On October 31, General Electric (GE) announced that it will be merging its oil and gas division with oilfield services giant Baker Hughes. GE will contribute its oil and gas operations along with $7.4bn in order to take a controlling stake in the merged business. The deal, which has been unanimously approved by the boards of both companies, is set to create the world’s second largest oilfield services provider, with operations in more than 120 countries.
“This transaction creates an industry leader, one that is ideally positioned to grow in any market”, General Electric Chairman and CEO, Jeff Immelt, said in a statement confirming the merger.
The partnership will enable GE to harness Baker Hughes’ expertise in drilling and fracking wells, while avoiding a costly full acquisition
“Oil and gas customers demand more productive solutions. This can only be achieved through technical innovation and service execution, the hallmarks of GE and Baker Hughes.”
The merger comes as oil companies look to cut costs through consolidation as they continue to battle low crude prices. The partnership will enable GE to harness Baker Hughes’ expertise in drilling and fracking wells, while avoiding a costly full acquisition of the company. The merged business is anticipated to generate $32bn in annual revenue and is predicted to produce synergies of $1.6bn by 2020.
The deal brings fresh hope to GE and Baker Hughes, both of which have suffered from the collapse in crude oil prices. As reported by the Financial Times, Baker Hughes reported an operating loss of $1.45bn in the first nine months of 2016, while GE’s oil and gas unit saw a 43 percent drop in operating profits for the same period.
However, both companies remain confident of a price recovery, believing that the merged business will be poised for growth as crude prices harden. Some believe this trend has already begun in the wake of the OPEC agreement to cut oil production, given that crude prices have recently risen slightly to around $50 a barrel – up from a low of $28 in January.
GE and Baker Hughes anticipate that the transaction will be finalised by mid-2017, although it still faces regulatory approval. As a wave of consolidation activity sweeps the oil industry, the merger may face increased scrutiny from US regulators, who are concerned with reduced competition in what is a rapidly shrinking market. Earlier this year, US antitrust regulators rejected Halliburton’s bid to acquire Baker Hughes, citing similar fears over industry monopolisation.
Although the possibility of gas infrastructure in East Siberia has become an attractive prospect for both oil and gas producers, significant challenges remain. As testament to this, Irkutsk Oil Company (INK) has dedicated more than six years of development to this particular area of activity.
More than 13 years ago, INK established itself as the first oil producer in the region, utilising its resources even without developed infrastructure for transportation or the presence of well foundations. Adapting to such conditions, INK grew to become the largest privately owned independent oil producer in Russia, consisting of several companies that specialise in every stage of the hydrocarbon extraction process (from research to production) across INK’s 23 licensed fields.
INK is also the region’s most experienced firm when it comes to difficult projects and commissions within East Siberia. Its most recent development consisted of opening eight new fields in the Irkutsk region and the Republic of Sakha. In the same vein, the past five years have seen INK drastically increase its production of crude oil, achieving more than 5.6 million tonnes in 2015, while 2016 is projected to exceed 7.5 million tonnes.
The technology used was able to yield both gas and petroleum in locations that were bereft of infrastructural developments
The largest taxpayer in the Irkutsk region, INK supplied over RUB 200bn (equivalent to $6bn at the time) to the government’s coffers between 2007 and 2015. As a consequence, the company’s net profit acts as an economic stimulus to the entire region.
Capturing success
The official start of INK’s gas framework in 2010 was marked by the introduction of gas re-injection into formation, with the simultaneous capture of liquids such as gas condensate. Just two years into the project – which was the first of its kind in Russia – INK was able to capture associated petroleum gas (APG).
The main innovation behind this advancement lay in the accessibility of the project, as the technology used was able to yield both gas and petroleum in locations that were bereft of infrastructural developments. These achievements received much praise and recognition from the European Bank for Reconstruction and Development, the project’s financing partner.
In recent years, INK has made significant investments into increasing the capacity of the compressors that process APG at its Yaraktinsky field. The Markovsky field, where the company also aspires to achieve the utilisation of APG, was included in INK’s gas project as well. Consequently, there are now 13 compressor units with a total power of 34MW in operation in both fields. Having this capacity in place boasts numerous advantages: importantly, they include the elimination of flaring gas, as well as a considerable reduction in the emission of greenhouse gases.
Given the success achieved by the Eastern Siberian project, INK then proceeded with the construction of several facilities, all of which relate to the processing of natural gas and APG. Furthermore, the framework for a coherent transportation system, predominantly concerning propane, butane and stable gas condensate, will soon be available for buyers of said valuable gas components. As such, it seems the gas industry in Eastern Siberia will flourish.
“I think that our example [of developing infrastructures in the region] will enter textbooks”, said Chairman of INK’s Board of Directors, Nikolay Buynov. “Many decisions still remain on paper, not set in concrete. Only in 2018, when the operation will literally start working, will we say we
have succeeded.”
Project backbone
Through a $40m investment in 2014, INK has raised international awareness about its gas programme. Then, in 2015, as the project began to increase its operations, INK tripled its investment into the concept, reaching $125m. The first phase of construction is now near completion, which will culminate in the establishment of natural and gas infrastructure in the region. The results will bear a production rate of 3.6 million cubic metres of gas per day, as well as creating a new pipeline that will stream liquefied petroleum gas (LPG) from the Yaraktinsky field to the city of Ust-Kut along a distance of 196km.
Speaking of the progress INK has made, Buynov remarked that this gas infrastructure is “the backbone” of a great future – not only for the project, but also for the whole region.
5.6m tonnes
Irkutsk Oil Company’s 2015 crude oil production
7.5m tonnes
The company’s projected total production for 2016
As things currently stand, the general processing of LPG is scheduled to commence in the first half of 2017. In parallel, propane and butane delivery to respective clients of the company will begin as well. The initial dispatch of LPG will consist of 160,000 tonnes per year, most of which will be transported by railroad to both foreign and domestic markets. In the local mobility sector, car drivers and public transportation will soon benefit from cheaper fuel and a cleaner environment. And here lies another major opportunity for the LPG industry: to displace gasoline and diesel fuel in river vessels.
New niche
INK’s new facility will have the ability to produce value-added products, such as propane and butane mixed with isobutane, which will meet international standards. With the capacity to process 1.8 million tonnes of natural gas liquids per year, the facility will be highly functional as well.
As natural gas liquid contains up to 39 percent ethane, by adding ethane processing, the facility’s processing power will be increased by another 30 percent, to 2.4 million tonnes. Eventually, ethane will form the feedstock for the facility, effectively actualising the third phase of INK’s gas project. The project is sui generis at its core: no comparable undertakings exist in the region at this time.
The launch of the facility will change the direction of INK’s sales strategy by supplying Pacific Rim countries with finished goods that will be transported by both land and sea. Deputy Commercial Director Vladimir Asmakovets told World Finance: “This market is large and exciting: China’s imports increase every year, with 2015 bringing 10 million tonnes of LPG, in comparison to only four million tonnes imported in 2013. Japan also consumes more than 10 million tonnes of LPG per year. INK holds an advantageous position in terms of logistics, as Asia-Pacific markets border us.”
Three additional gas processing plants with a daily capacity of six million cubic metres each will be supplied by UOP, a company owned and operated by Honeywell, within the next two-to-three years. UOP is a leader in modular plants for the natural gas industry and the world-leading manufacturer of gas processing equipment.
Another company that is deeply involved in the process is Toyo Engineering, which prepared front-end engineering design of the gas processing plants and assisted INK with development of the concept of the project. Teaming up with such experienced partners is essential for the undertaking of this project, as INK’s technologists and engineers have yet to accomplish tasks of such scale and complexity without external assistance.
Around $215m has been spent on the realisation of the project to date, while the total spending – which includes the construction of production facilities – is estimated at $3bn. INK’s ambitious goal is to monetise all components of natural gas and APG from virtually all of the company’s fields.
The culmination of INK’s gas project is the realisation of an advanced gas chemical complex. Indeed, this complex will allow the company to utilise the maximum potential of its gas resources. INK plans to have a polyolefin-production facility based in city of Ust-Kut, which will manufacture both linear low-density polyethylene and high-density polyethylene. Equipped with the most advanced technology available, the factory can dispense up to 500,000 tonnes of polyethylene per year. To accommodate such a high output, INK plans to build a 100MW-capacity power plant on the site.
The realisation of the three-phase project will have a great effect on the socio-economic status of East Siberia. In addition to creating myriad new jobs, INK’s plan will lift the living conditions of the citizenry and form a favourable economic atmosphere. Given that during the first 15 years of production the government is expected to collect more than $3.1bn in tax revenues, the project will significantly increase the local government’s budget as well. This in turn will have its own ripple effect, spurring economic activity and development throughout the region.
The issues of tax transparency and an increasingly complex world are making trusts and foundations more important for families to consider as part of their asset protection and succession planning. Many traditional providers of trust and foundation services are troubled by increased complexity and a growing need for tax compliance.
A number of bank-owned trust companies have been sold or scaled down, law firms and others operating smaller fiduciary services companies have been selling their businesses, and for many trust and foundation providers, there is serious concern about the future.
Trusts have had a long history, as has their civil law sibling, the foundation. While the two have many differences, they also have many similarities, and are broadly interchangeable vehicles that can be used by families to achieve a number of important objectives. Both are very flexible, but it is this flexibility that has contributed to misuses of trusts and foundations, particularly with regard to tax evasion and badly executed attempts at what was wrongly perceived as legal tax avoidance.
The recent move to tax transparency is not an attack on trusts and foundations, but rather an attack on any attempt to conceal income and assets that are legally required to be disclosed under tax laws applicable to those with relevant interests in the income and assets involved. There is no question that trusts and foundations are part of the new focus on how wealth owners structure their affairs, but for the well-advised wealth owner, it is more the case that trusts and foundations have to be considered as key tools in the wealth planning toolbox.
A rapidly changing world requires new ways of managing and navigating family wealth. For this challenge, we bring the right people to the table
To gain a better insight into trusts and foundations and the current role and challenges they face in the world, World Finance spoke to Philip Marcovici, Member of the Board at Kaiser Partner.
What can trusts and foundations achieve that other structures cannot easily replicate?
Both trusts and foundations offer families the ability to set out how they would like assets to be held and distributed in the long term. Structures can help to oversee family assets, with appropriate ‘checks and balances’ over trustees or foundation board members who take on the responsibility to look after things in a way that meets the needs of the family involved.
If a wealth owner has young children, and the wealth owner dies or becomes disabled, how can the wealth owner ensure his children will be properly looked after financially and the assets properly administered? If the children reach the age of 18, is it appropriate that they come into meaningful amounts of wealth? Is it important for someone to consider the intentions of the deceased or disabled wealth owner regarding how the assets should be administered and distributed?
Insurance structures, partnerships, corporate vehicles and other structures are all important elements of good wealth and succession planning. But it is not straightforward for these structures to provide the potential for long-term succession and asset protection planning that trusts and foundations can provide.
How do trusts and foundations work?
In very simple terms, there are four characteristics of trusts and foundations that are important to understand: these characteristics are revocable, irrevocable, fixed and discretionary. The settlor of a trust or the founder of a foundation is able to choose, when establishing the structure, whether to retain a right to ‘revoke’ or cancel the structure.
Being irrevocable does not mean the founder or settlor cannot be a potential beneficiary, but it does mean a clear right to cancel the structure and get the assets back does not exist. While it may be tempting to think it is always better to have a structure be revocable, this is not necessarily the case. If I am a founder or settlor, and am concerned about future lawsuits I may face, will the assets held in a trust or foundation be safer against claimants if I have a legal right to get the assets back, as opposed to an irrevocable structure, where I do not?
And is it better in the context of the wealth owner’s objectives for the trust or foundation to be fixed or discretionary? There is no single right answer, but the key is to understand the difference. If the structure is required to distribute to my child when he reaches the age of 25, my child is a beneficiary with a ‘fixed’ interest. If the trustee or foundation does not make the distribution, my son can sue to enforce his rights.
The opposite is where the structure is ‘discretionary’, meaning the trustee or foundation board does not have to distribute to my son when he reaches 25. I, as the settlor or founder, may have provided a ‘letter of wishes’ expressing my hope the trustee or foundation board would consider a distribution when my son reaches 25, but by leaving this in the discretion of the trustee or foundation board, my son does not have a legal right to force a distribution.
Is this good or bad? This depends: if my son is subject to a marital or other dispute, the assets may be significantly safer if my son does not have a legal right to the assets.
Good governance in trusts and foundations requires careful attention in overseeing the trustee or foundation board, and this is often achieved through the inclusion of a protector or guardian. A good trustee or foundation provider will provide wealth-owning families with clarity on the choices they have and help guide them through the many ‘what-ifs’ families should be asking themselves on an ongoing basis.
But what about tax and reporting?
The good news for wealth owners is that, in many countries, trusts and foundations are becoming increasingly understood, with the development of tax and reporting rules that clarify the tax treatment of trusts, and when and how interests in trusts need to be reported.
This is a good thing, as tax planning – which can still be achieved in legal and accepted ways using trusts and foundations – is only one of many needs of wealth-owning families: political risk; the destruction of wealth divorce claims give rise to; asset protection from creditor and other claims; succession and protection of the younger generation; ensuring assets are properly identified and administered; dealing with complex family relationships; holding special assets such as collectibles and businesses and much, much more can be addressed using well thought-out trusts and foundations.
Can you provide an example of why a trust or foundation may be a smart solution for a wealth owner?
A wealth owner considers giving a substantial gift to their daughter, who is in her 20s. Should this be a direct gift or a transfer to a trust or foundation for the daughter’s benefit?
If the daughter receives a gift of $10m, on the death of the wealth owner or before, what happens if her new husband comes up with a hare-brained business idea and tries to convince his wife to fund his business? What if there is a divorce? What if the daughter, on becoming a plastic surgeon, makes a mistake in the first surgery she performs? All or part of the money will be gone. What if the daughter moves to Canada or China or the US or to one of many other countries? She will be taxed on a worldwide basis on the income generated by investing the $10m, and if she dies and passes assets to her children, there may be tax at that time: in Canada, on the basis of a deemed disposition of assets, or in the US, under the estate tax rules of that country. And in the case of a country like China, ownership of the assets would also subject the daughter to exchange control and other rules.
If the daughter, instead, is a discretionary beneficiary of a trust or foundation established by her parent, the position may be transformed. If her husband has a good business idea, he cannot pressure his wife into supporting it. He needs to convince a professional trustee or foundation board that will be more able to say no – if saying no is the right decision.
Lawsuits against the daughter, for professional negligence, divorce or otherwise, will be difficult to enforce against assets in the trust or foundation if it was well structured and maintained. And in the tax area, Canada, the US and many other potential countries of residence are good examples of fully disclosed use of trusts and foundations that can permit significant tax savings. In both Canada and the US, appropriately structured trusts and foundations can permit beneficiaries to avoid taxation on both the earnings on assets held in the discretionary structure and on fully disclosed distributions. And assets that stay in trust or in the foundation can be held for further generations without exposure to taxes that arise on death and through gifts.
To say the least, 2016 has been a challenging year for Nigeria’s economy. With 70 percent of the nation’s revenue derived from oil, the commodity’s steep fall in price has led to a significant devaluation of the naira. Add to this a fall in foreign reserves and instability caused by the Boko Haram insurgency, and it is plain Nigeria has become a hard environment in which to do business.
Amid this economic uncertainty, Access Bank has been adopting innovative strategies to maintain its strong financial position and continue its growth. Access Bank was founded in 1988 and is now one of the five largest banks in Nigeria in terms of assets, loans deposits and branch network. Its position was significantly boosted in 2012 when it acquired International Commercial Bank, one of a number of banks that were failing government stress tests. This acquisition gave Access Bank the branch network and asset base to quickly become a major force in Nigerian banking.
To support the national economy, the bank has been partnering with the federal government on various programmes designed to uplift Nigeria’s non-oil industries. Another focus is on sustainability programmes, which the bank remains committed to despite the difficult economic climate.
With 70 percent of Nigeria’s revenue derived from oil, the commodity’s steep fall in price has led to a significant devaluation of the naira
World Finance had the opportunity to speak to Herbert Wigwe, Group Managing Director and Chief Executive Officer of Access Bank, about how these sustainability programmes are ensuring the future strength of the Nigerian banking sector.
How does Access Bank define sustainability?
At Access Bank, we appreciate the impact that environmental degradation has on the world we live in. Even though we are in business to make profit, we refuse to do so at the expense of our people and our planet.
We understand the projects and deals we finance could have a significant negative impact on our local communities. Our activities impact people’s livelihoods, the rivers, the soil, farmlands and even air quality. Sustainability to us is responsible business practices and community investment. Our work in sustainable development primarily focuses on health, arts, sports, education, gender empowerment and the environment.
How prevalent are sustainable approaches within your markets?
With the creation of the UN Sustainable Development Goals in September 2015, businesses and industries are challenged to drive agreed global objectives in their various communities. However, on a larger scale, the Nigerian banking industry’s attitude towards the adoption of sustainability is progressive and evolving. Many institutions are now showing commitment to sustainability as a strategy, practice or set of activities, offering opportunities to manage risks, explore opportunities and adapt to changing business.
For a successful and genuine commitment to sustainability, society at large has to provide an enabling environment in which it can thrive. Unfortunately, the Nigerian business environment – like most developing markets – is still characterised by an evolving structure. This in turn has implications for the success or failure of sustainability in banking operations.
Despite this, the launch of the Nigerian Sustainable Business Principles was a major step in the right direction. Even though there is room for improvement in creating an environment in which sustainability can thrive, the truly committed banks are seeking to create the change they desire.
Sustainability is often overlooked within challenging markets. Why is that?
Many companies have the misconception that the more sustainable they become, the more their efforts will work against their competitiveness. This pushes management executives to approach sustainability with reluctance, viewing it as an avoidable corporate social responsibility separated from business objectives. However, due to their intermediary role in the economy, banks hold a unique position and are therefore expected to approach sustainable development with a more proactive approach.
Sustainable businesses are ones that are able to ensure their future. They are able to cut down on energy and waste costs, which will in turn have a positive impact on their bottom lines. Ignoring the relevance and importance of sustainability is foolhardy.
Clients and investors are also drawn to sustainable businesses. If taken seriously and diligently enforced, the positive and profitable reputation for sustainable practices will grow.
What are the biggest challenges to maintaining a sustainable approach in a challenging market?
Sustainability should be firmly anchored in the business strategy and leadership structures of all organisations. However, embedding sustainability in a brand is usually ridden with various shortcomings and choked by several other pressing issues. This creates setbacks to advocating sustainability in business operations.
The challenges of embedding sustainability into business operations are diverse, ranging from the creation and definition of a business case for sustainability to the lack of standards and metrics for the measurement of sustainability. Furthermore, the motivation of management and employee engagement on sustainability issues remains low. With the lack of government policies supporting sustainability and the lack of understanding and support among consumers, advocating sustainability becomes an uphill battle. The lack of expertise for the credible implementation of sustainability initiatives and the need for better guidelines for engaging key stakeholders are also challenges.
At Access Bank, we recognise the sustainability journey is filled with challenges, and we believe that sustainability must be embedded into the fabric of any business that intends to contribute to economic development while achieving long-term success. Sustainability therefore remains at the core of our operations.
We have set up a sustainability committee at the executive management and board level, tasked with the responsibility of steering Access Bank’s sustainability strategy. The committee is responsible for the supervision of the bank’s sustainability activities. This includes monitoring performance and producing public reports of the bank’s sustainability projects.
Fulfilling a broader social, environmental and economic purpose does not mean looking away from profits. The significant impact of unsound banking practices on the economic health of many countries around the world is a salutary reminder of the responsibilities banks hold. Therefore, we at Access Bank have pledged to stand and advocate for sustainable business practices in our industry.
830,000
Access Bank’s number of shareholders
305
Branches in Nigeria
How have your various platforms helped to increase access to banking in Nigeria?
PayWithCapture was launched by Access Bank to solve issues of connectivity, intuition and diversity. It is a first in the sub-Saharan African payment space. It provides financial services anywhere and anytime, even without an internet connection.
The innovative app provides convenience and ease in accessing banking services for all individuals, whether they are customers of Access Bank or not. It also provides a solution that allows all types of devices, from smartphones to the simplest mobile devices, to access financial services utilising the USSD system. It is the ultimate mobile wallet that enables all types of diverse users to save, spend and invest their finances quickly and conveniently.
How important are innovative digital banking platforms in the Nigerian market?
In the Nigerian landscape, marketers and their clients are becoming aware of the fundamental effect and importance of digital banking. The leaders in digital banking are more client-centric, tech-savvy, inclusive and open to fundamental change to deliver the best results. In the past decade, digital banking has taken hold; most leading Nigerian banks have incorporated strong digital strategies into their system. These leaders understand the importance of mobility in a digital strategy. They are developing more agile operating models and, most notably, they have tackled the need for internal culture shifts.
First, as more customers use their mobile phones and tablets to do their banking, the mobile experience is becoming a crucial aspect of digital strategy that banks must address. Second, to keep up with the fast-changing technological market, Nigerian banks will have to adapt to newer, more innovative and more technologically advanced operating models. Top management-led innovation towards technological advancement and progression will lead the way to addressing market changes, becoming more agile, and improving openness to digitilisation in day-to-day business.
However, the digitilisation of retail banking is not a new development. Online solutions and services have existed since the turn of the century and have progressively led banking beyond mere multichannel strategies. In coming years, mobile use will become the epicentre of digital banking. Across Nigeria, transaction volumes from mobile devices are starting to take over all the other channels. It is therefore imperative that financial institutions strategise and embrace digital banking opportunities to advance with the world and changing trends in banking.
What changes can we expect to see in the Nigerian banking sector in the coming years?
As a result of the current economic crisis, raising the capital base of the banks has become a necessity. The need for this has become more imperative as capital ratios are under pressure from write-downs on credit products, downgrades of securities, as well as pressures to expand credit to the private sector, which requires banks to hold even more capital against potential losses.
Another trend that will result from the recent crisis will be the need to review the existing rules and laws relevant to the financial industry in Nigeria. In addition to all of this, it is also expected that the Nigerian banking sector will undergo a major shift towards more sophisticated, digitalised and modernised financial practices that will be customer-centric and efficiently sustainable, creating a more admirable banking industry and Nigerian economy.
The cloud of economic uncertainty over Malaysia has lifted, and with it the outlook for the country’s property market has taken on a whole new shape. A string of major infrastructure projects bodes well for both the commercial and residential sector, and stable incomes mean buyers are doing away with the wait-and-see approach that was so prevalent in the past.
Testament to its success in the property market, Mah Sing Group Berhad was recently selected as one of Macquarie’s top 10 picks for Malaysia. The report said: “Mah Sing is our top pick in the Malaysian property sector… Mah Sing has placed itself well in the market to capture the first homebuyers and upgrades at affordable pricing points. We believe, given the current property market conditions, Mah Sing will retain its exposure in the affordable segment in 2016 as this segment was seen to have better support from the buyers, especially in the Central Region.”
World Finance spoke to Tan Sri Dato’ Sri Leong Hoy Kum, Group Managing Director at Mah Sing Group Berhad, about Malaysia’s changed circumstances and the steps the company has taken to capitalise on this newfound sense of optimism.
Can you tell us about the property market in Malaysia and how Mah Sing has managed to maintain its market leadership position?
The competition among property developers here in Malaysia is very high, and this is a good thing. It is through healthy competition that we have been able to push ourselves to be better at what we do and to grow Mah Sing to where the company is today.
More than just building homes, we strive to provide innovative solutions to buyers looking to own their own homes
For the time being, Mah Sing will continue to focus on end-user demand for beginner homes, driven by a young demographic, continuing new household formation and stable labour market conditions. Our future sales pipeline includes the Meridin East township in Pasir Gudang, with affordable landed homes and Cerrado serviced apartments. While the group carefully times its launches to ensure products are in line with market demand, it also actively pursues sales from existing projects.
New growth corridors will benefit from ongoing and proposed major infrastructure projects such as the MRT [mass rapid transit], LRT [light rapid transit] and extension, and the proposed High Speed Rail.
What in your brand positioning makes you stand out from the competition?
At Mah Sing, our developments are known for their exceptional quality. When our buyers purchase one of our homes, they will likely stay in it for a considerable portion of their lives. As such, we ensure all of our developments are up to the mark when it comes to quality. Each of our developments goes through stringent quality assessments and we have also won numerous awards, which highlight our dedication in delivering quality homes. Nowadays, quality is no longer an extra: it is a given.
To maintain our position as a market leader, we are also highly committed to providing uncompromising customer experience. As a premier lifestyle developer, Mah Sing continues to ensure pleasant and memorable customer experiences at all points of contact – from handing over vacant possession, to managing customer feedback for continuous improvement in our products and services.
Our biggest asset is our people. Hence, it is a challenge to find talent. We want the cream of the crop to automatically have top-of-mind recall when they want to apply for a job in the property industry.
In your opinion, what was the biggest success in Mah Sing’s history?
Innovation is the key to the group’s success, and as a group we always look to offer something more to our buyers. We are proud of our Iconic Series developments, which have changed the Kuala Lumpur skyline. Mah Sing’s Iconic Series is a series of innovative developments known for their revolutionary design and exceptional quality. These properties have also enjoyed an excellent take-up rate. Our four Iconic Series developments include the Icon Tun Razak, the Icon Residence in Mont Kiara, M City in Jalan Ampang, and Icon City in Petaling Jaya.
More than just building homes, we strive to provide innovative solutions to buyers looking to own their own homes. We make this possible through our innovative campaigns, which offer different methods through which buyers can finance their homes.
How does Mah Sing stay on track with its overall plans and ensure its revenue is sustainable?
We are exploring land acquisition and joint venture opportunities. The group has approximately MYR 895.3m ($220m) in cash and bank balances, as well as a net gearing of 0.06 times compared to 0.09 in Q1 2016. As previously mentioned, the group’s remaining gross development value and unbilled sales can potentially support the company’s revenue growth for eight to nine years.
Further adding to the group’s cash position is the final stage billings, which amount to approximately MYR 446m ($110m) for the properties to be completed this year. Mah Sing has a key focus in Greater Kuala Lumpur and Klang Valley, as well as in Johor Bahru, Penang and states with strong economic prospects.
Mah Sing’s Cerrado Residential Suites Tower A achieved an impressive 100 percent take-up rate during its launch, with all 404 units of Tower A being taken up over a two-day period. The successful launch of Cerrado’s Tower A has seen Southville City lock in MYR 1.77bn ($432m) in just over two years. This follows the successful launch of Lakeville Residence’s Final Tower in Taman Wahyu, which attained a 92 percent take-up rate in August.
Mah Sing later launched Tower B of Ferringhi Residence 2. The first launched tower of the development opened up a total of 120 units for bookings. A total of 101 units were sold, which amounts to an 84 percent take-up rate.
The launch of Mah Sing Group’s largest township, Meridin East, saw the township’s double storey link homes, the Greenway, reach an impressive 85 percent take-up rate. Greenway comprises 492 units of double storey link homes priced from MYR 357,000 ($87,212).
What is the financial outlook for Mah Sing for the remainder of 2016?
Property is a cyclical industry; we support the market’s needs for affordable housing through our attractive pricing points, with 50 percent of 2016’s planned residential launches priced below MYR 500,000 ($122,146). Overall, 89 percent of our planned residential launches are priced below MYR 1m ($244,292), with 68 percent priced below MYR 700,000 ($171,000).
We are planning to further intensify our efforts in the coming months, and we are well positioned to reach a sales target of MYR 2.3bn ($560m) with our upcoming launches in the second half of 2016.
MYR 183.9m
Mah Sing Groups’s net profit in the first six months of 2016
MYR 27.5bn
Its remaining gross development value as of 30 June 2016
How does Mah Sing ensure it has the best minds and skills to stay ahead of economic trends?
Mah Sing is a market-driven developer. We go where the market is, and we strive to customise our product offerings to the needs of the market. Currently, our strategy is to focus on accessible, mass market housing in line with market demand and, as 89 percent of our planned residential launches are under the MYR 1m range and 50 percent are under MYR 500,000 ($122,146), we are primed to capture the market.
We also have a dedicated research team that conducts in-depth studies on what the market needs. The information we gather gives us the ability to identify and set new trends. Our product development team works with both international and local architects to design the product so that it appeals aesthetically and meets the needs of the buyers.
How do you inspire your employees to strive for excellence?
The description of a good leader is to be driven, passionate and disciplined. I have always emphasised to my team that change is constant and openness to change means constantly improving and learning new things.
I am proud to say that these are the traits my team practice. We are able to adapt quickly and constantly innovate our products to meet the market’s needs. At Mah Sing, we understand the significance of human capital to the group: we are committed to nurturing a diverse, versatile and dedicated talent pool for the growth and development of the group.
Various trainings are held to provide a platform for employees to discover and realise their full potential. In 2015, our employees had more than 27,000 training hours – a significant increase from 12,000 hours in 2014. We are also concerned about our team’s wellbeing, health and safety in and outside the workplace. Further to ensuring our workstations are conducive, Mah Sing Sports Club is taking the lead in encouraging a work-life balance with activities such as badminton, fitness classes, Skytrex Adventure and festive celebrations.
As a leader, what have you learned from your employees?
Along the years of building Mah Sing together with my team, we have learnt that life is about continuous learning and improvement. The world is constantly changing and, as a market-driven developer, we need to adapt to and stay ahead of the market. This commitment guides us in everything we do, and we strive to live up to our brand’s promise in building sustainable projects as part of a well-managed company.
What do you see the Mah Sing group achieving in the next 10 years?
I hope to see Mah Sing continue to grow and maintain its stature as one of the top developers in the country. We would like to continue our township development, niche industrial development and strategic commercial and mall development. Southville City is turning into the talk of the town and I hope to see it become the next major township in Malaysia. My ultimate goal is to see Mah Sing recognised as a world-class developer.
China’s aviation and tourism conglomerate HNA has purchased a 25 percent stake in the world’s largest hotel chain, Hilton Worldwide. In a statement released on October 24, the Chinese giant announced it had purchased the stake from Hilton’s biggest shareholder, Blackstone Group, for $6.5bn.
“We are pleased to welcome HNA Group as a long-term investor and strategic partner”, according to Hilton President and Chief Executive Christopher J Nassetta.
The Hilton deal marks HNA’s second hotel investment this year, as it aims to further tap into the profitable Chinese travel market
“We believe this mutually beneficial relationship will open new opportunities for our brands and guests around the world, particularly in light of HNA’s strong position in the fast-growing Chinese travel and tourism market, the largest outbound travel and tourism market in the world.”
As increasing numbers of Chinese citizens are travelling abroad, Chinese companies have been looking to invest in tourism-related industries overseas. The Hilton deal marks HNA’s second hotel investment this year, as it aims to further tap into the profitable Chinese travel market. In April, the conglomerate announced it had agreed to acquire Carlson Hotels for an undisclosed sum, thus expanding its hotel portfolio in Europe, the Middle East and Africa, where Carlson successfully operates.
The deal between HNA and Hilton marks another significant acquisition for China, in what has been a record year of foreign spending for the nation. As growth at home has slowed, Chinese companies have increasingly looked to invest in overseas acquisitions. HNA’s investment in Hilton takes China’s spending on foreign deals in 2016 to $191bn, far surpassing 2015’s record of $105.7bn.
As one of China’s leading aviation and tourism companies, HNA has emerged as one of the nation’s most prominent investors in overseas mergers and acquisitions. According to Reuters, the company has announced around $20bn in foreign deals so far in 2016. Aside from hotel investments, the company has also looked to expand its logistics operations, acquiring the electronics distributor Ingram Micro for $6bn in February of this year.
As HNA continues with its ambitious overseas investment programme, the rapidly expanding company looks set to develop further revenue streams from Chinese tourism. With the conglomerate already generating $30bn in annual revenues, such strategic investments will surely see the tourism giant enjoy continued financial success.
The European insurance industry has been through a challenging few years; pressure is being applied to both the assets insurers manage and their capability to ensure returns on investments. In this difficult environment of negative interest rates and greater customer expectations, insurers are finding they need to innovate in order to survive.
Whereas insurers were once able to count on their cash to be a steady revenue stream, the highly challenging global economic climate has proven to be a risky environment in which to invest. Adding to insurer’s difficulties was the introduction of the European Union’s Solvency II regulations at the beginning of this year. They are a stringent set of rules governing capital requirements and the levels of risk insurers are able to expose themselves to. While designed to give customers extra confidence in insurers and modernise the way regulators supervise the industry, they have made competition a far more challenging task.
It is clear that not all companies will survive the current climate
In order to remain competitive, insurers are finding ways to offer more compelling products that can meet the changing expectations of customers. With Millennials expecting a more immediate and dynamic service from their insurers, some companies are struggling to modernise their offerings. This is a particular challenge for insurers who are still relying on outdated and inefficient data systems. In 2016, modernisation has become the key to survival.
Despite the challenges, the sector is presenting significant opportunities as well. World Finance had the opportunity to speak to Pekka Luukkanen, CEO of Nordea Life Finland, about Finland’s insurance sector, and how the company is taking advantage of digital technologies to stay ahead of competitors.
What are the biggest challenges for the insurance business?
European companies have been struggling with initially low and now negative interest rates for almost eight years. It is clear that not all companies will survive the current climate, especially since forecasts show that no significant changes to interest rates are to be expected in the next few years. The companies that have been unable to adapt in time, or have done the same thing for too long, are now in trouble. Unfortunately, the number of these companies is set to grow in the near future. An alternative scenario is that EU-wide insurance sector regulations will be loosened with the aim of providing relief to some companies. This would not be an easy decision: neither is it a desired development.
In general, it can be said that the prolonged period of low interest rates is making it harder to gain returns in the investment markets, forcing many insurance companies to develop their operations more rapidly than before. Challenges to operations are posed by stricter regulation, which despite its aims does not always improve the protection and service experience of customers, but instead makes operations more complex and increases costs for insurance companies.
In addition, operations are affected by demographic factors, such as an ageing population and longer life expectancies. This will increase indemnity costs for certain types of cover, including serious illness and permanent disability, in risk life assurance policies. Generally speaking, customers changing to doing business digitally will pose obstacles to companies operating legacy IT systems, thereby limiting their competitiveness. This means that those who simplify their operations will have a competitive edge.
What are the biggest opportunities for insurers?
A low rate of risk life assurance uptake, together with the inadequacy of social security will increase demand for the product. This is especially the case in Finland. Moreover, there is still a great need for saving and preparing for retirement, and in this area, the insurance sector will continue to play a key role. Companies with modern IT systems can take advantage of the acceleration of digitalisation in their operations. Insurers will be able to offer better customer experiences by analysing customer needs in more detail than before.
How is it that Nordea Life Finland differs from its competitors?
Nordea Life Finland has modern IT systems and, as the only major operator in Finland, it will have a single core insurance management system in the future. This will give us an overwhelming competitive edge, enabling us to carry out agile system development to reconcile great customer experiences with regulatory requirements. In addition, Nordea Life Finland has the best and most efficient insurance distribution channel, namely Nordea Bank Finland. Nordea Life Finland has also been able to renew its operations far better than its competitors and to adjust its business operations to meet the challenges of the operating environment, an example of which are the effects of Solvency II regulations. The company has also managed to improve the general quality of its operations, including in the European Foundation for Quality Management and ISO 9001, much better than its competitors.
How are you meeting changing customer needs and expectations?
Customer expectations will increasingly focus on the service experience and a customisable service package. Customers are no longer satisfied with just having an insurance product; needs arise after the product has been bought and customers will increasingly emphasise the benefits they gain from their insurance solution. This change is already very clearly visible in how customers do business with us: they want a full-service package that is available at any time, any place. There will no longer be any demand for traditional service concepts in insurance solutions that are not deemed absolutely necessary. In this kind of competition, the winner will be the service provider that is able to not only exceed customer expectations, but to demonstrate clearly to the customers the benefits they gain and, overall, to manage the flow of information available on its clientele as a whole.
How important is digitalisation in doing this?
Digitalisation offers the chance to do business with the insurance company at any time, anywhere. But it also requires simplification of the insurance solutions offered. Services must be extremely easy to use; every click or minute spent on accessing the service package becomes more important from the customer’s point of view. Digitalisation creates the expectation of the possibility for customers to personalise the service experience, which means we are no longer able to serve customers with exactly the same concept, just like many companies have done with traditional service models.
What are the benefits of migrating to a single insurance system?
A single core insurance system provides Nordea Life Finland with a unique competitive edge that enables us to develop our services extremely quickly and nimbly, with a focus on customer experiences. Moreover, a single insurance system will simplify the company’s operations, as every change needs to be implemented only once, unlike in a situation where we have many systems. The existence of a single, modern system also makes digitalisation development easier since it would be extremely difficult and expensive to build new service concepts into the old systems.
Likewise, what are the benefits of automating company processes?
Raising the rate of automation speeds up the handling of simple, high frequency tasks, freeing up employee resources for duties that require thinking and creativity. In addition, automation improves quality by minimising the risk of human error, thus lowering the overall operational risk. Moreover, a higher rate of automation enables us to comply with regulatory requirements without the need for additional resources since, for instance, all the work resulting from reporting requirements does not have to be done manually.
What are your plans for the future?
By pioneering new technologies we can devote more resources to improving the customer experience. We seek growth and are expanding into business areas where we can best take advantage of our strengths. For example, we have recently submitted a licence application to the Finnish Financial Supervisory Authority for establishing a captive non-life company that will complement our current risk insurance offering. The new company, being a subsidiary of Nordea Life Finland, will utilise our newly developed core insurance system. My prediction is that, five years from now, life assurance operations in Finland will look very different from today.
In the future, our company’s goal is to further increase our efforts in boosting growth in risk life assurance and to further develop insurance-linked saving through digital means in order to meet our customers’ changing needs. Our personnel, who are committed to their goals, will play a key role in these efforts. The company’s permanent goal is to continuously improve quality, which will continue to be channelled into great customer experiences.
On October 24, South Korea’s troubled Hanjin Shipping won approval from the Seoul Central District Court to end its operations in Europe. According to Bloomberg, a court spokesman confirmed that the judge overseeing the shipper’s receivership had granted the request as part of the firm’s insolvency process.
The closure procedure, which is set to begin later this week, will shut down all of Hanjin’s existing European units, including its regional headquarters in Germany. Shares in the embattled firm plunged a further 12 percent following the announcement, as investors fear that liquidation may now prove inevitable for the South Korean giant.
Investors fear liquidation may now prove inevitable for the South Korean giant
The shipper’s bankruptcy would be the largest ever liquidation in the container shipping industry, which is currently suffering its worst downturn in six decades. Shipping firms across the globe are struggling to offset sluggish demand and a slowdown in international trade, with several smaller lines having already gone bankrupt.
Hanjin filed for bankruptcy protection in late August, after losing the support of its key lenders. On August 30, banks led by the state-run Korea Development Bank announced they would no longer be giving financial support to the firm, refusing a restructuring plan for Hanjin’s KRW 5.6trn ($5.4bn) debt.
Since entering receivership, Hanjin has been placed under a court order to sell its own ships and return its chartered vessels to their rightful owners. In early October, the troubled shipper began the process of auctioning off its US assets, which temporarily sent shares soaring at the firm. Aside from the sale of container ships, the auction is also set to include Hanjin’s Asia-US route network, with the deadline for bids set for November 7.
In separate negotiations, the shipping giant is also looking to sell its Long Beach Terminal in California to the Geneva-based Mediterranean Shipping Co., as it seeks to pay back its creditors. Last week, the firm announced it would be forced to cut 400 land-based employees in South Korea, or around 60 percent of its 700-person workforce.
Through an extensive programme of cost cutting and restructuring, Hanjin hopes to reposition itself as an intra-Asia operator. In December, the once-profitable shipper will submit a rehabilitation plan to the South Korean Central District Court, which will review Hanjin’s restructuring and then decide whether it should be liquidated or given a chance to survive.
British American Tobacco (BAT) has offered to buy out its US partner, Reynolds American, in a $47bn deal that would create the world’s largest tobacco company by sales. The merger would bring together several of the industry’s best-selling brands, including Camel, Lucky Stripe, Newport and Pall Mall.
The British tobacco giant, which already controls a 42 percent stake in Reynolds, is planning to acquire the remaining 58 percent in a cash-and-stock proposal that values the company’s shares at $56.50. BAT is offering a breakdown of $24.13 in cash and $32.37 in shares, representing a premium of 20 percent over the closing price of Reynolds’ stock on 20 October.
Sales of electronic cigarettes hit $6bn in 2015, and the market is expected to grow exponentially over the
next decade
“We have been a shareholder in Reynolds since its creation in 2004 and have benefitted from its growth in the US market”, BAT’s Chief Executive, Nicandro Durante, said in a statement.
“The proposed merger of our two great companies is the logistical progression of our relationship and offers all shareholders a stake in a stronger, truly global tobacco and next generation products company.”
The proposal, which awaits approval from Reynolds’ board of directors, is expected to generate cost savings of $400m a year and will allow both companies to diversify their sources of profit growth. BAT is also looking to ramp up its manufacturing potential through the included acquisition of Reynolds’ two million sq ft production facility in Tobaccoville, North Carolina.
As smoking rates continue to fall in the developed world, BAT hopes that merging with Reynolds will bolster its presence in the lucrative emerging markets of Africa, South America, Asia and the Middle East, where cigarette sales are rising steadily. If approved, the deal will also further extend BAT’s footprint in the US market, where a wave of mergers and acquisitions has significantly consolidated competition in recent years. In the third quarter of this year, Reynolds held a 34.6 percent of the market share, making it the second-largest US tobacco company behind rival Altria.
The proposed acquisition is the latest in a flurry of consolidation activity in the tobacco industry, as companies attempt to combat declining sales in existing markets by cutting costs though strategic mergers. However, as BAT and Reynolds look to a future in the US tobacco market, product innovation may prove to be the new key to success. Sales of electronic cigarettes hit $6bn in 2015, and the market is expected to grow exponentially over the next decade, reaching a value of over $50bn by 2025.
Southeast Asia has seen rapid development and strong economic growth for several years. At the heart of this growth story has been the rise of Singapore. The city-state – despite being faced with a small domestic market, limited natural resources and high poverty levels when it became independent in 1965 – has managed to build itself a first-world economy.
An underappreciated element of this economic journey has been the integral role small- and medium-sized enterprises (SMEs) have played in both driving Singapore’s continued growth and creating new jobs. SMEs comprise 99 percent of all businesses in Singapore and provide employment for 70 percent of its growing workforce. Together, they contribute nearly half of Singapore’s GDP. These figures show the fundamental importance of SMEs to the national business context and Singapore’s ongoing prosperity, but also emphasise the need to ensure SMEs remain robust and insulated against the kinds of risks inherent in any modern operating environment.
Despite this, however, it seems many SMEs remain dangerously underprepared for dealing with common business problems – risks that, if continually ignored or underestimated, could threaten their long-term survival. This is compounded by the increasing macroeconomic uncertainty confronting Singapore, including factors such as slowing growth in China, fluctuating oil prices and, closer to home, local firms having to operate with evolving manpower challenges due to an ageing workforce.
Necessity, not commodity
Even in the face of this uncertainty, comprehensive research conducted recently by QBE Singapore, based on the results of a survey conducted on local SMEs, showed that as many as one in seven smaller Singaporean SMEs – that is, firms with between five and 20 staff members or revenue of less than SGD 1m ($740,000) – have no business insurance at all. Across Singapore’s wider SME landscape, this suggests 21,000 firms are potentially taking unnecessary risks.
Ignoring inherent dangers by approaching insurance as a one-size-fits-all commodity is not an option
Some might suggest indifference is to blame, or that perhaps smaller companies feel their risk exposure is too insignificant to warrant more comprehensive insurance. These ideas may be partly true, but the results showed a more worrying reality about perceptions of insurance itself. It emerged SMEs view insurance products (beyond the minimum, mandatory coverage) as mere commodities, rather than necessities for their business. As many as 53 percent of respondents suggested insurance was low on their priority list, while 56 percent believe that minimum cover for their business was sufficient and additional insurance was not essential.
We know, however, that this is not the case. Taking out a minor, additional policy to further protect a business can reap huge dividends and ensure longer-term survival. For example, a client of QBE in Singapore, paying a premium of SGD 1,240 ($922) per month, saw its storage facility burned down in a local factory building. The fire destroyed all stock, furniture, fixtures, office equipment, office contents, factory improvements and machinery. Simply for being prepared and protected against this risk, the company received a claim of SGD 20.6m ($15.33m).
As illustrated by this example, the value of the insurance process in identifying and financially protecting against risks cannot be underestimated. Agents and brokers can play an important role within this context, providing bespoke reviews of SMEs’ vulnerabilities and guiding them through the process of dealing with an accident or issue.
This approach is strongly valued by our customers, with our research highlighting the factors SMEs most appreciate when working with agents. Specifically, they seek out agents that can help save them time by fully answering and dealing with questions, while prioritising a pain-free and efficient process that does not take them away from running their business. These are extremely important considerations, given the leaner operating structures and time constraints of many smaller companies.
We also found SMEs value the knowledge possessed by the respective entity, agent or broker they are dealing with and the professional recommendations they make. That is to say, they do not just want a policy with bottom-dollar implications, but they also want a provider who can help them deal with a problem when it arises.
Of the companies surveyed, however, 64 percent of smaller SMEs and 51 percent of larger SMEs – that is, SMEs with between 21 and 200 employees or revenues of up to SGD 100m ($74.4m) – admitted the policies provided by different insurers all look the same to them. These statistics are significant because they highlight the lack of awareness concerning the different insurance products on the market, thus illustrating that companies are failing to take into account how more specific offerings best fit their individual needs.
Work to be done
Given the strong ecosystem of agents and brokers and their ability to distil and explain important insurance considerations, why are so many SMEs still underinsured and failing to understand what is available on the market? Part of the reason may be the prevailing and harmful view that cost is the most important factor in purchasing insurance, with almost two-thirds of all SMEs we surveyed expressing this view.
It might also have something to do with the different operating realities companies of varying sizes work with. Smaller SMEs have less concern for business risk than larger ones, and therefore less appreciation for insurance decisions or greater protection. This also stems from the fact smaller SMEs are often more focused on immediate-term considerations, such as retaining customers and reducing costs, compared to the forward-looking and strategic considerations often made by the bigger players.
Nevertheless, failing to make informed insurance decisions has the potential to hinder business continuity and future success. Every company must understand not only its obligation to itself and its employees, but also to Singapore at large – whether it be a small hi-tech parts manufacturer better protecting its equipment against damage or theft, a consultancy insuring itself against the loss incurred due to acting on poor advice, or a retail-focused company guarding against liability from customers who purchase their products. Ignoring inherent dangers by approaching insurance as a one-size-fits-all commodity is not an option.
Our advice in response to this dynamic is simple: first, all SMEs need to undertake a proper assessment of their businesses, making their brokers or agent – and even their insurers – work on behalf of their interests. From there, they must seriously consider whether adequate protection is in place – and whether ‘adequate’ protection alone is really enough to ensure their long-term survival.
While these findings are specific to Singapore, it is possible other markets may face similar issues as well. Of course, every country has its own regulations surrounding insurance and minimum cover, but the true value of preparation may not be widely comprehended among the SMEs vital to any modern financial ecosystem. While these organisations remain inwardly focused on their own profitability, financial survival through difficult economic times remains an ongoing concern that can only be mitigated through comprehensive risk management.
Ensuring future prosperity
Looking more broadly to the general business context in Singapore and beyond insurance-specific considerations, our research also uncovered the specific business issues that concern most local SMEs. Chief among them were talent-related issues in the form of staff acquisition, training and retention, which are vital issues, as SMEs employ over two-thirds of working Singaporeans. This is also an understandable concern given how employee turnover typically leads to increased training expenses, recruitment costs and the loss of company-specific knowledge.
The new ASEAN Economic Community will have further ramifications for local SMEs, particularly from a talent standpoint. SMEs are not only integral to the economic development and growth of Singapore, but also to the other ASEAN member states, accounting for between 88.8 and 99.9 percent of all companies in these countries. We expect sharing of talent and greater cooperation across borders to occur in the future.
However, a positive financial outlook moving forwards countered these concerns. Of the firms surveyed, 72 percent said they either expected sales to grow by the end of 2016 or to at least hold their financial position (that is, 28 percent expect growth and 44 percent expect to remain the same), while 40 percent expected Singapore’s general economic outlook to improve.
Overall, Singapore clearly remains an opportunity-rich environment in which SMEs can and will thrive – but with these opportunities also come significant threats. We see a need for increased awareness among local companies of the consequences of being underinsured and the benefits of protection – specifically, customised protection that supports specific needs. Education as to the operational freedom a comprehensive insurance plan offers, and better engagement by SMEs with these plans, will improve their prospects and allow business insurance to be the glue that helps hold the economy together.
The Chinese economy grew at a rate of 6.7 percent in Q3 2016, in line with the government’s growth target of between 6.5 and seven percent for the year. The figure matches that of the two previous quarters, signalling that growth is stabilising for the world’s second largest economy.
Despite this year’s better-than-expected performance, it is likely that Chinese growth for 2016 will still be weaker than that of 2015, which saw the nation’s slowest growth in 25 years.
National debt currently stands at around 170 percent of GDP, while Chinese businesses have amassed $18trn in debt
Nonetheless, the steady GDP growth has eased investors’ fears over a potentially sharp slowdown in the Chinese economy, following a period of intense stock market volatility earlier in the year. In January, Chinese share trading was temporarily halted after the market dramatically plunged, leading global investors to question their confidence in China’s market regulator. Concerns over the nation’s currency have also lingered since China’s dramatic U-turn in monetary policy in the summer of 2015. In an unexpected move, Beijing chose to devalue its currency and allow it to weaken, as it looked to recover from its lower-than-expected export figures for the year.
Releasing the new data on October 19, China’s National Bureau of Statistics said the economy had faced “complicated and challenging domestic and external conditions” in the first three quarters of the year. Despite such challenges, impressive growth in retail sales and investment, which rose by 10.4 and 8.2 percent respectively, have bolstered Chinese GDP. Real estate prices have continued to soar, while property sales increased by almost 27 percent between January and September.
This stable yet slowing rate of GDP growth has been described by the Chinese National Bureau of Statistics as “the new normal”, while new economic guidelines focus on “making progress while maintaining stability”.
Although the latest official figures reveal a better-than-anticipated economic performance, debt still remains a pressing concern for the Chinese economy. National debt currently stands at around 170 percent of GDP, while Chinese businesses have amassed $18trn in debt.
As the world’s second biggest economy and the second largest importer of goods, Chinese growth has a significant impact on worldwide markets. The nation’s economic slowdown has already contributed to a drop in crude oil prices, and its continued muted growth is set to further impact the pricing of commodities across the globe.
Now the highly regarded CEO of PepsiCo, Indra Nooyi was born to a Tamil-speaking family in Madras (now Chennai) in India. Academically gifted, she was awarded a bachelor’s degree in Physics, Chemistry and Mathematics from Madras Christian College in 1974, which she followed up with an MBA from the Indian Institute of Management in Calcutta.
Nooyi began her career in India, holding several product management positions, firstly at Johnson & Johnson and then with textile manufacturing firm Mettur Beardsell, before moving to the US. There she returned to academia, gaining a master’s degree in Public and Private Management from the Yale School of Management. After graduating from Yale in 1980, Nooyi joined the Boston Consulting Group, before assuming senior managerial positions at Motorola and Asea Brown Boveri.
Nooyi’s influence is far-reaching, with her determination and perfectionism pushing her further through the industry than many expected
Nooyi joined PepsiCo in 1994 and had an almost immediate influence on the company’s strategic direction. An astute tactician, Nooyi oversaw a number of key restructurings during her first years with the company: in 1997, Pepsi elected to spin off its Pizza Hut, KFC and Taco Bell restaurants for $4.5bn. The company used the proceeds of the sale to slash its $8.5bn debt mountain by more than half, a move that also allowed the business to accelerate its share buyback strategy, giving it the financial flex to invest in further business development.
The following year, Nooyi played a key role in Pepsi’s acquisition of Tropicana. The $3.3bn deal was particularly significant for the company as it placed Pepsi in direct competition with rival Coca-Cola – the owner of soft beverage company Minute Maid – in the non-fizzy drinks market.
Further to this, in 2000 Pepsi made another strategic acquisition when it bought Quaker Oats. The $13.4bn price tag may have raised the eyebrows of some analysts, but the deal handed Pepsi control of Quaker’s popular and lucrative sports drink brand Gatorade.
Indra Nooyi first joined PepsiCo in 1994
A healthier outlook
One of Nooyi’s most controversial initiatives has been to redirect Pepsi’s considerable corporate spend away from junk foods and into healthier alternatives. To this end she reclassified Pepsi’s wide-ranging products into three categories, designed to give customers more information about the foods they consume: ‘fun for you’ (such as potato chips and regular soda), ‘better for you’ (diet or low-fat versions of snacks and fizzy drinks), and ‘good for you’ (for example, the recently acquired Quaker Oats oatmeal).
Dietary balance has been a key feature of Nooyi’s strategy since day one. In 2010, she declared that Pepsi needed to be part of the solution to “one of the world’s biggest public health challenges – a challenge fundamentally linked to our industry: obesity”. Under her steer, Pepsi has reduced the portion sizes of its ‘fun for you’ products and has delivered a marketing campaign to ensure its ‘diet’ products are promoted as aspirationally as its full-sugar equivalents. For example, Gatorade is now marketed specifically towards athletes, rather than being advertised as an everyday recreational beverage.
Today, the company has a diversified portfolio of products (see Fig 1). It still sells sugary drinks and potato chips, but it also has Tropicana, Naked Juice and Izze supporting the healthier end of its range. Since her inauguration at the company, Nooyi has also set Pepsi on a drive to reduce the salt, sugar and fat contents in its core products, while at the same time ramping up the production of its ‘good for you’ offerings, largely in response to the demands of modern society.
Design and innovation
One of Nooyi’s most visible achievements came in the complete overhaul of Pepsi’s branding. For this mammoth task, she recruited Italian design expert Mauro Porcini with the brief of reinvigorating the product design and logo. Porcini, having previously done impressive work to transform the image of 3M, got to work on reinventing one of the world’s most recognisable brands, and today Pepsi is pushing the design through the entire system – from product creation to packaging and labelling, to how a product looks on the shelf and how Pepsi’s consumers will interact with it.
Rather than focusing simply on the face of the product, Nooyi initiated a completely new approach to marketing. For instance, one of the project’s new creations is the Pepsi Spire, a unique touchscreen fountain vending machine. While competitors’ dispensing machines have focused on adding a few more buttons and different combinations of flavours, Pepsi has created a fundamentally different interaction between consumer and machine: the Spire is essentially a large iPad that communicates with the user, inviting them to interact with it. It tracks the customer’s habits, so that when purchasers swipe their ID, the machine reminds them of the flavour combinations they tried last time and suggests new ones, while at the same time displaying screenshots of the product being created.
Nooyi’s innovative ideas and overall success at the helm of one of the world’s largest food and beverage producers have earned her a wealth of awards. Every year between 2007 and 2014, Forbes listed her in its World’s 100 Most Powerful Women, while Fortune named her number one on its annual ranking of Most Powerful Women in Business for 2006-10. In 2008, US News & World Report named Nooyi one of America’s Best Leaders. Clearly Nooyi’s influence is far-reaching, with her determination and perfectionism pushing her further through the industry than many expected upon her inauguration. In 2015, she declared: “We ought to keep pushing the boundaries to get to flawless execution. Flawless is the ultimate goal.” It is an ideal that has seen her welcome success after success.
Global acclaim
Nooyi’s strategy to expand Pepsi’s operations into other areas has also resulted in a groundbreaking deal struck in Myanmar, where negotiations are now on track to build a separate plant and develop an agricultural area. This specialised site will produce Pepsi products to cater for the Myanmarese market, as well as create a wealth of job opportunities. Having visited the region following the World Economic Forum for East Asia meeting in 2013, she is said to have described the opportunity as “a story that is just beginning to unfold”.
Much of Nooyi’s current international strategy involves reaching out to emerging markets’ rapidly expanding middle classes. Her cross-category in-store programmes are designed to ensure the frequent purchase of Pepsi’s products in these markets; a demographic that accounts for some 35 percent of sales in emerging and developing regions.
Soda consumers are increasingly turning to alternatives they perceive as being healthier, such as energy drinks, bottled water and coffee – all of which have seen a spike in sales
In 2008, Nooyi was elected Chair of the US India Business Council. The council’s remit is to create an inclusive bilateral trade environment between India and the US by serving as the voice of the industry, linking governments to businesses and supporting long-term commercial partnerships that will nurture the spirit of entrepreneurship, create jobs and successfully contribute to the global economy. As recognition of her work on the council, Nooyi was presented with the 2015 Global Leadership Award for her commitment to driving a more inclusive global economy and encouraging the creation of more roles for female leaders.
A testament to Nooyi’s vision
PepsiCo is currently the second-largest food and beverage company in the world, today boasting approximately $63bn in revenues. Some have argued this achievement is largely thanks to Nooyi, who has consistently taken the company in a profit-making direction (see Fig 2).
The fact PepsiCo retains its position as the market leader for global salty snack sales – and second position in the sale of beverages – is testament to the success of Nooyi’s ongoing marketing and positional strategies. Analysts have predicted Pepsi could soon also become the market leader in terms of beverages, thanks in large part to Nooyi’s plans to enter the booming health food market with an extended range of juices, sports drinks and reduced fat and sugar carbonated beverages. While certainly lucrative, this move into a healthier market is a far cry from PepsiCo’s roots.
The company as we know it today was formed in 1965 following a merger between Pepsi-Cola Company and Frito-Lay, Inc. At that time, Pepsi-Cola Company was manufacturing Pepsi-Cola, Diet Pepsi and Mountain Dew drinks. Frito-Lay’s products included Fritos corn chips, Lay’s potato chips, Cheetos, Ruffles potato chips and Rold Gold pretzels.
In 1998, the company bought Tropicana, and in 2001 it acquired Quaker Oats – as mentioned earlier, adding Gatorade to its product portfolio in the process. At the time, Gatorade held a staggering 83.6 percent of the US retail market for sports drinks and was the world leader in its sector, with annual sales of approximately $2bn. The combination of these companies has made Pepsi a widely diversified consumer staples firm.
Challenges and successes
One of the most challenging periods faced by Pepsi came in the mid-1990s, when the company struggled against major problems in its overseas beverages operations. These included vast losses that were posted by its large Latin American bottler and the defection of its Venezuelan partner to Coca-Cola.
In 1996, Pepsi was forced to swallow a special charge of $576m in relation to international write-offs and restructurings, while its international arm posted a huge operating loss of $846m. Among the moves initiated to turn around its international beverage operations was a drive to increase emphasis on emerging markets, including India, China, eastern Europe and Russia. Cola drinks had a less entrenched reputation in these areas, and so the opportunity to focus more on Pepsi or franchise-owned bottling operations – rather than relying on securing joint ventures – was seen as a lucrative expansion opportunity for the company.
More recently, PepsiCo has enjoyed a greater number of successes than failures. In 2015, for the first time in its history, Pepsi outsold Diet Coke to become the second most popular carbonated drink in the US. Regular Coke maintained its long-standing top position, but Diet Coke’s sales fell by 6.6 percent as consumers began to shun ‘diet’ products laced with artificial sweeteners. However, by the same hand, Diet Pepsi’s 2015 sales also fell by more than five percent, according to figures published by the trade publication Beverage Digest.
In response to slumping sales, Pepsi spent two years surveying consumers in order to formulate a new Diet Pepsi recipe. In 2015, Pepsi removed aspartame from its Diet Pepsi drink entirely in an attempt to boost sales.
However, the move was short-lived: one year later, Pepsi announced it would be reintroducing aspartame to Diet Pepsi, largely because a considerable portion of consumers did not like the taste of the new and improved version of the product. During the aspartame-free trial at the start of this year, US retail sales of Diet Pepsi fell 10.6 percent in volume terms in a single quarter, while its share of the soda market fell 0.4 percentage points to 4.1 percent, according to Beverage Digest.
However, Pepsi has been savvy in the way it has brought aspartame back into the fold. From September this year, drinkers were given a choice over which of two versions of Diet Pepsi they would prefer: one with aspartame – sold in light blue packaging and labelled ‘classic sweetener blend’ – and another containing sucralose, an artificial sweetener better known as Splenda, which will be sold in Diet Pepsi’s recognisable silver packaging. The company will also be rebranding Pepsi Max as Pepsi Zero Sugar.
US sales of full-calorie soft drinks have declined by more than 25 percent in the last two decades: soda consumption peaked between the early 1960s and the late 1990s, but is now in a sustained decline. In 2014, for the 10th consecutive year, consumption of soda fell by 0.9 percent in the US – Pepsi’s largest market (see Fig 3). Traditional soda consumers are increasingly turning to alternatives they perceive as being healthier, such as energy drinks, bottled water and coffee – all of which have seen a spike in sales in recent years. It is this trend that has led PepsiCo down its new path of focusing on healthier food and beverages in place of previous consumer favourites.
Performance with purpose
In 2015, the company slashed the overall water use in its operations by about 3.2 billion litres in a drive towards improved water conservation. In doing so, it has saved more than $80m in production costs. Between 2011 and 2015, it reduced its water use per unit of production by 26 percent, exceeding its 20 percent goal. These actions were part of Pepsi’s broader sustainability agenda, which has delivered more than $600m in cost savings in the last five years through water, energy, packaging and waste reduction initiatives.
The firm has also partnered with non-profit organisations to provide safe water access to over nine million people in less affluent nations since 2006, exceeding its original goal of six million people by the end of 2015.
Pepsi has gone to great lengths to be seen as a company with a social conscience. Most visibly, in 2010 it announced that, for the first time in 23 years, it would not have any advertisements during the Super Bowl. Instead, the company spent its $20m advertising budget on a social media campaign branded the Pepsi Refresh Project. This was a seismic move for Pepsi, whose partnership with the Super Bowl had seen it spend more than $142m on advertisements over the course of the previous decade.
Under the Refresh campaign, customers submitted their ideas to Pepsi for ways to refresh their communities, with the proclaimed aim of ‘making the world a better place’. Pepsi then funded the projects that received the most votes. To date, more than $20m has been distributed across worthy causes including health, arts and culture, food and shelter, the planet, neighbourhoods and education.
Refresh was a huge success for Pepsi: according to feedback, consumers felt Pepsi was a brand that cared about the community. Moreover – and perhaps more importantly for its continued longevity and success – they felt Pepsi was a forward-thinking, innovative brand – something that Nooyi has pushed for since day one at the company’s helm.
On October 14, SoftBank and Saudi Arabia’s Public Investment Fund announced a new partnership, which will create a new tech fund. The SoftBank Vision Fund, which is set to be one of the world’s biggest private equity funds, aims to invest up to $100bn in tech companies worldwide.
The new tech fund, which will be based in the UK, will receive approximately $25bn from SoftBank and $45bn from Saudi Arabia’s sovereign wealth fund over the next five years.
“With the establishment of the SoftBank Vision Fund, we will be able to step up investments in technology companies globally”, said Masayoshi Son, Chairman and Chief Executive of SoftBank Group.
Saudi Arabia is increasingly looking to move away from
an economic overreliance
on crude
“Over the next decade, the SoftBank Vision Fund will be the biggest investor in the technology sector. We will further accelerate the ‘information revolution’ by contributing to its development.”
The deal marks the latest in a line of tech investments for SoftBank and Saudi Arabia’s Public Investment Fund. In July, SoftBank completed the world’s largest acquisition of a European technology company, purchasing microchip-designer ARM Holdings for a record $32bn. Expanding its tech ambitions further, the Japanese telecommunications giant has also recently invested in the US-based biotech firm Zymergen. Earlier this year, Saudi Arabia’s sovereign wealth fund injected $3.5bn into the ride-hailing firm Uber in a bid to diversify its holdings.
As oil prices remain low, Saudi Arabia is increasingly looking to move away from an economic overreliance on crude, with its Public Investment Fund thus investing in profitable non-oil industries. This strategic investment was outlined thoroughly in the Gulf nation’s 2030 economic plan, revealed earlier this year.
As part of its Vision 2030, Saudi Arabia intends to create an ambitious $2trn sovereign wealth fund in order to inject money into new assets, such as the rapidly evolving tech sector.
“The Public Investment Fund is focused on achieving attractive long-term financial returns from its investments at home and abroad, as well as supporting the kingdom’s Vision 2030 strategy to develop a diversified economy”, Deputy Crown Prince Mohammed Bin Salman said in a statement.
On October 11, the British High Court ruled against the UK’s tax authority, HM Revenue & Customs (HMRC), with regards to its treatment of creditors’ interest payments following the collapse of Lehman Brothers bank in 2008. According to the Financial Times, as much as £1.2bn ($1.4bn) in taxes is now at risk after the court ruled in favour of PricewaterhouseCoopers (PwC), the European administrators of the investment bank.
The ruling means that those companies owed money by the failed bank will no longer be directly required to pay taxes on the interest that resulted from the full payment of £5bn ($6.1bn) made by Lehman Brothers International Europe’s creditors.
Those companies owed money by the failed bank will no longer be directly required to pay taxes on the interest
The dispute, which was regarding the tax treatment of the bulk of a surplus (to the value of £6.6-7.8bn), ensued over whether a ‘yearly interest’ should be applied. This is usually the case for interest payments of long-term loans from which tax is deducted at source. Given the size of the sum, HMRC sought an appeal, which has now been granted.
Russell Downs, Joint Administrator of Lehman Brothers International Europe, said: “We would hope and expect to work constructively with HMRC to develop an appropriate interim arrangement so that creditors do not face any unnecessary delays from the appeal as the joint administrators’ plan for a distribution of interest next year takes shape.”
The court’s ruling is significant because the tax in question will not be deducted at source, despite this being the norm for HMRC when it comes to non-residents. The ruling supported the defence’s argument, which stated that it is simply not possible to determine how much tax was due, as the number of non-residents that will receive a payment is unknown. HRMC maintained that the total tax “potentially runs up to £1.2bn”.
In a small win for HRMC, the court’s decision does not relate to any tax that has already been collected, meaning that rebates are not expected.
Justice Hildyard, the judge overseeing the case, stated that he was unconvinced by HRMC’s arguments about the nature of the interest payments, and that the concept of ‘yearly interest’ remains elusive.
Also considered were the concerns of administrators, including fears that they may come under huge pressure to make payments before the first year after administration is complete. This outcome may lead some creditors to receive interest payments without tax deductions, which Hildyard said were “without merit”.
An appeal is already in the pipeline, but given Hildyard’s hard stance on HRMC and his criticism of the organisation, it seems unlikely that his ruling will be overturned.
On October 11, General Electric (GE) announced it had acquired Denmark’s LM Wind Power for $1.65bn, as the conglomerate seeks to establish itself as a world leader in the rapidly expanding renewable energies market.
LM Wind Power is one of the world’s largest producers of wind turbine blades, supplying approximately 50 percent of all blades used in offshore wind farms on turbines of over 5MW. The deal will allow GE’s renewable energy business to handle the design and manufacture of wind turbine blades in-house.
“This deal will merge the speed and focus of LM Wind Power’s entrepreneurial culture with GE’s world-class engineering and operational capabilities”, said LM Wind Power CEO, Marc de Jong.
The billion-dollar deal marks the latest move in GE’s ongoing green energy drive
“Our two organisations are highly complementary, and the transaction positions us well to respond faster to customer needs and enhance performance of wind turbines to ultimately reduce the cost of energy.”
Under the terms of the deal, GE will operate LM Wind Power as a standalone unit with the aim of encouraging its existing sales to the wind turbine industry, while attempting to expand on LM’s established working relationships. While the acquisition is subject to regulator approval, GE anticipates that the transaction will be finalised in the first half of 2017.
The billion-dollar deal marks the latest move in GE’s ongoing green energy drive. Last year, the conglomerate created a separate division for its renewable energy business in order to focus on developing advanced technology for use in wind, hydro and solar power. Since its inception, GE’s green energy unit has installed over 30,000 wind turbines worldwide, while its hydro generators and turbines account for more than 25 percent of global installed hydroelectric capacity.
In June of this year, GE formed part of a group of powerful energy companies that jointly pledged to cut the cost of offshore wind farms to €80 per megawatt hour by 2025. As volumes of wind farms increase, the cost of producing wind energy has begun to fall rapidly, and is expected to be cheaper than both coal and gas by 2027, according to the Bloomberg New Energy Finance research group. With this new deal promising to cut costs further, GE’s profitable renewable energies business looks set to go from strength to strength.
Rather than focusing simply on the face of the product, Nooyi initiated a completely new approach to marketing. For instance, one of the project’s new creations is the Pepsi Spire, a unique touchscreen fountain vending machine. While competitors’ dispensing machines have focused on adding a few more buttons and different combinations of flavours, Pepsi has created a fundamentally different interaction between consumer and machine: the Spire is essentially a large iPad that communicates with the user, inviting them to interact with it. It tracks the customer’s habits, so that when purchasers swipe their ID, the machine reminds them of the flavour combinations they tried last time and suggests new ones, while at the same time displaying screenshots of the product being created.
In 1996, Pepsi was forced to swallow a special charge of $576m in relation to international write-offs and restructurings, while its international arm posted a huge operating loss of $846m. Among the moves initiated to turn around its international beverage operations was a drive to increase emphasis on emerging markets, including India, China, eastern Europe and Russia. Cola drinks had a less entrenched reputation in these areas, and so the opportunity to focus more on Pepsi or franchise-owned bottling operations – rather than relying on securing joint ventures – was seen as a lucrative expansion opportunity for the company.
US sales of full-calorie soft drinks have declined by more than 25 percent in the last two decades: soda consumption peaked between the early 1960s and the late 1990s, but is now in a sustained decline. In 2014, for the 10th consecutive year, consumption of soda fell by 0.9 percent in the US – Pepsi’s largest market (see Fig 3). Traditional soda consumers are increasingly turning to alternatives they perceive as being healthier, such as energy drinks, bottled water and coffee – all of which have seen a spike in sales in recent years. It is this trend that has led PepsiCo down its new path of focusing on healthier food and beverages in place of previous consumer favourites.
