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08/03/2013by EOS Intelligence EOS Intelligence No Comments

South Korea – At the Crossroads!

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South Korea is the world’s fifth largest automobile manufacturer, behind China, Japan, the US and Germany. Automobile sales in South Korea breached the 8 million units mark for the first time in its history in 2012. The surge was mainly on account of strong overseas demand for locally-made models – exports accounted for 82% of these sales while domestic sales (accounting for the remaining 18%) actually contracted 4.2% to 1.4 million units in 2012.

Contracting domestic demand for local companies is mainly due to lack of real income growth, increased debt repayment burden and slump in the housing market in Seoul Special City (houses are often bought in South Korea for investment purposes). Meanwhile, overseas sales, cars exported from South Korea and vehicles assembled in overseas plants, expanded 7.9% to 6.8 million units in the same year.

The South Korean market is dominated by Hyundai Kia Automotive Group which accounted for 82% of domestic sales and 81% of exports in 2012. GM Korea, Renault Samsung and Ssangyong (acquired by Indian company Mahindra and Mahindra in 2011) account for 10% of the domestic sales while rest of the market is catered to by imports. BMW, Daimler (Mercedez-Benz), VW, Audi, Toyota, Chrsyler and Ford are the leading importers.

Free Trade Agreements

South Korea has aggressively pursued FTAs, with the provisional enforcement of an FTA with the EU from July 2011 and the full enforcement of an FTA with the US from March 2012. In the automotive industry, tariffs on parts and components were abolished as soon as the agreements came into force, whereas tariffs on vehicles will be abolished between South Korea and the EU over a three-to-five-year period and those with the US in the fifth year after enforcement of the agreement.

As a result of the FTA, exports to the EU sky-rocketed and the double-digit growth trend continued until March 2012. However, as the EU economy weakened, exports declined and returned to pre-FTA levels. In case of the US, exports surged around the time of the enforcement of the FTA in March, even though the tariffs on vehicles are yet to be scaled down. This phenomenon was labelled as ‘announcement effect’.

An interesting trend that has emerged is that whereas the domestic sales of South Korean cars declined by about 6.3% in 2012, domestic sales of imported cars increased by 24.6% in the same year. Moreover, for the first time, imports accounted for 10% of domestic sales, which is in sharp contrast to the 2% share about a decade back. European automotive OEMs have benefitted the most from this surge in demand for vehicles. This increased market share for European vehicles is mainly due to the fall in prices; as part of FTA between South Korea and the EU, the tariffs on large vehicles reduced from 8% to 5.6%.

Thus it can be said that while the enforcement of FTAs has been effective in boosting exports, it has brought about structural changes in South Korea’s domestic market.

Labour Strife

After an almost 4-year gap, strikes by the labor union returned to plague automotive manufacturing in South Korea in the summer of 2012. The industrial action, which also hit car parts manufacturers and some other industries, revived memories of the days when strikes were chronic in South Korea. Workers went on strike in 21 of the first 22 years since the unions’ formation in 1987; however, unions’ political influence has dimmed in recent years with declining memberships.

Hyundai, Kia and GM Korea were affected by the strikes and suffered record losses – Hyundai alone is estimated to have lost more than USD 1 billion. The main points of contention were the abolition of graveyard shift, wage increase and to confirming of permanent positions to the high proportion of contract workers. Although the companies agreed to most of the demands of regular workers, discussions with contract workers are still ongoing.

To offset the loss suffered from such strikes, OEMs are diversifying their production bases. Hyundai for one has moved to reduce the dependence on domestic manufacturing plants by expanding production in the US, China, India, Brazil and Turkey during the last decade. South Korean plants accounted for 46% of Hyundai’s capacity in 2011, down from 60% in 2008, when the last strike took place and 93% in 2000. Although another objective for establishing a global production network is to make inroads into the global markets.

Another consequence of strikes is that production costs are expected to shoot up, mainly on account of increased wages and also due to the additional investments that the OEMs will now have to undertake to make up for the reduced working hours per day; along with the abolition of the graveyard shift, another demand of the workers was to reduce the number of hours being worked in the two shifts from 20 to 17 hours.

Currency Uncertainties

The Won has been strengthening against the Yen and the US dollar since mid-2012, increasing production costs while adding to currency conversion losses, as sales in foreign markets translate into fewer Won. This has significantly eroded South Korean automotive OEMs competitiveness; companies such as Hyundai and Kia have consequently ceded market share to Japanese OEMs which are enjoying resurgence on the back of a brightening export outlook.

The Yen is also on a two-year low against the US dollar while the Won was at the highest level against the dollar since August 2011 in January 2013. Toyota can now in principle offer a discount of more than 10% to its US customers whereas South Korea’s Hyundai Motor has to raise the dollar price by over 5% to keep up with the Won.

A December report by the Korean Automotive Research Institute (KARI) states that South Korean export would shrink by 1.2% annually for every 1% drop in the Yen against the Won.

Over the years, the strategy of the South Korean Automotive OEMs has revolved around exports and the companies have established global production network to cater to geographies around the world. However, the recent upheaval in the foreign exchange markets have raised serious doubts about the company’s short-medium term prospects.

With increasing competition from global OEMs both in the domestic and global markets (resulting from FTAs) and currency uncertainties nullifying cost advantages that the Korean car makers have traditionally relied on, it is perhaps time for country’s OEMs to shift focus from quantity to quality – stressing superior design and engineering over sales growth.

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In our fourth discussion in this series, we understand the automotive market dynamics of Turkey. Its proximity to Europe and cultural affinity to Asia has seen a growing presence of both European and Asian OEMs. Is Turkey a long-term growth market for automotive OEMs, or is the market as developed as most western countries?

Part I of the series – Mexico – The Next Automotive Production Powerhouse?
Part II of the series – Indonesia – Is The Consecutive Years Of Record Sales For Real Or Is It The Storm Before The Lull?

13/02/2013by 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.

08/02/2013by EOS Intelligence EOS Intelligence No Comments

Mexico – The Next Automotive Production Powerhouse?

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As the first of our five part automotive market assessment of the MIST countries – Mexico, Indonesia, South Korea and Turkey, we discuss the strengths and weaknesses of Mexico as an emerging automotive hub, and the underlying potential in this strategically located gateway to both North and South America.

Emergence of Mexico as a major automotive production hub is the result of a series of events and transformations over the past decade. The most important of which is the growing trend among automotive OEMs and auto part producers to have production bases in emerging economies. And the earthquake in Japan in 2011 tilted the tide in favour of Mexico just as ‘near-shoring’ was already becoming a key automotive strategy in 2011.

Automotive production in Mexico increased by 80% from 1.5 million in 1999 to 2.7 million units per year in 2011, largely thanks to a significant boost in investment in the sector.

Between 2005 and 2011, cumulative foreign direct investment (FDI) in the automotive sector amounted to USD10.3 billion. In the last year, several automotive OEMs have initiated large scale projects in Mexico; some of these projects include

Nissan – building a USD2 billion plant in Aguascalientes; this was the single largest investment in the country in 2012 and should help secure the country’s position as the eighth largest car manufacturer and sixth largest car exporter in the world
Ford – investing USD1.3 billion in a new stamping and assembly plant in Hermosillo, New Mexico
Honda – investing USD800 million in a new production plant in Celaya, Guanajuato
GM – investing USD420 million at plants in Guanajuato and San Luis Potosi
Daimler Trucks – investing USD300 million in a new plant to manufacture new heavy trucks’ transmissions
Audi – has decided to set-up its first production facility across the Atlantic in Mexico; with planned investment outlay of about USD2 billion, this move by Audi represents a significant show of trust by one of the world’s leading premium car brands
Mazda – building a USD500 million plant in Guanajuato; it has reached an agreement to build a Toyota-branded sub-compact car at this facility and will supply Toyota with 50,000 units of the vehicle annually once production begins in mid-2015

Bolstered by this new wave of investment, Mexico’s vehicle production capacity is expected to rise to 3.83 million units by 2017, at an impressive CAGR of 6% during 2011-2017.

Why is Mexico attracting such large levels of investment from global automotive OEMs? Which factors have positively influenced these decisions and what concerns other OEMs have in investing in this North American country?

So, What Makes Mexico A Favourable Destination?

Trade Agreements – Mexico has Free Trade Agreements (FTAs) with about 44 countries that provide preferential access to markets across three continents, covering North America and parts of South America and Europe. Mexico has more FTAs than the US. The FTA with the EU, for instance, saves Mexico a 10% tariff that’s applied to US-built vehicles, thereby providing OEMs with an incentive to shift production from the US to Mexico.
Geographic Access – Mexico provides easy geographical access to the US and Latin American markets, thereby providing savings through reduced inventory as well as lower transportation and logistics costs. This is evident from the fact that auto exports grew by 12% in the first ten months of 2012 to a record 1.98 million units; the US accounted for 63% of these exports, while Latin America and Europe accounted for 16% and 9%, respectively (Source – Mexican Automobile Industry Association).
Established Manufacturing Hub – 19 of the world’s major manufacturing companies, such as Siemens, GE, Samsung, LG and Whirlpool, have assembly plants in Mexico; additionally, over 300 major Tier-1 global suppliers have presence in the country, with a well-structured value chain organized in dynamic and competitive clusters.

The Challenges

Heavy Dependence on USA – While it is good that Mexico has established strong relations with American OEMs, it cannot ignore the fact that with more than 60% share of its exports, the country is heavily dependent on the US. The country needs to grow its export markets to other countries and geographies to hedge against a downturn in the American economy. For instance, during the downturn in the US economy in 2008 and 2009, due to decline in sales in the US, automotive production in Mexico declined by 20% from 2.17 million in 2008 to 1.56 million in 2009. Mexico has trade agreements with 44 countries (more than the USA and double that of China) and it needs to leverage these better to promote itself as an attractive export platform for automotives.
Regional Politics – Mexico is walking a tight rope when it comes to protecting the interests of OEMs producing vehicles in the country. In 2011, Mexican automotive exports caused widespread damage to the automotive industries in Brazil and Argentina and in a bid to save their domestic markets, both the countries briefly banned Mexican auto imports altogether in 2012. Although, later in the year, Mexico thrashed out a deal that restricts automotive imports (without tariffs) to its two South American neighbours rather than completely banning them, it does not augur well for the future prospects of automotive production in Mexico. One of the reasons automotive OEMs were expanding their capacity in the country was to be able to cater to the important markets in Latin America, particularly Brazil and Argentina. Now the Mexican government has the challenge of trying to keep everyone happy – its neighbours, the automotive OEMs and most importantly its own people for whom it might mean loss of jobs and income.
Stringent Regulatory Environment – The Mexican government, the Mexican Auto Industry Association and International Automotive OEMs are locked in a tussle over the government’s attempts to implement fuel efficiency rules to curb carbon emissions. Mexico has an ambitious target of cutting greenhouse gas emissions by 30% by 2020, and 50% by 2050. The regulations are similar to the ones being implemented in the USA and Canada, however, the association has complained that the proposal is stricter than the US version. Toyota went as far as filing a legal appeal against the government protesting the proposed fuel economy standard. Although the government eased the regulations to appease the automotive OEMs in January 2013, the controversy highlights resistance by the country’s manufacturing sector to the low-carbon regulations the government has been trying to introduce over the past few years. Such issues send out wrong signals to potential investors.

So, does Mexico provide an attractive platform for automotive OEMs? From the spate of investments in the country so far, it seems so – over the past few years, the country has finally begun to fulfil that potential and is now a key driver in the ‘spreading production across emerging economies’ strategy of companies looking to make it big in the global automotive market. However, there are still a few concerns that need to be addressed in order for Mexico to become ‘the’ automotive manufacturing hub in the Americas.

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In our next discussion, we will assess the opportunities and challenges faced by both established and emerging automotive OEMs in Indonesia. Does Indonesia continue to be one of the key emerging markets of interest for automotive OEMs or do the challenges outweigh the opportunities?

30/01/2013by EOS Intelligence EOS Intelligence No Comments

Australia – Stepping on to the Mine Field

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While most developing countries have been negatively impacted by the significantly deteriorated economic conditions in the US and European markets, Australian economy appeared to be largely shielded from the impact of the global economic slowdown thanks to its mining industry. Following the onset of the 2008 crisis, when most developed economies slowed down, China continued on its path of infrastructure development and investment. This boosted its demand for minerals and resources, large part of which continue to be imported from mines across Australia.

Thanks to the Chinese economy growth sprint, Australian mining industry has been in a boom mode since 2006, and consequently witnessed soaring levels of capital investment in mining and related logistic infrastructure. The industry growth was significant enough to have resulted in higher dependency of Australian economy on this sector, with the mining and mining-related service industries accounting for about 20% of GDP in 2011-12, compared with only 10% a decade earlier.

The industry is still on a roll, yet the situation might change soon. With the Chinese economy showing signs of slowing down in 2011 and 2012, the Australian government and business executives can no longer be certain of the continuous inflow of Chinese orders for Australian mining output. But the decline in orders is just part of their worries, as mining companies operating across Australia are faced with other challenges as well, which question their ability to remain competitive in the global market.

The Challenges

While currently it is estimated that the strong performance of the Australian mining sector will continue till at least 2014, there are already growing challenges in the industry. Slackening demand, particularly from the Chinese infrastructure sector, has lead to a global drop in commodity prices of coal and iron. This decline in prices, coupled with higher operating costs due to rise in employee wages and energy costs, makes it less economical for Australian ore extractors to trade in global markets.

Skills shortage and union pressures further drive the operational costs upwards. A shortfall in skilled personnel is likely to result in employees being available only at a premium, leading to further increase in costs. A shortage of truck drivers in mining sector has seen employees of large companies, such as Rio Tinto and Xstrata, receive as much as three times their base salary. The insufficient talent is also witnessed in more skilled and experienced jobs, including mine planning engineers, geologists, metallurgists and mineral processing engineers. This skill shortage also gives employee unions an upper-hand when it comes to negotiating perks.

The rise in costs is further multiplied by the introduction of additional taxes, including the Carbon Tax and the Mineral Resource Rent Tax, all of which contribute to the rising cost burden of the Australian mining companies.

At the same time, mining productivity has resurfaced as an increasingly relevant issue. According to 2012 estimates by the Mineral Council of Australia, productivity in mining industry has reduced by about 30% since 2003.

These challenges are a visible sign that Australia’s mining sector is likely to have an increasingly harder job to compete with mining companies in other emerging resource-rich countries, such as Indonesia, whose proximity to important Asian customers results in lower shipping costs to the client. This could result in a considerable decline in Australian mineral exports, and thereby, have a negative impact on the Australian economy as such.

The Way Out

Both the government and mining companies are devising ways to overcome the challenges posed by these increasingly pressing issues.

Expecting that the current peak in mining investment boom will soon be followed by the sector’s decline, the Reserve Bank of Australia (RBA) announced cuts of cash and lending rates in December 2012. Concerned by the fact that the non-mining industries in Australia continue to struggle, RBA has introduced these cuts to support the underperforming non-mining sectors, such as housing, construction, and retail. While the short-term outlook for non-resources investment is likely to remain subdued, these cuts are expected to provide impetus for investment in these sectors over a long term.

Mining companies face a tougher task to remain competitive in the global market. In the short-term, several Australian mining companies are looking at temporary shelving of investment projects to deal with the deteriorating demand and decline in commodity prices. For instance, BHP Billiton, the world’s largest mining company, shelved its Olympic Dam and Bowel Basin projects after witnessing a decline in profits.

However, putting investment projects on hold is not enough and mining companies will have to continue to undertake initiatives to tackle the problem of increase in cost per ton of output.

Initiatives to raise employee productivity are being put in place. In 2012, a contracting company overseeing work on Chevron’s $52 billion Gorgon gas project banned sitting during working hours to improve operational productivity.
Companies are trying to explore alternatives to tackle skill shortage. Rio Tinto has started employing driverless trains and trucks to cart iron ore from its mines in order to tackle the premium wage demands, caused by the shortage of drivers in mining operations.
Companies are cutting employee perks to lower wage costs and offset lower returns. In 2012, Fortescue Metals Group scrapped weekly staff barbecues, and removed free coffee and ketchup from the canteens.

While these initiatives might attract negative publicity, particularly with labour unions, these steps have become increasingly necessary for mining companies to get back on the path of competitiveness and profitability over a long run. But will this be enough? Will cutting weekly employee get-togethers, and making workers stand at work take care of 30% productivity decline witnessed over the past decade? These measures definitely appear disproportionate to the problem’s weight. Or do the Australian mining executives have some more tricks up their sleeves that will actually matter in prolonging the mining sector golden years?

18/01/2013by EOS Intelligence EOS Intelligence No Comments

Can Poland Remain A ‘Green Island’ Amid Crisis-struck Europe?

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Since 2008, the economic crisis has been the subject of countless news headlines across the world with numerous economies sliding towards the verge of painful recession. Europe has been severely hit as well, with only one state, Poland, performing considerably better than those once believed to be more stable and better prepared for potential turmoil, resulting in the Polish economy being dubbed the ‘green island’ among weaker, crisis-ridden EU states.

As the economic crisis wave spread across the globe in 2008, it hit virtually all economies. The slowdown was visible in form of declining economic growth rates, which soon changed into negative growth in economies of Europe, USA and Japan. Interestingly, Poland was the only economy in the EU to register a positive growth during 2009, and, despite visible slowdown due to recession hitting its trading partners, Poland has managed to storm though the crisis reasonably well.

Since the onset of the crisis, Poland’s good economic performance has surprised many analysts. Obviously, the country did not remain unaffected, and a look at a trend line of the country’s growth rates over the past decade clearly shows how its performance has mirrored EU’s economic struggles. Nevertheless, the Polish economy managed to grow throughout the crisis, and this year, again, as the EU economy is expected to shrink by 0.3%, Polish economy is expected to expand (though modestly). Poland’s position in terms of GDP per capita increased considerably by 11 percentage points, to 65% of EU’s average in 2011. The economic growth and persistence in defying the crisis is believed to be largely underpinned by strong internal consumption, as Poles took long to believe that the crisis could have an actual impact on them, thus did not cut down on their expenditure (e.g. in 2011, the Polish retail sector enjoyed one of the highest y-o-y growth rates in retail sales during the December holiday season in Europe, second only to Russia). This strong internal consumption, paired with attractiveness for foreign investors in production-oriented sectors, along with postponed entry to the Euro zone (a fact that has helped shield Poland from Euro quakes) and limited household and corporate debt, allowing for greater stability of banking assets – these factors are typically cited as reasons for Poland’s good performance amid the crisis.

However, there seems to be an air of negativity and the country might get its share of the crisis after all. Just in November 2012, the IMF and Morgan Stanley slashed Polish GDP 2013 growth forecasts by almost half, down to 1.75% and 1.5%, respectively, as rather modest export gains are expected to fail to offset weaker consumer spending. Indeed, private consumption boom is likely to significantly cool down, as for an average Polish citizen the situation does not appear bright. The mood amongst Poles seem to no longer reflect the earlier enthusiasm, with opinions that good performance of Polish economy is now more of a government propaganda, since what they see on a daily basis contradicts the positive overtone of analysts’ words. The change in moods has been already captured – in November 2012, the Indicator of Consumer Trust (BWUK) was down by 5.3 percentage points over November 2011.

In reality, Poland’s position in EU’s GDP per capita statistics improved more as a result of a decline of the EU average, rather than actual improvement in Poles’ incomes and standard of living. The accumulated negative impact of adverse situation in the country’s Euro zone-based trading partners, leads to increased cautiousness of firms, who are introducing cost control measures, including layoffs. Rising unemployment (registered unemployment reaching close to 13% overall and as high as 28% amongst graduates in November 2012), together with growing fear of losing jobs, as well as limited credit activity, seem to have put brakes on consumer spending and thus internal consumption, an element once considered as one of the fundamental forces allowing Poland to withstand the pressures of the crisis. The mood is increasingly pessimistic, and the Poles have now started to change their shopping habits – they buy less, think twice, postpone high-value purchases, downgrade to cheaper equivalents and demand higher value for money. Poles are finally increasingly aware of the economic storm going through neighbouring economies, and realize that they do not live on a safe ‘green island’ any more. This fear is escalated by recurring news and discussions filled with warnings of 2013 brining the crisis full-on to Poland. And what is definitely not helping is the opposition leaders’ lack of political will to constructively work with the government in averting the impending crisis.

Many economists urge Poles to remain calm and claim that there is no reason to panic (at least, not yet). Though the slowdown in economic growth is a fact, consumers’ calm approach is definitely recommended, as fear of the future might multiply the slowdown, resembling a self-fulfilling prophecy. But, one has to keep in mind that consumption levels, strongly correlated with consumer sentiments, has no capacity to remain the single force driving economic growth. Several cushions that previously protected the Polish economy slowly cease to exist – continuous, high value public spending, favourable VAT, weak currency that supported Polish exporters and high inflow of EU funds to sponsor infrastructure investments are becoming a story of the past. In this negative scenario, consumers’ wishful thinking, positive attitude and frequent shopping trips might turn out far too weak to lift Poland’s economy as Europe and the Euro zone continue to sink.

It seems that the story of the ‘green island’ may not remain true for long.

06/12/2012by EOS Intelligence EOS Intelligence No Comments

Apple Vs Samsung: The Battle of the Wrong Contenders

On August 24, 2012, a jury in San Jose, California drew curtains (for the time being at least) on the long-drawn saga between Apple and Samsung. The court delivered a verdict largely favorable to Apple, validating most of Apple’s claims and ordering Samsung to pay Apple $1.05 billion in damages.

The verdict followed months of bitter battle between the two companies, which together sell more than half of the world’s smartphones and tablets. Although Apple’s charges against Samsung are more about design and features, it is actually an attack on Google and its Android software, which drives Samsung’s devices and has become the most widely used mobile software.

Since Apple, Google and Microsoft belong to the operating platform universe, their patent strategies differ vividly from the old mobile telecommunications world of essential patents. The mobile telecommunications industry is not new to IP litigations. However, current litigations concern the operating software used in smartphones, whereas earlier litigations were targeted at mobile telecommunications standards. This situation has arisen as Google did not have ex ante licenses from Apple and Microsoft.

There are two IP regimes, ‘essential patents’ (radio, transmission and telephony) and ‘platform patents’ (operating system software). In the Apple vs. Samsung case, the charges filed against Samsung relate both to essential patents (related to design of Samsung phones and tablets) and to platform patents (related to certain features allegedly copied by Android from iOS). However, when it comes to mobile internet, there is no overlap between the two patent regimes. The current IP litigation game (between Apple, Google and Microsoft) is only about platform patents (operating system software) and not about ‘essential patents’ (radio, transmission and telephony).

The mobile telecommunications market is currently undergoing upheaval as mobile internet is becoming the dominant application and phones are practically turning into mobile internet devices. For mobile telecommunication incumbents (such as Ericsson, Motorola, Nokia, Sony and Samsung), competition remains heated with direct threat from the likes of Apple and indirect competition from Google and Microsoft.

Apple and Microsoft are expected to be the winners in the current IP litigation scenario, since their IP is considered to have value in smartphones, while as Google’s IP, in comparison, is considerably lower, the Android operating system and its alliance network seem to be losing. The role of mobile telecommunication incumbents, with respect to patent portfolios is still important but limited to essential patents.

The unique position of Google as merely the provider of Android has also protected it from any direct IP litigation. However, to fight with Google, both Apple and Microsoft have filed IP litigation against the adopters of Google’s platform ecosystem, which includes original equipment manufacturers (e.g., HTC, Motorola Mobility, and Samsung) and application developers (Lodsys sues Rovio).

These attacks are global and are spread across four continents; specifically, Apple has sued the largest producer of Android-based devices, Samsung, in the USA and the rest of the world, except for China. It will be interesting to see the outcome of these litigations, as it might change the way the global mobile sector currently functions – if Samsung were to lose, it will shake-up Google’s ambitions of becoming the global leader in mobile telephony software; if the outcome comes out in favor of Samsung, both Samsung and Google will lead the market, and perhaps give rise to smaller hardware manufacturers which could use the Android platform to enter the market.

Whatever the outcome of these lawsuits, it sure is expected to spur innovation among relevant industry participants. Android (Google) has been found to be vulnerable/susceptible to litigation and unless they significantly strengthen their patent portfolio, hardware manufacturers would be wary of adopting android and will look for alternatives (such as MS Windows Mobile or develop their own operating systems). And if Apple wins, then OEMs will still have to look for alternative operating platforms. So the path is not as rosy for the Android system as it seems at the outset.

Thus, two key observations from the Apple vs. Samsung patent disputes can be noted:

Apple’s patents are only valid and enforceable in the USA and the company will have difficulty in leveraging these outside the USA, for example in Europe and Asia.
Apple’s patent portfolio outside the USA is minimal and the company will therefore struggle to protect its products in Europe and Asia. Moreover, the company would be forced to sign cross-licensing agreements with old mobile phone incumbents (Apple and Google Subsidiary – Motorola Mobility Consider Arbitration).

The current IP litigation scenario in mobile telecommunications shows how the industry is transitioning from an industry dominated by standards and essential patents in the late 1990s to an industry increasingly dominated by platform patents.

What’s next in this battle? Where might this lead the industry to?

Courts in different jurisdictions, such as in the UK, Korea, Japan, Australia and Germany have all given varied verdicts and the litigation battles are expected to continue (Samsung has already challenged the San Jose verdict). However, if Apple is able to enforce its patents outside the USA as well, mobile phone incumbents would feel hesitant to use Android and may opt for competing operating systems such as the Windows Phone.

Even then, it is unlikely to represent the demise of Android. Some of the features in contention have already been removed, while other features are given significantly lesser protection outside the USA.

The story, clearly, is far from over.

08/11/2012by EOS Intelligence EOS Intelligence No Comments

Will Retailers’ Cash Registers Ring This Holiday Season?

It’s a big moment for retailers as we enter the holiday season, which traditionally has been known to generate sales higher than in any other quarter during the year. But this year again, retailers cannot afford to sit back to enjoy the sweet sound of their cash registers ring. Despite the rebounding US economy and some European economies showing first signs of recovery, the ‘economic crisis’ phrase is still being heard in dozens of languages.

At the outset, the US retail holiday season outlook seems relatively optimistic, with National Retail Federation’s projections indicating a 4.1% increase in 2012 holiday retail sales over the 2011 season, to reach a healthy $586 billion this year. Though moderate, there is a visible increase in optimism compared with 2011, resulting in higher consumer confidence in economic recovery, employment stability, as well as individual and household finances, all of which should bring American retailers a sense of relief and may result in a brighter fiscal year-end.

Online shopping and mobile apps are expected to play an important role during this season in the American market. This, paradoxically, might mean a mixed bag of good and bad news for retailers. Well-informed consumers, empowered by easy access to online tools allowing for quick, on-the-spot price and offer comparisons, are bound to make retailers’ and marketers’ job harder. But, by now, any sane retailer should have realized the world of opportunities lying here, and only these retailers will be able to bite a bigger share of consumer’s holiday budget. Increased penetration of smartphones, in tandem with mobile apps, online shopping and social media, have opened several platforms for retailers to interact with consumers, leading to an increase in conversion rate of consumers from ‘online researchers’ to ‘actual buyers’. According to Deloitte’s research, shoppers using mobile apps are expected to spend 72% more than non-users this year, with the conversion rate for shoppers using dedicated mobile applications being 21% higher than shoppers not using such tools.

Although this data pertains to the American market, it offers a good learning for European retailers too, as for them, the 2012 holiday season outlook appears gloomier than for their American counterparts. They seem to be very much aware of what is at stake, especially remembering 2011, which was hoped to be the turning year for the European economy, but actually witnessed worsening of the retail sector across several European countries. Poor consumer confidence was reinforced with recurring news: “Italy Xmas sales seen down”, “Greece sales plunge”, “Retailers slash prices to clear stocks, hurting margins”. There were some instances of retail sales growth, mainly in Russia, Poland, Romania, and to some extent in the UK, which witnessed faster clearance of holiday stock, but, apart from Russia and Poland, it was far from the good old days of record sales.

Christmas shoppers brought little relief to Europe’s retailers last year, with online sales increasingly cannibalizing in-store purchases. Till date, 2012 has not been much better than 2011 in terms of hinting at better consumer confidence, with most Europeans constrained by lower disposable incomes, higher-than-average inflation, wage cuts, high unemployment and dwindling social benefits, all of which do not promise a very fruitful 2012 holiday season for retailers across Europe. Several European retailers, just like their American fellows, are also turning their eyes to online and mobile-app shopping, especially as 2012 has shown that online retail and mail order are relatively immune to economic volatility and falling consumer confidence (though online sales penetration varies considerably across EU states).

So can European retailers do anything or should they simply wait and watch the holiday season fare badly? While there are no magical solutions, some obvious aspects might help improve retail sales numbers a bit this year:

Christmas is the best time to play on emotions, but this alone will not charm consumers into opening their wallets during these difficult times. Retailers must offer great sale prices and monetary incentives to buy. As the gloomy outlook prolongs, consumers tend to be more perceptive to price cuts than Santa’s friendly image.
Price cuts, discounts and special holidays offers are a decent but rather ancient invention. Any retailer thinking of this being the sole instrument of gaining consumers will have to compete with the sea of price cuts available everywhere. Creating a sense of urgency and exclusivity allows one to stand out and force consumers to decide quickly, such as by offering sharp discounts but for a very short period.
It has never been more important for retailers to stay on their ones toes with excellent customer service. With a battle for consumer’s every euro and dollar, retailers just cannot afford unhappy customers, who are very likely to spread the news about their bad experience.
Offering a delayed payment option might not make the retailer excited, but it might be the best option to secure sales from those consumers who are worried about their liquidity and spending too much now. There might be a willingness to buy gifts, so a delayed payment option might help consumers make some purchase rather than nothing at all.
Retailers, even those who do not offer online shopping options, must make themselves visible online – this is not the right time to neglect social media (but is it ever?).

While the economic situation is slowly improving, consumers will undoubtedly remain cautious, and the 2012 holiday season is unlikely to break any sales record. With this rather mixed outlook, the good old basket of retailer tricks including Christmas special offers, jolly atmosphere and in-store decorations will turn out to be too weak to counterbalance the pressure on the consumer’s wallet and weak confidence. But perhaps the only thing that the European retailers CAN do is to pick from the old tricks basket as smartly as they can, wait out the worst times and just hope for the best.

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