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Edition #138. Thursday, 8 October 2020
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A 🔒 paid newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia. Someone sent you this? Subscribe to BFO
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Good morning,
The US Congress finally makes its recommendation on Big Tech, and it could mean a break-up. Over in France, a different kind of anti-competition battle is brewing.
Is borrowing cheap, or is it expensive? Should we preserve cash, or is this the moment to spend? Can India insert itself into global supply chains and serve its domestic market too? The Covid crisis is full of paradoxes.
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The antitrust loop
Arundhati
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“Google appears to be siphoning off traffic from the rest of the web.”
“The company (Facebook) used its data advantage to create superior market intelligence to identify nascent competitive threats and then acquire, copy, or kill these firms.”
“Publicly, Amazon describes third-party sellers as “partners.” But internal documents show that, behind closed doors, the company refers to them as “internal competitors.”
“Apple also uses its power to exploit app developers through misappropriation of competitively sensitive information and to charge app developers supra-competitive prices within the App Store.”
Over a year and 1.3 million documents later, these are some of the arguments that US lawmakers used in a report published yesterday. It called for the breaking up of Amazon, Facebook, Apple and Google to limit their dominance.
This comes after the heads of the four companies were called upon in July to convince the policymakers. But if anything, it looks like their answers only spurred the lawmakers further.
"Their answers were often evasive and non-responsive, raising fresh questions about whether they believe they are beyond the reach of democratic oversight," said the 450-page report.
Even as the four companies denied the findings in the report, the cases keep coming at them. Yesterday, Reuters reported that the Competition Commission of India has now slapped a brand new antitrust case on Google for dominating smart televisions.
But here is the thing. If being a monopoly is what is causing this existential crisis for these companies, being a monopoly is also what will likely save them from regulatory action.
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The growth in the platforms’ market power has coincided with an increase in their influence over the policymaking process. Over the past decade, the dominant online platforms have significantly increased their lobbying activity, which tends to create a feedback loop for large companies. More money spent on lobbying may deliver higher equity returns and market share, which, in turn, may spur more lobbying.
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Investigation of Competition in digital markets, Subcommittee on antitrust, commercial and administrative law
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The legislative action based on this report will show if that loop can be broken.
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Paradoxical generosity
Shruti
Amid an economic crisis, Indian companies seem to be in an unusually generous mood.
Companies across sectors have been doling out dividends much higher than previous fiscals. According to data from Capitaline, the dividend payout for the Nifty500 stock—an index of the top 500 listed companies on the National Stock Exchange—has risen by 42.5% in the year ended March 2020. This is the highest in about seven years.
Among those leading from the front is ITC Ltd, which announced the highest dividend of Rs 12,477 crore (US$1.71 billion) in July. This came despite its sales and profits dropping quarter-on-quarter. Like ITC, other top dividend payers include energy conglomerate NTPC, consumer goods majors Hindustan Unilever and Britannia Industries, automaker Maruti Suzuki, IT firms Tata Consultancy Services and Tech Mahindra and telecom player Bharti Airtel.
Presumably, to placate anxious investors and prevent them from dumping the stock, companies have continued to push the pedal on dividends in the current fiscal as well.
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At least 661 companies have announced dividends worth about Rs 49,674 crore between April and September. Around 1,335 companies paid a total dividend of Rs 60,767 crore in the same period last year, though their financials and stocks were performing much better at the time.
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Firms dole out large dividends amid covid, Livemint
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This generosity is not limited to public shareholders and is extended to the top management as well. On comparing the remuneration paid to top management with the median remuneration for 42 private companies in Nifty50, economists Reetika Khera and Meghna Yadav drew an interesting conclusion. There seemed to be little to no impact on the earnings of corporate India's top management in the year ended March 2020. Ironically, this is in a year when Covid-19 was used as a shield for massive pay cuts and job loss for lower- and mid-rung employees across sectors.
Incidentally, company management are also shareholders and receive the benefits of a hefty dividend payout.
However, when it comes to capital investments, corporate India prefers to tighten its purse strings. Kumar Mangalam Birla-owned Hindalco Industries, for instance, has cut capital expenditure by 40%. PVR, Adani Enterprises and Apollo Tyres have also made announcements to defer capex.
Sure, at a time when demand continues to remain muted and economic growth looks bleak, ‘cash preservation’ would be a preferred alternative. But capital investments constitute about a quarter of the country's gross domestic product (GDP). Lower expenditure could impact the already dwindling economy in the long-term and dent the potential growth rate of 7-8%.
So between splurging on the management and doling out dividends, versus investing more during a downturn, shouldn’t the choice be obvious, or at the least, more balanced?
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Dollar dollar bill y’all
Nithin
India Inc. has a growing penchant for borrowing in dollars. In fact, 2019 was a record year for overseas borrowings due to the availability of easy money and low interest rates.
But then the pandemic struck and global corporate bond markets froze. Investors preferred the safety of cash. And that was worrying for the dollar borrowers. According to BofA Securities, almost half of corporate India’s overseas debt was due by July.
But as luck would have it, the dollar bond market picked up just in time due to quick liquidity measures by global central banks. Whether for refinancing old loans or fresh loans, dollar loans were back.
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With Indian banks putting the brakes on loan disbursals, and ultra-low interest rates globally, dollar borrowings seem like the more attractive option for Indian corporates.
But the risk is two-fold:
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Pandemic fatigue could set into the bond markets again, and the refinancing options could dry up when it’s needed the most.
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The other is a falling value of the Indian rupee. When India Inc takes a loan in dollars, it has to pay back in dollars. So, a lower domestic currency value means corporates need to shell out more in terms of the Indian rupee to pay off the dollars. So not only is there an interest cost but also a currency cost.
While there are options available to hedge against a fall in the value of the rupee, that is an added cost. Which itself might negate the low-interest rate obtained from an overseas borrowing.
Now, it’s not just India Inc, but even the Indian government has been toying with the idea of borrowing money in US dollars. During the 2019 Union Budget, the finance minister announced that India would borrow from the overseas markets in external currencies. With the central bank currently facing low demand for its government securities programme in India, an uptick in the dollar bond market may tempt its hand at an overseas borrowing.
The risks remain though.
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A small issuance will likely not be problematic. The concern is that once the door is opened, the government will be tempted to issue more, much more, with attendant risks – after all, all addictions start small.
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The thirst for domination
Olina
An anti-competition battle is brewing in France. It has all the markings—a hostile takeover bid, the threat of a monopoly, and Margarethe Vestager. Except, this is not about Big Tech.
A 166-year old water and waste management company Veolia is on the verge of a hostile takeover of the 150-year old Suez. Suez, in addition to also being one of the world’s largest waste and water management companies, has the additional legacy of having built the Suez canal.
A century-and-a-half later, it risks being absorbed by a competitor. Veolia’s almost sanguine handshake, though, is being thoroughly rebuffed by Suez’s management. They fear that the initial 30% stake, bought by Veolia from a company called Engie, is a Trojan horse.
If Veolia did indeed take over Suez, this would be the world’s largest water and waste management company. The two would no longer have to fight over management contracts in countries like India and the Philippines. Instead, as the French government has proposed, they’d combine to form a “European giant” to battle the dominance of Chinese firms in almost all areas of business.
As Veolia’s chief executive officer Antoine Frerot puts it, the Veolia-Suez combine will be the “French world champion of ecological transition”.
Frerot’s dreams of dominance though might be severely cut down by Europe’s very own antitrust champion. Turns out, the “European champion” argument hardly cuts ice with Vestager.
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Verstager has emerged as the most powerful sceptic of the ‘European champion’ idea, a position which has made her the target of intense lobbying from a number of the most influential EU member states. Alongside France and Germany, which wanted Verstager to allow the Alstom-Siemens deal as well as mergers between French and German companies in the telecoms sector, Italy and Poland also want to see the Commission revise its approach to competition law. For her part, Verstager has held firm.
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The dangers of concentrating power will be felt most by France’s own customers, where these two companies currently control 60% of the water distribution networks. With such a monopoly, Vestager and her colleagues claim, there’s going to be no incentive for competitive prices, keeping up service levels and innovation
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India’s opportunity in manufacturing for home and the world
Seetharaman
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The developed world is clearly not happy with the way China handled the pandemic. This is from a survey conducted among nearly 14,300 adults between 10 June and 3 August.
Covid-19 threw a wrench in the China-dependent global supply chain. This and the US-China trade dispute have forced a rethink among many countries about exports from China.
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At a time when tensions between Washington and Beijing are increasingly beginning to resemble a new cold war, products ranging from computer servers to the Apple iPhone could end up having two separate supply chains — one for the Chinese market and one for much of the rest of the world.
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The great uncoupling: one supply chain for China, one for everywhere else, Financial Times
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Taiwan—where Apple’s contract manufacturers Foxconn and Wistron are headquartered—and Mexico are emerging as alternative export hubs to China, according to the article.
India is also jumping on the bandwagon, spurred partly by the recent border dispute with China.
But there is a big difference between India and Taiwan or Mexico: size. India is the world’s second populous country, with 1.37 billion people. Mexico, on the other hand, has a population of 128 million. And Taiwan, merely 24 million. That means manufacturers can both serve the huge domestic market in India and use the country as an export hub–not unlike China itself.
Under a new, incentives-led policy, India has approved the proposals of 16 handset and component makers, including Foxconn and Wistron. These companies, over the next five years, will produce goods worth Rs 10.50,000 crore (US$145 billion) in India, according to the Indian government. And 60% of that will be exported. India is also working with Japan and Australia on an initiative to beef up their own supply chains.
But it’s not going to be easy to wean manufacturers off China and its attractive cost structure. According to one estimate, it could cost companies US$1 trillion over five years to shift their manufacturing capacity meant for exports from China.
India’s past efforts to promote manufacturing left a lot to desire. But this may finally be a chance to get it right.
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Thailand: Land of delays
Jon
A month after we wrote that Thailand was testing a new system to allow tourists to return, it has delayed the plan. Officials are not ready. This comes just two days before it was due to start. The move affects 300 tourists and business travellers from China.
Officials on Phuket, the tourist island slated to be the experimental ground for the visas, said on Tuesday preparations for receiving foreign tourists are not completed in time. A tourism agency chief confirmed the news on Wednesday, adding that the group of 300 Chinese tourists and businessmen who were scheduled to arrive in Thailand tomorrow would no longer be admitted due to the delay.
The government said it won’t be issuing refunds for flights, accommodation, insurance, nor the fees the travellers paid for their Special Tourist Visas (STVs), as this is considered a delay and not a cancellation of the policy.
Officials said the tourists will “come within October for sure” but didn’t state a reason for the hold-up. 300 is not a huge number but the arrivals are symbolic and promise to be the first of many.
There’s a lot of pressure to get this decision right.
Reliant on tourism, Thailand has kept its border rigidly shut. That’s hurt business significantly—GDP is forecast to fall by as much as 9%—but the country has weathered the pandemic better than most with just 59 reported deaths and only two local infections recorded over the last four months.
Still, the business community has warned the government to open the economy soon, or it will be too late for many companies.
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Raspberry fields
Nithin
A food trading racket that spanned three continents. Makes for a good opening line in a Netflix documentary, don’t you think?
Reuters has followed the food trail to show how easy it is to game the global health agencies and even customs to get food across borders.
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Low-cost frozen berries grown in China were shipped to a packing plant in central Chile. Hundreds of tons of fruit were repackaged and rebranded by Frutti di Bosco as premium Chilean-grown organics, then shipped to consumers in Canadian cities.
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How a Chilean raspberry scam dodged food safety controls from China to Canada, Reuters
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That ‘organic’ fruit that you picked up at the supermarket? Well...you need to think twice before you believe its provenance. Especially during Covid-19 times.
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That’s a wrap for today.
Don't forget to write in with your thoughts and observations on how this pandemic is reshaping businesses, societies and economies. We will be back tomorrow.
Stay safe,
Nadine
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Beyond The First Order is a paid daily newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia. This newsletter is published by The Ken—a digital, subscription-driven publication focussing on technology, business, science and healthcare
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