LONDON Europe's auto bosses are finally getting serious about creating shareholder value.
They have little choice. Automotive stocks have been punished along with other 'old economy' manufacturing shares on global markets in the past year. On average, European carmakers returned a lackluster 15.7 percent to investors in the 12-month period through March 31, according to the first Automotive News Europe/PricewaterhouseCoopers Total Shareholder Return Index.
Retailers and suppliers did even worse 8.3 percent and a negative 5.6 percent respectively.
That compared with a 55.6 gain for the German DAX index, 52.7 percent for the CAC40 in France and 9.9 percent for London's FTSE 100.
Measured over three years, carmakers returned 50.5 percent to investors, suppliers 32.3 percent and retailers a negative 1.9 percent. All three sectors lag well behind the major European indices in the three-year period that ended March 31 152.6 percent for the CAC40, 121.6 percent for the DAX and 60.1 percent for the FTSE 100.
'European OEMs, suppliers and retailers have under-performed the [overall] market,' said Francis Drasar, Principal, Corporate Finance and Investor Services at PricewaterhouseCoopers. 'However, this hides the strong performance of some individual companies and in every segment the best performer has out-performed the [overall] market average.'
Big winners among automotive companies tend to be smaller, nimbler companies with hot products, efficient manufacturing, technology-oriented growth prospects and e-commerce strategies.
Parts makers do better if they have contracts to supply components on big-volume car platforms in the pipeline.
Retailers and suppliers with strong e-commerce strategies have been rewarded and companies with takeover prospects also get an added boost.
Still, automotive stocks have been getting little respect compared with other sectors of the economy. That was underscored last month when General Motors' stock price shot up on a report that Rupert Murdoch's News Corp. was interested in buying GM. In fact, Murdoch wasn't interested in the world's largest automotive business; he was attracted by GM's Hughes Electronics subsidiary.
DaimlerChrysler Chairman Jürgen Schrempp calls indifference to auto stocks 'a mood' among investors. 'There's nothing operationally we can do,' he said recently.
'This level of return is dispiriting given the relatively benign market conditions,' said Steve Utting, European Automotive Leader in Corporate Finance and Investment Banking Services at PricewaterhouseCoopers. 'Car sales have been going well. The big issues that need to be addressed are over-capacity, efficient manufacturing and consolidation. We see the [number of] vehicle brand owners declining to six or seven.'
Carmakers have begun working to attract investors through more aggressive financial engineering. Many are trying to unlock the kind of value that today's investors seem to prefer at least before technology shares began plummeting over the last month.
Exploiting their own web-based businesses is one tactic. Schrempp said DaimlerChrysler wants to persuade investors that it isn't just an old-style car producer, but a company that can use the Internet to increase shareholder value.
The new e-purchasing exchange formed by General Motors, Ford and DaimlerChrysler will be by far the world's largest Internet business.
'It clearly has a lot of value that isn't reflected in our current share price,' said Henry Wallace, Ford's chief financial officer recently. 'We have to look at that, whether it means making it an IPO (initial public offering) or whatever. But more than that, it is the whole e-commerce area. The question is how do you leverage this value?'
Meanwhile, there are signs of a change in the casual attitude European auto companies have shown towards shareholder value. Executives are beginning to tell their story to stock analysts. They are also implementing stock option packages for senior managers and buying back shares.
DaimlerChrysler has been influenced by the former Chrysler's devotion to shareholder issues. When former U.S. General Electric vice-chairman Paolo Fresco was named chairman of Fiat SpA in 1998 he quickly instilled a GE-style shareholder value focus. One of Fresco's first moves was to launch stock options for senior managers.
Even Volkswagen has changed its ways. Despite steadily rising market share, VW's stock has dropped dramatically over the past year. It finished at the bottom of the Automotive News Europe/PricewaterhouseCoopers shareholder value rankings for carmakers. VW declined 25 percent in the 12 months ending March 31 and was virtually unchanged over three years
Now VW executives said they want to better explain the company's platform strategy to equity analysts. One idea is to have analysts drive VW cars in an effort to convince them that common platforms don't mean identical cars.
VW also announced earlier this year that it would switch from German accounting standards to International Accounting Standards by 2001. The move was made to deliver more transparency to financial markets.
'There has been historically insufficient focus on shareholder value issues in Europe,' said Utting. 'The industry hasn't communicated well enough about how it is going to develop. But that is definitely changing. There is better awareness now of some of the techniques. The leading companies are addressing the fundamental issues.'
But are investors taking notice, even when auto companies communicate with them?
Yes, said Utting.
'The fact that there is such a substantial spread in the returns of auto companies indicates that the market recognizes what some companies are doing,' he said.
Some analysts think that even Volkswagen's shareholder value prospects are good.
'VW has three of the largest six platforms in the world in volume and that should be a positive factor going forward,' said Utting. 'The global growth on these larger platforms is going to be greater than the growth rate on smaller platforms.'