Monday, 30 January 2012

Macro Level Trends – European Economy – Devising Pragmatic Paths for Auto Sector Structural Reform in a New Dual Speed (Hybridized) Europe.

Last week saw global leaders from industry, finance and politics meet at the annual Davos event. High on the agenda of course, the sluggishness of pan-global economic growth, exempting the good news from China and the 'great expectations' of North America.

Given the financial and structural economic woes of much of Europe – with the national credit down-grading of France heightening fears about 'core contagion' and correlated delay in the EU's eventual rebound – the 'big picture' raison d'etre of the event has been EU solution seeking. Thus it may be argued that the event's focus continues to be about the here and now, but such supposed short-termism - which is actually in the long-term interest – has been the recurrent theme ever since 2008.

The global grand schemes of yesteryear have seemingly become marginalised, and perhaps none more so than the high-ideal ecological ambitions made almost sacrosanct by the 1997 Kyoto Protocol, even if not ratified by the major players and so formalised. Nonetheless, intent for change was there, and the eco-challenge still sits in the political background, even if superceded by fiscal and now nationalist concerns within the EU.

Recent years and associated hard times of late have understandably led to reticence amongst policy-makers and capital markets participants to optimistically push for drastic eco-orientated transformation. High costs, wavering confidence and often increasingly delayed or possibly ethereal ROI timelines (at domestic and state levels) means that the whole arena, ideology and discipline of 'Environmental Economics' has come under the 'pressure of pragmatism' as never expected in the 30 years prior to 2008; given the 'golden era' characteristics of that period.

[NB However, there have been exceptions, as discussed in a previous post, the Mayor of London introduced the LEZ (Low Emissions Zone) as of 01.01.2012 effectively banning older, heavy diesel engined vehicles from London streets].

Nonetheless, whilst scheduled programmes of change have been seen, the participants at Davos well recognise that it is in the midst of such daily and weekly turmoil that the art of grand schema is most required, and that is presently directly at economic need, over and above ecological.

However, that is not to say the two are mutually exclusive, indeed crafting the former need properly can actually propogate the later, by creating a more fertile soil for future growth.

It is this outlook of optimism, for turning challenges into opportunities, that the title of this year's Davos event chimes: 'The Great Transformation: Shaping New Models.'

The very fact that this title was chosen - each year's title generated by reading in between the lines of general consensus - points to the evident understanding of a much altered 'power-broking' basis in the global economy between East and West, aswell as recognition that the ecological challenge whilst presently in the background is forever with us as living standards across the globe rise.

Within this broad context, the emergence of the EU economic now sets 'conditional demands' for adapted and wholly new socio-economic 'progress paths' to be nationally, regionally and internationally constructed.

The fact that China's representation at Davos was lesser than expected indicates that China is subtly demonstrating its potential power to relieve EU woes, whilst also allowing it to remotely view a less guarded US – Euro relationship as would have otherwise been the case.

Contrasting such real-politik was CNN News' typical popularist manner of questioning Davos participants as to whether leaders were “ahead or behind the curve” regards the EU crisis; using the austerity of a basic flip-chart and re-orientated WEC logo as the base for its version of 'pin the tail on the donkey'. Mixed opinion returned. The IMF's MD & Chair Christine Lagard set out two positions – slightly ahead and slightly behind the apex of the curve – to illustrate both intention and reality. A similar dual depiction with far greater distance was given by Prof. Nuriel Rubini.

This the difference of perception (or rather of outward presentation) of these two individuals perhaps unsurprising given their respective backgrounds. Yet it outwardly suggests that the 'EU problem' is a long term one, and may only be fixed by ongoing phases of structural reform which thus attract broad-base liquidity injections for many years to come. That time scale also driven by inter-regional political complexity and the subtle tussle between cash injections provided by intentional ongoing Euro devaluation (QE), provision by the international capital markets and any 'saviour' offerings by China and other SWF's latterly returning to the table who would presumably only truly leverage their US$ FX reserves (from export income and petro-dollars) once the Euro has reached parity with the US$ - a small trickle flow of money until then.

Yet, the very notion of 'the curve' euphemistically used by CNN is a misnomer. The reality being that a multi-speed Europe must best manage divergent slopes of much muted prosperity, economic flat-lining and very real medium term watershed decline.

At worst this inescapable reality impels the eventual collapse of the Euro, as many doom-mongers predict. Yet a return to individual national currencies would be relatively chaotic, and would logically lead to each 'un-coupled' nation seeking ever greater competitive advantage over its preceding neighbour through ever greater devaluation efforts; notably via nation based QE and literal (old fashioned) currency printing to re-inject liquidity and consumer spending, as opposed to routing less visible but arguably more powerful liquidity through the investment disciplines of the banking industry.

In contrast, a best outcome scenario would be that the divergent fortunes of EU members allows Germany to take a greater lead, and with broad plan agreement by 'fellow-step' neighbours, providing for the slow remoulding of industrial and commercial Europe. This has been criticised as creating little more than an EU of 'Little Germanys', but would undeniably provide for far sounder national economic platforms, and indeed socially may well instil the German traits of caution, learning and self responsibility.

Importantly, any solution that sees the EU retain its shape would require a coordinated effort amongst members to allow the Eurozone to subtly massage the Euro's global valuation relative to future global conditions. Done so by in a pro-cyclical manner, able to leverage the fundamental economic differences between EU countries. Thus using the now emerged growth disparity gap to locate specific activities vis a vis the global competition in the most promising locations throughout Europe. This then in a similar vein to the FDI investments seen in 'New Entry' EU countries over the last decade or so. So in effect creating captive deflationary and inflationary zones suited to specific goods and service sectors.

If indeed a long-term hybrid '2-speed Europe' can be sustained to the benefit of investors seeking ROI from specifically aligned commercial and industrial sectors, the peoples of retained member state countries would gain from such Ricardo-esque re-orientation of geographically based core competencies; whilst in the interim benefiting from the support of German commercial assistance, the funnelling of EU and ECB monies via the ESM and ESFS aswell as the IMF.

Critically this route of 'twin Europe' plays to the best of both worlds, allowing member states the freedom of self-directed re-conceptualisation - if fundamentally watertight as a building bloc of a renewed Europe - aswell as the broad political support network to achieve realistic change. All at a lower cost than 'dropping out' altogether and so becoming reliant upon the demands of what would be seen as voracious free capital markets, which in themselves have a remit to allot investment capital on strict investment terms, even given the rhetoric of socio-consciousness.

[NB This creation of a dual-aspect 'Hybridized Europe' would then recreate a similar economic base to that of Europe in the post-WW1 & post-WW2 periods. Yet this time the spectre of Communism replaced by far a greater sensitivity by the 'hand in hand' power-brokers of Capitalism to social needs; a very real necessity given the sea-change of populist attitudes Thus perhaps closer to a re-run of Victorian Britain in which leading-light industrialists literally physically built a better world for employees, and privately directed philanthropic funds acted in the broad human interest, both initiatives arguably more effective in creating the 'public good' than state-run organisations which today across Europe have arguably little financial accountability to the populace and little in the manner of measurable 'social output' results. Such 'Conscientious Captalism' was a precursor to later state-run education, health etc programmes, and may today become an evolved successor on a far greater scale].

Such an economic hybridization of Europe might very well require differentiated dual pricing structures of basic goods and services to the public consumer between the EU's struggling periphery and the less impoverished core. This to avoid the type of real-world (inflationary) pricing pain experienced by the then periphery countries when the Euro came into being in 1999, and affect only consumer staples such as food, utilities and typically non-taxed critical goods such as children's clothing etc.

This would in turn provide for new employment roles within the state to ensure that basic prices of foodstuffs, petroleum etc were maintained, so eradicating profiteering and that black market 'arbitrage' between ('cheap') periphery and ('expensive') core was prohibited.

Yes, such a economic development path for the whole EU region need not have historical overtones of great division, as seen previously with Eastern and Western Europe. A freedom of movement for goods and people (though with certain economic strictures) would stay engrained, and there would be no physical barriers or militaristic checkpoints beyond those needed to maintain national security, and the emergence of electronic tagging, IT and the 'connected world' means that law enforcement can be far more subtle. Less intrusive and indeed effective.

Any such details would need very careful assessment, but the primary issue at hand is that the inescapable reality of a long term 2-speed Europe is accepted as the true state of play by all members within the region. Instead of – as seems presently the case – the denial of the new EU economic picture and the associated political infighting which presently post-pones a credible economic solution to the good of all, most notably each nation's peoples.

On the surface a 2-speed Europe looks to be a momentous failure but it must be recognised that the past good fortunes of the periphery countries through the 1990s and 2000s was built upon use of 'credit supercharging' by respective governments to grow state employment, by firms seeking to utilise the then lower labour costs, and by banks lending on a property bubble. Exempting portions of Italian and Spanish industry, little of that apparent growth was tangible industrial productivity of real use to the the nation, EU region or indeed world at large.

To this end, unlike EM growth in Asia, the Mid-East or South America, the EU's periphery lived well inside a more or less self-contained universe. But that universe is now recognised as little more
than a black-whole that is presently still unquantifiable in true value terms by many, including most importantly the investment community.

Thus a very real fundamental change is necessarily required so as to regenerate those economies via truly productive activities that can be both self-consumed and exported elsewhere.

And to this end, the automotive arena across Southern Europe – primarily in Italy & Spain - should take this rare opportunity for fundamental review of its global positioning and recognise the benefits of 'whole-sale' (ie value-chain) reconstruction, so as to step into the future by creating a true “Tier 0.5” production hub that can feed the multitude of European brands.

As has proven throughout history and especially over the last two decades, the present over-matured - and thus often value destructive - sector business model has increasingly relied upon industry consolidation (ie GM Opel-Vauxhall, FIAT Group,VW Group, PSA Group), the sale of intrinsically uncompetitive companies to foreign newcomers (ie Volvo to Geely and now SAAB to possibly either China Youngman, Turkish Brightwell or India's Mahindra) and the increasing deployment of shared platform projects underpinning seperately skinned and badged cars.

Unquestionably the economics of European production by 'empire VMs' has come under question time and time again. The only companies able to escape seemingly the German trio of VW, BMW and Daimler through brand and geographic expansion and capture of premium and luxury markets worldwide. Yet even they look to JVs to lessen new vehicle project and production costs to maintain profit margins. It is well recognised that FIAT-Chrysler's CEO Sergio Marchionne seeks to partner with another European VM so as to grow scale and thus lessen overall input costs for his Italian-American company. And moreover, the world of contract manufacturing grew ever larger, especially in low and medium volume segments such as Porsche's use of Valmet and BMW use of Magna Steyr.

In business, history and convention states a 'circular' paradigm: that profitability leads to expansion and that expansion leads to profitability. Given the web-like character of the auto industry's value chain, and the intent to maintain as powerful grasp on the value-chain as possible, the willingness to divest of prime manufacturing activity – even when highly questionable since only economically viable during boom periods – has been hard to challenge; international VMs seeking to maintain global presence, use profitability from other regions to bolster Europe, always an executive's insistence that “European operations can be turned around” (rhetoric the BoD wants to hear) and as last resort, the ability to sink costs into Europe so as to bolster further the profits of other better performing regional divisions.

This then the convention

Yet, on paper there is another way forward, one which the fragmentation of the EU into a 2-speed economic bloc offers. That of mass scale contract manufacturing of platforms, module sets, sub-structures and whole vehicles to 'service' many of Europe's VMs. Ostensibly moving the Jv manufacturing model forward a logical step to create a true full-scale Tier 0.5 production category and arena; something oft discussed amongst the investment community and auto-executives, but rarely actioned given massive ramifications across business, investment and society

However, changed times call for changed behaviour, and though against conventional wisdom investment-auto-motives believes that Southern Europe may be ripe for such an auto-sector introduction that can induce scale efficiencies which drive profits for both Tier 0.5 opoerator and the VM client base. Indeed such an intrinsic change could well act as the bedrock for new productive growth across the region.

Further to previous posts regards the Norther Europe Eco-Tech Rainbow, and the expansion of Northern Africa's components and assemblies production capabilities, investment-auto-motives envisages 3 horizontal bands of automotive activity across the EU and MENA region. Respectively Northern Europe to offer R&D, Design & New Product Development (and end-point vehicle production by those companies able to exhibit profitability), Southern Europe to offer mass scale contract manufacturing industry (ie Tier 0.5), and North Africa to grow from Tier 2 base into fully fledged Tier 1 production base at world quality levels, thus able to 'feed' Italy, Spain et al.

Under the banner of 'Conscientious Capitalism' those corporations that have both strong operational and strategic fundamentals should be uninhibited to maintain business as usual, yet those that have proven themselves to be either 'stagnant' or indeed 'value destructive' (and have been reliant upon state aid via cash injections or policy-led market manipulation) should pro-actively seek alternative paths that a 2-speed Europe can offer, so that convincing profitability can once again be achieved

The basic theorum of massively extending the use of contract manufacturing from a Souther EU production hub, echoes similar “change sentiment” for the industry proffered in the book “Time for a Model Change” in which the authors argued the reason for 'industry unbundling'

(AD 2004 / G. Maxton & J. Wormald / Cambridge University Press)
(see Post Script)

The time has surely come for the leaders of European investment banks and leaders of automotive operations to highlight the need to devise pragmatic paths for “auto sector hybridisation” between VMs and a new Tier 0.5 hub. The recent inescapable and long-horizon events within the EU creating a 2-speed region mean that such an opportunity can be seized.

In short the EU's own 'economic hybridization' promotes the basis of 'business model hybridization' and so 'industrial hybridization'; one in which the fundamentally strong VMs march onward and the weaker participants become part of 'new model shift' companies.

Time then for the true 0.5 Tier corporations to come to the fore, either from wholly newly developed synergistic portfolio companies held by private equity, or from the collective margins of VM based contract manufacture, or from expansion of present Tier 0.5 operators, or the onward coalescing of the Tier 1 supply companies morphing into that arena.

Needless to say that such change toward a hybridized region and aligned hybridized industry would almost expectantly lead to the development and popularisation of eco-sensitive hybrid vehicles.

Post Script -

'The primary message of “Time for a Model Change' is - the need to re-create the conventional auto sector, with a central strand that sees vehicles being developed by a sector that operates on a horizontal level relative to vehicle segment type rather than the historic, conventional model by which volume manufacturers seek to build vertical (ie pyramidal) empires. These typically brand based - in an understandable desire to achieve both scale (at the mainstream level) to ensure low-price platform efficiencies, and the desire for premium and luxury production to gain stratified higher margins on increasingly exclusive reduced output.

Monday, 23 January 2012

Micro Level Trends - American Manufacturers – Sizing-Up US Growth in a Vehicle Down-Sizing Age

Perhaps never in the history of US have its two most over-used phrases been so juxtaposed. “Its the economy, stupid” and “ the business of America is business” highlight the present near schizophrenic conditions that exist, a now engrained cautious attitude given the midst of fiscal and social upheaval of the nation, versus the rote conditioning of American business and populace to be optimistic and ambitious.

A recent front-page of Economist newspaper starkly depicts the present picture with the headline “America's Next CEO?”, referring to the results of the Presidential primaries across New Hampshire and South Carolina (poll rating) for the Republicans which show Mitt Romney as current favourite.

On paper, his background of ex-management consultant and ex-Governor looks to bolster the 'assets' side of a euphemistic personal balance sheet. But with the election a year away, the electorate will have noted President Obama's recent Asiatic focus to boost growth, US military presence in the region historically the precursor to strengthened trans-Pacific economic ties; this time however having to power-broke its way vis a vis China and a loss of previous 'reach' from S.Korea.

That combination of current economic fragility sat beside retained global aspiration is no better viewed than at the recent 2012 Detroit Auto Show. Though the state of Michigan has long lost its prowess as auto manufacturing powerhouse relative to the Japanese, Koreans, Chinese and of course the 'trans-plant' states in the “deep south”.

Yet for all the soulful remonstrations of the city's very real decline - by the likes of urban music artist Eminem - Detroit still endeavours to present itself as the vanguard of the global automotive sector as the new year gets under way.

And it is a very much needed show of confidence.

GM's stock price, though improved recently sits at $25, is well below its $33 IPO offering price; the IPO timed to ride previous market peak. Chrysler parent FIAT recognises the need to attract new capital into the US company from the markets, a necessary evolution, but made all the more prescient given FIAT's own concerns about the economic stagnation of Europe and its cash-burning effect upon the overall group balance sheet. And Ford has no doubt most disappointingly seen its stock price fall from its year ago high at near $19 to a present $12.50 due to the retraction of market confidence because of the macro-effects of the EU and global slow-down rather than company fundamentals.

Thus the Detroit trio all face capitalisation challenges.

However, as well recognised, 2011 (on a monthly YtD basis) did bring a glimpse of light for all in the US by way of the improved TIV demand figures, shoppers on Main Street seemingly more upbeat in the short-term than Wall Street traders besieged by the red price boards and 'Occupy Wall Street'.

Whilst 2009 gave 10.4m units sold, and 2010 gave 11.6 units, 2011 is expected to offer approximately 12.5m units. As for 2012, the market pollsters JD Power and sales outlet AutoNation seem agreed on a total of 14m units. That may at first appear a case of wishful thinking and pro-active sentiment boosting. Yet with Detroit's Big 3 sales expected to suffer on a world-wide basis, there may be reason to believe that the GM, Ford and Chrysler will be forced to grow US sales as an off-set to lost foreign demand. That typically means that new and refreshed products which attract dealer footfall are coupled with cross the board yet subtly offered sales incentives to seal deals and reach what may be ambitious state and country-wide sales targets.

With this as Detroit's very real global and national back-drop, the underlying message of NAIAS (North American International Auto Show) at Cobo Hall – just ended - was that although the philosophical broadcast is as 'international' as ever, the pragmatic communiqué is directed toward American buyers and dealers.

In order to excite consumers – and indeed Wall Street analysts – supposed 'concept cars' were rolled-out which intentionally bore more than a passing resemblance to current models so as to try and demonstrate their inherent progressiveness. But in reality – as is so often the case at this point in the economic cycle – are intended as image boosters to current models.

GM offered a compact sports study named the Chevrolet Miray (apparently meaning “future”) from its development centre in Korea, intended to simultaneously highlight the resurgence of the down-sized car – to befit the necessary global fit that enables scale efficiencies - and critical nudging of its sizeable presence in SE Asia's leading economy, with reach across the region. Also under the 'concept' name but seemingly more acutely related to the platform engineering of standard cars were the 2 items shown: the 'Code 130R' in the guise of a downsized Camaro 3-box coupe using Japanese German and Italian surfacing with all-american badging; and the 'Tru 140S', seemingly inspired by the 'organo' wedge-shaped Hondas of recent years. Both cars designed to fight against the 'import' market from Europe and Japan, but made more affordable for the targeted 'Millenium' (youth) consumer, which in reality translates as more affordable 'interpretations' of class leading foreign products for not just the youth but all consumers. An understandable design-policy driven by the strategic aim to build volume by capturing non-GM buyers from other VMs.

In a more candid effort to sell cars Ford offered stylised versions of its standard product range, including special editions of Fiesta, Focus, Taurus and Mustang in respectively, ST, ST-R, SHO and 'Laguna Seca' and 'Shelby GT500' guises. The company then, perhaps without the same pressure as GM to appear concomitantly global and future facing so as to buoy its market capital value, has followed previous US centric stance seen with 'Bold Moves' some years ago by wielding a set of obviously pragmatic 'showroom sellers' which are intended to draw general dealer interest. The new model introductions of course included 2012 versions of the general model range, but most interesting is the mid-size sedan Fusion, which is to be made available in a Plug-In Hybrid format. The investor website well recognised its – of course along with its peers - potential as the 'real-world' viable challenger to Tesla's Model S vehicle; this especially so if produced in Lincoln guise as Lincoln itself undergoes another brand overhaul. This aided by the new MKZ shown.

Chrysler showed the 700C concept, its contemporary take on a modern 'one-box' mini-van; a segment it essentially invented and captured in the mid 1980s after initial exploration with Renault (leading to Espace). Just as the Chrysler Town & Country and Dodge Caravan were – along with small sedan Neon – corporate saviours, so FIAT and Chrysler management seem keen to be seen to re-deploy pages from the history books, and target what appears an out of favour segment that lost its popularity given the 'soccer mom' tag and influx of SUVs and Cross-Overs. By way of more mainstream 'concept' efforts there is the Dodge Charger Redline. But of major interest was the Dodge Dart, the first US vehicle to be directly derived from a FIAT platform, the Alfa Romeo Giulietta. The re-engineering of Dodge with Alfa's sporting prowess should re-inject the brand with lost ride & handling characteristics, and with a $16,000 base price will be an attractive market contender. Importantly, FIAT-Chrysler used the show to display its 1.4L Multi-Air engine, which by historical American standards, and popular perception, a small power unit. However, it is being promoted through its use in the FIAT 500 to try and alter that perception so then able to be planned into later US market FIAT and Chrysler products. Furthermore FIAT used NAIAS to introduce the Maserati Kubang premium cross-over seeking to mimic Porsche's success with Cayenne.

From foreign stables, Toyota spotlighted the NS4 concept, a Camry sized Plug-In Hybrid sedan which intentionally spring-boards aesthetically from Honda's Hydrogen FCX Clarity concept of 2009, including its metallic deep red body colour, so subtly massaging public memory to Toyota's advantage. Toyota also debuts the LC-LF, a successor to its previously well received Lexus SC convertible. Honda itself provides a taste of the next generation NSX sportscar, badged in the US as Acura, and with the remit to kick-start what has been lost interest in the pseudo-premium marque that must switch its own centre of gravity from more recent SUV orientated vehicles to sedans, coupes etc. Whilst Daimler gave the idiosyncratic Smart For-US, trying to grow appeal of its micro-car marque.

This provides a basic view of the US market and US product outlook. However, given the bearish worldwide picture -exempting the surprising 8.9% growth in China in Q4 2011 – investors have great expectations that America can pull itself from the mire. To this end the recently experienced positive consumer traction in autos will be (nigh on) expected to continue as the theory of a self-sustaining America allows itself to kick-start its own upturn.

Yet that 'wished confidence' of a brighter era must be supported by evidence of top-line earnings improvement coupled with lean efficiency cost absorption within an organisation thus providing for appealing profitability and so investment incentive.

GM -

The reborn GM has (like Ford) the benefit of true global reach, but perhaps as never before have its 2 prime markets of China and the US been so important. The apparent 'soft landing' in China allowed GM to see its sales increase by 8.3%, ostensibly in line with general country growth.

In its first full year as a resurrected company, its FY 2010 revenue was $135.6bn, EBIT of $7.0bn, net Operating Cashflow of $6.6bn and FCF of $2.4 (having repaid $4.0bn to pension plans) and EPS of $2.89.
In 2011,
Q1 offered (net) revenue of $36.2bn (up $4.7bn YoY), an (adjusted) EBIT of $2.0, an Operating Income of $0.9bn (down from $1.2bn) and an EPS of $1.77 (up from $0.55), FCF dropped to $-0.9bn (from $1.0bn as a result of finance sourcing change that cost $2.5bn) and showed Automotive Liquidity of $36.5bn, with increased use of credit facilities (worth $5.9bn), this $42.2 set against Debt Obligations of $31.7bn.
Production was 2.32m units.
Q2 gave (net) revenue of $39.4bn (from $33.2bn), an (adjusted) EBIT of $3.0bn (from $2.0bn) and an EPS of $1.54 (from $0.85). FCF was up to $3.8bn (from $2.8bn), and Total Automotive Liquidity was $33.8 at hand and a further $$5.9 available via credit facilities. This total of 39.7bn set against Debt Obligations of $31bn.
Production reached 2.4m units
Q3 provided for (net) revenue of $36.7bn (vs $34.1bn a year earlier), an EBIT of $2.2bn (vs 2.3bn), net income for stockholders of $1.7bn (vs 2.0bn) and an EPS of $1.03 (vs $1.20). Operating cashflow reached $1.8bn and FCF from Autos equalled $0.3bn (from $1.4bn). Total Autos Liquidity equalled $33.0bn at hand with $5.9bn retained credit facility. This $38.8bn set against reduced Debt Obligations of $27.9bn, giving Net Liquidity of $10.9bn
Production dropped to 2.22m units.
As stated no Q4 figures presently available, though the BoD states a Q4 similar to that of Q4 2010

The company's earnings chart sets show that GMNA did near all the 'heavy lifting' in Q3, GMIO (Int Ops) showing reduced income, GM Financial assisting, GMSA (S.America) showing virtually no income and GME (Europe) showing a welcome reduction in losses, but still in the red. This the outcome from slow-down in global deliveries from 2.32m units in Q2 to 2.24m units in Q3.

GM has put effort behind its desire to decrease reliance on incentives, but results have been seasonally sporadic, with in the 16 months to Oct 2011, only 3 months of the series actually showing notable positive difference relative to the industry average 'give away' value, its own re-aligned pricing helping to beat internal targets.

This, looks to be part of the reason that Automotive Cash Generation shrank to $1.8bn in Q3 2011 from $2.4bn a year earlier, this broadly affecting Automotive FCF with the hike in YoY CapEx costs for the quarter from $1.2bn to $1.5bn, thus showing FCF heavily declining from $1.4bn to $0.3bn.

To re-quote the official statement “the company does not expect to achieve its target to break even on an EBIT-adjusted basis before restructuring charges in Europe, due to deteriorating economic conditions”. This then of little surprise. The IR department provides a general quote from Dan Ammann (CFO) “GM continues to execute the plan we outlined for investors in 2010...That includes investing in our products, further strengthening our balance sheet, generating cash and profits each quarter, and maintaining our low break-even level. The next level of performance will come as we systematically eliminate complexity and cost throughout the organization.”

Whatever the rhetoric, GM recognises that investors will need to be assured that the drop in stock-price (since IPO) can be off-set by the attraction of dividends. To this end the 2011 cumulative quarterly EPS rates (though not dividend rates)of Q1 $1.77, Q2 $1.52, Q3 $1.03, so far providing $4.32 will need to show a Q4 EPS of $1.44 to maintain an annualised average, and so theoretical attributable earnings to stock holders. If so, the notional “EPS Yield” generated relative to the $33 IPO price would show a 17% EPS return for 2011, and on the recent $24 price a 24% “EPS Yield”.

The prime aspect investors must watch is that whilst North America appears the most fertile and immediate sales ground, with the Q3 2011 numbers showing 96% of revenue came from NA, the exact methods GM uses for extracting additional value from the region must come under scrutiny. Just as the need must be to rebalance the international earnings contribution, so as not to put all the GM eggs in one basket.

Ford -

FY 2010 saw annual revenue of $129bn (vs $116.2bn in 2009), an EBIT of $7.15bn (vs $2.6bn) and a no paid EPS policy (relinquished in Q1 2012). Total Automotive Cash was $20.5bn (vs 24.9bn) with net (post Debt) sum of $1.4bn (vs $-8.7bn in 2009).
In 2011,
Q1 provided for revenue of $33.1bn (vs $5bn a year previous), an EBIT of $2.83bn (vs $0.82bn) and an unpaid EPS of $0.61 (vs $0.11). Total Automotive Cash stood at $21.3bn (vs $20.5bn), which after Debt Obligations stood at $4.7bn (up from $1.4bn) after debt reductions. Total Liquidity (inc marketable securities etc) stood at $30.7bn (from $27.9bn)
Production was 1.4m units (from 1.25m)
Operating Margin stood at 7.7% (vs 6.2% the preceding year) for the total company, though Ford NA offered 10.3% (vs 8.9%)
Q2 gave revenue of $35.5bn (vs $4.2bn), an EBIT of $2.9bn (vs $-0.06bn) and an EPS of $0.65 (vs $0.03).. Gross Automotive Cash stood at $22bn (vs $0.1bn) with net Cash at $8.0bn (vs $13.4bn).
Total Liquidity stood at $32.2bn
Production was 1.52m units (up from 1.42m)
Operating Margin was 7.0% (down from 9.1% preceding year)
Q3 offered revenue of $33.1bn (vs $4.1bn), an EBIT of $1.94bn (vs $0.111bn) and an EPS of $0.41 (vs $0.02). Gross Cash was $20.8bn (vs $-0.3bn) against Debt Obligations of $12.7bn, thus net Cash of $8.1bn (vs $10.7bn), with Total Liquidity inc credit lines at $31.0bn.
Total Liquidity stood at $31bn
Production was 1.34m units (vs 1.25m preceding year)
Operating Margin was 4.8% (from 6.2%)
Q4 along with FY2011 results to be presented on 27.01.2012..

With the same global market dynamic as GM, it was Ford's N.American operations which gave the greatest boost to revenue and profitability. However, whereas GM saw 96% of its revenue stem from NA, Ford sees only 58%, a far more balanced sales base, even if theoretically prone to ongoing international economic turmoil. The fact that Ford was able to enjoy that contribution in what has been a dire year for International Operations highlights what appears a leanly run ship.

Continuing to use the notional “EPS Yield” calculation, Ford saw EPS earnings of Q1 $0.61, Q2 $0.65 and Q3 $0.41, providing an average of $0.55 that investors would expect to see in Q4. However, as known, Ford decided to halt dividends through 2011 so as to buoy its cash cushion and maintain 'deep pockets' that could support CapEx projects, Working Capital needs and other obligations. That decision undoubtedly surpressed Ford's stock value, its current $12 or so seemingly reflective of that reality in tandem with previous bear-market sentiment, but some might argue that basic corporate fundamentals are brighter than recognised. As to how much the re-initiation of dividends at what is a notably cautious rate affects sentiment remains to be seen.


FY 2010 saw revenue of $41.95bn, a modified EBIT of $763m and Net Loss of $-652m, Cash at Hand of $7.34bn with Gross Debt of $13.12bn, giving Net Debt of $5.77bn
In 2011,
Q1 provided for revenue of $13.1bn (vs $9.7bn in the former year), a modified EBIT of $477m (vs $143 previously), [a modified EBITDA of $1.17bn (vs $787m)], a Net Income of $116m (vs $197m, so first reported profit), Cash at Hand of $9.9bn (vs $7.3bn), Gross Debt of $13.2bn (up from $11.2bn) and so Net Debt of $3.3bn (down from $3.8bn). FCF of $2.5bn (vs $1.6bn)
Total Liquidity was not stated.
Sales Total of 394,000 units (vs 334,000 units)
Operating Margin of 3.6% (vs 1.5% a year earlier)
Q2 gave net revenue of $13.7bn (vs $10.5bn), a modified EBIT of $507m (vs $183m), [a modified EBITDA of $1.3bn (vs $855m)], a Net Loss of $-370m (vs $-172m), Cash at Hand of $10.2bn (vs $9.9bn), and Net Debt of $2.1bn (vs $3.4bn). FCF of $174m (vs $491m),
Total Liquidity was not stated, Debt Obligations $12.3bn ($10.7bn of which is payable in 2016+).
Operating Margin of 3.7% (vs 1.7% a year earlier)
Sales Total of 486,000 units (vs 407,000 previously)
Q3 offered net revenue of $13.06bn (vs $11bn), a modified EBIT of $483m (from $244m) [a modified EBITDA of $1.1bn (vs $937m)], a Net Profit of $212m (vs $-84m), Cash at Hand of $9.45bn (vs $8.2bn), Net Debt of $2.9bn (vs $2.1bn). FCF of $-699m (vs $32m)
Total Liquidity was not stated, Debt Obligations $12.3bn (vs $12bn), Net Debt of $-2.86 (vs $-2.1bn).
Sales Total of 496,000 units (vs 401,000)
Operating Margin of 3.7% (from2.2%)
Q4 and FY results due on 1st February 2012, with the Revised Guidance at Q3 giving:
shipments at over 2m, net revenues over $55bn, modified EBIT of $2bn [modified EBITDA of $4.8bn], adjusted Net Income of approx $0.6bn andf FCF over $1.2bn

As an unlisted company – presently awaiting the right timing for a new IPO – Chrysler has little in the way of investor pressures, now that large portions of the tax-payer funded bail-out have been repaid, and the financial and technical gate-ways for FIAT's expansionary ownership of the corporation have been reached. But to generate a successful IPO, FIAT-Chrysler must demonstrate itself as a strategically strong and well positioned car company. Recent events in Europe have to a degree scuppered what had even previously been a tentative merging of empires. Chrysler's compact car future is effectively reliant upon FIAT platforms (which now need a 3rd partner to drive down costs, eliminate EU production overcapacity and generate credible regional earnings). This a sizable but realistically achievable challenge to be seen to be on track ahead of the US corporations own IPO.


The Detroit show's spotlighting of mainstream models in new model year and supposed 'concept' guises demonstrates the 'Big 3' need to generate showroom footfall and public interest converted into sales.

Yet the strategic positioning of the different firms – GM, Ford and Chrysler – largely reflects their 'playbook' positions seen in the past when re-emerging from recessionary times.

GM's play has historically been, and continues to be price-led, its large cash cushion of $10.9bn in Net Liquidity very probably used to maintain its strength at the coalface by continuing to offer the lowest RRP pricing of the Big 3 in each vehicle segment, and probably the biggest discounts and incentives on its vehicles. Thus, although GM seniors talk of a new company with new attitude, the tack it will take to generate market-share and ensure factories run at high capacity rates looks to be conventional.

Ford was the first to undertake corporate shrinkage during the early part of last decade, the sale of Volvo demonstrating the last vestiges of a yesteryear age that included PAG etc. That downsizing and the undertaking of its biggest 'mortgage' borrowing was part of the rationale to create the 'One Ford' of today, keenly focused on global platform/module set leverage and life extension of platforms to ensure what may be the industry's leading rates of CapEx amortisation. However, its strategic position appears 'historically normal', today setting itself out as the 'technologist' car company (eg SYNC etc) where car content and intelligence is decreed as the blue ovals USP in its mainstream markets, both at home and internationally. But once where historically the 'new era USP' was as the vanguard in styling, today with a need to satiate a broad cultural span of global consumers the maturity of middle of the road design is bolstered by efforts toward mainstream segment technology leadership

Chrysler finds itself in a curiously familiar position to that of the late 1970s and early 1980s, having to rise phoenix-like from what has been a very prolonged and concerning time, where its products where becoming very long in the tooth and its multi-brands appeal rapidly diminishing in brand equity. FIAT's parentage is of course seeking to alter that and the efforts thus far appear a mix of hit (ie new Dodge Dart) and miss (ie Chrysler badged Lancia's in Europe, and the FIAT badged Freemont SUV). Yet success is not yet assured, especially as European sales collapse especially so in Italy as it faces enormous economic strains. So the new onus is on Chrysler to help - along with FIAT's slowing but still potent South American operations - to buoy the parent company, by striking hard and fast in the US homeland. It will need to “pull a rabbit out of a hat” and re-create the new buzz it did in the mid and late 1980s. That was achieved back then with a venturesome daring spirit of the new. Today it must exploit the technical and financial advantages of 'pre-packaged' platforms yet recreate that lost spark seen 30 years ago, only periodically seen since, and distinctly lacking in recent years, offering little more than hackneyed 'Detroit Spin'.

To end, the attached table (top right) provides a brief but meaningful overview of the Big 3's current performance and financial positions; as viewed by :

- Worldwide Regional Production
- Revenue
- N. American Revenue as % of Global Whole
- N. American Operating Margin
- Total Liquidity Available vs Total Debt
- Net Liquidity Available

These very basic measures provide a much needed clarity as both global investors and Detroit looks to this emergent period of 'American Expectation'.

Once upon a time the Mako Shark Corvette, the mid-mounted Mustang and hi-tail Superbird reigned supreme in Detroit. Today, necessarily so, it is all about the numbers.

Saturday, 14 January 2012

Macro Level Trends – London's LEZ – Providing Economic Imperative from a Public Good

The beginning of the new year saw the Mayor of London's office introduce a new city-wide policy heavily discouraging the use of older, larger and more polluting vehicles within the city limits – now known as the LEZ (Low Emissions Zone). Delivered by Transport for London, the initiative is part of the Air Quality Strategy, seeking to cleanse the general breathable low level atmosphere, and so continue to avoid any potential build-up of low-level smog seen in other metro areas worldwide, such as Los Angeles or Beijing.

To quote official statements...“implementing the measures in the Mayor's strategy is expected to reduce PM10 emissions (tiny airborne particles generated principally by road transport) in central London by about a third by 2015, compared to 2008 levels. These new measures will play a significant role in the delivery of these targets”.

Since 3rd January those diesel vehicles 10 years old or more and rated at (at & above) 3.5 tons will face a heavy (£100 per day charge) for entering the LEZ. The policy aimed directly at those vans, trucks, mini-buses and coaches that do not comply to Euro3 or Euro 4 emissions standards. Furthermore, vehicles presently affected by the LEZ – lorries, buses & coaches - must now meet stricter emissions standards, set at the Euro IV standard for particulate matter; otherwise facing a £200 daily charge or risking a £1,000 fine.

There has been criticism that the policy unfairly disadvantages the small tradesman at a time of fiscal fragility for most businesses, websites such as 'HonestJohn' says that...“Obviously, this will have a major effect on small tradesmen using older vans, small lorries and pick-ups. Effectively anyone wanting any kind of job done on their house, flat or commercial premises within the LEZ will have to subsidise the purchase of newer vehicles by the tradesmen they call in”.

Yet, from the unbiased sidelines, this looks to be a knee-jerk reaction to the scheme, voices raised in an understandable yet overtly automatic manner. Of course some trades people use older vehicles, especially those who operate as one man bands or small companies, but of these investment-auto-motives suspects that only a small percentage run vehicles rated at 3.5 tons or greater. Look at the streets of London and the majority of small trades people use vans classified as LCVs- ie under the weight limit prescribed – in the form of the plethora of 'white vans' available from Ford, Vauxhall, Renault, PSA, FIAT, VW, Mercedes, Nissan, Toyota and Hyundai. These the long preferred choice of carpenters, plumbers, electricians and decorators given their easier manouvrability in town and the importance of lower fuel and running costs.

Undeniably, there will be business hit, the likes of scaffolding companies and roofing companies particularly given the hefty weights of steel poles and clay tiles that must be carried on what are usually flat-bed large trucks. Yet many of those companies are not the 'victimised' small trader, but typically because of sector consolidation, larger enterprises that should be better able to afford the CapEx costs of small fleet vehicle replacement; this especially the case given the government's push for initial economic re-generation spending in the construction industry.

Instead many of the vehicles in question appear to be owned or leased by major multinationals such as UPS, DHL etc in the delivery and logistics arena, companies which ordinarily 'write-down' CapEx devaluation from new on a 3, 5, or 7 year time-frame, or run by government agencies spanning Police, Ambulance, Fire, NHS and Social Services which have a natural imperative for policy driven renewal, either through 'farmed-out' fleet contracting (as has been the case with the Fire Brigade) or through self-managed fleets which can re-distribute older vehicles elsewhere in the country; such efforts assisted by the imperative of part-privatisation of the service, such as the Royal Mail.

Transport for London estimates that 94 per cent of the vehicles that will be affected already meet the new standards. This may or may not be an over-optimistic figure, leaving only 6% exposed, but view London's streets and it seems a rarity to see a 3.5 ton vehicle over 10 years old in the hands of the 'victimised' small trader.

Instead, conversely to the reactive rhetoric, it is believed that many of the central London (and broad city-bound) vehicles that are affected are seemingly owned by either major corporations, and medium sized companies able to undertake vehicle renewal if necessary, or by state entities which must accord to policy.

However, there are those who run such vehicles at the notional margins of the visible spectrum who are affected and will find the matter of vehicle renewal a more onerous prospect. 70,000 vehicles are run by smaller business catering for people moving, primarily schools, organisations and charities These special cases have been given a longer period in which to renew or decide not to replace their vehicles.

[NB Suggestions by TfL that such vehicles can be modified, whilst technically feasible to offer extended life-time use, are practically unaffordable given the costs of exhaust filtration and re-circulation systems) relative to vehicle value].

Even so, recognising the scheme's unintended consequences at the margins, those 'regionally exported' 70,000 vehicles, plus the seemingly small number that exist in private commercial hands, will critically allow for the improved broad supply of vehicles across the UK. That additional supply when set against what is likely to be a present static demand level for 3.5 ton vehicles will have the automatic market effect of actually lowering the price of these vans, trucks and mini-buses. That in turn allows single traders and small firms the ability to replace their own older vehicles (15-20 years old) with younger 10, 11, 12, 13, 14 year old 'ex-London' vehicles. So 'man a van' operators and low-priced van rental firms operating ageing stock can benefit with replacement vehicles that churn-out lower emissions and have greater fuel efficiency capabilities for lower cost per mile running.

Relative to London itself, the LEV scheme obviously promotes fiscal energisation by necessitating new 'demand pull', which in effect spans London and the wider UK economy.

This across:

- New Public & Private Vehicle Demand in London
- Vehicle Development & Coach-Fitting Demand from Regional Auto-Sector Suppliers

In the public realm, the new London Bus (NB4L) - although partly criticised by investment-auto-motives in its execution – saw welcome investment funds spent in its conception, development and build both on the Mainland with research establishments such as MIRA, aswell as importantly in County Antrim (Northern Ireland) where the winning contractors 'Wrightbus' are situated.

[NB Wrightbus are a family-owned and managed company that operates very much in the Mittelstand manner as recently advocated by Sir Anthony Bamford of JCB (similarly family run)]

Within that NB4L scheme a fleet of 300 hybrid buses will be operational by the end of 2012. Although the standard diesel only bus, set to enter service in February, is reported to emit under half the CO2 and NOx gases of previous generation diesel buses. Thus whilst the aesthetics may not be as wholly desired to truly replace the iconic Routemaster, the technological leap forward in using clean diesel and hybrid technology must be applauded. Furthermore, a zero-polluting hydrogen bus route is expected to operate through central London, though realistically more in the manner of a Mayoral flagship technology demonstrator than prospective scale-able transport solution.

The immediate beneficiaries of the LEV policy are of course those Medium-sized Commercial Vehicles (MCV) Dealers that offer both new and used (typically 3, 4, 5 year old) trucks, vans and mini-buses. The major corporate operators – often with buoyant cash reserves – can replace their fleet as necessary with all new vehicles typically ordered from the crop of major European producers. They in turn can benefit from the de-valuing Euro to negotiate good pricing on such purchases, the UK MCV dealers themselves having to balance margins per vehicle versus the improved volumes generated by the demand wave. Those intra-London government agencies and borough councils - if critically leveraging a combined 'cooperative buying' ability – will be able to gain sliding scale product discounts depending upon order numbers.

In short at 'the front end' of the process, it appears a 'win-win' for purchasers and dealers.

The benefits also appear down-stream, amongst the many UK based specialist coach-builders and body-fitters, those firms contracted to modify and 'fit-out' standard panel vans and cab-chassis variants (ie orders without rear body section; cab only). This then, the 'Phase 2' aspect of much MCV procurement, whence the base vehicle itself must be adapted to be fit for purpose, those tasks ranging from private utility company vans (ie electricity supply, water supply, telecoms supply) to the likes of Ambulances, Social Service passenger vehicles, TfL services such as 'Dial-A'Ride' for the elderly, infirm and non-abled, through to operators such as The AA, The RAC and GreenFlag breakdown & recovery companies;plus whole host of others.

This historically is a lucrative business for such vehicle body-builders, modifiers and fitters, a sub-sector typically very much aligned to economic cycles and fundamentals, but now seen as assisted by London's new 'Public Good' policy

Yet given the high labour content of this work, such companies are traditionally located well away from London in the lower-cost periphery of the country, areas which have suffered with the necessary withdrawal of state-based or government funded job creation schemes and have typically higher than national average unemployment levels.

Thus this seemingly London-centric policy, in reality has far wider positive economic ripples benefiting outlying areas.

[NB In order to assist the de-pollution of the urban centres and suburban street, it would serve well to have a rethink regards the use of road humps otherwise known as 'sleeping policemen'. Their widespread use whilst seeming to slow traffic may actually be causing greater pollutional harm with the fact that drivers are required to 'pull-away' from near stop after each hump, causing 'engine strain' when typically in second gear and so greater emissions.

investment-auto-motives suggests that a cobble-like Belgian Pavé be introduced instead to help slow traffic speeds, especially in conservation areas and roads of historic importance where such a surface would have previously been the case (ie where housing is of Georgian, Regency and Victorian age). The suggestion that such a pavé could be laid in a grid of cambered 'trays' so aiding removal when utility companies remove the road surface for underground pipe and cable work.

Larger SUV / 4x4s can obviously 'over-ride' the pavé, but this is already the case with present and intended road-humps. However, since such vehicles facing are increasingly socially disliked in British cities, their presence will gradually diminish, leaving conventional cars and small SUVs to better respect slow-area roads].

Friday, 6 January 2012

The 2012 Web-Log Format

Since 2007 the format and content of investment-auto-motive's web-log has sought to evolve, altering periodically in length and structure so as to provide different perspectives and interpretations of current affairs and specific cases within the automotive investment realm.

Ranging from the delivery of insightful analysis regards the shifting patterns of commercialism, business ownership and strategic interests within the sector itself and complementary 'feed-in' sectors.

Spanning organic enterprise growth, M&A and strategic bloc-buy-ins, to independent analysis of specific companies, the synergistic company portfolios held by asset keen investment holding companies, the market and commercial dynamics of various global-wide geographic regions, and the identification of the near, medium and long-term investment opportunities to be had for hedge funds seeking short-term plays, institutional investors reviewing their stock and bond interests and indeed private equity seeking macro-trend aligned new interests when building new portfolios.

[NB The latter was yesterday exemplified by investment-auto-motives' prompting for PE to review the full market and investment potential of the UK camping sector, with specific long-term interest in the potential for eco-technology transfer between the auto-camping fringes, leisure parks and into mainstream building habitation. The prompt was for involvement by a high profile figure, Deborah Meaden of 'Dragon's Den' TV programme the most obvious choice given her leisure park involvement.

Interestingly, yesterday (06.01.2012) the FT's front page reported that fellow “Dragon” Peter Jones – amongst other bidders - has taken an interest in the 'pre-pack' administration of Blacks Leisure, the outdoor-leisure orientated company, which over-exposed itself to high street clothing retail.

As noted, unlike competitor bidders, Jones has no similar retail store group into which Blacks can be naturally integrated, thus it is hoped that if successful he is able to 'reverse integrate' Blacks Leisure into other areas of the camping based mini-economy].

However, the prime intent of this post is to state that the future web-log posts throughout 2012 will take a different tack to those preceding. 2010 and 2011 presented what by web-log standards were 'heavyweight' dissections of trends (macro and micro), regional or sector-specific vehicle markets and the players therein; both within the sector and those investor parties that seek value and growth extraction from the sector worldwide.

The investment-auto-motive posts of 2012 will still seek to have a similar breadth and depth, across the world and across the myriad of sub-sectors; but instead such heavyweight dissection – often running to thousands of words, which to the reader is time-consuming - the 2012 aim will be to provide comment which is lighter, viewed as more easily accessible, though by typical web-log standards maintains much needed gravitas regards subject understanding, opinion forming and conclusion.

Critically as stated previously, investment-auto-motives will continue to meld the 'micro' aspects of automotive investment with the 'macro', so as to concentrate the 3 vital aspects of sector and company fundamentals, regional and global capital market dynamics and investor sentiment conditions.

Even though 2012 appears fragile for much of the world there will undoubtedly be success stories therein. The investment ethos remains: to ascertain, track and measure those rising opportunities.