AutoCognition Weekly News 28 May

VW: Two Cuckoos in the Nest

The German state of Lower Saxony has bolstered its shareholding in VW having bought 376,000 new shares. It cost the local taxpayers €41m for the privilege of keeping state ownership of the people’s car manufacturer at 20.36%, safely above the 20% threshold necessary to enjoy maximum voting rights. The reason for Lower Saxony’s urgency seems to be that employee share options are due to mature on July 9^th, and tempted by a potential profit of over €70 per share it is likely that most staff will liquidate their holdings as soon as they can. Not only will Lower Saxony’s holding be diluted below 20% but there is also no telling where these new shares might end up.

Of course, this is no threat to VW’s largest shareholder, Porsche, with around 30.9% of the company. AutoCognition has termed Porsche’s strategy “cuckoo nesting” since the low volume sports car manufacturer has muscled in on its mass market cousin and is now in a position to demand preferential treatment. Only the presence of Lower Saxony prevents complete domination by Porsche, though the state government is hardly without its own demands. The political influence within the governance structure has meant that the company has long been inhibited from making purely economic decisions. Fortunately, this is partially offset by the fact that VW is based in one of the world’s most affluent economies but there have been times in the past when the need to appease local politics has held the company back from making the necessary business decisions.

Ford, Volvo and BMW: The Rumour Mill Grinds On

Stuck into a massive restructuring, and having already divested itself of most of Aston Martin for £479m, Ford is now looking to sell Volvo – that is if the rumour mill is to be believed. Apparently the interested party is BMW. It has been reported that an analyst at Merrill Lynch values the Swedish company at $8bn, something of an embarrassment to Jaguar and Land Rover which were valued at around $1.5bn in combination by the same analyst.

Although $8bn would be a tidy sum for Ford as it battles with its finances, a net loss of $12.6bn last year and a $23.5bn mortgage, AutoCognition doubts that the answer is to sell one of the most profitable parts of the empire. Indeed, it might be better if the Ford management moved into Volvo’s headquarters and sold the US operation instead. As it is, Volvo sits comfortably above the Ford brand and gives the company comprehensive coverage of the mass market, even if it squeezes Land Rover and Jaguar out into the niches as a result.

Quite why BMW would be interested in Volvo is more of a mystery. The two brands compete in a broadly similar market segment, albeit from different perspectives. While BMW majors on driver oriented marketing Volvo has traditionally specialised in family values, recently spiced up with a bit of style. Although this suggests a complementary fit it would also weaken the opportunity for cost reducing commonality between the brands. The only genuine fit for Volvo inside the BMW structure would be with the MINI brand, somewhat isolated with its single model. Although the MINI sells well it suffers from its inability to fully exploit the economies of scale enjoyed by the mainstream BMW models. Perhaps the most sensible option would be for BMW to pool MINI with Volvo in a joint venture with Ford.

Gender premium: why women pay more for their cars

Research by What Car? and evecars.com, the web resource helping women buy cars, has confirmed what we already knew: women come off worse than men when buying their cars. We are well used to hearing of the indignity women suffer when faced with hoary-handed service managers saying things like “Oh dear love, your fangle-end needs fettling with a frimbulated fustbuster” before charging five hours to do something simple like adjust the spigots. Of course, some of the reason behind the disparity in servicing costs between men and women is that men are too ashamed to admit automotive ignorance, a cardinal sin on their home planet of Mars, so prefer to claim that they can adjust their own spigots and beat a hasty retreat.

When it comes to the showroom, however, both sexes should be on a level playing field. Since two cars of the same model and specification are technically indistinguishable they should also sell for exactly the same price. However, What Car? and evecars.com have found that the prices women pay for their cars are significantly higher than for men. For example, a woman can pay nearly £500 more for the same Audi A4 as a man, and the disparity is even wider for a Ford Focus Sport. Interesting, there is no difference when it comes to a bog standard Ford Focus 1.6, and women even have the upper hand when negotiating a deal on a Honda CRV.

This raises interesting questions about the way the sexes buy their cars. It should be emphasised that women are not being overcharged, the full list price remains unchanged, but it is all about negotiating a discount. If, for the sake of argument, we assume that men derive much of their status from the car they drive then we can expect them to stretch to the shiniest set of wheels they can get their hands on. The problem for the poor chaps is that even after emptying granny’s piggy-bank there are still not enough shillings to get that Focus Mega-Sport Quattro with the venturi down-thruster and chrome, dare I say, spigots. It then becomes a case of maximum discount or no deal. Women, on the other hand, might be more relaxed about the whole deal and are willing to accept a reasonable discount without getting sweaty palms. Curiously, though, men get their best deal on the Vauxhall Zafira: probably a case of them saying “the only way I am going to be seen in one of those things is if you practically give it to me”. They pay nearly £1200 less than women.

Ricardo puts the rover into roewe

In the latest edition of the Ricardo Quarterly Review (Q2 2007), Anthony Smith gives a detailed account of the UK engineering consultancy Ricardo and its unsung role in helping SAIC of China to realise its aspirations for independence. SAIC has a huge presence in China, but only as an assembler of cars for its western partners and it is ambitious to become a fully-fledged independent car manufacturer. It might even be argued that it is MG Rover acting from beyond the grave that is putting SAIC on the road.

In the UK SAIC is known only for its dalliance with MG Rover in a nascent joint venture that was hoped would save the venerable British company. The partnership was a long time in planning but by 2004 SAIC had secured the intellectual property rights (IPR) to the Rover 75 and 25 vehicles as well as the award-winning K Series petrol engine and the G Series diesel. Furthermore, SAIC was able to tap into MG Rover’s century of experience in the industry by gaining access to the relevant material specifications and development processes. In return, MG Rover received a badly needed injection of cash to the tune of £67m. Ominously, instead of working with MG Rover’s Powertrain division SAIC then turned to Ricardo to help develop the KV6 engine IPR it had purchased. It seemed that SAIC was hedging its bets with MG Rover even before the premature announcement by the British company, in desperation to send out some good news, that the joint venture with SAIC had been sealed. That MG Rover collapsed but a few months later, in April 2005, suggests that SAIC had already anticipated that the source of its new found IPR could not be relied on for further support.

However, for many fans of MG Rover in the UK, SAIC was the villain in the tragedy because it appeared to withhold life-saving investment in order to precipitate MG Rover’s collapse and so obtain the British company’s assets at a significant discount. Yet not only would this have been an extraordinarily risky strategy since it would have put SAIC in competition with every other potential bidder for MG Rover, having previously enjoyed the security of a contractual relationship, it was in any case entirely unnecessary. Engaging Ricardo to develop the acquired IPR meant that SAIC had already detached itself from MG Rover’s fate.

Far from being a Machiavellian strategy, it is unlikely that SAIC took this course without some sense of regret. From the start, an alliance with MG Rover held much promise for the Chinese company. Courtesy of its work with GM and VW, SAIC had built up a formidable ability as an assembler of cars, but had no significant capabilities in vehicle design. Conversely, MG Rover was home to prodigious engineering talent but with production output that was unsustainably low. Although there was probably little difference between the two in their ability to assembly the vehicles, SAIC had access to the massive Chinese market which allowed it to exploit the industry standard economies of scale, an option that was not open to MG Rover in the diminutive UK market. Any independent manufacturer needs to be strong in both product design and output to keep its place in the global industry, but SAIC and MG Rover could have replicated this integrated structure by dovetailing their capabilities in an international vertical joint venture. The fact that SAIC initially invested in MG Rover’s capabilities, and then chose to turn to Ricardo to develop them, indicates that SAIC was not receiving assurances of continuity from MG Rover.

Conspiracy theory would suggest that SAIC had bought the IPR that it valued at a knock-down price from a vulnerable MG Rover. Subsequent events, though, suggest that SAIC was protecting the continuity in product development by looking beyond its relationship with MG Rover. It makes no sense to have approached MG Rover for its IPR on the basis of its capabilities, only to opt to have another firm continue the development. This is further clarified by the events after the collapse of MG Rover when, within five days, Ricardo met with SAIC officials in Shanghai. The two sides agreed that there existed a limited opportunity to form a new R&D team around the very MG Rover engineers who were behind the IPR that SAIC owned. This team was inaugurated at the end of June 2005 as Ricardo 2010 and was managed by Ricardo solely for the benefit of SAIC. In effect this reasserted the international vertical joint venture that might have underpinned the partnership with MG Rover.

Ironically, the team worked in the same building that had housed the ex-Rover engineers employed by Ricardo to help BMW finish the MINI development programme. In the case of SAIC, though, Ricardo 2010 has become cemented within SAIC’s structure. Furthermore, the Chinese company is currently assuming ownership of the unit and renaming it SAIC Motor UK, yet with no intention of reducing the unit’s importance within the Chinese group. Instead, Anthony Smith describes in his article how the centre has been elevated to the status of a ‘home room’, SAIC’s term for an R&D centre that is responsible for a given project. The other two home rooms are in Shanghai and with the Ssangyong subsidiary in Korea. Indeed, Mr Smith may be underplaying the UK centre’s importance. Not only has it successfully re-engineered the Rover 75 into the Roewe 750 for the Chinese market and the KV6 engine with it, the centre is also taking the lead on the new medium and small cars as well as an entirely new range of engines. One can only wonder what Longbridge might have been like now if such projects had remained with this R&D team as part of the proposed international vertical joint venture between MG Rover and SAIC.

Ricardo Quarterly Review can be accessed online:

http://www.ricardo.com/rq/