US & China: Parallel (but different) worlds
And also: the digital tech narrative is called into question, but investors keep the faith. E-commerce is eating the (retail) world. Telecoms on the way to “layered specialization”
A parallel fight to limit the power of Big Tech is happening in the US and China
China has started a massive antitrust campaign focused on technology companies. 34 tech companies in China are being investigated by government agencies, including the antitrust regulator. These include TikTok’s owner Bytedance, food-delivery company Meituan and the social media and video game giant Tencent. This seems to be only the beginning, with some officials claiming that companies should get used to “tougher scrutiny”. Some analysts think these inquiries could actually help the companies, because they give them the chance to fix their problems before more disruptive interventions. However, companies complain that they have low visibility on the whole process, so it’s difficult for them to plan their businesses (WSJ)
In the US, the appointment of Lina Khan to lead the FTC could reinforce the “antitrust wave”, but she has a difficult task. Lina Khan, a young academic that has led the intellectual movement advocating for more aggressive antitrust laws against Big Tech in the US, has just been appointed to lead the Federal Trade Commission. This looks like a sign that antitrust actions will become tougher, e.g. on mergers or on potential anticompetitive behaviors of the Big Tech platforms. The problem for Khan could be that doing more with the current antitrust laws has already revealed a challenge, with several high-profile antitrust cases lost but the commission and the Justice Dept. in the last few years, so legislative changes may be required to support a more aggressive approach. As the FT says, appointing Khan “does not mean that Big Tech companies will break apart” (WSJ)(FT)(FT2)
The Chinese approach to antitrust is increasingly shaped by populism (like in the US). The government-sponsored antitrust initiative in China is largely linked to a fight for power between the Communist Party and the authorities, on one side, and the emerging Big Tech elites. Interestingly, and quite in the same way as in the US, the antitrust agencies are weaker than the local tech giants, and they’re struggling to define and prove what these companies have done wrong. So, like in the West, they have started to focus on issues that are generating public anger against these companies, as it will be easier to move ahead with these. Consequently, the government is constantly talking about the need to ensure that tech companies work to serve society (FT)
The reputation of Chinese Big Tech firms is increasingly under question. To reinforce its position in the fight for power, the Chinese government is identifying and highlighting the cases and situations where local Big Tech companies are making mistakes with negative social implications, or those where they are consciously acting against social welfare, looking for their own benefit
Data leaks and privacy issues increase pressure on the Chinese Big Tech platforms. A first example this week is the case of Alibaba, which has been a victim of a marketing consultant that has siphoned user data, including people’s phone numbers. The incident has affected more than 1bn data items since 2019. Apparently there have not been economic implications on the victims, but the news are being used to justify the government’s current efforts to control how companies like Alibaba handle users’ data. To support this, there is a new “data security regime” that will go into effect on Sept 1 (Bloomberg)
Chinese tech companies accused of “pushing workers to their limits” with surveillance software. In parallel, other topic that is increasingly being debated in China is the way local Big Tech companies are using surveillance software to monitor their workers’ behaviors and to increase their productivity. As an example, many companies are using a tool (appropriately) called “Third Eye”, which collects employees’ time spent by website and app, including “suspicious” visits to job-search sites or video streaming platforms. Apparently there is not much protection form this in Chinese labor legislation, so this is another pathway for the government to act against tech giants (FT)
Meanwhile, the US debates about the government’s rights to access people’s personal data (a key driver for regulation in China). In China, a key driver for the government to try to control the technology sector is the opportunity that they see to better monitor the population’s activities, always a very important tool for a totalitarian regime to survive. Obviously, the situation in the West is very different. But even so, in the US there is an increasingly intense debate on when can the government ask for access for citizen’s personal data. This week The NY Times published a long explanation of the different levels of access that are legally possible, and what needs to happen for each of them to be triggered. This has already created some tensions between the Federal authorities and companies like Apple, in the past (NYTimes)
Voices in the West claim that the US and China should prioritize the fight against Big Tech, rather than (or on top of) battling against each other. Also in The NY Times, Shira Ovide is not happy to see how Big Tech companies often mention the “Chinese threat” to argue against potential legal limits to their business practices. The story would be that by weakening local Big Tech firms, the US government could actually empower China to dominate the world through more advance technology. Shira here claims that these things are not necessarily correlated, and that, for example, restraining digital giants from doing whatever they want with people’s personal data does not weaken America’s position in the world stage. She concludes that Americans can restrain some companies to get rich at the expense of citizens, while at the same time protecting the country against abuses by China. The underlying message is that both American and Chinese Big Tech are becoming alternative powers to their own countries’ governments (NYTimes)
The US approach to the technology race with China might become less confrontational. In parallel, the Biden administration has started to change the approach to China in the current “Technology Wars”. A good example are 5G networks across the world. With Trump, the focus was on pushing for bans, often threatening countries with sanctions or unfavorable trade agreements. Now, the US is shifting to incentives, and in this context a new initiative called “Build Back Better World” has been presented at the G7 meeting last week, which looks like an alternative to the Chinese “Belt and Road” program. So expect financial aids, including loans, being offered to developing countries in exchange for choosing non-Chinese network equipment providers (WSJ)
Even Taiwan is becoming an area of (relative…) convergence, with both superpowers depending on this country for their semiconductors. Taiwan has been a traditional area of geo-strategic dispute between China and the US, and there are still many rumors these days about a potential Chinese invasion. But as this article shows, a reason why the Chinese could be not inclined to do it is that any military action could put at risk the supply of essential semiconductors, that are being built in the TSMC’s factories in the country. Taiwan generates 65% of the global chip manufacturing revenues, with TSMC responsible of approx. 56%. The company would make more than 90% of the most advanced chips, and about 60% of the less sophisticated semiconductors typically used in cars, which are now scarce. The fragility of this situation is driving governments in China, the US and Europe to looks for self-sufficiency in this field, but (as we have already discussed here) this is expensive and would (if at all possible) take a long time. The WSJ published a nice analysis of all this, this week (WSJ)
Finally, for investors, China is becoming a second pole of “venture investing”, together with the US, albeit with a different focus. Chinese startups have started to attract venture capitalists again. Deals have risen +56% in 1Q21 vs. 1Q20, reaching a total of $55bn of invested funds. Interestingly, in China the focus is still different from the US, with hardware, perceived as more “tangible”, preferred to software, and with the consumer segment being more significant than in the West, where the focus is now on enterprise “SaaS” products and services (FT)
Uncertainties emerge for digital innovation, but investors keep the faith
What is the emperor wearing? Contrarian opinions emerge against the “digital narrative”. An article published this week in the LA Review of Books questions the standard narrative about “digital transformation” that most consultants and executives have been repeating since some years ago. First, they say that if growth is exponential, there is no justification to talk about an “inflection point”, as the curve is always convex, and from that perspective, there is no ‘special point” in time when an “explosion” of anything is happening. Second, they also say that the “reification of data”, which relies on the assumption that more data will yield ever-more fruitful results, is based on a flawed argument, as sometimes those results depend on a target that may also increasingly difficult to reach. As an example, the authors say that “even if one accepts that technological progress against something like cancer is accelerating, that doesn’t mean “the cure” is within sight.” We partially agree. We believe we may be in a transition to a different economic paradigm, yes, and that this will be based on digital technologies, just like previous ones were based on other breakthroughs. But probably this is not the “biggest transition in the history of humanity”, and also it is to be expected that many of the promises being pitched today (often by people that don’t really know what they’re talking about) will not be able to deliver… (LAReviewofBooks)
“Green” SPACs in particular are struggling, but a new wave of technology investors resist the pressure
“Green” SPACs’ recent performance has been bad. SPACs dedicated to “green” or sustainable technologies used to be the most attractive ones for investors. An analysis of SPACs’ performance in the market reveals that the ones acquiring “green” startups had share price gains of around +10% in the first 90 days after their merger deals were closed, while all other SPACs fell -3% in a similar period. However, if we just look at the deals since late 2020, shares of “green SPACs” have fallen -24% in the same 90 days, while the number was -9% for the rest. This may point to specific problems to turn these exciting “green” promises into reality. Indeed, many of the initially targeted business still have no revenue (WSJ)
Electric Vehicles are under pressure… In particular, investors in special-purpose companies targeting startups building Electric Vehicles are having a bad time. Some people are blaming policymakers that had promised public subsidies for this type of technologies, as these promises have apparently fueled market speculation. So some political analysts are warning that all this also implies risks for taxpayers (WSJ)
Lordstown Motors is a good example. A quintessential example that everyone is talking about these days is Lordstown Motors, a company that had captured the interest of Republican politicians, as they were promising to breathe new life into a car factory abandoned by GM in Lordstown, Ohio, with a project focused on building cheap, all-electric pickup trucks. Now the plan is under question, with the company having warned of higher than expected costs, and insufficient capital for the coming needs. The founder, chairman and executive officer has just renounced. So it doesn’t look good… The WSJ article concludes that, given the costs, often linked to batteries, only companies with the right scale (e.g. incumbent car brands) will be able to compete in low cost electric cars, so startups should focus on luxury products for now, following the model of Tesla, NIO or (more recently) Lucid Motors (WSJ)
… but investors resist for now. In spite of the recent pressure on SPACs, and in spite of the recent organizational events, Lordstown Motors’ share price has resisted and the valuation is roughly the same as last month. The WSJ wonders at the “remarkable resilience” that some Electric Vehicle companies, including also Nikola or Canoo, are showing in the current context, and explains that this could be related to a new wave of “amateur” investors, which remain optimistic on how these companies could capitalize a “green economy” future. The article also mentions the “Reddit crowd” that we were discussing when the Gamestop case monopolized the business news, earlier this year (WSJ)
Meanwhile, money keeps flowing into autonomous cars. Autonomous cars have also been under question recently, as the promise of an imminent “swap” in the way we move within and between cities has largely vanished due to multiple technology challenges. However, this does not mean that companies like Waymo, the Alphabet subsidiary that still leads this field, have problems to get additional funding: they just raised $2.5bn, even when some analysis suggest that the company might be burning approx. $2bn per year. In its favor, Waymo has partnerships with car industry giants like Volvo, Daimler Trucks and Stellantis, for which they would now be developing “Waymo Driver”, an autonomous car operating system, that would (hopefully) become the “Android of cars”. But at the same time these are also turbulent times for Waymo, after the recent departure of the company’s CEO, and with its plans to deploy “robotaxis” in several American cities having been delayed (FT)
Batteries become a major investment theme in innovation
There is a race to build the “next-generation battery”, that could lead to massive returns. Investors look excited by companies targeting “moonshot projects” that could completely revolutionize the battery market. Solid-state batteries in particular are a hot industry topic, because they could (1) reduce the risk of accidents, as the flammable liquid in current lithium-ion batteries would be substituted by (much safer) solid, and at the same time (2) massively reduce costs, eliminating one of the key remaining barriers for mass market electric car adoption. However, developing a solid electrolyte is still a huge challenge. QuantumScape, a Californian company with a $12.8bn market cap, claims to have found a new ceramic material that solves the problem, but their published results are still preliminary. This week another startup working on this, Solid Power, merged with a SPAC in a $1.2bn deal (WSJ)
The future of electric cars depends on innovation breakthroughs in batteries. Batteries are indeed key for the future of electric cars. And it is not only a cost issue. As discussed in this WSJ article, building the current lithium-ion batteries, including the need to get the materials, requires a lot of resources and has a significant impact on the environment, that could even offset the advantages of an electric engine (vs. a traditional one). So the point is that, unless a solution is found, all this could “backfire” on electric car companies, at some point, from a political perspective. Of course, cost (or price) is the other key question, and the reason why adoption has been mostly limited to luxury cars, for now (WSJ)
Healthcare continues as a huge market “to be disrupted” by digital technologies, but it won’t be easy
Privacy remains a key issue. Digital health apps increase the perception of privacy risks by most users, because the very nature of the activities they monitor makes them track very intimate data, including e.g. heart rates, calorie intakes, or blood pressure. So they are exposed to much more pressure than the other apps, from a privacy perspective. This is already affecting “basic” fitness apps, as shown in this Bloomberg article (Bloomberg)
Apple have a plan to become a healthcare company, but they’re struggling to execute it. We’ve already commented here about how complex it is to disrupt the healthcare market using digital technologies, and how this has kept this industry largely immune to transformations that have drastically transformed other sectors. This week we learned about the case of Apple, actually the largest and most successful digital company in the world, which has apparently set healthcare as one of its key priorities for the future. Apple seems to have an ambitious plan for this, that goes much beyond the Apple Watch. However, the execution of this plan is revealing to be very challenging, and even a digital health app (“HealthHabit”) that the company is testing with its own employees has struggled to keep users engaged. An even bigger challenge seems to be the massive complexity and cost of creating a network of clinical facilities to support the service. So let’s see what happens (WSJ)
E-commerce is eating the (retail) world
Under pressure to become digital, small retailers look to build “anti-Amazon” coalitions. The pandemic has radically shifted customer behaviors, and traditional high street retailers are now being forced to develop an online presence. At the same time, in may cases they’re reluctant to use Amazon as a platform for that, as concerns are growing that Amazon is not so neutral, and uses its position to develop its own retail business. So we’re starting to see how smaller retailers organize themselves to get cost savings and other efficiencies through collaboration, and better compete against Amazon. In this article, we learn about an example in New York, ShopIN.nyc, which has already signed 90 local stores, and is increasing sales at a rate of +20-30% per month. Not bad (WSJ)
Traditional “big retail brands” are offering e-commerce platform services, in direct competition with Amazon. Larger retail brands are also coming to help, and several, including Express, Urban Outfitters, J.Crew, Walmart or Target, have started to offer retail platform services that directly compete with Amazon’s. This could be a big threat for Amazon, as the digital giant makes up to 60% of its total retail sales from third-party sellers. Some of them are mentioning the lack of competition in other (less successful) platforms as an advantage (WSJ)
Retailers are also using Shopify to match Amazon’s operations, and looking for ways to differentiate their offers. We’ve already seen here how companies like Shopify, that provides a sort of “e-commerce operating system”, have benefited by the acceleration of e-commerce that has come with the pandemic. They already have 1.75m merchants using the platform, more than 2x vs. last year. Interestingly, as it happens also with Amazon, some retailers are seeing that the rules of the competitive game are changing for them, with this. And a lot of creativity is being applied to reach customers in this new context, including analog ways, like printed catalogs. There is always a role for physical assets, even in a “digital-first” world (WSJ)
Shein: how to beat Zara with a digital-only app (based in China). Shein is a Chinese fashion app that is growing massively in the under-30 segment. The app became the most downloaded one in the US last month, surpassing Amazon. They doubled their sales in 2019, and have more than tripled them during the pandemic. They could have a valuation of around $30bn, and a big ambition, as shown by their bid to acquire the iconic British retailer Topshop, even if it finally didn’t succeed. Interestingly, the company’s success seems to be linked to their ability to exploit tax subsidies in China, that the government applied to offset the impact of the trade wars with the US, while at the same time benefiting from a tax loophole in the US, where packages worth less than $800 can enter the country duty-free since 2016 (Bloomberg)
The food delivery apps arrive in Japan. The battle for food delivery that has taken Western cities by surprise during this pandemic is now reaching Japan. DoorDash, the US leader, is launching in the Japanese market and will compete with Uber Eats (that had already done it) and with local specialists like Deme-con and Rakuten. AS in other countries, Japanese consumers are changing habits and starting to feel acceptable, or even interesting, to order restaurant food online (FT)
Telecoms: on the way to “layered specialization”
SK Telecom separates its apps from the core business, moving ahead towards “layerization”. SK Telecom was one of the most successful global telecom operators in developing a position in digital apps, exploiting the advantage of a digitally skilled and relatively “isolated” local market. But even if they’ve succeeded with that, it seems clear that they’re struggling to find the synergies that would justify to keep these businesses integrated with the core telecom operations. So they’ve decided to segregate them into a new vehicle, SKT Investment Co., that will also use them as the seeds to build a large investment fund that looks to replicate the SoftBank Vision Fund. This can be seen as another example of telecoms specializing in different layers. In this case (and in SoftBank), the “digital business” layer is segregated into an investment vehicle, with no synergies with the telecom layers, apart from finance / cash. Interestingly, both in this case and in SoftBank, there is a semiconductor component in the investment portfolio (SKHynix has been contributed to the new company) (Bloomberg)
After the sale of its media business, AT&T will focus on the network. Talking about disaggregation of telecoms with other adjacent business, AT&T is obviously the most relevant case these days. This Financial Times article reviews the story of AT&T, with a long series of (not too successful) M&A deals, that actually reveal how resilient are the telecom cash flows, as otherwise the company wouldn’t probably be alive today. Apart from this, the article discusses the priorities for the “new AT&T”, which are now expected to focus on the network, where the perception is that they need to catch up vs. their rivals. The plan is to spend around 20% of the company’s revenue to expand their FTTH footprint and to go “full throttle” (according to the company’s own words) in 5G. They have work to do, because after the sale of WarnerMedia they’re now the #4 player by market cap in the US telecom market. Not something that their executives have traditionally liked… (FT)
Vodafone moves closer to a cloudified network architecture, that will enable business model transformations. Finally, this week Vodafone identified the suppliers that they will use for their OpenRAN deployment in the UK. No big surprises here, with Tier-2 semi-incumbents like Samsung and NEC (also supported by NTT in Japan) playing the central roles. This will affect only a relatively minor part of the company’s UK network (less than 3,000 sites), but what is interesting from a strategic perspective is how this new technology opens the door to an evolution in which telecom networks converge with the cloud. As a consequence, it could be easier to evolve into the same business models applied to the cloud today, including separate layers for (1) physical infrastructure, (2) active infrastructure platform, shared “as a service”, and (3) applications and end customer relationships (FT)