EMERGING MARKETS Archives

29/06/2022by EOS Intelligence EOS Intelligence No Comments

Can 3D Printing Move Beyond Design Customization in the F&B Industry?

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First conceptualized over 40 years ago, 3D printing is still rapidly developing. The technology has been used in various industries ranging from 3D-printed human organs for implants to printing numerous customized products as per the customers’ requirement. There are several interesting applications of this technology in the Food & Beverage (F&B) industry as well. While currently they mostly pertain to creating visually complex geometrical food structures, there are also ongoing innovations with regard to using 3D printing for nutritional controllability and sustainability. However, most of these projects are one-off and 3D printing still remains a niche application in the F&B space.

3D printing is an evolving technology, offering F&B industry players benefits such as efficiency and customization. 3D printers are mostly used by F&B producers to make foods using the extrusion technique. In this method, the edible is in the form of a paste and is extruded from syringe-like containers onto a plate based on a 3D computer model. The process is similar to icing a cake using a piping bag, except with robotic precision, as the printer layers edible filament in desired shapes.

Traditionally, 3D food printing has been used to architect intricate shapes and designs that are difficult to achieve manually. It has been mostly confined to desserts such as chocolates and sweets as 3D printing offers huge potential for customization.

That being said, there is a gradual shift to adopt this technology in preparing more complex foods such as 3D-printed pizzas, spaghetti, burgers, and meat alternatives. For instance, since January 2022, BBB, an Israeli food chain has been serving 3D-printed burgers prepared from a mix of potato, chickpea, and pea protein. Similarly, since 2021, companies such as Spain-based Novameat and Israel-based Redefine Meat have been preparing 3D-printed beef steaks and other products using unique plant-based compounds that taste like blood, fat, and muscle that make up traditional meat flavors.

Printing beyond customization

While currently the main advantage of 3D printing in food is its ability to customize complex shapes and designs (thereby making it popular for creating chocolates, cakes, and cookies), it is also extending to customizing the level of nutrients in a meal. 3D printing offers the possibility to produce high-quality food concepts such as developing personalized meals by adding specific nutrients or flavors, ultimately giving more control over the food’s nutritional and flavor value.

With this idea in mind, a Netherland-based Digital Food Processing Initiative (DFPI) is testing this concept and trying to come up with a flexible food production system using 3D printing technology that will allow personalizing food at any time based on individual dietary choices. The collaboration is an ongoing project between the Dutch institution, Wageningen University & Research (WUR), global food and beverage companies GEA Group, General Mills, Tate & Lyle, and pharmaceutical company Solipharma B.V., together with Ministerie van Defensie, and a Netherland-based research organization, TNO, whose aim is to bring commercially viable personalized food products to the market, especially for military personnel and COPD (Chronic Obstructive Pulmonary Disease) patients.

Another potential use of 3D printers is to reduce food wastage. The Netherland-based food-tech startup, Upprinting Food, which specializes in recycling organic food waste through 3D printing, has offered design services to various chefs and is also training restaurants to utilize their 3D printers to reduce food wastage. The company specializes in creating dishes out of any food left at restaurants and currently focuses only on high-end restaurants. They plan to expand their work towards retail and wholesalers in the future to reduce food wastage on a larger scale.

While 3D food printing seems to have a lot of unique uses, commercializing 3D-printed foods on a large scale has always been a challenge. For instance, printing a small piece (5x5x5 centimeter) of a food item takes around four to five minutes. Thinking about producing large-scale printed food would be difficult at this rate. In 2015, a project called the PERFORMANCE project (PERsonalized FOod using Rapid MAnufacturing for the Nutrition of elderly ConsumErs ) was shut down because it could not produce at a scale large enough to provide meals at nursing homes. The project focused on creating customizable meals for the elderly who had difficulties in chewing and swallowing. Thus, while customization of food products has immense use and strong growth potential in theory, it still needs a lot of work on improving speed and costs to facilitate its commercialization and feasibility.

Despite several advantages and functionalities, the market does not seem to use 3D printers for printing food as much as it could. It is mostly limited to confectionaries and very high-profile restaurants where quantities are small and prices are high. For instance, Natural Machines 3D printer, Foodini, is being used at Spain-based Michelin-star restaurant, La Enoteca, to prepare seafood, where food puree is printed into a flower-like shape, topped with caviar, sea urchins, hollandaise sauce, and carrot foam.

As per industry experts, 3D printing in F&B is still at an initial stage of development and will be more accepted once people see it being extensively adopted at restaurants. For now, 3D printing can be used to produce food with unique functionalities related to shape, taste, and texture such as printed pasta shapes of unique designs as offered by Italian food giant Barilla, through its spinoff business BluRhapsody as well as 3D-printed candy selfies by Magic Candy Factory, a spinoff of German candy manufacturer Katjes.

EOS Perspective

At present, 3D printing in food is largely limited to confectionaries. It is an evolving technology that offers considerable benefits of saving time and improving efficiency. It can potentially bring other advantages to the table, including reduction of food wastage, but such applications still require more research, investment, and trials, as well as attempts of expansion across food service formats, including small eateries and larger restaurants.

A 3D printing machine requires skill and appropriate training to print a meal. 3D food printing machines may not seem attractive for personal usage at this point but several food and beverage industry players have already moved in to adopt and exploit this innovative technology for various customized and attractive food options, although still largely at a pilot or experimental scale.

Most 3D food printers currently only cater to single restaurants or personal kitchens and are not very popular. For the technology to enter mainstream use and become attractive to broader audience, the printers need to be able print at large volumes. At the moment, there is a huge gap between what could be achieved with 3D printers in the F&B space and what has been actually tested and implemented. While several companies are working towards using this technology in innovative ways, there is a large space open for market disruption.

27/05/2022by EOS Intelligence EOS Intelligence No Comments

Commentary: India-Afghanistan Trade Hangs in the Air after Taliban Takeover

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Over the past two decades, India has invested substantial political, diplomatic, and economic capital to foster good relations with Afghanistan, especially since the fall of the Taliban in 2001. Trade has been one of the key components of these relations, with India being the largest market for Afghanistan’s exports in South Asia, accounting for 41.2% of its global exports in 2020. In 2021, Afghanistan’s exports to India were US$509 million, while imports from India constituted US$825 million.

However, the Taliban takeover of Afghanistan in August 2021 has impacted the India-Afghanistan relations on multiple fronts, especially damaging trade relations between the two countries. According to the Federation of Indian Export Organization (FIEO), the Taliban stopped all imports and exports from India through transit routes in Pakistan, also called the International North-South Transport Corridor (INSTC), the main trade pathway.

Textile industry

The route blocking has impacted many businesses across India. One of the sectors witnessing direct repercussions has been the textile industry. The halted trade resulted in stock worth US$540,000 being stuck as corporate bank holders in Afghanistan were not able to withdraw money and do any electronic transactions, as per the Afghanistan Central Bank’s order. Due to this, over 100 traders in Surat, Indian textile hub, were hit hard with delayed payments.

Sugar and dry fruit

India’s sugar exports to Afghanistan have been hit as well with Indian merchants reporting cancellations of orders as a result of the changed rule in Afghanistan. Indian traders were already treading cautiously about exporting to Afghanistan, insisting on advance payments due to the looming uncertainty and restricted trade routes. Following the political upheaval in Afghanistan, Indian sugar exports came almost to a halt in September 2021. Indian food ministry seemed optimistic and expected the trade to resume under the new Taliban regime. However, it is still uncertain how this will unfold, especially in the face of sugar export restrictions introduced by India in May 2022 to ensure domestic availability and to keep the local prices in check.

The new rule in Afghanistan has not only affected Indian exports, but also imports, with imports of dry fruit seeing a particularly major blow as India receives 85% of its dry fruit from Afghanistan. With the disruption of shipments, dry fruit prices in India saw a considerable increase (around 30%), especially as the timing coincided with the festive season (from October to December) in India, a period with the highest demand for dry fruit.

The carefully-nurtured trade relations between India and Afghanistan have been gravely affected post the Taliban takeover and routes closure. As both countries are each other’s important trade partners, there is some hope that trade relations could resume over time, although it would be naïve to expect the matters to fall back to the state from before the Taliban takeover any time soon.

Pakistan routes issue

India had already faced problems routing its exports and imports to and from Afghanistan, as Pakistan repeatedly denied India’s access to overland trade routes with Afghanistan in the past. As a result, India sought alternative routes: one route through Chabahar Port in Iran and an air freight corridor. Although these are not major trade routes, the opening up of such alternatives allowed India’s exports to Afghanistan to be less dependent on Pakistan. Pakistan’s trade routes denials in the past could be somewhat seen as a blessing in disguise, especially in the face of the current INSTC block.

However, the INSTC continued to be the key route for India’s exports to Afghanistan, and its shutting also caused some drastic consequences impacting India’s trade with other countries. Not only was this route used to export products to Afghanistan but it was also a very important trade route for India to reach European and Central Asian markets and vice versa. Although some goods are still being exported through the international North-South Corridor and the Dubai route, the INSTC is the fastest connection to a range of international markets. The closure will continue to have impact on trade timelines and pricing as traders will have to resort to longer trade routes or trim the volumes of goods traded.

EOS Perspective

When and how India-Afghanistan relations could recoup is yet to be seen, and will depend significantly on the Taliban’s recognition as a legitimate government. While the Taliban may have gained military control over Afghanistan and stated that they want better diplomatic and trade relations with all countries, they are still struggling for global recognition and economic support.

While there is not much that India can currently do regarding its trade situation with Afghanistan, it can look at nurturing and developing relationships with alternative trading partners, especially that trade with Afghanistan is unlikely to return to the previous normal. The Indian government needs to work on policies to aid traders and improve relations with other countries, such as Bangladesh and Turkey, to attempt to fill up the void left by the Taliban upheaval.

27/04/2022by EOS Intelligence EOS Intelligence No Comments

Morocco’s Auto Industry Is in Full Gear

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Over the past few years, Morocco has established itself as a leading manufacturing hub for automobiles in Africa, surpassing South Africa as the biggest exporter of passenger cars on the continent. The North African country is well-placed geographically as well as economically (thanks to the African Continent Free Trade Agreement) to export cars to European markets, especially France, Spain, Germany, and Italy. While the market continues to grow and gain importance among auto manufacturers, it is to be seen if it can disrupt Asian auto manufacturing hubs in the future.

With the capacity to produce over 700,000 vehicles per year and employing about 220,000 people in the sector, Morocco has gained mass appeal as a leading automotive manufacturing hub in the African region. Several international auto manufacturers, such as Renault, Peugeot, and Volkswagen have set up units in Morocco and have been growing their exports from the market. The Moroccan government signed 25 separate trade agreements with several auto and auto parts manufacturers across the EU and the USA and this is estimated to drive the Moroccan automobile market to be worth US$22 billion by 2026. Moreover, the government has stated that it wants to reach a production capacity of 1 million vehicles by 2025.

Investments

Several companies have established presence in Morocco as a cost-effective gateway to the European markets, the largest of them in terms of production numbers being Renault. Renault was the first global auto manufacturer to enter Morocco in 2012 and has plants in Tangier and Somaca (Casablanca). The plants have a respective capacity of about 400,000 vehicles and 85,000 vehicles annually. The automaker has already exported more than 1 million vehicles from its Morocco plants and has further signed agreements with the Moroccan government to expand auto production in the country.

French automaker Peugeot (Group PSA) is another major automobile manufacturer in this country. In 2019, Peugeot opened a US$600 million plant in Kenitra, north of Rabat, which produces the Peugeot 208 at a capacity of 200,000 vehicles annually.

Other carmakers operating in Morocco include Volkswagen, which shut down its plant in Algeria in 2019 and moved it to Morocco. In a similar move, in 2021, Korean automobile giant, Hyundai, decided to suspend its production in Algeria and move it to Morocco, cementing Morocco’s position as the go-to manufacturing hub for automobiles in North Africa.

In addition to the presence of several leading car manufacturers, the country also houses a large number of parts manufacturers and has successfully leveraged backward integration. An American player, Lear, operates 11 production sites here for the production of automotive seating and electrical systems. Similarly, Chinese aluminum automotive parts manufacturer, Citic Dicastal, set up two plants in the Kentira region for the production of six million aluminum rims annually that it aims to supply to the Peugeot plant. In addition, auto part companies such as France-based Valeo, US-based Varroc Lighting Systems, and Japan-based Yazaki and Sumitomo also established presence in Morocco.

Morocco’s Auto Industry Is in Full Gear by EOS Intelligence

Apart from large international parts manufacturers, the country also houses several local players that support and provide parts to the automobile giants. The government has been promoting partnering with local suppliers to provide a boost to the domestic industry. In 2021, Morocco’s leading automobile manufacturer, Renault, entered into a strategic agreement with the government to increase local sourcing to US$2.9 billion by 2025 (from 2023 forecast of US$1.7 billion) and increase local integration to 80%, up from 2023 forecast of 65%.

While Morocco continues to cement its place as a leading auto manufacturing hub in Africa, it is simultaneously aiming to position itself as a preferred hub for EV and EV component production. In 2017, the government signed a deal with a Chinese electric automobile manufacturer, BYD Auto, to build a new plant in the Tangier region. The plant will be spread over 50-hectare and will employ about 2,500 personnel. However, its opening is facing delays and no date of completion has been announced yet.

In October 2021, a leading EV manufacturer, Tesla, deployed its first two supercharger stations in Morocco, marking its first foray into the African continent. While the EV giant has not announced its formal entry to the market yet, usually deploying supercharging stations and service centers has been its first step in entering a market.

In addition to this, in 2021, STMicroelectronics, an EV chip producer announced that it was set to open a new Tesla-dedicated EV chip production line at its facility in Bouskoura, Morocco, following a win of a contract with Tesla. Following this, STMicroelectronics also signed a strategic cooperation agreement with Renault to supply electric and hybrid vehicle advanced semiconductors for Renault’s Dacia Spring EVs range, starting 2026. While currently the Dacia Spring EV model is produced in China, chip production in Morocco raises prospects of the current electric model or any future models to be manufactured in Morocco, especially for the European market. This places Morocco in a strategic position to also become a leader in EV manufacturing in the African subcontinent.

Government initiative

While Morocco has a strong geographic advantage, given its proximity to several European countries that makes it an ideal export market, political stability is another factor contributing to the sectors growth. The Moroccan government offers a single window outlet at its Ministry of Industry and Trade, which makes it much easier for international players to do business as compared with other countries that are more bureaucratic and complex in their dealings. Moreover, the government is known to be consistent with their policies, which is critical for auto manufacturers looking to make long term investments.

The government has made tremendous efforts and investments in developing Morocco into a global auto manufacturing hub. Morocco has about 60 free trade agreements with Europe, the USA, Turkey, and the UAE, a fact that facilitates easy trade and exports.

In addition, the Moroccan government provides several tax benefits to companies setting up manufacturing units in the country. It offers zero tax for the first five years and 15% tax for the subsequent years. Moreover, it provides full exemption on value added tax and a 15-year exemption on business and occupation tax.

Apart from fiscal benefits, it has also constantly invested in infrastructure to ensure smooth operations with regards to both manufacturing and transportation. In 2015, the government allocated US$7.8 billion towards development of infrastructure including roads, airports, etc.

Moreover, in 2018, the government inaugurated the US$4 billion Al-Boraq high-speed rail line linking the two key auto manufacturing hubs, Casablanca and Tangier. The Al-Boraq line is also linked to the Tanger Med port, which is a key port for all exports to Europe. The Tanger Med port has also become the largest port in the Mediterranean region post its phase II development in 2019. The port now has a capacity of 9 million twenty-foot equivalent units, surpassing Spain’s Algeciras and Valencia ports in capacity. The development and expansion of the rail link and the ports have facilitated smooth export from Moroccan manufacturing plants to European markets.

Furthermore, the government also facilitates staff training through the creation of the Automotive Industry Training Institutes (Instituts de Formation aux Métiers de l’Industrie Automobile (IFMIA)). The training support centers address recruiting and competency development needs of companies operating in the sector. While three of the centers are managed by the Moroccan Automotive Industry and Trade Association (AMICA) at Casablanca, Kenitra, and Tangiers, the fourth center is run by Renault and is located at Renault’s Mellousa plant. The Moroccan government provided about US$10 million for the construction of the Renault training center, which has more than 5,000 students (about 4,200 of them work for Renault). This way the government provides comprehensive and all-encompassing support to the sector, which in turn is expected to permeate to the development of the local vendors and suppliers as well.

Other than this, Morocco enjoys the obvious advantage of low cost labor (although this is something common to the entire African region). The cost of labor in Morocco is about US$1.5 per hour, which is about one-fourth of that in Spain and much lower than many East European nations. Since companies such as Renault produce their entry level cars in Morocco, labor constitutes a high portion of the overall costs.

EOS Perspective

With strong political support, advantageous geographical location, and low labor costs, Morocco seems to have all the right ingredients for a booming auto industry. The sector has been witnessing exponential growth over the past few years and has already overtaken South Africa as the largest automobile manufacturer in Africa.

While the industry currently caters to the manufacturing of low cost models, it is also slowly creating a niche space for itself in the EV market, which is considered the future of the automobile sector. Moreover, the sector is creating an entire automobile ecosystem by encouraging and promoting backward integration, especially through the participation of local auto part suppliers and vendors.

There is clearly no contention that the North Africa is the leader in the automobile space in the region, however, it is still a long way before the region is a serious competitor in the global auto export market to countries such as China, India, Korea, or Mexico, which are global leaders. A lot will depend on how it manages to develop competencies beyond cheap labor and supportive policies, especially with regards to attracting premium and luxury models. While it has the potential, it will be difficult to displace leading hubs that are already competent in the space.

09/03/2022by EOS Intelligence EOS Intelligence No Comments

China’s BRI Hits a Road Bump as Global Economies Partner to Challenge It

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In 2013, China launched its infamous Belt and Road Initiative (BRI), which has gone about developing several infrastructure projects across developing and underdeveloped countries across the globe. However, BRI has faced significant criticism as it brought heavy debt for several countries that are unable to pay the loans. Moreover, it is believed that China exercises significant political influence on these countries, thereby building a sort of dominance across the globe. To counter this, several developed economies have come together to launch alternative projects and partnerships that facilitate the development of infrastructure across developing/underdeveloped countries without exerting significant financial and political bindings on them. However, the main aim of these deals seems to be to keep a check on China’s growing might across the Asian and African continent.

Read our previous related Perspectives: OBOR – What’s in Store for Multinational Companies? and China’s Investments in Africa Pave Way for Its Dominance

China’s BRI program has signed and undertaken several projects since its inception in 2013. As per a 2020 database by Refinitiv (a global provider of market data and infrastructure), the BRI has signed agreements with about 100 countries on projects ranging from railways, ports, highways, to other infrastructure projects and has about 2,600 projects under its belt with an estimated value of US$3.7 billion. This highlights the vast reach and influence of China under this project and its growing financial and political power across the globe.

China’s BRI – looked as a debt trap

Over the years, BRI initiative has been criticized for being a debt-trap for developing and underdeveloped nations, by imposing heavy debt through expansive projects over the host countries, the non-payment of which may lead to significant economic and political burden on them. While the USA, the EU, India, and Japan have been some of the most vocal critics of the BRI program, several participating countries now voice a similar message as they have enveloped in high debt under these projects.

In one such example, the Sri Lankan Hambantota Port was built under the BRI scheme by China Harbor Engineering Company on a loan of nearly US$1.26 billion taken by Sri Lanka from China. The project was questioned for its commercial viability from the very beginning, however, given China’s close relationship with the Sri Lankan government, the project pushed through. As expected, the project was commercially unsuccessful, which along with unfavorable re-payment plan resulted in default by Sri Lanka. Thus, in 2017, the Chinese government eventually took charge of the port and its neighboring 15,000 acres region under a 99-year lease. This transfer has given China an intelligence, commercial, and strategic foothold in a critical water route.

In a similar case, Montenegro is also facing a difficult time repaying its debt to China for a highway project under BRI. In 2014, Montenegro contracted with China Road and Bridge Corporation (CRBC) for the construction of a highway to offer a better connection between Montenegro and Serbia. However, the feasibility of the project was questionable. The Montenegro government took a loan of US$1.59 billion (85% of the first phase of the project) from China Exim Bank at a 2% interest rate over the next 20 years. However, the project, which is being undertaken by Chinese companies and workers using Chinese materials, has faced unplanned difficulties in completion, has put significant financial pressure on the Montenegro government. This is likely to further degrade the country’s economy, delay its integration with the EU, and leave it vulnerable to Chinese political influence. While the EU has refused to finance the loan altogether, it is offering special grants and preferential loans to the country from the European Investment Bank to facilitate the completion of the highway.

Moreover, as per a 2018 report by Center for Global Development, eight BRI recipient countries – Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan, and Tajikistan – were at a high risk of debt distress due to BRI loans. These countries are likely to face rising debt-to-GDP ratios of more than 50%, of which at least 40% of external debt owed to China in association to BRI related projects.

Owing to the growing concern over increasing Chinese investment debt, several countries are now looking to reduce their exposure to Chinese investments and financing. In 2018, the Myanmar government, in an attempt to avoid falling deep into China’s debt-trap and becoming over-reliant on the country, scaled down China-Myanmar Kyaukpyu port project size from US$7.5 billion to US$1.3 billion.

Similarly, in 2018, the Malaysian government cancelled three BRI projects – the East Coast Rail Link (ECRL) and two gas pipelines, the Multi-Product Pipeline (MPP), and Trans-Sabah Gas Pipeline (TSGP) as these projects significantly inclined towards increasing the Malaysian debt to China to complete these projects.

China’s long-term ally, Pakistan, also opted out from China’s BRI in 2019, exposing some serious flaws with the project. In 2015, the two countries unveiled a US$62 billion flagship project under BRI, called the China-Pakistan Economic Corridor (CPEC). While it was started with an ambition to improve Pakistan’s infrastructure (especially with regards to energy), this deal resulted in severe debt woes for Pakistan as the nation started to face a balance-of-payment crisis. This in turn resulted in Pakistan turning to International Monetary Fund (IMF) for a three-year US$6.3 billion bailout package. Pakistani officials have even claimed that the CPEC project is equally (if not more) beneficial for China in terms of gaining a strategic advantage over India and by extension the USA. Thus, given its partial failure and increasing financial pressure on Pakistan, many ongoing projects under CPEC have been stalled or being rebooted in a slimmed-down manner.

Similarly, more recently, in April 2021, Australia scrapped off its deal it had with China under BRI, stating the deal to be over ambitious and inconsistent with Australia’s foreign policy.

Developed nations come together to offer alternatives

Given the push against BRI, several developed nations have come out with alternative infrastructure plans, either individually or in partnership with each other. The key purpose of this is to not only offer more viable options to developing and underdeveloped nations but also to keep a check on China’s growing global influence.

In one such move, in May 2015, Japan launched a ‘Partnership for Quality Infrastructure’ (PQI) plan, which came out as a direct competitor to China’s BRI. The PQI Japan (in collaboration with Asian Development Bank (ADB) and other organizations and countries) aimed at providing nearly US$110 billion for ‘quality infrastructure investment in Asia from 2016 to 2020. Although, on one side, this initiative is intended to secure new markets for Japanese businesses and strength export competitiveness to further bolster its economic growth, on the other side, politically PQI is a keen measure to counter China’s influence over its neighboring countries.

Just like Japan, India has also been a staunch critic of China’s BRI as it feels that the latter uses the BRI to expand its unilateral power in the Indo-Pacific region. Thus, to counter it, India, formed an alliance with Japan in November 2016, called ‘Asia-Africa Growth Corridor’ (AAGC).

The alliance aims at improving infrastructure and digital connectivity in Africa and connecting the continent with India and other Oceanic and South-East Asian countries through a sea passageway. This is expected to boost economic collaborations of India and Japan with African countries by enhancing the growth and interconnectedness between Asia and Africa.

The alliance claims to focus on providing a more affordable alternative to China’s BRI with a smaller carbon footprint, which has been another major concern in BRI project execution across Indo-Pacific region. The emphasis has been put on providing quality infrastructure while taking into account economic efficiency and durability, inclusiveness, safety and disaster-resilience, and sustainability. The countries do not have an obligation of hiring only Japanese/Indian companies for the infrastructure development projects and are open to the bids from the global infrastructure companies.

In more recent times, in May 2021, the EU and India have joined hands for a comprehensive infrastructure deal, called the ‘Connectivity Partnership’. This deal aims at strengthening cooperation on transport, energy, digital, and people-to-people contacts between India and the EU and developing countries in regions across Africa, Central Asia, and the Indo-Pacific region. Moreover, it aims at improving connectivity between the EU and India by undertaking infrastructure development projects across Europe, Asia, and Africa. It also focuses on providing a more reliable platform to the already ongoing projects between the EU and India’s private and public sectors.

While the two partners claim otherwise, the deal seems to be their collective answer to China’s BRI and its growing influence in the Asian, African, and European belt. Unlike BRI, the EU-India Connectivity Partnership aims to follow a clear rule-based approach to have greater involvement from the private sector with backend support from the public sector of both sides. This protects the host country against heavy debt and in turn restricts the level of political influence that both sides may have on the host country. This advantage over China’s infrastructure deal makes this project a serious competitor to the BRI in this region as host countries are most vary of falling into a debt-trap with China.

Another recent initiative to dethrone the BRI has been the ‘Build Back Better World’ (B3W), which has been undertaken by the Group of Seven (G7) countries in June 2021. This project, led by the USA, is focused on infrastructure development in low- and medium-income countries, and aims to accomplish infrastructure projects worth US$40 trillion in these countries by 2035. Further, the project is intended to mobilize private-sector capital in areas such as climate, health, digital technology along with gender equity and equality involving investments from financial institutions of the countries involved.

This project claims to be based on the principles of ‘transparency and inclusion’ and intends to cease China’s rising global influence (through BRI) as it aims to make B3W comparatively more value-driven, market-led, and a higher-standard infrastructure partnership for the host country. To ensure inclusivity and success of the project, the USA invited other countries such as India, Australia, South Korea, and South Africa to join the project. However, considering the nascent stage of the B3W development, the proceedings and details of the project are not explicitly clear, however, given that its intention is to help the USA compete with the BRI, it is expected to be well-funded, robust, and inclusive.

EOS Perspective

China’s BRI started on a very high note, garnering multi-billion-dollar infrastructure projects across a host of Asia, African, and European countries. However, over the last couple of years, increasing number of countries have become wary of its inherent problems, such as looming debt, increasing Chinese influence, and incompletion of projects. This has helped shift the momentum towards other developed countries that have for long wanted to counter China’s growing global influence. Using this opportunity, Japan, India, the EU, and the USA have come up with alternative infrastructure deals to compete with the BRI.

That being said, BRI will not be easy to shove aside as China has been in this game for several years now and has a significant time advantage. While countries such as India can try to compete, they do not have the financial might to take up projects that are strategically important and commercially viable.

Further, several of the alternative projects, such as India-EU Connectivity Partnership and G7 B3W aim to significantly involve the private sector for investments. While this is good news for the host countries where the project will be undertaken, private players will definitely be more concerned about financial viability of their investment and may not be able to match the BRI investment values, debt rates, etc. Moreover, geographic location puts China in an advantage for projects in the Asian region (when compared with the USA and the EU).

Therefore, while the attempt to dethrone China’s BRI has gained significant momentum and found proper backing, it is something that cannot happen in the short term. However, given the growing anti-China sentiment, it can be expected that with the right partnerships and project terms, BRI may start facing some serious competition from global powers across the globe.

20/01/2022by EOS Intelligence EOS Intelligence No Comments

Clean Beauty: Next Stop – China

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China is one of the most promising markets for cosmetics and skin care companies globally, only being second to the USA in size. Despite its size and potential, the Chinese beauty market has remained relatively closed to several international players that make cruelty-free and vegan products. This is because of Chinese regulations that required compulsory animal testing pre- and post-market entry for international brands. However, in 2021, the Chinese government squashed the mandated animal testing requirement and introduced other certification methods. While this opens the market for a plethora of players who have till now shied away from entering the Chinese market, steering through the Chinese turf may still not be very simple.

China’s new cosmetic regulations easing entry for imported products

China is currently the second-largest cosmetics market globally, and has an immense potential to grow further. As per China’s Ministry of Commerce, the value of imported cosmetics grew by 30% in 2020, underlining the strong potential for international brands in the Chinese market. At the same time, several international companies have kept their distance from this US$57 billion beauty and personal care market, owing to stringent regulations.

However, in 2021, the government introduced new rulings for cosmetics and beauty products, which have altered the regulatory landscape in China. As per Chinese regulations, cosmetics are divided into two categories, special and general cosmetics, and the two are subject to different pre-market registration requirements.

As per the new regulations, while the former will continue to be subject to pre-registration with National Medical Products Administration (NMPA) before being allowed to be manufactured or imported, general cosmetics now only require filing documentation of the product with the authority. Earlier, the general category also required prior approval before import.

In addition to streamlining the process for the general category, the government has reduced the number of special product categories from nine to six. As of 2021, the only product categories under the special category encompass hair dye products, hair perm products, spots removal and skin whitening products, sunscreen products, and hair loss prevention products. The streamlining of the registration process for general category is expected to have a direct impact on the cost of warehousing and logistics for global brands as it is likely to quicken the import cycle.

Another regulation that was a deterrent to entering the Chinese market was that international beauty companies were expected to perform animal testing for their products both pre-and post-market entry. This created an issue for the growing number of global clean beauty brands who position themselves as vegan or cruelty-free. These brands could either choose to dilute their brand positioning by undertaking animal testing for the Chinese region or had to keep away from this goldmine market.

However, these companies did have one channel to enter this market, and that was through cross-border e-commerce sites, such as Alibaba’s Tmall. Although this resulted in a limited presence as the cross-border market size has government restrictions and is about one-tenth the size of the domestic market. Moreover, physical retail still continues to dominate the Chinese market with regards to cosmetics sale, with growing popularity of multi-brand stores.

As per the new regulations, global companies do not require animal testing anymore before entering the Chinese market. This will level the playing field between international imports and domestic brands, as domestic brands have been exempt from animal testing since 2014.

However, there are a few conditions to be met by companies looking to bypass animal testing. The brand must provide relevant quality certifications from their country of origin, the product should not be aimed at children or babies, the product should not contain any raw material that is not included in China’s approved list of raw materials, and the applicant brand and its Chinese representative should not have been flagged as requiring further supervision by the authorities.

Companies responding to the new regulations

This opens the door for several international players who position themselves as cruelty-free. In May 2021, Australian clean beauty brand, Frank Body, welcomed a closed investment from Chinese private equity firm, EverYi Capital, which put the value of the brand at about US$74 million (AUD 100 million). The investment, which includes the creation of a Shanghai team for the brand, will help the company find a strong footing in the Chinese market in the light of the latest animal testing relaxation. The brand is expected to enter the market over the next 12 to 18 months, with prospects of opening a physical store.

In a similar move, Brazilian beauty conglomerate, Natura & Co., mentioned during its 2020 fiscal year results that it is looking to expand into China with its brands, Aesop and The Body Shop. The two brands were expected to complete their registration in China by first half of 2021, with Aesop expected to open its first store in Shanghai by the end of 2021, while The Body Shop is scheduled to open its first store in 2022 (however, there is no information regarding the completion of the registration process yet). While these brands have been available in China through cross-border e-commerce, they expect that physical retail presence will help establish a strong foothold in this growing market.

Nerissa Low, founder of Singapore-based organic and cruelty-free cosmetic company, Liht Organics, has also welcomed the decision and expressed interest in entering the offline Chinese market. Liht Organics, which entered China in 2020 through cross-border e-commerce, gained significant traction in the Chinese market. However, the brand refused to enter the offline market when approached by several Chinese distributors, as the company did not want to compromise on its cruelty-free ethos. Given the change in regulations, the founder has expressed interest in expanding beyond cross-border e-commerce considering the potential in the offline market and is looking for the right partner and opportunity.

Moreover, popular international brands such as Drunk Elephant, Fenty Beauty, and The Ordinary, which are currently limited to be selling through Alibaba Tmall, are expected to enter the Chinese market and establish a physical presence there. While a lot of these brands might wait to establish physical stores and may penetrate the market through mainland e-commerce websites such as Tmall (instead of Tmall Global) to reach a larger audience, presence in multi-brand retail stores or opening pop-up stores will be the natural next step.

Despite new regulations, challenges remain

However, entering the Chinese market (despite the abolishment of the animal testing rules) will be no easy feat. Owing to the recent changes in regulations, the companies need to keep up higher standards in terms of product quality, marketing, and operations. Moreover, some of these regulations have made it harder for foreign players to comply as they require a complete overhaul of their local marketing strategies and operational functions.

Firstly, as per the new regulations, the NMPA of China has made it mandatory for international companies to have a domestic agent who must be based in China. This agent will be responsible for the registration process, which includes massive paperwork and approval procedures. Moreover, these agents will be held completely accountable for the company’s products and operations in China and will be answerable and responsible for any safety concerns arising in the product. In addition, they will be responsible for ensuring that the product, its ingredients, and its marketing are compliant with the Chinese regulations. Thus it will be a challenge for foreign players to find a Chinese agent to fill this capacity as in reality, such a person/company may have no impact on how the ingredients or final product are made. This is also definitely expected to increase costs for the company.

The government has also imposed harsher penalties for non-compliance and various violations such as misleading advertising, non-compliance of new cosmetic naming guidelines, non-submission of approved hygiene license and certificates, etc. This makes it critical for companies that the Chinese agent is well aware of all regulations and is thorough with all registration requirements as violations can also result in cancellation of license.

Secondly, while the removal of animal testing for imported cosmetics is a welcome news for a great number of global cosmetic brands, the policies put in place of this pose to be equally challenging and complex to steer through. Under the new regulations, cosmetics falling under the general category require a Good Manufacturing Practice (GMP) certificate to avoid animal testing. These GMP certificates need to be issued from the brand’s local government regulatory department. Considering that different countries will have different authorities and templates for issuing these certificates, there is a lot of ambiguity regarding what is acceptable and what is not.

Moreover, cosmetic companies need to provide a manufacturing quality management system (QMS) for each individual ingredient used in the cosmetic formulations. This requires companies to collect information on each and every ingredient manufacturer and supplier, including their quality specification documents and certificates. This is a tedious process since a company may use ingredients from several manufacturers for a single product. In addition, in case a company plans to change a supplier, it will have to undergo this process and update the information with the Chinese authorities for the new supplier, which is both money and time consuming.

On the one hand, it is true that the exemption from animal testing has given an opportunity of many cruelty-free brands to enter the Chinese market. However, on the other hand, the lengthy procedure and strict scrutiny over the process is undermining the overall market entry process for mid to small size companies. Non-compliance with these certifications will reverse the relaxation on animal testing for the companies that don’t meet the new procedural requirements and then their products will need to undergo animal testing for selling in China.

Furthermore, despite getting the green light to enter the Chinese market, the cruelty-free cosmetic companies would still need to deal with another challenge arising from the consumer side. While the clean beauty segment is definitely growing, it is currently not a major factor in purchasing decisions by consumers, unlike in the USA. Chinese consumers seek products that are functional and have healthier, milder, and more reliable formulas. Hence, to ensure a right placement of their cruelty-free products, companies would need to undergo distinctive marketing strategies to grab a good consumer base. Education and awareness regarding cruelty-free products and creating a substantial market for such products may require significant marketing funds.

In addition to the changes in regulations with regards to animal testing, the Chinese government added new regulations regarding product labelling. As per the new regulations, the labels must have corresponding Chinese explanation to everything mentioned and they must a have larger font size than the explanation in foreign language. Also, the label should contain the Chinese name and special cosmetics registration certificate numbers, product implementation number, name and address of the person responsible in China and of the manufacturer along with the production license number.

Adding to these is a ban on use of any kind of medical term, names/pictures/endorsement of celebrities in the medical field, and implication of medical effects to avoid any misleading of information. Although all these changes are implemented in order to curb the market of counterfeit products, they are expected to make the product approval process lengthier, as now companies would be required to undergo a comprehensive regulatory review of the guidelines to ensure hassle-free entry into the Chinese market.

EOS Perspective

While the new regulations provided a pathway for several foreign clean beauty players to enter the Chinese market, the process still requires a lot of navigation, especially since a lot of rulings regarding safety requirements, GMP authorities, and template remain ambiguous.

Moreover, since these certificates need to be derived from the country of origin, the country’s overall political and business equation with China might also play a subtle role in their acceptance by the Chinese authorities. For instance, China has not yet declared the jurisdictions that will be recognized for the QMS certificate. Given the current political friction with Australia and the USA, the Chinese authorities may not accept QMS certificates from these countries at the moment. Thus brands from these countries may have to look to find suppliers or shift part production to other countries to be able to enter the Chinese market.

While currently there is no clarity regarding what terms and jurisdictions will initially be accepted for the GMP and QMS certificates, it is expected that clarity on the matter will be provided by the government shortly. In the long run, these regulations are a move in the right direction. As the government has overall simplified the filing process and focused on quality and safety measures, the new regulations are a positive development for international cosmetic companies, especially clean beauty brands that have been unable to enter the second largest beauty market in the world.

08/12/2021by EOS Intelligence EOS Intelligence No Comments

Commentary: Europe’s Energy Woes – The Way Forward

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Europe is struggling to build up energy supply ahead of anticipated growth in demand due to economic rebound after pandemic outbreak and the winter months. Considering the knock-on effect of the energy crisis on industrial growth and consumer confidence, the prime focus for Europe is not only to respond to the mounting energy issues in the short term, but to also establish energy sustainability and security for the future.

In October 2021, the European Commission published an advisory for the member states to take some immediate steps to ease the effect of the energy crisis. Governments were urged to extend direct financial support to the most vulnerable households and businesses. Other recommended ways of intervention included targeted tax reductions, temporary deferral of utilities bill payments, and capping of energy prices. About 20 member states indicated that they would implement the suggestions outlined by the European Commission at a national level. While these measures may aid the most vulnerable user segment, there is not much that can be done to safeguard the wider population from the energy price shocks.

Energy security and sustainability is the key

While a magical quick-fix for Europe’s energy crisis does not seem to exist, the ongoing scenario has exposed the region’s vulnerabilities and serves as a wake-up call to move towards energy security and self-sufficiency.

Diversify energy mix

In general, petroleum products and natural gas contribute significantly to Europe’s energy mix, respectively accounting for about 35% and 22% of the total energy consumed in the EU. The remaining energy needs are fulfilled by renewable sources (~15%), nuclear (~13%), and solid fossil fuels (~12%).

The high dependence on fossil fuels is one of the main reasons behind Europe’s ongoing energy crisis. In order to mitigate this dependency, Europe has made concerted effort in the development of renewable energy production capabilities. In 2018, the European Commission set a target to achieve 32% of the energy mix from renewables by 2030, but in July 2021, the target was increased to 40%, clearly indicating the region’s inclination towards renewables.

Expediting renewable energy projects could help Europe to get closer to energy self-sufficiency, although the intermittency issue must also be accounted for. This is where nuclear energy can play a critical role.

After Fukushima disaster in 2011, many countries in Europe pledged to phase-out nuclear energy production. France, Germany, Spain, and Belgium planned to shut down 32 nuclear reactors with a cumulative production capacity of 31.9 gigawatts by 2035. However, in the wake of the current crisis, there is a renewed interest in nuclear power. In October 2021, nine EU countries (Czechia, Bulgaria, Croatia, Finland, Hungary, Poland, Romania, Slovakia, and Slovenia) released a joint statement asserting the expansion of nuclear energy production to achieve energy self-sufficiency. France, which generates about three-fourth of its electricity through nuclear plants, is further increasing investment in nuclear energy. In October 2021, the French government pledged an investment of EUR 1 billion (~US$1.2 billion) in nuclear power over the period of 10 years.

Look beyond Russia

More than 60% of EU’s energy needs were met by imports in 2019. Russia is the major partner for energy supply – in 2019, it accounted for 27% of crude oil imports, 41% of natural gas imports, and 47% of solid fossil fuels imports. While Europe is accelerating the development of renewable energy production, fossil fuels still remain an important source of energy for the region. In the face of escalating political differences with Russia, there is a need to reduce energy reliance on this country and to build long-term partnerships with other countries to ensure a steady supply.

EU has many options to explore, especially in natural gas imports. One of them is natural gas reserves in Central Asia. The supply link is already established as Azerbaijan started exporting natural gas to Europe via Trans-Adriatic Pipeline (TAP), operational since December 31, 2020. In the first nine months, Azerbaijan exported 3.9 billion cubic meters of gas to Italy, 501.7 million cubic meters to Greece, and 166 million cubic meters to Bulgaria. Trans-Caspian Pipeline (TCP) is a proposed undersea pipeline to transport gas from Turkmenistan to Azerbaijan. This pipeline can connect Europe with Turkmenistan (the country with the world’s fourth-largest natural gas reserves) via Azerbaijan. As a result, Europe has heightened its interest in the development of this pipeline.

Eastern Mediterranean gas reserve can also prove to be greatly beneficial for the EU. In January 2020, Greece, Cyprus, and Israel signed a deal to construct a 1,900 km subsea pipeline to transport natural gas from the eastern Mediterranean gas fields to Europe. This pipeline, expected to be completed by 2025, would enable the supply of 10 billion cubic meters of gas per year from Israel and Cyprus to European countries via Greece.

Africa is another continent where the EU should try to strengthen ties for the imports of natural gas. Algeria is an important trade partner for Europe, having supplied 8% of natural gas in 2019. Medgaz pipeline connects Algeria directly to Spain. This pipeline currently has the capacity to transport 8 billion cubic meters of gas per year, and the ongoing expansion work is expected to increase the capacity to 10.7 billion cubic meters per year by the end of 2021. In addition to this, Nigeria is planning the development of a Trans-Sahara pipeline which would enable the transport of natural gas through Nigeria to Algeria. This will potentially open access for Europe to gas reserves in West Africa, via Algeria. Further, as African Continental Free Trade Agreement came in to effect in January 2021, the natural gas trade within countries across Africa received a boost. Consequently, liquefied natural gas projects across Africa, including Mozambique’s 13.1 million tons per annum LNG plant, Senegal’s 10 million tons per annum Greater Tortue Ahmeyim project, and Tanzania’s 10 million tons per annum LNG project, could help Europe to enhance its gas supply.

Business to strive to achieve energy independence

While governments are taking steps to reduce the impact of the energy crisis on end consumers, this might not be enough to save businesses highly reliant on power and energy. Therefore, businesses should take the onus on themselves to achieve energy independence and to take better control of their operations and costs.

Some of the largest European companies have already taken several initiatives in this direction. Swedish retailer IKEA, for instance, has invested extensively in wind and solar power assets across the world, and in 2020, the retailer produced more energy than it consumed.

There has also been growing effort to harness energy from own business operations. In 2020, Thames Water, a UK-based water management company, generated about 150 gigawatt hours of renewable energy through biogas obtained from its own sewage management operations.

However, a lot more needs to be done to change the situation. Companies not having any means to produce energy on their own premises should consider investing in and partnering with renewable energy projects, thereby boosting overall renewable energy production capacity.

Energy crisis is likely to have repercussions on all types of businesses in every industry. Larger entities with adequate financial resources could use several hedging strategies to offset the effect of fluctuating energy prices or energy supply shortage, but small and medium enterprises might not be able to whither the storm.

Economist Daniel Lacalle Fernández indicated that energy represents about a third of operating costs for small and medium enterprises in Europe, and as a result, the ongoing energy crisis can trigger the collapse of up to 25% of small and medium enterprises in the region. Small and medium enterprises need to actively participate in government-supported community energy initiatives, which allow small companies, public establishments, and residents to invest collectively in distributed renewable energy projects. By early 2021, this initiative gained wide acceptance in Germany with 1,750 projects, followed by Denmark and the Netherlands with 700 and 500 projects, respectively.

EOS Perspective

Europe must continue to chase after its green energy goals while developing alternative low-carbon sources to address renewables’ intermittency issue. This would help the region to achieve energy independence and security in the long term. In the end, the transition towards green energy should be viable and should not come at a significant cost to the end consumers.

On the other hand, immediate measures proposed so far do not seem adequate to contain the ongoing energy meltdown. Further, energy turmoil is likely to continue through the winter, and, in the worst-case scenario, it might result in blackouts across Europe. If the issue of supply shortages remains difficult to resolve in the short term, a planned reduction in consumption could be the way forward.

In view of this, Europe would need to actively encourage energy conservation among the residential as well as industrial sectors. Bruegel, a Brussels-based policy research think tank, suggested that the European governments could either force households to turn down their thermostats by one degree during the winter to reduce energy consumption while not compromising much on comfort, or provide financial incentives to households who undertake notable energy saving initiatives.

This is perhaps a critical time to start promoting energy conservation among the masses through behavioral campaigns. Like businesses, it is necessary to enhance consumers’ participation in the energy market and they should be encouraged to generate their own electricity or join energy communities. The need of the hour is to harness as well as conserve energy in any way possible. Because, till the time Europe achieves self-sufficiency or drastically strengthens the supply chain, the energy crunch is here to stay.

15/11/2021by EOS Intelligence EOS Intelligence No Comments

Hydrogen: Fuel of the Future for Shipping?

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Just like many other carbon-emitting sectors, the shipping industry is also working to reduce its contribution to greenhouse gases and get closer to carbon neutrality. For this, the sector is pinning its hopes on hydrogen-based fuel. Being one of the most polluting industries in the world, the shipping sector is also one of the most difficult ones to introduce such a profound change. This is owing to the massive size of commercial vessels, long distances, hydrogen storage issues, and commercial costs. Although small-level adoption of hydrogen fuel has already begun, it remains unknown whether it will be functional in large commercial vessels as well.

As per the International Maritime Organization (IMO), the shipping industry was responsible for 2.9% of the total anthropogenic emissions in 2018, up by almost 10% between 2012 and 2018. It is expected that the sector’s contribution towards global greenhouse emissions will significantly increase by 2050 if proper efforts are not made towards decarbonization. To counter the situation, the IMO has set a global target to cut annual shipping emissions by 50% by 2050 (based on 2008 levels). In response to this, shipping corporations and other stakeholders across the shipping industry have been exploring different ways to reduce their impact on the environment. One of the most critical aspects in this is replacing fossil fuel with a greener fuel. This is where hydrogen fuel might find its place.

As we discussed in one of our previous articles (China Accelerates on the Fuel Cell Technology Front), hydrogen fuel is considered to be the fuel of the future for the transportation sector, as it produces zero emissions. Moreover, with regards to shipping, it is one of the only conceivable options at the moment.

That being said, using hydrogen fuel alone cannot solve the issue of reducing the sector’s carbon footprint, as it depends on how the hydrogen fuel is produced. Currently most of the hydrogen that is produced (and used in other industries), is produced using fossil fuels, while only a small portion of it is produced using renewable energy. Hydrogen produced through renewable energy is much more expensive, which keeps the production levels low. If ships run on hydrogen fuel produced using mainly fossil fuels, while the fuel itself would produce zero emissions, the whole process will not carbon efficient. However, with the shipping industry making real efforts to consider a change in fuel, it is expected that production of hydrogen through renewable sources will ramp up, which in turn may reduce costs (to some extent) owing to economies of scale.

At the moment, several leading players have pledged to develop new or modify existing vessels so that they can run on hydrogen fuel, however, these are currently either prototypes or short-distance small vessels. Antwerp-based Compagnie Maritime Belge (CMB) Group, which is one of the leading maritime groups in the world, commissioned the world’s first hydrogen-powered ferry in 2017, named Hydroville. It is currently operational between Kruibeke and Antwerp. It runs on a hybrid engine, with options of both hydrogen and diesel. CMB, which has been a pioneer and advocator of clean fuel for the shipping industry, also partnered with Japanese shipbuilder, Tsuneishi Group, to develop and build Japan’s first hydrogen-powered ferry (in 2019) and tugboat (in 2021). Moreover, it launched a joint venture with the Japanese firm to develop hydrogen-based internal combustion engine (H2ICE) technology for Japan’s industrial and marine markets. In another move to find a strong foothold with the shipping fuel of the future, CMB Group acquired UK-based Revolve Technologies Limited (RTL) in 2019, which specializes in engineering, developing, designing, and testing hydrogen combustion engines for automotive and marine engines. Moreover, CMB is building its own maritime refueling station for hydrogen automobiles and ships at the Antwerp port, which will produce its own hydrogen through electrolysis.

Similarly, in November 2019, Norwegian ship building and design company, Ulstein, developed a hydrogen-fueled vessel, called ULSTEIN SX190. The vessel is the company’s first hydrogen-powered offshore vessel providing clean shipping operations to reduce the carbon footprint of offshore projects. The vessel, which uses fuel-cell technology, can operate for four days in emission-free mode at the moment. However, with constant development and investment in the hydrogen fuel space, it is expected that it will be able to run emission-free for up to two weeks, post which it will have to fall back on its diesel engine. Ulstein also launched another hydrogen-powered vessel in October 2020, called ULSTEIN J102, which can operate at zero-emission mode for 75% of the time. Since Ulstein used readily available technology in developing the J102, the additional cost of adding the hydrogen-powered mode was limited to less than 5% of its total CAPEX. This vessel design is expected to cater to the offshore wind industry.

A leading oil corporation, Shell, also announced that it is looking at hydrogen as the key fuel for its fleet of tanker ships in the coming future as the company aims to become carbon neutral by 2050. In April 2021, the company commenced trials for the use of hydrogen fuel cells for its ships in Singapore. The trial encompasses the development and installation of a fuel cell unit on an existing roll-on/roll-off vessel that transports wheeled cargo such as vehicles between Singapore and Shell’s manufacturing site in Pulau Bukom. Shell has chartered the vessel, which is owned by Penguin International Ltd, however, Shell will provide the hydrogen fuel.

In addition to this, several other companies across Europe and Japan are undertaking feasibility studies to understand and assess the use of hydrogen fuel to power ferries and also the production of hydrogen fuel from renewable sources for the same purpose. For instance, in 2020, Finland-based power company, Flexens conducted a feasibility study to generate green hydrogen through wind farms in order to fuel ferries in the Aland group of islands. Similarly, Japan-based companies, Kansai Electric Power, Iwatani, Namura Shipbuilding, the Development Bank of Japan, and Tokyo University of Marine Science and Technology, are collaborating on a feasibility study to develop and operate a 100-foot long ferry with hydrogen fuel. The ferry is expected to be in operation by 2025.

Apart from small ferries, hydrogen fuel is also making a slight headway with commercial vessels. In April 2020, a global electronic manufacturer, ABB, signed an MoU with Hydrogène de France, a French hydrogen technologies specialist to manufacture megawatt-scale hydrogen fuel cells that can be used to power long-haul, ocean-going vessels. While most of the currently operational hydrogen technology is used in small-scale and short-distance vessels, this partnership, which builds on an already existing 2018 collaboration between ABB and Ballard Power Systems, is expected to bring this technology for larger vessels (which in turn are responsible for most of the carbon emissions).

In April 2021, French inland ship owner, Compagnie Fluviale de Transport (CFT), in partnership with the Flagships Project (which is a consortium of 12 European shipping players), launched the first hydrogen-powered commercial cargo vessel, which will ply the Sevine river in Paris. The vessel is scheduled for delivery in September 2021. In 2018, the Flagships project was awarded EUR 5 million of funding from the EU’s Research and Innovation Program Horizon 2020.

While several companies are bullish about hydrogen fuel being the answer to the industry’s carbon woes, others are skeptical to what extent hydrogen fuel can replace the current traditional fuel, especially given the challenges with regards to large commercial vessels. For instance, Maersk, global player in the shipping industry, does not feel that hydrogen fuel is suitable for container ships as the fuel takes up a lot of physical space in comparison with traditional bunker oil.

As per estimates, hydrogen fuel takes up almost eight times as much space as gas oil would take to power the same distance. The more space is occupied by the fuel, the less space is left for carrying containers, and this negatively impacts its container-carrying capacity and revenue per trip/ship. Moreover, container vessels travel extremely long distances across oceans, and carrying that much hydrogen fuel in either liquid or compressed form at this moment is not physically and commercially viable. To be stored as a liquid, hydrogen needs to be frozen using cryogenic temperatures of -253˚C, which makes it expensive to store. Currently about 80-85% of the sector’s emissions come from large commercial vessels such as cargo ships, container ships, etc., and considering that hydrogen can play only a limited role in these vessels, its adaptability and effectiveness as a tool to reduce carbon emissions may be restricted.

However, that being said, the industry is open to alternative fuels and one such fuel is ammonia, which in turn is also produced from hydrogen. Thus using green hydrogen to create green ammonia is another option to explore. Ammonia can be used either as a combustion fuel or in a fuel cell. Moreover, it is much easier and cheaper to store since it does not need cryogenic temperatures and takes up about 50% less space compared with hydrogen fuel, since it is much denser. Thus ammonia seems to fit the needs of commercial vessels in a better manner, however, at present most of ammonia being produced (mainly for the fertilizer industry) uses hydrogen obtained from fossil fuels. Moreover, it further uses fossil fuels to convert hydrogen into ammonia. Thus, to create green ammonia, additional renewable energy will be required, which adds to further costs.

EOS Perspective

Given the industry’s vision to reduce its carbon footprint and the ongoing efforts, investments, and feasibility studies, it is safe to say that hydrogen will definitely be the fuel of the future for the shipping industry, whether used directly or processed further into ammonia. However, how soon the industry can adapt to it is yet to be seen.

Moreover, the industry cannot bear the cost of the transition alone. To transition to a greener future, the shipping industry needs support in terms of on-ground infrastructure and investments in production of green hydrogen. Till the time production of green hydrogen reaches economies of scale, it will definitely be much more expensive compared with traditional fuel. This in turn, will make shipping expensive, which would possibly impact all industries that use this service. While the shipping industry may absorb a bit of the high costs during the transition phase, some of it will be passed down to the customers, which is likely to be met with resistance and in turn will impact the overall transition.

On the other hand, green hydrogen projects are expensive to set up and require significant investment and gestation period. Hydrogen companies do not want to rush into making this investment, unless they see global acceptability from the shipping sector. Thus while the transition to a more carbon-neutral fuel is inevitable, it may not be a short-term transition. Unless governments and regulatory bodies come up with strict regulations or a form of a carbon tax on the sector to expedite the transition, the change is likely to be slow and phased, especially when it comes to large commercial vessels.

23/07/2021by EOS Intelligence EOS Intelligence No Comments

Ethiopia’s Half-Hearted Push to Telecom Privatization Finds Limited Success

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Ethiopia’s telecom sector has been considered as the last frontier for telecom players, since the country is one of just a few to still have a state-run telecom industry. However, this is due to change, as the Ethiopian government has finally opened up the sector to private investment. Privatization of the telecom sector has been on the prime minister Abiy Ahmed’s agenda since he first took office in 2018, however, it was initially a slow process, mostly due to bureaucracy, ongoing military conflicts, and COVID-19 outburst. Apart from that, the privatization terms have not been very attractive for private players, making the whole process complicated.

With a population of about 116 million and only about 45 million telecom subscribers, Ethiopia has been one of the most eyed markets by telecom players globally. The telecom sector has immense potential as Ethiopia has one of the lowest mobile penetration rates in Africa.

To put this in perspective, Ethiopia has a mobile connection rate of only 38.5%, while Sub-Saharan Africa has a mobile connection rate of 77%. Moreover, 20% of Ethiopian users have access to the Internet and only about 6% currently use social media, which is much lower than that in other African countries. That being said, about 69% of the country’s population is below the age of 29, making it a strong potential market for the use of mobile Internet and social media in the future.

This makes the market extremely attractive for international players, who have for long been kept at bay by the Ethiopian government. Thus, when the government expressed plans to open up the sector, several leading telecom players such as MTN, Orange, Etisalat, Axian, Saudi Telecom Company, Telkom, Vodafone, and Safaricom showed interest in penetrating this untapped and underserved market.

Currently, state-owned Ethio Telecom, is the only player in the market. Lack of competition has resulted in subpar service levels, poor network infrastructure, and limited service offerings. For instance, mobile money services, which are extremely popular and common across Africa have only been introduced in Ethiopia in May 2021.

Moreover, as per UN International Telecommunication Union’s 2017 ICT Development Index (IDI), Ethiopia’s telecom service ranked 170 out of 176 countries. To correct this, in June 2019, the government introduced a legislation to allow privatization and infuse some competition and foreign investment into the sector. The privatization process is expected to rack up the country’s foreign exchange reserves, in addition to facilitating payment of state debt. It also aims to improve the overall telecom service levels and help create employment in the sector.

As a part of its privatization drive, the government has proposed offering two new telecom licenses to international players as well as partially privatizing Ethio Telecom by selling a 40% stake in the company. The sale of the two new licenses will be managed by the International Finance Corporation, which is the private sector arm of the World Bank.

While this garnered interest from several international telecom players, with 12 bidders offering ‘expression of interest’ in May 2020, the process has not been very smooth, owing to bureaucracy, ongoing military conflicts in the north of the country, and the proposal of an uneven playing field for international players versus Ethio Telecom. This last challenge appears to be a major obstacle to a smooth privatization process.

As per the government’s initial rulings, the new international players were not to be allowed to provide financial mobile services to their customers, while this service was only to be reserved for Ethio Telecom. Mobile money is a big part of the telecom industry, especially in Africa, where it is extremely popular and profitable as banking infrastructure is weak. This made the deal much less attractive for foreign bidders as mobile money constitutes a huge revenue stream for telecom players in African markets.

However, post the bidding process in May 2021, the government has tweaked the ruling to allow foreign players to offer mobile money services in Africa after completing a minimum of one year of operations in the country. However, since this ruling came in after the bidding process was completed, the government missed out on several bids as well as witnessed lower bids, since companies were under the impression that they will not be allowed to offer mobile money services. As per government estimates, they lost about US$500 million on telecom licenses because of initial ban on mobile money.

Another deterrent to the entire process has been the government’s refusal to allow foreign telecom tower companies to enter the Ethiopian market. The licensed telecom companies would either have to lease the towers from Ethio Telecom or build them themselves, but they would not be allowed to get third party telecom infrastructure players to build new infrastructure for them, as is the norm in other African countries. This greatly handicaps the telecom players who will have to completely depend on the state player to provide infrastructure, who in turn may charge high interconnection charges that may further create an uneven playing field.

These two regulations are expected to insulate Ethio Telecom from facing fierce competition from the potential new players, and in turn may result in incumbency and poor service levels to continue. Moreover, even with regards to Ethio Telecom, the government only plans to sell 40% stake to a private player (while 5% will be sold to public), thereby still maintaining the controlling stake. With minority stake, private players may not be able to work according to their will and make transformative changes to the company. It is considered a way to just get fresh capital infused into the company without the government losing real control of it.

In addition to these limitations, the overall process of privatization has faced delays and complications. The bidding process has been delayed several times over the past year owing to regulatory complexities, the COVID crisis, and ongoing military conflict in the northern region. The process, which was supposed to be completed in 2020 was completed in May 2021, with the final bidding process taking place in April 2021 and the government awarding the bids in May 2021.

During the bidding process, the government received only two technical bids out of the initial 12 companies that had shown interest. These were from MTN and a consortium called ‘Global Partnership for Ethiopia’ comprising Vodafone, Safaricom, and Vodacom. While the Vodafone consortium partnered with CDC Group, a UK-based sovereign wealth fund, and Japanese conglomerate, Sumitomo Corporation, for financing, MTN group teamed up with Silk Road Fund, China’s state-owned investment fund to finance their expansion plans into Ethiopia. The other companies that had initially shown interest backed out of the process. These include Etisalat, Axian, Orange, Saudi Telecom Company, Telkom SA, Liquid Telecom, Snail Mobile, Kandu Global Communications, and Electromecha International Projects.

In late May 2021, the government awarded one of the licenses to the ‘Global Partnership for Ethiopia’ (Vodafone, Safaricom, and Vodacom) consortium for a bid of US$850 million. While it had two licenses to give out, it chose not to award the other license to MTN, who had made a bid of US$600 million. As per government officials, the latter bid was much lower than the expected price, which was anticipated to be close to a billion by the government.

Moreover, the government seems to have withheld one of the licenses as currently the interest in the deal has been low, considering that it only received two bids for two licenses. Given that they have somewhat altered and relaxed the guidelines on mobile money (from not being allowed to be allowed after minimum one year of operations), there may be some renewed interest from other players in the market. That being said, the restriction on construction of telecom infrastructure is expected to stay as is.

In the meanwhile, Orange, instead of bidding for the new licenses, has shown interest in purchasing the 40% stake in Ethio Telecom, which will give the company access to mobile money services right away. However, no formal statement or bid has been made by either of the parties yet. If the deal goes through, it will give Orange a definite advantage over its international competitors, who would have to wait for minimum one year to launch mobile money services in the market. In May 2021, Ethio Telecom launched its first mobile money service, called Telebirr, and managed to get 1 million subscribers for the service within a two-week span. This brings forth the potential mobile money holds in a market such as Ethiopia.

EOS Perspective

While several international telecom companies had initially shown interest in entering the coveted Ethiopian market, most of them have fizzled out over the course of the previous year, with the government only receiving two bids. Moreover, the bid amounts have been much lower than what the government initially anticipated and the government chose to accept only one bid and reject the other. Thus the privatization process can be deemed as only being partially successful. Furthermore, the opportunity cost of restricting mobile money services has been about US$500 million for the government, which is more than 50% of the amount they have received from the one successful auction.

This has occurred because the government has been focusing on sheltering Ethio Telecom from stiff competition by adding the restrictions on mobile money and telecom infrastructure. While this may help Ethio Telecom in the short run, it is detrimental for the overall sector and the privatization efforts.

Restrictions on using third-party infrastructure partners, may also result in a slowdown in rolling out of additional infrastructure, which is much needed especially in rural regions of Ethiopia. Other issues such as ongoing political instability in the northern region have further cast doubt in the minds of investors and foreign players regarding the government’s stability and in turn has impacted the number of bids and bid value.

It is expected that the government will restart the bidding process for the remaining one license soon. However, the success of it depends on the government’s flexibility towards mobile money services. While it has already eased its stance a little, there is still a lot of ambiguity regarding the exact timelines and conditions for the approval. The government must shed clarity on this before re-initiating the bidding process. MTN has also mentioned that it may bid again if mobile money services are included in the bid.

However, with Vodafone-Safaricom-Vodacom consortium already winning one bid and expecting to start services in Ethiopia as early as next year, the company definitely has an edge over its other competitors. Considering that the first bid took more than a year and faced several bureaucratic delays, it is safe to say that the second bid will not happen any time soon, especially since this time it is expected that the government will give a serious thought to the inclusions/exclusions of the deal and the value that mobile money brings to the table for both the government and the bidding company.

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