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Sri Lanka’s Economic Crisis May Just Turn into a Battle for Influence

Sri Lanka is currently facing its worst economic crisis since its independence and is the first country in the Asia-Pacific region to default on its external debt in over two decades. While the financial crisis is underpinned by political mismanagement, low tourism during COVID-19, and affected exports and payments due to the Ukraine-Russia war, growing Chinese debt in recent years is also considered to be a major factor in the country’s financial downfall. More so, with China withholding desired and critical support at this time, more questions are being raised over China’s relationship with Sri Lanka. This has provided India and to an extent, the West, with the perfect opportunity to strengthen its ties with the country and in turn limit China’s political and economic influence in the region.

In April 2022, the Sri Lankan economy witnessed an absolute collapse owing to skyrocketing inflation, shortage of essential goods such as fuel, food, and medicines, and foreign debt to the tune of US$50 billion with just US$2 billion in foreign reserves. The financial turmoil further spiraled into a political crisis with the president, Gotabaya Rajapaksa, fleeing the country amidst strong public outcry.

There is no one cause for the freefall of the economy. However, the situation is largely underpinned by unforeseen factors such as halt in tourism earnings due to the pandemic, the Ukraine-Russia war, which resulted in blocked payments from Russia for tea exports, along with deep-rooted issues such as political corruption, favoritism, and weak policies.

An example of weak governance could be the 2019 tax cuts and 2021 ban on imports of synthetic fertilizers and pesticides, which forced majority of farmers to go organic overnight. While the ban on pesticides import was aimed at saving US$400 million that were spent annually on import of fertilizers (in addition to reducing the adverse effect of pesticides on health and environment), the move backfired as the ban led to a substantial drop in crop production. As a result, Sri Lanka had to spend US$450 million on rice imports to cover up for the 20% drop in rice production levels. Moreover, it saw a decline in tea exports by 18% due to limited production. To offset this loss by farmers, the government had to spend several hundred million dollars as compensation and subsidies for farmers who lost their livelihoods. While the policy was removed after only five months for some sectors such as tea production, the damage was done causing a huge dent to the economy.

However, one of the key reasons for the country’s downfall is attributed to the government’s close alliance with China and to several economically unviable infrastructure projects that were green-lighted with China’s financial support and influence. Currently China is Sri Lanka’s biggest unilateral creditor.

Sri Lanka’s Economic Crisis May Just Turn into a Battle for Influence by EOS Intelligence

Sri Lanka’s Economic Crisis May Just Turn into a Battle for Influence by EOS Intelligence

The Rajpaksa family, which has dominated Sri Lankan politics for the last two decades, has been a close ally of China, and has favored investments from the country at the cost of relations with India and other nations that have for long warned Sri Lanka (and other Asian and African countries) about China’s debt-trap diplomacy. Over the last 15 years or so, Sri Lanka’s government has authorized several Chinese infrastructure projects including some that were considered economically unviable.

One such example is the Sri Lankan Hambantota Port that was built by China Harbor Engineering Company on a loan of about US$1.26 billion taken by Sri Lanka from China. The project, which was also touted to be commercially unviable from the very start by several experts and was cleared primarily because of close ties between China and the Rajpaksa family, was a commercial failure. In 2017, the port was handed over to the Chinese government for a 99-year lease due to default in loan payment. Similarly, the Hambantota airport is considered to be one of the emptiest airports in the world and has not been attracting traffic as anticipated, while the Nelum Kuluna towers (touted to be the tallest building in South Asia), stand empty. This has resulted in huge debt to the Chinese government from projects that failed to generate revenue for Sri Lanka. Sri Lanka owes 10% of its total foreign debt to China alone.

Now in the midst of its worst financial crisis and ridden of the old political regime, Sri Lanka is realizing the burden of the foreign debt it has to China. Especially at the moment, when the support received from its once most valued partner has been lukewarm at best.

China has largely maintained silence on the current economic crisis faced by Sri Lanka as well as on the political turmoil and fall of the Rajapaksa clan. It has adopted a ‘wait and watch’ approach, which is being criticized globally. More so, China has only provided minimal relief support to the nation in crisis. To put it into perspective, China has provided only US$74 million of aid and has sent a large shipment of rice to Sri Lanka in response to the large-scale monetary assistance requested by the Rajapaksas, before their departure. Moreover, China has turned a deaf ear to Sri Lankan government’s plead for loan restructuring and is yet to consider the request for an additional financial aid of US$4 billion (which encompasses US$1 billion loan, US$1.5 billion credit line for Chinese imports and US$1.5 billion in bilateral currency swap). Furthermore, China has not cleared its stance on IMF’s relief package for Sri Lanka. While IMF is designing a relief package for Sri Lanka, it needs consent from all its creditors to write off some loans so that the relief sum is used for economic revival instead of just servicing foreign debt. While Sri Lanka is urging the IMF and China to work together, it is going to be a long round of negotiations.

On the other hand, India has been increasing its influence on its neighbor and has provided US$3.8 billion in monetary relief to Sri Lanka. In addition, it is willingly working with IMF to restructure loans to provide debt relief to the country in need. It is also collaborating with Japan to assist Sri Lanka during the crisis. Sri Lanka is of strategic importance to India as it connects several of its key trade routes to Africa and Europe. With China having close ties with Sri Lanka in the past, it had built a strong foothold in the Indian Ocean, which was threatening to India and led to a geopolitical rivalry between India and China.

This financial crisis comes as an opportunity to India to replace China as Sri Lanka’s preferred partner. In March 2022, the Indian government signed a deal with Sri Lanka to develop hybrid power projects in northern parts of the country after China suspended a similar project in December 2021, stating security reasons. Around the same time, India was awarded a US$12 million contract to build wind farms on three small islands in the Palk Strait (which lies between southern India and Sri Lanka) after the project was taken away from a Chinese firm. In March 2022, India’s National Thermal Power Corporation (NTPC) also signed an agreement with Ceylon Electricity Board (CEB) to jointly set up a solar power plant in Sampur, Sri Lanka.

Moreover, in July 2022, several investment proposals to strengthen the economic ties between India and Sri Lanka were discussed between officials from both countries. The key sectors that were identified for investments by India in Sri Lanka include renewable energy, hydrocarbon, ports and infrastructure, IT, and hospitality. The talks also encompassed the development of the Trincomalee Port on Sri Lanka’s northeastern coast and a proposal to use Indian Rupee for transactions in Sri Lanka. In August 2022, the Sri Lanka government also gave an approval to Lanka’s Indian Oil Corporation (LIOC, a subsidiary of India’s Indian Oil Corporation) to open 50 new fuel stations in the country. While LIOC already operates 216 fuel stations in Sri Lanka, it plans to invest US$5.5 million in the proposed expansion. In a separate deal in December 2021, LIOC gained control of 75 oil tanks in a strategically significant storage facility near Trincomalee.

For China, on the other hand, this crisis presents a precarious situation. While it holds 10% of Sri Lanka’s debt, the perception is that China is one of the key reasons for Sri Lanka’s downfall. With China’s other BRI partners, such as Pakistan, heading towards a similar fate, it is important for China to understand the grip it has in deciding the fate of countries over which it holds such significant power. At the same time, it will not like to lose the control it holds over this region to India that would gladly step in to displace China as the preferred partner.

EOS Perspective

The Sri Lankan crisis and its management is being closely observed by several global economies. While China has been Sri Lanka’s prominent partner over the last decade and a half, a new regime in Sri Lanka, China’s tepid response, and India’s support may lead to a shift in allegiances in the region. However, it is still early to offer any definite comments. China still holds significant influence in the region. This can be seen in the recent events, when in August 2022, China docked its ballistic missile and satellite tracking ship, Yuan Wang 5, (also termed ‘spy’ ship) at Sri Lanka’s Hambantota port for six days, despite significant resistance and raised security concerns by India. Therefore, while India is trying to get closer with Sri Lanka, it is very difficult to match China’s control over the region. That being said, there is definitely an opening to improve both political and business relations with Sri Lanka for India. While politically Sri Lanka is of strong geopolitical significance, the country can also prove to be a valuable economic partner with regards to growing trade as well as large scale power and infrastructure projects in the long run.

by EOS Intelligence EOS Intelligence No Comments

Commentary: India-Afghanistan Trade Hangs in the Air after Taliban Takeover

Over the past two decades, India has invested substantial political, diplomatic, and economic capital to foster good relations with Afghanistan, especially since the fall of the Taliban in 2001. Trade has been one of the key components of these relations, with India being the largest market for Afghanistan’s exports in South Asia, accounting for 41.2% of its global exports in 2020. In 2021, Afghanistan’s exports to India were US$509 million, while imports from India constituted US$825 million.

However, the Taliban takeover of Afghanistan in August 2021 has impacted the India-Afghanistan relations on multiple fronts, especially damaging trade relations between the two countries. According to the Federation of Indian Export Organization (FIEO), the Taliban stopped all imports and exports from India through transit routes in Pakistan, also called the International North-South Transport Corridor (INSTC), the main trade pathway.

Textile industry

The route blocking has impacted many businesses across India. One of the sectors witnessing direct repercussions has been the textile industry. The halted trade resulted in stock worth US$540,000 being stuck as corporate bank holders in Afghanistan were not able to withdraw money and do any electronic transactions, as per the Afghanistan Central Bank’s order. Due to this, over 100 traders in Surat, Indian textile hub, were hit hard with delayed payments.

Sugar and dry fruit

India’s sugar exports to Afghanistan have been hit as well with Indian merchants reporting cancellations of orders as a result of the changed rule in Afghanistan. Indian traders were already treading cautiously about exporting to Afghanistan, insisting on advance payments due to the looming uncertainty and restricted trade routes. Following the political upheaval in Afghanistan, Indian sugar exports came almost to a halt in September 2021. Indian food ministry seemed optimistic and expected the trade to resume under the new Taliban regime. However, it is still uncertain how this will unfold, especially in the face of sugar export restrictions introduced by India in May 2022 to ensure domestic availability and to keep the local prices in check.

The new rule in Afghanistan has not only affected Indian exports, but also imports, with imports of dry fruit seeing a particularly major blow as India receives 85% of its dry fruit from Afghanistan. With the disruption of shipments, dry fruit prices in India saw a considerable increase (around 30%), especially as the timing coincided with the festive season (from October to December) in India, a period with the highest demand for dry fruit.

The carefully-nurtured trade relations between India and Afghanistan have been gravely affected post the Taliban takeover and routes closure. As both countries are each other’s important trade partners, there is some hope that trade relations could resume over time, although it would be naïve to expect the matters to fall back to the state from before the Taliban takeover any time soon.

Pakistan routes issue

India had already faced problems routing its exports and imports to and from Afghanistan, as Pakistan repeatedly denied India’s access to overland trade routes with Afghanistan in the past. As a result, India sought alternative routes: one route through Chabahar Port in Iran and an air freight corridor. Although these are not major trade routes, the opening up of such alternatives allowed India’s exports to Afghanistan to be less dependent on Pakistan. Pakistan’s trade routes denials in the past could be somewhat seen as a blessing in disguise, especially in the face of the current INSTC block.

However, the INSTC continued to be the key route for India’s exports to Afghanistan, and its shutting also caused some drastic consequences impacting India’s trade with other countries. Not only was this route used to export products to Afghanistan but it was also a very important trade route for India to reach European and Central Asian markets and vice versa. Although some goods are still being exported through the international North-South Corridor and the Dubai route, the INSTC is the fastest connection to a range of international markets. The closure will continue to have impact on trade timelines and pricing as traders will have to resort to longer trade routes or trim the volumes of goods traded.

EOS Perspective

When and how India-Afghanistan relations could recoup is yet to be seen, and will depend significantly on the Taliban’s recognition as a legitimate government. While the Taliban may have gained military control over Afghanistan and stated that they want better diplomatic and trade relations with all countries, they are still struggling for global recognition and economic support.

While there is not much that India can currently do regarding its trade situation with Afghanistan, it can look at nurturing and developing relationships with alternative trading partners, especially that trade with Afghanistan is unlikely to return to the previous normal. The Indian government needs to work on policies to aid traders and improve relations with other countries, such as Bangladesh and Turkey, to attempt to fill up the void left by the Taliban upheaval.

by EOS Intelligence EOS Intelligence No Comments

China’s BRI Hits a Road Bump as Global Economies Partner to Challenge It

In 2013, China launched its infamous Belt and Road Initiative (BRI), which has gone about developing several infrastructure projects across developing and underdeveloped countries across the globe. However, BRI has faced significant criticism as it brought heavy debt for several countries that are unable to pay the loans. Moreover, it is believed that China exercises significant political influence on these countries, thereby building a sort of dominance across the globe. To counter this, several developed economies have come together to launch alternative projects and partnerships that facilitate the development of infrastructure across developing/underdeveloped countries without exerting significant financial and political bindings on them. However, the main aim of these deals seems to be to keep a check on China’s growing might across the Asian and African continent.


Read our previous related Perspectives: OBOR – What’s in Store for Multinational Companies? and China’s Investments in Africa Pave Way for Its Dominance


China’s BRI program has signed and undertaken several projects since its inception in 2013. As per a 2020 database by Refinitiv (a global provider of market data and infrastructure), the BRI has signed agreements with about 100 countries on projects ranging from railways, ports, highways, to other infrastructure projects and has about 2,600 projects under its belt with an estimated value of US$3.7 billion. This highlights the vast reach and influence of China under this project and its growing financial and political power across the globe.

China’s BRI – looked as a debt trap

Over the years, BRI initiative has been criticized for being a debt-trap for developing and underdeveloped nations, by imposing heavy debt through expansive projects over the host countries, the non-payment of which may lead to significant economic and political burden on them. While the USA, the EU, India, and Japan have been some of the most vocal critics of the BRI program, several participating countries now voice a similar message as they have enveloped in high debt under these projects.

In one such example, the Sri Lankan Hambantota Port was built under the BRI scheme by China Harbor Engineering Company on a loan of nearly US$1.26 billion taken by Sri Lanka from China. The project was questioned for its commercial viability from the very beginning, however, given China’s close relationship with the Sri Lankan government, the project pushed through. As expected, the project was commercially unsuccessful, which along with unfavorable re-payment plan resulted in default by Sri Lanka. Thus, in 2017, the Chinese government eventually took charge of the port and its neighboring 15,000 acres region under a 99-year lease. This transfer has given China an intelligence, commercial, and strategic foothold in a critical water route.

In a similar case, Montenegro is also facing a difficult time repaying its debt to China for a highway project under BRI. In 2014, Montenegro contracted with China Road and Bridge Corporation (CRBC) for the construction of a highway to offer a better connection between Montenegro and Serbia. However, the feasibility of the project was questionable. The Montenegro government took a loan of US$1.59 billion (85% of the first phase of the project) from China Exim Bank at a 2% interest rate over the next 20 years. However, the project, which is being undertaken by Chinese companies and workers using Chinese materials, has faced unplanned difficulties in completion, has put significant financial pressure on the Montenegro government. This is likely to further degrade the country’s economy, delay its integration with the EU, and leave it vulnerable to Chinese political influence. While the EU has refused to finance the loan altogether, it is offering special grants and preferential loans to the country from the European Investment Bank to facilitate the completion of the highway.

Moreover, as per a 2018 report by Center for Global Development, eight BRI recipient countries – Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan, and Tajikistan – were at a high risk of debt distress due to BRI loans. These countries are likely to face rising debt-to-GDP ratios of more than 50%, of which at least 40% of external debt owed to China in association to BRI related projects.

Owing to the growing concern over increasing Chinese investment debt, several countries are now looking to reduce their exposure to Chinese investments and financing. In 2018, the Myanmar government, in an attempt to avoid falling deep into China’s debt-trap and becoming over-reliant on the country, scaled down China-Myanmar Kyaukpyu port project size from US$7.5 billion to US$1.3 billion.

Similarly, in 2018, the Malaysian government cancelled three BRI projects – the East Coast Rail Link (ECRL) and two gas pipelines, the Multi-Product Pipeline (MPP), and Trans-Sabah Gas Pipeline (TSGP) as these projects significantly inclined towards increasing the Malaysian debt to China to complete these projects.

China’s long-term ally, Pakistan, also opted out from China’s BRI in 2019, exposing some serious flaws with the project. In 2015, the two countries unveiled a US$62 billion flagship project under BRI, called the China-Pakistan Economic Corridor (CPEC). While it was started with an ambition to improve Pakistan’s infrastructure (especially with regards to energy), this deal resulted in severe debt woes for Pakistan as the nation started to face a balance-of-payment crisis. This in turn resulted in Pakistan turning to International Monetary Fund (IMF) for a three-year US$6.3 billion bailout package. Pakistani officials have even claimed that the CPEC project is equally (if not more) beneficial for China in terms of gaining a strategic advantage over India and by extension the USA. Thus, given its partial failure and increasing financial pressure on Pakistan, many ongoing projects under CPEC have been stalled or being rebooted in a slimmed-down manner.

Similarly, more recently, in April 2021, Australia scrapped off its deal it had with China under BRI, stating the deal to be over ambitious and inconsistent with Australia’s foreign policy.

Developed nations come together to offer alternatives

Given the push against BRI, several developed nations have come out with alternative infrastructure plans, either individually or in partnership with each other. The key purpose of this is to not only offer more viable options to developing and underdeveloped nations but also to keep a check on China’s growing global influence.

In one such move, in May 2015, Japan launched a ‘Partnership for Quality Infrastructure’ (PQI) plan, which came out as a direct competitor to China’s BRI. The PQI Japan (in collaboration with Asian Development Bank (ADB) and other organizations and countries) aimed at providing nearly US$110 billion for ‘quality infrastructure investment in Asia from 2016 to 2020. Although, on one side, this initiative is intended to secure new markets for Japanese businesses and strength export competitiveness to further bolster its economic growth, on the other side, politically PQI is a keen measure to counter China’s influence over its neighboring countries.

Just like Japan, India has also been a staunch critic of China’s BRI as it feels that the latter uses the BRI to expand its unilateral power in the Indo-Pacific region. Thus, to counter it, India, formed an alliance with Japan in November 2016, called ‘Asia-Africa Growth Corridor’ (AAGC).

The alliance aims at improving infrastructure and digital connectivity in Africa and connecting the continent with India and other Oceanic and South-East Asian countries through a sea passageway. This is expected to boost economic collaborations of India and Japan with African countries by enhancing the growth and interconnectedness between Asia and Africa.

The alliance claims to focus on providing a more affordable alternative to China’s BRI with a smaller carbon footprint, which has been another major concern in BRI project execution across Indo-Pacific region. The emphasis has been put on providing quality infrastructure while taking into account economic efficiency and durability, inclusiveness, safety and disaster-resilience, and sustainability. The countries do not have an obligation of hiring only Japanese/Indian companies for the infrastructure development projects and are open to the bids from the global infrastructure companies.

In more recent times, in May 2021, the EU and India have joined hands for a comprehensive infrastructure deal, called the ‘Connectivity Partnership’. This deal aims at strengthening cooperation on transport, energy, digital, and people-to-people contacts between India and the EU and developing countries in regions across Africa, Central Asia, and the Indo-Pacific region. Moreover, it aims at improving connectivity between the EU and India by undertaking infrastructure development projects across Europe, Asia, and Africa. It also focuses on providing a more reliable platform to the already ongoing projects between the EU and India’s private and public sectors.

While the two partners claim otherwise, the deal seems to be their collective answer to China’s BRI and its growing influence in the Asian, African, and European belt. Unlike BRI, the EU-India Connectivity Partnership aims to follow a clear rule-based approach to have greater involvement from the private sector with backend support from the public sector of both sides. This protects the host country against heavy debt and in turn restricts the level of political influence that both sides may have on the host country. This advantage over China’s infrastructure deal makes this project a serious competitor to the BRI in this region as host countries are most vary of falling into a debt-trap with China.

Another recent initiative to dethrone the BRI has been the ‘Build Back Better World’ (B3W), which has been undertaken by the Group of Seven (G7) countries in June 2021. This project, led by the USA, is focused on infrastructure development in low- and medium-income countries, and aims to accomplish infrastructure projects worth US$40 trillion in these countries by 2035. Further, the project is intended to mobilize private-sector capital in areas such as climate, health, digital technology along with gender equity and equality involving investments from financial institutions of the countries involved.

This project claims to be based on the principles of ‘transparency and inclusion’ and intends to cease China’s rising global influence (through BRI) as it aims to make B3W comparatively more value-driven, market-led, and a higher-standard infrastructure partnership for the host country. To ensure inclusivity and success of the project, the USA invited other countries such as India, Australia, South Korea, and South Africa to join the project. However, considering the nascent stage of the B3W development, the proceedings and details of the project are not explicitly clear, however, given that its intention is to help the USA compete with the BRI, it is expected to be well-funded, robust, and inclusive.

EOS Perspective

China’s BRI started on a very high note, garnering multi-billion-dollar infrastructure projects across a host of Asia, African, and European countries. However, over the last couple of years, increasing number of countries have become wary of its inherent problems, such as looming debt, increasing Chinese influence, and incompletion of projects. This has helped shift the momentum towards other developed countries that have for long wanted to counter China’s growing global influence. Using this opportunity, Japan, India, the EU, and the USA have come up with alternative infrastructure deals to compete with the BRI.

That being said, BRI will not be easy to shove aside as China has been in this game for several years now and has a significant time advantage. While countries such as India can try to compete, they do not have the financial might to take up projects that are strategically important and commercially viable.

Further, several of the alternative projects, such as India-EU Connectivity Partnership and G7 B3W aim to significantly involve the private sector for investments. While this is good news for the host countries where the project will be undertaken, private players will definitely be more concerned about financial viability of their investment and may not be able to match the BRI investment values, debt rates, etc. Moreover, geographic location puts China in an advantage for projects in the Asian region (when compared with the USA and the EU).

Therefore, while the attempt to dethrone China’s BRI has gained significant momentum and found proper backing, it is something that cannot happen in the short term. However, given the growing anti-China sentiment, it can be expected that with the right partnerships and project terms, BRI may start facing some serious competition from global powers across the globe.

by EOS Intelligence EOS Intelligence No Comments

Cloud Kitchens on the Surge as Consumers Choose to Order-in

For food delivery, e-commerce was an option before Covid-19 but as the pandemic unfolded, it became the preferred way to take the customers’ orders. Restaurants were shut down for indoor dining, so customers turned towards cloud kitchens to order and enjoy restaurant-like food without having to step out. The ease of having high-quality food delivered right at the footstep, has instigated people, now more than ever, to order-in. The pandemic has accelerated the cloud kitchen business causing a paradigm change. Customer- and technology-driven cloud kitchens reflect a business model that will be adopted, sooner than later, unanimously by players in the food and restaurant service space.

The global cloud kitchen market was valued at close to US$ 52 billion in 2020, with the APAC region accounting for more than 60% of the global market share. Rising disposable income and increased use of smart phones have been driving the increase in online food delivery services (on which cloud kitchens depend), but it was not until the pandemic entered the scene that cloud kitchens really gained traction as restaurants and other eateries closed down.

COVID-19 accelerated the ascent of cloud kitchens as people used food delivery services much more frequently than before the pandemic. The growth was further favored by the trivial need for dine-in space due to social restrictions.

Everyone wants a piece of cloud kitchen on their menu

While China, India, and Japan are the key markets driving growth of the cloud kitchen market in the region, the market in other countries is also witnessing significant growth rates. For instance, JustKitchen, a Taiwan-based cloud kitchen operator established in March 2020, has 14 “Spokes” (smaller kitchens for final meal preparation and packaging) and one “Hub” (larger commercial kitchen where earlier stage food preparation takes place) across the country. The company further plans to expand both domestically (by having 35 Spokes and two Hubs in Taiwan by the end of 2021) and internationally – it opened its first overseas kitchen in Hong Kong in June 2021 and plans to expand further in Singapore, the Philippines, and the USA. Another player, GrabKitchen, owned by Singapore-based Online to Offline (O2O) mobile platform Grab, which opened its first cloud kitchen in Indonesia (in 2018), now has operations in Thailand, Vietnam, Singapore, Myanmar, and the Philippines.

Restaurant chains are the primary adopters of the cloud kitchen concept. The pandemic has made India-based QSR chain, Bercos, realize that it is important to include deliveries as part of the business plan because of which it is planning to launch three new cloud kitchen brands in the western and southern parts of India. Another Indian multi-brand cloud kitchen player, TTSF Cloud One, looks at opening 150 cloud kitchens by 2022. They aim at investing between US$ 3.3 million to US$ 4 million in the project through a combination of owned cloud kitchens, retail stores as well as franchised stores, and franchised cloud kitchens.

Owing to corporate strategy and global restructuring, the Philippines-based fast-food restaurant chain Jollibee Foods announced (in May 2020) that it would spend US$ 139.4 million on building its cloud kitchen network.

Global food chains are also partnering with local players to increase their outreach in the cloud kitchen ecosystem – in 2020, Wendy’s, a US-based fast food restaurant chain, entered into a joint venture with Rebel Foods, an Indian online restaurant company, to open up 250 cloud kitchens across India. This is a strategic move for Wendy’s as the company will get immediate access to scale rapidly across the country because of Rebel Foods’ existing network of cloud kitchens. Furthermore, Rebel Foods recently announced that the company plans to add another 250-300 locations to its repertoire across Southeast Asia, West Asia, and the UK via partnerships.

With the cloud kitchen concept growing at an astronomical rate, players, especially in nascent markets, are also looking to scale up rapidly. CloudEats, a Philippine-based cloud kitchen, plans to expand its reach further within the country (it currently has five cloud kitchens domestically) and other countries with the highest online food delivery penetration across Southeast Asia. Bangladesh-based cloud kitchen and digital food court player, Kludio, launched Kitchen-as-a-service to help restaurateurs, home cooks, and virtual brands to expand with no upfront investment, and FoodPanda Bangladesh, in July 2020, announced that it would be launching 30 new cloud kitchens (in a period of 6 months) across the country.

Cloud Kitchens on the Surge as Consumers Choose to Order-in by EOS Intelligence

Cherry-picked business model served on a silver platter (well, almost)

Cloud kitchens present a sea of prospects for both food and restaurant industry players as well as other adjoining sectors. They represent a potential of a tech-enabled business model for the restaurant and food delivery industry where operational jobs in the kitchen will be handled by robots and deliveries made by drones. Another opportunity is for restaurants that would like to expand their geographical reach but are incapable of opening another dine-in place. With a cloud kitchen in place, they can access new markets via delivery only. Restauranteurs can further use it to their advantage by experimenting with new food items with relatively no investment and low risk. Last but not the least, the mid and large-sized restaurant chains, which thrived on the dine-in concept (before the pandemic), will be quick to jump and adapt (some players have already ventured into this space) the cloud kitchen model to capitalize on the growing food delivery business. Furthermore, new players entering the restaurant and food business can take this as an opportunity to pan their premises layout in a way that space is efficiently optimized to adjust both the restaurant layout as well as the delivery service.

But it is not all smooth sailing. With a large number of cloud kitchens sprouting, the competition will be fierce in the coming years. Furthermore, with only so many food delivery platforms to support the already crowded cloud kitchen market, they are easily exploited by food aggregators. Not only do aggregators charge a high commission (ranging between 25% and 40%), the ratings for cloud kitchens on these portals (for a cloud kitchen) play a massive role in influencing other customers and affect the brand value.

EOS Perspective

Unlike restaurants, a cloud kitchen offers no dine-in facility and relies solely on online orders. The delivery-only model has its limitations, especially when it comes to customer experience. And a slowdown in dine-in style is indicative that restaurants are moving forward and looking to enter this space. Therefore, a hybrid model where cloud kitchen and dine-in concepts integrate is most likely to rise in the future.

The restaurant industry is recovering from the coronavirus crisis and adjusting to the fact that a pandemic could shake the entire foundation of the sector which was once based on dining in. But now with more and more people ordering in, the burgeoning cloud kitchen space represents a sprouting new business model. In the near future, smaller brands are most likely to embrace a cloud kitchen network model whereas the hybrid business model (combining physical stores and cloud kitchens) will work best for the larger and established brands. For instance, in July 2020, Thailand’s fast-food restaurant chain, Central Restaurants Group (CRG), which currently operates 1,100 fast food outlets nationally, announced that it will open 100 cloud kitchens across the country in the next five years to strengthen its food delivery business. Moreover, as social distancing becomes the norm (wherein restaurants are forced to maintain sizable distances between tables) and preference for eating out reduces, the dine-in spaces across restaurants are also likely to shrink.

In the long term, the concept of cloud kitchen seems practical and a plausible winner, however, its success hinges entirely on the growth of food delivery market. Before the pandemic, in 2017, APAC lead the global online food delivery market with a share of 52.1% and market revenue of US$ 34.31 (the region was anticipated to contribute a revenue of US$ 91.0 billion and a share of 56.2% by 2023). Post pandemic, these figures have multiplied and present a space that exudes growth potential. For instance, in Southeast Asia, the food delivery market grew 183% from 2019 to 2020 (in terms of gross merchandize value) owing to changing consumer behavior (towards how they consume food) and the ease of ordering in due to digitalization. Moreover, the growth in the food delivery sector is expected to continue.

Food aggregators have been active in the cloud kitchen space even before the pandemic hit. Their value proposition of acting both as a supplier (wherein it allows independent cloud kitchen players to use its platform while charging them on a revenue-sharing model) and operator of the platform puts them in an interesting position, where they have control, to a certain extent, of business functions of other players. Food aggregators may likely dominate this space in the long run.

The metrics of the food and restaurant service industry have changed as businesses evolve continuously. With concepts such as cloud kitchen, the sector has become consolidated wherein multiple establishments work under a single roof.  In a nutshell, the cloud kitchens are here to stay as they display substantial growth potential provided players revisit their business strategies and rethink the right hybrid business model (such as merging with a large brand, to expand into cloud kitchen space, among others) in order to thrive.

by EOS Intelligence EOS Intelligence No Comments

Indian Pharma Needs to Reinforce Supply Chain Capabilities

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COVID-19 has emphasized the importance of strong healthcare and pharmaceutical ecosystem for India. Constant demand for drugs and the expectation to deliver them in time put a lot of pressure on pharma supply chains, highlighting several challenges and shortcomings. At the same time, the Indian pharma sector seems to have benefited from the situation as well, as the pandemic unlocked new avenues of growth. To seize new opportunities, the Indian pharma sector should now focus on increasing manufacturing capacity, invest in R&D capabilities, develop world-class infrastructure, and strengthen its supply chain network.

Challenging times for the Indian pharma sector

With coronavirus wreaking havoc, the Indian pharmaceutical sector was shaken and the pandemic inflicted several challenges on the industry.

The key challenge faced by pharmaceutical companies has been the shortage of key raw materials for manufacturing drugs. India imports 60% of APIs (Active Pharmaceutical Ingredients) and DIs (Drug Intermediates) and nearly 70% of this demand is met by Chinese companies (as of July 2020). This reliance to import cheaper raw materials from countries such as China is a result of lack of tax incentives, high cost of utilities, and low import duties in India.

India’s dependence on China has affected the supply of essential APIs. The recent pandemic has magnified this problem, and in order to meet the increasing demand, Indian pharma manufacturers need to strengthen their supply chain strategies by working with multiple API suppliers, both domestic as well as international.

Another concern has been the increased raw materials and logistics cost. Between January and June 2020, the production costs at the Chinese suppliers increased due to the implementation of safety and hygiene measures thus increasing the overall cost of APIs and other materials imported by India by an average of 25%. Logistics prices also went up during the same period, with the cost of shipping a container from China to India increasing to an average of US$ 1,250 up from US$ 750. Additionally, air freight charges also went up from US$ 2/kg to US$ 5-6/kg.

Furthermore, restrictions on movement of products and other goods also posed a problem for pharma supply chain. Even though the sector was exempted from these restrictions, delays in the delivery of drugs were registered. These delays have been largely contributed to by the complexity of various processes and their elements (from raw material procurement to procuring casing and other packaging material – all of which come from different locations to the final assembly point, and their delivery can be exposed to delays at each stage). While logistics companies tried to make product deliveries on time, they were restrained by limited workforce and movement restrictions (that required clearance at every step).

Moreover, due to panic buying, scarcity of OTC and generic drugs was also observed.

Government’s push to make India self-reliant

The government has undertaken steps to strengthen the pharma sector and announced several schemes and policies to boost domestic pharma manufacturing.

To reduce import dependence in APIs and boost domestic manufacturing, the government approved a US$ 971.6 million (INR 69.4 billion) Production Linked Incentive (PLI) Scheme in March 2020 to promote domestic manufacturing of APIs and KSMs (Key Starting Materials)/DIs. Under the scheme, financial incentives ranging from 5% to 20% of incremental sales will be given to selected manufacturers of 41 critical bulk drugs (of the identified 53 APIs for which the country is heavily dependent on imports). This includes aid for fermentation-based products from FY2023–2024 to FY2028–2029 and for chemical-synthesis-based products from FY2022–2023 to FY2027–2028. It is expected that the scheme will result in incremental sales of US$ 649.6 million (INR 464 billion) and generate a large number of employment opportunities.

Moreover, in November 2020, a new PLI Scheme (referred to as PLI 2.0) for the promotion of domestic manufacturing of pharmaceutical products was announced, wherein US$ 210 million (INR 150 billion) were allotted for pharma goods manufacturers based on their Global Manufacturing Revenue (GMR). Financial incentives ranging from 3% to 10% of incremental sales will be given to manufacturers (classified under Group A – having GMR of pharmaceutical goods of at least US$ 700 million (INR 50 billion), Group B – having GMR between US$ 70 million (INR 5 billion) and US$ 700 million (INR 50 billion), and Group C – having GMR less than US$ 70 million (INR 5 billion). The objective of the scheme is to promote production of high-value products, increase the value addition in exports, and improve the availability of a wider range of affordable medicines for local consumers. The initiative is likely to create 100,000 (20,000 direct and 80,000 indirect) jobs while generating total incremental sales of US$ 41,160 million (INR 2,940 billion) and total incremental exports of US$ 27,440 million (INR 1,960 billion) during six years from FY2022-2023 to FY2027-2028.

Another scheme named Promotion of Bulk Drug Parks was announced by the government in March 2020 to attain self-reliance. Under the plan, funds worth US$ 420 million (INR 30 billion) were allotted for setting up three bulk drug parks between 2020 and 2025. This initiative aims at reducing the manufacturing cost as well as the dependency on importing bulk drugs from other countries. Financial assistance will be given to selected bulk drug parks to the extent of 70% of the project cost of common infrastructure facilities (for north-eastern regions and states in the mountainous areas, the assistance will be 90%). The aid per bulk Drug Park will be limited to US$ 140 million (INR 10 billion).

Furthermore, to end reliance on China, Indian pharma companies are also taking steps to strengthen their operations and manufacturing capabilities with regard to pharmaceutical ingredients. For instance, Cipla Ltd. (Mumbai-based pharmaceutical company) launched the “API re-imagination” program in 2020 to expand its manufacturing capacity by using the government incentive schemes.

The announcement of the above schemes is a show of intent by the government towards building a self-sufficient pharma sector in India. It will be interesting to see how much pharma players stand to gain from these potentially game-changing initiatives. However, only time will tell if these policies are good enough for the industry stakeholders or will these schemes not be plentiful enough to truly help the manufacturers.

Indian Pharma Needs to Reinforce Supply Chain Capabilities by EOS Intelligence

Investment in API and intermediaries’ sub-sectors on the rise

Since the outbreak of COVID-19, Indian pharmaceutical companies (that deal particularly with manufacturing of APIs, vaccine-related products, and bulk pharma chemicals) have been attracting huge investment from private equity firms. This is happening mainly because of two reasons. Firstly, the occurrence of the second wave of COVID-19 in India has increased the demand for medicines (including demand for self-care, nutritional, and preventive pharma products to boost immunity), and secondly, pharma companies across North America and Europe are shifting their manufacturing sites from China to India (to reduce dependency on a single source). Indian companies received an investment worth US$ 1.5 billion from private equity firms during the FY2020-2021 (since the coronavirus outbreak) and the investment is expected to reach US$ 3-4 billion in the FY2021-2022.

Some of the major deals that happened in this space included Carlyle Group (US-based private equity firm) buying 20% stake in Piramal Pharma (Mumbai-based pharma company) for US$ 490 million in June 2020 and 74% stake in SeQuent Scientific (India-based pharmaceutical company) for US$ 210 million in May 2020. Further, KKR & Co. (US-based global investment company) purchased a 54% controlling stake in J.B. Chemicals & Pharmaceuticals Ltd. (Mumbai-based pharmaceutical company) for nearly US$ 410 million in July 2020. Another example is Advent International (US-based private equity firm) acquiring stakes in RA Chem Pharma (Hyderabad-based pharmaceutical company) for US$ 128 million in July 2020.

From a capital perspective, COVID-19 acted as an investment accelerant that will keep the market open for opportunistic deals for many years to come. In the current scenario, investment firms are re-evaluating the pharma landscape and looking to invest in innovative ideas and products that help them grow. It is highly likely that in the coming months, if the right opportunity strikes, the investment firms will not deter from going ahead with novel deal structures. This could include arrangements such as both parties sharing equal risk and rewards, a for-profit partnership wherein the investor specifically focuses on enhancing the digital-marketing capabilities of the pharma company (rather than sticking to just acquiring a certain share or merge with an existing company) and being open to taking more risk, if needed.

Partnerships expected to increase

The pandemic has led pharma companies to rethink their operational and business strategies. For long-term sustainability, players are analyzing their market position and partnering with other industry stakeholders for better market penetration and value creation for their customers.

In November 2020, Indian Immunologicals Ltd. (Hyderabad-based vaccine company) announced that the company would invest US$ 10.5 million (INR 0.75 billion) in a new viral antigen manufacturing plant based in Telangana that would cater to the need for vaccines for diseases such as dengue, zika, varicella, and COVID-19 (in April 2021, the company announced a research collaboration agreement with the Griffith University, Australia to develop a vaccine for the coronavirus).

Furthermore, Jubilant Life Sciences Ltd. (Noida-based pharma company) entered into a non-exclusive licensing agreement with Gilead Sciences (US-based biopharmaceutical company) granting it the right to register, manufacture, and sell Remdesivir (Gilead Sciences’ drug currently used as a potential therapy for Covid-19) in India (along with other 126 countries).

In February 2021, to scale up the biopharma ecosystem, the state government of Telangana partnered with Cytiva (earlier GE Healthcare Life Sciences) to open a new Fast Trak lab in Hyderabad. This facility will enable the biopharma companies in the region to improve and increase production efficiency, reduce operational costs, and make products available in the market quicker.

Future ripe for new opportunities

The pandemic has opened a stream of opportunities for India’s pharma sector which are expected to drive the growth of the sector in the long term.

China’s supply disruption and increased raw material costs have forced global pharma companies to reduce dependence on China. As an alternative, the companies either set up new API manufacturing plants (which is time-consuming) or turn to existing European or US drug manufacturers to help them meet their requirements. However, both options are capitally draining and there is a need for finding a cost-efficient solution. This presents a huge opportunity for the Indian API sector which is also a key earnings growth driver for pharma manufacturers.

India is among the leading global producers of cost-effective generic medicines. Now there is a need to diversify the product offerings by focusing on complex generics and biosimilars. With the guidance of the United States Food & Drug Administration (USFDA) in identifying the most appropriate methodology for developing complex generic drugs, Indian pharma companies such as Dr. Reddy’s, Zydus, Glenmark, Aurobindo, Torrent, Lupin, Cipla, Sun, and Cadila are working on their product pipeline of complex generics. Currently, the space has limited competition and offers higher margins (in comparison to generic drugs) thus presenting a lucrative opportunity for Indian players to explore and grow.

Similarly, biosimilars (referred to as similar biologics in India) is another area where Indian companies have not been faring too well in international markets mainly due to the non-alignment of Indian regulatory guidelines with the guidelines in other markets (mainly in Europe and USA). The government had already revised the guidelines of similar biologics (done in 2016, which provided an efficient regulatory pathway for manufacturing processes assuring safety and efficacy with quality as per cGMP (Current Good Manufacturing Practice regulations enforced by the FDA)) and introduced industry-institute initiatives (such as ‘National Bio-Pharma Mission’, launched in 2017 to accelerate biopharmaceutical development, including biosimilars, among others) to improve the situation. But now with the intensified need for improved healthcare system and more effective medicines, COVID has presented Indian companies with an opportunity to shape their biosimilar landscape.

India holds a strong position as a key destination for outsourcing research activities. While it has been a preferred location for global pharma companies to set R&D plants for a number of years now, becoming an outsourcing hub for pharma research is another growth area that is yet to be explored to its full potential.

EOS Perspective

Currently, the Indian pharma industry is at an interesting crossroad wherein the industry responded to the unprecedented situation with agility and persistence. The pandemic presented several opportunities and challenges for the industry and unsurprisingly, had a positive impact on the sector. The pandemic acted as a catalyst for change and investment for the pharma sector, which also responded to the challenges by adjusting to the new normal that furthered new opportunities.

In the past few months, COVID-19 has led the government to reassess the country’s pharmaceutical manufacturing capabilities and led them to take steps to make India self-sufficient. As an immediate measure, the country has been reviewing its business policies (for the ease of doing business and to attract more investment) and pharma companies recalibrating their business models, and some success has been achieved. The government should also be mindful that, in the long run, success will only be achieved when industry stakeholders are presented with a business environment (in the form of incentives, tax-subsidies, low rate of interest on bank loans, utilities such as electricity and water at discounted rates, and transparent business policies, etc.) that is conducive for growth.

Moving forward, the Indian pharma companies need to be adaptive and flexible. While the sector has been resilient to the effects of the coronavirus pandemic, companies need to focus on risk management as well. Moreover, with continuous capital flowing into the sector, there is an opportunity for firms to not just broaden their scope of innovation but also to invest in critical therapeutic areas.

To emerge as a winner post pandemic, the Indian pharma industry needs to focus on its strengths and propel full steam in the direction of opportunities presented by COVID-19.

*All currency conversions as on 20th May, 2021, 1 INR = 0.014 US$

by EOS Intelligence EOS Intelligence No Comments

COVID-19 Unmasks Global Supply Chains’ Reliance on China. Is There a Way Out?

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Dubbed as the factory to the world, China is an integral part of the supply chain of a host of products and brands. From manufacturers of simple products such as toys to complex good such as automobiles, all are dependent on China for either end products or components. However, China’s ongoing trade war with the USA and the COVID pandemic have made several brands question their supply chain dependence on this country, especially in some industries such as pharmaceuticals. Moreover, aggressive investment incentives offered by countries such as India and Japan have further cajoled companies to reassess their global supply chains and reconsider their dependence on China. However, with years of investment in the supply chain ecosystem, a shift such as this seems easier said than done.

China emerged as the manufacturing hub of the world in the 1990’s and hasn’t looked back since. Owing to vast availability of land and labor, technological advancements, and overall low cost of production, China became synonymous to manufacturing. Over the past decade, increasing labor and utility costs, and growing competition from neighboring low-cost countries such as India, Vietnam, Thailand, etc., have resulted in some companies shifting out from China. However, so far this has been limited to a few low-skilled labor intensive industries such as apparel.

The year 2020 has changed this drastically. The COVID pandemic along with the ongoing trade war between the USA and China made companies realize and question their dependency on China. In the beginning of last year, COVD-19 brought China to a halt, which in turn impacted the supply chain for all companies producing in China. Moreover, several pharmaceutical companies also realized that they are highly dependent on China for few basic medicines and medical supplies and equipment, which were in a considerable shortage throughout 2020. This pushed several companies across sectors such as pharmaceuticals, automobiles, and electronic goods, to reconsider their global supply chains to ensure reduced dependence on any one region, especially China.

Currently, several companies such as Apple, Google, and Microsoft are looking to shift their production from China to other South Asian countries, such as Vietnam and Thailand.

Some of the companies looking to reduce dependence on China:

Apple

In November 2020, Apple, along with its supplier Foxconn, expressed plans to shift assembly of some iPad and MacBook to Vietnam from China. The facility is expected to come online in the first half of 2021. Moreover, Apple is also considering shifting production of some of its Air Pods to Vietnam as well. In addition, it has invested US$1 billion in setting up a plant in Tamil Nadu, India to assemble iPhones that are to be sold in India. Apple and Foxconn are consciously trying to reduce their reliance on China due to the ongoing USA-China trade war.

Samsung

In July 2020, Samsung announced plans to shift most of its computer monitor manufacturing plants from China to Vietnam. The move is its response to hedge the supply chain disruptions it faced due to factories being shut in China during the early phase of the pandemic. In addition, in December 2020, the company shared its plans to shift its mobile and IT display plants from China to India. Samsung plans to invest about US$660 million (INR 48 billion) to set up the new facility in Uttar Pradesh (India).

Hasbro

Hasbro has been moving its production out of China into Mexico, India and Vietnam over the past year. It aimed to have only 50% of its products to be coming out of China by the end of 2020 and only 33% of its production to remain in China by the end of 2023. In 2019, about 66% of its toys were produced in China, while in 2012, 90% of its toys were manufactured in the country. The key reason behind the consistent switch is the souring trade relations between the USA and China.

Hyundai

During the past year, Hyundai Motors has been looking at developing India into its global sourcing hub instead of China in order to reduce its over-reliance on the latter. It has been encouraging its vendors, such as Continental, Aptiv, and Bosch, to ramp up production in India so as to move their supply chain away from China. It plans to source its auto parts from India (instead of China) for its existing factories in India, South America, Eastern Europe as well as planned facility in Indonesia.

Google

Google is looking to manufacture its new low-cost smartphone, Pixel4A, and its flagship smartphone, Pixel5A in Vietnam instead of China. In addition, in 2020, it also planned to shift production of its smart home products to Thailand. This move has been a part of an ongoing effort to reduce reliance on China, which in fact gained momentum post supply chain disruptions faced due to the coronavirus outbreak.

Microsoft

In early 2020, Microsoft expressed plans to shift the production base of its Surface range of notebooks and desktops into Vietnam. While the initial volume being produced in Vietnam is expected to be low, the company intends to ramp it up steadily to shift volumes away from China.

Steve Madden

In 2019, Steve Madden expressed plans to shift parts of its production out of China in 2020, given growing trade-based tensions between the USA and China. However, due to the COVID pandemic, it could not make planned changes to its supply chain. In October 2020, it again expressed plans to start shifting part of its production away from China by spring 2021. It plans to procure raw materials from Mexico, Cambodia, Brazil, and Vietnam to reduce reliance on China.

Iris Ohyama

The Japanese consumer goods player expressed plans to open a factory in northeastern Japan to diversify its manufacturing base, which is based primarily in China. The company made this move on the back of increasing labor cost in China, rising import tariffs to the USA, along with the supply disruptions it faced for procuring masks for the Japanese market. In 2020, it also set up a mask factory in the USA. In addition, the company plans to open additional plants in the USA and France for plastic containers and small electrical goods to cater to the local demand in these markets.

Nations using this opportunity to promote domestic production

In August 2020, about 24 electronic goods companies, including Samsung and Apple, have shown interest in moving out of China and into India. These companies together have pledged to invest about US$1.5 billion to setup mobile phone factories in the country in order to diversify their supply chains. This move is a result of the Indian government offering incentives to companies looking to shift their production facilities to India.

In April 2020, the Indian government announced a production linked incentive (PLI) scheme to attract companies looking to move out of China and set up large scale manufacturing units in the electronics space. Under the scheme, the government is offering an incentive of 4-6% on incremental sales (over base year FY 2019-20) of goods manufactured in India. The scheme, which is applicable for five years, plans to give an incentive worth US$6 billion (INR 409.51 billion) over the time frame of the scheme.

In November 2020, the Indian government subsequently expanded the scheme to other sectors such as pharma, auto, textiles, and food processing. In addition, it is expected to provide a production-linked incentive of US$950 million (INR 70 billion) to domestic drug manufacturers in order to push domestic manufacturing and reduce dependence on Chinese imports. Apart from incentives, India is developing a land pool of about 461,589 hectares to offer to companies looking to move out of China. The identified land, which is spread across Gujarat, Maharashtra, Tamil Nadu, and Andhra Pradesh, makes it easy for companies looking to set shop in India, as acquiring land has been one of the biggest challenges when it came to setting up production units in India.

On similar lines, the Japanese government is providing incentives to companies to shift their production lines out of China and to Japan. In May 2020, Japan announced an initiative to set up a US$2.2 billion stimulus package to encourage Japanese companies to shift production out of China. About JNY 220 billion (~US$2 billion) of the stimulus will be directed towards companies shifting production back to Japan, while JNY 23.5 billion (~US$200 million) will be given to companies seeking to move production to Vietnam, Myanmar, Thailand, and other Southeast Asian countries.

In the first round of subsidies, the Japanese government announced a list of 57 companies in July 2020, which will receive a total of US$535 million to open factories in Japan, while another 30 companies will be given subsidies to expand production in other countries such as Vietnam and Thailand. The move is a combination of Japan looking to shift manufacturing of high value-added products back to the country and the initial disruptions caused to the supply chain of Japanese automobiles and durable goods manufacturers.

Similarly, the USA, which has been at odds with China regarding trade for a couple of years now, is also encouraging its companies to limit their exposure in China and shift their production back home. In May 2020, the government proposed a US$25 billion ‘reshoring fund’ to enable manufacturers to move their production bases and complete supply chain from China preferably back to the USA and in turn reduce their reliance of China-made goods. The bill included primarily tax incentives and reshoring subsidies. However, the bill has not been passed in Congress yet and now with the leadership change in the USA, it is expected that president Biden may follow a more diplomatic strategic route with regards to China in comparison to his predecessor.

In addition to individual country efforts, in September 2020, Japan, India, and Australia together launched an initiative to achieve supply chain resilience in the Indo-Pacific region and reduce their trade dependence on China. The partnership aims at achieving regional cooperation to build a stable supply chain from the raw material to finished goods stage in 10 key sectors, namely petroleum and petrochemicals, automobiles, steel, pharmaceuticals, textiles and garments, marine products, financial services, IT services, tourism and travel services, and skill development.

Similarly, the USA is pushing to create an alliance called the ‘Economic Prosperity Network’, wherein it aims to work with Australia, India, Japan, New Zealand, Vietnam, and South Korea to restructure global supply chains to reduce dependence on China.

COVID-19 Unmasks Global Supply Chains’ Reliance on China by EOS Intelligence

Is it feasible?

While these efforts are sure to help companies move part(s) of their supply chain out of China, the extent to which it is feasible is yet to be assessed. Although the coronavirus outbreak has highlighted and exposed several supply chain vulnerabilities for companies across sectors and countries, despite government support and incentives, it will be very difficult for them to wean off their dependence on China.

Companies have spent decades building their manufacturing ecosystems, which in many cases, are highly reliant on China. These companies not only have their end products assembled or manufactured in the country, but also engage Chinese suppliers for their raw materials, who in turn use further Chinese suppliers for their inputs. Therefore, moving out of China is not a simple process and will take tremendous amount of time as well as financial resources.

While companies such as Google or Microsoft are looking to shift their assembling plants out of China, they are still dependent on China for parts. This is all the more relevant in case of high-technology products, such as automobiles and telecommunication infrastructure, where companies have made significant investments in China for their supply chain and are dependent on the nation’s manufacturing capabilities for small, intricate, but technologically advanced parts and components.

Moreover, despite significant efforts and reforms from countries such as India, Vietnam, and Thailand, they still cannot match China in terms of availability of skilled labor, infrastructure, and scale, which is required by many companies especially with regards to technologically advanced products. That being said, more companies are looking at a strategy where they are maintaining their presence in China, while also developing relatively smaller operations outside the country to have a fallback and to reduce total dependency on China. This is also dubbed as the China + 1 strategy.

Another reason going in China’s favor has been its capability to bounce back from the pandemic and resume production in a short span of time. While production had been halted in January to March 2020, it ramped up April onwards and was back to normal standards within no time. This reinforced the faith of many companies on Chinese capabilities. Therefore, as some companies are already cash-strapped due to the pandemic, they are not interested in investing in modifying their supply chains when in most cases normalcy resumed in a relatively short span of time.

EOS Perspective

Companies have been looking to diversify their supply chains and reduce dependence on China for a couple of years now, however, the trend has gained momentum post the coronavirus pandemic and growing US-China trade tensions. The onset of the COVID-19 outbreak exposed several vulnerabilities in the supply chain of global manufacturers, who realized the extent of their dependence on China. Moreover, several countries realized that they relied on China for key medicines and medical supplies, which cost them heavily during the pandemic.

Given this situation, several nations such as Japan, India, and the USA – together and individually, have started giving incentives to companies to shift production from China into their own borders. While this has resulted in several companies, such as Apple, Microsoft, Sanofi, Samsung, etc., to expand their manufacturing operations out of China, it does not necessarily mean that they are moving out of China. This is primarily due to heavy investments (in terms of both time and money) that they have already made into developing their intricate supply chains as well as the inherent benefits that China provides – technologically skilled labor, sophisticated production facilities, and quick revamping of production after a calamity.

That being said, it has come into the conscience of companies to reduce their over-reliance on China and while it may not impact the scale and extent of operations in the country in the short run, it is quite likely that companies will phase out their presence (at least part of it) in China over the coming decade.

A lot depends on the level of incentives and facilities provided by other nations. While countries such as India, Vietnam, and Thailand can offer low cost production with regards to labor and utilities, they currently do not have the technological sophistication possessed and developed by China. Alternatively, while Japan and the USA are technologically advanced, without recurring incentives and tax breaks, cost of production would be much higher than that in China. Thus, until there is a worthy alternative, most companies will follow the China +1 strategy. However, with growing trade tensions between China and other nations, and ongoing efforts by other nations to encourage and support domestic production, China may risk losing its positioning as the ‘factory of the world’ in the long run.

by EOS Intelligence EOS Intelligence No Comments

Indian Medical Device Rules: Prospects among Ordeals for Manufacturers

India’s recent notification on regulating medical devices is another step on the government’s behalf to raise healthcare standards in the country. These regulations have implications for all stakeholders in the medical device industry, including medical device manufacturers and importers. The actual impact of these regulations will only be felt in next four to five years, once the regulatory regime comes into effect. However, based on some of the specific regulatory requirements, it is not difficult to ascertain what lies ahead for manufacturers and importers.

In 2019, Indian medical device industry was worth US$9 billion and is expected to reach US$14 billion by 2025. India imports nearly 70% of its medical devices, particularly high-end medical equipment including cancer diagnostics, medical imaging, ultrasonic scans, and PCR technologies, among others, the demand for which is met by multinational companies. The key medical devices that India imports include electronics and equipment – 53%, consumables – 14%, surgical instruments – 10%, IVD reagents – 9%, implants – 7%, and disposables – 7%. Domestic medical device market comprises mainly of small and medium medical device manufacturers with a large portion with turnover of less than US$ 1.3 million.

New Medical Device Rules – Prospects among Ordeals for Manufacturers

For many years, Indian medical device industry has dealt with a lot of challenges owing to lack of regulations. However, with the new medical device regulatory system, the scenario is expected to improve and reduce concerns among the device manufacturers around the lack of standardization and best practices. We discussed the new regulations of medical devices and their impact on various stakeholders in the healthcare sector in our article Indian Medical Device Rules: a Step towards a Better Future in February 2020.

Impact of new regulations on device manufacturers

Once the new regulations come into play, all manufacturers will have to maintain quality standards to avoid any punitive action by the regulator, as compromise on quality could result in suspension or cancellation of their license disabling them for doing business in the Indian market.

In order to assure quality, manufacturers will have to focus on quality management best practices to meet the quality objectives. This would mean creation of quality manual, documentation and execution of the quality-related procedures, and maintenance of quality-related records. Establishment of a quality assurance unit and installation of IT system to support quality-related processes will be the two key steps towards achieving quality objectives.

However, all this will not be easy to achieve from a financial viewpoint for manufacturers, considering majority of players are small and medium-sized. As an indicator, the average cost per year of having a five member quality assurance team in place can be anything between US$ 27,000 to US$ 34,000, which would account for about 2% of the annual turnover for a medical device company reporting US$ 1.3 million in sales (65% of the Indian medical device companies earn less than that). This would be a significantly high expense and, if incurred, is likely to be passed on to consumers.

The amount of expenditure on IT-related infrastructure for implementation on QA would depend primarily on two things. Firstly – the kind of medical device being manufactured (while some medical devices work on the principle of embedded software others do not require software-related quality checks, such as syringes, masks, head covers, etc.). Secondly – the extent to which a manufacturer wants to invest in IT (based on global standards, it would come to around 15-20% of annual IT budget).

Spending on IT infrastructure should be considered as a long-term investment, considering this would be required not only to ensure compliance on quality assurance but also to be done if the company wants to compete in export markets. In any case, the manufacturer would spend less than 1% of its annual revenue on IT for achieving quality objectives.

The government also wants all the device manufacturers to be compliant with Good Manufacturing Practices (GMP), laid down under the Drugs and Cosmetics Act of 1940, and currently introduced as a self-audit or self-assessment activity.

Getting a GMP certification (that confirms a firm uses quality assurance approach to ensure that products are consistently produced and controlled to the quality standards appropriate to their intended use and as required by the marketing authorization) for a single device is likely to cost less than US$ 135 for the manufacturer. Considering a manufacturer produces a range of devices, most of the small device manufacturing units do not follow the voluntary practice of attaining a GMP certificate citing certification costs (for the entire range of devices manufactured) and renewal fees (for each device after a certain number of years) to be adding to their overall expenses, but not significant enough to be passed on to customers. However, on the positive side, if companies were to get GMP certification, it would make their products compliant as per international standards making them more competent in the export market.

Road ahead for importers

Imports constitute a sizeable part of the medical device market in India. It is easier for importers now to place their products in the Indian market considering that there is a streamlined regulatory standard in place highlighting regulatory approval procedures to be followed in India, as against only the FDA (US Food and Drug Administration) or CE (Conformity Europé) approved products that were allowed to enter the market earlier. This will limit the importers’ cost required for approvals to market in India, rather than requiring marketing approval from international agencies.

Registration fees, license fees, and all duties levied for importing devices in India have been explained paving a clearer pathway for importers to operate in the market. Additionally, a list of forms specific for import purposes, required to apply for medical device approval has also been revealed.

All these practices and clarifications from the regulatory bodies have made it more convenient for manufacturers to import products. Clarity on import-related regulations is expected to make it easier for the importers to bring products to India thereby creating more challenges for the domestic players; however, it is too early to say how the market will evolve and which product segments will witness intensified competition in the next four to five years.

EOS Perspective

From the healthcare industry’s standpoint, governments’ step to ensure that medical devices available in the market meet quality standards in the future is positive and welcomed as it brings assurance of superior quality products for the people using them.

It is the small and medium sized enterprises that make up the low priced, high volume market segment of the medical device industry in India, that will need to make major operational changes and keep a close watch on the cost of compliance on quality aspect. The added cost aspect, if encountered, for developing high-quality products is most likely to hit them the hardest (especially the micro units and small-scale manufacturers) leaving them with no option but to pass on the increased cost onto the consumers. Larger players (5% manufacturers) are likely to remain practically unaffected. Nevertheless, it will be interesting to watch how these regulations shape the operations of device manufacturing companies functioning in India.

by EOS Intelligence EOS Intelligence No Comments

Indian Medical Device Rules: a Step towards a Better Future

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Healthcare sector in India is witnessing a churn as a result of the government’s attempt to make healthcare more affordable and to promote domestic healthcare industry. Recent medical devices-related notification is also part of the government’s vision for a better managed healthcare market, though it has ignited a debate about the future of medical device industry. There is hope as well as an apprehension among the stakeholders, as they wait for the notification to become fully effective in next three years.

The Notification

In the second week of February 2020, India’s Ministry of Health & Family Welfare announced that all medical devices sold in the country would be treated as drugs from April 1, 2020 onward and would be regulated under the Drugs and Cosmetics Act of 1940. To understand the context of this announcement, we will have to turn the clock back by about three years.

In 2017, Indian government announced Medical Device Rules-2017 (MDR-17) – a set of rules, which included:

  • Classification of medical devices into four classes (A, B, C, and D), based on the associated risks, i.e. low, low moderate, moderate high, and high risk devices
  • Procedures, including the required documents, for registration and regulatory approval of devices
  • Details regarding manufacturing, quality audit, import/export, and labelling-related requirements

There was no risk-based classification of medical devices prior to 2017 and it was also difficult to introduce new products, as the approval procedures were undefined. In case of imports, only the products approved by Conformité Européene (CE) and the US Food and Drug Administration were allowed. MDR-17 were expected to unlock the potential of Indian medical device market by introducing a well-defined regulatory regime, while assuring quality products to consumers.

Under the rules, a medical device had to be notified as ‘drug’ under the Drugs and Cosmetics Act to be regulated by Central Drugs Standard Control Organization (CDSCO):

  • Initially, 15 categories of medical devices (syringes, stents, catheters, orthopedic implants, valves, etc.) were notified as drugs
  • In 2019, the government notified (effective April 2020) another eight categories – MRI equipment, PET, bone marrow separators, dialysis machines, CT scan and defibrillators, etc., thereby placing a total of 23 categories of medical devices under drugs

The February 2020 notification, called Medical Devices (Amendment) Rules, 2020, has made the entire range of medical devices available in India (about 5,000 different types) under the ambit of drugs, as opposed to 23 categories before the announcement. The compliance requirements are to be enforced in a phased manner, with 30 months given to low and low moderate risk devices and 42 months for moderate high risk and high risk devices.

Indian Medical Device Rules - A Step Towards Better Future by EOS Intelligence

The Concerns

The February notification has drawn reactions, most of them positive, regarding the future from those associated with the industry. There are some concerns as well, such as:

  • What if the device rules accord unrestrained power to drug inspectors due to medical devices being regulated under the Drugs and Cosmetics Act?
  • Would the cost of quality compliance be substantial for device manufacturers?
  • Would the government resort to price control of medical devices, as it does in case of drugs?

Though the concerns are valid, they are unlikely to cause immediate disruption, as there would be at least 30 months (time given for enforcement of compliance for class A and B devices) after the notification date for the rules to start impacting the industry. An increased cost of compliance is a possibility, however, it would be found across the industry and should not impact only specific companies or a specific product segment.

At present, for price control purpose, four medical devices – cardiac stents, drug-eluting stents, condoms, and intrauterine devices – are in the national list of essential medicines that can be further expanded. However, the expansion cannot be directly linked with the medical device rules, which were primarily framed to ensure a better operating environment for industry players. For instance, from the initial list of 15 categories (i.e. about 350 devices) under MDR-17, only cardiac stents and knee implants were brought under price control (condoms and intrauterine devices were already under the price control regime when MDR-17 were introduced).

Impact on stakeholders

Indian medical device industry is expected to evolve under medical device rules (including the February 2020 notification). Even if the impact of the rules is speculative at present, it is interesting to take a look at their potential effect on key stakeholders in the coming years. While the patients appear to be the greatest beneficiaries due to improvement in quality of treatment, wholesalers and retailers of medical devices may have to prepare for a more demanding operating environment.

Indian Medical Device Rules - A Step Towards Better Future by EOS Intelligence


Read more on the implications for all stakeholders in the medical device industry in India in our article: Indian Medical Device Rules: Prospects among Ordeals for Manufacturers


EOS Perspective

Decision to notify all medical devices as drugs for regulatory purpose was a result of a long consultative process, which involved various stakeholders and experts, including Drugs Technical Advisory Board (DTAB). The industry was expecting such an announcement, as the government had previously shown its intent to do so. Hence, the February 2020 notification was only part of the process that was initiated in 2017 with the introduction of medical device rules. The notification is a show of intent by the government of India towards building a better regulated industry offering more quality products, thereby raising the standards of healthcare in the country. The phased implementation of rules is likely to provide enough time for the industry to adapt according to new regulatory requirement.

Any comment on the future of Indian medical device industry on account of probable price control measures would be purely speculative, as it is difficult to predict the outcome of such steps at present. The case in point is of stents, which were brought under price control regime in 2017. There were fears that the move might kill the sector; however, the stent-related procedures have not witnessed decline despite the multinational companies taking their high end products off the shelf, indicating that the domestic manufacturers have been able to cater to demand.

While the end-users can view the medical device rules as a means to provide better care to them, the device manufacturers can also look for positives, especially when the rules are seen along with the government’s other efforts, such as Make in India initiative, to boost domestic manufacturing. Device classification and the associated regulatory requirements have removed ambiguity for the manufacturers of medical devices in India. This clarity might also fast track investments in the sector, as the potential investors now know what to expect while operating in India. Under Make In India, up to 100% foreign direct investment is permitted in medical devices through automatic route.

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