In Q1 of this year, a painful five years on, the major western stock market indices at long last crept towards their October 2007 highs, America's S&P now beyond.
New Futurism -
This an important watershed moment
regards not only investor sentiment and outlook, but also renewed
faith amongst the much disillusioned America and European populace;
who saw the foundation stones of the much hyped ‘new norm’ being
laid, so promising a better (and closer) tomorrow.
The new highs of the S&P, FTSE, DAX
and CAC, indicate the critical transition point between heavily
contrasting old and new eras.
The former built on the premis of a
triple aspect demand-led economy that saw credit-fuelled exuberant
spending from governments, households and corporates. That in stark
juxtaposition against a present essentially reliant upon a single
aspect: the corporate-orientated “supply-led” economic
regeneration.
In the Hands of Corporations -
Centre-stage are the blue-chip,
high-cap commercial players, sitting upon sizeable liquidity cushions
gained from a mixture of retained earnings and access to QE measures
and (for investment grade entities at least) low borrowing rates. Yet
even in what appears this perfect-storm period for those corporate
giants, holding the levers to growth, they must now balance a range
of opposing forces which constitute the ingredients of the
supply-side mix.
Theory and practice expectantly sees a
shift from operational focus upon ‘tick-over’ maintenance budgets
toward greater capital expenditure, which obviously improves
productivity when well timed. Yet such heavy fixed costs in what is
still a fragile environment must invariably be off-set by truly
cost-efficient and critically value-adding labour; at all levels of
the organisation. The scheduling of available funds for such fixed
and variable cost endeavours obviously weighed against the macro and
micro picture, but given today's fiscal sensitivity more than ever
correlated a firm’s confirmed and prospective order book.
M&A Temptations -
Yet for many well positioned firms the
temptation of avoiding the disadvantages of organic growth –
primarily management time and cost - the idea of a quick-fix from
‘bolt-on’ growth achieved through M&A can be attractive.
Especially so at this time when funded either from cash reserves, or
from the presently compliant pool of credit sources.
M&A typically provides extended
horizontal business reach through complementary product segments
and/or additional regional markets, or can extended vertical reach up
or down the value chain. And indeed possibly provide for ‘diagonal’
reach giving the best of both worlds, though usually as part of a
major restructuring.
However, whilst typically assuring the
operations of an enlarged group in the short-term, and that of a
re-shaped group in the medium-term, that newly captured productivity
gains, associated value-added and wealth generation will naturally be
recycled internally to the company and of course distributed to
shareholders.
When performed well, M&A extracts
additional value from the synergies of a combined operations set ,
and typically sees a shrinkage of ‘back office’ functions as
administration is centralised or contracted-out externally (BPO).
These savings providing for expansion of outward-facing operations in
sales and marketing and core operations of production and/or service
provision. Therefore, whilst the firm changes shape, shedding
overhead and expanding value-creation, often overall personnel
numbers may ultimately remain little changed from previously.
Of course, the company is operating
more efficiently, and in doing so able to grow short and medium term
income, EBIT and net earnings. So operates well within its own
business sphere, and offers promise to investors.
Downsides Appear -
But from the macro-economic perspective
(specifically regards the central issue of GDP growth), to the
chagrin of governments, it (and its sector counterparts) are still
effectively treading water. The firm has yet to physically expand
enough so as to take on new labour (execs, management and staff), all
required to absorb meaningful portions of excess labour capacity.
Those newly employed then able to become more economically proactive
individuals and thereby able add to a nation’s economic growth
story.
Whilst we are undoubtedly in the mid
stages of western economic transition, the very process is complex
and verses a normative historic re-bound perspective has proven
stilted. This because the corporate and banking worlds are having to
wade through far greater “after-shock debris” at micro and macro
levels when seeking-out sector-specific M&A target opportunities
; whilst other finance-backed players such as holding companies,
'buy-out 'shells and hedge-funds seek – at the higher economic
altitude - an optimal re-arrangement of the good, the bad and the
ugly firms across the western world.
'Public Good' Growth Paths -
It is a well entrenched theme that
those nations and global corporates with interests in the
“post-industrial west” now seek to rediscover their manufacturing
pasts and potency through eco inspired technology and methods,
similarly seeking to strengthen their service sectors via the
affiliated ideology of “sustainability”.
The mantras of eco-tech and
sustainability complemented by the application of intelligently
efficient networked systems. The whole (a post-post-modern “grand
narrative”) notionally directed to humanistic ends, reducing time
and cost waste. Simultaneously reducing what economists term
'externalities', since the cost of dealing with issues that affect
the 'public good' can no longer be born from ever more limited
governmental resources.
This simplistic description today means
that an ever greater burden for economic growth and the public good
is placed upon the shoulders of corporations...largely western
corporations.
A Truly New Era -
The story of global industrial
development obviously had its 18th and 19th
century roots in Western and Eastern Europe, these innovations
deployed across British and French colonies of the time, and
redeployed with productive and consumptive economies of scale in
North America during the 20th century. That competitive
advantage in turn exercised giving the USA economic reach into Japan
and S.Korea. Thereafter, the mixed-market advantages of Europe
overtook the ailing Soviet system, with new the EU entrants able to
effectively provide new demand and new supply participants. The 21st
century has seen such productivity orientated economic expansionism
re-played yet again with formerly the 'BRICs', now the 'CIVETS', with
Mexico becoming ever more integrated into the NAFTA free-trade pact.
Thus the redeployment of 20th
century technology across the world has been the maxim to date.
Of course when such 'old tech'
previously created for smaller populaces invariably becomes adopted
by an ever increasing number of companies and consumers, the
associated 'externality' problems becomes increasingly apparent.
Newer innovations play a part in helping to circumnavigate some
problems.
An example being internet based 'apps'
based mobile telephony giving even those in remote under-developed
areas direct access to personal banking, so reducing their reliance
upon what are often heavily polluting aged public transport vehicles.
Yet for most people in notionally
advanced regions, for those in notional EM regions and those in so
called under-developed regions, the dream of personal travel has long
been an actuality, engrained as a basic human expectation.
Thus as those notional 'democratic
freedoms' have emerged so the challenges of containing the
'externalities' created by billions of people have equally emerged.
And though the internet and soft-tech solutions can undoubtedly
assist (as seen) it is also recognised that a major and ongoing
innovation overhaul is required if the peoples of the world are to
enjoy a similar living standards.
Re-Engineering Western Capabilities for
the Global Good -
It is obvious across various
disciplines that Europe and North America still retains portions of
technical advancement and advantage with a plethora of world-leading
companies offering research, development, specialist and
umbrella-span technologists and as critical strategically attuned
leadership.
View the S&P, FTSE, DAX and CAC and
those company names and associated brands are self-evident, from
AstraZeneca to GSK to Merck to Pfizer, from BAE to Boeing to EADS to
GE to Rolls-Royce to Safran, from GKN to Siemens to Bombardier.
North America, though perhaps more
socially fragmented today still operates as a politically and
financially unified entity, presently with positive indicators
regards home-market re-growth and ASEAN orientated free-trade
aspirations – such regeneration sought to heal both the domestic
social fractures and try and retain its world-power status.
Importantly, the central issue of the
supply-side driven economic model is being seen to take form in the
US with a cumulative effect that connects its domestic shale gas and
domestic deep water drilling energy policy to create affordable power
to energise its light and heavy industries.
Yet Europe, today whilst far from
broken even with negative conjecture, is still obviously politically
and socially fractured, so affording the idea that a more centralised
financial system will better support the ideals of the Euro, a
're-Europeanisation' of the region and so assist a stable future for
new EU members.
Ironically, whilst the US is able to
domestically merge its old-tech and new-tech industries (exemplified
by Detroit conjoining matured pressed-steel manufacturing with
evermore innovative consumer electronics), for the most part the
wider-world may eventually need to rely upon European, Japanese (and
to a lesser extent US) commercial know-how to bring forth advanced
'leap-frog' technical solutions – from lightweight hybrid cars to
public service and home-help robots – and their associated
manufacturing systems.
The USA will no doubt seek to
commercialise a new raft of militarily developed solutions,
successors to the likes of teflon materials of the 1960s space
programmes to unmanned flying drones of the last decade. And seek to
strengthen much of its web-related activities , building on the
foundation-stones of Google, Facebook etc; if indeed able to given
international privacy issues.
Here and now, very simplistically, it
seems that Europe leads in advanced materials and manufacturing
science, whilst the US leads in advanced cyber-space development; the
former obviously providing the basis for people's future physical
needs, the latter far more subtly shaping people's perceptions and
behaviour today/tomorrow.
Thus it will be both 'Euro-hardware'
and 'American-software' that promise to shape the world. But of
course, historic western dominance is slowly shifting.
Prime EM Players “Go Long” on Eco
Advantage -
The basis of European technical
leadership (along with Japan) was well recognised by India's TATA
conglomerate when TATA Motors bought Jaguar Land Rover, for its
lightweight engineering skills as much as its legendary nameplates.
Similarly China's Geely when it acquired Volvo Cars for its skill set
in world-class safety engineering, and the purchase of SAAB's assets
by Singapore's National Modern Energy Holdings, as it seeks to either
create a reborn eco-friendly SAAB via Chinese alliances or find
timely exit s from its ex-SAAB divisions .
Naturally then, as perhaps initially
prompted by Lenovo's purchase of the IBM laptop division, those EM
based companies with sizeable resources invariably seek-out
advantageous technological solutions for their own national, regional
and even global needs.
Though a Closer Horizon for Most -
Thus far such examples which marry
present/future scale with accordant technology solutions appear to
have been limited to these few obvious high profile deals.
As is the usual case, most EM firms
hunt for acquisitions that immediately fit everyday operational
business rationale, evolution rather than revolution, or indeed a far
horizon 'bolt-on' by which to possible steer the company. Most EM
firms, even the majority of large corporations, will be focused on
the near and mid-term business template as opposed to being primary
catalysts of the national economic agenda.
In the past, typically EM countries
with prime activities in 'low-order' activities have firstly sought
to strengthen their international presence so as to gain economies of
scale, access new markets and improve margins: as seen with
ArcelorMittal in steel production and various mining and oil sector
expansion efforts. Latterly, to serve the national and corporate
agenda such endeavours have been balanced with 'mid-order' at lower
cost service efforts, as seen by the previous emergence of Asian call
centres, whilst simultaneously efforts made to offer 'high-order'
services from highly educated workforces, such as TATA Consulting in
civil engineering and IT.
History's Influence -
Given the fact that for much of the
latter half of the 20th century EM countries were
effectively economically forced to retain extended use of licensed
1950s-1980s technologies - still evident in light 3-wheeler
'tuk-tuks', medium trucks and vans, though less so now with passenger
cars – it is hardly surprising that the skills base of EM countries
has been so slow to broadly grow, even with propelling project
efforts such as Nano.
The Knowledge Gap -
Though EM nations have been replicating
western solutions and processes to form ever higher value commercial
services and products, and the pace of progress impressive, it still
appears that a distinct knowledge-gap still exists.
That gap very much dependent upon the
philosophy of the specific national agenda. Whether to protect and
build a domestic industry, gaining skills as and when feasible, and
invariably takes decades; or to attract FDI (foreign direct
investment) so as to modernise far more quickly but see portions of
new national wealth creation repatriated to foreign firms.
This well illustrated by the
auto-sector development paths of India vs Brazil.
India's wish to protect the market
share of its indigenous manufacturers (TATA, Mahindra) and its
previous special relationship with Japan (Maruti-Suzuki, Hero Honda)
means that knowledge and technology transfers have limited. The Ultra
Low Cost Car idea – forged by Nano – was supposed to have opened
the doors to major VMs seeking to create such small cars via Indian
alliances. But initial collaboration deals publicising imminent new R
and D facilities flailed. Instead those 'open doors' (eg
Mahindra-Renault/Dacia and TATA-FIAT) invariably created to attract
limited series CKD manufacturing deals from which the host nation
could effectively extract modern vehicle design and manufacturing
intelligence (ie Dacia Logan and FIAT Linea).
Indeed, the 'knowledge-gap' seen by
TATA Motor's recourse to contracting Italian engineering skills when
developing the concept and development work of a supposedly
“home-grown” steel bodied, low parts count, Nano model. The
'Heath Robinson' appearance of Nano's initial prototype / packaging
buck, though with its own cost-learning merit, seemed to highlight
that knowledge-gap.
[NB Nano has been decried as a failure
since it has not met its targeted launch and early stage volume
forecasts, but the car seems certain to remain a core product of
TATA's line-up, and could eventually attain its 1 Lakh as the
company balances eventual amortised enabled price reduction relative
to slowly increasing wealth amongst the motorcycling masses].
Hence, India's historical background as
a national specialist in the licensing and national adoption of
western manufacture – from textiles to railway rolling-stock to
cars – means that whilst it has become very proficient at
'recycling' and 'life-extending' old technologies well suited to its
domestic low cost needs, it would as a result always be a technology
follower as opposed to leader. Hence would never allow India to
become a truly powerful global leader. With this well understood at
the turn of the 21st century, and with much improved
corporate cash positions thanks to the Indian IT revolution,
initiative were undertaken to reach the 'distant horizon'. Moreover,
it was understood that such learning could not be extracted from
short term foreign alliances, whilst long-term alliances demand a
give-away of domestic market share. Hence the decision to fully
purchase attractive entities such as JLR.
[NB investment-auto-motives believes
that TATA Motors / TATA Group will seek to similarly bolster the core
competences of its Truck / Bus and Defence Vehicle divisions by
acquiring world-class western firms].
In contrast has been the story of
Brazil's auto-sector.
Whilst Brazil has periodically enjoyed
pseudo-national vehicles (adaptations of other vehicles) it has never
had a truly indigenous large-scale auto industry. Since the 1920s
Ford, GM and Chrysler sought market domination, but post WW2, it was
the European corporations that won favour, initially VW and latterly
FIAT. From the early 1990s to date, initially as an 'over-spill'
market, many companies have become present, latterly the Japanese,
S.Koreans and now Chinese.
As such, with the need to grow GDP and
without the need to protect a self-created domestic industry, Brazil
has had a true open door policy to automotive FDI.
Thanks largely to the export of
commodity goods underpinning an impressive economic success story
over the last 20 years, public spending programmes and private
consumption created massive demand for construction equipment,
agricultural equipment, HGV, MGV and LGV trucks, buses and passenger
cars.
To satisfy this multi-aspect
transportation need the administrators in Brazilia welcomed most if
not all foreign interests, the well entrenched and newcomers. It
appears to have learned what could be construed as the past mistakes
of other countries (ie India) by not electing to create a large
domestic auto-industry from scratch using bought-in old generation
technology. Instead, it seeks to intrinsically learn by both keeping
pace and mimicking the capabilities of its broad, imported foreign
skills-base, from which the local population can professionally learn
both directly as an employee and indirectly via industry-academia
relationships.
That skills base seen to be grown with
the advent of FIAT's dedicated design and engineering centre in Belo
Horionte (the only one outside of Italy prior to acquiring Chrysler),
producing the effectively 'home-grown' Nouvo Uno.
First signs of this approach come from
the creation of the Brazilian motorcycle firm 'Brasil and Movomento'
in 2000, with apparent intent to deploy where possible best practice
learned from foreign makers, at lower cost to suit the national
marketplace.
Also have been commercial developments
form the multi-mix vehicle maker Agrale, It started with the licensed
manufacture tractors, but latterly has sought to develop (like other
EM countries) its own commercial and specialist vehicle ranges. This
with large trucks and specialist (4x4, 4x2) utility vehicles (utility
spanning military, emergency services and SVO build needs). Both are
understandably styled with heavy aesthetic connotations of class
leading vehicles – Euro-Trucks and for Utility a merged formula of
Hummer front aspect, Jeep rear aspect and Land-Rover side aspect;
typical of any newcomers engineering stance. However whilst seemingly
capable, the lack off-road poise (eg axle articulation / weight
distribution etc) demonstrates an absence of engineering integrity
compared to more expensive western products, hence a necessary lower
manufacturing cost and price point of Agrale (ie Brazilian) vehicles
to service Brazilian, Latin region and other EM nations.
However, as seen with Indian 4x4s (TATA
and Mahindra) dedication to decades long generational vehicle
improvement does pay dividends in home grown skills and maintained
and improved market share, even if ultimately still removed from
world-class vehicle performance benchmarks.
Hence Brazil is then seeking to
primarily extract core competence knowledge from western auto-makers,
whilst also creating its own extended learning path in low volume but
higher value specialist products.
India and Brazil then demonstrate two
very different auto-tech growth stories, and the lessons learned is
that: whilst EM countries undoubtedly seek to much improve domestic
Research, Design and Engineering Development capabilities, the
ability to actually properly obtain and integrate modern skills
(education, IT etc) very much depends upon trade negotiation terms
with the major international manufacturers.
Yes, self-creation and what may be
termed delayed learning is an approach that may be deemed appropriate
given specific country circumstances, (specifically the desire to
micro-manage industrial expansion directly relative to population
wealth expansion), but as also seen such a perspective must also be
balanced by recognising the need to invest toward the far horizon,
again done through complete acquisition (not alliances) of target
technologies.
However, whilst an obvious and large
technological (and associated commercialisation) knowledge gap
exists, its appears the fact that whilst all EM countries are
individually unique, the myriad of smaller non-BRIC countries will
only offer lip-service regards the transformative power of 'new-tech'
and 'eco-tech', and may in fact because of financial, political and
cultural reasons be generally satisfied by maintaining the general
status quo regards industrial development.
Whilst the BRICs and various CIVETS
have the financial might to apply advanced solutions in the mid-term,
across showcase buildings, general infrastructure, energy, vehicles,
IT and healthcare, the vast majority of those that lie beneath the
BRICs and CIVETS umbrella will in reality continue to recycle in a
marginal, evolutionary manner previous generation methods from the
west whilst re-deploying locally engrained traditional answers.
Timely Re-Expansion of the European
Advantage -
It is now seen that the technological
advantage held by the west is still apparent, yet because of the
re-orientation of global trade over the last 15 years and the EM
focus on national economic growth agendas, that once massive
knowledge-gap is being reduced, the top-tier EM countries able to now
obtain such knowledge by M&A or FDI.
Such events should raise 'alarm bells'
for western firms, the marked or gradual depletion of their innate
competitive advantage(s) halted and reversed through investment into
what needs to be a new golden era of western research, development
and manufacturing.
The spectre of global warming has been
an ongoing issue throughout the 20th century, in
contemporary times highlighted by the 1997 Kyoto Protocol's first and
second commitment periods (2008-12 and 2013-20). Whilst various
governments chose to adhere, or not, to the expectation, the fact is
that the aftermath of the 2007/8 financial crisis scuppered both
modest and grand scheme attempts to harness what is still by
conventional standards the high costs of the idealised 'new energy
economy', itself founded upon over-optimistic perceptions regards the
prevalence (ubiquitousness) and associated costs of 'far reach'
eco-tech.
The new norm has reset expectations,
yet that Kyoto ideal could instead be resurrected in a broader manner
beyond the centricism of 'new energy' to encompass a wider
appreciation of the 'global public good' and the challenges of the
'externalities' to be overcome.
The west, and specifically Europe,
should seek to lead this debate, but instead of putting the “horse
before the cart” as seems the case with Kyoto's reliance upon
immature, revolutionary technologies; European companies, consortia
and associations should offer and far more convincing and
constructive approach by demonstrating the very real advantages that
a quickened evolution of current and 'bridge' technologies may bring.
This perspective has already been seen
in the automotive sphere, with the likes of European manufacturers
avidly 'down-sizing' their engine capacities and reducing vehicle
mass, so as to much improve emissions measures, and now increasingly
adopting Japanese initiated petrol-hybrid, diesel-hybrid and plug-in
hybrid ('bridge technology') systems.
This approach, though more cautious
than the pre-2007 'eco-dream' - involving a world of electric cars
powered by wind and sea and solar farms – is readily understood and
applicable, and critically more readily understood and convincing to
the European and indeed global investment community.
Importantly, accompanying this
fast-track evolutionary technology approach should be a truly
concerted effort to cross-fertilise the cornucopia of technological
solutions past and present, so as to attain improved ecological (and
otherwise) performance standards.
Only by realistically creating a new
remit for 'Advanced Europe' (and indeed the broader West to include
the US, UK, Scandinavia and near Eurasia) toward a new but realistic
'global public good' forum (akin to Kyoto's principles but, but
within Europe) will the most advanced nations of the West be able to
positively influence the broader direction of world progress.
As the 'new order' BRIC and CIVETS*
countries understandably seek to take control of their own destinies
via trade pacts and ongoing summit talks (seen very recently), the
west will need to demonstrate its innate technological and moral
worth.
Without doing so it will become
increasingly excluded as new order countries seek to maximise the
exploitation of now engrained older technologies and benchmarks, and
dissuaded from anything but distant era improvement.
In automotive sector terms, when
China's C-NCAP safety standards (itself ultimately improved by
Volvo's local input) becomes the BRIC and CIVETS 'gold standard'
instead of Europe's original NCAP, much of the world will be happy to
continue with decreasing western input.
The time has undoubtedly come for a
European shift from investor profiteering to continent re-engineering
to leverage the diminishing but still powerful Euro-Global “knowledge
gap”.
To this end, the E16bn EuMaT 'materials
and technology' programme and its strategic research agenda may (or
may not) serve as the broad aspirations template, but necessarily
altered from the 'radical change' to 'optimal change'.
Of course, efforts must be maintained
to reach into the future with high-brow 'pure' research-work, but
without recognising the global realities and true challenges within
the 'applied' realm, the politicians, academics and 'brainiacs' in
Europe and the West may be seen to be operating idealistically within
its own slowly crumbling ivory tower.
Post Script -
Though formally known as the BRICS
since the inclusion of South Africa (invited because of its mineral
wealth), investment-auto-motives prefers to retain the distinct BRIC
and CIVETS nomenclature given S.Africa's closer approximation with
those notionally 2nd-tier countries.
