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by EOS Intelligence EOS Intelligence No Comments

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

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

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

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

Everyone wants a piece of cloud kitchen on their menu

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

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

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

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

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

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

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

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

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

EOS Perspective

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

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

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

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

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

by EOS Intelligence EOS Intelligence No Comments

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

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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

Thailand: Endeavoring to Become Asia’s Next Luxury Shopping Stop

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As purchasing power growth is slowing down in mature markets such as the USA and Europe, international brands and luxury retailers are seeking expansion opportunities in dynamic and rapidly developing Asian countries. Thailand is fast becoming a destination of choice for several luxury brands owing to robust demand, developed urban infrastructure, and low cost of establishing a business. Increasing number of tourists indulging in massive luxury spending as well as mushrooming high-end shopping centers are slowly coalescing to establish Thailand as a premier luxury shopping hub in South East Asia.

Luxury goods sales in Thailand are likely to reach US$ 2.2 billion by 2019 owing to improved economic conditions, retail expansion, and plethora of international brands entering the country. This growth has also spurred as Thailand offers several other benefits to luxury brands and retailers such as low rent and investment cost, and strong government support. Retail infrastructure is also witnessing a rapid growth, with expansion of several shopping malls and outlets.

Thailand - Asia’s Next Luxury Shopping Stop-1

Despite the bright growth prospects and encouraging retail development, there are several factors that are inhibiting this growth. For instance, the high luxury goods tax is a major hindrance to retail sales. Other factors such as counterfeit products, fragmented market, and political instability in the country are also adversely affecting sales.

Thailand - Asia’s Next Luxury Shopping Stop-2

EOS Perspective

Thailand faces a strong competition from other commercial centers such as Hong Kong, China, and Singapore, yet it is slowly emerging as a premier market for luxury products due to its unique ability to offer goods at more competitive prices owing to relatively lower overheads. Additionally, China and Hong Kong are the two most penetrated markets by high street brands in Asia, and are approaching saturation. Several luxury brands are halting further expansion in the two countries amid sluggish sales. Consequently, this has opened doors for Thailand which is slowly becoming a target market for retailers to expand operations.

Nevertheless, luxury retailers in Thailand face a major setback due to the 30% luxury goods tax, which discourages even affluent shoppers. Limited domestic purchasing capabilities further hinder sales, however relatively low housing costs leave a considerable disposable income in hand, which marginally helps to spur luxury spending.

Based on our analysis, certain strategies can be adopted to succeed in the Thai market – widening distribution channel by opting for online retailing, choosing the right target audience, designing an effective marketing strategy, and tapping the M-commerce boom in Thailand.

 

Thailand - Asia’s Next Luxury Shopping Stop-3

 

While Thailand still remains behind many of its peer countries in terms of luxury retail development, it is likely to become one of the leading Asian markets in medium to long term, increasingly hosting several prominent international luxury brands and registering tremendous retail sales growth.

by EOS Intelligence EOS Intelligence No Comments

Solar Rises in the East

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The international solar arena which was once dominated by the developed countries in the West is now flaring in the emerging markets of Asia. We are looking at a holistic view of solar PV market across selected Asian countries – the finale of our series focusing on solar photovoltaic market landscape across selected Asian countries.

Our previous articles of the series took a detailed look into current scenario and future prospects of solar PV market in China (China’s Solar Power Boom), India (Solarizing India – Fad or Future?), Thailand (Utility-scale Projects to Boost Thai Solar Market), as well as Malaysia (Uncertainty Looms over Future of Solar PV Market in Malaysia).

 

Solar Rises in the East - Markets Overview - EOS IntelligenceSolar Rises in the East - Markets Are Moving Towards Solar Power - EOS IntelligenceSolar Rises in the East - Growth Drivers - EOS IntelligenceSolar Rises in the East - Growth Challenges (1) - EOS IntelligenceSolar Rises in the East - Growth Challenges (2) - EOS IntelligenceSolar Rises in the East - Opportunities - EOS IntelligenceSolar Rises in the East - Our Perspective - EOS Intelligence

by EOS Intelligence EOS Intelligence No Comments

Utility-scale Projects to Boost Thai Solar Market

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In July 2015, Federation of Thai Industries’ renewable energy division indicated that Thailand is expected to add about 1,200-1,500 MW of solar capacity in 2015, which would require about THB 90 billion (~US$2.5 billion) of investment. Most of this capacity is expected to be installed through utility-scale solar PV projects.

This article is part of a series focusing on solar PV market across selected Asian countries: China, India, Thailand, and Malaysia.
The series closing article Solar Rises in the East examines challenges and opportunities in all four markets, with additional look into Indonesia and
The Philippines.

 

Market Overview

The development of solar market in Thailand can be traced back to 1993, when the solar PV installation was focused mainly on electrification of remote areas not connected to the grid. Between 1993 and 2011 a total of 1,756 systems, with a total solar power generation capacity of 3,905 kWp (output power achieved under full solar radiation conditions), were installed on schools, hospitals, community centers, military bases, national forests, and such other areas.

Thailand was one of the first Asian countries to pursue solar energy development by putting in place policy incentives. Introduction of feed-in premium or “adder” scheme for solar PV installations in 2006 attracted private investments in the sector (under the adder scheme, solar developers were offered premium/bonus in addition to basic electricity tariff, when selling electricity to power utilities).

The first commercial solar PV project was a 6 MW solar farm project, named Korat 1, built by SPCG which is now Thailand’s biggest solar power operator in terms of capacity. The project is located in Nakorn Ratchasima and has been operating since 2010. With continued support from Thai government and increasing participation of private investors, Thailand has become one of the fastest developing solar market in Southeast Asia. According to Thailand’s Ministry of Energy, by the end of December 2014, 294 solar farms had started selling 1.32 GW electricity to the grid, while 14 solar farms with total capacity of 296 MW had signed sales contracts but did not supply power yet.

This rapid development is largely attributable to Thai government’s support to solar PV industry to achieve its solar target: government of Thailand outlined a 10-year Alternative Energy Development Plan (AEDP: 2011-2021), with the aim to boost renewable energy output to account for 25% of the total energy consumption in Thailand by 2021. The target is to generate 13,927 MW of electricity from renewable sources by 2021, compared to 3,343 MW in mid-2013. Under AEDP, Thailand aims to achieve 3 GW of installed solar PV capacity by 2021.

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This appears to be a rather modest target considering that Thailand, being located in equatorial region, has abundant solar power potential. In 2012, Thailand Ministry of Energy – Department of Alternative Energy Development and Efficiency (DEDE) estimated country’s solar power potential at about 42,356 MW, with an average daily solar irradiation 18.2 Mega Joules per square meter (MJ/m2) per day. Northeastern region and certain areas in central region exhibit great potential for solar power generation.

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Key Growth Drivers

Commitment to develop a clean energy society

High dependence on natural gas for the country’s energy needs is affecting its energy mix. Natural gas has been Thailand’s primary source of energy for the past three decades. In 2014, 66.5% of country’s electrical power generation was fueled by natural gas. Moreover, country’s dependence on imported energy is high: Board of Investment of Thailand (BOI) indicated that about 67% of energy was purchased from overseas sources in 2012.

“As demand for electricity rises in Thailand, we believe that solar PV will play an increasingly important role in our energy mix, thanks to our country’s abundant solar resources.” – Mr. Soonchai Kumnoonsate, the Governor of Electricity Generating Authority of Thailand, 2014

Furthermore, Thailand encourages clean and environment friendly technologies in order to meet its obligations under Kyoto Protocol to reduce carbon emissions. Thailand is focusing on development of renewable energy sector, including solar PV, to strengthen country’s energy security.

Government incentives

Thai government provides several incentives to support the development of solar PV sector in the country

  • Financial Incentives

 

Thailand introduced adder program in 2006 to encourage participation of private sector in solar power generation. Approved projects received a premium of THB 8/kWh (~US$0.224/kWh) in addition to basic electricity tariff for a duration of ten years. The cost of adder payments was passed directly on to the end-consumers in the form of higher electricity bills. Considering the impact on end-consumers, in 2010, the premium was reduced to THB 6.5/kWh (~US$0.182/kWh). In 2010, the government temporarily stopped approving new projects under the scheme due to over subscription.

In 2013, Thailand introduced Feed-in Tariff (FiT) for rooftop solar PV projects and community ground-mounted solar PV projects.

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These financial incentives are not only expected to yield good returns on investment in solar projects, but they are also likely to help to reduce payback period. Thai Photovoltaic Industry Association (TPVA) estimates that the payback period in case of rooftop solar ranges from 7 to 10 years depending upon the size of the solar project, while in case of community ground-mounted solar projects, the payback period is 8 years for 1 MWp solar project and 7 years for 5 MWp solar project.

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  • Fiscal Incentives

 

Thailand Board of Investment actively promotes investment in renewable energy sector, including solar PV through several fiscal incentives:

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  • Financial Support

 

Besides incentives, the government also extends financial support for development of solar projects. The Energy Conservation Promotion Act 1992 (ENCON Act) established the ENCON Fund, which is Thailand’s primary source of public finance for renewable energy investment incentives and subsidies. A part of ENCON fund is allocated to revolving fund that offers low-interest loans for renewable energy projects (including solar projects) in cooperation with eleven banks in Thailand. DEDE developed ESCO (Energy Service Companies) fund in 2008, under the financial support from ENCON fund, to extend support in the form of venture capital funding, equity investment, equipment leasing, carbon credit facility, technical assistance, and credit guarantee facility.

Government’s constructive measures have helped to create conducive business environment for solar investors and developers.

Challenges

Regulatory uncertainty and loopholes in policy framework have affected investor’s confidence

A major difficulty with the adder scheme, introduced in 2006, was that the project approvals far exceeded the completed projects. Projects of over 2,000 MW were awarded under the scheme, but only about 800 MW solar capacity was installed at the end of November 2013. There were many speculative rather than realizable project applications, as there was no set timeline recommended or mandated for the completion of the proposed project after receiving approval under the adder scheme. This led government to introduce corrective measures such as termination provisions. In 2009, the government also introduced bid bonds in the form of security deposits of THB 200/kW (~US$5.6/kW) for project size greater than 100 kW. The security deposit was introduced to discourage those applicants who had intentions of revising and reselling power purchase agreements (PPAs) for a profit. Furthermore, the approval of new applications under the adder scheme was stopped in 2010.

Such frequent changes in policy framework have resulted in reduced investor confidence. Moreover, lack of transparency in the process of approval of the proposed solar projects raises concerns whether the scrutiny mechanisms are fair and independent of business interests. These issues may continue to have a negative impact the growth of solar PV development in Thailand.

 

Poor governance and inadequate planning stall community ground-mounted solar projects

With announcement of FiT for community ground-mounted solar projects, government planned to install 800 MW of combined solar capacity by the end of 2014, by installing one MW per village in Thailand. Financing was to be provided by a government bank, either Government Savings Bank or Bank for Agriculture and Agricultural Cooperatives. However, the scheme could not be implemented as it faced issues in raising the required finance for the projects due to political crisis in the country. In 2014, following the ouster of the last government under Prime Minister Yingluck Shinawatra in a coup, the military took control of the country. Amid uncertainties in the status of the interim government, the Government Savings Bank rejected the loan request of THB 48 billion (~US$1.34 billion) for community ground-mounted solar projects. In an effort to still achieve the proposed 800 MW target, community ground-mounted solar was transformed into Government and Agricultural Cooperative Program. Revised program encourages construction of solar farms with up to 5 MW in size in the form of public-private partnerships with the governmental sector or agricultural cooperatives. The proposed deadline for 800 MW quota under this program has been postponed to December 2015.

 

High up-front costs and insufficient FiT rate have impacted residential rooftop solar installations target

The Energy Regulatory Commission (ERC) of Thailand opened the first round of applications for residential rooftop solar PV FiT in October 2013 with a target to approve projects for total rooftop solar power generation of 100 MW. But the response was low, with only 33 MW of residential solar rooftop projects approved.

“In Thailand, 99% of the households that joined the solar feed-in tariff program are from the high-income segment. There has never been any inquiry or interest from customers in the middle-income household bracket.” – Dr. Dusit Krea-Ngam, Chairman of TPVA, September 2014

Subsequently, second round of applications was opened in February 2015, but applications for only 21.3 MW were received by May 2015. This low interest was partially attributed to higher than expected costs of developing power from solar energy in residential segment. In a media article released in May 2015, ERC Commissioner, Viraphol Jirapraditkul, emphasized that many people deem the FiT incentive insufficient as compared with the high investment required for installation of residential solar systems. Installation of solar rooftop systems involve high upfront cost, which is around THB 400,000 (~US$11,200) for a typical 5 kW solar PV system for residential usage in Thailand. This is a huge amount to shell out at once for people from middle income segment in Thailand. Hence, solar rooftop installation might remain a privilege only with higher income population in Thailand, unless third-party financing structures evolve to ease the need of out-of-pocket investment on installation of solar rooftop systems.

Opportunities

Developing solar market in Thailand offers ample opportunities for know-how and equipment producers from abroad

According to BOI, by first quarter of 2014, Thailand had only three companies manufacturing solar cells and modules using imported wafers, and another four assembling imported cells into modules. Local industry lacks expertise and competence to compete with the quality of solar PV modules from Germany or the USA, or with the price of solar PV modules from China. Thailand imports most of the equipment used in solar projects as the domestic supply does not meet the needs of expanding solar market. This could possibly create an unrest among domestic solar PV module industry, but as solar energy is high on Thai government’s agenda, imports of solar PV modules is likely to continue. Leading solar module producers from China, Japan, Taiwan, and Germany have already been able to tap considerable market in Thailand. Following is the list of some of the international companies whose solar PV modules have been installed in Thailand.

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Leading engineering, procurement and construction (EPC) companies see emerging market opportunity in Thailand

Solar developers in Thailand have been increasingly hiring leading international EPC firms owing to their experience and technical know-how. With push to realize the solar projects that have been approved for the FiT, a number of international EPC and project development firms have been able to rope in contracts to develop solar PV plants in Thailand. In October 2013, Conergy, a Germany-based EPC company having a joint venture with local company Annex Power, indicated to have a 20% market share in Thailand. The company has developed 70 MW with a further 100 MW in pipeline. Juwi, another Germany-based company, also has a strong presence in Thailand and it is developing 61 MW capacity solar PV projects. In 2014, Sharp, a Japanese company, signed EPC contract to construct a 52 MW solar PV plant in Thailand for Thai company Serm Sang Palang Ngan (SSP). Chinese EPC service providers, such as Anwell Technology and Yingli have also gained EPC contracts for development of solar projects in Thailand.

 

EOS Perspective

While rooftop solar market faces many challenges, the growth of Thai solar market is expected to be driven by utility-scale solar projects

Despite abundant potential for solar power generation, Thailand has set modest targets for solar PV development. In 2013, the share of solar power in Thailand’s total electricity generation (168,478 GWh) was only 0.553%. Under AEDP, Thai government targets only 3 GW of solar PV installation by 2021, though the country has the solar potential of around 42 GW.

Thai solar market is expected to exhibit high growth in the short term, owing to the uptake in utility-scale solar projects, till the government’s target for utility-scale solar PV installation is achieved. Government have approved PPAs for around 1 GW utility-scale solar projects in 2015. Thailand’s rapidly growing utility-scale solar market presents manifold opportunities for international solar companies with adequate experience and expertise.

Utility-scale solar PV installations accounted for 98.73% of grid-connected solar power in 2013, while expansion of the rooftop solar segment is still limited. In particular, development of residential rooftop solar market in Thailand has been sluggish and it will need more promotion and better incentives to shape up. The turnaround of solar rooftop market will largely depend on development of third-party financing structures to set up solar rooftop systems. Property developers have found unique business opportunity amidst challenging rooftop solar market. For instance, Prinsiri Plc, a Thai property developer, plans to invest in and install solar cells and other equipment for customers at its housing projects. The company will earn from electricity sold to the Metropolitan Electricity Authority (which supplies electricity to the Bangkok region) and as an incentive to home buyers, the company will not charge any common-area fees from them (common area is the area in the building that is available for use by all owners and tenants; common-area fees is the amount charged by the developer for upkeep and maintenance of common area). In June 2015, another Thai property developer, Sena Development PCL, signed a partnership deal with US-based First Solar and private equity firm Confidence Capital to develop a solar rooftop business in Thailand. Such business models, if successful, might change the scenario for Thai rooftop solar market. Moreover, it is yet to be seen whether public-private partnerships would be successful in achieving community ground-mounted solar targets.

The solar market in the country is currently witnessing interesting times. Utility-scale solar PV projects in Thailand are expected to drive the capacity build in 2015-2016, while further development of the Thai solar market is likely to depend on effective implementation of rooftop and community ground-mounted solar PV projects.

by EOS Intelligence EOS Intelligence No Comments

Universal Health Access in Southeast Asia – Bridging the Coverage Gap

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Affordable and accessible health care service is a common objective for governments across developed as well as developing nations.

Global trends suggest that generally countries, as they attain prosperity, tend to move towards a Universal Health Care (UHC)/ Social Health Insurance (SHI) regime, in which 100% population is provided with health care coverage (scope varies from country to country). There are some exceptions in the developed world, with the USA being an example.

In the Southeast Asian region, each country is at a different phase/stage regarding the implementation of universal health access. Several of these countries, such as Indonesia, Philippines, and Thailand, have implemented UHC (as a policy). The remaining countries in this region have various types of health insurance schemes to cover certain sections of the population, and are experimenting with some schemes to judge their effectiveness. It is expected that these countries will eventually work towards the common goal of achieving 100% UHC.

The following illustration captures the current health care sector situation (from UHC/SHI perspective) in four Southeast Asian countries (Cambodia, Indonesia, Philippines, Vietnam), and highlights few areas that require immediate attention in order to successfully manage universal health access for their citizens.


ASEAN UHC



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Details on country-specific social health insurance design and infrastructure:

by EOS Intelligence EOS Intelligence No Comments

Thailand – Is Just 100% Universal Healthcare Access Good Enough?

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Thailand has a well-developed healthcare system, as compared with most of the Asian countries. Majority of the health-related Millennium Development Goals (MDG) have been achieved, though a rapidly ageing population and the burden of non-communicable diseases remains a challenge for the public healthcare system. A better disease prevention mechanism, health promotion, and adequate primary care are some of the priorities of the Thai government in the healthcare sector.

This article is part of a series focusing on universal healthcare plans across selected Southeast Asian countries. The series also includes a look into the plans in The Philippines, Cambodia, Vietnam, Indonesia, and Thailand.

Thailand achieved Universal Healthcare Access (UHA) status in 2002 with the launch of health insurance benefits for 30% of the population that was outside the health insurance ambit till then.

Thailand boasts of world class medical facilities (especially in the private healthcare sector), and is among the world’s largest medical tourism markets. The government is looking to further develop Thailand into an “International Health Center for Excellence” under its second strategic five-year plan (2012-2016).

The plan focuses on four major areas: medical services, integrative wellness centers, development of Thai herbs, and traditional and alternative Thai medicines.

With almost 100% population already covered by UHA, and a reasonably developed healthcare infrastructure in place, the government’s focus is likely to be on improving the quality of healthcare services. This will create opportunities for the companies operating in the healthcare industry.

 

INFRASTRUCTURE
Key Stakeholders

  • The Ministry of Public Health (MoPH) is responsible for public healthcare services and for governing and regulating the healthcare industry, including healthcare-related NGOs, medical professionals, hospitals, and clinics. In a series of Decentralization Action Plan (1999, 2008, and 2012), responsibility for some of health facilities was delegated to local authorities at provincials (municipal and general hospitals) and sub-district level (health centres); However, the Thai healthcare system still remains highly centralized (and more dependent on public healthcare services).
Healthcare Service Delivery

  • Public healthcare service delivery system includes:

    • Primary Care: Community health posts and primary healthcare centres (village level) and health centres (sub-district level)
    • Secondary Care: Municipal health centres and community hospitals
    • Tertiary Care: Provincial and regional hospitals, and medical schools

  • At provincial and regional level, some of the hospitals are under the administration of other government bodies, such as the Army, Police, and Ministry of Education (MoE). All community hospitals and health centres in rural areas are operated by the MoPH. The healthcare infrastructure consist of the following:

    • Community Care Centers: ~50,000
    • Health Centers: ~10,000
    • Community Hospitals and Municipal Health Centers: ~ 1,000
    • Provincial Level Hospitals: ~ 200
    • Regional Level Hospitals: ~ 80
KEY CHALLENGES
Unequal Distribution of Services

  • Despite a well-developed healthcare infrastructure and almost 100% population coverage, inequalities still exist in terms of accessibility and quality of care

  • There is a variance in the geographical distribution of health workers and other resources; urban centres such as Bangkok have access to better quality healthcare as compared with the rural populace, which faces a shortage of clinical resources

Duplication of Efforts

  • Thailand’s healthcare sector consists of several stakeholders, including ministries, government agencies, and the local governments involved in management and financing of healthcare facilities. This has resulted in duplication of administrative systems (including payment, reporting, and monitoring), eventually leading to inefficiencies

 

DESIGN
Beneficiary Classification

  • In Thailand, the UHA covers the population not covered by

    • Civil Servant Medical Benefit Scheme (CSMBS) for government employees, pensioners, and their dependents
    • Compulsory Social Security Scheme (CSSS) for private employees or temporary public employees
    • Private Health Insurance (for individuals and private firms)
    • Once registered, people joining the UHA scheme receive a gold card to access services in their health district, and, if necessary, be referred for specialist treatment elsewhere
Healthcare Insurance Financing

  • Source of finances for different social health schemes is as follows:

    • UHA – general tax revenue
    • CSMBS – general tax
    • CSSS – premium (as a % of salary)
Payment System

  • The payment system varies according to the insurance scheme

    • UHA – The payment system is capitation-based for most of the services; and rest of the services, such as dental care are on fee-for-service basis; funding allocated to the contracting facilities for Primary Care are on a population basis
    • CSMBS – Outpatient services are on fee-for-service basis; inpatient services are on Diagnosis-related group (DRG) system (to classify hospital cases into groups to determine cost)
    • CSSS – the payment system is capitation-based for most of the services; and rest of the services, such as dental care are on fee-for-service basis
Benefits

  • The coverage is comprehensive in case of UHA and CSMBS and includes both inpatient and outpatient treatment. However, there are few conditions, such as:

    • UHA – Treatment available in contracted hospitals only; facilities, such as private bed and special nurses are not available
    • CSMBS – Private hospitals available in case of emergency care only; special nursing services not available
    • CSSS – Coverage is coverage is comprehensive except that it doesn’t include annual physical check-ups, and work-related illness and injuries
Co-payment (Reimbursement) System

  • At present no co-payment regime is applicable for UHA, however, 30-Baht co-payment (per service) is applicable to patients who receive prescriptions and are willing to pay. For the population covered by CSMBS and CSSS, co-payment system is applicable in case of emergency care.
Reimbursement System for Drugs

  • For UHA, CSMBS, and CSSS the drug benefit package is based on the National List of Essential Drugs (NELD), and the drugs can be reimbursed without any co-payment. Drugs used under CSMBS’ out-patient fee-for-service system, and not listed in NELD, are reimbursed.
KEY CHALLENGES
Absence of Unified Scheme

  • Theoretically, UHA is for the entire Thai population; however, two other health financing schemes for the government and formal sector private employees operate in parallel wherein the benefits differ from one another. E.g. variance in expenditure per patient, access to healthcare facilities, co-payment regime, and access to special care. It is a challenge for the government to achieve equality in the quality and range of services, which arise due to social health insurance specific policies

Funding Constraints

  • Due to changing disease profile (e.g. prevalence of chronic diseases and an aging population), Thailand is witnessing increasing cost of healthcare thereby putting burden on UHA, which is entirely funded through taxation. The government needs to look at the cost saving options e.g. payment system for healthcare facilities and procurement of drugs and equipment, to ensure the long term viability of UHA

 

Opportunities for Healthcare Companies

Healthcare Service Providers

  • Thailand has a better (as compared with most of the countries in Asia) developed healthcare system with a majority of the healthcare services being delivered by the public network. At present, it appears limited scope for the private providers, as they also are mostly concentrated in the urban centres while there is a greater need (at least at primary and secondary level) in non-urban areas

  • However, private providers can look for collaboration opportunities in areas/aspect that add value to pre-existing service set-up. For example in the field of mobile healthcare, telemedicine etc.

Medical Device Manufacturers

  • There is significant growth potential for the medical device companies, as the country’s universal healthcare system continues to support healthcare initiatives. Demand for medical devices is further anchored by the government’s efforts to develop the country into an Asian medical hub

  • Public hospitals continue to be the main user of medical equipment. Opening of new health facilities would also create demand for equipment and devices

Pharmaceuticals Companies

  • The government encourages the use of drugs listed in the National List of Essential Medicines, all of which are fully reimbursed by the three major public health insurance schemes

  • However, the government may review health expenditure pattern and reimbursement policies amid changing demographic profile (i.e. more senior citizens) leading to increased focus on cost-effective healthcare services. This may create better opportunities for generics and low-cost drugs

A Final Word

Thailand’s UHA scheme has largely been a success, and a model for other countries to follow. The scheme provides coverage to a large informal sector, which is a challenging task in itself. The benefit package, which includes curative as well as preventive services, is comprehensive.

The country has demonstrated efficiency in UHA implementation with satisfactory outcomes in terms of meeting healthcare needs of the society, and in attempts towards offering equitable health. A relatively better developed healthcare network and relevant administrative experience helped in achieving the desired results.

Leaving behind the past successes, UHA would be required to gear-up for the challenges ahead. For instance, the country needs to plan for changing disease profile i.e. an increased burden from Non-communicable Diseases (NCDs). This may have cost implications for UHA (and opportunities for the healthcare industry participants) in terms of accommodating suitable interventions and planning for adequate preventive measures at primary, secondary, and tertiary care level. It is expected that the country will witness more activity with respect to qualitative improvement in healthcare services, as compared with geographical expansion of services.

A comparative with other countries in the region should provide a better perspective on the actual potential of Thailand as a prospective destination for devices and drugs companies alike.

by EOS Intelligence EOS Intelligence No Comments

A Dragon Unfurls its Wings – How China’s Economic Slowdown Is Rippling Through Emerging Markets

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Almost 10 years ago, Goldman Sachs published a report, in which it predicted Chinese GDP to overtake the USA’s GDP by 2020. Today, this prognosis looks like a far-fetched dream as China has recently been riding a wild economic horse. When Chinese economy was growing, its demand for various products and services contributed to the economic growth of emerging markets across the world. The deteriorating performance of Chinese economy over the past few years appears to have started adversely affecting these markets. Will the emerging markets be able to successfully sustain in future?

China witnessed a spectacular and continued rise of its GDP during major part of last three decades. However, end of 2007 saw a turning point, and the country’s economic growth rate cooled off from 14.2% still in 2007 down to 9.6% in 2008, reaching mere 7.4% in the first quarter of 2014. This single digit growth would be more than satisfactory for a lot of economies. However, for China, which regularly recorded double digit rates, this extended period of slower growth is disappointing, with some calling it as ‘an end of an era’.

For years, China was enjoying relentless economic growth through massive investments, exemplary rise in exports, as well as abundance of labor force which was available at low wages. Due to these factors, economists started referring to China’s economic growth model as an investment-and-export driven model. This model has played a key role in driving exports also from emerging markets such as Latin America, Asia, and Middle East, as there was substantial demand for commodities from China’s end to support its domestic consumption as well as export requirements. With the weakening of foreign demand and internal consumption, China’s export demands have considerably weakened, leading to declining prices of export-related commodities and resulting in an adverse impact on emerging markets’ GDPs.

Is the Slowdown for Real?

China’s economic slowdown has not only been reflected in its modest GDP growth figures, but also in several other negative trends that have been observed. These include a continuous decline in the percentage of fixed-asset investments as a part of China’s GDP. Investments contracted from 24.8% in 2007 to 19.6% in 2013. Reduction of fixed-asset investments is likely to negatively contribute towards a country’s economic slowdown by adversely affecting sectors such as real estate, infrastructure, machinery, metals, and construction.GDP

Moreover, yuan has depreciated against US dollar (with average exchange rate of 7.9 in 2006 down to 6.26 in April 2014). In addition to this, Purchasing Managers’ Index (PMI), which is a composite index of sub-indicators (production level, new orders, supplier deliveries, inventories, and employment level), has plunged from 52.9 in 2006 to 48.3 in April 2014, below the middle value (50), thus indicating some contraction of China’s manufacturing industry. This industry contributes significantly to China’s GDP, therefore, the industry’s deterioration has a direct adverse effect on China’s economy.

This negative twist in China’s economic growth story is believed to be a result of a synergetic effect of various internal and external factors, some of which include:

  • Over-reliance on abundant supply of low-cost labor. For decades, China has based its growth on production of goods requiring high amount of cheap manual labor. However, as the economy continued growing, the demand for higher wages has increased, pumping up the labor cost. This cost is contributing to the inflation of products’ export prices, which is ultimately translating to a lower demand of Chinese goods.

  • The focus of Chinese workforce has been shifting from rural agriculture to urban manufacturing. The government has been taking steps to propel this transition in order to boost economic growth, prosperity, and industrialization. As more and more Chinese moved to urban areas, gradually, the transition has started yielding diminishing returns mainly due to saturation in the manufacturing industry.

  • Europe has also played a villainous role in China’s story. It has been one of China’s largest export markets but has recently been extending a significantly low demand for commodities and products from China. In 2007, the European Union accounted for 20.1% of all the exports from China. This percentage has fallen to 16.3% in 2012.

Chinese Leaders React

The Chinese government is in a reactive mode and has been unveiling a plethora of actions to bolster growth. The overall approach looks conservative in nature with a targeted GDP growth of 7.5% for this year, after recording a growth of 7.7% in 2013.

In an attempt to improve the situation, some of the expected financial and fiscal reforms are in the pipeline. Liberalizing bank deposit rates and relaxing entry barriers for private investment are some of the moves to be implemented by 2020. Various property measures (such as relaxing home purchase rules, providing tax subsidies, or cutting down payments) are planned to be introduced (based on local demands and conditions prevailing in a particular city) in order to balance the property market as a whole. A target of creating 10 million new jobs in Beijing has also been set for 2014. The underlying motive of all the rescue measures is strengthening the Chinese economy’s reliance on domestic consumption and services.

Influence on Emerging Markets

Undoubtedly, swing of the Chinese economy towards consumption and services is expected to considerably affect all the connected economies, several of them being emerging markets economies (EMEs). Commodity producing emerging markets such as Latin America, Middle East, parts of Africa and Asia are likely to be affected. Within this group, metal producers will probably suffer the most, as China had a significant demand for iron ore, steel, and copper during its investment boom phase. Within this subgroup, economies which are running current account deficits are forecast to be more susceptible to the ill-effects of China’s economic slowdown.

As China tilts towards domestic consumption, Latin America has started to witness a dawdling growth as the region’s growth rate dropped from an average of 4.3% in the period of 2004-2011 to 2.6% currently. For instance, as Chile depends heavily on copper exports to sustain its economic expansion, the country has been regularly reporting sluggish growth rates (5.8%, 5.9%, and 5.6% in 2010, 2011, and 2012, respectively) due to the decline in the price of copper, largely fueled by a lower demand from China. In addition to this, Brazil and Mexico are struggling to survive through falling benchmark stock indexes. The fall is mainly due to declining prices of commodities, as exports to China from Brazil and Mexico have weakened.

Middle East will probably register both positive and negative effects of China’s economic slowdown. One of the ill-effects could be reduction in oil prices, from US$140 per barrel in 2008 to approximately US$80 per barrel by the end of 2014, due to China’s lower demand of oil. On the positive side, Middle East is strengthening its position as an attractive region with long-term growth since China is being considered as a slightly less attractive option for investment by a majority of investors. This is mainly due to Middle East’s good infrastructure and accelerated development of industries such as defense, chemical, and automotive, and not only traditionally developed energy and petrochemicals.

The impact on African countries is expected to be negative primarily due to declining commodity prices. As Africa’s growth substantially depends on its exports to China, some African commodity exporters, such as Zambia, Sudan, and Angola, have started to feel the strain as China’s demand for commodities is weakening. This weakened demand has led to lower prices of commodities such as aluminum, copper, and oil, which registered a y-o-y decline by 4%, 9.5%, and 5.4%, respectively in January 2013. Zambia is likely to receive the strongest hit as copper constitutes almost 80% of the country’s total exports and reduction in copper prices could make its current account deficit to account for almost 4% of GDP in 2014.

Effect of China’s economic slowdown will vary from country to country in case of Asia. Countries such as Indonesia and Philippines, which have significant domestic demand, would be less adversely affected as they are less dependent on commodities exports to China. China’s unstable economy has spurred new investments in other growing Asian economies such as Cambodia. India is also likely to benefit from the ability to import oil at lower prices, which are pushed down by China’s weakened demand for oil. At the same time, however, export of cotton and metals such as copper and iron ore from India to China is dampened, adversely affecting India’s economy.

While EMEs have already been witnessing a lower demand from their traditional trading partners such as European Union and the USA, China’s slowdown will be an added burden to their economies.
China's Impact


It’s Touch and Go

It is rather evident that Chinese economic slowdown is having an adverse impact on emerging countries across Africa, Asia, and Latin America. One can hope that the measures taken by the Chinese leadership to curtail the slowdown will soon start taking effect and gradually lift up the economy, and in doing so, control the extent of damage spilling over many emerging countries and their economies.

In the event that the Chinese economy is unable to recover from this period of slowdown soon, it will continue to be a terrible blow to the economic ambitions of several emerging markets, especially those in Africa and parts of Asia-Pacific, which are heavily reliant on Chinese investment and trade relations.

Simultaneously to absorbing fewer production inputs imported from emerging countries, it is worth noting that China’s role in world economics might start to alter as it transforms to a consumption-led economy. This transformation is likely to slowly increase China’s appetite for imports of products and services, apart from traditional commodities-focused imports. It will be interesting to observe whether and how some of the emerging economies will attempt to satisfy this new Chinese hunger for goods extending beyond simple commodities.

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