Industrial Internet and Cultural Resources

In May I spent two weeks traveling, one week in China and one week in Greece.  I want to share some of my learnings from both countries. 


In early May, I traveled to Shanghai and Suzhou.  On this trip, I met with investors, bankers, companies in the textiles, heavy equipment and shipping industries as well as cab drivers, Didi drivers, friends, and family.  Despite the widespread concern in the (mainly Western) press about the risks stemming from the US-China Trade War and putative economic slowdown, the Chinese business-people I met did not seem phased.  Many businesses have already diversified their supply chains across Southeast Asia and away from China. Companies have expanded production outside of China primarily due to rising labor costs, and to hedge against the sorts of political risks appearing today. 

Business-people across industries continue to explain their current and ongoing innovation programs excitedly. Under China's industrial policy, businesses across industries are adopting "industrial internet," or "manufacturing 4.0." The industrial internet is a collection of techniques that allow companies to take an empirical approach to production, quality control, innovation, and cost management. 

One instructive use of industrial internet applications comes from a heavy construction equipment company, called Company A.  Company A has 350,000 bulldozers and cranes in use across more than 10,000 customers.  Each bulldozer has more than 1,000 sensors spread throughout the vehicle.  Each vehicle is connected to the internet 24/7 and broadcasts all usage data (audio, visual, click-stream, etc.) back to Company A in real time.  Company A can observe how each of their 10,000 customers is using their products.  For example, they can see which parts of their bulldozers are undergoing the most stress or tend to break down fastest.  Company A can then work with its suppliers and encourage quality improvement in the areas encountering the most problems. With information on each component quality, Company A can better evaluate its suppliers and quickly replace them if necessary. Company A can recommend purchasing other machines that it thinks would be complementary to its customers' lineup.  Industrial internet applications like those I listed here are just the tip of the iceberg and potential for cost reduction and volume expansion are both sizable.

Moreover, many of the companies I met in China are happy to explain how they are reducing headcount by replacing low and middle-skill tasks with industrial robots.  Many of the manufacturers I met have already reduced headcount by 50% or more over the last decade and increased use of industrial automation (robots).  As companies further implement industrial internet to improve manufacturing, headcount will decline industry-wide.  Also, it may be the case that many of the production comparative advantages resulting in trade secrets developed by incremental innovation techniques in countries like Germany and Japan may reverse engineered through industrial internet.  Should these techniques prove successful, China may be able to move up various value chains even faster. 

While industrial internet may seem like an obvious next step across the manufacturing sector, implementation can be challenging.  To meet this challenge, leading city governments like the Shenzhen government, have developed an industrial policy to support the application of industrial internet techniques.  Shenzhen recognized that it is difficult for small and medium-sized companies to implement industrial internet techniques due to high fixed costs.  If small players in the value chain are unable to make necessary fixed costs investment quickly, it could slow the implantation or retard the efficacy of the industrial internet – both sub-optimal economic outcomes. Shenzhen is experimenting by providing small and medium-sized enterprises with resources (including capital and consulting) to make the necessary expenditures to contribute to the industrial internet in their supply chains.  Should these policies succeed, we should expect to see similar programs in other cities emerge.


In first grade, I enjoyed learning about Ancient Greece.  My parents bought me a book about the Trojan War. I was fascinated by many elements of the story, including the concept of a Trojan Horse strategy and that the most beautiful woman in the world at the time, Helen of Troy, was from Greece.

Bradley Calder, Grade 1

Bradley Calder, Grade 1

Later, in 11th grade, I began studying philosophy with Kristin Smith, and she encouraged my love for the subject by giving me many of her college textbooks. Two years later, in college, I decided to pursue a second major in philosophy.  Rochester had a small but excellent philosophy department where I had the chance to study ethics and ancient philosophy with Robert Holmes and Deborah Modrak, respectively, both brilliant scholars who further encouraged my interest in visiting Greece.  While reading the trial of Socrates, I could not help but wonder how unique Athens must be for Socrates to sacrifice his life to remain an Athenian?

Death of Socrates

Death of Socrates

Greece is a country with an abundance of cultural resources.  Since the time of Socrates, people have traveled to Athens to study, pursue business ventures, and admire the Acropolis.  Today, Greece receives nearly 30 million tourists per year (and growing). Tourists collectively contribute 20% of Greece's GDP.  Few activities are more beneficial to a country than tourism. Tourists are happy to pay for a place to sleep, the chance to eat local food, and the opportunity to take photos of cultural resources and themselves.  Providing tourist experiences tend to be high margin/high volume and in my opinion, tend to have a high reward to effort ratio.  The reward to effort ratio is exceptionally high in Greece, given that their distant ancestors paid the costs to create Greek cultural resources.  These ancient investments provide them Greeks with cornered resources that are non-rivalrous, excludable, and have benefited the Greek economy for thousands of years.  

Acropolis Amphitheater

Acropolis Amphitheater

However, over the last decade, life has been challenging for many Greeks.  Fiscal imprudence, a culture of tax avoidance and graft have taken their toll and resulted in a lost decade:

  • The local stock market declined more than -90%

  • Median incomes declined -30%

  • Residential real estate prices fell -40%

  • The employment to population ratio declined from an already low 47% to 43% as of last year (15 percentage points below the US)

Greece is attempting to stage an economic recovery in part by trying to attract more foreign tourists and property investors.  While on tour across Athens, Naxos and Santorini, I saw numerous WeChat QR codes and scanned many of them.  Products available include Santorini wedding services starting at €2,000 and apartments in Athens starting at €250,000.  Buying an apartment secures you a residency permit and travel rights throughout the Schengen Zone.  The Greek 10 year treasury bond has declined from 40% yield to less than 4% today. As interest rates fall, capital market participants are apparently more confident in Greece’s improving ability to pay its debts.

I expect the road to recovery might be slow for Greece. However, if you are looking for an outstanding vacation filled with world-class hiking, biking, food and wine, all at an affordable price, Greece is an excellent option. 

Octopus 1.png


Residential Real Estate in Ho Chi Minh City, Vietnam

I first traveled to Ho Chi Minh City, Vietnam in February of 2011. At the time, virtually all vehicles on the road were motorbikes, side walk space was limited, and most real estate was two to four story residential buildings with the first floor used as commercial space. Vietnam's nominal GDP was $116 billion ($1,300 per capita).  Though poor, to a foreigner with experience living in China, Vietnam's Confucian work ethic was readily apparent. Everyone seemed to be constantly busy and moving fast.

Just last week, almost eight years later, I returned to HCMC and saw an enormous degree of change, cars, skyscrapers, branded clothing stores and Starbucks abound. According to the IMF's 2018 data, Vietnam's GDP grew to $241 billion (about $2,500 per capita) more than doubling since I last visited.  Vietnam's skyline is very different from when I last visited with many tall buildings completed and many more under construction. The percent of the population classified as urbanized has increased from about 30% to 35%, meaning an additional 4.5 million people have moved from rural areas to cities.

Education and Labor

Vietnam's education system has proved to be highly effective resulting in near universal literacy.  Additionally, Vietnamese students tend to perform well on standardized tests in math and science, exceeding the OECD average.

I heard throughout my trip that one of the few benefits of Vietnam's experience with socialism was that it resulted in a high level of female enfranchisement into the workforce.  This results in a situation where Vietnam is effectively utilizing all of its top human capital, rather than only utilizing human capital that happens to be male. 

Family Formation and Home Ownership

Vietnamese, like other East Asian cultures have a strong preference for home ownership.  Currently, home ownership rates in Vietnam are above 90%.  Given that incomes have been growing rapidly and both men and women work. Upon getting married, Vietnamese couples will have both the resources and desire to move out of their parents' home and buy their first apartment.

Vietnamese Real Estate Industry

Entrepreneurs anticipating Vietnam's demographic and cultural preferences for new homes have formed real estate development companies. Both foreign and local real estate companies compete for land, development licenses, tenants and capital in Vietnam.  One helpful heuristic that I’ve found to quickly understand the nature of a local economy is to look at the industry sector weights by market capitalization. The chart below indicates that 38% of Vietnam’s market capitalization came from the real estate industry.

MSCI Vietnam IMI, January 2019

MSCI Vietnam IMI, January 2019

Furthermore, two of the three largest public companies by market capitalization in Vietnam are in the residential real estate industry, Vinhomes and Vingroup.  Both are controlled by the same entrepreneur, Pham Nhat Vuong, the richest person in Vietnam.  Clearly residential housing demand is a big business opportunity for sophisticated real estate developers and institutional investors; but I wondered if it was possible for foreigners to buy property in Vietnam?

Buying a home in Vietnam on WeChat

I used WeChat to locate a real estate broker named Sarah Gui (WeChat: sarah7_722) who caters to Chinese people that are interested in buying property in Vietnam.  During my conversation with Sarah we discussed regulation, taxation, where to buy in HCMC and what opportunities are currently available on the primary market.

Firstly, it is possible for foreigners to buy property. In 2015, the Vietnamese government clarified the law and set up a system to allow foreigners to legally purchase property.  There are some important distinctions between the property rights of local Vietnamese and the property rights of foreigners.

Vietnam Real Estate Chart.png

Incidentally, I was told that the primary reason for preventing foreigners from levering their purchases is to reduce the risk of a housing bubble and to maintain home price affordability for local buyers who are much less capitalized.

HCMC Location Guide

HCMC is separated into many districts as indicated on the map below. I also included a satellite view of HCMC taken by astronaut Scott Kelly.

District 1, D1 is best thought of as the intersection of main-street and main-street. As HCMC’s central business district and the most densely populated area, life here reminds me of Puxi, Shanghai. Recently, a Hong Kong based company called Alpha King bought up 30% of the land in D1, resulting in a doubling of property values in the last three years.

Alpha King

D2 and D7 are both popular with foreigners because of their strong international schools as well as a less dense environment.  A significant component of D2 known as the Thu Thiem peninsula remains undeveloped. Nonetheless, Chinese buyers and developers are excited for the day when Thu Thiem get’s the green light from the government and they can try to create another Pudong. The chart below describes the long term plan for Thu Thiem.  

Proposed developments in D2 Thu Thiem.

Proposed developments in D2 Thu Thiem.

D7 has much unoccupied land and is being developed by a Taiwanese company.  One project on the market in D7 is called Eco-Green Saigon, it has 4,000 apartments and 6 total buildings. I attached the marketing materials for Eco-Green Saigon here.

D4 is an older district popular with many local people but with aging real estate and limited land supply for further development, however the location is considered excellent due to close proximity to D1’s CBD.

D9 is HCMC's high tech zone and is the direct recipient of much of the technology and manufacturing FDI going into Vietnam. Today, companies like Intel, Samsung, Schneider all have large manufacturing, design and engineering offices there. Vinhomes/Vingroup is building the largest residential real estate development in all of Vietnam in this area.  The massive project called “VinCity” will have 44,000 units and 71 total buildings.  I attached the VinCity marketing materials here and the master plan is below.

Red dots represent apartment buildings

Red dots represent apartment buildings

During my conversation with Sarah, I asked her to sketch out the current prices and yields in each district. She described the following prices below. Property prices in Vietnam are significantly cheaper than China’s first and second tier cities, and likely explains the strong Chinese demand. Very high yields relative to what is available in their home countries likely explains demand from Japanese and Korean buyers.



Deal or no Deal?

Suppose one wanted to buy a 75 SQM apartment in VinCity and act as a land lord for the next 35 years, under what conditions might this proposition result in an attractive investment? I constructed a basic financial model to help frame the problem. I estimated a probability weighted, unlevered, IRR of 7.8% and MOIC of 6.4x. Note that there are no capital gains taxes in Vietnam.

Supply and Demand Elasticity

D1’s housing supply will likely remain inelastic. Because Vietnamese own their property and land freehold, large scale redevelopment in D1 is susceptible to hold out problems. In contrast, supply elasticity should be much higher in D2, D7 and D9 given the large quantity of undeveloped land. As such, I reckon one should be relatively more cautious about owning property in these areas.

In summary, Vietnam has improved dramatically in the last eight years. People are getting richer, moving to the cities and buying homes. I am optimistic that Vietnam will be able to learn from China, Korea, Taiwan, Singapore and Japan’s development experience, resulting in continued growth.

My friend translated this article into Chinese, click here for the Chinese translation. 

Observations from the American Economic Association Annual Meeting

Last weekend, Sophie and I attended the 2019 American Economic Association Annual Meeting in Atlanta, Georgia.  AEA brings together thousands of economists from across the world for a weekend of lectures, networking, hiring, reunions, and fun with friends old and new.  The atmosphere is enthusiastic, respectful and curious. Each day at AEA, I have a small sense of wonder because it is possible that I might unexpectedly hear an argument that changes my mind.  Remarkably, the cost of admission for this three-day world-class event is a mere $75.00. What a bargain.  I attended many talks, and I'm delighted to share some of my observations with you.

Labor Economics

Work of the Past, Work of the Future; David Autor

David Autor gave the annual Richard Ely Lecture which focused on topics including the economic returns to education by location, urban/rural divide and speculates (with data) on the future of the labor market. David began by noting that the decline in inter-state mobility, which has been widely discussed in the press has been something of an economic puzzle.  It is puzzling because standard theory suggests that people will move from low opportunity areas (low population density areas) to higher opportunity areas (high population density areas).   Before attending this talk, the leading explanation for this puzzle was that rents are too high in cities for low skill people to move there.  Why are rents high? Because cities often have significant supply restrictions on new housing starts, which leads to supply constraints and high rents.  Thus pricing out low skilled people from moving to opportunity, so the story goes.

David’s talk presents a much more nuanced view of this story and even a novel partial solution to this puzzle. Using data on wage premiums for people with different levels of education in both low and high population density areas.  He found that while people with a high school degree and below (non-college people) used to earn a wage premium in cities relative to rural areas in the 1980s and 1990s, however by the 2010s, they no longer do.  Further, he shows that people with college degrees and above tend to move to high-density areas and stay there (in contrast to the out-migration we used to see).  In effect, he concludes that the reason there is less inter-state mobility is because non-college people do not have superior economic opportunities in cities relative to rural areas.  

I found these results somewhat disheartening because it implies that people with lower levels of education do not have opportunities to move to cities and receive a wage premium for their skills and there is already limited opportunity in low-density areas for low skilled people. 

Macroeconomics and Finance

Joint Interview with Ben Bernanke, Timothy Geithner, Henry Paulson

Ten years after the financial crisis, three of the most influential fiscal and monetary policymakers of the time held a public conversation about their memories of the crisis.  Early in the talk, the interviewer posed the question, why did you choose to save Bear, but not Lehman?  They explained that while JP Morgan was willing to acquire Bear (with substantial Fed support) early on in 2008.  The US Government was not able to find a buyer for Lehman toward the end of 2008.  While Barclays did come close, they were not able to consummate the transaction.  They were resolute in that the same process was used in both cases.  Paulson also, rather candidly, noted that he intentionally misrepresented the seriousness of the crisis to the public in late 2008 early 2009 (with full support of the President), saying that the government decided "not to throw gasoline on the fire" and further erode the public's confidence in the government's ability to manage the crisis.  We should continue to be skeptical of our public servants' public statements.  Also, B-G-P wanted to emphasize that the government's ability to come together in a crisis was at first begrudging, TARP measures were unpopular in Congress when introduced and failed. However, America came together in the end with an aid package, TARP was passed, QE was approved, and we socialized our losses. 


Trading and Arbitrage in Cryptocurrency Markets, Igor Makarov, Antoinette Schoar

Using a proprietary data set from 34 exchanges in 19 countries accounting for 85% of trading volume, Igor and Antoinette identified tradable arbitrage.  These observations seemingly violate the strong form of the efficient market hypothesis.  They noticed that these spreads were wider across exchanges in different countries relative to spreads on exchanges within a particular country. This may imply that barriers to inter-country capital mobility may explain the mispricing.

Furthermore, they noted that the width of the spreads is correlated with Bitcoin bull markets; the more excitement about cryptoassets, the more demand for leverage via derivatives (wider spreads).  Interestingly, they estimate relatively low transaction costs at 50 to 75 basis points.  Igor and Antoinette also mentioned that there are significant barriers for institutional investors (managing external capital) from investing in cryptoassets, but that proprietary investment firms are active in these markets. 

Real Estate

What Drove the 2003-2006 House Price Boom and Subsequent Collapse? Disentangling Competing Explanations; John Griffin, Samuel Kruger, Gonzalo Maturana

There are two primary explanations for what caused the housing boom during the early 2000s: 1. credit supply and 2. speculation.  The authors attempt to explain housing prices with two sets of variables that are more indicative of one explanation or the other.  To illustrate a credit supply story, they use the share of sub-prime lenders as a percent of total lenders in a given area.  To explain a speculation story, they considered the fraction of mortgages that were non-owner occupied, as a percent of total mortgages in a given area as well as considering percent of homes purchased by an out of town buyer.  These are just the flavor of the explanations considered (seven total).  Their results indicated that a credit supply story better explains the variation in home prices.  One surprise that came out of this research was that there was no observed year on year momentum in house prices.  The authors' main concern about their results is that perhaps credit supply is picking up because lenders are anticipating price increases.  It may be impossible to disentangle speculation from credit suppliers' decision making process.     

Fun Fact on Urban Economics from Edward Glaeser
The best single predictor of gentrification in the US is the number of Yelp reviews of laundromats in an area. 

Yelp Laundromat

Best food in Atlanta: Gus's

It was so good that we went two days in a row!

AEA is in San Diego next year, hope to see you there!

One Man's Trash is Another Man's Treasure

Adam Smith reminds us in The Wealth of Nations that “a jack of all trades will never be rich.” Specialization allows us to develop comparative advantage in the production of goods and services. Once we have a comparative advantage in production, we can exchange our goods and benefit from trading with other people who have developed their own comparative advantages. David Ricardo expanded on Smith's ideas and explained that there is mutual benefits from trade even if one country is more competitive in every area than its trading counterpart and that a nation should concentrate resources only in industries where it has a comparative advantage.*

Aside from comparative advantage in production, there is another reason why nations trade. Suppose neither the US nor China had an absolute or relative advantage at chicken production, would it make sense for them to trade?  Counter-intuitively, the answer is yes. 


The reason both China and the US stand to benefit from trade, even though they have no advantage (absolute or comparative) in chicken production, is because both countries have comparatively different preferences.  Suppose that Americans prefer to eat white meat chicken breasts and Chinese prefer to eat chicken feet.  From the American perspective, chicken feet are a byproduct of the chicken production process, without access to the international chicken market American farmers would need to sell chicken feet to local buyers who value chicken feet at a lower value than the Chinese.  Barriers to trade would make the American chicken farmers poorer than they otherwise would be if they were allowed to sell their chicken feet to the Chinese. Conversely, Chinese people prefer not to eat chicken breasts because they view them as less delicious than dark meat and less fun to eat because they lack bones.  Without access to international chicken markets, Chinese farmers would need to sell their chicken breasts to local buyers who would pay less than the Americans.  Therefore, if the Americans trade chicken breasts and the Chinese trade chicken feet, even if production costs were identical, gains from trade would occur.

Ricardian trade theory assumes homogeneous preferences.  However, traders often have heterogeneous preferences.  Heterogeneous preferences encourage trade because it may be possible to satisfy both traders varying preferences even if they have the same production costs. 

One way for Americans to explore trade driven by heterogeneous preferences is to go to a grocery store in Shanghai.  While walking through the store, you will likely see items that surprise you including but not limited to piles of fish heads, rows of pigs feet, and boxes of chicken hearts.  American grocers don't stock these items because there is no demand for them, but in China, they are all considered delicacies. I have limited experience outside of China and America, but I suspect that preferences across the world vary widely, resulting in trade. 

To the extent that there may be information frictions between countries, arbitrage opportunities based on heterogenous preferences may exist.  As the saying goes, one man's trash is another man's treasure.


* David Ricardo's Wikipedia