Paradigm shifts start slowly at first, and it is easy to miss them. But then one day, they suddenly become obvious, and it becomes a scramble to catch up. That’s what happened on the waste plastic issue last week, when China decided to take action. As official news agency, Xinhua, reported:
- “The policy measures proposed in this opinion basically cover the entire process and various links of plastic product production, circulation, use, recycling, and disposal, reflecting a system of full life cycle management
- “Policy adjustments target both traditional areas and emerging areas such as e-commerce, express delivery, and takeaway
- “(They focus on) plastic products that are currently in large use, relatively prominent, and strongly reflected in society, and take the lead in prohibiting or restricting production, sales, and use in some areas and regions
- “It is important to point out that implementation will inevitably affect the production of some industries and the convenience of residents’ lives”
My former company, ICI, invented polyethylene (PE) back in 1933. PE is now the largest single polymer with volume close to 100m tonnes. More than half of this goes into single-use applications. Yet in a major failure of the imagination, very few of us in the industry ever thought until recently about the waste this caused. As the BBC reported after China’s decision:
“China has for years been struggling to deal with the rubbish its 1.4 billion citizens generate. The country’s largest rubbish dump – the size of around 100 football fields – is already full, 25 years ahead of schedule.”
And we are all still ignoring the economic waste involved. Crude oil costs $60/bbl, and it costs lots more dollars to refine it/ship it/process it. And then we simply throw away the single- use plastic bags and packaging that we bring home from the shop or unwrap from the internet delivery.
Plus, of course, there is the marine waste problem, so vividly brought to life in the photo from Sir David Attenborough’s ‘Blue Planet 2 television series.
THE PLASTICS INDUSTRY MUST NOW TAKE UP THE CHALLENGE
China uses around 1/3rd of all the PE produced today. So its decisions are a game-changer for the entire global industry.
Nobody wants to do away with plastics themselves. They are unique materials – lightweight, resilient, usually non-reactive and waterproof. They have much lower carbon intensity than competing materials such as metals, and they play an incredibly valuable role in our daily lives. Food packaging, for example, is proven to reduce food losses, wastage and health risks from contamination.
But the business model for producing plastics is broken, and needs to be challenged:
- Does it really make sense to keep producing more oil and gas, with all the CO2 emissions this involves, and then throw away the end product?
- If not, why aren’t we investing the necessary dollars to set up Resource Centres (as pictured) around our cities and towns, to recycle this waste plastic back into usable products?
- And at the same time, why aren’t we developing robust contingency plans for optimising the legacy issues from the old business model
As I noted here a year ago, There’s a great future for the European plastics industry in recycled plastic, this opportunity is not just about China. Last month, new EU Commission President Ursula von der Leyen launched the EU’s Green Deal, noting:
“I am convinced that the old growth-model that is based on fossil-fuels and pollution is out of date, and it is out of touch with our planet. The European Green Deal is our new growth strategy – it is a strategy for growth that gives more back than it takes away. And we want to really make things different. We want to be the frontrunners in climate friendly industries, in clean technologies, in green financing.”
The key issue is summed up by new BP CEO, Bernard Looney. He warned at the weekend that the oil industry has to start:
“Going beyond small, ineffectual bets on low carbon investments.”
The plastics industry similarly has to step up from today’s relatively “small, ineffectual bets”. Otherwise it will run out of time to meet the 2025 recycling deadlines being set by an increasing numbers of brand owners and governments.
All paradigm shifts create Winners and Losers. Losers will focus on recession risks and the potential impact of the corona virus. But Winners will know they need to do more than focus on these risks, if they want to generate long-term revenue and profit growth.
They will be the ones who start investing realistic sums of money, today, to turn the concept of the circular economy into reality.
Brazil, Russia, India and China disappoint as manufacturers face investment demands of EVs © Bloomberg
Less than a third of China’s 31,000 auto dealers were profitable in the first half of 2019, as I describe in my latest post for the Financial Times, published on the BeyondBrics blog
Auto markets in the Bric countries are facing two major challenges. The first relates to the downturn already under way in the two largest markets, China and India, where 2019 sales seem likely to be at least 10 per cent below the previous year’s levels.
The second is the need for manufacturers and parts suppliers to spend billions of dollars on the transition to electric vehicles in order to meet Chinese government production targets in 2021-23.
It therefore seems probable that winners and losers will emerge over the next 18 months, as companies along the value chain find themselves short of cash to fund the new investments required.
China’s downturn is particularly important as sales in Brazil, Russia and India have already fallen by 20 per cent since peaking in 2012, as the chart below shows (January-November basis). Chinese sales have been in a downturn for more than a year, and the impact is broadening along the supply chain.
As Automotive News reported: “We knew China had been in a prolonged auto sales slump, and we knew the market was under pressure from tougher municipal and provincial emissions standards. Now, we’re seeing how these factors are devastating dealerships, to the tune of half of them being sold and several hundred being driven out of business.”
Less than a third of China’s 31,000 dealerships were profitable in the first half of 2019. The downturn is particularly bad news for western manufacturers, whose global profits have depended on China volumes.
US brands are worst hit, with January-November sales down 23 per cent due to frictions caused by the US-China trade war. General Motors reported third-quarter China sales down 17.5 per cent, continuing their slide since the second quarter of 2018, with sales also hit by strong competition in the key mid-priced sport utility vehicle segment. Ford saw its third-quarter sales fall 30 per cent — accelerating the downturn that began at the end of 2017.
French brands are having a difficult time, with volume down 54 per cent in January-November. Seventy per cent of Peugeot, Citroën and Renault’s dealerships were lossmaking in the first half of last year.
Korean brands were down 15 per cent, and even German brands had no growth over the previous year.
The problem is magnified by the fact that China’s market has seen rapid growth since 2008. Many companies and dealerships therefore assumed that the sales ramp-up from 550,000 vehicles a month in 2008 to 2m a month by 2016 was somehow “normal”. They have no concept of a slowdown, or how to survive it.
The downturn is likely to intensify as the government continues to squeeze the shadow banking sector and hence the property market. As the chart below shows, shadow lending remains well down on its earlier peaks, averaging just $67bn a month in the 10 months to October. This means, as we noted here a year ago, that “buyers can no longer count on windfall gains from property speculation to finance their purchase”.
As Reuters notes, the scale of the previous stimulus-driven growth also means that today, “much of the urban middle class has already purchased a vehicle. Household ownership rates were nearing 50 per cent in the provincial-level cities of Beijing and Tianjin and the wealthy province of Zhejiang by the end of 2017… Pushing ownership further down the income scale in urban areas as well as out into the poorer countryside is harder without generous tax incentives, plentiful credit and fast growth in incomes.”
Sales in the other Bric markets are also slowing. India’s sales were down 13 per cent at the end of November, while in Russia the industry is now forecasting a 2 per cent decline. Even in Brazil, industry trade group Anfavea has reduced its growth forecast to 8 per cent, due to the slowing Latin American economy.
The downturn creates a major dilemma for the industry, as it coincides with the need to commit to major new investments in EV manufacture.
China is proposing to set a 14 per cent target for EV production in 2021, rising to 16 per cent in 2022 and 18 per cent in 2023. Similarly, the industry ministry has called for EVs to be 25 per cent of total new car sales by 2025, and announced that “regions with ripe conditions have our support if they establish trial projects to establish no-go zones for gasoline-powered vehicles and replace them with new energy vehicles in the urban public transport system”.
Companies therefore have to move forward with EV investments, even though their profits are under pressure from the sales downturn.
Volkswagen, for example, is planning to open two Chinese EV factories this year with total capacity of 600,000 cars, and aims to produce 11.6m EVs in China by 2028. Tesla is opening capacity for 250,000 cars and plans to double production in the future.
With other manufacturers following suit, some in the industry expect EV prices to fall below those for internal combustion engines within the next two years, which would further accelerate the transition.
The industry is therefore faced with a stark choice. The need to commit to EV manufacture means there is no “business as usual” strategy for either manufacturers or parts suppliers. Those who decide to conserve their cash risk finding themselves without the relevant products and services in the world’s largest auto market.
Paul Hodges publishes The pH Report.
“If you don’t know where you are going, any road will do”. The Irish proverb’s logic shows us the way forward on the greatest challenge that we face today, of achieving climate neutrality by 2050.
As the President of the European Petrochemical Association, Marc Schuller, highlighted last month when issuing a ‘call to action’:
“The Youth of the the world is calling for ambition and transformation. There is a new sense of urgency and as business leaders we should ensure that we embrace it and that our response as an industry is keeping up with this new pace of change and level of ambition.”
Governments also have a major role to play. And it is important that they speak in language that ordinary people can understand.
This is why Portugal’s Roadmap for Carbon Neutrality 2050 is so important. As the chart shows, it positions climate neutrality as an opportunity. Most people, after all, would prefer to be up with the peleton – challenging for the yellow jersey and the lead, not stuck at the back.
There is also very little doubt that climate change is taking place. After all, as the chart on the right shows, the global population has more than trebled since 1950, from 2.5bn to 7.8bn today. An increase of this size must have a major impact on the world in which we live.
The chart on the left shows one aspect of this impact in terms of the rise in surface temperatures from 1960, versus 1850-1900. We have good data for both periods, and so the data’s reliability is high.
Of course, correlation doesn’t always equal causation. And no doubt there are a range of other factors involved – some positive, some negative. But given the observable risks of climate change today, it makes no sense to ignore the issue and hope it will go away.
This is why voters are telling their leaders that climate change is important. After all, what is the point of a better standard of living, if at the same time you worry that you might get flooded out of your home – or it might be burnt to cinders?
Portugal’s response is an excellent example of a government taking a lead, within the framework of the European Green Deal to be launched early next year. As the chart shows, it is focused on the key areas and aims to carry the population with it:
- “Eliminating coal-based power generation by 2030 and achieving full decarbonization of the power generation system by 2050
- Decarbonizing mobility by strengthening public transport, decarbonizing fleets and reducing the carbon intensity of sea and air transport
- Expanding conservation and precision agriculture and reducing emissions associated with livestock and fertilizer use
- Preventing waste generation, increasing recycling rates and reducing waste disposal in landfill
- Applying carbon tax, changing consumption and production patterns, environmental education and awareness
- Promoting skills development towards new economic opportunities”
Of course, nobody likes change. But as the chart above shows, the world is already changing.
As I discussed last month, the world’s population is now expanding because people are living longer, not because women are having lots of babies.
- Nearly a third of the world’s High Income population, those earning at least $12k/year, are in the Perennials 55+ generation. Their incomes decline as they retire, and so Sustainability is critically important for them as a way of doing more with less
- Younger people, the Millennials, still want mobility, but owning a car doesn’t excite them. Similarly, they want the benefits provided by plastics, but they don’t want the waste and pollution generated from applications such as single-use packaging
As Portugal has realised, most people – given the choice – would like to be at the front of the pack. We all want to enjoy the opportunities that the rise of the sustainability agenda will provide.
Corporate leaders need to respond – unless they want to risk finding themselves on their own, at the back of the pack.
Smartphone sales plateaued in Q3, down 9% since Q3 2017’s peak of 1.55bn, as the chart shows. But the bigger threat from smart feature phones – now retailing for as little as $11 – continues to grow as Reliance and Vodacom launch new models in India and Africa.
Smartphone sales are also seeing important shifts in market shares:
- Samsung has never recovered its 32% share in 2013 and is now around 21%
- Apple’s share has slid gently downwards from 18% in Q4 2016 to 12% today
- Low-cost Chinese companies, particularly Huawei, have been the big winners
The Top 3 Chinese companies’ share has nearly trebled from 12% in 2013 to 34% today. And Huawei has gone from just 5% in 2013 to 18% in the same period.
This has important consequences, and not just for the smartphone market. President Trump has been attacking Huawei on grounds of national security, but consumers outside the USA – where Huawei has only a small presence – clearly like their phones. And it is hard for European or other governments to ban Huawei from major telecoms contracts, if their citizens are happily using Huawei phones.
This may, of course, change if Huawei continues to lose access to the latest Google versions of Android. But for the moment, at least, the US pressure has fired up nationalist support in China itself, where its market share reached 42% in Q3. Apple, meanwhile, saw its Chinese market share fall to just 5% in Q3 – a far cry from the days when it was the No 1 aspirational buy.
Apple’s issue remains its decision to focus only on the high end of the market. This worked well when it was perceived as having the “best phones”. But today, aside from Apple aficionados, it is hard to find many consumers who believe Apple offers features that other phones lack. And on that basis, it makes little sense to pay the vast premium being demanded for the brand image.
The writing has been on the wall for smartphone pricing for some time, as the Statista chart confirms. The average global price peaked as long ago as 2011 at nearly $350 ($400 in $2019). Since then, it has almost halved in inflation-adjusted terms to $215 today.
As I noted back in 2015, when Apple was riding high, it was inevitably going to have to introduce cheaper models to maintain market share. But instead it chose to “double up” on the luxury end of the market, putting profit ahead of volume. Last year’s decision to stop reporting unit sales for its key products was therefore no great surprise, given that no company wants to be always reporting bad news.
In turn, of course, this has driven a growing disconnect between the stock price and Apple’s revenue growth, as the chart shows. Between 2016-2018, they moved in line in terms of percentage change. Revenue has flatlined since Q3 2018’s peak of $266bn, whilst profit has fallen 3% due to declining iPhone sales.
But investors continue to bid up the stock price from its low of $142 at the start of the year to $260 today. Technical indicators confirm it as a ‘strong buy’, but as common sense would suggest, also warn that the stock is highly over-bought:
- Of course, Apple might be able to repeat its iPhone success in its new target areas of wearables and services
- But its decision to undercut the $1099 iPhone 11 Pro Max with a $699 version suggests volume is still important after all
One day, as I noted back in August, investors may start to realise that low cost smart feature phones with a 4G connection are the new growth area. Reliance’s Jio service is now offering them in India for just Rs 800 ($11), half the original 2017 launch price, whilst Vodacom South Africa is also offering them att Zar 299 ( $20).
The next billion users are more likely to be buying these than iPhones. Suppliers to the industry might want to rethink their current strategies. At some point, perhaps not too far away, consumers in western countries might also start to realise these can provide most – if not all – of the features that they really need.
Nearly a third of the the world’s High Income population are now in the Perennials 55+ generation.
Yet companies mostly ignore their needs – assuming that all they want are walking sticks and sanitary pads. Instead, they continue to focus on the relatively declining number of younger people.
No wonder many companies are going bankrupt, and many investors are seeing their portfolios struggle. As the chart shows:
- The High Income group accounts for nearly two-thirds of the global economy
- It includes everyone with an income >$12k/year, equal to $34/day
- 31% of those in the world’s High Income population are now Perennials aged 55+
- In other words, High Income Perennials account for a fifth of the global economy
This is a vast change from 1950, when most people still died around pension age. But it seems very few people have realised what has happened. When we talk about the global population expanding, we all assume this means more babies being born. But in fact, 422m of the 754m increase in population between now and 2030 will be Perennials – only 120m will be under-25s.
It is therefore no surprise that central bank stimulus policies have failed. Rather than focusing on this growth sector, they have instead slashed interest rates to near-zero. But, of course, this has simply destroyed the spending power of the Perennials, as the incomes from their savings collapsed.
If the central banks had been smarter, they would have junked their out-of-date models long ago. They would have instead encouraged companies to wake up to this new opportunity, and create new products and services to meet their needs. Instead, companies and most investors have also continued to look backwards, focusing on the growth markets of the past.
The Perennials are the great growth opportunity of our time. Their needs are more service-based than product-focused – they want mobility, for example, but aren’t so bothered about actually owning a car. But it’s not too late to get on board with the opportunity, as the number of Perennials is going to continue to grow, thanks to the marvel of increased life expectancy.
I explore this opportunity in more detail in a new podcast with Will Beacham – please click here to download it.
Major disruption is starting to occur in the world’s largest manufacturing industry. Hundreds of thousands of jobs will likely be lost in the next few years in auto manufacturing and its supply chains, as consumers move over to Electric Vehicles (EVs).
As the chart from Idaho National Laboratory confirms, EVs have relatively few parts – less than 20 in the drive-train, for example – versus 2000 for internal combustion engines (ICEs). There is much less to go wrong, so many servicing jobs will also disappear.
The auto industry itself was the product of such a paradigm shift in the early 19th century, when the horse-drawn industry mostly went out of business. Now it is seeing its own shift, as battery costs start to reach the critical $100/kWh levels at which EVs become cheaper to own and operate than ICEs.
Unfortunately, this paradigm shift is coming at a time when global sales and profits are already falling. As the chart shows, sales were down 5.4% in January-August in the Top 7 markets versus 2018. And in the Top 6 markets, outside China, they were only 4% higher than in 2007, highlighting the industry’s current over-dependence on China:
- India is suffering the most, with sales down 15% this year
- But China’s woes matter most as it is the largest global market; its sales were down 13%
- Europe was down 3% YTD, but on a weakening trend with August down 8%
- All the major countries were negative in August, with Spain down 31%
- Russia was down 2%, despite the economic boost provided by today’s relatively high oil prices
- The USA and Japan were marginally positive, up 0.4% and 0.6% respectively
- Only Brazil was showing strong growth at 9%, but was still down 28% versus its 2011 peak
EV sales, like those of used cars, are heading in the opposite direction. China currently accounts for 2/3rds of global EV sales and sold nearly 1.3m EVs in 2018 (up 62% versus 2017). They may well take 50% of the Chinese market by 2025, as the government is now focused on accelerating the transition via the rollout of a national charging network.
Interestingly, it seems that Europe is likely to emerge as the main challenger to China in the global EV market. The US has Tesla, which continues to attract vast investment from Wall Street, but it is only expected to produce a maximum of 400k cars this year. Europe, however, is ramping up EV output very fast as the Financial Times chart confirms:
- The left-hand scale shows EV prices v range (km) for EVs being released in Europe
- The right-hand scale shows the dramatic acceleration in EV launches in 2019-21
One key incentive is the manufacturers’ ability to use EV sales to gain “super-credits” in respect of the new mandatory CO2 emission levels. These are now very valuable given the loss of emission credits due to the collapse of diesel sales.
2020 is the key year for these “super-credits” as they are the equivalent of 2 cars, before scaling down to 1.67 cars in 2021 and 1.33 cars in 2022. Every gram of CO2 emissions above 95g/km will incur a fine of €95/car sold. And as Ford’s CEO has noted:
“There’s only going to be a few winners who create the platforms for the future.”
VW NOW HAVE BATTERY COSTS AT BELOW $100/kWh
VW is likely to be one of the Winners in the new market. It is planning an €80bn spend to produce 70 EV models based on standardised motors, batteries and other components. This will enable it to reduce costs and accelerate the roll-out:
- Its new new flagship ID.3 model will go on sale next year at a typical mid-market price of €30k ($34k)
- Having disrupted that market segment, it will then expand into cheaper models
- And it expects a quarter of its European sales to run on battery power by 2025.
The key issue, of course, is battery cost. $100/kWh is the tipping point at which it becomes cheaper to run an EV than an ICE. And now VW are claiming to have achieved this for the ID.3 model.
Once this becomes clearly established, EV sales will enter a virtuous circle, as buyers realise that the resale value of ICE models is likely to fall quite sharply. Diesel cars have already seen this process in action as a result of the “dieselgate” scandal – they were just 31% of European sales in Q2, versus 52% in 2015 .
One other factor is likely to prove critical. The media hype around Tesla has led to an assumption that individuals will lead the transition to battery power. But in reality, fleet owners are far more likely to transition first:
- They have a laser-like focus on costs and often operate on relatively regular routes in city centres
- They don’t have the “range anxiety” of private motorists and can easily recharge overnight in depots
The problem for auto companies, their investors and their supply chain, is that the disruption caused by the paradigm shift will create a few Winners – and many Losers – as Ford warned.
Those who delay making the investments required are almost certain to become Losers. The reason is simple – if today’s decline in auto sales accelerates, as seems likely, the investment needed for EVs will simply become unaffordable for many companies.