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by EOS Intelligence EOS Intelligence No Comments

Sino-US Trade War to Cause Ripple Effect of Implications in Auto Industry

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The whole world has its eyes on China and the USA as both nations are threatening to impose massive tariffs on each other in a ‘tit for tat’ trade skirmish. According to the Trump administration, the proposed tariffs are intended to punish China for pursuing its protectionist policies, currency manipulations, and alleged intellectual property (IP) theft. Fears of a possible full-scale trade war between the world’s two largest economies have caused global stock exchanges to plunge and cautioned investors as well as governments across the globe. There is no doubt that a trade war would not only hurt both economies, but it would also impact the overall global economy. As the proposed tariffs would pertain, amongst others, to vehicles and auto components, we are taking a look at potential implications this trade war might have on automotive industry in both countries.

Since his presidential campaign, president Trump has criticized China for pursuing protectionist policies, currency manipulations, and IP theft. In order to punish China for its current trade policies, and to reduce USA’s huge trade deficit with China, Trump proposed tariffs on approximately US$50 billion worth of Chinese goods coming into the country. Of these, approximately US$34 billion worth of Chinese goods including vehicles and auto parts will be subject to new tariffs starting from July 6, 2018, while the remaining US$16 billion are still under review.

The total automotive trade between the USA and China stood at US$33.9 billion in 2017. At present, in the USA, a 2.5% import tax is levied on imported vehicles and components. The current government proposes to raise this to 25% for vehicles and parts coming from China. China charges around 25% tax on vehicle imports from overseas, and now have threatened to add an additional 25% for vehicles built in the USA. Although these are just proposals for now, if they do get implemented, they will have implications on the entire automotive ecosystem in both countries, including carmakers, dealers, and auto parts manufacturers, and suppliers.

American companies won’t remain unaffected

A trade war with China will make domestic-made cars more expensive at home and less competitive in China. As a significant portion of the auto components and parts used by the US carmakers is sourced from China, increased tariffs will lead to increased production costs. Experts fear that OEMs will pass the increased costs onto the consumer. As a result, domestic auto sales are expected to witness a dip. Further, automakers based in the USA will become less competitive in China and may not be able to retain their current market share any longer.

Tesla is one of the companies that will feel the heat of higher tariffs. Chinese market accounted for approximately 17% of Tesla’s revenue in 2017. The company is already struggling to cope with the existing 25% import duties amid stiff competition from local rivals, such as BYD, NIO, and Byton, who have cheaper alternatives. American OEMs, such as Ford, GM, etc., fear that vehicles made by their subsidiaries in China and exported to the USA could end up being hit by the proposed tariffs.

Besides USA, German automakers such as BMW and Daimler will also be highly exposed since they are the largest vehicle exporters from the USA to China. Potential implications of the Sino-US trade war on companies mentioned above could lead to several job losses at US manufacturing plants. According to a report by Peterson Institute for International Economics, the trade war could result in loss of around 195,000 jobs over the next three years. Additionally, it will also impact other industry players such as auto component OEMs and suppliers, dealers, as well as local retailers.

Trade war could also hamper and limit US companies’ access to the Chinese automotive market, which is currently the largest market globally both in terms of production as well as sales. China is also the best-performing market in the world for electric vehicles (EVs) from sales, infrastructure, and government support perspective. With trade war in place, US companies could lose out to EU and other Asian counterparts on various market opportunities in China.

With trade war in place, US companies could lose out to EU and other Asian counterparts on various market opportunities in China.

Besides automakers, trade war will also have serious implications on auto parts manufacturers and suppliers as well. For example key tier-1 suppliers such as Lear, Delphi Automotive, Adient etc., rely heavily on China for their revenue. On the other side, there are many suppliers that rely on China for sourcing. China is also the largest trading partner for USA in tires. Exports in 2017 reached nearly US$2 billion, an increase of 28.2% as compared to previous year. If the proposed tariffs become reality, all these players will face business challenges on sales as well as supply-chain fronts.

Chinese companies will also face some implications

For the Chinese automotive industry, the trade war will impact mainly imported cars produced in the USA and domestic cars that use components from the USA. Since most cars sold in China are manufactured locally, the impact on Chinese auto OEMs will not be as significant as felt by their US counterparts. However, China is a major exporter of auto spare parts and components to the USA. In 2017, China exported auto parts worth US$17.4 billion to the USA. Thus, the trade war will heavily impact Chinese car parts manufacturers and exporters that rely on US business. On the EV front, new tariffs will raise the prices for parts and components imported from the USA. This in turn, will dampen the adoption of EVs due to higher initial costs and impact domestic EV sales.

Trade war is likely to hinder auto investments in China up to some extent as many companies might re-think their production and supply-chain strategies and put China investments on hold. For example, Ford has kept its plan to export Focus compact to the USA from China on hold due to the ongoing rift. Trade war will therefore impact local production as automakers serving USA market might scale down production in China. This might result in layoffs at local manufacturing units. In addition, trade skirmish with the USA will also create more obstacles for Chinese companies, such as Geely and GAC Motor, looking for market expansion in the USA.

Trade war will therefore impact local production as automakers serving USA market might scale down production in China.

 

EOS Perspective

In May 2018, president Xi announced to lower tariffs on imported cars to 15% effective from July 1, and ease ownership restrictions in automotive joint-ventures. This had somewhat cooled down the ongoing tension between the two nations. At this stage, many experts believed that the current situation will be resolved between the two nations via negotiations. However, despite three rounds of negotiations, both sides have failed to reach an agreement yet.

In the recent chain of events, Trump has threatened to slap extra tariffs on additional Chinese products worth US$400 billion. He also plans to restrict Chinese investments in American technology companies and technology exports from USA to China. This has opened up another front in the ongoing battle. In response, Beijing has warned to retaliate with levies on additional list of American products.

As of now, the potential effects of a full-blown trade war on the auto industry are not clear as they are still proposals. However, if tariffs were imposed, OEMs based in the USA would feel the strongest impact as they export around 280,000 vehicles to China each year.

In addition, considering that automakers today are more globalized than ever and depend on globally-integrated supply-chain networks to optimize their bottom line, a broader impact of the trade war would impact the supply-chains of many global OEMs. The business losses suffered by them will eventually pour down to auto parts suppliers, dealers, retailers, and local auto businesses, who will all feel the heat with varying degrees. It will be interesting to see how things progress and finalize over the next few days. For now, industry stakeholders are sweating over the looming trade war between the two powerhouses.

by EOS Intelligence EOS Intelligence No Comments

Africa’s Struggling Auto Market Set for Modest Recovery in 2018

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After a challenging 2016, most African economies experienced modest recovery in 2017, aided by a recovery of oil and commodity prices. The 2016 economic downturn and a decline in oil prices in Africa impacted some of the largest economies in both Sub-Saharan Africa and North Africa, including Algeria, Angola, Nigeria and South Africa. A recovery in oil prices to US$65-70 per barrel, from as low as US$30 in 2016-2017, has resulted in these economies rebounding after a period of low economic growth, and recession in the case of Nigeria. The World Bank expects economic recovery to continue over the next couple of years, and predicts African GDP to grow by 3.2% and 3.8% in 2018 and 2019, respectively. While economic conditions continue to ease, a negative sentiment has set in the African consumer markets, which has changed the outlook of the automotive industry significantly across the continent.

The article was published as part of Automotive World’s Special report on Africa.
Click to read the full article

Driverless Autonomous Vehicles
by EOS Intelligence EOS Intelligence No Comments

Autonomous Vehicles: Moving Closer to the Driverless Future

An Uber self-driving car was reported getting into an accident in Arizona last month. But as the saying goes “any publicity is good publicity”, this also holds true for autonomous vehicles. The news sparked a discussion and shed some light on potential challenges the technology may face before it becomes available for commercial use. At the same time, it spread awareness about the level of safety testing being done to improve the technology before it is rolled out to the public. We are taking a look at what’s potentially in store for users waiting to see streets flooded with driverless vehicles.

Autonomous self-driving vehicles have been the talk of the industry for some time now, with some of the initial attempts to create a modern autonomous car dating back to 1980s. However, major advancements have only been made during the last decade, coinciding with advancements in the supporting technologies, such as advanced sensors, real-time mapping, and cognitive intelligence, which are perhaps the most crucial to the success of any autonomous vehicle.

Early advancements in the segment were led by technology companies which focused on developing software to automate/assist driving of cars. Some prime examples include nuTonomy, which has recently partnered with Grab (a ride-hailing startup rival to Uber) to test its self-driving cars in Singapore, Cruise Automation (acquired by GM in 2016), and Argo AI, which has recently received a US$1 billion investment from Ford. These companies use primarily regular cars/vans that are retrofitted with sensors, as well as high-definition mapping and software systems.

However, software alone is not capable enough to offer self-driving driving functionalities, therefore, automotive OEMs are taking the front seat when it comes to driving advancements in autonomous vehicles segment. New cars/vans, which are tuned to work seamlessly with this software, are likely to adapt better with the algorithms and meet stringent performance and safety standards required before they can be rolled out commercially. California-based Navigant Research believes that with its investment in Argo AI, Ford has taken a lead among such automotive OEMs in the race to produce an autonomous, self-driving vehicles.

Advanced levels of autonomy still to be achieved

In a nutshell, there are five levels of autonomous cars. Levels 1 through to 3 require human intervention in some form or other. The most basic level comprises only driver assistance systems, such as steering or acceleration control. Most common form of currently prevalent autonomy is Level 2, which involves the driver being disengaged from physically operating the vehicle for some time, using automation such as cruise control and lane-centering. Tesla’s current Autopilot system can be categorized as Level 2.

Level 3 involves the car completely undertaking the safety-critical functions, under certain traffic or environmental conditions, while requiring a driver to intervene if necessary.

Most OEMs developing autonomous cars target launching their vehicles in the next three to five years. Tesla is probably the closest, with its Model 3 car with Autopilot 3 system expected to be unveiled in 2018 (however, this depends on whether the regulations are in place by then). Nissan, Toyota, Google, and Volvo plan to achieve this by 2020, while BMW and Ford have set a deadline for 2021. Most of these companies are working on achieving cars with Level 3 autonomy, with a driver sitting behind the steering wheel to take over from the car’s programming as and when required.

Level 4 and Level 5 vehicles are deemed as fully autonomous which means they do not require a driver and all driving functions are undertaken by the car. The only difference is that while Level 4 vehicles are limited to most common roads and general traffic conditions, Level 5 vehicles are able to offer performance equivalent to a human driving in every scenario – including extreme environments such as off-roads.

Some OEMs, Ford in particular, are against the practice of using a human as a back-up, based on the understanding that a person sitting idle behind the wheel often loses the situational awareness which is required when he needs to take over from the car’s programming. Ford is planning to skip achieving Level 3 autonomy and target development of Level 4 autonomous vehicles instead.

Google is currently the only company focusing on developing a Level 5 autonomous car (or a robot car). The company already showcased a prototype that has no steering wheel or manual controls – a prototype that in true sense can be the first autonomous car. Tesla also plans to work on achieving the highest level of autonomy and plans to fit its cars with all hardware necessary for a fully-autonomous vehicle.

High costs continue to be challenging

While the plans are in place, one massive roadblock that persists in the development of these cars of future are costs. There are multiple sensors used in these cars, including SONAR and LIDAR. The ongoing research has helped to reduce the costs of sensors – Google’s Waymo has managed to reduce the costs of LIDAR sensors by 90%, from about $75,000 (in 2009) to about $7,000 (in 2016) – but they are still very expensive. The fact that a driverless car requires about four of these sensors, makes the cars largely unaffordable for consumers, and that puts off any discussion of feasibility of commercial production at this stage.

EOS Perspective

The first three months of 2017 have been particularly eventful, with several prototypes launched or tested. This activity is expected to increase further as companies try to meet their ambitious plans to roll out self-driving cars by 2020.

Initial adoption is likely to come from companies investing in commercial fleet, particularly those focusing on on-demand taxi or fleet, similar to what Uber or Lyft offer. Series of investments by large bus manufacturing companies, such as Scania, Iveco, and Yutong, also indicate how this technology will be the flavor of the future in public transport.

It is too soon to comment how and when exactly these autonomous vehicles can be expected to impact the way people choose to travel and how they may redefine the societies’ mobility. It is likely to depend on how the regulatory environment evolves to allow driverless cars in active traffic. Current regulatory environment for driverless cars is still at a nascent stage and allows only for testing of these cars in an isolated environment. Some states in the USA, particularly California, Arizona, and Pennsylvania, have opened up to testing of these cars in general public. However, recent accidents and cases of autonomous cars breaking traffic rules have put pressure on authorities to reconsider their stance until the cars become more advanced and tested to handle the nuances of public traffic. We might need to wait another decade or two before driverless cars are a reality in many markets. As things stand, endless efforts continue to go behind the curtain, as companies strive to win the race to develop highly autonomous and safe vehicles.

by EOS Intelligence EOS Intelligence No Comments

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

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

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

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

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

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

Who Is Using 3D and What For?

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

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

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

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

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

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

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

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

Various Stages in 3D Printing Adoption by OEMs

3D Printing Illustration

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

Strati is born in 44 Hours…

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

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

…Shuya to follow!

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

The Biggest Challenge – Seeing Beyond the Prototypes

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

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

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

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

On Reflection

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

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

by EOS Intelligence EOS Intelligence No Comments

Mexico: The Next Manufacturing Powerhouse?

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

The Changing Global Manufacturing Landscape

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

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

Why Mexico? Why Now?

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

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

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

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

US Imports from Mexico

 

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

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

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

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

Challenging Times Ahead

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

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

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

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

 

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

by EOS Intelligence EOS Intelligence No Comments

An Eco-Friendly Product Or Just A Mere Marketing Gimmick? Bio-plastics Are Gaining Momentum.

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The term ‘bio-plastics’ appears fascinating as it seems to revolutionize what plastics have always stood for. Being derived from plants and having the ‘bio-‘ prefix in their name, these plastics are considered to offset the main underlying negatives of conventional plastics, thus seem like ideal products. However, there is more to bio-plastics than meets the eye, as they carry their own fair share of baggage.

We are surrounded by plastics all the time and everywhere – may it be at home, at work, or in transit. The use and abuse of products containing plastics has increased exponentially over the past few decades, fuelled by low oil prices and limited awareness about their ill-effects on the environment. But the tide is turning now, with bio-plastics entering the stage.

Still in their nascent stage of commercialization, bio-plastics are portrayed as able to revolutionize the plastics industry over the next couple of decades. Playing on the key drawbacks posed by traditional plastics, such as limited supply and rising prices of feedstock as well as environmental concerns, the currently insignificant bio-plastic share of about 1% of overall demand for plastics is expected to soar to about 25% over the next 15-20 years. Advanced technical properties, potential for cost reduction (owing to easily available feedstock), biodegradability options, and higher consumer acceptance, are some of the key factors that usher the market to higher growth rate, especially in products such as PET bottles and disposable cutlery used by foodservice industry. While the market stands to grow at about 20% a year, there are also several factors that conspire to withhold the potential of the market.

First and foremost, bio-plastics cannot replace conventional plastics in all applications, and at this stage of development and commercialization are also known to generally offer poorer quality. While they are suitable for disposable products, they cannot yet replace traditional plastics where stability of material properties and durability over time is necessary, therefore, discouraging traditional plastics’ substitution on a mass scale.

At the bio-plastics production end, large land requirement for bio-feedstock (corn, sugarcane, etc.), which leads to conversion of forests into agricultural lands and increases the use of fertilizers and pesticides, may just negate the ecological benefits of bio-plastics to a certain extent.

At the consumption side, the key challenge is the lack of dedicated end-of-life facilities for bio-plastics. There is limited infrastructure for industrial composting and incineration worldwide, which largely limits the benefits reaped from the biodegradable property of these plastics. Moreover, bio-plastics are not uniform and vary greatly, thereby require different end-of-life infrastructure (including segregation, disposal, composting, and incineration). This makes it a much more complicated and expensive process. The recyclability of bio-based plastics is also limited and relatively more expensive. Furthermore, the mixing of conventional plastics and bio-plastics in the recycling stream results in poorer quality of the resultant recycled plastic.

Lastly, the traditional plastics market is much more developed. Bio-plastics on the other hand, are still in the pilot production stage and generally lack economies of scale, thereby costing much more than synthetic plastics. Instead of substituting incumbent plastics, the bio-based plastics market currently caters to a niche audience, which is highly environmentally-conscious and is willing to pay a premium for such products.

Follow the Leaders

Despite the mixed opinions on bio-plastics, several small- and large-scale bio-plastic adoption programs are increasingly undertaken by leading consumer goods producers. It can be expected that these programs and investments will eventually lead to economies of scale for bio-plastics, but as of now it seems that these players have been jumping into the bio-plastics arena mainly for marketing and PR-building purposes, as the group environmentally-conscious consumers expands globally. Here are some examples of investments and innovations by leaders in bio-plastics adoption-

Coca-Cola

  • In 2009, it launched PlantBottle, made of 30% bio-plastics and 70% oil-based plastics

  • The company aims at using the PlantBottle technology for all its bottles globally by 2020, in place of the current distribution network of 20 nations

  • Coca-Cola claims it is also looking into innovation in feedstock for bio-plastics, moving from food crops to waste and agricultural residues

  • It has also entered into agreements with three technology firms, Avatium, Gevo, and Virent, to develop and bring 100% bio-plastics bottle technology to commercial scale
PepsiCo

  • Pepsi developed the world’s first 100% bio-based PET bottle in 2012 and has been working towards its commercialization ever since
Coca-Cola, Ford Motors, H.J Heinz, Nike, and Procter & Gamble

  • In 2012, the companies formed a strategic working group called Plant PET Technology Collaborative (PTC), focused on the development and use of 100% bio-based PET materials in their products
Panasonic Corporation Eco Solutions Company

  • In 2012, the company used bio-based resins to manufacture a range of kitchen countertops and bathroom ceilings for its premium product lines
Gucci

  • Also in 2012, Gucci launched a range of women and men’s shoes called ‘Sustainable Soles’ made from biodegradable bio-plastics

  • In the same year, it also released an eyewear line wherein it manufactures sunglasses made from bio-plastics
Toyota

  • For the past few years, the company has been using bio-plastics (PET and PLA) in the manufacturing of several automobile parts (vehicle liners, interior surfaces, upholstery material on doors, luggage area trims, etc.)

  • It aims to have 20% of all plastic components in its automobiles to be made of bio-plastics by 2015


Notwithstanding the many benefits of using bio-plastics, they are not the perfect eco-friendly products the world would want them to be – at least at the current level of development and commercialization. While the benefits reaped from them at this point are marginal, companies are marketing these new plastics as the revolutionary heroes that will save our environment. However, with a strong momentum towards innovation to improve product quality, huge investments by leading players, drive towards commercialization, and a host of government initiatives, it seems too early to judge the industry as of yet.

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

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

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

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

  • The investment scheme is an extension of a programme launched in 2009 and will offer tax breaks of up to 60% for new investments, up from 30% in 2012

  • Projects eligible under the latest revision include vehicle investments of more than USD170 million, engine investments of more than USD43 million and spare parts projects of more than USD11.3 million

  • Incentives in the lowest band include VAT and customs rebates, employee cost contributions and subsidies on land purchases

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

The Challenges

  • Overdependence on Europe for Exports – In 2012, Europe accounted for 70% of Turkey’s automotive exports and the country suffered in 2012 due to weak demand from the continent. As an immediate step to curb the impact of the ongoing Euro crisis, automotive OEMs are expected to shift focus towards the Middle East and North Africa to reduce its dependence on the unstable European markets.

  • High Taxation – Special consumption tax and VAT raise the domestic purchase price of a vehicle in Turkey to 60-100% of the pre-tax price. For instance, the price of a Ford Focus 1.6 Trend without tax is EUR15,259 in Germany whereas the same vehicle costs EUR11,000 in Turkey. While the German government imposes a 16% tax, making the final price of the car EUR17,700, the Turkish government imposes a tax of 64.6% making the price EUR18,132. In this context, if Turkey becomes a full member of the EU, it will acquire a larger share of the European market because of lower price before taxation. Turkey also has a higher tax on luxury cars compared with the EU while tax on gas is also one of the highest in the world.

  • Resistance from Labour Unions in the EU – Labour unions in EU are against the transfer of automotive production to Turkey while some car producers prefer to move to other emerging economies such as China and India which have experienced rapid growth in productivity.


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

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

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South Korea – At the Crossroads!

South Korea is the world’s fifth largest automobile manufacturer, behind China, Japan, the US and Germany. Automobile sales in South Korea breached the 8 million units mark for the first time in its history in 2012. The surge was mainly on account of strong overseas demand for locally-made models – exports accounted for 82% of these sales while domestic sales (accounting for the remaining 18%) actually contracted 4.2% to 1.4 million units in 2012.

Contracting domestic demand for local companies is mainly due to lack of real income growth, increased debt repayment burden and slump in the housing market in Seoul Special City (houses are often bought in South Korea for investment purposes). Meanwhile, overseas sales, cars exported from South Korea and vehicles assembled in overseas plants, expanded 7.9% to 6.8 million units in the same year.

The South Korean market is dominated by Hyundai Kia Automotive Group which accounted for 82% of domestic sales and 81% of exports in 2012. GM Korea, Renault Samsung and Ssangyong (acquired by Indian company Mahindra and Mahindra in 2011) account for 10% of the domestic sales while rest of the market is catered to by imports. BMW, Daimler (Mercedez-Benz), VW, Audi, Toyota, Chrsyler and Ford are the leading importers.

Free Trade Agreements

South Korea has aggressively pursued FTAs, with the provisional enforcement of an FTA with the EU from July 2011 and the full enforcement of an FTA with the US from March 2012. In the automotive industry, tariffs on parts and components were abolished as soon as the agreements came into force, whereas tariffs on vehicles will be abolished between South Korea and the EU over a three-to-five-year period and those with the US in the fifth year after enforcement of the agreement.

As a result of the FTA, exports to the EU sky-rocketed and the double-digit growth trend continued until March 2012. However, as the EU economy weakened, exports declined and returned to pre-FTA levels. In case of the US, exports surged around the time of the enforcement of the FTA in March, even though the tariffs on vehicles are yet to be scaled down. This phenomenon was labelled as ‘announcement effect’.

An interesting trend that has emerged is that whereas the domestic sales of South Korean cars declined by about 6.3% in 2012, domestic sales of imported cars increased by 24.6% in the same year. Moreover, for the first time, imports accounted for 10% of domestic sales, which is in sharp contrast to the 2% share about a decade back. European automotive OEMs have benefitted the most from this surge in demand for vehicles. This increased market share for European vehicles is mainly due to the fall in prices; as part of FTA between South Korea and the EU, the tariffs on large vehicles reduced from 8% to 5.6%.

Thus it can be said that while the enforcement of FTAs has been effective in boosting exports, it has brought about structural changes in South Korea’s domestic market.

Labour Strife

After an almost 4-year gap, strikes by the labor union returned to plague automotive manufacturing in South Korea in the summer of 2012. The industrial action, which also hit car parts manufacturers and some other industries, revived memories of the days when strikes were chronic in South Korea. Workers went on strike in 21 of the first 22 years since the unions’ formation in 1987; however, unions’ political influence has dimmed in recent years with declining memberships.

Hyundai, Kia and GM Korea were affected by the strikes and suffered record losses – Hyundai alone is estimated to have lost more than USD 1 billion. The main points of contention were the abolition of graveyard shift, wage increase and to confirming of permanent positions to the high proportion of contract workers. Although the companies agreed to most of the demands of regular workers, discussions with contract workers are still ongoing.

To offset the loss suffered from such strikes, OEMs are diversifying their production bases. Hyundai for one has moved to reduce the dependence on domestic manufacturing plants by expanding production in the US, China, India, Brazil and Turkey during the last decade. South Korean plants accounted for 46% of Hyundai’s capacity in 2011, down from 60% in 2008, when the last strike took place and 93% in 2000. Although another objective for establishing a global production network is to make inroads into the global markets.

Another consequence of strikes is that production costs are expected to shoot up, mainly on account of increased wages and also due to the additional investments that the OEMs will now have to undertake to make up for the reduced working hours per day; along with the abolition of the graveyard shift, another demand of the workers was to reduce the number of hours being worked in the two shifts from 20 to 17 hours.

Currency Uncertainties

The Won has been strengthening against the Yen and the US dollar since mid-2012, increasing production costs while adding to currency conversion losses, as sales in foreign markets translate into fewer Won. This has significantly eroded South Korean automotive OEMs competitiveness; companies such as Hyundai and Kia have consequently ceded market share to Japanese OEMs which are enjoying resurgence on the back of a brightening export outlook.

The Yen is also on a two-year low against the US dollar while the Won was at the highest level against the dollar since August 2011 in January 2013. Toyota can now in principle offer a discount of more than 10% to its US customers whereas South Korea’s Hyundai Motor has to raise the dollar price by over 5% to keep up with the Won.

A December report by the Korean Automotive Research Institute (KARI) states that South Korean export would shrink by 1.2% annually for every 1% drop in the Yen against the Won.

Over the years, the strategy of the South Korean Automotive OEMs has revolved around exports and the companies have established global production network to cater to geographies around the world. However, the recent upheaval in the foreign exchange markets have raised serious doubts about the company’s short-medium term prospects.


With increasing competition from global OEMs both in the domestic and global markets (resulting from FTAs) and currency uncertainties nullifying cost advantages that the Korean car makers have traditionally relied on, it is perhaps time for country’s OEMs to shift focus from quantity to quality – stressing superior design and engineering over sales growth.

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In our fourth discussion in this series, we understand the automotive market dynamics of Turkey. Its proximity to Europe and cultural affinity to Asia has seen a growing presence of both European and Asian OEMs. Is Turkey a long-term growth market for automotive OEMs, or is the market as developed as most western countries?

Part I of the series – Mexico – The Next Automotive Production Powerhouse?
Part II of the series – Indonesia – Is The Consecutive Years Of Record Sales For Real Or Is It The Storm Before The Lull?

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