Apple as a commoditised luxury brand?

The Times has an article on the enduring iPhone phenomenon, as its 17th iteration is released.

There’s a general rule about consumer electronics: The older a device becomes, the more competitors appear and prices fall. This was true for televisions, personal computers and portable music players. It was supposed to happen with smartphones. But the iPhone has defied gravity... Remarkably, at an age in which most consumer devices have lost some of their appeal to users, Apple has increased its share of smartphone sales over less expensive rivals... In the United States, the iPhone’s largest market, the device now accounts for more than 50 percent of smartphones sold, up from 41 percent in 2018, according to Counterpoint Research, a technology firm. The gains have helped it claim about a fifth of the world’s smartphone sales, up from a low of 13 percent in 2019... In the United States, the iPhone’s popularity is expected to widen in the years ahead. Nearly 90 percent of teenagers own an iPhone, according to Piper Sandler, an investment bank... Apple has expanded its smartphone empire as the broader industry has faltered. Over the past two years, sales of Android smartphones have plummeted, but the iPhone has suffered only modest declines because it’s been winning new customers. It has done so despite being the industry’s priciest device.

The recipe for its success 

Apple has overcome price sensitivity by creating a business that is reminiscent of U.S. car sales. Like a car, iPhones last for years and can be resold to offset the purchase of a new one. Wireless providers, much like auto dealers, offer discounts and monthly payment plans that make it more affordable to buy the latest model. And customers, like brand-loyal car buyers, are more likely to buy another iPhone than switch to Google’s Android operating system. Apple has also been lucky. Two of its biggest challengers, Samsung and Huawei, have stumbled in recent years. The iPhone has avoided wobbles with a reliable blueprint: Apple annually updates the iPhone’s spare but sleek design and reliable software, and brings it to the masses with an operations machine that assembles 200 million flawless iPhones a year with military precision... The migration from Android to Apple has accelerated as promotional discounts, financing plans and trade-in offers make higher iPhone prices less of a barrier. Wireless carriers sweetened their offers as they scrambled to gain or keep customers... It made switching priceless... Apple and wireless carriers began more aggressively promoting monthly payment plans. The plans have reduced the cost of a new iPhone to less than $40 a month from the $800 to $1,200 that customers had to pay upfront. The prices are lower for people who trade in used devices. The old iPhones, which could fetch up to $640, have been auctioned to buyers in Asia, who resell them at a markup. 

Apple has leveraged its aspirational market position to pursue a creeping market acquisition strategy,  

For young people, iPhones equal inclusion. Many choose it over Android because Apple’s messaging service, iMessage, will turn the color of messages from its default blue to green if a non-iPhone user is in a messaging group. The stigma associated with having green text messages is so pronounced that when it came time for Dave Storrs’s 14-year-old son to get his first smartphone, the teenager told his father that he wanted an iPhone or no phone at all. “It’s a status thing,” said Mr. Storrs, an Army retiree who lives in El Paso. “They don’t want to be treated differently.”

Mr. Storrs, who is 49, has been subjected to the same pressure. For more than a decade, he took pride in being what he called an “Android renegade.” He owned a series of LG and Motorola phones, even as his son and other family members pressed him to buy an iPhone. He gave in this year after his family gave him a $99 pair of Apple’s wireless AirPod earbuds. Each time he wanted to use the AirPods on his Android phone, he had to manually sync them. The laborious process inspired him to buy an iPhone 13, which connects the AirPods instantaneously. After years of using a free Android phone, he now pays $11 a month for the iPhone. But he says that he’ll never go back to Android because he likes that he can wear AirPods and take phone calls while walking his Catahoula leopard dog, Teddy.

“It’s just convenient,” he said.

New buyers like Mr. Storrs illustrate how Apple is gaining customers. The gap between the two major operating systems is tilted in Apple’s favor. About 94 percent of iPhone customers are likely to buy another iPhone, while 91 percent of Android customers are likely to buy another Android, according to Consumer Intelligence Research Partners, a technology research firm.

The Storrs family is illustrative of how a generation, especially but not only in the US, has been sucked into Apple's orbit. 

It's widely known that the secret to Apple's success is its ability to maintain massive margins on its hardware products, especially the iPhone. Its gross margins (% of gross revenue retained after deducting operating expenses) have remained stable in the 38-40% range since 2013. 

When applied to the nearly 250 million iPhone shipped in 2022, these margins result in an eye-popping profit of $100 bn on a net revenue of $394.33 bn for the year. One estimate puts iPhone's price markup at 119% for its latest iPhone 14 Pro Max. 

Then there is the staggering figure of nearly 1.3 billion iPhones active by the end of 2021. 

To all this, adding its dominant share of the global smartphone market, especially its dominance in the world's largest market (the US), means that Apple with a small share of the total shipments commands a disproportionately large share of the industry's profits. 

And the margins have risen since the pandemic.

Apple's ability to retain high margins despite its large scale is interesting. Apple likes to differentiate and present its products as belonging to the premium segment. Its business model and pricing have elements of luxury brands. 

Weekend reading links

1. Brett Christophers has a very good article which links to several examples of infrastructure funds and private equity ownership of infrastructure assets gone wrong. It has become conventional wisdom that governments should stay out of infrastructure and should, at best, use public finance to de-risk projects so that private investors can come and invest. The main source of private investment in infrastructure is nowadays from infrastructure funds. Christophers writes that the number of global infrastructure focused funds rose from fewer than 100 in 2016 to more than 250 by 2020, with the total assets under management having quintipled since 2009. 

Led by Macquarie, an Australian financial services group that is the sector pioneer, asset managers began investing substantially in Asian and European infrastructure in the early 1990s. Today, in countries such as South Korea and Britain, infrastructure funds are the leading owners of major infrastructure assets in a range of sectors, among them energy, transportation and water.

The story of asset-manager-led infrastructure investment is overwhelmingly a negative one. Asset managers are focused on optimizing returns on the assets they control by maximizing the income they generate while minimizing operating and capital costs. Many users of infrastructure that has come under asset manager ownership have suffered, as service rates have risen quickly and service quality has deteriorated. Nowhere is this better illustrated than in Britain. There, numerous types of infrastructure have come substantially under asset manager ownership. This has led to consistently negative outcomes in, for example, care facilities, schools and water supply. Many observers have concluded that essential infrastructure and asset manager ownership simply don’t mix.

And in South Korea, Macquarie’s eight-year investment in Metro Line 9, part of the Seoul subway system, involved a bitter spat with the metropolitan government over a proposal to hike fares by nearly 50 percent. That led Macquarie and other shareholders in 2013 to unceremoniously sell their stake, in what commuters came to call the subway line from hell. Local critics charged Macquarie with taking excessive profits without assuming any risk, an accusation that has been a consistent drumbeat accompanying the phenomenon of asset manager infrastructure investment around the world. Macquarie said that it is committed to its operations in Korea and that its Korean infrastructure fund is a “passive financial investor” that has cooperated fully with the city of Seoul. 

The story has been much the same when housing is owned by asset managers. There have been allegations of skimped maintenance and egregious eviction practices in some areas. Such outcomes have been reported in Spain, for example, a notable hot spot of asset manager investment in housing since the global financial crisis, by a series of academic researchers. If the United States has been a relative laggard in asset-manager-owned infrastructure, it has been in the vanguard of asset-manager-owned housing.

2. Productivity booms lag behind inventions.

3. FT feature on South Africa's izinyoka's or copper thieves who steal for survival or to maintain drug addiction.

Copper was the new gold, as far as their gang was concerned, and anywhere it could be found was fair plunder. Theoretically, the sale and export of scrap copper is carefully controlled by South African officials. But the properties that make it the world’s third most-used metal also make copper a smuggler’s dream. Malleable and recyclable, it is easily melted down, after which its origin becomes virtually untraceable. It was February 2021 and prices had hit a 10-year high, reaching $9,000 a tonne on international markets. Any number of unscrupulous dealers would buy the coveted metal, then resell it in South Africa or, more likely, help smuggle it to booming markets in China and India... That made a ragtag group of izinyoka the first link in a lucrative supply chain ultimately controlled by international syndicates... in their time working together, they had all hacked down telephone poles, dug up underground cables and broken into industrial plants. Train stations were a favourite target. By the end of that year, izinyoka had ripped out more than 1,000 kilometres of overhead cable from Transnet, the state-owned freight rail operator, prompting it to contemplate switching from hybrid electric locomotives to diesel-only models that don’t require cabling...

In January, the consequences of industrial-scale theft in South Africa included: three security guards killed during heists; three hospitals scaling back operations because stolen copper plumbing hampers their ability to pipe oxygen to intensive care units; trains cancelled due to stolen signalling cable or track sleepers; parts of the city going without electricity for days after thieves toppled pylons. Mining, South Africa’s largest industry, has been severely disrupted. Pits across the country churn up gold, gemstones, rare earth metals and coal, and the country is home to about 90 per cent of known deposits of platinum, vital for electronics and electric vehicles. One morning in March, a platinum operator discovered 300 metres of copper cabling had been stolen from a production site. Workers at Royal Bafokeng Platinum laid new cables the following day, but the thieves were back by nightfall... City Power, Johannesburg’s main power utility, reported the cost of replacing cables stolen between July 2022 and February this year at R380mn ($21mn).

4. Edward Glaeser and Carlo Ratti write about reviving New York City, which like other cities around the developed world is facing large office vacancies in the aftermath of the pandemic

New York needs to attract the rich and talented, but the poem beneath the Statue of Liberty reminds us that the city’s greatness comes just as much from being the landing site for “your tired, your poor, your huddled masses” that it is now pricing out. One way to balance these two governmental imperatives — to help the poor and generate tax revenue from the affluent — is to view the city as a for-profit real estate development company wholly owned by a nonprofit poverty-alleviation entity. The for-profit company focuses on keeping the city attractive to the rich, and the revenue it generates gets plowed into schools and support for the poor.

This about how the office spaces can be converted into residential spaces and people brought back to the streets

Modern office towers have deep floor plans meant to maximize square footage, but units in residential buildings need windows and their natural ventilation and daylight. To achieve conversion at scale, we must therefore look past the architecture of the traditional apartment. Deep-core office buildings could be converted into new kinds of spaces optimized for co-living and co-working. Bedrooms, with windows, could line the perimeter while common areas for cooking, laundry, work, exercise and socializing could fill the middle. Such arrangements could also help meet one of the social challenges of our time: loneliness... The urban playground should be constantly rearranged: Streets could be cleared for weekends, annual festivals and temporary exhibitions; food bazaars and pop-up shops could multiply. Movie theaters struggle to compete with boundless streaming catalogs available on cheap 4K televisions. More outdoor screenings on summer nights could tip the balance back toward collective experience. These easy interventions are especially useful for garnering public support. To draw people into the Playground City, we need to show, not tell.

5. TSMC is facing a crunch on its most important resource, skilled chip engineers. Taiwan's chip sector employs around 326,000 engineers. There is an acute shortage of chip engineers, with China reporting an estimated shortage of 200,000 engineers. 

6. The debate on the proper role of the corporation has a century old echo

Chief executives have been debating the proper role of corporations — to make profits for shareholders or to serve society at large? — for more than a century. The Michigan Supreme Court considered the question in 1919, when the Dodge brothers, as shareholders in the Ford Motor Company, complained that Henry Ford was diverting profits into expanding the business and lowering the price of cars, rather than paying dividends. More than 50 years before Milton Friedman would famously declare that an executive’s responsibility was to make “as much money as possible,” Ford argued the opposite, saying the purpose of a corporation was to increase employment and pay good wages, and only incidentally to make money. The court ruled in favor of the Dodges. Some business leaders sided with Ford. Owen Young, the chairman of General Electric, said in the 1920s that, in addition to paying a “fair rate of return,” corporations had an obligation to labor, customers and the public.

7. Norway is at the vanguard of the shift to electric vehicles

Last year, 80 percent of new-car sales in Norway were electric, putting the country at the vanguard of the shift to battery-powered mobility. It has also turned Norway into an observatory for figuring out what the electric vehicle revolution might mean for the environment, workers and life in general. The country will end the sales of internal combustion engine cars in 2025. Norway’s experience suggests that electric vehicles bring benefits without the dire consequences predicted by some critics. There are problems, of course, including unreliable chargers and long waits during periods of high demand. Auto dealers and retailers have had to adapt. The switch has reordered the auto industry, making Tesla the best-selling brand and marginalizing established carmakers like Renault and Fiat. But the air in Oslo, Norway’s capital, is measurably cleaner. The city is also quieter as noisier gasoline and diesel vehicles are scrapped. Oslo’s greenhouse gas emissions have fallen 30 percent since 2009, yet there has not been mass unemployment among gas station workers and the electrical grid has not collapsed.

8. The Economist has an article which suggests that in relative economic terms China may already have peaked and it may never surpass the US GDP. 

Capital Economics, a research firm, argues that China’s economy will never be number one. It will reach 90% of America’s size in 2035 and then lose ground. In so far as the Peak China thesis can be captured in a single projection, this is it. What accounts for the lower expectations for China’s economy? And how much of a reduction is warranted? The answers hinge on three variables: population, productivity and prices. Start with population. China’s workforce has already peaked, according to official statistics. It has 4.5 times as many 15- to 64-year-olds as America. By mid-century it will have only 3.4 times as many, according to the un’s “median” forecast. By the end of the century the ratio will drop to 1.7...

The biggest swing in sentiment relates not to population but to productivity. Back in 2011 Goldman Sachs thought labour productivity would grow by about 4.8% a year on average over the next 20 years. Now the bank thinks it will grow by about 3%. Mark Williams of Capital Economics takes a similar view... As China ages, it will have to devote more of its economic energies to serving the elderly, leaving less to invest in new kit and capacity. What is more, after decades of rapid capital accumulation, the returns to new investments are diminishing... 

If China’s prices or exchange rate fail to rise as Goldman Sachs expects, then China’s gdp might never overtake America’s. If China’s labour productivity grows just half a percentage point slower than Goldman Sachs envisages, its gdp, everything else constant, will also never surpass America’s (see chart). The same is true if America grows half a point faster (as Capital Economic projects). If China’s fertility rate declines further (to 0.85 children per woman by mid-century), it might eke out a lead in the 2030s only to lose it in the 2050s. Even if China’s economy does become the biggest in the world, its lead is likely to remain small.

9.  For all the talk about its decline, The Economist points to some staggering numbers about the American economic progress over the decades, and it continues.

America’s $25.5trn in GDP last year represented 25% of the world’s total—almost the same share as it had in 1990. On that measure China’s share is now 18%... In 1990 America accounted for 40% of the nominal GDP of the G7, a group of the world’s seven biggest advanced economies, including Japan and Germany. Today it accounts for 58%. In PPP terms the increase was smaller, but still significant: from 43% of the G7‘s GDP in 1990 to 51% now... A hundred dollars invested in the S&P 500, a stock index of America’s biggest companies, in 1990 would have grown to be worth about $2,300 today. By contrast, if someone had invested the same amount at the same time in an index of the biggest rich-world stocks which excluded American equities they would now have just about $510... 

America’s working-age population—those between 25 and 64—rose from 127m in 1990 to 175m in 2022, an increase of 38%. Contrast that with western Europe, where the working-age population rose just 9% during that period, from 94m to 102m... between 1990 and 2022 American labour productivity (what workers produce in an hour) increased by 67%, compared with 55% in Europe and 51% in Japan... TFP in America increased by about 20% between 1990 and 2019. The G7 as a whole averaged less than half that... roughly 34% of Americans have completed tertiary education... Only Singapore has a higher rate... America is home to 11 of the world’s 15 top-ranked universities in the most recent Times Higher Education table.

And some pointers of economic dynamism,

In 2013 a Gallup survey found that about one in four adult Americans had moved from one city or area within the country to another over the past five years, compared with one in ten in other developed countries. About 5m move between states each year... Stockmarket capitalisation runs to about 170% of GDP; in most other countries it comes in below 100%... about half of the world’s venture capital goes to firms in America... 5.4m new businesses started in 2021, an annual record and a 53% increase from 2019... an OECD measure of the personal cost of failure for entrepreneurs consistently puts America and Canada at the bottom... (in the) World Management Survey America sits at the top of their ranking. Fierce competition... helps to explain America’s corporate culture. Bosses are more comfortable with firing employees... Markets are readier to reward companies for evidence that they are well run. America’s managerial strength, the survey finds, explains as much as half of the productivity lead that it has over other developed countries.

10. Novovax struggles with getting countries to comply with their advance market commitments to purchase Covid 19 vaccines. The lack of demand has led to governments either reneging or seeking to renegotiate their AMCs. The same problem is there with other vaccine makers' AMCs too. 

11. Berggruen Institute Governance Index for 2022 is here. This is the report. 

12. Indian Express article on Kerala's neighbourhood women's groups, Kudumbashree, that is the largest women's collective in the world and has completed 25 years of existence. 

It runs 49,200 micro-enterprises — 31,589 individual units and 17,611 group enterprises. So ubiquitous that in every half a kilometre in the state, you bump into one initiative or the other of Kudumbashree... Kudumbashree’s 46,16,837 members have organised themselves into 3,09,667 neighbourhood groups (or NHGs, called ayalkootam in Malayalam). The neighbourhood group is the primary level unit of Kudumbashree that has a three-tier hierarchy. The next rung is the Area Development Society (ADS) that functions at the level of the ward, followed by the Community Development Society that works at the local government. The NHGs usually begin with thrift and credit programmes, lending money to members using the group’s savings. Subsequently, NHGs are graded and once they qualify, they are eligible for bank loans. These loans address the immediate financial needs of the group members. Subsequently, the state government supplies grants and subsidies, besides administrative support. Banks provide loans to members at low interest rates. The total thrift collected by NHGs in the state, according to Kudumbashree’s website, stands at Rs 5,786.69 crore and the internal loans generated are to the tune of Rs 23,852.45 crore.

This is a striking achievement

Besides social mobility, the movement has armed women with political mobility too. Of the 11,000-odd seats reserved for women, 7,038 were won by active Kudumbashree members in the 2020 local body elections, up from 848 in 2005.

13. Argentina's latest bout of hyper inflation, spike in interest rate, currency collapse, foreign debt default, IMF bailout, economic contraction is on.

Argentina will announce on Monday a new round of emergency government measures, including raising interest rates 600 basis points to 97 per cent, to try to stave off the country’s worst economic crisis in two decades. The Peronist government is desperate to avoid a big devaluation before elections in October. But the South American country is also running out of foreign exchange reserves as Argentines abandon the fast-devaluing peso and embrace the US dollar. Fuelled by money-printing to finance a large government deficit, Argentine inflation hit 109 per cent a year in April, the highest level since 1991. The economy ministry said the new measures, to be announced Monday, would involve the central bank stepping up intervention in the foreign exchange market to try to slow the peso’s fall. Economy minister Sergio Massa is also trying to persuade the IMF to bring forward the disbursement of agreed loans and will travel to China on May 29 to seek greater use of the renminbi in foreign trade.

14. The Business Standard has an article which analysed 10 infrastructure stocks over the last twenty years and found them big wealth destroyers. 

Companies in the construction and infrastructure sector have been among the biggest underperformers and wealth destroyers in the stock market in the past 20 years. The sector has also seen a wave of corporate failures and bankruptcies, making it tough for retail or non-promoter shareholders to make money on their investments. The numbers suggest that companies in the infrastructure sector go through a typical boom-and-bust cycle. First, there is a sharp rally in the share price as companies report rapid growth in revenues and profits, but then earnings growth loses steam, triggering a big sell-off in these stocks and a further decline in share prices that lasts for years. For the poor showing by these companies, analysts blame high debt, poor return on capital and equity, and the inability of these firms to sustain growth and earnings when financial and macroeconomic conditions turn adverse.

15. Ghana signs a $3 bn bailout from IMF following defaulting on its $34 billion debt in December last. The IMF estimates another 19 countries in the continent could face the same fate. 

The government borrowed heavily to insulate the economy from the effects of the pandemic and may have avoided a recession as a result. But the country’s debt as a percentage of GDP went from 62.7 per cent in 2020 to more than 100 per cent last year, according to finance minister Ken Ofori-Atta. Debt servicing now takes up about 70 per cent of government revenue... The administration stopped charging for mains water and brought in cheaper tariffs on electricity... The government saw an opportunity in leveraging the Covid pandemic to engage in reckless expenditure in view of the 2020 election... Much of the Ghanaian government’s spending took place in a world of low-interest rates. Ghana gorged on cheap money, raising almost $17bn in eurobonds that the Ministry of Finance frequently said were oversubscribed for nine straight years. But as central banks began raising rates to control inflation — the Bank of Ghana has raised rates by 1,250 basis points since March 2022 — Ghana found itself shut out of international debt markets as concerns grew over its ability to repay what it owed. The government has since been forced to rely heavily on a domestic capital market, where interest rates are as high as 40 per cent, and central bank financing of 37.9bn cedis ($3.2bn) in 2022. Some of the money being injected into the economy by the central bank may have helped to fuel inflation.

Historically, Ghana, like Sri Lanka, has been a relative good performer in the region.

16. Finally, Gillian Tett has more data on how bad mobile phone use is on children's mental health.

A group called Sapien Labs, which studies mental health, has polled almost 28,000 18-24-year-olds. Part of Gen Z, Sapien describes this cohort as “the first generation who went through adolescence with this technology”. It’s no surprise that this research shows that Gen Z’s mental state is worse than earlier generations. As psychologist Jean Twenge notes in Generations, teenage mental health has worsened sharply in the past decade, the period after smartphones went mainstream. Covid-19 has exacerbated the problem, according to the Centers for Disease Control and Prevention. What’s most interesting, however, is that Sapien tracked the age at which respondents first got cell phones and compared this with their reported mental health. This showed a clear pattern: kids who received phones at a younger age had worse mental health, even after adjusting for reported incidents of childhood trauma. The share of females experiencing mental health challenges ranged from 74 per cent for those who received their first smartphone at age six to 46 per cent who received it at age 18. For males, the numbers were 42 per cent and 36 per cent... The pattern was particularly stark in one of six mental health categories, known as the “social self”, which tracks how we view ourselves and relate to others.  

Weekend reading links

1. What drives "hot-streaks"? Derek Thompson points to the findings of a new study,

Northwestern University economist Dashun Wang... found that artists and scientists tend to experiment with diverse styles or topics before their hot streak begins. This period of exploration is followed by a period of creatively productive focus. “Our data shows that people ought to explore a bunch of things at work, deliberate about the best fit for their skills, and then exploit what they’ve learned,” Wang said. This precise sequence—exploration, followed by exploitation—was the single best predictor of the onset of a hot streak... At least for artists, film directors, and scientists, neither exploration nor exploitation does much good on its own. “When exploitation occurs by itself,” Wang and his co-authors wrote, “the chance that such episodes coincide with a hot streak is significantly lower than expected, not higher, across all three domains.” Only when periods of trial and error are followed right away by periods of deliberate focus does the probability of a hot streak increase significantly.

The research suggests something fundamentally hopeful: that periods of failure can be periods of growth, but only if we understand when to shift our work from exploration to exploitation. If you look around you at this very moment, you will see people in your field who seem wayward and unfocused, and you might assume they’ll always be that way. You will also see people in your field who seem extremely focused and highly successful, and you might make the same assumption. But Wang’s paper asks us to consider the possibility that many of today’s wanderers are also tomorrow’s superstars, just a few months or years away from their own personal hot streak. Periods of exploration can be like winter farming; nothing is visibly growing, but a subterranean process is at work and will in time yield a bounty... Today’s best exploiters were yesterday’s best explorers.

2. In the context of departure of Jes Staley as Chief Executive of Barclays, Brooke Masters has a list of such departures for personal misconduct in leading UK and European banks in recent times. Makes you realise that the high pay comes despite these common place misdemeanours. Or more appropriately, the high pay (and associated stakes) distorts incentives and makes chief executives cut corners to keep the show going. 

It also emerges that Staley had close connections with the late serial sexual offender Jeffrey Epstein. 

3. In the aftermath of CoP 26 FT has an informative story on the sources of global climate financing. 

This from multilateral agencies

And this from bilateral donors

In this context, as another FT article writes, any illusions that the private sector can take leadership in addressing climate change is plain nonsense. Private companies can only be instrumental in the process if governments back up with appropriate policy mandates. 

This is a good example of fluff by a group with a proven track record of hypocrisy,

The Business Roundtable, for example, argued in September that the country had made significant progress towards reducing emissions “in part because of corporate leadership in the absence of a smart, national climate policy”.

This is a more accurate assessment of the private sector's role,  

Joachim Wenning, chief executive of reinsurance giant Munich Re, feel a growing sense of unease. “Very often I’ve heard things like ‘in the absence of governments doing their job . . . we the private sector, we the economic leaders, have to take care of combating climate change’. It’s almost: ‘Then we have to replace the governments,’” Wenning said. “I think it’s an illusion. It’s not only that we don’t have the mandate. We don’t have the means, honestly.”

The measurement difficulties and lack of standards associated with net zero claims makes any suggestions of private sector leadership deeply questionable. 

4. Brooke Masters on the rise and fall and rise of conglomerates. 

The history of conglomerates is a tug of war, not a straight line. Observers announced the “decline and fall of the conglomerate” in 1994 and declared “conglomerates are dead” in 2007. The 1980s wave of corporate break-ups cut the share of large US groups operating in three or more sectors from half to 30 per cent. ITT split in 1995 and Tyco broke up after a scandal in 2006. Yet each had become big enough by 2011 to split themselves up again. “It becomes the conventional wisdom that conglomerates are no good and need to be broken up. Then we end up with companies that are so specialised that somebody decides that there is merit in vertical and horizontal integration,” says Alexander Pepper, a London School of Economics professor of management. “Ten years later you end up with a conglomerate.” The conglomerate’s resurgent appeal lies in the normal ambition to improve coupled with a hubristic assumption that good managers can manage anything. Entering new business lines seems attractive when competition rules prevent dominance in a single sector. Cynics note that chief executive pay and influence expands along with company size.

5. From the Bank of America's equity derivatives team early this week, via FT, a set of facts which captures the times,

“The S&P has (i) reached new highs each of the past eight trading days, tying the longest streak since 1964; (ii) risen 17 of the last 19 trading days, a feat surpassed only once in 90-plus years, and (iii) for only the second time since 1950, taken less than a month to rebound from twin fragility shocks.”

6. The Economist questions the commercial viability of the ride-hailing and delivery sector. This is a remarkable snippet,

A pizzeria could make money by ordering its own food for a discounted price on DoorDash (which then paid back the regular amount).

The financials of the ride-sharing and delivery apps,

The nine firms that have gone public so far—Uber and its American rival Lyft;Didi, a Chinese ride-sharing app; and six delivery firms, from DoorDash and Delivery Hero, which is based in Berlin, to China’s Meituan and India’s Zomato—collectively raised more than $100bn... the nine listed flywheel firms are still growing nicely—at 103% on average in their latest reporting period compared to the same period the previous year. This explains why they are collectively worth nearly $500bn. But self-levitating they are not. Nor are they profitable. Sales for the group amounted to $75bn over the past year and the operating loss to nearly $11.5bn.

And there may be signs that the ride-hailing sector may be the drag on the sector,

What is more, the company, which has a market capitalisation of $85bn, is now more of a delivery service than a ride-hailing app: Uber Eats generates more than half of sales. DoorDash’s own punchy valuation, of $65bn, rests on revenue that has grown more than fourfold since the last quarter of 2019, albeit during a time when people dined at home more often. But it also bakes in success in new markets that it has recently entered, including groceries and pet food.

7. Livemint has a comparison of the valuations of internet companies with brick-and-mortar companies in the same sector in India. 

8. T N Hari has a good article on the talent crunch facing Indian economy. The frenzy of capital flowing into startups has driven up employee attrition rates and salaries (on the aggregate both by at least 30% each, he claims) and squeezed businesses everywhere. It is a good proxy for the limited depth of good quality talent in India that $20 bn or so funds that have flown into start-ups over the last couple of years has drained talent off from an entire continental sized economy. 

9. A feature of the financial market landscape in India is the belief that government entities cannot fail. This implicit guarantee has created several distortions. One such distortion is the propensity of power sector companies being able to access debt from banks despite severe indebtedness. 

In an important and welcome development, it appears that the power ministry in Delhi has lifted the bankruptcy protections on government power companies. It has said that these entities do not fall under the category of government companies as defined under Section 2(45) of Companies Act 2013 which prohibit insolvency of such companies.

The Supreme Court in a case involving Hindustan Construction Company Ltd and Union of India in the context of the NHAI held that IBC cannot be used on a statutory body which functions as an "extended limb" of the government since no resolution can take over the management of a body which performs a sovereign function. The Power Ministry has rightly taken the view that the Electricity Act allows for state of private ownership of electricity utilities. 

If public sector banks, and more importantly the power finance DFIs PFC and REC, can take defaulting state utilities to the NCLT that would do more than any UDAY to set right incentives and create conditions for sustainable and genuine reforms in the power sector. 

10. As the curtain comes down on GE's century long existence (it split into three units - health care, energy and digital, and aviation), FT writes that Wall Street investment banking firms made more than $7 bn offering services to GE since 2000 despite its value falling about 75% during the same time. 

GE spent $2.3bn on mergers and acquisition advice alone, according to figures from Refinitiv, as it built a sprawling empire through hundreds of deals... The rise and fall of the GE conglomerate has resulted in a windfall for Wall Street with the Boston-based group spending another $3.3bn on fees related to bonds, according to Refinitiv. It spent a further $800m and $792m, on loan and equity fees, respectively. Since 2000, the company has shelled out more on investment banking fees than any other US business, according to the Refinitiv figures... the outsized fees are indicative of how bankers — who have profited despite GE’s market value falling about 75 per cent since 2000 — care more about completing lucrative transactions than acting in the best interests of their clients.

Market concentration in Main Street and Wall Street

I have blogged earlier about Hendrik Bessembinder, the Arizona University Professor, whose research has shown that almost all the stock market returns over history have come from a handful of stocks. His work has been embraced by a few fund managers to justify single-minded pursuit of picking high growth stocks. As Bessembinder himself has written, it has been embraced by both sides,

One observer reacted by saying that the paper was “another nail in the proverbial stock picker’s coffin” while another interpreted the findings to support “giving yourself the best possible chance of owning a small number of outliers”... One writer pronounced that I argued that “the only way to invest is via index or exchange traded funds” while a Financial Times newspaper headline said I advocated “a shot at the moon”.

Though this is central to the assumptions of either side,

The results in this paper imply that the returns to active stock selection can be very large, if the investor is either fortunate or skilled enough to select a concentrated portfolio containing stocks that go on to earn extreme positive returns. Of course, the key question of whether an investor can reliably identify in advance such ‘home run’ stocks, or can identify a manager with the skill to do so, remains.

He found that despite the large equity market gains over the past century in the US, most stocks were duds (see this paper),  

In fact, of the roughly 26,000 companies listed between 1926 and 2016, more than half lost money or did worse than simply holding one-month Treasuries. In contrast, about 1,000 stocks — or just 4 per cent of the entire sample — in practice accounted for all the net wealth creation over the period, or almost $35tn.

In fact, he found that these trends were increasing in the US,

The study includes all of the 26,168 firms with publicly-traded U.S. common stock since 1926. Despite the fact that investments in the majority (57.8%) of stocks led to reduced rather than increased shareholder wealth, U.S. stock market investments on net increased shareholder wealth by $47.4 trillion between 1926 and 2019. Technology firms accounted for the largest share, $9.0 trillion, of the total, but Telecommunications, Energy, and Healthcare/ Pharmaceutical stocks created wealth disproportionate to the numbers of firms in the industries. The degree to which stock market wealth creation is concentrated in a few top-performing firms has increased over time, and was particularly strong during the most recent three years, when five firms accounted for 22% of net wealth creation.

And he found that the skewed nature of stock market returns were even more extreme outside the US, 

We study compound returns to nearly 62,000 global common stocks during the 1990 to 2018 period, documenting that the majority, 56% of US stocks and 61% of non-US stocks, under perform one-month US Treasury bills over the full sample. Focusing on aggregate shareholder wealth creation measured in US dollars, we find that the top-performing 1.3% of firms account for the $US 44.7 trillion in global stock market wealth creation from 1990 to 2018. Outside the US, less than one percent of firms account for the $US 16.0 trillion in net wealth creation. These results highlight the practical implications of the fact that the distribution of long-run stock returns is strongly positively skewed.

In this context, the concentration of returns is evident in the Indian markets too. Ananth points to this article from Marcellus Investment Managers. This about profit concentration in corporate India,

A handful of companies – precisely TEN – are now taking home almost the entire PAT generated by the Indian stock market. This profit concentration in the hands of the top 10 companies has quintupled in the past decade and it has nothing to do with Quantitative Easing (QE) by central banks. Fewer and fewer companies – precisely TWENTY – now account for around 55% of the Free Cashflow to Equity generated by the Indian stock market. A decade ago, the top 20 Free Cashflow generators accounted for around 41% of India’s FCFE. Once again this has nothing to do with QE...

The top 20 profit generators in India (‘the Leviathans’) now account for 90% of the country’s corporate profits. Beyond dominating the country’s profit pool, the Leviathans also reinvest these profits far more efficiently back into their businesses. In fact... India’s top 20 PAT generators not only account for 90% of the nation’s profits, but they also take home 45% of the nation’s Free Cashflow to Equity (or FCFE, which is the amount of cash generated by a business and available to its shareholders after payment of debt, expenses, and investments). The reason for the lower share of the Leviathans in FCFE rather than PAT is because these giant companies are heavily reinvesting their PAT to fuel future growth. This reinvestment reduces their FCFE.

An earlier article in the same site points to more signatures of concentration,

The last decade has seen a steady rise in the ROE superiority of the top 20 Leviathans. In FY20, the median ROE of the top 20 Leviathans was 17.2% whereas India Inc’s average ROE was a mere 4%! This means that the top 20 firms are not just putting greater amounts of money to work, they are also applying these larger sums of money far more effectively and far more profitably than the rest of India.

 

And this about concentration in the Indian equity markets,

In the decade ending 31st December 2010, the Nifty added around Rs. 35 trillion in market cap. In these ten years, 80% of the value generated came from 26 companies and the median Total Shareholder Return (TSR) CAGR was 34% for these 26 companies. Moving forward by a decade, in the decade ending December 31st, 2020, the Nifty added Rs. 71 trillion in market cap. 80% of the value generated in these ten years came from just 16 companies whose median TSR CAGR was 21%.

The authors at Marcellus points to drivers of such market concentration - nature of intangibles or knowledge based industries compared with brick and mortar industries, network effects, self-reinforcing nature of the impacts of modern technologies, superior access to talent etc. You could add more like globalisation and emergence of global markets. 

However, all these are only part of the explanation. There is more at play. The rules of the game of modern capitalism and political systems favour the larger firms disproportionately. The taxation regime (corporate tax, capital gains/buybacks, tax deductibility on interest expenses etc), ease of financing (lower cost of capital for the largest firms), the public bailout backstop (too big to fail), public policy dominance of stock markets health over that of real markets, and so on are examples. Most disturbingly, the setting of these rules themselves are captured by the same elite companies. And therein lies the risk to the sustainability of modern capitalism.

Update 1 (10.08.2021)

Business Standard points to increased business concentration across sectors during the Covid pandemic in India. It uses the Herfindahl-Hirschman Index (HHI) scores to map business concentration (an industry with HHI of greater than 2500 is highly concentrated, and one below 1500 to be competitive). 

The problems with schmooze-based business growth

Running a business requires maintaining relationships with various stakeholders. But many businessmen end up making relationships the very foundation on which they build their business. In the process, the lines between fact and fiction gets blurred and allow for questionable practices. It raises the question of how much schmooze is too much?

The fundamental issue is about bridging information asymmetry and trust deficits to facilitate economic transactions with outsiders. In public systems, such transactions with outsiders happen mostly through formal procurements. But this comes with the problems of delays and constraints on the selection of the right kinds of sellers/partners. These are prohibitive costs in the competitive world of businesses. Businesses overcome the problem by preferring deal-making or transactions which hinge on non-formal procedures. Relationships are an important tool to bridge information asymmetry. But it also comes with serious risks of relationships abuse. 

Lex Greensill of the now bankrupt supply-chain financier, Greensill Capital is a good example. This article highlights how he build relationships with people ranging from the former British PM David Cameron to Greg Bererton, an executive with an obscure Australian insurance firm. Cameron lobbied hard for state-backed emergency Covid 19 loans for Greensill despite strong resistance by the UK Treasury

Public records show Greensill representatives had 10 virtual meetings between March and June last year with the two most senior officials at the Treasury as they sought access to a Bank of England loan scheme... Cameron also intervened personally on behalf of the company. Treasury officials were reluctant to include Greensill in the Bank of England’s Covid Corporate Financing Facility... Greensill then deployed Cameron to lobby his former colleagues. The former prime minister approached the Treasury and 10 Downing Street — through both his personal email and at least one phone call.

Greensill's main borrower, Sanjeev Gupta, of GFG Alliance, is himself a schmooze and build business operator, with several questions now hanging around the solvency of his businesses following the demise of his main lender. 

Or the examples of Markus Braun of Wirecard or Adam Neumann of WeWork, both of whom were expert purveyors of the relationship strategy to drive business growth. In fact, if we analyse examples of business collapses, chances are that their business growth was most likely underpinned by questionable relationships. 

As I have blogged earlier here and here, such relationships are at the heart of transactional (or access money) corruption in developed countries. It's also central to the related disturbing practice of revolving doors between government and corporate world whose perverse incentives are becoming increasingly evident, especially involving those at leadership positions in the two parts.

An extension of the schmooze culture is the old-boys network that emerge from reputed organisations like McKinsey, Goldman Sachs etc. For sure, such networks play a positive role in reducing information asymmetry and helping facilitate business transactions. But this is a double-edged sword, in so far as it promotes corrupt business practices and raises creates closed loops of transactions. Contract-fixing over dinner table at a Michelin star restaurant by corporate attired executives and Congressman's Chief of Staff is no less corrupt than doing the same in a seedy joint by the local contractor and the junior government official. It's worth remembering Adam Smith

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. 

This also highlights an important difference between the cultures of public and private sectors. The former's process adherence culture and the latter's deal-making culture are fundamentally different. What passes off as outright corruption in the former is sound business practice in the latter. What's often decried by the private sector as red-tape in governments is considered inside the former as good governance. 

In case of government bureaucracies, the problem is less with adherence to processes. It's about taking things to the extreme - too much of process becomes red-tape and too much of deal-making becomes corruption. Large swathes of government and the private sector suffers from this 'excess' problem. In case of private companies, especially the biggest ones and at the highest leadership levels, the problem is with too much discretion and whimsical decision-making. It is a testament to the break-down of principal-agent compacts and the abuse of managerial control (for self-aggrandisement) in the face of dispersed ownership. 

The underlying reality that, unlike a private company spending its limited owners resources, public spending comes from taxes and private spending comes from shareholders cannot be wished away.

This also means that those entering the higher levels of government after a career in the private sector also bring with them deeply internalised norms of the relationship culture. In governments, again at the highest levels, this can have a corrosive effect. Some time back I had written,

How do we know that there was no corruption when Lloyd Blankfein and Co had such privileged access to Hank Paulson when he was designing a program to bail them all out? How do we know that there was no corruption when Obama met the Chief Executives of Honeywell and GE 30 and 22 times respectively in the 2009-15 period and those visits were accompanied by favourable regulatory or other benefits and abnormal share price increases for the respective companies?

These are examples of relationships gone rogue.  

Apart from business growth pursued by charismatic leaders, another widespread area of relationships abuse is insider trading based on internal information. See my earlier posts here, here, and here. Experience demonstrates that the belief that business relationships are at arms-length and there are internal controls and Chinese walls to police their abuse is mostly fiction. 

Closer home, there are several examples like Rana Kapoor of Yes Bank and Kapil Wadhwan of Dewan Housing. Readers can easily identify several other examples from corporate India, whose relationship trails raise several questions. In fact, the consequences of relationship banking, where bankers establish cosy partnerships with certain preferred clients and continuously roll-over their debts, is now well-established. As some recent high-profile examples show, if anything, India's private banks appear equally inclined to such transactions. 

So a simple smell-test for validating the credibility of a businessman is where does he/she figure on the Schmooze-meter?

Update 1 (07.05.2021)

Unherd.com has a good article on the problems with post-retirement activities of British Prime Ministers. This is an FT story on the impending Treasury Select Committee appearance of David Cameron. This is the list of 56 mails, SMSes, and WhatsApp messages sent by Cameron to high-ranking UK government ministers and officials lobbying for Greensill. 

Update 2 (15.05.2021)

Ian Osborne, the founder of the $1.5 bnVC firm Hedosophia, and one of the architects of the idea of Special Purpose Acquisition Company (SPAC), is a great example of networker. Fellow VC and SPAC founders Chamath Palihapitiya has described Osborne as 

“extremely, exceptionally discreet and unbelievably trustworthy. He’s unbelievably connected. He is our modern version of a homeless billionaire. Ian is constantly working, is constantly travelling, and he collects people.”

Covid 19, inter-generational equity and taxing multinationals

1. While the health costs of Covid 19 will fall disproportionately on the older, its economic costs will be borne by those below the age of 40. And its consequences will be a feature of the post-pandemic politics in the developed countries.

In fact, coupled with the GFC of 2008, the Cold 19 pandemic has upended the trajectory of intergenerational wealth distribution. The younger generations of today are worse off than their predecessors. They are left with having to finance the generous welfare state for the older generation even as they themselves face a future of economic stagnation and automation-related jobless growth, gaping unfunded pension liabilities, weakening social safety nets, and a secular decline in the aggregate rate of returns on investments.

An article in FT writes,

As governments begin to plot a path out of the crisis, generational redistribution is likely to become one of the dominant political themes. Having now watched them suffer two economic cataclysms in just over a decade, there will be strong pressure for older generations to repay the favour and help millennials get back on their feet. According to Ana Hernández Kent, a policy analyst at the Federal Reserve Bank of St Louis, many millennials in the US should be entering their peak earning years. Instead, the combination of the 2008 financial crisis and coronavirus is a “double blow” that could amount to a devastating setback. “That Great Recession has really followed them for the past decade or so,” she says. “Even as of the fourth quarter of 2019, millennials were still below, in terms of wealth, where we would expect them to be based on older generations at similar ages.”

... According to Carnegie Mellon University economist Shu Lin Wee, limited career mobility after the financial crisis meant that millennials were caught between two wholly unsavoury choices: stay in jobs where they were being underpaid due to lacklustre salaries set at a time of high unemployment, or change career path into areas where a lack of experience means starting out further down the ladder. Ms Shu says the wage scars of a recession could drag on a person’s income for up to 20 years. Ms Kent’s analysis presents a similar conclusion. Even before coronavirus, she calculates that the typical older millennial family’s median wealth — what they own minus what they owe — was around a third lower than where they should be compared with previous generations at the same stage of life. Many of those trends are now likely to be exacerbated by the coronavirus crisis. Millennials of all races are more likely to be on short-term, temporary or zero-hours contracts — the sorts of jobs in restaurants, cafés or the gig economy which have been most vulnerable to being cut during lockdown. The same is true for the members of Generation Z, the cohort younger than millennials, who have already entered the workforce. The St Louis Fed estimates as many as 16 per cent of US millennials do not have the immediate means to cover an emergency expense of $400. For black millennials in particular, that figure rises to 32 per cent.

In simple terms, demography has become an important dimension to the debate on widening inequality. The young-old divide is as much important as the rich-poor one. On most indicators of incomes and well-being, there is a widening trend between the younger and older generations. Inter-generational mobility is at record lows, and cost of education and home ownership have risen sharply to become prohibitive for the millennials.

2. The inter-generational problem, at a time of record public debts, makes increasing tax revenues ever more important. The massive fiscal stimuluses in the aftermath of the pandemic has seen fiscal deficits and debts balloon to unsustainable territory. It is estimated that 20 of the largest economies have so far provided $5 trillion of fiscal support, or 7% of their national incomes. The reckoning may have arrived. 

The FT writes about a salient target, multinational corporations. These entities have, in recent years, benefited from tax avoidance strategies, which the IMF estimates deprives governments off at least $650 bn a year. 

In the UK, more than 50 per cent of the subsidiaries of foreign multinational companies currently report no taxable profits, according to a 2019 study by Oxford university research fellow Katarzyna Bilicka. In the US, 91 companies on the Fortune 500 index, including Amazon, Chevron and IBM, paid an effective federal tax rate of zero in 2018.

Amazon, the highest valued corporation, is the exemplar, the most efficient purveyor of tax avoidance. It paid little or no federal tax in the US for years even as it benefited from tax credits from local governments. 

Amazon enjoys the benefit of tax deduction accorded to the cost of stock based compensation. 

The article writes about the pioneer in tax avoidance, General Electric under Jack Welch, 

Dozens of interrelated factors have eroded the system for taxing multinationals over the past half century; falling rates, ever increasing cross-border capital flows, hard-to-resist loopholes, and aggressive incentives from states desperate to attract multinationals. Since the late 1980s, there has been a complete change in mindset, one pioneered and taken to its extreme by General Electric, America’s biggest manufacturer by market capitalisation for most of the past 40 years. Under the late Jack Welch, who ran the company from 1981 to 2001, a tiny corporate tax team was transformed into a money-spinning entrepreneurial machine, with 1,200 tax lawyers spanning five continents. The fruits: between 2008 and 2015 the company not only paid no federal income tax in the US, according to research by the Institute on Taxation and Economic Policy, it booked positive tax benefits worth more than $1.3bn over the seven-year period... One of the first tax experts hired by Welch was John Samuels, a tall, bowtied former Treasury official. By the time he left GE in 2014, Mr Samuels was presiding over what was dubbed the “Harvard of tax departments”.

Efforts towards reforming taxation of multinationals and digital service companies are already underway. There are two pillars to the reforms being spearheaded by the OECD. The first pillar is about strengthening the right of countries to tax corporate income from sales on their territories, regardless of where company is located. The second pillar is about a minimum level of tax applied to all multinationals. 

Weekend reading links

1. Large is not always good. Marc Levinson writes how the latest giant container ships have, instead of lowering transport costs and raising efficiency, has increased costs, reduced speeds, and created a host of other problems.

Discharging and reloading the vessel took longer as well, and not only because there were more boxes to put off and on. The new ships were much wider than their predecessors, so each of the giant shoreside cranes needed to reach a greater distance before picking up an inbound container and bringing it to the wharf, adding seconds to the average time required to move each box. Thousands more boxes multiplied by more handling time per box could add hours, or even days, to the average port call. Delays were legion... The land side of international logistics was scrambled as well. At the ports, it was feast or famine: Fewer vessels called, but each one moved more boxes off and on, leaving equipment and infrastructure either unused or overwhelmed. Mountains of boxes stuffed with imports and exports filled the patios at container terminals. The higher the stacks grew, the longer it took the stacker cranes to locate a particular box, remove it from the stack and place it aboard the transporter that would take it to be loaded aboard ship or to the rail yard or truck terminal for delivery to a customer. Freight railroads staggered under the heavy flow of boxes into and out of the ports. Where once an entire shipload of imports might be on its way to inland destinations within a day, now it could take two or three. Queues of diesel-belching trucks lined up at terminal gates, drivers unable to collect their loads because the ship lines had too few chassis on which to haul the arriving containers.

2. Gautam Bhan writes about the lop-sided nature of urban land distribution,

Despite the language of “encroachment” and widespread “land grab,” bastis (slums) are on a minute portion of city land — less than 0.6% of total land area, and 3.4% of residential land in the 2021 Delhi Master Plan. This tiny percentage supports no less than 11-15% but possibly up to 30% of the city’s population, most settled for decades. One example shows how skewed this number is. In 2017, parking Delhi’s 3.1 million cars used 13.25 sq km of land, or 5% of all residential area. Cars, then, have more space than the housing of workers, residents, and families.

3. Obituary in FT of Lee Kun-hee, Samsung's Chairman. Lee was a real business titan and a force behind South Korea's economic transformation.

Samsung, which pulled away from Hyundai to become the biggest of South Korea’s chaebol, or industrial groups, by a wide margin. The company is the largest maker of memory chips, smartphones and electronic displays, Samsung C&T built the world’s tallest building in Dubai and Samsung Heavy Industries is the world’s third-largest shipbuilder by sales. Other subsidiaries’ range from theme parks to insurance. It is for the transformation of Samsung Electronics, however, that Lee will be most remembered. Samsung was a minor player in the global technology industry when he took the helm in December 1987, succeeding Lee Byung-chull, his father and the group’s founder... Within five years, Samsung was the world’s biggest producer of memory chips underpinned by billions of dollars of annual investment, even during downturns. Despite this success, shoppers around the world continued to view Samsung’s consumer electronics as poorly designed and undesirable. Lee’s aggressive interventions to change this perception have now become legend. The most famous came in 1995, after the humiliation of finding that Samsung mobile phones he had given as gifts did not work. Two thousand Samsung employees at a phone manufacturing factory south of Seoul were instructed to don headbands marked “quality first” and gather outside. Thousands of phones and other electronic devices — with an estimated total value of $50m — were incinerated on a bonfire and the ashes were pulverised by a bulldozer.

As I blogged earlier, Samsung's spectacular success breaks the mould on several scared tenets of modern business organisation and management techniques. See this from The Economist.

3. Chandra Nuthalapati et al have a good study that informs significant gains for vegetable farmers from selling directly to supermarkets,

Even after controlling for differences in quality and other relevant factors, we found that imputed farmgate prices that farmers receive in supermarket channels are around 20% higher than the prices received in traditional channels for most of the vegetables considered. For some of the vegetables, price differences are even higher. We also found that selling to supermarkets involves lower transaction costs for farmers than selling in traditional markets, as supermarket collection centers are located closer to the villages and involve lower commission fees Higher prices seem to be needed as an incentive for farmers to deliver to supermarket collection centers, because supermarkets do not offer any other incentives to farmers. In other countries, where supermarkets often procure vegetables from farmers through contracts, farmers benefit from lower price risk or from inputs and extension provided as part of the contracts. In India, supermarkets procure vegetables without contracts, so that higher mean prices are important to ensure regular supplies. We found significant price incentives for comparable qualities. In addition, higher quality grades are rewarded in supermarket channels, which is often not the case in traditional channels. Our data showed that farmers who supply supermarkets typically sell their highest-quality vegetables in supermarket collection centers, whereas they sell lower-quality produce in traditional markets.

While this will surely have some positive effect, these are excessively big effects. Something going on here about the study.  

4. Bihar sugar mill industry fact of the day,

Around 1980, Bihar accounted for 30% of the country’s sugar production, and 28 functional sugar mills. It has now come down to less than 5% of the production, and has 10 mills... At the end of 2016-17, only about 2,900 of Bihar’s estimated 3,531 factories were operational, employing on an average 40 people each. The national average is nearly double, 77 workers. The average salary per annum per worker in Bihar then was Rs 1.2 lakh, again less than half of the national average of Rs 2.5 lakh.

5. FT has a long read on the emerging geo-political struggle in the Middle East between UAE and Turkey, motivated by ambitions in both countries to influence politics in other countries across the region. Their frontline is in Libya, where Turkey is supporting the UN-backed government and UAE is supporting the rebels led by Gen Khalifa Haftar. 

The UAE accuses Mr Erdogan of colonial delusions, supporting Islamist groups and forming a hostile axis with Qatar, its Gulf rival. The belief in Abu Dhabi is that wealthy Qatar provides the funding, and Turkey the muscle as Mr Erdogan seeks to position himself as a leader of the Sunni Muslim world. “Turkey has many things to answer for, with its long-term attempts — in concert with Qatar and the Muslim Brotherhood — to sow chaos in the Arab world, while using an aggressive and perverted interpretation of Islam as cover,” Anwar Gargash, the UAE’s minister of state for foreign affairs, wrote in the French magazine Le Point in June as tensions over Libya soared. Sheikh Mohammed, known colloquially as MBZ, is spearheading the Arab push against Turkey’s influence... The UAE, which has an indigenous population of just 1.5m but is one of the region’s wealthiest countries, has long punched above its weight. Since the 2011 Arab uprisings rocked the region, Abu Dhabi has deployed tens of billions of petrodollars to bolster allies across the Middle East and Africa through trade, aid and the use of military resources. The Gulf state’s foreign investment and bilateral aid to eight countries including Egypt, Pakistan and Ethiopia, has totalled at least $87.6bn since 2011, according to the American Enterprise Institute, which analysed publicly available data.

Turkey is today the hub for the region's dissidents, especially Islamists, who pose an existential threat to the monarchical autocracies. UAE's normalisation of relations with Israel should be seen in this backdrop - an attempt to ingratiate itself in the West, against Turkey.

A related issue is the intensification of the stand-off between Armenia and Azerbaijan over the Armenian enclave of Nogorno Karabakh in Azerbaijan. One important reason for the breakage of the Russia-brokered truce which has held since 1994 has been Erdogan and Turkey, which have aggressively armed and supported Azerbaijan, thereby emboldening it. A humanitarian disaster is now unfolding which has displaced nearly half of the enclave's population. 

6. From Ananth, this article by Norman Doidge on the problems with RCTs in medicine,

An important review of RCTs found that 71.2% were not representative of what patients are actually like in real-world clinical practice, and many of the patients studied were less sick than real-world patients. That, combined with the fact that many of the so-called finest RCTs, in the most respected and cited journals, can’t be replicated 35% of the time when their raw data is turned over to another group that is asked to reconfirm the findings, shows that in practice they are far from perfect. That finding—that something as simple as the reanalysis of the numbers and measurements in the study can’t be replicated—doesn’t even begin to deal with other potential problems in the studies: Did the author ask the right questions, collect appropriate data, have reliable tests, diagnose patients properly, use the proper medication dose, for long enough, and were their enough patients in it? And did they, as do so many RCTs, exclude the most typical and the sickest patients?

7. The reality with Uber's misleading minimum wage adherence claim.

Drivers will be guaranteed earnings — 120 per cent of the local minimum wage — though with a significant caveat: Uber won’t count the time drivers are waiting to be matched with a passenger. When you factor in that period, a Berkeley study suggests that Uber’s promised $15.60 minimum an hour instead becomes, on average, just $5.64, once adjusted for driver expenses such as fuel.

8. This shocking story of the flight of ABC's Beijing Correspondent from China tells everything about today's China, which clearly does not abide by any rules applicable for civilised nations.  

9. A rare example of expose of corruption in the defence forces, which is without doubt at least a pervasive as elsewhere (perhaps even more given the lack of external oversight). The problem though with dragging CBI, CVC etc into investigating works, especially those done in places like Ladakh during the ongoing stand-off, is that it could backfire badly and end up delaying and derailing even those critical and time-bound works. 

10. Talking of burying your head in the sand, and Eugene Fama, in this interview, is a great exhibit. The level of obduracy on financial markets, negative rates, private debt, impact of central bank policies, business concentration and so on is stunning. Virtually every paragraph is an exercise in denial of reality. Evidently Fama is living in a different world. 

11. Economist hails Aditya Puri as the world's best banker!

The attributes are very old-fashioned,

First, Mr Puri’s management style, which features a clear vision, microscopic attention to detail, blunt speaking and a knack for retaining talent... The second factor is strategic discipline. Mr Puri intuited that Indian consumers and firms would be a consistent money-maker and has stuck to that view. He took the sophisticated processes used by foreign banks and used them to target local retail and commercial clients. The result is a large branch network, half of which is outside cities. The firm’s cash-machine and credit-card networks are the largest among India’s private banks. Mr Puri stayed away from foreign ventures and investment projects, avoided lending to India’s indebted oligarchs, and financed HDFC’s balance-sheet through deposits rather than debt... The final element is HDFC's approach to technology—though not a pioneer, it is a fast follower.

12. A Livemint story of the PLI scheme for mobile phone manufacturing, which has a five year allocation of Rs 41,000 Cr. This about the success of the segment as well as the distance to be travelled, 

India had two mobile manufacturing units in 2014. By 2019, there were over 200. The number of mobile handsets produced shot up from 60 to 290 million in the same period; the value of handsets produced jumped 10 times to $30 billion... China exported phones worth over $100 billion in 2019; Vietnam over $35 billion. India exported less than $3 billion in 2018-19.

Even with the PLIs, India stays below Vietnam and China on cost-competitiveness,

Assuming that $100 is the cost of producing a phone without subsidies, China can make it at $80 after factoring in the incentives the country provides. Similarly, the cost of manufacturing a phone in Vietnam. The PLI scheme bridges some of India’s deficit. The manufacturing cost, after factoring in PLI and other subsidies, totals $92-$93.

Interesting thing about the extent of subsidy, which is very significant,

The scheme is also a massive discount on India’s current value-add, the advisor mentioned above explained. Manufacturers in India import most of the components and the assembly value ranges between 8% and 15%. “If 15% is the assembly price, an incentive of 6% is almost a 50% discount," he said.

These are very instructive numbers. If even with assembly, India is not able to compete with Vietnam and China, that's disturbing. But perhaps, this underscores the need to localise component production to become competitive. That will hopefully happen in due course and the PLI scheme will expedite. But till then, the incentive is a massive subsidy cost being incurred. If it does not catalyse component manufacturing, then this can just as well be described as a corporate freebie.

13. The IPO of Ant Financial to raise about $35 billion, the world's largest ever, has attracted a staggering $2.8 trillion of orders from more than 5 million individuals, a sum which exceeds the value of all stocks listed on exchanges in Germany or Canada. For retail investors, the simultaneous listing at Shanghai and Hong Kong was oversubscribed more than 870 times. The company has a billion users and more than $17 trillion in yearly payment volumes.

14. Gillian Tett points to the alarmingly low CDS recovery rate projects with the recent corporate bond auctions. 

Most CDS contracts stipulate that financiers need to know what a company’s cheapest available bond will be worth at the point the company defaults. That’s because CDS contracts make investors whole by paying them the bond’s original face value minus its market value. When a company goes bust, financiers hold an auction to determine the market price, and the resulting prices offer one guide to what creditors think the company’s remaining assets are worth. Over the past decade, the average CDS auction prices have moved in a band between 10 and 60 cents on the dollar, but have generally been between 30 and 40 cents. However the nine US auctions conducted in the year to August produced an average price of just 9 cents — and just 2.4 cents if you look at the worst four: Chesapeake, California Resources, Neiman Marcus Group, and McClatchy.

Worsening matters, bondholders are being continuously shortchanged, 

And because loans take priority over bonds in a bankruptcy, the practice has also weakened bondholders’ claims, sparking fights in some bankruptcies... Bondholders’ claims have been further undermined by debt exchanges and stealthy asset transfers, including one known as the “J-Crew trap door”. Named after the recently bankrupted US retailer, it refers to a manoeuvre pulled off by the company’s private equity owners in 2016 in which they transferred intellectual property rights across to new lenders, out of the reach of the original creditors. Similar tactics have emerged at other troubled groups such as Travelport.

And all this is being driven by the search for yield among investors,

Indeed, four-fifths of US loans issued last year were “covenant-lite”, that is they had little or no control over borrower behaviour, up from one-fifth at the start of the decade. That is because investors are so desperate to chase returns in a zero-rate world that they no longer dare to impose covenants. Indeed, the hunt for returns is so frenzied that junk bond yields have plunged from 12 per cent in March to below 6 per cent. Cheap money, in other words, is enabling some zombie companies to stagger on, even as creditor value shrivels — until they collapse.

15. Fascinating article about the QR Code, the low-profile but functionally valuable invention in 1994 by Masahiro Hara to track components in car factories. Its use took off with its adoption by Ant Financial to make mobile payments through Alipay, and has not looked back. It was the crucial link which enabled the use of mobile phones for digital payments. It's now being used for everything from digital payments to browsing dinner menus online. 

Mr Hara worked at Denso Wave, part of a components group allied to Toyota, which used barcodes to label components in plants. But the barcode, first used in an Ohio supermarket in 1974, could be hard to use — as anyone who has tried to scan a bag of frozen peas will know — and did not hold much information. He solved the data constraint by making the QR code a two-dimensional square instead of a horizontal strip, allowing it to store up to 4,200 characters compared to 20 on the barcode. His team also conquered the time-consuming awkwardness of barcodes — every QR code includes three squares at its corners that help scanners to focus rapidly (hence, quick response). Japanese carmakers found it very useful: it saved some workers from having to scan up to 1,000 barcodes a day. 

This is one more to the point I've been making that Alibaba is a more entrepreneurial e-commerce engine than Amazon,

The QR code enabled Ant to pioneer mobile payments in China through its Alipay super app. The renaissance of QR codes, after years of half-baked efforts by US advertisers and retailers to use them for marketing campaigns and shopping vouchers, shows that it takes time for the strengths of some inventions to emerge.

And this is interesting, an illustration of how non-patenting of such general purpose ideas can have large positive externalities,

But Denso Wave realised that the QR code had greater potential and did not enforce its patent rights. That enabled others not only to use it free but make variations for their industries. The invention knocked around for a decade without finding another compelling use until Alibaba, the Chinese ecommerce group co-founded by Jack Ma, realised it could be used for payments. Shopping in the US and Europe, both online and in stores, is mostly done with payment cards, but the QR code offered an alternative.

It was the industry's good fortune that the QR Code was not invented in the US by the likes of Apple, who would have immediately patented it. 

16. A summary of the changes incorporated in the regulations proposed to implement the new labour codes in India.