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Auto’s Accounting Agony

Tuesday September 28th 2010

As the auto industry heads for the Paris Motor Show, October 2 to 17 two manufactures show differing strategies to enhance the bottom line.

The name “Ford Focus” is a brand of car sold by the number 2 US auto manufacturer. However, today it cab be taken to imply something else. The CEO, Alan Mulally has said that the company may look to reduce the product offering to just 20 models. He claims that this can put more “focus” on improving the quality of engineering.

Clearly this is not an overnight exercise.. The process of model reduction has been an ongoing activity since Mulally took over as Ford Motor Co. CEO in 2006. Back then the different brands and subsidiary companies meant Ford offered 97 models. This was thinned down dramatically through scrapping unproductive marques and selling off uneconomic brands. For example, Jaguar Land Rover was acquired by Tata motor (India) in 2008 and Volvo was sold to Geely Automobile in China in 2010.  Only a small stake is retained in Aston Martin and Mazda.

In 2007 Ford slipped from the 2nd spot in terms of US sales when it was passed by Toyota. During the recent economic downturn that brought havoc throughout the global auto industry Ford saw production slump from 5.532 million units in 2008 to 4.817 million units in 2009. Still, by being quick to reduce production and build a cash war chest when the capital markets were still open Ford managed to book a profit of $2.7Bn in 2009. It did not take government rescue money and never flirted with Chapter 11 unlike it’s major rival General Motors.

Ford are not quite going back to days of “any colour you like so long as it’s black”, however, there is a new simplicity about the firm. The new push is to build products that are less demanding on underlying component specification. This does not mean quality or technology is compromised…it actually implies that across a product range where there are a variety of options, 65% of the components will be standardized. The consumer can then add bells and whistles as they choose.

Mulally is not making unrealistic claims about the company’s future prospects as he knows that sales prospects are totally dependent upon the pace of  economic recovery now that the government programme “Cash- for-Clunkers” has come to an end both in the US and overseas. 

Prospects for expansion are bolstered by the Asian market and from October Ford will bring the “Edge” SUV to the Chinese market. It will be pitched at a price point 30% higher than is seen in the US.  Ford feels confident in its pricing strategy as SUV’s comprise 8% of total Chinese auto sales. Data from the China Association of Automobile manufacturers (CAAM), shows that in H1 2010 587,000 SUV’s were sold. That is a growth rate over the same period in 2009 of 133%!  

Today could be dubbed “Motor Monday” as it is not just Ford making the news. Recall SAAB? This was the Swedish automobile company that had a long, painful and costly relationship with General Motors.   The number 1 US auto firm sold SAAB to Spyker (Netherlands) in January 2010 in a deal that I thought was crazy.
Recall Spyker sold just 43 cars in 2008 and posted a loss of $35m. I asked at the time and still wonder what Spyker can do with a firm that needs to sell in the multiple thousands to simply break even. Do not be fooled for the latest offering the company has, the new 9-5 is still nothing more than a reskinned Opel Vauxhall Insignia. This is not going to take sales away from BMW, Jaguar, Lexus or Mercedes Benz!

So it is a curious development to hear today it has been announced that SAAB Automobile and BMW reached an agreement to allow the Swedish group to use engines developed by BMW. The first element of the JV will be for engines to be deployed in the new 9-3 that will appear in late 2012.  I cannot see the new 9-5 being sold in sufficient volume to generate a profit before the 9-3 arrives.

Today shares in Spyker leapt 37% to €3.28. No doubt there is euphoria that Spyker will not have to develop engines themselves. I take this on board still this price move is a great opportunity to sell Spyker because they are never going to sell enough SAAB models to ever make an economic return. What is the full detail?  I cannot believe that BMW would hand over the latest technology that provides the power to their successful model lineup. If so it will cheapen their image.

BMW has been looking for ways to share technology as a means by which revenue can be boosted it is clear that BMW’s CEO Norbert Reithoffer  can see pressure on the bottom line in the years ahead unless extra revenues can be generated. Rather than signaling a triumphant return for SAAB, I see’s this as another step along the road of further auto industry consolidation in which more marques will disappear. That includes SAAB.

Stephen Pope
Managing Partner ~ Spotlight Ideas
07931 543 740

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