1. Graphic on India's semiconductor chips manufacturing ambitions
On Thursday, the Union Cabinet approved Rs 1.26 trillion worth of investments in three semiconductor plants, including one by the Tata group to build India’s first major chip fabrication facility at Dholera in Gujarat. The Cabinet also cleared a separate Tata proposal for a chip assembly and testing plant in Morigaon, Assam, and another by CG Power in Sanand, also in Gujarat. Work on all three is expected to begin within 100 days. The Tata group’s Dholera plant entails an investment of Rs 91,000 crore and will churn out 28-nanometre and above chips — known for high performance and low power consumption — beginning with 50,000 wafter starts per month. It has tied up with the third- largest Taiwanese chip maker, PSMC, for the crucial technology. PSMC might take equity. Tata’s Assam project, for which Rs 27,000 crore is earmarked, will do semiconductor assembly, testing, marking, and packaging (ATMP). Deploying indigenous technology, it will process the wafers manufactured in Dholera, as well as wafers made by other companies, into “make in India” chips.
This is the global landscape of chip manufacturing
After the slowdown of 2023, says SEMI, 82 fab plants, including new ones and capacity expansion, will be operational during 2022-24 — the majority in 28 nanometres. In 2024 alone, 42 fab plants will join the fray, raising concerns about a possible oversupply. Companies including TSMC, Intel, Micron, and Samsung are investing over $500 billion by the year-end in building fabs in their home countries as well as in the US and Europe, where the supply chain is established, instead of looking at newer countries. India’s investment in fab and ATMP together would account for a mere 3.6 per cent of what the big guns are investing. The country’s subsidy incentive scheme is only 18 per cent of what the US offers ($52 billion). Also, the US and China are locking horns. About 40 per cent of the new plants are being built in the US, of which six will be operational in 2024. But China is moving faster, with 18 new plants slated to go on stream this year.
2. Office space demand in major Indian cities to top 50 million sq ft.
Gross leasing of office space stood at 58.2 million square feet across six major cities namely Bengaluru, Chennai, Delhi-NCR, Hyderabad, Mumbai and Pune... In a realistic scenario, the gross leasing of Grade-A office space is estimated at 50-55 million square feet this year across these six cities.
3. Elon Musk and the art of tax evasion in the name of philanthropy.
Since 2020, he has seeded his charity with tax-deductible donations of stock worth more than $7 billion at the time, making it one of the largest in the country. The foundation that houses the money has failed in recent years to give away the bare minimum required by law to justify the tax break, exposing it to the risk of having to pay the government a substantial financial penalty. Mr. Musk has not hired any staff for his foundation, tax filings show. Its billions are handled by a board that consists of himself and two volunteers, one of whom reports putting in so little time that it averages out to six minutes per week. In 2022, the last year for which records are available, they gave away $160 million, which was $234 million less than the law required — the fourth-largest shortfall of any foundation in the country...A New York Times analysis found that, of the Musk Foundation’s giving in 2021 and 2022 — the latest years for which full data is available — about half of the donations had some link to Mr. Musk, one of his employees or one of his businesses. Among the donations the Musk Foundation has made, there was $55 million to help a major SpaceX customer meet a charitable pledge. There were the millions that went to Cameron County, Texas, after the rocket blew up. And there were donations to two schools closely tied to his businesses: one walled off inside a SpaceX compound, the other located next to a new subdivision for Musk’s employees.
4. China is circumventing sanctions against it by shipping more to Mexico.
Chinese companies are seeking to circumvent US and EU tariffs in a number of different ways. One of these ways is transshipment, a method that is fully on display in Mexico, which as a member of North American Free Trade Agreement (Nafta) can export goods to the US market at much lower tariffs than China can access. An FT analysis of trade data shows a sharp rise in 20ft containers shipped from China to Mexico in the first three quarters of 2023 compared with the same period a year earlier. The rise came as Mexico overtook China as the biggest exporter of goods to the US last year, and as truck shipments across the border into the US have continued to increase quickly.
Sample this
Figures from Container Trades Statistics, analysed by Xeneta, show the number of 20ft containers shipped from China to Mexico hit 881,000 in the first three quarters of 2023, the most recent period for which data is available, up from 689,000 in the same period of 2022. The rise came as Mexico overtook China as the biggest exporter of goods to the US last year, and as truck shipments across the border into the US have continued to increase quickly.
5. As the WTO stalls and countries are pursuing bilateral deals, this is a good status report on India's bilateral FTA negotiations.
6. Some interesting facts about the dominance of the Magnificient Seven in the US equity markets and the general concentration of market capitalisation.
Today, the top decile of stocks in the US account for more than 75 per cent of total market capitalisation. The only other time we have seen this level of concentration was at the bubble peaks of 2000 and 1929. Worryingly, in both the prior periods, this ratio eventually mean-reverted to 60 per cent. Since 1926, the median ratio of concentration for the US has been 63 per cent. If we look at the top five stocks, at 25 per cent of the S&P 500, this ratio is back to the peak of the Nifty 50 era of the late 1960s. Even the top 10 stocks, constituting 34 per cent of the S&P 500, have never been a bigger part of the market than today. Driven by the Mag Seven, concentration, whichever way you cut it, has never been higher...
Taken together, the Mag Seven stocks, with a market capitalisation of $13 trillion, would be on their own the second-largest stock market in the world, larger than China and more than double the third-largest market, Japan. The single largest stock, Microsoft, at a market capitalisation of over $3 trillion, would on its own be the fifth-largest market in the world (just after India). Today, Microsoft and Apple individually have market capitalisation greater than the UK stock market... Even on the basis of profits, we are in a different world. Taking trailing 12 months profits, the Mag Seven have a total net profit of $361 billion—almost equal to the total profits of corporate Japan and half the profits of all the companies listed in China. Their profits on an absolute basis are more than double the profits of all the companies listed in India ($151 billion: Source DB). Apple alone over the last 12 months, delivered a net profit of $101 billion, 70 per cent of the profitability of all listed Indian corporations (source: DB). Combined, Apple and Microsoft deliver 20 per cent more profit than all the listed companies in India. I don’t think we have ever seen a phenomenon of companies with market capitalisation and profitability equal to large countries before... The US has had an incredible 15 years of both absolute and relative performance, and currently represents 62 per cent of global market capitalisation. It was higher than this in the mid-1960s, when there was no China and emerging markets. This relative performance dominance will reverse at some stage. The US cannot outperform forever...
All other global markets are far more concentrated. Most have a ratio of top 10 stocks over 50 per cent, and many have single stocks at over 25 per cent, compared to 8 per cent for the US. The size and profitability of these platform companies is also due to their network effects, global penetration and the inability of regulators until recently to rein them in. How do you compete against a company spending more than $30 billion a year each in terms of capex and research and design (R&D), as all the global platform stocks do? And how does one compete against Nvidia, which has the software/hardware integration, head start in graphics processing units (GPUs), and has locked much of TSMC’s leading edge Fab capacity?
7. A feature of today's capitalism is the extreme concentration of wealth and therefore power in the hands of a few. This threatens to destroy the social contract. There's a good FT interview of Peter Turchin where he makes this point.
In the modern period, elites have sometimes staved off the worst outcomes. Britain, Turchin argues, suffered decades of instability from the 1830s to the 1860s, but avoided revolution by abolishing food tariffs, widening the suffrage and allowing labour unions. For Turchin, these helped to address the root cause of instability: the fact that real wages had fallen between 1750 and 1800. Wealthy Americans checked their own power between the 1930s and 1960s, accepting income tax rates of more than 90 per cent. But today’s elites — by which Turchin means the richest 10 per cent — are unwilling to follow suit. “We are back to very similar attitudes that were prevalent during the Gilded Age.”
Saving capitalism from capitalists!
8. Two striking graphics on China. The first is the steep fall in economic data disclosures as the economy worsens.
The second is the surge in Chinese manufacturing surplus during the pandemic that contradicts the conventional wisdom on global decoupling.
9. FT long read on perhaps the biggest beneficiary yet of the Chip wars, Malaysia. Penang, a state in Northern Malaysia, has become the epicentre of the country's flood of semiconductor chip investments.
The state attracted RM60.1bn ($12.8bn) in foreign direct investment in 2023, more than the total it received from 2013 to 2020 combined... Malaysia has a 50-year history in the “back end” of the semiconductor manufacturing supply chain: packaging, assembling and testing chips. But it has ambitions to move up to the front end of a $520bn global industry that powers everything from televisions to smartphones and electric vehicles. That includes higher value activities such as wafer fabrication and integrated circuit design.
The region and the country has a history in the industry is well placed to benefit from the diversification away from China,
In 1972, a muddy paddy field in Penang became the first production facility outside the US for Intel. Lured by a new free trade zone and a busy shipping port in the Malacca Strait, Intel, alongside AMD, Renesas (formerly Hitachi), Keysight Technologies (formerly Hewlett-Packard) and several other tech multinationals were the pioneers of what used to be called the “Silicon Valley of the East”. Malaysia became a well-oiled machine in the packaging assembly and testing of chips, until recently considered a fairly low-end, labour intensive but necessary part of the semiconductor manufacturing supply chain. It is already the world’s sixth largest semiconductor exporter and holds 13 per cent of the global semiconductor packaging, assembly and testing market. It is the origin for 20 per cent of US semiconductor imports annually, more than Taiwan, Japan or South Korea. But there hadn’t been much of a catalyst for it to move up the value chain in semiconductors — until now.
Demand for ever more high-powered chips in sectors such as electric vehicles and artificial intelligence means so-called advanced packaging — which connects chips to their circuitboards and protects them from contamination — is regarded as key to improving performance. A previously labour-intensive process now often takes place in highly automated factories. Intel, the world’s largest chipmaker by revenue, is spending $7bn on new facilities in Malaysia, including a “3D” advanced packaging site due to be finished later this year. The cutting-edge technology stacks chips on top of each other to improve performance. It is also building another chip assembly and testing factory in Kulim, which borders Penang... Micron and Germany’s Infineon are also in expansion mode. US-based Micron last year launched its second facility for assembly and testing in Penang, while Infineon, a former subsidiary of German engineering conglomerate Siemens, said it would spend up to $5.4bn to expand over the next five years. It is building the world’s largest production site for the silicon carbide chips widely used by makers of electric vehicles.
The sudden spurt in activities in Penang has come with all the problems:
Prices of industrial land have gone from about RM50 per square foot in 2022 to as much as RM85 per square foot... Across south-east Asia, Penang’s residential property price growth in the first half of 2023 was second only to the expensive city-state of Singapore... Traffic jams have become a regular feature... The country’s engineering staff shortage has also become more acute. Zafrul, the trade minister, says the electrical and electronics sector alone requires 50,000 engineers, but only 5,000 engineering students graduate each year — and many of them slip across the causeway to Singapore, where they are paid much more. Engineering salaries, especially for starting graduates, are still below most other professional sectors in Malaysia and experts say there is a lack of specialised expertise crucial for moving up to the front end of the supply chain... Malaysia does not have a national champion in semiconductors like Taiwan’s TSMC.
The US crackdown on China has been the trigger for Malaysia,
Since the US began imposing trade restrictions on Chinese technology under the Trump administration, and especially since they were tightened by current US President Joe Biden, Penang started to see a flood of interest from mainland groups like Fengshi, according to InvestPenang’s Loo. Many of these are companies with global suppliers or western customers hedging against further US restrictions, she says. InvestPenang estimates there are now 55 mainland companies in Penang operating in manufacturing, mostly in semiconductors. That compares to just 16 before the American crackdown began. US restrictions do not currently apply to advanced chip packaging services, but Chinese businesses fear potential future curbs, says one Hong Kong-based analyst for a Chinese company, who asked to remain anonymous. Some are de-risking by partnering with Malaysian firms to assemble a portion of their high-end chips, they added.
The most interesting thing is that the wave of chip investments in Malaysia has come without too many incentives and active pursuit by the government. In other words, there has been not too much industrial policy contribution to these investments.
10. Sajjid Chinoy urges caution on reducing interest rates in India pointing to several conflicts trends and patterns in the economy.
Credit growth has been running at almost 16 per cent for the last year, almost twice as strong as nominal gross domestic product (GDP) growth of 9 per cent -- a multiple last seen in 2007... Uncertainty about neutral rates with the prospect they have increased, negative output gaps, but also forecasted inflation still above target... India’s policymakers are currently confronting several cross currents. Growth has surprised to the upside even as the economy remains below its pre-pandemic path. Core inflation is at multi-year lows, but credit growth is at multi-year highs. Private investment is yet to broaden out but public investment has been strong. GDP growth is strong but GVA growth has slowed.
11. Interesting graphic about the historical trend of GDP.
12. This year's meeting of the Chinese National People's Congress, the country's parliament, and the Chinese People's Political Consultative Conference, the top advisory body, (collectively called the "Two Sessions") set growth rate at an ambitious 5% and resolved to fight the country's high local government debt, property crisis, and persistent disinflation.
The ballooning local government debt has been a rising source of major concern.
Chinese local government debt, including off-balance sheet financing vehicles and shadow credit, was probably equivalent to between 75 and 91 per cent of national GDP in 2022, according to a paper last year by Victor Shih and Jonathan Elkobi of the University of California San Diego. Twelve province-level governments had outstanding bonds alone equivalent to more than 50 per cent of their GDP, they wrote. China says its total central and local government debt is less than 51 per cent of GDP.
The deeply indebted province of Guizhou is a totemic example of the problems with debt-based infrastructure development.
Fixed-asset investment was expected to fall this year by 60 per cent for the western province of Guizhou... Guizhou, one of China’s poorest provinces, is now home to nearly half of the world’s 100 highest bridges, including four of the top 10. Yuekai Securities estimates the province’s infrastructure building spree has left it with total debt, including off-balance sheet liabilities, at 137 per cent of its gross domestic product.
13. Finally, an article on the increasing mothballing of conventional car factories as they give way to electric vehicles highlights both the risks of foreign investment in China and more importantly how China is bearing the costs of the green transitions.
In 2017, Hyundai invested $1.15bn in a new factory in Chongqing, southwestern China, with the goal of reaching an annual output of 300,000 internal combustion engine cars. But six years later, the rapid switch by Chinese consumers to electric vehicles has stalled sales, forcing the carmaker to sell the factory in December for less than a quarter of the investment value... That plant is one of the hundreds of zombie factories that analysts are predicting over the next decade in the Chinese car market, the world’s biggest across sales, production and, since last year, exports. In 2023, China produced 17.7mn internal combustion engine cars, a 37 per cent fall from its prior peak in 2017, according to data from Automobility, a Shanghai consultancy. Bill Russo, the former head of Chrysler in China and founder of Automobility, said the “precipitous decline” of internal combustion engine car sales meant as much as half of the industry’s installed capacity — about 25mn out of 50mn units’ annual capacity — was not being used. While some older factories will be repurposed for plug-in hybrids or pure battery electric vehicles, others will never produce another car, posing a problem for both foreign and Chinese companies.
This has increased the pressure on foreign car makers in China who are now using China as a base for their exports, thereby undercutting their factories elsewhere.
Until recently, foreign carmakers could only enter the Chinese market as a joint venture with a local partner. Of 16 joint ventures between Chinese and foreign groups, only five had a capacity utilisation rate higher than 50 per cent while eight were below 30 per cent, according to a report by Chinese media outlet Yicai Global. In response to the worsening domestic market situation, Chinese companies have been ramping up exports of cheap petrol-powered cars to Russia, a market that many international carmakers have quit in the wake of that country’s full-scale invasion of Ukraine. Yet analysts question whether those sales deliver meaningful profits to the Chinese groups, for how long they can continue, or if other developing markets can help soak up Chinese non-EV exports. Foreign brands, too, are increasingly trying to export more from their Chinese factories. But, experts say, in doing this companies risk undercutting their own factories in other markets.
No comments:
Post a Comment