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COMMENTARY

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by EOS Intelligence EOS Intelligence No Comments

Commentary: Truck Drivers’ Strike amid Brazil’s Recovery from Recession

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In May 2018, Brazil witnessed a nationwide strike conducted by 200,000 truck drivers, which managed to paralyze the entire country for over 10 days and caused major issues such as shortage of food, death of poultry, and unavailability of public transport, among others.

In 2017, Brazil’s Oil and Gas Company, Petrobras, tied its fuel prices to float with international prices. This was following years of being exposed to high prices paid by Petrobras for refined fuel in international markets and the company’s inability to pass on these higher costs onto the customers domestically, due to existing price controls. The decision to float the domestic prices was further sealed by Petrobras’ attempt to seek recovery of profits after the company’s share prices fall due to a corruption scandal.

The floating price mechanism brought an increase in domestic fuel prices, which greatly affected truck drivers whose earnings were gradually slashed, in a scenario where the Real, Brazil’s official currency, weakened by 17% against the US dollar between May 2017 and May 2018. As a result, truck drivers decided to take their demands for a fuel price control policy to the streets, paralyzing many activities and sectors of the Brazilian economy, and exposing some of Brazil’s main weaknesses.

Brazil greatly depends on the truck industry for distribution

The strike caused substantial fuel shortage as oil trucks were not delivering petrol to gas stations, which affected delivery of other goods across the country. Subsequently, disruption in the distribution of food and other products translated into a visible shortage of items on supermarket shelves and a general hysteria that made people over-purchase what was left. The strike also exposed Brazil’s over-dependency on road distribution system for various sectors to operate (instead of using a balanced mix that would include other means of transport, e.g. cargo trains). Most importantly, the strike, in which truck drivers blocked main road arteries within the country’s 19 states, caused great losses, including (but not limited to) US$826.8 million worth of poultry during those 10 days.

After several attempts by the Brazilian government to reach an agreement with truck drivers, both parties settled to pause the strike – initially for 15 days although now for unlimited time, despite truck drivers’ reservations about the government eventually meeting their demands. The potential of the strike being resumed is still looming on the horizon of the Brazilian economy. The persistence of this conflict and the threat of a longer strike could lead to longer interruption of businesses and industrial activities, which is detrimental for a country that is recovering from one of its deepest recessions of 2015-2016.

Consumers’ purchasing power and confidence may decline

Consumers’ purchasing power is expected to slightly decline due to price increase after the temporary food shortage. According to the price index released by the FIPE (Economic Research Institute Foundation) during the strike, general food prices rose by 1.82%, resulting in a 0.62% increase above what was expected when compared to the same period of 2017. Price of half-finished goods (e.g. poultry) rose by 8.43%, while dairy products prices increased by around 5.85%. In some cases, such as with potatoes, the price increase was of 50.3%. Further, a spread hysteria among consumers led to over-purchasing of products, even at a higher value, meaning Brazilians’ disposable income was reduced for the month of May.

Inflation in May reached an unexpected 3.22%, an atypical increment for a month with usually low inflation rate. In a country overcoming a two-year deep economic recession, uncertainty about food availability and low disposable income have affected consumers’ confidence, which has fallen 4 percentage points in June, potentially translating into reduction of expenditures and hindering Brazil’s economic growth.

Investors’ trust may also fall

The 2015-2016 recession weakened local demand, however, Brazil managed to register a trade surplus and a low account deficit due to positive exports volumes and foreign direct investments (FDI) entering the country. Since the government and the truck drivers are still in talks to reach an agreement, the threat of another strike of similar nature is real. Experts agree that investors may become wary and cease to invest further, if political unrest and economic instability were to continue in the country. As a result, Brazil may not be capable of improving, or even maintaining, its low deficit in the account balance. In 2017, investments reached US$70.3 billion and, before the strike happened, experts believed FDI would register US$80 billion in 2018.

Brazilian president, Michel Temer, offered Petrobras US$274 million as compensation for losses it would incur by cutting oil prices. Though this may offer a 60-day solution to the worried truck drivers, it is only a short-term compensation which Brazil does not plan on extending forever.

EOS Perspective

It should come as no surprise that the strike was conducted only a few months away from Brazil’s presidential elections. Analysts believe it to be a strategy to weaken the image of president Temer, and shed some positive light on the Worker’s Party, of which Lula Ignacio Da Silva, former Brazilian president, is a current member. Despite Lula’s conviction in January 2018 for corruption, its party requested Brazil’s Supreme Court to grant a “suspensive effect” to the conviction, which would eventually allow him to run in the next presidential elections.

Regardless of who will be elected president, the strike has certainly stirred the economic and political scene, and has uncovered several of Brazil’s vulnerabilities.

by EOS Intelligence EOS Intelligence No Comments

Commentary: USA to Re-Enter TPP but Only If It Calls the Shots

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When Donald Trump decided to pull the USA out of Trans-Pacific Partnership (TPP) in January 2017, it was a huge setback for the remaining 11 countries – we wrote about it in our article TPP 2.0 – Minus the USA in May 2017. However, after months of discussions and deliberations, the surviving members (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) planned to move the partnership ahead without the USA, finally signing the pact in March 2018 and naming it Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Soon after, while in talks over another bilateral trade deal with Japan, Trump said that he would join back TPP, if the USA was offered a deal it cannot refuse. Asserting on the fact that Trump government prefers bilateral trade agreements over multilateral, Trump made it clear, in an indirect manner though, that unless the pact brings massive benefits for the American economy, there is no way the country is joining back the TPP.

American reconsideration of getting back in the TPP is a strategic step to deal with its growing trade war with China. As per the initial outline of the pact, designed under Obama administration, it was supposed to eliminate or reduce tariffs on the ‘Made-in-America’ exports to TPP countries (e.g. automotive, ITC, agriculture products, etc.). However, by backing out of the TPP, Trump government ended up making a rod for its own back, and may have opened doors for China, if it wishes to enter the pact in the future. In order to safeguard its own interest against China, it seems that rejoining the pact would be a smart move on the USA’s part.

But the re-entry to the TPP will not be easy for the USA, and dictating its own terms for getting back into the agreement does not seem to work in favor of the Trump government either. With the member countries just signing their own trade deal very recently, setting terms and conditions for re-negotiating the pact again with the USA would be difficult and cumbersome. While some countries such as, Japan, Australia, and New Zealand appreciated the USA’s interest to return back to TPP, they are not very keen on altering the agreement, and even if the terms were to be amended again, this is unlikely to happen in the near future. Despite the fact that the American participation will make the deal stronger, member countries do not trust Trump’s trade policies and USA’s re-consideration of TPP membership again is being viewed with hostility, to a certain extent.

Taking into consideration the fact that the deal already took six years to finalize (five years prior to USA’s exit and one year to amend the agreement after its withdrawal), altering the deal again as per USA’s convenience seems unrealistic. The idea of starting negotiations from square one in order to fit in the USA, might be too much to ask for from the member countries. Now that the USA has lost an upper hand in the TPP, many countries may be in favor of the country joining back only if it accepts the existing agreement, which definitely does not seem to go down well with Trump. However, there is a slight possibility that member countries might be willing to contemplate the terms of the pact, if they are given better access to the American market (e.g. with the reduction in tariff rates), which is also unlikely to happen considering that the USA wants things to be its way.

Now that the trade agreement is already in place sans the USA, the American position to re-negotiate the terms has weakened. If this decision was made earlier, the country would have had a stronger bargaining power. Also, for the CPTPP member countries, unlike for the USA, bringing the existing agreement into force as early as possible is an immediate priority.

At this stage, the future of the USA joining TPP again is a question mark. Though both sides, the USA and the participating member countries, stand to benefit from this move – the member countries would benefit in terms of increased trade and the USA would be able to thwart China from entering the pact and to increase own exports – the current attitude and mindset of both sides seem to make the re-negotiations unlikely, at least under current circumstances. All participating countries are open to the USA re-joining the pact, provided it agrees to the terms originally negotiated, gives up wanting to call the shots, and agrees to mellow down its supremacy inclinations in the pact, none of which can be expected to be happening anytime soon, at least under the Trump administration.

by EOS Intelligence EOS Intelligence No Comments

Commentary: Walmart Acquires Flipkart – The India Scenario

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Putting an end to all rumors and speculations making the rounds about the Walmart-Flipkart deal, Walmart, America’s largest retail chain, on 9th May, 2018, finally closed the deal at US$16 billion by acquiring Flipkart, India’s largest e-commerce platform

What’s the deal?

The buyout, touted as one of the biggest e-commerce deals, has led Walmart to own 77% stake in Flipkart. The association of the two players comes at a time when the Indian e-commerce market is bourgeoning and is expected to reach US$200 billion by 2026 (up from US$15 billion in 2016), increasing at a CAGR of nearly 30%. For Walmart, this is a great opportunity at the right time to grow its foothold in the Indian market.

As part of the deal, US$2 billion was the definite amount invested in Flipkart, and remaining US$14 billion was used to buy out other stakeholders which sees Softbank’s (Flipkart’s largest shareholder prior to the deal) exit from Flipkart, among others. The remaining 23% of the company stakes will stay with Binny Bansal (co-founder of Flipkart), China’s Tencent Holdings, Tiger Global Management, and Microsoft.

Flipkart and Walmart offer each other a strategic and valuable partnership. By acquiring Flipkart, Walmart adds Jabong and Myntra (fashion retail players), PhonePe (payment platform), and Ekart (logistics and supply chain provider) to its portfolio. Walmart can use them to its leverage in understanding the Indian e-commerce ecosystem and gain insights into Indian consumers’ online shopping habits. In return, Walmart’s experience in logistics and supply chain will come in handy for Flipkart to strengthen its operations, even further, in India.

What does it mean for e-commerce landscape and players?

Walmart acquiring Flipkart may prove to be a turning point for e-commerce in India. Small and medium sized enterprises are expected to gain from the deal. As Walmart grows in India, the company plans to procure products directly from local businesses and offer them growth opportunity by exporting their products to other countries via e-commerce. Even grocery suppliers and ‘kirana’ stores owners could benefit in the long run as Walmart may merge its cash and carry business with Flipkart, which aligns with Flipkart’s move to invest and grow its online grocery business – it launched a pilot program to sell groceries on its platform in Bengaluru in July 2017.

However, the deal has not been welcomed by online sellers on Flipkart and they are concerned about the future of their businesses. There is a speculation that with Walmart entering India, it may bring with it the already existing line of labels via Flipkart to the Indian market. This may not only increase competition among sellers but may result in eliminating some of the smaller sellers already present on the Flipkart platform by offering products at much lower prices.

But the most difficult challenge brought by the acquisition will be faced by other players, such as Snapdeal or BigBasket, operating in the e-commerce space. As Walmart and Flipkart ally together, having a proficient knowledge related to retail, supply-chain management and logistics, and with its tiff with Amazon, already a front runner, it is most likely that the competition in the e-commerce sector is going to intensify and players, especially small ones, will have to offer top notch service in terms of quality, price, on-time delivery, and possibly vertical or niche specialization, to survive the heat of the competition.

What does it mean for consumers?

With fierce competition expected to rise between the many e-retailers, it only means good news for consumers. Consumers can now expect new brands, better variety, and more options to choose from. In order to stay ahead of its competitors, players will be likely to offer better discounts which the consumers want.

Apart from better promotional offers, consumers can also expect better customer service and quicker product deliveries. Also, as the e-commerce sector grows in coming years, it is most likely that large players such as Walmart and Amazon would broaden their reach in Tier II cities, Tier III cities, and even rural areas, as consumers in these parts of the country represent a huge untapped potential for online sales.

What can be expected in future?

In the current scenario, this move brings with it both good and bad news. From a consumer’s point of view, evolution in the e-commerce space is great as they will now have more options at better prices to choose from. However from a supplier’s perspective, the pressure to offer good quality products at low prices, while surviving competition, will be intense.

The deal is expected to revolutionize the dynamics of online and offline retail sector in India. The e-commerce boom is relatively new to India and a merger like this signifies the enormous potential of the sector by offering new opportunities to suppliers and delivering more value to customers.

The deal is expected to revolutionize the dynamics of online and offline retail sector in India.

With the deal being finalized, one thing that is bound to happen is a head on collision between Walmart and Amazon to emerge as the leader in the Indian e-commerce landscape. To outrun its competitor, each player will rigorously work on improving its supply chain infrastructure thus can be hoped to create a good number of jobs. As the consumer demand increases, farming (through new grocery stores that Flipkart plans to open) and infrastructure sectors are expected to benefit in the long run.

At this stage, only speculations can be made about how much benefit Walmart will have by acquiring Flipkart. However, this deal has definitely paved the way for the growth of the Indian e-commerce industry.

by EOS Intelligence EOS Intelligence No Comments

Commentary: Indian Automotive Sector – Reeling under the Budget

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The Indian automotive industry has been witnessing a period of recovery and growth over the past couple of years. Every year, automakers look towards the government to provide a stimulus in the form of favorable policies and budget allocations, to spur growth in the sector. A week has passed since the announcement of Indian budget for FY 2018-2019. We take a look at its short and long-term impact across the automotive value chain.

Supply-side scenario (component manufacturers and OEMs)

The current Indian government under Prime Minister Modi has been focusing on promoting domestic production of automobiles and auto components, as a part of its “Make in India” campaign. A 5% increase in customs duty on imported completely knocked down (CKD) cars and automotive components for assembly and sale in India is seen as another step in this direction.

While international OEMs such as Volkswagen and Skoda have been left reeling under the burden of additional costs, this provides an opportunity to spur growth particularly in the domestic components manufacturing.

Another positive news for domestic automotive components manufacturers, most of which are small and medium scale enterprises, is the reduction in corporate tax rate by 5% percentage points (for companies with a turnover of under INR 250 Crores / USD 38.83 million). These tax savings can provide companies with additional capital to invest in their business, aiding their long-term growth.

Investments in road and rural electrification infrastructure also encourage OEMs to bring new products, particularly electric vehicle (EV) portfolio, to the Indian market. However, lack of an established EV infrastructure means that this market development is likely to occur only over a long-term horizon.

Demand-side scenario (individual and corporate consumers)

The key factor impacting the demand for automobiles is perhaps how deep the consumers’ pockets are (or can be) after bearing all the tax burdens – in other words, how high the disposable income is in India. This is even more relevant for the lower-end of the market (or the so-called “mass spectrum”).

Minimal income tax incentives to individuals, coupled with rising inflation, are likely to limit the disposable income of most people (particularly in the low and medium income brackets), which form the largest consumer base for automobiles in terms of volume.

A booming stock market in India attracted several consumers in the middle income group to invest their capital in equities. Levy of a 10% long-term capital gain tax (LCGT) on returns from these equities (although grandfathered till INR 1 Lakh / USD1,553) is likely to put even further pressure on consumers’ pockets, especially for those looking to finance their automobile purchases by getting the most out of their investments.

Moreover, the knee-jerk reaction to this year’s budget was also observed on the equity market. The negative sentiment has led India’s two leading stock exchanges – BSE and NIFTY – witnessing a 5% decline within a 7 day period from the announcement of the budget, thereby eroding consumer’s wealth, which may further impact consumers’ short-term decisions to purchase vehicles.

On the other hand, the support provided to the agricultural sector is likely to spur demand for tractors and small passenger vehicles in rural areas, however this demand growth is dependent on the agricultural output, and derived from it incomes, in the coming year.

Aftermarket scenario (recyclers)

For the past couple of years, automotive companies as well as aftermarket recyclers have been expecting the government to bring in the scrapping policy, which would allow consumers as well as OEMs to benefit from voluntary replacement and scrapping of vehicles older than 15 years. However, lack of any announcements related to this policy has left the aftermarket recyclers and OEMs disappointed. They will need to wait to tap the demand expected to come from voluntary replacement of old vehicles in exchange of monetary benefits.

EOS Perspective

The scenario for electric vehicles (EVs) looks bright over a long term with significant investments going into development of rural electrification infrastructure, which will impact the development of the EV ecosystem beyond the metros as well. OEMs look at this as an opportunity, and this is evident from the number of EVs and electric concept cars to be unveiled at the Auto Expo 2018, India’s largest automotive exhibition. However, in a short to medium term, the adoption of EVs is likely to be limited to the corporate sector. General mass adoption is likely to lag behind due to vehicles’ high prices, and limited distance range/capacities offered by the current EVs available in the market.

As the mass automobile demand is expected to remain lull in the short term, the market will be driven by luxury and premium segments, which is largely unaffected by the budgetary challenges. A push is evident from OEM-side as well, with a number of premium, high-end products (such as SUVs, large displacement motorcycles, and luxury vehicles) launched at the Auto Expo 2018.

While the budget has left a lot to be desired, there are positives which bode well over the long term. The market is likely to witness a downturn in demand over a short term, as the consumers are likely to turn to preservation of wealth till the negative market sentiment prevails. Moreover, as the government invests in infrastructure projects, demand for both commercial and private vehicles is likely to pick up in the future.

It remains to be seen how soon the market witnesses a recovery in terms of automobile demand. One thing is certain, as always, when the budget comes next year, expectations will be high, partially fed by this year’s disappointments.

by EOS Intelligence EOS Intelligence No Comments

Commentary: OLA Finds Its Way on Aussie Roads

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With plans to expand globally, Ola Cabs, India’s leading ride-sharing service provider, marked its entry into the international market by announcing in January 2018 the launch of its services in the Australian territory. While the exact date of the service launch in Australia is not yet decided, as it is subject to regulatory approvals, the service provider has already started the ground work by inviting private hire vehicles to join them. The company is starting to collaborate with private hire vehicle owners in Sydney, Melbourne, and Perth, the three cities where Ola cabs will initially be available for rides, to be ready to roll out once the commercial operations commence.

Presently, the market for ride-sharing service providers in Australia includes players such as Uber, Taxify, and GoCatch, among others. With Uber, which has emerged as the leading player in Australia, already present in the market, Ola needs to have its strategy, policies, and priorities set just right to smoothly launch and successfully run its operations. However, the presence of Uber has worked, to some extent, in favor of Ola, as it paved the way for ride-sharing services in the country resulting in regulatory policies being already in place. This makes the market entry a bit easier for Ola as the company will not need to deal with several challenges that the early market entrants in such novelty markets as ride-sharing typically have to tackle.

However, competing against its largest rival, Uber, is not the only concern for Ola. To be successful in the Australian market, Ola also has to focus on smaller and newer competitors, and set its operational and pricing policies keeping in mind their strategies in the market. Taxify, an Estonia-based company that launched its operations in Australia in December 2017, is expected to closely compete with Ola, especially with its ride services being operational only in Sydney and Melbourne, two of the locations where Ola is launching its services as well. With two ride-sharing service providers launching its operations in similar locations within a span of few months, a price war between the two is expected to happen. Currently, Taxify offers rides to its commuters without any surge pricing, making the ride cheaper than Uber. If Ola plans a similar pricing structure, among other strategies to drive the business, the competition between the two operators will, most likely, heat up very soon.

With two ride-sharing service providers launching its operations in similar locations within a span of few months, a price war between the two is expected to happen.

In the Australian market, the ride-sharing services segment is still in its infancy stage of development and with only one player (in this case, Uber) currently dominating the scene, it makes sense for Ola to launch its operations here now, offering a new option for consumers to choose from. Entry of Ola, along with new players such as Taxify, may indicate a transitioning phase in the Australian ride-sharing market as the entry of new players has the potential to end Uber’s monopoly. Currently, with very little known about the operating dynamics, not much can be commented about the success of Ola in the Australian market. However, the unsaturated state of the local market clearly indicates that Ola has a good chance to thrive in Australia, as long as they get the pricing right and set their eyes on the long-term business growth rather than short-term gain through higher prices.

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