Changes at VAG; Part 1

Source:  Autocar

As I’ve suggested elsewhere, expect the changes at VAG to have two components:

  1. Limiting the damage to VW the company as much as possible, obviously.  In the form of ceremonial lopping off of heads to calm the baying hounds at the door.  It will also include rationalising the balance sheet as much as possible.  This latter needs doing, the VAG balance sheet has become bloated, partly because of the dominance of the IG Metall union in everything the board does (through it’s “unique” governance structure) but also because of lax discipline.
  2. Remaking VW the brand.  This will involve bringing in new people and new blood.

One of the first moves in the latter, according to  Autocar:

Lamborghini boss Stephan Winkelmann is set to leave the Italian supercar brand and join Audi’s Quattro GmbH division, according to reports in Italy.

Winkelmann, 51, has guided Lamborghini through the past decade under VW Group ownership – although he has previous experience with Fiat in Austria, Switzerland and Germany.

Reports in the Italian media suggest that Stefano Domenicali – the man who led Ferrari’s Formula One team between 2007 and 2014 – is being lined up to replace Winkelmann at the helm of Lamborghini. Domenicali is already employed by the VW Group; he joined Audi in October 2014, sparking speculation that the German brand was lining up an F1 entry.

Quattro GmbH would be a return to relatively mainstream products for Winkelmann, even though the Neckarsulm-based company produces relatively high-end, niche versions of Audi models

This is pretty good news for Audi fans.  I don’t personally like Lambo’s but they have become drive-able supercars under Audi tutelage.  And Quattro GmbH makes proper fast cars:  all the RS and S models, and the divine (much better than the Lambo) R8.  The RS and S models (like the Audi’s they are based one) were becoming a bit staid.  Maybe Stephan will shake things up there.

As for VAG going back into F1…that would be a good thing but I hope it won’t be led by Stefano!  Just look what he did at Ferrari!!

Eugene Kleiner’s legacy

Eugene Kleiner

When the first techs were essentially creating the myth of Silicon Valley from whole cloth, there wasn’t even established science let alone the whiff of markets. The Economist‘s obituary of Eugene Kleiner gives an idea how these guys got into this [emphasis added]:

HAD you visited the Valley of Heart’s Delight, south of San Francisco, in the 1930s, you would have found a pretty place of plum and walnut orchards. …Seventy years later, the valley contained 7,000-odd companies working in electronics, biotech and their offshoots, with 11 more springing up every week. Yet this most recent industrial revolution, like earlier ones, depended on the chance combination of three elements: the scientist with his invention, an entrepreneur to market it, and an investor willing to risk his money.
Chance and genius collided to create something so much bigger than the sum of their parts.  Because, after succeeding in creating Fairchild Semiconductor (refugees from which later formed Intel), Kleiner got into the business of creating more technology companies.  The Economist again:

By 1972, Mr Kleiner had plenty of cash. He also wanted to become a venture capitalist himself. The breed was still rare, and even rarer in the guise Mr Kleiner had in mind: a “technologist” who was involved and got his hands dirty, as well as simply writing cheques. He was never interested in enterprises that did not relish this approach. But in partnership with Thomas Perkins, and later in the firm of Kleiner, Perkins, Caufield & Byers, he gave the starting push to more than 350 companies.

Eugene Kleiner is now long gone but the company, KPCB lives on, counting twitter, google, amazon, uber, etc. in its portfolio.  But I wonder how Kliener might assess what he would see now.  Bob O’Donnell says
Many technology companies, and the tech industry as a whole, have gotten incredibly arrogant.
… Everywhere you turn, there are people in tech describing how they are completely reinventing businesses or business models or ways of doing business.
…only when tech folks have brought their particular form of magic to other industries, such as transportation and logistics, are they deemed worthy of thinking, talking, or writing about. (Uber, anyone?)
The common assumption behind these, and many other, examples seems to be that only people in tech can really figure these things out.
While tech has become arrogant, the investors have thrown away Eugene Kleiner’s probity & technical expertise, fully upending the koolaid jar into their maw.
“Somebody posted too many party fliers.” says Mark Suster,
The uninvited crowds have all turned up. The people here don’t respect your parents’ furniture, are throwing beer cans in your back yard and there’s a dude passed out face down in your sister’s bedroom. About an hour ago he thought he was invincible. That he defied the laws of gravity. He turned up for the fun but went too hard, too early.
Mark blames unicorns and the
entire bullshit culture of swashbuckling startups who define themselves by hitting some magical $1 billion valuation number and the financiers who back them irrespective of metrics that justify it.
 What he is decrying is what I myself find distasteful and quite terrifying.  I have met and have been told of many a “successful entrepreneur” whose only measure of spectacular success has been that he has raised a shitload of money from a boatload of VC investors.  The products themselves are not much more than a GUI and an “app.”
Silicon valley is now Silicon ValleySilicon_valley_title the TV series:  life become art become parody.  Everyone I know in technology from investor to inventor winces in some version of PTSD whenever the series is mentioned.  I wonder what Eugene Kleiner would make of it all.

The VAG saga

VW van front

VAG confess they made a mistake trying to grow the US diesel business.  According to Jones Day,

early research pins the start of the problem in 2005. That’s when VW wanted to promote more diesel models in the US, but the automaker didn’t have a way for the EA189 engine to meet nitrogen oxide requirements here within the budget. VW created the software defeat device to get around the issue.

Of course, the obvious question follows: can you play this any other way than a straight short?  I think we can make the case for a short to medium term VAG (VOW:GR) short; this dagger may have a bit more to fall.  However, as we make money on the short (though caution, I’ve always found VAG to be a difficult one to short/long, it’s such a huge XETRA component that other news always screws things up), there are some things to think about

  1. Eventually,VAG will turn around.
  2. I never liked VAG group’s obsession with being number one.  Toyota always tries to get away from the “largest carmaker” label as fast as possible ever since that was first bandied around.  With good reason:  being big is about the ego and that always makes for stupid decisions.
  3. VAG wanted to be the biggest, so they went more for volume, so they went for the TDI 4 (never mind that the margins on those cars are a paltry 2%), and so on…
  4. The cars got boring (and I say this as a proud former owner of blisteringly fast A4 & S6 Plus Quattros).  For future reference, whenever a large automaker with a stable of brands goes to anything remotely resembling common platforms, the cars will get boring at the very least and the company will get into trouble at the very worst.
  5. So how will VW turn around?
    1. VW is Germany, this company and the country dug themselves out of the rubble of WWII, they will overcome this one too.
    2. The brand will morph, the Audi and Porsche brands will be less affected.  I’d say, if a gun were put to my head:
      1. There will be a few more Porsches, going with Lambo’s, Bentley and Bugatti (but that doesn’t count)
      2. There will be a lot more Audi’s, especially smaller ones, those use the VW small car platforms, so there is a cost saving
      3. There will be a lot fewer VW’s, if not for internal reasons than for the simple reason that the brand is tarnished
      4. There probably won’t be a lot of diesels around.  Certainly not at LeMans next year:  I’d say Porsche will certainly be there with their hybrid, not sure about Audi because they use Diesel.  So I guess you can put money down for Porsche winning LeMans next year. 🙂
      5. Winterkorn was too closely tied to the mooted Red Bull F1 deal, so that’s a loss for now.  But VW needs F1 more now than it ever did.  F1 cars use petrol after all.  And they are now on an efficiency kick.
      6. All VAG cars had become boring.  Expect that to change.
  6. So how do you play it?
    1. Wait for the bottom.  I’d say the bottom would be when:
      1. Short interest starts dying down
      2. When its market cap gets close to NAV + cash
    2. Buy
    3. Hold.  VAG is a long play, it will require engineers to change a lot of things and someone with a lot of balls to take a machete to the group.  That kind of patience is for engineers, not traders.

And thank God for that…

Alibaba and Casino Capitalism

Note:  I wrote up these notes in 22/09/2014 when my partner asked me if we should invest in Alibaba’s IPO.  I figured I should blog this in, just for history…


You’re kidding, right?  How can this stock (BAB:US) get a huge pop on the first day?  That on a valuation that some people were already considering rich? It started at USD 92.7 at 11:53, popped to USD 99.4 7 minutes later and ended the day at USD 93.89, on the first day!!

The only smart people in BAB:LN are the ones who got the pre-IPO allocations and then got out (or are in the process of getting out) ASAP.
FT Alphaville calls it a “Cayman e-commerce site.”  Not surprising considering the SEC docs for Alibaba Group Holding Limited.
You’re buying shares of Alibaba Group Holding, which eventually ends up with “contractual arrangements” with the underlying companies everyone is so excited about.  You don’t get a say in anything the company (read Ma) want to do.

The FT had an excellent background story that should be enough to lay greedy hearts to rest:, the online business which had been listed to great fanfare in Hong Kong in 2007, was being delisted nearly five years later.

…The business plan for, a trade website connecting Chinese exporters with foreign customers, had not worked, but a new economic opportunity was emerging. China’s economy was turning from an investment-driven export machine into a liberalising, consumption-driven economy. Alibaba had a chance to be at the centre of it.

That’s the hope everyone is buying into.  But is that going to happen fast enough and in great enough rates to justify BABA valuations? And where is the guarantee that this company will be at the center of it all?

… Total gross merchandise value traded on the two websites increased from Rmb131bn in the three months to end June 2011 to Rmb501bn in the three months to the end of June 2014.”

But that’s not as rosy as it sounds:

…some experts question the numbers Alibaba has published on gross merchandise value.
Anne Stevenson-Yang, the founder of J Capital Research in Beijing, said the rapid growth in Alibaba’s GMV, which it said rose 63 per cent from 2012 to 2013, is not supported by evidence. A study by J Capital of Chinese publicly listed retail companies, meanwhile, revealed a growth rate not exceeding 6 per cent, and online sales were growing slower than offline.”

Some believe ecommerce as a whole is overstated in China. Alibaba’s estimates of its own size put the total value of the ecommerce market at $300bn last year, which is larger than the US ecommerce market. Meanwhile, the size of China’s GDP is just over half that of the US and consumption as a percentage of GDP is under half that of the US.

…Alibaba has also gone on a shopping spree in the past year, spending over $5bn to buy stakes in more than 100 companies, such as Autonavi, a mobile GPS mapping software and UC Web, a popular mobile browser.”

…Some of the sons and daughters of China’s ruling elite managed shareholdings stakes via a team of banks and investment firms that took small stakes in 2012 that are now worth billions of dollars: Boyu Capital, Citic Capital Holdings and CDB Capital, the China Development Bank’s private investment arm.”

…Due to restrictions on foreign ownership, investors in China’s technology companies do not actually own shares in the license-holding company but in an offshore registered VIE, or variable interest entity, that simulates ownership via a series of contracts and directs cash flows to investors.

That presents two nightmare scenarios:

  1. insiders could make off with the company’s assets by simply removing them from the VIE; or
  2. China’s courts, which have turned a blind eye to the practice for more than a decade, could suddenly strike down the structure

The first variant is especially acute given Alibaba’s history with Alipay. Add to this the complicated shareholding structure and the risks are obvious.

I think I’ll pass…

Looks like Barrons has discovered Bangladesh…

Bangladesh RMG Factory

Barrons’ Devendra Joshi seems to have discovered Bangladesh.  Cue rueful smiles from anyone who’s tried to sell Bangladesh and been rebuffed by people who would  have rather invested in (I shit you not):  Kurdish oil companies, Ukrainian debt, Greek debt…

A lot of the stuff he says are blindingly obvious to regular denizens of frontier markets.  Nuggets like,

Remittances provide a source of income for many families…

…with a gross national income per capita of USD1,046, Bangladesh broke into its “lower middle-income” category in July 2015. …

But I have more fundamental problems with this report:

  1. He is focusing on equity plays based on the undeniably good macro story.
    1. I have found it well nigh impossible to properly correlate the two as an investor.  I think there probably still are quotes lying around from Soros rueing how difficult that play really is.
    2. It is actually doubly difficult in Bangladesh because the equity market doesn’t reflect the powerhouses of the economy.  The really well-run companies are very closely held public or completely private.
    3. Oh, and let’s not forget that the banks, some of the largest bloc holders of equity, are being forced to offload their equity holdings per Basle rules.
  2. He is talking up the consumer story.  Everything consumer I have found in Bangladesh is focused on the affluent or super-affluent consumer in Bangladesh.  The few who do cater to middle class consumers (where the real long money is) are
    1. private like Square Food and Beverage.  Great products and consumer brand image.  You could play through the “parent” Square Pharmaceuticals but that is a market darling and they don’t need outside money.
    2. bloody dangerous like Pran Foods.  Hugely profitable, a darling of foreign investors like the IFC but a disaster waiting to happen, considering huge debts and a tendency to play fast & loose with product quality
  3. He does like the banks.  That’s not such a bad idea, only (as he rightly points out) they have looming NPL bombs.  However, the good banks (and the bad) are running up against Tier I & II stoppers and quiet a few of them have asked us to raise funds.  You’d be surprised how may people are interested in that kind of paper….
  4. He doesn’t mention the RMG sector much.  Ready Made Garments (factory disasters notwithstanding) manufacturers are the country’s growth engine.  They are almost all privately held and, unless you want to buy Square Textiles, the public ones are not worth the time.  Just one, Mohammadi Group run by Rubana Huq, has revenues in the USD 200 million range and is completely private.

Of course, if you really want to make money in Bangladesh, you have to do it the “old fashioned way:” by investing in proper operating companies that make real products.  Call me if you care…

Background: Buffett and Investing in Indian Companies

Personal Note:  As can probably be guessed from the paucity of recent posts, I have been rather busy trying to set up a new partnership.  So, though there have been a lot of things that have caught my attention, I haven’t been able to post much.  I decided to take the medicine and do a few short posts when I get the time.

James Lamont had an interesting piece — quite a while ago — during Warren Buffett’s visit to India.  Buffett was really there with Gates for his philanthropic work Continue reading “Background: Buffett and Investing in Indian Companies”

Background: What is the Intrinsic Value of a Financier?

The question actually came to me last weekend at a party when an Englishman I was talking to said “Good Riddance” on hearing that BlueCrest had moved headquarters from London to Geneva.  I actually partly agree — probably for the first & last time — with Michael Farmer

“If one is a citizen and your country’s having a tough time, you pay your taxes and that’s it – although rather reluctantly if they are not spending it wisely,” Mr Farmer told the Financial Times. Continue reading “Background: What is the Intrinsic Value of a Financier?”