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EMERGING MARKETS

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by EOS Intelligence EOS Intelligence No Comments

EU-Mercosur FTA: Old Negotiations, New Zest

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The EU and Mercosur (a trade bloc comprising Brazil, Argentina, Uruguay, and Paraguay*) free trade agreement (FTA) negotiations date back almost two decades, to 1999. After failing to seal the deal in 1999 and again in 2004, the countries initiated new negotiations in 2010 and though started out slowly, they accelerated the process in 2016 (with hopes to finalize the deal by the end of 2017). A trade deal at this moment will be of significant importance to both sides owing to substantial amount of trade between the two blocs. The EU is Mercosur’s largest trading partner accounting for 21% of the bloc’s trade in 2015, while Brazil alone is the EU’s eleventh largest trading partner. However, despite a positive framework for the agreement to happen, there is still a great deal of resistance from few EU countries regarding the opening up of their agriculture sectors. Now it remains to see whether the two blocs can reach the much needed compromises and end up with an agreement by the end of the year or talks will remain hanging once more.
*Venezuela has been suspended from the trade bloc in 2016 and therefore is out of the negotiations

While this may not be the first time the EU and Mercosur sit to negotiate the terms of an FTA, it definitely seems to be the most promising one. The main reason the earlier efforts have gone in vain was the Argentinian leftist government’s adverse stance on trading outside their own backyard. This changed with the election of president Mauricio Macri in December 2015, who unlike his predecessor (Cristina Fernandez de Kirchner), looks at international trade as a growth opportunity for Argentina. Similarly, the impeachment of the Brazilian president Dilma Rousseff in May 2016 resulted in a new political wave in Brazil. While Brazil’s former president did take small steps towards trade liberalization, her successor, Michel Temer, has accelerated this process and has made the EU-Mercosur deal one of his top priorities.

Another reason this deal has gained immense importance for the Latin American bloc has been a declining bilateral trade among Mercosur’s two largest members, Argentina and Brazil, owing to recession. Trade between the countries declined from US$36 billion to US$22 billion during 2013-2016. This has forced the two nations to soften their stance on global trade.

Considering these developments, as well as the changing political and trade dynamics between several Latin American countries and the USA, following the arrival of Trumps administration at the White House, Mercosur’s openness and renewed interest in strengthening international trade ties is fully understandable. We wrote about it in February 2017 in our article Trump in Action: Triumph or Tremor for Latin America? and again later in June 2017 in Japan Hopes to Get a Slice of Mercosur Opportunity Cake as LATAM Exports to USA Decline.

On the other side of the negotiations table, as the EU has maintained a positive outlook towards foreign trade in general, the lost prospect of a Trans-Atlantic Trade and Investment Partnership with the USA under Donald Trump has also reinvigorated EU’s interest in the Mercosur FTA. Moreover, the EU views the deal with Mercosur as a suitable counter-measure to the growing Chinese influence in Latin America.

Apart from these aspects, the main reason for renewed commitment to the deal by both sides is the significant and increasing level of trade and investment between the two blocs. In 2014, EU’s investments in Mercosur countries reached US$494 billion. The EU’s exports to Mercosur expanded from about US$24.6 billion (€21 billion) in 2005 to about US$54 billion (€46 billion) in 2015. Similarly for Mercosur, its exports to the EU increased from US$37.5 billion (€32 billion) to US$49 billion (€42 billion) during the same period. Agriculture products constituted 48% of Mercosur’s exports to the EU, while machinery (29% of exports) and vehicle and parts (17% of exports) were EU’s largest export categories to the Latin American bloc.

The EU stands to gain a great deal from the FTA. As per current calculations, EU exporters would save about US$5.2 billion (€4.4 billion) annually on trade tariffs and stand to double their exports within five years of reaching a deal.

Despite hefty trade benefits and a lot of political and economic factors being in favor of the deal, agriculture remains a sore point. Several EU countries, led by France, do not want to open up their agriculture sector to Mercosur’s exports as they feel their domestic produce (especially grains and meat) cannot compete with that of Brazil and Argentina in terms of price. In addition, they are concerned that Mercosur’s agricultural produce are not subject to the same health standards as their domestic produce.

A quick glance at the average production costs indicates that the EU farmers have a reason to worry. As per estimates, if the deal comes through, the amount of maize available in Brazil and Argentina for export by 2020 will be between 23 and 26 million tonnes. While the average production cost of cereal in Mercosur is close to US$94/ tonne (€80/tonne), it is about US$141/tonne (€120/tonne) in the EU. This is likely to result in substitution of EU-grown maize with that from Mercosur, which will most likely result in a loss of about US$2.3 billion (€2 billion) by 2020 for EU’s agriculture sector. In addition, it can be expected to result in an indirect loss of about US$1.2-3.5 billion (€1-3 billion) as Mercosur-produced maize is likely to also replace wheat for animal feed during high production and harvest months.

In case of meat products, beef produced in Mercosur is more competitive than EU’s beef in terms of pricing. Moreover, a study of the usual trend of beef quotas suggest that they are first filled with noble cuts exports (including filet, entrecote, and rump steak) followed by other hindquarter cuts (such as topside and silverside). In case the deal takes place, it is expected that Mercosur’s beef will largely substitute local beef produce with Mercosur’s export volume (keeping in mind higher quantities of noble cuts, such as Hilton beef) expecting to reach 1 million tonnes. These would be worth US$18.8 billion (€16 billion) and would directly impact the local production and sales value. To bring this into perspective, the value of Brazil’s beef exports (the largest beef exporter among the Mercosur countries) to the EU was US$485 million in 2016. Moreover, low-priced imports from Mercosur will put pressure on the pricing in the domestic EU market resulting in close to a 30% downward price revision, which in turn is highly likely to result in further losses of about US$10.6 billion (€9 billion). In case the EU agreed to 300,000 tonnes at zero duty, this would expectedly result in US$3.5 billion (€3 billion) in direct costs and US$7.1 billion in indirect costs (€6 billion).

In addition to this, there are several non-tariff related issues with Mercosur’s produce, such as lack of tagging and traceability of livestock to identify and guarantee origin. Also, several drugs, such as hormones and growth promoters, as well as few antibiotics and insecticides that are banned in the EU are legally used in Mercosur. These factors have resulted in countries such as France, Ireland, and Poland opposing the EU-Mercosur FTA.

Another source of disagreement for the EU lies in the trade of sugar and ethanol, which the European producers claim should be excluded from the list of freely-traded items. This stems primarily from the fact that the Brazilian government provides subsidies worth US$1.8 billion annually to its ethanol and sugar producers, a fact providing them with an undue advantage compared to the European counterparts.

On the other hand, Mercosur is discontent with EU’s limited concessions on agricultural imports and its stance to continue quotas on the Mercosur’s food imports. Mercosur also has some concerns regarding providing the EU with access to public tenders, which in Brazil alone are worth about US$176 billion (€150 billion), however, they are positive that they will be able to reach a consensus during negotiations.

While few points of contention remain, negotiators at both ends are keen on resolving these issues and signing the deal by the end of 2017, remaining aware of the significance of this deal for both the sides as well as of the tendency for these talks to remain unresolved if not pushed soon. Moreover, both sides want to exploit the current favorable political scenario in Brazil and Argentina. With Brazil heading for presidential elections in 2018, the chances of a leftist-government coming to power do exist, and this can again put the deal in danger if it is not completed by then. Both sides of the negotiating table want to reach an agreement sought-after for the past 20 years as early as possible, even if it means compromising on some expectations.

EU Mercosur FTA Old Negotiations New Zest

EOS Perspective

A goal of completing the deal by the end of 2017 seems like quite a gun to the heads of both the blocs, as past experience, both in the case of this deal as well as other FTAs, proves that the process is never quick nor simple. Moreover, the EU seems somewhat divided on the deal, with Spain, Portugal, and Germany advocating for it and France, Poland, and Ireland opposing it. That being said, this deal – which has been on and off again and again since 1999 – has never been as close to getting finalized as it is now. This is primarily due to the fact that both Argentina and Brazil (that were the two main factors holding the deal back all these years) are extremely keen on reaching this agreement with EU, to the extent that they may be willing to compromise quite a bit as long as the deal includes provisions that leave room for future improvements and it brings increase in trade and thus growth for local economies. However, it remains to be seen whether they will be willing to stretch their compromises far enough to agree to the EU’s terms on the agriculture produce trade. At the same time, it is not clear how much the EU is going to push for these provisions, so there is a chance that both parties will manage to reach a well-rounded deal for both the sides. The least probable scenario is that the deal will come to a stand-still once more, however till the ink dries on the deal, nothing can be considered as certain.

by EOS Intelligence EOS Intelligence No Comments

Edtech Start-ups in China – Collaborating with Larger Players to Stay Afloat

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Over the past five years, China has witnessed a steep growth of the online education market with the emergence of start-ups offering economically accessible online education for students of all ages. This growth has been largely driven by favorable government policies, broadening internet reach, and an increased willingness of the population to spend money on education. Nevertheless, many Edtech (education technology) companies in the country have gone out of business during their first few years of entering the online market due to adopting unprofitable business models. This led to apprehension from investors, contributing to a slowdown in investment flow to the online education start-ups. What could online Edtechs do to turn the tables?

The global online education market has been promising due to an increasing demand for more ways to access education. The industry has received investments of US$7.33 billion globally in 2016, the highest investment in the history of the learning technology industry. The two markets that witnessed the highest investment in this sector were the USA and China, which recorded US$4.18 billion and US$2.06 billion, respectively, in that same year. As the second largest destination for online education, China has witnessed a soaring number of new online education start-ups thanks to investment from both government (Chinese government invested US$1.07 billion in 2015) and private sources (mostly venture capital). Moreover, by 2020, the Chinese online education market is expected to reach US$94.93 billion, growing at a CAGR of 34.6% from 2013 to 2020.

In recent years, China has been switching its focus from manufacturing to a service-oriented economy. Consequently, local demand for low-cost education has increased since more people seek to improve their skillset and successfully function in the dynamically changing economy. For this reason, the government has included the development and promotion of internet and education in its 13th Five-Year Plan (2016-2020) launched on January 19th, 2016. According to this plan, non-governmental players (e.g. foreign investors) are encouraged to participate in the education industry and domestic private companies will be allowed to collaborate with foreign innovative education companies.

With the Chinese government support along with investments from venture capital, equity investors, and other private funding, the Chinese online Edtech start-ups have been considered to offer a strong growth potential, which lead to a number of them being established in the past few years, including online learning platforms such as Tutor Group and Hujiang. However, despite the appealing scenario of the thriving industry, a recent study conducted by China Online Education Research Institute stated that only 5% of all Chinese Edtech start-ups were capable to gain profit during 2015-2016. According to the study, 70% of the start-ups recorded losses, 10% reached a break-even point, and 15% went out of business during that same period. Since a significant percentage of online Edtechs in China were unprofitable and some even went out of business between 2015 and 2016, investment flow slowed down in 2016. A more rational and cautious approach from investors could cause start-ups growth to slow down significantly.

EOS Perspective

China is already the second largest market of online education after the USA. With a large and increasing number of internet users (around 50% of China’s population) and a large spending assigned for education in most Chinese home budgets, China might seem perfect for Edtech companies to thrive.

However, Chinese online education market is highly competitive with crowded landscape. This is a challenging environment to operate in since majority of online Edtechs in China offer a very similar product with little to no differentiation, and most of these companies have failed to build a strong product that would allow them to compete against other players in the Chinese market.

Under this scenario, investors do not seem to be willing to wait for five years or more for their investment returns, causing them to shift focus and funding streams to other segments of technology-enhanced learning market, such as simulation-based learning, game-based learning, and educational robot companies. With the slowdown in the investment during 2016, Edtech companies that are highly dependent on investors’ funding in order to continue their operations found themselves in a particularly difficult situation, with 15% of such start-ups going out of business by the end of 2016.

In terms of investment flow, 2017 might not offer any drastic improvements in the operating environment for online Edtech start-ups, therefore these companies need to look for ways to counterbalance the slowdown in investment in order to stay in business. Beijing-based online language platform, 51Talk, acquired its counterpart 91Waijiao and all of its users in 2015 as a way to expand its business. This is an example of how these market players could attempt to turn the tables to their favor, benefitting from building partnerships or joint ventures with larger players in the market in order to scale-up and generate funds to sustain their operations.

by EOS Intelligence EOS Intelligence No Comments

A Close Look at Iran’s Post-Sanctions Growth Story

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Iran’s emergence from economic isolation in 2016 was considered by many industry experts as the largest market opportunity since the fall of the Union of Soviet Socialist Republics (USSR), paving way for plethora of new business opportunities. They expected massive influx of foreign direct investments (FDI) and a rapid economic growth in the country. As a result, many business delegations traveled from all over the world to Iran, hoping to tap its lucrative industry opportunities. Over a year later, we take a close look at Iran’s progress so far and whether it has truly leveraged its growth potential.

At first glance, multinationals saw the lifting of sanctions as the opening up of paths for foreign investments and international trade in crucial sectors such as oil and gas, automotive, aviation, mining, tourism, and financial services. In addition, Iranian president Rouhani’s long-term political vision with its focus on various domestic structural reforms and the stance on improving relations with the West were viewed by the international business communities as promising signs. Iran achieved 6.6% GDP growth during 2016-2017 as well as a drastic decline in annual inflation to 8.9% from nearly 40% during 2013.

Despite the economic growth achieved, a closer look at the ground realities in the country depicts a different picture, especially when comparing the expectations and the country’s actual achievements so far. The growth achieved in 2016 was largely due to the oil sector’s rebound in both production and exports. Growth in non-oil sectors was mere 0.9% during the first half of 2016. In the same year, unemployment rate also increased to 12.8% from 11% in 2015. There are still serious questions about the country’s ability to sustain its economic stability in the long run. To add fuel to the fire, Iran’s ballistic missile testing and accusations of sponsoring terrorism in the region have brought the nuclear deal again in jeopardy, eroding newly-regained investor confidence.

A Close Look at Iran’s Post-Sanctions Growth Story by EOS Intelligence

 

Although the FDI saw a massive 600% increase in 2016, it is still nowhere near the government’s projections. While several MoUs were signed, not many have converted into actual deals till date. It was realized soon by many that Iran still remains a challenging place for multinationals to conduct business due to high levels of state interruption, bureaucratic bottlenecks, lack of transparency, and outdated business and financial systems. Iran still continues to be isolated from the global financial systems. Majority of international banks are reluctant to re-engage in Iranian transactions mainly due to potential links with terrorism they might be implicated in and massive financial repercussions such transactions could entail. Therefore, investors are holding their horses amid current ambiguity over local and global political developments (Trump’s final stance on nuclear deal as well as President Rouhani’s reforms post elections).

Automotive

The automotive sector is Iran’s second largest industry after oil and gas, contributing around 10% of the GDP. Iran Khodro Company (IKCO) and SAIPA, the two major companies (state funded), have long benefitted from monopoly and protectionist policies, and therefore are reluctant to innovate. Currently, Iranian cars are considered to be of inferior quality mainly due to lack of technological innovation and outdated production platforms. The industry also suffers from price controls, unfavorable import tariffs, and other state interventions.

Since the lifting of sanctions, many expected car prices to decline and FDI to increase, both of which have not materialized quite yet due to the overall financial and political hurdles the country currently faces. Despite 19 MoUs already signed by global automakers, only few have progressed so far. With the new reforms pertaining to local content and export requirements, and the government’s ambitious plan to boost domestic production from 1.6 million cars at present to 3 million cars by 2025, the automotive industry presents a lucrative opportunity for foreign investors. Vehicle sales are projected to grow at a CAGR of 13% by 2020. Joint ventures with foreign automakers and deregulation are the top priorities for the government to unleash the industry potential.

Aviation

Due to the years of economic isolation, Iran’s aviation industry has failed to stay abreast with the latest industry developments, which we discussed in detail in our article New Wings to Fly – Post-Sanction Scenario of Iran’s Aviation Industry in April 2016. The sanctions restricted Iran to procure new planes as well as any maintenance or repair services for its existing fleet. As a result, the nation remains inherited with an outdated fleet that requires immediate modernization. Iran requires nearly US$220 billion in investment to uplift its aviation industry. Besides investments, Iran will have to make significant changes to the existing business and financial policies that have become outdated and unprofitable. The current pricing and finance management strategies have resulted in many local airline companies running with severe losses.

In the post sanctions era, Iran has signed four major procurement deals for over 240 new passenger aircrafts. However, industry experts believe that it will be challenging for Iran to finance these deals. The delivery of third Airbus A330 was postponed recently (March 2017) and banking restrictions were cited as the main reason. Considering the heavy investments required in this sector as well as the current ambiguity of political developments and financing bottlenecks, Iran’s aviation industry will still take a few good years to start its journey towards growth trajectory.

Oil & Gas

Iran’s underdeveloped oil and gas industry has attracted the eyes of many. This was evident from the visit of Chinese president Xi Jinping to the country just weeks after the sanctions were lifted. Oil production has increased rapidly from 3.2 million barrels per day (BPD) in 2015 to 3.7 million BPD in 2016. The total output is expected to reach 4.2 million BPD in 2017. Similarly, exports in the post-sanctions period have also witnessed a rapid surge as many countries resumed purchasing Iranian oil. Experts suggest that Iran also has the potential to supply Europe with around 35 billion cubic meters of gas each year by 2030.

While many multinationals have recognized the country’s potential, various legal, political, and financial hurdles are holding them back from acting on their interest. As a result, despite the high number of initial MoUs signed throughout 2016, only the joint deal between Total, Petropars, and China National Petroleum Corporation (CNPC) has materialized so far. With the current government’s strong focus to develop and boost the petrochemicals industry as well as to improve contract politics and terms to attract more investments, there are signs of growth in the medium to long term. The need of the hour for Iran’s oil industry is to attract FDI and technology to improve the current infrastructure in order to meet its long-term goals.

Implications for an Average Iranian

The nuclear deal and its expected socio-economic rewards are yet to yield significant benefits for an average Iranian. Before the recent elections, sentiments were mixed as many Iranians felt that their living standards have not improved as expected. In a recent 2016 survey by University of Maryland, only 46% of Iranians believed the country’s economic situation was good, compared to 54% expressing the same opinion in 2015. It is important to note that structural reforms at a national level and FDI deals require longer timeframes to be implemented and show their true impact on the economy as well as society. For example, it will take years for Airbus and Boeing to complete their deliveries and for Total to start pumping oil, and even longer for the financial benefits of these and other deals to trickle down to general population. Attaining economic prosperity as a result of investment deals is a time-consuming process and not something that happens overnight, hence, it is too early to judge the success or failure of the nuclear deal as of yet. Keeping in mind Iran’s current volatile environment, it will take at least few more years for Iranians to slowly start reaping the rewards.

EOS Perspective

The lifting of sanctions has helped Iran to boost its GDP, oil production, and trade, while at the same time, the country’s continuation of testing nuclear weapons and supporting terrorism has dampened investor confidence and business opportunities. The political and financial risk of doing business with Iran has forced many multinationals to refrain from pursuing new opportunities. In the current context, Rouhani’s recent victory echoes public acceptance towards his overall political propaganda including economic liberalization. The election results are expected to have a positive impact on Iran’s prospects in the next four years, as the government will continue to work towards reviving the economy by improving foreign relations and business policies.

In order to sustain the current economic recovery and to rekindle investor confidence, the government will have to implement major reforms with regards to its state-owned enterprises, financial systems, and business policies. In its second term, the government will have to push for investment promotion, upgrade its outdated policies, promote competitiveness, and business-friendly environment to encourage FDI. Further, with the current level of unemployment and present economic framework, it is clear that the pace of job creation is inadequate. There is a pressing need to diversify the economy and develop private sector free of current bureaucratic challenges. In the long run, the key question is whether Iran can leverage its natural resources to diversify its economic structure and ramp up its economic modernization.

Looking at the promising developments that Iran’s automotive, aviation, and oil and gas sectors have shown so far, there is no doubt about their growth potential in the long term. Over the next year or so, Iran should attempt to re-integrate itself into the global trade and finance systems. This would boost trade and open up more business opportunities, fueling growth in key industry verticals. In the short-term however one can only expect moderate growth.

China wine market
by EOS Intelligence EOS Intelligence No Comments

China’s Wine Market: Will Challenges Crush the Growing Appetite for Imported Wines?

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Over the past decade, China’s wine industry has evolved significantly and is at the forefront of becoming one of the most promising emerging wine markets globally. Globalization and massive socio-economic transformations among Chinese population have revolutionized consumers’ preferences and taste, which in turn created demand for high quality foreign wines in the country. Imported wines have been pouring into China, with approximately one out of every five wine bottles opened being imported. In 2016, China imported 638 million (15% y-o-y growth) liters of wine, valued at US$ 2.4 billion (16% y-o-y growth). The Chinese wine buyers are enthusiastically purchasing a variety of labels across all price ranges, making it an important market for global wine sellers. However, the burgeoning imported wine industry in China faces a few impediments. Faced with stringent import regulations, supply chain impairments, language barrier, counterfeit products, and exorbitant tariff rates, importing wine into China is not a simple process. Nevertheless, importers and producers need to overcome these challenges to establish themselves in the flourishing imported wine business in China.

China is one of the ten largest wine consumers in the world with over 2,000 brands of wine sold in the country, out of which 1,500 were imported in 2015. Consumption of imported wine is the highest in tier I cities including Beijing, Guangzhou, Shanghai, and Shenzhen, which together account for 53% of imported wine sales volume. These cities are populated with expatriates, western-educated young professionals, and consumers, who prefer imported wines. France has consistently been the key wine exporter, accounting for a share of 40% in total wine imports (by volume) to China in 2016, followed by Australia, Spain, and Chile.

China’s Wine Market

Imported wines are quickly trickling down among the wealthy Chinese citizens in urban areas, as consumption of wine is considered a status symbol, influenced by westernization. Growth is further driven by youth population and growing middle class learning about foreign liquor brands and demanding imported wines. In addition, increased consumer spending and government’s promotion of wine as a healthy substitute to the traditional alcohol ‘baijiu’ have accelerated demand for wine in the country.

Despite the growing wine demand, the imported wine industry faces several challenges including dealing with high import tariff rates and circulation of fake wine, breaking through the language and cultural barrier in China, and facing the complex distribution system along with strict import regulations.

EOS Perspective

Chinese consumers are typically interested and enthusiastic about overseas goods which explains their yearning for imported wines. The growing demand for foreign wines is driving the import business, with over 24,000 wine importers present in China, located mostly in Shanghai, Beijing, and Guangzhou. Although obstacles continue to hover above the imported wine market, certain steps have been taken to ease the hassles and this could help alleviate challenges to some extent.

What steps have been taken to overcome challenges?

The Chinese government is actively trying to curb the counterfeiting issue in the country and has introduced an anti-fraud initiative called Protected Eco-origin Product (PEOP) which is a label placed on wine bottles that acts as a guarantee of authenticity by the government. Several technologies are being adopted, including radio frequency identification (RFID) tags, Near Field Communication (NFC) chips, QR codes, etc., to combat counterfeiting. RFID tags and NFC chips offering unique serial identifiers are incorporated into wine bottle’s capsule. Using an app, users can quickly check the authenticity of wine bottles.

The government is also focusing on infrastructural development of tier II cities, which is likely to improve distribution channel across these cities, resulting in better access to imported wines.

What does the future hold for imported wine market in China?

Over 2016-2019, the Chinese wine market is forecast to reach US$ 69.3 billion, growing at a CAGR of 15.4%, with imported wines likely to occupy a significant portion of the market. In near term, imported wines are likely to filter down to tier II cities, as consumers’ knowledge and preference for imported wines is growing amidst government’s efforts to make wine more accessible across these cities.

Further, the imported wine market is likely to undergo certain structural changes. Presently, the Chinese imported wine market is very fragmented, comprising several small importers focusing and operating locally within one city. These smaller importers might realign themselves by joining forces through mergers and acquisitions, in order to take advantage of economies of scale to be able to better compete on price.

Online distribution of wines is likely to gain more popularity, as China offers highly developed e-commerce infrastructure to sell products online. Consumers are slowly opting for online channel to purchase imported wines due to the availability of wide selection, transparency of information, and ease of comparing different brands with each other through information available online. Some producers started selling their wines through marketplaces such as Tmall and JD.com, as well as through specialized alcohol platforms such as Yesmywine, Jiuxian, and Wangjiu. Further, importers use delivery apps such as Dianping and ELeMe to sell imported wines.

The foreign wine market is expected to continue thriving in China and remain an attractive proposition for importers and producers. However, the key challenges will most likely persist in the market amidst other weaknesses including slow implementation of regulations, corruption, and weak administration.

Nevertheless, wine importers and producers foresee tremendous growth opportunity in China’s imported wine industry, and they are likely to continue making efforts to navigate through all obstacles, hoping to make the struggle worthwhile in the long term.

by EOS Intelligence EOS Intelligence No Comments

Starbucks – Expanding in Asia

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With more than 25,000 outlets operating in 75 countries, Starbucks is rightly said to be the premier retailer of specialty coffee globally. With the mission to “establish Starbucks as the premier purveyor of the finest coffee in the world”, the brand continues to rapidly expand its retail operations by opening stores in new markets, particularly with focus on Asian countries. Starbucks has already captured a solid customer base in China and Japan, and it is aiming to expand in other parts of the region, especially in India. While partnerships with local players have been beneficial to the company’s expansion strategy, Starbucks uses an interesting mix of product localization ideas to suit consumer preferences and local tastes to make a mark in the land dominated by tea drinkers.

With plans to open 12,000 new outlets globally over a span of five years, out of which nearly half are to be opened in the USA and China, Starbucks is planning to take its chain to a total of about 37,000 outlets globally. Asia is increasingly important to Starbucks’ growth strategy. As of 2016, the company operated 6,443 stores in 15 countries in the China/Asia Pacific (CAP) region that includes Australia, Brunei, Cambodia, China, India, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam. Potential for growth in this region is great, not only measured in the number of stores, but also in per store revenue – the CAP region currently accounts for 25.7% of Starbucks stores count, but generates around 14% of the company’s revenue.

 

Starbucks – Expanding in Asia by EOS Intelligence

Starbucks follows a two-pronged approach to grow its business in the Asian markets (and other emerging regions). The first tactic of approaching these markets is to partner with regional players to have an easy access. For instance, the coffee maker entered the Japanese market in 1995 with a 50-50 joint venture with Sazaby League, a major Japanese retailer and restaurateur, and in 2014, Starbucks took over the full ownership of its Japanese operations. Similarly, the first Starbucks coffee store that opened in India in October 2012 was in alliance with Tata Global Beverages, Indian non-alcoholic beverages company and a subsidiary of Tata Group. These partnerships allowed to company to get a strong entrance to the local markets, navigate through diverse market environments, and to fulfill regulatory requirements imposed on foreign investors by local governments (which otherwise would leave Starbucks unable to tap these high-potential markets).

The second tactic that Starbucks has successfully implemented in most Asian markets was to tweak its menu to suit the tastes of the local population. Considering that since its inception, Starbucks has been synonym for coffee, adjusting the menus to suit tea-drinking consumer tastes without diluting the brand has surely been challenging. Although the Asian tastes evolve and more consumers start to drink coffee, basing the menu on coffee beverages alone would be a risky move. One of the moves Starbucks did to accommodate the local preferences was the 2016 launch of ‘Teavana’ line of tea beverages for Asian countries that includes matcha and espresso fusion, black tea with ruby grapefruit and honey, and iced shaken green tea with aloe and prickly pear, flavors not typically found in the company’s western stores.

Starbucks’ strategy in the region seems to be paying off. As of December 2016, in China, Starbucks store was said to be opened every 15 hours, making it the company’s fastest growing market, the highest revenue generator in the region, as well as the second largest market globally in terms of stores count. Overcoming challenges of reaching out to consumers with heterogeneous tastes in this vast country, partnering with local players, and creating a menu that suits the taste buds of local consumers have been a game changer for the coffee brewer in mainland China.

Japan is another key market for Starbucks in Asia. The company was able to successfully tackle the Japanese market, as it chose to focus on providing excellent customer experience to better resonate with Japanese culture that emphasizes traditional etiquettes and personal respect. Starbucks outlets in Japan do not ask for the customer name while placing order as privacy is highly valued in Japanese culture. To fit in the local culture, Starbucks in Japan has come up with the ‘concept stores’ that offer products based on local needs. Starbucks has the one of a kind ‘black apron-only’ store boosting of certified coffee experts in Japan.

India, a relatively new addition to the company’s Asian portfolio of markets, might turn to be a problem child for Starbucks. Since entering the Indian market, the company has been trying to take full advantage of the opportunities lying in the increasing income of the middle class population in India. Having opened more than 80 outlets in less than four years since inception, Starbucks in India (known as Tata Starbucks Private Limited) seems to be on an extension route in the Indian subcontinent. But with retail figures saying the opposite, with only 10 new stores in 2016 up against average of 25 stores in last three years and a few closed over infrastructure mishandling, the picture does not look very positive. India’s devotion to tea is a hard nut to crack for Starbucks, and while the company followed its standard move to include tea beverages in local stores, they do not always suit local tastes, as they differ greatly from chai that majority of Indians are used to and love. The scenario in south India might seem more favorable, as the locals have been accustomed to drinking coffee since long before Starbucks came to the country. But the local preference if for traditional filtered coffee, very different from anything on Starbucks’ menu, and bulk of it is consumed at home. With not much being said about the opening of new stores in the near future in any regions of the country, Starbucks in India needs to realign its strategic move to be able to see persistent growth.

EOS Perspective

While many enterprises fail to understand the impact of consumer behavior and preferences over the success or failure of a business, Starbucks offers a finely tailored customer experience to its consumers. For the most part, the company has managed to combine its exciting American flair with the underlying values of the Asian cultures to create a localized, unique experience.

With continuous and consistent expansion of its store base by adding stores to higher growth markets, Starbucks aims at standing as one of the most recognized coffee brands in China and Japan, and increasingly in other CAP countries. In those regional markets, where Starbucks has achieved the greatest success, China and Japan, the company’s efforts to offer consumers new coffee (and non-coffee) flavors in a variety of forms, across new categories have led to Starbucks’ continuous strong performance, and over time translated to acceptability of the American coffee-brewer in the lands of tea drinkers.

However, the coffee brand’s take off in India has been bumpy. The company has less than 100 stores in India, incomparably fewer than its competitor, Café Coffee Day, which has more than 1,500 outlets across the country. In terms of geographic spread in India, Starbucks has till now only concentrated on opening its stores in the largest metro cities, where to some extend it could justify its products’ high pricing (for local market standards). But in order to be successful, the chain needs to reach consumers in tier 2 and tier 3 cities, and appeal to them with more affordable products by marginally compromising on product prices (yet still remaining elitist, as it stands no chance to appeal to the clientele of traditional tea-corner stands which offer a cup of hot tea or coffee for virtually a fraction of Starbucks products price). If the company ensures expansion beyond tier 1 cities, continues to launch new stores offering localized products, it should be able to reap benefits of the rising income of the fast-expanding middle class largely interested in the foreign-feel-like experience and social statement that visiting Starbucks offers them along with their tall Frappuccino.

by EOS Intelligence EOS Intelligence No Comments

Fintech Paving the Way for Financial Inclusion in Indonesia

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Over the past two decades, financial sector in Indonesia has witnessed a massive transformation with the introduction of fintech solutions, fuelled by growing digital market and increasing investments in the fintech market. The sector’s growth offers tremendous opportunities and has led to the emergence of various start-ups offering online financial services. Fintech promises technological solutions to various challenges within the financial sector and offers value-added services such as transaction analysis and customer engagement initiatives. However, challenges such as poor financial literacy among Indonesians and cumbersome regulatory processes continue to pose a threat to the market growth.

Fintech is increasingly gaining traction in Indonesia and changing the way financial companies do business. Gone are the days when banks were the only source of financial transactions in the country. Fintech has revolutionized the financial sector with the emergence of various technological start-ups in areas of mobile payment, loans, money transfers, asset management, etc.

Fintech sector’s growth in Indonesia is largely driven by the rapidly increasing internet penetration and rising smartphone usage, as well as solid and continuous investments – over 2013-2018, investments in the fintech industry are forecast to reach US$ 8 billion, growing at a CAGR of 21.7%. Despite these growth drivers, the sector faces several hurdles such as inexperienced financial personnel, lengthy regulatory processes, and poor financial knowledge among the Indonesian population.

Fintech Paving Way for Financial Inclusion in Indonesia

Nevertheless, the country has been taking measures to tackle the challenges to create banks of the future. In November 2016, Bank Indonesia, central bank of the country, set up a fintech office in Jakarta to boost development of the industry. The office is aimed to optimize technological advancements across the fintech sector, assist players in understanding the regulations, and increase industry’s competitiveness by sharing its developments with international institutions. In addition, Indonesia’s Financial Services Authority is in the process of developing regulations to govern the industry, a significant step to enable both the fintech players as well as the regulators to function cohesively. Further, the industry is also receiving support from conventional financial institutions, which have started adopting digital innovations by initiating collaborations with fintech companies.

Indonesia’s high dependency on cash-based transactions along with low financial penetration rate serve as untapped opportunity areas for fintech players to explore. As of 2014, only 36% of the adult Indonesian population had bank accounts. Additionally, 89.7% of all transactions are still conducted in cash. Fintech players have gradually started leveraging these opportunity areas by expanding services with introduction of various start-ups offering a range of online financial products. As of 2016, the country hosted around 140 independent start-ups, an improvement from just a handful a few years ago, representing a steady growth of the industry. Some of the prominent players of the industry include HaloMoney, Cekaja, and Kartuku, among others.

EOS Perspective

Fintech is the answer to the need for a more secure, fast, and practical financial processing system. It has the potential to transform Indonesia’s financial industry by creating a paradigm shift in the way financial services sector operates. However, certain measures need to be taken to realize its full potential. In order to cultivate skilled personnel, the government should collaborate with universities across the country and promote fintech courses to develop the required skill set among people. Additionally, the government should encourage the association between conventional financial institutions and fintech companies to promote collaborative training and communication, which could help to improve financial education among players in the market. The association would also help both parties to improve their own areas of expertise.

Fintech industry has slowly started changing the way financial services are being accessed in Indonesia. Gradual yet steady on-going efforts to overcome hurdles are likely to result in a larger population enjoying benefits of digital financial services.

by EOS Intelligence EOS Intelligence No Comments

Affordable Auto Financing – The Key to New Passenger Vehicle Sales in Nigeria

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Since the announcement of the National Automotive Industry Plan in 2013, the Nigerian automotive industry has witnessed an increased interest from several global automakers. As a result of the Plan as well as recent reforms made by the Nigerian government, PwC predicts Nigeria has a chance of becoming Africa’s auto manufacturing hub by 2050. However, the passenger vehicles market in Nigeria remains heavily dominated by imported second-hand cars, mainly due to the various industry challenges, including lack of access to auto financing. Could affordable auto financing schemes drive growth in Nigeria’s new passenger vehicles market?

This post formed a mainstay of a broader coverage article titled
‘Affordable auto financing essential for OEM success in Africa’, contributed by EOS Intelligence to ‘Guide to the automotive world in 2017’, Automotive World’s annual publication covering a gamut of articles by leading global automotive industry analysts and consultants. The report was published in January 2015.

Nigeria’s new passenger vehicle sales are far behind sales in countries such as Egypt, Algeria, and Morocco, despite the fact that Nigeria is the most populous country in Africa. With a giant share of nearly 80%, Tokunbo vehicles (local name for imported used vehicles) heavily dominate the Nigerian passenger vehicles market.

Although there is a plethora of industry challenges that range from lack of cohesive government policies to poor infrastructure, one of the major growth constraints at present is the lack of affordable auto financing. Due to the limited accessibility and expensive financing options, new vehicles remain out of the reach for most Nigerians.

Nigeria Affordable Auto Financing

Nigeria Affordable Auto Financing

Currently, the cost of auto financing in Nigeria is exorbitant. Amid current economic environment and credit criteria, only a small segment of the population can obtain auto loans. Therefore, most Nigerians either buy used cars or save money over period of time to buy new vehicle for cash, stalling the new vehicle sales – retail customers accounted for less than one-third of all new cars sold in 2015.

This shows how lack of financing options is holding growth in a market segment with the highest growth potential. According to Lagos Business School’s research, an affordable vehicle finance scheme could boost Nigeria’s annual new vehicles sales to one million from 56,000 units at present.

Nigeria Affordable Auto Financing

Nigeria Affordable Auto Financing

EOS Perspective

Although the National Automotive Industry Plan and recent government reforms managed to attract some FDI in recent years, the Nigerian passenger vehicles industry still remains heavily reliant on imported used cars. As the government plans to curb the country’s auto imports, as a first step, the industry stakeholders should plan policies that can make new vehicle ownership more attractive to mass consumers.

The current credit facilities offered by banks are unattractive to many consumers due to cost and credit terms. In order to fuel growth in local vehicle manufacturing and new vehicle sales, the industry, along with the help of CBN, should develop more affordable vehicle credit purchase schemes targeted at the mass middle class population.

Further, as majority of consumers simply have little or no credit history, the current lending models are not going take the industry growth any further. By leveraging on alternative credit data such as payment data from utility and telecom companies, lenders should look beyond credit scores to segment a new customer base of creditworthy consumers.

For vehicle manufacturers and dealers, there is a tremendous opportunity to move up the value chain by setting up in-house financing with the help of the right partners. By offering innovative auto finance solutions, they can push the demand for new vehicles, especially among millennial and emerging middle class first-time buyers.

Whether Nigeria is capable of becoming the next auto manufacturing hub for Africa, only time will tell, but with better financing options, it can surely boost new car sales and help the local automotive industry to progress.

by EOS Intelligence EOS Intelligence No Comments

Refurbished Smartphones – the Future of High-end Devices in Emerging Markets

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An anticipated slowdown in the global smartphone sales forecast for 2016 due to lack of new first-time buyers in large markets such as the USA, China, and Europe, has been alarming for large players who have turned their focus to other emerging markets. To fit the expectations and financial capabilities of price-sensitive consumers in these markets, companies are lining up to sell refurbished smartphones as a strategic move to increase sales volume. However, competition – primarily from new smartphones – in these markets is still fierce, due to some smartphone makers (such as Chinese mobile phone manufacturer Tecno Mobile) reaching consumers with more economic devices. Are second-hand smartphones capable of outshining new devices in emerging markets?

The global smartphone market has been witnessing a slowdown in sales during 2016 in comparison to previous years, partially because some markets, such as the USA, China, and Europe have become saturated (in large part with mid-range and high-end models, such as Apple’s iPhone and Samsung’s Galaxy). Therefore, to avoid a decrease in sales and a subsequent loss in profits, smartphone makers are readjusting their strategies to focus on marketing economic second-hand sets in developing countries.

Refurbished Smartphones - Market Growth

 

 

According to a 2016 Deloitte report, refurbished smartphones global sales volume is expected to increase from 56 million units sold in 2014 to 120 million in 2017, growing at a CAGR of 29%. Large part of this growth is likely to occur in emerging markets, such as India, South Africa, or Nigeria, which is a sound reason for large players to venture into these geographies.

Most smartphone buyers in these markets are highly price-sensitive and frequently precede their phone purchasing decisions with intensive online research to get a good understanding of options that are available to them based on their financial capabilities. These consumers are likely to prioritize price over features and appearance of a smartphone. Therefore, refurbished devices from well-known brands, such as Samsung or Apple, need to offer satisfying functionalities yet be available at affordable price in order to be attractive for buyers in these emerging economies.

Refurbished Smartphones - India, South Africa, Nigeria

Refurbished smartphones hit obstacles across the markets

Emerging markets, despite their favorable dynamics that should at least in theory offer a great environment for refurbished phones sales to skyrocket, are not easy to navigate through, especially for high-end devices makers.

Some markets are becoming protective of their local manufacturing sectors, and introduce regulations that make it difficult to import smartphones, especially refurbished ones. India is one such case. In 2014, the Indian government rolled out the Make in India program, with the idea to promote local manufacturing in 25 sectors of various industries, one of them being electronic devices (including smartphones).

Coincidentally, two years later, when Apple initiated efforts to start importing and selling its refurbished smartphones as a way to increase the iPhone’s market share in the country, these efforts were unsuccessful. The Indian government rejected Apple’s plan, justifying its decision with a concern about the electronic waste increase caused by a deluge of refurbished smartphones entering the country. As a result, the refurbished version of Apple’s iPhone is currently sold only by online commercial platforms (e.g. Amazon, Snapdeal) from vendors that are not always official company retail stores. This could fuel sales in a parallel market, not necessarily benefiting either India’s local manufacturing or Apple.

In case of South Africa and Nigeria, both markets share similarities in terms of advantages as well as potential barriers for refurbished smartphone sales volume to grow. Nigeria’s GDP contracted by 2.06% in the second quarter of 2016, causing wary consumers to maintain their old phones or purchase very economic options due to decreasing disposable income. In South Africa, consumers are also highly price-sensitive with a very limited brand consciousness.

The rapid level of smartphone adoption registered in both markets is seen mainly in handsets with retail price of US$150 or less in South Africa and US$100 or less in Nigeria. Therefore, refurbished high-end models may dazzle local consumers, but low-cost devices can be expected to represent an obstacle for brands such as Samsung or Apple, as these smartphone makers are likely to sell their refurbished devices for half the original price which is still above the consumer-accepted purchase price in these two markets.

EOS Perspective

In case of India, the recent rejection of Apple’s plan to import and sell refurbished smartphones is an indicator that similar issues might be faced by other large players willing to do the same in the future. However, as one of the world’s largest smartphone markets, India is likely to continue building a strong sense of brand loyalty among consumers, especially towards Samsung’s and Apple’s brands in general (smartphones and beyond), and consumers will demand access to these brands (Samsung and Apple already held a 44% and a 27.3% market shares, respectively, in 2016).

The risk of India’s market being flooded with refurbished smartphones sold in a parallel market or online commercial platforms without proper regulation by authorities could result in lost control over excessive e-waste in the country, without necessarily driving local production of competitive products. Consequently, India’s government might have to consider the possibility of allowing large manufacturers to import factory-certified second-hand smartphones into the country, perhaps under the condition of refurbishing the devices in India.

In Nigeria and South Africa, the consumer price sensitivity and limited brand loyalty seem to be the most pressing issues for large players such as Apple or Samsung intending to sell their refurbished phones. In both markets, the rivalry is rather fierce, mainly due to a relatively strong presence of smaller regional manufacturers and large Chinese companies (e.g. Xiaomi) that offer affordable smart devices. While consumers in these markets are willing to spend up to US$100-150 for a device, in most cases they lack brand loyalty.

Apple or Samsung are likely to be negatively affected by this when launching their refurbished high-end handsets at half of the device’s original retail price, which in most likelihood would still be above the price consumers in these markets can and are willing to spend. As a result, large players may have to set their eyes on a long-term horizon, and slowly build the brand loyalty sense in local consumers and temporarily relinquish on large profits in order to enter these markets and settle among their potential customers.

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