Euro Autos - ecomento.com

Transcription

September 18, 2013
Max Warburton (Senior Analyst) • [email protected] • +65-6230-4651
Abbas Ali Quettawala, ACA • [email protected] • +44-207-170-0535
Robin Zhu • [email protected] • +852-2918-5733
Bo Wen • [email protected] • +852-2918-5718
Euro Autos: The 10 Most Loss Making Cars Of Modern Times
(Or What Happens When It All Goes Wrong)
Ticker
BMW.GR
DAI.GR
F.IM
PAH3.GR
RNO.FP
UG.FP
VOW.GR
VOW3.GR
MSDLE15
Rating
CUR
O
M
M
M
U
M
M
M
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
16 Sep 2013
Closing
Price
80.20
57.35
6.14
69.52
59.55
12.64
176.85
182.84
1296.96
Target
Price
TTM
Rel.
Perf.
90.00
55.00
6.00
60.00
50.00
10.00
170.00
170.00
15.5%
28.4%
14.4%
38.6%
29.8%
59.0%
12.7%
4.5%
EPS
P/E
2012A
2013E
2014E
2012A
2013E
2014E
Yield
7.77
5.71
0.29
25.53
6.51
-18.13
46.42
46.42
93.90
7.80
5.60
0.28
13.38
2.41
-2.24
20.87
20.87
93.60
7.40
5.21
0.54
14.53
8.26
-0.93
22.52
22.52
105.16
10.3
10.0
21.5
2.7
9.1
NM
3.8
3.9
13.8
10.3
10.2
21.9
5.2
24.7
NM
8.5
8.8
13.9
10.8
11.0
11.4
4.8
7.2
NM
7.9
8.1
12.3
3.1%
3.8%
NA
2.9%
2.9%
NA
2.0%
2.0%
3.5%
O – Outperform, M – Market-Perform, U – Underperform, N – Not Rated
Highlights
The recent Frankfurt Auto Show was a typically grand affair, full of automakers presenting new cars, new
concepts and new hopes. As always, a lot of current equity stories in the sector now rest on new product
launches. But while every OEM at Frankfurt will be hoping their new products succeed, not all of them will
make it. Some of them will fall short of sales targets, or pricing assumptions, or both. What happens then?
How much money can an OEM lose when a product fails? How can investors spot a product that's not
going to work? What lessons can be drawn from the biggest 'fails'?
European Autos
A few years ago we published a report titled "The 10 Most Profitable Cars of Modern Times" that
celebrated the industry's profitable success stories. This year we look at the other side of the coin, by trying
to identify the European industry's most catastrophic failures. Which cars have been the biggest loss
makers? Which cars have caused the most pain, the most reputational loss and the biggest career damage?
We analyse them in this note – estimating total losses from the Top 10 of almost €20bn. We show examples
of mainstream cars that lost over €15,000 per unit and explain how the Bugatti Veyron lost €5mn per car.
Which OEMs have the worst track record? Daimler, Renault, VW and Fiat take a bow. Conspicuous by its
absence from the Top 10? Only BMW (at least since the Rover days). Automaking can be a brutal industry.
For those who sat through a recent Frankfurt Show packed full of new products and new promises, that's
worth remembering.
∑ We spend a lot of time looking for upside surprises – but what about the failures? OEMs, equity
analysts and investors spend a lot of time talking about potential successes in the auto industry. Will the
S-Class get Mercedes to 10% margins? Will the Porsche Macan power VW earnings in 2014? Will the
308 save Peugeot? Will the i3 make money for BMW? Those are just the current themes. Perhaps some
of them will work. But we probably spend too little time talking about the potential for failures.
∑ What a fail! Automobile making can be an exciting and even glamorous industry. The careers of
successful executives can be rewarding. The rewards for those that make it to the top can be very
lucrative. But it's also a brutal industry where products can fail – taking financial projections, credibility,
See Disclosure Appendix of this report for important disclosures and analyst certifications.
September 18, 2013
Max Warburton (Senior Analyst) • [email protected]
• +65-6230-4651
careers, workforces and even communities down with them. It happens more often than share prices and
equity markets tend to recognize.
∑ Catastrophic losses are rare – but there are some great examples in European Autos. OEMs tend to
try to disguise failure – it's rare for management to stand up and admit a product has flopped. But there
are instances of real humdingers, with cars suffering spectacular losses. That's what this note is about.
What are the greatest examples of total failure, where a product falls flat on its face, unable to get
anywhere close to the planned level of volume or pricing? When a new vehicle fails to fill up even a
corner of a factory, or is so wide of the mark it has to be knocked out at half price? We've tried to
assemble a list of the European industry's 'Greatest Fails'.
∑ Is losing money a European core competence? Some will ask why we've just focused on Europe. Don't
other regions have instances of spectacular automotive failures too? Of course they do. The Americans
are pretty good at it. The Japanese have also scored some own goals. But we've focused on Europe as it is
our specialist area. We also cover Chinese Autos: but the Chinese have yet to build world class cars and
have yet to make world class losses. Their time will come in both categories…
∑ Our methodology – fixed costs, variable contribution, write downs. We've screened the last 15 years
of the European industry's history and honed in on models we regard as obvious commercial failures. Our
criteria for pre-selection is somewhat subjective, but we've tried to catch most of the key problem cars
during this period. We've looked at their production run over their lifecycle, then we've tried to estimated
fixed cost investments (based on scale, number of plants and automation levels) and R&D spend (based
on product sophistication) . We've then estimated likely price realization and contribution margin per car.
We've also tried to capture fixed asset writedowns. Our calculations are only approximate, based on
broad assumptions. They cannot hope to capture accurately the precise extent of losses. But we believe
they give a good indication of the magnitude of the losses suffered by these problem cars.
European Autos
∑ Our Top 10 loss making cars. There are a host of cars that make the short list for this analysis.
Honourable mentions go to the Maybach, the Renault Modus, the Lancia Thema and the Citroen C5 and
C6. But on our calculations, the 10 Most Loss Making European Cars Of Modern Times are, in
descending order: (1) Smart Fortwo, (2) Fiat Stilo, (3) VW Phaeton, (4) Peugeot 1007, (5) Mercedes AClass (6) Bugatti Veyron, (7) Jaguar X-Type, (8) Renault Laguna, (9) Audi A2 and (10) Renault Vel
Satis. Collectively, we estimate these products lost almost €20bn. The losses suffered by some of these
cars extend to over €15,000 per unit, including fixed costs. Each and every one of them have created
financial havoc for their producers.
∑ Lessons from the failures. What lessons can we glean from this list of disasters? (1) giant strategic leaps
forward are the biggest risks – trying to turn Mercedes into a small car producer or Jaguar into a Dsegment competitor didn't work, (2) premium brand engineers normally screw up the costs of small cars
– Mercedes have the biggest problem is this respect, (3) big technology leaps can be problematic –
unique body construction and complex engines (Smart), aluminium (Audi A2), unusual doors (Peugeot
1007)…electric cars (examples still to come), (4) don't try to be something you are not (Fiat's Stilo failed
because it tried to be an Italian version of VW Golf); and (5) don't make silly production projections and
tool up for them. The other lesson is: don't stand in the way of Ferdinand Piech. He was the father of the
Phaeton and Veyron but these were not projects that unexpectedly failed and incurred surprise losses. It
was pretty clear at inception that they would lose money, but they were pushed through anyway.
∑ How can investors avoid these mistakes? Given these seem to be the routes to failure, what are
investors better off backing? Well it's boring to say it, but premium brands with consistent execution
(BMW, Audi) or new products with a bulletproof badge and pricing (Porsche Cayenne, Panamera, etc.)
seem to be the more reliable routes to profitability – but that's why these stocks trade at a premium.
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∑ Who will be next? If you walked the halls of the Frankfurt Messe, or followed the product
announcements and reveals from your desk, you'll have seen the hopes and fears of every OEM on show.
The hopes and fears of hundreds of thousands of employees too. Who will be next to experience the
uncomfortable realization that their product is a failure? If we knew, we'd shout about it. But some OEMs
are taking more risks without proper research (arguing that focus groups don't work), some are following
strong leaders (who believe in a technology without data to back it) and many are crowding into existing
segments (yet more cynical premium branded SUVs – the latest are Maserati, Bentley, Rolls and Aston –
when will this end?). Some of these products are going to fail.
∑ Our best guess for the most likely failures. Have a look at our 5 criteria above. We'd argue electric cars
– from Renault to VW to BMW – look likely to qualify. Electric vehicle evangelists seem to be enjoying
a Tesla-powered rush of blood to the head, after the American company's sales success. But we're not
convinced that these European electric products can make money – in fact for the ones with big volume
hopes (Renault), they have the potential to lose a huge amount. Perhaps accounting (written off R&D, as
per BMW's claim) or government assistance (often forming a large contribution to the budgets of these
things) will moderate the effects – but in real terms, we'd be worried about the losses.
Investment Conclusion
We rate the European auto sector Neutral. Having maintained a positive stance for over 3 years since
launching coverage in late 2008, we revised our sector stance to Neutral in March 2012. We remain
Neutral. The prospects for earnings growth look limited heading into 2014 – although the German industry
is still strategically well positioned, is still seeing decent Chinese growth and valuations remain modest.
Our top pick – and only Outperform – remains BMW (PT €90 – best in class premium OEM with highest
ROIC and best capital discipline). We rate Renault Underperform (PT €50). Renault continues to struggle
in Europe and the main emerging markets on which it remains critically dependent look to be taking a turn
for the worse.
Details
OEMs set out to make money – and many succeed
European Autos
Making money may not be the primary objective of an automaker. Political considerations, full
employment, national pride, family control and independent survival but also be factored in. But making
money is an important part of the game and is ultimately vital. Most OEMs do try to make money and there
are many examples of the industry generating fantastic profitability – both on specific products and
sometimes at the total firm level. Many automakers make big money over a whole economic cycle.
Two years ago we published a piece called "The 10 Most Profitable Vehicles of All Time", which took a
global view and tried to compare and contrast approaches and figure out how much money each key
product had made over its lifecycle. We identified the vehicles in Exhibit 42 as the most profitable in
history. The piece seemed to cause some interest, including at the OEMs. This time we've decided to look at
the other side of the coin and look at the most loss making cars (although we've narrowed it to focus on
Europe).
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When it all goes wrong: OEMs tend to try to disguise failure
It's rare for management to stand up and admit a product has flopped. Sales targets are rarely communicated
externally and the language of the industry has evolved over time to present as optimistic a picture as
possible. If a car is in line with sales targets, we'll be told it's "significantly better than planned". If it's
falling short of targets, we'll be told it's "in line with plan but with a richer mix of orders than expected". If
it is falling woefully short of plan, management will try to change the topic. Even when a product is a
commercial failure and losing huge sums of money, automakers will persevere with it as long as it makes
some sort of cash contribution margin – but in P&L terms these products can often lose billions of Euros
over the lifecycle.
Many European cars lose money every year – in accounting terms
Many products make an EBIT loss throughout their product cycle – especially if we exclude spare parts
profits. Most small cars fit in this category. In the current economic malaise, many large ones do too. But as
long as they make a cash margin, they're left in production – and usually renewed (with new investments in
tooling and components), despite the lack of any strong business case. Much gets lost in translation in
conversations with OEMs, who will argue that such cars are profitable. But what they really mean is
"profitable before costs". In an industry where cutting capacity and people is so difficult, that's often the
best that can be hoped for.
Catastrophic losses are rarer – but there are some great examples in European Autos
While many cars lose money in a gentle, low key way – there are instances of real disasters, with cars
suffering spectacular losses. This actually happens more often than you might think. What are the greatest
examples of total failure, where a product falls flat on its face, unable to get anywhere close to the planned
level of volume or pricing? When a new vehicle fails to fill up even a corner of a factory, or cannot be
given away by dealers? Some products have lost so much money that they can drag an OEM's entire P&L
into loss. Notable examples include the Smart car at Mercedes in 2005 (along with E-Class quality costs
and currency), which we show in Exhibit 1. Another example is Fiat's Stilo, which did 20% of planned
volume and blew up Fiat (along with some other mistakes), which we show in Exhibit 2.
Exhibit 1
Massive Smart Car losses (including write downs) were a
big factor in Mercedes' losses of 2005…
Mercedes Cars: EBIT (2000-2007)
6,000
Exhibit 2
…Fiat's Stilo was a significant part of the heavy losses
early last decade
Fiat Auto: EBIT (2000-2007)
1,000
750
5,000
500
250
0
3,000
EURmn
EURmn
2,000
-250
-500
-750
1,000
-1,000
0
-1,250
Source: Corporate reports and Bernstein analysis.
2007
2006
2005
2004
2003
2002
2001
2000
2007
2006
2005
2004
2003
2002
-1,500
2001
-1,000
2000
European Autos
4,000
Source: Corporate reports and Bernstein analysis.
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Is losing money a European core competence?
Some will ask why we've just focused on Europe. Don't other regions have instances of spectacular
automotive failures too? Of course they do. The Americans are pretty good at it. GM and Chrysler went
bankrupt, although that was more macro than model specific. But the Americans can do model-specific
failures too – Saturn, GM EV1, Pontiac Aztec, Ford Contour, Dodge Caliber, Fisker Karma all spring to
mind (other suggestions welcome). The Japanese have also scored some own goals, albeit most a long time
ago (Mazda Eunos, early Nissan Infiniti, first Toyota Prius, Lexus LFA). But we've focused on Europe as it
is our specialist area. We also cover Chinese Autos: but the Chinese have yet to build world class cars and
have yet to make world class losses. Their time will come in both categories…
Our methodology – fixed costs, R&D and contribution margin per car
We've screened the last 15 years of the European industry's history and honed in on models we regard as
obvious commercial failures. Our criteria for pre-selection is somewhat subjective, based on memory of
products that obviously flopped, but we've tried to be as balanced as possible and catch most of the key
problem cars during this period. We've looked at their product run over their lifecycle, then we've tried to
estimated fixed cost investments (based on scale, number of plants and automation levels) and R&D spend
(based on product sophistication) . We've then estimated likely price realization and contribution margin per
car. We've also tried to capture fixed asset writedowns. The end result reveals vehicles that have lost
billions of Euros.
Don't take these numbers too seriously…
We've attempted to put some figures on the losses incurred by the most problematic cars – but our estimates
are obviously very, very approximate. Pinning down the real cost of investments by the OEMs is impossible
– some will let specific figures escape but it's very rare for them to provide total R&D and capex figures for
a project. We simply don't know what level of carryover parts are used, what level of new investment is
needed at a plant level (paint shops, robotics, stamping presses may be new but often are re-used) and what
the variable contribution margin is on each product. We also don't know how OEMs load central costs
(head office costs, distribution costs, marketing costs) by product. But we've tried to be reasonably
systematic about it:
∑ We've put much higher R&D costs in for ground breaking products like VW's Veyron and Phaeton than
for a platform derivative like the Peugeot 1007.
∑ We've used capex figures that vary with the installed capacity – except for the Phaeton where we assume
a brand new glass factory and new engine lines will have incurred huge costs.
European Autos
∑ We've adjusted capex figures so they are lower for models using carryover platforms (Laguna, Jaguar XType) than for brand new platforms (A-Class).
∑ We've tried to apply sensible contribution margin estimates and realized pricing assumptions.
We therefore think our figures are reasonable – but please don't take them as gospel. Somewhere in every
OEM there lurk people who know the truth. But you can be sure you'll never meet them. You can also be
sure that if you ask them, Board level and IR executives will dispute nearly every number we've published.
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The 10 most loss making cars of modern times
There are a host of cars that make the short list for this analysis. Honourable mentions go to the Maybach,
the Renault Modus, the Lancia Thema and the Citroen C5 and C6. But on our calculations, the 10 Most
Loss Making European Cars Of Modern Times are, in descending order: (1) Smart Fortwo, (2) Fiat Stilo,
(3) VW Phaeton, (4) Peugeot 1007, (5) Mercedes A-Class (6) Bugatti Veyron, (7) Jaguar X-Type, (8)
Renault Laguna, (9) Audi A2 and (10) Renault Vel Satis. We show our rank order in Exhibit 3.
Exhibit 3
The Smart Fortwo, Fiat Stilo and VW Phaeton make up our Top-3 loss making cars
Model
Year Of
Introduction
End Of Model
Cycle (Year)
1997
2001
2001
2004
1997
2005
2001
2006
2000
2001
2006
2009
2012
2009
2004
2013
2009
2012
2005
2009
Smart Fortwo
Fiat Stilo
VW Phaeton
Peugeot 1007
Mercedes A-Class
Bugatti Veyron
Jaguar X Type
Renault Laguna
Audi A2
Renault Vel Satis
Top-10 Loss Making Cars Of Modern Times
Achieved Peak Annual Total Lifecycle Total Estimated Sales Total Estimated Loss Loss Per Vehicle
Price (€)
Volume
Volume
(€mn)
(€mn)
(€)
9,000
12,000
70,000
12,000
17,000
1,000,000
22,000
16,000
20,000
30,000
139,964
187,937
11,168
73,563
207,229
83
69,059
275,757
49,369
21,989
749,304
769,395
71,016
123,256
1,187,085
369
362,806
433,965
176,205
64,018
6,744
9,233
5,681
1,479
20,180
369
7,982
6,943
3,524
1,921
3,350
2,100
1,996
1,896
1,713
1,704
1,700
1,540
1,327
1,198
4,470
2,729
28,101
15,381
1,443
4,617,547
4,687
3,548
7,532
18,712
Source: Bernstein estimates and analysis.
Almost €20bn of collective losses
The losses incurred on these vehicles are truly spectacular. Collectively, we estimate these products lost
almost €20bn. The losses suffered by some of these cars extend to over €15,000 per unit, including fixed
costs. Each and every one of them have created financial havoc for their producers.
Some OEMs can afford the pain – but the smaller ones simply cannot
While some automakers such as VW can shrug them off, given their size, alternative profit centres (Audi)
and strong balance sheet, others don't have such a luxurious position. The multi-billion losses that we
believe were suffered by the Fiat Stilo, Peugeot 1007 and Jaguar X-Type were severe trauma for the
companies concerned – and in some cases nearly sank them.
European Autos
There are some examples in our analysis of cars selling at a cash loss
There are only a few examples of products where we believe cars were sold at below cash cost – we fear
that fate may have befallen the Smart, Fiat Stilo (remember, it was a pre-Marchionne car) and Peugeot 1007
– due to cars being stacked up in inventory and needing to be liquidated. Or alternatively, it can happen due
to the OEM having given suppliers minimum volume guarantees (Smart) or dealers a promised level of
volume (Smart, Jaguar X-Type). Once the product starts losing money in cash terms, things can get very
ugly, as we show in Exhibit 4.
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Exhibit 4
Losses on failed models runs to the billions of Euros...the little Smart made the biggest losses, on our calculations
Euro Autos: Top 10 Loss-Making Cars Of Modern Times
4,000
3,500
3,000
Loss (EURmn)
2,500
2,000
1,500
1,000
500
0
Smart Fortwo
Fiat Stilo
VW Phaeton
Peugeot
1007
Mercedes AClass
Bugatti
Veyron
Jaguar X
Type
Renault
Laguna
Audi A2
Renault Vel
Satis
The per unit analysis is harsh – but fair
It is fascinating, in a rather morbid way, to look at the losses on a per unit basis. While Mercedes A-Class,
Fiat's Stilo and Renault's Laguna all lost billions in total on our calculations, they at least sold some volume.
So on a per unit basis, the loss of a few thousand Euro per car doesn't look too horrendous (although our
methodology doesn't capture the full fixed costs of an automaker – if we loaded these cars with their fair
share of central costs the result would be worse). But once we get further up the list in Exhibit 5, we begin
to see some really immense per unit numbers.
European Autos
The French score highly in the loss per unit championship…
The Peugeot 1007 was a disastrous commercial failure. Peugeot thought the European consumer needed a
small car with sliding doors. It turned out the European consumer did not. Having tooled up to make up to
200k units per annum at Poissy, PSA found that demand was about…zero. While Poissy was thankfully a
very flexible plant that could build other small cars built on the same platform, the tooling cost for the
bespoke exterior and interior the 1007 was a write off and the big hole left in the utilization of Poissy has
been a drag on Peugeot since. 1007 production volumes were tiny so despite R&D and capex costs below
those of a genuine standalone model, the per unit loss was horrendous – we estimate it at c.E15,000.
Another French "contre son camp" was the Renault Vel Satis, launched in 2001. Perhaps one of the oddest
looking cars of all time, it flopped, leaving a big gap in utilization at the Sandouville plant – a gap the
(related) Laguna failed to fill. We estimate per unit losses on the Vel Satis at almost €20,000 as its fixed
cost coverage fell woefully short.
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…but no-one can touch Volkswagen and its grandiose projects
Once we get into the really grand projects, the numbers per unit get silly. VW management put the Phaeton
limousine and Bugatti Veyron into production knowing they would lose money. There was no version of
the business plan for the Phaeton that could possibly have added up to a profit – but its sales weakness
probably still took VW by surprise. It has actually stayed on sale longer than planned and has to some
degree had its situation improved by China. But even with Chinese sales – and even with Bentley using the
platform – we believe its immense capital investment and R&D (including W12 and V10 engines) mean its
losses have been huge. We put its loss per unit at €28,000.
We calculate the (VW) Bugatti Veyron lost almost €5mn per unit
For the Veyron – what can we say? The most ambitious and complex vehicle ever put on sale. A tour de
force of engineering. A 10 year project with goals that some of VW's finest minds couldn't figure out how
to reach. The Veyron probably took more R&D than some OEMs spend it total each year. The car has sold
369 units so far. The loss per unit? We estimate it at almost €5m. VW argue that Veyron cost no more than
an F1 programme. Perhaps that's true, but it's also not clear how the Bugatti has helped the brand, pricing or
sales of VW Golfs and Polos.
Exhibit 5
A €4.6m loss per unit! The VW Veyron and Phaeton are hugely loss-making on a per unit basis because of massive
R&D and small lifecycle volumes
Euro Autos: Loss Per Unit Over Model Lifecycle
5,000
40
35
4,000
30
Loss/Unit - EUR '000
25
20
15
10
5
European Autos
0
Bugatti
Veyron
VW Phaeton Renault Vel
Satis
Peugeot
1007
Audi A2
Jaguar X
Type
Smart Fortwo
Renault
Laguna
Fiat Stilo
Mercedes AClass
Cash is king: why OEMs continue producing loss making cars
The numbers in Exhibit 5 may look huge – but on an annual basis they run at levels that explain why
management teams often preserve with a project. A loss of a few hundred million a year in P&L terms can
still be associated with a model that generates a little bit of cash (perhaps a few thousand Euro per unit),
even if it can't hope to ever repay the fixed asset investment. But if the R&D and capex has already been
spent, what's the upside to closing down production? If the automaker took an associated asset write down
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(we've seen a few in the last decade – Renault, Peugeot, Fiat and Daimler have all taken large charges) then
the P&L operating result would improve – but if a car is generating some cash, why not let it run to the end
of the cycle? Replacing the vehicle is a somewhat perverse decision – for instance Mercedes replaced the
A-Class with another loss making A-Class. But often OEMs will just let a car run to the end of its cycle – or
at least until the point where the vehicle can't even be given away – before retooling the plant to do
something else (or leaving it idle).
Exhibit 6
A number of OEMs have been guilty of tooling up for large volumes that have failed to materialise – but they typically
keep the car in production as long as it is generating a small amount of cash per unit
Euro Autos: Top-10 Loss Making Models Actual Lifecycle Production vs. Planned
Production*
Actual Production v Planned Production
80%
70%
60%
50%
40%
30%
20%
10%
0%
Peugeot
1007
Renault Vel VW Phaeton
Satis
Renault
Laguna
Jaguar X
Type
Fiat Stilo
Audi A2
Bugatti
Veyron
Smart
Fortwo
Mercedes AClass
Note: We compare actual production over a model's lifecycle versus planned production over an assumed 7 year model cycle.
Lessons from the failures
European Autos
What lessons can we glean from this list of disasters? We see five obvious lessons:
1. Giant strategic leaps forward are the biggest risks – trying to turn Mercedes into a small car
producer or Jaguar into a D-segment competitor didn't work.
2. Premium brand engineers normally screw up the costs of small cars – Mercedes having the biggest
problem is this respect, but Audi also running into similar issues.
3. Big technology leaps can be problematic – unique body construction and complex engines (Smart),
aluminum construction (Audi A2), unusual doors (Peugeot 1007)…electric cars (examples still to
come).
4. Don't try to be something you are not (Fiat's Stilo failed because it tried to be an Italian version of
VW Golf).
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5. Don't make silly production projections and tool up for them (Fiat, Jaguar, PSA and Renault).
Given these seem to be the routes to failure, what are investors better off backing? Well it's boring to say it,
but premium brands with consistent execution (BMW, Audi) or new products with a bulletproof badge and
pricing (Porsche Cayenne, Panamera etc).
Who will be next?
If you walked the halls of the Frankfurt Messe, or followed the product announcements and reveals from
your desk, you'll have seen the hopes and fears of every OEM on show. The hopes and fears of hundreds of
thousands of employees too. Who will be next to experience the uncomfortable realization that their product
is a failure? If we knew, we'd shout about it. But some OEMs are taking more risks without proper research
(arguing that focus groups don't work), some are following strong leaders (who believe in a technology
without data to back it) and many are crowding into existing segments (yet more cynical premium branded
SUVs keep coming – the latest are Maserati, Bentley, Rolls and Aston – when will this end?). Some of
these products are going to fail. Our best guess for those most likely failures? Have a look at our 5 criteria
above. We'd argue electric cars from Renault to BMW look to qualify. Electric vehicle evangelists seem to
be enjoying a Tesla-powered rush of blood to the head, after the American company's sales success. But
we're not convinced that these European products can make money – in fact they have the potential to lose a
huge amount.
A visual guide to failure – top right = good; bottom left = bad
European Autos
We have plotted our Top 10 loss makers against some of the industry's most profitable successes, to
highlight the usual origins of problems. As we show below in Exhibit 7, the key to making money is to sell
lots of vehicles for many years, preferably at high price points. The Exhibit below shows that the further a
car is to the top right corner, the more money it makes (shown by the size of the circle). Being in the bottom
left corner – with low volumes and low price points – is usually a recipe for losses. But two of our Top 10 –
the Veyron and Phaeton – have prices that are off the chart but have low volumes and massive development
and material costs.
10
European Autos
Exhibit 7
Our top-10 loss-making models (ex-Veyron & Phaeton) languish unsurprisingly towards the bottom left corner of our cumulative lifecycle
volume/APRU/profitability analysis
Veyron
ARPU €1mn
Phaeton
ARPU €70k
$55
Lifecycle Sales Volumes vs. Estimated Lifecycle ARPU - Positioning of Key Models (1990-2012)
Bubble Size =
Estimated Lifecycle
Operating Income
(Blue)/Loss (Red) by
Model ($mn)
BMW 5 Series (E60)
BMW X5 (E53)
Mercedes E-Class (W211)
Lexus RX (XU30)
$45
Merc E-Class (W210)
Merc E-Class (W124)
Audi A6 (PL56)
Lexus RX (XU10)
BMW 3 Series (E90)
BMW 5 Series (E39)
$35
BMW
Jeep Grand
3-Series (E36) Cherokee (WJ/WK)
Chevrolet Silverado
Jaguar X-Type Audi A6 (PL55)
(GMT901/902)
Merc C-Class (W203)
Dodge Ram
(DR/DE)
Toyota Camry (300N)
Ford
Honda Accord (CYR)
Audi A2
$25
Explorer (T2)
BMW 1-Series (E80)
Dodge Ram (BR)
Mercedes A-ClassVW Passat (VW461)
Ford Explorer
Renault Laguna
Toyota Camry (414T)
VW Passat (VW451)
Peugeot 1007
Chevrolet
Silverado (GMT800)
Chrysler Minivan (RS/RT)
Honda Accord (CY)
Fiat Stilo
Ford F-Series PU (PN38/96/131)
Ford Focus (C307)
VW Golf (VW350)
Totyota Corolla (150N)
Honda Civic (CF)
$15
Ford F-Series
PU (PN221/356/415)
VW Golf (VW340)
Honda Civic (CF)
Toyota Corolla (555N)
Ford Focus (C170)
Toyota Corolla (810T)
Smart Fortwo
Renault Clio (X65)
Fiat Punto (176)
Fiat Punto (188)
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
10,000,000
11
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Cumulative Lifecycle Volume (1990-2012)
September 18, 2013
$5
Estimate Lifecycle ARPU ($000)
Renault Vel Satis
September 18, 2013
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The Top 10 Loss Making Cars Of Modern Times (At Least In Europe)
So here we have it, the Hall of Shame in detail. The most financial disastrous, most wide of the mark, most
investor unfriendly products of modern times. We show them in descending order and discuss their reasons
for failure.
1.
Daimler Smart (Fortwo and Forfour) – Small Car, Massive Losses
It's amazing that such a small car can lose so much. But the Smart car was a big idea in search of a home –
and it was turned down by VW before Mercedes picked it up. Conceived by Nicolas Sayek of Swatch
watch fame, the vision was for a small city car for two people with unique safety and style. In many ways it
ended up fulfilling those criteria under Mercedes. But unfortunately is also caused immense financial
damage. Mercedes gave the project to a young and independently managed group of engineers. They raised
the specification again and again. If you consider the description of the product, forgetting what a Smart
looks like, you'd think it was for a super car. Rear wheel drive. A turbo charged engine. A semi-automatic
computer controlled gearbox. Sophisticated ABS and stability programme. A special safety cell.
Aluminium parts. But this wasn't a supercar – it was cheap city transport.
Costs on the Smart were out of control from the beginning
Development costs were huge. Capacity costs were huge – at a brand new plant in Hambach, France. Why
France? Variable costs were huge – with components and quality set at Mercedes standards. Launch and
marketing and distribution costs were huge. Even before launch, this project was out of control and was
doomed. But the product then sold poorly, at far weaker prices than hoped, and suffered massive losses. We
estimate total losses of some €3.35bn for Smart in its first life cycle. We're not convinced the current one
makes money either, even with all its fixed costs written off.
Smart For Four – doubled the problem
European Autos
To add to the problem, someone (still very senior at Daimler…) came up with the idea of Smart ForFour.
Just what the market needed – a four seat Smart. This was an even more catastrophic failure and it died at
launch, failing to fill the extra assembly plant that had been borrowed from Mitsubishi (in Holland) to build
it. Daimler at least didn't own the assembly plant (which, rather ironically, will soon build BMW Minis) but
it had to write off all the tooling, pay off suppliers and lick its wounds. Rumour has it Mercedes are going
to try again with a new one soon.
12
September 18, 2013
80,000
120,000
60,000
100,000
50,000
2002
2012
2011
2010
2009
2008
2007
2006
2005
2004
0
2003
0
2002
10,000
2001
20,000
2000
20,000
1999
40,000
1998
30,000
1997
60,000
2008
40,000
2007
80,000
2006
Units
70,000
Units
140,000
Source: IHS Global Insight and Bernstein analysis.
Smart Forfour: Production Volumes (20022008)
2005
Smart Fortwo: Production Volumes (19972012)
2004
160,000
Exhibit 9
...while Forfour production volumes were a total disaster,
peaking in 2004, wrecking Mercedes' P&L and then being
killed off
2003
Exhibit 8
Smart Fortwo production volumes peaked in 2008...at
half the planned level and with no gross margin
• +65-6230-4651
Exhibit 10
Smart investments, contribution margin and losses – our methodology
European Autos
Smart Fortwo
Investments (€)
R&D costs
Fixed asset investment
Other fixed costs per annum
Other costs (supplier guarantees)
Total other costs
Volumes
Planned annual production
Planned life cycle
Lifecycle volumes
Actual achieved volumes
(1997-2006)
900,000,000
1,000,000,000
100,000,000
300,000,000
1,000,000,000
200,000
7
1,400,000
749,304
54%
Pricing
Planned price (€)
Planned contribution margin
Actual achieved price (€)
Contibution per car (€)
Losses (€)
Total investment
Total lifecycle loss
Loss per annum
Loss per unit
12,000
20%
9,000
-600
2,900,000,000
3,349,582,400
478,511,771
4,470
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September 18, 2013
Exhibit 11
Smart Fortwo
Exhibit 12
Smart Forfour
Source: Wikimedia Commons.
2.
• +65-6230-4651
Fiat Stilo – Europe Didn't Want An Italian Version Of The Golf
The Stilo was a disastrous failure for Fiat and the company has arguably never recovered. Designed as a Csegment rival to replace the Bravo/Brava and, before that, the very successful Tipo, the Stilo fell massively
short of plan. It has a tough task – it was supposed to fill the huge Cassino plant in central Italy and was
supposed to take the fight to VW. Fiat management set out a specification to the product planners that
demanded a true rival to the VW Golf. The product planners and engineers delivered a competent product –
but one that didn't sell.
Europeans don't want an Italian Golf
European Autos
What it taught Fiat is that European consumers who want to buy a Golf, will buy a Golf. They don't want an
Italian version of a German car. Tooled up for 400,000 units on a new platform, with new engines and with
3 body styles, the Stilo flopped. Stilo managed to sell 180,000 units in it first and second years, albeit with
massive discounts, and then collapsed. The Stilo left the Cassino plant empty and Marchionne chose to do a
very low-cost (and rather good value, thanks to Magna-Steyr engineering) rebodying of the platform to
make the Bravo. It sells less than 50k units/year now and looks unlikely to be replaced. We estimate Stilo
losses at €2.1bn in total. This may be an under-estimate.
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September 18, 2013
Exhibit 13
Fiat Stilo production peaked in 2002/03 and declined
thereafter
• +65-6230-4651
Exhibit 14
Fiat Stilo – not what Europe wanted
Fiat Stilo: Production Volumes (2000-2010)
200,000
180,000
160,000
140,000
Units
120,000
100,000
80,000
60,000
40,000
20,000
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
Exhibit 15
Fiat Stilo investments, contribution margin and losses – our methodology
Fiat Stilo
European Autos
Investments (€)
R&D costs
Total other costs
Volumes
Planned life cycle
Lifecycle volumes
(2001-2009)
600,000,000
800,000,000
100,000,000
700,000,000
380,000
7
2,660,000
769,395
29%
Pricing
Planned price (€)
Losses (€)
Total investment
Loss per annum
Loss per unit
15,000
20%
12,000
0
2,100,000,000
2,100,000,000
300,000,000
2,729
3.
VW Phaeton – Piech Calls It His Greatest Achievement
Ferdinand Piech doesn't do things by halves. Building car companies, building families (he has 13 kids) and
building engineering masterpieces – he does them all with gusto. The Phaeton was an extraordinary project
– an attempt to launch the VW brand up market and take on Mercedes in its heartland. There was no
messing around – a bespoke platform, a range of enormous engines, a glass factory – built next to the Opera
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September 18, 2013
• +65-6230-4651
House in Leipzig – with a special owners' delivery suite. The investments were enormous – at €1.5bn of
R&D and €1.5bn of capex we are probably under-estimating it.
Competitors were shocked by the variable costs on the Phaeton
Competitors were astonished but also warned us at launch about VW's cost problems with the car. I recall
asking Juergen Hubbert, Mercedes CEO at the time, about whether he saw the Phaeton as a threat to the SClass. He replied that "I respect this competition but I don't worry about it – we have looked closely at the
car and I tell you, they can't afford to build too many". Hubbert was implying that the Phaeton would lose
money on a variable cost basis. We think VW signed off on the car knowing it would be loss making and
they would have happily sold more, if only there was demand.
The world's most expensive engine programme?
The engines were extraordinary – a 6 litre W12 gasoline engine (a unique layout – effectively a compacted
V12) and a 5 litre V10 diesel. It was said at the time that Piech chose a V10 for the diesel to test his
engineers. Making a gasoline V10 useable in a road car was a challenge enough, since the balance,
vibrations and harmonics are problematic. Making a diesel V10 was a step beyond. We were told by a VW
engineer that the only way to stop the V10 diesel vibrating was engineering in 'balancer shafts' that rotate in
the opposite direction to the crankshaft, but they needed to be made out of tungsten in order to be heavy and
effective enough. At one point VW apparently looked at buying its own Tungsten mine in Namibia to
secure supply – we've no idea if this actually happened. We doubt very much that VW ever needed much
tungsten as the engine hardly sold and most Phaetons were shipped with a 3 litre V6.
Massive loss making – but Piech is still proud of it
European Autos
We believe Phaeton has been a massive financial black hole – even though the car has sold quite well in
China in recent years and has provided the platform for more successful Bentley models (the profits from
which should arguably be allocated to the Phaeton). Despite this, we estimate total losses at €2bn – a per
unit loss of almost €30,000. VW – still led by Piech – is not giving up –and a new Phaeton is in
development (on a common platform with a wider range of cars this time and with no plans, as far as we
know, to build a new glass factory). Piech was recently asked what his greatest achievements were. Did he
say the building of the Audi brand or the globalization of VW? Apparently not – it's reported that he said
"the Porsche 917 [an old Le Mans car] and the Phaeton".
16
September 18, 2013
Exhibit 16
Phaeton production peaked in 2011 at just above 11k
units – China has partially rescued its fortunes
12,000
• +65-6230-4651
Exhibit 17
VW Phaeton – a rather special car, even if it didn't look it
VW Phaeton: Production Volumes (20012012)
10,000
Units
8,000
6,000
4,000
2,000
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
Exhibit 18
VW Phaeton investments, contribution margin and losses – our methodology
VW Phaeton
European Autos
Investments (€)
R&D costs
Total other costs
Volumes
Planned life cycle
Lifecycle volumes
(2001-present)
1,500,000,000
1,500,000,000
100,000,000
700,000,000
50,000
7
350,000
71,016
20%
Pricing
Planned price (€)
Losses (€)
Total investment
Loss per annum
Loss per unit
80,000
30%
70,000
24,000
3,700,000,000
1,995,616,000
285,088,000
28,101
4.
Peugeot 1007 – Sliding To Oblivion
Peugeot thought the European consumer needed a small car with sliding doors. It turned out the European
consumer did not. Peugeot took some criticism ahead of the launch of the car as competitors stated that
they'd looked at doing something similar but that the sliding door was far too costly. PSA was not deterred
– and tooled up to make up to 150-200k units per annum at Poissy. But after launch, PSA found that
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September 18, 2013
• +65-6230-4651
demand was about…zero. While Poissy was thankfully a very flexible plant that could build other small
cars built on the same platform, the tooling cost for the bespoke exterior and interior the 1007 was basically
a write off and the big whole left in the utilization of Poissy has been a drag on Peugeot since. 1007
production volumes were tiny and cut short – so despite R&D and capex costs below those of a genuine
standalone model, the losses on this vehicle were huge. We estimate a total project loss of €1.9bn and a per
unit loss of c. €15,000.
Exhibit 19
Peugeot's 1007 did one third of the volumes planned in
its first year, then totally died
80,000
Exhibit 20
Peugeot 1007 – I hired one in Nice once, but had to
return it as my friends refused to get in it
Peugeot 1007: Production Volumes (20042010)
70,000
60,000
Units
50,000
40,000
30,000
20,000
10,000
2010
2009
2008
2007
2006
2005
2004
0
Exhibit 21
Peugeot 1007 investments, contribution margin and losses – our methodology
European Autos
Peugeot 1007
Investments (€)
R&D costs
Total other costs
Volumes
Planned life cycle
Lifecycle volumes
(2004-2009)
400,000,000
500,000,000
100,000,000
700,000,000
150,000
7
1,050,000
123,256
12%
Pricing
Planned price (€)
Losses (€)
Total investment
Loss per annum
Loss per unit
18,000
20%
12,000
-2400
1,600,000,000
1,895,814,400
270,830,629
15,381
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September 18, 2013
5.
• +65-6230-4651
Mercedes A Class – Just Too Niche To Thrive
In a second Top 5 position for Mercedes, A-Class can also take a bow. The thinking, the product and the
problems were similar. The car wasn't quite as much of a flop as the Smart but its investment costs were
higher. A brand new clean sheet design, Mercedes' first ever front wheel drive car, a platform designed for
electrification (15 years too early) and a range of brand new engines. The car had an unfortunate start
(infamously falling over in a Swedish magazine lane change test) and had to have ESP added unexpectedly
– but that wasn't really the source of its problems. It just wasn't an attractive enough product to enough
buyers –and was a commercial failure, selling at zero contribution margin in many markets. With fixed
costs hanging over it throughout its life, we estimate A-Class suffered annual losses of some €244mn in its
first life cycle – €1.7bn in total. The financial performance of the second generation was better, but still
loss making in our view. The new one looks to be off to a much better start.
Exhibit 22
A-Class production peaked in 1999 and has been on a
downward slide since
250,000
Exhibit 23
Mercedes A-Class – actually a very interesting piece of
engineering and design, but it didn't sell
Mercedes A-Class: Production Volumes
(1997-2012)
200,000
Units
150,000
100,000
50,000
2011
2010
2009
2008
2007
2012
European Autos
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0
19
September 18, 2013
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Exhibit 24
A-Class investments, contribution margin and losses – our methodology
Mercedes A-Class
Investments (€)
R&D costs
Total other costs
Volumes
Planned life cycle
Lifecycle volumes
(1997-2004)
1,000,000,000
1,200,000,000
100,000,000
700,000,000
250,000
7
1,750,000
1,187,085
68%
Pricing
Planned price (€)
Losses (€)
Total investment
Loss per annum
Loss per unit
20,000
20%
17,000
1000
2,900,000,000
1,712,915,000
244,702,143
1,443
6.
Bugatti Veyron – R&D Costs To Rival Concorde
The Veyron is another amazing Piech masterpiece. The Veyron is probably the most ambitious and
complex vehicle every put on sale. A tour de force of engineering. A 10 year project with goals that some of
VW's finest minds couldn't figure out how to reach (eventually some Brits were called in to help with the
gearbox, cooling and aerodynamics – take a bow Ricardo). The Veyron probably took more R&D than
some OEMs spend in total each year – we put the R&D spend at €1.2bn and we are probably
underestimating it. The only saving grace is low fixed costs – the Veyron is largely hand built and the
assembly plant not that asset intense. VW did, however, buy Etore Bugatti's Chateau in Molsheim, in
Eastern Franc, refurbished it and built an assembly plant on the side. Magnificent, if a bit crazy. If you don't
believe us, have a look at:
http://www.bugatti.com/en/tradition/history/molsheim.html
Loss per car – c.E5mn, maybe more
European Autos
With more R&D than the Concorde and all the marketing and selling costs, the €1mn that VW charges for
the Bugatti is little more than an administrative charge. The car has sold 369 units so far. The loss per unit?
We estimate it at almost €5mn. VW argue that Veyron cost no more than an F1 programme. Perhaps that's
true, but it's also not clear how the Bugatti has helped the brand, pricing or sales of VW Golfs and Polos.
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September 18, 2013
Exhibit 25
The Veyron shifted c.80 units annually pre-crisis but
volumes have halved since then
90
• +65-6230-4651
Exhibit 26
Bugatti Veyron – the world's fastest car, the world's
biggest loss per unit
Bugatti Veyron: Production Volumes (20052012)
80
70
Units
60
50
40
30
20
10
2012
2011
2010
2009
2008
2007
2006
2005
0
Exhibit 27
Bugatti Veyron investments, contribution margin and losses – our methodology
European Autos
Bugatti Veyron
Investments (€)
R&D costs
Total other costs
Volumes
Planned life cycle
Lifecycle volumes
(2005-2013)
1,200,000,000
200,000,000
50,000,000
350,000,000
100
7
700
369
53%
Pricing
Planned price (€)
Losses (€)
Total investment
Loss per annum
Loss per unit
1,000,000
13%
1,000,000
125000
1,750,000,000
1,703,875,000
243,410,714
4,617,547
7.
Jaguar X-Type – Better Luck Next Time, Jaguar
The Jaguar X-Type story is very topical at present, as JLR has just announced that it is going to have
another go at producing a car in this segment. JLR argues that the forthcoming X760 programme is taking a
very different strategy to the original X-Type and will learn from its errors. Let's hope they're right, as the
original car nearly sunk Jaguar. It was launched into a market that Jaguar knew little about with unrealistic
21
September 18, 2013
• +65-6230-4651
volume ambitions and too limited a range of engines. Management actually knew it wasn't going to make
money before it was launched. I know because I was called in to meet Bill Cosgrove, the CFO of Ford's
Premier Automotive Group in 2000, before the X-Type launched. I'd written a note on 3 Series profitability
at BMW and Cosgrove wanted to discuss it – because on his numbers, the competing X-Type had no
chance of making proper money. Cosgrove was troubled because Ford has begun to realize that there was
no way the X-Type could make a profit, and that it was making heroic volume assumptions before it has
even launched.
There were 5 fundamental issues with the X-Type in our view:
1. Excessive volume ambitions – a 200,000 volume target represented 15% of the whole global
premium D-segment at the time.
2. Lack of body-styles - X-Type launched with only one body-style (a sedan) and two engines. Jaguar
rushed a station wagon through development but never got to a coupe or convertible.
3. Lack of diesel engines. The X-Type was launched with just 2.5-liter and 3.0-liter V6 gasoline
engines. This represented a small part of the global segment — without a smaller engine and
without a diesel engine, the car was almost unsaleable in Continental Europe.
4. Poor marketing/links with Ford Mondeo. This was clearly an issue for X-Type, despite VW getting
away with it.
5. Dealers who did not know how to sell the car. Jaguar dealers had no experience of how to sell a car
at this price point. They were ill-prepared when the car started to be shipped.
X-Type ended up selling 362,000 cars. This makes it officially Jaguar's bestselling car ever – but it made
too little gross margin and couldn't cover its huge fixed costs. We estimate total losses at over €1.7bn.
Exhibit 28
X-Type production peaked in 2002 and the last model
rolled off the line in 2009
80,000
Exhibit 29
Jaguar X-Type – failed to attract the audience that was
hoped for
Jaguar X-Type: Production Volumes (20002010)
70,000
60,000
Units
50,000
30,000
20,000
10,000
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
2000
European Autos
40,000
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September 18, 2013
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Exhibit 30
Jaguar X-Type investments, contribution margin and losses – our methodology
Jaguar X-Type
Investments (€)
R&D costs
Total other costs
Volumes
Planned life cycle
Lifecycle volumes
(2001-2009)
600,000,000
600,000,000
100,000,000
700,000,000
200,000
7
1,400,000
362,806
26%
Pricing
Planned price (€)
Losses (€)
Total investment
Loss per annum
Loss per unit
26,000
17.5%
22,000
550
1,900,000,000
1,700,456,700
242,922,386
4,687
8.
Renault Laguna – "A Commitment, Not A Target"…Hmmm
Oh Carlos, what were you thinking? The infamous Renault 'Commitment 2009' promised great things.
Renault promised a 6% margin, a massive increase in volumes and a successful Laguna (Top 3 quality in its
class – but the subtext was it would sell well too). These were 'commitments', not targets. Unrealistic from
the start, Ghosn is probably one of the few executives who was glad to see the global financial crisis come
along – as it bailed him out from targets the company would never have hit.
Target 300k; actual 30k
Laguna was a poor product that fell flat on its face, amongst other problems faced by Renault at this time.
Management felt that restyling the previous car, giving it a higher quality interior and promising perfect
reliability would deliver a winner in the sales charts. They were wrong. The car looked derivative, the back
seat space was uncompetitive and consumers had already deserted the brand is this segment. Renault's
original business plan (and investments) were predicated on 300,000 units. That was then lowered to
280,000. Before launch it had dropped to 220,000. Laguna 3 peaked at 100,000 and then fell like a stone. It
currently sells less than 30,000.
European Autos
Total losses of over €1.5bn
How did Renault management get it so wrong? We'd argue that Ghosn, fresh from his indisputable
achievements at Nissan, completely misjudged the competitive position of Renault, failing to realize how
marginal the brand had become. Trying to sell a weak product in a German dominated segment was a losing
proposition. Even PSA, which offered up a much better product (C5/508) has failed. While Laguna
investments were probably more modest than for a genuine new car, we estimate total fixed asset, supplier
and R&D investment at €1.1bn. We therefore estimate that Laguna has lost over €1.5bn.
23
September 18, 2013
Exhibit 31
Laguna production peaked in 2001/02 and has been
declining ever since
300,000
• +65-6230-4651
Exhibit 32
Renault Laguna – Mr. Erich Hauser bought one, but few
others did
Renault Laguna: Production Volumes
(1993-2012)
250,000
Units
200,000
150,000
100,000
50,000
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0
Note: Includes the Laguna coupe.
Exhibit 33
Renault Laguna investments, contribution margin and losses – our methodology
European Autos
Renault Laguna
Investments (€)
R&D costs
Total other costs
Volumes
Planned life cycle
Lifecycle volumes
(2006-2012)
500,000,000
600,000,000
100,000,000
700,000,000
300,000
7
2,100,000
433,965
21%
Pricing
Planned price (€)
Losses (€)
Total investment
Loss per annum
Loss per unit
22,000
30%
16,000
600
1,800,000,000
1,539,621,000
219,945,857
3,548
9.
Audi A2 – Ahead Of Its Time
Audi's A2 is widely described as "an idea before its time". Journalists rave about it to this day, citing its
aluminium construction and great fuel economy. Values of used cars are rising. Examples are owned by
individuals with exquisite taste in cars, such as BarCap's Michael Tyndall. But while the Audi A2 was a
24
September 18, 2013
• +65-6230-4651
great project, it was a financial disaster. We understand that it was originally conceived as a VW product, as
part of Piech's push to take a lead on fuel economy. It was switched to the Audi brand to try to get better
pricing – but put on sale at over €20,000, it still couldn't make much of a gross margin given its all
aluminium construction. It was an R&D project for VW – along with the Audi A8 – as it tried to learn about
how to make cars out of aluminium.
Huge R&D costs and a very complex assembly process
A lot of R&D was sunk into it, the body stamping process needed special dies and the car was riveted, laser
welded and even glued together. It was horribly costly to build and did not sell very well. It was withdrawn
from production early and we estimate the total loss at over €1.3bn, or over €7,000 per car. Aluminium
production has since fallen in cost and is being pushed by other OEMs – notably JLR. The German
companies have plans to use it more and more going forward. But it probably makes best sense on big
expensive cars, not small city cars like the A2.
Exhibit 34
Audi's A2 hit peak production in 2001
Exhibit 35
Audi A2 – everyone agrees it still looks modern today
Audi A2: Production Volumes (2000-2005)
60,000
50,000
Units
40,000
30,000
20,000
10,000
2004
2005
European Autos
2003
2002
2001
2000
0
25
September 18, 2013
• +65-6230-4651
Exhibit 36
Audi A2 investments, contribution margin and losses – our methodology
Audi A2
Investments (€)
R&D costs
Total other costs
Volumes
Planned life cycle
Lifecycle volumes
(2000-2005)
800,000,000
600,000,000
50,000,000
350,000,000
50,000
7
350,000
176,205
50%
Pricing
Planned price (€)
Losses (€)
Total investment
Loss per annum
Loss per unit
22,000
20%
20,000
2400
1,750,000,000
1,327,108,000
189,586,857
7,532
10. Renault Vel Satis – The Kingdom Of The Blind
Renault makes two appearances in our top 10 – but the Vel Satis was a "contre son camp" of the previous
management team, not Carlos Ghosn. The Renault Vel Satis was launched in 2001 and was another attempt
by the French to stay relevant in the luxury market. It was developed under CEO Louis Schweitzer, a rather
academic and philosophical man, who openly stated that he was "not a car guy". It showed. Schweitzer
always seemed somewhat besotted with the charms and views of designer Patrick Le Quement, who was
preoccupied with stand out design and polarizing cars.
Blame the designer
European Autos
Le Quement sold Schweitzer the idea of a controversial car in the high end segment – as well as something
similar for the Megane. Many designers praised the bravery of both (one competitor at the Paris Auto
Show, when the Megane 2 was launched, was quoted as saying "the industry will never be the same
again"). But customers shunned them – especially the Vel Satis. Renault had plans to sell 50,000 a year.
They barely sold that many in its whole lifecycle. Along with the Laguna (with which is shared part of its
platform), it left the large Sandouville plant in Northern France empty for years. We estimate total losses on
the car at €1.2bn and a per unit loss of almost €20,000, as its fixed cost coverage fell woefully short.
26
September 18, 2013
Exhibit 37
Renault's Vel Satis hit peak production in 2002
25,000
• +65-6230-4651
Exhibit 38
Renault Vel Satis – yes really, it looked like this
Renault Vel Satis: Production Volumes
(2001-2009)
20,000
Units
15,000
10,000
5,000
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
Exhibit 39
Renault Vel Satis investments, contribution margin and losses – our methodology
Renault Vel Satis
Investments (€)
R&D costs
Total other costs
European Autos
Volumes
Planned life cycle
Lifecycle volumes
(2001-2009)
600,000,000
600,000,000
50,000,000
350,000,000
50,000
7
350,000
64,018
18%
Pricing
Planned price (€)
Losses (€)
Total investment
Loss per annum
Loss per unit
35,000
30%
30,000
5500
1,550,000,000
1,197,901,000
171,128,714
18,712
Ending on a positive note: sometimes it goes very right
Some OEMs have to deal with massive loss making products. But most enjoy decent profitability on at least
one part of their range – and some have genuine profit centres. But for a car to be real profitable, it always
has to sell proper volume. By that we mean volume over the lifecycle rather than just in any one year.
Vehicles that peak early then decline fast are actually problematic as capacity utilisation falls. Keeping the
product on sale for as long as possible, at good volumes (or using a carry-over platform with a reskin) is
critical. A number of vehicles have been able to use the same basic platform, engine and gearbox for two or
three model cycles – e.g. US pick-ups. In fact there's probably more profit benefit from using a platform
27
September 18, 2013
• +65-6230-4651
over two model cycles than there is using common parts (modules etc) between models. Consistently high
volumes – and smooth model changeovers between product generations – are key. We show some notably
successful examples in Exhibit 40.
Exhibit 40
Consistent volumes over a model cycle (or multiple cycles) is key to maintain profits
Annual Sales Development of Selected Models (1995-2010)
1,200
1,000
Annual Sales (000)
800
600
400
200
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Chevrolet Silverado (GMT800)
Peugeot 206 (T1)
Renault Clio (X65)
Honda Accord (CYR)
BMW 5 Series (E39)
BMW 5 Series (E60)
2008
2009
2010
A high price point alone is not enough
European Autos
There are number of high priced point cars that generate huge gross margins per unit – think of Ferraris,
Astons and Bentleys. These cars cost a lot less to build than they can be sold for, and the marginal profit on
the marginal unit is enormous. But the volumes are often insufficient to repay the development spending.
While Ferrari pulls it off – 7,000 units at over €200k per unit, and high teen EBIT margin – Aston has
rarely been profitable and Bentley, despite support from VW's fixed costs/R&D, is also not consistently
profitable. Even companies like Ferrari that have high gross and EBIT margins are obviously too small to
make overall EBIT that registers in the context of the wider industry. Within the larger OEMs, profitability
for high priced, but more niche models, is sometimes questionable. High end cars are often image builders,
rather than being built to pay the bills. We do not believe BMW's 6 Series or Mercedes SL makes a really
significant contribution (although on a 5 Series platform, the 6 Series unit profits are good). We show price
points of the major OEMs in Exhibit 41, but emphasize again that this is not the only criteria for success.
28
September 18, 2013
• +65-6230-4651
Exhibit 41
Unsurprisingly, the Germans dominate the top 5 of the OEMs with the highest ARPU per vehicle; BMW and VW both
have improved their ARPU substantially over the last 15years
Average Revenue Per Unit for Selected OEMs
1995 and 2012 (€ 000)
90
80
70
ARPU (€000)
60
50
40
30
20
10
0
Porsche
DAI
BMW Chrysler
VW
Honda Nissan Toyota
1995
Ford
Mazda
GM
Renault Hyundai
PSA
Fiat
Auto
Suzuki
2012
"Pile 'em high and sell 'em expensive"
European Autos
The obvious ideal for an OEM is to have a car that sells in big volumes but at decent prices. Tom Purves,
former head of BMW UK and BMW USA, once described the company's strategy as "pile 'em high and sell
'em expensive". It pretty much sums up the 3 Series and its great success. We would classify BMW's 5
Series and 3 Series as very, very profitable vehicles. At Mercedes we think the volume drivers are E-Class
and S-Class. But the contrast between S-Class and 7-series is interesting. While pricing is roughly similar
(Mercedes has an edge), BMW has historically sold about half the annual volume of S-Class – at least until
China came along, which has closed the gap somewhat (China has been a bigger relative boost for 7 Series
than S-Class). We believe that historically, S-Class has been much more profitable than 7 Series – while at
the other end of the range, 3 Series has been much more profitable than the C-Class
29
European Autos
Mercedes E-Class (W210)
BMW 5 Series (E39)
BMW 3 Series (E46)
BMW 5 Series (E60)
Honda Accord (CYR)
Ford Explorer ()
Audi A6 (PL56 (C6))
Porsche 911 (997)
BMW 3 Series (E90)
Honda Accord (CY)
Jeep Grand Cherokee (WJ/WK)
Mercedes S-Class (W220)
Dodge Ram (BR)
Lexus RX (XU30)
Mercedes S-Class (W221)
Dodge Ram (DR/DE)
Chevrolet Silverado (GMT901/902)
35
Chevrolet Silverado (GMT800)
Lifecycle Operatin Income ($bn)
September 18, 2013
• +65-6230-4651
Exhibit 42
The most profitable vehicles of modern times – US pickups, German luxury sedans & SUVs, Japanese sedans
Estimated Lifecycle Operating Income of Top-20 Models (1990-2011) - $bn
30
25
20
15
10
5
0
30
September 18, 2013
• +65-6230-4651
Disclosure Appendix
Valuation Methodology
In a "normal" economy, we value stocks on the basis of their returns on capital, using the calculation
"EV/IC = (ROIC – g)/(WACC – g)" where g accounts for growth. We believe that over time, even in the
momentum-driven auto sector, valuations will be driven by the ability of a company to generate a return on
its capital base and grow its business. In a "normal" economy, we also look at EV/EBITDA and P/E to
gauge relative valuations and peak stock price potential. In more challenging times, when earnings are
minimal and stocks de-rate, we also look at valuations versus historical troughs on metrics such as EV/IC
and EV/sales and look at balance sheet strength.
Risks
The risks to our view on European Autos stocks and our share price targets are straightforward and are
mainly macroeconomic in nature. Earnings, liquidity and equity value could be severely tested in the event
of a double-dip recession proves even deeper and longer than we forecast and if auto and truck sales fall far
below our assumptions, putting our price targets for the European Autos stocks at risk. The ability of the
financial services businesses to remain viable is at risk if the financial system deteriorates again and capital
market access becomes impossible.
European Autos
Our forecasts are also sensitive to moves in the Euro versus the US dollar and the UK sterling as well as
Latin American and Asian currencies.
31
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(0.4% banking clients); Underperform - 12.2% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in
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12-Month Rating History as of 09/17/2013
Ticker
Rating Changes
BMW.GR O (RC) 03/23/11
DAI.GR
M (RC) 03/16/12
F.IM
M (RC) 05/17/13
PAH3.GR M (RC) 07/23/12
RNO.FP U (RC) 07/11/13
UG.FP
M (RC) 01/18/10
VOW.GR M (RC) 08/17/10
VOW3.GR M (RC) 08/17/10
O (DC) 02/01/13
O (RC) 05/21/12
M (RC) 12/18/12
O (RC) 04/06/09
Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated
Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change
OTHER DISCLOSURES
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Euro Autos - ecomento.com

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