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EMERGING MARKETS

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by EOS Intelligence EOS Intelligence No Comments

EU New Medical Device Regulations: Cause of Ache for Medical Device Players

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Circling around patient care and improving overall healthcare services, the European Parliament has set new requirements for medical device and in vitro diagnostic manufacturers that distribute products in the EU. However, medical device manufacturers have realized that they are bound to face many challenges in order to make their products market-ready, not to forget the gigantic task of implementing new protocols in a timely manner, which will not be easy.

Need for a comprehensive updated medical device regulatory system

EU’s Medical Device Regulation (MDR) and In Vitro Diagnostic Medical Devices Regulation (IVDR) were made official in May 2017, with transition period of three years (fully applicable from May 26, 2020) for the former and five years (fully applicable from May 26, 2022) for the latter. These regulations will replace EU’s previous directives: Medical Device Directive (MDD), Active Implantable Medical Devices Directive (AIMDD), and In Vitro Diagnostic Directive (IVDD).

The need for new regulations of medical devices in EU arose from the growing demand for technologically advanced medical products which necessitated more stringent monitoring of these devices to ensure a high level of efficacy and safety among patients.

Unlike earlier version of the regulations where the main focus revolved around the pre-approval stage of medical device manufacturing, the new regulatory guidelines promote an overall product-life cycle approach, focusing on both device safety and performance.

Enhanced supervision, easy documentation of devices, more stringent clinical evidence requirement, and increased supervision on part of authorities providing medical device certifications are some of the key changes in MDR as compared to the EU’s previous directives.

Bumpy road ahead for medical device manufacturers

Reclassifying existing product line-up

Based on the risk factor, changes have been made to the way medical devices are classified. Under MDR, the number of classification rules has expanded from 18 to 22 intensifying the task of product re-classifications by the manufacturer.

For instance, products using software for monitoring purposes being implanted in the body has been reclassified to higher-risk class (from Class I to Class III) which would now require conformity assessment by a notified body (NB – an organization that assess the conformity of medical devices before they are placed on the market), unlike earlier, when Class I products did not require assessment via a NB. This is going to burden players with increased operational costs; thus, it is imperative that the manufacturers familiarize themselves with the classification changes and study the impact on their product portfolio.

New products are also being added to the list of medical devices that earlier were not part of the medical device regulatory framework. For instance, products manufactured utilizing human tissues or cells and devices incorporating nanomaterial, under new regulations, will be considered medical devices. Manufacturers of such products have work cut out for them – from conducting clinical investigations, preparing technical documentation and evaluation processes, to product certification. Though such products could only form a very small percentage of the company’s product range, the task to make them available in the market is great, especially under current circumstances.

Manufacturers who do not comply with the new regulations will no longer be able to market their products in Europe. Thus, a robust strategy in terms of resource allocation, time management, and budget is an absolute must for manufacturers to make this transition possible.

EU MDR Cause of Ache for Medical Device Players - EOS Intelligence

Distress over notified bodies

Strict parameters are also being applied on NBs. Since all devices will require new certification from a NB, only designated NBs will be able to certify a device. The designation process is a complex procedure as it involves audits and corrective actions (once a NB expresses interest). However, while the medical device manufacturers have been in the process of switching to newer protocols since mid-2017, the first designated NB (BSI United Kingdom, the national standards body of the UK) was announced in January, 2019, almost 18 months after the regulations were announced and 14 months into the formally started designation process.

Such time-consuming process raises concern among medical device companies about the ability to complete the necessary conformity assessments within the allotted time. The huge task of recertifying medical devices with only a handful of designated NBs is a cause of worry for companies, as it could potentially result in significant backlogs as the last date approaches. However, there is only so much companies can do – even though they are proactive to comply with the new regulations much ahead of the deadline, poor process planning and lack of supporting bodies (notified bodies in this case) results in a long halt for these players.

The companies are heavily dependent on NBs for auditing and product certification, and the insufficient number of designated bodies adds to the risk of many devices being non-compliant according to new regulations. As of May 2019, less than 40 NBs have filed application for designation procedure (out of 58 designated NBs under the directives); only two have actually received a designated status – BSI UK and Germany based TÜV SÜD Product Service GmbH Zertifizierstellen (certification received in May 2019). With very little time at hand to reassess and rectify issues (if any), this could jeopardize the product availability in the market, resulting in not only risking the patients’ life (due to non-availability) but also in huge financial losses for the players.

Detailed clinical evaluation of medical devices

Owing to reclassification of product categories, many devices will require changes to their existing clinical evaluation reports, another challenge for medical device manufacturers. Manufacturers that have not previously been required to perform clinical testing will have to do so now. For instance, mechanical heart valve sizers will be moved up from Class I to Class III, and unlike in MDD where clinical evaluation was based on literature analysis, new evaluation of valve sizers will require clinical investigation. This will require a huge deal of additional time, money, and expertise, further burdening the device manufacturers.

Medical devices already in the market that remain untouched by the reclassification criteria will still require reassessment of clinical data. If the data do not meet the new requirements, devices will need to undergo additional testing to be recertified, increasing the expense for manufacturers.

MDR also calls for inclusion of risk management within the clinical evaluation expecting clinical risks to be addressed in clinical investigations and evaluation studies – adding another task to the long list of activities to be accomplished before MDR fully rolls out.

Explore our other Perspectives on medical devices markets

Comprehensive demonstration of equivalence data

Unlike MDD, where device manufacturers were able to use clinical data of an equivalent device for their own product registration, under MDR, equivalence is going to be less accepted, particularly for higher risk devices.

There are two ways out – manufacturers can either conduct their own trials not having to deal with the equivalence commotion or they can demonstrate that they have access to the equivalent device (with respect to technical and clinical properties) data. The latter is highly unlikely to happen considering equivalent device would typically belong to a competitor unwilling to grant such access. Thus, with stern requirements for comparative evaluations, more effort, planning, money, and resources will be needed for device manufacturers to demonstrate product safety and performance.

As new medical devices are developed, multiple small incremental improvements (minor changes in design, addition or subtraction of small hardware parts such as bolts or screws) happen over time. Once the device is already in the market, it is practically impossible to conduct a re-trial to gain approval for such small changes. An expected solution to this would be a provision to accept such minor changes through pre-clinical evidence or prior trial results. However, with equivalence testing being reduced drastically under MDR, unless a solution for such cases is offered, manufacturers will have to conduct re-trial and re-document everything, which would result in significantly increased cost. Another issue that could arise from such situations is the reduction in R&D activities inclined towards product improvement.

Trouble galore for SME’s

While making amendments and prioritizing to comply with new regulations seems to be the top most priority for medical and diagnostic device manufacturers, it seems SMEs will be dramatically more impacted than large players – in Europe, a small-sized company employs less than 50 people and has a turnover of less than or equal to €10 million while a medium-sized company employs less than 250 people and has a turnover of less than or equal to €50 million. Owing to the increase in cost, time, and resources associated with the process, the new regulations may put smaller companies under pressure, possibly resulting in altering (such as merging with or being acquired by larger companies) the European medical device market structure, currently dominated by SMEs – there are nearly 27,000 medical technology companies in EU, 95% of which are SMEs.

SMEs also need to be more vigilant when it comes to being associated with a designated NB as not all currently functioning NBs are expected to get a designated status. With their already dwindling numbers married with an increased demand for their services, once the new regulations roll out, it is quite possible that small manufacturers are orphaned since NBs could be partial towards larger players and prioritize them over other small and medium players.

Smaller players will not only have to hire additional personnel for dealing with regulatory issues but also employ clinical trials specialists (for documenting insights to be presented and approved by the NB) for launching products in the market which means higher costs. Adjusting budgets to keep costs under control would hamper other critical business operations, e.g. reduce R&D activities or cut the number of products being launched in the market.

As a step to overcome these issues, players with limited financial resources should strategically study their product portfolio to determine which products are worth investing in for MDR compliance. For doing this, they should lay out a detailed plan for each product and decide whether to remediate, transition, or divest.

It is also advised that SMEs should devise a clear step-by-step approach plan to ensure compliance. As an alternative to hiring transition specialists, they could engage employees from various functions within the organization to take responsibility for specific processes thus keeping costs in check.

EOS Perspective

The changes and revisions required to be carried out under MDR are company-wide and require significant investment to plan and execute. This will lead to players devising a business strategy based on assessing risk associated with product portfolio (whether some products need to be pulled out from the market and what effect it would have on future revenue) or looking for acquisition partners. Based on these decisions, the medical device market topography in EU is expected to see some major changes in the coming years – small companies looking for partners to get acquired or for new partnership with a service provider (specializing in regulations compliance). This will also result in organizational restructuring, revamping design processes, and systems implementation.

Companies have to make crucial decisions around the product portfolio. For some of the already existing products, if reclassified, the cost of compliance could be much higher than actual market returns. In such cases, manufacturers may be compelled to pull away such products from the market resulting in high healthcare costs and ultimately burdening the patients, who (theoretically) form the center point of the MDR. Though this is unlikely to happen at a large scale, since there are always alternative products available, it cannot be denied that this may be a major loophole in MDR requiring immediate attention.

Since SMEs drive the EU medical device market, as an immediate consequence, MDR is not likely to have any positive effect on these players other than distorting their business operations. However, it can only be anticipated that, with time, MDR may adapt and amend to offer some relaxation in provisions especially for small and medium-sized players. Nonetheless, MDR also brings an opportunity for such players to audit their current offerings and come out with an enhanced product portfolio, which could be an opportunity to be capitalized on in the distant future.

Modifications being made in the functioning of NBs are also likely to have an impact on the device manufacturers. For high risk devices, manufacturers may expect deeper scrutiny of design records and data files leading to providing more credentials, in case any query arises. This, along with long wait time for product review (due to reduction in the number of designated NBs) and limited availability of resources (again on account of NBs), could lead to unknown delays for obtaining product re-certification. Thus, companies need to chalk out their market strategies very effectively and be prepared to address any concern that rises during product reviews.

The aim of implementing new regulations is to bring a transparent and robust regulatory framework for medical devices. However, there is no assurance that the new regulations are completely accurate and will apply seamlessly to live case scenarios. Therefore, once implemented, there is a possibility that MDR may see revisions in the initial months of coming into action.

These changes, though certainly positive from a healthcare point of view, are enormous. Transitioning to meet the new standards within the stipulated time frame is challenging for manufacturers. Not adapting to the changes is not a choice for manufacturers as non-compliance could result in losing license to operate in the EU market. And for players fearing stringent scrutiny in the future, operating in the European healthcare market will not be easy once the new regulations come into force.

Fuel cell technology
by EOS Intelligence EOS Intelligence No Comments

China Accelerates on the Fuel Cell Technology Front

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For the past decade, China has been on the forefront of the New Energy Vehicles (NEVs) revolution. Although most of its focus has been on battery-powered electric vehicles (BEVs), the government has recently also begun to put its financial might behind hydrogen fuel cells for vehicles. Unlike battery-powered vehicles that need regular and long-periods of charging (therefore are more suitable for personal-use vehicles), hydrogen fueled vehicles do not need frequent refueling and their refueling is quick. This makes them ideal for long-distance buses, taxis, and long-haul transport. However, the existing infrastructure to support fuel cell-powered cars is limited. Thus, despite having inherent benefits over electric vehicles (especially in case of commercial vehicles), fuel cell vehicles fight an uphill battle to build a market for themselves in China, owing to the challenges in acceptability, infrastructure availability, and sheer economies of scale.

Over the last decade, the Chinese government heavily backed the production and sale of electric vehicles through substantial subsidies, investment in infrastructure, and favorable policies. This resulted in the sector picking up rapidly and reaching 1.2 million vehicles sold in 2018. However, the government has begun to reduce the subsidies provided to the sector and the focus is slowly shifting to fuel cell vehicles.

How do fuel cell vehicles work?

Fuel cell vehicles use hydrogen gas to power their electric motor. Fuel cells are considered somewhat a crossover between battery and conventional engines in their working. Similar to conventional engines, fuel cells generate power by using fuel (i.e. pressurized hydrogen gas) from a fuel tank.

However, unlike traditional internal-combustion engines, a fuel cell does not burn the hydrogen, but instead it is chemically fused with oxygen from the air to make water. This process, which is in turn similar to what happens in a battery, creates electricity, which is used to power the electric motor.

Thus, while fuel cell vehicles are electric vehicles (since they are solely powered by electricity), they are similar to conventional vehicles with regards to their range, refueling process, and needs. This makes them ideal for long-haul commercial vehicles.

Chinese government bets big on fuel cell vehicles

Under China’s 13th Five-Year Plan, the government has laid out a Fuel Cell Technology Roadmap, in which it aims to operate over 1,000 hydrogen refueling stations by 2030, with at least 50% of all hydrogen production to be obtained from renewable resources. In addition, it has set a target for the sale of 1 million fuel cell vehicles by 2030.

To achieve these ambitious targets, the Chinese government plans to roll-out a program similar to its 2009 program – Ten Cities, Thousand Vehicles, which promoted the development and sale of battery electric vehicles and hybrid vehicles. It currently plans to promote fuel cell vehicles in Beijing, Shanghai, and Chengdu. Considering the vast success garnered by this program, it is likely that the government will also be successful in achieving similar targets for fuel cells.

Moreover, while the government is phasing out subsidies for BEVs, it is continuing them for fuel cells. As per the government guidelines issued in June 2018, US$32,000 purchase subsidy is available for fuel cell passenger vehicles, while US$48,000-US$70,000 purchase subsidies are available for fuel cell buses and trucks. However, for the buses to receive subsidy, they are required to drive a minimum of 200,000 km in a year.

While the government is phasing out subsidies for BEVs, it is continuing them for fuel cells. As per the government guidelines issued in June 2018, US$32,000 purchase subsidy is available for fuel cell passenger vehicles, while US$48,000-US$70,000 purchase subsidies are available for fuel cell buses and trucks.

Moreover, the government also provides subsidy for the development of hydrogen refueling stations. A funding of US$0.62 million is available for hydrogen refueling stations having a minimum of 200kg capacity.

In addition to these national subsidies, state-wise subsidies are also available for several regions such as Guangdong, Wuhan, Hainan, Shandong, Tianjin, Henan, Foshan, and Dalian. Local subsidies differ from region to region and are given as a ratio of the national subsidy. For instance, it equals 1:1 in Wuhan, while it is 1:0.3 in Henan province. On the other hand, local or state subsidies are cancelled for BEVs (except buses).

Apart from subsidies given to fuel cell infrastructure and vehicle manufacturers, the price of hydrogen is also heavily subsidized, making it cheaper than diesel in many cases.

China’s fuel cell vehicle market picks up steam

The government’s backing and subsidies have stirred interest of several international players towards China’s fuel cell vehicle market. Considering its success and dominance of the BEV market, these players are placing their bets on China achieving similar volumes and success in the fuel cell sphere.

Chinese companies have also begun to invest heavily in fuel cell technology companies globally. In May, 2018, Weichai Power, a Chinese leading automobile and equipment manufacturer, purchased a 20% stake in UK-based solid oxide fuel cell producer, Ceres Power. Similarly, in August 2018, Weichai Power entered into a strategic partnership with Canada-based fuel cell and clean energy solutions provider, Ballard Power Systems. As part of the strategic partnership, the company purchased 19.9% stake in Ballard Power Systems for US$163.3 million. In addition, they entered into a JV to support China’s Fuel Cell Electric Vehicle market, in which Ballard holds 49% ownership. Through this partnership, Weichai aims to build and supply about 2,000 fuel cell modules for commercial vehicles (that use Ballard’s technology) by 2021.

China Accelerates on the Fuel Cell Technology Front - EOS Intelligence

Global leader in industrial gases, Air Liquide, has also partnered with companies in China to be a part of the fuel cell movement. In November 2018, the company entered into an agreement with Sichuan Houpu Excellent Hydrogen Energy Technology, a wholly-owned affiliate of Chengdu Huaqi Houpu Holding (HOUPU), to develop, manufacture, and commercialize hydrogen stations for fuel cell vehicles in China. In January 2019, the company also partnered with Yankuang Group, a Chinese state-owned energy company, to develop hydrogen energy infrastructure in China’s Shandong province to support fuel cell vehicles in that region.

Another global player, Nuvera Fuel Cells (US-based fuel cell power solutions provider) has also engaged with local companies to foster growth in China’s fuel cell vehicle market. In August 2018, the company entered into an agreement with Zhejiang Runfeng Hydrogen Engine Ltd. (ZHRE), a subsidiary of Zhejiang Runfeng Energy Group based in Hangzhou. Under the agreement, Nuvera will provide a product license to ZHRE to manufacture the company’s 45kW fuel cell engines for sale in China. While the fuel cells will be initially manufactured in Massachusetts, it is expected that they will be locally manufactured by 2020.

In December 2018, the company signed another agreement with the government of Fuyang, a district in Hangzhou (in Zhejiang province), to start manufacturing fuel cell stacks locally in 2019. The agreement also includes an investment by Nuvera to establish a production facility in Fuyang region. These fuel cell stacks will be used to power zero-emissions heavy duty vehicles (such as delivery vans and transit buses), which comprise 10% of on-road vehicle fleet, but account for 50% fuel consumption.

In addition to the fuel cell energy producers, global car manufactures have also shifted their attention to fuel cell vehicles market in China. In October 2018, Korean car manufacturer, Hyundai, entered into a MoU with Beijing-Tsinghua Industrial R&D Institute (BTIRDI) to jointly establish a ‘Hydrogen Energy Fund’. The fund aims to raise US$100 million from leading venture capital firms across the globe to spur investments in the hydrogen-powered vehicle value chain. This agreement will help the Korean automobile manufacturer identify and act upon new hydrogen-related business opportunities in China and will eventually help pave the way for Hyundai Motors to make a foray into the Chinese fuel cell vehicle market in the future.

A bumpy road ahead for fuel cell vehicles

While the industry players are working along with the government to meet the ambitious targets set by the latter, fuel cell vehicles must overcome several challenges for them to be a realistic alternative to conventional and electric vehicles.

Currently, the infrastructure for fuel cell vehicles is by far insufficient. More so, it is extremely costly to develop, costing about US$2 million to build a refueling station with a capacity of about 1,000 kg/day. While the government is investing heavily in developing hydrogen refueling stations (for instance, China Energy, China’s largest power company, has been building one of China’s largest hydrogen refueling stations in Rugao City, Jiangsu Province), it requires long term partnerships and investments from private and global players to meet its own targets. Until an adequate number of refueling stations is constructed, especially on highway routes (facilitating truck and bus transportation), fuel cell vehicles will remain in a sphere of concept rather than commercial and mass use.

Another challenge faced by the industry is that hydrogen, the main fuel, is also considered to be highly hazardous, and storing and transporting it is currently difficult. Moreover, it is difficult to convince customers to purchase hydrogen-powered vehicles because of this perceived notion of hydrogen being unsafe. In addition to providing subsidies and incentives for building fuel cell vehicles, the government must also invest in marketing campaigns and enact policies that raise awareness about hydrogen in fuel cell vehicles as a safe and green energy.

In addition to providing subsidies and incentives for building fuel cell vehicles, the government must also invest in marketing campaigns and enact policies that raise awareness about hydrogen in fuel cell vehicles as a safe and green energy.

A lot of new technologies are also being explored to further make transporting and storing hydrogen safer. A German company, Hydrogenious Technologies, has developed a carrier oil that can carry hydrogen in a safe manner. This oil is non-toxic and non-explosive and thus makes transporting, storing, and refueling hydrogen safe. Moreover, using hydrogen mixed with this carrier oil to refuel fuel cell cars follows a similar refueling process as that of a conventional car, with one cubic meter of the oil carrying about 57kg hydrogen, which in turn is expected to give a car a driving range of 5,700km. However, the carrier oil is still in its nascent stage of development and would take time and resources to gain commercial applicability.

However, one of the largest challenges that fuel cell vehicles face is direct competition from battery electric vehicles. BEVs have a 10-year head start over fuel cell vehicles whether it comes to government support, technological development, infrastructure, or acceptability. Moreover, BEVs are cheaper both in terms of cars price and cost of running, which is an important factor for consumers. In addition, BEV players are constantly working towards reducing charging time and increasing driving range. Since both are green technologies, it is likely that the consumer prefers the one which has now proven to be a successful alternative to conventional vehicles in terms of pricing and supporting infrastructure. Although higher subsidies for fuel cell vehicles may help bridge the gap, it is yet to be seen if fuel cell cars will be able to give stiff competition to their green counterparts.

EOS Perspective

There is no doubt that the Chinese government intends to throw its weight behind the fuel cell technology for automobiles. In 2018 alone, the central and local governments spent a total of US$12.4 billion in supporting fuel cell vehicles. This has helped attract the attention of several local and international companies that want a share of this growing market.

It also helps that hydrogen as a fuel has several benefits when compared with battery power, the key advantages being short refueling time and long driving range. Moreover, some consider hydrogen to be a cleaner fuel when compared with battery power as the electricity required to create hydrogen (which is created by pumping electricity into water to split it into hydrogen and oxygen) can be derived from renewable sources from China’s northern region, which are currently going to waste.

Despite these inherent benefits, it will be difficult for fuel cell vehicles to catch up with battery-powered vehicles as the latter have significantly advanced over the past decade (leaving fuel cell vehicles behind).

Moreover, China’s model of promoting green energy is yet to pass its ultimate test, i.e., to sustain and flourish without government support. Since the government has now begun to phase out its support to BEVs, it is to be seen if the large group of domestic electric vehicle makers can survive in the long run or the market will face significant consolidation along with slower growth. Thus it becomes extremely critical for the Chinese government and companies in this sector to understand the feasibility of the market post the subsidy phase. Fuel cell vehicle market should take advantage of learning from the experience of battery powered vehicles sector, which was the pioneer of alternatives to conventional combustion vehicles.

Europe Fights Back to Curb China’s Dominance
by EOS Intelligence EOS Intelligence No Comments

Europe Fights Back to Curb China’s Dominance

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Given the swiftness of China’s economic development in the past three decades, transitioning from an impoverished and insular country to one of the formidable economic powers of the world, it has taken some time for Europe to accept China’s growing power and influence. Not only does China sit on largest currency reserves worldwide, but it has also become a significant provider of foreign investments, including in EU nations. This has recently strengthened China’s influence over the EU, which has created a sense of caution amidst European policymakers.

How is Europe benefiting from China’s growing investments?

Europe-bound Chinese investments were six times higher than Chinese investments in the USA – in H1 2018, Chinese investments in Europe stood at US$ 12 billion as compared to US$ 2 billion in the USA. For some of the economically struggling EU countries, Chinese investments are critical for developing and upgrading infrastructure, including energy plants, railways, motorways, and airports.

China’s Belt and Road initiative, under which cross-border infrastructure will be developed, will reduce transportation costs across Europe and China, creating an opportunity to facilitate trade expansion, regional integration, and attract foreign investments.

Besides infrastructure development, the investments are likely to create job opportunities and enhance economic competitiveness across Europe.

Then why is China’s growing influence alarming Europe?

Europe now sees a range of threats that China’s rising dominance in the region could bring along. Recently, the European Commission labelled China as economic competitor seeking technological leadership and systemic rival encouraging alternative models of governance. Europe realizes that China pursuits to shape globalization to suit its own interests.

The EU is deeply concerned regarding China exercising divide and rule tactics to strengthen its relationship with individual member countries that are susceptible to pressure, which could eventually harm the European cohesion. Recently, Italy signed the Belt and Road initiative, a landmark move against the counsel of western European nations, such as France and Germany, thus, raising questions on cohesion of EU countries.

The other concern is China’s rising influence over key governments of EU nations, thus, empowering itself with political leverage across the continent. China has already yielded political returns by wearying EU unity, particularly, when it is related to European policy on international law and human rights. In 2017, Hungary broke EU’s consensus by refusing to sign letter on human right violation against China. During the same year, Greece blocked an EU statement, which condemned China’s human rights record, at the UN human rights council.

Besides politics, China has also spread wings across key sectors of economy such as infrastructure, high-end manufacturing (including critical segments such as electronics, semiconductors, automotive, etc.), and consumer services, among others – growing dominance of China across these sectors is another cause of worry for the EU.

Europe also condemns China’s discrimination against foreign businesses, rendering limited market access to European firms and employing a non-transparent bidding processes. European firms operating in China face several trade and investment barriers such as joint venture obligations and discriminatory technical requirements that entail forced data localization and technology transfers. On the other, European markets have been open to foreign investments leading to massive Chinese FDI. However, lack of reciprocity harms European interest and could lead to unfulfilled EU-China trade ties.

The EU also criticizes China’s Belt and Road project for its lack of respect for labor, environment, and human rights standards. Other concerns include non-transparent procurement procedures with majority of contracts being awarded to Chinese companies without issuing public tenders, meagre use of domestic labor and limited contractor participation from host country, and use of construction materials from China – all of which undermine Europe’s interests.

Europe Fights Back to Curb China’s Dominance

How is Europe responding to China’s actions?

Europe is adopting strategies to limit China’s influence and reach across Europe and beyond, in African and Pacific countries.

Development of EU-Asia Connectivity Strategy

The EU’s new initiative, EU-Asia Connectivity Strategy, is an implicit response to China’s Belt and Road initiative, signifying a crucial first step to promoting European priorities and interests in terms of connectivity. The initiative aims to improve connectivity between Europe and Asia through transport, digital, and energy networks, and simultaneously promote environmental and labor standards.

The EU’s initiative emphasizes sustainability, respect for labor rights, and not creating political or financial dependencies for the countries.

Robust FDI screening process

European nations have been increasingly alarmed due to state-owned Chinese companies acquiring too much control of critical technologies and sensitive infrastructure in the continent, while China shields its own economy.

For the same reason, EU parliament is developing an EU-level screening tool to vet foreign investments on grounds of security to protect strategic sectors and Europe’s interests. The regulation will protect key sectors such as energy, transport, communication, data, space, technology, and finance.

While the EU still remains open to FDI, the regulation will protect its essential interests. Nonetheless, stringent investment screening procedures are likely to limit foreign investments in the continent, particularly from China.

Tackling security threat posed by China

In March 2019, the EU Parliament passed resolution asking European institutions and member countries to take action on security threats arising from China’s rapidly rising technological presence in the continent.

The resolution is likely to impact the ongoing debate of whether to eliminate China’s Huawei Technologies from building European 5G networks. The EU is concerned that the Chinese 5G equipment could be used to access unauthorized data or sabotage critical infrastructure and communication systems in the continent.

To minimize dependence on Chinese technology firms (such as Huawei Technologies), EU countries would need to diversify procurement from different vendors or introduce multi-phase procurement processes.

EU countries expanding footprint to counter China’s reach

Since 2011, China has invested US$ 1.3 billion in concessionary loans and gifts across the Pacific region, and has established its supremacy by becoming the second largest donor. China has been trying to build its influence, as the Pacific is bestowed with vast expanse of resource-rich ocean and the regional countries have voting rights at international forums such as the United Nations.

To counter China’s reach and ambitions across the Pacific countries, European nations such as the UK and France plan to open new embassies, increase staffing levels, and engage with leaders in the region. The UK plans to open new high commissions in Vanuatu, Tonga, and Samoa by the end of May 2019 and France is looking to meet and engage with Pacific leaders during the year.

Investment in Africa to limit China’s influence

As a strategy to curb China’s growing influence, the EU plans to deepen ties with Africa by boosting investment, creating jobs, and strengthening economic relations. The plan is to create 10 million jobs in Africa over the next five years. Europe is also aiming to establish free trade agreement between the two continents.

In recent times, China has been blamed of neo-colonial approach towards Africa, which is aimed at emptying the continent of its raw mineral in exchange for inexpensive loans, extensive but inferior infrastructure, among others. Europe aims to curb such influence by attempting to do business ethically. 

EOS Perspective

Unnerved by flurry of Chinese investments in the continent, the EU is looking to regain its control over matters. Europe has adopted a defensive approach against China’s initiatives, reflected through measures taken to protect critical sectors using investment screening system. The EU understands the downsides of enormous Chinese investments/loans, which may seem hugely enticing in the beginning, but could saddle vulnerable countries in debt they cannot repay – for example, a Chinese-built highway in Montenegro is likely to increase the country’s debt to about 80% of its GDP.

Currently, the key issue is the fact that Europe is standing divided on the right strategy to respond to bolder and ambitious China. While countries such as Germany, France, and UK have grown skeptical of China and are revolting against it, Italy, Hungary, Portugal, Greece, among others, are generally China-friendly. Europe has certainly become stern and tougher on China, but cannot pursue its interests without standing united.

The current situation does not demand Europe opposing China outright, but rather ensuring fair business conditions and equal market access through dialogue and cooperation with China.

Nonetheless, the EU has been quite slow to wake up to the various challenges that excessively ambitious China brings to the table. However, if Europe is able to become united now, there is still a chance to build a decent Sino-European partnership that serves interests of both parties.

by EOS Intelligence EOS Intelligence No Comments

Connecting Africa – Global Tech Players Gaining Foothold in the Market

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While in the past, most global tech companies have focused their attention on emerging Asian markets, such as India, Indonesia, Vietnam, etc., they have now understood the potential also offered by African markets. Africa currently stands at the brink of technical renaissance, with tech giants from the USA and China competing to establish here a strong foothold. That being said, Africa’s technological landscape is extremely complex owing to major connectivity and logistical issues, along with a limited Internet user base. Companies that wish to enter the African markets by replicating their entry and operating models from other regions cannot be assured of success. In addition to global tech firms building their ground in Africa, a host of African start-ups are increasingly finding funding from local as well as global VC and tech players.

Great potential challenged by insufficient connectivity

Boasting of a population exceeding 1.2 billion (spread across 50 countries) and being home to six of the world’s ten fastest-growing economies, Africa is increasingly seen as the final frontier by large global technology firms.

However, the African landscape presents its own set of challenges, which makes increasing tech penetration extremely complex in the market. To begin with, only about 35% of the continent’s population has access to the Internet, as compared with the global rate of 54%. Thus, Africa’s future in the technology space greatly depends on its ability to improve digital connectivity. This also stands in the way of large tech-based players that wish to gain foothold in the market.

Large players try to lay the necessary foundations

Due to this fundamental challenge, companies such as Google, Facebook, and IBM have initiated long-pronged strategies focusing on connectivity and building infrastructure across Africa. Facebook’s Free Basics program (which provides access to a few websites, including Facebook and Whatsapp, without the need to pay for mobile data) has been greatly focused on Africa, and is available in 27 African countries. With Facebook’s partnership with Airtel Africa, the company has started to strengthen its position in the continent.

Similarly, Google has launched Project Link, under which it rolled out a metro fiber network in Kampala, Uganda, with Ghana being in the pipeline. Through such efforts and investments, Google is aimed at bringing about faster and more reliable internet to the Africans.

Microsoft, which has been one of the first players to enter the African turf, is also undertaking projects to improve connectivity in Africa. The company has invested in white spaces technology, which uses unused radio spectrum to provide Wi-Fi connectivity at comparatively lower costs.

However, managing to get people online is only the first step in the long journey to develop a growing market. Companies need to understand the specific dynamics of the local markets and develop new business models that will fit well in the African market.

For instance, globally, the revenue model for several leading tech companies, such as Google and Facebook, largely depend on online advertising. However, the same model may not thrive in most African markets due to a limited digital footprint of the consumers as well as the fact that the business community in the continent continues to draw most transactions offline, using cash.

Connecting Africa – Global Technology Firms Gaining a Foothold in the Market

Players employ a range of strategies to penetrate the market

These tech giants must work closely with local businesses and achieve an in-depth understanding of the unique challenges and opportunities that the African continent presents. Therefore, these companies are increasingly focusing on looking for collaborations that will help in the development of successful and sustainable businesses in the continent.

Leading players, such as Google and Microsoft have been investing heavily in training local enterprises in digital skills to encourage businesses to go online, so that they will become potential customers for them in the future.

While this strategy has been used somewhat extensively by US-based and European companies, a few Chinese players have recently joined the bandwagon. For instance, Alibaba’s founder, Jack Ma announced a US$10 million African Young Entrepreneurs Fund on his first visit to Africa in July 2017. The scheme will help 200 budding entrepreneurs learn and develop their tech business with support from Alibaba.

The company has also been focusing on partnerships and collaborations to strengthen its position in the African market. Understanding the logistical challenges in the African continent, Alibaba has signed a wide-ranging agreement with French conglomerate, Bollore Group, which covers cloud services, digital transformation, clean energy, mobility, and logistics. The logistics part of the agreement will help Alibaba leverage on Bollore’s strong logistics network in Africa’s French-speaking nations.

Considering the importance of mobile wallets and m-payments in Africa, Alibaba has expanded its payment system, Alipay, to South Africa (through a partnership with Zapper, a South Africa-based mobile payment system) as well as Kenya (through a partnership with Equitel, a Kenya-based mobile virtual network operator). In many ways, it is applying its lessons learnt in the Chinese market with regards to payments and logistics, to better serve the African continent.

While Chinese players (such as Alibaba and Baidu) have been comparatively late in entering the African turf, they are expected to pose a tough competition to their Western counterparts as they have the advantage of coming from an emerging market themselves, with a somewhat better understanding of the challenges and complexities of a digitally backward market.

For instance, messaging app WeChat brought in by Tencent, China-based telecom player, has provided stiff competition to Whatsapp, which is owned by Facebook and is a leading player in this space. WeChat has used its experience in the Chinese market (where mobile banking is also popular just as it is across Africa) and has collaborated with Standard Chartered Bank to launch WeChat wallet. In addition, WeChat has collaborated with South Africa’s largest media company, Naspers, which has provided several value added services to its consumers (such as voting services to viewers of reality shows, which are very popular in Africa). Thus, by aligning the app to the needs and preferences of the African consumers, it has made the app into something more than just a messaging service.

While collaboration has been the go-to strategy for a majority of tech companies, a few players have preferred to enter the market by themselves. Uber, a leading peer-to-peer ridesharing company entered Africa without collaborations and is currently present in 16 countries.

While entering without forging partnerships with local entities helps a company maintain full control over its operations in the market, in some cases it may result in slower adoption of its services by the local population (as they may not be completely aligned with their preferences and needs). This can be seen in the case of Netflix, a leading player in the video streaming service, which extended its services to all 54 countries in Africa in January 2016 (the company has, however, largely focused on South Africa). Despite being a global leader, Netflix has witnessed conservative growth in the continent and expects only 500,000 subscribers across the continent by 2020.

On the other hand, Africa’s local players ShowMax and iROKO TV have gained more traction, due to better pricing, being more mobile friendly (downloading option) and having more relatable and local content, which made their offer more attractive to local populations.

Netflix, slowly understanding the complexities of the market, has now started developing local content for the South African market and working on offering Netflix in local currency. The company has also decided to collaborate with a few local and Middle-Eastern players to find a stronger foothold in the market. In November 2018, the company signed a partnership with Telkom, a South African telecommunication company, wherein Netflix will be available on Telkom’s LIT TV Box. Similarly, it partnered with Dubai-based pay-TV player, OSN, wherein OSN subscribers in North Africa and Middle East will gain access to Netflix’s content available across the region. However, while Netflix may manage to develop a broader subscriber base in South Africa and a few other more developed countries, there is a long road ahead for the company to capture the African continent as a whole, especially since its focus has been on TV-based partnerships rather than mobile (which is a more popular medium for the Internet in Africa).

On the other hand, Chinese pay-TV player, StarTimes has had a decade-long run in Africa and has more than 20 million subscribers across 30 African countries. While operating by itself, the company has strongly focused on local content and sports. It also deploys a significant marketing budget in the African market. For instance, it signed a 10-year broadcast and sponsorship deal with Uganda’s Football Association for US$7 million. To further its reach, the company also announced a project to provide 10,000 African villages with access to television.

US-based e-commerce leader, Amazon, is following a different strategy to penetrate the African markets. Following an inorganic approach, in 2017, Amazon acquired a Dubai-based e-retailer, Souq.com, which has presence in North Africa. However, the e-commerce giant is moving very slowly on the African front and is expected to invest heavily in building subsidiaries for providing logistics and warehousing as it has done in other markets, such as India. This approach to enter and operate in the African market is not widely popular, as it will require huge investment and a long gestation period.

Local tech start-ups are on the rise

While leading tech giants across the globe are spearheading the technology boom in Africa, developments are also fueled by local start-ups. As per the Disrupt Africa Tech Startups Funding Report 2017, 159 African tech start-ups received investments of about US$195 million in 2017, marking a more than 50% increase when compared to the investments received in 2016.

While South Africa, Nigeria, and Kenya remained the top three investment destinations, there is an increasing investor interest in less developed markets, such as Ghana, Egypt, and Uganda. Start-ups in the fintech space received maximum interest and investments. Moreover, international VC such as Amadeus and EchoVC as well as local African funds appear keen to invest in African start-ups. The African governments are also supporting start-up players in the tech space – a prime example being the Egyptian government launching its own fund dedicated to this objective.

African fintech start-ups, Branch and Cellulant, have been two of the most successful players in the field, raising US$70 million and US$47.5 million, respectively, in 2018. While Branch is an online micro-lending start-up, Cellulant is a digital payments solution provider. Both companies have significant presence across Africa.

EOS Perspective

Although US-based players were largely the first to enter and develop Africa’s technology market, Chinese players have also increasingly taken a deeper interest in the continent and have the advantage of coming from an emerging market themselves, therefore putting themselves in a better position to understand the challenges faced by tech players in the continent.

Most leading tech players are looking to build their presence in the African markets. Their success depends on how well they can mold their business models to tackle the local market complexities in addition to aligning their product/service offerings with the diverse needs of the local population. While partnering with a local player may enable companies to gain a better understanding of the market potential and limitations, it is equally imperative to identify and partner with the right player, who is in line with the company’s vision and has the required expertise in the field – a task challenging at times in the African markets.

While global tech companies are stirring up the African markets with the technologies and solutions they bring along, a lot is also happening in the local African tech-based start-ups scene, which is receiving an increasing amount of investment from VCs across the world. In the future, these start-ups may become potential acquisition targets for large global players or pose stiff competition to them, either across the continent or in smaller, regional markets.

It is clear that the technological wave has hit Africa, changing the continent’s face. Most African countries, being emerging economies in their formative period, offer a great potential of embracing the new technologies without the struggle of resisting to adopt the new solutions or the problem of fit with legacy systems. It is too early to announce Africa the upcoming leader in emerging technologies, considering the groundwork and investments the continent requires for that to happen, however, Africa has emerged as the next frontier for tech companies, which are causing a digital revolution in the continent as we speak.

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China’s Investments in CEE: Sharing Benefits or Building Own Dominance?

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In 2012, China unveiled its plan to invest in Central and Eastern European Countries (CEECs) through transregional platform called the 16+1 Cooperation framework. Since the launch of this framework, China has been proposing various policies of mutual benefit, making efforts to become an important trade and economic partner of the CEECs.  While investments are welcome, several EU leaders and political experts in the region criticize such deals. They point at a threat of China’s growing dominance in the CEECs, as well as at China not keeping its promises made during the launch of this framework and negotiations of various deals.

China promises mutual benefits

The 2008 crisis brought worsened economic conditions to the CEECs, which have since been seeking capital to stimulate investment and facilitate higher economic growth, along with expanding exports beyond traditional European destinations.

Owing to China’s position as one of the largest economic power houses and due to the CEECs’ high trade deficit with China, the countries in this region showed interest in Chinese investments and opened their doors for potential avenues to increase trade with China. China too has looked for diversifying its export destinations and expanding its brands internationally, and CEECs could help it achieve just that. Chinese motivation to focus on CEECs has been fueled by two key factors: availability of skilled and cheaper workforce in CEECs (as compared to EU average) as well as China’s desire to gain stronger strategic influence in business and politics arena in the region as against the EU and Russia.

In this mutual interest, China and the 16 countries (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Lithuania, Latvia, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia, and Slovenia) signed a framework named 16+1 Cooperation in Warsaw in 2012. At the outset, this framework aimed at deepening the multi-lateral economic ties, intensifying infrastructural and cultural cooperation, and capitalizing on the emerging business opportunities for both China and the CEECs.

The scope of cooperation was set to cover projects in CEECs’ infrastructure through investing in transportation systems by establishing new rail routes connecting the 16 countries with other parts of the world (Asia, Africa, and Middle East). China also intended to focus on capitalizing on green technologies, expanding export and import of goods, bringing new technologies for manufacturing sector, enhancing exchange programs for science, architecture, literature etc., and improving cross-cultural relations with the 16 countries.

Framework institutionalization raises a few eyebrows

In order to execute all the cooperation plans, the institutionalization of this framework in the CEECs became the first task to accomplish. It began with launch of Permanent Secretariat at the Chinese Foreign Ministry in China in 2012, followed by opening of Business Council in Poland (2014), Secretariat of Investment Promotion in Poland (2014), New Silk Road Institute in Czech Republic (2015), Center for Dialogue and Cooperation on Energy Projects in Romania (2016), Regional Center of the China National Tourism Administration in Hungary (2016), Coordination Mechanism on Forestry Cooperation in Slovenia (2016), Association for the Promotion of Agricultural Cooperation in Bulgaria (2017), China-CEE Institute in Hungary (2017), and few more.

Such institutionalization in the form of CEECs national coordinators, establishment of several secretariats, and a number of associations and industry organizations for individual states, became a crucial step towards enhanced political and economic relations of China and CEECs, and paved the way for further projects.

On the other hand, however, it left room for criticism. Some organizations, such as Institute for Security and Development Policy, Sweden, pointed out that establishing these institutions in a scattered rather than centralized way will deeply affect proper coordination and flow of information about all projects and initiatives within the framework.

Other voices of criticism, mostly from EU diplomats, warned about the fact that these institutions will limit accessibility to the information for the public. These institutions tend to work in line with the Chinese culture which differs greatly from cultural norms in European (and thus CEECs) organizations. In CEECs’ political culture (prevalent to various degrees across the European region), institutions are expected to actively and symmetrically communicate information to the public, providing room for public criticism and ensuring transparent procedures.

However, in Chinese political culture, public consultation and individual opinion are not given such importance. This leaves many EU leaders to ponder whether China’s intentions are to actually enhance the Sino-CEECs relations or to grow its dominance over the CEECs and act as it pleases behind the veil of its own culture providing an excuse for limited transparency.

OBOR and 16+1 framework go hand in hand

One of China’s major initiatives (and perhaps the only one so far considered to bring real benefit for both sides) is the One Belt, One Road (OBOR) project, launched in 2013 (we wrote about it in our article OBOR – What’s in Store for Multinational Companies? in July 2017). Under this project, China is ambitiously investing in developing one road connectivity, and this plan includes connecting the 16 CEECs with Asia, Africa, and Middle East. According to National Development and Reform Commission of China, Chinese investment in OBOR is likely to reach anywhere between US$120 billion and US$130 billion and with the external investments, it is expected to be totaling to US$600-800 billion by 2022. The success of OBOR is likely to impact the economies of CEECs though increased trade not only with China but also with other countries in Asian Pacific region.

China’s Investment in CEE Sharing Benefits or Building Own Dominance

The Balkans remain important in China’s plans

As part of OBOR, China has increased investment in infrastructure development in CEECs countries, with the initial focus on a few Balkan projects, especially in Serbia, with which China have always had excellent bilateral relations. The country appears to be the central hub in the Balkans for OBOR, both at an infrastructural and political level.

China started with a couple of agreements for infrastructure development with Serbia. These included China’s first large infrastructure investment in the region – construction of “Mihajlo Pupin”, the second bridge over Danube River in Belgrade in 2014 by China Road and Bridge Corporation (CBRC). The bridge shortened the travel time between Zemun on the south bank and Borca on the north bank of the Danube River from more than an hour to just 10 minutes. It also considerably reduced traffic problem on the first bridge. The project was received well by Serbia and taken as a good sign of China’s efforts to strengthen relations between the two countries.

China and Serbia came together for three more deals under the 16+1 framework, leading to total Chinese investment of nearly US$1.06 billion. These included US$715 million for construction of Kostelac power generation unit and expansion of coal-fired plant complex started in 2013, another US$350 million for re-construction of 34.5 km long segment of Belgrade-Budapest railway line, started in 2014, and undisclosed-value project of construction of Surcin-Obrenovac segment on Serbia’s E763 highway developed by China Communication Construction Company (CCCC) in 2017. All the three projects are likely to be completed by 2020.

Another flagship project, which involved Serbia and Hungary, was the construction of China-Europe land-sea fast intermodal transport route that was initiated in 2014 and became operational in 2017. With these infrastructural developments, China showed it delivered on its promises, and took steps to facilitate an enhanced exchange of goods with the CEECs.

Asymmetrical distribution of opportunities also causes criticism

The fact that all these projects were developed predominantly by Chinese firms, has been a cause for concern for western European leaders who criticized Chinese companies for seizing all opportunities and profits. The critics point out that if China and CEECs are coming together for such projects, the local companies should be able to benefit and be given opportunity to contribute skillset and technologies to local infrastructure development.

On the other hand, according to numerous experts, several countries, including Serbia, lack the technical and financial capacity required for such projects. China’s perspective should also be considered here – as China is already investing in the CEECs in the development of infrastructure, it is only logical (and natural) that it would prefer to engage own firms in order to help their business and take back some revenue from the projects.

China strengthens its foothold through financing initiatives

Chinese investments in CEECs are not only limited to the infrastructure sector, but also include certain financing initiatives in the form of availability of loans and funds. During the launch of 16+1 Cooperation framework, China announced a special credit of US$10 billion to the 16 countries to be used as preferential loans for implementation of common projects. Apart from that, in 2013, China together with CEECs launched a Sino-CEE investment fund of US$435 million, which aims at contributing financially to the sustainable economic development of CEECs.

Further, various banks and financial institutions, such as Bank of China, China Development Bank, China Export-Import Bank, and Industrial and Commercial Bank, have opened their branches in the region. While the official reason for this was to provide financial support and availability of funds to the CEECs, a relevant reason was also for China to expand the reach of these financial institutions’ brands in the European market.

Chinese investments grow in size and breadth

It is clear that China’s interest in CEECs has been growing, as exhibited through the sectoral breadth of investment initiatives and the variety of investment modes. Chinese companies are also pursuing the path of acquisitions and joint ventures with CEECs-based companies, the key example of which was seen in 2016, when Polish waste management firm, NOVAGO, was acquired by China Everbright International (Hong Kong). The deal was signed up at a value of US$144.3 million and was one of the largest acquisitions by a Chinese firm in the environment sector in CEECs.

While it is expected that such acquisitions can certainly bring benefits to the local entities involved in the deal (through capital and technology transfers, and easier access to the Chinese market), some concerns have been raised that an intensive Chinese-dominated M&A activity is not healthy for the local market dynamics.

The extent of these investments and acquisitions resulted in year-on-year increase in China’s outward foreign direct investment (OFDI) stock in the 16 countries. According to data from the Chinese Ministry of Commerce, the OFDI stock in 2010 in CEECs was estimated at US$0.85 billion and it reached US$1.97 billion in 2015, depicting an overall increase of around 130% in five-year period. Overall, Hungary was the leading recipient of FDI in CEE region with US$571.1 million, followed by Romania with US$364.8 million, and Poland with US$352.1 million in 2015.

The increased FDI in these countries is partially also a result of their interest in attracting Chinese investments even before the 16+1 cooperation framework came into picture. Poland, for example, being the largest economy amongst CEECs, started promoting itself with Chinese firms since the EXPO 2010 in Shanghai. For long, Hungary seems to have made a point to maintain good relations with China, even before other CEECs intensified multilateral relations with China. Hungarian government also made efforts to attract FDI, including from China, by proposing deals such as introduction of special incentives for foreign investors from outside EU or residence visa programs for bringing in a certain level of investment in Hungary.

Trade intensifies, though less than expected

Not only has there been growth in Chinese FDI since the yearly 2010s, but also the trade between China and the CEECs has grown progressively. According to Department of European Affairs at China’s Ministry of Commerce, trade between CEECs and China was estimated at US$43.9 billion in 2010 and grew to US$68.0 billion in 2017, showing a growth at a CAGR of 6.5% during 2010-2017.

While this might seem impressive, it must be noted that at the time of the launch of 16+1 cooperation framework, China promised to increase the trade value to US$100 billion by the end of 2015, which is far from the actual results even by the end of 2017. This again led to the criticism by the western European leaders over China’s ability (and willingness) to deliver on its promises, indicating lack of credibility in Chinese assurances.

On the other hand, the numbers do depict growth in trade between China and CEECs from 2010 to 2017 as compared to the previous years. According to Chinese Ministry of Commerce, China exports to CEECs were US$49.4 billion and imports from CEECs were US$18.5 billion in 2017, with an increase of 13.1% and 24%, respectively, from 2016. China’s exports to CEE concentrate on technology (with high-tech products from telecommunication, service sectors, and e-commerce sectors). CEECs supply agricultural products including fruit, wine, meat, and dairy products to meet the growing demand of the large population of China. Further interest in expanding imports of agricultural and dairy products by China can be expected, and an increased ease of exporting to China is likely to help CEECs to reduce their continued trade deficit in the coming years.

EOS Perspective

The rising investments of China in the CEECs have been under scrutiny since formalizing the 16+1 cooperation framework in 2012. Ever since the launch, China has been taking a range of initiatives that on the one hand worked towards development of the CEECs, but on the other hand gradually built its dominance in various markets and sectors in the region.

It is clear that such steps are taken by China in order to strengthen its political and economic foothold in the region. European leaders continue to remain skeptical over the intentions of China, which might also indicate the EU’s insecurity about China capturing strong hold over CEECs markets and building its dominance, which potentially might be able to overpower the EU’s influence in the region (especially in the Balkans out of which several countries are not EU members).

From the development point of view, initiatives such as OBOR, China-Europe sea-land express way, Belgrade and Budapest railway line, and even the mergers and acquisition deals, certainly bring advantages not only for China but for the CEECs as well, through much needed funding of infrastructure projects as well as through increased trade revenue.

Although it is of paramount importance for European watchdogs to keep an eye on the ongoing trade imbalance and growing Chinese ownership in CEE enterprises, it must be noted that acquisitions of CEECs-based firms by Chinese firms have largely affected the business in a positive way till now, thanks to influx of capital and the possibility to get the base to expand in Asian markets. Under this framework, despite its inherent issues and associated risks, steps taken by China for future development in the form of ongoing projects, especially in the infrastructure sector, have the potential to create more opportunities for the parties involved to strengthen cross-regional trade and hence create a (almost equal) win-win situation for both China and the CEECs.

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China’s Investments in Africa Pave Way for Its Dominance

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Connecting nearly 70 countries through an extensive land network and sea routes across Asia, Europe, and Africa, the One Belt, One Road (OBOR) Initiative is the focal point of China’s foreign policy that is publicized as providing various economic developmental opportunities. Proposed by China’s President, Xi Jinping, in September 2013, the action plan and framework of the OBOR, also known as Belt and Road Initiative (BRI) was officially presented in March 2015. Since the unveiling, the initiative has gained huge momentum in certain parts of the world. Africa is one such region that has witnessed major infrastructural development across road and rail network, telecommunication, and energy sectors in the early stages of BRI.

Africa is keen on receiving investment from China to boost its economic development. Owing to its location, the continent, as such, is placed perfectly on the sea route as part of China’s global plan. Although the continent lies on the Maritime Silk Road, the sea route that connects Indian Ocean to Suez Canal via Red Sea, only few African countries are of direct strategic importance to China along the OBOR route (including Egypt, Kenya, Tanzania, Ethiopia, and Djibouti). However, in its growth strategy, China is involved in several projects to increase its presence across other African nations as well.

Focus on strategic sectors

China is focusing intensely on infrastructure projects in the initial years of this initiative, as strengthening the railway and road network across the countries and developing sea ports is crucial for the success of the project. However, the expansion plans are not only limited to logistics. China is also investing heavily in other sectors, such as energy, mining, and telecommunications.

China’s Investments in Africa Pave Way for Its Dominance

Logistics and industrial zones

China is involved in a number of mega infrastructure projects in Africa. Railway projects rolled out by Chinese companies across Africa are amongst the ones (along with road network and sea ports projects) that have gained momentum in terms of execution and become operational ahead of scheduled time. The Mombasa-Nairobi Standard Gauge Railway (Madaraka Express) in Kenya at a cost of US$3.2 billion, built by China Road and Bridge Corporation (a Chinese state-owned construction and engineering company) and funded by China Exim Bank (90% funding by the bank and remaining 10% by Kenya government) connecting Mombasa to Nairobi, became operational in June 2017 (construction of the railway line began in January 2015) as against the timeline of four years. In due course, the line will link Tanzania, Uganda, Rwanda, Burundi, and South Sudan to Ethiopia’s Addis Ababa Light Rail Transit (AA-LRT) built by China Railway Group Limited, a Chinese construction company. Initiatives such as this, when married with port connectivity across sea-based countries, will not only improve trade amongst nations within the continent but will also boost Africa’s commerce market by opening new trade routes with other continents.

Some of the railway projects initiated by China were planned long before OBOR came to play, however, they could still form a crucial part of the initiative. For instance, the Tanzania-Zambia railway line built in 1970 with the technical and financial aid from China, is now being revived again with the help of Chinese companies Plans are underway to link it with other ports and build an industrial economic belt along the railway line to utilize the line more effectively. Chinese government has given Tanzania-Zambia Railway Authority (TAZARA) a US$22.4 million interest-free loan to not only improve the operations but also to extend the line to other countries that include Malawi, the Democratic Republic of Congo, Rwanda, and Burundi. This line is of strategic importance to China in terms of better connectivity, which could lead to improved trade partnerships in the future, as this is the only railway line in Africa that connects three economic blocs, namely East African Community, Common Market for Eastern and Southern Africa (COMESA), and Southern African Development Community (SADC).

China is effectively planning for future stability of its position in the continent, as evident from its plan to build Africa’s largest free trade zone in Djibouti, considered as China’s gateway to the continent.

China is effectively planning for future stability of its position in the continent, as evident from its 2016 announcement to build Africa’s largest free trade zone in Djibouti, considered as China’s gateway to the continent, spread over an area of 48 sq. km. The port will be built by Dalian Port Corporation Limited, Chinese largest port operator, and is expected to handle US$7 billion in trade within two years of becoming operational. About 15,000 direct and indirect jobs are expected to be created from the project. Strengthening Djibouti air transport sector is also of crucial importance to China and in light of this, two new airports – Hassan Gouled Aptidon International Airport and Ahmed Dini Ahmed International Airport – are also being set up to boost connectivity between the two countries. Funded by the China Civil Engineering Construction Corporation (CCECC), a Chinese construction engineering company, at a combined cost of US$599 million, this paves way for the country’s economic growth and development by making it a trade hub.

Telecommunications

China Communications Services Corporation Limited (also known as China Comservice), a subsidiary of China Telecommunications Corporation, is planning to revamp the original Africa Information Superhighway to Trans Africa Information Superhighway, an information and communication technology (ICT) project. The 20,000 km long optical cable is expected to pass through 48 African countries and involves an investment of US$10 billion. With growing internet penetration in many African countries (as per World Bank report, Kenya had an internet penetration rate of 45.6% in 2015 which was above the world’s average of 44%), the ICT project offers huge potential.

Mining and energy

China has already been heavily investing in energy, power, and mining sectors in Africa as part of its FDI policy, and now under the OBOR initiative the investments are expected to rise further. China General Nuclear Power Holding Corporation (CGNPC), a Chinese player that develops, constructs, and operates power plants, started mining uranium in the western-central part of Namibia in 2016. Known as the Husab Uranium Project or Husab Mine, it is amongst China’s largest projects in Africa, and has received investment worth US$2 billion, expected to produce 6.8 million kilograms of uranium oxide every year.

Although China has been investing in Africa for development of renewable energy projects, China’s focal point on the energy and power sector under OBOR initiative is still diluted. However, investments across this sector can be expected to happen in the near future owing to abundance of natural resources in the continent.

EOS Perspective

China’s OBOR initiative seems to be successfully transitioning from a theoretical plan to reality, at least within African continent. It provides developing countries across Africa what they need the most – infrastructure (roads, railways, sea ports, airports, power plants, refineries) along with supporting various other sectors such as information technology, telecom, and financial services. Apart from streamlining infrastructural development in Africa, African countries can also benefit in terms of better trade within the continent as China plans to build high speed rails, ports, and roads across the continent as indicated in the memorandum of understanding (MoU) with the African Union (AU), signed in 2015. Though this means some good news in terms of job creation, infrastructural development, and overall growth, African nations need to strategically think and analyze how they can emerge truly stronger in the run for economic development, without the threat of being increasingly dominated by the Chinese influence.

Projects undertaken as part of OBOR are of great size and offer growth opportunities, but also involve large amount of investment, long periods of construction, and associated operational risks – we wrote about it in our article OBOR – What’s in Store for Multinational Companies? in July 2017. African domestic stakeholders should wisely chalk out their approach tactics and secure participation in implementation plans when partnering with Chinese companies, in order to favor their own economic and sustainable development as well as share in benefits. Governments and local leaders of each African country will have to play an active and important role in negotiating and finalizing business terms with Chinese companies, if they want these partnerships to benefit their country and local population in the long run.

African stakeholders should secure participation when partnering with Chinese companies, in order to favor their own economic and sustainable development as well as share in benefits.

While it cannot be denied that African countries are surely bound to benefit from the OBOR initiative, it is the Chinese companies leading these projects that will reap the largest benefits as well as China that will intensify and strengthen its economic hold in the region. Starting off with successful road and railway projects in Africa, Chinese companies are going to focus on sectors such as manufacturing and real estate in the coming years. Presence of natural resources in the continent is also likely to attract Chinese players in the mining sector. And with so much investment already happening in the initial phase of OBOR, Chinese players are planning for the long haul by developing large industrial zones to avoid issues related with labor costs and tariffs.

This sudden inclination of China towards developing and helping African nations seems overwhelming. It draws attention to the fact that China may try to overpower and dominate the economic and geo-political scenario across Africa in disguise of offering the countries development opportunities. With easy loans, with no stringent clauses related to intellectual property, legal matters, and human rights policies, all of which are conditions far more attractive than those that would be offered by China’s Western counterparts, China makes sure to have an upper hand in all the projects that are undertaken as part of the OBOR initiative.

With loans from Chinese banks and projects led by Chinese companies, there is no doubt that the Chinese influence in the continent is already on the rise. While the immediate effect of growing Chinese dominance in Africa will first be realized in the countries that fall directly on the OBOR sea route (or are easily connected to these sea routes via road and rail), other regions, that are currently not on the OBOR map, are highly likely to also witness the rising control of Chinese companies in less than a decade.

It is also being speculated that if Chinese investment continues to grow at this speed, it can be expected that in relatively near future many sectors will be dominated by Chinese companies, leaving no room for African players to grow. This could lead to exploitation of African players by the Chinese side, local governments finding themselves under huge debt with Chinese banks hampering plans for domestic development, and leaving local people to deal with meaner jobs as all the high paid jobs would be retained with the Chinese – these are just a few of possible immediate repercussions, but the list might not end here.

If Chinese investment continues to grow at this speed, it can be expected that in relatively near future many sectors will be dominated by Chinese companies.

A drive such as OBOR definitely seems to greatly contribute to putting the African economy on a growth path by pouring the much needed billions of dollars to link China’s trade route to African countries through a strategized set-up of railways, roads, sea ports, and airports thus opening doors for investment in other sectors as well. In the short term, it is clear that African countries have more to gain than to lose when receiving huge investments from China as this drives the continent towards economic prosperity. But China’s intentions behind investing in developing African economies, under the disguise of OBOR initiative, might be more than meets the eye. In the long run, Africa’s economic scene may be China-dominated, not only reshaping the continents’ infrastructural and business scenario, but also initiating a new phase of globalization and development, which most of the African nations have been void off for a long time.

Amid these discussions of the extent to which African nations will let China take control in the name of growth, one thing is clear that China is a strong ally for African nations and the association can only be expected to strengthen under OBOR. Both China and Africa stand to gain from this association – China to notch up a step to reach its goal for global expansion by leaving an imprint on the continent that will be clearly visible for decades to come, and Africa, with regular investment from China, to work on the development and economic upliftment of the continent.

by EOS Intelligence EOS Intelligence No Comments

Commentary: The Suzuki-Toyota Partnership – Are Such Partnerships Here to Stay?

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In February 2017, Suzuki and Toyota signed a memorandum of understanding (MoU) for business partnership. The two Japanese carmakers drafted framework for collaboration on future technology development, joint manufacturing, and market development projects. Both companies agreed to share their R&D, product portfolio, infrastructure, and dealer networks in India.

The collaboration includes mutual supply of passenger vehicles between the two companies for the Indian market. Maruti Suzuki (Suzuki’s Indian subsidiary) will supply Toyota with between 30,000 and 50,000 units of Baleno and Vitara models, while Toyota will provide Suzuki with 10,000 units of Corolla annually. These vehicles will be marketed nationally through their respective sales networks. In addition, Toyota and Denso Corporation (owned by Toyota) will offer technology transfer to Suzuki for developing a compact and highly efficient powertrain. Toyota’s Indian arm, Toyota Kirloskar Motor (TKM) will manufacture models developed by Suzuki for sale in India, Africa, and other emerging markets via their global sales networks. Further, in November 2017, both companies announced plans to co-develop and introduce electric cars (EV) in India by 2020. For this, they are setting up a lithium ion battery plant in the Indian state of Gujarat.

What does it mean for both OEMs?

By tapping into Toyota’s under-utilized manufacturing capacity in India, Maruti Suzuki will get access to the much needed extra production bandwidth. The OEM has so far relied heavily on Fiat for its diesel engines. With the new collaboration, it will have access to Toyota’s superior diesel engines that will help Suzuki to improve its brand perception in the Indian market. The partnership will also provide Maruti Suzuki with a chance to take a stab at the executive sedan space by offering Toyota’s Corolla via its sales network. Lastly, Suzuki will leverage Toyota’s technology and EV expertise, an area where the OEM is relatively weak and definitely needs improvements.

The partnership will give Toyota access to Suzuki’s expertise in India. It will hopefully help it to penetrate the low-priced compact cars market, a segment it has failed to crack so far. The OEM relies mainly on diesel car sales in India. However, the new partnership will help Toyota to fill the current product gaps, broaden their portfolio with petrol cars from Suzuki, and achieve higher sales in India.

What does it mean for Indian automotive industry and customers?

At present, both carmakers have started sharing a few of their models with each other. However, there is a potential for more models in pipeline, followed by joint product development and manufacturing platform sharing (shared engineering and production efforts for different vehicle models). This is likely to lead to the introduction of new cars in various market segments. The co-developed cars are promised to have Toyota’s technological sophistication as well as Suzuki’s affordable ticket price, providing customers with broader and better options. In addition, the partnership can be expected to make both carmakers compete with each other for performance improvement, this will result in enhanced products and services for customers.

From an industry perspective, the joint manufacturing will result in creating more local jobs. Volume production will mean that both OEMs will also look to source components locally for cost savings. This will provide some boost to domestic components industry and government’s Make in India initiative. Suzuki’s size, scale, market knowledge, as well as unrivalled supply chain in India, along with Toyota’s global expertise and technology know-how, make this tandem a great fit in the context of kick-starting, promoting, and meeting the Indian government’s ambitious 2030 EV targets. In the EV space, the partnership will contribute to manufacturing more efficient cars and aid in development of the automotive and ancillary industries.

Are such partnerships here to stay?

Since growth opportunities in developed automotive markets are confined, global carmakers have set their eyes on emerging markets as these are projected to represent around 60% of the total global auto sales by 2021. India is on a fast track towards becoming the world’s third-largest auto market thanks to the rapidly growing passenger car market. According to IHS Markit estimates, annual new car sales are expected to reach 5.1 million in 2020, an increase of about 30% from 2016-2017 figures. Therefore, it looks like a logical move for global OEMs, such as Toyota, to look at all possible collaboration avenues to capture the growth opportunities in these markets.

The global automotive industry is constantly evolving triggered by rapidly rising new technologies, changing customer preferences, and multiplying sustainability policies. Carmakers globally are faced with massive costs to develop new technologies for highly energy-efficient cars. To remain competitive in such rapidly changing industry, OEMs need to increasingly look for strategic collaborations that will enable them to work together and leverage their shared expertise to optimize cost as well as performance. As a result, increasing number of alliances are seen where carmakers collaborate by sharing platforms and joint manufacturing for cost savings in R&D, manufacturing, and components procurement. This is especially true in emerging markets where growth opportunities are ample, but own set of challenges exists, and such alliances are increasingly becoming catalysts for growth. Recent examples include five MoUs signed between Mahindra and Ford to jointly develop new products in India and other emerging markets, or a similar alliance between China’s Geely Group and Daimler.

While the coming together of two Japanese OEMs with two different working cultures may pose its own challenges, both carmakers need this collaboration to succeed for their own reasons. For Toyota, the reason is to increase its presence in a country that is soon to become the world’s third-largest auto market. Suzuki’s reason is the much needed technical know-how to enter the EV space. While the success of this partnership at present remains uncertain and it will be interesting to see how this partnership pans out in the next few years, one thing that is certain is the fact that one can expect more such collaborations in the near future, as carmakers will look for partners to better penetrate new markets, develop new products to grow, at the same time optimize their R&D, manufacturing, and procurement costs.

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.

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