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Edition #143. Thursday, 15 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,
Ah, GDP. That imperfect measure of an entire country’s economic failure or success. With India risking a fall below Bangladesh’s per capita GDP, this slippery indicator is on top of our minds.
Stick around to follow the increasingly bloody battles of streaming apps vs cinemas, the US vs Huawei, India’s government vs workers rights, and for updates on batteries and vending machines.
Let’s get started.
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Source: Aleksandar Pasaric/Pexels
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Whose GDP is it anyway?
Nithin
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Chest thumping calls for a US$5 trillion economy provide the average Indian with a sense of pride. But when headlines scream of India’s per capita GDP falling behind its neighbour, Bangladesh, eyebrows are raised.
What is Bangladesh doing right? Manufacturing and exports. And for all of India’s talks about improving its manufacturing capabilities, the sector has failed to participate in job growth and contribute significantly to the country’s GDP.
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Reuben Abraham from the IDFC Institute, an independent policy think tank, has a solution to the problem. And it involves learning from China’s Special Economic Zones (SEZs):
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“Shenzhen, one of the (Chinese) mainland’s first SEZs, grew from a population of 310,000 and a GDP of $160 million in 1981 to a population of 12.5 million, a GDP of $388 billion and per capita income in excess of $30,000 by 2019 — surely the fastest-ever increase in human prosperity.
[...]
(In India) there are simply too many SEZs (238). Indian state capacity is already limited. Asking the government to provide even a basic suite of services in so many places is futile. (India is running into similar problems in trying to develop a multitude of “smart cities.”) China’s experiment began with just four such zones in Shenzhen, Shantou, Xiamen and Zhuhai. India should do the same.
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With India’s new Production Linked Incentive (PLI) scheme (BFO #102 and BFO #138), which provides sales-based incentives to attract global manufacturers, this is one opportunity the country cannot afford to miss.
But there’s also another part that goes unnoticed—women.
A study by the International Monetary Fund (IMF) found that per capita GDP losses due to gender gaps in the labour market can be as high as to 27%. A report by global consulting firm Deloitte also states that the female labour force participation in India fell to 26% in 2018 from 36.7% in 2005. Here, again, there could be lessons from Asia—the IMF found that Vietnam’s female labour force participation is about 70% and China’s is about 60%.
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A majority of India’s rural women are employed in the agriculture sector. And it will be women who will bear the brunt of the economy’s shift towards manufacturing. After all, India’s manufacturing sector hasn’t created the sort of labour-intensive jobs that rural women can qualify for.
While a US$5 trillion economy is a good target to have, for India’s per capita GDP to improve and lift all boats, policy-makers need to find ways to capitalise on manufacturing and exports. And take the women along on the journey.
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Why streaming vs cinemas is finally a zero-sum game
Seetharaman
With the rise of streaming, much time has been spent over the past few years discussing whether cinemas will continue to be relevant. But thanks to tent-pole movies like the Avengers series, theatres were far from an existential crisis till last year. This, even as streaming services like Netflix and Amazon Prime Video extended their reach across the world.
Then the pandemic hit, and cinemas’ and streaming platforms’ fortunes changed significantly. But in diametrically opposite ways. And, increasingly, there is only one winner.
Three key developments over the past week are proof of that.
First, Walt Disney Co. decided to skip a theatrical release for Soul, its next animated flick. It opted, instead, to premiere it on its streaming service, Disney+. This prompted an angry response from theatre chains desperate for a reprieve.
Second, Disney announced a restructuring plan that prioritises its streaming business.
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Under the new structure, Disney is creating content groups for movies, general entertainment and sports. It is also forming a distribution arm to determine the best platform for any given content, whether that is a streaming service, a TV network or movie theaters.
The new alignment pushes Disney’s streaming platforms, including Disney+ and Hulu, even closer to the center of the company. The various programming arms, including movie and television studios, will be aiming to feed those streaming services, not just legacy outlets.
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And finally, on Tuesday, AMC Entertainment Holdings, the world’s largest theatre chain, said that it might run out of cash by the end of the year or early next year.
The outlook for the 9,500-odd movie screens in India—two-thirds of which are single screens—is hardly better. Though they have been allowed to reopen, streaming services are nipping at their heels, having bagged the rights to some big-ticket films that are unlikely to have a theatrical release.
And it’s safe to say most people aren’t waiting with bated breath to walk into a theatre anytime soon.
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The US draws blood from Huawei
Jon
Fighters don’t tend to bleed in the first round of a boxing match—neither opponent is typically bloodied until a few rounds in. Perhaps because one has tired and let their guard down, or maybe because the other’s relentless blows have finally cracked a defence.
If America vs Huawei were a boxing match—and it easily could be—then the Trump administration has just drawn blood from its beleaguered Chinese opponent for the first time.
Round one started some time ago—arguably in August 2018, when President Trump signed a bill banning the use of equipment from Huawei and fellow Chinese telecom company ZTE by US government agencies.
A hard blow arrived in May 2019 when Huawei was banned from working with US businesses, depriving it of chips from US suppliers.
In May 2020, Huawei was punched harder still as the US banned global firms from using US tech to make components for its business. That cut off most of its supply chain.
Huawei began to wobble.
The company admitted in August 2020 that despite stockpiling during the uncertainty, it was running low on chips for smartphones—a direct result of those aforementioned sanctions and very much the intention of the US.
Now, two months later, there’s a glimpse of blood for the first time after Reuters reported that Huawei is in talks to sell parts of its Honor smartphone brand. The brand produces mid-range Android devices targeted at young people.
Reuters says that fellow smartphone firm Xiaomi, prolific electronics maker TCL and Digital China—which acts as Honor’s distribution—are in the running for a deal. One that could fetch Huawei anything in the range of US$2.2 billion to US$3.7 billion.
Honor has been a success for Huawei, helping to keep it top-dog on sales. A partial sale or investment could salvage the business by circumventing those component bans through new ownership.
Huawei was ranked number one in the world for smartphone sales in the April-June quarter of 2020, according to data from Canalys. It also accounted for 26% of the 55.8 million smartphones that Huawei shipped, the firm said. Without those sales, Huawei would have dropped to third behind both Apple and Xiaomi.
The deal is speculative at this point, but it’s one to follow. Huawei has been hurt on the 5G opportunity front thanks to sustained and aggressive pressure from the US government. But this sale would mark its first visible recoil… with perhaps more to come.
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The imperfect balance between retrenchment and re-skilling
Olina
India’s four new labour codes—on occupational safety, wages, industrial relations, and social security—might be put to work as early as December 2020.
Since their passage in the Parliament, these bills have come under intense scrutiny, especially when it comes to protecting the rights of workers. One provision—on retrenchment—has particularly drawn ire.
As per the Industrial Relations Code, Indian firms with over 100 workers could retrench workers without seeking prior permission from the government. The new code increases the threshold from 100 to 300 in an attempt to simplify hiring and firing norms for smaller firms that might otherwise be footing large compliance bills.
The threshold is stretchable further, and states can independently increase it. This makes it easier for larger firms to retrench people without the government’s permission.
Through the new codes, the government aims to cut down unnecessary and bloated rules and regulations for firms. But when it comes to the retrenched workers themselves, it’s following a somewhat different approach.
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“Retrenched workers who take cash benefits from the new reskilling fund mooted in the labour codes may have to show proof of reskilling to the government.
If they are unable to reskill within a fixed period of time, they will have to return the money given to them by the government, according to a proposal being contemplated by the central government, a senior government official said.
Moreover, the workers may be asked to pay back an interest on the sum transferred to them if they are unable to get themselves trained after being retrenched, the official added.”
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Now there are several challenges with this proposition.
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Who validates the skill certificate?
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Do these new skills guarantee a new job?
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How does a retrenched worker pay back a principal sum with interest, with no job in hand?
But let’s start with the most basic question of all:
If a worker wanted to avail this re-skilling benefit, where does he go?
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“Training companies have dues pending from central government schemes such as Pradhan Mantri Kaushal Vikas Yojana (PMKVY) and Deen Dayal Upadhyaya Grameen Kaushalya Yojana (DDU-GKY). Also from state governments.
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The dues have added up because most government programmes follow a staggered model of payments. The training provider invests upfront in infrastructure, people, and enrols the candidates. The government then reimburses in three tranches based on milestones. The first tranche is usually released on enrolment; the second on completion of training and certification; the third after the candidate is placed and remains employed for at least three months.
The lockdown has disrupted this system.
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India’s skilling firms have entered the ICU, Livemint
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Without a robust system of well-funded training institutes, retrenched workers have only two choices. Either leave the fund untouched or risk signing up to a skilling agency that, at best, will train them for low-paying work, and at worst, will eat up their meagre allowance with no results at all.
The incentives to provide fake skilling certificates are also ripe for skilling centres already struggling to make ends meet.
An older problem (the anaemic skilling structure) meets a new problem (retrenchment during covid). And the workers stuck in between are being set up for failure.
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Gigaplans
Nadine
Indonesia is angling to attract investments of US$20 billion from top lithium-ion battery makers, writes Bloomberg. China’s CATL and South Korea’s LG Chem have signed MoUs with state-owned mining company Antam, according to government statements.
The plans involve nickel processing and battery pack assembly plants, which would elevate Indonesia’s role in the battery supply chain. Lithium-ion batteries are expected to see a surge in demand with the global trend towards electric vehicles.
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Indonesia has large nickel reserves and is already a major exporter of nickel ore. But it has been seeking ways to move further downstream in the battery supply chain. The plans aren’t much more than a non-binding agreement for now, but if they materialise without much delay, Indonesia could beat India. The latter’s gigafactory ambitions to produce lithium-ion batteries for the EV industry have, so far, seen much talk but little action.
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The fall of the vending machines
Nithin
Japan and technology go hand in hand. Except when it comes to its ubiquitous vending machines.
At slightly over five million nationwide, Japan has the highest density of vending machines worldwide. But only around 20% of the machines can deliver real-time inventory data.
“Companies usually have no idea what’s in stock or out of stock until someone opens the machine,” says Dominik Steiner, chief executive officer of VPC Asia, a Japanese internet-of-things startup.
And just like that, falling foot traffic in Japan due to Covid19 is adding another industry to the death list.
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But vending machines are reinventing themselves. Or at least, they’re being advised to. Private data storage, weather monitors are all ideas being mooted for the industry’s survival.
For now, the good old days for vending machines that spit out hamburgers and coke are over. Soon, they’ll be memories in a museum.
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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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