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Vol. 3 Issue 1
thesmartcube.com
Welcome to our first
installment of
Cubisms for 2013.
It’s always nice to start the new year afresh and this year, we
certainly embraced that philosophy. We’re excited to reveal our
new look to you—from our new corporate logo to the revamped
Cubisms you are now reading.
Omer Abdullah
Co-founder and Managing Director
The Smart Cube
Cubisms
Vol. 3 Issue 1
10 4 32 19 15
Corporate Governance
perceived to be more trustworthy and
usually enjoy higher valuations as well
as easier access to capital.
Chinese Companies
scandal and fraud rear its ugly head
with increasing intensity. While western
countries have seen large-scale scandals
such as Enron and WorldCom, more
Jyoti Prakash, Sajal Agarwal, Ashish Kumar, and Naman Vij
recently, a growing number of such cases
Financial Research
(and with increasing regularity) are being
attributed to Chinese companies listed
on foreign exchanges.
Corporate governance— of geography. A natural follow on has
need of the hour? been the demand for improved and
This alarming trend has brought to the
Globalization of the world economy, more transparent corporate governance
fore the issue of CG and transparency
the opening of trade relations, (CG). According to the Organisation
standards in the country and has
convergence of global capital markets for Economic Co-operation and
forced the Chinese government to take
and the resultant move towards a Development (OECD), “Corporate
a hard look at its implementation and
capitalistic, market-based economy governance is critically important to a
enforcement efforts in this area.
have led to an increase in the scale and country’s economic growth and stability,
complexity of corporations, irrespective because it provides the credibility
Phase 2 (1993–2003)
Background on CG in China meant more exposure to international
This phase was characterized by radical
China embarked on the path towards corporate and governance standards.
changes in terms of liberalization,
economic reform in the late 1970s, after including passing of the Company Law
The introduction of CG in China
years of operating under the control in 1993 and China’s accession to the
and subsequent improvements can
of the state which, until then, had World Trade Organization (WTO) in
be segregated into three distinct
staked a claim on all production assets 2001. The Company Law provided the
phases (Fig. 1):
in the country. The reforms focused legal support to lay the groundwork for
on shifting away from state-owned China’s CG framework and established
Phase 1 (1978–1992)
enterprises (SOEs) to private enterprises, companies as legal entities. Further,
During this phase, the focus was
and encouraged the liberalization of accession to the WTO integrated
on the development of the Chinese
the Chinese economy with respect to China into the world economy, in
capital market. In 1990, two major
foreign capital markets and trade. turn, leading to the increased need
Chinese exchanges—the Shanghai
Stock Exchange and the Shenzhen for improved transparency.
As more Chinese firms transitioned
Stock Exchange—were established.
towards privatization, company Phase 3 (2004 and onward)
This was followed by the establishment
ownership became more diversified, This phase was marked by
of the Chinese Securities Regulatory
leading to a conflict between improvements and amendments
Commission (CSRC) in 1992. This
management and shareholders’ in existing laws and policies and
opened up corporates to scrutiny
interests. This led to the need to set the introduction of new, enterprise-
by investors and also required the
up standard CG practices to manage friendly laws. The amendment in
government to ensure the protection
conflicts. Increasing foreign trade also
Sources: China Securities Regulatory Commission; OECD; “Chinese Corporate Governance — History and Institutional Framework”, RAND Center of Corporate Ethics and Governance, November 2012;
“Corporate Governance at the Chinese Stock Market — How it Evolved”, Junhua Tang and Dirk Linowski.
the Securities Law and Criminal The primary reason for this lack of listed companies continue to be non-
Law (2006) led to an increase in the enforcement is persistently high state tradable. However, their percentage has
supervision of listed companies and ownership, which has had a trickledown declined from 64% in 2004. Another
made issuance more transparent. The effect on all aspects of corporate follow-through effect of ownership
law on protecting state-owned assets of functioning and governance in the concentration in the hands of the state
enterprises (2009) was promulgated to country. Even after three decades of is the lack of independence among the
safeguard the country’s basic economic reform, the state’s ownership of companies board of directors. Provisions allow
system, to consolidate and develop the in China remains pervasive, with close for the dominant shareholder (in most
state-owned sector. In addition, the law to 80% of market capitalization being cases, the government) to nominate all
banned embezzlement of state-owned accounted for by government-controlled directors, putting a question mark on
funds and the sale of state-owned assets enterprises. As of mid-2010, the top 10 the “independence” of the directors.
at below fair value. state-owned firms accounted for nearly
40% of the Shanghai Stock Exchange According to an assessment of a
range of factors by Transparency
Steady regulatory progress, market capitalization. Mutual funds and
International (a non-governmental
but CG and transparency still financial institutions (which typically
encourage higher standards of CG) have organization monitoring corporate and
lagging developed and emerging
seen little growth since their debut in 1998. political corruption in international
market peers development), of the largest 105 listed
Despite the significant headway made by
A legacy issue related to state ownership companies globally, three of the six
the introduction of CG standards, China
is non-tradable shares, which are shares Chinese companies on the list (including
continues to experience inefficiencies in
owned either by state enterprises or one in Hong Kong) were among the worst
the implementation of these practices. As
other legal entities that cannot be performers, i.e., least transparent, while
a result, Chinese corporations continue
traded. Despite reforms over the years, the other three Chinese companies fared
to suffer from weak enforcement of and
approximately 20% of issued shares of in the second-worst category (Fig. 2).
adherence to corporate laws.
7 11 4 4 8 3 39 6 5 Hong Kong 66 62 68 71 75 53
7.0 Thailand 58 62 44 54 80 50
6.8
6.6 6.5
6.2 Japan 55 45 57 52 70 53
5.5
Malaysia 55 52 39 63 80 38
4.2 Taiwan 53 50 35 56 77 46
Korea 49 43 39 56 75 34
China 45 43 33 46 70 30
Philippines 41 35 25 44 73 29
y
om
ia
a
l
d
ce
s
zi
an
n
e
an
pa
al
ra
at
n
hi
gd
tr
m
ra
Ja
rl
St
B
C
us
ze
in
er
Indonesia 37 35 22 33 62 33
ed
it
A
G
Sw
it
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it
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U
Another study by the Asian Corporate Many of these scandals have involved While the Chinese market
Governance Association revealed that companies that avoided the rigorous
Chinese companies lag their Asian peers disclosure requirements of IPOs by
scored well on accounting
as well. While the Chinese market scored opting for the reverse merger route, standards, it fared the worst
well on accounting standards, it fared in which a private Chinese company on CG enforcement.
the worst on enforcement of CG (Fig. 3). acquires an already listed shell
company. Insider trading has also been
Accounting scandals aggravating an ongoing issue, as has been seen in
the situation further recent cases in the news.
The lack of appropriate CG and
transparency practices among Chinese Stricter enforcement of CG and
companies has been highlighted by transparency required to reap full
the accounting scandals surrounding benefits of global capital markets
Chinese companies listed on the Continued economic growth will place
NASDAQ, NYSE and the Toronto Stock a continued emphasis on improved CG.
Exchange. Firms such as Muddy Waters, China, despite its growth slowdown, has
Alfred Little and Citron Research have fared significantly better than its global
revealed accounting discrepancies and peers, registering 7.7% GDP growth
erroneous information disclosure by in 2012, having witnessed an average
a number of Chinese companies. The growth rate of more than 10.0% during
number of cases filed against such the past 30 years. Although Fixed Asset
Chinese companies has increased Investments (FAI), which has been the
substantially, from 2 in 2009 to 15 in major driving force behind China’s GDP
2010 and 38 in 2011—with the most growth, has declined, it continues to be
typical issues usually being fraudulent close to 24.0% in 2012 (Fig. 4). Growth
or misleading accounting disclosures in industrial production, at 9.6% YoY
(e.g., overstatement of assets, revenue, in October 2012, beat the consensus.
profits and margins). Further, inflation eased to 1.7% and
retail sales increased slightly to 14.5%
However, some cases of other poor YoY, indicating that the economic
CG practices have also been observed. slowdown may be past the trough.
All of which is to say that, with either through acquisitions or creation As companies look to get back on track
continued (and possibly further of joint venture with foreign firms, by in terms of IPOs and IPO strength,
pickup in) economic growth, Chinese swapping American Depositary Receipts. improved CG will be a key factor in
companies are expected to continue driving listing performance (and beyond).
to seek capital to expand existing The US and Hong Kong have hitherto
operations and fund growth. Chinese been the primary markets to seek Beyond the individual company level,
companies have been active in the capital. While the global crisis was a the Chinese government’s “go global”
foreign capital markets, with an major setback, with capital raised from strategy (announced in 1999 in response
increasing number of them seeking IPOs in foreign markets declining to the changing global environment and
listings on foreign exchanges 75% YoY to $10.5 billion in 2008, the with an aim to scale up local Chinese
to raise capital. recovery was quick. In 2010, the market companies and seek those resources
rebounded to $38.4 billion, with a unavailable within the country) has
The primary factors making these record of 90 IPOs. Further, in 2011, been going strong—with increasing
markets attractive business destinations foreign direct investment into China overseas acquisitions in both 2010 and
are easier access to capital/liquidity, was at consistently high levels, at $124 2011 (Figs. 6-7). Given the increasing
optimal valuation, high credit-worthiness billion. However, concerns regarding exposure of Chinese corporations to
and the possibility of new partnerships. the Eurozone debt crisis and fears of a foreign companies (through mergers
The developed equity markets provide hard landing for the Chinese economy and acquisitions) and their corporate
a larger pool of capital, more liquidity made investors cautious, a situation standards, it is imperative for Chinese
and the opportunity to raise funds which has been aggravated by the CG corporates to continue to improve their
from institutional investors (who are issues described earlier. In 2012, only 32 transparency standards.
absent from China’s stock markets due IPOs have been launched by Chinese
to stability and transparency concerns). companies, raising a total of slightly Sound CG reflected
Further, as the issuers expect to obtain over $2 billion. Vipshop, China’s leading in improved performance
the ‘right’ valuation for their securities, online discount retailer for brands, Does effective CG actually reflect
due to the presence of a large numbers was the sole US listing in 2012, raising in performance, and does the market
of peers, these markets provide optimal $71 million—39% lower than initially recognize and reward better CG
valuation opportunities. Moreover, an planned (Fig. 5). China Auto Rental, which and transparency?
international listing enhances the scope had originally planned to raise $300
for improved credit ratings and the million, postponed its IPO after failing to To answer this question, The Smart
possibility of entering into partnerships, attract enough investor interest. Cube evaluated CG and transparency
946 38
791 34
769 718 30
399 455
360 384 377 21
264
11 12 11 11
9
2008 2009 2010 2011 2012 7 6
4 5
Chinese Acquirer/Non-Chinese Target Non-Chinese Acquirer/Chinese Target
Sources: China Securities Regulatory Commission; OECD; “Chinese Corporate Governance – History and Institutional Framework”, RAND Center of Corporate Ethics and Governance, November 2012;
“Corporate Governance at the Chinese Stock Market –How it Evolved”, Junhua Tang and Dirk Linowski.
practices of the best- and worst- and Corporate Social Responsibility This article was written by The Smart Cube (TSC)
on an independent basis. The insights included are
performing overseas-listed Chinese disclosures. That said, other CG areas
based on its own research and from sources believed
companies. It focused on overseas- such as ensuring independence of board
to be reliable. However, TSC may have received
listed Chinese stocks, as the impact of members and independent members on information on this topic that is confidential and
the accounting scandals is highest on various committees also continue to be proprietary to a third-party. As such, this
these stocks with overseas investors a pain point for both worst performing information will not have been utilized and is thus
not reflected in this article.
becoming more aware of the issue and best performing companies.
and hence greater scrutiny of CG and The views mentioned in this article do not in any
way constitute investment advice and should not be
transparency practices in these stocks. In conclusion
construed as an offer to sell, a solicitation to buy, or
In recent decades, China has continually
an endorsement or recommendation of any
The identification of the 15 best and 15
reinvented itself as a globalized, market- company, security or commodity. TSC disclaims all
worst performers is based on excess/
based economy. At the same time, CG responsibility for investment decisions based on the
lower returns generated compared with content of this article or the dissemination or
practices are struggling to evolve and
their sector peers listed in China (this distribution of this article to a third party. Any
break free of their bureaucratic past.
is to separate the effects of sector and conclusions, calculations or determinations reached
While the Chinese government has
constitute TSC’s views as of the date of this
macroeconomic factors), premium/
shown great initiative in introducing publication and are subject to change without notice.
discount in P/E multiple (average of
radical reforms, the drive and effort
last three years) to sector peers listed
required to implement these reforms
in China, and the level of institutional
must continue to develop.
holdings in the stock (the higher level
of institutional holdings, the better; To this end, continued privatization,
therefore, institutional holdings level increased participation by institutional
as a parameter for the quality of the shareholders (to create a broader
company was used). shareholder base), strengthening
of the legal framework (increasing
The analysis of CG and transparency
legal obligation of management and
practices of these companies revealed
controlling shareholders to protect
that, on the whole, better transparency
minority shareholder rights) and clearly
and disclosure practices are clearly more
etching out the roles, responsibilities
prevalent among the 15 best performers
and independence of the supervisory
(Figs 8-9). This indicates that companies
board are some of the key areas that
with better transparency/disclosure
need to be addressed on an immediate
tend to perform better. However, there
basis for China to continue on its
is significant room for improvement
growth trajectory.
in Environmental Sustainability
D
demographics, and sustained economic
espite adverse economic and reach about 13.8 billion revenue
activity. Between 2012 and 2031, the
conditions in the recent past, passenger kilometers (RPK) (Fig. 1).
region is likely to record a CAGR of 7%
the airline industry globally
in air travel, increasing its market share
has proven to be resilient. After a short While the mainstay markets (Europe
from 27% in 2011 to 37% in 2031 (Fig. 2).
downturn, the industry recovered and North America) have not shown
In contrast, the North American and
quickly and, in fact, grew moderately. significant growth, and are not
European markets are likely to grow at
From 2011 to 2031, annual air traffic expected to grow substantially in the
a relatively muted CAGR of 3% and 4%,
is expected to increase at a compound near future, Asia Pacific has emerged as
respectively, during the period.
annual growth rate (CAGR) of 5%, a savior of the global air travel industry,
driving growth and expansion. With the
2
28% 23% 20% Increasing corporate travel
According to various statistical
bodies, corporate travel is also expected
to further drive growth of the Asia-
2031F
Pacific airline industry as a number
100% = 13,764
of professionals/entrepreneurs are
billion RPK
traveling within and to the region.
Europe Asia Pacific Europe
This is largely attributed to the
27% 37% 20%
increasing trade, business, and financial
opportunities happening within this
region among various countries. As
Source: Boeing Current Market Outlook 2012–2031 (September 2012)
100% = 13,764 billion RPK a result, Asian markets are likely to
12
10
6
USD Billion
-2 Europe Asia Pacific North America Latin America Middle East Africa
“We see tremendous growth experience continuous growth in and tourism industry. OTAs are also
business travel, despite a weak European experiencing faster growth than airline
potential in Asia Pacific. The economy. In China, business travel is websites, leading all travel categories
Asia-Pacific region is now the expected to grow 17% and 21% in 2012 in terms of unique monthly visitors
world’s single largest aviation and 2013, respectively, and the country and attracting, in some cases, more
is projected to pass the US as the world’s than twice as many visitors as airline
market, as well as a growing largest business travel market by 2015. websites. Online gross bookings in this
economic powerhouse, region are likely to grow twice as fast as
3
Budding middle class
making it crucial for airlines the total travel market to comprise 25%
The rapidly growing middle class in of the total market by 2013.
to be a part of this market for Asia Pacific provides a large number of
increased growth.” opportunities for the airline industry,
Growth in Asia Pacific helps
domestically and internationally. By
Robert Bailey, President and CEO, Abacus airline industry soar
2030, Asia Pacific will be home to 66%
International (June 2012) Many of the key drivers fueling growth
of the middle class population. Further,
among Asia-Pacific airlines have a direct
in Asia, there are 270 cities with a
impact on the airline industry globally.
population of one million that lack
Three primary areas are in new airplane
an airport. Additionally, by 2014, one
deliveries, demand for single-aisle
billion people are expected to travel by
aircraft and the outcrop of new airlines
air in Asia Pacific.
in the Asia-Pacific market.
4
Growth of online travel agencies
1
Asia Pacific to lead in new
Online travel agencies (OTAs) in
airplane deliveries
Asia Pacific continue to dominate travel
Between 2011 and 2031, the number
retail sales. There also is significant
of airplanes in the Asia-Pacific fleet
room for growth, as bustling economic
will nearly triple, from 4,710 to 13,670.
activity and the rise in adoption of
To meet the increasing demand,
e-commerce continue to aid the travel
2
Rising single-aisle aircraft usage
The increasing preference for a
low cost carrier (LCC) model and the Asia Pacific North America Europe Latin America Others
increase in demand for short-haul
flying are likely to fuel a substantial Source: Boeing Current Market Outlook 2012–2031, September 2012
increase in demand for single-aisle
aircraft. Between 2003 and 2011,
single-aisle capacity doubled, and it
is expected to further double by 2021 Figure 5 — Share In Global Fleet
(Fig. 5). The narrow body, single-aisle By Aircraft Size
segment is likely to increase as well, as
these aircraft have lower maintenance, 19,890 39,780
better economics, and higher fuel
4.0% 2.5%
efficiency. This will be primarily due to
5.6%
the increased demand for LCCs from 14.0%
developing economies such as India 22.9%
and China. 18.6%
3
New airlines entering the market
To leverage these growth
opportunities, the number of new airlines
in Asia Pacific has increased sharply over 63.4% 69.0%
the past decade. New LCCs have cropped
up in almost every major nation (Fig. 6).
Regional airlines also are establishing
subsidiaries in neighboring countries 2011 2031F
and even diversified business groups are
entering the sector. Single Aisle Twin Aisle Regional Jets Large
also venture into international and long- and taxes, resulting in dampened Final destination
haul markets. Asia-Pacific carriers will growth. In Asia Pacific, the presence Amidst the rapidly changing market
continue to invest in service innovation, of multiple governments and regulators dynamics and increasing regulations,
adding more fuel-efficient aircraft in in a highly diverse region has led to air carriers have started to adopt
a bid to meet the projected growth in several inconsistencies. different end user strategies. The
travel demand. future may look bleak in the short term,
From a workforce standpoint, the region
driven by immediate challenges such as
However, the industry continues to face needs to train personnel such as pilots
high fuel costs and risks posed by the
challenges, such as a weak cargo market and aircraft technicians to leverage the
Eurozone crisis; however, air carriers
and high fuel prices. Further, the global benefits of rapid fleet modernization and
from Asia Pacific are likely to stand
economic slowdown has resulted in projected growth in air travel. According
out. The region is expected to exhibit
significant downside pressure on air to Boeing’s estimates, Asia Pacific is
higher sales and margins than their
freight volumes. This is primarily due likely to require the highest number of
Western counterparts in the long term.
to weak consumer sentiment, especially new pilots and technicians over the next
Carriers in the region also are looking to
in developed economies such as Europe 20 years globally. A pilot shortage has
innovate and differentiate by providing
and the US, and a corresponding already started to take place in the Asia-
travel features such as air-cushioned
slowdown of exports from Asia. Pacific region, with airlines experiencing
seats and freshly-made food to attract
delays and operational interruptions
customers. The spirit of transformation
On the regulatory side, the global airline due to pilot scheduling constraints. The
that is prevailing across this region, in
market has been affected by political region is expected to need an additional
the form of strategic realignments and
concerns in the US and Europe. In 185,600 pilots and 243,500 technicians
versatile airline offerings, is likely to
addition, global air travel experienced by 2031, as airlines expand their fleet
propel these air carriers to look beyond
increased government regulations and new carriers open shop. traditional business models and register
regarding airport security, emissions
high sales growth in the long run.
Country–
Airline Commencement of Development
Operations
In 2012, Jetstar Airways entered Japan by forming a partnership with Japan Airlines (JAL) and
Jetstar Japan Japan
Mitsubishi Corporation
Joint venture among AirAsia, Malaysia, and All Nippon Airways, Japan. The airline commenced
AirAsia Japan Japan
operations in August 2012
Scoot Singapore LCC subsidiary of Singapore Airlines. Began operations in June 2012
Air Mantra India Subsidiary of Religare Group, which started operations in 2012
Commenced operations in March 2012, as a joint venture between All Nippon Airways and the First
Peach Aviation Japan
Eastern Investment Group (a Hong Kong-based private equity and venture capital firm)
Tiger Airways, Australia Australia An Australian subsidiary of Tiger Airway, the airline commenced its services in November 2007
Tianjin Airlines China Commenced operations in 2007, with a focus on China, Mongolia, and South Korea
Began operations in November 2007. It is a long-haul, budget airline, with domestic and
AirAsia X Malaysia
international operations
Commenced operations in August 2006, and is India’s largest LCC. In January 2011, it qualified to start
IndiGo India
international operations, which coincided with an order for 180 A320s from Airbus worth $15 billion
A domestic airline established in 2006 It is a joint venture between Shenzhen Airlines of China and
Henan Airlines China
Mesa Air Group of the US
Began operations in November 2005, in India as a LCC. In 2011, the company ordered 72 new A320 Airbus
GoAir India
aircraft in a deal worth about $6.1 billion
Spring Airlines China A China-based LCC, which began operations in July 2005
Started operations in 2005, as an LCC. To augment its fleet of 20 Boeing 737NGs, it ordered 15 Q400s
SpiceJet India
(with 15 options) and 30 Boeing 737NG aircraft in November 2010, adding to another 8 B737s on order.
Tracking Consumer
An illustrative example is used to
demonstrate the tool’s effectiveness on a
particular topic—specifically looking at
Attitudes on
the launch of the Apple® iPhone® 5 and
the nearly 60,000 tweets related to it.
Social Media
Sentiment analysis:
a three-step approach
The overall model development can be
Deepak Trehan and Rachit Khare divided into three phases (Fig. 1):
S
ocial networking sites can provide and dislikes and brand perception. 3. Build a model
valuable insight into the minds Armed with this knowledge, marketers
of consumers. The wealth of data can develop a more effective strategy
available can help marketers better and make better decisions overall. That
understand wide-ranging issues, such said, given the unstructured nature
as customer reception of a new product of the data, tracking and analyzing
launch, overall product attribution likes information from social channels can
NO
1
Collect and prepare data • Segregating commercial tweets • Cleaning text, such as removing http
R, an open source statistical software, links, punctuation, whitespace, etc.
• Cleaning tweets for word forms such
provides a Twitter interface that can
as nouns and adjectives • Removing stop words such as had,
be used to download tweets based on
which, that, product name, etc.
keyword and hashtag search criteria. • Filtering out commonly used
Nearly 60,000 tweets were downloaded English words • Stemming to get the root form of
two months after the launch of the every word
Some of these challenges were
Apple® iPhone® 5. This was done to ensure
2
addressed by applying the following Derive sentiment and
that consumers had enough time to use
set of operations: visualize tweets
and express their views about various
After the data was cleaned, a custom
features of the device. • Identifying words such as “win,”
list of positive and negative words
“contest,” etc., that could be attributed
Processing of these tweets for sentiment associated with the device was built to
to commercial tweets
analysis presented a number of classify the tweets. A matching logic
challenges, including: was developed to derive a sentiment
25,670
16%
30%
Frequency
11,102
53%
5,867
2,883
1,606 524
2 10 53 261
Negative Neutral Positive
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7
Score
3
score for tweets, and accordingly Build a model bottom. For instance, node 12 represents
classify them into positive, neutral To derive more meaningful results, tweets containing only keywords related
and negative. The chart on the secondary research and a count of words to the feature “body” of the smartphone,
previous page shows the output for this was used to identify the most frequently and a majority (51%) of them carry
classification (Fig. 2). appearing words. Keywords related to negative sentiments on this feature.
product attributes were then classified Similar key nodes with high percentages
In addition to this, an overall into product subcategories such as of negative sentiments can then be
sentiment score was calculated. In this battery, screen, apps, etc. (Fig. 6) researched further, to deep dive and
case, the overall sentiment score was explore reasons for dissatisfaction.
+31% (+ indicating positive consumer Upon consolidating the data, a heuristic
sentiment). At this stage of the model (decision tree) (Fig. 7) was built
Enhancements
analysis, the analyst team used word to understand the relationship among
The approach illustrated in this article
clouds to provide an effective way to various iPhone® 5 attributes driving
uses basic algorithms for sentiment
visualize textual data (Figs. 3-5). public sentiment. For our classification
detection in tweets. For better results,
model, tweets with neutral sentiment
advanced Natural Language Processing
The visual representation in the first scores were ignored, to avoid dilution of
(NLP) can be used to more accurately
shows that the word “love” was the model output. Various tree classification
identify the sentiment score for each tweet.
most repeated word. However, this options such as CART, CHAID and
NLP can handle the many complexities of
alone does not present a clear picture Exhaustive CHAID are available to
unstructured text data through advanced
of factors driving positive and negative create relevant decision trees. We used
processes such as conference resolution,
sentiments. Therefore, the first word the CART option in SPSS to arrive at
part-of-speech tagging, etc.
cloud was split into two—one each for the optimum decision tree.
positive and negative tweets (Figs. 4-5).
Additionally, other methods can
The classification tree presented here
alternatively be used to identify key
Even though the last two word clouds are provides an easy way of visualizing the
product attributes, and model their
not directly comparable, they provide impact of different product attributes in
impact on overall public sentiment.
insight into possible factors driving driving public sentiment, as captured
Alternatives include statistical techniques
positive and negative sentiments. For by Twitter data. This decision tree
such as logistic/ordinal regression
example, the positive sentiment word highlights the attributes most important
modeling, and advanced techniques such
cloud seems to be crowded by the in segregating positive and negative tweets.
as supervised and unsupervised artificial
appearance of related words, while the As seen here, attributes such as accessories,
neural networks (ANN). Feed-forward
words battery, screen, and voice-search voice search, camera, appearance, body,
networks like multi-layer perceptron,
appear more often than any other and comparison with other phones seem
radial basis functions, and Kohonen ‘s self
product attribute in the negative word most important in segregation of positive
organizing maps are commonly used for
cloud. Hence, this data could provide and negative tweets.
this purpose.
useful information for Apple’s product
development teams as well as marketers To identify defining characteristics
Use of ANN provides many advantages,
engaging with consumers on various of a particular node, the hierarchy of
including its ability to map and replicate
social media channels. classification should be read from top to
Inches
Further applications
Adapters Body Download HDSlot
This article highlights one of the uses
Battery Dead Shine Design Install bits/GBs
of analyzing unstructured text data to
better understand consumer sentiment.
However, the field of text data analysis
offers a large number of opportunities to
gain insight into consumer minds across
multiple media, including:
Figure 7 — Decision Tree Output
• Social networking sites such as Facebook
Node 0 (n=11,917) • Blogs
Negative – 35%
Positive – 65% • Call center logs
N Accessories Y • Email
Negative – 28% Negative – 39% Negative – 33% Negative – 7% • Promotion impact analysis
Positive – 72% Positive – 61% Positive – 67% Positive – 93%
• Brand image analysis
N Comparison Y
• Red-flagging potential sources of
Node 9 (n=7,397) Node 10 (n=1,461) dissatisfaction
Negative – 40% Negative – 30% • Developing consumer targeting policies
Positive – 60% Positive – 70%
Telecom Sector?
(MAPS), a practice where telecom
operators transfer their network
maintenance and management-related
responsibilities to NEPs. From 2000
Pankaj Dokania and Subash Chandar
to 2009, a number of managed and
STRATEGIC SERVICES professional services deals were signed,
as network operators took aggressive
I
n the first half of the last decade, Confronted with declining profit margins steps to streamline operations. Further,
leading network equipment providers from voice services, increasing market the evolution of MAPS and increase in
(NEPs) such as Alcatel-Lucent, complexities, strengthening regulations, trust among network service providers
Ericsson, and Nokia Siemens Networks and changing consumer preferences, and equipment manufacturers led to
(NSN) faced one of the industry’s most telecom companies realized the need to the beginning of turnkey models in the
challenging business environments. streamline their operations and focus on telecom sector, where NEPs handle
Before 2000, in the absence the complete deployment process from operators to differentiate their product
logistics to installation of the equipment offerings with new mobile services and
of a turnkey model, network in the base station for telecom content. All these require an extensive
operators typically hired companies (Fig. 1). effort on the part of the operator,
a telecom consultant for while improving the time-to-market of
Since then, the turnkey market has also the new services. Therefore, telecom
network deployment, been driven by the growing demand for companies are increasingly outsourcing
including network planning, new network deployment and expansion field activities—leveraging the
from network operators that are either
design, and optimization and vendor’s expertise as the technological
resource constrained or lacking in environment is becoming more
engaged with a third-party adequate in-house expertise. With the complex—while keeping planning and
logistics provider (3PL), such continuing evolution, telecom operators management functions in-house.
had a single point solution in NEPs
as DHL and Kuehne & Nagel,
for their base station deployment and Reduction in operational costs
for transportation and management (Fig. 2). Globally, telecom companies have
warehousing of the network come under increasing pressure to
equipment. Drivers propelling this evolution streamline their operational costs due to
declining margins from voice services.
Shifting business ecosystem This has sparked growth of leaner
Telecom companies are increasingly business models. Network operators can
simplifying the supply chain and leverage their manufacturing expertise
moving closer to consumers. As a result, and R&D capabilities to drive down
these companies are relinquishing the costs. Therefore, a turnkey logistics
technological aspects of the business management model is a comprehensive
and focusing on sales and marketing. model that can address an operator’s
Further, increasing competition in imperative to cost-effectively plan and
the telecom market requires network design new network deployment.
Turnkey Logistics
Management
Managed and
Professional Services In the recent past, telecom
Pure Play Equipment network deployment and
Manufacturer logistics management has
With declining revenue been increasingly moving
from telecom equipment towards a turnkey model
The telecom industry sales, NEPs diversified as operators look to focus
adopted a simple supply into network operation on the marketing and
chain, with the equipment and maintenace services operational aspects of the
manufacturers involved (MAPS) business, and outsource
only in the equipment their non-core activites
manufacturing process The model became very
and sales popular and a large
number of MAPS deals
were signed
Network Equipment
Deal Synopsis
Operator Provider
In May 2012, T-Mobile awarded a joint contract to Ericsson and NSN for LTE 4G network modernization and deployment
T-Mobile, US Ericsson
– Under the contract, Ericsson will provide turnkey services for a number of areas such as installation and commissioning
Based in Japan, SoftBank awarded a turnkey contract to NSN, in April 2012, to supply, deploy, and integrate its 4G,
SoftBank, Japan NSN Frequency Division Duplex—Long Term Evolution (FDD-LTE) network
– As part of the agreement, NSN will deploy Flexi Multiradio Base Stations
Telenor, a Norwegian telecom company selected ZTE, a Chinese telecom equipment and solutions provider,
in March 2012, to provide network equipment and construction services for its 2/3/4G networks in Pakistan
Telenor, Pakistan ZTE – The project scope includes about 18,000 network stations that covers 1,500 new GSM base stations,
7,000 new HSPA base stations, and 2,000 new LTE base stations
– The contract includes end-to-end network management
In March 2012, Optus—an Australian telecom operator, awarded a turnkey contract to Huawei to build a LTE
network in New South Wales and adjacent areas
Optus, Australia Huawei
– The contract’s scope includes a number of services, such as installation, project management, transmission
provisioning, and managed and professional services
Etisalat Misr, In February 2012, Etisalat Misr signed a turnkey agreement with ZTE, which would cover the supply, installation,
ZTE
Egypt and implementation of a number of equipment solutions, such as base station subsystem (BSS) solutions
M1, a telecom company based in Singapore, awarded a turnkey contract to Huawei, in May 2011,
for deploying a LTE 4G network
M1, Singapore Huawei
– The contract includes installation of macro base stations, distributed base stations and Evolved
Packet Core (EPC) architecture
In November 2010, Mobile Cellular, the largest mobile telephone operator in Mozambique, signed a multi-million dollar,
Mobile Cellular, Ceragon
turnkey-solution deal with Ceragon Networks for the planning and deployment of the Backbone Network link
Mozambique Networks
– The link will join the central part of Mozambique to the southern part, from the city of Beira to the capital city of Maputo
Togo Cellulaire awarded a turnkey contract to Alcatel-Lucent in January 2010, to extend its network capacity in GSM and
Togo Cellulaire, build a 3G wireless broadband network
Alcatel-Lucent
Togo – Alcatel-Lucent will provide a full end-to-end, turnkey solution, including converged radio access network (RAN) and transport
solutions as well as professional services, such as network planning, radio design and operation and maintenance optimization
In December 2010, Sprint, a telecom company based out of the US, awarded a five- year, turnkey contract to Alcatel-Lucent for
Sprint, US Alcatel-Lucent providing a number of services, such as network integration, converged RAN, and network monitoring
– The contract also includes base station solutions that support 3G and other technologies
Beijing Mobile, In January 2010, Beijing Mobile awarded a turnkey contract to NSN for deployment of TD-SCDMA base stations
NSN
China – Beijing Mobile plans to strengthen its 3G coverage through this contract
Based in Uzbekistan, UCell awarded a contract to Nokia Siemens Networks (NSN), in October 2009, to upgrade its network capacity
UCell,
NSN – NSN will install mobile soft switching and packet core network technology, transport equipment, base station controllers, home
Uzbekistan
location registers and media gateways, as a part of the contract
Industry Economics
and Investment
Considerations
Sourish Gupta and Nakul Kanchan
FINANCIAL RESEARCH
T
he four major sports leagues in investors following a personal dream Are U.S. major league teams
the United States—the National of owning a sports franchise? While
Football League (NFL), Major ownership of sports teams certainly
good investments, or are they
League Baseball (MLB), the National has novelty, glamour, and a passion for only for affluent individual
Basketball Association (NBA) and sport associated with it, our analysis investors following a personal
the National Hockey League (NHL)— suggests that, following positive
witnessed deals worth an estimated developments between 2011 and 2013,
dream of owning a sports
$5.6 billion in 2012, an increase of 200% major league teams can potentially franchise?
YoY. The $2.2 billion1 sale of baseball make for a strong investment case (at
team, the Los Angeles Dodgers, to an industry level). The major leagues’
Guggenheim Baseball Management in recent media rights contracts promise
May 2012, is the largest ever buyout of substantial improvement in top line,
a professional sports team. The deal while renewed collective bargaining
valued the team at an expensive 9.3x agreements (CBAs) with the players
EV2/Sales, despite the Dodgers being have not only immunized the leagues
in Chapter 11 bankruptcy at the time from labor disputes for several years
with a meager $3.2 million in EBITDA3 to come, but have also reduced payroll
in the preceding season. The valuation costs. This can potentially transform
multiple for the Dodgers deal was many teams into highly profitable
much higher than that of any other businesses. That said, the major leagues
major league deal, but even the median remain an extremely heterogeneous
EV/Sales multiple of 3.8x for all major mix of profitable and deep-in-the-red
league deals in 2012, was far from cheap. teams. Given the demanding valuation
multiples that deals have typically
All of this merits the question—are U.S. commanded, not all teams will prove to
major league teams good investments, be truly attractive investments.
or are they only for affluent individual
1) Includes $150 million paid for real estate in the vicinity of Dodger Stadium
2) EV: Enterprise Value
3) EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization
No. of Deals
USD Billion
may result in a significant understatement 3 6
of revenue and EBITDA figures. Forbes’
estimates also have been disputed from 2 4
time to time by league officials.
1 2
• In this article, all references to financial
data of the NFL, MLB, NBA and NHL, 0 0
unless mentioned otherwise, refer to the 2007 2008 2009 2010 2011 2012
aggregated financials of the individual
teams within the league.
• All references to data pertaining to a NFL MLB NBA NHL Total no. of deals
specific year are to data for the season
ended in that year. For example, 2012 refers SourceS: WR Hambrecht + Co; Forbes, Thomson Financial, and various press
to the NBA season 2011-12.
LA Dodgers
(MLB),
$2.2 billion1
5.0
2.5
0.0
2008 2009 2010 2011 2012
Median Highest
1) Includes $150 million paid for real estate in the vicinity of Dodger Stadium
4) Deal values represent pro-rata allocation of Enterprise Value (EV) based on stake acquired
5) Deal multiples are calculated based on sales in immediately preceding game season; dollar values in comments on the chart
represent EV on a 100% basis
8.8
8.3
6.8
6.4
4.0
3.7 3.5 3.4
3.1
2.7
2.4 2.2
0.4
NFL MLB NBA EPL (UK) NHL Bundesliga La Liga Serie A (Italy) AFL
(Ger.) (Spain) (Australia)
SourceS: Forbes; Deloitte Football Finance Review 2012; DFL Bundesliga Report 2012; IBIS World
Revenue for European leagues converted at EUR/USD=1.39 (average during 2011; source: Bloomberg)
Latest publicly available data, other than US major leagues, pertains to seasons ended 2011
16% 23%
30%
8% 38%
Lockout reduced regular 11%
season to 66 games per team
(down from the usual 82) 16%
15% 42% 9%
25% 4%
12%
10%
5% 49%
42% 41%
34%
0%
-5%
NFL MLB NBA NHL
-10%
2008 2009 2010 2011 2012 Ticket sales (season, regular seating) National media
Parking, concessions Local media, sponsors,
merchandising, luxury box
NFL MLB NBA NHL
National media rights, however, are The NFL, with a 14.9% EBITDA
just one part of the story of the major margin in 2012, has consistently
leagues’ revenue growth. From 2011 delivered superior margins compared
through 2013, several teams have with the other major leagues. The
separately signed large rights deals with remaining major leagues, despite
RSNs. Given that revenue from deals steady revenue growth, have so far
with RSNs are categorized as “local been low-margin businesses. The new
revenue” for teams, only a portion of media rights contracts, which start in
this revenue is shared with other teams 2014 for MLB and the NFL, could be
(as opposed to “national revenue”, which a game changer for the profitability of
is divided equally among teams). Teams MLB and will help the NFL improve
with the most lucrative RSN deals stand margins further. The only incremental
Lower revenue
share for players
(new CBA)
15%
10%
Increasing
attendance,
5% ticket prices
0%
2007 2008 2009 2010 2011 2012
Source: Forbes
cost associated with the additional concluded positively for the leagues,
revenue from media rights will be the with the new CBAs drawn for periods of
share of revenue paid to players. This 10 years (except MLB, for which the new
implies (based on 47-50% players’ share CBA extends until 2016). This compares
of revenue) a near doubling of 2012 with five-to-six-year durations for the
EBITDA for the NFL and MLB, and a earlier CBAs and is a major positive
relatively lower 12% addition to 2012 for the leagues as it reduces the risk of
EBITDA for the NHL. revenue loss as well as possible damage
to the leagues’ brand value, which are
Owner-player negotiations have associated with work stoppages and
ended on a positive note, lockouts. The most positive impact,
reducing operational risk and however, was on the NBA and the NHL
teams’ profits. Along with the stability
payroll costs
provided by their longer duration, the
Between 2011 and 2013, the major
new CBAs reduced the guaranteed share
leagues signed new collective bargaining
of revenue for players to 49-51% (from
agreements (CBAs)8 with the respective
57%) and 50% (from 57%) for the NBA
players’ associations. Barring MLB,
and NHL, respectively. This resulted in
each CBA renewal witnessed intense
significant EBITDA margin expansion
negotiations, resulting in lockouts9 in
for the NBA in 2012, and will have a
the NFL, NBA and NHL and truncated
similar effect on the NHL in 2013, the
game seasons for the NBA and the
first year of the new CBA.
NHL. However, the negotiations
8) Each league’s CBA lays down extensive rules including players’ share in league revenue, minimum and maximum player
salaries, team-wide salary caps, and the framework for revenue-sharing among teams. By setting player salary caps, the CBA
attempts to restrict financially strong teams from consistently outbidding financially weaker teams when hiring top players. The
revenue-sharing agreement divides revenue into national and local pools. National revenue comprises media rights (broadcast
television), sponsorship and merchandising deals entered into by the league, and is divided equally among teams. Local
revenue comprises local media rights (e.g. with RSNs), gate revenue, concessions etc. contracted by individual teams. Reve-
nue-sharing mandates that teams in large home markets share a certain proportion of locally generated revenue, such as gate
revenue and local media rights, with teams operating in smaller markets. Revenue-sharing for local revenue (as a percentage)
is the highest in MLB and at low levels in NBA and the NHL
9) Lockouts resulted from team owners shutting down facilities
as well as corporations have also had suitable hunting grounds for PE and on the content of this article or the dissemination
strategic investors. or distribution of this article to a third party.
consistent presence as team owners,
Any conclusions, calculations or determinations
though to a limited degree until now. reached constitute TSC’s views as of the date
Several top executives from well-known …Though multiples are likely of this publication and are subject to change
private equity firms currently own to contract without notice.
11) All valuations based on share prices as of April 15, 2013; EV/Sales multiple is based on the latest reported financial year.
Machine-to-Machine
is set to grow globally, the emerging
Asia-Pacific countries are expected
to experience high growth, owing
Technology—The Next
to increased network coverage, data
throughput growth, expected regulatory
changes, and a rising number of health
Big Thing?
care and infrastructural projects in the
near future.
M
achine-to-Machine (M2M) (at the receiving device) is then used between 2012 and 2017, Asia-Pacific
refers to the technology that to translate this information into a countries, such as China and India, are
allows communication among meaningful event (placing an order for expected to become leading users of
machines (wireless or wired systems). It inventory, dispatch of medicine, etc.) (Fig.1). M2M technology (Fig. 3).
is based on a process in which a device
captures a particular event (inventory Since the first significant development Three types of connections are used in
levels, test results, etc.) and transfers the in M2M technology in 1995, M2M has the M2M market—wireless (2G, 3G, 4G,
information gathered through a network evolved to provide customized solutions and satellite), fixed, and short-range
(wireless, wired, or short-range network) to organizations across a range of (Wi-Fi, Bluetooth, ZigBee, MAN, etc.).
to another device. A special application industries, including retail, health care, By 2015, short-range connections are
KEY INDUSTRIES
Coordination
Data Collection
BACK END FIELD SUPPORT
Retail Health Care SUPPORT TEAM
REMOTE EQUIPMENT
Industrial Security
M2M Server and Application
expected to dominate the market with Cellular M2M market are expected to drive significant demand
around 70% share, as most information Ongoing developments in high-speed for cellular M2M applications across
being transferred through M2M does data transfer, cloud computing, industries, making it a key focus area for
not require long-distance transmission. smartphone technology, and regulatory service providers.
This will be followed by wireless initiatives have created a three-fold
connections (i.e., long-range cellular Although the share of emerging Asia-
advantage for the cellular-based
and satellite connections)—accounting Pacific countries in the total M2M
(wireless) M2M market— including
for 20–25% of the market—and then connections is expected to increase,
substantial reductions in installation
fixed connections, accounting for less their share in cellular M2M connections
and operational costs, easy installation
than 10% of the market. (a part of the overall M2M connections)
and usability, and an increase in the
has registered only minor growth
number of applications. These benefits
First significant development in M2M technology took Technological breakthroughs between 2006 and 2008, led to a
place in 1995, when Siemens set up a dedicated substantial cost reduction in the development and application
department to undertake development of products for of M2M-based products, and expanded applications of this
industrial M2M applications. technology across industry verticals, including surveillance,
security, health care, and utilities.
From 1995 to 2005, several M2M products were Since 2009, M2M has become one of the fastest
launched for applications across point of sales (POS) growing markets with several players, including
terminals, vehicle telematics, remote monitoring, and AT&T, Vodafone, Telenor, Verizon, and Qualcomm
logistics routing and tracking purposes. making significant investments in this market.
General Motors and Hughes Electronics were among M2M applications have increased across smart
the first companies to adopt M2M technology. buildings, and energy distribution and monitoring, etc.
between 2009 and 2012. Technological Figure 3 — Global M2M Connections Breakdown
and infrastructural constraints in
By Geography
these regions are the primary factors
responsible for this slow growth of 30.0% 28.0% 27.0%
27.0%
19.0% 22.0%
cellular M2M connections (Figs. 4-5).
13.0% 11.0% 14.0%
9.0%
Highest M2M growth markets
Health Care
2010 2020F
Application of M2M across the health-
North America Europe Emerging Asia-Pacific Countries Developed Asia-Pacific Countries Other Regions
care sector—in the form of remote
health monitoring and telemedicine—is Note: This breakdown is for total M2M connections, including wireless, fixed and short-range (Wi-fi, Bluetooth, Zig, Bee, MAN, etc.)
Source: EIU, 2012
emerging as an effective means to
reduce health-care costs (both for
health-care providers and patients) and Figure 4 — Global Cellular M2M Connections
to improve the quality of health-care (USD Million) 364.5
services. The introduction of a variety
CAGR (2009-2011): 24.7%
of M2M-based applications across
298.2
radiology, cardiology, dermatology, and CAGR (2012E-2016F): 27.4%
other health-care areas from 2008 to 232.9
2011, created a sizable global market
180.3
for remote health monitoring and
138.4
telemedicine. 110.6
87.7
71.1
The key factors driving the growth of
M2M in the health-care sector include
the following:
2009 2010 2011 2012E 2013F 2014F 2015F 2016F
Cost-effective Health Monitoring Note: This breakdown is for total M2M connections, including wireless, fixed and short-range (Wi-fi, Bluetooth, Zig, Bee, MAN, etc.)
Source: ABI Research
Deployment of sensors (remote monitoring
devices) at patients’ homes enable
Figure 5 — Global Cellular M2m Connections Breakdown
doctors to monitor them from a remote
location. This is particularly useful for By Geography
patients with chronic illnesses, such as
42.0% 41.5%
blood pressure, cardiac diseases, and 30.4% 29.4%
diabetes. This results in a substantial 16.1% 17.6%
reduction in hospital visits and stay- 8.9% 9.2%
2.6% 2.3%
related expenditure for patients.
Telefonica Tele-rehabilitation Service: a remote location, following the patient’s The device, priced at $8,000, can be
Telefonica, a Spanish communications discharge from the hospital. used to take fetal, abdominal, cardiac,
service provider, commenced sales of and pelvic imaging, and transmits the
its M2M-based product ‘Rehabitic’ to Mobile Ultrasound Equipment: data through a USB connection to a
hospitals and health-care providers in In October 2011, the US Food and Drug smartphone for viewing. This enables
2011. Rehabitic is co-embedded with Administration approved a portable, medical consultants to diagnose these
motion sensors that allows the doctor to M2M-based ultrasound device called images without requiring patients to
monitor a patient’s healing process from Mobius, manufactured by Mobisante. visit clinics.
Case Study: How Promega (a US-based biotech company) saved $1.7 million using M2M technology?
About Promega: Headquartered in Madison, Wisconsin, Solution: To tackle the problem of product spoilage, the company
Promega operates in the field of genomics, protein analysis decided to switch to advanced freezers for inventory storage.
and expression, cellular analysis, drug discovery, and genetic These freezers are equipped with radio frequency identification
identity analysis. With more than 1,200 employees and 2,500 (RFID) technology that captures data such as volume of liquid
products, the company has an annual revenue of $300 million. within a container and temperature of the product, and transmits
this information to the data center using M2M technology. It
Challenge: Promega’s 15–18% of total inventory was being also provides the user with information regarding location of the
written off each year as shrinkage—due to products not product, its expiry date, details of the end user, etc., thus providing
being sold during their life cycle or being damaged in transit the company with greater control over its supply chain.
or storage. This was costing the company approximately
$1.2 million per annum. Owing to the low level of control over Results: Deployment of RFID- and M2M-enabled freezers
storage of products and low visibility on expiry dates for onsite helped Promega reduce its product shrinkage to near-zero
products, the company was losing an additional $500,000 levels and hence, save about $1.7 million annually. Further, this
each year as write-offs in product spoilage. provided the company with more detail about end users and
their preferences, as well as the overall supply chain.
“The real advantage to Promega is the information it captures. Now, we really know who our
end customer is at the individual level. Now we have the intelligence about their preferences
and buying habits and usage patterns to proactively tailor our delivery practices to their
specific needs. And as part of improving our customer service, we find we have more
opportunities to introduce new products, more merchandising opportunities, and higher
ability to add incremental business through more efficient supply.”
Todd Clermont, Business Development Director, Promega (2012)
of smart meters in all homes by 2022. technological innovation in the market solution, including product, platform,
The smart meter automatically collects will require companies to regularly device, and application development;
data about energy consumption and update the platform used for integration monitoring of transmission; and
quality of supply at the customer site of internal and external devices—i.e., processing of information critical in
and communicates back to the utility devices at customer locations and gaining consumer confidence. Experts
company for monitoring and billing back-end devices—and also ensure that believe that the absence of global
purposes. Between 2010 and 2017, the the platform is compatible with new standards has acted as a key barrier to
number of smart meters installed in applications being launched. M2M market growth.
Europe is expected to increase more
In addition, companies will need to • In July 2012, several global
than four-fold.
invest in infrastructure and human standard organizations collaborated
resources to expand their sales, on an agenda to standardize M2M
Growth potential marketing, order management, and communication and launched an
Over the past few years, several reports after-sales capabilities. initiative to develop oneM2M—a
have been published, highlighting the single standard for the global M2M
• Service management: Service
massive growth potential in the M2M market. Participating organizations
providers need to develop strong
market. However, the market—in terms include the Association of Radio
service management facilities to
of number of M2M connections as well as Industries and Businesses (ARIB),
deliver timely service, as required
total revenue generated—has not grown the Telecommunication Technology
by customers, and ensure smooth
as expected (Fig. 6). Committee (TTC) of Japan, the
functioning of devices, transmission
Alliance for Telecommunications
lines, and applications.
Five barriers to growth Industry Solutions (ATIS), the
1
High investment costs Declining ARPU (average revenue per Telecommunications Industry
To effectively exploit the opportunities user) and slower-than-expected growth Association (TIA) of the US, the
in the M2M market, communication of the M2M market have affected service China Communications Standards
service providers (CSPs) need to invest providers’ faith regarding return Association (CCSA), the European
heavily to keep up with growth in on investments. Telecommunications Standards Institute
demand. The key investment areas (ETSI) and the Telecommunications
2
include the following: Standardization of M2M services Technology Association (TTA) of Korea.
The M2M market involves multiple
• Product development: Given the • oneM2M is also expected to simplify
platforms and devices as well as
customized nature of M2M products, the development of M2M devices and
operations through remote locations,
companies need to proactively identify applications, create a mass market,
different types of networks and
areas that need product innovation and shorten the time-to-market for new
applications, and most importantly,
have strong in-house R&D capabilities products, and help CSPs in reducing
transmission of sensitive information
to support new product development. operating and capital expenses.
through M2M systems. This makes
• Platform-related costs: A high level of standardization of the complete M2M
American Trash Management KORE Telematics, Sprint, Verizon Transportation Reduction in operational costs by almost 25%
Tata Teleservices (TTSL) Discom, TTSL Smart Grid and Metering Savings on bill collection costs of 15–20%
3
Strained growth in to the growth of this market. Convincing However, the outlook for the M2M
emerging markets customers about the benefits of M2M market is not entirely rosy, as there
While a few emerging countries (such applications also is a big challenge. are multiple barriers that may prevent
as Brazil, China, and India) are already the market from growing to its full
5
using M2M technology across industries Customer persuasion potential. The investment costs
and are continuously expanding the The M2M market faces a major involved are high and the target market
usage of these systems, the demand for challenge of limited technology awareness is fragmented. These factors, coupled
M2M products in the Middle East and among potential individual customers. with the fact that a large number of
Africa declined over the past few years. According to industry experts, convincing customers are still not convinced about
Slow financial growth and political end users about the benefits of adopting the effective cost savings of M2M
unrest in the recent past have been the M2M technology is an issue due to high application in day-to-day operations,
main reasons for strained growth of installation costs. Standardization in pose concerns about the pace of growth.
M2M in African markets. technology used, and deployment of devices
that are more compatible with advancing M2M is a unique market and CSPs
4
Fragmented target market technology can help operators in this regard. need to manage their steps within the
The M2M target market is highly Security of information is another constraint space carefully. The future of M2M will
fragmented, covering several industries in the acceptance of M2M technology by be determined by service providers’
and niche user segments. While certain customers, as they are skeptical about ability to devise innovative strategies to
M2M solutions can cater to several users sharing personal information. improve their product development and
across industries, others are customized service capabilities, reduce the cost of
to meet the requirements of specific end Although there are barriers to growth, technological upgrades, and market the
users only. For example, the user segment various companies have successfully product across untapped industries.
of a fleet management application is very implemented M2M technology across
limited, compared with that of a smart their supply chain in the recent past and
metering application or a CCTV security achieved cost benefits (Fig. 7).
application. There is faster growth of
M2M applications in industries such as The future of M2M technology
transportation, logistics, and security, Industry analysts and market experts
where some relatively standardized agree that the market is set to register
solutions can be deployed. However, exponential growth over the next decade.
applications developed for specific The opportunities available in the market
consumer segments offer limited revenue are potentially limitless, as M2M offers
opportunities, as the associated sales applications for almost every industry,
volumes are low. from automation in industries such as
automobiles, security and surveillance,
This fragmented target market leads utilities, smart buildings/homes, to
to a slowdown in the development of improving health-care facilities and
new applications, as each application monitoring logistics. The most critical
involves longer go-to-market timelines. factor that makes M2M highly attractive
Development of M2M solutions that are is that it can be customized to meet
applicable across industries will be critical general as well as niche requirements.
V
ery few industries today are 2011 and will continue to influence this This acquisition paved the way for
as global and multifaceted as industry in 2013. Heinz to enter the Brazilian market.
Consumer Packaged Goods
(CPG). Organizations within this industry Trend #1: Expanding into Trend #2: Streamlining portfolios
are extremely responsive to consumer emerging markets With improving macroeconomic
demands and sentiments and largely Brimming with growth potential due conditions, large CPG companies have
operate in a business environment that is to rising populations and disposable realized the need to restructure business
highly dynamic and increasingly prone to incomes, emerging markets—Argentina, operations to more effectively (and
the following challenges: Brazil, China, India, Indonesia, Mexico, efficiently) drive long-term growth. As
• Need for continuous innovation and Russia, Saudi Arabia, South Africa, a result, companies are increasingly
product development Thailand, Turkey, and Vietnam— implementing spin-off strategies
offer numerous opportunities for the to divest non-core businesses and
• Increasing government regulations
CPG industry. Consequently, CPG enhance their focus on those activities
• Rapidly changing consumer demands companies are adopting inorganic they consider to be core to their
• Rising raw material and product growth mechanisms to tap into these businesses. This is assisting companies
development costs markets at an increasing rate. These in reducing cost as well as time-to-
acquisitions by CPG companies are market and more effectively leveraging
• Brand commoditization set to continue into 2013, and are competencies within newly created
• Emerging low-cost private likely to provide newer (and in many entities. CPG companies will continue
label manufacturers cases, locally attuned) platforms to to assess spinoff strategies in 2013,
deliver sustainable growth in a rapidly and restructure portfolios to develop
Given these challenges, CPG players changing environment. Some recent systems that make them distinctive and
are today operating in a more complex, examples include: profitable. Some recent examples of this
volatile, and changing environment. trend include:
• In August 2012, General Mills
In order to more effectively respond to
acquired Yoki Alimentos, a Brazilian • In October 2012, Kraft Foods approved
these challenges and attain sustainable
food company, to accelerate its top- a spinoff of its North American grocery
top-line growth, CPG companies
line growth in Brazil. The company business into Mondelez International
are deploying new strategies based
also acquired Parampara Food Incorporated and Kraft Foods Group.
on innovation, reduction in time-to-
Products in May 2012, an Indian This was done so that the newly formed
market, operational transformation as
food company that specializes in entity (Mondelez International) could
well as the adoption of new technologies
producing ready-to-cook spice and focus on strengthening its snacks
and tools in marketing and sales. As a
sauce mixes, to expand its meal business unit and the parent entity
result, five underlying trends have been
solution offerings within the country. (Kraft Foods Group) could focus
shaping the CPG industry beginning in
exclusively on core grocery products.
• In October 2011, Fortune Brands, a Trend #4: Innovating innovative marketing campaigns include:
Richa Singhal and Rakesh Ranjan By 2010, China became the largest
electricity consumer in the world,
strategic services
overtaking the US. Approximately 70%
of this demand was met using coal
C
oal has played a key role in Demand for coal in China has reserves. And, as such, increasing coal
China’s economic development predominantly been driven by the consumption over the years has been
in the past decade. As of electrical power sector. However, since driving China’s contribution towards
December 2012, China has been the 2008, a new trend towards coal-based global GDP. Per the table on the
largest producer and consumer of coal chemical production has been emerging following page, China’s share in world
worldwide. According to the World Coal in the country, with the potential to coal consumption has approximately
Association, China’s coal production is significantly impact both the Chinese tripled over the last 30 years, and its
estimated to have tripled between 2000 and the global economy. This includes a contribution to the share of GDP has
and 2010, and in 2011, China accounted shift in the usage of coal from fuel to raw grown nine fold (Fig. 4).
for 45% of global coal production, material. Some key questions analysts,
totaling 3,520 million tons. In that same buyers, and producers are asking are: Clearly, China’s economic growth will
year, China accounted for less than be constrained if its coal production/
• Will this trend hold?
3% of the world’s oil and natural gas supply does not fulfill this energy need,
reserves compared to approximately • What are the drivers stimulating which also eventually will impact the
13% of the world’s coal reserves, making this trend? global economy.
it an irreplaceable energy source in the • What is the future of coal-based
country. (Figs. 1-2). chemical production in China?
3000
2500
2000
3.2%
1500
1.2% 1.3%
1000
500
Oil Natural Gas Uranium Coal
0
1990 2000 2011
China US India Australia Russian Federation Source: EIA; OECD
Coal as chemical feedstock is there has been a considerable amount internal production from hydrocarbon
the new way forward of investment to produce coal-based and coal-based feedstocks to become self-
Although China predominantly uses petrochemicals as a substitute for reliant. Huge petrochemical facilities are
coal for power generation, it is now traditional crude oil-based processes. being built by Chinese and multinational
also being used to produce chemicals. firms in the country. These planned
China is using coal extensively for the facilities will require more than 20 million
Certainly, the country is not new to
production of chemicals, because coal is tons of additional coal every year. This
the idea of using coal as a chemical
considerably less expensive and has the implies that China will continue using
feedstock. In the late 19th and early
potential to meet China’s desire to become coal for the production of chemicals in the
20th centuries, coal tar was used in
self-sufficient in resource inputs. As such, future. (Refer to Potential roadblocks to coal-
the dye industry to produce aromatics
China is expected to achieve sufficient based chemical production on page 42.)
and specialty chemicals. Since 2000,
1980 17 2.2
1990 21 3.9
2000 25 7.2
418
363
298
204
175 172
143
120
70 85
58 47 58
16 31
Using coal as a chemical feedstock poses certain limitations Increased carbon emissions and environmental risk from
for China’s coal-based chemical industry. coal extraction are the other major areas of concern for the
coal-based chemical industry in China. These challenges are
The biggest challenge is limited availability of water
threatening China’s target of cutting down greenhouse gas
resources. According to statistics, for each ton of coal
(GHG) emissions.
produced, seven tons of water is required in the direct
liquefaction process, whereas the indirect process requires To combat these challenges, China is taking various measures
12 tons. It is estimated that water consumption by the that might help it in the long run. For instance, it is improving
Chinese coal industry will reach 9.07 billion metric tons by the technology used in sewage treatment plants to recycle
2015, which significantly exceeds its estimated supply. In waste water. The Baotou Iron and Steel Company plant
addition to water problems, local ecological issues and soil recycles 98% of its water, as directed by the country’s law that
degeneration will also be affecting the environment. prompts owners of industrial plants to conserve water. China
might also consider transporting water to its northern and
The technology used in coal-based chemical production is still
western parts, which are dry and receive less rainfall.
in its nascent stage and is not fully developed. Thus, pollution
and technological limitations make the future of China’s To reduce GHG emissions, China is moving toward scientific
investment in coal-based chemicals an open question for now. development—a drive started by President Hu Jintao.
This drive aims to reduce waste and emissions, boosting
According to Kai Pflug, CEO of Shanghai-based Management
productivity, and shutting down plants where modern
Consulting, per capita coal reserves in China are below
technology cannot be implemented.
average. It is expected to last for only 38 years if consumed
at the present rate.
“Coal prices will remain low China’s transition into the Looking to the future
in the long term, and the coal markets Overall, the Chinese coal chemical
After becoming the largest importer of industry is now gearing towards
structure of China’s power thermal coal in 2011, China is expected considerable growth. It is experiencing a
supply is expected to change, as to play a major role in setting its prices. complete evolution with an environment
It is believed that this is the key reason full of substantial opportunities, which
the coal industry will enter an
behind China’s slower approach to needs to be dealt with utmost care in
adjustment period featuring reforming coal prices. This affected coal view of the existing challenges. One
high costs and low profits.” miners from Australia and Indonesia should note that coal is an advantageous
significantly, who supplied more than feedstock only if international oil prices
Shandong Provincial Coal Transporting and half of China’s coal in 2012. According stand above $80 per barrel. However,
Marketing Association, China (August 2012) with China significantly lacking in
to the local media, China’s cabinet is
considering the National Development crude oil and natural gas reserves, coal
and Reform Commission’s (NDRC) has become a blessing in disguise for the
proposal to give more freedom to miners Chinese economy.
for negotiating coal prices.
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