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High-Flying Growth Prospects In India’s Domestic Travel Market

Bar chart showing domestic and foreign visits to Indian states, 2006-2016 (in millions of visits). Domestic visits to Indian states grew from 462.4 million in 2006 to 1,613.6 million in 2016 while foreign visits grew from 11.7 million in 2006 to 24.7 million in 2016.

Tourism is booming in India, and the industry is emerging as a key growth driver in India’s service sector. Much of the growth stems from India’s domestic tourism sector which has seen a steady increase in visits from domestic travelers over the past decade; domestic tourist visits (DTVs)  increased 12.7% to 1.613 billion in FY 2016, (the latest year for which data is available) according to statistics from India’s Ministry of Tourism.

Domestic tourist visits have consistently registered positive growth rates over the past decade; during 2006-2016 domestic tourist visits grew at double digit rates every year except in years 2008 and 2013 when growth was at single digits. This compares with foreign tourist visits which mostly saw single-digit growth and sometimes zero or negative growth. In 2012 for instance, foreign tourist visits registered negative 6% growth while domestic tourist visits jumped 20%.

The rise of India’s domestic visitor numbers has been a long term trend; during the period 1991-2016, domestic visits to all Indian states grew at a CAGR of 13.03%, far outpacing foreign visits which grew at a CAGR of 8.25% during the same period according to data from India’s Ministry of Tourism.

Bar chart showing domestic and foreign visits to Indian states, 2006-2016 (in millions of visits). Domestic visits to Indian states grew from 462.4 million in 2006 to 1,613.6 million in 2016 while foreign visits grew from 11.7 million in 2006 to 24.7 million in 2016.

Domestic travelers also account for the lion’s share of tourism earnings; India’s tourism industry contributes about 7% to India’s GDP, and domestic travelers accounted for 88% of the sector’s contribution to GDP in 2016.

India’s rising numbers of domestic tourists have largely been driven by an expanding middle class with rapidly increasing purchasing power (currently estimated at 250 million Indians and counting), infrastructure development, a growing fleet of low cost airlines, and initiatives such as the UDAN Regional Connectivity Scheme.

Yet, there is considerable potential for further growth as a result of demographic, regulatory and economic factors. The number of middle class Indians is small compared to China and their purchasing power is considerably lower than their Chinese counterparts. However, India continues to be the fastest growing major economy in the world and this is likely to remain so in the foreseeable future; the International Monetary Fund (IMF) predicts India’s Gross domestic Product (GDP) will grow at an average of more than 8% every year over the next five years and this should drive income growth. According to Global Insight Inc, some 150 million additional Indian households are due to achieve real PPP incomes of more than US$ 20,000 by 2026, almost triple the amount in 2016 and according to Steelcase Growth Market Research, India’s middle class population is expected to grow to around 475 million people by 2030.

India’s expanding middle class citizens are expected to drive India’s consumption expenditures to reach US$ 4 trillion by 2025, helping India emerge as the world’s third biggest consumer market by 2025 according to consultancy firm Boston Consulting Group.

India’s domestic tourism sector is also benefiting from an encouraging regulatory environment; the Indian government is planning to turbocharge the tourism sector with tax cuts, incentives, infrastructure development and more. The Union Budget 2018 focuses on expansion of airport infrastructure (a key constraint limiting air traffic growth in the country) and there are expectations of a reduction in hotel tariffs and tax exemptions on investments in new hotels.

Thus, with several growth drivers in place from favorable demographics to a supportive policy environment, India’s domestic tourism sector is poised for greater expansion in the future. Domestic tourism is expected to maintain its dominance in India’s tourism industry through 2021. A report by Google India and Boston Consulting Group projects India’s domestic travel market to grow at a five-year CAGR of 11.2% to US$ 48 billion by 2020 from US$ 27 billion in 2015 opening numerous opportunities for businesses and investors.

 

Airlines

India’s domestic air traffic crossed the 100 million mark for the first time with 117 million passengers flying in 2017, up 18% from 99.88 million passengers in 2016 according to data from India’s Directorate General of Civil Aviation (DGCA) making India the world’s fastest growing domestic aviation market for the third consecutive year according to IATA. India was followed by China and Russia where domestic air passenger numbers increased 13.3% and 10.1% respectively in 2017.

Bar chart showing India’s domestic air traffic, 2013-2017 (in millions of passengers). India’s domestic air traffic grew from 61,426 million passengers in 2013 to 117,176 passengers in 2017, representing a CAGR of 17.5% between 2013 and 2017.

The boom in domestic air travel was a boon to local airlines such as Indigo (NSE:INDIGO), Jet Airways (NSE:JETAIRWAYS), Spice Jet (BOM:500285) and Vistara (a joint venture between Tata Group and Singapore Airlines) which enjoyed higher passenger load factors.

In 2017, market leader Indigo commanded a market share of 39.6%, Jet Airways had 17.8%, Air India 13.3%, Spice Jet 13.2%, Go Air 8.5%, Air Asia 3.7%, and Vistara 3.5%.

Yet the growth potential is still enormous; less than 10% of Indians take to flying and at around 0.08 annual domestic seats per capita, India’s penetration rate is relatively low compared to other developing markets such as Brazil (0.6) and China (0.4) according to data from flight information and data company OAG. By comparison, the United States has around 2.8 annual domestic seats per capita.

Rising incomes particularly among India’s tech-savvy millennial generation (those born between 1981 and 1996) which have a greater affinity to travel could propel India’s domestic aviation sector in the years to come. India has about 400 million millenials which account for about a third of the country’s one billion plus population and India is expected to be the youngest nation in the world by 2020 with a median age of 29. A survey by Phocuswright and ixigo revealed that Indian millenials take more trips per year compared to seniors and they also spend more.

The Indian government is also taking encouraging measures to boost efficiency and reduce flying costs. For instance, India is mulling the prospect of breaking the monopoly held by public sector oil companies in the supply of Aviation Turbine Fuel (ATF) at the Mumbai airport by allowing private refiners to enter the market, thereby improving operating costs and increasing efficiency. Mumbai airport, India’s busiest airport, accounts for about 20% of India’s ATF consumption. With ATF costs making up about 40% of the operating costs of airlines, the move could be a boon for India’s aviation industry, benefiting airlines as well as private refiners such as Reliance Industries (NSE:RELIANCE).

The International Air Transport Association expects India to overtake the United Kingdom to emerge as the third largest aviation market by 2025 (China will be the biggest market followed by the United States).

Morgan Stanley forecasts India to witness a CAGR of 13% in domestic air traffic during 2016-2026.

According to a report by Google India and Boston Consulting Group, air travel is expected to be the biggest contributor to the India’s travel market, registering a CAGR of 15% reaching a market value of US$ 30 billion by 2020, making up over 50% of the projected value of India’s domestic travel market which is forecast to reach US$ 48 billion by 2020.

Hotels

Overinvestment, cost overruns and high interest rates have hampered the financial performance of India’s hotel industry with stressed loans jumping 63% over the past three years.

Much of the industry’s woes appear to be concentrated on branded, full-service hotels in the luxury and upscale segment in Tier I and Tier II cities.

On the other hand, India’s mid-market hotel segment (i.e., two, three and four star hotels) is booming, driven by both domestic and overseas tourists, encouraging brands such as Lemon Tree Hotels (NSE:LEMONTREE), and Royal Orchid Hotels (NSE:ROHLTD) to expand into the sector pushing up the supply of mid-market hotel rooms over the past several years; in 2002, some 6,000 of the 26,000 branded hotel rooms in India – less than 25% percent – were mid-market hotel rooms. By 2017, mid-market hotel rooms jumped nine-fold to 53,200, accounting for 43% of the total branded hotel rooms in the country which increased five-fold to 125,000 according to data from hospitality consulting firm Horwath HTL.

However, there are signs of recovery in India’s hotel industry with occupancy rates rising to 66% in 2017 – the highest in nine years according to a report by Horwath HTL – and average room rates growing by 8% since 2008 according to hotel consultant firm Hotelivate.

Bar chart showing all-India hotel occupancy rates, FY 2013 - FY 2017 (E). Occupancy rates have been rising in India; during FY 2013, FY 2014, FY 2015, FY 2016 and FY 2017 (E) hotel occupancy rates were 58%, 59%, 61%, 64% and 66% respectively.

The momentum is expected to continue going forward driven by a muted hotel room supply pipeline, an increasingly travel-hungry Indian middle class population, and favorable policies such as the Indian government’s UDAN scheme Phase-II which is expected to open new opportunities benefiting domestic mid-tier hotels in particular. Horwath HTL anticipates all-India occupancy rates to be more than 70% next year and mid-market segment occupancy rates will hit 82%.

The annual average leisure hotel spend per household is expected to grow 7% to US$ 18 by 2020 compared with US$ 13 in 2015.

A report by Google India and Boston Consulting Group expects hotels to grow at CAGR of 13% to US$ 13 billion by 2020, making up slightly more than a quarter of the overall domestic travel industry which is expected to be valued at US$ 48 billion. Much of the demand will be fueled by domestic travelers who are expected to account for over 60% of hotel spend in India. The mid-scale segment is expected to retain its dominant share, accounting for about 44% of India’s branded hotel rooms in 2020.

Bar chart showing India hotel spend by domestic and foreign tourists in 2010, 2015 and 2020 (forecast) (in US$ billions). India’s hotel market was valued at US$ 4 billion in 2010, US$ 7 billion in 2015 and is expected to grow to US$ 13 billion by 2020. At about US$ 9 billion - US$ 10 billion, domestic travelers will account for more than 60% of hotel spend in India by 2020.

Online travel portals

According to consulting firm Praxis, India’s online travel market was valued at US$ 5.71 billion at the end of 2015, and is expected to more than double to US$ 13.6 billion by 2021, representing a CAGR of over about 16% driven by increasing penetration of international hotel and flight bookings from travel portals such as MakeMyTrip (NASDAQ:MMYT) (India’s largest online travel agency), Yatra (NASDAQ:YTRA), and Cleartrip to name a few.

Increasing internet penetration and rising incomes among India’s tech savvy millenials as they increasingly climb up the income ladder are some of the tailwinds that are expected to drive India’s online hotel market. The country’s internet user base stood at 481 million in December 2017, up 11.34% from a year earlier, representing an internet penetration rate of less than 40% indicating ample potential for growth. Much of India’s offline population resides in rural India. However, even in urban India where incomes are higher and residents generally have a higher propensity to travel, there is potential for higher internet penetration; about 295 million (equal to about 64%) of India’s 455 million urban population are connected to the internet leaving a potential market of about 160 million internet users in urban India alone. This is equal to nearly one half of the entire population of the United States.

Indian millenials are expected to be a key driving force in India’s online travel market going forward. According to booking data from India’s largest online travel company MakeMyTrip which is often touted as India’s answer to Ctrip  (NASDAQ:CTRP) and Expedia (NASDAQ:EXPE), the majority of the platform’s customers were millenials; over half of travelers who made bookings through MakemyTrip were under 35 years of age.

India has the world’s largest millenial population and as their disposable incomes grow, they are likely to travel more and thereby drive the country’s online travel market as they plan their itineraries online, presenting a major growth opportunity for online travel companies.

Online hotel bookings in particular presents a major growth opportunity in India’s online travel market. According to a report by Morgan Stanley, Indian millenials have shifted a large part of their activities online, for instance through the adoption of digital entertainment channels (to the detriment of traditional channels such as radio) and online shopping. However, online travel booking is an exception to the trend with 63% of all hotel bookings being reportedly made by walking into hotels. Less than 20% of hotels were booked online, and only one third of those were booked using travel agencies indicating tremendous potential for growth.

One third of all hotels are expected to be booked online helping the sector grow at a CAGR of 25% to be worth US$ 4 billion by 2020 according to a report by BCG and Google India.

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Healthy opportunities in China’s blossoming healthcare market

Bar chart showing the top 10 countries by health expenditure per capita and China’s health expenditure per capita (in US dollars), 2000, 2005, 2015 according to data from the World Health Organization. The top countries by per capita health spend as at 2015 are: Switzerland (US$ 9,818), U.S.A. (US$ 9,536), Norway (US$ 7,464), Luxembourg (US$ 6,236), Sweden (US$ 5,600), Denmark (US$ 5,497), Australia (US$ 4,934), Ireland (US$ 4,757), Netherlands (US$ 4,746), and Germany (US$ 4,592). By comparison, China’s per capita health expenditure in 2015 amounted to just US$ 426.

China, the world’s second largest healthcare market in the world after the United States, is growing rapidly driven by an ageing population, government support,  and rising urbanization (which is contributing to an increase in lifestyle diseases such as diabetes and cancer.

China is currently the fastest growing major healthcare market in the world with a five-year compound annual growth rate (CAGR) of 17% compared with just 4% for the United States and -2% in Japan according to 2015 information from the World Bank. Healthcare spending in China has risen four-fold from about CNY 1 trillion (US$ 126 billion) in 2006 to CNY 4.6 trillion in 2016 (US$ 698 billion).

Yet, the Chinese healthcare market is still relatively immature compared to developed economies such as the United States and Germany. China holds nearly 20% of the world’s population but the country accounts for just about 3% of the world’s healthcare spend.

As a percentage of GDP, China’s healthcare expenditure is about 5.6% of the country’s GDP compared with 17.1% for the United States, 11.3% for Germany and 10.3% for Japan according to 2013 data from the World Health Organization.

Furthermore, despite being the world’s second biggest healthcare market, China’s per capita healthcare spending is only a fraction of mature markets such as the United States, Luxembourg and Germany. China does not even make it to the list of the world’s top 10 countries with the highest per capita health expenditure indicating huge potential for spending increases.

Bar chart showing the top 10 countries by health expenditure per capita and China’s health expenditure per capita (in US dollars), 2000, 2005, 2015 according to data from the World Health Organization. The top countries by per capita health spend as at 2015 are: Switzerland (US$ 9,818), U.S.A. (US$ 9,536), Norway (US$ 7,464), Luxembourg (US$ 6,236), Sweden (US$ 5,600), Denmark (US$ 5,497), Australia (US$ 4,934), Ireland (US$ 4,757), Netherlands (US$ 4,746), and Germany (US$ 4,592). By comparison, China’s per capita health expenditure in 2015 amounted to just US$ 426.

China’s healthcare market is expected to continue its rapid growth in the years to come propelled by growth drivers such as an greying population, increasing lifestyle diseases as a result of increasing urbanization and government support.

China’s population is ageing with the country’s over-65 year olds accounting for 11.4% of the total population in 2017, up from 10.8% in 2016 and less than 8% in 2000 according to data from the statistics bureau. That equates to over 150 million Chinese over the age of 65 which is slightly less than half of the entire population of the United States. This number is expected to grow with the State Council expecting 25% of China’s population to be aged 60 and over by 2030, up from 13% in 2010 which is expected to drive healthcare costs going forward.

China’s urbanization rate has been on the rise and it currently stands at 59% according to the National Statistics Bureau. This compares with the United States which is at 82%, the United Kingdom which is at 83% and South Korea which is at 83%. China’s increasing urbanization has contributed to a greater incidence of lifestyle diseases such as diabetes and cancer. China has the most number of obese children in the world and has the world’s second -biggest population of obese adults after the United States according to the Global Burden of Disease report by a team at the University of Washington.

The urbanization process is continuing in China and thus as Chinese get increasingly wealthier and urbanized which leads to unhealthy diets and sedentary lives, the country’s lifestyle disease burden is expected to increase thereby driving China’s healthcare market.

Recognizing the need for a robust healthcare industry to meet the country’s increasing healthcare needs, the Chinese government has undertaken a series of reforms and supportive government policies such as the blueprint “Healthy China 2030” which aims to improve the level of health throughout the country by improving health services, expanding the medical industry and encouraging private investment in the local healthcare sector.

By 2030, the National Health and Family Planning Commission (NHFPC) estimates China’s health-related industries will reach CNY 16 trillion (approximately US$ 2.4 trillion).

These factors are expected to drive China’s healthcare industry going forward. According to a 2017 report by Research ad Markets, China’s healthcare market is poised to expand from around US$ 710 billion in 2016 to over US$ 1.11 trillion in 2020 creating numerous opportunities.

 

Pharmaceuticals

Pharmaceuticals is the largest sector of China’s healthcare market and China’s pharmaceuticals industry has been growing rapidly; the Chinese pharmaceutical market grew at a CAGR of 9.4% from 2013 to 2017 helping China overtake Japan to emerge as the world’s second largest pharmaceutical in the world after the United States.

Bar chart showing the world’s top 10 pharmaceutical markets in 2016 by market value (US$ billion). The top 10 markets are U.S.A. (US$ 461.7 billion), China (US$ 116.7 billion), Japan (US$ 90.1 billion), Germany (US$ 43.1 billion), France (US$32.1 billion), Italy (US$ 28.8 billion), U.K. (US$ 27 billion), Brazil (US$ 26.9 billion), Spain (US$ 20.7 billion), and Canada (US$19.3 billion).

 

Yet, China’s pharmaceutical market lags far behind the United States in sales; despite having a population that is three times the size of the United States, at US$ 122.6 billion in 2017, China’s pharmaceutical market was worth less than a quarter of the United States’ which was valued at US$ 466.6 billion the same year according to data from health information vendor IQVIA. However, with drug demand expected to grow due to factors such as a greater incidence of lifestyle diseases and faster drug approvals, IQVIA forecasts China’s pharmaceutical market to expand from US$ 122.6 billion in 2017 to reach US$ 145 billion to US$ 175 billion by 2022.

In 2017, China announced new rules aimed at speeding up the country’s inefficient drug approval process, which could be a revenue boost for pharmaceutical companies.

Foreign pharmaceutical companies in particular stand to benefit as the new rules allow foreign drug makers to file for drug approval in China using data from international, multinational trials (provided China is included as a study site) which enables them to gain greater inroads into the Chinese market and eliminates the necessity of conducting additional costly and often time-consuming clinical trials in China after receiving approval overseas.

Swiss pharmaceutical giant Novartis AG (VTX: NOVN) aims to double China sales over the next five years.

AstraZeneca (LON:AZN) has deepened its substantial China business with the announcement of a new company Dizal Pharmaceutical, which is a drug development joint venture with the Chinese Future Industry Investment Fund (FIIF).

French pharma giant Sanofi (EPA:SAN), one of the leading insulin providers in the world and in China, expects to maintain double-digit sales growth in China thanks to China’s growing diabetes population. One third of the world’s approximately 420 million diabetic population live in China which amounts to over 100 million diabetic Chinese, accounting for about 11% of Chinese adults as of 2015 up from less than 1% in 1980, a dramatic increase over the past 35 years. China’s growing insulin demand has been a boon to Sanofi’s rival insulin makers as well, Novo Nordisk (CPH:NOVO-B) and Eli Lilly (NYSE:LLY).

Local drug makers also stand to benefit from accelerated drug approvals.

Hutchison MediPharma, a subsidiary of Hutchison Meditech (LON:HCM) is expected to receive approval this year for its fruquintinib capsule for colorectal cancer, the second-most common prevalent cancer in China with about 380,000 new cases annually according to the National Central Cancer Registry of China. The market potential for cancer drugs in China is substantial with cancer rates rising nationwide as a result of aging, and environmental factors among other reasons. With China seeing approximately 700,000 new cancer cases annually, the country has one-third of new cancer patients in the world.

While China is the world’s biggest producer of APIs, the country lags behind the U.S. and other developed markets in drug innovation, and most innovative drugs are produced by foreign pharmaceutical companies. To help its pharmaceutical industry move up the global value chain, the Chinese government has been actively creating a supportive regulatory framework to galvanize homegrown pharmaceutical companies through grants and tax breaks for research, and through initiatives such as the ‘Made in China 2025’ plan which mentions innovation in pharmaceuticals, among 10 other key sectors, a national priority.

With the results of such initiatives likely to bear fruit in the long term, in the shorter term Chinese pharmaceutical companies’ expansion efforts are likely to remain focused on capturing market share in the global generic drugs market. China’s drugs market is dominated by generics, accounting for 85% of total drug sales as of 2016 according to data from Fitch, and over 95% of the 170,000 drug approvals by the China FDA according to data from the National Health Commission. China’s generics market is dominated by a large number of low-cost domestic pharmaceutical companies, and these Chinese pharmaceutical companies are now venturing out to overseas markets. In the United States, the world’s largest generics market, Chinese generic drug manufacturers have reportedly won approval for 38 generic drugs from the U.S. Food & Drug Administration in 2017, up from 22 in 2016. Jiangsu Hengrui (SHA;600276), Zhejiang Huahai Pharmaceutical (SHA:600521), Zhejiang Hisun Pharmaceutical (SHA:600267) are among the Chinese pharmas that received U.S. FDA approval.

Meanwhile the world’s largest exporter of generic drugs, India, (which won U.S. FDA approval for 300 drugs, roughly one third of the 927 generic drugs granted U.S. FDA approval in 2016)  has seen its imports of Chinese generic drugs soar 50% in dollar terms over the past four years (2012/2013 – 2016/2017) according to data from the Pharmaceuticals Export Promotion Council (Pharmexcil).

 

Medical devices

One of China’s fastest growing sectors, the Chinese medical device industry has grown in leaps and bounds, with the industry maintaining double digit growth for over a decade. According to data from China Medical Pharmaceutical Material Association, China’s medical device market expanded from CNY 53.5 billion in 2007 to CNY 370 billion in 2016, representing a CAGR of 23.97%, which is three times faster than the global average growth rate of 8%.

Bar chart showing China’s medical device market size (US$ billions) in 2014, 2015, 2016 and 2017 (estimate). China’s medical device industry has been growing at double digits over the past few years with the market valued at US$ 39.32 billion in 2014, US$ 47.38 billion in 2015, US$ 53.62 billion in 2016 and an estimated US$ 58.63 billion in 2017.

The stellar growth has helped boost sales of multinational medical device manufacturers such as Siemens (ETR:SIE), J&J (NYSE:JNJ), Philips, and General Electric (NYSE:GE).

Yet the Chinese medical device market is still at a relatively immature stage considering the fact that globally, the medical device market is about 42% the size of the pharmaceutical market but in China however, the percentage is considerably lower at about 14%, indicating an attractive growth opportunity for medical device manufacturers.

China is Johnson & Johnson’s second largest market after the United States and the company expects China to remain as a key growth engine in the years to come.

Carlyle Group (NASDAQ:CG) owned American in-vitro diagnostics company, Ortho Clinical Diagnostics plans to build manufacturing facilities in China, as it banks on the mainland to be its “No. 1 growth country”. China’s in-vitro diagnostics (IVD) market is expected to grow at a CAGR of over 14% by 2021 according to research firm Technavio, which could be a boon for Swiss healthcare giant Roche Holdings (VTX:ROG), which is the dominant player in China’s IVD market.

But much like China’s pharmaceutical industry, foreign-made medical device brands are perceived to be of superior quality compared to those produced by domestic manufacturers. Consequently, while Chinese medical device manufacturers dominate the local market in general, the vast majority of them compete in the low to mid-range medical device product categories (according to figures from the International Trade Administration, more than 80% of Chinese medical device manufacturers compete in the low to mid-end medical device categories).

Meanwhile foreign medical device manufacturers such as those from the United States, Germany and Japan tend to dominate the higher-end, high-value medical device product category; medical device brands from the United States, which is the number one foreign supplier of medical devices in China, rake in nearly 75% of their local revenue from China’s top tier i.e., Tier III hospitals with the rest from Tier II hospitals according to figures from the International Trade Administration.

In an effort to help local medical device manufacturers play a greater role in the higher-end medical device segment, the Chinese government unveiled its ‘Made in China 2025’ plan which focuses on domestic high-end medical devices in sectors such as diagnostic imaging, medical robots, wearable devices and telemedicine.

Under the plan, China hopes to increase the use of domestically produced medical devices in hospitals to 50% by 2020 and 75% by 2025. The move could further accelerate the rise of local device manufacturers which have been growing faster than multinationals, (albeit from a smaller revenue base), and as a result of continuous product improvement, they have been increasingly taking market share from foreign rivals in medium-level segments of the country’s medical device sector.

For instance, multinationals’ share of China’s orthopedic implant market has dropped from 80% to less than 50% over the past five years, multinationals’ share of China’s drug-eluting stents market (which stood at about 90% as recently as 2004), has declined considerably with local manufacturers such as Biosensors International, Lepu Medical, and MicroPort selling about 80% of China’s drug-eluting stents and multinationals’ share of China’s direct radiography market has dropped from 100% in 2004 to about 50% currently according to data from Boston Consulting Group.

Buoyed by their growing financial, technological and R&D capabilities and supportive government initiatives, Chinese medical device manufacturers appear poised to take further market share in more of China’s medical device sectors in the long term.

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China’s $150 Billion AI Ambition Opens New Growth Opportunities

Line and bar chart showing facial technology investment value and deal volume (including grants) in China 2013-2017. Disclosed funding in facial recognition in China grew from US$ 2 million in 2013 to US$ 41 million in 2017 while the number of deals increased from 3 in 2013 to 41 in 2017.

China is aiming be the world’s leading player in artificial intelligence (人工智能) by 2030 and by some measures, the country appears to be on track.

According to a report by CB Insights, Chinese companies seem to be overtaking their US counterparts in AI-related patent applications; the number of patents published in China containing the words “artificial intelligence” and “deep learning” have grown rapidly over the past few years, and the middle Kingdom finished 2017 with six times more patent publications containing those words than the United States in 2017.

Line graph showing the number of AI related patent publications published in China and the United States, 2013-2017.

While the United States continues to lead in terms of the number of AI startups and equity deal volume, it has seen its share of global AI equity deal volume shrink from 77% in 2013 to 50% in 2017. By comparison, China accounts for a mere 9% share of the world’s AI equity deal volume.

Bar chart showing global AI equity deal share (US vs Non-US deal share), 2013-2017.

However, in terms of global AI funding value, China is the dominant player accounting for 48% of global equity funding in 2017 representing a major increase from the 10% share China held in 2016 and surpassing the United States for the first time. By comparison, the United States accounted for 38% while the rest of the world accounted for the balance 13% of global AI funding value in 2017.

The numbers are likely to be just the beginning for China’s AI industry expansion which, driven by government funding, an encouraging regulatory environment, and the natural advantage of having the world’s largest population yielding unrivaled quantities of data (AI systems need to be “trained” with real-world data and the more data fed into a system, the more accurate it is) positions China as a hotbed of AI opportunities for investors and entrepreneurs.

The Chinese government has set forth a plan for the Development of a New Generation of Artificial Intelligence Industry, which runs in three stages during which the country’s AI capabilities will be steadily developed through 2020 and 2025 and conclude in 2030 when the government aims China will be the leading player in artificial intelligence.

Towards this end, the Ministry of Industry and Information Technology (MIIT) unveiled the first stage of the plan in December 2017, a detailed Three-Year Action Plan (2018-2020) which supports the local AI sector as a strategic area by developing AI-related technologies, bolstering AI talent and investing in AI research through various initiatives, incentives, grants, and funding commitments. The plan focuses on the development of some key AI areas namely,

  1. Intelligent Networked Vehicles (智能网联汽车)
  2. Intelligent Service Robots (智能服务机器人)
  3. Intelligent Drones (智能无人机)
  4. Medical Imaging Diagnostic Systems (医疗影像辅助诊断系统)
  5. Video Image Recognition (视频图像识别)
  6. Intelligent Voice Systems (智能语音)
  7. Intelligent Translation Systems (智能翻译)

 

This creates tremendous business opportunities. By 2030, the Chinese government expects China’s AI sector to blossom into a CNY 1 trillion (US$ 150 billion) industry which could stimulate as much as CNY 10 trillion in related businesses.

The opportunity has attracted local and foreign tech giants eager to profit from China’s burgeoning AI industry. Google (NASDAQ:GOOGL) for instance has opened an AI research facility, Google AI China Center, in Beijing to hire China’s top talent in artificial intelligence while homegrown tech giants such as Alibaba (NYSE:BABA), Baidu (NASDAQ:BIDU), Tencent (HKG:0700), Xiaomi, Huawei and JD.com (NASDAQ:JD) are making hefty investments in AI technologies.

 

Artificial Intelligence chips

AI systems depend on powerful AI chips to run and while numerous Chinese tech giants such as Alibaba, Baidu and Tencent are actively deploying AI technologies to improve their core offerings, much of the AI chips that power their systems are made by foreign suppliers such as Nvidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC).

Although China is the world’s largest semiconductor market, accounting for about 45% of the world’s demand for chips (also known as integrated circuits), much of the country’s demand for chips is met through imports which account for about 90% of China’s total consumption of integrated circuits.

AI chips make up the basic infrastructure of AI systems and having a greater presence in the supply of such strategic components could potentially facilitate the Chinese government to achieve its goal of becoming an AI powerhouse.

Furthermore, as the global AI industry expands at a rapid clip, the global AI chips market is expected to witness extraordinary growth as well. According to research from ResearchAndMarkets, the AI chipset market is poised to expand from US$ 7.06 billion in 2018 to US$ 59.26 billion by 2025, representing a CAGR of 35.5% during 2018-2025.

Globally, chip startups have raised more than US$ 1.5 billion from in venture capital funding last year, nearly double the amount the year before according to CB Insights.

The Chinese government appears intent on capturing some of that profit potential too; in its Three Year Action Plan (2018-2020), the Chinese government aims to mass-produce neural network processing chips by 2020. China’s previous attempts to build the local semiconductor sector (from as way back as the 1990s) had mixed results partly due to the fact that government incentives and funds were concentrated on research and academia than on business.

This time however, Chinese AI chip businesses seeing greater government support, putting them in good position to participate in the growing global AI chip market.

Within 18 months of its founding by scientists at the Chinese Academy of Sciences (CAS), Chinese AI chip developer Cambricon Technologies raised US$ 100 million in Series A funding making it China’s first AI unicorn. Led by SDIC Chuangye Investment Management which is a subsidiary of China’s State Development and Investment Corporation, the funding round attracted prominent investors including e-commerce giant Alibaba Group, computer manufacturer Lenovo (HKG:0992), robotics company Zhongke Tuling Century Beijing Technology and the investment arm of the Chinese Academy of Sciences (CAS).

Scientists and engineers from Beijing’s Tsinghua University (which is known as China’s ‘MIT’) have developed “Thinker” a multi-purpose AI chip that can support any neural network and is extremely energy efficient. Beijing-based chip manufacturer Tsinghua Unigroup, a subsidiary of Tsinghua Holdings which is owned by Tsinghua University received up to US$ 22 billion in state financing in early 2017.

Chinese e-commerce goliath Alibaba is also reportedly developing its own chips, joining global tech giants such as Google, Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB) which are already working building their own AI chips. Called the Ali-NPU, Alibaba’s AI chips will be made available for anyone to use through its Alibaba Cloud service.

 

Facial recognition

 Over the past few years, China’s facial recognition market has seen a rapid growth in investment in terms of deal value and volume.

Line and bar chart showing facial technology investment value and deal volume (including grants) in China 2013-2017. Disclosed funding in facial recognition in China grew from US$ 2 million in 2013 to US$ 41 million in 2017 while the number of deals increased from 3 in 2013 to 41 in 2017.

According to CB Insights, of all countries in the world, China appears to be making the greatest use of facial recognition software with the technology being widely used throughout the country from supermarkets, airports, streets, office buildings, apartments, hotels, bank counters and ATMs.

The business opportunity has given birth to a number of Chinese facial recognition startups such as Alibaba-backed AI unicorn SenseTime (the most valuable AI startup in the world as if April 2018), Megvii (which develops Face++, one of China’s most common facial recognition platforms used for applications such as to manage entry in places such as Beijing’s train stations and Alibaba’s office building, and to enable Alipay customers to authenticate payment), CloudWalk Technology (a facial recognition software developer whose clients include the Zimbabwean government and Bank of China), DeepGlint, Zoloz and Yitu Technology (which counts the Malaysian Police as a client).

Chinese police are already using facial recognition sunglasses to track its citizens and the Chinese government is reportedly aiming to build a national database that will recognize any of the 1.3 billion citizens in China (the world’s most populous country) in three seconds. Already, more than 4,000 people have been arrested by Chinese authorities, helped by facial recognition technology.

Alipay, China’s most popular mobile payment app owned Alibaba affiliate Ant Financial has rolled out the world’s first payment system that uses facial recognition to enable customers to authenticate payments using just their face and a second authentication using their mobile phones.

In spite of China seeing rapid advancements in facial recognition, there is still considerable potential for the industry to grow driven by the growth of intelligent vehicles in China.

 

Intelligent vehicles

While autonomous cars are gathering momentum worldwide, China, the world’s largest car market is speeding towards intelligent vehicles with the country’s top economic planning agency, the National Development and Reform Commission naming intelligent vehicles as a national priority in a three year action plan unveiled in December 2017.

Autonomous cars refer to vehicles that are equipped with sensors and GPS while intelligent vehicles (the so called “smartphones on wheels”) refer to cars with technologies such as road safety monitoring, interactive entertainment, facial recognition, voice interaction systems and in-vehicle payment systems.

By 2020, the Chinese government expects the market share of smart vehicles to reach 50% of total new vehicles sold in China. Towards that end, the Chinese authorities have taken steps to boost the country’s intelligent and connected vehicle industry such as through talent training and research, encouraging investment, and encouraging cross-border mergers and acquisitions.

Strong regulatory support coupled with Chinese car buyers’ seemingly high enthusiasm for connected vehicles which presents a potentially sizeable market for smart cars suggests the government’s target could be within reach. According to a survey conducted by McKinsey in 2017, 64% of Chinese consumers would switch brands for better in-car connectivity. By comparison, 37% of Americans would switch brands for better in-car connectivity and just 19% of Germans would do the same.

Bar chart showing desire for in-car connectivity from consumers in China, United States and Germany. 64% of Chinese consumers surveyed were willing to switch brands for better in-car connectivity compared with just 37% of American consumers and 19% of German consumers. For 33% of Chinese consumers, having in-car connectivity is critical while 20% of American consumers and 18% of German consumers felt the same. 62% of Chinese consumers were willing to pay a subscription for in-car connectivity while just 29% of American consumers and 13% of German consumers were willing to do the same.

The opportunity has turned China’s intelligent connected vehicle market into a hot sector attracting a raft of companies, from established tech giants to smaller startups, keen to participate.

Alibaba has signed agreements with auto companies such as Ford (NYSE:F), Dongfeng Peugeot Citroen and SAIC Motor (SHA:600104) to develop connected vehicles which use its AliOS automotive operating system which was unveiled in 2016.

Chinese social media behemoth Tencent has teamed up with Changan Automobile, while Chinese internet giant Baidu has partnered with Great Wall Motors towards develop intelligent connected vehicles.

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The Digitization Of Global Agriculture And Agtech Startups Poised To Profit

Bar chart and scatter chart showing livestock products consumption (Kcal/person/day) and beef and mutton consumption (Kcal/person/day) and percentage change in 2016 and 2050 (forecast). From 2006 to 2050, world livestock products consumption (Kcal/person/day) is forecast to increase 23% while world beef and mutton consumption (Kcal/person/day) is forecast to increase 30%.

The agtech startup scene is booming with venture capital funding climbing steadily over the past few years. According to data from PitchBook and US fund Finistere Ventures, the agtech industry raked in US$ 1.5 billion in investments in 2017, most of which were in early stage startups.

The flurry of interest in agtech startups is driven by a number of reasons. From climate change to increasing water scarcity, the global agriculture industry faces numerous long term challenges which, if unaddressed could affect global food availability in the future due food supply growth being far outpaced by food demand growth which is driven by a growing population and rising income levels.

Today’s approximately seven billion population is forecast to grow to 8.5 billion by 2030 and 9.7 billion by 2050, according to data from the United Nations Department of Economic and Social Affairs (UN DESA). Consequently, the demand for food is projected to be 60% greater than it is today.

Global rice consumption is poised to increase by around 1.1% annually from 2016 until 2025 when rice consumption is expected to reach 570 million tons according to market research firm IndexBox.

Per capita meat and dairy consumption is expected to see tremendous growth, particularly in China and India according to information from the World Resources Institute; global per capita, per day livestock products consumption is forecast to grow 23% while global per capita, per day consumption of beef and mutton is projected to grow 30% between 2006 and 2050.

Bar chart and scatter chart showing livestock products consumption (Kcal/person/day) and beef and mutton consumption (Kcal/person/day) and percentage change in 2016 and 2050 (forecast). From 2006 to 2050, world livestock products consumption (Kcal/person/day) is forecast to increase 23% while world beef and mutton consumption (Kcal/person/day) is forecast to increase 30%.

Yet, resource availability is growing increasingly scarce due to pollution and climate change among other reasons. Globally, agriculture uses 70% of freshwater worldwide according to data from the National Groundwater Association, making it the biggest consumer of the world’s freshwater. Water consumption for domestic use is second, accounting for about 10% of global freshwater consumption.

With agriculture having to feed a population of more than 9 billion by 2050, water demand from the agriculture sector is expected to increase substantially in the decades to come; without improved water-use efficiency measures, water consumption by the agriculture sector is expected to increase 20% globally by 2050. However with climate change affecting rainfall patterns, the world’s freshwater resources are being depleted faster than they are being replenished by rainfall.

About 50% of the world’s habitable land is used for agriculture. However, soil erosion and pollution have resulted in the loss of nearly 33% of global arable land in the past 40 years, at a rate faster than the ability for natural processes to replenish diminished soil, according to a study by the University of Sheffield’s Grantham Centre for Sustainable Futures. The study found that soil erosion had been occurring at a rate of up to 100 times faster than the rate of soil formation.

Environmental challenges coupled with rapid population growth and urbanization has resulted in a steady decline in arable land per capita; according to data from the Food and Agriculture Organization (FAO), arable land per capita declined from 0.35 hectares per person in 1965 to about 0.19 hectares per person in 2015, which is about a 40% decline over four decades.

Line graph showing global arable land (hectares per person) from 1961 to 2015. From 1961 until 2015, global arable land per capita has declined by about 40%.

Therefore, in order to feed the world’s population that is growing in number and purchasing power, the agriculture industry is compelled to solve these challenges by achieving greater productivity gains such as by reducing input cost, increasing yield, and increasing environmental sustainability and thereby increase food supply with limited resources.

Technology is emerging as a key solution and this growing digitization of the global agriculture industry is an opportunity numerous agtech startups are working to profit from. According to a report by Accenture, the market for digital agriculture services will expand 12.2% between 2014 and 2020 to reach US$ 4.55 billion.

WeFarmUp – France’s Airbnb of agriculture

Launched in 2015, French startup WeFarmUp could be described as the Airbnb of agriculture. The farm machinery rental platform allows French farmers with underused machinery to rent equipment to other farmers in need of such machinery which ultimately boosts farmer bottom lines since underutilized machinery could be converted into assets generating extra income and farmers can be relieved of the potential debt burden that comes with purchasing costly farm machinery.

Although France is the biggest recipient of EU farm aid under the EU’s Common Agricultural Policy (CAP), French farmers struggle with debt and weak farm incomes which are more volatile than wages and salaries in other sectors according to a report from the European Commission.

With the UK, a net contributor to the EU budget, reportedly not contributing to the CAP after 2020, the subsequent budgetary gap could result in a downward review of the Common Agricultural Policy which represents one of the biggest expenditures under the EU budget.

It has been estimated in 2016 that without the current level of subsidies under the CAP, more than 50% of all French farms would not break even, which suggests that any reduction in subsidies under the CAP could result in bigger losses for France’s farmers. This presents an opportunity for a platform such as  WeFarmUp which indicates bright prospects for the startup. WeFarmUp is currently focused on France but plans to expand to Belgium.

 Gold Farm and EM3 AgriServices – disrupting India’s agri sector with Farming as a Service (FaaS) platforms

Agriculture is one of the most important sectors of India’s economy. The country has the world’s second largest amount of agricultural land after the United States, is the world’s second largest producer of horticultural crops and fruits after China, and is the world’s largest producer and consumer of dairy.

However, the industry is challenged by low productivity and low profitability. While at least 50% of the country’s workforce depends on agriculture, the sector contributes just about 15% of India’s gross domestic product.

India lags behind countries such as China in terms of crop yields. For instance, India produces 2.4 tons per hectare (t/ha) of rice (nearly half of China’s yield of 4.7 t/ha) and 3.15 t/ha of wheat (compared with China’s 4.9 t/ha).

According to data from the World Bank, as of 2016, agricultural value added per worker in India amounted to US$ 1,202, far behind the world average of US$ 16,730, ranking India 119th in terms of agricultural productivity out of 155 countries.

Farm mechanization could help boost crop productivity however, much of India’s farmers have small-scale farming operations and are often heavily in debt, which constrains their ability to invest in expensive farm machinery; almost half of India’s agricultural households are in debt and the average farm land size in India is estimated at 1.15 hectares according to India’s Agriculture Census conducted in 2015. 65% of Indian farmers are marginal farmers holding less than one hectare of land, while less than 1% have large land holdings of 10 hectares or more.

The challenge is an opportunity for Indian agtech startups such as EM3 Agri Services and Gold Farm which manage platforms that aim to improve India’s poor farm mechanization levels by allowing farmers to rent, rather than purchase, expensive but much needed farm machinery. Using their respective mobile apps, farmers choose and book the machinery required and pay based on the amount of time the machines are used (hence the term Farm as a Service) which cost-efficiently boosts farm productivity.

Of India’s approximately 120 million farmers, just about one-quarter or roughly 30 million are equipped with smartphones. However, smartphone and mobile internet penetration are on an uptrend among rural Indians, including rural segments such as farmers, aided by increasing affordability of smartphones and mobile data, as well as government initiatives to help digitize Indian farming as part its Digital India program, such as the Government of India’s AgriMarket app.

This factor coupled with an increasing trend among younger Indians to move away from agriculture, rising input costs and rising labor costs, could result in greater demand for FaaS solutions such as the outsourced farm mechanization services offered by Gold Farm and EM3 Agri Services. According to data from Bain & Company, total investor funding into FaaS startups in India is currently about US$ 105 million to US$ 115 million, and more than 40% of funding rounds are at “series stage”.

Gold Farm partners with local entrepreneurs and farmers who have the financial wherewithal to invest in farm machinery and helps them with demand generation by renting out the machines to India’s rural, small-scale farmers through the Gold Farm platform, creating a win-win situation for all parties. The payback time for the entrepreneur is reportedly around two years.

Stellapps – improving productivity along India’s dairy supply chain through IoT and Big Data

 India is the world’s largest producer and consumer of dairy and the country has been the largest milk producing country in the world since 1997.

However, despite per capita milk consumption in India steadily rising over the past few years, there is still ample potential for growth; Indian per capita milk consumption is just about half that of countries such as the United States, Australia and New Zealand.

Bar chart showing annual per capita milk consumption (kilograms per capita) during 2012 and 2017 in Ukraine, New Zealand, Australia, United States Russia and India.

As India’s middle class expands and incomes grow, protein needs are expected to grow as well which should drive demand for milk and milk products. India’s urban dwellers being wealthier on average tend to consume more milk per person than the average rural Indian.

But with just about 31% of the one billion plus Indian population living in urban areas, there is tremendous potential for growth in per capita milk consumption as India’s remaining half a billion or so population urbanize over the longer term.

While India could meet this additional demand by growing its huge livestock population which is already the largest in the world (58% of buffaloes and 15% of cattle), the country may be better served by increasing efficiency and productivity in its dairy industry; according to India’s Agriculture Ministry, the average milk yield for cross-bred cattle stands at around 7.1 kg per day which is significantly lower than developed countries such as the United Kingdom, the United States and Israel which boast daily milk yields of 25.6, 32.8 and 38.6.

Indian agtech startup Stellapps Technologies, which is backed by the Bill and Melinda Gates Foundation is aiming to address this issue. The company’s solution uses technologies such as IoT, Big Data, Cloud and data analytics to help dairy farmers, cooperatives and private dairies optimize their dairy operations and covers all aspects of the dairy supply chain across milk production, procurement, cold chain, animal insurance and farmer payments. The full dairy technology solution, brand named SmartMoo™ uses different types of sensors which gather data through wearable devices. For instance, on the farm, data on the animal’s health and yield is gathered,  while data on milk quality (such as fat content) is gathered at dairy collection sites which assists with pricing. The data is automatically sent to relevant parties across the supply chain such as the dairy farmer and dairy companies with the ultimate aim of helping participants improve efficiency, quality and productivity by improving milk yields, improving animal health, reducing pilferage, spoilage etc.

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Southeast Asia: Emerging Wave Of Opportunities In Booming Digital Economy

Bar chart showing people aged 0-24 (number., and percentage of the country's population) in Southeast Asian countries namely Indonesia, Philippines, Vietnam, Myanmar, Thailand, Malaysia, Cambodia, Laos, Singapore, Timor Leste, and Brunei.

Venture capital funding into Southeast Asian startups tripled in 2017 from US$ 2.52 billion in 2016 to US$ 7.86 billion in 2017 according to data from Tech in Asia.

The flurry of activity in Southeast Asia’s startup scene is not surprising; the 11-country region has a population of about 650 million, about 42% of which are aged 24 and below according to data from the CIA World Factbook, and about 51% of the total population (equal to about 260 million) are active internet users with about 90% of them accessing the internet using their smartphones according to a report by Google and Temasek.

Bar chart showing people aged 0-24 (number., and percentage of the country's population) in Southeast Asian countries namely Indonesia, Philippines, Vietnam, Myanmar, Thailand, Malaysia, Cambodia, Laos, Singapore, Timor Leste, and Brunei.

HSBC revealed that Southeast Asia is the world’s fastest growing internet region with nearly four million users coming online for the next five years, representing a user base of 480 million by 2020.

Southeast Asians are also growing increasingly wealthy; in 2012, Southeast Asia’s middle class population (people with disposable income of $16-$100 a day) was estimated at 190 million people. According to Nielsen, by 2020, the figure is expected to more than double to 400 million.

With a youthful, increasingly digitally savvy population along with rising disposable incomes, Southeast Asia has the ingredients to fuel a major expansion of its digital economy over the next few years thereby triggering a wave of investment opportunities, making the region an attractive location for investors and entrepreneurs exploring opportunities in the digital space.

The digital revolution has already given birth to a number of homegrown unicorns such as Alibaba-backed Lazada (Southeast Asia’s e-commerce leader), Google-and-Tencent-backed-Go-Jek, Grab, Razer, Tokopedia, Traveloka and Sea to name a few however the region’s blossoming startup ecosystem is in good position to produce numerous more in the coming years. A report by Google and Singapore’s sovereign wealth fund Temasek found that that Southeast Asia’s digital economy is growing at a CAGR of 27% and is expected to expand four-fold from about US$ 50 billion in 2017 to US$ 200 billion by 2025.

By destination, Singapore and Indonesia raked in the lion’s share of 2017 funding dollars, while by sector, fintech, e-commerce and gaming took in the most investments according to Tech in Asia. However, there are untapped opportunities in other countries within the bloc and in other sectors.

 

Education

Education is big business in Southeast Asia and private education is on the rise partly thanks to an expanding middle class. Private education spend in Southeast Asia is estimated to have reached nearly US$ 60 billion in 2015 according to a report by global advisory firm EY. Education technology or “edtech” has tremendous potential in the region; London-based consultancy firm IBIS Capital estimates the global edtech market will expand three-fold between 2013 and 2020 to reach $252 billion in 2020. During that time, it is expected that the Asia-Pacific region will see its edtech market go from 46% of the global market to 54%.

Much of the growth is likely to stem from India and China which have the world’s largest and second-largest youth population i.e. those aged 10-24 (India has 356 million and China has 269 million people aged between 10-24).

However, Southeast Asia is also poised to ride the opportunity driven partly by Indonesia which is home to 67 million 10-24 year olds, the world’s third largest youth population. And unlike the hyper-competitive markets of ride-hailing, e-commerce, travel, food delivery and mobile payments, Southeast Asia’s “edtech” market is a relatively uncontested territory; while China and India both have an edtech startup to their list of homegrown unicorns (China has Yuanfudao and India has Byju’s), Southeast Asia has yet to find its own. There are however a few startups worth watching. One of them is Indonesian edtech startup Ruangguru (literally means “teacher’s room” in Indonesian) which is reportedly the largest marketplace for private tutoring in Indonesia, a country which despite having the world’s third largest youth population, ranks relatively poorly education-wise; a study commissioned by the Network for Education Watch Indonesia (JPPI) reveals that the index of education services in Indonesia in 2016 is at the same level as Honduras and Nigeria but lower than the Philippines and Ethiopia.

 

Health

Southeast Asian’s healthcare market is a growth opportunity supported by solid fundamentals; a growing population along with the rise of an increasingly affluent middle class is leading to an increase in Non-Communicable Diseases (NCD) such as diabetes, heart disease and cancer. According to the World Health Organization, 55% of deaths in the region are due to NCDs. This is creating an increased demand for healthcare however in terms of supply, the availability of medical facilities, equipment and manpower is relatively inadequate with the exception of Singapore; a ranking of 191 countries by the World Health Organizations of the world’s health systems ranks Singapore in 6th position while other Southeast Asian countries appear down the list; Brunei is 40th, Thailand is 47th, Malaysia 49th, Philippines is 60th, Indonesia is 92nd, Vietnam is 160th, Laos is 165th, Cambodia is 174th, and Myanmar is 190th.

Singaporean startup DocDoc is a healthcare platform that enables patients to find and schedule appointments with healthcare professionals overseas. The platform holds promise as a solution to connect affluent patients in Southeast Asia (Indonesia is a priority for the startup) seeking quality treatment in neighboring countries.

Go-Jek-backed Indonesian e-health startup Halodoc has taken a more holistic view in tackling Indonesia’s healthcare system; founded by the son of the founder of Mensa Group, one of Indonesia’s largest healthcare companies, HaloDoc has built a network of nearly 20,000 licensed doctors and about 1,000 certified pharmacies, and forged partnerships with service providers such as Go-Med (a medicine delivery service owned by Indonesian ride-hailing startup Go-Jek) and ApotikAntar (a medicine delivery service) to offer  an integrated healthcare solution for patients.

 

Home Services

Asia Pacific is the fastest growing region in the world for sales of home improvement products according to Euromonitor International.

While China is the biggest market in the region, Southeast Asia is positioned to account for a significant share of the market driven by strong housing demand (a survey by PropertyGuru found that home ownership is a major aspiration for Southeast Asian consumers), and rising disposable incomes.

The opportunity is a boon not just for sales of home improvement products but also for home improvement services as time-strapped, middle class home owners turn to service providers for their home improvement needs.

However, as much of these service providers are small businesses and individuals, they often have little to no brand recognition and are often hard to locate which means customers are forced to find such professionals through referrals from friends and co-workers.

Malaysian startups Kaodim, ServisHero and Recommend.my are aiming to capitalize on the opportunity.

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China’s Geely: A Formidable Global Automaker In The Making?

Bar chart showing the world's top 10 fastest growing car brands in 2017 (by YoY sales volume growth %).

Chinese automaker Geely (HKG: 0175) (OTCMKTS: GELYF) is on a hot streak. The company reported record sales in 2017 selling 1.24 million units, a 63% year-on-year increase, emerging as the world’s second-fastest growing automaker by sales volume in 2017.

Bar chart showing the world's top 10 fastest growing car brands in 2017 (by YoY sales volume growth %).

Much of Geely’s sales were concentrated in its home country China, the world’s largest passenger car market, which accounted for over 99% of the brand’s sales volume in 2017 according to data from its annual report. Geely’s strong sales performance in China helped boost its market share to 5.06% of China’s passenger car market in 2017, an increase of 1/75% from the previous year.

Outside China, Geely’s subsidiary Volvo Cars which Zhejiang Geely Holding Group acquired in 2010 is also on a run, reporting its fourth straight year of record sales; revenues grew 17% in 2017 to 210.9 billion Swedish crowns while operating profit rose jumped 28% to 14.1 billion ($1.76 billion) from 11.0 billion in 2016. Volvo sold 571,577 Volvo cars globally last year, up 7% thanks to strong sales in China its biggest market, which accounted for 20% of Volvo’s sales in 2017.

After years of lackluster performance under the Ford Motor Co umbrella, the upscale Sweden-based Volvo Cars is now a success story, enjoying a remarkable turnaround under Geely’s ownership.

Global expansion

For Geely, already a major automaker in China, Volvo’s success could be a sign of bigger things to come as Geely sets its sights on going global. The company has been aggressively amassing a formidable portfolio of international car brands thereby expanding its geographical reach and broadening it technical expertise; the company gained an avenue into Europe through its acquisition of Volvo Cars while its 49.9% stake in Malaysia’s Proton Holdings Bhd gives it an inroad into Southeast Asia.

Geely’s 51% stake in British sports car maker Lotus Cars will give the company a presence in the sports car segment while its acquisition of American flying-car startup Terrafugia gives it access to the nascent flying car industry. The investments may also play a part in uplifting the brand’s image going forward; having started life as a cheap, low-cost, no-frills car brand, Geely has already come a long way since its inception boasting four design studios around the world (specifically in Los Angeles, Barcelona, Gothenburg and Shanghai) employing over 500 designers (headed by Geely’s chief designer Peter Horbury who formerly worked at Volvo and Ford), and four R&D centers (in Hangzhou Bay, Ningbo, Coventry and Gothenburg) employing nearly 7,000 full-time engineers.

With average e-x-factory selling prices of its vehicles steadily climbing from RMB 47,872 per unit in 2012 to RMB 73,550 per unit in 2017 according to its latest annual report, the company is now making inroads into the midscale auto segment with its new car brand Lynk & Co which is being developed with technology from Gothenburg-based Volvo.

“Born global and connected”, the millennial-aimed Lynk & Co car brand which made headlines as the “most connected car ever” (a ‘smartphone on wheels’) is unique in several aspects; the company’s cars can be purchased outright, or they could be leased, or they could be subscribed to via the company’s subscription model, or they could just be borrowed via the car’s unique ‘sharing’ feature. The company’s focus on mobility rather than car ownership means it fills a niche that taxi companies, ride-sharing solutions such as Uber, and traditional auto companies such as Honda do not fulfill. Lynk & Co is also differentiating itself by building a direct-to-consumer sales model, allowing customers to purchase a car online thereby bypassing traditional dealer networks.

Geely’s new marque holds promise; in November last year, Lynk & Co held a three-day sales campaign in China for the brand’s ‘01’ SUV model. In just over two minutes, the stock of 6,000 vehicles was sold out.

However, while the Geely brand is expected to continue its goal of being a leading automotive brand in China, Lynk & Co which is European designed and engineered, aspires to be a global auto brand, competing against global car giants such as Volkswagen and Ford. Lynk & Co plans to launch sales of its cars in Europe in 2019 and in the United States in 2020. The brand is aiming to sell 500,000 cars globally by 2021.

Over in Southeast Asia, Geely has been busy trying to turn-around struggling Malaysian car company Proton, which it acquired last year. Established in 1983, Proton reached its zenith in 1996 when the company accounted for 64% of Malaysia’s car sales, and exported its cars to over 50 countries including Australia, Ireland, New Zealand, Sri Lanka and Brunei. That was also the year Proton acquired sports car brand Lotus Cars.

Fast forward to today, Proton’s market share has dwindled to less than 15% with sales dropping to 70,991 last year from 72,291 units in 2016. Meanwhile local rival Perodua, and Japanese car company Honda are flying high in the country with market leader Perodua’s sales exceeding 200,000 units and Honda notching record-breaking sales of 109,511 last year.

Bar chart showing Malaysia passenger car sales (number of units) by car brand, 2016 and 2017.

Determined to regain lost ground, Proton is now on an aggressive transformation path with CEO Dr Li Chunrong introducing multiple changes for Proton dealerships and service centers in the country aimed at strengthening the brand and improving customer experience, as well as tapping into Geely’s technical know-how and expertise to help Proton expand its current model lineup to include SUVs (Proton is reportedly developing its first SUV model from Geely’s best selling SUV model the “Boyue”), and move up from producing fossil fuel vehicles to plug-in hybrid and electric vehicles. Malaysia is Southeast Asia’s third largest automotive market after Thailand and Indonesia, and if Geely could repeat its Volvo turnaround success story with the currently loss-making Proton, Geely could be sitting on a potentially profitable investment as well as a platform to develop a beachhead in Southeast Asia.

Under its former owner Proton, iconic British sports car brand Lotus Cars struggled due to lack of funds and currently offers a handful of models dating back several years. However under its new deep-pocketed owner, Geely, it could be light at the end of the tunnel for Lotus Cars as Geely could do for Lotus Cars what it did for Volvo; offer much-needed financial support along with a relatively hands-off management to allow Lotus Cars to unlock its full potential.

The partnership could also result in a cross-pollination of technology, know-how and possibly other resources as well such as suppliers and distribution networks among Geely’s portfolio of automotive marques similar to the way the Geely-Volvo tie-up gave birth to Lynk & Co which uses technology jointly developed by the two companies. Volvo and Lotus Cars are reportedly exploring options on sharing their technologies (Lotus Cars is renowned for lightweight engineering while Volvo is known for safety features and hybrid drivetrains).  The resulting partnerships could generate significant cost savings such as through shared development costs and procurement costs.

Eye on costs 

While Geely’s global aspirations could boost top-line growth, such international expansion plans are expensive and hence if unchecked could negatively impact bottom-line performance resulting in poor investment returns. However, Geely seems to have its eye on costs as well. Geely’s new marque Lynk & Co is reportedly aiming for success by being “brutally simple” by limiting model variations that rotate seasonally and offering limited options which the management believes is not only cost effective since production costs are lower but also offers a better, less-complex customer experience since Lynk & Co cars will be sold at a flat rate throughout Europe so buyers won’t have the trouble of haggling for a discount.

Although the car companies under Geely’s umbrella operate independently and maintain their own unique identity, they are forging close ties to cut costs. Volvo is deepening links with Geely and Lynk & Co to cut electric car development costs for instance by sharing knowledge and thereby cutting costs on developing expensive new technologies.

Volvo is also exploring ways to share technology with Lotus Cars for mutual benefit while Proton is depending on know-how from Geely to develop its first SUV.

Lynk & Co meanwhile has tapped into Volvo and Geely’s jointly developed CMA platform (Compact Modular Architecture platform), a cost-effective move, particularly since the new CMA platform was developed to be highly scalable, allowing multiple models to be developed using the same platform.

Geely’s global ambitions are clear and how far the company gets remains to be seen, however the company is worth watching.

 

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Reliance Industries: India’s Answer To Amazon, Alibaba?

Amazon, Alibaba and Reliance Industries have wide business ecosystems - LD Investments

Amazon (NASDAQ:AMZN) and Alibaba (NYSE:BABA) are two of the world’s biggest e-commerce companies, each boasting a market value of about half a trillion dollars (specifically speaking, Amazon is more than half a trillion dollars while Alibaba is slightly less).

Both companies boast top-line figures that surpass the Gross Domestic Product of entire countries – Amazon raked in US$ 178 billion in revenues in 2017 while Alibaba earned CNY 250.3 billion or about US$ 40 billion for the year ended March 2018, higher than the 2017 GDP figures of countries such as Estonia (US$ 26 billion), Iceland (US$ 24 billion), Cyprus (US$ 21.6 billion), Afghanistan (US$ 20.8 billion), Jamaica (US$ 14 billion), Brunei (US$ 12.1 billion), Fiji (US$ 5 billion), and Maldives (US$ 4.5 billion) according to data from the World Bank.

Both companies also serve sizeable user bases the number of which is larger than the population of entire countries; Alibaba’s over 600 million monthly active users would make it the third most populous country in the world after China and India, while Amazon’s over 300 million monthly active users would make it the fourth most populous country in the world after China, India and the United States.

Both companies owe much of their initial success to the rapid growth of e-commerce in their respective home countries which make up the world’s two biggest e-commerce markets; Alibaba in China (the world’s biggest e-commerce market) and Amazon in the United States (the world’s second biggest e-commerce market).

Both companies continue to dominate their respective home markets, with Amazon holding a market share of nearly 40% in 2017 while Alibaba commanded a market share of about 55%.

With India emerging as e-commerce’s next major opportunity (Morgan Stanley estimates India’s e-commerce market will grow from US$ 15 billion in 2016 to US$ 200 billion in 2026, representing at a CAGR of nearly 30% between 2017 and 2026), could the South Asian nation join China and the United States in producing its own e-commerce juggernaut?

India’s crowded e-commerce landscape boasts its own share of homegrown online retailers notable examples include Flipkart, Snapdeal, Alibaba-backed Paytm Mall (the e-commerce arm of India’s top digital payment firm Paytm) and ShopClues. With Reliance Industries (RIL) (NSE:RELIANCE) (BOM:500325) and Future Group planning on entering India’s e-commerce sector, competition is set to intensify in an already hyper-competitive market where the majority of players are yet to show profits.

For instance, India’s second-biggest online retailer and e-commerce veteran Amazon’s loss from its international business jumped nearly 30% to US$ 3 billion in 2017 from US$ 1.28 billion in 2016, with much of it due to massive investments in India. Meanwhile India’s leading homegrown e-commerce player, Flipkart saw its losses balloon by 68% during the fiscal year ended March 2018.

With e-commerce making up just 3%-4% of India’s US$ 670 billion retail sector, it is still early days for India’s e-commerce market which is undergoing rapid change. Founded in 2010, local competitor Snapdeal, at one time was India’s number two e-commerce platform after Flipkart, while Amazon India stood at number three. By mid-2016, Snapdeal found itself dislodged from its second-placed position by deep pocketed Amazon India, which began life a couple of years after Snapdeal. With current market leader Flipkart holding retaining its crown (with a market share of 39.5%, ahead of Amazon’s 31% share) the market has so far evolved to be a two-horse race with Flipkart (which was bought up by Walmart this year) and Amazon fighting tooth and nail for gold while ShopClues, Snapdeal and Alibaba-backed PayTM Mall battle for bronze.

Although late to the party, oil-to-telecom conglomerate Reliance Industries possesses several competitive advantages from an extensive brick-and-mortar network to a wide eco-system of businesses which could help it emerge as a formidable player in India’s e-commerce war.

Deep Pockets

Amid stiffening competition, e-commerce platforms are investing substantial sums and burning money heavily as they vie for a slice of India’s promising e-commerce market. Aiming for dominance, Amazon, the world’s largest e-taiiler, has a massive US$ 5 billion war chest while local rival and current market leader Flipkart managed to add nearly US$ 4 billion to its kitty thanks to a funding round from investors such as Softbank, Tencent, Microsoft and eBay last year. The company reduced its burn to just US$ 17-18 million a month while arch rival Amazon continues to burn twice that amount estimated at over US$ 40 million. Against this backdrop, it is likely that smaller, cash-strapped rivals will gradually find themselves edged out by deep-pocketed players. Reliance Industries Ltd being a Fortune 500 company and India’s biggest private sector corporation could have the financial wherewithal to compete against the incumbents similar to the manner in which its telecom arm, Reliance Jio disrupted India’s telecom sector in less than two years of operation to emerge as India’s fourth largest telco after Bharti Airtel, Vodafone and Idea Cellular.

Extensive brick-and-mortar store network

Omnichannel retail experiences (offering customers a seamless online and offline shopping experience) are increasingly becoming commonplace in mature retail markets such as China and the United States. India is expected to follow suit and retailers such as Pepperfry, Adidas, Urban Ladder, FirstCry and Nykaa are among the few in India to have already incorporated click-and-mortar shopping experiences.

Unsurprisingly, Amazon and Flipkart have also been busy plotting their own omnichannel retail strategies; last year, Amazon made its first investment in an offline retailer in India when it picked up a 5% stake in Shoppers Stop, a Mumbai-based department store chain for INR 179.24 crore (about US$ 28 million).

Under the partnership, the duo will conduct “joint marketing” initiatives which will see Amazon open Amazon Experience Centres showcasing Amazon’s products across all 80 Shoppers Stop outlets located in 38 cities in India.

Not wanting to be outdone, Flipkart is reportedly in talks to acquire a 8%-10& stake in Future Lifestyle Fashions Ltd (NSE:FLFL), the listed fashion company owned by Future Group, one of India’s largest retail companies with a presence in grocery, electronics, home furnishings and furniture with over 17 million square feet of retail space in more than 240 cities.

Future Lifestyle is one of India’s largest branded apparel retailers in India with a total retail space of over 5 million sq ft across 400 stores in 90 cities.

Flipkart claims to have a 70% market share in India’s online fashion retail space. A deal with Future Lifestyle Fashions could open an avenue for Flipkart to establish an offline presence in India’s fashion retail sector thereby helping it solidify its market leading position as India’s leading online fashion retailer.

While the e-commerce giants have bolstering their offline presence, Reliance Retail already has an extensive brick and mortar store network throughout India which the company can leverage as part of an omnichannel retail strategy. Similar to Future Group which was founded in 1997, Reliance Retail which was founded nearly a decade later in 2006 is one of India’s largest retail enterprises with a presence in grocery, electronics, furniture and fashion. The company boasts a store network of over 3,700 stores across 750 cities with an area of over 14.5 million square feet of retail space according to the company’s December 2017 quarterly report.

Reliance Jio

There has been a noticeable trend in developed markets where media companies such as Google, Amazon and Alibaba which deliver copious amounts of video and other content are increasingly morphing into telecom companies and telecom companies such as AT&T and Verizon are morphing into media companies.

In other words, the “pipe” owners i.e., the telecom companies are increasingly taking control of the content that flows through their “pipes” while the content owners i.e., the media companies, are increasingly evolving into pipe owners.

Google offers high-speed internet service through its subsidiary Google Fiber, Amazon has reportedly been considering the prospect of becoming an ISP in Europe, and Alibaba is reportedly looking at expanding into the telecom sector.

AT&T, America’s second-largest wireless carrier merged with Time Warner while Verizon, America’s largest wireless carrier, scooped up AOL in 2015 and Yahoo last year, and then clubbed the two companies together to launch its digital content subsidiary Oath Inc with the goal building a media business that could compete with the likes Google and Facebook.

Over in India, a similar trend has been unfolding and Reliance Industries has made its moves. Reliance Industries owns the “pipes” via its telecom arm Reliance Jio and the company also offers its own unique content via its plethora of content apps such as JioCinema, JioMusic etc.

In response to rising net neutrality concerns, the Telecom Regulatory Authority of India (TRAI) last year proposed guidelines in favor of net neutrality; however, Content Delivery Networks (CDNs) or “content “edge” providers (a network of computer servers set up inside an ISP which can deliver digital content faster to end users) do not fall under the proposed regulations and thus integrated operators such as Reliance Jio and Bharti Airtel are poised to benefit as they could leverage this CDN exemption and offer their content at lower prices to their subscribers.

Content Delivery Networks are often built and owned by third-party companies such as Akamai Technologies Inc and Cloudflare, however, some deep-pocketed content providers such as Google, Facebook, Netflix, Amazon, Microsoft and Alibaba have built their own private CDNs. The net neutrality debate focuses on ISPs (Internet Service Providers) and not CDNs.

Wide ecosystem of businesses

Amazon, Alibaba and Reliance Industries have wide business ecosystems - LD Investments

With businesses spanning cloud computing to video streaming Amazon and Alibaba are much more than just e-commerce companies. Interestingly, Indian stalwart Reliance Industries also boasts a highly diversified ecosystem of businesses which combined could prove to be a powerful force.

In brick-and-mortar retailing, Amazon owns the Whole Foods grocery chain, Alibaba owns Hema Supermarkets (盒马) while Reliance has Reliance Retail.

All three companies have logistics arms – Amazon with Amazon Logistics, Alibaba with its Cainiao and Reliance Industries with Reliance Logistics.

In video streaming, Amazon has Amazon Video while Alibaba has video hosting platform Youku Tudou. Relince has JioCinema.

In music streaming, Aamzon has Amazon Music, Alibaba has Ali Music and Reliance Industries has JioMusic.

All three companies have ventured into production of digital video content; Amazon through Amazon Studios, Alibaba through Alibaba Pictures and Reliance Industries via its partnership with Roy Kapur Films (RKF) which will produce original digital video content as “Jio Originals”.

In the mobile wallet space, Amazon has Amazon Pay, Alibaba has Alipay and Reliance has Jio Money.

In messaging apps, Amazon has Amazon Chime, Alibaba has DingTalk and Reliance Industries has JioChat,

All three companies have their feet in the cloud business as well with Amazon offering cloud services through AWS, Alibaba through Alibaba Cloud and Reliance through JioCloud.

All three companies have a direct or indirect involvement in media as well, with Amazon founder Jeff Bezos owning the Washington Post, Alibaba founder Jack Ma owning the South China Morning Post and Reliance Industries holding Network 18.

Such a wide eco-system has several advantages; the businesses will reinforce each other as existing consumers and companies become more likely to use their platforms which not only generate diverse sources of revenue but vast quantities of consumer and business data as well, which ultimately could be used towards further business expansion.

RIL Chairman Mukesh Ambani famously said, “Data is the new oil and India does not need to import it”.

While Reliance Industries is a latecomer to India’s e-commerce arena and the company’s success depends on several factors such as execution, Reliance’s entry into e-commerce cannot be taken lightly; the Indian giant could be a formidable competitor, disrupting the current status quo similar to the manner in which it reshaped the Indian telecom sector within a few years of operation.