Value Partners NewsletterPublished by Value PartnersVia Vespri Siciliani 9 - 20146 Milan - ItalyEditor: Tina GuiducciEdito...
NEWSLETTERAnyone who’s ever played Pac Man, Bubble Bobble or Mario Bros – and there aremillions of such people all over th...
Power - up                                                            There is compelling evidence that the automotive sec...
NEWSLETTERAs was the case for VM Motori, all industry players that are hit hard by this sort of abruptmarket downturn and ...
Power - up                                         inventories. Strategic partnerships, joint ventures and licensing contr...
NEWSLETTERThe financial and industrial crisis in 2009 had a dramatic effect on the Group, as it hadto deal with a drastic ...
Power - upsion phase. From the agricultural equipment we were producing in the ‘30s we wenton to tractors, and from comple...
NEWSLETTERWhat do you feel has been the most decisive action taken, and of which you’re mostproud? And the most upsetting ...
Power - upPotential in China’s auto parts          Revenue of total Chinese auto parts industry          China’s after-sal...
NEWSLETTERand sourcing is not just feasible but convenient, notwithstanding the unavoidablerisks in know-how protection.IP...
Power - up                                                                                                                ...
NEWSLETTERalso being excluded from increasingly important product innovation trends and leavingcrucial scale and cost adva...
Power - up                                          The need for distinctiveness also involves the brand’s image. The post...
NEWSLETTERnel of something good” (in this case, energy that causes less pollution) but then somepeople start to get rich r...
Power - up         The government in France has recently declared its intention to stop financing groundFrance   photovolt...
NEWSLETTERsupply of cells and components coming from countries where the government has cutincentives. The combination of ...
Power - upcates from renewable energy producers. This could have a significant impact on greencertificate prices and reduc...
NEWSLETTERa government intervention on building efficiency – for example, the obligation in Italy toinstall 1kW of renewab...
Power - up                                       Luminous efficiency                                              (lumen/W...
Value Partners Power Up
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Value Partners Power Up
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Value Partners Power Up

  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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