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24/07/2013by EOS Intelligence EOS Intelligence No Comments

Auto-Financing in China – A Valuable Business Proposition

From a humble beginning in 1998, when state-owned banks were first allowed to provide car loans, automotive financing has come a long way in China. Vehicle loans are now available through commercial banks and automotive finance companies (AFCs), which are mainly non-banking financing companies (captive subsidiaries of automotive OEMs, both domestic and foreign). According to a 2012 report by Minseng and Deloitte, outstanding car loans are expected to grow over five times to reach US$ 160 billion during the next decade, from US$ 31 billion in 2011.

China has been a late bloomer when it comes to automotive finance, mainly because of its cultural mindset, which has been against credit-based consumption (houses are still paid for in cash, so a cash purchase of a car isn’t considered a big deal). However, in the last few years, the Chinese have become more open to the idea of credit and the trend of automotive finance has caught up, mostly with younger generations. About 80% of automotive financing consumers in China are individuals in the 20-40 years age group, according to a survey conducted by China Europe International Business School. The survey also found that 30% of buyers in this age group are likely to choose some form of auto financing, compared to only 10% of buyers over the age of 40.

Auto loan penetration rate currently is about 10% and is expected to triple by 2017. Developed automotive finance markets such as USA, UK and Germany boast of penetration rate of 92%, 74% and 70%, respectively; thereby highlighting the underlying potential in the world’s largest automotive market.

This potential hasn’t gone unnoticed and China now boasts of having close to two dozen automotive finance companies; however, these AFCs only account for one-fifth of the car loans market. The market is instead dominated by commercial banks, mainly the big four state-owned banks, largely thanks to their significant first-mover advantage over AFCs (state owned banks have operated in this segment since 1998, while AFCs started offering auto-financing in 2003).

Another disadvantage for AFCs vis-à-vis commercial banks is their inability to raise funds through bank deposits or by issuing bonds. In China, AFCs are only allowed to raise funds through inter-bank lending. Consequently, interest rates offered by AFCs to car buyers are higher, making their services less competitive. Moreover, AFCs also face a mismatch between the maturity of short-terms loans they have to take from banks and the maturity of the long-term car loans they provide to their customers. With such unfavourable financial conditions, AFCs find it tough to compete with commercial banks.

In spite of the many constraints, AFCs continue to set up their businesses in China (almost 10 new entrants over the past 24 months). One luring factor is China’s gradual opening-up of its domestic financial markets to foreign investors. The world’s second-largest economy is also considering allowing foreign AFCs to issue financial bonds in China. Moving from bank loans to bond financing, should help AFCs reduce funding costs and become more competitive. Bond issuance will also help them in extending the average maturity of their liabilities and create a better maturity match between their assets and liabilities.

The market potential for automotive financing in China is obviously huge, and with the gradual easing of regulatory barriers, foreign financing companies are much more comfortable setting up a shop in the country. This will lead to more competitive financing options for automotive consumers and will also go a long way in popularizing automotive financing concept in China.

27/06/2013by EOS Intelligence EOS Intelligence No Comments

Future of Global Solar Power Industry – Tense, But There’s Still Hope.

The global solar power industry was always viewed as one based on flawed business principle of artificial sustenance. With prolonged low economic growth, the artificial support base disintegrated, resulting in shutdown of multi-million dollar business across the globe.

Several leading players, such as Siemens, Solar Millennium, First Solar Inc, and SunPower Corp and Suntech Power, have either filed for bankruptcy or pulled out of their loss-making solar power businesses. Others, such as Germany-based Bosch, have decided to wrap-up solar operations at the end of 2013 after having “tried unsuccessfully to achieve a competitive position”.

A 60% fall in solar panel prices between 2010 and early 2013, as well as the rapid expansion of natural gas production in the USA and curtailment of subsidies in the EU were some of the key reasons for growing losses. What is also worth noting is the overcapacity in the market – global production capacity for photovoltaic panels reached about 60 GW in 2012, while expected demand was only 30 GW. Driven by such unsustainable market conditions, no wonder solar power companies went out of business.

Industry experts, however, view the above factors as simply the result of China’s growing dominance in the global solar power industry. Driven by government subsidies, China became the largest solar panel supplier, accounting for 60% of global solar power production capacity. This domination of the industry has, however, come at a price. Amidst growing unhappiness with China-made products leading to local companies becoming uncompetitive, USA imposed a 40% anti-dumping duty in 2012 while in May 2013 the EU imposed provisional duties of 12% (likely to increase to 47% in August) on imports of Chinese-made solar panels. Whether this will deter China or encourage local growth is unknown; this might however have a negative effect of pushing the industry further into crisis.

Beneficiary of the present situation are likely to be manufacturers in countries like Taiwan which are not yet subject to US/EU import tariffs. About 90% of solar cells manufactured in Taiwan are exported to the USA, Europe, and China. Taiwan might also benefit from the EU’s imposition of duties on China made products, driving Chinese investment into Taiwan for setting up manufacturing plants to then directly export to the EU from Taiwan without having to pay the duties. Recent activities of some Chinese companies have indicated Turkey and South Africa being possible destinations for setting up manufacturing units.

The Chinese will find ways to get their products into the US and EU markets, even if it means moving their operations to Taiwan or other countries which are not subject to the high duties. The real issue, however, is the state of the global solar industry – with some of the major players shutting down operations and funding of solar power depleting, is the end of the road? We doubt it.

There is still hope for the solar power industry, largely driven by favorable policy measures in emerging Asian and Latin American countries. The first half of 2013 witnessed solar power investments in several countries, including Kuwait, South Africa and Chile. The industry received a major boost from Middle-East when Saudi Arabia announced a US$100 billion investment plan in 2012, to generate one-third of the country’s electricity demand through solar energy. Although current demand in these emerging markets is relatively low and may take about 10-15 years to develop into a sizeable market, the scope for growth is immense.

23/05/2013by EOS Intelligence EOS Intelligence No Comments

Will Pharma Tweet Louder? 6 Rules of Doing it Right on Social Media

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Initially considered to be exclusively a tool for common people to connect with friends and share their private pictures, social media platforms have now gained the status of a potent communication channel eagerly used by companies across the world. While the expansion of social media is influencing the way businesses are conducted today, pharma and healthcare industry has been somewhat slow and reluctant to use it to its fullest potential.

By 2012, Facebook user base crossed 1 billion mark, increasing by 200 times since 2005, while Twitter recorded tremendous growth, reporting 200 million active users sharing 400 million tweets per day. While some industries such as consumer goods, retail, and hospitality have been benefitting from engaging with their customers through a range of social media platforms, other sectors, including pharma and healthcare, have been slow to join the ‘social crowd’.

Points of concern

There is a reason why healthcare-related sectors were late on the social media map. Creating an open platform for communication on health and drugs aspects, raises a range of concerns: the FDA regulations, patient confidentiality, cyber security, unavoidable off-label use discussions, uncontrolled negative comments, and risks of providing wrong medical advice that could lead to lawsuits. The FDA in particular, plays an important role here, through its Division of Drug Marketing, Advertising and Communications (DDMAC), which lays out the rules of the content that can and cannot be communicated, what content must be included and the manner in which the communication must occur. The fears associated with social media activity monitoring by the FDA, typically originate from three problems:

Lack of clarity and formal guidelines – in 2011, the FDA published draft guidelines, and it is yet to develop definitive rules on social media policy. The FDA is acting slow, and there is no clarity on dos and don’ts for social media engagement, yet the authority regularly scans the social space to monitor risky communication, while pharma companies find the rules of the game ambiguous
User-initiated off-label use discussions – a common issue in pharma social media platforms is user questions and discussions on off-label use of drugs, i.e. using a drug in a different way than described in the approved drug label or leaflet. This is considered unsolicited content and companies must respond and correct such a content occurring in public forum as these discussions might encourage dangerous experiments with drugs by patients or might be confused with recommended and approved use of a drug
Adverse event reporting obligation – the FDA obliged pharma companies to immediately report any adverse drug effect or reaction they learn about. Social media give platform for large numbers of patients to share their experience with adverse drugs effects, and the companies are afraid they will have to report it, which may cause investigations, bad press, and might lead drug being banned from sale

Similar fears are faced by non-US pharma companies too, as the FDA’s local counterpart authorities introduce similar regulations on communication via social media, which at times can be even stricter than the American ones.

Game worth the candle

Ignoring the risks by pharma companies can unfold a range of undesirable scenarios, a fact that has kept many drug makers hesitant of engaging in social media for quite some time. But this does not mean that pharma and healthcare organizations are still not present in social media at all. To the contrary, pharma companies, healthcare providers, device manufacturers, and health insurers have started to listen and engage with users through social platforms, though many of them still do it cautiously and have still not been able to unlock the social media’s full potential. These players have started to understand that with careful moves, the benefits will outweigh the risks:

generate engagement and discussion around health issues, which contributes to the positive reputation and brand image, and obviously – increase sales,
get quick, cheap, first-hand information on drugs’ effects on a large scale, which brings valuable insights that are not available from regular clinical trials whose scale is always smaller,
gather information invaluable in building marketing strategies, including pointers on price perceptions, drug availability as well as patients’ opinions about competitors’ drugs.

Who’s doing it?

Though it was estimated that in 2011, 90% of the pharmaceutical industry was still inactive on social media, currently, this has changed (though today’s participation share is unknown). Several pharma-sponsored communities are now active across Facebook, Twitter, YouTube, Google Plus, on one or multiple platforms, with a differing level of interactivity and different weight being put on inbound versus outbound marketing. Some of the examples include:

Roche’s Accu-Check Diabetes Link, a diabetes-support community with information, discussions, and blogs
GSK’s Alli Circles well-being, weight loss, and health community
Novartis’ CV Voice for cystic fibrosis patients and Chronic Myelogenous Leukemia own community-based site CML Earth
Pfizer’s community ‘getold.com’ targeting the expanding elderly group of the American population
Sanofi US’ Diabetes support community
Soon-to-be-launched Boehringer Ingelheim’s Facebook-based game, where players create and operate their own pharmaceutical firm, and discover imaginary medicines through virtual laboratory

Getting it right

It appears that the healthcare industry is finally attempting to catch up on the social media revolution in spite of a slow start. From primarily information dissemination, it is now moving towards real time engagement between physicians, patients, and other stakeholders. Soon, developing a social media policy will no longer be an option for pharma companies. But this should not be seen as a burden, but rather as an immense opportunity for the pharmaceutical companies to develop trust, build brand image, and impart health education. Drug makers that want to be successful on their social media path should consider 6 basic rules of online presence for pharma companies:

Take your risks seriously – social media engagements, especially in pharma domain, always raise privacy, legal, and confidentiality concerns among the participants and monitoring bodies. Extra cautiousness in operating online communities is of utmost importance, including constant monitoring of the content being added by individual users and patients. Social platforms also pose risk of incorrect drug information or unfair accusations that might damage your image, but it can be flipped to an advantage, using the platform to quickly clarify and avert unwanted comments, provided that you have a dedicated, competent staff handling your social media
Control your speakers – given the high risks and ambiguity of formal guidelines, there is a need for internal policy or guideline book listing dos and don’ts for online communication, content approval process, crisis management practice, confidential information sharing policy for employees running social platforms on behalf of the company
Know your target audience – the social media pharma-related content must stay relevant and target focused groups to have the right impact. Patients with a particular disease or ailment look for relevant, detailed information, and they typically already know quite a bit about the problem. Expertise must be shown along with dedication to creating high quality content, that is useful, new, and (ideally) entertaining
Get the objective right – social media is not another advertising board. The primary aim of the social media presence is to generate engagement as well as share and manage knowledge by facilitating interaction and discussions. This must take precedence over advertising
Be transparent – transparency is always appreciated by consumers and patients. The link with the company must be clear, users working for the company must disclose their affiliation, and negative comments, unless unjustified or vulgar, cannot be censored
Understand that social media are not a lone island – social media activity and content must be aligned with overall marketing strategy and be used cohesively with all other marketing channels, ideally to complement each other. Social media cannot become a neglected child of the marketing department in a long run, it must be maintained actively and linked to other marketing efforts whenever possible (e.g. to disseminate important announcement teasers, generating traffic to blog entries, or provide interactive content as part of larger marketing campaign including traditional media)

Social media engagements by drug makers might seem only as a nice publicity stunt, but it is so much more than that. Pharma companies, as most players across many industries, finally started to realize that listening and engaging with conversation with the customer pays off in many aspects. Just as was the case in consumer goods or retail sectors, social media will continue to change the pharma industry on a large scale. Players who want to matter, should not allow themselves to stay behind, even considering the risks involved.

15/05/2013by EOS Intelligence EOS Intelligence No Comments

As Myanmar Works Towards Stability, Communal Violence Holds The Nation Back.

In mid-2012, we published a report on Myanmar, looking into its potential as a new emerging market with considerable investment and trade opportunities for foreign investors (see: Myanmar – The Next Big Emerging Market Story?). Almost a year later, we are returning to Myanmar, to check and evaluate whether the political, social, and economic changes envisioned and proposed by the quasi-civilian government have really translated into actions to push the country forward on the path to becoming the next big emerging market story.

Being plagued by uninspiring and inefficient governance for more than six decades, Myanmar for long has been proclaimed as Asia’s black sheep. The Chinese named it ‘the beggar with a golden bowl’, asking for aid despite its rich natural and human resources. However, having embarked on a momentous yet challenging political revolution, the nation is said to be on its way to open a new chapter in the Asian development story.

Contrary to what was believed to be just hollow promises and sham, the reforms initiated by the Thein Sein government have gathered much steam in quite a few cases. Bold moves over the last year have also immensely helped the country in gaining goodwill internationally. We are looking at some of the game-changing reforms enacted over the past present year in Myanmar.

Media Censorship

In August 2012, the government put in actions their proposed end to media censorship. As per the new system, journalists are no more required to submit their reports to state censors prior to publication. To further strengthen the power of media, in April 2013, the government abolished the ban on privately run daily newspapers – ban remaining in force for over 50 years.

Foreign Investment Law

In January 2013, the Thein Sein government passed a foreign investment law that was initially drafted in March 2012. The law allows foreign companies to own up to 80% of ventures across several industries (apart from activities mentioned on the restricted list –including small and medium size mining projects, importing disposed products from other countries for use in manufacturing, and printing and broadcasting activities). This acts as an important milestone in opening up the Burmese economy to heaps of foreign investment.

Opening Up Of Telecom Sector

Myanmar, one of the least connected countries in the world, has embarked on the deregulation of its much neglected telecom sector by initiating the sale of 350,000 SIM cards on a public lottery basis. It plans to offer additional batches on a monthly basis. As a more tangible effort to revolutionize the sector, the government is auctioning two new 15-year telecom network licenses to international companies. These companies are to be announced in June 2013 from a list 12 pre-qualified applicants, namely, Axiata Group, Bharti Airtel, China Mobile along with Vodafone, Digicel Group, France Telecom/Orange, Japan’s KDDI Corp along with Sumitomo Group, Millicom International Cellular, MTN Dubai, Qatar Telecom, Singtel, Telnor, and Viettel. Despite the current 9% mobile penetration claimed by the government, an ambitious goal has been set to reach 80% penetration by 2015.

The World Responding To Myanmar’s Progress

As Myanmar works towards attaining political stability, introducing economic reforms and easing social tensions, the world is also opening up its arms to increasingly embrace the otherwise banished land. In April 2013, the EU permanently lifted all economic sanctions against Myanmar, while maintaining the arms embargo for one more year. The USA, on the other hand, has not permanently removed the sanctions, but has had them suspended since May 2012. This allows US companies to invest in Myanmar through the route of obtaining licenses. The definite abolishment of these sanctions by the EU puts pressure on the USA to act soon and lift them as well, to avert the risk lagging behind in the race to tap this resource-rich market. The USA has already begun working on a framework agreement to boost trade and investment in Myanmar. Japan has also been improving its relations with Myanmar to gain a foothold in this market.

With the EU, the USA and Japan encouraging investments in Myanmar, several international companies have directed investments to this previously neglected country.

In August 2012, a Japanese consortium of Mitsubishi Corporation, Marubeni Corporation and Sumitomo Corporation contracted with the Burmese government to jointly develop a 2,400 hectare special economic zone in Thilawa, a region south of Yangon. The Myanmar government will hold a 51% stake, while the Japanese consortium will own the remaining share in the industrial park, which will also include large gas-fired power plant. In the first phase of the project development, the companies plan to invest US$500 million by 2015 to build the necessary infrastructure on the 500 hectares area in order to start luring Japanese and global manufacturers.
In August 2012, Kerry Logistics, a Hong-Kong based Asian leader in logistics, opened an office in Myanmar. Recognizing the immense potential in the freight forwarding and logistics sector (underpinned primarily by growing international trade), European freight forwarders, Kuehne + Nagel, also began operations in this country in April 2013.
To cash upon a booming tourism market, in February 2013, Hilton Hotels & Resorts initiated the development of the first internationally branded hotel in Yangon, which is expected to open in early 2014. The hotel will be a partnership between Hilton Worldwide and LP Holding Centrepoint Development, the Thai company that owns the 25-storey mixed-use tower, called Centrepoint Towers, which will house the hotel. Hilton has signed a management agreement with LP Holdings to operate the 300-room property.
In February 2013, Carlsberg, the world’s fourth-biggest brewer, announced its plans to re-enter Myanmar, after it left the country in mid 1990’s owing to international sanctions.
Fuji Xerox, a joint American-Japanese venture, set up its office in Myanmar in April 2013. The company, which is the first player in the office equipment industry to start direct operations in Yangon, looks to revive its internationally declining business through this venture.
In April 2013, JWT, an international advertising firm, entered into an affiliation agreement with Myanmar’s Mango Marketing, in anticipation of opportunities in this country, given an increasing interest in Myanmar expressed by a number of international players who are likely to seek advertising and marketing services.

Civil Unrest Still Stands As a Major Concern

While Myanmar has made great strides in reforms over the past year, the ongoing unrest between Myanmar’s majority Buddhists and minority communities (primarily Muslims), and the lack of a concerted effort by the government to address it, poses a major threat for the nation to descend into ethnic-religious war. In October 2012, the Rakhine riots between the Buddhists and Muslims claimed 110 lives and left 120,000 displaced to government setup refugee camps around Thechaung village. A similar case followed in April 2013 in Meiktila, where the death roll of Muslims reached 30. Strong international condemnation for the growing racial and religious violence in the region has caused concerns of losing international support gathered over the past few years. Moreover, the use of military force to suppress the Meiktila riots raises fear about the army once again seizing power in the name of restoring order to the nation.

Myanmar’s attempts to transition into a democracy from a highly repressive state have yielded positive outcomes over the past year. While Myanmar seems to be on the right trajectory for future growth and stability, the government must address internal conflicts immediately before the nation stands at risk of tumbling back into chaos, with possible outcomes similar to those seen in Yugoslavia. Therefore, it is safe to say that although political and economic developments are increasingly seeing the daylight, underpinned by the government’s pro-development course, the recent spate of religious, ethnic and communal violence as well as the magnitude of reforms still to be introduced, might still question the nation’s ability to attract and sustain foreign investments and economic development in the long run.

06/05/2013by EOS Intelligence EOS Intelligence No Comments

Africa is Ready For You. Are You Ready For Africa?

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For decades, Africa was associated with poverty and helplessness rather than business opportunities and thriving markets. But the reality is evolving, and companies from across industries are increasingly including the African continent in their investment plans. Global FMCG players too have started to set their eyes on this untapped goldmine of opportunities. However, the market is much more complex than its thriving counterparts in Asia and companies must get hold of the market dynamics before entering or they stand the risk of getting their hands burnt.

Some two decades ago, it became apparent to the leading international FMCG companies that many of their core developed markets in the USA and Europe were no longer able to provide sustainable growth, which made them extend their business focus to include developing markets in Asia. While these economies will continue to still generate significant returns for quite some time, many global FMCG giants are already exploring new growth avenues and are turning their eyes towards the African continent. Growing middle class (already accounting for more than one-third of the continent’s total population, it is expected to hit 1 billion people by 2060), paired with accelerating economic growth, large youth population, overall poverty decline, and urbanization trends are the key factors underpinning Africa’s position as the next frontier in the global FMCG arena.

This has already spurred investment activity amongst leading FMCG players. By 2016, Unilever and P&G plan to invest US$113 million and US$175 million, respectively, to expand their manufacturing facilities in the continent. While these facilities are to be developed mostly in South Africa, they are expected to cater to developing markets across eastern and southern regions. Godrej, a relatively smaller India-based company, has taken up the inorganic route to tap this market, by acquiring Darling group, a pan-African hair care company.

Despite luring growth potential offered by the continent, the African markets are much thornier to penetrate than it seems. A shaky political and regulatory environment acts as one of the largest roadblocks. The continent has witnessed 10 coup d’états since 2000 and has been subject to countless changes in business policies resulting from unstable governments. Further, inefficient distribution networks, inadequate business infrastructure, as well as complex and inhomogeneous marketplace housing 53 countries, 2,000 dialects, and countless cultural groups, all cause African consumer markets difficult to navigate through.

Notwithstanding the challenges, the potential offered by the African continent overweighs. Companies, however, must mould their strategies and offerings to the realities of African markets in order to succeed. Here are a few pointers to consider:

Bring affordability and quality to the same side of the coin: Contrary to popular perception, the middle-class African consumer attaches much importance to quality and brands. Companies that have long followed the strategy of selling poor-quality products in this market cannot sustain for long. Having said that, affordability still stays as an important factor for the middle-class Africans. To deal with this, companies can look at offering good quality products in smaller packaging, to ensure low unit price. For several years, African consumers have gotten used to buying smaller quantities that could fit their limited budgets.
Discard the one-size-fits-all approach: On a continent with 53 nations, companies looking to enter African markets with blanket approach are likely to fail. While South Africa is relatively more developed and has slower growth, markets such as Nigeria and Kenya are developing at a rapid pace, and thus their dynamics differ. Consumer shopping behaviors and patterns also vary. Sub-Saharan nations, in comparison to North African consumers, tend to exhibit more brand loyalty and are more conservative in trying new things. North African countries also present stronger desire for international brands. Thus, it is most critical for international players to identify the characteristics of a particular market that they plan to enter.
Locate the right partners: Informal trade dominates African markets making distribution a daunting task. However, this challenge can be turned into an opportunity for companies to improve their competitive edge and bypass the lack of sufficient distribution and retail facilities. In rural areas of Nigeria and Kenya, Unilever has replicated its Indian direct-to-consumer distribution scheme, wherein a host of individuals undertake direct selling to consumers in their communities. Similarly, other companies have posted sales executives with each sub-distributor to manage inventory and brand image. Distribution costs are high in Africa but bearing them is not optional.
Move beyond traditional media: TV and print remain a popular and trusted media for advertising to urban consumers. However, owing to their low penetration in rural regions, they have limited impact on rural consumers. This brings forth the need to reach mass consumers through in-store marketing. Over the coming years, companies can also look into mobile advertising as surveys reveal that the number of Africans having access to mobile phones is already higher than those with access to electricity. Mobile penetration in the Sub-Saharan Africa stood at 57.1% in 2012 and is expected to reach 75.4% in 2016. This promises a gamut of mobile marketing opportunities for consumer companies.
Deal with infrastructural woes and innovate to compensate: Power outages, poor transportation, and limited access to cold storage facilities make public infrastructure undependable for businesses. Thus, companies must be open to invest in own power generators and water tanks. Innovations at the product end may also help overcome infrastructural limitations. For instance, Promasidor, an African food company, uses vegetable fat instead of animal fat to extend its milk powder’s shelf life when stored without refrigeration. While spending on infrastructure heavily increases costs, it can provide companies with a competitive advantage in the longer run.
Invest in personnel management and grow new talent: The fear for personal safety among foreign nationals and lack of skilled professionals within Africa makes recruitment a challenging task, especially for mid- and top-level management. Tapping into African diaspora located throughout the world comes across as a win-win solution. Moreover, providing training and management courses to local graduates allows addressing personnel needs over long term.

The African market can be a goldmine for FMCG players, if entered cautiously. However, the same can become a landmine, if proper investments and planning are not undertaken. Despite the present challenges, increasing number of companies will be looking into Africa, however only few will have the skill set to translate this opportunity into a great success.

08/04/2013by EOS Intelligence EOS Intelligence No Comments

Venezuela – Evolution After the Revolution?!

It has been a month since Hugo Chavez passed away, losing a two-year long battle against cancer. With snap elections on 14 April, both Venezuelans and the rest of the world eagerly await the outcome – an outcome that might drive Venezuela deeper into a state of socialism or towards the path of market-oriented economic development.

Whatever the result of the election, perhaps the most pertinent question is how Chavez’s demise has impacted the future of Venezuela’s oil economy? What good has the largest proven oil reserves in the world (297.57 billion barrels) brought Venezuela in terms of inclusive human and economic development?

Let us retrace our steps to 1998. The global oil industry was in a big mess, with prices at an all time low of (less than $10 per barrel), driven by oversupply of oil by OPEC member countries, which were unwilling to comply with production and export quotas. Things, however, took a turn for the better when in February 1999 Hugo Chavez came into power in Venezuela. Now at the helm of affairs of one of the world’s largest oil producing nations, it became important for Mr. Chavez to revive the oil sector, which was to become the driving force behind his socialist policies. In his own charismatic manner, Hugo Chavez convinced the OPEC members to lower production, thus driving-up oil prices (to a price of $25-28 per barrel).

Further, driven by his ambition to bring about a socialist revolution in Venezuela, a new Hydrocarbons law was passed in 2001, to bring all oil production and distribution activities in Venezuela under the purview of the government. The law proposed a minimum 51% state ownership of PDVSA, the national oil company, and an increase in royalties paid by foreign corporations from 16.6% to 30%.

Under Chavez, Venezuela also shifted its focus from the US, to forge closer alliance with Russia, China, Nicaragua, Cuba and Iran by signing preferential oil deals. These deals, however, put additional economic pressure on PDVSA, and in turn the Venezuelan economy, with 43% of the company’s crude and oil products sales not being paid directly in cash, resulting in shelving of some of the company’s investment plans.

Oil-sector reforms were carried out under a veil of socialist change and reform. While the pro-socialist policies of Hugo Chavez remain popular among the Venezuelan masses, they have resulted in a lack of talent and investment, causing the Venezuelan oil industry to decline. According to Morgan Stanley reports, Venezuela’s oil production declined by 25% during the Chavez era (1998-2013).

While the socialist regime under Chavez is said to have brought about a sense of income equality amongst Venezuelans, the cost of this equality has left the country in an economically dilapidated state. Huge deficits and high inflation have lead to significant devaluation of its currency (30% to the US Dollar in February 2013).

The state of the economy hinges purely on the outcome of the elections, with Nicolas Maduro, the acting president and the hand-picked successor of Chavez, and Henrique Capriles, the governor of Miranda State, vying to be the next president.

Nicolas Maduro, who served as a foreign minister under Chavez for six years, is a right-wing activist. A loyalist to Chavez, Maduro pledges to follow Chavez’s policies. Given his closeness to Chavez, Maduro also enjoys the support of military.

On the other hand, Henrique Capriles, who came closest to beating Chavez in the last elections in 2012 (bagging 44% votes), vows to adopt pro-business policies, which include de-politicization of the oil sector and opening-up Venezuela to foreign investments. Capriles does recognize that actions taken during the Chavez era cannot be undone over a short period of time.

Driven by the emotions linked with Chavez’s death, initial polls widely tip Maduro to win the upcoming elections. But given the economic condition of Venezuela, would this be a right choice? Even if Capriles wins, will the government be stable enough to guide Venezuela to development? Will the Venezuelan oil sector open for global trade? One can only speculate.

Irrespective of who comes to power, one thing will stay unchanged. The oil sector will remain critically important in either continuing to aid the path towards a fully-socialist state or changing the course to a more market-oriented economy.

01/04/2013by EOS Intelligence EOS Intelligence No Comments

Will Shale Gas Solve Our Fuel Needs for the Future?

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At first glance, shale gas might look too good to be true: large untapped natural gas resources present on virtually every continent. Abundant supplies of relatively clean energy allowing for lower overall energy prices and reduced dependence on non-renewable resources such as coal and crude oil. However, despite this huge potential, the shale gas revolution has remained largely limited to the USA till now. Concerns over the extraction technology and its potentially negative impact on the environment have hampered shale gas development in Europe and Asia on a commercial scale. However, increasing energy import bills, need for energy security, potential profits and political uncertainty in the Middle East are causing many countries to rethink their stand on shale gas extraction development.

How Large Are Shale Gas Reserves And Where Are They Being Developed?

An estimation of shale gas potential conducted by the US Energy Information Administration (EIA) in 2009 pegs the total technically recoverable shale gas reserves in 32 countries (for which data has been established) to 6,622 Trillion Cubic Feet (Tcf). This increases the world’s total recoverable gas reserves, both conventional and unconventional, by 40% to 22,622 Tcf.

Continent	Shale Gas Reserves and Development
North America	Technically Recoverable Reserves: 1,931 Tcf Till now, almost whole commercial shale gas development has taken place in the USA. In 2010, shale gas accounted for 20% of the total US natural gas supply, up from 1% in 2000. In Canada, several large scale shale projects are in various stages of assessment and development. Despite potential reserves, little or no shale gas exploration activity has been reported Mexico primarily due to regulatory delays and lack of government support.
South America	Technically Recoverable Reserves: 1,225 Tcf Several gas shale basins are located in South America, with Argentina having the largest resource base, followed by Brazil. Chile, Paraguay and Bolivia have sizeable shale gas reserves and natural gas production infrastructure, making these countries potential areas of development. Despite promising reserves, shale gas exploration and development in the region is almost negligible due to lack of government support, nationalization threats and absence of incentives for large scale exploration.
Europe	Technically Recoverable Reserves: 639 Tcf Europe has many shale gas basins with development potential in countries including France, Poland, the UK, Denmark, Norway, the Netherlands and Sweden. However, concerns over the environmental impact of fracturing and oil producers lobbying against shale gas extraction are holding back development in the region with some countries such as France going as far as banning drilling till further research on the matter. Some European governments, including Germany, are planning to bring stringent regulations to discourage shale gas development. Despite this, countries such as Poland show promising levels of shale gas leasing and exploration activity. Several companies are exploring shale gas prospects in the Netherlands and the UK.
Asia	Technically Recoverable Reserves: 1,389 Tcf China is expected to have the largest potential of shale gas (1,275 Tcf). State run energy companies like Sinopec are currently evaluating the country’s shale gas reserves and developing technological expertise through international tie-ups. However, no commercial development of shale gas has yet happened. Though both India and Pakistan have potential reserves, lack of government support, unclear natural gas policy and political uncertainty in the region are holding back the extraction development. Both Central Asia and Middle East are also expected to have significant recoverable shale gas reserves.
Africa	Technically Recoverable Reserves: 1,042 Tcf South Africa is the only country in African continent actively pursuing shale gas exploration and production. Other countries have not actively explored or shown interest in their shale gas reserves due to the presence of large untapped conventional resources of energy (crude oil, coal). Most potential shale gas fields are located in North and West African countries including Libya, Algeria and Tunisia.
Australia	Technically Recoverable Reserves: 396 Tcf Despite Australia’s experience with unconventional gas resource development (coal bed methane), shale gas development has not kicked off in a big way in Australia. However, recent finds of shale gas and oil coupled with large recoverable reserves has buoyed investor interest in the Australian shale gas.

What Are The Potential Negative Impacts Of Shale Gas Production?

Despite the large scale exploration and production of shale gas in the USA, countries around the world, especially in Europe, remain sceptical about it. Concerns over the environmental impact of hydraulic fracturing, lack of regulations and concerns raised by environmental groups have slowed shale gas development. Though there is no direct government or agency report on pitfalls of hydraulic fracturing, independent research and studies drawn from the US shale gas experience have brought forward the following concerns:

Will Shale Gas Solve Our Future Energy Needs?

Rarely does an energy resource polarize world opinion like this. Shale gas has divided the world into supporters and detractors. However, despite its potential negative environmental impact, shale gas extraction is associated with a range of unquestionably positive aspects, which will continue to support shale gas development:

Shale gas production will continue to increase in the USA and is expected to increase to 46% of the country’s total natural gas supply by 2035. USA is expected to transform from a net importer to a net exporter of natural gas by 2020.
Despite initial opposition, countries in Europe are opening up to shale gas exploration. With the EU being keen to reduce its dependence on imported Russian piped gas and nuclear energy, shale gas remains one of its only bankable long-term options. Replicating the US model, countries like Poland, the Netherlands and the UK are expected to commence shale production over the next two-five years and other countries are likely to follow suit.
Australian government’s keenness to reduce energy imports in addition to the recent shale gas finds has spurred shale gas development the country. Many companies are lining up to lease land and start shale gas exploration.
More stringent regulations from environment agencies are expected to limit the potential negative environmental impact of shale gas exploration.
Smaller energy companies that pioneered the shale gas revolution in the USA are witnessing billions of dollars worth of investments from multinational oil giants such as Exxon Mobil, Shell, BHP Billiton etc. are keen on developing an expertise in the shale gas extraction technology. These companies plan to leverage this technology across the world to explore and produce shale gas.The table below highlights major acquisitions and joint venture agreements between large multinational energy giants and US-based shale gas specialists over the last three years.

Major Deals in Shale Gas Exploration

Company	Acquisition/Partnership	Year	Investment
Sinopec	Devon Energy	January 2012	USD 2.2 billion
Total	Chesapeake Energy	January 2012	USD 2.3 billion
Statoil	Brigham Exploration	October 2011	USD 4.4 billion
BHP Billiton	Petrohawk	July 2011	USD 12.1 billion
BHP Billiton	Chesapeake Energy	February 2011	USD 4.75 billion
Shell	East Resources	May 2010	USD 4.7 billion
Exxon Mobil	XTO Energy	December 2009	USD 41.0 billion
Source: EOS Intelligence Research

Shale gas production is expected to spike in the coming three-five years. Extensive recoverable reserves, new discoveries, large scale exploration and development and technological improvement in the extraction process could lead to an abundant supply of cheap and relatively clean natural gas and reduce dependence on other conventional sources such as crude oil and coal For several countries including China, Poland, Libya, Mexico, Brazil, Algeria and Argentina, where the reserves are particularly large, shale gas might bring energy stability.

The need for energy security and desire to reduce dependence on energy imports from the Middle East and Russia (and hence to increase political independence), are likely to outweigh potential environmental shortfalls of shale gas production, and some compromise with environment protection activist groups will have to be worked out. Though the road to achieving an ‘energy el dorado’ appears to be long and rocky, it seems that with the right governments’ support, shale gas could become fuel that could significantly contribute to solving the world energy crisis over long term.

08/03/2013by EOS Intelligence EOS Intelligence No Comments

South Korea – At the Crossroads!

South Korea is the world’s fifth largest automobile manufacturer, behind China, Japan, the US and Germany. Automobile sales in South Korea breached the 8 million units mark for the first time in its history in 2012. The surge was mainly on account of strong overseas demand for locally-made models – exports accounted for 82% of these sales while domestic sales (accounting for the remaining 18%) actually contracted 4.2% to 1.4 million units in 2012.

Contracting domestic demand for local companies is mainly due to lack of real income growth, increased debt repayment burden and slump in the housing market in Seoul Special City (houses are often bought in South Korea for investment purposes). Meanwhile, overseas sales, cars exported from South Korea and vehicles assembled in overseas plants, expanded 7.9% to 6.8 million units in the same year.

The South Korean market is dominated by Hyundai Kia Automotive Group which accounted for 82% of domestic sales and 81% of exports in 2012. GM Korea, Renault Samsung and Ssangyong (acquired by Indian company Mahindra and Mahindra in 2011) account for 10% of the domestic sales while rest of the market is catered to by imports. BMW, Daimler (Mercedez-Benz), VW, Audi, Toyota, Chrsyler and Ford are the leading importers.

Free Trade Agreements

South Korea has aggressively pursued FTAs, with the provisional enforcement of an FTA with the EU from July 2011 and the full enforcement of an FTA with the US from March 2012. In the automotive industry, tariffs on parts and components were abolished as soon as the agreements came into force, whereas tariffs on vehicles will be abolished between South Korea and the EU over a three-to-five-year period and those with the US in the fifth year after enforcement of the agreement.

As a result of the FTA, exports to the EU sky-rocketed and the double-digit growth trend continued until March 2012. However, as the EU economy weakened, exports declined and returned to pre-FTA levels. In case of the US, exports surged around the time of the enforcement of the FTA in March, even though the tariffs on vehicles are yet to be scaled down. This phenomenon was labelled as ‘announcement effect’.

An interesting trend that has emerged is that whereas the domestic sales of South Korean cars declined by about 6.3% in 2012, domestic sales of imported cars increased by 24.6% in the same year. Moreover, for the first time, imports accounted for 10% of domestic sales, which is in sharp contrast to the 2% share about a decade back. European automotive OEMs have benefitted the most from this surge in demand for vehicles. This increased market share for European vehicles is mainly due to the fall in prices; as part of FTA between South Korea and the EU, the tariffs on large vehicles reduced from 8% to 5.6%.

Thus it can be said that while the enforcement of FTAs has been effective in boosting exports, it has brought about structural changes in South Korea’s domestic market.

Labour Strife

After an almost 4-year gap, strikes by the labor union returned to plague automotive manufacturing in South Korea in the summer of 2012. The industrial action, which also hit car parts manufacturers and some other industries, revived memories of the days when strikes were chronic in South Korea. Workers went on strike in 21 of the first 22 years since the unions’ formation in 1987; however, unions’ political influence has dimmed in recent years with declining memberships.

Hyundai, Kia and GM Korea were affected by the strikes and suffered record losses – Hyundai alone is estimated to have lost more than USD 1 billion. The main points of contention were the abolition of graveyard shift, wage increase and to confirming of permanent positions to the high proportion of contract workers. Although the companies agreed to most of the demands of regular workers, discussions with contract workers are still ongoing.

To offset the loss suffered from such strikes, OEMs are diversifying their production bases. Hyundai for one has moved to reduce the dependence on domestic manufacturing plants by expanding production in the US, China, India, Brazil and Turkey during the last decade. South Korean plants accounted for 46% of Hyundai’s capacity in 2011, down from 60% in 2008, when the last strike took place and 93% in 2000. Although another objective for establishing a global production network is to make inroads into the global markets.

Another consequence of strikes is that production costs are expected to shoot up, mainly on account of increased wages and also due to the additional investments that the OEMs will now have to undertake to make up for the reduced working hours per day; along with the abolition of the graveyard shift, another demand of the workers was to reduce the number of hours being worked in the two shifts from 20 to 17 hours.

Currency Uncertainties

The Won has been strengthening against the Yen and the US dollar since mid-2012, increasing production costs while adding to currency conversion losses, as sales in foreign markets translate into fewer Won. This has significantly eroded South Korean automotive OEMs competitiveness; companies such as Hyundai and Kia have consequently ceded market share to Japanese OEMs which are enjoying resurgence on the back of a brightening export outlook.

The Yen is also on a two-year low against the US dollar while the Won was at the highest level against the dollar since August 2011 in January 2013. Toyota can now in principle offer a discount of more than 10% to its US customers whereas South Korea’s Hyundai Motor has to raise the dollar price by over 5% to keep up with the Won.

A December report by the Korean Automotive Research Institute (KARI) states that South Korean export would shrink by 1.2% annually for every 1% drop in the Yen against the Won.

Over the years, the strategy of the South Korean Automotive OEMs has revolved around exports and the companies have established global production network to cater to geographies around the world. However, the recent upheaval in the foreign exchange markets have raised serious doubts about the company’s short-medium term prospects.

With increasing competition from global OEMs both in the domestic and global markets (resulting from FTAs) and currency uncertainties nullifying cost advantages that the Korean car makers have traditionally relied on, it is perhaps time for country’s OEMs to shift focus from quantity to quality – stressing superior design and engineering over sales growth.

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In our fourth discussion in this series, we understand the automotive market dynamics of Turkey. Its proximity to Europe and cultural affinity to Asia has seen a growing presence of both European and Asian OEMs. Is Turkey a long-term growth market for automotive OEMs, or is the market as developed as most western countries?

Part I of the series – Mexico – The Next Automotive Production Powerhouse?
Part II of the series – Indonesia – Is The Consecutive Years Of Record Sales For Real Or Is It The Storm Before The Lull?

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