Category Archives: Asia

Urban water: Crucial challenges and drivers

In light of key trends and challenges, what is the future outlook for urban water utilities?

There have been lots of changes in urban water utilities due to industrialization and consequential urbanization. Due to the water intense industries, utilization of water has increased abnormally and excessive withdrawal of water from the ground has depleted ground water in many areas due to insufficient surface water availability. Drawing water from the ground requires more energy to be used, and in turn, a lot of water is needed for generating energy. Many Government regulations have been enforced to combat this situation, such as rain water harvesting and the recycling and reuse of water in industries and common effluent treatment plants, etc. In some coastal areas, desalination plants have been installed to treat seawater in order to make it drinkable, and although the cost of treatment is high, there is no other place to go to get fresh water. Awareness of water utilization needs to be increased and the practice of conservation of water to be cultivated in people. People need to be aware of the consequences of having no water or less water in the future and thus act accordingly for optimum utilization of water. There is a need for the water authorities to brainstorm for the solutions for future urban water utilities by bringing water experts together and taking necessary precautions now to experience a better outlook in future for urban water utilities. Funds need to be allocated accordingly to balance the water utilities in urban areas.

What opportunities do innovations in nano and biotechnology present for the water sector?

A recent buzz word in various fields is nano technology, and there has been a lot of work happening in the research of nano technology within the water sector. Nano materials are being developed to remove harmful constituents from water. Most of the research in nano technology is happening in the area of water treatment rather than water conservation. Nano materials are developed and used for the removal of pesticides, Arsenic, lead, iron, etc. There is ongoing research for further advancements in this area.
There are a lot of opportunities in the field of water for biotechnology, especially for the treatment of waste water from industries and domestic applications. This will enable people to use the treated water for industrial and other applications, helping to reduce fresh water usage.
Using nano technology and biotechnology, water intense industries can treat their effluent efficiently and reuse the treated water for process and other applications. Industries should aim for Zero Liquid Discharge concept to protect the fresh water contamination, thereby reducing the disease burden on people. More and more technologies need to be developed for water treatment for the removal of total dissolved solids for drinking water applications. Presently people are using Reverse Osmosis technology, which generates a lot of waste water during the process. There is an urgent need to develop alternative technology to Reverse Osmosis where conversion should be closer to 100%. Increasing research in biotechnology to develop new crops which do not require so much water is vital, as agriculture is the major consumer of water.

The global population is expected to reach around 9.5 billion in 2050, which amounts to an estimated 90% population growth in the cities of the developing world. What challenges does rapid urbanisation pose to water utilities, and how will they adapt to manage rising demand and depleting resources?

It is very important to think of future problems regarding water availability due to increasing population. The quantity of total water remains the same and hence there is urgent need for alternate arrangements for water conservation. Increase of population leads to more demand for water for their use. This also increases the industrialization and consequential demand for more water for making more products. Industries need to optimize their utilization of water per product produced. There should be normalization on this aspect for the total water management in industries. Some countries face problems with leakage of water during distribution, a problem which needs to be addressed with new technologies and mitigative measures. Governments of every country need to plan and allocate funds and technical people to think of the solutions for the issues presented by population increase and thus higher demand for water. Resources need to be planned in advance, there should be strict regulations for the proper utilization of water, and Zero Liquid discharge needs to be implemented by regulators and strictly followed. Incentives need to be planned for the industries for their good work in the field of water conservation.

In addition to population growth, what other social, economic and environmental factors are driving the water utilities industry?

Primarily, industrialization due to urbanization is driving the water utilities industry. Agriculture is the major consumer of water and the requirement of water needs to be optimized for this purpose. New industries are evolving day by day to meet the demand of the requirements of the increasing population. Every day, new chemicals are introduced to the environment and these are entering the water bodies and contaminating the water. Most of the water then becomes unfit for drinking due to the increased industrialization and release of contaminants to the water bodies, be it surface water or ground water. Water availability per person is decreasing day by day due to population increase.
Increase in population has a tremendous impact on the water utilities industry with regards to meeting the expectations of people on water supply. Treatment of water is becoming more costly and also has a definite impact on the water utilities industry. Availability of fresh water is depleting due to industries and changing evironmental factors, and rains are decreasing over time due to increased environmental changes.

Automotive Finance Industry – Highlights and Top Trends from Dr. Olaf Neitzsch

Dr. Neitzsch, for the start and in a “nutshell”, could you please give us a short general overview on the Automotive Finance Industry?

Yes, sure! Automotive Finance is on the one hand a global industry but at the same time has to adapt to legislation and business environments in specific local markets.
Main players in that industry are the Financial Services Divisions / “AFC” (1) of Global Automotive Groups / “OEM” (2) as well as “independent” universal banks / finance companies which could serve numerous OEM / brands / dealers in specific markets.

In general, the large Global OEMs have a very integrative approach with their AFC, and that concerns ownership, strategy and tactical actions. Here we could mention especially Toyota Motor Corporation, VW Group, Renault – Nissan Group and Ford Motor Company as well as the two premium groups Daimler and BMW – all of them covering their numerous Automotive Brands. General Motors is somewhat specific: although one of the “Top 3” OEM in car sales and having had their own AFC named “GMAC” for a long time – in the last few years they have changed  ownership and strategy several times – so it remains to be seen how that plays out for them long-term. Also, Hyundai – Kia Group has only entered a few markets so far with its own AFC; in many others they work with external providers, so there is still some potential to be captured. Usually, all these AFC go into “larger” (3) markets and support their OEM there.

In “smaller” Automotive Markets, those AFC which focus on the brands of their own OEM could find it challenging to achieve the necessary scale for a Business Case. So, especially in smaller markets, local Universal Banks / Finance Companies often cover Automotive Finance and work directly with OEM and / or the car dealers.

It is important to note that “Automotive Finance” means not only Retail Finance but also includes Corporate / Dealer Finance as well as related services such as Leasing, Fleet Finance and Insurance “packaged” with Finance products.

In Developed Markets, what financial support is expected by both OEM and Dealers?

In Developed Markets both OEM and Dealers expect an “integrated” approach by the Automotive Finance supplier and that means:

  • Delivering both Retail and Corporate Finance products
  • Support not only during “good” times but also during “bad” times, such as market depression and financial difficulties in the Dealer Network
  • Cooperating very closely with OEM and Dealer Network regarding mid and long-term strategies but also a flexible and “sense of urgency” approach on short-term tactical actions

As the OEM is their Shareholder, the AFC has these three above mentioned priorities in their “DNA”. However, even in smaller Markets where OEMs cooperate with “independent” providers, OEMs expect no less – so either the Universal Bank delivers or the OEM considers changing the partner or  somewhat “adjusting” KPI due to the local market environment.

How is that in Emerging Markets?

In general, clients in Emerging Markets expect the same level of service, if not even higher, at least in the mid-term. So, especially in the larger Emerging Markets, the leading OEMs already have their AFC there and they deliver the same kind of services to the Dealer Network and to their Retail Customers.

However, when a new market is entered, usually not everything can be done at once with a “Big Bang”, but rather a staged step-by-step approach is deployed, setting priorities. That being said, if in Developed Markets it took 50 years to come to today’s levels, in New Markets it should be done not in 10 or 20 years but in 5 – provided the local market environment allows for a Developed Market level of efficiency (4).

Tata Motors of India acquired Jaguar Land Rover and Zhejiang Geely of China took over Volvo Cars. How do players from Emerging Markets drive changes in the Automotive Industry in general and how does this affect Automotive Banking?

That’s an interesting one! Let’s first recap: Jaguar and Land Rover, both beacons of the British Motor Industry for a long time now, at some point run into problems and were acquired by Ford Motor Company at a time when FMC was the most profitable company globally – not just in the car industry, but of all. However, later on Ford also had problems and that US Motor Giant had to sell … and sold to an Indian Company. It was a similar situation with Volvo Cars, that synonym of Swedish Steel and toughness, so it became part of FMC but in 2010 was sold to Geely.

So, coming back to your question: although Jaguar Land Rover and Volvo Cars are not large manufacturers but rather fit into special niches, the fact that a Giant and founder of the Global Automotive Industry – Ford – had to sell to Indian and Chinese companies shows that the world is changing! Both Tata and Geely are far from being Global players yet, but they could use JLR and Volvo as a test in Global Markets and, if successful, and if building up a sufficient “war chest”, they could repeat such acquisitions in the future with a larger OEM, establishing a real global footprint.

In Automotive Banking however, that has no impact as yet. On one hand, both Tata and Geely have no global AFC as they are not a global player themselves yet. On the other hand, both JLR and Volvo Cars have a very diverse structure to support their Finance needs, differing from market to market: in some large markets they established their own AFC, in some smaller markets their long time existing AFC was closed after ownership change, in some they are served by independent external banks and finance companies. But as I said above, if Tata and Geely really were to go Global, all that could change and they could also become a player in Automotive Finance.

According to a PwC Study, there is a backdrop of Macroeconomic uncertainty and major transitions are under way that will transform Auto Manufacturing over the next 10 years. With this transformation approaching, how will OEMs build Market Share and Profitability in the short-term and how should they position themselves for long-term success?

First let me say that I will focus on the Automotive Industry in general without going into technical details of Manufacturing.

Let’s first address Macroeconomic uncertainty. During my 25 years in the Industry, I have seen many ups and downs, booms and recessions, sometimes on a global scale and sometimes limited to specific regions. In general I think today we have no more or less uncertainty than 10 or 20 years ago. And if 10 years ago someone was too certain, then something unexpected hit and all the plans fell through like a house of cards – see the “Firestone” problem which hit Ford very hard in 2000 or the 2008 Global Finance Crisis hitting all OEMs brutally! Of course, OEMs cannot really influence the Global Economy, but they must prepare. How? Global Reach and Flexible Structures are key! Global Reach means that an OEM plays in all global key markets, not only with sales but also with (local) production, so they are better “buffered” if in one region recession hits, leading to a falling Car Market, because such an OEM can accelerate in other regions instead. The same applies if that recession region were to come back to growth, the OEM could increase production and sales there again. OEM with a strong global reach are, for example, Toyota Motor Corporation and VW Group; rather weak examples in this area are PSA Peugeot Citroen and FCA Fiat Chrysler, and level of global reach is one reason why these 4 OEM are either at the top of the automotive league or just average.  Flexible Structures come into play when there is a global downturn and it is necessary to adjust capacities for a certain time and to ramp up production afterwards once again. That flexibility is required in production (e.g. using external Assemble Capacities in peak times instead of opening a new plant or increasing / decreasing number of shifts) but it is also necessary in sales (e.g. having some flexibility to increase / decrease Car Stock in the Dealer Network (5) or directly at the OEM; or increasing / decreasing tactical Sales Support (6) depending on how Supply and Demand balance or not).

Major Transitions: besides the importance of new Production Systems and sharing Platforms, Powertrains, Engines and Modules between Brands and Car Models within the Group, I would just mention a few points (there could be a full article on each of them) which are crucial to being successful:

  • Products & Innovation
    • Needs strong CORE Brands (Client must desire it, not just buy because of pricing)
    • Needs to LEAD in future SUCCESS Technologies (e.g. Hybrid, Hybrid Plug-in, Electric Cars) AND still make a profit with these products mid-term
  • Local production & local content purchasing
  • Group’s Integration of Manufacturing, Sales and Financial Services

Having spoken about points for long-term success and being prepared for the future, these are heavy investments which do not pay off immediately. To fund them, the OEM needs some present Profit Generators and today, whether we consider that “progressive” or not, these are still gas guzzling pick-ups, SUV and large Limousines.

Let me give you two iconic examples: Toyota started to develop the Hybrid Technology very early on, at a time when nobody could be certain if that would become the next big thing – today they start reaping the rewards of that courageous decision! Ford has already had  an absolute profit machine in their portfolio for decades – and that is the gas thirsty “F-150” pick-up which does not really seem to be the “transitional thing” but has already saved Ford through several crises!

So to summarize my answer to your question: a successful OEM must master the fine balance between generating cash and profit today and investing into the future – not easy but that distinguishes the leaders from the average!

Many Automotive Industry studies discuss the changing face of Retail based on evolving consumer demand. Can you explain this change and how it plays out for all participants?

Yes, there are changes. It’s important to put them into context to the whole Industry, to their weight and to either their regional or global relevance, so let’s take a “balanced” view.

E-commerce: Of course, today automotive consumers have a complete and easy way to access information. They can compare brands, dealerships, car models, specs, pricing and special actions. So, before they even hit the Dealer Showroom, they are very well informed and can negotiate as empowered partners. As that is the case for all OEMs and brands, it does not really shift the balance between them, unless somebody had in the past tried to “play with closed cards” – he would now lose to the players who value long-term customer satisfaction over short-term gains. Now looking at Direct Sales via the web: cars are not books or shoes, so Automotive Sales work somewhat differently, and  the after-sales process is even more important,  for example regular inspections, warranty repairs and servicing. During the last decade some OEM already looked deeply into the possibility of Web-based Direct Retail Sales, but did not go ahead with it for a number of logistical, organizational and “political” reasons (it’s not possible to go into all details here). Tesla Motors is an exception, but they are a small niche player and they are new, without Dealer Network “asset & liability”. So, I cannot predict what will be in 2045, but for the next decade I do not foresee dramatic shifts away from retailing via the Dealer Network.

Ownership: Especially in Western European urban areas, we have recently seen that “desire” and “convenience” of owning a car is somewhat fading. For example, in London, Paris and Berlin one has to deal with traffic jams and shortage of parking facilities, so it’s faster and more convenient to go by public transportation, to take a Taxi or, when you really need a car, to take a “rent-as-you-go” vehicle. And during their holidays, they fly to the south anyway. So, if not everyone who could afford a car wants to own one,  that means, of course, less Retail Sales. On the other hand it means more Fleet Sales, but taking into account that these “rent-as-you-go” vehicles are often rather small and E-powered vehicles. So, overall, less Retail but a bit more Fleet still means less Total Sales. However, at the moment that is a development seen mainly in Western Europe, not in China, USA or other Regions. As “old” Europe does not rule the automotive world anymore, (as we will see in the next paragraph), I would call the global impact “limited” so far.

New Technologies: Of course consumer demand will go even more into Hybrid, Hybrid Plug-in, Electric Cars and other new evolving Technologies, but so far I don’t see how that would really change the way Cars are sold and serviced in Retail and Fleet, at least not over the next decade.

Impact on Automotive Finance: As Finance is closely related to Car Sales, even “bundled”, the trends described above also have an impact on the AFC. So, the Client considering Finance will also collect information on that before entering the Dealer Showroom. If in Western Europe less people intend to own a car, this would mean less Retail Finance but on the other hand increased Fleet Finance for all these “as-you-go” Fleets. As for New Technology Cars, they are also bought with credit or leasing, so it does not change the total picture … even more … sometimes OEM and AFC jointly launch special programs to attract consumers to these vehicles which often are more expensive than the same models with conventional engines.

By 2030, what three Countries do you predict will be on Top of the Global Automotive arena and why?

First let me say that we should look at Sales, at Production and also at the Global Players regardless of their country of origin. When predicting what will be in 15 years from now, we should take into account strengths and weaknesses (present) as well as opportunities and threats (future development).

Sales (7): It is not difficult to foresee that China will be No. 1 and the USA No. 2 – China is already “THE Giant” and is still growing; the US is “a Giant” but already saturated (just the usual ups and downs depending on how the US economy is going). As No. 3 in 2030 I would not pick a country but a group of countries having some market similarities. Today that would be the EU, but as they are saturated as well, I think the “B-R-I” (Brazil-Russia-India) have the long-term potential, even if facing some specific challenges presently.

Production (8): Of course China as No.1; their production is almost in parallel with their sales. As the US is losing capacities to Mexico, I would see them at No. 3 and “B-R-I” would go up to the No. 2 spot, also overtaking Japan and Germany.

Balance of Sales and Production – Importers and Exporters: China is almost the only country with a real balance and should stay so. “B-R-I” as a group is almost balanced today, and by 2030 could even be exporting. The US is an Importer today and will be even more so by 2030. In general, the OEMs increasingly shift production from their countries to Emerging Markets, often within a region, so by 2030 we will see that: Mexico supplies the US; Thailand, Vietnam and Indonesia also produce for Japan; and Czech Republic, Slovakia, Romania and Turkey supply the German, UK and French markets!

Players (9): As with China, here we have two “easy” predictions at the top: VW Group and Toyota Motor Corporation will make No. 1 and No. 2 between them, just trading places several times during the next 15 years. They are the two giants today, each of them having some weaker and some stronger spots, but clearly the leaders in the industry. At No. 3 there could be a “Dark Horse” emerging, for example a Chinese Player teaming up with an “old” OEM. If not, than we have four potential candidates: GM, Renault – Nissan Group, Hyundai – Kia Group as well as Ford. I would bet on Hyundai – Kia, as during the last decade they got up a great momentum: in Developed Countries they increased reputation and market share steadily and in Emerging Markets they grew aggressively. So, I think Hyundai – Kia could make it to No. 3 … and last but not least … recently Pope Francis started to drive around in a new Hyundai “Papamobile” – what else could be  better support!?!

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  1. AFC: “Captive” Automotive Finance Company owned by Global Automotive Groups
  2. OEM: “Original Equipment Manufacturer”, in this case Global Automotive Groups which produce, export-import and distribute Cars and Light Commercial Vehicles
  3. Each AFC / OEM has to define what is sufficient “large” for them, for example 500 Thousands New Car Sales / year in the Market could be the point to go in for some, whilst others would look for 1 Million at least
  4. For example, do Credit Bureaus exist and hold sufficient data to allow for a fast Underwriting Process? Also, can Client and Bank close their Contract remotely via the Dealer based Point of Sales or does the local Bank Legislation still require the Client’s Identity to be checked by a Bank employee (“KYC” / “Face-control”)?
  5. Importance of AFC provided Dealer Finance!
  6. Importance of Special Interest Rate programs jointly offered by OEM and AFC / Finance Provider!
  7. Sales 2014 (Mills.): China 23.6, USA 16.5, JAP 5.5, BRA 3.3, GER 3.2, IND 3.0, UK 2.8, RUS 2.5, FRA 2.2, CAN 1.9, S-KOR 1.7, ITA 1.5
  8. Production 2014 (Mills.): China 23.7, USA 11.7, JAP 9.8, GER 5.9, S-KOR 4.5, IND 3.8, MEX 3.4, BRA 3.1, ESP 2.4, CAN 2.4, THAI 1.9, RUS 1.9
  9. OEM Sales 2014 (Mills.): VW 9.9, TOY 9.8, GM 8.0, R-N 8.0, H-K 7.6, Ford 5.9, FCA 4.6, HON 4.4

What innovation strategies will unlock the growth in the financial sector in 2015?

Growth drivers of financial services, Today and Tomorrow

It will be very difficult to not mention ‘Fintech’ when discussing financial innovation of today. The buzz word has captured the attention of the media and, in turn, the media has started a cycle of monetization (conferences, special reports etc). No doubt, financial technology will be a key growth driver for the industry as a whole and over a longer period of time. Financial services companies that have brushed it aside will likely suffer customer attrition, while those that have embraced it will attract more and more ‘mobile’ customers. Some thinkers speculate that new comers coming from outside the financial industry could oust big and slow incumbents, but that is a little too stretched. Finance is, at the very core, a ‘conservative’ industry. But even though ‘Fintech’ is here to stay, it won’t be the main driver of growth for the year at hand, 2015.

Having touched upon the hype of today, which innovation strategies will unlock the growth in the financial sector in 2015? The short answer is the innovation that has been happening at the core of innovative financial services firms, which is to acquire the execution capability to provide cross-border investment solutions and advice in the institutional space, while also providing the ability to replicate something similar for retail investors. These early movers will immediately reap the benefits and growth will come in the traditional forms of increased AUM and fatter fees, not tomorrow, but today.

Asia’s Institutional Appetite for Global Assets

There is much money in Asia that is looking for solutions to invest in global asset classes. China’s sovereign wealth fund CIC (China Investment Corporation) which holds assets of 652.7B USD (end of 2013) of which about 220B is invested in overseas assets, manages about 67% of this through external management. Those Chinese and global advisors who have invested in their network and relationship with CIC and Chinese decision makers will reap great rewards. CIC holdings grew a whopping 13% (77B USD in absolute terms) in 2013.

Japan’s Government Pension Investment Fund (GPIF), the largest of its kind in the world, manages some 137B JPY (1.14T USD, end of 3Q 2014). Its overseas allocation is 13.14% in global bonds and 19.64% in global equities. Recently, its decision to more than double its target allocation of foreign stocks to 25 percent, which came together with BOJ’s shocking decision to ramp up stimulus, was greeted with a world-wide equities rally. Again, those firms who had strategized before-hand and have come up with innovative solutions will stand to benefit.

NPS, the Korean national pension grew 10% in 2014 to 426B USD. Of the 42.9B USD increase, 20B was in global asset classes.

Recently, the Ministry of Employment and Labor of Korea, selected one lead manager to manage its 14B USD holdings. In the past, it used to directly apportion the holdings to about 10 different managers. In the new scheme, a single manager will be making the decision as to which asset manager will get how much, while the firm earns a fee on the total AUM for providing advice and risk management services. This ‘beauty-contest’ to decide which firm will lead was decided based on many criteria, of which allocation and execution skills were key.

Reduced home bias, a common trend for all Markets

In their Global Pension Assets Study 2015, Towers Watson calculated a 6.1% rise in the assets of the top 16 markets reaching a 2014 year-end total of 36T USD. During the last 10 years, the most rapidly growing pension markets have been Mexico (16.1%), Australia (11.7%), Hong Kong (10.0%), Brazil (9.7%) and Canada (7.3), when measured in US dollar terms. Since 1995 bonds, equities and cash allocations have been reduced to a varying degree while allocations to other alternative assets have increased from 5% to 25%. There is a clear sign of reduced home bias in equities, as the weight of domestic equities in pension assets portfolios has fell, on average, from 64.7% in 1998 to 42.9% in 2014.

Innovation of Core Competencies: How to execute is a strategic choice

As the most visible ‘smart money’ in each of the regions, SWFs and pensions have great impact on how wealth managers advise and HNWIs invest. Financial services firms all over the world, both local and global, both emerging and developed, will be competing for the patronage of not just institutional clients but also HNWIs.

Winners will have already answered critical strategic questions: Will it provide execution for all or part of the vast space that is global asset classes? Will it forge alliances or go it alone to create a platform for that chosen space? How much customization and dedicated personnel will it provide to the major SWF and pensions? How much, if at all, can this capability be replicated or mirrored for the retail clients?

Local firms have the clients, global firms have the execution capability. Fintech firms are providing easier and cheaper ways to reach both clients and execution platforms. The innovation challenge is huge: people, IT and networks. It is almost to the scale of reinventing the whole business process and value chain.

In the Now

This megatrend is not in the near future, it is in the here and now: 2015. Firms that innovated their old locally oriented models are experiencing growth. Those that think this is still a future event are quickly losing ground.

How oil and gas producers can take advantage of the new energy environment in 2015?

For many years the discussion on climate change has been on the table. It is obvious that the earth’s climate is changing. The real question is, is it a natural behavior of our solar system or is it triggered by humans and the industry?

Physics tells us that energy cannot be created nor destroyed, it can only be transformed into various forms, such as heat (e.g. steam or hot water), electrical energy, gases (various hydrocarbons in gas or liquid forms). We see this clearly in the operation of nuclear power plants where the heat generated in the nuclear reactor is transformed into electrical energy.

Almost every transformation of energy will have undesired by-products or lost unusable energy forms. The challenge now is to reduce, or avoid, undesired by-products and energy forms. Politics urge the industry to reduce their emissions, particularly CO2 (Carbon-Dioxide, which should force the “Global-Warming”), and many other emissions (like SO2 (Sulphur-Oxide) and NOx (Nitrogen-Oxides) which also have an impact on our climate. The major complication is that these emissions don’t stop on national borders, they move across them, dependent on the weather system which exists at the time. A small difference is between local micro climate, which might be influenced locally only, by small emissions, and the larger influence of large emissions, which may have a regional or a global influence.

This means, in order to archive any success in protecting the earth’s climate, which is changing due to forced industrial emissions and the wasteful use of energy in homes or buildings, we need everybody to participate. This might be difficult to achieve right away, but to start with those which are already known as the biggest waste and emission producers could help significantly.  Having a 70% to 30% rule or an 80% to 20% rule is better than a 100% rule with no result at all.  Bringing ~7 billons humans under one umbrella is nearly impossible, not to mention the different industries at the same time.  This needs to happen gradually over a longer period of time; political rules and economics have to meet in an acceptable way.

As we all know, the primary energy form is oil or coal, but more and more electrical energy is coming from wind driven generators and solar panels.

To produce the equipment that is needed to transform wind or solar energy to electrical energy, will also use energy to be made and will produce unwanted waste. But the real questions are:

  • How long can these equipment’s be economically used?
  • What kind of waste will be produced after decommissioning?

Some other energy forms are also under development like “Hydrogen” (to produce hydrogen, is also energy intensive; you need electrical energy or a lot of heat, to transform other energy forms to hydrogen). It is clear, using “Hydrogen” as clean fuel, has a positive effect on the micro climate where it is used, but not on a larger scale, because of the amount of energy which has to be used to come to the energy form of “Hydrogen”.

The question here is:

  • Can “Hydrogen” be produced with low emissions that are less than the amount of emissions hydrogen creates when it is burned? It will produce nearly 100% water.

There is a large amount of research necessary to find technologies that make other energy forms usable without having a lot of undesired effects and wastes.

A good and feasible alternative could be the use of natural gas (Methane), which is available in many regions across the globe. But of course, there is also a lot of energy needed to get the natural gas out of the ground.

You have to drill and you may need compressors to operate to get the gas out of the grounds. And be sure the natural gas has some other gases, which are coming out of the ground with it (like H2S (Hydrogen-Sulfide), which needs to be removed and safely destroyed. In addition, to store natural gas under atmospheric conditions is not easy. There mainly two possibilities, (1) in a high compressed version and (2) in a liquefied version.

Using the high compressed version (several hundred bars) is used to supply cars, but the amount of gas which can be stored is still limited and it doesn’t matter if it is in the automobile or in the industrial environment. The distribution of high compressed gas is done by special trucks which can transport this form of gas and deliver it to the end user distribution terminals (some gas stations are already selling natural gas). The challenge for producers is to build more stations which sell natural gas. In the end, we need a dense network to make natural available to end users. The other challenge is for car makers since the distance you can drive with one load of compressed gas is not long enough for most users. For drivers in cities, it is already quite convenient with today’s cars. But driving long distances may still take a long time in regards to developments for both car makers and gas distributers.

One option is using natural gas to make electrical energy with gas turbines and attached generators, then using the waste heat for district heating. These combinations currently have an efficiency factor of ~61.7% and soon above ~62%. Gas turbines are very efficient to make electricity, but the current economic situation show that other primary energy forms are cheaper, so the option does not foster political desire.

Another option is using liquefied natural gas which is already utilized in the Oil & Gas industry, because it is the only form where natural gas can be stored and transported in large quantities. The disadvantage lies in the fact that natural gas needs to be cooled down to -162 °C to store it in a liquid form. Not to mention the cooling process also requires a certain amount of energy with another small amount of energy required to keep it cool.

In addition, to get the liquid natural gas back into a form of gas that can be used by end users it needs to be evaporated again. Again, this process will need some energy to make the natural gas available for commercial or industrial use.

But overall, “Natural Gas,” is the cleanest burning hydrocarbon gas of all, as it burns to water a lower amount of CO2. Natural gas can be produced, stored and transported in large quantities which is economically feasible. This should be the favored form for Oil & Gas companies.

Another possibility is the distribution and use of refinery produced gases like “Propane” and “Butane”. These kinds of gases have been used for decades now, but the widespread use has not really been seen.  There is also LPG (Liquefied Petrol Gas) which is offered at gas stations in many different countries and is used in vessels for cooking and many other applications.

LPG for cars is becoming more and more popular, due to the fact that it is much cheaper than gasoline or diesel. Due to the fact that is liquid under the conditions it is stored and sold, cars need to be modified to use it for the engine. Engines can burn only gasified products otherwise they wouldn’t work. 

With the all these options, it is clear that “Natural Gas” seems to be the future for Oil & Gas companies, as it has a positive impact on climate change and yet, is still economically feasible.

In conclusion, the “Full Energy Balance” for all kinds of energy forms and transformations needs to be achieved by oil and gas producers. This includes the investigation of all forms of losses and wastes or by-products, as well as a declaration to make the best and most economical form of energy, always in conjunction with the protection of our climate and, in general, our world.

“Oil & Gas – Ever changing market insights” Interview with Mr. Sapan Dalal

This interview was conducted May 14th 2015

What is the state of the Oil markets? More specifically, how are politics and the global macro events trumping supply and demand in the trading of the Oil futures markets?

In late 2014, Saudi Arabia kicked off a crude oil price war in quiet recognition that US shale represents an existential threat. Now the pressure on shale companies is starting to show results.

When Saudi Arabia realized that US shale had the potential to become the new “swing producer” for global oil supply, there was really no alternative to price war. The old playbook was torn up forever with the presence of this new force in markets. In the old pre-shale days, Saudi Arabia could keep the oil price high – or at least stabilize it – by cutting back supply when demand softened. This worked because Saudi production closed the gap in the global supply and demand balance for crude. By making adjustments, the house of Saud could turn marginal pressure on crude oil prices into marginal support, by way of restricting supply until demand levels slightly exceeded supply levels once again.

With the new producers on the scene, however, any cutback in Saudi supply would simply be met by a US shale supplier. Let’s say there is global equilibrium between oil supply and oil demand at 90 million barrels per day. If demand levels slipped to, say, 89.5 million barrels per day, that would produce downward pressure on the price of oil… until the Saudis cut 600,000 barrels per day worth of production, bringing supply a notch below the new demand level. But now you have US shale fracking on the scene providing an extra couple million barrels per day. With the addition of U.S. shale, Saudi cuts would NOT bring supply and demand back to balance. Supply levels would remain above soft demand levels regardless. Now, any supply cut by the Saudis, would only be giving money to the U.S. shale producer, filling in as the new global oil “Swing Producer”.

Another way to understand OPEC, both pre- and post-shale, is to think in terms of price collusion. When a few companies (or countries) dominate a market, they can get together and decide to keep prices above a certain level. If just one player decides to break the pact, however, they can sell with size at lower prices than everyone else, and prices are forced down across the board. The U.S. shale fracking industry was the odd man out and basically, threw in a huge monkey wrench for the colluders.

What are the key opportunities and challenges facing the Oil & Gas industry?

There are several opportunities and challenges facing the Oil & Gas industry. When the US shale boom arrived in and ramped up US crude oil production by nearly 4 million barrels in five years, the Saudis knew their control regime was in serious trouble. From a long-term perspective it was clear that, if U.S. shale just kept pumping, the oil price could fall drastically. Furthermore, oil prices could then stay low permanently. Imagine a world in which global oil supply consistently exceeded demand, by a few million barrels per day, for years on end. That would be a nightmare for OPEC. The Saudi solution is to kill off high cost producers sooner rather than late, and make sure they are good and dead.  This will ensure U.S. production so that current production is scrapped and new production is mothballed. Theoretically, enough short-term pain could give the Saudis their swing position back. If short-term pain is great enough to bankrupt a whole slow of producers and shutter a hundred-billion-plus worth of longer term projects then at some point down the road, the global supply / demand balance will favor supply again, and the Saudi financial future will be better assured. The plan only makes sense, however, if the Saudis finish what they started. Saudi Arabia will not let the oil price rise too much now, after investing so heavily in a strategy to crush the shale enemy. However, given this threat, opportunities have arisen to produce a barrel of oil more efficiently and to enter different markets through acquisitions. This efficiency, is a result of better bargaining power from producers, technological advances that produce efficiencies, strategic acquisitions of producers by larger better capitalized companies, for example, Shell’s acquisition of BG Group. As always in the oil and gas industry challenges yield innovation and opportunity.

According to Daniel Yergin, vice chairman of IHS, the Oil market is “going to be a lot more volatile.” Do you agree with this statement, and if so, why?

Yes, I absolutely agree with Mr. Yergin. The retreat in U.S. oil drilling is a prime example of how the market will play out in the future. Oil prices began collapsing in September, and yet U.S. producers didn’t really start pulling rigs out of fields until December. When prices rebound, their return to shale fields will again take months.

OPEC, but more so, the Saudis, could snap their fingers and make prices rebound by tomorrow. Hence in essence there is a whole sector of a couple hundred companies, countries, and political regimes, looking out for their own self-interests. Throw in the cross current effects of global currency moves and their impact on oil priced in dollars and the uncertainty only grows. With so many forces at play, the end result is a volatile market that is at the mercy of such forces.

The International Energy Agency noted that competing forces are still playing out in the market, making the direction of prices difficult to discern. With this said, how sure can we be on our predictions?

The International Energy Agency is correct that competing forces are still playing out in the market, making the direction of prices difficult to discern. As for predictions in prices, we can’t be sure, since any change in regulations, geopolitics, M&A activity, global growth or lack thereof, global interest rates and moves undertaken by global central banks would have a material effect on oil price predictions. Unless, you can predict every single political event outcome, adjust for the different political regime agendas, and account for how global central banks will leverage interest rates and their respective currencies to stimulate their economies, you can’t predict global energy prices with great certainty and be 100% confident in your price predictions.

As international sanctions have sharply reduced Iran’s sales of Oil, what would be the potential effect on Oil supplies if the proposed nuclear accord with Iran eases and/or lifts those sanctions?

A huge uncertainty in the oil market is the potential effect on oil supplies of a proposed nuclear accord with Iran, a major producer. International sanctions have sharply reduced the country’s sales of oil, and an accord is expected to ease, or lift, those sanctions. However, the U.S. Senate has just passed a bill that would require congressional approval and review on any deal with Iran. In addition, since Congress imposed many of the sanctions on Iran, any lift of Iranian sanctions imposed by Congress, could not be bypassed by president Obama through the U.N. The bill passed the Senate with bipartisan support and should easily pass the House of Representatives, with its GOP majority.  Therefore, this deal is very much up in the air.

However, if an accord was to be reached and sanctions were lifted so that Iran could legitimately sell its oil in the global market, it would take time for Iran to organize the enormous investment that would be required to sustainably bolster its production capacity; the country might be able to make short-term changes to increase output and exports relatively quickly.

Iran has 30 million barrels of oil stored on tankers, which could quickly feed an increase in exports. It has also been estimated that Iranian oil fields could ramp up production to as much as 3.6 million barrels a day, a 29 per cent increase, within months of sanctions being lifted.

Under the pressure of sanctions, both Iranian production and exports have been curbed. Many reporting agencies state that Iranian exports are down about 50 per cent since 2012, to an average of around 1.1. Million barrels a day, although some reports state they rose to 1.3 million barrels a day in March on high demand from China.

The issue I see here is the one of geopolitics. First, with the U.S. shale already threatening Saudi price dominance, surely Saudi would not be pleased with Iran pumping crude back onto the global oil markets thereby, further threatening Saudi pricing power. Secondly, there is the proxy war being fought by Iran backed Houthi rebels, and the coalition of Saudi, Egypt, Israel and other countries. None of the coalition countries want Iran to have access to more funding to support its proxy war. This is secretarian conflict for some of the countries involved, but for Israel, its very existence it feels is in question. So the question is if sanctions were lifted and Iran benefited from the renewed source of revenue, how would the coalition countries respond? Would it trigger a nuclear arms in the Mideast, as most of the countries in the Mideast believe whatever nuclear deal is reached that Iran would cheat, just it as has had on previous agreements. Would it be the final indicator that prompts Israel to take matters into its own hand and bomb Iranian Nuclear sites? The short term impact on the oil market should there be a nuclear deal, might be more oil supply from Iran thereby further depressing crude prices but this could change on a dime depending on the reactions of the coalition countries. I think supply/demand are indicators that are certainly the crux in the formation of a commodities price but with Oil, geopolitics are the dominant theme to be followed closely in the formation of short, medium, and long term outlooks.

What is the global outlook for Smart cities over the next 12 months?

To talk about the global outlook for smart cities, we first must describe what it means to be a “smart city” and also explain what is Cisco’s vision for cities around the world. Taking a step back, we need to explain the concept of the Internet of Everything (IoE).

The Internet of Everything is Cisco’s vision of a connected world, in which People, Data, Processes and Things are all connected and generate added value to everyone, including cities. By 2020 Cisco estimates that we will have about 50 billion smart devices existing all over the world connected to the Internet. This technological transition is called Internet of Things. This path brings unparalleled value of data that Cities can leverage to improve themselves.

Our estimates calculate a total IoE market at $19 Trillion dollars over the next 10 years, in which 4,6 Trillion dollars come from the Public Sector area. That value is the value at stake revenue that comes from various areas within a city. Optimization and creation of new infrastructure services; adoption of new technology within their internal teams; centralization of services and networks; new governance models, managed services, etc.

Cities today are looking to multiple ways to become Smart cities. But what does it mean to become “Smart”? There are multiple layers and angles to address this concept of smart city:

For cities, the main focus and challenge will be how they can better manage their infrastructure in a way that not only enables them to provide better services to their citizens, but also optimize their OPEX and centralize all departmental IT networks, converging them into a single foundational network.

Besides that, being smart is also being sustainable in the way that it focuses on the continuity of the city based on three main pillars: the environmental, the economic, and the social. Many cities today are already investing in accelerators and their startups in a way to generate such innovation and wealth, which will also be key for the city to grow.

Considering the above, cities of today are focusing on the above areas while walking the path to become “smart”:

Government

The will of a group of public officials determined to create a transformational strategy for its city, not only by setting up a digital strategy roadmap, but also how every department will cross-functionally work with each other. Alignment on joint budget and strategic initiatives around economic development is also key as well as monetization strategies for a quick ROI turnaround of their install base.

Technology

To understand the current infrastructure of the city and also what is needed to create the foundation of a single unified platform that connects every city department, to serve its city team members as well as citizens. To focus on areas like parking, lighting, traffic, safety and security, operations center, environmental, water and waste management, in order to optimize such areas, which are so critical within the city. Collecting data through sensors, which are processed in the data center to generate value that makes it possible for city officials to make better decisions.

Citizens

To attract talent and retain highly educated individuals, whilst at the same time, providing e-government/Wi-Fi tools for all citizens within the city to bridge the digital divide and provide more opportunities for everyone to be able to grow and become empowered as an active citizen.

Governance

To drive the creation of key legislation that enables these new services to appear in order to simplify bureaucracy in order to allow a better agile set of services. To drive key initiatives that enable a better approximation of the citizens to their government through a participating democracy.

Partners 

Not only technology partners, that integrate, manage and operate these smart services, but also economic partners, who can drive foreign direct investment into the city, allowing but new job creation, revitalization of the economy and key areas of the city.

Coming back to the initial question, and based on the above context, the global outlook for the next 12 months is going to be very exciting in the smart cities area as we are starting to see a convergence of these key factors that enable cities around the world to become smart. Every city is different in specific use cases, but the ingredients are all there.

We clearly see cities today coming forward with their own structured digital agenda, aligning their several internal departments to meet the needed requirements, set budgetary needs as well as resources and structured planning in order to start working in deploying smart city solutions. All of this while working together with key stakeholders to build an eco-system of partners, subject matter experts, which will help them manage and deploy all of these complex solutions.

Cities today are in competition with each other and the fight is to create the best city in the world that has the very best infrastructure and services, that serves their current citizens, attracts top talent, local and foreign investment and generates wealth. 

Which trends will shape the obesity treatment market in 2015?

It is well known that obesity is a pandemic. More than one third of the global adult population and around 20 percent of children in industrial countries are overweight or obese. In some countries we are starting to talk about a widespread disease. This development is dramatic and, without intensive activities around the treatment and the prevention of obesity, it is possible that nearly 80 percent of the global adult population will be overweight or obese by 2030. Policy, research, companies and society are faced with enormous challenges regarding the treatment, avoidance and medical assistance of obesity and secondary disease.

In 2015 the focus on obesity will be on both the prevention and treatment of the disease. .Regarding obesity prevention, there are several trends supporting people in their nutritional behavior and in strengthening the psyche, as well as their knowledge. Naturally, the market potential of low-fat food and mental assistance etc. is increasing and, naturally, the potential of the obesity treatment market is increasing, as is the supply of treatment methods. Obesity prevention and treatment will be part of new efforts undertaken by different countries.

Some trends that will shape the obesity treatment market in 2015 are:

  1. Economic development of countries and increasing income of the population will extend the market potential for current as well as new obesity treatment.
  2. Further research will be implemented to improve current treatment and to develop new treatment methods.
  3. Social media can change the attitude of young people to what it is to be overweight.
  4. Innovative IT can improve and campaign several obesity treatment methods.
  5. National programs on prevention can support the cooperation of stakeholders and the affected people.
  6. National legislation can lead to higher investments in prevention by health insurances or companies.

These trends can be accompanied by trends in the obesity treatment market, such as:

  • extension and assistance regarding nutritional behaviour and consultation
  • extension of early detection screening programs
  • development of Remote-Patient-Monitoring
  • innovative data bases and research programs
  • further research on indicators and coherences
  • analysis of daily health by mobile devices
  • on-going development of gastric surgery methods
  • innovations in metabolic treatments and surgery

Obesity is a global issue. The causes of obesity are different. The obesity treatment market still has a high potential in many countries of the world. Some treatment methods are available globally but market trends are going to be defined by national activities and cultural issues in particular. 

Can multinational retailers be successful in the Chinese market?

Since 2004, China has officially liberalized restrictions on the store opening of multinational retailers. Multinational retailers have experienced about 5 years of rapid expansion and development. In 2010, the multinational retailers collectively suffered a crisis of survival in the Chinese market. Carrefour, Home Depot, Best Buy and even retail giant Wal-Mart announced the closure of some stores or withdrew from the Chinese market. It was unexpected that the multinational retailers would encounter Winter in a market full of infinite potential. While McKinsey estimates: “From 2008 to 2025, just for Chinese cities, the consumption increment will be equivalent to that of creating a new market”. Undoubtedly, China’s retail market is full of potential.

To further emphasize my point, multinational retailers have the opportunity to succeed if they can implement the correct strategy in China. To this end, the following points require some attention:

#1:  To better serve the middle-class customer segment. According to McKinsey, the ‘’middle class will account for the largest share of consumption, affluent and above households will lead consumption growth by 2025 in China”. Significant expansion of the Middle class brings new demands and multinational retailers should be prepared to serve this new, emerging customer segment: Relatively mid to high end categories; Customized products and services; Seamless omni-channel retailing; More comfortable shopping environment etc.

#2:  To invest in retail service products. Retail services meaning product lines which can enhance the core retail experience by offering value-added products and services. Products including: Prepaid card and 3rd party card, Financial Services (Credit Card, Money Transfer, Installment Loan, Insurance etc.), Convenience Products (Welfare Lottery, Bill Payment, Extended Warranties etc.) and Lifestyle Products (Tourism, Fitness Center, Children’s Education Center etc.). Retail Services is still quite a new idea and field for retailers in China. It can help retailers gain market share in four ways: meet customers needs, drive traffic and sales, reduce cost of payments and provide standalone profits. At Tesco, the income of Retail Services products accounts for almost 7% of its total income. So, for multinational retailers, the earlier they invest in this field, the earlier they will get returns from both financials and customers’ satisfaction.

#3:  To steer the front from 1st and 2nd tier cities to 3rd and even 4th tier ones. According to the China Statistics Bureau, in 1st and 2nd tire cities, retail employees annual income growth is 5-10% and a core gold district annual rent increase is over 10%.

Along with the soaring rate of manpower and real estate costs in 1st and 2nd tier cities, it has been declared the end of the dividend era, and the retail industry will now step into an era of meager profit or worse. Instead, Midwest, 3rd and 4th tier cities will be the driving factors of China’s urbanization. We can get a glimpse from the performance of China’s Top 100 retail enterprises; the average annual sales increase was 6% for those in 1st and 2nd tire cities, while this number was 18% in 3rd and 4th tire cities. Multinational retailers should actively build strategic alliances with local enterprises to seek entry into the market, or select the appropriate approach in anticipation of the future development of 3rd and 4th tire cities.

#4:  To invest to improve food safety. In China, food retailing is definitely an important pillar of the retail industry, food products sales account for over 50% of retailers’ total sales. The frequent food safety incidents have made the customers lose confidence in retailers. With customer attention increasing on food safety, multinational retailers can bring their best practices and experiences in other countries to the Chinese market and to invest to make it their core competitive advantage.

Opportunities and risks coexist. Multinational retailers should face the reality that the local Chinese retailers have made significant progress in recent years, learning from local players and the multinational retailers should be prepared to evolve with them in the market.

What are the top three opportunities and challenges faced by the raw material industry over the next 12 months?

From the many challenges faced by the natural raw material industry, I can see the following three being the most important to the supplying industry of the perfumes and flavors industries and their customers, the fast moving consumer goods and food industries: 

  1. Supply availability
  2. Mounting regulatory pressure and certification needs
  3. Local versus global

Those three are not particularly new but these themes have been increasing in importance over the past 10 years and they repeatedly come to the front of the minds of sourcing professionals in our industry.

Let’s look at them in more detail:

1.       Supply availability

More than ever, our industry is governed by low inventories due to cash flow and financial short-term results, coupled with uncertainty of demands, due to the ever increasing overabundance of choices faced by the consumers and often uncertain economic times. It does not allow for predictability, forecast and long-term commitments, as used to be the case in the early 2000s. Unfortunately, when one talks about natural raw materials, one needs to plan ahead, commit to volume, price and guarantee working farmers a steady income. There is less and less commitment in the industry, coupled with two additional factors that are of increasing importance year-on-year: on the one side we have an internal competition for the skilled farmers and their lands, attracted by other jobs or other crops (e.g. palm oil), and on the other we seem to see an increase in natural disasters badly affecting some harvests every year (e.g. citrus this year).

My advice: fight your inventory pressure and go back to partnership, long-term partnership and contract with your natural suppliers.

2.       Mounting regulatory pressure and certification needs

The mounting regulatory new rules and regulations is in itself a positive factor as it aims at ensuring a better quality of products and allowing the consumers to know that the products are safe and do respect national rules and regulations. In addition, it somehow also rewards those in our industry who comply with those rules by forcing the players who are not 100% compliant out of the market. However this means that, for a while, less supply (even if it was of bad or adulterated qualities) is available and all demands concentrate on less supply. In the long-term the supply-demand balance will be re-established but in the short-term it means there might be less material available to all and almost always more expensive.

My advice:  be close and fair with your supplier, ensure that you treat them well and commit when needed on an annual contract covering at least 2/3 of your annual forecast needs.

3.       Local versus global

There is a clear trend in the market for natural, close-to-home, organic, etc… coupled to push for many of us to reduce our carbon footprint and come back to a more “natural” way of life. It indeed increases the pressure to source more raw materials locally and/or at least closer to the consumer.  In the fragrance and flavor industry, and I am sure for many of its clients too, this is rather difficult to manage. Today, factories are often sized for regional productions and deliveries taking sourcing and supply to the scale of a country or even a continent – they would have to be down-scaled and the whole manufacturing footprint would be redefined over time. On the raw materials side, we are facing a very difficult, if not impossible challenge, as many natural raw materials do not grow in every country of the world but only in a few particular ones.

My advice: Don’t try to grow plants anywhere to extract an essential oil locally, but look closely at bio-technology and the possibilities it offers.

Opportunities for the fragrance and flavor industry

As always, the market is looking for innovative new products and ideas. Therefore the industry should:

  1. Try developing fragrances with added functions, like active ingredients, where the perfume is not only perfuming but also adding a benefit to the final product. The same goes for flavors.
  2. Sustainable, fair and natural are all attributes which strongly resonate with consumers today and the industry should offer more choices to clients and consumers. The challenge lies with the price that consumers are ready to pay for those products.
  3. Closer contact with customers has always been a key successful factor but today it is even more important than before, as clients need flexibility and speed. Global organizations should decentralize and localize as much of the customers interface as possible, without losing the benefit of global processes and systems.

What are the top opportunities and challenges faced by automotive suppliers?

Most people, who are not from the sector, cannot imagine the complexity existing behind a product like a car passenger. Many relate the word complexity to the several technologies employed. That is true but there is more, something bigger than the technologies: the organizational machine which regards many parties.

The main actor is surely the car maker. They involve and pull in its mechanism, directly and indirectly, 1st suppliers, 2nd tier suppliers, service providers, external designers, external consultants, logistic companies etc.

Each of these actors plays a key role, but some are innovators whilst others are followers. The difference between an innovator and a follower is crucial: it means being out of the crowd or being jammed in the heart of the war on cost effectiveness.

All the automotive participants in the development and production of a car model or platform (basically the same car but different “skins”) have their own characteristics and all can be considered suppliers, but for the sake of this article let’s just refer to the suppliers of the direct components (tier 1 and tier 2).

The answer to the question in the title is apparently easy: as an innovator you will just have opportunities. But what does being an innovator mean? What does innovation mean for a supplier player in the automotive industry?

We may say that the best 2nd tiers are those who are manufacturing processes innovators. They supply components, single parts that are delivered to the 1st supplier, to become parts of modules or systems. Their parts have to be the cheapest, and that means that their manufacturing processes have to be the fastest and, if they want to compete with the fast growing countries, their processes should have the minimum employment of manpower. These suppliers are normally capital intensive, and the luckiest are involved by the 1st tiers in the co-design process, so they can work using the so-called design for the manufacturing practice. This last factor is important for cost reduction and control, since making the manufacturing easy helps to be competitive regarding the transformation, also regarding the hidden costs that arise later for the quality problems during the series production.

The 2nd tiers have to catch the opportunities given by the difficulty in managing the sophisticated manufacturing processes. Even in the production of “simple” parts, their technologies drain capital and their human resources should be capable enough to convince the 1st tier to approve the simplicity.

The 1st tiers are normally less reactive in approving engineering changes. They often say that nothing can be changed because the component is part of a system that has been designed by the car maker.

I would say that there are more challenges and threats than opportunities for a 2nd tier. Aside from the capabilities of top management (normally the sole entrepreneur) in attracting the talented engineers (design for manufacturing and decision on the manufacturing processes) and in dealing with the financial institutions (capital intensive assets), the future of the 2nd tiers is influenced by the volume of the 1st tier supplier. The most frequent cause of bankruptcy of the 2nd tier is represented by the planned volume (n. of parts produced per year) that is not met.

The 1st tier supplier has other kinds of problems. It is required by the car maker to localize its production sites near the car assembly plants. It is also required to come up with new proposals to innovate the product continuously, better performance and cheaper. Their investments are relatively safe since their agreement with the car makers are with the clause “take or pay”.

This kind of organization is normally a system and module developers and its plants are pre-assembling the lines. They are big, global organizations. As they influence the business of the tier 2, their business is directly influenced by the car maker. The biggest mistake they may make is to have unbalanced business with one customer. There are much more product innovation capabilities, and therefore, for a tier 1 independent than those linked to a single customer or under the control of the same customer.

We might say that, in general, innovation is the secret to maintain the current opportunities and to win the challenges for the future.

Based on my experience, working as car maker, first tier and second tier supplier, I strongly believe that the 2nd tier has to innovate its manufacturing processes and the 1st tier has to be proactive with product innovation; but these are only prerequisite, it’s 50% of the job to survive. We have to remember that both are dependent on the main customer.

Thinking out of the box, we may say that the main customer is not the car maker. The car industry supplier should understand the trend in order to secure its business for the long-term. The main customer is the consumer, the driver that choses the model at the dealer’s. If it is true that the 2nd tier depends on the 1st tier and this depends on the car maker, all 3 depend on the final consumer.

Now, provided the prerequisite of the innovation, the answer might be: the automotive suppliers should simply get opportunities by serving the best car sellers.

And which kind of cars will the people buy in the future? What will people want? Are we so sure that we will still wish to own cars?

In the most civilized countries, the car is considered an obsolete concept. People consider the car just a vehicle for transportation. It is no longer considered a status object, it is simply considered an expense which one hopes to avoid, or at least reduce.  It is different in fast-growing or developing countries; the car is indeed still something to show.

The suppliers should make strategic decisions for the medium and long term. For the medium term they should follow the car makers that are well positioned in the premium segments and with good reputation brands, the best sellers in the Asian markets (opportunity). For the long term, they should look at the past, when the car was invented, and follow the one or those that are really reinventing the car for the future (challenge).

They should remember a basic concept for the relatively short term: the business opportunities are where the GDP grows. It grows with the investments in the infrastructures and in mass production, where the car industry plays a fundamental role. The Asian countries are nowadays the most representative countries where the Governments plays a Keynesian role, supporting both sectors.

Regarding challenges for the future, the supplier should be more wary of those who are not consistent with the volumes, with unsuccessful platform projects, or those who sell an electric motor on a traditional chassis or even alternative fuels for the internal combustion engine.

In reality, the car has never been invented, it has just been a continuous development of the coach, when the horses were replaced with steam and then an internal combustion engine. I feel that many car makers are doing the same regarding the electric vehicle. In my opinion, the only car maker that has had the right vision and the courage to develop a completely truly new car concept around the electric motor and the batteries is BMW with the iProject. BMW has developed a complete project, including the dedicated assembling plant. That is vision. The challenge of the suppliers is to monitor these kind of initiatives and to try to understand whether the vision may meet ‘what people want’.

The electrical car is still considered a challenge but, since the car already is and will be a more anachronistic object compared to public transportation, I’m sure that no other technologies will be considered other than electrical power.

The vehicle will be simpler, lighter and more equipped with telecommunication technologies. It is not excluded that the car of the future will be made by Google/Samsung rather than by the current players. The car is and will be a mix of assembled components and the suppliers with the right vision will continue to play a fundamental role in the future.

The consumers of the fast growing and emerging markets will achieve the same Western needs in around 20-25 years. A second round of M&A between the car makers will characterize the end of the next twenties. The 1st tier car industry suppliers will be represented by just a few big organizations as well. The successful 1st tier suppliers will be more similar to multi-technologies and divisional companies, such as Bosch, Siemens, Panasonic and Samsung. The 2nd tiers will continue to be specialized and increasingly concentrated in the low cost countries, besides the producers of the manufacturing processes.