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Value Partners 2011 newsletter

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  • 2. Value Partners NewsletterPublished by Value PartnersVia Vespri Siciliani 9 - 20146 Milan - ItalyEditor: Tina GuiducciEditorial co-ordinator: Daniela PitittoRegistered in Milan. Reg No. 84-01/31/2008Printed in March 2011, on recycled paper,by Grafiche Marianovaluepartners.comnewsletter@valuepartners.comCopyright © Value Partners S.p.A.All rights reservedThis newsletter is sent by Value Partners S.p.A.If you wish an electronic copy or would liketo be removed from our mailing list,please write to subscription@valuepartners.comand we will act accordingly
  • 3. NEWSLETTERAnyone who’s ever played Pac Man, Bubble Bobble or Mario Bros – and there aremillions of such people all over the world – knows what a power-up is: an extra Power-Up Power-Up Powadvantage. Power-ups are objects, abilities and qualities that let you exceed variouslevels of play, and win or extend the game. Being lucky’s not enough to get a power-up, though. You have to be good from the very start, brave, and determined – in aword, skilled. And if you are, you’re rewarded.With this in mind, we’ve called the first edition of the 2011 Value Partners new-sletter Power-up. It introduces companies and sectors that, even during the recenteconomic crisis, focused on their skills and capabilities, and then emerged with anadvantage that looks hopeful for the start of the decade. Power-up April 2011No sector was left untouched by the crisis – not even the automotive sector, which fifth issuewitnessed successful turnarounds, as with the case of the Italian company VM Mo-tori or the Carraro Group. In this issue, Enrico Carraro shares with us the most chal- 4 Moving with the times: managinglenging moments of his group’s global turnaround. We also take a look at China – a for value in the automotive sectormarket that is set to buy a quarter of all cars sold worldwide this year. 6 Carraro 2.0: growing globally beyond the turmoilIt’s also interesting to discover the power-ups in the luxury goods and fashion indu-stry, which sharpened its marketing tools, centring every initiative on the new cer- 9 Automotive components in China:tainty that consumer choices are based on emotions. Value Partners met Riccardo opportunities and challengesBellini, vice-president of Diesel, a company that successfully focused on authenticity, 13 The consumer is my loverinnovation, and brand distinctiveness, beginning with the assumption that the con-sumer is no longer the marketing manager’s boss, but rather his or her lover. 14 Green economy Cassandras: are we headed towards a solarThe energy sector is also at a turning point. The uncertainty around government in- photovoltaic bubble?centives for renewable energies in all countries is forcing operators to defend them- 17 Green energy bubbles:selves from the risk of a possible bubble, as we hear from Vittorio Chiesa, Professor an academic perspectiveat the Politecnico di Milano, or to look for new investments in energy savings sec-tors, where LED lighting technology – an extraordinary power-up – shows promise 19 LED there be light: are you readyof a new revolution. to replace your light bulbs? 21 The electric car: last century’s idea,Under the pressure of reducing emissions and dependency on fossil fuels, the largest this century’s futurecar and utility vehicle manufacturers are investing in the electric car, which is pre-paring for mass production and a real gain in popularity. It will be interesting to see 27 New needs driving the changenot just the winning models, but also the strategies and investments from public in health-care businessand private players to create the necessary infrastructure for recharging points.Even in the health-care sector, the crisis and increasing competition from genericmedicines has brought about an original power-up: the gradual shift towards a‘patient-centred’ model. Pharmaceutical companies are looking for the key to suc-cess in an ongoing relationship with the patient, by emphasising prevention andpromoting a healthy lifestyle.‘Power-up’ is also the recurring theme with which Value Partners has searched forvalue creation niches since its launch, even in more conventional businesses, in orderto gain a competitive advantage during a crisis, and be ready to take off again withnew energy, new products, but most of all, new ideas. 3
  • 4. Power - up There is compelling evidence that the automotive sector has Moving with the times: managing for value been hit hardest by the global economic and financial crisis. in the automotive sector Since late 2008, in fact, the news has been flooded with an- nouncements of severe supply chain disruptions, the bankrupt- Alberto Calvo, Milan office cy of tier-1 suppliers, proposals for government bailouts, mas- sive 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 com- mercial policies. In the industrial sector (such as agricultural and construction equipment manufactur- ing), 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 mar- ket 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 growthManaging a deep crisis: Resize your capacitya three-pronged approachto corporate restructuring Stop the bleeding › Ensure cash flow for 18 months › Get internal saturation › Reshaping portfolio close to 90% › Launching new products › Entering new markets › Forging alliances 4
  • 5. NEWSLETTERAs was the case for VM Motori, all industry players that are hit hard by this sort of abruptmarket downturn and want to preserve their ability to thrive and succeed in the futureshould draft plans centred around the following overarching goals.At the very beginning, make sure your operations have enough cash to survive the 18months aheadIt is essential that company management quickly engages and builds a fruitful collabora-tion with lenders and shareholders, discusses the situation in a transparent manner, andpresents the board with a bold action plan – along with any impact on company figures.More importantly, this eliminates complacency and “happy ending” biases, which mostof the time, don’t fully consider the possible extent of the crisis. A top-level, scenario-based new industrial plan, which makes full reference even to the worst case of the newcompetitive context, is key to ensuring good financing.At the same time, a war room aimed at finding and protecting all possible internal sourc-es of cash generation and freed-up capital must be established. Usually, fixed productioncosts, general expenses and working capital dynamics are the main target of such a taskforce, which must also typically reset priorities in capital spending.Take the opportunity to significantly adjust and resize the capacity of your operations Stop the bleeding atIn a world that will run at two different speeds (replenishment and substitution in ma- VM Motori: 1st year impactture economies; expansion and growth in emerging countries), both your physical as-set base and your staffing levels are probably inadequate for mid-term market demand. Production fixed costs -10/15%Many players have to come to grips with reality and to take decisive actions to restruc-ture on both fronts. General expenses -30%If it is more difficult for management to readjust production capacity in the short term, Inventory (% on sales) -50%the institutional framework devised recently by many governments allows for smoothtransitions and the displacement of labour capacity across different industries and com-panies. However, this critical task requires a proactive, hands-on approach and skilfulnegotiation with public authorities, government representatives, local communities andstakeholders, which have to be carefully managed through a proper communicationsstrategy.Lay down the foundations of your company’s ability to compete in the future nowEven in standardised, consolidated industries which are characterised by high levels ofeconomies of scale, creative business models can prove successful in the competitivearena. Each company must ask itself on the basis of which distinctive assets or capabili-ties it can deliver material value to selected customers. Interestingly enough, VM Motorihas, over time, crafted a unique selling proposition to OEMs unable to afford the de-velopment of purpose-built, low-volumes production lines within those OEMs’ productranges. With a modular “core” engine platform, and by making enough customisationavailable for customers (for example, in ancillaries, interfaces, and accessories), the com-pany 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, openco-operation approach with selected customers, suppliers and competitors, in all of thosesituations where stand-alone strategies are not sufficient to address fundamental indu-stry 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 to-day’s management practices, it is quite common to come across situations wheremanagement resists a true open boundaries mindset. This denies them the opportunityto create possible synergies – for example, teaming up with competitors by pooling the re-sources allocated to non-critical phases of their business; slashing costs by allowing low-cost country suppliers to provide larger portions of component production, redesigning logi-stic footprints and quality control procedures to speed up deliveries, and reducing material 5
  • 6. Power - up inventories. Strategic partnerships, joint ventures and licensing contracts in untapped mar- kets are typical examples of such moves. +Diesel engines competitive map:strategies must reflect distinctivecapabilities % captive revenues Large scale, OEM -Selection driven integrated players, competing on volume Niche/stand - alone players, Large/ competing by independent “extracting engine producers, complexity” in open markets from big OEMs competing operations (speed, customisation, low volume batches) - + % 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 vo- latility can be obtained by rebalancing the weight of businesses within a portfolio. For in- stance, 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, rede- sign 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 enthu- siastic 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, Carraro 2.0: growing globally eco-compatible power transmission systems. Founded in the 1930s by beyond the turmoil Giovanni Carraro, it is divided into four independent business units, con- trolled by the Carraro SpA holding, each with a specific mission and with An interview with Enrico Carraro a different risk profile and targeted strategies. The Group’s core business consists in the design, manufacture and sale of integrated drivelines (ax- les, 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. In 2006 the Group took over Elettronica Santerno, a company specialising in power elec- tronics. This operation enabled Carraro to combine mechanics and electronics, and also to enter into new, rapidly expanding sectors, such as renewable energies. 6
  • 7. NEWSLETTERThe financial and industrial crisis in 2009 had a dramatic effect on the Group, as it hadto deal with a drastic slowdown in the markets and also the loss of orders from the mainOEMs, 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 tocontain operational losses to € 1 million in terms of EDITBA, and to tackle the recoverywith success. Today Carraro has reached a new competitive position, approaching pre-crisis turnover figures (> € 710 million), with a business model that has been completelyupdated, more competitive products, and a stronger team and client portfolio.Value Partners met with Enrico Carraro, Executive Vice Chairman of Carraro Group, toanalyze the phases and the difficulties of a successful turnaround in a mature industry. Enrico Carraro joined the familyA relaunch and reorganisation process is unsettling and risky in itself, but it becomes business in 1985. In 2007 heeven more so in the framework of a crisis. The Carraro Group has managed it, but how? accepted the office of ExecutiveA fall in demand, such as that which took place in 2009, has no precedents. Nobody, not vice chairman of the Carraroeven our clients, could have forecasted it. What’s more, we were coming out of a double- SpA board of directors (BoD),figured period of growth. The destocking effect along the chain increased the already working alongside the Chairmanconsiderable reductions in volumes, which were close to 70% in some cases. In 2009, our in leading the Group. He alsoturnover halved. promoted the new business development initiatives, underSuch a situation couldn’t be dealt with using ordinary measures. We realised right away which he co-ordinated thethat a total rethink was required, with regard to the company, our business model, and definition of new businessesgeographical position. Therefore short-term intervention was required to ensure the and the relative development‘survival’ of the Group, while maintaining long-term vision. programmes over the mediumConsequently the Group’s strategic relaunch plan, known as Carraro 2.0, was created, and long term. He chairswith two fundamental guidelines: first, to maintain and strengthen research and inno- the Group’s strategic committee,vation activities, crucial for sustaining the Group’s competitive position, and second, to a consulting organization to thelook to emerging markets, working within a local framework. BoD. Enrico Carraro is also director on the board of Assosolare,What aspect did you start with? the national association of theWith the most important one, the customer. Basically because never more than at that photovoltaic industry affiliatedpoint, during such a difficult period, had we realised how important it is to listen to with Confindustria Energia.our own partners, to work out how to ensure the presence of the Group in the variousmarkets together. Nothing was how it was, no long-term forecasting could be done, wejust 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, asses-sing new component standardisation processes, reducing complexity and re-organisingdesign and manufacturing processes. TTM (time to market) improved immediately, andhidden costs relating to lack of quality were eliminated.At the same time we operated within a local framework, thanks to industrial platformslocated in various emerging geographical areas, in order to guarantee the best productsfor each market, with the solutions and level of sophistication most suited to the variouscontexts. Another reason for this is that technology in itself does not always meet everyrequirement.On the established markets we followed the specific actions of the main OEMs, byworking on advanced transmission systems (automatic transmission with electroniccontrol, 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 strategiesand has 4 heavily focused business units, with independent objectives. Aptitude forchange is in our DNA, and we are now experiencing the umpteenth significant expan- 7
  • 8. Power - upsion phase. From the agricultural equipment we were producing in the ‘30s we wenton to tractors, and from complete vehicles to transmission systems. Now we’ve ope-ned the door to electronics applied to mechanics and the renewable energy sector. TheCarraro brand has always been recognised as a technological partner by the Group’scustomers.The Group has been active for several years in the renewable energy sector with Elettro-nica Santerno, a company with a distinctive business model and a double-figured rateof growth, compared with the mechanics sector. Has this aspect further complicated orsupported the relaunch process?Integration between mechanics and electronics has been a key factor for some time nowin the industry, with applications ranging from electric vehicles to large earthworks ma-chinery. With the acquisition of Santerno we capitalised on our technical knowledge ofthe consolidated businesses, and at the same time we seized the opportunity to extendthe 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, whichhave a logic that is completely different from traditional thinking. We startedwith a solid product range, with inverters which are very advanced technological-ly, and very competitive. Quick success soon followed and the undisputed leader-ship position of the small company at Imola, which grew exponentially in a veryfew 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 cashflow has to be monitored continuously. Strengthening financial position is the founda-tion on which an industrial relaunch plan should be based. It’s a rule that shouldn’t bedisregarded.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 tran-sformation come about?We are entrepreneurs, we’re passionate about our business. Over the years we foundourselves dealing with various market scenarios, and we never lost our industrial spiritfor advanced technology, cutting-edge products, and new production platforms. That’sjust how we are. Our pioneering experience in India followed in the ‘90s, and then theglobalisation process that led to us being present with production activities on everycontinent. Now it’s a case of foreseeable, compulsory choices. Ten years ago, that’s nothow it was.Management is a critical factor in this phase. Is it possible to make a radical change instrategy, without changing the management team?We entrusted the relaunch to a new CEO, Alexander Bossard, and capitalised on in-hou-se talent with new challenges, by assigning significant amounts of responsibility. As aresult we showed we were changing direction, but also confirmed one of the Group’svalues - 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 smallpart of a much broader plan. The objective has to be permanent transition towards newmarkets, in terms of applications and areas of the world. There’s always an opportunityto be taken. However anyone wanting to run a company now is called upon to make anextra effort, compared with the recent past.8
  • 9. NEWSLETTERWhat do you feel has been the most decisive action taken, and of which you’re mostproud? And the most upsetting one?It’s not about my direct actions. I’m proud of the cohesion, which has been demonstratedby the facts, the management team, my father, my brother Tomaso (chairman and CEOof 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 reduc-tion in staff, about a year ago. Now our colleagues almost number that of pre-crisis le-vels. A positive sign however you look at it.China has been the world’s largest automotive mar-ket since 2009, and it continues to hold great poten- Automotive components in China:tial: auto sales – particularly for fuel-efficient com- opportunities and challengespact vehicles – are expected to keep growing in thenear future, and China is likely to account for about Enrico Lanzavecchia, director, and Tiger Shan, principal, Beijing officea quarter of global car sales by the end of 2011.The government’s stimulus policies – Growth in China’s auto market Total vehicle new sales: China vs the worldtransition from an investment-driven Million units, %, 2007 - 2011E is accelerating and soon Chinaeconomy to a consumption-driveneconomy; incentives to consumers CAGR 2006-2011E will account for a quarterand producers of world auto sales 71,9 74,5Increased personal disposable inco- World 68,3 68,8 1% 65,4me – 15% GAGR 2000-2009, set to total Note: 2010-2011E China vehicle newexceed US$ 2,000 in 2011 sales are forecast by JP Morgan; world 88% 86% 79% 77% 76% vehicle new sales are forecast by WWMore developed consumer financing Global Insightmarket -3%Competitive market and more Source: CEIC, JP Morgan, The Econo-affordable vehicles – from luxury mist Intelligence Unit, Value Partnersto everyday consumer product analysisImproved road infrastructure – 19%national highway and intra-citytransportation systems 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 2009Several factors are driving this expansion:• The positive economic trend results in increased disposable income for Chinese con- sumers, who also benefit from the developments in the consumer financing market• The government stimulus policies are increasingly oriented to sustaining private con- sumption, 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 post-sales auto parts market. 9
  • 10. Power - upPotential in China’s auto parts Revenue of total Chinese auto parts industry China’s after-sales market is growing rapidly: as the age of the country’s car fleet increases,market has been unleashed and US$ billion, %, 2005 - 2015E the demand for spare parts will grow faster than vehicle sales growthrapid growth is expected in the CAGR 2006-2011Eyears to come The market is open for 100% foreign owner- 350 ship and most global brands have already established a presence 20% Domestic capability is still limited: more advanced parts, especially for high-end plat- forms, are still imported from overseas, but the government has stepped up their “locali- sation efforts” 100 67 Backed by the government, there are subsi-Source: KPMG, JD Power, Value Partners dies for R&D by domestic playersanalysis 2005 2008 2015E 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 effi- ciency and environmental compliance will increasingly affect consumer choices, hel- ped 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 pos- sibly promoting aggregations among the Chinese manufacturers, while the foreign manufacturers will try to expand their distribution coverage and deepen their pre- sence 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 fir- ms, 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 as- sess the potential contribution of the Chinese partner, and ensure that the agree- ment benefits from a preferential policy context. They must also anticipate any pos- sible 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 streng- ths of each party (for example, accounting for the geographical focus of the partner, which can seldom boast a nationwide influence) and conflict mitigation mechani- sms 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
  • 11. NEWSLETTERand sourcing is not just feasible but convenient, notwithstanding the unavoidablerisks in know-how protection.IPR rules are still far below western standards, but to grow successfully in China, theresearch and product development activities must be tuned to the specific needs of theChinese 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 impor-tant steps in this direction and it is a safe bet that all the main component suppliers willsoon be forced to follow. Product development Sourcing & manufacturing Distribution & sales Foreign automotive companies Successfully launched Buick Sophisticated supplier develop- Around 800 dealers with na- in China: best practice GL8, star MPV model in China ment to nurture local suppliers tionwide coverage penetrated to many tier 2 & 3 cities in localisation along the value chain Launched Lavida, a specific mo- Suppliers are clustered around del developed for China the local production base In 2004, established first auto finance company in China Established a wholly owned Very high level of local produc- R&D subsidiary in Guangzhou, tion, about 90% Source: industry research, China, to produce a specific mo- 50% customers are Chinese OEMs, with Chery as the lar- Value Partners analysis del in 2010 gest customer Investment announced to triple local production by 2013 Launched longer wheelbase versions of 5 & 7 series to meet Balanced dealership coverage. local requirements 69% are located in fast-growing Manufacturing facilities are tier-2 and tier-3 cities spread across six locations in China, close to the OEM clients Downward product mix to capture the local market de- Plans to expand sales outlets mand (PVs no higher than 1.6L High level of local production. by 180%, reaching 1,200 in account for 60%) Camry has a local content ratio 2010 of around 85% Extensive product launches High-profile marketing acti- planned – 7 in 2010 to respond In 2009, increased local produc- vities to increase local brand to rapid local market develop- tion of engines (new factory awareness. Audi sponsored the ment with annual output of 100,000 Beijing Olympics units) and started local produc- tion of continuously variable Offering specific products solely transmissions (annual output of for China, such as the 408 140,000 units) Spare parts are distributed through multi-channels, e.g. Developed localised Elantra online Invested US$790m in its second Yuedong – the bestselling A- plant in Beijing, expanding class sedan in 2009, with sales production capacity to 600,000 of 240k units – to better cater units by Feb. 2010 to Chinese consumers’ tasteFinally, the commercial responsibilities can no longer be delegated to loosely manageddistributors. The evolution of the local market needs to be closely monitored, and althou-gh in most sectors, the distributors cannot be bypassed, the control mechanisms mustbe upgraded and the indirect sales coverage must be selectively supplemented with thedeployment of direct sales forces, promoters or manufacters’ own outlets.Increasingly, the success of the commercial and distribution strategy will dependon the flexible adaptation of the go-to-market approaches to the different featuresof various regional and municipal markets, because in most sectors, the bulk of fu-ture growth will come from newly developed areas strongly diversified in coveragerequirements. 11
  • 12. Power - up OF DEALERION REGINTEREST RISK FACTOR ASSESSMENT BRAND MIx CROWDING LOCATION MANAGED RELIABILITY FINANCIAL OVERALL REGION BRANDS DEALER BRAND SIzEFor distribution network Beijing Dealer R1build-up, it is key to analise in 1 (exF)detail the distributors in each Beijing Dealer n.a. Mi, Aeregion Tiajin 2 Beijing Dealer n.a. n.a. DC, 3 Mi, M Tiajin Dealer n.a. n.a. Ae 4 Low Beijing Dealer n.a. n.a. TR Medium 5 High Hebei Dealer R1, M D1 selected for visits 6 First choise D1 Hebei Dealer R1, M 7 Second choise D1 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 fled- ged 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. Prior - 1995 1995 - 1998 1998 - 2005 2005 - Most recentlyGeneral Motorsin China GM GM GM GM GM Intl. GM Intl. GMAP GMAP GMAP GMAP Japan, ASEAN, GM China GM Corp. ASEAN Taiwan, Japan Korea (new), BD, PR/IGR to AP Australia to China Japan ASEAN, Australia Taiwan JV Global India (new) SGM/SGMW JV’s Functional Taiwan GM China GM China WOFE Parts Dist. Alignment China Rep Office (PR/IGR/Sup- Rep Office fully functional Functional Staffs ports) staffed (Planning, Purchasing, Rep Office (HK, China) Two BD Teams+1 JBGM JV Vehicle Import Sales VSSM, IT, ME, GMPT, Finan- Vehicle BD Vehicle Import Sales GM Taiwan JV ce, Legal, Tax, Public policy, Vehicle Import Sales EDS (IT) 2 vehicle JVs in China Technology, etc.) WOFE Parts Dist. Hughes, Alison, Hughes, Alison, Hughes, Alison, Alison, Comp. BD in China Delphi in China Delphi in China GMAC in ChinaSource: Value Partners analysis 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 ad- vantages 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
  • 13. NEWSLETTERalso being excluded from increasingly important product innovation trends and leavingcrucial 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 positionscan really be considered as entrenched or unassailable. Latecomers can still be successfulcomers, as proven by the examples of Toyota and Iveco, and the governmental push onpotentially disruptive innovation trends like “green” transportation is bound to open upeven more opportunities in the near future.Value Partners met with Riccardo Bellini, vice-president of brand and marke-ting for Diesel, to talk about how fashion brands can win consumer trust. The consumer is my loverIn your view, how has this recession affected luxury and fashion consumers? An interview with Riccardo BelliniThe global meltdown has strongly hit a middle class that had been fuelling thegrowth of luxury and accessible luxury brands up until mid-2008. Today’s con-sumer, even the more affluent one, has been burned by the recession, and is becoming Riccardo Bellini has over tenmore and more difficult to win over. Fashion buyers are becoming more educated and years of marketing experienceare able to make knowledgeable judgements: they will buy you, because the product has at Procter & Gamble, where hisdistinctive design, true quality and authenticity; if your brand holds up to its promise and last role covered was that ofbecause the company behind it is true to what it says it stands for. Brands will no longer associate marketing director forbe able to hide or cheat the buyer, as every inconsistency is revealed and amplified by the the European Fine Fragrancesvoice of the web. business. He moved to Diesel in 2007 as managing director ofWhat is the recipe fashion brands should therefore adopt to win the consumer’s trust? Diesel UK and was promotedThree concepts need to be top of mind for any creative director or marketing manager in in September 2008 to vice-our 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 theproduct side, this means quality of fabrics and a distinctive style. The challenge for bran-ds is not to reduce prices and offer value for money but rather offer value for me to thecustomer, 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 indivi-duality. If you win the consumer over with the coolness of your jeans, you won’t get him tobuy your T-shirt for free, but you will have to win him over with the beauty and distincti-veness of your T-shirt. Each product category for brand extensions will have to be taken asseriously as the brand’s core category, and each item of the collection will have to have agreat deal more product and design value poured into it. Dressing today means wanting toexpose 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 bla-tantly 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 RollingStones, no new Madonna or Michael Jacksons, but a bunch of “me toos” singing along. Inthe post-recession world of more demanding consumers, the choice will be about beingdistinct or becoming extinct. Distinctiveness will be played on all grounds, that of pro-duct, that of communication and that of style. Winners will not be those that shout outtheir brand to the world louder, but those able to stand out. Think of the success of asmall distinctive brand like Jun Takahashi’s UnderCover, that has become the essenceof Japanese cool, thanks to its different beautifully crafted products – or of the Capitalbrand, that owes its following to self-expression without fear. 13
  • 14. Power - up The need for distinctiveness also involves the brand’s image. The post-recession consu- mer 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 edu- cated and sophisticated and as their minds are continuously overwhelmed with new messages and offerings. Advertising needs to evolve from mere communication to con- versation and dialogue. Companies have to show their real faces; they have to show con- sumers 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 pro- ducts; 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 lea- ther 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 lon- ger 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 innova- tion – 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 tech- nologies 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. “ha- ving the balls to stand out and express what you stand for”, and being smart in under- standing 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 Green economy Cassandras: are we headed stock indexes are plummeting, there is still one sector towards a solar photovoltaic bubble? 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 the1 Condition when renewable energy promise to reach “grid parity”1 in a few years.cost is comparable to conventionalpower 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
  • 15. NEWSLETTERnel of something good” (in this case, energy that causes less pollution) but then somepeople start to get rich really fast and the edge of a bubble is very quickly reached. Inthe meantime, other things have to happen, such as significant government involve-ment to focus attention and capital on a specific industry, and then a new source ofcredit 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 un-common multiples with price earnings ratios in the hundreds and regional governmentdecisions are creating the first victims within the industry.If we take, for example, the revision of feed-in tariffs in the solar photovoltaic sector, wecan highlight four main courses of action, in four different countries.In Spain, a combination of factors diverted the attention of investors from solar pho-tovoltaic. The first factor was the reduction of feed-in tariffs: an average of -22 per- Spaincent from 2008 to 2009. The second factor was the introduction of a maximum cap of500MW accessing incentives each year. The effect is clearly identifiable in the stock per-formances after mid 2009. Even the promise of “green jobs” creation was not fulfilled. A 2 Study of the effects on employment ofstudy from Universidad Rey Juan Carlos2 reports that for every four “green jobs” created, public aid to renewable energy sourcesanother nine are lost. Recently, at least three companies that were planning to IPO thisyear 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 inoperation.Germany, with a cumulative photovoltaic power of almost 10 GW, including around 3.8GW installed in 2009, alone, remains the world’s largest photovoltaic market. Recently, the Germanygovernment reduced feed-in tariffs – a move that caused confrontation between the go-vernment and industrial photovoltaic associations. The highest cuts have been for largerplants (above 1 MW plants will receive a -25 percent feed-in tariff), while the medium andsmall installations received lower revisions (-10 percent and -8 percent, respectively). Thisreduction aims to force producers of photovoltaic modules and components to achieveefficiencies and consolidate in order to reduce prices. At the same time, the reduction willkeep investors in the game by ensuring sector attractiveness in the mid-term. Fast take off after the Introduction of the new Cumulated installed photovoltaic3.000 incentive scheme power (MW)2.5002.0001.5001.000 500 0 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 Source: GSE Gestore Servizi Elettrici ItalyItaly is fifth in the world (after Germany, Spain, Japan and the US) in terms of installedphotovoltaic power. This massive growth was the consequence of introducing a new ge- Italynerous tariff scheme. 15
  • 16. Power - up The government in France has recently declared its intention to stop financing groundFrance 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 indu- stry associations are pushing hard to keep the reductions within “reasonable” ranges. The government intends to confirm its commitment to the development of photovoltai- cs 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 pro- cess. 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 ac- cording 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 au- thorisation, 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 mar- ket due to the financial crisis and to the limited access to capital, together with an over- 16
  • 17. NEWSLETTERsupply of cells and components coming from countries where the government has cutincentives. The combination of these effects could introduce a market shift from supplyconstricted to demand driven, with a beneficial effect on prices for end users.Value Partners met with Vittorio Chiesa, head of theEnergy Strategy Group at Politecnico di Milano, to Green energy bubbles: an academic perspectiveget his point of view on the possible developmentof the renewable energy and technology sectors. An interview with Professor Vittorio ChiesaProfessor Chiesa, in your reports, you highlight thedifferent approaches undertaken by some countries to promote the development of re-newable energies. How much did the incentive schemes influence the success or failureof green energy-generating technologies?Let’s start by saying that, without incentives, apart from some eolic installations, the eco-nomics of renewable energies is not sustainable. The total cost of generating renewableenergy is much higher than conventional generating schemes.With regard to incentives, there are two major considerations. First, the incentive sche-me must gradually decrease, in correlation with the green technology industry capacityto reach economies of scale and reduce costs. Second, there has to be a maximum capto the total incentivised installed power, but this cap must be reasonable. In Spain, theabrupt end to the photovoltaic sector was not due to the reduction of feed-in tariffs butto the announcement of a maximum cap of 500MW per year, whereas in 2008, more Vittorio Chiesa is Full Professorthan 2.5 GW of solar photovoltaic power were incentivised. of Strategy and Organisation of R&D in the DepartmentIf we look at the multiples of listed companies operating in the renewable sector and we of Management, Economicstrack the drop in performance of some Spanish stocks, we observe analogies with the and Industrial Engineeringe-economy. In your opinion, is there any risk of a “green energy bubble”? at Politecnico di Milano.It very much depends on two factors: how the incentive schemes evolve and the way that He heads the Energy Strategysingle states promote the growth of relevant value chains. For example, in Italy the solar Group (,photovoltaic scheme (“Conto Energia”) helps the adoption of the generating technology, where he conducts in-depthbut not the development of a value chain. A national economy has grown up around mo- analysis of solar energydules and panels, thanks to the initiative of single entrepreneurs, rather than public aid. and biomass energy, issuing periodical reports thatA green energy bubble could only develop if there were to be a sudden stop in incentive are a renowned referenceschemes worldwide, but since we are far from reaching our declared objectives in green for operators, investorshouse gas reduction, the environmental issue will play in favour of green energy. What and researchers.could happen is a shift of incentives schemes to promote a well-balanced mix of tech-nologies and a premium to distributed generation solutions (putting power generationnear 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 revolutionin operations that then did not, or only partially, happened. The picture is completely diffe-rent here: in the green economy, there is a potential market. Revenues are based on incen-tives, and thus on government will to incentivise the growth of clean generating technolo-gies, 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 sec-tor is an example of a significant reduction of its government commitment, which hasdecreased investors’ interest.Even in Italy, there could be a significant risk – for example, as a result of the decision toabolish the obligation of GSE (Gestore Servizi Energetici) to collect excess green certifi- 17
  • 18. Power - upcates from renewable energy producers. This could have a significant impact on greencertificate prices and reduce the attractiveness of renewable energy investments, the-reby putting employment at risk and destabilising the sector. On the other hand, thegovernment is promoting the development of lower scale plants (<1MW), which benefitfrom a well-defined and generous feed-in tariff (and faster authorisation procedures).Recently, you released an exhaustive report on biomass energies, highlighting the diffe-rences in the technologies, supply chains, economics and regulatory issues of agro fore-stry, biogas, bio fuels and waste to energy. Which of these are the most promising andhow could the incentive schemes or authorisation procedures determine their successor failure?In Italy, the incentive scheme is mainly determined by the size, rather than the techno-logy. Apart from bio fuels, plants above 1MW receive green certificates, whereas below1MW, there is a feed-in tariff. Having said this, what really matters in biomass generationis the supply chain. In agro forestry, there is a lack of collection systems guaranteeing acontinuous and price stable feeding. With biogas, the difficulty is in making sound con-sortia agreements between agricultural farms and breeding industries. As far as wasteto energy is concerned, there is a strong cultural factor against incinerators (“Not in myback yard”) and waste collection must be well organised.On the subject of bio fuels, unless we develop second-generation feedstock, such as cel-lulosic bio ethanol, micro algae or jatropha, there will always be competition in the foodchain and a strong dependence on imports.How can a country (e.g. Italy) replicate the virtuous path of Germany in the solar photo-voltaic 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, butin 3-4 years’ time, we will see a growth in thin film technologies (some estimate an opti-mistic 30-40 percent of share of new installations). There are also excellent prospects inconcentrated solar and in solar thermodynamic generation, where Italy has strong engi-neering 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 indu-stries to play a leading role in this field.In the second-generation bio fuels, companies such as Mossi Ghisolfi are well positionedto develop a consistent presence in cellulosic wood bio ethanol production. Another in-teresting project is Mambo (Micro Algae Material for Bio Oil), in which the objective is togrow micro algae – which won’t compete with the food value chain – to produce dieseloil. Exxon is also investing US$ 600 million in this field.Up to now, a significant amount of incentives have been devoted to generation or tosystem safety. What has been done to promote energy efficiency?In my opinion, energy efficiency is undervalued. Energy demand is growing, and the ca-pacity to reduce consumption is limited and well below the 2020 objectives. Of the three20/20/20 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 aprocess of cultural growth. It entails changing people’s behaviour and making use of exi-sting solutions and technologies. For example thermal solar is completely undervalued,it can be easily integrated into cooling systems since the energy production is perfectlymatched with the need and it can be easily integrated in industrial processes. Also lowenthalpy 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 is18
  • 19. NEWSLETTERa government intervention on building efficiency – for example, the obligation in Italy toinstall 1kW of renewable energy in order to obtain the construction permit of a new hou-se, or the obligation to obtain an energy certificate during real estate transactions. In theUK, from 2016 every new house built must be energy sufficient. The growing industry ofESCO (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 incentiveschemes survive. In the next few years, the focus on energy efficiency will grow, due tofinancial restrictions and government willingness to reduce state aid and promote savings.Moreover, there could be significant development in the energy efficiency components in-dustries – for example, in illumination and construction materials.It is often said that the least pollutingenergy is the one that is not consumed. LED there be light: are you ready to replace your light bulbs?Energy efficiency is often the most ne-glected measure in the 20/20/20 pack- Alessandro Leona, Milan officeage. In this article, we will highlightone of the areas of energy efficiencyconnected to technology improvement (as opposed to changing consumption behav-iours) – namely, illumination using LEDs.Energy consumption for illumination can range from 10-12 percent of total consumptionfor households to 40 percent in the commercial sector. For example, in the US, around750-800TWh per year is consumed in illumination – about the same amount of electrici-ty produced in the country’s 104 nuclear power plants. Half of this amount is consumedin the commercial sector; a quarter in houses, and the rest is split between industrialillumination 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 1 Overall luminous efficiency is the is lower than 10 percent, due to the fact that most of the energy becomes heat ratio of total luminous flux emitted and the total amount of input power• Gas discharge lamps, where light is produced by a electricity discharge in a mixture total. This measure accounts for input of gases, such as neon, high pressure sodium or metal halide, with lighting efficien- energy that is lost as heat or otherwise exits the source as something other cies ranging from 10-15 percent of the classic T5 lamp2 to 22-29 percent of sodium than electromagnetic visible radiation. vapour lamps The maximum luminous efficiency of 100 percent is the ideal green light• Solid state lamps, using semiconductor light emitting diodes (LEDs), where efficien- (555nm), with luminous flux of 683- cy is rapidly improving up to 160 lumen/Watt, meaning a LED with this performance lumen/watt can produce the same illumination as a 60W incandescent light using only 7W. 2 T5 is the common 5/8-inch diameter neon tubeWhen it comes to energy efficiency and environment sustainability, incandescent lightsare being progressively banned due to their poor conversion efficiency, while fluorescentlamps may be banned in the future because of their mercury content. LEDs may thus bethe natural candidates to substitute conventional lights, due to their continuous andrapid growth in performance backed up by a high product lifetime and by the relativelylow impact on the environment. Outdoor Shares of energy use by lighting Stationary technologies in the US 100% = 760TWh Industrial Incandescent Residential Fluorescent Commercial High Intensity Discharge Source: US Department of Energy 0 100 200 300 400 19
  • 20. Power - up Luminous efficiency (lumen/W) 200Luminous efficiency trendof different light sources 150 LED 100 White LED Fluorecent 50 Reflector Halogen Incandescent 0Source: Lumileds 1920 1940 1960 1980 2000 2020 LEDs will be experiencing diminishing cost thanks to volume effects. Haitz law (equiva- lent 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 reduc- tion trend suggests that white LED luminous efficacy and costs should compare to com- pact 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 marketaccording to PhilipsTotal market size: € 45-50 billion Lamps Lighting electronics ENTERTAINMENT Applications/luminaires HEALTHCARE HOSPITALITY INDUSTRY OUDOOR HOMES OFFICE RETAILSource: Philips 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 mate- rials (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
  • 21. NEWSLETTERIn order for LED technology to replace our old-economy light bulbs, the industrial andscientific communities will have to widely promote the main advantages over the cur-rent 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, buttaking into consideration the longer life (50 times that of a conventional incandescentlight bulb) and lower consumption (20 percent of energy input to obtain the same levelof illumination), the payback could be reached in less than two years, without the needfor government incentives.If we compare three lamps of almost equivalent lighting flux and their costs, the energycost over the year for the incandescent light is enough to repay for half of the equivalentLED lamp, which, if bought for a newborn child, will last till his graduation day! Lamp Type Cost (€) Lifetime Lifetime Power Year cost for Year cost Cost comparison of different (hours) (years@5h/ (Watt) power (€) including re- day) placements (€) lighting technologies Energy cost € 0,22/kWh Incandescent 0,7 - 1 1.500 0,8 70 28,1 29,1 Compact 7-8 10.000 5,5 12 4,8 6,2 Fluorescent LED 50 - 60 50.000 27,4 6,3 2,5 4,5One might think that compact fluorescent lamps (CFLs) may be a good intermediate so-lution, given their more accessible costs, but we believe that further improvement inLED cost (with prices reducing by half over the next two years), together with increasingsensitivity over environmental issues (CFLs have to be correctly disposed, due to theirmercury content) and strong marketing of the total cost of ownership of lighting tech-nologies, will help the LED retail market rapidly grow.The use of performance contract schemes could be helpful in speeding up the adoptionof LEDs in large-scale retrofit projects. Energy Service Companies (ESCOs) could financethe upfront cost of designing the best solution together with clients, and implement thereplacement/retrofitting. The energy saving benefit could be initially divided betweenthe 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 disseminationof technological achievements, case histories and relative energy savings by renownedindustry players, academic institutions and governmental agencies.Value Partners is watching this sector very closely and with growing interest, given thepossibility of a rapid, self-sustaining growth, as opposed to many other green technolo-gies, which are strongly dependent on incentive schemes.Imagine yourself jogging behind a car without choking on CO2emissions. Now picture traffic on the streets of New York at the The electric car: last century’s idea,beginning of the 20th century. Wondering what these two have this century’s futurein common? The answer is electric vehicles.While many people know that car manufacturers are now invest- Maurizio Oliveri, principal, and Federica Friz, Milan officeing in R&D to develop electric vehicles, they probably don’t knowthat at the beginning of the 20th century, many cars in New Yorkwere electric, produced by about 300 manufacturers.There are already thousands of electric cars on the road today, and it’s expected that inthe year 2020, around 18 million will be sold, with a penetration of about 15 percent1. 1 Source: Credit Suisse 21
  • 22. Power - up The premise for transforming electric vehicles into mass-market products is sound, al- though it is not yet clear which business model will lead to a successful rollout. In this context, opportunities could also arise for new stakeholders. 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.2 EDTA: Electric Drive Transmission There are already a number of electric vehicles (EV) on the road today, represented byAssociation three main types2: • Hybrid Electric Vehicle (HEV) – has an internal combustion engine (ICE) that runs on pe- trol, 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 emis- sions 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 and3 Source: ACEA, European Parliament China begin to converge. In the 27 European countries, ACEA (European Automobile Ma- nufacturers’ Association), in line with the European Commission, is pursuing the objecti- ve 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 si- milar 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 intro- ducing a carbon tax, which would favour drivers of electric vehicles. The Chinese govern- ment has also announced future subsidies for the purchase of electric vehicles. 22
  • 23. NEWSLETTERHidden costsA key consideration for electric vehicles is choosing the right battery, by assessing its en-ergy density (storage ability), power density (ability to provide energy bursts, such as inacceleration) and durability (calendar and cycle life). Lithium-ion is the technology mostlikely 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 percentof the total cost of an electric vehicle. Their price will only decrease when they reachmass scale volumes. For now, only environmentally motivated adopters are willing to paya premium for electric vehicles.One of the main things that influences consumers in their purchase is the total cost ofownership (TCO). Comparing advanced diesel vehicles to electric vehicles at the expectedbattery cost of US$ 500/kWh, the latter’s TCO over a five-year time frame is cheaper whenthe 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 thosein France – where electric vehicles are more attractive than ICEs even when oil prices arebetween US$ 60-80 a barrel, because of a subsidy of about € 5,000 to the purchaser.What to expect down the roadThe availability of recharging infrastructure is another element that influences the adop-tion of electric vehicles. There is no widespread infrastructure to support the number ofelectric 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 automak-ers. Projects and partnerships are already in place to develop an adequate infrastructureand 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 rechar-ge batteries must also be taken into consideration. In China and India, CO2 emissionsare likely to see little reduction, either now or in 2020, because of the carbon-intensivepower mix generation. On the other hand, in European countries, where nuclear andrenewable energies are used, an electric vehicle would reduce emissions by about 40-45percent compared to ICE-only vehicles, over an expected lifespan of about five years.180000 7,0% Non HEV, PHEV, EV sales HEV’s PHEVs and BEVs are growing160000 although still represent a small 6,0% HEV sales140000 portion of vehicle sals120000 5,0% PHEV sales Units ‘000, percentage100000 4,0% BEV sales 80000 3,0% 60000 2,0% PHEV Penetration Rate 40000 1,0% HEV Penetration Rate 20000 0 0,0% BEV Penetration Rate Source: Credit Suisse estimates 2010 2020 2030Looking at the next decade, in 2020, ICEs will still represent the majority of new vehiclesales, as well as those vehicles already on the road. In 2020, about 6 percent of vehiclessales 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 2010-15 CAGR of 99 percent and 2015-20 CAGR of about 18 percent.In recent years, multiple international car manufacturers have begun work on BEVs. Audihas recently established the “e-Tron” division that will launch the “R8” in 2012, Nissanlaunched the “Leaf” at the end of 2010 and started selling the Denki Cube in 2008 byfitting 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 marketingelectric vehicles or plan to do so in the near future.Yet there are also car manufacturers that focus only on electric vehicles: the Indian REVAhas produced EVs since 2001. The German IWK launched its vehicles in 2008, while theNorwegian Th!nk has produced electric cars since the ‘90s and now markets them world 23
  • 24. Power - up 120 99EV models launched and planned 63 29 Models launched 2009 2010 2011 2012 OEMs 17Source: Credit Suisse 30 33 33 Average models/OEM 1,7 2,1 3 3,6 OEMs Additional OEMs Additional OEMs BYD Nissan Bestrun Great Dongfeng Changan Subaru BMW Kia SAIC Daimler Tata Chery Lifan Volvo Ford Tesla Chrysler Peugeot FIAT GM Think Coda Renault Honda Tianjin Fisker VW Hyundai Toyota Geely Jianhuai zotye Mitsubishi 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 manu- facturers 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 currently4 Source: EDTA building electric vehicles4. Producing the best business model Electric vehicles, despite existing for more than a century, have yet to become mass pro- ducts, although they are now on their way to doing so. This is because a standard busi- ness model has not yet been identified. Best practices are still emerging from the multi- ple 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 simpli- fy battery production, and so translate into lower costs. Having replacement batte- ries, 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 volta- ge 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 Den- mark, 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
  • 25. NEWSLETTER Recharging Technical fea- Recharging Place Cable Timeframe € solution tures time Recharging models Slow › Alternate Cur- 6-8h › Home › Cables on › Adopted in the - recharge rent (max 10 › Public board cars very early stage Ampere) station (e.g. e - mobility › Single - Phase Berlin) › Low voltage (220 V) Fast › Alternate 3-4h › Public › Cables on › Adopted in the recharge current (33 Am- station board cars early stage pere) › Three - Phase › Low voltage (380 V) Very fast › Direct Current 20 - 30 › Specialised › Cables › Adopted in a recharge › Medium/High min public embedded second stage voltage station in station Quick drop › Battery 3 min › Dedicated › No cables › Currently is replaced garages implemented automatically in Israel (Better + Place) 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/Re- nault-EDF in France, e-mobility-RWE in Germany and "CHAdeMO" in Japan, a recen- tly 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 orga- nisations throughout the world working on the project. Another example of compa- nies 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 involvementGovernments are careful to monitor CO2 emissions and have implemented regulationsfor diminishing them by partially pushing car manufacturers to invest in R&D, in order toproduce cars that can be more environmentally friendly. To make the aim more achieva-ble, authorities should also put in place – as some are already doing – tools to motivatepurchasers and infrastructure investments, without which, electric vehicles will face hur-dles to becoming mass products.Traditional car manufacturers, as well as electric vehicle manufacturers, are focusing onsetting up efficient vehicles by investing in R&D. In order to do so, they are also part-nering with battery suppliers, which is key to developing new efficient products. Someexamples 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 BYDbattery manufacturer. Overall, in 2012, about 120 models (HEVs, PHEVs, and BEVs) are ex-pected to be on the market. Consumers are also very cautious about pricing, and therefo-re 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 in-vesting in developing reliable and long-lasting batteries, often in partnership with carmanufacturers. The lithium-ion technology is the most popular one, at least in the nearfuture, and there is no risk that lithium will become in short supply. The major obstacleis the price for the batteries, which is still very high and will become cheaper only whenscale economies are reached with large orders from manufacturers. Japanese and Ko-rean players presently dominate the lithium-ion based rechargeable market. Key players 5 Source: Morgan Stanleyinclude LG Chem and Samsung SDI from Korea and Sanyo, Sony and Panasonic (whichrecently acquired Sanyo) of Japan.5 25
  • 26. Power - upElectrification likely to lead Battery JV Auto OEMs Battery JV Auto OEMs,to emergence of new OESsautomotive suppliers Panasonic EV Deutsche Panasonic Energy AccumotiveBattery strategy by key OEM Toyota (Toyota 60% Evonik (Daimler 90% Panasonic 40%) Industries Evonik 10%) Daimler (Germany) Tesla Motor (Daimler 10%) Blue Energy Ford (Honda 49% Honda JCS GS Yuasa 51%) BMW GS Yuasa Lithum Energy Sanyo Japan (MMC 15% MMC VW Yuasa 51% Mitsu- Toshiba bishi Corp 34%) Hitachi Vehicle BYD (China) BYD Auto Energy GM A123 System Samsung SDI SBLiMotive Bosch (US) (Korea) (Bosch 50% SDI 50%) LGChem Hyundai Electrovaya Tata Motors (Korea) (Canada) 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 de- mand is lowest (and energy is cheapest), the ratio of renewable energy to non-renewa- bles is commonly highest, and, if managed correctly, the need to invest in grid infra- structure 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
  • 27. NEWSLETTERIsrael, Denmark and Japan to substitute part of their fleet with Better Place vehicles. Cor-porates 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 thevehicle he buys. At the moment, purchasers are generally not willing to pay a premiumfor electric vehicles. It is therefore critical that pocket prices decrease, through lower pro-duction costs, or through subsidies by governments or car manufacturers. Only a fewconsumers will be moved to pay a premium because of environmental concerns or highoil prices.Electric vehicles are experiencing a new popularity, with a greater number of modelsbeing offered by the world’s manufacturers, technology leapfrogging, infrastructurebeing built and pocket prices for consumers becoming more affordable. All this is leadingto a widespread use of electric vehicles: the past coming back to the future.The ongoing shift of health-care business froma provider-centred to a patient-centred system New needs driving the change in health-care businessis the result of efforts to match emerging needson both the demand and supply side. In fact, Carola Croci, principal, and Davide Conforti, Milan officepatients are increasingly seeking dedicatedand integrated care services, while pharmaceu-tical companies are facing increasing pressure on the prices and margins of their leadingproducts, due to stricter governmental laws. This has forced a reduction of health-carebudgets and the strengthening of generic products as patents expire.In the last decade, patients, especially those located in wealthy regions such as WesternEurope, North America and Japan, have identified a raft of new needs with respect tohealth-care services:• Integrated care, as the implementation of a team medicine philosophy that promo- tes 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 indivi- dual 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 sce-nario which is becoming more and more competitive.What this means is that some major pharmaceutical companies are looking for op-portunities to differentiate their products from the generic versions, in order to keepa competitive advantage reflected in higher prices, i.e. margins. We need to considerprescription drugs separately from those sold over the counter (OTC). With respect toprescription drugs, this opportunity lies in revised business models, creating product-service packages built around patient needs. With OTC products, instead, there isthe 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 andgrowing communication channel, pharmaceutical companies may drive content, pro-vide advice, and gather feedback, in order to increase brand and product reputationand gain direct contact with end users. 27
  • 28. Power - up 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 Integrated care - physicians work as part of co- experts operative teams Decisions by clinical autonomy Data-driven decisions Episodic testing Clinically impactful biomonitoringSource: World Economic Forum,adapted from Institute for Alternative Focus on current medical problem Focus on all risks and needsFutures, “2019 Healthcare That Works Short visits with little information Continuous personal relationship with coachingfor All” (2009), and the World HealthOrganization, “The World Health Report One size fits all Customised personal approach(2008)” 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 ap- proach. 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 indivi- duals 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 circumstan- ces, 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 para- digm. 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 non- medical 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 pro- grammes, in order to defend or relaunch their positioning in specific therapeutic areas. 28
  • 29. NEWSLETTERPrevention/education Diagnostics/healing Total Health Management: Unique interfaceProvide online contents Provide scientific diagnostic how to redesign offer aroundto spread the “culture services customer needsof prevention” Offer free diagnostic campaignsBuild up a network with ho- 360°Wellness focused on specific diseasesspitals and clinics to provideclasses to doctors and nurses Build up partnerships with: Grant psychological and materialabout: - Fitness chains, in order to offer wel- support to patients (clinical sup-- Specific diseases lness services targeted to patients port centre and/or home delivery- Patient assistance protocols with specific clinical needs of services and pharmaceuticalEnrich product offer including - Nutritionists and dieticians products)preventive drugs and self-medication (e.g. homeopathic Create a call centre to manage patients’ Complement product portfoliodrugs for allergies) follow up after completing diagnostic with diagnostic products (e.g. and healing phases contrast agents) and healing drugs (painkillers, anti-virals, etc.) Offer wellness products (all nutritionals, vitamin and saline integrators, etc.) Expected - Patient-oriented business approach - Strengthening of brand and visibility (espe- benefits (starting from market needs and not cially when targeting specific diseases) from product portfolio), resulting in a sound competitive advantage - Networking and lock-in effect with: - Patients - Generation of new profitability sources - Doctors - Other influencersAll the examples outlined are within American and Western European companies, asthese are the most evolved markets, where pharmaceutical companies are facing evenfiercer competition from generic products.A brief analysis of the Italian situation shows that, generally speaking, there is still a lackof sensibility towards these opportunities – even if major Italian pharmaceutical compa-nies are also facing growing pressure on margins, and the wellness trend is already highlyvisible – as companies prefer to scout for other products or licences to differentiateTotal Health Management initiatives: success stories built on areas of therapeutic excellence Business US pharmaceutical US pharmaceutical Danish pharmaceutical French industrial UK insurance company focused on company focused on company focused on group specialising in biotechnology kidney diseases and diabetes both industrial and Revenues: $13.4 Bln biotechnology Revenues: $ 9.4 Bln pharmaceutical activities EBITDA: 39% Revenues: $12.3 Bln EBITDA: 29% EBITDA: 21% Covered Bio-oncology Kidney infections Diabetes Respiratory problems N/A clinical area Immunology Immunology Hemostasis Forced nutrition Metabolism and First Aid Virology Growth and other Virology Chronic diseases hormones Hemophilia Total Health Partnership with DAXO Offer of a series of From 2001, provided a Launched a series of Established a Management (ICT and mobile RFID services associated psychological support initiatives in the ’90s in partnership with Virgin initiatives systems) to design a with the healing of to people affected by the healthcare business: Active Health Club clinical test to identify kidney diseases: diabetes - Home delivery of oxygen network, granting all patients affected by - Site with custom Moreover, a training for people affected facilitations for patients’ breast cancer (and healed tutorial for medical staff on by chronic respiratory subscriptions .... by some hospitals/clinics) - Network of nurses chronic diabetes disease problems .... and providing a who could benefit providing products has been provided in - Technical and clinical reduction in insurance from Herceptin (their and education on 65 countries, as well support services to both fees for all clients who blockbuster for oncology) specific treatments as free analysis of patients and hospitals/ train themselves on a Commercial push (at home or in blood glycaemia and clinics regular basis (clients’ of Herceptin on the hospitals and clinics) economic/ diagnostic - Education services on risk reduction thanks to identified target - Travel service for support to associations/ how to use Air Liquide a healthier life) patients clinics for research on equipment diabetes Pharmaceutical Sources: companies’ websites, PWC report Not pharmaceutical 29
  • 30. Power - up Italian cases: signals that something is changingBusiness Italian pharmaceutical group acting Italian pharmaceutical group acting into Italian company focused on wellness into contrast agents, pharmaceutical, pharmaceutical products, cosmetics and machinery and solutions diagnostic services and devices personal care, agri-food, real estate sectors Revenues: € 400 Mln Revenues (group): € 960 Mln (of Revenues (group): € 1,220 Mln (of which EBITDA: 14% which € 60 Mln CDI and € 220 Mln pharmaceutical products € 610 Mln) pharmaceutical products) EBITDA: 13%Covered Gastroenterology Self-healing and first aid Medical rehabilitation (product lineclinical area Cardiology Pain therapy specifically addressed to cope with hospitals/clinics’ therapeutic needs) Neurology Neuropsychiatry Respiratory Daily care (nutrition, body care)Current Provider of home diagnostic services Company website structured to provide USB key with clients’ customised fitnessefforts towards and specific support to smokers suggestions on how to manage clients’ own programs and physiological parameters“Total Health through the CDI (e.g. anti-smoking health:Management- clinic) - Preventionlike” approach Recent portfolio enrichment, - Daily wellness (sport and diet) introducing nutritional supplements - 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 processWhat’s next? Develop a Total Health Scout a limited set of therapeutic areas on Provide online tailored training programs Management programme, built on which to design a comprehensive service Commercialise Technogym branded gastroenterology products package wellness devices to monitor the key parameters of physical activity Get synergies with Enervit nutritionals product line (same owner) Pharmaceutical Sources: companies’ websites Not pharmaceutical 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 Ital- ian 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 so- lely 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 pro- grammes 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 op- portunity, with the chance to enrich their product offering. They are entering a rela- tively new segment which still needs a reference business model and leveraging on their brand value. 30
  • 31. NEWSLETTERValue Partners Group Rio de Janeiro Value Team Pisa Rua da Candelária 60 IT Consulting & Solutions S.S. del Brennero km 4Milan 10º andar Loc. La FigurettaVia Vespri Siciliani, 9 Centro Milan 56123 Pisa - Italy20123 Milan - Italy Rio de Janeiro Viale Cassala, 14 A Tel. +39 050 8009 401Tel. +39 02 485 481 CEP 20091-020 20143 Milan - Italy Fax +39 050 8009 626Fax +39 02 485 48 720 / 725 Brasil Tel. +39 02 489851 Tel. +55 21 2213 9191 Fax +39 02 4898 5999 TurinValue Partners Fax +55 21 2213 9190 Corso Svizzera 185Management Consulting Rome 10149 Turin - Italy Buenos Aires Via Sant’Evaristo, 167 Tel. +39 011 772 241Milan Alicia Moreau de Justo 550 00165 Rome - Italy Fax +39 011 771 644 6Via Vespri Siciliani, 9 4° Piso Tel. +39 06 3988 1120123 Milan - Italy Buenos Aires - C1107AAL Fax +39 06 3937 6283 TrevisoTel. +39 02 485 481 Argentina Viale della Repubblica, 12Fax +39 02 485 48 720 / 725 Tel. +54 11 4314 4222 Cosenza 31020 Villorba - Italy Fax +54 11 4314 6111 Via Spagna, 50 Tel. +39 0422 2511Rome Contrada Cutura Fax +39 0422 251251Via di Porta Pinciana 1 Mumbai 87036 Rende - Italy00187 Rome - Italy 8th floor,”C” Block, Tel. +39 0984 44871 MunichTel. +39 06 697 6481 Devchand House Fax +39 0984 448781 Maximilianstrasse 35aFax +39 06 697 648 51 Shiv Sagar Estate, Capital Dr. Annie Besant Road Genoa D 80539 Munich - GermanyLondon 400 018 Worli - Mumbai World Trade Center Tel. +49 (0) 89 24218 445Greencoat House India Via De Marini, 1 Fax +49 (0) 89 24218 200Francis Street Tel. +91 22 66119 700 16149 Genoa - ItalySW1P 1DH London - UK Fax +91 22 66119 988 Tel. +39 010 2359 1 IstanbulTel. +44 (0) 20 7630 1400 Fax +39 010 2359 251 Dereboy Sok. Sun Plaza, 24 KatFax +44 (0) 20 7630 7011 Hong Kong 10 Maslak Spectrum Value Partners Naples Istanbul - TurkeyIstanbul 18-06, Vicwood Plaza Via Campi Flegrei 34 Tel. +90 212 276 98 86Meydan Sok. Spring Giz Plaza 199 Des Voeux Road Loc. Arco Felice Fax +90 212 276 98 82Floor 3 n° 26 Maslak Sheung Wan 80078 Pozzuoli - Naples34398 Istanbul - Turkey Hong Kong Italy São PauloTel. +90 212 276 98 86 Tel. + 852 2103 1000 Tel. +39 081 8046025 Av. Eng. Luiz Carlos Berrini,Fax +90 212 276 98 82 Fax + 852 2805 1310 716 5° andar - cj. 52 Edificio Palace BerriniDubai Beijing Brooklin NovoBusiness Central Towers Tower A, Suite 1702, Vantone São Paulo - CEP 04571-926Suite n° 1304 A Centre BrasilP.O. Box 503025 - DMC 9 Jia 6 Chaoyangmenwai Avenue Tel.+55 11 3075 5116Sheikh zayed Road 100020 Beijing Fax +55 11 3075 5117Dubai Media City People’s Republic of ChinaUnited Arab Emirates Tel. +86 10 5907 0616 Rio de JaneiroTel. +971 4 4335628 Fax: +86 10 5907 0383 Rua da Candelária, 60Fax +971 4 4380223 10º andar Singapore CentroSão Paulo Spectrum Value Partners Rio de JaneiroRua Padre João Manuel 755 7 Temasek Boulevard. CEP 20091-0201º e 2º andares - cj. 11, 12 e 21 Suntec Tower One #26-04 BrasilCerqueria Cesar 038987 - Singapore Tel. +55 21 2213 9191São Paulo - CEP 01411-001 Tel. +65 6820 3388 Fax +55 21 2213 9190Brasil Fax +65 6820 3389Tel. +55 11 306 809 99Fax +55 11 308 141 38 If you would like to discuss any of the issues raised, please contact your nearest Value Partners office or write to 31
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