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01/03/2024by EOS Intelligence EOS Intelligence No Comments

Lithium Discovery in Iran: A Geopolitical Tool to Enhance Economic Prospects?

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Iran possesses significant mineral reserves, but its mining industry grapples with issues, including machinery shortages and international sanctions. The recent lithium discovery in Iran holds the potential to boost its mining sector and economy, depending on the viability of lithium extraction and processing, as well as geopolitical factors. It can serve as a bargaining chip to lift sanctions imposed by the Western world. China is poised to benefit the most from Iran’s lithium discovery due to its strategic partnership and expertise in lithium refining and extraction technologies. However, despite Iran’s strong mining potential, high infrastructure costs, technological limitations, and sanctions hinder its mining industry development.

Lithium discovery to help drive mining industry and economic upliftment in Iran

Iran is home to more than 7% of the world’s total mineral reserves and is rich in minerals, including zinc, copper, iron ore, coal, and gypsum. However, Iran’s mining industry is still nascent and barely contributes to economic growth due to a lack of necessary machinery and equipment as well as international sanctions.

In the past, Iran exported various minerals, such as iron ore, zinc, and copper, to Western countries. However, prolonged international sanctions, initially imposed in 2006 to restrain Iran’s nuclear development program, resulted in insufficient investment in the mining sector.

Lithium Discovery in Iran, a Geopolitical Tool to Enhance Economic Prospects by EOS Intelligence

Announced in March 2023, the discovery of lithium deposits holding up to 8.5 million tons of lithium in Iran, if proven accurate, is expected to strengthen the country’s mining sector and overall economic growth. Iran is the first country in the Middle East to discover lithium deposits.

Lithium is a crucial component of lithium-ion batteries used in smartphones and electric vehicles. The increasing adoption of electric vehicles is fueling the demand for lithium at a significant rate globally. There is a great need to scale up lithium mining and processing to meet the demand, particularly for the manufacturing of electric vehicles.

International Energy Agency (IEA), in its global EV outlook for 2022, indicated that about 50 new average-sized mines need to be built to fulfill the rising lithium demand for electric vehicles and meet international carbon emission goals. There are already signs of lithium shortage as demand for lithium increases globally. The lithium reserve found in Iran holds the potential to reverse the lithium supply shortage into surplus in the coming years.

Read our related Perspective:
Electric Vehicle Industry Jittery over Looming Lithium Supply Shortage

Hope for the lifting of sanctions and reestablishment of diplomatic relations

The lithium discovery in Iran is expected to redirect focus toward mining activities in the Middle East. Iran can leverage this discovery to persuade Western nations, such as the USA and the EU countries, to lift sanctions imposed for its nuclear program, support for terrorism, and human rights violations. These sanctions include restrictions on Iran’s access to the global financial system, travel bans on targeted individuals and entities involved in concerning activities, and limitations on trade in certain goods and technologies.

In August 2023, Iran and the USA reached an agreement wherein Iran intended to release detained Americans in exchange for the release of several imprisoned Iranians and access to frozen financial assets. Fulfillment of commitments demonstrates mutual trust among the countries, which could pave the way for improved relations, reduced tensions, and future diplomatic initiatives. The US government also permitted Iran to enrich uranium up to 60%. This can be interpreted as allowing Iran to meet their nuclear aspirations, which could encourage Iran to comply with the agreement signed with the USA. As cooperation and trust between the nations strengthen, this agreement could ease sanctions. Moreover, if relations continue to improve, Iran could potentially seek assistance from the USA for its lithium venture.

Also, in March 2023, Saudi Arabia and Iran, with the help of China, reached an agreement to resume their diplomatic relations, re-open embassies, and implement agreements covering economy, investment, trade, and security. With the reestablishment of cordial relations, Saudi Arabia is likely to engage in joint ventures within Iran’s mining sector, providing mutual benefits for both nations.

It can also be expected that India will seek to strengthen its ties with Iran by building strong collaborations to ensure a regular lithium supply, considering that India is one of the largest importers of lithium-ion batteries. Iran and India share strong and multifaceted relations across various areas, such as trade, energy, connectivity, culture, and strategic cooperation. As India strives to transition to renewable energy sources and reduce its carbon footprint, access to lithium reserves from Iran could facilitate the development and deployment of energy storage solutions, such as grid-scale batteries and off-grid systems.

Potential to disrupt the global lithium race and geopolitical relations

The announcement of lithium deposits in Iran is likely to impact the global competition for lithium resources significantly. It holds the power to disrupt the existing power dynamics in the global lithium race, as it is estimated to be the second-largest lithium reserve in the world after Chile.

Many countries compete to control lithium supply chains due to its strategic importance, particularly in the EV industry. A few countries dominate the global lithium production, including Australia, Chile, and China. The emergence of Iran as a significant lithium producer could diversify the global supply chain. China, the largest importer and processor of lithium and manufacturer of lithium batteries, holds a substantial share of the lithium market. China is particularly reliant on foreign lithium suppliers, including Australia, Brazil, Canada, and Zimbabwe, accounting for around 70% of its total lithium imports.

With China’s well-established economic and political relations with Iran, there is potential for collaborative ventures in the clean energy transition supply chain. In addition, China’s expertise in technological advancements in lithium-related technologies, particularly lithium-ion battery manufacturing, purification and refinement of lithium, battery management systems, and development of battery materials, will likely play a crucial role in gaining access to Iranian lithium. Increased access to lithium will reduce its dependence on the current lithium suppliers and gain dominance in the lithium supply, impacting the trade balance and economic growth of countries supplying lithium to China.

At the same time, Australia, which stands out as China’s current primary source of lithium, exporting around 90% of its lithium to China, might encounter political and economic challenges. Australia, being a close ally of the USA, is likely to face pressure to curb its lithium exports to China, aiming to limit China’s access to sources of lithium. Chile, also being the key supplier of lithium to China, may face similar pressure from the USA. The USA is likely to exert such pressures, as China’s strong position could undermine the USA’s technological competitiveness and leadership in the EV market, accelerating the existing tensions and disrupting power dynamics in the global lithium race.

Major influencing countries such as the USA, Canada, France, Japan, Australia, the UK, and Germany also formed the Sustainable Critical Minerals Alliance in 2022. The alliance aims to secure supply chains of critical minerals, including lithium, nickel, and cobalt, from countries with more robust environmental and labor standards to reduce dependency on China. Such initiatives are expected to impact China’s dominant global lithium supply chain position.

Inevitably, Iran’s lithium discovery and China’s potential involvement in securing access to the resource can influence international relations, particularly between China and the USA, and China and Australia.

China to deepen ties with Iran

China and Iran have established an extensive partnership focused on China’s energy needs and Iran’s abundant resources. China has remained Iran’s primary trading partner for more than a decade. Their relationship grew stronger, specifically after the USA pulled out of the nuclear agreement and reintroduced sanctions on Tehran in 2018. Both China and Iran are confronted with sanctions from the USA, which is expected to strengthen collaboration between the two to mitigate the impact of sanctions and to counterbalance US influence in the Middle East and Asia.

In March 2021, China and Iran signed a 25-year strategic collaborative agreement to reinforce the countries’ economic and political alliance, particularly focusing on investment in Iran’s energy and infrastructure industry and assuring regular oil and gas supply to China. This is expected to further strengthen the relations between Iran and China.

China, the most trusted strategic ally of Iran and a significant lithium producer will likely act as a critical partner in building up Iran’s lithium industry. As the global leader in electric vehicle adoption (in absolute terms), the demand for lithium in China has increased dramatically in recent years. Also, China stands out as the only trade partner capable of accessing and refining lithium on a large scale. This will strengthen the Iran-China relations further.

High infrastructure costs and lack of FDI to challenge the Iranian mining sector

Despite the presence of a vast mining potential in the country, certain factors such as inadequate access to essential machinery and equipment, lack of exploration facilities, lack of sufficient infrastructure and investment, absence of advanced technologies, and shortage of financial resources limit the growth of the mining sector in Iran.

Lack of access to new cutting-edge production technologies, exacerbated by international sanctions, results in inefficient utilization of resources, particularly water, fuel, and electricity in mining operations. In addition, high production costs, mandatory pricing, and lack of skilled labor further pose obstacles in mining operations. This, together with the fact that the lithium extraction process is generally expensive and time-consuming, has led to various small and medium-sized mines opting to cease their operations.

The absence of foreign investment due to international sanctions poses challenges in conducting mining operations in the country. The government seeks to attract foreign investment in the mining sector, a difficult task amid structural challenges, human rights abuse accusations, and international sanctions.

Exploitation of lithium reserves discovered in the country will be difficult due to the lack of advanced technologies required for extraction, processing, and refining. The assessment of lithium grade and its economic feasibility will play a crucial role in determining whether to exploit the reserve.

EOS Perspective

The scale of lithium reserves discovered in Iran is significant, but the exploitation of the mineral is not likely to happen in the near future. Its viability, economic feasibility, actual quantity, and grade are yet to be ascertained. Also, the country does not have access to the necessary technologies required to process and refine lithium, so it has to rely on foreign investors.

Foreign investment in Iran is hindered by the sanctions imposed by the USA and the EU against Iran’s nuclear development program. Back in 2015, Iran agreed to scale down its nuclear program and allow broader access to international inspections to its facilities in return for billions of dollars in sanctions relief. But that ended in 2018 when the USA withdrew from the deal. With the recent agreement signed in 2023, there is hope that it could pave the way for the relaxation of sanctions on Iran.

Additionally, considering lithium’s pivotal role in multiple industries and concerns about China’s dominant power in the lithium supply chain, the US government might consider easing sanctions. EU is not likely to ease or lift sanctions and invest in Iran immediately due to uncertainties about the viability of the reserve, its impact on the environment during extraction, and lack of energy investments in the country. However, the EU may consider easing sanctions in the future if the USA moves in that direction.

Russia and China, having economic and diplomatic ties with Iran, are more likely to show interest in Iran’s lithium discovery. Russia is focusing on expanding its presence in the lithium market to meet the increasing demand for lithium in vehicles and energy storage systems. As a step in this direction, in December 2023, Rosatom, a Russian state corporation, signed a deal to invest US$450 million in Bolivia to construct a pilot lithium plant. Russia is also likely to explore investment opportunities in Iran’s lithium sector.

China is expected to benefit the most from the lithium discovery in Iran, considering its longstanding relations with Iran. At the same time, Iran is also more likely to be eager to collaborate with China, considering China’s strength in the lithium industry and international sanctions.

However, Iran should not solely rely on China, considering China’s track record of engaging in debt-trap diplomacy to exert influence and dependence, particularly over low-income countries. For instance, in 2013, China launched its infamous Belt and Road Initiative (BRI), under which it started funding and executing several infrastructure projects in developing and underdeveloped countries across the globe. However, over the years, the BRI initiative has been criticized for resulting in an increased dependence and trapping of the partner countries in heavy debt through expansive projects, non-payment of which may lead to a significant economic and political burden on them. A collaborative agreement spanning 25 years was also signed by China with Iran, primarily focusing on investing in Iran’s energy and infrastructure sectors, facilitating Iran’s involvement in the BRI. Iran could also fall into a similar debt trap, having no viable alternative partner, a fact that China can take advantage of.

Read our related Perspective:
China’s BRI Hits a Road Bump as Global Economies Partner to Challenge It

Many countries are likely to be interested in investing and building strong collaboration with Iran if the reserves’ viability is confirmed and the grade and quality of lithium are suitable for use. This could change the entire dynamics of the lithium supply chain and also lead to a decrease in lithium prices, which have been skyrocketing due to a significant surge in global lithium demand.

06/10/2022by EOS Intelligence EOS Intelligence No Comments

Africa’s Mining Industry Gaining Momentum

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Africa is home to 30% of the world’s mineral reserves, 8% of the world’s natural gas, and 12% of the world’s oil reserves. Despite being endowed with abundant resources, the continent accounts for only 5% of the global mining production. Mining in Africa was often overlooked because of the unstable political environment, opaque regulations, and poor enforcement capacity. Despite these challenges, investments in Africa’s mineral wealth have been steadily increasing in recent years. The massive swings in mineral demand due to the accelerated clean energy transition along with the rising geopolitical tensions have made countries across the globe diversify their sources of minerals and venture into highly challenged regions such as Africa.

Clean energy – A major force driving mineral extraction in Africa

The globally accelerating clean energy transition is set to unleash unprecedented mineral demand in the coming decades. Demand for minerals such as lithium, copper, cobalt, nickel, and zinc is expected to increase exponentially since they are required in the production of batteries, electric vehicles, wind turbines, and solar photovoltaic plants, all of which are the cornerstone of clean energy development. Among all clean energy technologies, electric vehicle manufacturing and energy storage are likely to account for about half of the global mineral demand over the next two decades.

Lithium

The African continent hosts many of the global mineral reserves required for manufacturing electric vehicles and batteries. Zimbabwe and the Democratic Republic of the Congo are among the top ten countries with the largest lithium reserves in the world. Lithium is a crucial component of lithium-ion batteries, which are used in smartphones and electric vehicles. In Zimbabwe, a mine named Bikita holds more than 11 million tons of lithium ore. Despite being bestowed with massive lithium reserves, the region is largely unexplored due to the lack of investment. However, as the lithium demand is on the rise, the government of Zimbabwe has been actively promoting the development of lithium mines to attract foreign investments. At the same time, an increasing interest in electric vehicles and lithium-ion batteries is driving the lithium demand, pushing many global economies to invest in lithium mining. One such example is an investment from December 2021, when a Chinese-owned mineral production and processing company, Zhejiang Huayou Cobalt, acquired a 100% stake in the Zimbabwean Arcadia lithium mine.

Cobalt

Cobalt is another important metal, used in energy storage technologies and electric vehicle production. Most lithium-ion batteries depend on cobalt, which is a by-product of copper and nickel production. The Democratic Republic of the Congo supplies almost 70% of global cobalt, while Australia and the Philippines supply 4.2% and 3.3% of global cobalt, respectively. The growth of the electric vehicle industry has driven major cobalt producers to ramp up the output at multiple mine sites in the Democratic Republic of the Congo.

Graphite

Like lithium and cobalt, graphite is another significant mineral used in electric vehicle manufacturing. A lithium-ion battery needs 10 times more graphite than lithium. China produces around 82% of the global graphite, followed by Brazil at 7%. Due to the increasing demand, many countries with graphite reserves are launching their graphite mining projects. Mozambique is expected to increase its flake graphite 2021 production levels fivefold by 2030. The country has around 20% to 40% of total global graphite reserves.

Copper

Copper also holds a significant position in a range of minerals used in renewable energy technologies. It plays a vital role in grid infrastructure due to its efficiency, reliability, and conductivity. Around 60% of copper demand is driven by wind turbines, solar panels, and electric vehicle manufacturing. Increasing copper demand along with the rising global copper shortage has made many global producers expand their production and venture into new regions for mining. Consequently, Africa’s Zambia, one of the largest copper producers in the world, has attracted a significant number of investments recently. The country aims to take its annual copper production levels from 830,000 metric tons in 2020 to 3 million metric tons in the next ten years.

Africa also hosts many other mineral reserves such as platinum, manganese, nickel, and chromium, which are used in a variety of clean energy technologies. The continent is poised to take advantage of the growing demand for these minerals and has already started to attract significant foreign investments.

Africa’s Mining Industry Gaining Momentum by EOS Intelligence

High commodity prices and rising geopolitical tensions favor Africa’s mining

Africa has experienced a boom in mining since 2000 when the commodities super cycle (a phenomenon where commodities trade for higher prices for a long period) began. Along with the commodity boom, the African mining industry has grown substantially, attracting investments in exploration, acquiring new concessions, and opening new mines. The recently spiking prices of commodities such as aluminum, zinc, nickel, copper, gold, and coal are further fueling investments across the continent.

The Russian war on Ukraine further benefits Africa as many countries started to diversify their supply chains away from Russia. In March 2022, the USA and the UK imposed a ban on Russian oil imports. Europe also has plans to cut its Russian gas imports by two-thirds before the end of 2022. These could lead to supply shortages of oil and gas in many countries. Russia also supplies 7% of the world’s nickel, 10% of the world’s platinum, and 25-30% of the world’s palladium, which are critical to the globally accelerating clean energy transition. The US and European governments are looking closely at further sanctions against Russia which could disrupt these critical minerals supply. The situation has made many developed countries diversify and secure their sources of minerals. This will be a huge opportunity for Africa to promote its resources.

Massive African gold reserves attract global gold producers

Gold is often perceived as a safe haven asset and its demand is constantly rising, pushing major global gold producers to ramp up their production. Additionally, as many of the global gold reserves are depleting, mining companies find it imperative to explore new gold deposits across the world. Interestingly, the Birimian greenstone belt of West Africa hosts huge deposits of gold but remains highly underexplored. Many leading global gold producers started exploring the region due to the favorable mining regulations and mining codes implemented recently. Between 2009 and 2019, approximately 1,400 metric tons of gold reserves were discovered in West Africa, while about 1,000 metric tons and 680 metric tons were found in Canada and Ecuador, respectively. A total of US$470 million was invested in West Africa’s gold resource exploration in 2020. This was the third-largest global gold exploration expenditure in 2020, behind that of Australia and Canada.

Investments in Africa’s mining

Countries such as Australia, China, Canada, the UK, and the USA have invested heavily in Africa’s mineral extraction over the years. Emerging economies such as India, Russia, and Brazil also have sizeable investments in Africa’s mining, creating more competition for resources. Among all the countries that have invested, China has demonstrated a significant presence across the continent. The rise of industrialization in China has driven increased demand for mineral exploration and extraction in Africa over the past decades. China’s investment in exploring African mineral resources multiplied to a remarkable extent between 2005 and 2015. In 2021, China’s total outbound foreign direct investment (FDI) was US$145.2 billion, of which a quarter was dedicated to African mining.

Many of the mining projects in Africa are funded by international stock exchanges. For instance, in 2015, Deloitte analyzed the funds of 29 major mining projects which were in development across the continent. The Toronto Stock Exchange funded 28% of these projects, followed by the Hong Kong Stock Exchange funding 17%, and the National Stock Exchange of India funding 10% of the projects.

A 2019 report published by PricewaterhouseCoopers states that, in 2018, total mining deals in Africa amounted to US$48 billion. Out of this, West Africa received the largest share of investment worth US$16.2 billion for its oil, gas, and gold reserves, followed by Southern Africa, which received US$14.7 billion worth of investment for its gold, platinum, nickel, and cobalt. East Africa and Central Africa received the least amount of mining investment.

Challenges

Asia constitutes approximately 60% of the world’s total mining production, followed by North America (14%). Africa, despite being endowed with abundant mineral reserves, constitutes only 5% of the global mining production. The continent has failed to achieve real mining expansion due to many challenges prevailing in the continent. One of the prime challenges is the poor infrastructure (rail and port) that causes trade blockages. High levels of political instability, unstable regulations, and corruption are other significant challenges hindering mining across Africa. Other challenges impacting the African mining industry include poor geological data management, illegal mining, lack of mineral processing facilities, unreliable power supply, and weak local markets.

EOS Perspective

With the world’s increasing appetite for clean energy, Africa has a chance to establish itself as a key player in the mining industry. Significant investments in extraction and exploration are required to get the most out of the continent’s resources, and this is happening to a certain extent. Most significantly, the countries involved must build a robust value chain to promote industrialization and boost their economies, instead of just supplying raw materials. Governments should consider fostering joint ventures and partnerships with foreign companies to bridge the technical skill gaps that prevail in the continent. The industry itself must ensure that it shares the mining benefits with the people, thereby improving their welfare.

The African countries must also address challenges such as poor infrastructure to participate effectively in the value chain. Many projects are already underway to boost the transport infrastructure. China has built significant inroads in Africa under its Belt and Road Initiative. Deloitte estimates approximately US$50 billion would be invested in over 830 infrastructure projects between 2003 and 2030.

Along with infrastructure development, strong governance, and a stable and reliable regulatory environment are critical to attracting foreign investments. Several governments across Africa are revising mining codes and regulations and providing tax incentives to stimulate manufacturing. The mining industry is at a critical stage where it needs to satisfy an increased demand for minerals while also curbing the environmental impact of mining operations. This process seems to be complex, but it also provides many opportunities. For instance, mining companies can utilize the adoption of renewable, energy-efficient systems for power generation. Technologies such as artificial intelligence, automation, and big data could be adopted to mitigate rising costs.

There is still a long way for the region to achieve the desired mining growth and economic development, with multiple challenges across the entire value chain. However, with stronger governance, more stable regulations, and considerable foreign investments, Africa could position itself as one of the largest mining economies in the world. The opportunity for Africa is huge, but it needs to be utilized properly.

07/11/2019by EOS Intelligence EOS Intelligence No Comments

Tax Cuts – Enough to Make India a Global Manufacturing Hub?

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India has recently announced an unprecedented reduction in its corporate tax rates. Not only is this a respite for domestic and existing foreign companies, but it is also expected to boost India’s position as a preferred investment destination for international companies looking to diversify their manufacturing footprint. Amidst the ongoing trade war between China and the USA, many companies, such as Apple, are looking to relocate a chunk of their manufacturing facilities away from China as part of a de-risk strategy. This presents the perfect opportunity for India to swoop in and encourage manufacturers to set base there instead of other Asian countries. However, tax reduction alone may not be enough to score these investments as the government needs to provide additional incentives apart from improving logistics and infrastructure, as well as land and labor laws in the country.

For the past three decades, India had one of the highest corporate tax rates in the South Asian region standing at 30% (effective rate of about 35% including surcharge and cess), making it one of the biggest sore points for investors looking at setting up a shop here.

However, September 2019 brought an unprecedented move, as the Indian government slashed the corporate tax rate to 22% from the existing 30%. Moreover, new manufacturing units established after 1 October 2019, are eligible for even lower tax rate of 15% (down from 25%) if they make fresh manufacturing investments by 2023.

The effective tax rate in these cases (subject to the condition that companies do not claim benefits for incentives or concessions) will be 25.75% (in case of 22% tax rate) and 17.01% (in case of 15% tax rate). These companies will also be exempt from minimum alternate tax (MAT). The tax cuts in effect are believed to have improved India’s competitiveness among investment destinations in the region.

The tax cuts in effect are believed to have improved India’s competitiveness among investment destinations in the region.

To put this into perspective, India’s new tax rate is lower than the rate in China (25%), Korea (25%), Bangladesh (25%), Malaysia (24%), Japan (23.2%), however still a little higher than that of Vietnam (20%), Thailand (20%), Taiwan (20%), Cambodia (20%), and Singapore (17%). However, for new companies/MNCs looking to set up a unit in India, the country offers the most competitive rates in the region.

This tax break by India is also well-timed to exploit the degrading US-China relationship, which is resulting in several US-based companies, such as Apple, Google, Dell, etc., to look for manufacturing alternatives outside of China. Currently, Vietnam, Taiwan, and Thailand have been the prime beneficiaries of the trade war, with the three countries attracting about 80% of the 56 companies that have relocated from China during April 2018 to August 2019. However, India’s recently introduced tax cuts may act as a major stimuli for companies (that are looking to partly move out of China or are already in the process of doing it) to consider India for their investments.

While the tax reform stands across all industries, India is looking to boost investment in the labor-intensive electronics manufacturing sector including smart phones, televisions, etc. To achieve this, the government recently scrapped import tax on open cell TV panels, which are used to make television displays. In addition to large brands such as Apple, India is also targeting component and contract manufacturers for such companies (such as Wistron, Pegatron, and Foxconn) to shift their business from China and set a shop in India.

Is a tax break enough?

While this is a big step by the Indian government to attract foreign investments in the manufacturing space, many feel that this alone is not enough to make India the preferred alternative to its neighbors. Companies looking to relocate their manufacturing facilities also consider factors such as infrastructure (including warehousing cost and set-up), connectivity (encompassing transportation facilities and logistical support), and manpower (such as availability of skilled manpower and training costs) along with overall ease of doing business, which covers the extent of red tape, complexity of policies, and transparency of procedures.

The Indian government has to work towards improving the logistical infrastructure, skilled labor availability, and cumbersome land-acquisition process, among many other aspects. As per the World Economic Forum’s Global Competitiveness Report 2019, India ranks 70 (out of 141 countries) in terms of infrastructure. While India heavily depends on road transportation, it needs to invest in and develop modern rail and water transportation and connectivity if it wishes to compete with China (rank 36).

India also ranks poorly with regards to skilled workforce and labor market, ranking 107 and 103 on the indices, respectively. To put this in perspective, Indonesia ranks 65 with regards to skilled workforce and 85 for labor market, and Vietnam ranks 93 for skilled workforce and 83 for labor market. Other than this, India also struggles with complex land acquisition laws and procedures, and must look into streamlining both to position itself an attractive investment destination.

Apart from this, the government also needs to provide additional incentives for investments in sectors that are its key priorities, such as tech and electronics manufacturing for export. As per industry experts, electronics manufacturing in India carries 8-10% higher costs in comparison with other Asian countries. Thus the government must provide other incentives such as easy and cheaper credit, export incentives, and infrastructural support, to steer companies into India (instead of countries such as Vietnam, Indonesia, and Thailand).

Several experts and industry players suggest that the government should provide the electronics manufacturing industry incentives for exports that are similar to those under the ‘Merchandise Exports from India Scheme’, which provides several benefits including tax credits to exporters.

In August 2019, the Ministry of Electronics and Information Technology (MeitY) proposed incentives to boost electronics manufacturing in India. These include a 4-6% subsidy on interest rates on loans for new investment, waiver of collateral for loans taken to set up machinery, and the renewal of the electronics manufacturing cluster (EMC). EMC creates an ecosystem for main company and its suppliers to operate in a given area (the previous EMC scheme ended in 2018).

Apart from this, industry players are also seeking an extension of another scheme, Modified Special Incentive Package Scheme (MSIPS), which also ended in 2018. MSIPS provided a subsidy of about 25% on capital investment.

EOS Perspective

India’s tax break came at an extremely opportune time, with several MNCs having expressed their plans to branch out of China (for at least 20% of their existing manufacturing facilities). From imposing some of the highest corporate taxes, India has now become one of the most tax-friendly markets, especially for new investments.

This is likely to put India in the forefront for consideration, however, it is probably not enough. The government needs to work on several other facilitating factors, especially infrastructure, land laws, and availability of skilled labor, which are more favorable in other Asian countries.

Moreover, the appeal of some countries, such as Vietnam and Thailand, seems to remain high, as several of them introduced a ‘single point of contact’ facilities for investors. Under these facilities, in various forms, investors are provided with investment-related services and information at a single location, and/or are provided with single point of contact within each ministry and agency they have to deal with. This makes the access to information and investment procedures much easier for foreign investors, and increases the perception of transparency of the whole process. India on the other hand struggles with bureaucracy, fragmented agency landscape, and red tape. Despite initiating a single window policy, multinational representatives need to visit multiple offices and meet several officials (also in many cases offer bribes) to get an approval of their proposals and subsequently get the required permits. Bureaucratic and procedural delays, as well as poor work culture remain to be considerable deterrents for foreign investors.

India struggles with bureaucracy, fragmented agency landscape, and red tape. Bureaucratic and procedural delays, as well as poor work culture remain to be considerable deterrents for foreign investors.

Also in 2018, India only managed a mere 0.6% of its GDP from manufacturing FDI, indicating a low confidence level among foreign companies to make medium to long-term commitments in India. However, large part of the reason for this were also the high tax rates. Therefore, the recent tax reduction is a major step in the right direction, while the government still has some distance to bring India to replace China in the position of manufacturing giant of Asia, especially in the electronics sector.

22/05/2019by 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.

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.

12/02/2019by EOS Intelligence EOS Intelligence No Comments

India and China Make Space for Domestic Medical Devices

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Medical device industries in India and China have long been dominated by international players, especially when it comes to high-end devices. High investment requirement, long gestation period on ROI, limited support from the government, and relatively low demand and awareness about medical procedures have resulted in limited domestic investments. However, the industry has been evolving as more and more local players are realizing the scope of this high-potential market that is still in its nascent growth stage in India and China. Moreover, increased government support is further expected to boost indigenous production in the industry.

Similar market structures, a whopping difference in size

While the medical device sector in China is far ahead of that of India (with respect to sales, number of players, and investment), they both have a similar market structure, i.e. being dominated by large multinational players, who have built strong relationships with large hospitals, healthcare organizations, and influencers.

Very few local players have had any significant presence in this industry, and those that did hold some share in the market, limited their focus to the low-investment, low-price product range. However, with healthcare spending in the two countries rising significantly, more and more domestic players are entering and expanding into this space.

India’s healthcare industry is poised to reach US$280 billion by 2020 registering a CAGR of 15% during 2016-2020, while China’s healthcare spending is projected to reach US$1 trillion by 2020, growing at a CAGR of about 12% during the decade.

The rise in healthcare spending in both countries is underpinned by rising disposable income, availability and growing awareness about medical care, expansion of health insurance coverage, rising burden of lifestyle diseases and increased stress levels, as well as ageing population (especially in China).

In addition to this, the governments in both countries are providing instrumental support to companies interested and engaged in medical device manufacturing on domestic soil.

Government takes initiative to promote Indian domestic manufacturing

India’s medtech market, which was valued at close to US$4 billion (INR 260.5 billion) in 2015 is expected to reach about US$8 billion (INR 550.4 billion) by 2020, registering a CAGR of 16.1% during 2015-2020, which is significantly higher than the global industry growth of about 4-6%.

Although about 65-70% of the market value is characterized by imports, the current government’s initiatives in the sector (including the Make in India initiative) are expected to reduce the country’s dependency on imports in the medium-to-long term. Some of the initiatives undertaken by the government include allowing 100% FDI in the sector, setting up medical technology and devices parks across selected states to bring down indigenous manufacturing costs by as much as 30%, developing two testing and quality certification labs aimed at monitoring and improving quality of manufactured devices, and issuing Medical Device Rules 2017, which promote domestic manufacturing.

Before the Medical Device Rules 2017, medical devices were regulated as drugs and this resulted in several regulatory bottlenecks with regards to medtech manufacturing. The new set of rules ease the process of obtaining licenses and undertaking clinical trials, encourage self-compliance, and promote a single-window digital platform for the processing and easy tracking of applications and licenses for import, manufacture, sale/distribution, and clinical investigation of medical devices. In addition, the new medical device rules classify medical devices into four categories based on the risks these devices may pose, in line with global standards for classifying and registering medical devices.

In addition to this, the government also corrected the inverted tax structure faced by the industry in the past (i.e. import of finished goods attracted lower duty compared with import of raw materials for domestic manufacturing). Under the 2016-2017 budget, the government relaxed import duty on components and raw materials required to manufacture medical devices to 2.5% and provided full exemption from additional customs duty (SAD). Further, it increased duty on import of finished medical devices from 5% to 7.5% (in addition to imposing an additional duty of 4% on medical devices by withdrawing exemptions.)

While the move of reducing duty on raw materials has been appreciated by the industry, the rise in duty of imported medical devices has met with mixed reviews. India is highly import-dependent with regards to medical devices and a rise in duty on most categories will make medical care more expensive for the consumer.

Further, in June 2017, the union cabinet announced a US$250 million initiative as a part of the National Biopharma Mission to fund bio-tech start-ups in the field of medical devices, bio-therapeutics, etc. The government is also looking to encourage innovation in this space by setting up R&D incubation centers in association with leading research institutions in this field.

Apart from easing the supply side, the government’s initiatives, such as Free Diagnostics Service Initiative also play a vital role in boosting the demand for medical devices (especially in-vitro devices) in the country. Through this initiative, the government, under the National Health Mission aims at providing a minimum set of diagnostics to the underprivileged population in the country.

In addition to this, the program has worked on devising an integrated approach to combat prevalent non-communicable diseases such as hypertension, diabetes, and cancer by undertaking year-round screening and testing. This will result in large government orders for IVDs and other medical devices.

Another initiative undertaken by the government to both support the domestic industry and ensure a more widespread reach of medical devices has been price capping of coronary stents and orthopedic implants. Observing the huge distributor margins on these medical devices, the government undertook a bold step to cap the prices at which stents and knee implants can be sold in India.

Prior to the price control, the average retail price for a bare metal stent was about US$700, while that for a drug-eluting stent was about US$1,800-2,000. In February 2017, the government fixed a ceiling price of ~US$106 (INR 7,260) for bare metal stents and ~US$431 (INR 29,600) for drug-eluting stents.

In a similar move, the government capped prices for knee implants in August 2017. Knee implants, which ranged from ~US$2,308-US$13,121 (INR 158,300 – 900,000) were limited to ~US$791-1,661 (INR 54,270-113,950). In mid-2017, the government published a list of 19 medical devices (including catheters, heart valves, other orthopedic implants, etc.) that will be monitored for pricing, thus similar price capping may be expected for other devices as well.

Large players may withdraw their latest generation products from India, while Indian players will focus only on cost-effective products instead of innovations.

While the intent for the price capping is noble and will provide a boost to the domestic manufacturers who are better equipped at producing low-priced products, several leading international companies, such as Abbott Vascular and Medtronic, have criticized the decision and submitted applications to increase the ceiling price for the premium quality products or allow them to withdraw the products from the Indian market (as per the government’s rules, no manufacturer can withdraw their products from the market for a period of 12 months from the date of the price ceiling without prior approval from the government). This may be detrimental to the overall industry as large players may withdraw their latest generation products from India in the long run, while Indian players will focus only on cost-effective products instead of innovations.

Indian domestic players might go beyond high-volume low-end products

The Indian medical device market is largely import driven with a very fragmented domestic players landscape. While there are around 800 local medical device manufacturers across the country, only 10% have a turnover of more than ~US$7.3 million (INR 500 million).

The small-scale domestic players focus primarily on the consumables and disposables segment of the medical device industry, which include high-volume low-end products such as syringes, needles, and catheters.

The patient aids segment, including mostly hearing aids and pacemakers, is largely import dependent.

While the equipment and instruments segment and the implants segment are largely dominated by foreign players, they have recently seen an influx of local players that have customized their offerings to the Indian market. Karnataka-based Remidio Innovative Solutions has come up with a retinal imaging system, wherein the fundus of the eye connects to a mobile phone camera to take pictures of the retina to detect diabetic neuropathy. The device can also be used in remote areas and the images and results can be shared in real time on the treating doctor’s phone. Similarly, Karnataka-based Tricog Health Services has developed a cloud-based ECG machine for faster diagnosis. Several other players include Sattva, Cardiotrack, Forus Health, etc.

Understanding the needs and price-sensitivity of the Indian market, several leading global players have also created customized offerings for Indian consumers. For instance, GE Healthcare has come up with a compact CT scanner, which consumes less power, while Skanray Technologies has developed affordable X-ray imaging systems to meet the Indian needs.

We can expect a transition in the domestic sector, which will not only focus on high-volume low-end products but also look at entering the high-end innovative segment offering more affordable and locally customized solutions.

Since the Indian government has fixed the inverted duty structure and provided other instrumental support to the domestic sector, we can expect a huge transition in the industry, which will not only focus on high-volume low-end products but also look at entering the high-end innovative segment offering more affordable and locally customized solutions. This may eventually result in a phase of consolidation, with foreign market leaders absorbing several innovative Indian start-ups and established players.

Chinese government also focuses on aiding local producers

China’s medical device market is the third largest globally, after the USA and Japan, and is expected to surpass Japan to become the second largest by 2020. In 2017, the industry was valued at US$58.6 billion, maintaining a double-digit growth over the previous three years.

Similar to the Indian market, the Chinese medical device sector continues to be dominated by foreign players through imports or their locally manufactured products. However, the market is also characterized by the presence of several local players (though smaller in size), especially in the drug-eluting stents, IVDs, and orthopedics segments.

While the foreign players hold the major chunk of innovative medical devices, the government has been taking several and significant steps to promote local companies. The government requires international players to have local legal entities in China for registration and licensing, thus China cannot serve only as an export market.

Another such major step is the regulatory proceedings under Order 650, which mandate clinical trials in China for all class II and III medical devices, with few exceptions. This prolongs the period for obtaining a license to 3-5 years and adds close to US$1-1.5 million (CNY 7-10 million) in costs. However, it has introduced a shorter channel, called the Green Channel, which provides a fast track review option. While the government introduced this to foster domestic innovation, foreign players can use it too. To be eligible for the Green Channel, the device must have a Chinese patent and it must be an innovative product with design progress and records. Products qualifying for the Green Channel are given priority in the registration review and are exempt from the US$90,000 registration fee.

In 2016, the government introduced a second priority review system for certain breakthrough products. Under this fast track channel, the need for a lengthy pre-qualification application process was further eliminated.

The government’s guidelines in its new healthcare reform called The Healthcare Reform 2020 also aim at reducing the share of imported medical devices and promoting locally produced counterparts. Several state-based medical tenders differentiate between local and imported products, giving preference to the former. Moreover, in some tenders a further distinction is made between domestic and foreign-owned local manufacturers. Thereby foreign companies that buy-out local companies to get an easier access into China are also considered as foreign players.

Under its Made in China 2025 plan, the government has also focused on domestic development and manufacturing of high-end and innovative medical devices. These devices include imaging equipment, medical robots, fully degradable vascular stents, and other high-caliber medical devices. The government aims to boost local production of such innovative and high-value devices by supporting the R&D infrastructure and manufacturing capabilities of local players. The government also provides extension of tax benefits for a period of three years if the investment made is used towards the development of medical devices.

Moreover, under the initiative, the government has aimed at increasing the use of locally produced devices by hospitals to 50% by 2020 and 70% by 2025. To pursue this goal, in September 2017, the Sichuan province mandated the use of locally-made devices in hospitals across 15 categories including respirators, PET, and CT scanners.

Just like India, China is also focusing on combating high distribution costs of medical devices, which in turn will make their prices more affordable for the general population. However, instead of capping prices, the government has introduced a Two Invoice System. The system limits the number of invoices between a supplier and the hospital to only two – the first invoice would be from the manufacturer/trading company to a government-appointed supplier/distributor (GAS) and the second invoice will be from the supplier to the hospital. This will eliminate most links in the non-transparent and fragmented distribution network in the Chinese medical device sector, which encompassed several distributors, sub-distributors, agents, etc. (the sub-distributors were engaged due to their personal and long-standing relationships with a set of hospitals). This new system is expected to reduce the corruption level by reducing the number of intermediaries and in turn improving efficiency and reducing prices for the patients.

Chinese players dominate several narrow industry segments

China’s medical device industry is dominated primarily by international players, especially with regards to high-end and innovative devices. Having said that, there are a lot of upcoming local players, although, most of them are still limited to the high-volume low-technology segments.

However, local Chinese players have managed to dominate several narrow industry segments, such as drug eluting stents, which is dominated by three domestic companies, namely Biosensors International, Lepu Medical, and MicroPort. Similarly, local players have managed to capture a significant share of the digital x-ray market, which was dominated by foreign players a few years back.

The orthopedic sector is also characterized by the presence of several large and small local players while a few dominating local players (Trauson, Kanghui, and Montage) have also been acquired by leading international players (Stryker, Medtronic, and Zimmer, respectively). Mindray and Microport, two of the largest Chinese medtech players (who have also successfully internationalized), have strong hold on the country’s patient monitoring equipment and orthopedic segment, respectively.

Moreover, while foreign companies enter the Chinese market to cater to the grade-3 hospitals and the high-end segment, the local players focus primarily on the grade-2 hospitals’ value segment (i.e. products that may not have as many functionalities but serve the basic need). The products in the value segment are more localized in terms of both need and pricing. Several international companies, such as Siemens, Philips, and GE, have also modified their product offerings and have come up with a lower-end range of devices to capture this market (as per experts, the value segment has the potential of becoming much larger in comparison with the high-end segment over the coming years).

Leading Chinese medical device companies are investing heavily in their R&D to move up the value chain with more innovative and high-segment products. Therefore, in the coming years, one can expect intense competition in the Chinese medical device sector.

Similarly, leading Chinese medical device companies are investing heavily in their R&D to move up the value chain with more innovative and high-segment products. Therefore, in the coming years, one can expect intense competition in the Chinese medical device sector, which may also lead to some consolidation. With growing government support to local companies as well as their ease to localize, it is expected that the domestic players will provide a stiff competition to international players unless the latter take action soon.

EOS Perspective

While the governments in both countries are taking significant and constructive steps to increase the reach of the medtech industry as well as boost domestic manufacturing, it is too far-fetched to believe that this will uproot the leading global players from the market. However, that being said, in case global companies such as GE, Siemens, and Philips do not continue to customize and localize their offerings as per the changing needs of these markets, they will definitely lose market share to domestic players.

If global companies do not continue to customize and localize their offerings, they will definitely lose market share to domestic players.

Moreover, with the upcoming regulatory changes, support to local production, and overall surge in demand (especially from tier-2 and tier-3 cities in India and grade-2 hospitals in China), the sector is likely to undergo a phase of consolidation in both countries.

30/08/2016by EOS Intelligence EOS Intelligence No Comments

Uncertain Impact of the 2016 FDI Reforms on the Civil Aviation Sector in India

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Indian aviation industry is aiming high and intends to grow at a fast pace. Studies forecast that India could become world’s third largest aviation market by the end of this decade. In June 2016, the Indian government opened doors to 100% foreign investments in the Indian aviation sector. With an aim to establish one of the most FDI liberal economies across the globe, the government has taken steps to ensure easy and smooth inflow of foreign currency to India. This move has triggered mixed reactions – some raised their eyebrows while others welcomed the change.

With the objective of driving growth in the local aviation market, spurring airport infrastructure improvements, as well as giving the employment sector a push and creating new jobs in the country, the Indian government announced amendments to the FDI policy for the aviation sector. Under the new regulations, 100% FDI is allowed for both greenfield and brownfield projects through the automatic route. Regulations have been updated also in other categories of aviation operations. In Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline Service, though Non-Resident Indians continue to be allowed to invest up to 100% FDI without any approval, foreign investment is capped at 49% under the automatic route and any investment beyond this share must go through the government approval route, however allowing for the possibility of 100% FDI by only non-airline players. This effectively maintains the previous limitation for foreign airlines to bring in only up to 49% of the capital in Indian carriers operating scheduled and non-scheduled air transport services.

Under substantial ownership and effective control, any foreign airline that invests in domestic carriers via non-airline investors, is bound to have an Indian chairman and at least two-thirds of its directors of Indian origin, so that majority of the ownership rights are vested in the hands of Indian nationals. Indian Civil Aviation Ministry say that though the new provisions allow full investment of foreign parties in the national aviation sector, 100% foreign ownership dominated airlines will still not enjoy the freedom to fly internationally. International investors can own full stakes only in domestic airlines but will have to bear the heat of the government procedures and approvals to fly overseas. Though the new changes in the policy give hope to increase the ease of doing business in the country thus increasing FDI inflow, a question still remains why an international carrier would enter the Indian market to operate primarily on the domestic front. Also, owing to heavy debt, high input costs, and rigid competition, most of the domestic players are already registering business losses, so whether a new entrant in this segment would earn profits is rather questionable.

EOS Perspective

Foreign air carriers face various hindrances when planning to enter the Indian civil aviation landscape. The leverage offered currently by the Indian Civil Aviation Ministry allowing 100% foreign direct investment in the sector may look rosy but it comes with fine print, i.e. despite allowing 100% FDI, the regulators still kept several limitations, effectively reducing the attractiveness for foreign players to invest in India.

The relaxation in the FDI norms is likely to attract many overseas carriers to invest in existing airlines that were looking to expand their operations in India. The deteriorating financial condition of domestic players is expected to improve with investment from foreign players.

Improved service standard, professionalism, and adoption of industry best practices are likely to be seen in existing air services within the country. Nevertheless, a doubt still remains whether these amendments in the FDI regulations that aim at boosting the aviation sector will really be fruitful.

20/07/2016by EOS Intelligence EOS Intelligence No Comments

FDI Regulations in Indian Pharmaceutical Sector: A Game-changer?

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In June 2016, the Indian government liberalized its FDI policy in the pharmaceuticals sector by allowing 74% FDI under automatic route in brownfield pharmaceutical investments (investment in an existing plant). Earlier, even though 100% FDI was allowed in the brownfield projects, government approval was mandatory for investments beyond 49% stake. In greenfield pharmaceutical investments, the existing FDI policy allows 100% FDI under the automatic route. The recent changes effectively introduce a new regime, under which a foreign company is now allowed to hold a majority stake in an Indian pharmaceutical company without government approval in either brownfield or greenfield projects.

This has been done with a view to boost the development of the Indian pharmaceutical sector. The move is likely to increase the number of investments in the sector along with a decrease in investment timelines leading to a greater inflow of capital in a short span of time. In addition, the policy is likely to result in Indian pharmaceutical companies exporting products to the USA and EU, encouraging the sharing of technologies and overseas investment. An increase in the inflow of funds will also lead to the promotion of R&D activities in the country.

That being said, the liberalization of the FDI regulations has also a potential to threaten competition in the Indian pharmaceutical sector, as seen previously with Ranbaxy. In 2008, Daiichi Sankyo, a Japan-based company acquired a majority stake (including brands, R&D facilities, and production units) in Ranbaxy, a leading Indian generic manufacturer, for US$ 4.6 billion. However, the investment proved unfruitful as post the acquisition, Daiichi faced several regulatory hurdles with the US Food and Drug Administration regarding drug testing authenticity and manufacturing criteria. In addition, four of Ranbaxy’s plants were banned from selling medicines in the USA and Daiichi was made to pay US$ 500 million to the US Justice Department in order to settle the lawsuit. In 2014, Ranbaxy was acquired by India-based Sun Pharma with Daiichi as the controlling shareholder before Daiichi sold its entire stake in Sun Pharma for US$ 3.18 billion in 2015. Once a renowned brand, Ranbaxy has now lost its independent status and exists only as a shadow of Sun Pharma.

Thus, the new FDI regime could easily lead to the sale of several Indian generic pharma companies to pharmaceutical players intending to enter the Indian pharma market, which is considered a generic pharmaceuticals hub with market size estimated at US$ 20 billion as of June 2016. The policy could lead to foreign players grabbing market share and exercising greater control to sway the government to alter the IP regime. This could lead to India losing its independent industry providing low cost essential medicines.

However, things could also take an entirely different turn. Large, well-established Indian pharmaceutical companies might not be looking to receive new investments, which could lead to the acquisition of small and medium-sized Indian pharmaceutical companies by foreign players. This move could lead to the inflow of capital in these small companies, promotion of R&D activities, increased manufacturing of medicines, and higher exports.

While the impact of the FDI regulations change will be seen in the next couple of years, the government has already taken an arduous task of maintaining a balance between foreign investment-friendly regime and guarding the local generic medicines laws while protecting local players from large foreign companies.

16/06/2016by EOS Intelligence EOS Intelligence No Comments

Is Cambodia Ready To Dress Up The World?

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Gap, Adidas, and Giorgio Armani are some of the renowned fashion brands that manufacture their designs in Cambodia. As of 2014, Cambodia was the sixth fastest growing economy in the world and its textile production held a 1.2% share of the global market by volume in 2008. It is no coincidence that whenever Cambodia is mentioned, almost instantaneously, it is linked to a soaring apparel production sustained by a large number of factories as well as workforce in number only comparable to some of the world’s largest textiles producers such as Thailand or Vietnam. Is Cambodia ready to face this steep growth?

Accounting for 16% of the country’s GDP in 2012, garment sector certainly plays an important role in the Cambodian economy. It provided employment to 8.2% of the country’s population in 2014, while textile export accounted for 80% of Cambodia’s total exports in 2013. Moreover, Cambodia’s government has recently increased its focus on industry development with stress on garments. The country has not only set a long term Industrial Development Policy to spur its textile sector growth but it also has implemented initiatives seeking to organize the apparel production and become an even more appealing destination for international buyers as well as investors.

In 2009, as a long term strategy, the country became part of the Association of South East Asian Nations community (ASEAN), a regional economic and political organization associating 10 member states. This allowed Cambodia to take advantage of several FTAs previously signed by ASEAN with developed countries, and benefit from many other betterments offered by this international community. After years of political stress and economic instability of the Cambodian’s economy, ASEAN membership helped Cambodia register a manifold increase in trade in the last five years, with stabilized inflation rate at about 4%, and an expected GDP CAGR of around 8-9% during 2015-2018.

Since declared a Least Developed Country (LDC) in 1991, Cambodia has been benefitting from quota-free and duty-free export to EU countries without having to comply with the rule of origin, a rule establishing that all manufactured goods must originate from the country of export. Fabrics may come from, i.e. China, but it is Cambodia that manufactures and exports all of the clothing and footwear to places such as UK (which accounted for 7.8% of total garment exports from Cambodia in 2013) or Germany (accounted for 6.7% of total garment exports in the same year). For a country as heavily dependent on raw material (57.2% of total imported garment raw material came from China in 2013) as Cambodia, this scheme is greatly favorable, allowing the country to export US$554 million worth of textiles and footwear during the Q1 2015 to the EU alone.

For the past two decades, the country has been relying on FDIs with a strong focus on garment industry investment. Cambodia became an attractive investment destination in 1996, after receiving the status of Most Favored Nation (MFN) by the USA and launching an open trade administration with permissive investments and incentives for foreign investors. Due to open trade policies such as no price controls on products or services, free remittance of foreign currencies abroad, and full import duty exemption, favoring mostly foreign capital, Cambodia tripled its FDI in the last decade with a record of US$4.6 billion of cumulative approved FDI. As of 2014, about 28% of that FDI, or US$1.28 billion, focused on the garment and footwear sector production through foundation of new factories and implementation of high-tech manufacturing equipment rather than depending on low cost and low skilled labor as means of retaining international competitiveness.

Despite an increase in total export volumes buoyed primarily by textile and footwear export over the past several years, Cambodia’s government is yet to address internal problems that may obstruct both the country’s economy as well as apparel sector’s growth in the coming years.

EOS Perspective

During the last decade, Cambodia has strategically positioned itself as an attractive FDI destination for clothing and footwear companies to make their designs or to open new low-cost production facilities. However, since 2014, Cambodia’s internal conflict with garment sector workers has affected the country’s image causing a decline in purchase orders for the first time in a decade. The conflict has also negatively impacted foreign investors who are losing confidence in the country’s management of the apparel sector, and subsequently, Cambodia is registering a decline in FDI inflow, which it greatly relies on to aid its apparel industry development. Further, considering Cambodia’s textile industry is highly dependent on imported raw material and electricity, the apparel production cost is susceptible to possible increase in prices of imported fabric and unforeseen changes in electricity rates.

As a result, it does seem Cambodia is still unprepared to handle a possible steep growth of its textile industry. Although there have been several industrial development policies implemented to better organize the industrial setup, Cambodia is yet to build strong manufacturing industries to supply for its own apparel industry needs. Further, the ongoing lack of a fully-working power grid that feeds textile factories puts Cambodia in a weak position vis-à-vis its garment-oriented competitors. Therefore, in order to become a truly large player in the global apparel industry playground, Cambodia has to focus its efforts on developing self-sustainability and overcoming its ingrained internal conflicts.

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Lithium discovery to help drive mining industry and economic upliftment in Iran

Hope for the lifting of sanctions and reestablishment of diplomatic relations

Potential to disrupt the global lithium race and geopolitical relations

China to deepen ties with Iran

High infrastructure costs and lack of FDI to challenge the Iranian mining sector

EOS Perspective

Clean energy – A major force driving mineral extraction in Africa

Lithium

Cobalt

Graphite

Copper

High commodity prices and rising geopolitical tensions favor Africa’s mining

Massive African gold reserves attract global gold producers

Investments in Africa’s mining

Challenges

EOS Perspective

The tax cuts in effect are believed to have improved India’s competitiveness among investment destinations in the region.

Is a tax break enough?

EOS Perspective

India struggles with bureaucracy, fragmented agency landscape, and red tape. Bureaucratic and procedural delays, as well as poor work culture remain to be considerable deterrents for foreign investors.

How is Europe benefiting from China’s growing investments?

Then why is China’s growing influence alarming Europe?

How is Europe responding to China’s actions?

EOS Perspective

Similar market structures, a whopping difference in size

Government takes initiative to promote Indian domestic manufacturing

Large players may withdraw their latest generation products from India, while Indian players will focus only on cost-effective products instead of innovations.

Indian domestic players might go beyond high-volume low-end products

We can expect a transition in the domestic sector, which will not only focus on high-volume low-end products but also look at entering the high-end innovative segment offering more affordable and locally customized solutions.

Chinese government also focuses on aiding local producers

Chinese players dominate several narrow industry segments

Leading Chinese medical device companies are investing heavily in their R&D to move up the value chain with more innovative and high-segment products. Therefore, in the coming years, one can expect intense competition in the Chinese medical device sector.

EOS Perspective

If global companies do not continue to customize and localize their offerings, they will definitely lose market share to domestic players.