Marketing and innovation
New opportunities hit global investors' radar screens Global Investor, 02/2005 Credit Suisse
New opportunities hit global investors' radar screens
Global Investor, 02/2005
Credit Suisse
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Global Investor<br />
Expert know-how for Credit Suisse investment clients May 2005<br />
<strong>Marketing</strong> versus <strong>innovation</strong> Is the balance right?<br />
Chemicals Modernization is key to remaining competitive<br />
Healthcare Innovation resurgent in big pharma?<br />
Automobiles Driving the future<br />
Technology Not yet poised for the next upcycle<br />
Covered Bonds European covered bonds in the spotlight<br />
Swiss Real Estate Stocks ready to take a breather<br />
MARKETING EXPENSES<br />
R&D EXPENSES<br />
93 94 95 96 97 98 99 00 01 02 03<br />
MARKETING AND INNOVATION
GLOBAL INVESTOR 2.05 Editorial—3<br />
Long-term investing as volatility rises<br />
With volatile <strong>and</strong> often downward movements across many of<br />
the world’s financial markets, investors have tended to seek risk<br />
reduction <strong>and</strong> capital preservation strategies, <strong>and</strong> our shorterterm<br />
research has focused on this. But we believe that now is<br />
also a good moment to look at much longer-term issues, so that<br />
investors can start to identify opportunities that may emerge<br />
once the current phase of volatility settles down. Accordingly,<br />
much of this issue of Global Investor is devoted to a big-picture<br />
analysis of the balance between marketing <strong>and</strong> <strong>innovation</strong> in<br />
major industries. We argue that an overemphasis on marketing<br />
at the expense of genuine <strong>innovation</strong> has contributed to<br />
underperformance in recent years of global sectors such as<br />
automobiles <strong>and</strong> pharmaceuticals, <strong>and</strong> stunted the growth<br />
prospects of consumer electronics companies. Looking forward,<br />
we suggest that the big pharma companies may be on the<br />
brink of rectifying this imbalance, potentially opening exciting<br />
opportunities for investors. By contrast, most major automobile<br />
manufacturers seem stuck in their old ways. Separately, we<br />
look at Europe-wide covered bonds, <strong>and</strong> Swiss real estate<br />
assets, as possibly attractive diversification amid an uncertain<br />
market environment for bonds. Here, we conclude that the<br />
underlying collateralization of covered bonds does indeed make<br />
them interesting, while for Swiss real estate assets, investors<br />
should wait for valuations to become less rich.<br />
As usual, the medium-term analysis in the Global Investor will<br />
be complemented by our shorter-term research, which will<br />
advise in detail on the timing <strong>and</strong> the vehicles for implementing<br />
the bigger themes discussed here. And as with all our<br />
publications, we welcome your comments <strong>and</strong> feedback –<br />
good or bad.<br />
Giles Keating, Head of Global Research
GLOBAL INVESTOR 2.05 Contents—4<br />
Themes<br />
<strong>Marketing</strong> versus <strong>innovation</strong><br />
Is the balance right? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5<br />
Chemicals<br />
The European chemicals industry: Innovation is the key<br />
to remaining competitive . . . . . . . . . . . . . . . . . . . . . . . . . . . 12<br />
Healthcare<br />
Will <strong>innovation</strong> regain the upper h<strong>and</strong> over marketing<br />
in pharma? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17<br />
Automobiles<br />
Driving the future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24<br />
Technology<br />
Technology not yet poised for the next upcycle . . . . . . . . . . . . 31<br />
Topics<br />
Covered Bonds<br />
European covered bonds in the spotlight . . . . . . . . . . . . . . . . 39<br />
Real Estate<br />
Swiss real estate stocks ready to take a breather . . . . . . . . . . 42<br />
Services<br />
Credit Suisse publication l<strong>and</strong>scape . . . . . . . . . . . . . . . . . . . 46<br />
Author index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48<br />
Imprint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Mass <strong>Marketing</strong><br />
GLOBAL INVESTOR 2.05 <strong>Marketing</strong> versus <strong>innovation</strong>—5
Limited Innovation?<br />
Mass-marketed br<strong>and</strong>s have guaranteed quality <strong>and</strong> consistency to consumers since the nineteenth century,<br />
but do they make companies complacent about <strong>innovation</strong>?
GLOBAL INVESTOR 2.05 <strong>Marketing</strong> versus <strong>innovation</strong>—7<br />
<strong>Marketing</strong> versus <strong>innovation</strong>: Is the balance right?<br />
<strong>Marketing</strong> <strong>and</strong> <strong>innovation</strong> have been two inseparable parts of capitalist success<br />
since the earliest days of the industrial revolution. Craftsman Thomas Chippendale<br />
published his Furniture Catalogue in 1754. Giles Keating<br />
Mr. Chippendale’s fine products, previously sold only in small<br />
quantities, were transformed into the ultimate interior design<br />
feature for the English middle class, <strong>and</strong> he became a wealthy<br />
man. The following century, international br<strong>and</strong>s such as Lipton’s<br />
Tea <strong>and</strong> then Coca-Cola emerged, offering consumers the guarantee<br />
of a product with consistent taste <strong>and</strong> quality, <strong>and</strong> making<br />
fortunes for their owners.<br />
Initially, marketing <strong>and</strong> br<strong>and</strong>ing were about taking a product<br />
that had already been invented <strong>and</strong> making sure that it sold. Gradually,<br />
many successful companies introduced feedback in the<br />
other direction, giving marketing people a say in the way that<br />
products were developed, aiming to leverage their br<strong>and</strong>s <strong>and</strong><br />
increasing the chances of commercial success for new products.<br />
This process gathered momentum in the later decades of the<br />
twentieth century as marketing <strong>and</strong> pricing strategies became<br />
increasingly refined, bringing benefits to both companies <strong>and</strong> their<br />
customers. But arguably, it has now gone too far for the good of<br />
either, with marketing now dominating R&D in many firms. In<br />
some major pharmaceutical companies, the heads of each of the<br />
main br<strong>and</strong> lines are now paid multiples of what is earned by the<br />
research chief. And across many of the sectors covered in this<br />
edition of Global Investor, the budget for marketing far exceeds<br />
that for R&D.<br />
This dominance of marketing over R&D is very often associated<br />
with a reliance on ever more incremental product improvement,<br />
rather than the development of truly life-altering <strong>innovation</strong>s. In<br />
the short-term, this is a nice safe <strong>and</strong> easy strategy for managements,<br />
since instead of the risk of costly development of unknown<br />
novelties, it leverages existing br<strong>and</strong>s, taps into apparently loyal<br />
consumer groups, <strong>and</strong> may allow new look-alike patents to replace<br />
old ones that are expiring. The sense of comfort is enhanced when<br />
all the major incumbent companies in a sector are doing much the<br />
same. However, in the medium to long term, this kind of strategy<br />
can be a recipe for disaster, as utterly unexpected competitors<br />
appear with genuinely new <strong>innovation</strong>s that sweep the market.<br />
The classic case is the rise of the low-cost airlines, which has left<br />
Southwest Airlines with a higher market capitalization than the<br />
three traditional carriers combined.<br />
Another obvious example is in the consumer electronics sector,<br />
where Sony’s focus on incremental improvements to its<br />
famous Walkman (allowing, for example, ever-larger jolts without<br />
upsetting the music flow) has left it gasping in the face of the
assault from the iPod produced by Apple – a company that previously<br />
had not been a direct competitor to Sony at all. The iPod’s<br />
ability to play <strong>and</strong> organize large amounts of downloaded music<br />
makes it utterly different from the Walkman. This followed a similar<br />
incident some two years earlier where Sony’s emphasis on its<br />
Trinitron TV technology left it far behind in the development of<br />
flat-screen TVs, where South Korea’s Samsung has raced ahead.<br />
For Sony, there seems to be a pattern of over-reliance on a<br />
powerful br<strong>and</strong>, backed up by merely incremental <strong>innovation</strong>. This<br />
is especially striking since Sony had itself, half a century before,<br />
emerged from nowhere on the back of radical product <strong>innovation</strong>.<br />
In the automobile sector, the annual reports of the major<br />
companies suggest large expenditure on <strong>innovation</strong>, which is<br />
apparently much more than is spent on marketing (where data<br />
are available). But it is an open question whether this <strong>innovation</strong><br />
really offers genuinely new responses to consumer needs, or<br />
whether it is over-reliant on a marketing-dominated strategy that<br />
leverages off consumers’ desire to keep up with the latest models<br />
in a strong br<strong>and</strong>. DaimlerChrysler’s recent problems with reliability,<br />
largely caused by the unnecessary electronics packed into<br />
its latest automobiles, provide a stark reminder that the core<br />
business model of the US <strong>and</strong> European manufacturers over the<br />
last two decades has been to add extra gizmos into their cars to<br />
persuade people to upgrade. While driving their business down<br />
this route, they have failed to come up with far more fundamental<br />
<strong>innovation</strong>s under the hood. No one has produced a viable massmarket<br />
fuel-cell-powered automobile or electric car, suggesting<br />
that more than two decades of research has been underfunded<br />
<strong>and</strong> under-focused by the major companies. Instead, they offer<br />
an ever-increasing number of voice options on sat-nav systems<br />
<strong>and</strong> yet larger number of pre-set memories for electric seats. The<br />
prospect of sustained high oil prices may eventually cause the<br />
management at the major US <strong>and</strong> European carmakers to inject<br />
badly needed urgency into this research. But meanwhile, successful<br />
genuine <strong>innovation</strong> in fuel systems has been realized by<br />
other companies. In Japan, Toyota has achieved world-beating<br />
success with its petrol-electric hybrid car (the Prius), which has<br />
caught the imagination of consumers. And Valeo, a medium-sized<br />
component manufacturer, has developed a system that substantially<br />
boosts urban fuel efficiency through the simple expedient of<br />
shutting off the engine at red traffic lights <strong>and</strong> re-starting automatically<br />
when the driver hits the gas.<br />
The next big competitive threat could well come from ultra-cheap<br />
urban cars, costing perhaps only two or three thous<strong>and</strong> euros or<br />
dollars, lightweight <strong>and</strong> with unnecessary gizmos stripped out.<br />
Companies such as Shanghai Motor Corporation, or Tata Motors<br />
in India, are well positioned to produce these automobiles. So are<br />
the Japanese companies contributing to the one-person transport<br />
in use at this year‘s World Expo in Aichi, Japan. This kind of product<br />
would strike at the heart of the marketing strategy of the<br />
major US <strong>and</strong> European carmakers, which have focused for decades<br />
on pushing customers up-market to maintain sales values<br />
in the face of falling production costs.<br />
And in the pharmaceuticals sector, the biggest companies<br />
have focused heavily on marketing. Large sales teams targeted<br />
at health professionals, <strong>and</strong> ad campaigns aimed at the general<br />
public, have pushed marketing budgets up to more than double<br />
R&D budgets. And a major part of the research budgets has<br />
generated products designed to cope with patent expiry by, for<br />
example, offering weekly doses of a drug that previously had to<br />
be taken daily. Very useful for the patients involved – <strong>and</strong> very<br />
profitable in the short to medium term – but for the long-term<br />
health of both companies <strong>and</strong> their customers, this kind of<br />
incremental <strong>innovation</strong> is hardly in the same class as inventing<br />
drugs that really address currently incurable diseases such as<br />
Alzheimer’s.<br />
With researchers playing second fiddle to marketing people<br />
in the corporate culture, <strong>and</strong> often much less well paid, it is unsurprising<br />
that many of the best <strong>and</strong> brightest research scientists<br />
have quit big pharma companies to go work in biotech companies<br />
where they can participate in the upside of their work. Unsurprisingly,<br />
a broad index of biotech shares, although volatile, has<br />
substantially outperformed the largest pharma stocks over the<br />
last decade. And a new competitive threat is now appearing, with<br />
India moving toward international patent law, <strong>and</strong> large Indian<br />
generics companies, such as Ranbaxy, starting to develop the<br />
capability to produce their own original drugs.<br />
If there is good news in the big pharma sector, it is that the<br />
situation has become so bad, that finally a constructive reaction<br />
may be starting to emerge. The takeover by Novartis of the generics<br />
producers Hexal <strong>and</strong> Eon Labs may yet turn out to have<br />
significance beyond mere business-line diversification, if it allows<br />
the combined company to focus on offering its own generic<br />
response to patent expiry, rather than researching <strong>and</strong> marketing
GLOBAL INVESTOR 2.05 <strong>Marketing</strong> versus <strong>innovation</strong>—9<br />
Three steps on the path of evolution of the Walkman …<br />
Sony created <strong>and</strong> dominated the mass mobile music market with the Walkman, then lapsed into low-<strong>innovation</strong><br />
complacency <strong>and</strong> lost out to Apple‘s iPod.
follow-on patentable drugs that differ only marginally from those<br />
expiring. This should then free up research resources for genuine<br />
<strong>innovation</strong>. And in another potentially very positive development,<br />
GSK recently signaled that it is prepared to make a substantial<br />
cut in its marketing budget, with the money to be re-directed to<br />
research, provided its major competitor Pfizer takes the lead. This<br />
move (still uncertain at the time of publication) would represent an<br />
end to the marketing “arms race.” Investors should reap the peace<br />
dividend.<br />
The message from these <strong>and</strong> other sectors, is that the progressive<br />
takeover by marketing seen over the last few decades is<br />
either already reversing, or is set to do so soon. In our view, this<br />
can only be good for companies, investors <strong>and</strong> customers, not<br />
because we think marketing is somehow bad, but because we<br />
perceive there is an optimum mixture between marketing <strong>and</strong><br />
research within a company, both in terms of money spent <strong>and</strong> in<br />
terms of corporate power. Moreover, we believe that the pendulum<br />
has swung too far away from research. The companies that move<br />
fastest to bring it back to a better balance will outperform; those<br />
that lag will underperform. In this issue of Global Investor we<br />
provide more detailed analysis on this, <strong>and</strong> in further publications<br />
over the next few months, we will bring detailed investment<br />
recommendations based on these concepts.<br />
Furthermore, this re-balancing toward R&D, with more genuine<br />
<strong>innovation</strong> <strong>and</strong> less marketing-led incremental product development,<br />
could have broader economic <strong>and</strong> political ramifications. One<br />
of the big debates among economists at the moment focuses on<br />
why people say they are no happier today than they were 40 years<br />
ago, despite the fact that real per capita gross domestic product<br />
has doubled over that period (see chart on page 11, derived from<br />
data cited in a new book titled “Happiness: Lessons from a new<br />
science,” by Professor Richard Layard). Among the various likely<br />
explanations for this, there is much focus on the notion that much<br />
of consumer spending is focused on one-upmanship, i.e., simply<br />
trying to be better than the person next door. This is, of course,<br />
a zero-sum game: If I buy a bigger car purely to get ahead of my<br />
neighbor, then I feel better, but as soon as he or she follows suit,<br />
we are both back where we started in terms of happiness, although<br />
GDP has gone up. By contrast, if we both buy a genuinely new<br />
product that enables us to do something that was impossible<br />
before, or makes us both healthier, than we are both better off.<br />
The increasing emphasis given to marketing by major companies<br />
in the last four decades, with the accompanying tendency<br />
to make marginal product improvements rather than to seek out<br />
quantum leaps, tends to prey off people’s natural inclination<br />
toward one-upmanship. If within companies there is now a return<br />
to focus on genuine <strong>innovation</strong>, there should be an accompanying<br />
upswing in happiness. That would be a worthwhile change in itself,<br />
representing a major shift in society, <strong>and</strong> it might be accompanied<br />
by a new dynamism in people’s economic attitudes, which (together<br />
with a re-engagement with politics) is most especially needed<br />
in Europe, in our view. But whether or not this truly represents a<br />
new Zeitgeist, for investors there is a simple message: to invest<br />
in companies that are riding this wave of change. |
GLOBAL INVESTOR 2.05 <strong>Marketing</strong> versus <strong>innovation</strong>—11<br />
%<br />
USD<br />
80<br />
40,000<br />
70<br />
35,000<br />
60<br />
30,000<br />
50<br />
GDP per capita (real), r.h. scale<br />
25,000<br />
40<br />
20,000<br />
30<br />
20<br />
Happiness (% very happy), l.h.scale<br />
15,000<br />
10,000<br />
10<br />
5000<br />
Source: Credit Suisse<br />
Note: Data from the book titled “Happiness: Lessons from a new science” by Richard Layard<br />
0<br />
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000<br />
0<br />
Corporate emphasis on marketing over <strong>innovation</strong> implies that much of rising GDP has gone to bigger, shinier<br />
versions of existing products, which doesn’t really make us happier.
The European chemicals industry: Innovation is the key to remaining competitive<br />
The golden age of chemicals <strong>innovation</strong> (i.e., dyes, fertilizers, plastics<br />
<strong>and</strong> many other products) ended in the 1960s <strong>and</strong> was followed by<br />
decades of limited, incremental development. Now at last, that is changing<br />
as interdisciplinary research promises a new era of genuine <strong>innovation</strong>. Dr. Maria Custer<br />
Chemistry is all around us. Industrial chemicals enrich daily life,<br />
whether in food production, agriculture, medicines, cosmetics,<br />
textiles, electronics or cars. The industry produces a vast array<br />
of diverse products, originating from raw materials derived from<br />
oil, natural gas, minerals <strong>and</strong> air, <strong>and</strong> it supplies practically all<br />
sectors of the economy. Until around the 1990s, specialty chemicals<br />
were high-margin products produced in small volumes <strong>and</strong><br />
sold at high prices, justified by the products’ capacity to fulfill<br />
specific functions. These businesses sat reasonably comfortably<br />
alongside pharmaceuticals, which were also high-margin, intellectual-property-driven<br />
activities. However, at that time parent<br />
companies decided to concentrate on pharmaceuticals, spinning<br />
off their specialty chemicals businesses into separate firms. For<br />
example, S<strong>and</strong>oz demerged its specialty chemicals business by<br />
floating Clariant before creating Novartis with Ciba-Geigy, while<br />
Astra-Zeneca <strong>and</strong> Novartis hived off their agrochemicals divisions<br />
to create Syngenta. Nevertheless, the newly formed specialty<br />
chemicals companies were rapidly confronted with the commoditization<br />
of many of their products.<br />
While the global specialty chemicals market has traditionally<br />
been dominated by the USA <strong>and</strong> Europe, Asian countries – particularly<br />
China <strong>and</strong> India – are becoming important players too.<br />
These countries benefit not only from low-cost manufacturing, but<br />
from the strong dem<strong>and</strong> for chemicals in the region as well.<br />
Roughly 70% of the plastic toys worldwide, for instance, are produced<br />
in China, where the market for plastics is growing at a rate<br />
of 15% per annum. Other segments with high dem<strong>and</strong> for chemicals<br />
in Asia are footwear (accounting for 74% of global dem<strong>and</strong><br />
for chemicals) leather (50%) <strong>and</strong> textile processing (53%).<br />
Europe’s leading position as chemicals producer threatened<br />
The European chemicals industry has enjoyed a leading global<br />
position in past decades, though this position is weakening rapidly.<br />
In 1992, the EU produced 32% of available chemicals worldwide.<br />
According to the European Chemical Industry Council<br />
(CEFIC), this market share dropped to 28% in 2002. By 2015, the<br />
CEFIC expects Europe’s share of global chemicals production to<br />
be between 23% (best-case scenario) <strong>and</strong> 16% (worst-case<br />
scenario) (see Figure 1). In a study titled “Horizon 2015, Perspectives<br />
for the Chemical Industry,” published in 2004, CEFIC explains<br />
that the main factors negatively affecting competitiveness in<br />
Figure 1<br />
The EU’s share of global chemicals production<br />
is declining<br />
Source: CEFIC<br />
34<br />
32<br />
30<br />
28<br />
26<br />
24<br />
22<br />
20<br />
18<br />
16<br />
14<br />
12<br />
10<br />
8<br />
%<br />
32<br />
32<br />
30 30 30<br />
20.5<br />
19.0<br />
13.2<br />
14.815.817.1<br />
27 28 23.7<br />
23?<br />
16?<br />
90 92 94 96 98 00 02 04 06 08 10 12 14 16<br />
EU USA Asia excluding Japan Japan
GLOBAL INVESTOR 2.05 Chemicals—13<br />
Innovation feeds ideas<br />
Ciba SC offers a broad range of innovative products for packaging, enhancing product protection <strong>and</strong> conservation.<br />
Ciba’s Shelfplus UV filters block ultraviolet light, extending the shelf life of the product.
Europe are 1) the decreasing attractiveness of investments in<br />
Europe due to low dem<strong>and</strong> growth in the region, delocalization<br />
of customer industries, high production costs <strong>and</strong> highly regulated<br />
environment; 2) the decline in R&D spending in the region<br />
(see Figure 2); <strong>and</strong> 3) an eroding skill base (according to<br />
CEFIC, the number of graduates in the field of chemicals in the<br />
EU is estimated to decrease by 10% per annum between 1996<br />
<strong>and</strong> 2007).<br />
Strategies of European companies to remain competitive<br />
p Expansion to Asia … The importance of the Asian markets for<br />
the chemicals industry is well known, <strong>and</strong> for virtually all companies<br />
under our research coverage, expansion to Asia is a key point<br />
in their strategy. Between 2001 <strong>and</strong> 2005, BASF, for example, is<br />
investing approximately 20% – 25% of the group’s total capital<br />
expenditure, or USD 5.6 billion (including USD 2 billion in China),<br />
in Asia. European companies follow diverse strategies in Asia, but<br />
it is clear that their activities in the region are not confined to<br />
production, in order to reduce costs or to be closer to the chemical<br />
consumer markets. They also include the formation of R&D<br />
centers. Ciba Specialty Chemicals, for example, has just opened<br />
a new R&D center in Shanghai.<br />
p … <strong>and</strong> differentiation through <strong>innovation</strong>. The other pillar of<br />
the strategy currently followed by the industry to remain competitive<br />
is product differentiation through <strong>innovation</strong> <strong>and</strong> improving<br />
customer relationships. We observe a strong trend in the sector<br />
toward <strong>innovation</strong>, driven by the need of providing solutions to<br />
customers. Clariant, for example, is able to offer color systems<br />
for every element in the interior of a car. The “Clariant Color Concept”<br />
for the automotive industry enables the harmonization of<br />
colors of textiles, leather, plastics <strong>and</strong> aluminum inside the car.<br />
This process takes place mainly in collaboration with customers,<br />
which means that R&D <strong>and</strong> marketing efforts come together to<br />
ensure the market relevance of new products <strong>and</strong> services. Specialty<br />
chemical companies aim to have a proportion of approximately<br />
25% new products (products less than five years old) in<br />
their portfolios.<br />
Despite the focus on <strong>innovation</strong>, R&D expenses as a percentage<br />
of sales have remained more or less stable during the past<br />
ten years (see Figure 3). The fact that the focus on <strong>innovation</strong> as<br />
a key for competitiveness does not translate into higher R&D<br />
expenses as a percentage of sales is due to several factors. First,<br />
R&D expenses do not necessarily correlate with productivity of<br />
R&D. Second, the most important trend in R&D seems to be the<br />
necessity of focusing on a smaller number of projects with potential<br />
for quick commercialization, rather than following a large<br />
number of projects in parallel.<br />
Besides in-house research <strong>and</strong> collaborations with companies<br />
with new technologies <strong>and</strong> academic groups, a possibility to<br />
drive <strong>innovation</strong> is the acquisition of technologies or smaller firms<br />
with expertise in specific fields (see Figure 4). BASF, for example,<br />
invests in start-up companies through its BASF Venture Capital<br />
GmbH subsidiary.<br />
Figure 2<br />
R&D expenditures as percentage<br />
of sales by region<br />
Source: The European Chemical Industry Council (CEFIC)<br />
4.5<br />
4.0<br />
3.5<br />
3.0<br />
2.5<br />
2.0<br />
1.5<br />
25<br />
20<br />
15<br />
10<br />
5<br />
%<br />
95 96 97 98 99 00 01 02<br />
EU USA Japan<br />
Figure 3<br />
Despite more focus on <strong>innovation</strong>, R&D<br />
expenses as a percentage of sales<br />
remain stable, at approximately 5% on average<br />
for the sector<br />
Source: CSFB HOLT<br />
%<br />
R&D focus on extending product lines, improving processes<br />
The golden age of <strong>innovation</strong> in the chemicals sector was in the<br />
1930s to 1950s, when the industry brought to the market life-changing<br />
products such as plastics <strong>and</strong> man-made fibers. During the<br />
last 20 years, there have been only a few really “revolutionary”<br />
products.<br />
0<br />
94 95 96 97 98 99 00 01 02 03<br />
R&D as % of sales<br />
SG&A as % of sales
GLOBAL INVESTOR 2.05 Chemicals—15<br />
Fertilizers<br />
Nanotechnology, biotechnology<br />
Dyes<br />
Nylon, plastics<br />
Real <strong>innovation</strong>:<br />
plastics, dyes …<br />
Development <strong>and</strong><br />
commoditization<br />
Interdisciplinary<br />
<strong>innovation</strong><br />
opportunities<br />
1865 1925 1950<br />
1970<br />
1990<br />
2005<br />
Source: Credit Suisse<br />
The golden age of <strong>innovation</strong> in the chemicals sector was in the 1930s to 1950s, when the industry brought to<br />
[Topic_Quote] the market life-changing products [Topic_Quote_Autor]<br />
such as plastics <strong>and</strong> man-made fibers. Looking ahead from now,<br />
<strong>innovation</strong> will mainly come from new research areas such as nanotechnology <strong>and</strong> biotechnology, <strong>and</strong> these<br />
interdisciplinary approaches offer significant potential for growth over the coming decade.
p Packaging, performance <strong>and</strong> appearance: Ciba SC offers a<br />
broad range of innovative products for the production of paper<br />
<strong>and</strong> plastic packaging. These specialty chemicals enhance product<br />
protection <strong>and</strong> conservation, packaging integrity, product<br />
promotion <strong>and</strong> manufacturing ease. Fast food packaged in paper<br />
for microwave cooking (e.g., popcorn, french fries, fried chicken)<br />
requires a stain-resistant barrier. Ciba’s LODYNE ® is a repellent for<br />
oil, grease <strong>and</strong> water that helps to keep the package stain-free. Light<br />
can cause colors to fade <strong>and</strong> loss of vitamins in products packaged<br />
in plastic bottles. Ciba’s Shelfplus UV filters block ultraviolet<br />
light, extending the shelf life of the product (see page 13).<br />
Really innovative new products will emerge from interdisciplinary<br />
research combining knowledge of chemicals with new technological<br />
developments such as biotechnology <strong>and</strong> nanotechnology:<br />
p Biotechnological processes are used for the synthesis of<br />
chemicals. The advance of scientific knowledge in areas such as<br />
biotechnology <strong>and</strong> nanotechnology have opened new opportunities<br />
for the chemicals industry. The traditional chemicals-based<br />
methods are often more awkward than the biotechnological processes.<br />
Biotechnology uses microorganisms or cell cultures as<br />
“production machines.” One example is chiral compounds. BASF<br />
uses an enzymatic process for the production of chiral intermediates.<br />
These products are sold under the br<strong>and</strong> name ChiPros.<br />
Syngenta has extensive expertise in plant biotechnology <strong>and</strong> a<br />
dedicated scientific team working closely with academia to develop<br />
biopharmaceuticals that can be produced by plants.<br />
p Nanotechnology will most likely play an important role in future<br />
<strong>innovation</strong>: Many chemical companies are investigating the application<br />
of nanotechnology to areas such as plastics, electronics<br />
<strong>and</strong> pharmaceuticals. Nanotechnology opens up new opportunities<br />
for the chemicals industry. At the nano level, materials show<br />
different properties (e.g., color, magnetic properties, electrical<br />
properties, etc.) than at the macroscopic level, allowing the design<br />
<strong>and</strong> construction of innovative materials with better or distinct<br />
electrical, optical or thermal properties.<br />
Innovation versus marketing<br />
The chemicals industry has a distinctive feature in that a substantial<br />
part of the supply chain involves companies in the same or<br />
related industries (automotive, electronics, food, etc.), rather than<br />
consumers, so marketing is not considered as an industry strength.<br />
This is not the case, however, in some specialty chemicals areas,<br />
where customer relationships <strong>and</strong> product development, in close<br />
collaboration with consumers in order to provide solutions for their<br />
needs, is increasingly playing an important role.<br />
In summary, the European chemicals industry of the future<br />
will rely on both <strong>innovation</strong> <strong>and</strong> marketing to remain competitive<br />
amid a tough environment. The role of marketing will be to improve<br />
customer relationships in order to underst<strong>and</strong> client needs <strong>and</strong><br />
to develop new, innovative <strong>and</strong> market-oriented products. Innovation<br />
will mainly come from new research areas such as nanotechnology<br />
<strong>and</strong> biotechnology, <strong>and</strong> these interdisciplinary approaches<br />
offer significant potential for growth over the coming<br />
decade. |<br />
Figure 4<br />
M&A activities in the industry;<br />
acquisition of technology<br />
Source: Company data, Credit Suisse<br />
Materials<br />
Biotech/Food<br />
Genencor<br />
(enzymes)<br />
Eastman high<br />
performance<br />
christaline<br />
plastics<br />
DuPont<br />
Danisco<br />
(Food Ingr.)<br />
ICI Quest’s<br />
Food<br />
Ingredients<br />
Chemicals<br />
Kerry<br />
Food<br />
Monsanto<br />
Emergent<br />
genetics<br />
Syngenta<br />
Merck<br />
KGaA<br />
Avecia’s<br />
OLED <strong>and</strong><br />
polymers<br />
Biotech/Seeds<br />
Golden Harvest<br />
Seeds<br />
Technology/<br />
Nanotechnology
GLOBAL INVESTOR 2.05 Healthcare—17<br />
Will <strong>innovation</strong> regain the upper h<strong>and</strong> over marketing in pharma?<br />
Hope looms for a turnaround in big pharma as strategies begin to shift toward<br />
meaningful <strong>innovation</strong> – rather than progressing in small increments – to provide<br />
long-lasting value creation. Dr. Luís Correia, Dr. Maria Custer<br />
The pharmaceuticals sector has fallen out of favor with many<br />
investors. We believe this mainly reflects pricing pressure, patent<br />
expirations <strong>and</strong> slowing research productivity. We think that this<br />
can be traced back to overemphasis on marketing compared with<br />
<strong>innovation</strong>. Many big pharma companies now spend more on<br />
marketing than some of the large consumer goods companies,<br />
<strong>and</strong> their sales forces have grown rapidly. Although this marketingdominated<br />
approach proved very profitable for some time, we<br />
believe that it has sapped the large pharmaceutical companies’<br />
ability to deliver true <strong>innovation</strong>. This damages profitability in the<br />
long run, <strong>and</strong> we argue that this is a key driving force behind the<br />
recent poor performance of pharmaceuticals shares. Looking<br />
ahead, we feel that there is hope for a turnaround in big pharma<br />
as strategy begins to shift toward meaningful <strong>innovation</strong> – rather<br />
than advancing in small increments – providing long-lasting value<br />
creation.<br />
The rise of marketing in the pharmaceuticals industry<br />
Over the last two decades, the importance of marketing in the<br />
pharmaceuticals industry has risen sharply, <strong>and</strong> now surpasses<br />
that of many consumer goods companies (see Figure 1). Several<br />
factors have driven this development:<br />
p The realization that primary care products were promotion<br />
sensitive <strong>and</strong> that greater product sales meant more profits. The<br />
undisputed leader of this marketing/blockbuster strategy is Pfizer,<br />
which managed to achieve the industry’s highest operating margins<br />
– close to 40%. As competitors tried to keep pace, this<br />
inevitably led to a race: i.e., a sharp increase in the size of sales<br />
forces (see page 18).<br />
p The introduction of direct-to-consumer advertising. Over the<br />
last 10 years, spending on direct-to-consumer advertising has<br />
risen sharply (see Figure 2). While this spending still represents<br />
a small fraction of overall marketing costs, it can mean allocations<br />
of significant proportions for specific mass-market products (such<br />
as allergy treatments or oral contraceptives). The objective of the<br />
pharmacy industry was to generate dem<strong>and</strong> driven by patients,<br />
rather than relying exclusively on promotion to physicians.<br />
p Crowded therapy classes driving the need for intense spending<br />
in clinical trials, with the aim of differentiation. In this regard, the<br />
state of things has not changed much as analyses such as those<br />
shown in Figure 3 suggest. As a rough approximation, we regard<br />
the number of products in development as a measure of R&D<br />
Figure 1<br />
Selling, general & administrative (SG&A)<br />
expenses as % of sales for pharma <strong>and</strong><br />
consumer goods companies<br />
Source: GS (Note: As a proxy for marketing costs, we use data on SG&A expenses)
Number of sales representatives in the US pharmaceuticals market (1994 – 2003)<br />
Source: Verispan<br />
thous<strong>and</strong>s<br />
100<br />
90<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
94 95 96 97 98 99 00 01 02 03<br />
Big pharma new product approvals in the USA (1998 – 2004)<br />
Source: FDA, LB, Credit Suisse<br />
40<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
98 99 00 01 02 03 04E<br />
While marketing expenditures have risen, the number of new product approvals in big pharma has declined.
effort. The figure indicates that companies continue focusing their<br />
efforts on the largest commercial opportunities. In our view, they<br />
do not seem to be taking into account the fact that if they all do<br />
the same, they will be paving the way for tough competition <strong>and</strong><br />
decreasing value at a later stage!<br />
GLOBAL INVESTOR 2.05 Healthcare—19<br />
The marketing/lifecycle management game cannot last forever<br />
Before patents expire <strong>and</strong> in the absence of a truly novel molecule<br />
to replace the old one, companies attempt to launch so-called<br />
line extensions, or second-generation drugs, which correspond<br />
to minor improvements over the older product. While the old<br />
product is charged at 30% of the price in the USA once it goes<br />
generic, a line extension can retain a price similar to the original<br />
price of the old drug. It is this sort of strategy that annoys healthcare<br />
payers <strong>and</strong> damages the reputation of the pharmaceutical<br />
industry.<br />
The combination of lifecycle extension tactics with the blockbuster<br />
strategy described previously has been almost consensual<br />
in big pharma. In our view, it explains the developments of<br />
recent years of increased pricing pressure already before patents<br />
expire. Healthcare payers have resorted to tools such as increasing<br />
patient co-payments for the more expensive drugs within a class,<br />
so that they are encouraged to use generics or the cheaper drug.<br />
A further downside to the blockbuster strategy is the dependecy<br />
it creates on few drugs. This can pose high risk of a sharp decline<br />
in earnings once patents expire <strong>and</strong> there are no substitutes.<br />
Best innovators moved away from supremacy of marketing<br />
Under this new, more competitive environment, analysts have<br />
started to evaluate companies’ portfolios to identify the better<br />
placed companies, i.e. the ones with more unique products that<br />
are subject to less pricing competition (see Figure 4).<br />
The rise in importance of marketing has meant that marketing<br />
departments have gained such a high profile in pharmaceutical<br />
companies that the key decision makers <strong>and</strong> best-paid workers<br />
are the marketers. Dissatisfaction with this state of things has led<br />
many scientists <strong>and</strong> medical developers to start their own businesses.<br />
We believe this was a main driving factor beyond the<br />
emergence of the biotechnology industry. As biotechnology companies<br />
matured over the last 20 years, their importance has<br />
become evident in terms of the weight of their products <strong>and</strong> R&D<br />
pipelines. A good case in point is Genentech.<br />
Genentech<br />
Genentech is a very innovative company within the healthcare<br />
sector. Since its founding in 1976, it has remained at the forefront<br />
of <strong>innovation</strong> based on its scientific strengths. Scientists at<br />
Genentech have focused on the underst<strong>and</strong>ing of the molecular<br />
basis of disease. The strong expertise in oncology allowed the<br />
development of several cancer drugs with novel <strong>and</strong> more specific<br />
mechanisms of action. Although these drugs are commonly<br />
used in combination with existing chemotherapeutic agents, they<br />
represent an important step into targeted <strong>and</strong> less aggressive<br />
therapies. Rituxan, the first therapeutic antibody to treat cancer<br />
in the USA, was approved in 1997. Rituxan works by binding to a<br />
particular protein on the surface of healthy <strong>and</strong> malignant B-cells,<br />
making them susceptible for the body’s natural defenses. After<br />
treatment, new normal B-cells regenerate from the bone marrow<br />
<strong>and</strong> return to normal levels within months. Avastin, approved in<br />
2004, is the first therapy that inhibits angiogenesis (the process
Figure 2<br />
Amount spent on direct-to-consumer<br />
advertising in the US pharmaceuticals market<br />
1993 to 2003 (USD millions)<br />
Source: Verispan<br />
Figure 4<br />
Product portfolio analysis by degree<br />
of innovativeness<br />
Source: LB<br />
USD millions<br />
3500<br />
3000<br />
2500<br />
2000<br />
1500<br />
1000<br />
500<br />
0<br />
93 94 95 96 97 98 99 00 01 02 03<br />
% of pharma sales in 2004E<br />
100<br />
90<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
More novel portfolio<br />
Less novel portfolio<br />
Amount spent on direct-to-consumer advertising<br />
in the US pharmaceuticals market 1993–2003<br />
Eli Lilly<br />
Roche<br />
GlaxoSmithKline<br />
Bristol Myers Squib<br />
Schering Plough<br />
Novartis<br />
Sanofi-Aventis<br />
AstraZeneca<br />
Johnson & Johnson<br />
Abbott<br />
Merck<br />
Wyeth<br />
Pfizer<br />
Novel<br />
Genericized<br />
Discountable<br />
Other products<br />
Figure 3<br />
Net present value by therapeutic class versus<br />
number of products in development<br />
Source: GS analysis<br />
Figure 5<br />
Number of projects in R&D by phase 1<br />
Source: Company data <strong>and</strong> LB analysis. P1 P2 P3 refer to the phases of clinical development.<br />
Please note that P1 companies only partially disclose their projects.<br />
NPV (USD billions)<br />
24<br />
20<br />
16<br />
12<br />
8<br />
4<br />
0<br />
Diabethes/Metabolism/<br />
Endocrinology<br />
20.5 bn<br />
Cardiovascular/Thrombosis<br />
13.3 bn<br />
6.3 bn Arthritis/Immunology<br />
Respiratory/<br />
Allergy 5 bn<br />
4.5 bn Others<br />
3.9 bn Anti-infectives/Virology<br />
0.8 bn Reproductive/WH/Fertility<br />
15.8 bn Oncology<br />
15.8 bn CNS<br />
Number of drugs<br />
160<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
Number of<br />
molecules<br />
0<br />
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75<br />
P1<br />
P2 P3 Filed<br />
1998 1999 2000 2001<br />
2002 2003 2004<br />
Late-stage projects have been declining,<br />
but signs from the early pipeline are encouraging<br />
1<br />
(AZN,AVE,GSK,NVS,ROG,SASY)
y which new blood vessels develop needed for a tumor to grow)<br />
<strong>and</strong> interferes with the blood supply to tumors.<br />
Beyond the cancer portfolio, the company has pursued highly<br />
novel product opportunities outside the area of cancer. These<br />
products have highly novel mechanisms of action <strong>and</strong> can be considered<br />
first in class: e.g., Raptiva (psoriasis), Xolair (asthma).<br />
Psoriasis occurs when the skin replaces itself too quickly.<br />
This process begins when T-lymphocytes, also called T-cells,<br />
become activated <strong>and</strong> travel to the skin leading to inflammation.<br />
Raptiva, the first biologic therapy for psoriasis, prevents T-cells<br />
from being activated <strong>and</strong> entering the skin.<br />
Interestingly, Genentech’s majority owner, Roche, has decided<br />
not to exercise its opt-in rights on these non-cancer products.<br />
Instead, Genentech has partnered them with other companies. A<br />
possible reason that Roche decided not to license these products<br />
is that they did not satisfy a minimum level of commercial potential.<br />
GLOBAL INVESTOR 2.05 Healthcare—21<br />
Decline in R&D productivity is mainly a big pharma problem<br />
In recent years, big pharma has had an effective decline in products<br />
in phase III trials <strong>and</strong> flat trend in new product filings, as<br />
illustrated in Figure 5.<br />
This has several possible reasons, in our view. Mergers have<br />
typically led to streamlining of R&D projects. More stringent<br />
requirements by the authorities have led companies to resize <strong>and</strong><br />
redesign their late-stage clinical trials. The pharmacological targets<br />
that could be exploited for new drug discovery with the knowledge<br />
of ten years ago reached a saturation point. The first fruits of new<br />
research methodology based on genomics <strong>and</strong> proteomics could<br />
start to bear fruit.<br />
New technologies in research should start delivering soon<br />
During the 1950s <strong>and</strong> 1960s, the strategy for drug development<br />
was screening of known compounds <strong>and</strong> new molecules in animal<br />
models. Although several important drugs were discovered using<br />
this approach (e.g., benzodiazepines), the method was limited in<br />
that the number of molecules with structural diversity was not<br />
enough, <strong>and</strong> that the mechanism of action of many drugs was<br />
unknown.<br />
With the development of knowledge in cell biology during the<br />
1960s <strong>and</strong> early 1970s, it was possible to use a more rational<br />
approach. Scientists would identify proteins (receptors) relevant<br />
to conditions such as asthma or diseases such as glaucoma, <strong>and</strong><br />
then find a drug to inhibit its action (in some cases, the problem<br />
would be the other way round, where a receptor was meant to do<br />
something desirable but was failing to do so, <strong>and</strong> in such cases<br />
the aim would be to find a drug to enhance the action of the<br />
receptor). For example, beta-blockers (i.e., drugs that block the<br />
β-adrenergic receptors) have around 30 different indications,<br />
such as treating irregular heartbeats, addressing high blood pressure,<br />
<strong>and</strong> relieving migraines, to cite just three.<br />
From the mid-1980s, new solutions based on biotechnology<br />
began to appear. The earliest major example was the development<br />
of biotechnologically produced insulin, which has transformed<br />
the lives of diabetics around the world.<br />
With the start of the new millennium, biotechnology has<br />
taken another big step forward, helped by three key factors. First,<br />
scientists’ underst<strong>and</strong>ing of the biochemical factors causing<br />
diseases has been greatly enhanced by advances in genetics,<br />
including the sequencing of the human genome. Second, modern<br />
combinatorial chemistry greatly facilitates the creation of large<br />
Figure 6<br />
Number of new product approvals<br />
in the USA (1998 – 2004)<br />
Source: FDA, LB, Credit Suisse<br />
40<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
98 99 00 01 02 03 04E<br />
Pharmaceuticals<br />
Biotechnology
Generica<br />
Line extension<br />
Before patents expire <strong>and</strong> in the absence of a truly novel molecule to replace the old one, companies attempt<br />
to launch so-called line extensions, or second-generation drugs, which correspond to minor improvements over<br />
the older product.
numbers of possible drugs. Third, mass screening techniques<br />
allow this plethora of possible drugs to be subjected to at<br />
least a preliminary testing of their effectiveness in a very short<br />
time span. Processes of this kind are only preliminary, but they<br />
prevent a large number of dead-ends very quickly so that the<br />
much more expensive <strong>and</strong> time-consuming phase of full testing<br />
focuses on putative drugs, for which the chance of success is<br />
reasonably high. The result is that the number of diseases for<br />
which a cure may be found has risen substantially <strong>and</strong> continues<br />
to grow.<br />
Reflecting these advances, an increase in the number of<br />
early stage R&D projects (phase I <strong>and</strong> II, see Figure 4) provides<br />
some reasons to be hopeful in the coming years. GlaxoSmithKline<br />
could be the focal point for the industry on this front. The company<br />
expects to report phase II results for 15 new drugs as soon<br />
as 2005.<br />
GLOBAL INVESTOR 2.05 Healthcare—23<br />
The future belongs to innovators<br />
Typical analyses of the industry tend to focus on the decline<br />
of new product launches, but we believe that these analyses<br />
very often exclude biotechnological products. If we include the<br />
approvals of products from biotechnology <strong>and</strong> smaller pharma<br />
companies, we arrive at a positive trend over the last years (see<br />
Figure 6). What is more, the importance of biotechnology companies<br />
is gaining significance in terms of new product output.<br />
In summary, we believe that <strong>innovation</strong> is still the lifeblood of<br />
the pharmaceutical industry. Overall, the biotechnology industry<br />
has generated higher returns (see Figure 7), which seems only a<br />
fair reward for the greater risk taking <strong>and</strong> willingness to genuinely<br />
innovate. Can the pharmaceutical industry balance the power<br />
between research <strong>and</strong> marketing in a better way? This is an issue<br />
that is even more concerning since many of the large blockbuster<br />
products will lose patent exclusivity over the next three<br />
years, <strong>and</strong> it is difficult to see enough pipeline opportunities to<br />
make up for the lost sales. Some views in the financial markets<br />
point to the inevitability of a reduction in sales force for companies<br />
with significant patent expirations, which would avoid a sizable<br />
earnings shortfall in the near term. Some in the industry have<br />
said that an initiative by industry leader Pfizer to reduce its sales<br />
force would be greatly welcomed. However, the same circles<br />
emphasize that cost savings from such a move would be reinvested<br />
in R&D. It may still be only wishful thinking, but we see it<br />
as an encouraging sign. |<br />
Figure 7<br />
Performance of biotechnology versus<br />
pharmaceuticals over ten years<br />
Source: Datastream<br />
1400<br />
1200<br />
1000<br />
800<br />
600<br />
400<br />
200<br />
0<br />
12/93<br />
12/94<br />
12/95<br />
12/96<br />
12/97<br />
12/98<br />
12/99<br />
12/00<br />
12/01<br />
12/02<br />
12/03<br />
12/04<br />
World DS Biotechnology price index<br />
World DS Pharaceuticals price index
GLOBAL INVESTOR 2.05 Automobiles—24<br />
Driving the future<br />
For the car industry, developed countries are replacement markets, where new<br />
customers can only be acquired by gaining market share from the competition.<br />
<strong>Marketing</strong> <strong>and</strong> sales incentives are key elements of this strategy, but in mature markets<br />
like Europe <strong>and</strong> North America, they rapidly become a zero-sum game. Markus Mächler<br />
Penetration into fast-growing emerging markets is one response<br />
to this problem, but the competition is fierce here too. The other<br />
response would be to try to re-invigorate the developed markets<br />
through radical <strong>innovation</strong>, for example, in new fuel systems or<br />
utterly new market segments such as ultra-lightweight urban<br />
vehicles. Instead, the major automobile manufacturers have<br />
focused on relatively marginal <strong>innovation</strong>, which is rapidly copied<br />
<strong>and</strong> ultimately is little better than marketing spending in terms of<br />
the benefits it brings to companies <strong>and</strong> consumers.<br />
US <strong>and</strong> European car registrations reached their peak in 2000,<br />
followed by a sharp correction of the economy (due to post 9/11<br />
shock, the economic slowdown <strong>and</strong> end of the so-called technology<br />
bubble). As consumer confidence diminished, especially in the USA,<br />
the automobile industry increased sales incentives <strong>and</strong> marketing<br />
led strategy did achieve its narrow objective of sustaining sales<br />
volumes. As Figure 1 shows, this marketing-led strategy did<br />
achieve its narrow objective of sustaining sales volumes. However,<br />
it did so at the expense of margins. This was a deliberate<br />
choice by the US mass-market manufacturers, which were not<br />
flexible enough to cut volumes substantially due to their pension<br />
<strong>and</strong> healthcare costs. Measured as a percentage of sales, average<br />
incentives per automobile have risen steeply in the last six<br />
years, while R&D spending has fallen (see Figure 2).<br />
The US <strong>and</strong> the European market are both over-saturated car<br />
markets. Despite greater spending on marketing, only a few car<br />
manufacturers have managed to grow during the last few years.<br />
Consumer response to higher incentive spending is decreasing.<br />
Pressure from raw-materials prices has become an issue <strong>and</strong><br />
does not allow carmakers to further cut prices either. The question<br />
is how to keep consumer spending at least stable. In our view,<br />
only serious <strong>innovation</strong> can help bring the automobile industry out<br />
of this current predicament (see Figure 3).<br />
Increasingly, the major automobile manufacturers have concentrated<br />
on what we would describe as “pseudo-<strong>innovation</strong>,” i.e.,<br />
changing the size <strong>and</strong> shape of cars as part of a marketing-led<br />
strategy to appeal to image <strong>and</strong> perception, without fundamentally<br />
altering their functionality. The rapid growth of the sports<br />
utility vehicle (SUV) market is an example of this. In the short term,<br />
this can be highly successful, allowing early movers to capture<br />
significant market share. But over time, it becomes a zero-sum<br />
game as others enter the new market segment <strong>and</strong> drive margins<br />
Figure 1<br />
US consumer confidence <strong>and</strong> new passenger<br />
car registrations<br />
Source: Autodata<br />
150<br />
130<br />
110<br />
90<br />
70<br />
50<br />
30<br />
01/76<br />
07/78<br />
01/80<br />
07/82<br />
01/84<br />
07/86<br />
01/88<br />
07/90<br />
01/92<br />
07/94<br />
01/96<br />
07/98<br />
01/00<br />
07/02<br />
01/04<br />
US consumer confidence index SADJ (l.h. scale)<br />
US new passenger car <strong>and</strong> light truck sales (r.h. scale)<br />
millions of units<br />
18<br />
17<br />
16<br />
15<br />
14<br />
13<br />
12<br />
11<br />
10<br />
9<br />
8
China is currently the third-largest car market after the USA <strong>and</strong> Japan<br />
The Middle Kingdom experienced phenomenal growth in dem<strong>and</strong> for automobiles following the WTO entry in<br />
December 2001. China has a large number of local car producers facing increasing competition from<br />
Western car manufacturers in their home market. Will they be able to export their products to the Western world?
down again. Spending on research <strong>and</strong> development (R&D) was<br />
dispersed across a wider product range <strong>and</strong> more technical gizmos<br />
to cover every possible niche, instead of being focused on developing<br />
genuine <strong>innovation</strong>s. As a result, there has been miserably<br />
slow progress on new technologies that could have really breathed<br />
new life into the industry, such as fuel cells (see below). In addition,<br />
the life cycle of existing model lines shortened on increasing<br />
competition.<br />
While the life cycle of a car model is getting shorter <strong>and</strong><br />
shorter, the average car in use is getting older <strong>and</strong> older. In Germany,<br />
a country where the automobile plays a significant role, the<br />
average age of a car increased from 6.8 years to 7.6 years<br />
between 1999 <strong>and</strong> 2003. The same trend can be seen in the USA,<br />
where the average age of a car rose from 4.9 years back in the<br />
1970s to 8.6 years in 2004. Notwithst<strong>and</strong>ing marketing campaigns,<br />
such as 0% financing, this trend has only eased in the<br />
short term (see Figure 4).<br />
Due to cost pressure, development of key technology features<br />
has been carried out in cooperation with suppliers or in joint<br />
ventures with other manufacturers. The search for <strong>innovation</strong>s<br />
was not always successful, as seen from an investment point of<br />
view. Despite more than 20 years of research <strong>and</strong> several successful<br />
tests, fuel-cell technology is far from being introduced<br />
into the mass market. Hydrogen-powered engines are also known<br />
as zero-emission power. The best way to picture the evolutionary<br />
development of fuel cells is with the graph of Ballard Power. The<br />
Canada-based company, under control of Chrysler (now Daimler-<br />
Chrysler) <strong>and</strong> Ford, has focused on fuel-cell technology for more<br />
than a decade now (see Figure 5).<br />
The technology is available <strong>and</strong> running, but one big problem<br />
is cost. Fuel-cell units are ten times more expensive to make than<br />
petrol or diesel engines. Another problem is the lack of a refueling<br />
infrastructure, which requires huge investments. Optimistic estimates<br />
for commercial sales of hydrogen-powered cars are made<br />
for 2010, while realistic forecasts predict mass-market penetration<br />
no earlier than 2020. BMW, DaimlerChrysler, Ford <strong>and</strong> Opel<br />
(GM) currently have test vehicles running in Germany, while BMW<br />
uses the technology of liquid hydrogen for conventional car<br />
engines (bi-fuel). However, realizing the goal of making hydrogenpowered<br />
cars available for everyone is between two <strong>and</strong> three<br />
(car) generations away.<br />
Another very promising but unsuccessful technology – the<br />
electric-powered automobile – has fallen far short of market<br />
expectations. The electro car has not disappeared from the scene,<br />
but the lack of development of new-generation batteries has<br />
hampered the success in this segment. Electric-powered cars<br />
use lead acid or nickel metal hydrid batteries, but scientists say<br />
lithium ion batteries are more promising, though still insufficiently<br />
developed for use in automobiles. Lithium ion batteries are<br />
currently more appropriate for use in low-voltage equipment such<br />
as cell phones <strong>and</strong> h<strong>and</strong>-held electronic devices. In terms of<br />
environmental compatibility, the success of electric-powered passenger<br />
cars depends a lot on the means of electricity generation<br />
<strong>and</strong> battery recycling. Taking this <strong>and</strong> significantly higher buying<br />
costs into account, the environmental balance for the time being<br />
is similar to other technologies already in place, such as diesel or<br />
hybrids. Furthermore, after 80 to 100 kilometers, the batteries<br />
need to be recharged, which takes considerable time.<br />
Even with existing electric propulsion technology, it would be<br />
possible to build medium or lightweight urban cars with reason-<br />
Figure 2<br />
Annual US incentives compared<br />
with total marketing <strong>and</strong> R&D spending<br />
Source: Autodata, CSFB HOLT, company data<br />
3500<br />
3000<br />
2500<br />
2000<br />
1500<br />
1000<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
%<br />
94 95 96 97 98 99 00 01 02 03 04<br />
US incentives (l.h. scale)<br />
BMW<br />
1994<br />
1998<br />
2002<br />
DCX<br />
Peugeot<br />
Renault<br />
1995<br />
1999<br />
2003<br />
Volkswagen<br />
Fiat<br />
<strong>Marketing</strong> as % of sales<br />
(estimate)<br />
R&D as % of sales<br />
Figure 3<br />
R&D spending by OEMs (original equipment<br />
manufacturers) as % of sales<br />
Source: Company data, broker research<br />
Ford<br />
1996<br />
2000<br />
GM<br />
Toyota<br />
1997<br />
2001<br />
5.0<br />
4.5<br />
4.0<br />
3.5<br />
3.0<br />
2.5<br />
2.0<br />
1.5<br />
Average<br />
%
able range, <strong>and</strong> indeed a few examples are available from specialist<br />
manufacturers. But their costs are relatively high, which is<br />
unsurprising given that they are built on tiny production runs. What<br />
is noticeable by its absence is a viable medium or lightweight<br />
urban electric vehicle produced <strong>and</strong> marketed in large numbers<br />
by one of the major automobile manufacturers – a product which<br />
has the potential to open up whole new market segments.<br />
We cannot be sure whether greater focus on R&D spending<br />
in the key areas such as fuel cells or electric propulsion would<br />
have produced better results. But it is not unreasonable to believe<br />
that we could be far closer to success, if these projects had benefited<br />
from the R&D resources that were instead devoted to adding<br />
a few extra features to adjustable electric seats, or to designing<br />
the shape of yet another SUV, or creating yet another voice<br />
variation for the SatNav system.<br />
Next <strong>innovation</strong> driver will be ecological compatibility<br />
Safety has become a key issue in the automobile industry, but<br />
environmental friendliness is garnering more attention too. With only<br />
few exceptions, most obviously the United States, all major countries<br />
signed the Kyoto Protocol, which is now in place. With the<br />
current technology, it will be very difficult to reach the set targets<br />
of 6%–8% lower emissions by 2012 compared with 1990.<br />
Safety <strong>and</strong> technological features are very often developed<br />
by one of the supplier companies. The latest example comes from<br />
Valeo, which produces a start/stop alternator that automatically<br />
shuts down the engine when a car is stopped at traffic lights<br />
<strong>and</strong> re-starts it when the driver presses the gas pedal. This offers<br />
up to 10% fuel savings for mini <strong>and</strong> small cars. The system is<br />
already available in the Citroen C3 <strong>and</strong> will soon be available<br />
from Ford in its latest Fiesta model. Continental has a start/stop<br />
system available as well, but it is only used in a single GM light<br />
truck model so far. Safety features such as airbag systems <strong>and</strong><br />
seat belts are dominated by Autoliv. The two large US suppliers<br />
Johnson Controls <strong>and</strong> Delphi are very active in safety <strong>and</strong><br />
comfort equipment. Delphi has a special interest in the development<br />
of fuel cells <strong>and</strong> batteries technology. These constitute<br />
good examples underpinning our premise that <strong>innovation</strong> is<br />
currently originating from suppliers <strong>and</strong> to a lesser extent from<br />
OEMs. The exceptions are Japanese manufacturers, where<br />
Toyota <strong>and</strong> Honda heavily invest in hybrid technology. In general,<br />
OEMs try to use synergies resulting from cooperative agreements<br />
in key areas of technology such as engines <strong>and</strong> power-trains.<br />
This harbors the advantage that new developments become<br />
available to a number of OEMs within a short period of time,<br />
though this first-mover advantage from OEMs does not last very<br />
long. The implication for investors is that the more innovative<br />
parts suppliers may offer better medium-term prospects than the<br />
auto majors.<br />
Diesel boom in Europe; still no interest from rest of world<br />
Diesel engines are a real success story in Western Europe, where<br />
market share reached 43.7% of new car registrations in 2003.<br />
One reason for this success comes from improving technology,<br />
where suppliers such as Bosch <strong>and</strong> Beru once again supported<br />
the development significantly. French manufacturers, especially<br />
Peugeot, are the key driver behind the trend, overwhelming the<br />
competition by introducing a diesel catalyst system. Peugeot has<br />
offered this technology for four years now, <strong>and</strong> it seems to<br />
become a set st<strong>and</strong>ard for the European market as a whole.<br />
Figure 5<br />
Ballard Power <strong>and</strong> S&P 500<br />
Source: Bloomberg<br />
GLOBAL INVESTOR 2.05 Automobiles—27<br />
Figure 4<br />
Average age of light vehicles in the<br />
USA since 1970 <strong>and</strong> average age of cars<br />
in Germany since 1994<br />
Source: Polk (USA); VDO (Germany)<br />
9<br />
8.5<br />
8<br />
7.5<br />
7<br />
6.5<br />
6<br />
5.5<br />
5<br />
4.5<br />
1600<br />
1400<br />
1200<br />
1000<br />
800<br />
600<br />
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04<br />
Average age of cars in the USA<br />
Average age of cars in Germany<br />
01/97<br />
01/98<br />
01/99<br />
01/00<br />
S&P 500<br />
Ballard Power (r.h. scale)<br />
01/01<br />
01/02<br />
01/03<br />
01/04<br />
200<br />
180<br />
160<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0
Several countries intend to make catalysts compulsory for new<br />
diesel engine-equipped cars in order to reduce particle emissions.<br />
The problem seems to be supply since only a few producers are<br />
able to deliver diesel catalysts at present. One key supplier is<br />
Faurecia, a 71% subsidiary of Peugeot.<br />
Recently, several German car manufacturers had to recall<br />
diesel cars <strong>and</strong> reduce or even close production of several model<br />
lines because supplier Bosch delivered a low-quality injection<br />
pump. OEMs are highly dependent on their suppliers <strong>and</strong> the<br />
quality that they deliver. Automobile suppliers are currently very<br />
powerful; they can pass on higher raw-materials costs to OEMs<br />
<strong>and</strong> even increase their own margins. German car manufacturers<br />
concentrate their diesel research on inner-engine solutions for<br />
the particular problem, but have failed to deliver a system in due<br />
time. The first generation of new diesel engines just hit the market.<br />
Diesel market penetration in North America is still below 1%,<br />
which is attributable to the poor history <strong>and</strong> lack of acceptance<br />
by customers as well as to the poor quality of diesel fuel in the<br />
past. The big question is whether diesel engines will eventually<br />
become a success story in the USA too. (see Figure 6)<br />
The current success story comes from Japan, where hybrids<br />
attract key attention for development. It took three years <strong>and</strong> a<br />
second-generation hybrid car to successfully launch this technology<br />
for the mass market. The latest-generation hybrid cars do<br />
not differ from other automobiles on the road with respect to<br />
shape, look or performance. The <strong>innovation</strong> is taking place behind<br />
the scenes, with an additional electric engine (or even two in the<br />
new Lexus 400h), a trunk of batteries <strong>and</strong> the latest electrical<br />
technology to coordinate the performance between the two different<br />
engines. Even hybrid cars have just started to undergo<br />
<strong>innovation</strong>. Toyota has been the first-mover in this field of technology,<br />
followed by Honda. Both companies are offering their technology<br />
to third parties, which will enable the industry to further<br />
develop this new st<strong>and</strong>ard. Several countries support this technology,<br />
with incentives similar to, or even exceeding, those for diesel<br />
catalyst cars in some European countries. Besides this support,<br />
hybrids provide a real alternative for anyone living in urban areas.<br />
Next-generation hybrid cars will be equipped with diesel-powered<br />
or natural-gas-powered engines, in combination with improved<br />
battery technology or even fuel cells later on.<br />
Natural gas on the edge<br />
Natural-gas technology is drawing more attention as the discussion<br />
for ecological compatibility seriously evolves. Argentina has<br />
the largest fleet of natural-gas-powered cars, with 750,000 units,<br />
followed by Italy with more than 400,000. More cars are available<br />
with bi-fuel tanks, where conventional gasoline <strong>and</strong> natural gas<br />
can be used together, providing the same power <strong>and</strong> performance<br />
as gasoline engines. A number of cars are now available with bifuel<br />
tanks. Besides the ordinary gasoline tank <strong>and</strong> engine, an<br />
additional fuel tank needs to be added <strong>and</strong> some electronics. With<br />
natural-gas technology, the number of fuel stations as well as tax<br />
advantages will be key for this environmentally friendly alternative<br />
to penetrate the market. Several countries in Europe support<br />
natural gas <strong>and</strong> the development of a fuel-station grid. Today,<br />
around 60 fuel stations for natural or biogas are already in place<br />
throughout Switzerl<strong>and</strong>, 555 in Germany <strong>and</strong> 24 in the UK. A full<br />
grid should be in place by 2007 given that political support for tax<br />
cuts on fuel continues. Several gas stations for bio-fuel are<br />
already in place. Bio-fuel is produced without any CO 2 emissions.<br />
Figure 6<br />
Market share of diesel engines in Europe<br />
by country<br />
Source: ACEA<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
%<br />
94 95 96 97 98 99 00 01 02 03<br />
France Germany Italy<br />
United Kingdom Switzerl<strong>and</strong> Western Europe
GLOBAL INVESTOR 2.05 Automobiles—29<br />
Projects to produce a simple low-cost car in large volumes <strong>and</strong> on a profitable basis have failed so far.<br />
Every part of a car features the latest technology developments, but know-how ownership increasingly belongs<br />
to supplier companies.
GLOBAL INVESTOR 2.05 Automobiles—30<br />
Mercedes, Fiat, Citroen, Ford, Opel, Volkswagen <strong>and</strong> Volvo offer<br />
cars that are st<strong>and</strong>ard equipped with bi-fuel tanks already.<br />
Emerging markets: Growth <strong>and</strong> low-cost production<br />
To reduce cost pressure, OEMs <strong>and</strong> suppliers have started to shift<br />
production to the emerging markets, where wage costs are lower<br />
<strong>and</strong> investments in production facilities are supported by the government.<br />
Meanwhile, new market entrants from emerging markets<br />
are progressively starting to increase competition in the developed<br />
markets. And we believe this effect will become much more powerful<br />
over the next few years, notably as Chinese auto production<br />
capacity starts to outstrip domestic dem<strong>and</strong> by a wide margin.<br />
For the time being, emerging markets are growth areas for<br />
domestic producers as well as for foreign companies willing to<br />
move their production for cost reasons. Since average incomes<br />
in the new markets are rather low, the need for low-cost cars has<br />
increased. With a price tag of EUR 5,000, the Dacia Logan from<br />
Renault is opening up a new market segment. It offers a full-size<br />
car for the price of a second-h<strong>and</strong> import car. Renault uses the<br />
advantage of low-cost production in Romania, where the Dacia<br />
Logan is mainly h<strong>and</strong>made since workers in Romania are cheaper<br />
than high-tech robots to build this car. Since the EU has some<br />
stricter rules for safety, content <strong>and</strong> recycling, the very basic<br />
technology coupled with an attractive model car will be available<br />
for around EUR 7,500 in the developed countries as well. Plans<br />
are to produce the Logan in various locations around the world<br />
(Iran, India, China, Columbia, Brazil <strong>and</strong> Russia). Renault intends<br />
to produce one million units per year at its peak. In our view, this<br />
target is very ambitious since the competition is working on<br />
similar projects. It looks like Volkswagen plans to cooperate with<br />
Proton of Malaysia to build an even cheaper entry-level car, but<br />
no plans have been confirmed yet. Small-size entry-level cars,<br />
with a price tag of around EUR 8,000 in developed markets are<br />
available from various producers. China is the third-largest automaker<br />
in the world. It experienced phenomenal growth in dem<strong>and</strong><br />
for automobiles following its entry into the World Trade Organization<br />
(WTO) in December 2001 (see Figure 7)<br />
Chinese car production is currently focused on the local<br />
market, with 4.4 million units a year. Despite the market’s huge<br />
growth potential, expansion of production plants seems to exceed<br />
the needs of the local market over the long run. China aims to<br />
boost its automobile <strong>and</strong> component exports from USD 8 billion<br />
in 2003 to USD 15–20 billion in 2005, <strong>and</strong> even more to USD<br />
70–100 billion by 2010. China’s competitive advantage is in the<br />
areas of labor-intensive parts <strong>and</strong> material-intensive parts, such<br />
as auto glass, tires, wheel hubs, brakes <strong>and</strong> universal joints.<br />
There is still a technology gap to fill with the foreign companies.<br />
Local content ratio is estimated at around 65% for the time being.<br />
Due to high import taxes on spare parts, total vehicle production<br />
costs in China are still 15%–20% higher than in Europe or the<br />
USA. So far, only Honda, Volkswagen <strong>and</strong> some large local<br />
manufacturers intend to export complete cars from China to<br />
other countries. We expect China to play a mayor role in the supply<br />
parts business, with a less stringent regulatory environment:<br />
100% foreign ownership is allowed versus a maximum of 50% for<br />
OEMs. Besides some Chinese suppliers, familiar names including<br />
Delphi are using this advantage for low-cost production. Emerging<br />
markets such as China will be important for the pricing of the<br />
supplier industry in the next few years.<br />
Suppliers <strong>and</strong> OEMs face a very challenging future, with new<br />
market entrants in their core market areas, while they have to<br />
grow in the emerging markets too. We see key technology ownership<br />
as the best way to invest in the car market. While massmarket<br />
producers will face more pricing pressure in the future, it will<br />
be mainly suppliers that own key technology <strong>and</strong> <strong>innovation</strong>s –<br />
such as Valeo <strong>and</strong> Continental – who will be able to maintain<br />
higher margins <strong>and</strong> growing sales volumes. Automobile manufacturers<br />
such as Renault, Proton or Tata, which are able to produce<br />
low-cost cars for the mass market, have good opportunities to<br />
reap rewards from the opening up of the emerging markets. |<br />
Figure 7<br />
Monthly growth in sedan sales in China<br />
Source: CAAM, Merill Lynch<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
%<br />
China’s WTO entry –<br />
import tariff/quotas<br />
started changing in<br />
January 2002<br />
Jan/Feb 01<br />
Jun<br />
Oct<br />
Mar<br />
Jul<br />
YoY growth (l.h. scale)<br />
Monthly sales (r.h. scale)<br />
Nov<br />
Apr<br />
Aug<br />
Dec<br />
May<br />
Sept<br />
thous<strong>and</strong>s<br />
250<br />
200<br />
150<br />
100<br />
50<br />
0
GLOBAL INVESTOR 2.05 Technology—31<br />
Technology not yet poised for the next growth cycle<br />
Robotics offers exciting potential five to ten years down the road, while<br />
marketing <strong>and</strong> “pseudo-<strong>innovation</strong>” imply modest, cyclical growth<br />
for the time being. Ulrich Kaiser, Uwe Neumann<br />
At present, the global technology sector is very much driven<br />
by replacement dem<strong>and</strong> rather than <strong>innovation</strong>, resulting in pronounced<br />
cyclicality. We believe consumers are unlikely to see any<br />
real life-changing <strong>innovation</strong>s for another five or perhaps ten<br />
years, but then we do expect to see new products such as intelligent<br />
vacuum cleaners <strong>and</strong> kitchen appliances – or even robots<br />
that can manage conventional appliances. As these <strong>innovation</strong>s<br />
become an accepted way of life, making people’s lives easier <strong>and</strong><br />
giving them more time off, dem<strong>and</strong> should surge <strong>and</strong> growth<br />
prospects for the industry will be transformed.<br />
In the meantime, success in marketing will remain crucial in<br />
driving corporate profitability. This means investors can expect<br />
only modest, cyclical growth in profits, while consumers will have<br />
to be content with “pseudo-<strong>innovation</strong>,” (i.e., new products that<br />
basically just enhance old ones, with new features or different<br />
designs). The large majority of new products in the audio, video,<br />
data processing <strong>and</strong> telecommunications segments improve only<br />
marginally on old models (see page 33).<br />
Within this rather unexciting short-term outlook, we do expect<br />
occasional bright spots. These can occur where companies create<br />
a product, which, although not incorporating radically new technology,<br />
does offer a genuine quantum leap in terms of ease of<br />
use <strong>and</strong> associated services. Apple’s iPod, with its link to one of<br />
the first legal music download websites, is one of these inventive<br />
marvels. In our view, companies that are in a position to create<br />
added value in this way, from existing technologies (process<br />
<strong>innovation</strong>) will enjoy temporary success in the interim term, until<br />
the new phase of real <strong>innovation</strong> kicks in.<br />
Markets for early consumer electronics totally unsaturated<br />
In the past, the consumer electronics industry was confronted by<br />
different underlying conditions. The rise in prosperity after the<br />
Second World War sparked the innovative prowess of Western<br />
industrial nations, in particular, <strong>and</strong> provided an ideal selling environment<br />
for consumer electronics companies. The range of products<br />
was originally mainly limited to radios <strong>and</strong> cameras. Thereafter,<br />
black <strong>and</strong> white televisions, <strong>and</strong> audio devices, such as<br />
stereos <strong>and</strong> tape recorders, increasingly found their way into<br />
consumers’ living rooms. Generally, the products made by individual,<br />
mostly regional manufacturers hardly differed in functional<br />
terms. For consumers, quality was the main factor, which<br />
was manifest in the life span of the products.<br />
Figure 1<br />
Balance between R&D, marketing <strong>and</strong><br />
margins at Sony (1984 – 2003)<br />
Source: Sony<br />
18<br />
16<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
%<br />
84<br />
85<br />
86<br />
87<br />
88<br />
89<br />
90<br />
91<br />
Other SG&A in % of sales<br />
R&D in % of sales<br />
92<br />
93<br />
94<br />
95<br />
96<br />
97<br />
98<br />
99<br />
00<br />
EBITDA margin<br />
EBIT margin<br />
01<br />
02<br />
03
Evolution has edge over <strong>innovation</strong> in consumer electronics<br />
When we talk about product <strong>innovation</strong>, we are referring to inventions<br />
that have significantly changed people’s lives. Here, we would<br />
include consumer electronics products such as radios, televisions,<br />
record players, tape recorders, as well as photo <strong>and</strong> movie cameras.<br />
While the first generation of audio/video appliances satisfied<br />
people’s basic needs, subsequent consumer electronics<br />
products would be better classified as replacement products.<br />
Hence, we saw the evolution from tubes to transistors, <strong>and</strong> from<br />
the first battery-operated appliances to the forerunners of today’s<br />
portable electronic devices. Color TVs replaced black-<strong>and</strong>-white<br />
TVs, cassette recorders replaced tape machines, CD players<br />
replaced record players, <strong>and</strong> video replaced 8 mm movie cameras.<br />
One could call this the birth of second-generation consumer<br />
electronics products. Based on previous products, companies<br />
came up with increasingly sophisticated, user-friendly models,<br />
releasing them faster <strong>and</strong> faster into the market. Today, as the<br />
life cycles of products diminish, the ability to launch a new product<br />
as quickly as possible (time-to-market) is now an increasingly<br />
important <strong>and</strong> often crucial success factor. Companies justify<br />
their extremely high marketing budgets on these grounds.<br />
The future has already begun<br />
The next generation of consumer electronics devices will involve<br />
further cross-linking or combinations of existing products. We<br />
should see new products progressively entering the market; for<br />
example, remote control mobile telephony, voice-controlled PCs<br />
without keyboards, <strong>and</strong> so on. Remote control by mobile phone<br />
will allow people to manage their lives electronically. For example,<br />
they will be able to check the amount of food in the refrigerator<br />
or freezer without being at home, or program the DVD player or<br />
bake a pizza while they are on their way home.<br />
Company reports provide no conclusive evidence<br />
If we look at the income statements of leading manufacturers<br />
such as MEI, Sony <strong>and</strong> Philips to test our supposition that marketing<br />
costs are rising faster than spending on <strong>innovation</strong>, we end<br />
up with two basic observations: First, research <strong>and</strong> development<br />
costs amount to only a third or half of marketing costs. Second,<br />
marketing costs are much more volatile in relation to sales, while<br />
research <strong>and</strong> development costs are relatively stable. How do we<br />
explain this? We believe the marked decline in profitability of<br />
these companies (see Figure 1) is one of the main reasons. Companies<br />
are sometimes compelled to undertake major cost-savings<br />
programs, <strong>and</strong> that often means cutting back on marketing spending<br />
for a while. This ongoing pressure on costs forces consumer<br />
electronics firms to adopt different business models, with varying<br />
degrees of flexibility.<br />
Evolution changes conditions for consumer electronics<br />
With market saturation at an advanced stage, the main consideration<br />
is no longer the satisfaction of basic needs, but more <strong>and</strong><br />
more the satisfaction of individual needs. In their efforts to cater<br />
to as many market segments as possible, manufacturers have<br />
exp<strong>and</strong>ed their range of products, <strong>and</strong> at the same time disproportionately<br />
increased their costs. To counter this, they began to<br />
outsource part of their production. In addition, they were able to<br />
benefit from the fast-growing, rapidly developing semiconductor<br />
technology. In this way, a kind of modular construction system<br />
has arisen <strong>and</strong>, in the most extreme cases, the role of consumer<br />
electronics companies has become purely one of design <strong>and</strong><br />
assembly.<br />
Because the components of modular systems are often the<br />
same, manufacturers face an increasingly difficult task of differentiating<br />
their products from those of competitors. Where this<br />
may have been achieved in the past by applying a specific manufacturing<br />
technology or know-how to achieve superior quality,<br />
today’s customers are won with price concessions, unique designs<br />
<strong>and</strong>/or manufacturing concepts. Br<strong>and</strong>ing, supported by high<br />
marketing budgets <strong>and</strong> to some extent design, has become crucial<br />
in this environment.<br />
Semiconductors driving force behind consumer electronics<br />
As consumer electronics companies have focused more on<br />
assembly, br<strong>and</strong>ing <strong>and</strong> marketing, the cutting edge of research<br />
has, to some extent, shifted to the semiconductor industry. The<br />
steady flow of ever-smaller microchips in line with Moore’s Law<br />
(which predicts that the processing power of microchips will double<br />
every 12 months) enables manufacturers to produce smaller <strong>and</strong><br />
more convenient consumer electronic devices. Moreover, smaller<br />
chips mean that more of them can be used in consumer electronics<br />
devices <strong>and</strong> an increasing number of functions can be built in.<br />
Texas Instruments is one example of a company where we can<br />
see the increasing importance of research <strong>and</strong> development in<br />
the semiconductor industry. The ratio of R&D spending to sales<br />
has risen disproportionately in the last few years. In contrast,<br />
marketing costs play only a secondary role. Compared with consumer<br />
electronics firms, however, semiconductor companies<br />
generate higher operating profit margins. On the one h<strong>and</strong>, this<br />
supports the notion that the real value added in consumer electronics<br />
products takes place at the semiconductor level. On the<br />
other, it also explains the relatively modest research <strong>and</strong> development<br />
costs of consumer electronics firms.<br />
Figure 2<br />
Balance between R&D, marketing <strong>and</strong><br />
margins at Texas Instruments (1984 – 2003)<br />
Source: Texas Instruments<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
–5<br />
–10<br />
% %<br />
84<br />
85<br />
86<br />
87<br />
88<br />
89<br />
90<br />
91<br />
92<br />
93<br />
94<br />
95<br />
96<br />
97<br />
98<br />
99<br />
00<br />
01<br />
02<br />
03<br />
Other SG&A in % of sales<br />
R&D in % of sales<br />
25<br />
20<br />
15<br />
10<br />
EBITDA margin (r.h. scale)<br />
EBIT margin (r.h. scale)<br />
5<br />
0
GLOBAL INVESTOR 2.05 Technology—33<br />
2020<br />
2010<br />
2000<br />
1990<br />
1980<br />
1970<br />
1960<br />
1950<br />
1940<br />
1930<br />
1920<br />
1910<br />
1900<br />
voice<br />
transmission<br />
audio<br />
recording<br />
television<br />
display<br />
word<br />
processing<br />
In the wake of 30 years of continuous <strong>innovation</strong>, life is becoming more difficult for technology companies.
Nanotechnology should open the door to truly exciting <strong>innovation</strong> in five to ten years, in the areas of consumer<br />
electronics as well as pharma.
From the investor st<strong>and</strong>point, the following questions arise: Will<br />
<strong>innovation</strong> continue to contribute to the success of technology<br />
companies? Which products are likely to be similar success stories<br />
to Apple’s iPod? Will there be new technologies such as nanotechnology<br />
that make their way into industry <strong>and</strong> trigger a new<br />
surge of growth? Or have we entered a long, sustained sideways<br />
trend that, at most, offers us short upcycles <strong>and</strong> downcycles?<br />
GLOBAL INVESTOR 2.05 Technology—35<br />
Optimistic long-term view thanks to nanotechnology<br />
In most of the large innovative companies like IBM, Microsoft,<br />
General Electric, Siemens, Ericsson or Sony, R&D is increased<br />
over time, broadly in line with sales. This should result in new<br />
technologies <strong>and</strong>, in turn, new growth. In particular, nanotechnology<br />
could trigger a new phase of technological progress in consumer<br />
electronics, by reducing the energy consumed by electrical<br />
devices, using biochemical processes <strong>and</strong> new materials.<br />
Better energy consumption technology is crucial for the<br />
electronics industry. Intel recently announced that newly developed<br />
procedures should keep Moore’s Law valid for another<br />
10 – 15 years. However, to take advantage of this, a new revolution<br />
is required to cut back energy consumption, reductions in which<br />
have not kept up with the pace of miniaturization.<br />
In our view, since the start of the new millennium, this situation<br />
has led the technology sector into a blind alley for the time being in<br />
terms of real <strong>innovation</strong>. Smaller semiconductors could, in theory,<br />
allow more complex features to be built into mobile phones, for<br />
instance. But in practice, the energy needed tends to make the<br />
components overheat, so the potential of miniaturization cannot yet<br />
be realized. The same applies to computers, which mostly come<br />
equipped with fans to stop the semiconductors from overheating.<br />
At present, researchers are concentrating on applications <strong>and</strong><br />
manufacturing processes for so-called nanotubes or quantum<br />
dots, aimed at improving energy consumption of memory chips<br />
<strong>and</strong> chip capacity. In the future, chip sets should be able to perform<br />
more complex processes (similar to the way the human brain<br />
works) <strong>and</strong> thus save energy. This would, in turn, open the door<br />
to mass-production of intelligent robots at prices affordable for<br />
ordinary consumers. Intelligent robots performing various functions<br />
would come closer to our definition of real <strong>innovation</strong><br />
because they would change people’s lives <strong>and</strong> behavior significantly,<br />
just as the first televisions, personal computers <strong>and</strong> mobile<br />
phones did. We could even see double-digit growth rates similar<br />
to those in the 1990s.<br />
The first nanotube was discovered in 1991 by a researcher at<br />
the NEC Corporation in Tsukuba, Japan, <strong>and</strong> laboratories all over<br />
the world have been exploring the potential applications of nanotubes<br />
at top speed ever since (government spending on nanotechnology<br />
<strong>and</strong> the number of secured patents have increased<br />
sharply around the globe, see Figure 3). Still, we believe it will<br />
take at least ten years before widespread affordable commercial<br />
applications appear due to the difficulties of economically producing<br />
nanotubes on a large scale. Hence, it will take at least five<br />
years, or perhaps much more, before the stock markets factor in<br />
this scenario.<br />
Figure 3<br />
Government spending on nanotechnology<br />
Source: Lux Research<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
USD billions<br />
More cautious short-term view, with limited growth for years<br />
With several years to go before we are likely to have a clearer<br />
idea whether nanotechnology can really create a breakthrough<br />
toward mass robotics, the short-term outlook is focused on relatively<br />
modest improvements to existing products in the consumer<br />
97 98 99 00 01 02 03<br />
Western Europe<br />
United States<br />
Japan<br />
Other<br />
04
Telecom house of the future<br />
Innovation down the road will focus on process optimization.
electronics industry. For example, the luminance <strong>and</strong> clarity of flat<br />
screens or mobile phone displays can be improved, or new materials<br />
can help to enhance the durability, mobility, functionality, as<br />
well as the look <strong>and</strong> feel of devices. In short, advanced technology<br />
will mainly be used to support replacement cycles.<br />
In this environment, large corporations such as Nokia, which<br />
have built up a high market share in a particular technology segment<br />
(mobile phones in Nokia’s case), are starting to take a defensive role<br />
<strong>and</strong> are concentrating mainly on replacement cycles. Nokia is inclined<br />
to cut back on research spending in the next three years <strong>and</strong> focus<br />
more on finding the best possible way to serve existing market<br />
segments. The latter course has more of a marketing character.<br />
In fact, the last series of mobile phones (7260–7280, etc.) was<br />
designed to match the latest fashions in women’s shoes <strong>and</strong> accessories<br />
<strong>and</strong> was successfully launched in the market. As long as large<br />
companies exhibit this behavior, we think the technology sector<br />
will tend to remain cyclical in the big picture. For all that, some TMT<br />
subsectors could reap the benefits of small technological advances.<br />
New developments with regard to batteries are one example.<br />
New batteries for consumer electronics?<br />
The performance of mobile-phone batteries still leaves something<br />
to be desired, especially with the new high-performance third-generation<br />
(3G) phones. This is a serious deficiency, if customers of<br />
telecom providers cannot make optimal use of the new technology.<br />
For this reason, NTT DoCoMo will have invested USD 300 million<br />
up to March 2006 to develop a new battery for mobile phones. The<br />
use of nanotubes should help batteries last ten times longer <strong>and</strong><br />
make it easier to exchange them. This development could make<br />
a difference with regard to penetrating the market with 3G mobile<br />
phones. Telecom providers would clearly reap the benefits.<br />
Technology companies focus on process optimization<br />
The iPod is a good example of process optimization. Besides its<br />
appearance <strong>and</strong> Apple’s targeted marketing campaign, iPod’s<br />
ease of h<strong>and</strong>ling was clearly one of its key success factors. Interoperability,<br />
universality, ease of use <strong>and</strong> safety of consumer<br />
electronics devices are today’s buzzwords in the technology world.<br />
Innovation is thus focused on process optimization. Nokia’s recent<br />
announcement of a tie-up with Microsoft aimed at st<strong>and</strong>ardizing<br />
the transfer of files from fixed networks to mobile phones <strong>and</strong><br />
vice versa is a move in this direction. However, this is unlikely to<br />
result in above-average growth. This merely represents a better<br />
way of utilizing the technological advances achieved to date.<br />
On the other h<strong>and</strong>, service providers are likely to profit from<br />
the additional income generated by improved <strong>and</strong> easier-to-use<br />
products. Besides telecom service providers, this also includes<br />
Internet companies such as Yahoo, Google or E-Bay. Moreover,<br />
software companies involved in the security aspects or, such as<br />
Cognos, in the area of business intelligence, can look forward to<br />
an increase in dem<strong>and</strong> for their services. This also goes for information<br />
service providers, such as Amdocs, that offer segmentation<br />
<strong>and</strong> settlement systems, for example, <strong>and</strong> which are likely<br />
to attract more attention from investors.<br />
Conclusion: Investors need to be flexible in their investment<br />
We tend to lean toward a cautious outlook for the next two years.<br />
The <strong>innovation</strong>s expected during this time will not be pioneering,<br />
in our view. While the sector still offers opportunities, the search<br />
for investment success stories based on new technologies is<br />
GLOBAL INVESTOR 2.05 Technology—37<br />
unlikely to bear much fruit in the short run. Even companies<br />
known for their marketing prowess, such as Nokia or Philips,<br />
could turn out to be “lame ducks” because of their defensive<br />
strategies aimed at securing market share. For the time being, we<br />
would advise investors to concentrate on companies that focus<br />
on process optimization <strong>and</strong> the creation of user-friendlier products<br />
(Apple or Research in Motion are examples of companies that<br />
have had success in this area). With markets tending to move<br />
sideways in general, mergers <strong>and</strong> acquisitions are also likely to<br />
drive prices of technology stocks. At any rate, flexibility is called<br />
for with regard to the technology sector because of its ongoing<br />
cyclical character.<br />
Still, investors should constantly keep a close eye on developments<br />
in the field of nanotechnology – an area where research<br />
has been carried out for 15 years. If the vision of radical improvements<br />
in microprocessor energy consumption can be achieved, it<br />
would remove the major roadblock that currently inhibits further<br />
miniaturization. That, in turn, would open the door to truly exciting<br />
<strong>innovation</strong>s, such as mass robotics. Companies such as IBM or<br />
Intel put their emphasis on nanotechnology research, while Japanese<br />
firms like Sony are frontrunners in applications such as<br />
robotics. These companies could turn out to be among the winners<br />
in the industry. It could easily be five years or more before the<br />
way forward in this area becomes clear, but when it does, a range<br />
of exciting new opportunities will emerge. And investors should<br />
st<strong>and</strong> ready. |<br />
Figure 4<br />
Selected nanotechnology patents in the USA<br />
Source: Lux Research<br />
1000<br />
800<br />
600<br />
400<br />
200<br />
0<br />
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03<br />
Selected nanotechnology patents<br />
in the USA
Topics
GLOBAL INVESTOR 2.05 Covered Bonds—39<br />
European covered bonds in the spotlight<br />
Covered bonds are fixed-income securities, with the benefit of being collateralized<br />
by either public-sector debt, or by mortgages. Dr. Jeremy Field, Cédric Spahr, CFA<br />
Covered bonds are fixed income securities, issued by banks <strong>and</strong><br />
other financial institutions <strong>and</strong> retained on their balance sheets,<br />
but with the protection of being collateralized by either publicsector<br />
debt, or by commercial or household mortgages. In 2004,<br />
the European covered bond market was worth about EUR 1.5<br />
trillion. By comparison, the European government bond market<br />
was worth about EUR 2.9 trillion, so the covered bond market is<br />
very significant for fixed-income investors. Although the market<br />
is mainly denominated in euros, covered bonds have also been<br />
increasingly issued in US dollars, British pounds <strong>and</strong> Swiss francs.<br />
Ten years ago, the European covered bond market was dominated<br />
by the issuance of Pf<strong>and</strong>briefe from German banks. Since<br />
then, most other countries – with the exception of the UK – have<br />
either introduced, or are currently working on new or improved<br />
legal frameworks for covered bonds.<br />
The European covered bond market has exhibited solid growth in<br />
recent years, with new markets such as Spain <strong>and</strong> Irel<strong>and</strong> contributing<br />
to issuance volumes. In July 2005, the German Pf<strong>and</strong>brief<br />
market will be opened up to all German banks. Italy <strong>and</strong><br />
Portugal are expected to pass covered bond legislation in 2005.<br />
Norway <strong>and</strong> Sweden are likely to access the euro covered bond<br />
market for the first time this year. Mortgage covered bonds have<br />
increased their importance relative to public-sector covered<br />
bonds, with Spain making an increasing contribution to overall<br />
issuance volumes. At present, there is no common European<br />
legislation governing covered bonds, although there are clear<br />
similarities between countries. Table 1 lists some of the major<br />
issuers of European covered bonds <strong>and</strong> German public Pf<strong>and</strong>briefe.<br />
So-called structured covered bonds have been issued in<br />
the UK, for example by HBOS, but due to the absence of specific<br />
covered bond legislation, these securities incorporate<br />
accepted techniques to enhance their credit quality, as well as<br />
structural features that are accepted under English law.<br />
Despite the fact that there is no common European legislation,<br />
in most European countries covered bonds comply broadly<br />
with Article 22 (4) of the UCITS (Undertakings for Collective<br />
Investments in Transferable Securities) directive <strong>and</strong> are structured<br />
around the following broad principles:<br />
p Covered bonds must be issued by a recognised credit institution<br />
in an EU member state.<br />
p The bond issuance is regulated either by a specific legal framework,<br />
or on a contractual basis. The issuer is subject to national super-<br />
Figure 1<br />
Efficient portfolio frontier<br />
Source: Credit Suisse<br />
6.0<br />
5.5<br />
5.0<br />
4.5<br />
4.0<br />
3.5<br />
3.0<br />
2.5<br />
Volatility in % 0<br />
Expected return in %<br />
2 4 6 8 10 12 14 16 18 20<br />
Efficient portfolio with covered bonds<br />
Efficient portfolio without covered bonds
vision designed to provide protection to the covered bondholders.<br />
p The amount of money derived from the issuance of covered<br />
bonds must be invested in conformity with the law in assets that<br />
are able to cover the obligations attached to the bonds throughout<br />
their lifetimes.<br />
p In the event of financial distress on the part of the issuer, the designated<br />
assets must be used on a priority basis to pay the accrued<br />
interest <strong>and</strong> reimburse the principal to the covered bondholders<br />
European covered bonds that comply with the aforementioned<br />
criteria enjoy various preferential regulatory treatment. In<br />
particular, covered bonds qualify as Tier 1 collateral for banks in<br />
the EU for their refinancing operations with the European Central<br />
Bank. Banks, taking about 40% of new issues, represent the<br />
largest single group of covered bond investors.<br />
Surprisingly, what is not addressed in the aforementioned<br />
features is the type <strong>and</strong> quality of the collateral assets. The German<br />
authorities are preparing new Pf<strong>and</strong>briefe legislation that is<br />
expected to come into force in July 2005. One of the main aims<br />
of the proposed law is to open up the issue of Pf<strong>and</strong>briefe backed<br />
Table 1<br />
Major European covered bond <strong>and</strong> German public Pf<strong>and</strong>brief issuers<br />
Source: Bloomberg, Credit Suisse<br />
Issuer BB ticker Country Rating/Outlook Fitch Rating/Outlook Moody’s Rating/Outlook S&P<br />
HBOS Treasury SRVCS PLC HBOS Great Britain AAA/n.a. Aaa/Stable AAA/n.a.<br />
DEPFA ACS Bank DEPFA Irel<strong>and</strong> AAA/Stable Aaa/Neg AAA/Stable<br />
AYT Cedulas Cajas III AYTCED Spain AAA/n.a. Aaa/n.a. AAA/n.a.<br />
Cedulas TDA 1 CEDTDA Spain AAA/n.a. Aaa/n.a. AAA/n.a.<br />
CIE Financement Foncier CFF France AAA/n.a. Aaa/n.a. AAA/n.a.<br />
CIF Euromortage CIFEUR France AAA/n.a. Aaa/n.a. n.a./n.a.<br />
DEXIA Municipal Agency DEXMA France AAA/n.a. Aaa/n.a. AAA/n.a.<br />
Allg. Hypobank Rheinboden AHBR Germany AAA/Develop Aa1/n.a. AAA/Neg<br />
DEPFA Pf<strong>and</strong>briefbank DEPFA Germany AAA/n.a. Aaa/n.a. AAA/Neg<br />
Deutsche Hypothekenbank DHY Germany n.a./n.a. Aaa/Neg AAA/n.a.<br />
Eurohypo AG EURHYP Germany AAA/n.a. Aaa/Stable AAA/n.a.<br />
Hypothekenbank in Essen HYPESS Germany AAA/Pos Aaa/Stable AAA/Stable<br />
LB Baden-Wuerttemberg LBW Germany AAA/Stable Aaa/Stable AAA/Neg<br />
Muenchner Hypothekenbank MUNHYP Germany n.a./n.a. Aaa/Neg n.a./n.a.<br />
NRW. Bank NRWBK Germany AAA/Stable n.a./Stable AAA/Stable<br />
n.a. = not available<br />
Table 2<br />
Legal Framework for covered bonds in Europe<br />
Source: Barclays Capital, Credit Suisse<br />
Germany UK France Spain Luxembourg Irel<strong>and</strong><br />
Typical name Pf<strong>and</strong>briefe UK asset-covered securities Obligations Foncières Cedulas Lettres de Gage Irish asset-covered securities<br />
Special legislation framework Yes No Yes Yes Yes Yes<br />
Special bank principle No No Yes No Yes Yes<br />
Operational limitations Yes Yes Yes No Yes Yes<br />
Bankruptcy remoteness Yes Yes Yes No Partial Yes<br />
Priority of claims Yes Yes Yes Yes Yes Yes
y a specific pool of mortgage loans, public authority debt, or ship<br />
mortgage loans to any licensed bank, subject to the approval of<br />
the German financial services regulator.<br />
The covered bond legislation in the various European countries<br />
applies different guidelines on loan-to-value (LTV) ratios,<br />
interest-rate risk <strong>and</strong> market risk management, <strong>and</strong> over-collateralization<br />
requirements. Table 2 gives an overview of the legal<br />
framework for covered bonds in Europe.<br />
In 2004, a new Spanish insolvency regime came into force,<br />
which has strengthened the bankruptcy remoteness of Cedulas,<br />
the Spanish covered bonds. Probably the strongest covered bond<br />
legislation in Europe at present, from the st<strong>and</strong>point of protecting<br />
the investor, is in France (see Table 2.) The French credit institutes,<br />
Sociétés de Crédit Foncier, which issue covered bonds,<br />
Obligation Fonciér, are special-purpose vehicles, which are bankruptcy<br />
remote from the holding bank. This provides the strongest<br />
degree of protection for the bond investor, with the eligible cover<br />
assets being held by a separate legal entity.<br />
GLOBAL INVESTOR 2.05 Covered Bonds—41<br />
European covered bonds <strong>and</strong> asset allocation<br />
Table 3 shows the correlation between European equities, represented<br />
by the DJ Euro Stoxx Index, German government bonds,<br />
Bunds, the JP Morgan Euro Cash Index <strong>and</strong> covered bonds, represented<br />
by the MSCI Euro Credit Covered Bond (CB) Index. The<br />
table shows that Bunds, cash <strong>and</strong> CBs all have a negative correlation<br />
to equities, which is positive from the diversification<br />
st<strong>and</strong>point. Figure 1 shows the efficient frontier for a portfolio of<br />
the above assets, with <strong>and</strong> without covered bonds. The graph<br />
clearly shows that a higher return for the same risk (volatility) can<br />
be achieved by the inclusion for covered bonds in a portfolio of<br />
the aforementioned assets.<br />
Conclusions <strong>and</strong> recommendations<br />
Covered bonds, because of their construction, have a lower<br />
default probability <strong>and</strong> a lower loss in the case of default than<br />
unsecured bonds. According to ABN Amro Bank, no European<br />
covered bond has ever defaulted in more than 100 years. This<br />
allows investors to have greater exposure to a single issuer, which<br />
is an important consideration for private clients who do not have<br />
the possibility to diversify a bond portfolio to the extent that an<br />
institutional investor can. The inclusion of covered bonds in a<br />
portfolio of equities, cash <strong>and</strong> government bonds significantly<br />
improves the expected return for the same level of risk<br />
We view the rating outlook for the major European covered<br />
bond issuers as stable. Although the German L<strong>and</strong>esbanks will<br />
lose their state guarantees in July this year, their existing Pf<strong>and</strong>briefe<br />
issues will retain the guarantee (i.e., they are “gr<strong>and</strong>fathered”)<br />
<strong>and</strong> so will only be subject to a rating downgrade if the<br />
corresponding German state is downgraded.<br />
We do not see any potential for tightening of credit spreads at<br />
the current levels, but we anticipate that the yield pick-up of AAA<br />
rated covered bonds over governments will remain attractive.<br />
We anticipate that investor dem<strong>and</strong> for European covered<br />
bonds will remain high. The investor base for European covered<br />
bonds is broadening, with Asian investors starting to take interest.<br />
Various central banks <strong>and</strong> other semi-government organizations<br />
have been diversifying into high-quality covered bonds because<br />
of the yield pick-up over sovereigns. The upcoming removal of the<br />
German L<strong>and</strong>esbanks’ state guarantees is also likely to increase<br />
dem<strong>and</strong> for covered bonds. |<br />
Table 3<br />
Correlation between various asset classes<br />
Source: Credit Suisse<br />
DJ Euro<br />
Stoxx<br />
German<br />
Bunds<br />
JPM Euro<br />
Cash<br />
MSCI Euro<br />
Credit CB<br />
DJ Euro Stoxx 1.0 –0.4 –0.1 –0.3<br />
German Bunds –0.4 1.0 0.3 0.9<br />
JPM Euro Cash –0.1 0.3 1.0 0.3<br />
MSCI Euro Credit CE –0.3 0.9 0.3 1.0
Swiss real estate stocks poised to take a breather<br />
In the wake of two years of good share-price gains for real estate companies, we see<br />
little potential for a further outperformance. The looming rise in interest rates<br />
<strong>and</strong> the persistent oversupply of office space prompt us to anticipate a difficult year<br />
for Swiss real estate firms. Eric Güller<br />
The proportion of real estate assets in investors’ overall portfolios<br />
diminished toward the end of the twentieth century as a result of<br />
the real estate crisis in the early 1990s <strong>and</strong> the stock-market<br />
euphoria that lasted through the year 2000. However, the subsequent<br />
sharp correction on the equity markets until 2003 prompted<br />
private <strong>and</strong> institutional investors alike to rethink their strategies<br />
<strong>and</strong> adopt a more conservative investment policy. The income<br />
stability <strong>and</strong> intrinsic value solidity offered by real estate are once<br />
again being prized. Real estate assets have thus recaptured<br />
investor interest. This fact is also visible in the robust price performance<br />
over the past couple of years. The increased dem<strong>and</strong><br />
propelled prices upward, especially for residential properties. As<br />
a result, the achievable return on direct investments declined<br />
materially. Indirect investment vehicles such as real estate funds<br />
<strong>and</strong> real estate companies likewise profited <strong>and</strong> posted a pleasing<br />
performance. Both types of securitized investment vehicles significantly<br />
outperformed the broader Swiss stock market (SPI) over<br />
the past three years. In 2004 alone, the share-price performance<br />
for the group of publicly traded Swiss real estate companies<br />
amounted to an impressive 25%.<br />
Meanwhile, the valuation discount has vanished<br />
The strong share-price performance of the past three years is<br />
more a reflection of the heavy dem<strong>and</strong> for real estate investments<br />
<strong>and</strong> is less attributable to the trend in the underlying property<br />
market. In other words, the share-price performance is far more<br />
imputable to the change in the premium/discount to net asset<br />
value than to asset value appreciation itself. The long-existing<br />
valuation discount has largely disappeared over the last two years.<br />
Only PSP <strong>and</strong> Züblin are still trading below their net asset value,<br />
while shares of Warteck, Allreal <strong>and</strong> SPS are changing h<strong>and</strong>s on<br />
the stock exchange at prices well above net asset value. Although<br />
the sector valuation is now at an all-time high, Swiss real estate<br />
companies nonetheless remain attractively valued relative to real<br />
estate funds since the latter carry a valuation premium that is<br />
approximately 20% higher.<br />
Upside potential in the short run primarily depends on dem<strong>and</strong><br />
Over the long term, investors can expect to reap a total return of<br />
around 6% to 7% on real estate stocks because the companies<br />
are likely to achieve a return on equity of that magnitude over the<br />
Figure 1<br />
Steady outperformance of real estate stocks<br />
versus the broader equity market since 2002<br />
Source: Datastream, Credit Suisse<br />
130<br />
120<br />
110<br />
100<br />
90<br />
80<br />
70<br />
60<br />
50<br />
01.02<br />
04.02<br />
07.02<br />
10.02<br />
SWX real estate funds<br />
SPI<br />
01.03<br />
04.03<br />
07.03<br />
10.03<br />
01.04<br />
04.04<br />
07.04<br />
SWX real estate companies<br />
10-year Swiss bond index<br />
10.04
GLOBAL INVESTOR 2.05 Real Estate—43<br />
“We see no reason to rush to build up new<br />
investment positions in real estate stocks.” Eric Güller
GLOBAL INVESTOR 2.05 Real Estate—44<br />
course of the economic cycle. In the short run, however, share<br />
prices are likely to remain driven more by the change in the premium<br />
or discount to net asset value, <strong>and</strong> thus by the dem<strong>and</strong><br />
for real estate investments, than by asset value appreciation (currently<br />
+6% including dividends). In view of institutional <strong>and</strong> private<br />
investors’ structural adjustments to their asset allocations – <strong>and</strong><br />
given the attractive dividend yields in the current low-interest-rate<br />
environment – we expect dem<strong>and</strong> for real estate investments to<br />
continue to bolster share prices, though dem<strong>and</strong> looks set to<br />
increasingly flatten.<br />
Figure 2<br />
Inverse correlation between real estate<br />
<strong>and</strong> long-term bond yields<br />
Source: Datastream, Credit Suisse<br />
140<br />
130<br />
120<br />
110<br />
100<br />
90<br />
80<br />
70<br />
60<br />
95 96 97 98 99 00 01 02 03 04 05<br />
SWX real estate funds (l.h. scale)<br />
10-year Swiss bond yields (r.h. scale)<br />
%<br />
9.5<br />
8.5<br />
7.5<br />
6.5<br />
5.5<br />
4.5<br />
3.5<br />
2.5<br />
1.5<br />
Rising interest rates may constrain share-price performance<br />
Despite the share-price explosion, real estate companies continue<br />
to sparkle with attractive dividend yields averaging in excess<br />
of 4%. The dividend yield thus not only far exceeds the yield on<br />
ten-year Swiss Confederation bonds (2.4%) <strong>and</strong> the average<br />
dividend yield paid out by the companies listed on the Swiss Market<br />
Index (1.8%), but also beats the payout yields offered by real<br />
estate funds (3.6%). Swiss real estate stocks also score well<br />
compared with their European counterparts: despite Switzerl<strong>and</strong>’s<br />
much lower yield level on five- to ten-year bond investments,<br />
the dividend yield offered by Swiss real estate companies<br />
lies only slightly below the average for European real estate firms<br />
(4.4%).<br />
The attractive dividend yield in relation to bond yields was one<br />
of the main drivers behind the re-rating of real estate stocks.<br />
However, the support from income-oriented investors is likely to<br />
ebb as interest rates climb. Although rises in interest rates generally<br />
occur when the economy is recovering – <strong>and</strong> for this reason<br />
tend to coincide with higher revenue, earnings <strong>and</strong> asset value for<br />
real estate stocks – their attractiveness will nonetheless diminish<br />
as the yield differential narrows <strong>and</strong> as investors focus on other,<br />
strongly cyclical, stocks. Since most of the Swiss real estate<br />
companies have been listed on the stock exchange only since<br />
2000, the historical data series is not extensive enough to reliably<br />
Figure 3<br />
Vacancy ratio is steadily rising<br />
Source: Credit Suisse annual report<br />
%<br />
20<br />
18<br />
16<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Allreal<br />
Intershop<br />
Maag<br />
PSP<br />
SPS<br />
Warteck<br />
Züblin<br />
Average<br />
2001<br />
2002<br />
2003<br />
2004E (adjusted for portfolio movements)<br />
2004E (published vacancy ratio)
measure the impact of market interest-rate movements on the<br />
share-price performance of real estate firms. However, real<br />
estate funds, some of which have existed since 1938, exhibit a<br />
strong inverse correlation to the trend in long-term bond yields.<br />
The negative correlation between real estate companies <strong>and</strong> longterm<br />
bond yields is probably weaker because real estate firms<br />
have the characteristics of a stock <strong>and</strong> hold a higher proportion<br />
of cyclical office properties than real estate funds do. Nevertheless,<br />
climbing interest rates are bound to weigh on share-price<br />
performance, though to a lesser extent than in the case of real<br />
estate funds. Since we expect interest rates to rise in the second<br />
half of 2005, short- to medium-term investors should increasingly<br />
exercise caution when investing in securitized real estate.<br />
The office market situation remains difficult<br />
As already mentioned, the good share-price performance of<br />
Swiss real estate companies does not correspond to the trend<br />
in the underlying property portfolio. Real estate companies are<br />
predominantly invested in office properties, while the booming<br />
<strong>and</strong> cycle-resistant residential property segment, which dominates<br />
in real estate fund portfolios, plays a secondary role. The cyclical<br />
market for commercial properties has been plagued by a supply<br />
overhang since 2001. The publicly traded real estate companies<br />
have been unable to circumvent this tough market situation, as<br />
reflected by the trend in vacancy rates. Adjusted for portfolio<br />
acquisitions <strong>and</strong> property disposals, all of the listed real estate<br />
companies – apart from Allreal – exhibit steadily rising vacancy<br />
rates. Moreover, although a huge oversupply has existed for a<br />
good three years running, additional office space is set to come<br />
onto the market during the next two years <strong>and</strong> will further aggravate<br />
the situation, particularly in Zurich <strong>and</strong> vicinity. At the same<br />
time, we expect the dem<strong>and</strong> deficit to persist because uncertainty<br />
about the sustainability of the current economic upturn is making<br />
tenants wary, employment growth is weak, <strong>and</strong> the trend toward<br />
reducing per capita office space usage continues. The vacancy<br />
rate is therefore more likely to rise slightly higher than fall. We do<br />
not foresee a significant improvement until the second half of<br />
2006 at the earliest.<br />
High vacancy rates are not a priori a bad thing. As dem<strong>and</strong><br />
picks up, vacancies afford potential to boost rental revenue. However,<br />
the persistently high vacancy rates <strong>and</strong> the completion of<br />
new buildings pose an increasing risk that rent levels themselves<br />
– where only marginal concessions have been made to date –<br />
could come under pressure. Since property prices directly depend<br />
on the rent level, real estate companies’ net asset values will<br />
come under pressure if prices begin to drop, which would probably<br />
cause their share prices to slump. Peripheral sites <strong>and</strong> older<br />
buildings that no longer meet modern-day specifications face the<br />
greatest risk of rent <strong>and</strong> price reductions.<br />
No hurry for new investments in real estate stocks<br />
After three consecutive years of strong share-price performance,<br />
the party for real estate stocks now appears to be largely over: the<br />
market environment for real estate companies remains difficult, <strong>and</strong><br />
we see only limited upside potential from the current valuation level.<br />
However, the intrinsic value of stability, attractive dividend yields<br />
<strong>and</strong> defensive risk profile offered by real estate vehicles make<br />
them a sensible long-term addition to investment portfolios, in our<br />
opinion. Moreover, the enduring dem<strong>and</strong> for such investments is<br />
likely to continue to support real estate stocks for the time being,<br />
though an eventual rise in interest rates would probably break the<br />
positive trend. In view of these circumstances, we recommend<br />
remaining invested in real estate companies for now, though<br />
increasing caution should be exercised. As for individual stocks,<br />
we favor PSP, which we think has the most attractive risk-return<br />
profile among the Swiss real estate companies for the medium<br />
term. However, not even PSP is immune to potential setbacks given<br />
its high vacancy rates <strong>and</strong> large percentage of leases up for renewal.<br />
We therefore see no reason to rush to build up new investment<br />
positions in real estate stocks, not even in our sector favorite. |<br />
Table 1<br />
Overview of Swiss real estate company valuations<br />
Source: Bloomberg, Credit Suisse, company annual reports<br />
Swiss<br />
real estate<br />
companies<br />
Price:<br />
29/03/05<br />
Market<br />
cap.<br />
(CHF m)<br />
P/E<br />
2004E<br />
P/NAV<br />
2004E<br />
Premium/<br />
discount<br />
to NAV<br />
Dividend<br />
yield<br />
ROE<br />
2005E<br />
Vacancy<br />
rate<br />
2004E<br />
Equity<br />
ratio<br />
2004E<br />
Leases up<br />
for renewal<br />
in 2005<br />
Allreal 111.0 902.5 18.2 1.15 15 % 4.1 % 6.9 % 4.0 % 42 % 14 %<br />
Intershop 238.9 501.7 11.9 1.15 15 % 4.2 % 8.2 % 18.4 % 36 % 8 %<br />
Maag 190.0 193.8 -2.1 0.99 -1 % 0.0 % 4.0 % 6.3 % 20 % 5 %<br />
PSP 49.8 2197.1 12.0 0.96 -4 % 4.0 % 5.5 % 11.7 % 53 % 14 %<br />
SPS 293.3 1175.9 20.2 1.12 12 % 4.3% 6.8 % 5.0 % 31% 12 %<br />
Warteck 1635.0 245.3 17.1 1.25 25 % 3.8 % 7.7 % 2.9 % 55 % 16 %<br />
Züblin 10.4 292.2 18.3 0.85 -15 % 3.8 % 5.2% 10.0% 26 % 16 %<br />
Average 13.7 1.06 6 % 3.4 % 6.3 % 8.3 % 37.6% 12.1 %<br />
Average excluding Maag 16.3 1.08 8 % 4.0 % 6.7 % 8.7 % 40.5% 13.3 %
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Asset Allocation<br />
Quelle: Credit Suisse Details vgl. Seite 5<br />
Empfohlen Neutral<br />
12% 10%<br />
31% 35%<br />
35% 35%<br />
22% 20%<br />
10% 10%<br />
33% 35%<br />
35% 35%<br />
22% 20%<br />
GLOBAL INVESTOR 2.05 Services—47<br />
Global Investor Focus – Microfinance<br />
Die in den letzten Wochen veröffentlichten<br />
Wirtschaftsdaten signalisieren ein stärker als<br />
erwartetes globales Wachstum. Als Folge baut<br />
sich – allerdings nur langsam – Infl ationsdruck<br />
auf, sodass die Notenbanken die Zügel ausreichend<br />
straff halten müssen. Allerdings ist bei<br />
Zinserhöhungen keine Eile geboten.<br />
Das Umfeld bleibt weiterhin ungünstig für Anleihen.<br />
Da der Infl ationsanstieg gemässigt ausfällt,<br />
ist die Stimmung nur leicht negativ. Wir empfehlen<br />
den Anlegern Bonds mit kürzerer Duration<br />
oder variabel verzinsliche Anleihen (FRNs).<br />
Aktien halten wir auf mittlere Sicht für ein attraktives<br />
Investment. Allerdings müssen vorübergehende<br />
Rückschläge ins Kalkül gezogen werden<br />
– so zum Beispiel diesen Frühling.<br />
Wachstums- und Energiethemen dürften eine<br />
Outperformance zeigen.<br />
Der US-Dollar dürfte die jüngsten Tiefs nicht<br />
oder kaum mehr unterschreiten und sich möglicherweise<br />
zeitweilig leicht erholen.<br />
Balanced kurzfristig (1–3 Monate)<br />
Research Monthly: The themes of this<br />
monthly publication are based on the decisions<br />
<strong>and</strong> ideas of the Credit Suisse Investment<br />
Committee, augmented by sound investment<br />
advice.<br />
14. März 2005<br />
Research Monthly<br />
Erste Gewinnmitnahmen bei Aktien, Anleihen untergewichten;<br />
Qualität und längerfristige wachstumsorientierte Themen kaufen<br />
Top-Investment-Ideen<br />
Währungen<br />
BUY CAD gegen CHF bei 0.95, mit einem Stoploss<br />
bei 0.92 und einem Ziel von 0.98. Seite 8<br />
Fixed Income<br />
BUY Floating Rate Notes (FRNs) in USD, z.B. Goldman<br />
Sachs 3M-US-Libor + 50 Bp 2015 oder<br />
Kaupthing Bank 3M-USD-Libor + 15 Bp<br />
2009. Seite 10<br />
Aktien<br />
BUY Qualitätswerte wie Canon, Home Depot,<br />
Johnson & Johnson, Sanofi -Aventis und Stryker.<br />
Seite 14<br />
Rohstoffe<br />
BUY Near COMEX Gold-Futures in Schwächephasen,<br />
Kursziel USD 460, Stop-loss bei USD<br />
400. Seite 18<br />
Balanced langfristig (6–9 Monate)<br />
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The United Nations Organization has declared this<br />
year as the International Year of Microcredit 2005.<br />
Microfinance, a form of development aid aimed at<br />
supporting micro-businesses in third-world countries<br />
by providing access to basic financial services<br />
under fair conditions, is enjoying growing public<br />
awareness. Credit Suisse Global Research tackles<br />
this exciting <strong>and</strong> multifaceted issue in the debut<br />
of Global Investor Focus, which will be published in<br />
May. The first publication focuses on the development<br />
of microfinance from various angles as well as<br />
provides analysts’ views on the investment opportunities<br />
<strong>and</strong> risks. In addition, specialists from<br />
all corners of the world were invited to an intense<br />
roundtable discussion – hosted by Credit Suisse<br />
Chairman of the Board of Directors, Walter Kielholz,<br />
<strong>and</strong> Head of Global Research, Giles Keating –<br />
featuring distinguished guests Paola Ghillani (previously<br />
with Max Havelaar), Roshaneh Zafar (Kashf),<br />
Hern<strong>and</strong>o de Soto (Instituto Libertad y Democracia)<br />
<strong>and</strong> Jane Nelson (Harvard University).<br />
The second issue, Global Investor Focus – Nanotechnology,<br />
will be published already in June.<br />
bulletin<br />
Das Magazin der Credit Suisse . Nummer 1 . Februar 2005 . 111. Jahrgang<br />
Thema Aufbruch : Merian – eine Frau geht ihren Weg; Berufe auf Zeit; China lockt<br />
Florierender Wohnungsmarkt, Das Interview: Winterthur-CEO Leonhard Fischer<br />
Global Investor<br />
Expert know-how for Credit Suisse private banking investment clients May 2005<br />
Balance of M&I <strong>Marketing</strong> versus <strong>innovation</strong><br />
Chemicals Modernization is key to remaining competitive<br />
Healthcare Innovation over marketing in big pharma?<br />
Automobiles Driving the future<br />
Technology Not yet poised for the next upcycle<br />
Global Investor Focus<br />
Expertenwissen für Anlagekunden der Credit Suisse<br />
Covered Bonds European covered bonds in the spotlight<br />
Real Estate Stocks ready to take a breather<br />
<br />
<br />
<br />
<br />
<br />
<br />
MARKETING AND INNOVATION<br />
MICROFINANCE<br />
Jane Nelson // Harnessing the potential of Microfinance<br />
Ursula Oser // The attractive business modell<br />
Roundtable // Walter B. Kielholz, Giles Keating, Paola Ghillani,<br />
Jane Nelson, Hern<strong>and</strong>o de Soto, Roshaneh Zafar<br />
Klaus Tischhauser // Challenges for tomorrow<br />
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GLOBAL INVESTOR 2.05 Authors—48<br />
Giles Keating, Head of Global Research . . . . . . . . . . . . . . . . . . . . . . . . . . 5–11<br />
Markus Mächler, Equity Sector Research . . . . . . . . . . . . . . . . . . . . . . . 24–30<br />
Dr. Maria Custer, Equity Sector Research . . . . . . . . . . . . . . . . . . 12–16, 17–23<br />
Ulrich Kaiser, Equity Sector Research. . . . . . . . . . . . . . . . . . . . . . . . . . .31–37<br />
Dr. Luís Correia, Equity Sector Research . . . . . . . . . . . . . . . . . . . . . . . .17–23<br />
Uwe Neumann, Equity Sector Research . . . . . . . . . . . . . . . . . . . . . . . . .31–37
GLOBAL INVESTOR 2.05 Research team—49<br />
Global Research<br />
Giles Keating, Managing Director, Head of Global Research . . . . . . (44) 332 22 33<br />
Research Switzerl<strong>and</strong><br />
Bernhard Tschanz, Managing Director, Head of Research Switzerl<strong>and</strong> (44) 334 56 27<br />
Eric Güller, Equity Sector Research . . . . . . . . . . . . . . . . . . . . . . . . . . . 42–45<br />
Dr. Jeremy Field, Fixed Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39–41<br />
Cédric Spahr, Equity Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39–41<br />
Fixed Income <strong>and</strong> Credit Research<br />
Dr. Thomas Trauth, Director,<br />
Head of Global Fixed Income <strong>and</strong> Credit Research . . . . . . . . . . . . . (44) 333 34 62<br />
Manfred Büchler, Public Sector <strong>and</strong> Corporate Bonds . . . . . . . . . . (44) 333 37 35<br />
John Feigl, Swiss Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . (44) 333 13 70<br />
Dr. Jeremy Field, Vice President, Public Sector <strong>and</strong> Corporate Bonds . (44) 334 56 29<br />
Sylvie Golay, Credit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44) 333 57 68<br />
Elena Guglielmin, Financial Institutions . . . . . . . . . . . . . . . . . . . . (44) 333 57 67<br />
Karsten Linowsky, Fixed Income Strategist . . . . . . . . . . . . . . . . . . (44) 333 24 15<br />
Walter Mitchell, Vice President, Emerging Markets . . . . . . . . . . . . (44) 334 56 67<br />
Dr. Ursula Oser, Vice President, Global Credit Strategist . . . . . . . . (44) 334 56 92<br />
Ernst Zbinden, Swiss Corporate Bonds . . . . . . . . . . . . . . . . . . . . . (44) 333 67 10<br />
Equity Sector Research<br />
Robin Seydoux, Director, Head of Equity Sector Research . . . . . . . (44) 333 37 39<br />
Dr. Luís Correia, Vice President, Global Pharmaceuticals . . . . . . . . (44) 334 56 37<br />
Dr. Maria Custer, Vice President,<br />
Global Biotechnology <strong>and</strong> Medical Technology Europe . . . . . . . . . . (44) 332 11 27<br />
André Frick, Energy, Basic Resources. . . . . . . . . . . . . . . . . . . . . . (44) 334 66 71<br />
Eric Güller, Vice President, Insurance <strong>and</strong> Financial Services . . . . . (44) 332 90 59<br />
Ulrich Kaiser, Vice President, Media, IT Hardware <strong>and</strong> Software . . . (44) 334 56 49<br />
Markus Mächler, Vice President, Automotive, Capital Goods, Transport (44) 334 56 41<br />
Olivier P. Müller, Nordic <strong>and</strong> Italian Banking. . . . . . . . . . . . . . . . . . (44) 333 01 46<br />
Uwe Neumann, Vice President, Telecommunications . . . . . . . . . . . (44) 334 56 45<br />
Maritza Ribeiro, Assistant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44) 334 56 44<br />
Christine Schmid, Vice President, Banking Europe. . . . . . . . . . . . . (44) 334 56 43<br />
Basil Sohrmann, Assistant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44) 334 88 38<br />
Henry Stalder, Assistant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44) 334 56 47<br />
Claude Vautier, Assistant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44) 334 88 38<br />
Equity Strategy<br />
Christian Gattiker-Ericsson, Director, Head of Equity Strategy . . . . (44) 334 56 33<br />
Cédric Spahr, Vice President, Equity Strategy, Emerging Markets . . (44) 333 96 48<br />
Economics & Forex<br />
Dr. Anja Hochberg, Director,<br />
Head of Global Economics <strong>and</strong> Forex Research . . . . . . . . . . . . . . . (44) 333 52 06<br />
Thomas Herrmann, Assistant . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44) 333 57 97<br />
Sven Friebe, Forex Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44) 334 56 91<br />
Marcus Hettinger, Vice President, Forex Strategist . . . . . . . . . . . . (44) 333 13 63<br />
Rol<strong>and</strong> Kläger, Swiss Economist. . . . . . . . . . . . . . . . . . . . . . . . . . (44) 332 09 69<br />
Tobias Merath, Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44) 333 13 62<br />
Sven Schubert, Emerging Market Forex Analysis . . . . . . . . . . . . . . (44) 333 52 28<br />
Zoltan Szelyes, International Real Estate . . . . . . . . . . . . . . . . . . . . (44) 334 83 22<br />
Technical Research<br />
Rolf Bertschi, Director, Global Strategy, Fixed Income, Commodities . (44) 333 24 05<br />
Beat Grunder, Assistant Vice President,<br />
Equities Switzerl<strong>and</strong> <strong>and</strong> Asian Pacific . . . . . . . . . . . . . . . . . . . . . (44) 333 53 58<br />
Sigisbert Koch, Assistant Vice President<br />
Europe Equities excl. Switzerl<strong>and</strong> . . . . . . . . . . . . . . . . . . . . . . . . . (44) 333 94 64<br />
Mensur Pocinci, Assistant Vice President, US Equities, Currencies . . (44) 333 20 69<br />
Equity Trading Research<br />
Lars Kalbreier, Director, Head of Equity Trading Research . . . . . . . (44) 333 23 94<br />
Sadik Akkoka, Quantitative Analysis . . . . . . . . . . . . . . . . . . . . . . . (44) 334 78 07<br />
Hervé Prettre, Vice President, Trading Strategist. . . . . . . . . . . . . . (44) 334 88 57<br />
Roger Signer, Trading Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . (44) 335 72 98<br />
Harald Zahnd, Vice President,<br />
Consumer <strong>and</strong> Luxury Goods, Retail, Emerging Markets. . . . . . . . . (44) 334 88 53<br />
Asia Research<br />
Arjuna Mahendran, Director,<br />
Chief Economist <strong>and</strong> Strategist, Asia-Pacific . . . . . . . . . . . . . . (+65) 6212 6727<br />
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