Friday, 26 October 2012

Micro Level Trends – The London Black Cab – Britain 0, Germany 1.

During a week that saw the British legend James Bond brought back to the world's cinema screens, it was sad to see the apparent imminent demise of a very real British icon: the London Black Cab.

The vehicle has been virtual time-capsule which interlinks the economic psycho-geographies of Bond Street and Threadneedle Street, it crosses numerous decades, and played a prominent role during the closing ceremony of this year's Olympics.

However, in direct contrast to that celebration, recent news has come that the vehicle's principle manufacturer and manufacturing licensor, Manganese Bronze Holdings plc, with a workforce of 288 people, has been forced to call in PricewaterhouseCoopers, to act as the administrators; having failed to elicit necessary re-structuring finance from China's Geely, a JV partner.

Presently it seems that unless PwC can find an optimal direct restructuring and recapitalisation route (best for all concerned, including remaining shareholders), a likely outcome would be the more advantageous 'packaged liquidation' (for any buyer and employees) versus at worst, a fire-sale of remaining company assets.

[NB Physical assets have dwindled over the years as MBH sought to gain liquidity and run lean, with sale and lease-back of its HQ property the prime example. Today it seems that 'goodwill' elements such as trading name and vehicle design & tooling are prime valuation determinants, along with usual inventory, (a costly £3.9m and accounting erred) IT system and miscellaneous].

The suspended share price today, near the end of 2012, now languishes at 10p.

(MarketCap context: end '08 = 600p, end '09 = 90p, end '10 = 100p, end '11 = 75p)

Background -

Manganese Bronze built a business that spans the prime areas of vehicle manufacturer, vehicle retail and vehicle maintenance. Most activities are undertaken under the trading name of the London Taxi Company.

LTC itself consists of 3 divisions:

1. Vehicle Sales - including design, development, assembly and retail [new and part exchanged]
2. Vehicle Services – primarily provision of finance
3. Shanghai LTI – manufacturing and sales JV with China's Geely Auto
(of which Lloyds Banking Group holds 48%)

Whilst 1. and 2. have been essentially continuance of 'business as usual' in the UK, it was company investors that initially pushed for creation of the 3. viewing the international high regard for the classic London cab as both an exportable item (from 'commodity' to 'idiosyncratic' relative to region) as well as recognising the obvious need to reduce the impact of invariably high UK assembly costs, for what is a high labour content vehicle.

The Recent Past -

The 2008 financial crisis had an immediate and to date long-lasting effect upon the fortunes of MBH, given the massive deflation of what to then had been strong demand buoyancy from its customers – large and medium sized fleet operators and single owner-operators – who themselves heavily relied upon corporate and personal fares from those within London's financial and support sectors.

Recognising the fragility of the company at the time, and so as to strengthen the strategic mutual interests of the Anglo-Sino relationship, October 2008 saw previous talks with Geely Auto culminate in the sale of near 20% in MBH to the Shanghai based vehicle manufacturer, at a stock price in the region of 600p

This was in effect done to underpin the financing structure of the company, to try and ensure greater stability and reduced pressure on what was likely as a downward trend of free-float trading.

Increasingly Dire Straits -

That assisted for a short time, but as earnings results faltered year on year the ever present 'eyes of the market' narrowed to a contemplative and increasingly cynical squint, thus ongoing pressure seeing the general share price drop from

A view of corporate fundamentals illustrates the condition of very poor health. The share price of the 30 million registered share float was suspended from market trading when the announcement was made, done so at a price of 10p. This obviously gives a Market Capitalisation of approximately £3 million, a pitiful sum.

Expected Stumble...of Sorts -

For some years those drivers and operators 'at the coal face' recognised an increasing failure of LTC product quality, with increasing levels of “things gone wrong”. With an ever present eye upon UK auto manufacture, conversations between investment-auto-motives and rank-parked cab drivers highlighted an ever-present, yet critically increasing, dissatisfaction with LTC; as serious and less serious vehicle problems spanning engine, gearbox and ancillaries, prior to the latest issue of the steering box which required a product recall of 400 cabs.

[NB it is understood by investment-auto-motives that the steering box issue is not immediately dangerous, the box is understood as a conventional hydraulically assisted mechanical link, with simply loss of hydraulic power assistance; able to operate unassisted].

Whilst a good portion of that driver dissatisfaction is directly due to MBH/LTC''s component and service failures, it must be recognised that driver disaffection was heightened by an inability to earn during a more economically troublesome 2012.

Nevertheless, it was felt - real or perceived - that the later TX models had become less reliable, drivers 'off the road' for longer periods, which they felt was attributable to diminishing product quality between TX2 and TX4, a less enjoyable ownership experience and critically their business costs. Thus some 'cabbies' viewed the competitive position of MBH/LTC as increasingly tenuous, from a ground floor perspective.

The Economic Squeeze -

It seems a viscous circle once again emerged between LTC and operator owners, whereby problem vehicles required more replaced parts, necessitated longer time by service technicians and so saw a hike in both parts replacement costs and associated labour costs, both of which incurred VAT.

Of course it is almost an expected truism – though morally wrong – that during lean economic times both distributor associated dealers and independent garages will seek to stretch-out repair and servicing jobs for their own financial benefit. But by far the greatest impact has been the stalling economy which since 2008 has meant the unfortunate appearance of a vicious downward economic spiral affecting all levels of the inter-linked service and industry value chain.

The cracks first appeared in 2008 when recognising the very fragile near term picture, and likelihood of mid term depleted new vehicle sales, MBH sought to operationally redress the downturn. That obvious forecast was realised, with the annual new vehicle sales rate diminished as follows:

2008 = 1,900 units approx.
2009 = 1,700 units approx.
2010 = 1,650 units approx.
2011 = 1,500 units approx.

Positive Company Reaction -

In order to try and achieve the prime necessity of reducing per unit losses, ensure Coventry's manufacturing activities and ultimately 'balancing the books', it was necessary that new component sourcing efforts were undertaken, seeking to obtain lower value items (typically pressed and casting produced mechanicals) from those China located companies that had been involved in the ramp-up of TX4 production in Shanghai, many of whom themselves had been awarded ISO 9000 quality awards, or recognised Chinese equivalents.

Thus the MBH Board and managers invariably leveraged the immediate opportunities available to them, so as to reduce manufacturing costs and so try maintain stable though low level margins in the face of ever growing product competition in the UK Hackney Carriage segment.

So as seen, strategically and operationally the company under increasing commercial pressure manoeuvred as necessary, seeking to continue to serve its customers and temper the grievances of increasingly fraught shareholders that had seen the value of their holdings effectively plummet.

That battle to overcome macro and micro headwinds, had up until recently been well fought, though “far from out of the woods”.

2010 vs 2011 Results -

MBH appears to have necessarily frozen the IR portion of its website – responding to regulatory needs - thus there is an inability to access and read the quarterly / bi-annual / annual earnings releases over the years.

However basic figures available via other sources show the following business pick-up between 2010 and 2011 as manufacturing cost savings and a 'sweated' Service division were off-setting the loss new vehicle sales:

FY2010 vs FY 2011

Group Revenue: £75m vs £69,6m (+7.8%)
Operating Loss: £1.3m vs £1.9m (+31%) [exc special items]
Finance Costs: £0.8m vs £0.9m (+8%)
EBIT: £-2.6m vs £-6.3m (+58%)
EPS: -9.95p vs -18.19p
Net Debt: £8.9m vs £14.4m (+38.2%)

[NB an exceptional restructuring cost of £-3.5m was incurred for 2010]

Hence indications of new momentum.

Q1 2012 Corporate Update -

The beginning of the year showed renewed strength within the enterprise, with the Q1 results and investor presentation depicting:

- Record export sales in 2011 of 705 units vs 2010 of 226 units
(500 units shipped to Azerbaijan in February)
- Sales of new vehicles in London rose 4% YoY (1,074 vs 1,034)
- Sales of new vehicles across UK declined -31% (428 vs 619)
- UK Group operating loss much reduced (£-377k vs £-2m) (exc JV income)
- Cash generation of £7.1m (£7.7m used in 2010)


- Continued JV development of TX4
- Continue TXn 'global taxi' development
- Identify further JV opportunities
(ie international order book)


- Stabalised financial position
- (Critical) extended credit terms by Geely Auto.
- Sluggish London sales expect boost from new TfL regulations
- Launch of new Euro V compliant vehicle
- Interim agreement signed regards LTC support of Geely Cars UK introduction
- 'After tough years, company well positioned with Geely' (paraphrased)

Miscreant Accounting -

However, for all the good work seen on renewed foundations, it has been the reported issue of accounting 'oversight', an oversight estimated at £3.9m incurred on IT systems procurement and maintenance, that has now heavily undermined the balance sheet and cash-flow position of MBH.

Whilst CEO John Russell tries to best manage this newly arrived blow, press reports indicate that the ultimate blame is being accorded to the finance function and invariably CFO Peter Johansen, perhaps along with the external auditors Grant Thornton UK, if reported as audited accounts.

From this week onwards there will no doubt be a near forensic focus on previous reporting and management accounts between PwC and GT.

The prime concern for MBH and its shareholders and creditors, financiers and suppliers, yet more so for a potential company buyer, is exactly what effect the outcome of an investigation might have.

Critically, whether the £3.9m sunk into IT systems can actually be viewed as providing substantial competitive advantage, so truly value generative, in better connecting those core aspects of the internal value chain and associated supporting activities.

If viewed as such, it would add to a much improved valuation of 'intangibles' which could be effectively re-booked to the long-term assets portion of the balance sheet.

(The art of interpretation always a moot topic in the compilation of accounts!)

Intensified Stricken Position -

As important, the company's executives, external stakeholders and any new buyer( will be very much aware of the intensified competition which has come to pass within the black cab sector over the last decade.

With the ability to offer high general functionality and improved running costs, small, midi and large passenger vans have over the last 10 years taken an ever increasingly large slice of the general mini-cab market across London and the UK, increasingly replacing saloon cars, estate cars and older suburban run FX series and TX series black cabs during the early 2000s.

But for those higher-value 24 hour city-centre applications, typically overseen by the Public Carriage Office, the fact that the iconic black cab had been designed to fulfil the demanding criteria of 'Hackney Carriage' regulations had for a seeming eon given it effective protection against the less agile standard production vehicle.

That was the case up until the last 5 years or so.

In a bid to create greater competition, add what was viewed as greater fairness, and dismantle what was by many seen as a closed-shop approach to gaining and running a black-cab licence, the unified operating agency that is Transport for London (TfL) sought to slowly deregulate the sector.

This was first seen with a more lassez-faire attitude toward mini-cabs, itself leveraged through the creation of TfL regulated and approved taxis which themselves were typically black coloured mid-sized people carriers; so a hybrid of mini-cab and classic black-cab.

Thus, TfL and the PCO started to dismantle what had been historically fervent protectionist walls against other vehicle types ostensibly produced by foreign manufacturers which tended to utilise associated vehicle converters located within the UK.

[NB European harmonisation of taxi type vehicle regulations provides an incentive for major vehicle manufacturers to create central in-house modification centres,as opposed to deploying country by country specialist adaption companies to befit local needs].

So for years those others had well recognised the their inability to access the profitable black cab trade, and had feared the waste of investment costs necessary to modify a standard vehicle to meet PCO regulations – the greatest issue being that of the required turning circle radius – to 'U' turn in what are narrow olde London streets.

But the opportunity to grasp a slice of the official 'Ply for Hire' sector, operated by “The Knowledge” qualified “Green Badge” holders proved very tempting. And so gradually headway has been made by others.

Most notably Daimler with its Vito M8 model.

The Black Cab Market -

Very basic web research indicates that London's black cab 'car parc' (by far the biggest in the UK) is approximately 23,000 vehicles, out of approximately 25,000 nationwide. (Of these 23,000, about 12,000 are in use midweek afternoons).

It is understood that the TX series holds 93% of the 'orange lamp' taxi population and the Vito 6% (remaining being older MetroCabs). The standard TX4 black cab presently costs about £31,000 (actually £29,150 or 32,15), versus approximately £34,000 for the modified Vito.

[NB The distributors of Vito (via H1 2012 reporting) cite TfL data that indicates that the vito has taken 38% of all new taxi sales, presumably spanning all taxi types not simply 'pure' black cab].

Two approaches may be used to gauge the market value: producer intelligence and car parc intelligence.

Regards the former, MBH has traditionally produced about 2,500 vehicles per annum, as mentioned, the downturn seeing that fall to 1,900 units in 2009 and 1,500 in 2011. Thus in the present mid term 'new norm' it could be assumed that average annual demand of TX vehicle is about 1,700. This rate alone is worth £52,700,000 . At the old norm rate of 2,500 worth £77,500,000.

However, looking at broader 'car parc' renewal, it is assumed that a vehicle is replaced on average every 5 years (though actually between 4 and 6 years depending on reliability, mileage, financing structure and operator type). These used vehicles sold-off to other UK regions, whilst a small portion of far older FX series vehicles remain run by enthusiast drivers as 'originals'. The Euro 5 emissions regulations thus hasten and assist that renewal rate.

With a car parc of 21,000, a 5 year renewal rate starting as of 2013, it indicates a theorectical annual demand rate of about 4,200 units. Using present TX pricing alone, that indicates a theoretical annual market value is £130,200,000.

[NB However, the Mercedes Vito retails at approximately £34,000 and could be viewed as the new benchmark for a next generation vehicle which offers improved running costs, and arguably better residual values].

Furthermore, the Mayor of London's office set-down requirements that no vehicle over 15 years old would be allowed to remain, given that a reported 20% of PM10 classified air pollution derived from taxi tail-pipes.

Little wonder then that Mercedes and others such as Nissan, with far better eco credentials, wish to make headway into the London and UK Hackney Carriage arena, at the trough of a new economic cycle, and start of a new green era, and critically, especially so during a period when private and fleet car sales in Europe have slowed.

The New Entrants -

As seen, over the last decade growing recognition that TfL was practically changing and 'opening-up' that previous 'closed shop' culture gave far greater confidence to those on the 'outside', as long as they could meet the necessary vehicle functionality demands set in place for very good reason to aid the public and drivers alike.

As noted, the greatest response has undoubtedly come from Daimler via adaptation of the the Mercedes-Benz Vito passenger van, itself a 6 passenger seater, thus providing greater seating capacity than the 5 seater TX4 series. It is produced in the Basque area of Spain and in special London taxi guise uses a rear axle unit licensed from the specialist engineering company One80.

It gained PCO accreditation in 2008,and has since been sold via a subsidiary of Eco City Vehicles plc (an AIM listed company) called KPM-UK.

To enable accordance to PCO turning circle standards, the Vito has been fitted with 'rear steer' modification thus making what were normal uni-directional fixed rear wheels multi-directional, the rear steer only activated when manoeuvring at low speeds. That was

But now the TX and so MBH/LTC is under even more direct attacked from Japan and even the US.

The Nissan NV200 small van was showcased in August 2012 as a black cab variant, and touted as ready for 2014, whilst also publicised as a possible new New York yellow cab – so effectively seeking to be seen as the global taxi standard.

It is smaller than the Mercedes Vito but package efficient given its 'tall-boy' body (this shape very common in Japan), and provides the conventional 3+1+1 seating layout of the London Taxi. It offers a standard diesel engine (the whole vehicle reported by Nissan as 50% more efficient than the TX4) and has the apparent option an EV variant, supposedly with affordable battery and maintenance costs.

[NB investment-auto-motives in not convinced by the ever depleting argument for EVs (given present and mid-term battery cost, battery replacement and specialist servicing needs, and so believes that the EV variant is being touted by Nissan UK as a PR exercise and to tempt TfLTfL the PCO and others toward the NV200. It will however and rightly should be judged on its own merits].

Critically, unlike Vito and its more corporate account and group travel directed clientèle, the NV200 seeks to compete head-to-head against TX4.

But what gives Nissan (ie Renault-Nissan) the confidence to do so?

The fact is that Nissan is the UK's largest vehicle producer, having manufactured in Sunderland since the mid 1980s, itself along with Toyota and Honda the mainstay of British vehicle manufacture by volume, in contrast to the premium set of JLR, Rolls-Royce, Bentley (all foreign owned) which provide useful but less turnover.

Nissan's good standing has been attained as both being seen to be committed to the UK, as an export earner and job provider for the local North East and inter-regional Midlands. That powerful economic concoction means that it rightfully garners governmental respect.

[NB Even more so now, after the news of Ford's 1,400 job losses across Dagenham and Southampton (transit van plant), in addition to it Belgium plant].

Unlike the TX4, the NV200 is a mass platform derived vehicle, thus dramatically lowering the ex-factory price of the standard, intentionally 'commoditised' vehicle, before modification to PCO standards (ie turning circle, wheelchair access etc). Furthermore even these adaptions may be unnecessary or cheaper to undertake than on 'comparable' Vito, since the van was created for tight Japanese prefecture streets, that its turning circle may already meet the PCO requirement.

Furthermore, in mid 2010 Ford showcased versions of the small Transit Connect dressed in a Yellow Cab livery, highlighting CNG and LPG powertrain options, so obviously demonstrating its suitability as a new global taxi provider to large eco orientated cities.

Returning to The Classic -

It should be recognised that the 1997 TX1 was not simply a re-engineered, re-bodied FX/Fairway – as has been mentioned in the press – but a completely new vehicle. There were very few minor carry-over items (excluding engine types), and as such was purely a spiritual successor to the previous Fairway, itself the last iteration of the 1959 Austin FX4 Taxi.

The new cab was immediately welcomed by the British public and UK motor industry with open arms, and demonstrated that Britain's engineering capabilities could create a utility vehicle to match the reputation of niche British luxury cars and sports cars.

Whilst other attempts had been made to update the black cab – the square-bodied MetroCab the most 'infamous' – none were previously successful given lack of the the 'classic' shape of the FX4, hence the retro-body of the TX series.

Given the historically high price of Black Taxis, high valuations seemingly aligned to the high value of the necessary 'green badge' license, TX volume production numbers pertained roughly to the demand levels of a then deeply regulated trade.

The initial business model for TX vehicle was to seek the customer mix between owner-operators and fleet-operators would provide for a mix of high margin unit sales for the former (seeking more luxury) and lower margin but higher volume sales for the latter (seeking to better 'sweat' the company assets via multi-driver, round the clock use). So a three tier trim moniker was used – Bronze, Silver and Gold – reflecting ever better features. However, in the midst of growing competition from Mercedes, the most recent variants are named 'Style' and 'Elegance': the latter a well known trim variant for Mercedes-Benz products.

When the variant naming change occurred it demonstrated that MBH itself felt that it was loosing its historic near monopolistic grasp of the sector.

A Time for TX Re-Incarnation -

Quite obviously, and inevitably after 15 years, the TX series has aged. Not simply in its own right, but critically relative to the influx of newer rivals from far larger and typically much financially stronger volume manufacturers.

Thus beyond the efforts seen to date, primarily 'running lean' and the Geely Auto JV, in order to try and secure its own future MBH executives (prompted by Grant Thornton) must seek to create a new vision for the future of the TX series.

This must be centred around the Mayoral (so TfL administered) 'Clean Air Strategy' set out in 2010 :

“The aim is to produce a taxi with a 60 per cent improvement in fuel economy by 2015 (based on current levels) and capable of zero tail pipe emission operation by 2020. The introduction of such vehicles will deliver significant air quality benefits. There are a variety of promising propulsion and power technologies which could see hybrid, plug-in electric, full-electric and fuel cell taxis on London’s roads in the future. The Mayor will establish a financial incentive scheme that will offer a reduction on the purchase prices of qualifying vehicles to London’s taxi drivers.

[NB Whilst the ambition is to be applauded, investment-auto-motives believes that achievement of low and zero emissions is a 'whole vehicle' issue, thus affecting the weight/mass and efficiency of all systems, thus providing an open door for conventional ICE technology which is more affordable].

In reply to the 'Clean Air Strategy' MBH previously highlighted the adaption of prototype TX bodyshell(s) to house a completely electric drivetrain; the EV project partnered with Tanfield Vehicles, best known for modification of panel van and chassis-cab vans to EV. Little has been heard since, given Tanfield Group's own commercial restructuring with America's Smiths Electric Vehicles, but it is assumed that the TX EV project has been shelved with Smiths for the present.

[NB an alternative car-based operator Green Tomato Cars has now stated that it will bring EV versions of the Chinese made (Berkshire Hathaway backed) BYD e6 to London; whether this is just a publicity grabbing exercise in the light of MBH struggles, or true 'live' initiative remains to be seen].

Whilst the full EV route appears the magic potion for what is obviously a heavy vehicle, such technology cannot conceivably be applied as a mass-market application. Beyond probable production constraints and high installation and so ex-factory product costs, cab drivers have heard many EV horror stories over the decades, and by and large would prefer an all ICE or Hybrid (even PHEV) solution...whichever wholly reliable system provides themselves with maximum earning power.

Thus investment-auto-motives views the only correct avenue for life extension of the TX4, after Euro 5 and 6 to be the triple aspect adoption of:

1. 'Light-weighting'
1a. Select or all external body panels
1b. Select internal structural items
1c. Select ancillary items (eg radiator etc)
(these to be aluminium and basic composites)

2. Powertrain Sourcing
2a Optimal 'long-life' VM sourced engine (bias to Volvo unit)
2b. Advanced lower cost 'bolt-on' eco-tech

3. Parts Sourcing
3a. Major focus on improving quality of Chinese made components

This intentionally evolutionary route is typical of any cash-constrained vehicle development programme, retaining as much previously amortised engineering as possible, whilst providing a 'staircase' type technology strategy over the next 15 years. But critically retaining the classic TX body shape which, for all the vehicle's woes to drivers, is by far its primary USP.

Any other route would seem foolhardy given the economic advantages to MBH.

Chinese Whispers -

Geely Auto's near 20% stake of course gave its far greater strategic interest in the fortunes of MBH, of course viewing it as a useful component of its own vehicle empire. This spans Volvo Cars at the premium level to the Emgrande brand sold as 'domestic premium' to the Englon brand (into which the TX4 is uncomfortably slotted) to the Gleagle at entry level.

The TX4/Englon business model developed thus far sees envisages an annual production rate of 40,000 units, with the core vehicle – and critically development off-shoots - being spread across new segments, including not only the conventional city centre taxi market, but also a limousine taxi variant and two premium sedan variants for other commercial and private buyers.

[NB it appears that – typically for a production orientated, supply-led economy such as China – that the TX4 is being made to fit into a company strategy that is intentionally 'capacity-centric' so as to underpin the domestic growth aspirations, and export ambitions, of Geely Auto; and of course China itself].

Geely's ownership of Volvo Cars is an undeniable massive advantage, both as a respected marque across the world, but perhaps as powerfully the ability to draw from Volvo eco-orientated vehicle systems technologies that can be deployed elsewhere across the group's other divisions, MBH/LTC a prime potential beneficiary.

Conclusion -

The unfortunate fact is that the UK is ultimately not the best location for what is still, in automotive terms, a relatively low priced niche product - versus 'big ticket' sportscar and specialist vehicle peers.

The primary internal and external headwinds are that: it demands large levels of low-skilled and semi-skilled labour, which typically demands wage levels inconsistent with the global norm for such work. It is also set within the industrial context of greatly increased competition from heavily automated VMs using low-cost in-house or farmed-out modifiers dedicated to the adaption of mainstream passenger vans to black cab and other dedicated task variants.

In short, the volume producers have intentionally created business models to out-flank the likes of MBH/LTC, utilisng the best of both worlds: much amortised basic platforms and vehicles (especially so for vans) and highly cost effective SVO (Special Vehicle Operations) cost centres.

There may be a case for maintaining an assembly section in Coventry, thus re-appointing the status qou in which CKD units are exported from China into the UK for full assembly and finish. But it would need to operate with truly competitive fixed and variable cost rates, meaning a highly flexible workforce operating as autonomously as possible meaning a heavy bias toward 'rounded apprenticeships' including multi-tasking and job-sharing, with a very lean group of highly influential and respected affordable managers to deploy a younger, more affordable and more flexible workforce.

Since 2008 Manganese Bronze / LTC has come under immense business pressure, firstly from obvious macro-level trends, and secondly from an ever growing competitive environment in which what was once a heavily tilted (virtually monopolistic) playing field has been made more and more level.

MBH and Geely must together learn as much as possible from the 'new champions' of the taxi market and their routes to market via the likes of Eco City, and equally leverage as much knowledge as feasible from internally across the increasingly powerful Geely Group.

Though presently it appears that Geely Auto has stepped back from its ties with MBH/LTC, it seems highly likely that a growth orientated Geely Auto seeking to make its global name with iconic foreign marques and nameplates will ultimately seek to buy the assets of Manganese Bronze, and so take up a majority or full share.

The question remains exactly what route will be used to do so? Use of a proxy company to 'invisibly' access a packaged liquidation, use of a co-opted private equity company to pick and choose from the whole 'carcass', or multi-party proxies via a fire sale, so as to individually pick-up different elements of the whole to be latterly re-assembled?

With a £3 million MarketCap, many involved in investment banking, private equity and the auto industry will see it as a highly compelling proposition. But as ever its the full Enterprise Value, via its component parts, that must be fully calculated before thoughts of other future EVs can be entertained.

Post Script -

To update the web-log: The Telegraph's Business pages (29.10.2012) published a letter from the Mayor regards latest developments of  possible MetroCab based EV taxi.

[NB MetroCab 'as was' had been the maker of previous generation taxis, was owned by KamKorp (which presently also owns Bristol Cars) and appears to have been passed onto Ecotive Limited.  This company seemingly continuing the Fraser-Nash associated development of an EV black cab. Exactly how much credibility actually sits within this proposal - given the need for a major technical update of the whole vehicle - remains to be seen].

Monday, 15 October 2012

Company Focus – Greyhound UK – Poor Stewardship of 'Best of Breed''

In early 2009 investment-auto-motives – via this weblog - highlighted the opportunity available to FirstGroup by transporting the iconic American brand that is 'Greyhound Lines' into the United Kingdom.

Titled “Object Lessons for Teaching Greyhounds to Chase Rabbits”, (referencing National Expresses 'long eared' coaches) the essay highlighted the potential for Greyhound to enter a high-impact yet low cost bus/coach transport space. The timing was perfect to replicate the US model, providing highly differentiated, yet critically affordable coach service routes across the UK.

Upon 14th September 2009 that conjecture, though unfortunately only in name, became a reality, with the arrival of the brand to British shores.

The British press exalted the firm's decision to do so, recognising the massive potential to leverage what is possibly the only, and so greatest, globally renowned bus/coach moniker. A name that was interwoven within the cultural fabric of the American 20th century, and could have eventually become in the 21st century the preferred transport of the aspirant global masses, from Mobile, Alabama to throbbing Mumbai, India.

The Initial Public Response -

When the BBC ran the story on its news website in September 2009 a prompt and intelligent responses came from web-viewers. Many reacted positively with an expectation to travel upon a British incarnation of Americana, but it was the articulate views of a Jon Combe from Woking that summarised the challenge ahead :

...”The markets between the UK and US are very different. In the US Greyhound is the main ground-based long distance "inter-city" public transport, as it has very poor rail services outside of large cities. In the UK the rail network largely does that job. Even a two-hour journey time won't compete with the journey time of trains on these routes (typically about 90 minutes) and with the stop/start nature of traffic in our cities, I doubt it will be as comfortable as travelling by train. There is also heavy competition on both routes”.

At launch, MD Alex Warner said that the British incarnation was about the practicality of travelling from point A to point B. But as will be clearly seen, it instead devised as a premium service, seemingly targeted at a select socio-demographic group who are distinctively time rich and also cash rich. Thus the very idea of speediness and convenience – as per business traveller demands - was not actually a prime service consideration.

Poor Traction Out of the Gate -

Unfortunately, after only 3 years of operational service, Greyhound's owner, FirstGroup plc, stated that the brand's UK operations would be discontinued.

In the 12 months to March 2011 the division lost over £600,000 on revenues of £1.2 million. Although sales were reportedly rising, that pace was far too slow and was not expected to rise by any substantial amount given a restricted budgetary allowance from the parent company, which presently must battle its own financial woes; with the addition of further pressure given the loss of the West Coast mainline rail-service franchise (after Virgin Group's push for a judicial review on the matter).

But what exactly went wrong for Greyhound UK, given the highly promising macro-outlook.

Here in London, investment-auto-motives believes that the seeds of strategic failure had actually been sewn prior to launch.

Three Years Ago -

On that heavily publicised launch day, Warner proudly posed for the paparazzi, those press agency photos showing the new UK Greyhound bus positioned in front of the British landmark of Tower Bridge, so juxtaposing two powerful images, the setting enlived by the obvious inclusion of two real greyhounds. Warner regaled that "It's like when McDonald's was brought over to Moscow," he said. "There is a level of loyalty to iconic brands."

The PR campaign expectantly generated an avalanche of words that described the importation of the legend, and an explanation of how Greyhound UK would add excitement to the passengers and other road users alike.

Yet, even as the bus metaphorically stood in the station ready to leave, the signs of a commercial misadventure were present to see.

[NB investment-auto-motives winced at the time, but for the sake of common courtesy decided against negative comment, since the venture was ultimately funded by FirstGroup's mixed shareholder groups - institutionals to private retail].

To only very partially dissect the Greyhound UK case, the following undertakes a very shallow review to identify some of the basic mistakes.

These span:

1. Misconceived Brand Persona
2. Misdirected Product Offering
3. Misidentified Payment & Price Positioning
4. Misallocated Routes

1. Misconceived Brand Persona

Over the last 20 years within brand management circles the word 'Authenticity' has been so over-used so as to become almost an irony. However, there can be no denial that the maintenance of core values via a central product/service formula has been central to the ongoing success of 'iconic' brands. Especially so American nameplates new and old, ranging across Apple Inc to Harley-Davidson to LL Bean to Winnebago. Whilst a 'set formula' will have a degree of flexibility to meet subtly changing consumer wants, any fundamental change of perceived brand persona may well bring negative reaction from users and broader public alike.

The obvious example being Coca Cola's introduction of its new recipe in the mid 1980s with its immediate consequential backlash taught corporate America the lesson that users and the public are fundamental stakeholders in any brand's continued success story.

The issue for FirstGroup and Greyhound's executive team was a core dilemma as to how exactly to present a new Greyhound division to Britain. Whilst Britain views Greyhound Lines through the retrospective rose-tinted spectacles of Route 66 etc, in the US the brand has tried to maintain a contemporary stance, today very much middle of the road in terms of service offering and pricing; with brands such as MegaBus and BoltBus and others seeking regional and country-wide market-share of low-cost travel. This presented the exec team with a major branding dichotomy between UK perception and US reality.

In the UK bus and coach market, FirstGroup had to contend with Stagecoach's low-cost offering, and National Express' mainstream mid-market offering, aswell as of course available rail services (part of which it runs) and national airline services, which reflect much of the premium level travel sector.

With bottom, mid and top tier sectors already catered for, first impressions were that Greyhound UK could not compete head-on with 'incumbent' MegaBus, nor 'well entrenched' National Express, and so by default must be positioned as a road equivalent to rail and air – which of course it could never realistically be.

Its natural position was as a direct competitor to MegaBus. Yes it would be second in the marketplace but it hold far greater customer attraction, and could have 'owned the low-cost road' had its offering reflected the wants of target user groups, which when considered properly would not have cannibalised FirstGroup's prime rail customers, by offering very different travel experiences.

Greyhound Lines has been the archetype of American city to city transport (both trans-state and inter-state) since its birth in 1914 and evolution into a 'big corp' operator by 1929. As described in previous weblogs, the name became endemically interwoven into America's public consciousness during the Great Depression years as millions travelled across the USA in search of work.

It's personality invariably changed along with the economic fortunes of America, as personal travel needs merged from the pursuit of work to the pursuits of pleasures, its ability to offer transport links to industry and leisure through an ever expanding route network (often via M&A) giving it an unprecedented standing in the low-budget traveller's psyche. The brand share of mind grew through inclusion in Clarke Gabel films of the 1930s, inclusion in Chuck Berry (and others') Rock 'n' Roll songs of the 1950s and Simon and Garfunkel folk-pop songs of the '60s, and of course countless appearances as the contextual backdrop for an abundance of striving film characters.

The whole point of Greyhound, from its origins to today, is that far beyond the emotionality of its its cultural references, is that it offers a well recognised package of low-cost, few frills and and often frugal, transport. It was not all about the product (the bus) but all about the journey and the knowledge that Greyhound Lines would take you to or close to a chosen destination (the network).

However, underpinning the brand was the notion that the physicality of the bus actually imbued the spirituality of the journey – the two melded together through shiny corrugated aluminium, and bright orange front and rear marker lights which often because of the close proximity to the bus' destination boards literally shone on travels end.

The Greyhound bus had then become a cultural phenomenon, to ride a Greyhound was to “Ride America”, even if the experience itself was not always a perfect one, more often the case during recessions for social reasons. It succeeded in becoming a “Travelling 'Fan-Fare' for the Common Man”, whereby it gained its fans by virtue of the fares ascribed and the experiences had, whether good, average or indeed bad. But at heart it was cheap, dependable transport.

2. Misdirected Product Offering –

FirstGroup chose to reflect the style and service package of today's contemporary American Greyhound for the UK. Whilst that choice obviously expanded the norm and made brand management elements easier to deal with – presumably using a standards based corporate ID catalogue – the very flavour of an expected 'Classic Greyhound' was lost. FirstGroup was introducing 'New Coke' where the market appeared to longingly await 'Classic Coke'.

It is obviously not operationally feasible to wholly replicate the look & feel of the original American experience. Not all UK operators wish to deploy a high capacity 3-axle single deck bus (the US icon) given its lesser practicality and higher running costs and hardly wish to commission a special versions clad in an aluminium skin. Yet although an obvious problem exists in seeking to transplant the aesthetic DNA inherent in those freeway cruisers, it seems that no meaningful fettling of the 11 Scania Irizar PB coaches was made. No doubt because of the additional set-up costs of adapting near standardised 'euro' coach bodies to appear American and the fact that such adaption would have rendered a lower residual value on each vehicle and reduced the ability to repaint and re-use elsewhere within FirstGroup. An understandable compulsion to not undertake major modifications.

However simply clothing the standard 'euro' coach-body in the contemporary Greyhound livery of primary blue and secondary grey-silver (a reversal of the classic format) over a conventional 'long eared rabbit' coach-body, had the meaningless outcome of creating a sheep in wolf's clothing, not vice versa, as would have been the intention.

A small token to link to American culture was the provision of female names for 11 coaches drawn from yesteryear pop songs, to personalise and project a comforting personification; this no doubt influenced by the popularity of Eddie Stobart trucks, and is reminiscent of naming railway locomotives.

The supposed USP of the service were items such as on-board power sockets, WiFi, extra legroom and reclining seats (in addition to standard service items such as seatbelts, toilets and CCTV). But the media-device related items are increasingly seen as an entry level necessity by the 'connected' public, and those comfort related items whilst momentarily enjoyable are not a powerful purchase attraction upon the majority of short and medium distance routes.

Thus, the external and internal product package has little inherent differentiation and so attraction.

3. Misidentified Payment and Price Positioning -

As stated, given FirstGroup's perceived lack of opportunity in the low-cost and mid-stream coach travel markets, the company decided to seek out a premium pricing policy by which to launch Greyhound UK.

The exact rationale for this remains privately held by the BoD and management, but it seems obvious that Greyhound was viewed as having to become commercially self-financing as soon as possible so as not to be a drag on broader group profitability. Also, the latter-day 'top-down' expansion of a brand into mid and low tier sectors is theoretically far easier than trying to grow upwards.

To support this approach, it was decided that in one region (South Wales) the brand should offer a 'premium' orientated shopping-shuttle service from Swansea to Cardiff via the Bridgend Designer Shopping Mall.

This itself gives a clue to the general business model, whereby it appears, that the routes and pricing chosen were to in effect target the leisure shopping pursuits of the wealthier 'grey-market' (over 50s) situated in pockets of the Wales, but primarily on England's South Coast with day-trip and weekend-trip interest in going to London.

Thus from very general interpretation, it appears that the bias of passenger numbers were actually London-bound, which is a reversal of the notional routing (ie outbound from London). This is supported by the number and location of pick-up points.

[NB this often the case for operators that seek to both appear London-centric and reduce operational overheads. The company itself based in Empress Road, Southampton].

Although there is on-line advertising toward the business traveller set, it is unlikely that business people would choose to travel by road as opposed to rail given the far greater likelihood of travel disruption.

So whilst a tenable, indeed praiseworthy, marketing and business strategy for any other coach business seeking to provide a more upmarket package for deep pocketed (privately endowed) pensioners, small female groups and couples, such a start-point for the UK business meant that Greyhound UK was soon euphemistically called “Grey-Pound” by younger travellers.

[NB This was learnt of a couple of years ago from conversation with only a few coach travellers in Victoria Coach Station, some of which felt 'alienated' by the brand that was so well known to have previously served them in the USA]

The negative aspects of the ticketing model chosen may well have had a severe impact on user popularity, return custom, and so a firm and steady income stream. The disadvantages appear as:

A. Use of a flexible-pricing structure (commonly seen in the airline industry)
B. This applied on a per journey, capacity-specific basis (ie ever shifting)
C. Thereby providing little cost assurance to the passenger (esp “walk-up” cash payers)
D. Non-standardised payment facilities
E. Acceptance of cash vs cards vs both on different routes
(presumably because of differing socio-economic dynamics)
F. Notional promotion of 'on-line' booking
G. This less amenable to older users
H. Charge rates for telephone bookings (as opposed to toll-free)
I. Typical use of multi-shop counter-bought tickets
J. Use of 'e-tickets' (reference numbered)
K. Typical dislike of 'e-tickets' by older clients

4. Misallocated Routes -

At the 2009 launch of Greyhound UK, it was a real surprise to investment-auto-motives to view the initial very few (and later hardly expanded) routes to be run.

London – Southampton and London – Portsmouth were the first offerings, these hardly seen as providing either capacity or cache for the newly arrived icon.

[It is not until one objectively takes an overview that the real raison d'etre of these routes ((ie 'Grey-Pound) is understood].

London – Fareham joined the tiny network thereafter, with the addition of Swansea - Bridgend – Cardiff and lastly London - Glasgow (overnight).

This then relates a somewhat disjointed approach to network creation, which is best done organically so as to maintain public visibility and share of mind; although the similar rationale to connect provinces to regional hubs (London & Cardiff) is clear.

However, the latter addition of London-Glasgow (and vice versa) is less convincing, since it does not accord to the strategy rational, and is viewed as a parent-led decision to maintain contractual obligations and so a necessary addition. This especially so without an Edinburgh leg, which would provide a greater capacity boost from wealthier pensioners and couples seeking weekend or week-long holiday trips to London. Once again the apparent obvious potential has not been exploited, and so raises questions regards business intent.

Furthermore, there appears to have been overt over provision of the South coast service, with what are high-cost but poorly capacity utilised vehicles running once every hour - highly uneconomical.

To gain true public exposure, and so build the business, Greyhound should have ideally also been running services westbound and northbound from London Victoria along the M4, M40 and M1 motorways with reach into other regions. A charter basis to provide flexibility and avoid regulatory conditions of scheduled services. This would have been achievable by re-allocating what were under-capacity vehicles to such routes, and aligning the South Coast – London service primarily around early morning outbound and evening return departures, with some interspersed through the day (perhaps every 2.5 hours) to maintain daytime travel connections.

Summary -

To summarise, it appears that the very core of the business model contained drastic strategic and operational mistakes. This unfortunately achieved via dilution of the brand's central persona, failure of its vehicles to fulfil the subtleties of an expected Greyhound experience, poorly constructed ticketing methods and marginalised route allocation and so exploitation.

In short, a misdirected initial strategy created in late 2008 / early 2009 has been further undermined by unconvincing operational execution since.

The fact that the original 40 journeys per day on the London – South Coast run had been reduced to 8 in recent months, highlights that the vehicles were being re-appropriated to support other First Group services elsewhere.

An obvious final development was the loss of a dedicated management team as long ago as last year, the division now effectively in the hands of two FirstGroup bus depots.

Into Tomorrow -

But what of tomorrow? Could what remains of the Greyhound business unit, that is its few remaining assets, be provided with a better future via a fundamental review of the business and ultimately a turnaround of performance and fortunes?

Perhaps so, but highly unlikely to do so from inside FirstGroup, given its focus on re-strengthening its primary rail and road services, specifically the public embarrassment and consequential share price fall from loosing its preferred bidder status to on the West Coast rail line tender. That has given greater impetus for the likes of Virgin Group and others to try and further topple FirstGroup.

This then leaves the possibilities of

1. Discontinuation and absorb losses
2. Divestment via a trade-sale
3. Divestment to Private Equity

Of these three options, the third appears the most likely..simply because:

1. A gradual discontinuation has been underway, but in itself undermines the start-up efforts of the brand to date and damages its credibility. It also questions the business acumen of its original internal backers who supported the project, aswell as seen as absorbing sunk costs and so being effectively 'value-destructive' by share-holders.
2. A trade sale would of course give a fundamentally strong brand to direct competitors, an untenable situation. Conversely, any bidding competitor would be strategically hamstrung with no direct control of Greyhound US or Canada by which to synthesis and synergise operations, so offering little incentive to purchase.

3. A sale of the few remaining assets and UK brand rights to an empathetic, growth orientated, private equity house would be a positive outcome. It would allow FirstGroup to retain a minority stake, yet also offer a first-refusal re-purchase possibility at a future time after successful turnaround, or offer the potential for full exit at a much improved per share value.

A New Destination for Greyhound UK ? -

The ongoing deterioration of specific services (vehicles, drivers, routes and ticket availability) demonstrated that the division was being slowly wound down by FirstGroup. Press stories – such as the FT's on 27th September – confirming the wind-down process.
In perhaps a first sign of FirstGroup's lack of true commitment to Greyound UK, CEO Tim O'Toole said that it “was largely a re-branding exercise of existing services”.

Given the conjecture thus far, it may be viewed that the brand's UK future lies in the potential hands of the private equity industry. Itself presently in new growth mode seeking to attract a new intake of capital to be used for various UK national, European, American and EM directed funds.
Whichever fund takes an interest will have to already have a good understanding of the UK bus and coach market, with ideally past or present stakes in another well capitalised, well politically connected, and very probably wholly privately held, bus and coach firm. A firm, British or otherwise, which itself could offer the very necessary operational springboard.

Such a re-launch would require far deeper commitment than seen by FirstGroup thus far, and critically engage capable 'business drivers' who can actually see around the corner and far down the road.
Building a sensible, achievable, user-centric and exciting business model will the fund's prime expectation.

Whilst the expectations of any actual future customers of 'New Greyhound UK' will be to see the legend made properly tangible, enjoyable and a truly memorable experience.
That means 're-visioneering Greyhound UK' from top to bottom.

With a far greater melding of the Greyhound Spirit with the modern needs, wants and desires of youth, youthful and young at heart target client groups. That somehow means welding the physical iconographies of the American past – such as 'corrugated' polished aluminium (even if painted), the roof-top strips of orange marker lamps that theatrically underline the final destination – to the spiritual ideals of today and tomorrow – themselves arguably seen in socially spirited 'festival' culture.
The fact that the coach division already serves the Isle of Wight (renowned for its get-away festival events) along with island transport providers via with a single pass, provides one potential avenue for any New Greyhound UK.

Yet just as the Old Greyhound adopted airline practices in its pricing structures, so any new animal should look to the progressive efforts of participants in that sector to see what could be deployed.
When in actuality far from 'Route 66', the endless Idaho plains and anticipation of the blue Pacific Ocean, the very familiar British window-scape may need to be accompanied with far more theatricality inside the cabin.

This is something Richard Branson recognised when he considered expansion plans for Virgin Atlantic in the early 1990s, a potential avenue being the commercial rental of windowless aircraft, fuselages giving better crash protection, and internally sets of wall screens used to provide an altogether very different flying environment, with if required, the image of a porthole and sky outside beamed via an external camera.

Whilst it did not come to fruition it demonstrates the open-minded, creative thinking required when creating or re-creating a powerful travel brand.

An imaginary place made real where a whole raft of American and British cultural references from across the decades, today and tomorrow, could be juxtaposed and melded to create new attraction. Itself forming a fundamental part of a much needed refreshed UK commercial perspective which itself coalesces culture – service – industry.

Today, the commercial vehicle that is Greyhound UK could be said to be presently 'up on blocks'. However, in private equity hands it could be given four 'new legs' and settle into the 'starting blocks'. Once again set out to chase.

All the best from investment-auto-motives to whomever chooses to raise a new 'best of breed'.

Thursday, 4 October 2012

Macro Level Trends – Triangulation to Square the Economic Circle – Corporates as the Global Economic Cornerstone.

Present investor cautiousness inside the Eurozone and even North America is only to be expected today given the strong traction and impressive rallies across certain sectors, banking the most notable, on the back of Mario Draghi’s promise to undertake whatever actions are deemed necessary. The fervency has diminished last week as profit taking by those who rode the wave; with general conjecture that investors will ‘rotate’ their holdings away from ‘defensives’ toward ‘cyclicals’ – better news for recently stock battered car-makers.

Caution Abounds -

Adding to that sense of caution has been the fact that a kind of impasse still exists between Spain and the ECB before the EU court approved monies can be injected, all dependent upon Spain’s official request for aid, which could in itself re-generate capital market fears. So the Eurozone appears to be in yet another ‘push-me, pull-me’ hiatus.

Adding to the sense of gloom is the reiterated press coverage regards the 40% drop of the Chinese stock market over the last year, the accompanying concerns of a possible Sino-Japanese military clash over the East China Sea islands, and the resultant continued constraint of Chinese consumer and industrial goods demand. Obvious is the parallel impact upon Germany’s export economy ranging from premium cars to specialist equipment, seen in manufacturing indicators, so affecting its ability and willingness to “lead” (in Soros-speak) the Eurozone's additional liquidity programme.

[A radical Sino-German corroborated agreement to improve the Eurozone situation would certainly be a revival short-cut, but would also deny the very necessary deleveraging actions required by the ECB and IMF via ESM & OMT, and possibly herald EU stagflation].

Indication from PRC leaders that new national stimulus measures worth $35bn would be forthcoming, so affecting the global picture, helped raise oil and metals prices.

So, the general macro-economic picture then could be said to have seen darkened clouds, interspersed with bright spots; investor reaction and prime stock markets, as ever reacting to the news-stream and indeed itself in a self-fulfilling manner.

The Oft Described Present Paradigm -

Yet, in what has become a very correlated investment world – confounding the historical orthodoxy of inverse asset class relationships – clear investment signals must be heeded, especially regards equities. An all-important true big picture perspective should to a far greater degree include much more ‘bottom-up’ recognition, interpretation and influence.

More than ever investors seek both a level of medium security and medium return. Yet western government bonds have massively diverged so as to be either a) over-subscribed and safe but with negative real interest yield, versus b) overtly volatile relative to Eurozone 'real-politik'. Commodities have suffered as part of the worldwide downturn so seeing heavy reduction in CapEx and sector restructuring. Property has likewise diverged as money has been directed out of EU periphery and various EM regions, so as to create a new and probably sustainable 'hyper-pricing' in select inner-city districts, and new hiked price-floors in the most pleasant suburbs. Equities are still trading on macro, fiscal-policy induced sentiment rather than in many cases underlying fundamentals. Noted in automotive have been the overt price swings - even amongst some of the best positioned (BMW & Daimler) - which are inconsistent with the company revenues : perhaps the most basic but prime indicator at present Reduced earnings guidance and goodwill write-downs seemingly having disproportionate effect on already historically depressed price/earning ratios. A beneficial era for those seeking to trade on interspersed peaks and troughs, but adding little to much needed confidence building throughout the West.

The Exponential Return of Confidence Invariably Slows Animal Spirits -

The present zig-zag effect along what appears a relatively narrow floor to ceiling band has been described by academics as the tail-end of the 'exponential effect'. The steep to shallow shaped curve created on a stock index after the previous mass exodus which tracks investors' initial 'rush for value' purchasing behaviour, so providing the massive uplift seen during the 2008 financial crisis, and to a lesser extent more recently over the summer as concerns about sovereign debt abated. The propensity for investors to snap-up what are viewed as bargain stock prices undoubtedly wanes as time passes. More participants enter the frey, and the near-term 'under-valuation gap' recedes. So the 'exponential curve', with its flattening tail, is the natural outcome, seen many times before and hardly a revelation.

The question is what happens next?

A collapse of confidence and so mass exit? Ongoing zig-zagging within a bounded range? Or the beginning of a new growth era?

Undoubtedly the short and mid term speculative investors will seek to monetise their gains, and seek new opportunities in other under-values capital markets – the MSCI EM index highlighting rebound possibilities after the man-made and natural disaster woes of Japan and Thailand, a settling of the Arab Spring, South Africa's diffused tensions, Brazil's internal rebound and China's present predicaments.

So western buoyancy, having seen a good run, may be for a time deflated.

But just as normal 'corrections' (ie pause for investor thought) is seen in typical stock growth spikes, so the exponential curve's 'flat-tail' premises time for renewed macro and micro consideration. This does not necessarily mean a partial collapse of confidence, but likely a new growth curve based upon firmer fundamentals rather than speculative re-bound stock buying.

Here, investment-auto-motives believes that any sharp retraction of confidence here and now would only contravene the logic of the broader picture, a picture that sees good reasons for mid and long-term confidence, created by :

a) China's willingness to top-up previous QE measures (presently $35bn)

b) Spain's assertion of continued austerity action to quell fears, 50% pass rate banking sector stress tests, official aid request.

c) France's shift toward 'socialism bounded within global reality'

d) Germany's low unemployment rates, increased pay awards assisting domestic consumption and decision to constrain high frequency trading so stabilise capitalise markets volatility.

e) An improving EU outlook, possibly averting extensive use of ESFS-ESFM / OMT

f) UK's much re-strengthened banking sector, improved growth prospects, still sound credit rating & room for additional QE moves as required.

g) US's ongoing bond-buying ($40bn per month) and retained 0% rate until 2015 with regulated responsible credit easing so assisting consumer spending across SMEs and blue-chip firms, highlights capital markets support..

If western markets are indeed rational, these relatively few but powerful macro indicators point to a more upbeat picture than that being presently painted.

A picture which overly concentrates upon the reduced Q3 & Q4 earnings guidance of many Euro-centric and multi-national companies, perhaps without recognition of the ongoing productivity balancing now inherent as part of new era operations. As witnessed by Volvo Truck, far leaner and more flexible operational stances have been demanded, especially in the areas of labour and supplier relations, which will allow for better commercial rebound than was the case in 2008 and 2010/11.

The Shape of Things Today -

This slow and admittedly painful commercial re-invigoration process, necessary as part of the broader 'structural turnaround' requirement across much of the west has and continues to be the central over-arching theme. Whilst the two fiscal crises brought about undoubted hardships, any contrived continuance of the former period of credit-fuelled 'good living' for governments, companies and consumers, would have simply widened an increasingly untenable cost-base gap between the notionally advanced and EM regions. By international standards, the EU was in danger of operating with increasing over-valuation of its competitive abilities, and the economic region in danger of having to become increasingly isolated to maintain what was essentially cost-driven currency inflation. Thus, many advanced nations, though especially the EU periphery, would have become wholly disconnected from the global stage, creating very real conditions of far greater public distress and possibilities for far right or far left political outcomes.

Instead, the west continues its hard but required 'economic diet', this period setting the tone for re-assessment of not just the usual econometrics of monetary and fiscal policies, but given the size of macro re-shaping required, questions about the basic very socio-economic template of the west. As EM nations are able to replay the west's 20th century industrialisation & commercialisation play-book, so the very high costs of 'saving' America and Europe – undertaken via 'QE' – must deliver a desired strategic social outcomes across (developed) skills and (higher value) employment, on a pan regional basis, so that America and Europe may seek to retain their positions as value-creators, in the face of what have become very capable EM nations.

That EM capability has obviously been derived from industrial and commercial learning absorbed directly or indirectly from the Triad regions (North America, Europe and Japan) and latterly S.Korea, Directly via multi-national companies seeking to expand their global footprints and gain promising new markets (BRICS especially so), and indirectly from a new generation of globe-trotting, constantly technologically & culturally absorbing, nationals. The obvious intent to replicate what is learned from the advanced nations so as to replay.

[NB It could be argued that much of that learning has already taken place throughout the last decade, so putting EM regions on a far more advantageous footing versus US-Euro-Japan-Korea].

The true beneficiary is of course the multi-national corporation, whether western in origin or increasingly so, with much improved financial and cultural 'fire-power', BRIC & CIVETS 'new multi-nationals'.

Many within this latter group will be unknown to average westerner, and often have limited insight amongst western investor groups, broadly followed but at a shallow level by analysts. Yet they have ever growing influence. That lack of general knowledge and deeper insight exists almost by default, as besides being beyond 'western geographies' such companies tend to populate the lower levels of the industrial pyramid. Greater exposure to the lower visibility 'primary' extraction/agricultural activities on a worldwide operating basis, medium exposure to 'secondary' processing/manufacturing activities typically on a LatAm, CIS or Asian regional basis, and though some inhabit the tertiary service sectors (ie telecoms) and have become dominant 'market saturation' players, do so typically on a regional intra-national basis (but have possibly the greatest world expansion ambitions given business model structure and access to retained and geared liquidity).

Though they may be listed on international bourses, and ranging in size from conglomerate to sector-contained, names like CNOOC Oil, BreadTalk and America Movil are still 'off the radar' and so foreign to westerners.

[NB This itself the natural consequence of historic western capitalism].

The Need for Western Advance -

There is increasingly realisation that much of the west is becoming 'left behind' as the gaze of heavyweight investor groups continues to look eastwards and southwards, calculating the investment promise from western multi-nationals' involvement in EM states, and vice versa, the ability of 'emerging multi-nationals' to:

1. improve performance in domestic markets as general population wealth grows

2. collect “unpolished” western assets for business turnaround (typically in premium && luxury domains, eg TATA - JLR)

3. expound the possibility to align domestic EM product & service offerings to the increasingly cost-driven needs of the 'austerity west'.

This much altered contextual backdrop, a reversal of the historical norm, then sets very real challenge for western national industrial policy setting, the strategy & operations of domestically orientated SMEs and blue-chips, and the overall population's skills-base those notionally 'advanced' regions.

'Advanced' a misnomer for notionally 'post-industrial' countries, which today after the credit-boom, are more than ever reliant upon a selection of medium-value and high-value industries for economic health, but must also contend with large sections of the 16 - 65 population who do not have the requisite formally taught or self-educated skills-set themselves to become proactive in those buoyant hi-tech, financial and cultural sectors which are in global demand, but are not geographically evenly spread over a nation.

Whilst certain level of unskilled and semi-skilled is invariably required to service basic service and industrial needs, and a return of 'off-shoring' is occurring thanks to rising EM wage levels, there appears to be very real and relatively urgent need for transformation of western labour-force capabilities. This very much the case because the international capabilities and competition gap within the private sector that has formed over preceding years (1995-2008) – in favour of the much improved EMs – was greatly masked by the west's maintained GDP and GNP growth levels, themselves under-pinned thanks to record (unsustainable, credit-fuelled) government spending to maintain national growth.

The necessary on-going contraction of central and local government funding and so downsizing of governmental responsibility – a central theme of the 'new normal' – means that any repetition of previous government funded job creation schemes in old industrial, economically depressed, areas such as is wholly untenable.

That unfortunate economic void can only be filled by the private sector and public-private partnership projects.

The former has a responsibility to invest wisely for the long-term, undertake ever greater due diligence and likely rebuff only temporary investment incentives. The latter is under new pressure to attract private participation, especially in infrastructure, when it has been noted that commerce dislikes the bounding regulations and terms that accompanying PPP's/PFI's; especially so at a time when governments have less financial and so philosophical and thus operational flexibility, and is more likely to enforce terms to reduce its own exposure.

This then indicates that western nations' future economic fortunes increasingly rely upon the private sector, a sector whose own commercial landscape has altered massively over the last 30 years, the last 5 years of which have been a major watershed.

As a consequence of the very personality of capitalism, seeking to grown general wealth and have such monies re-cycled into the capital markets via various avenues, the strength and role of the private industry – specifically the corporation – has grown and grown. That process, with its pros and cons, has seen organic decay of middle and small sized enterprise, unless otherwise supported as in the German mittelstand, as the power of economies of scale and access to capital for market expansion decides not only the fate of stock-holders, bond-holders and employees, but of local economies; and now in a few select cases, as with Apple Inc, even impact the health indicators of national economies.

The Shape of Things to Come -

However, the 21st century's rise of corporatisation has a distinctly different flavour to that of the 18th & 19th century versions, even arguably that of the 20th century model. Increasingly corporations, with the shop-widow of their prime and sub brands have become increasingly socio-centric, as the products and services of specific brands become ever more entwined into people's lives, consciousness and sub-consciousness; and so an increasing tribal arrangement ensues, promoted by the “socio-corporatisation” effect of web-based presentation and social networking

So whilst product and brand loyalty has always been an explicit part of consumerisation, best seen by the tribal rivalries of Chevy vs Ford pick-up truck owners in the American mid-west, or BMW vs Audi owners in affluent cities and suburbs, today because of the ability for brands to become present “24/7” through personal communications devices, the tribalisation effect of various sectors with especially close relations to its users in reality and hyper-reality (ie meshed reality) means that the corporate ability to mould people's self-identities at an all time high.

Through a wide spectrum of direct 'brokering' personal enablement and indirect cultural 'lifestyle' association, brands such as Apple Inc and RedBull have become far more powerful and socially entwined than product and service providers of the past, even compared to such socially impactful commercial leaps as gas-provision, electricity provision, previous white and browns goods provision, personal transport provision Utility service branding only really coming into effect in recent times when service bundling was introduced, but then only to a small degree as consumers price-hopped.

The commercial beauty of creating socially powerful brands is that – as seen with the model series of improved iPhones' – the elasticity of conventionally rational and so flexible pricing structures is overtaken by the ability to pre-set product life-cycle pricing structures, to control the supply-side provision to constantly be under demand-side levels, so maintaining sector and markets busting profit margins.

There is now arguably more allegiance to socially powerful brands than to the 'old' relationships with socio-groupings such as national identity, community identity, familial identity etc...the breakdown of the “grande narrative” to re-quote post-modernist commentators. Download of an iPhone application at a moment of dire need may create closer personal relationships between (wo)man and machine, and so ultimately more emotional support and so connectivity, than that of fair-weather friends or agenda driven associates.

Each time a desperate informational or physical need is met by a product or service there is in the consumer a reactionary joy akin to a worrisome broken-down motorist stood on a cold, dark road, then seeing the lights of the recovery service truck. At a basic, powerful level, a satisfied need equals advantage and happiness, an unsatisfied need equals disadvantage and unhappiness. The ability to produce the former should be a prime modus operandi for all consumer facing companies.

This possibly an unrecognised process of societal transformation which has uncomfortable overtones.

However, the upside – if it may be called such - is that new social groupings have and are being formed, centred around a 'like-me' perspective; that identity being of course brand(s) centric, fashion centric, and massively influenced of course by cultural / media promotion which merges the once independent interests of the teenager, twenty-something, thirty-something, with that of a mirrored corporate cultural and product offering.

During a period when society as was across western Europe is undoubtedly fragmented with strains upon many inter-relationships, when the 'grande narratives' of family, state and religion fail to unify, the aforementioned metaphor lays the contextual foundations for a world of far greater corporate orientated personal reliance. With it, a sense that corporations will have to take on greater corporate social responsibility, themselves through affiliated agencies, to create a form of responsible capitalism.

Melded Ideologies & Expanded Corporatisation -

The late 19th and 20th centuries saw ructions of socio-economic and thus political ideologies, the forces essentially creating triangularity of ideological choice between Conservatism, Liberalism/Socialism and Communism, the democratic model that emerged reflecting each to varying degrees, but obviously ultimately after 1945 seeing a split between the mixed market economy of democratic Western Europe and a centrally planned CCCP led Eastern Europe.

The 1989 collapse of the Communist ideal demonstrated the power of western democratic capitalism as the most effective force for social progress, the edicts of Adam Smith et al highlighting how it law-bound competition better serves the human instinct for progress and betterment. But of course the 2008 financial crisis – like its 1929 predecessor - with subsequent collapse of living standards for millions ((if not billions) across western Europe, has naturally called into question the disadvantages of the capitalist least in its most voracious form. The 'equal and opposite force' has been a call to far greater socialist, and in some quarters, communist values.

In reaction to this public call, political representation of the left (as in France) and right (as in UK) has had to steer a new course of centralism (as seen in Germany for many years) to both quell public anger and to also critically avoid the rise of true national socio-fascism or indeed a revived communism. When President Hollande backs necessary budget cuts and understands the long-term need for raised short-term unemployment, and Prime Minister Cameron talks of a 'Big Society' it is evident that there is no alternative to new centralist ideals and actions.

However, given the fact that western governments are increasingly financially strained through those necessary austerity measures, and the fact that western consumers are themselves deleveraging it is obvious to investment-auto-motives that the new economic power and thus social power lies in the hands of large corporations...and thus the socio-economic remedy of 'supply-side' economics, ideally assisted by a 'Reaganomic' political regime.

The trend towards the 'corporatisation' of western society has in effect been under-way for some time, with commerce initially seeing to increasingly immerse itself into cultural phenomena through social event sponsorship, and its decision to become far more proactive in humanitarian ideals, most notably through corporate philanthropy.

As such, in an overtly simplistic 'readable' manner, investment-auto-motives has named the process: “Triangulation to Square the Economic Circle”.

The three primary aspects being:

1) Historical economic ideologies of 'left' and 'right' largely debunked, over-taken by socio-economic commercial and policy pragmatism

2) Recognition of a much reduced role of the state, its sprawling divisions, agencies and quangoes, given the untenable cost burden to western society

3) Rise of principles based 'corporatisation', with a closer coupling of banking and industry to create new value from 'under-managed' firms and new firms; and greater autonomy for companies which demonstrate the three pillars of self-sufficiency, the profit motive and 'extended' CSR (viewed in steady long-term climb of share price)

The accompanying diagram – viewed top-right corner (for the length of this web-log) – simplistically demonstrates how this shift of traditional macro-economic perspectives may occur.

The 'Triangulation Effect' within politics seeks to demonstrate that the renowned tri-partite model bounded by the 3 primary ideologues of: Conservatism/Republicanism (pro-Hayak) vs Liberalism/Socialism (pro-Keynes) vs Communism (pro-Marx), has been effectively forever 'condensed' by the events of 2008. Those extreme points of view replaced by a necessarily narrower, less complex 'middle road' system which requires both greater 'input vs output' (ie value creation) accountability for all productive activities.

The 'Circularity Effect', which displays the relationships of the the people, government and commerce, highlights a near-term re-centring and mid-term rightward shift of economic bias, as western government states shrink – so as to only focus resources on the truly needy (elderly and disabled) – and a new powerful and greater economic dialogue grows directly between the corporate world (as a supply-side economic actor) and the consumer world (as a demand-side economic actor).

This then leads to the 'Squaring' (of that Circle) by viewing the re-vitalised closer relationships between a re-invigorated, far healthier, retail and investment banking system (the present ring-fencing expected to diminish as financing needs arise) and newly buoyant industry and commerce; itself growing closer still to the consumer across all levels from utility to luxury purchases (via the previous explanation of 'branded tribalism').

[NB the fact that Facebook is now 'experimenting' with ways to monetise its users personal data demonstrates just one of the methods being used to grow the 'brand tribes' model].

The Inevitable Case for Equities -

By historical norms, many corporate equities are indeed, “down in the dumps” even after the mighty rises from previous disfavour, seen across 2009-11, consumer cyclicals perhaps especially so, and perhaps best represented by under-appreciation of the auto-sector, rebounding markedly in the US as it has, and still affecting even the best positioned European players like Volkswagen, presently trading on a P/E of only 3.45.

Unlike certain government notes, high-yield corporate bonds though presently low on defaults and much sought in recent times are still exposed to the much mentioned 2015 financing wall. Thus mid-yield corporate bonds with a good risk-reward ratio have been massively oversubscribed.

So there is a very strong case to be made that the price of buying equity stakes in what are both continually strong and value generative companies as well as cyclically affected firms – various auto players reflecting both - has never been so attractive.

Constant and compelling news-feed regards the ever seismically shifting macro has arguably over-shadowed the level of required attention towards the micro of balance sheets, profit & loss statements and cash-books. And critically where done so regards the positions of more fragile entities – such as previously described Peugeot SA – such focus has distracted from the true and immediate value of the strong: possibly across all industrial and commercial sectors.

Cash is certainly ‘out there’ – the liquidity holdings of the more readily visible such as: Morgan Stanley, Goldman Sachs, Swiss Life Holding, Credit Agricole, Credit Suisse, Standard Life, Legal & General and even Italy’s ‘Generali’ ably demonstrate the fact. Even under the necessary regulatory intervention that separates retail & investment divisions, investment-auto-motives believes that the banking sector is fundamentally stronger than is generally believed, and will get stronger yet as present cash cushions built-up from central bank funds, external clients and incoming stock investors are added to by growing retail holdings. The internal leverage levels will be much reduced from the ridiculous levels seen pre-crisis, but cash levels will be at record levels and will need to be directed to grow national and western economies.

Though it may appear presently distasteful, to do so, many banks will need to deploy such monies via proprietary trading over the mid-term – even if partially selling-off certain geographic units recently – with also a new push towards fixed-income agreements with secure, wealthy parties (ie the “global elite”) so that they may undertake share trading, M&A and devise share accrual strategies that mesh both internal and external client interests.

Yet there is obviously a vitally important need to ensure attractive purchases, which means an unavoidable process of liquidity drip-feeding into what are and will be the most fit and able companies; many of which – arguably like PSA – are having to undergo a slimming process to regain competitiveness.

Add-in the sovereign debt turmoil of Europe, the growth volatility of the US, the structural re-orientation of China, Brazil and to a lesser extent India, and the reason for that slow drip-feed of cautious capital into good purchase opportunities, as and when they appear, becomes self-evident.

Conclusion -

The consequences of what has been unprecedented global economic disruption are still being witnessed, so the slow and steady approach by what is now a much (forced) changed financial community is unavoidable. Real world conditions altered the typical 'animal spirits' behaviour of once over-exuberant financiers, far, far more so than public humiliation or regulatory precedence.

But, much like the required 'Triangulation to Square the Economic Circle' it would be churlish – indeed foolish – to maintain an unaltered philosophical financial stance as real-world economic and financing conditions gradually improve in time.

Ultimately, if any person that lives in the western world is inevitably a de facto beneficiary of capitalism; whether of Soros or Gates billionaire ilk, a captain of industry, middle-manager, member of staff, high or low ranking bureaucrat, high or low spending consumer, or indeed most obviously but conversely a newbie financier or old aged pensioner.

But more obvious is the irrefutable fact that more and more, many or possible all westerners will rely upon pension schemes that directly draw income from investments in companies that are emerging market orientated and thus draw of the talents and productiveness of emerging market peoples and workers.

Thus, leading to a condition wherein the people's of western society of whatever ideological persuasion have become both the consumers of global goods and unwittingly become the beneficiaries (and so 'capitalist bosses') of emergent market workers.

Fact is that that western governments will need to follow the Scandinavian and EM lead by creating new and stronger sovereign wealth funds (SWF's) to alleviate the future stresses upon internal and external budgets, so that the PIIGS crisis – and the suffering of populations – may rarely happen again. Thus even governments well-being will increasingly need to buy into global capitalism via worldwide, regional and national firms.

Like it or not, no matter what your social standing “we are all capitalists now”, and even more so into the future.

That is not something to be confused about, instead we should be 'Confucian' about how such generated wealth can be best deployed. And to always remember that the most important things in life should never be ascribed a monetary valuation.