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UK Paves The Way for A Greener and Carbon-Free Future

The UK is working to create a policy for building a more sustainable future for itself through the New Green Industrial Revolution, aiming to attain net-zero emissions in the UK by 2050. As the country separated itself from the EU through Brexit, it is also setting its own environmental goals and in that, its own version of the EU’s 2019 Green Deal (we wrote about it in The EU Green Deal – Good on Paper but Is That Enough? in March 2020). With highly ambitious targets, the proposed investments are worth GBP12 billion, creating 250,000 jobs in the process. While this seems like a promising funds allocation, the plan’s success will actually depend on significant investments in next-generation technologies, which have currently not been proven commercially. Moreover, a lot will depend on an equal involvement from the private sector that might be more cautious with investments than the public sector.

The UK is in a bid to position itself at the forefront of global markets for green energy and clean technologies. To achieve this, it proposed a 10-point Green Industrial Revolution in November 2020, which aims to mobilize GBP12 billion funds and create 250,000 jobs in the UK. Through this plan, the UK aims to achieve net zero carbon emissions by 2050. The key areas covered under the plan include offshore wind, hydrogen, nuclear, electric vehicles, public transport, jet zero and greener maritime, homes and public buildings, carbon capture, nature, and innovation and finance.

UK Paves The Way for A Greener and Carbon-Free Future

Offshore wind

The new Green Industrial Revolution outlines the UK government’s commitment to put offshore wind energy at the forefront of the country’s electricity needs. It has increased the offshore wind targets from previous 30GW to 40GW by 2030, aiming to produce enough energy to power all homes in the UK by 2030.

In addition to this, the government plans investments of about GBP160 million to upgrade ports and infrastructure in localities that will accommodate future offshore wind projects (e.g. Teesside, Humber, Scotland, and Wales).

This investment in developing offshore wind energy is expected to support about 60,000 direct and indirect jobs by 2030 in construction and maintenance of sites, ports, factories, etc.

While the government’s plan is great on paper, meeting the 40GW target will require 4GW of offshore wind projects to be commissioned every year between 2025 and 2030, which is extremely ambitious and challenging. Moreover, just developing offshore wind projects will not be enough until works are also done to update the electricity grid. Further, the target 40GW generation is calculated based on current electricity demand by households, which in reality is bound to increase as a shift towards electric vehicles is being encouraged.

Hydrogen

With the help of industry partners, the UK government plans to develop 5GW of low carbon hydrogen production capacity by 2030 for industries, transport, and residences. The government is expected to publish a dedicated Hydrogen Strategy in 2021, to position the UK as a front runner in production and use of clean hydrogen. It plans to develop 1GW (of the planned 5GW) hydrogen production capacity by 2025.

A central part of the UK’s Hydrogen Strategy is expected to have hydrogen potentially replace natural gas for the purpose of heating. The government is undertaking hydrogen heating trials, commencing with building a ‘Hydrogen Neighborhood’ and potentially developing a plan for the first town to be heated completely using hydrogen by 2030.

In addition to this, works with industry partners are under way to develop ‘hydrogen-ready’ appliances in 2021, such that new gas boilers can be readily converted to hydrogen if any future conversion of the gas network is commissioned. To facilitate this, the government is working with Health and Safety Executives to enable 20% hydrogen blending in the gas network by 2023. However, this is subject to successful trials.

In transportation, an investment of GBP20 million in 2021 is planned to test hydrogen and other zero emission freight truck technologies in order to support the industry in developing zero-emission trucks for long-haul road freight.

To achieve these targets, a GBP240 million Net Zero Hydrogen Fund is planned to be set up. It will provide capital co-investment along with the investment from private sector to develop various technologies. These will include carbon capture and storage infrastructure for the production of clean hydrogen that can be used in home, transport, and industrial requirements. The policy is expected to support 8,000 jobs by 2030 and push private investment worth GBP4 billion by 2030.

However, the government’s ambitious 2030 hydrogen policy requires significant investment and participation from the private sector. While several global companies such as ITM Power, Orsted, Phillips 66, etc., have come together to collaborate on the Gigastack project in the UK (which aims to produce clean hydrogen from offshore wind), such private participation will be required on most projects to make them feasible and meet the targets.

Nuclear power

In search of low-carbon electricity sources, UK plans to invest in nuclear energy. In addition to development of large-scale nuclear plants, the investments will also include small modular reactors and advanced modular reactors.

To this effect, the government has set up a GBP385 million Advanced Nuclear Fund. Of this, GBP215 million is to be used towards small modular reactors, i.e., to develop a domestic smaller-scale nuclear power plant technology that could be built in factories and assembled on site. Apart from this, GBP170 million is to be used towards research and development of advanced modular reactors. These are reactors that could operate at over 800˚C, and as a result, unlock efficient production of hydrogen and synthetic fuels. These are also expected to complement the government’s other investments and initiatives with regards to hydrogen and carbon capture.

While the government expects the design and development of small modular reactors to result in private sector investment of up to GBP300 million, these next generation small reactors are currently considered a long shot as no company has created them yet. While Rolls Royce has offered the government to design one, it is conditional on them receiving a subsequent order worth GBP32 billion for 16 such reactors as well as the government paying half of the GBP400 million design cost.

Moreover, nuclear power plants are expensive and long-term investments and are considered to be one of the most expensive sources for power. Thus it is very important to evaluate their economic feasibility. While the government is bullish on the role of nuclear power in decarbonizing electricity, it is very important for large-scale projects to be economical, while small-scale projects still remain at a conceptual stage.

Electric vehicles

It is estimated that cars, vans, and other road transport are the single largest contributor to the UK’s carbon emissions, making up nearly one-fifth of all emissions emitted. Thus the government is committed to reducing carbon emissions produced by automobiles. To achieve this, the country plans to ban the sale of all new petrol and diesel cars and vans by 2030 (10 years earlier than initially planned). However, hybrid cars will be allowed to be sold till 2035.

The government has planned a support package of GBP2.8 billion for the country’s car manufacturing sector, which in turn is expected to create about 40,000 employment opportunities up till 2030. Of this, GBP1 billion will be used towards the electrification of vehicles, including setting up factories to produce EV batteries at scale. In addition to this, GBP1.3 billion is planned to be spent to set up and enhance charging infrastructure in the country by installing a large number of charge points close to residential areas, office and commercial spaces, highways, etc., to make charging as convenient as refueling. The government plans to have a network of 2,500 high-power charging points by 2030 and about 6,000 charging points by 2035. Lastly, grants are planned to the tune of about GBP582 million up till 2023 to reduce the cost of EVs (cars, vans, taxis, and two-wheelers) for the consumer. In addition to the investment by the government, private investment of about GBP3 billion is anticipated to trickle into the sector by 2026.

While this is considered to be a very important step in the right direction, it is estimated that it will still leave about 21 million polluting passenger vehicles on the UK roads by 2030 (in comparison to 31 million in 2020). Moreover, the government continues to allow the sale of hybrid cars for another five years beyond 2030, which means that carbon emissions-producing vehicles will still be added to UK roads even after the target dates set in the New Green Industrial Revolution plan.

Green public transport

In addition to reducing carbon emissions from passenger cars, the government also wants to make public transport more approachable and efficient. It plans to spend about GBP5 billion on public transport buses, cycling- and walking-related initiatives and infrastructure.

In addition, funding of GBP4.2 billion is planned on improving and decarbonizing the cities’ public transport network. This will include electrifying more railway lines, integrating train and bus network through smart ticketing, and introducing bus lanes to speed up the journey. The plans also include investment in about 4,000 new zero-emission buses in 2021, as well as funding two all-electric bus towns (Coventry and Oxford) and a completely zero-emission city center. While York and Oxford have shown interest in becoming the UK’s first zero-emission city center, the government has not yet formally announced the city for the same.

Improvements in public transport networks in other cities are also planned to bring them on par with London’s system. A construction of about 1,000 miles of segregated cycle lanes is in plans to encourage people to take up this mode of transportation for shorter distances.

While it is expected these investments will encourage people to use public transport more, the current COVID pandemic has created apprehensions when considering such shared transportation. Although this is expected to be a short-term challenge, it may be a slight damper to the government’s plan for the next year or so.

Jet zero and green ships

Apart from road transport, the government also aims at decarbonizing air and sea travel. It plans to invest GBP15 million in FlyZero – a study by Aerospace Technology Institute (ATI) aimed at identifying and solving key technical and commercial issues in design and development of a zero-emission aircraft. Such an aircraft is expected to be developed by 2030. In addition to this, the government plans to run a GBP15 million competition for the development of Sustainable Aviation Fuel (SAF) in the UK. The plans also include investing in upgrading airport infrastructure so that it can service battery and hydrogen fueled aircrafts in the future.

In addition to aviation, the government is also investing GBP20 million in the Clean Maritime Demonstration Programme to develop clean maritime technology.

While the plans to develop greener fuel for aircraft and ships is a step in the right direction, it is still somewhat of a long shot as a lot more investment is required into this than proposed. Moreover, the shipping industry in particular has shown little interest in wanting to reform in the past and it is likely that both the sectors will continue to follow international standards (that are high in carbon emissions) to remain competitive globally.

Greener buildings

The UK has a considerable number of old and outdated buildings that the government wants to put in the center of its Green Industrial Plan, thus making existing and new buildings more energy efficient. The plan is to slowly phase out carbon-heavy fossil fuel boilers currently used for heating buildings and instead promote the use of more carbon efficient heat pumps. For new buildings, an energy efficiency standard is to be developed, known as the Future Home Standard. To achieve this, the domestic production of heat pumps needs to be ramped up, so that 600,000 heat pumps are installed annually by 2028. This is expected to support about 50,000 jobs by 2030. In addition to this, the government is providing GBP1 billion to extend the existing Green Home Grant (launched in September 2019) by another year, which is aimed at replacing fossil fuel-based heating in buildings with more energy efficient alternatives.

While the subsequent shift to heat pumps from gas boilers will definitely help reduce the buildings’ carbon footprint, heat pumps are currently much more expensive and more difficult to install. Thus, the government must provide ongoing financial incentives for consumers to make the switch.

Carbon capture, usage, and storage

Carbon capture, usage, and storage (CCUS) technology captures carbon dioxide from power generation, low carbon hydrogen production, and industrial processes, and stores it deep underground, such that it cannot enter the atmosphere. In the UK, it can be stored under the North Sea seabed. A the technology has a critical role to play in making the UK emission free, a GBP1 billion investment is planned to support the establishment of CCUS in 4 industrial clusters by 2030 to capture 10Mt of carbon dioxide per year by 2030. Developed alongside hydrogen, these CCUS will create ‘SuperPlaces’ in areas such as the North East, the Humber, North West, Scotland, and Wales. The development of the CCUS is expected to create 50,000 jobs by 2030.

CCUS is a very new technology, with no large-scale or commercially successful projects operational across the world. While the technology has been proved in pilot projects, its feasibility is yet to be seen. Also, a significant amount of private investment will be required to carry through the proposed project. While some private players, such as Tata Chemicals Europe have begun constructing the first industrial-scale CCU plant (expected to capture 40,000 tons of CO2 per year) in Northwich, the government needs several more private players to step up to meet its ambitious targets.

Nature

In addition to the above mentioned programs, the government plans to safeguard and secure national landscapes as well as restore several wildlife habitats to combat climate change. To achieve that, it plans to reestablish several of the nation’s landscapes under National Parks and Areas of Outstanding Beauty (AONB), as well as create new areas under these two heads. The National Parks and AONB program is expected to add 1.5% of natural land in the UK and will help the government in reaching the target of bringing 30% of the UK’s land under protected status by 2030.

In addition to this, the government plans to invest GBP40 million in nature conservation and restoration projects, which in turn is expected to create several employment opportunities across the country. Moreover, it plans to invest GBP5.2 billion over six years into flood defenses, which will help combat floods and damage to homes as well as natural environment. This is also expected to create about 20,000 jobs up till 2027.

Green finance and innovation

The last agenda on the 10-point Green Industrial Revolution entails developing new sources of financing for supporting innovative green technologies. To this effect, the government has committed an R&D investment of 2.4% of its GDP by 2027. This will extensively be used towards developing high risk, high reward green technologies, which will help the UK attain net zero emissions by 2030.

Additionally, the government launched a GBP1 billion Net Zero Innovation Portfolio that will focus on commercialization of low-carbon technologies mentioned in the 10-point agenda, including development of floating offshore wind, nuclear advanced modular reactors, energy storage, bioenergy, hydrogen, greener buildings, direct air capture and advanced CCUS, industrial fuel switching, and other disruptive technologies. In November 2020, the government launched the first phase of this investment, GBP100 million, towards greenhouse gas removal and in the coming year it plans to invest another GBP100 million towards energy storage. It also plans to invest GBP184 million for fusion energy technologies and developing new fusion facilities. Moreover, GBP20 million will be directed towards development and trials of zero emission heavy goods vehicles.

Apart from this the government plans to issue the UK’s first Sovereign Green Bonds in 2021. These bonds, which are likely to be first of many, are expected to finance sustainable and green projects and facilitate the creation of ‘green jobs’ in the country. Furthermore, similar to the EU Green Deal, the government plans to implement a green taxonomy, which helps define economic activities into two categories – the ones that help limit climate change and others that are detrimental to the environment – to help investors make better investment choices.

EOS Perspective

The UK’s Green Industrial Revolution seems to be a comprehensive policy with a multi-pronged approach to tackle climate change, promote green technology and investments, and achieve net zero emissions by 2050. With Brexit in action, it seems like a worthy counterpart to the EU’s Green Deal, which the UK was initially a part of. Moreover, it is an important framework for the UK to show its commitment towards controlling climate change, especially with the country hosting the upcoming 26th session of the Conference of the Parties (CoP 26) to the United Nations Framework Convention on Climate Change summit in Glasgow in 2021.

However, currently the UK’s Green Industrial Revolution is not a legally binding policy document but more of a proposal, which would need to go through several legislative procedures to become binding. Moreover, while the plan is ambitious, it depends heavily on next generation innovative technologies that require hefty investments to achieve the targets. Thus, its success depends on whether the government is seriously committed and prepared to spend heavily on commercializing these technologies along with managing to attract significant amount of private investment to complement own efforts. While few aspects of the 10-point approach have already received investment from the private sector and first phase of funding from the government, it is yet to be seen if the UK’s ambitious net zero emission goals are truly feasible.

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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.

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The EU Green Deal – Good on Paper but Is That Enough?

The EU, which has always been ahead of the curve in tackling climate change and ensuring emission control, has rolled out a new EU Green Deal in December 2019. The Green Deal is the most ambitious environmental policy devised by the EU and encompasses several targets and policy measures that will require a complete overhaul in how business across sectors is currently done in the region.

In the beginning of December 2019, European Commission President, Ursula von der Leyen, unveiled a suite of policies known as the EU New Green Deal and called it Europe’s ‘man on the moon moment’. EU’s Green Deal is aimed at decarbonizing the economy and encompasses a host of policy measures including a plan to ensure EU reaches net-zero emissions by 2050.

To this effect, it has also increased its carbon emission reduction targets from 40% to 55% for 2030. This is the ubiquitous goal for the Commission and all its measures and policies are to be aligned to achieve this objective. Thus, the EU Commission is expected to review and align laws and regulations, such as the Renewable Energy Directive, Energy Efficiency Directive, and Emissions Trading Directive among many others, over the next couple of years to ensure that they are tuned to support the ambitious climate goals. Moreover, taxation will also be aligned with climate objectives to ensure effectiveness.

Policy measures

In order to achieve this objective of carbon neutrality, the EU Commission is focusing on energy efficiency since the production and use of energy across the EU states accounts for 75% of EU’s greenhouse gas emissions. The EU member states are revising their energy and climate plans to ensure higher dependence on renewable sources (especially offshore wind energy production) and phasing out coal and gas-based energy. Moreover, the Commission has also guided member states to review and update their energy infrastructure to ensure the use of innovative and energy-efficient technologies such as smart grids and hydrogen networks.

The Commission is also working towards adopting a new EU industrial strategy along with a new circular economy action plan. The plan will focus on decarbonizing and modernizing several energy-intensive industries, such as steel, chemicals, and cement. It will also include a ‘sustainable product policy’ that will prioritize reducing and reusing materials before recycling them. Moreover, while the circular economy action plan will be applied across all sectors, it will be most relevant for resource-intensive sectors such as textiles, construction, electronics, and plastics.

The plan will focus on fostering new business models that drive sustainable use of resources, set regulations and minimum standards to prevent environmentally harmful products from being sold in EU markets, as well as set a regulatory framework to ensure that all packaging in the EU is reusable or recyclable in an economically viable manner by 2030. In addition to this, the Commission aims at achieving ‘clean steelmaking’ by 2030 by using hydrogen for the process and introduce new legislation by 2020 to ensure that all batteries are reusable and recyclable.

Understanding that construction, use, and renovation of buildings account for a significant part (about 40%) of energy consumed in the EU, the Commission aims at improving energy efficiency in this sector by focusing on more frequent renovations. A quicker renovation rate helps improve the energy performance of buildings and is effective in lowering energy bills and reducing energy poverty. Currently, the annual renovation rate of buildings in the EU states ranges between 0.4% and 1.2%. However, the Commission is looking to at least double the renovation rate to reach its energy efficiency and climate objectives.

In addition to this, the Commission is also working towards curbing carbon emissions from transportation, which accounts for about 25% of EU’s total greenhouse gas emissions. In order to achieve carbon neutrality by 2050, the current transport emission levels would be needed to be cut down by about 90%. To attain this, the Commission has planned for significant investment in boosting electric vehicles and plans to deploy 1 million public recharging stations across the EU states by 2025. Moreover, in July 2021, the Commission plans to revise the legislation on CO2 emission performance standards for cars and vans to achieve its target of zero-emission mobility by 2025.

With regards to commercial transport, the EU Commission aims at pushing automated and digitized multimodal transport. It aims at shifting 75% of inland freight currently carried by road to rail and inland waterways. Moreover, it aims at deploying smart traffic management systems and sustainable mobility services that will facilitate a reduction in congestion and pollution.

The EU Green Deal – Good on Paper but Is That Enough by EOS Intelligence

The Commission also plans to align agriculture and food production with its climate goals. To this effect, the Commission is expected to present a ‘Farm to Fork’ strategy in spring 2020, which aims to introduce and strengthen policies in the agriculture and fisheries space so that they are well equipped to tackle climate change and preserve biodiversity. As per the Commission’s new proposal, 40% of the agricultural policy’s budget and 30% of the maritime fisheries fund within the EU 2021-2027 budget will contribute to climate action and objectives. In addition to this, the ‘Farm to Fork’ strategy aims at significantly reducing the use of chemical pesticides, fertilizers, and antibiotics and in turn increase the area under organic farming.

In addition to agriculture, the EU Commission also aims at preserving and restoring biodiversity. To this effect, the Commission will present a new ‘Biodiversity Strategy’ by March 2020, which will be shared at the UN Biodiversity Summit to be held in China in October 2020. The biodiversity strategy is expected to be brought to action in 2021 and will cover measures aimed to address the key drivers of biodiversity loss such as soil and water pollution. The policy will also encompass a new EU forest strategy that will focus on afforestation, forest preservation, and restoration, which in turn will increase CO2 absorption and aid EU’s ambitious climate goals.

Lastly, the EU Commission plans to reach a ‘pollution-free environment’ by 2050. For this purpose, it plans to review and revise measures that monitor pollution from large industrial installations. Moreover, to ensure a toxic-free environment, the Commission will present a sustainable chemicals strategy that will protect the environment (and citizens) against hazardous chemicals and encourage innovation for the development of safe and sustainable alternatives.

Global trade

The EU’s Green Deal is ambitious, with measures in place to achieve this goal. However, the economic bloc cannot realize this goal in isolation. To get other countries to act on climate change and also prevent the influx of cheaper imports from countries that do not have similar strict policies on carbon emissions, the EU plans to propose a border adjustment carbon tax. This carbon tax is expected to be introduced by 2021 with an initial focus on industries such as steel, cement, and aluminum. The tax may hamper imports from the USA and China as well as smaller countries that cannot afford such climate-based policy measures. However, there is still some ambiguity regarding the tax as it may breach WTO rules, which require equal treatment for similar products, whether domestic or international.

Investment

To achieve this arduous goal, the EU will require a significant amount of additional investment. For starters, the Commission will require additional investment of about EUR260 billion (~US$288 billion) per annum only to achieve the 2030 goal (of reducing carbon emissions by 55%). This is about 1.5% of the EU’s 2018 GDP. Thus it is safe to assume that the investment required for achieving zero emissions by 2050 will be much higher.

The magnitude of the investment requirement will call for participation from both the public and private sector. To achieve this, the commission will present a Sustainable Europe Investment Plan, which will help meet the additional funding needs. The Plan will provide dedicated financing to support sustainable projects in addition to building a proposal for an improved regulatory framework. The commission has also proposed to dedicate at least 25% of the EU’s long-term budget towards achieving climate-based objectives. Moreover, the European Investment Bank (EIB), which has about EUR550 billion funds in its balance sheet, has also pledged to increase its lending towards green projects, thereby becoming a climate bank of sorts. While EIB is already in the process to phase out financing fossil fuel dependent projects by 2021, the bank aims for 50% of its financing to go towards green projects by 2025 (up from 28% in 2019).

In order to ensure an easy and fair transition to climate neutrality, the Commission plans to mobilize a EUR100 billion fund to help regions most dependent on fossil fuels or carbon-intensive sectors. The fund, also called the ‘Just Transition Mechanism’ fund will be funded from the EU’s regional policy budget as well as the EIB. The fund will be used primarily to support and protect citizens most vulnerable to the transition by providing access to re-skilling programs, technical assistance, jobs in new sectors, or energy-efficient housing.

Moreover, the Horizon Europe research and innovation program will also contribute to the Green Deal. As per a new agreement between the EU members in May 2019, 35% of the EUR 100 billion (US$110 billion) research budget for 2021-2027 will be used for funding clean tech and climate-related projects.

With regards to the private sector participating in this green transition, the commission will present a Green Financing Strategy in Q3 2020, which is expected to incentivize the private sector to invest in sustainable and green projects.

To this effect the Commission has created a classification system that for the first time defines what is considered as ‘green projects’ or ‘sustainable economic activities’. This classification is also termed as the ‘green list’ or ‘taxonomy’. This will help redirect private and public capital to projects that are actually sustainable and in turn help the transition to climate neutrality and prohibit ‘greenwashing’, i.e. the practice of marketing financial products as ‘green’ or ‘sustainable’ when actually they do not meet basic environmental standards.

Moreover, it will be made mandatory for companies and financial institutions to provide full disclosure on their climate and environmental impact to clearly lay out how their portfolio stands with regards to the set taxonomy criteria. This is expected to not only increase the transparency of the financial markets but also steer more private investments towards financing an economy that is aligned towards a green transition.

 

The Taxonomy Criteria

The EU Commission set out a basic framework to define what can be termed as a sustainable economic activity. It sets out six environmental objectives and four requirements that need to be complied with in order to make it to the green list.

Six objectives are as follows:

1.       Climate change mitigation

2.       Climate change adaptation

3.       Sustainable use and protection of water and marine resources

4.       Transition to a circular economy

5.       Pollution prevention and control

6.       Protection and restoration of biodiversity and ecosystems

 

Four requirements that need to be met to qualify are as follows:

1.       Must provide a substantial contribution to at least one of the six environmental objectives

2.       Must not provide ‘any significant harm’ to any of the other environmental objectives

3.       Must have compliance with robust and science-based technical screening criteria

4.       Must have compliance with minimum social and governance safeguards

While this provides a general framework, detailed rules and thresholds along with a list of sustainable economic activities will be assessed and developed based on recommendations from a ‘Technical Expert Group on Sustainable Finance’, which is advising the European Commission on this matter.

 EOS Perspective

The Green Deal makes EU the world’s largest economic bloc to adopt such ambitious measures that aim to cease or offset all emissions created by them by mid-century. As per climate scientists, this is necessary to ensure that global temperatures do not rise by more than 1.5-2˚C above the 1990 levels.

While these goals sound promising, they are rarely achieved because they are usually not binding. However, in this case the commission announced that the net-zero emission target would be made legally binding. While that does make achieving the Green Deal objectives more promising, many experts still remain skeptical about the bloc’s capability to achieve it. This is given the fact that the EU has failed to meet 29 (out of 35) environmental and climate targets for 2020. These include energy savings, air, water, and soil pollution, etc.

Moreover, the plan can only be achieved if the EU Council, Commission, and the Parliament, come together and work in tandem and in a timely manner and also work individually with member states to ensure guidelines are converted into actions. For instance, currently CO2 are taxed at different levels across member states (EUR 112 (US$123) per ton in Sweden, EUR 45 (US$50) per ton in France and tax-exempt in Germany). To get all member states to agree at a common point and have a pan-EU strategy is a difficult task. Thus, while the EU has devised an all-encompassing strategy and dedicated significant funds to the same, results will only materialize if there is inclusive and credible implementation of the plans.

In addition to this, there is also some criticism of the policy at a global level, with some nations indicating that it has more to do with protectionism rather than climate goals, owing to its policy on border adjustment carbon tax. Since the EU has more measures and flexibility to cut emissions in its own region, it creates an unfair disadvantage for its trade partners (some of who are still in the developing stage and cannot afford such measures). Moreover, given the technical and political complexities of the carbon tax (with regards to WTO and other trade treaties), it is unlikely that it will be implemented before 2024, which is when the current President Ursula von der Leyen’s term gets over. This will further make its implementation dicey.

However, all being said, the EU Green Deal is a policy in the right direction. With the blueprints being laid down, now it all depends on the implementation. While few measures may be difficult to achieve, there is a lot of unanimous backing for green finance. An increasing number of investors is moving away from ‘brown’ assets towards climate-friendly investments. Irrespective of the outcome or success of the Green Deal, green investments are definitely the future. Thus companies, both within the EU as well as globally, must look at innovating their processes as well as products/services to align them with climate goals to lure both public and private funding in the long run.

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.

by EOS Intelligence EOS Intelligence No Comments

Commentary: India’s Automobile Sector Breakdown Causing Economic Distress

Over the past few months, a lot has been said about the shrinking automobile sales in the Indian market. Touted as one of the key drivers of India’s economic growth, the automobile industry is facing the worst slowdown in two decades as production and sales numbers continue to drop month after month sending the sector in a slump. While the government has made efforts to improve the situation, it will take more than just policies and measures to flip the status quo and bring the industry back on the growth path.

Indian automotive industry witnessed a period of growth during the first term of Modi government – we wrote about it in our article Commentary: Indian Automotive Sector – Reeling under the Budget in February 2018. However, over the past year, the auto sector is in shambles and far from recovery. The sector that contributes 49% of the manufacturing GDP in the country (and more than 7% to the country’s total GDP) has shown decline in growth in the past 18 months as the numbers continue to fall each month. The slowdown is so severe that it has affected all aspects of the business leading to piled up inventory, stalled production lines, decelerating dealership sales, delayed business investments, and job loss.

Quintessential factors that triggered the slowdown

There are various reasons that have plagued the auto industry in the recent months. One of the key factors is the inability of NBFCs (Non-Bank Financial Companies) to lend money. NBFCs, which largely depend on public funds (mainly in the form of bank borrowings, debentures, and commercial paper), have been facing liquidity crunch in the recent past as both public sector and private sector banks have discontinued lending money. This had a double effect on the auto sales – firstly low liquidity has restricted NBFCs ability to finance vehicles, thus having an adverse impact on sales, and secondly, the limited availability of funds bulleted the cost of financing vehicles thereby making them relatively more expensive, further worsening the sales scenario.

In October 2018, the Supreme Court of India announced that no BS-IV cars shall be sold in India with effect from April 1, 2020 (all automobiles should be equipped with BS-VI compliant engines, with an aim to help in reducing pollution in terms of fumes and particulate matter). Owing to this, consumers have delayed their plans to purchase vehicles expecting automobile companies to offer huge discounts in the early months of 2020. And to clear out their existing stock of BS-IV vehicles, it is highly likely that the companies will offer massive concessions before the deadline hits. Delay in purchase of vehicles on consumers’ end has contributed to the overall low sales.

Additional factors that add to the downfall include changes in auto insurance policy (implemented in September 2018) under which buyers have to purchase a three-year and five-year insurance cover for car and two-wheeler, respectively (as against annual renewals), inclusion of additional safety features (including airbags, seat-belt reminders, and audio alarm systems) in all vehicles manufactured after July 1, 2019 adding to the manufacturing cost for the OEMs, and stiff competition from growing organized pre-owned vehicle market which has doubled in size in less than a decade (the share of the organized channel of the pre-owned car market has increased to 18% in 2019 from 10% in 2010). Customers have been passive on buying new vehicles as the total cost of ownership goes up due to an increase in fuel prices, higher interest rates, competition from used cars segment, and a hike in vehicle insurance costs.

Government initiatives to help the auto sector recover

To boost demand for automobiles and offer some respite to the businesses operating in the space, the government announced a number of measures and policies. These include lifting the ban on purchase of vehicles by government departments (the ban was introduced in October 2014), which is hoped to result in loosening of stocked-up inventory and getting sales for automakers, component manufacturers, and dealers. Government also announced additional 15% depreciation on new vehicles for commercial fleet service providers acquired till March 2020 with the aim to clear the high inventory build-up at dealerships.

Other than lifting the ban and price reductions, the government also announced that all BS-IV engine-equipped vehicles purchased until March 2020 will remain operational for the entire period of registration. This will have a two-fold effect – firstly, automakers will be able to push out their stock without having to upgrade existing models and make them BS-VI-complaint (since no more BS-IV-complaint vehicles will be registered post March 2020 and manufacturers will have to upgrade to BS-VI from BS-IV emission standard on the old stocks) thus clearing old inventory, and secondly, consumers can expect much higher discounts. This is expected to provide enough movement within the auto sector, both in terms of sales and revenue generation.

Government has also taken steps to stabilize the NBFC crisis where a separate budget of US$ 14 billion (INR 100,000 crore) has been announced to refinance selected NBFCs. While it is clear that these limited funds will not last long, currently, any step taken to recover from the situation is welcomed.

Though considered temporary, the relief measures offered by the government have gained traction in the industry and players believe that these provisions will have a positive impact on the buyers’ sentiment, even if for a short period of time.

Implications of the auto industry crisis

The slowdown is expected to have a negative impact across all aspects of auto business, especially in the short term. Drop in sales has led manufacturers to decrease production (and even stop production for a certain period of time), cut down overall costs, and reduce headcounts thus weighing down the overall automotive sector.

The months leading to reduced sales did not only impact the production capacities but also resulted in the loss of more than 350,000 jobs. In the coming months, many more risk losing their jobs owing to plant shutdowns, dealership closures, and small component manufacturers going bankrupt.

The cost of vehicle ownership has also increased. Automobiles attracts the highest GST slab of 28%, and this, coupled with the varying road and registration charges imposed by state governments, makes the upfront cost of the vehicle exorbitant for a large segment of consumers (especially the working middle class for whom a two-wheeler or a small segment car is a basic necessity rather than a nice-to-have convenience) making it almost impossible for them to but it.

Given that the automobile sector works in conjunction with other industries, the current slump in auto sales will pull down ancillary industries including parts and components, engines, battery, brakes and suspension, and tire, among others. Considering the fact that the sector contributes nearly half to the country’s manufacturing GDP, if the issue at hand is not addressed immediately, it will further add to the ongoing economic crisis within the country worsening the situation altogether.

EOS Perspective

Policies announced by the Modi government to revive the tumbling automobile sector only seem to mitigate the negative sentiments circling about the future of the industry. However, at this stage, what the industry really needs is a stimulus package in the form of tax incentives or liquidity boost to immediately change things on the ground level.

There is an urgent need of a remedial course of action on the government’s part to stop the vehicle sales from dropping further. As an immediate relief to boost sales and invigorate the auto sector, the government should implement a GST cut on vehicles. This would kick-start vehicle demand almost instantaneously that would work in favor of the automobile industry – manufacturers (to resume halt production), dealers (to clear inventory), and parts makers (to resume small parts and component manufacturing), help resuscitate lost jobs, and contribute, to a small extent, to strengthen country’s slow economic growth.

However, with the government turning a blind eye to industry needs (lowering the GST slab), there is only so much the business owners can do. Under this current scenario, unless the government takes some drastic measures that ensure validation in backing automakers, auto ancillary businesses, and dealers, the sector is unlikely to recover soon. Provisional policies and short-term measures can offer momentary relief but not the survival kick the auto industry is in dire need of.

by EOS Intelligence EOS Intelligence No Comments

Tax Cuts – Enough to Make India a Global Manufacturing Hub?

India has recently announced an unprecedented reduction in its corporate tax rates. Not only is this a respite for domestic and existing foreign companies, but it is also expected to boost India’s position as a preferred investment destination for international companies looking to diversify their manufacturing footprint. Amidst the ongoing trade war between China and the USA, many companies, such as Apple, are looking to relocate a chunk of their manufacturing facilities away from China as part of a de-risk strategy. This presents the perfect opportunity for India to swoop in and encourage manufacturers to set base there instead of other Asian countries. However, tax reduction alone may not be enough to score these investments as the government needs to provide additional incentives apart from improving logistics and infrastructure, as well as land and labor laws in the country.

For the past three decades, India had one of the highest corporate tax rates in the South Asian region standing at 30% (effective rate of about 35% including surcharge and cess), making it one of the biggest sore points for investors looking at setting up a shop here.

However, September 2019 brought an unprecedented move, as the Indian government slashed the corporate tax rate to 22% from the existing 30%. Moreover, new manufacturing units established after 1 October 2019, are eligible for even lower tax rate of 15% (down from 25%) if they make fresh manufacturing investments by 2023.

The effective tax rate in these cases (subject to the condition that companies do not claim benefits for incentives or concessions) will be 25.75% (in case of 22% tax rate) and 17.01% (in case of 15% tax rate). These companies will also be exempt from minimum alternate tax (MAT). The tax cuts in effect are believed to have improved India’s competitiveness among investment destinations in the region.

The tax cuts in effect are believed to have improved India’s competitiveness among investment destinations in the region.

To put this into perspective, India’s new tax rate is lower than the rate in China (25%), Korea (25%), Bangladesh (25%), Malaysia (24%), Japan (23.2%), however still a little higher than that of Vietnam (20%), Thailand (20%), Taiwan (20%), Cambodia (20%), and Singapore (17%). However, for new companies/MNCs looking to set up a unit in India, the country offers the most competitive rates in the region.

This tax break by India is also well-timed to exploit the degrading US-China relationship, which is resulting in several US-based companies, such as Apple, Google, Dell, etc., to look for manufacturing alternatives outside of China. Currently, Vietnam, Taiwan, and Thailand have been the prime beneficiaries of the trade war, with the three countries attracting about 80% of the 56 companies that have relocated from China during April 2018 to August 2019. However, India’s recently introduced tax cuts may act as a major stimuli for companies (that are looking to partly move out of China or are already in the process of doing it) to consider India for their investments.

While the tax reform stands across all industries, India is looking to boost investment in the labor-intensive electronics manufacturing sector including smart phones, televisions, etc. To achieve this, the government recently scrapped import tax on open cell TV panels, which are used to make television displays. In addition to large brands such as Apple, India is also targeting component and contract manufacturers for such companies (such as Wistron, Pegatron, and Foxconn) to shift their business from China and set a shop in India.

India's Tax Cuts Not Enough by EOS Intelligence

Is a tax break enough?

While this is a big step by the Indian government to attract foreign investments in the manufacturing space, many feel that this alone is not enough to make India the preferred alternative to its neighbors. Companies looking to relocate their manufacturing facilities also consider factors such as infrastructure (including warehousing cost and set-up), connectivity (encompassing transportation facilities and logistical support), and manpower (such as availability of skilled manpower and training costs) along with overall ease of doing business, which covers the extent of red tape, complexity of policies, and transparency of procedures.

The Indian government has to work towards improving the logistical infrastructure, skilled labor availability, and cumbersome land-acquisition process, among many other aspects. As per the World Economic Forum’s Global Competitiveness Report 2019, India ranks 70 (out of 141 countries) in terms of infrastructure. While India heavily depends on road transportation, it needs to invest in and develop modern rail and water transportation and connectivity if it wishes to compete with China (rank 36).

India also ranks poorly with regards to skilled workforce and labor market, ranking 107 and 103 on the indices, respectively. To put this in perspective, Indonesia ranks 65 with regards to skilled workforce and 85 for labor market, and Vietnam ranks 93 for skilled workforce and 83 for labor market. Other than this, India also struggles with complex land acquisition laws and procedures, and must look into streamlining both to position itself an attractive investment destination.

Apart from this, the government also needs to provide additional incentives for investments in sectors that are its key priorities, such as tech and electronics manufacturing for export. As per industry experts, electronics manufacturing in India carries 8-10% higher costs in comparison with other Asian countries. Thus the government must provide other incentives such as easy and cheaper credit, export incentives, and infrastructural support, to steer companies into India (instead of countries such as Vietnam, Indonesia, and Thailand).

Several experts and industry players suggest that the government should provide the electronics manufacturing industry incentives for exports that are similar to those under the ‘Merchandise Exports from India Scheme’, which provides several benefits including tax credits to exporters.

In August 2019, the Ministry of Electronics and Information Technology (MeitY) proposed incentives to boost electronics manufacturing in India. These include a 4-6% subsidy on interest rates on loans for new investment, waiver of collateral for loans taken to set up machinery, and the renewal of the electronics manufacturing cluster (EMC). EMC creates an ecosystem for main company and its suppliers to operate in a given area (the previous EMC scheme ended in 2018).

Apart from this, industry players are also seeking an extension of another scheme, Modified Special Incentive Package Scheme (MSIPS), which also ended in 2018. MSIPS provided a subsidy of about 25% on capital investment.

EOS Perspective

India’s tax break came at an extremely opportune time, with several MNCs having expressed their plans to branch out of China (for at least 20% of their existing manufacturing facilities). From imposing some of the highest corporate taxes, India has now become one of the most tax-friendly markets, especially for new investments.

This is likely to put India in the forefront for consideration, however, it is probably not enough. The government needs to work on several other facilitating factors, especially infrastructure, land laws, and availability of skilled labor, which are more favorable in other Asian countries.

Moreover, the appeal of some countries, such as Vietnam and Thailand, seems to remain high, as several of them introduced a ‘single point of contact’ facilities for investors. Under these facilities, in various forms, investors are provided with investment-related services and information at a single location, and/or are provided with single point of contact within each ministry and agency they have to deal with. This makes the access to information and investment procedures much easier for foreign investors, and increases the perception of transparency of the whole process. India on the other hand struggles with bureaucracy, fragmented agency landscape, and red tape. Despite initiating a single window policy, multinational representatives need to visit multiple offices and meet several officials (also in many cases offer bribes) to get an approval of their proposals and subsequently get the required permits. Bureaucratic and procedural delays, as well as poor work culture remain to be considerable deterrents for foreign investors.

India struggles with bureaucracy, fragmented agency landscape, and red tape. Bureaucratic and procedural delays, as well as poor work culture remain to be considerable deterrents for foreign investors.

Also in 2018, India only managed a mere 0.6% of its GDP from manufacturing FDI, indicating a low confidence level among foreign companies to make medium to long-term commitments in India. However, large part of the reason for this were also the high tax rates. Therefore, the recent tax reduction is a major step in the right direction, while the government still has some distance to bring India to replace China in the position of manufacturing giant of Asia, especially in the electronics sector.

by EOS Intelligence EOS Intelligence No Comments

EU New Medical Device Regulations: Cause of Ache for Medical Device Players

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Circling around patient care and improving overall healthcare services, the European Parliament has set new requirements for medical device and in vitro diagnostic manufacturers that distribute products in the EU. However, medical device manufacturers have realized that they are bound to face many challenges in order to make their products market-ready, not to forget the gigantic task of implementing new protocols in a timely manner, which will not be easy.

Need for a comprehensive updated medical device regulatory system

EU’s Medical Device Regulation (MDR) and In Vitro Diagnostic Medical Devices Regulation (IVDR) were made official in May 2017, with transition period of three years (fully applicable from May 26, 2020) for the former and five years (fully applicable from May 26, 2022) for the latter. These regulations will replace EU’s previous directives: Medical Device Directive (MDD), Active Implantable Medical Devices Directive (AIMDD), and In Vitro Diagnostic Directive (IVDD).

The need for new regulations of medical devices in EU arose from the growing demand for technologically advanced medical products which necessitated more stringent monitoring of these devices to ensure a high level of efficacy and safety among patients.

Unlike earlier version of the regulations where the main focus revolved around the pre-approval stage of medical device manufacturing, the new regulatory guidelines promote an overall product-life cycle approach, focusing on both device safety and performance.

Enhanced supervision, easy documentation of devices, more stringent clinical evidence requirement, and increased supervision on part of authorities providing medical device certifications are some of the key changes in MDR as compared to the EU’s previous directives.

Bumpy road ahead for medical device manufacturers

Reclassifying existing product line-up

Based on the risk factor, changes have been made to the way medical devices are classified. Under MDR, the number of classification rules has expanded from 18 to 22 intensifying the task of product re-classifications by the manufacturer.

For instance, products using software for monitoring purposes being implanted in the body has been reclassified to higher-risk class (from Class I to Class III) which would now require conformity assessment by a notified body (NB – an organization that assess the conformity of medical devices before they are placed on the market), unlike earlier, when Class I products did not require assessment via a NB. This is going to burden players with increased operational costs; thus, it is imperative that the manufacturers familiarize themselves with the classification changes and study the impact on their product portfolio.

New products are also being added to the list of medical devices that earlier were not part of the medical device regulatory framework. For instance, products manufactured utilizing human tissues or cells and devices incorporating nanomaterial, under new regulations, will be considered medical devices. Manufacturers of such products have work cut out for them – from conducting clinical investigations, preparing technical documentation and evaluation processes, to product certification. Though such products could only form a very small percentage of the company’s product range, the task to make them available in the market is great, especially under current circumstances.

Manufacturers who do not comply with the new regulations will no longer be able to market their products in Europe. Thus, a robust strategy in terms of resource allocation, time management, and budget is an absolute must for manufacturers to make this transition possible.

EU MDR Cause of Ache for Medical Device Players - EOS Intelligence

Distress over notified bodies

Strict parameters are also being applied on NBs. Since all devices will require new certification from a NB, only designated NBs will be able to certify a device. The designation process is a complex procedure as it involves audits and corrective actions (once a NB expresses interest). However, while the medical device manufacturers have been in the process of switching to newer protocols since mid-2017, the first designated NB (BSI United Kingdom, the national standards body of the UK) was announced in January, 2019, almost 18 months after the regulations were announced and 14 months into the formally started designation process.

Such time-consuming process raises concern among medical device companies about the ability to complete the necessary conformity assessments within the allotted time. The huge task of recertifying medical devices with only a handful of designated NBs is a cause of worry for companies, as it could potentially result in significant backlogs as the last date approaches. However, there is only so much companies can do – even though they are proactive to comply with the new regulations much ahead of the deadline, poor process planning and lack of supporting bodies (notified bodies in this case) results in a long halt for these players.

The companies are heavily dependent on NBs for auditing and product certification, and the insufficient number of designated bodies adds to the risk of many devices being non-compliant according to new regulations. As of May 2019, less than 40 NBs have filed application for designation procedure (out of 58 designated NBs under the directives); only two have actually received a designated status – BSI UK and Germany based TÜV SÜD Product Service GmbH Zertifizierstellen (certification received in May 2019). With very little time at hand to reassess and rectify issues (if any), this could jeopardize the product availability in the market, resulting in not only risking the patients’ life (due to non-availability) but also in huge financial losses for the players.

Detailed clinical evaluation of medical devices

Owing to reclassification of product categories, many devices will require changes to their existing clinical evaluation reports, another challenge for medical device manufacturers. Manufacturers that have not previously been required to perform clinical testing will have to do so now. For instance, mechanical heart valve sizers will be moved up from Class I to Class III, and unlike in MDD where clinical evaluation was based on literature analysis, new evaluation of valve sizers will require clinical investigation. This will require a huge deal of additional time, money, and expertise, further burdening the device manufacturers.

Medical devices already in the market that remain untouched by the reclassification criteria will still require reassessment of clinical data. If the data do not meet the new requirements, devices will need to undergo additional testing to be recertified, increasing the expense for manufacturers.

MDR also calls for inclusion of risk management within the clinical evaluation expecting clinical risks to be addressed in clinical investigations and evaluation studies – adding another task to the long list of activities to be accomplished before MDR fully rolls out.


Explore our other Perspectives on medical devices markets


Comprehensive demonstration of equivalence data

Unlike MDD, where device manufacturers were able to use clinical data of an equivalent device for their own product registration, under MDR, equivalence is going to be less accepted, particularly for higher risk devices.

There are two ways out – manufacturers can either conduct their own trials not having to deal with the equivalence commotion or they can demonstrate that they have access to the equivalent device (with respect to technical and clinical properties) data. The latter is highly unlikely to happen considering equivalent device would typically belong to a competitor unwilling to grant such access. Thus, with stern requirements for comparative evaluations, more effort, planning, money, and resources will be needed for device manufacturers to demonstrate product safety and performance.

As new medical devices are developed, multiple small incremental improvements (minor changes in design, addition or subtraction of small hardware parts such as bolts or screws) happen over time. Once the device is already in the market, it is practically impossible to conduct a re-trial to gain approval for such small changes. An expected solution to this would be a provision to accept such minor changes through pre-clinical evidence or prior trial results. However, with equivalence testing being reduced drastically under MDR, unless a solution for such cases is offered, manufacturers will have to conduct re-trial and re-document everything, which would result in significantly increased cost. Another issue that could arise from such situations is the reduction in R&D activities inclined towards product improvement.

Trouble galore for SME’s

While making amendments and prioritizing to comply with new regulations seems to be the top most priority for medical and diagnostic device manufacturers, it seems SMEs will be dramatically more impacted than large players – in Europe, a small-sized company employs less than 50 people and has a turnover of less than or equal to €10 million while a medium-sized company employs less than 250 people and has a turnover of less than or equal to €50 million. Owing to the increase in cost, time, and resources associated with the process, the new regulations may put smaller companies under pressure, possibly resulting in altering (such as merging with or being acquired by larger companies) the European medical device market structure, currently dominated by SMEs – there are nearly 27,000 medical technology companies in EU, 95% of which are SMEs.

SMEs also need to be more vigilant when it comes to being associated with a designated NB as not all currently functioning NBs are expected to get a designated status. With their already dwindling numbers married with an increased demand for their services, once the new regulations roll out, it is quite possible that small manufacturers are orphaned since NBs could be partial towards larger players and prioritize them over other small and medium players.

Smaller players will not only have to hire additional personnel for dealing with regulatory issues but also employ clinical trials specialists (for documenting insights to be presented and approved by the NB) for launching products in the market which means higher costs. Adjusting budgets to keep costs under control would hamper other critical business operations, e.g. reduce R&D activities or cut the number of products being launched in the market.

As a step to overcome these issues, players with limited financial resources should strategically study their product portfolio to determine which products are worth investing in for MDR compliance. For doing this, they should lay out a detailed plan for each product and decide whether to remediate, transition, or divest.

It is also advised that SMEs should devise a clear step-by-step approach plan to ensure compliance. As an alternative to hiring transition specialists, they could engage employees from various functions within the organization to take responsibility for specific processes thus keeping costs in check.

EOS Perspective

The changes and revisions required to be carried out under MDR are company-wide and require significant investment to plan and execute. This will lead to players devising a business strategy based on assessing risk associated with product portfolio (whether some products need to be pulled out from the market and what effect it would have on future revenue) or looking for acquisition partners. Based on these decisions, the medical device market topography in EU is expected to see some major changes in the coming years – small companies looking for partners to get acquired or for new partnership with a service provider (specializing in regulations compliance). This will also result in organizational restructuring, revamping design processes, and systems implementation.

Companies have to make crucial decisions around the product portfolio. For some of the already existing products, if reclassified, the cost of compliance could be much higher than actual market returns. In such cases, manufacturers may be compelled to pull away such products from the market resulting in high healthcare costs and ultimately burdening the patients, who (theoretically) form the center point of the MDR. Though this is unlikely to happen at a large scale, since there are always alternative products available, it cannot be denied that this may be a major loophole in MDR requiring immediate attention.

Since SMEs drive the EU medical device market, as an immediate consequence, MDR is not likely to have any positive effect on these players other than distorting their business operations. However, it can only be anticipated that, with time, MDR may adapt and amend to offer some relaxation in provisions especially for small and medium-sized players. Nonetheless, MDR also brings an opportunity for such players to audit their current offerings and come out with an enhanced product portfolio, which could be an opportunity to be capitalized on in the distant future.

Modifications being made in the functioning of NBs are also likely to have an impact on the device manufacturers. For high risk devices, manufacturers may expect deeper scrutiny of design records and data files leading to providing more credentials, in case any query arises. This, along with long wait time for product review (due to reduction in the number of designated NBs) and limited availability of resources (again on account of NBs), could lead to unknown delays for obtaining product re-certification. Thus, companies need to chalk out their market strategies very effectively and be prepared to address any concern that rises during product reviews.

The aim of implementing new regulations is to bring a transparent and robust regulatory framework for medical devices. However, there is no assurance that the new regulations are completely accurate and will apply seamlessly to live case scenarios. Therefore, once implemented, there is a possibility that MDR may see revisions in the initial months of coming into action.

These changes, though certainly positive from a healthcare point of view, are enormous. Transitioning to meet the new standards within the stipulated time frame is challenging for manufacturers. Not adapting to the changes is not a choice for manufacturers as non-compliance could result in losing license to operate in the EU market. And for players fearing stringent scrutiny in the future, operating in the European healthcare market will not be easy once the new regulations come into force.

by EOS Intelligence EOS Intelligence No Comments

Sharing Economy in the GCC: A Success Story Waiting to Happen

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The current landscape in the Gulf countries is believed to show solid scope for sharing economy platforms’ growth. On the other hand, the region still lacks consumer engagement as well as updated and adequate regulations, which may cause these platforms to stumble and fall on their way to growth.

The concept of sharing economy has been spreading with great velocity worldwide with the advent of new technologies and connectedness. It emerged as a recognized concept around 2008-2010 with the arrival of successful players such as Uber and Airbnb offering P2P platforms that allowed financially strapped consumers to earn extra income. Global sharing economy was valued at US$15 billion in 2014 and is expected to reach US$335 billion by 2025.

GCC’s good foundations and latent potential

In 2016 alone, PwC estimated that consumers in the Gulf Cooperation Council (GCC) spent US$10.7 billion within five sectors of the sharing economy platforms – household services, accommodation, business services, transportation, and financial services.

The spending in sharing economy was of course lower than spending on similar services acquired through traditional avenues – for instance, in 2016, hotel revenues were expected to hit US$24.9 billion in the GCC, a considerably higher sum than accommodation revenues in the sharing economy that totaled to US$1.29 billion in that same year. This indicates latent potential, and with part of the traditional service revenue possibly taken over by sharing economy, the scope for growth is very promising, underpinned by favorable characteristics of the GCC countries.

Young and technologically-participative population

Sharing economy platforms do not hire employees directly but work with self-employed service providers instead. The essence of these platforms is to enable people – mainly young, dynamic, and technologically-participative – to use them as a way to exchange goods or services for money.

The appeal of the GCC for sharing economy platforms is exactly that – the diversity and demographic profile of the region’s population allows sharing economy platforms to reach a large pool of young, tech-savvy consumers and service providers. In 2018, 60% of the GCC population was under the age of 30 – considered key demographic to interact and use sharing economy services on both the demand and supply side.

Large immigrant pool willing to engage

Another market growth driver that is somewhat unique to the region is the large percentage of non-nationals living and working in the GCC. Between 2016 and 2017, 51% of the Gulf region total population were non-citizens, who, according to a 2016 PwC survey, were active users of the sharing economy services, largely due to relatively low incomes and limited (if any) access to other ways of improving their financial standing. The region’s large volume of immigrants has always been a steady trait that is very unlikely to change in the future. Due to this, high numbers of expatriates participating in the sharing economy platforms on a daily basis is likely to ensure a long-term steady growth of these platforms in the region.

(Slowly) growing women’s economic inclusion

Another appealing aspect of the GCC market is that all six countries have been changing (alas, slowly) their attitude towards women’s economic inclusion, fueled by shifting cultural norms that traditionally imposed limitations on women’s ability to work and earn.

This change is likely to allow them to participate more actively in the workforce, and a ride-hailing app company could be a good option to provide transportation to and from work to female workers, since in some GCC countries they are not allowed to drive by themselves, while in others they customarily do not often do it. With women representing around 40% of the GCC population, higher financial independence places them in the group of potential consumers of sharing economy goods and services for their transportation as well as household services needs.

Eagerly-consumed fast connectivity

Regardless of the gender participation mix at both supply and demand side, the sharing economy players are certainly set to benefit from fast adoption of technology by local consumers in the GCC. In 2017, 64% of the population owned a smartphone and, by 2018, 77% of the GCC population were mobile network subscribers. Such rates seem to give strong foundation for sharing economy platforms to grow.

Moreover, the GCC highly tech-savvy youth seeks new technologies and faster mobile connections. In response, the Gulf countries aim to become global leaders of 5G deployment (all markets planning to launch 5G by 2020), a major contributing driver to the sharing economies growth in the region. High-speed mobile connections plus a growing pool of eager-tech young adults willing to engage in P2P platforms are likely to become a major driver for their growth.

Sharing Economy in the GCC A Success Story Waiting to Happen

Nonetheless, despite these favorable foundations, there may be roadblocks representing a threat for the success of sharing economy platforms in the Gulf region.

Large immigrant pool refrained from joining the platforms

One of the key obstacles is the cultural-legal environment prevalent in the region. While the region has long been characterized by large share of immigrants in local populations, their way of working is controlled by Kafala, an outdated sponsorship system carried out by the GCC. This system allows immigrants to work in the region only for their sponsor, who is legally responsible for them during the time of his or her stay.

Kafala system does not allow for self-employment, nor does it allow for second employment beyond the job given by the sponsor. Since sharing economy companies interact mainly with freelance service providers, there is a large portion of expatriates working in the GCC who will find it difficult to be able to freely join the platforms as service providers.


Explore our other Perspectives on sharing economy


Lack of legislation and consumer protection

Lack of a dedicated government entity to oversee sharing economy services in the Gulf countries may cause consumers to be wary of using these platforms, ultimately hindering market growth.

According to a 2016 survey conducted by PwC, GCC users put considerable emphasis on trust and transparency when dealing with online providers, two factors that can influence their purchasing decisions.

In sharing economy, users need to be able to trust platforms’ screening process for providers before they deal with them. As a result, if the states do not establish bodies and laws governing sharing economy services, the platforms could witness weak demand from both consumers and services suppliers who are cautious about protecting themselves.

Limited awareness and lack of need

Lack of consumer awareness and simply lack of need for the sharing economy services is also an issue for the market growth since not all GCC nationals seem to be aware about the existence of the sharing economy platforms.

According to the same PwC survey, an average of 21-35% of respondents were not familiar with the sharing economy concept. This could be attributed to the fact that many households in GCC countries have traditionally enjoyed high income levels, a fact that resulted in no need for shared services and allowed them to afford services of expatriate workers hired directly and for long term (e.g. employing a household driver or cleaner, rather than using external providers as needed).

Consequently, local consumers may not see the need to use an online platform dampening the success of sharing economy platforms. This might change, as households’ incomes growth stagnates and sharing economy could help stretch that income.

EOS Perspective

The GCC countries could be a promising landscape for sharing economy platforms to dock successfully. The region offers growing population, continues to be characterized by a solid base of young, tech-savvy users, as well as females and non-citizens available to participate in the sharing economy market.

However, despite the current growth, these platforms could nosedive unless local authorities deal with regulatory deficiencies. A dedicated supervisory entity is required to allow local authorities to regulate sharing economy companies, which will also provide support to consumers through consumer protection and better screening processes of services providers. Local customers clearly manifest their need for such a protection, and the lack of it is likely to dampen the demand and thus market growth.

The update of labor policies such as the Kafala system is also required for sharing economy platforms to witness a continuous growth. This growth can only happen through allowing a good share of the readily-available pool of expatriates to work under a more flexible scheme these platforms require. This is something for GCC states to consider, as there region is increasingly facing the requirement for economic diversification and stimulation of its sluggish economies. Creating labor policies that allow people to work for sharing economy platforms legally (at least as a secondary employment, as it is increasingly allowed in Dubai) is likely to create employment opportunities across the region, spurring consumer spending and generating tax revenues.

While there also are other obstacles in the GCC sharing economy market, it is the lack of appropriate regulation and supervision of the industry, as well as the current form of the Kafala system that are the two key challenges to the market’s accelerated growth. Considering the nature of these challenges, it seems that the potential of this market is unlikely to be realized without active facilitation by the local governments. However, it is uncertain to what extent the governments will try to understand the potential economic benefits of fully embracing sharing economy, and change the deeply-rooted, long-standing, archaic labor laws.

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