Electric Cars: Is it coming yet?

The BMW i8 (left) and i3 (right)
Image source: http://cdn.tecnologia21.com

Since the start of 2012, we have been seeing several leading car manufacturers, including BMW, Tesla, and Toyota, rushing to push electric cars (ECs) onto the market. In addition, the European Commission announced on July 11, 2012, that it proposes further cuts to car emissions in the EU. All these signs suggest that the era of the electric car is arriving. The problem, however, is that we have been hearing about the arrival of the electric car since the 80s, and it never came. So what makes people believe that this time the market is any better?

One of the biggest differences between the EC market now and the market a decade ago is customer demand; customer demand for ECs has improved because of 3 main factors:

1.       Lower Price.

Improved technology and strong marketing has generated enough interest in ECs for mass production, dropping the average retail price for an EC to about $40K. It is still about twice the price of the cheapest cars on the market, but cheaper lithium batteries (Bloomberg New Energy Finance reported a 14% drop in prices in the first quarter of 2012 and the trend is likely to continue), bigger emission grants, and rising gasoline prices will add to the financial attraction of ECs. This works well in the current environment where austerity is highly valued.

2.       Better Technology.

Batteries have always been a major concern for EC drivers. A decade ago, drivers where put off by low quality, expensive batteries with a short life span, poor mileage, long charging times, and worse, limited charging stations. This issue has been effectively answered today by:

a.       Cheaper batteries that offer longer mileage, longer lifespan, and faster charging times.

b.       Improved battery power. Tesla’s new model S was reviewed by journalists as the Lambo-like, but minus the noise. Need I say more?

c.       Higher government and co-operate commitment to provide charging stations. In fact, a group in Japan recently went a step further and demonstrated the concept of transferring electricity through concrete. The hope is that by providing a constant stream of electricity beneath roads ECs will never need to be charged again.

3.       Wider Acceptance.

Interest in ECs have been fueled by both economic reasons following rising gas prices and lower oil reserves, and the changes in the competitive environment of the auto industry. New market entrants that focus primary on ECs, such as Tesla, have limited concerns for cannibalization, and have therefore significantly accelerated development and marketing efforts within this market. The effect leads back to more affordable and sustainable pricing.

The 3 factors described above advocates for an overall healthier market environment than before. Although the success of the recent EC ventures can only be predicted following a better understanding of the other factors at work, including a thorough understanding of the competition. But based on what we have said so far, and provided governments and co-operates are committed, the road is paved for the ECs.

Low-end markets (not really?) a way out for Nokia

Image adopted from http://www.fonearena.com/blog/34403/

It is no secret that Nokia is in trouble. Since the launch of the iPhone and the subsequent entry of Android phones, Nokia market value has dropped 90% lower and its shares are now trading at less than 2GBP, from 28GBP in 2008. Nokia’s Stephen Elop has since realized that Nokia needs to listen to the market and offer the right products to the right people at the right time. The problem, however, is deciding which market to listen to.

Nokia currently has two major markets, the mid-high end smart phone market and the low end mobile market. The lack of suitable products for either market, the high costs from its scale, and the pressure from investors could force Nokia to concentrate its efforts on one of these markets.

One might think that because of the competition from Apple and Google in the high end smart phone market, Nokia should concentrate on the low-end market. After all, with Nokia’s scale and experience, it should be the 300 pound Kong in the playground. But surprisingly, Nokia has not been able to keep up with the rate this market has been evolving. In fact, there are 3 main reasons showing why Nokia may soon exit the low-end mobile market:

1.       The profit margins within this market are too low for Nokia.

Companies like China’s XiaoMi Tech have kept costs low and achieved fast cash flow-back through not having an outlet store, using local manufacturing, and adopting controlled release. Most of these techniques may not be applicable to a company the scale of Nokia. And even if Nokia could, despite its scale, reduce its cost to match that of regional competitors, the profit margins is likely to be too low for it to gain significant profit for a turnaround.

2.       Currently Nokia does not have the product the market needs.

Even if Nokia is happy on operating on low margins, it still needs to develop a product suitable for the market. Nokia has been slow in adapting to the requirements for the market. An example is its slow development of dual-SIM systems, a trend driven by the customer retention programs of monopoly network providers. The traditional advantage of their low-end feature phones is quality, but this is being undermined by both low prices and more applications from competitor products. In fact, Chinese vendors are flooding the low-end market with cheap smart phones packed with demographically designed features. Samsung now estimates that Africa, currently the world’s largest ‘feature’ phone market, will be dominated by smart phones in 5 years time. Nokia does not have a smart phone cheap enough to be loved.

3.       Resource dilution.

Resource is scarce for Nokia, and if it does not distribute what it has left wisely, it risk losing an important ally - Microsoft. The software giant made a big bet in choosing Nokia to be its partner with a specific aim to develop smart phones that will challenge Apple and Google. Up till now, this co-operation has caused Microsoft more money out than in. Selling smart phones in low-end markets could be too prohibitive because of the price set by competitors. Spending resources on creating ‘feature’ phones for this market defies the purpose of the co-operation.
 

The key point here is whether Nokia can start offering high quality and high-end specs at low prices. But even so, its current financial situation and the competition within this market may not give it the time and patience needed to regain its mindshare and market share leadership in this market. Therefore, it is very likely is for Nokia to exit regional low-end markets, especially the Chinese market. They may hang on to markets in Africa, to fund their research into the next generation smart phone. Eventually though, if things fail to improve, Nokia will exit the low-end market completely.

Alibaba will buyback half of Yahoo stake!

This is interesting news I just saw 10 mins ago.

Yahoo needed to make the sale to free capital for shareholder reward and to buy it support for a review of its strategies. 

In recent years, Yahoo’s profits have slumped because of competition from Google and Facebook in the search and networking market, sparking investor discontent. Yahoo therefore needs to concentrate on rallying up investor support (or least so there’s no great barriers to decisions made) and refocusing company strategies to turn the company around. The current sale of its stakes in Alibaba is just 1 step of its 3 step strategy to help it refocus on core competencies:

 

1.       Identify core competencies. In Yahoo’s case, it will be its foothold in China (unlike Google and Yahoo), and its media.

2.       Sell stakes to free capital for shareholder reward and improving relationships with Alibaba.

3.       Focus resources on improving core competency offering with the aim of increasing market share in these segments. 

Based on the above, we may expect to see more Yahoo news! and media activity, especially in China. How about Yahoo China pps tv for a thought?

Oh my patent cliff

Drugs
Source: http://www.hudong.com/wiki

Lamberto Andreotti of BMS, Ian Read of Pfizer, and Christopher Viehbacher of Sanofi are just some of the people who are all too familiar with the effects of patent cliffs on a drug company’s revenues and its share price. Last week Pfizer reported a drop in their first quarter sales and earnings mainly because of a $1bn drop in Lipitor sales from generic challenge. BMS and Sanofi are weeks away from seeing a massive drop in the sales of their blockbuster drug Plavix, which brought in $7bn in sales in 2011, as it loses its US patent.

But what is really worrying the pharma industry is that unlike their predecessors who faced patent cliffs of their own, pharma heads are now facing an unprecedented predicted financial loss as some of the world’s best selling drugs nearly simultaneously go off patent. In addition, generic manufacturers are becoming increasingly aggressive in challenging drug patents. The pharmaceutical industry therefore needs to adopt dramatic, effective strategies to help them through this crisis.

What the industry needs right now is enough free capital to allow them to focus on three core strategies - Increase Pipeline/Increase Offering/Increase Vigilance

Industries usually deal with patent expiries through continued innovation and/or psychological customer retention (take Google for example). But developing a new drug could take up to 10 years and several billion dollars in research spending and unfortunately for the pharmaceutical industry, time is not on their side. But by releasing enough capital, companies can speed up drug discovery by acquiring pipeline drugs from other companies, evade future generic competition by moving into relatively generic-free areas, and also be prepared to challenge generic entry through protecting their patents and/or adapting marketing strategies (Lipitor sounds familiar here).

Pfizer is amongst the pharmaceutical companies determined to focus on their core capabilities of drug discovery. Pfizer recently secured $12 free capital by selling its nutrition arm to Nestle (see the Pfizer-Nestle discussed previously in this blog) giving it muscle power in future acquisitions or its own R&D. Its pipeline efficiency is looking significantly improved compared to the previous year and it has 11 drugs currently in registration, including Eliquis which some analysts predicted to generate between $1-2bn annual sales. Other companies following this strategy include AstraZeneca (who recently purchased Ardea for $1.3bn for its gout remedy) and Eli Lilly. But unlike Pfizer, these companies don’t have deep pockets and many assets to sell, and if they can’t deliver, they could themselves end up as targets for acquisitions.

But even companies with a steady pipeline may not be rewarded by investors who are losing their patience and confidence in drug pipelines. In fact, critics have accused BMS of being overvalued as they believe the proprietary drugs in its pipeline could not effectively offset the losses incurred from patent expires. For this reason, not only are companies looking to expand their pipeline, they are looking to diversify their offerings. In essence, companies are trying to evade generic challenges by:

1.       Making their own generics

2.       Entering new markets that have high barriers against generic entry

3.       Creating new markets through technology breakthroughs

Examples of the above include Novartis’s Sandoz acquiring Fougera for $1.3bn in an attempt to dominate the generic dermatology medicine market, the focus of nearly all major pharmaceutical companies on acquiring macromolecules and biosimilars, and Roche’s attempt to improve their targeted therapy and disease screening fields by bidding $7bn for Illumina.

Having enough capital also means that companies can afford to be more vigilant in their answers to generic challenges by both fighting the case in court as well as increasing marketing efforts through decreasing sale prices, improving customer retention, and increasing distribution channels. But such an approach also has its risks, including being perceived as aggressive marketing, or worse, being completely ineffective in delaying generic erosion of revenue. Previously companies have also tried to be more vigilant in renewing their patents, but with the recent tightening of FDA regulations the chances of successful patent renewals are diminishing.



Ginseng used for cancer therapy
Image source: http://www.466ganai.com/ganai/3800.html



In the mid to short term, most companies have chosen to focus mainly on one of these three core strategies but also adopting the other strategies when the opportunity arises. Looking outside the immediate challenges, the excess capital may be used to fuel moves into the world’s fastest growing economy, China. Up to know proprietary drugs have been struggling to survive in China. But as the regulations and market environment matures, this move will soon become inevitable. And there is an additional advantage of co-operating with Chinese drug makers; drugs made through active ingredients extracted from herbs are harder for generics to copy because of the complex extraction procedure.

As the clock ticks towards diffusing the patent-cliff bomb in the upcoming months, expect to see a greater flurry of M&A activity in the short term as well as increasing movement of pharma industries into China in the long term. But all this will only be possible if the company can secure enough capital.  

Milk - Why Pfizer sells and Nestle buys



Wyeth products in China.
Photo source jacynkong.blogspot.co.uk

Pfizer and Nestle, two of the largest names in industry, are once again adorning the front pages as Nestle bids $9bn for Pfizer’s nutrition unit. But why are Pfizer selling and Nestle buying?

Since acquiring the unit from Wyeth in 2009, Pfizer’s nutrition unit has been performing well. Revenues from the unit have increased ~15% from 2010-2011 to reach $2.1bn (~3% of Pfizer’s total revenue). And this trend is likely to continue considering Pfizer’s strong presence in China’s milk market, which already accounted for ~25% of the global market in 2009 (ubic-consulting) and its annual growth rate is in two digits. The business, therefore, should effectively diversify Pfizer’s offerings and the revenues generated help shield Pfizer from drying revenues elsewhere. Why then, would Pfizer sell?

As it turns out, Pfizer is selling the unit to refocus its business and, in fact, offset the negative impact of the patent cliffs. Several of Pfizer’s bestsellers, including Lipitor, Xalatan, Effexor, and Zosyn, are facing patent cliffs between the years 2011-2013, affecting roughly $17bn of its sales in 2009. As a result its share prices are down and shareholders are tested with the low return on investment.

Selling the nutrition unit will give Pfizer three strategic advantages. Firstly, the move eases the pressure from investors as it can be viewed as Pfizer’s commitment to uphold the CEO’s promise to “take advantage of our core capabilities” and concentrating on its most profitable and competitive capability; making drugs. Secondly, the sale will increase the capital it have available for pipeline expansion through M&A, funding R&D, or increasing dividends to shareholders. And lastly, China’s milk market, though lucrative, is not without its dangers. The market has suffered numerous scandals resulting in overwhelming buyer distrust of locally produced milk. Pfizer’s Wyeth, which produces its milk in China, may therefore struggle to compete with importers such as Mead Johnson, who currently dominates the market. Pfizer, then, has made a wise choice to exit this market.

Nestle milk under inspection.
Photo source http://www.duchawang.com/

Nestle, on the other hand, has its core capabilities within the nutrition market and needs Wyeth in order to stay within China’s milk market and to diversify its product range. Unlike Wyeth, Nestle has been the center of numerous Chinese milk scandals, making it one of the most distrusted milk brands in China’s rapidly expanding milk market. But if it acquires Wyeth, it will regain its foothold and become the third largest infant milk provider in China. Wyeth’s research on medical value-added aspects of infant milk will also help Nestle, a purely nutrition focused company, diversify its global product range.

And the deal itself is also looking free of barriers. Deeper pockets have helped Nestle out bid fellow competitors such as Danone. Chinese officials are expected to take a favorable view on the deal to prevent market monopoly. Without surprises then, both parties will soon go home to do what they do best – making drugs and producing milk.

Facebook celebrates Instagram deal, but should they?

Facebook recently announced a billion dollar takeover of Instagram, but the move may prove to be far from wise for its future.

It is obvious why Facebook is interested in mobile apps. It is undeniable that mobile apps are overtaking the internet apps, with more and more users switching from their computers to their phones. People have already started using their mobile phones to help with navigation, play online games, and in fact, do their shopping. This trend is even more significant in social-networking applications, with examples including news blogs and twitting. As such, it may come as no surprise for Facebook’s determination to break into the mobile world. Rival photo-sharing network provider Instagram, with its current 27m user base (with anticipated increase due to its recent incorporation of Android) may therefore look like the perfect choice.

But is paying a price of 9 zeros, almost all of Facebook’s liquid cash flow, a wise deal? Tech startups are heavily dependent upon innovation for customer retention, and burning all its fuel on something that is yet to generate profit may starve Facebook of innovation funds in the short term. And do bear in mind that many tech startups started with just one guy with a good idea (sound familiar Marc?) and a big stroke of luck. And guys with good ideas are in no short supply. One must therefore wonder just how many more acquisitions can Facebook make.

Facebook seems to be trying to kill off major competition before its IPO is complete, but in doing so is placing a huge bet on the absence of major competition in the short term and how their move will be perceived by the public.

Will China's Housing Prices Collapse?

There have been speculations that China’s property market is set for a hard landing, and in fact experts are amazed that the market hasn’t already crashed (http://www.forbes.com/sites/kenrapoza/2012/03/19/china-housing-prices-are-not-collapsing/). But looking deeper into what drives this market, it seems highly unlikely that China’s property prices could fall.

Consider both the short term and long term scenario of China’s housing environment. In the short term, expect some fall in housing prices following strict government regulations. However, difficulties in implementing standards hinders dramatic drop in prices. Take property tax for example, the diversity of the types of property in the Chinese market presents difficulties in implementing a fair tax law. Looking more long term, the government will eventually relax their hold on prices. Investors aware of this are less likely to sell at this stage and instead bet on the near future. Investor confidence is also fueled by China’s increasing urbanization. As a result, demand will remain higher than supply. As long as this does not change, it is unlikely to see massive drops in housing prices.

Photo from http://www.fdc.com.cn/