1. Pointer to where India could be focusing its semiconductor chip ambitions
India already has a fifth of the world’s chip designers, but only 7 per cent of actual design facilities.
2. The US Government has announced plans to close off an old de minimis rule that allows importers to bypass US taxes and tariffs on goods as long as shipments do not exceed $800 in value. Shein, Temu, and other Chinese retailers have exploited this rule to ship cheap items directly from China to shoppers, thereby forcing other retailers including Amazon to consider the same option.
To bring goods into the United States, retailers have traditionally arranged for shipping containers full of products to arrive from China at U.S. ports. Those goods would then be trucked to a company’s warehouses and retail stores before being sold to consumers. But retailers have been increasingly bypassing that process by individually packaging and shipping items directly from China to consumers under the de minimis law. With that method, the shopper is the official importer, rather than the retailer or e-commerce platform, and the value of the shipments largely stays under an $800 threshold.In addition to avoiding tariffs, sellers do not have to provide as much information to U.S. Customs and Border Protection as with larger shipments. That model has taken off since the Trump administration in 2018 and 2019 imposed tariffs on many Chinese goods that retailers brought to the U.S. through traditional channels. The surge in online ordering during the pandemic also helped to popularize such shipments, which now make up roughly a fifth of e-commerce orders. The number of packages entering the United States each year under the de minimis rule has ballooned to more than one billion in 2023, up from 140 million a decade ago. China is by far the biggest source for such packages, sending more than all other countries combined, according to the customs agency.
U.S. companies and trade groups have complained that those rules set up a two-tiered system, in which brands with U.S. stores and warehouses had to pay higher tariffs than those that shipped directly to consumers. For example, an importer shipping 10,000 cellphone screen protectors into the United States could save more than $7,000 in taxes and duties if it individually packaged and shipped the protectors to consumers, rather than routing them through a warehouse, according to a presentation Apex Logistics prepared for its clients. Other U.S. businesses have complained that the de minimis exception puts pressure on retailers that employ Americans in their distribution centers. Lobbying groups in favor of eliminating de minimis have said the provision has recently led to the shuttering of some of the remaining textile plants around the United States.
3. The contrasting fortunes of US and Chinese stock markets
But in the year so far, the benchmark S&P 500 index is still up by 18 per cent. China, meanwhile, is in a deep hole. The CSI 300 index has fallen by about 7 per cent this year.
According to the regulations, for company promoters, 20% of the post-issue paid-up capital must be locked in for 18 months, while any allotment exceeding this 20% threshold is subject to a lock-in period of six months. For anchor investors, 50% of the allotted shares is locked in for 30 days from the date of allotment, with the remaining 50% locked in for 90 days. The lock-in period for non-promoters ends after six months... From an equity market perspective, the true test of such companies is when the lock-in shares are released in the market. This is where most domestic startups seem to be floundering. The report card of the startups listed over the past two years makes for a sobering read.Out of the five startups listed in 2023, two are deep in red, one is barely in the green while only two have delivered respectable returns. Even for the last two companies, stock prices have stagnated after around six months, coinciding with the release of lock-in shares. Out of the three startups listed in 2022, Delhivery is down 25%, Tracxn Technologies has inched up 2% and DroneAcharya has delivered a modest 12% returns.
6. Some findings from a SEBI study of investor behaviour in IPOs that examined 144 IPOs listed between April 2021 and December 2023 which collectively raised Rs 2.13 lakh Cr from 21.9% allotment to retail investors and 64.6% to qualified institutional investors.
About 54% of IPO
shares
(in value terms)
allotted to Investors
(excluding anchor investors) were sold within
a week
from listing
About 54% of IPO
shares
(in value terms)
allotted to Investors
(excluding anchor investors) were sold within
a week
from listing
Excluding anchor investors, it was observed that 53.9% of IPO shares (in value terms) were sold within a week and 72.6% within a year.... Individual Investors sold 50.2 per cent shares (in value terms) allotted to them within a week from listing. Non Institutional Investors (NIIs1) sold 63.3 per cent shares by value. Retail2 investors sold 42.7 per cent shares by value... Mutual Funds sold about 3.3 per cent of allotted value within a week, as compared to 79.8 per cent for Banks... 39.3 per cent of Retail Investors were from Gujarat, followed by Maharashtra (13.5%), and Rajasthan (10.5%)... A positive association was observed between IPO subscription, listing day returns, and exit of investors (in terms of percentage of shares sold in value terms). Higher subscription was associated with higher listing day returns and in turn higher exit by investors. For Individuals, the exit from IPOs roughly doubled from the oversubscribed IPOs in the range 5x-10x, compared to those in the range 1x-5x.
7. India's household non-mortgage debt is among the highest in the world at 30% (compared to 10-11% housing debt), even compared to developed countries.
South Korean exporters of products ranging from steel and petrochemicals to textiles and cosmetics are struggling to compete with a glut of goods from Chinese rivals, as the effects of overcapacity and sluggish domestic demand spill over into global markets. Even Korean makers of kimchi, the fermented vegetable product widely seen as a symbol of national identity, are feeling the heat. South Korea imported more kimchi in the first half of 2024 — almost all of it from China — than it exported, amid intensifying competition from Chinese kimchi that cost six times less than the Korean equivalent.
9. Nice description of how the US FTC and DoJ are shifting the framing of the anti-trust debate
As the FTC put it in a recent statement launching a deep investigation into algorithmic price discrimination, while the transparent use of freely given information to price products and services is normal, “now data collection has become common across devices, from smart cars to robotic vacuums to the phones in our pockets. Many consumers today are not actively aware that their devices constantly gather data about them, and that data can be used to charge them more money for products and services. An age-old practice of targeted pricing is now giving way to a new frontier of surveillance pricing.”... Jonathan Kanter, who has brought a record number of cases during his tenure. More important than the breadth is the approach. His department has pulled ahead on issues like algorithmic pricing before private actors were able to build a body of judicial victories in lower courts that would make it hard to do so. In 2022, Kanter launched what he calls Project Gretzky, named after ice hockey great Wayne Gretzky, because as he puts it, “what made Gretzky great is that he skates not to where the puck is, but to where it’s going.” When you are dealing with large technology platforms that can leverage the network effect to create competitive moats around areas entirely outside their own industries — such as healthcare, groceries, automobiles, or AI — that kind of prescience is crucial.
10. On caste inequalities in India
Two recent studies based on the panel data from Indian Human Development Survey indicate rather clearly that caste plays an important role in determining income level. The first study regresses income on a variety of determining factors and finds that the annual income of lower-caste individuals is 21.1 per cent lower than that of the rest of the population. On a more disaggregated basis, the model shows that Adivasis’ income is, on average, 28.7 per cent lower than that of upper caste groups, while the income of Dalits, Muslims, and OBCs, are 27.74 per cent, 20.17 per cent, and 19 per cent lower, respectively... The study shows that lower-caste individuals with higher education have a significantly lower disparity, which is 10.3 per cent relative to the upper caste. The reduction is even more substantial for Adivasis. As for the state-specific effect, the study shows that for every Rs 10,000 increase in the real gross domestic product (GDP) per capita at the state level, there is, on average, a 9.05 percentage points reduction in caste-based income disparity for Adivasis. For Dalits, OBCs, and Muslims, the reductions are 7.6, 4.9, and 1.8 percentage points, respectively. Note, however, that the difference, though reduced, is not eliminated.
Another study, based on the same survey data, focuses on the differences experienced by lower and upper caste groups who are business owners. The study finds that Dalit business owners have a lower income compared to those who do not face the stigma of exclusion but who do face socio-economic disadvantage, namely, OBCs, Adivasis, and Muslims. The study takes into account what it describes as social capital, which is defined in terms of the extent of inter-personal contact that the individual has with other professionals, particularly from other castes. It finds that even when the social capital of the Dalit individual is higher, the income gap persists, indicating that caste stigma continues to play a role. This study also finds that education improves the incomes of Dalits to a similar degree as it improves the incomes of non-Dalits.
11. China steel industry facts of the day
China’s exports of steel have surged, reaching 90m tonnes in 2023, up by 35% on the previous year. That may be a fraction of China’s total production, but it is more than what America or Japan make in a year... As the commodity-intensive property sector has suffered, its steelmakers have taken a beating. In August barely 1% of the 250 steel mills in China that report their finances to the government turned a profit, according to Isha Chaudhary of Wood Mackenzie, a consultancy. The domestic price for hot-rolled coil steel, a benchmark product, has fallen by 16% over the past year. Despite the slump in prices, many of the country’s producers have been reluctant to curtail production; idling a blast furnace takes months and is often costlier than keeping it running. Facing lacklustre demand from their usual customers at home, steelmakers are looking elsewhere. The result is surging exports.
12. The first US Fed rate cut in four years.
13. Volkswagen and Wolfsburg is Europe's equivalent of Geeneral Motors and Flint, Michigan.
For decades, Wolfsburg and its car plant — the world’s largest — symbolised Germany’s miraculous post-war industrial revival. VW’s crisis, and its plan to close some German factories, has unleashed angst among the city’s 120,000 inhabitants, many of whom are employed by the carmaker... Wolfsburg was founded by the Nazi government a year before the outbreak of the second world war to house workers who were to build the Volkswagen — the people’s car. Since then, more than 48mn cars have rolled off the city’s production lines, more than anywhere else in the world. VW employs 60,000 people in Wolfsburg and just as many more in the wider central German state of Lower Saxony, where it also supports thousands of jobs at automotive suppliers that exist only because of the demands of Europe’s largest carmaker... the company’s importance to the region stretched beyond the automotive sector to “the baker around the corner, the hairdresser”.
The problems stem from cheap Chinese imports and electric vehicles (and also declining VW market share from the highly profitable Chinese markets).
VW last week notified its worker's unions that due to growing competitiveness issues, its three-decades-old job security guarantee was now void, provoking a strong reaction from the IG Metal union.
14. Finally, the latest data point in Xi Jinping turn is the spectacular fall in Chinese startup activity and VC funding.
In 2018, at the height of VC investment, 51,302 start-ups were founded in China, according to data provider IT Juzi. By 2023, that figure had collapsed to 1,202 and is on track to be even lower this year.
The FT has an investigation that describes how the Party stifled entrepreneurship.
The crisis in the sector partly reflects the slowdown in the Chinese economy, which has been buffeted by the protracted Covid-19 lockdowns, the bursting of its property bubble and the stagnation of its equity markets. As bilateral tensions have risen, US-based investors have also largely pulled out. But it is also the direct result of political decisions taken by President Xi Jinping that have dramatically changed the environment for private business in China — including a crackdown on technology companies regarded as monopolistic or not attuned to Communist party values, and an anti-corruption crusade that continues to ripple through the business community. Desmond Shum, author of Red Roulette and a former real estate mogul, says the party “has throttled the private sector”...
Jack Ma was hauled in by the authorities for what were termed “supervisory interviews”, kicking off a wider crackdown on the technology sector that underscored the unpredictability of investing in China. Since then, the optimism that fuelled a generation of risk-taking entrepreneurs has been systematically eroded... VC firms have laid off investment professionals and in some cases replaced them with lawyers or former judges to enforce the repayment terms... The pool of capital that VCs can tap into is also shrinking. Foreign investors, wealthy Chinese, and corporate investors have been divesting or reducing their exposure to China, leaving state-backed players with an outsized role... Beijing’s efforts to cut what it views as excessive salaries in finance have also reduced the incentive for high-risk but potentially high-reward investments. State limited partners have either mandated that fund managers either cap their salaries at the Rmb2.9mn (around $407,000) annual limit that has been more rigorously enforced this year at state-backed financial institutions, or slash management fees by half, according to several people with knowledge of the matter.
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