Weekly Market Links [30 Aug 2021-05 Sep 2021] - ARM China Goes Rogue, Platform Businesses Upended, NXP Semicon's CFO Heads For The Exit
ARM China Goes Rogue, Platform Businesses Upended, NXP Semicon's CFO Heads For The Exit. Heavy country-level news this week, with implications for now-dominant companies.
Countries
USA
The US is looking into how to ban payment for order flow (PFOF).
Subsequently, market-making firms such as Virtu have seen price declines - most of their trading advantage comes from using this order flow, provided by companies such as Robinhood.
Robinhood makes 80% of its revenues from this business model, selling to market makers such as Virtu and Citadel securities.
Thomas Peterffy, the founder of Interactive Brokers, spoke out saying that eliminating PFOF would result in market-makers purchasing companies like Robinhood, or Charles Schwab purchasing Virtu.
An alternative is to have a publication on these PFOF executions made on all exchanges, providing “fuller disclosure on price execution…[showing] how much customers pay on...prices”
China
China’s State Administration for Market Regulation (SAMR) has drafted a change in e-commerce law, calling for business license revocations on companies such as Alibaba, Pinduoduo, and JD, should they “fail to address serious IP violations of vendors using...their platforms”
This coincides closely with strict rules on transferring Chinese citizen’s data outside of China, and on sensitive military assets.
No company seems to be spared - even Meituan’s completed acquisition of bike-sharing company Mobike is being scrutinized, and this was done in 2018.
For Alibaba, a 15.5B donation to the “Common Prosperity” drive was pledged over 5 years, which followed an earlier 7BN donated by Tencent.
We see this as an appeasement move, and may not be the only one to happen - the roadmap for Chinese Tech is rather uncertain as strict regulations rein more control over them.
On the bright side, the crackdown seems to affect Tencent more than Alibaba, due to their exposure to games and their effect on youth development, which is closely associated with China’s 5 year plans.
Japan
In breaking news on Friday, PM Suga will step down. More news to follow the transition and who will be the next PM.
South Korea
Continuing from last week’s mandate to block Apple and Google’s App stores, South Korea has passed another bill to restrict app developers to use built-in payment systems. This will be signed into law by the President soon.
Apple had recently got off the hook by allowing app developers to have other payment means outside the app. But specifically for South Korea, Apple would have to configure a way to also allow in-app payments as well, posing additional costs of adhering to the regulation standards.
In addition to seeing their 30% commission revenue reduced in South Korea, failure to comply would result in fines worth 3% of their total revenue. Ouch.
It is noted in the article that Russia and Australia are also putting pressure on the app stores, while also facing antitrust/anti-monopoly suits at home.
South Korea is most aggressive worldwide in taking down Apple's and Google's advantages on app stores
Singapore
Gig economy workers were lauded for their essential service in the pandemic, during Singapore’s National Day Rally.
Studies are being done to “give these workers more secure futures”.
It is likely platforms such as Deliveroo, Grab and FoodPanda may have to commit extra resources compared to what they enjoy now, as gig workers are not considered as employees and do not enjoy benefits, consistent pay or insurance as compared to full-time employers.
It may be “mandated that the online platforms provide...workplace injury compensation, union representation, medical benefits and employer provident fund contributions”
Grab is intended to IPO by end of 2021, and this may affect valuations as business expenses will rise a lot more.
SEA - MY/VN/TH/ID/PH
TH: Thailand will start taxing foreign technology firms, with a VAT of 7%.
This affects companies from Google, Grab, and even Netflix.
Similar tax treatment is slated to go into effect in Singapore and in Vietnam; Vietnam is planning to use banks’ data and withhold taxes on payments made to foreign companies for e-commerce and digital services, while Singapore will track via its existing GST program, though it would be raised to 9%, from 7%, in due course.
Companies
Apple
A settlement with Japan allows developers of “reader” type apps to link to external websites for users to manage their own accounts.
Indirectly, this also gives more support for sites belonging to news agencies / independent writers but also covers books, audio, music and video apps with a purchase or subscription mechanism.
Redirecting to external sites for user management helps link traffic back to their sites, as compared to users staying in the Apple ecosystem for too long.
Japan is one of the places where Apple has a dominant market share - 47% as of 2020. If not pressure by Japan, the combined countries may see Apple opening more out of their App Store ecosystem, or risk having more aggressive actions taken; Such as that of South Korea last week.
In a similar fashion, India is also raising antitrust cases regarding Apple’s in-app purchase system
Bytedance
The owner of Tiktok, wary of a belligerent government crackdown, is exiting a large portion of their Fintech and Brokerage businesses.
Bytedance is still waiting to be listed, and they will want to ensure they are in all the good books of Chinese officials before doing so.
We all saw what happened to Didi when they did not comply - an outright removal of their apps from Chinese app stores, and a load more regulation to come.
The Fintech sector in China, with big names such as Ant Financial caught in the crosshairs, saw increased oversight due to its contagion risk and high indebtedness of consumers. It would make sense for Bytedance to totally shed this, else be slowed by regulation that it sees its competitors and other tech giants will face.
Paypal
Paypal may be launching stock trading soon. Named “Invest at Paypal”, an executive leading the team was hired from TradeKing, which was bought by Ally Invest.
Payments have always been competitive, and though Paypal is one of the market leaders, it does not seem to be slowing down to look at avenues for growth.
Paypal has already accepted Bitcoin for payments, and this may see them heading down digital currency trading too.
On the other side of the table, Robinhood also had intentions to go into payments. It would be interesting to see which approach works better, or if these players can all co-exist.
Thoughts are, it would be the lowest-cost player who edges out, since the services of payments and trading have become more commoditized, even if they were to sell on order flow.
NVDA
ARM China has apparently been seized by Allen Wu, the one-time CEO of ARM China.
ARM China is 49% owned by ARM+Softbank, while a Chinese group owns 51%.
This news is concerning on two fronts; Firstly regarding China, whereby IP owned by ARM China may be used to build out their own Semiconductors production capacity, in China’s efforts to reduce dependency on companies like TSMC, and amidst bans on Semicon trade.
Secondly, Nvidia can get affected, as the ARM acquisition deal does involve this relationship with ARM China, and may see IP ownership and anti-competitive/National security discussions with the UKprogressing slower than expected.
The social forum/message board site, is looking to IPO, on a valuation of 10B based on private valuations.
Reddit currently has 52M DAUs, and 100K communities, or otherwise known as subreddits.
Tencent is one of the largest investors, alongside Fidelity, A16Z and Sequoia.
Tencent
In China, gaming hours will be regulated with fixed hours - from 8-9pm only, on Fridays, weekends and holidays.
These rules are to curb indulgence in games, and to “protect minors physical and mental health”.
Game developers with large user bases in China will get affected severely. For platforms such as Tencent, they are also likely to see less usage and engagement of the WeChat app, while also having their vast portfolio in games and entertainment companies because of these rules.
It could be possible that youths use other apps instead, such as Tiktok (or Douyin as it is called in China), for entertainment, as they cannot game and need an outlet. Withdrawal symptoms are real.
Industry
Semicon
NXP Semiconductor’s CFO sells 70% of his shares.
Samsung was supposed to acquire NXP, but the deal seems to be off.
A large sale of shares by the CFO is a clear sign of the loss of confidence - investors may also head for the exits as Samsung mulls on their plans.
DDR5 (The stuff that makes your Desktop PC run faster), would be priced 30% higher than the current DDR4s.
Samsung also happens to be the world’s largest DRAM producer.
Its current lineup allows stacking up to 768GB of RAM in a server
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