rightly cautious of expansion indebtedness. So although there is a natural onus on all to appreciate the market and commercial terrain, the greater responsibility may lie with those firms that have taken on private equity interests in their private shareholder structure.

Here then for family-firm and PE backed companies, learning from the aforementioned 'Japanese Experience' would prove useful. Whilst the economists spout about macro-economic case studies and fiscal policy-setting learning, it is left to industry's active participants to dissect the reality.

To Follow -

The next instalment Part 2 provides a basic overview of the motor-camping sector's primary manufacturing players.

These ranging from old established family run firms happy to continue in their own carved niche generation on generation, to conglomerate holding companies that recognise the need for the scale-up / cost-down imperative so as to grow margins and feed investment into the sector, and lastly but far from least, the entrepreneurial 'agitators' who wish to progress product and professionalism standards so as to create a new heyday for motor-camping.

Whilst Part 3 looks to how the sector could act as an eco-tech bridge between the fringe habitation of camping and the everyday world of conventional house-dwelling; an issue very much back at the top of the governmental agenda given the protected funds now made available to kick-start housing.

It shows how the UK's motor-camping sector must be re-invigorated, so as to embrace more leading edge technology where available, recognising how 'new-tech' transformed the sector in other countries and made globally renowned brands in doing so. All to demonstrate that the necessarily energy-efficient world of motor-camping can both grow its own gravitas and standing amongst the public, and in doing so grow the health of what should be a critical corner of UK industry, which can have a far broader, transformative affect across the nation.

Friday, 18 November 2011

Company Focus – Kenya Vehicle Manufacturers – The Necessary Continuation of African Auto - Entrepreneurialism

The previous web-log provided outline of the indigenous economic eco-system that exists in India as part and parcel of its historically linked national evolution. Yet on a global basis, India of course is not alone, and may indeed be seen to be progressive compared to other continents in which even greater historical, cultural and economic complexity exists.

One such is Africa and its constituent countries.

Seen by non-Africans as geographically massive land mass, largely culturally indistinct from north to south and west to east, and with the exception of South Africa, much of it caught somewhere between a merged yesteryear Dutch, German and British colonial past and today's and tomorrow's Chinese colonial future. Its enormous agricultural, mineral and labour reserves, were seemingly less exploited during the post WW2 period of Euro-African intercontinental stability, globalised markets and growing African independence. But in a fresh era of financial markets concern, food security and supply chain integrity, the resource wealth of Africa has once again become a central focus for many, from the leadership of China to New York, London and Hong Kong's private equity funds who once again seek 'fundamentals' style investment approaches.

The global public's eye was drawn to Africa in 2010 when it hosted the World Cup football (soccer) tournement, its theme song 'Waka Waka (This Time for Africa) sung by 'Shakira & FreshlyGround' highlighting the continent's much raised profile relative to worldwide matters, with the support band's name referring to a desired new non-exploitative era of coffee (ie commodities) fair-trade.

Yet though others treat Africa as one entity, it is of course massively complex: ethnically, religiously politically, nationally, intra-nationally and internationally.

Indigenous Black people co-exist live alongside the 'remaining', non-diaspora multi-generational Indian & European people who to themselves are 'African' – a reversal of the African-American precept. Whilst the 'new' Chinese inhabitants simply re-run a trading relationship that China & parts of Africa shared centuries ago.

The following provides a basic outline of the vast continent, within it one country – The Republic of Kenya – that sits on a geographic, historical and hence geo-political cross-roads between Europe, the Middle East and Asia and within that country one firm named Kenya Vehicle Manufacturers Ltd that may be viewed as one of a myriad of SME economic pillars, who's own business will in a small but critical way, when reflected a hundred-fold by similar others will help determine the continent's future.

As a limited and purely desk-bound exercise, it will not delve as deep nor wide as the fictional investigative achievements of the Botswanian female detective Mma Precious Ramotswe, the central character of “No 1 Ladies Detective Agency” (by Alexander McCall Smith), and who herself marries the proprietor of 'Speedy Motors' garage. However, it does hope to provide a general, rounded, analytical and fair understanding of the opportunities and challenges that investors face when considering the automotive investment potential of indigenous Africa.

Africa -

Basic facts regards the massive and diverse continent are:

- Land Mass of approximately 30.2m km² (11.7mi sq mi)
- Covers 6% of Earth's surface area
- 20.4% of total land area.
- 61 countries / territories
- 1bn people approximately
- 14.72% of the world's population
- De-Colonisation & Cold War created C20th socio-political upheaval
- Rich natural reserves again being leveraged
- Chinese trade levels an impetus for Western & Asian interest
- 'Collectivised' via the African Union (exc Morocco)

Beyond these very basic observations, Africa geo-politics has undergone very recent transformation with the departure of long-time leaders in the Arabic North, with the supposed 'African Leadership' presented by Libya's Gadaffi now overtaken by events and a rebalancing of international interests in the continent's natural resources and peoples.

On a cultural level, African leaders have understandable concerns about the emerging issue of FDI and Foreign Grant and Loan programmes becoming linked to the 'human rights' issue of homosexuality. Whilst political and religious rights are seeing slow progress, it is the issue of gay-rights that has caused friction since (esp Sub-Sahara) Africa is beneath the 'sexualised exterior' socially deeply conservative. It is a rationale that underpins 'community and family' and indeed continuing tribal existance / identity, and is very probably in no small part also related to its AIDS epidemic (5% of population in Kenya) which even the west itself historically publicised as being more easily and viralently spread through prostitution and amongst gay males.

Thus today this deeply cultural issue may provide a very real sticking point in broad European / US & African relations, a function of very different social backgrounds.

Kenya -

Kenya is located on Africa's mid-eastern seaboard, and borders with Ethiopia, Somalia, South Sudan (after its recent independence),Tanzania and Uganda; its land mass totals 580,367 square kilometres, which rises from the Indian Ocean across low plains and up to the Central Highlands with the Rift Valley as a dominant feature. It houses a diverse eco-system of flora and fauna, is typically prone to the usual equatorial conditions including drought and flooding, and suffers from water availability and quality problems for its populace.

Its 41m population are: Kikuyu (22%), Luhya (14%), Luo (13%), Kalenjin (12%), Kamba (11%), Kisii (6%), Meru (6%), other African (15%), with Asian, European, & Arab descendancies (1%).
Demographically, it is a very young country with an average age of 19 years old, thus shows a very 'bottom heavy' population pyramid, 42% being 14 or under, and a relatively high average birth rate of 4.19 children per mother.

The capital is inland Nairobi (3.375m people), with coastal Mombassa (1m approx) as the second urban centre. 22% of Kenyans live in urban areas, thus with 78% spread across rural areas, pan-national and intra-regional transport links are critical, mostly served by 'Matatu' vans and state buses, with taxis and auto-rickshaws more common in towns and cities.

Administratively, the country is divided into 7 provinces and 1 'area': Central, Coast, Eastern, Nairobi 'Area', North Eastern, Nyanza, Rift Valley, and Western.

Kenya gained its independence from the UK (formerly known as British East Africa) in 1963, led by Jomo Kenyatta – from which it derives its name. The Kenyan African National Union (KANU) ruled as a one-party state until 1982, with political liberalisation in 1991, yet KANU remained in power until 2002 after heavy social unrest The National Rainbow Coalition came into power with an anti-corruption promise, yet it fractured internally, some joining with KANU to formed the Orange Democratic. 2007 saw further social unrest with accusations of vote rigging.

The UN negotiated a power-sharing accord between President Mwai Kibaki & Prime Minister Raila Amolo Ondiga

Economically, Kenya is the regional hub for trade and finance in East Africa, but has been restricted – as the CIA World Fact Book reports - by the headwinds of reliance upon export goods which in recent years have commanded only low prices in the global market and ongoing existence of innate corruption. A failure to curb this corruption led the IMF to suspend its assistance via the 'Enhanced Structural Adjustment Program' on various occasions, the last being 2006. Lending from international sources resumed despite continuing corruption cases. Post-election violence in early 2008, coupled with the effects of the global financial crisis on remittance and exports, reduced GDP growth to 1.7% in 2008, but the economy rebounded in 2009-10 at a 4.5% growth rate based upon tourism, telecoms, transport, construction and recovery in agriculture. The 2011 upward trend through H1 was re-rated by the World Bank as remaining at 4.5% to year end as a result of drought impacting agricultural output and a ripple-effect through the rest of the economy.

Agriculture represents only 22% of GDP yet contains 75% of the labour force, whilst industry and services offer 16% & 62% GDP respectively (78% combined) yet utlilising only 25% of the labour force; thus highlighting a lack of economic development compared to .S.Africa, N.Africa and non-African countries; translating as a a GDP per capita at US$1,600 (2009 & 2010). This income level resulting also from a 40% unemployment rate, leading to 50% living below the poverty line

2010 Government Revenues were US $7.016 billion, with an expenditure of US $9.043 billion, showing the current degree of internal investment led ambition, whilst 2010 Public Debt remains low by European standards at 47.7% of GDP, up 0.6% YoY. The overall 2010 Investment Level reached 19.8% of GDP.

However FDI, primarily from the US and UK still accounts for a hefty portion of investment monies, this perhaps resulting from the Kenya's own 'viscous liquity' as seen by a 2010 Central Bank Discount Rate at 7% (ie the wholesale buying level) and a Commercial Bank Lending Rate of about 14.5% (ie available to SME's and private individuals). The reluctance to borrow at these rates – no doubt set by default levels and corruption cases – is seen in the somewhat low 2010 inflation rate of 4%, heavily down from the 9% of the previous year.

As stated, even though Kenya is the most industrially developed country in East Africa, manufacturing only represents 16% of GDP, a level which has increased by a tiny proportion since Independence in 1963. Initial expansion in the 1960s flailed in the 1970s and stagnated thereafter, undermined by infrastructure problems: energy shortages and retailing costs, aged transport and the 'dumping' of inexpensive imported goods. But with slowly increased urbanization comes a raising of industry's economic importance, especially around Nairobi, Mombasa and Kisumu.

Prime industrial activities are: processing of steel / aluminium / lead / cement, ship repair, food-processing (grain milling / flour, beer production, sugarcane crushing), furniture, batteries, textiles, soap, cigarettes, the fabrication / assembly of consumer goods, such as vehicles, farm implements and white / brown durable goods.

Critically, Kenya has a Mombasa based oil refinery operated by Kenya Petroleum Refineries Ltd itself 50% government owned & 50% by India's Essar Oil and Gas; processing imported crude petroleum into petroleum products, in most part for the domestic market.

[NB One key area for regulatory and practical progress appears to be – as the CIA World Fact Book once again notes – is the arena of drug production, trafficking and money laundering, Kenya's small-holder agricultural system often realistically operating at subsistence level together with its seeming loose land borders & sea border and its financial centre enabling the raising and transportation of various narcotics and the laundering of associated monies].

Kenyan Auto Sector -

The country has a total of 160,886 km of roadways, of which in 2008 11,197 km are paved and
149,689 km were unpaved, demonstrating that only 7.5% of its route-way infrastructure may be considered modern. Thus hindering the use of large buses / coaches with importantly an impact on the use of large (container and long-bed type) trucks as efficient nationwide logistical conveyors, though useful along modern routes such as the 6-lane Uhuru Highway

With slowly increased wealth car ownership has grown, with a preference for used imported Japanese products especially in compact sedans, hatch-backs, estates / wagons and SUVs such as the Mitsubishi Pajero, and aspirations of German vehicles from VW golf to BMW to Mercedes etc.

As mentioned, the 'Matatu' van has been the primary mode of mass transit for years, these vehicles passenger carrying variants of the medium sized vans produced by typically the Japanese VMs Toyota (Hiace), Nissan (Urvan), Mazda (E-series) and Mitsubushi (L300). These later joined by larger Toyota-Hino and Isuzu truck-based buses, operated on a very free-market, privateer basis, painted in eye-catching lurid paint-schemes (pertaining to music, Kenyan culture, global brands etc) and with fare-conductors soliciting for passengers as the 'Matatu' drives.

These core transit vehicles increasingly complimented by an influx of larger medium coaches that are used to serve the 'luxury' tourist and local premium markets. Tourism companies also historically used 4x4s by way of Toyota (Landcruiser), Nissan (Patrol) and Land Rover (Defender) for out-of town excursions across poor rural roads and into the Bush.

Historically given the older age of the Kenyan car parc and its essentialness to national activity the authorities were lax on vehicle emissions and safety issues, but with an increasing desire to be seen as modern and to capture revenues through vehicle non-compliance there appears to have been an increasing trend toward mass stop-checks on motorists. Whilst painful for the average motorist, taxi driver and fleet operator should result in not only improved safety and pollution conditions but also feed the Kenyan garage sector with greater 'replace and repair' jobs and so income.

Like many counterpart African countries, the low income base of Kenya (though higher than others) has historically necessitated low-cost solution-seeking and a 'make do and mend' philosophy, the arena of transport and vehicles no exception.

The country's motoring heritage dates back to 1912 when Cooper Motor Corporation was founded as importer of the Ford Model T and assembler of the eponymous Land Rover in the 1950s and 1960s, adding later brands in the 1970s, 1980s and 1990s such as VW, Mazda, Skoda, Maruti (see last India web-log), Suzuki, Iveco, Nissan Diesel (truck), and in the agricultural fold Bobcat, Liebherr, Case CE, Case IH and New Holland. Today it exists today as CMC Motors, owned by parent group CMC Holdings Ltd, and is the largest vehicle assembler and distributor in Kenya, operating numerous franchises from Range Rover to Nissan Truck. A sister division named CMC Engineering provides a range of custom designed and built truck bodies, high speed trailers, agricultural trailers, water tanks and commission items. Another division being the Accident Repair workshop which is equipped with the latest equipment in dent repair and re-spray booths.

CMC Holdings forms an important part of the 4 company listing in the 'Autos & Accessories' sector of the Nairobi Stock Exchange, it's participants being

- CMC Holdings Ltd
as described
- Car & General Ltd
2-wheelers / 3-wheelers / power sets / white goods / garden goods / marine goods /pneumatic goods.
- Marshalls (EA) Ltd
Vehicles from: Kia, Force, TATA, Delta / Leasing / Hire / Used Sales / Parts / Import-Exprot
- Sameer Africa Ltd
Tyres from: Yana, Hankook, Firestone, Bridgestone

More recently established and at the opposite end of the spectrum, and non-listed, is a relatively new start-up called Mobius Motors. Its aim is to create a truly indigenous African vehicle using simple engineering and off-the-shelf component parts / systems. It seeks to replicate the ambiton of the previously ill-faited AFRICAR project, but using a more durable construction method of steel tubular frame (as opposed to wood) [but not true conventional “monocoque” as advertised], seemingly higher ground clearance than AFRICAR (but with similar suspension travel), and uses conventional seemingly Ford based components (as opposed to the light but fragile Citroen 2CV parts of AFRICAR). However, like the original 2CV it is intended as an affordable rural farmers' car but with greater durability and payload limits. The projects eventual success or failure will only be seen in a metter of time, but the very fundamentals of product type and basic business case strategy are highly unorthodox and to a seemingly large degree questionable, thus up against real headwinds given the historical propensity for emergent 'middle classe' consumers to buy 'tried and tested' and critically aspirationally induced used mainstream vehicles.

Beyond the passenger car realm and Kenya like much of Africa – and akin to the previous India web-log - partly satisfies its transportation needs by importing older generation* CKD (complete knock down) kits for its 'Matatu' vans; their age and import form thus being as inexpensive as possible and and having them built-up by an abundance of local low cost labour. It seems that assembly was and is undertaken by prime assembler/fabricator contractors in Kenya's industrially aligned provinces; very possibly each company seemingly taking a specific van model to build and so assist the local economy.

One such is 'KVM' in the Eastern province, 20kms north east of Nairobi in Thika.

As a privately held Limited statute company it is not listed on the Nairobi Stock Exchange, thus there is no current liquidity in its trading. But it (and no doubt many other similar companies Africa-wide) may well be viewed by present owners as offering potential in the long term as 'economic growth vehicles', thus might, be shaped to eventually undertake part-share IPO, very possibly after initial honing and shaping by private equity interests.

It is then as a case study that 'KVM' is considered here.

Kenya Vehicle Manufacturers -

The company was originally established in 1974 under the title Kenya Leyland Ltd. Start of production followed in 1976 the plant itself fitted-out to assemble and part fabricate LCVs & MCVs, specifically the Series 2 Land Rover, Series 1 Range Rover, VolksWagen T2 Microbus, and Leyland Trucks and Buses.

After what appears a busy period the 1980s saw contraction, and as part of a re-energisation initiative in1989 the company changed to its current trading name.

KVM states that since inception almost 40 years ago it has assembled 11 vehicle models, and approximately 60,000 units, the later production consisting of Nissan(s), Mazda, Land Rover Mercedes and Iveco.

The website provides an overview of operations:

Income Streams:

Assembly of
- Nissan Urvan 'Matatu' (E24 model) on behalf of (French) African distributor CFAO
- Land Rover Defender – 4 variants; some stated as CKD
- Nissan Diesel Truck (MCV) Truck & Bus Build on behalf of CMC Holding
- MAN Diesel Truck (HCV) Truck Build
- SVO Dept dealing in Safari & Tour specific vehicles & adaptions

Repair & Paint of all vehicles
- All Vehicles
- “Vehicle Rehabilitation” (full rebuild)

Design & Build
- Semi-Truck Trailer Units
- Water Tanker Trailers
- Safari-Camp Trailers (for 4x4s).

- Large Tents / Marquees
- Hawker's Boxes
- Ice Boxes
- Trolleys
- Tri-Cycles
- Pre-Fab Houses

- Steel (sheet & tube)
- Wood
- Plastics
- Cardboard
- Packaging

Training Unit
- For company employees

Vehicle Importation & Distribution
- Beiqi Foton Motor Co Pick-Up Trucks from China (Isuzu based)

Thus we see that KVM derives its income from a broad-aspect product and service portfolio, itself no doubt the outcome of past boom and bust periods, which made horizontal expansion into synergistic, complimentary and extensional realms no doubt necessary.

The following looks a little closer at some of these activities:

Nissan Urvan 'Matatu' :
This vehicle appears to be primarily supplied to the Kenyan Nissan Dealer Group D.T. Dobie (owned by CFAO) (which offers locally build Urvan and half-ton Pick-Up alongside imported vehicles). The dealer offers the Urvan starting at KShs. 2,375,000 (approximately £16,540 / $26,115).

However investment-auto-motives believes that constant 'series' production is not undertaken to feed a constant supply of demand from dealers. Instead units or unit assembly undertaken on a commission bases from fleet operators in Kenya and from elsewhere. With the common-sense probability that only when such a large order is obtained, then additional units are built for KVM/CMC inventory, thus lowering the overhead and boosting unit margins of any self-build, self-sell. However a single vehicle commission at Kshs 2,375,000 would it is imagined cover parts, labour and amortised overhead

However, it must be stated that the photos of 2 'new' vehicles as shown give cause for concern. The main vehicle pictures shows evidence of corrosion (rust) to the rear face of both front and rear wheel-arches. This would clearly not be the case in a 'brand new' production vehicle. Either the 'old stock' part was heavily exposed to corrosion before the body was welded together and not removed and treated, or a very real question arises over the newness of the van's structural shell. The area affected is recognised as being a rust-spot on high-mileage Urvans, especially those in European climates.

[NB investment-auto-motives later describes a van refurbishment business model which may be of use to KVM and the Kenyan and Africa-wide economies, which involves the re-conditioning of old vans, but critically sold as “as new”vans known to be wholly reconditioned].

However, there is a remote possibility that the company is unwittingly or knowingly acquiring old shells - or complete vehicles – shipped from Europe, where many of these vehicles have either been scrapped and sold on to exporters or stolen. The demand for new Urvans (and similar Japanese vans) across Africa could well entice a criminal network to 'sell on' vehicle shells and parts to assembler companies.

[NB Given KVM appears to hold the United Kingdom's Accreditation Service qualification this is something that UKAS should investigate, with the relevant British government department overseeing the UKAS investigation].

Land Rover Defender -
Of the 4 Defender models presented, it is stated that 3 are CKD assembly builds. However, a anomaly is that one of these CKDs – the 140 Safari Wagon – is described as a 'Kenyan designed variant', thus cannot purport to be a pure CKD vehicle. [CKD is a complete vehicle pack shipped from the VM's original factory]. Thus it appears a LWB adaption of standard CKD kit-form 110 station wagon, and should be described properly as such.

SVO Department -
This section deals with Safari & Tour specific vehicles and vehicle adaptions. Typically upgrading of standard Land Rover Defender, body customisation into wild game viewing vehicles, the widening of standard vehicles and the offering of large Overland tour truck.

To date the Tour operators who have ordered such vehicles have relied upon European and American package tourists. Since the dramatic 2008 financial collapse and subsequent recession – now extended in Europe due to 'austerity' measures – it is believed that this market for vehicle adaption would have markedly contracted, tour operators either cancelling or postponing new builds. Whilst Chinese, Asian and Arab tourists have become a new source of Safari & Tour income, the present levels and near term levels are not expected to off-set the income loss from Europeans, Americans Australians & Japanese, thus this sector of the market looks to be presently far quieter than previously.

Repair & Paint -
The previous rise in vehicle fleet operators through 2000s and rise in private car ownership seen by the influx of imported 'grey market' Japanese used cars and demand growth for Japanese, S.Korean and German sourced new cars means that the Kenyan car parc is presently a record levels.

However, the emergence of the global economic slowdown means that the previous rising tide that Kenya experienced may well slow. This in turn slows demand for new vehicles, supports the price of used vehicles and buoys demand for Repair Services from insurance companies and private pay car owners and fleet operators.

Equally, the “Vehicle Rehabilitation” (full rebuild) service should start to see a growth in demand in the mid-term, especially from specialist vehicle owner-operators such as the Safari & Tour companies as they seek to avoid CapEx spending on new vehicles and instead seek major overhauls and and refits of current vehicles. Moreover, many of these operators may decid eto re-freshen corporate logos and colour schemes so demanding new vehicle liveries to provide the impression of newness.

This division of KVM then looks set to benefit from the large and now probably re-ageing car parc.

Design & Build -
As stated, this arm deals with the production of 'Semi-Trailer' Units for articulated trucks, the manufacture of similar articulated Water Tanker Trailers and the more recent emergence of Safari-Camp Trailers (for 4x4s).for tour operators and self-discovery tourists.

The Semi-Trailer work of the company has undoubtedly developed in tandem with the governments efforts to grow the quality of main trunk roads serving major metropolitan and urban areas. With special focus on the ability to transfer with greater efficiency goods from Mombasa port inland to its light and heavy industrial areas, aswell as of course returning goods for export. Thus the large carrying capacities such Trailers offer are the natural 'scale-efficient' solution as well as meeting the typical international standard of road haulage; something well understood by KVM given its contract to erect ex-European used trailers for DHL's apparent expansion ambitions in Kenya..

Given the improved but still problematic methods for providing Kenya's people with clean fresh water, the need to produce Water Tankers Trailers – for Kenya and other nations – looks to be sustained over the long term. Whilst water supply infrastructure has improved in main cities and towns, the majority of the populace (as stated) still lives rurally, and cannot possibly capture their general domestic and agricultural requirement from either the sporadic rains or the flood vs draught periods. This then a critical non-cyclical business stream for KVM.

The business opportunity regards Safari-Trailers for 4x4s has proven itself, but as with SVO vehicles may possibly wain over the near term given the slowdown in tourist travel. Moreover, it is a segment that has low barriers to entry and so both tour operators and self-discovery tourists may be able to shop-around and negotiate discounts for those that they do intend to commission, possibly avoiding the larger players like KVM and instead using local garages to create self-designed Bush Trailers.

So. from the perspective of the Design and Build arm of the company, 2 income streams appear as safeguarded.

Fabrication -
This appears the company's historic heart and core competence, very much reflective of the African Engineering personality, typically simple but robust. This arm deals with 3 distinct income streams:
- 'Markets Durables'
- 'State Emergency'.
- 'Open Air Gatherings'

The company supplies the basic needs of one man traders and small companies in the street market
realm with: Hawker's Boxes, Ice Boxes, Trolleys and Tri-Cycles. This income space will continue to demand items as new waves of small traders come from the ranks of cross-border refugees and the growth of small business holders employing family and friends to broaden street and market coverage.

Secondly KVM produces 'Pre-Fabricated' small houses suitable as both emergency relief shelter to serve refugees and flood impacted citizens. The reletive stability of Kenya will keep drawing refugees and the flood problems presently seem insurmountable without major national budget spend which looks unlikely. Thus both forms of income look to continue.
Lastly it fabricates Large and Medium sized “Tents” (ie Marquees) for personal and corporate gatherings and festivities ranging from weddings to award ceremonies, aswell as serving the corporate conference agenda as an inexpensive spring and autumn alternative to typical conference room hire.

Given that Kenya's population is so young, and that KVM is essentially Nairobi based, it should have been theoretically enjoying a boom period in tent rentals over previous years, this demand maintained in the present day and well into the future, a steady income base set to continue and probably grow as Kenyans grow slowly more wealthy and spend greater sums on festivities. This a similar story for the corporate sector which will seek to retain its talented staff and management by holding 'business family' type gatherings aswell as participating in ever greater conference gatherings as the Kenyan economy itself grows.

Recycling -
KVM highlights its eco-friendly credentials as a recycler, thus most materials across Steel (sheet & tube), Wood, Plastics (thermoplastics and thermosets), Cardboard and General Packaging are examined and either re-appropriated for another use of sold to major collection companies which in turn recycle at a far greater scale.

Like Fabrication, Recycling has always been at the heart of African nations given a history for self-sufficiency and typically low-income backgrounds. Thus for KVM and many similar others, a case of 'business as usual'.

Training Unit -

The firm states that it offers training facilities for its new staff, this then 'part and parcel' of a business model that must constantly seek-out the lowest cost labour in young and untrained, whilst obviously seeking a level of practical capability to work quickly, efficiently and with product quality in mind.

It is not known how the training unit operates, its curriculum, intake numbers , achievement / qualification criteria etc. But such a method typically captures the first-timer and has them work their way up from the basic Fabrication division on Hawkers boxes etc, into Semi-Trailers and into either Vehicle Repair or Vehicle Assembly, these 2 highly complimentary as thus able to transfer trained staff across different business operations as necessary.

Vehicle Importation & Distribution -
A more recent initiative has been the apparent agreement with Beijing's 'Beiqi Foton Motor Company' to import and distribute its (originally Isuzu based) single-cab and double-cab Pick-Up Trucks from China.

Seen in the greater context of KVM;s co-owner DT Dobie, this then allows for the introduction of a new (Chinese) Pick-Up product to ostensibly inter-fill between the smaller (old) Nissan Half-Tonne, the newer Nissan badged (Dacia Logan) Pick-up (Half-Tonne aswell), and the more expensive standard Nissan range of Pick-Ups (1-1.5 Tonne) and the Land Rover Heavy Duty (up to 3 tonnes)
Thus the Foton vehicle whilst offering little recognised brand attractiveness does offer low-priced heavier GVW and durability. It is assumed that the agreement with Nissan prohibits DT Dobie from also offering competitor produts, so the routeway through KVM already with Pick-Up history is the natural alternative for the co-owners to capture demand for lower priced Chinese vehicles.

Company Share-Hold -

35% Government owned
32.5% D.T. Dobie & Co Ltd owned (part of CFAO Group)
32.5% CMC Holdings Ltd (see above)

The company's structural share-holding suggests to have been formatted so that whilst its day to day operations and corporate strategy is commercial in nature, that the company's facilities (or rather sections thereof) may effectively be 'commandeered' by the Kenyan government in times of state emergency.

Previous Investment -

The company states that “investment in buildings and plant now stands at over US$4m”. Yet to be candid, little of such a seemingly large sum for such a relatively simple fabrication firm is directly viewable via the website. Beyond the training centre, which appears an external refurbishment of an older building, other buildings appeared somewhat decrepid, with have severely cracked concrete floors and the like.

Given that KVM operates a business model that seeks to understandably reduce outlay – thus seeks its 'contract manufacture customers' to supply all necessary production equipment (jigs etc) – one would expect the infrastructure conditions to be better, especially given its apparent UKAS and ISO 9001 standing.

That US$4m investment may indeed represent 40 years worth of on-off site improvement, or may represent the purchase &/or leasing costs of the 58 acre site itself; or indeed a combine of both. But the seemingly rudimentary conditions of the site do not reflect the ideal or near ideal for a vehicle assembly plant. Whilst it is not expected that the infrastructure or operations meet world-class standards, the ensure quality in product execution and management and employee mindsets, improvements appear to be necessary to continue attracting new contract assembly customers.

It should be noted that any future assembly efforts by Chinese VMs may very well bypass indigenous assemblers so as to maintain Chinese quality standards (themselves drawn from Japanese and European practice), by building their own African indigenous operations of far greater standard, and utilising local low-cost labour run by Chinese management. A duplication then of the usual Sino-African business model.

A website based review of infrastructure is of course overtly cursory and cannot truly appreciate the reality 'on the ground'. However, the critical challenge that KVM and its parental co-owners must meet is the demonstration that investment in infrastructure bears productive fruit, and not ends up as non-productive sunk-costs to no advantage to the firm or its customers.

Summary -

KVM appears to operate with typically African business acumen, exploiting its resources to maximum coverage & efficiency whilst simultaneously running very lean using a low-cost labour force, basic equipment levels and so avoiding heavy CapEx and Working Capital costs.

Given economic roller-coaster Kenya has ridden since 1963 – like much of Africa – this ends up as the default position for many firms that must both limit exposure yet seek maximum profits to see themselves through lean periods.

Those lean periods resulted in broad diversification, today seeking income from 5 distinctly different yet wholly fabrication-centric fields.

KVM also acts as a 'core feeder' to the operations of its two commercial parents: DT. Dobie (Vans & Pick-Ups) and CMC Holdings (Trucks & Buses), aswell as serving the Kenyan Government. Possibly a case of “One Man, Two Governors”: commercial and state. Yet this may not be the case in eality where the two side of the ownership equation are justly weighted to the commercial.

The problem may be that as the 'subordinate child' to DT Dobie and CMC Holding that it is intentionally (and perhaps necessarily) exploited to support each of those companies' own profitability margins, perhaps greater onus from CMC Holdings given its public listed on the Nairobi Stock Exchange.

Any such CapEx or Working Capital 'starvation' may also have impact on what KVM states as its 'core values' : “quality through standards” and “customer & supplier intimacy” and “uncomprimised integrity” in particular, since any observations of little self-investment will undermine confidence levels.

Thus KVM must continue to seek new income streams and critically be able to re-inject such monies from old and new activities into its own future potential.

Additional Income Stream -
Matatu (Nissan Urvan) Major Reconditioning / Rebuild -

It was previously mentioned that there appears a remote possibility that old vehicles were being re-fitted and sold as new. Not an accusation but an observation of product evidence set within the African context of legal and criminal shipping activities toward African vehicle re-use and participant profitability. investment-auto-motives presumes this not to be the case with KVM but nevertheless seeks that relative Kenyan and UK authorities look into the matter.

Thus assuming it is not presently the case, there may be a opportunity for a new income stream that sees mass refurbishment of old and scrapped Urvans.

The fact that Kenya has thousands of Matatu's, the majority appearing to be Nissan Urvan E24 models, means that the company looks to have a possible additional income stream.

Given the near unlimited supply of vehicles – which in their basic form were little structurally changed during their 22 year production span in E23 & E24 guises – a seemingly feasible incremental and sizeable income stream, would be as follows. To cheaply purchase those used vehicles which have failed official test procedures (equivalent to the UK's MOT), and provide a full over-haul / re-build / re-fit to a near 'as new' condition.

The process would include: strip the vehicle down to major component parts – body shell vs mechanicals. Strip to basic shells (with glazing and dashboard intact), cut-out oxidised metal and replace with welded section, replace door skins etc as necessary; surface preparation and re-paint of all exposed exterior and interior metal surfaces; re-condition of engine, gearboxes, suspension and all piping and cabling as necessary, application of late-model front face headlights / grill / bumper and general re-fit to required variant type. This would span the following and no doubt more: Matatu bus, school bus, corporate van, authority agency van, tradesmans' van, ambulance, fire truck, army vehicle etc etc.

Thus whilst the city-based Matatu's are replaced with either younger vehicle models from S.Korea and China to maintain operator attractiveness in the highly competitive trade. The 'as new' models can be used for rural route Matatu's, as school and college mini-buses and by various government agencies etc.

Conclusion -

KVM is undoubtedly a fascinating business which reflects the character of the country and continent. Its central competency and need to diversify demonstrates its ability to match market forces with internal vision, capturing opportunities across varied market arenas and income streams, from the national commercial imperative of HGV trucks suited to improving roads, to the needs of those at the bottom of the socio-economic pyramid seeking to earn a living, to the celebratory aspirations of a young nation seeking better new tomorrows of their own.

However, the apparent shortcomings of the firm, from this very shallow and brief review, have been made clear and should be addressed by its 3-way owners of CMC Holdings, DT Dobie and the Kenyan government if the company itself is not to be overtaken in its core assembly competances by the well entrenched Chinese seeking price-based entry and later possibly Japanese and Europeans that seek to replay their own South African growth play as Kenya itself develops.

Kenya as a country, whilst notionally industrialised is so at a very low level, still obviously reliant upon agriculture, subsistence farming and relatively low-value commodities orientated exports.
Thus itself appears stuck between the ideals of an ambitious future – as were previously relayed during its period after Independence – that of an an African lead country, and the realities which see it stuck in a virtuous circle where immediate fiscal needs or desires of many are met through more nefarious dealings through corruption and the drugs trade.

Yet as ever, there is a far better future for all if it can be created by government, commerce and foreign interests.

Kenya itself has high literacy rates compared to the rest of Africa thus showing educational ability and possibilities, it has a major population swell of young people – its average age being 19 years – thus highlighting both a pressure and opportunity to enable personal and economic development,

This socio-demographic pressure approaches the 'neck of the Kenyan bottle' represented by high unemployment, a heavy bias toward very low value agricultural labour, and at the administrative and commercial level a proven propensity to turn a blind eye to matters of corruption. As that pressure grows so the potential for social unrest heightens and as a result an unwillingness by international markets and governments to invest in a teetering or unstable country.

Thus the age old 'African problem' persists.

Botswana has been able to produce a turnaround in fortunes thanks to the increasingly ethical exploitation of its diamonds. Kenya, like many other countries, is not so fortunate to have such a high levels of mineral wealth ready for extraction, but it has a diverse, cosmopolitan and young population, high literacy rates and obvious increasing educational focus which should underpin a more successful future.

Whilst the 2010 'African' World Cup gave joy in a soccer obsessed continent, the old phrase “give them bread and games” will not suffice into the 21st century. This new era of 'emerging country' prominence means that Kenya's leaders must be as successful in pro-actively placing Kenya strategically within the broad international context to vastly improve its competitive position, as the likes of the BRICs and 'Next 11' (including Nigeria) have done.

A key path by truly investing in its auto-sector and associated industries.

Friday, 11 November 2011

Micro Level Trends – India Autos (Part 3) – VM's Alignment to the New Economic Headwinds

Having reviewed the fantastic growth story in India over the past decade (in Part 1) with recognition that the country's Automotive Mission Plan (AMP) must be truly strategically holistic, not 'part-picture' over-reactionary, and must be driven by competitive forces operating in ever more liberal auto-markets (in Part 2); this final weblog reviews the present strategic, operational and financial positions of the prime corporate players.

This done with the primary intent of better understanding those companies which may benefit by, or falter from, the growing concern of economic slowdown in India as a result of an increasing troublesome global economy.

The present picture shows s general decline of economic activity across the previously very brsk BRIC regions, with only the 'Next 11' countries showing buoyancy, yet these as a whole cannot off-set the broader EM markets slowdown. Those markets of course are still starkly buoyant compared to the Triad regions, but having experiences spiralling costs and diminishing competitive advantage relative to the historic global norm, themselves are undertaking macro and micro-level actions as the reality of a new 'self-preservation' period becomes part of the mid-term new norm.

The only region which shows (paper-based) growth traction is the USA, yet that growth will have been, and will continue to be, self-generated as the multiple QE programmes slowly release liquidity through Wall Street and into 'Main Street' America. However portions of that liquidity – investment-auto-motives believes – will be effectively held in reserve for mid-term drip-feed injection into those foreign lands which require reconstruction, ie the S. Mediterranean countries and North Africa in particular.

[NB Nonetheless, in the ethos and interests of true globalisation, the restructuring of the Eurozone and North Africa should be undertaken with agreed liquidity levels drawn from from the US, GCC, Brazilian, Russian, Indian, SE Asian & Chinese participants].

Thus even the US, as a consequence of its new era 'soft-power' policy will see immediate growth heavily restrained, with the possibility that any good-news economic indicators, which provide momentary optimism, may be under 'expectational par' or may need re-publishing. And, as mentioned previously, that necessary sizeable US corporate spending will be directed at US companies, as part of a more easily managed homeland restructuring process that both aids overall control and critically allows for value-creation to be seen to be working and witnessed at the Wall Street level.

Across the world then, in the short-term the previous demand for Indian goods and services will naturally diminish as each country seeks to replicate the US restructuring model, also recognising that home-grown growth will be a lead agenda issue, so leading to greater repatriation of trade flows, the self-sufficiency theme becoming increasingly common.

Whilst undoubtedly India will continue to export its goods and services – continuing to do so in autos – the general picture indicates one of reduced reliance on exports and imports and thus a case of 'battening down the hatches' across the corporate world, to ride the incoming choppy waves.

However, those Indian companies with noted North American presence will start to try and create balanced equations, restructuring and leveraging their own domestic cost-base so as to invest more in NA and so grasp opportunities to win US tendered contracts. Well managed - ie still heavily cost constrained - US exposure will then be seen in a positive light by institutional, PE and individual retail investors.
The Auto-Market Outlook (2012-13) -

As noted by sector participants, India impressive 2008-10 rebound was shaken by world events, namly Japan's Fukushima disaster and the MENA 'Arab Spring'; with more recently the Thailand floods. The 2010-11 Indian accounting period (March – March) was then shaken from its previous optimism, the last 2 quarters (Indian Q1 & Q2) providing greater concerns given the deepening of Eurozone* worries and reaction from Asian capital markets.

[* Please see post script]

The global economic headwinds facing India will result in contraction of vehicle sales to the private sector. Thus it is expected that hardest hot will be passenger cars, especially by those who were to be first time buyers, postponing purchase until the future looks brighter. Motorbikes, mopeds and scooters may also see contraction as buyers think twice, but here the demand curve will be less elastic given the lower price of these items compared to cars. Of greater importance will be the pricing effect of less new car sales on used cars, the latter typically seeing a rebound in values as people stay in used car territory yet the affordability factor still draws people upward from motor-cycles into the territory, thus used cars set to experience a dual inflow effect that will maintain residual values; that level dependent upon the level of contraction that new car sales ultimately experience.

Government departments and SME company buyers constitute a far greater percentage of new passenger sales than in western or Triad countries, so the 'fall-off' effect in unit should not be dramatic, but the contribution made by the private car purchaser may see a sharp decline, especially when it is noted that corporate budgets and spending are to be tightened, so affecting the now usual expectation of inflation related salary rises and the possibility of management and staffing levels.

In the distinction between small passenger cars and larger SUVs, given that the former are typically the domain of private buyer whilst the latter are typically bought by small company director, it will be those manufacturers serving 'the masses' that suffer proportionately more.

This then primarily affects the large small car exposure of TATA Motor and Maruti-Suzuki, with those operating in the fringes offering smaller older model small SUVs such as Premier Motor especially exposed. More lightly affected will be Hindustan Motor (Mitsubishi) compact sedan car sales given habitation of a different sub-segment with higher prices and lower volume expectantly purchased by the small company director set.

Whilst the expected broad economic contraction will then more heavily affect small cars, it should favour those companies which produce motorcycles, mopeds and scooters for the broad sweep of private, corporate and government sectors, the private and corporate buyers more likely to view the direct substitutional effects of 2-wheels vs 4-wheels.

In contrast to the passenger car market the Indian B2B Commercial Vehicles market, related to 3-wheelers, mini-CV, Light CVs Medium CV and possibly Heavy CV should remain buoyant as it is expected that the corporate world's spending cuts will not be as deep or quick as that of the private buyer. There may be concern regards the sale of the largest HGVs given the substantial outlay and investment recouperation / breakeven timespan; but any cancellation of orders in this sub-segment should provide for a boost in those below as fleet managers alter their fleet mix to suit the 'adaptability needs' any B2B downturn would require.

As a result, investment-auto-motives would advise investors to expect a 6-8% drop off of passenger car sales for the Indian FY2011-12, seeing a 12-15% fall in small cars specifically.

In contrast 2-wheeler sales may see a 5% improvement due to the size of the ongoing consumer wave in the segment less prone to reaction because of its affordability and the sports-bike sub-segment seeing a maintained boost as people deny themselves the new small car.

All the while, the commercial vehicle sector should remain ostensibly flat across all its sub-segments.
Balancing Growth & Fundamentals Analysis -

Consequentially, investors and analysts will necessarily need to modify and re-orientate their investment criteria. From that of wholly growth centric, focused heavily on on profitability ratios, efficiency ratios and market ratios, to encompass greater 'weight' given to liquidity ratios, activity ratios and indeed the 'foundational level' finances of companies which sit throughout the auto-sector value chain, either as part of (typically family led) conglomerates or as singular entities.

Company Reviews -

The following provides brief description and analysis of the 9 major players which span the truck/bus, car, 3-wheeler and 2-wheeler segments; each company typically operating across 2 of these distinctly separate sub-segments.

- Maruti-Suzuki
- Hindustan Motor
- Mahindra & Mahindra
- Ashkok Leyland
- SML Isuzu
- Force Motors
- Bajaj Auto
- Hero MotoCorp

[NB 1 Lakh = R10,000 and 1 Crore = R10,000,000)

Maruti-Suzuki India Ltd (MSIL) –

- 1970 creation of a private limited company named 'Maruti Technical Services Private Limited' to offer create value chain for "a wholly indigenous motor car".
- 1971 “Maruti Ltd” created the following year.
- 1977 scandal regards misdirected funds, near collapse. I
- 1981 partnership deal with Maruti Udyog Ltd and SMC of Japan.
- 1983 license of Suzuki Maruti 800; first modern/affordable small car.
- later licence of Suzuki 4WD appeared vehicles.
- 1988 first plant expanded to 100k units pa.
- 1991 - beginning of the liberalisation era – 65% of components 'Indian Made'.
- 1992 Suzuki increased its stake to 50% (with 50% nationally held).
- Capacity grew to an additional 200k units with new second plant..
- 1997-8 friction between Suzuki and Maruti Udyog regards “government proxy”MD.
- 2000s expansion of product portfolio to retain position as No1
- 'horizontal' expansion and integration policy implemented
- increasing competition from domestics and foreign (esp Hyundai Motor No2)

The present BoD is led by MR R.C. Bargava (Chairman) and Mr Shinzo Nakanishi (MD & CEO).

The company's success is a consequence of its parent companies scale and international leverage, consistent model renewal provided a story of ever growing market grasp across car, small utility and small 4WD /SUVs, with product range expansion creating/capturing new markets. Complimentary new initiatives such as an Emergency Rescue Service and by 2000 a Customer Call Centre and creation of a (PPI funded) National Driving School, Insurance Services and Financial Services for dealers and car-buyers. 2003 saw an IPO on BSE and NSE. 2005 its 5 millionth car.
The company has two manufacturing facilities located at Gurgaon and Manesar, south of New Delhi, India. Both the facilities have a combined capability to produce over a 1.2 million units pa, and there are plans to expand its manufacturing capacity to 1.75 million by 2013.

Since June, labour unrest in the 2 Haryana plants has undermined production, public confidence and market share. The face-lifted Swift model (a prime seller) has faced delivery shortages and so cancelled orders & migrated sales during the Diwali festivities, a peak sales period. This added to increased input costs squeezing margins, and high interest rates undermining sales volumes has made the Indian Q2 painful, Maruti's market share declining heavily. This adds to previous market share slide already underway, now Hyundai taking 21.7% market share, TATA Cars 16.4% and Mahindra 11.7%.

Those sales provided for a 2010-11 (vs 2009-10):
Net Income of Rs3,61,282m (vs Rs3,01,198m).
Net Sales of Rs41,467m (vs Rs44,510m)
PbT was Rs31,088m (vs Rs35,925m)
PaT was Rs22,886m (vs Rs24,976m).
EPS of Rs79.22 (vs Rs86.45)

Operating Margin of 8.6% (vs 11.9%)
[using PbT / Turnover less Excise Duty]
Hindustan Motor -

- flagship division of Birla Technical Services (of Birla Group).
- Birla Group (Birla family), commercial roots in India reach back to 1857
- (Technical Services division also specialises in oil and gas).
- 1942 Hindustan Motors established in Gujurat, ,
- moved to West Bengal and later moved HQ to Kolkata.
- known for the long-standing Ambassador car (long used by government and taxi operators)
- 'Indian establishment' roots gave SVO arm for vehicle armouring.
- enters JV with auto-parts company Sriram Group

Led by C. K. Birla (Chairman) and Manoj Jha (Managing Director), Hindustan Motor operates what its states to be ”the first and only integrated automobile plant in India: the Uttarpara factory, popularly known as Hind Motor.

The company operates a twin-mode business template, manufacturing for itself and offering contract production for another. It makes and sells the Ambassador (in sedan & pick-up forms) and the 'Winner' mini-truck. Also operating an alliance deal with Mitsubishi vehicles. Thus its can be said to notionally span a number of sub-segments: Fleet (Government, Taxi, Other), LUV (with incursion into 3-wheeler territory), passenger cars (via Mitsubishi) and SUVs (via Mitsubishi). It operates 3 plants in Utterpara near Kolkata (Ambassador), Pithampur in Madhya Pradesh (Winner mini-truck) and Tiruvallur near Chennai (contract manufacture for Mitsubishi products).

Given that it has a broad vehicle mix and dual-client manufacturing base, the company is no doubt viewed by Indian analysts as typical of the broad exposure mentality reflected in the bigger conglomerate - indeed Indian mentality. Reducing higher risk, cyclical exposure to specific segments, and so enabling an income off-setting.

However, the ongoing natural sales decline of Ambassador (in both segments) has and is a cause of real concern, with an apparent 20% plant utilisation. HM mentioned the launch of a smaller model based on the Ambassador, though it seems very dubious and unlikely that a new car would be developed on this basis, seemingly a PR story to maintain dealer confidence. In mid 2011 it mentioned manufacture of a niche (what it calls) 'James Bond' Mitsubishi product, which again appears 'over-selling', though perhaps alluding to a special series of the Evo.

Its stated aim is to rebalance the present 80:20 CV vs Cars bias, and to re-fill its 50k unit pa capacity. Exactly how it will do so is currently questionable, though the Ambassador pick-up (Veer) available in body-side and flat-bed versions should provide a much needed volume boost from its current low, if marketed with adroitness possibly doubling or more of volumes. Whilst 'neither fish nor fowl' (car or forward control truck) it is a very worthwhile low-risk exploration to assist turnaround, and may give a whole new lease of life to Ambassador.

Those sales provided a 2010-11 (vs 2009-10):
Net Income of Rs 85,004.15 lacs/lakhs (vs Rs 73,688.03 lacs).
Net Sales of Rs 66,152.71 lacs (vs Rs 57,404 lacs)
PbT was Rs -376.12 lacs (vs Rs -3326.37 lacs)
PaT was Rs 75.23 lacs (vs Rs -5,110.02).
EPS of Rs 0.05 (vs Rs -3.17) lacs

Operating Margin of -0.44% (vs -4.5%)

TATA Motor –

- founded in 1945 (formerly TELCO) to produce locomotives.
- first road based commercial vehicle created in 1954 with Daimler-Benz.
- Over four decades effectively held Truck duopoly with Ashok Leyland
- 1991 Liberalisation forced diversification into MUVs/SUVs and later Cars
- sold over 4 million vehicles in India sold since.
- part of TATA Group (Steel, Autos, Consulting, IT, Data, Telecoms, Chemicals, Energy, Hotels & Tea).

With an HQ in Mumbai, TATA Motor has tended to be the more progressive (first mover) amongst India's VMs, a necessary stance given the competitive landscape. Between 1998-2008 the decade long focus was on developing SUV and small car capabilities. This since followed by the M&A era.

2004 – Daewoo Truck (South Korea).
2005 - (21% of) Aragonese Hispano Carrocera (Truck & Bus) (Spain).
2007 - Marcopolo Coach (Brazil)
2007 – FIAT (JV) India
2008 – Jaguar Land Rover (Premium Car & SUVs) (UK) [inc Daimler & Lanchester brands].
2009 - Hispano Carrocera (full takeover)
2010 - (80% of) Trilix Engineering (Vehicle Development) (Italy)

TATA Motor is dual-listed on BSE & NYSE stock markets

The ten member BoD members are led by Ratan Tata (Chairman) and Ravi Kant (Vice-Chair).

Given the broad-based acquisition spree over the preceding 6-7 years the company will be in the midst of consolidating the efficiency of ownership to reap rewards as soon as possible. These interests provide for greater global coverage, new vehicle absorption to replace & extend the domestic range, entry into new segments, access to advanced engineering materials and methods and capture of best practice processes. So the task of ongoing incorporation of foreign companies into the TATA fold, whilst in parallel circulating Indian management & employees in those firms.

As part of TATA's desire to climb the value-curve, R&D in powertrain and structures appears to take priority, no doubt deep learning made available from JLR & FIAT (in steel & aluminium** see post script) and (deisel & petrol), not only assisting TATA branded NPD in Cars, SUVs and utility 4WDs, but feasibly bearing technology transfer fruit for the Truck and Bus divisions.

Much of TATA's apparent alternative, progressive attitude is exemplified via its Nano model, which though unorthodox in wheel size and engine rear location, may well be viewed as much symbolic as commercial. Like the original Mini, the car has been slow to be accepted, and as such will require ongoing financial support until it is seen as a true alternative to a used conventional car. That car's sales totals to date crossed 100,000 units in 2010-11.

R&D work has been directed at EV models and exploration of Compressed-Air Car, but the former will presumably only be purchased by an eco-conscious government and companies whilst the latter has equal (indeed greater) fundamental functional shortcomings.

Strengthening the Sales & Service Network to support new products will be key, since although
Tata Motors has >250 dealerships in >195 cities across 27 states and 4 Union Territories of India, this ranks 3rd after the bigger Maruti Suzuki and Hyundai networks.

Manufacturing and assembly plants are located in Jamshedpur, Pantnagar, Lucknow, Sanand, Dharwad and Pune, India, and internationally, in Argentina, South Africa, Thailand and the United Kingdom.

The company's consolidated FY2010-11 results (ending March 2011) illustrated that worldwide sales grew to a record of 1,080,994 units, equal to 24.2% YoY growth. Of these TATA Motor branded vehicles (all types) reached 836,629 units, representing a growth of 25.2% . In the domestic market, CV sales increased by 22.7% year-on-year to 458,828 units (vs 373,842 the previous period), its market share a reported 61.8%. Passenger vehicles, including FIAT and Jaguar & Land Rover vehicles distributed in India, grew by 23.0% year-on-year in the domestic market to 319,712 units (vs 260,020 in 2009-10), market share at 13.0%. Exports rose to 58,089 from 34,109.

Sales of the TATA passenger vehicles sales crossed 2,000,000 since inception, in FY 2010-11.

Those sales provided 2010-11 (vs 2009-10):
Turnover of Rs 51,902.93 crore (vs 38,144.83 crore)
Net Sales of Rs 47,807.42 crore (vs Rs 35,373.78 crore)
EBIT of Rs 3,487.63 crore (vs Rs 4,853.83 crore)
PaT was Rs 2,196.52 crore (vs Rs 2,829.54 crore).
EPS of Rs 30.28 (vs Rs 42.37)

Operating Margin of 7.3% (vs 13.7%)

Mahindra & Mahindra –

- founded in1945 in Ludhiana as Mahindra & Mohammed, by brothers K.C. Mahindra, J.C. Mahindra and Malik Ghulam Mohammed.
- 1948 the present name was established.
- initially processing steel, took the license for the Willys JEEP
- developed tractor section, then MUVs, CVs, SUVs, Pick-Ups, Cars & 2-wheelers
- today a subsiduary of Mahindra Group (Autos, Aerospace, Agribusiness, Construction, Defense, Energy, Finance, Insurance, Industrial Equipment, IT, Leisure, Hospitality, Logistics, Property & Retail).

The company seeks to use its sizeable domestic presence and well known brand to both attract JV partners by which to either contract produce, or itself enter new auto-segments, using its typically Indian 'roll-over profit' balance sheet reserves for M&A purposes.

2000 – Ford Ikon/Classic (ended 2011)
2005 – Navistar/International Truck, (USA)
2007 - Renault/Dacia Logan (France, Romania) [the M&M Verito].
2008 – M&M Scorpio CKD agreement with Bavarian Auto Group (Egypt)
2009 – M&M Pick-Up models CKD agreement (Brazil)
2010 – Reva EV (India)
2011 – M&M purchase of Ssangyong Motor (S. Korea)

The BoD lead members are XXXXX (Chairman) and (Vice Chairman) and Rajesh Jejurikar (CEO). Dow Jones Newswire reports that Jejurikar has resigned but will stay in situ until January 2012.

Much of this external learning allowed M&M to undertake its own small SUV project (code-named W201), to be released as the XUV 500, and it says is a platform that “could be used for developing more SUVs”. Beyong the domestic market, M&M seeks export sales in South Africa, Europe, Africa, Australia and Latin America. This then 'book-ends' the mid and large sized SUVs acquired from the Ssanyong acquisition, providing a broad and relatively modern SUV portfolio.

The XUV500 better naturally mates with the Verito car model (from Ranault Dacia), however that JV relationship looks to have been under strain when reading between the lines. One M&M exec states that..."a little over a year ago we took over the platform and brand from Renault. That time we used to sell 300 units per month and now we are at 1,710 units, so we have been able to grow in the sedan segment”...indicating that sales were previously suffocated and latterly promoted.
The REVA EV is set for introduction at some point, but it looks to realistically be little more than a PR exercise producing limited numbers for Indian eco-projects and EV enthusiasts amongst the metro elite, thus re-running the 'big-exposure but small-impact' story seen in the UK and Europe.

Building on its competencies in Farm Equipment, Mahindra Tractors(China) Co. Ltd. Was established to manufacture tractors for an expanding Chinese market, and is used as the export portal to the USA and elsewhere. It maintains its No1 domestic position, August 2011 sales up 21% YoY at 15,059 units.

The 2-wheeler business has experienced production problems, the launch new Stallio motorcycle having been postponed 3 times, but still set to ride the sector's ongoing positve growth story.

Like TATA, the company has increasing worldwide presence: Mahindra Europe Srl. based in Italy, Mahindra USA Inc., Mahindra South Africa & Mahindra (China) Tractor Co. Ltd.

Mahindra & Mahindra Limited is listed on the BSE.

Those sales provided for a 2010-11 (vs 2009-10):
Turnover of Rs 24,850.22 crore (vs Rs19,832.06 crore)
Net Income of Rs 22,757.51 crore (vs Rs 18,038.05 crore).
EBIT of Rs 3,402.13 crore (vs 2,756 crore)
PaT of Rs 2,662.1 crore (vs Rs 2087.75).
EPS of Rs 46.21 crore vs Rs 37.97 crore)

Operating Margin of 11.7% (vs 8.64%)

Ashok Leyland -

- founded in 1948 as Ashok Motor to assemble Austin cars
- 1955 onward a focus on commercial vehicles
- equity split with Britain's Leyland Motors, using Comet truck as base for bus product
- nationwide success amongst public and private bus operators
- replaced by the bus specific Tiger model and by Titan double decker.
- 1980s onward similar business model for Trucks, with FIAT & Ford UK
- and with Engines with (Toyota) Hino.
- since 1987 the company has been a flagship subsidary of the Hinduja Group (Foundries, Autos, Defence, Oil, Banking, IT, Media, Health)

Ashok Leyland, may not be aswell known to non-Indian observers as TATA, but is renowned as India's Truck and Bus producer, with additionally the assembly of Emergency & Military vehicles, Components and Engine Sets for Marine & Industrial applications, and more recently inclusion of a Power Sets section for independent static based power generation. To date its basic business model to buying the licence and tooling for previous generation vehicles and engine sets.

The 'old tech' products have historically been embraced by smaller truck and bus operators for 'repairability' (depot and roadside) but the brand had been increasingly seen as aged 'old India', something recognised internally in the early 2000s. To combat JVs and acquisitions were embarked upon:

- 2006 acquired Avia (Czech Republic) [Avia Ashok Leyland Motors s.r.o]
- 2007 JV with Nissan
- 2010 acquired (26% stake) in Optare (UK)
- 2007 JV with Nissan Motor

The main BoD members sit in the Chennai HQ, and consist of Mr Dheeraj Hinduja (Chairman), Mr R Seshasayee (Exec Vice- Chairman) and Mr. Vinod Dasari as the Managing Director. Mr Hinduja replaces Mr R J Shahaney who recently stepped down as Chairman.

It has been stated that Avia will providing a foothold in the highly competitive European truck market, and has major room for improvement given that recently its output is only 20% capacity (1,200 units in 2009-10). However, the EU+ truck sector is very competitive, with entrenched players and buyers, so although A-L may obviously see ramp-up potential, invetsment-auto-motives suspects that ultimately Avia tooling etc will be taken to India and serve A-L's own-brand ambition.

The buy into Optare - which specialises in the smaller class of urban 'runabout/hopper' bus – looks to take advantage of the growing trend for smaller local area and intra-urban routes, and to take advantage of the needs of the school, college & university sector and organisations that require daily route-pick-up and drop-off transport for its students, staff and members. Optare also has apparently made advances in hybrid powertrain, a system better suited to small bus segment, thus also useful for A-L's own R&D.

The agreement with Nissan was to create 3 linked companies for: a) vehicle production, b) powertrain production and c) mutual development, A-L holds a 51% majority stake in vehicle production, Nissan 51% in powertrain and equal 50:50 split in development.

Rated as No2 in In Trucks (after TATA), A-L spans 7.5 – 49ton classes. Historic focus was in the 16 - 25 ton segment, but this broadened into the lower LCV class via the Nissan JV. However, A-L is noted as No1 Bus producer, with capacities spanning 19 - 80 seaters.. It has 7 production plants. 2008 annual sales were about 60,000 vehicles, and about 7,000 engines. 2008-9 sales of 54,431 medium and heavy vehicles. 2010-11 sales of 94.100 units. Presently it has a build capacity of 105k units p.a. And is rated about 20th in world rankings of truck company size.

Ambitions are to become a global Top 10 player, with aspirations of doubling its sales of MCV and HCV output over the next 5 years, this underpinned by its level of investment in fabrication & machine tools and production engineering, Vinod Dasari remarking that over 80% of A-L vehicle output is made from plant machinery 5 years old or younger.

R&D has spanned all electric, hybrid, CNG and H-CNG (20% Hydrogen), whilst new CapEx projects include a new plant in North India and a Bus Body assembly plant in mid-east Asia.

Thus we see that A-L seeks to continue its historic trend of purchasing 'ready-made' vehicles from foreign sources in order to directly buy product types suited to Indian market trends and absorb best practice & technical advances, whilst simultaneously contract manufacturing for others so as to also gain exposure and capture additional technology knowledge.

Those sales provided for a 2010-11 (vs 2009-10):
Net Income of Rs 11,117.71 crore (vs Rs 7,244.71 crore)
PbT was Rs 801.8 crore (vs Rs 544.78 crore)
PaT was Rs 631.3 crore (vs Rs 423.63 crore).
EPS of Rs 4.75 (vs Rs 3.18)

Operating Margin of 7.2% (vs 7.5%)

SML Isuzu -
(previously Swaraj Mazda)

- established in 1983 as Truck sector parallel to ambitions of Maruti Suzuki
- previously owned by Sumimoto of Japan and Punjab Tractor
- Sumimito buys-out Punjab Tractor
- creates capabilities in task-specific variants of MCV vehicles
- develops capabilities in HCV via Isuzu
- majority share (54.96%) held by India's Promoter Group

SML Isuzu manufactures LCV / MCV, Luxury Bus (Coach) and Special Vehicle products. It offers vehicles from both SML and Isuzu branded stables; the former serving the plethora of generally smaller trucks and buses and variants for organisation based clients at a lower price level, whilst the latter serves a smaller higher priced markets for larger truck and coach. Plans are to access the new sectors of: multi-axle trucks, refridgerated trucks and articulated-truck tractor-cab units, also seeking to offer the Isuzu D-Max pick-up.

The company's HQ is in Chandigarh.
It is not publicly listed for open share sales.

The BoD is led by Mr SK Tuteja (Chairman) and Mr Y. Watanabi (MD & CEO).

In fiscal 2010-11, the Commercial Vehicle (CV) Industry experienced sales of 7,53,000 units
(vs 5,76,400 units a year previously). Within the 5.0 ton to 12.0 ton GVW segment in which SML Isuzu operates, sector sales reached 99,500 units (vs 83,000 units) thus 13.2% of aggregate volumes. Of these the company sold 12,870 vehicles (vs 10,133 units previously), a record volume,
with an increase in market share to 13% (vs 12.2%). Vehicle sales plus spare part sales provided record revenue.

However sales targets set were not reached, and consequently, capital expenditure for a luxury coach expansion project was restricted for the time being. Furthermore the expected level of segment sales for luxury coaches failed to meet expectations, thus of the Rs1800 lahks monies that were to be utilized by March 2011, only Rs.321.70 lacs is to be spent.

The increasingly constrained macro-environment thus set a cautiously optimistic strategy using lower key product and sales initiatives across H1 of 2011-12.

Those sales provided a 2010-11
Net Income of Rs.893.0 crores (vs Rs. 722.2 crores)
PbT was Rs.51.4 crores (vs Rs. 30.4 crores)
PaT was Rs36.55 crores (vs Rs21.46 crores).
EPS of Rs25.26 (vs Rs19.44)

Operating Margin of 5.7% (vs 4.2%)

Force Motors –

- founded in 1958 as Firodia Tempo Ltd by N.K.Firodia
- originally licensed German Hanseat 3-wheeler & Matador truck
- renamed Bajaj Tempo after partial acquisition by Bajaj Auto

Today the company's portfolio includes 3-wheelers, Tractors, Mini-Trucks, MUVs, LCVs, Vans, Trucks, latterly SUV and a desire to capture a portion of the MPV segment and ambitions for a premium SUV

The BoD's primary positions are held by Abhay Firodia (Chairman) and Prasan Firodia (M.D.),

As with much of the Indian auto-sector, Force Motors has historically bought the licence to manufacture previous generation vehicles from western VMs. The same route for engine sets, with a simultaneous effort to contract manufacture engines for others, such as Daimler.

- 2008 50:50 JV with MAN Trucks in HCV segment (“MAN Force Trucks”)
- 2011 announced MPV using (Vito) Daimler platform (for Van & MPV variants)

The 2010-11 Annual report noted that the 2009-10 growth story continued, with growth across all the segments Force Motors operates within. It welcomed the “rising standards of competition, technology, environmentalism and safety”, seen as beneficial to the auto-industry's ongoing improvement. Force Motors sold: 19,822 LCVs (inc small vehicles), 6,215 of MUVs (Multi Utility Vehicles), 1,013 Tractors

Exports saw growth in 2010-11 vs 2009-10, to a value of R27.17 crores from R26.96 crores, helping to fund technical consulting assistance commissioned from Germany via an independent expert, Mercedes-Benz Project Consultation GmbH and MB Technology GmbH. R&D for tooling and project costs were 2.26% of company turnover.

A labour relations legal case with Pithampur Plant staff is ongoing but cordial relations remain on the shop floor itself thus not expecting any disruption in production.

Those sales provided a 2010-11

Net Income of Rs 1481,43,74,099 (vs Rs 956,03,39,962).
PbT was Rs 82,13,21,341 (vs Rs 42,88,48,470)
PaT was Rs 58,61,78,955 (vs Rs 60,42, 25,926).
EPS of Rs 44.49 (vs Rs 45.86)

Operating Margin of 5.5% (vs 4.5%)

Bajaj Auto –

- established by Jamnalal Bajaj in 1926 with imported vehicles
- Kamalnayan Bajaj (son) leads from1942.
- Baja Auto formally incorporated in 1945.
- 1959 licence granted to manufacture vehicles
- 1960 IPO
- Rahul Bajaj leads from 1965.
- 1970 sees 100,000th vehicle produced
- 1977 sees 100,000 vehicles produced that year.
- broadened products from (business) 3-wheelers to (consumer) 2-wheelers.
- model improvement and new product expansion
- a division of Bajaj Group (Iron & Steel, Autos, Home Appliances, Lighting, Travel, Insurance, travel & Finance).
- the demerger of Bajaj Auto Ltd into three separate corporate entities:
Bajaj Finserv Ltd (BFL),
Bajaj Auto Ltd (BAL), and
Bajaj Holdings and Investment Ltd (BHIL)—

Bajaj's association with 3-wheeler tuk-tuks is renowned, with its previous expansion into 2-wheelers a natural expectation to broaden the business base and lessen reliance upon a largely commercial marketplace.

Its HQ is in Pune, with production plants in Pune, Uttarakhand and Waluj Aurangabad.

The BoD is led by Rahul Bajaj (Chairman since 1965), Madhur Bajaj (Vice Chairman) and Rajiv Bajaj (MD) and supported by Sanjiv Bajaj (Exec Dir), Shekhar Bajaj (Dir) and Niraj Bajaj (Dir).

The 2008 buy into Austrian bike-maker KTM - worth 40% in shareholding - provided for mutual synergies between the companies. KTM is renowned for its Motocross bikes and has further developed its Road-bike range, thus Bajaj & KTM able to undertake R&D and development together aswell as cross-sell (badge-engineered) products in their different primary markets as possible. This allows Bajaj to introduce Moto style bikes and seize the opportunity for Moto-style products as has been the major trend in Europe over the last decade (as per BMW bikes).

As a result it has jointly developed its 125cc and 250cc ranges.

[NB Furthermore KTM's exploration into street legal race-track cars with its X-Bow model provides for an exciting alternative and very tentative entry into the car market, potentially able to further boost the Bajaj brand with a unique, limited volume track-road 'race car' for emerging track-day events at the Buddh International Circuit and elsewhere. This would precurse any attempt for a similar attempt at a higher price point by Force Motor – see below].

After a failed alliance attempt with Renault to produce a competitor to TATA's Nano small car, expected low-cost small car, the idea could remotely, but possibly be born through the KTM alliance. Though a 'developmental stretch' for both parties it might produce something as, if not more radical, as Nano.

2010-11 sales were a record 3.82m units; consisting of 3,387,043 motorcycles and 436,884 three-wheelers. Exports crossed rose by 35% to 1,203,718 units.

The Chairman's own words depict the very successful 2010-11 period...”No doubt, some of this excellent performance was on account of a smart rebound of the Indian economy, which has grown
by 8.6% in FY2011 — second only to China. After all, the year saw total motorcycle sales by the industry increasing by 24% to 10.5 million units. However, sales grew significantly faster than the
market. For instance, Bajaj Auto’s total motorcycle sales increased to almost 3.39 million units. Similarly, while domestic motorcycle sales in the aggregate grew by 23% to a bit over 9 million units, domestic sales rose by more than 35% to over 2.4 million”.


Those sales provided a 2010-11
Turnover of Rs 16931.53 crore (vs Rs 12118.08 crore )
Net Income of Rs 15998.12 crore (vs Rs 11508.5 crore).
PbT was Rs 4350.75 crore (vs Rs 2411.13 crore)
PaT was Rs 3339.73 crore (vs Rs 1703.63 crore).
EPS of Rs 115.4 (vs Rs 58.8)

Operating Margin of 27% (vs 21%)

Hero MotoCorp (previously Hero Honda)-

- established in 1984 JV of Hero Cycle and Honda Motorcycles
- created to provide Indian manufacturing competence in the sector
(as per Maruti Suzuki and Swaraj Mazda).

- Mujal Bros buy-out 26% sharehold from Honda (of Hero-Honda)
- India's Promoter Group own 52.21% of Hero MotoCorp's shares.
- 2011 company renamed

The brand could be said to be the the 2-wheeled equivalent to Maruti. Created to give India an internal modern technology competence in the development and production of scooters, mopeds and motorcycles, and critically give Hero Cycle a new commercial avenues beyond diminishing use of pedal bikes.

(Thus was at the time a re-run of technical licensing previously seen with Enfield motorcycles et al, except using the Honda base of a broad product range). Its HQ is in New Delhi, and operates 3 plants; two in Haryana and in Utterakhand

It is reported that Hero-Honda has sold over 50m units in its history, and the old-new entity sells more two wheelers than its 2nd, 3rd & 4th ranked competitors combined; the Splendor model being the prime seller at >1m units p.a.

Plants are based at Dharuhera, Gurgaon in Haryana and at Haridwar in Uttarakhand, combined a capacity of 3 million units per year. HeroMotoCorp has a over 3000 sales and service points across India, and seeks to achieve revenues of $10 billion and volumes of 10 million two-wheelers by 2016-17.

Hero MotoCorp is listed on the NSE

The BoD is lead by Mr Brijmohan Lall Munjal (Chairman) and Pawan Munjal (MD & CEO)

The purchase of 100% of shares thus should provide Hero Group with an ability to capture the business' full income stream, which it hopes to boost further as the termination of the JV leaves Hero MotoCorp free to export internationally, whereas it only previously had licence to export to Sri Lanka.

However, given that it was indeed Honda technology that underpinned the JV, the new company will either need to develop motorcycle systems itself and/or rely on an external alliance.

During the fiscal year 2008-09, the company sold 3.7 million bikes, a growth of 12% over last year. In the same year, the company had a market share of 57% in the Indian market.

In 2010-11 the 2-wheeler market consisted of 13,413,312 sales (vs 10,574,835 in 2009-10),
Motorcycles represented 10,500,004 (vs 8,444,173), Scooters 2,209,595 (vs 1,559,173) and Mopeds 703,713 (vs 571,489). Hero took 54.6% of India's motorcycle market and had a 44.5% market share in scooters & mopeds, selling 5,402,444 units (vs 4,600130 the previous year) giving 17.4% growth.


Those sales provided a 2010-11
Net Income of Rs19,670 crores (vs Rs16,099 crores).
Net Sales of Rs19,245 (vs Rs15,758)
PbT was Rs2,405 (vs Rs2,832)
PaT was Rs1,928 (vs Rs2,232).
EPS of Rs96.5 (vs Rs111.8)
Dividend of Rs105 (vs Rs110).

Operating Margin of 11.4% (vs 16.2%)

Conclusion -

The previously depicted 9 companies span the full spectrum of the Indian automotive sector.
Each has undoubtedly ridden the wealth creation wave India has enjoyed through the 1990s and 2000s, possibly an unparalleled period of Indian economic strength enjoyed by its people and corporations.

Yet the global economic headwinds that have come to the fore over the last 12 months look set to take a toll on economic well-being, something that Chairmen, MD's and CEO's appreciate. The story at Maruti-Suzuki may foretell problems elsewhere, by which a highly expectant workforce, well used to the good time years, is not yet cogniscent of the broader slowed picture, and so make unrealistic demands which in turn interupts output and the cost-base and so inadvertantly helps to undermine the corporate position, job security, local economy and wide economy health. Yet ironically at the same time such pressures mean that executives must come to grips with the fundamentals of the business, its cost base, its operational structure and strategic position..

The macro-economic headwinds however, blow over different companies in different ways, depending on their exposure to their product's general market, pricing elasticity and substitutional effect. In autos the headwinds that quickly directly effect consumer spending bode greater ill for passenger car producers, than for commercial vehicle firms, and may indeed create a consumer migration effect away from cars in general (new and used) and toward far more affordable 2-wheelers so boosting the outlook for such providers.

The accompanying graphic (at the top of screen) depicts the exposure levels of each manufacture to each vehicle segment type. It then provides a very macro-orientated view of those that are poorly, squarely, or best positioned to face the near and medium term.

The above mentioned Operating Margins for each firm and relative positions on the 'macro-map' make the basic case clear to all, (though each company of course deserves far closer consideration by investors).

It could well be another period that encourages further structural change in the Indian industry, between indigenous players and between themselves and foreign multinationals and expert service providers. Yet there are also those who being progressively-minded are already in the process of shaping themselves to meet the challenge.

It is a behaviour pattern that should be critically viewed and mimicked by all a sector participants.

Until very recently, most companies have been characteristically similar, in as much that endemic family / conglomerate control has been handed down from father to (typically) son, and that the firms were were themselves established at critical watersheds during the country's past: merchants in the colonial period, new industrialists during independence and technology appropriators in the early 1980s.

But the success of the 2000s has perhaps masked, now markedly juxtaposed by the global slowdown, may create the shifting of tectonic plates of commercial India.

Given the protected state of markets up until 1991 – though arguably realistically semi-protected ever since - the families, as the Indian elites, have understandably sought to maximise the returns on their original investment. Thus the well proven formula was to adopt licences, tooling and products (of all descriptions) from British, Germans and Japan sources, and ensure decades-long lifecycles. That ensured that original monetary layout was reduced, that cost relatively quickly amortised from output, requiring additional expenditure on tools and jigs on an adhoc basis, whilst enabling an absorption of increasing input costs and when necessary - as in times of economic slowdown. Critically the business model gave an great deal of 'business elasticity', able to maintain lower pricing during slump periods and boost profits during upturn periods.

As one would expect, it is a business model that few families and conglomerates wish to see quickly replaced, but not doing so endangers India of being left in the technological dark ages. Thus given the need to 'serve Mother India's population', 'integrate with the world at large' and 'produce profits' there has had to be a commercial balancing act, that accords more than most to the 'mixed economy' philosophy. India may on the surface see itself as the dynamic equivelent to China or the old US, but appearances are still somewhat deceptive, and there are very real differences between the 'Indian way' and elsewhere.

One such to date is the use of somewhat antiquated accounting procedures - seemingly closely linked with the British methods of the Victorian era - which has both positive and negative aspects.

They allow for a far greater roll-over of (ie retained) profits year after year, 'brought forward' to the next year's balance sheet. Effectively a liquidity-driven model. This then has the positive outcome of ensuring a firms stability, something that India and its families has long understandably held sacrosanct – and can be indeed be assisted by the BoDs choice to pay out a small stock dividend relative to overall EPS.

The more negative argument that may be stated is that such monies are not being used in the broader economic picture, thus not only viewed by investment bankers as 'dead funds', by viewed by economists as anti-circulatory, possibly holding back the economy and possibly raising the cost of capital for others. Moreover, whilst the accounting practices follow the same basic formula, the Indian currency practice of talking and reporting using 3 ways (Rupee, Lakh & Crore) adds complication when reviewing accounts, especially against international peers. This only really negated by those firms which are publicly listed on foreign bourses.

Thus India could be said by default or virtue to have created its own economic, corporate and reporting eco-system.

And as stated it is one that may well come under even greater pressure as the weak-spots of its economy and old-family firms become more visibly apparent.

India's necessary task in the automotive sector and elsewhere is to try and balance the firm's agenda to operate as an instrument of social good, whilst also avoiding the apparent complacency that even since 1991 could be said to exist, and obviously committed to ethical profit maximisation. Itmust look again at the speed and depth of its liberalisation programme, better align itself with international investor requirements; and possibly even create the basics of an economic template that can be exported to the west, one which aligns all stakeholder needs.

The size and mid-speed dynamic of the auto-sector (compared to slow evolution of agriculture or rapid evolution IT) means that it could feasibly play a role in developing that more holistically-minded economic model.

Good Luck India...अच्छे भाग्य

Post Script -

India's press reporting – as read from some executive comments - appears to suggest that Turkey is viewed as problematic to the Eurozone. Whilst the Turkish economy is viewed as 'overheating' and is heavily EU exposed via exports, as a non EU member with stronger structural economy (good capital markets plus lower wage climate) it should not be viewed by India as a similar positioned 'periphery country' to Greece, Italy, Spain or Portugal - as seems the case.

Though investment-auto-motives refuted the feasibility of “Indian Lightweighting” across the whole of the India auto-sector, so as to provide a national USP (ie “Radical Lightweighting”), it does promote efforts of 'technology trickle-down' whereby on a project by project basis, with convincing business case, conventional mass-manufacture steel vehicles incorporate 'assistive solutions' “Practical Lightweighting”. To this end, given the TATA ambition, investment-auto-motives expects to see TATA include such efforts, primarily to demonstrate its USP to the Indian public in passenger cars, esp versus Suzuki Maruti and foreign competition.