AUTOMOTIVE Archives

12/10/2016by EOS Intelligence EOS Intelligence No Comments

Sharing Economy Needs Regulator Support

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Sharing economy works on a business model where individuals have the ability to borrow or rent goods or services owned by someone else. The concept has been widely accepted in a short span of time and companies such as Uber and Airbnb have become well known among consumers. The sharing economy sector has witnessed tremendous growth with aggregate valuation of the companies operating in this market reaching US$ 140 billion in 2015. The industry has already started causing a shift in the employment sector and is said to have far-reaching implications which are likely to disrupt the traditional rental business model, particularly for companies in hotel and transportation sectors. The growth potential of sharing economy has become of considerable interest to policy makers around the globe as well, and the industry has recently come under scrutiny of various governments and regulators, and is likely to face regulatory barriers affecting its potential to scale up.

The concept of sharing economy, also known as peer-to-peer economy, facilitates a direct contact between consumers and service providers and is centered around the use of privately owned, unused inventory. Technology is key to the growth of this type of economy, which has already witnessed the emergence of several sharing platforms enabling consumers to share products and services such as cars and houses.

EOS Perspective

Companies such as Uber and Airbnb have become the talk of the town, due to their tremendous growth achieved thanks to a simple business model: providing consumers the ability to monetize idle inventory and rent an asset, instead of purchasing it. Sharing economy also meets consumers’ desire for social interaction, lower costs, and technology-based access to goods and services. However, the sudden and overwhelming rise in its popularity has shaken the governments’ ability to appropriately and sufficiently regulate this economy. Weak legal frameworks hampering consumer’s safety and tax collection have led to debates around the benefits of sharing economy.

Implementation of the traditional regulatory frameworks in the sharing economy sector is likely to upend the peer-to-peer business model. Inclusion and implementation of monetary employee benefits, tax obligations, and safety regulations in the sharing economy can be expected to lead to an increase in the cost of services offered by these companies, thereby defeating the purpose of the existence of sharing economy. Thus, instead of imposing regulations originally developed and meant for traditional rental sector, there arises a vital need to develop a new policy framework best suited to the peer-to-peer business model.

Instead of completely imposing bans on these services and eliminating the opportunity to make use of idle inventory, governments should work alongside these companies and create regulations tailored to their regions to encourage safe business conduct. For instance, Airbnb signed an agreement with the City of Amsterdam to promote responsible home sharing in 2015. The agreement includes a set of rules for the hosts to be followed before activating their listing, and also stipulates the collection and remittance of tourist tax by Airbnb on behalf of the hosts. In addition, the agreement also includes a partnership with Airbnb to collect content from the company’s database to shutdown illegal hotels. These efforts are expected to ensure the hosts receive clear information on renting their homes and promote consumer safety.

Sharing economy has the potential to make a tremendous impact on the traditional rental sector and is likely to create opportunities across various different economic activities. However, from a legal perspective, it cannot be ignored that the model lacks a strong regulatory support, which over time will continue to put pressure on this newly emerged sector. The peer-to-peer model will be required to address these imperatives in the near future in order to scale to new heights.

29/03/2016by EOS Intelligence EOS Intelligence No Comments

Driving Growth in Kazakh and Uzbek Passenger Vehicles Markets

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The past two years have brought a mixed bag of experience for both Kazakh and Uzbek automotive industries. Passenger vehicles sales volumes witnessed growth, however at a varied rate, affected by internal as well as external macroeconomic disruptions and regional developments. Amid these conditions, 2016 is likely to be an uncertain year for the automotive industries in both countries. Although growth is likely to be challenging, by re-thinking its current focus along with the help of the right government policies, growth prospects over the long term are promising.

While the Kazakh and Uzbek economic and automotive industries scenarios differ to quite an extent, and both countries have witnessed a varied growth in recent years, their macroeconomic and sector dynamics have continued to remain under a strong impact of the global slump in oil prices, volatile economic and political environment in neighboring regions, as well as currency devaluations. While Kazakhstan automotive industry, with sales volume CAGR of 67.8% during 2010-2014, was one of the fastest growing auto markets worldwide, the country’s GDP was witnessing a fluctuating y-o-y growth ranging from 7.5% in 2011 to 4.4% in 2014. At the same time, while Uzbek’s economy posted strong and steady GDP growth at around 8% annually between 2011 and 2014, its car sales volume grew at a mere CAGR of 1.4% during 2010-2014.

Uzbekistan’s automotive industry is currently around twice the size of the industry in Kazakhstan, however its sales volume growth has recently stalled putting a question mark on Uzbek industry future growth dynamics. Kazakhstan might soon be seen to be catching up, with more than healthy sales volume growth rate, much of it supported by recent government reforms to boost local production and sales.

EOS Perspective

With Russia’s economy still struggling to recover amid Western sanctions, banking on vehicle exports is unlikely to take Kazakhstan and Uzbekistan any further. Passenger vehicles sales and production figures in most likelihood will continue to be impacted by internal as well as external macro-economic factors in 2016. In order to grow in the current environment, OEMs will have to look beyond their status-quo. Automakers will have to start focusing on domestic markets, which are still underserved with rapidly increasing demand for new cars.

The governments will have to work together with industry participants to create consistent as well as comprehensive industry policies that can attract more investments and stimulate growth. Measures such as financial incentives, special land allotment, creating SEZs, and various other schemes can significantly boost investor (both local and foreign) confidence. At the same time, reforms such as increasing local content requirement will drive more local producers to enter the industry. This might be a great help to the overall vehicle manufacturing and auto components industry in its development and growth trajectory.

With automakers trying to scale down their operations in Russia and Ukraine, growth opportunities are ripe for region’s manufacturers to capture and fill the market gaps in neighboring regions such as EEU and CIS. By leveraging their strategic location and proximity to European, CIS, and Asian markets, Uzbekistan and Kazakhstan could potentially attempt to reinvent themselves as the region’s next automotive export hub.

22/12/2015by EOS Intelligence EOS Intelligence No Comments

Printing the Automotive Industry of the Future – 3D Style!

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3D printing has been around for almost three decades but it is only recently that OEMs have begun to realize the commercial benefits of this phenomena beyond just prototyping. It has significantly altered the ways OEMs approach model designing, development, and manufacturing. It is helping car manufacturers across the globe shorten their product development phase, reduce prototype costs, and test new ways of improving efficiency.

Using 3D printing for prototyping has become much of a standard in the industry today. The 3D printing automotive industry, which is estimated at a little less than US$500 million in 2015, is expected to more than triple by 2020.

With 3D printing, OEMs are able to use CAD software to design parts and then print a prototype themselves, saving them both time and money.

Previously, OEMs outsourced the process of prototyping to machine shops, which not only resulted in additional costs but also took weeks to produce a part. Moreover, if the produced part needed modification (which in most cases it did), then the modified blueprint was sent to the machine shop again for production, resulting in a repeat of the entire process.

Due to lower costs and turnaround time, this technology has given OEMs the flexibility to use a fleet of printers to try out multiple designs in a go, rather than being limited to one design and then restarting with another in case the first result did not meet expectations. This has largely helped OEMs boost quality levels as they do not waste too much time applying modifications to their designs and then testing them.

Who Is Using 3D and What For?

GM uses 3D printing technologies of various kinds, such as selective laser sintering (SLS) and stereolithography (SLA), across its design, engineering, and manufacturing processes and rapid prototypes about 20,000 parts. Chrysler uses 3D printing for prototyping a wide variety of side-view mirror designs and then selecting the one that looks and performs the best. Ford, on the other hand, has been one of the earliest adopters of 3D printing technology. It runs five 3D prototyping centres, of which three are in the US and two are in Europe. The company churns out about 20,000 prototyped parts per annum from just one of these centres (Michigan, USA).

However, few OEMs such as Mitsubishi (who bought its first 3D printer in 2013), have been late adopters of the technology.

While 3D printers continue to be widely used for rapid prototyping across the industry, several large automobile manufacturers have advanced into the next stages of 3D printing technology adoption. Although still in nascent/experimental stage, these OEMs have applied 3D printing to produce hand tools, fixtures and jigs to enhance production efficiency at floor level. Ford, which is definitely one of the most advanced users of 3D printing, uses this technology to produce calibration tools.

The Case of BMW and Stratasys
BMW also uses 3D printing’s FDM technology to build hand-tools for automobile assembly and testing. In addition to the financial advantages, FDM process helps the company to make ergonomically designed assembly tools that perform better than traditionally made tools.

For one such tool, BMW worked with 3D printing company, Stratasys, to reduce the weight of the device by about 72%, thereby enhancing its ease of use considerably. Apart from improving the handling abilities of tools, the technology has also helped enhance functionality. The company has managed to print parts with complex shapes that allow workers to reach difficult areas specific to BMW-produced vehicles. In one such instance, the company created a tool using 3D printing for attaching bumper supports, which features a convoluted tube that bends around obstructions and places fixturing magnets exactly where needed.

Leaders in the use of 3D printing, such as Ford, also apply the technology to prototype parts that are of such strength that they are installed on running test vehicles. The company uses engine parts, such as intake manifolds, from 3D printing white silica powder, to install it in its running test vehicles. With the use of 3D printed prototypes of components such as cylinder heads and intake cylinders in test vehicles, Ford is successful in avoiding the requirement of investment castings and tooling, and in turn saving significant amount of time and dollars.

Another advancement in 3D printing encompasses the use of new and innovative materials. While most companies use silica powder, resin, and sand, few OEMs are innovating with forming test parts out of clear plastics. This allows them to validate designs as the team can visually see what is happening inside the part. Chrysler uses transparent plastic in 3D prototyping their differential/transfer case. By inserting oil inside it, they can ensure if the gear is staying well-lubricated under the prototyped design/model.

The use of metal as printing material is an innovation that though is still in its nascent stage is being used by OEMs such as BMW to 3D print (using SLM technology) a metal water wheel pump for its DTM racing car. Auto-parts manufacturer, Johnsons Controls Automotive Seating, also uses 3D printers to print metal parts that have complex shapes and are difficult to produce using traditional welding.

Various Stages in 3D Printing Adoption by OEMs

With these new applications taking the industry by storm, several OEM manufacturers are increasingly investing in and exploring the uses of additive manufacturing. While few companies have been slow in adopting to 3D manufacturing initially, it is expected that they will soon come up to speed with the advances in the use of this technology, given the holistic benefits offered by it.

Strati is born in 44 Hours…

Local Motors, and Arizona-based company has created the world’s first 3D printed car, Strati, which it plans to launch in 2016 (considering it passes the crash test and other requisite tests).

Strati’s body and chassis are completely created from 3D printing, however, components such as wheels and suspension are sourced from Renault. The battery-operated car is expected to cost in the range of US$18,000-30,000 and have a top speed of 50mph.

…Shuya to follow!

Taking cue from Local Motors, China’s automobile manufacture, Sanya Si Hai, has unveiled its own 3D printed vehicle called Shuya. While Shuya takes relatively longer (5 days) to print and has a top speed of only 25mph, it costs only US$1,770.

The Biggest Challenge – Seeing Beyond the Prototypes

One of the biggest drawbacks of 3D printing is that in an industry driven by volumes, its current speed cannot match the production volume requirements, thus inhibiting the use of this technology for direct part manufacturing. This in a large way restricts the use of 3D printing for mass production. While there is ongoing research on high-speed additive manufacturing, it still remains a concept.

Even if large automobile components are to be produced using this technology, they still need to be attached together through welding or other techniques. This lowers the benefits accrued from 3D printing the parts in the first place. This aspect of 3D printing is also being researched upon, and unlike high-speed additive manufacturing, 3D printing companies have made good ground in building large 3D printers that do not restrict the size of the component produced.

Another indirect but real challenge to the widespread adoption of additive manufacturing is high levels of intellectual property theft. Since additive manufacturing products can only be patented (and not copyrighted), there is much ambiguity regarding what all falls under patent protection. Till the time there are no clear guidelines regarding intellectual property and 3D printing, OEMs will remain wary regarding the extent to which they should use this technology.

The biggest challenge, however, is the mindset of OEMs which continue to look at 3D printing as primarily a prototyping tool.

On Reflection

The automotive industry must take cue from the aerospace and defence industry, which has heavily invested (along with additive manufacturing companies) in developing new materials and technology in 3D printing to meet their evolving requirements. Instead of sitting and waiting for 3D printer manufacturers to bring about new uses of 3D printing for the automobile industry, OEMs should proactively look for innovating with the technology themselves.

Companies such as Ford and BMW, which are exploring other uses of this versatile technology have the opportunity to not only save costs, but also improve overall performance. And this is what may just provide these OEMs the competitive edge they are looking for. The question is who else is willing the take the big leap of faith.

08/07/2015by EOS Intelligence EOS Intelligence No Comments

North Africa: Is It The Next Frontier Market For Automotive Manufacturing?

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The article was also published in Automotive World’s Q2 2015 Megatrends Magazine

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Rapid urbanization, growing consumer base with rising disposable income, significant infrastructure investments, and proximity to the EU are some of the key reasons why automotive companies are increasingly attracted towards the North African markets. In spite of the impact of political upheavals on the region’s economy in recent times, the value proposition for global auto manufacturers remains strong.

The North African markets of Algeria, Egypt, Morocco, and Tunisia have attracted the eyes of multinational automakers in the last few years, thanks to rapid urbanization, rising disposable incomes, and continuous investments in infrastructure. In recent years, several automotive companies have assessed and entered these markets due to its favorable demographics.

North Africa’s market attractiveness relative to other regions has improved dramatically over the past years. According to E&Y’s Africa Attractiveness Survey of 2014, nearly three out of four respondents believed that Africa’s attractiveness will improve further over the next three years. Morocco and Egypt were seen as the two most attractive countries in North Africa by 55% of the respondents.

Despite several political and economic challenges, there is growing consensus that the region’s growth curve is on an upward trajectory, aptly supported by improvements in the EU economies, steadier inflation rates, and policy reforms undertaken by individual governments to harness growth.

While the FDI inflow statistics shows a different picture, the trend is expected to change as investors have been encouraged by the gradually restored political stability in these countries, as well as recent government initiatives to create business friendly regulatory frameworks.

What’s attracting automakers to North Africa?

In the North African region, Algeria, Egypt, Morocco, and Tunisia together accounted for a giant share of over 90% of the total new passenger car sales in 2014, as per statistics from International Organization of Motor Vehicle Manufacturers.

These four countries represent approximately 42% of the total African passenger cars market. After witnessing a steep decline in 2013 due to the weak external demand as well as the region’s volatile political environment, new car sales figures picked up in 2014. With the region’s growth back on track, rising investors’ confidence, and uptick in tourism, these sales figures are projected to increase in the next coming years.

For global OEMs, lower labor costs, proximity to Europe, expanding port facilities, various financial incentives, and increasing network of auto parts suppliers and subcontractors are making the region’s value proposition stronger.

North Africa’s strategic geographic location and its skilled labor force at competitive wages, has provided a perfect solution for vehicle manufacturers, allowing easy exports in order to cater to the needs of the European automotive industry. Besides, the region also serves as a gateway to the rapidly growing African and Middle-eastern automotive markets.

The region’s favorable demographics – a young and rapidly growing population, increased urbanization, and rising income levels are attracting many global automotive players. Consumers today in North Africa are more brand-conscious and technologically savvy. Forecasts from the OPEC suggest that car ownership in the Middle-East and Africa will nearly triple to 66 million by 2035, compared to 23 million in 2010, making it among the fastest growing markets in the world over the next few decades.

Individual governments have also played a vital role in the industry’s growth story by creating a favorable investment regulatory framework. Despite economic pressures and tight budgets, governments in these countries have continued to make significant investments towards infrastructure across ports, roads and railway networks. In addition, a range of financial incentives are offered to foreign investors in the auto industry. This includes free trade zones, multiple tax incentives, special land allotment, and partial contribution towards infrastructure expenses for auto industry projects. Further, the government has also invested towards training programs to build a skilled labor force that can fulfill the demands of the growing auto industry.

North Africa’s Big 4 Markets – Morocco, Algeria, Egypt and Tunisia

Morocco has aggressively marketed itself as the new regional automotive hub for global automotive players. According to a 2013 report by PricewaterhouseCoopers, the Kingdom will be the 19th-largest vehicle producer in the world by 2017. Renault, Delphi, Lear, Leoni, Yazaki, Faurecia, Sumitomo, and Hirschmann Automotive are some examples of key investment projects in recent years. These companies are not just providing employment, but, are also supporting a thriving automotive SME sector.

Renault’s operations in Morocco have provided a major boost to its automotive industry, as more than 40% of the parts are sourced locally. Renault aims to further expand its production capacity in Morocco and is also considering setting up an engine production plant to serve the two production plants. This represents large scale potential opportunities for auto parts manufacturers and suppliers. In October 2014, the Moroccan government announced the signing of five MoU deals with leading manufacturers of automotive wiring, vehicles interior & seats, metal stamping, and batteries.

As demand from both local as well as export markets grows, the industry is going to witness higher investment growth in the near future. Further, car makers that enter the Moroccan markets are also able to leverage on the pool of skilled labor and network of more than 40 Tier-1 suppliers.

Algeria’s automotive industry relies heavily on imports from Europe and China, importing approximately 75,000 cars annually. The age of current passenger vehicles plying on Algerian roads and low ownership rates present a significant potential for passenger car manufacturers. The Algerian government has played its part by promoting investments, and creating a business-friendly environment for the auto sector.

Mercedes Benz recently announced that it aims to transfer its investments from Egypt to Algeria in 2015 in order to take the advantage of benefits and facilities provided by Algerian government to foreign automakers. Renault’s production unit that became operational in 2014 has facilitated the development of local subcontracting and network of suppliers to create a local automotive industry. In order to meet the growing demand, Renault plans to triple its production output to 75,000 units by 2019, and has also committed to increase the level of local content.

With an increased interest of OEMs in the Algeria story, several opportunities will arise for suppliers of auto spare parts, plastic injection, paint as well as bodywork facilities.

In spite of being one of the smaller countries in the region, the automotive industry in Tunisia boasts of more than 80 companies, employing over 60,000 people, with a turnover of TND 2 billion (US$ 1.02bn) in 2013. The recent MoU signed with Iran for co-operation in car manufacturing will also help the Tunisian automotive industry grow further in the next few years.

Tunisia has a robust network of suppliers in the automobile wiring sector, and an abundant pool of skilled engineers and technicians at its disposal. The bigger benefit is the fact that the cost of hiring such talent is not only one-third the cost of that in the EU, but is also lower than its North African peers. Investment in manufacturing automotive components for exports is a priority sector for the government and in order to attract more investments, the government offers fully integrated sites with industrial, logistics, and infrastructure support to companies seeking to establish their manufacturing operations in Tunisia. There are plenty of opportunities for companies that manufacture automotive electronic, mechanical, and plastic components dedicated for exports to European and African markets.

New passenger cars sales in Egypt posted a solid growth of nearly 25% in 2014. With ongoing government plans to develop and encourage investment in the sector, and the improving tourism industry, new car sales are expected to grow further beyond 2015.

Nissan motors in October 2014 announced that it will invest an additional US$60 million towards expanding its assembly operations in Egypt. The government is also encouraging a vehicle production joint venture between domestic firm Nasr Automotive Manufacturing and Russia’s AvtoVAZ. The deal will not only give automotive production industry a major boost, but, it will also create opportunities for auto parts manufacturers and suppliers. For example, tire market Pirelli signed a MoU to invest US$107 million over a three year period to increase the production capacity in order to meet the growing demand.

Egypt is well poised to see a stronger automotive growth, driven also by very favorable demographics and proximity to the Middle-east.

A Final Word – Immense Scope, Manageable Challenges

OEMs must accept that North Africa will be unable to match the potential of the BRICS, MIST or ASEAN countries; however, given the region’s positive economic growth trend and rising investor confidence, the outlook for automotive industry is upbeat.

Various initiatives taken by individual governments have provided a boost to the automotive industry, and continue to attract global OEMs to establish local presence for both regional and export markets. Region’s favorable demographics, strategic location and competitive wages not only make it an attractive hub for auto exports, but, also a lucrative market for auto manufacturers which seek to tap the potential of African passenger cars markets.

There are a few challenges, political and economic, that need to be managed, in order to encourage OEMs to set up shop in North Africa. On the economic front, it would be imperative to demonstrate an investor-friendly regulatory environment, as well as the willingness to provide tax breaks and similar financial incentives to OEMs to establish production base and export hubs. While on the political front, ensuring stability and managing issues surrounding external factors such as ISIS will be critical to convince automotive companies to invest both monetary and technological resources in the region.

At this point in time, given the political, economic and social dynamics of the North African region, the scope for growth of the automotive sector is immense.

23/01/2015by EOS Intelligence EOS Intelligence No Comments

Fleet Management System Adoption Gathers Pace in Eastern Europe

European truckers, in general, have lagged in the adoption of fleet management technology, which has delivered significant cost benefits to their US counterparts. Within Europe, transport/logistics companies from the established economies have been quicker in realising the technology’s potential, evident from a greater adoption rate (up to 20% in case of Germany) as compared with those based in the developing/emerging economies of Eastern Europe.

To continue reading, please go to the original article on Automotive World

02/10/2014by EOS Intelligence EOS Intelligence No Comments

Mexico: The Next Manufacturing Powerhouse?

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As China’s cost advantages continue to erode with its increasing wages and fuel costs, the trend of nearshoring surges in popularity. North American manufacturers have started to include Mexico in their supply chains to achieve operational efficiencies such as speed to market, lower inventory costs, and fewer supply disruptions. As a result, Mexico’s manufacturing industry has gained tremendous momentum in recent times and industry experts often cite Mexico as ‘China of the West’.

The Changing Global Manufacturing Landscape

“There is always a better strategy than the one you have; you just haven’t thought of it yet” – this quote from Sir Brian Pitman, former CEO of Lloyds TSB, captures the dire need for companies seeking to gain competitive edge. In the current business environment with shrinking profits and increased competition, companies are under tremendous pressure to gain operational efficiencies.

More than a decade ago, when in 2001 China joined the World Trade Organization, it changed the dynamics of the global manufacturing industry. It became the safe haven for manufacturers across many industries and geographies due to significantly lower wages it offered as well as the abundant workforce. However, more recently, with sharp wage and energy cost increases, declining productivity, as well as unfavorable currency swings in China, the global manufacturing industry is witnessing another paradigm shift, as outsourcing production near home has gained popularity amongst North American companies. The economic growth, skilled labor force, proximity to the US market has allured firms to open up their manufacturing operations in Latin America region. Companies are investing billions of dollars into new production capacities in Latin America to serve their North American markets. In 2011, Gartner predicted that by 2014, 20% of Asia-sourced finished goods and assemblies consumed in the USA would shift to the Americas. Although, the entire Latin American region has witnessed an influx of investments, Mexico seems to have outperformed its peers.

Why Mexico? Why Now?

Mexico received a record US$35.2 billion in foreign direct investment (FDI) in 2013 from various countries, of which 74% was directed towards the manufacturing sector. According to a 2014 AlixPartners study, Mexico continues to be the top-choice for North American senior executives from manufacturing-oriented companies to outsource. So what has suddenly attracted manufacturers towards Mexico?

On the one hand, labor costs have seen a sharp rise in China over the past 7 years. Wage inflation has been running at about 15-20% per year and this trend is expected to continue in the coming years. The tax incentives offered by the Chinese government for foreign companies are diminishing, while local energy costs and costs of shipping goods back to the USA continue to increase. As per AlixPartners’ 2013 estimates, by 2015, manufacturing in China is expected to cost the same as manufacturing in the USA. Additionally, going forward, China is set to be more focused on catering to the rising domestic demand, as its domestic businesses grow and consumers are strengthening their purchasing power. These factors have made North American companies to re-think their outsourcing strategies, previously heavily linked to China-based manufacturing. Mexico seems to have seized this opportunity and started to reap the rewards by establishing itself as a lucrative manufacturing hub.

On the other hand, a dramatic improvement in cost competitiveness is driving Mexico’s manufacturing industry growth. Mexico government’s economic reforms, sound policy framework, and investments in infrastructure have boosted investor confidence and attracted several corporations to open their manufacturing operations in Mexico. According to BCG’s Global Manufacturing Cost-Competitiveness Index of 2014, Mexico has positioned itself as a rising star of global manufacturing. Besides having a growing aerospace industry, the country now has positioned itself as a major exporter of motor vehicles, electronic goods, medical devices, power systems, and a variety of consumer products.

Including North America Free Trade Agreement (NAFTA), Mexico has more free-trade agreements than any other country in Latin America. For manufacturers, this results in ease of doing business as well as a range of tax and financial benefits. Additionally, lower wages and energy costs offered by Mexico, strengthens its prospects as an outsourcing destination for North American manufacturers. Mexico is US’ third largest trade partner and has seen its exports to the USA increasing from US$51.6 billion in 1994 to US$280.5 billion in 2013, an increase of a whopping 444%.

The mass consumerization of IT, increased competition, and changes in consumer behavior are forcing companies to develop and deliver products at a faster pace than ever before. Manufacturers need to streamline their supply-chain operations in order to be more agile and customer-centric. Mexico’s proximity to the US market makes it compelling for North American companies to nearshore their manufacturing as this can drive transport costs down, increase their speed to market, and reduce inventory cost. Besides, it helps them to avoid supply-chain disruptions and serve the markets better by reducing shipping lead times, ensuring on-time deliveries to customers, and responding faster to customer issues.

In the past few years, North American aerospace companies such as Bombardier, Cessna Aircraft, Honeywell, General Electric, Hawker Beechcraft, and Gulfstream Aerospace have all developed major operations in Mexico. In the electronics industry, 2014 figures from BCG show that Mexican exports of electronics have more than tripled to US$78 billion from 2006 to 2013. This has also attracted the eyes of Asian electronic giants such as Sharp, Sony, Samsung, and Foxconn who invested heavily in Mexico as a part of their outsourcing strategy to effectively serve their North American markets. In 2013, they account for nearly one-third of investment in Mexican electronics manufacturing.

In the automobile sector, Mexico today is the world’s fourth largest exporter of light vehicles. On top of Ford, General Motors, and Chrysler’s significant investments towards manufacturing facilities in Mexico, the country is now gaining traction from the likes of global players such as Nissan, Honda, Toyota, Mazda, BMW, and Volkswagen. By investing in Mexico, all companies have committed to establish or strengthen their manufacturing capabilities there. According to IHS’s 2012 estimates, by 2020, Mexico will have the capacity to build 25% of the vehicles remaining on roads in North America.

Why manufacturing companies are running to Mexico with their manufacturing needs makes perfect sense due to its cheap and well-educated labor force and the proximity that can provide companies a strong supply base to cater the North American markets. Combining these factors with the rising middle-class population and increasing consumer spending across several South American nations, offers manufacturers a strong value proposition not only to use Mexico-based manufacturing to support their established North American markets, but also to penetrate and grow its customer base in emerging South American markets.

Challenging Times Ahead

Despite Mexico’s emergence as a leading destination for manufacturing nearshoring, there are certain pain-points that need to be addressed. Mexican government lowered its growth projections for 2014 after a disappointing economic performance during the first quarter of the current year. As reported by Bloomberg in May 2014, the economy is struggling to re-bound from 1.1% growth last year and many analysts predict the growth to be extremely modest in the short term.

Security concerns top the list of worries due to the nation’s history of drug-related crime and attempts to slip contraband into trucks moving north across the Mexico border. It will be interesting to see how the government plans to keep this under control, and whether these attempts will result in investors’ increased confidence in this market.

Further, despite recent reforms and investments made in infrastructure, there are large gaps that need to be filled. The country has areas with unstable supplies of water, electricity, and gas. In order to compete with the likes of China, and to further encourage the influx of foreign investments, Mexico’s government will have to make continued investments in infrastructure in the foreseeable future.

Additionally, over longer term, as Mexico continues to attract manufacturers from across the globe, leading to growth in manufacturing employment and increase of wages, the country might face a similar challenge to that of China, where labor rates continuously increase over years and cease to be as attractive as they used to be. This can hamper the nation’s competitiveness as a lucrative outsourcing destination. It is now the task for policy makers to develop policies that can enable Mexico to be more than just a source of cheap labor. To maintain good availability of skilled labor both in terms of quality and quantity that can meet the global manufacturing demands is a rather complex challenge.

For manufacturers operating in today’s cost-conscious environment, Mexico is becoming their top manufacturing go-to destination to shorten supply chains, cut inventory and logistics costs, and reduce delivery lead times. Although Mexico seems to be on the right path towards establishing itself as the manufacturing hub for the North American markets, it still has a long way to go in order to become the global manufacturing hub. Together with ongoing economic, social, and political reforms, as well as a progressive work environment, Mexico definitely can hope for a bright future as the hotspot for global manufacturing.

24/07/2013by EOS Intelligence EOS Intelligence No Comments

Auto-Financing in China – A Valuable Business Proposition

From a humble beginning in 1998, when state-owned banks were first allowed to provide car loans, automotive financing has come a long way in China. Vehicle loans are now available through commercial banks and automotive finance companies (AFCs), which are mainly non-banking financing companies (captive subsidiaries of automotive OEMs, both domestic and foreign). According to a 2012 report by Minseng and Deloitte, outstanding car loans are expected to grow over five times to reach US$ 160 billion during the next decade, from US$ 31 billion in 2011.

China has been a late bloomer when it comes to automotive finance, mainly because of its cultural mindset, which has been against credit-based consumption (houses are still paid for in cash, so a cash purchase of a car isn’t considered a big deal). However, in the last few years, the Chinese have become more open to the idea of credit and the trend of automotive finance has caught up, mostly with younger generations. About 80% of automotive financing consumers in China are individuals in the 20-40 years age group, according to a survey conducted by China Europe International Business School. The survey also found that 30% of buyers in this age group are likely to choose some form of auto financing, compared to only 10% of buyers over the age of 40.

Auto loan penetration rate currently is about 10% and is expected to triple by 2017. Developed automotive finance markets such as USA, UK and Germany boast of penetration rate of 92%, 74% and 70%, respectively; thereby highlighting the underlying potential in the world’s largest automotive market.

This potential hasn’t gone unnoticed and China now boasts of having close to two dozen automotive finance companies; however, these AFCs only account for one-fifth of the car loans market. The market is instead dominated by commercial banks, mainly the big four state-owned banks, largely thanks to their significant first-mover advantage over AFCs (state owned banks have operated in this segment since 1998, while AFCs started offering auto-financing in 2003).

Another disadvantage for AFCs vis-à-vis commercial banks is their inability to raise funds through bank deposits or by issuing bonds. In China, AFCs are only allowed to raise funds through inter-bank lending. Consequently, interest rates offered by AFCs to car buyers are higher, making their services less competitive. Moreover, AFCs also face a mismatch between the maturity of short-terms loans they have to take from banks and the maturity of the long-term car loans they provide to their customers. With such unfavourable financial conditions, AFCs find it tough to compete with commercial banks.

In spite of the many constraints, AFCs continue to set up their businesses in China (almost 10 new entrants over the past 24 months). One luring factor is China’s gradual opening-up of its domestic financial markets to foreign investors. The world’s second-largest economy is also considering allowing foreign AFCs to issue financial bonds in China. Moving from bank loans to bond financing, should help AFCs reduce funding costs and become more competitive. Bond issuance will also help them in extending the average maturity of their liabilities and create a better maturity match between their assets and liabilities.

The market potential for automotive financing in China is obviously huge, and with the gradual easing of regulatory barriers, foreign financing companies are much more comfortable setting up a shop in the country. This will lead to more competitive financing options for automotive consumers and will also go a long way in popularizing automotive financing concept in China.

26/03/2013by EOS Intelligence EOS Intelligence No Comments

Turkey – When Being ‘The Gateway to Europe’ Wasn’t Good Enough

As with several emerging markets, Turkey’s automotive market slowed down in 2012. The ongoing crisis in Europe limited export opportunities (declined by 8% y-o-y) while domestic economic woes drove vehicles sales down (by 10% y-o-y). Although this came as a setback to the industry, which recorded strong growth during 2009-2011, the industry has bounced back as sales rebounded in the first two months of 2013.

In the last few years, Turkey, to the surprise of many industry experts, has emerged as an attractive automotive production destination. Several international OEMs, such as Ford, Hyundai, Toyota, Renault and Fiat, have set up production units in Turkey, largely to cater to growing domestic demand and as an export hub to Europe. At the same time, leading automotive OEM, Volkswagen, which has a significant presence in Turkey, remains an exception – Volkswagen does not have any plans to establish production capability in Turkey, and this has led Turkey’s Economy Minister to threaten the company with a 10% tax on the company’s imports.

The emergence of Turkey as an automotive production hub has primarily been driven by government incentives and subsidies to this sector. At the turn of 2013, the Turkish government announced incentives to encourage investment in the automotive industry as it targets USD75 billion in automotive exports over the next decade. Salient features of the incentives are as follows:

The investment scheme is an extension of a programme launched in 2009 and will offer tax breaks of up to 60% for new investments, up from 30% in 2012
Projects eligible under the latest revision include vehicle investments of more than USD170 million, engine investments of more than USD43 million and spare parts projects of more than USD11.3 million
Incentives in the lowest band include VAT and customs rebates, employee cost contributions and subsidies on land purchases

Turkey’s path to success as a preferred destination for manufacturing and as a growing automotive market has not been easy. There are several challenges facing the industry that have the potential to severely impact growth and expansion of the sector.

The Challenges

Overdependence on Europe for Exports – In 2012, Europe accounted for 70% of Turkey’s automotive exports and the country suffered in 2012 due to weak demand from the continent. As an immediate step to curb the impact of the ongoing Euro crisis, automotive OEMs are expected to shift focus towards the Middle East and North Africa to reduce its dependence on the unstable European markets.
High Taxation – Special consumption tax and VAT raise the domestic purchase price of a vehicle in Turkey to 60-100% of the pre-tax price. For instance, the price of a Ford Focus 1.6 Trend without tax is EUR15,259 in Germany whereas the same vehicle costs EUR11,000 in Turkey. While the German government imposes a 16% tax, making the final price of the car EUR17,700, the Turkish government imposes a tax of 64.6% making the price EUR18,132. In this context, if Turkey becomes a full member of the EU, it will acquire a larger share of the European market because of lower price before taxation. Turkey also has a higher tax on luxury cars compared with the EU while tax on gas is also one of the highest in the world.
Resistance from Labour Unions in the EU – Labour unions in EU are against the transfer of automotive production to Turkey while some car producers prefer to move to other emerging economies such as China and India which have experienced rapid growth in productivity.

While automotive OEMs face several constraints in the Turkish market, the opportunities seem to outweigh the challenges. Using Turkey as a production hub to cater to regions beyond Europe, such as Middle-East and North Africa is a potentially significant opportunity for automotive OEMs. At the same time, booming domestic demand should continue driving growth of players such as Volkswagen, General Motors, Ford, Hyundai, Renault and Fiat.

Even though 2012 temporarily put the brakes on rapid expansion, the Turkish automotive industry is expected to remain an attractive destination for manufacturing and a promising market for sales.
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Part I of the series – Mexico – The Next Automotive Production Powerhouse?
Part II of the series – Indonesia – Is The Consecutive Years Of Record Sales For Real Or Is It The Storm Before The Lull?
Part III of the series – South Korea – At the Crossroads!

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