Substack

Sunday, February 27, 2022

Weekend reading links

1. FT reports that the courts are the latest means by which western multinationals operating in China are being squeezed,

Businesses, including Sweden’s Ericsson, Finland’s Nokia and Sharp of Japan, have lost money after China’s supreme court banned them from protecting their patents by securing licensing deals in foreign courts, the European Commission said. Chinese courts set licence fees at around half the market rate previously agreed between western technology providers and manufacturers such as Oppo, Xiaomi, ZTE and Huawei, it added. The lower licensing fees set by Beijing deprive smartphone makers and other mobile telecommunications businesses of a crucial source of revenue to reinvest in research and development... Smartphone makers have agreed global standards for telecommunications networks. In return, technology manufacturers must license their patents to others. If they cannot agree on a price, they go to court to set it. Chinese courts generally set prices at half the level of those in the west, meaning their companies pay less for the technology from overseas providers.

2. Simon Kuper has a brilliant essay on the 30 years of English Premier League. This quote by Greg Dyke, the head of ITV Sport which won the broadcast rights to EPL sums up an important reason for the success of EPL,

“Who could have foreseen that we’d end up with English football being largely owned by foreign owners, managed by foreign managers, and disproportionately played by foreign players?”

Kuper highlights the pioneering roles played by Eric Cantona, Arsene Wenger, and Roman Abramovic in this transformation. The article has several snippets - no English manager has won the EPL; almost every English club that existed a century ago survives today; EPL's bottom club gets more TV income than every European club bar Real Madrid, Atletico Madrid, and Barcelona.

3. Tamal Bandopadhyay has an explainer on the bank frauds involving Rishi Agarwal and his ABG Shipyard. 

The alleged fraud has all the usual elements: The creation of close to 100 associates, affiliates and subsidiaries; diversion of funds for money laundering; ever-greening of bank loans; and creating personal assets... Since 2012, ABG Shipyard has allegedly defrauded 28 banks and financial institutions of Rs 22,842 crore. ICICI Bank Ltd tops the list with a Rs 7,089 crore exposure, followed by IDBI Bank Ltd (Rs 3,639 crore) and State Bank of India (Rs 2,925 crore).

4. Ajay Shah highlights an interesting point about source of funds for Indian corporates,

Equity made up 22.4 per cent of the total liabilities of private domestic non-financial firms in 1991-92, and has risen dramatically to its highest ever value of 39.43 per cent in 2020-21... (In the same period) Bank+FI financing went down from 27.7 per cent of the balance sheet to 10.8 per cent.

5. From an NYT article which discusses the housing market in the US using the example of Spokane town in Washington state,

The typical home in the Spokane area is worth $411,000, according to Zillow. That’s still vastly less expensive than markets like the San Francisco Bay Area ($1.4 million), Los Angeles ($878,000), Seattle ($734,000) and Portland ($550,000). But it’s dizzying (and enraging) to long-term residents. Five years ago, a little over half the homes in the Spokane area sold for less than $200,000, and about 70 percent of its employed population could afford to buy a home, according to a recent report commissioned by the Spokane Association of Realtors. Now fewer than 5 percent of homes — a few dozen a month — sell for less than $200,000, and less than 15 percent of the area’s employed population can afford a home. A recent survey by Redfin, the real estate brokerage, showed that home buyers moving to Spokane in 2021 had a budget 23 percent higher than what locals had.

6. The Russian invasion of Ukraine is a defining moment of our era. It upends the widely accepted reality that we're past the times of one country invading another. It's a reversion to the historical trend. 

The Russian strategy of backing pro-Russian regimes in "frozen conflicts" involving Russian speaking majority areas to control its neighbourhood is well known. Transnistria in Moldova for over three decades, Abkhazia and South Ossetia in Georgie in 2008, Crimea from Ukraine in 2014, and now Donetsk and Luhansk in Ukraine are examples. It has used supporting rebels and limited conflicts to control its neighbourhood. This one marks a departure from trend in so far as it's a full-fledged invasion. 

The western response to the invasion will be a test case for China. It will scrutinise all the reactions in minute detail to make an assessment of what could be the likely response in case of it itself invades Taiwan. That assessment will play a critical role in shaping the world of at least the next quarter century. Sanctions have so far been imposed on Russian banks and industry, on top leaders including Vladimir Putin, Oligarchs. Germany has cancelled its certification of the Nordstream 2.0 Gas Pipeline. Several countries have barred the Aeroflot from using their airspace. They are now considering severing Russian banks from the international payments network, SWIFT. Are these enough to make the Chinese blink? 

Russia is the biggest gas supplier to Europe, making up a third of the continent's needs

The impact of the tensions has constrained supply and boosted prices,

European gas futures jumped almost 70 per cent to €142 per megawatt hour after the invasion began. A year ago they were €16.

Over the week, the Russian President has given two rambling long speeches. In both, especially the second, he vented the frustration and anger at the eastward expansion of NATO and EU and the perceived threat thereof. 

The importance of Ukraine is highlighted in this long read in FT

As the Soviet Union was crumbling in 1991, US defence secretary Dick Cheney advised his boss that Washington should do everything possible to accelerate that collapse. The US secretary of state, Bush’s old friend and tennis doubles partner James Baker, disagreed vehemently... Torn between Cheney’s and Baker’s views, the Bush administration became badly split. As its senior figures fought over what to do, Ukrainians forced the matter by holding a referendum on December 1 1991 on whether to become an independent state. The result was lopsided: with 84 per cent turnout, the vote was over 90 per cent in favour of independence. Support for breaking away ranged from 54 per cent in Crimea to over 95 per cent in western districts and in Kyiv. Even in Donetsk, Luhansk and neighbouring eastern districts, the vote in favour was more than 80 per cent. The then US ambassador in Moscow, Robert Strauss, advised Washington that this result was devastating for Russians — “the most revolutionary event of 1991 for Russia may not be the collapse of Communism, but the loss of something Russians of all political stripes think of as part of their own body politic, and near to the heart at that: Ukraine.”

Ukraine emerged from the break-up as the third largest nuclear power, bigger than even France or UK.  

Earlier in the week Russia recognised the two breakaway Ukrainian regions of Donetsk and Luhansk, thereby effectively ending the Minsk agreement of 2014. This is an explainer. Jeff Sachs calls for NATO foreswearing its expansion to include Ukraine in return for Russian withdrawal and demobilisation. 

7. The disturbing trend of fiscal dominance in India

If Korea needs to improve its fiscal balance by 2.5 per cent of GDP, non-interest spending would need to be reduced by 11 per cent (2.5 percentage points divided by non-interest spending of 22.3 percentage points). This would be a tall order. But it might be feasible. In contrast, in India the same reduction in deficit would require non-interest spending cuts of 20 per cent (2.5 percentage points divided by 12.7 percentage points), nearly double the reduction in Korea. This would be politically impossible and not desirable either.

8. From the US State Department's just released Indo-Pacific strategy document,

We will continue to... steadily advance our Major Defense Partnership with India and support its role as a net security provider... We will continue to build a strategic partnership in which the United States and India work together and through regional groupings to promote stability in South Asia; collaborate in new domains, such as health, space, and cyber space; deepen our economic and technology cooperation; and contribute to a free and open Indo-Pacific. We recognize that India is a like-minded partner and leader in South Asia and the Indian Ocean, active in and connected to Southeast Asia, a driving force of the Quad and other regional fora, and an engine for regional growth and development.

9. An example of China's extra-territorial actions in trying to kidnap its nationals living in foreign countries and accused of corruption etc in China,

Grace Meng, the wife of the former Interpol chief Meng Hongwei, who was seized and jailed by the Chinese authorities in 2018... a businesswoman and former member of the jet-setting elite whose Chinese name is Gao Ge, and her husband, a vice-minister of public security until he was jailed, are among the highest profile of the many Chinese politicians, activists and business leaders to have been targeted at home and overseas by Xi and the CCP in recent years. In interviews with the FT in Paris and Lyon she described how days after her husband was detained in 2018, Chinese agents made at least two attempts to kidnap her from Lyon — the French city where Interpol is based and where the couple lived — and take her back to China.
Shortly after her husband’s disappearance in Beijing, she fled to a hotel after her home alarm was triggered and her car appeared to have been broken into. Two Chinese men tried to find her at the hotel before she moved to a new location. At the same time, a Chinese acquaintance tried to persuade her to join him on a private jet from Lyon for a business trip to eastern Europe but she smelled a trap and declined to go. On yet another occasion, the Chinese consul in Lyon invited her to come and collect a letter from her husband, but she responded that she would only meet in a public place in the presence of journalists and with the knowledge of the French authorities. The meeting never took place and she says she never saw any letter from her husband.

There is an interesting contrast in the relatively lukewarm coverage for such egregious actions, which are now increasingly commonplace, to the outrage generated in UK by similar Russian actions (see here and here). Is it case of implicit acknowledgement of China's might and a belief that they can get away with aggressive response in case of a less strong Russia. 

10. The fortunes of Netflix in India underlines two aspects about the Indian market. One, the addressable market is really small (small middle class). Two, it's extremely price sensitive.  

The first comes from this graphic 

And the second from this graphic

This captures the problem,
Back in 2016, when Netflix launched in India, Bollywood welcomed the godfather of streaming with open arms. “Producers looked at Netflix as this hen that’s going to lay golden eggs,” said one studio executive. Yet more than five years later, Netflix’s ambitions to find 100mn subscribers from India look like hubris. Today, Netflix has just 5.5mn subscribers in India, according to Media Partners Asia (MPA), a research and consulting company. In contrast, MPA estimates that Netflix’s competitors, Amazon Prime Video and Disney Plus Hotstar, have 16mn and 50mn, respectively — the latter boosted by holding the rights to air Indian Premier League (IPL) cricket matches.

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