Portugal shows the way to climate neutrality by 2050

“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.

The next billion phone users will be buying $10 smart feature phones, not $1000 iPhones

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.

 

Companies ignore the Perennials 55+ generation at their peril

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.

Auto markets set for major disruption as Electric Vehicle sales reach tipping point

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.

 

 

Smartphone sales continue their decline, whilst $25 smart feature phones open up new markets

Global smartphone sales have now been falling for 8 consecutive quarters, since Q3 2017. They are now down 9% from their peak, as the chart shows, based on Strategy Analytics data.  As always in a falling market, Winners and Losers are staring to appear:

LOSERS

  • Apple’s market share fell to its lowest level for 10 years at just 11%; revenue and profit are falling
  • Samsung’s Q2 profits fell 56%, hit by Galaxy Fold problems plus Japan-Korea and US-China trade wars
  • Smartphones themselves are losing ground to smart feature phones that retail for just $25

WINNERS

  • China’s Huawei, Xiaomi and OPPO now have a combined 35% market share, double their Q2 2014 share
  • Huawei’s Operating System is being readied to compete with Android, as the US-China trade war continues
  • 85 million smart feature phones, developed for Reliance’s Jio telecom company will likely be sold this year

As discussed here before, the Western majors have failed to recognise this paradigm shift in the market.  Cash-strapped consumers are no longer prepared to pay $1000+ for the prestige of an up-market brand, as analysts IDC note:

“A key driver in Q2 was the availability of vastly improved mid-tier devices that offer premium designs and features while significantly undercutting the ultra-high-end in price”.

President Trump’s new China tariffs will, of course, create further problems for Apple and Google as these will:

  • Push up prices in the US domestic market and hit consumer demand in the critical Thanksgiving/Christmas period
  • Galvanise Huawei’s development of its new Operating System – helping it to become a major competitor in the global market

COMPANIES ARE FOCUSING ON THE WRONG MARKETS

But the really critical issue for most smartphone sellers is their continued focus on the Wealth Creator 25 – 54 age group. This was a great strategy during the Boomer-led SuperCycle, as there were vast numbers of Western Boomers with money to spend and a liking for innovative products. But not today, as the chart above confirms:

  • Increasing life expectancy means the Perennials 55+ generation is now the fastest growing segment
  • There were 500m Perennials in the Top 10 economies in 2000, and their numbers will double by 2030
  • And they represent an entirely different market opportunity

Perennials don’t need ever-more complicated “bells and whistles” on their phones.  They just want the basic features, clearly laid out. And they need their phones to be affordable, as their incomes decline as they move into retirement.

Equally important is the other major untapped market for growth –  the 3.4bn people in the world who currently don’t own a smartphone and can’t afford one.  As the Wall Street Journal has reported:

“Smart feature phones aren’t only inexpensive, but they also have physical keypads that are less intimidating than touch screens for those new to the technology. Meanwhile, their batteries last for days, a bonus in places where electricity is unreliable”.

These phones represent a major threat to smartphone sellers, and their supply chains around the world:

  •  As Reliance’s Jio network found after launching in 2016, millions of Indians could afford its ultra-cheap data plan, but couldn’t afford a smartphone
  • Many people in the developed world, old and young, would happily swap an over-complicated smartphone selling for an average $300+ for a more basic feature phone selling for $25

Already apps such as Facebook and WhatsApp have been modified to work on feature phones, further extending their appeal.  Google has also invested in Hong Kong’s KaiOS, which makes the operating system most widely used in feature phones.

The Orange network is also starting to realise the potential. It is rolling out cheap data services on the Jio model in the Ivory Coast, and plans to extend service elsewhere in Africa and the Middle East. Meanwhile Indonesia’s WizPhone is about to offer a phone for $7, and is planning a launch in Brazil.

As the world moves into recession, losing companies will stick their heads in the sand. They will hope central banks somehow find a way out of the debt mess they have created. Winning companies, however, will go back to first base and focus on unmet market needs, such as for smart feature phones, and figure out a way to supply them profitably.

 

Smartphone sales decline begins to impact global stock markets

The bad news continues for the world’s smartphone manufacturers and their suppliers.  And President Trump’s decision to add a 25% tariff on smartphone component imports from China from June 25 is unlikely to help. Morgan Stanley estimate it will add $160 to the current US iPhone XS price of $999, whilst a state-backed Chinese consumer boycott of Apple phones may well develop in retaliation for US sanctions on Huawei.

Chances are that a perfect storm is developing around the industry as its phenomenal run since 2011 comes to an end:

  • Global sales fell 4% in Q1 as the chart shows, with volume of 330m the lowest since Q3 2014
  • China’s market fell 3% to 88m, whilst US volume fell 18% to 36m
  • Apple has been badly hit, with US sales down 19% in Q1 and China sales down 25% in the past 6 months
  • Foldables have also failed to make a breakthrough, with Gartner estimating just 30m sales by 2023

This downbeat news highlights the fact that replacement cycles are no longer every year/18 months, but have already pushed out to 2.6 years.  Consumers see no need to rush to buy the latest model, given that today’s phones already cater very well for their needs.

Apple’s volumes confirm the secular nature of the downturn, as its volume continued the decline seen in 2018 as the iPhone comes to the end of its lifecycle. Its market share also fell back to 13%, allowing Huawei to take second place behind Samsung with a 17.9% share.  This decline came about despite Apple making major price cuts for the XS and XR series, as well as introducing a trade-in programme. Meanwhile, Samsung saw its profits fall 60%, the lowest since its battery problems in 2017.

The President’s tariffs are also set to impact sales, as manufacturers have to assume that today’s supply chains will need to be restructured. Manufacturing of low-end components can perhaps be easily relocated to countries such as Vietnam and other SE Asian countries.  But moving factories, like moving house, is a very disruptive process, and it is certainly not easy to find the technical skills required to make high-end components – which represent the core value proposition for consumers.

This highlights how second-order impacts are often overlooked when big announcements are made around tariffs and similar protectionist measures.  Not only do prices go up, as someone has to pay the extra costs involved. But companies along the supply chain see their margins squeezed as well – Apple suppliers Foxconn and Pegatron saw their gross margins fall to 5.5% and 2.3%, the lowest level since 2012, for example. So they will have less to spend on future innovations.

We can, of course, all hope that the current trade war proves only temporary. But President Trump’s decision to embargo Huawei from US telecom equipment markets suggests he is digging in for a long battle. Ironically, however, Huawei was one of the few winners in Q1, with its volume surging 50% despite its planned 2018 US entry being cancelled due to congressional pressure.  And other governments seem notable reluctant to follow the US lead.

The bigger risk, of course, for investors is that the profit downturn caused by protectionism cannot be “solved” by central bank stimulus. Since 2009, as the chart of the S&P 500 shows, they have rushed to support the market whenever it appeared poised for a return to more normal valuations. But it is hard to see how even their fall-back position of “helicopter money” can counter the impact of a fully-fledged trade war between the world’s 2 largest economies.