Tuesday, 28 February 2012

Micro Level Trends – PSA & GM Collaboration – What Substance Behind the Rhetoric?

Last week saw reports that cross-party discussions amongst GM and PSA auto-executives at the 2012 Detroit Show were exploring the possibility of some sort of collaboration in Europe.

[NB, this was publicly 'ratified' by announcements on 29.02.12. Please view the attached Post Script at end of this item for reaction comment. investment-auto-motives stands by the argument for skepticism outlined below].

Investor's Reaction -

One autos analyst at a major investment bank reflects the central 'pros versus cons' dilemma as viewed by the investor mindset...

“Synergies between GM and PSA could thus ultimately run into billions - we estimate from 3 billion to 4 billion euros from joint purchasing alone – but it would take many years to deliver and, given the political sensitivity, would not come without significant execution risk either."

Background -

All auto-makers have obviously suffered across the EU region since the credit driven 2007 high of near 15m unit TIV in 2007 (only previously beaten in 1999), heavy demand contraction only temporarily buoyed in 2009 by massive levels of government intervention. Those monies directed to both sides of the consumption and enterprise equation so as to prop-up flailing economies; perhaps none more so than the exercises seen in the USA and France.

The historic plethora of 'national champion' VMs has led to on-going production over-capacity within the region, this the result of what could be described as a competitive tussle between largely 'free-marketeering' German producers (exempting Opel-Vauxhall) which sell on quality grounds, versus the oft far greater government assisted – and so endemically socially obliged – national producers of France and Italy which arguably sell on price and nationalism.

[NB it is noted that the this historic norm is being confronted by PSA & FIAT – and though 2008-10 conditions were an aboration – both recognised that a growing 'competitive disconnect' did emerge some years ago given the rapid pace of competitive landscape change (esp regards Japanese & Korean EU transplants) and their historic reliance upon state aid and economic up-swings].

Yet the past and present has, and still, sees decent margins for those able to operate a technically progressive and strategically adept automaker which has inherent 'brand equity'. That then is the goal for all participants, old and new.

The essential problem is of course that all seek that successful position, but very few truly possess it, and so whether ostensibly state-backed, parent-backed or presently successful in its own right. And thus complex, intrinsically nation-based, interests dictates that the status-quo continues even if through long periods actually economically value destructive. This problem sought to be overcome through alliance ventures with others, as seen with Renault & Nissan and FIAT and Chrysler.

But the fact of over-capacity and dwindled margins remains, the trade magazine Automotive News recently quoting statistics from PWC which indicate that by 2015 Europe's expected 112 plants will have an installed capacity for 22.84m units (vs 2009's 113 plants generating 21.1 million, and 2007's 117 plants with 22.4 m capacity).

Hence the constant expectation of alliances and joint ventures.

PSA & GME : Respective Positioning -

This story appears to be playing-out between PSA and GM Europe (GME), but is all as obvious as appears?

As investment bank analysts have been quoted, there are apparent product and manufacturing synergies, but also important issues relating to the capture or loss of strategic control.

As is the norm in the sector, both companies have track-records with alliances – in its broadest definition. GM has used them to both downsize its operations, with Toyota via NUMMI in joint venture US manufacturing, aswell as growing regional presence, as with GM-Daewoo as was (resulting in GM-DAT technical centre in Korea) and across China with SAIC, FAW and SAIC-Wuling; thus giving pan-Asia coverage and distribution leverage..

In contrast to GM's global dominance, the much reduced position of PSA in the 1970s – especially relative to Renault - meant that it has typically used JVs to critically bolster its product line – with the necessary exception of China's Dongfeng-PSA and Changan-PSA. Less well known is the relationship with Renault which operates 'Francaise de Machanique' and a share in automatic gearboxes. Conversely, most obvious alliance has been the 'Sevel' agreement in its LCV division including a derivative MPV with FIAT. This a JV precursor to projects with: Toyota for its 107/C1 A-segment car and Mitsubishi with its SAV (4WD) 4007/8, the very limited run 'iOn' city e-car and exploration with BMW into e-cars. However, investment-auto-motives suspects that far deeper collaboration has taken place regards compact cars, given the previous 'Prince' engine JV and the loss of 'contract capacity' for that engine which was destined to go to a now seemingly defunct SAAB, plus the innate ongoing margins pressure within the segment.

Thus, precedence demonstrates that GM exploited JVs to assist the 'right-sizing' of its older manufacturing base and new market strategy, whilst PSA uses alliances to support a full or expansionary vehicle range.

Thus on this basis of both companies' in market and manufacturing EU presence, there seems little obvious connect, apart from the obvious of co-ordinating where 'weaknesses' mutually prevail.

GM Europe in the form of Opel-Vauxhall has been essentially a perpetually loss-making division for decades, as with its US parent, its previous market dominance gradually eroded by others, itself able to maintain itself with US style sales discounting and incentives, a seeming necessary tactic even though its products have improved and essentially benchmarked as the norm by others, its 'yesteryear' and 'mainstream' brand personalities have prove a hurdle which both meant effective retraction from truly competitive executive style cars some years ago and little perceived personality amongst A, B, C and D segment vehicles even though more venturesome innovation efforts have been made, across Zafira, Meriva and Corsa. The corporate reaction to the 'over-stretch' Opel and Vauxhall suffered across all segments was the introduction of the lower positioned Chevrolet brand, seen thus far in Europe across the near full spectrum of vehicle types from the A segment (Spark) to the nuanced SAV and MPV segments, the same products represented in both, and far rarer halo cars such as Corvette and Camaro adding 'Chevy glamour'.

PSA's Peugeot and Citroen brands, once ailing marques, have in contrast managed to periodically refresh themselves through styling and target marketing, and have been able to demonstrate themselves as increasingly separate identities since their 80% + component and systems value share in the mid 1990s, that success allowing for wider design and engineering separation – though common modules remain key. However, there still remains a cause for concern that whilst the 'sportier'. 'younger' Peugeot is seen to sell itself with limited incentivisation, the more supposedly 'techno' & 'family' oriented Citroen is aided by discounting, the seeming necessary norm given the financial might of GM and FIAT to do so and the pricing pressure of rapidly rising Hyundai, Kia & Dacia. The move to create the 'pseudo-premium' DS brand has been its method to utilise systems share between both Peugeot and Citroen whilst also improving unit margins, growing a new facet to its group personality and so seeking to sustain its corporate autonomy.

This then provides a very generalised background.

Respective EU Production -

Unsurprisingly given the predominance of GM's established worldwide manufacturing footprint versus PSA's far later Euro+, MENA, S.America and China orientated sales push – largely from a Eurocentric hub - the two companies differ considerably.

A snap-shot glimpse provided by the Financial Times shows that in 2010 within Europe, GM built 1.464m vehicles (cars and vans) whilst PSA built 2.67m (selling 2.2m in 2010 and 2.0m in 2011). Thus the former had only – in very basic production terms – 54% of the production exposure of PSA in “broad Europe”. This important because of the traditionally high cost of European labour, especially so in respective 'homelands' of Germany and France.

However, note the major statistical difference within.

In Germany GME produces 530,000 units (rising to 730,000 including Poland). Whilst in France alone PSA built 1,465,000m units, effectively double that of GME. Exactly how that major difference is to assessed depends upon various productivity measurements, most notably respective labour force sizes, man-hours per (ex-factory) vehicle, the amortised S&GA overhead and CapEx depreciation rates.

In 2008 PSA had a headcount of 130,000, of which it is estimated that 70% (91,000) were located in France. Thus giving a general productivity rate in 2010 of 11.23 cars per person. Capacity utilisation for PSA across Europe was in 2011 approximately 80% (the nominal industry standard break-even figure), expected at 75% in 2012 given the demand fall in the domestic market.

GME, whilst positively with a smaller domestic manufacturing base, is expected to see a 2012 capacity utilisation rate of 65%. Yet whilst seemingly worse than PSA it should be remembered that it's out put is half of that of PSA at 1.1m units in 2010, and German manufacturing output is 530,000 units, which from a 2011 headcount of approximately 33,000; gives a productivity rate of 16 cars per person; better than PSA but highly inefficient relative to global benchmarks such as Korean manufacturers.

Euro-Market 'Quicksand' -

Such problematic top-line production figures, now below the standard 80% utilisation rate then are unable to absorb costs and so create a cash-burn at the operating level.

Whilst PSA partly restructured as a necessary aspect of accepting the E2bn soft loan from the French government during the financial crisis, it appears that it has been GM Europe which appears to be ahead in the industrial reformation stakes. This made all the more easier given that GME operates as a stand-alone manufacturing as sales division, whilst PSA includes its 'in house' Tier 1 suppliers of Faurecia and GEFCO. The critical aspect here being that GME may essentially more easily massage its transfer-pricing of supplied engines and gearboxes from its facilities in Austria and Hungary; whereas Faurecia and GEFCO may have sought to defend their income margins from parental pressure, as looks to have been the case when viewing the divisional income breakdown in the annual report.

However, progress is relative, and whilst GME looks good compared to PSA, its unfortunate position of having to constantly “do more with less”; whilst other specific German, Japanese and Asian rivals are winning market share, expanding their European and global volumes and so able to better finance product and corporate ambitions.

To try and remain competitive GME's has stated ambitious R&D and product actions relative to its income. But that means that strategic planning effectively becomes ever harder and contains more inherent risk; whether that be the importation of lower quality vehicles which provide unit margin but degrade brand perception, or the allocation of R&D and innovation funds in specific low-impact or high-impact technology solutions.

The Earnings Perspective -

In Q4 2011 GM Europe reported an EBIT-adjusted loss of $0.6bn, which included $0.2 billion of restructuring costs - thus matching last year’s results. This Q4 'hit' was rolled into an FY2011 EBIT-adjusted loss of $0.7 billion in 2011, showing improvement over the negative $2.0bn loss in FY2010.

[NB. This sits within GM's total worldwide Q4 2011 revenue of $38.0bn (+3% YoY), a net income of $0.5bn (or $0.28 per diluted share), which when EBIT-adjusted reaches $1.1bn. And an FY2011 net income of $7.6bn, which when EBIT-adjusted reaches $8.3 billion; up $1.3bn versus 2010].

Tellingly PSA did not provide a quarterly update for 2011, simply giving H1 & H2 accounts, which may be theoretically de-constructed by to provide a basic appreciation of PSA's European performance.

For the full year overall EU market sales share slipped by 0.9% to 13.3%, the A & B segment down by -1.1%, and the very positive 7.3% per car contribution seen in H1 reduced to -1.7% in H2. The Group's overall Operating Income / EBIT was E898m, down from E1,736m in 2010, this infact buoyed by positive contributions from Faurecia, GEFCO & Banque PSA Finance against the Vehicle Division's E-439m loss (vis a vis E563m the previous year).

Importantly PSA saw its balance sheet alter significantly as its Net Debt position nearly tripled and its Gearing level rose from 9% at YE2010 to 23% at YE2011, which indicates that deep structural reforms of the Group could well be on the horizon

Conclusion -

On balance, investment-auto-motives believes that PSA and GM will not collaborate in any meaningful manner on the core of small & compact cars, ie the B & C segments between 1.0L (inc the 900cc 'triple') to 1.6L; the arena of so much auto-industry, press and investor speculation.

Whilst both companies similarly recognise the need to constantly improve product quality in what are the European core segments - and increasingly 'B' as the 'global segment – and so collaboration appears a natural presumption, the fact remains that both GM and PSA will want to control their own destinies relative to such strategically important market sectors; the latter if necessary leaning upon its technically enabled BMW German links.

The only reason to contravene this stance, were if PSA sought to introduce a new entry level brand – in the Dacia manner – which would necessarily demanded a low-cost / reduced quality alternative approach, which itself could utilise either its own last generation platform or that of a (GMDAT) Korean product as its base. However, given the historical independent stance of the controlling Peugeot family and the similar independent PSA corporate mindset which must build “PSA DNA” into its cars, this seems unlikely.

So once again investment-auto-motives suspects that Thierry Peugeot and PhilipVarin will maintain a continuation of the Toyota relationship in this field, especially as a less problematic solution to replacement of the Aygo based 107, But more importantly, because of Toyota's own 21st century corporate centrality and R&D exploration of city-cars. Thus new agreements could be drawn-up which replay of the Aygo-107/C1 deal, whilst adding yet a possible plethora of Toyota sourced small and city-cars to the PSA stable, such as the 'sliding door' Toyota Porte which could replace the novel yet defunct 1007. This would offer a cost-effective and ready-made product stream for PSA as it seeks to 're-animate' in Peugeot and Citroen guises 'Japan-only' vehicles (inc kei-sized commercials) via low cost 're-skins', as it itself through initiatives such as 'Mu' seeks to become a branded transport provider, as opposed to a conventional 'production heavy', and arguably production trapped, conventional automaker.

Under this scenario, those PSA owned production plants that are potentially divested would be run or purchased by Toyota, able to leverage its strong Yen to positive FX effect, whilst continuing to de-industrialise its over-costly Japanese operations.

However, that does not discount GM's possible importance. Given the potential size of the ongoing asset disposal programme at PSA, GM could be utilised not as an operational partner, but as a potential facilities purchaser.

GM Europe imports small Chevrolet branded cars from Korea and USA, a situation which to date has been favourable because of FX tailwinds, but the much strengthened Won and recent re-strengthening of the US Dollar, means that a continuation of such a ploy only means that ant Chevrolet growth inside the EU is much undermined by the FX differential between US, Korea and Europe, this much exacerbated by the ongoing long-term devaluation of the Euro. Thus the use of discounted priced factory facilities, assisted by much reduced overheads and operating costs enabled by massively altered new labour-force agreements would be attractive.

Thus GM's Chairman and CEO Dan Akerson may well desire an ever more cost-effective manufacturing base situated within Europe, but PSA's major shareholder Thierry Peugeot and its CEO Philip Varin will seek to use the deflation of the Euro as a central pillar in their own export expansion drive where feasible, as well as a solid raison d'etre behind increasing ties with BMW given their similar single currency positions.

But for the moment, investment-auto-motives believes that whilst basic exploratory talks may well have taken place behind the scenes in Detroit 2012 – and indeed may no doubt be being more deeply assessed both in the Renaissance Centre and across the Atlantic in the Grande Armee – the idea of platform sharing is a remote one.

Whilst there are packaging and stylistic similarities, PSA's chief engineers will probably see very little (if any) 'engineering envelope' remaining at a systems level from which to develop both a sporty Peugeot derivative or comfortable citroen vehicle from the GM Spark - given its basic engineering origins as an ostensibly low cost, low priced item aimed largely at EM regions.

Yet, both Akerson and Varin innately recognise that within a new era of long-trend diminished EU sales, the primary interest (behind the immediate talk of product and supplier synergies) is that of GM's own EU market growth interest for Chevrolet.

And that GM's own long-game is to capture a low CapEx route that may combine Chevrolet's in-market production and sales ambitions across Europe, whilst also integrating Opel-Vauxhall platform efficiencies so that they may benefit from improved and better directed R&D expenditures.

GM undoubtedly seeks to take 'Monsieur Chevrolet' successfully back to his (its) homeland. And hopes that the its corporate 'bow-tie' will find favour on the back of that once famous breed of cattle. Eventually to do as much for US-French commercial relations as 'de Nîmes' sourced 'Denim' cotton did long ago.

Depending upon the PESTEL views taken by Thierry Peugeot and Philippe Varin potential and the relative probability and impact of various tailwinds and headwinds – ranging form a beneficial deflationary Euro to possibly protectionist EM regions – PSA should have room for manouvre between its seeming courting rivals of GM and Toyota. But in the meantime PSA must be seen to be adding far deeper strategic thinking behind the 'headlines' of its 2012 Plan; and that includes meaningful strategic and financial 'value extraction' from GM and Toyota.

Post Script -

The viewpoints stated by investment-auto-motives obviously run counter to the GM & PSA announcements dated Wednesday 22nd February.

This highlights an apparent £2bn per year synergies to be obtained in small and compact cars.

Whilst synergies undoubtedly exist in mutual commodities/materials purchasing (esp steel via Varin's connections), and in certain 'near & far horizon' R&D, aswell as in potential for a shared E segment vehicle programme (608/Insignia), investment-auto-motives believes that ultimately an attempt to co-alesce mainstream small and compact programmes will ultimately prove technically frustrating, even with a repositioning of Opel, Vauxhall & VXR brands to mirror Citroen, Peugeot and DS.

Thus the 7% stake by GM is, it is believed, a move to allow internal insight into PSA so that it can be 'remotely supervised', as is so often the real case behind competitor investment stakes, aswell as provide immediate knowledge and influence in PSA asset disposal vis a vis GM purchase issues.

Tuesday, 21 February 2012

Macro Level Trends – UK Film-Making – 'Exporting Britain' using the Car as Cultural Delivery Vehicle.

The very beginning of 2012 saw David Cameron visit Pinewood Studios in Middlesex, north-west of central London. He questioned how the British film industry might achieve a new economic renaissance. Whilst simultaneously achieving far greater financial accountability within the strictures UK film industry funding, a large portion of which comes from the UK's Lottery monies.

[NB it is the very complexity and so poor opacity of the film-making process, together with abundant stories failed film ventures, which deters much of the private sector investment, itself seeking low-risk, measurable and manageable returns].

Cameron's words appeared to infer that Britain must once again create a new golden age of film. Presumably, an era that can capture both the country's own popular imagination, so as to re-direct monies inward that have been previously flowing outward to foreign producers; and the world's popular imagination at large, so to bring-in external revenues (thus assisting the 'invisible' trade inflows) and attract FDI into the sector, and maintain a level of soft-power influence through cultural affiliation across the world.

In short, mimicking yet also re-orientating a prevailing US “Bang for the Buck” mentality of Hollywood, toward a “Punch for the Pound” ethos. The present problem - possibly more evident to those critical external eyes outside the film industry than those optimistic, idealised mindsets inside the industry – is the seeming large expenditure that takes place relative to box-office and other income stream returns.

The success stories 'Four Weddings & A Funeral', 'The Full Monty', 'Notting Hill', 'Slumdog Millionaire' and 'The Kings Speech' are lauded as recent pinnacles of the UK film sector, but those examples stretch back over nearly 20 years, and whilst other titles such as 'Lord of the Rings' and 'Harry Potter' are considered British, they are in fact Anglo-American creations; and as such, much of the box office return goes to American coffers.

These then the blockbuster titles amongst the UK's no doubt plethora of culturally worthy but financially miserable (ie loss-making) film output year on year. Hence the PM's over-due call for a changed business model given the scale of public funding previously injected into agencies like the BFI (British Film Institute) and UK's National Film Council.

Established in 2000, the NFC states that it has: “backed more than 900 films, shorts and features, which have won over 300 awards and entertained more than 200 million people around the world, generating £5 for every £1 of Lottery money it has invested”. Exactly how that figure was arrived at, and exactly where much of that £5 flows into the UK economy – presuming it was not a simple 'multiplier effect' sum - is no doubt debatable. Of those 900 films, it can only be the case that a limited number became engrained in the popular consciousness.

Britain is typically accused of producing little more than its historic 'stock output' of: period dramas, middle-class romantic comedies, working-class comedies, and latter-day dour 'kitchen-sink' genre.

These typically more culturally sensitive (realistically niche) films set against America's global distributional dominance and constant cinema feed of action-adventure, 'rom-coms' and wars films.

The surface difference between the UK and US is that the former has little distributional leverage and so focuses on what it knows can be internally digested or sell to TV related channels such as Film4 in the UK or similar elsewhere. Whilst the America seeks to feed the many thousands of (increasingly multiplex) cinemas and a worldwide audience of possibly near a billion viewers.

To partially feed that growing and insatiable global appetite, dipping into ones own filmic archive to re-produce past hits has become an industry staple, but over recent times Hollywood produced new versions of British classics such as 'Alfie' and 'The Italian Job'. Rodeo-Drive lunching executives recognising the innate draw of the originals and cross-play between US and UK audiences.

[NB The latter also heavily commercially driven by BMW's entry of the Mini into the US, made for a highly compelling business case].

If the previous simple delineation between 'inward micro' UK and 'outward macro' US output remained the case, then perhaps the UK's relatively small industry could continue indefinitely within its own micro-economy, the few big hit films such as The King's Speech providing the notional 'return on investment' to support the raft of financially floundered films.

But, critically it seems that Britain's own filmic and story-telling history, has and is, being subtly appropriated by others. The adaption of the book 'War Horse' to stage (on London's South Bank) appears a British undertaking, with the casting of (Harry Potter's) Daniel Radcliffe giving the production added mass appeal. Yet the film rights, directed by Steven Spielberg, were bought by a an American-Indian venture.

British nationalists, stereotypically reflected as the readers of 'Horse & Hound' and 'Country Life' would be less than delighted to know that has been the outcome, and very probably the British masses (English, Welsh, Scottish & Northern Irish alike) would no doubt feel some tinge of regret were it widely known.

So the Prime Minister's visit to Pinewood Studios and the call for innate reform of the UK film industry so as to re-balance the cultural and commercial was timely indeed.

Given that a reported £4.2bn is absorbed annually there must be greater input versus output alignment.

The findings of Lord (Chris) Smith's film industry review – announced in May 2011 and released in mid January 2012 – sought that UK film-making become a far less volatile, more stable entity. Providing various recommendations intended to assist. In short to re-balance the application of industry's national lottery funding toward supporting independent pictures that have mainstream potential. Successful film companies would receive greater support, rather than large portions of funding given to unproven film-makers; very possibly using that money to raise their profile on experimental ventures that make their name, possibly win awards, but add are actually economically value destructive.

Thus far greater and very necessary finance provision criteria, general financial planning and oversight, with centralisation of management within the BFI; as the NFC becomes amalgamated.

Though at first sight it appears the system's reform is intended to only back projects intended for large scale commercial success, we are also told that monies will be provided for those promising individuals, companies and projects on the filmic fringe and those 'up and coming' who's fruits of commercial success can be “re-cycled” back into film ventures. This a much improved and logical path for assistance, instead of those fruits being automatically handed back to the general lottery pot, and the frustrations of film funding apportioning revisted.

Furthermore, the now more potent British Film Institute also expected to develop an export strategy.

Critics of course question whether any body – committee or single guru - can guess which films may go on to find big audiences, at home or across the globe, but at least an important issue has gained greater limelight and the question can be addressed with new formulae.

Although 'UK film' per se stretches back to the end the Victorian era and the adoption of the early celluloid process, the sector's glory days were undoubtedly the post-WW2 period, when 3 primary studios ran. Rank Organisation owned Ealing Studios offered 'Kind Hearts & Coronets', 'The Lavender Hill Mob' & 'Passport to Pimlico'. Shepperton Studios gave 'The Third Man', 'Guns of Navarone' & 'The Day of the Triffids'. Whilst Pinewood Studios presented 'Oliver Twist', 'Genevieve' and 'Carry on Nurse' (the 2nd of that successful series), it came into its own in the 1960s and 1970s with its James Bond films. Bond perhaps reflecting the only archetype of a stable and growth orientated film income stream up until Harry Potter, which now has built on such popularity with a 'studio lot' tourist facility in Leavesden, Hertfordshire.

The innate dynamics of the film industry - its complexity and associated cost structures of facilities, equipment, an army of on-set crew and off-set artisans, editors etc, all riding upon the insecure nature of public reception and revenues – make it the very definition of an “alternative asset class” through investors eyes.

That world of film funding then makes even the now castigated, poor performing hedge fund sector look positively 'alpha' in its overall returns with 'only' a 2% loss over recent years versus the FTSE's or S&P's 4-5% average gains.

As long as capitalism per se has been in existence, its fringes have been populated by what has come to be known as the 'alternative asset class'.

This then an arena which spans a varied spectrum of possibilities – initially far beyond the norms of regulated instruments such as government guilts, corporate bonds, company stocks, and often diametrically opposite the 'solidness' of physical entities such as land, natural resource rights, commodities, semi-manufactured goods and finished goods.

As economies and nations moved forward, from agricultural to to industrial toward post-industrial and increasingly knowledge-based, so innate perception of what constitutes 'value' has altered. And with it of course the development of commercial entities and the financial markets to cater for a much changed world, which itself operates within a 'man-made', technologically based and increasingly ethereal construct.

The creative and increasingly conceptually based aspect of 'media' is the apex of this construct, and within that sphere the art or craft or whatever of film-making then becomes ever harder to properly value, and even when successful increasingly hard to repeat on all but the most powerful of titles.

Ironically this has remained the ongoing 'variable constant' even over the last 2 decades were other realms once classified as 'alternative asset classes' have become increasingly mainstream. Even with the 1999 Tech Bubble, the success stories of Silicon Valley (ie Apple, Google, Facebook) have become responsible for injecting phrases like 'VC' and 'Bootstrap Financing' into the lexicon of teenage business students across not only Berkeley or Yale, but across Delhi, Beijing & Sao Paulo. Over a few decades, or even very few years, those and similar monolithic names have come to dominate the on-line world, which itself has now morphed seemlessly into the everyday real-world, creating a new era of virtual-physicality; this itself extended with trends such as near-point payment methods that require no actual physical contact.

We see the ultimate fusion of what post-modern philosophers call the 'subject' (the person) and the 'object' (the external); in which the IT device, software and network operator become the aligned information broker, and rational mankind – as some argue - steps ever closer toward becoming cybotic, and subsumed to the interplay of human emotional impulse and external machine prompting, unthinking reactors to possibly orchestrated external stimuli.

Whilst the sophistication of this merged-realm, merged-reality has undoubtedly increased over the last 20 years from mobile phone and personal notebook and e-tablet use, the origins of the subject-object inter-connect lay in the formation of film and television industries, which themselves have unarguably influenced 20th and 21st century collective and individual psychology, indeed psychosis.

Thus, over the last 100 years Film, TV (with now 'connected media') have irrevocably shaped - and at times controlled – western society, and in the last 50 years reached across the global society. Moving far beyond the influence of the previous influencer - a newspaper page - that expansive geographic 'horizontal' reach, now with the web and mobile devices, is supported by reach into the vertical depth of the individual's mind and being. Sci-Fi meets Science Fact.

As such the very essence of culture was molded by film, the the depiction of old culture juxtaposed to new culture and of course the early 20th century arrival of society-wide consumer culture.

Such social influence is then an immensely powerful theme for the global investment community. It's what makes the world turn.

To this end the socially influential aspect of film has undoubtedly been exploited, the prevalence of product placement having both assisted corporate PR ambitions whilst also simultaneously undermining the credibility of film as a socially reflective art-form.

Thus far this post has shown why the UK film arena should take heed of the Film Review's recommendations for the benefit of both the sector's credibility and a necessary stabilised income stream and to buoy UK finances. It has demonstrated how the culturally important stories about the British identity (true and fictional) have been and are being retold to global audiences by foreign film-makers, film companies and distributors. How the US vs UK differences are: distribution & value-chain 'demand' led by USA Inc, versus the more culturally nuanced narrow 'supply' led formula of UK Ltd. And how, even in an era of technology led cyborg-like fusion for the user, film exists in its own unique (effectively mid 20th century formed) bubble.

[NB Though of course Sony's purchase of Colombia & Tri-Star and other entities was effectively merged to create a broad-span interest that could unify 'top to tail' cinematic/video entertainment activities: creation through to consumption].

Recent years have seen an ongoing power exchange between the organised commercial film world, its internal operators and rising talent and indeed film watchers, as the availability of ever more affordable technical devices with near professional quality have empowered those 'independents' inside the industry and indeed outside to create their own films. To then post them on video-sharing websites, social networking sites, personal websites and dedicated amateur film-making websites.

Thus a new 'flip-side' has grown which, as with all similar creative arts from music to painting to publishing, has 'democratised' the process. Though of course the new “creativity enablers and brokers” could be said to be Google et al.

It should be no surprise then that the marginalisation of UK film has occurred, with the US not only effectively owning global cinema distribution but also, as inextricably linked with Japan's hardware heritage, able to reach both cinema auditoriums and home sofas.

As such contemporary commercial reality has eroding the UK's traditional position. Yet the government has recognised Britain's loss of soft-power influence, relative to the critical importance of global media power, and the key issue of UK and Western culture's dissemination within a much altered, new economically ordered, world.

How then does this emergent picture relate to the automotive world, and its use by the UK? After all the title of this item is “ 'Exporting Britain' using the Car as Cultural Delivery Vehicle”.

The fact is that although the once culturally disparate world has become increasingly homogenised, because of the past and present global reach of US corporations such as Coca-Cola, GM, Ford, Microsoft, Starbucks, WallMart etc, and so the world's peoples increasingly Americanised, the still core truism is that English is the real 'lingua-franca'. Whilst the Dollar is the international reserve unit of currency, English (even in modified forms) is the common worldwide communicational currency.

Internationalisation has also brought with it western consumer values, attitudes and ambitions; none perhaps more so than that embedded in the car.

The car whilst enjoyed by many millions of new middle class in EM countries is still an aspirational dream for the billions across S.America, Africa, CIS region, India, SE Asia and China.

And the past is set to replay.

After years of experimentation in each respective field, the automobile and film-making industries were essentially technically perfected and popularised in parallel from the mid 1880s onward. This meant that the role of the car has been intrinsic to film-making ever since.

That role typically alternating between symbolism of a specific consumer age, associative connotations with specific character type (high flying versus down at heel), or simply as ever-changing 'street furniture' in the formal and entertainment recordings which collectively reflect social history.

For the 130 years or so of previous western economic superiority over the east, the car has been an essential signifier of personal aspiration and social progress. It literally opened-up people's own hopes, capabilities and worlds. Similarly today, it is performing that very task for those who were previously denied because of economic isolation, national stagnation and strangulated free markets.

This very obvious notion was described by investment-auto-motives in a previous web-log post:

It was relative to India's rise and the creation of poorly conceived TV programme that sought to soak in what seemed a western socio-political agenda, verses a very well conceived corporate advertisement. Unlike the crass TV programme, the advert centred upon the young man's desire to own a modern car, yet financially constrained, he resorted to the remodeling an old Indian vehicle into something apparently 'new' and impressive. That post sought to highlight the essential difference between a culturally sensitive advert, and an insensitive, seemingly agenda driven TV programme.

Relative to this, it should be noted that Britain's cinematic relationship with the car is very different to that of its American cousin.

Since the 1920s the US has exploited the commercial synergies of Hollywood and Detroit, marrying the fantasy-world of weekend cinema-going with Alfred Sloane's GM business model. To 'crank the handle' of general human dissatisfaction overcome by consumer culture. – purchase of a better brand car or new model year vehicle. All the while unfortunate comedy characters such as Laurel & Hardy and the Keystone Cops travelled in old Ford Model T-like jalopies, so psychologically pushing the Average Joe out of the purely functional and into the cosmetic and futuristic. This theme prime in the 1939 and 1964 World Fairs in which GM showcased its Futurama display.

And in the economically slowed 1960s and 1970s a mix of personalised 'hot rods', 'muscle cars' and 'chopper-bikes' took on an affectational parallel the then endemic counter-culture. This seen in 'Two Lane Blacktop' and 'Dirty Mary, Crazy Larry' and many other films, aswell as production vehicle graphics such as the decals for the 'Judge' GTO or Plymouth 'Road-Runner' Superbird. Albeit this was little more than the 'drop-out' zeitgeist re-attuned for consumers, Car showrooms stocked “fully loaded” Corvettes, Mustangs, Ramblers etc, simultaneously (and paradoxically) playing the intendedly ironic 'Oh Lord, won't you buy me a Mercedes Benz” by Janis Joplin.

So cinema along with TV and easy terms credit were fundamental driving forces which drove US cars sales for 90 years; nearly always associated with the US staple of fantasy suburbia, the counter-culture road movie and macho action movie.

[NB Only really in The Karati Kid (1984) and Gran Torino (2008) did American film coalesce the massive social regard for the car together with that of a positive male values system, as passed down from generation to generation: using it as a motivational reward to defy high school bullying and community gangs].

Thus in the US, cars on film have been not just product placement items, but central to forming the consumer mentality and so previous wealth generation.

In stark contrast, the UK film industry has historically seemingly held higher artistic ideals, this a result of a far smaller and 'older' country with arguably a more deeply entrenched socio-cultural background. As such Screenwriters and Directors have more typically used the car as more of a supporting role to main characters and plot lines. Frequently the car used as visual short-hand to convey associative traits.

Undeniably, UK film-makers have of course been an advocate of product placement (see 007's list of cars and much else) with also a periodic fondness of car chase sequences in the right plot setting. Yet the possibility of a more astute - perhaps cynical UK audience – has meant that obvious product placement has generally been avoided and the visual impact of a car chase often far less dramatic on narrow British roads than the scope enabled by broader American Main Streets and highways.

The key British element is that the car has acted as a believable supporting prop often as part of plot and character development; and not an obvious focal point as seems the case in US film.

Those yesteryear classic films which even expounded the car's name in the film's title - 'Genevieve' and 'Chitty Chitty Bang Bang' – maintained them as meaningful and believable, almost anthropomorphic, items. The trials and tribulations of the leading characters shown in direct relation to their cars, and plain to see. Whether it was Alan Kim's constant fixing of his antiquated Darracq on the London-Brighton Run, or Caractacus Pott's DIY rebuild of a dilapidated racer into something magical with the aid of children's story-telling.

As the antithesis to the underlying American economic agenda, the British portrayal of cars has typically been far warmer and very much character driven'. Just a few examples being: the past its best Bentley in 'The Fast Lady' which feeds an underdogs dreams, the acrobatic Minis in The Italian Job, John Cleese's exasperations with an Austin 1100 in Clockwise, the truly abominably 'patinated' Jaguar in 'Witnail & I', the use of well worn Mini, Land Rover and Volvo in Four Weddings, Harry Potter's sky-blue Ford Anglia and of course the oddity of the triple-decker 'Knight Bus' echoing (Sir) Cliff Richard's double decker in 'Summer Holiday'.

In short 'British' films portray vehicles that are anything but brand new, vehicles which engender both innate modesty and, for the most part, resilience.

Often less than perfect (such as Chitty's unique engine sound which adds eccentricity and its name), often battered and dented, and often in need of an overhaul.

Some might argue very much like the UK film sector itself.

Yet at a time when even the previously super-charged EM economies are feeling the economic pinch of global contraction, and at a time when more of the world's population than ever before see within practicable reach a better tomorrow – itself ultimately represented by small, basic car ownership – the UK should look to the subtle yet appealing success stories of its past to instill the now much needed 'can do' spirit into the hearts of millions at home and abroad.

The UK may no longer have a mainstream indigenous auto-industry, but it has a plethora of niche auto-companies which in themselves reflect the small but tenacious virtues of the UK film industry.

The past should never be a last resort creative crutch for the future, but contemporary culturally sensitive re-telling of classic tales and fables for a new global audiences seems to make sense.

This however undertaken with acute 'quantity surveyor' type accountability throughout the film-making process - as opposed to perhaps the theoretical actuary - to ensure all expenditure is transparent and that expensive props like classic and new vehicles, or furniture, clothing or jewelery etc (and attendant paperwork) does not end-up 'lost' off-set. And ultimately 'curiously' hidden away in the Director's or Producer's country house garage.

And whilst the BFI itself quite possibly requires a new round of financial pragmatism itself, given the size of its South Bank located facility, the oversight of Lottery sourced project finance should be given to a truly independent and proven cost-conscious agency, well away from what seems to have historically been the film-makers closed shop.

The creative film-making cues of yesteryear can be mixed into the current zeitgeist, providing a philosophical platform for progressive work.

Yet relative to the East, it should not be a Tarantino-esque tone of self-reference and self-indulgence. The best of UK film-making has and is exemplified by those brilliant global minds of those that trod between David Lean and Danny Boyle.

Britain's various productions then have massive export potential, spanning many genres and illustrated by the BBC's wonderful "Bleak Shop of Old Stuff". However the UK must also ensure its film industry fully opens its doors inwardly and externally so as not to become “The Bleak Closed Shop of Old Stuff”.

Tuesday, 14 February 2012

Micro Level Trends - UK Luxury Car Dealers - Organic & Acquisition Transformation on the Tentative First Step of the Upswing Cycle.

The general decline in new sales of luxury, super-luxury & 'supercars' from record highs in 2007 has been the natural consequence of the 'new norm' in the West. The Triad region saw unprecedented economic contraction, which in turn created virtual market stagnation, thus requiring such vehicle producers to markedly alter what were ambitious business plans and concomitant new model introductions. The same heavily adjusted business attitude matched by all producers, from the smallest low volume workshops to the might of German VMs; all having to weather the storm.

That major toll has likewise affected the operations of premium & luxury car retailers, a mixed bag of enterprises ranging from small family firms to large publicly quoted corporations.

That rapid change shifting from 'thrive' to 'survive' firstly of course seen across the US; then as credit retraction and economic contagion spread across Europe seen throughout the EU. The overall general consumer and industrial demand collapse of the West thus affected portions of the rest of the world, especially those countries that were commodities exporters, and had previously seen buoyant economies reflected in the car purchasing habits of the new wealthy and super-rich, typically the Russian and Brazilian quotient of the BRICs.

However their peers, China and India – as massive internal economies – have remained the only true exceptions, the core metropolitan hubs of China and India acting as the recent life-blood for luxury and sporting marques.

So the sales directors of (BMW) Rolls-Royce, (VW) Bentley, Aston Martin, (Daimler) Maybach, (VW) Bugatti, (FIAT) Ferrari, (VW) Lamborghini, (FIAT) Maserati and now (VW allied) Porsche have all sought to increasingly engender their respective histories and brand values into Asian markets. But thankfully, unlike the past experience new incoming volume producers with mainstream offerings, these brands were already well recognised and very much reverted by a very internationally aware and astute client set, one which in many cases had already many years before ascribed itself to the best cars the world had to offer; and in other cases were eager to learn about brand heritage and social and personal statements their conspicuous consumption conveyed.

However, unlike their upstream vehicle producer counterparts, most western retailers of these vehicles were unable to take advantage of that eastward shift in demand, the majority being themselves small or medium sized in enterprise stature, with operational and cash-flow problems in setting-up and financing overseas expansion into EM markets. And indeed facing stiff competition from indigenous companies or entrepreneurs within those territories, the more remote often the more troublesome.

[NB, within this, it is recognised by the sector and the authorities that luxury car showrooms are prime targets or created entities that may be used to aid money laundering schemes; large amounts of cash immediately converted into an easily (often self) transportable item for resale in a different locale or country].

Thus, only the largest of companies from the UK, US and Europe have been able to exercise their muscle in such geographic expansion, whilst also seemingly avoiding such pitfalls.

So the broad story for many within the the luxury and supercar retailing realm has been that of an unprecedented challenge to operational stability throughout 2008-12.

Though their have been short-term reasons for hope what with QE initiatives seeing money pumped into US, UK and European economies, such reasons to be cheerful have themselves dulled what should have been sector 'bright spots' given the reality about present day conspicuous consumption, especially amongst those working in the financial sector, an historic back-bone of high-end car sales.

But of course with every downturn emerge ever more potentially fruitful opportunities for those companies which are able survive the downturn, able to run 'flat' for a period, and simultaneously able to set-out future strategic visions and thereafter able to execute; via finely honed step-by-step adaption of the company, espousing internal metamorphosis and new persona and ideally financial standing for eventual positive growth.

To cite a comprehensive list of the Triad companies that faced this sizeable challenge would be largely fatuous.

However the more recognised names are those such as North America's massive Penske Auto Group, sparring against a plethora of small-fry state and regional competitors: Southern California's 'Chariots' for example. In Europe, the continent's largest privately owned luxury dealer group Porsche Holding Salzberg is being absorbed by Porsche's parent to be VW AG, whilst on a national basis the Eurozone crisis will theoretically effectively enforce cross-border consolidation amongst dealer groups, the real battle then being between the German's and Italians for supremacy of dealer locations, showroom sizes and so customer connectivity. In Japan, given the reality of a lacklustre economy for nigh on two decades, little appears to have changed in terms of dealer sector structure, with names like the Nicole Group continuing to hold a grasp on imported luxury vehicles with sales licenses agreed with European suppliers.

In the Middle East, the supercar hub that is the UAE is represented by dealers such as Al Nabooda and Al Habtoor, which themselves are essentially 'royal appointed' and as such effectively limit new entrants and provide sector stability. Whilst in South America, Brazil specifically, Aston Martin, Bentley and more recently Rolls-Royce have or intend to have partnered dealership presence.

But, even in a 'soft-landing' period for the economy, it is the immensity of China that has seen the lost sales in the West recaptured to support German, English and Italian production, SG&M and associated overhead,

The UK as a luxury car market could be said to be positioned somewhat mid point between the US, Europe and Japan. Not yet enjoying the 'great expectations' of North America, escaping the economic drag abound across the EU and with a more dynamic sector structure than Japan's participants and positioned upon what could be described as the first step of the expected economic upswing, with certain groups (as mentioned) with EM exposure to balance global earnings.

All of this makes the UK sector an intrinsically interesting arena for the investment community, whether British 'self-interest' spanning the broad terrain of in-direct institutionals to direct PE, to international investors from PE to SWFs seeking synergistic activities that can be replicated or directly imported to buoy their own growing economies and consumer tendencies.

The very brief following list categorises some of the better known UK participants by general size, so highlighting an expected 3-tier composition of dealer groups and specialist retailers:


Inchcape plc, (MktCap of £1,680m)
Pendragon plc, (MktCap of £85.50m)
HR Owen plc, (MktCap of £14.46m)
Sytner Group Ltd (a division of Penske Auto Group)


Clive Sutton Ltd,
Grange Ltd,
Marlow Cars Ltd (used dealer only)


SparksCars Ltd,
Romans International Ltd,
William Loughran Ltd,
Tom Hartley Ltd

This provides an interesting picture, in as much as that beyond the notional 3-tier classification, even within the top-tier of 'Large' players there is distinct and sizable company market valuation differences - spanning £1.68bn for Inchcape plc, Pendragon plc at one-twentieth its size at £85.5m and H.R. Owen one-sixth the size of that at £14.46m. Thus the smaller listed company is in fact one hundred and sixteenth the size of its mighty competitor. This indicates then that each notional competitor must infact follow its own very specific business path; in simplistic terms: regional for H.R Owen vs national for Pendragon (especially so after previous problems expanding in the USA) vs international (with ever increasing EM bias) for Inchcape.

Nevertheless, regard the core of UK business strategy, all essentially find themselves in the same boat, having to re-orientate the fundamentals of the company given the seizmic shift in events and the sector's general playing field.

That shift impacting all aspects of the business, but most pertinantly :

1. the basic product bias (new vs used)and variant mix.
2. the ability to source finance for working capital and expansion capital; given the still restricted reality of bank lending practices, though now slightly eased – again in theory - by further BoE QE raising the new ceiling by $50bn to $325bn
3. the critical 're-resourcing' of personnel across both management and staff beyond skeleton levels after previous necessary shrinkage.

Yet, at this stage, early in the new economic cycle, clearly it is the creation of a meaningful, contemporary and strongly coherant strategy that takes precedence. So as to ensure that credibility can be assured from investors, staff and critically the client-base alike. This means an evolutionary yet much changed face to any business, so as to tangibly and metaphorically throw-off the old and create a new business template and matured company persona.

The distinct aspects of that strategic planning are:

A. Early Phase Planning for Future New Vehicle Sales Up-tick
B. Improved Purchasing Access to the Used Luxury Vehicle Market
C. Ever Greater Reliance upon the Service dimension of Sales and Service
D. Greater Personalisation
E. Greater Experience Creation
F. Organic & Acquisition Growth for Expanded Catchment Area
G. Creating a New Dealer Group Specific USP
H. Organisational 'Rebalancing'

Each of these issues is very briefly described to add “meat to the bones”.

A. Planning for New Sales in the Mid-Term

Though presently dealing with the urgency of re-aligning the fundamental stock inventory mix, so as to dispose of older models and re-align toward 'more affordable luxury', an eye will undoubtedly be upon the incoming pipeline of new cars so as to obtain “assured” pre-order volumes from the factory and by doing so ensure discounted ex-factory rates from suppliers. Moreover, in an era of what are necessarily 'long in the tooth models' access to all new functional yet sporting models such as the Bugatti's Galibier (4-door coupe) and a possble sister Lamborghini model (visually derived from the Estoque concept plus Maserati's Kubang SUV will draw customer footfall into showrooms via special presentation evenings. These cars, initially available in limited numbers, will however act as attractors for new sales of facelifted versions of Porsche's Panamera and Aston Martin's Rapide, given that many 'middling' buyers are looking to downsize the cost and depreciation levels of their business and domestic vehicles, typically including a separate SUV and 2-door coupe or convertible, whilst retaining the runabout (eg Mini Cooper). However, the runabout category now affords an opportunity what with the previous release of Aston's Cygnet and Ferrari's Fiat 500 with similar vehicles expected to come from other prestige marques to solidify customer loyalty.

[NB it should be noted that over the last last 2 big economic upturns in 2002 onward and previously in 1992 onward it was the symbolism and innate commercial punching power of Porsche that gave the German firm and its dealers the 'out of the gates' advantage of volume and margins, once again expected under VW stewardship, versus others that offer higher margins but lower volumes].

Given the well known 'German grasp' in early stage confidence – a kind of run for safety in product quality and residual levels – those dealers offering other non-German marques may be required to provide 'quietly whispered' discounting, which will in turn will set demand-led ceilings for others; though it must be noted that the differential today between German and 'Other' is not as great, the greatest danger being factory and dealer over-stock forcing client discounting to shift metal and ensure a smooth flow from factroy to showroom. Thus demand, inventory and margin balancing will be crucial for many dealers, and from an investors perpective should provide insight into a dealer group's 'inventory days' and RoA efficacy, along with other Activity Ratio measures.

B. Improved Purchasing Access to the Used Luxury Vehicle Market

Whilst the early phase of the upturn will no doubt see more than a trickle of conspicuous consumers rewarding themselves, the fundamental basis of the now 'New Norm', including inherent spending prudence and sensitivity to the overtly apparent 'social divide' amongst even high earners means a renewed interest in 'late model' used cars (adorning ageless personal plates) is already evident and will become more so; an issue to which dealers must pay close attention.

Thus there should be an increased sales bias toward 'provenance proven' pre-owned, lower mileage vehicles which still retain their glamour yet escape the immediate depreciation experienced when driving a brand new car out of the showroom.

This fiscally driven trend will then have increasing influence across the UK's used luxury inventory base. And since such vehicles over a certain age – typically 7 years old - depreciate massively, the ability to successfully manage inventory between 2-3 and 5-6 years old will be vital. To do so will test the inventory sourcing and disposal capabilities of the 4 largest players in the sector, specifically in sourcing, this via:

- other dealers used vehicle stock (including via acquisition).
- company car sales by SME businesses seeking cash-flow injections.
- replacement sales by elite clients seeking vehicle renewal.
- company asset liquidation sales (if 100% owned).

C. The 'Service Dimension' of Sales and Service

With an increase in age of the luxury vehicle car-parc comes the inevitable need for clients to both maintain mechanical, structural and aesthetic quality, so as to retain enjoyment from owning the vehicle and simultaneously buoy residual value of the car.

Thus historically there has been a clear demarcation in the customers eyes between Sales and Service departments of a dealership, one effectively handing over to the other and so often altering the very basis of the dealer-client relationship. This typically from one extreme to the other – from the ethereal endless pander of salespeople hovering over signatures for five or six figure credit enabled paperwork; juxtaposed by the very tangible 'cold world' of service and repair costs where client ignorance of hi-tech mechanical issues grates leaves the customer feeling 'fleeced' by the hefty workshop invoices. Thus two very different 'seemingly “Jekyll and Hyde” experiences under often one roof.

Thus there must be improved merging of both worlds.

Beyond the central aspect of client satisfaction, the increasing threat of independent and chain service centres that are able to diagnose and service luxury vehicles – whether scheduled service or mechanical overhaul – is growing as a result of sector de-regulation. That poses a very serious threat for dealers, especially so on pre-loved vehicles sold where a manufacturers warranty (and so the dealers monopoly) will have been diminished even if not expired.

And from the vehicle technical improvement perspective – as noted by the auto-trade - it could well be the case that ongoing improvement in the reliability and durability of cars will inevitably reduce the intermittent periods need for servicing and repairs, thus revenue streams. This especially the case if clients drive less mileages, preferring to use media devices for personal contact than in-person conversations.

Today though such macro themes are not yet evident and the need for service with broader after-sales initiatives to maintain a captive client means that the post-sales dimension is more important than ever.

Whether large or small, dealers will have already well recognised the importance of the service aspect so as to retain all important customer loyalty during this depressed period. The golden rule in service stemmed from the hotel/concierge arena is to accommodate the client requirements through flexible policy. This notes the measured yet common-sense differentiation of basic 'needs' (fundamental expectancy), 'wants' (expedient tailoring of the service) and 'demands' (typically black or white between wholly reasonable versus wholly unreasonable). All undertaken with basic courtesy and if possible old fashioned manners. This no doubt the norm for many luxury dealers, but unfortunately requiring innate cultural change by others.

Thus, to use the rhetoric, far closer and suited 'CRM' - Customer Relationship Management providing for Customer Retention Management.- as validated by the two following points.

D. Greater Personalisation
The ability to access 'relationship data' in this electronic age has transformed the workings of the humble high street taxi service, thus together with web-enabled collated client information looks to be the transformation lever for client information storage and so improved communications building and thus the ideal of Personalisation.

[NB though it must be noted that the advantages of such 'client insight' can be a two edged sword if the basis of conversations rooted in such information retreaval appears mechnical and cold]

The ideal of course is for smooth delivery and expansion of the 'Tailored Service Ethic', ranging from the early phases of client introduction, through to say the co-creation of personalised vehicle specification detailing, through the plethora of after-sales initiatives through to the new possibility of vehicle 'life-extending' re-trimming as part of an eco-responsibility aswell as perhaps creating a very personal car collection.

The world of 'personalisation' generates many issues, not least the blurring between brand / product integrity as officially designated by the car designer or company CEO and the wishes of the client; a fine line that must be trod carefully to respect the demands of both parties.

E. Greater Experience Creation

The growth of the automotive experience arena has been prolific in recent years, and has become a bone of contention between carmaker and dealer, as each seeks to seize the opportunity to clutch the client closer and extract greater sums of money. Thus the carmaker and dealer must clearly define brand and service responsibilities and initiatives, yet that possible strain has not stopped the vibrancy of building 'client experience programmes'.

These ranging from factory visits to watch an ordered car assembled, to manufacturer built brand centres by way of auto-museums and now amusement parks (Ferrari World in Abu Dhabi the 21st century incarnation of GM's 1980s concept of the 'Test-Track' ride at DisneyWorld's EPCOT Centre in Florida). With of course driver training courses extolling the virtues of a vehicle used as a pathway toward race-track based hospitality events, and at the far reaches the offering of a manufacturer supported race track-day events and amongst the true wealthy adventurers the ability to have a factory-supported race car or whole race team for FIA events.

The merging of product, client and dealership has been taken further still by luxury progressives such as Ferrari, who have now set-up in conjunction with certain dealer groups its Ferrari Atelier initiative, where car showroom meets up-scale hotel so as to derive the perfect environment for the personal tailoring a newly orders supercar.

This then once again extends the development of 'lifestyle brand value nets', which in effect coalesce and deliver what would have possibly been separate but values aligned brand choices.

Thus Ferrari, at the behest of the Agnelli heir Lapo Elkann and well publicised via the FT some months ago, has sought through its Atelier idea to encourage its clients to co-create their ordered cars in suitably comfortable but contemporary surroundings. It creates an haute coiture high fashion-house feel that most critically attracts increasing female buyers – and as yet unnoticed by seeming all – actually encourages joint decision-making between man and wife or same sex partners regards the car, and by doing so no doubt compels participants to spend more in the process

F. Organic & Acquisition Growth for Expanded Catchment Area

Company growth is of course the typical prime ambition, this matter critical for those with public listings even if less so for family-held conerns. But no matter what type of ownership structure is in place, progressive executives and investors will be seeking to leverage present challenging conditions into a foundation for future opportunities.

Organic growth is of course the norm for most businesses, and methods to improve the fundamental business base have been mentioned, but during such contraction periods board directors rightly look to the possibilities of well considered, well executed and well implemented M&A so as to gain firm footing on that first step of the economic upswing cycle.

Already firms have been scanning and purchasing smaller entities which appear to have themselves run-out of financing or lost crucial supplier contracts. However, the opportunities that have arisen – exemplified by the sale of Broughton's (spanning the M4/M25 corridor) – have been schizophrenically valued. The price itself seemingly good by a measure of long-horizon sales potential reletive to the catchment area, but with the inclusion of intangible 'goodwill' a major component of the overall price; perhaps a greater portion than has historically been the case in previous decades.

Nevertheless, the Broughton's deal well exemplifies how larger entities are presently assessing the absorption potential of SME companies. And as part of that calculation the preditors themselves must asses the inevitable cost of infrastructure development on these new sites. Depending upon the location itself, ranging from basic alteration of company signage and showroom colourways to possible full re-modelling of showroom building, showroom interiors & exteriors, re-fitting of
back-office hardware, whilst also welcoming those retained staff and management into the new fold via training and team-building efforts.

This M&A costings must be realistic and set against a realistically constructed ROI model, which then provides indication of the mid-point offered purchase price. Though such M&A opportunities have been apparent, the combination of competitive playing field and low borrowing rates must not absolve the fundamentals of sound business planning.

G. Creating A New Dealer-Group Specific USP

Unlike mainstream vehicle dealers which can rely upon the high cost above-the-line advertising & PR efforts of volume manufacturers to generate showroom footfall, the luxury car dealer must seek to gain its publicity and attraction 'edge' far more so by its own efforts. Hence the usual PR initiatives as sponsoring a local private school event, a monied neighbourhood community event, advertising in the regional 'upscale' county magazine (eg Hertfordshire Life, Berkshire Life etc) and select local sports events such as rugby or rowing.

However, whilst credibly targeting the specific location, this is little more than the norm. Today facing an ever greater competitive threats from outside the locale by those old and new operators exploiting virtual but strong web links, all dealers must re-appraise their own personas, and try and create their unique competitive and charaterful positions, by going far further than simply advertising on the web-sites of that local magazine.

Thus time to re-appraise the outward persona and indeed the inward personality of the dealership, effectively deconstructing and reconstructing the ID, Ego and Super-Ego of the commercial entity.

One very obvious route to adding client value for those that do not already operate the 'concierge' type service is to effectively mimic Peugeot UK's 'just add fuel' marketing campaign, where much of the inconvenience of ownership – ie the usually separate administrative aspects including road tax and insurance - has been 'bundled' into the overall price and package.

However this is an obvious example of 'solutions provision', instead all aspects of the clientel's needs, wants and desires should be evaluated, as should the actual brand personality the dealer wishes to convey. Thus using well known others for 'service influence' - from something as obvious as Virgin Airlines' Upper Class offering, to the far less obvious but subtly powerful service offering of the Goring Hotel (London Victoria). However, the key point here is not to directly copy, but to draw influence and evolve a truly “unique manner”; note not style over substance.

H. Organisational Re-balancing

There is well recognised a need to fundamentally change dealer mindsets to suit the 'New Norm' generated by much altered economic and technological (IT) conditions. Thus an imperative to evolve an organisational structure. This in short to reflect the change from a pre-2008 mentality in which cars almost sold themselves to a new 2012+ mentality which requires far greater insight and subtlety at 'front of house' and far greater business assessment behind the curtains.

This then requires meaningful performance measurement in both enhanced quantitative and the qualitative methods. From the quantitative perspective ensuring that management budget and accounts are very closely entwined with sales targets vs progress. From the quantitative angle, the ability to properly understand positive and negative perceptions of clients.

In this vein, a corporate mission statement might relay “where authentic customer connectivity can be nurtured at both the physical and virtual customer interface levels', but such a 'removed' rhetoric' and jargon should be avoided and instead a true culture of mutual respect and human relationship understanding honed and nurtured. This admittedly hard to achieve in what has often been an ego-centric world between some dealer staff, their customers and of course the general public who are often deemed time-wasters by dealers, but who in themselves ultimately support the reverential esteem of the luxury marques themselves.

[NB Here, once again investment-auto-motives spotlights the decades long attitude of Morgan Motors, whose own MD (Charles Morgan) acts far beyond the role of marque figurehead and appears to have time for all; from inquisitive telephone calls from university students to high value vehicle orders by blue-chip company board members. All are treated kindly and respectfully].

As for intrinsic risks on the horizon, whilst all companies recognise the basic demand-side and supply-side risks, driven by macro PESTEL and micro Supplier issues, it is the increasing influence of internet based ventures which pose the possibility of 'new entrant' threat.

Although most dealers have embraced the web as both advertising display instrument for inventory and route to purchase used vehicles aswell as of course client information gathering, this approach is an extension of 'business as usual' – with extended tentacles. Possible threats come from those newcomers such as TrueCar.com which try to fundamentally alter (ie break) the historical dealer vis a vis customer relationship by acting essentially as a broker of vehicles.

So it seems that the very operational structures of dealers are undergoing or should undergo slow but fundamental change. The previously mentioned merging of sales and service departments then probably requiring greater circulation of staff throughout the different functions of a dealership than has historically been the case, which will in turn engrain cross functional knowledge and behaviour to the benefit of the client-base and so the business.


The release of credit agency Moody's 'Negative Outlook' on the UK outlook - from the EU relative perspective - should not markedly dampen what has been a slowly grown confidence in investor attitude toward UK companies. Especially toward those with greater national focus, and have assertained their strategic position at macro and micro levels and are readying themselves for the future. Other undoubtedly stable FTSE100 companies with greater EM and global exposure undoubtedly provide defensive investment routes, but as for the typical Buffet-esque value driven 'cigarette but' buy, their appear to be those in the luxury sector that are preparing for a resurgence over the years to come.

Positively that possible dampening of the UK economy will provide the timescale for much needed ongoing change in the auto sector, both at structural levels where divestment and integration can take place, at the visionary level so that new dimensions can be brought to established enterprises and at the people level, where it should be recognised that the value of true service to clients is well recognised when the immediacy of financial gain is not obviously apparent.

With increasing reliance upon used luxury vehicle sales and that of service, repair and value for money 'customer experience' UK dealers are no longer as exposed to what was in previous years a strong Euro, and so no longer suffer the FX conversion into Sterling. Infact as regards the matter of lower volume new sales, the fact that the Euro has weakened so much as a result of the Eurozone crisis infact means that importing German and Italian cars for those that desire new should provide additional margin per unit, with the additional benefit of the ability to strongly negotiate with vehicle suppliers to accept what look to be over-sized factory inventories.

[NB That FX tailwind for the UK against the Euro will have also played in favour of the likes of Rolls-Royce, Bentley and Aston Martin given the high level of 'content value' (ie bodyshells and engines) imported from Germany].

Ultimately, investment-auto-motives views the the Luxury element of the UK's auto-sector as ripe for transformation and thus investment opportunism.

This driven by those groups with the common sense to have cautiously weathered the storm to date with limited or no debt exposure.....the strategic vision to rebalanced their operational practices and procedures.....which underpins organic growth.....and the ability to call upon cash reserves or low-cost of capital lending to undertake directly synergistic (ie horizontal) acquisitions.....with possibly potential throughout the vertical value chain at the service & repair workshop level below.....aswell as potentially, the ability to access the top of the value chain when truly advantageous CRM soft-ware applications developed around concierge-type hospitality.

If the sector manages itself, its inventories, the market and its CRM well there should not be a glut of used Bentleys, Roll-Royces, Aston-Martins, Lamborghinis and Ferraris languishing in storage or in showrooms. Instead a revitalisaed approach to the business and sector consolidation supported by ever increasing access to wholesale credit for new customer credit-lines, will breath new life into the UK luxury vehicle sector.

After all it is those symbolic 'flying ladies', the 'prancing horses', the 'charging bulls' and the 'spread wings' which together have historically succeeded in stoking a now much needed 'animal spirit' amongst investors, entrepreneurs and executives.


Monday, 6 February 2012

NOTE and Overview : IAMAUTO

Note -

Please note that investment-auto-motives (ie Turan Ahmed of London, England), has absolutely no connection whatsoever to the recently created new car firm named IAMAUTO.

(A connection possibly supposed given the grammatical and so psychological similarity).

Overview -

IAMAUTO is based in Los Angeles, with as figurehead the celebrity Will.i.am of the music group The Black Eye Peas. The company publicised on the Jay Leno Show in the US and Top Gear here in the UK.

The company appears the car sector parallel to the clothes company FUBU. Intended to be led and run predominantly by African-American executives, management and staff.

However, FUBU attracted criticism by some quarters for seemingly leveraging its Black roots to grow a massive commercial entity which grew ever further apart from its raison d'etre to assist marginalised and under-priveliged black people within the USA.

As to how supposedly exploitative FUBU is thought to have been (or not) is a direct issue for those living in South Central and Watts in Los Angeles, the outlying districts of New York, Detroit and across the Deep South.

But such themes remain important for all.

Especially so at this time, when the usual state support projects for the long-term marginalised have contracted given diminishing federal and state income from the 'stumbling' middle classes that represent the American melting-pot. Thus the need for self-starting economic ventures from what might be described as the social periphery is increasingly important.

So the publicised 'mission' of IAMAUTO is of course worthy...very worthy.

Yet any new ethno-centric, culturally orientated project which enjoys the 'tail-wind' of public goodwill - in whatever business sector - must still be critically assessed at the fundamental level by those approached for investment.

This principle especially applied to those more naive and willing participants who stem themselves from the lower echelons of any ethnic group concerned. Those who may be more easily persuaded to help finance any such a venture, yet all the more exposed to any possible negative future outcome.

IAMAUTO will no doubt bring welcome PR to Chrysler - the providers of mechanical hardware to the company - and so by virtue of association attract mainstream car sales from African-American consumers across the wealth spectrum, from high earners, the middle class and sub-prime buyers.

[NB Furthermore, as part of that FIAT-Chrysler PR exercise, it seems wholly intended that an image search over any popular web search engine generates the logo of 'iamauto', an Italian enterprise based in Rome, a firm surely connected to FIAT, Marchionne or the Agnelli family; which may develop new business streams for the company and Italy itself].

However, in an age of increasing corporate responsibility there may be good reason for Chrysler itself to ensure the good governance of the IAMAUTO venture itself, to ensure best practice principles relating to investment funding sources, the uses of such funds, and critically the recipients of the positive productive economic output.

If IAMAUTO is able to run along the lines of the John Lewis model including beneficial and self-investing associates, then perhaps it should. So all participants can learn about business and value development.

With that mentioned, the recent 70th birthday of the legendary boxer Muhammad Ali will have hopefully buoyed the 'fighting spirit' of Black America and indeed all American entrepreneurs of whatever colour to promote a 'can do' attitude.

Ali once said "Superman don't need no seatbelt", yet any 'passenger' investing in any ethno-centric venture - from VC company to aspirant 20-something employee to a doting grandma providing for grandchildren - should undertake meaningful due diligence, and as in any corporate assessment discount the inherent goodwill. In such an emotionally charged arena, “head over heart” must be the mantra so as to operate the business keenly and efficiently.

Duke Ellington once stated that "A problem is a chance for you to do your best", so it is hoped that the real company corps beyond Will.i.am at can create something that is truly "Boom Boom Pow!", and over-rides those Blaxploitation Kung Fu movies of the 1970s.

Post Script

IAMAUTO may be confused by some with the firm BTOAUTO, which itself was an exploratory niche firm and sought to remodel the vehicle order and construction process. The two are thought to be unrelated, with the leader of that ultimately still-born venture - Scott Painter, serial entrepreneur - moving on to start TrueCar.com attitude.