Industrial policy to overcome the China problem may require market making

There were two important industrial policy decisions taken by the US government last week that underline its commitment to securing the supply chains for critical minerals. They also offer important lessons about the direction of industrial policy in general. 

In the first, the US plunged into the rare earths industrial policy by taking a direct stake in a private rare earths firm and setting a price floor for its output. 

The Pentagon last week said it had become the largest shareholder in MP Materials, operator of the Mountain Pass facility in California, which sent shockwaves through the industry and drove the company’s shares to record highs. The US government committed $400mn of direct investment in the Las Vegas-based company and guaranteed a decade-long price floor for its output at nearly double the current market rate. MP, led by founder James Litinsky, is also building a domestic magnet manufacturing facility… The arrangement is part of the White House’s drive to break the Chinese dominance of critical minerals and strengthen the domestic supply chain. It is rare for the government to make direct investments in businesses, and critics argue this deal went too far... Rare earths are vital to modern manufacturing and to the magnets used in high-tech industries, from electric cars to fighter jets. Low market prices have deterred western rare earth projects from coming online.

... the US government had overnight become the dominant “influence” in the market for the rare earth neodymium-praseodymium (NdPr oxide). The price floor for NdPr, which is used in magnets, has been set at $110 a kilogramme, almost double the current market price of about $60. The guarantee covers all the NdPr that MP would produce over 10 years… MP does not currently make magnets at commercial scale, but the US has also guaranteed to buy roughly 7,000 tonnes of magnets annually for a decade that the company would produce using its own NdPr at the as-yet unbuilt facility. Industry veterans say this volume far exceeded US defence demand. Despite industry unease, the rare earths agreement has drawn bipartisan support in Washington.

In the second decision, the US announced anti-dumping duties of 93.5% on the imports from China of anode active materials (graphite), a mineral vital to batteries in EVs. This increases the total US tariffs on Chinese graphite to 160%, and comes on top of the US Energy Department’s $750 million loan last year to the Australian company Novonix to construct the largest synthetic graphite factory in North America at Chattanooga. 

Anodes are widely regarded as the most difficult part of the battery for the west to reduce its dependence on China, due to low prices and the near-complete dominance of Chinese groups over global supply. Chinese companies accounted for 95 per cent of the global anode market in the first five months of 2025, with South Korean companies, led by Posco and Daejoo, accounting for 2.7 per cent, and Japanese makers for 2 per cent, according to market information provider SNE Research. Tim Bush, a Hong Kong-based battery analyst at UBS, said efforts in Asia and North America to build a non-Chinese anode supply chain had been “undermined by US automakers’ unwillingness to underwrite the costs”. That reflects, in part, scepticism among battery and electric vehicle producers about the ability of North American producers to supply the battery-grade graphite they require.

The tariffs undoubtedly come at a significant incremental cost to the US consumers. 

Given the current paucity of non-Chinese anode suppliers, the additional import costs are likely to sting Asian battery providers, including those serving American EV manufacturers such as Tesla, General Motors and Ford, with the extra costs potentially passed on to US consumers. An average EV battery contains 50 to 100 kilogrammes of graphite, meaning the new tariffs could deprive battery and EV makers of up to 20 per cent of the value of generous federal production credits that were introduced by the Biden administration and which survived the recent passage of President Donald Trump’s “One Big Beautiful Bill”.

Incidentally, the US decision comes even as China finalised new restrictions on the export of technologies essential for making cutting-edge lithium iron phosphate (LFP) batteries, which have a low-cost chemistry composition. 

What do these two examples inform us about the emerging trends in industrial policy?

The earliest industrial policy actions were regulatory, primarily in the form of infant industry protection measures, by way of outright bans and prohibitive tariffs. Industrial policy of the kind pursued by the East Asian economies has focused on capital subsidies and fiscal concessions aimed at firms. The Chinese expanded their boundaries further with economy-wide subsidies, cheap capital, regulations like hukou that assured a supply of cheap labour, economies of scale from operating in a massive market, and generally provided capital subsidies and fiscal concessions on a scale never before seen. The result is that global manufacturing sectors are either overwhelmingly dominated by their manufacturers or they far outcompete their peers from other countries. 

This China problem means that traditional industrial policy instruments deployed by the East Asian economies are hardly sufficient. No country, except perhaps the US and that too only in certain sectors, can outspend the Chinese. 

There’s a chicken-and-egg problem. There’s very little or no domestic manufacturing of good quality. Domestic manufacturers cannot match the very low prices of Chinese imports. In the absence of an assured domestic market, no investor or firm is willing to put money. This gridlock perpetuates Chinese dominance. It must be broken.

Accordingly, the US government's decisions to invest public funds and assure a floor price (for rare earths), and raise prohibitive tariffs and give state loans (for synthetic graphite) go beyond traditional industrial policy. It effectively creates a market that can support domestic manufacturing. But this comes at a higher cost (of production compared to the Chinese imports), which is passed on to the domestic consumers who must pay higher prices. 

There are lessons for India. Traditional industrial policy must be complemented with market-making policies. Policies must be tailored to leverage the attractions of India’s massive market to incentivise domestic manufacturing. Apart from prohibitive tariffs and other barriers, this can be successful only with a mandate to purchase domestic produce. 

There are several product markets where market-making levers are available to the government. They include solar power and smart meters (where state-owned discoms are the monopsony buyers), telecom equipment (which are B2B markets), surveillance cameras and drones (which, while sold to consumers, also have a dual-use/security aspect). In these products, there’s a case for public policy to either mandate sales of domestic manufactured goods, or mandate a minimum domestic content, or raise disability bridging tariffs. Given the nature of these products and the volumes required, they are an unprecedented opportunity to catalyse a domestic ecosystem that covers the entire value chain involving component manufacturing, chip design, product design, and product manufacturing. Taken together, they have the potential to catalyse a serious deepening and broadening of India’s manufacturing base. 

However, in many products, Indian manufacturers will not be able to meet the domestic demand and that too with quality. Further, the domestically made goods will come at a much higher price. This gridlock can be broken only gradually. 

A prudent strategy would be to phase in the domestic purchases and domestic content requirements gradually. For example, the domestic manufactured equipment requirement can start with at least 5-10% in the first year, going on to 50-75% over five to seven years. Similarly, domestic content requirements can be progressively increased over time. Apart from facilitating the emergence of strong domestic manufacturing bases in these products, such phasing will also enable the domestic firms buying and selling these products to at least partially mitigate the high costs of domestic manufacturers. 

This strategy creates the risk of being captured by inefficient domestic vested interests. India’s memory of autarky is not too distant. The North East Asian economies mitigated this risk by building incentives around export competition and creating mechanisms to ensure that the market itself rewards the efficient manufacturers and weeds out the inefficient ones. Export focus would anyway be required to realise the economies of scale to become competitive with the Chinese manufacturers. However, given the political economy that emerges once such policies are put in place, this will be a big challenge for the government.

Such measures will invariably generate opposition from trade partners and likely violate WTO commitments. However, it appears that there is no other alternative. 

There’s a paradox with liberalised trade regimes. It’s like the bullies who favour the status quo. The US and the West created the WTO to institutionalise the prevailing global economic balance in their favour. The Chinese overcame this imbalance and turned it to their advantage. It’s therefore natural that they are now the most vocal supporters of the WTO. 

The WTO status quo is not in the interests of a country building its manufacturing base. The Chinese largely ignored the WTO regulations while building up its manufacturing industry, while enormously benefiting from the global market access it provided. This hard reality must be recognised while pursuing industrial policy. 

Bridging an important data gap in improving learning outcomes in India

Credible long-term performance measurement can be a powerful lever to transform systems. There’s a compelling case that the National Assessment Survey (NAS) (now PARAKH), administered nationwide by the NCERT, can be one such longitudinal data source. Started in 2001, it is a large-scale representative sample assessment of student learning outcomes in Grades 3, 5, 8, and 10, and is conducted every three years. 

A big frustration about school education policy making in India is the absence of credible learning outcomes data that can be compared over time and across geographies, and also which can be used to generate actionable insights for education system managers. The NAS can be an excellent source to address this deficiency. It can become the definitive source of data to design both pedagogy and school education policies at both national and, more importantly, at the state government levels.

But this would require certain important changes in the design, administration, and analysis of NAS/PARAKH. In particular, the following six measures are critical. 

1. The NAS should be conducted every year. The most useful takeaway from such surveys is often the directional trends with important parameters. Three years is too long a period for this data to generate meaningful and actionable takeaways. 

2. Instead of primarily being a mechanism for the Ministry of Education (MoE), Government of India, to compare performance across states, it should become a tool for state governments to understand where their schools stand and improve their education systems. India is too large and too diverse (in terms of the baseline of educational outcomes) to be able to derive meaningful, actionable inferences from nationwide surveys. Comparisons across states need only be a secondary outcome. 

3. Instead of being a centrally administered test, it may be more appropriate for NAS to be administered by state governments. This is necessary to ensure ownership by the state governments. To ensure the objectives are not compromised, it can be done by contracting with independent testing agencies using a standardised set of instruments. The contracts should be for 3-5 years to build capabilities, including at the supply side. 

ASER, for example, samples 600 households in each district through a two-stage randomisation process - 30 villages in the district and 20 households in each village. PARAKH 2024 was administered to 2.29 million students across 75,565schools. Tablets and digital technologies can be used extensively to administer these tests effectively. 

MoE can issue guidance on the instruments, administration and scoring of the tests, selection of independent agencies (including model RFP, contract agreement, etc.), analysis of the test scores/performance data, and analysis of the instruments for academic learning. This guidance can also help ensure comparability of the test data from different states. 

Alternatively, the NCERT must figure out ways to conduct the test in a collaborative mode with state governments and with their full ownership. This may be difficult given the legacy and NCERT’s own incentives and institutional culture. 

4. It should have two objectives: to evaluate test performance and to improve pedagogy. The former will be done by analysing the test scores, and the latter by analysing the responses in the instruments. The current NAS does little (or nothing) to directly address the latter. There’s a strong case that the latter is arguably more important. 

5. The test scores data should allow for the comparison of grade-wise and subject-wise performance across blocks and districts, and provide actionable insights for administrative-side improvement interventions/measures (analysis based on blocks, subjects, grades, gender, social groups, management, etc.). 

6. The student responses in the instruments, especially when they make mistakes, can offer important insights about how children understand concepts, and can help with academic-side improvements. It can help identify the most common types of mistakes made by students in each concept, and even why they are making those mistakes. This analysis can be used to create subject-wise and grade-wise libraries of the common mistakes for concepts mapped to the respective lessons. 

Given the critical importance of understanding concepts in achieving learning outcomes, this library can be an invaluable pedagogic tool for teachers. It can help teachers to make lesson plans and tailor their pedagogy to pre-emptively address the common misconceptions and mistakes that students tend to make. This library can be appropriately digitised and made available on Apps for teachers and students to engage with these concepts. 

The national and state councils for education research and training could build a body of pedagogic practices to remediate these common learning misconceptions and mistakes. The NCERT could develop a mechanism to bring together and compile a library of good pedagogic practices,

This can be called the Science of Learning (SoL) library, and can be continuously updated from the analysis of the emerging data from each NAS. It’s unlikely to vary significantly across states and can even be developed as a central SoL library by the NCERT and then made available to state governments to customise and adapt for their respective contexts. It can be a powerful global public good generated by India and is very useful in addressing the global challenge of lagging student learning outcomes.

The NAS/PARAKH instruments can be analysed to generate these academic-side insights. They must be shared with state governments. Given the effort put into administering NAS and its longitudinal nature, it is a great opportunity that must not be wasted. 

For a start, NCERT could share the instruments with state governments so that at least some interested states could analyse them to generate some versions of SoL libraries. The NCERT itself could create a dedicated unit with resources to analyse its vast repository of NAS student responses and build a SoL library on the lines mentioned above. 

A more comprehensive and practical agenda for school education reforms, covering these and more, aimed directly at improving student learning outcomes, is outlined here. 

Weekend reading links

1. Heat impacts productivity and lot else. Therefore the need for airconditioning.

Once indoor temperatures rise above the low-twenties centigrade, or around 75 Fahrenheit, humans start to suffer. Sleep duration and quality fall rapidly when temperatures rise above 23C. Cognitive performance fares similarly, with scores in US high school tests dipping on hot days, and the affected students suffering a lasting impact on their prospects of graduation. The same is true of office workers’ productivity, which peaks at around 21C and rapidly deteriorates as the mercury rises. And that’s all before we get on to mortality, where death rates climb steeply once temperatures hit 30C.

2. Lessons for life from Roger Federer.

In tennis, a small, consistent edge over your opponent can translate into big margins in the long run. Nadal, for instance, also won exactly 54 percent of his points. And when Carlos Alcaraz defeated Jannik Sinner on Sunday in the French Open final — in one of the greatest matches since the 2008 Wimbledon final — Alcaraz, the champion, actually won one fewer point than Sinner. It’s an easy concept to apply to almost any field. In 2022, Ronald van Loon, a portfolio manager at BlackRock, authored a paper on the percentage of investment decisions that need to be correct to beat market benchmarks for returns. He researched markets, crunched the numbers and came up with a number: As low as 53 percent... Federer may have only won 54 percent of his points... but he always seemed to win the points that mattered most.

The three lessons offered by Federer - effortless is a myth; it's only a point; and life is bigger than the court. 

3. The US-Vietnam trade deal depends on how the Trump administration will define "transshipment" which attracts a 40% duty.

Experts say the Trump administration’s definition of transshipment could refer to a range of practices from simply repackaging Chinese goods with a counterfeit “made in Vietnam” label or to using Chinese raw materials in goods manufactured in Vietnam. “The impact may be more limited if these 40 per cent tariffs are enforced solely for the most egregious practices of plain diversion of trade to avoid US tariffs,” said MUFG analyst Michael Wan. “In contrast, if there is a stricter determination of transshipment defined as a certain threshold of foreign value added, the impact . . . may be pronounced.” Given the Trump administration’s interest in isolating China, businesses fear a wider definition. This would be extremely damaging for Vietnam, where many businesses rely on Chinese raw materials and components, and warned that removing them would be impossible.

4. As the use of electricity, especially from renewables, to replace natural gas and other fossil fuel sources increases, countries are finding that they are falling woefully short on the associated infrastructure. Sample this from Netherlands which has even started rationing power. 

The Netherlands already has some of the highest electricity costs in western Europe because of the grid bottlenecks... To cover the necessary investment, tariffs are expected to increase each year until 2034 by an average of between 4.3 and 4.7 per cent in real terms, a presentation from national grid operator Tennet said. To free up capacity, Tennet and regional grid operators have started to offer contracts to households that discount electricity used at non-peak times, such as between 11am and 3pm, and other flexible contracts that allow users to pay for electricity in time blocks. From April 1, operators could offer contracts where large industrial users are barred from using their connections at all during certain busy hours in exchange for lower tariffs. The Hague has also put out a “more conscious use of energy” advertising campaign across TV and social media that asks consumers to charge bikes and cars outside of the 4pm-to-9pm peak, when the grid comes under greatest strain...

“Everything is going electric and electricity infrastructure needs to grow massively everywhere,” said Jeroen Dijsselbloem, mayor of Eindhoven. The Brainport region around Eindhoven, covering 750,000 people in several municipalities in the southern Netherlands, had lost investment because it had to ration power supply, he said. Brainport is also home to a cluster of advanced technology companies led by ASML, the maker of the world’s most sophisticated chipmaking machines. No significant new grid capacity would be installed in the region until 2027, Tennet figures show. “We need more than 100 medium-size substations and 4,000 small substations,” Dijsselbloem said. Grid operators are also short of 28,000 technicians to install the necessary infrastructure, according to Netbeheer Nederland. Companies such as Thermo Fisher, a US medical business with a base in the Eindhoven area, have maintained their growth plans but invested in on-site battery storage and solar to counter the grid congestion issues.

5. Does the US suffer from Dutch disease?

The US has Dutch disease. Its export is the dollar... The dollar lost roughly 8 per cent of its value over the past six months, which has renewed the old discussion of whether holding the world’s reserve currency is an exorbitant privilege or an exorbitant burden... In 1999, Aaron Tornell, now at UCLA, and Philip Lane, now European Central Bank chief economist, offered a theoretical framework to explain (Dutch Disease). The commodity export changed the budgeting process, they argued. After a windfall, powerful groups will fight to get their hands on any new spending. If the country has strong institutions and social solidarity, this grab for spending will fail. With weak institutions, it will succeed: instead of going to things that increase productivity, such as roads and schools, new spending goes to powerful groups, as unproductive gifts. Tornell and Lane called this the “voracity effect”. 

They applied it to data from Nigeria, Venezuela and Mexico, but if we accept that the US is not magic, we can easily ask these questions of it, too. How voracious are its powerful groups? How strong are its institutions? The answers in order are: quite, and not as strong as we’d thought. The voracity effect does help explain the gobsmacking audacity of Donald Trump’s so-called “Big Beautiful” Bill, with a cost of $3.4tn over 10 years and the benefits going overwhelmingly to the wealthy. In the past, Republicans have attempted to present tax cuts for the rich as a policy to release productive investment. They’ve even attempted to model this idea as a process called “dynamic scoring”.

6. The balance sheet of six months of Trump tariffs.

Chinese exports to the US fell 9.9 per cent year on year in renminbi terms between January and June... Exports to countries in the Association of Southeast Asian Nations, which the US accuses of transshipment of Chinese exports, rose 14.3 per cent, while imports increased 2.3 per cent in the first half.

7. The Israeli economic miracle

In tech-driven Israel, GDP per head has nearly tripled since 2000 to more than $55,000, rising from 50 to 70 per cent of the level in the US... Its $550bn economy is now among the largest 30 in the world... Total factor productivity, which captures how well labour is using new machines, has grown four times faster in Israel than in other developed economies over the past 25 years... Perhaps the most telling sign of its dynamism is that Israel now spends more than 6 per cent of GDP on research and development — more than any other nation and over double the global average... Since the early 2000s, as most other developed governments have increased spending and debt, Israel has cut state spending from 50 to 40 per cent of GDP, and public debt from a high of 90 per cent to under 70 per cent of GDP. The government also made some smart investments, seeding the venture capital industry that helped to launch the nation’s vaunted tech sector... Spillovers from defence have made Israel a global leader in fields from air-traffic control to, above all, cyber security. With more start-ups per head than any other country, its business culture is closer to that of California than the Middle East. It has 73 start-ups in the hot field of generative artificial intelligence, the third largest in the world. Half of its exports are tech products.

8.  Akash Prakash on corporate India

One of the clear takeaways when speaking with senior people working with Apple is their disappointment at the lack of willingness among India Inc to step up and make the investments needed to bring the Apple ecosystem into India. While China is putting up obstacles, the profit focus of Indian entrepreneurs is also a stumbling block. Whether it is putting up the component supply chain or making large capital investments for display units, there is a lack of interest on the part of large Indian groups to commit capital. They cite the low margins on offer and the intense scrutiny that Apple demands on quality and scale. In effect, it would take years of sustained effort to earn a reasonable return on capital — if at all. Is it worth it? Many believe they would be derated by their shareholders, who would not accept the initial losses and question the ultimate return on capital. With a drop in margins will come pressure on valuations and market capitalisation — this is the common belief among Indian industrialists. Indian markets are hyper-focussed on profitability and return on capital.

9. FT long read on BYD, China's battery and EV champion. 

Until recently, the main advantage Chinese EV manufacturers had over Tesla was that their products were significantly cheaper. But in February, BYD’s founder Wang Chuanfu stood on stage in Shenzhen and unveiled “God’s Eye”, an advanced driver-assistance system that is a precursor to fully autonomous vehicles. A month later, Lian, who now heads BYD’s automotive engineering research institute, was on stage with Wang to announce a new battery charging system capable of adding a driving range of about 470km in five minutes — a fraction of the time it would take a Tesla to charge to that level. The startling technological advances made by BYD and others have sparked panic among legacy carmakers, who have responded by partnering with Chinese rivals to learn how to build vehicles faster and cheaper, and with better software.

10. Unless I'm missing something, the Chinese have definitively outsmarted Trump and the US by being able to link the relaxation of its export controls on rare earths with a similar US relaxation of restrictions on the export of advanced semiconductor chips. The latter has been in place since the Trump 1.0 and has progressively tightened. The Chinese export controls on rare earths were introduced in response to the Trump reciprocal and higher tariffs on China. The US ceded ground by both sharply reducing its steep tariffs (which would have been a significant blow to the Chinese economy) as well as making concessions on its export controls on advanced chips. 

Now that the linkage is established, the Chinese will use the rare earths instrument to combat both tariffs and export restrictions.

This is a good article about how Nvidia's Jensen Huang charmed Trump and convinced him to lift the ban on the export of its powerful H20 chips. One more example of how corporate America's commercial interests have trumped America's national interests. It also underlines the point that President Trump has no deep interest in containing China. 

11. As Donald Trump warms up to Ukraine, even suggesting that the US could supply missiles to Ukraine if it could target sites deep inside Russia, including Moscow, Janan Ganesh makes some very important points about Donald Trump.

Trump and Maga are no longer the same thing. His movement — the intellectuals, the donors, the more online of the grassroots — have intense beliefs. Besides a life-long conviction that running a current account deficit with another nation constitutes “losing”, he doesn’t. None of this is fatal to Trump himself. He papers over the differences with force of charisma, electoral success and the dutiful enactment of key Maga priorities. This will protect him from serious internal dissent... Still, we can now see what the future of the US right looks like. Unless the Republicans find another version of Trump — someone whose star power overwhelms all philosophical reservations about him or her — the next leader will have to be more in tune with the movement. That is, more Christianist, more nationalist, more paranoid. An extreme right-winger can put up with half a loaf under Trump because he provides so much else in dazzle and tribal leadership. You aren’t getting that with JD Vance. Ideological and even personal litmus tests, which have been waived for Trump, could return. In other words, we have to entertain the notion that Trump is a moderating influence on a movement that will become much more doctrinal once he is gone. He approaches the world through personal relations, which are malleable, not ideas, which aren’t. 

Consider Ukraine policy. In all likelihood, Trump has been soft on Putin because he appreciates the Russian’s well-aimed flattery and resents the cost to the US of protecting Europe from him. This is bad, but it isn’t dogmatic. Much of Maga, in contrast, backs Putin out of a belief that Russia is nothing less than Christendom’s frontline, whether against Islam or secular Chinese communism or the woke enemy within. Because it is practical, Trump’s position can be shaken, as seems to be happening now... There are worse things than a personality cult, such as an ideas cult. For a decade, conservatism has been whatever Trump says it is. He has made it possible to regard China as the threat of the century but admire Viktor Orbán, who is China’s biggest friend in Europe; to oppose vaccines but not the president who oversaw the Covid vaccine; to view Ukraine as another region’s problem but Iran as a core US interest. This is an intellectual farrago, but it might be preferable to hard, consistent doctrine... Trump doesn’t share the movement’s interest in the fate of “western civilisation” and other grandiose abstractions. He is not much of a China hawk: his concern is the bilateral trade data, not the grand strategy, much less the contest of values. As for religion, we can’t know another person’s inner life, but come on.

12. China is staring at zero interest rates.

The release of China’s second-quarter growth data this week... real economic expansion was strong and steady at 5.2 per cent but widespread falling prices meant nominal growth was much weaker, at 3.9 per cent... The central bank’s benchmark seven-day reverse repo rate, following a series of gradual cuts, now stands at 1.4 per cent... The yield on China’s 10-year government bond has been hovering around 1.7 per cent, near historic lows, suggesting investor expectations of persistent disinflation... The average interest margin at China’s top six state lenders fell to 1.48 per cent in the first quarter, its lowest level on record, compared with more than 2 per cent in 2021... At most Chinese banks, the interest rate on demand deposits is 0.05 per cent, while one-year term deposits yield less than 2 per cent.

13. Europe's rural depopulation

In the decade to 2024, the estimated number of people living in predominantly rural EU regions fell by nearly 8mn, an 8.3 per cent drop, while the urban population rose by over 10mn, or 6 per cent. Regions making up about 40 per cent of the EU’s land area and containing almost one-third of its population, are experiencing a sustained drop in residents. Dwindling numbers mean shops and bars are forced to close, buses run less frequently, doctors are harder to find, and classrooms become emptier. This fuels further departures, in what the OECD describes as a vicious cycle... Depopulation threatens Europe’s cultural heritage, local languages, cuisines, crafts, farmland, traditions and even national security... Attempts at reversing the trend range from selling houses for €1 to encourage new arrivals to restore them, to subsidising vital services and repurposing civic buildings so they can serve several different functions. Some areas are turning to tourism, encouraging second-home ownership even as some other areas turn against it... the EU’s rural population is forecast to shrink by 18 per cent by 2100, with some areas — including in Bulgaria, Croatia, Portugal and Lithuania — expected to lose one-third of their rural inhabitants or more.

 

14. China is snapping up mines across the world at record rates.

Chinese companies had become adept at snapping up mining assets from western rivals in recent years, often being willing to take a longer-term view on valuations and invest in riskier jurisdictions... The most active Chinese mining groups in overseas deals include CMOC, MMG and Zijin Mining. Chinese financial institutions have also issued billions in loans for minerals mining and processing projects in the developing world... Chinese companies were positioning themselves to benefit from resource nationalism in nations such as Mali. Some military governments in Africa have sought to take control of western mining assets and are demanding higher royalty payments. Chinese companies are often prepared to accept a less lucrative arrangement if they can take over the running of the asset.

15. As China grapples with overproduction and deflation, President Xi has warned against excessive production in EVs, computing power (data centres), and AI. 

“When it comes to projects, there are a few things — artificial intelligence, computing power and new energy vehicles. Do all provinces in the country have to develop industries in these directions?” Xi told the Central Urban Work Conference, a rarely held high-level Communist party meeting on urban development.

Since September 2022, Chinese producer prices have been in a deflationary trajectory.

In articles across state and party media, Chinese President Xi Jinping and other leading officials have attacked what they call neijuan, or “involution”, meaning excessive price competition... Beijing is growing increasingly wary that surging industrial output, coupled with weak consumer demand at home, is fuelling a race to the bottom in prices that is entrenching deflation and fuelling tensions with the country’s biggest trading partners. Official data is expected to show on Wednesday that factory gate price growth remained negative in June for a 33rd consecutive month, one of the country’s longest such falls in decades. Overcapacity is a sensitive issue for China, which has sought to dispel complaints that its industrial policy has flooded its partners’ markets with artificially low-cost goods.

16. Important decision by the University of California's $190 bn endowment fund to completely exit its hedge fund investments. 

UC Investments in a meeting on Tuesday approved a plan to reallocate its 10 per cent absolute return portfolio — or its investments in hedge funds — to public equities, finalising a wind-down that began five years ago. Jagdeep Singh Bachher, chief investment officer of UC Investments, one of the largest institutional investors in the US, sharply criticised the industry in a recent meeting for not delivering for clients... He added that UC Investment’s hedge fund positions had undermined its overall performance by introducing risks during market upheavals in 1999, 2008 and 2020. “In each of those three scenarios, hedge funds didn’t hedge us,” he said. “They exposed us to the opposite kind of risk, which actually meant they hurt us.” The move underscores concerns among asset allocators about hedge fund investments that come with unstable returns and high fees that have ballooned in recent years.

Productivity driven by large firms and short bursts?

The McKinsey Global Institute have an informative report that highlights the role of a few large firms in driving national economic productivity growth. It analysed 8,300 large firms covering two-thirds of GVA in four sectors—retail, automotive and aerospace, travel and logistics, and computers and electronics—in three countries (Germany, the UK, and the US) over the 2011-19 period. 

This research finds that a relatively small number of firms making bold strategic moves generated the majority of productivity growth in the period we studied (2011-19), in powerful bursts rather than in a smooth trickle of gradual change, and through strategic moves, top-line growth, and portfolio shifts more than efficiency gains. This was a more concentrated, dynamic, and sporadic pattern than existing literature tends to highlight, with progress on productivity being defined by a few firms moving a mile rather than many firms moving an inch. Single firms can move the productivity needle for entire economies—the “power of one”… 

Fewer than 100 firms in our sample of 8,300—a group that we have dubbed Standouts— accounted for about two-thirds of the positive productivity gains in each of the three country samples we analysed. Standouts are defined as firms that added at least one basis point to their national sample’s productivity growth.

The number of firms that were responsible for the largest drags (negative contributions of at least one basis point) on productivity growth—we call them Stragglers—was even smaller. Only 55 Stragglers accounted for 50 to 65 percent of the firm-level productivity drag in the three country samples… In the United States, for instance, 44 Standouts—5 percent of sample firms, accounting for 23 percent of employment share—generated 78 percent of positive productivity growth. And 14 Stragglers—2 percent of sample firms, accounting for 10 percent of employment—were responsible for 57 percent of negative growth…

The ratio of Standouts (and their contribution) to Stragglers (and their drag) was the clearest factor in driving fast productivity growth. In almost all subsectors experiencing rapid productivity growth (defined as 2 percent per year or more), Standouts drove the bulk of that growth, and there was less drag from Stragglers… Standouts drive the growth of sectors, but some sectors also have the market dynamics, technology, regulation, and competitive setting that provide fertile ground for Standouts. There were more Standouts in sectors where firms could create new customer value and scale new business models than in sectors that were mostly about efficiency. For instance, the US computer and electronics sector came with many scalers and disruptors… 

Productivity grows in powerful bursts as firms find new ways to create and scale new value. Think Apple expanding into services, easyJet shaping the discount airline trend, and Zalando pioneering apparel e-commerce. This is not the efficiency transformation nor the gradual diffusion described by conventional wisdom… In the United States, the most productive firms expanded and unproductive firms restructured or exited. This contributed half of US sample productivity growth while sticky underperformers dragged down growth in Germany and the United Kingdom. This fresh view of productivity growth calls for a new playbook. It suggests focus on the power of the few more than the broad swath, on value creation more than efficiency, and on reallocation of resources to leading businesses.

The report analyses the Standout category of firms 

Improvers—large firms that mainly contribute by advancing their productivity levels—made the largest contribution to productivity growth. Disruptors, or small firms that grew productivity and share very rapidly, actually made the smallest contribution. Scalers, which were already far above the sector’s average productivity and grew their share of employment, and therefore drove productivity growth mostly via employment reallocation, made the second-largest contribution. Restructurers are less productive firms that made a positive contribution by losing market share and employment to more productive firms or exited altogether…

Large firms did not make an outsize contribution for their employment share. For example, in the United States, the top 10 percent of firms by size that made positive contributions had 54 percent of the employment share but accounted for only 68 percent of positive productivity growth. Meanwhile, US Standouts had a 23 percent share of employment but accounted for 78 percent of positive growth… MSMEs collectively accounted for less than one-third of productivity growth. In short, in our sample, a handful of Standouts out of a million firms would account for more than half of productivity growth. This is a much more extreme concentration than commonly appreciated. Some Standouts remain Standouts over long periods, but many change over time. With limited sample, we find that about two-thirds of Standouts in 2011–19 remained Standouts in 2019–23.13 The other one-third fell back, while new firms emerged as Standouts—including former Stragglers turning around.

This graphic disaggregates among Standouts and Stragglers.

Another insight from the report is the dynamics of productivity improvements. It happens in short bursts rather than at a gradual pace, more in the form of doing things “differently” than “more efficiently”. It states that Standouts used a combination of five types of moves to increase productivity, four of which related to scaling productive businesses or finding new ways to create value, and only one is primarily about efficiency and cost… 

1. Scaling more productive business models or technologies. Examples include Apple shaping the mobile internet wave, Amazon shaping e-commerce, Zalando successfully scaling e-commerce in apparel, and easyJet helping to set the low-cost carrier trend.

2. Shifting regional and product portfolios toward the most productive businesses or adjacencies. Examples include doubling down on product lines that have higher customer value relative to the hours needed, such as Nissan expanding electric vehicle (EV) offerings in automotive, and other players doing likewise for SUVs; Apple and Broadcom shifting their product portfolios to higher-margin services; General Motors exiting unprofitable geographies; and Amazon venturing into cloud computing through Amazon Web Services (AWS).

3. Reshaping customer value propositions to grow revenue and value added. This strategy can be effective in both high-end niche segments and mass markets, and it often comes in response to trends or competitive attack. Examples in mass markets include US retailer The Home Depot improving customer experience both in-store, with a wider assortment and denser network, and online, integrating buying online and picking up in-store; and UK supermarket chain Tesco responding to pressure from hard discounters in addition to cost reduction, portfolio adjustments, and price reductions by improving the premium assortment offering and fully leveraging its convenient locations. US airlines including Delta and American Airlines provided distinct value propositions and value-added services to loyalty customers. In niche segments, examples include Nvidia building a winning value proposition for graphics processing units (GPUs) and scaling it up; Zeiss providing cutting-edge tech in extreme ultraviolet (EUV) lithography; and Danaher in high-tech life sciences.

4. Building scale and network effects. Examples of firms offering more for less include Amazon scaling its fulfillment capabilities to make them available to more shoppers and partner retailers; logistics conglomerate Hapag-Lloyd driving growth through acquisitions and geographic expansion; and US airlines improving route networks and aircraft capacity utilization, including through mergers.

5. Transforming operations to raise labor efficiency and reduce external cost at scale. Examples include Tesco’s multibillion-pound cost-reduction program (in addition to competing on price and quality with discounters) and easyJet’s fleet modernization to reduce operating cost (alongside shaping a winning customer value proposition). While this is the lever most commonly associated with productivity growth—at least among businesses—it was very rarely the most important one in our case studies.

The report shows that beyond the presence of Standouts and absence of Stragglers, subsectors and countries that experienced rapid productivity growth were also characterised by frontier firms contributing disproportionately; leaders pulling ahead drove rapid subsector growth as often as laggards catching up; and employment reallocation from lagging to leading firms mattered nearly as much as productivity advances within firms and more than new entries or exits… Firms leaving or entering the market—traditional creative destruction—mattered less. It is notable that, in virtually all positive-growth subsectors, exits added to growth, sometimes substantially, while in almost half of these subsectors, entries detracted from growth. New entrants proved too small or unproductive to leave a mark during the 2011–19 snapshot period.

The graphic below captures the contributors to productivity growth in the three countries studied.

The report concludes by pointing to six shifts in the thinking on productivity growth.

Apple is a good illustration of these trends. This is an illustration of Apple’s productivity improvements in the 2011-19 period.

And this shows how it translates to national economic productivity growth. A and B constitutes the firm productivity contributor and C and D form the reallocation efffect.

The overarching takeaway from this report is that a handful of big firms, through bursts of activity, drive productivity growth. However, it may not be accurate to generalise this across countries and times. 

This analysis is confined to three advanced countries - Germany, the UK, and the US - and the period from 2011-19. In these countries, the baseline of productivity is already high, including among the SMEs (which constitute the overwhelming majority of firms). In these conditions, meaningful increases in productivity can come only from step-change innovations in technologies, practices, business models, etc. Such step changes will generally be led by a few first movers who will benefit from the productivity increases. Given that the information technology sector is the main likely contributor to any growth in our times, it’s a stark reality that large incumbents are likely to be the first adopters of emerging innovations and likely beneficiaries. Others benefit in due course with the gradual diffusion of productivity across them.

I’m not sure this story would apply to developing countries like India. In these countries, the baseline of productivity is very low, and there are disproportionately few medium and large-sized firms. Significant productivity improvements can therefore come both from increased overall baseline and from the growth of middle and large firms. And given the lower baseline of productivity, the pipeline of innovative technologies, practices and business models available for adoption will be much longer, and their diffusion is likely to happen quicker across a larger subset of firms. 

This explanation does not contradict the argument about the importance of big firms in contributing to knowledge spillovers by forcing their suppliers to adopt newer technologies and practices, and generally in focusing on quality improvements. The role of Apple in the general improvement of manufacturing quality in China is a good example.

Business concentration - airport services edition

A feature of the efficiency-maximising (American version) capitalism is the trend of business concentration at the extensive and intensive margins. The former involves horizontal integration, whereby a handful of firms make up an increasingly major market share in their respective industries. It’s a phenomenon that spans industries and countries in varying degrees. The latter refers to the trend of vertical integration, where the dominant firm tends to capture an increasing share of value addition within the industry. This feature is pervasive in certain sectors like IT, healthcare, infrastructure, etc.

The Ken has a story on the rapid changes in business models in the airport services industry due to the increasing dominance of the Adani Group. The predominantly outsourced model of services in the airport industry in India is giving way to a more vertically integrated model. 

Traditionally, the various non-aeronautical services in the airport, like lounges, food and beverages (F&B), retail, etc., were outsourced to specialised service providers who in turn contracted with aggregators who brought together brands (like banks for lounges, retail brands for F&B and retail space, etc.). This is now giving way to a strategy where the real-estate concessionaire (Adani Group) is seeking to maximise value capture from airport services by creating its own service companies and squeezing out the outsourced service providers. 

The article narrates the story of Dreamfolks Services.

Dreamfolks Services, a publicly traded company that has quietly built a 90% monopoly in the lucrative business of getting Indian credit-card holders into airport lounges. It sits in the middle of a four-way handshake among banks, card networks, lounge operators, and travellers… TFS and Encalm ran the physical lounge spaces. But it was aggregators like Dreamfolks that unlocked access by bundling lounge networks and partnering with banks and credit-card issuers. If a lounge visit costs Rs 100, the aggregator might charge Rs 115, pass Rs 5 back to the operator, and keep the rest. Banks liked the convenience. Aggregators liked the margins… Around them, a cottage industry of brands and partners grew…

Liberatha Peter Kallat, the company’s founder and chairperson, appeared on CNBC TV-18 and accused Adani Airport and the second-largest airport operator, GMR Airports—without naming them directly—of pressuring banks like ICICI and Axis to abandon aggregators like hers in favour of themselves… Travel Food Services (TFS) and Encalm Hospitality, both prominent lounge operators, have since cut out Dreamfolks and signed directly with Adani. Banks are following suit… As tech infrastructure improved, there was no longer a strong reason to maintain the middle layer… every airport and lounge operator is now building its own backend.

It describes how in-sourcing is happening across service verticals.

Unlike Adani’s other airports, where retail concessions are often managed by third parties, in the Mumbai airport, Adani directly runs the non-aero business… Adani Airport has moved to a franchisee model—a shift from the earlier system, where brands paid rent (fixed or revenue-linked) to concessionaires who had won competitive bids for spaces. Now, instead of paying rent, they are licensing their brand to the airport and letting it run the show… 

In Mumbai, three large players—TFS, Lite Bite Foods, and Devyani International—used to dominate F&B. That has changed. Last March, Adani acquired a majority stake in Semolina Kitchens, a TFS subsidiary. TFS, now aligned with Adani, is emerging as the primary F&B operator at the airport. Lite Bite’s share has reportedly fallen from 50% to under 20%, said F&B operators in the know. Both it and Devyani are expected to exit entirely once their contracts expire later this year… 

Of the eight lounges at the Mumbai airport, at least five are now managed by TFS. Through Semolina, TFS has lounge and Quick Service Restaurant (QSR) concession rights at six Adani-operated airports, as well as Goa (operated by GMR), according to its pre-IPO documents. The roles are consolidating. The partners are getting fewer. The integration is getting tighter… So if a brand is trying to operate at the airport, they can’t be surprised if the space goes to TFS’s in-house brands like Caffecino, Curry Kitchen, or Dilli Streat instead… 

Over the past 18–24 months, categories like watches, apparel, cosmetics, salons, and even convenience stores have seen a shift in how business is done at Adani-run airports. The model is familiar by now: migrate the old setup into a new one, run by a close partner. In this case, that partner is April Moon Retail, claimed multiple brand owners. Stores at these airports still carry their logos and branding, but the backend has moved, they said. Employees are now on April Moon’s payroll. Bills carry the brand’s name, but the GST number belongs to April Moon… 

April Moon has begun launching in-house formats across categories. Stores like Bon Voyage, which sell everything from snacks and books to travel accessories, now operate across multiple Adani Airports… What’s really taking off is the retail-cloning strategy. When something sells well at the airport, it doesn’t take long for a lookalike to show up—all run by April Moon. A luxury watch counter resembling Ethos or Helios? That’s Meridiem. A beauty and cosmetics outlet that looks like Nykaa? Meet Amara Luxe. Something that feels like Lenskart or Titan Eye+? It’s probably Vue De Luxe. Handicrafts à la Rare Planet? That’d be Pravasi. There’s even talk of a Hamleys knockoff said to be in the works.

This trend, in turn, creates several disturbing concerns.

TFS, whose IPO opens on 7 July, was founded by the Kapur family—the same folks behind Copper Chimney, Bombay Brasserie, and The Irish House… TFS could eventually be replaced, too. Adani is reportedly talking to Plaza Premium, the global lounge operator, for future airport lounge ops… 

April Moon began appearing around 2021. Its role was to take over the duty-paid retail at airports. That September, Adani acquired a 74% stake in Flemingo Travel Retail—a global duty-free operator founded by Atul Ahuja—for just Rs 2.8 crore. This, for a company that had clocked nearly Rs 900 crore in revenue in FY19. The deal, struck mid-pandemic when travel retailers were reeling, came at a throwaway price. And it gave Adani near-total control over both duty-free and duty-paid retail. For brands, that left little room to negotiate: either go through April Moon, or lose access to airport shelves… “If we made Rs 15 lakh in monthly sales at a store, we’d only be allowed to record Rs 5–6 lakh,” said one retailer. After costs, they say, the effective take-home margin is 5–6%. “Retailers who spent decades building these brands are now effectively just vendors.”

Strong financial incentives are driving these trends

At AAI airports, non-aeronautical revenue makes up maybe 10% of the pie. At private airports like Mumbai or Delhi, that jumps to 62%, per data cited by Crisil in TFS’s IPO documents. And within that, F&B alone account for as much as 40%. For instance, the top five Starbucks outlets in India by revenue are all located at airports, according to an F&B operator. A single store can bring in Rs 1.5 crore a month; that’s 3–4X more than a high-street outlet. And margins are nothing to sneeze at. A Rs 400 latte at an airport (Rs 350 at other outlets) contains roughly Rs 20 worth of ingredients.

Business concentration through horizontal and vertical integration may be inherent to the dynamic of capitalism with its profit-maximising firms. And there are doubtless efficiencies to be realised from both these trends. 

But the case of the airport sector in India, representative of trends across several sectors, raises questions about the stifling of entrepreneurship and innovation, and business dynamism in general. 

For example, what’s the incentive for entrepreneurs to start something like Dreamfolks Services, or April Moon Retail, or TFS, if there’s an imminent threat of being squeezed out of the market or being taken over by the dominant airport operator? Wouldn’t such trends deter investors from putting their money behind entrepreneurs whom they would otherwise have supported? More generally, is business concentration at the extensive and intensive margins likely to scare risk capital away from these sectors?

In addition, there’s a compelling argument that vertical integration under a corporate behemoth would lower innovation, service quality, and sector-wide dynamism. There’s a strong likelihood that once these services are taken in-house, like with all monopolies, the airport operator will have diminished incentives to pursue innovation and service quality and instead will have increased incentives to maximise profits. 

In any case, it’s unlikely that large infrastructure groups or their subsidiaries will be as innovative or driven to improve service quality (say, cater to all market segments), expand service portfolios (including interoperability with similar services globally), explore adjacent market synergies, and so on. This has been the global experience from across sectors, especially but not only in the infrastructure sector, over time.

It’ll be easy for the airport industry in India to become entrapped in a sub-optimal equilibrium of a horizontally and vertically integrated market dominated by a couple of operators. Given the inevitable growth in traffic due to economic growth starting from a low baseline, the associated inefficiencies can be papered over for a long time. But its opportunity cost can be considerable. 

Vertical integration also creates problems with the transparency of accounting for all those involved. Being part of the same corporate group means that there will be incentives to indulge in manipulation of accounts to minimise statutory payments and taxes, besides also maximising leverage. The operator can show lower revenues by over-invoicing and shifting profits to subsidiaries. Entities within a corporate group can do tax arbitrage by shifting profits among themselves. 

There’s also the case that horizontal integration creates the incentives for vertical integration. Adani Airport will have the incentive to in-source hitherto outsourced airport services only if it enjoys the economies of scope and scale from operating multiple airports. This underlines the importance of controlling market shares in such technically monopolistic markets (which also include those in IT, which benefit from network effects).

However, concerns about business concentration must be balanced with the need for large capital, a high risk appetite, and business ambition, especially if the objective is to scale big and rapidly. The country’s rapid and high growth ambitions require massive investments. The government is expanding airports at a rapid pace, and the airline industry is expected to grow fast for several years. Given their long gestation and deep exposure to the business cycle, only businesses with a high risk appetite and access to patient capital will invest in these sectors. 

Take the example of smart meters. The Government of India wants to install bi-directional smart meters in all 250 million households by the end of 2026. Even at a very conservative Rs 10,000 per smart meter (and its allied components), this would require a staggering investment of Rs 2500 billion (or about $28 bn). Given that regulatory conditions would restrict the discoms from recovering the cost of these new meters from existing metered customers, this cost must be borne by the government or the discoms. 

Since mobilising upfront capex of this scale would have been impossible, a totex model was adopted where the major share of capex would be borne by the concessionaires who would recover it over the eight years of the contract. This also means that the concessionaires would have to bear the significant risks (technology obsolescence, political economy of electricity tariffs, policy shifts, and local politics) involved and carry them in their balance sheets over the contract period. Only a few firms with the deepest pockets and highest risk appetites can assume such risks and make money from these contracts.

In conclusion, business concentration poses a dilemma for policy-making in many sectors. Its harms are well-known and often salient in a bad way, but its benefits are less known. When it unleashes a dynamic that confines an increasing and dominant share of the benefits in the hands of a few corporate groups, then there will be problems. 

Econ 101 would have it that such monopolistic trends should be formally regulated. But regulation is fraught with problems, given its inefficiencies and the political economy. Besides, there are limits to the extent of regulation required to control these business dynamics. 

From another perspective, the reliance on large corporate groups to drive high-growth aspirations is essentially a legitimate political economy choice that many countries, including those in the West, have made in their growth trajectories. Therefore, it’s only natural that a recognition of the problems that accompany the pervasiveness of large corporate groups be met with a similar political economy choice to force some form of restraints on their overreach.