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by EOS Intelligence EOS Intelligence No Comments

Can Luxury Swiss Watches Stand the Test of Time?

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Swiss watches have long been synonymous with innovation, elegance, and class. These pieces have been considered the standard of sophistication and finesse, making their producers the undisputed leaders of the luxury watch market. But as the saying goes “what rises must fall”, the rock solid foundation of this popularity is going thorough turbulent times. The industry has seen a hard time in the past two years, as Swiss-made watches exports have recently declined. We are taking a look into what has led to low exports of these watches and whether the industry is ready to take any steps to see a revival in the near future.

Swiss watchmakers dominate the luxury watch segment with close to 50% of the global market share controlled by three Swiss watch manufacturers (Swatch Group, Richemont, and Rolex). As of 2016, these luxury watches were exported across all continents – Asia (53%), Europe (31%), Americas (14%), Africa (1%), and Oceania (1%). Hong Kong, USA, and China are the top three export markets.

The Swiss watch industry has been facing difficulties since 2015, when the year ending exports by value of Swiss watches stood at US$ 21.5 billion (CHF 21.5 billion), a 3.1% decline from 2014. The situation worsened in 2016, when the exports were further 9.7% lower than in 2015, falling to the lowest level since 2011. This was mainly due to a sharp decline in sales across Asia, especially Hong Kong and China, which are among the industry’s top export markets. Hong Kong is the most crucial market for Swiss watches – its share decreased from 14.4% in 2015 to 11.9% in 2016. During the span of five years between 2012 and 2016, exports to Hong Kong reduced by 46.5%. The third largest export market, China, was also affected and observed a decline of 18.7% in value exports over the five year period. The situation has not been so dramatic in the USA. Exports share held by the USA also went down between 2012 and 2016, showing a marginal decrease of 0.45%. The Swiss watch industry, over the period of five years, also saw a fall in sales volume globally, declining by almost 13% from 29.1 million units in 2012 to 25.3 million units in 2016.

The year 2017 also did not start on a positive note for the Swiss watch industry. The first quarter of the year recorded a drop of 3.1% in unit exports to 5.6 million from 5.9 million in 2016. Similar trend was observed in the change of exports value. The industry generated US$ 4.5 billion (CHF 4.5 billion) from exports during January to March in 2017, a figure showing a 3% decrease in export value from US$ 4.6 billion (CHF 4.6 billion) in 2016 and a 11.6% lower from US$ 5.1 billion (CHF 5.1 billion) in 2015 in the first quarter. Exports to Hong Kong and USA also took a plunge during the first three months of 2017 – the value of exports for Hong Kong was lower by 0.1% and 31.6% when compared to 2016 and 2015, respectively, in the USA exports were lower by 4.2% and 18.9% in contrast to 2016 and 2015, respectively. However, China gained 16.6% (over 2016) and 7.9% (over 2015) in exports value. But this small achievement does not paint a rosy picture for the luxury watch industry for 2017. With exports taking a dive globally, the downward trend is expected to continue over the coming months.

The dip in exports to Hong Kong and China is a cause of worry. Economic slowdown in Hong Kong is one of the reasons responsible for slumping sales of luxury watches here. Hong Kong also attracts a large number of Chinese travelers each year solely for shopping purposes. The country is heavily dependent on China in terms of trade and tourism, and any drastic change in China’s economic situation affecting the buying patterns of Chinese consumers can be seen across Hong Kong as well. The launch of anti-corruption campaign in China by President Xi Jinping in November 2012 has also affected the sales of luxury watches. The campaign keeps a strict check on government officials and employees of state-owned enterprises who indulge in extravagant show-off of property, luxury belongings, or other similar expensive assets. Under the new amendments made to the campaign in 2014, both the payer and payee of a bribe are to be penalized. This has made consumers wary of buying Swiss luxury watches, among other lavish goods, as a gifting item to high rank government officials. The Swiss watch market has been hit by this policy and the impact on luxury watches sales has been negative. Another reason that has led to the decrease in luxury watches exports is the strengthening of the Swiss Franc. After the Swiss National Bank removed the cap on the exchange rate to prevent the Swiss Franc from over appreciating in 2015, importing products from Switzerland in these Asian countries became more expensive which has disturbed exports.

Swiss luxury watchmakers also face tough competition from smartwatch manufacturers. In 2016, 21.1 million smartwatches were shipped as against 25.3 million Swiss watches. The volume gap between the two types of watches is expected to further reduce in the coming years. With most of the smartwatches priced in the range of US$ 400 to US$ 1,000, the high-end luxury watch market does not feel too much competitive pressure from the smartwatch industry. It is the low-cost and mid-tier segments of the luxury watches that are facing the largest threat. Luxury watchmakers are introducing their own line of smart watches to deal with this threat posed by smartwatch manufacturers.

Luxury watch market is also not free of counterfeit products. The urge to own a luxury piece without burning a hole in the pocket is a dream of many, pushing some consumers to settle down for fake items at affordable prices. With better mechanical parts and improvement in aesthetics over the years, the fake copies have improved in quality. Every year, 40 million fake pieces are produced (against 30 million original Swiss watches), as per figures published by Federation of Swiss Watch Industry. With more fakes than genuine products available in the market, the Swiss industry needs to find ways to curb the illegal sales of counterfeit products and prevent erosion of own sales.

EOS Perspective

In the current challenging environment, Swiss watchmakers are forced to rethink their business strategies. With plunging exports, the manufacturers are focusing on introducing new products enabled with newer technologies and gradually stepping into the smartwatch market to attract buyers. For instance, Swatch Group, in 2015, launched ‘pay-by-the-wrist’ watch named Swatch Bellamy. With built-in NFC technology, the watch allows the user to pay for their purchases. Another example is Mont Blanc, part of the luxury Swiss manufacturer Richemont Group, which introduced Montblanc Summit that runs on Google’s Android Wear 2 platform. The watch is equipped with features such as heart-rate monitor but still looks like a classic mechanical watch. The watch aims at offering consumers a unique experience of wearing a smartwatch which does not resemble a typical smartwatch, a factor important for many style-oriented users.

In the midst of these risks hovering above the luxury watch industry, we believe innovation, adoption of new technology, and expanding into new markets should be the top priorities for watch manufacturers in the coming years. There is some concern about how long will it take for the luxury watch industry to revive from the current turbulent situation, but this definitely does not indicate the death knell for the Swiss watch makers anytime soon.

China wine market
by EOS Intelligence EOS Intelligence No Comments

China’s Wine Market: Will Challenges Crush the Growing Appetite for Imported Wines?

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Over the past decade, China’s wine industry has evolved significantly and is at the forefront of becoming one of the most promising emerging wine markets globally. Globalization and massive socio-economic transformations among Chinese population have revolutionized consumers’ preferences and taste, which in turn created demand for high quality foreign wines in the country. Imported wines have been pouring into China, with approximately one out of every five wine bottles opened being imported. In 2016, China imported 638 million (15% y-o-y growth) liters of wine, valued at US$ 2.4 billion (16% y-o-y growth). The Chinese wine buyers are enthusiastically purchasing a variety of labels across all price ranges, making it an important market for global wine sellers. However, the burgeoning imported wine industry in China faces a few impediments. Faced with stringent import regulations, supply chain impairments, language barrier, counterfeit products, and exorbitant tariff rates, importing wine into China is not a simple process. Nevertheless, importers and producers need to overcome these challenges to establish themselves in the flourishing imported wine business in China.

China is one of the ten largest wine consumers in the world with over 2,000 brands of wine sold in the country, out of which 1,500 were imported in 2015. Consumption of imported wine is the highest in tier I cities including Beijing, Guangzhou, Shanghai, and Shenzhen, which together account for 53% of imported wine sales volume. These cities are populated with expatriates, western-educated young professionals, and consumers, who prefer imported wines. France has consistently been the key wine exporter, accounting for a share of 40% in total wine imports (by volume) to China in 2016, followed by Australia, Spain, and Chile.

China’s Wine Market

Imported wines are quickly trickling down among the wealthy Chinese citizens in urban areas, as consumption of wine is considered a status symbol, influenced by westernization. Growth is further driven by youth population and growing middle class learning about foreign liquor brands and demanding imported wines. In addition, increased consumer spending and government’s promotion of wine as a healthy substitute to the traditional alcohol ‘baijiu’ have accelerated demand for wine in the country.

Despite the growing wine demand, the imported wine industry faces several challenges including dealing with high import tariff rates and circulation of fake wine, breaking through the language and cultural barrier in China, and facing the complex distribution system along with strict import regulations.

EOS Perspective

Chinese consumers are typically interested and enthusiastic about overseas goods which explains their yearning for imported wines. The growing demand for foreign wines is driving the import business, with over 24,000 wine importers present in China, located mostly in Shanghai, Beijing, and Guangzhou. Although obstacles continue to hover above the imported wine market, certain steps have been taken to ease the hassles and this could help alleviate challenges to some extent.

What steps have been taken to overcome challenges?

The Chinese government is actively trying to curb the counterfeiting issue in the country and has introduced an anti-fraud initiative called Protected Eco-origin Product (PEOP) which is a label placed on wine bottles that acts as a guarantee of authenticity by the government. Several technologies are being adopted, including radio frequency identification (RFID) tags, Near Field Communication (NFC) chips, QR codes, etc., to combat counterfeiting. RFID tags and NFC chips offering unique serial identifiers are incorporated into wine bottle’s capsule. Using an app, users can quickly check the authenticity of wine bottles.

The government is also focusing on infrastructural development of tier II cities, which is likely to improve distribution channel across these cities, resulting in better access to imported wines.

What does the future hold for imported wine market in China?

Over 2016-2019, the Chinese wine market is forecast to reach US$ 69.3 billion, growing at a CAGR of 15.4%, with imported wines likely to occupy a significant portion of the market. In near term, imported wines are likely to filter down to tier II cities, as consumers’ knowledge and preference for imported wines is growing amidst government’s efforts to make wine more accessible across these cities.

Further, the imported wine market is likely to undergo certain structural changes. Presently, the Chinese imported wine market is very fragmented, comprising several small importers focusing and operating locally within one city. These smaller importers might realign themselves by joining forces through mergers and acquisitions, in order to take advantage of economies of scale to be able to better compete on price.

Online distribution of wines is likely to gain more popularity, as China offers highly developed e-commerce infrastructure to sell products online. Consumers are slowly opting for online channel to purchase imported wines due to the availability of wide selection, transparency of information, and ease of comparing different brands with each other through information available online. Some producers started selling their wines through marketplaces such as Tmall and JD.com, as well as through specialized alcohol platforms such as Yesmywine, Jiuxian, and Wangjiu. Further, importers use delivery apps such as Dianping and ELeMe to sell imported wines.

The foreign wine market is expected to continue thriving in China and remain an attractive proposition for importers and producers. However, the key challenges will most likely persist in the market amidst other weaknesses including slow implementation of regulations, corruption, and weak administration.

Nevertheless, wine importers and producers foresee tremendous growth opportunity in China’s imported wine industry, and they are likely to continue making efforts to navigate through all obstacles, hoping to make the struggle worthwhile in the long term.

by EOS Intelligence EOS Intelligence No Comments

Bikes Are Back: China Gaining Pedal Power

Once a symbol of China’s culture, bikes use slumped with the country’s economic and urban development. The country’s streets have seen a mass influx of cars and China became the largest automobile market in the world. Commuting by bikes started to be perceived as a symbol of belonging to a lower class, while owning a car represented a higher economic and social status of an individual. However, this trend seems to be changing again, along with commuters’ view on using bike as a mode of urban transportation. With sharing economy on the rise, mobile app-based bike sharing starts to appeal especially to younger Chinese, who perceive biking across the country’s cities cool. Given the congested roads and poor air quality, the government is ready to embrace such greener bike renting services that offer eco-friendly alternative to cars and have the potential to reverse the way people commute thereby reshape the dynamics of the cities in China.

Previously known as the ‘kingdom of bicycles’, bikes were China’s major mode of transportation from 1980 to 2000. However, over time, the economic boom led to a high demand for cars making two wheelers go out of fashion. In 1980, around 63% of people in China used bicycles for their commute. By 2000, the rate dropped to 38% and as of 2016, it was below 12%. In 1995, there were estimated 670 million bikes in China, a figure which fell to 370 million in 2013. But now, the new bike sharing apps are likely to help promote the reversal of this trend in China, a country which has been making efforts to promote cars in the last two decades.

While the country already witnessed the emergence of innovative bike sharing apps over the last few years, bicycle sharing is still set to become a vital focus area for several China’s start-ups in 2017. This new bike-sharing service borrows from the known public bike concept present both in China and in several cities across the world, but unlike the government-run bike rental programs (also present in various cities in China), these bike sharing start-ups offer bikes equipped with GPS. GPS lets the user know which bike is in the user’s vicinity and allows to hold the bike for up to 15 minutes until the user arrives at the location where the bike is parked. The bike is unlocked by scanning a QR code and the GPS device is charged by pedaling the bike.

Popularity of such apps is fueled by the rising demand for means to commute on short distance, currently an underserved area of public transportation. For instance, in Beijing and Shanghai, white-collar workers depend primarily on public transportation for their daily commute, which leads to an increased demand for means to commute from their home or their workplace to the nearest subway or bus station. Bike rental caters to this demand without any complicated procedure or heavy deposit required (since these apps offer bikes with minimal and refundable deposit). In addition, the bike rental concept is becoming a hit with college and school students who cannot afford or try to avoid the responsibility of owning an asset, and also consider biking around the city cool.

Furthermore, the bike rental industry resonates with the growing awareness of an urgent need to address the issue of dramatically deteriorating air quality in most Chinese cities by offering eco-friendly substitute to cars, thereby fighting China’s increasing traffic and air pollution problem.

As of January 2017, there were around 17 companies operating in this new bike rental sector of sharing economy market, out of which MoBike and Ofo are the leading players attracting investment from foreign companies. In January 2017, MoBike raised US$ 215 million from a range of investors including Warburg Pincus, Tencent Holdings, and Ctrip.com International. In February 2017, the company raised additional funding from Singapore-based investment company Temasek Holdings and investment group Hillhouse Capital. The start-up also announced it raised an undisclosed amount from Taiwan-based electronics contract manufacturing company, Foxconn, in January 2017 with a view to increase its fleet size to reach 10 million new bikes every year. The association also aims to cut down the overall production cost and reduce the distribution cost of placing bikes internationally by setting up production houses in strategic locations.

MoBike’s competitor, Ofo, has also been in the limelight for attracting investments from tech players. China’s leading ride-hailing start-up, Didi Chuxing, investment group DST Global, and a private equity firm CITIC are some of the investors in Ofo, which has raised a total of US$ 450 million as of 2017.

App-based bike rental industry has become one of the hottest sectors in China, leading to various domestic and international investors eager to cash in, funding new start-ups operating in this market. The start-ups compete majorly on price and the range of services offered with regards to finding and unlocking bikes, and aim to increase their presence throughout China and abroad. Despite the increasing investment, these start-ups are facing challenges which might hinder the growth of the industry. At present, no industry-specific regulations have been laid out for the bike renting services, including framework of rules and criteria qualifying companies as bike-renting operators, monitoring their activities, or setting up bike maintenance requirements, which can in turn affect user safety. In addition, start-ups face the constant fear of theft and vandalism of their fleet, which can lead to considerable expenses. For instance, in March 2017, around 4,000 bikes were found to be illegally parked in public areas in Shanghai and were confiscated by local authorities. Most of the bikes were owned by MoBike which is now required to pay a management fee and hopes to get 3,500 bikes returned.

Further, the ‘park anywhere’ policy followed by most operators is a double-edged sword, mostly due to users’ negligence with regards parking the bikes. While the policy increases the chances of bikes being found in immediate vicinity, a fact appreciated by the users, it also agrees to bikes being parked in remote areas. As a result, cities in China witness bikes being piled up along freeways and private buildings, and also obstructing pedestrians on the sidewalk.

EOS Perspective

Internet-based bike renting business is booming at an unprecedented rate and adding new momentum to the push to build up the country’s green transportation system. Investors are ogling opportunities presented by the growing platform which leverages on millions of young and tech savvy users. The bike rental start-up battle has just started and the competition is helpful in boosting the size of the industry. Start-ups such as MoBike and Ofo are thriving in the short run by offering new services which let the commuter rent a bike with the help of a mobile phone. However, the increasing investment is not enough for long-term viability and external support in the form of regulations and parking rules is required.

In order to grow, bike rental operators have to resolve issues such as bike theft, vandalism, and disorderly parking. For instance, to avoid bike theft, MoBike has hired staff patrols to keep a check on the bikes. However, this generates additional costs and is only partially able to address the issue of bike theft, as these patrols are unable to monitor all bikes at any point of time. In addition, MoBike introduced a credit score system for users to avoid damage to the bikes, by increasing the user’s responsibility for equipment. Under this system, penalty points are taken in case of any vandalism. Once a user’s score falls below a certain level, the rental fee is increased.

Bike rental companies also need to work on their business model for long-term viability. Despite booming in the short run by offering new and innovative services, these companies will need to overcome a major challenge around the profitability model – tackling it either through in-app advertising, government subsidies, or expanding to other ancillary services. It seems that long-term growth based exclusively on rental fees might be limited as soon as streets in key cities become saturated with this kind of service. Further, the industry is yet to solve problems such as the limited number of bikes a city can handle, as the road space and bike-dedicated lanes might not expand fast enough in most Chinese cities. Unless these companies come up with a long-term plan for sustainability, the future of the industry is hard to predict.

by EOS Intelligence EOS Intelligence No Comments

Starbucks – Expanding in Asia

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With more than 25,000 outlets operating in 75 countries, Starbucks is rightly said to be the premier retailer of specialty coffee globally. With the mission to “establish Starbucks as the premier purveyor of the finest coffee in the world”, the brand continues to rapidly expand its retail operations by opening stores in new markets, particularly with focus on Asian countries. Starbucks has already captured a solid customer base in China and Japan, and it is aiming to expand in other parts of the region, especially in India. While partnerships with local players have been beneficial to the company’s expansion strategy, Starbucks uses an interesting mix of product localization ideas to suit consumer preferences and local tastes to make a mark in the land dominated by tea drinkers.

With plans to open 12,000 new outlets globally over a span of five years, out of which nearly half are to be opened in the USA and China, Starbucks is planning to take its chain to a total of about 37,000 outlets globally. Asia is increasingly important to Starbucks’ growth strategy. As of 2016, the company operated 6,443 stores in 15 countries in the China/Asia Pacific (CAP) region that includes Australia, Brunei, Cambodia, China, India, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam. Potential for growth in this region is great, not only measured in the number of stores, but also in per store revenue – the CAP region currently accounts for 25.7% of Starbucks stores count, but generates around 14% of the company’s revenue.

 

Starbucks – Expanding in Asia by EOS Intelligence

Starbucks follows a two-pronged approach to grow its business in the Asian markets (and other emerging regions). The first tactic of approaching these markets is to partner with regional players to have an easy access. For instance, the coffee maker entered the Japanese market in 1995 with a 50-50 joint venture with Sazaby League, a major Japanese retailer and restaurateur, and in 2014, Starbucks took over the full ownership of its Japanese operations. Similarly, the first Starbucks coffee store that opened in India in October 2012 was in alliance with Tata Global Beverages, Indian non-alcoholic beverages company and a subsidiary of Tata Group. These partnerships allowed to company to get a strong entrance to the local markets, navigate through diverse market environments, and to fulfill regulatory requirements imposed on foreign investors by local governments (which otherwise would leave Starbucks unable to tap these high-potential markets).

The second tactic that Starbucks has successfully implemented in most Asian markets was to tweak its menu to suit the tastes of the local population. Considering that since its inception, Starbucks has been synonym for coffee, adjusting the menus to suit tea-drinking consumer tastes without diluting the brand has surely been challenging. Although the Asian tastes evolve and more consumers start to drink coffee, basing the menu on coffee beverages alone would be a risky move. One of the moves Starbucks did to accommodate the local preferences was the 2016 launch of ‘Teavana’ line of tea beverages for Asian countries that includes matcha and espresso fusion, black tea with ruby grapefruit and honey, and iced shaken green tea with aloe and prickly pear, flavors not typically found in the company’s western stores.

Starbucks’ strategy in the region seems to be paying off. As of December 2016, in China, Starbucks store was said to be opened every 15 hours, making it the company’s fastest growing market, the highest revenue generator in the region, as well as the second largest market globally in terms of stores count. Overcoming challenges of reaching out to consumers with heterogeneous tastes in this vast country, partnering with local players, and creating a menu that suits the taste buds of local consumers have been a game changer for the coffee brewer in mainland China.

Japan is another key market for Starbucks in Asia. The company was able to successfully tackle the Japanese market, as it chose to focus on providing excellent customer experience to better resonate with Japanese culture that emphasizes traditional etiquettes and personal respect. Starbucks outlets in Japan do not ask for the customer name while placing order as privacy is highly valued in Japanese culture. To fit in the local culture, Starbucks in Japan has come up with the ‘concept stores’ that offer products based on local needs. Starbucks has the one of a kind ‘black apron-only’ store boosting of certified coffee experts in Japan.

India, a relatively new addition to the company’s Asian portfolio of markets, might turn to be a problem child for Starbucks. Since entering the Indian market, the company has been trying to take full advantage of the opportunities lying in the increasing income of the middle class population in India. Having opened more than 80 outlets in less than four years since inception, Starbucks in India (known as Tata Starbucks Private Limited) seems to be on an extension route in the Indian subcontinent. But with retail figures saying the opposite, with only 10 new stores in 2016 up against average of 25 stores in last three years and a few closed over infrastructure mishandling, the picture does not look very positive. India’s devotion to tea is a hard nut to crack for Starbucks, and while the company followed its standard move to include tea beverages in local stores, they do not always suit local tastes, as they differ greatly from chai that majority of Indians are used to and love. The scenario in south India might seem more favorable, as the locals have been accustomed to drinking coffee since long before Starbucks came to the country. But the local preference if for traditional filtered coffee, very different from anything on Starbucks’ menu, and bulk of it is consumed at home. With not much being said about the opening of new stores in the near future in any regions of the country, Starbucks in India needs to realign its strategic move to be able to see persistent growth.

EOS Perspective

While many enterprises fail to understand the impact of consumer behavior and preferences over the success or failure of a business, Starbucks offers a finely tailored customer experience to its consumers. For the most part, the company has managed to combine its exciting American flair with the underlying values of the Asian cultures to create a localized, unique experience.

With continuous and consistent expansion of its store base by adding stores to higher growth markets, Starbucks aims at standing as one of the most recognized coffee brands in China and Japan, and increasingly in other CAP countries. In those regional markets, where Starbucks has achieved the greatest success, China and Japan, the company’s efforts to offer consumers new coffee (and non-coffee) flavors in a variety of forms, across new categories have led to Starbucks’ continuous strong performance, and over time translated to acceptability of the American coffee-brewer in the lands of tea drinkers.

However, the coffee brand’s take off in India has been bumpy. The company has less than 100 stores in India, incomparably fewer than its competitor, Café Coffee Day, which has more than 1,500 outlets across the country. In terms of geographic spread in India, Starbucks has till now only concentrated on opening its stores in the largest metro cities, where to some extend it could justify its products’ high pricing (for local market standards). But in order to be successful, the chain needs to reach consumers in tier 2 and tier 3 cities, and appeal to them with more affordable products by marginally compromising on product prices (yet still remaining elitist, as it stands no chance to appeal to the clientele of traditional tea-corner stands which offer a cup of hot tea or coffee for virtually a fraction of Starbucks products price). If the company ensures expansion beyond tier 1 cities, continues to launch new stores offering localized products, it should be able to reap benefits of the rising income of the fast-expanding middle class largely interested in the foreign-feel-like experience and social statement that visiting Starbucks offers them along with their tall Frappuccino.

by EOS Intelligence EOS Intelligence No Comments

Trump In Action: Triumph Or Tremor For Latin America?

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Donald Trump commenced his presidency by announcing ‘America First’ policy, thus casting a dark shadow on trade and exports from other countries to the USA. Trump’s protectionist and neo-isolation policies are accepted with gritted teeth across the world, particularly by the USA’s southern neighbors. The renegotiation of trade treaties, more stringent migration policies, as well as strong focus on encouraging domestic industrialization by pruning imports might contribute to a slowdown in economic growth of a few Latin American countries. The policies set by the new president may result in economic malaise across Latin America, where people are uncertain and apprehensive towards the alarming strategies laid down by the USA.

While the degree of economic and trade impact will vary across LATAM countries, the strongest distress is likely to be witnessed across Cuba, Mexico, and Venezuela. On the other hand, Brazil might partially benefit, while the impact is unlikely to be significant on other larger economies such as Argentina or Chile.

The wall between Mexico and the USA

Mexico is facing the worst of Trump’s wrath. The country is highly dependent on the USA for trade – most importantly for duty free exports. These are likely to witness a tremendous setback with Trump imposing 20% import tax on goods from Mexico to finance a wall that he intends to build to safeguard USA’s border from illegal immigrants.

Renegotiation of the North American Free Trade Agreement (NAFTA) and withdrawal from the Trans-Pacific Partnership will further tarnish Mexico’s trade with the USA. Trump intends to renegotiate terms of NAFTA, focusing mainly on moving away from the zero trade barrier policy. By imposing tariffs on imports from Mexico, the cost of goods will increase as they enter the USA, which is likely to boost domestic production of those goods, but it will surely have a negative impact on Mexican production. Another key driver for Trump’s plans to put a break on Mexican imports is the concern over trade deficit that the USA faces with Mexico – approximately, US$ 50 billion in 2015. Hence, Trump wants to encourage domestic production to reduce imports from Mexico.

Further, Trump’s administration has also endangered billions dollars of remittances, one of the largest sources of foreign capital in Mexico, received from Mexican citizens working in the USA. Trump has threatened to tax the remittance transfers if Mexico does not support the trade and immigration limitations imposed by the USA.

Another major issue is the possibility of implementation of strict migration policies which can result in deportation of millions of undocumented migrants, most of them being Mexicans. Several other countries such as Haiti, Dominican Republic, El Salvador, Guatemala, Honduras, and Cuba also stand to suffer due to the change in migration policies. Mass deportation will increase unemployment in these migrants’ home countries and reduce remittances in foreign currency.

Amid the USA-Mexico tension, the Mexican peso has already witnessed a slump, almost nearing its all-time low – declined by 5% since the beginning of 2017 and by 20% since Trump came into power.

Trump’s crackdown on Cuba

The relationship between Cuba and the USA is predicted to get frosty under Trump’s administration. Cuba has struggled for several years under the USA-imposed isolation until president Obama negotiated to re-establish diplomatic relationship between these two countries. However, in his campaign, Trump threatened to reverse the restated diplomatic relationship – including easing of travel and remittances between Cuba and the USA – if Cuba does not agree to a “better deal” which Trump left undefined. Moreover, the US president has announced that he was against the Cuban Adjustment Act, which permits any Cuban, who reaches the USA to stay there legally and apply for residency.

Venezuela, not far from Trump’s radar

Trump has already turned hostile towards Venezuela considering the recent sanction imposed by his administration in February 2017 on the Vice President Tareck El Aissami, accusing him of playing a significant role in international drug trafficking. Relationship between these two countries has already turned sour amidst the deep economic and political crisis that exists in Venezuela.

Further, Venezuela’s oil exports to the USA might suffer due to Trump’s decision to revive the Dakota Access Pipeline – an oil pipeline project that can reduce country’s need to import crude oil. Presently, Venezuela exports 792,000 barrels a day of its crude oil or 38% of total crude exports to the USA, and any additional access to oil for the USA could have a deep impact on Venezuela’s oil exports.

Trump could be good news for Brazil

It appears that the only silver lining for Latin America, while Trump hovers with his protectionist policies, is Brazil’s opportunity to strengthen its ties with Pacific and European nations. Brazil’s Minister of Foreign Trade predicts new trade opportunities for Brazil, as the country aims to expand trading relations with other countries, while the USA withdraws and renegotiates key trade agreements. Moreover, Brazil (as a member of Mercosur – consisting of Argentina, Brazil, Paraguay, and Uruguay) is already pursuing free trade agreement with the European Union, with next round of negotiations lined up for March 2017.

However, a few setbacks that Brazil could suffer include deportation of many of the 1.3 million Brazilians immigrants living in the USA, whose stay in the USA remains undocumented. The deportation is likely to adversely impact the remittances received by Brazil. Further, Trump’s focus on implementing higher import tariffs is likely to impact the Brazilian exports to the USA – approximately 13% of Brazilian exports are directed to the USA.

 

EOS Perspective

USA’s withdrawal from Trans-Pacific Partnership and aim to renegotiate NAFTA is driving Latin American countries to break dependence on the USA, establishing friendly trade relations with other countries and strengthening intra-regional ties. Latin American countries are focusing to redirect trade and investment towards countries such as China and Russia, as well as Europe and Africa.

China is already a key trading partner for Latin America – with trade between the two regions growing from US$ 13 billion in 2000 to US$ 262 billion in 2013 – and USA’s withdrawal from Trans-Pacific Partnership is likely to further deepen the ties between them. China aims to increase investment and trade in LATAM to US$ 250 billion and US$ 500 billion, respectively, by 2025.

China is moving swiftly to strengthen relationship with Latin American countries. Soon after Trump’s win, the Chinese President visited LATAM aiming to deepen economic cooperation, and to promote social and economic development in the region. During the visit, Ecuador and China agreed to a new economic Free Trade Agreement, focused to grow production and investment across energy, infrastructure, and agriculture sectors. An extension of China-Peru free trade agreement was also signed to promote bilateral trade and investment between the two countries. A closer association between China and Latin America is likely to reduce USA’s dominance and supremacy in the region.

Further, with USA’s plans to increase import tariffs, Latin American countries are slowly focusing on expanding intra-regional trading relationships, which till now have not been developed to their full potential due to dependence on the USA for trade and exports. Present circumstances are optimal to slowly start building an intra-regional trade force in Latin America, and the region’s countries should work towards strengthening existing trade and integration blocs, such as the Union of South American Nations (UNASUR) and the Community of Latin American and Caribbean States (CELAC).

Trump’s policies are likely to have a diverse impact on different Latin American countries. The region has already slowly started forging new trading relationships to reduce dependence on the USA, which proves that LATAM might be able to divert the negative repercussions of USA’s new policies and turn them into new opportunities (at least to some extent).

by EOS Intelligence EOS Intelligence No Comments

China’s Water Crises Set to Boost Private Investment

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The past two decades of a rapid industrialization in China have heavily impacted the country’s water supply and quality, resulting in almost two thirds of groundwater and close to one third of main rivers being classified as not suitable for direct human contact. The country is in a water crisis and wastewater treatment continues to be a key concern. The government is making efforts to strengthen the wastewater treatment industry, leading to an increase in investment and the number of joint ventures in the development of wastewater treatment plants.

The country’s 13th Five Year Plan provides ample opportunities for the private sector and foreign companies to bring in advanced technologies to support the country’s environmental targets, as under the Plan, the government plans to increase investment in wastewater treatment plants by 35% between 2016 and 2020. These plans have made China a great prospect for foreign investors, who can leverage on their experience and high-end technology to enter the local market, now receiving great governmental support, as wastewater treatment has become an integral part of the country’s environmental goals, following decades of neglect and a slow pace of pollutants reduction.

Opportunities appear vast, especially that many needed technologies are not available from local providers. For instance, ultrapure water treatment in pharmaceutical and microelectronics industries require advanced technical know-how which domestic companies are currently unable to offer. This provides opportunities for international players who can provide the necessary technology for the requirement of high quality water in semiconductor and pharmaceutical industries, both of which are witnessing a double-digit growth in China. Other needed but locally unavailable technologies include zero liquid discharge (ZLD) solutions that are compulsory in the coal-to-chemical wastewater treatment plants. Further, advanced wastewater treatment applications such as nanofiltration, reverse osmosis, and membrane bioreactor systems, which allow users to treat wastewater to a high standard, are required to comply with the new Chinese wastewater discharge standards. Such high-end applications can be offered by foreign companies who can thus gain a major foothold in the market.

What has greatly contributed to making the industry increasingly lucrative for suppliers of wastewater treatment technologies and equipment, are the legislative changes aimed at dealing with environmental issues. With a desperate need to improve environmental protection, the government introduced numerous policies regarding wastewater discharge and emission standards. Prior to the introduction of the new policies in 2015, state-owned enterprises were able to disregard the existing regulations, typically without any legal consequences. However, the new water pollution action plan has led to an increase in water and wastewater tariffs and higher wastewater discharge standards. The government has also tightened the facility inspections to ensure that the rules are being followed, and non-compliance to these regulations could now lead to a shutdown of the facility.

These stricter regulations offer significant opportunity for international players who can offer sound technologies which domestic companies are not capable of providing. For instance, less than a half of the 3,300 industrial parks in China have installed a centralized treatment plant. As per the new regulation, all industrial parks are required to install such plants by the end of 2017. The administration departments of these parks are now looking for appropriate solutions providers to meet this requirement. Fine chemical and petrochemical industrial parks, in particular, provide the greatest opportunities for foreign players as their wastewater treatment needs require high-end technology that is not available in the country.


EOS Perspective

China’s problem of efficiently managing its water resources has provided a boost to the country’s wastewater industry. The government’s willingness to support environmental protection even at the cost of industrial profits has made the country one of the largest markets for wastewater treatment in the world. With the use of various wastewater technologies, the country continues to grow its sewage processing capacity (around 3,717 wastewater treatment plants as of 2014, including Shanghai’s Bailonggang plant, world’s second largest wastewater treatment plant with capacity of 528 million gallons per day as of 2013). Ecologically progressive 13th Five Year Plan and the Water Pollution Prevention and Control Action Plan (also called Water Ten Plan) could lead to a flourishing wastewater treatment market with significant growth potential of annual investment of over US$ 6 billion.

Increase in investment and change in regulatory requirements have created ample opportunities for international players, primarily in terms of the much needed technical know-how and experience that domestic players are incapable of offering. International players such as Aquatech and Oasys Water have already leveraged on this and started gaining traction in the market. The entrance of international players could lead to increased competition in the market. Even though domestic players, supported by the state, will continue to have a strong foothold in the market, the rising demand for technical expertise is likely to make foreign players grab market share in the near future.

These prospects for international players are likely to be materialized as the Chinese government has introduced effective enforcement mechanisms to ensure that new regulations are being followed by wastewater treatment plants. It is promising that there are reported cases of heavy fines being levied on these plants. For instance, Hebei province in China spent around US$ 153,000 for the installation of automatic inspection systems at 210 wastewater treatment plants. Further, six wastewater treatment plants in the province were fined a total of US$ 3.3 million in 2015 for discharging excessive pollutants, post the introduction of the new regulations. If the government continues with its efforts for stricter enforcement, polluting plants will be forced to implement the required technologies, a step that will be welcomed by international wastewater treatment solution providers capable of offering such technologies.

by EOS Intelligence EOS Intelligence No Comments

A Doctor under Your Skin: Wearable Medical Devices in India, Brazil, and China

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From smart glasses that allow a surgeon to operate having his patient’s medical records at sight to an intelligent contact lens that measures glucose levels of its wearer, technological innovations are changing the world as we know it. Wearable medical device market growth has been promising and the industry is expected to reach a value of US$7.8 billion by 2020, growing at a CAGR of 19% from 2015 to 2020. Since 2015, the USA and Europe have been two key markets hosting majority of users of these new technologies. However China, India, and Brazil are expected to increase its demand for wearable devices driven mainly by rapid expansion of smartphone users and an increasingly aging population. Is these emerging economies’ current set-up favorable for medical wearable to maintain a steep growth?

 

The use of wearable medical devices is skyrocketing due to aging populations, fast adoption of new trends, and greater incidence of chronic conditions around the world. An increase in health awareness across the globe and a simultaneous increase in worldwide wearable medical device shipments estimated to reach 97.6 million units by 2021, growing at a staggering CARG 108% between 2016 and 2021, might indicate the industry’s large growth potential.

Wearable Medical Devices in India, Brazil, and China-Global Outlook

Brazil, India, and China (BIC), in particular, have been registering increasing rates of chronic diseases such as heart failure, diabetes, and obesity for the past several years. Therefore, these countries have started to be considered as the next destinations to focus on in search for high growth-potential wearable medical devices markets.

Wearable Medical Devices in India, Brazil, and China - BIC Markets Are Attractive

Regardless of the fact that wearable medical devices are thriving in the USA and Europe, in countries such as Brazil, India, and China, these devices are bound to face challenges that could translate into major roadblocks for the market to grow. For instance, although wearable medical devices have proved to be a significant aid when monitoring and preventing illnesses, these are not yet considered an essential product for healthcare consumers. Consequently, BIC buyers, who tend to also be highly price sensitive, may refrain from purchasing such solutions if the retail price is high in comparison to their purchasing capabilities. As a result, this behavior may lead to a stalling sales volume in these markets and, subsequently, a slowdown in the wearable medical market growth.

Wearable Medical Devices in India, Brazil, and China - Successful in BIC

In addition, the growth of wearable medical technologies in BIC is challenged by deficient regulatory frameworks with regards to categorizing and supervising such devices for their import and commercialization in each market. Currently, regulatory frameworks are mostly outdated and do not include specific category for wearable devices with proper security measures. Moreover, as these wearables are battery-operated, improper testing due to lack of regulation can affect their safety as well as may reduce the trust consumers need to develop in order to accept and use the device. Further, this inadequate regulatory scenario may drive away potential market players (including key providers).

Wearable Medical Devices in India, Brazil, and China - Regulatory Frameworks

 

Wearable Medical Devices in India, Brazil, and China - Challenges

EOS Perspective

Global wearable medical device market is witnessing a steep growth driven mainly by changes in demographic profiles of many populations and a growing incidence of chronic conditions. In developed economies, wearable medical technology is experiencing high adoption rates and its role in the healthcare sectors is strengthening, mainly because physicians already use such solutions during consultations, whether to monitor, diagnose, or treat a patient. In emerging economies such as Brazil, India, and China, wearable medical technology has even more room to continue expanding, however, current scenarios in these countries may partially impede this growth.

Some of the key issues in these markets include the problem of import regulations unfitted for wearable medical devices, and this seems to be an important issue which needs to be sorted out in the short term to avoid driving potential players and manufacturers away from BIC markets. At the same time, the high retail price makes the wearable devices unaffordable for a large percentage of the population causing low rate of adoption among patients, and hindering medical wearables’ market growth.

Further, the fact that healthcare providers are not planning to include such devices in public health insurance schemes and reimburse the cost of wearable devices as part of their health plans, lowers the chance of this technology reaching higher number of consumers. This limited accessibility to wearable medical devices in BIC markets may result in low consumer’s awareness about their benefits, or even their existence.

Local governments should reform and adapt their import regulations to fit the wearable medical devices characteristics, allowing a better flow of these products to enter the countries without risking human health. At the same time, for wearable medical devices to healthily grow in these promising and widely populated markets, manufacturers and retailers should aim to lower a wearable device retail price. A way to achieve this could be by adding wearable devices to private health care plans (and encouraging public health insurers to do the same) – especially for chro
nic diseases patients and people over 60 years old. This will most likely allow consumers to purchase such a device at a lower retail price or rely on their healthcare reimbursement policies.

by EOS Intelligence EOS Intelligence No Comments

China’s Digital Single Market – Internet of Things

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Underpinned by immense government support, private investments, as well as the highest number of machine-to-machine (M2M) mobile connections globally, China has potential to get to the forefront of IoT (Internet of Things) development. While most countries are still beginning to understand the benefits of IoT, China already embraced the technology as early as 2010, when it built a national IoT center and aimed to create a market worth US$160 billion by 2020. IoT, with its promise of delivering continuous connectivity, is likely to usher an industrial revolution in China resulting in improved productivity, global competitiveness across industries, and higher economic growth.

IoT is helping China to build momentum and succeed in the digital age, fostering development across various industries by revitalizing manufacturing, boosting connectivity through smart cars and buildings, crafting a new consumer market for wearable devices, enhancing healthcare services, and stimulating energy efficiency.

China seeks to integrate various industries with IoT technology for economic gains and efficient management. Industries such as logistics, manufacturing, transportation, and utilities and resources, in particular, are likely to witness improved efficiency, lower costs, and better-managed infrastructure through real-time information provided by IoT technology.

China’s Digital Single Market – IoT - Revitalizing Growth

 

Chinese consumers are very open to adopting IoT technology, which results in growing penetration of smart devices. Smart home appliances, cars, meters, and retail devices are likely to witness tremendous success in China.

China’s Digital Single Market – IoT - Adoption

 

Industry dynamics are improving driven by launches of new smart devices by private companies, pivotal government support, and several digital drivers (including growing M2M connections as well as smart phone and Internet users). However, there a few factors such as security and infrastructure issues, fragmentation in the market, and lack of standardization that are slowing down IoT development.

China’s Digital Single Market – IoT - Promotors and Inhibitors

 

Despite IoT’s immense potential, several driving factors, and promises of economic gains across industries, a 2015 study conducted by Accenture revealed some deterring factors such as lack of specialized skills, low R&D investments, and substandard infrastructure, which may hold back IoT development in China.

China’s Digital Single Market – IoT - Readiness for Adoption

EOS Perspective

Undoubtedly, China is likely to witness unrivalled opportunities in terms of productivity improvements and economic development as IoT technology spreads across the country. Efforts made by the Chinese government are stimulating the IoT growth – ‘Made in China 2025’ initiative launched in 2015 aims to integrate production with Internet to deliver smart manufacturing and higher manufacturing value. Further, with the ‘Internet Plus’ strategy, China plans to integrate mobile Internet, cloud computing, big data, and IoT with manufacturing.

However, Chinese business leaders and policymakers cannot expect to reap benefits of IoT technology without the right enabling conditions. In order to ensure development, it is imperative for China to overcome the gap in technical skill set, infrastructure, as well as focus on promoting IoT investments. To address the shortage of critical skills, China needs to improve the number and quality of tertiary graduates in science and engineering fields. Beyond that, building a cross-industry ecosystem is also essential for IoT-led growth, which requires development of an integrated communication system along with cluster of secured networks for data transmission.

China’s IoT industry, still at a developing stage, has promising growth potential that could materialize only if the country takes all necessary measures to improve its infrastructure and technological platform, which will allow IoT to diffuse through its industries and completely transform them.

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