Week 31: Investing In China, Zero G Manufacturing and Cloud Spending

Briefing: It shouldn’t come as a surprise that investing in Chinese companies comes with the risk of intervention by the Chinese government. China is acting as an unpredictable investment partner. | Fiber optics will soon be manufactured in space to reduce imperfections. | Cloud spending continues to grow at a rapid pace, and it’s not done growing yet.

Chinese Tech Stocks: On the one hand, on the other hand

One thing we know for sure when we invest in China is there is no separation between Chinese companies and the Chinese government. That close connection has been on grand display over the past few quarters. Chinese regulators canceled a major IPO (Ant Financial), fined Alibaba (Amazon of China) billions for perceived anti-trust violations and took one if its most popular apps off of the app store. Then Didi (China’s Uber) was taken off of the app store and Tencent’s WeChat (social media) suspended new registrations.

Imagine if the Biden administration stopped Instagram and Uber from gathering new users. It’s almost unthinkable in the United States that we would simultaneously crackdown on every one of our leading technology companies. If the move within China was meant to increase competition, it’s doing the opposite as venture capital investing is now slowing.

On the one hand, when skepticism is at its peak and markets have sold off quickly, that can present an excellent buying opportunity. Many of the largest leading Chinese tech companies are now down -25% to -40% from their highs in February. On the other hand, investors don’t like the additional uncertainty from the Chinese government intervention and money has clearly been flowing from China to Europe and the US as a result.

Two decades ago, it was widely assumed that the next phase would be the “Chinese Century”, yet none of the world’s top ten most valuable companies today are Chinese. It’s also likely that China’s working population has already peaked, which would point to the increasing importance of innovation-based growth going forward. This could turn out to be an excellent opportunity to invest in China’s best, high-growth technology leaders.

Manufacturing in Space

Why would we bother with manufacturing something in space? It turns out that gravity causes meaningful defects in our most sensitive high-performance materials like fiber optics and semiconductor wafers. Already, NASA has confirmed via experiments aboard the ISS that we can create dramatically more effective fiber optics cables if we manufacture them in micro-gravity. It’s estimated that new space-produced fiber optics could reduce the cost of a transatlantic cable by over $100 million. For context, these underwater cables cost around $300m. Here’s a map. As a result, Varda has raised $42 million from a series of highly respected VCs to create unmanned space factories. Manufacturing in space may sound absurd, but it’s quickly becoming a reality.

Cloud Spending

Global spending on cloud infrastructure in the 2nd quarter was $47 billion. Over the quarter, Amazon captured 31%, Microsoft 22% and Google 8%. 61% of global cloud spending went to just three US companies. The market for global cloud spending is expected to grow to $800 billion by 2025, a 4x increase from where we are today. For a sense of the size and scope of today’s global cloud-based tech giants, Facebook has 3.5 billion monthly active users (half of the world’s population), Google has 2 billion monthly active users and Apple has 1 billion active iPhones. If you’re ever wondering how we are going to continue to keep growing our global economy, scalable cloud-based technology is a good place to look.

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