Issuu on Google+

VALUE PARTNERS NEWSLETTER - NR. 05 - APRIL 2011 - POSTE ITALIANE SPA - SPEDIZIONE IN ABBONAMENTO POSTALE - 70% - DCB MILANO

Power-Up Power-Up Pow

April 2011

N EWSLETTER


Value Partners Newsletter Published by Value Partners Via Vespri Siciliani 9 - 20146 Milan - Italy Editor: Tina Guiducci Editorial co-ordinator: Daniela Pititto Registered in Milan. Reg No. 84-01/31/2008 Printed in March 2011, on recycled paper, by Grafiche Mariano valuepartners.com newsletter@valuepartners.com Copyright Š Value Partners S.p.A. All rights reserved This newsletter is sent by Value Partners S.p.A. If you wish an electronic copy or would like to be removed from our mailing list, please write to subscription@valuepartners.com and we will act accordingly


NEWSLETTER

Anyone who’s ever played Pac Man, Bubble Bobble or Mario Bros – and there are millions of such people all over the world – knows what a power-up is: an extra advantage. Power-ups are objects, abilities and qualities that let you exceed various levels of play, and win or extend the game. Being lucky’s not enough to get a powerup, though. You have to be good from the very start, brave, and determined – in a word, skilled. And if you are, you’re rewarded. With this in mind, we’ve called the first edition of the 2011 Value Partners newsletter Power-up. It introduces companies and sectors that, even during the recent economic crisis, focused on their skills and capabilities, and then emerged with an advantage that looks hopeful for the start of the decade. No sector was left untouched by the crisis – not even the automotive sector, which witnessed successful turnarounds, as with the case of the Italian company VM Motori or the Carraro Group. In this issue, Enrico Carraro shares with us the most challenging moments of his group’s global turnaround. We also take a look at China – a market that is set to buy a quarter of all cars sold worldwide this year. It’s also interesting to discover the power-ups in the luxury goods and fashion industry, which sharpened its marketing tools, centring every initiative on the new certainty that consumer choices are based on emotions. Value Partners met Riccardo Bellini, vice-president of Diesel, a company that successfully focused on authenticity, innovation, and brand distinctiveness, beginning with the assumption that the consumer is no longer the marketing manager’s boss, but rather his or her lover. The energy sector is also at a turning point. The uncertainty around government incentives for renewable energies in all countries is forcing operators to defend themselves from the risk of a possible bubble, as we hear from Vittorio Chiesa, Professor at the Politecnico di Milano, or to look for new investments in energy savings sectors, where LED lighting technology – an extraordinary power-up – shows promise of a new revolution. Under the pressure of reducing emissions and dependency on fossil fuels, the largest car and utility vehicle manufacturers are investing in the electric car, which is preparing for mass production and a real gain in popularity. It will be interesting to see not just the winning models, but also the strategies and investments from public and private players to create the necessary infrastructure for recharging points. Even in the health-care sector, the crisis and increasing competition from generic medicines has brought about an original power-up: the gradual shift towards a ‘patient-centred’ model. Pharmaceutical companies are looking for the key to success in an ongoing relationship with the patient, by emphasising prevention and promoting a healthy lifestyle. ‘Power-up’ is also the recurring theme with which Value Partners has searched for value creation niches since its launch, even in more conventional businesses, in order to gain a competitive advantage during a crisis, and be ready to take off again with new energy, new products, but most of all, new ideas.

3

Power-Up Power-Up Pow

Power-up April 2011 fifth issue 4 Moving with the times: managing for value in the automotive sector 6 Carraro 2.0: growing globally beyond the turmoil 9 Automotive components in China: opportunities and challenges 13 The consumer is my lover 14 Green economy Cassandras: are we headed towards a solar photovoltaic bubble? 17 Green energy bubbles: an academic perspective 19 LED there be light: are you ready to replace your light bulbs? 21 The electric car: last century’s idea, this century’s future 27 New needs driving the change in health-care business


Power - up

Moving with the times: managing for value in the automotive sector Alberto Calvo, Milan office

There is compelling evidence that the automotive sector has been hit hardest by the global economic and financial crisis. Since late 2008, in fact, the news has been flooded with announcements of severe supply chain disruptions, the bankruptcy of tier-1 suppliers, proposals for government bailouts, massive protests by workers’ unions and the rescaling of production capacity almost everywhere on the planet.

Still, despite a dramatic slump in sales volumes across all market segments, we believe that companies along the entire value chain can create solid value by adopting wise and long-term-oriented management practices – without being forced to consider industry consolidation as the primary way out of this crisis. As a matter of fact, numerous industry analysts have praised the spectacular comeback of Ford in 2009, when all of its direct competitors (GM, Toyota in the US, Daimler and PSA in Europe, just to name a few) were fighting for survival in the direst of straits. The performance of Alan Mulally as CEO is even more remarkable considering that Ford has refused to accept any governmental support to weather the recession, and has focused only on getting good products out of its plants at the right cost, channelled through a well-balanced dealership with a fresh, effective marketing strategy. On a global scale, KIA, too, has recorded an astonishing boost in new car sales, both in Europe and in the US. The company has been able to match the cash saving needs of most of its users and customers during the crisis, with a well-tailored, no-frills product offering, built over good quality product platforms and supported by innovative commercial policies. In the industrial sector (such as agricultural and construction equipment manufacturing), bottom-line success stories in mature economies are still difficult to see. This is due to the relatively high intensity of capital and the strong correlation with the large cyclical up-and-downs of the real estate, construction and engineering markets. However, the leading players are undergoing profound restructuring programmes to get themselves in better shape – before demand will bounce back. In this business environment, we have a remarkable story of turnaround to offer, which allows us to illustrate and pinpoint the core ingredients of a successful “surfing the market tides” strategy. VM Motori, an Italy-based, tier-1 supplier of high-performance diesel engines on a global scale for both automotive and industrial OEMs, experienced – like many of its peers – a dramatic wake up call in November 2008. This was when most of its customers suddenly decided to stop all engine purchases, thus reducing internal activity to almost zero. Management, however, quickly realised that the world had changed for good, and put in place a very aggressive action plan to keep its operations alive during the storm and ensure healthier conditions when a “new normal” would set in. Start preparing now for future growth

Managing a deep crisis: a three-pronged approach to corporate restructuring

Resize your capacity Stop the bleeding

› Ensure cash flow for 18 months

4

› Get internal saturation close to 90%

› Reshaping portfolio › Launching new products › Entering new markets › Forging alliances


NEWSLETTER

As was the case for VM Motori, all industry players that are hit hard by this sort of abrupt market downturn and want to preserve their ability to thrive and succeed in the future should draft plans centred around the following overarching goals. At the very beginning, make sure your operations have enough cash to survive the 18 months ahead It is essential that company management quickly engages and builds a fruitful collaboration with lenders and shareholders, discusses the situation in a transparent manner, and presents the board with a bold action plan – along with any impact on company figures. More importantly, this eliminates complacency and “happy ending” biases, which most of the time, don’t fully consider the possible extent of the crisis. A top-level, scenariobased new industrial plan, which makes full reference even to the worst case of the new competitive context, is key to ensuring good financing. At the same time, a war room aimed at finding and protecting all possible internal sources of cash generation and freed-up capital must be established. Usually, fixed production costs, general expenses and working capital dynamics are the main target of such a task force, which must also typically reset priorities in capital spending. Take the opportunity to significantly adjust and resize the capacity of your operations In a world that will run at two different speeds (replenishment and substitution in mature economies; expansion and growth in emerging countries), both your physical asset base and your staffing levels are probably inadequate for mid-term market demand. Many players have to come to grips with reality and to take decisive actions to restructure on both fronts. If it is more difficult for management to readjust production capacity in the short term, the institutional framework devised recently by many governments allows for smooth transitions and the displacement of labour capacity across different industries and companies. However, this critical task requires a proactive, hands-on approach and skilful negotiation with public authorities, government representatives, local communities and stakeholders, which have to be carefully managed through a proper communications strategy. Lay down the foundations of your company’s ability to compete in the future now Even in standardised, consolidated industries which are characterised by high levels of economies of scale, creative business models can prove successful in the competitive arena. Each company must ask itself on the basis of which distinctive assets or capabilities it can deliver material value to selected customers. Interestingly enough, VM Motori has, over time, crafted a unique selling proposition to OEMs unable to afford the development of purpose-built, low-volumes production lines within those OEMs’ product ranges. With a modular “core” engine platform, and by making enough customisation available for customers (for example, in ancillaries, interfaces, and accessories), the company has gained a strong reputation and distinctive positioning among its peers. Most players in any business may realize large benefits by fully embracing a true, open co-operation approach with selected customers, suppliers and competitors, in all of those situations where stand-alone strategies are not sufficient to address fundamental industry barriers, such as in product development, distribution networks, and supply chains. Despite the fact that co-operation has long proved successful and is widely used in today’s management practices, it is quite common to come across situations where management resists a true open boundaries mindset. This denies them the opportunity to create possible synergies – for example, teaming up with competitors by pooling the resources allocated to non-critical phases of their business; slashing costs by allowing lowcost country suppliers to provide larger portions of component production, redesigning logistic footprints and quality control procedures to speed up deliveries, and reducing material

5

Stop the bleeding at VM Motori: 1st year impact Production fixed costs

-10/15%

General expenses

-30%

Inventory (% on sales)

-50%


Power - up

inventories. Strategic partnerships, joint ventures and licensing contracts in untapped markets are typical examples of such moves. +

Diesel engines competitive map: strategies must reflect distinctive capabilities Selection

% captive revenues

Large scale, OEM driven integrated players, competing on volume

Niche/stand alone players, competing by “extracting complexity” from big OEMs operations (speed, customisation, low volume batches)

Large/ independent engine producers, in open markets competing

% of non-automotive volumes

+

Moreover, a critical task for managers is a structural business portfolio de-risking: most of the time, an internal “natural hedging” against market fluctuations and business volatility can be obtained by rebalancing the weight of businesses within a portfolio. For instance, automotive and industrial can be, by a non-negligible extent, counter-correlated, thus limiting the exposure of the company bottom line to unpredictable events within international markets. Finally, as our experience shows, in difficult times like these, the best CEOs consistently stand out because of two critical capabilities: • A bold, energetic leadership style, enabling them to mobilise company ranks, redesign the company and banish the negative attitudes that very often leak into line managers. This is especially valuable for small and mid-size companies (e.g. “This has never worked here, we’re too small, when the big guys show up; we’ll just follow….”). • The ability to quickly frame a problem, simplify internal decision-making and identify high-value options amidst a jungle of possible alternatives, which always get enthusiastic support by any sort of advisors in the midst of a deep crisis.

Carraro is an international group that leads the world in highly efficient, eco-compatible power transmission systems. Founded in the 1930s by Giovanni Carraro, it is divided into four independent business units, controlled by the Carraro SpA holding, each with a specific mission and with a different risk profile and targeted strategies. The Group’s core business consists in the design, manufacture and sale of integrated drivelines (axles, transmissions and electronic controls) for off-road applications, and agricultural and earthmoving machinery. Carraro is a longstanding partner of the main international OEMs, such as AGCO, CNH and Caterpillar.

Carraro 2.0: growing globally beyond the turmoil An interview with Enrico Carraro

In 2006 the Group took over Elettronica Santerno, a company specialising in power electronics. This operation enabled Carraro to combine mechanics and electronics, and also to enter into new, rapidly expanding sectors, such as renewable energies.

6


NEWSLETTER

The financial and industrial crisis in 2009 had a dramatic effect on the Group, as it had to deal with a drastic slowdown in the markets and also the loss of orders from the main OEMs, which turned to their own warehouse stocks. After years of growth the Group suffered a loss in turnover, from almost € 1 billion to € 500 million, however thanks to a quick, committed turnaround process, it managed to contain operational losses to € 1 million in terms of EDITBA, and to tackle the recovery with success. Today Carraro has reached a new competitive position, approaching precrisis turnover figures (> € 710 million), with a business model that has been completely updated, more competitive products, and a stronger team and client portfolio. Value Partners met with Enrico Carraro, Executive Vice Chairman of Carraro Group, to analyze the phases and the difficulties of a successful turnaround in a mature industry. A relaunch and reorganisation process is unsettling and risky in itself, but it becomes even more so in the framework of a crisis. The Carraro Group has managed it, but how? A fall in demand, such as that which took place in 2009, has no precedents. Nobody, not even our clients, could have forecasted it. What’s more, we were coming out of a doublefigured period of growth. The destocking effect along the chain increased the already considerable reductions in volumes, which were close to 70% in some cases. In 2009, our turnover halved. Such a situation couldn’t be dealt with using ordinary measures. We realised right away that a total rethink was required, with regard to the company, our business model, and geographical position. Therefore short-term intervention was required to ensure the ‘survival’ of the Group, while maintaining long-term vision. Consequently the Group’s strategic relaunch plan, known as Carraro 2.0, was created, with two fundamental guidelines: first, to maintain and strengthen research and innovation activities, crucial for sustaining the Group’s competitive position, and second, to look to emerging markets, working within a local framework. What aspect did you start with? With the most important one, the customer. Basically because never more than at that point, during such a difficult period, had we realised how important it is to listen to our own partners, to work out how to ensure the presence of the Group in the various markets together. Nothing was how it was, no long-term forecasting could be done, we just had to play it by ear. A high level of flexibility was required of everyone. What was the next move? We concentrated on the product. We analysed and re-analysed cost structures, assessing new component standardisation processes, reducing complexity and re-organising design and manufacturing processes. TTM (time to market) improved immediately, and hidden costs relating to lack of quality were eliminated. At the same time we operated within a local framework, thanks to industrial platforms located in various emerging geographical areas, in order to guarantee the best products for each market, with the solutions and level of sophistication most suited to the various contexts. Another reason for this is that technology in itself does not always meet every requirement. On the established markets we followed the specific actions of the main OEMs, by working on advanced transmission systems (automatic transmission with electronic control, hybrid power trains, and continuously variable transmission). How would you define Carraro now, after such extensive reforms? Carraro is a Group that has been strengthened, with a holding that defines strategies and has 4 heavily focused business units, with independent objectives. Aptitude for change is in our DNA, and we are now experiencing the umpteenth significant expan-

7

Enrico Carraro joined the family business in 1985. In 2007 he accepted the office of Executive vice chairman of the Carraro SpA board of directors (BoD), working alongside the Chairman in leading the Group. He also promoted the new business development initiatives, under which he co-ordinated the definition of new businesses and the relative development programmes over the medium and long term. He chairs the Group’s strategic committee, a consulting organization to the BoD. Enrico Carraro is also director on the board of Assosolare, the national association of the photovoltaic industry affiliated with Confindustria Energia.


Power - up

sion phase. From the agricultural equipment we were producing in the ‘30s we went on to tractors, and from complete vehicles to transmission systems. Now we’ve opened the door to electronics applied to mechanics and the renewable energy sector. The Carraro brand has always been recognised as a technological partner by the Group’s customers. The Group has been active for several years in the renewable energy sector with Elettronica Santerno, a company with a distinctive business model and a double-figured rate of growth, compared with the mechanics sector. Has this aspect further complicated or supported the relaunch process? Integration between mechanics and electronics has been a key factor for some time now in the industry, with applications ranging from electric vehicles to large earthworks machinery. With the acquisition of Santerno we capitalised on our technical knowledge of the consolidated businesses, and at the same time we seized the opportunity to extend the solutions we offer, also with regard to new applications linked to renewable energies, such as photovoltaic and wind energy. We found ourselves dealing with markets undergoing exponential growth, which have a logic that is completely different from traditional thinking. We started with a solid product range, with inverters which are very advanced technologically, and very competitive. Quick success soon followed and the undisputed leadership position of the small company at Imola, which grew exponentially in a very few years. What did you give priority to during the relaunch process? Straightaway, and day by day, to managing cash flow. In a serious crisis situation cash flow has to be monitored continuously. Strengthening financial position is the foundation on which an industrial relaunch plan should be based. It’s a rule that shouldn’t be disregarded. The Carraro Group is one of the iconic companies of Italian industry - family company, longstanding reputation, connected to its roots, now a multinational. How did this transformation come about? We are entrepreneurs, we’re passionate about our business. Over the years we found ourselves dealing with various market scenarios, and we never lost our industrial spirit for advanced technology, cutting-edge products, and new production platforms. That’s just how we are. Our pioneering experience in India followed in the ‘90s, and then the globalisation process that led to us being present with production activities on every continent. Now it’s a case of foreseeable, compulsory choices. Ten years ago, that’s not how it was. Management is a critical factor in this phase. Is it possible to make a radical change in strategy, without changing the management team? We entrusted the relaunch to a new CEO, Alexander Bossard, and capitalised on in-house talent with new challenges, by assigning significant amounts of responsibility. As a result we showed we were changing direction, but also confirmed one of the Group’s values - team spirit. Do you regret not having done something, either sooner or better? I don’t have any regrets, but I often think of how to avoid difficult situations in the future. This doesn’t curb our desire to grow. Short-term measures should only represent a small part of a much broader plan. The objective has to be permanent transition towards new markets, in terms of applications and areas of the world. There’s always an opportunity to be taken. However anyone wanting to run a company now is called upon to make an extra effort, compared with the recent past.

8


NEWSLETTER

What do you feel has been the most decisive action taken, and of which you’re most proud? And the most upsetting one? It’s not about my direct actions. I’m proud of the cohesion, which has been demonstrated by the facts, the management team, my father, my brother Tomaso (chairman and CEO of Gear World, Business Unit Components), the managing director Alexander Bossard, and the new BU and department managers - all - working together and in full harmony. The most upsetting measure was, without a doubt, having to plan a significant reduction in staff, about a year ago. Now our colleagues almost number that of pre-crisis levels. A positive sign however you look at it.

China has been the world’s largest automotive market since 2009, and it continues to hold great potential: auto sales – particularly for fuel-efficient compact vehicles – are expected to keep growing in the near future, and China is likely to account for about a quarter of global car sales by the end of 2011.

The government’s stimulus policies – transition from an investment-driven economy to a consumption-driven economy; incentives to consumers and producers Increased personal disposable income – 15% GAGR 2000-2009, set to exceed US$ 2,000 in 2011

Automotive components in China: opportunities and challenges Enrico Lanzavecchia, director, and Tiger Shan, principal, Beijing office

Growth in China’s auto market is accelerating and soon China will account for a quarter of world auto sales

Total vehicle new sales: China vs the world Million units, %, 2007 - 2011E CAGR 2006-2011E World total

71,9 88%

68,3

65,4

86%

79%

68,8 77%

74,5 1%

Note: 2010-2011E China vehicle new sales are forecast by JP Morgan; world vehicle new sales are forecast by WW Global Insight

76%

More developed consumer financing market

-3%

Competitive market and more affordable vehicles – from luxury to everyday consumer product Improved road infrastructure – national highway and intra-city transportation systems

Source: CEIC, JP Morgan, The Economist Intelligence Unit, Value Partners analysis 19%

China

12%

14%

21%

23%

24%

2007

2008

2009

2010

2011E

2009: Government stimulus PV penetration: 39 vehicles/1,000 people vs global average of 120 vehicles/1,000 people in 2009

Several factors are driving this expansion: • The positive economic trend results in increased disposable income for Chinese consumers, who also benefit from the developments in the consumer financing market • The government stimulus policies are increasingly oriented to sustaining private consumption, through incentives to both consumers and producers • Competition and offer enrichment are making new car models affordable for larger shares of the population (overall car penetration is still below 2 percent in China), and improvement in road infrastructures are facilitating usage outside the main urban centres. The rapid ageing of vehicles park will also result in a sustained expansion of the postsales auto parts market.

9


Power - up

Potential in China’s auto parts market has been unleashed and rapid growth is expected in the years to come

Revenue of total Chinese auto parts industry US$ billion, %, 2005 - 2015E

China’s after-sales market is growing rapidly: as the age of the country’s car fleet increases, the demand for spare parts will grow faster than vehicle sales growth

CAGR 2006-2011E 350

The market is open for 100% foreign ownership and most global brands have already established a presence

20%

Domestic capability is still limited: more advanced parts, especially for high-end platforms, are still imported from overseas, but the government has stepped up their “localisation efforts” 67 Source: KPMG, JD Power, Value Partners analysis

2005

100

2008

2015E

Backed by the government, there are subsidies for R&D by domestic players

Auto parts offer attractive opportunities for foreign producers, because the constraints are lower than in vehicle production (for instance, 100 percent foreign ownership of local operations is allowed) and the capabilities of domestic players are still limited (especially in electronics systems, transmission systems, fuel efficiency and safety solutions). In fact, foreign players dominate in the Chinese components market, with an estimated share of 60 percent – growing to about 80 percent for sedan components. Because domestic capability is limited, more advanced parts – especially for high-end platforms – are still imported from overseas. Continued growth will be accompanied by some substantial changes in the composition of both local demand and local offer: • On the demand side, small models are likely to increase their dominance, while the geographical focus of sales will shift towards 2nd and 3rd tier cities and energy efficiency and environmental compliance will increasingly affect consumer choices, helped by explicit governmental incentives • On the offer side, the government will push the development of domestic production even further, directly sustaining R&D investments and local procurement and possibly promoting aggregations among the Chinese manufacturers, while the foreign manufacturers will try to expand their distribution coverage and deepen their presence by moving towards a fully fledged “local for local” approach. Since the Chinese government favours domestic development, the number of domestic players is rising and the competition with foreign players is intensifying. For western firms, the recipe for success in the Chinese automotive and auto parts market will be based on becoming as local as possible, acting on three key levers: • Making the most of local partnerships • Turning the “local for local” approach into an effective business model • Strengthening the direct contacts with the local market, not only in the major cities. Establishing and developing local partnerships remains a necessity for operating in China, and requires a proactive approach. The western company must carefully assess the potential contribution of the Chinese partner, and ensure that the agreement benefits from a preferential policy context. They must also anticipate any possible issues, knowing that no contractual mechanism can be fully relied upon for ex-post settlements. Specifically, the organisation must be balanced to leverage the respective strengths of each party (for example, accounting for the geographical focus of the partner, which can seldom boast a nationwide influence) and conflict mitigation mechanisms must be introduced in the ordinary planning process to avoid the escalation of minor disputes. At the same time, a number of examples in the automotive industry indicate that extending the localisation of the value chain beyond manufacturing

10


NEWSLETTER

and sourcing is not just feasible but convenient, notwithstanding the unavoidable risks in know-how protection. IPR rules are still far below western standards, but to grow successfully in China, the research and product development activities must be tuned to the specific needs of the Chinese market, and this can be done most effectively by locating them in the country. Leading automotive players like GM, Volkswagen and Hyundai have already taken important steps in this direction and it is a safe bet that all the main component suppliers will soon be forced to follow.

Product development

Sourcing & manufacturing

Successfully launched Buick GL8, star MPV model in China

Sophisticated supplier development to nurture local suppliers

Launched Lavida, a specific model developed for China

Suppliers are clustered around the local production base

Established a wholly owned R&D subsidiary in Guangzhou, China, to produce a specific model in 2010

Very high level of local production, about 90%

Launched longer wheelbase versions of 5 & 7 series to meet local requirements

Downward product mix to capture the local market demand (PVs no higher than 1.6L account for 60%)

Extensive product launches planned – 7 in 2010 to respond to rapid local market development Offering specific products solely for China, such as the 408 Developed localised Elantra Yuedong – the bestselling Aclass sedan in 2009, with sales of 240k units – to better cater to Chinese consumers’ taste

Distribution & sales Foreign automotive companies in China: best practice in localisation along the value chain

Around 800 dealers with nationwide coverage penetrated to many tier 2 & 3 cities

In 2004, established first auto finance company in China Source: industry research, Value Partners analysis

50% customers are Chinese OEMs, with Chery as the largest customer

Investment announced to triple local production by 2013 Manufacturing facilities are spread across six locations in China, close to the OEM clients

High level of local production. Camry has a local content ratio of around 85%

In 2009, increased local production of engines (new factory with annual output of 100,000 units) and started local production of continuously variable transmissions (annual output of 140,000 units) Invested US$790m in its second plant in Beijing, expanding production capacity to 600,000 units by Feb. 2010

Balanced dealership coverage. 69% are located in fast-growing tier-2 and tier-3 cities

Plans to expand sales outlets by 180%, reaching 1,200 in 2010

High-profile marketing activities to increase local brand awareness. Audi sponsored the Beijing Olympics

Spare parts are distributed through multi-channels, e.g. online

Finally, the commercial responsibilities can no longer be delegated to loosely managed distributors. The evolution of the local market needs to be closely monitored, and although in most sectors, the distributors cannot be bypassed, the control mechanisms must be upgraded and the indirect sales coverage must be selectively supplemented with the deployment of direct sales forces, promoters or manufacters’ own outlets. Increasingly, the success of the commercial and distribution strategy will depend on the flexible adaptation of the go-to-market approaches to the different features of various regional and municipal markets, because in most sectors, the bulk of future growth will come from newly developed areas strongly diversified in coverage requirements.

11


Low Medium High D1 selected for visits First choise D1 Second choise D1

Brands managed

Overall assessment

Tiajin

RegInterest of dealerion

Dealer 3

Brand crowding

Beijing

brand mix

Dealer 2

risk factor

Beijing Tiajin

Financial reliability

Dealer 1

Location

Beijing

size

Dealer

For distribution network build-up, it is key to analise in detail the distributors in each region

Region

Power - up

R1 (exF) n.a.

Mi, Ae

n.a.

n.a.

DC, Mi, M

Dealer 4

n.a.

n.a.

Ae

Beijing

Dealer 5

n.a.

n.a.

TR

Hebei

Dealer 6

R1, M

Hebei

Dealer 7

R1, M

Overall, these pressures result in an accelerated shift of the organisational paradigm for the foreign players. The Chinese subsidiary that so frequently accounts for a major share of the expected growth must rapidly evolve from a representative office to a fully fledged operative entity, reporting directly to the CEO (or at least highly visible to him) and staffed with high potential resources in continuous contact with the HQ functions and competence centres. A quick look at the transformation of GM China’s organisational chart in the last 20 years clearly illustrates this point. In addition, the Chinese operation must be effectively integrated with the activities of the company elsewhere in the world. Investing in China makes the most sense if the local competitive advantages can be leveraged on a global scale, which entails shaping the role of the Chinese structures in a broader perspective, and sometimes anticipating a radical relocation of the company’s value chain.

General Motors in China

Prior - 1995

1995 - 1998

1998 - 2005

2005 - Most recently

GM

GM

GM

GM

GM Intl.

GM Intl.

GMAP

GMAP

GMAP

GMAP

Japan, ASEAN, Korea (new), Australia India (new)

GM China

ASEAN

Taiwan, Japan ASEAN, Australia

Japan Taiwan

GM China

China Rep Office (HK, China) Vehicle BD Vehicle Import Sales Hughes, Alison, Comp. BD in China Source: Value Partners analysis

Rep Office (PR/IGR/Supports) Two BD Teams+1 JBGM JV Vehicle Import Sales EDS (IT) Hughes, Alison, Delphi in China

GM China Rep Office fully functional staffed Vehicle Import Sales GM Taiwan JV 2 vehicle JVs in China WOFE Parts Dist. Hughes, Alison, Delphi in China

BD, PR/IGR Taiwan JV SGM/SGMW JV’s WOFE Parts Dist. Functional Staffs (Planning, Purchasing, VSSM, IT, ME, GMPT, Finance, Legal, Tax, Public policy, Technology, etc.) Alison, GMAC in China

With so much change involved, so many complexities to face and so many competitors already rooting themselves in the local market, it’s understandable that some companies will wonder if it’s not too late to enter China. Surely there are no more first mover advantages to be exploited. But staying out of China is hardly a sustainable option. Giving up on China means not just giving up on a substantial source of demand growth, but

12

GM Corp. to AP to China Global Functional Alignment


NEWSLETTER

also being excluded from increasingly important product innovation trends and leaving crucial scale and cost advantages to the local (and localised) competitors. At the same time, the evolution of the Chinese market is so fast that few local positions can really be considered as entrenched or unassailable. Latecomers can still be successful comers, as proven by the examples of Toyota and Iveco, and the governmental push on potentially disruptive innovation trends like “green” transportation is bound to open up even more opportunities in the near future.

Value Partners met with Riccardo Bellini, vice-president of brand and marketing for Diesel, to talk about how fashion brands can win consumer trust.

The consumer is my lover

In your view, how has this recession affected luxury and fashion consumers? An interview with Riccardo Bellini The global meltdown has strongly hit a middle class that had been fuelling the growth of luxury and accessible luxury brands up until mid-2008. Today’s consumer, even the more affluent one, has been burned by the recession, and is becoming Riccardo Bellini has over ten more and more difficult to win over. Fashion buyers are becoming more educated and years of marketing experience are able to make knowledgeable judgements: they will buy you, because the product has at Procter & Gamble, where his distinctive design, true quality and authenticity; if your brand holds up to its promise and last role covered was that of because the company behind it is true to what it says it stands for. Brands will no longer associate marketing director for be able to hide or cheat the buyer, as every inconsistency is revealed and amplified by the the European Fine Fragrances voice of the web. business. He moved to Diesel in 2007 as managing director of What is the recipe fashion brands should therefore adopt to win the consumer’s trust? Diesel UK and was promoted Three concepts need to be top of mind for any creative director or marketing manager in in September 2008 to viceour sector: authenticity, innovation and brand distinctiveness. president of brand and marketing worldwide. In the post-recession scenario, there is a strong need, first of all, for authenticity: on the product side, this means quality of fabrics and a distinctive style. The challenge for brands is not to reduce prices and offer value for money but rather offer value for me to the customer, for example, by increasing the product content value of each of their products. Marketing without a strong product content value will take you nowhere. The total look concept is over, as consumers mingle brands and styles in search of individuality. If you win the consumer over with the coolness of your jeans, you won’t get him to buy your T-shirt for free, but you will have to win him over with the beauty and distinctiveness of your T-shirt. Each product category for brand extensions will have to be taken as seriously as the brand’s core category, and each item of the collection will have to have a great deal more product and design value poured into it. Dressing today means wanting to expose your personality, your soul and your uniqueness. I like to talk of “undressing up” by “dressing up”. Brands have to address this need for individuality by seeking true innovation. You could label the last few years as the era of clones, in which all luxury brands were blatantly copying each other – without paying any price in terms of credibility. No art field was able to produce real innovation. Take music, for instance: no new Rolling Stones, no new Madonna or Michael Jacksons, but a bunch of “me toos” singing along. In the post-recession world of more demanding consumers, the choice will be about being distinct or becoming extinct. Distinctiveness will be played on all grounds, that of product, that of communication and that of style. Winners will not be those that shout out their brand to the world louder, but those able to stand out. Think of the success of a small distinctive brand like Jun Takahashi’s UnderCover, that has become the essence of Japanese cool, thanks to its different beautifully crafted products – or of the Capital brand, that owes its following to self-expression without fear.

13


Power - up

The need for distinctiveness also involves the brand’s image. The post-recession consumer wants more than just a product when making a purchase in our category. He or she is also buying the values the brands stands for. Brands today are evolving to become real people, with their own personalities and mindsets, and the challenge for marketers is to make it clear to the consumer, through multiple touch-points and communication avenues, what the brand’s soul is about. This communication is getting increasingly difficult as consumers become more educated and sophisticated and as their minds are continuously overwhelmed with new messages and offerings. Advertising needs to evolve from mere communication to conversation and dialogue. Companies have to show their real faces; they have to show consumers who the people behind the products they make are and what values they have. For some brands, this means reaching back to their heritage. Louis Vuitton, for instance, is banking on reaffirming its roots as maker of beautiful high quality handcrafted products; no longer selling the image of accessing an exclusive privileged club. For Diesel this means going forward to its roots, rediscovering its product origins in jeans and leather and re-stressing its rebellious unconventionality. Being unconventional today, however, may be very different than what it meant a few years ago, with the punk and rock movements, for example. Today, rebellion may no longer be about being against a system but rather about being for something. What an act of rebellion Obama’s “Yes, we can” turned out to be. This is what we are trying to achieve, for example, with our “Be Stupid” campaign. Are there any implications in terms of how fashion companies structure themselves to deliver this recipe? Companies will have to structure themselves to be on the leading edge of innovation – no longer dependent on the sketches of a single designer’s personality, but with richer and more diverse style and product teams and with new roles, to be more open to experimentation and to hungrily absorb new trends, material technologies and styles. Relationships between the merchandising, style and product departments with material suppliers and production partners will have to become tighter than ever. To win the heart of today’s consumer, I would say it takes a mix of being stupid i.e. “having the balls to stand out and express what you stand for”, and being smart in understanding the importance of authenticity, staying ahead of the pack in innovation and listening to the consumer’s voice, living with him, understanding his lifestyle, what he loves and what he hates, in a continuous dialogue. Procter & Gamble’s CEO used to say, “the consumer is your boss”. Well, I believe that the consumer is my lover: I constantly need to surprise, over-deliver expectations, cover with attention and give what never would have been expected.

In times of crisis, when access to capital is limited and stock indexes are plummeting, there is still one sector that keeps attracting investor interest and government spending. Green or cleantech stocks have performed in Gianni Tessitore, director, and Alessandro Leona, Milan office the double digits thanks to a growing concern for the environment and generous tariff schemes incentivising clean technologies that wouldn’t otherwise be viable for power generation – with the 1 Condition when renewable energy promise to reach “grid parity”1 in a few years.

Green economy Cassandras: are we headed towards a solar photovoltaic bubble?

cost is comparable to conventional power prices accessing the grid

But will everything connected to “green” or “cleantech” go through the same turmoil in the future as the “dot-coms” did in 2000? In November 2008, in the midst of the Internet stock boom, Eric Janszen founded iTulip, named after the Dutch tulip bubble of 1630s, to study the financial bubbles phenomenon. In his opinion, “bubbles start with the ker-

14


NEWSLETTER

nel of something good” (in this case, energy that causes less pollution) but then some people start to get rich really fast and the edge of a bubble is very quickly reached. In the meantime, other things have to happen, such as significant government involvement to focus attention and capital on a specific industry, and then a new source of credit is needed. In the housing bubble, it was mortgage-backed securities, in this case, it could be feed-in tariffs or cap and trade emission schemes. The signs of a green energy bubble are certainly visible: some stocks are registering uncommon multiples with price earnings ratios in the hundreds and regional government decisions are creating the first victims within the industry. If we take, for example, the revision of feed-in tariffs in the solar photovoltaic sector, we can highlight four main courses of action, in four different countries. In Spain, a combination of factors diverted the attention of investors from solar photovoltaic. The first factor was the reduction of feed-in tariffs: an average of -22 percent from 2008 to 2009. The second factor was the introduction of a maximum cap of 500MW accessing incentives each year. The effect is clearly identifiable in the stock performances after mid 2009. Even the promise of “green jobs” creation was not fulfilled. A study from Universidad Rey Juan Carlos2 reports that for every four “green jobs” created, another nine are lost. Recently, at least three companies that were planning to IPO this year have put their decision on hold. Moreover, as a consequence of deficit control needs, the government announced it could reduce incentives even for power plants already in operation. Germany, with a cumulative photovoltaic power of almost 10 GW, including around 3.8 GW installed in 2009, alone, remains the world’s largest photovoltaic market. Recently, the government reduced feed-in tariffs – a move that caused confrontation between the government and industrial photovoltaic associations. The highest cuts have been for larger plants (above 1 MW plants will receive a -25 percent feed-in tariff), while the medium and small installations received lower revisions (-10 percent and -8 percent, respectively). This reduction aims to force producers of photovoltaic modules and components to achieve efficiencies and consolidate in order to reduce prices. At the same time, the reduction will keep investors in the game by ensuring sector attractiveness in the mid-term.

3.000

Fast take off after the Introduction of the new incentive scheme

Spain

2 Study of the effects on employment of public aid to renewable energy sources

Germany

Cumulated installed photovoltaic power (MW)

2.500 2.000 1.500 1.000 500 First ‘Conto Energia’ incentive scheme New ‘Conto Energia’ incentive scheme Jan 07 Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10

0

Italy is fifth in the world (after Germany, Spain, Japan and the US) in terms of installed photovoltaic power. This massive growth was the consequence of introducing a new generous tariff scheme. 

15

Source: GSE Gestore Servizi Elettrici Italy

Italy


Power - up

France

The government in France has recently declared its intention to stop financing ground photovoltaic plants, in favour of roof installations from now on, to reduce feed in tariffs by 20% and to put a maximum cumulative cap of 500 MW on new installed power per year. This decision has totally upset the sector players and a revision of this drastic cut is strongly requested by companies that have heavily invested and created new green jobs. This is unique in the sense that, on top of the energy incentive (around € 0.4-0.43 kWh), the plant owner can sell the power to the grid at market price or exchange it “in place”, thereby creating an extra revenue flow. The incentive scheme is being revised and industry associations are pushing hard to keep the reductions within “reasonable” ranges. The government intends to confirm its commitment to the development of photovoltaics in Italy in the hope that the country will be able to create investment opportunities, employment and the development of a national chain, although foreign investments are certainly welcome. As for the new “Conto Energia”, the new decree, effective from 1st January 2011, provides for a reduction of tariffs in line with the decrease in the cost of modules (around 20 percent). However, incentives will be reduced less for small residential systems, and the incentive system will remain among the most generous in the world. The target will be a capacity of 3,000 MW over the next three years – a goal that may require the use of tariffs for a further 14 months. Another target is to simplify, but also give certainty, to the rules for accessing incentives. This is the case in the Apulia region, which has seen an impressive boom of photovoltaic systems and applications, but now requires a careful handling of the authorisation process. Terna, the Italian TSO, and the distributors are receiving requests for connections in excess of 152,000 MW, three times more than the highest ever registered power peak in Italy. This is a clear signal that there are no investors involved and that many people are creating an “authorization market”. A piece of land with a solar photovoltaic plant authorised could trade for € 100,000 authorized megawatt. So what are the differences between the green/cleantech sector and the dot-coms, and how can a green bubble be avoided? The first difference is that with dot-coms, evaluations were based on the promises of future, uncertain profits, the number of subscribers and unique website visitors – while the revenues of green developers are guaranteed for a certain number of years, and in most cases they are drawn not from government funding but from taxes on consumers’ energy bills. Governments should avoid interrupting virtuous circles (as was the case in the Spanish photovoltaic feed-in tariff) and instead progressively reduce the tariffs according to the rate of cost decrease per MW installed. The second difference is that, through the incentive schemes, some countries were able not only to develop power plants at a faster pace than others (e.g. Germany, Spain and Italy for solar photovoltaic) but at the same time, create an industry. As a result, they now possess leading edge technology (e.g. QCELL and SMA in Germany or Ingeteam in Spain). So the incentives should be also directed to researching new technologies, in order to capture a larger portion of the value chain inside the country. Last, but not least, authorisation procedures have to be simplified to encourage the adoption of renewable generating technologies. At the same time, there must be a clear commitment from investors, such as a personal bank guarantee on the request for authorisation, to avoid “easy money”, coming from the trading of authorisations. What we expect to observe in the near term is a time shift in the solar photovoltaic market due to the financial crisis and to the limited access to capital, together with an over-

16


NEWSLETTER

supply of cells and components coming from countries where the government has cut incentives. The combination of these effects could introduce a market shift from supply constricted to demand driven, with a beneficial effect on prices for end users.

Value Partners met with Vittorio Chiesa, head of the Energy Strategy Group at Politecnico di Milano, to get his point of view on the possible development of the renewable energy and technology sectors.

Green energy bubbles: an academic perspective An interview with Professor Vittorio Chiesa

Professor Chiesa, in your reports, you highlight the different approaches undertaken by some countries to promote the development of renewable energies. How much did the incentive schemes influence the success or failure of green energy-generating technologies? Let’s start by saying that, without incentives, apart from some eolic installations, the economics of renewable energies is not sustainable. The total cost of generating renewable energy is much higher than conventional generating schemes. With regard to incentives, there are two major considerations. First, the incentive scheme must gradually decrease, in correlation with the green technology industry capacity to reach economies of scale and reduce costs. Second, there has to be a maximum cap to the total incentivised installed power, but this cap must be reasonable. In Spain, the abrupt end to the photovoltaic sector was not due to the reduction of feed-in tariffs but to the announcement of a maximum cap of 500MW per year, whereas in 2008, more than 2.5 GW of solar photovoltaic power were incentivised. If we look at the multiples of listed companies operating in the renewable sector and we track the drop in performance of some Spanish stocks, we observe analogies with the e-economy. In your opinion, is there any risk of a “green energy bubble”? It very much depends on two factors: how the incentive schemes evolve and the way that single states promote the growth of relevant value chains. For example, in Italy the solar photovoltaic scheme (“Conto Energia”) helps the adoption of the generating technology, but not the development of a value chain. A national economy has grown up around modules and panels, thanks to the initiative of single entrepreneurs, rather than public aid. A green energy bubble could only develop if there were to be a sudden stop in incentive schemes worldwide, but since we are far from reaching our declared objectives in green house gas reduction, the environmental issue will play in favour of green energy. What could happen is a shift of incentives schemes to promote a well-balanced mix of technologies and a premium to distributed generation solutions (putting power generation near the final point of consumption), as opposed to big projects. Which are the factors that differentiate e-economy from green economy? In the e-economy, skyrocketing evaluations were based on a general belief in a revolution in operations that then did not, or only partially, happened. The picture is completely different here: in the green economy, there is a potential market. Revenues are based on incentives, and thus on government will to incentivise the growth of clean generating technologies, either through feed-in tariffs or with market mechanisms such as green certificates. Are there any particular sectors or geographies risking a green economy bubble? Again, it depends on governments and on their decisions. The Spanish photovoltaic sector is an example of a significant reduction of its government commitment, which has decreased investors’ interest. Even in Italy, there could be a significant risk – for example, as a result of the decision to abolish the obligation of GSE (Gestore Servizi Energetici) to collect excess green certifi-

17

Vittorio Chiesa is Full Professor of Strategy and Organisation of R&D in the Department of Management, Economics and Industrial Engineering at Politecnico di Milano. He heads the Energy Strategy Group (www.energystrategy.it), where he conducts in-depth analysis of solar energy and biomass energy, issuing periodical reports that are a renowned reference for operators, investors and researchers.


Power - up

cates from renewable energy producers. This could have a significant impact on green certificate prices and reduce the attractiveness of renewable energy investments, thereby putting employment at risk and destabilising the sector. On the other hand, the government is promoting the development of lower scale plants (<1MW), which benefit from a well-defined and generous feed-in tariff (and faster authorisation procedures). Recently, you released an exhaustive report on biomass energies, highlighting the differences in the technologies, supply chains, economics and regulatory issues of agro forestry, biogas, bio fuels and waste to energy. Which of these are the most promising and how could the incentive schemes or authorisation procedures determine their success or failure? In Italy, the incentive scheme is mainly determined by the size, rather than the technology. Apart from bio fuels, plants above 1MW receive green certificates, whereas below 1MW, there is a feed-in tariff. Having said this, what really matters in biomass generation is the supply chain. In agro forestry, there is a lack of collection systems guaranteeing a continuous and price stable feeding. With biogas, the difficulty is in making sound consortia agreements between agricultural farms and breeding industries. As far as waste to energy is concerned, there is a strong cultural factor against incinerators (“Not in my back yard”) and waste collection must be well organised. On the subject of bio fuels, unless we develop second-generation feedstock, such as cellulosic bio ethanol, micro algae or jatropha, there will always be competition in the food chain and a strong dependence on imports. How can a country (e.g. Italy) replicate the virtuous path of Germany in the solar photovoltaic sector and create a national value chain? And what could be the “next wave”? In the solar photovoltaic sector, Italy has missed the boat in crystalline technologies, but in 3-4 years’ time, we will see a growth in thin film technologies (some estimate an optimistic 30-40 percent of share of new installations). There are also excellent prospects in concentrated solar and in solar thermodynamic generation, where Italy has strong engineering skills and significant manufacturers of components (mirrors, reflecting surfaces, heat collectors and sun trackers). If the Obama plans are maintained, there are significant opportunities for these industries to play a leading role in this field. In the second-generation bio fuels, companies such as Mossi Ghisolfi are well positioned to develop a consistent presence in cellulosic wood bio ethanol production. Another interesting project is Mambo (Micro Algae Material for Bio Oil), in which the objective is to grow micro algae – which won’t compete with the food value chain – to produce diesel oil. Exxon is also investing US$ 600 million in this field. Up to now, a significant amount of incentives have been devoted to generation or to system safety. What has been done to promote energy efficiency? In my opinion, energy efficiency is undervalued. Energy demand is growing, and the capacity to reduce consumption is limited and well below the 2020 objectives. Of the three 20/20/20 elements, the most forgotten is indeed energy efficiency. For CO2 reduction, there is an Emission Trading Scheme. Renewable generation, we already mentioned. The 20 percent of energy efficiency is totally neglected. It’s a factor that passes through a process of cultural growth. It entails changing people’s behaviour and making use of existing solutions and technologies. For example thermal solar is completely undervalued, it can be easily integrated into cooling systems since the energy production is perfectly matched with the need and it can be easily integrated in industrial processes. Also low enthalpy geothermal energy is a possible solution. The culture of energy efficiency is weak: solutions with low costs upfront tend to prevail, even though energy consumption is higher. What could help draw people’s attention is

18


NEWSLETTER

a government intervention on building efficiency – for example, the obligation in Italy to install 1kW of renewable energy in order to obtain the construction permit of a new house, or the obligation to obtain an energy certificate during real estate transactions. In the UK, from 2016 every new house built must be energy sufficient. The growing industry of ESCO (Energy Service Companies) can help this sector’s growth. To sum up, in your opinion, which sectors are the most promising in the future? Renewable energies, in general, will continue to develop, provided that the incentive schemes survive. In the next few years, the focus on energy efficiency will grow, due to financial restrictions and government willingness to reduce state aid and promote savings. Moreover, there could be significant development in the energy efficiency components industries – for example, in illumination and construction materials.

It is often said that the least polluting energy is the one that is not consumed. LED there be light: are you ready to replace your light Energy efficiency is often the most neglected measure in the 20/20/20 packAlessandro Leona, Milan office age. In this article, we will highlight one of the areas of energy efficiency connected to technology improvement (as opposed to changing consumption behaviours) – namely, illumination using LEDs.

bulbs?

Energy consumption for illumination can range from 10-12 percent of total consumption for households to 40 percent in the commercial sector. For example, in the US, around 750-800TWh per year is consumed in illumination – about the same amount of electricity produced in the country’s 104 nuclear power plants. Half of this amount is consumed in the commercial sector; a quarter in houses, and the rest is split between industrial illumination and outdoor stationary lighting. Light sources can be divided by technologies in three main areas: • Incandescent lamps, using a thin filament of tungsten, where luminous efficiency1 is lower than 10 percent, due to the fact that most of the energy becomes heat • Gas discharge lamps, where light is produced by a electricity discharge in a mixture of gases, such as neon, high pressure sodium or metal halide, with lighting efficiencies ranging from 10-15 percent of the classic T5 lamp2 to 22-29 percent of sodium vapour lamps • Solid state lamps, using semiconductor light emitting diodes (LEDs), where efficiency is rapidly improving up to 160 lumen/Watt, meaning a LED with this performance can produce the same illumination as a 60W incandescent light using only 7W.

1 Overall luminous efficiency is the ratio of total luminous flux emitted and the total amount of input power total. This measure accounts for input energy that is lost as heat or otherwise exits the source as something other than electromagnetic visible radiation. The maximum luminous efficiency of 100 percent is the ideal green light (555nm), with luminous flux of 683lumen/watt 2 T5 is the common 5/8-inch diameter neon tube

When it comes to energy efficiency and environment sustainability, incandescent lights are being progressively banned due to their poor conversion efficiency, while fluorescent lamps may be banned in the future because of their mercury content. LEDs may thus be the natural candidates to substitute conventional lights, due to their continuous and rapid growth in performance backed up by a high product lifetime and by the relatively low impact on the environment. Outdoor Stationary

Shares of energy use by lighting technologies in the US 100% = 760TWh

Industrial Incandescent

Residential

Fluorescent High Intensity Discharge

Commercial 0

100

200

300

Source: US Department of Energy

400

19


Power - up

Luminous efficiency trend of different light sources

Luminous efficiency (lumen/W) 200

LED

150

100

White LED

Fluorecent 50

Reflector Halogen

Incandescent 0 Source: Lumileds

1920

1940

1960

1980

2000

2020

LEDs will be experiencing diminishing cost thanks to volume effects. Haitz law (equivalent of Moore’s law for semiconductors) predicts that every decade the LED light output increases 20 times (around +35 percent every year), while the cost decreases by a factor of 10 (-25 percent each year). According to the US Department of Energy, this cost reduction trend suggests that white LED luminous efficacy and costs should compare to compact fluorescent lights by 2013. We believe this evolution will determine a rapid growth for the LED lighting market. Overall, the global market for lighting fixtures (excluding automotive and LED television backlighting) was worth around € 45-50 billion in 2009, according to Philips and other analysts. Of this, 20 percent is related to lamps and replacements, 70 percent to fixtures and the remainder to electronics and controls. Split of lighting fixture market according to Philips Total market size: € 45-50 billion

Lamps Healthcare Entertainment

Retail

Industry

Office

Source: Philips

Oudoor

Homes

Applications/luminaires

Hospitality

Lighting electronics

In 2009, the market related to LED lighting was only around € 1 billion, but Philips projects a very fast take up of share over the total: by 2015, the LED market could be worth € 55 billion, with a share of 50 percent of the total lighting market. This rapid growth could be fostered by a combination of factors, such as: • The rapidly increasing luminous performance, which has gone above the 100 lm/W that make LEDs good substitutes for compact fluorescent lamps • The continuous government attention to energy efficiency and non-polluting materials (such as the mercury in compact fluorescent lamps) • The proliferation of lighting fixtures and retrofits based on LEDs that are being spread across the commercial sector (which alone accounts for half of the consumed energy for illumination) • The progressive reduction in LED prices, due to scale-volume effects.

20


NEWSLETTER

In order for LED technology to replace our old-economy light bulbs, the industrial and scientific communities will have to widely promote the main advantages over the current solutions and commercialise the product with a total-cost-of-ownership concept. In the short term, LED lighting may be quite expensive as an initial investment, but taking into consideration the longer life (50 times that of a conventional incandescent light bulb) and lower consumption (20 percent of energy input to obtain the same level of illumination), the payback could be reached in less than two years, without the need for government incentives. If we compare three lamps of almost equivalent lighting flux and their costs, the energy cost over the year for the incandescent light is enough to repay for half of the equivalent LED lamp, which, if bought for a newborn child, will last till his graduation day! Lamp Type

Cost (€)

Lifetime (hours)

Lifetime (years@5h/ day)

Power (Watt)

Year cost for power (€)

Year cost including replacements (€)

Incandescent

0,7 - 1

1.500

0,8

70

28,1

29,1

Compact Fluorescent

7-8

10.000

5,5

12

4,8

6,2

LED

50 - 60

50.000

27,4

6,3

2,5

4,5

Cost comparison of different lighting technologies Energy cost € 0,22/kWh

One might think that compact fluorescent lamps (CFLs) may be a good intermediate solution, given their more accessible costs, but we believe that further improvement in LED cost (with prices reducing by half over the next two years), together with increasing sensitivity over environmental issues (CFLs have to be correctly disposed, due to their mercury content) and strong marketing of the total cost of ownership of lighting technologies, will help the LED retail market rapidly grow. The use of performance contract schemes could be helpful in speeding up the adoption of LEDs in large-scale retrofit projects. Energy Service Companies (ESCOs) could finance the upfront cost of designing the best solution together with clients, and implement the replacement/retrofitting. The energy saving benefit could be initially divided between the client and the ESCO, in order to repay its investment and guarantee against risk. Another factor that may help the fast adoption of LEDs is the continuous dissemination of technological achievements, case histories and relative energy savings by renowned industry players, academic institutions and governmental agencies. Value Partners is watching this sector very closely and with growing interest, given the possibility of a rapid, self-sustaining growth, as opposed to many other green technologies, which are strongly dependent on incentive schemes.

Imagine yourself jogging behind a car without choking on CO2 emissions. Now picture traffic on the streets of New York at the beginning of the 20th century. Wondering what these two have in common? The answer is electric vehicles. While many people know that car manufacturers are now investing in R&D to develop electric vehicles, they probably don’t know that at the beginning of the 20th century, many cars in New York were electric, produced by about 300 manufacturers.

The electric car: last century’s idea, this century’s future Maurizio Oliveri, principal, and Federica Friz, Milan office

There are already thousands of electric cars on the road today, and it’s expected that in the year 2020, around 18 million will be sold, with a penetration of about 15 percent1.

21

1

Source: Credit Suisse


Power - up

The premise for transforming electric vehicles into mass-market products is sound, although it is not yet clear which business model will lead to a successful rollout. In this context, opportunities could also arise for new stakeholders.

2 EDTA: Electric Drive Transmission Association

3

Source: Acea, European Parliament

Taking your foot off the gas Put simply, an electric vehicle is one that runs partly, or wholly, on electricity, instead of relying on petrol. This means that the vehicles create a reduction in carbon emissions. There are already a number of electric vehicles (EV) on the road today, represented by three main types2: • Hybrid Electric Vehicle (HEV) – has an internal combustion engine (ICE) that runs on petrol, as well as a small electric motor that stores power in the battery when the vehicle is braking. The ICE is generally used for fast speeds. These cars do not “plug” into any socket for recharging. Nowadays this type is the most popular one (eg. Toyota Prius) • Plug-in Hybrid Electric Vehicle (PHEV) – has an internal combustion engine (ICE) as well as a bigger electric motor. These cars “plug” into the socket for recharging. - Parallel PHEV – the ICE provides driving range extension and is connected directly to the wheels - Series PHEV or Range Extender – the ICE is used only to generate electricity to recharge the batteries, which are the only means to provide propulsion • Battery Electric Vehicle (BEV) – only has an electric motor and plugs into a socket for recharging. How to get there from here Of course, developing electric vehicles isn’t just about producing a car that runs with an electric motor and selling it. There are many variables that impact on its development and growth. Globally, the transportation sector accounts for over 30 of all energy consumption and about 70 percent of oil demand. The consequence is that it’s one of the main causes of global warming and a target for the reduction of CO2 emissions. Passenger vehicle emissions account for 10 percent of current global emissions of greenhouse gases (GHG). Faced with the challenge of achieving significant reductions in global GHG emissions, policymakers have focused their attention on the automotive industry through CO2 emissions targets. The announced regulations and indicated plans aim to significantly reduce emissions per vehicle over the next decade, as emissions regulations in the USA, Japan, Europe and China begin to converge. In the 27 European countries, ACEA (European Automobile Manufacturers’ Association), in line with the European Commission, is pursuing the objective of reducing CO2 emissions to 130g/km (roughly equivalent to 45 miles/gallon) in 2012 and to 95g/km in 2020.3 In the US, the push from the government comes from the CAFE standards (Corporate Average Fuel Economy) aimed at reducing fuel consumption, which set a target of 25 miles/gallon for 2010 and 35 miles/gallon for 2020 for light vehicles. In Japan, too, OEMs have to meet the government’s fuel economy targets. Several cities in China, including Shanghai and Beijing, have already placed significant restrictions on gasoline-powered two-wheelers. This has resulted in the world’s largest market for plug-in electric motorcycles (30 million units). And these cities are taking similar measures against less fuel-efficient cars. Most first-world countries, such as Australia, Canada, Taiwan and South Korea have set their own CO2 emissions targets. In order to promote electric vehicles, governments in the US, Europe and Japan are implementing a set of tools for automakers, such as loans and manufacturing grants, as well as for purchasers, such as reductions in income tax, premiums, and road and registration tax. Many governments are also looking at introducing a carbon tax, which would favour drivers of electric vehicles. The Chinese government has also announced future subsidies for the purchase of electric vehicles.

22


NEWSLETTER

Hidden costs A key consideration for electric vehicles is choosing the right battery, by assessing its energy density (storage ability), power density (ability to provide energy bursts, such as in acceleration) and durability (calendar and cycle life). Lithium-ion is the technology most likely to meet drivers’ power needs, and has a driving range of up to about 150km. Advanced batteries can cost about US$ 15,000-25,000, accounting for about 50 percent of the total cost of an electric vehicle. Their price will only decrease when they reach mass scale volumes. For now, only environmentally motivated adopters are willing to pay a premium for electric vehicles. One of the main things that influences consumers in their purchase is the total cost of ownership (TCO). Comparing advanced diesel vehicles to electric vehicles at the expected battery cost of US$ 500/kWh, the latter’s TCO over a five-year time frame is cheaper when the oil price varies between US$ 100 and US$ 120 per barrel. What will mainly trigger demand for EV when looking at TCO are subsidies such as those in France – where electric vehicles are more attractive than ICEs even when oil prices are between US$ 60-80 a barrel, because of a subsidy of about € 5,000 to the purchaser. What to expect down the road The availability of recharging infrastructure is another element that influences the adoption of electric vehicles. There is no widespread infrastructure to support the number of electric vehicles and the length of trips, due to the uncertainty of finding a recharging point. Significant investment will be required from government, utilities operators and automakers. Projects and partnerships are already in place to develop an adequate infrastructure and standard practices and products (e.g. plug, type of battery, recharging speed.) When discussing the reduction of CO2 the generation of electricity in order to recharge batteries must also be taken into consideration. In China and India, CO2 emissions are likely to see little reduction, either now or in 2020, because of the carbon-intensive power mix generation. On the other hand, in European countries, where nuclear and renewable energies are used, an electric vehicle would reduce emissions by about 40-45 percent compared to ICE-only vehicles, over an expected lifespan of about five years. 180000 160000 140000 120000 100000 80000 60000 40000 20000 0

7,0%

Non HEV, PHEV, EV sales

6,0%

HEV sales

5,0%

PHEV sales

4,0%

BEV sales

HEV’s PHEVs and BEVs are growing although still represent a small portion of vehicle sals Units ‘000, percentage

3,0%

2010

2020

2030

2,0%

PHEV Penetration Rate

1,0%

HEV Penetration Rate

0,0%

BEV Penetration Rate

Looking at the next decade, in 2020, ICEs will still represent the majority of new vehicle sales, as well as those vehicles already on the road. In 2020, about 6 percent of vehicles sales will be PHEV and BEV and in 2030, they will be about 8 percent of the total sales. These expectations translate into a significant growth in electric vehicles, with a 201015 CAGR of 99 percent and 2015-20 CAGR of about 18 percent. In recent years, multiple international car manufacturers have begun work on BEVs. Audi has recently established the “e-Tron” division that will launch the “R8” in 2012, Nissan launched the “Leaf” at the end of 2010 and started selling the Denki Cube in 2008 by fitting it with an electric power train. Mitsubishi has marketed the iMiEV since 2009, BMW presented the Mini-e in 2010, and many other major manufacturers are marketing electric vehicles or plan to do so in the near future. Yet there are also car manufacturers that focus only on electric vehicles: the Indian REVA has produced EVs since 2001. The German IWK launched its vehicles in 2008, while the Norwegian Th!nk has produced electric cars since the ‘90s and now markets them world

23

Source: Credit Suisse estimates


Power - up

99

EV models launched and planned

63 29

Models launched

2009 OEMs

17

Source: Credit Suisse Average models/OEM

BYD Changan Daimler Ford GM Honda Hyundai Jianhuai Mitsubishi

4

Source: EDTA

120

1,7

2010

2011

2012

30

33

33

2,1

3

3,6

OEMs

Additional OEMs

Additional OEMs

Nissan Subaru Tata Tesla Think Tianjin Toyota Zotye

Bestrun Great BMW Kia Chery Lifan Chrysler Peugeot Coda Renault Fisker VW Geely

Dongfeng SAIC Volvo FIAT

wide. Tesla produces electric Roadsters. The BYD Auto Company in China launched its first car in 2003, and in China overall, there are about 66 percent of the world’s manufacturers of electric vehicles (over 90 percent of the world’s electric vehicles are made in China, mainly for use in China). These are but a few of the 450 manufacturers currently building electric vehicles4. Producing the best business model Electric vehicles, despite existing for more than a century, have yet to become mass products, although they are now on their way to doing so. This is because a standard business model has not yet been identified. Best practices are still emerging from the multiple tests being carried out, but some key questions remain: • Built-in battery or replacement battery? Both options have their benefits. A standard battery for all cars would mean reduced flexibility at a time when research is still being carried out. Yet this would also simplify battery production, and so translate into lower costs. Having replacement batteries, on the other hand, would mean the opportunity to recharge the car very quickly, by simply substituting a depleted battery for a full one at a recharging station. • What recharge times can be expected? Recharge times vary according to the technical features of the technology used. Slow recharge uses an alternate current of max 10 Amperes, a single phase and low voltage of about 220V. This determines a recharging time of about 6 to 8 hours, as would be needed to recharge a car at home. Fast recharge uses an alternate current of max 33 Amperes, a three phases and low voltage of about 380V. This determines a recharging time of about 3 to 4 hours – the time needed to recharge a car at public service stations. Very fast recharge uses direct current in medium/high voltage. Recharge time is about 30 minutes and power would be supplied by specialised recharging stations, which are now being developed. The downside is that quick charge spots are more expensive to build and operate and present challenges to the grid. The quick drop is where the battery is replaced with a full one. In this case, though, batteries would need to be standardised. Better Place is testing this set-up in Denmark, Israel and US. • Who will manage public supply stations? Both utilities companies and petrol stations are set to provide power in terms of expertise and infrastructure, although both will have to bear significant investments – but third parties could also enter the market. What is necessary is an attachment to the electrical grid, except if an off-grid solution is implemented, in which case power will be supplied by renewables such as solar energy.

24


NEWSLETTER Recharging solution

Technical features

Recharging time

Place

Cable

Timeframe

Slow recharge

› Alternate Current (max 10 Ampere) › Single - Phase › Low voltage (220 V)

6-8h

› Home › Public station

› Cables on board cars

› Adopted in the very early stage (e.g. e - mobility Berlin)

-

Fast recharge

› Alternate current (33 Ampere) › Three - Phase › Low voltage (380 V)

3-4h

› Public station

› Cables on board cars

› Adopted in the early stage

Very fast recharge

› Direct Current › Medium/High voltage

20 - 30 min

› Specialised public station

› Cables embedded in station

› Adopted in a second stage

Quick drop

› Battery is replaced automatically

3 min

› Dedicated garages

› No cables

› Currently implemented in Israel (Better Place)

Recharging models

+

Source: external interviews, companies’ websites, Value Partners analysis

• Who will define standards? Worldwide multiple partnerships between auto manufacturers and utilities have already been agreed, because of the complementary expertise required to develop a test prior to defining a standard. Examples include Smart-Enel in Italy, Nissan/Renault-EDF in France, e-mobility-RWE in Germany and "CHAdeMO" in Japan, a recently formed association between Toyota, Nissan, Mitsubishi, Subaru and The Tokyo Electric Power Co. that will work to promote electric vehicles and a standardisation of the infrastructure. It expects to have 158 business and government member organisations throughout the world working on the project. Another example of companies developing products to become standards is the harness-maker YAZAKI, which designed the plug that became the US standard for electric vehicles at the beginning of 2010. Managing stakeholder involvement Governments are careful to monitor CO2 emissions and have implemented regulations for diminishing them by partially pushing car manufacturers to invest in R&D, in order to produce cars that can be more environmentally friendly. To make the aim more achievable, authorities should also put in place – as some are already doing – tools to motivate purchasers and infrastructure investments, without which, electric vehicles will face hurdles to becoming mass products. Traditional car manufacturers, as well as electric vehicle manufacturers, are focusing on setting up efficient vehicles by investing in R&D. In order to do so, they are also partnering with battery suppliers, which is key to developing new efficient products. Some examples of this are Toyota and Panasonic, Volkswagen and Sanyo, GM and LG, Renault/ Nissan and NEC (AESC), and the Chinese BYD Motor Company, which grew from the BYD battery manufacturer. Overall, in 2012, about 120 models (HEVs, PHEVs, and BEVs) are expected to be on the market. Consumers are also very cautious about pricing, and therefore OEMs must pursue TCO efficient cars that are competitive against traditional models. The battery is the most critical part of an electric vehicle. Battery manufacturers are investing in developing reliable and long-lasting batteries, often in partnership with car manufacturers. The lithium-ion technology is the most popular one, at least in the near future, and there is no risk that lithium will become in short supply. The major obstacle is the price for the batteries, which is still very high and will become cheaper only when scale economies are reached with large orders from manufacturers. Japanese and Korean players presently dominate the lithium-ion based rechargeable market. Key players include LG Chem and Samsung SDI from Korea and Sanyo, Sony and Panasonic (which recently acquired Sanyo) of Japan.5

25

5

Source: Morgan Stanley


Power - up

Electrification likely to lead to emergence of new automotive suppliers Battery strategy by key OEM

Battery

JV

Auto OEMs

Panasonic

Panasonic EV Energy

Toyota

(Toyota 60% Panasonic 40%)

Battery

Evonik Industries (Germany)

JV

Auto OEMs, OESs

Deutsche Accumotive (Daimler 90% Evonik 10%)

Daimler

Tesla Motor (Daimler 10%)

Blue Energy (Honda 49% GS Yuasa 51%)

GS Yuasa

Lithum Energy Japan (MMC 15% Yuasa 51% Mitsubishi Corp 34%)

Hitachi Vehicle Energy A123 System (US) LGChem (Korea)

Ford

Honda

JCS

MMC

Toshiba

VW

BYD (China)

BYD Auto

BMW

Sanyo

GM

Hyundai

Samsung SDI (Korea) Electrovaya (Canada)

SBLiMotive (Bosch 50% SDI 50%)

Bosch Tata Motors

Electric cars are built with different features from traditional ones and batteries need dedicated maintenance. This means that a different expertise is required when dealing with these kinds of vehicles, and garages will have to train their mechanics to fix them. Electric vehicles need regular recharging, as they have limited driving ranges (about 150km). A recharging infrastructure is critical to support the widespread use of these cars. While,owners will have a plug at home to recharge the car for a lengthy period of time (6-8 hours), it is important to also have public infrastructure available elsewhere, able to recharge the car in shorter times. Utilities companies will be the first to develop recharging stations. Some are already developing integrated solutions, such as the German RWE, working on the e-mobility project in Berlin with Daimler since end of 2008, or the Danish Dong Energy, working in conjunction with the project Better Place. Existing petrol stations could also supply power, as well as third parties (such as retailers), who have fewer restrictions. Another item that utilities companies should consider is the importance of setting up a smart grid and intelligent billing. For example, when recharging at home, there could be the risk of overload, and a smart grid would be an appropriate tool to manage the power loads – for instance, by recharging at night. Dedicated billings would help the consumer have a better view of the expenses related to car recharging. Off-peak (night-time) charging is ideal for both consumers and the grid, since energy demand is lowest (and energy is cheapest), the ratio of renewable energy to non-renewables is commonly highest, and, if managed correctly, the need to invest in grid infrastructure and additional electricity generation is minimised. New service companies are emerging within the new sector of electric vehicles. One of the emerging market leaders is Project Better Place Inc. It is establishing a business model in which it will own the battery and sell the consumer “miles” at a lower cost than the equivalent cost of petrol in each country. This way, the consumer can immediately benefit from lower fuel costs, without incremental upfront cost in the vehicle. A direct relationship between Project Better Place and electrical utilities means that the cost of electricity will be absorbed by Better Place. The cars used will be Renault/Nissan and battery solutions are being developed with NEC. Better Place provides clients with a charge spot for their homes and installs public charge spots, as well as battery switch stations. They are equipped with communication systems that send real-time data to both the client and the company. Several major companies have signed agreements in

26


NEWSLETTER

Israel, Denmark and Japan to substitute part of their fleet with Better Place vehicles. Corporates or government service fleets are the best initial target customers. Price and TCO are the two critical factors that lead the consumer to the choice of the vehicle he buys. At the moment, purchasers are generally not willing to pay a premium for electric vehicles. It is therefore critical that pocket prices decrease, through lower production costs, or through subsidies by governments or car manufacturers. Only a few consumers will be moved to pay a premium because of environmental concerns or high oil prices. Electric vehicles are experiencing a new popularity, with a greater number of models being offered by the world’s manufacturers, technology leapfrogging, infrastructure being built and pocket prices for consumers becoming more affordable. All this is leading to a widespread use of electric vehicles: the past coming back to the future.

The ongoing shift of health-care business from a provider-centred to a patient-centred system New needs driving the change in health-care business is the result of efforts to match emerging needs on both the demand and supply side. In fact, Carola Croci, principal, and Davide Conforti, Milan office patients are increasingly seeking dedicated and integrated care services, while pharmaceutical companies are facing increasing pressure on the prices and margins of their leading products, due to stricter governmental laws. This has forced a reduction of health-care budgets and the strengthening of generic products as patents expire. In the last decade, patients, especially those located in wealthy regions such as Western Europe, North America and Japan, have identified a raft of new needs with respect to health-care services: • Integrated care, as the implementation of a team medicine philosophy that promotes interaction and collaborative thinking among all those in the care delivery team. Patient data is shared through the use of secure electronic medical records that can be accessed only with an individual patient’s authorisation. • Personalised care, such as having a unique interface providing support and coaching with respect to health-care services, granting a fast and effective response to individual preferences. One example of this is the increasing use of gene scan technology to customise treatments. • Interest in preventing disease like, for example, the growing trend towards wellness initiatives, the proactive assessment of risks (also helped by enabling technologies, such as bio-monitoring). Conversely, pharmaceutical companies have to protect their margins from a market scenario which is becoming more and more competitive. What this means is that some major pharmaceutical companies are looking for opportunities to differentiate their products from the generic versions, in order to keep a competitive advantage reflected in higher prices, i.e. margins. We need to consider prescription drugs separately from those sold over the counter (OTC). With respect to prescription drugs, this opportunity lies in revised business models, creating productservice packages built around patient needs. With OTC products, instead, there is the opportunity to leverage and drive the spontaneous birth of online communities, comprised of product – and, indirectly, brand – supporters, which can include clients, doctors and pharmacists, e.g. OKI’s page on Facebook. Exploiting this innovative and growing communication channel, pharmaceutical companies may drive content, provide advice, and gather feedback, in order to increase brand and product reputation and gain direct contact with end users.

27


Power - up

Source: World Economic Forum, adapted from Institute for Alternative Futures, “2019 Healthcare That Works for All” (2009), and the World Health Organization, “The World Health Report (2008)”

Payer/provider-centred health care

Patient-centred health care

System designed for disease

System designed for health

Patients are passive consumers of care services

Patients are active partners in managing own health

Reactive - aim for cures when symptoms occur

Proactive - aim for prevention and early detection

Providers held responsible for advising patients

Providers held responsible for health of population

Culture of avoiding mistakes

Culture of striving for improvement

Fragmented care - physicians work as individual experts

Integrated care - physicians work as part of cooperative teams

Decisions by clinical autonomy

Data-driven decisions

Episodic testing

Clinically impactful biomonitoring

Focus on current medical problem

Focus on all risks and needs

Short visits with little information

Continuous personal relationship with coaching

One size fits all

Customised personal approach

Costs out of control

Affordable, value-based care

From provider-centred to patient-centred health care The result of these needs and pioneer initiatives carried out by the major pharmaceutical companies in the most developed regions represents the evolution of the health-care system towards a more patient-centred approach. A patient-centred system fundamentally reorients health care from a reactive, curative and disease-focused approach to a preventative, lifestyle-based and health-focused approach. Shifting the delivery of health care to a patient-centred system helps reduce the financial pressures of an ageing society on health-care systems, by encouraging individuals to take ownership of their health across the course of their life, thereby reducing the incidence of preventable chronic diseases and leading to better health in old age. A patient-centred system encourages patients to be informed and active partners in managing their own health, as opposed to passive consumers of health-care services. It starts with a close, direct and continuous relationship between an individual and a designated contact person, whose role is to get to know each individual’s circumstances, mentor them to manage their health, so that they are less likely to need medical interventions, and help them make informed choices among specialist care options when care becomes necessary. This contact person can be highly trained, such as a nurse practitioner, or a health coach, who has basic training and a sufficient level of generalist health-care knowledge to help patients elicit information from providers and make them better informed. In either case, the contact person should be easily accessible to patients, whether virtually or by being conveniently based in local neighbourhoods. In this respect, total health management is undoubtedly an interesting emerging paradigm. In brief, it refers to the revision of a pharmaceutical company’s business model, providing a full set of services specifically structured to answer a patient’s needs. All the cases considered share a common background: they are all built on a product or series of products that are considered success stories for the company, thereby raising visibility. They can also be easily attributed to a specific therapeutic area. Of course, this approach has to be tailored in order to meet local market needs and specificities. In Italy, for instance, the presence of a family doctor may prevent the possibility of training nonmedical staff to provide coaching support. USA and UK lead the change, while Italy remains stuck in the middle As previously mentioned, among all players in the health-care business, some major pharmaceutical companies have started to implement Total Health Management programmes, in order to defend or relaunch their positioning in specific therapeutic areas.

28


NEWSLETTER

Prevention/education

Diagnostics/healing

Unique interface

Provide online contents to spread the “culture of prevention”

Provide scientific diagnostic services

Build up a network with hospitals and clinics to provide classes to doctors and nurses about: - Specific diseases - Patient assistance protocols Enrich product offer including preventive drugs and selfmedication (e.g. homeopathic drugs for allergies)

Expected benefits

Total Health Management: how to redesign offer around customer needs

Offer free diagnostic campaigns focused on specific diseases

360°Wellness Build up partnerships with: - Fitness chains, in order to offer wellness services targeted to patients with specific clinical needs - Nutritionists and dieticians

Grant psychological and material support to patients (clinical support centre and/or home delivery of services and pharmaceutical products)

Create a call centre to manage patients’ Complement product portfolio follow up after completing diagnostic with diagnostic products (e.g. contrast agents) and healing and healing phases drugs (painkillers, anti-virals, etc.) Offer wellness products (all nutritionals, vitamin and saline integrators, etc.)

- Patient-oriented business approach (starting from market needs and not from product portfolio), resulting in a sound competitive advantage - Generation of new profitability sources

- Strengthening of brand and visibility (especially when targeting specific diseases) - Networking and lock-in effect with: - Patients - Doctors - Other influencers

All the examples outlined are within American and Western European companies, as these are the most evolved markets, where pharmaceutical companies are facing even fiercer competition from generic products. A brief analysis of the Italian situation shows that, generally speaking, there is still a lack of sensibility towards these opportunities – even if major Italian pharmaceutical companies are also facing growing pressure on margins, and the wellness trend is already highly visible – as companies prefer to scout for other products or licences to differentiate Total Health Management initiatives: success stories built on areas of therapeutic excellence

Business

US pharmaceutical company focused on biotechnology Revenues: $13.4 Bln EBITDA: 39%

US pharmaceutical company focused on kidney diseases and biotechnology Revenues: $12.3 Bln EBITDA: 21%

Danish pharmaceutical company focused on diabetes Revenues: $ 9.4 Bln EBITDA: 29%

French industrial group specialising in both industrial and pharmaceutical activities

UK insurance

Covered clinical area

Bio-oncology Immunology Metabolism and First Aid Virology

Kidney infections Immunology Virology Chronic diseases Hemophilia

Diabetes Hemostasis Growth and other hormones

Respiratory problems Forced nutrition

N/A

Total Health Management initiatives

Partnership with DAXO (ICT and mobile RFID systems) to design a clinical test to identify all patients affected by breast cancer (and healed by some hospitals/clinics) who could benefit from Herceptin (their blockbuster for oncology) Commercial push of Herceptin on the identified target

Offer of a series of services associated with the healing of kidney diseases: - Site with custom tutorial - Network of nurses providing products and education on specific treatments (at home or in hospitals and clinics) - Travel service for patients

From 2001, provided a psychological support to people affected by diabetes Moreover, a training for medical staff on chronic diabetes disease has been provided in 65 countries, as well as free analysis of blood glycaemia and economic/ diagnostic support to associations/ clinics for research on diabetes

Launched a series of initiatives in the ’90s in the healthcare business: - Home delivery of oxygen for people affected by chronic respiratory problems - Technical and clinical support services to both patients and hospitals/ clinics - Education services on how to use Air Liquide equipment

Established a partnership with Virgin Active Health Club network, granting facilitations for patients’ subscriptions .... .... and providing a reduction in insurance fees for all clients who train themselves on a regular basis (clients’ risk reduction thanks to a healthier life)

Sources: companies’ websites, PWC report

Pharmaceutical Not pharmaceutical

29


Power - up

Italian cases: signals that something is changing

Business

Italian pharmaceutical group acting into contrast agents, pharmaceutical, diagnostic services and devices Revenues (group): € 960 Mln (of which € 60 Mln CDI and € 220 Mln pharmaceutical products) EBITDA: 13%

Italian pharmaceutical group acting into pharmaceutical products, cosmetics and personal care, agri-food, real estate sectors Revenues (group): € 1,220 Mln (of which pharmaceutical products € 610 Mln)

Italian company focused on wellness machinery and solutions Revenues: € 400 Mln EBITDA: 14%

Covered clinical area

Gastroenterology Cardiology Neurology Respiratory

Self-healing and first aid Pain therapy Neuropsychiatry Daily care (nutrition, body care)

Medical rehabilitation (product line specifically addressed to cope with hospitals/clinics’ therapeutic needs)

Current efforts towards “Total Health Managementlike” approach

Provider of home diagnostic services and specific support to smokers through the CDI (e.g. anti-smoking clinic) Recent portfolio enrichment, introducing nutritional supplements

Company website structured to provide suggestions on how to manage clients’ own health: - Prevention - Daily wellness (sport and diet) - Natural healing - Self healing Each type of advice is then linked to a specific product Online wiki and quiz sections to involve clients in healing process

USB key with clients’ customised fitness programs and physiological parameters

What’s next?

Develop a Total Health Management programme, built on gastroenterology products

Scout a limited set of therapeutic areas on which to design a comprehensive service package

Provide online tailored training programs Commercialise Technogym branded wellness devices to monitor the key parameters of physical activity Get synergies with Enervit nutritionals product line (same owner)

Pharmaceutical Not pharmaceutical

Sources: companies’ websites and internal documents, interviews

their portfolio, rather than building an end-to-end service package on a success story. However, there are some signals suggesting that even the Italian health-care system will move in the direction already chosen by more evolved economies, so we expect that Italian companies will also gradually modify their business model, in order to exploit this new opportunity for differentiation. Indeed, there is already some evidence that things are changing. It’s a change driven not only by players in the health-care business, but also those who are part of contiguous ones. One major concern about Italy and other European markets lies in the identification of the revenue model for Total Health Management opportunities. The service package could be either offered for free or sold to patients. In the first case, the payback lies solely in the expected increase on sales volumes and in the reduced price pressure. In the second instance, the company has to decide whether to sell it privately, or to find an agreement with policymakers and insurance providers, in order to reduce the financial burden on patients. The shift from a provider-centred to a patient-centred health-care system opens a wide window of opportunity to support our clients: • Pharmaceutical companies can either implement total health management-like programmes as a defensive move, to protect the margins of their prescription drugs, or to exploit and drive the self-generation of online communities as an opportunity to recover a direct relation with patients. • Players belonging to other businesses, instead, are gradually recognising this shift, and the growing emphasis on wellness solutions and products, as a key business opportunity, with the chance to enrich their product offering. They are entering a relatively new segment which still needs a reference business model and leveraging on their brand value.

30


NEWSLETTER

Value Partners Group Milan Via Vespri Siciliani, 9 20123 Milan - Italy Tel. +39 02 485 481 Fax +39 02 485 48 720 / 725 Value Partners Management Consulting Milan Via Vespri Siciliani, 9 20123 Milan - Italy Tel. +39 02 485 481 Fax +39 02 485 48 720 / 725 Rome Via di Porta Pinciana 1 00187 Rome - Italy Tel. +39 06 697 6481 Fax +39 06 697 648 51 London Greencoat House Francis Street SW1P 1DH London - UK Tel. +44 (0) 20 7630 1400 Fax +44 (0) 20 7630 7011 Istanbul Meydan Sok. Spring Giz Plaza Floor 3 n° 26 Maslak 34398 Istanbul - Turkey Tel. +90 212 276 98 86 Fax +90 212 276 98 82 Dubai Business Central Towers Suite n° 1304 A P.O. Box 503025 - DMC 9 Sheikh Zayed Road Dubai Media City United Arab Emirates Tel. +971 4 4335628 Fax +971 4 4380223 São Paulo Rua Padre João Manuel 755 1º e 2º andares - cj. 11, 12 e 21 Cerqueria Cesar São Paulo - CEP 01411-001 Brasil Tel. +55 11 306 809 99 Fax +55 11 308 141 38

Rio de Janeiro Rua da Candelária 60 10º andar Centro Rio de Janeiro CEP 20091-020 Brasil Tel. +55 21 2213 9191 Fax +55 21 2213 9190 Buenos Aires Alicia Moreau de Justo 550 4° Piso Buenos Aires - C1107AAL Argentina Tel. +54 11 4314 4222 Fax +54 11 4314 6111 Mumbai 8th floor,”C” Block, Devchand House Shiv Sagar Estate, Dr. Annie Besant Road 400 018 Worli - Mumbai India Tel. +91 22 66119 700 Fax +91 22 66119 988 Hong Kong Spectrum Value Partners 18-06, Vicwood Plaza 199 Des Voeux Road Sheung Wan Hong Kong Tel. + 852 2103 1000 Fax + 852 2805 1310

Value Team IT Consulting & Solutions

Pisa S.S. del Brennero km 4 Loc. La Figuretta 56123 Pisa - Italy Tel. +39 050 8009 401 Fax +39 050 8009 626

Milan Viale Cassala, 14 A 20143 Milan - Italy Tel. +39 02 489851 Fax +39 02 4898 5999

Turin Corso Svizzera 185 10149 Turin - Italy Tel. +39 011 772 241 Fax +39 011 771 644 6

Rome Via Sant’Evaristo, 167 00165 Rome - Italy Tel. +39 06 3988 11 Fax +39 06 3937 6283

Treviso Viale della Repubblica, 12 31020 Villorba - Italy Tel. +39 0422 2511 Fax +39 0422 251251

Cosenza Via Spagna, 50 Contrada Cutura 87036 Rende - Italy Tel. +39 0984 44871 Fax +39 0984 448781

Munich Maximilianstrasse 35a Capital D 80539 Munich - Germany Tel. +49 (0) 89 24218 445 Fax +49 (0) 89 24218 200

Genoa World Trade Center Via De Marini, 1 16149 Genoa - Italy Tel. +39 010 2359 1 Fax +39 010 2359 251

Istanbul Dereboy Sok. Sun Plaza, 24 Kat 10 Maslak Istanbul - Turkey Tel. +90 212 276 98 86 Fax +90 212 276 98 82

Naples Via Campi Flegrei 34 Loc. Arco Felice 80078 Pozzuoli - Naples Italy Tel. +39 081 8046025

São Paulo Av. Eng. Luiz Carlos Berrini, 716 5° andar - cj. 52 Edificio Palace Berrini Brooklin Novo São Paulo - CEP 04571-926 Brasil Tel.+55 11 3075 5116 Fax +55 11 3075 5117

Beijing Tower A, Suite 1702, Vantone Centre Jia 6 Chaoyangmenwai Avenue 100020 Beijing People’s Republic of China Tel. +86 10 5907 0616 Fax: +86 10 5907 0383

Rio de Janeiro Rua da Candelária, 60 10º andar Centro Rio de Janeiro CEP 20091-020 Brasil Tel. +55 21 2213 9191 Fax +55 21 2213 9190

Singapore Spectrum Value Partners 7 Temasek Boulevard. Suntec Tower One #26-04 038987 - Singapore Tel. +65 6820 3388 Fax +65 6820 3389

If you would like to discuss any of the issues raised, please contact your nearest Value Partners office or write to newsletter@valuepartners.com

31


Power-Up Power-Up Pow

Power-Up Power-Up Pow


value partners power up april 2011