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Japan's EV Hesitation The High Cost of Delay to Its Automotive Sector by EOS Intelligence
by EOS Intelligence EOS Intelligence No Comments

Japan’s EV Hesitation: The High Cost of Delay to Its Automotive Sector

Japan is the world’s fourth largest automotive manufacturer, behind China, the USA, and India. The country has been long known for its innovation, technology, and efficiency in car manufacturing. Despite being one of the automotive superpowers, Japan has been slowly losing its dominance, struggling to maintain its competitive edge on the global stage. Rising consumer demand for electric vehicles (EVs) and Japan’s slower rate of adopting EV technology have largely contributed to this downfall. In 2022, Japanese brands accounted for less than 5% of global EV sales.

A 2022 report by the Climate Group, an international non-profit organization, warns that if Japan fails to adapt swiftly to global EV trends, the country could witness a 50% reduction in auto exports, impacting over 14% of its GDP by 2040.

Japan prioritizes hybrids and plug-in hybrids over electric vehicles

Japanese automakers are the pioneers of the EV development. Toyota launched Prius, the first mass-produced hybrid vehicle, in 1997, marking a significant development in the global automotive industry. Following Prius, Nissan launched Leaf in 2010, which gained significant attention worldwide as the first mass-produced battery electric vehicle.

Despite being the first to the EV revolution, Japan has failed to make a strong footprint in the global EV race so far. Japanese automakers have been largely skeptical about the EV’s future, profitability, and proposed environmental benefits. This has led them to tread cautiously. Instead, the Japanese government views hybrids (HEVs) and plug-in hybrids (PHEVs) as a strategic priority. It claims these vehicles meet both emissions targets and offer customers electrification features.

However, other major markets, such as the USA, China, the EU, and the UK, are trying to curtail HEVs and internal combustion engine vehicles (ICEVs) sales within the next 10-15 years. For instance, in 2021, the EU Commission announced a ban on ICEVs, including HEVs and PHEVs, starting in 2035. Similarly, the UK government proposed to ban all ICEVs beginning in 2035.

While Japan decided to ban gasoline vehicles by 2030, much of its focus is on promoting HEVs. Japan currently dominates the global gasoline-electric hybrids (HEVs) market and hopes to leverage its massive investment in the technology. Consequently, the country has delayed a significant push for EV adoption. Japan’s strong emphasis on hybrid technology has made other countries, especially China, gain a massive lead in developing and commercializing battery electric vehicles (BEVs).

With the looming bans on ICEVs and the increased consumer preference for BEVs over gasoline-powered engines, the limited number of Japanese BEVs on the market has led to a subsequent loss of market share for Japanese automakers.

Japan's EV Hesitation The High Cost of Delay to Its Automotive Sector by EOS Intelligence

Japan’s EV Hesitation The High Cost of Delay to Its Automotive Sector by EOS Intelligence

Traditional auto manufacturing environment makes the EV switch difficult

Japan’s economy is intertwined with its auto industry. Automotive manufacturing accounts for about 2.9% of the country’s GDP and 14% of the manufacturing GDP. The country spent years working on perfecting the ICEV automotive technologies and manufacturing. Japan wishes to retain its advantage from ICEVs for as long as possible. The current prevalence of traditional manufacturing capabilities and well-established supply chains make the country hesitant to switch to EVs.

ICEVs and EVs cannot be manufactured on the same platform. Remodeling existing ICEV facilities into EV facilities is a daunting and cost-intensive task. Moreover, as EVs require fewer parts, Japanese automakers are concerned about the impact on their extensive networks of components and parts suppliers, which could disrupt the entire industry.

Further, the significant costs associated with developing EV production technologies and platforms have led these automakers to question the potential profitability of EVs. Japan’s complacency with ICEVs has resulted in its lagging position in the global EV race.

Japan’s focus on fuel cell vehicles hampers EV development

Japan is a country with the least self-sufficient energy system. The country imports over 90% of its energy, heavily relying on foreign sources. Energy independence has been Japan’s major strategic goal for many years now. The government views hydrogen as a crucial clean energy source since the country can produce it domestically. On the contrary, EVs use electricity and could further increase the country’s energy dependence.

The government invested about US$3 billion between 2012 and 2021 in hydrogen technology. Some 70% of that was dedicated to fuel cell vehicles (FCEVs) and related infrastructure. The country aims to sell 800,000 FCEVs by the end of 2030 and provides massive subsidies and funds to Japanese automakers to research, develop, and commercialize FCEVs.

Thanks to substantial government support, in 2014, Toyota launched Mirai, the first mass-produced fuel cell vehicle. However, high fuel costs and insufficient hydrogen infrastructure have slowed its adoption in the country. As of January 2023, Japan had only built 164 hydrogen stations nationwide, far behind the target of 1,000 stations by 2030.

FCEVs demand and sales have not picked up the pace owing to the limited number of fueling stations and FCEVs’ high running costs. Automakers sold only 8,283 fuel cell vehicles by the end of July 2023. This was far below the sales that could lead to the 800,000-vehicle target set for 2030. Japan’s heavy focus on hydrogen technologies contributes to the slow EV transition, impacting its competitiveness in the global automotive space.

Increased EV competition puts Japan in a tight spot

Due to the surging interest in EVs, automakers from China, South Korea, Germany, and the USA have disrupted Japan’s dominance in the automotive sector over the past few years. This shift is especially evident in emerging markets such as Southeast Asia, with a surging demand for EVs. International automakers, especially the Chinese, have slowly expanded their presence in this region.

For instance, several Chinese automakers have entered Indonesia over recent years, challenging Japan’s long-standing dominance of the Indonesian automotive market. Wuling, a prominent Chinese EV automaker, has gained significant popularity in Indonesia, making it the seventh preferred car brand. In May 2024, BYD, another Chinese automaker, announced its plans to build a US$1 billion EV production facility in West Java, Indonesia. To be completed in 2026, this facility would significantly improve the Chinese market presence in Indonesia, which might further weaken the Japanese market share. Meanwhile, South Korean automakers Hyundai and Kia are also making significant strides in the Indonesian market.

Japanese automakers have also been losing their grip in Thailand as EVs are gaining traction. In 2023, new vehicle sales of Mazda, Mitsubishi, Nissan, Suzuki, and Isuzu fell by 25% in the country, while the market share of Chinese brands increased to 11% from 5% the previous year. As a response to these shifting dynamics, Japanese automakers either choose to close or merge factory operations in Thailand. In June 2024, Suzuki Motor decided to stop making cars in Thailand altogether. China’s BYD and Great Wall Motor are spending US$1.4 billion on new EV production and assembly facilities in Thailand to facilitate domestic production and overseas sales.

Sales of Japanese brands have also plunged in China in recent years. Amid low sales and intense EV competition, in October 2023, Japanese automaker Mitsubishi Motors announced its exit from a joint venture with the Guangzhou Automobile Group, a China-based automotive manufacturer. They shut down all the local manufacturing operations.

With the rising preference for EVs, Japanese automakers will likely face more fierce competition, which could profoundly transform their position in the global automotive landscape.

Toyota and Honda look to strengthen overseas EV manufacturing capabilities

Amidst increasing competition, Japanese automakers have recently started investing in EV technologies and production to catch up with rivals such as China, Europe, and the USA. Large carmakers, such as Honda and Toyota, are looking to develop and commercialize solid-state batteries to enhance the competitiveness of their EV line-up in the global EV market. These batteries are relatively safer than lithium-ion batteries, offering greater energy density and quick charging times. For instance, Toyota claims its first-generation solid-state batteries would cover a range of about 520 miles (about 830 km), with a 10-minute charging capability.

Toyota and Honda want to strengthen their EV supply chain, especially in North America. Toyota plans to launch a three-row electric SUV in the USA in 2025, now postponed to 2026. This SUV will be the company’s first electric car assembled locally. Toyota invested US$8 billion in its Princeton, Indiana facility to support production and added a new battery pack assembly line. The company has also invested considerably in preparing its facility in Kentucky for another three-seater electric SUV manufacturing.

In the European market, Toyota is looking to release six electric models by 2026 amidst the increasing demand. As its sales are shrinking in China, Toyota plans to launch an EV with autonomous driving technology in 2025. In Thailand, Toyota is set to launch an electric pickup truck in 2024.

In January 2024, Honda announced an investment of US$14 billion to build an electric car and battery plant in Ontario, Canada. The carmaker also announced an investment of US$700 million to start EV production in Ohio, USA. Honda said it would invest nearly US$65 billion in EVs till 2030. It plans to sell two million BEVs by 2030 and aims to make 40% of the vehicle sales either EV or FCEV by the same year.

Nissan, another giant Japanese carmaker, plans to achieve 40% of global offerings as EVs by 2026. However, Nissan’s EV strategy is largely unclear compared to Toyota and Honda. As Nissan struggles to counter the EV dominance, the company has increasingly leveraged partnerships with carmakers such as Mitsubishi and Renault to bolster its EV supply chain and production. In March 2024, Nissan and Honda did a joint feasibility study on vehicle electrification. Together, the companies look to develop automotive software platforms, core components related to EVs, and other electrification components.

Suzuki Motor has also announced its plans to invest approximately US$35 billion by 2030 in BEVs. The company plans to introduce BEVs in Europe, Japan, and India over the next few years.

Some smaller automakers, such as Subaru, Mazda, and Mitsubishi Motors, are still unclear about their EV transition and face daunting challenges in rolling out EVs.

EOS Perspective

Japanese automakers are realizing their difficult position and plan to bolster their EV manufacturing and technological capabilities. However, it requires significant efforts, and the road to EV transition will not be easy.

One of the critical factors affecting Japan’s EV adoption is the supply chain constraints. Japan does not possess the minerals necessary to make batteries for EVs. The country primarily depends on its rival, China, for approximately 60% of its rare earth requirements. Globally, China refines 90% of critical minerals, including 60% to 70% of lithium and cobalt, needed to make EV batteries. The Japanese government is looking to diversify its EV manufacturing supplies to reduce its reliance on China. The country has taken significant strides to develop critical mineral resources with other countries such as the USA, Indonesia, and Australia. Inevitably, all these efforts would take a lot of time and money.

Japanese automakers are also less proficient in vehicle software development, an aspect that EVs require to a great extent. To address this challenge, leading Japanese automakers have partnered with other automotive companies to develop software for EVs. In August 2024, Honda, Mitsubishi Motors, and Nissan announced a collaboration to develop software-defined vehicles (SDV), to standardize battery technology, and to reduce EV production costs.

Mass-producing EVs at a competitive price is one of the other significant challenges for Japanese automakers. Currently, China-based BYD and CATL supply 50% of the batteries for EVs globally. These companies spent years perfecting the cost-effective battery technology using lithium iron phosphate (LFP) cathodes. They have strong expertise in efficiently transferring innovations from R&D into large-scale production.

However, unlike China, Japan still depends on lithium-ion batteries using NMC cathodes, which involve lithium, nickel, manganese, and cobalt. These batteries are cost-intensive in comparison to China’s LFP batteries. BYD and CATL produce batteries at lower capital costs (below US$60 million per gigawatt hour). In comparison, Japan’s Panasonic produces batteries at US$103 million per gigawatt hour. It would take years for Japan to perfect the battery technology and mass-produce EVs at affordable prices.

Japan has also not yet established comprehensive policies and strategies to push EV adoption. Stringent regulations have hampered the expansion of EV charging infrastructure in the country. On the other hand, since the 2010s, countries such as the USA, China, and Norway have started implementing measures such as EV purchase subsidies, tax rebates, and procurement contracts to promote EV sales. China invested over US$29 billion between 2009 and 2022 in promoting EVs. If Japan does not take similar measures soon, its ability to foster an EV-friendly environment will be significantly compromised.

by EOS Intelligence EOS Intelligence No Comments

Beverage Industry in Troubled Waters, Attempting Conservation Efforts

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Water is a finite resource, which is becoming constrained with the growing population and climate change. It is a vital component in production of beverages, both alcoholic and non-alcoholic. From growing raw materials (such as wheat or barley) for beverages, through product development, till the production process, water is indispensable at each step. The beverage industry has come to realize that water scarcity could tremendously impact businesses, forcing them to reassess water management strategies and tap into efficient conservation measures.

Water covers around 70% of the earth’s surface and only 3% is available as freshwater, which can be used for various commercial and non-commercial activities. Unfortunately, this quantity of water is inadequate for growing population and thriving businesses using this resource without considering its limited availability. According to WWF, an international NGO for preservation of wilderness and nature, two-thirds of the world’s population may face water shortage by 2025, with demand for water exceeding supply by 40% by 2030.

Beverage production is highly water-intensive, with water being used at each step across the value chain. According to Water Footprint Network, it takes at least 70 liters of water to produce 0.5 liter of soda, 74 liters of water for a glass of 0.25 liter of beer, and 132 liters of water for a cup of 0.125 liter of coffee. Water footprint for beverage companies is evidently high, and this can be mitigated by implementing water management technologies across the value chain, from farming to beverage production.

Water scarcity posing challenges for beverage producers

Water stress is a pressing problem for all beverage industry players, causing various operational challenges that are impacting business operations.

Opposition to water extraction from natural resources

California suffered a searing seven year drought that ended in 2017. Distress from water scarcity impacted communities, as well as companies operating in the region. For instance, Nestlé, a Swiss multinational food and beverage company, faced opposition from local communities and criticism from conservationists for extracting large quantities of water from Californian springs even during the drought-stricken years.

These events impacted Nestlé’s operations and eventually, succumbing to the pressure, Nestlé invested US$7 million in conservation projects across five of its bottling plants in California in 2017. The projects focused primarily on reducing the amount of water used in filtration process while simultaneously maintaining hygiene of the processing plant. Only after consistent water conservation efforts, Nestlé was granted a three-year permit by US Forest Service in 2018 to extract water within the limit of 8.5 million gallons annually from Californian springs.

Similarly to Nestlé, Coca-Cola faced opposition from local communities in India resulting in closures of two of its bottling plants located in the states of Kerala (in 2004) and Uttar Pradesh (in 2014), due to extensive water extraction from local resources. In order to sustain operations, Coca-Cola announced plans to invest about US$5 billion between 2012 and 2020 to help replenish groundwater in India, allowing the company to also use water for beverage production.

Water shortage impacting business operations

According to global survey of 600 companies by Carbon Disclosure Project (CDP), water scarcity and stricter environmental regulations cost businesses around US$14 billion in 2016. Many companies agreed that water-related issues have affected their businesses directly or indirectly.

For instance, severe droughts in Southeast Brazil in 2014 and 2015 disrupted water supply in the area, limiting production capacity and disturbing operations of Danone, a French multinational food and beverage corporation. As a result the company suffered sales loss of ~US$6 million in 2015.

Not only Danone was affected. As Brazil is one of the world’s leading coffee producers, limited availability of water for irrigation due to the drought, crop production in the region took a hit. Eventually, the situation threatened supply, which led to higher raw material prices for coffee manufacturers. One of the producers that felt the repercussions was J.M. Smucker, an American producer of food and beverages, reported a net loss of US$90.3 million in 2015 due to higher coffee bean prices in Brazil.

Tapping into innovations to reduce water consumption

Water risk for beverage companies highly depends on external factors, such as water quality and availability either through natural resources or municipal bodies. Industry players have very little control over the external factors but can regulate water usage in their internal manufacturing operations to reduce consumption.

Recycling water using zero water technology

Beverage companies are collaborating with technology providers to incorporate innovative water recycling methods.

For instance, in 2014, Nestlé collaborated with Veolia Group (a French company providing water, waste, and energy management solutions) and GEA Group (a German food processing technology firm), to introduce Cero Agua (zero water) technology across dairy production plant in Lagos de Moreno, Mexico. Using the technology, the factory does not have to rely on external water sources. Instead, it recycles and reuses the waste fluid extracted from milk – Nestlé extracts 1ml of water from every 1.6ml of milk. The treated water is used in non-food production applications such as cooling, irrigating the gardens, and cleaning, thus, eliminating the need to depend on external water sources. The company has invested around US$15 million to introduce zero water technology in the plant.

With the help of this technology Nestlé claims to have saved 168 million liters of water in the first year of implementation, reducing water consumption by more than 50%. Zero water technology has been rolled out across its other diary factories located in water-stressed areas of South Africa, India, China, to list a few.

Moreover, between 2004 and 2014, Nestlé claims it was able to reduce water consumption globally by one third and by 50% across its Mexican plants.

Onsite wastewater treatment

Brewing companies are not far from adopting technologies to reduce water footprint. Waste water treatment is one of the effective ways to reuse water and several brewing companies have jumped on the bandwagon to conserve water using this approach.

Since 2014, Lagunitas Brewing Company, a subsidiary of Heineken, has been using EcoVolt membrane bioreactor, a wastewater treatment technology that removes up to 90% pollutants from water so that it can be reused onsite for cleaning purposes. Using this solution, the company has reduced its water footprint by approximately 40%.

In 2016, Bear Republic Brewing Company, a brewery based in California, invested US$4 million in a waste water treatment system that uses electrically active microbes to purify wastewater, which helps the brewery to recycle about 25% of water that it uses to clean factory equipment.

Furthermore, in 2015, a Boston-based craft brewer, Harpoon Brewery, collaborated with Desalitech, a US-based water treatment company, to produce beer made from treated Charles River water. Desalitech uses its ReFlex Reverse Osmosis systems to purify the river water and has been able to recover 93% of the treated river water to brew beer.

Innovative farming techniques

Farming is highly water-intensive and sustainable beverage production can only be achieved if water consumption is cut down during farming. Hence, companies are employing various water management solutions to check water utilization during farming.

In 2014, Anheuser-Busch, an American brewing company installed six AgriMets, a network of agricultural weather stations, in Idaho to provide farmers with real-time weather and crop water use data. Using AgriMet data, growers can monitor rainfall and soil conditions, which helps them to cut down on the amount of water required in irrigation and decide when to irrigate. This ensures efficient use of water across the fields.

Further, for improving water management, the company is employing various seeding and harvesting techniques – for instance, it plants and harvests winter barley earlier in the year, resulting in 30% higher crop yield and 40% lower water usage.

PepsiCo and Coco-Cola have been promoting drip irrigation (a type of irrigation system where water is allowed to drip slowly to the roots minimizing evaporation) in water-scarce Indian states of Maharashtra, Gujarat, Karnataka, Haryana, among others. Coca-Cola started with drip irrigation project in 2008 with 27 farmers covering 13.5 hectares of agricultural land in India, which expanded to over 513 drip irrigation systems installed, stretching across 256.5 hectares of agricultural land by 2011. Drip irrigation leads to significant water conservation, with an average saving of 1200 kiloliter/ hectare of water for a cropping cycle of 110 days/hectare (an agricultural cycle comprising activities related to the growth and harvest of crops). Additionally, savings on account of electricity, fertilizers, and pesticides are estimated at about US$ 29/hectare/year.

Beverage Industry in Troubled Waters - EOS Intelligence

EOS Perspective

For decades, water has been regarded as free commodity in processing and manufacturing environments, but this notion is beginning to change with growing awareness about water scarcity. Limited availability of water puts pressure on industrial activities and often pushes operational costs of beverage companies up. Availability of water is likely to get worse in the future, which could jeopardize operations of food and beverage companies unless the crisis is treated as a priority.

The solution to water scarcity lies in the hands of businesses as much as the governments of various countries. Water management requires stringent policies by the governments to better regulate the use of groundwater or natural resources for irrigation. The governments also need to implement efficient wastewater management and recycling technologies to conserve water. Countries such as Singapore have undertaken water recycling and management measures, but unfortunately such examples are relatively scarce in other parts of the world, with most conservation efforts being implemented only by large food and beverage companies. It is time that the governments as well as all industry players (including small-to-mid sized companies) wake up to the challenges that lie ahead owing to water stress.

Solutions to water scarcity do not always need to be expensive. Small-to-mid sized companies could start with small and inexpensive measures such as installing flow meters or leak detection systems, measuring water usage at each step and setting short and long term goals to reduce consumption across those processes.

Other measures could be to reduce water consumption across most water intensive processes, such as cleaning, which typically accounts for 60% of a beverage plant’s total water consumption. Water could be replaced with dry ice to manually wash equipment or it can be physically cleaned using vacuum systems or high-pressure hoses that can be used to move debris.

Nonetheless, sustainable water management efforts by large beverage companies have resulted in lowering of operational costs, improvement in quality of final products, and in building better brand perception among customers. These strategic advantages could motivate all industry players to reduce water footprint and play their part as responsible water users.

by EOS Intelligence EOS Intelligence No Comments

Will Shale Gas Solve Our Fuel Needs for the Future?

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

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

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


Technically Recoverable Shale Gas Reserves

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

What Are The Potential Negative Impacts Of Shale Gas Production?

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


Shale Gas Challenges

Will Shale Gas Solve Our Future Energy Needs?

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

  • Shale gas production will continue to increase in the USA and is expected to increase to 46% of the country’s total natural gas supply by 2035. USA is expected to transform from a net importer to a net exporter of natural gas by 2020.

  • Despite initial opposition, countries in Europe are opening up to shale gas exploration. With the EU being keen to reduce its dependence on imported Russian piped gas and nuclear energy, shale gas remains one of its only bankable long-term options. Replicating the US model, countries like Poland, the Netherlands and the UK are expected to commence shale production over the next two-five years and other countries are likely to follow suit.

  • Australian government’s keenness to reduce energy imports in addition to the recent shale gas finds has spurred shale gas development the country. Many companies are lining up to lease land and start shale gas exploration.

  • More stringent regulations from environment agencies are expected to limit the potential negative environmental impact of shale gas exploration.

  • Smaller energy companies that pioneered the shale gas revolution in the USA are witnessing billions of dollars worth of investments from multinational oil giants such as Exxon Mobil, Shell, BHP Billiton etc. are keen on developing an expertise in the shale gas extraction technology. These companies plan to leverage this technology across the world to explore and produce shale gas.The table below highlights major acquisitions and joint venture agreements between large multinational energy giants and US-based shale gas specialists over the last three years.

Major Deals in Shale Gas Exploration

Company

Acquisition/Partnership

Year

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


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

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

by EOS Intelligence EOS Intelligence No Comments

Indonesia – Is The Consecutive Years Of Record Sales For Real Or Is It The Storm Before The Lull?

Part II of our Automotive MIST series brings us to Asia – Indonesia, now the second largest South-east Asian automotive market.

Indonesia, South-east Asia’s biggest economy, is now set to become the region’s largest automotive market as well. While Indonesia sold more vehicles than Thailand for the first time in 2011, the land of white elephants made a strong recovery in 2012 and regained its status as the biggest automotive market in the region. This, however, wasn’t enough to take the sheen off the performance of Indonesia’s automotive market in 2012. The country crossed the 1 million mark (vehicles sold in a calendar year) for the first time, surpassing expectations and beating all forecasts. This is the third consecutive year of record sales and represents something of a gold rush for automotive OEMs.

Indonesia achieved GDP growth of 6.2% in 2012 only slightly lower than the 6.5% it clocked in 2011. Over the past decade, its GDP growth has averaged 5.7%, highlighting a positive domestic economic environment. Rising average income levels has created a burgeoning middle class (half of its population of 240 million). Low borrowing costs, rising purchasing power, cheap subsidized fuel, reduced inflation and currency stability have positively influenced the automotive sector. Huge construction projects and mining investment drove the demand for commercial vehicles.

It is no surprise, then, that car-makers are lining up to increase output, with both incumbents and new entrants making large investments to improve their production capacity in the country. The market is currently dominated by Japanese OEMs, with a share of almost 90%. Toyota (along with its affiliate Daihatsu) accounts for almost half of domestic sales, while Mitsubishi, Suzuki, Honda and Nissan are the other important players (in that order).

The Japanese automotive OEMs are on a massive expansion drive in Indonesia – major automotive OEMs and over 50 automotive component makers from Japan committed an investment of about USD 2.4 billion in 2012 to boost production capacity. Car production is expected to increasefrom 900,000 units in 2012 to 1.5 million units in 2015.

  • Toyota Motor Manufacturing Indonesia (TMMI) is building two manufacturing plants at a combined cost of USD 534.4 million to double its annual production capacity to 240,000 units.

  • Suzuki Indomobil Motor, a joint venture between Suzuki Motor and Indomobil Sukses Internasional plans to spend USD 782.6 million to double its annual production capacity to 200,000 units.

  • Nissan Motor plans to invest USD 400 million to increase production capacity from 150,000 to 250,000.

  • Honda Motor is building an automotive plant that would triple its production capacity to 180,000 per year. The plant is expected to be operational by 2014 and create 2,000-5,000 jobs.

  • Astra Daihatsu Motor, a joint venture between Daihatsu Motor and Astra International is spending USD 233.1 million to boost capacity from 330,000 to 430,000 units.

  • Isuzu Astra Motor Indonesia (joint venture of Isuzu Motors and Astra International) and Krama Yudha Tiga Berlian Motors (subsidiary of Mitsubishi Motors) are investing USD 111.1 million and USD 27.8 million, respectively to expand their production capacities.

Other fringe players such as GM, Ford and BMW are also expanding their presence while Tata Motors also recently entered the market.

  • In August 2011, GM announced that it would be resuming operations at its plant in West Java which has been shut since 2005. The company is investing USD 150 million and the plant is expected to be operational by this year.

  • BMW also recently doubled its production capacity through an investment of USD 11.15 million.

The next step up for Indonesia is to come out of Thailand’s shadow and establish itself as an export hub. In 2012, exports accounted for 45% of Thailand’s automotive industry while the corresponding figure was only 16% for Indonesia. After the floods in Thailand in 2011, automotive OEMs are keen on diversifying production and Indonesia has emerged as the manufacturing hub at about the right time for them. Consequently, OEMs have committed over USD 2 billion to expand their production capacities in Indonesia.

Underlying Growth Potential

  1. Vehicle ownership levels in Indonesia are very low at 32 per 1,000 people, compared to 123 cars per 1,000 people in Thailand, 300 cars per 1,000 people in Malaysia and around 460 cars per 1,000 people in developed countries. Hypothetically, to reach the same penetration rate as its neighbouring countries, Indonesia would require additional 108 million cars on the road. Given that Indonesia is the fourth most populous country in the world, the potential is obvious and these statistics fuel belief that despite the record sales, there is significant scope for continued rise in sales. Industry experts forecast annual sales of 2 million cars by the end of the decade and by then the country would have long since overtaken Thailand as the region’s biggest automotive market.

  2. In 2013, the Indonesian government announced the ‘Low Carbon Emission (LEC)’ program to spur the development of eco-friendly vehicles to include hybrid cars, electric cars and ‘Low Cost Green Cars (LCGC)’ – vehicles with efficient fuel consumption. With the automotive industry ready to commit USD 4.5 billion on the project, Indonesia has the potential to be a major player in the LCGC market if the government goes ahead with its promise to provide tax incentives and other support for the production of these LEC vehicles. The project will completely change Indonesia’s position in the global automotive industry and may also transform the landscape of the domestic industry by boosting car sales in the long term. With bigger volumes generated from LCGC program, manufacturers operating in Indonesia could also catch up with Thailand by exporting to new markets, particularly other developing economies.

  3. Over the years, automobile manufacturers have been notorious for their penchant to establish production set-ups close to component suppliers – to the extent possible. Indonesia has now reached a stage where it has a substantial base of local component suppliers, making the country an even more attractive destination for vehicle production, and with OEMs now planning production expansion in the country, this should further stimulate growth of the components industry.

The Challenges

The success story is not without its woes though. The economic meltdown in Europe and critical challenges in the domestic market will potentially slow down growth if not addressed timely and properly.

  1. Fuel Subsidy – The Indonesian government wants to reduce the fuel subsidy to free up funds to invest in the development of the country’s infrastructure. The government had planned to increase the fuel prices but the proposal was shot down by the parliament in March 2012. The price increase is, however, inevitable and once the proposal does go through, it increases the total cost of vehicle ownership and maintenance, thereby reducing purchasing power of vehicle buyers. (Read our Perspectives on India’s fuel subsidy struggles: India – Reducing Reliance on Diesel)

  2. Enforcement of Minimum Down-payment – To prevent the risk of a ‘car loan bubble’ the government reduced the Loan-to-value ratio (LTV) to 70% when borrowing from banks to buy cars – essentially forcing buyers to pay more down-payment than before. Loans account for 70% of all new car purchases in Indonesia and although it did not affect vehicle sale in 2012 it is expected to have an impact on sales in 2013.

  3. Dependence on Japanese OEMs – With Japanese OEMs accounting for almost 90% of the Indonesian automotive market, Indonesia is overly reliant on Japan. This became evident during the 2011 earthquake in Japan, when disruptions in supply chain were felt across ASEAN, including Indonesia. Although automotive sales in Indonesia did witness impressive growth, such dependence acts as a hindrance and might hold the country’s automotive industry back from fulfilling its potential in the long run.

So, is the upswing in the Indonesian automotive market for real or is it tempting to deceive again? After sticking with the country as other companies bailed out during one of its periodic meltdowns, Japanese auto OEMs are now benefiting from the consecutive years of record vehicle sales in Indonesia. And the extremely low vehicle penetration rate highlights the huge underlying potential. However, critical challenges remain and the country must tackle them effectively if it wants to become the preferred manufacturing hub in the ASEAN region.

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We study the South Korean automotive market in our next discussion. Being the most developed automotive sector amongst the MIST countries, we try and understand the underlying growth potential in this Asian giant and evaluate the challenges faced by OEMs and component suppliers.

Mexico – The Next Automotive Production Powerhouse? – read the first part of our MIST series.

by EOS Intelligence EOS Intelligence No Comments

Production Re-shoring – a Great Idea That Won’t Materialize?

After years of shifting American production capabilities to China as the primary low-cost location, the trend might be somewhat changing. As costs increase in this previously cheap destination, American executives have started to question whether it still makes economic sense to spend more and more on Chinese labour and transport the products back half across the world to the final customer.

With estimations that Chinese wages double every four years, it is clear that the cost benefit of off-shoring to China is narrowing and the country might start losing its competitive edge. It has been, and will continue to be, a very slow process, and we will surely hear stories of another industry giant opening another production facility in this ‘global manufacturing centre’. Yet, the concept of re-shoring, i.e. shifting manufacturing capabilities, once off-shored in search for decreased costs, back to the USA, has been the story of several American producers for the past couple of years. While reasons vary, cost element is probably a key deciding factor, as cited to be the reason behind the re-location of some of the capabilities by Apple or General Electric.

But it is not only the cost that is forcing companies to think of bringing manufacturing capabilities back home. There is a range of reasons indicated as strong factors that should force American manufacturers to consider re-shoring:

  • Slowly, but gradually the cost benefit of off-shored production will narrow, given the faster rise in labour costs in locations such as China

  • Shipping costs associated with long-distance logistics are also increasing, e.g. shipping rates, cutbacks in logistics infrastructure, are estimated to have caused an average hike of 70% in shipping costs between 2007-2011

  • Quality inconsistency issues, both real and perceived, continue to resurface in Asia-manufactured products – flawed production lots, inaccurate specifications, as well as end customers’ continued scepticism towards the ‘made in China’ label

  • Production is increasingly executed in small lots to ensure responsiveness to fluctuations in demand volume and structure, customization requests, and to mitigate the risk of reduced liquidity with cash trapped in inventory

  • Supply chains are found to be more and more vulnerable to disruptions caused by ‘beyond control’ factors, from natural disasters (earthquakes, tsunamis in Asian locations) to political disruptions affecting smooth and timely shipping

  • Weaker dollar requires US-based companies to spend more bucks on the same foreign-based production and transportation services

  • While economic result matters most, producers also consider the customers patriotic interest to buy products that are ‘local’ to them – in terms of appeal as well as the production location, which can be an extra public relations benefit for the company re-shoring its manufacturing jobs back to the USA.

While reasons are varied and not mutually exclusive, there is still a question whether re-shoring is actually a strong trend, and whether jobs will return to the USA. The question cannot be ignored – if re-shoring turned out to be a persisting trend, it could be a well-needed kick to this crisis-shaken American economy.

Not long ago, in mid-2012, Forbes published an article, in which it asked whether re-shoring is actually a trend or more of a trickle. A simple survey conducted amongst MFG.com members, an online marketplace space for the manufacturing industry, proved that re-shoring can be a real trend, as a number of American executives indicated new contracts being awarded to them – contracts that had previously been off-shored. The re-shoring trend seems to be further confirmed by the frequently quoted 2010 Accenture report, which indicated that around 60% of manufacturing executives surveyed considered re-shoring their manufacturing and supply capabilities. The trend could be additionally supported by tax incentives proposed by Barack Obama for companies re-shoring back to the USA, as well as drives such as The Reshoring Initiative, founded by Harry Moser in 2010, aiming at promoting the concept amongst American businesses and tracking the phenomenon. According to Moser, re-shoring brought some 50,000 jobs back to the USA during the period of 2010-2012.

But, with all these points being legitimate reasons for American companies to re-think their off-shoring, perhaps the big believers in the return of the ‘Made in the USA’ era, should curb their enthusiasm just yet. It is quite unlikely that low-cost producers will return to the American soil for good – on a scale large enough to have a positive impact on American economy.

First of all, China will still hold enough advantage over the next couple of years – an unbeatable advantage of a large pool of workers available for $2 an hour wage, which, even if increases, will still be far lower than in the USA. And it is not only about the cost, but also about the relatively high elasticity of low-cost Chinese labour supply (in terms of wage accepted and workers volumes available), which even at its lower productivity, makes it still more economical to stick to factories based in China, than re-shoring on big scale to the US market. The public relations dimension of bringing back jobs has to be approached realistically too, keeping in mind that much higher productivity of American workers means that for each 4-5 Chinese jobs being cut, American market would gain probably not more than 1, making the job creation benefit much more modest than hoped for. And even if, over long term, the increasing labour cost squeezes the cost benefit tight enough to make the producers leave China, it is highly unlikely that they will turn to American workers as first priority. There are more economical options available across Asia and other geographies (perhaps at higher cost than in China but still well below American levels). We might see some of these manufacturing jobs fly to India, Bangladesh, and the emerging African continent.

It seems that this big re-shoring move might be just wishful thinking, which will translate to a few jobs brought back to the USA, in numbers not significant enough to actually make much difference.

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