WRFest 25Feb08(Old Line Bizz): Back in the Real World
Literally back in the real world. Despite all the on-going storms and thunder there is a real world out there of real companies not involved in financial engineering; though subject to (victimized by ?) it. Again there was a huge amount of relevent news that's going to impact a lot of things. Below you'll find our selected excerpts with stories from the oil, airline, steel, auto, retail and aircraft manufacturing. They're all interesting but a couple or three are harbingers.
Exxon is getting to the point where it's not replacing its' reserves - partly from increased problems with accessing foreign fields but also because of the increased difficulties in finding new, large fields that are economic. Think about that one for a while.
Meanwhile various mearger frenzies continue including the airline industry (which we waxed on at some structural detail) and continued evolution of the worldwide steel industry, Mittal in particular. The Auto industry just moves from one "challenge" to another. A couple/three interesting stories there as well - from Ghosn's naming it recession to an interesting story on Hyundai's Superbowl Ads to Chrysler's increased off-shoring of engineering and R&D. Now those last two we think are particularly important because they not only represent increased globalization but sophistication in both directions. In fact IOHO the Hyundai ads were the best ones on the Superbowl - not for viewer entertainment but from getting bang for the bucks. Everybody laughed or cringed at the others but Hyundai's a) served notice that they were seriously in the game and were credible and b) got the biggest response that way from viewers. The next time you're in a parking lot test this yourself - see the Mercedes lined up next to a Bimmer next to a Lexus next and so forth down to a Hyundai. That bridges $120K to $20K but we don't see that much difference in fit and finish let alone features and quality. Hmm...indeed.
Traditional Industries
Is Exxon Mobil Going Dry? Like the rest of its big oil brethren, Exxon Mobil is having a difficult time replacing its reserves. The Texas titan barely replaced the amount of oil and gas it produced last year -- its worst showing ever. If Exxon boss Rex Tillerson can't reverse the trend, his company could run dry within a generation.
Airline Merger Frenzies (II): Network Structure, Costs and Strategic Outlook There have been three interesting (or more) stories on the rapid airline feeding/merger frenzy that's bubbling up before our eyes as the result of intractably higher fuel costs. Like every other strategic initiative since '00 this one too will NOT fix the underlying problems. Which won't stop the mergers nor prevent the financial community from providing the liquidity ammo necessary to bring it about on the theory that it will. Earlier we'd posted a first pass (Airline Merger Frenzies (I): Deep Cost Structure, Restructuring & Outlook) explaining how the hub-n-spoke network route structure was the deepest underlying factor in airline's lack of profitability and failures, since the end of WW2 btw, to earn their cost-of-capital. Excerpts from the three stories are below but here's an excerpt from a strategic assessment we wrote in '04 both predicting the consolidation and its' likely failure.
The M&A Forge (WSJ '06) Flush with cash and anxious to take advantage of interest rates that are still near historic lows, corporate and private equity buyers turned 2006 into one of the most explosive years on record for both the number and size of transactions -- a total deal volume of about $4 trillion. Why in most industries do you find some companies thrive doing deals while so many others stumble? Beyond Mittal in the industrial sector, witness the acquisition success of Nestlé in food, Cisco in technology and the Royal Bank of Scotland in financial services, to name just a few. Our research shows that the most successful opportunists share a set of characteristics that they have consciously developed over time. The winners tend to make mergers and acquisitions central to their strategies; they study and learn from their mistakes; they nurture M&A as a core competency; and build a team to preserve institutional knowledge. They tend to focus mostly on small and medium deals, not blockbusters. And when they do pursue megadeals, they only do so when it is both strategically and organizationally appropriate.
Mittalic magic Lakshmi Mittal built the world's biggest steel firm from scratch—at internet speed. The answer was neither: Mittal Steel was a company from everywhere and nowhere, which helps to explain why its integration with Arcelor to form ArcelorMittal, the world's largest steelmaker, went so surprisingly smoothly. Most mergers fail: from AOL Time Warner to DaimlerChrysler, the corporate landscape of the past decade is littered with wrecks. Just as surprising was the way in which Mr Mittal managed to overcome opposition to the deal from the business establishment and the French government—and has now gone on to increase profits in the new firm's first full year.
Ghosn Says US Auto Market in Recession The head of Nissan Motor Co. said even if the United States is not in recession, its auto industry is. "We are very lucid on the situation of the industry that there is a recession in the United States, at least in the car market," Chief Executive Carlos Ghosn told reporters, saying automakers face rising costs for iron ore, precious metals, aluminum and other materials. "These represent risk for the industry," he said. Ghosn, who is also president and CEO of Renault SA of France, expressed optimism that the market will improve. The American auto market "will not stay in recession for a long time," he said. U.S. car and light truck sales totaled 16.1 million vehicles in 2007, the worst year in a decade, and sales are expected to slip this year as well. Ghosn said the cost of raw materials, increasing for the fourth straight year, must come down. Earlier, Ghosn told students at Seoul's Korea University that global automakers need to focus on emerging markets. During a visit to South Korea to meet local Nissan and Renault officials, Ghosn said growth in countries such as Russia, China, India and Brazil will be key.
Hyundai Super Bowl Advertising Yields Highest Positive Impact on the Brand Hyundai's Super Bowl advertisements did the best job of boosting brand opinion according to two leading marketing research firms. The Nielsen Online MegaPanel Survey, post- game study showed that 43 percent of respondents had improved their opinion of the Hyundai brand -- the highest of any automotive advertiser. In addition, in comScore's 2008 Super Bowl post-game survey, Hyundai garnered a 45 percent increase in net brand improvement, the highest figure of any Super Bowl advertiser.
Chrysler Begins Engineering Overhaul Six months after taking the helm at Chrysler LLC, Chief Executive Officer Robert Nardelli is beginning to move forward with his first major reorganization at the auto maker: a broad shake-up of its engineering operations. In coming months, Chrysler will expand operations at engineering centers in China and Mexico and will prepare to open others in India and Eastern Europe as part of a push to internationalize a company heavily dependent on its home market in North America. Mr. Nardelli is betting the overseas centers will help Chrysler cut engineering costs and move it forward in sourcing parts and selling vehicles in big developing markets. Chrysler has been slow to move engineering work abroad, a cost-saving measure that other auto makers around the world are increasingly adopting.
Wal-Mart Evades Global Woes as Net Rises Fiscal fourth-quarter profit rose 4% at Wal-Mart Stores Inc. as cost-cutting and strong international gains helped the world's largest retailer sidestep many of the troubles dogging its rivals in a soft U.S. market. The Bentonville, Ark., retailer felt the drag from energy and housing earlier than many of its department-store and grocery rivals, and began paring its U.S. store-expansion plans, trimming inventories, and boosting marketing efforts that emphasized low prices. Better marketing and fewer markdowns in the final quarter lifted gross margins to 23.5% from 23% a year ago despite a broad retail slowdown that triggered losses elsewhere. U.S. same-store sales, a measure of market-share gains, rose 1.7%, compared with a 1.6% gain in the same-quarter last year. Wal-Mart's Strong Earnings Can't Beat Back the Doubters
- No Satisfaction at WMT (CNBC vidlink) Although Wal-Marts sales stand out among other struggling retailers, its not keeping its customers happy, with Adrianne Shapira, Goldman Sachs; Claes Fornell, University of Michigan Business School; and CNBCs Melissa Francis.
Airbus Expects '08 Plane Orders to Halve Airbus said Wednesday it expects half as many orders for new planes in 2008 as it got last year after receiving record orders in recent years and amid slower global growth. John Leahy, Airbus' chief salesman, said at the Singapore Airshow that the European planemaker is likely to sell about 700 planes this year, down from more than 1,400 orders last year. The 700 planes that Toulouse, France-based Airbus wants to sell will include more than a hundred A350s, a redesigned widebody 300-seat jet, and about 30 units of the A380, the world's largest commercial jet. Korean Air Lines Co. said Monday it will buy three more double-decker A380s on top of its existing order for five of the world's biggest commercial jets. Leahy said the past three years have been the peak of plane orders and that manufacturers were now ramping up production to deliver them. Airbus had about 3,600 planes in its order backlog, he said, about the same number as its U.S. rival, Boeing Co. Together, the rivals won a record 2,754 orders last year. The biggest challenge the companies face is getting planes off their production lines fast enough to meet demand. At the end of 2007, the two companies together had enough airplanes on order to keep their factories busy for about five to six years. Both companies have faced delays in deliveries. Airbus's first A380 was delivered nearly two years late last fall -- a delay that slashed profits at parent company EADS. Chicago-based Boeing last month said the inaugural flight for the 787 would be delayed up to three months, pushing delivery of the first plane into early 2009 -- the third time the airplane has been delayed.