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Private Equity Firm Invests in the Growing PC Gaming Industry

Background and challenge

With the PC gaming industry growing worldwide, the race is on for growth-minded firms to take advantage of opportunities in rapidly maturing markets in the Asia-Pacific region and in Europe, the Middle East and Africa. One of the most enticing markets is China, with a rapidly growing middle class and a tech-minded culture.

A private equity firm was considering how to maximize the value of a portfolio company that was a leading supplier of components to high-performance gaming PCs. The private equity firm enlisted L.E.K. Consulting to evaluate the forecasted growth of the international PC components market and to assess the company’s competitive positioning within the market.

A key challenge was understanding how the gaming market segments across hardcore gamers, core gamers and moderate gamers. The client needed to know how the segments varied in spend.

Approach and recommendations

We took a murky environment and prioritized three key dimensions: PC gaming population, penetration rate of products into the gaming population and spending by gamers.

In order to assess each of the three dimensions, we had in-depth discussions with key market experts and identified two new growth drivers: eSports and virtual reality. We then launched a survey of more than 1,500 gamers worldwide to understand current and potential consumer habits and the impact of growth drivers.

Our assessment culminated in a forecast for global demand of PC components segmented by region and product. We determined the key purchasing criteria of gamers and how the company performed across each criterion by product. We were able to successfully identify where the company had competitive advantages and where there was room to grow.

Finally, we were able to identify the size and fit of adjacent PC product opportunities for the company to capture.


Our assessment provided assurance around the long-term growth prospects for the company and documented the value. Using our work, the client successfully sold its stake for a significant multiple of its initial investment.

Music Giant Refreshes Digital Music Strategy by Understanding New Consumer Behaviors and Product Models

Background and Challenge

New and disruptive streaming music services have unsettled the music business. A major music company was evaluating the future of its digital music offering as physical sales and downloads plummeted.

As a result, the major record label enlisted L.E.K. Consulting to further understand the consumer audio listening behaviors and trends of current and potential customers. One challenge was assessing the landscape for existing and emerging digital models in order to prioritize future action.

Approach and Recommendations

L.E.K. organized a consumer survey across various demographics and U.S. locations to gain insight. The survey focused on key behaviors and psychographics to understand the broader U.S. population. Key inputs of the survey involved:

  • Historic and current music consumption
  • Key purchase drivers and inhibitors
  • Marketing access or action channels for distribution
  • Segmentation characteristics

The survey indicated that digital purchases were growing significantly, with digital streamers forming the core targeted market. To better understand the population, L.E.K. segmented customers into seven groups across all demographics: ethical downloaders, obsessed music customers, sharers, peer-to-peer copiers (pirated music), free-only streamers and traditionalists (still favor CDs).

We then analyzed these core customer groups to evaluate their spending habits and how spending was changing. The results indicated that there were new opportunities to increase conversion from digital service to paid acquisition, convert the traditionalists, monetize the free-only streamers and deal with the pirates.


Equipped with specific and actionable strategic recommendations, the major media giant refreshed its global music strategy. L.E.K. also recommended it build a robust period-to-period or continuous response tracking system. The company is now able to better track trends over time, achieve economies of scale, and create the ability to evaluate customers and noncustomers at the segment level.

Local Casino Leverages Playbook to Optimize New and Existing Operations

Background and challenge

As legislation eased on non-Nevada casinos and online gambling grew, competition heated up significantly for long-standing existing regional casinos. Our client, a regional casino brand, was facing increasing competition from new casinos in the region. In the near term, the client was at risk of losing 25-30% of its revenues.

A key challenge was in identifying which casino market segments were expected to grow while staying protected from competitors. L.E.K. Consulting evaluated the current property ownership of the client to identify which regions may have growth opportunities and how they may be protected.

Approach and recommendations

L.E.K. took a two-pronged approach for improving the client’s business: optimizing existing and potential assets.

In order to identify challenges with existing assets, L.E.K. conducted in-depth discussions with management. Leveraging L.E.K. intellectual property, we were able to identify three key tools that would help the client optimize its existing business:

  • Formalize the training and development of management
  • Streamline the return-on-investment tracking of marketing efforts

Additionally, L.E.K. identified and evaluated five vectors for growth:

  • Transform the adjacent tourist area with existing land ownership
  • Expand its customer base through effective markets
  • Build casinos in new markets without existing land ownership
  • Develop a presence in the online gaming market
  • Acquire other high-growth properties

We rigorously evaluated each vector by risk level, expected return on investment and necessary upfront investments required. Then, we developed a detailed playbook of best practices across each of the tools for optimization.


Armed with plans to optimize the business, the local casino successfully transformed existing operations and improved cash flow. After L.E.K. completed the project, the client successfully renovated its properties to support continuing growth in the business.

Fast-Moving EV Battery Market: How to Win the Competition?

The global trend toward electric vehicles is taking place in China’s auto industry. Strong policy support and continual technical advances are the key drivers. For example, the U.S. government incentivizes EV purchases by providing a tax credit of up to $7,500. China has also set ambitious targets and introduced subsidy policies for new-energy vehicles, making China the world’s fastest-growing EV market.

The prospect of continued rapid growth in EV sales is beyond doubt. However, with changing subsidy policies and maturity of the market, competition will become increasingly intense. The American government is considering cutting the tax credit mentioned above, and that will have a significant impact on the EV market. In China, data shows that China’s overall subsidy on new energy vehicles in 2017 has dropped by 40% as compared with 2016, although EVs with high energy density and long battery life continue to receive support from the government. China will stop subsidizing pure EVs with battery life below 150 km but increase subsidies for models with longer battery life.

Under the policy changes, the fast-growing EV battery market is facing increasing challenges. Entry barriers are becoming higher and the market is consolidating. The number of EV battery manufacturers in China dropped from about 150 in 2016 to fewer than 100 in 2017.

So, what are the key success factors?

1. Investing in technologies: Follow the development of next-gen technologies

NiCoMn/ NiCoAl (NCM/NCA) batteries enjoy advantages in energy density and are catching up in cost.

Energy density: In China, policy guidelines require that the energy density of a passenger vehicle battery needs to reach 300Wh/kg by 2020 and 500Wh/kg by 2030. NCM/NCA batteries will be the only ones that can achieve this level of energy density.

Manufacturing cost: Increasing battery production brings economy of scale, with the cost of NCM/NCA batteries estimated to further decline over the next few years. Although the recent rise in the price of cobalt is a factor, it’s still highly possible that NCM/NCA batteries will break the threshold of 1,000 RMB/Kwh in two years.

Safety and service life: Both the safety and the service life of NCM/NCA batteries will be further improved with technical advances, such as better battery management and cooling systems. The number of full charging cycles for this type of battery will reach 1,200 (nearly a 15-year life) by 2020.

We project that global market demand for NCM/NCA batteries will increase rapidly.

In addition to NCM/NCA, a series of new technologies are emerging that will shape the market in the long run. For example, lithium-ion with solid electrolyte can greatly improve safety and energy density. The energy density of lithium-ion batteries with solid electrolyte can be 2.5 times greater than that of liquid electrolyte. Meanwhile, with the absence of liquid electrolyte, storage becomes easier, and additional cooling systems or electronic controls are not required, significantly enhancing safety.

Toyota announced significant progress in solid electrolyte battery research at the end of 2017 and plans to begin shipping cars with solid-state batteries in 2022. In China, several companies and research institutes have also begun research on solid electrolyte batteries. Contemporary Amperex Technology Co. Limited (CATL) and China Aviation Lithium Battery Co. (CALB) have announced that they are both accelerating the development and commercialization of solid-state batteries.

Lithium-ion batteries with solid electrolyte still have problems such as high manufacturing costs, insufficient solid interface stability and low electrolyte conductivity, although these problems will gradually be solved. We believe that early commercialization of solid-state batteries might occur by 2022, with gradual achievement of scale industrialization by 2025-2030.

2. Ramping up capacities: Accelerate capacity buildup and drive cost down through scale

Manufacturing capacity for EV lithium-ion batteries will expand rapidly to reach 180GWh globally by 2020. China will be the fastest-growing country in terms of capacity, with an estimated 60%-65% of share by 2020, surpassing that of the United States.

Low capacity and disadvantages in economy of scale will be the major challenges faced by small to midsize manufacturers.

Cuts in subsidies and pressure from downstream OEMs will squeeze the profit margin of battery manufacturers. Companies need to expand capacity to gain an edge on capacity and cost in order to survive. “Megafactories” with 20GWh capacity will bring significant competitive advantages.

Capacity expansion results in a reduction in manufacturing costs. Tesla claims that its newly built megafactory will lead to a 30% drop in battery cost. CATL achieved a 15% decrease in battery cost in the past two years through technology upgrades and capacity expansion.

Rapid expansion of capacity will bring about financial risks. Therefore, strategic partnerships with downstream OEMs are vital to risk reduction. The $5 billion joint venture between Panasonic and Tesla is the most well-known example of how EV battery manufacturers cooperate with OEMs to deal with competition and risks. Similarly in China, SAIC and DF Motor invested in CATL, and BYD announced cooperation with Guoxuan High-Tech. These are all considered to be forward-looking strategies.

3. Moving up the value chain: Control key technologies and resources through vertical integration

EV battery manufacturers (and some EV manufacturers) consider vertical integration as key to lowering costs, extracting more value through synergies both upstream and downstream, and avoiding commodity price/supply fluctuations.

Electrode materials

Given the growth in battery sales, demand for raw materials will increase rapidly, especially for nonferrous metals such as lithium, nickel and cobalt. Steady cobalt and nickel supplies are of critical importance.

  • Cobalt: Further promotion of NCM/NCA batteries will drive demand for cobalt, pushing up its price
  • Nickel: The trend toward “high nickel” will drive increasing demand for nickel sulfate; however, domestic pressure about environmental protection concerns may limit the supply capacity of nickel sulfate
  • Lithium: The demand for lithium carbonate is rapidly increasing, but capacity is lagging, leading to a short-run gap between supply and demand

Lithium battery manufacturers can invest in the upstream and strengthen control of raw material supply. With the increase in cobalt prices, competition between tech companies and EV battery manufacturers/OEMs for cobalt resources has intensified. Apple is negotiating on the long-term purchase of metallic cobalt from mining companies, seeking five-year or even longer stable contracts. Tesla and BMW have announced negotiations with mining companies to ensure raw material supply. In China, CATL and BYD have strengthened their supply chain and control of upstream battery materials in 2017.

Further promotion of NCM/NCA batteries will drive demand for raw materials even while new capacity is limited in the short run. The market is concerned that prices of raw materials will soar over the next three to five years. However, with increases in capacity or emergence of substitute materials, we project that pricing will become stable within two to three years.

Take the case of cobalt for analysis. Increase in capacity of existing projects and the launch of new cobalt mine projects (there are approximately 400 active cobalt mine projects in the world) will gradually increase overall capacity. Hence, we project that the price of cobalt will stabilize after 2019 unless affected by special factors (such as political instability in Republic of Congo, the main supplier of cobalt).


Cathodes account for the highest proportion of cost in battery production, reaching approximately 30% of the total cost.

In China, most components, except separators, have been supplied by local manufacturers. Strengthening R&D-driven investment should be the priority for future development.

It’s important for EV battery manufacturers to strengthen control of the value chain, push proper vertical integration, and control key upstream resources or technologies. Vertical integration is the trend, but associated risks need to be mitigated, including financial pressure, policy uncertainty and upstream material price fluctuations.

We are witnessing great changes in the EV and battery industries. To survive and thrive in this dynamic market, all players must consider carefully how to follow technology development, leverage economy of scale through capacity and capture more value through appropriate vertical integration.

Fast-Moving EV Battery Market: How to Win the Competition? was written by Yong Teng and Helen Chen, Managing Directors at L.E.K. Consulting. Yong and Helen are based in Shanghai, China.

For more information, please contact

Top 8 Insights From the 2018 Beauty, Health & Wellness Survey

Think nutritional supplements and skincare are of interest only to consumers of a certain age? Think again. According to L.E.K. Consulting’s third installment of a biennial survey of the healthy living marketplace, this one focusing on nutrition and skincare, some 80% of health and wellness (H&W) consumers across generations — from millennials to baby boomers — are highly engaged with both categories.

The survey captured insights from more than 1,600 respondents, representing roughly 77% of the U.S. adult population who identify with H&W themes, and generated eight key insights across categories. Together these insights make clear that consumer interest in nutritional supplements and skincare often lasts a lifetime.

For additional insights, please see L.E.K.’s 2016 Health & Wellness Survey and the two-part 2015 Health & Wellness Study: “The Many Faces of H&W Consumers” and “Six Ways to Win With H&W Consumers.”

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U.K. Specialist Lending Market Trends and Outlook 2018

The U.K.’s specialist lending sector plays an essential role in providing credit to the c. 20 - 25% of the U.K.’s adult population that is considered sub-prime and is poorly served by mainstream financial institutions.

In our previous Executive Insights covering the sector’s development between 2009 and 2014 (Consumer Specialist Lending: Newly Sustainable or Another Boom-and-Bust?), we discussed its revival in the aftermath of the financial crisis. Outstanding balances at the end of 2014 had started to approach pre-financial crisis levels, which naturally raised questions about the sector’s sustainability as it navigated through changes in regulatory supervision. We highlighted the essential ingredients for success for lenders operating in this new world.

Two years on – a paradoxical overall growth story…

By early 2018, a significant majority of the sector had achieved full regulatory authorisation. Affordability assessment has become an important feature of operating in this sector and lenders that we work with have significantly enhanced their focus on both income and expenditure assessments to ensure that customers are able to repay.

This tightening of processes and focus on responsible lending might have been expected to reduce the amount of credit from specialist lenders, but the actual progression of the market has defied this logic. Between 2014 and 2016, our analysis suggests that the overall outstanding balances of lenders actively operating in this market grew at c. 9% p.a., with balances in aggregate at the end of 2016 at an all-time high of c. £16 billion (see Figure 1).

…however, there are variations at a product level

As Figure 1 shows, point of sale finance and credit cards have been the largest drivers of growth. This is in part linked to greater consumer confidence and spending over recent years, as well as expansion from the supply side driven by the greater availability of financing at retailers, the increasing maturity of lenders (including more rigorous underwriting, and better and broader use of data), and the availability of alternative funding, including securitisation. Store cards and credit unions, in contrast, experienced relatively modest growth, reflecting the greater maturity of these segments.

There are more disparate trajectories at a product level within the ‘Other unsecured products’ category (see Figure 2).

  • The increased regulatory scrutiny of and intervention in the ‘rent to own / buy’ sector has contributed to a significant decline in balances. In parallel, the ongoing migration of customer channels towards online has meant a re-evaluation of business strategy for this type of lending. This will continue to play out over 2018.
  • Growth in the car finance segment has mirrored growth rates seen in prime car finance, reflecting greater consumer confidence and used car purchases, increased availability of finance from lenders and online brokers, and a gradual progression towards higher LTV lending.
  • Following a period of steady decline to 2014, home collected credit has been relatively stable over the last two years, in part driven by the greater professionalisation of smaller players. However, we expect to see an overall decline in balances in 2017, reflecting the well-chronicled changes in the operating model of the industry leader.
  • High Cost Short Term Credit (HCSTC) lenders have resumed growth after achieving full authorisation. As expected, the leading players are now offering a range of medium-term products (12-24 months) in addition to their short-term propositions, resulting in an uptick of balances between 2015 and 2016. We expect these to have grown further in 2017.
  • Guarantor lending is now emerging as a more mainstream product, with significant growth in balances in recent years. While the industry leader continues to grow originations and, with the lion’s share of the market, drive growth of the category overall, a couple of smaller players are also beginning to reach maturity.
  • This period also witnessed the growth of longer-term unsecured loans at APRs in excess of 40%, completed both through branch and online / remote channels. Despite advances in scoring and risk assessment, the latter continues to be a challenging channel to operate in and we may very well see some changes to this landscape in the next twelve months.

Standing back from the individual product level, there has also been some momentum towards multiple product offerings from some of the larger market participants. However, this has largely stopped short of any genuinely integrated offering that provides a holistic solution to customers’ borrowing needs.

Our views on the health of the market and outlook

The industry is far more mature in its post-authorisation phase and credit is due to the regulator for having taken the industry through this process diligently. Consumers are, with few exceptions, being treated fairly, and affordability and forbearance are part and parcel of business as usual. Existing businesses continue to innovate around their propositions and products, and new entrants are operating under the stricter rules of the game. With some exceptions, in 2017 we expect the sector to have seen continued strong growth of balances.

Looking at 2018, there continues to be considerable unmet demand. However, economic uncertainty remains the key unknown at an industry level. While consumer affordability assessment has certainly been made more robust and there are built-in buffers in most players’ income / expenditure assessments, there may be some adverse impacts to originations and default rates should a slowdown materialise.

Beyond this, the potential for a more integrated “whole of customer” offering remains, and the impact of Open Banking / PSD2, may offer further opportunities for non-standard lenders to compete at the margins with prime lenders and banks in some product categories. But it’s early days in these areas, and we don’t expect 2018 to see market-altering progress.

Australian Public Transport Barometer – June 2018

The Australian Public Transport Barometer has been developed in partnership between the Tourism & Transport Forum (TTF) and L.E.K. to provide up-to-date insights about the performance of major metropolitan public transport networks in Australia. Each edition monitors public transport across Australia as well as explores the specific challenges and opportunities facing service providers. 

The Barometer promotes the role of public transport in Australian capital cities and looks at how operators are achieving improvements in customer service nationwide. 

In each edition of the Barometer, we examine a specific issue affecting public transport in Australia. ‘In the Spotlight’ this time observes how public transport patronage has seen different fortunes based on geographical location and mode. We explore the rising congestion levels in Australian capital cities and the subsequent impacts on public transportation. 

TTF & L.E.K. Consulting Public Transport Barometer July 2015

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