• SERVICES
  • INDUSTRIES
  • PERSPECTIVES
  • ABOUT

    • Who We Are

      We support businesses in their strategic decisions on growth and optimization

      Who We Are

    • Connect With Us

      let’s connect to discuss how we could support your intelligence needs

      Contact

    • Work With EOS

      We are researchers – curious, knowledge-hungry, and eager to solve problems

      Work With Us
  • Search
  • ENGAGE

USA

Home USA

by EOS Intelligence EOS Intelligence No Comments

Is ChatGPT Just Another Tech Innovation or A Game Changer?

ChatGPT, a revolutionary AI-based conversational chatbot has been making headlines around the world. The AI-based tool can answer user queries and generate new content in a human-like way. By automating tasks such as customer support and content creation, ChatGPT has the potential to revolutionize many industries, resulting in a more efficient digital landscape and an enhanced user experience. However, the technology is not without its risks and poses a number of issues such as creating malicious content, copyright infringement, and other moral issues. Despite these challenges, the possibilities for ChatGPT are infinite, and with the advancement of technology, the opportunities it presents will only continue to expand.

ChatGPT is an AI-based question-and-answer chatbot that responds to user queries in a conversational way, just like how humans respond. OpenAI, a US-based research and development company, launched ChatGPT in November 2022. Since then, ChatGPT has garnered increased attention and popularity worldwide. The tool surpassed over 1 million users within five days and 100 million users within two months of launch.

ChatGPT has become popular due to its capability of answering queries in a simple and conversational manner. The tool can perform various functions such as generating content for marketing campaigns, writing emails, blogs, and essays, debugging code, and even solving mathematics questions.

OpenAI’s ChatGPT works on the concept of generative AI and uses a language model called GPT3 – a third-generation Generative Pre-trained Transformer. The AI chatbot has been fed with about 45 terabytes of text data on a diverse range of topics from sources such as books, websites, and articles and has been trained on a set of algorithms to understand relationships between words and phrases and how it is used in context. This way, the model is able to develop an understanding of languages and generate answers. ChatGPT uses a dialog format, asks follow-up questions for clarification, admits mistakes, and is capable of dismissing inappropriate or dangerous requests.

ChatGPT also has a simple user interface allowing communication through a plain textbox just like a messaging app, thus making it easy to use. Currently, ChatGPT is in beta testing, and users can use it for free to try and provide feedback. However, the free version is often inaccessible and out of capacity due to the increasing traffic.

In February 2023, OpenAI launched a pilot subscription plan named ChatGPT Plus, starting at US$20 per month, which is available to its customers in the USA. The subscription plan provides access to ChatGPT even during peak times and provides prior access to any new features. OpenAI is also testing ChatGPT to generate videos and pictures using its DALLE image-generating software, which is another AI tool developed by OpenAI to create art and images from text prompts. OpenAI also plans to launch a ChatGPT mobile app soon.

How could ChatGPT help businesses?

One of the most impactful areas where ChatGPT can make a difference is customer support. The AI tool can handle a large volume of consumer queries within a short time frame and give accurate responses, which can boost work efficiency and reduce employees’ workload.

In addition, the tool can also be employed to answer sales-related queries. By training ChatGPT to understand product information, pricing, and other details, businesses can provide a seamless sales experience for customers. ChatGPT can also analyze user data and behavior and can assist customers to find the products they are looking for, and give product recommendations leading to a more tailored and enjoyable shopping experience. ChatGPT can be incorporated into websites to engage visitors and help them find the information they need, which can help in lead generation.

Another potential benefit of ChatGPT is its ability to automate content generation. ChatGPT can generate unique and original content quickly, making it an effective tool for creating marketing materials such as email campaigns, blogs, newsletters, etc.

ChatGPT could be used in a number of industries such as travel, education, real estate, healthcare, information technology, etc. For instance, in the tech industry, ChatGPT can write programs in specific programming languages such as JavaScript, Python, and React, and can be very helpful to developers to generate code snippets and for code debugging.

In healthcare, the tool can be used in scheduling appointments, summarizing patient’s health information based on previous history, assisting in diagnostics, and for telemedicine services.

In the education sector, ChatGPT can be used to prepare teaching materials and lessons and for providing personalized tutoring classes.

These are just a few applications of ChatGPT. As the generative technology continues to evolve, there may be many other potential applications that can help businesses achieve their goals more efficiently and effectively.

Is ChatGPT Just Another Tech Innovation or A Game Changer by EOS Intelligence

ChatGPT’s output may not be always accurate

While ChatGPT offers several benefits and advantages, the tool is not without limitations. ChatGPT works on pre-trained data that cannot handle nuances or other ambiguities and thus may generate answers which are incorrect, biased, or inappropriate.

Moreover, ChatGPT is not connected to the internet and cannot refer to an external link to respond to queries that are not part of its training. It also does not cover the news and events after 2021 and cannot provide real-time information.

Another major limitation is that the tool is often out of capacity due to the high traffic, which makes it inaccessible. There are also other potential risks associated with these generative AI tools. Some of the threats include writing phishing emails, copyright infringement, generating abusive content or malicious software, plagiarism, and much more.

ChatGPT is not the first or only AI chatbot

While ChatGPT has garnered most of the attention in the last few months, it is neither the first nor the only AI-based chatbot in the market. There are many AI-based writers and AI chatbots in the market-already. These tools vary in their applications and have their own strengths and weaknesses.

For instance, ChatSonic, first released in 2020, is an AI writing assistant touted as the top ChatGPT alternative. This AI chatbot is supported by Google, has voice dictation capabilities, can generate up-to-date content, and can also generate images based on text prompts. However, ChatSonic has word limits in its free as well as paid versions, which makes it difficult for users who need to generate large pieces of text.

Similarly, Jasper is another AI tool launched in 2021, which works based on the language model (GPT-3) similar to ChatGPT. Jasper can write and generate content for blogs, videos, Twitter threads, etc., in over 50 language templates and can also check for grammar and plagiarism. Jasper AI is specifically built for dealing with business use cases and is also faster and more efficient and generates more accurate results than ChatGPT.

YouChat is another example, developed in 2022 by You.com, and running on OpenAI GPT-3. It performs similar functions as ChatGPT – responding to queries, solving math equations, coding, translating, and writing content. This chatbot cites source links of the information and acts more like an AI-powered search engine. However, YouChat lacks an aesthetic appeal and may generate results that are outdated at times.

ChatGPT-styled chatbots to power search engines

While a lot of buzz has been created about this technology, the impact of AI-based conversational chatbots is yet to be seen on a large-scale. Many proclaim that tools such as ChatGPT will replace the traditional search method of using Google to obtain information.

However, experts argue that it is highly unlikely. While AI chatbots can mimic human-like conversation, they need to be trained on massive amount of data to generate any kind of answers. These tools work on pre-trained models that were fed with large amounts of data sourced from books, articles, websites, and many more resources to generate content. Hence, real-time learning and answering would be cost-intensive in the long run.

Moreover, ChatGPT’s answers may not always be comprehensive or accurate, requiring human supervision. ChatGPT may also not be very good at solving logical questions. For instance, when asked to solve a simple problem – “RQP, ONM, _, IHG, FED, find the missing letters”, ChatGPT answered incorrectly as “LKI”. Similarly, when provided a text prompt “The odd numbers in the group 17, 32, 3, 15, 82, 9, 1 add up to an even number”, the chatbot affirmed it, which is false. Moreover, the AI chatbot does not cover news after 2021, and when asked “Who won the 2022 world cup?” ChatGPT said the event has not taken place.

On the other hand, Google uses several algorithms to rank web pages and gives the most relevant web results and comprehensive information. Google has access to a much larger pool of data and the ability to analyze it in real-time. Additionally, Google’s ranking algorithms have been developed over years of research and refinement, making them incredibly efficient and effective at delivering high-quality results. Therefore, while AI chatbots can be useful in certain contexts, they are unlikely to replace traditional search methods, such as Google.

However, leading search engines are looking to incorporate ChatGPT into their search tools. For instance, Microsoft is planning to incorporate ChatGPT 4, a faster version of the current ChatGPT version into its Bing Search engine. Since 2019, the company has invested about US$13 billion in OpenAI, the parent company of ChatGPT.

In February 2023, Microsoft also incorporated ChatGPT into its popular office software Teams. With this, users with Teams premium accounts will able to generate meeting notes, access recommended tasks, and would be able to see personalized highlights of the meeting using ChatGPT. These add immense value to the user.

In February 2023, China-based e-commerce company, Alibaba also announced its plan to launch its own AI chatbot similar to ChatGPT. Similarly, Baidu, a China-based internet service provider, launched a chatbot named “Ernie” in its search engine in March 2023.

Amidst the increasing popularity of ChatGPT, Google has also started working on a chatbot named “Bard” based on its own language model, Lambda. The company is planning to launch more than 20 new AI-based products in 2023. In February 2023, Google invested about US$400 million in Anthropic AI, a US-based artificial intelligence startup, which is testing a new chatbot named Claude. Thus, the race of building an effective AI-enabled search engine has just begun and things have to unfold a bit to know more about how chatbots can modify web search.

On the other hand, AI technologies such as ChatGPT are sure to leave an impact on how businesses operate. With the global economy slowing down, resulting in low business margins, many businesses are looking to cut down costs to increase profitability.

ChatGPT could be extremely beneficial to companies looking to automate various business tasks such as customer support and content generation. The tool can be integrated into channels, including websites and voice assistants. While this sounds beneficial, there is also a likelihood of the technology displacing some jobs such as customer service representatives, copywriters, research analysts, etc.

However, ChatGPT will not be replacing the human workforce completely since many business tasks require creative and critical thinking skills and other traits such as empathy and emotional intelligence that only humans have. This technology is expected to pave way for new opportunities in various fields such as software engineering and data analysis and allow employees to focus on more value-added tasks instead of routine, mundane tasks, ultimately boosting productivity.

EOS Perspective

With their remarkable ability to generate human-like conversations and high-quality content, generative AI tools, such as ChatGPT, are sure to be touted as a game-changer for many businesses. The advancements in generative AI are expected to have a significant impact on various business tasks such as customer support, content creation, data analysis, marketing and sales, and even decision-making.

Investors are slowly taking note of the immense potential the technology holds. It is estimated that generative AI start-ups received equity funding totaling about US$2.6 billion across 110 deals in 2022, which echoes an increasing interest in the technology.

The adoption of generative AI technologies is poised to increase, especially in business processes where a human-like conversation is desirable. Industries such as e-commerce, retail, and travel are likely to embrace this technology to automate customer service tasks, reduce costs, and increase efficiency. In addition, generative AI is likely become an indispensable part of industries such as finance and logistics, where high levels of accuracy and precision are required. Media and entertainment companies can also benefit from this technology to quickly generate content such as articles, videos, and audio.

That being said, generative AI is not without its risks and the technology could be used to create fake and other discriminatory information. Hence, there is an inevitable need to ensure that generative AI models are trained and deployed in an ethical and responsible manner. Despite these challenges, there is increased research and significant activity going on in the field of generative AI, especially with regards to combining the capabilities of chatbots and traditional search engines.

The current chatbots will continue to evolve and will lead to the creation of even more advanced and sophisticated models. The popularity of generative AI tools such as ChatGPT is unlikely to wane, and the technology is here to stay, with the potential to create better prospects for business and a brighter future for society.

by EOS Intelligence EOS Intelligence No Comments

Powering Healthcare Diagnostics with AI: a Pipe Dream or Reality

369views

The growing paucity of radiologists across the globe is alarming. The availability of radiologists is extremely disproportionate globally. To illustrate this, Massachusetts General Hospital in Boston, USA, had 126 radiologists, while the entire country of Liberia had two radiologists, and 14 countries in the African continent did not have a single radiologist, as of 2015. This leads to a crucial question – how to address this global unmet demand for radiologists and diagnostic professionals?

Increasing capital investment signals rising interest in AI in healthcare diagnostics

The global market for Artificial Intelligence (AI) in healthcare diagnostics is forecast to grow at a CAGR of 8.3%, from US$513.3 million in 2019 to US$825.9 million in 2025, according to Frost & Sullivan’s report from 2021. This growth in the healthcare diagnostics AI market is attributed to the increased demand for diagnostic tests due to the rising prevalence of novel diseases and fast-track approvals from regulatory authorities to use AI-powered technologies for preliminary diagnosis.

Imaging Diagnostics, also known as Medical Imaging is one of the key areas of healthcare diagnostics that is most interesting in exploring AI implementation. From 2013 to 2018, over 70 firms in the imaging diagnostics AI sector secured equity funding spanning 119 investment deals and have progressed towards commercial beginnings, thanks to quick approvals from respective regulatory bodies.

Between 2015 and 2021, US$3.5 billion was secured by AI-enabled imaging diagnostics firms (specialized in developing AI-powered solutions) globally for 290 investment deals, as per Signify Research. More than 200 firms (specialized in developing AI-powered solutions) globally were building AI-based solutions for imaging diagnostics, between 2015 and 2021.

The value of global investments in imaging diagnostics AI in 2020 was approximately 8.8% of the global investments in healthcare AI. The corresponding figure in 2019 was 10.2%. The sector is seeing considerable investment at a global level, with Asia-based firms (specialized in developing AI-powered solutions) having secured around US$1.5 billion, Americas-based companies raising US$1.2 billion, and EMEA-based firms securing over US$600 million between 2015 and 2021.

As per a survey conducted by the American College of Radiology in 2020 involving 1,427 US-based radiologists, 30% of respondents said that they used AI in some form in their clinical practice. This might seem like a meager adoption rate of AI amongst US radiologists. However, considering that five years earlier, there were hardly any radiologists in the USA using AI in their clinical practice, the figure illustrates a considerable surge in AI adoption here.

However, the adoption of AI in healthcare diagnostics is faced with several challenges such as high implementation costs, lack of high-quality diagnostic data, data privacy issues, patient safety, cybersecurity concerns, fear of job replacement, and trust issues. The question that remains is whether these challenges are considerable enough to hinder the widespread implementation of AI in healthcare diagnostics.

Powering Healthcare Diagnostics with AIPowering Healthcare Diagnostics with AI

AI advantages help answer the needs in healthcare diagnostics

Several advantages such as improved correctness in disease detection and diagnosis, reduced scope of medical and diagnosis errors, improved access to diagnosis in areas where radiologists are unavailable, and increased workflow and efficacy drive the surge in the demand for AI-powered solutions in healthcare diagnostics.

One of the biggest benefits of AI in healthcare diagnostics is improved correctness in disease detection and diagnosis. According to a 2017 study conducted by two radiologists from the Thomas Jefferson University Hospital, AI could detect lesions caused by tuberculosis in chest X-rays with an accuracy rate of 96%. Beth Israel Deaconess Medical Center in Boston, Massachusetts uses AI to scan images and detect blood diseases with a 95% accuracy rate. There are numerous similar pieces of evidence supporting the AI’s ability to offer improved levels of correctness in disease detection and diagnosis.

A major benefit offered by AI in healthcare diagnostics is the reduced scope of medical and diagnosis errors. Medical and diagnosis errors are among the top 10 causes of death globally, according to WHO. Taking this into consideration, minimizing medical errors with the help of AI is one of the most promising benefits of diagnostics AI. AI is capable of cutting medical and diagnosis errors by 30% to 40% (trimming down the treatment costs by 50%), according to Frost & Sullivan’s report from 2016. With the implementation of AI, diagnostic errors can be reduced by 50% in the next five years starting from 2021, according to Suchi Saria, Founder and CEO, Bayesian Health and Director, Machine Learning and Healthcare Lab, Johns Hopkins University.

Another benefit that has been noticed is improved access to diagnosis in areas where there is a shortage of radiologists and other diagnostic professionals. The paucity of radiologists is a global trend. To cite a few examples, there is one radiologist for: 31,707 people in Mexico (2017), 14,634 people in Japan (2012), 130,000 people in India (2014), 6,827 people in the USA (2021), 15,665 people in the UK (2020).

AI has the ability to modify the way radiologists operate. It could change their active approach toward diagnosis to a proactive approach. To elucidate this, instead of just examining the particular condition for which the patient requested medical intervention, AI is likely to enable radiologists to find other conditions that remain undiagnosed or even conditions the patient is unaware of. In a post-COVID-19 era, AI is likely to reduce the backlogs in low-emergency situations. Thus, the technology can help bridge the gap created due to radiologist shortage and improve the access to diagnosis of patients to a drastic extent.

Further, AI helps in improving the workflow and efficacy of healthcare diagnostic processes. On average at any point in time, more than 300,000 medical images are waiting to be read by a radiologist in the UK for more than 30 days. The use of AI will enable radiologists to focus on identifying dangerous conditions rather than spend more time verifying non-disease conditions. Thus, the use of AI will help minimize such delays in anomaly detection in medical images and improve workflow and efficacy levels. To illustrate this, an AI algorithm named CheXNeXt, developed in a Stanford University study in 2018 could read chest X-rays for 14 distinct pathologies. Not only could the algorithm achieve the same level of precision as the radiologists, but it could also read the images in less than two minutes while the radiologists could read them in an average of four hours.

Black-box AI: A source of challenges to AI implementation in healthcare diagnostics

The black-box nature of AI means that with most AI-powered tools, only the input and output are visible but the innards between them are not visible or knowable. The root cause of many challenges for AI implementation in healthcare diagnostics is AI’s innate character of the black box.

One of the primary impediments is tracking and evaluating the decision-making process of the AI system in case of a negative result or outcome of AI algorithms. That is to say, it is not possible to detect the fundamental cause of the negative outcome within the AI system because of the black-box nature of AI. Therefore, it becomes difficult to avoid such occurrences of negative outcomes in the future.

The second encumbrance caused by the black-box nature of AI is the trust issues of clinicians that are hesitant to use AI applications because they do not completely comprehend the technology. Patients are also expected to not have faith in the AI tools because they are less forgiving of machine errors as opposed to human errors.

Further, several financial, technological, and psychological challenges while implementing AI in healthcare diagnostics are also associated with the black-box nature of the technology.

Financial challenges

High implementation costs

According to a 2020 survey conducted by Definitive Healthcare, a leading player in healthcare commercial intelligence, cost continues to be the most prominent encumbrance in AI implementation in diagnostics. Approximately 55% of the respondents who do not use AI pointed out that cost is the biggest challenge in AI implementation.

The cost of a bespoke AI system can be between US$20,000 to US$1 million, as per Analytics Insights, while the cost of the minimum viable product (a product with sufficient features to lure early adopters and verify a product idea ahead of time in the product development cycle) can be between US$8,000 and US$15,000. Other factors that also decide the total cost of AI are the costs of hiring and training skilled labor. The cost of data scientists and engineers ranges from US$550 to US$1,100 per day depending on their skills and experience levels, while the cost of a software engineer (to develop applications, dashboards, etc.) ranges between US$600 and US$1,500 per day.

It can be gauged from these figures that the total cost of AI implementation is high enough for the stakeholders to ponder upon the decision of whether to adopt the technology, especially if they are not fully aware of the benefits it might bring and if they are working with ongoing budget constraints, not infrequent in healthcare institutions.

Technological challenges

Overall paucity of availability of high-quality diagnostic data

High-quality diagnostic and medical datasets are a prerequisite for the testing of AI models. Because of the highly disintegrated nature of medical and diagnostic data, it becomes extremely difficult for data scientists to procure the data for testing AI algorithms. To put it in simple terms, patient records and diagnostic images are fragmented across myriad electronic health records (EHRs) and software platforms which makes it hard for the AI developer to use the data.

Data privacy concerns

AI developers must be open about the quality of the data used and any limitations of the software being employed, without risking cybersecurity and without breaching intellectual property concerns. Large-scale implementation of AI will lead to higher vulnerability of the existing cloud or on-premise infrastructure to both physical and cyber attacks leading to security breaches of critical healthcare diagnostic information. Targets in this space such as diagnostic tools and medical devices can be compromised by malware or software viruses. Compromised data and algorithms will result in errors in diagnosis and consequently inaccurate recommendations of treatment thereby causing stakeholders to refrain from using AI in healthcare diagnostics.

Patient safety

One of the foremost challenges for AI in healthcare diagnostics is patient safety. To achieve better patient safety, developers of AI algorithms must ensure the credibility, rationality, and transparency of the underlying datasets. Patient safety depends on the performance of AI which in turn depends on the quality of the training data. The better the quality of the data, the better will be the performance of the AI algorithms resulting in higher patient safety.

Mental and psychological challenges

Fear of job substitution

A survey published in March 2021 by European Radiology, the official journal of the European Society of Radiology, involving 1,041 respondents (83% of them were based in European countries) found that 38% of residents and radiologists are worried about their jobs being cut by AI. However, 48% of the respondents were more enterprising and unbiased towards AI. The fear of substitution could be attributed to the fact that those having restricted knowledge of AI are not completely educated about its shortcomings and consider their skillset to be less up-to-date than the technology. Because of this lack of awareness, they fail to realize that radiologists are instrumental in developing, testing, and implementing AI into clinical practice.

Trust issues

Trusting AI systems is crucial for the profitable implementation of AI into diagnostic practice. It is of foremost importance that the patient is made aware of the data processing and open dialogues must be encouraged to foster trust. Openness or transparency that forges confidence and reliability among patients and clinicians is instrumental in the success of AI in clinical practice.

EOS Perspective

With trust in AI amongst clinicians and patients, its adoption in healthcare diagnostics can be achieved at a more rapid pace. Lack of it breeds fear of job replacement by the technology amongst clinicians. Further, scarcity of awareness of AI’s true potential as well as its limitations also threatens diagnostic professionals from getting replaced by the technology. Therefore, to fully understand the capabilities of AI in healthcare diagnostics, clinicians and patients must learn about and trust the technology.

With the multitude and variety of challenges for AI implementation in healthcare diagnostics, its importance in technology becomes all the more critical. The benefits of AI are likely to accelerate the pace of adoption and thereby realize the true potential of AI in terms of saving clinicians’ time by streamlining how they operate, improving diagnosis, minimizing errors, maximizing efficacy, reducing redundancies, and delivering reliable diagnostic results. To power healthcare diagnostics with AI, it is important to view AI as an opportunity rather than a threat. This in turn will set AI in diagnostics on its path from pipe dream to reality.

by EOS Intelligence EOS Intelligence No Comments

Commentary: Is Privatization Key to Self-sustainability for US Post?

United States Postal Service (USPS), one of the largest government entities in the USA with over 633,000 employees as of 2019, has been bleeding red ink on its financial statements for many years now, causing a worry that it might soon need a bail-out with tax-payers money. While majority of the crisis at USPS stems from several regulatory and legislative restrictions, privatization could help USPS to transform its business to align with changing market dynamics in the digital age and to secure sustainable future.

USPS is in dire need of a revamp

USPS, the largest postal system in the world, is feared to be gradually moving towards financial instability as the revenues are not able to meet the operational costs and liabilities.

USPS’ financial woes began with enactment of the Postal Accountability and Enhancement Act (PAEA) in 2006 which required USPS to create a US$72 billion reserve (equivalent to cost of employee post-retirement pension and health benefits during next 75 years) over a 10-year period from 2007 to 2016. This mandate added a huge financial burden and USPS has been registering losses every year since.

The situation is dire, as clearly stated in USPS’ five-year strategic plan (2020-2024), released in January 2020, highlighting the grim financial condition of the organization:

We have an underfunded balance sheet, significant debt, and insufficient cash to weather unforeseen cyclicality or changes in business conditions…we expect to run out of liquidity by 2021 if we pay all our financial obligations – and by 2024 even if we continue to default on our year-end, lump sum retiree health-benefit and pension related payments.

On February 5, 2020, US House of Representatives passed the US Fairness Act which repeals the prefunding mandate under 2006 legislation, thus, relieving USPS from financial burden of amassing huge reserves to fund retirement benefits. The reform does not exempt USPS from its obligations to its retired employees, but allows them to fund the costs on pay-as-you-go basis, a practice followed by most other government agencies and majority of private businesses in the USA. This bill still needs to be approved by the US Senate.

Even if the US Fairness Act becomes a law after being approved by the US Senate and the president, it does not seem to end all the challenges faced by USPS. The business has taken a major hit due to changing market dynamics with the rise of the Internet.

USPS’ largest revenue segment, i.e. First-Class Mail services, which include the delivery of letters, postcards, personal correspondence, bills or statements of account, as well as payments, has seen about 43% drop in volume between 2007 and 2019. This is because the mode of communication has changed drastically as email, mobile, social media, other tech-based platforms allow Americans to talk to one another instantaneously and mostly for free.

Marketing Mail, which includes advertisements and marketing packages, is another category that also took a hit because of the rise of digital media. Marketing Mail volume declined by more than one-fourth over the same period.

The package delivery service has experienced multi-fold increase with the rise of e-commerce, but it also faces growing competition from private players such as UPS or FedEx as well as e-commerce giants such as Amazon that are rapidly building and expanding their own network.

Due to the prefunding retirement benefit mandate, USPS has not been able to invest in new products and infrastructure since 2006. Rather than expanding its capabilities to capitalize on the new market opportunities, USPS had to take aggressive cost control measures and restricted investment in new service offerings, technology, and training.

Moreover, the coronavirus pandemic is adding to the woes of the agency. Though there has been an increase in online orders for medicines and food, the volume of letter mail, organization’s largest revenue stream, has seen a decline. Marketing mail category business has also gone down as a lot of companies have stopped advertising through mail. In April 2020, Congressman Gerry Connolly indicated that the mail volume could decline up to 60% by the end of the year. Further, USPS is facing a spike in expenses due to provision of necessary support and additional benefits to its workforce affected by the virus. In April 2020, Megan Brennan, then postmaster general, hinted that coronavirus-related losses could reach US$13 billion in this fiscal year.

USPS needs structural transformation to meet the demands of the digital age. USPS’ five-year strategic plan (2020-2024) emphasized that despite taking all possible measures such as cost control, technology upgradation, and service improvement, financial loses are likely to continue in absence of legislative and regulatory reforms.

Privatization to provide USPS with path towards self-sustainability?

Being a government entity, USPS is subject to many regulatory and legislative constraints which makes it less competitive than its private counterparts such as FedEx or UPS. For instance, under Universal Service Obligation, USPS is required to service all areas across the country six days a week. If privatized, USPS will be able to reduce the frequency of delivery on as-needed basis to optimize operations and control costs.

Similarly, USPS is legally obligated to serve all Americans, and hence closing down of any branches generally cause public uproar as locals in the remote and rural areas demand their right to postal service. A post office closure process takes at least 120 days during which affected public can appeal the decision. As per USPS’ five-year strategic plan (2020-2024) released in January 2020, about 36% of the retail post office locations are retained despite being unprofitable. Unlike private entities, USPS cannot easily close or consolidate underperforming non-profit facilities, a fact that adds to the financial strain for the organization.

Moreover, the pricing of the postal service, which ideally needs to be a business decision based on the cost structure and profit margins, is controlled by the US government. USPS needs approval from the government for making any changes in pricing of its products. While for private entities pricing is part of routine business decision-making, for USPS, unreasonable federal controls and limitations make it difficult to adopt a market-oriented pricing strategy for the services that USPS provides.

It is also to be noted that the average compensation offered by the USPS to it employees is higher than what private-sector workers receive. A study conducted by US Treasury found that, for 2017, the average employee costs at USPS was US$85,800, compared to US$76,200 at UPS and US$53,900 at Fed Ex. About fourth-fifth of the USPS workforce is unionized which means that salary increases occur through collective bargaining agreements. While disputes are resolved in binding arbitration, the financial health of USPS is often not given due consideration in the process. USPS could save significant costs by adopting private-sector labor and compensation standards.

Further, USPS is legally required to invest funds for retirement benefits only in treasury bonds which yield very low interest. The idea of conservatively investing retirement funds to avoid risk is reasonable, but the interest earned is too low compared to other investment returns commonly achieved by private entities. Thus, despite having large reserves, USPS is legally prohibited to make sound investment in debt and equity markets which could potentially yield higher returns.

Privatization and breaking away from these limitations would allow USPS to at least attempt to optimize its operations, amend service standards, provide more pricing flexibility, and earn greater return on investments.

EOS Perspective

Time and again, US president Donald Trump has proposed privatization of USPS to make it self-sustainable and profitable. Many countries across the world have illustrated how privatization of the postal service could be a success. For instance, a European Commission report tracking development in the postal sector between 2013 and 2016 indicated that post-privatization postal services were able to diversify their revenue sources, reduce the labor costs, upgrade technology and infrastructure, close unprofitable facilities, and improve delivery frequency based on demand – all the measures which USPS needs to take. Thus, privatization could potentially help USPS to transform its business towards self-sustainability.

It can be argued that upon privatization, USPS may lose certain privileges it enjoys as a government entity. For instance, at present, USPS is exempt from all government taxes, but if privatized, USPS will be subject to federal, state, as well as local taxes. USPS boasts huge workforce operating more than 31,000 post offices using 204,274 delivery vehicles as of 2019. When USPS is opened to competition, it will have the distinct advantage due to its wide-spread delivery network and last-mile delivery capabilities. From market point of view, levying taxes on USPS may actually create a level-playing field for all the postal delivery firms promoting healthy competition. This will in turn prove to be good for the overall development of the sector.

If the idea of USPS privatization floats through, e-commerce companies and retailers such as Amazon and Walmart could be interested in acquiring a majority stake. As the e-commerce business grows, such companies are investing billions of dollars in building logistics network and capabilities to acquire larger market share. Moreover, they already rely on USPS for last-mile delivery. For instance, as per a Morgan Stanley report released in 2018, Amazon accounted for about a quarter of USPS package business. Thus, USPS’ large delivery network and resources offer a great value proposition to these companies.

by EOS Intelligence EOS Intelligence No Comments

Iran’s Tourism Industry Sprouts despite US Sanctions

545views

For several years, the US sanctions on Iran continued to have a detrimental impact on the economic growth of the country, with tourism sector being severely affected throughout the period under sanctions. The 2016 sanctions removal brought many visible changes to the development of the country, with hopes for tourism industry to benefit from the potential influx of travelers and new opportunities for the industry players.

Iran’s tourism was severely affected by the US sanctions

Iran was in a quivering state for more than 35 years owing to the never-ending political tensions with the USA post the 1979 Iranian Revolution. This led to no formal diplomatic relationships between the countries since 1980, and considerable sanctions imposed on Iran over the years. The impact of these sanctions was visible through a range of profound economic problems such as inflation, unemployment, poverty, and underdevelopment of virtually all industries in the country.

One sector that faced severe repercussions of the sanctions was Iran’s tourism industry. A negative image of the country was reinforced by the mainstream media as a flag-burning, west-hating nation, a fact that caused a major dent to Iran’s tourism industry. Adding to it, lack of resources to tackle this negative discourse had further left Iran in an international isolation over all these years. Despite being rich in culture, natural history and landscapes, a country with such an image could not persuade foreign tourists to visit.

Moreover, the US sanctions drastically affected Iran’s economy, which resulted in lack of proper resources to establish a well-equipped transportation sector, including airlines, trains, and buses, which in turn led to Iran becoming even less attractive to tourists. In addition, lack of proper hospitality infrastructure such as hotels, restaurants, roads, etc., further negatively impacted international tourists’ interest in Iran. Adding to it, the US sanctions also created greater tensions between Iran and the USA which led the US government to issue a travel advisory over all these years, which restricted its citizens to travel to Iran due to safety risks, such as getting kidnapped or arbitrary arrest and detention in the country. Thus, this resulted in almost no tourist from the western countries visiting Iran.

Iran’s tourism sector did witness a very modest growth over the years, largely thanks to pilgrimage tourism visiting the shrines and originating mostly from regional countries such as Iraq, Azerbaijan, and Turkey.

According to The World Bank data, the number of international tourists’ arrivals in Iran fluctuated, increasing from 2.7 million in 2006 to just 4.9 million visitors in 2014. Iran’s tourism industry was suffering particularly badly not only from the lack of arrivals of American tourists, but generally more affluent, well-spending tourists from western hemisphere, who were universally deterred by sanctions, poor state of the tourism infrastructure, as well as the negative image of the country created by international media.

According to official figures by Iran’s Culture Heritage Organization, during the sanctions period, tourism sector contributed around 2.0% to the country’s GDP (an average of US$7.5 billion in a year), leading to sluggish infrastructural development throughout that period. Iranian tourism sector’s hopes for change and better growth started budding when Iran signed a nuclear deal with six countries in July 2015, an event that led to the US sanctions being finally lifted.

The nuclear deal came as a ray of hope

Even before the US government removed the sanctions, the country started witnessing a slight increase in the number of foreign visitors. This was thanks to the nuclear deal signed between Iran and a group of six countries (the permanent members of the United Nations Security Council – Russia, France, UK, USA, and China, plus Germany) and the EU in July 2015. The deal included Iran’s commitment to restricting its nuclear activities, agreeing to keep check on the uranium stockpile, among other agreements.

The deal immediately mellowed down Iran’s negative image and released a positive message of lowered risks associated with visiting the country. This gave a slight boost to the tourism sector with a moderate growth of 4.5% with 5.2 million foreign tourists visiting the country in 2015, the highest arrivals number till date.

Another upward push on the growth trajectory came the following year, when the US government removed sanctions from Iran in January 2016, as part of the nuclear deal. This was expected to have a major impact on tourism sector as it offered hope for much needed economic stimulation, along with investments and development in the economy, and tourism sector in particular.

Iran’s Tourism Industry Sprouts despite US Sanctions by EOS Intelligence

Post lifting of sanctions, tourism sector rejoiced with developments

The nuclear deal and removal of sanctions brought growth to the tourism sector, owing to removal of restrictions on imports of financial and transportation-related services. As a result, some European airlines, such as British Airways and Lufthansa, resumed direct flights to the country. As visa requirements were increasingly relaxed, tourists from western countries started to arrive. This in turn slowly raised the demand for accommodation leading to skyrocketing prices of hotel rooms. These changes finally generated higher income for local businesses such as hotels, restaurants, tourist guides, local transportation providers, and other players in the market. Iranians excitedly welcomed foreign tourists, including the Americans, along with the positive outlook for the sector’s growth.

The Iranian government, following the sanctions removal, initiated efforts to attract foreign investments with a clear agenda of reducing Iran’s oil dependency and boost the country’s economy, by betting on increasing revenues from tourism sector.

The initiatives included the launch of a scheme called “100 Hotels, 100 Businesses” that outlined 174 projects to be introduced to investors interested in hotel construction. This is was an ambitious scheme led by the Iranian government focusing on bringing the hotel industry of the country back on track. This scheme aimed at attracting investments for the construction of 100 hotels across 31 provinces with priority given to most popular regions such as Tehran, Kashan, or Mashhad. Also, through this scheme, the government focused on initiating joint ventures with foreign companies, benefiting both the government and foreign investors.

The government also announced other major plans for the development of tourism industry. These included creating regulations to facilitate investment, creating brands of hotels and restaurants, promoting new types of tourism such as sports, climate, and industrial tourism, developing knowledge-based human resources, creating a comprehensive system of standards, balancing inbound and outbound tourism by improving political relations, and creating a system for the protection and restoration of historical and natural sites.

The Iranian government further assured about the transfer of capital and profits overseas as per the foreign investment law of the country and full protection for the investors against any non-commercial risks such war or border conflict, confiscation or corruption, etc.

The government also started working on changing the image of the country and its tourism industry in the eyes of potential foreign visitors. One major change to this was to allow increased access to the internet, e.g. over social media, for the local players, which gave the restrained westerners a far greater insight into the country without the filters added from the mainstream media.

These efforts undertaken by the Iranian government were welcomed by several foreign investors, as they brought a sense of encouragement and stability to prospects of investing in the country.

This soon led to emergence of international hotel chains, the first being Novotel (296 rooms) and Ibis (196 rooms) hotels by the French hospitality company Accor which came to Tehran already in 2015. The company’s chief executive Mr. Bazin, at the launch of the venture, was optimistic in bringing up the chain of budget hotels such as Ibis and mid and upmarket hotels such as Novotel, Sofitel, and Pullman in 20 cities of Iran, but with no particular timeline given. Another hotel that came up in 2017 was Spanish Melia in Caspian Sea in 2017, built in partnership of Melia and its Iranian partners in Tehran, where the Iranians invested more than US$250 million while the management is taken over by Melia. The hotel includes 319 luxurious rooms, two residential towers, a sports center, and other services in an area of 18,000 square meters. Similarly, the Abu Dhabi’s Rotana Management Corporation planned to open four hotels in Iran’s major cities, Tehran and Mashhad, two in each. One of the hotels (a five-star hotel with 275 rooms and suites in Mashhad) was built within one year in 2017.

Overall, investments in the tourism sector started growing at a moderate level post the removal of US sanctions. According to World Tourism and Travel Council (WTTC) data on the capital investments in Iran’s tourism sector, 2016 witnessed an investment of US$2.75 billion contributing 3.25% of all investments in the country, as compared to the investment of US$2.63 billion in 2015. Since then, capital investments have been growing and are estimated to reach US$3.75 billion in 2028 with a share of 4.86% of all investments.

As a result of increased investments and rise in tourism sector, the GDP of the country also witnessed a slight growth. According to WTTC data, tourism industry’s share in the country’s GDP increased to 7.1% in 2015 contributing US$26.04 billion, up from 6.5% (US$24.38 billion) in 2014. However, it stabilized in the following years (6.8% in 2016, 6.4% in 2017, and 6.5% in 2018), with expected contribution to GDP of 6.52% amounting to US$35.39 billion by 2028. With developments in the tourism sector, the ministry of tourism is hoping to host nearly 20 million tourists per year by 2025.

But as the country started seeing benefits of the sanctions removal, with its improved economy thanks to rise in export and import, infrastructural developments, increase of foreign investments from 2016 to mid-2018, and boost in tourism sector and many other industries, the US government shocked the country by re-imposing sanctions in August 2018. The re-imposition was a consequence of the USA withdrawing its participation from the nuclear deal in May 2018 over political differences. This brought a blow to the Iranian economy with restrictions over imports and exports, thus again leaving Iran in economic struggle due to recession through shrinking oil exports.

EOS Perspective

The economic trembles coming from crude oil export ban led the Iranian government to increase its focus on tourism industry to offset the lost revenues. While American tourists are again restricted to travel to Iran, the country is still witnessing an increased influx of tourists from other regions, including the Middle East and Asia, a fact that cushions the impact of re-imposed sanctions.

Although a blessing in disguise for Iran, one of major reasons for the rise in tourism despite the US sanctions was the almost threefold fall of Iranian currency against US dollar which made travelling to Iran a low-cost affair for many foreign tourists, especially in comparison to other Middle Eastern destinations. This has contributed to the foreign tourists’ influx especially from the western countries – tourists with budget constraints as well as tourist arriving for medical tourism purposes. At the same time, the fall in rial value against the US dollar increased travel expenses for Iranians going overseas. This has constrained the outbound tourism, resulting in a decrease of 6.5% during 2018 (March 21- June 21 of Iranian Calendar).

The weakening of the currency was just one of the reasons that contributed to the slight growth in the Iran’s tourism sector, despite the US sanctions. The country continued to communicate its selling points and positive image to foreign audiences. Iran has been working on reinforcing its position as destination of religious pilgrimages, place with improved infrastructure, natural landscape, and cultural history. Through these messages on social media, the country seems to have attracted various sorts of tourists, from leisure travelers to artists to businessmen and more, resulting in growth of the industry.

According to deputy minister of the Cultural Heritage, Handicrafts and Tourism of Iran, the number of tourists’ arrivals increased by 24% during the first seven months of 2019 (starting from March 21 as per Iranian Calendar) compared to the same period previous year. In terms of tourists’ arrivals numbers, between March 2018 to March 2019, Iran witnessed 7.8 million foreign tourists visiting the country as compared to 4.7 million tourists from March 2017 to March 2018.

Encouraged by the growth in the sector, Iranian government undertook further initiatives to ensure the inflow of foreign visitors continues (and increases). In August 2019, a functionalized center was established in Cultural Heritage, Handicrafts and Tourism Organization, with a task to make decisions on reducing the negative impact of the US sanctions on tourism industry.

Following the US State Department’s warning (issued in May 2018) against travelling to Iran, citing it being an unsafe travel destination, the risk of fall of other western tourists’ arrivals increased. The Iranian government, to compensate for the fall, focused more on attracting tourists from regional countries. For instance, visa fees for Iraqi tourists (accounting for 24% of inbound tourists in 2018) were removed, while visas for Omanis were waived off.

Iran is also looking for tourists in more remote markets, especially in countries that are known to frequently stand against the USA in the international area. China is one such market which Iran is hoping to attract leisure tourism from by allowing visa-free entry of the Chinese nationals into Iran as of July 2019. Iran has an ambitious plan to increase the number of Chinese visitors from just over 50,000 in 2018 to 2 million in 2020.

Furthermore, in order to encourage foreign tourists to visit Iran, the Iranian government decided not to stamp their passports to help them avoid issues with subsequent attempts to travel to the USA. Additionally, the government is also trying to spur medical tourism by developing health tourism hubs, especially in Shiraz with a vision to increase the tourists travel for medical purposes as well.

These measures have been quite successful in promoting Iranian tourism growth, even though the American and other western visitors have (to some extent) been replaced with arrivals from the Middle Eastern and Asian countries. However, looking at the current situation of unrest, with the killing of Iranian general Qassem Soleimani in January 2020 by US military, and Iran responding to this with missile attacks on the US military troops in Iraq less than a week later, the conflict between the two countries is nowhere near its end. This political unrest, if continues, has a potential to again severely affect Iran’s tourism industry, as the country will be unable to grow the sector without reliance on western visitors. Tourists’ sentiments are tightly linked to political climate; therefore, it can be expected that only improved relations with the USA, and through this a better image, will allow Iran to truly develop its tourism industry and its economic situation in general.

Global Economy Bound to Suffer from Coronavirus Fever
by EOS Intelligence EOS Intelligence No Comments

Global Economy Bound to Suffer from Coronavirus Fever

Global economy has slowed down in response to coronavirus. Factories in China and many parts of Europe have been forced to halt production temporarily as some of the largest manufacturing hubs in the world battle with the virus. While the heaviest impact of the virus has been (so far) observed in China, global economy too is impacted as most industries’ global supply chains are highly dependent on China for small components and cheaper production rates.

China is considered to be the manufacturing and exporting hub of the world. Lower labor costs and advanced production capabilities make manufacturing in China attractive to international businesses. World Bank estimated China’s GDP in 2018 to be US$13.6 trillion, making it the second largest economy after the USA (US$20.58 trillion). Since 1952, China’s economy has grown 450 fold as compared with the growth rate of the USA economy. International trade and investment have been the primary reason for the economic growth of the country. This shows China’s strong position in the world and indicates that any disturbances in the country’s businesses could have a global effect.

On New Years’ Eve 2019, an outbreak of a virus known as coronavirus (COVID-19) was reported in Wuhan, China to the WHO. Coronavirus is known to cause respiratory illness that ranges from cough and cold to critical infections. As the virus spreads fast and has a relatively high mortality rate, the Chinese government responded by quarantining Wuhan city and its nearby areas on January 23, 2020. However, this did not contain the situation. In January 2020, WHO designated coronavirus a “public health emergency of international concern” (PHEIC), indicating that measures need to be taken to contain the outbreak. On March 11, 2020, WHO called coronavirus a pandemic with the outbreak spreading across about 164 countries, infecting more than 190,000 people and claiming 7,800+ lives (as of March 18, 2020).

Coronavirus threatening businesses in China and beyond

Businesses globally (and especially in China) are feeling the impact of coronavirus. Workers are stuck in their homes due to the outbreak. Factories and work places remain dormant or are running slower than usual. Also, the effects of coronavirus are spreading across the globe. Initially, all factory shutdowns happened in China, however, the ripple effects of the outbreak can now be seen in other parts of the world as well, especially Italy.

Automotive industry

Global automobile manufacturers, such as General Motors, Volkswagen, Toyota, Daimler, Renault, Honda, Hyundai, and Ford Motors, who have invested heavily in China (for instance, Ford Motor joined ventured with China’s state-owned Chongqing Changan Automobile Company, Ltd., one of China’s biggest auto manufacturers) have shut down their factories and production units in the country. According to a London-based global information provider IHS Markit, Chinese auto industry is likely to lose approximately 1.7 million units of production till March 2020, since Wuhan and the rest of Hubei province, where the outbreak originated, account for 9% of total Chinese auto production. While the factories are reopening slowly (at least outside the Wuhan city) and production is expected to ramp up again, it all depends on how well the outbreak is contained. If the situation drags on for few months, the auto manufacturers might face significant losses which in turn may result in limited supply and price hikes.

American, European, and Japanese automobile manufacturers, among others, are heavily dependent on components supplied from China. Low production of car parts and components in China are resulting in supply shortages for the automakers globally. UN estimates that China shipped close to US$35 billion worth of auto parts in 2018. Also, according to the US Commerce Department’s International Trade Administration, about US$20 billion of Chinese parts were exported to the USA alone in 2018. A large percentage of parts are used in assembly lines that are used to build cars while remaining are supplied to retail stores. Supply chain is crucial in a connected global economy.

Coronavirus outbreak poses a risk to the global automotive supply chain.

South Korea’s Hyundai held off operations at its Ulsan complex in Korea due to lack of parts that were supposed to be imported from China. The plant manufactures 1.4 million vehicles annually and the shutdown has cost approximately US$500 million within just five days of shutting down. However, Hyundai is not the only such case. Nissan’s plant in Kyushu, Japan adjusted its production due to shortage of Chinese parts. French automaker Renault also suspended its production at a plant in Busan, South Korea due to similar reasons. Fiat Chrysler predicts the company’s European plant could be at risk of shutting down due to lack of supply of Chinese parts.

However, very recently, automobile factories in China have started reopening as the virus is slowly getting contained in the region. While Volkswagen has slowly started producing in all its locations in China, Nissan has managed to restart three of its five plants in the country.

That being said, auto factories are facing shutdowns across the world as coronavirus becomes a pandemic. Ford Chrysler has temporarily shut down four of its plants in Italy as the country becomes the second largest affected nation after China.

Automobile supply chains are highly integrated and complex, and require significant investments as well as a long term commitment from automobile manufacturers. A sudden shift in suppliers is not easy. The virus is spreading uncontrollably across Europe now and if France and Germany are forced to follow Italy’s footsteps of shutting down factories to contain its spread, this will spell doom for the auto sector as the two countries are home to some of the biggest automobile manufacturers in the world.

Technology industry

China is the largest manufacturer of phones, television sets, and computers. Much of the consumer technologies from smartphones to LED televisions are manufactured in China. One of the important sectors in the technology industry is smartphones.

The outbreak of coronavirus is bad news for the technology sector, especially at the verge of the 5G technology roll-out. Consumers were eagerly waiting for smartphone launches supporting 5G but with the outbreak, the demand for smartphones has seen a decline. According to the China Academy of Information and Communications Technology, overall smartphone shipments in China fell 37% year over year in January 2020.

Foxconn, which is a China-based manufacturing partner of Apple, has iPhone assembling plants in Zhengzhou and Shenzhen. These plants, which make up a large part for the Apple’s global iPhone assembly line, are currently facing a shortage of workers that will ultimately affect the production levels of iPhone in these factories. According to Reuters, only 10% of workers resumed work after the Lunar New Year holiday in China. As per TrendForce, a Taiwanese technology forecasting firm, Apple’s iPhone production is expected to drop by 10% in the first quarter of 2020.

Moreover, Apple closed down all its retail stores and corporate offices in the first week of February 2020 in China in response to the outbreak. On March 13, 2020, it reopened all of its stores in China as the outbreak seems to be under control. However, while Apple seems to recover from the outbreak in China, it is equally affected by store shutdowns in other parts of the world (especially Europe). On March 11, Apple announced that all stores in Italy will be closed until further notice. Italy has been hit by the virus hard after China. The Italian government imposed a nationwide lockdown on the first week of March 2020.

On the other hand other multinational smartphone giants such as LG, Sony Mobile, Oppo, Motorola, Nokia, and many others have delayed their smartphone launches in the first quarter of 2020 due to the outbreak.

The coronavirus outbreak is more likely to be a disaster for smartphone manufacturers relying on China.

Other sectors such as LCD panels for TVs, laptops, and computer monitors are mostly manufactured in China. According to IHS Markit, there are five LCD factories located in the city of Wuhan and the capacity at these factories is likely to be affected due to the quarantine placed by the Chinese government. This is likely to force Chinese manufacturers to raise prices to deal with the shortage.

According to Upload VR, an American virtual reality-focused technology and media company, Facebook has stopped taking new orders for the standalone VR headset and also said the coronavirus will impact production of its Oculus Quest headset.

Shipping industry

In addition to these sectors, the new coronavirus has also hit shipping industry hard. All shipping segments from container lines to oil tanks have been affected by trade restrictions and factory shutdowns in China and other countries. Shipyards have been deserted and vessels are idle awaiting services since the outbreak.

According to a February 2020 survey conducted by Shanghai International Shipping Institute, a Beijing based think-tank, capacity utilization at major Chinese ports has been 20%-50% lower than normal and one-third of the storage facilities were more than 90% full since goods are not moving out. Terminal operations have also been slow since the outbreak in China. The outbreak is costing container shipping lines US$350 million per week, as per Sea-Intelligence, a Danish maritime data specialist.

According to Sea-Intelligence, by February 2020, 21 sailings between China and America and 10 sailings in the Asia-Europe trade loop had been cancelled since the outbreak. In terms of containers, these cancellations encompass 198,500 containers for the China-America route and 151,500 boxes for the Asia-Europe route.

Moreover, shutting down of factories in China has resulted in a manufacturing slowdown, which in turn is expected to impact the Asian shipping markets. European and American trade is also getting affected as the virus spreads to those continents. US retailers depend heavily on imports from China but the outbreak has caused the shipping volumes to diminish over the first quarter.

The USA is already in the middle of a trade war with China that has put a dent in the imports from China. National Retail Federation (world’s largest retail trade association) and Hackett Associates (US based consultancy and research firm) projects imported container volumes at US seaports is likely to be down by 9.5% in March 2020 from 2019. The outbreak is heavily impacting the supply chains globally and if factory shutdowns continue the impact is more likely to be grave.

Read our other Perspectives on US-China tensions: Sino-US Trade War to Cause Ripple Effect of Implications in Auto Industry and Decoding the USA-China 5G War

Other businesses

In addition to the auto, technology, and shipping industries, other sectors are also feeling the heat from the outbreak. Under Armour, an American sports clothing and accessories manufacturer, estimated that its revenues are likely to decline by US$50-60 million in 2020 owing to the outbreak.

Disney’s theme parks in California, Shanghai, Tokyo, and Hong Kong have been shut down due to the outbreak and this is expected to reduce its operating income by more than US$175 million by second quarter 2020.

Further, IMAX, a Canadian film company, has postponed the release of five films in January 2020, due to the outbreak.

Several fast food chains have been temporarily shut down across China and Italy, however, most of them have opened or are in the process of reopening in China as the outbreak is slowly coming under control there. While the global fast food and retail players have limited exposure in China, they are suffering huge losses in Europe, especially Italy. The restaurant sector is severely impacted there, where all restaurants, fast food chains, and bars have been shut down temporarily till April 3 in an attempt to contain the outbreak.

Another significantly affected industry is the American semiconductor industry as it is heavily connected to the Chinese market. Intel’s (a US-based semiconductor company) Chinese customers account for approximately US$20 billion in revenue in 2019. Another American multinational semiconductor and telecommunications equipment company, Qualcomm draws approximately 47% of its revenue from China sales annually. The outbreak is making its way through various industries and global manufacturers could now see how much they have become dependent on China. Although the virus seems to be getting under control as days pass, the businesses are not yet fully operational. Losses could ramp up if the virus is not contained soon.

Global Economy Bound to Suffer from Coronavirus Fever by EOS Intelligence

 

Housebound consumers dealing with coronavirus

Since the virus outbreak, people across many countries are increasingly housebound. Road traffic in China, Italy, Iran, and other severely affected countries has been minimized and public places have been isolated. People are scared to go out and mostly remain at home. This has led local businesses such as shopping malls, restaurants, cinemas, and department stores to witness a considerable slowdown, while in some countries being forced to shut down.

TV viewing and mobile internet consumption on various apps have increased after the outbreak. According to QuestMobile, a research and consultancy firm, daily time spent with mobile internet rose from 6.1 hours in early January 2020 to 6.8 hours during Lunar New Year (February 2020).

While retail outlets and other businesses are slower, people have turned to ordering products online. JD.com, a Chinese online retailer, reported that its online grocery sales grew 215% (year on year) to 15,000 tons between late January and early February 2020. Further, DingTalk, a communication platform developed by Alibaba in 2014, was recorded as the most downloaded app in China in early February 2020.

EOS Perspective

International businesses depend heavily on Chinese factories to make their products, from auto parts to computer and smartphone accessories. The country has emerged as an important part in the global supply chain, manufacturing components required by companies globally. The coronavirus outbreak has shaken the Chinese economy and global supply chains, which in turn has hurt the global economy, the extent of which is to be seen in the months to come. Oxford Economics, a global forecasting and analysis firm, projected China’s economic growth to slip down to 5.6% in 2020 from 6.1% in 2019, which might in turn reduce the global economic growth by 0.2% to an annual rate of 2.3%.

A similar kind of outbreak was seen in China in late 2002 and 2003, with SARS (Severe Acute Respiratory Syndrome) virus. China was just coming out of recession in 2003 and joined the World Trade Organization, attaining entrance to global markets with its low cost labor and production of cheaper goods. The Chinese market was at its infancy at that time. As per 2004 estimates by economists Jong-Wha Lee and Warwick J. McKibbin, SARS had cost the global economy a total of about US$40 billion. After SARS, China suffered several months of economic retrenchment.

The impact of coronavirus on Chinese as well as global economy seems to be much higher than the impact of SARS, since COVID-19 has spread globally, while China has also grown to be the hub for manufacturing parts for almost every industry since the SARS outbreak. In 2003, China accounted for only 4% of the global GDP, whereas in 2020, its share in the global GDP is close to 17%.

Currently, the key challenge for businesses would be to deal with and recover from the outbreak. On the one hand, they need to protect their workers safety and abide by their respective governments’ regulations, and on other hand they need to safeguard their operations under a strained supply chain and shrunken demand.

In the current landscape, many businesses in China have reopened operations but the outbreak is rapidly spreading to other parts of the world (especially Europe and the USA), where it is impacting several business as well as everyday lives. The best thing for manufacturing companies in this scenario is to re-evaluate their inventory levels vs revised demand levels (which may differ from industry to industry), and consider a short-term re-strategizing of their global supply chains to ensure that raw materials/components or their alternates are available and accessible – bearing in mind their existing production capability with less workers and customer needs during this pandemic period.

With the rapid spread of the virus, it seems that the outbreak is likely to cause considerable damage to the global economy (both in terms of production levels as well as psychological reaction on stock markets), at least in the short term, i.e. next 6 months. However, many experts believe that the situation should soon start coming under control at a global level. For instance, some experts at Goldman Sachs, one of the world’s largest financial services companies, believe that while this pandemic will bring the lowest growth rate of the global GDP in the last 30 years (expected at 2% in 2020), it does not pose any systematic risks to the world’s financial system (as was the case during the 2008 economic crisis).

Having said that, it is difficult to estimate what real impact the coronavirus will have on the global economy yet, and if opinions such as Goldman Sachs’ are just a way to downplay the situation to keep the investors calm. It is more likely to depend on how long the virus continues to spread and linger and how effectively do governments around the world are able to contain it.

by EOS Intelligence EOS Intelligence No Comments

Growing Appetite for Plant-Based Foods Disrupts the Meat Market

987views

Not many years ago, veganism or consumption of only plant-based foods, was considered an extreme form of lifestyle. Food options that were available for vegans were very limited and meat alternatives were based mainly on tofu, tempeh, and nuts. However, this is not the case anymore. Not only has the mindset regarding vegan food changed in the recent times, but also plant-based alternatives have become the fastest growing food category in the USA. This is also driven by a greater number of meat eaters experimenting with plant-based meat alternatives, whether due to health benefits, growing awareness regarding animal cruelty, or environmental reasons. Moreover, tremendous amount of investment and research in this space has resulted in wide range of food options, including vegan cheese and vegan meats that taste similar to animal-based proteins.

Vegan food has been around for quite some time now, but it was largely considered to be a niche market having a separate shelf in the supermarkets or being served in vegan-only restaurants and cafes. Moreover, it was considered an extreme lifestyle by many. However, over recent years, vegan meal options have found their way into the mainstream, with more and more people embracing veganism and meat-eaters adding plant-based food options in their diet. This is clearly evident from the steep growth witnessed by this food category, especially in the western world.

As per a study commissioned by the Good Food Institute (GFI) and the Plant Based Food Association in the USA, the retail market for plant-based foods was valued at about US$4.5 billion in April 2019, registering a year-on-year increase of about 11% and a growth of 31% in the two-year period from April 2017 through April 2019. The largest segment of vegan food market in the year ending April 2019 was the plant-based milk segment, which comprised about 40% of sales (US$1.9 billion). This category witnessed a y-o-y increase of about 6%. To put this in further perspective, animal-derived milk sales for the same period declined by 3%. While plant-based meat alternatives, cheeses, yogurts, eggs, and creamers are relatively new and smaller categories, they are driving growth in the vegan food segment too.

The growing sales across most vegan food segments indicate a momentous shift towards a vegan diet, which is not only propelled by an increasing number of people turning purely vegan but also a rise in meat eaters that prefer plant-based alternatives in some food categories, such as milk and milk-based products. This is due to growing lactose intolerance among consumers, with about 65% of the world’s population estimated to be lactose intolerant. The environmental benefits (i.e. lower carbon footprint) of maintaining a vegan diet and a growing uproar regarding animal cruelty have also driven conscious consumers to adopt a vegan lifestyle.

The environmental benefits (i.e. lower carbon footprint) of maintaining a vegan diet and a growing uproar regarding animal cruelty have also driven conscious consumers to adopt a vegan lifestyle.

The trend is further supported by the launch of vegan meat substitutes that resemble meat products in taste, look, and even texture. US-based players, Impossible Foods and Beyond Meat, are leading this space with the latter having received investments from the likes of Bill Gates, Leonardo DiCaprio, and Twitter co-founders Biz Stone and Evan Williams.

Industry players are diversifying into plant-based foods

Understanding that this trend is more than just a fad, several food companies (including large meat producers) have started entering this space, by either buying or investing in plant-based food start-ups.

Tyson Foods, USA’s leading meat producer, invested in Beyond Meat in 2016 and 2017, by acquiring a 6.52% stake in the company. However, in April 2019, Tyson Foods sold its stake in Beyond Meat with an intention to develop its in-house line of alternative (plant-based) protein products.

Nestle, which is one of the largest food companies globally, has also been expanding its portfolio with a keen focus on plant-based alternatives. In 2017, the company purchased Sweet Earth, a California-based producer of vegan meals and snacks, while in 2018, it purchased majority stake in Terrafertil, a plant-based organic food player that was founded in Ecuador and has presence across the USA, UK, and Latin America.

In January 2019, Nestle expressed its plans to launch its in-house vegan burger patty, called the Incredible Burger under its Garden Gourmet brand. The company is also looking to develop a portfolio of dairy-free beverages, such as purple milk (which is made with walnuts and blueberries) and blue latte containing spirulina algae. It is also adding vegan options to its existing brands, such as Haagen-Dazs (which launched a range of dairy-free ice creams in July 2017) and Nescafe (which introduced vegan protein-based coffee smoothies in December 2018).

Similarly, Marfig, Brazil-based leading meat processor, also entered the plant-based food alternatives market through a partnership with Archer Daniels Midland in August 2019. Under the partnership, Archer Daniels Midland will produce the raw material while Marfig will produce and sell the end product through foodservice and retail channels.

Canada-based Maple Leaf has also made significant investments in plant-based food players to expand its product portfolio and brand positioning. In February 2018, it acquired US-based plant protein manufacturer, Lightlife Foods, for US$140 million. Through this acquisition, it added Lightlife’s refrigerated plant-based products, such as hot dogs, breakfast foods, and burgers, to its portfolio and garnered a strong footprint in the US plant-based food market. To further strengthen its hold in this market, in December 2018, the company entered into an agreement to buy US-based Field Roast Grain Meat Co. for US$120 million. Field Roast Grain Meat supplies grain-based meat alternatives (including sausages, burgers, etc.) and vegan cheese products to the North American market.

Danone, a global food company with large number of dairy products is also bullish on the growing popularity of plant-based foods. In April 2017, it purchased WhiteWave Foods, a US-based leading player in plant-based food and beverage for US$10 billion. It rebranded the company to DanoneWave and in October 2017, further invested US$60 million into its plant-based milk operations. In 2019, the company expressed plans to triple its revenue (to about US$5.6 billion) from its plant-based food line by 2025.

In addition to these, many other large food processors and retailers have entered the plant-based food market either through acquisitions or the launch of in-house products and brands. These include Brazil-based JBS Foods, US-based Smithfield Foods, UK-based Hilton Food Group, Germany-based Wiesenhof, UK-based Heck Food, Canada-based Saputo, and US-based Dean Foods Company, among many others.

In addition to these leading food producers, many other large food processors and retailers have entered the plant-based food market either through acquisitions or the launch of in-house products and brands.

Fast food chains have also joined the vegan bandwagon. In April 2019, Burger King introduced a vegan version of its classic sandwich, called the Impossible Whopper. Similarly, Dunkin introduced a vegan breakfast sausage made by Beyond Meat, while KFC launched vegan fried chicken also made by Beyond Meat. In 2017, McDonald’s launched a vegan burger in Finland and Sweden and has plans to launch the same in Germany. In 2016, UK-based café, Pret a Manger opened a vegan pop-up store in central London and later made it permanent in 2017. Over the years, it opened three more stores (two in London and one in Manchester) under the name Veggie Pret. In April 2019, the company purchased rival food chain, Eat, and aims to convert about 90 of its stores into its vegan chain, Veggie Pret.

Just like the food producers and quick service restaurant chains, supermarkets have also been quick to respond to the vegan trend. In 2018, Tesco, a leading UK-based supermarket chain, launched its own range of vegan foods under the name Wicked Kitchen. Similarly, British department store chain, Marks & Spencer has also introduced a vegan food range in its food department. Vegan options have been introduced and are easily available across a wide range of US-based departmental stores such as Whole Foods, Target, and Kroger.

However, the key shift seen in departmental stores regarding plant-based meals is their placement. Traditionally, vegan food including plant-based meats and dairy were stocked together in a ‘vegetarian’ or ‘vegan’ isle or section. However, recently, these options have begun to be stored alongside their animal-based counterparts. For instance, plant-based dairy has now been moved to the beverage or dairy case. This exposes shoppers to a wider range of options for milk and increases the shopper’s chances of trying plant-based alternatives. This thereby opens the category to shoppers who otherwise would have not explored the separate vegan section in the store.

Similarly, plant-based meat options are also being increasingly stored along with traditional meat items, widening the choice for consumers who are flexitarians (i.e. consumers who are not completely vegan but do also consume vegan food from time to time). UK-based department chain, Sainsbury, was the first supermarket in the UK to place vegan products that are designed to look and taste like meat within the meat section.

Challenges ahead

While the number of vegan consumers is on the rise, it is still very low when compared with people consuming a meat-based diet. Moreover, while a great number of people are exploring vegan options, vegan meals are still largely perceived as offering limited nutritional value when compared with traditional meat-based meals, especially with regards to protein intake. While there is limited truth to this, companies offering vegan options have to invest substantially to educate consumers regarding the nutritional value of vegan meals.

In addition to this, vegan or plant-based meal options face another mindset block. Meat eating has long been associated with masculinity. This by contrary gives vegan meals a perception of being less ‘manly’ and thereby limiting the number of men who are open to embracing this meal option. To counter this, market leaders such as Impossible Foods and Beyond Meat have been avoiding terms such as vegan and vegetarian in their marketing strategy and have been promoting their burgers at male-centric locations such as sports events. Instead of pushing men to eat less meat, they are working towards expanding the definition of meat in the consumer’s mind to include plant-based options. They have also included ingredients (such as beet juice) in their burger to resemble a bleeding beef, making it clone the beef burger in terms of appearance, texture, and experience of consuming.

Other than mindset, price is also currently a considerable barrier for consumers. Plant-based meat substitutes are more expensive when compared with animal meat. While the Beyond Burger sells for about US$12 a pound at Whole Foods (a leading retail chain), its beef counterpart retails for about US$5. Similarly, Beyond Meat’s, Beyond Sausage retails for US$10.30 a pound, charging a premium of about 70% over a comparable pork sausage. Higher price points are off-putting for a big chunk of consumers, who may otherwise be willing to change eating habits owing to health or environmental reasons. While currently, the prices differ greatly, it is expected that the price difference will reduce in the long run (or be wiped off completely). Understanding price to be a big limiting factor, companies such as Beyond Meat are researching and investing into alternative plant protein sources that would lower the cost.

Price is also currently a considerable barrier for consumers. Plant-based meat substitutes are more expensive when compared with animal meat. While the Beyond Burger sells for about US$12 a pound at Whole Foods (a leading retail chain), its beef counterpart retails for about US$5.

However, one of the biggest roadblocks faced by the vegan food producers in making them mainstream is the backlash from the meat industry, which has in some cases resulted in labeling regulations that are damaging for the growth of the plant-based food sector.

In 2017, the EU banned the use of the term ‘milk’ and other dairy products, such as ‘cheese’, ‘yogurt’, etc., for plant-based alternatives (however, traditional versions such as almond or coconut milk and peanut butter are excluded from the ban).

In April 2018, France banned meat names for plant-based alternatives, such as vegetable ‘steak’, soy ‘sausage’, and ‘bacon-flavored strips’. Similarly, in May 2019, the European Parliament’s agriculture committee proposed a ban on the use of meat-related terminology on their labels and product description for vegetarian or vegan products. This includes terms such as ‘steak’, ‘sausage’, and ‘burger’. The proposal will be voted upon by the Members of the European Parliament in autumn 2019 and if passed, will be a big setback to the vegan industry as they would be required to remove the word burger from any product that does not contain meat.

In the USA, a Dairy Pride Act, which requires FDA to stop all plant-based dairy alternatives from being labeled as ‘milk’, was reintroduced in Congress in March 2019 (after being squashed earlier in 2017). While the chances of the bill being passed remain slim, if passed, it could seriously dampen growth in the vegan dairy market in the USA. Most of these legal actions are likely to have stemmed from strong meat and dairy lobbies that are directly impacted by the growth witnessed in the vegan market.

EOS Perspective

There is no doubt that the plant-based food market is growing exponentially and the food industry is taking notice. Meat producers and animal-based dairy companies are currently at a fork, where they may face some level of cannibalization of sales (especially in case of dairy) when they introduce vegan alternatives to their portfolio. The cases of Kodak and Apple are important examples when discussing the prospects of cannibalization of sales. While Kodak failed to innovate at the time of camera digitalization due to a fear of cannibalizing sales of its then popular camera films, Apple has made this one of its strength by innovating and launching new products that have (to an extent) cannibalized its own sales (IPhone for IPods and IPad for Mac).

While most players in the food industry have been quick to understand the potential of plant-based food market and have started to invest in this segment, several others still remain resistant to change. This may cost them dearly. Moreover, evaluating the future prospects of this industry, it may be prudent for meat producers to be focusing more on their plant-based food section than their long existing meat business. In a first of its kind case, in May 2019, Vivera Foodgroup, a leading European meat company sold off its meat business retailed under the brand name, Enkco, to Netherland-based Van Loon Group so that it could solely focus on its vegan food line.

However, while plant-based foods seem to be the future now, things may stir up again when clean meat (also known as lab-grown meat) goes mainstream. Currently, a lot of industry players (such as Tyson Foods) and business tycoons (such as Bill Gates) have begun investing in companies that are researching and developing lab-grown meat. It is expected to become a reality very soon, however, it may still take some years for lab-grown meat to match the prices and volume of farmed animal meat as well as obtain the required regulatory approval. While clean meat will definitely upset sales of farmed meat, it may also have a considerable impact on the plant-based food market as several consumers (who turned to vegan options due to animal cruelty and environmental reasons), may switch to clean meat instead of vegan alternatives. Thus vegan companies must stay ahead of the curve in terms of pricing as well flavors and product range to not only thrive but also survive in the coming times.

by EOS Intelligence EOS Intelligence No Comments

Decoding the USA-China 5G War

945views

The USA perceives Huawei, world’s largest telecom network equipment supplier and second largest smartphone manufacturer, as a potential threat capable of using its telecom products for hacking and cyber attacks. The US government suspects that China could exploit Huawei for cyber espionage against the USA and other countries. Amidst national security concerns, the US government has called for global boycott of Huawei, including of its 5G product range. The USA’s efforts to clamp down Huawei have rippling effect across the 5G ecosystem.

The USA and China have been trading rivals since 2012, particularly on the technology grounds. This resulted in a ban on China-based telecom equipment provider Huawei preventing it from trading with the US firms, over the accusation of espionage of critical information to the Chinese government. As a result, Huawei was barred from selling any type of equipment to be used in the US communication networks. This ban pertained to the 5G network equipment as well, and thus, Huawei’s 5G network equipment was ruled out from deployment in all parts of the USA. Few other countries, which agreed with the USA’s accusations on Huawei, also imposed a ban on the company’s 5G network equipment. The move severely affected Huawei’s exposure to some of the potential 5G markets, but it came as sigh of relief for its global competitors wary of Huawei’s growing dominance in 5G space.

Further, on May 16, 2019, the US government decided to put Huawei on the Security Entity List which restricted the company from buying any US-based technology (key hardware and software) for their 5G network equipment without approval and license from the US government, thus aggravating the 5G war. This not only brought new set of challenges for Huawei, but also created a rough path for the USA’s own technology firms involved in supplying components to Huawei. Considering impact on the US technology firms having Huawei as a key customer, on June 29, 2019, the US government announced relaxation on the Huawei ban, thereby allowing these US firms to continue their supply to Huawei for a 90-day period which got over in mid-August. The relaxation period was further extended till November 18, 2019, giving temporary relief to Huawei and its US-based business partners.

Huawei bears the brunt of USA-China 5G clash

The USA has initiated a global campaign to block Huawei from next-generation wireless communication technology over security concerns and it is pressuring other countries to keep out Huawei from 5G rollout. This invited quite a few repercussions for the company. One of the major and obvious consequences involved a major loss of potential market opportunity in the US territory as well as in other countries which are under strong influence of the USA.

After prolonged persuasion by the US government, in July 2018, Australia banned Huawei from 5G rollout in its territory. Japan also joined the league in December 2018 by imposing a ban on Huawei’s network equipment for 5G deployment, amid the security concerns to avoid hacks and intelligence leaks. Further, New Zealand and Taiwan also followed the suit in shutting out Huawei from 5G deployment.

In June 2019, the founder and CEO of Huawei, Ren Zhengfei, indicated that the company is likely to experience a drop in its revenue by US$30 billion over the next two years, which can be seen as a knock-on effect of growing US sanctions on Huawei. Also, Huawei expects its smartphone shipments to decline by 40% to 60% by the end of 2019 as compared to the total shipments in the previous year.

Despite repeated warnings from the USA, some countries have come out in support of Huawei by rejecting the USA’s claims. The regulatory bodies of countries such as Russia, Germany, Brazil, South Korea, Finland, and Switzerland have taken their decisions in favor of Huawei and allowed the company to deploy its 5G network equipment in their territories, affirming that they do not see any technical grounds to ban the company from their telecom networks.

Moreover, the US government has been persistently urging many European countries, especially the UK, to join its decision of barring 5G trade with Huawei. In March 2019, the EU recommended its member countries not to impose outright ban on Huawei, but instead assess and evaluate the risks involved in using the company’s 5G network equipment. Already earlier, in February 2019, the UK government concluded that any risks from the use of Huawei equipment in its 5G network can be mitigated through certain improvements and checks which the company will be asked to make and hence the decision of completely banning the company’s equipment from UK’s 5G network was not taken.

Among Asian countries, India, the second-largest telecom market in the region, has not decided whether to allow Huawei to sell its 5G network equipment in the country. China has warned the Indian government that the repercussions of banning Huawei equipment would include challenges in catering to the demand for low-priced 5G devices, thus causing a hindrance in rapid development of India’s telecom sector. In June 2019, the Department of Technology of India indicated that, since the matter of Huawei concerns the security of the country, they will scrutinize the company’s 5G equipment for presence of any spyware components. India will see how other countries are dealing with the potential security risks before giving a green light to the company.

The USA’s allegations against Huawei have made all the countries cautious over dealing with the company. Despite having proven technological supremacy in 5G network equipment market, Huawei has come under strong scrutiny for its 5G network equipment across the globe.

Huawei ban: Boon for some, bane for others

Huawei’s troubles are turning into major opportunity for its competitors in the 5G network equipment and smartphones market space. However, suppliers to Huawei, particularly US-based companies providing hardware and software for 5G devices and network equipment, took a hard hit as they lost one of their key customers because of the trade ban.

Huawei ban presents increased opportunities for its global competitors in 5G network equipment market

Major competitors of Huawei in 5G network equipment manufacturing business – Samsung (South Korea), Nokia (Finland), and Ericsson (Sweden) – are positioned to get the inadvertent benefit of expanded market opportunities with one competitor less. With Huawei losing potential market in countries where it is facing backlash, its competitors managed to grab a few contracts.

For instance, in March 2019, Denmark’s leading telecom operator TDC, which had worked with Huawei since 2013, chose Ericsson for the 5G rollout. Further, in May 2019, Softbank Group Corp’s Japanese telecom unit, which had partnered with Huawei for 4G networks deployment in the past, replaced Huawei with Nokia for its end-to-end 5G solutions including 5G RAN (i.e. radio access network equipment including base stations and antennas which establish connection between individual smart devices and other parts of the network). In the USA, Samsung is gaining significant traction as it has started supplying 5G network equipment to some of the leading US telecom operators including AT&T, Verizon, and Sprint.

A report released in May 2019 by Dell’Oro (a market research firm specializing in telecom) indicated that Samsung surpassed Huawei for the first time by acquiring 37% of the share of total 5G RAN revenue in the first quarter of 2019. In the same period, Huawei stood second with 28% share, followed by Ericsson and Nokia with 27% and 8% share, respectively. Earlier, Huawei led the 5G RAN market in 2018, accounting for 31% share of total 5G RAN revenue that year. Huawei was followed by Ericsson, Nokia, ZTE (China), and Samsung with 29.2%, 23.3%, 7.4%, and 6.6% share, respectively. Due to widespread skepticism about Huawei over espionage accusations, a shift in 5G network equipment market can be expected by the end of 2019, since competitors are likely to gain more growth momentum over Huawei.

Demand for Samsung smartphones gets a boost as Google blocks Android support to Huawei

In the smartphones sector, Samsung, which is the world’s largest smartphones manufacturer, may turn out to be the winner in the Huawei ban situation. Huawei, through its low-priced Android smartphones with features similar to Samsung’s smartphones, is emerging as the largest rival of Samsung in the smartphone market.

As per IDC data, Samsung’s market share (by total smartphone shipments volume) declined from 21.7% in 2017 to 20.8% in 2018, whereas Huawei recorded 33.6% year-on-year growth as market share increased from 10.5% in 2017 to 14.7% in 2018. But since Huawei was placed on US trade blacklist, Samsung is likely to benefit from the situation because of the broken deal between Google and Huawei which led Huawei to lose access to Google’s Android operating system (OS) for its next-generation 5G smartphones.

While Google managed to get a temporary license to continue to provide update and support for existing Huawei smartphones, it prevented Google from providing Android support for Huawei’s new products including soon to be released 5G smartphones. Huawei indicated that its latest 5G smartphones Mate 30 series, which will be launched on September 19, 2019, will run on open-source version of Android 10 and it will not have any of the flagship Google apps such as Google Maps, Google Drive, Google Assistant, etc.

Huawei unveiled its own operating system named HarmonyOS on August 9, 2019, but it still seeks support of Google’s Android OS for its upcoming 5G smartphones along with access to widely popular apps such as Facebook and WhatsApp which all belong to American firms. Android OS, controlling over three-fourths of the mobile OS market as of August 2019, is widely adopted by both the app developers as well as the users. As of second quarter of 2019, Android allowed its users to choose from 2.46 million apps. Encouraging app developers to rewrite their apps as per platform-specific requirements of a new OS with low user base is challenging. Conversely, consumers prefer OS which allows them to use all the apps they like. If HarmanyOS needs to be used as Android replacement, Huawei will need considerable time and financial resources to work with app developers to add similar apps to Huawei’s HarmonyOS.

Explore our other Perspectives on 5G

The future scenario for global 5G smartphones market will depend on the pending decision of the US government over allowing US technology firms to trade with Huawei. If the US government allows the trade, Huawei will have high chances of leading in the 5G smartphones sector owing to its competitive pricing and innovative solutions. On the other hand, if the ban still persists in future, the market of Huawei’s global competitors, Samsung in particular, is likely to swell, owing to their trusted brand name and reliability along with the support of Android OS.

US-based hardware suppliers for telecom devices face revenue loss as they lose their key customer, Huawei

The US government’s executive order issued in May 2019 blocking US exports to Huawei led to adverse effect on the revenue of the US-based companies that used to supply key hardware to Huawei for its 5G network equipment and devices.

For example, Qualcomm which was one of the largest sellers of modem chips, mobile processors, and licenses for 3G, 4G, as well as 5G technology in the Chinese market, has experienced a decline in revenue by 13% year-on-year in the third quarter of 2019 along with decline of approximately 36% in shipments of chipsets and processors. Similarly, Broadcom, which supplies switching chips used in network equipment, is also facing challenges with loss of its highest revenue-generating customer, Huawei, accounting for US$900 million of company’s revenue in 2018. Considering the Huawei blacklisting’s impact on financial results in the first two quarters of 2019, Broadcom has even cut its revenue outlook of the fiscal year 2019 from US$24.5 billion to US$22.5 billion.

In view of financial implications of Huawei blacklisting on the businesses of US-based technology firms, the US government, in June 2019, reprieved the trade ban on Huawei till November 18, 2019. Post the relaxation period, the US government may again ban Huawei from doing business with US technology firms. In case the US government puts the ban in effect owing to the security concerns, the repercussions are likely to deepen further for the US firms over losing considerable revenue coming from China’s telecom hardware industry.

Ban on Huawei means telecom operators will have to pay a higher price for 5G network equipment

Huawei ban is also seen to be impacting the US telecom operators as they face a particular challenge of increasing outlay to build the 5G networks. This is because the 5G network equipment provided by Nokia and Ericsson is more expensive than Huawei’s. In March 2019, Huawei claimed that allowing the company to compete in the telecom market in North America would reduce the total cost of wireless communication infrastructure development in the region by 15%-40% and provide an opportunity for telecom operators to save US$20 billion over the next four years.

The cost factor has also made some European countries sway their decision in favor of Huawei. In June 2019, GSMA, an industry association with over 750 telecom operators as members, indicated that shunning Chinese equipment from 5G network deployment in Europe would add EUR 55 billion (~US$61 billion) to the costs of telecom operators and will also cause the delay of about 18 months in 5G network deployment. In fact, to avoid such repercussions, many European countries have already decided to continue buying telecom equipment (including 5G network equipment) from Huawei and other Chinese firms, Greece being the latest one to join the group of countries including Switzerland, Finland, Sweden, and few more.

India, which is a huge market for low-priced smartphones and telecom network equipment, still remains undecided on the proposed ban on Huawei. The 5G network equipment supplied by Nokia and Ericsson in India is expected to be 10%-15% more expensive as compared to Huawei’s. Also, Huawei claims that imposing a ban on the company will push back 5G deployment in India by two to three years. Moreover, the prolonged decision-taking has also affected the 5G network deployment timeline of the country and thus slowing down the overall development of its telecom industry. Dilemma whether to work with Huawei is seen to have wide-reaching implications on overall development of 5G technology in some countries.

Decoding USA-China 5G War - EOS Intelligence

EOS Perspective

The USA-China 5G war has taken many unpredictable turns over the last year, resulting in adverse implications for Huawei and its US-based business partners. The current status of the 5G war indicates a relaxation over the Huawei ban till November 18, 2019. This allows the US companies to continue supply of their technology products including key software and hardware required by Huawei for 5G equipment manufacturing. However, the relaxation of the ban is not intended to remove Huawei from the US Department of Commerce’s Entity List and the US companies still have to apply for temporary license for exporting products to Huawei.

The USA has been targeting Huawei since 2012, and there seems to be no stopping. Considering the implications of the US sanctions, Huawei has been making notable efforts to end the ongoing discord with the US government. Huawei has always denied all the accusations and maintained that the company is willing to work with the US government to alleviate their concerns over cybersecurity. In May 2019, Huawei proposed implementation of risk mitigation programs to address potential security threats. To further appease the US government, on September 10, 2019, Huawei proposed selling its 5G technology (including licenses, codes, technical blueprints, patents, as well as production know-how) to an American firm. This is seen as one of the boldest peace-offering deals by Huawei to win back the trust of the US government. Huawei claimed that the buyer will be allowed to alter the software code and thereby eliminate any potential security threats.

Currently, there is no US company manufacturing 5G network equipment. Acceptance of Huawei’s proposal would enable the USA to gain footing in the 5G network equipment market and mitigate the fears over rising dominance of Huawei in global 5G space. While the move risks to create a competitor for Huawei in the 5G network equipment market, the company could also use this as an opportunity to evolve from core manufacturing business to providing technical expertise to other companies for manufacturing 5G equipment. The proposal is still subject to approval from the USA and Chinese governments.

While Huawei is ramping up its efforts to break the deadlock with the US government, at the same time, the company is also devising a parallel strategy presuming the worst possible outcome of USA-China trade tensions over 5G, i.e. the USA eventually cutting off ties with Huawei. The company is working towards a contingency plan with an ambition to take control of its supply chain and reduce its dependency on the US technologies and supplies.

One of the major actions of its plan B includes developing its own operating system HarmonyOS as a substitute to Google’s Android OS. While Huawei wants to continue with Android OS for its future 5G smartphones, in case the US government blocks Huawei’s access to Google’s services, Huawei will have to switch to own HarmonyOS.

China, Huawei’s home market, is more receptive to the company’s products, and switching to own operating system is expected to work in favor of the company. In July 2019, Canalys, a Singapore-based technology market research firm, estimated that China would account for over one-third of 5G smartphones globally by 2023. Huawei could use this opportunity to develop its proprietary OS based on the learnings in China before expanding globally to compete with more established and mature OS such as Android OS and iOS (which respectively controlled 76.23% and 22.17% of the smartphone OS market as of August 2019).

On the other hand, in anticipation of loss of partnerships with key suppliers such as Qualcomm and Broadcom, Huawei had stockpiled critical components between May 2018 and May 2019, according to a research report by Canalys. This move was aimed at ensuring the continuity of production of 5G products that rely on core technology from US-based firms for three to twelve months.

Further, Huawei has been developing proprietary chipsets for its 5G smartphones and networking products, which are being considered as alternatives for products offered by Qualcomm and Broadcom. On September 6, 2019, Huawei launched Kirin 990, a new 5G processor for smart devices, which will power Huawei’s upcoming 5G smartphone including Mate 30 series. Further, in January 2019, Huawei launched a 5G multi-mode chipset, Balong 5000 that supports a broad range of 5G products including smartphones, home broadband devices, vehicle-mounted devices, and 5G modules. The company claims this chipset to be the first to perform to industry benchmark for peak 5G download speeds.

Seeing such developments at the Huawei’s end, it is clear that the company is striving hard to remain on the top of 5G network equipment and device manufacturing sector. The USA’s efforts to derail Huawei from its path to dominance in 5G are certainly going to impact the overall growth of the company in short term, but, with its plan B, things are expected to smooth out for Huawei in future. Even if Huawei is not be able to retain its current global leading position in 5G network equipment and device manufacturing, it will certainly remain one of the strong contenders. The US sanctions are further encouraging Huawei to evolve as an all-round player in the 5G ecosystem.

On the contrary, the USA’s aggression against Huawei is expected to hit its own technology industry in the long term. For instance, the blacklisting of Huawei will not only cost the US technology firms to lose one of its largest customers, but will also result in intensified competition as Huawei ramps up its in-house capabilities to fulfill the demand of the entire 5G ecosystem. An example of this could be Huawei’s announcement in April 2019 that the company was open to selling the 5G chips to rival smartphone companies, including Apple. Moreover, if Huawei’s HarmonyOS is able to succeed in gaining significant user base, it would challenge the dominance of Android and iOS. Hence, it would be in best interest of the USA and its technology industry, if the country could take a different approach and try to control and minimize security risks related to Huawei’s engagements, rather than placing an outright ban on the company. Similar to what Germany did in December 2018, the USA could encourage telecom operators to establish verification centers and hire third-party experts to identify and resolve vulnerabilities in Huawei’s 5G network equipment and devices.

by EOS Intelligence EOS Intelligence No Comments

The Smoke around Legal Cannabis

1.1kviews

Till date, 31 countries and 41 states in the USA either legalized cannabis in various forms, including making it legal for medical or recreational use, or decriminalized it while still maintaining its illegal status. Few countries are preparing to legalize or decriminalize the use of marijuana for all purposes while many countries are still debating over the legalization of this plant only for medical and not for recreational use. With the rise in education about cannabis and its benefits for humans, economies, and culture, chances of positive changes in laws around cannabis are growing across the world. As legalizing cannabis is still a topic of debate with variety of business, political, and cultural views involved, we are looking at how the legalization of cannabis might impact the economy and businesses in the countries taking the step towards less restrictive approach to handling the issue.

Cannabis – a controversial medicinal plant

Cannabis or marijuana plant and its alleged benefits and risks for human body have been a difficult topic of debate amongst law makers, medical professionals, researchers, economists, politicians, and (of course) cannabis users. In many parts of the world, it still has negative connotations with a narcotic drug, due to presence of psychoactive substance tetrahydrocannabinol (THC) which brings an intoxicating effect to human mind.

In many countries, cannabis has been treated similarly to other chemical drugs, such as cocaine, heroin, etc., in terms of its legal status, by banning from legal cultivation, purchase, or selling for any purpose. However, there has been a continuous development in spreading awareness by the medical professionals, researchers, and scientists on the benefits of using cannabis for medical purposes. This has been followed by voices being raised on people’s right to legalized cannabis also for recreational purposes, comparing it with alcohol and tobacco, which are claimed to have far worse impact on human health, yet are enjoying legal status in many countries.

In addition to this, many economists too are coming forward in favor of legalizing cannabis to bring a boost to economies. As a result of such strong petitions, more and more countries are considering legalization of cannabis and the future might see countries such as USA (including all 50 states), Mexico, New Zealand, The Netherlands, Columbia, France, Spain, Italy, Czech Republic, Jamaica, and Portugal legalizing the plant for all purposes, along with legalization of personal cultivation of cannabis with an aim of bringing cure or relief to several diseases, helping to control healthcare costs, curbing illegal drug businesses, and stimulating country’s economy through adding another taxable business activity.

The Smoke around Legal Cannabis

Countries signal green light for marijuana

The league of countries with full legalization of cannabis for all purposes is still a small, two-member club, which was most recently entered by Canada (in October 2018) with more than 100 legal cannabis retail stores running across the country. After Uruguay that started this league in December 2013, Canada is the second country in the world to completely legalize cannabis, and it does not seem that the club will expand any time soon.

The USA are considering to gradually legalize cannabis for recreational use along with medical use. As of November 2018, The District of Columbia and 10 states including Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, and Washington have legalized the recreational use of cannabis. An addition of 30 states along with US territories of Puerto Rico and Guam allow the use of cannabis only for medical purposes.

Amongst the European countries, none of them has legalized smoking cannabis or using it for recreational purposes yet, but there are several countries which have legalized the medical use of cannabis under a treatment process, while also decriminalizing the use of cannabis for recreational purposes. Malta, Greece, Luxemburg, and Denmark are amongst the European countries that legalized medical cannabis in 2018 adding to the group of other European countries such as Italy, Norway, Poland, The Netherlands, France, Spain, Slovenia, to name a few.

Some Asian countries are also moving towards legalizing cannabis but exclusively for medical purposes and that too with strict policies. Recently, in November 2018, Thailand legalized medical marijuana, but with very stringent rules to get access to marijuana plants. Also, in November 2018, South Korea became the second Asian country to legalize medical cannabis, while Malaysia is expected to be the third nation to fall into this group. Interestingly though, India, known to be the origin of cannabis sativa plant, has not legalized the use of cannabis for any purpose yet, although the country runs a huge illegal trade of marijuana as well as hashish (a drug made of cannabis resin). There are many petitions already submitted by various Indian economists and politicians in favor of legalizing cannabis for use in cancer patients and even hemp cultivation for horticulture use, but due to changing political environment in India, the petitions are still pending to be considered by the relevant law-making bodies.

Cannabis business – boom in economies

According to a report published in 2018 by Brightfield Group, with the on-going trend of countries moving towards legalizing cannabis, the global legal cannabis market is expected to reach US$ 31.4 billion by the end of 2021, owing to the growing adoption of medical cannabis in treatment or relief in a range of diseases and ailments, such as cancer, mental disorders, chronic pains, and others.

Apart from medical applications, the recreational use of cannabis too has led to a continuous rise in sales of cannabis for direct and indirect use, thus giving a push to retail businesses as well as tourism sector in countries that moved towards legalization. As a result of the rise in sales, governments of these countries and states have registered increased tax revenues and a boost to local economies. For instance, California that legalized cannabis for recreational use in January 2018, generated US$74.2 million of tax revenue during second quarter, with a rise of 22% over the first quarter. In another, more hypothetical example, according to a report by Canada’s Parliamentary Budget Officer, Canada could generate US$463.74 million in tax revenue by 2021 if the projections of nearly 734 metric tons of legal cannabis to be consumed by that year are correct.

Similarly, according to a study by New Frontier Data, if cannabis was legalized in all American states, it would generate a combined US$131.8 billion in federal tax revenue between 2017 and 2025, considering 15% retail sales tax, payroll deductions, and business tax revenue. In fact, according to a research study by Ameri Research Inc. in 2017, in the USA, tax revenues from legal cannabis are now comparable with revenues from other products, such as draft beer and e-cigarettes, a fact highlighting the recent growth of sales in legal cannabis market in the USA.

Apart from tax revenue generation, creating new business opportunities is also one of the reasons for countries to seriously consider legalization of cannabis. States such as Colorado, for example, have registered some 431,997 new business entities between 2014 and 2017. In 2017, it also experienced a 17.7% rise in employment over 2016 with 17,281 full-time equivalent jobs. Also, in 2017, across the USA, there were 9,397 active licenses with slightly more than 3,000 licenses active in Colorado. These licenses were made active for cannabis businesses dealing with cultivation, manufacturing, retailing, distributing, delivering, and even lab testing that generated 121,000 jobs in 2017 across the District of Columbia plus 10 US states. This number is expected to reach 1.1 million jobs by 2025, if cannabis is legalized in all 50 states, across all ends of cannabis industry supply chain, from farmers to transporters to sellers.

It is expected that through legalization of cannabis, several countries, especially Mexico, USA, and Canada, are also expected to witness significant drop in illicit activities related to drugs industry. According to a study by Deloitte in 2018, cannabis users in Canada are willing and in fact looking forward to pay more for legal purchase of cannabis grown and processed under federal laws and sold through legal channels rather than going for illegal drug purchase options. This goes hand in hand with Canadian government’s hopes to crack down on illegal drug trade while also finding new sources of stimulation to the country’s economy.

Impact of legal cannabis market on other business sectors

The emergence of legal cannabis market has raised many business opportunities in various sectors such as retail, food and beverages, real estate, and even tobacco and alcohol industry.

Amongst these sectors, real estate has been developing strongly in many countries allowing for legal cannabis for medical as well as recreational use. Properties and facilities that are well-suited for cannabis-related operations are experiencing rise in industrial rents and sales price premiums owing to the rise in demand for warehouses, industrial and storage facilities, agricultural, and other properties.

In Canada, legalization of growing and sales of recreational cannabis has fueled a six-fold surge in plant-growing facilities to 8.7 million square feet in 2018 according to data from Altus Group, Canadian real estate company. Aurora Cannabis, one of Canada’s leading cannabis companies, has already started its project for cultivation of cannabis in a new 8 million square feet facility in 2018. Canopy Growth, market leader in cannabis industry of Canada, has announced plans in October 2018 to develop 3 million square feet of greenhouse space in British Columbia through October 2019, which will be more than double its production surface as of 2018. With the legalization of cannabis, the demand is also rising for commercial real estate thus giving an opportunity for struggling retailers to make a move into a new market. Alberta, where cannabis industry is fully private, has experienced a sharp surge in demand for 1,200 to 3,000 square feet retail real estate to set up cannabis shops and dispensaries in malls and street-front locations.

Similarly, within the USA, Colorado, experienced a rise in real estate sector through increase in housing values by about 6% owing to increasing development in retail sector through legal cannabis pharmacies, dispensaries, cafés, and retail shops. Going beyond real estate, the retail industry is also likely to receive a push thanks to opportunities in auxiliary businesses such as accessory shops, cannabis cafés, weed gardening products stores, bakeries, and candy shops, contributing to rising demand for retail locations.

The impact of cannabis legalization is visible also in food and beverage industry thanks to new products such as cannabis-infused edibles such as cakes, candies, and drinks. In 2017, California reported sales of US$180 million of edibles, whereas Colorado has seen about a 60% rise in edibles sales volume (with 11.1 million edibles unites been sold in the same year). The future of food and beverage industry with cannabis-infused edibles is projected to be promising due to the benefits of cannabis plant for using it in food products. According to a food and beverage industry expert, Sylvian Charlebois, cannabis offers good nutrients (proteins, vitamin E and C, to name a few), hence for food products manufacturers looking for new avenues of growth, cannabis could be deemed the next ‘superfood’.

On the other hand, the legalization of cannabis has affected alcohol industry due to the emerging inclination of people towards choosing the “green high” over alcoholic drinks.

According to a study by Deloitte in 2018, in Canada, cannabis is likely to be increasingly perceived as a substitute to beer, spirits, and wine which could negatively impact the alcoholic beverages-related revenues for governments, liquor companies, and retailers. This is already observed in the USA, where a joint recent research study of 10 years conducted by two US-based universities, namely University of Connecticut, Storrs and Georgia University, Atlanta in cooperation with Universidad del Pacifico in Peru, has suggested that the counties located in medical marijuana states showed almost a 15% decline in monthly alcohol sales between 2006 and 2015.

At the same time, some industry experts believe that since it is part of American and European food culture to drink alcoholic drinks such as beer and wine with food, the legalization of cannabis is not going to affect the demand for such food-complementing alcoholic drinks. In fact, cannabis legalization is also coming out to be a stepping stone for large alcohol brands to enter the cannabis industry with cannabis-infused alcoholic beverages, mostly through mergers and acquisitions with leading cannabis growing companies. In August 2018, New-York based Constellation Brands acquired more that 50% stake of Ontario-based Canopy Growth for US$4.0 billion, the largest investment registered in cannabis industry so far. The received investment is believed to help Canopy Growth strengthen and expand its leadership position in Canada and other countries with legalized cannabis. It is expected that in the future, other alcohol industry leaders will also consider getting involved in cannabis industry in order to expand through cannabis-infused drinks, creating a new segment of products with combination of alcohol and cannabis.

EOS Perspective

The benefits of cannabis on human body in diseases such as cancer, acute and chronic pains, or neurological and mental illness, have resulted in a growing count of countries legalizing use of cannabis. On the other hand, the legalizing of cannabis for recreational purpose is still receiving mixed views by industry experts and public opinions in several countries. The only way to make this experiment work, is to follow the steps of those countries that have legalized recreational cannabis and are simultaneously focusing on implementing a completely regulated system to scrutinize the whole supply chain in order to curb illegal drug activities and over-dose of cannabis by the users.

For this purpose, the leaders – Uruguay and Canada – have created systems of registration cards with a specific limit to purchase a quantity of cannabis for recreational use per month. As a result of this, the situation is expected to be under control and authorities believe that this will help in curbing illegal trade activities while keeping check on personal consumption of cannabis.

It is also recommended to consider the fact that legalization of cannabis for recreational and medical purposes is likely to reduce the use of other, more harmful and addictive drugs, as well as curb (at least to some extent) the over-consumption of alcohol that is associated with serious health hazards and many deaths, generating huge social burden and healthcare costs in many countries.

Considering all these factors, the success of legalizing cannabis for all purposes in any country depends on how the processes across cultivation, distribution, retail, all the way to the end buyer is regulated and scrutinized by the law makers and law enforcers of the country. There surely are both pros and cons of legalizing cannabis but with solid work towards improved awareness, and, more importantly, a regulated system with proper (enforced) laws, it can give the countries a boost to their economies along with rise in employment, better medical treatments, and decline in illegal drug activities.

Top