1. Is corporate governance overrated?
While equity investors ignore bad governance when it suits them, the irony is they don’t need to. Academic studies of governance and shareholder returns struggle to find a definitive positive relationship — let alone causation. Indeed, a Journal of Corporate Finance paper in 2022 showed that poor governance stocks have actually outperformed good ones since 2008. Even with practices we consider no-brainers, such as independent board members to improve the monitoring of executives and prevent conflicts of interest, evidence of a relationship with performance is weak... An influential paper by James Coombs of Florida State University concludes that CEO power simply overwhelms board independence... Whether governance matters or not has become even more important in recent years as it makes up a third of environmental, social and governance investing. And whereas there is much disagreement around “E” and “S”, few people question sound governance as a worthy goal. And yet the most comprehensive long-run analysis I’ve seen of ESG scores versus returns — by Rómulo Alves, Philipp Krüger and Mathijs van Dijk — shows no relationship at all, be it across regions, time periods or ESG constituents. Indeed the statistically weakest of the three weak relationships was governance.
All this cannot be taken to mean that separation of the posts of Chairperson and CEO, independent boards, restraints on family control of public companies, limits on dual-class voting shares etc are not required. These are all essential, but as evidence shows, they do not ensure good corporate governance. It begs the counterfactual of what would have been the case without these restraints?
2. Janan Ganesh makes a stab at explaining the rise of Trump
Lots of voters, right or left, and especially the most engaged, don’t come to politics for ideas. What they crave is belonging. (The belonging that once came from a church, a life-long employer or a homogenous town.) This is why, from a person’s opinion on Israel, you can extrapolate their line on tax, abortion, Ukraine and other miscellany. They have joined a team and taken their beliefs from it as a kind of bundled software. The joy is in the membership, not in the doctrine. No one was going to budge people from Team Trump, not even a purer rightwinger.
3. France looks set to crackdown on the likes of Airbnb amidst a housing shortage and rising rents.
France is seeking to clamp down on Airbnb and other holiday rental companies, spurred on by mayors in tourist destinations such as the Alps and the Basque country who are concerned that the platforms are worsening housing shortages and disfiguring historic centres. The French national assembly is set to vote on Monday on a draft law that would give local authorities broad powers to set quotas on short-term rentals or impose compensation mechanisms, such as requiring landlords to add a unit of long-term housing for each unit let out on Airbnb. A tax advantage is also on the chopping block. Iñaki Echaniz, a Socialist lawmaker from the Pyrénées in south-west France who co-wrote the legislation, said the proposals would empower local officials to regulate the market and repel a wave of lawsuits that have been filed by property owners and unions who oppose such restrictions.
4. FT writes how JP Morgan benefits from the confidence it has among depositors.
In its fourth-quarter earnings reports... it shared that it made $24bn in net interest income — the difference between its cost of capital and what people pay the bank to borrow its money. Across the full year, net interest income surged 34 per cent to $90bn... that is more than double the increase of the next bank, Wells Fargo, which reported a 16.5 per cent rise. In fact, the bank gets much of its moneymaking raw material — its $2.4tn of deposits — nearly for free. For instance, despite rising interest rates across the debt spectrum, and some money market funds paying interest rates of 5 per cent or more, JPMorgan is taking a very different tack. It pays 0.01 per cent annually on its checking accounts and 0.02 per cent annually on its savings accounts (or at least mine). That is about as close to zero as you can get, giving it access to trillions of dollars of raw material for just about nothing. No wonder that as interest rates have risen since the Federal Reserve started pivoting in 2022, JPMorgan has been raking in profits. It is still paying depositors interest payments from the previous, zero-interest rate cycle while charging its borrowers interest rates based on the current much higher rate card...
You may wonder why the bank does this. The answer is simple. Because it can. JPMorgan is perceived as the safest place to keep your money, thanks to the so-called fortress balance sheet that Dimon tells people he has created. And when the various US regional banks melted down last year, where did depositors run, if they could? To JPMorgan, of course... There has never been any question that Wall Street banking is a confidence game. The whole banking system, in fact, depends on faith — faith that your money will be there when you want it, faith that borrowers will pay back the money they owe.
5. Vietnam facts of the week
It is more open to commerce than its South-East Asian peers. Trade in 2022 was equivalent to an eye-popping 186% of its GDP, versus 45% in Indonesia, 72% in the Philippines and 134% in Thailand.
6. The Economist has a briefing on the prospects for AI in developing countries, and it concludes that this time will be different.
India is combining large language models with speech-recognition software to enable illiterate farmers to ask a bot how to apply for government loans. Pupils in Kenya will soon be asking a chatbot questions about their homework, and the chatbot will be tweaking and improving its lessons in response. Researchers in Brazil are testing a medical AI that helps undertrained primary-care workers treat patients. Medical data collected worldwide and fed into AIS could help improve diagnosis. If AI can make people in poorer countries healthier and better educated, it should in time also help them catch up with the rich world... Much about the AI revolution is still uncertain, but there is no doubt that the technology will have many uses and that it will only get better. Emerging countries have suffered disappointments before. This time they have a wonderful opportunity—and the power to seize it.
The promise in the context of developing countries is that AI-powered devices will help capacitate and empower teachers, nurses, doctors, extension officers and so on to significantly improve their productivity and quality of service delivery. The full briefing is here. Will this time be different?
7. Disclosures on violations of regulations mandated by the US Public Company Accounting Oversight Board (PCAOB), intended to protect the independence of their audit work, show that the Big Four Accounting firms have hundreds of such cases.
US regulators require audit firm staff and their immediate family to make thorough financial disclosures, for example of their investments, and they ban employment and financial relationships with audit clients that could impair the firm’s independence. PwC said on Monday that it had identified 129 breaches of independence rules affecting 74 clients and PCAOB inspectors had found a further one themselves while inspecting audit work in 2022. The figures were included in an update to PwC’s audit quality report, published on its website. Deloitte said in its audit quality report last month that it had told PCAOB inspectors of 129 breaches across 78 clients in 2022 — affecting approximately 3 per cent of its US audits — and 107 across 53 clients in the 2023 inspection cycle. EY also said it had found independence violations affecting 3 per cent of its audits in 2022... PCAOB inspectors had found flawed work in 9 per cent of PwC audits it examined in 2022, where its staff failed to carry out all the procedures required to justify their audit opinion. That is twice the rate of 2021, but remains the lowest among the Big Four. EY admitted in November that its PCAOB inspection report for 2022 would show a deficiency rate of 46 per cent, a figure it deemed “unacceptable”.
8. Falling fertility is a challenge not only in developed economies, but even in many developing ones. In the latter, the concern is about the pace and steepness of the fall. Nowhere is the problem more acute than in Finland which has suffered dramatic reduction in fertility to just 1.27 in 2023. Among Finns born in the late seventies and eighties, fewer than on in twenty said at the age of 25 that they didn't want children, compared to one in four among those born in late eighties and nineties. FT has an interview of Finnish demographer Anna Rotkirch who points to some explanations,
Her findings suggest that children do not fit into many millennials’ life plans. Once it was a sacrifice not to have children; now starting a family means sacrificing independence. “In most societies, having children was a cornerstone of adulthood. Now it’s something you have if you already have everything else. It becomes the capstone.” This helps to explain why it is no longer Europeans with less education who want more children. Instead “those who are well-off in many ways — [who] have a partner, have support from their parents, are employed, are not lonely — want to have more children . . . This is quite a new thing in many countries, including England.” The phenomenon inverts the theory of “uncertainty reduction”, which held that people, particularly from poorer backgrounds, had children to shore up their lives. “[The idea was:] my career isn’t going well, my relationships are a bit here and there, but at least I have a child . . . You just don’t see that way of thinking any more. For millennials, uncertainty reduction is not to have children.” Rotkirch also suspects that the spread of social media is playing a role, not least by stoking political polarisation, loneliness and mental health issues, which reduce fertility.
9. The dramatically surging Chinese exports of green energy products - solar energy products, electric vehicles, and lithium batteries - threatens to unleash a massive protectionist backlash. Such exports surged 30% in 2023 to $139.3 bn, providing a big boost to an otherwise struggling Chinese economy.
But for its developed country trading partners, the prospect of China’s low-cost imports flooding their markets and wiping out jobs in important industries such as the automotive sector and solar and wind power is prompting growing alarm... Later this year, the European Commission is set to conclude an anti-subsidy investigation into Chinese EV production that could lead to higher tariffs for Chinese imports... China’s policymaking has been mercantilist for decades, with the methodical setting of targets to increase domestic supply chain self-reliance. Foreign companies complain they are facing growing obstacles to accessing the Chinese market... Developed countries, and those in the EU in particular, want China to dilute its industrial policies and focus on the domestic economy. Chinese leaders, meanwhile, “obviously like the idea of open trading relationships but it’s open trading relationships that are consistent with the way that they want to do industrial policy”, he adds.
For all practical purposes the Chinese government's "Made in China 2025" is a massive mercantilist plan.
The worrying part of Made in China from developed countries’ perspective was that accompanying documents listed ambitious market share targets across 10 strategic industries, from IT and digital machine tools to robotics, aerospace and new energy vehicles. For instance, Chinese producers of 5G mobile network equipment and handsets should have 80 per cent domestic market share and 40-45 per cent international market share by 2025, according to analysis from the US Chamber of Commerce. To achieve similar targets, electric battery makers were offered subsidies that could account for more than 50 per cent of the cost of the product... China ended a 13-year consumer subsidy scheme for EV purchases in 2022. But local governments still offer subsidies and tax rebates and the central government has prolonged a tax reduction on EV purchases to 2027. CSIS, the US think-tank, has put Beijing’s cumulative state spending on the EV sector at more than $125bn between 2009 to 2021. Importantly for China’s state planners, the sector has met its targets. Chinese brand EVs held 79.9 per cent of the domestic market in 2022, according to state media.
10. Finally, striking fact about female manufacturing employment in India.
43 percent of all Indian female factory employees work in Tamil Nadu, which is home to 5 percent of the national population.
This about Tamil Nadu's remarkable manufacturing success
Parts of Tamil Nadu are already working as industrial champions. A long belt of car and car-part manufacturers stretches down the coast from its capital, Chennai. In the western Coimbatore valley, factories specialize in die-casting and pump manufacturing. There is a knitwear cluster in Tiruppur, and the country’s biggest maker of matchsticks is in Sivakasi... Sriperumbudur was initially attractive because of its experience in auto manufacturing. Hyundai had set up shop in 1996, soon after India opened up its economy to more foreign investment and Tamil Nadu formed its first state development agency. Glassmaking and basic electrical goods followed. After a lull, the old Nokia site was built over by Salcomp, a local company that makes high-end power chargers, now for companies like Apple. The plants of a dozen other known and rumored Apple suppliers have sprouted around it, along with Samsung, Dell and most other big multinational electronics companies... more than 130 Fortune 500 companies are doing business in Tamil Nadu... Corning, the American glassmaker, is setting up a factory that could produce iPhone’s Gorilla Glass screens, and Vietnam’s VinFast Auto has announced a $2 billion facility to make electric vehicles.
The Ken has another article on Tamil Nadu's second coming with manufacturing investments.
Four major suppliers to iPhone-maker Apple—Finland’s Salcomp, Taiwanese giants Foxconn and Pegatron, and homegrown Tata Electronics—alone are set to hire around 115,000 people for their units in the state over the next three years... At $6 billion, Tamil Nadu accounted for a third of India’s electronics exports between April and December of 2023; its market share was higher than that of Uttar Pradesh and Karnataka combined... A chunk of this growth came from Apple’s contract manufacturers. Mobile phones comprised 53% of India’s $20.35 billion electronics exports during April–December 2023... India’s iPhone exports soared 177% to US$5 billion between April and October 2023 compared with the previous year’s corresponding period. The country’s share in global iPhone exports hit 7% in 2023 from just 1% three years ago.
The industrial belt of Hosur-Krishnagiri-Dharmapuri, a poster example of manufacturing boom, is also the first to be caught in the crosshairs of rising demand and a workforce that’s fast turning shifty... The labour supply for roles such as assembly-line operators, pick-and-place operators, smartphone-assembly technicians, and machine-maintenance executives has dried up in Tamil Nadu, said a recruiter for an electronics manufacturer in Hosur. Their firm is now expanding its search to the nearby states of Karnataka, Andhra Pradesh, and Telangana... some workers even quit within a week or 10 days after finding out that the role involves hard labour. Those at the assembly lines, for instance, may need to stand the entire time while working. And hiring for the sector is likely to become more challenging. By 2025-26, the number of people employed in electronics-manufacturing -services in India is likely to surge by about 5X to over 6 million.Tamil Nadu’s lead in electronics manufacturing depends not only on offering concessional land or infrastructure but also on ensuring the quality supply of human capital. To that end, the state has tied up with 494 Industrial Training Institutes (ITIs) to offer 700 courses to equip workers with electrical, electronics, manufacturing, and other skills. Companies aren’t behind in this area either. A lot of them are tying up with ITIs and local skill-development centres to prepare workers to meet their demands. In June 2022, Tata Technologies, the homegrown multinational engineering and product-development company, joined hands with the Tamil Nadu government to transform 71 state ITIs into technology centres at an investment of Rs 2,204 crore (US$265 million). Such centres are aimed at providing skill development in areas such as EV maintenance, robotics, automation, advanced plumbing, and additive manufacturing. Tata Electronics has even co-developed a diploma course in digital manufacturing along with Tamil Nadu’s Directorate of Technical Education. The programme will offer three months of classroom sessions and nine months of paid on-the-job training at the company’s Hosur plant. Similarly, the Chennai-based conglomerate, TVS Group, has been running an exclusive training and services company since 2010 to arm people with automotive and engineering skills.
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