Consumer Goods: Looming overcrowding?
TIC providers and investors love Consumer Goods testing. It’s highly profitable, it’s stable and it’s growing nicely. According to the established narrative, this is driven by the world’s seemingly insatiable demand for T-shirts and electronics, from which however only incumbent TIC providers can benefit, due to certain barriers to entry (such as the need to have an extensive and costly lab network).
The segment’s attractiveness has repeatedly given rise to concerns that it could become a “battleground”, a hotly contested remaining green pasture in a more and more barren TIC environment. In this thinking, price wars and overcapacities would subdue growth and reduce profitability.
In contrast to such fears however, Consumer Goods testing in the last years still expanded quickly enough not only to steadily yield enchanting margins and growth rates for the incumbent larger TIC players, but also to comfortably accommodate two noteworthy newcomers (AsiaInspection and AQF, now both achieving considerable revenue).
And it continues to attract TIC players, even those who traditionally did not have a significant presence and competence in the field. For example, DEKRA has repeatedly confirmed and underlined its ambitions in the segment with several acquisitions and partnerships, and even Eurofins has recently begun to strongly expand its footprint in the segment, especially in the UK with now at least seven sites for Consumer Goods testing there.
[Especially the latter is a bit puzzling, as up to now most industry participants and observers liked to perceive Eurofins as an “Agriculture & LifeScience” pureplay. We will investigate the question further whether this is purely opportunistic or constitutes a strategic move.]
We believe that the fundamental analysis of “Consumer Goods as a TIC battleground” is quite compelling – to this end, “trouble is maybe postponed, but not called off”.
With global trade frameworks deteriorating and even larger parts of the TIC industry placing their hope on Consumer Goods, it remains to be seen if the segment can continue to reliably deliver on everybody’s aspirations and growth expectations. Will everybody be able to grow as planned? Let’s see.
B2G TIC: Boon and bane
Some parts of TIC have a parastatal character –governments outsource certain testing or inspection tasks to TIC providers, who then perform these on behalf of them. Prominent examples include Trade Inspections, Pre-Shipment Inspection or Statutory Vehicle Inspection.
Such B2G TIC is far from being unattractive, even though it can be bureaucratic. In fact, government outsourcing schemes create (temporary) monopolies, with two appealing features: Inspections are often made compulsory by law, and prices are set by the government. In other words: Nobody can escape and price competition does not exist.
With clever contract design, B2G TIC can be a money-printing machine – as for example indicated by Applus+’ enviable margins in SVI of close to 20% (cp. the 2017 results presentation, p. 17). Winning such contracts can thus provide a nice source of profit, and naturally many major TIC companies are active in B2G TIC.
Yet, the blessing can also turn out to be a curse, as SGS’ experience with Statutory Vehicle Inspection in Uganda tells (http://allafrica.com/stories/201803050136.html ; https://www.independent.co.ug/inside-sgs-contract-saga). In short, the Ugandan government decided to reintroduce SVI, and SGS won the contract and set up operations. But parts of the Ugandan Parliament became more and more unhappy with the whole thing, finally accusing SGS of bribery, not meeting promised job creation targets and implicitly of expropriation.
We’re leaving it to others to judge and determine whether or not these accusations are correct. For us, this colorful story of what B2G TIC can be like is a stark reminder that it can hold significant risks. As tempting the honey pot of large B2G TIC profits may be, TIC companies must be aware that corruption risks are real and that they effectively put themselves at the mercy of governments, whose decision-making is politicized, not necessarily commercial.
In our opinion, TIC providers should not depend too much on B2G TIC businesses with their high risk of potentially erratic and intransparent political decisions. It’s okay as an icing on the cake, but not as the cake itself – because unfortunately, governments at times decide to give the cake to someone else or to close the bakery.