Weekend reading links

1. The Times has an article on the spectacular rise of BYD as the world's leading electric vehicle manufacturer. 

The Swiss bank UBS found last year that a BYD Seal electric hatchback sedan cost 35 percent less to make than a slightly smaller Volkswagen ID.3 of similar quality made in Europe. The savings came only partly from the cheaper lithium iron phosphate batteries. BYD makes three-quarters of the Seal’s parts. Like Tesla, BYD uses only a few electronic systems in each car. By contrast, VW outsources up to two-thirds of its components. BYD also has benefited from lower labor costs in China, although those have risen as factories compete to hire skilled workers.

Interesting that BYD uses iron and phosphate batteries and mostly sells cheaper and plug-in hybrid vehicles with lower ranges. Plug-in hybrids make up nearly half of its sales. In contrast, Tesla sells costlier and purely electric vehicles for larger ranges. Given the smaller ranges of typical urban commuters, Indian electric car manufacturers should focus on hybrids with lower ranges that are cheaper and can be used to expand the demand for these vehicles. 

2. Some facts about the Indian equity markets

Currently, we have about $35 billion entering the markets from domestic investors (mutual funds, insurance, Employees Provident Fund Organisation and National Pension System ). This number will rise to at least $60 billion in the next five years. Combine this with a normalised $20 billion from foreign portfolio investors and we have a structural bid of $80 billion annually for equities.

3. China may never match TSMC in its domestic semiconductor chip manufacturing mission.

At the forefront of the many incredibly complex supply chain challenges Chinese companies will need to overcome is photolithography equipment. Arguably, ASML’s EUV machine is not one but three separate technological challenges - light source/laser, optics, and the instrument worktable - all of which combine to create a machine with over 450,000 components. In etching a semiconductor, a laser in a photolithography machine does not just have to be capable of firing an accurate beam. To create a 13.5nm chip, the laser must hit its target (30 millionths of a meter in diameter) at 50,000 times a second while the target is traveling over 200mph. The many lenses used in the machines must be smooth on the atomic level. Zeiss, the leading (and only) German optical manufacturer capable of providing lenses and mirrors to ASML, likens the challenge of creating mirrors for ASML to “enlarging the mirror to the size of Germany, with elevations no greater than 0.1 mm”. The last major component of an EUV machine is the precision instrument worktable, which in an ASML machine takes over 55,000 components to control the transistors' carving into the silicon accurately.

Shanghai Micro Electronics Equipment (SMEE) is the most advanced Chinese photolithography company, founded in 2002. It’s advanced for China but not for Taiwan or South Korea: its current SSA600 series machines can be used to create 90nm, 110nm, and 280nm chips, generations behind ASML technology. SMEE previously announced plans to release a machine capable of manufacturing 28nm chips, with the initial release scheduled for 2021. As of January 2024, it has still not released a device... Contrary to the Chinese government's goals of establishing an indigenous semiconductor manufacturing industry, SMEE's suppliers depend on foreign parts, with Chinese companies UP Optotech, Focuslight Technologies, and MLOptic Corp sourcing equipment from abroad. In 2022, UP Optotech revealed that German company iC-Haus was their second-biggest supplier. Doubtlessly, there will be dozens of other examples demonstrating the very high barriers to an entirely de-Westernized semiconductor supply chain... Attaining its own semiconductor industry or leapfrogging TSMC or ASML to become the leader in fabrication or photolithography are both extremely unlikely. 

4. Very good article in Livemint about restrictive building regulations limiting the extent of land utilisation of factory lands. It points to a study of regulations in 10 states by a think tank Prosperiti that finds factories can lose over 50% of their land to comply with them. The full report is here. Setbacks, parking, ground coverage, and FAR are the four reasons for the loss of land. 

The restrictions vary across states in their degrees.

The opportunity costs of these restrictions are prohibitive,

An industrial entrepreneur has to shell out large sums of money to keep part of their plot fallow forever. Based on Prosperiti’s estimates, factories in these 10 states stand to lose between ₹2.67 lakh in a micro-factory to ₹3.16 crore in a mega factory. These regulations may be driving an irrational location of factories. Factories should ideally go where land prices are lower. However, restrictive regulations in cheaper areas may drive factories to more expensive locations... Even if the land loss on account of regulations was halved, states could generate between 30-74 jobs in a medium-sized factory. These losses at the factory level can compound to millions of job opportunities lost. For instance, large factories in Maharashtra could have space for 563,000 more industrial jobs had the state reduced the land lost by half. This is 38% of the factory workers currently employed in Maharashtra generating more than ₹500 crore per month in additional wages.

I'm not sure about some of these numbers, but the scale of losses from such restrictions are nevertheless very high. 

5. The warmest winter on record coupled with surging production (which hit a record 105 bn cubic ft a day in December) has left US natural gas prices close to their lowest levels since 1995 at $1.61 mmBTU. 

US natural gas production has mirrored petroleum production, driven by shale gas.

6. FT reports that the EU is set to announce a nearly 500 million euro penalty on Apple for placing restrictions on Apps that inform iPhone users of cheaper alternatives to access music subscriptions outside the App Store. The action follows a complaint by Spotify in 2019. 

The Commission will say Apple’s actions are illegal and go against the bloc’s rules that enforce competition in the single market, the people familiar with the case told the Financial Times. It will ban Apple’s practice of blocking music services from letting users outside its App Store switch to cheaper alternatives. Brussels will accuse Apple of abusing its powerful position and imposing anti-competitive trading practices on rivals, the people said, adding that the EU would say the tech giant’s terms were “unfair trading conditions”. It is one of the most significant financial penalties levied by the EU on big tech companies... Companies that are defined as gatekeepers, including Apple, Amazon and Google, need to fully comply with these rules under the Digital Markets Act by early next month. The act requires these tech giants to comply with more stringent rules and will force them to allow rivals to share information about their services.

7. A new renewable energy race has begun - the tapping of naturally available hydrogen, estimated at 5 trillion tonnes in underground reservoirs. While only a small proportion is likely to be available for tapping, even a small percentage share will be enough to meet the annual demand of around 500 million tonnes for centuries. 

The demand for hydrogen as a fuel and industrial raw material, particularly to make ammonia for fertiliser production, has been mainly met so far by chemically reforming gas that is made up largely of methane, known as “blue hydrogen” when the carbon emissions are captured or “grey hydrogen” when they are not. A smaller amount is made by splitting water through electrolysis using renewable energy sources, known as “green hydrogen”. But Mengli Zhang of the Colorado School of Mines said tapping natural hydrogen — also known as geologic or gold hydrogen — would be cleaner and cheaper than blue or green hydrogen. “A gold rush for gold hydrogen is coming,” she told the conference. The prospect is beginning to attract interest from investors. US start-up Koloma raised $91mn last year from funds including Bill Gates’s Breakthrough Energy Ventures... Previous scientific opinion held that little pure hydrogen was likely to exist near Earth’s surface because it would be consumed by subterranean microbes or destroyed in geochemical processes. But geologists now believe hydrogen is generated in large quantities when certain iron-rich minerals react with water

8. China's spectacular rise as the world's leading automobile exporter and its dominance of the global EV value chain may well be a defining moment in the world trade agenda for the coming decades. 

Chinese companies today dominate the entire value chain of EVs - EV chassis, autonomous driving software, CoNi batteries etc. - as well as the vehicle production itself.  

Paul Li, founder of Chinese electric vehicle parts supplier U-Power, claims working with the country’s EV sector, which is by far the world’s biggest, can mean foreign companies developing cars years faster than they have traditionally and reducing costs by as much as half. As evidence that foreign carmakers are realising the advantages, he points to Volkswagen’s $700mn tie-up with Chinese rival Xpeng last year. That deal was soon followed by a €1.5bn investment in Chinese EV start-up Leapmotor by Stellantis, which makes Jeep cars in the US and owns the Fiat and Citroën brands in Europe... Li’s company... designs and sells EV chassis — known as skateboards. U-Power last month signed a deal to supply New York-based EV start-up Olympian Motors with its skateboards. The company is also working with Singapore-based FEST Auto to sell EVs to the European logistics market. In another example, Shenzhen-based Appotronics, which provides laser projectors for nearly half of China’s cinemas, will supply BMW with laser technology for some of the German group’s latest in-car displays. And Shenzhen-based DeepRoute.ai, which already has a US office, is now setting up one in Europe to sell its mapping technology for driverless cars.

This is a defining moment for US and European trade policy. Corporate interests will mount pressure to allow them to tap the Chinese suppliers for their EV businesses. But this in turn will only end up amplifying the leverage China already has on the global EV industry. The Chinese firms are trying to overcome US restrictions by establishing factories in Eastern Europe and Mexico and then exporting to the US. Some are even establishing JVs with European manufacturers. 

9. Nvidia's $740 share price is nuts? FT Alphaville hints it might be.

This week Nvidia’s market cap passed the $1.8tn mark, leapfrogging Alphabet — whose 2023 net income was greater than Nvidia’s 2023 revenues — to become the third most valuable US company after Microsoft and Apple... To get to a $740 share price simply requires that the company maintain a monopolist-like operating profit margin of 55 per cent for the next decade, while also growing sales tenfold, from $60bn a year to more than $600bn. For context, the entire industry sold $527bn worth of chips last year, according to the the Semiconductor Industry Association. Over the past decade Nvidia did admittedly achieve a similar level of growth: in 2014 its sales were a mere $4bn... Nvidia’s unusual profitability is a recent phenomenon related to the very high prices pushed through in response to overwhelming demand: The EBIT Margins were all over the place from 2014-2023 (range of 12-37 per cent) and certainly nowhere near a steady 55 per cent... At a 15 per cent growth rate and 30 per cent sustainable margins his antiquated model cranks out a share price of $176!

The share has since surged following its latest quarterly earnings report. It added $277 bn in market capitalisation in a single day, which is bigger than the entire market capitalisation of Reliance Industries of $243 bn!

10. A health check of Indian banks presents some very promising numbers.

Believe it or not, 21 of 32 listed banks, including SBI, HDFC Bank, ICICI Bank, Bank of Baroda, Axis Bank, Kotak Mahindra Bank, IDBI Bank and IDFC First Bank have less than 1 per cent net NPAs. Indian Bank has the lowest net NPAs (22 basis points), followed by HDFC Bank and CSB Bank (31 basis points each). One basis point is a hundredth of a percentage point. Lower bad loans have led to lower provisions. In fact, provisions in the December quarter Y-o-Y have dropped 39.51 per cent, from Rs 38,852 crore to Rs 23,503 crore. As a result, collectively the net profit of all listed banks has grown 15.29 per cent to Rs 74,976 crore even though the operating profit growth is just 2.05 per cent at Rs 1.31 trillion.

11. Cory Doctrow has an excellent essay on how social media platforms have degenerated through a process that he describes as enshittification. 

It’s a three-stage process: first, platforms are good to their users. Then they abuse their users to make things better for their business customers. Finally, they abuse those business customers to claw back all the value for themselves. Then, there is a fourth stage: they die... Facebook arose from a website developed to rate the fuckability of Harvard undergrads, and it only got worse after that. When Facebook started off, it was only open to US college and high-school kids with .edu and K-12.us addresses. But in 2006, it opened up to the general public. It effectively told them: Yes, I know you’re all using MySpace. But MySpace is owned by a billionaire who spies on you with every hour that God sends. Sign up with Facebook and we will never spy on you. Come and tell us who matters to you in this world. 

That was stage one. Facebook had a surplus — its investors’ cash — and it allocated that surplus to its end users. Those end users proceeded to lock themselves into Facebook. Facebook, like most tech businesses, had network effects on its side... But Facebook didn’t just have high network effects, it had high switching costs... So Facebook’s end users engaged in a mutual hostage-taking that kept them glued to the platform. Then Facebook exploited that hostage situation, withdrawing the surplus from end users and allocating it to two groups of business customers: advertisers and publishers. To the advertisers, Facebook said: Remember when we told those rubes we wouldn’t spy on them? Well, we do. And we will sell you access to that data in the form of fine-grained ad-targeting. Your ads are dirt cheap to serve, and we’ll spare no expense to make sure that when you pay for an ad, a real human sees it. To the publishers, Facebook said: Remember when we told those rubes we would only show them the things they asked to see? Ha! Upload short excerpts from your website, append a link and we will cram it into the eyeballs of users who never asked to see it. We are offering you a free traffic funnel that will drive millions of users to your website to monetise as you please. And so advertisers and publishers became stuck to the platform, too. 

Users, advertisers, publishers — everyone was locked in. Which meant it was time for the third stage of enshittification: withdrawing surplus from everyone and handing it to Facebook’s shareholders. For the users, that meant dialling down the share of content from accounts you followed to a homeopathic dose, and filling the resulting void with ads and pay-to-boost content from publishers. For advertisers, that meant jacking up prices and drawing down anti-fraud enforcement, so advertisers paid much more for ads that were far less likely to be seen. For publishers, this meant algorithmically suppressing the reach of their posts unless they included an ever-larger share of their articles in the excerpt. And then Facebook started to punish publishers for including a link back to their own sites, so they were corralled into posting full text feeds with no links, meaning they became commodity suppliers to Facebook, entirely dependent on the company both for reach and for monetisation... Facebook now enters the most dangerous phase of enshittification. It wants to withdraw all available surplus and leave just enough residual value in the service to keep end users stuck to each other, and business customers stuck to end users, without leaving anything... But that’s a very brittle equilibrium.

They argue that in the pre-enshittification era, there were restraining forces like competition, regulation, self-help and worker power that prevented uncontrolled enshittification. over time each of these constraints have eroded and enhittification has been happening unchecked. The author argues in favour of restoring each of these restraints to reverse the process of enshittification. 

This is a good example,

When Diapers.com refused Amazon’s acquisition offer, Amazon lit $100mn on fire, selling diapers way below cost for months, until Diapers.com went bust, and Amazon bought them for pennies on the dollar.

12. The post-Cold War peace dividend enjoyed by Europe

Estimates suggest the continent would have spent an additional $8.6tn on defence over 30 years had they maintained cold war levels of military expenditure.

This, as JD Vance writes, is also an implied tax on US citizens to ensure European security.

13. Amidst geopolitical uncertainties, crackdowns on foreign consultancies and an increasingly hostile environment for foreign firms, foreign investment in China has fallen to its lowest level in 30 years! 

China’s direct investment liabilities, a gauge of foreign capital flowing into the country, totalled about $33bn in 2023, according to data released late on Sunday by the State Administration of Foreign Exchange. This was an 82 per cent decline from the previous year and the lowest annual figure since 1993.

14. Good set of graphics about the struggling Pakistani economy. This is about the very large share of revenues going into debt-servicing.

15. The Red Sea ship attacks have imposed large costs and increased shipping times, thereby creating shipping fleet shortages.

Diversions to a route round the Cape of Good Hope have added 10 days to two weeks to each voyage between Asia and north Europe and vastly complicated the task of serving some parts of the world... The 102-day time required to complete a loop between Asia and north Europe and back via the Cape of Good Hope means a line needs to deploy 16 ships for a weekly service, instead of the normal 12.

17. This week the Nikkei surpassed the level it reached 34 years back in 1989. The FT article describes the changes in Japan over this time.

The IMF expects Japan’s ratio of public debt to gross domestic product to reach 256 per cent in 2024, compared with 65 per cent in 1989... In 1989 Japanese companies, particularly banks, dominated the global top 10 by market capitalisation. No Japanese companies make the top 10 now. Today, Toyota has risen to become the world’s largest carmaker by sales and the most valuable company in Japan. Sony, which is now more famous for its entertainment business and PlayStation games than the Walkman portable music player, is ranked third while semiconductor equipment maker Tokyo Electron is fifth... In 1989, six of the world’s 10 richest people were Japanese. At the top of the list was Yoshiaki Tsutsumi, the former owner of Seibu Railway, whose wealth Forbes estimated at $15bn. Now, only three Japanese people are ranked among the world’s top 100 billionaires, with Tadashi Yanai, founder of Uniqlo owner Fast Retailing, and his family ranked 30th with an estimated net worth of $40bn... Decades of deflation and economic stagnation, however, have also sapped the appetite for investment, leaving companies sitting on a massive cash pile of ¥343tn... 

By 1989, Japan had also begun to make its name as one of the world’s pre-eminent exporters of soft power, and of the idea that Japan as a country and a culture had something unique to share with the world. Hello Kitty, Mario, Gundam and Sonic enthralled, and Japan’s power to entertain became one of its best-known superpowers. As the stock market neared its peak, Nintendo released the handheld Game Boy console — a machine that would go on to sell more than 100mn units worldwide and physically put Japanese games, a Japanese pop-culture aesthetic and Pokémon in pockets around the world. Just three days before the Nikkei peak, US audiences had their first glimpse of Akira, the seminal anime that would create a global generation of Japanese cartoon fans. In 2024, Japan retains much of this soft power and a significant store of wealth but has lost much of its pre-eminence.

Arguably the biggest change has been with the country's demographics - nearly 30 per cent of the population is over the age of 65!

18. Finally, David Solomon's unreasonable 24% pay rise as Goldman CEO while presiding over one of the firm's weakest performances has naturally triggered discontent within the firm. The firm has already seen several high-profile bankers leave and is now facing the threat of more departures.