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REGULATORY LANDSCAPE

by EOS Intelligence EOS Intelligence No Comments

Bayer-Monsanto Deal to Genetically Modify the Agriculture Industry

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After its abandoned attempt to acquire Syngenta in October 2015, Monsanto stated it would continue its search for best acquisition targets within the agriculture industry claiming that “consolidation is inevitable”. The statement turned out to be prophetic. The agriculture industry has seen a signification M&A activity throughout 2016 – first with ChemChina acquiring Syngenta in a US$43 billion deal, followed by a planned merger of Dow and DuPont (probably two of the largest agrochemical companies), and now with Bayer announcing a US$66 billion deal to acquire Monsanto – putting further pressure on the already competitive and consolidated industry.

Every deal can bring positives and negatives, depending on from whose point of view the deal is looked at. While some may see positives in the Bayer-Monsanto deal, indicating it as the logical step of vertically integrating in the agriculture supply and value chain, others see it as a risk, and a desperate move by Bayer to remain competitive in a consolidating industry, especially when Monsanto has a not-so-good reputation among consumers.

Investors’ point-of-view

The joint portfolio of Bayer and Monsanto will surely allow the combined entity to move to the forefront and become a leader in seeds and pesticides market (holding more than a quarter share in the segment post the acquisition), which will allow the company to dictate terms in the market – definitely a positive from the investors’ point of view. Further, a cash-only deal, financed by the company’s cash reserves and new debt, display Bayer’s optimistic expectations about the company position in the near future, acting as a sweetener for the investors.

The combined Bayer-Monsanto entity is also expected to achieve improved operational efficiencies. Bayer claims the merger will result in annual synergies of US$1.5 billion after three years, bringing in operational costs reduction. Consolidation of R&D expenditure is also likely to result in further cost savings.

However, there are some critical voices as well. Historically, Monsanto has had a bad reputation for its aggressive policies, and was rated the third most hated company in the USA in 2015. Acquiring such a company could backfire on Bayer. Moreover, certain investors feel that pursuing the cash only deal may put pressure on Bayer’s core pharmaceutical business.

Market’s point-of-view

If the Bayer-Monsanto deal, as well as the Dow-DuPont merger, get the regulatory approvals, they will effectively end up consolidating more than 75% of the agricultural supplies market in the hands of four companies (Bayer-Monsanto, Dow-DuPont, ChemChina-Syngenta, and BASF). This presumably is likely to leave smaller companies at a very disadvantageous position, fighting for their survival.

A number of regulatory authorities (30 in case of Bayer-Monsanto deal) will engage in a long drawn process (lasting the entirety of 2017) to ensure the market remains competitive, and that must be enough for smaller companies and consumers to cling onto.

Consumer point-of-view

Experts feel the Bayer-Monsanto merger might lead to poorer choice and lower number of product options for consumers to choose from. This may lead to a rise in prices of agricultural supplies, which is not likely to go down well with the consumers, as the agricultural commodity prices and incomes have dropped to their lowest levels in the past couple of years. Any increase in raw material prices is likely to leave consumers scraping for margins.

EOS Perspective

Which of these positive and negative outcomes actually materialize will likely depend on how the industry behaves in the next year and a half, as Bayer and Monsanto wait to get the required regulatory approvals. If the deal gets a green light, the nature of competition in the agricultural supplies industry is undoubtedly destined to be ‘genetically modified’.

by EOS Intelligence EOS Intelligence No Comments

Uncertain Impact of the 2016 FDI Reforms on the Civil Aviation Sector in India

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Indian aviation industry is aiming high and intends to grow at a fast pace. Studies forecast that India could become world’s third largest aviation market by the end of this decade. In June 2016, the Indian government opened doors to 100% foreign investments in the Indian aviation sector. With an aim to establish one of the most FDI liberal economies across the globe, the government has taken steps to ensure easy and smooth inflow of foreign currency to India. This move has triggered mixed reactions – some raised their eyebrows while others welcomed the change.

With the objective of driving growth in the local aviation market, spurring airport infrastructure improvements, as well as giving the employment sector a push and creating new jobs in the country, the Indian government announced amendments to the FDI policy for the aviation sector. Under the new regulations, 100% FDI is allowed for both greenfield and brownfield projects through the automatic route. Regulations have been updated also in other categories of aviation operations. In Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline Service, though Non-Resident Indians continue to be allowed to invest up to 100% FDI without any approval, foreign investment is capped at 49% under the automatic route and any investment beyond this share must go through the government approval route, however allowing for the possibility of 100% FDI by only non-airline players. This effectively maintains the previous limitation for foreign airlines to bring in only up to 49% of the capital in Indian carriers operating scheduled and non-scheduled air transport services.

1-FDI Reforms In Indian Civil Aviation

Under substantial ownership and effective control, any foreign airline that invests in domestic carriers via non-airline investors, is bound to have an Indian chairman and at least two-thirds of its directors of Indian origin, so that majority of the ownership rights are vested in the hands of Indian nationals. Indian Civil Aviation Ministry say that though the new provisions allow full investment of foreign parties in the national aviation sector, 100% foreign ownership dominated airlines will still not enjoy the freedom to fly internationally. International investors can own full stakes only in domestic airlines but will have to bear the heat of the government procedures and approvals to fly overseas. Though the new changes in the policy give hope to increase the ease of doing business in the country thus increasing FDI inflow, a question still remains why an international carrier would enter the Indian market to operate primarily on the domestic front. Also, owing to heavy debt, high input costs, and rigid competition, most of the domestic players are already registering business losses, so whether a new entrant in this segment would earn profits is rather questionable.

EOS Perspective

Foreign air carriers face various hindrances when planning to enter the Indian civil aviation landscape. The leverage offered currently by the Indian Civil Aviation Ministry allowing 100% foreign direct investment in the sector may look rosy but it comes with fine print, i.e. despite allowing 100% FDI, the regulators still kept several limitations, effectively reducing the attractiveness for foreign players to invest in India.

The relaxation in the FDI norms is likely to attract many overseas carriers to invest in existing airlines that were looking to expand their operations in India. The deteriorating financial condition of domestic players is expected to improve with investment from foreign players.

Improved service standard, professionalism, and adoption of industry best practices are likely to be seen in existing air services within the country. Nevertheless, a doubt still remains whether these amendments in the FDI regulations that aim at boosting the aviation sector will really be fruitful.

by EOS Intelligence EOS Intelligence No Comments

Flying LATAM Skies on a Low Cost Carrier: Dream or Reality?

With 600 million population, Latin America still remains highly unexploited by low cost carriers (LCC). The region is dominated by only six homegrown low cost airlines, which makes it a promising growth market for discount carriers. With growing middle class, flourishing trade and commerce, and appetite for travel, Latin America is destined to become a discount air travel hub. However, even with such substantial opportunities, LATAM region is yet to overcome the hovering hurdles standing in its way to fulfill its potential as a dynamic market for low cost airlines.

Some regions housing emerging economies such as South East Asia have grown to accommodate 22 low cost airlines while Latin America is stalled with only six — Azul, Gol, Interjet, Volaris, VivaAerobus, and VivaColumbia. Currently, travelers flying across only Brazil, Columbia, and Mexico have the privilege to book their tickets with a low fare airline. Other potential markets such as Argentina, Chile, Ecuador, Peru, and Venezuela remain unexplored by LCCs with minuscule penetration or complete absence of any discount carriers. Some of the roadblocks hindering LCC development in the region include high costs of operation, government bureaucracy, economic headwinds, etc.


Obstacles faced by new entrants and existing LCCs in LATAM
LATAM Low-cost Airlines


Is there any growth prospect for LCCs in Latin America?

The emerging Latin American countries offer an array of opportunities for low cost airline industry, leading to new LCCs slowly starting to enter the market with recent example including the Southwest Airlines, an American low cost carrier, which in March 2015, started operating flights between Costa Rica and Baltimore (USA).

Currently, Latin American travelers typically opt for long haul buses, which are an economically viable, yet time-consuming option, to travel long distances. However, the advent of LCCs in the region could completely change the landscape for time and money conscious travelers. The LCCs could offer cost effective travel in a much shorter time.

New emerging customers

The burgeoning demand for air travel is increasingly accompanied with favorable conditions such as the growing middle class and signs of recovery in GDP growth, which collectively are likely to push low cost airlines’ growth in the near future. Presently, the middle class represents about 34% of the population in Latin America, approximately 200 million people, and is likely to grow resulting in higher demand for no frills airlines. The growing middle class, possessing the required financial means, is likely to push intra-regional travelling, as these people will want to travel for tourism and work. This section of the population is prone to consider travel options that are more expensive but less time consuming than long haul buses, but would still not be able to afford mainline airlines fares. Hence, they would prefer flying with a low cost airline.

As in 2015, the Latin American economy is forecast to show signs of recovery from years of slow GDP growth, the overall economic growth in the region is likely to increase investments in the LCC market and put higher disposable income in hands of the middle class population. This might lead to higher spending on vacation, thus, pushing the interest in LCCs. Economic growth is likely to pick up in countries such as Mexico, Chile, Colombia, Brazil, and Panama. In 2015, Brazil is forecast to grow at 1.4% from 0.3% in 2014. Chile is expected to rebound witnessing a 3.3% GDP growth in 2015 after slowing to 1.9% in 2014. Mexico’s GDP growth is likely to accelerate from 2.4% in 2014 to 3.5% in 2015.


Cost cutting and revenue generation

LCCs are seeking opportunities to reduce cost of operation and generate more revenue. For ticket reservation, LCCs are switching to direct sources (airline website) or metasearch engine (a search tool that takes input data from other search engines to produce its own results) instead of relying on Online Travel Agencies (OTA) such as Despegar, which sell various airline tickets. While the OTAs are perceived as a convenient platform for travelers to compare prices and book airline tickets, they seek a healthy cut from airline ticket sales. Switching to direct sources or metasearch engines could help LCCs cut intermediaries and boost profits.

Airlines are trying to drive revenues by selling ancillaries such as luggage, seats, hotel services, etc. by driving traffic to their own website. VivaColombia and VivaAerobus have refused to pay OTAs and have started distributing tickets through metasearch engine, Escapar, while Volaris has switched to Kayak (a US-based metasearch engine).

Further, airlines are focusing on international route expansion — particularly to the USA — to earn higher passenger yield (average earning of an airline generated by transporting passengers) and to take advantage of the growing international travel demand. In 2015, airlines such as Volaris, VivaAerobus, and Gol plan to bolster international network breadth. In H1 2015, Volaris increased international capacity by 33% and its traffic grew by 28%. By the end of 2015, Azul plans to start flights between Guarulhos (Brazil) and Orlando (USA) as well as Belo Horizonte (Brazil) and Orlando.


Despite the setbacks, jetting across Latin America on a low cost airline does seem like a reality in the foreseeable future

Presently, the low cost airline market in Latin America faces various challenges such as high cost of operation, currency depreciation, and regulatory hurdles. However, with new airlines starting to slowly enter the market, growing middle class pushing the demand for LCCs, and higher forecast GDP growth resulting in more disposable income in hands of people, the future of low cost airlines seems rather bright.

by EOS Intelligence EOS Intelligence No Comments

Mexico – The Next Automotive Production Powerhouse?

As the first of our five part automotive market assessment of the MIST countries – Mexico, Indonesia, South Korea and Turkey, we discuss the strengths and weaknesses of Mexico as an emerging automotive hub, and the underlying potential in this strategically located gateway to both North and South America.

Emergence of Mexico as a major automotive production hub is the result of a series of events and transformations over the past decade. The most important of which is the growing trend among automotive OEMs and auto part producers to have production bases in emerging economies. And the earthquake in Japan in 2011 tilted the tide in favour of Mexico just as ‘near-shoring’ was already becoming a key automotive strategy in 2011.

Automotive production in Mexico increased by 80% from 1.5 million in 1999 to 2.7 million units per year in 2011, largely thanks to a significant boost in investment in the sector.

Between 2005 and 2011, cumulative foreign direct investment (FDI) in the automotive sector amounted to USD10.3 billion. In the last year, several automotive OEMs have initiated large scale projects in Mexico; some of these projects include

  • Nissan – building a USD2 billion plant in Aguascalientes; this was the single largest investment in the country in 2012 and should help secure the country’s position as the eighth largest car manufacturer and sixth largest car exporter in the world

  • Ford – investing USD1.3 billion in a new stamping and assembly plant in Hermosillo, New Mexico

  • Honda – investing USD800 million in a new production plant in Celaya, Guanajuato

  • GM – investing USD420 million at plants in Guanajuato and San Luis Potosi

  • Daimler Trucks – investing USD300 million in a new plant to manufacture new heavy trucks’ transmissions

  • Audi – has decided to set-up its first production facility across the Atlantic in Mexico; with planned investment outlay of about USD2 billion, this move by Audi represents a significant show of trust by one of the world’s leading premium car brands

  • Mazda – building a USD500 million plant in Guanajuato; it has reached an agreement to build a Toyota-branded sub-compact car at this facility and will supply Toyota with 50,000 units of the vehicle annually once production begins in mid-2015

Bolstered by this new wave of investment, Mexico’s vehicle production capacity is expected to rise to 3.83 million units by 2017, at an impressive CAGR of 6% during 2011-2017.

Why is Mexico attracting such large levels of investment from global automotive OEMs? Which factors have positively influenced these decisions and what concerns other OEMs have in investing in this North American country?

So, What Makes Mexico A Favourable Destination?

  1. Trade Agreements – Mexico has Free Trade Agreements (FTAs) with about 44 countries that provide preferential access to markets across three continents, covering North America and parts of South America and Europe. Mexico has more FTAs than the US. The FTA with the EU, for instance, saves Mexico a 10% tariff that’s applied to US-built vehicles, thereby providing OEMs with an incentive to shift production from the US to Mexico.

  2. Geographic Access – Mexico provides easy geographical access to the US and Latin American markets, thereby providing savings through reduced inventory as well as lower transportation and logistics costs. This is evident from the fact that auto exports grew by 12% in the first ten months of 2012 to a record 1.98 million units; the US accounted for 63% of these exports, while Latin America and Europe accounted for 16% and 9%, respectively (Source – Mexican Automobile Industry Association).

  3. Established Manufacturing Hub – 19 of the world’s major manufacturing companies, such as Siemens, GE, Samsung, LG and Whirlpool, have assembly plants in Mexico; additionally, over 300 major Tier-1 global suppliers have presence in the country, with a well-structured value chain organized in dynamic and competitive clusters.

The Challenges

  1. Heavy Dependence on USA – While it is good that Mexico has established strong relations with American OEMs, it cannot ignore the fact that with more than 60% share of its exports, the country is heavily dependent on the US. The country needs to grow its export markets to other countries and geographies to hedge against a downturn in the American economy. For instance, during the downturn in the US economy in 2008 and 2009, due to decline in sales in the US, automotive production in Mexico declined by 20% from 2.17 million in 2008 to 1.56 million in 2009. Mexico has trade agreements with 44 countries (more than the USA and double that of China) and it needs to leverage these better to promote itself as an attractive export platform for automotives.

  2. Regional Politics – Mexico is walking a tight rope when it comes to protecting the interests of OEMs producing vehicles in the country. In 2011, Mexican automotive exports caused widespread damage to the automotive industries in Brazil and Argentina and in a bid to save their domestic markets, both the countries briefly banned Mexican auto imports altogether in 2012. Although, later in the year, Mexico thrashed out a deal that restricts automotive imports (without tariffs) to its two South American neighbours rather than completely banning them, it does not augur well for the future prospects of automotive production in Mexico. One of the reasons automotive OEMs were expanding their capacity in the country was to be able to cater to the important markets in Latin America, particularly Brazil and Argentina. Now the Mexican government has the challenge of trying to keep everyone happy – its neighbours, the automotive OEMs and most importantly its own people for whom it might mean loss of jobs and income.

  3. Stringent Regulatory Environment – The Mexican government, the Mexican Auto Industry Association and International Automotive OEMs are locked in a tussle over the government’s attempts to implement fuel efficiency rules to curb carbon emissions. Mexico has an ambitious target of cutting greenhouse gas emissions by 30% by 2020, and 50% by 2050. The regulations are similar to the ones being implemented in the USA and Canada, however, the association has complained that the proposal is stricter than the US version. Toyota went as far as filing a legal appeal against the government protesting the proposed fuel economy standard. Although the government eased the regulations to appease the automotive OEMs in January 2013, the controversy highlights resistance by the country’s manufacturing sector to the low-carbon regulations the government has been trying to introduce over the past few years. Such issues send out wrong signals to potential investors.

So, does Mexico provide an attractive platform for automotive OEMs? From the spate of investments in the country so far, it seems so – over the past few years, the country has finally begun to fulfil that potential and is now a key driver in the ‘spreading production across emerging economies’ strategy of companies looking to make it big in the global automotive market. However, there are still a few concerns that need to be addressed in order for Mexico to become ‘the’ automotive manufacturing hub in the Americas.

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In our next discussion, we will assess the opportunities and challenges faced by both established and emerging automotive OEMs in Indonesia. Does Indonesia continue to be one of the key emerging markets of interest for automotive OEMs or do the challenges outweigh the opportunities?

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