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by EOS Intelligence EOS Intelligence No Comments

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

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

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

Refurbished Smartphones - Market Growth

 

 

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

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

Refurbished Smartphones - India, South Africa, Nigeria

Refurbished smartphones hit obstacles across the markets

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

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

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

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

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

EOS Perspective

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

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

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

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

by EOS Intelligence EOS Intelligence No Comments

2014 FIFA World Cup Brazil – A Squandered Opportunity

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After 7 years of preparations, Brazil hosted the most expensive FIFA World Cup in 2014 at a cost that totaled billions of dollars. What is the associated outcome of spending huge sums on World Cup preparation? Did the investment leave any positive legacy for the country? What is the economic impact of hosting the World Cup on Brazil?

Investment and Associated Outcome

Investment in projects considered essential to hosting World Cup in 2014 varied across a range of sectors and had different impact on each of them. Around US$12.9 billion were invested in numerous projects focused on urban mobility, airports, stadiums, tourism, ports, telecommunication, and security between 2007 and 2013.

World Cup-related Investment By Sector, Brazil

Urban Mobility

Brazil has been struggling with overcrowded urban transportation systems for years. The insufficient public systems, paired with Brazilians’ growing financial capabilities, resulted in an increase in personal vehicles use, which in turn triggered chaotic and congested traffic conditions across Brazil’s major cities. 2014 World Cup investments planned in relation to urban mobility were expected to leave positive legacy for the country and to improve transportation systems in metropolitan cities easing traffic problems. But, several delays (caused by corruption, financing problems, etc.) were observed in execution of the planned urban mobility projects during 2007-2012, long before the event. Furthermore, as the World Cup neared, the government’s focus transferred to stadium construction works, as six out of the proposed twelve stadiums for 2014 World Cup still remained incomplete a year before the tournament. According to Responsibility Matrix 2013, investments dedicated to urban mobility projects were cut down to US$4 billion from US$6.6 billion anticipated in 2010. Some 21 of 53 projects planned in 2010 were discarded from the Matrix in 2013. Transformative advancements in transit infrastructure were expected to be the most beneficial outcome from hosting the mega sporting event. But with time, the priorities for government changed, and many of the ambitious projects never took off, as was the case with the proposed project for building high speed train linking Rio and Sao Paulo that was never executed.

Moreover, as the required urban mobility projects remained unfinished during the tournament, government declared holidays in schools and businesses on game days to ease traffic congestion. In June 2014, Sao Paulo State Federation of Commerce, a representative of 155 trade and business unions, estimated that the cost of lost productivity and overtime pay for businesses that remained inoperative during games would be around US$5 billion.

Furthermore, experts allege that these urban mobility projects were approved hastily without giving much thought to long-term benefits, which represents an intangible opportunity cost. For instance, some of the host cities, such as Sao Paulo, Manaus, Salvador, and Porto Alegre, were not allotted any investments in transport infrastructure. In most host cities, the mobility projects were limited to Bus Rapid Transit lines and there were no plans to invest in light rail, metro, or ferry lines.

Airports

An estimated investment of US$3.9 billion was designated to airports, out of which US$2.9 billion were contributed by private sources. These investments led to a noticeable improvement in airport infrastructure and facilities. An assessment report, published in July 2014, by President Dilma Rousseff and the Minister of Civil Aviation Moreira Franco indicated that around 16.7 million passengers used airport services in Brazil during the tournament. In addition, annual passenger capacity at airports increased by 52% over 2013 capacity level, reaching 67 million passengers per year. Between 2007 and 2014, aircraft yards were increased by 1,360 m², passenger terminals were increased by 350,000 m² and 54 new boarding gates as well as 10,300 parking slots were built. Modernized infrastructure and increased capacity will remain as positive legacy for the country.

Stadiums

Between 2007 and 2014, Brazil constructed five new stadiums, renovated five stadiums, and demolished and rebuilt two stadiums for 2014 World Cup. The estimated cost of construction and renovation of the proposed twelve stadiums for hosting 2014 World Cup game increased to US$3.5 billion, up from US$1.2 billion projected in 2007. Public opinion was outraged at these inflated costs, especially that they were paired with un-kept promises once given by the government representatives. After winning the bid to host the World Cup in October 2007, the former Sports Minister Orlando Silva promised, “There won’t be one cent of public money used to build stadiums”. However, according to Responsibility Matrix 2013, the contribution by private sources for building and refurbishing stadiums stood only at US$61.3 million, so majority of the costs were borne by federal investments and state and municipal governments. Another issue associated with the construction of large stadiums is its effect on urban real estate. Each newly built facility is spread across around 15 to 20 acres of urban land, making the space unavailable for any other, perhaps more productive, purposes. It is likely to also continue to negatively affect the real estate prices, especially, as urban land is scarce in Brazil.

Post 2014 World Cup, some cities, which received large stadiums built specifically for the tournament at capacities far exceeding local, every-day needs, are struggling to make these facilities economically viable. In particular, the stadiums built in Manaus, Natal, Cuiaba, and Brasilia appear to be under the fear of turning into ‘white elephants’. These cities have football teams playing in Brazil’s third-fourth division championships, which are not expected to attract the audience at volumes close to the stadiums’ capacities. Moreover, if government fails to find private sponsors for these stadiums, hefty maintenance costs will have to be paid from public funds. The newly built US$325 million stadium in Manaus alone is expected to demand US$3 million for annual maintenance.

Security

In June 2013, mass protests were held across the country during Confederation Cup, a warm-up tournament organized by FIFA to test stadiums, transportation, and security before 2014 World Cup, to express frustration over exorbitant spending by government on World Cup while Brazil still struggled with below par standards of healthcare and education. The protests turned violent with police crackdown and arrests. Following the event, Brazil’s government became alert and tightened up the security measures for the 2014 World Cup to ensure safety of the visitors. 177,000 security personnel were deployed during the tournament and US$900 million were invested in security structures, equipment, and training. Such high spending on security might not have been required if the government had addressed the problems of the country’s citizens in time, or at least had exhibited more understanding attitude to these sensitive in nature social problems.

Ports

Around US$322 million were invested in ports. With more than 90% of trade in Brazil routed through ports in 2012, ports are an important medium for international trade in the country. However, the funds allotment for improvement of ports under the header of World Cup-related investment remained limited as the sector was not assumed to directly impact the event. Between 2007 and 2013, funds were mainly used for modernization of port terminals at Salvador, Fortaleza, and Natal.

Telecommunication

During 2007-2013, around US$200 million were invested in improvement and expansion of telecommunication infrastructure in association with World Cup in Brazil. In order to connect the host stadiums and other official venues of the tournament, a 15,000 km long optical fiber network was installed that enabled to handle 166 terabytes of data during the World Cup. Furthermore, 15,012 mobile antennas were installed across the host cities. A report released post 2014 World Cup by SindiTelebrasil, a national union of telephone companies in Brazil, indicated that the telecommunication networks in the country were successful in handling large traffic volumes during the event. For instance, during the World Cup final match, held on July 13, 2014, between Germany and Argentina, the telecommunication networks managed high traffic volume of around to 2.6 million photos, which is equivalent 1,430 gigabytes of data.

Tourism

Post 2014 World Cup, President Dilma Rousseff announced that one million foreign tourists visited the country and three million Brazilian tourists travelled around the country during the event. Around 3.4 million people bought tickets to attend matches at the stadiums. Fan Fests attracted another five million people. By mid-June 2014, a total of 340,000 daily hotel bookings were recorded.

According to data released by Brazil Central Bank in July 2014, international visitors spent US$797 million in Brazil in the month of June 2014. Higher revenues from spending by international tourists in Brazil and reduced foreign trips by Brazilians during 2014 World Cup contributed in improvement of international travel account of services trade, which posted a deficit of US$1.2 billion in June 2014, down 17.3% from June 2013, providing some cushion to current account deficit. Economists believe that current account deficit over 5% of gross domestic product may lead to currency crisis in Brazil involving difficulty in debt repayments and currency depreciation. The twelve-month current account deficit remained stable at 3.6% of gross domestic product in June 2014, at the same level as in August 2013, because of narrowed gap in international travel account of services trade.

A survey conducted by Getúlio Vargas Foundation (FGV) and the Foundation Institute of Economic Research (FIPE), conducted by interviewing 6,627 foreign visitors and 6,038 Brazilians during the World Cup indicated that about a million tourists from 203 different countries came to Brazil during the tournament. Foreign visitors stayed in the country for an average of 13 days and visited 378 Brazilian municipalities. Thus, the event offered an opportunity for the country to promote its less popular tourist destinations to a group of diverse visitors. Furthermore, the survey suggests that 95% of the visitors expressed the desire to revisit, which might indicate brighter days for tourism industry in the future, provided that these tourists actually come back.

A Rocky Road to the Event

A look into World Cup-related investment across these sectors reveals that there have been mixed repercussions of the event across social and economy spheres. However, on a broader level, the planning, preparation, and organization of the event were challenged by a range of problems, which led to lost opportunities or even negative outcomes, and questioned the overall benefit of organizing 2014 World Cup by Brazil.

Increased Costs and Delays

In 2007, Carlos Langoni, then Finance Director of the 2014 World Cup Local Organizing Committee and former President of the Brazil Central Bank, estimated the World Cup-related cost at US$6 billion. In January 2010, Sports Ministry revised the estimates to around US$11 billion. According to the Responsibility Matrix 2013, the estimated actual expenditure was US$13 billion.

The increase in costs is believed to be partially attributed to the rampant political corruption in Brazil. By analyzing Brazil’s electoral data and government audit reports from 2007 to 2013, The Associated Press reported many-fold increase in campaign contributions to the political parties by the construction firms that were awarded most World Cup projects. This is suspected to have been a form of a bribe to win Word Cup-related projects and later allowed these companies to make huge profits by indulging into unfair practices such as fraudulent billing, under-compensation to workers, etc. For instance, Andrade Gutierrez, a construction conglomerate that got large contracts associated with World Cup, increased its political contributions to US$37.1 million in 2012 from US$73,180 in 2008. Adding to the suspicion of possible political linkage of the construction firms involved in World Cup-related projects, in 2014, Contas Abertas, a watchdog group that scrutinizes Brazilian government budgets, alleged that some contracts were awarded directly to the chosen construction firms and were never made available for public bid. A government audit report on construction projects associated with World Cup, released in early 2014, highlights several instances of price-gouging and suspected misuse of financial linkages between the construction firms and government. For instance, Brasilia’s government failed to impose US$16 million fine on Andrade Gutierrez for a five-month delay in completion of the stadium in the city. However, no corruption charges have been filed yet on individuals or companies related to World Cup work.

Additionally, experts believe that the lacking capability of construction firms in project planning and management also contributed to rising costs and delays. Furthermore, in order to accelerate the construction work, ‘emergency’ contracts were awarded at a higher price to leading (and known to be influential) construction firms, waiving the normal contracts, which further led to inflated costs.

Overexploitation of Workers

Construction projects, especially the stadiums, which were left to last-minute completion, had adverse effect on the workers. Many workers were assigned twelve-hour shifts and were asked to give up holidays to finish the construction work in time for World Cup. Some workers reportedly lost their employment as they could no longer tolerate the stress and physical strain. Around eight workers died in accidents on construction sites and these accidents occurred mainly due to lack of safety measures and inhuman working conditions. Many workers that had migrated from rural parts of the country to urban areas in search of World Cup-related employment opportunities complained about poor working and living conditions and under-compensation. Between 2007 and 2014, workers in various parts of the country, supported by labor unions, went on strike demanding their basic rights. Strikes and accidents triggered further delay in construction work related to World Cup.

Projects Financing and Funds Clearance Issues

According to Responsibility Matrix 2013, 80% of the total investments in World Cup-related projects were financed through investments and funding from federal, state and municipal governments.

Source of Funds

A larger role from the private sector was anticipated in preparation for 2014 World Cup, particularly for the event-specific projects such as construction of stadiums, and the government was expected to contribute mainly as a facilitator for the event. As the actual contribution from private funding was limited, the strain was passed on to local government budgets. In 2010, on failure to attract private investments for building stadiums for World Cup, the National Bank for Economic and Social Development (BNDES) opened a credit line of US$2.7 billion for completion of the World Cup stadiums. After receiving requests from states for financing, BNDES took up to three months to analyze the proposals and consequently the stadium construction work was further delayed.

Furthermore, complex and time consuming procedures continued to cause delay in funds clearing. According to World Cup Transparency Portal, by March 2014, 89.9% project work had already been contracted out, but payments were done for only 51.2% of them. This was implying increased payments out of local governments’ pockets in the second quarter of 2014, which occurred at the expense of several high-importance sectors such as healthcare or education.

Roadblocks for Micro and Small Enterprise

Around 44,000 enterprises associated with Brazilian Service of Support for Micro and Small Enterprises (SEBRAE), a non-profit autonomous institution promoting competitiveness and sustainable development of micro and small enterprises, are estimated to have earned US$230 million in revenue from World Cup-generated business opportunities from 2007 to 2014, which indicates that several of them were able to take good advantage of the opportunities provided by the event. However, it appears that many small food and FIFA merchandise vendors could have benefited to a greater extent, if they were not deterred to capitalize on large demand generated in the close proximity of stadiums during World Cup by FIFA’s heavy fee of US$8,000 from any non-FIFA approved vendor who wished to operate in a 1.5 km radius of host stadiums. The question is whether such a considerable fee remains in proportion to small and micro vendors’ scale of operations, who after all distribute FIFA merchandize, contributing to the publicity success of the event.

Even the few selected street vendors (estimated at around 1,000) that were granted temporary licenses to sell FIFA sponsors’ goods in the FIFA prohibited zones during the World Cup were not much at advantage. FIFA sponsors were responsible for selecting, contracting, and training the vendors. Proven experience of the vendors in selling goods in the neighborhood was the main the criteria for selection. Vendors were provided with uniforms, authorization cards, as well as goods to sell. Vendors retained a fixed 30% share in revenue from goods sold during the event, which limited their ability to negotiate the profit margins. As these vendors were not allowed to sell goods from non-FIFA sponsors, they lost an opportunity of earning higher revenues by selling locally manufactured or self-produced goods.

Mass Eviction

Eviction of People from Host CitiesBetween 2007 and 2013, about 248,297 people were forced to leave their homes due to infrastructure work for the tournament. Social activists claimed that most of the designated areas for relocation were at far distances from former dwellings and were less developed. There have been complaints that the compensations offered by the government to people for relocation were unfair and insufficient.

For instance, in May 2014, AlJazeera reported that in Rio de Janerio compensation sums offered to people for relocation was half the value of their old house, while employment opportunities in relocated areas remain scarce. These people belong to most impoverished communities in Brazil and lack of work opportunities and inadequate compensation may further worsen their condition, which may also lead to increase in crime rate.

Tax Revenue Lost Opportunity

Brazil government was rather generous in giving out tax breaks in relation to various activities associated with 2014 World Cup, and this was considerable revenue lost for the budget. In 2010, the Ministry of Treasury announced tax breaks for the construction and renovation of the stadiums for World Cup. The entities involved in stadium works were granted exemption from Industrialized Products Tax, Importation Tax, or social contributions. In addition, the twelve host cities were granted exemption from State Value Added Tax on all operations involving merchandise and materials for construction or renovation of the stadiums. Furthermore, all expenditure by FIFA in Brazil for World Cup was exempted from taxation. While it is always expected that tax relieve and exemptions are given in such high-profile, national events, it remains doubtful whether Brazil could afford foregoing such tax revenue, especially in the face of many social, structural, and welfare problems eating away the country’s public system.

 

EOS Perspective

2014 World Cup is believed to have provided a boost to Brazil economy, but this push was not significant enough to upswing economy’s recently sluggish growth. The temporary rise in tourism associated with the event, can, to some extent, offset lowered production and disruptions in the country during the event. However, it is unlikely that gains from this short tournament will make up for the inflated and overrun costs, suspected political corruption, fraudulently spent or lost money, missed opportunities of diverting some of the funds to other sectors, or social damage caused by disregard for dwellers and workers, along with other social costs that follow these deficiencies in a ripple effect. World Cup-generated opportunities benefited mostly construction, hospitality, travel, and tourism sectors.

The improvements and modernization of infrastructure will leave positive legacy for the country, which is a positive outcome, however achieved at a great expense, arguably not comparable with the country’s current financial capabilities. As emotions cool down and more objective analyses are offered by various experts, it is more and more visible that the positive impact of the event on Brazil economy, its people, and businesses is rather short-lived. Over long term, it is likely that Brazil will end up being the loser of the 2014 FIFA World Cup. As the event-generated income sources slowly dry up, Brazil will be left with a huge bill to pay in its hand, one that will have to be settled over years to come.

by EOS Intelligence EOS Intelligence No Comments

Is New Legislation Enough To Transform Mexico’s Telecom Market?

When Mexico’s telecommunication market is under discussion, one name is sure to pop out – that of the world’s richest man, Carlos Slim, who through his companies (America Movil Telcel and America Movil Telmex), controls majority of the market. But now, with the government determined to break open this tightly-held market, it gave a first-ever nod to game-changing reforms that can boost foreign investment and competition. The question, however, remains whether the country is mature enough to take these reforms till the finish line.

In July 2012, when after 12 years the PRI Party (Institutional Revolutionary party) bounced back to power in Mexico under the leadership of Enrique Pena Nieto, there was little hope for any reforms in the country. This assumption was based on the party’s actions during its previous tenures, which were marked by electoral frauds, widespread corruption, economic mismanagement, and its success in blocking attempts at reforms proposed by previous presidents: Vicente Fox (2000-2006) and Felipe Calderón (2006-2012).

However, remaining under a growing pressure of frustrated and agitated general public asking for reforms and solutions the widespread mafia problem, PRI was forced to offer several promises during the electoral campaign. These included addressing the problem of unwarranted concentration and lack of competition in many sectors of the economy, and post election PRI had no choice but go ahead with at least some of its promised reforms. PRI’s-led government entered into an alliance, called the ‘Pact for Mexico’, with its opposition – National Action Party and the Democratic Revolution Party, to push reforms and encourage competition. After the overhaul in the labor laws and the education system, this Pact has been pushing for reforms in the country’s telecommunication and broadcast industry. These reforms look to provide a makeover to this previously quasi-monopolistic and inefficient sector, introducing several fundamental changes:

  • Firstly, opening the market to new international players by allowing 100% foreign ownership in the telecom sector (a rise from the existing 49% FDI limit)

  • Secondly, forming two new independent regulatory commissions to regularize the industry

    • Federal Telecommunications Institute, with profile similar to the U.S. Federal Communications Commission, to have the authority to check and punish non-competitive practices to the extent of withdrawing company licenses

    • Federal Competition Commission, created to fight monopolistic practices by ordering companies that control more than 50% of the market to sell off assets to reduce market dominance

  • The reforms also encompass the creation of a specialized court to oversee all competition, telecom, and media rulings

  • The previously existing Mexican law allowed companies to file private injunctions in order to block the regulator’s rulings aimed at improving competition in the market (while appeals were in progress); this loophole in law, which was misused by companies to indefinitely freeze inconvenient regulatory decisions, has been removed under the new legislation

Recently, Mexico’s Senate approved these changes, and passed legislation aiming at improving competitiveness in the telecom sector. While few key changes brought about by these reforms still need to be ratified by two-thirds of Mexico’s 31 states in order to become a law, this seems like a mere formality considering PRI’s dominance in provincial legislatures, as well as complete support from the opposition through the ‘Pact for Mexico’. The legislation is thus expected to go into effect by early 2014.

These reforms aim primarily at improving market dynamics in this $30billion annually industry, by facilitating competition, encouraging foreign investments, pushing down prices, and increasing mobile penetration, which (currently at 85.7%) stands much lower than 100%+ penetration in its neighboring Argentina and Brazil. However, the new legislation spells trouble for the current monopolies in this sector – America Movil Telcel (that accounts for 70% of the mobile market) and America Movil Telmex (that accounts for 80% of landline market). Both these companies operate as subsidiaries of America Movil, which is owned by world’s richest man, Carlos Slim.

The reforms seem to be particularly beneficial for international telecom companies operating in neighboring lands, who have been shy of entering the Mexican arena owing to the 49% limit on foreign investments. These players can look to buy companies such as Axtel and Maxcom Telecommunications, to get their hands on the fiber-optic cables placed across Mexico, thus hinting towards a wave of consolidation activities in the medium term.

However, despite ongoing efforts by the government, the success in this industry is not guaranteed. Firstly, the fixed line market is expected to remain devoid of foreign investment, owing to the overall decline of the industry globally, and the local Telmex’s 80% share in the market. Moreover, the impact of the reform would only be assessed on how it is brought to force (i.e. if it is implemented in its current form by the legislatures of the 31-states) and also upon how well is it enforced by the independent bodies (Federal Telecommunications Institute and Federal Competition Commission), as previously the industry suffered mostly due to law loopholes and poor implementation of these laws by authorities.

Moreover, reforms similar to those in the telecom industry have been implemented in the television industry, where Televista holds 70% market share. While these reforms (in both the telecom and the television industry) are expected to weaken the hold of the monopolies in their respective markets, it provides them with an opportunity to strengthen their existing presence in each other’s market. (Carlos Slim’s America Movil is a leading player in the pay-TV sector in Latin America, having a subscriber-base of 15million viewers and Televista, along with Azteca, owns Lusacell, the third largest mobile network in Mexico.) Thus, it is feared that instead of stirring foreign investments and competition, these reforms might just result in these incumbent monopolies swapping market share among themselves.

While the majority of the nation rejoices at these reforms and eagerly awaits an influx of investment and increase of competition that could push down the prices, it is premature to predict the long-term outcome of the new legislation. The country is on a correct path to build competitiveness in the telecom sector, but considering the level of corruption and red-tapism in the nation, it seems clear that what matters even more than the reforms themselves, is the way they are implemented.

by EOS Intelligence EOS Intelligence No Comments

As Myanmar Works Towards Stability, Communal Violence Holds The Nation Back.

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In mid-2012, we published a report on Myanmar, looking into its potential as a new emerging market with considerable investment and trade opportunities for foreign investors (see: Myanmar – The Next Big Emerging Market Story?). Almost a year later, we are returning to Myanmar, to check and evaluate whether the political, social, and economic changes envisioned and proposed by the quasi-civilian government have really translated into actions to push the country forward on the path to becoming the next big emerging market story.

Being plagued by uninspiring and inefficient governance for more than six decades, Myanmar for long has been proclaimed as Asia’s black sheep. The Chinese named it ‘the beggar with a golden bowl’, asking for aid despite its rich natural and human resources. However, having embarked on a momentous yet challenging political revolution, the nation is said to be on its way to open a new chapter in the Asian development story.

Contrary to what was believed to be just hollow promises and sham, the reforms initiated by the Thein Sein government have gathered much steam in quite a few cases. Bold moves over the last year have also immensely helped the country in gaining goodwill internationally. We are looking at some of the game-changing reforms enacted over the past present year in Myanmar.

Media Censorship

In August 2012, the government put in actions their proposed end to media censorship. As per the new system, journalists are no more required to submit their reports to state censors prior to publication. To further strengthen the power of media, in April 2013, the government abolished the ban on privately run daily newspapers – ban remaining in force for over 50 years.

Foreign Investment Law

In January 2013, the Thein Sein government passed a foreign investment law that was initially drafted in March 2012. The law allows foreign companies to own up to 80% of ventures across several industries (apart from activities mentioned on the restricted list –including small and medium size mining projects, importing disposed products from other countries for use in manufacturing, and printing and broadcasting activities). This acts as an important milestone in opening up the Burmese economy to heaps of foreign investment.

Opening Up Of Telecom Sector

Myanmar, one of the least connected countries in the world, has embarked on the deregulation of its much neglected telecom sector by initiating the sale of 350,000 SIM cards on a public lottery basis. It plans to offer additional batches on a monthly basis. As a more tangible effort to revolutionize the sector, the government is auctioning two new 15-year telecom network licenses to international companies. These companies are to be announced in June 2013 from a list 12 pre-qualified applicants, namely, Axiata Group, Bharti Airtel, China Mobile along with Vodafone, Digicel Group, France Telecom/Orange, Japan’s KDDI Corp along with Sumitomo Group, Millicom International Cellular, MTN Dubai, Qatar Telecom, Singtel, Telnor, and Viettel. Despite the current 9% mobile penetration claimed by the government, an ambitious goal has been set to reach 80% penetration by 2015.

The World Responding To Myanmar’s Progress

As Myanmar works towards attaining political stability, introducing economic reforms and easing social tensions, the world is also opening up its arms to increasingly embrace the otherwise banished land. In April 2013, the EU permanently lifted all economic sanctions against Myanmar, while maintaining the arms embargo for one more year. The USA, on the other hand, has not permanently removed the sanctions, but has had them suspended since May 2012. This allows US companies to invest in Myanmar through the route of obtaining licenses. The definite abolishment of these sanctions by the EU puts pressure on the USA to act soon and lift them as well, to avert the risk lagging behind in the race to tap this resource-rich market. The USA has already begun working on a framework agreement to boost trade and investment in Myanmar. Japan has also been improving its relations with Myanmar to gain a foothold in this market.

With the EU, the USA and Japan encouraging investments in Myanmar, several international companies have directed investments to this previously neglected country.

  • In August 2012, a Japanese consortium of Mitsubishi Corporation, Marubeni Corporation and Sumitomo Corporation contracted with the Burmese government to jointly develop a 2,400 hectare special economic zone in Thilawa, a region south of Yangon. The Myanmar government will hold a 51% stake, while the Japanese consortium will own the remaining share in the industrial park, which will also include large gas-fired power plant. In the first phase of the project development, the companies plan to invest US$500 million by 2015 to build the necessary infrastructure on the 500 hectares area in order to start luring Japanese and global manufacturers.

  • In August 2012, Kerry Logistics, a Hong-Kong based Asian leader in logistics, opened an office in Myanmar. Recognizing the immense potential in the freight forwarding and logistics sector (underpinned primarily by growing international trade), European freight forwarders, Kuehne + Nagel, also began operations in this country in April 2013.

  • To cash upon a booming tourism market, in February 2013, Hilton Hotels & Resorts initiated the development of the first internationally branded hotel in Yangon, which is expected to open in early 2014. The hotel will be a partnership between Hilton Worldwide and LP Holding Centrepoint Development, the Thai company that owns the 25-storey mixed-use tower, called Centrepoint Towers, which will house the hotel. Hilton has signed a management agreement with LP Holdings to operate the 300-room property.

  • In February 2013, Carlsberg, the world’s fourth-biggest brewer, announced its plans to re-enter Myanmar, after it left the country in mid 1990’s owing to international sanctions.

  • Fuji Xerox, a joint American-Japanese venture, set up its office in Myanmar in April 2013. The company, which is the first player in the office equipment industry to start direct operations in Yangon, looks to revive its internationally declining business through this venture.

  • In April 2013, JWT, an international advertising firm, entered into an affiliation agreement with Myanmar’s Mango Marketing, in anticipation of opportunities in this country, given an increasing interest in Myanmar expressed by a number of international players who are likely to seek advertising and marketing services.

Civil Unrest Still Stands As a Major Concern

While Myanmar has made great strides in reforms over the past year, the ongoing unrest between Myanmar’s majority Buddhists and minority communities (primarily Muslims), and the lack of a concerted effort by the government to address it, poses a major threat for the nation to descend into ethnic-religious war. In October 2012, the Rakhine riots between the Buddhists and Muslims claimed 110 lives and left 120,000 displaced to government setup refugee camps around Thechaung village. A similar case followed in April 2013 in Meiktila, where the death roll of Muslims reached 30. Strong international condemnation for the growing racial and religious violence in the region has caused concerns of losing international support gathered over the past few years. Moreover, the use of military force to suppress the Meiktila riots raises fear about the army once again seizing power in the name of restoring order to the nation.


Myanmar’s attempts to transition into a democracy from a highly repressive state have yielded positive outcomes over the past year. While Myanmar seems to be on the right trajectory for future growth and stability, the government must address internal conflicts immediately before the nation stands at risk of tumbling back into chaos, with possible outcomes similar to those seen in Yugoslavia. Therefore, it is safe to say that although political and economic developments are increasingly seeing the daylight, underpinned by the government’s pro-development course, the recent spate of religious, ethnic and communal violence as well as the magnitude of reforms still to be introduced, might still question the nation’s ability to attract and sustain foreign investments and economic development in the long run.

by EOS Intelligence EOS Intelligence No Comments

Africa is Ready For You. Are You Ready For Africa?

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For decades, Africa was associated with poverty and helplessness rather than business opportunities and thriving markets. But the reality is evolving, and companies from across industries are increasingly including the African continent in their investment plans. Global FMCG players too have started to set their eyes on this untapped goldmine of opportunities. However, the market is much more complex than its thriving counterparts in Asia and companies must get hold of the market dynamics before entering or they stand the risk of getting their hands burnt.

Some two decades ago, it became apparent to the leading international FMCG companies that many of their core developed markets in the USA and Europe were no longer able to provide sustainable growth, which made them extend their business focus to include developing markets in Asia. While these economies will continue to still generate significant returns for quite some time, many global FMCG giants are already exploring new growth avenues and are turning their eyes towards the African continent. Growing middle class (already accounting for more than one-third of the continent’s total population, it is expected to hit 1 billion people by 2060), paired with accelerating economic growth, large youth population, overall poverty decline, and urbanization trends are the key factors underpinning Africa’s position as the next frontier in the global FMCG arena.

This has already spurred investment activity amongst leading FMCG players. By 2016, Unilever and P&G plan to invest US$113 million and US$175 million, respectively, to expand their manufacturing facilities in the continent. While these facilities are to be developed mostly in South Africa, they are expected to cater to developing markets across eastern and southern regions. Godrej, a relatively smaller India-based company, has taken up the inorganic route to tap this market, by acquiring Darling group, a pan-African hair care company.

Despite luring growth potential offered by the continent, the African markets are much thornier to penetrate than it seems. A shaky political and regulatory environment acts as one of the largest roadblocks. The continent has witnessed 10 coup d’états since 2000 and has been subject to countless changes in business policies resulting from unstable governments. Further, inefficient distribution networks, inadequate business infrastructure, as well as complex and inhomogeneous marketplace housing 53 countries, 2,000 dialects, and countless cultural groups, all cause African consumer markets difficult to navigate through.

Notwithstanding the challenges, the potential offered by the African continent overweighs. Companies, however, must mould their strategies and offerings to the realities of African markets in order to succeed. Here are a few pointers to consider:

  • Bring affordability and quality to the same side of the coin: Contrary to popular perception, the middle-class African consumer attaches much importance to quality and brands. Companies that have long followed the strategy of selling poor-quality products in this market cannot sustain for long. Having said that, affordability still stays as an important factor for the middle-class Africans. To deal with this, companies can look at offering good quality products in smaller packaging, to ensure low unit price. For several years, African consumers have gotten used to buying smaller quantities that could fit their limited budgets.

  • Discard the one-size-fits-all approach: On a continent with 53 nations, companies looking to enter African markets with blanket approach are likely to fail. While South Africa is relatively more developed and has slower growth, markets such as Nigeria and Kenya are developing at a rapid pace, and thus their dynamics differ. Consumer shopping behaviors and patterns also vary. Sub-Saharan nations, in comparison to North African consumers, tend to exhibit more brand loyalty and are more conservative in trying new things. North African countries also present stronger desire for international brands. Thus, it is most critical for international players to identify the characteristics of a particular market that they plan to enter.

  • Locate the right partners: Informal trade dominates African markets making distribution a daunting task. However, this challenge can be turned into an opportunity for companies to improve their competitive edge and bypass the lack of sufficient distribution and retail facilities. In rural areas of Nigeria and Kenya, Unilever has replicated its Indian direct-to-consumer distribution scheme, wherein a host of individuals undertake direct selling to consumers in their communities. Similarly, other companies have posted sales executives with each sub-distributor to manage inventory and brand image. Distribution costs are high in Africa but bearing them is not optional.

  • Move beyond traditional media: TV and print remain a popular and trusted media for advertising to urban consumers. However, owing to their low penetration in rural regions, they have limited impact on rural consumers. This brings forth the need to reach mass consumers through in-store marketing. Over the coming years, companies can also look into mobile advertising as surveys reveal that the number of Africans having access to mobile phones is already higher than those with access to electricity. Mobile penetration in the Sub-Saharan Africa stood at 57.1% in 2012 and is expected to reach 75.4% in 2016. This promises a gamut of mobile marketing opportunities for consumer companies.

  • Deal with infrastructural woes and innovate to compensate: Power outages, poor transportation, and limited access to cold storage facilities make public infrastructure undependable for businesses. Thus, companies must be open to invest in own power generators and water tanks. Innovations at the product end may also help overcome infrastructural limitations. For instance, Promasidor, an African food company, uses vegetable fat instead of animal fat to extend its milk powder’s shelf life when stored without refrigeration. While spending on infrastructure heavily increases costs, it can provide companies with a competitive advantage in the longer run.

  • Invest in personnel management and grow new talent: The fear for personal safety among foreign nationals and lack of skilled professionals within Africa makes recruitment a challenging task, especially for mid- and top-level management. Tapping into African diaspora located throughout the world comes across as a win-win solution. Moreover, providing training and management courses to local graduates allows addressing personnel needs over long term.


The African market can be a goldmine for FMCG players, if entered cautiously. However, the same can become a landmine, if proper investments and planning are not undertaken. Despite the present challenges, increasing number of companies will be looking into Africa, however only few will have the skill set to translate this opportunity into a great success.

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