Luckin as tech startup

Tim Culpan of Bloomberg notices an oddity about Luckin Coffee, China’s answer to Starbucks:

The pending Nasdaq debut of China’s Luckin Coffee Inc. begs the question of whether it’s a purveyor of beverages, or a technology company.

As I pore through its 286-page IPO filing, I find myself struggling to decide. It’s kind of like Starbucks Corp., I guess, but also a lot like food-delivery giant Meituan Dianping and ride-hailing pioneer Uber Technologies Inc. […]

Luckin posted 841 million yuan ($125 million) in revenue last year, exploding from 250,000 yuan the year prior. But its operating expenses were three times higher than sales at 2.4 billion yuan. And it wasn’t even materials, store rentals or admin expenses that blew out the bottom line.

Marketing costs were 746 million yuan last year. To make every 100 yuan from selling coffee, Luckin spent 152 yuan to produce and market that cup – not including rent and general expenses.

Spending three times more than revenue makes Luckin a tech startup, not an F&B company.

Is it also part of the Belt and Road?

I previously wrote about Luckin here.

What has changed

The Simpsons

Tweet by Paul Musgrave, assistant professor of political science at UMass Amherst:

The Simpsons used to be viewed as a portrait of a lower-middle class family. They had a house, car, job security, and a single wage-earner who didn’t graduate college. These days, that’s beyond unattainable.

The Simpsons premiered in December 1989. What has changed in the intervening 30 years is the destruction of the middle class and Middle America. The US is not wisely led.

PS:

1989: mr. burns is a dick. 2019: i would literally weep with relief if my boss offered me this kind of job security.

Mr Burns The Simpsons

Fuzzy GDP math

It’s hardly a secret that China’s reported GDP growth figures are less than reliable; premier Li Keqiang actually acknowledged that the numbers are “man-made and therefore unreliable” more than a decade ago. A new study from economists at the Chinese University of Hong Kong and the University of Chicago estimates just how inaccurate those figures are:

China has overestimated its nominal and real growth rates by about 2 full percentage points on average between 2008 to 2016, with the miscalculation increasing each year, according to a new study published on Thursday.

The results indicate that the actual size of China’s economy at the end of 2018 was well below the government’s official estimate. […]

Using the study’s findings and applying them to government figures starting with the level of nominal gross domestic product (GDP) at the end of 2007 and the growth rate for 2008, calculations by the South China Morning Post show that the current nominal size of the Chinese economy is about 18 per cent lower than the official level of 90 trillion yuan (US$13.4 trillion) at the end of 2018. […]

SCMP calculations show the adjusted nominal GDP level in China is about US$11.5 trillion using current exchange rates, still more than twice the size of Japan’s economy at US$5.16 trillion, but well below the economy of the United States at US$20 trillion.

Some economic doom & gloom

David Stockman says it wouldn’t be prudent

A sobering assessment of America’s economic health by a former Director of the Office of Budget and Management (OBM). Whether you agree or disagree with his analysis, it’s worth a listen:

Listen to “Josh Jalinski Talks to David Stockman, Author & Former Budget Director” on Spreaker.

Quoth David Stockman:

The trade war with China is aimed at the wrong problem: it’s not bad trade deals or even nefarious activities by the Chinese state, the problem is bad money – this tremendous money-pumping that the Fed has done over the last 20 or 30 years, which has really undermined the Main Street economy and caused production and good jobs to shift offshore.

[…]

At the federal level, we now have [$]22 trillion of debt… If you take households that have 15 and a half trillion of debt, business that has about 14, you take the federal government, state and local, and then financial institutions, the total debt in our society today is $70 trillion, sitting up there on top of a GDP that’s barely 20 trillion. So we have three and a half times as much debt as we have income, and if you look at history… that is off the charts, that is a warning sign that this system is not sustainable. When we had a healthy economy, pre-1971, we had in fact a whole century of good economic prosperity and progress, from 1870 to 1970, the average debt-to-GDP ratio for the whole economy was 150%, not 350%.

Y’all aboard

Texas bullet train

I admit I was surprised to learn that a private company is planning a high-speed rail line between Houston and Dallas, and construction is expected to start as early as this year:

  • Texas Central Partners could begin construction on its $12 billion Dallas-to-Houston high-speed rail project in late 2019 or early 2020, according to The Houston Chronicle. The developer also has tentative plans for a midway stop near Texas A&M University in College Station or Bryan.
  • The bullet train will be modeled after Japan’s Shinkansen high-speed train system because of its safety and efficiency track record. Texas Central says that the train’s two-track system — one northbound and one southbound — will not share tracks with freight lines.

This looks like a far better place for America’s first high-speed rail line than, say, LA to San Francisco, as the land between the two Texan cities is mostly flat, making the construction far simpler and therefore cheaper than the $77-98 billion California project.

From developer Texas Central’s website:

The main challenge, as noted in the press releases, is connecting the Central Valley to the main centers of population in the Bay Area and Los Angeles. This is why the current range of expected cost in California is between $77 billion and $98 billion. Out of this figure, the tunnels required to link the valley to San Jose (Pacheco Pass) and Los Angeles (Tehachapi Mountains) collectively, could cost well over $20 billion with significant underground risk.

To put this in perspective, the potential cost of these tunnels alone, is more than the total projected cost of Texas Central’s 240-mile project to link Houston and North Texas.

More about the project:

Nearly 50,000 Texans, sometimes called “super-commuters,” travel back and forth between Houston and Dallas/Fort Worth more than once a week. Many others make the trip very regularly. The approximately 240-mile high-speed rail line will offer a total travel time of less than 90 minutes, with convenient departures every 30 minutes during peak periods each day, and every hour during off-peak periods – with 6 hours reserved each night for system maintenance and inspection.

[…]

Capable of operating at speeds in excess of 200 miles per hour and moving passengers between Dallas and Houston in less than 90 minutes

[…]

JRC’s Series N700 rolling stock features 16-car trains running between Tokyo and Osaka, Japan. To serve the Texas market, Texas Central anticipates an eight-car train with seating capacity for an estimated 400 passengers, and the room necessary to provide them the comfort, amenities and service options they will expect and deserve.

And more background on the selection and financing of the project:

Our project is in Texas intentionally. After reviewing over 90 pairs of cities to determine the most commercially successful place to deploy a high-speed train, Houston to Dallas was the answer. The Houston to Dallas/Fort Worth region is by far, the most rapidly growing region in the nation. In 2018, Dallas and Houston combined added 224,700 jobs, compared to number two city, New York, at 115,500 jobs. No other region even comes close.

This generates significant congestion in roads and air travel infrastructure, which gives rise to a third choice: high speed rail. At the right distance, with the right economic links between Dallas, Houston and the Brazos Valley, and without the complexities now evident in California, our approach is more financially feasible.

As an investor owned project, not a government project, our financial discipline is rooted in the economic model and timelines for significant, public use infrastructure. Given economic realities, this is the right way to build this large-scale infrastructure for the public good, at the right time, to alleviate the growing congestion growth is bringing to our area, and so reduce public investment in other infrastructure.

We know the market and economics between North Texas and Houston match and exceed those of successful train routes globally. We are confident the Texas line will provide the ridership to sustain the operations, repay the debt and provide a return to the investors.

Sounds great. I hope they actually build it.

Pork

This is an interesting thread by investor Adam Townsend about agriculture and US-China trade that sheds light on China’s monumental takeover of Smithfield Pork in 2013. What happens when you sell domestic farmland to a Chinese government-supported company? Worth reading in full, despite the terrible formatting (thanks to its origins on Twitter):

1/ This is a kick a*s thread about China, tech theft, its food supply and its pollution. You are about to become an expert, lets begin…
Technology…
CFIUS (Committee on Foreign investment in the US) is made up of 32 different federal agencies…
2/ that review foreign purchases that could affect U.S. security such as access to technology, military contracts, installations or other sensitive information. Agriculture isn’t part of the CFIUS mandate nor is the USDA or FDA.
3/ The committee isn’t required to review any deals, relying instead on outsiders or other government agencies to raise questions about the appropriateness of a proposed transaction.

The most common foreign investor that hits the CFIUS radar is China. Let’s peel that onion
4/ President Obama stopped a Chinese investment fund from acquiring the U.S. subsidiary of a German semiconductor manufacturer
In September 2017, Trump halted a China-backed investor from buying the American semiconductor maker Lattice
5/ A Chinese company’s plan to acquire the American money transfer company MoneyGram fell apart after CFIUS expressed their concerns that the personal data of millions of Americans would be exposed
6/ CFIUS advised against a Chinese group’s attempt to buy Xcerra, a Massachusetts HQ’ed tech company
Trump blocked the purchase of the chipmaker Qualcomm by Singapore-based Broadcom Ltd.on the advice of CFIUS

Now we gotta talk about Chinese pollution. Buckle up…
7/ Only (about) 11 percent of Chinese land can be farmed. Most of its tremendous land mass is inarable, degraded by erosion, salinization, acidification, industrial effluent, sewage, excessive farm chemicals and mining runoff.
8/ Chinese rivers have been drying as demand from farms and factories have depleted them. Of the ones that remain, 75 percent are severely polluted, and more than a third of those are so toxic they can’t be used to irrigate farms,

Now we gotta talk about food…
9/ Chinese authorities have encouraged companies to gain greater control over the entire supply chain for imported agricultural products.

Enter the United States…China’s average annual water resources are less than 2,200 cubic meters per capita. The United States, by contrast
10/ is about 9,400 cubic meters of water per person
The United States has six times more arable land per capita
Pork
The Chinese currently eat 88 pounds per capita annually (Americans eat 60 pounds) They produce and consume half of the world’s pork, so…
11/ when there are fluctuations in their domestic production – even small fluctuations – it can really increase their need for imports.

To meet the growing demand, China’s hog farms have grown and multiplied, and more than half of the globe’s pigs are now raised there.
12/ But even so, its production can’t keep up with the pork emand
US pork exports to China went from about 57,000 metric tons in 2003 to more than 2.31 million metric tons (mt) in 2016 which converts to $5.94 billion

It’s cheaper to produce pork in the US than in China.
13/ Our meat industry churns out hogs for about $0.57 per pound, versus $0.68 per pound in China’s new, factory-scale hog farms. The main difference is feed costs. US pig producers spend about 25% less on feed than their Chinese counterparts. We have more abundant land, water…
14/ …and grain resources.
“Control oil and you control nations; control food and you control the people.”
So, China buys Smithfield Pork…

In an effort to cut out the middleman, China is trying to circumvent the American farmer. Instead of buying food from farmers who…
15/ … work their own land, they want to own and operate these American farms themselves—as well as the livestock barns and slaughterhouses.

Chinese consumers, pay a large premium for US pork as it is viewed as higher quality due to our strict food safety laws.

Shaunghui,…
16/ a Chinese meat-processing company in 2013, purchased Smithfield for 30 percent over its market value. It was the largest purchase of a U.S. company by a Chinese firm and the first acquisition of a major American food company by a Chinese business.

U.S. Treasury Department
17/ allowed the purchase to go forward after assurances from Smithfield CEO Larry Pope that there was no connection between Shaunghui and the Chinese government. A year later it was discovered that the Chinese government did have a connection to Shaunghui.
18/ he Communist Party supported the Smithfield purchase with “preferential policy”, as well as “investment,” Zhang Taixi, the government-appointed president of WH Group (the corporate name Shaunghui adopted in 2014), told reporters!
19/ The WH Group advanced the China Communist Party aims to own the entire production chain for pork with the least geographic distance between U.S. pork production and the Chinese market.

One of the benefits to owning every aspect of production from feed through packaging…
20/ is that you can increase production on demand.

ChemChina, a China Communist Party owned company, recently bought Syngenta, a Swiss agrichemical company, for 43 billion dollars, and this creates a bigly foothold in feed production.
21/ What if the Chinese government becomes of the largest players in American agriculture.

We’ve handed over a vertically integrated system to a foreign government.
22/ Side effect of that is the damage left in its wake, production leads to more barns being built and, in turn, waste coming out of those barns. You need more feed for those pigs, so you’re raising more row crops and putting more of that waste onto the fields.
23/ Between 2007 and 2012, Iowa had the largest increase in hog and pig sales of any state in the country, a jump of $1.9 billion. The number of polluted Iowan waterways increased 15 percent between 2012 and 2014. Not only do the waste pits used to capture manure…
24/ …from large hog operations produce antibiotic-resistant bacteria, the pathogens can travel miles away. When a foreign investor buys land, local population loses farming rights, which can lead to people losing their homes, livelihoods, and access to resources like water.
25/ …to preserve its well-being, Iowa outlawed selling farmland to foreign buyers. The median age of the American farmer is 55, in the next five years about 92,000,000 acres will go up for sale.

China no longer growing at Ludicrous Speed

Guangdong province factory

To the extent that official GDP figures mean anything at all, it’s worth noting that Chinese growth is slackening as trade and manufacturing get hit hard:

China is expected to report on Monday that economic growth cooled to its slowest in 28 years in 2018 amid weakening domestic demand and bruising U.S. tariffs, adding pressure on Beijing to roll out more support measures to avert a sharper slowdown.

[…]

Analysts polled by Reuters expect the world’s second-largest economy to have grown 6.4 percent in the October-December quarter from a year earlier, slowing from the previous quarter’s 6.5 percent pace and matching levels last seen in early 2009 during the global financial crisis.

That could pull 2018 gross domestic product (GDP) growth to 6.6 percent, the lowest since 1990 and down from a revised 6.8 percent in 2017.

We have a culprit:

Surprising contractions in December trade data and factory activity gauges in recent weeks have suggested the economy cooled more quickly than expected at the end of 2018, leaving it on shakier footing at the start of the new year.

Sources have told Reuters that Beijing was planning to lower its growth target to 6-6.5 percent this year from around 6.5 percent in 2018.

Tepid expansion in industrial output and weaker consumer spending is squeezing companies’ profit margins, discouraging fresh investment and raising the risk of higher job losses.

Some factories in Guangdong – China’s export hub – have shut earlier than usual ahead of the long Lunar New Year holiday as the tariff war with the United States curtails orders. Others are suspending production lines and cutting back on workers’ hours.

Beijing slowing credit growth is also to blame:

Qin Nan, the chief executive of a Beijing-based manufacturer, needs to borrow at least Rmb5m ($740,000) to expand production of his company’s air purifiers and air conditioners. But because his company lacks an equivalent amount of collateral in property and other assets, Chinese banks were willing to lend only Rmb2m.

[…]

Mr Qin’s grievances, which he recently aired on social media, are increasingly common among private sector companies in the world’s second-largest economy, which have been hit by a squeeze on lending as Beijing has worked to reduce the economy’s dependence on debt-fuelled stimulus. If their complaints are not addressed, the consequences could be disastrous for Chinese officials as they try to avoid a precipitous deceleration in economic growth, which last year slowed to a 28-year low of 6.6 per cent, according to data released on Monday.

Interestingly, according to data cited by the article, “non-state companies” (including foreign-invested enterprises) received only 11% of new loans issued by the official banks in 2016, despite accounting for more than half of total economic output. (Private sector firms received 52% of new loans in 2012.) More fodder for the great debate about how much of China’s economy is really private.

More:

Mr Xi and Mr Liu [the vice-premier] appear to have underestimated both US President Donald Trump’s willingness to launch an all all-out trade war with China, which has sapped investor and private-sector investment, and also their ability to force the country’s state-controlled banking sector to direct more lending to non-state companies.

Also worth bearing in mind:

Yes, China’s 6.6% growth in 2018 is its slowest in nearly 3 decades. But given the size of its economy, that represents about $1.2trn of additional demand, nearly twice as much as it generated with 14% growth in 2007.

(And yes, we should take official figures with a big pinch of salt. And yes, China faces big downside risks. But it is worth taking a moment to look past the growth rate at the fact that, within a decade, we’ve gone from talking about a $4trn economy to a roughly $13trn economy.)

Here’s another angle on it:

China GDP growth global comparison

People don’t like fuel tax hikes

At this point, I think that’s a safe conclusion to draw from events in France and, now, Zimbabwe:

Violent protests erupted in Zimbabwe’s two largest cities after the government announced a massive fuel hike.

Police fired tear gas in order to contain the protests in the capital Harare and Bulawayo Monday, while protesters threw rocks, burned tires and blocked streets.

There were media reports of riot police using live ammunition to disperse the crowds.

At least 13 people were injured by gunfire, the Zimbabwe Association of Doctors for Human Rights said.

The clashes came on the first day of a three-day strike called by unions in response to an intensifying economic crisis.

On Saturday, President Emmerson Mnangagwa announced a 150 percent rise in fuel prices.

More Zimbabwe news (from last November):

Zimbabwe’s President Emmerson Mnangagwa on Friday laid the foundation stone for huge new parliament to be built with Chinese funds outside the capital Harare.

The imposing circular complex will be built over 32 months by the Shanghai Construction group at Mount Hampden, 18 kilometres (11 miles) north-west of Harare, the Zimbabwe Broadcasting Corporation reported.

Officials say the current colonial-era parliamentary building in the city centre is too small to accommodate lawmakers.

Mnangagwa said at the ceremony that China had provided a “grant, not a loan, to build a new parliament”, without giving a figure.

“Other facilities like banks, hotels will be built around this place,” Mnangagwa said adding that a “modern, smart city” was planned.

Mnangagwa took over from long-time ruler Robert Mugabe who was ousted by the military in November 2017.

He has vowed to revive Zimbabwe’s economy that has been in ruins for nearly two decades.

China has funded and provided loans for many infrastructure projects across Africa in recent years, ranging from roads and power plants to sports stadiums and government institutions.

Critics say China’s increasing sway over the continent undermines democracy and sovereignty.

Some good news for US manufacturing

US manufacturing

Advanced manufacturing is the key to lasting prosperity. The destruction of the US manufacturing base in recent decades – the US lost 55,000 factories and 5 to 6 million manufacturing jobs in the first decade of the 21st century – has dealt a severe blow to America’s economic competitiveness and its ability to generate wealth and provide decent, well-paying jobs to its population.

Reversing this dangerous state of affairs should be one of America’s top strategic priorities. In this regard, the latest US jobs report has some encouraging numbers:

Partly as a result of the last few months’ numbers, 2018 stands preliminarily as the best year for U.S. manufacturing job creation (284,000) since 1997 (304,000). The previous December-to-December manufacturing employment gain was 209,000.

Also, manufacturing jobs as a share of total non-farm jobs (the Labor Department’s definition of the total U.S. employment universe) rose to just under 8.55 percent – their highest level since July, 2016 (8.56 percent).

That’s the good news. The bad news:

Even so, manufacturing’s prior relative employment creation has been so weak that the sector still remains a laggard on this front for the recovery era as a whole.

Since bottoming out in February and March of 2010, manufacturing has regained 1.389 million (60.58 percent) of the 2.293 million jobs it had lost during the Great Recession and its aftermath. Overall private sector employment sank by 8.785 million during the downturn, but since then has regained 20.608 million jobs.

Manufacturing keeps trailing the overall private sector on the pay front, too. In December, pre-inflation manufacturing wages rose by 0.26 percent – considerably slower than the overall private sector’s 0.40 percent.

In summary, manufacturing employment is booming, but wage growth is still terrible. Part of the reason for this could be that some of the best and most lucrative manufacturing jobs are going unfilled. Given the general disdain for factory jobs in current-year America and the lack of emphasis on training people for highly skilled manufacturing roles, it’s unsurprising that the industry faces a sharp shortage of qualified workers:

This week’s new Job Openings and Labor Turnover Survey (JOLTS) revealed that job openings in the manufacturing sector jumped in October [2018] to a record-high 522,000, and it’s only going to get worse.

[…]

There are several causes behind this workforce crisis, notably that many workers lack critical training in the necessary skills to fill these jobs. The manufacturing industry also suffers from inaccurate perceptions among talented students who may avoid career opportunities in modern manufacturing.

In crisis there is opportunity, and the dearth of skilled manufacturing workers implies that a greater focus on closing the skills gap could lead to a boost in wages as the open jobs get filled. Jay Timmons, CEO of the National Association of Manufacturers, appears to think so. At the very least, this could be one piece of the puzzle to addressing the disaster of real wage stagnation in America. Rome wasn’t built in a day, and it will take many years to undo a generational catastrophe.

Also, the tariffs are working.

===

More on the strong manufacturing employment numbers: another way to put it is that “the U.S. had as many people working in the manufacturing sector in December as it did 69 years ago.” And, although the percentage of the population working in manufacturing is far lower than it was in 1949, it is growing: “As a percent of the total workforce, manufacturing rose for the first time since 1984.”

And here’s a comment from Timmons:

This year was one for the record books, with manufacturers’ average optimism for 2018 hitting an all-time high. Empowered by tax reform and regulatory certainty, manufacturers are keeping our promise to expand our operations, hire new workers and raise wages and benefits. But as this survey also shows, we face challenges, most seriously the workforce crisis. We have more than half a million jobs to fill right now—and by 2028, as many as 2.4 million could go unfilled if we don’t equip more Americans to take on these high-tech, high-paying careers.