World Truck Manufacturers A strategic review of finance and operations 2001 Edition By Jonathan Storey 1 0 CHAPTER 1: THE GLOBAL TRUCK INDUSTRY DEMAND Global sales of trucks in the 6t-plus GVW category grew by 3% to over 1.5m units in 2000. The increase was driven by improved demand levels in most regions, particularly Asia, South America and eastern Europe, partly offset by a downturn in Nafta where truck sales had reached record levels the previous year. Contrary to what many of the truckmakers expected, truck sales in western Europe increased during 2000 but by the final quarter demand was slipping below year-ago levels. In the heavy truck sector (over-16t) global demand rose by 4% in 2000 to 0.78m units. Again the decline in Nafta was more than offset by growth in most other regions. In western Europe sales rose by 4% to a record 250,000 vehicles. Together, Nafta and western Europe accounted for 59% of global demand in the heavy-truck sector during 2000, down from 71% in 1999. During 2001 the Nafta truck market has continued declining, with the volatile heavy sector likely to end the year more than 30% below year-ago levels. Demand has also been falling in western Europe, albeit at a more sedate pace. The fall in sales within these two regions is being partly offset by growing demand in Asia, Latin America and eastern Europe. By 2005, demand growth in emerging markets is forecast to have driven worldwide sales to 1.8m units and the proportion of global truck demand contributed by Nafta and western Europe is expected to have fallen to 47% from 57% in 2000. This expected pattern of growth is one factor behind the recent interest among western truckmakers in establishing links with Asian producers to bolster their presence in the region. Figure 1.1: New truck sales worldwide, by region, 1996-2000 & 2005 (000s) Region 1996 1997 1998 1999 2000 2005* Western Europe 254.4 248.2 299.0 335.0 344.7 340.0 Increase / (Decrease) (0.6)% (2.5)% 20.5% 12.0% 2.9% (1.3)% Eastern Europe 80.2 78.9 66.4 59.7 71.5 118.0 Increase / (Decrease) (11.7)% (1.6)% (15.8)% (10.1)% 19.7% 65.2% Nafta 396.6 427.5 484.4 587.3 532.9 514.2 Increase / (Decrease) (11.9)% 7.8% 13.3% 21.2% (9.3)% (3.5)% Asia 608.9 513.3 376.4 382.1 438.2 661.3 Increase / (Decrease) (0.5)% (15.7)% (26.7)% 1.5% 14.7% 50.9% Latin America 64.0 76.0 74.5 61.2 75.1 97.6 Increase / (Decrease) (16.9)% 18.8% (2.0)% (17.9)% 22.8% 29.9% Oceania 8.2 7.4 7.3 7.6 7.8 8.4 Increase / (Decrease) (4.7)% (9.8)% (1.4)% 4.1% 2.6% 7.7% Middle East 42.0 63.7 54.4 47.4 54.6 61.3 Increase / (Decrease) 5.0% 51.7% (14.6)% (12.9)% 15.2% 12.3% Africa 9.6 8.9 8.1 6.9 7.6 9.6 Increase / (Decrease) 4.3% (7.3)% (9.0)% (14.8)% 10.1% 26.3% World 1,464 1,424 1,371 1,487 1,532 1,810 Increase / (Decrease) (5.2)% (2.7)% (3.7)% 8.5% 3.0% 18.2% * Increase/decrease calculations for 2005 are versus 2000 data Source: Marketing Systems. Historical data for emerging markets includes estimates 1 UNIT SALES & OPERATING PROFIT The data presented in Figure 1.2 shows the aggregate operating profit of five European truckmakers: Iveco, MAN, RVI, Scania and Volvo; plotted against the aggregate unit sales for those companies since 1987. Data for DaimlerChrysler's CV division is not shown due to the lack of a suitable data series (see DaimlerChrysler discussion). The unit sales and profit data for Iveco and RVI includes the contribution from sales of vehicles under 6t, just 4,000-5,000 units in RVI's case but 80,000-90,000 units at Iveco. The chart shows the industry's profit reaching a peak of Eur1.5bn in 1988 before the E urope-wide recession of the early nineties caused sales and profits to fall, reaching a nadir in 1993 when an aggregate loss was recorded. The European industry's profit rose to a fresh peak in 1995, helped by strong demand in North and South America. Unit sales declined by 7% in 1996, but aggregate profit fell more sharply, down 57% due to the intense price competition faced by all the truckmakers. Over the four years to 2000 the industry's profit grew at an average rate of 26%, and in 2000 the aggregate profit figure rose 6.5% above its 1995 peak as sales climbed to a record 484,000 vehicles, 34% above the 1995 figure. It can be seen that over the past twelve years, a 1% rise in unit sales has been associated with an average rise of 2.2% (average deviation 1.3pts) in operating profit, whereas a 1% fall in sales has been associated with an average fall in operating profit of 8.1% (average deviation 1.7pts). Figure 1.2: Aggregate unit sales & operating profit of Europe's major truckmakers (1) 600 2,000 Unit sales Op. Profit 500 1,500 400 Op. profit (Euro m) 1,000 Unit sales (000s) 300 500 200 0 100 0 -500 87 89 91 93 95 97 99 Year 89 90 91 92 93 94 95 96 97 98 99 2000 Unit Sales (000s) 347.4 322.4 307.4 285.1 253.0 300.7 360.7 334.9 357.1 415.8 443.2 484.1 Change (%) 5% (7)% (5)% (7)% (11)% 19% 20% (7)% 7% 16% 7% 9% Op'g Profit (Euro m) 1,454.8 679.9 532.6 183.3 (49.8) 1,089.2 1,714.8 731.4 943.1 1,397.1 1,632.7 1,827.2 Change (%) (3)% (53)% (22)% (66)% (127)% N/A 57% (57)% 29% 48% 17% 12% (1) Aggregated data for MAN, Iveco, RVI, Scania & Volvo trucks Source: Marketing Systems 2 REVENUE The revenue data for the latest financial years of the major truck-making groups is shown below. We have attempted to show the results for the truck (6t-plus) and heavy bus divisions only, but inevitably the figures are not all based on consistent criteria due to different levels of disclosure. However, the dominance of the European producers is clear, occupying six of the top eight places in revenue terms, with DaimlerChrysler's (DC's) truck activities generating more than double the revenue of all its principal rivals except Volvo. If the contributions from DC's other commercial vehicle divisions (vans and powertrain) are included, its 2000 revenue figure increases from Eur21bn to Eur29bn. Following Volvo's takeover of RVI at the beginning of 2001, Volvo Global Truck will in future have a revenue base about 28% smaller than that of DC's truck and bus divisions, going by the 2000 results. The Japanese truck producers have never been a significant force outside Japan and some Asian markets. This mainly reflects the significant product differences that have traditionally existed between Japan, North America and western Europe but also reflects poor strategic planning by company managers. The slump in truck demand within Japan and other Asian markets at the end of the nineties has clearly shown the risk of such a narrow sales focus, as the industry has suffered three years of aggregate net losses and the Japanese truckmakers have all had to negotiate alliances with other producers from positions of weakness. Figure 1.3: Revenue of the major truckmakers, 2000 Nissan Diesel Telco MMC med/heavy (e) Isuzu med/heavy (e) Hino Trucks MAN Scania RVI Paccar Iveco Navistar Volvo DC-Truck & buses 0 5,000 10,000 15,000 20,000 25,000 Revenue (Euro mils) Source: Companies & estimates 3 UNIT REVENUE Looking at average unit revenue is a proxy for the different product profiles of the truckmakers. Unsurprisingly it shows the manufacturers primarily engaged in heavy truck production, such as Scania and Volvo, as receiving the largest unit revenues. If RVI was included in the Volvo data for 2000 its average unit revenue would drop from Eur109,000 to Eur89,000. It is worth stressing that this is not a qualitative measure, under which a company with high unit revenue can be considered better than one at the other end of the scale. It is more a reflection of the different sectors in which the truckmakers operate and, to some extent, highlights which are a company's key competitors. Figure 1.4: Unit revenue of the major truckmakers, 2000 Isuzu med/heavy (e) MMC med/heavy (e) Iveco Nissan Diesel RVI Paccar Navistar DC-Truck & buses Hino Trucks MAN Volvo Scania 0 20,000 40,000 60,000 80,000 100,000 120,000 Eur / unit Source: Companies & estimates 4 Figure 1.5: Average operating margins of the major truckmakers, 1996-2000(1) Hino Nissan Diesel Isuzu Mitsubishi RVI DC-CVs Volvo Truck Fiat CVs Navistar MAN Paccar Scania -2% 0% 2% 4% 6% 8% 10% Operating margin (1) DaimlerChrysler data reflects 1996-99 only Source: Companies Figure 1.6: Average operating margins of the major truckmakers, 1991-2000 RVI Hino Isuzu Nissan Diesel Mitsubishi Navistar Fiat CVs Volvo Truck MAN Paccar Scania -2% 0% 2% 4% 6% 8% 10% Operating margin Source: Companies 5 AVERAGE PROFIT MARGINS As Figure 1.2 showed, the European truckmakers benefited from four years of rising sales and rising profits from 1996 to 2000. The US producers similarly benefited from a sales boom, though their time of plenty lasted only three years as US truck demand began turning down early in 2000. Consequently both Navistar and Paccar reported lower earnings for 2000 (down 48% and 19% respectively) after three years of growth averaging 81%. In a business as markedly cyclical as the truck industry, it is a company's ability to remain profitable throughout the demand cycle which is the real sign of having got the fundamentals of the business right and the performance of the major truckmakers over the last decade suggest there are few which fall into this category. The current downturn is already highlighting the best performers and is forcing the others to implement substantial restructuring programmes to reduce their cost bases. As the preceding charts show, looking over the past five years three producers: Hino, Nissan Diesel and Isuzu, have recorded negative average operating margins. A further two: Mitsubishi and RVI have recorded positive average operating margins of less than 1%. Among the remainder only three have reported average margins above 5%: • MAN at 5.2%; • Paccar at 7.0%; • Scania at 9.0% This is probably the lowest target any truck producer is likely to set itself as a long term cyclical average. Over a ten year period the number of companies with negative average operating margins remains at three but RVI takes the place of Nissan Diesel. The next six firms are all below 5% and Paccar and Scania again head the field with average margins of 5.5% and 9.9% respectively. It should be noted that the profit figures used in the charts are as reported by the companies concerned and in some cases include the profit contribution from non-truck areas of the businesses such as light commercial vehicles and even passenger cars or SUVs in the case of Isuzu and Mitsubishi. Please see the individual manufacturer discussions for more details. Given the slump in demand faced by the Japanese truckmakers over the past few years, it is only to be expected that their recent average profit indicators begin to suffer. However, their poor showing is not just a reflection of the recent sales downturn. In aggregate the Japanese truckmakers have reported an average operating margin of just 1.1% over the eighteen years from 1983 to 2000. The peak aggregate margin during this time was 2.6%, achieved in 1988, which was also the year in which Hino reported the peak individual operating margin of 3.8%. Among the European truckmakers RVI has usually been the worst performer over the past eighteen years. The division made pre-tax losses in thirteen of those years as it was dragged down first by a lengthy turnaround at its loss-making North American subsidiary, Mack and then by losses within its European operations. Although RVI has reported a profit for the last three years after incurring losses in 1996 and 1997, its underlying profitability has lagged that of other western producers. Previous editions of this report have suggested that if RVI could not perform better in boom conditions, the parent company should consider disposing of the division before the next downturn. This has now been done through the sale of the division to Volvo and this probably gives RVI its best chance of long term profitability. INDUSTRY STRUCTURE The inadequate rates of return by many truckmakers have been a major factor in the recent wave of industry consolidation. In the past two years takeovers or partial takeovers have been announced regarding ERF, Hino, Hyundai, Mitsubishi Motors, RVI, Scania and Western Star. The consolidation process has nearly run its course now, but there remain some significant players in Europe (MAN) and Japan (Nissan Diesel) who continue to look susceptible to takeover. 6 Figure 1.7: Truck production by manufacturer, 2000 Sisu 0.5 Roman 0.8 Norinco 0.8 Samsung 0.9 Skoda-Liaz-Tatra 1.7 Dina 2.2 Daewoo 2.5 Temsa 2.8 Otoyol 3.0 Chrysler Kamyon 3.8 AIOS 4.4 BMC 4.7 Otosan 4.8 Uralaz 8.5 Zil 8.6 VW 8.8 CNHDTC 12.1 Gaz 14.9 Kamaz 23.5 Nissan Diesel 24.2 Hyundai 27.1 Ashok Leyland 32.9 Hino 36.3 Telco 43.6 Scania 51.4 Mitsubishi 51.6 GM 56.8 Isuzu 64.8 MAN 65.3 Iveco 75.1 Ford 80.1 Dongfeng 91.0 Navistar 107.5 Paccar 111.1 China FAW 115.0 VGT 169.7 DC-Trucks 255.0 0 50 100 150 200 250 Production (000s) Source: Companies & Marketing Systems Figure 1.6 shows thirty-seven different truck producers existing as independent entities in 2000, five of which produced fewer than 2,000 units during the year and a further eleven produced fewer than 10,000 units. Most of these firms are in some way dependent on larger producers, for technology and/or capital and a proportion can be expected either to go out of business or be taken over by larger concerns in the next few years. For example Mexico's Dina has ceased production this year and all six of the Turkish producers are suffering from the current severe contraction of their domestic market and it is unlikely that all six will continue to survive. 7 At the other end of the scale it looks likely that the global truck industry will in future be dominated by between six and eight producer groups, each with an annual output in excess of 100,000 units. On the basis of 2000's results DaimlerChrysler, Volvo Global Truck, Navistar and Paccar are already above this threshold. Two of the Chinese producers could probably reach this level on the basis of domestic demand growth alone. Merger and acquisition activity is likely to put at least one other group into this category. 8 CHAPTER 2: TRUCK DEMAND IN WESTERN EUROPE SHORT TERM DEVELOPMENTS New registrations - 2000 New truck registrations in western Europe rose by 2.0% in 2000 to a new peak of just under 385,000 units. The growth reflected: • a significant increase in economic growth, at 3.4% compared with 2.4% in 1999; • the continuing dominance of the road transport industry in the freight market; • real interest rates at historically low levels in most markets, both inside and outside the euro-zone; • the ongoing restructuring and maturing of Europe's road haulage industry, partly in response to various single market measures. Figure 2.1 shows that at the beginning of the year demand in western Europe was significantly higher than year-ago levels - the difference between Q1-2000 and Q1-1999 being 4.7%. As the year progressed the rate of increase slowed and then reversed in Q4-2000 when new regis trations were 1% below Q4- 1999 levels. This marked a highly significant turning point for truck demand in western Europe which had been registering year-on-year increases in every quarter since Q2-97. France and Italy were significant exceptions to the general pattern of demand during 2000. Demand in both these markets remained above prior year levels for most of the year and was rising strongly in the fourth quarter. In the five major markets of western Europe, accounting for 78% of the region's new truck registrations, demand during 2000 evolved as follows. q In Germany demand for new trucks was weaker throughout the year and overall new registrations fell by 3% to 109,000 units, about 18,000 units short of the peak of 127,000 units reached in the 1991 reunification boom. The decline was sharpest in the sub-16t sector which dropped by 5.6%, compared with a 0.8% fall in the heavy sector. q In France new truck registrations increased by 7% to 59,000 units, taking the total growth since 1997 to 45.5%. This level of demand represented a new peak for the French market, the 1989 peak of 54,000 trucks having been exceeded for the first time in 1999. The heavy truck sector rose by 8% to a record level for the third successive year. Figure 2.1: Quarterly truck & bus registrations in western Europe units 110,000 105,000 100,000 95,000 90,000 85,000 1999 2000 2001 2002 80,000 Q1 Q2 Q3 Q4 Source: Marketing Systems 9 Figure 2.2: New truck & bus registrations in western Europe Segment & GVW 1997 1998 1999 2000 2001(F) A 2-Axle Rigid 3.51 - 6t 37,326 39,059 42,319 40,051 38,191 B 2-Axle Rigid 6.01 - 10t 50,242 59,247 62,126 61,893 58,526 C 2-Axle Rigid 10.01 - 15.9t 24,844 28,267 32,079 32,934 31,828 Trucks below 16t 112,412 126,573 136,524 134,878 128,545 Change (%) 2.2 12.6 7.9 -1.2 -4.7 D 2-Axle Rigid 16t + 41,501 47,084 57,601 53,245 54,812 E 3 & 4 Axle Rigid 42,760 52,637 60,958 66,637 61,210 F Artic's 88,803 111,247 122,202 129,979 124,620 Trucks above 16t 173,064 210,968 240,761 249,861 240,642 Change (%) -1.5 21.9 14.1 3.8 -3.7 Total trucks 285,476 337,541 377,285 384,739 369,187 Change (%) -0.1 18.2 11.8 2.0 -4.0 G Buses 20,864 24,299 26,780 26,195 23,998 X Unsegmented 0 0 0 0 0 Total CVs 306,340 361,840 404,065 410,934 393,185 Change (%) 0.2 18.1 11.7 1.7 -4.3 Economic Indicators Road freight (tonnes mils) 11,004.0 11,196.4 11,556.0 11,924.3 12,261.3 Percentage change 1.3 1.7 3.2 3.2 2.8 GDP growth (%) 2.5 2.7 2.4 3.4 1.6 Real interest rates (%) 2.9 2.7 2.1 2.1 2.1 Consumer price growth (%) 1.9 1.6 1.2 2.3 2.5 Unemployment (%) 10.5 9.7 9.0 8.1 7.6 Source: Marketing Systems q In the UK truck demand grew by 4.5% to 54,000 units, following its 2% decline the previous year. Demand grew by 5.8% in the sub-16t sector, following an 8.8% decline in 1999. In the heavy sector new registrations rose by 3.6%, following a 2.8% rise in 1999. The UK remains one of the few markets not to have exceeded its late-1980s peak volumes in either the sub-16t or 16t-plus sectors. q In Italy new truck registrations increased by nearly 13% to 42,000 units. This was the fastest rate of increase among Europe's major markets and made the Italian truck market larger than that of Spain for the first time since 1996. Within the heavy sector demand rose by 10% to a new peak of 26,600 units (slightly lower than Spain), having exceeded the 1990 peak for the first time in 1999. In the sub-16t sector new registrations of 15,000 units were 18% higher than in 1999 but remained below their 1989 peak of 16,000 units. q In Spain demand for trucks dropped by 5% to 38,000 units. This followed three years in which growth averaged 31%. The decline was wholly due to the sub-16t sector where demand fell by 25% to 11,000 units. In the heavy sector new registrations increased by 7% to a new peak of 27,000 units, maintaining Spain's status as the fourth biggest European market for heavy trucks. At a west European level the growth was wholly concentrated in the 16t-plus sector which grew by 3.8% to just under 250,000 units, reaching a new peak for the third successive year. Artics remained the largest market segment, growing by 6.3% to 130,000 units. This segment accounted for 33.7% of total truck demand in 2000, up from 23% in 1990. In the sub-16t sector demand declined by 1.2% to 135,000 units, remaining below the sector's 1991 peak of 143,000 units. Most of the fall occurred in the 3.5-6t segment which dropped by 5.4%. Last year's decline principally reflects falls in the Spanish and German markets. Germany accounts for 38% of west European demand in the sub-16t sector but only 19% of demand in the 16t-plus sector. 10 Figure 2.3: Truck & bus demand in western Europe (1982-2006) 450 400 All CVs 3.51-16t 16t + 350 300 250 Units (000's) 200 150 100 Pre-90 excl. E. Germany 50 0 82 84 86 88 90 92 94 96 98 2000 2002 2004 2006 Source: Marketing Systems New registrations - forecast As noted above, truck demand in western Europe began turning down in Q4-2000 and there was a widespread expectation that the decline would continue and deepen during 2001. As the year has progressed the economic outlook has, for the most part, worsened. In view of this general deterioration in economic fundamentals and the specific effects of the September 11th terrorist attacks in the US, the forecast for West European truck demand might be expected to be sharply lower. In fact we are expecting a mild decline of just 4%. This reflects the fact that in the first eight or nine months of the year demand in some markets, notably France and the UK, has either continued growing or at least remained at a high level for longer than expected. For example over the first nine months of the year new CV registrations in France (above 5t) and the UK (above 3.5t) increased by over 2%. Apart from the beneficial impact on the forecast for 2001, the fact that major European markets are moving in opposite directions is significant, as for a period of 2-3 years the growth patterns of the major markets were converging. This has implications for the forecast for 2002 and beyond. As can be seen from Figure 2.1 we are expecting the slowdown to accelerate in the final months of the year with an 8.3% decline in volumes in Q4-2001, but the strength of demand in France and the UK in the early part of the year will limit the full-year decline. If France and the UK were excluded from the calculation, the forecast decline would be 6%. In 2002 we are anticipating declines of around 10% in about half the markets in western Europe, but at a European level the drop is expected to be limited to 3.5% as an expected recovery in German demand partly offsets the falls elsewhere. The recovery forecast for Germany reflects the fact that truck demand in this market turned down earlier than in the other major European markets, having slipped below prior- year levels in Q1-2000 and forecast to remain there through to the end of 2001. Following these eight consecutive quarters of falling sales we expect demand to pick up in the early part of 2002. 11 If the German market was excluded from the calculation, the forecast drop in Western European truck sales next year would be 7%. This still looks mild compared with the 40% slide in heavy truck demand in the US this year, but the western European market has always been less volatile than the US, its maximum drop over the past 20 years was in the 1993 recession when truck demand fell by 21%. Two key differences between then and now are: first that thus far, an outright recession is not forecast and second, that 1993 was a time when all the major markets moved in the same direction simultaneously. Factors supporting a positive view of the demand outlook for Europe include: • low interest rates; • low inflation; • positive economic growth, albeit low; • a relatively low oil price, currently some 30% below year-ago levels at $22/barrel. That said, the risks to this forecast are almost entirely on the downside. At the time of writing the full economic impact from the events of September 11th and the US retaliatory action can only be guessed at. Just as we were going to press there were reports that the OECD was lowering its 2001 and 2002 growth forecasts for the G7 countries. If confirmed, this could alter the shape of our forecast. By 2003 a number of markets are expected to be experiencing a rise in truck demand boosting the overall figure for western Europe by 1.4%. The growth in demand is forecast to continue in the following two years though the 2000 figure of nearly 385,000 trucks is expected to remain the peak for new registrations during the forecast period. Market shares sub-16t In the light to medium sector market leader DaimlerChrysler's (DC) share of the European market fell sharply in 2000, down by 3.6pts to 31.7%. The decline reflects share losses in most of DC's markets and the fall in demand for sub-16t vehicles in Germany, DC's largest market. DC's share had risen strongly in 1999 as it benefited from the disruption suffered by some competitors during product changeovers. The losses in 2000 were partly a reversal of that process as the new competition began to have an impact. We are expecting a new Vario in 2002 and a new Atego in 2003 to help DC rebuild its share of this sector but its 1999 share of 35.3% is expected to remain a peak figure during the forecast period. Figure 2.4: Shares of West European truck market (%) Manufacturer Group 1997 1998 1999 2000 2005 DaimlerChrysler 33.9 33.9 35.3 31.7 32.8 Iveco 27.3 26.4 26.5 27.4 26.6 MAN 10.1 10.8 10.9 11.6 12.3 Paccar 5.8 5.9 4.8 5.4 5.6 RVI 7.0 6.3 6.1 7.3 7.2 Scania 0.0 0.1 0.1 0.1 0.0 Volvo 3.9 3.6 3.0 2.8 3.2 Other 11.9 13.1 13.4 13.7 12.2 Total 3.51-15.9t 100.0 100.0 100.0 100.0 100.0 DaimlerChrysler 21.3 20.7 20.9 19.6 20.6 Iveco 11.3 10.9 11.2 11.2 11.8 MAN 14.3 14.1 14.7 15.3 15.5 Paccar 9.7 10.6 10.1 10.1 9.7 RVI 11.3 11.8 11.8 12.0 11.5 Scania 15.0 15.0 14.7 15.5 14.3 Volvo 15.3 15.2 15.0 14.8 15.0 Other 1.9 1.6 1.6 1.5 1.5 Total 16t plus 100.0 100.0 100.0 100.0 100.0 Source: Marketing Systems 12 Iveco's market share increased by 0.9pts to 27.4%. The overall figure reflects a varied performance, with gains in seven markets and declines in four. The share gains in 2000 were helped by the new Daily/TurboDaily and we expect Iveco to hang on to its gains this year as demand for the EuroCargo benefits from the availability of a new engine family. The EuroCargo is due to be renewed the following year or possibly 2003 and this should help to lift Iveco's share in many markets but we expect it to lose share in its domestic market which will reduce its share at a European level. MAN had a fairly even balance of gains and losses, registering share increases in six markets and falls in five. However, as the gains included a 2.1pts increase in Germany and a 1.6pts rise in the UK (respectively Europe's largest and second-largest markets for sub-16t vehicles) MAN's overall share of the west European market rose by 0.7pts to 11.6%. MAN’s market share in the light/medium sector is expected to decline in the next two to three years before rising again towards the end of the forecast period in response to product actions. RVI's market share in the light/medium sector rose by 1.2pts to 7.3% in 2000. The improvement was in line with our expectations and mostly reflects the impact of the new Midlum range introduced in 2000 and the Mascott, launched the previous year. Despite the new models RVI lost share in its domestic market but this was more than offset by substantial gains in the UK, where RVI's share more than trebled to 5.1% and in Germany where its share doubled to 1.4%. Market Shares - 16t-plus DC's dominance of western Europe's heavy sector was reduced in 2000 as its share dropped by 1.3pts to 19.6%. DC's share fell in six out of the eleven major markets but it was the substantial fall in Germany which did most to affect the European figure. In Germany DC's share fell from 42.1% in 1999 to 38.1% in 2000, with most of the share being taken by MAN. We are expecting a further decline this year, before product actions help DC to regain some of its lost share in the 2002-2005 period. Scania was the second best-selling marque in western Europe during 2000 with a share of 15.5%, up from 14.8% in 1999. The increase reflected gains in all but two markets, with particularly significant in-creases in the UK and the Netherlands. MAN continued its steady progress during 2000, its share rising to 15.3% from 14.7% in 1999. The company is now clearly established as one of the major players in Europe, having previously been overshadowed by the triumvirate of DC, Scania and Volvo. We expect the recently launched TG-A range and forthcoming new products to help MAN make some further gains and consolidate its position in the premier league. MAN's acquisition of ERF does not affect the year-on-year comparisons as we have included ERF data with that of the MAN group in all years. Volvo's share of the heavy sector was marginally lower during 2000 as its gains and losses in the individual markets were fairly evenly balanced. We are not expecting the alliance with RVI to have any significant impact on Volvo's market share during the forecast period, but if the two begin integrating and optimising their service and distribution networks this could help Volvo to improve its penetration of southern European markets in particular. RVI was the fifth best-selling brand in western Europe's heavy sector during 2000 with a share of 12.0% up from 11.8% in 1999. This small increase helped offset the small decline at Volvo thus maintaining the Volvo Global Truck share at 26.8% during 2000. 13 LONG TERM DEVELOPMENTS An outline of fundamental drivers of truck demand is shown in Figure 2.5. This helps to analyse the historical development of the truck market as well as to examine and quantify the major trends which will determine future truck demand. Figure 2.5: The fundamentals of truck demand Freight Demand Market Share Rail Road Other Existing Capacity Efficiency Gains / Losses Required Capacity Source: Marketing Systems 14 Figure 2.6: Freight & GDP growth in western Europe (1970-2010) 300 250 200 Index 1970 = 100 150 100 50 GDP Tonne/Km (All Modes) 0 1970 1980 1990 2000 2010 Source: Marketing Systems Freight demand Truck demand is fundamentally driven by the levels of demand for goods transport (by all mo des). The choice of mode for goods transport in Europe is primarily between road and rail, although the preferred choice for some goods or some regions will be transport by sea, inland waterways, pipeline or air. The aggregate freight transport figure tends to follow the pattern of GDP growth quite closely (see Figure 2.6) though trade patterns, lifestyle/technology changes and political/legislative factors can all influence the relationship. For example for several decades there has been a trend towards transporting goods for longer distances, the establishment of the single market has boosted this trend which is likely to lead to higher freight volumes without a concomitant increase in GDP. 15 Figure 2.7: EU freight transport by mode (1970-2000) 1,400 Road Rail Other 1,200 15% 13% 14% 1,000 13% 17% 16% 20% 14% Billion tonne/km 800 23% 21% 24% 600 31% 400 74% 200 48% 61% 65% 72% 59% 0 1970 1980 1985 1990 1995 2000(e) Market share Having established the aggregate demand for f reight transport, this is then subdivided to reflect the market shares of the road haulage industry, rail and other transport modes. It is the road haulage industry’s growing market share which has enabled it to grow at rates in excess of GDP for a number of years. As shown in Figure 34 the market share achieved by the road transport industry within the EU has grown from 48% in 1970 to 72% in 1995 and an estimated 74% in 2000. This increase occurred over a period when total freight volumes rose by 72%; thus the increasing market share of road transport led to a volume increase of some 140% over this period. We are anticipating that the road haulage industry’s market share will begin to level off towards the end of the decade, in response to three principal factors: 1. The scope for taking market share from rail or waterways has become more limited as there are certain core products which are likely always to be transported by those modes e.g. bulk shipments by primary industries. 2. In addition the competition from railways is being increased by investment in rail networks, principally in response to environmental concerns. Recently the European Union has taken steps to harmonise the wide range of systems, standards and procedures that apply in the different member states, in a bid to enhance the attraction of the international rail freight to freight hauliers. How-ever, even if such initiatives get underway progress is likely to be so slow as to have no impact within our forecast period. 3. Environmental concerns in various countries are beginning to be translated into policies and legislation aimed at curbing the increase in road traffic. For example many countries have bans on trucks in certain areas and/or at certain times of day. Despite these pressures our exp ectation is that the market share of the road haulage industry will reach a plateau rather than decline to any significant extent. As that market share will be a share of a rising market, road freight volumes are expected to continue growing. This is illustrated on the following chart showing the historical and forecast trends of road haulage compared with other transport modes. 16 Figure 2.8: Freight modes in western Europe, (road versus other) 1980-2005 1,200 1,000 Billion Tonne/Km 800 600 400 200 Road Other 0 1980 1982 1985 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: Marketing Systems & UK Dept. of Transport This forecast of road freight’s market share is based on the following observations: q The majority of transport by road takes place over relatively short distances. Within the EU, some 64% (by weight) of goods transported by road are carried less than 50km; 85% is carried less than 150km. In 1993 the average length of haul by road within the EU was 90km compared with an av- erage of 236km by rail. Railways are not realistic substitutes for the short journeys, typically per- formed by trucks, except within specific niches such as taking coal to power stations. q Railways also cannot currently match the speed and flexibility of road transport which has come to be relied upon for just-in-time (JIT) deliveries etc. Despite the efforts of the European Commission referred to previously, the rail industries of the various member states are almost all state-owned, with all the stifling of innovation and resistance to change that so often implies. For example VW has quoted the average speed of its vehicle shipments to European dealers and distributors as follows: the average speed of shipments by road was 40kph compared with 16kph for rail ship-ments. For a whole range of time -critical freight from perishable goods to JIT supplies, these rela-tive speeds would mean rail transport was not a viable alternative. Existing capacity Once the level of road haulage demand is established, consideration is given to any changes in the pattern of demand (e.g. increases in international traffic and just-in-time deliveries or the bans on trucks in city centres). The existing vehicle parc is then analysed for its capacity to meet the demand (including segmentation changes and expected efficiency gains or losses) and the level of new registrations is calculated on the basis of the replacement vehicles and incremental vehicles necessary to achieve the required capacity. In the short term, deviations from these long term sales trends are caused by factors such as legislative changes, haulage industry profitability and pricing actions by manufacturers. As an example Figure 36 shows the development of the EU tractor parc. 17 Figure 2.9: EU road tractor parc (1970-2000) 1,400 1,200 1,000 Units (000's) 800 600 400 200 0 70 75 80 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 Source: Marketing Systems & UK Dept. of Transport Emissions regulations in Europe Permissible levels of truck exhaust emissions within the EU have become progressively restricted during the nineties and are scheduled to become tighter still over the next decade. The emissions standards are known as Euro 1, Euro 2 etc. and the timetable for compliance is as follows: • Euro 1 - New models from July 1, 1992 - All production from October 1, 1993 • Euro 2 - All new models from October 1, 1995 - All production from October 1, 1996 • Euro 3 - All new models from October 1, 2000 - All production from October 1, 2001 • Euro 4 - From 2005/06 • Euro-5 - Further tightening planned for 2008 The tighter standards are not expected to have a significant effect upon long term demand, although in the short term we have seen market distortions associated with the introduction of the Euro 1, Euro 2 and Euro 3 regulations as buyers in some markets have brought forward their purchases to avoid the higher cost of the vehicles using the cleaner technology. This process has also been encouraged by manufacturers giving greater discounts to clear their stocks of old technology vehicles. Apart from such short term market effects, the emissions standards are significant in that the costs associated with developing engines to comply with tighter and tighter standards in Europe and worldwide are encouraging several producers to enter joint ventures. Examples include RVI and MAN, Mercedes- Benz and Detroit Diesel, Iveco and Nissan and Iveco and Cummins. Details of these and other joint ventures are contained in the manufacturer summaries. 18 Road haulage industry deregulation As part of the move to the single European market ideal of free movement of people, goods and services the rules governing the road haulage industries of member states are being harmonised and barriers to cross-border competition removed. The deregulation of Europe's road haulage industry has phased out the previous system under which hauliers were not allowed to ply for hire outside their domestic market other than under a restrictive licensing system. Following the transitional phase, during which the number of cabotage authorisations increased by 30% per year, EU hauliers were free to collect or deliver goods anywhere in the community from July 1, 1998. The effect of liberalisation is not only expected to increase competition and so lower prices, but also to increase efficiency by reducing the number of trucks returning empty after delivering to other member states. Prior to the deregulation process it was estimated that around 30% of trucks on cross-border work made the return journey with no cargo. As more efficient operation becomes possible we expect increasing numbers of hauliers to maximise their efficiency by operating heavy trucks, particularly artic's. During 2000 the Commission published its second report on cabotage operations within the EU over the 1990-1998 period. The report notes that the abolition of quantitative restrictions to access the national road freight markets by non-resident EU carriers did not lead to any explosion in cabotage activities. In general, domestic freight services provided by resident carriers are three hundred times higher than the tonne-km produced in cabotage. The share of cabotage in international freight transport of hauliers increased from 0.2% in 1990 to 1% in 1997 just before complete liberalisation. Transport freight services between Member States measured in tonne-km are seventy times greater than the current volume of cabotage. Germany emerged as the country with the highest number of such operations, providing 68.3% of all cabotage services compared to 12.6% in France and 6.9% in Italy for the period between 1990 and 1998. The statistical breakdown of carriers by nationality reveals that carriers from the Benelux are the most successful in cabotage as they are reported to perform almost 60% of all cabotage tonne-km in the EU, Dutch hauliers leading with a share of 31.2%. Greek, Spanish and Portuguese vehicles hold a share of just 2%, French carriers account for 12.7%, followed in order of importance by the Danish (6.7%), the German (5.3%), the Swedish (5%), the Italian (3%) and the British (3%) hauliers. Deregulation is also likely to provide added impetus to the restructuring of the European haulage industry, so that it becomes just that - European - rather than twelve or sixteen largely discrete national industries. Already it is estimated that half of all freight movements (all modes) in Europe are controlled by just ten companies, but much of their road freight is subcontracted to small fleets, sometimes just single owner-drivers. A greater concentration of truck ownership would have adverse implications for the profit margins of truck producers. 19 CHAPTER 3: DAIMLERCHRYSLER CV DIVISION OVERVIEW In terms of units produced, DaimlerChrysler (DC) is the world's fifth largest carmaker, and its largest truckmaker. The company is thus unique in being a globally significant and independent OEM in both the car and truck sectors of the industry. Many other OEMs have competed in both sectors over the years but have found the synergies to be few and failed to achieve critical mass in one or other sector. Consequently, over the past twenty years the trend among such companies has been for the weaker business to be divested. DC has played a full part in this process. Various purchases over the years have endowed the company with a portfolio of eight truck and bus brands, most notably Freightliner, acquired in the 1980s and Sterling, (formerly Ford's North American heavy truck business) acquired in 1998. More recently DC has broken new ground in the consolidation of the world's truck industry, by becoming the first western truckmaker to acquire management control of a major Asian truckmaker i.e. the truck and bus division of Mitsubishi Motors (MMC). The Japanese firm is a substantial player in Asia's commercial vehicle markets, selling some 154,000 units in 2000 and commanding a 30% share of the Japanese market. Notwithstanding MMC's heavy debt burden and its recent losses, the alliance holds the potential for DC to benefit significantly from increased scale economies plus the expected rise in Asian commercial vehicle demand in the coming years. DC's shareholders could be forgiven for greeting such optimistic comments with a hollow laugh, given the post-merger proble ms that have beset the car side of the business with the Chrysler division reporting a loss of Eur4.5bn in the first quarter of 2001. However, one key difference with the MMC alliance is that it was formed at a time when MMC's performance was close to its nadir, as opposed to the acquisition of Chrysler at a time when it was riding high. Given the previously mentioned trend for OEMs to focus on either car or truck production it is surprising how infrequently the issue of DC's presence in both sectors seems to be raised by shareholders or industry commentators. While the financial performance of the CV division has not been a major cause for concern, it is usually one of the weaker performers with a average return on net assets over the past three years of 17%. This is above DC's targeted minimum of 15.5% but not by much, considering that for most of those three years truck demand in the major markets was booming. The truck division's profit record suggests it will not weather a downturn comfortably. By contrast the Mercedes -Benz passenger car division has generated an average return of 26.5% over the past three years. There seems little industrial logic in keeping the car and truck businesses in the same portfolio and there are at least two reasons for considering a demerger of the CV division. q First that it could unlock shareholder value, something that DC (and Daimler-Benz before it) has shown itself keen to do since Jürgen Schremmp became chairman. q Second, DC's managerial resources will be fully stretched in the next few years, trying to develop the various businesses in which it has acquired stakes into a coherent structure and so secure the targeted benefits. There is an argument for improving the focus of senior management by spinning off the CV business as an independent unit and concentrating on the car side of the business. 20 Figure 3.2: Latest results - DC Currency DaimlerChrysler Unit January - September Year to December 2000 2001 (%) 1999 2000 (%) Revenue Eur(m) 121,862 112,964 (7.3) 149,985 162,384 8.3 Of which: - MB cars Eur(m) 31,835 35,291 10.9 38,100 43,700 14.7 - Chrysler group Eur(m) 52,226 46,450 (11.1) 64,085 68,372 6.7 - commercial vehicles Eur(m) 21,414 20,974 (2.1) 26,695 28,818 8.0 Operating profit Eur(m) 8,540 (1,424) (116.7) 11,012 9,752 (11.4) Of which: - MB cars Eur(m) 2,160 2,297 6.3 2,703 2,145 (20.6) - Chrysler car & L/trk Eur(m) 1,937 (4,905) (353.2) 5,051 501 (90.1) - commercial vehicles Eur(m) 979 (24) (102.5) 1,067 1,110 4.0 Operating margin percent 7.0 (1.3) (8.3) pts 7.3 6.0 (1.3) pts - MB cars percent 6.8 6.5 (0.3) pts 7.1 4.9 (2.2) pts - Chrysler car & L/trk percent 3.7 (10.6) (14.3) pts 7.9 0.7 (7.1) pts - commercial vehicles percent 4.6 (0.1) (4.7) pts 4.0 3.9 (0.1) pts Net profit Eur(m) 6,467 (724) (111.2) 5,746 7,894 37.4 Unit sales (000's) 3,650.9 3,357.5 (8.0) 4,864.3 4,749.0 (2.4) - MB Of which: cars & Smart (000's) 845.4 922.5 9.1 1,080.4 1,154.9 6.9 - Chrysler car & L/trk (000's) 2,397.7 2,068.9 (13.7) 3,229.0 3,045.2 (5.7) - commercial vehicles (000's) 407.7 366.1 (10.2) 554.9 549.0 (1.1) Source: DaimlerChrysler Figure 3.1: DC commercial vehicles revenue and operating profit trend 600 Index (Revenue 1983 = 100, Op. Profit 1996 = minus 100) 500 Revenue (Eur) Op. Profit (Eur) 400 300 200 100 0 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 -100 -200 Source: DaimlerChrysler 21 RECENT PERFORMANCE 2000 results In the early part of 2000 DaimlerChrysler was anticipating a reasonable year with little more than a blip s in its third-quarter earnings a a new generation of Chrysler's best-selling product, the minivan, was introduced. By the end of the year that blip had turned into a major crisis at Chrysler, causing its president to be dismissed and his successor to introduce a Eur3bn restructuring plan. For the group as a whole, revenue increased 8.3% during 2000 and reported operating profit fell 11.4% to Eur9.7bn. This figure includes a net Eur4.5bn of non-recurring gains, mainly from the conversion of Dasa into EADS and the spin-off of Debis Systemhaus into an alliance with Deutsche Telekom. Recurring operating profit dropped by 49% to Eur5.2bn. Reported net income rose 37% but on a recurring basis dropped by 44% to Eur3.5bn. Following a 12.7% rise in operating profit during 1999, the CV division reported a more modest 4% increase to Eur1.1bn in 2000. At the nine-month stage, operating profit was 14% higher than the year- earlier figure but the deterioration in US demand accelerated during the final quarter of the year, causing DC's unit sales in the Nafta region to drop by 35% from Q4-99 levels. 2001 results During 2001 a Eur3bn restructuring programme to try and turn around Chrysler has led to major losses at DC. The first half reported operating loss was Eur2.8bn and the net loss was Eur1.6bn. Strip out various non-recurring gains and losses the adjusted operating profit figure becomes positive at Eur115m (H1- 2000: Eur5,078m) and the net income is also positive at Eur162m (H1-2000: 3,441m). The principal non-recurring items were: • Eur3,047m expense in connection with restructuring at Chrysler; • Eur302m expense in connection with restructuring at MMC; • Eur500m gain from the sale of Temic and debitel shares (see Business Structure). The CV division reported a 5.6% decline in first-half revenue to Eur13.9bn. The H1-2000 figure of Eur14.7bn is a pro-forma figure to reflect the consolidation of the MTU/Diesel Engine unit within the CV division, having previously been included in Other. The revenue decline reflected a 12% drop in worldwide unit sales, as falls of 40% and 10% in North America and South America respectively, were only partly offset by increased sales in minor markets. Sales in western Europe remained at the same level as the previous year. The CV division reported a nine-month operating loss of Eur24m compared with a year-ago profit of Eur979m. Adjusted for non-recurring items the result was positive at Eur7m. The reported loss reflects a Q1-2001 loss of Eur138m, partly offset by profits of Eur96m and Eur18m in Q2 and Q3 respectively. The weak performance is primarily attributable to Freightliner which has been operating at a loss for most of the year. On a recurring basis, the CV division expects to remain in the black over the full year. It will be helped by its exposure to the light/mediu m truck sectors and to the van market - into which it has recently launched a new compact van, Vaneo. However, the reported full-year profit will be negative due to a planned charge of Eur360m for restructuring the North American operations. The measures, announced in October, were drawn up by Freightliner's new president, Rainer Schmückle, who replaced Jim Hebe in May 2001. 22 BUSINESS STRUCTURE Chrysler (to 1998) During the late 1970s and early 1980s, Chrysler adopted a similar diversification strategy to those of Ford & General Motors. It acquired interests in aerospace (Gulfstream) and electronics companies (subsumed within Chrysler Technology Corporation) as well as expanding its finance and credit division, Chrysler Financial Corporation (CFC). Chrysler also bought stakes in Mitsubishi Motors Corporation (MMC) and Peugeot. The links with MMC (which go back to the early 1970s) led to the formation of a joint venture, Diamond Star Motors, which started production in the US in 1988. As the automotive business required more and more resources, Chrysler reduced its interests in many of its non-core businesses in the latter half of the 1980s and into the 1990s, selling the Peugeot stake in 1986, Gulfstream in 1990 and its stake in Diamond Star Motors back to Mitsubishi in 1991. Chrysler’s equity holding in Mitsubishi Motors itself was gradually reduced, the final tranche being sold in July 1993. The notable exception to this process of divestment was Chrysler’s acquisition in 1987 of American Motors Corp. for $800m. AMC was the fourth-largest car maker in the US, and prior to the sale 46% of AMC’s equity was held by Renault. The purchase gave Chrysler access to: • the Jeep brand; • three assembly plants; • 1,600 dealerships; • a joint venture in Beijing. Thus, by 1994, Chrysler’s revenue was principally (96%) composed of earnings by the car and truck division, which included Chrysler Technology Corporation (CTC) and Pentastar Transportation Group (car rental), each of which accounted for less than 10% of the division’s total revenue, profits or assets. During 1996, two more electronics companies, Electrospace Systems Inc. and Chrysler Technologies Airborne Systems Inc., were sold. The remaining company within the CTC division (Pentastar Electronics) was sold in January 1997. Chrysler sold the car rental company, Thrifty Rent-A-Car, at the end of 1997. The Eagle brand was discontinued after the 1998 model-year, due to weak sales. Daimler-Benz (to 1998) In the mid-eighties Daimler-Benz began to tread a diversification path similar to that of Chrysler and other leading carmakers. It acquired companies involved in electronics, rail systems, aircraft, space systems, defence and others, as then chairman Mr Edzard Reuter pursued his vision of an integrated technology group. The electronics companies were grouped within the AEG division and those involved in aerospace within the Deutsche Aerospace (Dasa) division. In general these divisions were unsuccessful, losing money for a number of years in succession and diluting the attraction of Daimler- Benz as an investment. Indeed one unhappy shareholder famously described Mr Reuter as the biggest destroyer of capital in German postwar history. With the installation of Mr Jürgen Schrempp as chairman in May 1995 long overdue action was taken to restructure these divisions, including workforce reductions and divestment when no realistic prospect of long term profitability existed. Thus a substantial part of AEG was quickly sold and Daimler-Benz withdrew its financial support for Fokker, the loss-making Dutch aircraft manufacturer. The process continued into 1997 when Daimler-Benz ended its partnership with the French software company Cap Gemini. In 1998 Daimler-Benz sold the semiconductor business of Temic, its electronics subsidiary. As well as disposing of non-core businesses Daimler-Benz acted to strengthen its principal activities. For example the acquisition of Ford's heavy truck division and the purchase of bus manufacturer Thomas Built in 1998. In 1998 Daimler-Benz formed a new unit, grouping together its commercial vehicle powertrain activities. The powertrain business unit is seeking to develop business outside DaimlerChrysler in a similar fashion to Ford's Visteon and GM's Delphi. 23 DaimlerChrysler structure At the end of 2000 DC comprised six principal divisions: 1. Mercedes-Benz passenger cars, including the Smart brand. This was the most profitable division during the year as Chrysler's results deteriorated. 2. Chrysler passenger cars and light trucks, including the Chrysler, Jeep, Dodge and Plymouth brands (though Plymouth is being phased out this year). This remains the largest division in terms of revenue, unit sales and employees. 3. Commercial vehicles, now encompassing eight wholly-owned truck and bus brands: American LaFrance, Freightliner, Mercedes-Benz, Orion, Setra, Sterling, Thomas Built, and Western Star. The division also includes the Powertrain business unit (see below). 4. Financial services, the company has been focusing its attention on offering financial services to the automotive sector, disposing of non-core businesses. During 2001 it has announced a plan to sell its stake in Debis Air Finance, one of the world's five largest airline leasing businesses. 5. Aerospace - commercial and military aircraft, satellites, defence systems and aero-engines. During 1999 DC agreed to merge its aerospace operations with those of France's Aérospatiale Matra and Spain's Casa, to form the European Aeronautic Defence and Space Company (EADS), the world's third largest aerospace company. EADS came into existence in the summer of 2000. Since July 2000 the contribution from EADS has been included in DC's accounts on an equity basis. 6. Other - at the end of 2000 this encompassed: Adtranz rail systems; the Temic automotive electronics business and MTU Diesel Engines for marine and industrial applications. The sale of Adtranz to Bombardier was announced in 2000 and completed in May 2001. A 60% stake in Temic was sold to Continental in April 2001 and the MTU Diesel Engines business was moved to the CV division's Powertrain unit. 'Other' now includes just the MTU Aero Engines business and the part-share in EADS. During 2001 DC has sold its remaining 10% interest in debitel for Eur292m. The sale of 60% of Temic raised Eur209m. The commercial vehicle division is structured into five business units: • Mercedes-Benz trucks; • Mercedes-Benz vans; • Mercedes-Benz/Setra buses; • Freightliner, Sterling, Thomas Built; Western Star and Orion buses • Powertrain business unit. Acquisitions and alliances The past eighteen months have been a busy period for the CV division as it has made a number of acquisitions and alliances. Hyundai Motor In June 2000 DC and Hyundai Motor announced an alliance, with a view to co-operating in the commercial vehicle sector. As part of the agreement DC subsequently took a 10% stake in the Korean firm and has the option to purchase a further 5% in 2003. Taken in conjunction with the 2% shareholding of Mitsubishi Motors this could give DC considerable leverage over Hyundai Motor in future. It was not until June 2001 that the two firms announced details of a joint venture project to assemble diesel engines in Korea. Please see under Production for more details. Western Star In July 2000 Freightliner made an agreed offer to acquire 100% of the outstanding shares of Western Star, the Canadian maker of rugged heavy-duty trucks. The offer was worth about C$670m. The purchase of Western Star included its subsidiary, Orion Bus Industries, a leading producer of transit buses in North America. In 1999, its last full year of independence, Western Star produced 7,200 trucks and 800 buses, (not including production by ERF which was sold to MAN in March 2000) generating revenue of C$1.3bn. Western Star's Australian operations were excluded from the sale. 24 Detroit Diesel Also in July 2000 came the announcement that DC was making an agreed offer of $423m to acquire the 78.7% of Detroit Diesel's (DDC) shares which it didn't already own. Most of those were held by Penske Corporation, which owned 48.6% of DDC's equity. The acquisition made DC the world's leading manufacturer of diesel engines for medium and heavy duty trucks and offers the potential for it to capture more value from its truck sales in the US, where many truck customers still prefer to specify branded engines such as Caterpillar, Cummins and Detroit Diesel. DDC sold about 167,000 units in 1999, generating revenue of $2.4bn. The acquisition of DDC was followed, in November 2000, by the announcement of a 50/50 joint venture with Caterpillar to develop, manufacture, market and distribute medium -duty engines (around 9-litres), fuel systems and other powertrain components. However this agreement was abandoned in August 2001 and the two firms are expected to focus on fuel systems and heavy duty engines for Freightliner. Mitsubishi Motors In March 2000 DC announced plans to acquire a 34% stake in Mitsubishi Motors. At the time MMC was suffering from a heavy debt burden and the severe downturn in Asian truck demand but it was subsequently weakened further when it was discovered that for years, the firm had hidden details of faulty products from the authorities. This further downturn in MMC's fortunes allowed DC to negotiate some more favourable terms including a price reduction, more influence on MMC's board and an option to increase its stake in MMC by as much as it wants after three years instead of the ten years originally agreed. Outwardly, the original plan was for the alliance between MMC and Volvo (see the discussions on those manufacturers) to proceed as planned i.e. MMC was to split its truck and bus division into a separate legal entity during 2001 and Volvo had the option to acquire up to 19.9% of the new firm. However, it has to be questioned whether DC ever seriously contemplated letting such a major part of MMC's business come under the control of a major rival. In last year's edition of this report we commented that it would clearly be in DC's interest to extend its alliance to include the truck division, not only to increase its exposure to the Asian truck market but also to thwart a major competitor's plans for the region. In the end this was exactly what happened. After more than twelve months of uncertainty Volvo gave up hoping that its planned alliance would proceed and in April 2001 DC paid Volvo $297m for its 3.3% stake in MMC, taking DC's holding in the Japanese firm to 37.3%. MMC's Truck & Bus division sold 154,000 trucks and buses in 2000 and had a domestic market share of 30.7 %. The division employs about 17,000 people. DC has yet to announce detailed plans for co-operating with MMC but the purchase from Volvo includes the rights to a new light truck that the Swedish firm and MMC had been developing together and DC will certainly be looking to make use of MMC's Asian distribution network. Longer term DC will obviously be looking for scale economies through component sharing. All in all it has the potential to be an excellent move for DC. Our biggest concern would be whether DC fashion its various acquisitions and alliance partners into an integrated whole. As suggested in the opening remarks we believe there is a case to be made for giving the CV division greater autonomy to accelerate this process. MARKETS The CV division's unit sales (including vans) fell by 1% during 2000 to 554,900 units. Truck sales (6t- plus) were particularly affected by the strong downturn in demand for heavy trucks in N. America, falling worldwide by 12% to 249,000. In western Europe the Mercedes-Benz Trucks business unit sold 77,700 vehicles over 6t, down 2.1% from the 1999 figure of 79,400 units. Mercedes-Benz remained the market leader in the 6t-plus sector, with a 22.1% share. Sales in South America rose by 20% to 26,300 units and Mercedes -Benz remained market leader in Argentina and Brazil. However, sales of DC’s North American brands dropped by 20% to 154,000 units. 25 Figure 3.3: DC commercial vehicle sales by market Market 1996 1997 1998 1999 2000 (000s) (000s) (000s) (000s) (000s) Germany 87 97 107 114 113 Share of M-B total 25.0 23.3 21.8 20.5 20.6 Other Europe 109 132 170 173 187 Share of M-B total 31.3 31.7 34.7 31.2 34.1 North America 75 80 126 193 154 Share of M-B total 21.6 19.2 25.7 34.8 28.1 Latin America 42 55 58 45 51 Share of M-B total 12.1 13.2 11.8 8.1 9.3 Other 35 53 29 30 44 Share of M-B total 10.1 12.7 5.9 5.4 8.0 Total 348 417 490 555 549 Source: DaimlerChrysler Figure 3.4: DC market shares, western Europe (%) Sector & market 1997 1998 1999 2000 2005 3.5t-15.9t Austria 35.7 37.9 38.1 36.6 34.3 Belgium & Luxembourg 36.9 41.0 40.9 35.8 37.8 France 19.1 20.9 25.7 25.9 25.5 Germany 50.3 47.8 49.0 46.2 46.5 Italy 12.7 13.0 15.9 13.4 16.1 Netherlands 32.9 33.9 34.9 31.6 31.6 Portugal 5.8 6.5 9.6 9.9 10.6 Spain 29.4 31.7 26.9 23.4 26.6 UK 24.5 24.1 25.4 20.5 21.9 Nordic markets 27.1 28.8 28.4 24.6 27.1 Other 27.7 29.4 41.9 38.8 35.8 Total W. Europe 33.9 33.8 35.0 31.5 32.9 16t plus Austria 20.1 19.0 17.2 15.4 16.8 Belgium & Luxembourg 18.8 18.7 16.4 16.8 16.4 France 15.5 15.6 16.2 15.5 15.6 Germany 43.5 42.2 42.0 38.2 39.3 Italy 15.1 15.7 15.4 15.2 15.6 Netherlands 12.8 12.0 13.3 11.9 12.1 Portugal 12.4 12.2 13.0 15.2 13.5 Spain 16.0 14.8 15.3 15.3 14.6 UK 9.6 8.9 9.5 9.9 9.3 Nordic markets 13.3 12.4 9.7 8.4 9.6 Other 21.7 18.2 19.8 21.2 19.1 Total W. Europe 21.3 20.7 20.9 19.6 20.8 Source: Marketing Systems 26 Western Europe - sub-16t trucks In the light to medium sector, market leader DC's share of the European market fell sharply in 2000, down by 3.5 percentage points to 31.5%. The decline reflects share losses in most of DC's markets and the fall in demand for sub-16t vehicles in Germany, DC's largest market. DC's share had risen strongly in 1999 as it benefited from the disruption suffered by some competitors during product changeovers. The losses in 2000 are partly a reversal of that process as the new competition began to have an impact. We are expecting a new Vario in 2002 and a new Atego in 2003 to help DC rebuild its share of this sector but its 1999 share of 35% is expected to remain a peak figure through to 2005. Western Europe - 16t-plus trucks In the heavy sector Mercedes-Benz is again the leading brand in western Europe with a share of around 20%, but since Volvo's acquisition of RVI, the enlarged company: Volvo Global Trucks is the market leading group. DC's market share dropped by 1.3pts to 19.6% during 2000 as it underperformed in six out of the eleven major markets but it was the substantial fall in its German market share which did most to affect the European figure. In Germany DC's share fell from 42% in 1999 to 38.2% in 2000, with most of the share being taken by MAN. We are expecting a further decline this year, before product actions help DC to regain some of its lost share in the 2002-2005 period. USA market In the USA the Freightliner, Sterling and Western Star brands accounted for 37.5% of the Class 8 market during 2000 (1999: 38.5%). Retail sales of these three brands dropped by 21.7% to 79,366 units. In the Class 4-7 sector sales of the three brands were 5.6% lo wer at 45,090 units, slightly underperforming the overall market decline of 3.4%. 2001 sales During the first nine months of 2001 the CV division sold 366,000 units, a 10% decrease from the year- ago figure. Sales in western Europe were unchanged at 202,000 units as a 5% drop in German sales was offset by increases elsewhere. The sales mix weakened as a drop in truck sales was offset by increased demand for vans. In the USA where DC's sales are concentrated in the heavy truck sectors, sales during the first nine months dropped by 34% to 70,000 units. Sales fell by 12% to 34,000 units in South America and dropped by 2% to 60,000 units in the rest of the world. MODELS The Mercedes-Benz truck range in Europe comprises: • Sprinter - Light to medium vans 2.5t-4.6t, built at Düsseldorf; • Vario - Medium to heavy vans and light trucks 4.5 to 7.5t, built at Ludwigsfelde; • Atego - Initially medium trucks 7.5 to 17t, now including multi-axle, built at Worth; • Axor - Fleet artic, built at Worth. Atego derived cab, ‘new’ engine, Actros chassis; • Actros - Heavy trucks built at Worth; • Unimog - Light/medium all terrain and special purpose vehicles built at Gaggenau; • Econic - SPVs aimed at the municipal market, built at Arbon in Switzerland. The Sprinter van range (2.5-4.6t) was launched in 1995 and heavily facelifted in early 2000. It was introduced in the USA in Q2-2001 under the Freightliner brand and will be launched in Mexico next year. The North American Sprinters are being assembled locally at Freightliner's Gaffney plant in South Carolina. A new generation Sprinter is expected in 2004. A replacement for the Vario light truck range is under development. The project started as a JV with Nissan Diesel but the co-operation was terminated when Renault bought its stake in Nissan. A new light truck is expected to be introduced initially in Brazil. The European version is believed to be about two years away. The current Vario may be phased out around 2003. How the light truck under development by MMC fits into this picture has not yet been declared but clearly DC will be looking to avoid duplication of effort and minimise product overlap where possible. 27 Figure 3.5: DC European CV range (> 3.5t) MODEL DEBUT 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 REMARKS I II I II I II I II I II I II I II I II I II I II SPRINTER 1995 F N Replaces T1 Up to 4.5 t T2 1985 T VARIO 1996 I T Rev. cabs new engines NEW LIGHT TRUCK I European debut 2003 LN2 1984 T ATEGO / LKN I E F Repl. LN2 MK / SK 1984 T Old heavy range AXOR I Atego cab, Actros chassis ACTROS / 1996 I F N Rigids 1997 SKN Facelift 2001-2 I: INTRODUCTION T: TERMINATION N: NEW MODEL F: FACELIFT E: NEW ENGINE Source: Marketing Systems The Atego received its market launch in early 1998, with artics and multi-axle rigids appearing towards the end of the year. A facelifted version is expected in 2003. A new artic, the Axor, was launched in autumn 2001. Aimed at the fleet market the new model uses an Atego derived cab on an Actros chassis, to give operators increased payload (up to 500kg) compared with the Actros. It features an OM457 12litre, 6 cylinder, in line engine instead of the 500 Series V6 and V8 Actros units. A revised Actros - codenamed MP2 - is expected in late 2002 for early 2003 introduction. The updated model will feature an interior and exterior cab facelift. DC's truck operations in Europe and North America have traditionally developed and produced vehicles largely independently of each other. This has been a feature of all the US subsidiaries of European truck producers. The reasons cited for the lack of component commonality were: • that trucks, heavy trucks in particular, are very different on each side of the Atlantic; • the fact that North American truckmakers are traditionally much less vertically integrated than those in Europe, mostly outsourcing the major components such as engines, gearboxes and axles to the specialists like Caterpillar, Cummins, Eaton and Rockwell. However, as all the truckmakers look to improve their profitability, there is a slow but steady drift towards greater integration between North American and European operations. This is true of DC, although the group has not been in the vanguard of this trend. In DC's case the first significant example of closer integration was the March 1999 introduction of the German-built Mercedes 900 Series engine as an option in Freightliner's middleweight truck range. The engine is offered as an alternative, alongside the Caterpillar and Cummins units which buyers can currently specify. It is widely agreed that a move to offer only an in-house engine, would have been punished by a sharp drop in sales. This initiative was followed by the introduction of Mercedes -Benz transmissions and axles to North America in 1999. 28 In early 2000 the Sterling Acterra (Class 5-8) was launched in North America, equipped with 4-cylinder and 6-cylinder Mercedes-Benz engines as standard, though Cummins and Caterpillar units are optional. A further sign of closer integration was the introduction of the Sprinter in 2001. PRODUCTION STRATEGY Europe and North America DC's commercial vehicle plants are mostly concentrated in Europe and North America. In Europe the company has 15 production locations for its vans, trucks, buses and components. The principal truck assembly plant is at Worth, as mentioned above. In February 2001 Worth produced its 100,000th Atego, three years after the model's launch. In 2003 the Worth plant will take over production of the Unimog range, currently produced at Gaggenau. The Gaggenau plant will concentrate on producing transmissions for commercial vehicles. In North America the acquisitions in recent years have left DC with 23 plants in all: • 4 Freightliner truck plants; • 1 Sterling truck plant; • 9 American LaFrance plants; • 3 Thomas Built Buses plants; • 1 Western Star plant; • 2 Orion bus plants; • 1 Custom Chassis plant; • 2 parts manufacturing plants. A number of North American plants were idled during the second half of 2000, and the North American workforce is being reduced by about 8,000 people or 38% by the end of 2001. A further 1,100 jobs are to be cut by October 2001 due to the continuing slump in demand. Following the resignation of Jim Hebe in May 2001 the new president, Rainer Schmückle is taking a fresh look at efficiency improvements and it is likely that one or more of the 23 plants will be closed. The move to offer Mercedes-Benz components in North America was one of the activities of the Powertrains business unit which is seeking external customers for the products and expertise formerly reserved for Mercedes-Benz products. While securing Freightliner and Sterling as customers looks a bit of a soft option, the financial advantage (both revenue and scale economy benefits) of selling in-house versions of major components such as engines should not be sniffed at. With the planned acquisition of Detroit Diesel the Powertrains unit can be expected to find more external customers over time, especially in view of the massive costs of developing engines to comply with ever-tighter emissions regulations. Other regions In addition to the truck assembly plants in western Europe and North America, DC produces commercial vehicles at wholly-owned or majority-owned facilities in Argentina, Brazil, South Africa and Turkey. There are a number of low volume assembly operations in other markets. In Latin America DC has moved to rationalise its production system, by concentrating truck and bus assembly in Brazil and van production in Argentina. Formerly the company produced trucks in both countries. In a further sign of increasing commonality between DC's operations, a new generation of medium-heavy trucks was recently launched in South America using the Atego cab. In June 2001 DC and Hyundai announced a $180m joint venture project to assemble Mercedes diesel engines at a new facility next to Hyundai's commercial vehicle plant at Chonju in South Korea. The Chonju plant has the capacity to produce about 120,000upa, though last year Hyundai and Kia's combined worldwide sales of trucks and buses was only 70,000 units. The 50:50 venture will produce OM900 engines for installation in about 75% of Hyundai's commercial vehicle range. The engines offer Hyundai an off-the-shelf solution to meeting forthcoming emissions standards in Korea and elsewhere. This project marks the first significant sign of co-operation between DC and Hyundai since DC acquired its 10% stake in the Korean firm. In addition to the engine project the two companies have agreed to co-operate on initiatives to assist Hyundai in product development, production and marketing. 29 NOTES UP ON FINANCIAL STATISTICS Prior to the merger, as part of the restructuring of the Daimler-Benz Group carried out by Mr. Schrempp, the Mercedes -Benz subsidiary was reintegrated into Daimler-Benz with the aim of reducing management layers and speeding decision making. Mr. Schrempp also introduced greater clarity and transparency into the Group’s financial reporting so that the performance of individual business units could be more accurately assessed. This was a welcome change as the profitability of the comme rcial vehicles division began to be officially disclosed instead of being subsumed within the combined accounts of the Mercedes-Benz car and truck div isions as previously. The accounts of DaimlerChrysler present operating profit figures for the commercia l vehicles division as well as capital spending, R&D and employee numbers. The division's net revenue is provided along with a split showing gross revenue (i.e. before elimination of intra-company transfers) for: • Mercedes-Benz trucks; • Mercedes-Benz vans; • Mercedes-Benz / Setra buses; • Freightliner (including all the other North American brands); • DC powertrain. There are four sets of statistics showing information for DaimlerChrysler, DaimlerChrysler CVs (including Mercedes-Benz CVs as was), Daimler-Benz and Mercedes-Benz Group. Prior to 1989/90, comprehensive information was not available for Mercedes-Benz Group. In October 1993 Daimler-Benz became the first German company to be listed on the New York Stock Exchange. The company therefore changed its accounting standards to conform more closely with the US generally accepted accounting principles (US-GAAP). These adjustments resulted in non-recurring income of some DM2.6bn, as provisions made under German accounting standards were released to conform with US-GAAP. The accounts for DaimlerChrysler are prepared in accordance with US-GAAP. From 1994 the Daimler-Benz and Mercedes-Benz accounts adopted the “Cost of Sales” presentation, whereby costs are allocated to the functional areas of manufacturing, sales and administration. This is becoming the international standard format. The 1993 figures have been restated to conform with this presentation. Other items to note include: Capital Investment - from 1987 capital investment excludes expenditure upon vehicles for leasing purposes. Cash Flow - as of 1993 this figure was no longer reported for the Mercedes-Benz Group. Liabilities - prior to 1987 current debt (defined as debts due within one year) and long term debt were not separated in the accounts, in the interests of completeness a 60/40 split has been used for earlier years, based on the 88-92 actuals. Employees - the employee numbers for Mercedes-Benz Cars plus Mercedes-Benz CVs do not reconcile to the Mercedes -Benz Group figure due to the non-allocation of sales staff and head office/central staff. 30 CHAPTER 4: HINO MOTORS OVERVIEW Hino Motors develops, manufactures and markets diesel trucks and buses in Japan and other (primarily Asian) markets. In Japan it has been the market leader in the medium to heavy truck sector for more than twenty years. The domestic market typically accounts for 60-66% of Hino's truck and bus sales. In revenue terms, the proportion contributed by domestic operations is even higher, due to the income generated by work performed on behalf of Toyota, Hino's majority shareholder. During the eighties and early nineties, Hino ranked as one of the world's top producers of trucks above 6t GVW. With output of 70-80,000 trucks per year the company vied with Navistar of the US for second place, a long way behind the industry leader, Daimler-Benz (as was). The slump in demand in Japan during most of the nineties and the sharp downturns in other Asian markets in 1997/98, caused Hino's output to fall by more than 50% from its 1989-91 peaks and on a world scale it currently ranks outside the top-10. Hino's profit margins were unimpressive before the slump in demand so such a precipitous decline in sales inevitably caused the company to slide into the red. The year to March 1999 saw its first net loss since listing on the Tokyo Stock Exchange in 1949. Further net losses were incurred in the following two years, though the company returned to the black at the operating level in its most recent financial year. Despite that return to profit, the scale of losses in fiscal 1998 and 1999 meant that over the ten years to March 2001, Hino made a cumulative operating loss of Y5bn. During this period of declining performance Hino has had the benefit (if 'benefit' is the right word) of a long-term principal shareholder, Toyota, to ward off the threat of foreign takeover. The association between the two firms dates back to the 1960s and recently Toyota has made several injections of funds into Hino, increasing its equity stake from 20% in 1998 to over 50% during 2001. We raise the question as to whether the link with Toyota has been truly beneficial because while it has undoubtedly offered Hino a welcome security blanket, particularly during the recent slump, it appears that thus protected, Hino's attempts to restructure and regain profitability have lacked the necessary urgency and vigour. The validity of this observation has been confirmed by Toyota's plan to revamp Hino, now that it has acquired majority control. Toyota has installed one of its own vice-presidents, Tadaaki Jagawa, as Hino's new president. Interestingly, despite the long association between the two companies Mr Jagawa is the first Toyota employee to be appointed to the position. Mr Jagawa has clearly been given a brief to make rapid changes to bring Toyota's new subsidiary closer to the profit levels achieved by the rest of the group. He has talked of a "shift to offensive management" in describing his approach to rehabilitating the firm. Although detailed restructuring plans had not been announced at the time of writing, Mr Jagawa and Toyota's president, Fujio Cho, have both indicated that Hino will be looking for international alliances to bolster its operations. Although technical co-operation is the preferred route there is also a willingness to consider equity tie-ups. From our perspective these are welcome changes, probably best summed-up as better late than never. 31 Figure 4.1: Hino revenue & operating profit trend 300 200 Index (Year to March 1985 = 100) 100 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 -100 -200 -300 -400 Revenue (Yen) Op. Profit (Yen) -500 Source: Hino RECENT PERFORMANCE Figure 4.2: Hino net income trend 2000/2001 results 1,100 In the year to March 2001 Hino reported a Index (Yr to March 1985 = 100) consolidated operating profit of Y5.6bn, on 700 revenue which rose by 7.8% to Y704bn. Although this was still a weak performance with 300 an operating margin of just 0.8%, the result was significant for marking a return to profit after two -100 1985 1987 1989 1991 1993 1995 1997 1999 2001 successive years of substantial operating losses. -500 The improvement principally reflects increased Yen truck sales and the benefits of restructuring as -900 Eur labour and material costs were reduced. -1,300 Sales of Hino trucks and buses rose by 8% overall and by 10% in Japan. Car production on behalf of Source: Hino Toyota rose by 4 per cent to 140,000 units. Hino also moved into the black at the pre -tax level, reporting a profit of Y3.1bn compared with a prior year loss of Y25.7bn. The profit was achieved despite interest payments of Y8.4bn, or 1.5 times the operating profit. Like most of the other Japanese truckmakers, Hino's net result was adversely affected by non-recurring charges to cover a shortfall in pension fund reserves under new accounting regulations. Hino booked a Y21.7bn charge, taking it to a net loss of Y13.3bn compared with a loss of Y21.8bn the previous year. Forecast Hino is anticipating a continuing recovery during the year to March 2002. Revenue is forecast to grow by 6%, boosted by a 16% rise in domestic sales and a 3% increase in exports. An operating profit of Y16bn is forecast, 2.1% of projected revenue. Net profit is forecast at Y24.5bn, helped by non-recurring gains from sales of land and Toyota shares. 32 BUSINESS STRUCTURE Hino’s origins date back to 1918. In addition to manufacturing medium and heavy trucks, buses and light- trucks for Toyota, the company produces industrial engines for compressors, generators and marine applications etc. The engine production activity accounts for less than 10% of Hino's revenue so the company is not obliged to disclose any separate financial information on this business. The revenue generated by production of Toyota vehicles has accounted for around 30% of Hino's revenue in the last two years. Links with Toyota The association with Toyota goes back to 1966. During 1997 Toyota rais ed its stake in the smaller firm from 16.4% to 20.1% and in March 2000 the stake was raised to 33.8%, giving Toyota effective management control. Last year's edition of this report commented that "It will be no surprise if Toyota takes a majority stake in Hino within the next few years" and this is what Toyota has done. In April 2001 Hino announced it would issue Y66.4bn worth of new shares for private placement with Toyota, boosting Toyota's stake to 50.1%. Payment for the shares was due at the end of August and Toyota's executive vice president, Tadaaki Jagawa, is to become Hino's new president. By the end of March 2002, Hino will sell all of the 5.24m Toyota shares it holds, in order to comply with regulations that bar a subsidiary from owning shares in its parent. Hino will use the proceeds from the share placement to beef up its two-ton truck business and offshore operations and for the development of environment-friendly technologies. Generally speaking, we are unconvinced of the industrial or comme rcial logic for keeping a carmaker and truckmaker under the same roof. The trend over the past decades has been in the opposite direction, with companies such as Ford, GM, Renault, Saab-Scania and Volvo all deciding to focus on one sector or the other. The reason underpinning this trend is simple: there are few worthwhile scale economies to be gained from a presence in both sectors. In all the principal areas of expense such as design, development, production, marketing and distribution; there is no significant potential for cost reduction from synergies - cars and trucks simply being too different. Having said that, if a company decides it does want to maintain an interest in both sectors it must be preferable for that interest to be a controlling one, as Toyota's now is. At least this gives Toyota a reasonable chance of managing the business to its own standards. In the case of Hino and Toyota there is more overlap between the two firms than was the case in the earlier examples. Toyota uses Hino to assemble some of its light commercial vehicles and Hino also builds trucks of up to 7t GVW which Toyota sells under its own brand name. However, Toyota having a stake in Hino is not a necessary precondition for either arrangement. Fundamentally Hino has still to fund the development and renewal of its medium and heavy truck ranges and powertrains. The link with Toyota does not enable it to spread those development costs over a higher unit volume. Last year's edition of this report commented that " - - even as a division of Toyota, Hino will be facing much the same degree of competitive pressure that has forced numerous other truckmakers worldwide to forge alliances. If Hino's profitability is to improve to anywhere near that of Toyota's car operations, then it too is likely to need to form alliances.". Recent comments by Toyota and Hino's new president suggest they have reached the same conclusion. In July Mr Jagawa said Hino should seek a tie-up with a foreign firm to survive amid intensifying global competition. He noted that Hino was the only one of Japan's major truckmakers not to have a foreign alliance of some sort and said he is particularly looking for co-operation in the supply of engines and other major components. He thought an alliance with a European firm would be particularly attractive. Restructuring Prior to Mr Jagawa's arrival Hino was already making efforts to restructure and cut costs. It formed some collaborative arrangements with its domestic competitors, pooling resources in specific areas. In the early months of 2000 Hino and Isuzu formed a joint venture to integrate bus production with effect from 2003. However, Mr Jagawa has called into question the future of this relationship, suggesting it will not proceed if it is judged to interfere with other possible alliances. 33 During 2001 Hino, Isuzu, Mitsubishi Motors and Nissan Diesel have agreed on a set of common specifications for interior and exterior parts for "non-step" buses, which have low floors designed for the elderly and handicapped. The companies hope to cut costs and expand the use of such buses, after the introduction of a law designed to facilitate the travel of the elderly and handicapped on public transport in November 2000. In May 2001 it was announced that Hino will begin supplying medium -sized diesel engines to Nissan Diesel with effect from 2004 when Nissan Diesel will stop its in-house production of such engines. Hino is expected to supply 13-14,000 units annually. In addition to such collaborative arrangements Hino has made some internal efficiency improvements. By March 2000 it had eliminated all temporary workers at its domestic plants and reduced its workforce by around 30% from a peak of 12,000. The company also consolidated its six regular truck production lines into three during 2000. Mr Jagawa plans to intensify the efficiency drive by reducing Hino's annual procurement costs by 30% from the current Y350bn. Mr Jagawa is credited with achieving a similar reduction in costs of the Toyota Vitz (badged Yaris in Europe). MARKETS Hino sold 51,000 units of its trucks and buses in the year to March 2001 a 16% increase from the previous year's 45,000 units and the second successive year of increase. Domestic new registrations were 12% higher at 32,995 units and exports were 24.8% higher at 18,043 units Most of the increase in domestic sales reflects the impact of the Dutro in its first full year of sales, having been launched in May 1999. New registrations of this model rose by 54% to 8,900 units. New registrations of medium/ heavy trucks rose by a more modest 5% to 22,200 units and those of buses fell by 13% to 1,900 units. Hino has long dominated the domestic market for medium and heavy-duty trucks but it is third in the 2- ton pickup segment, with a share of about 20%, including Toyota-brand trucks made by Hino. The new president has said he wants to raise Hino's share of the pickup market to 30% as soon as possible. Hino's exports have traditionally been concentrated in Asia which accounted for over 80% of export sales in most years, the principal markets being Thailand, Malaysia, Indonesia and Pakistan. Sales in the region plummeted in the wake of the economic crisis, falling by 75% in 1998/99 to 3,700 units. Demand in the region improved significantly during 2000, helping Hino's exports to rise by nearly 25%. Hino intends to exploit its closer ties with Toyota to boost its overseas sales by making use of Toyota's extensive overseas sales network, as well as using Toyota factories abroad for truck production. MODELS Hino's truck range comprises: Dutro - a light truck (4.3-7.4t GVW) developed jointly by Hino and Toyota (which badges it Dyna or Toyoace). This is Hino's first entry into the light truck sector, launched in May 1999. New registrations of Hino-badged models in the year to March 2001 were 8,900 units. Space Ranger - launched in March 1999, medium trucks spanning 7.9-17t GVW. Super Dolphin Profia - the range of heavy duty trucks was renewed in May 1998. 34 PRODUCTION STRATEGY During the year to March 2001 Hino's domestic output increased by 11.8% to just under 50,000 units. Production of the Hilux pickup truck on behalf of Toyota grew by 4% to 140,000 units. In April 2001 Hino added a second shift at its plant in Hamura, Tokyo, where it produces the Hilux. The extra shift will enable output to rise by 20% to around 460 units per day to meet growing export demand. The company has transferred 250 employees to Hamura from its plant in Hino, Tokyo, where it produces regular trucks. This will increase the Hamura plant's work force by about 10%. Elsewhere in the world Hino has various local assembly arrangements, the major ones being: q China - in 1993 Hino established a joint venture, Heilongjiang Bus, for the production of touring h buses. Hino has a 12.5% stake in t e venture. Capacity is 500upa. In December 2000 Hino announced a plan to produce and market buses in China with another company, Shenyang Shenfei Automobile Manufacturing. Hino has bought a 25% stake in the new firm and will supply design and production technology and marketing know-how as well as the right to manufacture and market Hino vehicles. Production will be carried out at an existing Shenyang Shenfei plant and at a new plant scheduled to open in 2003. In the initial phase, Shenyang Shenfei will produce 1,000 buses a year. From 2003, an additional 100 units will be made at the new plant. By 2010, annual production will be raised to 3,500 units, including 2,000 Hino models. q Indonesia - PT Hino Indonesia Manufacturing assembles trucks and buses. Output has been less than 100 units in the past couple of years, having reached 3,000-5,000upa before the economic crisis. q Pakistan - capacity at Hino-Pak Motors exists for 6,000 trucks and 1,200 buses per year, actual production usually 3,000 or below. Hino holds 59% of the equity and Toyota a further 30%. q Taiwan - Kuozui Motors was established by Hino in 1984 and Toyota bought a stake in 1986. Toyota now holds 38.3% and Hino 18.1%. Kuozoi assembles Hino trucks and the Toyota Dyna as well as Toyota passenger cars. Output of Hino models is 2,000-3,000 units annually. q Thailand - assembly of trucks, buses and Toyota CVs by Thai Hino Motor Corporation. Hino will begin exporting trucks from Thailand to other Asean members in 2004, when it releases a new model. The firm hopes to raise annual output at the Thai plant to 20,000 units from the present 3,000. q Vietnam - operations started at Hino Motors Vietnam in November 1997. Hino owns 51% of the venture, which has assembled less than 100 units in each of the last two years. Hino trucks are also assembled in: Bangladesh, Costa Rica, Ireland, Kenya, Malaysia, the Philippines, South Africa; Turkey and Zimbabwe. Volumes are generally tiny and Hino has no equity stake in the assemblers. NOTES UPON FINANCIAL STATISTICS The production on behalf of Toyota has a significant effect on Hino's accounts as revenue from Toyota has represented some 35% of the total in recent years. This needs to be considered when, for example, comparing Hino's unit revenues with those of other truck producers. Beginning with the annual report for the year to March 1996 Hino's accounts are published on a consolidated basis. The results for the year ended March 30, 1995 have been restated but earlier years remain on a non-consolidated basis. 35 CHAPTER 5: ISUZU MOTORS OVERVIEW Isuzu is now primarily a producer of trucks, with models spanning the range from SUVs to 26-tonners. In the last few years it has produced around 0.4m vehicles annually. About 90% of these have been light trucks, including SUVs and pickups. In Japan Isuzu's Elf range is the market leader in the light-duty truck sector. In the past Isuzu also produced passenger cars, selling models such as the Gemini, Aska and Piazza in Japan, North America, Europe and elsewhere. However, as only a medium -sized car producer with domestic production volumes seldom exceeding 200,000 units during the 1980s, Isuzu struggled and often failed to remain profitable. For the period from 1983 to 1992, the company returned a cumulative deficit at both the operating level and net levels. Its difficulties during this time can be attributed to having been spread too thinly, trying to offer a wide product range across a wide range of markets without having been able to secure the sales volumes to achieve the necessary scale economies. In recognition of these strategic weaknesses, the company decided during 1992 that it would no longer develop and produce passenger cars independently, concentrating instead on its trucks and sports utility vehicles, which offered the attractions of: • higher profit margins; • being an area where Isuzu had existing expertise; • existing demand. The contribution of car sales to Isuzu’s revenues has not entirely disappeared. The company sells Isuzu- badged Hondas and Honda in turn sells Honda-badged Isuzu products, both in Japan and elsewhere. Isuzu has a long-term relationship with GM, dating back to 1971 when the US company acquired a 34.2% stake in Isuzu. Since then the two companies have co-operated in various discrete joint ventures, such as the IBC operation in the UK (now wholly owned by GM). In recent years, the relationship has become closer, both formally and operationally: • formally – GM’s stake increased to 49% in March 1999; • operationally – Isuzu is becoming more closely integrated into GM’s worldwide structure, with global responsibility for the development of GM’s diesel engines and commercial truck development. Isuzu has made operating and net losses during the two years ending March 2001 and even in the six profitable years which preceded this period its operating margins were low, averaging just over1%. In response to this lengthy period of underperformance plus some signs of growing dissatisfaction from GM, Isuzu is significantly accelerating its restructuring programme, planning staff cuts of 26%, closing plants and exploiting its relationship with GM to the full in order to drive down costs. In our view there is room for speculation about GM's future intentions for Isuzu's medium/heavy truck business. The American firm decided to opt out of this sector over twelve years ago, selling its heavy truck interests to Volvo in 1988, though it retained a minority stake until 1997. The substantial stake in Isuzu's truck operations sits oddly with this strategy, thus from GM's perspective there is an argument to be made for disposing of this division. From Isuzu's perspective the link with GM does little to help its medium/heavy truck business in terms of either sales or costs. The rapid consolidation of the world's truck industry means Isuzu will soon be facing competitors with global reach and economies of scale. Given that Isuzu is not in a position to purchase another truckmaker and GM has already turned its back on the truck industry, it would be surprising if one or both companies were not considering the benefits of either a major alliance for, or the disposal of its medium/heavy truck business. 36 Figure 5.1: Isuzu (cons.) revenue and operating profit trend 600 400 200 Index (1987 = 100) 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 -200 -400 -600 Revenue Op. Profit -800 Source: Marketing Systems and Isuzu RECENT PERFORMANCE Figure 5.2: Isuzu (cons.) net income trend 800 2000/2001 results Yen Isuzu made a consolidated operating loss of Eur 300 Y27.3bn and a net loss of Y66.8bn in the year to March 31, 2001. 1987 1989 1991 1993 1995 1997 1999 2001 Index (1987 = 100) -200 The company was hit by restructuring costs and expenses aimed at boosting competitiveness, but -700 expects these measures to help it return to profit in its current fiscal year. -1,200 The latest loss was significantly smaller than the -1,700 previous year's, though Isuzu had originally forecast a return to profit. -2,200 Forecast Isuzu has said it expects to post a group operating Source: Isuzu profit of Y25bn and a net profit of Y1.0bn in the year to March 2002. BUSINESS STRUCTURE Since abandoning passenger car production in 1992 Isuzu’s business has been organised around three main divisions: Light-duty vehicles - these include recreational vehicles (e.g. Bighorn/Trooper), pickups (e.g. Campo), light trucks such as the Elf Series and microbuses. Medium/heavy-duty vehicles. Engines, components and others - the importance of this division has risen as Isuzu pursues its aim of becoming the number one diesel engine producer worldwide. In May 2001 Isuzu announced a new three year business plan, known as the V-plan ('V' for 'victory' and 'V-shaped rebound'). The move followed pressure from GM which has become concerned about Isuzu's continuing weakness following operating losses in five of the last eleven years. Even in the six profitable years the operating margin has only averaged 1%. 37 By the end of the year to March 2004 Isuzu plans to have: • cut staff by 9,700 or 26% of the current 38,000; • switched production of sport utility vehicles to North America; • switched production of pickups for overseas markets to Thailand; • sold its Tokyo headquarters building; • cut procurement costs by 20% through joint purchasing with GM; • consolidated domestic sales companies into around 25 from the current 41, in an effort to return all sales firms to profitability in 2003/04; • reduce by 40% the number of affiliates, currently 109; • shut a truck plant in Kawasaki city (by 2005); • reduced the number of platforms to three from the current seven. The changes are expected to reduce group interest-bearing liabilities to Y510bn from the current Y750bn and result in a group net profit of over Y30bn in 2003/04. The company is aiming for a total capacity utilisation rate in excess of 90% compared with the current 50% Not all the changes are aimed at cutting back. Isuzu is also looking to: • expand its diesel engine business; • develop global models for its LCV and pickup range; • make full use of GM's distribution channels to sell Isuzu products and boost its own distribution channels by selling GM products; • tap into GM's purchasing organisation to reduce the cost of materials and components by 20%; • make use of GM's production facilities. It is clear from the V-plan that the links with GM are principally of benefit to Isuzu's light truck activities, for the obvious reason that GM is no longer involved in heavy trucks. Indeed it is noticeable that Isuzu's V-plan makes very little mention of expanding the medium/heavy truck business other than introducing its truck and bus range in China. As mentioned in the opening comments earlier, we believe GM may well encourage Isuzu to sell off the truck business entirely and concentrate on those aspects of the business which have the best fit with the rest of GM's operations. The workforce reduction programme got off to a flying start in July 2001 when Isuzu announced that its early retirement scheme had been oversubscribed on the first day, with 740 workers applying for the scheme compared with the target of 700. Plant workers were not eligible for the programme which was confined to employees of 32 years old or older with more than 10 years of service at the company. There are 4,500 such employees. While the company will be pleased at the scheme's ready acceptance by the workforce there must be at least a small concern over the level of motivation among employees. During January 2000 Isuzu and Hino announced an agreement to collaborate in the development and manufacturing of buses in order to reduce costs and improve product competitiveness. The companies plan to merge their bus production and development operations in 2003. MARKETS 2000 sales In the year to December 2000 Isuzu's domestic plants sold 30,162 medium/heavy trucks and buses, 7.4% more than the previous year's 28,084 units. Domestic sales accounted for 19,293 units with 10,869 going to export markets. Sales of domestically produced light duty trucks were 9.4% higher at 106,975 units, including just over 5,000 units provided to Nissan and Nissan Diesel for rebadging. Export markets accounted for 57,358 units with 49,437 units sold in Japan. Sales of domestically produced recreational vehicles dropped by 9.8% to 135,033 units, principally due to a fall in exports from 140,805 to 127,585 units. This was offset by a rise in overseas production to 309,325 units from 285,273 units in 1999. 38 2001 sales During the 2001 calendar year Isuzu is anticipating a 10.7% drop in sales of its domestically produced vehicles, to 244,500 units, reflecting a 9% rise in domestic sales more than offset by an 18% drop in export sales. Most of the decline in exports can be attributed to the switch to overseas production, which is expected to rise by 3% to 320,000 units but the company is expecting overall sales to drop by 2% to 556,500 units. The company may well miss this target due to recent problems with exports to China. In June 2001 Isuzu announced it was suspending exports to China, following the imposition of import tariffs by Beijing on Japanese vehicles. New orders from China dried up since Beijing slapped a 100% tariff on Japanese-made vehicles in retaliation for curbs imposed on Chinese farm imports by Japan. Isuzu had been exporting large trucks to China and plans to resume production if local demand warrants it. US sales In calendar 2000 Isuzu's share of the US market for Class 4-7 trucks, rose to 5.3% from 4.8% in 1999 and 2.9% in 1998. Unit sales increased by 5.4% to 13,173 units, with about 60% of sales being concentrated in Class 4. A Class-5 delivery truck was launched in 1999, using an Isuzu cab and engine on a GMC chassis. This helped Isuzu's Class 5 sales to rise by 22% during 2000. GMC is also marketing the vehicle under its brandname. Both vehicles are assembled in the US at GM's Janesville plant. During the first six months of 2001 Isuzu's Class 4-7 sales in the US rose by 12% to 8,263 units. This substantially outperformed the overall market which dropped by 18.9% during this period. MODELS Isuzu's truck range comprises: N-series: light duty (3-8t GVW) trucks badged as Elf in the domestic market. Isuzu counts these vehicles within its light-duty vehicle division. F-series: medium weight 2-axle trucks 9-15t GVW, badged Forward in the domestic market. CV-series: also medium weight 2-axle trucks intended for heavy duty work (15.1-16.8t GVW) with more robust construction hence smaller payload than the F-series. CX-series: heavy duty, 3-axle trucks, 26t GVW, badged as Giga in Japan. EX-series: 2-axle and 3-axle road tractors, also badged Giga in Japan. PRODUCTION STRATEGY Isuzu is aiming to produce 320,000 vehicles overseas in calendar 2001, up by 3% from the 2000 figure of 309,325. The domestic production target is 236,500 units, down by 8% from the 2000 level. The domestic production target is composed of: • 35,000 medium/heavy trucks (including 1,200 buses) up by 21% from the 28,898 produced in 2000; • 109,000 light-duty trucks, up by 8% from 2000; • 92,500 recreational vehicles including pickups, a drop of 28% from prior year levels reflecting the switch of production to overseas plants. The company's V-plan provides for an expansion of diesel engine production and a refocusing of vehicle production such that light-duty and medium/heavy trucks will be built in Japan, pickup trucks and a multi-purpose vehicle in Thailand and SUVs in the US. 39 Expansion of diesel engine business The company aims to boost its annual output of diesel engines to 1.8m by the end of fiscal 2005, comprising: • 0.6m at the Polish plant opened in 1999; • 0.5m in Japan; • 0.4m elsewhere in Thailand, Indonesia and China; • 0.3m in the US at the DMAX plant, the joint venture between Isuzu (60%) and GM (40%). In support of this target Isuzu is to invest Y100bn in diesel engine manufacturing facilities over the five years to 2005/06. Capacity at the Polish engine plant reached 300,000upa in January 2001, a year ahead of schedule. In November 2001 the plant will start producing diesel engines for Honda's Civic. The company will build about 5,000 engines by March 2002, ramping up production to 15,000upa thereafter. Isuzu will also help Honda to develop its own 2.0-litre passenger car diesel engine, for installation in its next -generation Accord models in Europe in 2003. Isuzu may be given the production contract for this new engine but a final decision has not yet been made. Capacity at the DMAX plant in Ohio is to be raised to 150,000upa by the end of fiscal 2002 then to 300,000upa from 2004. Total investment for the expansion is projected at Y10bn. The plant currently produces 6.6-litre V8 diesel engines which are used in GM's Silverado and other models. In 2004 a V6 unit is expected to enter production at the plant. Domestic production structure The company will close its Kawasaki plant in Kanagawa Prefecture at the end of 2005. That will leave it with three (or perhaps two) domestic plants: the Fujisawa plant in Kanagawa Prefecture, at which it will concentrate truck manufacturing; while a plant in Tochigi Prefecture will specialise in truck engine production. The Hokkaido plant will continue making diesel engine parts to supply Isuzu's overseas plants, but Isuzu is considering spinning off the Hokkaido plant as an independent entity. With the moves, Isuzu aims to raise its capacity utilisation ratio to 90% from the current 50%. Overseas production Isuzu and GM have agreed to assemble Isuzu's next generation 1-ton pickups at GM's plant at Rayong in Thailand on a contract basis from 2003. The vehicle has been co-developed by the two companies. Isuzu's own Thai plant at Samut Prakan will produce the pickup for Thailand, Australia and New Zealand while the Rayong plant will supply other markets. In April 2001 production started of F -Series medium and heavy-duty trucks at Isuzu's Chinese joint venture Qingling Motors Co. which previously made only light trucks. The F-Series trucks range from 9.5 to 21.5 tons in size and the joint venture aims to produce 1,000 of the new vehicles in the first year, rising to 2,000 in 2004. Founded in 1985, Qingling Motors makes about 40,000upa of light and pickup trucks. Isuzu has a 7.4% stake in the company. The previous month Isuzu became the first Japanese automaker to begin producing midsize and large buses in China, where annual demand for buses is currently about 40,000 units, or eight times that in Japan and expected to increase by at least 50% by 2005. Guangzhou Isuzu Bus Co., a joint venture in Guangdong Province, a ims to turn out about 100 units of three Isuzu bus models this year, rising to 1,000upa in three years. Also during the first quarter of 2001 Isuzu began producing the new Axiom SUV. The model is for the US market only and is produced at Subaru-Isuzu Automotive, the joint venture plant in Lafayette, Indiana. Axiom output is planned at 24,000upa. 40 NOTES ON FINANCIAL STATISTICS Data is shown in the appendices for consolidated and non-consolidated accounts. The commentary focuses on the consolidated data where possible but the non-consolidated data has been available for longer and the level of disclosure used to be better. Since the 1998/99 fiscal year the disclosure of consolidated data is much improved, in response to changed regulatory requirements. Isuzu’s accounting year-end changed from October to March in 1995, hence the 1994–95 period covers the five months from November 1994 to March 1995. The sales and production data refer to all vehicles including heavy trucks. 41 CHAPTER 6: IVECO OVERVIEW Iveco, the commercial vehicle division of the Fiat Group, was formed in 1975 by the integration of five truck companies. The Fiat Group's three Italian truck divisions: Fiat Veicoli Industriali, Lancia Veicoli Industriali and OM were joined by Unic a Fiat Group company in France and Magirus Deutz of Germany, a Klockner Humboldt Deutz (KHD) company which joined Iveco in return for a 20% equity stake in the combined group. The rationale for Iveco’s formation was clear: the five companies/divisions were too small and nationally concentrated to compete effectively at a European level, still less at a global level. Magirus Deutz was an entirely independent company with its own product range and manufacturing facilities but even Fiat’s own truck divisions were operated as discrete entities with no product overlap or significant pooling of resources, so the potential for economies of scale and rationalisation was high. That rationalisation of products and manufacturing facilities took most of the ensuing two decades to achieve, partly as a result of having to accommodate the later acquisitions of Ford’s UK truck operations, Astra in Italy, Pegaso in Spain and Seddon Atkinson in the UK. The launch of the Euro range, starting with the EuroCargo in 1991 and completed with the introduction of the EuroStar in 1993, marked the full integration of Iveco’s disparate divisions and as the company enters the 21st century it is beginning the first major renewal of the Euro range. Iveco is by far the smaller of Fiat's two vehicle divisions, typically generating revenues about one quarter the size of Fiat Auto's. However, over the past decade Iveco has usually been the more profitable of the two divisions. In the ten years to 2000 Iveco's cumulative operating profit was Eur1.62bn or 2.8% of revenue compared with Eur0.28bn or 0.1% of revenue at Fiat Auto, which incurred operating losses in four of those ten years. It is not that long ago that we were making some similar comments about the performance of Volvo Cars in relation to Volvo Trucks and RVI in relation to Renault Auto. In both cases the parent company has now bitten the bullet and disposed of the underperforming division, Volvo selling its car division to Ford and Renault its truck division to Volvo. The question now being asked is whether Fiat is preparing to do make a similar manoeuvre. It has certainly given itself the option. In March 2000 Fiat Auto and GM announced an alliance under which the US carmaker has taken a 20% stake in Fiat Auto in return for 5.1% of GM's equity. Fiat Group has the option to sell GM the remaining 80% of Fiat Auto in three and a half years' time. This gives the group a chance not only to see how fruitful the GM alliance is, but also time to improve the competitive strength and focus of the divisions which would remain if Fiat Auto was sold entirely. Against that background it is no surprise that the Fiat Group is looking for a major strategic acquisition or alliance to bolster Iveco's position in the global truck industry. Last year Iveco was the seventh largest producer worldwide of trucks above 6t GVW and the seventh largest producer of vehicles above 16t GVW. However, recent consolidation activity means that in volume terms, the gap between Iveco and producers such as DaimlerChrysler, Paccar and Volvo Global Trucks has widened considerably, particularly in the heavy sector. Iveco's chief executive, Giancarlo Boschetti, has said he expects his firm to emerge as one of the world's top-five producers of medium-heavy trucks. While the logic for an acquisition is compelling, Iveco faces the problem of a dwindling stock of potential targets, with companies such as MAN and Navistar seeing themselves in the role of buyers or at least allies, rather than sellers. Iveco is reported to have held talks with both those companies and several others (Nissan Diesel most recently) about alliance possibilities, but at the time of writing no deals had been announced. The link between Fiat Auto and GM may put one additional name into the frame, that of Isuzu, whose medium/heavy truck division (see previous chapter) is its weakest and probably of least strategic interest to GM. 42 Figure 6.1: Iveco revenue & operating profit trend 500 400 300 Index (1983 = 100) 200 100 0 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 -100 -200 Revenue (NLG) Op. Profit (NLG) -300 Source: Iveco RECENT PERFORMANCE Figure 6.2: Iveco net income trend 2000 results 300 Among western Europe's major truckmakers, Iveco reported the strongest increase in operating profit during 2000, with a 57% rise to Eur489m. 200 The improvement was helped by a change in the 100 basis of consolidation but the underlying result was still 45% above the previous year. 0 The company's operating margin of 5.7% was 1983 1985 1987 1989 1991 1993 1995 1997 1999 second only to that of Scania. The figure was inflated by non-recurring gains from asset -100 disposals but the recurring operating margin of 4.7% still left Iveco in second place in Europe. -200 The net increase of Eur178m reflects: NLG • Eur136m from increased unit sales and a Eur -300 more favourable mix; • Eur88m from property sales; • Eur38m from the first-time consolidation of Source: Iveco Fraikin • Eur28m from a reduction in discount levels These positive factors were partly offset by cost increases of Eur112m. Interestingly Iveco reports that its sales mix "improved" because it sold a higher proportion of light vehicles, as the new Daily made its impact. All other things being equal, profitability would be expected to improve as the proportion of heavy trucks increased. However, all other things were not equal as Iveco found that competition in the heavy sector grew particularly tough during the closing months of 2000, with steep discounts having to be offered. 43 Figure 6.3: Latest results – Fiat Group Currency Fiat Group / Unit January - September Year to December 2000 2001 (%) 1999 2000 (%) Revenue Eur(m) 42,368 43,063 1.6 48,123 57,555 19.6 Of which: - Fiat Auto Eur(m) 18,784 18,735 (0.3) 24,101 25,361 5.2 - Iveco Eur(m) 6,159 6,247 1.4 7,387 8,611 16.6 - Other Eur(m) 17,425 18,081 3.8 16,635 23,583 41.8 Operating profit Eur(m) 500 563 12.6 788 855 8.5 Of which: - Fiat Auto Eur(m) (27) (117) 333.3 (121) 44 - - Iveco Eur(m) 264 190 (28.0) 311 489 57.2 Iveco operating margin percent 4.3 3.0 (1.2) pts 4.2 5.7 1.5 pts Profit before tax Eur(m) 682 855 25.4 1,024 1,050 2.5 Unit sales 000s 1,875.3 1,726.1 (8.0) 2,477.9 2,514.8 1.5 Of which: - Fiat Auto 000s 1,756.7 1,610.9 (8.3) 2,328.0 2,350.0 0.9 - Iveco 000s 118.6 115.2 (2.8) 149.9 164.8 9.9 Source: Fiat While most other heavy truck brands faced a similar situation, Iveco has been having a particularly tough time in the heavy truck sector as its Euro range is close to the end of its life. The resulting pressure on margins is causing the company to bring forward the launch dates for its new generation of models. 2001 results The trend of improving profit ended in the first quarter of 2001 as Iveco's operating income dropped, year-on-year by 4.5% to Eur64m. The second quarter saw an acceleration of the decline as profit dropped by 12.2% and in Q3-2001 profit fell by nearly 60% to Eur40m as unit sales fell by 5.3%. Iveco's overall revenue for the first nine months of 2001 rose by 1.4% to Eur6.25bn. The increase reflected an increased contribution from financing and service activities plus higher sales of buses and special vehicles, partly offset by a drop in sales of other vehicles and engines. Pricing pressure reduced Iveco's operating margin over the first nine months to 3.0% from 4.3% a year ago. With truck demand in western Europe set to fall further the company is likely to report a lower margin for the year as a whole. BUSINESS STRUCTURE As mentioned, Iveco's core structure was established in the period spanning its initial formation in 1975 through to its acquisition in 1990 of Spain's Enasa Pegaso, an acquisition which brought Pegaso-owned Seddon Atkinson along with it. Since then the core structure has been largely unchanged as Iveco concentrated its attention on integrating the various companies to form a cohesive entity. Although it has not undergone any further significant expansion by acquisition, during the late eighties and the nineties Iveco was active in developing alliances, generally either in order to penetrate new markets or to share the costs of product development. Examples of the former are included under 'Production Strategy', examples of the latter include joint ventures with: 44 Figure 6.4: Fiat Group revenue by division Division 1996 1997 1998 1999 2000 Fiat Auto 53.6% 57.0% 54.3% 50.1% 44.1% CNH Global 10.6% 11.5% 11.2% 10.9% 18.7% Iveco 13.2% 12.7% 14.5% 15.4% 15.0% Other 22.7% 18.8% 20.0% 23.7% 22.3% Total 100% 100% 100% 100% 100% Source: Fiat q Nissan Diesel in 1991 for the development of a new engine range, badged Cursor by Iveco (see Markets & Models). q Cummins in 1996, with whom Iveco and Fiat's New Holland formed the European Engine Alliance to develop another engine range. The first of these are due to appear in Iveco trucks before the end of 2000. The new range will include 4-cylinder and 6-cylinder units and will slot in below the Cursor range with expected displacements of 3.9-5.9 litres. q ZF, with whom Iveco has jointly operated a transmission production plant in Spain since 1993. The two firms co-operated in the development of a semi -automatic gearbox, launched by Iveco as the Eurotronic in 1997. q RVI with whom Iveco has collaborated in the development of a new cab for their respective van ranges. The new cab is used in the new Daily. In 1998 the ties between Iveco and RVI became closer, first with the announcement that their bus and coach operations were to merge and then the planned merger of the foundry operations of their respective parent companies. The merged bus and coach operations are called Irisbus, and until this year each partner had an equal share in the business which sold 9,800 units in 2000, a 12% rise from the previous year. However, the European Commission's approval for Volvo's takeover of RVI was conditional upon RVI disposing of its interest in Irisbus and in May 2001 it was announced that Iveco will take full control of Irisbus in two stages over the next two years. For four years after the signing of the agreement, Irisbus Holding Irisbus will retain the right to use the Renault trademark for four years, allowing it to replace the brand gradually with the Irisbus name and logo as the core trademark of the Group. The Iveco brand will be similarly phased out. The Fiat group has undergone substantial change in recent years, as non-core businesses have been divested and the core business sectors have been boosted by acquisitions and alliances e.g.: • the acquisition in 1999 of Case Corporation by New Holland - Fiat's agricultural and construction equipment business); • the partnership between Fiat Auto and GM. This refocusing of the group's industrial portfolio has been conducted with the objective of making each of the retained businesses world leaders within their sphere of activity. So far, Iveco shows little sign of achieving this status and there has long been speculation as to how Fiat might act to boost its presence in the world's truck industry. Merger and alliance activity among Iveco's competitors means there are few potential partners left to talk to. The company's name has frequently been linked to both MAN and Navistar but Navistar's recent alliance with Ford makes a tie-up with Iveco much less likely and in March 2001 Iveco's chairman, Giancarlo Boschetti, said that the company would not be pursuing talks with MAN in the foreseeable future due to the high price of MAN's shares. The link between Fiat Auto and GM has thrown up a fresh possibility for Iveco, that of an alliance with Isuzu (in which GM has a 49% holding). GM's primary interest in the Japanese firm is its SUVs and diesel engine expertise, so there may be scope for co-operation with Iveco on the truck side of the business. The official word is that as yet there has been no contact between the two companies but there are several good reasons for Iveco to pursue an alliance of some sort. 45 In the meantime Iveco is implementing its plan to capture a substantially larger share of the service business (financing, insurance, servicing and maintenance) that attaches to its products, it being recognised that service industries are generally more profitable than capital-intensive manufacturing operations. This rationale underpins Iveco's expansion of its finance and leasing network under the Transolver brand. During 1999, new Transolver companies were established in Germany and Spain. In western Europe, Transolver provides financing for 25% of the new vehicles sold by Iveco. This side of Iveco’s business was also expanded by the purchase in December 1999 of a controlling interest in Fraikin Group. Fraikin is a truck leasing company with 33,700 vehicles under contract (as at December 31, 2000) in France, the UK, Benelux and Spain. Fraikin also has a network of more than 200 repair shops. This acquisition forms a major part of Iveco's plan to double its truck fleet to 80,000 vehicles. MARKETS & MODELS Iveco sold 164,800 vehicles in 2000, a rise of 9.9% from the previous year. If the contribution of non- consolidated joint ventures and licensees is included, sales were 8.1% higher at 207,500 units. Of the 164,800 units sold, 97,500 were LCVs, 24,900 were medium trucks and 33,000 were heavy trucks. The company also sold 5,600 buses (mostly through Irisbus) and 3,800 specialist trucks. Figure 6.5: Iveco's share of W. European truck markets (%) Sector & market 1997 1998 1999 2000 2005 3.5t-15.9t Austria 12.1 14.4 13.3 16.0 15.5 Belgium & Luxembourg 16.0 16.2 15.9 15.4 16.9 France 26.4 23.6 21.8 23.8 23.6 Germany 22.7 21.5 21.5 22.5 22.4 Italy 61.2 60.3 61.1 62.9 57.8 Netherlands 17.2 18.3 22.2 21.7 19.3 Portugal 13.7 9.5 8.5 10.0 13.0 Spain 27.3 26.5 30.8 26.4 28.1 UK 35.5 33.2 31.3 30.3 29.9 Nordic markets 13.1 13.5 16.0 16.8 17.8 Other 13.4 15.8 11.2 13.7 14.5 Total W. Europe 27.3 26.4 26.4 26.7 26.6 16t plus Austria 5.5 5.7 5.6 6.2 7.0 Belgium & Luxembourg 6.6 5.7 5.2 4.4 5.3 France 9.8 8.4 8.4 9.3 9.8 Germany 6.7 5.9 5.1 4.8 6.5 Italy 40.1 40.2 39.1 39.0 39.3 Netherlands 3.4 2.9 4.2 2.6 4.2 Portugal 7.8 7.3 7.1 6.6 8.3 Spain 20.1 19.6 19.5 17.8 19.1 UK 11.6 11.3 10.1 8.9 10.8 Nordic markets 3.6 3.7 2.5 2.9 4.8 Other 9.6 7.8 9.2 7.7 8.9 Total W. Europe 11.3 10.9 11.2 10.9 11.8 Source: Iveco 46 Figure 6.6: Iveco unit sales by market Market 1996 1997 1998 1999 2000 (000s) (000s) (000s) (000s) (000s) Italy 32.6 34.4 37.2 41.5 45.8 Share of Iveco total (%) 27.2 27.7 27.2 27.7 27.8 France 15.2 15.1 16.3 20.1 23.1 Share of Iveco total (%) 12.7 12.2 11.9 13.4 14.0 Germany 14.7 14.5 16.6 16.9 18.4 Share of Iveco total (%) 12.3 11.7 12.1 11.3 11.2 Great Britain 13.9 14.6 15.6 13.7 13.1 Share of Iveco total (%) 11.6 11.8 11.4 9.1 7.9 Other 43.3 45.6 51.1 57.7 64.4 Share of Iveco total (%) 36.2 36.7 37.4 38.5 39.1 Total 119.7 124.2 136.8 149.9 164.8 Source: Iveco In terms of market share Iveco improved its position in western Europe's 3.5-16t sector from 26.4% to 26.7 registering gains in seven of the eleven markets/regions shown in Figure 6.5. The increases mostly reflect higher sales of the EuroCargo range, which reached its highest level of sales since its 1991 launch. We continue to expect Iveco to increase its share in a number of markets over the next few years, but at a European level the effect of these gains will be diluted by the expected decline in the company's share of its domestic market. In the heavy truck sector Iveco's share of the west European market dropped by 0.3 percentage points to 10.9% in 2000. As the entire Euro range is renewed over the next couple of years and new engines are introduced we expect Iveco's share of the European heavy sector to begin improving from around 2002. Again we expect the company to struggle to increase its domestic share significantly and this will constrain the rise at a European level. In the table it can be seen that outside Italy Iveco's market share is on average forecast to be 1.4pts higher in 2005 than 2000, but in Italy the increase is just 0.3pts. Iveco sold 130,900 trucks in western Europe during 2000, a rise of 9.3%. In eastern Europe sales rose by 26.9% to 8,500 units. In the rest of the world sales rose by 8.5% to 25,400 units, helped in particular by a strong recovery in Brazil. In the first quarter of 2001 Iveco sold 37,879 vehicles, a 3.7% drop from Q1-2000. In the second quarter of 2001, sales of 41,753 vehicles were within 12 units of the Q2-2000 figure. In Q3-2001 sales were down by 5.3% at 35,600 units. The company reports that declines of 16% in Italy and 12% outside Europe were partly offset by growth in other European markets. Iveco has entered a phase of significant product renewal with a number of new or facelifted models scheduled and all-new engine families being introduced. The first phase of the current product cycle began in October 1998 when a 7.8-litre version of the new Cursor engine (Cursor 8) was launched in the EuroStar. The Cursor 10 followed in late 1999, this is a 10.3-litre unit which is installed in the Euro-Tech and EuroStar models. A 13-litre unit debuted in the EuroTrakker at the beginning of 2001 and will appear in the EuroStar and EuroTech later in the year. At the autumn 2000 IAA commercial vehicle show in Frankfurt, Iveco showed its new Tector engine range, now being installed in the EuroCargo range. The Tector engine has been jointly developed by Fiat group companies (Iveco and New Holland) and Cummins under the European Engine Alliance. 47 Figure 6.7: Iveco's product range MODEL DEBUT 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 REMARKS I II I II I II I II I II I II I II I II I II I II DAILY 1999 F F N F LIGHT VANS / CHASSIS CABS EUROTRAN 2003? N LIGHT (HOME DELIVERY) EUROCARGO 1991 E E E/F N MEDIUM EUROTECH 1992 E E E N MEDIUM-HEAVY ROAD TRUCKS EUROTRAKKER 1993 E E N HEAVY (CONSTRUCTION) EUROSTAR 1993 E E N HEAVY (ROAD) I: INTRODUCTION T: TERMINATION N: NEW MODEL F: FACELIFT E: NEW ENGINE Source: Marketing Systems In July 1999 the EuroCargo EL was launched. This model is intended to serve the urban and suburban delivery markets and particularly the growing home delivery market. It was this mo del in particular which helped lift EuroCargo volumes to record levels in 2000. PRODUCTION STRATEGY The principal truck manufacturing companies within Iveco are: q Iveco SpA - which produced 43,608 trucks (for buses see Irisbus) from its Italian plants in 2000, about 100 more than in 1999. q Iveco Pegaso SA - responsible for about 25% of European production of the Daily van which is produced at Valladolid. At the Madrid plant Pegaso produces the EuroTrakker and the EuroTech which is also produced by Iveco Magirus. Production of 3.5t plus trucks at Pegaso was 14,900 units in 2000 about 1,500 fewer than the previous year. q Iveco Magirus AG - produces the heavy trucks EuroStar and EuroTech as well as fire-fighting vehicles. Output from the plant at Ulm was unchanged at 13,500 units in 2000. q Astra Veicoli Industriali SpA - manufactures special purpose vehicles such as dumper trucks for quarries and mines at its plant in Piacenza. Astra produced nearly 1,700 vehicles in 2000, up by 36% from the previous year. q Seddon Atkinson - the UK company produced 508 vehicles in 2000, down from 766 units in 1999. q Irisbus - the merged bus and coach operations of Iveco and RVI employed about 6,200 people and produced 5,400 vehicles in 2000, down by 12% from the previous year. Irisbus acquired a controlling interest in Ikarus, the Hungarian bus producer during 1999. In the firefighting sector Iveco has been at the forefront of industry consolidation. In 1996 Iveco acquired BTG, an East German manufacturer of small fire fighting vehicles. Subsequently Iveco formed a joint venture with RVI through a new holding company called Iveco Eurofire in which Iveco is an 85% shareholder. In 1997 Iveco Eurofire acquired a manufacturer in Austria and established a new company called Lohr Magirus Feuerwehrtechnik. 48 Joint ventures outside West Europe include Naveco, a 50-50 joint venture with Yuejin Motor Corporation in China for the joint production of up to 60,000 Daily vans and 75,000 engines annually. In 2000 Naveco produced 17,500 vehicles, a drop from 18,000 the previous year and 20,000 in 1998. During 2001 a further Chinese joint venture has been announced. The 50:50 venture between Iveco and the Changzhou Bus Company entails an investment of $36m by Iveco. The new company will turn out three new ranges of buses - minibuses, town buses and touring coaches - with chassis, engines and mechanical assemblies developed by Iveco. Production of the first new vehicles is planned for the first quarter of 2002. In India, Ashok Leyland in which Iveco holds a 15% stake, sold 34,500 vehicles in 2000, 1,700 fewer than the previous year. In Turkey Iveco's joint venture (Iveco: 27%) with the Koc group sold 8,100 units, 40% more than the previous year. Fiat's link with GM has led Iveco to consider establishing a plant in North America to build the Daily van for distribution in the region, presumably through GM's dealership network. NOTES ON FINANCIAL STATISTICS Statistics are provided for Fiat Group and Iveco. Iveco is registered in the Netherlands, therefore the native currency shown in the financial statistics is Dutch guilders. There is good disclosure in the accounts. As Iveco also produces and sells commercial vehicles of less than 6t GVW and buses, the company's financial data includes the contribution from these sides of the business. From 1988 to 1993, the Fiat Group statistics reflect the consolidated results of the industrial companies only, with financial services included on an equity basis. In 1996, the financial services group Fidis SpA was merged into Fiat and the related financing activities were transferred to the automotive sectors. The results from finance activities are now consolidated on a line by line basis and operating profit is calculated after deducting the interest expense related to financing activity. The data for 1994 and 1995 have been restated. 49 CHAPTER 7: MAN NUTZFAHRZEUGE OVERVIEW MAN Nutzfahrzeuge is the truck and bus division of MAN AG, the German industrial conglomerate. It is the largest division within the group in terms of revenue, employees and (usually) profit contribution. The truck division is mostly focused on west European markets and typically 60-70% of its output is in the 16t-plus sector. During 2000 MAN acquired two small truckmakers: ERF the UK producer and Star, based in Poland. These acquisitions increased to five, the number of brands controlled by the division (MAN, Steyr, ÖAF, ERF and Star). Also during 2000 MAN announced its plan to take over Gottlob Auwärter, the German bus manufacturer which sells under the Neoplan brand. The acquisition was approved by the competition authorities this year. In view of the recent consolidation within the world's truck industry there has been much speculation over the last few years as to whether MAN will need to form an alliance or make a more significant acquisition in order to remain competitive against groups such DC and Volvo with their significantly higher production volumes and greater exposure to emerging markets. During 2000 MAN added to this speculation when it said it would consider a capital increase and an initial public offering for MAN Nutzfahrzeuge to fund a major deal. Subsequently MAN's name was linked with a variety of other companies, including Iveco, Navistar. and RVI. However, during 2001 most speculation has centred upon VW, following a report in a German business magazine that VW has been holding talks with the insurance group Allianz, one of a group of shareholders controlling 26% of MAN Group's equity and 36% of the voting rights, with a view to purchasing their stake. The talks have been prompted by a forthcoming change in German tax laws. Beginning in 2002 German companies will be exempt from tax on capital gains from the sale of holdings in other companies. This is expected to lead to an unravelling of many of the cross-shareholdings which have been a feature of Germany's post-war industrial structure. It is not clear what VW's truck strategy is, beyond wanting a second heavy truck brand in its portfolio alongside Scania. From the MAN perspective there is little potential for synergies between it and VW's limited truck operations, though the Scania link offers more possibilities. Figure 7.1: Latest results - MAN Currency MAN Group / Unit January - June July-December 2000 2001 (%) 1999 2000 (%) Revenue Eur(m) 8,291 7,331 (11.6) 6,290 7,524 19.6 Of which: - MAN Nutz. Eur(m) 3,221 3,242 0.7 2,534 3,048 20.3 - Other Eur(m) 5,070 4,089 (19.3) 3,756 4,476 19.2 Pre-tax profit Eur(m) 440 155 (64.8) 228 264 15.8 Of which: - MAN Nutz. Eur(m) 148 6 (95.9) 121 85 (29.8) - Other Eur(m) 292 149 (49.0) 107 179 67.3 MAN Nutz. pre-tax margin percent 4.6 0.2 (4.4) pts 4.8 2.8 (2.0) pts Net profit Eur(m) 280 105.0 (62.5) 145.0 177.0 22.1 Net margin percent 3.4 1.4 (1.9) pts 2.3 - - Unit sales 000s n/a n/a - 28 34 21.1 Sources: Marketing Systems & MAN 50 Figure 7.2: MAN Nutzfahrzeuge revenue & operating profit trend 350 Revenue (DM) Op. Profit (DM) 300 250 Index (1989 = 100) 200 150 100 50 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2000* 2001 2000* is Jul-Dec 2000, when year-end changed to December Sources: Marketing Systems & MAN Figure 7.3: RECENT PERFORMANCE MAN Nutzfahrzeuge - net profit trend 1999/2000 results 300 Native During 2000 MAN AG changed its fiscal year end 250 Eur from June 30th to December 31st . 200 In the fiscal period July 1 - December 31, 2000 the Index (1989 = 100) group reported a 22% increase in net profit to 150 Eur264m. 100 MAN Nutzfahrzeuge reported a 20% increase in 50 revenue from the corresponding year-ago figure to Eur3.0bn. 0 1989 1991 1993 1995 1997 1999 2000* Reported unit sales rose by 21% to 34,000 units, -50 with approximately one-third of the increase being -100 attributable to the first-time consolidation of Star and ERF. 2000* is Jul-Dec 2000, when year-end changed to December Source: MAN Despite the revenue increase, the division reported a 30% decline in its pre-tax profit, reflecting launch costs for its new truck model (the TG-A) and greater competitive pressures in the European truck market. The TG-A seems to have been well received in MAN's main markets and helped the company's order book to be 7% ahead of prior year levels at the end of December 2000. However, the build -up of TG-A production did not proceed as smoothly as MAN had planned. Demand for the new model was unexpectedly strong, so that production had to be boosted. It then became evident that some of the newly- developed components could not be supplied at the required speed. Many vehicles then had to be stored until the relevant components could be retro-fitted. This led to increased stocks, delays in delivery and additional assembly time. The delays were partly alleviated by continuing production of the F2000 beyond its planned termination date - which was an additional unplanned expense. 2001 results During the first six months of 2001 MAN's group net profit dropped by 65% to Eur155m as all divisions except financial services reported lowe r earnings. 51 The truck division only just stayed in the black as pre-tax profit dropped by 96% to Eur6m. The decline reflects: • tougher competition; • weak demand in key markets; • the continuing cost of producing the F2000; • a Eur36m charge in connection with accounting irregularities at ERF (see Business Structure). The company is introducing a number of cost-saving measures to ensure a return to profit growth by 2002. These are described under Products & Manufacturing Strategy. For 2001 the company is expecting earnings to bottom-out in the third quarter. Full-year earnings before tax are expected to be in the region of Eur40-60m before the impact of charges in connection with ERF. At the operating level we are expecting full year earnings to be around Eur180m, or 3% of anticipated revenue. BUSINESS STRUCTURE Besides trucks and buses MAN has four principal business divisions: • Ferrostaal - a provider of industrial services with three core divisions: Facility Construction & Contracting, Industrial Equipment & Systems and Steel Trading & Logistics. • MAN Roland - a manufacturer of printing machinery; • MAN B&W - diesel engines for marine and other applications. • Industrial equipment and facilities - this division includes various businesses, mostly in unrelated sectors: MAN Turbomaschinen GHH Borsig; SMS; Renk; MAN Technologie; SHW; DWE. MAN is aiming to establish its products within the top three best-sellers in their respective markets. The company also has the objective of increasing its business volume by 50% over the five years to December 2004. Within MAN Nutzfahrzeuge growth is being achieved by a combination of product-led sales growth and the acquisitions of Star, ERF and Neoplan (see Production Strategy for more details). Figure 7.4: MAN Group revenue by division Division/ Yr to June except * 1996 1997 1998 1999 2000 2000* Commercial vehicles 39.4% 37.3% 35.7% 37.2% 39.2% 40.0% Industrial services 18.9% 20.2% 25.6% 20.1% 17.0% 18.2% Printing machines 11.6% 11.6% 10.8% 12.7% 12.2% 11.7% Diesel engines 7.5% 7.6% 7.8% 7.7% 7.3% 8.6% Industrial eq't 24.2% 22.0% 20.7% 23.3% 23.4% 20.4% Other & intra-group -1.7% 1.4% -0.6% -1.1% 0.9% 1.0% Total 100% 100% 100% 100% 100% 100% 2000* is Jul-Dec 2000, when year-end changed to December Sources: Marketing Systems & MAN During August 2001 it emerged that there were accounting irregularities at ERF, whose chief executive and finance director were dismissed. The problem reportedly centres around trade credits to customers being inflated, depressing real loan figures and raising the amount of payments receivable. As mentioned MAN has taken an extraordinary pre-tax charge of Eur36m in connection with this problem, which was still being investigated at the time of writing. Once the problem has been adequately analysed and quantified, litigation is expected to follow, possibly against the company's auditors. 52 During July 2001 press reports suggested that MAN's five divisions are to be established as stand-alone businesses. VW was cited as a prospective buyer of the truck division and the reports further suggested that Allianz AG, a part of a consortium that holds 25% stake in MAN, is in talks with VW about selling its stake. The companies have all declined to comment but there is no doubting VW's interest in the truck industry. VW and MAN are no strangers to one another, having collaborated to design and produce a light truck in the 1980s. Figure 7.5: MAN Nutzfahrzeuge West European unit sales Calendar year 1996 1997 1998 1999 2000 Germany 18,333 18,350 22,322 25,931 27,856 Share of MAN total 53% 48% 49% 49% 49% Austria 2,646 2,641 2,984 3,510 3,416 Share of MAN total 8% 7% 7% 7% 6% UK 3,265 5,881 6,752 7,140 7,672 Share of MAN total 9% 16% 15% 13% 14% Spain 2,066 2,481 3,215 4,509 4,584 Share of MAN total 6% 7% 7% 8% 8% France 2,163 2,138 2,602 3,249 3,668 Share of MAN total 6% 6% 6% 6% 6% Netherlands 1,536 1,429 1,754 1,570 1,583 Share of MAN total 4% 4% 4% 3% 3% Other 4,580 4,989 6,111 7,329 7,712 Share of MAN total 13% 13% 13% 14% 14% Total 34,589 37,909 45,740 53,238 56,491 * 1997, 1998 & 1999 restated to include ERF Source: Marketing Systems MARKETS During the six months to December 2000 MAN sold 31,300 trucks and 2,600 buses, both figures representing 21% increases from the corresponding year-ago results. The company's truck sales in Germany rose by 5% to 13,200 units or 42% of total truck sales. Western Europe accounted for 83% of sales. Western Europe - sub-16t trucks In the light/medium sector, MAN's share of West European demand grew for the fourth successive year in the 2000 calendar year, with a useful increase of 0.8 percentage points to 11.6%, the second-highest rise of the year. The overall increase was helped particularly by a gain of 2.1pts in Germany. Sales of ERF models have been included with MAN in all years, to ensure comparability. We are expecting MAN's share in 2000 to represent a peak for the next three years, after which new product launches should help it to rise even higher. 53 Figure 7.6: MAN market shares, western Europe (%) Sector & market 1997 1998 1999 2000 2005 3.5t-15.9t Austria 34.6 28.0 31.4 29.2 30.9 Belgium & Luxembourg 7.2 8.1 8.8 10.3 10.5 France 3.0 4.3 4.6 4.4 5.1 Germany 14.8 16.2 16.8 18.9 18.9 Italy 3.7 3.6 3.6 3.2 3.5 Netherlands 12.1 12.6 11.4 11.2 12.0 Portugal 3.1 2.8 2.7 4.0 4.1 Spain 8.2 8.3 7.4 8.5 8.4 UK 9.0 9.1 8.6 10.3 10.1 Nordic markets 6.1 6.3 6.0 4.3 6.1 Other 3.6 4.2 5.1 5.3 5.7 Total W. Europe 10.1 10.8 10.8 11.6 12.0 16t plus Austria 35.6 34.6 35.9 35.0 33.4 Belgium & Luxembourg 11.8 11.1 12.0 13.1 12.1 France 5.9 5.5 6.0 6.4 5.8 Germany 26.6 26.2 26.7 29.7 28.8 Italy 6.2 6.0 6.4 6.6 5.7 Netherlands 9.2 8.8 8.5 8.5 7.9 Portugal 4.2 6.2 7.2 8.0 8.0 Spain 8.2 9.2 11.6 11.9 12.0 UK 15.1 15.1 16.3 16.3 16.0 Nordic markets 7.5 6.9 7.4 7.7 7.2 Other 11.9 7.0 8.2 5.5 7.5 Total W. Europe 14.3 14.1 14.6 15.4 15.3 Source: Marketing Sy stems Figure 7.7: MAN's product range MODEL DEBUT 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 REMARKS I II I II I II I II I II I II I II I II I II I II L2000 1993 N Repl. G90, TG-C 2003 I Repl. L2000 M2000 1996 I E N T Repl. M90, TG-B 2002 I Repl. M2000 F2000 1994 E E N T Repl. F90 TG-A 2000 I Repl. F2000 I: INTRODUCTION T: TERMINATION N: NEW MODEL F: FACELIFT E: NEW ENGINE Source: Marketing Systems 54 Western Europe - 16t-plus trucks In the heavy sector MAN also gained 0.8 percentage points in 2000, taking it to 15.4% or third position in the European sales table, just behind Scania on 15.5%. Again MAN's performance was boosted by a substantial rise in the German market where its share rose by 3.0pts to 29.7%; but it recorded increases in most other markets also. 2001 sales During the first six months of 2001 MAN was adversely affected by the decline in the German truck market, though non-German orders remained at prior-year levels reflecting increases in most west European markets, offset by a fall in Turkey. MAN's share of the European 6t-plus market increased by 0.8 percentage points during the period. MODELS The TG-A range made its debut in all European countries in spring 2000. This represents the first phase of a project to renew the whole of MAN's range by 2003. The TG-A will be followed by the TG-B, replacing the M2000 range in 2002 and in 2003 the TG-C is scheduled to replace the L2000. The whole TG project will cost about DM1.1bn and is MAN's most amb itious project ever. The TG-A has been networked using a new electronic architecture. Electronic control units respond faster and more sensitively, the aim being to maximise driver comfort and vehicle efficiency. The TG-A trucks have planned service intervals of 80,000km. PRODUCTION STRATEGY The TG-A range is built at the Munich and Salzgitter plants in revamped production facilities. The main components for it come from the MAN's other German plants: the frame and metal pressings from Gustavsburg and Steyr, engines from Nuremberg, wiring harnesses from Penzberg. The principal production subsidiaries are described below. Steyr Nutzfahrzeuge AG - now owned 100% by MAN after it bought Steyr-Daimler-Puch's 15% stake in 1992/93. Österreichische Automobilfabrik ÖAF-Gräf & Stift AG - produces and sells buses for the Austrian market and produces most of MAN’s special purpose heavy vehicles. In December 1999 MAN took over Star, the Polish producer of medium trucks based in Starachowice. The company built about 1,400 Star-brand trucks in 2000, similar to the previous year. At the end of 2000 Star employed 883 people. A new generation of Star trucks was unveiled in December 2000, making extensive use of MAN components. MAN is positioning the Star brand below MAN products, and plans to market it in countries where the complexity of products has to be limited. Star is also being developed as a source for labour-intensive components to take advantage of Poland's low wage levels. MAN also has a bus assembly plant in Poland. The newly-built facility near Poznan began production in January 1998. Output by the plant is targeted at 250 buses per year like the Star plant, is being developed as a production-source for bus components. In 1994 MAN purchased a 33% stake in the Turkish company MAN Kamyon VE Otobüs A.S. (MANAS) and assumed management control of it’s plant in Ankara. MAN is using MANAS as a spring-board for its expansion in Eastern Europe, where demand for buses in particular is high. In 1996 MAN increased its control over the Turkish firm by becoming the majority shareholder and MANAS is now a fully consolidated subsidiary. A high level of demand for buses in East Europe has led to MANAS increasing its capacity from 400 to 1,000 buses per year. 55 In January 2000 MAN took over ERF the UK truckmaker. ERF sells mainly in the UK in the heavy truck sector and produced 2,473 vehicles in 2000. In the short to medium term MAN is aiming for annual output of 3,000 trucks of 14t-plus GVW. ERF has 1,333 employees, 280 of them in sales companies. In the UK, Europe's third largest truck market, ERF has a similar market position to MAN in the heavy sector. MAN's long-term strategy for ERF entails retention of the ERF marque with its own character, this being guaranteed by its own engineering and a separate sales organisation. MAN also want to exploit potential synergies to improve the profitability of ERF, one idea is to extend ERF's product range below 14t GVW. In September 2000 MAN announced the planned acquisition of bus manufacturer Gottlob Auwärter (brand name Neoplan). The acquisition was approved by the European competition authorities in June 2001. MAN already supplies about half the engines for Neoplan buses and also supplies some bus chassis for its export models. The combined bus operations of the two firms produced 7,200 buses in 2000 and are expected to generate revenue of about DM2.5bn. Auwärter employs just under 2000 people and has five plants in Germany, the assembly plant being in Stuttgart. In the Commonwealth of Independent States MAN has a joint venture with MAZ. A MAZ-MAN truck has been developed from MAN's modular component range and the first of these vehicles were produced in July 1998. Following completion of trial operation the MAZ-MAN joint venture officially commenced its activities in Minsk, Belarus, on 8th September 1999. MAN holds 51% of the venture, the state-run "Minsk Automobile Plant" holds 39% and Lada-OMC Holding of Minsk the remaining 10%. The industrial management has been assumed by MAN. Since 1992 MAN has been co-operating with Autodromo of Modena, Italy in the field of scheduled- service buses. 600 of the low-floor buses built on MAN chassis have in the meantime been produced and sold to transport authorities in Italy. In South Africa MAN has a wholly-owned assembly facility near Johannesburg. It employs 400 people and assembles about 500 trucks annually. ERF also has a presence in South Africa through a 30% stake in a local assembler. MAN also has a wholly-owned assembly facility in Australia. It employs 150 people and assembles about 100 buses annually. Restructuring In March 2001 MAN announced a series of measures to restore profitable growth. The key elements of the programme were a reduction of the product range by 20%, cutting 1,600-1,800 temporary jobs in Germany and Austria, integrating Star and ERF and the introduction of profit-centre structures for the engine plant in Nuremberg and the forging-press works in Gustavberg. Bus operations will also be restructured following the takeover of Auwärter. During the summer the company announced additional job cuts, to include permanent staff. NOTES ON FINANCIAL STATISTICS Data is presented for what the company terms the "MAN Nutzfahrzeuge Subgroup", which comprises MAN Nutzfahrzeuge and its consolidated subsidiaries. The division's consolidated subsidiaries include ÖAF and Steyr (see under Business Structure). The company's financial year end was June 30th until June 2000. Thereafter it is December 31st and the transition period from July 1st to December 31st , 2000 is shown as a short financial year. In 1998/99 MAN changed its accounts to conform with International Accounting Standards (IAS). The figures for 1997/98 have been restated. The switch to IAS caused MAN Nutzfahrzeuge's net profit to drop by DM13m in the restated figures for 1997/98. 56 CHAPTER 8: MITSUBISHI MOTORS CORPORATION OVERVIEW Mitsubishi Motors Corporation (MMC) is currently a full-line vehicle producer, with a presence in all the major vehicle sectors. It is the fourth largest vehicle producer in Japan with output in calendar 2000 of 997,300 units of which 263,200 were vans and trucks and 6,500 buses. Production of trucks above 3.5t GVW was 94,200 units, of which 64,500 were the Canter light truck range. Until the last 3-4 years MMC was one of the most consistent, if unspectacular, performers among the Japanese producers. Over the fifteen years to March 1997 it achieved a peak operating margin of 3.2% and a low of 1% with the margin in ten years falling in a narrower range of 2 -3%. The company's performance during this time benefited from a high proportion of its sales being in the profitable recreational vehicle (RV) sector. MMC gained an early foothold in the RV market with its launching of the Pajero/Shogun SUV in 1982 and as sales of RVs in Japan, North America and Europe increased MMC was able to capitalise on its well established brandname. That the company's profitability was not higher during this time was due to lower profits on some of its passenger car models and its attempt to compete in all market sectors. MMC offers: mini-cars, mini-vans, conventional passenger cars in all the mainstream segments, MPVs, SUVs, light trucks, medium trucks, heavy trucks, small, medium and large buses. In all, MMC's data for domestic production lists forty-one models in 1999, only one of which was produced at volumes in excess of 100,000 units and average volumes among the thirty-three cars and LCVs was 27,400 units. A more profitable competitor such as Honda, was making fewer models and average output per model was close to 50,000 units. For a long time MMC paid too little attention to the danger of its cost structure. Perhaps it was due to the protection conferred by the friendly shareholder structure but whatever the reason, the danger was evident from its relatively low earnings even during the years in which vehicle demand was strong. For the period from 1983 to 1997, a time when MMC remained consistently profitable at the operating level, its average interest cover was only 1.2 times, with a maximum value of 1.8 and a minimum of 0.5. The corresponding average figures for Honda and Toyota were 5.8 times and 13.6 times respectively. MMC was thus clearly vulnerable to any downturn and when the Asian economic crises hit in 1997/98 it was no surprise to see the company slip into loss. Among the Japanese carmakers, MMC was among the worst affected by the downturn due to its exposure to the heavy truck market which fell more sharply than the car market. Mr Kawasoe became MMC's president in November 1997 and introduced a vigorous programme of cost- cutting and rationalisation. He also began seeking project-specific alliances, with the publicly declared intention of avoiding capital tie-ups. However, the company's continuing difficulties forced it to form two equity alliances, one with Volvo in 1999 and one with DaimlerChrysler (DC) in 2000. The Volvo alliance was intended to be confined to MMC's truck and bus business, which was to be split off as a separate entity in 2001. The DC alliance was supposed to be confined to the car business. However, it always looked implausible that DC would willingly stand back and watch a competing truckmaker gain a major ally in Asia. In last year's edition of this report we commented that "there is considerable room for doubt as to whether MMC's original plan for twin alliances will come to fruition. As DC's bargaining hand has been strengthened it may try to capture MMC's heavy truck business (a valuable business for its exposure to emerging Asian markets), as well as the car operations." So it proved. In April 2001 DC paid Volvo $297m for its 3.3% stake in MMC, taking DC's holding in the Japanese firm to 37.3%. 57 Figure 8.1: MMC consolidated revenue & operating profit trend 500 400 Revenue (yen) Op. Profit (yen) 300 200 100 0 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 -100 -200 -300 -400 Sources: Marketing Systems & MMC RECENT PERFORMANCE Figure 8.2: MMC consolidated net profit trend 2000/2001 results As expected, MMC's results for the year ended March 31st 2001 were its worst ever. The impact of the recall scandal has been far-reaching, 0 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 particularly in terms of the effect on the company’s image and thus on domestic sales. -500 Revenue for the year fell 1.7% to Y3,277bn as unit sales fell 3.6%, reflecting a fall in domestic sales of 15%. -1,000 Yen Eur The company reported an operating loss of Y73.9bn compared with an operating profit of -1,500 Y22.5bn in the previous year, mainly reflecting the appreciation of the yen. Both European and Japanese operations reported an operating loss. -2,000 -2,500 Source: MMC The combination of restructuring costs to implement the new Turnaround Plan, recall costs and underfunded retirement payments brought the consolidated net loss to Y278.1bn. The company booked a non-recurring charge of Y320.5bn to cover one-off costs including its recall expenses and charges in connection with retirement reserves. Although the company does not disclose separate figures for its truck operations it has said that the division broke even during the year as it benefited from: • the closure of a transmission plant at Maruko near Tokyo, • a reduction in the number of sales companies from 45 to 36; • a 14% cut in the workforce. 58 Forecast MMC is optimistic in its projections for the current fiscal year. It is predicting that the company will break even on a net basis and post an operating profit of Y20bn following a reduction in employee numbers and savings in procurement costs in line with the Turnaround Plan, which was detailed in the last issue of this review. Revenue is forecast to rise to Y3,500bn on unit sales that are projected at 1.55m, inclusive of a projected 8.4% rise in domestic sales. At this point in the year it must be said that the company’s sales in Japan are showing little sign of growth, in fact, quite the reverse. However, the company is expecting to raise Y200bn in revenue from sales to Volvo Cars at NedCar, following Mitsubishi’s purchase of Volvo’s stake. This year the Turnaround Plan is expected to achieve savings of Y60bn in purchasing costs, and Y40bn in fixed operation costs. MMC is also expecting to benefit from the yen’s appreciation to the tune of Y10- 20bn, assuming an average exchange rate of Y110 to the dollar and Y105 to the euro. This compares with Y108 and Y101 respectively last fiscal year. For next fis cal year MMC is targeting an operating profit margin of 2.5%, and the following year 4.5%. The company is also forecasting a return to break-even in Europe by the fiscal year beginning April 2003. BUSINESS STRUCTURE MMC is involved solely in the manufacture of trucks, buses and passenger cars. It began as the automobile division of the large industrial conglomerate, Mitsubishi Heavy Industries, but became independent in 1970. Mitsubishi Heavy Industries retained a 22.7% shareholding in the firm as at March 2000, the Mitsubishi Corporation held a further 8% and other Mitsubishi companies held over 16% in total. As discussed, following a time when both Volvo and DC held stakes in MMC, Volvo has sold its 3.3% stake to DC, taking DC's stake to 37.3%. The $297m paid by DC to Volvo includes the rights to a new medium truck that Volvo and MMC were developing together. DC has yet to announce detailed plans for co-operating with MMC's truck division but in the near-term it can be expected to make use of MMC's Asian distribution network. Longer term DC will be looking for scale economies through component sharing. The first manifestation of this appeared in August 2001 when the two firms announced a plan to co- operate in developing truck diesel engines for trucks. Development is expected to be completed by 2005, in time for the introduction of tighter emission regulations in Japan and Europe. The new engines are expected to 8-litres to 21-litres. The partners are considering whether to include Hyundai Motor in the project. To achieve the targets set out in the Turnaround Plan MMC is set to expand parts procurement overseas to 30% from its current 6%, and to reduce the number of suppliers (currently 650) by 30%. More than one third of the employee reduction target of 9,500 is to be met by passive methods such as natural retirements, suspension of recruitment, and a retirement promotion programme. q In April the Tokyo District Public Prosecutors Office filed indictments against MMC and four top executives, including two former vice-presidents, for failing to report over 10,000 customer complaints to regulatory authorities. q In June it was reported that MMC were about to appoint outside advisers to oversee the restructuring and disposal of many of its subsidiaries. The company has asked investment banks to pitch for the challenge of disposing of the complicated network of suppliers in a bid to realise assets that will reduce its interest-bearing debt. MMC has fewer real estate and cross-shareholdings to sell than Nissan and is also reportedly considering selling off core parts operations such as its transmission and axle operations to help lift the burden of debt. 59 MARKETS & MODELS Including minivehicles, MMC sold 269,755 commercial vehicles in Japan during calendar 2000, a 3.4% rise from the previous year. Exports were 2.9% lower at 80,835 units. Minivehicles comprised 40% of the total domestic sales figure at 108,450 units and buses accounted for a further 4,272 units, leaving 134,515 trucks. Of these, 21,528 units were classed as medium/heavy trucks with a payload in excess of 3t which equates to a GVW of about 5-5.5t. During the first six months of 2001 MMC's domestic sales of commercial vehicles dropped by 19.8% to 106,756 units as the domestic market remained weak. MMC has been building a more significant sales presence in North America and Europe in recent years. In calendar 2000 the company sold 3,343 class 4-7 trucks in the US, down from 3,800 the previous year and 1,400 in 1990. This level of sales gave MMC a 1.33% share of the Class 4-7 market in 2000, a slight fall from 1.46% in 1999. Over the first six months of 2001 MMC sold 1,575 units to take a 1.4% share of the declining US market. MMC's sales in Europe have been boosted in recent years by an arrangement with Volvo, for the Swedish company to distribute MMC's Canter range, through its European dealerships. This also benefited Volvo by giving it a market presence in the light truck sector where it was previously represented only at the top end with a 7.5t truck, the FLC. Now that DC has bought Volvo's stake it plans to distribute the Canter through its own sales network. MMC's new registrations in western Europe peaked at 3,928 units in 1999, falling by 19.4% to 3,167 units in 2000 as sales in Spain fell sharply. The Canter range (produced in Portugal) accounted for over 90% of sales. In Japan MMC's truck range is marketed under the Fuso brand. The range comprises: Canter - badged with FB, FC, FD, FE, FF or FG prefixes, light duty trucks, 3.3-7.9t GVW. Fighter - badged with FH, FK, FL, FQ or NX prefixes, medium/heavy range 7.9-19.9t GVW. Super Great - badged with FP, FS, FT, FU or FV prefixes, heavy range 19.8-24.9t GVW. PRODUCTION STRATEGY In response to the downturn in its profitability, MMC has restructured its production system, closing some plants at home and abroad. On the CV side of the business MMC has closed a bus plant at Nagoya in Japan and a truck transmission plant outside Tokyo. The company is looking to achieve a further Y150bn in cost savings in the four years to March 2004. The savings were to be achieved by reducing material costs, through greater outsourcing and making use of the connection with Volvo to secure scale economies. There seems little reason why the targeted savings should change just because Volvo has been replaced by DC, indeed DC's purchasing power is greater than that of Volvo so the potential savings should be greater although the schedule might need adjusting. Apart from rationalising its facilities MC is also looking at its production processes and has decided to change the way it builds trucks and buses. The company is aiming for a middle ground between building to order - which it says creates unacceptable lead times for delivery - and building for stock which often means parts have to be changed in order to tailor a vehicle to the exact specification ordered by the customer. The new system will see the trucks basically assembled, but the final customisation will not take place until a customer's order is confirmed. In Europe Mitsubishi trucks were assembled by a Portuguese firm, Tramagauto, for many years. In 1996 MMC took over this operation as it began a more determined sales push in Europe. Output of vehicles above 3.5t was 4,246 in 2000, up by 18.5% from the 3,584 units produced in 1999. 60 Elsewhere in the world MMC has equity stakes in truck assembly ventures in China, the Philippines, Thailand and Vietnam. Low volume assembly of MMC trucks is also carried out by non-affiliated enterprises in: Costa Rica, Egypt, Ivory Coast, Kenya, Malaysia, Morocco, Taiwan, Turkey, Venezuela and Zimbabwe. NOTES UPON FINANCIAL STATISTICS MMC's financial year runs to March 31st . Data in the appendices is shown from the consolidated accounts. Unfortunately there is no breakdown in the reported figures to show the contributions from different divisions. MMC has stated that the truck division used to contribute 30-40% of revenue. The figure over the last three years is likely to have fallen to 20-25%. Data from the consolidated accounts are shown from 1987 onwards. Prior data refers to the non- consolidated accounts. 61 CHAPTER 9: NAVISTAR INTERNATIONAL CORPORATION OVERVIEW Navistar operates in three industry sectors: trucks (including school buses), engines and financial services. In its financial year ending October 2000 it sold 124,900 trucks and school buses and 304,400 engines to other manufacturers. Selling vehicles under the International brand, Navistar is the leader in the USA market for class 5-7 trucks (7.3-14.9t), selling 67,200 units in calendar 2000 for a market share of 33%. In the USA's class 8 market, Navistar sold 34,400 trucks in 2000, for a market share of 16.2%, putting the company in fourth place on a group basis, behind DaimlerChrysler, Paccar and Volvo Global Truck. The International brand was the second best-selling brand in the Class-8 sector, behind Freightliner. Navistar suffered four years of operating and net losses from 1990-1993 as it was hit by a slowdown in the market and labour problems. Having had a similarly rocky start to the eighties, the company earned the reputation among investors for profits falling off a cliff when the truck industry goes through a cyclical downturn. This reputation was reinforced by comparisons with its principal rival, Paccar, which remained profitable throughout Navistar's years of losses. Under the leadership of John Horne, who became president in 1990, Navistar's performance has substantially improved. On the operational side, profitability has been improved by reducing product and manufacturing complexity and by achieving competitive wage, benefit and productivity levels. In terms of strategy Navistar has: • invested significantly in a new medium -truck range, launched earlier this year; • expanded internationally (to a limited extent); • boosted the importance of its engine business, • formed a partnership with Ford to build medium-duty trucks. Navistar contends that its restructured business is now less vulnerable to cyclical downturns. The h operational changes have given t e company more flexibility in its cost structure and the strategic changes have led to a substantial proportion of earnings being generated by the medium truck and engine businesses which are seen as offering less volatility than the heavy truck business. The current downturn in North American truck demand is giving the company the chance to demonstrate the validity of this contention. In the US demand for Class-8 trucks dropped by 20% in calendar 2000 and by 39% in the first half of 2001. Over the same periods demand for vehicles in Classes 5-7 dropped by 3% and 24%. Navistar did slip into loss in the fourth quarter of its 1999/2000 year due to restructuring charges as it scaled back its operations to match the lower demand levels. It also reported a loss for the first quarter of its 2000/2001 year but it just managed to scrape a profit in its second quarter. In view of the severe contraction of the truck market this was a creditable performance and compares favourably with most of Navistar's North American rivals with the exception of Paccar. 62 Figure 9.1: Navistar (manufacturing) revenue & operating profit trend 400 5,000 Revenue ($) Op. Profit ($) 350 4,000 3,000 300 Op. profit (1983 = 100) revenue (1983 = 100) 2,000 250 1,000 200 0 150 -1,000 100 -2,000 50 -3,000 0 -4,000 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Sources: Marketing Systems & Navistar RECENT PERFORMANCE Figure 9.2: Navistar net profit trend 150 1999/2000 results $ Eur It was widely expected that Navistar's results for its financial year ending October 2000 would be 100 significantly lower than the previous year, but the size of the fall in the fourth quarter caught the Index (1983 = minus 100) 50 investment community by surprise and the company's share price dropped by 44% in the three days following the results announcement. 0 1983 1985 1987 1989 1991 1993 1995 1997 1999 Consolidated revenue for the year dropped by 2.2%, reflecting a fall in the sale of manufactured -50 products, partly offset by an increased contribution from the finance and insurance division. The drop in revenue from manufactured products primarily -100 reflected: • a decline in demand for Navistar's heavy -150 trucks, sales of which were 13.4 per cent lower at 45,000 units; Source: Navistar • difficult pricing conditions. These adverse factors were partly offset by small increases in sales of medium trucks (up 2 per cent at 56,500 units) and school buses (up 7.8 per cent at 23,400 units). Sales of diesel engines were also higher, up 5 per cent at 392,900 units. Navistar responded to the downturn in truck demand by introducing a restructuring programme, the principal feature of which was the elimination of 3,100 jobs. The company took a non-recurring pre-tax charge of $306m in its fourth quarter to cover the cost of this programme. That charge resulted in a fourth quarter net loss of $105m compared with a year-ago net profit of $132m. Excluding the restructuring charge, fourth quarter net profit would have been 36% lower at $85m. If non- recurring gains and losses are excluded from the full year comparisons, net profit for the year to October 2000 was $349m compared with $366m in the prior year, a drop of 4.6%. 63 2000/2001 results Navistar made a net loss of $35m in the first quarter of its current fiscal year, hit by falling volumes and weak pricing. The situation improved in the second quarter as the company managed to earn $5m pre-tax profit and $3m net. During the third quarter, ending July 31,2001, Navistar remained marginally profitable with a net profit of $2m compared with $96m in the year-ago period. Revenue was $1.6bn compared with $1.9bn. Manufacturing gross margins rose to 14.2% in Q3, up from 13.9% in Q2 and 11% in Q1 but down from the year-ago figure of 17.5%. For the first nine months of its fiscal year Navistar is showing a net loss of $30m compared with a net profit of $264m million in the year-ago period. The company is continuing to aim for a full year profit in the face of a North American truck market which continues to be weak and is expected to remain so for at least another six to 12 months. BUSINESS STRUCTURE Navistar International Corporation is a holding company and its principal operating subsidiary until recently was Navistar International Transportation Corp. In March 2000 the operating company's name was changed to International Truck and Engine Corp. This makes a more explicit link between the operating company's name and the brandname, International, under which its products are sold. All trucks and buses are now sold under the International nameplate, whereas previously some buses were badged Amtran, the badge of American Transportation, acquired by Navistar in 1990. i Navistar was formerly called International Harvester when it was also engaged n the agricultural equipment business. International Harvester ran into difficulties in the seventies, when it had to file for protection from creditors under the US Section 11 bankruptcy law. Various assets around the world were sold, including its UK subsidiary Seddon Atkinson, now owned by Iveco. The agricultural division was sold in 1985 to Tenneco. The change of name to Navistar occurred in 1986. Navistar now has five main divisions, some further divided into business units: 1. Heavy trucks • Heavy Ve hicle Centre - responsible for conventional road tractors for long haul use. • Severe service vehicle centre - dealing with heavy duty trucks for construction, waste and other rugged applications. 2. Medium trucks & school bus chassis • Medium vehicle centre (Class 5-7 - typically producing delivery trucks and those used by utilities and local authorities. • Bus vehicle centre - Navistar had a 59.5% share of the school bus market in 1998/99. • International operations - co-ordinates assembly of trucks in Brazil and Mexico plus export operations. 3. Engine & foundry - Navistar claims leadership in the production of mid-range (160-300hp) diesel engines. In 1998 this division won a major contract to supply Ford with V-6 and V-8 diesel engines. Sales to external customers in 1999/2000 reached 304,400 units, most of which were supplied to Ford. The division's unit sales have grown by 86% in the past four years. 4. Navistar Financial Corporation - financing for retail customers plus insurance. 5. Parts operations - Navistar states that it has the largest truck parts distribution organisation in North America, with more than 1,000 dealer locations. 64 Figure 9.3: Navistar revenue & profit contribution by division Revenue* Operating profit* 1997 1998 1999 2000 1997 1998 1999 2000 Trucks & buses 4,999 6,276 6,628 6,365 129 246 295 179 Engines 1,609 1,959 2,379 2,430 138 186 294 331 Fin. Services 239 286 344 387 67 74 102 98 Total 6,847 8,521 9,351 9,182 334 506 691 608 * Engines and financial services include intersegment transactions Source: Navistar Following the engine contract, Navistar's relationship with Ford has developed further. In February 2001 the two firms announced outline plans for a joint venture to build trucks. The JV, subsequently named Blue Diamond Truck Company, will build medium commercial trucks on a common chassis at Navistar's plant in Escobedo, Mexico, and explore other opportunities for collaboration on diesel engines. Navistar's restructuring programme included several actions in addition to the 3,100 job cuts which accounted for $104m of the overall charge of $306m. Asset write-downs accounted for $93m, lease terminations $33m, dealer termination and exit costs $39m and inventory write-downs $20m. Of the 3,100 job losses, about 1,600 are truck production-related positions, the rest are from the other divisions and head office staff. MARKETS & MODELS In the year to October 2000 Navistar shipped: • 56,500 medium trucks, up 2.2% from the prior year's 55,300 units; • 45,000 heavy trucks; down 13.5% from the prior year's 52,000 units; • 23,400 school buses, up 7.8% from the prior year's 21,700 units. Most of these vehicles were absorbed by the US and Canadian markets, but around 7,900 (prior year: 5,300) were sold in Mexico, giving Navistar a market share of 22.7%, up from 20% the previous year. The increase in sales was helped by increasing output from the new plant at Escobedo and by the expansion of the dealer network. The company is also aiming for increased sales in Brazil and other Latin American countries. In Brazil contract assembly of Navistar trucks by Agrale began during 1998 and Navistar established a network of ten dealers expanding to 14 in 1999. During calendar 2000 just under 600 International brand trucks were sold in Brazil. Navistar has also established export locations in South Africa and United Arab Emirates. It sold about 370 trucks in South Africa in 2000. Navistar's product range is badged as follows: Heavy road tractors are badged as the International 8000 and 9000i Series. 'Eagle' models are offered with higher trim and specification. Heavy duty rigid trucks (the responsibility of the Severe Service Vehicle centre) are badged as International 2000, 4000 and 5000 Series. The 5000i was launched during the last financial year. Medium trucks are badged as 1000 and 4000 Series. Buses are based on a 3000 Series chassis 65 In February 2001 Navistar launched the first examples of its New Generation Vehicle (NGV) which it claims is the most significant new truck product development in the company's history, requiring investment of some $900m. The company plans to launch new versions of the High Performance Trucks every few months for the next several years. Navistar has said that it sees more opportunities for synergies between its heavy and medium trucks than by combining with another manufacturer and attempting to secure scale economies between products in North America, South America, western Europe and Asia. The counter-argument to this is that other manufacturers are increasing commonality between ranges and tapping alliances for further economies. During 2001 new versions of the 4000, 7000 and 8000 Series are being offered. The 4000 began production in the spring, the 8500 tractor will enter production in October followed by the 7000 Series in December. In 2002 new versions of the 8000 Series will be offered. PRODUCTION STRATEGY Navistar has traditionally had a higher level of vertical integration than most US truckmakers, making many powertrain components that other producers would typically buy from outside suppliers. For its heavy trucks, engines were usually purchased from outside suppliers, while medium trucks were fitted with Navistar’s own engines. This changed during the 1993/94 financial year when Navistar introduced the T444E engine as an option for its heavy truck range. Navistar assembles its trucks and buses at seven plants. Buses are produced at Conway, Arkansas, Springfield, Ohio and Tulsa, Oklahoma. Trucks are produced at: • Chatham, Ontario, where the 9000i is produced; • Springfield, Ohio, where the 8000 heavy truck and all the medium-weight range are produced; • Garland, Texas, sole source for the 5000i also able to produce some other heavy models; • Escobedo, Mexico, which produces the 4000 and 9000 Series models; • Caxias, Brazil, Agrale produces medium and heavy trucks under contract. The plant in Mexico at Escobedo began production in 1998. The plant is now building at the rate of 90 trucks per shift. As well as serving the local market this has given Navistar access to lower cost labour which is a benefit in its own right but has also proved a useful bargaining tool in the company's negotiations with its other employees. In March 1999 Navistar agreed to acquire a 50% stake in Brazilian engine maker Maxion Motores - the leading supplier in the Mercosur diesel engine market. The joint venture company, renamed Maxion International Motores, continued to produce Maxion products but also added Navistar's 7.3-l, V8 turbodiesel. In January 2001 Navistar announced it had finalised arrangements to become the sole owner of the operation. Maxion has manufacturing facilities in Canoas, Rio Grande do Sul, Brazil and Cordoba, Argentina. In April 1999 Navistar announced an investment of $250m to build a facility to design and produce diesel engines in Huntsville, Alabama. The plant is scheduled to begin production of a new generation of V6 diesel engines later this year. The plant will join Navistar's two existing engine production facilities in the US at Melrose Park, Illinois and Indianapolis, Indiana. In June 2001 a new school bus manufacturing facility opened in Tulsa, Oklahoma. The plant is building the International IC school bus, the industry’s first integrated conventional school bus that combines assembly of the chassis and the bus body, in a continuous operation, under one roof. Output reached 15 units per day by July 2001. NOTES UPON FINANCIAL STATISTICS Navistar's financia l year runs to October 31st. From 1988 the data in the appendix is presented for Navistar Manufacturing with earnings and assets of the financial services division included on an equity basis. Data from 1988 onwards is presented for Navistar Manufacturing. This data includes the contribution from financial services on an equity basis. Data for 1986 & 1987 refers to Navistar Consolidated. Data for 1983 to 1985 refers to International Harvester consolidated. 66 CHAPTER 10: NISSAN DIESEL MOTOR CO. OVERVIEW Nissan Diesel, as it is now called, was established in 1935 under the name of Nihon Diesel Industries to produce diesel engines and introduced its first line of trucks in 1940. It now offers a range of light, medium and heavy duty trucks as well as buses, bus chassis, engines, components and special purpose vehicles. In calendar 2000 Nissan Diesel produced 25,600 units of its own-brand vehicles in Japan, an increase of over 13% from year-ago levels but still some 58% below its peak output in 1991. Nissan Diesel's income is supplemented by contract production of light-duty trucks for Nissan Motor Company. The decline in sales since the early nineties has brought to the fore, many problems with Nissan Diesel's structure, processes and underlying philosophy. The company, typically referred to in newspaper reports as 'beleaguered', 'ailing' or 'struggling' provides a good example of how Japan's keiretsu system can engender ineffective managements and inhibit the fresh, bold thinking necessary to maintain competitiveness. With Nissan Motor Company as its principal shareholder Nissan Diesel has been protected from the sort of scrutiny and accountability which would probably have enabled its many problems to be addressed much earlier. Nissan Diesel's problems have of course been substantially exacerbated by the Asian downturn and the continuing low level of truck demand in Japan. However, the company has long been a sloppily managed inadequate performer which, if subject to normal (or perhaps that should read "western") commercial pressures, would surely have lost its independence some time ago. The data in the appendix shows Nissan Diesel to have generated an average operating margin of 0.8% over the sixteen years to March 1998 (i.e. before the Asian downturn), with a peak margin of 2.2% during that time. In only two of the past eighteen years has the company's operating profit been sufficient to cover its interest payments. Interest-bearing debt at the end of March 2001 had been reduced to Y440bn from Y480bn a year ago, but even this reduced figure still represented nearly 1.1 times revenue. Return on equity during the sixteen years to March 1998 averaged 2.7% with a peak of 12.4%. At rival Hino, the return on equity was more than twice as high. Nissan Motor Company held a 39.8% stake in the company until the tie-up with Renault, following which Nissan Motor and Renault each hold stakes of 22.5%. The two carmakers have shown little interest in prolonging this relationship and Nissan Diesel has been seen as an acquisition target for some while. Various potential partners have been rumoured to be interested in the firm. Most recently attention has been focused on Hino and Volvo. Hino is in the frame because it has made no secret of its desire to expand by acquisition and/or alliance. Hino's preference is for a tie-up with a foreign firm but Nissan Diesel is a possible target, particularly since the recent agreement for Hino to supply Nissan Diesel with medium-size engines. Volvo became interested in Nissan Diesel after its planned alliance with Mitsubishi Motors was scuppered by DaimlerChrysler. As Volvo already has an equity relationship with Renault, it is in a good position to negotiate a deal concerning Nissan Diesel. Irrespective of such developments, over the pas t year or so the company appears (finally) to have got serious about restructuring in order to reduce its debt burden and improve profitability. This restructuring not only helped it to return to profit for the first time in four years in the year to March 2001, but also enabled it to beat its targets for the year. 67 Figure 10.1: Nissan Diesel revenue & operating profit trend 400 200 0 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Index (1983 = 100) -200 -400 Revenue (yen) Op. Profit (yen) -600 -800 Source: Nissan Diesel RECENT PERFORMANCE Figure 10.2: Nissan Diesel net profit trend 2000/2001results 1,000 Nissan Diesel reported a consolidated operating profit for 2000/2001, following a 0 loss in the previous year - which was the first 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 year in which consolidated results were disclosed. -1,000 The Y12.6bn profit represented a 3.1% return on revenue which grew by 7.5% to Y404.7bn, -2,000 Index (1983 = 100) helped higher sales of own-brand trucks and increased contract production for Nissan -3,000 Motor. After net interest expense of Y3.4bn, bad debt -4,000 write-offs and provisions for underfunded pension reserves and tax, the company was left with a net profit of Y0.6bn compared with -5,000 a prior year loss of Y0.7bn. -6,000 On a non-consolidated basis revenue Yen Eur increased by 15.5% to Y276.4bn. The operating profit of Y8.4bn or 3% of revenue -7,000 was the first positive result for three years. Source: Nissan Diesel At the net level, the profit of Y2.8bn was the first positive result in four years and followed a prior year loss of Y44bn. The company has benefited from cuts in its workforce and a reduction in purchased material costs. Further restructuring is planned, including moving to single-sourcing wherever possible and cutting the number of engines it produces from seven to two by 2005, with medium-size units being purchased from Hino in future at a rate of about 13-14,000 per year. 68 Forecast For the current fiscal year to March 2002 Nissan Diesel has issued a cautious forecast, indicating consolidated net profit would remain at around Y600m. This reflects an expected drop in overseas truck sales. At the time of writing Nissan Diesel's exports are looking weaker than the company was expecting so the risks to their forecast are probably on the downside. Figure 10.3: Nissan Diesel revenue by division, 1999/2000 BUSINESS STRUCTURE Nissan Diesel manufactures and Heavy-duty distributes in its own name: vehicles 28% • heavy-duty trucks (payload 8t-plus), Components / • medium-duty trucks (payload 4-5t); Other • buses. 37% It also produces diesel engines for use in vehicles, generators, marine applications and industrial machinery. Typical annual Medium-duty volumes are 120,000-130,000 units, the vehicles main customer being Nissan Motor. 9% Diesel Light-duty trucks (payload 1-3.5t) are engines Light-duty produced under contract for Nissan Motor 10% vehicles Company. 16% Source: Nissan Diesel In early 2000 Nissan Diesel announced a five year restructuring programme, much of it building on the relationship with Renault. Nissan Diesel and RVI agreed to co-operate in several areas, including: • Nissan Diesel to supply diesel engines to Renault from 2003 at the rate of 30,000 per year; • Nissan Diesel to sell 1,000 Renault trucks in Japan each year; • Renault's South African distributor to sell 1,800 Nissan Diesel vehicles per year; • RVI and Nissan Diesel to co-operate in parts procurement with a view to reducing Nissan Diesel's procurement costs by 20%. However, following the takeover of RVI by Volvo, the status of these plans is less clear. Initially there was the potential for conflict with Volvo's alliance with Mitsubishi Motors but the collapse of that alliance removed that complication. It seems likely that Volvo will now try to develop its relationship with Nissan Diesel, to help build its presence in Asia. Despite the Japanese firm's poor track record and high debt levels, it is currently one of the only significant truckmakers in the region to be looking for a larger partner. Volvo is not the only possible partner for Nissan Diesel. Domestic rival Hino, is a possible suitor with whom Nissan Diesel has recently signed an engine supply deal. Iveco also has a track record of collaboration with Nissan Diesel, the two having shared the development of a new engine family. Other elements of Nissan Diesel's restructuring programme include a reduction of more than Y80bn in interest bearing liabilities by the end of the year to March 2005. This was not a particularly aggressive target, representing just 17% of total debt but at least the company is making substantial progress, achieving a Y40bn reduction during its last fiscal year and forecasting a further reduction of Y20bn this year. In June 2000 the company merged two parts associations to improve efficiency among its affiliated parts manufacturers. An association of 87 makers of single components like fuel injection systems and tires was merged with an association of 60 Nissan Diesel subsidiaries and small companies. The new 147- company association will initially be headed by Zexel Corp. Parts associations meet once a year to share production technology. By promoting further technology exchanges, Nissan aims to improve quality while cutting purchasing expense. 69 MARKETS & MODELS In calendar 2000 Nissan Diesel sold 16,494 trucks and buses in its domestic market, a 2.1% rise from the previous year's figure though still 58% below the 1991 peak of 39,800 units. The total figure comprises 571 buses, 1,407 units of the Condor light-truck (also sold by Nissan Motor) and 14,516 medium/heavy- duty trucks. During the first six months of calendar 2001, domestic new registrations of Nissan Diesel trucks slipped by 3.5% to 8,196 units. However, preliminary data for July indicates a significant increase in sales. At the beginning of the year the company was forecasting an 11.8% rise in domestic sales to 18,470 units. During its last fiscal year the company exported 10,938 units as follows: • Asia 4,855 • Africa 2,494 • North America 1,768 • Oceania 698 • Middle East 666 • South America 383 • Europe 74 The company is expecting its overseas sales to drop by 10% during 2001. It looks as though it will undershoot this target, having seen an 18% drop during the first five months of the year. Nissan Diesel's truck range extends from 6t GVW upwards. The light-duty Condor trucks are produced for Nissan Motor (badged as Atlas) as well as for export by Nissan Diesel. A variety of cab-over and bonneted cabs are offered as well as special vehicles such as crane carriers. As part of its restructuring process the company is to reduce the number of models it produces. PRODUCTION STRATEGY Over the past couple of years the company has been rationalising its domestic production, looking at both facilities and products. The principal actions taken or planned are: q Truck production at the Gu nma plant ended in September 1999 and all trucks are now produced at the Ageo facility. q By spring 2002 the company plans to halve the number of parts it uses in trucks to 300,000, mainly by eliminating specialised parts now used in export models. The move should reduce downtime, tooling costs, component costs and inventory costs. q As part of its drive to reduce procurement costs by 20% by fiscal 2002 the company is substantially reducing its supplier base. It has started to use single suppliers for steel sheet, paint and engine oil compared to the four or five suppliers previously used for each. Further single-sourcing moves will follow. q With effect from May 2002 the company is to revise its production planning methods, drafting a new production plan each week instead of every 10 days as currently. The increased frequency will help it to keep a tighter rein on inventory levels and improve customer service. The current system requires at least 15 days from the time a truck is ordered until it rolls off the assembly line. The new system is expected to reduce that lead time to eight days. The cost of developing the new system is estimated at Y300-400m. q During 2001 Hino, Isuzu, Mitsubishi Motors and Nissan Diesel agreed on a set of common specifications for interior and exterior parts for "non-step" buses, which have low floors designed for the elderly and handicapped. The companies hope to cut costs and expand the use of such buses, after the introduction of a law designed to facilitate the travel of the elderly and handicapped on public transport in November 2000. q In May 2001 it was announced that Hino will begin supplying medium-sized diesel engines to Nissan Diesel with effect from 2004 when Nissan Diesel will stop its in-house production of such engines. Hino is expected to supply 13-14,000 units annually. 70 Nissan Diesel has been slower to establish overseas production capacity than its main domestic competitors. Low volume assembly of its trucks or buses, some under technical licence, is carried out in fifteen countries, the affiliated enterprises being in: China (25%), Indonesia (12.5%), Pakistan (15%), Philippines (1.6%), South Africa (0.3%) and Thailand (30%). The bracketed percentage figures refer to Nissan Diesel's equity stake in each enterprise. In August 2001 the company signed an agreement with China's largest diesel engine maker, Dongfeng Chaoyang Diesel, under which the Chinese firm will make about 20,000upa of a 3.15-litre diesel engine, based on Nissan Diesel technology. It is hoped that further collaboration will follow. This agreement came just over a year after Nissan Diesel signed a contract to supply manufacturing and assembly technology for transmissions used in mid-size trucks to Anhui Jianghuai Automotive Group, a Chinese manufacturer of trucks and buses. Nissan Diesel will also provide parts, generating annual sales of about Y200m. The Chinese firm is aiming to produce 1,000 transmissions annually, beginning at the o end of 2000. Nissan Diesel has been providing 5,000 microbus engines a year t Anhui Jianghuai Automotive since 1998 through Nissan Motor. NOTES UPON FINANCIAL STATISTICS Information is presented in the appendices for Nissan Diesel's non-consolidated operations from 1983. Beginning in the year to March 2000 the company has begun reporting consolidated figures. No comparable figures for earlier years have been disclosed, which is in keeping with a generally poor level of disclosure in the annual reports. The full annual report for the year to March 2001 was unavailable at the time of writing. 71 CHAPTER 11: PACCAR INC OVERVIEW Paccar is now the third largest manufacturer of heavy duty trucks in the world, having been ousted from second place by Volvo's takeover of RVI. It is also the fourth largest producer of trucks in the 6t-plus category. In 2000 it sold 102,000 trucks of 6t-plus, down from a record 108,000 the previous year. In the US Paccar is number three in the class-8 segment, having again been pushed from the number 2 position by Volvo Global Trucks. The company used to derive more than 90% of its revenue from sales in the USA and Canada where it operates under the Kenworth and Peterbilt brandnames. However the company's geographical spread was altered significantly towards the end of 1996 when it acquired Daf, the Netherlands based truck producer. Along with Foden, the low-volume, UK based heavy truck producer acquired by Paccar in 1980, this has given Paccar a 10% share of the west European heavy truck sector and a 5-6% share of the light/medium sector. At the time Paccar bought Daf the Dutch firm was operating profitably following its collapse in 1993 and subsequent restructuring with the assistance of the Dutch government. Daf has since gone from strength to strength and this has enabled Paccar to build upon its record of having generated a profit every year for over 60 consecutive years. This would be a creditable achievement in any industry but for a company exposed to the marked cyclical swings of the truck industry, particularly the North American heavy truck sector, it is a remarkable feat. The contrast between Paccar's record and that of Navistar, the only other major US-owned truckmaker could hardly be more stark. Not only has Paccar been consistently profitable, but it has also generated some of the highest profit margins in the industry worldwide. As shown in the introductory chapter, over the past five or ten years, Paccar's profitability has put it in second place in the ranking of major truckmakers. Paccar's purchase of Daf can be seen as having kicked off the recent round of industry consolidation, followed as it was by alliances or takeovers involving: DC/MMC, DC/Sterling, DC/Western Star, MAN/ERF, Volvo/RVI, Volvo/MMC and VW/Scania. Having got the ball rolling, Paccar has looked in danger of being left behind as the rate of consolidation gained momentum, especially as other manufacturers take advantage of the buying opportunities being presented by the troubled Asian truckmakers. In April 2000 the company's chairman acknowledged that Paccar was considering acquisition opportunities "with a sense of urgency", the comment being sparked by the news of the Volvo/RVI merger. There have been no tangible developments since that time although a trade publication reported in October 2000 that Paccar had made an offer for Navistar's assets. Such a move would clearly be attractive for Paccar, giving it the size to compete against its recently enlarged competitors in the domestic market and a significant boost to its sales in weight classes below Class-8. However, during 2001 Paccar's "sense of urgency" has mostly had to be directed towards dealing with the rapid deterioration in the US heavy truck market which is bumping along near a ten-year low. The company has acted quickly to reduce costs, staying profitable during the first six months of 2001 and expected to remain so over the year as a whole. Notwithstanding concerns about the current downturn, Paccar's balance sheet remains healthy, with nearly $950m in cash or near-cash in the truck business and just $166m in interest-bearing debt. Once the company feels confident that the end of the downturn is in sight it remains in a good position to consider acquisition targets. 72 Figure 11.1: Latest results - Paccar Currency Paccar / Unit January - September Year to December 2000 2001 (%) 1999 2000 (%) Revenue $(m) 6,248 4,553 (27.1) 9,021 7,919 (12.2) Of which: - Truck/Other $(m) 5,896 4,204 (28.7) 8,648 7,437 (14.0) - Finance $(m) 352 349 (1.0) 373 482 29.2 Pre-tax profit $(m) 571 181 (68.3) 852 630 (26.1) Of which: - Truck/Other $(m) 479 126 (73.7) 774 554 (28.4) - Finance $(m) 59 28 (52.4) 78 76 (2.6) Pre-tax margin percent 9.1 4.0 (5.2) pts 9.4 8.0 (1.5) pts - Truck/Other percent 8.1 3.0 (5.1) pts 9.0 7.4 (1.5) pts - Finance percent 16.7 8.0 (8.7) pts 20.9 15.8 (5.1) pts Net profit $(m) 379 123 (67.5) 584 442 (24.3) Unit sales 000s n/a n/a - 108.0 102.0 (5.6) Source: Paccar Figure 11.2: Paccar (Manufacturing) revenue & operating profit trend 2,500 2,000 Revenue ($) Op. Profit ($) Index (1983 = 100) 1,500 1,000 500 0 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Sources: Marketing Systems & Paccar RECENT PERFORMANCE 2000 results Following record revenue and profit in 1999, Paccar's earnings fell in 2000 as the US heavy truck market deteriorated rapidly in the second half of the year. In the fourth quarter alone, pre -tax earnings from its truck business were down by 66% at $75m as the US heavy truck sales fell by 40% from year-ago levels. Over the full year the truck division's revenue dropped by 12% to $7.4bn, reflecting a 5% fall in unit sales to 102,000; the weaker euro and a tougher pricing environment. These adverse factors caused operating profit in the truck division to drop by 30% to $544m. The operating margin fell to a still-healthy 7.3% from 9.1% the previous year. 73 Pre-tax earnings in the truck business fell by Figure 11.3: Paccar net income trend 33% to $506m. In the financial services division pre-tax income was just 1.8% lower at $76m. At 1,600 the net level, Paccar's consolidated earnings 1,400 dropped by 24% to $441.8m. 1,200 2001 results $ Index (1983 = 100) Eur Paccar's earnings fell sharply from year-ago 1,000 levels during the first nine months of 2001. 800 Revenue in the manufacturing division fell by 600 29% to $4.2bn. Within the financial services division the drop was less than 1% to $349m. 400 The decline reflects a 37% fall in US sales of 200 Class-8 trucks over the period. Pre-tax income in the manufacturing division fell by 74% to 0 1983 1985 1987 1989 1991 1993 1995 1997 1999 $126m and consolidated net profit dropped by over 67% to $123m. Source: Paccar BUSINESS STRUCTURE The company can trace its roots back to 1915 when the Gerlinger Motor Company launched its first truck. Renamed Kenworth in 1923 (combining the names of the two founding partners) the company was bought by Pacific Car & Foundry, later to become Paccar, in 1945. Peterbilt was bought in 1958 and the small UK truckmaker Foden in 1980. The purchase of Daf in 1996 gave Paccar its first significant exposure to the European market and was also significant for going against the trend for European truckmakers to buy US producers (Daimler-Benz / Freightliner, Renault / Mack and Volvo / White GMC). In 1998 Paccar also made the widely anticipated purchase of Leyland Truck Manufacturing (LTM) which had separated from Daf following the collapse of the Leyland-Daf group in early 1993 Paccar's primary business remains the production and sale of trucks and parts. In 2000 the company was also involved in: • finance and leasing, principally but not exclusively, of its own vehicles; • the production of industrial winches; The truck division and parts business is the most important element, accounting for 93% of group revenue and 76% of group pre-tax profit in 2000. The company has had other interests over the years but has increasingly focused on the truck business. In 1999 it sold Al's Auto Supply and Grand Auto Supply, its chain of retail stores selling automotive parts. The sale resulted in a post-tax gain of $17m. The sale of the retail parts division in 1999 followed the 1997 disposal of Paccar's oilfield equipment business, Trico Industries, in 1997. Both disposals are said to have enabled the company to focus on its core truck business, which begs the question: why not the winch division? During 1999 Paccar formed two new business units: Paccar.com and e-Paccar, through which it is to channel investments in information technology to improve customer services (e.g. on-line finance and insurance) and truck utilisation. In March 2000 the company formed Truckxchange.com a business-to- business e-commerce com pany to develop a web-based market for goods and services in the commercial vehicle industry. 74 MARKETS & MODELS Nafta region The US is usually Paccar's largest market in terms of both sales and profitability, though that is unlikely to be the case this year. Retail sales of the company's Class-8 trucks in the US fell 18% in 2000 to 45,747 units. Sales of Kenworth branded Class-8 vehicles were 20,984 units versus 28,637 in 1999. Peterbilt sold 24,763 units compared with 27,323 the previous year. Paccar's share of the Class 8 market in 2000 was 21.6%, unchanged from the previous year. The company sold 4,000 Class 7 trucks in the USA in 2000 for a market share of 3.2%, up from 3,743 units and 2.8% in 1999. The increase reflects the company's efforts to expand its Class 7 sales, having launched new models in the sector during 2000. In Canada new registrations of Paccar trucks rose 9.3% to 6,025 units in 2000 (1999: 5,500) taking Paccar's market share to 16.6% from 14%. In Mexico new registrations rose 42% to 7,345 units (1999: 5,177). Paccar's share of Mexico's truck market rose to 21.1% from 19.5% in 1999. Figure 11.4: Paccar's share of W. European truck market (%) Sector & market 1997 1998 1999 2000 2005 3.5t-15.9t Austria 3.1 2.5 2.1 1.5 2.2 Belgium & Luxembourg 7.6 6.6 7.1 7.1 7.1 France 2.2 2.0 1.4 1.7 2.1 Germany 0.9 0.9 0.7 0.9 1.4 Italy 1.9 1.9 1.6 1.7 2.0 Netherlands 17.6 14.4 12.0 14.7 17.4 Portugal 5.0 3.7 4.3 3.6 5.2 Spain 3.0 2.6 1.8 2.9 4.1 UK 23.4 23.3 22.4 23.1 22.6 Nordic markets 0.6 1.0 0.4 0.2 1.4 Other 4.2 6.3 4.5 5.0 5.6 Total W. Europe 5.8 5.9 4.7 5.4 5.7 16t plus Austria 8.7 8.8 9.0 8.0 8.3 Belgium & Luxembourg 16.4 16.9 16.7 16.0 16.1 France 7.1 8.1 8.5 8.9 9.1 Germany 3.9 4.8 4.8 5.2 5.2 Italy 3.3 4.3 5.9 5.6 3.9 Netherlands 30.2 32.9 31.3 31.3 30.2 Portugal 14.2 13.7 14.1 11.3 12.8 Spain 8.2 8.8 9.3 9.2 8.9 UK 19.2 20.5 18.9 18.4 19.3 Nordic markets 1.3 2.0 1.8 2.1 2.3 Other 5.1 6.1 5.7 6.3 7.3 Total W. Europe 9.7 10.6 10.1 10.1 9.7 Source: Paccar Over the first six months of 2001 Paccar's Class-8 retail sales in the US fell by 44% to 15,013 units. The company has said it anticipates conditions remaining weak for a further 6-12 months, a reflection of the general economic slowdown plus the impact of a glut of used vehicles working their way through the market. 75 Western Europe Paccar's share of the West European light/medium truck sector fell back from the 6.5% recorded in 1996 to 4.7% in 1999 but recovered to 5.4% in 2000. The recovery was mainly due to growth in both sector volumes and penetration by Daf in its two principal markets – the UK and the Netherlands. The company’s share at a European level in 1996 was on a par with their pre-collapse market penetration, which averaged 6.5% in the five years to 1992. We can conclude that it made a substantial recovery in this sector, but remains a minor player because it continues to be handicapped by over-dependence upon just 3 markets – the UK, the Netherlands and Belgium. We are still expecting Paccar's 1996 sector share to represent a peak it will not match over the forecast period. However, following the recent introduction and good reception of the new LF models, we do anticipate a further increase in market share to over 6% in the 2001–2002 period. Sales remain vulnerable to any major fall in the UK market. In the 16t-plus sector Paccar has claimed a more than 10% share since 1998 due to a strong performance by the Daf 95XF, although its penetration slipped back a little in 1999. It appears set to consolidate at around its 2000 level in 2001. This is comparable to the average share over the five years to 1992. With its 16t-plus models Daf has achieved a wider market spread than in the lighter sector, having shares of 8% or better in seven markets including France and Spain. Additional production capacity and the revised 65/75/85CF model range should help it defend its share of the sector. Daf’s share of the heavy sector has exceeded our initial expectations. The 95XF in particular has been a considerable success. Nevertheless we are still expecting 1998 to represent peak performance years for Daf’s sector share within the forecast period due to the increasing intensity of competition. Paccar's ability to finance dealer and service network expansion could increase growth potential in the medium to long term. Other markets Paccar is represented in Australia through Kenworth Australia which is market leader in the heavy truck sector with an 18% share. New registrations in 2000 dropped by 12% to 890 units. Elsewhere in the world Paccar International targets sectors requiring specialised trucks, such as logging, mining and oil exploration. Less than 1% of Paccar's sales are generated in Asia and South America. North American models Kenworth and Peterbilt trucks each have a reputation for robustness, durability and reliability. Peterbilt models are considered the more upmarket of the two and usually have higher specification and trim levels. Their most popular models are the long-bonneted road tractors that most people would picture when they think of an American truck, although there has been a trend in recent years towards more aerodynamic designs such as the Kenworth T2000. Customers can choose from a wide variety of options, from the make and technical characteristics of engines and gearboxes, through to the comfort features inside the cab. Peterbilt offers the models: 387, 385, 379, 378, 362, 357, 330, 320 and 270 each suiting different applications. The 330 is a Class-7 vehicle launched in 2000. A Class-6 version was also launched. The Peterbilt 270, which uses the Daf 45 series cab, was also launched in 2000. Kenworth offers: • T2000 its flagship model introduced in 1996; • W900 classically styled bonneted introduced in 1982; • T800 & T600 introduced in 1989 and 1992 respectively, the T800 is suited for construction and similar applications; • T300 introduced in 1994 is a medium -duty (Class 7) truck; • K300 introduced in December 1999, using the Daf 45 series cab. 76 European models Daf's current truck range comprises the 45, 55, 65, 75, 85 and 95 series. Until recently the heavy 65 to 95 range was assembled exclusively at Eindhoven but right-hand-drive versions are now assembled by LTM in the UK. LTM is the sole production source for the lighter 45 and 55 Series (6-18t). The Eindhoven based vehicles were all updated in 1997/98. The 75 and 85 Series are expected to receive updated cabs in 2001. All vehicles are equipped with Euro 3 compliant engines. Daf launched the 95XF, a long distance version of the 95 series with a new 12.6 litre engine at the Brussels show in January 1997. The CF65/75/85 model range received a new chassis and reworked cabs in late 2000. All vehicles are equipped with Euro 3 compliant engines. In 1995 Daf filled a gap in its market coverage from 11-18t GVW with the 55 Series, which was developed by LTM. The LF range, a replacement for the FA55 and the older, lighter FA45 Series, was launched at the beginning of 2001. The LF45s and 55s are being produced at Leyland. They feature RVI developed cabs and Cummins four and six cylinder engines. Foden's truck range is badged Alpha and is concentrated entirely in the heavy sector, starting at 18t. The range is undergoing a renewal in 2001 and 2002. In August 2001 the company launched the first of the Next Generation Alpha trucks, 4x2 rigids, 4x2 tractors and 6x2 tractors. Multi-wheelers will be launched in 2002. The new models make use of the new Daf CF cab. Figure 11.5: Daf's product range MODEL DEBUT 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 REMARKS I II I II I II I II I II I II I II I II I II I II 45 SERIES 1990 F T Cummins eng's LF 45/55 I Cab from RVI Iveco-Cummins engines 50 SERIES 1990 T 55 SERIES 1995 T Repl for 50 Series & DAF 1100-1700 60 SERIES 1991 T CF65 1993 E F N F FA cab pre-98 New chassis 2001 CF75 1993 F N F FA cab pre-98 New chassis 2001 CF85 1993 F N F FA cab pre-98 New chassis 2001 XF95 1997 N F I: INTRODUCTION T: TERMINATION N: NEW MODEL F: FACELIFT E: NEW ENGINE Sources: Marketing Systems & Paccar PRODUCTION STRATEGY As mentioned in the introductory comments, Paccar has a low level of industry integration as it buys in the major powertrain components (engines, transmission and axles) for its trucks. This helps the company provide a high degree of product customising to suit individual customer requirements. However, this approach contrasts with that of Daf which is more vertically integrated. 77 Paccar is looking to exploit the potential for component sharing between its US and European operations but it has decided against creating a common cab structure to be used as the basis for bonneted trucks in Nafta and the cabover style preferred in Europe. The company contends that this would involve too many compromises, although other manufacturers (e.g. Volvo) are adopting this strategy. However, there are plenty of opportunities to share the development and manufacturing/purchasing costs in powertrain, electronics, chassis and suspension systems. Although common cab designs for European and US operations have been ruled out, Paccar is not holding back from integrating its two European marques, Daf and Foden, as shown by the sharing of cabs between Daf's CF and Foden's Alpha range. Given an increasing level of commonality it was a logical progression to switch production of Foden models from its under-utilised plant at Sandbach to the Leyland facility. This was done in March 2000. In 1999 the Leyland facility had already started assembling all right-hand-drive units of the 75 and 85 Series and all versions of the 65 Series, freeing up capacity at Eindhoven for production of the popular 95 Series. The Leyland plant is planned to have an assembly capacity of some 80 units per day or 18,000 per year by the end of 2001. Paccar's European facilities produced 40,100 trucks in 2000, of which 31,100 were 16t-plus. Output is expected to drop below 38,000 units in 2001 in response to falling sales in the region. Daf sells 85%-90% of its output in West European markets so the level of truck demand in markets outside western Europe is not a significant consideration. RVI co-operated with Daf on the development and supply of cabs for trucks in the 6-19t range, and is supplying cabs for the new LF45/55 range. Cabs for the previous models were sourced externally from Mayflower. In addition to the truck and engine assembly facilities at Eindhoven in the Netherlands, Daf manufactures cabs and axles at Westerlo in Belgium. Recent investment has increased truck production capacity in the Netherlands and the company is confident it could satisfy demand of well over 25,000 units a year from this source. Within North America in 2000 Paccar operated five truck assembly plants in the US (Chillicothe, Ohio, Renton & Seattle in Washington state; Denton in Texas and Madison in Tennessee), one in Canada (Ste Therese) and one in Mexico (San Luis Mexicali). During 1995 the company acquired full control of its Mexican subsidiary, Vilpac and renamed it Kenworth Mexicana. Subsequently production of Class 7 trucks was relocated to Mexico and this led to the closure of two plants, Ste Therese and Seattle, both subsequently reopened to meet capacity demands. The North American versions of the Daf 55-Series (Kenworth T300 and Peterbilt 270) are assembled at Ste Therese which officially reopened in September 1999 following an investment of C$135m. The plant's capacity is 20,000 trucks per year." In July 2001 the company announced an 8% increase in the build-rate of Class 8 trucks by the Peterbilt division. It also planned a 22% increase in the build rate of its Class 6/7 trucks produced at Ste. Therese, with effect from August 2001. The increases reflect lowered inventory levels of Class-8 vehicles in response to earlier cutbacks and rising demand for the company's new medium trucks. Retail sales of Paccar's Class-7 vehicles rose by 18.5% over the first six months of the year to 1,776 units. In February 2001 Paccar announced it had entered into two long-term supply agreements with Cummins, covering heavy-duty engine for the US and medium-duty engines for the recently introduced Daf LF Series trucks. In Australia Kenworth manufactures vehicles locally for the Australian market, producing 650-750 units in each of the last three years. A new assembly operation in South Africa was established during 1999. 78 NOTES UPON FINANCIAL STATISTICS Paccar's financial year ends in December. The data sheets in the appendix show information for Paccar's manufacturing operations with financial services included on an equity basis. Financial information is provided for Daf Trucks from 1993-95. The data for 1983-1986 reflects Paccar's consolidated accounts. The data for 1987 onwards reflects data for "Manufacturing" only down to and including interest expense entries. From 1987 onwards the balance sheet items reflect "Manufacturing" data for current assets, current liabilities and long term debt. 79 CHAPTER 12: RENAULT VÉHICULES INDUSTRIELS OVERVIEW The commercial vehicles division was Renault Group's second largest, contributing 17.5% of group revenue in 2000. The division was formed in 1978 when, under a government initiative, Renault's existing truck subsidiary, Saviem, was merged with Berliet to form RVI. The US company Mack Trucks became a consolidated subsidiary of RVI in 1990, the two companies having developed a technical alliance during the preceding 4-5 years. RVI (including Mack) produced a record 96,100 trucks in 2000, including 8,300 vehicles below 5t. In terms of heavy trucks, the company's output of 68,800 vehicles put it in fourth place worldwide. Previous editions of this report commented that RVI has struggled for most of the two decades it has been in existence. The division reported a pre -tax loss in thirteen out of the last eighteen years. In several of those years the positive results of the European operations were more than offset by losses at Mack but when Mack was profitable RVI was often not, as it has had difficulty establishing itself as a major player in Europe outside its two principal markets, France and Spain. The division had begun to perform better over the last three years, although given the boom conditions in its main markets this was no great achievement. In view of its problems and the fact that its major competitors were expanding by mergers and alliances, previous editions commented that "Renault would do well to contemplate the disposal of the entire truck operation and that there have been few, if any, better times to sell the CV division during the last decade". This type of thinking underpinned the announcement, in April 2000, that Volvo was to acquire 100% of RVI's equity in exchange for Renault taking 15% of Volvo's shares. Renault was to buy a further 5% of Volvo's equity on the open market. The transfer of ownership took place on January 2, 2001, following approval by the competition authorities in Europe and the US. At the time of the initial agreement RVI's 15% stake in Volvo was worth about Eur1.7bn. It looks like an excellent move for both Renault and Volvo. The combined group will become the second largest heavy truck producer in the world. On the basis of recent sales patterns Volvo/RVI will be market leader in the European heavy truck sector. In the US RVI/Volvo was the second best-selling group in the Class 8 market in 2000. The expected benefits of the alliance are the familiar ones of scale economies in development, purchasing, manufacturing, investment and marketing. The new alliance of course rejuvenates some elements of the broader alliance planned by Renault and Volvo back in 1993, which failed due to resistance by Volvo's shareholders. Indeed it was only in 1997 that Volvo disposed of the last of its shareholding in Renault, acquired at the time of the proposed alliance. The logic for an alliance between the two truck divisions is at least as strong now as it was then, probably more so, in view of the industry consolidation and heightened levels of competition that have taken place in the intervening years. The only query we would raise about this agreement is why Renault bothered to take a stake in Volvo instead of cash. Renault states that: "As Volvo's largest shareholder, Renault would secure on a long-term basis its presence in the truck sector, under optimum conditions for both RVI/Mack's customers and employees, as well as for its shareholders, with strengthened prospects in terms of growth and profitability." Well, it has secured a long term presence in the truck sector, but why? Why not return the money to shareholders and let them invest in the truck industry if they so choose? They might prefer more profitable performers like Paccar or Scania. And Volvo is not just about trucks. Renault's stake will also secure a presence in Volvo's other divisions: buses, construction equipment, marine & industrial engines and aerospace. In the 12-16 mo nths since the deal was announced Volvo's share price has declined by 28%, adding weight to these criticisms. 80 However, it should be acknowledged that the situation facing Renault was not that simple. As a company in which the state still retains a significant stake, it would probably face political resistance had it disposed of RVI in one swoop. As the above quote hints, Renault's stake in Volvo will give it some degree of influence over future decisions affecting RVI employees and this will probably have helped to get the deal approved by state representatives on the board of directors. It may well be that we see Renault reducing its stake in Volvo in the future, but this is unlikely to happen within the next two or three years. Figure 12.1: RVI revenue & operating profit trend 250 300 Revenue (FFr) Op. Profit (FFr) 200 250 150 Op. profit (1987 = 100) Revenue (1983 = 100) 200 100 50 150 0 100 -50 -100 50 -150 0 -200 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: Renault RECENT PERFORMANCE 2000 results RVI reported an 8.3% increase in like-for-like revenue in 2000, to Eur7,033m. The increase reflects higher unit sales in Europe and a favourable euro:dollar exchange rate, partly offset by falling sales and a weaker pricing environment in the USA. The company's European sales particularly benefited from the continuing high level of demand in France and Spain, its two principal markets. Despite the revenue increase the division's operating profit excluding "other operating income and expenses" dropped by 11% to Eur195m in 2000. The company reports that cost reductions and favourable exchange rates were insufficient to offset the impact of an 18% drop in Mack's sales and increased engineering expense. In terms of operating profit the 2000 figure of Eur202m or 2.9% of revenue was nearly 3.5 times higher than the 1999 result of Eur58m or 0.9% of revenue. The 1999 figure was distorted by an Eur180m charge to fund an early retirement programme. These results were again poor in comparison to the automobile division where the operating margin was 4% of revenue in 2000, continuing its consistent record of outperforming the CV division. This highlights again the reason for Renault disposing of its CV division and the correctness of that decision. 81 2001 res ults Figure 12.2: Renault Group net income trend Following its takeover by Volvo with effect from January 2001, earnings figures for RVI are 800 FFr Eur no longer disclosed. Please see the Volvo 600 discussion for the latest available information. 400 Index (1983 = minus 100) BUSINESS STRUCTURE 200 Renault's origins date to 1898. It became a 0 1983 1985 1987 1989 1991 1993 1995 1997 1999 limited company in 1922 and was nationalised in 1945 at which time the parent company of -200 the Renault Group became known as Régie -400 Nationale des Usines Renault. Following the initial stages of the company's privatisation in -600 1994, the parent company's name was shortened to Renault in 1995. -800 Source: Renault Figure 12.3: Renault Group revenue by division Division 1996 1997 1998 1999 2000 Automobile 79.3% 79.8% 80.0% 79.1% 78.3% Commercial Vehicle 16.3% 16.4% 16.7% 17.2% 17.2% Finance 4.4% 3.8% 3.4% 3.7% 4.5% Total 100% 100% 100% 100% 100% Source: Renault RVI was formed in 1978 when, under a government initiative, Renault's existing truck subsidiary, Saviem, was merged with Berliet to form RVI. The US company Mack Trucks became a consolidated subsidiary of RVI in 1990, the two companies having developed a technical alliance during the preceding 4-5 years. As from the beginning of 1996 the Renault Group comprised three divisions as shown in Figure 12.3. Before 1996 there was a fourth business area called the Industrial Division. This operated in four sectors: farm machinery, capital goods, transportation and bearings. As all the division’s activities except agricultural machinery involve the automobile business, it was decided to subsume this division within the main automobile division. The Finance Division carries out sales financing and related activities as well as cash management for the Renault Group. The division employed 3,460 people at the end of 2000 and in the four years to 1997 it made a bigger contribution to group operating profit than any other division. In 2000 the operating profit contribution by this division remained higher than that of RVI. On the CV side of the business Renault has formed several alliances or strategic ties in recent years: q In 1997 RVI and Daf agreed to co-operate in the development of cabs for mid -range trucks. The jointly developed cab has now appeared in RVI's Midlum range. q Also in 1997 RVI took over the Sisu sales and marketing network and agreed to provide components to Sisu. 82 q In 1998 RVI and Iveco agreed to pool their bus and coach operations in a 50/50 venture called Irisbus. The new company came into being on January 1, 1999. The venture is accounted for by the equity method, therefore sales of buses are no longer included in the consolidated figures for RVI. Included within Irisbus is RVI's subsidiary, Karosa. RVI took a 34% stake in the Czech bus and coach maker in 1994. This was increased to 51% in 1996 when Karosa became a consolidated subsidiary. In 1998 the stake was increased to 94%. In July 1999 Irisbus entered into a joint venture with Hungarian bus and coachbuilder, Ikarus. IkarusBus is 75% owned by Irisbus The European Commission's approval for Volvo's takeover of RVI was conditional upon RVI disposing of its interest in Iris bus and in May 2001 it was announced that Iveco will take full control of Irisbus in two stages over the next two years. For four years after the signing of the agreement, Irisbus Holding Irisbus will retain the right to use the Renault trademark for four years, allowing it to replace the brand gradually with the Irisbus name and logo as the core trademark of the Group. The Iveco brand will be similarly phased out. As discussed in the Nissan Diesel chapter, Renault Group has a 22.5% stake in the Japanese firm but would like to dispose of it. MARKETS & MODELS RVI's total new registrations rose 11% to 103,646 units in 2000. Renault-branded products contributed 67,814 units, up 27.4% from 1999 and Mack contributed 35,832 units, down 10.7%. The group's global sales of vehicles over 5t was 86,345 units, a 4.7% increase. New registrations of sub-5t vehicles grew by 59% to 17,301 units, boosted by demand for the new Mascott range in its first full year of sales. RVI’s share of the West European light/medium sector rose strongly in 2000 to 7.2%. The success of the Midlum replacement for the Midliner was supported by the new Mascott range (below 7t gvw) introduced in 1999. Sector penetration is expected to improve further to around 8% by 2002, taking the brand's share back towards the 8.2% recorded in 1996. However RVI remains a relatively small player in this sector. In the heavy sector RVI also improved its share of the West European market in 2000, rising to 12.1% from 11.8% the previous year. In part this reflected market weighting factors i.e. RVI being strong in markets which rose more than average, but the company also made useful gains in Italy, Portugal and Spain. Further progress beyond the 12.1% achieved will be difficult, and we consider that around 12% is likely to be a ceiling to the brand's penetration in this sector given anything like a normal country market mix. The Magnum range, even with updates, is likely to lose ground in the face of more advanced competitor products, although the Premium has undoubtedly revived RVI’s prospects in this sector. We expect RVI will be hard pushed to maintain its share of the French market as competitors put more resources into increasing their shares of Europe’s second largest heavy truck market. Mack’s share of the US class 8 market rose from 12.8% in 1998 to 13.1% in 1999 and 13.3% in 2000. The division produces short and long haul road vehicles and is the market leader in construction site and municipal vehicles. Since 1995 it has extended its range with the CH600 Millennium range, targeted at the premium end of the long haul market. In 1999 Mack introduced the CH Vision, targeted at the regional haul market. The Vision can be seen in the context of Mack's attempt to reach 20% of the US Class-8 market by 2004. Although its share has improved for seven consecutive years, its chances of reaching this target independently were remote. The majority of Mack's sales occur in the so-called vocational sector - meaning construction, garbage collection etc. Although Mack is the market leader in this sub-sector, it accounts for only 30% of Class-8 sales. The remaining 70% of Class-8 sales is made up long haul trucks. 83 Figure 12.4: RVI unit sales by market Market 1996 1997 1998 1999 2000 France 16,683 16,127 19,268 20,001 20,834 Share of RVI total 29.3% 25.1% 25.2% 24.3% 24.1% Spain 2,908 4,081 4,952 6,333 6,335 Share of RVI total 5.1% 6.4% 6.5% 7.7% 7.3% Other Europe 7,197 7,848 9,713 9,807 14,180 Share of RVI total 12.6% 12.2% 12.7% 11.9% 16.4% N. America 23,010 27,115 31,253 38,716 33,923 Share of RVI total 40.4% 42.3% 40.9% 47.0% 39.3% Other 7,113 8,988 11,213 7,596 11,073 Share of RVI total 12.5% 14.0% 14.7% 9.2% 12.8% Total 56,911 64,159 76,399 82,453 86,345 Excludes <5t trucks and buses/coaches Source: Renault Figure 12.5: RVI share of W. European markets Sector & market 1997 1998 1999 2000 2005 3.5t-15.9t Austria 1.5 0.7 1.4 3.2 4.6 Belgium & Luxembourg 6.5 5.0 5.0 6.6 6.8 France 42.6 43.4 38.5 37.8 37.6 Germany 0.7 0.5 0.7 1.4 1.1 Italy 9.0 9.6 6.6 7.9 9.7 Netherlands 3.7 3.6 2.7 5.7 5.3 Portugal 9.2 11.8 9.9 9.6 10.1 Spain 13.6 11.1 13.4 13.2 14.1 UK 2.6 2.0 1.6 5.1 4.9 Nordic markets 0.4 0.4 0.9 2.4 2.4 Other 4.9 2.8 2.5 2.9 3.1 Total W. Europe 7.0 6.3 6.1 7.2 7.4 16t plus Austria 3.1 3.5 3.5 2.8 2.7 Belgium & Luxembourg 8.1 8.1 8.3 7.8 7.7 France 38.2 37.8 36.2 35.4 35.1 Germany 1.9 1.9 2.1 2.0 2.1 Italy 9.2 9.8 8.9 9.2 8.3 Netherlands 2.5 2.5 2.5 2.6 2.8 Portugal 14.2 16.6 18.6 21.2 18.3 Spain 18.7 18.7 17.4 18.2 18.0 UK 4.8 5.7 6.5 6.5 6.1 Nordic markets 1.4 1.8 2.0 2.0 2.5 Other 3.1 2.9 2.7 2.9 3.0 Total W. Europe 11.3 11.8 11.8 12.1 11.5 Source: Marketing Systems 84 Figure 12.6: RVI product range MODEL DEBUT 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 REMARKS I II I II I II I II I II I II I II I II I II I II MESSENGER 1981 F T Der. from Master B Range Iveco cab MASCOT 1999 I F Repl. Messeng MIDLINER 1986 F E T New cab & S / M Ranges engines MIDLUM 2000 I N F Repl. Midliner MANAGER / MAXTER T G Range 1981 MAJOR T R Range H100 PREMIUM 1996 I E F N Repl. G, R & KERAX 1997 Maxter MAGNUM 1990 E F E F T? Maybe terminated AE Range or repl by Volvo I: INTRODUCTION T: TERMINATION N: NEW MODEL F: FACELIFT E: NEW ENGINE Source: Marketing Systems The current W. European range of models produced in France and Spain comprises: • ascott (B-Series) - light truck produced at Batilly; • Midlum - medium truck produced at Blainville; • Kerax - new multi-wheel rigid being produced in Spain; • Premium (H100) - medium/heavy truck produced in France and Spain; • Magnum E-Tech - premium truck produced at Bourg-en Bresse. RVI has replaced the entire truck product range below the Magnum in the last five years. • the Premium range replacements for both G and R Series ranges were introduced in 1996; • Kerax (Premium derived multi axle rigids) replaced the Maxter in 1997; • the Mascott light truck range replaced the Messenger in mid 1999; • the Midlum replaced the Midliner in 2000. The Magnum was given a revised engine in 2000 and facelifted this year but its future is uncertain. The low production volume (7,700 in 2000) makes a stand-alone replacement unlikely. A joint development with a top of the range Volvo model appears likely. In June 2000 Mack launched two new truck ranges, Freedom and Granite, making extensive use of components from the Midlum range sold in Europe. The Freedom truck competes in Classes 6 and 7 and the Granite is a Class 8 vehicle. RVI has devised a World Truck Convergence strategy under which it aims to base all its heavy truck models on a single platform. In June 2000 the division announced it had approved a project to create a common chassis for the Magnum, Premium and Kerax in Europe and the Vision and CH in North America. 85 Considered in isolation this sounds an entirely logical strategy, albeit long overdue. But considered in the context of the (then) planned takeover by Volvo it seems strange that RVI publicly announced a product strategy which makes no mention of its new owner's plans. PRODUCTION STRATEGY RVI produced 96,067 trucks in 2000, an increase of 9.9% and a company record. Output of vehicles over 5t rose by 6.5% to 87,746 units, reflecting a 22.6% increase in Europe to 53,157 units and a drop of 11.4% in North America to 34,589 units. Since 1999 RVI has introduced a greater degree of specialisation at its plants. The principal plants and their activities are as follows: • Blainville sur Orner, France - Midlum and cabs for all models; • Bourg-en-Bresse, France - Magnum and Premium; • Limoges , France - components & reconditioning of military vehicles; • Saint-Priest, France - driveshafts, axles; • Vénissieux, France - engines, stamping, casting; • Villaverde, Spain - Kerax; • Hagerstown, USA - engines & transmissions; • Macungie, USA - MR, LE, DM, DMM, RB and RD ranges • Winnsboro, USA - CH, CL, Vision.; • Brisbane, Australia - assembly of Mack and RVI models. Both RVI and Mack have traditionally built most of their key components (engines, transmissions, drivetrains and axles) in-house. In recent years this pattern has been changing as RVI began a more critical examination of where its core competences lay and the costs of developing and manufacturing complex components. One tangible sign of this new approach is RVI's joint venture with transmission specialist ZF which effectively outsources gearbox supply to ZF. Renault has a 40% stake in the venture, which began at the end of 1997, to which it transferred its Bouthéon transmission plant. Volvo has a similar tradition of in-house manufacture and has similarly been more open to the idea of outsourcing in recent years. The link between RVI and Volvo may actually increase the degree of vertical integration, as activities which were judged uneconomic for a single producer, become viable for the two combined. In the future we can expect extensive commonality between the ranges of the two manufacturers, but much of the progress will be geared to product replacement cycles and as RVI has so recently renewed much of its range the visible signs of a link between the two will be limited. One of the first joint projects is likely to be a new engine range with displacements spanning nine to twelve litres. Volvo is reported to have such an engine family at an advanced stage of development so this is likely to be adopted. In June 1999 RVI signed a memorandum of understanding with the Russian truck manufacturer Amo Zil and the Moscow Government. The joint production and marketing of medium-heavy trucks in Russia is planned. Investment is expected to be $100 million. Apart from the production locations mentioned above, outside Europe Renault trucks are assembled (mostly at rates of less than 100 per year) in: Algeria, Malaysia, Morocco, Poland, Tunisia and Zimbabwe. Outside North America Mack trucks are assembled in New Zealand and Venezuela. NOTES UPON FINANCIAL STATISTICS Renault's financial year runs to December 31st . The consolidated accounts provide full information upon Renault Group with more limited disclosure for RVI. Although data is provided for Renault Group in the appendices the following discussion is concentrated upon the truck division's activities as much as possible. Renault's annual reports provided commendably comprehensive information on the key operating statistics. 86 The statistics in the appendix are presented for Renault Group and RVI. Since 1993 the financial services division has been included in the group accounts on a consolidated basis. The affected figures for 1991 and 1992 are restated. Operating profit is calculated after the deduction of cost of sales financing. Group operating expenses include restructuring costs of: • Eur210m in 2000 • Eur680m in 1999; • Eur245m in 1998; • Eur235m in 1997; • Eur600m in 1996; • Eur40m in 1995; • Eur100m in 1994; • Eur239m in 1993; • Eur190m in 1992; • Eur195m in 1991; • Eur295m in 1990. Please note all the above figures are converted from French francs into euros at the fixed rate of FFr6.56 per Eur1. 87 CHAPTER 13: SCANIA GROUP OVERVIEW Scania was the fifth largest heavy truck maker in the world in 2000, producing 51,400 trucks. The company was also the fourth largest manufacturer of heavy buses during the year, producing 4,200 units. The origins of the company can be traced back to 1891 when Vabis (Vagnfabriks-Aktiebolaget i Södertelge), produced railway rolling stock. In 1902 Vabis and its competitor Scania, in southern Sweden, each built their first trucks. The two companies merged in 1911 to form Scania -Vabis. In 1921 the company was reorganised after declaring bankruptcy. During the thirties Scania-Vabis produced more buses than trucks but by the late forties had decided its future lay primarily in truck production. In 1969 it merged with Saab to form Saab-Scania. Scania has grown almost entirely organically, establishing its first plant outside Sweden, in Brazil, during 1957. Seven years later a plant was built at Zwolle in the Netherlands and in 1976 bus and truck production began in Argentina. International expansion has accelerated in recent years with: • a bus plant (now producing trucks also) at Angers in France inaugurated in 1992; • an assembly plant in Poland in 1993; • an assembly plant in Mexico in 1994; • bus assembly in Denmark, where Scania bought local assembler DAB Silkeborg in 1994 - the exception to its policy of organic growth. During 1995 Scania became an independent company again when the Saab-Scania group to which it belonged was divided into Saab AB and Scania AB. This ended a 25 year period for Scania of being part of the same group as Saab. Saab-Scania AB had been a wholly owned subsidiary of Investor, the investment arm of the Wallenberg industrial empire, since 1991. During 1996 Investor floated 55% of Scania's share capital in a public offering which was three times oversubscribed and placed a value of SKr36bn on the company. The sale wiped out Scania's net debt at the end of 1995 of SKr8bn. The flotation was well timed from Scania's perspective, as it came at a time of peak profitability with an operating margin of 15.4%. In the following five years the margin was, on average, 6.4pts lower as the company was adversely affected by various factors including: launch costs for the new 4-Series; price competition in western Europe; the appreciation of the Swedish krona and the downturn in South America. However, even at its reduced profit levels Scania has remained the most profitable of the world's major truckmakers in most years. The company's consistently strong profit performance can be attributed to three long term features of its business strategy: 1. It has a modular construction strategy, yielding scale economies in development, purchasing and production as well as production flexibility. Scania used to use about 20,000 components for its model range, but with the introduction of the 4-Series the parts count has been reduced to about 13,000 pieces. Although Scania's competitors have been waking up to the benefits of a modular approach in recent years, Scania remains ahead of the game. 2. Scania competes only in the heavy sector, which has been the fastest growing sector in Europe. 3. Growth has been organic, rather than by acquisition (DAB Silkeborg excepted). Considering the company's record as the world's most consistently profitable truckmaker with a solid record of outperforming its rivals, it has had a surprisingly volatile time over the past few years with regard to its ownership structure. 88 In January 1999 Volvo began acquiring Scania's equity in a surprise move that followed Volvo's sale of its car division to Ford. The average price paid by Volvo (SKr266 per share) represented a 138% premium to Scania's share price in October 1998. Scania's majority shareholder, Investor, was initially opposed to the proposed takeover by Volvo but then supported it. However, in early March 2000, the takeover was blocked by the European Commission on the grounds that the Volvo-Scania combine would dominate Europe's nordic markets to an unacceptable extent. The blocking of this takeover led to Scania holding discussions with VW (the two companies have had a business relationship since 1948) and at the end of March VW announced it was to buy an 18.7% stake (34% of the voting rights) in Scania for SKr14bn (about SKr370 per share). The shares were sold to VW by Investor which retains 9.1% of Scania's equity and is committed to maintaining this stake for at least two years. At Scania's annual general meeting in May 2000, three of VW's senior executives joined Scania's board. One of the three was VW's chairman, Ferdinand Piëch, who became the chairman of Scania's board of directors. At the end of 2000 Volvo held 45% of Scania's equity and 30.6% of the voting rights. As a condition of the US competition authorities approving Volvo's takeover of RVI, they stipulated that Volvo must divest its holding in Scania within three years of the approval being given. Until recently a private sale to VW seemed the most likely disposal route but recent comments by Bernd Pischetsrieder - now confirmed to succeed Ferdinand Piëch as VW's chairman in 2002 - have led us to question his commitment to VW's truck industry strategy (see VW discussion), leaving Scania still facing an uncertain future. Figure 13.1: Scania revenue & operating profit trend 600 500 Revenue (SKr) Op. Profit (SKr) Index (1983 = 100) 400 300 200 100 0 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Sources: Marketing Systems & Scania RECENT PERFORMANCE 2000 results Scania's results for 2000 continued to show an improvement from the downturn in profit during 1996 and 1997, though profit levels remained below the 1995 peak and margins declined from 1999 levels. Revenue grew by 14.2% to SKr53.8bn as sales rose by 12.1% to 56,492 units. Operating profit rose by just 0.8% to SKr5.08bn, a margin of 9.4% compared with 10.7% in 1999. The increase was entirely due to a strong fourth quarter performance when a 44% rise in earnings offset the declines registered in the first three quarters of the year. 89 Over the full year operating profit in Europe fell by Figure 13.2: Scania net profit trend 7% to SKr4.6bn as a 12% rise in sales, an increase in service-related products and SKr200m in non- 1,000 recurring gains were more than offset by: Native Eur • reduced average unit revenue due to price 800 competition and an adverse geographical sales mix (SKr500m); Index 1993 = 100 • higher R&D expense (SKr300m); 600 • increased marketing expense (SKr300m); • adverse currency effects (200m); • lower earnings from bus and engine operations 400 (SKr150m). 200 In South America the company recovered from two years of operating losses, reporting a profit of SKr9m (1999 loss: SKr328m). The improvement 0 principally reflected increased unit sales, improved 1993 1994 1995 1996 1997 1998 1999 2000 pricing and cost reductions. Source: Scania Scania's net profit dropped slightly, to SKr3.08bn from SKr3.15bn. The net margin was 5.7% compared with 6.7% in 1999. Figure 13.3: Latest results - Scania Currency Scania / Unit January - September Year to December 2000 2001 (%) 1999 2000 (%) Revenue SKr(m) 36,203 37,900 4.7 47,110 53,823 14.2 Of which: - Scania products SKr(m) 31,056 33,579 8.1 41,625 47,165 13.3 - VW products SKr(m) 5,147 4,321 (16.0) 5,485 6,658 21.4 Operating income SKr(m) 3,057 2,004 (34.4) 5,045 5,084 0.8 Of which: - Scania products SKr(m) 2,905 1,924 (33.8) 4,792 4,809 0.4 - VW products SKr(m) 152 80 (47.4) 253 275 8.7 Operating margin - group percent 8.4 5.3 (3.2) pts 10.7 9.4 (1.3) pts Op. margin - Scania productspercent 9.4 5.7 (3.6) pts 11.5 10.2 (1.3) pts Net income SKr(m) 1,791 1,037 (42.1) 3,146 3,080 (2.1) Net margin percent 4.9 2.7 (2.2) pts 6.7 5.7 (1.0) pts Unit sales 000s 39.4 35.2 (10.8) 50.4 56.5 12.1 Of which: - Trucks 000s 36.5 31.9 (12.7) 46.7 52.3 12.1 - Buses 000s 2.9 3.3 12.7 3.8 4.2 10.9 Sources: Marketing Systems & Scania 2001 results During the first nine months of 2001 Scania's earnings dropped sharply as its main markets in Europe and South America grew weaker. Despite an 11% decline in unit sales revenue for the period rose by nearly 5%, helped by favourable currency effects. Group operating income was SKr2.0bn, down 34% from the year-ago figure of SKr3.1bn. The operating margin of 5.3% was 3.2pts below the year-ago margin of 8.4%. The decline reflected a weaker performance in both Europe and South America. European earnings dropped by 26% to SKr2.18bn as: • unit sales in western Europe dropped by 13%; • the sales mix weakened; • R&D expense increased. 90 The decline in European earnings accelerated in Q3-2001 with a fall of 35% versus the year-ago figure, following falls of 33% and 12% in Q2-2001 and Q1-2001 respectively. In South America Scania made an operating loss of SKr476m compared with a year-ago loss of SKr148m. The decline reflected lower margins, adverse currency effects and increased R&D expense. The company's net profit for the first nine months was 42% lower at SKr1.04bn, a net margin of 2.7% compared with 4.9% in the year-ago period. Scania is clearly heading for a sharp reduction in full year profit. The company's order bookings suggest there is little prospect of a recovery in demand during the final quarter of the year. Scania is responding by reducing its European workforce by 1,200 people (around 5% of the total at the end of 2000) and cutting costs in production, sales and marketing and administration. The bus and coach operations are being restructured (see Production Strategy). BUSINESS STRUCTURE Figure 13.3: Scania revenue by division Division 1997 1998 1999 2000 Scania is primarily engaged in the manufacture and distribution of trucks, buses and coaches but it also Trucks 60% 60% 59% 58% produces industrial and marine engines and sells Buses 8% 8% 8% 7% VW, Audi, Porsche, Seat and Skoda products in Sweden. Engines 1% 1% 1% 1% VAG 12% 13% 12% 12% These products are sold through Svenska Volkswagen AB (VAG), a company jointly owned Other 19% 19% 21% 22% by Scania AB and Volkswagen AB since 1948. As Total 100% 100% 100% 100% shown in Figure 1 3.3 VAG typically contributes around 12% of group revenue, though its Source: Scania contribution to operating profit is usually smaller. The link with VW is of course much stronger now that the German carmaker has an 18.7% stake (34% of the voting rights) in Scania, as discussed in this chapter's introduction. At the end of 2000 Volvo held 45% of Scania's equity and 30.6% of the voting rights. As a condition of the US competition authorities approving Volvo's takeover of RVI, they stipulated that Volvo must divest its holding in Scania within three years of the approval being given. At the time of writing Scania's shares are trading at around SKr160, well below the SKr266 paid by Volvo in 1999. Volvo will presumably wait until the shares are more highly valued before selling, but in any case a private sale to VW seems the most likely disposal route. Scania's customer finance operations have become a more significant contributor to group profit in recent years. In 2000 the division's operating profit rose to SKr179m from SKr140m in 1999. The increase partly reflected the acquisition of finance companies in Italy and South Korea during the previous year. During 2000 Scania continued to expand its sales and service organisation, acquiring its distributors in: Malaysia and Thailand. The previous year it had acquired its importers and distributors in: Italy, Norway, Finland and Latvia. The process of integrating the distribution network continued in January 2001 when Scania acquired two distributors in Brazil and Beers a Dutch distributor. MARKETS & MODELS Scania sold more trucks in all its major markets during 2000, with the strongest rise in relative terms occurring in Asia, up 132% to 3,400 units. Sales in Latin America were 8% higher at 6,800 units over the full year but the recovery was gathering momentum in the final quarter of 2000 when Scania's sales in the region rose by 36%. 91 Figure 13.4: Scania European market shares Sector & market 1997 1998 1999 2000 2005 16t plus Austria 16.9 16.0 14.6 15.2 15.2 Belgium & Luxembourg 17.6 17.2 18.9 17.6 18.1 France 9.2 9.4 10.7 10.5 10.5 Germany 7.8 8.8 9.5 10.0 8.4 Italy 12.9 11.9 12.0 13.1 12.7 Netherlands 19.6 22.3 19.0 21.9 20.6 Portugal 18.9 19.1 16.7 17.2 18.4 Spain 14.5 15.3 14.1 14.3 13.7 UK 20.2 18.6 17.9 20.7 18.8 Nordic markets 33.4 33.9 35.8 36.9 33.9 Other 19.4 20.4 22.3 23.1 21.0 Total W. Europe 15.0 15.0 14.8 15.5 14.3 Source: Scania Sales in central and eastern Europe during 2000 were 46% higher, as demand recovered to the same level as before the 1998 downturn. Particularly strong growth was recorded in the Czech Republic, Hungary, Poland and Russia. The acquisition of the Latvian distributor was mentioned above and follows the establishment of wholly owned importing companies in Bulgaria, Croatia, Lithuania and Ukraine in 1998 when Scania also set up new dealer facilities in Estonia, Poland and Russia. Scania's share of the West European heavy sector grew by 0.7 percentage points to 15.5%, its highest level since 1996. The improvement was broadly based as the company took an increased share in ten of the twelve markets/regions shown in the table. Its performances in Italy, Netherlands and the UK were particularly noteworthy. We are expecting a decline in Scania's market share in western Europe during the next few years, as several competitors renew their heavy truck ranges. Figure 13.5: Scania unit sales by market Market 1996 1997 1998 1999 2000 Great Britain 5,661 5,634 6,028 6,308 7,253 Share of Scania total 13% 12% 12% 13% 13% Germany 3,032 3,227 4,446 5,627 5,817 Share of Scania total 7% 7% 9% 11% 10% Brazil 6,810 8,401 6,477 4,961 6,400 Share of Scania total 16% 18% 13% 10% 11% France 3,042 2,854 3,728 4,711 4,993 Share of Scania total 7% 6% 8% 9% 9% Other W. Europe 17,282 18,564 22,558 23,013 22,031 Share of Scania total 40% 40% 45% 46% 39% Other 7,164 8,296 6,433 5,794 9,998 Share of Scania total 17% 18% 13% 11% 18% Total 42,991 46,976 49,670 50,414 56,492 Source: Scania 92 During the first nine months of 2001 Scania's truck sales in western Europe dropped by 17% from year- ago levels to 16,191 units. The company underperformed in most markets, leading to a drop in its market share to 14% from 15.8% in the year-ago period. The sharpest falls came in the Netherlands and Great Britain where Scania's new registrations dropped by over 23%. New registrations in Germany fell by 21%. Sales in eastern Europe were 23% higher at 1,089 units and in South America the company sold 9.9% more trucks at 3,320 units. Sales in other markets were 2% higher at 2,126 units. Scania’s product range has long been based upon modular concepts whereby a small number of components can be offered in a wide variety of permutations to suit individual operator needs. Following the introduction of the Series-4 cab the product range is currently based upon: q Five engine series (9, 11, 12, 14 litres and a V8 15.5-litre unit launched in 2000) with a choice of thirteen power outputs. The old 14-litre V8 will cease production in October 2001 and the range of power outputs will reduce as Euro-3 emission standards come into force as currently Scania offers some Euro-2 engines alongside Euro-3 units. q Four chassis classes (C - construction, D - urban/regional distribution, G - heavy duty & L - long distance). q Three variants of the Series 4 cab (P - low forward control, R - high forward control and T - conventional bonneted). The bonneted cab is mostly identical to the forward control cabs from the A- pillar rearwards, except for some sheet metal changes to the doors. Various combinations of day- cabs, sleeper-cabs, crew-cabs etc. are available. q Various gearbox, axle gear and axle combinations and suspension systems. Now that Scania has VW as the majority shareholder, the two companies are expected to collaborate in the development of a new middleweight truck, a project which the two had discussed before the equity link was established. Little information is known about the project but reports suggest a 12-14t truck is being developed, that it will be produced at Scania's Sao Paolo plant in Brazil and initially it will be sold only in South America. If such a model is developed it seems likely it will also be sold in emerging markets, where the infrastructure and finance systems required to support heavy trucks are not yet in place. With this in mind there is a strong possibility that the new range would not be offered in western Europe, particularly if it is designed without the refinements that are necessary for European markets but inappropriate for developing markets. It should also be remembered that the 10-15.9t segment in western Europe is the smallest of the six main truck segments. The 12-14t weight band sounds very narrow and it would not be surprising if it turns out to be wider than this. PRODUCTION STRATEGY The company produced a record 55,581 trucks, buses and coaches in 2000, exceeding the previous year's output by 12.3% and the previous production record (set in 1998) by 11%. Scania's European plants produced 46,353 units (1999: 42,322 units), of which 44,235 (39,794) were trucks. Productivity within European operations grew by 9.6% during the year. The South American operations produced 9,228 units (7,160) of which 7,174 (5,985) were trucks. Like Volvo Scania produces the majority of its vehicles outside Sweden. Its principal truck and bus assembly plants are as follows: • Zwolle, Netherlands - trucks, 2000 output: 21,659 units; • Södertälje, Sweden - trucks, capacity was expanded in 2000 output12,117 units; • Angers, France - trucks and buses, 2000 output: 10,702 units; • Sao Paulo, Brazil - trucks and buses, 2000 output: 7,812 units; • Tucumán, Argentina - trucks, 2000 output: 1,084 units; • Slupsk, Poland - truck and bus assembly, 2000 output: 1,857 units; • Silkeborg, Denmark - buses, 2000 output: 18 units. 93 Scania vehicles are also assembled in low volume in, Australia, Botswana, China, Egypt, Estonia, Kenya, Malaysia, Morocco, Mexico, Pakistan, South Africa, South Korea, Tunisia and Zimbabwe. During 2000, the company announced a decision to establish its own local truck and bus assembly facility in Thailand. The plant is being built on a site in Rayong, and should be completed this year. Thailand is recovering from the economic crisis that caused a drop in CV demand from around 30,000 units annually to 2,500 units in 1999. Scania's move followed Volvo's decision to start assembling heavy trucks at its Bangkok plant. The new assembly plant will supply vehicles mainly to the Thai market. However, depending on how the economies of the Asean region develop, Thai-built trucks and buses may also be exported to other markets in the region. In November 2000 Scania began producing buses at a new assembly plant in St. Petersburg, Russia. Capacity at the plant is planned at 250 buses per year, with output in 2001 targeted at 100 units. During 2001 Scania has begun restructuring its bus operations, splitting it between the chassis building activity and coachbuilding. The chassis operations are being integrated more closely with truck operations, reflecting the fact that many components are shared. A stand-alone coachbuilding unit with its own reporting structure is being created and the company is aiming to increase the share of fully-built buses in its overall sales - a response to increasing customer demands for a single supply source rather than the traditional arrangement of buying a chassis and selecting one of the dedicated coachbuilders to carry out the body and trim operations. Scania hopes the new structure will reduce the time to assemble a bus to an average 800 hours, from the current 1,200 hours. In 1998 Scania began transferring engine and axle assembly from Zwolle, Netherlands to Södertälje (engines) and Falun (axles) in Sweden. This process continued into 1999. In October 1999 a component plant at Lulea, Sweden was turned into a limited company, Ferruform, and has begun competing for external customers. Also in 1999 a special vehicle plant at Laxa, Sweden, was bought out by its management. NOTES UPON FINANCIAL STATISTICS The data is presented for Scania Group. For the years prior to the formation of Scania as a separate entity, data is drawn from the Saab-Scania AB annual reports but the level of disclosure was limited. Statistics for Saab-Scania AB are provided until 1994. 94 CHAPTER 14: VOLVO TRUCKS & BUSES OVERVIEW Towards the end of the nineties the Volvo group began reducing the breadth of its portfolio of industrial holdings and increasing its depth, concentrating on the automotive and transport vehicle industries, having previously acquired interests in a number of unrelated industry sectors (see Business Structure). This rationalisation process was taken a stage further in early 1999 when the car division was sold and Volvo's focus was narrowed to the following commercial transport industries: • trucks; • buses; • construction equipment; • marine and industrial engines; • aerospace equipment. Volvo Trucks is now the group's largest division in terms of revenue and usually profit, though during 2000 the construction equipment division contributed the highest profit. Volvo is predominantly a producer of heavy trucks, which account for more than 90% of its production. In 2000 the company was the world's third largest producer of heavy trucks, turning out 76,812 units from eighteen final assembly locations around the world. Volvo also produced 5,194 trucks below 16t. The truck division had been investigating alliance opportunities for most of the nineties having had to abort a planned merger with Renault in 1993, following shareholders' objections. The search was given added impetus by the sale of the car division, which left Volvo looking an attractive bid target with its large cash pile representing around 34% of its market capitalisation during 1999. However, the added urgency to form alliances led Volvo to make an ill-considered and initially unwelcome bid for Scania in January 1999. In the following months it became an agreed bid but the deal was blocked by Europe's competition authority forcing Volvo to withdraw its bid in March 2000. Volvo spent little time in seeking an alternative alliance and within two months of aborting the Scania bid, the proposed purchase of RVI from Renault was being announced. The deal provided for Volvo to acquire 100% of RVI's equity in exchange for Renault taking 15% of Volvo's shares. Renault was to buy a further 5% of Volvo's equity on the open market, taking its overall stake to 20%. At the time of the initial agreement Renault's 15% stake in Volvo was worth about Eur1.7bn. The rationale for such a move was little changed from that which applied when Renault and Volvo tried to merge in 1993. That merger would have had Volvo taking the lead role in the truck sector and Renault in cars and the logic for combining forces in the truck sector remains at least as compelling today as it did then. In strategic terms it is probably a better deal for Volvo than a Scania takeover, with less product and market overlap. The timing was not ideal, as Volvo bought RVI at the top of the market, just as truck demand in North America was beginning to turn down. However, had Volvo delayed it could have lost the opportunity and itself been the object of a takeover bid. The price of about SKr14bn was reasonable at the time, considering that VW paid a similar amount for an 18.7% stake in Scania, which, at the operating level, has been about three times more profitable than RVI in the past two years. The deal was approved by the European and US competition authorities in 2000 and became effective on January 2, 2001. It makes the Volvo truck group (now called 'Volvo Global Trucks') the second-largest producer of heavy trucks in the world and the combined group makes more heavy trucks in Europe than any other producer. Having finally succeeded in bolstering its strategic weight in Europe and North America, Volvo's Asian strategy promptly began to unravel. In April 2001 it was forced to sell its stake in Mitsubishi Motors to DaimlerChrysler, in recognition of DC's increasing control over the Japanese firm. 95 Following the ending of its alliance with Mitsubishi Motors, Volvo is widely expected to develop a relationship with Nissan Diesel, partly due to Nissan Diesel's equity links with Renault (now a 20% stakeholder in Volvo) and partly because Nissan Diesel is seen as the only Japanese truckmaker open to takeover. However, a deal with Nissan Diesel is not a foregone conclusion. We can think of three main arguments against such a development. First, Nissan Diesel's levels of debt make it an unattractive prize - though in theory this could be fully reflected in the company's price. Second, Volvo may prefer to get on with integrating RVI and to develop its Asian sales by itself or with local partners outside Japan. After all, Volvo sold more trucks in non-Japan Asia last year than Nissan Diesel did. Third, Volvo has a lousy record as a dealmaker. The aborted deals with Renault in 1993, Scania in 2000 and Mitsubishi Motors in 2001, must surely give the company some pause for thought before attempting another. Figure 14.1: Volvo truck & bus revenue & operating profit trend 1,200 1,000 Revenue (SKr) Op. Profit (SKr) 800 Index (1983 = 100) 600 400 200 0 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 -200 2001 -400 -600 Source: Marketing Systems & Volvo RECENT PERFORMANCE 2000 results Volvo's truck division sold 81,830 units in 2000 (down 4% from 1999) and the bus division sold a further 11,015 units (16% more than in 1999). The truck division suffered a 56% fall in operating income to SKr1.4bn during 2000 as its revenue fell by 1% to SKr62.2bn. This was the truck division's lowest operating profit since 1996. The sales decline was wholly due to a 31% fall to 23,610 units in Volvo's North American unit sales, partly offset by increased sales in all other regions: • West Europe - up 6% at 42,054 units; • East Europe - up 41% at 4,089 units; • South America - up 16% at 4,534 units; • Asia - up 104% at 5,556 units; • Other - up 22% at 1,987 units. 96 Figure 14.2: Latest results - Volvo Currency Volvo / Unit January - September Year to December Var. Var. 2000 2001 (%) 1999 2000 (%) Revenue SKr(m) 87,155 131,982 51.4 125,019 130,070 4.0 Of which: - Global Trucks SKr(m) 44,545 86,444 94.1 63,010 62,196 (1.3) - Buses SKr(m) 12,277 12,631 2.9 14,713 17,187 16.8 - Other & elim's SKr(m) 30,333 32,907 8.5 47,296 50,687 7.2 Op. income (ex restructuring) SKr(m) 4,998 2,413 (51.7) 6,726 6,154 (8.5) Of which: - Trucks SKr(m) 729 449 (38.4) 3,247 1,414 (56.5) - Buses SKr(m) 278 (293) (205.4) 224 440 96.4 - Other SKr(m) 3,991 2,257 (43.4) 3,255 4,300 32.1 Trucks operating margin percent 1.6 0.5 (1.1) pts 5.2 2.3 (2.9) pts Buses operating margin percent 2.3 (2.3) (4.6) pts 1.5 2.6 1.0 pts Net income SKr(m) 3,522 (980) (127.8) 32,222 4,709 (85.4) Net margin percent 4.0 (0.7) (4.8) pts 25.8 3.6 (22.2) pts Unit sales 000s 142.1 120.4 (15.3) 94.6 92.8 (1.8) Of which: - Volvo Trucks 000s 61.2 49.2 (19.7) 85.1 81.8 (3.8) - RVI Trucks 000s 45.4 45.8 0.9 n/a n/a - - Mack Trucks 000s 27.5 18.3 (33.6) n/a n/a - - Volvo Buses 000s 8.0 7.2 (10.9) 9.5 11.0 15.9 Source: Volvo As well as the fall in unit sales, the truck division's profits were adversely affected by strong price competition, increased R&D expense and the weakness of the euro. However, restructuring actions in the early part of 2000 and its introduction of a new truck in North America (the VHD) helped to limit its profit decline in the final quarter of the year. The bus division reported a near doubling of operating income to SKr440m from SKr224m in 1999, helped by higher sales and lower material costs. 2001 results During the first nine months of 2001 restructuring charges of SKr2,725m caused Volvo group to fall to a net loss of SKr980m compared with a net profit of SKr3,522m in the year-ago period. Most divisions reported lower profits, the exceptions being the Marine and Aero businesses. Analysis of the truck division's performance is complicated by several factors: • the first-time inclusion of RVI in the results; • restructuring charges of SKr1.32bn 2001 and SKr1.28bn taken in Q1 and Q3 respectively; • non-recurring gains from the sale of the MMC stake. The division's revenue increased by 94% to SKr86.4bn, reflecting the first-time inclusion of RVI sales which (including Mack) were 12.1% down from year-ago levels at 64,072 units. Sales of Volvo-brand trucks dropped by 19.7% to 49,154 units. At the operating level VGT earned an underlying profit of Skr449m, a 38% decrease from a year-ago. However, that figure excludes restructuring charges of SKr2.6bn. Among other things the charges cover the costs of closing one of Mack's North American plants (Winnsboro) and integrating Volvo and RVI's purchasing and engine development processes. Further restructuring costs of SKr1.4-1.5bn are expected to be charged by the end of 2003. 97 It seems fair enough to exclude this charge from the headline figures as Volvo has done, to give a like- for-like comparison with the year-ago result. However, the profit figure of SKr449m includes a non- recurring gain of SKr574m from the sale of Volvo 's MMC shares in Q2. Excluding this figure shows Volvo to have made a recurring operating loss of SKr125m. The decline reflects: • the 19.7% decline in sales of Volvo -brand trucks, in particular a 41% fall in Nafta sales; • reduced margins; • excess capacity. The truck division has responded to the downturn by taking 83 down-days at Mack's plants and 30 at Volvo's North American plants. On a like -for-like basis the division's workforce was reduced by 4,520 employees or 12% during the first nine months. The bus division reported a nine-month operating loss of SKr293m, compared with a year-ago profit of SKr278m. The deterioration principally reflects a 10.9% fall in unit sales to 7,162 vehicles, the decline in Europe being 22%. BUSINESS STRUCTURE In the wake of the abandoned merger with Renault, Mr Pehr Gyllenhammar who was at the head of Volvo Group for more than two decades, was forced out. His successor, Mr Sören Gyll, made fundamental changes to the strategy and structure of the company, a process continued by Mr Leif Johansson, formerly chief executive of Electrolux who replaced Mr. Gyll in 1997. Following the sale of the car division Volvo is now concentrating on the five core businesses listed earlier. The background to the decision to dispose of the car division was its record of low profitability, consistently lower than the truck division, and the limited options for improvement for a relatively small player (400,000 units in 1998) in an industry dominated by companies making upwards of 2m units annually. Volvo's final links with the car division were severed in June 2001 when it sold (subject to regulatory approval) its 50% stake in AB Volvofinans to Ford Credit for SKr871m. Volvofinans is primarily engaged in providing credit for passenger car buyers. In May 2001 Volvo and Navistar announced plans for the Swedish firm to supply Navistar with 12-litre engines. Initially the engines will be produced at Volvo Powertrain's plant in Skövde, Sweden. However, Volvo eventually intends producing the engines in North America. Over the past eighteen months, most of Volvo's corporate activity has mostly been focused on finding a partner for the truck division. A summary of the relationships with Mitsubishi Motors, Scania and RVI is provided below. Figure 14.3: Volvo Group revenue by division Division 1996 1997 1998 1999 2000 Car Group 52.4 51.1 47.5 0.0 0.0 Truck Group 25.3 25.1 26.8 50.4 47.8 Buses 5.3 5.6 6.5 11.8 13.2 Volvo Construction 8.0 8.8 8.9 15.1 15.4 Marine / industrial engines 2.4 2.4 2.3 4.6 5.1 Aero Group 2.6 4.0 3.9 8.0 8.2 Fin. Services 3.5 2.7 3.3 6.9 7.4 Other & Eliminations 0.4 0.3 0.9 3.2 2.8 Total 100.0 100.0 100.0 100.0 100.0 Source: Volvo 98 Volvo / MMC Until recently Volvo held a 3.3% stake in MMC. In 1999 the firms announced a plan for MMC to split its truck and bus division into a separate company during 2001 and Volvo was to acquire up to 19.9% of the new company. The firms were developing a medium-heavy truck together and co-operating in various other ways. As soon as DC formed an alliance with MMC we began to question whether the Volvo-MMC alliance had a viable future. Despite the insistence of all three companies that the alliance would continue we were of the opinion that it would be in neither DC's nor Volvo's interests for this to happen. In last year's edition of this report we commented that "there is considerable room for doubt as to whether MMC's original plan for twin alliances will come to fruition. As DC's bargaining hand has been strengthened it may try to capture MMC's heavy truck business (a valuable business for its exposure to emerging Asian markets), as well as the car operations." So it proved. In April 2001 DC paid Volvo SKr3.2bn for its 3.3% stake in MMC, taking DC's holding in the Japanese firm to 37.3%. The price included the rights to the medium truck programme being undertaken by Volvo and MMC. Volvo / Scania Volvo's truck division had been investigating alliance opportunities for a long time and this activity was given added impetus by the sale of the car division, which left Volvo looking an attractive bid target with its large cash pile representing around 34% of its market capitalisation during 1999. However, the added urgency to form alliances led Volvo to make an ill-considered and initially unwelcome bid for Scania in January 1999. In the following months, it became an agreed bid but in early 2000 the deal was blocked by Europe’s competition authority, which forced Volvo to withdraw its bid in March 2000. The main reason for the bid being blocked was the dominance that a Volvo/Scania combine would have over Europe’s Nordic markets. At the time of writing Volvo retains 45.5% of Scania's share capital and (nominally) 30.6% of the voting rights. As a condition of the European Commission's approval of the RVI takeover, Volvo is not allowed to exercise any ownership influence and is obliged to sell the shares by the end of 2003. Volvo paid SKr24.35bn for its stake, which at current market prices is worth about SKr15.2bn. Clearly it will be hoping not to make a significant loss on the sale but with all potential buyers aware of the 2003 deadline and some potential purchasers probably put off by VW's stake in Scania, Volvo is not in a strong position. Volvo / RVI The takeover of RVI was described in the introductory comments. Following the formation of Volvo Global Trucks (VGT) to co-ordinate and optimise the development of the three brands (Mack, RVI and Volvo) Tryggve Sthen. was appointed its president. The co-ordination of the three brands is being performed by a separate unit within VGT known as 3P (Purchasing, Product planning and Product development). RVI was a good fit for Volvo in terms of geographical sales distribution and product range. RVI offers exposure to markets where Volvo was relatively weak, such as southern Europe where RVI typically takes a 23% share of the heavy truck market compared with Volvo's 13%. The only market where the two companies are relatively equally matched in terms of heavy truck market share is in North America. However, even here the overlap is actually relatively low as about half of Volvo-brand sales are to the long-haulage sector while Mack trucks are primarily used in heavy construction and regional distribution. In terms of product, about 40% of RVI's output is light/medium trucks compared with just 10% of Volvo's and even where the brands nominally overlap in the heavy sector, they quite often compete in different niches as in North America. 99 As well as having to dispose of its Scania shares as a condition of the European Commission's approval for the RVI takeover, the US competition authority made its approval conditional upon Volvo divesting its Xpeditor low-cab-over-engine (LCOE) truck product line. Xpeditor markets the WX and WXLL range of vehicles, which are used for vocational applications, such as refuse collection. These products represent about 8% of Volvo's North American sales. Another consequence of the takeover was that Volvo became one of the world's four largest producers of heavy diesel engines - defined by Volvo as being in excess of 8-litres. In recognition of this the company has formed a new business unit Volvo Powertrain, which will supply the whole group with engines and other powertrain components. It will also look for opportunities outside the Volvo group - the previously mentioned deal to supply Navistar with engines is an early example of success in this regard. Volvo is expecting the takeover to generate annual savings of SKr3.5bn after two years, with purchasing efficiencies accounting for about half that figure. Longer term, an incremental annual saving of SKr3bn is being suggested as the consequence of integration between the two companies’ product ranges. To put these figures into context, Volvo Trucks incurred operating expenses of SKr61bn in 2000. Figure 14.4: Volvo's share of European markets (%) Sector & market 1997 1998 1999 2000 2005 3.5t-15.9t Austria 2.1 2.7 3.4 4.0 3.7 Belgium & Luxembourg 11.7 11.4 9.2 11.0 10.4 France 5.9 4.4 4.7 4.4 4.8 Germany 1.9 1.9 1.2 0.9 1.1 Italy 3.3 3.0 2.5 2.2 2.7 Netherlands 10.6 11.5 10.6 8.9 9.0 Portugal 7.4 5.8 6.1 4.9 4.7 Spain 2.5 2.8 2.0 2.9 3.1 UK 3.4 3.2 2.9 2.3 3.1 Nordic markets 11.9 11.2 9.2 8.6 9.9 Other 2.0 2.7 3.8 3.0 3.0 Total W. Europe 3.9 3.7 3.0 2.8 3.2 16t plus Austria 9.7 12.0 13.4 16.4 15.9 Belgium & Luxembourg 20.6 22.3 22.6 24.2 24.3 France 13.5 14.5 13.3 13.2 13.4 Germany 7.5 7.7 7.3 8.2 8.1 Italy 12.9 11.9 12.1 11.1 14.3 Netherlands 18.0 15.6 16.8 16.8 18.7 Portugal 28.3 24.9 23.3 20.4 20.7 Spain 13.6 12.5 12.1 12.6 12.8 UK 16.5 18.3 19.3 17.7 18.2 Nordic markets 36.2 35.9 37.9 36.6 35.8 Other 24.2 20.7 19.1 19.9 21.1 Total W. Europe 15.3 15.2 14.9 14.8 15.1 Source: Volvo 100 Figure 14.5: VGT's share of European markets (%) Sector & market 1997 1998 1999 2000 2005 3.5t-15.9t Austria 3.6 3.4 4.8 7.2 8.3 Belgium & Luxembourg 18.2 16.4 14.2 17.6 17.2 France 48.6 47.9 43.1 42.2 42.4 Germany 2.6 2.4 1.8 2.3 2.2 Italy 12.3 12.6 9.1 10.1 12.4 Netherlands 14.3 15.1 13.3 14.6 14.3 Portugal 16.6 17.6 16.1 14.5 14.8 Spain 16.1 14.0 15.4 16.1 17.2 UK 6.0 5.3 4.5 7.4 8.0 Nordic markets 12.3 11.6 10.1 11.0 12.3 Other 7.0 5.6 6.3 5.9 6.1 Total W. Europe 11.0 10.0 9.1 10.0 10.7 16t plus Austria 12.8 15.5 16.8 19.2 18.6 Belgium & Luxembourg 28.7 30.4 30.9 32.0 32.0 France 51.7 52.3 49.5 48.6 48.5 Germany 9.4 9.6 9.4 10.1 10.2 Italy 22.1 21.8 21.0 20.3 22.6 Netherlands 20.5 18.1 19.3 19.4 21.5 Portugal 42.5 41.5 41.9 41.6 39.0 Spain 32.3 31.2 29.5 30.8 30.8 UK 21.4 24.0 25.9 24.3 24.3 Nordic markets 37.5 37.7 39.9 38.6 38.3 Other 27.3 23.5 21.8 22.8 24.1 Total W. Europe 26.6 27.0 26.7 26.9 26.6 Source: Volvo Figure 14.6: Volvo truck & bus sales by market 1996 1997 1998 1999 2000 N. America 17,600 22,010 32,040 37,940 27,479 Share of Volvo total 25% 28% 34% 40% 30% Great Britain 7,280 5,870 7,110 6,880 7,014 Share of Volvo total 10% 8% 8% 7% 8% Brazil 4,740 5,430 5,180 3,690 4,642 Share of Volvo total 7% 7% 6% 4% 5% France 4,930 4,310 5,770 5,982 6,497 Share of Volvo total 7% 6% 6% 6% 7% Germany 3,400 3,230 3,985 4,402 4,741 Share of Volvo total 5% 4% 4% 5% 5% Other 33,140 36,860 39,395 35,696 42,472 Share of Volvo total 47% 47% 42% 38% 46% Total 71,090 77,710 93,480 94,590 92,845 Source: Volvo 101 MARKETS Volvo delivered 81,830 trucks in 2000, a 3.8% drop from the 1999 figure. Invoiced sales in western Europe (different to new registrations) grew by 6.1% to 42,050 units but in North America sales dropped by 31% to 23,610 units. Sales increased in all other regions, by 41% in eastern Europe to 4,090 units, by 16% in South America to 4,530 units and by 104% in Asia to 5.560 units. In the West European light/medium sector Volvo's market share fell again in 2000, to 2.8%. The introduction of the FLC light truck, in autumn 1996 gave a temporary boost to Volvo's performance in this sector but competition from products such as the Atego and the Mitsubishi Canter (formerly sold through Volvo's European distribution network but now sold by DaimlerChrysler) has caused its share to slip. Volvo's representation in this sector is expected to increase during the next two years in response to the facelifting of the FL range during 2000. Longer term it seems likely that Volvo will look to use an RVI product to increase its exposure to this sector, as the French firm typically enjoys a sector share about double that of Volvo. The two brands together were the fourth best-selling group in the sub-16t sector, during 2000, the same position that RVI occupied without Volvo. As expected, in the heavy sector Volvo's share of the west European market fell slightly in 2000 to 14.8%. The decline was not particularly significant and we expect it to recover this year. Looking at the combined market share of the Volvo and RVI brands it can be seen that the alliance is the European market leader in the heavy truck sector with a share in 2000 of 26.9%, which compares with DC's 19.6%. Figure 14.6: Volvo's European product range MODEL DEBUT 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 REMARKS I II I II I II I II I II I II I II I II I II I II FLC 1996 I E T 7.5-10.0T GVW FL6 1985 F N? Was to be 2004 in JV with MMC FS7 1991 T FL7/10/12 1985 N/E T Replacement (FM) is based on FH FM 1998 I F FH12/16 1993 F F/E E N SUCC. F SERIES I: INTRODUCTION T: TERMINATION N: NEW MODEL F: FACELIFT E: NEW ENGINE Source: Volvo 102 In the US Volvo branded trucks took a smaller share than Mack of the Class 8 market in 2000, at 10.7% (unchanged from 1999) compared with Mack's 13.3% (1999:13%). The two brands together would have been in second place in 2000. During the first nine months of 2001 the number of Volvo-brand trucks sold dropped by 29.7% to 49,154 units. Sales were down by: • 41% to 10,357 units in North America; • 15.9% to 27,046 units in western Europe; • 10.6% to 3,518 units in Asia. These declines were partly offset by gains in eastern Europe, South America and elsewhere. RVI's worldwide unit sales dropped by 12% to 64,072 units, reflecting a 34% fall in North America to 18,270 units and a 1% drop in Europe to 40,836 units, partly offset by gains in the rest of the world. MODELS & PRODUCTION STRATEGY Within Europe, Volvo currently produces trucks based upon three ranges of cabs, the FL (facelifted in April 2000) the FM and FH. The cabs themselves and all major components are produced at plants in Sweden, while final assembly (until 2000) was carried out at three locations in West Europe: Gent in Belgium, Göteborg in Sweden and Irvine in Great Britain. In 1998 it was decided to close the Irvine plant. Production was subsequently wound down and during 2000 assembly was transferred to Göteborg and Gent. The facelifting of the FL saw the end of the FLC badge, used on Volvo's lightest truck (7.5-10t). The FL is available in weights from 7.5-18t but the Perkins 4-cylinder engine used in the FLC has been dropped in favour of a Volvo 6-cylinder unit. The FM series, launched in 1998 shares 78% of its components with the FH series. The FM replaced the FL7, FL10 and FL12, a range introduced some fourteen years previously. The loss of its alliance with MMC meant Volvo also lost the medium truck project the two firms were jointly pursuing. However, in RVI it has acquired a company with an already established presence in this sector of the market and recently updated versions of medium (Midlum) and light (Mascott) product ranges. During 2001 Volvo has shown a new 16-litre engine which it plans to begin producing in 2003. Demand for the existing 16-litre unit has always been fairly low, but Volvo sees opportunities to install it in Mack and RVI models as well as perhaps selling it to outside firms. In western Europe final assembly of the FL6/FS7 takes place at Gent in Belgium. The FL and FH Series are assembled at Göteborg in Sweden, Gent and Irvine in the UK (until 2000). The plant at Gent is the largest, producing 30,486 units in 2000 (1999:25,350); Göteborg produced 17,873 units (1999: 15,348); Irvine produced just 317 units in its final months (1999:2,090). In North America Volvo is represented by Volvo Trucks North America (VTNA). Until 1997 the operation was known as Volvo GM Heavy Truck Corporation, and was 87% owned by V olvo and 13% by General Motors. In 1997 Volvo took 100% control after the US company had run up substantial losses. In autumn 2000 Volvo launched a new model in North America, the VHD, which is intended primarily for the construction sector but also for refuse collection and other demanding duties. The VHD cost SKr900m to develop and is based on the VN range. Apart from western Europe and North America production occurs in the following countries (all production figures refer to 2000): Eastern Europe • Wroclaw, Poland - 1,110 units. 103 South America • Curitiba, Brazil - 4,555 units; • Lima, Peru - 243 units. Asia / Middle East • Teheran, Iran- 1,438 units; • Brisbane, Australia - 771 units; • Kuala Lumpur, Malaysia - 515 units; • Bangalore, India - 347 units; • Jeddah, Saudi Arabia - 188 units; • Bangkok, Thailand - 146 units. Africa • Gaborone, Botswana - 340 units; • Tunis, Tunisia - 210 units; • Cairo, Egypt - 52 units • Casablanca, Morocco - 20 units. During 2000 Volvo announced that it will end truck production at its Polis h plant which is located in Wroclaw. The plant will instead be used by Volvo's Construction Equipment division. Also during 2000 Volvo began assembling heavy trucks in Bangkok, Thailand. Production for the year was on target at 146 units of the FM model and is planned to increase to 350 units in 2001. Investment in the plant is just $1m. In December 2000 Volvo announced it is to open an assembly plant just outside Moscow. The joint venture with the Russian company JSFC Sistema will build a new facility in Zelenograd. The first trucks should roll off the production line in the middle of 2001. The plant's capacity will initially by 200- 300upa. Volvo claims to be the leading western brand in Russia's heavy truck market with over 6,000 vehicles registered. The company has twenty service centres in Russia. In March 2001 Volvo a new co-operative agreement with Saipa Diesel in Iran was approved by Iran's Ministry of Industry. The joint venture aims to produce 1,500 FH12 and NH12 models a year. Since the early 1970s, Volvo Trucks has supplied more than 40,000 heavy trucks to Iran. At the time of the RVI takeover Volvo said it planned to maintain separate brand names, and sales organisations, which sounds sensible enough; but also to maintain separate assembly plants tied to each brand, which doesn't. It is to be hoped that the idea of separate plants for separate brands was offered as a sweetener to ensure the deal was accepted. It should not become a dogmatic policy which inhibits the new alliance from extracting all the scale economy benefits possible. Those readers familiar with the car industry may be aware that PSA Peugeot Citroën has relatively recently abandoned its policy of making Citroën and Peugeot models in different plants, recognising that this was an unnecessary constraint which of itself, did nothing to preserve different brand identities. 104 NOTES UPON FINANCIAL STATISTICS As Volvo Trucks and Volvo Buses are only divisions of the Volvo Group, the disclosure of financial information is relatively limited. Nevertheless information such as revenue, operating income, R&D and capital spending is available for all years and this enables the following discussion to concentrate primarily upon the these divisions' performance and activities. Data sheets are presented for Volvo Group and Volvo Trucks and Buses. In the 1995 accounts, units sold refers to invoiced units rather than retail sales as previously. Data back to 1991 has been altered to conform. A new Annual Report Act became effective in Sweden on January 1, 1996 and has changed the presentation of Volvo's accounts from 1997. Most of the changes are presentational but in the income statement the cost of sales calculation is changed, resulting in different (higher) gross profit figures. Operating profit and other profit figures are unchanged. In Volvo's 1996 accounts it published an income statement showing 1994, 1995 and 1996 data in conformity with the new standards and this data has been adopted in the appended data sheets. Beginning in 1999 Volvo adopted new Swedish accounting standards on the treatment of tax. The tax and net profit data for 1997 and 1998 has been restated.