As automotive industry delegates gathered recently in Prague for the annual Automotive News Europe Congress, there was plenty to talk about. Corporate restructuring in the industry was on everyone’s lips. But the growing opportunity in Russia was also a hot topic. just-auto editor Dave Leggett was there.
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Volvo for sale was the elephant in the room
It must be tough for Volvo Car Corporation CEO and President, Fredrik Arp right now. He has a company line to maintain when asked about the future of Volvo Car Corporation, but the uncertainty must be getting to him as it will be to all of the employees of the PAG brands that Ford appears suddenly to be in a hurry to offload. He was duly asked about the future for Volvo Car in Prague this week.
Mr Arp went for the stock response. “I am focussed, along with my colleagues, on developing and going forward with a very strong brand that is performing well,” he said.
I suppose he can’t exactly say something like this: “Ford’s whole PAG strategy has fallen apart and it is now highly unlikely that Ford will retain Volvo. I’m annoyed with the way they have behaved, never quashing the speculation, showing proper commitment.
“If we are sold I really hope it’s not private equity and that a solid industry buyer who understands Volvo values can be found. Ford clearly has no interest – Alan Mulally doesn’t get premium brands and has decided all eggs are going into rescuing the Blue Oval badge and fixing North America.
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By GlobalData“I think it is short sighted but that is the strategy decided on in Dearborn. And they have their reasons, no doubt.
“In any case, there’s a slight problem that we face as part of the Ford Group which I understand has been within a whisper of filing for Chapter 11. Where’s the money for new product coming from? It’s a bailout strategy, pure and simple. And when looking at who might be a good buyer for Volvo, resources for new product development is the first question to be raised. The next is whether they might have a good understanding of a brand such as Volvo.”
If Fredrik Arp is praying for an industry buyer, he may have found some succour in remarks made by the head of automotive research at UBS Investment Bank, Max Warburton. Where would Ford’s remaining PAG brands be going, he was asked? No industry buyers are interested in the assets of Jaguar and Land Rover, he maintained. However, there are perhaps 2-3 private equity firms who could be interested, Warburton added.
But Volvo, he said, would be considered a prize asset and an industry buyer was a possibility.
Just how well placed is Volvo? It was losing money last year under the twin pressures of lower US sales (undermined further by an adverse exchange rate) and a new product hiatus. The new S80 and C30 have certainly brought some respite, but does the line-up have the right balance? Would a small MPV have been more in keeping with Volvo’s brand values than the C30? Where exactly does the S60 sit and would a slightly bigger and more upmarket next generation S40 in 2010 effectively make it redundant?
Asked about the small MPV, Arp went for a corporate PR-speak answer. In fact, he did rather a lot of that and many in the audience weren’t all that impressed with his presentation (Volvo core values, safety, environment blah, blah, blah). But given that he and his company are in a place of extraordinary uncertainty, could he say much more? We can perhaps sympathise with his reticence to depart from the PR speech. And if there is a potential buyer out there, maybe a fundamental sales pitch on what Volvo is about is understandable.
Here’s another theory. A buyer is lined up for Volvo already – yes, an industry buyer is on perhaps likely, waiting in the wings. Volvo is not in a bad state in terms of profitability; but a big group is needed to get the best leverage on shared product development costs (er, yes, like Ford). It could be Renault or BMW (both have definitely been in for a bit of a poke around). Or maybe it’s Investor (the Wallenbergs could have access to the necessary resources and there may be a Swedish nationalist factor coming into play).
Jaguar and Land Rover have therefore been publicly offered up again after the consequences of an early Volvo Car sale for the remaining brands were thought through. Better to get the whole lot notionally out there now and get some interest generated, before it starts to look like a fire-sale with just a few hard-to-sell assets left.
How depressed are they becoming in Dearborn, with all this talk of selling the family silver, shedding the interesting stuff and battening down the hatches to save mass-market Ford? This might cheer some of them up. Max Warburton was asked for his recommendations on vehicle maker stocks. Some were predictable. Daimler? Buy. Fiat? Buy. PSA? Sell. Renault? Sell. BMW? Buy. GM? Neutral. Ford? He said neutral, but there was a caveat. “It is sometimes darkest just before dawn,” he said, implying that things will get better for Ford. If that North American turnaround is going to happen for Ford, the first signs of spring need to show in the monthly sales figures – and fast.
Chinese threat in Europe seen as muted
Max Warburton was asked about prospects for Chinese vehicle manufacturers looking to break into the European market. He said he struggles to see what the Chinese USP will be in terms of quality, product or price.
“The Chinese companies will not be able to offer any competitive advantages in terms of technology, safety, fuel consumption or emissions,” Warburton said. He also pointed out that on price they will be competing with a high quality used car market and concluded: “I can’t see them making any headway in our markets for at least the next ten years.”
How will they differentiate themselves, he asked, adding that they are relatively weak on brands (though private equity firms may see them as a sell-on customer for any automotive brands they pick up).
A reminder of the difficulties the Chinese automakers face in entering the European market was provided this week when the Brilliance BS6 model failed an ADAC crash test, echoing the Landwind SUV’s spectacular failure in 2005. The BS6 has reportedly been withdrawn from the market by its Belgian importer.
What about the Chinese manufacturers’ plans to get into Russia and use that market to test the European water in a less highly regulated environment? Matt Donnelly of Rolf (a leading car distributor in Russia focussing on Western brands) was dismissive.
“They lack logistics, infrastructure in parts, service – they have no backfill,” Donnelly said.
Russia’s opportunity
As far as the opportunity in Russia is concerned, some familiar points were raised about the good things and bad. Jonathan Browning of GM Europe had talked Russia up earlier. GM is doubling its network in Russia, he had said, seeing it as a major volume opportunity for its Chevrolet brand in particular: “Chevrolet is the right brand at the right time for central and eastern Europe”.
The volume opportunity in Russia clearly stems from its rapid economic growth which is forecast to make Russia the second largest new car market in Europe – behind Germany – by 2010, according to Rolf.
Rolf figures on Russian retail car sales – non-domestic brands only – in 2006 (total market of 1m units; including domestics equals 1.74m units) put Ford at the head of the Western brands pack – 116,000 units in 2006; followed by Chevrolet on 111,000, Hyundai on 101,000 and Toyota on 96,000 units.
Donnelly was (naturally) very upbeat on prospects for the Russian car market, predicting a future that would see foreign brands continue to grow alongside the gradual demise of Russian brands. ‘Made in Russia’ means ‘where’s the discount’ and Western brands are trusted on quality and reliability grounds, he maintained. Unfortunately, the AvtoVAZ representative on the Russia panel session was a no-show, so we weren’t able to get the domestics’ perspective. As far as AvtoVAZ’s deal with Magna is concerned, Donnelly didn’t mince his words: “Even with Magna’s help, AvtoVAZ can’t make a new car for less than USD16,000 unit price and that is simply too high for a Russian car.”
That fitted the Rolf view that for Russians a car is overwhelmingly a luxury good rather than a utility one, because ‘public transport is so well developed’, reinforcing the attraction of Western brands. I have heard it said that there are two vehicle markets in Russia; a new affluent consumer class attracted to Western brands and a poorer group that buys cheap domestic product. How large are these groups and how is the less well-off group developing? Perhaps Renault has really cracked it with a low-cost car that carries a Western brand and can potentially traverse both groups, upselling to some of the poorer consumers who are tiring of their AvtoVAZ models. But perhaps that is an opportunity for AvtoVAZ/Magna also?
Emphasising the upbeat numbers, Donnelly cited a Moscow dealership owned by Rolf that sells 300 units a month and is on a high-track growth path to achieve 16,000 cars this year.
For all the upbeat talk, there was a familiar ring to the problems facing the auto industry in Russia. The supplier sector is poorly developed. Logistics can be a problem. And administrative factors and bureaucracy can impact business in a big way. But the risks and problems, it seems, are seen as worth persevering with while the market is growing.
[For more on Russia: UK: Seminar highlights Russia opportunity as well as structural problems]
The case of Fiat Auto – however bad things get, there’s hope
Fiat Auto CEO Luca De Meo brought a refreshing air to the proceedings. We all know that Marchionne has worked some magic at Fiat with its transformation over the past few years. The firm was on the brink of going under just three years ago and is now a top performer.
De Meo picked up the ‘PwC European shareholder valuation award’ at the Congress dinner and it was a reminder that companies in very serious trouble can be turned around. The key is decisive management that puts in place a structure and processes, at all levels, to get the best outcomes.
“We recognised we had to change,” said De Meo. And the fact that Fiat did follow through and change on such a short timescale shows that it can be done.
They said that? A selection of soundbites from ANE 2007
- The theme is you! – Peter Leger, President & CEO, MSX International (event sponsor)
- Ferdinand Piëch and Wendelin Wiedeking are the ultimate insiders – Max Warburton, Head of Automotive Research, UBS Investment Bank
- Too many [automaker] plans are volume and model cycle based. There has been little genuine rationalisation. Which of the emperors has no clothes? – Max Warburton, Head of Automotive Research, UBS Investment Bank
- Saab is one of our greatest market opportunities in the premium car sector right around the world – Jonathan Browning, VP Sales, Marketing and Aftersales, GM Europe
- We are now selling 405,000 Chevrolet models a year around Europe and I can see that growing to one million a year – Jonathan Browning, VP Sales, Marketing and Aftersales, GM Europe
- The [Russia] risks of being on the outside looking in are bigger than the risks of being there – Jonathan Browning, VP Sales, Marketing and Aftersales, GM Europe
- A problem in Kolin is labour retention, but with the unemployment rate at 6% and falling, it’s a general problem in the Czech Republic – Jiri Cerny, Production VP, TPCA
- The Delphi-UAW deal will have a positive impact on others in their negotiations with the UAW – Jose-Maria Alapont, Chairman, President & CEO, Federal Mogul
- The judge decides [on our Chapter 11 status] in October – Jose-Maria Alapont, Chairman, President & CEO, Federal Mogul
- Labour costs are higher in Western Europe than in North America – Jose-Maria Alapont, Chairman, President & CEO, Federal Mogul
- Think of Russia as Holland with oil – Matt Donnelly, President & CEO, Rolf Group of Companies, on Russia’s geography
- Bureaucracy concerning land ownership is one of the biggest problems we face in Russia – Matt Donnelly, President & CEO, Rolf Group of Companies
- Russians don’t like hatchbacks – the weather gets very cold – open the hatch and grandma in the back dies – Matt Donnelly, President & CEO, Rolf Group of Companies
- Russians dream of SUVs – Matt Donnelly, President & CEO, Rolf Group of Companies
- Some 50% of our cars sold in Sao Paulo are armoured – Fredrik Arp, CEO & President, Volvo Car Corporation
- We have an offensive marketing strategy [perhaps aggressive would have been a better choice of adjective] – Fredrik Arp, CEO & President, Volvo Car Corporation
- The challenge was to design a three million-part product entirely with virtual, collaborative processes. We did it with the Boeing 777 – Bernard Charles, President & CEO, Dassault Systemes
- The [LAB] internet site is very advanced but it is very simple to navigate. We are re-inventing the automotive buying experience on-line (see it here) – Luca De Meo, CEO, Fiat Auto
- You don’t have to speak Russian to do business in Russia, but a few basics are a good idea when shopping or in a restaurant – Walter Schopf, Exec VP Sales, OE Sales, Robert Bosch, Moscow
- ‘Delicious meetings, Delicious wines, Delicious conversations’ – a promising flyer for a reception in the Hilton handed out by leggy blondes on behalf of ‘AAA Auto’ to ANE Congress delegates in the lobby
