Please take a moment to provide us with some feedback on how we can add value to your research process going forward. The survey should only take a few minutes to complete.

To learn more about how we can help with your investment idea generation and due diligence needs, contact me directly at the email address or phone number below.

All the best to you and yours for the holidays!

Kate Horn // Director // kate.horn@foglamp.org

Direct: +1 914.682.4127 // Cell: +1 914.806.5285

www.foglamp.org

In this issue

SEND US YOUR FEEDBACK!

FOGLAMP INSIGHT: South African Mining

FOGLAMP SERVICE: Foglamp Market Updates

CONTRIBUTOR PROFILE: Teams on the Ground in Indonesia

FOGLAMP INSIGHT

Labor Unrest in South Africa: Effects on Political Stability

In the wake of the recent labor unrest across the South African mining industry, Foglamp conducted research on the political connections of key mining companies to understand the influence that they might have on company activities and profitability going forward.

The following results were obtained through interviews with industry experts, including former company employees, competitor employees, and affiliated academics and lawyers. Interviews focused on two major players: Anglo-American Platinum Ltd. (AMS: SJ) and Kumba Iron Ore Ltd. (KIO:SJ).

Background: Mining in South Africa

South Africa’s mineral endowment is estimated to be the world’s largest. Over the years, the South African mining industry’s direct contribution to the country’s GDP has decreased substantially (it is currently less than 5%) but the industry still accounts for almost 60% of the country’s export revenue, as well as the direct employment of about half a million people.

The decline in the price of platinum in early 2012 greatly impacted the local mining industry; many mining companies, including Anglo American Platinum (Amplats), reduced their capital expenditure and numerous mine workers lost their jobs. Strikes ensued that were said to be driven by a combination of union rivalry, wage dissatisfaction and police misconduct. Helping to fuel the fire is the government’s black economic empowerment (“BEE”) policy, an attempt to de-racialize the economy and the industry in particualr, but has said to have enriched only a well-connected few.

Anglo American Platinum (Amplats)

On August 16, 2012, a protest by miners at the Lonmin Marikana platinum mine (situated ~100km northwest of Johannesburg) ended in a hail of police gunfire and resulted in the death of 34 miners. It has since been dubbed “the Marikana Massacre” and has prompted a judicial inquiry by the government.

Ultimately, the Marikana unrest stemmed from a turf war in the platinum sector between the dominant National Union of Mineworkers (NUM) and the Association of Mineworkers and Construction Union (AMCU).

About 80,000 mineworkers, representing 16% of South Africa’s mining workforce, are currently on strike across South Africa. Analysts say the Marikana strike may have motivated other mineworkers to strike because the Marikana miners eventually succeeded in obtaining a 22% percent pay raise.

Political Connections

Many of the AMCU-affiliated miners accuse the NUM of caring more about its political connections to the ruling party – the African National Congress (ANC) – than about the plight of workers. “The NUM is all about politics. They have forgotten about the man in the mine shaft,” said Lazarus Letsoele, one of the striking miners at the Lonmin Marikana mine.

AMC Leader, President Zuma, is close to the NUM – his right hand man, Secretary General Gwede Mantashe, is a former NUM leader. As Zuma is seeking re-election next month, he is said to be reassuring investors that their money will be safe despite the unrest.

An affiliated colleague of an Amplats competitor and shareholder of a listed platinum mine said all listed mining houses have some non-executive directors with current and/or past political ties. One executive of a mine partnered with Amplats revealed that Mohammed Valli Moosa sits on the board of Amplats and is connected to the ANC. Moosa is also the former Deputy Minister for Provincial and Constitutional Affairs.

Effects on Financials

A former marketing managing executive of Kumba Iron Ore told Foglamp that the strikes will not have a major affect on Kumba’s financials or profitability because strikes are not new to the company. He added that it would also not affect Kumba’s relationships with suppliers because they are long established international relationships.

According to an executive of an Amplats partner company, it would not be surprising for Amplats to shut down some of its mines in the near term, which would have a clear negative affect on their financials – “No mining, no revenue”. However, he told Foglamp that Amplats is the biggest primary producer of platinum group metals, contributing 40% of the world’s mined platinum, and as a result, they have a reputation that will retain business. In addition, he noted that things will at least remain steady for the next month or so as President Zuma ensure it so as to avoid upsetting the powerful labor union voting block that is anticipated to support him in next month’s election.

The Way Forward

Overall, many experts are saying that the mining strikes in South Africa have peaked. Moreover, the consensus seems to be that the industry will keep stable for the next few months. On the other hand, this round of labor unrest managed to reduce output by nearly 50%, so the stir it created is not to be ignored. Furthermore, the ANC connections of key mining companys and their links to retaining shorterm stablility, provide reasons for caution in the medium term.

FOGLAMP SERVICE

Foglamp Market Updates

Is there a research topic or investment idea that you need in-country assistance fleshing out?  Is the outcome of an upcoming political election or regulatory event  important to your decision making process?

In addition to providing memos, surveys and other deliverables, our on the ground teams can keep you updated with data and information from in-country sources on a regular basis to help you stay informed about companies, country regulation, political risk and other issues of your choosing.  In line with our mission to provide clients with on-demand, customizable in-country research, our regular “Foglamp Market Updates” help investors, consultants and managers get a snapshot and better understand specific market realities.

CONTRIBUTOR PROFILE

Our Teams on the Ground in Indonesia

This contributor is an independent consultant and researcher based in Bandung, Indonesia. She is fluent in Sundanese, Indonesian, and English and has helped Foglamp on projects ranging from healthcare to education to mining for our clients.  We have worked with this contributor numerous times since 2008 and have relied on her contacts and research abilities to source actionable information throughout the region.

Feel free to forward this newsletter to any colleagues you think might be interested in receiving it.  We also appreciate your privacy, so please unsubscribe at the bottom of this newsletter if you would rather not hear from us.

Enjoy your summer!

Kate Horn // Director // kate.horn@foglamp.org

Direct: +1 914.682.4127 // Cell: +1 914.806.5285

www.foglamp.org

In this issue

FOGLAMP INSIGHT: E-Commerce Logistics in China

FOGLAMP SERVICE: Foglamp Market Updates

CONTRIBUTOR PROFILE: Teams on the Ground in Brazil

FOGLAMP INSIGHT

E-Commerce Logistics in China

The Takeaway

It has become clear to Chinese e-commerce companies that investing in self-built logistics systems may be the only way to overcome commonly faced logistical constraints. Key players have begun acquiring land, trucks, warehouses and dispatching points. Many are investing in national and regional distribution centers and a few are also establishing last mile delivery points. Key e-commerce companies are targeting Tier 1 cities, and many are set to expand into Tier 2 and 3 cities. At this rate, expect to see further investment in logistics systems by e-commerce companies looking to be competitive in China.

With the recent explosive growth in China’s e-commerce industry, many within the industry are paying close attention to logistical needs, including everything from small rented warehouses to large-scale logistics centers and self-owned dispatching systems. Amazon China, Jingdong (360buy.com), Alibaba (Tmall.com and Taobao.com), Dangdang.com, Vancl.com and Suning.com are running their own logistics systems. Other smaller online retailers, such as Xiu.com and Masa Maso, are also planning to build self-owned logistic warehouses to keep up with near term expectations of rapid growth.

The inability of the logistics industry to keep pace with the changing environment has led many e-commerce companies in China to invest heavily in self-built logistics. The CEO of Jingdong Mall (360buy.com), Liu Dongqiang, said that he initially didn’t want to get involved in logistics but had to because he couldn’t find a single logistics company that could deal with Jingdong’s entire dispatching service. According to an investment partner of Jiapin.com: ”The advantages of investing in self-built logistics for e-commerce companies in China are threefold: first, it’s faster than using a third-party courier company; second, Chinese consumers prefer to pay for products when they receive them, making a self-built logistics system more convenient to collect money; third, service quality control is easier to manage than dealing with third-party companies. The major drawback of a self-built logistics system, however, is that is requires a large investment for the acquisition of land and trucks, as well as the construction of operating units.”

Sources told Foglamp contributors that due to the rising costs of employing third-party logistics companies, companies that pursue self-built logistics can reduce costs by 30 to 40%.  We expect to see further investment in logistics systems by any e-commerce company looking to be competitive in China, not only in Tier 1 cities, but in Tier 2 and 3 cities as well.

For specific information on investment plans of key players in the industry, jump to the detailed report below.  If you would like to know more on this topic or a specific topic of your interest, please get in touch with us at Foglamp.

FOGLAMP SERVICE

Foglamp Market Updates

Is there a research topic or investment idea that you need in-country assistance fleshing out?  Is the outcome of an upcoming political election or regulatory event  important to your decision making process?

In addition to providing memos, surveys and other deliverables, our on the ground teams can keep you updated with data and information from in-country sources on a regular basis to help you stay informed about companies, country regulation, political risk and other issues of your choosing.  In line with our mission to provide clients with on-demand, customizable in-country research, our regular “Foglamp Market Updates” help investors, consultants and managers get a snapshot and better understand specific market realities.

CONTRIBUTOR PROFILE

Teams on the Ground in Brazil

This contributor is a freelance reporter based in São Paulo, Brazil.  Since 2007, he has worked with international media on many stories involving Brazilian politics and business.  Foglamp has relied on his contacts and expertise for numerous projects on everything from consumer goods to tech/telecom, and private education.  His vast experience in investigative journalism has made him invaluable on due diligence and political risk projects for our clients.

—-

E-Commerce Logistics in China: Detailed Report

History and Industry Constraints

Over the past 10 years, China’s express delivery industry has gone through three phases corresponding to e-commerce development: B2B, C2C and B2C. There were few express companies in China during the B2B e-commerce period. However, with the introduction of Alibaba’s Taobao.com platform, C2C businesses and small-scale express delivery companies that rely on C2C businesses such as Shentong, Yuantong and Yunda, experienced strong growth. Today, the logistics industry is consumed by B2C business whereby dispatch from companies is directly to consumers.

The B2C stage has proved to be challenging for Chinese logistics companies. Greater delivery volumes are requiring additional manpower; for example, companies are now expected to have service capabilities to help users install home appliances. Another issue is the collection of money in the distribution process. Specifically, consumers make payments when products arrive, but most courier companies operate on a franchise model, leaving the headquarters with little control over courier workers. This has resulted in workers that have absconded the system and in turn, a very low (less than 1%) contribution of e-commerce activities to China’s logistics business, as opposed to the typical 10%.

Key Players & Their Plans

The table below highlights the near term logistics plans of major e-commerce companies in China.

Alibaba

To address logistical constraints, Alibaba is focusing on two areas: the first is improving their logistics information system (e56.taobao.com platform), and the second is constructing a storage network around the country.

According to an official from Wuqing District of Tianjin, “Alibaba’s logistics platform will attract B2B suppliers and C2C sellers to rent Alibaba’s warehouses, logistics-related IT systems, dispatching services and after-sales services.”

In January 2011, Alibaba announced that it would invest between RMB 20 and 30 billion in constructing a nationwide storage and logistics system, including 7 bases in Northeast China, North China, East China, South China, Central China, Southwest China and Northwest China. They also asked partners to finance RMB 100 billion to help with the expansion.

In 2012, Alibaba invested RMB 3 billion in constructing a logistics center in Tianjin. This is Alibaba’s North China e-commerce center, which will be used for dispatching, storage and clearance operations. It covers an area of 1,500 mu (around 1 million square meters). The construction will begin in June of this year and the first stage is expected to be completed by the end of 2013.

360buy.com (Jingdong Mall)

In 2009, Jingdong Mall obtained USD 21 million, 70% of which they invested in building their own logistics system. In 2010, they obtained USD 150 million in venture capital and spent half of it on constructing warehouses and developing dispatching services. In 2011, Jingdong Mall obtained USD 1.5 billion from a private investor and used nearly all of it on their logistics system.

The following table summarizes Jingdong Mall’s investment plans to acquire land for building their logistics system:

A Jingdong Mall Customer Service Specialist told Foglamp contributors:

“Jingdong’s effort in expanding logistics is evident in our expansion of labor. In the first two months of 2012, we recruited 4,000 new staff members for R&D, supply chain, logistics, dispatching, and customer service departments. We also plan to recruit 25,000 new employees over the course of this year nationwide, 80% of whom will work in the supply chain and logistics departments.”

Dangdang.com

Dangdang.com has set up 10 logistic centers in China: two central centers in Beijing and the remaining eight in Shanghai, Guangzhou, Chengdu, Wuhan and Zhengzhou, totaling 180,000 square meters nationwide. Altogether they have a daily delivery capacity of 165,000 parcels.

Dangdang.com has been constructing a logistics center in Wuqing district of Tianjin and have already spent RMB 400 million in the first stage, which they expect to complete by the end of 2012. The second stage is expected to finish in 2014. This will be the largest logistics base of Dangdang in China.

Amazon China

In recent years, Amazon China built storage and logistics centers in Beijing, Suzhou, Guangzhou and Chengdu. In tier 1 cities, Amazon uses its own dispatching system to deliver goods, while they hire third-party companies to deliver goods in tier 2 and tier 3 cities.

To date, Amazon China has 11 operation centers in mainland China with logistics operations occupying over 500,000 square meters.

Amazon China’s newest storage and logistics center is located in Wuqing district in Tianjin. Covering over 90,000 square meters, this center began its operations in February 2012. Amazon plans to invest RMB 2 billion in the second stage of the logistics center.

Suning

Suning has 1,684 chain stores across mainland China. In 2011, Suning established 8 new logistics centers and began the construction of 10 others. They also set up 10 B2C dispatching centers for small appliances and 500 “last mile” express points, as well as 5,000 dispatching points.

According to a Suning East China customer service center representative, “In 2011, Suning invested RMB 3 billion in logistics construction. To reach its goal of setting up 60 dispatching centers, it needs another RMB 9 billion. In 2012, Suning will will accelerate the construction of 8 B2C small goods automatic selection centers and the construction of nearly 2,000 express self-service points across the country. In addition, as books and groceries become new business, Suning will improve storage, supply chain and dispatching systems for books and grocery dispatching.”

Conclusion

In recent years, it has become clear to Chinese e-commerce companies that investing in self-built logistics systems may be the only way to overcome commonly faced logistical constraints. As such, the key players have all begun acquiring land, trucks, warehouses and dispatching points to do so. Many are investing in national and regional distribution centers and a few are also establishing last mile delivery points. Key e-commerce companies are targeting Tier 1 cities, and many are set to expand into Tier 2 and 3 cities. At this rate, we can only expect to see further investment in logistics systems by any e-commerce company looking to be competitive in China.

If you would like to know more on this topic or a specific topic of your interest, please get in touch with us at Foglamp.

Please feel free to forward this newsletter to any colleagues you think might be interested in receiving it. We also appreciate your privacy, so please unsubscribe at the bottom of this newsletter if you would rather not hear from us.

Kate Horn // Director // www.foglamp.org

Direct: +1 914.682.4127 // Cell: +1 914.806.5285

kate.horn@foglamp.org

In this issue

FOGLAMP INSIGHT: Single Brand Retailing – INDIA

FOGLAMP SERVICE: Weekly or Monthly Foglamp Market Updates

CONTRIBUTOR PROFILE: Our Teams on the Ground

Foglamp Insight

SINGLE BRAND RETAILING – INDIA

The Government of India recently further opened the country’s retail sector to foreign investment: the allowable foreign direct investment (FDI) of single brand retailing in India has increased from 51% to 100%. With the removal of the 51% investment cap, single-brand foreign companies (think Apple, Nike, or Gucci) can now compete in the retail market without domestic partners.

Supporters of the policy argue that increased investment and competition from foreign companies will result in increased employment, improved quality, and reduced prices. They also claim that attracting foreign capital and technology will modernize the retail sector through improved supply chain management and distribution infrastructure. Domestic small and medium enterprises also stand to benefit, as the policy requires all foreign single brand retailers to source 30% of goods locally and invest in infrastructure.

Opponents argue that opening the retail sector to foreign competition will kill domestic businesses and local independent retailers. This is the domestic equivalent of small-town grocers and shopkeepers arguing to keep Walmart out of their town.

Given the change in the regulatory environment, we thought it would be interesting to hear what senior managers from leading retail companies in India think will be the effects of the new policy. Leveraging our team of local Foglamp contributors in India, we asked them to identify the retail companies (domestic and/or foreign) that stand to win and lose because of the recent policy change. Here is a brief synopsis of the chatter we heard:

1. Unsurprisingly, expert views on winners and losers in broad categories such as ‘local retailers’ vs. ‘single brand foreign retailers’ were mixed. Some argued that local retailers would benefit most, while others argued the opposite. Some forecasted no effect at all. What is most interesting is the attention paid to the policy requirement of local sourcing as the driver of their forecasts. Specifically, some experts cited the advantage enjoyed by local retailers of having established networks to source local goods. On the other hand, others argued that the increase in competition for local goods would harm local retailers.

2. There was a general consensus that foreign and domestic retailers across various subsectors would benefit from FDI in some way. Groceries/Food/ Beverages/Supermarkets and Health/Beauty subsectors were noted as potential top gainers. Among domestic food retail brands, predicted big winners included Spencer’s Daily and Nilgiri’s. Foreign food predicted winners were Starbucks (SBUX) and fast food chains including McDonald’s (MCD), KFC (YUM), and Domino’s Pizza (DPZ). In the Health/Beauty segment, predicted domestic winners included Lakme and Big Bazaar. The predicted foreign winner was Body Shop (OR: EN).

3. Home Furnishings, Apparel/Footwear and Jewelry/Accessories were all indicated as subsectors that would benefit from the change in investment policy. The predicted big domestic winner in Home Furnishing was Godrej, and the foreign winner IKEA. As for Apparel, many experts mentioned domestic firms Pantaloons and FabIndia. The top predicted foreign winner was LVMH (MC:FP). In the Jewelry sector, two domestic winners were consistently identified: Tanishq and Gitanjali.

4. Nearly all experts identified Food Processing, Logistics/Shipping/Transportation and Commercial Real Estate Development as related industries that would benefit from spillover effects of the new policy. Specifically, senior retail managers identified Snowman, a domestic food processing company, and Gati, a domestic shipping company, as potential big winners. A large number of interviewees forecasted high growth in commercial real estate development, particularly in companies that build malls such as the multinational corporation GVK Group.

5. Identifying potential losers was more difficult than picking winners. We heard little chatter in this area, presumably because most senior managers felt the change in policy would benefit domestic and foreign companies alike. One trend we did track was the mention of small domestic Indian firms, particularly in the unorganized sector, as potential losers. Although difficult to define, the Government of India describes this sector as having a low scale of organization, typically family-owned/household enterprises that are unregulated and unprotected.

6. When asked whether they thought the Government of India would allow a majority foreign stake in multi-brand retailers (for example, Tesco or Carrefour) in the next two years, the majority said yes because FDI is beneficial for most parties (though a sizeable number of managers interviewed were more skeptical). The most commonly cited reason for this was the upcoming election period and the sensitivity of FDI as a political lightening rod in India.

For better or worse, the change in policy regarding FDI in Single Brand Retail in India has many looking to the future. Leaders in the industry are predicting winners and losers and accordingly, working towards keeping their businesses competitive.

If you would like this type of information on a specific topic of your own interest, please get in touch with us at Foglamp!

Weekly or Monthly Foglamp Market Updates

Is there a research topic or investment idea that you need in-country assistance fleshing out? Is the outcome of an upcoming political election or regulatory event important to your decision making process?

Our on the ground teams can keep you updated with data and information from in-country sources on a regular basis to help you stay informed about companies, country regulation, political risk and other issues of your choosing. In line with our mission to provide clients with on-demand, customizable in-country research, our regular “Foglamp Market Updates” help investors, consultants and managers get a snapshot and better understand specific market realities.

Contributor Profile: Our Teams on the Ground

Foglamp continues to see interest in Russia. Whether it be due diligence work on corporate executives or industry surveys and market information, clients want and need to better understand the issues and risks prevalent in Russia.

This Foglamp contributor holds a Ph. D. in Economics with experience in banking and finance, energy and consulting. This contributor has worked on numerous client projects for Foglamp and can utilize contacts to help research and verify information on a range of topics including state owned media, distribution and supply chain, as well as oil and oil and gas services.

About Foglamp

Foglamp is a customizable in-country research service providing clients with access to a network of more than 1,300 on-the-ground information miners in more than 120 countries. Our research is provided in the form of short memos, surveys, interviews, and market research; by reaching out to a range of market participants, clients are able to glean insights from dozens of local managers rather than just one or two industry experts. Our network of field contributors can be used for due diligence work, market scanning, and other in-country research activities to help clients in geographies where resources are difficult to find. Please see our website at www.foglamp.org for more information and contact us (kate.horn@foglamp.org ) to schedule a follow-up conversation.

The future of Blackberry in Emerging and Frontier Markets

Despite many analysts writing off Research in Motion (TSE:RIM)and its Blackberry smartphones as “basically dead in the US and Europe,” [1] the company remains optimistic that its devices will continue to do well given RIM’s ability to capture and maintain its position in emerging markets overseas.Since we work regularly in those geographies, we were curious to test our hunch that RIM might be overstating its ability to survive in its current form by simply selling more and more cheap handsets in emerging and frontier markets. So we asked a number of our field contributors in several disparate markets around the world to have some quick-and-dirty conversations with consumers to get a sense of their preferences for mobile devices.  The highlights of their conversations with 1,500 respondents from six countries — three in Africa (Kenya, Nigeria, and South Africa) and three in Asia (China, India, and Thailand) — are below.

What mobile phones are people using in Africa and Asia?  What phones do they want to use and/or plan to purchase and why?

Foglamp field contributors took to the streets with a short questionnaire asking those questions of consumers in their home markets. Not intended to be a statistically significant sample, our conversations with consumers were instead a rapid one-week dipstick approach to better understand how cost, satisfaction levels, and features played into their current and future choices of mobile devices. Full results can be downloaded here as a spreadsheet.Unsurprisingly, smart phone usage varied across the countries, with Nigerian and South African consumers being the more frequent users of Blackberry devices. Thai consumers seem to enjoy their iPhones, with the Chinese consumers being Android fans (certainly a good sign for Samsung (SEO:005930), HTC (TPE:2498), Huawei, LG (NYSE:LG), and other major Android handset manufacturers). If nothing else, these findings are a helpful reminder that “emerging markets” are not a monolithic black box of preferences; they instead represent radically different countries with different prospects and consumer trends.What might be more interesting is which phones consumers aren’t using in these markets. In our conversations, Apple’s(NASDAQ:AAPL) iPhone was the only smart phone to register a sizeable presence (in terms of current usage) across all markets. Blackberry’s presence in China was negligible, at least in our quick exchanges.When asked about what phone they planned to purchase next, the results tracked with the current choice of phone. Conversations with consumers did not suggest a mass exodus from consumers’ current platforms. A modest exception was in India, where respondents often identified Blackberry as the next preferred phone.

Wither Blackberry? Our results, while again not statistically significant, do raise interesting questions about RIM’s future in emerging and frontier markets that deserve deeper research and surveying. Certainly RIM has a presence in a number of large and growing emerging markets. And the company is unlikely to see a massive drop in its user base in those countries in the short-term. Even after removing cost as a factor for next phone considerations, consumers in half the countries preferred Blackberry the most. But we also saw no noticeable fervor for Blackberry devices. On the whole, iPhone remains quite a bit more popular than Blackberry when discounting cost as a consideration.  For those consumers that preferred iPhone, superior aesthetics, ease of use, and variety of features/apps were commonly cited reasons. As cheaper and more feature-rich Android devices flood these markets in the coming years, and as rumors of an iPhone Nano or other low-end iPhone continue to swirl, the question remains: can RIM actually grow its market share in emerging markets to offset major losses in North America and Europe? The company’s future might depend on it.

[1] http://articles.businessinsider.com/2011-03-16/tech/30006699_1_markets-playbook-tablet-rim

New Foglamp Service: Market Chatter

The release of these results marks the launch of a new service from Foglamp: Market Chatter.  In line with our mission to provide clients with on-demand, customizable in-country research, Market Chatter helps investors, consultants and managers test their hunches through affordable, rapid exchanges with market participants in more than 120 emerging and frontier markets. Client requests for Market Chatter can typically be launched within 48 – 72 hours at a fraction of the cost of traditional market research in more than 100 markets simultaneously. Through rapid-fire man-on-the-street conversations, our field contributors can provide clients with real-time insight into market trends and consumer preferences. While not designed to yield statistically significant results, we have found increased demand from clients for this type of rapid primary data collection that is helpful for testing out investment theses and “scratching an itch.”

Contributor Profile: Our Teams on the Ground

Foglamp has seen an increased demand for information in and about China, and our growing roster of Chinese contributors is always available to assist clients across a broad spectrum of projects.  This Foglamp contributor is an independent consultant with a Masters in Journalism from the University of British Columbia.  She has worked as a news researcher, a market research analyst, and a broadcast journalist internationally and in China.  She travels extensively for us on assignments from her home base in Beijing and has contacts in numerous industries that she reaches out to as requested.

Foglamp is a customizable in-country research service providing clients with access to a network of on-the-ground information miners in more than 120 countries.  Most of our research is provided in the form of short memos; by reaching out to a range of market participants, clients are able to glean insights from dozens of local managers rather than just one or two industry experts. Our network of field contributors can be used for due diligence work, market scanning, and other in-country research activities to help clients in geographies where resources are difficult to find. Please see our website at www.foglamp.org for more information and contact us (info@foglamp.org) to schedule a follow-up conversation.

Foglamp founder Nathaniel Heller; credit: New York Times

Foglamp’s unique approach to working with investors was recently profiled in The New York Times as, “A new type of company intended to put social goals ahead of making profits…”

Global Integrity, is likely to spin off a project called Foglamp, which it started, into a flexible-purpose company. Foglamp has a worldwide network of 1,200 people that provide research, for example, on a country’s political stability. Hedge funds, institutional investors and global companies pay market rates for the information.

Nathaniel Heller, Global Integrity’s managing director, said that on at least two occasions recently, it had to turn away venture capitalists wanting to invest in Foglamp. “As a nonprofit, we have no equity to offer them,” Mr. Heller said.

That means, he said, that Foglamp can only grow “arithmetically, not geometrically.” He added, “As a nonprofit, we don’t have extra cash sitting around that would allow us to hire five more employees for Foglamp.”

Read the full story here.

– Kate Horn, Director, Foglamp (kate.horn@foglamp.org)

In this issue

FOGLAMP INSIGHT: Trends in Chinese government healthcare spending

WHAT WE’RE HEARING: The latest chatter on overseas investment

CONTRIBUTOR PROFILE: Our teams on the ground – Nigeria

FOGLAMP INSIGHT: Trends in Chinese government healthcare spending

Healthcare Spending in China

The majority of China’s health care costs are borne by individual Chinese citizens. In 2009 the Chinese government contributed 24.7% of total health expenditures, far below the average of 75% in developed countries and 55% in developing countries.

The New Health Care Reform Plan outlines how the Chinese government will spend RMB 850 billion (100 RMB equaled $15.42 on June 26, 2011) from 2009 to 2011 to reform the country’s healthcare system. This plan is aimed at benefiting the poor by increasing coverage and improving the availability of key medical equipment.

The government spent RMB 149 billion on healthcare in 2010 with RMB 22.5 billion spent on local-level healthcare infrastructure and RMB 29.6 billion on major public health programs. This figure does not include local-government healthcare budgets for infrastructure construction, medical equipment procurement, and hospital capacity enhancement. The government estimates it will spend RMB 172.8 billion on health care in 2011, up 16% from 2010.

China’s Healthcare Spending Priorities

Government spending on healthcare will be significant in the coming years across three priority areas:

Subsidy Programs

Through the New Rural Cooperative Medical Care System and the Urban Worker’s Health Insurance System, 90% of peasants and unemployed urban residents are covered with basic health care services (835 million under NRCMCS and 196 million under URHI in 2010).  To ensure similar levels of participation, the government will spend RMB 140 billion more in 2011, increasing the direct subsidy from RMB 120 to RMB 200 per person and raising the percentage reimbursed for hospitalizations.

Healthcare Infrastructure construction

The government spent more than RMB 40 billion during 2009 and 2010 to support the construction of 1,877 county-level hospitals, 5,169 town-level hospitals, 2,382 city community health centers, and more than 11,000 rural health centers. It also spent RMB 13 billion on the purchase of medical equipment in facilities. Officials indicate that spending figures will be far higher in 2011 on hospital construction, equipment procurement, and personnel training.

Reforming public hospitals

Most public hospitals in China are considered inefficient, corrupt, and expensive. To counter this perception, the government is placing a high priority on reforming public hospitals and is investing significant financial resources to reorganize hospital administration and pharmaceutical procurement systems.

Healthcare Reform and Investment Opportunities

Many industries are poised to benefit from the ongoing healthcare reform initiatives in China, including medical equipment, pharmaceutical, information technology, and health insurance companies.

Medical Equipment

According to industry experts and government officials, medical equipment providers have been the biggest beneficiaries of healthcare reform in China. The Ministry of Health will require all county- and town-level hospitals to maintain X-ray machines, CT scanners and cardio monitors. This represents a windfall for the industry, especially for local Chinese manufacturers, as imported medical equipment is expensive. A Ministry of Health official estimated that procurement of medical equipment in the country could reach RMB 100 billion for the period 2009 – 2011.

Pharmaceuticals

Many more Chinese will be able to afford medicines following the increases in government subsidies as a result of healthcare reforms. Experts predict that prices of basic medicines will increase, with many anticipating a “golden decade” of 15% – 20% growth for Chinese pharmaceutical companies.

Information Technology

The Chinese information technology industry will also benefit significantly as the government will need to invest heavily in IT hardware and services to implement many of the country’s healthcare reform proposals.

Health Insurance

The impact of reforms on the health insurance industry is uncertain. Burgeoning healthcare budgets point to future market opportunities for private insurance companies; however, currently the industry is tightly regulated and the government’s central role as an insurance provider crowds out investment by private insurance providers.

Conclusion

Despite the Chinese government undertaking large-scale reforms of its healthcare system, uncertainties remain. Central government budgets and healthcare policymaking are notoriously opaque. Despite these risks, the government’s commitment to reform and increased investment in the healthcare sector brings significant growth opportunities for Chinese and international companies over the next five years.

WHAT WE’RE HEARING: The latest chatter on overseas investment

Africa, Africa, Africa. That’s what we’ve been hearing and seeing lately in terms of investors’ and companies’ interest in overseas expansion and growth opportunities.  With a growing middle-class, rising levels of disposable income levels, and an emerging consumer class, a number of exciting markets in Africa are increasingly popping onto investors’ radars. We like Nigeria (huge market and booming middle-class; corruption concerns real but highly variable depending on the sector and vertical) and companies that can market and sell their goods and services seamlessly across East Africa (Kenya, Uganda, Tanzania).  Morocco offers another intriguing though riskier opportunity.

Elsewhere, we see growing concern over non-economic trends in Mexico affecting long-term business opportunities (drug war spiraling out of control).  Brazil remains of interest but with increasing concern over inflation and other macro economic indicators. In Asia, the Philippines remain a popular destination for investors looking to diversify into a burgeoning emerging market in the region.

CONTRIBUTOR PROFILE: Our teams on the ground

In Nigeria we have a deep bench of contributors with contacts across numerous industries and verticals ready to assist clients.  This Foglamp contributor has a Masters in Communications Studies and is an award-winning journalist as well as a business and economics editor for a major local news organization.  He has covered a range of industries and has performed investigative work on everything from healthcare, travel and leisure, energy (oil and gas), to local internet companies.  His research capabilities have proven valuable to clients wanting help with due diligence as well as those interested in understanding new market dynamics.

The Transneft controversy has only heightened interest in Mr. Navalny’s blog. He has since branched out from shareholder activism, creating RosPil.info, a new Web site about corruption in the government procurement process. It posts documents about state tenders and asks for public input on matters like the fairness of the prices or the deadlines.

Africa had a bad reputation in business circles. Of course some African countries have issues but the vast numbers of countries are actually okay. So the perception of Africa is much worse than the reality. And whenever there is gap between perception and reality there’s a fantastic business opportunity.

Full story is here.

In this issue

FOGLAMP INSIGHT: Exploding demand for cell phone towers in Brazil

WHAT WE’RE HEARING: The latest chatter on overseas investment

CONTRIBUTOR PROFILE: Our teams on the ground

FOGLAMP INSIGHT: Exploding demand for cell phone towers in Brazil

COMPANIES MENTIONED

Telecoms: Vivo, Claro,TIM, Oi. Service Providers: Relacom, Embratel, QiS Engenharia

With the increasing availability of spectrum-guzzling mobile devices, Brazil had witnessed a more than 15% increase in the rate of cell phone tower installations since 2008. São Paulo, the wealthiest state in the country, has seen towers go up at a rate close to 20%.  As those numbers increase, tower providers and operators able to keep pace with the exploding demand stand to benefit.

Shifting landscape

Brazil has 203 million cell phones for 185 million inhabitants, according to January 2011 figures from Anatel, the country’s telecommunications regulator. Most of those phones, up to 80% for some mobile operators, are cheap, prepaid devices – so-called “burners.” There are four major mobile phone operators in the country – Vivo (owned by the Spanish group Telefónica), Claro (owned by Mexico’s América Móvil), Oi (owned by the Brazilian group Telemar, with minority shareholders Portugal Telecom, the state-owned Brazilian development bank BNDES, and the pension funds of Brazilian civil servants) and TIM (owned by Telecom Itália).  In a country where more than 2,500 cities lack raw sewage collection, only 19 cities in Brazil lack cell phone coverage.

Currently, the largest share of cell towers in the country belongs to Oi. Oi controls 4 in every 10 towers in Brazil despite providing service for only 1 in five 5 mobile phones. Vivo, with nearly 3 in 10 mobile customers, controls 25% of the towers. Claro (18% of towers) and TIM (15% of towers) bring up the rear.

In 2010, Anatel announced important auctions of high-speed 4G wireless spectrum. That new spectrum will require both upgrades to existing cell phone towers as well as new towers. Meanwhile, due to rising real estate costs across much of the country, acquiring sites for new towers has quickly become more and more expensive. A number of mobile phone providers – especially TIM, which controls only 15% of the towers in Brazil despite servicing 25% of the phones – are increasingly talking in public about the need to share tower capacity.

Sharing infrastructure a solution to tower shortages?

In a press conference in December, TIM’s president Luca Luciani said that to meet growing demand for network capacity, Brazilian cell phone companies needed to ramp up tower installations immediately.  “It’s like trying to fit 3 million people in the Maracanã stadium. It’s possible to do it, but you’d need 50 floors of seats,” said Luciani. Claro’s president João Cox reckoned in 2009 that to properly handle demand for 3G services in the country, mobile operators would need twice as many towers as they needed when rolling out 2G coverage.  The looming 4G auctions will compound the problem further.

Currently, installing a new cell phone tower in Brazil can take up to four months due to the red tape involved in site acquisition. The cost of site acquisition is increasingly becoming a burden thanks to a booming real estate market. In São Paulo, for example, square meter prices have shot up 267% in some parts of the city. Both factors – red tape and high real estate prices – are encouraging the cell phone operators to try and share their networks and towers as much as possible.

A number of the major operators already share towers and backhaul infrastructure, although that cooperation is often limited. Claro, Vivo and Embratel are preparing a shared fiber optic ring to support their data transmission networks, but they still maintain competing voice networks. A 2010 study by AT Kearney argued that sharing networks in Brazil would not have a meaningful impact in reducing the network operating costs of the major carriers.

In December of 2009, Anatel convened a meeting of six of the major cell phone companies. Jarbas Valente, Anatel’s superintendent for private services, presented the carriers with a proposal: they could share a common physical network provided that the traffic was separated. As of January 2011, public comments were still being sought to determine the feasibility and conditions under which such a shared network strategy might be allowed to occur.

The immediate winners

In the meantime, more towers will have to go up across Brazil.  Most of the network installation and maintenance of towers is done by contractors on a turnkey basis: the contractors, and not the cell phone companies, are responsible for maintaining the towers from site acquisition to tower maintenance. Since the contractors usually work for most or all of the mobile operators, a possible move towards a shared infrastructure model could also reduce some of the contractors’ own costs.

The biggest tower contractor in Brazil is the Swedish company Relacom. Their clients include three out of the four largest cell phone operators: Telemar (Claro), Telefonica (Vivo) and TIM. Relacom is responsible for the maintenance of more than 3,000 towers in the country.

Oi, which controls the largest number of towers of all the carriers, doesn’t use Relacom’s services. Oi has traditionally worked with Nokia Siemens; Nokia Siemens was responsible for installing Oi’s 3G network, at the time the first 3G network in Brazil. In 2007, Oi hired Nokia Siemens executive Eduardo Smith to manage their in-house tower contractor, Serede. Serede focuses primarily on Rio de Janeiro, where Oi has its largest concentration of subscribers. At the time, they reported spending R$500 million (US$300 million at today’s rates) every year for outsourced network and cell tower maintenance services, contracting with 24,000 employees in 16 Brazilian states.

Tower contracts are scattered among many smaller contractors as well.  One of the better-known small contractors is Tel Telecomunicações, created in 2004 and based in São Paulo. The firm provides a variety of services for the big four operators: Oi (turnkey site implementation since 2007), Vivo (underground fiber optic networks), Claro (towers in São Paulo, Rio and Espírito Santo, as well as linking towers with fiber optic fibers) and TIM (fiber optic services in the Northeast).

The industry has grown at such a rate that the larger tower contractors are now sub-contacting services to small firms.  QiS Engenharia, for example, installs cables for Relacom, repais fiber optic cables for Telsul, and repairs phone lines for Lider Telecom.

Regulatory changes: battery requirements increased for towers

Two recent Anatel regulations (numbered 379 and 394) could cut into those burgeoning profits, however.   Those new rules increase the requirement for regular tests of the commercial-grade batteries used in towers to keep mobile services going in the event of a power outage. The telecom carriers are virtually the only users of those types of batteries – 80% to 90% of the batteries are purchased by the operators. According to technical experts at CPqD labs, resolution 394 increases the amount of required tests by 50% and requires that batteries be evaluated every three years.

Regardless of any eventual regulatory changes, there’s no indication that demand for tower infrastructure in Brazil will recede in the coming years.  For the firms best positioned to meet that demand, the future is bright.

WHAT WE’RE HEARING: The latest chatter on overseas investment

The Middle East and North Africa are not surprisingly on people’s minds.  What’s striking to us, however, is how unprepared many investors have been when it comes to having the resources and expertise in place to rapidly respond to and evaluate the tumult roiling the region.  While Foglamp has seen demand for research in markets such as Egypt and Morocco steadily increase in recent years, fewer investors have significant in-house contacts in those markets relative to their interest in quickly capitalizing on the continued rise of the consumer class in the region.  Given language and cultural barriers, perhaps this shouldn’t be surprising.  Foglamp has maintained and grown research teams in Egypt, Morocco, Algeria, Tunisia, Jordan, and Yemen for several years, and we can attest to the fact that building relationships in those countries is far tougher than in most parts of the world.  We expect a growing number of both investors and operating companies to take a hard look at  the risks and the potential opportunities in these countries as industries like energy, transportation, consumer, and tourism are impacted by events as they unfold.

CONTRIBUTOR PROFILE: Our teams on the ground

This Foglamp expert maintains a focus on the impact of conflict on property rights and is currently a professor in political science and international studies at the University of the Philippines as well as a member of the Board of Trustees of ESCR Asia, Inc., an organization dedicated to the promotion of economic and cultural development in the Philippines.  He was formerly a professor in economics at the University of the Philippines and vice president for research and strategic studies at the National Defense College of the Philippines.  He has also been a visiting associate professor at the Graduate School of International Relations and Pacific Studies at the University of California-San Diego.

He has conducted research into civil resistance and democratization in the Philippines for an Oxford University Press volume and has published papers on the politics of property rights enforcement and protection in the Philippines. His other research interests focus on the interplay between the Philippines’ four economies (formal, informal, criminal, and war economies).