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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

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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

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

Electric Trucks in Japan – a Tale of Tests and Trials

“I am convinced that electric trucks are the future of inner-city distribution”, said Marc Llistosella, President and Chief Executive of Mitsubishi Fuso Truck and Bus Corporation (MFTBC) when inaugurating Japan’s first public power charging station for trucks in May 2017.

There are two ways to view Llistosella’s statement. On the one hand, with the launch of the Fuso eCanter, a fully electric light truck, in 2017 and now with the setting up of the charging infrastructure, Mitsubishi is establishing a strong hold in Japan’s electric/electrified trucking space, marking its territory as one of the few players in the country to go beyond the trial phase.

 

The article was published as part of Automotive World’s Special report: ACE trucks – autonomous, connected, electrified.

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Japan Hopes to Get a Slice of Mercosur Opportunity Cake as LATAM Exports to USA Decline

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In early May 2017, representatives from Japan and Mercosur, a sub-regional alliance consisting of Argentina, Brazil, Paraguay, and Uruguay, met to discuss trade and investment between the nations with the aim to promote free trade and fluid movement of goods. Over the past years, business between Mercosur and Japan has been badly affected mainly by outdated trade policies that have not been revised in a long time. To improve economic relations between Japan and member countries of Mercosur, trade policies need to be renewed and new sectors of investment should be explored.

In 2016, Japan exports to Mercosur nations reached US$3.5 billion and imports from Mercosur totaled US$7.6 billion. Both exports and imports drastically reduced since 2012, taking a hit of 52% and 42.8%, respectively.

Japan and Argentina

After a decade of slow business dealings, trade relations between Japan and Argentina are showing signs of improvement. The number of Japanese companies operating in Argentina reduced from 120 in the 1990s to 54 by the end of 2007. However, the interest of Japanese businesses in the Argentinian market has started to return since the last quarter of 2015, with 78 companies currently in operation in Argentina, and Japan aims to have a minimum of 200 Japanese companies operating in the coming years. According to Japan External Trade Organization (JETRO), in 2016, Japanese exports to Argentina stood at US$630 million, primary exports being machinery and electronics. Imports to Japan were worth US$762 million in the same year.

In order to boost Argentina’s economy, president Mauricio Macri has focused on reviving infrastructure projects in the country. Taking an advantage of this opportunity, Japanese trading companies are keeping a close watch on upcoming rail contracts. Marubeni Corporation, Mitsubishi Corporation, and Mitsui & Co., three of the largest trading companies in Japan, are interested in sales of passenger rail cars in Argentina and planning on submitting bids as part of the new proposed projects. Japanese companies plan to invest between US$6 billion and US$9 billion in Argentina during 2017-2020. The investments are likely to be made across various sectors including mining, energy, and agriculture, among others. With more sectors now open to investment, Japan hopes to boost trade in the broader Latin American market.

Japan and Brazil

Brazil is a large investment market for Japan. With close to 700 Japanese companies currently operating in Brazil, the commercial and industrial opportunities the country offers are unquestionable. In 2016, Japan imported goods worth US$6.7 billion from Brazil, a drop by 10.6% over the previous year when the imports stood at US$7.5 billion. Japan and Brazil are now partnering to strengthen trade and investment between the two countries to spur increase in trade.

Brazil offers Japan a considerable investment opportunity in infrastructure projects. After the Cooperation Agreement for the Promotion of Infrastructure Investments was signed in October 2016, investment in areas such as transportation, logistics, information technology, and energy is expected to increase. At the same time, Japan is a large market for Brazilian agricultural products such as soy, corn, and cotton, but Brazil is also interested to enter the fruit and beef market in Japan. While discussions and negotiations regarding the entry of Brazilian products in the Japanese market are still under way, issues related to hygiene and sanitary standards still need to be addressed.

Japan and Paraguay

Paraguay is one of the least explored countries in terms of trade by Japanese firms. Between 2011 and 2014, only some 10 Japanese companies established operations in Paraguay. Japanese exports to Paraguay stood at US$77.5 million in 2016 while imports from Paraguay were reported at US$41.6 million during the same year. Japanese companies plan to invest in Paraguay to improve business and generate revenue in sectors such as infrastructure, agriculture, and energy, which are seen as areas of opportunities in the future.

Japan and Uruguay

In January 2015, the countries signed a Japan-Uruguay Investment Agreement – the first investment agreement between Japan and any member of Mercosur. Uruguay has become an attractive destination for Japanese investors mainly due to the country’s economic and political stability, low level of corruption, and easy inflow of FDI in the country. Additionally, Japanese companies are provided with the same opportunities and conditions as domestic firms. Uruguay offers the benefit of being able to serve as a distribution hub and boasts of good logistical services to other Mercosur countries – Japanese companies are likely take this as an opportunity to develop an overseas base to strengthen business ties within the region. Uruguay largely depends on natural resources such as wind, water, solar, and biomass to produce energy, making the renewable energy sector in the country another attractive area for investment by Japanese companies in the coming years.

EOS Perspective

The arrival of Trump’s administration leading to USA’s withdrawal from Trans-Pacific Partnership and focus on encouraging domestic industrialization by limiting imports from countries across Latin America, have resulted in several LATAM countries’ attempts to improve and tighten friendly trade relations within their own region as well as with new partners globally, including Asia – we wrote about it in our article Trump In Action: Triumph Or Tremor For Latin America? in February 2017. Japan appears to be willing to use this situation to its advantage by renewing trade and investment policies with Mercosur nations as well.

In the past five years, exports and imports value have declined continuously between Japan and Mercosur nations, and to reverse this declining trend and to revive trade, Japan started to build new trading relationships with Mercosur countries. If successful, this initiative is likely to serve two purposes – firstly, Mercosur countries can reduce dependence on the USA and move towards new markets to look for new opportunities, and secondly, through increased investment in Mercosur, Japan can become a prominent player in the region to reap benefits from engaging in business with several emerging countries.

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Starbucks – Expanding in Asia

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

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

 

Starbucks – Expanding in Asia by EOS Intelligence

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

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

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

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

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

EOS Perspective

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

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

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

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Japan’s Quest for Renewable Energy

Japan, for many years the symbol of safe use of nuclear energy, started to revise its focus on atomic power following the 2011 tsunami and Fukushima plant meltdowns. After the accident, atomic plants were shut down, and in 2012, the government declared its commitment to the diversification of energy sources, working towards making the country renewable energy-powered.

Yet this wishful thinking was soon confronted with the reality of slow growth of renewable energy generation. In April 2014, a new energy plan re-designated coal as an important long-term electricity source, with similar importance given back to nuclear power. While Japan is unlikely to abandon fossil fuels and nuclear power in any foreseeable future, the shifting focus and public reluctance to atomic power gave start to a more dynamic development of renewable power generation technologies.

Several projects across solar, hydro, biomass, and to a lesser extent geothermal, had already been developed prior to Fukushima accident, but it is now the time for Japan to embrace its renewable energy potential at a larger scale.

Read our report – Japan’s Quest for Renewable Energy

 

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As Myanmar Works Towards Stability, Communal Violence Holds The Nation Back.

In mid-2012, we published a report on Myanmar, looking into its potential as a new emerging market with considerable investment and trade opportunities for foreign investors (see: Myanmar – The Next Big Emerging Market Story?). Almost a year later, we are returning to Myanmar, to check and evaluate whether the political, social, and economic changes envisioned and proposed by the quasi-civilian government have really translated into actions to push the country forward on the path to becoming the next big emerging market story.

Being plagued by uninspiring and inefficient governance for more than six decades, Myanmar for long has been proclaimed as Asia’s black sheep. The Chinese named it ‘the beggar with a golden bowl’, asking for aid despite its rich natural and human resources. However, having embarked on a momentous yet challenging political revolution, the nation is said to be on its way to open a new chapter in the Asian development story.

Contrary to what was believed to be just hollow promises and sham, the reforms initiated by the Thein Sein government have gathered much steam in quite a few cases. Bold moves over the last year have also immensely helped the country in gaining goodwill internationally. We are looking at some of the game-changing reforms enacted over the past present year in Myanmar.

Media Censorship

In August 2012, the government put in actions their proposed end to media censorship. As per the new system, journalists are no more required to submit their reports to state censors prior to publication. To further strengthen the power of media, in April 2013, the government abolished the ban on privately run daily newspapers – ban remaining in force for over 50 years.

Foreign Investment Law

In January 2013, the Thein Sein government passed a foreign investment law that was initially drafted in March 2012. The law allows foreign companies to own up to 80% of ventures across several industries (apart from activities mentioned on the restricted list –including small and medium size mining projects, importing disposed products from other countries for use in manufacturing, and printing and broadcasting activities). This acts as an important milestone in opening up the Burmese economy to heaps of foreign investment.

Opening Up Of Telecom Sector

Myanmar, one of the least connected countries in the world, has embarked on the deregulation of its much neglected telecom sector by initiating the sale of 350,000 SIM cards on a public lottery basis. It plans to offer additional batches on a monthly basis. As a more tangible effort to revolutionize the sector, the government is auctioning two new 15-year telecom network licenses to international companies. These companies are to be announced in June 2013 from a list 12 pre-qualified applicants, namely, Axiata Group, Bharti Airtel, China Mobile along with Vodafone, Digicel Group, France Telecom/Orange, Japan’s KDDI Corp along with Sumitomo Group, Millicom International Cellular, MTN Dubai, Qatar Telecom, Singtel, Telnor, and Viettel. Despite the current 9% mobile penetration claimed by the government, an ambitious goal has been set to reach 80% penetration by 2015.

The World Responding To Myanmar’s Progress

As Myanmar works towards attaining political stability, introducing economic reforms and easing social tensions, the world is also opening up its arms to increasingly embrace the otherwise banished land. In April 2013, the EU permanently lifted all economic sanctions against Myanmar, while maintaining the arms embargo for one more year. The USA, on the other hand, has not permanently removed the sanctions, but has had them suspended since May 2012. This allows US companies to invest in Myanmar through the route of obtaining licenses. The definite abolishment of these sanctions by the EU puts pressure on the USA to act soon and lift them as well, to avert the risk lagging behind in the race to tap this resource-rich market. The USA has already begun working on a framework agreement to boost trade and investment in Myanmar. Japan has also been improving its relations with Myanmar to gain a foothold in this market.

With the EU, the USA and Japan encouraging investments in Myanmar, several international companies have directed investments to this previously neglected country.

  • In August 2012, a Japanese consortium of Mitsubishi Corporation, Marubeni Corporation and Sumitomo Corporation contracted with the Burmese government to jointly develop a 2,400 hectare special economic zone in Thilawa, a region south of Yangon. The Myanmar government will hold a 51% stake, while the Japanese consortium will own the remaining share in the industrial park, which will also include large gas-fired power plant. In the first phase of the project development, the companies plan to invest US$500 million by 2015 to build the necessary infrastructure on the 500 hectares area in order to start luring Japanese and global manufacturers.

  • In August 2012, Kerry Logistics, a Hong-Kong based Asian leader in logistics, opened an office in Myanmar. Recognizing the immense potential in the freight forwarding and logistics sector (underpinned primarily by growing international trade), European freight forwarders, Kuehne + Nagel, also began operations in this country in April 2013.

  • To cash upon a booming tourism market, in February 2013, Hilton Hotels & Resorts initiated the development of the first internationally branded hotel in Yangon, which is expected to open in early 2014. The hotel will be a partnership between Hilton Worldwide and LP Holding Centrepoint Development, the Thai company that owns the 25-storey mixed-use tower, called Centrepoint Towers, which will house the hotel. Hilton has signed a management agreement with LP Holdings to operate the 300-room property.

  • In February 2013, Carlsberg, the world’s fourth-biggest brewer, announced its plans to re-enter Myanmar, after it left the country in mid 1990’s owing to international sanctions.

  • Fuji Xerox, a joint American-Japanese venture, set up its office in Myanmar in April 2013. The company, which is the first player in the office equipment industry to start direct operations in Yangon, looks to revive its internationally declining business through this venture.

  • In April 2013, JWT, an international advertising firm, entered into an affiliation agreement with Myanmar’s Mango Marketing, in anticipation of opportunities in this country, given an increasing interest in Myanmar expressed by a number of international players who are likely to seek advertising and marketing services.

Civil Unrest Still Stands As a Major Concern

While Myanmar has made great strides in reforms over the past year, the ongoing unrest between Myanmar’s majority Buddhists and minority communities (primarily Muslims), and the lack of a concerted effort by the government to address it, poses a major threat for the nation to descend into ethnic-religious war. In October 2012, the Rakhine riots between the Buddhists and Muslims claimed 110 lives and left 120,000 displaced to government setup refugee camps around Thechaung village. A similar case followed in April 2013 in Meiktila, where the death roll of Muslims reached 30. Strong international condemnation for the growing racial and religious violence in the region has caused concerns of losing international support gathered over the past few years. Moreover, the use of military force to suppress the Meiktila riots raises fear about the army once again seizing power in the name of restoring order to the nation.


Myanmar’s attempts to transition into a democracy from a highly repressive state have yielded positive outcomes over the past year. While Myanmar seems to be on the right trajectory for future growth and stability, the government must address internal conflicts immediately before the nation stands at risk of tumbling back into chaos, with possible outcomes similar to those seen in Yugoslavia. Therefore, it is safe to say that although political and economic developments are increasingly seeing the daylight, underpinned by the government’s pro-development course, the recent spate of religious, ethnic and communal violence as well as the magnitude of reforms still to be introduced, might still question the nation’s ability to attract and sustain foreign investments and economic development in the long run.

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