24 September 2015
Week in Brief:BUSINESS AND THE CITY
BREAKDOWN: The extraordinary confession by Volkswagen Group that it had carried out sophisticated amendments to the software which governs its car engine management systems, so that when the engine is under test it will reduce emissions to meet USA standards – which the engines in normal use would not have done – caused the Volkswagen share price to plunge over 40% since the testing news broke. The USA Environmental Protection Agency has ordered VW to recall 500,000 cars in the USA to change the engine programming and similar action may follow in other markets. Not only does the company face massive fines in the US and European markets, possible class actions from disaffected car owners, and regulatory action in its home market, it has undone, at a tweak, efforts over many years by VW to build its green credentials. The effect on sales of its VW, Audi, Seat, and Skoda models seem likely to suffer, not just in the short run, but also for the future.
It may of course be that VW is not the only car manufacturer who has been tinkering with software – a symbol of the increasingly complex technology in the automobile industry – and thus that many car makers will end up with a similar issue. Certainly the market rapidly picked up the potential and most car manufacturers saw share prices fall, as did those of suppliers to the industry. But at the moment it seems to be Volkswagen Group’s Perrier moment (the sparkling water company was found to have traces of benzene in its water and suffered a disastrous fall in sales and loss of independence two years later), and it seems likely that several executives will be seeking new employment opportunities soon. Given the importance of motor manufacture in the modern economy, the knock on effects of all this could be very damaging to national economies worldwide.
DIGGING IN: It might be difficult to believe in the UK, with new building sites appearing every day and the skyline dominated by construction cranes, but worldwide the construction industry is suffering a rapid slow down. JCB, the Staffordshire based manufacturer of the earth moving equipment of the same name and owned by the Bamford family, is always a good lead indicator of how conditions are in the overseas building business, the company being one of the UK’s top exporters. They reported this week that demand for machinery is well down in the first half of this year – 70% in the Russian market and nearly 50% in China. Also suffering is South America and even some European builders – France has seen a 25% drop in demand. JCB are looking to make a cuts in their workforce of about 400 people through a series of voluntary redundancies in their international operations. The company says that it sees no immediate reversal of the position and that further redundancies may have to follow.
FOR SALE: The Redcar Steel works, which we examined in the last issue in our review of the problems of the UK steel and iron industry, was closed by its Thai owners, Sahaviriya Steel Industries (“SSI”), at the end of last week. SSI said that it could no longer sustain the financial losses of the plant, which gives jobs to 2,000 people in an area of high unemployment. The plant is currently “paused” – which means that it can be fairly quickly restarted, while SSI tries to find a buyer for the business. Most workers are being kept on for the time being, but the owners say that if no solution is found by the end of September then they will start to make redundancies and to close the plant fully. The UK business owes US$790m to its four UK banks, who have announced they are writing the loans down by US$750m to reflect the likely value of a sale on a non-continuing business basis. The UK government has said that it is unable to act because of EU rules on state aid for business. Local union leaders have called however for government intervention, citing the potential costs of cleaning up pollution on site, and also further damage to the local economy if the port of Redcar (also owned by SSI) is closed by the company.
NOT FOR SALE: Zurich Insurance has announced that it is not proceeding with its purchase of RSA Group, the UK domiciled insurance company led by Stephen Hester (ex Abbey National, British Land, and then Royal Bank of Scotland chief executive). RSA was a struggling business turned around by Mr Hester in 18 months since his arrival last year. His actions included a £775m rights issue and sales of underperforming divisions around the world, so that the business is now focussed on the UK, Canada, and Scandinavia, but still large enough to maintain its place in the FTSE100. Its most public face is the motor insurer, More Than. Hester’s plan was to sell the business to another group and to move on elsewhere. Zurich was keen to buy but has found that its capital is been stretched by recent insurance claims, especially in relations to its business in China, which is still assessing claims for the massive recent industrial fire in Tianjin. The question will now be whether a new buyer emerges, or, if not, whether Mr Hester will prefer to continue enhancing the profitability of the smaller business, or to step aside for a new chief, happy to run the more mundane aspects of a modern insurer for the longer term, Hester now being regarded as more of a corporate recovery man.
BANKING IT: Berkeley Group has long been one of the UK’s most successful housebuilders, judged if not on size, then certainly on return on capital, and on returns to shareholders. The company is well known for its high quality housing delivered through its Berkeley brand in South East England and also through its St George brand in central London. It has long been led by founder Tony Pidgley who in his mid 70’s is still fully in command of his business, now quoted in the FTSE 100. His shareholders are enjoying a good run at the moment with all vital indicators pointing in the right direction and will doubtless not begrudge Mr P his annual bonus for 2014/2015 of £23m. It is hoped though that they will also not grumble too much about his long term share incentives which on present indications will give him 5 million shares, worth £177m when they vest in five years time. In the cyclical world of housebuilding five years is a very long time, but, in his forty plus years building Berkeley, Mr Pidgley has not called the market wrong so far.
OUT OF FASHION: So much in the fashion retail business depends on the latest season. The formerly sure footed judge of shopper’s whims, French Connection, led for many years by Stephen Marks, has been struggling for the last couple of years to get the right stock on its rails for its customers. Marks took drastic action two years ago by hiring a new merchandising team, which seemed to be working as the customers returned, but not for long; the first half of this year saw losses of £7.9m, up from losses of £3.9m in the first half of 2014. Retail is difficult at the moment – the bad weather has blown fashion strategies, wage costs go up as the minimum wage increases, and competition grows ever stronger. Marks says that the outlook for the second half should be better, with the new autumn ranges selling well. Here is one man not hoping for a hot dry autumn.
KEY MARKET INDICES: (at 22nd Sept 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.58% (steady); 5 year 1.37% (falling).
Euro€: 1 mth -0.10% (steady); 3 mth -0.6% (steady); 5 year 0.25% (falling)
US$: 1 mth 0.47% (rise); 3 mth 0.43% (steady); 5 year 1.52% (steady)
Currency Exchanges:
£/Euro: 1.38, £ steady
£/$: 1.54, £ steady
Euro/$: 1.18, € steady
Gold, oz: $1133, steady
Oil, Brent Crude barrel: $48.92, slight rise
Wheat, tonne: £111, down
London Stock Exchange: FTSE 100: 5,935. FTSE 350: 3,321
Briefly: It is a steady time on the markets although volumes are up in most trading. The LSE which was steady is showing the impact of the Volkswagen news and fears that the problems of diesel engine management systems could be widespread – the UK has a major exposure to motor car assembly and specialist components.
