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Cybersecurity and Digital TIC: Tales of pride and fall

July 1, 2019

Even though quite likely untrue defamation by envious rivals at the court of Catherine the Great, the story of “Potjomkin’s villages” continues to hold a prominent place in the collective set of European metaphors. Its powerful imagery still works today: Refer to them, and most people promptly see the fake houses painted on canvas along the Dnieper’s beds in their mind’s eye, and immediately understand the implication.

And because some things haven’t changed since the prince’s alleged deceit in 1787, the story continues to enjoy unbroken popularity. Still today, some people apparently feel the need to cover up failings and shortcomings by painting in glowing colors and by embellishing on a grand scale, pretending that results/achievements/progress/life are great. Just like in the story, this can work quite well and quite a while, saving faces and jobs.

Not even stoic consultants are immune to that powerful imagery. When reading certain statements by some TIC players on Cybersecurity, the gap between the bold assertions on the one hand and the rather unexciting reality on the other is too obvious – so striking that we can’t help thinking of the proverbial canvas villages:

  • Some recent remarks, made by TIC top-level executives during press conferences and in results presentations, suggest a level of Cybersecurity competence and Digital capability that in most cases simply does not exist in practice. It is okay to stretch things a bit, but neither is the TIC industry a thought leader in the field nor the natural address to turn to. Rather, the industry is not even able to protect itself against Cybercrime, as the Eurofins hack has vividly illustrated.
  • Likewise, the mellow wordiness of some exhilarating press announcements on Cybersecurity partnerships with OEMs only hardly obfuscates the very uneven arrangements behind: that TIC players felt compelled to team up with OEMs to get a foot in the door at all, and that most of the competence and business rests with the partner. That is yet another clear indication that the TIC industry is about to lose the battle against OEMs reg. asset-related OT Cybersecurity, and that it is devolving into a mere subcontractor role in this field.
  • Furthermore, some players’ praised investments into “Digital” appear less stellar when compared to others’ efforts and initiatives. Just as an example: U.S. Venture Capitalists and strategic investors are pumping triple-digit millions into the next wave of Cybersecurity start-ups, fueling nail-hard competition between these tech-savvy, promising and ambitious newcomers and pushing them to maximum performance and progress. Neither does the TIC industry match that level of spending, nor are most players able to keep up with that pace.

Some readers may feel being treated unfairly, and it would indeed be incorrect to say that all of the TIC industry is on the wrong track. Many TIC companies have realized that Cybersecurity and Digital competence will be crucial for continued success in TIC, but not all players seem to achieve actual progress or take the topic seriously. In consequence, we observe a growing disparity between those TIC players really working on Cybersecurity/Digital and making headway, and those just pretending to do so and resting on their laurels.

In our view, this growing division between the “future-proof TIC players” and the “heroes of the past”, and not hypothetical synergies, will trigger the next consolidation wave in the industry. And this will follow a very simple “predator and prey”-logic: The “future-proofs” will acquire the others, or only those parts of the obsolete players useful for them.

Pride comes before a fall, but a fault confessed is half redressed. The TIC players on the slow track reg. Digital/Cybersecurity should finally acknowledge that they are not just falling behind against new competitors from outside, but that they are unwillingly turning themselves into acquisition targets for the next wave of TIC consolidation – and that seducing oneself and fooling others with sweet little lies will take them nowhere.

 

Photo copyright: Gregor Sailer

ALS Global/China: Eastern Misgiving

June 3, 2019

At times, writing an article for this TIC blog can be a straightforward thing. After reading the comments ALS Global’s CEO Raj Naran made on the divestment of ALS’ Chinese environmental business in the Australian Financial Review, we decided to simply quote a few of his memorable statements.

Your stage, Raj:

  • “China (is) one of the larger markets globally for environmental work (…), (with) ALS' business (of three labs in Shanghai, Beijing and Guangzhou) being small in a market with more than 16,000 laboratory competitors.”
  • “What we've seen is an increasing trend in China of vertical integration … many of our clients that we've had over five years have developed their own in-house testing facilities”
  • “We're just a laboratory services provider. So we're increasingly disadvantaged when competing with companies that have services across the value chain.”

  • “In China there's evidence of increasing provisional-level regulations requiring testing services to be done locally in province, and this really is against our business model”

  • “With higher levels of governance … we really don't see a real opportunity for growth for ALS.”
  • “Government policy changes rapidly in China. And subjectively, as a wholly owned foreign entity, I feel like we are a little bit disadvantaged in the local market.”

To us, this is not news at all. And it definitely contradicts the “China domestic market”-narrative so popular in TIC. Instead of finding unlimited growth opportunities in an enormous market that is gradually opening up and prone to more outsourcing, ALS Global experienced the exact opposite: A tough fight with strong local competition for shrinking volume, more and more hampered by unfavorable government policies and interventions.

We have always been skeptical that the longed-for liberalization and opening of the Chinese domestic TIC market would resolve all worries and fuel the TIC industry’s next growth cycle. This does not mean that we negate the great potential TIC possibilities in China – but they have to be viewed realistically, with a pinch of salt, as ALS’ experience shows. China is not going to be the silver bullet for the TIC industry, and success in this increasingly difficult market is hard work and cannot be taken for granted.

We are firmly convinced that we are going to hear more stories of this kind, as the Chinese government’s adamant push for consolidation of the domestic TIC scene slowly bears fruit, in turn gradually making life harder for Western players. In the worst case, their revenues and profits could have peaked already.

Let’s see which major TIC player is going to be the first one to come up with a more realistic view on opportunities in China – and let’s see how investors will react. Our feeling is that they have grown a bit too accustomed to the good old fairytale of “Eastern Promises”, and that the rather unsettling and sobering new stories are not going to be received well.

 

https://www.afr.com/business/professional-services/not-easy-being-green-als-cites-rule-changes-in-chinese-withdrawal-20190502-p51ji3

https://www.caixinglobal.com/2019-05-06/australian-lab-testing-giant-cites-competition-rule-changes-for-china-withdrawal-101412128.html

 

China-US trade tensions: Hardball

May 13, 2019

It could have been so great. With Chinese Vice Premier Liu He and his 100+ member trade delegation coming over to Washington D.C. last week, the setting would have been perfect for forging the long-awaited Chinese-American trade deal – and of course then celebrating it, with bold words of renewed friendship and entire photo albums filled with nice pictures of smiles and handshakes. And that would have only been the teaser for the much bigger show that would have followed between Donald Trump and Xi Jinping at the G20 summit in Japan next month. Instead, Donald Trump decided to unilaterally tighten existing and to impose further tariffs, thwarting hopes that a trade agreement between China and the United States can be found any time soon.

To readers of this blog, this probably was less of a surprise. We had already concluded in February that the trade tensions are only the result of a much more fundamental, political-military confrontation between the two countries, and that the conflict is likely to follow an upward zig-zag escalation path (cp. blog post "Decoupling").

In our view, it becomes more and more obvious that “deal” is not going to mean “compromise between the two”, but most probably that one side (China) would have to buckle and accept the demands of the other (USA). Quite hard to imagine for decision-makers from a culture obsessed with maintaining face, and for a country still deeply humiliated by the brutal Western harassment and bullying-for-concessions in the late 19th century.

But for Donald Trump, anything but total victory is likely to be inconvenient. The trade conflict not only serves as a useful reassurance for his voters that he adheres to his policies and promises, but potentially as a very valuable tool in the upcoming 2020 presidential elections. His latest tweets on the topic already gave an impression that he is willing to leverage it for his re-election campaign. It could be too temptingly useful for delivering a few slaps into his opponents’ faces now and then, constantly reminding the electorate that Democrats haplessly and passively witnessed Chinese expansion while he is taking decisive action to limit China’s influence.

The Economist concludes that all this has already damaged the “Chimerica” economic arrangement that worked so well in the past decade, and that it will, even if resolved soon, leave an unstable relationship between the two countries, hardly able to serve as a solid foundation for the world economy again. And hopes could be exaggerated that relocation of Chinese production to other markets will counter the losses and re-balance world trade again. Instead, it seems that key “potential relocation economies” are being hurt as well, as for example the recent (negative) development of Korean exports could indicate.

All in all, the Sino-American trade tensions have begun to scar world trade, and there is limited hope for quick relief. In consequence, this sends the wrecking ball through key elements of the good old TIC growth story told so often and indeed valid for such a long time: that the TIC industry grows because global trade grows. Let’s see which growth rates the TIC industry is able to achieve without such a major structural support and fundamental driver.

In any case, the impact on TIC as a late-cyclical industry will be delayed, but we are certain that it will be felt. We expect negative impacts to materialize in HY2/2019, potentially ruining the traditional “Christmas rallye”.

Betting on a miracle healing is not illegal, but likely to turn out to be a miscalculation, in our opinion. Therefore, we can only repeat our recommendation to finally factor all this in, and suggest to give sufficient notice after HY1 – instead of otherwise having to reveal a very big ugly surprise later.

 

Economist: https://www.economist.com/leaders/2019/05/11/the-us-china-trading-relationship-will-be-fraught-for-years-to-come

Capital Economics on world trade: https://www.capitaleconomics.com/publications/global-economics/global-trade-monitor/global-trade-volumes-set-to-contract-again-in-q1/

Korean exports: http://www.koreaherald.com/view.php?ud=20190513000624