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17/06/2014by EOS Intelligence EOS Intelligence No Comments

A Dragon Unfurls its Wings – How China’s Economic Slowdown Is Rippling Through Emerging Markets

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Almost 10 years ago, Goldman Sachs published a report, in which it predicted Chinese GDP to overtake the USA’s GDP by 2020. Today, this prognosis looks like a far-fetched dream as China has recently been riding a wild economic horse. When Chinese economy was growing, its demand for various products and services contributed to the economic growth of emerging markets across the world. The deteriorating performance of Chinese economy over the past few years appears to have started adversely affecting these markets. Will the emerging markets be able to successfully sustain in future?

China witnessed a spectacular and continued rise of its GDP during major part of last three decades. However, end of 2007 saw a turning point, and the country’s economic growth rate cooled off from 14.2% still in 2007 down to 9.6% in 2008, reaching mere 7.4% in the first quarter of 2014. This single digit growth would be more than satisfactory for a lot of economies. However, for China, which regularly recorded double digit rates, this extended period of slower growth is disappointing, with some calling it as ‘an end of an era’.

For years, China was enjoying relentless economic growth through massive investments, exemplary rise in exports, as well as abundance of labor force which was available at low wages. Due to these factors, economists started referring to China’s economic growth model as an investment-and-export driven model. This model has played a key role in driving exports also from emerging markets such as Latin America, Asia, and Middle East, as there was substantial demand for commodities from China’s end to support its domestic consumption as well as export requirements. With the weakening of foreign demand and internal consumption, China’s export demands have considerably weakened, leading to declining prices of export-related commodities and resulting in an adverse impact on emerging markets’ GDPs.

Is the Slowdown for Real?

China’s economic slowdown has not only been reflected in its modest GDP growth figures, but also in several other negative trends that have been observed. These include a continuous decline in the percentage of fixed-asset investments as a part of China’s GDP. Investments contracted from 24.8% in 2007 to 19.6% in 2013. Reduction of fixed-asset investments is likely to negatively contribute towards a country’s economic slowdown by adversely affecting sectors such as real estate, infrastructure, machinery, metals, and construction.

Moreover, yuan has depreciated against US dollar (with average exchange rate of 7.9 in 2006 down to 6.26 in April 2014). In addition to this, Purchasing Managers’ Index (PMI), which is a composite index of sub-indicators (production level, new orders, supplier deliveries, inventories, and employment level), has plunged from 52.9 in 2006 to 48.3 in April 2014, below the middle value (50), thus indicating some contraction of China’s manufacturing industry. This industry contributes significantly to China’s GDP, therefore, the industry’s deterioration has a direct adverse effect on China’s economy.

This negative twist in China’s economic growth story is believed to be a result of a synergetic effect of various internal and external factors, some of which include:

Over-reliance on abundant supply of low-cost labor. For decades, China has based its growth on production of goods requiring high amount of cheap manual labor. However, as the economy continued growing, the demand for higher wages has increased, pumping up the labor cost. This cost is contributing to the inflation of products’ export prices, which is ultimately translating to a lower demand of Chinese goods.
The focus of Chinese workforce has been shifting from rural agriculture to urban manufacturing. The government has been taking steps to propel this transition in order to boost economic growth, prosperity, and industrialization. As more and more Chinese moved to urban areas, gradually, the transition has started yielding diminishing returns mainly due to saturation in the manufacturing industry.
Europe has also played a villainous role in China’s story. It has been one of China’s largest export markets but has recently been extending a significantly low demand for commodities and products from China. In 2007, the European Union accounted for 20.1% of all the exports from China. This percentage has fallen to 16.3% in 2012.

Chinese Leaders React

The Chinese government is in a reactive mode and has been unveiling a plethora of actions to bolster growth. The overall approach looks conservative in nature with a targeted GDP growth of 7.5% for this year, after recording a growth of 7.7% in 2013.

In an attempt to improve the situation, some of the expected financial and fiscal reforms are in the pipeline. Liberalizing bank deposit rates and relaxing entry barriers for private investment are some of the moves to be implemented by 2020. Various property measures (such as relaxing home purchase rules, providing tax subsidies, or cutting down payments) are planned to be introduced (based on local demands and conditions prevailing in a particular city) in order to balance the property market as a whole. A target of creating 10 million new jobs in Beijing has also been set for 2014. The underlying motive of all the rescue measures is strengthening the Chinese economy’s reliance on domestic consumption and services.

Influence on Emerging Markets

Undoubtedly, swing of the Chinese economy towards consumption and services is expected to considerably affect all the connected economies, several of them being emerging markets economies (EMEs). Commodity producing emerging markets such as Latin America, Middle East, parts of Africa and Asia are likely to be affected. Within this group, metal producers will probably suffer the most, as China had a significant demand for iron ore, steel, and copper during its investment boom phase. Within this subgroup, economies which are running current account deficits are forecast to be more susceptible to the ill-effects of China’s economic slowdown.

As China tilts towards domestic consumption, Latin America has started to witness a dawdling growth as the region’s growth rate dropped from an average of 4.3% in the period of 2004-2011 to 2.6% currently. For instance, as Chile depends heavily on copper exports to sustain its economic expansion, the country has been regularly reporting sluggish growth rates (5.8%, 5.9%, and 5.6% in 2010, 2011, and 2012, respectively) due to the decline in the price of copper, largely fueled by a lower demand from China. In addition to this, Brazil and Mexico are struggling to survive through falling benchmark stock indexes. The fall is mainly due to declining prices of commodities, as exports to China from Brazil and Mexico have weakened.

Middle East will probably register both positive and negative effects of China’s economic slowdown. One of the ill-effects could be reduction in oil prices, from US$140 per barrel in 2008 to approximately US$80 per barrel by the end of 2014, due to China’s lower demand of oil. On the positive side, Middle East is strengthening its position as an attractive region with long-term growth since China is being considered as a slightly less attractive option for investment by a majority of investors. This is mainly due to Middle East’s good infrastructure and accelerated development of industries such as defense, chemical, and automotive, and not only traditionally developed energy and petrochemicals.

The impact on African countries is expected to be negative primarily due to declining commodity prices. As Africa’s growth substantially depends on its exports to China, some African commodity exporters, such as Zambia, Sudan, and Angola, have started to feel the strain as China’s demand for commodities is weakening. This weakened demand has led to lower prices of commodities such as aluminum, copper, and oil, which registered a y-o-y decline by 4%, 9.5%, and 5.4%, respectively in January 2013. Zambia is likely to receive the strongest hit as copper constitutes almost 80% of the country’s total exports and reduction in copper prices could make its current account deficit to account for almost 4% of GDP in 2014.

Effect of China’s economic slowdown will vary from country to country in case of Asia. Countries such as Indonesia and Philippines, which have significant domestic demand, would be less adversely affected as they are less dependent on commodities exports to China. China’s unstable economy has spurred new investments in other growing Asian economies such as Cambodia. India is also likely to benefit from the ability to import oil at lower prices, which are pushed down by China’s weakened demand for oil. At the same time, however, export of cotton and metals such as copper and iron ore from India to China is dampened, adversely affecting India’s economy.

While EMEs have already been witnessing a lower demand from their traditional trading partners such as European Union and the USA, China’s slowdown will be an added burden to their economies.

It’s Touch and Go

It is rather evident that Chinese economic slowdown is having an adverse impact on emerging countries across Africa, Asia, and Latin America. One can hope that the measures taken by the Chinese leadership to curtail the slowdown will soon start taking effect and gradually lift up the economy, and in doing so, control the extent of damage spilling over many emerging countries and their economies.

In the event that the Chinese economy is unable to recover from this period of slowdown soon, it will continue to be a terrible blow to the economic ambitions of several emerging markets, especially those in Africa and parts of Asia-Pacific, which are heavily reliant on Chinese investment and trade relations.

Simultaneously to absorbing fewer production inputs imported from emerging countries, it is worth noting that China’s role in world economics might start to alter as it transforms to a consumption-led economy. This transformation is likely to slowly increase China’s appetite for imports of products and services, apart from traditional commodities-focused imports. It will be interesting to observe whether and how some of the emerging economies will attempt to satisfy this new Chinese hunger for goods extending beyond simple commodities.

04/02/2014by EOS Intelligence EOS Intelligence No Comments

Vietnam’s Macroeconomic Environment: FDI Paving the Way for Growth

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2013 was the sixth consecutive year since Vietnam first witnessed macroeconomic instability. With high inflation levels, a collapse of the banking system, and relatively lower growth levels compared with its Asia-Pacific peers, the economy faced immense pressures. However, thanks to continuous efforts by the government to uplift the economy as well as the presence of several inherent benefits that Vietnam offers to foreign corporations, the economy has been resurging, largely on the back of soaring FDI.

Vietnam has faced several economic pressures since 2008, which resulted in high levels of inflation, stagnated growth, and a crumbling financial system primarily led by rising bad debts and loss of liquidity. This also brought a negative impact on the real estate sector and its periphery industries. Over the past few years, the country has struggled to find its ground and has undertaken several policy measures to instigate investor interests. In fact, the Vietnamese government is largely focusing on increasing FDI investment levels and exports as the key tools to pull its economy out of stagnation.

The government made substantial moves with regards to economic policies. These initiatives, which led to a boost in the country’s FDI in 2013, included:

Equitization of 573 state-owned enterprises (SOEs), wherein foreign investors are eligible to hold stake in SOEs with few conditions
Tax allowance that reduces corporate income tax from 25% to 22% from January 2014 and further to 20% in January 2016
The approval of a scheme to enhance FDI management in Vietnam

These efforts by the government appear to have started yielding results, as the registered FDI rose by 95.8% to US$13.1 billion during the first 10 months of 2013, and the disbursed FDI rose by 6.4% year-over-year to $9.6 billion for the first 10 months of the year.

In addition to these initiatives, the government has stepped up to strengthen the country’s banking sector since 2012. Over the past two years it has significantly reduced average lending rates, equitized four state-owned commercial banks, and set up Vietnam Asset Management Company, a state-owned company created solely to purchase bad debt from existing banks in order to clear their books. This company purchased bad loans worth about US$1.6 billion in 2013. In an effort to further speed up the restructuring of the banking system, the government announced that it would increase the allowed limit for foreign strategic investors to invest in a domestic financial institution from 15% to 20% in February 2014.

The government efforts to stimulate FDI have also been supplemented by the existence of several positive intrinsic factors that Vietnam boasts off. The country remains an attractive investment destination thanks to its abundance of natural resources and cheap labor availability (according to JETRO report, monthly pay for general workers in Vietnam is about 32% of levels in China, 43% of that in Malaysia and Thailand, and 62% of that in Indonesia). The country also offers a young and dynamic consumer base domestically, as well as favorable conditions and location to supply within the subcontinent. It also enjoys a stable political environment, a significant advantage over several of its neighbors.

The resurfacing of negotiation talks regarding Vietnam becoming a member of The Trans-Pacific Partnership (TPP) is also positive news for the export sector, which is expected to receive a significant boost with the signing of the agreement (especially in the area of garments, footwear, and wooden furniture). This will also ease investment inflow in Vietnam from other TPP members.

Backed by the aforementioned factors and a robust young population, several sectors in the country are registering a double digit growth and intensified attention from foreign investors.

Vietnam’s aviation sector, for instance, is expected to be the third-fastest growing sector globally with regards to international travel and freight, and the second-fastest with respect to domestic travel in 2014.
The electronics sector has also witnessed keen interest from foreign players. Nokia, a leading telecom handset player, opened its first factory in Vietnam in 2013. Samsung and LG have announced plans to build factories in the country primarily for export purposes.
Retail, consumer goods, and tourism are some of the other best performing sectors with strong growth potential in the near future.
Moreover, in anticipation of the TPP agreement, Wal-Mart is also exploring investment opportunities in Vietnam that would entail sourcing of several products, such as clothing and footwear, entertainment, home appliances, toys and seasonal goods.

It is clearly visible that Vietnam is on the right path of growth and expansion, nevertheless, there is still a long way to go. While the FDI levels rise, the government has to channelize this investment to develop support industries and high-quality workforce to sustain growth. Moreover, while Vietnam enjoys abundant natural resources and cheap labor that attracts FDI, these factors remain exhaustible, especially in the light of new investment hotspots (such as Myanmar) emerging. Therefore, in addition to just focusing on economic policies, Vietnam must work towards creating better investment climate to lure FDI. The country’s legal framework still presents several hurdles to foreign investment and the country ranks very poorly on the global corruption index (114 out of 177 countries). While it is almost certain that Vietnam will continue to see an inflow of foreign investments, it is to be seen if it can use this to achieve sustainable growth for its economy.

27/01/2014by EOS Intelligence EOS Intelligence No Comments

Mongolia – Mining in China’s Backyard

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Mongolia, uninteresting and perhaps almost forgotten to the rest of the world until just recently, has turned out to become of the world’s largest untapped mining centers. The country houses minerals worth over US$ 1 trillion, thanks to which it has the potential to become one of the most prosperous economies in the East. We take a closer look at Mongolia’s potential, its background, most relevant advantages, and challenges that continue to put a brake on the country’s development. Read Our Detailed Report.

28/10/2013by EOS Intelligence EOS Intelligence No Comments

E-commerce in China – Intensive Competition In Spite of Low Penetration

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In the concluding article of our E-commerce Challenges in the BRIC series, we highlight the challenges faced by online retail companies in China. While China is one of the rapidly growing online retail markets, we discuss how aspects such as growing local competition, infrastructure deficiencies, issues with online security for buyers, and heavy dominance of price-based competition hinder the expansion of e-commerce in the country.

Given the Chinese economic growth story, good performance of its e-commerce market comes as no surprise. Exploding middle and upper class, rapidly growing disposable incomes, rising internet penetration, fascination with foreign brands and mobile solutions, all add up to a perfect scenario for online retail to flourish.

According to McKinsey & Company, China’s online retail market, estimated at US$210 billion in 2012, is the world’s second largest market after USA. It is expected that by 2015, it will reach US$305 billion and surpass the US market, having grown at a CAGR of around 34% during the 2010-2015 period. With the size of even up to US$650 billion by 2020, the momentum is expected to continue, especially that industry analysts emphasize that in China’s case, e-commerce has strong effect of generating additional consumption, and not only drives change of sales channels from the otherwise existent off-line sales.

Thanks to the favorable dynamics, Chinese e-commerce has been named the most promising destination for online retailers, which found reflection in China’s first position in AT Kearney’s 2012 E-commerce Index. Unlike in other markets, Chinese e-commerce space is dominated by virtual market places, where a plethora of merchants sell their products, without the need to invest in opening and managing own online stores. However, aspects such as these, along with other specific characteristics of the market, make doing e-commerce business in China a challenge.

The Challenges

Strong and consolidating position of local players – the Chinese e-commerce market is dominated by Alibaba’s consumer-serving arms: consumer-to-consumer e-commerce platform, Taobao, and business-to-consumer marketplace, Tmall, which together account for close to 90% market share. Several local and foreign merchants, such as Microsoft, are increasingly joining Tmall and other e-marketplaces (as opposed to opening own online stores) to sell their products online to Chinese consumers, which leads to further consolidation of Alibaba’s position in the market. While the market is growing and space is expanding to absorb new entries, such strong and established local players are a significant challenge for newcomers, as well as existing online retailers.
Dominance of price-based competition – despite strong local players both in the field of direct online retailing as well as e-marketplaces, majority of them do not offer any particular differentiating factor or unique proposition. However, what makes competing with them particularly difficult is their ability to slack the prices and enter into price competition. With price being the key platform of competing, achieving profitability is very difficult, or even impossible, for instance, for retailers who sell imported products subject to high import duties.
Considerable infrastructure deficiencies – Infrastructure woes are a common challenge affecting e-commerce markets developing across all BRIC markets, including China. Only metropolitan areas have sufficient infrastructure to ensure that product delivery can reach in time (and reach at all). In rural areas and locations far from main hubs, there is no guarantee the orders will reach the customer, as the road infrastructure and delivery services tend to be non-existent or fragmented. The infrastructure issues are often indicated as the biggest challenge that hinders realization of the country’s full e-commerce potential, as online retailers are not able to control and improve the entire supply chain. This challenge is particularly difficult, given the already high expectations of Chinese online consumers, who not only expect wide selection and attractive prices, but also excellent and fast services, including short delivery times.
Insufficient security solutions for consumers to shop online – despite numerous industry analysts agreeing that the market will continue to grow with large numbers of consumers joining the online shopping crowd, there is a common consensus that security-related risks in China are still significant. This includes issues such as product quality, payment security, information security, consumer rights protection, illegal transactions, etc. All of these aspects still significantly impact consumer trust, deterring many of them from shopping online. Also, e-commerce providers have little control over these risk factors, as the security of online payment is handled by a third party. Cash-on-delivery method is not very popular due to other risks (robbery, fraud, etc.), which drives some e-commerce companies to partner with security services providers or to double the number of own couriers sent to deliver the order and collect the payments, to eliminate fraudulent activities (which generates considerable costs).
Low internet penetration in rural areas of the country – while the overall internet penetration is increasing, majority of this growth occurs in urban and metropolitan areas. Currently, it is estimated that not more than 35% of Chinese population uses internet, a ratio below levels in many developing countries. As large proportion of Chinese consumers is still located in the countryside, the internet usage growth confined to the cities limits the internet user base growth for the time being. Moreover, rural-based consumers are not very likely to start using the internet and build an interest in online shopping very soon. Therefore, e-commerce players are challenged with having their customer base currently limited mostly to tier 1 to tier 3 cities.

E-commerce in China is booming, in spite of several teething problems around infrastructure, online and offline security, and low internet penetration. The bigger challenges, however, impact new entrants, which are faced by a highly intensive competitive environment and a market driven purely by price competition. E-commerce will continue to grow in China; there is no question about it. The pace of growth will depend on how the market environment changes to mitigate the risks emanating from the current set of challenges.

05/09/2013by EOS Intelligence EOS Intelligence No Comments

Strike On Syria – Potential Impact On Emerging And Frontier Markets

Though there is still uncertainty of the US military action on Syria, global markets seem to have already given an indication of what could be in store if it actually happens. Crude oil prices rallied in the last week of August amid indication of strike, followed by a fall in oil futures, as the fear of imminent action receded. In another instance, share markets showed signs of panic due to a false alarm regarding missile attack on Syria (which eventually turned out to be an Israeli missile testing exercise).

The possible US strike on Syria has implications for global economy, and specifically for emerging economies, which are experiencing economic slowdown. The situation could be a tough test for countries such as India and Indonesia, as both of them struggle to keep trade-deficit under control, and are under the watch of credit rating agencies. For countries such as Brazil and Mexico, the US action may lead to delayed economic recovery. For Russia, being one of the largest oil producers, political implications are more than the economic one in case of a unilateral US action (i.e. without UN backing) on Syria.

While a sense of uncertainty and urgency prevail globally, we take a look at what potential impact the strike might have on select emerging and frontier markets.

27/08/2013by EOS Intelligence EOS Intelligence No Comments

E-commerce in Brazil – Marred By Political and Social Influences

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The opportunities for e-commerce offered by several emerging countries, such as the BRIC, has been analyzed at length, and quite rightfully so, given their expanding economies, growing middle class, soaring disposable incomes, paired with higher internet and mobile penetration. While the opportunities coming from these transformations are plentiful, e-commerce markets in the BRIC countries also face serious challenges to their development, some of them common across all four countries, some unique to single markets.

We explore these challenges in a four-part series to understand the major roadblocks influencing growth of the e-commerce industries across Brazil, Russia, India and China.

Brazilian consumers are still relatively new to e-commerce, with current propensity to shop online often compared with the penetration rate witnessed in the US market in 2000-2001. This might seem like a small market, however, the e-commerce growth in Brazil is strong, estimated at 21% during the first half of 2012. According to AT Kearney, Brazil’s 80 million Internet users spend about US$10.6 billion online annually, the largest online spending across Latin American markets. Brazilians are expected to spend US$18.7 billion per year by 2017. These might be modest estimates, considering that eMarketer, a digital marketing portal, already forecasts that retail e-commerce sales in Brazil will grow by 14.8% in 2013, to reach US$13.26 billion. While the market appears to be poised for a very promising growth period, several challenges will continue to put a break on sudden growth.

The Challenges

Troublesome and bureaucratic procedures to set up and run e-commerce business – these structural problems make it difficult for local and foreign players to enter the e-commerce market (or set up a business entity in Brazil in general). Burdensome regulations and procedures mean that it might take even 6 months to establish an e-commerce entity. Further, while operating, the entities are often challenged by frequent litigations and lawsuits over variety of issues (e.g. the domain used). Even with no litigations, Brazil has a generally paperwork-heavy business environment, and this is particularly challenging in a relatively new industry such as e-commerce. All these difficulties have led to Brazil being placed at 130 (out of 150) rank in World Bank’s Ease of Doing Business in 2013 (behind countries such as Ethiopia, Yemen, Uganda, or Pakistan).
Inadequate e-commerce regulations – while setting up a business appears overly bureaucratic and regulated, several aspects of e-commerce operations are under-regulated, affecting clarity and smoothness of operation as well as consumer trust. Legislation is slowly, yet gradually being introduced, e.g. only in mid-2013, a seemingly basic and obvious requirement was introduced for e-commerce entities to clearly and visibly display their registration numbers, contact details, purchase terms and conditions, and customer’s rights. While this step is likely to help build customer trust, it covers just a tip of regulations necessary in the market.
Inadequate infrastructure affecting order delivery – the country’s weak and immature infrastructure has a negative impact on orders shipping. Brazil is a country with vast territory, and majority of transportation is done by road. The country’s road infrastructure (both city streets and highways) are in poor condition, many of them unpaved, affecting safety, delivery time as well as damaging the cargo and trucks. Overall, receiving a delivery package by a customer located outside of major Brazilian cities stretches to a week at a minimum, with frequent cases of customer complaints about packages not arriving within two weeks or more.
Underdeveloped shipping and delivery services – while delivery services are available, many of them are provided by small, often family owned companies, that have limited coverage area and lack parcel tracking systems, thus there is generally inadequate availability of reliable courier services. The government-owned national post, (Empresa Brasileira de Correios e Telegrafosand), does not commonly offer parcel tracking options, inviting fraud, and is considered unreliable and slow.
High taxes and complicated tax structure – issues with taxes are often placed amongst top challenges of e-commerce in Brazil. Taxes are high and numerous, which significantly increases overall costs – duties, taxes and fees can double the original price of a product, and can vary considerably depending on product category. Payroll taxes in business innovation sectors reach even 80%. It is estimated that on average, business owners and executives spend 30% of money and 50% of time on dealing with tax-related issues. Further, complex tax structure drives added costs for lawyers and accountants compensation in order to navigate through various issues with the tax regulators and facilitating tax differences between Brazilian states (as there is no uniform tax across the country).
Insufficient talent availability – Brazil’s expanding e-commerce market creates jobs that are difficult to fill, given the shortage of qualified workers, people with e-commerce experience or at least an understanding what a particular e-commerce job entails, e.g. e-commerce web designers, experienced IT and business process professionals or high-quality, competent customer service specialists. The lack of good customer service acts as a deterrent to customer base growth, as according to McKinsey’s Consumer and Shopper Insights from July 2012, Brazilian shoppers who no longer shopped online listed previous bad experience with customer service amongst key reasons for turning away from online purchases.
Online payment security concerns – the lack of trust amongst Brazilian consumers towards safety of online purchases and transactions, deters many of them from buying online and using internet banking in general. Therefore, the predominant payment option that is currently used and preferred by customers is the ‘boleto bancario’, a code receipt that is generated on the website during the purchase, printed by the online shopper and later taken physically to a bank or a post office where the payment for the purchase is made. On the one hand it allows to satisfy consumers concerns about payment safety and to tackle the issue of many users not having credit cards or internet-purchases enabled debit cards. On the other hand, however, it is contrary to the very concept of shopping online (i.e. without the need to physically go to the shop), and extends the entire process of completing the purchase. Further, in order for e-commerce entity to offer ‘boleto bancario’, it should be led by a Brazilian citizen or at least in partnership with a Brazilian citizen. While foreigners can fulfil prerequisites of offering ‘boleto bancario’, the process of filling those requirements is lengthy and difficult, especially when compared with PayPal functioning in several other markets.
Installments shopping culture – Brazilian customers are used to, and hence expect payment options that allow for multiple and no-interest instalments or delayed payment options, resulting in e-commerce entities requiring higher working capital to finance purchases while the customers’ payments for current purchases are received after several weeks. Further, bank involvement to handle the instalments increases costs for online retailers, since bank receives a commission (which is not paid by customers as their instalments are zero-interest).
Language barrier – while this challenge might not be of particular relevance to domestic start-ups, international online retailers find it demanding that the entire e-commerce experience must be provided in Portuguese, and that having previous experience in Spanish-speaking market does not automatically make it easy in Portuguese, as these are two different languages (though western parts of the country have considerable base of Spanish-speaking consumers). This pertains to everything from language used on the online store interface, entire customer service, as well as the fact that many local IT and programming specialist speak only Portuguese (with extremely limited English), making it difficult for foreign start-ups to simply copy their experience and solutions to the Brazilian market.

While there are several challenges that currently undermine the growth potential of e-commerce in Brazil, the gradual changes in regulatory environment, customer service and improvement in infrastructure should positively influence the demand for e-commerce services in the future.

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.

27/06/2013by EOS Intelligence EOS Intelligence No Comments

Future of Global Solar Power Industry – Tense, But There’s Still Hope.

The global solar power industry was always viewed as one based on flawed business principle of artificial sustenance. With prolonged low economic growth, the artificial support base disintegrated, resulting in shutdown of multi-million dollar business across the globe.

Several leading players, such as Siemens, Solar Millennium, First Solar Inc, and SunPower Corp and Suntech Power, have either filed for bankruptcy or pulled out of their loss-making solar power businesses. Others, such as Germany-based Bosch, have decided to wrap-up solar operations at the end of 2013 after having “tried unsuccessfully to achieve a competitive position”.

A 60% fall in solar panel prices between 2010 and early 2013, as well as the rapid expansion of natural gas production in the USA and curtailment of subsidies in the EU were some of the key reasons for growing losses. What is also worth noting is the overcapacity in the market – global production capacity for photovoltaic panels reached about 60 GW in 2012, while expected demand was only 30 GW. Driven by such unsustainable market conditions, no wonder solar power companies went out of business.

Industry experts, however, view the above factors as simply the result of China’s growing dominance in the global solar power industry. Driven by government subsidies, China became the largest solar panel supplier, accounting for 60% of global solar power production capacity. This domination of the industry has, however, come at a price. Amidst growing unhappiness with China-made products leading to local companies becoming uncompetitive, USA imposed a 40% anti-dumping duty in 2012 while in May 2013 the EU imposed provisional duties of 12% (likely to increase to 47% in August) on imports of Chinese-made solar panels. Whether this will deter China or encourage local growth is unknown; this might however have a negative effect of pushing the industry further into crisis.

Beneficiary of the present situation are likely to be manufacturers in countries like Taiwan which are not yet subject to US/EU import tariffs. About 90% of solar cells manufactured in Taiwan are exported to the USA, Europe, and China. Taiwan might also benefit from the EU’s imposition of duties on China made products, driving Chinese investment into Taiwan for setting up manufacturing plants to then directly export to the EU from Taiwan without having to pay the duties. Recent activities of some Chinese companies have indicated Turkey and South Africa being possible destinations for setting up manufacturing units.

The Chinese will find ways to get their products into the US and EU markets, even if it means moving their operations to Taiwan or other countries which are not subject to the high duties. The real issue, however, is the state of the global solar industry – with some of the major players shutting down operations and funding of solar power depleting, is the end of the road? We doubt it.

There is still hope for the solar power industry, largely driven by favorable policy measures in emerging Asian and Latin American countries. The first half of 2013 witnessed solar power investments in several countries, including Kuwait, South Africa and Chile. The industry received a major boost from Middle-East when Saudi Arabia announced a US$100 billion investment plan in 2012, to generate one-third of the country’s electricity demand through solar energy. Although current demand in these emerging markets is relatively low and may take about 10-15 years to develop into a sizeable market, the scope for growth is immense.

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