Chips! But who has the tech chops? 🕹️

There are contenders but it doesn’t seem like things will change anytime soon

This is edition 337 of Beyond The First Order, a premium daily newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia

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Good morning,

Semiconductor shortages are fast becoming a nationalistic battle, and every country wants to get into the game—all to beat China. Our contributor Sricharann Seshadri weighs in.

Shortages of specialist doctors like oncologists are also a problem in a country like India; what can fix that? 

But one place without any shortage is in the world of money management, with mutual funds raking in the big bucks.

Semiconductor foundry and geopolitical quandary

The US Secretary of Commerce, Gina Raimondo, gets asked a lot of things these days, from governmental spending to inflationary risks. But what she probably gets asked the most about are semiconductors and what the Biden administration is doing about its shortage.

Here is what she had to say at Fortune’s CEOI Collaborative Discussion a couple of weeks ago:

We have fallen very far behind from where we need to be with respect to semiconductors… Semiconductors are the building blocks of our entire digital economy and unfortunately, we're vulnerable now because we don't make enough leading edge semiconductors in America

US semiconductors accounted for about US$193 billion in global sales in 2020—approximately half of the overall chips sold. But only 12% of those are manufactured within the US. 

To correct this, the Biden administration is pushing forward with its tech agenda through the US Innovation and Competition Act, previously known as the Endless Frontier Act (the inspiration for the retired moniker goes all the way back to 1945). It brings with it an approved outlay of nearly US$250 billion over five years to develop and innovate new technology. The bill is sponsored by Republican senator Todd Young and Democrat senator Chuck Schumer, and includes an allotment of US$52 billion for the “CHIPS for America” Fund to boost domestic manufacturing of semiconductors. (CHIPS is an acronym for Creating Helpful Incentives to produce Semiconductor)

Nationalism and bipartisan bills go hand in hand, I’d say. You know it’s especially true when one of the sponsors of the bill goes on record and says, “it’s not only about beating the Chinese Communist Party…”

Even the European Union announced its ambition to manufacture up to 20% of the global high-end semiconductor output by the year 2030.

India, too, stepped on the gas last year in its long courtship and pursuit of building domestic manufacturing capacity for semiconductors. The government notified a new semiconductor manufacturing policy in April 2020 and floated an expression of interest to global players in December. India’s almost quixotic pursuit finds itself in a unique situation with its own set of challenges, as written by The Ken. You can read more about it here

At first glance, it might be difficult to explain why China has a target on its back, given it only produces 5.9% of the global semiconductor market output. However, numbers aren’t everything when it comes to geopolitical ambitions.

The palpable nervousness globally comes from Beijing’s insistence that self-ruled Taiwan, the beating heart of the global semiconductor industry, will be reunified with the People’s Republic of China. Taiwan Semiconductor Manufacturing Corporation, or TSMC, manufactures 84% of the most advanced chips used by tech companies across the world

It seems irresponsible of technologically advanced nations to have allowed for manufacturing to be concentrated in one tiny island nation (let alone a geopolitical snafu of an island). In fairness, this concentration extends across the entire value chain because everything about semiconductors is just incredibly hard.

Here’s an excerpt from a primer published by SNV, a German technology think tank, that gives a fair idea about what goes into building a semiconductor:

Roughly speaking, chip design is skill intensive with high research and development costs. Fabless companies typically spend 25% of their revenue on R&D. Chip fabrication is capital intensive because of expensive facility and equipment costs. Building a modern fab easily exceeds $15 billion. Assembly is labor intensive with lower profit margins. But it is not just that each production step is governed by varying business dynamics. Different semiconductor technologies are also often produced by companies with certain business models

There are a handful of companies that can design advanced chips, fewer companies that can provide the equipment required to manufacture them, and a similar number that can fabricate these chips at scale. If one was to strategically go after the corporations that possess the technological nous and take them out, the world would be set back by at least a couple of decades.

Yet, TSMC’s business model as a contract manufacturer is so far ahead of its competition that it is potentially the single most critical point of failure in the entire value chain. Only Samsung comes close, and could come closer in the coming years with large investment commitments for its foundry business. 

Together, they are the only companies that can manufacture cutting-edge chips at 7 nanometres or smaller, the current technological limit of Moore’s Law (1 million nanometres make up 1 millimetre). Intel is scheduled to introduce 7nm chips in 2023, but they are not a foundry. At least not yet. The Wall Street Journal has reported that Intel was in talks to buy GlobalFoundries, a US-based semiconductor manufacturer. But GlobalFoundries no longer competes in the  “More Moore Race” and stopped developing technology to manufacture 7nm chips in 2018. 

Given the challenges in building manufacturing capacity and scaling production, it is unlikely that the foundry landscape will change significantly over the next 5-10 years. Samsung and TSMC will likely be the only contract foundries capable of producing cutting-edge chips. 

If there is one thing the supply shortage over the last year or so has taught us, there is more to the industry’s ubiquity than cutting-edge chips. The US might lack manufacturing capacity (for now) but has built a significant competitive advantage along the value chain. China finds itself in a difficult spot of having to rely on external actors to build additional capability, which it more than compensates for through military manoeuvres in the Taiwan Strait. Meanwhile, Taiwan (or TSMC) has made itself indispensable to both the US and China, and somehow finds itself at the centre and on the sidelines at the same time. 

It is precariously balanced for now, and is evolving rapidly. Blink at your own risk. 

How did a boring new mutual fund raise so much money?

Initial public offerings (IPOs) of companies are all the rage today. So why should mutual funds be left behind? 

When a mutual fund company launches a new product (read: fund), they do it through a new fund offer (NFO), which remains open for subscription for 15 days. A company that’s heading for an IPO can show a track record and vision for the future, but, mutual fund NFOs don’t have a prior track record. It’s all new. Maybe the fund manager of the new fund has proven their worth, but it’s still tough to attract a lot of new money. 

Even with the differentiated allure of an environmental, social, and governance (ESG) theme, some funds launched last year—like Kotak ESG Fund and Aditya Birla SL ESG Fund–managed to raise Rs 1,450 crore (US$194.9 million) and Rs 860 crore (US$115.6 million), respectively.

But a couple of weeks ago, an NFO for a boring new flexicap fund—one that can invest in large, mid-sized, or small companies, depending on what the fund manager fancies, and which has no new redeeming features to speak of—broke these records. 

Launched by ICICI Prudential Mutual Fund, this fund raised over Rs 10,000 crore (US$1.3 billion)—the highest for a new mutual fund launch by a large margin. 

Where did all this money come from? Part of it is surely from the fund house’s banking partner (ICICI Bank), which would’ve done a fair part of the selling. But it may not all be ‘fresh’ money. When there’s an NFO, many distributors of mutual funds advise their clients to churn their portfolio and move from an underperforming fund to a new one.

But also, many distributors might have switched from a large fund to what they hoped would be a smaller fund to increase their incomes. Because as per regulations, a smaller fund can charge a higher fee, which gets passed on as commissions to distributors. So, that’s often incentive enough. Investors could have been quite aggressively nudged into the new fund. 

Also, something else also happened:

Several customers of online brokerage platform Groww got a rude shock, finding their investments in liquid schemes redeemed without their authorisation and re-invested in a New Fund Offer.

Oops. 

So how did an NFO of a boring old mutual fund manage to raise so much money? I don’t have an answer other than shrugging and saying, ‘peak bull market’, but I’ve left some hints.


PS: Other fund houses are also capitalising on this, but in a way that’s more responsible than launching funds all over the place. DSP Mutual Fund’s marketing gimmick is an OFO, or an old fund offer. With all the attention people are giving to flexicap funds, the fund house wants to promote its already existing flexicap fund, which already has a track record and manages a little over Rs 5,000 crore (US$650 million). Because if the ICICI Prudential Flexicap Fund can raise so much money, why not theirs?

How can every oncologist treat more patients?

The short answer is by using her time more efficiently. And using a bit of technology.

On Tuesday, India’s health ministry reported that the estimated incidence of cancer cases in the country increased from 1.32 million in 2018 to 1.39 million in 2020. On one hand, the incidence of cancer has increased; and on the other, the diagnosis and treatment has suffered since the pandemic hit India. We have written about the impact of lockdowns last year on cancer care in detail.

The health ministry has approved the setting up of 39 new centres of cancer care, but they need more than the infrastructure. They need specialist doctors like oncologists and surgeons to staff these centres. With a ratio of one oncologist per 677 new cancer patients, India fares as one of the worst globally.

More importantly, cancer care demands a uniform standard of care. In an elaborate interview with The Ken in 2019, CS Pramesh, director at the Tata Memorial Hospital, explained why the single most important goal of the National Cancer Grid, a network of about 250 healthcare facilities, research institutes, patient groups and charitable institutions across India, is to ensure that more and more patients get treatment that adheres to the protocol. However, the cancer grid has a limited number of hospitals and specialist doctors on its panel.

Enter oncology technology platform Navya. 

In June this year, it presented a solution to the American Oncology Society. By using its research, an oncologist could suggest which treatment plan is right for the patient in 4.8 minutes on average. A job that could take about 30 minutes without the research. 

“Technology assisted abstraction and case summary can facilitate access to subspecialized expert opinions at a global scale,” the study concluded. In another paper last year, the American Oncology Society had concluded that the guideline compliant care offered by Navya’s tech platform ensured best achievable clinical outcomes with existing therapies. “A technological earthshot that significantly increases adoption of guideline based care is the first step towards cancer moonshots,” it said.

In other words, say a patient—a 67-year-old male with mouth cancer—consults Navya. It takes the information and puts it through the database that weighs the treatment protocols and clinical outcomes for the same age group and kind of cancer in recorded cases. It then suggests what are the best possible options for the patient based on their household income and if they have health insurance. The patient shares this research with the consulting oncologist, who then suggests a treatment a lot faster than they would without this report. 

It is one way to make about 300 expert oncologists from leading centres in India like Tata Memorial Centre, AIIMS, Apollo, Manipal, and Memorial Sloan Kettering Cancer Centre, New York-Presbyterian and other hospitals in the US, accessible to cancer patients in India.

We have written about teleconsultations as one of the ways to connect patients across the country to a limited number of doctors in cities when the disease does not need immediate medical attention. As the cases of cancer have grown during the pandemic in India, technologies like artificial intelligence and machine learning are playing a bigger role in improving access to cancer care as well.

That’s it for today.

Don’t forget to write in with your thoughts and observations on the reshaping of businesses, societies, and economies. We will be back tomorrow.

Stay safe,
Nithin
nithin@the-ken.com

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