How A New Battle Between Google And Nvidia Affects Us
India's economy grew about 7.3% in the July to September quarter
On Episode 735 of The Core Report, financial journalist Govindraj Ethiraj talks to Sajjid Chinoy, Part-Time Member, EAC-PM (Economic Advisory Council To Prime Minister) & Chief India Economist & Head of Asia Economics at JPMorgan as well as Manish Garg, CEO of Interarch Building Solutions Limited.
SHOW NOTES
(00:00) Stories of the Day
(00:55)A new battle between Google and Nvidia and why it affects us and the shocking story about Taiwan’s chip boom.
(10:52)India’s Q2 GDP growth could come in at 7.2%
(12:11)Can oil really fall to $30 a barrel, as JP Morgan says.
(14:04)Steel prices are high because of import duties and does it affect all downstream steel users?
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NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Wednesday, the 26th of November and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital, which is positively smogged down and polluted to levels one has not seen in a while. Now, our top stories and headlines.
A new battle between Google and NVIDIA and why it affects us.
The shocking story about Taiwan's chip boom.
India's Q2 GDP growth could come in at about 7.2%.
Can oil really fall to $30 a barrel, as J.P. Morgan says?
Steel prices are high because of import duties. Does it affect all downstream steel users?
Silicon Valley And Its Impact
It could be argued that what is happening in Silicon Valley, even as tech giants battle it out for AI supremacy, is of limited importance to us. Maybe it was at one time, but no longer. India can surely build on the developments in AI worldwide, including the progress in large language models or LLMs, but the prospect of job loss is also getting more real.
Equally, the nearly week-to-week developments in the chip race have profound geopolitical and trade implications, as we are seeing, as they do on the markets themselves, given the continuous noise about the likelihood of an AI bubble. NVIDIA shares, for example, fell on Tuesday morning after the information a tech news outlet reported that Meta is considering using chips designed by Google. Google parent Alphabet was trading 3% higher, even as NVIDIA shares fell.
And Google had already rallied about 6% on Monday. On Monday, the information reported that Meta was considering using Google's tensor processing units, or TPUs, in its data centres in 2027. It could also rent those TPUs from Google's cloud unit next year, according to that publication.
Google launched its first generation of TPUs in 2018, and it was initially designed for its own internal use for its cloud computing business. Since then, Google has launched more advanced versions of that chip are designed to handle artificial intelligence workloads, according to CNBC, which also added that TPUs are a customised chip, and experts say, according to CNBC, that this gives Google an advantage over rivals as it can offer customers a highly efficient product for AI. Now, if Meta uses those TPUs, it could be a big win for Google and potential validation of that technology, says CNBC.
This means that Google, which is already receiving rave reviews for its Gemini 3 AI, has entered the chip race at a much larger scale than before. Meanwhile, Michael Burry, the man who bet against the US housing market in the 2008 financial crisis, about whom a Hollywood film was made as well, called a big shot, last week called out the company for its stock-based compensation dilution and stock buybacks. We're talking about NVIDIA.
CNBC quoted Barron saying NVIDIA responded by sending a memo to Wall Street analysts over the weekend to address these claims, but obviously if they've had to send a memo, it means that there is some concern. NVIDIA has come under increased scrutiny from Burry in recent weeks, says Bloomberg, over the circularity of AI deals, revenue recognition, and how companies are depreciating computing gear. While NVIDIA shares are strong, they're still below, or rather 12% below a late October level.
NVIDIA and rival Advanced Micro Devices, or AMD, have triggered concerns amongst some investors because of the circular deals that they've been making with artificial intelligence providers. So, one big example, NVIDIA signed an agreement with OpenAI, the owner of Chad GPT, to invest as much as $100 billion in that startup, which in turn would build data centres with millions of NVIDIA chips. Now, Bloomberg says these kinds of arrangements, reminiscent of some dot-com era partnerships, risk inflating the market and tying the fate of numerous companies together.
Another point surfacing now, in recent media reports particularly, is how quickly NVIDIA's chips, known as graphics processing units or GPUs, will become obsolete. And that's obviously a concern and a consideration when companies could be investing trillions of dollars in data centres with these chips. And there's more on that AI bubble shortly, but from a slightly different angle, with JPMorgan Managing Director and Chief India Economist Sajid Chinoy.
And that brings us to India, where concerns with the US-India trade deal continue to hang over the markets. India's stock benchmarks fell for a third straight session on Tuesday, as investors continued to book profits near record highs. The Sensex and Nifty were down also because of a monthly expiry of Nifty futures and options contracts for the November series.
The Sensex was down at 313 points to 84,587, and the Nifty 50 was down 74 points to 25,884. The broader markets were, however, stronger, with the Nifty mid-cap 100 and small cap 100 indices going up about 0.3 and 0.19 percent each. Now, going past the September 2024 market peak is not likely to be easy, or evidently is not easy, given that profit-taking kicks in the moment the indices come close, which is, of course, a characteristic of a market trying to hit or regain a much older peak, in this case, more than a year now.
Elsewhere, the rupee was flat on Tuesday, even as it gave up early gains thanks to month-end dollar demand from importers, which offset broader strength in regional currencies, according to Reuters, which added that the rupee closed at Rs 89.22, almost the same as the previous session. Remember, the rupee had fallen to an all-time low of Rs 89.49 on the 21st of November, that's Friday, even as the Reserve Bank of India, which was absent on that day, came back in on Monday and lifted the currency. Elsewhere, gold has hit its highest in more than a week, despite a stronger dollar, after dovish comments from the Federal Reserve revived prospects of a rate cut in December, according to Reuters, which added that spot gold was up to about $4,141 per ounce on Tuesday morning, which is the highest since November 14th.
Now, back to the AI bubble. There are some unusual fallouts of the AI boom, if not bubble, including on Taiwan, which is at the epicentre of the chip boom. The discrepancy could not be wider and maybe more stark in Taiwan, the country which makes most of these high-priced chips and essentially powering the world's chip revolution that we're seeing today, which in turn is obviously powering the AI revolution or bubble, as you might call it.
I spoke with Sajith Chinoy, JPMorgan India's Chief India Economist, and I asked him about the AI revolution and what the AI revolution or boom or bubble, depending on how you look at it, was affecting the fate of world markets and the economy, on the weekend edition of the Core Report.
INTERVIEW TRANSCRIPT
Sajjid Chinoy: The way I think about emerging markets is if you look through all the noise, that there's a lot of focus on what happens to the US, a lot of focus on what happens to China. But the ones that get really squeezed are going to be emerging markets, because I think the world is getting much less globalised. I think there's a consensus now among developed markets that the globalisation of the last 10 or 15 years failed them.
Right. There's a lot of muscular industrial policy, fiscal policy has become much less well-behaved and much more vulnerable and precarious in advanced economies. But you're in a world where you will face much less globalisation or much more deglobalization, much more economic balkanisation.
Why does this matter? Because if you look at emerging market growth over the last 25 years and you take China out of this picture and you look at those growth rates and you plot a line of global trading volumes, it's essentially the same line. In other words, emerging markets, including India, have been far more reliant on export led growth than we believe, number one.
Number two, you know, in talking about trade, we're forgetting that with the U.S. putting on high tariffs on China, what China used to export to the U.S. is now being progressively redirected to the rest of the world. Think of a river flowing down. Those are Chinese exports.
And the U.S. puts on a big tariff wall akin to a dam. What happens? The water floods the adjoining areas.
That's what you're seeing. The Chinese exports are flooding Asia, coming into India, the Middle East, North Africa, even Latin America. So now emerging markets, including India, have got a second problem.
One is how do you get, how do you find export growth in a world that's more balkanized? And the second problem is how do you protect your domestic manufacturing sector from a flood of cheap Chinese imports, given the excess capacity and the deflation that China is foreseeing? So you're also playing defence at home.
The third issue comes to your point about AI and labour substitution. Already we're seeing manufacturing has become so automated that it's hard for countries to create jobs because every unit of output involves more machines and fewer people. That was happening in the blue-collar level for manufacturing.
The worry is AI will do this at the white-collar level. So if you're an ageing economy like Japan, you know, China, Europe, you don't worry about this. When you're India and you've got your dividend in front of you over the next 15 years, that's a very real question.
Let me give you one final example in Taiwan, because I now look at Asia. The build-out of Taiwan is very instructive. This is AI build-out, not adoption.
Taiwan's been the biggest beneficiary of all these data centres in the US. All the servers and the GPUs and the high-end chips go from Taiwan, from TSMC. Taiwanese exports have been growing at 33% over the last year.
Taiwanese private consumption over the last year has grown less than 1% because all of this is so capital-intensive that there is no spillover to the labour market and therefore no spillover to consumption. And guess what? The Taiwanese government has had to roll out 2% of GDP in fiscal support and cash transfers for an economy that is at the centre of the AI boom that's growing at 7% this year.
I think that's a harbinger of things to come globally.
A Stronger Q2
India's economy grew about 7.3% in the July to September quarter, according to a Reuters poll of economists, thanks to a push in rural and government expenditure.
This is down from the better than expected 7.8% in the previous quarter, according to a median forecast from a Reuters poll of 61 economists, which was conducted between 18th and 24th of November, and estimates ranged from 6% to 8.5%. The data is going to be released this Friday, that's the 28th of November in the morning. Analysts told Reuters that as far as drivers of growth are concerned, private consumption and central government capex, so that's capital expenditure, will remain the key supports for growth now, while private sector capex investment will likely grow at a slower pace due to persisting global uncertainty. Household consumption, which accounts for about 60% of the economy, strengthened in the previous quarter, thanks to rural spending and on better agricultural output.
Urban demand and private investment continue to lag. India, of course, has emerged as more resilient than expected in the face of U.S. President Donald Trump's tariffs on Indian goods, which are now at 50%. Foreign investors have pulled out a net of $16 billion from Indian equities so far this year.
Economists also told Reuters that the deflator used to strip out the effect of inflation to show real economic growth was likely very low, making India seem a little stronger than it really is. Economists are also cautious on the medium-term outlook, predicting GDP growth to slow to 6.8% this quarter and 6.3% in the quarter ending March 2026.
Here's Our IEW Oil Segment
The international crude benchmark, that's Brent, could fall to $30 per barrel by 2027 as oversupply could overwhelm the market according to a JP Morgan forecast reported by Oil Price. On the other hand, despite fears of a glut, analysts and investment banks don't see oil prices moving down to $40 or below, even as oil is set to fall in the near term thanks to a strong supply from Organisation of Petroleum Exporting Countries Plus, as well as non-OPEC producers in the Americas. Analysts also feel that peace in Ukraine could bring down energy prices, as we've been discussing, as some sanctions and restrictions on Russia could be eased.
So what are other investment banks saying? Well, oil prices could drop too, but from current levels to about $53. That's for WTOI crude according to Goldman Sachs, and this would be in 2026. Goldman Sachs, co-head of Global Commodities Research, spoke to CNBC last week.
He said that the oil market is set to rebalance in 2027, as 2026 will see that last big oil supply wave the market has to work through. So remember that Brent crude prices have fallen about 14% year-to-date and are currently around $62.5 a barrel. Back home, India's Russian oil imports are set to hit their lowest in at least three years in December, down from multi-month highs in November as refiners turn to alternatives to avoid breaching Western sanctions, according to refining industry sources who spoke to Reuters.
Now, the deadline for winding down buying Russian oil was November 21st, and the EU, that's the European Union, has also set a January 21st deadline, after which it will decline fuel from refineries that handled Russian crude within 60 days of the Bill of Lading, according to Reuters.
A Steel Story
Non-tariff barriers in the form of quality control orders on stainless steel flats has created a supply crunch and pushed prices up, a recent note from think tank Global Trade Research Initiative in Delhi has argued.
Domestic production for that category is just 2.2 million tonnes per annum against a demand of 3.5 million tonnes per annum, forcing firms to depend on imports, yet the quality control orders require raw material certification at source that most foreign suppliers will not obtain. Specialised alloy steel grades, says GTRI, are not even produced in India, and removing such QCOs would restore fair competition, reduce abnormal margins, and compel large domestic players to invest in R&D rather than relying on protection, said that fairly strong-sounding note from GTRI, adding that similar distortions affect steel fasteners, auto hinges, and telescopic channels, all of which are downstream. On the other hand, value addition obviously reduces the impact of raw material prices, but of course the question is to what degree.
I caught up with Manish Garg, CEO of InterArch Building Solutions, a leading player in pre-engineered steel building solutions, for instance warehouses, which can be set up faster than conventional concrete, and an area or business where flow or business flow or auto flow is pretty strong at this time. I began by asking Manish about the impact of steel prices in the context of the higher duties imposed by India.
INTERVIEW TRANSCRIPT
Manish Garg: Before I dwell into, you know, what kind of raw material we use, I assume that you know how pre-engineered buildings are made. So we buy steel in various forms, majorly three forms. One is plates, which are called HR steel.
Then second is the coils, which are coated products, means in the steel parlance, you will call them coated products. And then we have further downstream, which is the colour-coated products. So these are basically the three raw materials that we use, three forms of steel.
Now there was a time when everything that we used was imported, either from Australia or from Thailand or from China. Today is a situation wherein we do not import any steel at all, given India's capacity to manufacture the kind of steel that we need, particularly in terms of the quality of steel that we need. So the first answer to your question is that we do not import any steel whatsoever.
We do buy all our steel from the domestic manufacturers currently, which are the likes of JSW and JSPL and Tata Steel, Steel Authority, and AMNS primarily. So we do buy, you know, very major quantity. And what you have been seeing is that steel, you know, has gone through a lot of cycles.
If I was to say even in last four years, it has gone through a lot of cycles in term, and the cycle do move in terms of availability of steel through the domestic manufacturers and in terms of the pricing. Now, quite obviously, India does export a lot of steel, means the kind of raw material that we use, it gets exported. So what we have seen in our industry, that whenever the major manufacturers, which I just named, you know, four or five major manufacturers of steel in India, they are full with exports, then there is quite obviously availability issues in the market and prices do go up.
Whereas, on the other hand, if the export orders for them are a little lesser, then quite obviously, there is more availability, and therefore the prices do go down. It also depends a lot on how the domestic demands are, it's a little bit of cyclic also, because of the monsoon and everything. So I would say, in the recent times, the availability of steel isn't a problem.
And I assume because of two issues, number one, there is quite obviously, a lot of global availability because of the China situation, number one. Number two, India has increased a lot of steel capacity in the last two to three years, I should say, rather last five years, and we are still building almost the similar capacity that is existing in India. And you must have heard, you know, AMNS and all these people setting up very, very large crude steel facilities.
India is already number two in the world, though, by a very, very long gap between China and India. But I think we are catching up very fast. So I think that has been the situation of steel.
Today, I will say the prices as well as the availability is excellent, as we speak, there is plenty of availability of quality steel, and the prices are at, I should say, one of the lowest in the recent times.
Govindraj Ethiraj: So can you illustrate that? And also, you know, we've had a 12% countervailing duty that was recently imposed because of pressure from steel manufacturers. So I'm assuming that the landed cost in India for finished steel is higher than most other places in the region, assuming it's not being dumped.
So is there a comparison that you can make for us? Yes.
Manish Garg: So see, how it moves is very clearly, Indian domestic steel prices have no absolute pricing, if I was to say, you know, there is no absoluteness in that, let's say before the duty, because 12% came much earlier, I think it just got extended, it came much earlier. So let's say before the 12% duty, it was X, and the landed international price was X minus 12%, which it doesn't always happen that way. But when 12% does get added, the point number one is that the people who are exporting, they can always adjust their prices to make sure that the delivered price does remain the same, including the duty, that also can go.
But what happens is that anybody will assume that, oh, if the 12% duty has come, the steel prices should actually go up by 12%. It doesn't happen that way, actually. So I would say that the steel prices in India by domestic manufacturers do have a very, very large impact now in the current scenario of the domestic demand.
There was a time when domestic demand was not very great. Domestic demand is very, very strong in India. Right now, it continues to be pretty strong.
Just to give you an example, our per capita steel consumption was about 72 kilogrammes three, four years ago. It has increased to 100 kilogrammes per person. That's been the steel consumption increase on a per capita basis.
And at about 60, 70 kilogrammes per capita, given the Indian population, you know, you can do the math, it's really increased. So I think we produced something like 150, 155 million tonnes. And a lot of it does get consumed here itself.
So the prices, frankly, don't move as much because of the duty. Yes, the downstream people like us or the auto or the, you know, white goods people gets little impacted for the month that it gets introduced. But I think it levels out in the long run, because of the availability of steel and the quantity of steel that is being produced in India and the domestic pull.
Govindraj Ethiraj: Right. You're saying from a slightly different perspective than that we are sort of on the verge of oversupply in India, or there is maybe more supply than demand, and therefore prices are constantly being kept under check. And the reason I ask this is, you know, a global trade research initiative study, which we follow quite closely, has said that a lot of downstream steel manufacturers do face pressure and have been facing pressure, you know, things like hinges, automotive components, and so on.
I'm guessing you are in a slightly different boat.
Manish Garg: We are perhaps in a similar boat. But since our business is a little more B2B, and we are more into, you know, the kind of buildings that we do, pre-engineered steel buildings, very large infra and other manufacturing projects, it is like a capital good for my customer. So I am in a little different business.
But nevertheless, if the steel goes, you know, for downstream people, if it still goes up, then my cost also will have to go up to my end customer. And therefore, the pressure starts. Now, what I'm trying to tell you here is that, yes, downstream people do come under pressure a little bit.
But I would say not because the steel prices have gone up significantly in a month or the other month. It is because of the mechanism that there is always a little time lag between the actual increase and the passing on to the end customer. So in those particular two to three months, you know, people get a little bit hit before the end consumer, because ultimately, all the increases will have to be passed on to the end consumer at the end of the day.
Govindraj Ethiraj: And if I were to take, let's say, an average size warehouse that you will build, what would be the raw material cost in percentage terms, or you're building currently, let's say, percentage or absolute, whatever you're comfortable with.
Manish Garg: Whatever we sell, let's say if I sell at 100, my raw material cost is about 65% of that. So just to give you approximately a medium size warehouse for us will be about 15 to 20 crore order value. And in that 65% will be the cost of steel.
So that's about 12 to 13 crores.
Govindraj Ethiraj: Right. So it is a substantial cost.
Manish Garg:
More than 60 to 65% is the raw material cost for people like us, definitely.
Govindraj Ethiraj: Right. How are things looking on the warehouse and the pre-engineered building space right now? I mean, are you seeing any new trends?
I know that you're setting up more construction plants, including in Gujarat, or close to finishing those. And are you seeing any new trends? And what are the kind of demand uptake?
Manish Garg: So things are looking, I will say, better than ever. In fact, we are living in one of the best times that at least we have seen after 2004 to 2007. Two, three reasons.
One is the PLI incentive by the government. Number two is the shift to steel from the conventional methods. A lot of buildings which would otherwise be done in concrete, like the commercial buildings, institutional buildings, or any other data centre, you know, EV infrastructure are now actually getting converted into steel.
So steel, in absolute sense, is increasing by more than, you know, the new projects. Because the old conventional concrete projects are getting converted to steel. Last quarter also, we delivered a, you know, top line growth in volumes of close to about 40%.
That's a humongous growth. And we have a very good order book. In fact, our industry itself, two more companies got listed and, you know, all the companies are doing very well.
So I think this entire nation building, you know, that is happening, and there's a lot of things getting converted to steel, I don't see any stoppage, at least for five to 10 years. We are in a very, very good situation.
Govindraj Ethiraj: What is the average speed or how fast can you put up, let's say, pre-engineered steel construction warehouse versus concrete? And what's the price difference between concrete and steel?
Manish Garg: So I will give you this answer in just two parts. One is for the industrial and logistics buildings, logistics means the warehousing part of it and manufacturing. There is no cost difference between conventionally made and pre-engineered building.
However, they come up at least twice as fast. That means you save about 50% of time at no extra cost. That's part one.
Part two is commercial and institutional buildings like the railway stations and airports and, you know, the commercial buildings there. Their steel, as we speak, is about three to five percent more costlier than a concrete building as we speak right now, but you save about 60% of the time. So if you were to take two years, you would take about eight to nine months in a steel building.
Now that's again humongous for, just imagine, you know, if you were to rent out three million square feet one year earlier, means it just pays much more than that cost two, three percent extra.
Govindraj Ethiraj: Thank you so much for joining me.
Manish Garg: Thank you, Govind.
