Weekend reading links

1. Interesting snippet about the investments and profits of car companies and Apple.

Ford and Apple each maintain $40bn or so in fixed assets and spend $8bn-10bn a year on capital investments. Yet in 2023 the iPhone-maker raked in more than twice Ford’s revenue and 23 times its net profit. Even if you add its $30bn in research and development (R&D) costs to its capital expenditure, Apple is matched by Volkswagen and Toyota, the world’s two biggest carmakers, neither of which sells as much. As a share of revenue, Apple’s combined R&D and capital spending, at 10%, is dwarfed by that of BYD, China’s EV champion, which last year spent 27%.

This about HP's outsourcing strategy

In 1993 Hewlett-Packard, then one of the world’s biggest makers of computer hardware, began outsourcing the production of its pcs, printers and servers. By 2000 virtually all its computers were made by third parties. In that period HP increased its revenues from $20bn to $49bn. It pulled this off while barely growing its fixed-asset base and nearly halving the share of sales going on R&D and capital expenditure, from 16-18% in 1988-92 to 9% by the end of the decade. Its global workforce shrank from 96,000 to 88,500. Net profit more than trebled. Return on equity improved from 12% in the early 1990s to an average of 19% between 1994 and 2000.

2. Johanna Deeksha has an excellent story that describes how SC/ST students who are awarded National Overseas Scholarships to pursue master's education abroad struggle with inadequate funding, procedural obstacles and delays in disbursements, and unreasonable conditionalities. 

The article is symptomatic of design problems with government schemes. One, in order to maximise coverage with a small pot of money, departments tend to spread the butter thin, thereby skimping on the unit allocation (in this case scholarship amount and the specific things to which it can be used). Second, the implementation is designed to primarily minimise the likelihood of fraud and wastage, even if it trades off against ease of access and service quality. Three, programs try to achieve multiple objectives, in the process struggling and failing with all objectives.

This is true of any program that provides government financing to individuals, companies, and organisations. The funding is inadequate at the unit-level, access is very difficult, and conditionalities are onerous. 

3. The Economist has a long read on the Space X phenomenon. Last week Space X's booster rocket, Starship, returned back to the launchpad after delivering several satellites. Space X already offers satellite-based internet services, Starlink, using over 6400 satellites located at low earth orbits (three-fourth of all satellites currently active) and is valued at $180 bn. Starship is an advanced version of Starlink's Falcon rockets that have already disrupted satellite launches by making space flight much cheaper and the rockets partially reusable. Unlike Falcon, Starship is almost fully reusable, have low turn-around times, and can put almost 150 tonnes into orbit far more than the 18 tonnes of Falcon 9. 

In the first quarter of this year the firm shot almost seven times as much into orbit as all its rivals put together, be they private firms or national space programmes.

Despite Starship’s enormous size, it is intended to be cheaper than a Falcon, too. SpaceX charges $70m to launch a Falcon 9. It hopes to drive down the cost of a Starship launch to $10m. The eventual goal is to transform the rocket business into something more like the aircraft one, via the mass production of a vehicle that is designed to be refuelled quickly and flown again and again. Mr Musk’s aspiration is that the “Starfactory” that SpaceX is building at its headquarters in Texas will churn out a new Starship every day, and that the firm’s fleet of them will fly hundreds or even thousands of times a year.

Space X threatens to upend the telecommunications market.

Its distinctive white antennae have popped up everywhere from remote schools in the Amazon to the bunkers and trenches on the front lines of the war in Ukraine... Traffic through its networks has more than doubled in the past year, as SpaceX has signed deals with cruise lines, shipping firms and airlines. Modelling by Quilty Space, another firm of analysts, suggests that Starlink’s revenue will hit $6.6bn this year, up from $1.4bn in 2022. That is already 50% more than the combined revenue of ses and IntelSat, two big satellite-internet firms that announced a merger in April...

Using satellites to provide internet access is not a new idea. Such firms as Hughes, ses and ViaSat already offer exactly this service, bouncing signals from subscribers back down to ground stations and on to the wider internet. But they rely on small numbers of satellites mostly in high orbit. That allows a single satellite to see a large portion of Earth’s surface and thus to serve many customers at once. Unfortunately, flying so high also means that signals take a noticeable amount of time to get up to the satellite and back down to Earth. That makes remote working, video calls and online gaming a pain. And having lots of people share one satellite risks congestion. For that reason... satellite internet has been seen as a last-resort option, useful only when nothing better is available. 

Starlink’s satellites fly in very low orbits, around 500km up. That slashes transmission delays, allowing Starlink to offer a connection similar to ground-based broadband. The trade-off is that each satellite can serve only a small area of Earth. To achieve worldwide coverage you therefore need an awful lot of satellites... SpaceX has firm plans to deploy 12,000 satellites, and has applied to launch as many as 42,000... One consequence of the satellites’ low orbits is that each has a lifetime of only around five years, before the tenuous atmosphere at that altitude drags it below orbital velocity. To maintain a constellation of 40,000-odd satellites would require replacing about 8,000 of them a year. Cheap launch costs are not the only secret of Starlink’s success. 

Vertical integration helps, too. SpaceX makes its own satellites and the high-tech antennas it sells to its customers... by making so many satellites and antennas, the firm can drive unit costs down... each antenna cost the firm around $3,000 to make in the early days... Last year SpaceX said it had managed to drive the cost of production below $599, the price at the time... A system made of thousands of comparatively small satellites rather than a handful of big ones can also be more easily tweaked and upgraded. Starlink’s newer satellites, for instance, sport laser links that allow them to talk to each other directly. That allows traffic to be routed between satellites before it is sent back down to Earth. That should limit the number of ground stations that Starlink needs to build—an important saving.

People living in remote areas, unconnected by terrestrial networks, governments for security purposes, shipping and cruise lines, airlines, and mines in remote areas, are among the likely customers for Space X's services. It currently charges a household $120 per month, clearly unaffordable for the vast majority of unconnected people across developing countries. 

4.  US Big Pharma tax avoidance fact of the day

In 2023, seven of America’s largest pharmaceutical companies reported losing a combined $14 billion on their US operations while earning $60 billion abroad. The absence of reported profits in the US translates directly into a loss of federal tax revenues.

5. Good read in Scroll.in on how DBT for school uniforms and textbooks introduced in Bihar in 2017 and withdrawn in 2021 not only struggled to make an impact but left students worse off.

6. Andy Mukherjee writes about the Hyundai Motor Company's IPO, India's largest ever,

Hyundai’s parent offered to sell as much as 17.5 per cent of its local unit not because anyone twisted its arm. The Korean firm did it to take advantage of India’s sizzling valuations. Suzuki Motor Corp. is worth $20 billion on the Tokyo stock exchange. Its Indian unit, in which the Japanese automaker owns a little over 58 per cent, has a market capitalization of $45 billion in Mumbai. Hyundai’s compatriot LG Electronics Inc. is also reported to be preparing for a potential IPO of its Indian unit. Whirlpool Corp., the American home-appliances giant, has already offloaded 24 per cent of its unit headquartered in Gurgaon, near New Delhi... Family-controlled enterprises account for 75 per cent of India’s GDP. But while a few of them have created enormous shareholder value, many more have destroyed wealth with impunity. Multinationals, generally more conservative with their investments, do reward investors: Hindustan Unilever Ltd. paid out 96 per cent of its last full-year profit. ITC Ltd., formerly Imperial Tobacco Co., distributed 84 per cent of its earnings as dividends.

7. Debashis Basu points to some trends about the Indian economy.

Growth in collection from goods and services tax (GST) fell to 6.5 per cent, its lowest level in 40 months. At 6.5 per cent, GST collection barely tracked inflation, which means there was no volume growth. The trade deficit widened to $29.7 billion in August from $24.2 billion a year earlier. India’s merchandise exports, its weakest spot and a tell-tale sign of India’s poor competitiveness, declined to $34.7 billion in August from $38.3 billion in the same month last year. The annual gross domestic product (GDP) growth rate is down from 7.8 per cent to 6.7 per cent. The index of industrial production (IIP), which tracks the output of eight core industries, such as coal, oil, and electricity, was negative in August for the first time in three years. In September, car sales fell by 19 per cent over the same period last year...

The PMI hit an eight-month low at 56.5 in September from 57.5 in August. The services PMI fell to 57.7 points in September to hit a 10-month low; it was 60.9 points in August 2024. Home loan disbursement was down 9 per cent in the first quarter, auto loans were up 2 per cent, and personal loans increased just 3 per cent. Credit disbursement by fintechs is stagnant. In April-August, diesel sales rose just 1 per cent year-on-year (Y-o-Y). A slowdown seems to have set in.

8. The Great Latin American Stagnation.

Income in the pink tide nations of Mexico, Brazil, Colombia, Chile and Peru is on average around a quarter that of the US, having gained no ground over the past 10, 50 or even 150 years.

9. The US VC industry facts of the day

New VC investments rising from $100 billion in 2014 to a peak of $700 billion in 2021. Today, new investments are around $350 billion — while this is half of the peak, it still represents a historically healthy level of investment. The issue is more with exits, which have collapsed to less than $75 billion per year in the US after peaking at over $700 billion 2021. Exits are down as private equity interest has been subdued due to higher rates, and the tougher regulatory regime in both the US and the EU makes it difficult for large technology behemoths to buy smaller startups. The initial public offering (IPO) market for new technology listings has also collapsed. Amazingly, since calendar 2022 onwards, there have been only 14 technology listings in the US, averaging fewer than six per year... Founders today can execute large secondary sales of their private stock to VCs and growth equity firms, ensuring liquidity not only for themselves but also for seed investors and employees... 

Many funds are still stuck with high-flying IPOs they bought in the last few years, which are still trading below issue price. If we look at the record of all technology IPO listings in the US since 2020, they have, on net, destroyed $140 billion in market value, with the median IPO down 40 per cent from its offer price. Thus, we have today almost 1,500 unicorns (unlisted companies with valuation over $1 billion), there are more unlisted technology companies with a valuation of greater than $1 billion than listed tech companies! This is an IPO backlog of over 25 years! Obviously, many of these companies will never list, nor are they actually worth billions. Due to the continued high rate of VC investment and very poor exits, the industry is today running a record cash negative, with the lowest distributions back to their investors on record. This has not always been the case; from 2010 to 2021, cash flows were positive every year except one, meaning the industry paid back to investors more than it invested. These record low distributions are creating a cash flow squeeze for many of the endowments, foundations, and pension plans that have historically been the largest investors into VC.

10. AK Bhattacharya has some useful datapoints on India's laudable tax revenues trajectory over the last quarter century.

According to an analysis by the Central Board of Direct Taxes (CBDT), the share of direct taxes in gross domestic product (GDP) in 2023-24 rose to a 24-year high of 6.64 per cent. In 2000-01, this number was about half, at 3.25 per cent... the decline in the share of indirect taxes in GDP... from 5.62 per cent of GDP in 2000-01, the share of indirect taxes fell to 5.11 per cent in 2023-24. The Union government’s gross tax collection efforts, therefore, rose from 8.8 per cent of GDP in 2000-01 to 11.7 per cent in 2023-24. Not only did gross tax collections maintain a steady growth rate in this period, but their composition also got better, with direct taxes accounting for 57 per cent of gross collections last year, up from about 36 per cent in 2000-01... The Centre’s annual expenditure at over 18 per cent of GDP was quite substantial in 1990-91. Over the last 34 years, this share has declined to about 15 per cent of GDP. The ability to have squeezed government expenditure even as the size of the economy kept rising has not received adequate appreciation... In 1990-91, the share of capital expenditure was relatively high at over 5.5 per cent of GDP and revenue expenditure accounted for 12.8 per cent of GDP. Worryingly, capital expenditure saw a steady fall over the next three decades and by 2019-20, its share in GDP fell to as low as 1.67 per cent of GDP... Barring the Covid year of 2020-21, when subsidy expenditure rose to a record level of 3.8 per cent of GDP, the outgo on subsidies has seen a southward turn, reaching a level of 1.5 per cent of GDP in 2023-24... The Centre’s efforts at collecting non-tax revenues have been sub-optimal. Last year, they were estimated at 1.36 per cent of GDP, down from a record high of 2.93 per cent in 2001-02.

11. It's reported that TSMC has achieved four percentage points higher production yield in its 4 nm chip production facility at Arizona, marking a major achievement for the chip maker in its efforts to establish chip manufacturing in the US. 

The latest yield advancement is notable for TSMC because it has historically kept the most advanced and efficient plants in its home island of Taiwan. Its Arizona site got off to a rocky start, as the company couldn’t find enough skilled staff to install advanced equipment and workers struggled with safety and management issues. TSMC reached an accord with construction labor unions late last year. The chipmaker originally planned to have its first Arizona plant start full production in 2024, but pushed back the target to 2025 over the labor issues. It later delayed the start date for its second fab to 2027 or 2028, from an initial target of 2026. That fueled concerns that the company might not be able to make chips in the US as efficiently as in Taiwan.

12. Business Standard points to a troubling trend with corporate income in India. 

For the corporate sector, the share of passive income has increased from 16.6 per cent in AY 2016-17 to 30.7 per cent in AY 2023-24. This sharp rise is primarily driven by increases in long-term capital gains and other incomes. Between AY 2016-17 and AY 2023-24, income from business for companies has increased at an average rate of 14 per cent per annum, significantly lower than 35 per cent growth reported for long-term capital gains. The surge in capital gains and in incomes from other sources for corporations could indicate a shift in corporate preferences in favour of financial investments, rather than physical or what are often referred to as productive investments. The sharp increase in stock market valuations during this period — average annual growth of over 12 per cent — alongside muted demand for goods and services attributable to economic shocks could induce such a shift. Poor recovery in private capex in the post-Covid period seems to reflect the challenges of this new evolving scenario. An issue of concern in this emerging context is whether a sustained bull run in the capital markets could act as a hurdle to encouraging real sector investments in the economy.

13. Finally, Yuval Noah Harari has a good oped in FT about AI algorithms ruling the world. The article has a nice description of how writing was transformative.

Consider, for example, the impact that written documents and the bureaucrats who wield them have had on the meaning of ownership. Before the invention of written documents, ownership relied on communal consensus. If you “owned” a field, it meant that your neighbours agreed it was your field, through both their words and actions. They didn’t construct a residence on that field, and didn’t harvest its produce, unless you allowed them to. The communal nature of ownership limited individual property rights. For example, your neighbours might have agreed that you had the sole right to cultivate a particular field, but they did not acknowledge your right to sell it to foreigners. At the same time, as long as ownership was a matter of communal consensus, it also hampered the ability of distant central authorities to control the land. In the absence of written records and elaborate bureaucracies, no king could remember who owned which field in hundreds of remote villages. Kings therefore found it difficult to raise taxes, which in turn prevented them from maintaining armies and police forces. 

Then writing was invented, followed by the creation of archives and bureaucracies... Ancient Mesopotamian bureaucrats used little sticks to imprint signs on clay tablets — which were basically just chunks of mud. But in the context of the new bureaucratic systems, these chunks of mud revolutionised the meaning of ownership. Suddenly, to own a field came to mean that it was written on some clay tablet that you owned that field. If your neighbours had been picking fruit there for years, and none of them ever said that piece of land was yours, but you nevertheless managed to produce an official chunk of mud that said you owned it, you could enforce your claim in court. Conversely, if the local community acknowledged that you owned a field, but no document gave it an official stamp of approval — then you didn’t own it. The same is still true today, except that our crucial documents are written on pieces of paper or silicon chips instead of on clay. Once ownership became a matter of written documents rather than communal consent, people could begin selling their fields without asking permission from the neighbours. To sell a field, you just transferred the crucial clay tablet to someone else. But it also meant that ownership could now be determined by the distant bureaucracy that produced the relevant documents, and perhaps held them in a central archive. The path was opened for levying taxes, paying armies and establishing large centralised states. The written document changed how power flowed in the world, and gave enormous clout to bureaucrats such as tax-collectors, paymasters, accountants, archivists and lawyers.

He points to the prospects of this world

In the coming years, millions of AI bureaucrats will increasingly make decisions about the lives not just of lions, but also of humans. AI bankers will decide whether to give you a loan. AIs in the education system will decide whether to accept you to university. AIs in companies will decide whether to give you a job. AIs in the court system will decide whether to send you to jail. Military AIs will decide whether to bomb your home.