"Confessions of a Capital Junkie" by Sergio Marchionne

Ketz · 1st June 2015, 23:37

Sergio Marchionne is an unusual chief executive, a man who is not afraid to talk the language of investors and is open about the problems confronting not only his company, but also the entire automobile business.

While he has been arguing that case for a while, sometimes in public and sometimes with other auto company executives, he crystallized it in a presentation he made in an analyst conference call, titled "Confessions of a Capital Junkie".

SM_Fire_investor_presentation.pdf

In the presentation, he argues that the auto business has not generated its return on capital over its last cycle and that without significant structural changes, it will continue to under perform. He then diagnoses the reason for the under performance as over investment in R&D and capital costs, with companies duplicating each other's efforts. He concludes with the remedy of consolidation, where with mergers and joint ventures, companies could co-operate and reduce their capital costs, and asks analysts and investors in auto companies to apply pressure for change.

A very insightful read.

alpha1 · 2nd June 2015, 12:56

I can see the main issue is that market is not expanding at the same rate as these guys have ramped up their production capacities (or in other words their investments and recurring costs). Which leads to a downwards price pressure.

Investment in R&D is to gain a differentiation edge over the other competitors. Unfortunately since everyone is doing it, no one really benefits from it (in terms of better prices or higher volume or both compared to other competitor).

But it is not going to stop. Whether Fiat-Chrysler likes it or not.

What he speaks about consolidation is the only way out, but that will happen naturally, organically - coming about when the firms with lower ROCE or ROIC start dying therefore leaving less sellers in the market or getting acquired by the dominant player (who would still be making some money more than the cost of capital) and find these dying firms a bargain.

vipul_singh · 2nd June 2015, 14:22

@Ketz: I cant thank you enough for sharing this. Wish there was a "+1000" button next to your post. This fully explains SM's approach to global auto OEMs (including GM) for consolidation.

Some of the juicy details (including components of product development costs) are a delight for enthusiasts!

1st June 2015, 23:37	#1
Ketz Newbie Join Date: Jun 2010 Location: Pune Posts: 22 Thanked: 41 Times	"Confessions of a Capital Junkie" by Sergio Marchionne Sergio Marchionne is an unusual chief executive, a man who is not afraid to talk the language of investors and is open about the problems confronting not only his company, but also the entire automobile business. While he has been arguing that case for a while, sometimes in public and sometimes with other auto company executives, he crystallized it in a presentation he made in an analyst conference call, titled "Confessions of a Capital Junkie". SM_Fire_investor_presentation.pdf In the presentation, he argues that the auto business has not generated its return on capital over its last cycle and that without significant structural changes, it will continue to under perform. He then diagnoses the reason for the under performance as over investment in R&D and capital costs, with companies duplicating each other's efforts. He concludes with the remedy of consolidation, where with mergers and joint ventures, companies could co-operate and reduce their capital costs, and asks analysts and investors in auto companies to apply pressure for change. A very insightful read. Last edited by Rehaan : 2nd June 2015 at 17:28. Reason: Adding PDF as attachment. Thanks!
	(6) Thanks

2nd June 2015, 12:56	#2
alpha1 Senior - BHPian Join Date: Apr 2007 Location: LandOfNoWinters Posts: 2,095 Thanked: 2,605 Times	re: "Confessions of a Capital Junkie" by Sergio Marchionne I can see the main issue is that market is not expanding at the same rate as these guys have ramped up their production capacities (or in other words their investments and recurring costs). Which leads to a downwards price pressure. Investment in R&D is to gain a differentiation edge over the other competitors. Unfortunately since everyone is doing it, no one really benefits from it (in terms of better prices or higher volume or both compared to other competitor). But it is not going to stop. Whether Fiat-Chrysler likes it or not. What he speaks about consolidation is the only way out, but that will happen naturally, organically - coming about when the firms with lower ROCE or ROIC start dying therefore leaving less sellers in the market or getting acquired by the dominant player (who would still be making some money more than the cost of capital) and find these dying firms a bargain. Last edited by alpha1 : 2nd June 2015 at 13:00.
	(1) Thanks

2nd June 2015, 14:22	#3
vipul_singh BHPian Join Date: Sep 2005 Location: BLR / Lucknow Posts: 595 Thanked: 833 Times View My Garage	re: "Confessions of a Capital Junkie" by Sergio Marchionne @Ketz: I cant thank you enough for sharing this. Wish there was a "+1000" button next to your post. This fully explains SM's approach to global auto OEMs (including GM) for consolidation. Some of the juicy details (including components of product development costs) are a delight for enthusiasts!
	() Thanks