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CHINA: A True Story and the pending danger


China: A True Story and the pending danger 


Since opening up to foreign trade and investment and implementing free-market reforms in 1979, China has been among the world’s fastest-growing economies, with real annual GDP  growth averaging up to 9.5% through 2018, a pace described by the World Bank as “the fastest sustained expansion by a major economy in history”


As China’s economy has matured, its real GDP growth has slowed significantly, from 14.2% in 2007 to 6.6% in 2018, and that growth is projected by the IMF to fall to 5.5% by 2024


Now that much has been written, discussed and read about the flourishing Chinese economy, let’s take a close look at the challenges China has on its hand which are seldom reported by the media. 


Policies that were employed in the past to essentially produce rapid economic growth at any cost were very successful. However, such policies have entailed a number of costs (such as heavy pollution, widening income inequality, overcapacity in many industries, an inefficient financial system, rising corporate debt, and numerous imbalances in the economy) and therefore the old growth model is viewed by many economists as no longer sustainable.   


This appears to indicate that the government accepts and allows the use of free market forces in a number of areas to help grow the economy, but the government still plays a major role in the country’s economic development.


Industrial Policies and State Owned Enterprises (SOE) 


China has become one of the world’s most active users of industrial policies and administrations. China’s State Council has said that they currently continue to dominate a number of sectors (such as petroleum and mining, telecommunications, utilities, transportation, and various industrial sectors); and are shielded from competition;  and are the main sectors encouraged to invest overseas and dominate the listings at the Chinese Stock Markets. 


There are more than 150000 State Owned Enterprises (SOE) at the central and local government level employing about 57 Million people. 


China’s SOEs may account for up to 50% of non-agriculture GDP.


One study found that SOE constitutes 50% of the 500 largest manufacturing companies and 61% of the top 500 service sector enterprises. 


Not only are SOEs the dominant players in China’s economy, many are quite large by global standards.


Fortune’s 2019 list of the world’s 500 largest companies includes 119 Chinese firms (compared to 29 listed firms in 2007). Of the 119 Chinese firms listed, Fortune identified 80 % of these are SOE. Together, these 80% firms in 2019 generated $8.2 trillion in revenues. 





State-Dominated Banking Sector, Excess Credit, and Growing Debt 


China’s banking system is largely dominated by state-owned or state-controlled banks. The managers of China’s state banks are drawn from the ranks of the Chinese Communist Party cadre system, which enables the party and government leaderships to exert influence over bank lending. In 2019, the top five largest banks in China in terms of assets were state-owned entities. banks (including the five large state-owned banks), the three government policy banks, joint-stock commercial banks (where government entities are a major stockholder), together accounted for 68.5% of total bank assets in China. Foreign participation in China’s banking system is relatively small accounting for 1.25 % of the total bank assets.




SOE’s are believed to receive preferential credit treatment by Government banks, or private firms must pay higher interest rates or obtain credit elsewhere. The Chinese banking sector is the largest in the world with a total assets of US40.1 Trillion. SOE’s are having a lion's share of the bank advances. It is often estimated that SOE do not repay their loans, which may have saddled the banks with ever increasing non performing loans. Many analysts contend that one of the biggest weaknesses of the banking system is that it lacks the ability to ration and allocate credit according to market principles, such as risk assessment. 


China Chengxin International Credit Rating reckons the magnitude of hidden local government debt was roughly $6.5 trillion in 2019, up from about $6 trillion in 2018. This year, analysts at Chengxin International figure it could rise toward $7.2 trillion 




The Chinese central government uses the banking system to boost credit in order to help meet its GDP growth objectives. However, China’s debt levels (in both dollars and as a percentage of GDP) have risen sharply within a relatively short time, which some have speculated could spark an economic crisis in China in the future. From 2006 year-end to mid-2016, China’s total non financial sector debt as a percentage of GDP increased from 143% to 254% (up 111 percentage points). In dollars, China’s corporate debt rose from $3 trillion to $17.8 trillion (up $14.8 trillion) and currently greatly exceeds U.S. corporate debt levels. Several observers have warned that China’s credit growth may be too extensive and could undermine future growth by sharply boosting debt levels, causing overcapacity in many industrials (especially extending credit to firms that are unprofitable to keep them operating), contributing to bubbles (such as in real estate), and reducing productivity by providing preferential treatment to SOEs and other government-supported entities.


Local government debt is viewed as a big problem in China, largely because of the potential impact it could have on the Chinese banking system. During the beginning of the global financial slowdown, many Chinese subnational government entities borrowed extensively to help stimulate local economies, especially by supporting infrastructure projects. The Chinese Government has a reported 

debt of $5.48  trillion as of 2020. Efforts have been made over the past few years by the central government to restructure local government debt and restrict local government borrowing, with mixed success, according to some press reports, because of pressures on local Government to maintain rapid economic growth




Many economists blame China’s closed capital account for much of China’s debt problems. The Chinese government has maintained restrictions on capital inflows and outflows for many years, in part to control the exchange of its currency, the renminbi (RMB), against the dollar and other currencies in order to boost exports. Many argue the Chinese government’s restrictions on capital flows have greatly distorted financial markets in China, preventing the most efficient use of capital, such as overinvestment in some sectors (such as real estate) and underinvestment in others ( such as services)


Environmental Challenges


China’s economic growth model has emphasized the growth of heavy industry in China, much of which is energy-intensive and high polluting. The level of pollution in China continues to worsen, posing serious health risks to the population. The Chinese government often disregards its own environmental laws in order to promote rapid economic growth. China’s environmental challenges are illustrated by the following incidents and reports.


2018 report by ExxonMobil estimated that China contributed about 60% of the growth in global CO2 emissions from 2000 to 2016, and that its emissions would surpass the combined CO2 levels of USA and EU by 2025


More than 80% of underground water in China is heavily polluted. According to statistics reported by the Chinese media, more than 80% of the underground water in large river basins of mainland China is unfit for drinking or bathing because of contamination from industry and farming.


Air pollution is estimated to contribute to more than 1 million premature deaths in China each year.


The Chinese government has indicated that it is taking steps to reduce energy consumption, boost enforcement of environmental laws and regulations, reduce coal usage by expanding the use of cleaner fuels (such as natural gas) to general power, and relocate high-polluting factories away from large urban areas, although such efforts have had mixed results on the overall level pollution in China . In addition China has become a major global producer of clean and renewable technology In January 2017, the Chinese government said it would spend $361 Billion in renewable energy power generation by 2020.


Corruption and the Relative Lack of the Rule of Law


The relative lack of the rule of law in China has led to widespread government corruption,

financial speculation, and misallocation of investment funds. In many cases, government

“connections,” not market forces, are the main determinant of successful firms in China. Many

U.S. firms find it difficult to do business in China because rules and regulations are generally not

consistent or transparent, contracts are not easily enforced, and intellectual property rights are not

protected (due to the lack of an independent judicial system). The relative lack of the rule of law and widespread government corruption in China limit competition and undermine the efficient allocation of goods and services in the economy. A New York Times article reported that (former) Chinese Premier Wen Jiabao’s family controlled assets worth at least $2.7 billion. One study estimates that between 2001 and 2010 , China was the world's largest source of illicit capital outflows of USD 3.8 Trillion. A 2012 survey by the Pew Research Centre’s Global Attitudes project reported that  50% of respondents said that corrupt officials are a very big problem ( up from 39% in 2008) 

Chinese officials often identify government corruption as the greatest threat to the Chinese communist party and the state. 

The Chinese government anti corruption watchdog reported that 106,000 officials were found guilty of corruption in 2009. Since assuming office in 2012, Chinese Xi Jinping has carried out an extensive anti corruption drive. China has reportedly sought cooperation with the United States to obtain extradition of 150 alleged corrupt who have fled to the USA. However many analysts contend that the anticorruption campaigns are mainly used to settle political scores with out-of-favor officials. Some analysts contend that President Xi's anti-corruption drive is more about consolidating his own political rather than instituting reforms . 

In addition, there are some indicators that the current anti corruption campaign may be having a negative impact on the Chinese economy, due to hesitancy by some local officials to pursue projects they feel will lead to scrutiny from the central government.

Many observers argue that meaningful progress against government corruption cannot occur without greater government transparency, a system of checks and balances, a free press, Internet freedom, and an independent judiciary. In October 2014, China held its fourth Plenum of the 18th Party Conference. The meeting focused on the need to enhance the rule of law in China, but emphasized the leading role of the Communist Party in the legal system. 


China maintains a weak and relatively decentralized government structure to regulate economic activity in China. Laws and regulations often go unenforced or are ignored by local government officials. As a result, many firms cut corners in order to maximize profits. This has led to a proliferation of unsafe food and consumer products are being sold in China or exported abroad. Transparency International’s Corruption Perception Index for 2019 ranked China 80th out of 176 countries and territories up from 72nd in 2007.


Demographic Challenges


Many economists contend that China’s demographic policies, particularly its one-child policy (first implemented in 1979), are beginning to have a significant impact on the Chinese economy. For example, according to a McKinsey Global Institute study, China’s fertility rate fell from about 5.8 births per woman in 1964 to 1.6 in 2012. This is now affecting the size of the Chinese workforce.


The existence of a large and underemployed labor force was a significant factor in China’s rapid economic growth when economic reforms were first introduced. Such a large labor force meant that firms in China had access to a nearly endless supply of low-cost labor, which helped enable many firms to become more profitable, which in turn led them to boost investment and production. Some economists contend that China is beginning to lose this labor advantage. According to the Chinese government, the size of its working age population (ages 16 to 59) peaked at 925 million in 2011, but then fell for seven consecutive years to 897 million in 2018. The Chinese government projects that its working age population will drop to 830 million by 2030 and to 700 million by 2050. If these projections prove accurate, the Chinese working age population could drop by 225 million individuals (2011-2050).


The one-child policy has also resulted in a rapidly aging society in China. According to the Brookings Institute, China already has 180 million people aged over 60, and this could reach  20 % by 2020 and 27% by 2030. 

With a declining working population and a rising elderly population, the Chinese government will face challenges trying to boost worker productivity (such as enhancing innovation and high-end technology development) and expanding spending on health care and elderly services. 


Credits: Wayne M Morrison, Bank for International Settlement , Economist Intelligence Unit , OECD, China National Statistics office , Bloomberg,



ZERO INTEREST RATES POLICY (ZIRP) WHERE ARE WE HEADING TO?

What is ZIRP?

 Zero interest rates policy (ZIRP) is when a central bank sets its target short-term interest rate at or close to 0%. This is the base rate which the Central Bank pays to financial institutions that hold money and what it charges them to borrow. Basically, it means a world where savers are penalized, and borrowers rewarded. The goal is to spur economic activity by encouraging low-cost borrowing and greater access to cheap credit by firms and individuals. ZIRP is a method of stimulating growth while keeping interest rates close to zero.

Japan - The first country in the world to implement ZIRP during the years in 1990’s.

Japan was officially in an economic bubble during the years between 1986 to 1991 when Real Estate and Stock prices were highly inflated. By 1992, the bubble in the asset price had burst and the economy stagnated. The bursting of the Japanese asset price in 1992 led to huge accumulation of non-performing assets loans (NPL), causing difficulties for many financial institutions. Equity values plunged 60% from late 1989 to August 1992, while land values dropped throughout the 1990's, falling an incredible 70% by 2001. The Bank of Japan (BoJ) decided to bring an unconventional monetary policy such as quantitative easing to increase the monetary base. As a result, since the 1990's interest rate policy in Japan increasingly moved toward the zero-lower bound. Three decades later, the country is still stuck in a zero-interest rate and has never been able to raise the rates again.

(For comparison, US data is provided in the image above)

What triggered ZIRP in Japan?

After World War II in 1945, it took Japan about 15 years and from the 1960's to 1980’s it became the envy of the world. Japan caught up economically with the Western world. The economic growth of this period was to go down in the history books as Japan's post-war economic miracle. Companies such as Sony, Panasonic, Toyota, Mitsubishi, Hitachi became increasingly feared international competitors. They knew how to take over key technologies from abroad, improve them continuously, and conquer international market share step by step. Japan grew at an average annual rate (as measured by GDP) of 3.89% in the 1980's, compared to 3.07% in the United States.

The BoJ started to worry about inflation and asset prices in the 1980’s and decided to put the brakes on the money supply in the late 1980's. This may have contributed to the bursting of the equity bubble and as equity values fell, the BoJ continued to raise interest rates because it remained concerned with still-appreciating real estate values. Higher interest rates contributed to the end of rising land prices but also helped the overall economy slide into a downward spiral. In 1991, as equity and land prices fell, the BoJ dramatically reversed course and began to cut interest rates. The innovative products of Japanese manufacturers that grew rapidly in the 1960's and 1970’s started to fade in the late 1980’s.


When the economy becomes stagnant and Zero Interest Rates Policy fails to stimulate the economy, there comes a huge social effect on the population of the nation. During normal times, the goal of a Central Bank is to increase corporate investments and consumption by lowering the interest rate but could end up in a Liquidity Trap. So, what exactly is a Liquidity Trap? During an economic crisis, such a policy might lose its potency: Instead of stimulating economic activities, lowering the interest rate may end up stimulating a higher demand for cash-like assets. And why cash like assets? Because the Govt and Central Bankers want the Investors to spend, but Investors want to avoid investments during uncertain times and rather do not mind parking money under Govt Notes even if it means losing some amount of the capital.

What does uncertain economics do?

During uncertainty, the country loses its economic power and economic culture. This loss of economics further spirals down to loss of Power of Innovation. Power of Innovation is the key linking companies directly to progress and market leadership in most industries. The power of innovation spreads further than breakthrough solutions – it spreads to the people as well. Zero interest rates counteract the power of innovation. Three decades after Interest rates started going down, the country is still stuck in a zero-interest rate trap and the magic and innovative power of Japanese companies has diminished considerably. The opportunity costs of this zero-interest rate policy are also reflected in the dwindling innovative strength and productivity.

 ZIRP impact on Society

The zero and negative interest rates have not only paralyzed the innovative power of Japanese companies, but in the same breath they have also affected the working population. Younger people have been hit the hardest. As recently as 1992, 80 percent of young Japanese workers had a regular job. In 2006, half of all young workers were in part-time jobs with lower wage levels. Only 2 percent of non-regular workers in Japan move to regular work each year. Most of today's young workers are unlikely to find a regular job. Once a country embraces Zero interest rates policy for a long duration, the change in the culture shifts from Economics to Social for a near permanent period. Zero and negative interest rates are a reality in Europe and will soon be in the US as well.


In the West, the first "signs of resignation" are beginning to appear, particularly among millennials and younger generations. A growing proportion of them seems to be subconsciously realizing that they have to adjust to an increasingly stagnant life. Stagnation in the economy leads to decline in total output, flat or slow growth. Stagnation results in flat job growth, no wage increases, and Consistent unemployment. Once there is lack of development, advancement, or progressive movement: a stagnant economy. inactive, sluggish, or dull pushes people to resort to means of earnings from riskier activities like Day Trading in Stock Markets. Due to Lack of regular full-time jobs, flat industrial growth, Artificial Intelligence (AI), and Automation have led to loss of income and a rising inflation hand in hand leads to social unrest and means of earning from speculative trades. It is estimated that less than 10 % of the population who indulge in day trading are successful, which means real earnings from speculation is only a myth.


Once real earnings are not visible for a long time it will lead to a full-blown social unrest which further will be directed towards anger and frustration against which more and more people take to the streets in demonstrations. In Japan, people are withdrawing more and more from civil society and the public sphere into their own four walls. According to the OECD. Japanese workers sleep less than their colleagues in other Western economies, averaging 442 minutes per twenty-four hours. In the USA, for example, this average is 528 minutes. These are warning signs and they are about to increasingly happen in Europe and the US. If the consequences of ZIRP are not taken seriously by the authorities, it may lead to people's growing hatred of people who will be directed at the wrong culprits. In addition to the economic consequences, the social consequences must be considered, as these often weigh more heavily in the long term.

Credits: Pascal Hügli


GROWTH VS VALUE INVESTING – PART II

The factors which typically affect the performance of a value investor are Valuations, Opportunities, and Speculation.

Valuations

Deep Value Price-to-Cash-Flow Multiples over Time! This means stocks which are trading at low valuations multiply in value over time and same way the valuation may compress during another time.

Opportunities

Opportunities for investment open to the investor that stresses quantitative factors with precognition resulting into Growth.

Speculation

Massive interest in investment performance created through a short-term orientation.

The markets during the last decade have shifted towards “Opportunities” and “Speculation“. These have seen sell off in “Valuations” based business. In other words, deep-value stocks are at attractive prices maybe because of pessimism or pervasiveness.


As we follow “Opportunities” for sustainable wealth creation policies, the same can be found in “Trends” of the markets. Trend following works especially well for large growth and improves returns relative to buy and hold strategy. Trends work wonders across multiple asset classes and will not do justice to Value Investing if Growth is considered as an effective means for long term strategy. In short, Trend is an important catch.

If the Value has performed worse in recent times or is at low multiples, the chances of its expected returns becomes higher. With Growth though, the better the historic return, the higher the expected future return. Growth is generally seen in the Innovative Business segment of the economy. By innovating and creating new technologies, growth companies become more efficient with resources enabling them to deliver higher profit margins and faster earnings growth than their competitors.

Markets will chase Growth stocks by investing huge capital to seek comfort in very few companies leading to irrational stock prices at times. Value even at low multiples will struggle to perform as they must take huge actions in order for the business to sustain in a competitive and ever-changing economy. Not much capital will chase these value stocks hence multiples will take time to climb higher.

While growth stocks have soared to ever higher heights, value stocks have struggled to attract investor capital over the past 10 years mainly after 2007. Growth companies have access to cheap cost of capital compared to value companies as the latter has to reduce operations costs, pay dividends, do stock buybacks, etc, to keep cost of capital attractive and on the other hand, large growth stocks’ breakthrough innovations and fat profit margins.

But all said some value stocks still have an edge with companies that are profitable and cash flow positive to perform going forward.

GROWTH V/S VALUE INVESTING - PART I

This blog will attempt to break the myths about investing and how some great minds have been deeply influenced the new millennials and Generation X mind. Investing is an art that requires multiple strategies to reach the destination.  No “one“ strategy can be considered a fool proof way of the wealth creation process.

The process of investing since the era of The Great Depression from the purview of market greats like Benjamin Graham, David Dodd, John Bogle, Phillip Fisher, Warren Buffet, Charlie Munger, Peter Lynch and others have mostly stood the test of time. All these great Investors had one thing in common: the philosophy of “Value Investing“ based on fundamental data such as financial statement line items, economic data, and unstructured data in a rigorous and systematic manner.


The common thread that united these great minds was “ Precognition” What is “Precognition” ?? It is a prescience, future vision, and future sight as claimed by psychics to see events in the future. There is a cult following for all these great Value Investors and their style of investing which has been adapted time and again by the Millennials and Generation  X. The Equity and Debt markets have undergone a massive change more after 1980 when the USA went for an all out fight against Inflation and more such policies were introduced in the system by USA and various other countries.


The thesis followed by Investors across the world modeled after the legends mostly traces only “Value Investing” and not “Precognition”, as the former is quantitative in nature and latter is psychology in nature. For successful investing the combination of quantitative plus psychology gives rise to Qualitative model. Hence Psychology plays an additional  significant role towards “wealth creation”. Most Investors cannot replicate the success of these legends because of the lack of “Precognition”.

The ones who have mastered the art of Value Investing with Precognition are the most successful investors and wealth creators

 To be continued...


FACEBOOK’S $5.7 BILLION BET ON INDIA THROUGH JIO - PART III

PART 3

How the dynamics will work?

This acquisition benefits both companies. For Reliance, the equation is simple. The money is vital for fulfilling Mukesh Ambani’s goal of making Reliance Industries debt free by 2021 and For Facebook, the deal comes close on the heels of the nod from the Reserve Bank affiliated National Payments Corporation of India (NPCI) to allow WhatsApp Pay to operate in India, and its decision to comply with the data localization guidelines.

WhatsApp could leverage Jio’s Payments Bank as a sponsor bank to power its UPI-based payments. The deal will open up WhatsApp’s entire user base for Reliance Jio, including the customers on rival telecom partners. The power of content, commerce, and community supported by the mobile network can be unleashed for these services at scale, making the impact widespread from e-commerce to telecom to mobile payments and potentially even healthcare and education. Through this deal, JioMart could become a one stop shop for e-commerce, social media consumption, instant messaging and digital payments. The network effect also helps in creating an ecosystem that disincentivises users from leaving.

The cryptocurrency community in India is upbeat about the deal between Facebook and Reliance Jio. Last year, Reliance Jio announced its plan to build the largest blockchain network in India. The Indian cryptocurrency space recently got a boost when the supreme court quashed the banking ban by the central bank, the Reserve Bank of India (RBI). Since then, the crypto sector has been growing and attracting investments from abroad despite the global coronavirus pandemic and the nationwide lockdown. Meanwhile, Facebook’s Libra project has undergone a major change.

Notwithstanding its minority share, the fact that Facebook now has a seat on the board of Jio Platforms might mean that its voice will be given greater importance in policy deliberations. This could mark a shift away from Chinese investments and prove to be a boost for Indo-U.S. trade and investment relations. This deal comes on the heels of a change to India’s Foreign Direct Investment (FDI) norms that make it more difficult for Chinese companies to continue investing in India. These norms certainly act as fetters to the Alibaba-Paytm alliance to compete with Jio Mart.

Facebook constellation is sitting on a huge pile of data which they were not able to monetize. The vast quantities of data generated by users of online services can now be processed into valuable information for commercial and strategic gains by leveraging Jio Mart’s reach. In reverse data sharing, WhatsApp, through its commercial agreement with JioMart, could end up providing deeper and richer data to Facebook which will provide more intense, localized insight into the consumption patterns of Indian customers. This new perspective on Indian consumers will add to Facebook’s already formidable advertising revenue stream.

Just as a firm’s competitive advantages are shaped by the strategy and resources of the firm, so it goes with platform-based advantages. When the platform yields synergy, each member can be thought of as adding something to the network-based advantages. As a platform scales, its costs per unit sold decreases logarithmically in comparison to linear business. A platform grows not by buying more assets, but by acquiring more users, which has a near-zero cost. This costs the platform next to nothing.

Credits: Ravi Agarwal, Sam Shead, Akshat Kashyab, Debasish Sarkar, Casey Newton, Arindrajit Basu, Amber Sinha, Kevin Helms, Nick Wood, Ruchi Gupta 

FACEBOOK’S $5.7 BILLION BET ON INDIA THROUGH JIO - PART 2

What is Jio Platforms?

 Jio Platforms is a technology subsidiary of Reliance Industries that came to light in 2010 when Infotel Broadband Services Limited (ISBL) spent $2.7 billion to win pan-India license during broadband spectrum auction. Shortly after the auction, Reliance Industries took a 95 percent stake in ISBL. In 2013, Mukesh Ambani renamed ISBL as Jio Platforms, which operates Reliance Jio Infocomm Limited as a wholly owned subsidiary. Jio platforms is described as a next-generation technology platform focused on delivering digital services across India. Jio Platforms claims to build a digital society powered by Reliance Jio‘s network technology. Jio platform was growing through mergers and acquisitions such as Saavn’s merger with Jio Music in 2018 and Haptick acquisition in 2019.

 

The power of content, commerce, and community supported by the mobile network can be unleashed for these services at scale, making the impact widespread from e-commerce to telecom to mobile payments and potentially even healthcare and education. To put it another way, Jio was a bet on zero marginal costs — or, at a minimum, drastically lower marginal costs than its competitors. This meant that the optimal strategy was — you know what is coming! — to spend a massive amount of money up front and then seek to serve the greatest number of consumers in order to get maximum leverage on that up-front investment.

What is the synergy between Facebook and Jio Platform?

 Facebook has invested in the Jio platform to create and unlock meaningful value through Network Synergy. The two companies could leverage each other’s strengths to build a Connected Ecosystem comprising of digital payments, telecom, and offline/online commerce. The deal will unlock a huge network effect with the combined power of Facebook and Jio’s subscribers across plays in commerce and payments.

 

What is Network Effect?

 Network effects are the incremental benefit gained by an existing user for each new user that joins the network. There are two types of network effects:

 ·    Direct network effects - Also known as the same-side effects. The value of service simply goes up as the number of users goes up. 

 ·   Indirect network effects - Also known as cross-side effects. With indirect network effects, the value of the service increases for one user group when a new user of a different user group joins the network

 

Platform Business Cost Model

Platforms boast higher profit margins and higher price-to-revenue multiples. Perhaps this explains some of the high valuations we see in platform businesses today including the recent Facebook – Reliance Jio deal.

 


Platforms business have two or more user groups exchanging value with one another. The more consumers on the network, the more valuable that network is to producers, and vice versa. The deal will jointly create an ecosystem that take advantage of Facebook’s high daily active users and Jio’s platform assets. For Facebook, this deal presents an opportunity to leverage the partner’s significant reach in India and explore the next-billion-user landscape. For Reliance Jio, the business will not be dependent solely on how successful the next generation is, as it will continue to grow with the strategic partner.

 

TO BE CONTINUED…


FACEBOOK’S $5.7 BILLION BET ON INDIA THROUGH JIO - PART 1

     
Facebook has spent $5.7 billion for a 9.99 percent stake in Jio Platforms, the tech subsidiary of India’s Reliance Industries. It was the classic Silicon Valley bet: spend money up front, then make it up on volume because of a superior cost structure enabled by the zero-margin nature of technology. Reserve Bank of India’s 2018 directive, which mandated the local storage of all payments data, various entities in the Indian government have introduced a slew of data localization policies mandating some form of data localization. Facebook, desperate to avoid the onerous compliance costs of data localization, left no stones unturned in getting the Indian government to renege on their data localization mandate. 

The investment—One of the single largest in Facebook’s history—is a giant bet on India’s online growth. India has long been a major growth market for Facebook, one that it has yet to successfully monetize. 400 million WhatsApp users—platform owned by Facebook that has more users in India than in any other country. The investment increases Facebook's exposure to India's massive SME market, and potentially opens a major new opportunity for those companies involved in the Telecom Infra Project (TIP), in which Facebook plays a pivotal role.


What is TIP??

Telecom Infra Project (TIP) was formed in 2016 as an engineering-focused, collaborative methodology for building and deploying global telecom network infrastructure, with the goal of enabling global access for all. One of Jio Platforms' strategic objectives is to use its network, cloud, and software assets to improve access to cutting-edge connectivity and online services for Indian consumers and businesses – particularly SMEs, so-called micro-businesses, and farmers. There are more than 60 million SMEs, 30 million small merchants, and 120 million farmers across India.  They account for the majority of jobs in the country and form the heart and soul of rural and urban communities. Their collaboration with Jio will be creating new ways for people and businesses to operate more effectively in the growing digital economy.
 
TIP could also be a significant beneficiary of this deal.  Jio provides for an aggressive, 4G-only deployment with disruptive pricing while forging swiftly on fibre deployment across the nation, in parallel. Jio Platforms encompasses not just fixed and mobile networks, but everything that goes with them including services, apps, content, AI, devices, and cloud. Jio offers mobile Internet for nearly free and tries to make money by up-selling subscriptions to their own versions of Spotify and Netflix. 

Is there still room for Facebook to grow?? The answer is a BIG YES and here is how… 
 
At least half a billion Indians remain offline. Partnering with Jio and its influential owners may help the company navigate an increasingly protectionist Indian market. Facebook has previously been rebuffed by Indian regulators—when it tried to launch a free, gated version of the internet in 2016. Jio, now the biggest cellular internet provider in India, is a valuable friend for Facebook to have in its corner. Jio’s success in India has raised a lot of eyebrows but the biggest moment came when Mukesh Ambani invested $33 billion to construct a nationwide 4G broadband service network. This allowed Jio to offer cheaper data services and free domestic calling to its subscribers. Reliance Jio has the highest ARPU (Average Revenue Per User) in the industry.

TO BE CONTINUED….