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P2P Lending Needs More than Just an Appetite for Investment by EOS Intelligence
by EOS Intelligence EOS Intelligence No Comments

P2P Lending Needs More than Just an Appetite for Investment to Sustain Its Growth

Peer-to-peer (P2P) lending has emerged as a global financial phenomenon. It has revolutionized the way individuals access loans. The innovation of P2P lending has experienced varying degrees of success and turbulence in different regions, notably India, China, and the USA. Understanding the reasons behind the rise and fall of P2P lending across these major markets provides critical insights into the global dynamics of this industry.

P2P lending – good old loans with a modern take

Peer-to-peer (P2P) lending is giving loans through an online platform that connects lenders and borrowers to exchange goods, services, or money directly by eliminating traditional intermediaries such as banks. Financial technology facilitates P2P lending, directly connecting individuals or businesses with investors.

Lenders and borrowers need to register with a P2P platform before conducting any transactions. The registration entails an AI-based evaluation of the borrowers to assess their credit score, employment details, income, and credit history. It also monitors their social media activities, including usage patterns and interactions. Using these assessments, the borrowers’ creditworthiness is determined, categorizing them into various risk tiers and informing the interest rates offered.

Subsequently, lenders can make informed decisions about lending money based on borrowers’ assessed scores. This empowers them to select suitable borrowers and enables borrowers to choose appropriate lenders. The P2P platform charges fees from both parties for its services instead of deriving profit from monthly installments.

To mitigate fraudulent activities, certain regulatory bodies oversee these platforms to ensure compliance with regulations and maintain transparency. For example, P2P lending in the USA is regulated at the federal and state levels. The US Securities and Exchange Commission (SEC) oversees the investors of the P2P lending platforms, while the Federal Trade Commission and the Consumer Protection Financial Bureau oversee the borrowers. In India, all P2P lending platforms must register as Non-Banking Financial Companies (NBFC)-P2P Lenders with the Reserve Bank of India (RBI).

The global P2P lending market is expected to reach US$705.81 billion by 2030 up from US$83.79 billion in 2021, at a 26.7% CAGR during 2022-2030, according to Precedence Research.

In addition to the increasing demand for financial services, factors such as lower operating fees compared to traditional financial services, quicker loan approvals, and the adoption of digitization in the banking sector drive the growth of the P2P lending market.

P2P Lending Needs More than Just Appetite for Investment by EOS Intelligence

P2P Lending Needs More than Just Appetite for Investment by EOS Intelligence

China’s P2P lending – started strong but faced a downturn

China’s P2P lending industry witnessed speedy development since 2007. There were 3,383 P2P lending platforms running in China with around RMB 130 billion (~US$18.2 billion) in combined monthly transactions in January 2016, as per the Home of Online Lending, an organization that collects and assembles P2P data from various sources in China. Founded in August 2007, PPDai or Paipaidai, currently known as FinVolution Group, was the first online P2P lending platform in China. PPDai was listed on the New York Stock Exchange in November 2017.

However, this burgeoning growth of the P2P lending industry in China was unsustainable and short-lived. This was evident from the fact that out of 6,607 P2P lending platforms, 6,277 were closed and problematic, leaving only 330 P2P lending platforms in business in China as of August 2020, as per the Home of Online Lending. As of August 2020, the lenders of the collapsed P2P lending industry of China owed depositors US$115 billion.

There were several Ponzi schemes related to untrustworthy P2P lending platforms enticing potential investors with attractive bonuses for referring family and friends, as reported by the Chinese media by the end of 2015. For example, in early 2015, Ezubao, with 900,000 investors, went bust when it turned out to be a Ponzi scheme with US$9 billion. Some P2P platforms were found creating fictional information about the borrowers in order to create groups of assets, and these platforms utilized funds to fulfill their own business requirements.

Although until early 2016, no regulatory authorities were overseeing P2P platforms in the country, it was believed that the Chinese government was observing the industry closely. Three bodies (The China Banking Regulatory Commission regulating P2P lending business, the Central Ministry of Industry and Information Technology supervising the telecom business of P2P lending, and the Cyber Administration of China developing rules, managing administrative licenses, and control over internet regulation and censorship in China) together announced the Interim Measures on Administration of the Business Activities of Peer-to-Peer Lending Information Intermediaries (“Interim Measures”) in August 2016.

Interim Measures became China’s first regulatory framework for the P2P lending industry. According to the Measures, a P2P lending platform’s scope of business in China is limited to acting as lending information intermediaries. As per the new rules, P2P lending platforms were mandated to establish custodian accounts with registered financial institutions for investor and borrower funds previously held by them. This was done to decrease the risks associated with situations when P2P lending platform owners flee with the investors’ money.

Interim Measures also mandated that P2P lending platforms register with the local financial regulatory body. The Measures provided P2P lending platform owners with a twelve-month timeline for implementing all the mandates. However, there was a delay in the implementation, as the registration and rectification processes were scheduled to be completed by June 2018, but they were not complete as of August 2018.

The exponential growth of P2P lending platforms in China resulted in several crashes due to cash shortfalls, defaults, frauds, and closures, causing massive financial losses for lenders. Such market scandals made it difficult for investors and borrowers in China to survive. They presented difficulties in acquiring financial resources, and the platforms faced a situation where investors started withdrawing their investments, thus bringing about the ultimate crash of the P2P lending industry in China.

Indian P2P lending – bright future fueled by regulators

P2P lending started in early 2014 in India. However, it began gaining significance in September 2017 when the Reserve Bank of India (RBI) decided to regulate P2P lending in the country.

People in India started using online platforms to borrow and lend funds to various untapped markets characterized by less developed infrastructure and lower investment activity. The method of borrowing changed over time. Borrowers who found it difficult to access credit from financial institutions were borrowing money from relatives, friends, acquaintances, lenders, colleagues, and business partners. The revolution took place via the intervention of digital ways of funding the credit ecosystem.

In September 2017, RBI introduced regulatory guidelines that ensured P2P lending through non-banking financial companies (NBFCs). In October 2017, RBI published a different framework for the P2P lending platforms. RBI categorized these rules as NBFC-P2P. The regulatory norms have enabled P2P lending platforms to create adaptable lending and borrowing models, including the development of flexible loan tenures, interest rate structures, and more.

Later, in 2018, RBI published a list comprising names of the first five companies registered with NBFC-P2P lending. The registration list helped ensure a secure, regulated sector and protect the interests of lenders and borrowers. RBI, in one of its regulations, mentioned a cap of Rs.5,000,000 (~US$60,000), which means if lenders invest money above Rs.1,000,000 (~US$12,000) across P2P platforms, they are required to submit a certificate from a practicing Chartered Accountant certifying a minimum net worth of Rs.5,000,000. This also means that the borrower must certify the difference between their assets and liabilities to show their financial strength. The introduction of the cap discouraged many lenders from giving out big loans.

According to RBI, fund transfers between participants on the P2P lending platform should be made through the escrow account mechanism. This means that all transactions will be processed via bank accounts, and cash transactions are strictly prohibited.

RBI mandated that P2P lending platforms be members of the Credit Information Companies, entities that maintain credit-related information about businesses and individuals. This regulation by RBI was welcomed by P2P platforms but separated less powerful players from the P2P market. The inclusion of rules has brought higher transparency, credibility, and stability to P2P lending. However, they have also increased the operation cost for P2P lending platforms and decreased the activities of lenders and borrowers.

All these changes have helped borrowers obtain loans more easily and protected lenders from fraudulent activities. According to IndustryARC, India’s P2P lending market is predicted to reach US$10.5 billion with a CAGR of 21.6% between 2021 and 2026. Market transparency in P2P lending, facilitated by technologies such as blockchain and smart contracts, has contributed to the growth of the P2P lending market.

Government promotion of cashless technology in P2P lending has reshaped the financial sector, gaining significant momentum over the past years. The introduction of AI and machine learning, along with RBI norms, has created a more secure marketplace for investors and borrowers. Innovations and new players in the P2P market are expected to impact the growth of P2P lending in the future.

P2P lending in the USA – star performer driven by technologies

The P2P lending market shows significant growth in the North American market with a larger size, higher revenue, and rapid growth. Several platforms, such as Lending Club (founded in 2006) and Prosper (founded in 2005), supported the growth of the P2P lending market in the USA by making P2P lending easy and secure. These platforms helped in attracting a large number of borrowers and investors. In the USA, the adoption of mobile and digital technologies such as Venmo, which was acquired by PayPal in 2013, and Squash Cash increased customer interest in digital transfer capabilities.

The USA has achieved remarkable success in P2P lending compared to other countries, partially due to the implementation of various payment technologies, including the EMV (Europay, Mastercard, and Visa) smart payment card protocol used as an electronic payment method. This success can be attributed to the presence of adequate legal frameworks and well-defined strategies for generating revenue.

One contributing factor to the rise of P2P lending in the USA has been the emergence and growth of small and medium-sized enterprises (SMEs actively involved in P2P lending activities). These platforms helped reduce the cost of office setups, maintenance, staffing, etc., and thus helped boost the growth of P2P lending.

One of the reasons behind the increase in the P2P lending market was the COVID-19 pandemic in 2020. At a time when major businesses and organizations were facing difficulties regarding finance and operations, P2P lending platforms helped them to raise funds for their operations through online lending platforms such as i2iFunding, Faircent, Lendbox, etc., allowing a direct lending process without the involvement of third-party participants, such as banks.

Technological advancements, such as blockchain, are another reason behind the increase in the P2P lending market in the USA. They eliminated the need for physical branches and reduced operational costs. They reached global audiences such as individuals and businesses in underserved or remote areas. They also helped in reducing the risk of fraud and improve financial transactions. Undoubtedly, the P2P lending market is growing largely thanks to the adoption of new technologies.

EOS Perspective

Peer-to-peer (P2P) lending has shown distinct trends in India, China, and the USA. India and China witnessed a decline in their P2P lending markets due to regulatory hurdles aimed at addressing issues such as fraud and investor protection. Conversely, the USA experienced a surge in P2P lending activities. This uptick can be attributed to a well-established regulatory framework and a sustained appetite for alternative lending solutions. P2P lending platforms in the USA have been able to offer borrowers access to credit while providing appealing investment opportunities to lenders, all while adhering to regulatory standards.

Many new developments in P2P lending are helping the platforms become successful. One such development is the integration of decentralized finance (DeFi), a financial technology that works on a secure distributed ledger. The DeFi technology, born in 2018, aims to create a transparent, open, and permissionless financial system operating on blockchain networks such as Bitcoin or Ethereum.

DeFi in the USA empowers individuals with P2P digital exchange by challenging the centralized financial system by eliminating banks’ fees and other charges. DeFi allows a P2P lending platform to access a global pool of liquidity (which means a collection of digital assets to enable trading on DeFi), reduces costs and risks, and offers more flexible and customized products.

Artificial Intelligence and Machine Learning will continue to be the solutions that transform P2P lending with better data analysis, credit scoring, risk assessments, and fraud detection capabilities. AI will also allow for efficient and more personalized services to both lenders and borrowers.

Regulatory authorities, with their frameworks, have saved several platforms from data breaches, tax compliance issues, consumer protection concerns, and cyberattacks. These authorities, together with industrial associations, will continue to create innovative and adaptive solutions such as sandbox programs (a time-bound, controlled, and live testing environment involving parameters within which the firm must operate).

Looking at the history of some of the key P2P lending markets, it is evident that creating a more robust, secure, and dependable P2P lending ecosystem necessitates technological innovations and establishing a practical regulatory framework to ensure the safety of financial activities.

Flavors and Fragrance Industry Rivalry Intensifies as DSM and Firmenich Join Forces by EOS Intelligence
by EOS Intelligence EOS Intelligence No Comments

Commentary: Flavors and Fragrance Industry Rivalry Intensifies as DSM and Firmenich Join Forces

Over the years, DSM, a Dutch-based petrochemicals and commodity chemicals company, has strategically been shifting its focus to evolve into a fully integrated health, nutrition, and biosciences company. This transformation has been driven by several key factors, including increasing consumer demand for healthy and natural products, growing opportunities in the health and nutrition market, and DSM’s claimed commitment to sustainability.

Since 2003, DSM has actively pursued strategic acquisitions, consistently strengthening its product portfolio in human and animal health nutrition while divesting its chemical businesses. In 2022, the company sold the last of its traditional chemicals business to fully focus on its health and nutrition endeavor. In the same year, DSM made a notable move by announcing its plans to merge with Firmenich, a prominent player in the flavors and fragrances industry. The merger was completed in May 2023, and the combined entity is now renamed as DSM-Firmenich. While DSM has a history of acquiring businesses, the industry was taken aback by DSM’s recent acquisition of one of the world’s largest flavor and fragrance companies, leaving peers intrigued about the potential implications of this merger.

How does the deal impact the industry?

The flavors and fragrance industry is highly concentrated, with four major players – International Flavors & Fragrances (IFF) (22%), Givaudan (18%), Symrise (12%), and Firmenich (11%) – controlling more than 60% of the market in 2022. Changing consumer preferences for natural, exotic, and functional ingredients have prompted companies in this sector to explore growth opportunities beyond traditional flavor and fragrance products.

Over the last few years, these companies have been actively expanding their presence by acquiring or investing in businesses specializing in functional and natural ingredients. For instance, in 2021, IFF acquired DuPont Nutrition and Biosciences, a well-established player in value-added ingredients; in 2020, Givaudan acquired Ungerer, a leading US-based company specializing in flavor and fragrance specialty ingredients; and in 2021, Symrise acquired Canada-based company called Giraffe Foods, which develops custom flavors. The merger of DSM’s health and nutrition business with Firmenich’s Perfumery and Taste business has positioned the combined entity alongside these industry leaders.

Hence, in a broader context, all these major players look quite similar and are moving in a similar direction, except Symrise. Though Symrise has made some acquisitions, many of them are related to pet food, unlike the others who have been actively broadening their product portfolio in food, beverage, and nutrition.

Consequently, the DSM-Firmenich merger heightens competition, particularly among DSM-Firmenich, IFF, and Givaudan, as they strive to enhance their product offerings in flavors and nutrition and secure a larger market share. Furthermore, this recent merger consolidates the market, making it challenging for smaller players to compete in this highly competitive flavors and fragrances space. That being said, there are still numerous opportunities for innovation in flavors and functional ingredients among startups, mid-sized, and smaller companies.

How could DSM and Firmenich benefit from the deal?

The combined entity operates in four distinct business segments: Perfumery and Beauty (encompassing perfumery, fragrance, and personal care ingredients), Animal Nutrition and Health (offering products and solutions for animal nutrition), Health, Nutrition and Care (covering dietary supplements, early life nutrition, health and wellness products, etc.), and Taste, Texture, and Health (encompassing flavors, food, and beverage ingredients). Through the merger, the companies could capitalize on each other’s core strengths and benefit from synergies.

It is anticipated that 60% of the DSM-Firmenich revenue synergies will be derived from the Taste, Texture, and Health segment, signaling the likelihood of a substantial transformation in the combined entity’s food and beverage product portfolio. DSM is expected to capitalize on Firmenich’s expertise in enhancing taste using natural flavors, particularly in areas such as plant-based protein alternatives for meat and fish, and dairy alternatives. DSM is also expected to leverage Firmenich’s other strengths, such as salt and sugar reduction, bitterness locking, masking unpleasant taste, and texturizing, to further enhance its food and beverage offerings.

In the Health, Nutrition, and Care segment, DSM is likely to focus on developing next-generation supplements that promote health enriched with Firmenich’s taste offerings. Additionally, DSM may also expand its product portfolio in areas like gut health, brain health, women’s health, and postbiotics, incorporating Firmenich’s unique flavors to enhance product appeal.

In the Perfumery and Beauty segment, Firmenich might have some potential to expand its presence in the beauty and personal care market. Currently, specializing primarily in nutritional flavors and fragrances, Firmenich is likely to consider incorporating DSM’s aroma chemicals into its portfolio, enhancing its personal care capabilities. Furthermore, there’s the possibility of exploring the integration of DSM’s functional ingredients to cater to the growing demand for functional beauty products. However, relative to perfumery, DSM lacks the complementary or core strengths necessary to significantly enhance Firmenich’s already robust perfumery offerings. Hence, it is anticipated that the combined entity would have little to benefit from the merger on the perfumery side.

Additionally, the combination of DSM and Firmenich would provide opportunities to leverage each other’s proprietary technologies, especially in fermentation and extraction. DSM-Firmenich would benefit from extending its presence into local and regional markets worldwide.

How does the deal impact customers?

The extensive worldwide presence of both DSM and Firmenich would be advantageous for customers, enabling them to gain deeper insights into regional consumer preferences and tailor their products accordingly. Additionally, customers could take advantage of the expanded product range provided by both companies, which simplifies access to all necessary ingredients through a single source. The integrated solutions also enhance control and coordination throughout the product development process, ensuring a stable and secure supply chain.

EOS Perspective

The DSM-Firmenich merger is likely to result in higher innovation and growth opportunities in the flavors and ingredients space. However, both DSM and Firmenich are major players with diverse product portfolios, which could pose integration challenges. Speedy integration is crucial as CPG companies look to make products to meet the growing demand swiftly. Therefore, the success of the merger depends heavily on the speed of integration and how well the product offerings align with customer needs and target markets.

It is anticipated that the DSM-Firmenich merger will take some time to fully materialize and make a significant impact on the market. If the integration challenges are well-managed, DSM-Firmenich has the potential to capture a significant market share from its competitors. Ultimately, the success of this merger depends upon how effectively DSM incorporates Firmenich’s ingredients into its products and builds on new opportunities with these resources.

by EOS Intelligence EOS Intelligence No Comments

Chip Shortage Puts a Brake on Automotive Production

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The world is currently witnessing a semiconductor shortage and one of the worst-hit sectors is the automotive industry. A new vehicle uses an average of 1000-1500 microchips, making semiconductors an integral part of automobile manufacturing. Thus, the current shortage has resulted in a slowdown (and in some cases a halt) in production by several car manufacturers, especially of high-feature vehicles that require more chips. This has had a severe impact on auto manufacturers’ revenues in 2021, expecting to cost them close to US$200 billion this year. With no sight of recovery in the near future, the automobile sector must get creative with its supply chains and make some long-term changes in order to sustain production.

The automobile sector globally has been hit by the shortage of semiconductor chips, which are a key component in automobile manufacturing and are used for numerous features, such as fuel-pressure sensors, digital speedometers, and navigation displays.

The shortage stems from the increased demand for chips in the consumer electronics segment (such as laptops, phones, TV sets), which witnessed a spike in demand and sales during the early onset of the COVID-19 pandemic. This was coupled with a subdued demand for chips from the automobile segment during the same time as the environment was less favorable for new vehicle purchase.

Although the demand for automobiles quickly recovered in the second half of 2020, auto manufacturers had already withheld large chip orders due to sales uncertainty, and hence they could not secure a steady supply of chips to fulfill the recovered demand, as most foundries had already adjusted their production and increased their focus on catering to alternative industries.

Moreover, the nature of order contracts largely differs between the automobile and the consumer electronics sectors. The auto sector follows primarily the just-in-time manufacturing principle with focus on short-term orders and purchase commitments for chips. On the other hand, other sectors such as consumer electronics work with long-term orders, which in turn bind the suppliers that have switched production from auto sector chips to other chips. Furthermore, semiconductor players are happier with long-term binding contacts as such contracts provide them with more stability and facilitate better planning of their own supply chain.

The shortage was further aggravated by a storm in Texas in February 2021 that halted production in two of the world’s largest semiconductor factories and a subsequent fire in one of the largest semiconductor factories in Tokyo in March 2021.

Chip Shortage Puts a Brake on Auto Production by EOS Intelligence

Chip Shortage Puts a Brake on Auto Production by EOS Intelligence

Given these factors, the supply has tightened, forcing several automotive companies to curtail their production levels, which in turn has significantly affected their revenue. To give just a few examples, General Motors saw a 30% dip in sales in 2021 while Ford expected its 2021 earnings to be affected to the tune of US$2.5 billion.

Moreover, there is no short-term sight of respite. On an average, the lead time for chip production is anywhere between four to six months, with setting up new production lines or switching foundries taking even longer (six to twelve months). Further, switching to a new manufacturer may even take longer than 12 months in case new design or licensing requirements need to be met.

To counter this problem in the short run, auto manufacturers are reducing the number of features they offer and are focusing on fewer high-feature models. For instance, Japan-based Nissan is now omitting the navigation system in several of its models. Similarly, Renault has stopped adding a large digital screen behind the steering wheel, while BMW announced that it will remove touchscreen functionality from the Central Information Display in several models. However, these are short-term measures and not ideal for premium car segment as they may impact brand reputation.

Thus, given the circumstances, auto companies have to be innovative with their supply chains to solve this problem in the long run. They also need to ensure that they do not land in a similar situation in the future.

Traditionally, most auto manufacturers deal with only one key supplier (known as tier 1 supplier), who in turn sources all parts from specific component suppliers, including semiconductors from foundries. While this was convenient for the auto manufacturers, this resulted in lack of transparency across the supply chain. Moreover, this meant that the manufacturers did not have direct relations with foundries to ensure smooth supply.

However, in the face of the unfolding shortage, several leading players, such as BMW, Mercedes, and Volkswagen, started building strategic relations with chip manufacturers to get better and direct access to supply lines for semiconductors. In December 2021, BMW signed an agreement with German-based Inova Semiconductors and US-based GlobalFoundries to lock in a steady chip supply for their cars. Similarly, Ford also entered into a strategic collaboration with GlobalFoundries to purchase directly from the chipmaker. Furthermore, in November 2021, General Motors entered into an agreement with Foxconn Technology Group to co-develop chips that can be used in its vehicles.

Additionally, the auto sector is also moving away from the widely followed just-in-time model that facilitated lean inventory and pushed up profits. Companies are now keener to secure long-term non-disrupted supply of chips and are willing to enter into long-term contracts ranging 2 to 3 years.

Apart from this, car manufacturers are also looking at altering designs to limit the number of chips needed. Currently, most chips needed by the auto sector are large and outdated compared with those used for smart phones and other gadgets. Most foundries are now producing new generation microchips for these devices and do not want to switch back to old chips used in cars as investing in old technology is much less lucrative for them.

For this reason, auto manufacturers are considering revamping their chip designs, however, this comes with its own set of limitations. Automobiles need to undergo a host of certifications and safety testing to ensure road readiness. Any changes in designs regarding features such as cruise control, navigation, etc., would require the vehicles to get re-certified and clear safety testing again across all geographic markets, which has significant cost and lead time attached to it. Moreover, a complete overhaul in the chip board would require large amount of investment as it would impact the overall mechanical design of the vehicle.

However, several companies have already started working on this. In late 2021, General Motors announced that it is working with chip suppliers, Qualcomm, STM, TSMC, Renesas, NXP, Infineon, and ON Semi to develop a new set of microcontrollers that will consolidate many functions handled by individual chips and reduce the number of chips required by 95% for all future vehicles.

In the long run, it is expected that several auto companies will work on updating their chips as foundries refuse to downgrade the chips they produce. Moreover, while it will be costly and cumbersome in the beginning, it will be beneficial in the long run as companies will be less dependent on a number of chips, and instead work with a single chip overseeing multiple functions.

EOS Perspective

Chip shortage has significantly crippled the automotive sector stalling production in an unprecedented manner. It has also cost auto companies billions of dollars, while creating an inconvenience for users as car prices have risen significantly and customers have to wait for months, if not more, for their new cars.

But this shortage has also been a learning opportunity for the automobile sector, which is now working on restructuring its supply chain to reduce reliance on one key supplier. The industry is also placing more emphasis on supply chain visibility to ensure that a similar shortage does not occur in the future. This will mean a real-time insight not just into the key suppliers, but also further into their vendors, i.e. individual part suppliers. This is likely to bring the use of technologies such as IoT and AI to automotive supply chain monitoring in a more prominent manner.

The chip shortage is also likely to result in vehicle design upgradation by several leading manufacturers, so that the new upgraded chips can be used. This upgradation in design to incorporate new chips has been long due, however, auto manufacturers were stalling it because of costs and cumbersome re-certification processes.

The current pressures resulting from the semiconductor and chip shortage, are likely to bring a deep overhaul in the automotive sector, with companies and suppliers willing to invest in supply chain and design-based creative solutions, striving to gain a long-term competitive edge amid the new and challenging environment.

by EOS Intelligence EOS Intelligence No Comments

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

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.

by EOS Intelligence EOS Intelligence No Comments

Diagnostics Gain Spotlight amid Coronavirus Outbreak

It took 60 days for global COVID-19 infections to reach 100,000, but this figure doubled in the following 12-14 days, and the addition of next 100,000 cases took only 3 more days. Because of highly contagious nature of the novel coronavirus, testing became essential to keep the epidemic under control. As a result, there was a spike in global demand for coronavirus testing kits. As per McKinsey’s estimates, in May 2020, global demand for coronavirus testing was 14 million to 16 million per week, but less than 10 million tests were being conducted.

Industry was quick to respond to the rise in demand

The widespread outbreak of coronavirus required the manufacturers to develop and launch new testing kits in large volumes in a short duration of time. Diagnostics kit suppliers responded promptly to this spike in demand by developing new coronavirus testing kits. Roche Diagnostics, for instance, developed coronavirus test in about six weeks – such diagnostic tests generally take 18 months or more to reach regulatory review stage. In 2020, Roche developed a total of 15 solutions for coronavirus diagnosis.

Governments across the world eased up regulatory procedures for manufacturers in order to allow rapid development and commercialization of the coronavirus testing kits. This paved way for many companies to quickly launch new products to the market. For instance, a Korean firm, Seegene, developed coronavirus testing kit in two weeks and got approval from Korea Centers for Disease Control and Prevention (KCDC) in another two weeks’ time. Such approvals generally take more than six months in Korea.

Furthermore, standard regulatory process for approval of diagnostic kits in the USA typically take several months, but considering the public health emergency in the event of pandemic, the FDA issued emergency use authorizations to expedite the process of bringing coronavirus test kits to the market. Emergency use authorizations are like interim approvals provided on the basis of sufficient evidence to suggest a diagnostics test is effective and the benefits outweighs potential risks.

By the end of 2020, the FDA granted emergency use authorization to 225 diagnostic tests for coronavirus detection, including test kits developed by Abbott Laboratories, Roche, Cepheid, Clinomics, Princeton BioMeditech, UPenn, Inno Diagnostics, Ipsum Diagnostics, Co-Diagnostics, QIAGEN, DiaSorin, BioMérieux, and Humanigen.

Leading companies with adequate resources quickly ramped up their production capacity by multifold in line with the rising demand. For instance, a US-based firm, Thermo Fisher Scientific, increased the global production of coronavirus test kits from 50,000 per week in January 2020 to 10 million per week by June 2020. In 2020, Roche spent CHF 137 million (~US$149 million) to ramp up production capacity and supply chain for all COVID-19-related testing products.

Some companies also received government grants and private investment to scale up their production capacity. For instance, in July 2020, BD (Becton, Dickinson and Company) received a US$24 million investment from the US government to scale up production of coronavirus test kits by 50%, thereby, enabling the company to produce 12 million test kits per month by the end of February 2021.

The pandemic encouraged the shift towards decentralizing diagnostics

While the test kit manufacturers were trying to achieve round the clock production to meet the demand, they struggled with global supply chain disruptions which were also induced by the pandemic.

Coronavirus testing requires several components including specialized chemicals and laboratory testing equipment. Roche, for example, manufactures coronavirus tests in the USA but procures components of the test kit from different countries. One of the important components of test kits is reagent, a specialized liquid used for the identification of coronavirus. Roche produces these reagents mainly in Germany and few other production sites located across the world.

Further, the test kits are often compatible only with company’s own testing equipment and systems. For instance, the Roche cobas SARS-CoV-2 test kit runs on the cobas 6800 or 8800 systems. The cobas 8800 system includes approximately 23,000 components which are procured from different parts of the world. In addition to this, the production involves 101 sub-assemblies and accumulated assembly time of about 450 hours each. Final production of these instruments from Roche takes place in Switzerland.

Manufacturing of a coronavirus testing kit involves complex supply chain. Spread of coronavirus forced countries to implement extreme measures including lockdowns and trade restrictions which impacted the supply chain of test kit manufacturers. Producing all the testing components and equipment at one place is near to impossible. For instance, the production of reagents involves highly sophisticated and sensitive processes, and thus, setting up a new production site to manufacture reagents on a large scale would take several months. Setting up a new production site and streamlining the procurement for such testing equipment and systems would take several years. Hence, the diagnostics firms upped their R&D activities in an effort to develop tests that could be conducted without sophisticated laboratory systems and equipment.

Moreover, the high demand for testing compelled the diagnostics practices to evolve far beyond the traditional laboratory-based business model. The need for community testing during the pandemic that challenged the operational capabilities of hospitals and diagnostics labs dictated the importance of decentralizing diagnostics for improved patient care. This gave rise to increased demand for point-of-care testing.

The two most widely used diagnostic tests for coronavirus detection are Reverse Transcription Polymerase Chain Reaction (RT-PCR) and Antigen tests. RT-PCR test detect viral RNA in samples from the upper and lower respiratory tract, while antigen test is used to detect viral proteins in samples.

RT-PCR test is considered gold standard for coronavirus detection since the accuracy and reliability is high compared to Antigen test. However, RT-PCR test needs to be processed in a laboratory-setting and had turnaround time of several hours. Hence, there was a need for development of RT-PCR tests that could give faster results without the support of laboratory equipment.

On March 18, 2020, Abbott announced the launch of their first coronavirus test kit that was compatible with their system ‘m2000 RealTime’ which processed 470 tests in 24 hours and another ‘Alinity m’ system with capacity to run 1,080 tests in a 24-hour period. Since there was demand for more portable and fast testing solution, on March 30, 2020, Abbott launched a RT-PCR point-of-care test that ran on ID NOW system, which is the size of a small toaster. The test delivers results in 13 minutes or less. The test price is in the range of ~US$100.

Further, despite the limitations of accuracy and reliability, in some cases antigen test is preferred because there is no requirement of a lab specialist to conduct this test, thus making it less expensive, and the result is available in a few minutes. The industry saw an opportunity here and quickly developed rapid antigen tests that can be conducted at home without any assistance. For instance, in December 2020, the US FDA granted emergency use authorization to an Australia-based firm Ellume’s antigen test (priced at ~US$30) as first over-the-counter at-home diagnostic test for coronavirus detection. Soon after, Abbott also received emergency use authorization from FDA for its at-home rapid antigen test (priced at US$25) giving results in 15 minutes.

Other countries around the world also followed the suit by extending official authorization to the home-based tests for coronavirus detection. For instance, in February 2021, Germany’s Federal Institute for Drugs and Medical Devices (BfArM) granted special approval for the first time to antigen home-test kits developed by US-based Healgen Scientific as well as China-based firms Xiamen Boson Biotech and Hangzhou Laihe Biotech.

Diagnostics Gain Spotlight amidst Coronavirus Outbreak by EOS Intelligence

Coronavirus crisis accelerated innovation in the field of diagnostics

In a united fight against the pandemic, governments, private sector, as well as NGOs and philanthropists across the world stepped forward to raise funds to bolster R&D efforts in coronavirus diagnostics. As per data compiled by Policy Cures Research (an Australian firm engaged in global health R&D data collection and analysis), from January 2020 to September 2020, funds worth over US$800 million were committed for coronavirus diagnostics R&D. The firm also indicated that 450+ coronavirus diagnostics products were in R&D pipeline since January 2020 to December 2020.

With firms looking to capitalize on exponentially rising demand for coronavirus testing, the development of new diagnostics technologies beyond conventionally used tests (i.e., RT-PCR and antigen tests) picked up significantly.

For instance, in May 2020, the FDA granted an emergency use authorization to first ever CRISPR-based rapid test kit developed by Sherlock Biosciences. CRISPR, an acronym for Clustered Regularly Interspaced Short Palindromic Repeats, is a gene editing technology which allows to alter the DNA. Sherlock’s rapid test is a paper-strip test (like a pregnancy test) which can be conducted at point-of-care and does not require any additional equipment for processing of the test. The test works by programming a CRISPR enzyme to release a detectable signal in presence of genetic signature for coronavirus.

In March 2020, US-based Surgisphere launched a smartphone app using Artificial Intelligence algorithms to detect coronavirus infection. This app confirms diagnosis by integrating the findings of chest CT scan and laboratory tests with clinical symptoms and exposure history. Preliminary studies found that the tool can detect coronavirus infection with 95.5% accuracy.

Further, application of nanotechnology for diagnosis of coronavirus infection is also underway. Canada-based Sona Nanotech developed a rapid antigen test using gold nanoparticles. This is a strip test that can be conducted at point-of-care and gives result in 15 minutes. Research is in progress to develop wearable sensors using nanoparticles for detection of coronavirus. In January 2021, University of California San Diego received US$1.3 million from the National Institutes of Health to develop a test strip containing nanoparticle that change color in presence of coronavirus. This test strip can be attached on a mask and used to detect coronavirus in a user’s breath or saliva.

Innovation wave was not limited to development of different types of tests but also expanded to consumables. For instance, in March 2020, HP (a company manufacturing 3D printers) teamed up with Beth Israel Deaconess Medical Center (a teaching hospital of Harvard Medical School) to develop 3D printed nasopharyngeal swab (typically used to collect sample for coronavirus testing) and within 35 days the clinically validated swab was ready for use. By May 2020, these swabs were commercially available for the US market following the FDA approval. In June 2020, a Belgium-based 3D printing service provider, ZiggZagg, began to plan large-scale production of swabs on their fleet of HP 3D printers. By October 2020, the company had 3D-printed over 700,000 swabs for the Belgian market.

EOS Perspective

A market research firm, The Business Research Company, estimated that the global COVID-19 rapid test kits market was expected to reach a value of US$14.94 billion in 2020. Due to worldwide vaccination drive, the market is expected to decline at a rate of -54.9%, to reach US$1.37 billion in 2023.

Though the demand for coronavirus tests is expected to diminish eventually, it has supported rapid development of diagnostics infrastructure which will remain. In India, for example, only one laboratory was performing molecular assays for COVID-19 in January 2020. The COVID-19 pandemic has shifted that balance. By May 2020, some 600 Indian RT-PCR laboratories had been set up in an effort to help manage the pandemic, thousand-fold increasing testing capacity. The additional capacity will likely remain in place as the pandemic subsides, leaving the RT-PCR assay as the dominant method for diagnosing most viral infections in India in the future.

Furthermore, with surge in demand for the coronavirus testing, the provision of diagnostic services expanded beyond the purview of hospitals and laboratories. Mobile testing facilities and drive-through testing sites propped up with development of point-of-care diagnostics. For instance, Walgreens, one of the largest pharmacy chains in the USA, offer coronavirus drive-thru testing at 6,000+ locations across the country. Further, there is high-demand for home-based testing.

Diagnostics firms riding high on the COVID-19 gains have been actively scouting opportunities to strengthen their positioning in the market and prepare for the post-pandemic world. High demand for COVID-19 test kits boosted the revenues of diagnostic companies, with Roche, Thermo Fisher, PerkinElmer, Hologic, and DiaSorin among the companies benefiting. With strong balance sheet, these companies went on with M&A flurry to advance their diagnostic portfolio and other core business verticals.

As the virus originated in China, the country was better prepared and first to develop relevant detection mechanisms. By the time the virus spread to the other parts of the world, Chinese companies were ready to export detection kits globally. Coronavirus outbreak helped China to penetrate major markets such as EU and the USA in which the indigenous diagnostics companies traditionally had a stronger hold. China was a net importer of diagnostic reagents and test kits in 2019. But in 2020, after the outbreak of coronavirus, China ramped up its production capacity of diagnostic reagents and test kits, and as a result its export growth increased by more than 500% and the country became a net exporter of diagnostic reagents and test kits by the end of 2020.

This indicates that the outbreak of the pandemic has shifted the market dynamics on many fronts. As the pandemic slowly subsides, some of these shifts might partially revert, however, the way testing is performed is likely to remain.

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