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Trump In Action: Triumph Or Tremor For Latin America?

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Donald Trump commenced his presidency by announcing ‘America First’ policy, thus casting a dark shadow on trade and exports from other countries to the USA. Trump’s protectionist and neo-isolation policies are accepted with gritted teeth across the world, particularly by the USA’s southern neighbors. The renegotiation of trade treaties, more stringent migration policies, as well as strong focus on encouraging domestic industrialization by pruning imports might contribute to a slowdown in economic growth of a few Latin American countries. The policies set by the new president may result in economic malaise across Latin America, where people are uncertain and apprehensive towards the alarming strategies laid down by the USA.

While the degree of economic and trade impact will vary across LATAM countries, the strongest distress is likely to be witnessed across Cuba, Mexico, and Venezuela. On the other hand, Brazil might partially benefit, while the impact is unlikely to be significant on other larger economies such as Argentina or Chile.

The wall between Mexico and the USA

Mexico is facing the worst of Trump’s wrath. The country is highly dependent on the USA for trade – most importantly for duty free exports. These are likely to witness a tremendous setback with Trump imposing 20% import tax on goods from Mexico to finance a wall that he intends to build to safeguard USA’s border from illegal immigrants.

Renegotiation of the North American Free Trade Agreement (NAFTA) and withdrawal from the Trans-Pacific Partnership will further tarnish Mexico’s trade with the USA. Trump intends to renegotiate terms of NAFTA, focusing mainly on moving away from the zero trade barrier policy. By imposing tariffs on imports from Mexico, the cost of goods will increase as they enter the USA, which is likely to boost domestic production of those goods, but it will surely have a negative impact on Mexican production. Another key driver for Trump’s plans to put a break on Mexican imports is the concern over trade deficit that the USA faces with Mexico – approximately, US$ 50 billion in 2015. Hence, Trump wants to encourage domestic production to reduce imports from Mexico.

Further, Trump’s administration has also endangered billions dollars of remittances, one of the largest sources of foreign capital in Mexico, received from Mexican citizens working in the USA. Trump has threatened to tax the remittance transfers if Mexico does not support the trade and immigration limitations imposed by the USA.

Another major issue is the possibility of implementation of strict migration policies which can result in deportation of millions of undocumented migrants, most of them being Mexicans. Several other countries such as Haiti, Dominican Republic, El Salvador, Guatemala, Honduras, and Cuba also stand to suffer due to the change in migration policies. Mass deportation will increase unemployment in these migrants’ home countries and reduce remittances in foreign currency.

Amid the USA-Mexico tension, the Mexican peso has already witnessed a slump, almost nearing its all-time low – declined by 5% since the beginning of 2017 and by 20% since Trump came into power.

Trump’s crackdown on Cuba

The relationship between Cuba and the USA is predicted to get frosty under Trump’s administration. Cuba has struggled for several years under the USA-imposed isolation until president Obama negotiated to re-establish diplomatic relationship between these two countries. However, in his campaign, Trump threatened to reverse the restated diplomatic relationship – including easing of travel and remittances between Cuba and the USA – if Cuba does not agree to a “better deal” which Trump left undefined. Moreover, the US president has announced that he was against the Cuban Adjustment Act, which permits any Cuban, who reaches the USA to stay there legally and apply for residency.

Venezuela, not far from Trump’s radar

Trump has already turned hostile towards Venezuela considering the recent sanction imposed by his administration in February 2017 on the Vice President Tareck El Aissami, accusing him of playing a significant role in international drug trafficking. Relationship between these two countries has already turned sour amidst the deep economic and political crisis that exists in Venezuela.

Further, Venezuela’s oil exports to the USA might suffer due to Trump’s decision to revive the Dakota Access Pipeline – an oil pipeline project that can reduce country’s need to import crude oil. Presently, Venezuela exports 792,000 barrels a day of its crude oil or 38% of total crude exports to the USA, and any additional access to oil for the USA could have a deep impact on Venezuela’s oil exports.

Trump could be good news for Brazil

It appears that the only silver lining for Latin America, while Trump hovers with his protectionist policies, is Brazil’s opportunity to strengthen its ties with Pacific and European nations. Brazil’s Minister of Foreign Trade predicts new trade opportunities for Brazil, as the country aims to expand trading relations with other countries, while the USA withdraws and renegotiates key trade agreements. Moreover, Brazil (as a member of Mercosur – consisting of Argentina, Brazil, Paraguay, and Uruguay) is already pursuing free trade agreement with the European Union, with next round of negotiations lined up for March 2017.

However, a few setbacks that Brazil could suffer include deportation of many of the 1.3 million Brazilians immigrants living in the USA, whose stay in the USA remains undocumented. The deportation is likely to adversely impact the remittances received by Brazil. Further, Trump’s focus on implementing higher import tariffs is likely to impact the Brazilian exports to the USA – approximately 13% of Brazilian exports are directed to the USA.

 

EOS Perspective

USA’s withdrawal from Trans-Pacific Partnership and aim to renegotiate NAFTA is driving Latin American countries to break dependence on the USA, establishing friendly trade relations with other countries and strengthening intra-regional ties. Latin American countries are focusing to redirect trade and investment towards countries such as China and Russia, as well as Europe and Africa.

China is already a key trading partner for Latin America – with trade between the two regions growing from US$ 13 billion in 2000 to US$ 262 billion in 2013 – and USA’s withdrawal from Trans-Pacific Partnership is likely to further deepen the ties between them. China aims to increase investment and trade in LATAM to US$ 250 billion and US$ 500 billion, respectively, by 2025.

China is moving swiftly to strengthen relationship with Latin American countries. Soon after Trump’s win, the Chinese President visited LATAM aiming to deepen economic cooperation, and to promote social and economic development in the region. During the visit, Ecuador and China agreed to a new economic Free Trade Agreement, focused to grow production and investment across energy, infrastructure, and agriculture sectors. An extension of China-Peru free trade agreement was also signed to promote bilateral trade and investment between the two countries. A closer association between China and Latin America is likely to reduce USA’s dominance and supremacy in the region.

Further, with USA’s plans to increase import tariffs, Latin American countries are slowly focusing on expanding intra-regional trading relationships, which till now have not been developed to their full potential due to dependence on the USA for trade and exports. Present circumstances are optimal to slowly start building an intra-regional trade force in Latin America, and the region’s countries should work towards strengthening existing trade and integration blocs, such as the Union of South American Nations (UNASUR) and the Community of Latin American and Caribbean States (CELAC).

Trump’s policies are likely to have a diverse impact on different Latin American countries. The region has already slowly started forging new trading relationships to reduce dependence on the USA, which proves that LATAM might be able to divert the negative repercussions of USA’s new policies and turn them into new opportunities (at least to some extent).

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McDonald’s – Facing the Heat Globally

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With more than 36,000 outlets globally, out of which 14,000 are located in the USA alone, McDonald’s is rightly known as the fast-food giant. After decades of expansion that saw the brand conquer leading markets across the globe, McDonald’s seems to have been losing its sheen across leading markets since 2014, with the biggest challenge arising in its home market. Growing health consciousness among consumers, new diverse competition, legal hassles, and supply chain troubles have kept McDonald’s in the news for all the wrong reasons, while dropping profitability has forced this leading fast-food chain to shut down about 700 outlets globally in 2015 and further 500 in 2016. With a change in management and a proactive approach to upgrade its offerings, at least in its home market, the chain does seem to have a plan of action in place, however, it is yet to be seen if it is enough for damage control.

In an unprecedented step, McDonald’s (McD’s) shut down 700 outlets globally (350 outlets in the USA and 350 outlets in its remaining countries of operations) in 2015, and it expressed plans to shut down further 500 outlets globally in 2016. While the company maintains that this will help weed out unprofitable stores, it definitely does spell trouble for the world’s largest burger chain. The biggest concern, however, remains that the slowdown does not stem from poor performance in any one economy but an amalgamation of issues faced by the brand across the globe.

1-McDonald’s Struggles

2-McDonald’s Struggles

3-McDonald’s Struggles

As McD’s strides through one of its worst times, the company looks to tackle the dim outlook with a head-on approach. As one of the first steps, in March 2015, the company changed its management, appointing Steve Easterbook as CEO in place of Don Thompson (who served the company as CEO since July 2012. Since taking charge of the driving seat, Steve Easterbook (who was previously responsible for turning around the company’s business in the UK), has introduced several initiatives that seem to reinvent the brand offerings and reprise its lost reputation.

In the USA, the company introduced all day breakfast and introduced a new customizable menu called ‘TasteCrafted’ in nearly 700 outlets in the USA. The new menu is the company’s attempt to follow the Chipotle strategy of personalization of meals and presents consumers with the choice of three buns, three different meats, and three different styles of toppings. The company has also tried to tackle the minimum wage issue by raising wages in company-owned outlets in the USA, however, this created dissatisfaction among franchised outlets employees. However, even as a start, these measures have helped the company improve sales at home (US sales witnessed the first rise in two years in Q3 2015).

Internationally, and especially in Asia, the company is working towards stricter supply chain auditing to rebuild its brand image. In the Chinese market, the company has launched several healthier options such as apple slices, veggie cups, and multigrain muffins to attract the health-conscious consumers. McD’s is also looking at massive expansion in China, with plans to open about 250 new outlets each year over the next five years. It wants this next wave of growth to stir from the franchising model. Similarly, the company is looking at the prospects of selling a stake in its Japanese operations to a local investor, who could help the company turnaround its Japan business.

EOS Perspective

As McDonald’s woes seem to arise from a mix of dissatisfied stakeholders – consumers, partners, and employees across the globe that vary for each economy, it is not far-fetched to say that the company stands the risk of losing its leadership position across its top markets (as it already has in India). Several strategic decisions are being made by the brand to return to its past glory, however, these seem more long term in nature and therefore will have a significant gestation period before their results are visible.

While the company is largely looking to lean on franchising to spur growth and streamline operations, such as dependence on franchising can act as a double-edged sword especially in times when the company is facing tarnished reputation in several of its leading markets.

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Biofuels: From Crest to Trough?

For the past decade biofuels have been contemplated as a sustainable source of energy that could alleviate global warming problems. The biofuel industry has experienced rapid growth driven by strong government support resulting in policy mandates and subsidies. However, the bucolic scenario of biofuels may soon be overshadowed considering the ecological toll on farm land and food crops from its production. The question still remains if we are ready to imperil food crops to grow energy crops.

The biofuel buzz sparked in the 2000s when several governments across the world offered subsidized ethanol and biodiesel to make it cost competitive with gasoline and diesel, and investors acquired lands to produce feedstock, particularly in emerging economies.

Biofuels are promoted as alternatives to fossil fuels, however, it seems that this green energy facade is impinging on our food and environment needs. Turning plants into fuel or electricity comes across as an inefficient strategy to meet the global energy demand. Irresponsible farming practices — to grow corn to suffice biofuel needs — in countries such as the USA are likely to result in adverse temperature and precipitation conditions due to climatic changes that will shrink corn and wheat yields in coming 10-20 years.

Biofuel development certainly creates employment opportunities in economies, improves vehicle performance, and reduces dependence on crude oil imports. However, this comes at the expense of higher food prices as biofuels compete with food production by using crops and lands. Moreover, biofuel production does not generally result in reduced greenhouse gases, as emissions still occur causing pollution.

Further, biofuels are less cost effective than fossil fuels. For example, biomass costs about 20% more than coal. Also, biofuels have lower energy content as compared with fossil fuels, which allows vehicles running on biofuels to travel shorter distances than on the same amount of fossil fuel. The energy content of biodiesel is approximately 90% of petroleum, while ethanol is 50% that of gasoline. Consequently, travelers would require higher amount of fuel, if running on biofuels, which will increase their expenditures. With the government laws supporting blending of ethanol in petroleum, motorists in the UK (for example) are likely to pay about £460 million annually due to higher fuel cost at pumps and lower energy content of biofuels.

While the disadvantages of biofuels has been widely known, in the past couple of years, bioethanol and biodiesel production has grown rapidly in several countries, supported by various policies and government subsidies. Currently, some of the leading biofuel producing countries include the USA, Brazil, and Argentina. It is interesting to look at the socio-economic and ecological impact of biofuel production on these countries.

Impact of Biofuels on Top Producing Countries
Biofuels


A Final Word

To choose biofuels over fossil fuels is like entering into a race between food versus fuel. Countries such as the USA use 40% of corn harvest for fuels — devoting farmlands to energy needs instead of feeding people. With crude oil extinction almost 10 million years away, it is quite inappropriate to contaminate environment to yield economic benefits from biofuels. Biofuels have not lived up to the expectation and have ceased to provide lower carbon footprint, as they cause indirect emissions by ruining the farming land and vegetation. At a time, when demand for land is likely to grow 70% by 2050 to meet global food demands, it is highly wasteful to use the same land to suffice energy needs.

In April 2015, Renewable Energy Directive of the EU announced a cap of 7% on the contribution of food crops in biofuel production. Such initiatives will help to sustain a balance in food supply chain. In order to establish appropriate carbon footprint accounting, the European Commission has approved indirect emissions to be considered as part of a holistic picture of biofuel harmful effects. Moreover, the European Commission is likely to prohibit the use of first generation biofuel post 2020.

So, what’s the alternative to biofuels, or at least another source of energy that is more sustainable?

A sustainable solution to the problem could be clean renewable fuels like cellulosic ethanol, which is manufactured from inedible parts of plants. Greenhouse gas emissions from cellulosic ethanol are 86% lower than from petroleum sources. Companies such as DuPont are investing to build bio-refineries to manufacture cellulosic ethanol. The refinery is located in Nevada, USA and will produce 30 million gallons of cellulosic ethanol annually after commencing operations in 2016. Other avenues such as energy efficient batteries, fuel cells, and solar and wind energy for powering vehicles and factories should also be pursued. Companies such as Tesla, a US-based automotive and energy storage company, have made groundbreaking progress in manufacturing low-cost solar powered batteries that discharge to generate electricity for homes, businesses, and utilities. Solar and wind energy investments are at an all-time high, both across advanced and emerging markets.

Perhaps, the need of the hour is for governments to look at diverse sources of renewable energy as a whole, and invest in a way that is most effective and sustainable for the economies and the environment. Clearly, biofuels (as was perhaps once expected) is not the ideal solution to global energy needs.

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Local Sourcing – It’s The New Global Sourcing

Not long ago, the buzz term for the automotive world was global sourcing. OEMs aimed to standardise product offerings and pricing by producing in select emerging countries that offered low production costs. This rendered the supply chain long and complex, but equally justified in the name of cost saving. Recently, however, global sourcing seems to be on the reverse gear, with local sourcing gaining momentum among OEMs globally.

Localisation brings cost-savings across the supply chain, especially in light of climbing costs in traditionally low-cost regions. According to a study by BCG, manufacturing costs in previously low cost sourcing locations like China, Latin America and Eastern Europe that for many years attracted global vehicle manufacturers, are reaching parity with manufacturing costs in developed countries, once productivity, energy prices and currency conversions are factored in.

To continue reading, please go to the original article on Automotive World.

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China’s Green Energy Revolution

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China is widely criticized as the world’s largest emitter of carbon dioxide and other greenhouse gases. Less noticed, however, has been the fact that the country is also building the world’s largest renewable energy system. China plays a significant role in the development of green energy technologies and has over the years become the world’s biggest generator and investor of renewable energy. As China heads towards becoming the global leader in renewable energy systems, we pause to take a look at the major drivers behind this development and its implications on China as well as on the rest of the world.

Reducing CO2 emissions has become one of the top priorities and the Chinese government has set its eyes on developing sustainable energy solutions for its growing energy needs. To support this objective, China has set forth aggressive policies and targets by rolling out pilot projects to support the country’s pollution reduction initiatives and those which reflect the strategic importance of renewable energy in country’s future growth.

Why has China suddenly become so environmental conscious and investing billions on renewable energy?

  1. Air and water pollution levels have become critical, causing tangible human and environmental damage, which lead Chinese authorities to rethink on the excessive use of fossil fuels. Considering current and potential future environmental hazards of burning fossil fuels, China decided to decrease the use of coal and is actively seeking for greener energy solutions. While serious concerns about climate change and global warming are key drivers towards expanding the use of renewable energy for any country, for China, the motives are well beyond abating climate change; they are creating energy self-sufficiency and fostering industrial development.

  2. China is witnessing a dramatic depletion of its natural gas and coal resources and has become a net importer of these resources. China’s increased dependency on imported natural gas, coal and oil to meet its growing energy demands bring along some major energy security concerns. The current political volatility in Russia, the Middle-East and Africa pose serious challenges not only for China, but, for other countries as well to secure their energy supplies for the future. Not to mention the risks associated with energy transport routes.

Taking into account these geo-political risks and in order to achieve a secure, efficient and greener energy system, China started its journey towards developing an alternative energy system. A new system that reduces pollution, limits its dependency on foreign coal, natural gas and oil was envisioned.

China’s Ambitious Renewable Energy Plans

According to RENI21’s 2014 Global report, in 2013, China had 378 gigawatts (GW) of electric power generation capacity based on renewable sources, far ahead of USA (172 GW). The nation generated over 1,000 terawatt hours of electricity from water, wind and solar sources in 2013, which is nearly the combined power generation of France and Germany.

The country has now set its eyes on leading the global renewable energy revolution with very ambitious 2020 renewable energy development targets.

China’s Renewable Energy Development Targets













In May 2015, we published an article on the solar power boom in China, in which we presented the revised, higher solar power generation targets.

To achieve the 2020 renewable energy targets, China has adopted a two-fold strategy.

  1. Rapidly expand renewable energy capabilities to generate greener and sustainable energy.

    It has significantly expanded its manufacturing capabilities in wind turbines and solar panels to produce renewable electricity. As per data from The Asia-Pacific Journal, China spent a total of US$56.3 billion on water, wind, solar and other renewable projects in 2013. Further, China added 94 GW of new capacity, of which 55.3 GW came from renewable sources (59%), and just 36.5 GW (or 39%) from thermal sources. This highlights a major shift in energy generation mix as well as China’s commitment towards cleaner energy technologies.

  2. Reduce carbon footprint.

    The government has banned sale and import of coal with more than 40% ash and 3% sulphur. Government’s Five year plans have stringent targets on reducing coal consumption as well as CO2 emissions. It is expected that environmental and import reforms will become more stringent along with greater restrictions, which would help accelerate China’s migration to a green economy.

The government has also announced a range of financial support services, subsidies, incentives and procurement programs for green energy production and consumption. Solar PV and automotive industries are good examples.

  1. By supporting domestic production and providing export incentives, China has become the global leader in solar panels. Over the last few years, the government has also financed small-scale decentralized energy projects, deployed and used by households and small businesses, in order to make them self-sufficient in their energy needs

  2. China has also positioned itself as the leading manufacturer of electric vehicles globally. According to Bloomberg, China is mandating that electric cars make up at least 30% of government vehicle purchases by 2016. To achieve this target, the government has started investing on essential infrastructure and providing tax incentives for purchasing of electric vehicles.


China has laid the foundations for a future where renewable energy will play a vital role. The advancements in technology and changes in policies will further enhance the country’s renewable energy landscape and will drive affordable, secure and greener energy. How the Asian giant achieves to balance between its economic, industrial, regulatory and environmental goals with sustainable renewable energy investments will, however, only become clear in the next few years.

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Mexico: The Next Manufacturing Powerhouse?

As China’s cost advantages continue to erode with its increasing wages and fuel costs, the trend of nearshoring surges in popularity. North American manufacturers have started to include Mexico in their supply chains to achieve operational efficiencies such as speed to market, lower inventory costs, and fewer supply disruptions. As a result, Mexico’s manufacturing industry has gained tremendous momentum in recent times and industry experts often cite Mexico as ‘China of the West’.

The Changing Global Manufacturing Landscape

“There is always a better strategy than the one you have; you just haven’t thought of it yet” – this quote from Sir Brian Pitman, former CEO of Lloyds TSB, captures the dire need for companies seeking to gain competitive edge. In the current business environment with shrinking profits and increased competition, companies are under tremendous pressure to gain operational efficiencies.

More than a decade ago, when in 2001 China joined the World Trade Organization, it changed the dynamics of the global manufacturing industry. It became the safe haven for manufacturers across many industries and geographies due to significantly lower wages it offered as well as the abundant workforce. However, more recently, with sharp wage and energy cost increases, declining productivity, as well as unfavorable currency swings in China, the global manufacturing industry is witnessing another paradigm shift, as outsourcing production near home has gained popularity amongst North American companies. The economic growth, skilled labor force, proximity to the US market has allured firms to open up their manufacturing operations in Latin America region. Companies are investing billions of dollars into new production capacities in Latin America to serve their North American markets. In 2011, Gartner predicted that by 2014, 20% of Asia-sourced finished goods and assemblies consumed in the USA would shift to the Americas. Although, the entire Latin American region has witnessed an influx of investments, Mexico seems to have outperformed its peers.

Why Mexico? Why Now?

Mexico received a record US$35.2 billion in foreign direct investment (FDI) in 2013 from various countries, of which 74% was directed towards the manufacturing sector. According to a 2014 AlixPartners study, Mexico continues to be the top-choice for North American senior executives from manufacturing-oriented companies to outsource. So what has suddenly attracted manufacturers towards Mexico?

On the one hand, labor costs have seen a sharp rise in China over the past 7 years. Wage inflation has been running at about 15-20% per year and this trend is expected to continue in the coming years. The tax incentives offered by the Chinese government for foreign companies are diminishing, while local energy costs and costs of shipping goods back to the USA continue to increase. As per AlixPartners’ 2013 estimates, by 2015, manufacturing in China is expected to cost the same as manufacturing in the USA. Additionally, going forward, China is set to be more focused on catering to the rising domestic demand, as its domestic businesses grow and consumers are strengthening their purchasing power. These factors have made North American companies to re-think their outsourcing strategies, previously heavily linked to China-based manufacturing. Mexico seems to have seized this opportunity and started to reap the rewards by establishing itself as a lucrative manufacturing hub.

On the other hand, a dramatic improvement in cost competitiveness is driving Mexico’s manufacturing industry growth. Mexico government’s economic reforms, sound policy framework, and investments in infrastructure have boosted investor confidence and attracted several corporations to open their manufacturing operations in Mexico. According to BCG’s Global Manufacturing Cost-Competitiveness Index of 2014, Mexico has positioned itself as a rising star of global manufacturing. Besides having a growing aerospace industry, the country now has positioned itself as a major exporter of motor vehicles, electronic goods, medical devices, power systems, and a variety of consumer products.

Including North America Free Trade Agreement (NAFTA), Mexico has more free-trade agreements than any other country in Latin America. For manufacturers, this results in ease of doing business as well as a range of tax and financial benefits. Additionally, lower wages and energy costs offered by Mexico, strengthens its prospects as an outsourcing destination for North American manufacturers. Mexico is US’ third largest trade partner and has seen its exports to the USA increasing from US$51.6 billion in 1994 to US$280.5 billion in 2013, an increase of a whopping 444%.

US Imports from Mexico

 

The mass consumerization of IT, increased competition, and changes in consumer behavior are forcing companies to develop and deliver products at a faster pace than ever before. Manufacturers need to streamline their supply-chain operations in order to be more agile and customer-centric. Mexico’s proximity to the US market makes it compelling for North American companies to nearshore their manufacturing as this can drive transport costs down, increase their speed to market, and reduce inventory cost. Besides, it helps them to avoid supply-chain disruptions and serve the markets better by reducing shipping lead times, ensuring on-time deliveries to customers, and responding faster to customer issues.

In the past few years, North American aerospace companies such as Bombardier, Cessna Aircraft, Honeywell, General Electric, Hawker Beechcraft, and Gulfstream Aerospace have all developed major operations in Mexico. In the electronics industry, 2014 figures from BCG show that Mexican exports of electronics have more than tripled to US$78 billion from 2006 to 2013. This has also attracted the eyes of Asian electronic giants such as Sharp, Sony, Samsung, and Foxconn who invested heavily in Mexico as a part of their outsourcing strategy to effectively serve their North American markets. In 2013, they account for nearly one-third of investment in Mexican electronics manufacturing.

In the automobile sector, Mexico today is the world’s fourth largest exporter of light vehicles. On top of Ford, General Motors, and Chrysler’s significant investments towards manufacturing facilities in Mexico, the country is now gaining traction from the likes of global players such as Nissan, Honda, Toyota, Mazda, BMW, and Volkswagen. By investing in Mexico, all companies have committed to establish or strengthen their manufacturing capabilities there. According to IHS’s 2012 estimates, by 2020, Mexico will have the capacity to build 25% of the vehicles remaining on roads in North America.

Why manufacturing companies are running to Mexico with their manufacturing needs makes perfect sense due to its cheap and well-educated labor force and the proximity that can provide companies a strong supply base to cater the North American markets. Combining these factors with the rising middle-class population and increasing consumer spending across several South American nations, offers manufacturers a strong value proposition not only to use Mexico-based manufacturing to support their established North American markets, but also to penetrate and grow its customer base in emerging South American markets.

Challenging Times Ahead

Despite Mexico’s emergence as a leading destination for manufacturing nearshoring, there are certain pain-points that need to be addressed. Mexican government lowered its growth projections for 2014 after a disappointing economic performance during the first quarter of the current year. As reported by Bloomberg in May 2014, the economy is struggling to re-bound from 1.1% growth last year and many analysts predict the growth to be extremely modest in the short term.

Security concerns top the list of worries due to the nation’s history of drug-related crime and attempts to slip contraband into trucks moving north across the Mexico border. It will be interesting to see how the government plans to keep this under control, and whether these attempts will result in investors’ increased confidence in this market.

Further, despite recent reforms and investments made in infrastructure, there are large gaps that need to be filled. The country has areas with unstable supplies of water, electricity, and gas. In order to compete with the likes of China, and to further encourage the influx of foreign investments, Mexico’s government will have to make continued investments in infrastructure in the foreseeable future.

Additionally, over longer term, as Mexico continues to attract manufacturers from across the globe, leading to growth in manufacturing employment and increase of wages, the country might face a similar challenge to that of China, where labor rates continuously increase over years and cease to be as attractive as they used to be. This can hamper the nation’s competitiveness as a lucrative outsourcing destination. It is now the task for policy makers to develop policies that can enable Mexico to be more than just a source of cheap labor. To maintain good availability of skilled labor both in terms of quality and quantity that can meet the global manufacturing demands is a rather complex challenge.

 

For manufacturers operating in today’s cost-conscious environment, Mexico is becoming their top manufacturing go-to destination to shorten supply chains, cut inventory and logistics costs, and reduce delivery lead times. Although Mexico seems to be on the right path towards establishing itself as the manufacturing hub for the North American markets, it still has a long way to go in order to become the global manufacturing hub. Together with ongoing economic, social, and political reforms, as well as a progressive work environment, Mexico definitely can hope for a bright future as the hotspot for global manufacturing.

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Alcohol in Pouches – Fad or Business Reality?

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Packaging and labeling are one of the key factors driving alcohol purchasing decision for an average consumer. For years, the alcohol packaging industry focused on developing sleek, sophisticated bottles with elegant labels, a significant factor in brand positioning. Beer was amongst the first alcoholic beverages to be poured into something other than glass container. Beer cans gained popularity several decades ago, however always posed the problem of lack of resealability, one of the most important package attributes for consumers. In wine segment, sales of carton box (e.g. Tetra Pack) and bag-in-box packaged wine started to accelerate in early 2000s, though these were mostly associated (sometimes not without a reason) with substandard quality products. This has continued to improve, however till date, it is the bottle that still rules alcohol packaging, and any other form of packaging in alcohol drinks generally meets with consumers’ skepticism and assumption of inferior quality.

With a relatively new concept of alcohol sold in pouches, it is unreasonable to expect a different reaction, with associations with baby beverage rather than classy adult drink. However, something is buzzing in the alcohol pouch packaging industry, and while still marginal, several launches of alcoholic drinks and beverages in this packaging format were welcomed with surprising consumer acceptance.

What’s the growth story so far?

In September 2012, Nielsen reports indicated that retail sales of pouch-packaged alcoholic beverages were about US$200 million annually (compared to US$12 million sales in a comparable period in 2010). This growth is being eyed by more and more producers, and invites market entries across new products, flavors, and alcohol types. Interestingly, it is being observed that this new packaging format brings additional sales and expands the market – while there is some level of cannibalization of existing sales with consumers shifting from purchases of bottled drinks to pouched drinks, there is a number of new consumers, who never bought such drinks before (and probably would not have tried them in bottled format, if it was not for the curiosity of trying a new drink in a pouch).

Ready-to-drink and frozen cocktails are currently the leading segment, in which pouches are gaining popularity. For instance, sales of several frozen cocktails such as margaritas and daiquiris, offered by brands such as Daily’s and Cordina in 187ml and 296ml pouches, are known to have witnessed healthy growth in 2012 in the USA, and it is expected that majority of growth will continue to be experienced in this market. The UK has also seen launches of pouched alcoholic drinks over the past few years; however, they were typically associated with summer season.

Another segment to have seen pouch launches was, surprisingly, vodka. In early 2013, Good Time Beverages launched its first Ultra Premium Vodka in flex pouches, positioning the product as an environmentally- and budget-friendly option. This was an addition to the existing line of pouched Good Time Beverages’ products, Bob & Stacy’s Premium Margarita and Big Barrel Spirits.

In wine segment, while multiple wineries in the USA, Australia, Europe, and South Africa have been using pouches for several years, the trend is yet to take off in mainstream use. This is mostly due to the fact, that the common perception of wine being a traditional and sophisticated product clashes with pouches being typically associated with hip, unsophisticated, low quality products. Launches of pouched wine products tend to focus around multiple-serve quantity pouches, e.g. launches by Echo Falls and Arniston Bay, both in 1.5 liter stand-up pouches with dispensers, launched in the UK in ASDA in summer 2013. The products were so popular that, ASDA followed with the launch of its own pouch wine brand. ASDA’s sourcing arm, IPL Beverages, which deals with bottling and pouching, said that the demand for pouched wines was so great that it led to sales forecasts being outstripped by 400% by the actual demand.

What’s so great about the pouches?

Contamination and oxygen barrier

Glass has long been considered the best material to store wine and other alcohols, mostly due to the fact that it is neutral and does not lend flavors to the bottle’s content, even during long-term storage. Alcohol was also too aggressive for most flexible packaging available in the market, affecting the layers of films used in such pouches and compromising their safety and durability. Therefore, previous limitations to the introduction of pouches in alcohols packaging were driven not by the problems with leakage or thickness, but rather with the right choice of materials and laminating – materials that would offer adequate protection and prevent product’s ingredients from changing their properties. The currently available pouches do not pose such problems, e.g. with triple-layer structure: polyethylene terephthalate, aluminum metalized film, and polyethylene. Instead, they offer very good oxygen barrier with around one year shelf life as the tap nozzle allows for one way flow, and once the beverage is poured, oxygen does not enter the container, extending the product’s freshness.

Ability to compete in economy price range

Selling alcoholic beverages, such as wine or vodka, in a pouch, enables the producer to compete against the glass bottle in the economy price range, both in single serving capacity, as well as larger 1.5-2 liter pouches. For instance, in 2012, the single-serve 10-ounce pouches of fruity malt-beverage alcoholic drinks by Parrot Bay or Smirnoff retailed for around $1.99 in the USA. Thus, it was a cheap, easy-to-carry option that offered these alcoholic drinks at a fraction of a bar or bottled equivalent price. In Europe too, economy packs of wine, sangria, and other drinks in larger 1.5 liter pouches meet with customer acceptance, allowing the producers to increase sales.

Lightweight for reduced transportation costs and greener label

The traditional glass bottle always brought challenges, due to its energy intensity in production process, as well as weight and fragility in transportation. Pouches, on the other hand, offer reduced weight and by far greater resistance in transportation, considerably reducing transportation costs (using less fuel to transport same amount of the product), at a lower risk of breakage. Pouches are also presented as a greener alternative to glass, as they do not require such energy-heavy production process. Additionally, many currently available pouches are increasingly made with recyclable materials. Overall, pouches are believed to offer an 80-85% reduced carbon footprint compared to glass (i.e. flexible film pouch is said to offer a carbon footprint of approximately 20% of traditional glass bottles). Also, producers indicate that in alcohol packaging, the cost of pouches stands at around 68% of the cost of traditional bottling.

Frozen single- and multiple-serve convenience

From consumer’s perspective, too, pouches have the potential to deal with some of the disadvantages inherent to glass bottles. Several alcoholic drinks launched in a pouch are positioned as straight-from-the-pouch, instant, ready-to-drink cocktails, that do not require the use of cork pullers or even glasses. Currently offered pouches, thanks to metalized layers, allow for faster cooling (about half the time required to chill a bottle), and can be frozen, while cans and bottles cannot. Such ready drinks are typically launched in single- or double-serve size, allowing the consumer to save time of preparing a real drink. There have been several launches in larger capacities as well, such as Pernod Ricard’s Malibu rum launched in 2010, at 1.75 liters pouch size. The product was not positioned as a single serve but rather emphasized it was enough for 10 cocktails, for use in larger gatherings or over period of time, thanks to resealable nozzle. Also in wines segment, pouches, thanks to their reduced weight and resistance, can be larger, at 1-2 liters. 2-3 liter pouches are particularly popular in food service sector, e.g. in restaurants selling wine by the glass.

Lightweight for on-the-go use by consumers

Reduced weight and resistance to breakage have found consumers’ acceptance, as pouched alcoholic beverages are often positioned as on-the-go, convenient, easy products for use in outdoor situations, picnics, concerts, boating, barbecues, etc. Convenience of pouches also comes from the pack’s stability thanks to the popular stand-up design, commonly offered reseability (in a form of a tap or screw cap, a considerable advantage over vast majority of cans). Pouches are believed to be stronger, safer, and more convenient for consumer transportation, and they eliminate the risk of an unpleasant realization of having left the cork puller at home.

Challenges and question marks

It is unlikely, to say the least, that the nearest future will see pouches enter the mainstream dinner-table use. As of 2013, pouches had rather limited application in retail alcoholic drinks markets globally, with differing levels of popularity across regions and seasons. The most significant challenge for this packaging format is still to build consumer trust in quality of an alcoholic drink sold in a pouch. Equally important challenge is to overcome the consumers’ perception that classy alcoholic beverages (wine, vodka) should come only in a bottle and perception of mismatch of pouched wine and traditional wine etiquette.

While the list of potential advantages of pouches in alcohol packaging is unquestionably robust, there is still a key question of the consumer’s long term acceptance of this packaging format. It remains unclear what it will mean to a range of alcoholic beverages, especially in wine, whisky, and vodka segments, which have traditionally positioned themselves in upper to premium segments. Will the pouches, no matter how sleek or elegant in design, affect such a brand positioning? Will they ever go beyond the outdoor use, and enter mainstream use (dinner tables in homes and restaurants)? Will a pouch be ever fully accepted in such sophisticated setups, or will the association with juices, baby drinks, or inferior quality remain too strong? And finally, while producers emphasize green aspects of pouches in terms of production and transportation, what is the real environmental impact of such pouches ending up in a landfill, considering that not all used pouches will enter recycling stream?

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Strike On Syria – Potential Impact On Emerging And Frontier Markets

Though there is still uncertainty of the US military action on Syria, global markets seem to have already given an indication of what could be in store if it actually happens. Crude oil prices rallied in the last week of August amid indication of strike, followed by a fall in oil futures, as the fear of imminent action receded. In another instance, share markets showed signs of panic due to a false alarm regarding missile attack on Syria (which eventually turned out to be an Israeli missile testing exercise).

The possible US strike on Syria has implications for global economy, and specifically for emerging economies, which are experiencing economic slowdown. The situation could be a tough test for countries such as India and Indonesia, as both of them struggle to keep trade-deficit under control, and are under the watch of credit rating agencies. For countries such as Brazil and Mexico, the US action may lead to delayed economic recovery. For Russia, being one of the largest oil producers, political implications are more than the economic one in case of a unilateral US action (i.e. without UN backing) on Syria.

While a sense of uncertainty and urgency prevail globally, we take a look at what potential impact the strike might have on select emerging and frontier markets.

Strike on Syria - Impact on Emerging Economies

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