Beyond The First Order is a daily email newsletter that digs deep into the higher order effects of the Covid-19 pandemic on industries, ecosystems, economies, governments and more. This is a free edition of a paid newsletter that’s available exclusively to The Ken’s premium subscribers.

Edition #66. Tuesday, 30 June 2020
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Good morning.
 
Today’s BFO is a “turn it on its head” edition. What happens when a state takes a tracing model and removes all the bits that were working? Amid all the turbulence in Hong Kong, why aren’t companies packing off to, say, Singapore, which offers similar advantages? What happens when food delivery companies do not deliver? How’s Malaysia going to find daily wage workers? Oh, and there’s a spook in today’s edition. Can you spot it?
 
And in case you missed it, starting from 1 July, this newsletter will continue to be free only for our premium subscribers. For others, it’ll be just Rs 99 (in India) or US$2 (internationally) per month.
TikTok ban and a government-given equaliser

Arundhati
 
Something big happened last night. India banned a host of popular apps in India because they were Chinese and ‘threatened the sovereignty and security’ of Indian citizens. It decided to make this “emergency move” as the Home Ministry and the Indian Cyber Crime Coordination Centre were concerned about the security of data. 
 
Here’s the complete list:
It is not clear how this ban will be implemented. It could always ask Apple and Google to remove the apps from their respective app stores in a case of grand scale of overreach. And companies like Google may just comply. For Google, India is much more important than China. 
 
Assuming they do it, the immediate ripples of this would first be felt by consumers. Most of the apps banned are used by those with low-end smartphones. For instance, peer to peer file sharing app SHAREit is how people in tier two and three markets share apps without using the internet. Most of these apps come pre-installed on those smartphones, which also subsidises the cost of the mobile device. 
 
Without these popular apps, it is fair to expect a price increase of the device itself.
The absence of apps like TikTok, SHAREit, means these users are up for grabs. Will it be Facebook-owned Instagram or the more local alternative ShareChat (which lay in the shadow of TikTok) that draws all those users? In how many ways will the user pie get divvied up? Or to put it the way my colleague Praveen did on our Slack channel when we were discussing this: “This is like when Alexander the Great died and all his generals fought and divided up his Empire.”
 
Among those who suffer would be influencers who have fashioned careers out of these platforms and for whom this was a means of steady earning, not to mention the employees of these companies. 
 
The ban is a hard reset in the Indian video content ecosystem. It could be the best of times and the worst of times. 
The Un-Bengaluru model 
 
Arundhati

The weekend saw Indian state Karnataka succumbing to widespread transmission as it witnessed the highest single-day spike in Covid-19 cases. 918 cases in a single day, with Bengaluru accounting for 596 of those. And to think until 18 June, the city had 827 confirmed cases and 43 deaths, lower than any other city with a population of over 10 million.
 
The famed Bengaluru model to battle Covid-19 is now being put under an enormous pressure test. If you think about what helped Bengaluru keep a lid on the virus is contact tracing. It followed a flowchart model of tracing, where it traced all the movement of a COVID-19 patient, and this was then released in public to help them triangulate if anyone came in contact. In the absence of mass testing, this model made sense.
 
“If I have to summarise the Bengaluru model in one sentence, it is the retrospective tracing of contacts," said Dr Giridhar R Babu, member of the ICMR National Task Force for Covid-19, to Financial Express
 
So in the thick of Covid-19 spread, when it came to contact tracing, Bengaluru decided to pull the plug on sharing travel history.
Contact tracing for the city became a challenge because of the way people were reacting to their test results. 
Most people are shocked when told they have tested positive and go into a cocoon. At first, they refuse to divulge if they met any person with Covid-like symptoms and also do not reveal the names of all the people whom they met. This delay in revealing names is making contact tracing difficult. Some give false information to protect their families and friends, without realizing they are causing bigger damage.
Karnataka’s much-lauded contact tracing model falters in Bengaluru, The Times of India
To circumvent this, the government banned labs from sharing results with patients and demanded all information be routed through the district administration. 
 
And to deal with hospitals that raised the point of being overwhelmed with the increasing caseload, the government asked, ‘what would be the ideal incentive to get hospitals to take on more patients?’
 
It zeroed in on water and electricity. 
 
Bengaluru's water board and electricity officials visited private hospitals and asked them to share 50% of their beds with the government, else it said it would cut water and power supplies to the hospitals. 
“If private hospitals don’t fall in line, they will face action.” 
Private hospitals in Bengaluru told to spare beds or face power, water cuts, The Times of India
In the face of growing adversity, the state government is dumping the approach that worked for it when the numbers were manageable. It’s now relying on what it knows best in times of crisis—punishment, penalties and parsimony with information. 
Ghost issuer and ghost ratings

Rohin
 
Even in the best of times, credit rating agencies are known for their conflicts of interest. Most operate around the “issuer pays” model, whereby the very companies whose creditworthiness they rate are the ones who pay their fees.
 
And these aren’t the best of times. Credit agencies are getting ghosted by nearly 25% of all Indian issuers, reports the The Economic Times.
Credit rating agencies have approached financial market regulators for withdrawing ratings to more than 10,000 companies that are refusing to share information.

[…]
 
“A company which was unwilling to disclose information before the lockdown, is likely to be even more disinclined post Covid-19 as earnings and cash-flow drop,” a senior official of a rating agency told ET.
One would assume that if an issuer refuses to provide vital company information—like sales, cash-flows, operational data or management changes—then a credit rating agency has no option but to stop rating the issuer’s creditworthiness.

But no. In order to stop or remove a rating, agencies need one of the most quintessential of Indian bureaucratic documents—an NOC, or “No Objection Certificate”—from the banks that have lent money to it.
 
Of course no bank wants to provide such an NOC, because that would mean the money it had lent to a previously creditworthy issuer might now need to be classified as high risk, since it will be to an unrated or low rated issuer.
According to an industry officer, some of the bankers may also fear that allowing a withdrawal of rating may not go down well if fraud or other irregularities are detected later. In many cases, companies have not revealed information for more than a year.
Agencies keen to withdraw ratings of over 10,000 companies not sharing info, The Economic Times
So, banks are incentivised to hold on to old and outdated ratings, to preserve the illusion of due diligence. 

Between issuers who refuse to provide information and banks who refuse to provide NOCs lie ratings that are dead and meaningless. Ghost ratings.
Beijing’s long shadow

Nadine
 
With all that’s happening in Hong Kong, you’d expect companies to start packing and looking for alternatives. Like jurisdictions that are similarly strategically located and offer comparably low tax rates. Singapore is an obvious candidate. The city-state would surely welcome a new era with it at the heart of Asia’s finance sector. But so far there hasn’t been an exodus of bankers from Hong Kong to Singapore. Both sides are in wait-and-see mode. There is the fact that moving a business is a long, tedious process. But, in part, both sides are cautious because they’re scared of confronting China.
“It is a delicate issue and I cannot imagine a government in Asia making a strong public announcement to lure firms into their country. Not sure China would see this as wise,” Antonio Fatas, economics professor at INSEAD told SCMP.
Could Singapore take Hong Kong’s finance crown?, South China Morning Post
On the Hong Kong side, companies are treading lightly. While wealthy individuals may have quietly moved their money out of Hong Kong, companies aren’t yet shuttering their offices or relocating headquarters.
“Businesses would be mindful that moves to or talk of relocating could be perceived by Beijing as the brand being “unsupportive” of its policies on Hong Kong,” a banker, who did not want to be named as he was not authorised to speak on behalf of his organisation, told SCMP.
Japan, on the other hand, has been more vocal about opening the door to Hong Kong’s finance workers. It has launched a campaign that includes visa waivers, tax advice, and free office space for asset managers, traders and bankers from Hong Kong. 
The new snake oil

Arundhati
 
Who needs a formal white shirt anymore? So clothing brand Zodiac has given up on trying to lure the fashion-forward. 
 
Instead, it’s now advertising to the Covid-conscious.
The delivery drag for food aggregators
 
Seetharaman
 
What if online food delivery platforms’ future is in, well, not delivering? That’s Dutch company Just Eat Takeaway.com’s bet as it buys its American peer Grubhub for US$7.3 billion.
“We don’t put people on bikes,” said Jitse Groen, who founded Takeaway.com in 2000 and took it public in 2016. Last year, it recorded its first annual profit since its initial public offering, crediting its “marketplace” model.
 
Mr. Groen, 42 years old, who would become chief executive of the combination with Grubhub, describes the approach as simply facilitating messages between restaurants and customers. “As long as we send messages, we make money,” he said. “That’s why marketplace is just a superior business model.”
Strategy behind blockbuster Grubhub deal: Don’t deliver, The Wall Street Journal
Over 75% of Just Eat’s orders and around 50% of Grubhub’s orders are fulfilled by the restaurants themselves, according to the article.
Delivery can be the largest expense in an online food order, amounting to around 25% of an order’s overall cost, Grubhub says. When an online service does the delivery, it passes along the expense. However, restaurant contributions don’t always cover the cost, especially in the case of big chains, which are able to negotiate lower rates for themselves.
This is hardly a US-specific phenomenon. In October 2019, we wrote about how the shift from relying on restaurants for fulfilment to doing the deliveries itself was a key factor behind Zomato’s ballooning losses. Zomato lost Rs 25 (US$0.3) per delivery in 2018-19. In the same year, Zomato and its rival Swiggy posted losses of around US$300 million each. 
 
Could such platforms emulate Just Eat and just focus on restaurant discovery and food ordering in the coming years? If that’s the case, they sure wouldn’t need to raise—and spend—gobs of cash. Zomato and Swiggy have raised nearly US$2.9 billion between them. At a time when Covid has caused online food orders to crater, Amazon, too, has entered the space in India. 

The pandemic has also made restaurants consider having their own platform as an alternative to Zomato and Swiggy. But that’s much easier said than done. And in Malaysia, local food delivery players are charging a lower commission than the likes of GrabFood to attract restaurants.
 
But from the customer’s point of view, trusting a Zomato or Swiggy with their food order is a lot easier than depending on a different restaurant every single time. There’s so much more that could go wrong there. 
 
The price is (not) right

Kay
 
In order to curb the spiking unemployment rate of 5%, the Malaysian government announced that it will freeze the hiring of migrant workers till year-end and prioritise filling the gaps with locals.
 
Malaysia has always sought to reduce its reliance on foreign workers and Covid seems to be giving the country an opportunity to reinvent its labour market. But are employers ready to accept the potential new norm? 
 
For one, it’s becoming abundantly clear employers have been short-changing migrant workers. They haven’t even been paying minimum wage.
"MTUC (Malaysian Trade Union Congress) finds that many employers are reluctant even to offer the minimum wage of RM1,200 (US$279.6) to foreign workers to keep their costs low and bottom line healthy. This is an area that the MoHR (Ministry of Human Resources) must tackle earnestly and honestly if it is serious in getting locals take over from migrant workers," said MTUC secretary general J. Solomon.
MTUC to Home and HR ministries: Address foreign workers issue together, New Straits Times
The palm oil industry, for instance, is already feeling the pinch of labour shortage even before the hiring freeze. The Malaysian plantation industry alone is short of 500,000 workers—a gap that is unlikely to be filled by 778,800 unemployed Malaysians if it pays so poorly.
 
Companies will have to fork out more money to hire locals. That’s a tough ask during the best of times. As economies slow during the pandemic, employers would prefer migrant workers more because they can get away with paying them less.
 
It’s said “beggars can’t be choosers”, but in the case of unemployed Malaysians, they actually can choose. Instead of toiling on plantations for less than minimum wage, they can choose to be gig workers until a better job opportunity turns up. Many unemployed/furloughed Malaysians have opted to become delivery riders, with some of them earning double during the Movement Control Order (MCO) period.
 
Moreover, the Malaysian government has begun to seriously look into providing a social safety net for gig workers, starting with a regulatory framework and a RM75 million (US$17.5 million) budget to 1) incentivise gig workers to make voluntary contributions to their pension scheme through matching grants, 2) upskill freelancers.
 
Migrant workers aren’t allowed to take gig work. Their employment passes are tied to a specific role or sector. If unemployed Malaysians deliver food and migrant workers aren’t allowed in, who’s left to do the cheap manual labour?
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That’s a wrap for today. Do write in with your thoughts and observations on how this pandemic is reshaping businesses, societies and economies. We will be back tomorrow.

Stay safe,
Savio
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Beyond The First Order is a daily newsletter that analyses the complex second and third order effects thrown into motion because of Covid-19 across India and Southeast Asia. This newsletter is published by The Ken—a digital, subscription-driven publication focussing on technology, business, science and healthcare