The Great Game: Indian Defence
Naveed Ahmed. Unsplash.
Chess – that classic game, played out over an 8x8 board, largely accepted to have descended from the ancient Indian strategy game Chaturanga.
Whilst labelled a “solved game” thanks to the likes of Watson, Deep Blue and AlphaZero, chess very much remains a puzzle for most humans. For the late Grandmaster Bobby Fisher, the King’s Indian Defence was close to the top of his list of opening plays. With a win rate of 40% (vs 44% draws and 16% losses) – stats courtesy of chessgames.com – it was most certainly a compelling strategy to follow. The idea is simple: when playing Black, not having the first move, start with consolidating a solid defence around a castled King, freeing the rest of the board for an attack on White.
Away from the chess boards of history, however, another great game is being played as we speak (fortunately between humans, rather than superintelligent AI systems). We haven’t written about The Great Game for a while now, partly because the change of turn wasn’t yet clear. It is increasingly so now.
The first move has already been made by Team China. Its Belt and Road strategy was the manifestation of a strongly expansionist geopolitical stance combined with an increasingly sinocentric worldview. And perhaps drawing from the playbook of Bobby Fischer, Team America has seemingly adopted his King’s Indian Defence: its most prized assets (cutting edge tech) have been corralled into tightly protected castles, freeing up their most aggressive pieces (a seemingly endless supply of capital) to move freely and dominate strategic positioning.
Equally fascinating is the new ground it’s now seeking to dominate: India.
Match recap
The onset of COVID-19 and the resulting chaos all over the world has dominated the bulk of the global narrative around geopolitics. Yet as far as the balance of power is concerned, a crisis that affects everyone – severe as it may be – must not be assumed to have taken over the maneuvering that happens down the corridors of political power.
The initial US response to China’s change of tone was to consolidate: whether through invoking security legislation like CFIUS or by exerting political pressure on its allies to boycott/avoid Chinese technology (think Huawei), the US has essentially spent the past few years consolidating its defenses around its most prized assets: technology.
Having now largely cleaned out its backyard, the focus is shifting overseas. While Hong Kong remains perhaps out of bounds when it comes to intervention, Taiwan has been a frequent flash point in the past, and remains so today.
But while the modern Arc of Containment (insights therein courtesy of an old friend, teacher and coach Wen-Qing Ngoei, whose book is strongly recommended!) has many links on China’s east (Japan, S. Korea, Taiwan), it is much less defined to its west. Until now.
The remedy to over-reliance
With a domestic population of just over 1.3bn people, India is certainly an economic force not to be trifled with. Demographically, with more than 50% of its population below the age of 25 and 65% of its population below the age of 35, it has simply been waiting for an opportunity to shine.
Over the past decade, many global corporations have at least taken a look at the possibility of moving manufacturing operations to India, but none of those plans have been put in place in earnest, mainly because the opportunity cost of leaving the well-oiled machine of Chinese manufacturing – complete with logistics and infrastructure – was too high.
The COVID-19 lockdowns that began in China at the beginning of the year brought to the fore the risk of concentrating too much production capacity in a single location. Just-in-time inventory, made possible by a hitherto flawless global logistics system, could no longer be replenished on the fly, and the fragility of what seemed to be a hyper-efficient but complex system was revealed. Add to that an increasingly hostile stance against companies that maintain supply chains in China, and a growing disillusionment towards the idea of investing in the “world’s biggest market”, and the inertia against change was very quickly overcome.
Over the past few months, we’ve heard no shortage of announcements (including from the likes of Apple and its entire supply chain) of plans to relocate production facilities to India. Some of these plans were ultimately put on hold as China and India clashed in some skirmishes over disputed borders (coincidence?), but as far as investments go, none compares to the amount of capital that has been sent down the coffers of Reliance Industries.
The long game, well played
The elder of the two Ambani brothers, Mukesh Ambani, had already built for himself a successful petrochemicals refining business, with Reliance Industries owning the Jamnagar Refinery, the largest petrochemical refinery in the world. The group had also built up strong businesses in textiles and retail – typical “old-school” industries, nothing to get too excited about.
In 2015, Reliance Industries announced that it was launching a move to build a 4G only mobile network under its Reliance Jio unit. The move was greeted with skepticism by the market, to say the least: telecommunications as an industry is notoriously capital consumptive, and with India already at the time the most competitive telecoms market in the world, traditional metrics like Average Revenue Per User (ARPU) were one of (if not THE) lowest in the world. Furthermore, the younger of the Ambani brothers, Anil Ambani, had already attempted a foray into the sector with little success.
But Reliance Jio lacked the one thing every other telco operator had: a legacy. The opportunity for them was not in building up a full set of traditional telecoms infrastructure to cater for voice, SMS and data. Approaching the market from an outsider’s point of view, Jio built a network that only offered what customers needed and wanted: fast, cheap mobile internet. Everything else could be built on top of, rather than alongside, mobile-data optimised infrastructure: calls, video, text messages. Why go for SMS when there’s whatsapp, which also allows calls over a data connection?
Drawing on the near-unlimited resources of Reliance Industries’ cashflow generating businesses, the following 5 years saw Jio go from telco upstart to become India’s largest mobile operator, with more than 33% of the market, much to the chagrin of established players like Bharti, Idea and Vodafone. And the best part of it? In 5 years, Jio had become a profitable business, not just on an EBITDA basis often employed to account for the heavy initial infrastructure investments such companies have to make, but also on a net profit basis. And not by a slim, contrived margin either: EBITDA margins for the Jio standalone business were a whopping 41.8% last quarter, with standalone Net Profit margins a healthy and respectable 13.4%.
One would’ve thought that proving the financial orthodoxy wrong would be good enough. But Jio’s crowning glory came this year: starting with Facebook writing them a ticket for US$5.7bn to buy a 9.99% stake in Jio Platforms, the unit of Reliance Industries that controls its mobile business. It didn’t stop there: Facebook was soon followed by investments from TPG, Intel and Qualcomm. Even the Saudi PIF joined in. In true Mukesh Ambani style, the investment proceeds were promptly used to retire debt taken up to fund Jio’s establishment. The icing on the already glamorous cake came this week, when Google announced a US$4.5bn investment into Jio Platforms.
Chess pieces get benefits too
The bet here is clear. Whether as a result of some policy-driven exhortation or by their own volition, capital has been mobilised in the effort to win support from India.
Again, this isn’t a new strategy: the “Truman Doctrine”, adopted in 1947, saw the US start to provide “political, military and economic assistance to all democratic nations under threat from external or internal authoritarian forces.” Operating under the protection of US policy, the “Asian Tigers” – Hong Kong, Singapore, S. Korea and Taiwan – enjoyed immense amounts of foreign direct investment and access to technology, allowing them to flourish independently of the rest of the region, simultaneously acting as prime examples showcasing the benefits of being on the “right side” of the Cold War.
If capital flows into India on the scale that we’ve seen with Jio continue at this pace, they could be a profound game changer. After all, the initial impetus for China’s rapid rise was similarly political: the Sino-American rapprochement initiated by Richard Nixon and ultimately crystallised between Deng Xiaoping and Jimmy Carter in Dec 1978 set the stage for years of investment inflows to China, undoubtedly a major contributor to it becoming the economic behemoth of today. What’s to say the same cannot happen with India?
To be sure, the current agenda of President Trump has a much more domestic focus and is unlikely to be a carbon copy of the Truman Doctrine. At the same time, it is perhaps Realpolitik at its most raw, a fight for survival more than anything else.
The Great Game has only just begun.