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As Asia’s economies attempt to recover from the grip of COVID-19, they face added obstacles brought on by slow vaccine rollouts and new pandemic restrictions. We’re exploring the latest economic and regulatory developments in the Asia markets in Q3 including the impact of the new Delta variant of the virus, vaccinations, and China’s crackdown on ridesharing giant, DiDi.
Guest:
Joining me for this conversation is Seoul, Korea-based attorney, Paul Kim. Paul graduated in Economics from the University of Chicago, with highest honors, and obtained his Juris Doctorate degree from Harvard University. Paul currently serves in private practice as a Corporate Partner in Sheppard Mullin’s Seoul office advising clients on cross-border mergers and acquisitions (M&A), private equity, venture capital and securities transactions, restructurings and multi-jurisdictional disputes.
Transcript:
Michael P.A. Cohen:
Welcome to Sheppard Mullin's Nota Bene, a weekly podcast for the C-Suite, where we tackle the current national and international legal headlines affecting multinationals doing business without borders. I'm your host, Michael P.A. Cohen. Let's get started.
Welcome to Episode 137 of the Nota Bene podcast and thank you so much to all of our listeners in more than 100 nations around the planet. We so appreciate your continued participation in our ongoing conversations and your feedback. Please keep it coming. It continues to help influence our programming.
Tonight, I'll say tonight because I'm recording tonight, my time, but it is my guest's morning in the future, meaning a day ahead of us. We'll be continuing our quarterly check-ins this week. And tonight or tomorrow morning depending on where you are in the world or anywhere in between. This week's quarterly check-in will be with Asia and one of my favorite regular guests in the world, Paul Kim, who is joining us from Seoul, Korea.
Paul, for those of you who are new to the podcast and by reminder to those of you joining us weekly or joining us again, Paul obtained his undergraduate degree with highest honors from the University of Chicago in the United States. He subsequently received his Juris Doctorate degree also in the United States from Harvard University.
He is a corporate lawyer who worked in Manhattan for many moons, as the Native Americans would say, before he transitioned across a continent and the Pacific Ocean to Seoul, Korea. He is licensed to practice in New York and in the Republic of Korea as a foreign legal consultant for US law. Paul advises multinationals on cross-border M&A, private equity, venture capital and securities transactions, restructurings, and multi-jurisdictional corporate disputes.
He speaks fluent Korean and American English as you will soon hear if you're hearing Paul for the first time. Well, we won't be speaking Korean on tonight's show, but we probably will be speaking American English. Paul is recognized by just about every peer review and ranking system and service and publication out there. His bio, we will link to the show notes, he is a well-established and highly acclaimed in his areas of expertise around the planet at this stage of life and the spin of the globe. Paul Kim, welcome back to the Nota Bene podcast.
Paul Kim:
Thank you, Michael, always a pleasure to be on the show. Thanks for inviting me back and glad to be here.
Michael P.A. Cohen:
So I know we're going to check in on Asia tonight. You're our last check-in, meaning we have checked in on the show with America, Europe, Africa, by the time we will release this episode. But before we get started with the legal and regulatory developments in the Asia markets that we maybe we'll talk about and look at for the past quarter presently or what you think we may want to look ahead toward in the Q3. Tell me a little bit about how life is on the ground there in Korea. How are you?
Paul Kim:
That's basic but fundamental and an interesting question. I'm fine. I've been fortunate not to have contracted COVID. This is a portion of the case for others or many globally. First podcast that we did, I believe it's the first or second one, was when COVID was just on the scene here in Asia and first in Asia. And Asia now we're talking about, we're the first and maybe last out when it comes to the pandemic. So we're the first to be exposed and we may be the last to be, through vaccinations and control of the virus, the spread of the virus, the last to come out of the crisis.
So, we are here now experiencing in Korea, the fourth wave of the virus largely related to the spread of the Delta variant, which is the case throughout Asia and globally. When we look at the numbers, it's the most serious phase, at least or in terms of the number of cases per day where we're experiencing about 1500, 1600 cases a day and that's over a conservative period of time, and that's the highest it's ever been even during the first wave.
The difference is we don't have the lockdown that we had when the first wave and COVID was really novel and people didn't know what to do. We don't have a real lockdown, but we have a lot of very stringent restrictions on social distancing and gatherings. We basically can't meet in more than groups of four before 6:00 pm, and then after 6:00 pm, groups of two. Restaurants have to close by 10 o'clock. Workplaces in general, I think 40% of their staff have to be working from home.
But again, we don't have the lockdown that we had back then. Nor that other countries experienced, the US and UK and Europe. So we're still operating and functioning. But as a result, I think that the case levels will probably be heightened for some period of time, because, again, they've taken the trade-off of trying to function at a certain level, having restrictions in place to try to control the spread, but not really taking the pains to have a lockdown, and then inflict what could be viewed by the government and people in the economy as being much more severe and having more severe impacts.
So I'm doing okay, but now we're coping with this fourth wave. There's obviously fatigue here and fatigue in the household as is the case probably globally. But we're surviving.
Michael P.A. Cohen:
Good to hear. There's fatigue everywhere. In America, they give you a counter perspective from this person's opinion, meaning me. It's outrageous that this virus continues to spread in America, given the complete universal availability of vaccines to prevent it.
I live currently on Hatteras Island, North Carolina, which is a very small place remotely out in the Atlantic Ocean, commonly referred to as the Outer Banks. It used to be a quiet secret until Forbes ranked it the number one destination to visit in America.
Paul Kim:
I'm sure you're happy about that.
Michael P.A. Cohen:
Yeah, I thank God. Yeah, well, there's a consequence. Yahoo! Finance reported that the Outer Banks of North Carolina are now the number two destination searched on all search engines behind only Hawaii and Disney World.
Paul Kim:
Wow.
Michael P.A. Cohen:
Yeah, we got discovered by the pandemic in the sense that people looked for a place they could reach by driving. And it turns out that this tiny island is one of the few national parks on the East Coast of the United States, and particularly on the eastern seaboard, and that it is in a driving distance of about every major city from Miami to Chicago. So, a lot of folks have or decided to make their way out here.
What is really interesting to me is that I've actually been following the reported statistics for residents and non-residents on the island, etc., and the vaccinations as they've occurred. And we had vaccinations available to us as a whole island, everybody, in February, well ahead of the rest of the country, if you will, simply because there were so few actual residents on the island here. And the county, it got a good share of vaccines and did an excellent job of scheduling appointments and making them available quickly, and getting people who wanted to become vaccinated, vaccinated.
And still, only with that, I watched for months as the vaccinations stalled out somewhere around a 59% mark, meaning that about 40% of the island decided not to get vaccinated, some because they were scared, some, for religious reasons, but most for political reasons, at least by my assessment of talking to folks around the island.
I said to myself, there's two choices in America, once it opens up, you either get vaccinated or you get COVID. You're going to get one of those, so that's what's going to happen. And there isn't one infectious disease specialist in the United States who disagrees with that. In fact, that's why I got it. That is a universal unanimous opinion by every legitimate infectious disease specialist from Johns Hopkins to Mass General to UCLA to UCSF, the four major teaching hospitals in the country, with the country open, not in lockdown.
So, I'd like to tell you that here in America, where we have a vaccine that can by established science, quash this virus and universal availability of this vaccine. I'd like to tell you that we're through the woods, but we're not through the woods.
Paul Kim:
Well, it's interesting you mentioned the vaccination. Just to contrast that what's going on in Korea. Korea, as you've known through following the course of the pandemic here, we had it very serious in the first wave, and then there was lock down, and then we introduced the world to just very aggressive contact tracing, to some extent. It's really, I think, pioneered here, and maybe in elsewhere in Asia like Taiwan and places like that, and Hong Kong.
And so we're able to get the virus under control. They were a handful of cases. We're down to teens at some point in our daily caseload and then started to spike up a little bit more. At that time, the first vaccines were approved and then being disseminated to the public in the US and elsewhere. Korea, for whatever reason, didn't move quickly enough to secure a great supply of vaccines, maybe because people thought it was under control, that would be under control. There's various theories out there.
But as a result, the vaccination rates, the vaccination on a large scale, it really didn't start until just a few months ago, actually. And this is the case in large parts of Asia. China has their own vaccine but Japan also has just 20% vaccination rates of people that haven't had one dose. Korea, it's about 30%. I think in other parts of developed East Asia, it's similar, maybe even lower. And these are countries that all things considered probably should have, maybe could have, secured a greater supply of vaccines, but just wasn't there.
Southeast Asia is a different story. I think they have much higher caseload political issue of getting vaccinated, just the rollout has been very slow. Just to give you an example, for my age group, I'm in my early 50s, I just registered to get vaccinated. I won't be able to get my first dose until August 16th. So everyone above me, more or less has scheduled a vaccination, but anyone below me, hasn't even had one scheduled.
So, there's no political opposition to it but the rollout's been very slow with the vaccinations, and that's been controversial here. And criticism has been levied by people. The Korean president recently made a visit to US bringing a lot of these big corporate heads. And the story is that he promised, they announced large deals and investments that were in the works for a long time. And then they announced them at these presidential visits.
But something like $40 billion in investments and acquisitions in the United States with the likes of Samsung Electronics, SK, Hyundai, and these types of big corporates. And he struck deals with vaccine makers and the US government to try to use Korea as a manufacturing base to develop and manufacture or produce vaccines for not just Korea, but for Asia.
At the end of the day, again, there was criticism that he didn't bring enough, didn't secure enough vaccination supply, sounds like $40 billion for who knows how many vaccines. So the controversy here is about securing the vaccination, not about anyone avoiding it because they have some political status or don't believe in it or believe it's dangerous.
There's some issues about people think some of them have side effects, and this one is better than the other, there's that issue, but the vaccination is not politicized. It's more, again, why did it take so long to secure the amount of supplies necessary for the population? And why was that delayed? And I think that that's the criticism heard in a lot of different places in Asia, outside of China.
Michael P.A. Cohen:
It's very interesting. It's a massive difference. It's like, in Asia, there's a supply issue, but there's no demand issue.
Paul Kim:
Exactly, yeah.
Michael P.A. Cohen:
If there's a supply glut, there's a demand issue. It's absolutely astonishing to me. And so why don't we talk about this. Why do I care what someone else does? Here's why, they're freaking up the economy. You can watch the markets go up and down on the vaccination rates. And it's not like the investors are panicked, they are realizing that the American economy can't open if 40% of the people choose not to be vaccinated.
It's only a matter of time before... Well, it's not even a matter of time. There are hospitals already that are now diverting people, out of supplies, seeing surges that they've seen in the past. And this isn't a time where not only did we think we were through it, but we can be and people are choosing not to be. And I'll never for the life of me understand or appreciate it.
And what I hear you saying to start our show is, "Michael, we're still talking about COVID." We talked about COVID in episode one, and we're talking about it again because it's going to impact the Asian economies again. We have not enough vaccines, even though we have the demand. The virus is becoming more contagious. And the vaccine is the only thing that stops it spread. And as it sweeps around the world again, we're already seeing it.
Paul Kim:
Yeah.
Michael P.A. Cohen:
Half of Australia is now closed again. A good 50% of Australia is entirely closed again. That's their economy, half of their economy is closed again. This is a real thing. This is an economic issue.
Paul Kim:
What's interesting in Asia is that the tolerance levels for the number of cases is much lower here. The reaction is much more severe, even on based on a low level of cases relative to the US and Europe. You see the UK, which is a prime example, they have 50,000 daily cases, a population of over 60 million, 65 million, something like that. Korea has 1,500 cases in the population of 51 million, 52 million. Not that's dissimilar.
They have complete freedom. They had freedom there. They're going to nightclubs. There's absolutely no restrictions and no requirements and mask wearing and no restrictions whatsoever. Here, you have Hong Kong with seven daily cases. And they essentially have... I think they have more restrictions than Korea does. There's a two-week quarantine. Even for Hong Kong citizens when they enter from a different country.
And I think Taiwan, a place like Taiwan get dozens of cases, very few number of cases. They essentially just went through a lockdown. They had a spike in their number of cases. But the threshold here is much lower to have a much greater restrictions imposed and measures to try to control the spread. Whereas in Europe, essentially I think, moving in a direction of either no restrictions or much fewer restrictions, no one longer required to wear a mask.
Michael P.A. Cohen:
The point is, we're talking about COVID again because the world is falling back into and an economic cycle of COVID.
Paul Kim:
In Asia, I was just talking to folks, people in Hong Kong, Korea, Japan, we're probably looking at another six months to a year of COVID being a material impact on the operations and the activities.
Michael P.A. Cohen:
In America, just it's going to have to be like 150 million to 200 million people are going to have to get it before we come out of it. We're probably pretty high right now. We could by December have a nation that has had COVID, 100%. It could happen.
Paul Kim:
What's surprising to me, everyone talks about herd immunity. It can't be that some countries may not be that far off, right, in terms of the number of cases, and then vaccinations, but yet the number of cases still keeps going up. It looked like it was on a downward path to possible eradication, or at least very low level than US and UK too.
But then, all of a sudden, another spike. The one good thing is that we've seen this here and elsewhere, is just the mortality rates have plummeted. So, we're looking at 1% or less than 1%, so it's not a great percentage, 1 out of 100 but still, is much better than earlier in the crisis.
Michael P.A. Cohen:
Those tend to lag though, those mortalities.
Paul Kim:
Yeah, that's true. They'll probably come up. But in Korea, they're doing this very sensibly. They're rolling it up by age group, and the older folks have already been vaccinated, And they're the most vulnerable. So people getting COVID now are younger people, and they are less prone to severe reactions and mortality as a result of catching COVID. So, we've talked about COVID for many episodes, but it's still around, it's still having a material adverse effects and impact.
Michael P.A. Cohen:
We have to start our conversation with it every time, it just kills me that we have to because we don't have to, but we do.
Paul Kim:
Yeah.
Michael P.A. Cohen:
But I do remember that first episode that you referenced, Paul, I remember you saying, "Hey, Michael, we got to talk about this COVID. It's kind a big deal over here." And I'm like, "Oh, come on, Paul. It's just a freaking common cold. It’s a Coronavirus, it’s a common cold." And I completely dismissed you.
Paul Kim:
Well, I think no one could have ever predicted the global scale of this. It's literally impacted... In fact, it has impacted every life on this planet. And I don't know if there's ever been a phenomenon, and certainly not during my lifetime that's been this global and this pervasive.
Michael P.A. Cohen:
This is a lifetime event, for sure.
Paul Kim:
Yeah.
Michael P.A. Cohen:
And it's changing American society drastically. It's really amazing. Like what it's done to the employees and to the workforce. And from a white collar to blue collar, doesn't matter. People are saying, "You know what, take this job and shove it, man. I work in here no more, the rest of my life is going to be different. Because now I know I have the power to make it different.”
“And that you're imposing arbitrary rules on me that make my quality of life less if I have to pack myself into a subway every day, even to go six stops back and forth and waste 90 minutes of my life jammed in a tube with other infections human beings, when there's no need for that." People are totally reorganizing, rethinking how they're going to proceed in life. And that to me, that's neat to me. I think it's interesting.
Paul Kim:
Here, a lot of people think there's also the arbitrary regulations and rules that have been handed down some sense ago, some not necessarily. So, I'll give you two examples. In health clubs now in Korea, you can't run on a treadmill at a pace faster than six kilometers per hour. That's one of the rules. Because God forbid, you've run faster that you're being expectorating and sweating and spreading germs.
And then in those same health facilities, you can't have... Well, they change this rule because there was, as you can imagine, a reaction to it. But you couldn't have music with beats per minute faster than, I don't know what the number was, 100 beats, 130 beats per minute because again, that would excite people too much into just running fast or exercising too vigorously, sweating, expectorating, and spreading the virus.
So, anyway, people were like, "Who came up with this? Who came up with these rules?" But I think every country probably has their own set of rules just to boggle the mind. "Why this and not that?" So we've seen that. But one thing that has, I think people here have seen the virus as an outgrowth of just manmade or a human-driven excess, contact with animals. And, I guess, the origins of COVID. That's also in the spirit.
But let's say we're to believe that the wet markets were the real origin of COVID, there's a sense that we've violated nature to some extent here in Korea. Some people believe that in climate, what's going on in the climate and climate control is also a feature of that. And it's just the sense that we've overplayed our development to something we need to be in greater harmony with the natural elements. And COVID is a symptom of that.
There's a fear that there will be, and this is all over the globe. And people think this is just the first of many pandemics that could come, like climate control and all the floods and the fires, the severe temperatures or the heightened volatility and the climate.
There's the sense here amongst some that believe that we've got to do something to rein humankind in a more responsible. That's like ESG has become popular here in Korea and also in Asia. Where ESG, which for those environmental, social, and governance, because this also coincided with Black Lives Matter and discrimination against Asians in America, for example, and other sensitivity to those types of issues. And that's create a cord here to some degree.
And so there is a greater interest in climate control and ESG and these types of things. And I think the pandemic has heightened that or certainly jumpstarted that level of interest. So, I don't know if that's intended or it's a good side effects. But that is certainly something that I've seen.
Michael P.A. Cohen:
There's fascinating things coming out of the pandemic. And it's hard to characterize things are good or bad, but ESG is one environmental, social governance, but also ESG investment. And the standard being adopted by investors now imposing that on companies.
There are certainly are people who are recognizing the human footprint in ways that potentially map a different future for world behavior, or certainly world corporate behavior, that being a multinational audience, and how those things are occurring. In fact, we're going to talk a little bit about that next, I think, or some of that, I think.
But yeah, I actually agree. There's been all kinds of changes that are in some ways, exciting. In many ways, COVID transformed the 21st century, dramatically accelerated, perhaps, change the outset of what stands to be a super important century in human history, forget about anyone nation's history. And I think all of those things are important to note because they are impacting the business world, the business world has transformed to new standards, in many respects, a well beyond those that existed pre-pandemic.
What does scare me a little bit about something you said, which is, it's subject to dispute the origin of the virus, it is subject to dispute. From this old prosecutor's seat, the behavior of the Chinese government isn't helping to alleviate that dispute. So, what scares me about that is if it is not wet market virus, if it is, in fact, a lab virus, then we don't have 450,000 years of human history and a library of viruses to build an immunity to fight it. What we have is, that's the kind of stuff that's going to be getting out around the world, that's a different ballgame entirely because now you're talking about something that isn't natural, really. And that's pretty darned frightening.
So, whether it turns out to - well, we're never going to know - but either way, the question's been raised. And I think perhaps a super important question to come out of all of this, Paul, going forward is laboratory containment and laboratory research of deadly diseases and their escape. There are strong position papers on the potential that this virus originated in the lab. And it's probably not worth us getting into that because neither one of us are really schooled to do it.
But the mere question itself presents an unknown, when you start to look forward into the world and unknowns are generally bad for business. As far as we talk about unknowns, unknowns are bad for business. And all of these things that you just mentioned, stand to present perhaps drastic and seismically felt unknowns with higher frequency and a forward future that markets will have to work hard to overcome because that kind of instability is swinging wildly around the world through climate events, through infectious disease events.
We're seeing what it does to supply chain now. It's true, it's dramatic and just incredible. I think we're entering a new world. And I'm very interested to hear about Asia's grappling with COVID again and in many ways, I think everybody's in the same place they were, they're just dealing with it differently. But that's my overall point is that we're not anywhere farther down the road, even though there's this illusion that everybody is. Not from the economics, the numbers don't change.
Paul Kim:
Yeah. Now, it's shocking and really part of the crisis we dreamt of, we dreamed of having a vaccine. And now we've got the vaccine, or at least some of us have. And yet it's still raging. The pandemic is still raging. We're coping, I think, better. We've got a lot of knowledge. It's not as severe in terms of mortality and the like, but it's a material event, we still need to constantly talk about how people are reacting, and how they're going to cope with it.
My point was just that, I think, related to or as a result of, or coinciding with the COVID crisis, or the pandemic is just this notion of other things that we should be focused on or movements we should focus on, like ESG and climate control. I think there's, at least what I see in Korea, the government is very focused on there's a public sector support for renewable energy, looking into those sorts of rumors, and then there's massive public-private partnerships and collaboration and ultimately investment that will go into, it's just been announced in Korea, at least, for example, rechargeable renewable energy, rechargeable batteries, electric batteries, vaccines, semiconductors.
Semiconductor is not ESG but still, I think that those are the strengths of Korea, but also that they could double down on some of these areas that they have strengths in, but certainly rechargeable batteries are firmly within the world of ESG. So, there's definitely a desire to support that.
Michael P.A. Cohen:
No, it's really super fascinating. And anyways, if you take just the old Wealth of Nations free-trade philosophy, there is remarkable potential here for economies to benefit from what we've observed from the supply chain deficiencies during the crisis. And a country like Korea that has sophisticated production capacity in place as well as innovative engineering to continue the progress of semiconductor manufacturing stands to benefit greatly. I do wonder whether, from the supply chain crisis, we will see a reordering of supply chain. It is likely the pickup truck crisis in America that will cause America to start making semiconductors again.
Paul Kim:
Biden has already announced initiatives regarding having local semiconductor production in the United States. Some of that is going to be driven by foreign makers like the TSMC and Samsung's of the world will now relocate or build out or new plants in the United States. So the domestic supply will be secure. But who will be making, some of them will be for making some of the US makers.
So, I've been reading about the car shortage, even the used car shortage in America. I want to find a way to sell my car here in the US because the prices have just spiked. It's unbelievable. Now we're seeing that in a lot of different product categories. We talked about it earlier when it was more business to business, supply chain issues.
But now, I think the consumer is seeing that and it's showing up in inflation figures. So if that continues, the supply chain issues continuing with what's going on with COVID and just because there was contraction in people's estimates for what volume they needed, and now they're picking that back up but the lockdown's now, and who knows what's going to happen?
I think that that's been, at least in Korea from what I see, the manufacturing facilities haven't been affected yet by what's been transpiring. So it won't be driven by that. I think this is more driven by people had estimates and forecasts that were just below what when this economy came roaring back in someplace, now maybe won't becoming roaring back. Will actually again recede a little bit. So, maybe that would be better.
But then the new normal tech companies that benefited from the pandemic, they're also going to see a rise in their business, which is a segue way to the next topic we need to talk about is just who's benefited from this. From the pandemic, it's many of the tech companies. And the tech ecosystem in Asia is quite interesting in terms of its origins and foundations. There's a lot of companies here that essentially created a fast follower model or a model, a business model based on what's worked in the US and Europe.
And in some cases, they're actually invested by the same venture capital firms or companies that are successful with US. In Korea, we've got a big company here, a delivery company similar to Amazon called Coupang, which just went public a few months ago in the US actually and was valued at a market cap of $80 billion and they are largely Korean domestic company, they own a bunch of logistics centers and warehouses throughout the country.
And they've benefited greatly from what's happened during the pandemic, in terms of people don't go to as many restaurants, they order a lot, the there's a lot more deliveries being done and they've taken advantage of that. They've benefited greatly from that phenomenon. But essentially, that was, again, a fast follower model based on Amazon, for example, but now they're moving into all different areas as Amazon did. So they're not just limited to deliveries.
I think the largest shareholder SoftBank of Japan, another company that is also a fast follower model-based company. DiDi of China, which is the Uber of China, also invested by SoftBank, is one of the largest shareholders and Uber is one of the largest shareholders in DiDi.
So, DiDi is an interesting case in Korea. Korea and US relations and integration is quite good as you know China and US not as good China, but much larger domestic economy, obviously, and DiDi, mostly a Chinese company, a Uber of China, they've been now caught up in, a lot of commentators have seen as just in the crosshairs of a lot of the confluence of interconnectedness in the financial markets, interconnectedness in the tech markets, or in IT investing markets with the same investors investing in different countries, and the capital markets where you have companies listing in Hong Kong, or Korea, or US depending on what best suits them and where they can probably get the greatest value.
But what is not quite as coordinated are the regulators as between, for example, the US and China. I don't know if you've been following the story, what's interesting is that, so DiDi, they raised $4 billion were valued at something like $70 or $80 billion in June, they listed on the New York Stock Exchange, as I mentioned that 30% owned by Uber. SoftBank also has a big position, I think they might actually be the largest shareholder.
And what happened is the Chinese government, what's called the Cyberspace Administration of China, the CAC hadn't fully cleared their data security assessment prior to then going public. There are stories out there that said that those in charge pushed ahead with the IPO process without getting that full assessment and approval from the Cyberspace Administration of China, CAC, there's stories in the press about that. I can't really evaluate what's true.
But for what has happened is that the CAC plays DiDi under investigation, and prevented the company from acquiring new users. And they actually, I think, required that the app be, I think they suspended the downloading of the app, or they ordered the removal of 25 apps linked to DiDi from Chinese app stores. So very, very severe.
And as a result, the stock took a 30% plunge, and there's also been other developments, whether they're related to or related to what's happening with DiDi or at least regulatory developments or part of restrictions, or reviews being announced, that seem to be caused by the DiDi situation, which are also of note to international investors.
One of the biggest is the China's State Council directed the China Securities Regulatory Commission to examine closely what's called a loophole that... I don't know if you know the VIE loophole, the variable interest entity, which is obscure to many people in the corporate world who do business in China, it’s a very common structure used, where you essentially have an offshore company that, depending on how you want to say it, they invade some of the onshore PRC domestic requirements or restrictions on foreign investments, and also regulations governing the Chinese onshore company that may be a substitute.
They take the offshore company public in the US or otherwise. As a result, they're not subject to the domestic regulatory regime in China. They actually enter into sometimes the management agreement or other contractual ranges where the profits and control are ceded to the offshore company. So the onshore PRC company is ceded to a control and the profits have ceded to the offshore company.
Why is that important? Well, there's literally, just citing some figures, they estimate that VIE structure companies, there's 100 VIE structured companies under Morgan Stanley Capital index that have a market value of $4 trillion. The Chinese regulators are going to look at the structure, that's $4 trillion. Alibaba is structured, as I understand it. Alibaba is structured this way.
DiDi was structured in this way as some of the biggest tech companies in China, operating in China are structured. They announced rules that said the VIEs already listed like Alibaba would need approval to issue new shares. And then I think that they're going to actually review any overseas listings before cybersecurity, this is for the new companies looking to list abroad.
I think that there's a requirement that the analysis set of new cross-border data security regulations, and we need to basically get some type of approval before you can list your shares overseas, and I think that's directed to the DiDis of the world.
There's a lot there. So, the Chinese domestic regulators have taken a stance and this is governed by or driven a lot by the cybersecurity and data security issues that we've seen with frankly, with TikTok in the United States. Securing the domestic data security of the Chinese people by the PRC regulatory authorities.
It's related to, they don't want the data of Chinese citizens to be transferred overseas. And that's what these regulations are aimed at. And many commentators that are observers of this, to some extent, they're not surprised. I think the timing of this with the profile after the IPO, that's surprising, with the company on the scale of DiDi.
So Coupang in Korea and other tech companies invested by investors all over the globe, listing in whatever capital market that suits them, DiDi being similar, but again, they're caught up in the crosshairs of more, you can get into geopolitical concerns, but it's just the Chinese regulatory objectives that they wanted to regarding protecting the data of their citizens.
Michael P.A. Cohen:
I'm going to give you a view to get your reaction. You can dress it up however you want. But what I see is that the American capital market is the hottest capital market in the world. It's on fire. Nothing's coming close. And what China is doing, however they may dress it up, is punishing companies for listing on the American stock exchanges, period. I shouldn't use the word American stock because there was an American Stock Exchange, I should use New York stock exchange or NASDAQ.
But what they did to DiDi is they punished DiDi for listing on the NYSE. DiDi goes public on the NYSE and China comes in and says, "Stop. Stop downloading apps. We're going to cap your users. These are the things we're going to do to you," and they're cow towing them. And they did the same thing to, what's TikTok's parent, Paul? I always forget what it is.
Paul Kim:
Oh, yeah, Byte Media or something like that.
Michael P.A. Cohen:
Yeah, it's something like that, right?
Paul Kim:
Yeah.
Michael P.A. Cohen:
It's ridiculous that I don't know and I've... I am embarrassed was actually just looking forward somewhere around here. ByteDance.
Paul Kim:
Yeah, ByteDance, okay, yeah.
Michael P.A. Cohen:
ByteDance was going to go public and TikTok just announced that they're delaying their public offering on the New York Stock Exchange, can translate that to whatever you want. I translate it to the Chinese government cow towing ByteDance and I don't think that IPO is going to happen. Ant didn't happen.
China is literally, there's war with China, isn't just a trade war, it's become an all-out economic war. And China is hitting America and its capital market where it hurts with new tech companies that serve a market that is by population and economic consumer potential five times the North American reach.
This is why the United Kingdom remained relevant for so long in world history. It was its capital market. There's no other reason for it, despite having a nice Queen and the best cab drivers in the world for sure. There's no particular good or service that made the United Kingdom stand out so disproportionately to its population over world history other than its capital market.
That has been true for America since its get-go. And it is absolutely true right now through political schisms, through insurrections, through COVID, through everything, the American capital market has been on fire. I hear people saying, "Well, isn't that great for business?" Well, I'm not sure it's good for business at all. It's a capital market. It's good for the capital market, but that can or may not be good for business, it depends. But China has gone to war against the American capital markets. That's what this says to me. Now, what's your reaction to that?
Paul Kim:
Well, that's where a lot of pundits viewed as the financial war, it's a war of financial markets. What market should you be listing on if you're a Chinese domestic company or a domestic business. See the same issues in Korea. After Coupang went public in US, there was a parade of tech companies in Korea lining up to go public in US.
For whatever reason, now they're lining up to go public in Korea again. So Korean capital markets are red hot as well. That's probably the case in a lot of different markets, but they've had to imitate some of the aspects of the US capital markets in order to retain that home base as the base for domestic businesses.
But still, though, you're still going to see this arbitrage, taking place which are valued more highly by US investors and US investors, from their perspective is great. And I get exposed to China with 1.4 billion people in a growing market, whereas in the US, 340 is big country, but growth is more limited.
And so, US investors and foreign investors, all investors would like to have exposure to growing markets and growing businesses. That's the case everywhere, right?
Michael P.A. Cohen:
Yeah.
Paul Kim:
So I think this is just, again, another one. This is a new flash, it's not a new flash, but it is a flashpoint that bears greater looking forward how this will be applied in differences. The VIE scrutinies, they said, it's at least a $4 trillion market, just as publicly traded companies. There's many more VIE structures out there.
So, the fact that they might look at them, again, that could just be a pronouncement without great legs. And from what I understand, the Chinese government has many ways to receive input from the business community over there. And so, I don't think that it's going to lead to really market disruptive moves. But there will be examples made of certain players.
Michael P.A. Cohen:
How was a 30% dip and an $80 billion public offering not a market disruptive move, Paul?
Paul Kim:
Well, that is, but I'm just saying that that's... it's at least $4 trillion market. I think if you look at all the VIEs out there, it's going to be far greater than that. $20 billion market cap loss is temporary, nothing compared to if they can make more seismic moves with other VIEs that are publicly traded or established.
Michael P.A. Cohen:
Let's see what happens with it going forward.
Paul Kim:
Yeah.
Michael P.A. Cohen:
I'm so glad you raised DiDi. I think it's the most important thing that's happened in the Asian markets is the Chinese government cow towing companies that are listing in the American capital markets. I think it represents a new flashpoint. And I do think it's new, a new flashpoint in the economic wars between these two powerhouses. And I think it's fairly seismic. And my own view is it's fairly seismic in a lot of ways, and I think it's worth watching forward.
We flagged a lot of issues on this show. And I mean this show, like our podcast together on the Asian markets. You flagged COVID before anybody knew how to spell it. And you said, "Hey, Michael, this is a pretty big deal. People ought to pay attention." You can go back to that episode, I'll find it but it was way before anybody knew what was going on. It was January of the outbreak that occurred in December. That's when you picked up on that, Paul, and that's when we broadcast to our listeners.
Paul Kim:
I just call them as I'm seeing it here.
Michael P.A. Cohen:
That's why we do the show. And you picked it up, it happened in Asia, and you were there on the ground. And you were saying, "Hey, this is becoming a pretty big deal here. People need to pay attention to this." And sure enough, it became the biggest deal of the ensuing two years, including our present moment.
We (you and I) flagged supply chain as a massive issue before it started to hit. We kept saying, "Hey, man, there's 42 boats parked outside the Long Beach Port," and you were talking about the same thing and Shinzen about where ships were being redirected. And you flagged the semiconductor supply chain issue, I think in Q1 and now we're seeing it in the pickup truck market in the United States. I just can't help but to name pickup trucks.
Paul Kim:
You would think that those semiconductors are in pickup trucks.
Michael P.A. Cohen:
But they are selling pickups in the United States for like 10% right now over the sticker price, which is just outrageous. And the funny thing is that their Toyota is selling the Tundra for more, and the Tundra doesn't have a semiconductor. It's killing me.
Paul Kim:
I was shocked that the average selling price for a new car in the United States is not like $40,000, $45,000.
Michael P.A. Cohen:
Yeah, it's close to $50,000.
Paul Kim:
Wow. Yeah.
Michael P.A. Cohen:
Yeah.
Paul Kim:
There's inflation and things have gotten up.
Michael P.A. Cohen:
I thought my old cars were cute and fun to have around. And I just rather drive them. But now I'm critically trying to keep them going because I can't afford a new car.
Paul Kim:
Anyway, it's amazing what's going on.
Michael P.A. Cohen:
It is. Look, my point here is that we do this show, and we do this check-in with Asia because you're on the ground and you're experiencing things that matter. And I think you're hitting on DiDi is another one of these seismic issues that matter. I think it marks the beginning. And I'm just saying I could be completely wrong. I could be completely wrong. But to me, it feels like a shot directly at Wall Street, and that it marks the beginning of what I'll call the capital market wars. And we may be getting into the onset of just that.
Paul Kim:
There's also people who call to say it's also the data control war. There's a lot to talk about there. There's a lot going on.
Michael P.A. Cohen:
Yeah, there is. Data control is one of those really broad terms that everybody says and you throw it up and it still sphere in everyone’s minds.
Paul Kim:
Orwellian visions. We’ve already living with by the way.
Michael P.A. Cohen:
Yeah, we're already there. You could smile, you can't smile in Manhattan, or Shanghai, or Tokyo without having your face recognized with these people. We're already there.
Paul Kim, you have been super generous with your time as always. I think we hit the main issues. Some are recurring, but one is super new. And that's the DiDi capital market war issue.
There's a takeaway from this show. Investors now need to be thinking about investments differently caught up in the geopolitical economic wars between the United States in North America and China and Asia. And that war is just going to continue to spill out across economic areas of interest for all of our multinationals doing business.
As I said, you've been generous with your time, Paul, should we talk about anything else before we wrap up looking into Q3 here or save the rest for October? What do you think?
Paul Kim:
Let's save something for the next show.
Michael P.A. Cohen:
You always come up with this wise zinger right at the end. It's the zingers that we'll pick up on so we'll pick up with the zinger of the capital market wars when we see you again in October and Korea will probably be fully vaccinated by then.
Paul Kim:
I don't think so. But yeah, let's see.
Michael P.A. Cohen:
Well, that's it for this week, folks. But before I get into that closing, Paul, I do want to thank you so much for your participation.
Paul Kim:
No, my pleasure. Always a pleasure to participate and talk to you on this show.
Michael P.A. Cohen:
No, I absolutely love it and relish it, the opportunities. We'll link your bio again, as I said at the beginning of the show to the show notes and Paul, I'll look forward to seeing you again in October.
Paul Kim:
Great. Looking forward to it. Thank you.
Michael P.A. Cohen:
Well, that's it for this week, folks. I'm going to be taking the rest of the month of August off. So, for the next three weeks, our producer will run some of her favorite summer repeats. And I look forward to joining you all again picking up our live programming on September 1st, the first Wednesday in September. Until then and as always, wherever you may be on the planet, please, be well.
Contact Information:
Paul’s Sheppard Mullin attorney profile : Paul Kim: Sheppard Mullin
Email: pkim@sheppard.com
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