Thematic Tuesday's
This week, we take a break from our usual country profiles to talk about overarching themes in emerging markets.
Welcome back everyone!
This week we’ll be pivoting from our usually scheduled programming. Rather than country profiles, I wanted to talk about some of the biggest trends in emerging markets and how they’re expected to shape our future.
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Last Week’s Briefing:
President Donald Trump announced that the Federal Government Pension Fund is barred from investing in Chinese stocks, citing concerns over China’s role in the spread of COVID-19.
Aramco declared a quarterly dividend of $18.8B on Tuesday, making it the largest dividend distribution in the world. For context, the market capitalization of Ford Motors is only $18.7B.
Taiwan Semiconductor Manufacturing, one of the largest companies in the Asian Pacific, announced plans to build a $12B manufacturing plant in the U.S..
Consumer vs. Producer
In previous letters I’ve written about how economists create different ways of categorizing emerging markets (BRICS, CIVETS, N-10, etc.) Today, I’m interested in splitting up these countries between producers versus consumers. Keep note: This is not a clean split between “net exporter” vs “net importer”. Many wealthy countries, including the United States, are net importers while many poor countries — such as Iraq — are net exporters. Net importers are not created equal, however. The U.S. can survive as a net importer because we are a developed, high-income country per the World Bank. Our GDP is mostly driven by the enormous levels of consumption in the U.S. economy. In fact, over 70% of the $21T in American economic output is comprised from consumption.
The U.S. currently runs an enormous deficit in its current trade balance. This issue was magnified by now-President Donald Trump during his election campaign in 2016. That deficit is often filled through borrowing. In theory, the U.S. will sell treasuries to sovereign nations in order to offset the trade deficit. The increasing size of this deficit has raised concerns regarding the United States as a “risk-free” creditor.
What Characterizes a “Consumer” Country?
Consumer countries should be relatively familiar for Americans. These countries are best known for their sophisticated service sectors and high levels of income. Typically, these nations are net importers, although the country’s high levels of consumption and government spending drive their GDP. What’s more, consumer countries often have stronger currencies, making them an unfavorable export partner due to the foreign exchange cost of exported goods. We can simplify these countries by referring to them as the demand side.
What Characterizes a “Producer” Country?
Producer countries are characterized by their competitive advantage in the supply chain. Most of the time, this advantage can be traced back to looser labor laws (Think: China, Vietnam) or an edge in technology (Think: Japan, Germany). Being a producer country normally entails volatile levels of economic output and an increased exposure to international trade risk. We can generalize these countries as the supply side.
Detroit, Michigan
Consider the Rust Belt in America: Once upon a time, the region was a manufacturing hub for American blue chip companies such as General Motors and U.S. Steel. Since then, America has seen its manufacturing prowess diminish as companies fled for cheaper alternatives. Failed protectionist policies coupled with cheaper production opportunities elsewhere had effectively shifted the global supply chain out of the West.
The past fifty years or so, the world’s supply chain has transitioned into the Asian-Pacific due to their low labor costs and government subsidized energy costs. American juggernauts such as Nike and Apple have benefited from cheaper labor costs in producing their goods in China. There is an argument to be made about the merits of outsourcing production: Goods made in China are significantly more affordable than goods made in America. The costs of American labor would theoretically yield astronomically priced sneakers and smartphones. On the other hand, critics argue that America’s manufacturing sector is desperately in need of a life line. Our trade deficit grows yearly while competitive adversaries such as China capture valuable foreign investment.
Interestingly enough, China has gradually shifted towards a consumption-based economy since the beginning of the century. This demonstrates China’s progress in shifting away from being export-dependent to becoming an attractive destination for foreign direct investment.
It should also be mentioned that China’s role as manufacturing power broker is being challenged by foreign counter-parties. The Japanese government recently began paying Japanese companies to move their supply chains out of China due to the instability in the country. Similarly, Apple announced they plan on shifting around 20% of their production to India, from China. Other countries such as Bangladesh, Vietnam, and Indonesia are expected to benefit from this strategic shift.
Transitioning from Producer to Consumer
The shift from becoming a producer into a consumer is a milestone for many emerging economies. If you think about it on a micro-level, it’s easier to be SOLD TO than to be SELLING TO. Consumer countries are less exposed to fluctuations in commodities prices and don’t rely upon its exporting prowess to bolster government tax revenues or economic activity. Consumer economies attract foreign investment from countries looking for hungry buyers. The U.S. has become a destination for cultural exports because budding economies understand that wealthy Americans are known to spend and consume. Take BTS: the Korean K-Pop group. BTS has no preexisting relationship with America, although they release songs in English and tour in the U.S. with the goal of capturing a share of American consumption.
Tourism is an example of a service industry that represents promising prospects for economic growth. While not necessarily a sophisticated service, tourism encapsulates many other facets of an economy. For instance, high hotel occupancy often yields high restaurant occupancy. High restaurant occupancy would then yield an increased demand for labor (wait staff, cooks), inputs (flour, oil, potable water), and capital improvements (better equipment, more skilled cooks). On top of all of that, profits from tourism do not sit idly in the pockets of hotel and restaurant owners. Instead, that capital is reinvested back into the domestic economy into different industries such as financial services, education, and infrastructure. Budding economies such as Thailand and the U.A.E. have generated vast sums of wealth while introducing the world to their unique culture.
Bring Your Sunscreen: What were the three most trafficked tourist destinations in the world? Answer will be at the bottom.
Shanzhai
If you recall from a few weeks back, we spoke briefly about a trend in talented Indian ex-pats returning to their home countries to pursue ventures of their own. This week, I’d like to explore that phenomenon further within the concept of copycat companies.
American companies are bastions of corporate strategy and prosperity. Corporations like Amazon and Facebook have built revolutionary business models that change the way companies operate in the 21st Century. Their astronomical domestic growth has piqued them to pursue foreign opportunities. Many businesses, however, struggle to measure foreign, local consumer preferences. This has allowed for copycat companies to ascend in their wake, offering similar products or services with a local aurora.
This isn’t necessarily a fault of corporate management. Consumer preferences can vary drastically from country-to-country. Consider Wal-Mart’s failed venture into Germany: Germans found the Wal-Mart’s “Greeter” to be very irritating and off-putting. Corporate strategists were unaware that it is uncommon and condescending for strangers to smile at one another in Germany. There is often a sense of nationalism in supporting a domestic company versus an enormous multinational corporation.
Walmart is the controlling shareholder of Flipkart, India’s largest E-Commerce business. Wal-Mart acquired 77% of the company in 2018 at a $20B valuation. Coincidentally, the company was founded by Sachin & Benny Bensal, former employees of Amazon Web Services. The company occupies nearly 40% of the e-commerce market share in India, beating out Amazon India and Paytm Mall, a subsidiary of Alibaba. Like Amazon, Flipkart prioritized selling books before ultimately expanding their product offerings to things such as smartphones and luxury goods. The company is just one of many foreign company emulating a popular American brand. Ola Cabs is an example of yet another app hoping to capture a chunk of that vast ride-sharing and food delivery marketplace.
Shenzen, China
The Great (Internet) Firewall of China
Due to the nation’s restrictive economy, China is notoriously known for their copycat companies. The term Shanzhai directly translates to “mountain fortress” although its modern use is more related to the culture of counterfeit or parody products. Didi Chuxing (ride-sharing), Baidu (search engine), and AliBaba (e-commerce) can all be linked to Western equivalents. China’s Internet Firewall — the term used to describe the restrictions on sites such as Facebook, Instagram and Twitter — has allowed for Chinese brands to unobstructed access to their domestic market. On top of that, these companies have knit close relationships with the Chinese Communist Party, receiving favorable treatment and government subsidies. Consequently, companies such as Google and Amazon have failed to capture a share of the colossal Chinese market.
This phenomenon is not exclusive to China or India. Copycat business models exist all across the globe. Rocket Internet is a German startup incubator which has successfully capitalized upon the copycat business model, helping over 70 startups get to untapped markets before American companies do. Founded by three brothers — Oliver, Marc, and Alexander Samwer — the company got its start from launching (then almost immediately selling) Alando, a German equivalent to EBay. The company, like other copycat businesses, is frequently criticized for curtailing innovation. In fact, Rocket Internet is pejoratively labeled the “Clone Factory” given its history of replicating successful business models. The Samwers would contend that they’re simply supporting competition in the marketplace. After all, Amazon did not invent retail nor selling things over the internet. Conventional economic theory would lead us to believe that competition would beget more innovation and thus a higher degree of economic prosperity. In reality, copycat companies will eventually be confronted by the issue of scale. In our increasingly globalized society, can any company have a ‘home country’?
Miniso store in China. The red backdrop / white lettering combo is eerily similar to that of UNIQLO.
Examples of CopyCat Businesses Across the World:
E-Commerce:
Tokopedia — Indonesia (Korean K-Pop Group BTS is the company’s spokesperson)
Jumia — Africa (Jumia is based out of Lagos, Nigeria but operates in over ten African countries)
Ozon — Russia (Founded in 1998, the company got its start by selling books. Sound familiar?)
Lazada — Southeast Asia (HQ’d in the Philippines, supported by Rocket Internet. Lazada was acquired by AliBaba in 2016.)
Ride-Sharing / Food Delivery:
Zomato — Indian Food Delivery: The company acquired Seattle-based restaurant app: UrbanSpoon in 2016.
Bolt — Estonia: Formerly known as Taxify, the company operates in over 35 countries.
Yamee — Botswana: Formerly known as MyFoodness, the company recently announced plans to penetrate the Tanzanian market.
Easy Taxi — Brazil: The company exclusively operates in emerging markets in Latin America and throughout the Middle East and North Africa.
Others:
Peixe Urbano — Brazil: The country’s version of Yelp was acquired by Baidu, the Chinese search engine, in 2014.
Miniso — China: This retailer is almost a complete rip-off of the Japanese brand, UNIQLO.
Serial Entrepreneurs: The Samwer Brothers are also credited with co-creating what popular, early-internet meme?
Money & Banking in Emerging Markets
It goes without saying but the coronavirus pandemic has been devastating for emerging economies. Petroleum-rich countries have seen tax revenues plummet alongside the price of oil while tourism-dependent countries have seen new visitor traffic disappear. Another defining characteristic of emerging markets is the lack of a sophisticated central bank, unlike developed countries. The Central Banks of the U.S., E.U., and Japan have unraveled massive stimulus packages for their domestic market. Conversely, the International Monetary Fund (IMF) must act as a backstop for emerging economies. The IMF initially allocated over $50B in relief measures although recently announced they’re prepared to deploy over one trillion dollars ($1T) in relief.
All of this so-called “money-printing” carries consequences. Currencies such as the Argentinian Peso and Turkish Lira have hit all time lows while other emerging markets struggle to pay dollar-denominated debts. In 2019, the Venezuela attempted an unprecedented overhaul of the Bolivar, their domestic currency. President Nicholas Maduro believed that removing five zeros from the currency would curb the nation’s hyperinflation and reignite Venezuela’s economy. Instead, the Venezuelan Bolivar fell in value by 95%. Citizens reportedly began using the currency to construct bags, toilet paper, and wall paper. In case you weren’t familiar, this is known as hyperinflation. Hyperinflation has plagued not just Venezuela, but Turkey, Brazil, and Argentina as well. Excessive government manipulation in the central bank or money supply has almost always been the root cause behind hyperinflation. Unfortunately, emerging markets are commonly associated with oversized governments.
Venezuelan Annual Inflation Rate, in %
Where does crypto fit in?
There’s a dwindling sentiment in America that suggests cryptocurrencies are risky fads similar to tulips in the 1600’s or tech stocks in the late 1990’s. To be fair, there is some truth to that statement. Cryptocurrencies have been an instrument of speculation and shady behavior. On top of that, Crypto meme products such as DogeCoin serve no legitimate purpose, nor do they represent any intrinsic value. That said, the demand for decentralized banking has certainly increased in the past decade.
In my belief, cryptocurrencies can serve a unique niche in emerging markets. Laborers and working class individuals are at an inherent disadvantage relative to their wealthier counterparts. It is extremely common for laborers to work grueling jobs overseas or across borders in order to return money to their family back home. This money typically goes to support family or friends who otherwise don’t have the means, opportunities, or skills to support themselves. The process of sending money cross-border is costly and inefficient. Consider Western Union: the international money exchange company. Western Union charges fees for foreign exchange, transfers, and deposits. While companies like Western Union serve vital roles in that pocket of the economy, their service is costly, eroding the resources these people are looking to live upon. Cryptocurrency has the potential to disrupt that industry. Converting a cryptocurrency such as USD into Bitcoin then into an Indian Rupee is a significantly cheaper alternative to utilizing a money transfer service. In addition, decentralizing transactions serves as a democratic alternative to electronic payment surveillance in places like China.
Hong Kong Octopus Card — A government issued card that is used to travel throughout Hong Kong.
There’s an inherent risk in dealing with decentralized cryptocurrency. The merits behind its intrinsic value are often contended (the common understanding is that a cryptocurrency represents a unit of computing power) and institutional adoption is extremely nascent. Renowned investors such as Paul Tudor Jones have picked up Bitcoin as a hedge on our unprecedented monetary environment. In addition, China recently released their own digital currency. However, those in the crypto space are skeptical of its qualifications given China’s record with personal liberties. At this rate, digital currencies are inevitable in the U.S.. There is a ton to unpack within the cryptocurrency/blockchain space, I will delve into it further in a future newsletter.
Popular Culture: Which famous author took to Twitter this past week to ask her audience about what Bitcoin is? Answer at the bottom.
A Sobering Prediction
Hong Kong Protesters wearing masks of Chinese President Xi Jinping
I’ve spent a lot of time thinking about how the post-corona world will look like — whenever that day comes. One thing in particular that’s stayed on my mind is the adoption of masks.
Masks have become a cultural staple in Asian countries since the SARS outbreak of the early 2000’s. Masks function as a means of safety and good hygiene, although serve a tertiary purpose as a means of anonymity. Looking forward, I believe the function of masks will have more to do with the latter.
There is a growing zeitgeist that governments as a whole have overstepped their bounds in trying to tackle the coronavirus. This sentiment rings similar to how the events of 9/11 lead to the PATRIOT Act and other unpopular, intrusive government policies. The increasing scope of government and big technology in traditional life will motivate privacy-savvy individuals to cover their face.
I believe this trend began to take shape during the Hong Kong Protests of 2019. High-resolution surveillance systems coupled with artificial intelligence allowed for autocratic government officials to monitor citizens who attended protests. In response, Hong Kong protesters took to wearing masks; Some for function, some for expression. While Hong Kong depicts a much darker reality, I predict that Western countries will begin to adopt this trend to curb the nagging oversight of big technology and government bodies. I’m not predicting a reenactment of Orwell’s 1984, but rather a passive objection to the unilateral measures being taken to preserve citizen safety. Just last week, the U.S. Senate overwhelmingly agreed to restore FISA’s surveillance powers amid the COVID-19 crisis. In addition, Spanish local governments have been scrutinized for using drones to enforce social distancing measures.
Our current coronavirus environment will segue in a popular mask culture. This is a good thing. I believe wearing a mask demonstrates a commitment to safety and a respect for those working to keep society humming along. On top of that, Americans have also never been known to reject secular trends. The entire front page of Etsy.com (a popular online marketplace) is decorated with homemade masks. I believe we’re one Instagram Influencer away from masks becoming a full-fledged fashionable accessory.
What I’m Reading / Watching:
Reading (article): Fuck the Bread. The Bread is Over. What is going to be normal after this is over?
Watching (movie): The Big Sick - Kumail Nanjiani stars in his own pseudo-biographical rom-com. Very hilarious insight into the dynamics of a Pakistani family.
Reading (Blog): Doordash & Pizza Arbitrage - There is such thing as a free lunch.
Trivia Answers
Bring Your Sunscreen:
1) Grand Bazaar, Istanbul — Turkey
2) The Zocalo, Mexico City — Mexico
3) Times Square, New York City — United States
Serial Entrepreneurs:
The Samwer Brothers are credited as co-creators of Crazy Frog. They created it alongside Max Finger and Ole Brandenburg during their time at Jamba!
Popular Culture: J.K. Rowling took to Twitter, setting off a frenzy in the cryptocurrency community.
