Weekend reading links

1. Sobering tale of Qantas, Australian national carrier, as it pursued profit maximisation at the cost of all else,

Founded in 1920 and nationalized in 1947, the carrier was slowly privatized in the 1990s, and only 51 percent of shares in it must be held by Australians, while the rest may be held by offshore investors. Still, the Sydney-based airline is critical to the ordinary functioning of Australian life, operating 61 percent of domestic flights...

Australians bemoan that its flights are unreliable and expensive. They are aghast at how government protectionism has made Qantas by far the biggest airline in Australia and pushed up the price of travel. They are stunned by allegations that it sold tickets for flights it never intended to fly. They cannot square how Qantas unfairly laid off hundreds of workers, then handed out enormous paychecks to its chief executive and board directors... finding that Qantas illegally outsourced the jobs of nearly 1,700 baggage handlers during the pandemic, in part to prevent union action... Now, as the baying for blood intensifies, labor unions and lawmakers are calling on the company’s board to resign en masse. The anger is personal for Australians, who feel profound ownership over the carrier that bills itself as “the spirit of Australia”... Qantas is rooted in Australian aviation history and long enjoyed a reputation for safety and comfort... signing up for a Qantas frequent flier account is a rite of passage for many. The recent scandals, which many Australians see as betrayals, sting acutely... 

Qantas may be scrambling to apologize — but its balance books are in exceptional health. Last month, it posted a record annual profit of 2.47 billion Australian dollars, about $1.6 billion, as well as multimillion-dollar bonuses for the previous chief executive, Alan Joyce, and other top brass, and a share buyback program of 500 million Australian dollars. Those blockbuster results have come at a cost, with the pursuit of short-term profits above all else tarnishing the brand in some customers’ eyes, said Angus Aitken, a Sydney-based stockbroker and the founder of Aitken Mount Capital Partners. “Profitability is one thing, but you also have to look after your clients.”

2. As interest rates go up and the economic growth slows down, private equity firms are seeing their buyout deals dry up and instead private debt deals are on the rise. Buoyed by the higher interest rates, PE firms are competing with deposit taking banks to make corporate loans. 

Apollo’s private credit unit now manages more than $400bn, dwarfing the $100bn in assets under management in its buyout division, historically the cornerstone of the group’s business.

3. A now viral scathing essay by Garrison Lovely on how it feels to be working at McKinsey,

What does McKinsey do? Generally, it deploys teams of sleep-deprived, overeducated young people to solve tough problems for organizations—typically for-profit businesses, though the firm also serves many governmentsand large nonprofit organizations. If you’re a CEO who wants help evaluating whether to enter a new market or lay off thousands of employees, you might hire McKinsey. McKinsey made the prescient decision to avoid credit for its work, keeping its client and project lists secret. In practice, this has insulated the company from the disasters it was party to, such as the collapse of Enron... McKinsey was an amoral institution willing to do almost anything for almost anyone who will pay them.

4. Works in Progress article about the transformational impact of floatation technique for copper mining pioneered at the turn of the 20th century by Daniel C Jackling that allowed easy extraction of copper from even low grade ores and ushered in the electrical era. 

According to mining expert Paul Gait, if you look at the number of labour hours it takes to mine and refine a tonne of copper, it has fallen rapidly and consistently over much of civilised history. At the time of the Roman Empire the price of a tonne of pure copper was equivalent to roughly 40 years of the average wage: forty years of work. By 1800 this had fallen to six years per tonne. In the following 200 years to the early twenty-first century it dropped to just 0.06 years (or 21 days) per tonne.

This technique also brought in its wake an environmental disaster as it led to the razing down of mountains and digging of massive open pit mines to extract copper. And given the climate transition imperatives, the importance of copper will only multiply.

The average internal combustion engine car contains about a mile of copper wire. The average electric car contains three or four times more. Then there’s the many tonnes of copper we will need for all the wind turbines, solar panels and other grid infrastructure you need if you’re relying ever more on power – copper for the circuitry inside them, for the windings in generators and transformers and, most of all, for the thick, shielded cabling taking power from one place to another. All told, according to some estimates the green energy transition will necessitate us doubling the total amount of copper we use each year from around 25 million to more than 50 million tonnes.

5. India's tourism market is increasingly dominated by domestic tourists. 

Worryingly the number of foreign tourist arrivals in the 12 months to June 2023 was just 8.4 million, 21% lower than the 10.7 million for the same period ending June 2019!

On the positive side, the potential for growth is enormous

6. Two very promising graphics about the Indian economy. First, India is the least leveraged global economy.

Second, corporate debt service burden is very low.

7. Excellent FT long read on the human resource challenge facing Dyson, the British engineering group famous for its vacuum cleaners and air filters, as it tries to get employees back to office following the pandemic. 

This is a very good article that captures all the different aspects of the issue. Clearly the nature of Dyson's business demands that employees need to be physically present. And that has been the norm till the pandemic. The employees have realised the convenience and benefits of work from home and want to continue the practice. 

I don't understand the need to have an equivalence on these two positions, as the FT article appears to take. Dyson is a private business with its shareholders and its set of business requirements. If they require the workers to be physically present, then where's the need for any debate. Such moral equivalence framing is a slippery slope wherein over time the convenience of working from home starts to becoming an entitlement demanded by workers even if it comes in the way of the business requirement. What prevents the emergence of a world where one day a week is earmarked for work from home as a basic worker right? 

Even the equivalence is asymmetric. While the articles talks about employees being intimidated by the HR tactics of Dyson to get people back to work, there is no reference to the intimidation of Dyson and others by employees and the opinion makers to accommodate work from home for employees. 

8. A big story over the week was the decision by the US Federal Trade Commission (FTC) and 17 States to sue Amazon, alleging "illegal use of monopoly power to overcharge consumers, hobble competitors, and exploit sellers on its marketplace". 

The landmark lawsuit... accused the $1.3tn ecommerce giant of increasing fees to sellers on its marketplace so that it extracts nearly half of every dollar of revenue made by many sellers. The FTC also alleged that Amazon punishes sellers that discount heavily by making them “effectively invisible” in its search results and forcing vendors to use its “costly” logistics network. “Most sellers must now pay for advertising to reach Amazon’s massive base of online shoppers, while shoppers consequently face less relevant search results and are steered toward more expensive products,” according to the complaint, filed in federal court in Seattle... “Our complaint lays out how Amazon has used a set of punitive and coercive tactics to unlawfully maintain its monopolies,” Lina Khan said in a statement... The heavily redacted complaint detailed ways in which it said Amazon built up and maintained both an “online superstore” attracting hundreds of millions of shoppers, and an “online marketplace” where other vendors could sell their products, creating a behemoth of goods and data that would-be rivals could not match... To maintain this alleged monopoly, the FTC said Amazon used a “sophisticated surveillance network of web crawlers” that monitored whether Amazon sellers were offering their products cheaper on other sites, and punished sellers who did so... The lawsuit also alluded to an Amazon pricing system internally codenamed “Project Nessie”, which the FTC said had boosted the company’s profits.

The novelty of this anti-trust action is that it deviates from the standard of consumer welfare, and directly takes on the issue of market structure and competition, both of which courts in the US have so far refused to entertain. To this extent, this will be an effort at redefining the paradigm on anti-trust actions in the US.  

Matt Stoller has a very good article that illustrates how the free-shipping of Prime Consumers is a Click-Bait and consumers pay a hidden tax that's borne by the retailers selling on Amazon and passed on to consumers. The article is a good summary of Amazon's business model now.

In 2022, Amazon CEO Andy Jassy said this explicitly, “small and medium sized” sellers use Amazon not because of the “eCommerce software” Amazon provides but “because they get access to a few hundred million customers.” There are extremely high switching costs to move from one online superstore to another, so this is a business with significant barriers to entry. Indeed, this barrier to entry is baked into the very structure of Amazon Prime and its free shipping, which was created, Jeff Bezos said, “to draw a moat around our best customers”... Amazon’s strategy is to use Prime to build, extend, and fortify barriers to entry. One result of Prime is that Amazon now has an overwhelming monopoly share of online shoppers. And online shoppers aren’t the customer, but the product that Amazon brokers to third-party sellers, who must either pay Amazon what it demands or lose access to the market. As one seller put it, "We have nowhere else to go and Amazon knows it."

Once it achieved monopoly power, Amazon squeezed on price through fees to third-party sellers. As a third-party seller, you pay fees for listing on Amazon; for using Amazon’s warehouse services, known as Fulfillment by Amazon (FBA); and for advertising services. If you don’t pay, you don’t get put in a place on the site where consumers click. "Advertised products on Amazon,” reads the complaint, “are 46 times more likely to be clicked on when compared with products that are not advertised." And these fees have all increased steadily over the years. At this point, the price Amazon charges these third party sellers has grown to nearly 50% of its revenue. It is this money, estimated at $123 billion in total last year, that pays for “free” shipping, as well as its video service, its music service, Twitch, and everything else that comes bundled with Prime. These third-party sellers in turn raise their prices to consumers, aka you and me, and then send that money back to Amazon in the form of fees. It’s basically money laundering.

Apart from network effects, there's one more reason why Amazon's sellers cannot also sell at lower price on another platform,  

Today, Amazon tells sellers that if it detects a lower price for their products on any other online store, they will be punished, which is to say, their ability to get their products onto a place on the Amazon website where customers click will go away. The net effect, as Amazon itself wrote, is that "prices will go up"... It is able to block third-party sellers from going elsewhere, and therefore also stop potential rivals from gaining share. 

This is an FT long read on the FTC's case against Amazon. This is Lina Khan's famous 2017 paper on Amazon. 

The article points to an important point that highlights why this would a hard challenge for FTC

If the FTC wants to impose tough sanctions on Amazon, it will have to also persuade the public that a company whose services so many people find incredibly convenient and efficient is actually harming their interests. “You just could not be going after a more popular corporation,” says David Balto, a former policy director at the FTC. A win for the FTC could mean that consumers end up facing “higher prices and weaker services” on Amazon, he adds. “Consumers aren’t going to be happy with that . . . Ultimately, the consumer is sovereign at Amazon, and what [the regulator is] condemning are things that are responses to consumer demand.”

9. Bain Capital reports of declining returns of South East Asian conglomerates.

10. FT's Alan Beattie is an ideologue of trade liberalisation and is therefore naturally angered by the EU's threats to impose anti-subsidy duties on imports from China of electric vehicles. Their volumes have surged in recent months and now threaten to outcompete the European domestic EV makers. This is a repeat of what happened with the likes of clothes, shoes, solar panels etc. The heavily subsidised Chinese manufacturers reengineer and perfect products that compete in foreign markets, even as its own domestic market is rife with increasing non-tariff barriers. 

There is no free trade or comparative advantage theory that's relevant here. The question that European policy makers should be asking is whether it wants to protect its domestic EV industry or not. If so, it has no choice but to level the playing field and either itself heavily subsidise its EV makers or impose meaningful enough trade restrictions. In the absence of the former, the latter, howsoever much it is against the orthodoxy, is inevitable. It's a strategic choice in national interest (as different from purely commercial or economic choice) to limit Chinese imports. 

The problem is that trade restrictions alone is not sufficient to prop up the European EV industry. It would require complementary measures, especially urgency and vision from European car makers to catch up and create world-class EVs. Unlike developing countries, European countries are better placed to catch up. 

So I'm not sure what's the tree that Beattie is barking up!

11. The surging sales of obesity drugs Ozempic and Wegovy, manufactured by Danish company Novo-Nordisk, threatens to distort the country's economy. This has drawn comparisons with the fate of Finland following Nokia's spectacular rise and fall. 

Ozempic, a diabetes treatment that celebrities take to lose weight, and Wegovy, an anti-obesity medication, have propelled Novo Nordisk to become Europe’s most valuable company and single-handedly stopped Denmark from falling into recession. At $410bn, Novo Nordisk’s market capitalisation is now larger than Denmark’s annual GDP of $400bn last year, raising concerns among officials and business figures that the country’s fortunes have become too closely tied to a single company. “The way that we look at it is that in Denmark we have a two-speed economy: the pharmaceutical industry — and the rest,” said Thomas Harr, chief economist at Denmark’s central bank. “The risk is that you think the economy is performing better than it is.”

After it found success during the first wave of mass adoption of mobile phones, handset maker Nokia’s profits collapsed from the 2000s onwards after the release of Apple’s iPhone. At its peak, the company provided a quarter of Finland’s corporate tax revenues and accounted for 4 per cent of GDP. With that sharply reduced, the Nordic economy struggled to grow at all during the 2010s... Denmark’s economy expanded by 1.7 per cent in the first half of this year compared with the same period in 2022. But stripping out the pharmaceutical sector — which is dominated by Novo Nordisk — GDP would have fallen by 0.3 per cent.

12. Fascinating portrait of Binyamin Netanyahu

He has been compared in the Israeli press to a “weather vane” blowing with the wind... Elkin, the former Likud minister, believes that Netanyahu’s sole governing ideology is his own survival. “He began with a worldview that said, ‘I’m the best leader for Israel at this time,’” Elkin says. “Slowly it morphed into a worldview that said, ‘The worst thing that can happen to Israel is if I stop leading it, and therefore my survival justifies anything.’ From there, you quickly reach a worldview of ‘The state is me.’ He believes in it wholeheartedly.”

The important role of Sara Netanyahu in Bibi's radicalisation since 2015 and the current proposal to weaken the Supreme Court is nicely described in the article.

13. Finally, on the remarkable appeal of Taylor Swift.

The cloak of confidentiality in consulting has become a fig leaf for corruption

I had blogged here about PwC Australia leaking confidential information about the Australian government's tax policy changes to benefit the consultant's private sector clients in other countries. The private clients, multinationals like Google and Apple, were able to pre-emptively tweak their accounts to avoid paying taxes, thereby costing the Australian government an estimated $120 million in annual taxes. 

An independent report has now confirmed the allegations.

PwC’s Australian partners overlooked rule-breaking by “rainmaker” colleagues in the pursuit of revenue growth, according to a damning report on a scandal involving the misuse of government tax secrets... (it) assailed an “overly collegial” culture in which too much power was concentrated in the Australian firm’s chief executive and loyalty was rewarded above challenging more senior partners... The scandal was triggered by revelations that a PwC partner who acted as an adviser to the government had passed information about upcoming tax changes to colleagues, who used it to tout for business among US tech companies including Google and Uber.

The Australian government has responded by cracking down on PwC 

The affair has provided ammunition for the Labor government as it looks to wind back the influence and cost of consultants in favour of a stronger public service... Government departments have now enacted a shadow ban on awarding new work to PwC. Some companies and a growing number of pension funds have followed suit... The effects are also being felt by the wider consulting industry as the Labor government starts to rebuild public sector expertise after decades of... “the slow-motion privatisation of the civil service by the big consultants”. Figures from the National Audit Office show federal government spending on consultants reached A$888mn in the 2022 financial year, up from A$352mn in 2013. The Big Four consultants won the lion’s share of contracts over the nine-year period, raking in an aggregate A$1.3bn, according to the NAO. But the tide has started to turn as Labor has cut back, with government spending on major consultants and auditors reported to have more than halved year-on-year so far in 2023. There have also been moves at state level, with New South Wales, Australia’s largest by population, on Thursday imposing a three-month ban on PwC working on any tax-related contracts.

But these temporary suspensions and fines are a mere slap on the wrist, and are internalised as a cost of doing business by PwC and other consultants. They do not create sufficient incentives or deterrence to repeat such actions. 

This post will highlight a feature of the consulting business that is an important contributor to such perverse incentives - the confidentiality of its clients. The FT article writes

Deborah O’Neill, the former school teacher-turned-senator who released the emails, said that the PwC scandal was only “the tip of the iceberg”. She highlighted issues such as a “revolving door” between government departments like the Australian Taxation Office and Big Four consultants, along with the use of legal professional privilege by consultants to not disclose information such as client lists, which she compared to the “cloak of invisibility in Harry Potter”... Andy Schmulow, an associate professor at the University of Wollongong’s school of law, said there was a strong temptation by profit-driven partnerships to misuse information when they were brought into the “inner sanctum” on issues like tax law. He said he experienced pressure in his previous career as a consultant to show his colleagues drafts of confidential work he was doing.

In a recent viral article exposing corrosive work culture and business practices within McKinsey, Garrison Lovely wrote,

McKinsey made the prescient decision to avoid credit for its work, keeping its client and project lists secret. In practice, this has insulated the company from the disasters it was party to, such as the collapse of Enron.

This is a much-overlooked and very important issue. At a time when transparency and information disclosure are de riguer everywhere, consulting firms remain conspicuously immune to being allowed to retain the confidentiality of their clients on deeply questionable grounds. Consulting firms invoke the cover of confidentiality to not only rightly avoid disclosing information about the work done with their clients but disturbingly also deny even disclosing their client and project lists. In this age of a deeply interconnected and globalised economy, there cannot be any justification for continuing the latter confidentiality. 

In the instant case, the Australian Treasury was unaware that while PwC was advising it on its cross-border tax avoidance reform policy aimed at multinational corporations, it was also advising the same companies in other jurisdictions on their global tax optimisation strategies (which also included Australia). Even accounting for the independent and separate nature of the operations of different country units of PwC, if the client and project lists were disclosed, the Australian tax authorities would have been aware of possible conflicts of interest when they made the decision to procure PwC (and would have taken sufficient safeguards to mitigate). 

The consultants defend such confidentiality on grounds of protecting the interests of their clients and the presence of internal Chinese walls to prevent conflicts of interest. Both are questionable arguments. 

For one, as aforementioned, while the argument about protecting details of the work done with their clients is unexceptionable, the same cannot be said about sharing client and project lists. It's also only fair that consulting firms protect the interests of not only their current clients but also their prospective clients. Further, if the consultants are concerned about protecting the private interests of their clients, the governments should be more concerned about protecting the public interest. 

Transparency is fundamental to activities involving public resources and public interest. And the globalised nature and partnership model of such businesses cannot be an excuse for not sharing information. There are  examples of cross-country regulatory oversight. In the US, the Public Company Accounting Oversight Board (PCAOB) has the responsibility of inspecting all accounting firms that audit US companies, regardless of where they are based. In any case, it'a a sovereign responsibility and right to regulate all economic activities happening in its jurisdiction, especially when it comes to notice of negative externalities and distortions. 

The point about Chinese Walls is interesting and needs more discussion. Service providers particularly in consulting, finance, and law regularly invoke the presence of internal Chinese Walls to justify working with clients on all sides and avoid having to take stronger and stricter internal safeguards to prevent conflicts of interest and transfer of information. In all these industries, the financial stakes associated with client assignments are often very high and the potential for internal sharing and misuse of information sis higher still. 

Consultants often end up advising both the contracting governments and some constituents of the bidders. We have seen several examples in recent times of financial institutions playing on both the sell and buy sides of an instrument or transaction. Similarly law firms often advise both their clients and unconnected (to the case) but interested (to the outcome of the case) parties on the other side. What makes these problems likely and very difficult to manage is the globalised nature of these firms and their internal structures.  

The fundamental requirement for the success of Chinese Walls is strong corporate governance and ethical grounding within the organisation. As several scandals from across service industries in recent times have shown, both these are deeply questionable. 

In 2021, it was revealed that KPMG consultants and auditors across its practices globally cheated on their professional exams for atleast five years until 2020. Several other ethics violations were exposed in the investigations done by the US PCAOB.

Hundreds of KPMG employees in the UK and Colombia cheated on professional exams, a US regulator alleged on Tuesday, and the conduct continued even after the accounting group was fined for a similar scandal in the US. The cheating was one of several infractions uncovered across KPMG’s global network by inspectors from the US Public Company Accounting Oversight Board, for which KPMG has agreed to pay a total of $7.7mn. The oversight board also discovered KPMG staff in the UK outsourced work to an unregulated affiliate in Romania, while staff in Colombia altered documents in order to deceive audit inspectors and a partner in India signed dozens of blank audit papers rather than waiting to see that they were filled in accurately... In a wide-ranging $50mn enforcement action by the Securities and Exchange Commission in 2019, KPMG was charged with using data stolen from the PCAOB to discover which audits would be inspected, backdating audit work, and allowing US employees to share answers to internal training exams.

... the oversight board alleges that cheating at the UK arm went on from between at least 2018 and March 2021. It involved direct employees and staff at an Indian joint venture that does audit work for the UK firm. Hundreds of personnel “shared answers primarily through emails attaching documents that contained answers to training test questions”, the board said. In Colombia, cheating on compliance tests went on from 2016 to 2020, it said. KPMG’s UK arm will pay fines of $2.6mn to settle the allegations. KPMG Colombia is paying $4mn and three individuals there will be barred from working with an audit firm for between one and three years. KPMG India was fined $1mn. Smaller fines on individuals take the total to $7.7mn. KPMG’s Colombia, UK and India offices said they had taken action to strengthen compliance, training and quality control... Disciplinary actions ranged from official warnings to dismissals, a KPMG UK spokesman added.

See also this and this about cheating in Australian KPMG practice.  

On the issue of ethics and corporate governance, it's also an open secret that consulting firms hired as bid process or project management consultants collude with Original Equipment Manufacturers (OEMs) and/or their consortium partners in public procurements. Such collusion comes in the form of preferential leaking of confidential information about the bids, incorporating provisions/specifications favourable to an OEM in the bid document, favouring an OEM in the bid scoring, tweaking the bid process to favour an OEM etc.  Given the weak state capabilities and state capture by private interests, governance of the bid process is often poor allowing the consultants the space to undertake such practices. 

These practices are commonplace, with only the extent varying across state and procuring entities. They happen both at the firm and individual consultants' level. The former helps the firm increase its business, while the latter aggrandise the individual consultants involved. Both are clear corrupt practices that should attract immediate action to address them, besides criminal liabilities.

In these circumstances, the Chinese Walls are a mere figment of imagination. They have become a convenient and dignified cover to continue deeply unhealthy and corrupt business practices that impose large public costs while boosting firm revenues. 

Strengthening public oversight and enhancing transparency is therefore critical. Especially given the poor corporate governance and ethical practices within the industry, the removal of the confidentiality cloak on client and project lists is an important first step. 

Procurement guidelines currently only require in general terms that consultants and service providers "do not have any conflicts of interest", "adhere to highest standards of ethics", "safeguard the agency's legitimate interest", "shall not engage in any corrupt practice", and so on, while contracting with governments. Self-declarations to this effect by the consulting firms and their officials are taken at face value. There's no requirement for proactive disclosure about consulting assignments done by the firm. 

But these general principles have become so routine as to be given lip-service by all concerned, including the government officials. These declarations have come to be regarded as perfunctory homilies that consultants provide in their contracts. I'm not aware of a single instance of these provisions having been invoked in India to penalise or punish consultants, despite the common violation of these principles. 

It's therefore required to at least mandate proactive disclosures in this regard. Accordingly, consultancy firms should disclose all their relationships with private and public sector clients in the same or related broadly defined sectors at the time of contracting, and any new relationships entered during the duration of the contract and within two years of the end of the contract. In case of a procurement process involving multinational companies or a global competitive tender, the disclosure should include the client and project lists of the consultant’s foreign practices. This would enable the government agency to be aware of any potential conflicts of interest and take necessary action to mitigate likely adverse events. 

On the government side, the officials engaged with a project should disclose any relationship they or their immediate family members have or have had with the Consultancy firm in the last five years from the date of contracting or from the date of their engagement with the project, whichever is later.

Calling for transparency and good governance, the famous US Supreme Court Justice Louis Brandeis said that "sunlight is the best disinfectant". This sunlight is now critically important to disinfect and restore confidence in the consulting industry. 

Some thoughts on smart metering in electricity

India is in the midst of a frenetic rush into smart metering of electricity connections on the belief that this technology is the solution to the deep-rooted problems that bedevil the electricity distribution sector. 

The Central Electricity Authority has amended its metering regulations to define an electricity consumer meter itself as "smart meters with prepayment mode" instead of the generic "meter used for accounting and billing of electricity supplied to the consumer". The electricity meter thereby becomes a bi-directional smart meter that both relays consumption data and allows for disconnection of service. 

The Smart Meter National Program (SMNP) aims to replace 250 million conventional meters with smart meters by March 2025. These smart meters enable bi-directional communication to acquire data and communicate information, and also control supply. The central government entity, Energy Efficiency Services Ltd (EESL) is the designated nodal bulk procurement agency for smart meters. The program is being funded as part of the Government of India's Revamped Distribution Sector Scheme (RDSS), with an incentive grant of Rs 900-1350 per meter. The meters are to be installed on a Design-Build-Finance-Own-Operate-Transfer (DBFOOT) model by private operators through totex (capex plus opex) contracts. The contracts offer a part of the meter cost in the form of upfront payment and the rest is amortised in the monthly bills. 

Accordingly, distribution utilities across the country have called tenders for the installation of smart meters. It's estimated that over 50 million meters are at different stages of procurement. The meters have three cost components - the fixed cost consisting of the cost of the meter and its allied materials (including the meter reading software), and the recurring billing cost. The meters are procured by the discoms on a hybrid totex model where a part of the fixed cost is paid upfront and the rest is paid out along with the monthly billing. 

It has recently been reported that the Maharashtra discoms have awarded tenders for the installation of 17 million smart meters, in addition to an earlier tender awarded by BEST for Mumbai consumers. This is part of the state government's plan to install 23.6 million smart meters in the first phase. These meters are to be installed over a period of 30 months and maintained over the following 90 months. 

A few observations on this issue.

1. In Europe and elsewhere, smart metering was motivated by the desire to allow demand response that would improve grid management, conserve electricity use, and also minimise consumer bills. It was aimed at improving the effectiveness of the Time of Day (ToD) pricing of electricity. Smart meters are essential for such functions. Accordingly, the smart meters there don't have pre-paid or remote disconnection features. 

In contrast, in India, smart metering is being driven primarily by the desire to lower distribution losses and improve the quality of supply. In a system where atleast one unit of electricity is lost for every four units delivered and where supply interruptions are all too common, it's believed that a technology solution like smart metering can be effective at addressing these problems. But this may be a questionable premise. 

2. The functional functional effectiveness of smart metering depends on several assumptions. One, the smart meter's telemetry is always synchronised to the grid and it reliably delivers information. Two, the smart meter itself is operational and does not suffer from technical problems and failures. Three, the smart meter is not tampered with or even bypassed at the consumer level. Four, even if the data is acquired and processed to make available actionable decision support, the discoms have the capabilities to undertake rigorous energy audits and monitor and enforce them. Five, the discoms are able to disconnect errant connections. 

These assumptions will struggle to stand the test of real-world scrutiny. There's little to suggest that the  specific technology of smart meters has changed any of these conditions. 

3. In Europe, the smart meter procurement follows a simple model. The meter cost is amortised over a long period and added to the monthly consumer bills. The meters are owned by metering companies, who lease out the meter operation and maintenance to distribution supply companies. The metering contracts  are backed by a regulatory mandate that requires the meter cost to be billed and paid to the metering company by the consumer's supply company. The meters reside on the balance sheets of these metering companies. 

Private equity investors have been attracted by the stable and low risk nature of this regulated revenue stream. It's an easy business to deploy large volumes of accumulated raw powder. 

In India, in the absence of private supply, the cost of the meters has to be borne by the public monopoly distribution companies. The discoms, through the totex DBFOOT model, have sought to off-load maintenance to private companies like Adani Transmission which itself is estimated to have won a third of all smart meter tenders finalised nationwide till date. 

However, given the complex political economy and poor state of discom finances, these companies may be assuming insurmountable risks through such contracts. Despite the risks, these contracts are valuable assets with stable and long-term revenue streams which are both monopoly and virtually backed by a sovereign commitment. But some contractors, for undesirable and unhealthy reasons, may be well-placed to bear such risks and bid aggressively to bag such contracts. 

This may be an opportunity to transition to a model of supply competition while retaining the distribution company as a public sector wires company. Supply competition is the simplest (in terms of structuring the reform) and least problematic (in terms of political economy) approach to introduce private sector efficiencies into the power sector. It's also (along with power generation) the dominant model of private participation in electricity across continental Europe. This model would also allow for the adoption of the well-tested European model of shifting ownership of the meters to private metering companies on the back of regulatory commitment to the underlying revenue streams from meters.  

4. The biggest problem with amortisation of the meter cost into consumer bills is the math behind the meter cost and monthly electricity bills. In the UK, for example, with an average monthly electricity bill of £250 per household, the fixed cost of less than £1500 is easily recovered in affordable instalments. But in India, where over 80% of consumers pay less than Rs 500 (perhaps even Rs 300) and fixed cost is over Rs 12000, affordable and acceptable (politically and for the regulator) amortisation becomes difficult. To put this in perspective, the monthly billing cost itself is comparable to the monthly bill for a large portion of household consumers. The unit economics of amortisation just does not exist, except for a small share of consumers. 

This is insurmountable for now with the vast majority of Indian consumers, leaving the discoms or governments to bear the subsidy. Neither are clearly in any position to bear this subsidy. 

5. Further, in the absence of any consumer welfare case for the replacement of existing meters with smart meters, there are questions about the legal tenability of amortisation. How can regulators be convinced about allowing the recovery of the smart meter cost from existing consumers through amortisation? What's the value addition? Neither the discoms nor the state governments are in any position to bear the cost as a subsidy.

Then there's the issue of prepaid metering, which is effectively an interest-free loan to the discom. It's inevitable that at some point (as prepaid smart metering scales) the regulators would have to take this into account, thereby forcing a possible reduction in tariff due to the associated interest cost borne by the consumer. The reality of both the discom or government bearing the cost of the meter and also offering a reduction on the tariffs due to pre-paid smart metering can be fatal for the distressed sector. 

6. In light of all the aforementioned, a more appropriate strategy would be to confine smart metering to higher value consumers, perhaps those using more than 500 units per month or those with a monthly bill of more than Rs 2000. This would make cost recovery amortisation realistic. 

Besides, these higher value consumers can be offered useful value added services that utilise the smart meter's features. This would help enhance the effectiveness of grid management. It can also help address the regulator's concerns about amortisation of meter costs in monthly billing.

7. But even before we get into such details, it's useful to adopt a nuanced strategy for the phased installation of smart meters. As a phasing of installation, a prudent policy would be to target metering of all 11 kV feeders on priority. In fact, the biggest low hanging fruit for the distribution system improvement is to be able to monitor feeder-wise supply on a real-time and uninterrupted basis, and be able to use this information as a decision support to both improve quality of supply and undertake energy audits (to detect losses). 

This is important since in practice the intermittent telemetry synchronisation troubles ensure a large portion of feeder data is unavailable at any time, thereby making effective monitoring impractical. The poor quality of telecommunications connectivity means that highly sensitive smart meters with their need for always-on synchronisation will struggle to function with any degree of efficacy. 

The next priority should be to undertake smart metering of high value consumers, who form a small proportion of all consumers (and are more likely to be located in areas with acceptable enough telecommunications coverage quality). This could be supplemented with smart metering of distribution transformers that do not have consumer-level smart meters. If these two are completed, it would be more than sufficient to create a platform for sustained reduction in losses and improvements in the quality of supply. 

8. Then there are the critical (but often overlooked) issues of privacy of data collected and the security of such networks. The large volumes of data collected are a treasure trove of monetisable information that can be siphoned off by private metering companies in the absence of safeguards to control its ownership and management. Such safeguards will involve data management processes and protocols, encryption techniques, sanitised data access systems, and data sharing pathways. Similarly, a smart meter network can become a tool to control and destabilise the electricity grid, thereby raising strategic concerns. 

Mandating safeguards and monitoring their implementation is beyond the capabilities of discoms or the Ministry of Power. Neither do they have any incentive. It's therefore essential that the Government of India prioritise these by defining standards and safeguards through its technically competent agencies and also ensure its independent surveillance and monitoring for compliance. All discom smart grids should be mandatorily certified by an independent government agency (yes, I don't think it's a good idea to outsource this to a private agency in the Indian context for a variety of reasons, primarily concerns of capture and corruption) for adherence to privacy and security safeguards. Besides these certifications should be revisited with some periodicity. 

9. The smart metering network provides an excellent opportunity for harvesting data that can catalyse a host of markets. For example, while granular household or business electricity consumption data trends can provide sufficient information for credit assessment, aggregate data trends can help with macroeconomic and business forecasting. The network should be seen as a platform for flowering numerous B2B and B2C business opportunities and models. This can be a dedicated stream to encourage entrepreneurship under the Startup India program.

However such data sharing has to protect privacy and ensure security concerns are safeguarded. This is a non-trivial task and requires significant public investment to develop templates and digital plumbing for data sharing by the discoms. For example, the US Bureau of Labour Standards and Census Bureau spends several hundred million dollars just on standardisation techniques for sharing data. Nothing like this exists in the Indian context. 

10. Finally, given all the aforementioned, it's hard not to come away feeling that smart metering of all 250 million households in India is an overkill. It's a classic example of relying on technology-based solutions to skirt around the deep-rooted and intractable governance and political economy challenges that must be addressed to realise any sustainable solution to the problems facing the electricity distribution sector. It cannot be a substitute for the hard and painstaking struggle to deliver good governance and overcome political economy challenges.

Aswath Damodaran on valuation, VCs, and more

Excellent interview here and here of Aswath Damodaran where he summarises what he's long argued with eloquence. Some snippets. 

1. On the difference between valuation and pricing

Pricing essentially is a very simple process. You decide how much to pay for something by looking at what other people are paying for similar things... In pricing, you attach a number to an asset based on what other people are paying for similar assets. It's how we decide how much to pay for a house or an apartment. Pricing is intuitive. We all do it. 

Valuation, on the other hand, requires that you understand a business. So, if you want to buy the Chennai Super Kings as a business, you’ve got to understand how they make money, how much money they make from the stadiums, how much money they make from media, and essentially think about how much you will pay for the business you buy. It's more work, but your assessment then drives your decision. Most people price things, they don't value them. They like to use the word value when, in fact, they're pricing things.

This is an area of fundamental misunderstanding, one that underpins the irrational exuberance that pervades capital markets. As Keynes famously said, equity prices essentially emerge from a competitive pricing contest. 

2. On the real investment strategy adopted by venture capital investors

VCs [firms] don't value companies. They're incapable of valuing companies. They price them based on what? Based on total addressable markets, number of users, number of subscribers. I understand why they do what they do, but remember it's a pricing game, which means the game does well when the momentum is with you, but when the momentum shifts, guess what? The price adjusts as well. So, VCs are traders. They're not investors. They trade on companies and a successful VC is one who times a drive, times entry and exit drive. So, I would not shed any tears for VCs who lose money when the momentum goes against them because they make money when the momentum is in their favour. I don't expect VCs to have deep thoughts about businesses because they're interested in whatever metric will allow them to flip the company to other people at a higher price.

At best, valuations are done by support teams using models with wildly optimistic and flawed assumptions that in turn are used to justify the irrational pricing decisions made by senior partners in the investment teams and committees. These irrational pricing decisions have long been dictated by the fear of missing out in a market that's collectively irrationally exuberant and the need to deploy large volumes of dry powder mobilised from investors and sitting idle. 

3. He suggests this practical approach to the valuation of firms when faced with uncertainties

First, you need to look at the uncertainties you face and organise them. Not all uncertainties are created equal. I believe in putting uncertainties in buckets, so you have a sense of what's going into which bucket. So, it'll keep you from getting overwhelmed... Second, recognise that the nature of the uncertainties you face will be very different depending on the company you value... As companies age, the kinds of uncertainties you face will vary. Once you've decided which uncertainties are the big ones with this company, face up to the uncertainty. Don't hide from it. Don't go into denial. And facing up to the uncertainty means figuring out how uncertain you are, and actually incorporating it into your analysis. 

I do what I call simulations and valuations, but rather than valuing a company with point estimates, revenue growth is going to be 23 percent, margins are going be 15 percent, you build distributions around your assumptions, and you come up with distributions of value. It's a much more honest way of saying, look, I can give you a value for a company, but I'm going to be wrong. Why? Not because I haven't done my homework, but because I'm not God. Essentially, you're going to be uncertain because you don't control what the future will deliver. And I think facing up to it gives you a much better chance of dealing with it. And my final advice when you face uncertainty is keep it simple. Don't have hundreds of line items because again, you'll get overwhelmed. Less is more. And I think that message more than anything else stood me in good stead when I think about valuing companies where there's a lot of uncertainty.

However, this process requires experience. The ability to make good judgments is based on one's experience. Organising all the relevant uncertainties, and more importantly, attaching weights to them, is an exercise in judgment. This comes from the experiential knowledge of a lived career and cannot be short-circuited through learned knowledge in a classroom setting of a top college or MBA course. This is about wisdom.  

4. This is a much-needed reminder that our times are not as extraordinary as we have come to believe. 

I'm going to push back on the notion that we live at a time of extreme uncertainty. Do we? Do you think the people who came out of the second World War faced less uncertain times than we do? Or the invention of the automobile, and how it changed the way people live, or electricity, or the original factory system? I don't think we live in special times. Each generation likes to think it's special. 

You know why we feel that we're in more uncertain times? Because everybody's problem becomes everybody else's problem... I think one of the reasons we feel more uncertain is we're inundated with information and everything happening in real time, not just around us, but around the world. And I think that's making us very uncomfortable, because as human beings, uncertainty makes us uncomfortable. So, in a strange and contradictory way, our access to data is actually making us more susceptible to doing emotional things because we now feel we're more surrounded by uncertainty. And when you do, you behave in unhealthy ways.

The combination of information deluge and social media has dramatically shortened our attention spans. The long-term view of anything has been pushed aside by the focus on the now and the immediate. Commentators and experts have collectively embraced this perspective. 

5. And this is profoundly wise advice for life in general, one that many experts would do well to heed. 

I have everything I need, and could I get more? Yes. What am I going to use it for? So, from that perspective, I've never been tempted to be anything other than what I am as a teacher. I've never consulted a day in my life. I don't do expert witness work. I don't serve on boards of directors. I essentially don't do any of those things because I don't see the need to. I'm lucky enough that I don't have to do those things. I'm not looking down on the people who do it, but for me, teaching is front and centre, what I do... There is no day that I wake up and say, I wish I didn't have to teach today. When you have something that truly brings together your passion and your livelihood, why would you ever want to go explore something else?

Weekend reading links

1. Gillian Tett interviews Walter Issacson on the eve of the release of his biography of Elon Musk

Do innovators have to be a psychological mess to have the drive to succeed?... “Musk goes through manic mood swings and deep depressions and risk-seeking highs, and if he didn’t have that risk-seeking maniacal personality he would not be the person who launched EVs and got rockets into orbit. “So my key point and conclusion is that all people have light and dark strands, whether that is Da Vinci or anyone else. We celebrate the light ones while decrying the dark ones. But those strands are entwined and you can’t disentangle them.” To put it bluntly: Isaacson thinks that Elon’s demons are also his inspirational angels. Of course, Isaacson adds, this is not the only key to genius: the other trait that many of the people he has studied also share is a passion for interdisciplinary study. Da Vinci, say, explored the arts, humanities and science in combination, while Jobs used the principles of calligraphy to design computers. Isaacson argues that building interdisciplinary curriculums is one secret of unleashing more innovation.

2. Even by Chinese standards, the country's spectacular surge in automobile sector to emerge as the largest car exporter in the world since early 2021 is unprecedented. 

A stark mismatch between production at Chinese factories and local demand has been caused, in part, by industry executives mis-forecasting three key trends: the rapid decline of internal combustion engine car sales, the explosion in popularity of electric vehicles and the declining need for privately owned vehicles as shared mobility booms among an increasingly urbanised Chinese population. The result has been “massive overcapacity” in the number of vehicles produced in factories across the country, said Bill Russo, former head of Chrysler in China and founder of advisory firm Automobility. “We have an overhang of 25mn units not being used,” he said... The overcapacity problem is hitting both local companies such as Chery, SAIC, BYD, Geely and Changan, and an increasing number of foreign groups. Companies including Tesla, Ford, Nissan and Hyundai are among those repositioning their Chinese factories towards export markets... Chinese auto exports have mostly targeted developing markets in Europe and Asia... The export wave is expected to intensify as Chinese EVs, which are significantly less expensive than rivals, gain a foothold, especially in Europe... Tesla already exports electric cars from its Shanghai facility to Europe and about one-fifth of all EVs sold in Europe are manufactured in China. BYD is spearheading China’s EV exports into developed markets.

3. Singapore may have the highest housing rent, but Tokyo has the lowest!

The NYT has an article that explains the reasons for Tokyo's housing affordability success. 

In the past half century, by investing in transit and allowing development, the city has added more housing units than the total number of units in New York City. It has remained affordable by becoming the world’s largest city. It has become the world’s largest city by remaining affordable. Two full-time workers earning Tokyo’s minimum wage can comfortably afford the average rent for a two-bedroom apartment in six of the city’s 23 wards. By contrast, two people working minimum-wage jobs cannot afford the average rent for a two-bedroom apartment in any of the 23 counties in the New York metropolitan area...

But the benefits are profound. Those who want to live in Tokyo generally can afford to do so. There is little homelessness here. The city remains economically diverse, preserving broad access to urban amenities and opportunities. And because rent consumes a smaller share of income, people have more money for other things — or they can get by on smaller salaries — which helps to preserve the city’s vibrant fabric of small restaurants, businesses and craft workshops... Tokyo appears as a vast sea of low- and mid-rise buildings laced with archipelagos of high-rises, each island marking the location of a station along one of the city’s railroad lines... As Tokyo grew and demand for housing increased, the railroad has rebuilt the areas around its stations with condominium towers, shopping malls and office buildings...

In Tokyo, by contrast, there is little public or subsidized housing. Instead, the government has focused on making it easy for developers to build. A national zoning law, for example, sharply limits the ability of local governments to impede development. Instead of allowing the people who live in a neighborhood to prevent others from living there, Japan has shifted decision-making to the representatives of the entire population, allowing a better balance between the interests of current residents and of everyone who might live in that place. Small apartment buildings can be built almost anywhere, and larger structures are allowed on a vast majority of urban land. Even in areas designated for offices, homes are permitted. After Tokyo’s office market crashed in the 1990s, developers started building apartments on land they had purchased for office buildings... Tokyo makes little effort to preserve old homes. Historic districts subject to preservation laws exist in other Japanese cities, but the nation’s largest city has none... Parks, too, are sometimes treated as unaffordable luxuries. Parks and gardens occupy just 7.5 percent of the city’s land, far below the figures for New York (27 percent) and London (33 percent)... Between 2013 and 2018, new homes accounted for 86 percent of home sales in Japan, according to the most recent government data. In the United States, new homes typically account for about 15 percent of sales, according to data from the National Association of Realtors!

4. More from Byju's cupboard

One of India’s hottest tech companies, Byju’s, allegedly hid $533 million in an obscure three-year-old hedge fund that once said its principal place of business was an IHOP pancake restaurant in Miami, according to lenders trying to recover the cash. Byju’s last year transferred more than half a billion dollars to Camshaft Capital Fund, the investment firm founded by William C. Morton when he was just 23 years old, some Byju’s lenders claim in a lawsuit. Morton’s fund received the money despite an apparent lack of formal training in investing, according to the lenders. What’s more, luxury cars — a 2023 Ferrari Roma, a 2020 Lamborghini Huracán EVO, and a 2014 Rolls-Royce Wraith — have been registered in Morton’s name since the transfer occurred, according to court papers...

In a 2020 Securities and Exchange Commission filing, Camshaft listed its principal business address as 285 NW 42nd Ave. Far from a typical office, that building is currently home to an IHOP. The diner in Miami’s Little Havana district is surrounded by a drive-through car wash and a strip mall that hosts a massage parlor and a sandwich shop... the address had been home to the IHOP for decades... Miles away from that IHOP, an entity linked to Camshaft listed a swanky oceanfront condo at the Porsche Design Tower in Sunny Isles Beach — where the likes of Lionel Messi own homes — as its business address, court papers show.  

You can bet this is not going to be the last, and that this might well end up along these lines.  

5. Germans work fewer hours than any other OECD countries

Interesting that Germany's China exposure in terms of exports to China is only slightly above 6% of total exports and that share has been falling sharply. 

6. Latest trend in PE financing is Net Asset Value (NAV) loans, described as "defending the portfolio" loans. 

The manoeuvres... have cropped up as many older private equity funds run low on cash just as the companies they own struggle with their own debt loads. Buyout firms have turned to so-called net asset value (NAV) loans, which use a fund’s investment assets as collateral. They are deploying the proceeds to help pay down the debts of individual companies held by the fund, according to private equity executives and senior bankers and lenders to the industry. By securing a loan against a larger pool of assets, private equity firms are able to negotiate lower borrowing costs than would be possible if the portfolio company attempted to obtain a loan on its own... The borrowing was spurred by a slowdown in private equity fundraising, takeovers and initial public offerings that has left many private equity firms owning companies for longer than they had expected. They have remained loath to sell at cut-rate valuations, instead hoping the NAV loans will provide enough time to exit their investments more profitably... Private equity executives who spoke to the FT noted that the borrowings effectively used good investments as collateral to prop up one or two struggling businesses in a fund. They warned that the loans put the broader portfolio at risk and the borrowing costs could eventually hamper returns for the entire fund.

7. Surge pricing or dynamic pricing is becoming more common.

Stonegate, Britain’s biggest pub company which runs the Coach House, has announced it will charge pubgoers 20p extra for a pint of beer on busy evenings and weekends. It is part of what it called a new “dynamic pricing” policy in some of its venues... When booking flights and hotel rooms, consumers have become accustomed to the rhythms of the dynamic pricing model: book early or during the shoulder season and get a good deal; book last-minute or during the busy holiday periods and get penalised. However, powered by algorithms and artificial intelligence, it is being introduced at a rapid pace by a growing number of consumer industries. Amazon changes the price of its products on average every 10 minutes, using millions of real-time data points to benchmark against competitors and track demand surges... As high inflation erodes margins and improvements in technology make dynamic pricing cheaper and more practical for businesses to implement, the temptation to deploy the pricing strategy is growing in industries that have so far remained largely untouched by the method. Bars, restaurants and bricks-and-mortar retailers have historically only adopted dynamic pricing for basic discount offers, but that could change.

And this about how the present interest in dynamic pricing is perhaps a return to the norm

For most of the history of human commerce, dynamic pricing was the norm, with customers haggling and bartering with vendors over the price of every item. But in 1876, inspired by notions of equality, Quaker merchant John Wanamaker introduced price tags at the launch of his eponymous department store in Philadelphia. Macy’s, the iconic New York-based department store, also under Quaker ownership at the time, did the same. Beyond high-minded ideas of fairness, fixed prices allowed the stores to save on years of training for shop clerks in price negotiation, which in turn enabled faster expansion. The price tag quickly caught on. Now, however, with advancements in data collection and the transition of commerce online, businesses are reverting to the historical norm and pivoting away from the fixed price.

This is a fascinating graphic of how different categories of consumers react to surge pricing.

8. The latest example of failure of free market competition comes from the European football leagues. 

The competition between leagues and the influx of Gulf money and private equity firms has resulted in a ruinous race to the bottom. Costs have ballooned on the back of superstar players salaries putting the finances of clubs under unsustainable strains.  

This has also led to entrenched dominance by a few clubs and reduced competition in European leagues

Already several leagues are struggling to maintain the levels of unpredictability and jeopardy that fuel fan interest. PSG has won nine of the past 11 French league titles, Bayern Munich has been German champions 11 times in a row, while Manchester City has won five in six Premier League races.

The UEFA are contemplating hard limits on costs and salary caps for players.  

Cost controls and salary caps are a feature of other sports, particularly in the US. Hard spending limits have been a boon for owners and helped boost team valuations in basketball, NFL and more recently in Formula One. A Forbes list of the 50 most valuable sports franchises published last week includes just seven from global football, compared with 30 NFL teams. Other football competitions, such as Spain’s La Liga, are subject to financial controls that force member clubs to submit regular updates on revenue that the league then uses to allocate a set budget for playing staff.

9. Stock markets are irrational. One more example of the irrationality comes from the way markets treat TSMC and Apple. Both are exposed to heavy geopolitical risks. And TSMC's market price reflects these risks. But in case of Apple, with arguably an even greater risk arising from its China-centric manufacturing supply chain (besides the Chinese smartphone market), the markets appear completely unconcerned. 

However, this month Apple has lost almost $200 bn in market capitalisation after news emerged of bans on Apple products by Chinese government agencies. A sub-plot is the unexpected rise of Huawei.

Cook, chief executive since 2011, has been praised as the “architect” of Apple’s production shift to China after originally being hired by Steve Jobs in 1998 to run worldwide operations. Under Cook’s leadership, years of investment, marketing and careful corporate diplomacy allowed Apple to orchestrate a manufacturing powerhouse while generating more China-based profit than any other company, western or Chinese. Paul Triolo, an associate partner at advisory group Albright Stonebridge, said the company “invested a lot in its relationships with both the central . . . and municipal governments, particularly in Zhengzhou”, where it has partnered with Foxconn and created hundreds of thousands of jobs. He added that Apple had been “very careful” to abide by local regulations, taking down politically sensitive apps.

Along with concerns over possible curbs on Apple products, a fresh competitive threat has emerged with the unexpected launch of a new Huawei smartphone in China at the end of August. The Mate 60 Pro sold out immediately on a patriotic wave of enthusiasm, as teardown experts revealed it was running advanced Chinese chips inside. US sanctions against Huawei had previously crippled the capabilities of its handsets and enabled Apple to dominate sales of high-end smartphones in China... Beijing would be keen to support homegrown alternatives to Apple such as Huawei — which was briefly the biggest-selling phonemaker in the world before US sanctions banned it from accessing certain foreign components, forcing it to discontinue sales of its 5G smartphones. The Shenzhen-based company’s China sales are now supported by its perceived status as a “national champion” by consumers.

10. US Politics is a gerontocracy

The US is an outlier even in a world where the majority of lawmakers are much older than the broader populace. Compared to peer countries, the US is especially dominated by older elected officials; one in five congresspeople is over the age of 70, making it one of the nation’s most elderly professions.

Even among its peers, the US has the oldest legislators. 

11. Chris Miller, author of Chip Wars, writes about the recent unveiling of Huawei's Mate 60 Pro phone with its homegrown chip made by local chip maker SMIC. 

The chip industry is divided on what this means. On the one hand, SMIC has succeeded only in replicating a manufacturing process — called 7 nanometre — that Taiwan’s TSMC, the world’s leading chipmaker, was already producing at high volume in 2018. SMIC generally lags half a decade behind TSMC in rolling out new manufacturing processes, so by that metric, the Chinese company’s 7nm process has arrived right on schedule. Moreover, to produce Huawei’s chips, SMIC has used DUV lithography machines rather than more advanced EUV tools, which it is barred from buying. Foreign chipmakers such as TSMC and Intel learnt how to produce 7nm chips with DUV machines years ago, before turning to more efficient EUV tools. SMIC’s manufacturing costs are thus probably only competitive because the Chinese state is footing the bill. The company’s 7nm chip is, then, far from an unprecedented breakthrough.

He also argues that Huawei is able to produce such chips only because it's being heavily subsidised by the government. 

12. A deflation in China may not set of deflationary pressures across developed markets because producers prices may be a small part of the consumer prices. 

Critically, China is at the end of many production chains, but not at the end of supply chains. Supply chains end in the aisles and on the websites of the retailers of Europe and the US. There is a great deal that happens between factory gate and the end consumer. The consumer is not just paying for the goods, but also has to hand over money (or, in the case of US consumers, a credit card) to cover the trade taxes, warehousing costs, transport costs, wholesale costs, retail costs, advertising budgets, financing costs and sales taxes — and, of course, profit margins for each link of the lengthening supply chain. Each of those supply chain links are local components to the price the consumer pays, and they will move independently of the exporters’ or domestic producers’ prices... 

In the US the gross value added of warehousing, transport, wholesale and retail trade is more than 15 per cent of the economy. The value added by US manufacturing is about 11 per cent of the economy. This is only a hint of the relative importance of different sectors of the supply chain, but it hints very strongly at the muted role of producers. Some sectors of the economy allow a more detailed examination... Clothing and footwear, and household furniture, combined account for just over 10 per cent of US imports from China. In these sectors domestic and foreign producers get about 30-40 per cent of the price paid by the US consumer. This does not mean that the exporters receive so low a share of the consumer price for all items. For autos, the foreign and domestic manufacturers get about two-thirds of the consumer price. But generally an exporter selling in the US can expect to receive less than half the price the consumer pays. This means that China’s export price deflation is likely to be a modest disinflation force for the rest of the world.