ASIA Archives

01/04/2013by EOS Intelligence EOS Intelligence No Comments

Will Shale Gas Solve Our Fuel Needs for the Future?

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At first glance, shale gas might look too good to be true: large untapped natural gas resources present on virtually every continent. Abundant supplies of relatively clean energy allowing for lower overall energy prices and reduced dependence on non-renewable resources such as coal and crude oil. However, despite this huge potential, the shale gas revolution has remained largely limited to the USA till now. Concerns over the extraction technology and its potentially negative impact on the environment have hampered shale gas development in Europe and Asia on a commercial scale. However, increasing energy import bills, need for energy security, potential profits and political uncertainty in the Middle East are causing many countries to rethink their stand on shale gas extraction development.

How Large Are Shale Gas Reserves And Where Are They Being Developed?

An estimation of shale gas potential conducted by the US Energy Information Administration (EIA) in 2009 pegs the total technically recoverable shale gas reserves in 32 countries (for which data has been established) to 6,622 Trillion Cubic Feet (Tcf). This increases the world’s total recoverable gas reserves, both conventional and unconventional, by 40% to 22,622 Tcf.

Continent	Shale Gas Reserves and Development
North America	Technically Recoverable Reserves: 1,931 Tcf Till now, almost whole commercial shale gas development has taken place in the USA. In 2010, shale gas accounted for 20% of the total US natural gas supply, up from 1% in 2000. In Canada, several large scale shale projects are in various stages of assessment and development. Despite potential reserves, little or no shale gas exploration activity has been reported Mexico primarily due to regulatory delays and lack of government support.
South America	Technically Recoverable Reserves: 1,225 Tcf Several gas shale basins are located in South America, with Argentina having the largest resource base, followed by Brazil. Chile, Paraguay and Bolivia have sizeable shale gas reserves and natural gas production infrastructure, making these countries potential areas of development. Despite promising reserves, shale gas exploration and development in the region is almost negligible due to lack of government support, nationalization threats and absence of incentives for large scale exploration.
Europe	Technically Recoverable Reserves: 639 Tcf Europe has many shale gas basins with development potential in countries including France, Poland, the UK, Denmark, Norway, the Netherlands and Sweden. However, concerns over the environmental impact of fracturing and oil producers lobbying against shale gas extraction are holding back development in the region with some countries such as France going as far as banning drilling till further research on the matter. Some European governments, including Germany, are planning to bring stringent regulations to discourage shale gas development. Despite this, countries such as Poland show promising levels of shale gas leasing and exploration activity. Several companies are exploring shale gas prospects in the Netherlands and the UK.
Asia	Technically Recoverable Reserves: 1,389 Tcf China is expected to have the largest potential of shale gas (1,275 Tcf). State run energy companies like Sinopec are currently evaluating the country’s shale gas reserves and developing technological expertise through international tie-ups. However, no commercial development of shale gas has yet happened. Though both India and Pakistan have potential reserves, lack of government support, unclear natural gas policy and political uncertainty in the region are holding back the extraction development. Both Central Asia and Middle East are also expected to have significant recoverable shale gas reserves.
Africa	Technically Recoverable Reserves: 1,042 Tcf South Africa is the only country in African continent actively pursuing shale gas exploration and production. Other countries have not actively explored or shown interest in their shale gas reserves due to the presence of large untapped conventional resources of energy (crude oil, coal). Most potential shale gas fields are located in North and West African countries including Libya, Algeria and Tunisia.
Australia	Technically Recoverable Reserves: 396 Tcf Despite Australia’s experience with unconventional gas resource development (coal bed methane), shale gas development has not kicked off in a big way in Australia. However, recent finds of shale gas and oil coupled with large recoverable reserves has buoyed investor interest in the Australian shale gas.

What Are The Potential Negative Impacts Of Shale Gas Production?

Despite the large scale exploration and production of shale gas in the USA, countries around the world, especially in Europe, remain sceptical about it. Concerns over the environmental impact of hydraulic fracturing, lack of regulations and concerns raised by environmental groups have slowed shale gas development. Though there is no direct government or agency report on pitfalls of hydraulic fracturing, independent research and studies drawn from the US shale gas experience have brought forward the following concerns:

Will Shale Gas Solve Our Future Energy Needs?

Rarely does an energy resource polarize world opinion like this. Shale gas has divided the world into supporters and detractors. However, despite its potential negative environmental impact, shale gas extraction is associated with a range of unquestionably positive aspects, which will continue to support shale gas development:

Shale gas production will continue to increase in the USA and is expected to increase to 46% of the country’s total natural gas supply by 2035. USA is expected to transform from a net importer to a net exporter of natural gas by 2020.
Despite initial opposition, countries in Europe are opening up to shale gas exploration. With the EU being keen to reduce its dependence on imported Russian piped gas and nuclear energy, shale gas remains one of its only bankable long-term options. Replicating the US model, countries like Poland, the Netherlands and the UK are expected to commence shale production over the next two-five years and other countries are likely to follow suit.
Australian government’s keenness to reduce energy imports in addition to the recent shale gas finds has spurred shale gas development the country. Many companies are lining up to lease land and start shale gas exploration.
More stringent regulations from environment agencies are expected to limit the potential negative environmental impact of shale gas exploration.
Smaller energy companies that pioneered the shale gas revolution in the USA are witnessing billions of dollars worth of investments from multinational oil giants such as Exxon Mobil, Shell, BHP Billiton etc. are keen on developing an expertise in the shale gas extraction technology. These companies plan to leverage this technology across the world to explore and produce shale gas.The table below highlights major acquisitions and joint venture agreements between large multinational energy giants and US-based shale gas specialists over the last three years.

Major Deals in Shale Gas Exploration

Company	Acquisition/Partnership	Year	Investment
Sinopec	Devon Energy	January 2012	USD 2.2 billion
Total	Chesapeake Energy	January 2012	USD 2.3 billion
Statoil	Brigham Exploration	October 2011	USD 4.4 billion
BHP Billiton	Petrohawk	July 2011	USD 12.1 billion
BHP Billiton	Chesapeake Energy	February 2011	USD 4.75 billion
Shell	East Resources	May 2010	USD 4.7 billion
Exxon Mobil	XTO Energy	December 2009	USD 41.0 billion
Source: EOS Intelligence Research

Shale gas production is expected to spike in the coming three-five years. Extensive recoverable reserves, new discoveries, large scale exploration and development and technological improvement in the extraction process could lead to an abundant supply of cheap and relatively clean natural gas and reduce dependence on other conventional sources such as crude oil and coal For several countries including China, Poland, Libya, Mexico, Brazil, Algeria and Argentina, where the reserves are particularly large, shale gas might bring energy stability.

The need for energy security and desire to reduce dependence on energy imports from the Middle East and Russia (and hence to increase political independence), are likely to outweigh potential environmental shortfalls of shale gas production, and some compromise with environment protection activist groups will have to be worked out. Though the road to achieving an ‘energy el dorado’ appears to be long and rocky, it seems that with the right governments’ support, shale gas could become fuel that could significantly contribute to solving the world energy crisis over long term.

05/03/2013by EOS Intelligence EOS Intelligence No Comments

Ultimate Convenience Indian Style – Why Do Ready-to-eat Meal Producers Have a Difficult Job in India?

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After a long day at work, a tasty meal is every hard working man and woman’s dream. But, cooking such a meal late in the evening – more of a nightmare. Enter ready-to-eat meals. Throw a packet in the microwave and your main meal of the day is steaming hot in under five minutes. What could be faster, tastier, more convenient and cheaper than that? Many options, Indians respond.

The healthy growth of ready-to-eat (RTE) consumer meals (i.e. microwavable pouches containing ready dishes) has become a success story across many countries, where lifestyles are getting busier, disposable incomes are increasing and women are becoming an integral part of the workforce. The RTE industry is taking several emerging economies in Asia by storm, as dynamic demographic and economic transformations occurring in many of these economies drive increased interest in convenience sought in matters of food by the region’s inhabitants. The trend, though, is of uneven magnitude, with rural communities largely remaining deeply traditional about home-cooked food, besides having very limited financial capacity to afford RTE products or a microwave oven. However, the growing preference for such meals is so strong amongst middle class groups, that, overall, the RTE segment across Asian markets has become an attractive area of opportunity for food companies.

RTE foods sector is one of the most dynamic growth sectors in the packaged foods markets across Asia, and on a global scale, Asian consumers exhibit the highest interest in RTE meals. A 2007 AC Nielsen study revealed that seven out of top ten markets with the highest propensity to purchase RTE meals are Asian countries, with Thai consumers emerging as the world’s biggest fans of RTE products.

Surprisingly though, India does not feature in the list of top 10 RTE markets. Unquestionably, the country does enjoy most of the RTE foods market growth prerequisites – fast developing economy, expanding modern retail channels, dynamically growing middle and upper class, rising nuclear family format, soaring participation of women in workforce, rapidly rising incomes and the growing reality of hectic lifestyles driving the demand for convenience.

So where is India in this picture? Why does its name not appear in the list of attractive RTE meals markets? Why do India-made RTE food products have a bigger market internationally than domestically? What are the challenges that RTE producers such MTR Foods, ITC Foods, Heinz India or Haldiram’s face in their home territory?

The fact is that although there is a market for RTE products in India, its size is modest and its growth is slowing down. AC Nielsen estimates the Indian RTE market growth slowed from 44.9% in 2010 to 28.1% in 2011 (reaching INR 506 crore, or about USD 110 million). In comparison, the Thai RTE market grew by 105% during 2005-2010, with a strong, upwards trend that is set to persist.

The reasons for such differing dynamics are many, largely due to cultural background and the Indian consumer’s mindset. Here are six key reasons why RTE foods producers have a difficult job in the Indian market, reasons, that might make them reconsider RTE expansion plans:

Traditionally, Indians are accustomed to hot fresh food served straight from sizzling pots, mainly because of easy and cheap access to domestic help and primary cooking ingredients easily available for purchase. RTE meals, despite their convenience, have a hard job competing with home cooked food.
Busy Indian consumers look for speed and convenience, and there’s plenty of options in the food services sector – countless cheap order-in and take-out options, that also offer great advantages over RTE meals, especially as these are freshly cooked, a factor of great importance to Indian consumers.
Unlike in many other countries, RTE foods in India are more expensive than most order-in and take-out options. This, paired with the preference for freshness, tends to put RTE products at a disadvantageous position.
Despite growth in modern retail format, majority of Indians still do their food shopping in traditional stores, which have limited space and interest in carrying novelties such as RTE foods (organised food retail is estimated to still account for only about 3-5% of the total retail market).
Considering the hot climate, Indian consumers tend to be reluctant to trust the safety of a ready meal that has been stored and transported out of temperature-controlled supply chain, especially given the largely inefficient supply chain management.
Some RTE meals, which do require cold storage, also fall prey to inefficient supply chain management and frequent power cuts, which lead to rise in production costs, in turn translating into higher RTE product prices resulting in lower demand for such products.

In spite of the many challenges, the Indian RTE market is growing, though at much slower rate than once anticipated. Indian attitude towards meal from a pouch is changing, with growing social acceptability to consume such foods and to prepare meals in the microwave.

Producers are optimistic, as the mere size of the potential customer base offer vast opportunities, even with slower y-o-y growth. But they also remain cautious, citing improvements in supply chain and distribution management, growth in modern retail format, continuous growth in consumers’ disposable incomes as the main changes needed to occur for the Indian RTE market to actually take off. However, given that many of these transformations have been occurring over the past years, perhaps these form just a secondary problem. Perhaps the key prerequisite for RTE market growth is the change in the Indian consumer’s mindset – change that is the slowest to occur and hardest to influence by producers.

28/02/2013by EOS Intelligence EOS Intelligence No Comments

It’s Good the Crisis Happened – How Private Labels Benefit from Global Economic Turmoil

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Stagnating or declining consumption, falling sales, lower financial stability – the economic crisis is in full swing in many geographies. But it is not a bad thing for everyone. Across markets, private labels have witnessed strong growth over the past five years, the upward trend coinciding with the onset of the economic turmoil in 2008. Cash-strapped consumers, worried about their financial security, turn to cheaper options during their everyday shopping, providing the retailers’ own labels with unprecedented opportunity to win consumers’ hearts.

Since the very beginning of the private labels story, retailer-owned products have been typically associated with low quality (to some extent quite rightly as the first private label products were clearly inferior). These concerns over quality made it difficult for the private label market to take off, making it cater predominantly to the least demanding or poor group of consumers. Several retailers started to realize that while many consumers are indeed price-driven, what most of them actually look for is value for money – so value matters to most of them. While changing the private-labelled product quality was relatively easy to do, changing the consumer bias and conviction of these products’ low quality was a more difficult task.

Quality improved, but it was the onset of the economic crisis in 2008 that made many consumers develop a ‘crisis mindset’ that led them to actually try out private labels for the first time. It appears that the crisis gave private labels a unique chance to enter homes of a group of consumers who were very unlikely to try them out before, mainly due to the consumers’ loyalty to branded products, strong unverified perception of poor quality of private labels and lack of financial pressure to even consider cheaper options. With search for cost savings and brand loyalty in decline, many consumers have found private label products quality to be on a par with market leading brands across segments, but at considerably lower price (even up to 40% cheaper than branded equivalents, depending on product category).

Private labels market has been growing across several countries (most of Asia still has a relatively low penetration of modern retail formats thus presence of own labels is largely limited there), but the increased acceptance of private labels is particularly visible in Europe. According to a AC Nielsen report “The Power of Private Label in Europe”, already in 2010, a considerable group of consumers associated private labels with good value – between 82% and 87% of consumers across Spain, France, Belgium, Ireland, the Netherlands, UK and Germany believed that supermarket own brands offer extremely good value for money. This is a significant change of mindset, considering the long period of inferior quality associations. Such opinions have played an integral role in boosting the growth of the European private label segment, and in 2012, the average value share of private label across European markets was estimated at 30%.

Clearly, private labels will continue to benefit from the overall deterioration of the economic climate, not only now (even though private labels are gaining higher share of retailer sales, the overall consumption expenditures are all in all lower), but also after the crisis, when consumption will start to grow again. This will be possible provided that retailers use the current situation to build some sort of loyalty amongst customers. This is the time for retailers to prove to their customers that private label products are not half as bad as generally regarded, and to convince the consumers to stick to private label products even after the crisis.
It is not all nice and easy for private labels yet, as they are faced with a range of challenges, which might question their ability to win customers’ loyalty that would last even in the post-crisis era. Obviously, producers of branded products have also reacted to the deteriorated financial capabilities of their customers, and introduced a range of offers or launched product lines in cheaper segments.

Additionally, we have already seen an increase in private-labelled product prices, resulting in lower cost benefit over reduced-price branded products. Growth in the private label segment is linked to improved product quality and the retailers’ attempts to offset the decline in overall sales as consumption stagnates. This increase might eventually lead the consumers to realizing that they can get an old, beloved brand, that reminds them of pre-crisis security, at just marginally higher cost, especially with branded products now available at discounted rates and in promotional offers.

So, the question really is, whether the private label growth story is just a temporary affair, and most consumers will hop back to the branded cart the minute crisis is over?

22/02/2013by EOS Intelligence EOS Intelligence No Comments

Indonesia – Is The Consecutive Years Of Record Sales For Real Or Is It The Storm Before The Lull?

Part II of our Automotive MIST series brings us to Asia – Indonesia, now the second largest South-east Asian automotive market.

Indonesia, South-east Asia’s biggest economy, is now set to become the region’s largest automotive market as well. While Indonesia sold more vehicles than Thailand for the first time in 2011, the land of white elephants made a strong recovery in 2012 and regained its status as the biggest automotive market in the region. This, however, wasn’t enough to take the sheen off the performance of Indonesia’s automotive market in 2012. The country crossed the 1 million mark (vehicles sold in a calendar year) for the first time, surpassing expectations and beating all forecasts. This is the third consecutive year of record sales and represents something of a gold rush for automotive OEMs.

Indonesia achieved GDP growth of 6.2% in 2012 only slightly lower than the 6.5% it clocked in 2011. Over the past decade, its GDP growth has averaged 5.7%, highlighting a positive domestic economic environment. Rising average income levels has created a burgeoning middle class (half of its population of 240 million). Low borrowing costs, rising purchasing power, cheap subsidized fuel, reduced inflation and currency stability have positively influenced the automotive sector. Huge construction projects and mining investment drove the demand for commercial vehicles.

It is no surprise, then, that car-makers are lining up to increase output, with both incumbents and new entrants making large investments to improve their production capacity in the country. The market is currently dominated by Japanese OEMs, with a share of almost 90%. Toyota (along with its affiliate Daihatsu) accounts for almost half of domestic sales, while Mitsubishi, Suzuki, Honda and Nissan are the other important players (in that order).

The Japanese automotive OEMs are on a massive expansion drive in Indonesia – major automotive OEMs and over 50 automotive component makers from Japan committed an investment of about USD 2.4 billion in 2012 to boost production capacity. Car production is expected to increasefrom 900,000 units in 2012 to 1.5 million units in 2015.

Toyota Motor Manufacturing Indonesia (TMMI) is building two manufacturing plants at a combined cost of USD 534.4 million to double its annual production capacity to 240,000 units.
Suzuki Indomobil Motor, a joint venture between Suzuki Motor and Indomobil Sukses Internasional plans to spend USD 782.6 million to double its annual production capacity to 200,000 units.
Nissan Motor plans to invest USD 400 million to increase production capacity from 150,000 to 250,000.
Honda Motor is building an automotive plant that would triple its production capacity to 180,000 per year. The plant is expected to be operational by 2014 and create 2,000-5,000 jobs.
Astra Daihatsu Motor, a joint venture between Daihatsu Motor and Astra International is spending USD 233.1 million to boost capacity from 330,000 to 430,000 units.
Isuzu Astra Motor Indonesia (joint venture of Isuzu Motors and Astra International) and Krama Yudha Tiga Berlian Motors (subsidiary of Mitsubishi Motors) are investing USD 111.1 million and USD 27.8 million, respectively to expand their production capacities.

Other fringe players such as GM, Ford and BMW are also expanding their presence while Tata Motors also recently entered the market.

In August 2011, GM announced that it would be resuming operations at its plant in West Java which has been shut since 2005. The company is investing USD 150 million and the plant is expected to be operational by this year.
BMW also recently doubled its production capacity through an investment of USD 11.15 million.

The next step up for Indonesia is to come out of Thailand’s shadow and establish itself as an export hub. In 2012, exports accounted for 45% of Thailand’s automotive industry while the corresponding figure was only 16% for Indonesia. After the floods in Thailand in 2011, automotive OEMs are keen on diversifying production and Indonesia has emerged as the manufacturing hub at about the right time for them. Consequently, OEMs have committed over USD 2 billion to expand their production capacities in Indonesia.

Underlying Growth Potential

Vehicle ownership levels in Indonesia are very low at 32 per 1,000 people, compared to 123 cars per 1,000 people in Thailand, 300 cars per 1,000 people in Malaysia and around 460 cars per 1,000 people in developed countries. Hypothetically, to reach the same penetration rate as its neighbouring countries, Indonesia would require additional 108 million cars on the road. Given that Indonesia is the fourth most populous country in the world, the potential is obvious and these statistics fuel belief that despite the record sales, there is significant scope for continued rise in sales. Industry experts forecast annual sales of 2 million cars by the end of the decade and by then the country would have long since overtaken Thailand as the region’s biggest automotive market.
In 2013, the Indonesian government announced the ‘Low Carbon Emission (LEC)’ program to spur the development of eco-friendly vehicles to include hybrid cars, electric cars and ‘Low Cost Green Cars (LCGC)’ – vehicles with efficient fuel consumption. With the automotive industry ready to commit USD 4.5 billion on the project, Indonesia has the potential to be a major player in the LCGC market if the government goes ahead with its promise to provide tax incentives and other support for the production of these LEC vehicles. The project will completely change Indonesia’s position in the global automotive industry and may also transform the landscape of the domestic industry by boosting car sales in the long term. With bigger volumes generated from LCGC program, manufacturers operating in Indonesia could also catch up with Thailand by exporting to new markets, particularly other developing economies.
Over the years, automobile manufacturers have been notorious for their penchant to establish production set-ups close to component suppliers – to the extent possible. Indonesia has now reached a stage where it has a substantial base of local component suppliers, making the country an even more attractive destination for vehicle production, and with OEMs now planning production expansion in the country, this should further stimulate growth of the components industry.

The Challenges

The success story is not without its woes though. The economic meltdown in Europe and critical challenges in the domestic market will potentially slow down growth if not addressed timely and properly.

Fuel Subsidy – The Indonesian government wants to reduce the fuel subsidy to free up funds to invest in the development of the country’s infrastructure. The government had planned to increase the fuel prices but the proposal was shot down by the parliament in March 2012. The price increase is, however, inevitable and once the proposal does go through, it increases the total cost of vehicle ownership and maintenance, thereby reducing purchasing power of vehicle buyers. (Read our Perspectives on India’s fuel subsidy struggles: India – Reducing Reliance on Diesel)
Enforcement of Minimum Down-payment – To prevent the risk of a ‘car loan bubble’ the government reduced the Loan-to-value ratio (LTV) to 70% when borrowing from banks to buy cars – essentially forcing buyers to pay more down-payment than before. Loans account for 70% of all new car purchases in Indonesia and although it did not affect vehicle sale in 2012 it is expected to have an impact on sales in 2013.
Dependence on Japanese OEMs – With Japanese OEMs accounting for almost 90% of the Indonesian automotive market, Indonesia is overly reliant on Japan. This became evident during the 2011 earthquake in Japan, when disruptions in supply chain were felt across ASEAN, including Indonesia. Although automotive sales in Indonesia did witness impressive growth, such dependence acts as a hindrance and might hold the country’s automotive industry back from fulfilling its potential in the long run.

So, is the upswing in the Indonesian automotive market for real or is it tempting to deceive again? After sticking with the country as other companies bailed out during one of its periodic meltdowns, Japanese auto OEMs are now benefiting from the consecutive years of record vehicle sales in Indonesia. And the extremely low vehicle penetration rate highlights the huge underlying potential. However, critical challenges remain and the country must tackle them effectively if it wants to become the preferred manufacturing hub in the ASEAN region.

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We study the South Korean automotive market in our next discussion. Being the most developed automotive sector amongst the MIST countries, we try and understand the underlying growth potential in this Asian giant and evaluate the challenges faced by OEMs and component suppliers.

Mexico – The Next Automotive Production Powerhouse? – read the first part of our MIST series.

13/02/2013by EOS Intelligence EOS Intelligence No Comments

Production Re-shoring – a Great Idea That Won’t Materialize?

After years of shifting American production capabilities to China as the primary low-cost location, the trend might be somewhat changing. As costs increase in this previously cheap destination, American executives have started to question whether it still makes economic sense to spend more and more on Chinese labour and transport the products back half across the world to the final customer.

With estimations that Chinese wages double every four years, it is clear that the cost benefit of off-shoring to China is narrowing and the country might start losing its competitive edge. It has been, and will continue to be, a very slow process, and we will surely hear stories of another industry giant opening another production facility in this ‘global manufacturing centre’. Yet, the concept of re-shoring, i.e. shifting manufacturing capabilities, once off-shored in search for decreased costs, back to the USA, has been the story of several American producers for the past couple of years. While reasons vary, cost element is probably a key deciding factor, as cited to be the reason behind the re-location of some of the capabilities by Apple or General Electric.

But it is not only the cost that is forcing companies to think of bringing manufacturing capabilities back home. There is a range of reasons indicated as strong factors that should force American manufacturers to consider re-shoring:

Slowly, but gradually the cost benefit of off-shored production will narrow, given the faster rise in labour costs in locations such as China
Shipping costs associated with long-distance logistics are also increasing, e.g. shipping rates, cutbacks in logistics infrastructure, are estimated to have caused an average hike of 70% in shipping costs between 2007-2011
Quality inconsistency issues, both real and perceived, continue to resurface in Asia-manufactured products – flawed production lots, inaccurate specifications, as well as end customers’ continued scepticism towards the ‘made in China’ label
Production is increasingly executed in small lots to ensure responsiveness to fluctuations in demand volume and structure, customization requests, and to mitigate the risk of reduced liquidity with cash trapped in inventory
Supply chains are found to be more and more vulnerable to disruptions caused by ‘beyond control’ factors, from natural disasters (earthquakes, tsunamis in Asian locations) to political disruptions affecting smooth and timely shipping
Weaker dollar requires US-based companies to spend more bucks on the same foreign-based production and transportation services
While economic result matters most, producers also consider the customers patriotic interest to buy products that are ‘local’ to them – in terms of appeal as well as the production location, which can be an extra public relations benefit for the company re-shoring its manufacturing jobs back to the USA.

While reasons are varied and not mutually exclusive, there is still a question whether re-shoring is actually a strong trend, and whether jobs will return to the USA. The question cannot be ignored – if re-shoring turned out to be a persisting trend, it could be a well-needed kick to this crisis-shaken American economy.

Not long ago, in mid-2012, Forbes published an article, in which it asked whether re-shoring is actually a trend or more of a trickle. A simple survey conducted amongst MFG.com members, an online marketplace space for the manufacturing industry, proved that re-shoring can be a real trend, as a number of American executives indicated new contracts being awarded to them – contracts that had previously been off-shored. The re-shoring trend seems to be further confirmed by the frequently quoted 2010 Accenture report, which indicated that around 60% of manufacturing executives surveyed considered re-shoring their manufacturing and supply capabilities. The trend could be additionally supported by tax incentives proposed by Barack Obama for companies re-shoring back to the USA, as well as drives such as The Reshoring Initiative, founded by Harry Moser in 2010, aiming at promoting the concept amongst American businesses and tracking the phenomenon. According to Moser, re-shoring brought some 50,000 jobs back to the USA during the period of 2010-2012.

But, with all these points being legitimate reasons for American companies to re-think their off-shoring, perhaps the big believers in the return of the ‘Made in the USA’ era, should curb their enthusiasm just yet. It is quite unlikely that low-cost producers will return to the American soil for good – on a scale large enough to have a positive impact on American economy.

First of all, China will still hold enough advantage over the next couple of years – an unbeatable advantage of a large pool of workers available for $2 an hour wage, which, even if increases, will still be far lower than in the USA. And it is not only about the cost, but also about the relatively high elasticity of low-cost Chinese labour supply (in terms of wage accepted and workers volumes available), which even at its lower productivity, makes it still more economical to stick to factories based in China, than re-shoring on big scale to the US market. The public relations dimension of bringing back jobs has to be approached realistically too, keeping in mind that much higher productivity of American workers means that for each 4-5 Chinese jobs being cut, American market would gain probably not more than 1, making the job creation benefit much more modest than hoped for. And even if, over long term, the increasing labour cost squeezes the cost benefit tight enough to make the producers leave China, it is highly unlikely that they will turn to American workers as first priority. There are more economical options available across Asia and other geographies (perhaps at higher cost than in China but still well below American levels). We might see some of these manufacturing jobs fly to India, Bangladesh, and the emerging African continent.

It seems that this big re-shoring move might be just wishful thinking, which will translate to a few jobs brought back to the USA, in numbers not significant enough to actually make much difference.

30/01/2013by EOS Intelligence EOS Intelligence No Comments

Australia – Stepping on to the Mine Field

While most developing countries have been negatively impacted by the significantly deteriorated economic conditions in the US and European markets, Australian economy appeared to be largely shielded from the impact of the global economic slowdown thanks to its mining industry. Following the onset of the 2008 crisis, when most developed economies slowed down, China continued on its path of infrastructure development and investment. This boosted its demand for minerals and resources, large part of which continue to be imported from mines across Australia.

Thanks to the Chinese economy growth sprint, Australian mining industry has been in a boom mode since 2006, and consequently witnessed soaring levels of capital investment in mining and related logistic infrastructure. The industry growth was significant enough to have resulted in higher dependency of Australian economy on this sector, with the mining and mining-related service industries accounting for about 20% of GDP in 2011-12, compared with only 10% a decade earlier.

The industry is still on a roll, yet the situation might change soon. With the Chinese economy showing signs of slowing down in 2011 and 2012, the Australian government and business executives can no longer be certain of the continuous inflow of Chinese orders for Australian mining output. But the decline in orders is just part of their worries, as mining companies operating across Australia are faced with other challenges as well, which question their ability to remain competitive in the global market.

The Challenges

While currently it is estimated that the strong performance of the Australian mining sector will continue till at least 2014, there are already growing challenges in the industry. Slackening demand, particularly from the Chinese infrastructure sector, has lead to a global drop in commodity prices of coal and iron. This decline in prices, coupled with higher operating costs due to rise in employee wages and energy costs, makes it less economical for Australian ore extractors to trade in global markets.

Skills shortage and union pressures further drive the operational costs upwards. A shortfall in skilled personnel is likely to result in employees being available only at a premium, leading to further increase in costs. A shortage of truck drivers in mining sector has seen employees of large companies, such as Rio Tinto and Xstrata, receive as much as three times their base salary. The insufficient talent is also witnessed in more skilled and experienced jobs, including mine planning engineers, geologists, metallurgists and mineral processing engineers. This skill shortage also gives employee unions an upper-hand when it comes to negotiating perks.

The rise in costs is further multiplied by the introduction of additional taxes, including the Carbon Tax and the Mineral Resource Rent Tax, all of which contribute to the rising cost burden of the Australian mining companies.

At the same time, mining productivity has resurfaced as an increasingly relevant issue. According to 2012 estimates by the Mineral Council of Australia, productivity in mining industry has reduced by about 30% since 2003.

These challenges are a visible sign that Australia’s mining sector is likely to have an increasingly harder job to compete with mining companies in other emerging resource-rich countries, such as Indonesia, whose proximity to important Asian customers results in lower shipping costs to the client. This could result in a considerable decline in Australian mineral exports, and thereby, have a negative impact on the Australian economy as such.

The Way Out

Both the government and mining companies are devising ways to overcome the challenges posed by these increasingly pressing issues.

Expecting that the current peak in mining investment boom will soon be followed by the sector’s decline, the Reserve Bank of Australia (RBA) announced cuts of cash and lending rates in December 2012. Concerned by the fact that the non-mining industries in Australia continue to struggle, RBA has introduced these cuts to support the underperforming non-mining sectors, such as housing, construction, and retail. While the short-term outlook for non-resources investment is likely to remain subdued, these cuts are expected to provide impetus for investment in these sectors over a long term.

Mining companies face a tougher task to remain competitive in the global market. In the short-term, several Australian mining companies are looking at temporary shelving of investment projects to deal with the deteriorating demand and decline in commodity prices. For instance, BHP Billiton, the world’s largest mining company, shelved its Olympic Dam and Bowel Basin projects after witnessing a decline in profits.

However, putting investment projects on hold is not enough and mining companies will have to continue to undertake initiatives to tackle the problem of increase in cost per ton of output.

Initiatives to raise employee productivity are being put in place. In 2012, a contracting company overseeing work on Chevron’s $52 billion Gorgon gas project banned sitting during working hours to improve operational productivity.
Companies are trying to explore alternatives to tackle skill shortage. Rio Tinto has started employing driverless trains and trucks to cart iron ore from its mines in order to tackle the premium wage demands, caused by the shortage of drivers in mining operations.
Companies are cutting employee perks to lower wage costs and offset lower returns. In 2012, Fortescue Metals Group scrapped weekly staff barbecues, and removed free coffee and ketchup from the canteens.

While these initiatives might attract negative publicity, particularly with labour unions, these steps have become increasingly necessary for mining companies to get back on the path of competitiveness and profitability over a long run. But will this be enough? Will cutting weekly employee get-togethers, and making workers stand at work take care of 30% productivity decline witnessed over the past decade? These measures definitely appear disproportionate to the problem’s weight. Or do the Australian mining executives have some more tricks up their sleeves that will actually matter in prolonging the mining sector golden years?

06/12/2012by EOS Intelligence EOS Intelligence No Comments

Apple Vs Samsung: The Battle of the Wrong Contenders

On August 24, 2012, a jury in San Jose, California drew curtains (for the time being at least) on the long-drawn saga between Apple and Samsung. The court delivered a verdict largely favorable to Apple, validating most of Apple’s claims and ordering Samsung to pay Apple $1.05 billion in damages.

The verdict followed months of bitter battle between the two companies, which together sell more than half of the world’s smartphones and tablets. Although Apple’s charges against Samsung are more about design and features, it is actually an attack on Google and its Android software, which drives Samsung’s devices and has become the most widely used mobile software.

Since Apple, Google and Microsoft belong to the operating platform universe, their patent strategies differ vividly from the old mobile telecommunications world of essential patents. The mobile telecommunications industry is not new to IP litigations. However, current litigations concern the operating software used in smartphones, whereas earlier litigations were targeted at mobile telecommunications standards. This situation has arisen as Google did not have ex ante licenses from Apple and Microsoft.

There are two IP regimes, ‘essential patents’ (radio, transmission and telephony) and ‘platform patents’ (operating system software). In the Apple vs. Samsung case, the charges filed against Samsung relate both to essential patents (related to design of Samsung phones and tablets) and to platform patents (related to certain features allegedly copied by Android from iOS). However, when it comes to mobile internet, there is no overlap between the two patent regimes. The current IP litigation game (between Apple, Google and Microsoft) is only about platform patents (operating system software) and not about ‘essential patents’ (radio, transmission and telephony).

The mobile telecommunications market is currently undergoing upheaval as mobile internet is becoming the dominant application and phones are practically turning into mobile internet devices. For mobile telecommunication incumbents (such as Ericsson, Motorola, Nokia, Sony and Samsung), competition remains heated with direct threat from the likes of Apple and indirect competition from Google and Microsoft.

Apple and Microsoft are expected to be the winners in the current IP litigation scenario, since their IP is considered to have value in smartphones, while as Google’s IP, in comparison, is considerably lower, the Android operating system and its alliance network seem to be losing. The role of mobile telecommunication incumbents, with respect to patent portfolios is still important but limited to essential patents.

The unique position of Google as merely the provider of Android has also protected it from any direct IP litigation. However, to fight with Google, both Apple and Microsoft have filed IP litigation against the adopters of Google’s platform ecosystem, which includes original equipment manufacturers (e.g., HTC, Motorola Mobility, and Samsung) and application developers (Lodsys sues Rovio).

These attacks are global and are spread across four continents; specifically, Apple has sued the largest producer of Android-based devices, Samsung, in the USA and the rest of the world, except for China. It will be interesting to see the outcome of these litigations, as it might change the way the global mobile sector currently functions – if Samsung were to lose, it will shake-up Google’s ambitions of becoming the global leader in mobile telephony software; if the outcome comes out in favor of Samsung, both Samsung and Google will lead the market, and perhaps give rise to smaller hardware manufacturers which could use the Android platform to enter the market.

Whatever the outcome of these lawsuits, it sure is expected to spur innovation among relevant industry participants. Android (Google) has been found to be vulnerable/susceptible to litigation and unless they significantly strengthen their patent portfolio, hardware manufacturers would be wary of adopting android and will look for alternatives (such as MS Windows Mobile or develop their own operating systems). And if Apple wins, then OEMs will still have to look for alternative operating platforms. So the path is not as rosy for the Android system as it seems at the outset.

Thus, two key observations from the Apple vs. Samsung patent disputes can be noted:

Apple’s patents are only valid and enforceable in the USA and the company will have difficulty in leveraging these outside the USA, for example in Europe and Asia.
Apple’s patent portfolio outside the USA is minimal and the company will therefore struggle to protect its products in Europe and Asia. Moreover, the company would be forced to sign cross-licensing agreements with old mobile phone incumbents (Apple and Google Subsidiary – Motorola Mobility Consider Arbitration).

The current IP litigation scenario in mobile telecommunications shows how the industry is transitioning from an industry dominated by standards and essential patents in the late 1990s to an industry increasingly dominated by platform patents.

What’s next in this battle? Where might this lead the industry to?

Courts in different jurisdictions, such as in the UK, Korea, Japan, Australia and Germany have all given varied verdicts and the litigation battles are expected to continue (Samsung has already challenged the San Jose verdict). However, if Apple is able to enforce its patents outside the USA as well, mobile phone incumbents would feel hesitant to use Android and may opt for competing operating systems such as the Windows Phone.

Even then, it is unlikely to represent the demise of Android. Some of the features in contention have already been removed, while other features are given significantly lesser protection outside the USA.

The story, clearly, is far from over.

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