Regional Notes 2018.03.30

China’s push for tech self-sufficiency threatens Asia’s exporters

But at the same time, there’s been a spike in sales to China of precision metal working machines and equipment for making chips from firms like Japan’s Yaskawa Electric Corp. With a Chinese state-backed fund gearing up to pour as much as $31.5 billion into homegrown semiconductor manufacturing, there’s potential for trade flows to start to shift.

Yet the direction is clear: Beijing is aiming higher and it has the resources to reach its destination. And that will mean difficulties for many companies around the region. “China, in a very short period of time, is rapidly going up the value chain,” said Gary Hufbauer, senior fellow and trade specialist at the Peterson Institute for International Economics in Washington, speaking from Taos, New Mexico. “They will produce the things that Korea and Japan are now producing, and Korean and Japanese firms have a big challenge to try to keep ahead on the technology.”

Uber pulls out of Southeast Asia, selling operation to rival Grab

The cease-fire marks a victory for Grab as well as SoftBank Group Corp., the biggest shareholder in both companies. Masayoshi Son’s firm is pushing to reduce competition in a Southeast Asian ride-hailing market forecast to reach $20.1 billion by 2025. Uber and Grab, together with two other SoftBank-backed ride-hailing firms — India’s Ola and China’s Didi Chuxing — provide about 45 million rides a day, according to SoftBank presentation material in February.

Regulators to ensure Grab-Uber deal will not erode competition

“We will ensure that no one single market player dominates the sector to the detriment of commuters and drivers,” an LTA spokesman said. The LTA added that it was reviewing a regulatory framework to license private-hire car operators “to keep the private-hire car and taxi industries open and contestable”.

The CCS said Singapore’s competition laws prohibit mergers that may result in a “substantial lessening of competition”, and indicated that it could “require the merger to be unwound or modified” to prevent an erosion of competition. It said it could also issue “interim measures” before it made up its mind.

The taxi company agreed in December to pay some $640 million for a 51 per cent stake in Uber’s Singapore rental car fleet. ComfortDelGro spokesman Tammy Tan said: “We are reviewing all aspects of the proposed tie-up with Uber Technologies, which is currently under review by the CCS.”

Pentamaster plans dividend in two years

“Currently, 50% of our exports go to mainland China, including to US-based multinational corporations located there. We expect the exports to rise to 60% in the near future. The business opportunity is great which is why we are expanding our facilities.”

“I think KWAP is seeing the potential in the future of technology we are in — 3D sensing. It is going to be used a lot in autonomous cars and electric vehicles. We have developed a 3D sensor testing capability to test the component that can be used in telco, automotive and smartphones.”

He said five years ago, PCB only focused on automotive handlers without test solutions, which “anyone could do”, so he built the handler with tester as a complete ecosystem to reduce competition.

“We are also looking to secure more IARM business from the US. We have secured a few now. This segment has a lot of growth potential because of Industry 4.0 where factories look to becoming fully automised. Our technical sales unit in Sunnyvale, US, would be able to discuss with clients regarding requests for quotations and proposals. Proximity to our clients is key, hence we see our US business growing. More so now with the US placing 30% tariff on raw materials which would make manufacturing in US expensive.”

US tariffs may hurt Malaysian technology firms

However, a report last Friday by Nomura highlighted US trade protectionism and a sharper-than-expected slowdown in China as bigger risks to the Malaysian economy, as exports account for 71% of GDP. “We estimated Malaysia’s ultimate exposure to the US — including via intermediate goods to China for assembly into final products destined for the US — at 10% of GDP, about half of which is in electronics products,” the research house said, adding that another 8% is exposed to China’s final demand.

Minimal impact on M’sia from US tariffs

This is because Malaysia’s trade exposure to both China and the US accounted for 25% of its total trade, she said, pointing out that Malaysia was impacted by Washington’s earlier move to impose tariffs on solar panels.

Malaysia is the largest exporter of solar cells and panels to the US, accounting for 24% of total US imports of the products last year. Meanwhile, the country’s steel and aluminium exports to the US of US$300 million in 2016 accounted for only 1.8% of total exports to the US.

In 2017, China was Malaysia’s second-largest export destination, constituting 13.5% or RM126.2 billion of total exports, while the US was the third-largest export destination, accounting for 9.5% or RM88 billion of Malaysia’s total exports.

Bank Negara cautions of severe property market imbalances

“Such (the purchase of non-residential properties) financing accounted for 26.1% of banks’ exposures to the property market or 13.5% of banks’ total outstanding loans. End-financing for the purchase of shops accounted for the bulk (40%) of banks’ exposures to non-residential properties or 5.4% of banks’ total outstanding loans. Exposures (via end-financing) to the office space and shopping complex segments, where oversupply is particularly acute, accounted for 3.2% of banks’ total outstanding loans,” it said.

Based on Bank Negara’s analysis, the incoming supply of 38 million square feet of new office space in Klang Valley is expected to drive vacancy rates to an all-time high of 32% by 2021 (1997: 5.1%; historical high in 2001: 25.3%), far surpassing levels recorded during the Asian Financial Crisis (AFC).

The incoming supply of 140 new shopping complexes by 2021 across Klang Valley, Penang and Johor is expected to worsen the oversupply condition in this segment. In 2016, major states such as Penang, Klang Valley and Johor already had higher retail space per capita (10.5, 8.2 and 5.1 square feet per person, respectively) relative to regional cities such as Hong Kong and Singapore (3.6 and 1.5 square feet per person, respectively). This will continue to exert downward pressure on occupancy rates and rentals.

Malaysians’ income weighed down by low-wage foreign workers

“In Malaysia, our salaries and wages are low, as half of the working Malaysians earn less than RM1,700 per month and the average starting salary of a diploma graduate is only about RM350 above the minimum wage. The low-income segment of Malaysian households face many challenges with regard to their income level. Since 2014, the bottom 40% (B40) population’s income expanded by 5.8% on an annual basis. However, expenditure grew at a faster pace of 6%, reflecting the rising cost of living. It is high time to reform our labour market by creating high-quality, good-paying jobs for Malaysians,” he said at a media briefing after the release of the central bank’s 2017 annual report here yesterday.

From 2011 to 2017, the share of low-skilled jobs in Malaysia increased significantly to 16% compared with only 8% in the period of 2002 to 2010. Apart from that, local economic sectors that rely on foreign workers such as agriculture, construction and manufacturing also suffer from low productivity.

Company Notes 2018.01.05

Malaysia mobile giant weighs $500 million tower IPO

Edotco raised $700 million in a private placement last year from investors including Axiata’s top shareholder, sovereign fund Khazanah Nasional Bhd., and government-backed Innovation Network Corp. of Japan, according to an April statement. Malaysia’s second-biggest pension fund, Kumpulan Wang Persaraan (Diperbadankan), also invested in Edotco through the deal, which reduced Axiata’s stake to 62.4 percent.

Edotco was started in 2012. It owns more than 26,000 towers spread across Malaysia, Sri Lanka, Bangladesh, Cambodia, Pakistan and Myanmar.

SCGM on track for expansion

“We take customer rapport very seriously; this is how we have managed to not just survive but thrive in a competitive world. In light of this, we do not simply increase prices merely to improve margins; rather, any price increases are carefully evaluated and justified by price hikes in costs beyond our control, such as resin costs.”

“We intend to increase our product range in the coming years. At present, we have only started producing biodegradeable lunchboxes, and aim to add on more items like bowls, plates and other common F&B-related items from next year.”

“The population is also increasingly mobile and need more convenient packaging. For example, in the past, thermoform lunchboxes were the only portable semi-rigid packaging. Today, thermoform is used for bento, soups, egg trays and a host of other items, replacing paper-based or glass packaging because of hygiene, cost and sustainability.”

Growing discord in Malaysia’s paddy industry

In its earlier incarnation in 1971 as Malaysia’s state-run rice board, Bernas was tasked with maintaining adequate rice supplies, keeping prices fair and stable for farmers and consumers, and improving the industry. It continued to shoulder these obligations after it was privatised in 1996 and became a for-profit company. Two decades later, however, farmers are up in arms over Bernas’ alleged failure to protect and promote the local industry, by favouring cheaper imported rice to bump up its own profits.

Rural voters – 400,000 farmers, with nearly 300,000 of them planting paddy – form 11.2 per cent of the country’s registered voters and have traditionally supported the ruling Barisan Nasional (BN) coalition. Many live in the states of Kedah, Perlis and Perak.

Malaysia produces about 2 million tonnes of rice annually, which is not enough to meet its own estimated annual consumption of 3 million tonnes. In 2016, it spent US$377.4 million (S$515 million) on 822,000 tonnes of rice to meet the shortfall, making it the 14th-largest rice importer globally.

BCG: Unlocking Cities–The impact of ridesharing in Southeast Asia and beyond

Solutions going forward should balance between further capital investments to expand capacity and initiatives to increase the efficiency of existing assets. Ridesharing is one way to significantly increase the utilisation of existing infrastructure. Three characteristics of the ridesharing model contribute to its potential as a cost-efficient part of the overall response to the growing demand for transport in Asia: (1) Flexible supply base utilising existing private vehicles, (2) dynamic routing with smart supply-demand matching, and (3) demand pooling.

Radiation risk in home construction materials

“Materials traced to natural materials like brick, mosaic, wallpaper, plastic or wooden flooring, granite or cement blocks… even toilet bowls, contain radioactive materials… There is no way for us to run away from them. The levels of radiation vary depending on the origin of the materials. For example, mosaic from Kerala, India, may have higher radiation levels than those from the domestic market because the earth in Kerala has higher natural background radiation. Exposure to radiation can have long-term, short-term or acute effects… We must be careful with the long-term effects because it can slowly kill us even though we may not realise it.”

“Different rays affect us differently. For example, although alpha rays can be blocked using things like a piece of paper, it could cause a lot more damage on a surface, compared with beta, which has smaller particles. Since alpha’s particles are bigger, they will affect a wider area when it enters the human body, including through wounds, inhalation or contaminated food. For example, if you knead dough directly on top of a chipped granite table top, you will not notice particles containing NORM attaching to it. When you consume it, these radioactive materials will enter your body… some might exit through the excretion process, but the rest will continuously emit rays that will kill your cells.”

“It is important for homes to have good ventilation. Open the windows, turn on the fan, as this will help remove the gases,” he said, adding that radon would remain in a confined area for four days before it dissipated. As these gases are continually produced, good air circulation will help channel them out of confined areas.

Curated Insights 2017.12.24

Why Tesla wants a piece of the commercial trucking industry

But above all, it’s business opportunity—and trucking is the physical embodiment of a thriving economy. Trucks moved more than 70% of all U.S. freight and generated $676 billion in revenue in 2016, according to the American Trucking Associations. Some 33.8 million trucks were registered for business purposes in 2016. Almost 4 million of them were categorized Class 8, denoting the largest freight trucks.

Other autonomous trucking startups are in hot pursuit. TuSimple, a company that has operations in China and San Diego and is backed by Nvidia and Sina Corp., plans to test fleets on two routes: one 120-mile stretch between Tucson and Phoenix and another segment in Shanghai. Meanwhile Nikola Motor is designing and building its own driverless, hydrogen fuel cell–powered Class 8 truck—“the iPhone of trucking,” says CEO Trevor Milton. “In the next eight years, you’re going to see a complete transformation of trucking,” he adds.

In China, a three-digit score could dictate tour place in society

In 2015 Ant Financial was one of eight tech companies granted approval from the People’s Bank of China to develop their own private credit scoring platforms. Zhima Credit appeared in the Alipay app shortly after that. The service tracks your behavior on the app to arrive at a score between 350 and 950, and offers perks and rewards to those with good scores. Zhima Credit’s algorithm considers not only whether you repay your bills but also what you buy, what degrees you hold, and the scores of your friends. Like Fair and Isaac decades earlier, Ant Financial executives talked publicly about how a data-driven approach would open up the financial system to people who had been locked out, like students and rural Chinese. For the more than 200 million Alipay users who have opted in to Zhima Credit, the sell is clear: Your data will magically open doors for you.

Zhima Credit is dedicated to creating trust in a commercial setting and independent of any government-initiated social credit system. Zhima Credit does not share user scores or underlying data with any third party including the government without the user’s prior consent.”

The State Council has signaled that under the national social credit system people will be penalized for the crime of spreading online rumors, among other offenses, and that those deemed “seriously untrustworthy” can expect to receive substandard services. Ant Financial appears to be aiming for a society divided along moral lines as well. As Lucy Peng, the company’s chief executive, was quoted as saying in Ant Financial, Zhima Credit “will ensure that the bad people in society don’t have a place to go, while good people can move freely and without obstruction.”

For those with good behavior, Zhima Credit offers perks through cooperation agreements that Ant Financial has signed with hundreds of companies and institutions. Shenzhou Zuche, a car rental company, allows people with credit scores over 650 to rent a car without a deposit. In exchange for this vetting, Shenzhou Zuche shares data, so that if a Zhima Credit user crashes one of the rental company’s cars and refuses to pay up, that detail is fed back into his or her credit score. For a while people with scores over 750 could even skip the security check line at Beijing Capital Airport.

Tencent and Alibaba go abroad to push for growth and know-how

“[Tencent] are willing to look at anything they think will help them to export what they know in China to other countries,” he says, describing the company’s efforts as a China-inspired “third way” of doing M&A. “The deals they are doing tend to be very strategic, and the size of the deals is typically hundreds of millions of dollars or single-digit billions, whereas those by Anbang, HNA and the rest are tens of billions of dollars and unrelated with nothing strategic about it,” says one banker.

Meituan-Dianping, the biggest company in food delivery, ticketing and other services that was valued at $30bn in its latest fundraising, gives Tencent access to swaths of merchants and customers in physical restaurants and stores. “This capability is not something Tencent has in-house, but it’s something that will be beneficial to help it grow its ecosystem. We can push Tencent payments, and small merchants to work with Tencent platforms. And Tencent can bring their traffic to us, provide infrastructure, mapping, cloud services. So this is very complementary.”

Facebook: The bear case will only gain momentum, says Moffett Nathanson

Bull case is predicated on its massive scale […] 2.1 billion monthly users and 1.4 billion daily active users, representing 58% and 39% of the globe’s Internet users […] the level of scale, reach and gigantic trove of data that comes with it clearly has immense value for targeted marketers […] still growing MAUs at respectable rates […] growth is even more impressive in the developing regions [….] 17% CAGR in the Rest of World over the past three years has and has sourced more than a third of its growth from here over that period […] immense base of advertisers […] staggering 6 million advertisers in November of 2017 […] this diversification is a huge asset […] very different than traditional media where, in areas like Network TV, the top 100 clients generally represent 2/3 of ad dollars […] still has a huge opportunity in international and messaging […] in every country except France, Canada, China, the U.S., and the U.K., WhatsApp is the dominant IM platform with more than 60%+ penetration […] We think that if it can get the formula right, it already has a significant user foothold and runway for ramping revenue quickly […] Street estimates look too conservative [for 2018] Street’s conservatism in forecasting despite years of outperformance is a result of Facebook’s aggressive expectation management […] It’s still really cheap! Facebook currently trades at 19x 2018 EV/Ebitda […] By comparison, Priceline (PCLN) is trading at 18X.

Facebook’s video strategy remains a mystery [….] It hosts this content in its standalone Watch Tab […] We don’t think it has been terribly successful here, and wonder how many users even realize or opt to click the Watch Tab when on Facebook […] Facebook hasn’t been aggressive in approaching studios or smaller video creators for content. It appears that Facebook is slowly trying to tiptoe […] Facebook has really frustrated producers by continually changing what it is looking for […] Engagement amongst younger demos has been waning […] Facebook’s video push is more than simply nice to have, it’s now a must have if it wants to stave off further engagement declines […] Facebook has apparently hit the upper bound of its ad load on core Facebook […] The story has moved from a largely volume driven one to a largely pricing driven one […] businesses that have years of significant double digit volume growth ahead of them certainly look more appealing and greenfield other things being equal than those that have moved into the pricing growth phase of their lifecycle […] Despite the significant traction for Messenger and WhatsApp globally, Facebook’s ability to meaningfully monetize them still remains a major question mark […] [Congressional investigations into Russian advertising, etc.] are just the beginning of a bigger regulatory review of Facebook’s influence on our society and political process. As a result, it could spell years’ worth of incremental investment to help police the problem […] With 82%+ of analysts with a Buy rating on Facebook for the last 3.5 years […] any hiccups in growth or profitability could lead to a downside reaction that is amplified.

Amazon hasn’t figured out drugstores yet. But it will have to

Even so, many shoppers prefer get their medications from a store, which offers peace of mind that their order is correct and the opportunity to speak with a pharmacist. Mail-order prescriptions fell 23 percent from 2012 to 2016, according to Adam Fein, CEO of the Drug Channels Institute, with mail pharmacies dispensing only 10 percent of all 30-day equivalent prescriptions in 2016. And the cash generic-drug market for the uninsured — once eyed by Wal-Mart — is considerably smaller thanks to Medicare Part D and Obamacare. The cash market makes up about 7 percent to 8 percent of all prescriptions, and has been declining slowly along with the number of uninsured people, according to Fein. Revenues from cash-paid prescriptions are about $25 billion a year, he said.The most promising window for Amazon may be the rising out-of-pocket costs shouldered by those with prescription-insurance plans. About half of all insurance plans had deductibles on prescription drugs in 2016, up from 23 percent in 2012, according to Pharmaceutical Research and Manufacturers of America. If insured drug-takers become more cost-conscious, Amazon could attempt to bring convenient online price transparency to a complex industry that makes it difficult for customers to shop around. Amazon could be encouraged to push through the complexities to increase the value of Prime membership. Two-thirds of Prime members would fill prescriptions through Amazon if the company offered them, according to research by Cowen Inc.

The loopholes drug companies use to keep prices high

The expiration date for the main Revlimid patent will be 2019. But Celgene’s business tactics, also used by other drugmakers, could allow the company to put off unrestricted competition from generics until 2026. That would cost Americans an extra $45 billion just for Revlimid, according to I-MAK, a consumer advocate.

Among the shenanigans: Securing new patents that extend old ones. Keeping brand-name drugs under wraps so generic makers can’t copy them. Filing so-called citizen petitions that gum up the FDA approval process for rivals. Negotiating restrictive deals with drug plans that crowd out less expensive drugs.

Citizen petitions are another way brand-name drug companies delay approval of competitors’ products. The petitions were designed to elicit public concerns about the drugs. The FDA is required to divert resources to address each one. From 2011 to 2015, brand-name drugmakers filed 108 citizen petitions during the approval process for cheaper versions, and 91 percent were denied, according to a paper by Rutgers University Law Professor Michael Carrier. The petitions “can play a crucial role in delaying generic entry,” he wrote. The introduction of cheaper generics can be delayed even after a brand-name patent has been invalidated in court.

A hospital giant discovers that collecting debt pays better than curing ills

The amount of past-due medical debt in the U.S. is about $75 billion, spread among 43 million people, according to estimates from economists at MIT, Northwestern University and the University of Chicago.

As Tenet and other hospital companies struggle to make money providing medical care, they are turning to the profitable and growing business of collecting debt. Most hospitals have finance departments or outside companies that try to ensure they get paid by insurers and patients. But Tenet has gone a step further than most, turning its operation into a separate business line called Conifer and contracting its services to other medical providers.

Collecting payment has become more important as hospitals’ traditional revenue streams come under pressure. Looming cuts to Medicare reimbursements may make as many as 60 percent of U.S. hospitals unprofitable, compared with about 25 percent currently, according to a 2016 Congressional Budget Office analysis.

Blow to Uber in Europe as top court rules it’s a transport service

The judgement means Uber must comply with individual Member States’ transportation regulations, and cannot claim its p2p ride-hailing services are only governed by less restrictive EU-wide ecommerce rules.

In its ruling the court writes that Uber’s “intermediation service… must be regarded as being inherently linked to a transport service and, accordingly, must be classified as ‘a service in the field of transport’ within the meaning of EU law. Consequently, such a service must be excluded from the scope of the freedom to provide services in general as well as the directive on services in the internal market and the directive on electronic commerce. It follows that, as EU law currently stands, it is for the Member States to regulate the conditions under which such services are to be provided.”

Asimov: Engineering biology

Not only do such biological circuit design automation tools give bioengineers the ability to debug biological circuits much like we debug software — with complete detail of what the simulated circuit is doing — but Asimov engineers have also developed modular biological circuit components that don’t have adverse reactions to other parts of the cell. Why does this matter? It’s akin to a computer programmer designing code that is then injected into a running program or existing operating system. These biological building blocks can be easily used downstream by circuit designers — the bio advance in turn facilitates the computer science advance, namely the accurate simulation of biological circuits.

With Asimov’s approach, high-accuracy simulation, and circuit building-blocks, we can greatly speed the development of biological circuits — decreasing their cost, and greatly increasing their sophistication and complexity.

Because biology is everywhere, living cells have applications in everything from food and materials to agriculture to healthcare. In fact, 7 of the top 10 drugs today are biologics, i.e., proteins that have therapeutic properties. These proteins are manufactured in cells at the cost of billions of dollars. Asimov’s technology could drive a dramatic reduction in cost to patients — enabling these drugs to be in the hands of more and more people.

Auctions & power

This results in decaying economics to the advertisers, as more advertisers join the auction to bid on keywords and clicks become more expensive. Google hides behind the overall statistic that its cost-per-click has been routinely getting cheaper on the aggregate even though this is a direct result of the mix shifting from desktop to mobile, where clicks are nearly ⅔ lower than on desktop.

Since Google is effectively a toll road on the internet, capturing over 90% of the searches performed in nearly every country it touches, advertisers are forced to play ball. But they’re not happy. Not many bidders to an auction come away saying, “wow, we got such a great deal.” In fact, the entire online travel industry is starting to find television advertising an equally compelling offer for their businesses over time. Even in real estate transactions, even if there are just two parties bidding on the property, the auction is designed to capture the highest value from the buyers.

The worst case scorched-earth scenario is far worse for Priceline. It’s a particularly bad time for to open up space for hotels to be bidding on clicks in TripAdvisor’s auctions. At the same time, is getting more aggressive in western markets and third party OTA supply on TripAdvisor has been building, with >80% of listings having a third, fourth or fifth OTA option. Because charges considerably higher commissions than TripAdvisor, hotels are highly incentivized to divert traffic away from Priceline’s channels.

China’s $189 billion giant of finance reveals a huge bet on tech

In the first nine months of 2017, Ping An got more than 70 percent of its earnings from insurance, with banking and asset management each contributing about 15 percent. Profit from its fintech units amounted to 1 percent of the group’s total, a proportion that Bloomberg Intelligence analyst Steven Lam estimates could increase to 3 percent to 5 percent in five years.

One risk for Ping An is that China’s tech companies are building their own financial services ecosystems. Alibaba and Tencent already dominate the online payments industry and are expanding rapidly into areas including asset management, lending and insurance. Ping An’s Tan argues that the company’s massive cache of financial data (it has nine petabytes of the stuff), combined with its offline resources, make the company’s products “fairly difficult” to replicate.

Beijing’s electric-car push could produce a world-class Chinese auto brand

China already leads globally in EV sales, passing the U.S. in 2015. Sales of new-energy vehicles, or NEVs (EVs, plug-in hybrids, and fuel-cell vehicles), may top 700,000 units in 2017 and 1 million in 2018, says Xu Haidong, assistant secretary-general of the China Association of Automobile Manufacturers. Almost all those cars are Chinese brands. The government has set a target of 7 million vehicles by 2025. To reach that goal, it’s doling out subsidies and tightening regulations around fossil-fuel cars.

“With electric cars, the cards are being reshuffled,” says Wolfgang Bernhart, a senior partner at Roland Berger Strategy Consultants in Munich. “We’ll see significantly more competition.” That could happen far from the mainland. “It’s obvious that Chinese carmakers want to sell their cars abroad,” says Klaus Rosenfeld, chief executive officer of German parts maker Schaeffler AG. “China’s manufacturers know that it will be tough for them to compete on combustion engines in our home market. But the shift to more and more electric cars may become an opportunity for them.”

China is building some of the world’s biggest packaged food companies

Having American brands gives WH Group a way to reach upscale consumers in the country that eats about half of the world’s pork, said Kenneth Sullivan, chief executive officer of Smithfield Foods and an executive director of Hong Kong-listed WH Group.

Chinese per-capita consumption is 39.4 kilograms (87 pounds) a year, and domestic hog farms can’t keep up with demand. U.S. pork exports to China and Hong Kong totaled 545,000 metric tons last year, a 61 percent increase from 2015, according to the U.S. Meat Export Federation.

Smithfield can’t export sausage, ham and bacon from its U.S. factories because China prohibits imports of processed meat. So WH Group opened an 800 million-yuan ($116 million) factory in Zhengzhou that will produce 30,000 metric tons of those meats when it reaches full capacity next year.

Truth from zero?

The achievements in Go and Shogi—the Japanese game whose higher depth in relation to Western chess we discussed three years ago—strike us as greater than AlphaZero’s score of 28 wins, 72 draws, and no losses against the champion Stockfish chess program. One measure of greatness comes from the difference in Elo ratings between the machine and the best human players. AlphaGo Zero’s measured rating of 5185 is over 1,500 points higher than the best human players on the scale used in Go. In Shogi, the paper shows AlphaZero zooming toward 4500 whereas the top human rating shown here as of 11/26/17 is 2703, again a difference over 1,500. In chess, however, as shown in the graphs atop page 4 of the paper, AlphaZero stays under 3500, which is less than 700 ahead of human players.

Although AlphaZero’s 64-36 margin over Stockfish looks like a shellacking, it amounts to only 100 points difference on the Elo scale. The scale was built around the idea that a 200-point difference corresponds to about 75% expectation for the stronger player—and this applies to all games. Higher gains become multiplicatively harder to achieve and maintain. This makes the huge margins in Go and Shogi all the more remarkable.

Bitcoin billionaires may have found a way to cash out

The U.S. Securities and Exchange Commission rejected the use of the Gemini exchange to determine bitcoin prices — which Cboe is using for the daily settlement of bitcoin futures — and has expressed doubts about using an index of exchanges — which CME is using. This creates the possibility that a few million dollars of actual bitcoin transactions, assembled in untested ways, will drive hundreds of millions of dollars of derivative settlement payments, which in turn could set the price for potentially tens of billions of dollars of ETFs.

If, say, 1 percent of all bitcoin were taken off the market and held as option collateral, 4 and financial investors put up cash in one-year derivatives, that could do a lot to stabilize the market. That means both reducing price volatility and giving confidence that market prices represent true trading prices for institutional quantities of bitcoin. This, in turn, could make Cboe and CME cash-settled futures more attractive, and thereby represent a solid base for bitcoin ETFs.

On the other hand, if bitcoin billionaires stay out of the market, institutional investment in bitcoin will remain problematic. Individuals will be able to trade small amounts in a fragmented market of loosely regulated exchanges, but futures and ETFs will not be securely backed by physical bitcoin — their prices will be pushed around by betting sentiment of people who own no bitcoin.

What Is Ethereum?

Note that because every single operation on the EVM is executed by every node, computing on the EVM is expensive. Therefore — and according to Ethereum’s development tutorial — the best current use-cases for Ethereum are for running business logic: “if this, then that.” Other use cases might be prohibitively expensive. Due to current issues around scalability and the size of Ethereum’s blockchain, more computationally-intensive programs will find it difficult and expensive to operate on the EVM.

Here’s another way to think about it: where Bitcoin could help users avoid banks, Ethereum could help users bypass platforms like Facebook, Amazon, or any number of more complex middlemen. Once upon a time, developers of a game or a collectible like CryptoKitties might have launched a Farmville-style game on Facebook, or a physical product on Amazon. Today, instead of doing that or building their own blockchains from scratch, developers can use the EVM to create their own decentralized applications – like Cryptokitties.

Can this man build a better bitcoin?

Vitalik Buterin grasped the significance immediately. Prior to creating Ethereum, Buterin covered the San Jose Bitcoin conference as a correspondent for Bitcoin Magazine, a publication he cofounded. The wunderkind programmer interviewed Ben-Sasson about his breakthroughs, and it left an indelible impression. “Personally, I think zk-SNARKs are a hugely important, absolutely game-changing technology,” Buterin tells Fortune. “They are the single most under-hyped thing in cryptography right now.”

In January 2009, Wilcox became perhaps the first person ever to blog about Bitcoin in a post titled “Decentralized Money” on his personal blog, Zooko’s Hack Log. Satoshi Nakamoto returned the favor several weeks later, linking to Wilcox’s write-up in an addendum to a preliminary release of the Bitcoin software on, the newly created project’s home page. Wilcox was one of only three people to receive an honorable mention in the “related links” section. (The others were Nick Szabo, inventor of “bit gold,” and Wei Dai, creator of “b-money.”)

Curated Insights 2017.12.03

A dynamic knowledge tool to understand the issues and forces driving transformational change across economies, industries, global issues and the Forum’s system initiatives.

How to tame Google, Facebook, Amazon, and Apple

The problem with price regulation is that Google doesn’t charge high prices—at least not to consumers, the traditional victims in monopoly cases. The company initially helped wipe out the profitability of newspapers and magazines, in part, by undercutting the price of print advertising. These days, however, Google can charge hefty prices to advertisers because it controls so much inventory and user data. Advertisers can feel they have no choice but to pay up, while consumers pay precisely zero to do searches or send emails.

Amazon is a “cheetelephant,” said one analyst: an elephant that runs as fast as a cheetah. It’s considerably faster than the regulators and lawmakers who have been caught flat-footed and are now wondering what, if anything, to do about its increasing market power, from books to groceries to moviemaking.

“If you look at the business models of these firms, none of these is a predatory pricing model. These firms are making a lot of money doing what they’re currently doing,” said Penn’s Hovenkamp. Besides, he said, “there are constantly new entrants” that would prevent a company from earning monopolistic profits. For antitrust enforcers, the problem is that by the time you know for sure whether a company predatorily drove rivals out of business, it’s too late to prevent it.

Facebook, in other words, is damned if it does censor and damned if it doesn’t. How is this likely to evolve? One possibility is that Facebook will tire of taking the heat and voluntarily submit to government regulation. A regulated Facebook would still have to employ people and algorithms to scour its website of forbidden materials, as it does today, but at least it could point the finger at lawmakers and regulators if questioned about its choices. The same would go for Google and some companies not covered here, such as Twitter.

It’s a good bet that there will be more such orders in coming years. Governments want money, and the four tech giants have a lot of it. In the meantime, while trying to come up with a better tax system, Europe is toying with the idea of taxing the tech companies’ revenue rather than their profits. The reasoning is that revenue is harder to manipulate. But revenue is a crude measure of a company’s ability to pay taxes. Revenue-based taxation would be too hard on companies with lots of revenue but little profit, and too easy on companies with little revenue but lots of profit.

Under an apportionment system, each country is still permitted to set its corporate tax rate however it chooses. But it will be able to charge its rate only on its little slice of the company’s global profit—a slice that’s determined by an agreed-upon formula. A country can no longer grab a bigger piece of a shrinking corporate-tax pie by cutting its rate below other countries’. In one stroke, the race to the bottom in tax rates is cut short.

Getting low-tax countries to go along with an apportionment system would be tough, though. No country wants to give up what makes it special. So something like the current tax system, albeit with fewer loopholes, is likely to persist for at least awhile. Apple, Google, Facebook and Amazon will keep finding ways to pit countries against one another.

Why Tencent Could Become an Advertising Powerhouse Like Facebook

Tencent’s ad revenue could more than double to $11.4 billion by 2019, according to researcher eMarketer. The company is estimated to increase its market share in China’s digital ad space to 15 percent from about 9 percent, eMarketer said.

Social advertising, which relies on information from a user’s network, is still a nascent business in China. The model that drives Facebook only accounts for about 10 percent of mainland digital marketing with e-commerce and search ads still taking the lion’s share. Lau expects that to change. “Social advertising can play a larger role,” said Lau. “In China, we are kind of pioneering the categories” of that.

So Tencent’s chosen to exercise restraint, usually showing just one ad per day on WeChat’s “Moments”, a function similar to Facebook’s news feed, capping inventory by intention. That’s why it earns just $2.10 per daily active user on WeChat, versus Facebook’s $30.10, Morgan Stanley estimates.

To do that, it’s enlisted an army of more than 250 computer scientists to expand in artificial intelligence, focusing on natural language processing, image recognition and user behavior prediction. That investment is showing up in some areas: Tencent worked with BMW to target high-end users based on their friends and location logs, sending them WeChat ads through which they could book test drives. The end game is converting ads into purchases, which is why the company’s exploring also hotels, dining and property, Lau said.

How Tencent could help Snapchat

Integrating gaming into Snapchat might be a good idea – not just because it creates more ways to generate revenue, but also because it can enhance user engagement. Globally, more people watch gaming videos and streams than HBO, Netflix, ESPN, and Hulu combined. As Snapchat strives to add users globally, it would be smart to tap into the millions of gamers worldwide who are already spending hours each day playing games, many of which Tencent has invested in.

“There is a strong likelihood that the redesign of our application will be disruptive to our business in the short term. We’re willing to take that risk for what we believe are substantial long-term benefits to our business.”

Amazon focuses on machine learning to beat cloud rivals

The industry has turned into a race to provide customers tools and functions to use that data in new ways. Those tools are helping speed the transition to the cloud, since companies that don’t have access to them will be at a competitive disadvantage, Jassy said. “We are in a transition stage right now. Relatively few companies will own their own data centers, and those who do will have significantly smaller footprints. That means all of that data is moving to the cloud.”

The cloud computing market will grow to $89 billion in 2021, up from $35 billion today, according to technology research firm Gartner Inc.

Amazon AWS: Is that what the second headquarters is about? Asks Goldman

“While Amazon has never discussed any plans for a spin or any HQ2 plans relative to AWS, it is possible that the location of the new headquarters could provide some insight into the way management is thinking about the positioning of AWS.”

Terry’s curiosity is piqued by the fact that Amazon increasingly competes in the same industries that are customers for AWS, including gaming, healthcare and life sciences. Presumably, a separation of AWS might lessen the conflict there. Terry sees AWS being worth $430 billion, on a sum-of-the-parts basis, equaling 60% of Amazon’s enterprise value.

Broadcom could bid as much as $100 for Qualcomm and still see a payoff, says Canaccord

We assume Qualcomm settles its licensing dispute with Apple with Apple paying roughly half of what it previously paid Qualcomm for iPhone royalties. We also assume Qualcomm settles its dispute with Huawei or the other large OEM currently not paying Qualcomm royalties. We believe Broadcom management has solutions for Qualcomm’s disputes as part of its reasoning to make a bid for Qualcomm, but we have used these assumptions based on our Qualcomm scenario analysis used for our Qualcomm price target in our last published Qualcomm note. We also assume $500M in synergies achieved between Qualcomm and NXP in our scenario analysis including NXP. Further, we assume a 4% interest rate on combined debt for an acquisition with NXP and 3.5% for an acquisition without NXP given larger debt levels needed if the acquisition includes NXP. We also assume $1.5B in F2019 synergies between Broadcom in Qualcomm and a combined company tax rate of 15%.

Beyond Tesla’s semi truck: The future of trucking and transportation

We are currently entering a period of a rapid change in our transportation systems. And as I see it, it’s the innovator’s dilemma playing out in the wild: Incumbents like General Motors are moving too slowly to adapt to an all-electric future—wasting billions of dollars on stock buybacks—while upstarts like Tesla, unencumbered by legacy business models, are forging a path into a clean, fully-electric, fully-autonomous future. (GM has spent almost $17 billion in the last several years buying back its stock, three times what Tesla has spent building Gigafactories.)

One is that the cost of trucking falls by at least 50%, if not more. No driver, double the passive productivity, and in essence, you eliminate most of the safety problems. And by the way, if you apply this [autonomous] technology, many of the concerns we have from a safety standpoint about large trucks go away and you can make the trucks bigger. So, the costs fall at least in half. Transit time falls at half too, because you’re not waiting.

Let’s look at it from a technical standpoint. There are two competencies that keep trucking firms alive. The first one is their ability to match demand and supply; which is very important, and the second is their ability to manage drivers. There’s a modest competency with respect to equipment, but it’s not that important. Well, in the first place, if you if you eliminate the drivers, you eliminate half of the value-added that the trucker provides. And second, if you go to integrated big data, the business of matching capacity to demand becomes much easier. So, what it does is it either eliminates, or dramatically changes the principal competencies of whatever we call this entity which we now call “trucker” provides to the marketplace. So it’s big, big changes.

Why Tesla’s fuel efficiency advantage won’t last

At the early part of the 2000’s trucks getting 5 mpg were common. Today’s fleet is more like 7 mpg. That two miles per gallon increase means diesel used falls from 20,000 gallons a year down to under 15,000 gallons. Best-in-class trucks today might approach 9-10 miles per gallon. That three mpg increase versus fleet average (presumably what Tesla used in its cost calculator) is another 30% drop in fuel use, down to 10,000 gallons. The SuperTruck programs that get 12 or more mpg, (using many of the same aero techniques that Tesla’s Semi uses) would use around 8,000 gallons of fuel. In other words the opportunity to lower the Tesla cost of ownership with fuel savings is currently 15,000 diesel gallons a year, but will soon enough be only half that, using current line-of-sight technologies. At current fleet average diesel costs the savings opportunity on 100,000 miles per year is $37,500 per truck. At current best-in-class the available pool of offset-able fuel cost is $25,000. On future trucks, perhaps not too far distant from Tesla’s launch, is only $20,000 per year. All this assumes you can run a truck 100,000 miles a year in 300 to 500 mile increments.

The future difference between Tesla’s astonishing 19 mpg equivalent and the SuperTruck 12 mpg is only 3,000 gallons a year of diesel equivalent. Compared with the 7,000 gallons per truck per year already in the diesel improvement pipeline, that 3,000 gallons doesn’t look as compelling.

Inside the revolution at Etsy

Inside Etsy, Mr. Silverman’s reorganization has upended parts of the company once considered sacrosanct. Last month, Etsy changed its mission statement. Gone was a verbose commitment “to reimagine commerce in ways that build a more fulfilling and lasting world.” Instead, the mission was reduced to just three words, “Keep commerce human,” accompanied by a spreadsheet outlining its goals for economic, social and ecological impact. And because remaining a B Corp would require the company to change its legal standing in Delaware, where it is incorporated, Etsy will let that certification lapse.

Paytm aims to become largest full-service digital bank

“Digital payments was our entry point, we want to become a vertically-integrated financial services company.”

Payments banks can accept deposits and remittances but cannot lend. Paytm is one of less than a dozen entities that got permits to start payments banks to bring financial services within easy reach of about a fifth of India’s 1.3 billion people who do not have access to organized financial services.

Paytm Payments Bank is majority-owned by Sharma. One97 Communications, which is backed by Alibaba Group Holding, Ant Financial Services and others, holds the remaining 49 percent. The payments bank morphed out of Paytm’s digital wallet which got a huge boost and amassed over a hundred million customers after India took its high currency bills, totaling nearly 90 percent of the value of cash, out of circulation last November.

Sharma may have found a way around the regulatory hurdles that bar lending. One97 Communications will introduce a charge card and offer monthly installment-based loans, he said. “We will launch share trading and insurance products very soon,” said Sharma. “We want to become an Internet-age financial services company.”

Business lessons from Ben Thompson of Stratechery

“Zero distribution costs. Zero marginal costs. Zero transactions. This is what the Internet enables, and it is completely transforming not just technology companies but companies in every single industry.” “Aggregation Theory is a completely new way to understand business in the Internet age.”

“instead of some companies serving the high end of a market with a superior experience while others serve the low-end with a “good-enough” offering, one company can serve everyone…. it makes sense to start at the high-end with customers who have a greater willingness-to-pay, and from there scale downwards, decreasing your price along with the decrease in your per-customer cost base (because of scale) as you go (and again, without accruing material marginal costs). Many of the most important new companies, including Google, Facebook, Amazon, Netflix, Snapchat, Uber, Airbnb and more are winning not by giving good-enough solutions to over-served low-end customers, but rather by delivering a superior experience that begins at the top of a market and works its way down…”

“Apple and Amazon do have businesses that qualify as aggregators, at least to a degree: for Apple, it is the App Store (as well as the Google Play Store). Apple owns the user relationship, incurs zero marginal costs in serving that user, and has a network of App Developers continually improving supply in response to demand. Amazon, meanwhile, has Amazon Merchant Services, which is a two-sided network where Amazon owns the end user and passes all marginal costs to merchants (i.e. suppliers).”

“Once an aggregator has gained some number of end users, suppliers will come onto the aggregator’s platform on the aggregator’s terms, effectively commoditizing and modularizing themselves. Those additional suppliers then make the aggregator more attractive to more users, which in turn draws more suppliers, in a virtuous cycle. This means that for aggregators, customer acquisition costs decrease over time; marginal customers are attracted to the platform by virtue of the increasing number of suppliers.”

“Breaking up a formerly integrated system — commoditizing and modularizing it — destroys incumbent value while simultaneously allowing a new entrant to integrate a different part of the value chain and thus capture new value.”

Active vs. passive vs. Amazon et al.

“Sectors such as finance, information technology, media, and pharmaceuticals — which have the highest margins — are developing a winner-take-all dynamic, with a wide gap between the most profitable companies and everyone else.”

“I have long described Amazon as a Field of Dreams company, one that goes for higher revenues first and then thinks about ways of converting those revenues into profits; if you build it, they will come. In coining this description, I am not being derisive but arguing that the market’s willingness to be patient with the company is largely a result of the consistency with [which] Jeff Bezos has told the same story for the company, since 1997, and acted in accordance with it.”

“These models have an in-built structure where they are going to tip into winner-take-all areas. The cost of adding a new user gets smaller and smaller the bigger you get. [This starts] creating a competitive advantage that gets harder and harder to bridge.”

It’s not unusual for a few stocks to drive broader market performance in a given year, but we would be foolish to ignore that it has been the same several stocks quite frequently in recent years. Facebook, Apple, Amazon, Netflix, and Google are responsible for roughly 20% of the S&P 500’s performance this year, and generated more than the entire return of the index in 2015.

The secret to tech’s next big breakthroughs? Stacking chips

The advantage is simple physics: When electrons have to travel long distances through copper wires, it takes more power, produces heat and reduces bandwidth. Stacked chips are more efficient, run cooler and communicate across much shorter interconnections at lightning speed.

Chip stacking enables totally new capabilities too. Some phone cameras stack an image sensor directly on top of the chip that processes the image. The extra speed means they can grab multiple exposures of an image and fuse them together, capturing more light for dim scenes.

But Mr. Dixon-Warren says the spread of 3-D chips is rapid and their takeover inevitable. A decade ago, this technology was limited almost exclusively to university labs; five or six years ago, it was still hard to find commercial examples. But now it’s popping up all over, in applications like networking and high-performance computing and in high-end wearables like the Apple Watch.

How does Costco sell 18-year-old single malt Scotch for $38?

“Costco has a volume deal with [spirits] companies including Edrington and Diageo. They agree to buy a certain amount of product at a certain price, which is far lower than everyone else is paying. For products like Johnnie Walker Blue or Macallan, it’s virtually impossible to beat Costco on price.”

“If Costco can control the importation of the whisky, get someone to distribute it to them at cost (or at very slim single-digit margins due to high volume) and then sell it at very low margins, then they’re golden.”

Finally, one reason rarely considered for why Costco might be able to offer better pricing is proof. Typically, whisky connoisseurs would want that 25-year-old Scotch to have some decent heft after all those years of concentrating in barrel. Alcohol is a conduit for flavor, after all. But all Kirkland Signature Scotches are sold at 80 proof, meaning that these whiskies are watered down to the absolute lowest legal limit and, thus, Costco is able to empty barrels into way more bottles.

Big oil and auto makers throw a lifeline to the combustion engine

The new lubricants are meant to help auto makers build smaller, turbocharged engines that are still quite powerful, resulting in efficiency gains close to 15% compared with older models. Optimizing internal combustion engines could boost efficiency by an additional 25%—a calculation that might tempt auto makers from spending more on electric-vehicle technology. Other efforts to enhance performance include adding gears to transmissions and making vehicles more aerodynamic.

The gains from engine oil alone are limited, however. Industry experts say the latest lubricants typically boost fuel economy by less than 1%, primarily by reducing the amount of energy needed to pump a piston. Even so, it is a highly cost-effective solution that adds up when spread across millions of vehicles.

‘It’s beautiful’: This Toronto startup is investors’ secret weapon to beating the market

Legal experts say investors may be risking more than their capital when using such alternative data since case law hasn’t yet determined what crosses the line into privacy violations or insider trading, but it’s a risk a growing number of financial institutions are willing to take, especially since in Apache’s case, and many others, it has paid off.

“That is the original alpha source, knowing something the market doesn’t know. It’s beautiful,” he said. “If you can come to them with a genuine information advantage, where they can know something their peers in the market do not know that’s tradable, that’s hugely valuable.”

Quandl is particularly interested in companies that produce what it calls “exhaust” data, or data collected as part of a company’s normal operations without intending to turn it into a revenue source. For example, insurance companies keep records of how many new car insurance policies they sell, as well as which vehicle manufacturer’s model is being insured, which happens to be a great predictor of new car sales before the automakers release the data themselves.

But Quandl faces a dilemma after convincing suppliers to sell their data: the more clients the company sells the data to, the less of an investing edge it provides, making it less valuable. To solve that problem, Quandl uses the data to build a predictive model to make an educated guess about how much money could be invested before the data loses its advantage and then sells it to a limited number of clients accordingly.

About 11% of land in Japan is unclaimed

That’s about 41,000 square kilometers (16,000 square miles), which is equivalent to the size of Japan’s southwestern island of Kyushu, or almost as large as Denmark. By 2040, land equivalent to Japan’s second-largest island of Hokkaido will be unclaimed or abandoned, according to a panel of experts and government representatives. This will cost the nation roughly 6 trillion yen ($54 billion) over the period 2017-2040, including lost development opportunities and uncollected taxes, the panel says.

“Land prices are falling in the depopulating regions,” Yamanome said. “Not only is it impossible to make money by owning some land, but also you can’t get rid of it because regional real estate markets are stale.”

Great products vs. great businesses

A product is something that solves someone’s problem. A business is a product that works so well that people will pay more than it costs to produce.

But losses come in different flavors. There is a difference between a company that loses money because it’s investing in the infrastructure needed to become a profitable company, and a company that loses money because it can’t charge customers a price that reflects what it costs to run the business. But we often conflate the two, treating all loss-making startups with a sense of, “It’s OK, they’re growing.”

Companies are staying private longer than they used to. So venture investors that specialize in the early phase of big-losses-because-we’re-investing-in-what-it-takes-to-build-a-profitable-business have found themselves holding mature companies that in a different era would have been passed onto investors who demanded a sustainable business model with profits. In any other era, Uber, Airbnb, Pinterest, and others all would have been public companies by now. And public markets almost certainly wouldn’t let losses pile up for as long as they have. We’ve seen this with Blue Apron and Snap, whose shares have fallen between 50% and 70% since going public just months ago. Both make amazing products that attracted armies of users, which VC investors oogled over. But public investors took one look at their business models and said, “What the hell is this?!” Who knows what that means for their future as standalone companies.

Pricing power: Delighting customers vs mortgaging your moat

The problem with this source of pricing power is that it comes with an off balance sheet liability. A sort of “negative goodwill” that grows every time you increase prices. While the profits might roll in for awhile, one day the customers will revolt. At the very least, the perceived excessive pricing of the well water will create a huge incentive for customers to try any new competitor that comes to town. While the high pricing makes it look like the company has a competitive advantage, in fact the excess returns are being created by a process that increases the likelihood of a successful competitive assault sometime in the future.

Lessons from a legendary short seller

“Because I never wanted to get up in the morning hoping that things would be getting worse. All intellectuals I think — and I don’t use that as a particularly flattering term — but all intellectuals tend to have a pessimistic streak.”

“I would forget the shorting. I think it’s over. It’s over for one simple reason: If shorts start working, that is, stocks go down for any sustained period of time, a great many people who are not now shorting will start shorting. There is a limited supply of stocks to borrow to sell short. Those stocks that are good shorts tend to be very obvious. As I’ve often said, I can predict with confidence that you’ll die. I cannot predict that you’ll be born, and so failure is analytically obvious and everybody piles into the same short. . . . I do believe if shorting really becomes profitable again, it’s going to become so crowded that most people won’t be able to borrow stock.”

Pulling iron from brain may offer hope in Alzheimer’s fight

The familiar metal is key to numerous brain functions, but too much of it is toxic. Researchers in Melbourne showed two years ago that iron levels in the brain can predict when people will get Alzheimer’s disease. Now, the team aims to show how removing excessive amounts with a drug called deferiprone can stave off the memory-robbing disorder.

Laptops are great. But not during a lecture or a meeting.

Laptops distract from learning, both for users and for those around them. It’s not much of a leap to expect that electronics also undermine learning in high school classrooms or that they hurt productivity in meetings in all kinds of workplaces.