The world’s richest man... is in the middle of lobbying Beijing over important decisions for his $1tn electric vehicle business, Tesla... Shanghai accounts for more than 40% of Tesla’s car manufacturing capacity... Tesla has received billions of dollars in cheap loans, subsidies and tax breaks from the Chinese government. The carmaker is highly dependent on its Shanghai factory, the biggest in its global network, for not only selling to the country of 1.4bn people but also exporting its China-made cars to other parts of the world. Musk’s Chinese suppliers, especially in batteries, are also crucial to the company’s global manufacturing operations, including in the US...
For Musk, the Shanghai factory is Tesla’s biggest, producing millions of cars and delivering revenues of $54bn over the past three years — accounting for 23 per cent of its total sales. Tesla has also said its new adjacent factory, building battery packs for electricity storage, is on track to start production in the first quarter of 2025... “Musk is not only vulnerable to Beijing’s pressure given his extensive business interests in China, he also seems to genuinely enjoy close relationships with China’s authoritarian leaders,” says Yaqiu Wang, research director for China at Freedom House, a US-based advocacy group. “This dynamic creates ample opportunities for the CCP to influence Trump’s China policy.”... more importantly to Xi Jinping’s economic planners, the rapid delivery of Tesla’s high-tech factory helped turbocharge the nation’s nascent electric vehicle industry, both in terms of the local supply chain and popularising the EV among retail consumers. Chinese policymakers had “dreamed for 20 years” of a domestic auto industry but the “inflection point was Tesla’s launch in Shanghai”, says Bill Russo, the former head of Chrysler in China and founder of Shanghai-based consultancy Automobility. “Just like the iPhone unleashed a host of Chinese smartphone companies, the Tesla Model 3, initially, unleashed the Chinese EV wave,” Russo says. Over the past five years, Tesla’s global operations have deepened their reliance on Chinese suppliers, whose scale, efficiency and levels of automation have become world-leading.... the future success of Musk’s business in China hinges on obtaining — and maintaining — regulatory approval for his FSD platform, the company’s semi-autonomous driving software... whether Beijing could use Tesla as leverage when negotiating with Trump — both in terms of Tesla’s FSD approvals and access to supplies of key components. “Tesla is looking for a solution on FSD so that could be part of the discussions on tariffs: we give you FSD, you negotiate on tariffs,” says one analyst at a US brokerage, who asked not to be named.
2. Cash transfers to women is the flavour of the times
Nine Indian states with ongoing or proposed cash transfer schemes for women have collectively allocated $18 billion in their 2024-25 Budget Estimates, amounting to 0.5 per cent of India’s gross domestic product (GDP) for the same financial year, according to research by Goldman Sachs.
3. Rana Faroohar describes the coming Trump years as a high stakes geopolitical poker.
If you think of the global economy as one giant Las Vegas gaming table, the US consumer market as the world’s most valuable chip and Trump as a wily deal maker in a high-stakes poker game, then you will better understand what the next four years might look like. For starters, let’s remember that nothing — and I mean nothing — that the next US president says can be counted as fact until the ink is dry — and if history is a guide, probably not even then. We keep trying to analyse Trump’s moves in the way we would those of a normal president. But he is not a normal holder of the office, and never will be. He is a compulsive dealmaker, someone who loves to drive a hard bargain and win — or at least appear to.
4. Ruchir Sharma points to signatures of American exceptionalism in its equity markets gone too far.
The US accounts for nearly 70 per cent of the leading global stock index, up from 30 per cent in the 1980s. And the dollar, by some measures, trades at a higher value than at any time since the developed world abandoned fixed exchange rates 50 years ago... America’s share of global stock markets is far greater than its 27 per cent share of the global economy... At the height of the dotcom bubble in 2000, US stocks were more expensively valued than they are now. But the US market did not trade at nearly so vast a premium to the rest of the world... On indices that weight stocks equally regardless of size and correct for the domination of Big Tech, the US has outperformed the rest of the world by more than four to one since 2009... America’s drawing power in the global debt and private markets is also stronger than ever. So far in 2024, foreigners have poured capital into US debt at an annualised rate of $1tn, nearly double the flows into the Eurozone. The US now attracts more than 70 per cent of the flows into the $13tn global market for private investments, which include equity and credit.
This is an important point
Though most observers think the world is increasingly multipolar, investors believe it is increasingly unipolar — and that makes the markets a zero-sum game. In the past, including the roaring 1920s and the dotcom era, a rising US market would lift other markets. Today, a booming US market is sucking money out of the others. Investors still like to believe that fundamentals drive prices and sentiment. But there comes a time when sentiment starts to drive fundamentals. When money leaves smaller markets, the outflows weaken the currency, force the central bank to raise rates, slow the economy and make the nation’s fundamentals look worse. Talk of bubbles in tech or AI, or in investment strategies focused on growth and momentum, obscures the mother of all bubbles in US markets. Thoroughly dominating the mind space of global investors, America is over-owned, overvalued and overhyped to a degree never seen before.
6. FT has a good article on a secret Japanese project to reclaim its leadership in the semiconductor industry (its market share has fallen from over 50% at the end of 1980s to less than 15% today) with an audacious technological bet.
Rapidus... has raised billions of dollars from both the government and Japan’s leading companies and banks... it is one of the world’s most capital intensive start-ups — and among the riskiest technological bets ever placed by the Japanese government. At the heart of the Rapidus project is an attempt to prove that bespoke chips can be efficiently and profitably produced in small quantities rather than large batches, an idea that overturns the received wisdom in advanced semiconductor manufacturing. About 90 per cent of the world’s advanced chips are produced by Taiwan Semiconductor Manufacturing Company, whose model involves operating at massive scale — with the huge capital costs that involves. If Rapidus succeeds, it would challenge both the economics and geography of the industry... In... three years... Rapidus has leapt from concept to reality. A massively expensive plant is rising from the forests of Hokkaido, 900km north of Rapidus’s headquarters in Tokyo...In December, it will take delivery of an extreme ultraviolet lithography (EUV) machine from Dutch equipment maker ASML, vital for manufacturing the two-nanometre chips the company is targeting for trial production from April. If all goes to plan, mass production is set to begin in 2027... The government has already pledged ¥920bn for Rapidus and in November unveiled a package of ¥10tn ($65bn) for the artificial intelligence and semiconductor industries over the next seven years that could include funds that would double state backing for the company... Alongside huge returns and investment for Japan, Rapidus could open up an entirely new vista for cutting-edge chip production, allowing new companies and countries to enter the industry. It could also ease one of the key geopolitical issues of the day: the concentration of manufacturing expertise in Taiwan... Japan is still home to a deep reservoir of expertise and niche dominance of semiconductor tools and equipment businesses...Rapidus and Japan’s hope of success rests on two highly contested propositions. The first is that the surging AI market means that there will be sufficient demand from smaller customers for customisable special-use chips — bespoke designs that prioritise efficiency and can outperform more generic chips, such as those produced by Nvidia, in specific tasks. Rapidus believes that such customers will pay a premium for speed of production and because they cannot get the required capacity from TSMC, which has its hands full with bigger orders. Rapidus thinks it can win 10 per cent of what it estimates to be the $90bn foundry market. The second, more controversial, bet is that it can reject the core industry premise of large-scale batch manufacturing — printing hundreds of wafers at the same time — in favour of a much quicker single-wafer process.Atsuyoshi Koike, a veteran chip industry executive, claims that producing individual silicon wafers, one after another and at high speed, generates data that can improve efficiency in real time. This increases quality and consistency and raises the “yield rate” — the percentage of chips produced deemed shippable to customers... The company will also use so-called advanced packaging to improve performance by integrating multiple chips more closely together to increase speed and efficiency. Rapidus will, says Koike, boast the “world’s shortest total cycle-time”, meaning the total amount of time it takes to process a wafer in a fabrication plant. And he thinks he can hit yield rates of up to 90 per cent within a year. “Usually it takes up to one year to reach 30 per cent yield and to start the production. But our speed is so fast we can move easily to reach 50 per cent yield at the start of production,” he predicts. “Within one year it might be possible to hit 80 to 90 per cent. The key is how to generate feedback quickly.”
7. With R&D spending across sectors of just 4.7 bn euros, India is a global R&D minion.
It’s R&D spending in technology sectors is just 0.3 bn euros, 2.3 bn euros in automobile and parts, 1.44 bn in health care, and 0.6 bn in basic materials.
This compares with the total R&D spending of 596.15 bn euros among US companies, 222.01 bn among Chinese, 116.3 bn among Japanese, 103.77 bn among German, 37.02 bn among S Korean, 35.92 bn among British, 31.66 bn among French companies.
8. The US economy is a clear standout outlier among advanced economies.
US labour productivity has grown by 30 per cent since the 2008-09 financial crisis, more than three times the pace in the Eurozone and the UK... Data from the Conference Board shows that, in the past few years, labour productivity has dropped relative to that of the US in most advanced economies... According to data by Preqin, the US accounts for 83 per cent of the amount of VC funding in G7 economies over the past decade. The country also attracted 14.6 per cent of the world’s overall greenfield foreign direct investment in the first 10 months of 2024, according to fDi Markets data — a record high. Germany, by contrast, registered its lowest share of global FDI in 18 years.
9. Guru Madhavan makes an important point cautioning the relentless search for efficiency maximisation.
The difference between medicine and poison lies in the dose. This truth speaks directly to government reform. As Washington prepares to launch an efficiency crusade, we must remember that efficiency, wrongly dosed, can sicken the very system it means to improve. This principle extends beyond metaphor. Just as our bodies maintain seemingly inefficient back-up systems (like two kidneys), and financial systems keep seemingly inefficient capital reserves, governments need built-in redundancies and safety margins to function effectively during crises. But widespread worship of efficiency has now created the unfortunate tendency to prioritise it over efficacy at all costs.
10. Renewable energy costs are falling.
Offshore wind, the global average cost has fallen to $81 per megawatt hour, down from $137 in 2018, according to the most recent data from BloombergNEF. That compares with $72 per MWh for coal-fired power plants and $83 for gas-fired power plants, respectively — figures unthinkable just a few years ago.
The article itself recounts the fascinating rise and fall of Ørsted as a Danish wind power pioneer.
Ørsted’s own transformation has its roots in the run-up to the international UN climate change conference in Copenhagen in 2009. Denmark’s national energy company was then known as Dong Energy, and its oil and gas wells and coal-fired power stations accounted for about a third of the country’s entire CO₂ emissions. The conference left a lasting mark on Anders Eldrup, a former top civil servant in Denmark’s finance ministry who was then Ørsted’s chief executive. Before it even began, he announced a plan for the company to produce an ambitious 85 per cent of its electricity and heat from renewables by 2040, up from 15 per cent at the time... State support, high wind speeds in the North Sea and the fact that turbine makers Siemens Energy and Vestas were based near by made the nascent offshore wind sector seem like a good bet. Ørsted pushed the industry forward, developing ever-larger farms such the Hornsea 1 project off the Yorkshire coast — the first globally to exceed 1GW capacity, which started generating in February 2019... In 2017, a year after it listed in Copenhagen, the company sold off its oil and gas production business to the chemicals empire Ineos for just over $1bn. It was also rechristened in honour of the 19th-century Danish physicist Hans Christian Ørsted, who discovered electromagnetism... By late 2020, Ørsted’s valuation reached £51bn — higher than BP’s, even though it produced a fraction of the energy...In the years following the pandemic, as interest rates jumped, supply chains came under strain and investors looked at higher returns elsewhere, Ørsted and others came under increasing pressure. To secure financing — a challenge for renewables companies, where costs are heavily front-loaded — many had already locked in electricity prices on large projects. That was a particular problem in the US, where Ørsted also overestimated its ability to get tax credits from the federal government. When the company warned in August 2023 that discussions were not progressing well, investors began to worry. Early that November, when Ørsted said it would walk away from two huge offshore wind projects in New Jersey, triggering some $4bn in impairments, its shares tumbled almost 30 per cent. The subsequent 12 months have been rough: the company announced that its finance chief and chief operating officer would leave, a suspension of dividends, a downgrade to its renewables target to 35-38GW by 2030 (a reduction from 50GW) and up to 800 job cuts.
11. McKinsey & Co. agrees to a fine settlement of more than $122 million to resolve a felony bribery investigation from its work in South Africa.
The fine... was part of a deferred prosecution agreement that would dismiss the bribery charge against the company after three years if McKinsey meets the conditions of the deal. Separately, a former McKinsey senior partner, Vikas Sagar, who was a leader in its Johannesburg office, pleaded guilty to conspiring to violate an anti-corruption law, prosecutors said. The bribery investigation stemmed from work that McKinsey’s South African branch performed, starting more than a decade ago, for two state-owned companies: one overseeing the country’s run-down electric generating system, the other managing its freight rail system and ports. Mr. Sagar received confidential information about the companies that led to multimillion-dollar consulting contracts, and in return, some of the money McKinsey and its local partners made was routed to two officials as bribes, prosecutors said. “McKinsey Africa participated in a yearslong scheme to bribe government officials in South Africa and unlawfully obtained a series of highly lucrative consulting engagements” that netted McKinsey $85 million in profits, Damian Williams, the U.S. attorney for the Southern District of New York, said in a statement.
It's surprising that such egregious bribery incidents have little stigmatisation effect of western corporations like McKinsey. Imagine a similar incident involving a company from a developing country.
12. Declining EV sales trajectories in N America and Europe.
Matthias Schmidt, an independent car analyst, estimates that EV volumes will decline by 29 per cent this year in Germany, Europe’s largest market, after Berlin abruptly pulled purchase subsidies for EVs in late 2023. France is planning to slash EV purchasing subsidies by as much as half for some families next year... According to analysis by NGO group Transport and Environment, the average price of an EV in Europe was around €40,000 before taxes in 2020. Today, the price is around €45,000. A separate study by the European Commission suggests that the median price European consumers are prepared to pay for an EV is €20,000, including new and secondhand sales.
13. Some measures of China's manufacturing dominance.
China accounts for only 15 per cent of global consumption, less than its 18 per cent share of world GDP and far below its 30 per cent share of manufacturing. That made it reliant on demand in other countries to absorb its enormous excess production... China’s share of global gross production had risen from 5 per cent in 1995 to 35 per cent by 2020 — three times that of the US and more than the next nine countries combined... Its share of global manufactured exports was 20 per cent in 2020, up from 3 per cent in 1995 and dwarfing the US, Japan and Germany. Out of a total of about 5,000 products, China held a dominant position in exports for almost 600 in 2019, at least six times greater than for the US or Japan and more than double that of the EU.
And this is causing problems
Yet policymakers are doubling down on manufacturing. China’s nominal fixed asset investment in manufacturing is expected to grow 9 per cent this year compared with 6.5 per cent last year, according to Morgan Stanley estimates. This threatens to create even more industrial capacity in a country where domestic consumption accounts for about 55 per cent of GDP compared with 70 per cent in rival exporters Japan and Germany, and 80 per cent in the US. China’s dominance of green industries such as electric vehicles, solar panels and batteries has already led to trade restrictions from the EU and the US. And its sluggish domestic demand is causing overcapacity across many other manufacturing segments, analysts say... China’s inability to raise domestic consumption has left it in an unenviable position: weak demand at home and trade-related tensions abroad.
